Andrew Sorkin - Too Big to Fail - The Inside Story of How Wall Street and Washington Fought to Save the FinancialSystem--and Themselves

But until the current crisis, few had been willing to listen to his admonitions. Because their hedge fund clients wanted the rule eliminated, Wall Street firms were happy to accede—right up until the time that they themselves became the target of short-sellers and had to run for cover.

“You can be a great ally to me on this uptick rule crusade,” Cramer said.

Fuld contemplated his guest’s enthusiasm as he silently weighed the advantages and disadvantages of lending his firm’s name to the cable news star’s crusade. Cramer was probably right about the rule’s removal hurting Lehman, but Fuld also knew that his firm’s own arbitrage desk had hedge fund clients who were selling short, and they made the firm a great deal of money. He certainly didn’t want to alienate them, and at the same time, he recognized that there was a legitimate debate about the issue. And however protective the restrictions may have been intended to be, Fuld knew perfectly well that investors could get around them by using options and derivatives.

Donini, skeptical that the uptick rule was Lehman’s biggest problem, interjected on behalf of Fuld. “What are you trying to accomplish, Jim?” he asked.

“The shorts are destroying great companies,” Cramer replied. “They destroyed Bear Stearns, and they’re trying to destroy Lehman,” he said, perhaps trying to play to Fuld’s ego. “I want to stop that.”

“If you’re trying to accomplish that,” Donini replied, “and you believe that shorts are causing the problem, then I don’t believe the uptick rule is the way to do it.” Donini explained to Cramer that he felt the real problem in the marketplace was “naked shorting.” Normally, when investors sell shares short, the investor first borrows the shares from a broker, sells them, and then hopes they drop in value so the investor can buy them at a lower price, replace the borrowed shares, and pocket the difference as a profit. But in naked shorting—which is illegal—the investor never borrows the underlying shares, potentially allowing them to manipulate the market.

Cramer was intrigued but also visibly taken aback by Donini’s answer. He had been invited to the meeting, had offered to help, and now his offer was being rejected. He tried changing the subject back to Lehman’s troubles. “Well, why don’t you give me ammo so that I can tell a positive story?” he suggested.

Sensing the tension rising in the room, Callan interjected, speaking up for the first time. “We just bought this unbelievable portfolio from Peloton, and it’s immediately accretive,” she said, cheerfully offering what she considered a bit of good news.

But Cramer could barely conceal a frown, for he knew a good deal about Peloton. Based in London, the hedge fund had been started by Ron Beller, a former Goldman executive whose wife was a policy adviser to Prime Minister Gordon Brown. It had once been among the top-performing hedge funds in the world but had faltered, selling its assets in a virtual fire sale. “Geez,” Cramer answered with as much tact as he could muster, “I’m surprised to hear it’s any good, given the fact that they were levered thirty to one with what I hear is a lot of bad stuff.”

“No,” Fuld said enthusiastically, “we got this for a song.”

Cramer did not look convinced. “One of the things I’m really unclear about is that, if you talk to Goldman, Goldman’s radically trying to deleverage, and what you’re saying is, ‘I’m gonna deleverage,’ but you actually are increasing your leverage.”

Fuld, who didn’t appreciate the tone of the observation, responded, “What we’re doing is, we’re buying really important portfolios that we think are worth a lot more and we’re trading out of ones that are worth less.”

Callan said that Lehman was quickly deleveraging its own balance sheet. She also said, “There are assets on the books that we have a high degree of confidence are undervalued.” She spent the next ten minutes telling Cramer about the firm’s residential real estate assets in California and Florida, two of the hardest hit markets, suggesting she expected them to rebound soon.

Having come to the conclusion that any alliance with Cramer could only be problematic, Fuld quickly changed the subject and began pumping Cramer for information. “So, what are you hearing out there? Who’s coming after us?”

Fuld said that he had become convinced that two of the nation’s most powerful financiers, Steven A. Cohen at SAC Capital Advisors in Greenwich, Connecticut, and Kenneth C. Griffin of Citadel Investment Group in Chicago, were largely responsible for both the short raid and rumormongering, though he didn’t say their names aloud.

“They are liars!” Fuld said adamantly of the shorts. “I think it’s pretty safe for you to go out and say they’re liars.”

Cramer, while sympathetic, made it clear that he wasn’t prepared to go out on a limb and back Lehman’s stock unless he had more information. “I can say that people could be skeptical of the rumors,” he offered, and then added, “why don’t you go to government? If you think this is so bad and you think that there’s a real bear raid and people are lying about it, why don’t you go tell the SEC?”

But Fuld, growing increasingly agitated, only repeated, “Why don’t you just give me the names of people telling you negative things about us?”

Cramer was flushed. “Look, there isn’t anybody. I do my own work, and my own work makes me feel that you’re taking down a lot of crap and you’re not selling a lot of crap, and that therefore you really need cash.”

Fuld didn’t like being challenged.

“I can just categorically dismiss that. We’ve been completely transparent. We don’t need cash, we have tons of cash. Our balance sheet has never been this good,” he asserted.

But Cramer was still skeptical: “If that’s the case, why aren’t you finding some way to be able to translate that cash into a higher stock price, buying some of your bonds?”

Fuld scoffed as he brought the meeting to an end.

“I’m on the board of the Federal Reserve of New York,” Fuld told Cramer. “Why would I be lying to you? They see everything .”

It was mid-May and David Einhorn had a speech to write.

Einhorn, a hedge fund manager controlling over $6 billion of assets, was preparing to speak at the Ira W. Sohn Investment Research Conference, where each year a thousand or so people pay as much as $3,250 each to hear prominent investors tout, or thrash, stocks. The attendees get to absorb a few usually well-thought-out investment ideas while knowing that their entrance fee is going to a good cause—the Tomorrow’s Children Fund, a cancer charity.

Einhorn, a thirty-nine-year-old who looked at least a decade younger, was sitting in his office a block from Grand Central Terminal, pondering what he would say. With only seven analysts and a handful of support staff, his firm, Greenlight Capital, was as peacefully quiet as a relaxation spa. No one was barking trade orders into a telephone; no one was high-fiving a colleague.

Greenlight was known for its patient, cerebral approach to investing. “We start by asking why a security is likely to be misvalued in the market,” Einhorn once said. “Once we have a theory, we analyze the security to determine if it is, in fact, cheap or overvalued. In order to invest, we need to understand why the opportunity exists and believe we have a sizable analytical edge over the person on the other side of the trade.” Unlike most funds, Greenlight did not use leverage, or borrowed money, to boost its bets.

Einhorn’s analysts spent their days studying 10-Ks in conference areas with wonky names like “The Nonrecurring Room,” a reference to the accounting term for any gain or loss not likely to occur again—a categorization sometimes used by companies to beef up their statements. For Einhorn, it was a red flag, and one that he used to spot businesses he could short. Among the companies he had identified from recent research was Lehman Brothers, which he thought might be an ideal topic for his speech. While questioning Lehman’s solidity may have become the most popular recent topic of Wall Street gossip, Einhorn had been quietly worried about the firm since the previous summer.