All along Mudd saw it as a structural problem. “Sooner or later, you need to resolve the business model,” he told me. “Right up to the end I was saying, ‘Let’s come up with a new structure.’ Because one way or the other, whether you like Dan Mudd or whether you like Frank Raines, or whether you like any of the leadership, it doesn’t matter. There’s been a whole series of good, bad, competent, incompetent CEOs running the place. And nobody has found it simple to do. That tells me there’s a business-model issue. Let’s resolve that, instead of just making it part of the federal government.”
A contributory factor to the agencies’ problems was the mentality that every American had a right to own a home. This was the American dream, people said, never stopping to question whether such a goal was remotely realistic. The more that home ownership was wrapped in the flag, the worse things grew for the agencies charged with making the dream come true.
On September 7 the government took control of Fannie Mae and Freddie Mac. There was very little controversy about the decision, but there was plenty of unease in the markets. The tentacles of the subprime crisis were extending into nearly every major financial institution. It could not be contained.
The Monday after the takeover of Fannie Mae and Freddie Mac, I interviewed Hank Paulson, searching for clarity. The bailout had fueled a debate about the proper role of government. Was it appropriate to put taxpayers on the line when companies ran into trouble? Hank Paulson, I had learned from experience, was very good at talking lots and saying little, and on this occasion he seamlessly spoke in nonanswers, unruffled and unrevealing—until I asked a question about Lehman Brothers: “Are there plans afoot for a takeover of Lehman?”
He got edgy and jabbed in the direction of his watch. “I’ve got to hop,” he said, suddenly in a rush, and ended our interview. Four days later he would summon the captains of finance to the Federal Reserve for a last-ditch attempt to rescue Lehman.
It was nearly six months to the day since Bear Stearns was snapped up by JPMorgan Chase for a bargain price. Now it was déjà vu all over again—with one difference: how could Lehman have failed to gird itself for this predictable moment? I remembered so vividly the strong sentiment in the financial media and among my sources on Wall Street that the failure of Bear Stearns had set Lehman up for a grand fall. But what could Lehman do now to save itself before the end of a do-or-die weekend?
Late on the evening of Friday, September 12, the phone rang in Dick Fuld’s office. It was Bank of America’s Ken Lewis, the man he most wanted to talk to. He didn’t have the phone on speaker, so those in the room heard only his side of the conversation, but it was obvious by his smile and his words that he felt as if he was hearing very good news. Fuld ended the call with, “Ken, I’m looking forward to being your partner. This is going to be a great deal.”
He hung up and said, “It’s Bank of America. It’s going to happen.”
Soon after, a source inside Lehman called me on my cell phone. “Bank of America is doing the deal,” he said with assurance. “I was in the room when Ken Lewis spoke to Dick. They were basically shaking on it over the phone. Ken gave Dick his home phone number, and they’re discussing the details in the morning.”
My source was a good one, but was it plausible that Fuld had made a handshake deal with Lewis, even as the heads of JPMorgan, Goldman, Merrill, and others were engaged in a desperate effort to save his company? Maybe he thought he could be a hero cowboy and come riding in with the treasure strapped across his saddle. But the idea that Fuld had overcome Lewis’s resistance when Paulson could not sounded bizarre. Was it really happening?
I remained on call late into the evening, trying to stay on top of events at the Federal Reserve. No one expected a resolution on Friday. We all expected a long weekend ahead. When I finally put away my phone and notes, it was long after midnight. I sat back and thought about what I was witnessing.
I was also a citizen, and when I took off my reporter’s hat late at night, I gave in to my feelings of sadness that we had come to this point. For a long time the euphoria in the housing market had been troubling, because in my experience, euphoria came before a fall. Now that the fall was happening, I was deeply disappointed and personally shaken. I knew that whatever the outcome of the weekend, things would never again be the same for any of us. There was a lot of pain ahead.
FOUR
Down to the Wire
“Let’s say we got together and saved Lehman. Do we then get together and save the next firm and the next firm? And is saving a weak firm undermining our own position in the market?”
—A BANKER IN THE MEETINGS AT THE NEW YORK FEDERAL RESERVE, RECALLING THE ANXIETY HE AND OTHERS IN THE ROOM WERE FEELING
SEPTEMBER 13, 2008
Early Saturday morning, I reached the source at Lehman who had alerted me to the late-night phone call between Fuld and Lewis. He was staying at the Michelangelo Hotel, down the street from Lehman’s headquarters. “We finished around midnight, so I’ve only had about five hours of sleep,” he said.
“So, do you expect to conclude a deal with Bank of America today?” I asked.
“Yeah, we’re done,” he said wearily. He sounded more resigned than happy. “So we’ll be part of Bank of America. Who cares? At this point I
