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

Clearing his throat audibly, Einhorn ended his speech with a warning.

“My hope is that Mr. Cox and Mr. Bernanke and Mr. Paulson will pay heed to the risks to the financial system that Lehman is creating and that they will guide Lehman toward a recapitalization and recognition of its losses—hopefully before federal taxpayer assistance is required.

“For the last several weeks, Lehman has been complaining about short-sellers. Academic research and our experience indicate that when management teams do that, it is a sign that management is attempting to distract investors from serious problems.”

Within minutes of Einhorn’s leaving the stage, news of his speech had been broadcast throughout financial circles. Lehman was in for some serious pain when the market opened the following day; the shares would fall as much as 5 percent.

As Einhorn headed up Broadway to attend a book party being thrown for him at the restaurant Shun Lee West, he leafed through the program of the conference he had just left and saw something that made him smile ruefully.

Lehman Brothers had been one of the Patron Sponsors of the conference, having paid $25,000 so that the world could hear him publicly undermine the firm’s credibility.

CHAPTER SIX

“Who talked?” Dick Fuld demanded, scarcely able to control his fury and looking as if he might leap across the table and strangle someone.

Lehman’s executive committee—the firm’s top managers—were arrayed around a conference room table on Tuesday, June 3, awkwardly sitting in absolute silence.

Fuld held a copy of that day’s Wall Street Journal in his hand. There, on the front page, was what he described to them as “the greatest betrayal of my career.” He had practically choked that morning when he read the headline—“Losses Push Lehman to Weigh Raising New Capital”—with the story adding the damning details: “Wall Street executives estimate it is likely to be $3 billion to $4 billion. They said Lehman would probably announce the capital raising in conjunction with its quarterly results.”

There it was, the morning’s news, the secret plan he had been working on for the past month to counter the critics and demonstrate strength, exposed for the entire world to read. He had been working frantically to shore up the firm, and now, he thought, the leak put all that effort in jeopardy.

Fuld had spoken to the reporter Susanne Craig on and off the record many times over the last few months. But he’d certainly never breathed a word of this. Fuld could only take solace in the fact that she didn’t have all the facts of his plan just yet: Lehman was in discussions with the Korea Development Bank, a state-owned policy bank in South Korea. The talks, which were being orchestrated by Kunho Cho, Lehman’s top executive in Seoul, could lead to a major cash infusion of more than $4 billion. Still, Fuld knew that the only way Craig could have learned that the firm was considering seeking new capital was if someone in the know—someone at the table in the conference room that morning, in fact—had leaked the story.

Coming on the heels of David Einhorn’s campaign against the firm—Lehman’s stock had fallen 22.6 percent since his speech in May—it was yet another public relations disaster. Fuld knew perfectly well that bankers were occasionally prone to being loose-lipped about their clients, but this concerned the firm he had given his entire life to and was about its very survival. The breach of loyalty stung him deeply.

Already that morning rumors were circulating that Lehman was so desperate for liquidity that it had tapped the Federal Reserve’s discount window. That was untrue, but Lehman’s stock was pummeled anyway, falling 15 percent.

For the past two weeks Fuld had been forced to respond to such rumors on an almost daily basis, as Einhorn’s comments had taken on enough credibility to sow seeds of doubt about Lehman’s own. To Fuld’s thinking, that was precisely Einhorn’s objective. Fuld’s co-chief administrative officer, Scott Freidheim, had been in touch with nearly half the public relations flacks in the city, desperately attempting to formulate a counterattack against Einhorn and the shorts. “How does this guy have any credibility coming after us?” Freidheim asked Joele Frank and Steve Frankel, two crisis specialists. “We can’t go tit for tat with everyone who makes a claim,” he’d said to another PR executive, Steven Lipin. In the meantime, the firm had established a clear script for all discussions with the media: There would be no more winging it; they couldn’t afford any mistakes.

Fuld thought Craig’s coverage had crossed the line, even if it was a legitimate scoop. To him, in his fit of rage, it was as if she had knowingly set out to undermine the firm, just like Einhorn. The article made Lehman seem like a collection of petty high school cliques, a gossip mill. He had always considered her one of only a handful of trustworthy reporters. The week before she’d even asked to sit in on one of Lehman’s management meetings, a request he thought was ludicrous, but he’d declined the request politely. “I’d like to be helpful,” he explained. “But I can’t allow that.”

When Craig phoned Fuld that afternoon to follow up on her story, he lit into her mercilessly. “You pose as a responsible journalist but you’re just like the rest of them!” he said. “Your seat at the table has been removed,” he shouted, then slammed down the receiver. There would be a new rule in effect at Lehman, he subsequently decreed: Nobody, not even the PR department, was allowed to speak to the Wall Street Journal ever again.

When he learned of Fuld’s diktat, Andrew Gowers, Lehman’s head of communications, was beside himself. “I don’t understand how on earth this policy is supposed to help us communicate in the middle of all this if we’re going to shut out the biggest financial paper in the country,” he complained to Freidheim.

“I don’t know,” Freidheim replied with a shrug. “It’s between Dick and the paper.”

Scott Freidheim knew who the leaker was, or so he believed.

At forty-two years old, Freidheim was the youngest member of Fuld’s inner circle. The son of the former CEO of Chiquita, he was the ideal Fuld operative: a get-it-done loyalist with a killer instinct. As the firm’s co-chief administrative officer, he wasn’t so much a banker as he was a highly paid strategist. To Fuld’s detractors, he was one of the chairman’s pets, a know-nothing protector of the throne who shielded Fuld from any number of ugly truths. Freidheim was an executive in the Joe Gregory mold: He owned an enormous home in Greenwich and a constantly rotating fleet of cars; he had recently bought the “mobile office” once owned by one of his friends, hedge fund mogul Eddie Lampert—a black GMC Denali outfitted with Internet access that he had chauffeur him to Manhattan each day. “Isn’t this awesome!” he once announced excitedly when he showed off the vehicle to colleagues as it blasted the theme song to Mission: Impossible .

After the tense meeting with Fuld about the Journal story, Freidheim was determined to find the leaker for his boss. He had in fact sensed that something was amiss the night before, after he’d had a flurry of confusing phone calls with Craig and with Lehman’s spokesperson, Kerrie Cohen. He had been frustrated because he couldn’t get a straight answer about the coming story.