So, who did Lehman have to ask for the $20 million? The bank apparently in charge of its destiny all along: JPMorgan Chase.
According to Berkenfeld, Steve Cutler, JPMorgan’s general counsel, initially balked at handing over $20 million to Lehman, explaining that a “higher authority” had frozen all Lehman’s accounts. Berkenfeld says, he was about ready to snap at that point. Many at Lehman groused about Dimon “hovering” around their team at the New York Fed that hellish weekend—wearing black jeans and a black silk shirt and “you know, looking very hip,” recalls one of the attendees.
“I don’t know if ‘ higher authority’ means Jamie Dimon or if it means somebody outside of your organization,” Berkenfeld told Cutler, “but when we take your deposition,
we will find out
. All right?”
The funds were released.
Lehman could now file for bankruptcy—the largest filing in history. It listed $613 billion in liabilities and had $34 billion tied up in open derivatives contracts in 22 currencies in dozens of countries all over the world. Each of those foreign offices were governed by local bankruptcy laws.
Around 9 P.M. that night, Fuld’s team—one by one—came by to give him a hug. In they trooped: McDade, Lessing, Russo, Freidheim, Goldfarb . . . all of them. It was like a receiving line at a funeral.
Fuld was stricken, numb. “I think I am going to puke,” he said.
Much later, Paulson called. “Dick, you did everything you could,” he told him.
Paulson truly believed this; he felt very sorry for Fuld.
“It’s a tragedy,” Paulson said a year later.
A tragedy that confirmed a view that Paulson had about corporate leadership. “It is not healthy for a
CEO
to stay too long. When he is in the job for upwards of 10 years, he can become set in his ways and it becomes increasingly difficult for a management team to challenge the boss’s decision or to change longstanding policies or practices.”
He didn’t know that Fuld had tried years earlier to hire Joe Perella for precisely that reason—and had been blocked.
That week was just nuts. Everything happened so fast. None of us got any sleep. Ian [Lowitt] was almost incoherent by the end. I even got asked if I needed a doctor at one point, I was so tired.
—Alex Kirk
W
hile Dick Fuld and his board convened during Lehman’s last hours on Sunday, an exhausted Bob Diamond was walking up Madison Avenue with his wife, Jennifer, and daughter, Nell, who had been in constant touch with him as the crisis escalated all weekend. Nell had caught the train up from Princeton to comfort her father, and the three were walking glumly to dinner when his cell phone rang.
“I don’t think I can take another call,” he said, half-joking.
“Who is it, Dad?” Nell said.
“It’s Bart McDade.”
“Dad, answer your phone.”
The weekend had taken a massive toll on McDade ‘s already low tolerance for fools. He had spent the afternoon at the New York Fed being castigated by various regulators for the manifold sins of Dick Fuld and Joe Gregory.
He feared that no one in the government seemed capable of grasping the carnage that would ensue if Lehman filed for bankruptcy on Monday.
Lehman was on one side or the other of hundreds of billions of dollars in trades. It had hundreds of billions of assets and liabilities strewn all around the world in an unimaginable variety of investments. If everyone who had done business with Lehman, as a client or a trading partner or merely a strategic partner, called their lawyers, there’d be free fall in the markets.
At the very least, McDade needed someone to buy Lehman’s New York broker-dealer operations out of receivership—and he knew Diamond would be interested; it was the only part of the firm he had really wanted, anyway.
Diamond’s answer, of course, was a resounding “Yes.”
The men agreed to meet up early the next morning back at Lehman headquarters, because everyone in London who was needed to sign off on such a deal was asleep.
Hank Paulson flew back to D.C. to explain to the press what had happened.
It wasn’t all bad news. Lehman may be filing for bankruptcy, but Bank of America announced it had taken over Merrill Lynch the night before.
And for the next 24 hours, Paulson would be lionized in the press for letting Lehman go, for standing up to the Street, for refusing to grease the country’s slide to socialism.
“On Merrill and Lehman, Paulson makes the right move,” read a typical headline.
But Paulson knew his troubles were just beginning.
He later said he felt that he sounded cavalier the next morning when he said, “I never once considered putting government money into Lehman Brothers.” People thought Paulson was saying that he never once tried to save Lehman, which could not have been further from the truth.
“I didn’t want to stand up and say, ‘Guess what? We’ re sitting here naked. The United States of America is powerless. And we can do whatever we want for a commercial bank, but for an investment bank we can’t. And we’ve got a problem.’ [Even though this] was true. And so what I said was something very narrowly true.
“What I’d meant was, ‘ If there had been a deal where we could have put government money in, I would have considered it.’”
While Paulson talked to the press, Diamond and McDade set up a war room on Lehman’s 31st floor, where Fuld could watch them brain-storming through the window of his office—a somewhat uneasy arrangement for all parties.
“It was really horrible to watch him suffer,” says one of Fuld’s friends.
But Diamond, sorry as we was for Fuld, had to get down to sealing the deal of his career.
To stave off Armageddon while Barclays hammered out a deal, Lehman’s clearing bank, JPMorgan, had agreed to keep the New York trading desk in working order by funneling the broker-dealer tens of billions of dollars in loans from the New York Fed. JPMorgan
CEO
Jamie Dimon would later claim in a letter that JPMorgan did this at the request of not only Lehman and the New York Fed but Barclays itself. Lehman had to survive.
Or, rather, Lehman America did. Lehman’s treasurer, Paolo Tonucci, had been instructed not to move any money outside the United States. (Usually Lehman did; it moved $8 billion to Europe.) This meant that on Monday morning, in London, Christian Meissner had no money to pay his 10,000 employees, and no news to deliver.
Meissner was livid. He was surrounded by chaos. His secretary was due to give birth and suddenly she had no health insurance. People stopped coming in to work; no one knew if they’d be paid that week.
“You’ re on your own,” Tom Russo says he told the firm’s London general counsel, Andrew Wright, during a phone conversation. After all, if not for the protectionist unresponsiveness of the British at the Financial Services Authority (
FSA
), many felt that the firm might still be alive. “Please don’t ask me to feel sorry for the British,” one Lehman senior executive said. “After what they did to us over the weekend? Please! They got what they deserved.” This was payback for the
FSA
and for Alastair Darling.
Meissner felt that Fuld had shafted him. Where was “one firm” now? Why hadn’t McDade and Fuld tried to negotiate for Europe and Asia, too? But Barclays Capital wasn’t interested in Europe and Asia.
Meissner implored employees to come to work, since the firm’s value lay in its people. Meanwhile he tried to keep cool and look for a buyer in markets that were shifting like roiling seas.
In New York, Diamond and McDade were hammering out basic terms. First on the agenda was that the deal could not move forward unless eight key executives, including Skip McGee, Eric Felder, Jerry Donini, and Ian Lowitt, stayed. They were apparently offered generous retention packages, which rumors had put at high as $50 million for McGee (he said this was a “ridiculous” figure).
Significantly, McDade, Kirk, and Gelband were not among the eight. Gelband would quickly leave for the hedge fund Fortress. McDade and Kirk knew Diamond already had his own trusted deputies, so they would be on their own. After ensuring a smooth transition, they left in November 2008.
On Tuesday, September 16, Diamond felt sufficiently confident that he’d got a deal that he went down to the trading floor mid-afternoon and announced that for $17 billion BarCap had bought the U.S. broker-dealer.
He was met with a standing ovation.
Upstairs was Fuld, who sent out a letter saying he felt “horrible” about what had happened. He wanted to go down to the trading floor, too—but McDade stopped him.
“We were worried someone might try to hit him,” a colleague said.
Fuld had not yet realized how the firm felt about him. A picture of his face was being defaced by angry bankers on the office wall.
As soon as McGee had shaken hands with Diamond to seal their deal, he flew to London to see if he could help Meissner while Barclays put together a bid for the European businesses.
But Barclays was not prepared to deal with the costs or headaches involved in laying off most of Meissner’s staff, so in a move Chris Pettit would have been proud of, Meissner eventually took an offer for Lehman’s international operations from the Japanese bank Nomura, pointedly making sure Lehman’s Asian subsidiaries were acquired as well. He saved more than 10,000 jobs.
Meissner felt less like a victor than a hardened survivor. To make matters more depressing, his chief legal officer, Peter Sherratt, told him that one of his legal advisers on the Nomura deal had taken him by the hand and thanked him for “the biggest payday in our firm’s history.” The lawyers, it seemed, were the real victors in this sorry mess—or rather, the lawyers and Bob Diamond.
Shortly after the Nomura deal closed, Fuld called to congratulate Meissner, who was in no mood to coddle “the Gorilla.”
“At the end of the day, we’ re all defined by our actions,” Meissner told Fuld. “I think you and a bunch of your other senior guys really behaved appallingly in all this.” He felt Fuld should have negotiated much more tenaciously with Barclays. He should have believed in ” one firm.” Fuld hung up on him.
Two days later Fuld called him back: “Look, I thought about what you said. I can’t really disagree. I just want you to know I’ m sorry.”
Bob Diamond’s first big test at the helm of Lehman Brothers came the Tuesday afternoon after the announcement of the merger.
JPMorgan told his team it was turning over the responsibility of facilitating Lehman’s line of credit with the Fed to Barclays, a mindnumbingly complex affair involving the transfer of tens of billions of dollars in cash to JPMorgan in exchange for tens of billions of dollars’ worth of Lehman’s portfolio of securities.
As the markets seesawed in the aftermath of the filing, Diamond ‘s team got increasingly jumpy about some of the securities it was getting back from JPMorgan in exchange for its wire transfers. The result would be a $7 billion legal battle in which both Barclays and JPMorgan would accuse the other of trying to stick them with toxic assets.
Even so, at four o’clock on Friday afternoon, September 19, Judge James Peck of the U.S. Bankruptcy Court in the Southern District of New York approved the deal.
Almost immediately Diamond started to trim Lehman’s fat.
A source says he was somewhat sickened by how rarely senior executives had flown commercial. “There is an airport in New York and an airport in London,” he noted sarcastically.
Diamond knew that Lehman’s rot was at the top.
He had also heard about the friction between London and New York—not just of the past few days, but going back years. Since he had lived in London he knew Jeremy Isaacs well, and he knew both the pluses and minuses of the firm he’d bought.
Diamond decided he needed to lead a cultural change for the new Barclays Capital. He realized Fuld should never have cut himself off from the foot soldiers. So he put his office right on the trading floor. And on his whiteboard wall is a single phrase. It reads:
ONE
FIRM
Both Hank Paulson and his British counterpart, Alastair Darling, the chancellor of the Exchequer, had known that the repercussions of Lehman going bankrupt would be bad. Just how bad was anyone ‘s guess.
“I always knew that when we had a major bankruptcy, we ‘d find out how the connectivity of credit default swaps really performed under stress for the first time,” Paulson said later. “And I didn’t think it’d be good.”
Credit default swaps are unregulated financial instruments that act as “insurance” against bond defaults. In the weeks leading up to Lehman’s bankruptcy, the price to buy credit default swaps had soared, but even at the 8 or 9 cents on the dollar at which they were trading the week before, they were still a bargain, considering Lehman bonds would trade around 10 cents on the dollar the next month.
Paulson was worried about the lack of transparency of these instruments, which connected Lehman to financial institutions and investors throughout the world. He feared that these instruments, which usually served as risk mitigators, had the potential to become
transmitters
of risk, and exacerbate the crisis.
“I didn’t try, initially, to go into the gory details, and neither did Bernanke,” he said later. “I didn’t want to scare the American public and make the panic worse, and create a bigger economic hole because people were terrified.”
By Monday afternoon, rumors were swirling about American International Group (
AIG
), the market’s single biggest seller of credit default swaps.
With AIG’s liquidity hole topping $85 billion on Monday afternoon, it had to be bailed out at a very heavy price.
Quickly, the Fed hammered out a take-it-or-leave-it deal: The government would get an 80 percent stake in the firm, its short -term line of credit with the Fed came at a double-digit interest rate, and CEO Bob Willumstad--who had taken the helm only months earlier in an attempt to engineer a last -minute turnaround--was out, to be hastily replaced by Ed Liddy, the former CEO of Allstate Insurance.