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

On July 29 Lehman’s Gulfstream circled over the airport in Anchorage, Alaska, preparing for its approach to land to refuel. Aboard was Dick Fuld, heading back from Hong Kong, where he and a small Lehman team had met with Min Euoo Sung of the Korea Development Bank.

Fuld was in uncharacteristically good spirits that day, confident that he was finally getting closer to a deal. He had had a productive conversation with KDB, and both sides had agreed to continue talking. It would still be a “long putt,” he knew, but K DB had become his best hope. Min had indicated that he would be interested in buying a majority stake in Lehman. He knew Min was still anxious about Lehman’s real estate portfolio—the toxic assets weighing it—but Min also seemed to be upbeat about the prospect of making KDB a major player on the world stage. There hadn’t been much discussion about price at the meeting at the Grand Hyatt in downtown Hong Kong, but Fuld was confident that a deal might finally be at hand.

Fuld was also pleased with himself for having kept the talks out of the press. He had been so concerned about leaks this time around that he had instructed the team he took with him to the meetings—Bart McDade, Skip McGee, Brad Whitman, Jesse Bhattal, and Kunho Cho—not to answer their phones. McGee had gone so far as to mislead his staff back in New York by leaving a voice mail for Mark Shafir, who had gone on the earlier trip to South Korea, telling him that he had flown to China to visit with clients. Fuld had organized the meeting in Hong Kong, as opposed to the more likely Seoul, partly so that if anyone was tracking the firm’s plane, its destination would lead to less speculation.

On the return trip the Lehman team watched The Bank Job , a British heist movie, on the plane’s large screen. Fuld had already seen it and made the case for an action film instead, but McDade, who was increasingly taking control of the firm, won out.

As they taxied to the refueling station, Fuld’s good mood suddenly vanished: The maintenance crew had discovered an oil leak. As the pilot tried to coordinate a repair, the Lehman team ate lunch on the plane as it sat on the tarmac. But after an hour, it was uncertain whether that damage could be repaired.

McDade started calling his secretary to see if they could book a commercial flight home.

“When’s the last time you flew commercial?” McDade ribbed Fuld, who was plainly not amused.

On August 6, 2008, a team of bankers from Morgan Stanley arrived at the Treasury building and was escorted up to a conference room across from Paulson’s office for what they all knew would be an unusual meeting. Looking for help with Fannie Mae and Freddie Mac, Paulson had called John Mack a week earlier to hire his firm as an adviser to the government. Paulson would have chosen Goldman were it not for the obvious public relations problem or the fact that it was advising Fannie. He also briefly considered hiring Merrill Lynch, but Morgan Stanley seemed the best option.

Mack had originally been reluctant even to take the assignment, for the cost of serving as Treasury’s adviser on Fannie Mae and Freddie Mac was that the firm could not conduct any business with the mortgage giants for the next six months, and therefore stood to lose out on tens of millions of dollars in fees. “How can we tell our shareholders we’re walking away from this kind of money? I’m going to get asked about why I did that,” he told his team.

But after some soul-searching, Mack decided working for the government was the patriotic thing to do. Morgan Stanley would receive a token payment of $95,000, which would barely cover the cost of their secretaries’ overtime.

Just a week earlier the Senate had passed, and President Bush had signed into law, an act that gave Treasury the temporary authority to backstop Fannie and Freddie. Now the question that faced Paulson was: What to do with that authority?

He recognized that he had created an odd dilemma: Investors now assumed the government was planning to step in. That would make it even harder for Fannie and Freddie to raise capital on their own, as investors worried that a government intervention would mean they would get wiped out. Any sort of investment by the government increasingly seemed as if it could become a self-fulfilling prophecy. “Either investors are going to be massively diluted, given the amount of equity they are going to need, or [Freddie and Fannie] are going to be nationalized,” Dan Alpert, managing director of Westwood Capital LLC, had told Reuters that morning. “Without a larger equity capital base, they are going to be incapable of surviving.”

In a Treasury conference room, Anthony Ryan, assistant secretary for financial markets, briefed the bankers on the department’s work to date on the GSEs. Attending from Morgan Stanley were Robert Scully, fifty-eight, the firm’s co-president, who had worked on the government’s bailout of Chrysler nearly three decades earlier; Ruth Porat, fifty, the head of its financial institutions banking group; and Daniel A. Simkowitz, the forty-three-year-old vice chairman of global capital markets.

Ten minutes into Ryan’s presentation, Paulson walked in, looking slightly distracted. “Everyone’s going to scrutinize what we do,” he told the group as he tried to inspire and scare them simultaneously. “I’m going to work you to the bone. But I’m confident of this: It will be the most meaningful assignment of your career.”

Scully pressed Paulson to explain his rationale for the assignment. “Just tell us what you’re really looking to do here,” he said. “Do you want to kick the can down the road?”

“No,” said Paulson, shaking his head. “I want to address the issue. I don’t want to leave the problem unsolved.” He was adamant that the project not become another bureaucratic exercise in producing PowerPoint presentations that would just get filed away. “I, ah, we have three objectives: market stability, mortgage availability, taxpayer protection.”

Scully was still skeptical, certain there had to be some political calculus involved. And, with Freddie’s reported loss of $821 million that morning, doing nothing no longer seemed a viable option.

“Are there any policy options that are off the table or, alternatively, are there any stakes you have in the ground in terms of starting points and approaches to this problem that you’d like us to think about?” Scully probed.

“No, you have a clean sheet of paper,” Paulson said. “All options are on the table; I’m willing to consider everything .”

A young child’s squeal a few doors down suddenly halted the discussion. It was Paulson’s granddaughter, Willa, who was visiting that day and waiting in a small conference room across from his office. Paulson was about to catch a flight with his family to attend the Olympic Games in Beijing. It was, however, a working vacation—he had a busy set of meetings with Chinese officials—and as they all knew, he would be attached to his cell phone.

He apologized to the group for cutting the meeting short.

“I’ll be back in ten days,” he told them. “I want a lot of progress.”

In the first week of August, Min Euoo Sung arrived in Manhattan from Seoul to continue talks with Lehman Brothers. The parties were still far from signing a final agreement, but they were inching closer to nailing down at least the outlines of one.