Treasury, while telling Jamie Gamble and Michael Wiseman about his and Jester’s call to Moody’s to try to persuade them to hold off on downgrading AIG.
Willumstad had hoped that Jester, using the authority of the government and his powers of persuasion as a former banker, would have been able to finesse the task easily.
Willumstad explained the original plan “was that the Fed was going to try to intimidate these guys to buy us some time.” Instead, when Jester finally got on the phone, “he didn’t want to tell them.” Clearly uncomfortable with playing the heavy, Willumstad told them that Jester could only bring himself to say, “We’re all here, and you know, we got a big team of people working and we need an extra day or two.”
The core group of bankers who had been over at AIG now returned to the Fed, Jester having unsuccessfully tried to persuade Geithner to come to them at AIG—given that they were a group of some thirty and he was just one. Being the president of the Federal Reserve of New York had its privileges, however: They would come to him.
The hole that they needed to fill, Winkelried now reported in their summary to Geithner, was some $60 billion and “possibly more.” No one knew how any solution could work without financial help from the Fed.
“There’s no government money for this,” Geithner told them, repeating what Paulson had said earlier that day in Washington and echoing the same sentiment he had been conveying all weekend with regard to Lehman. If they needed proof that he was serious, Lehman’s bankruptcy was Exhibit A.
Geithner authorized Lee to begin making phone calls to Asia that night to see if he could begin raising some money there. JP Morgan and Goldman made it clear they still had a good deal more work ahead of them.
Late that evening, Jamie Gamble, AIG’s lawyer; John Studzinski; and Brian Schreiber gathered in a conference room for a morose meal of take-out Chinese. The situation seemed hopeless. Dinallo and Governor Paterson may have bought them a day by announcing their plan to release $20 billion of collateral, but it was too little, too late. Hours earlier they had called in the bankruptcy experts, and when the markets opened on Tuesday, they planned to draw down their credit lines, a clear sign to the markets that they were in trouble. When they had suggested the move, Willumstad had told them it was akin to “lowering the lifeboats into the water because you’re about to abandon ship. That’s the last thing you do. Shutting the lights off on the
Schreiber still couldn’t believe they were in this position and remained convinced that the Fed would ultimately come to the rescue. “At this point, it’s a game of chicken,” he said, with a slight air of cockiness.
“Do you think the Fed gets what’s at stake?” Gamble asked.
“Are you crazy?” Studzinski replied. “Of course not. They just let Lehman fail. It’s like a bad Woody Allen movie.”
By 1:00 a.m., Scully and Porat of Morgan Stanley, who were still representing the Fed, decided they needed to talk privately. They hid in one of AIG’s small kitchens and closed the door, so they’d be out of earshot of the Goldman and JP Morgan bankers.
“This isn’t going to work,” Porat said. “They aren’t going to get there.”
“Agreed,” Scully replied. “We need a fallback plan.”
They gave their assignment a code name and decided they’d head back to the Fed to alert Dan Jester.
When they opened the kitchen door, they noticed that everyone else had already left, which only seemed to confirm their worst fears: Any chance of a deal had officially ended.
When they reached the Fed, it, too, was deserted, apart from Jeremiah Norton passed out on a couch. He had originally tried to commandeer Geithner’s couch but was told he had to find a napping place elsewhere.
Scully and Porat woke him, and the three of them went to deliver the bad news to Jester.
A conference call was set up for 3:00 a.m. with the Fed team and Treasury, leaving Hilda Williams, Geithner’s assistant, the unenviable task of calling everyone at that ungodly hour to coordinate it.
“We’ve got a problem …” Geithner began the call.
For the first time in weeks, on Tuesday morning the editorial pages of the major newspapers were heralding Hank Paulson. They applauded his decision to not use taxpayer money to bail out Lehman Brothers. “It is oddly reassuring that the Treasury Department and Federal Reserve let Lehman Brothers fail, did not subsidize the distress sale of Merrill Lynch to Bank of America, and tried to line up loans for the American International Group, the troubled insurer, rather than making a loan themselves,” the
Given the conversation he’d had with Dan Jester at 6:00 that morning, however, it was looking increasingly likely that AIG and the global financial system were now in such peril that the government would have no choice but to intervene.
Paulson had seen the panic gripping the markets in the past twenty-four hours, which was duly reflected in the headlines on every newsstand. That morning’s
The Dow Jones Industrial Average had slumped 504.48 points on Monday, the biggest point decline for the index since September 17, 2001, when trading started up again after the September 11 terrorist attacks. AIG’s stock had fallen 65 percent to close at $4.76.
By 7:45 a.m., Ben Bernanke was in his office preparing for the Federal Open Market Committee meeting that was due to begin forty-five minutes later in the boardroom just down the hall from his office. It was purely a matter of chance that the FOMC, the Fed’s board of directors that determines monetary policy and decides whether to raise or lower interest rates, had one of its eight meetings a year scheduled for this morning.
Before his meeting began, Bernanke called Kevin Warsh and Don Kohn into his office to join him in a conference call with Tim Geithner, who instead of attending the FOMC gathering had decided he had to stay in New York to deal with AIG, sending Christine Cumming, his vice president, in his place. There was only one small problem with that decision: FOMC meetings were relatively public affairs, and Bernanke was concerned that Geithner’s absence could leak to the press and cause further panic in the markets.
