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

The daunting thirty-first executive floor, known around the firm as “Club 31,” was nearly empty as Fuld stepped out of the elevator and walked toward his office.

After hanging his coat and jacket in the closet next to his private bathroom, he began his series of daily rituals, immediately logging on to his Bloomberg terminal and switching on CNBC. It was just after 6:00 a.m. One of his two assistants, Angela Judd or Shelby Morgan, would typically arrive in the office within the hour.

When he checked the futures market—where investors make bets on how stocks will perform when the markets open—the numbers hit him in the face: Lehman shares were down 21 percent. Fuld reflexively did the calculations: He had just personally lost $89.5 million on paper, and the market hadn’t even opened.

On CNBC, Joe Kernen was interviewing Anton Schutz of Burnham Asset Management about the fallout from the Bear Stearns deal and what it meant for Lehman.

“We’ve been characterizing Lehman Brothers as the front, or ground zero, for what’s happening today,” Kernen said. “What do you expect to see throughout the session?”

“I expect these investment banks to be weak,” Schutz replied. “The reason is there’s just this tremendous fear of mismarking of assets on balance sheets, and how could JP Morgan have gotten away with paying so little for Bear Stearns, and why did the Fed have to step up with $30 billion to take on some of the bad assets. I think there’s a lot of question marks out here, and we’re in need of a lot of answers.”

Fuld watched with a stone face, mildly relieved when the conversation veered away from Lehman. Then it veered back. “What do you do if you’re one of the thousands and thousands of Lehman employees watching every tick here today?” asked Kernen. “This is people on pins and needles.”

Pins and needles? That didn’t begin to describe it.

At 7:40 a.m. Hank Paulson called to check in. Dow Jones Newswire was reporting that DBS Group Holdings, the largest bank in Southeast Asia, had circulated an internal memo late the previous week ordering its traders to avoid new transactions involving Bear Stearns and Lehman. Paulson was concerned that Lehman might be losing trading partners, which would be the beginning of the end.

“We’re going to be fine,” Fuld said, reiterating what he had told him over the weekend about the firm’s solid earnings report, which he planned to announce Tuesday morning. “That’ll quiet down all this shit.”

“Keep me updated,” Paulson said.

An hour later tumult ruled on every trading floor in the city. Fuld stayed glued to the two Bloomberg screens on his desk as Lehman’s stock opened: down 35 percent. Moody’s reaffirmed its A1 rating on the investment bank ’s senior long-term debt, but the rating agency had also lowered its outlook to stable from positive. On the flight back from India, Fuld had debated with Gregory and Lehman’s chief legal officer, Tom Russo, about whether to preannounce the firm’s earnings today, before the market opened, instead of tomorrow, as originally planned. There was no compelling reason to wait. The earnings were going to be good. Fuld had been so confident that, before leaving for Asia, he had recorded an upbeat internal message to employees. But Russo had talked him out of moving up the earnings announcement, fearing that it might look desperate and ratchet up the anxiety.

As Lehman’s stock continued to plummet, Fuld was second-guessing not only this decision but countless others. He had known for years that Lehman Brothers’ day of reckoning could come—and worse, that it might sneak up on him. Intellectually, he understood the risks associated with cheap credit and borrowing money to increase the wallop of your bet—what is known on the Street as “leverage.” But, like everyone else on Wall Street, he couldn’t pass up the opportunities. The rewards of placing aggressively optimistic bets on the future were just too great. “It’s paving the road with cheap tar,” he loved to tell his colleagues. “When the weather changes, the potholes that were there will be deeper and uglier.” Now here they were, potholes as far as the eye could see, and he had to admit, it was worse than he’d ever expected. But in his heart he thought Lehman would make it. He couldn’t imagine it any other way.

Gregory took a seat in front of Fuld’s desk, the two men acknowledging each other without uttering a word. Both leaned forward when CNBC ran a crawl along the bottom of the screen asking: “Who Is Next?”

“Goddamit,” Fuld growled as they listened incredulously to one talking head after another deliver their firm’s eulogy.

Within an hour, Lehman’s stock had plunged by 48 percent.

“The shorts! The shorts!” Fuld bellowed. “That’s what’s happening here!”

Russo, who had canceled his family’s vacation to Brazil, took the seat next to Gregory. A professorial sixty-five-year-old, he was one of Fuld’s few other confidants in the firm besides Gregory. On this morning, however, he was fanning the flames, telling Fuld the latest rumor swirling around the trading floor: A bunch of “ hedgies,” Wall Street’s disparaging nickname for hedge fund managers, had systematically taken down Bear Stearns by pulling their brokerage accounts, buying insurance against the bank—an instrument called a credit default swap, or CDS—and then shorting its stock. According to Russo’s sources, a story making the rounds was that the group of short-sellers who had destroyed Bear had then assembled for a breakfast at the Four Seasons Hotel in Manhattan on Sunday morning, clinking glasses of mimosas made with $350 bottles of Cristal to celebrate their achievement. Was it true? Who knew?

The three executives huddled and planned their counterattack, starting with their morning meeting with nerve-racked senior managers. How could they change the conversation about Lehman that was going on all over Wall Street? Every discussion about Bear, it seemed, turned into one about Lehman. “Lehman may have to follow Bear into the confessional before Good Friday,” Michael McCarty, an options strategist at Meridian Equity Partners in New York, told Bloomberg Television. Richard Bern-stein, the respected chief investment strategist for Merrill Lynch, had sent out an alarming note to clients that morning: “Bear Stearns’s demise should probably be viewed as the first of many,” he wrote, tactfully not mentioning Lehman. “Sentiment is just beginning to catch on as to how broad and deep the credit market bubble has been.”

By midmorning Fuld was getting calls from everybody—clients, trading partners, rival CEOs—all wanting to know what was going on. Some demanded reassurance; others offered it.

“Are you all right?” asked John Mack, the CEO of Morgan Stanley and an old friend. “What’s going on over there?”

“I’m all right,” Fuld told him. “But the rumors are flying. I’ve got two banks that won’t take my name”—Wall Street-speak for the stupefying fact that the banks wouldn’t trade with Lehman. The newest rumor was that Deutsche Bank and HSBC had stopped trading with the firm. “But we’re fine. We’ve got lots of liquidity, so it’s not a problem.”

“Okay, we’ll trade with you all day,” Mack assured him. “I’ll talk to my trader. Let me know if you need anything.”

Fuld began reaching out to his key deputies for help. He called the London office and spoke to Jeremy Isaacs, who ran the firm’s operation there. When he got off the phone with Fuld, Isaacs told his team, “I don’t think we’re going bust this afternoon, but I can’t be one hundred percent sure about that. A lot of strange things are happening… .”