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

In the meantime, Paulson instructed them, the message should be clear: No bailouts.

Brian Schreiber, removing his thick-framed glasses to rub his eyes, could see from his examination of AIG’s daily cash tally that the firm could soon be out of money if it didn’t start selling assets quickly. He nervously began working through the list of people whom he could call whose companies would be capable of providing assistance almost immediately.

The first name that occurred to him was Chris Flowers. His fund had several billion dollars available to buy financial-services assets, and as a former financial-services banker he understood the insurance business well enough that he could move instantly if he was interested. They had also worked together before; Flowers had sought to partner with the firm to buy some smaller insurance companies in the past.

Schreiber tracked down Flowers over at Sullivan & Cromwell, still doing diligence on Lehman’s books.

“We have a huge problem,” Schreiber told him. “We’re going to run out of cash shortly, um, and, you know, we only have, you know, one or two shots to get this right.”

“Well, I’m in the middle of Lehman here,” Flowers replied. “I’m working with BofA.”

“Is there any way you could come down here tomorrow?” Schreiber persisted.

“We’ll come take a look,” he said somewhat noncommittally, uncertain whether he’d be finished with Lehman by then, and then added, “I see this is really important.”

After ending his conference call with Geithner and Bernanke, Paulson summoned Michele Davis, his head of communications, to his office.

“So, I talked to Lewis and Diamond. They’re, of course, all saying that they want government money,” he told her. “And we’ve got Pelosi and everybody else all over us,” he added, referring to rumblings that the Speaker of the House had made expressing her disapproval of any more bailouts.

Davis had brought with her a handful of articles that had already been published by the major papers on the Internet, and it was clear that a possible bailout would be the primary focus of the following day’s news cycle.

A Dow Jones article published at 7:03 p.m., just minutes earlier, opened: “With a beleaguered Lehman Brothers Holdings Inc. likely to be sold, one key issue is what a backstop from the Federal Reserve, if it materialized, would look like.”

“You cannot have this in tomorrow’s headlines, tomorrow’s newspapers saying this,” Davis said, shaking her head. “Everyone is going to think, Oh, Hank is coming with his checkbook. That is not the way you want to start this negotiation.” As a former staffer herself, she was also aware of the Bush administration’s stand on the matter, and knew how politically problematic it would be if the possibility of a bailout of a major Wall Street firm were even being entertained.

Although the subject was left unspoken, both she and Paulson knew another reason a Lehman bailout could quickly become a public relations nightmare: Bush’s brother, Jeb, the former governor of Florida, worked as an adviser to Lehman’s private-equity business. Bush’s cousin, George H. Walker IV, was on the firm’s executive committee. And then there was Paulson’s brother, Richard. The press, needless to say, would have a field day.

“We should make some calls,” she urged him, subtly suggesting they begin leaking to the press word that the government wouldn’t be pursuing any bailout of Lehman.

Paulson mulled over his dilemma. He had always opted to be cautious with the press and hated the very idea of leaking as a tactic. But he trusted Davis’s instincts, and in any case, he preferred not to get his own hands dirty in the matter.

“Do what we need to do,” he told her. “Just, you know, don’t have it be me on the record.”

As soon as Paulson awoke on Friday, he began poring through the morning papers, looking for evidence of Davis’s handiwork. The message was supposed to have been made clear: Read Our Lips: No More Bailouts.

The mood in Washington was not hard to discern: There was no desire whatsoever for any further Wall Street rescues. All punditry could talk about was moral hazard, as if it were some sort of emerging disease that had just reached pandemic proportions. Bail out Lehman, the thinking went, and you will make bailouts the default solution at a time when no firm seems safe.

And what could be more satisfying than having your decision—the buck stopped there, thank you very much—manifested on the front pages of the country’s leading publications? Paulson first turned expectantly to the newspaper of financial record, the Wall Street Journal , and was sorely disappointed. The A1 article about the financial crisis merely tiptoed around the issue without ever being forceful enough about it, he thought as he read the piece. As close as the reporter got to explaining his position was this sentence: “Federal officials currently aren’t expected to structure a bailout along the lines of the Bear transaction or this past weekend’s rescue of mortgage giants Fannie Mae and Freddie Mac.”

The New York Times was even worse: “But while the Treasury Department and Fed were working to broker an orderly sale of Lehman, it was unclear whether the Fed would stand behind any deal, particularly after the Bush administration took control of the nation’s two largest mortgage finance companies only days ago.”

No, that doesn’t quite capture what they have been trying to convey, Paulson thought.

He turned to the Journal ’s editorial page, where the air was typically more rarefied, and was able to take solace, as conservatives so often had, in its hyperintellectual and at times harsh right-wing opinions. The typically unsigned editorial was called “Lehman’s Fate,” and its position was right out of Paulson’s playbook.

“At least in the Bear case,” the Journal editorial read, “there was some legitimate fear of systemic risk. The Federal Reserve’s discount window hadn’t yet been opened to investment banks, and so there was some chance of a larger liquidity panic.

“That’s far less likely with Lehman. The discount window is now wide open to Merrill Lynch and Morgan Stanley, among others, and federal regulators have had months to inspect the value of Lehman’s assets and its various counterparties. If the feds step in to save Lehman after Bear and Fannie Mae, we will no longer have exceptions forged in a crisis. We will have a new de facto federal policy of underwriting Wall Street that will encourage even more reckless risk taking.”

Yes, yes, all true , Paulson thought as he finished the editorial. Still, it didn’t go far enough. He needed somehow to make it clear to all the banks that there would be no handouts, no more “Jamie Deals.” And he needed to do so in a way that would leave no room for misunderstanding.

When he arrived at the office Paulson walked down the hall into Michele Davis’s office and asked sullenly, “What do we do?”

“I’d rather say today that we don’t want to use our money and on Sunday night have to explain why we were backed into a corner,” Davis told him. “You want me to call Liesman?” she asked.