And the third emotion?
“Frankly, I feel a lot of anger,” Smith said. “I feel a lot of anger for the former CEO Stan O’Neal, and for the board of directors, who really acted incredibly irresponsibly and got us into this position and dealt John the hand that he was dealt today.”
I had no doubt that Win Smith would have plenty more to say as the dust settled and the full implications of the merger took hold—and that turned out to be true. However, with all the turmoil swirling around us that day, Merrill seemed more like a winner than a loser. We had to look at the entities that may still fall in the coming weeks and months, the state of insecurity of the system as a whole, and whether a greater collapse was imminent. Meredith Whitney of Oppenheimer, who had been calling it right during this period, had been one of the first to start issuing warnings about the consequences of overleveraging years earlier when people should have paid heed. She never minced words or offered standard pap. She was often the first one out with the bad news, which earned her the informal title of the new “ax” on Wall Street. (One of Whitney’s best calls was that Citigroup would be forced to cut its dividend, which happened weeks after she predicted it and caused the stock to plummet.)
Whitney was completely unsentimental about Wall Street. She called it as she saw it, and on September 15 she was already looking ahead to the next upheavals and failures, specifically naming Wachovia, Washington Mutual, and Citibank as being vulnerable. (In retrospect, her predictions would prove to be 100 percent true.) By the time the closing bell rang at 4:00 p.m. on Monday, the Dow had dropped 500 points, the largest drop in seven years.
Throughout the day the news cameras focused on the volatile scene taking place at Lehman Brothers, as stunned workers carried boxes of their belongings out through the revolving doors. Most of them looked shell-shocked. Some were blistering with anger. At one point during the day, a group erected a giant picture of Dick Fuld outside the building, and employees scribbled comments like, “Thanks for screwing up.” Tourists gathered, pointing digital cameras at the scene and having their pictures taken under the Lehman logo.
One source said to me on Monday, “I wasn’t here in 1929, but I’m pretty sure it felt like what it feels like today.”
Back in Washington, Hank Paulson held a press conference in the West Wing briefing room. He knew what to expect. People wanted to understand the difference between Bear Stearns and Lehman Brothers. And they wanted to know if the Lehman collapse was a message from the government that there would be no more help coming from Washington. At the press conference, Paulson insisted that Lehman Brothers’ circumstances were different than Bear Stearns’, and voiced a sentiment likely to be well received on Capitol Hill: “I never once considered it appropriate to put taxpayer money on the line in resolving Lehman Brothers.”
Literally every player across the board in the financial system was scrambling to secure its own interests. “Our days had been starting at two a.m. for a couple of weeks,” Mohamed El-Erian recalled. “The weekend of Lehman we were in all of Saturday, all of Sunday. We had plan A, plan B, and plan C. Plan A was that you’d get a repeat of Bear Stearns, so at the very last minute you’d have a marriage of some sort—like the Barclays-Lehman solution. Plan B was that Lehman failed, but in an orderly fashion, so that someone in the government minimized the shock to the payments and settlement system. And plan C was that Lehman failed in a disorderly fashion.
“We had responses for A, B, and C. We were ready. And it became clear on Sunday that it was going to be C. Very early on Monday morning we sent lawyers to deliver notices of default to Lehman, which then allowed us to crystallize whatever swap positions we had and to replace them pretty quickly so that our clients would be protected. We then went around to make sure that every aspect of the business was robust enough to weather the upcoming storm. It took a few days for the whole thing to play out. We had to find out where every dollar of our cash was, who our counterparties were, who had our collateral. And there was a heightened sense that we could no longer take a single thing for granted. We got very defensive very quickly. We raised cash, and we made sure that everybody understood that no matter what they were seeing in their sector, the massive liquidity shock was the overriding issue. We canceled vacations completely. It was all hands on deck. There was a lot more communication with clients, because a lot of our clients—and we have eight million of them—didn’t know what was going on at all. There was a massive increase in the amount of communication with the outside world.”
That scene was duplicated across the financial landscape, on a global level. “The week of September 15, everything halted,” El-Erian said. “And it happened in a cascading and a rapidly accelerating fashion. It was the equivalent of what the economists call a sudden stop to markets. It’s like a cardiac arrest, where it doesn’t matter whether you’re the leg or the arm—if the heart stops, everything stops. So what you got, starting on the Monday, but really building up to Wednesday and Thursday of that week, was a cascading cardiac arrest of the system. We saw it on the trading floor, where area after area
