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

When Paulson turned to leave and other executives started to get up and mill around, Geithner approached Lewis and, leaning close to him, whispered, “I believe you have a meeting with Dick.”

“Yeah, I do,” Lewis replied.

Geithner gave him directions to a side room where they could speak in private. Geithner had apparently already given Fuld the same instructions, because Lewis noticed him across the room looking back at them like a nervous date. Seeing Fuld start to walk in one direction, Lewis headed in the other; with half of Wall Street looking on, the last thing either of them needed was to have word of their meeting get out.

The two men eventually doubled back and found the room, but when Lewis arrived, Fuld was in the midst of a heated argument with a Fed staff member. It was only the second time the men had ever met, and the sharp tone of his hectoring startled Lewis.

For about twenty minutes Fuld explained how he pictured a deal might work, reiterating the proposal he had made to Curl a week earlier. Fuld said he’d want at least $25 a share; Lehman’s shares had closed that day at $18.32. Lewis thought the number was far too high and couldn’t see the strategic rationale. Unless he could buy the firm for next to nothing, the deal wasn’t worth it to him. But he held his tongue.

Two days later, Lewis called Fuld back.

“I don’t think this is going to work for us,” Lewis said as diplomatically as he could, while leaving open the possibility that they could discuss the matter again.

Fuld was beside himself as he called Paulson at 12:35 p.m. to relay the bad news. Now all he was left with was the possibility of the Koreans, and he pressed Paulson to make a call to them on his behalf—a request that Paulson, having already interceded with Buffett and Bank of America, was now resisting.

“I’m not going to pick up the phone and call the Koreans,” Paulson told him. “If you want to scare someone, call them up and tell them I said they should buy Lehman Brothers,” he said, explaining that his involvement would only heighten suspicion about the firm’s prospects. “Dick, if they call me and want to ask questions, I’ll do what I can to be constructive.”

It was just the latest bad piece of news of a very long day. That night, Bart McDade forwarded Fuld an e-mail from a trader with more speculation about where the negative rumors were coming from. “It is clear that GS [Goldman Sachs] is driving the bus on the hedge funds kabal [ sic ] and greatly influencing the downside momentum, LEH and others. Thought it was worth passing on.”

Fuld replied: “Should we be too surprised? Remember this, though—I will.”

CHAPTER ELEVEN

Robert Willumstad could feel the perspiration begin to soak through his undershirt as he strode along Pearl Street at 9:15 a.m. on Tuesday, July 29, in Manhattan’s financial district. Although the humidity was oppressive that summer morning, he was also anxious about his upcoming appointment with Tim Geithner at the Federal Reserve Bank of New York.

Since accepting the position of CEO at AIG just over a month earlier, he had been working long hours to try to get a handle on the company’s myriad problems. With the exception of a weekend trip to Vail over July Fourth to visit his daughter, he had been at the office seven days a week. When he began the job he had announced plans “to conduct a thorough strategic and operational review of AIG’s businesses” and “to complete the process in the next sixty to ninety days and to hold an in-depth investor meeting shortly after Labor Day to lay it all out for you.”

As Willumstad started his investigation, his head of strategy, Brian T. Schreiber, pulled him aside and shared a startling discovery he had made: “It could actually be a liquidity problem, not a capital problem.” In other words, even though this massive insurance conglomerate had hundreds of billions of dollars’ worth of securities and collateral, given the credit crisis, it could find itself struggling to sell them fast enough or at high enough prices to meet its obligations. The situation could become even worse if one of the ratings agencies, like Moody’s or Standard & Poor’s, were to downgrade the firm’s debt, which could trigger covenants in its debt agreements to post even more collateral.

“You scared the shit out of me last night,” Willumstad told Schreiber the following day, after spending the night contemplating the firm’s liquidity issues. The problem would soon be further compounded, Willumstad realized, with the firm scheduled to report a $5.4 billion loss in its second quarter.

On this muggy July day, Willumstad was on his way to see Geithner, whom he had only met for the first time a month earlier, to sound him out about getting some help if the markets turned against him. The Federal Reserve Bank of New York did not regulate AIG, or any insurance company for that matter, but Willumstad figured that between AIG’s securities-lending business and its financial products unit, Geithner might take an interest in his problems. Even more he hoped that Geithner appreciated how closely AIG was interconnected with the rest of Wall Street, having written insurance policies worth hundreds of billions of dollars that the brokerage firms relied on as a hedge against other trades. Like it or not, their health depended on AIG’s health.

“No reason to panic, no reason to believe anything bad is going to happen,” Willumstad said after Geithner had greeted him with his usual firm, athletic handshake and invited him back into his office. “But we’ve got this securities lending program… .”

He explained that AIG lent out high-grade securities like treasuries in exchange for cash. Normally it would have been a safe business, but because the company had invested that cash in subprime mortgages that had lost enormous value, no one could peg their exact price, which made them nearly impossible to sell. If AIG’s counterparties—the firms on the other side of the trade—should all demand their cash back at the same time, Willumstad said, he could run into a serious problem.

“You’ve made the Fed window available to the broker-dealers,” he continued. “What’s the likelihood, if AIG had a crisis, that we could come to the Fed for liquidity? We’ve got billions, hundreds of billions of dollars of securities, marketable collateral.”

“Well, we’ve never done that before,” Geithner replied briskly, meaning that the Federal Reserve had never made a loan available to an insurance company, and he seemed none too swayed by Willumstad’s argument.

“I can appreciate that,” Willumstad replied. “You never did it for brokers before either, but obviously there’s some room here.” After Bear Stearns’ near-death experience, the Fed had decided to open the discount window to brokerage firms like Goldman Sachs, Morgan Stanley, Merrill Lynch, and Lehman.

“Yes,” Geithner acknowledged, but said that it would require the approval of the entire Fed board and, he added pointedly, “I would only recommend it if I thought I was making a good credit decision.”

He then delivered to Willumstad the same warning that he had given to Fuld the month before when Fuld had sought bank holding company status for Lehman.

“I think the problem is it’s going to exacerbate what you’re trying to avoid,” he said. “When it would get disclosed, that would cause concern among the counterparties. It would exacerbate anything we had.”

Willumstad could see he wasn’t getting anywhere with his argument as Geithner rose to indicate that he had to get to his next meeting, saying only, “Keep me informed.”