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

For fuck’s sake! Wilkinson thought. He and Treasury had had enough trouble trying to fend off all the Goldman Sachs conspiracy theories constantly being bandied about in Washington and on Wall Street. A private meeting with its board? In Moscow?

For the nearly two years that Paulson had been Treasury secretary he had not met privately with the board of any company, except for briefly dropping by a cocktail party that Larry Fink’s BlackRock was holding for its directors at the Emirates Palace Hotel in Abu Dhabi in June.

Anxious about the prospect of such a meeting, Wilkinson called to get approval from Treasury’s general counsel. Bob Hoyt, who wasn’t enamored of the “optics” of such a meeting, said that as long as it remained a “social event,” it wouldn’t run afoul of the ethics guidelines.

Still, Wilkinson had told Rogers, “Let’s keep this quiet,” as the two coordinated the details. They agreed that Goldman’s directors would join him in his hotel suite following their dinner with Gorbachev. Paulson would not record the “social event” on his official calendar.

That evening, the Goldman party boarded a bus to take them the dozen or so blocks to the Moscow Marriott Grand Hotel on Tverskaya Street. Some felt as if they were taking part in a spy thriller, what with the security detail and the grandeur of downtown Moscow. The directors walked through the bright lobby with its large fountain and were escorted upstairs to the Treasury secretary’s rooms.

“Come on in,” a buoyant Paulson said as he greeted everyone, shaking hands and giving bear hugs to some.

For the next hour, Paulson regaled his old friends with stories about his time in Treasury and his prognostications about the economy. They questioned him about the possibility of another bank blowing up, like Lehman, and he talked about the need for the government to have the power to wind down troubled firms, offering a preview of his upcoming speech. “Nonetheless,” he told them, “my own view is that we have tough times ahead of us, but based upon history, I think we may come out of this by year’s end.”

It was that comment that Blankfein recalled the following day to a director over breakfast. “I don’t know why he’d say that,” Blankfein said quizzically. “It can only get worse.”

CHAPTER TEN

One afternoon in late June, Dick Fuld stepped into the bustling lobby of the Hilton Hotel on Sixth Avenue at Fifty-third Street. He was late, which made him even more anxious about the meeting he was about to attend. Within days of Bart McDade’s being named Lehman’s new president, he had made a startling demand of Fuld: He wanted to rehire Michael Gelband and Alex Kirk, the two senior traders Joe Gregory had fired. The men, whom Gregory used to call the “naysayers,” were among the most vocal opponents of the firm’s escalation of risk over the years.

“We need these guys,” McDade had told Fuld, regarding his decision. “They already know the positions,” referring to Lehman’s portfolio of toxic assets, which they still hoped to sell. And McDade said that both of them had the support of “the troops on the trading floor,” which was critical in restoring confidence.

McDade hadn’t given Fuld much choice in the matter. And, given that Fuld had just handed McDade authority over the day-to-day operations of the firm, he felt he had to go along with his wishes for the good of the firm, as embarrassing as it might be to have his own judgment challenged so publicly. Before he did, however, he told McDade, “Look, you’re not hiring either guy back until I talk to them.”

Now Fuld was on his way to a face-to-face with Gelband, whom he hadn’t seen in over a year.

The tension was palpable as they both took seats in a dark meeting room. “We need to clear the air,” Fuld said, acknowledging that there was still some unfinished business to resolve. “Let’s understand: You’re coming back. I want to fucking hear from you.”

Gelband, a broad six-footer with a closely shaved head, didn’t appreciate Fuld’s aggressive tone and had no patience for bullying or bluffing. As far as he was concerned, he was doing Fuld a favor by returning amid the turmoil. Indeed, ironically enough, before agreeing to come back to Lehman he had been recruited to take Joe Cassano’s job at AIG.

“How’s that, Dick?” he asked.

“The last time we talked, okay, not the last time, but when you were at the firm and you and I talked about your bonus, I got the sense that you were unhappy with it, and that pissed me off, because you made a shitload of money in 06,” Fuld said, pouring himself a glass of water.

Gelband thought this was an unusual way to begin a meeting that he believed had been intended as something of a reconciliation. They had had a frank discussion about his bonus the year that he left, when he had earned more than $25 million, but he didn’t remember having complained about it too vociferously. “That’s interesting, because I didn’t have a problem with my bonus,” Gelband said. “In fact, I was completely fine with it.”

“Well, that’s not what Joe told me,” Fuld said.

For a moment they set aside their differences and talked about the firm, reminiscing about the better times and reviewing Lehman’s prospects. It was clear the company would have to unwind its positions as quickly as possible and try to get the best possible price for them. Gelband said he would have to conduct an inventory of the assets to get a sense of their value. Fuld also told him that it was his intention to raise additional capital.

“There is just one thing you need to understand,” Gelband said as the meeting was coming to a close. “The one reason I am coming back is because of Bart.”

As Fuld knew, Gelband had been a longtime friend of McDade’s; they had been classmates at the University of Michigan Business School, and it was McDade who had helped Gelband get his initial job interview at Lehman. “Well, yes, Bart is going to be running the day-to-day business,” Fuld said, trying to sound nonchalant, “ but I hope it has something to do with me as well.”

Gelband looked at him quizzically and replied, “No, no. This has to do with Bart.”

On the Fourth of July weekend, Hank and Wendy Paulson were walking along the beach on Little St. Simons Island when they spotted a loggerhead sea turtle laying its eggs in the sand. For nature lovers like the Paulsons, it was an extraordinary moment, and they stopped to marvel at the sight. Paulson had flown down to the tiny island, just off of Georgia’s coast and some sixty miles south of Savannah, to relax with his wife after what had seemed like a whirlwind of travel and work. The island, a sanctuary for unusual birds and reptiles, is where he liked to go to clear his head; he liked it so much that the Paulsons bought up three quarters of the ten-thousand-acre property starting in 2003 for $32.65 million.

The European trip had been a success. His speech in London about the need to build a safety net for investment banks in order to prevent a failure from reverberating throughout the system had attracted a great deal of notice, and at the reception afterward at 10 Downing Street, Gordon Brown, the prime minister, congratulated him “for thinking ahead and getting out in front of the problem.”

Still, as Paulson walked the shore, he was finding it difficult to unwind. He continued to have deep misgivings about the economy in the near term and had stated as much on his trip: “The U.S. economy is … facing a trio of headwinds: high energy prices, capital markets turmoil, and a continuing housing correction.” Apart from his general systemic concerns, though, Paulson’s immediate worry was Lehman Brothers. He had spoken to Fuld from his cabin on the island earlier in the day, and it was becoming clearer to him that the firm was unlikely to find a buyer. Most of the large sovereign wealth funds in the Middle East and Asia had been stung by investments they had made in other U.S. banks back in December and wouldn’t be likely to invest in Lehman, at least not in the present. Paulson feared that Fuld could soon run out of options.