Lehman as “a bunch of thugs” when he was at Goldman, he did nonetheless respect its hard-driving culture, admiring how aggressively Lehman bankers hustled. And they were loyal, almost to a fault; it was a tight-knit group that reminded him of Goldman’s partnership.
Still, there was something about Fuld that made him nervous. He was a risk taker—recklessly so, in Paulson’s view. “He’s like a cat; he’s had nine lives,” he said at one staff meeting. Paulson believed that his old Goldman colleague, Bob Rubin, had unwittingly bailed out Fuld in early 1995 when, as Treasury secretary, he provided aid to Mexico during its peso crisis. Lehman had wagered a fortune on the direction of the Mexican peso without hedging that bet, and it had gotten it wrong. Paulson remembered the moment well—and told his staff about it—because of accusations at the time that Rubin had actually organized the international bailout in an effort to save Goldman Sachs.
Fairly or not, Paulson lumped Fuld in with what he saw as the rear guard on Wall Street, financiers like Ken Langone and David Komansky, the type who were habitual power lunchers at Manhattan’s San Pietro restaurant and were friends of Richard Grasso, a symbol of excess. Paulson had been a member of the New York Stock Exchange’s Human Resources and Compensation Committee that had approved a $190 million payday for Grasso, the NYSE chairman. Fuld had been on that committee as well; Langone had been its chairman. After the uproar over the size of Grasso’s compensation package, Paulson wanted him out. In his view, Grasso hadn’t been just greedy; he had been deceitful. Eliot Spitzer, the New York attorney general, then at the top of his game, soon became involved in the matter, suing both Grasso and Langone. It was in the resulting battle that Paulson came to dislike Grasso’s cronies, who seemed all too ready to throw Paulson under a bus if it suited their purposes.
But as secretary of the Treasury, he was obliged to be a diplomat, and as such, needed to maintain good relationships with all the Wall Street CEOs. They would be huge assets, his eyes and ears on the markets. If he needed “deal flow,” he preferred to get it directly from them, and not from some unconnected Treasury lifer whose job it was to figure these things out.
About a month after he settled into the job, in the summer of 2006, Paulson called Fuld, whom he reached playing golf with a friend in Sun Valley, where he had a home. Fuld had just teed off on the 7th hole, a par 5, dogleg left, when he heard his cell ringing. Although mobile phones weren’t allowed on the course, he picked up anyway, and no one protested.
“I know this call may be a little unusual,” Paulson began. “You and I have been trying to kill each other for years.”
Fuld laughed, flattered by Paulson’s acknowledgment of him as a worthy opponent.
“I’d like to be able to call you from time to time,” Paulson continued, “to talk markets, deals, competition; to find out what your concerns are.”
Fuld was pleased by the gesture and told him as much.
After that conversation they talked to each other regularly. Indeed, Paulson came to rely heavily on Fuld for market intelligence, and, in turn, shared his own views about the markets, which Fuld regarded as the official read. Almost to his surprise—given how much he had vilified the man when he was Goldman’s CEO—Paulson found Fuld to be engaging and impressively hands-on. Although he still didn’t completely trust him, he knew he could work with him.
But in the current market climate, the past few calls had been particularly tricky, and the next one would be especially so.
As Paulson’s morning meeting came to an end, he handed out a number of assignments to his staffers, one of which was urging Neel Kashkari and Phil Swagel to hurry up and finish a draft of an apocalyptic white paper they had been working on about how the government should think about saving the financial system if it started melting down.
As everyone began to leave, the Treasury secretary stopped Bob Steel and pulled him aside to discuss the special assignment he had given to himself. “I’m going to lean on Dick,” he announced.
An hour later his assistant, Christal West, had Dick Fuld on line one.
“Dick,” Paulson said cheerily, “how are you?”
Fuld, who had been in his office waiting for the phone call, answered, “Holding up.”
They had checked in with each other a handful of times over the past week since the Bear deal, but they hadn’t discussed anything substantial. This morning’s call was different. They talked about the fluctuations in the market and Lehman’s stock. All the banks were suffering, but Lehman’s share price was being hammered the most, down more than 40 percent for the year. More worrisome was that the shorts were smelling blood, meaning that the short position—the bet that Lehman’s stock had much further to fall—was swelling, accounting for more than 9 percent of all Lehman shares. Fuld had been trying to convince Paulson to have Christopher Cox, chairman of the SEC, get the short-sellers to stop trashing his firm.
Paulson was not unsympathetic to Fuld’s position, but he wanted an update on Lehman’s plans to raise capital. Fuld had already been hearing from some of his top investors that this would be a wise course of action, especially while things were still relatively positive for the firm in the press.
“It would be a real show of strength,” Paulson said, hoping to persuade him.
To Paulson’s surprise, Fuld said he agreed and had already been thinking about it. Some of his bondholders had been pressing him to raise money on the back of the firm’s positive earnings report.
“We’re thinking about reaching out to Warren Buffett,” Fuld replied. That had been a carefully considered remark; Fuld knew that Paulson was a friend of the legendary Omaha investor. Although Buffett had a public disdain for investment bankers in general, for years he had used Goldman’s Chicago office for some of his business, and Paulson and Buffett had become friends.
An investment by Buffett was the financial world’s equivalent of a Good Housekeeping Seal of Approval. The markets would love it. “You should pitch him,” Paulson said, relieved that Fuld was finally taking action in that direction.
Yes, Fuld agreed. But he had a favor to ask. “Could you say something to Warren?”
Paulson hesitated, reflecting that it probably wasn’t a particularly good idea for a Treasury secretary to be brokering deals on Wall Street. The situation could only be complicated by the fact that Buffett was a Goldman client.
“Let me think about it, Dick, and get back to you,” Paulson said.
