Too Big to Fail: The Inside Story of How Wall Street and Washington Fought to Save the FinancialSyst

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… .”

Despite his recent infatuation with leverage, Fuld believed in liquidity. He always had. You always needed a lot of cash on hand to ride out the storm, he would say. He liked to tell the story about how he once sat at a blackjack table and watched a “whale” of a gambler in Vegas lose $4.5 million, doubling every lost bet in hopes his luck would change. Fuld took notes on a cocktail napkin, recording the lesson he learned: “I don’t care who you are. You don’t have enough capital.”

You can never have enough.

It was a lesson he had learned again in 1998 after the hedge fund Long-Term Capital Management blew up. In the immediate aftermath, Lehman was thought to be vulnerable because of its exposure to the mammoth fund. But it survived, barely, because the firm had a cushion of extra cash—and also because Fuld aggressively fought back. That was another take-away from the Long-Term Capital fiasco: You had to kill rumors. Let them live, and they became self-fulfilling prophecies. As he fumed to the Washington Post at the time, “Each and every one of these rumors was proved to be incorrect. If SEC regulators find out who started these stories, I’d like to have fifteen minutes with them first.”

One of the people on Fuld’s callback list that morning was Susanne Craig, a hard-nosed reporter at the Wall Street Journal who had been covering Lehman for years. Fuld liked Craig and often spoke to her on “ background.” But this morning she had called trying to convince him to be interviewed on the record. She pitched it as a way for him to silence the critics, to explain all the advance planning Lehman had done. Fuld, who hated reading about himself, thought it might be a good idea to participate. He regretted the way he had handled the media during the Long-Term Capital crisis. He wished he’d been more proactive from the start. “I want to do it right this time,” he told her.

By noon, Fuld and his lieutenants had formulated a plan: They would give interviews to the Wall Street Journal, the Financial Times, and Barron’s. They’d provide a little ticktock and color to Craig, about what was going on inside the firm, in the hopes that her editors would splash the story on the front page. They set up back-to-back sessions with the reporters starting at 3:00 p.m. The talking points were clear: The rumors were bogus. Lehman had ample liquidity, right up there with Goldman Sachs and Morgan Stanley. If the firm did need to make a payout, it was good for the money.

For the interview with Craig, Fuld was joined in a conference call by Gregory, Russo, and Erin Callan, the company’s new chief financial officer. “We learned we need a lot of liquidity and we also know we need to deal with rumors as they arise, not long after,” Fuld told the reporter. He also stressed the fact that, with the Fed window now open, Lehman was on much stronger footing: “People are betting that the Fed can’t stabilize the market, and I don’t think that is a very good bet.”

“We have liquidity,” Gregory reiterated. “But while we don’t need it right now, having it there alone sends a strong message about liquidity and its availability to everybody in the market.” That remark skirted the catch-22 involved with the Fed’s decision to make cheap loans available to firms like Lehman: Using it would be an admission of weakness, and no bank wanted to risk that. In fact, the Fed’s move was intended more to reassure investors than to shore up banks. (Ironically, one of Lehman’s own executives, Russo, could take partial credit for the strategy, as he had suggested it in a white paper he presented in Davos, Switzerland, at the annual capitalist ball known as the World Economic Forum, just two months earlier. Timothy F. Geithner, the president of the Federal Reserve Bank of New York, had been in the audience.)

After wrapping up the interview, Gregory and Callan returned to their offices and worked the phones, calling hedge funds that were rumored to be scaling back their trading with Lehman and doing everything they could to keep them on board.

The blitz paid off: In the last hour of trading, Lehman’s stock made a U-turn: After falling nearly 50 percent earlier in the day, it closed down at only 19 percent, at $31.75. It was now at a four-and-half-year low, the gains of the boom years erased in a single day. But the executives were pleased with their efforts. Tomorrow they would release their earnings, and maybe that would keep the good momentum going. Callan would be walking investors through the report in a conference call, and she went back to Gregory’s office to rehearse her lines.

Exhausted, Fuld got into his car to head back home and get a good night’s sleep. Once again he found himself wishing that the renovations on the sixteen-room, full-floor apartment he and Kathy bought at 640 Park Avenue for $21 million were finished, but Kathy had decided to gut it. He settled into the backseat of the Mercedes, put down his BlackBerry, and enjoyed a few minutes of respite from the world.

No one would ever have voted Dick Fuld the most likely to rise to such levels on Wall Street.

As a freshman at the University of Colorado at Boulder in 1964, he seemed lost, struggling academically and unable to decide on a major. Looking for answers, he joined the Reserve Officers’ Training Corps, the college-based, officer-commissioning program.

One morning during ROTC training, the commanding officer, a university senior, lined up all the students in the huge university quadrangle for a routine inspection.

“Fuld, your shoes aren’t shined,” the officer barked.

“Yes they are, sir,” he began to answer. But before he could get the words out of his mouth, the officer stomped on Fuld’s left shoe and sullied it. He ordered Fuld to go back to the dorm and shine it, which he did without complaint. When Fuld returned, the officer then stepped on his right foot—and again sent him back to the dorm.