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

Around 11:00 that night, Bob Willumstad’s driver pulled up to his building on Park Avenue, just across from Lenox Hill Hospital. Dashing under its green awning, Willumstad, tired and depressed, rode up the elevator to his seventh-floor apartment. Pacing in his kitchen, he recounted the day’s events to his wife, Carol.

Before turning in for bed, Willumstad checked his BlackBerry one last time. David Herzog, the company’s controller and a man who had been working behind the scenes nonstop for the past weekend to keep the firm afloat, had sent him an e-mail. The time stamp was 11:54 p.m.; the subject line, “Last Steps”:

Thank you for taking on this very difficult challenge. The events that unfolded tonight were set in motion long ago.

Before you leave office, I ask only one thing. Please clean the slate for Mr. Liddy. I urge the following dismissals immediately:

Schreiber

Lewis & McGinn

Nueger & Scott

Bensinger

Kelly

Kaslow

Dooley

While this may seem a bit harsh, this group of executives each have shown in their own ways a clear pattern of ineptness that contributed to the destruction of one of America’s greatest companies. Please, don’t make Mr. Liddy figure this out on his own.

I mean no disrespect to these individuals, but the 120,000 employees around the world deserve better, and some sense of accountability for what just happened.

We need leadership, and these individuals are simply not leaders.

Respectfully yours,

David

Willumstad, standing in the hallway in his boxer shorts, just shook his head in disbelief.

CHAPTER SEVENTEEN

When Tim Geithner began his run on Wednesday morning along the southern tip of Manhattan and up the East River just after 6:00, the sun had yet to come up. He was tired and stressed, having slept only several hours in one of the three tiny, grubby bedrooms in the New York Fed’s headquarters.

As he stared at the Statue of Liberty and the first of the morning’s commuter ferries from Staten Island gliding across the harbor, he tried desperately to clear his mind. For five days his brain had been trapped in a maze of numbers—huge, inconceivable, abstract numbers, ranging in the span of twenty-four hours from zero for Lehman to $85 billion for AIG. Eighty-five billion dollars was more than the annual budgets of Singapore and Taiwan combined; who could even begin to understand a figure of that size? Geithner hoped the sum was sufficient—and that the crisis would finally be over.

Those ferries, freighted with office workers, gave him pause. This is what it is all about, he thought to himself, the people who rise at dawn to get in to their jobs, all of whom rely to some extent on the financial industry to help power the economy. Never mind the staggering numbers. Never mind the ruthless complexity of structured finance and derivatives, nor the million-dollar bonuses of those who made bad bets. This is what saving the financial industry is really about, he reminded himself, protecting ordinary people with ordinary jobs.

But as he passed the South Street Seaport and then under the Brooklyn Bridge, he had inadvertently begun thinking about what fresh hell the day would bring. He was most anxious about the latest shocking development: A giant money market fund, Reserve Primary Fund, had broken the buck a day earlier (which meant that the value of the fund’s assets had fallen to below a dollar per share—in this case, 97 cents). Money market funds were never supposed to do that; they were one of the least risky investments available, providing investors with minuscule returns in exchange for total security. But the Reserve Primary Fund had chased a higher yield—a 4.04 percent annual return, the highest in the industry—by making risky bets, including $785 million in Lehman paper. Investors had started liquidating their accounts, which in turn forced managers to impose a seven-day moratorium on redemptions. Nobody, Geithner worried, knew just how extensive the damage could end up being.

Between the money-market funds being under pressure, Geithner thought, and billions of dollars of investors’ money locked up inside the now-bankrupt Lehman Brothers, that means only one thing: the two remaining broker-dealers—Morgan Stanley and Goldman Sachs—could actually be next.

The panic was already palpable in John Mack’s office at Morgan Stanley’s Times Square headquarters. Sitting on his sofa with his lieutenants, Chammah and Gorman, drinking coffee from paper cups, he was railing: The major news on Wednesday morning, he thought, should have been the strength of Morgan Stanley’s earnings report, which he had released the afternoon before, a day early, to stem any fears of panic about the firm following the Lehman debacle. His stock had fallen 28 percent in a matter of hours on Tuesday, and he decided he needed to do something to turn it around. The quarterly earnings report had been a good one—better than that of Goldman Sachs, which had announced their earnings Tuesday morning and also had suffered, but not nearly as much. Morgan had reported $1.43 billion in profits, down a mere 3 percent from the quarter a year earlier. But the headline on the Wall Street Journal was gnawing at him: “Goldman, Morgan Now Stand Alone; Fight On or Fold?” And as the futures markets were already indicating, his attempt to show strength and vitality had largely failed to impress.

Apart from the new anxiety about money market funds and general nervousness about investment banks, he was facing a more serious problem than anyone on the outside realized: At the beginning of the week, Morgan Stanley had had $178 billion in the tank—money available to fund operations and to lend to their major hedge fund clients. But in the past twenty-four hours, more than $20 billion of it had been withdrawn, as hedge fund clients demanded it back, in some cases closing their prime brokerage accounts entirely.

“The money’s walking out of the door,” Chammah told Mack.