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

Fannie’s lawyers summoned all the members of the board to Washington for a meeting at the FHFA the following day. Treasury had made it clear that it wanted only board members present—Fannie could not bring its banking adviser, Goldman Sachs, to the gathering.

At noon on Saturday the lawyers—Beth Wilkinson, Rodgin Cohen, and Robert Joffe of Cravath, Swaine & Moore, who were advising Fannie’s board—accompanied the entire thirteen-member board, who crowded into the same small room at FHFA as had been used the day before when Treasury presented its terms: It would acquire $1 billion of new preferred senior shares in each company, which would give it 79.9 percent of the common shares of each. The government would contribute as much as $200 billion into both companies if necessary. The terms were nonnegotiable.

The meeting ended quickly, and the Fannie directors left to deliberate. Wilkinson realized that she would have to cancel a birthday dinner she had planned for her husband, David Gregory of NBC News. Late that Saturday night the board of Fannie Mae finally voted to give its assent. Paulson was awoken at 10:30 that night by a call from Barack Obama, the Democratic presidential candidate. Earlier that day, on a campaign stop in Indiana, Obama had said about the Fannie and Freddie situation that “any action we take must be focused not on the whims of lobbyists and special interests worried about their bonuses and hourly fees, but on whether it will strengthen our economy and help struggling homeowners.” Obama and Paulson spoke for nearly an hour.

After the takeover was announced on Sunday, there was palpable relief among the Treasury staffers who had been working on it for weeks. They had accomplished something that they were convinced would go a long way toward stabilizing the financial system. The markets would steady now that a major source of uncertainty had been removed. They had hit a home run.

Paulson, however, still had one pressing concern: Lehman Brothers.

Ken Wilson, with a free afternoon on his hands for the first time since he had started working for Paulson, left Treasury and walked to his apartment, and then to a pub in Georgetown to have dinner while watching a football game.

That night he checked his voice mail to find several messages from Dick Fuld.

When he returned the call, Fuld told him how thrilled he was about the Fannie and Freddie news, hoping it would calm the markets. But he was distraught over the lack of deals available to him. The Korean situation seemed doomed. Bank of America was nowhere. Fuld said that the firm was planning to pursue a good bank-bad bank strategy, in which he hoped to spin off the firm’s toxic real estate assets into a separate company. Stephen Schwarzman, the co-founder of Blackstone Group and a former Lehman banker, had just had a blunt conversation with Fuld. “Dick, this is like cancer. You’ve got to lop off the bad stuff. You need to get back to the old Lehman,” he told him.

Wilson, getting nervous that the spin-off plan wouldn’t be enough, told Fuld, “You have to really think about doing what’s right for the firm,” trying politely to suggest that he needed to sell the firm without actually using the word.

“What do you mean?” Fuld asked.

“If your stock price continues to slide, something might come out of the woodwork here with a price that doesn’t look that compelling. But you might have to take it to keep the organization intact.”

“What do you mean, low price?”

“It could be low single digits.”

“No fuckin’ way,” Fuld said heatedly. “Bear Stearns got $10 a share, there’s no fuckin’ way I will sell this firm for less!”

CHAPTER TWELVE

The news started crossing the tape late Monday night, and by 2:00 a.m., it had been picked up by every wire service in the world: The Korea Development Bank was no longer a bidder for Lehman. “Eyes on Lehman Rescue as Korea Lifeline Drifts,” the Reuters headline screamed.

Jun Kwang-woo, chairman of the Financial Services Commission in Korea, had held a briefing with reporters in Seoul that night and all but proclaimed that the summer-long talks with Lehman were dead: “Considering financial market conditions domestically and abroad, KDB should approach buying into Lehman at this point of time very carefully.”

Dick Fuld, alone in his office on Tuesday morning, sat staring at his computer screens, fixated in an unmitigated rage. To Fuld the talks had long since ended. KDB had returned briefly with an offer of $6.40 a share, though Fuld didn’t think they were serious. But to the public, which had heard about a rumored deal, the news would come as a shock. Shares of Lehman dropped precipitously from virtually the moment the stock market opened.

The timing of the report was especially embarrassing to Fuld in that it had come while Lehman was in the midst of holding its high-profile annual banking conference at the Hilton Hotel in Midtown Manhattan, just two blocks away from his headquarters. A CNBC van was parked out front to cover the second day of the event; Bob Steel, now of Wachovia, and Larry Fink, of BlackRock, were set to present that morning; Bob Diamond of Barclays Capital had spoken at the conference the day before.

Bart McDade walked into Fuld’s office just after the market’s open, but before he could say anything, Fuld started shouting and pointing to the TV. “Here we go again,” Fuld said. “Perception trumping reality once more.” McDade politely turned his attention to the screen.

CNBC’s headline warned: “Time Running Out for Lehman.” David Faber, the network’s seasoned reporter, elaborated on that theme, pointing out, “They need to do an awful lot between now and next Friday [ sic ], when the company reports earnings.” But then he added, somewhat prophetically: “Can they actually report the losses that are anticipated on Friday [ sic ] and simply say we’re continuing to review strategic alternatives? Perhaps they can, and perhaps they will have to. But there are certainly a lot of questions.”

As it happened, McDade had come to speak to Fuld about precisely the subject that Faber had raised. McDade told Fuld he thought they should preannounce earnings before the scheduled earnings call next Thursday—maybe as early as the next day. “We have to settle things down,” he told Fuld.

Fuld, nodding in agreement, said, “We’ve got to act fast so this financial tsunami doesn’t wash us away.”

McDade’s overture to Fuld was, at least in part, Kabuki theater, for at this juncture, asking Fuld’s permission was simply a courtesy. McDade had already told Ian Lowitt, Lehman’s CFO, to get the numbers ready. He was also thinking of announcing the SpinCo plan—the good bank-bad bank plan—at the same time.

Although McDade didn’t require Fuld’s blessing to release the numbers—he and his cohorts had already stripped Fuld of any real authority—he did need Fuld’s cooperation in leading the earnings call. For better or worse, he was still the public face of the firm, and his presence would be a key factor in helping to calm the markets.

Given the complexities of their current situation, however, McDade was worried about Fuld’s emotional state. “I don’t know if he can do it. He’s under an enormous amount of stress,” McDade told Gelband before he went to see Fuld. From a public relations point of view, however, they had few alternatives, and McDade knew Fuld would want to lead the earnings call. Fuld wouldn’t have it any other way.