challenges that Merrill’s new CEO, John Thain (who had been Paulson’s number two at Goldman), was facing with his own balance sheet. But leverage and Merrill’s problems weren’t Fuld’s primary concern at the moment; he was still irked by the short-sellers and once again pressed Paulson to do something about them. If they could be contained, it would give Lehman and the other firms a chance to find their footing and get their balance sheets in order. But if the shorts were allowed to keep hammering away, the overall situation was only going to get a lot uglier.
As a former CEO himself, Paulson could understand Fuld’s frustration. Short-sellers cared only about their own profits and gave little thought to their impact on the system. “I’m sympathetic,” Paulson said. “If there are bad actors, we’ll put them out of business.”
But Paulson was also concerned that Fuld was using the short-sellers as an excuse to avoid addressing the genuine problems at Lehman. “You know, the capital raise, as good as it was, is just one thing,” Paulson told him. “It’s not going to end there.” He reminded him that the pool of potential buyers for Lehman was not a large one.
“Look, Dick,” he continued. “There aren’t a lot of people out there saying, ‘I have to have an investment banking franchise.’ You have to start thinking about your options.”
It was a not-so-subtle hint to start thinking about selling the entire firm. Although the conversation agitated Fuld slightly, they’d had similar discussions before, so he took Paulson’s advice in stride.
The group took their seats, and as each of the speakers rose to talk, the perilous state of the economy became ever clearer. The credit crisis wasn’t just a U.S. problem; it had spread globally. Mario Draghi, Italy’s central bank governor and a former partner at Goldman Sachs, spoke candidly of his worries about global money-market funds. Jean-Claude Trichet told the audience that they needed to come up with common requirements for capital ratios— the amount of money a firm needed to keep on hand compared to the amount it could lend—and, more important, leverage and liquidity standards, which he thought were much more telling indicators of a firm’s ability to withstand a “run on the bank.”
Mr. King, the governor of the Bank of England, offered perhaps the harshest assessment. “You are all bright people, but you failed. Risk management is hard,” he declared. “So the lesson is, we can’t let you get as big as you were and do the damage that you’ve done or get as complex as you were.”
That night, after Fuld had finally found his car and driver outside the Treasury Building, he thumbed out an e- mail on his BlackBerry to Russo. “Just finished the Paulson dinner,” Fuld wrote at 9:52 p.m.
A few takeaways//
1-we have huge brand with treasury
2-loved our capital raise
3-really appreciate u + Reiders work onm [
4-they want to kill the bad HFnds [hedge funds]+ heavily regulate the rest
5-they want all G7 countries to embrace
Mtm stnds [Mark-to-market standards]
Cap stnds
Lev + liquidity stnds
6-HP [Hank Paulson] has a worried view of ML [Merrill Lynch]
All in all worthwhile.
Dick
On the following Tuesday, April 15, Neel Kashkari and Phillip Swagel hurried down past the guard house of the Treasury Building to where Hank Paulson and Bob Steel were waiting for them in the secretary’s black Suburban. The group was due at the Federal Reserve in Foggy Bottom at 3:00 p.m.—in ten minutes—and was running late.
The two men made something of an odd couple. Kashkari, dark with a bald dome, still dressed like the investment banker he had recently been, while Swagel, pale with dark hair and glasses, looked more like a wonky government official. A former academic, he had kept fit and seemed younger than his thirty-four-year-old colleague, even though he was eight years older.
Paulson had invited his young advisers to a meeting with Ben Bernanke so that they could present a confidential memo that the two of them had authored—a memo that had far-reaching implications for the nation’s increasingly unsteady financial system.
At Paulson’s request, they had done nothing less than to formulate a plan for what to do in the event of a total financial meltdown, outlining the steps that the Treasury Department might have to take and the new powers it would require to stave off another Great Depression. They had given the proposal the provocative title “Break the Glass: Bank Recapitalization Plan.” Like a fire alarm enclosed in glass, it was intended to be used only in an emergency, though with each passing day, it appeared more and more likely that the proposal was no mere drill.
As the Suburban raced to Bernanke’s office, Kashkari, who was unflappable by nature, remained calm. After a brief stint as a satellite engineer, he had gone to work as an investment banker for Goldman Sachs in San Francisco, where no one had ever needed to tell him that he was good at his job. He loved meeting with clients and putting his salesmanship to the test; like Paulson, he was an aggressive, get-it-done guy. And like Paulson, he occasionally ruffled feathers with his shoot-first-and-ask-questions-later approach, though few ever doubted his intellectual firepower.
Kashkari had always wanted to work in government, and though he’d met Paulson only once previously, he left him a congratulatory voice mail when Paulson was named Treasury secretary. To his surprise, Paulson responded the next day: “Thanks. I’d love for you to join me at Treasury.”
Kashkari immediately booked a flight to Washington, during which he carefully rehearsed the pitch he would make to Paulson. They met at the Old Executive Office Building, where Paulson was camped out until the Senate could confirm him, and Kashkari had scarcely begun his presentation when he noticed a distracted, slightly irritated look come over Paulson’s face. Kashkari stopped in midsentence.
“Look, here is what I’m trying to do here,” Paulson told him. “I want to put together a small team that will be
