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The Race to Save Lehman Brothers

In the summer of 2008, two months before Lehman Brothers filed for bankruptcy, Richard S. Fuld Jr., the firm's chairman, was continuing his desperate efforts to find a lifeline. They had begun in March, shortly after the demise of Bear Stearns, when Mr. Fuld called the legendary investor Warren E. Buffett seeking a capital infusion, to no avail. Lehman had raised money elsewhere, but that didn't help for long, and its condition again was worsening.

This article is adapted from "Too Big to Fail: How Wall Street and Washington Fought to Save the Financial System — And Themselves." The book, being published Tuesday by Viking, reveals how officials in Washington, worried about the impact of Lehman's possible failure on the financial system, for months helped orchestrate efforts by Mr. Fuld to seek a solution for the firm and stave off its collapse. The conversations recounted are based on hundreds of hours of interviews with dozens of participants, many of whom agreed to speak on the condition that they not be identified as sources.

“I know it’s not true, you know it’s not true.”

Richard Fuld, as tightly wound as ever, was raging in his office on the morning of Thursday, July 10, 2008, to one of his lieutenants. Lehman Brothers’ stock had opened down 12 percent, to an eight-year low, in response to a rumor that the Pacific Investment Management Company, the world’s biggest bond fund, had stopped trading with the firm. Speculation also was swirling that SAC Capital Advisors, Steven A. Cohen’s hedge fund, was also no longer trading with Lehman. “You’ve got to call these guys and get them to put out a statement,” Mr. Fuld said.

The constant stream of bad news was hampering Mr. Fuld’s efforts to raise more capital. He and his investment banking team had been reaching out to at least a dozen prospects — Royal Bank of Canada , HSBC and General Electric among them — but was coming up empty.

Dick Fuld
Dick Fuld

Increasingly desperate that morning — “I feel like I’m playing Whack-a-Mole,” he complained to his peers — Mr. Fuld decided to call his old friend John Mack, the chief executive at Morgan Stanley , the second-largest investment bank after Goldman Sachs . After dialing Morgan’s New York office, Mr. Fuld was transferred to Paris, where Mr. Mack was visiting clients in the firm’s ornate headquarters, a former hotel on the Rue de Monceau.

After some mutual disparagement of the markets, the rumors and the pressure on Fannie Mae and Freddie Mac, Mr. Fuld asked candidly: “Can’t we try to do something together?” It was a bold question and Mr. Mack had suspected it was the reason for the call. While he didn’t believe that he’d be interested in such a prospect, he was willing to hear Mr. Fuld out.

“We’ll come over to your offices,” Mr. Fuld, clearly anxious, said.

“No, no, that makes no sense. What if someone sees you coming into the building?” Mr. Mack asked. “We’re not going to do that. Come to my house, we’ll all meet at my house.”

On Saturday morning, Mr. Fuld pulled up to Mr. Mack’s mansion in Rye, N.Y. Despite the beautiful weather, he was tense. He could already imagine the headlines if it leaked.

The Morgan Stanley team had arrived and was socializing in the dining room, where Mr. Mack’s wife, Christy, had put out plates of food she had ordered from the local deli. There was Walid Chammah and James Gorman, the firm’s co-presidents; Paul Taubman, the firm’s head of investment banking; and Mitch Petrick, head of corporate credit and principal investments.

Bart McDade, Mr. Fuld’s new No. 2, showed up next, dressed in a golf shirt and khakis. Skip McGee, the firm’s head of investment banking, was running late; his driver got lost.

As the group took their seats on sofas around a coffee table, an awkward silence followed; no one knew exactly how to begin.

Mr. Fuld looked at Mr. Mack as if to say, It’s your house, you start. Mr. Mack imperturbably glared back, You asked for the meeting. It’s your show.

“Well, I’ll kick it off,” Mr. Fuld finally said. “I’m not even sure why we’re here, but let’s give it a shot.”

“Maybe there’s nothing to do,” Mr. Mack said in frustration as he noticed the discomfort around the room.

“No, no, no,” Mr. Fuld hurriedly interjected. “We should talk.”

He began by discussing the possibility of selling Neuberger Berman, Lehman’s asset management business and one of its crown jewels. He also suggested that Morgan might buy Lehman’s headquarters on Seventh Avenue — the same building that had been Morgan Stanley’s until Philip Purcell, the firm’s former C.E.O., sold it to Lehman after 9/11. The irony would be rich.

“Well,” said Mr. Mack, not entirely sure what Mr. Fuld was proposing, “there are ways we can, you know, there are ways we can work together.” He wanted to segue the conversation to Lehman’s internal numbers, because even if nothing were going to come of the meeting, it would be helpful to Morgan Stanley to get at least a peek at what was going on inside the firm.

The Morgan team began to throw out a barrage of questions: How are things marked? they asked, Wall Street jargon for how the assets were valued. Were you able to sell them inside your marks? How much business has left the firm?

In the middle of the conversation, Mr. Fuld’s cellphone rang, and to the amazement of the group, he excused himself and retreated to the kitchen. The Morgan Stanley side was perplexed: Was Lehman working on another deal at the same time?

The art of the failed deal

What they didn’t know was that the caller was Treasury Secretary Henry M. Paulson Jr., at his office, checking in on Mr. Fuld.

When Mr. Fuld returned to the living room, the conversation continued. But the meeting ended with no agreement and what seemed like no incentive to keep talking. “Was he offering to merge with us?” Mr. Mack asked after the Lehman executives departed.

“This is delusional,” Mr. Gorman told his Morgan Stanley colleagues. Mr. Taubman had other worries. Maybe they were being used to help Lehman goose its stock price? “If I were their guys, I’d want to put my own spin on this.”

A Search for Answers

Mr. Fuld, discouraged but undeterred, drove to Lehman’s headquarters in Manhattan, racing down the Henry Hudson Parkway.

He had scheduled a call that Saturday afternoon with Timothy F. Geithner, president of the Federal Reserve Bank of New York, who was helping manage the financial crisis.

Mr. Fuld’s outside lawyer, Rodgin Cohen, chairman of Sullivan & Cromwell, had recently suggested an idea to help stabilize the firm: to voluntarily turn itself into a bank holding company. The move, Mr. Cohen had explained, would make it easier for Lehman to borrow money from the Fed “just like Citigroup or JPMorgan.”

Mr. Cohen, a 64-year-old, mild-mannered mandarin from West Virginia, was one of the most influential and yet least well-known people on Wall Street. Pacing in his hotel room in Philadelphia before the wedding of his niece that night, he joined the call between Lehman and the New York Fed.

“We’re giving serious consideration to becoming a bank holding company,” Mr. Fuld started out by saying. “We think it would put us in a much better place.” He suggested that Lehman could use a small industrial bank it owned in Utah to take deposits to comply with the regulations.

Mr. Geithner, who was joined on the call by his general counsel, Tom Baxter, was apprehensive. “Have you considered all the implications?” he asked.

Mr. Baxter, who had cut short a trip to Martha’s Vineyard to participate, walked through some of the requirements, which would transform Lehman’s aggressive culture, minimizing risk and making it a more staid institution, in league with traditional banks.

Regardless of the technical issues, Mr. Geithner said, “I’m a little worried you could be seen as acting in desperation,” and the signal that Lehman would send to the markets with such a move.

Exhausting Their Options

Mr. Fuld ended his call deflated. Later that evening, Mr. Fuld called Mr. Cohen, finding his lawyer in the waiting room of a hospital, attending to a cousin who had become ill at the wedding.

It was time to consider a different deal, he told Mr. Cohen. “Can you reach out to Bank of America?” Still standing in the emergency waiting room of the hospital, Mr. Cohen found Greg Curl, Bank of America’s top deal banker, on his cellphone in Charlotte, N.C., where the bank was based. Mr. Curl, a 60-year-old former naval intelligence officer, had helped orchestrate nearly all of the many deals Bank of America had made over the last decade.

“Do you have any interest in doing a deal? Of all the institutions we’ve been considering, you’d be the best fit,” Mr. Cohen said.

Mr. Curl, though intrigued to be getting a call on a Saturday night, was noncommittal; he could tell they must be desperate. “Hmm ... let me talk to the boss,” he said. “I’ll call you right back.” (The boss was Ken Lewis, the silver-haired chief executive of Bank of America.)

A half-hour later, Mr. Curl called back to say he’d hear them out, and Mr. Cohen set up a three-way call with Mr. Fuld.

“We can be your investment banking arm,” Mr. Fuld explained, the idea being for Bank of America to take a minority position in Lehman and for the two to merge their investment banking groups. He invited Mr. Curl to meet in person.

Dressed in a blazer and slacks, Mr. Curl arrived at Sullivan & Cromwell’s Midtown offices in the Seagram Building on Sunday afternoon, July 13, having flown to New York from Charlotte that morning on one of his bank’s five private jets.

Mr. Fuld walked him though his proposal. He wanted to sell a stake of up to one-third of Lehman to Bank of America and merge their investment banking operations under the Lehman umbrella.

Mr. Curl was dumbfounded, though he characteristically gave no sign of what he was thinking. Far from the plea for help he had been expecting, the pitch he was hearing struck him as a reverse takeover: Bank of America would be paying Mr. Fuld to run its investment banking franchise for it.

Mr. Curl said he was interested, but that he and Mr. Lewis often disagreed about whether they should acquire an investment bank or continue buying other commercial banks.

“I’d prefer a deal with you,” Mr. Curl continued, “but to be honest, Ken would probably prefer to buy Merrill or Morgan.”

Mr. Fuld was confused. What was Mr. Curl signaling?

“So do you think we have something here?” Mr. Fuld asked.

“I don’t know,” Mr. Curl replied. “I need to talk to the boss. It’s obviously his decision.”

"I believe you have a meeting..."

Even before meeting with Mr. Curl, Mr. Fuld had been ringing Mr. Paulson about Bank of America, trying to get Mr. Paulson to make a call on behalf of Lehman. “I think it’s a hard sell, but I think the only way you’re going to do it is go to him directly,” Mr. Paulson had told him. “I’m not going to call Ken Lewis and tell him to buy Lehman Brothers.”

Meeting in Secret

To keep the talks alive after the session at Sullivan & Cromwell, Mr. Paulson and Mr. Geithner over the course of the next week arranged a secret meeting between Mr. Fuld and Mr. Lewis.

It would take place at a previously scheduled event on the evening of Monday, July 21, in New York. Mr. Paulson was being honored at a dinner at the New York Fed in Lower Manhattan, organized by Mr. Geithner as an opportunity for the secretary to get together with top leaders from JPMorgan Chase, Goldman Sachs and Morgan Stanley, as well as Mr. Fuld and Mr. Lewis.

As the dinner was ending, Mr. Geithner, approached Mr. Lewis and, leaning close, whispered, “I believe you have a meeting with Dick.”

“Yeah, I do,” Mr. Lewis replied.

Mr. Geithner gave him directions to a side room where the two could speak in private. He had apparently already given Mr. Fuld the same instructions, because Mr. Lewis noticed him across the room looking back at them like a nervous date. Seeing Mr. Fuld start to walk in one direction, Mr. Lewis headed in the other; with half of Wall Street looking on, the last thing either of them needed was to have word of their meeting get out.

The two men eventually doubled back and found the room. Mr. Fuld explained that he would want at least $25 a share from Bank of America to buy Lehman; Lehman’s shares had closed that day at $18.32. Mr. Lewis thought the number was far too high and couldn’t see the strategic rationale. Unless he could buy the firm for next to nothing, the deal wasn’t worth it. But he held his tongue.

Two days later, he called Mr. Fuld back.

“I don’t think this is going to work for us,” Mr. Lewis said as diplomatically as he could, while leaving open the possibility that they could discuss the matter again.

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Mr. Fuld was beside himself. He called Mr. Paulson to relay the bad news. The only possible suitor left was a group of Korean banks, who had expressed an interest in a separate deal. Mr. Fuld pressed Mr. Paulson to call them on his behalf — a request that Mr. Paulson resisted.

“I’m not going to pick up the phone and call the Koreans,” Mr. Paulson told him, exasperated. “Dick, if they call me and want to ask questions, I’ll do what I can to be constructive.”

He added, “If you want to scare someone, call them up and tell them I said they should buy Lehman Brothers.”

Without the direct involvement of Mr. Paulson, Lehman pursued a deal with the Koreans. But that, too, fell through in August, after a visit by Korean bank executives to New York. A month later, two last-ditch efforts by Washington — to bring Bank of America back into the mix or broker a sale of Lehman to Barclays, the British bank — failed. Lehman was history.

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