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The New York Times
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 [RY
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], HSBC [HBC
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] and General Electric [GE
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] among them — but was coming up empty.
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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 [MS
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], the second-largest investment bank after Goldman Sachs [GS
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]. 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?
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