I can say with confidence,” he told the committee members. “If the private and public parties before you today had not acted in a remarkable collaboration to prevent the fall of Bear Stearns, we would all be facing a far more dire set of challenges.”
In the end, the day’s testimony produced no smoking guns, no legendary exchanges, no heroic moments. But it introduced to the American public a cast of characters it would come to know very well over the next six months, and it provided a rare glimpse into the small circle of players that sits atop the world of high finance, wobbly though it may have been at the time. The senators were a long way from being able to make up their minds about the Bear deal—how necessary had it really been? And had it really fixed a problem, or merely postponed a greater reckoning?
Of all the members of the Banking Committee, Bunning, with his strong free-markets bias, was the most critical—and perhaps the most prescient. “I am very troubled by the failure of Bear Stearns,” he said, “and I do not like the idea of the Fed getting involved in a bailout of that company… . That is socialism, at least that’s what I was taught.
“And what’s going to happen,” he added ominously, “if a Merrill or a Lehman or someone like that is next?”
CHAPTER FOUR
On the oppressively humid evening of Friday, April 11, 2008, Dick Fuld strode up the steps of the Treasury Building, passing the ten-foot-tall bronze statue of Alexander Hamilton that looms over the south entrance. He had come at the personal invitation of Hank Paulson for a private dinner to mark the end of a G7 summit and the beginning of the annual spring meetings of the International Monetary Fund and the World Bank. The guest list featured a group of the most influential economic policy makers and thinkers, including ten Wall Street CEOs and a number of the world’s leading finance ministers and central bankers, including Jean-Claude Trichet, president of the European Central Bank.
Fuld was feeling fairly optimistic—certainly less despairing than he had been earlier. Lehman’s announcement two weeks before that it would raise $4 billion had stabilized the stock, at least for the moment. The entire market was rallying, buoyed by comments from Lloyd Blankfein, CEO of Goldman Sachs, who had emphatically declared at his firm’s annual meeting that the worst of the credit crisis was likely over. “We’re closer to the end than the beginning,” he said.
That was not to say that the gloom in the financial community had completely lifted. Just that morning Fuld had attended a contentious meeting in downtown Manhattan with Tim Geithner at the New York Fed, imploring him to do something about the short-sellers, who he was convinced were just catching their breath. Erik Sirri, the head of the SEC’s Division of Trading and Markets, repeatedly pressed Fuld for proof of any illegal activity, pleading, “Just give me something, a name, anything.” Fuld, who considered Sirri—a former Harvard Business School professor—to be a free-market zealot with no real-world experience, told him he had nothing concrete. He just knew what he knew.
Tonight, as Fuld was ushered across the checkered squares of black and white marble of the Treasury hallways, he tried to clear his mind and prepared to enjoy himself.
The dinner was being held in the Treasury Cash Room, so named because until the mid-1970s, it was where the public went to exchange U.S. government notes and bonds for cash. Opened in 1869, the room was intended to foster confidence in the new federal paper currency—the “greenback ”—that had been introduced during the Civil War. Today, nearly a century and a half later, that confidence was in short supply.
Fuld had been looking forward to the dinner all week, eager for a chance to talk with Paulson face-to-face. Over the past few weeks, they had spoken several times by phone, but given all that was at stake, meeting in person was essential. It would give Fuld a chance to impress upon the secretary the seriousness of his efforts and to gauge where Lehman really stood with Washington.
Amid the procession of financiers slowly filing into the Cash Room, Fuld noticed an old friend in the corner, John Mack, CEO of Morgan Stanley, one of the few people in the room who understood exactly what Fuld was going through. Of all the CEOs on the Street, Fuld felt closest to Mack; they were the longest-running leaders of the major firms, and they would occasionally dine together with their spouses.
There were also a number of other men in the room whom Fuld stopped to shake hands with but didn’t know well—though little did he suspect they would soon become major figures in his life. One was an American banker named Bob Diamond, who ran Barclays Capital, the investment banking arm of the British financial behemoth. Fuld had spoken with him a handful of times, usually seeking donations for his favorite charities. Diamond was polite but noticeably cool as Fuld greeted him, perhaps because Fuld had once invited him over for a casual coffee, unaware that he was based in London, not New York—a little slight that Diamond had never forgotten. Fuld also briefly paid his respects to Diamond’s regulators, Alistair Darling, the head of Britain’s Treasury, and Mervyn King, the governor of the Bank of England. High finance was in general a very small world, though at this particular moment, none of them realized just how small it had become.
As he made his way through the crowd, Fuld kept an eye out for Paulson, whom he hoped to buttonhole before the dinner began. But it was Paulson, wearing a blue suit that seemed one size too big for him, who spotted Fuld first. “You guys are really working hard over there,” Paulson told him, grasping his hand. “The capital raise was the right thing to do.”
“Thanks,” Fuld said. “We’re trying.”
Paulson also expressed his gratitude for the “thoughtful” dialogue that had been initiated among Tom Russo, Lehman’s general counsel, and Rick Rieder, who ran Lehman’s global principal strategies group, with Paulson’s deputy, Bob Steel, and Senator Judd Gregg. Russo had been advocating a plan in which the government would create a special facility—what Russo called a “good bank” proposal—to help provide additional liquidity to Wall Street firms by creating a backstop for their most toxic assets, but he had met resistance. It would simply look too much like another bailout, and Washington wasn’t ready for that—not yet.
“I am worried about a lot of things,” Paulson now told Fuld, singling out a new IMF report estimating that mortgage-and real estate-related write-downs could total $945 billion in the next two years. He said he was also anxious about the staggering amount of leverage—the amount of debt to equity—that investment banks were still using to juice their returns. That only added enormous risk to the system, he complained.
The numbers in that area were indeed worrisome. Lehman Brothers was leveraged 30.7 to 1; Merrill Lynch was only slightly better, at 26.9 to 1. Paulson knew intuitively that Wall Street’s leverage problem could not end well. He also knew that the firms would never rein themselves in; they were all blindly chasing one another. He always reminded himself of a remarkably telling question that Charles Prince, the CEO of Citigroup, had asked him the year before at a similar dinner: “Isn’t there something you can do to order us not to take all of these risks?”
Paulson was worried not just about Lehman; he knew Merill too was awash in bad assets, and mentioned the
