Like a manic marriage broker, Paulson had been going back and forth between Fuld and Bank of America’s CEO, Ken Lewis. Paulson knew that after JPMorgan acquired Bear Stearns earlier that year, Bank of America was likely the strongest, most deep-pocketed American bank that could pull off another takeover. Lewis was attracted to the idea of buying Lehman, with one big caveat: he wanted to leave behind the toxic assets—that is, those whose value had declined so substantially that they represented a burden on the balance sheet. It was like making an offer to buy a house except for the leaking roof. Paulson stated repeatedly that the federal government was not going to be on the hook for the bad assets. A private-sector solution was required. But Ken Lewis didn’t seem to register what Paulson was saying. Now, sitting in his car, Paulson took another call from Lewis.
“Okay, I’ll do a deal if you guarantee all the bad assets.”
Paulson sighed heavily. “Ken, we can’t do that.”
“Then I’m out,” Lewis said.
Paulson urged him to wait. He told him about the meeting at the Federal Reserve and suggested that perhaps a consortium of banks could get together and take on some of Lehman’s toxicity. Lewis agreed to hold off on a decision, but he didn’t sound optimistic.
“Do you think he’s really serious about buying Lehman?” Paulson’s chief of staff, Jim Wilkinson, asked. They were all beginning to have their doubts. Separate conversations were being held with Barclays, just in case. Members of Paulson’s staff were constantly on the phone with the British regulators who, like Lewis, were balking at the idea of taking on Lehman’s debt. It was going to be a long weekend, and Paulson had no idea going in whether they’d be able to pull off the save.
I remember asking someone from the Treasury that week whether Lehman’s toxic assets were so much worse than what anybody else had on the books.
“Oh, yeah,” he said. “The difference between Bear and Lehman was that everybody had been into Lehman looking at its books. They knew exactly how bad it was. I was in there with Bank of America, and they were talking about just some of this horrible land. Believe me, it was awful.”
Contrary to the way it is portrayed in movies, the floor of the New York Stock Exchange is not consumed by frenzy or populated by unruly, shouting traders. Computers long ago replaced ticker tape, and the scene today is of hundreds of people hunched over their terminals making electronic trades. Even so, a visceral energy pulses through the vast room. When the opening bell rings each morning at 9:30, no one can predict with any certainty how the market is going to end at 4:00 p.m.—although hundreds of analysts and reporters are dedicated to the job of divining the outcome. I have been reporting from the floor for more than fifteen years. My afternoon show, Closing Bell, broadcasts between 3:00 and 5:00 p.m., which is the apex of global trading. And during this particular time, the nervousness was surreal. Every day I would come in not knowing what to expect. We would watch massive gyrations with the Dow, down 500, 600, 700 points on some days and up 500 points on others. Investors were nervous, and the nervousness manifested itself on markets around the world.
Closing Bell focuses on the financial issues everyone is talking about, and during the few days leading up to that “big weekend,” the talk was about Lehman Brothers: Would it survive until Monday? How much did it matter to the financial health of Wall Street if Lehman went down? Would the Fed backstop a purchase as it had done with Bear Stearns six months earlier? Were there serious suitors that might rescue Lehman? The experts were generally pessimistic about Lehman, and the flashing board told the tale: the once-great investment firm’s stock closed on Friday at a paltry $3 a share, down from a fifty-two-week high of $67.73.
To outsiders, the crisis might have seemed sudden, shocking, unbelievable—a bolt from nowhere. But it had been coming for a long time. A Lehman insider, recalling the months leading up to this fateful moment, told me, “By Friday, September 12, we just wanted to get through the damn day. Every day you’d sit there and think ‘I can’t wait until the market closes.’ People were transfixed by the ticker and what was happening to our stock price.” Now months of agony and hope were coming to a final reckoning, and the actions of the men gathering at the Fed would define the financial landscape for years and even decades to come.
By the time I arrived at the New York Stock Exchange for Closing Bell on Friday, I had been working the phones and text messaging for hours. Lehman Brothers was on the ropes. With the announcement of third-quarter losses of nearly $4 billion, credit agencies were threatening a downgrade unless Lehman raised substantial cash before the weekend was out. Share prices had plummeted throughout the week. Rumors had been floating around for weeks that the state-owned Korea Development Bank (KDB) was talking about acquiring Lehman and/or taking a sizable stake, but that deal was dead by the weekend. My sources told me that the Koreans had made an offer of capital in exchange for a 50 percent stake, but Fuld declined it. “It’s not enough,” he told them, asking for much more than they wanted to pay. He overreached and lost the deal.
Midway through my show, my BlackBerry started buzzing
