As Lehman and other companies struggled, the people trying to hold them together were working overtime, exploring multiple options. It was complex and it was tricky. Fuld was frequently on the phone with the Treasury Department, discussing options. Paulson would later say that they spoke some fifty times between April and September. Paulson was often frustrated with Fuld, who he believed had trouble seeing and accepting reality.
As one of Paulson’s cohorts told me, “It really became apparent over the summer that no one had the same view as Dick of what Lehman was worth. Now, I think Dick is a fine guy, but he just wouldn’t wake up and smell the coffee. We at the Treasury began to focus on Lehman Brothers immediately after Bear Stearns went down. We were in frequent touch with Dick. Actually, Dick was in India the weekend that Bear Stearns went down. And I talked to him two or three times in India that weekend and said, ‘You’ve got to get back. There’s going to be a laserlike focus on Lehman.’ But there were serious doubts about whether Fuld was getting the message.”
If Fuld’s expectations seemed unreasonably high, it may have been because of his past experience. Ten years earlier, Fuld had been the hero who rescued Lehman when the collapse of the hedge fund Long-Term Capital almost brought the firm down. He believed he could pull off another rescue.
In the early summer Lehman was in discussions with several potential strategic international partners. Fuld had long been interested in developing a collaboration with a foreign company, with the partner taking a 5 to 7 percent stake in Lehman.
“Every weekend we were at the office, busted up into teams, discussing options,” a former Lehman executive told me. “We thought we could do any number of things. For example, if for the third quarter, instead of announcing the numbers we did, we’d reported having sold $10 billion of the risky mortgages and now had no mortgages on the books; or if we had announced a spin-off with $10 billion in equity, and the debt on the books was guaranteed by JPMorgan; or if we’d sold the investment management division for $6 billion and made a profit, and our leverage was strong and we’d be good to go. Or if we’d announced that we got a $10 billion investment from Korea Development Bank, or we’d sold the company to Bank of America, everyone would be applauding us. These were all valid options under consideration.”
Then something inexplicable and shattering occurred that put a huge dent in Lehman’s credibility. On Wednesday, June 4, a story appeared in the Wall Street Journal, “Lehman Is Seeking Overseas Capital: As Its Stock Declines, Wall Street Firm Expands Search For Cash, May Tap Korea.” The story highlighting Lehman’s liquidity problems was written by business reporter Sue Craig, and it cited a source high up in the executive office. This was potentially devastating for the company because it proved Lehman needed cash. Who would talk to the Journal, especially to reveal such a strategy? That day Lehman’s stock dropped like a stone, leaving the top executives baffled and horrified.
Scott Friedheim had a vague suspicion of who might have been Craig’s source. That morning, Erin Callan came into his office and sat down. It was the first time she’d ever done that. Dick Fuld and Joe Gregory did it all the time. Callan never did. And she said, “What do you think of the Journal story? Do you think our stock is going to go up?”
Friedheim stared at her, bewildered. “No,” he said, “I don’t. I think it’s going to go down.” He couldn’t believe she would see it that way, but her presence in his office raised his antennae. Why was she so eager to put a positive spin on it?
Dick Fuld was out for blood. What really got him was that he’d just spoken with Craig a week or two earlier. She’d called him and said, “I want to come in and sit in on one of your strategy sessions with your senior management team.” She’d told Fuld that she was interested in getting an honest, and by implication, favorable picture of Lehman. Fuld said he couldn’t let her sit in on actual strategy sessions, but he’d figure something out and get back to her. Then this happened. Feeling betrayed and blindsided, Fuld called Craig. “You posed as a friend of the firm,” he said angrily, “and you’re not what you said you were. You went behind my back, deceived me, and printed something that wasn’t even true, and I’m not going to deal with you or the Journal again. We’re through.”
He slammed down the phone and turned to Friedheim. “Scott, no one in the firm talks to the Journal. That’s it.”
As Friedheim left Fuld’s office, he continued to puzzle about the source of the story. Fuld had been so angry he hadn’t thought to ask Craig. But as soon as he got back to his own office, Friedheim’s phone rang. It was Kerrie Cohen, in public relations.
“Hey, Kerrie, what’s up?” Friedheim said, distracted.
She said, “I just got the strangest call from Sue Craig.” Friedheim sat up straight, now paying close attention.
“What did she say?”
“She was very angry,” Cohen said. “She said, ‘I just got off the phone with Dick. You have Erin call me immediately.’ And then she hung up on me.”
Now Friedheim felt it was likely that Callan was behind the Journal story. She’d apparently assured Craig that she was speaking with authority, and the reporter felt as if she’d been unfairly slammed by Fuld. Senior executives then checked the firm’s e-mail records and said they found evidence that Callan had been talking to Craig.
I never had direct confirmation that Callan told Craig about the outreach to Korea and the possibility of a capital raise. But key
