adviser to the government. Paulson would have chosen Goldman were it not for the obvious public relations problem or the fact that it was advising Fannie. He also briefly considered hiring Merrill Lynch, but Morgan Stanley seemed the best option.
Mack had originally been reluctant even to take the assignment, for the cost of serving as Treasury’s adviser on Fannie Mae and Freddie Mac was that the firm could not conduct any business with the mortgage giants for the next six months, and therefore stood to lose out on tens of millions of dollars in fees. “How can we tell our shareholders we’re walking away from this kind of money? I’m going to get asked about why I did that,” he told his team.
But after some soul-searching, Mack decided working for the government was the patriotic thing to do. Morgan Stanley would receive a token payment of $95,000, which would barely cover the cost of their secretaries’ overtime.
Just a week earlier the Senate had passed, and President Bush had signed into law, an act that gave Treasury the temporary authority to backstop Fannie and Freddie. Now the question that faced Paulson was: What to do with that authority?
He recognized that he had created an odd dilemma: Investors now assumed the government was planning to step in. That would make it even harder for Fannie and Freddie to raise capital on their own, as investors worried that a government intervention would mean they would get wiped out. Any sort of investment by the government increasingly seemed as if it could become a self-fulfilling prophecy. “Either investors are going to be massively diluted, given the amount of equity they are going to need, or [Freddie and Fannie] are going to be nationalized,” Dan Alpert, managing director of Westwood Capital LLC, had told Reuters that morning. “Without a larger equity capital base, they are going to be incapable of surviving.”
In a Treasury conference room, Anthony Ryan, assistant secretary for financial markets, briefed the bankers on the department’s work to date on the GSEs. Attending from Morgan Stanley were Robert Scully, fifty-eight, the firm’s co-president, who had worked on the government’s bailout of Chrysler nearly three decades earlier; Ruth Porat, fifty, the head of its financial institutions banking group; and Daniel A. Simkowitz, the forty-three-year-old vice chairman of global capital markets.
Ten minutes into Ryan’s presentation, Paulson walked in, looking slightly distracted. “Everyone’s going to scrutinize what we do,” he told the group as he tried to inspire and scare them simultaneously. “I’m going to work you to the bone. But I’m confident of this: It will be the most meaningful assignment of your career.”
Scully pressed Paulson to explain his rationale for the assignment. “Just tell us what you’re really looking to do here,” he said. “Do you want to kick the can down the road?”
“No,” said Paulson, shaking his head. “I want to address the issue. I don’t want to leave the problem unsolved.” He was adamant that the project not become another bureaucratic exercise in producing PowerPoint presentations that would just get filed away. “I, ah, we have three objectives: market stability, mortgage availability, taxpayer protection.”
Scully was still skeptical, certain there had to be some political calculus involved. And, with Freddie’s reported loss of $821 million that morning, doing nothing no longer seemed a viable option.
“Are there any policy options that are off the table or, alternatively, are there any stakes you have in the ground in terms of starting points and approaches to this problem that you’d like us to think about?” Scully probed.
“No, you have a clean sheet of paper,” Paulson said. “All options are on the table; I’m willing to consider
A young child’s squeal a few doors down suddenly halted the discussion. It was Paulson’s granddaughter, Willa, who was visiting that day and waiting in a small conference room across from his office. Paulson was about to catch a flight with his family to attend the Olympic Games in Beijing. It was, however, a working vacation—he had a busy set of meetings with Chinese officials—and as they all knew, he would be attached to his cell phone.
He apologized to the group for cutting the meeting short.
“I’ll be back in ten days,” he told them. “I want a lot of progress.”
In the first week of August, Min Euoo Sung arrived in Manhattan from Seoul to continue talks with Lehman Brothers. The parties were still far from signing a final agreement, but they were inching closer to nailing down at least the outlines of one.
On that Monday, McDade, who remained skeptical that a deal would come to pass, walked over to Sullivan & Cromwell’s Midtown offices with his colleagues to begin formal negotiations. “They are never going to have the balls to do this,” Mark Shafir said as he headed up Park Avenue with McDade and Skip McGee. Kunho Cho and Jesse Bhattal of Lehman, who were closest to Min, had flown over from Asia to help shepherd a deal. McGee had urged Fuld to stay at the office, despite his insistence on coming to the meeting. “Chill out,” McGee had told him. “You’re the CEO. You have to be the ‘missing man’”—Wall Street parlance for the handy excuse they could use when they closed in on the final terms of the deal but wanted to push for slightly better ones: They’d simply say they still needed approval from the CEO.
McDade also had become increasingly anxious that Fuld’s fragile state wouldn’t help the negotiations. McDade was beginning to fear that Fuld suspected him of attempting to take over the firm. Often when he was in conversation with Gelband and Kirk, his proteges, Fuld would emerge seeming apprehensive, as if imagining they were plotting his ouster. Fuld’s paranoia was only further encouraged when McDade refused to inhabit Joe Gregory’s old office directly next to Fuld’s, citing its “bad karma”; instead, he took an office farther down the hall, where it was harder for Fuld to monitor him.
In truth, McDade was increasingly in control of Lehman. He was in the process of putting together a document called “The Gameplan,” a detailed examination of the firm’s finances and a vision for a way forward. It included a half dozen possible scenarios, most of which included some variation on dividing Lehman in two: a “good bank” that they’d keep and a “ bad bank ” that they’d spin off, thereby ridding themselves, at least on paper, of their worst real estate assets. The plan would enable Lehman to make a fresh start, unencumbered by assets that continued to fall in value. McDade also had pressed Fuld to put Neuberger Berman and the firm’s investment management business up for sale, and an auction was already under way among a series of private-equity firms.
While the rumors about Lehman may have continued unabated, the leaks coming out of the company appeared to be shrinking in volume. A few weeks after McDade was appointed president, McGee gave him a T-shirt with the inscription: “A Person Familiar with the Situation”—a wry reference to how the financial press generically referred to its sources. McGee had told him, “Give it to Scott!” a not-so-subtle dig at Scott Freidheim, who managed much of the firm’s media strategy.
The first meeting that morning at Sullivan & Cromwell was to allow the Koreans an opportunity to review
