Lehman was a logical merger candidate if Diamond—and, of course, his boss and the board in London—wanted Barclays to become an overnight investment banking powerhouse in New York. But he knew it would be an expensive purchase so long as Dick Fuld was running it. Still, an opportunity like this hardly came up often.
What the rest of Wall Street didn’t know at the time was that Barclays had been contemplating another purchase: Diamond had been in conversation with UBS about buying its investment banking franchise and was planning to fly to Zurich later that week for further meetings. He now shared this information with Steel but cautioned him that the talks with UBS were very preliminary, and the last thing Diamond needed was word of them leaking out. As was always a possibility, the deal might not go anywhere.
Lehman, in any case, was in a different league altogether. It wouldn’t be easy selling an acquisition of this magnitude to his board, who were still feeling gun shy after losing an expensive bidding war for Dutch bank ABN AMRO months earlier. But Lehman was the fourth biggest investment house in the United States. If Lehman could be had for a major discount, he’d have to consider the prospect seriously, wouldn’t he?
“Yes,” Diamond said to Steel, “ it’s definitely something to think about.”
CHAPTER FIVE
Surprisingly soft-spoken when not on the air, Jim Cramer, CNBC’s blustery market guru, politely told the security guard standing outside Lehman Brothers’ headquarters on Seventh Avenue and Fiftieth Street that he was expected for a breakfast meeting with Dick Fuld. He was ushered through the revolving door, past Lehman’s bomb-sniffing Labrador, Bella, and to the reception desk, where he made his way through the familiar security procedures. Looking rumpled as usual, he was received in the waiting area of the thirty-second floor as ceremoniously as if he were a major client who had arrived to negotiate a billion-dollar deal. Erin Callan, the CFO, was present, as was Gerald Donini, the head of global equities and a neighbor of Cramer’s in Summit, New Jersey.
Fuld, who was still zealously conducting his jihad against the short-sellers, had personally invited Cramer for the meeting. By now he had come to realize that he needed an ally in his struggle against the shorts, but so far, nobody had been willing to join the battle. Not Cox. Not Geithner. And not Paulson, despite their recent conversation at Treasury. But maybe Cramer, with his huge television audience and connections deep within the hedge fund world, could somehow help sway the debate and talk up Lehman’s stock price.
Fuld had known Cramer for a decade. After Long-Term Capital Management blew up in 1998, word spread that Lehman had huge exposure to the fund and might be the next to go down. Fuld had received a major public boost from Cramer, then a new face at CNBC, when he declared on television that all Lehman needed to do was buy back its own shares to halt the downward spiral and squeeze the shorts. The following morning, Fuld, who had never met Cramer, called him at his office and told him, “I bid thirty-one dollars for one million shares of Lehman.” Shares of the company steadied soon afterward.
If Wall Street had indeed been taking on some aspects of a Shakespearean tragedy, Cramer would likely serve as the comic relief. Voluble and wild-eyed, he spoke in his TV appearances so quickly that it often seemed as if his head might explode from the sheer effort of communicating his ideas. But for all his carnival-barker antics, people on Wall Street knew Cramer was no fool. He had managed a hedge fund and founded TheStreet .com, an early and influential investing Web site, and had a keen understanding of how the market worked.
Fuld and Cramer had come to respect each other as no-nonsense street fighters, despite their pronounced differences in character. Cramer, a media star, was solidly Harvard, had once worked at Goldman, and counted as one of his best friends Eliot Spitzer, the bane of Wall Street. Fuld, for his part, tended to despise Ivy Leaguers, liked to think of himself as the anti-Goldman, and had never been much of a communicator. Still, he appreciated the fact that Cramer had always been an honest broker, willing to speak his mind, however unpopular his opinions might be.
After one of Lehman’s wait staff had taken food orders for the group, Fuld walked an attentive Cramer through his talking points. Lehman, Fuld said, was working hard to reduce the firm’s leverage and restore confidence among investors. Though they had raised $4 billion in new capital in the first quarter, Fuld was convinced that a “cabal of shorts” was preventing the stock price from being properly reflected. The franchise was undervalued.
Cramer nodded his head energetically. “Look,” he said, “I think there is definitely a problem with the shorts—they’re leaning all over you.”
Fuld was gratified to see that he had a receptive audience. As he was well aware, his short-seller predicament touched on an obscure issue near and dear to Cramer: the uptick rule—a regulation that had been introduced by the Securities and Exchange Commission in 1938 to prevent investors from continually shorting a stock that was falling. (In other words, before a stock could be shorted, the price had to rise, indicating that there were active buyers for it in the market. Theoretically, the rule would prevent stocks from spiraling straight downward, with short-sellers jumping on for the ride.) But in 2007 the commission had abolished the rule, and to critics like Cramer, its decision had been influenced by free-market ideologues who were eager to remove even the most benign speed bumps from the system. Ever since, Cramer had been warning anyone who’d listen that without this check, hedge funds were free to blitzkrieg good companies and drive down their stock.
But until the current crisis, few had been willing to listen to his admonitions. Because their hedge fund clients wanted the rule eliminated, Wall Street firms were happy to accede—right up until the time that they themselves became the target of short-sellers and had to run for cover.
“You can be a great ally to me on this uptick rule crusade,” Cramer said.
Fuld contemplated his guest’s enthusiasm as he silently weighed the advantages and disadvantages of lending his firm’s name to the cable news star’s crusade. Cramer was probably right about the rule’s removal hurting Lehman, but Fuld also knew that his firm’s own arbitrage desk had hedge fund clients who were selling short, and they made the firm a great deal of money. He certainly didn’t want to alienate them, and at the same time, he recognized that there was a legitimate debate about the issue. And however protective the restrictions may have been intended to be, Fuld knew perfectly well that investors could get around them by using options and derivatives.
Donini, skeptical that the uptick rule was Lehman’s biggest problem, interjected on behalf of Fuld. “What are you trying to accomplish, Jim?” he asked.
“The shorts are destroying great companies,” Cramer replied. “They destroyed Bear Stearns, and they’re trying to destroy Lehman,” he said, perhaps trying to play to Fuld’s ego. “I want to stop that.”
“If you’re trying to accomplish that,” Donini replied, “and you believe that shorts are causing the problem, then I don’t believe the uptick rule is the way to do it.” Donini explained to Cramer that he felt the real problem in the marketplace was “naked shorting.” Normally, when investors sell shares short, the investor first borrows the shares from a broker, sells them, and then hopes they drop in value so the investor can buy them at a lower price, replace the borrowed shares, and pocket the difference as a profit. But in naked shorting—which is illegal—the investor never borrows the underlying shares, potentially allowing them to manipulate the market.
Cramer was intrigued but also visibly taken aback by Donini’s answer. He had been invited to the meeting, had offered to help, and now his offer was being rejected. He tried changing the subject back to Lehman’s troubles. “Well, why don’t you give me ammo so that I can tell a positive story?” he suggested.