Paulson agreed he needed to tamp down all the anxiety. By 10:30 a.m. Treasury issued a statement under Paulson’s name, stating: “Today our primary focus is supporting Fannie Mae and Freddie Mac in their current form as they carry out their important mission.” By using the phrase “in their current form,” Paulson was trying to send a signal that he had no plans to nationalize the companies, even though he knew he might ultimately have to seek the power to do so.
Still miffed by the leak, Paulson walked over to the White House as President Bush was preparing to go over to the Department of Energy on Independence Avenue for a briefing on oil and the energy markets. “Can I ride over with you, sir?” Paulson asked, and on the short trip there briefed Bush on the Fannie and Freddie situation. Bush, who had been a critic of the GSEs for years, was supportive of Paulson’s plan. As the motorcade arrived at their destination, Paulson suggested that when the president spoke to the press that afternoon he needed to tread carefully, fearful of spooking the markets even more. “Emphasize how committed we are to the stability of these organizations,” Paulson told him.
Although Freddie’s stock price would plunge as much as 51 percent that day, falling to as low as $3.89, and Fannie shares sank by as much as 49 percent, they managed to pare back their losses, with Freddie ending the session down only 3.1 percent and Fannie down 22 percent. Paulson, meanwhile, began calling congressional leaders to determine what it would take to get Treasury the authority to put capital into Fannie or Freddie or to backstop their debt.
Just as the market closed, Paulson had a call with Sheila Bair, the chairwoman of the Federal Deposit Insurance Corporation, who shared further dismaying news of the intense pressures in the mortgage market: The FDIC was about to seize IndyMac Bancorp, a mortgage lender, marking the fifth FDIC-insured bank failure that year and the biggest since the savings and loan debacle.
Recognizing that Fannie and Freddie could soon spin out of control, Paulson summoned his brain trust to his office at 4:15 p.m. and told them to get ready to work throughout the weekend on a way to stabilize the GSEs. His plan was simple: He wanted to ask for the authority to put money into Fannie and Freddie, in the hopes that he’d never actually have to use it.
“I want,” he instructed, “to announce a plan before the Asian markets open Sunday night.”
On Saturday morning, Fuld pulled up to John Mack ’s Tudor mansion in Rye, New York. Despite the beautiful weather, he was tense about the upcoming meeting. God help me, he thought, if this leaks. He could already imagine the headlines.
“Dick, good morning,” Mack said amiably as he greeted Fuld at the front door. Mack’s wife, Christy, stepped out to say hello as well.
The Morgan Stanley management team had arrived and were socializing in Mack’s dining room. 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. They have probably been strategizing for hours, Fuld thought.
McDade showed up next, dressed in a golf shirt and khakis. McGee was running late.
On a table in the den, Christy had put out plates of wraps that she had ordered from the local deli and said, “Everything is all set for you guys.” As the group took their seats on sofas around a coffee table, an awkward silence followed; no one knew exactly how to begin.
Fuld looked at Mack as if to say, It’s your house, you start. Mack imperturbably glared back, You asked for the meeting. It’s your show.
“Well, I’ll kick it off,” 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,” Mack said in frustration as he noticed the discomfort around the room.
“No, no, no,” Fuld hurriedly interjected. “We should talk.”
Fuld began by discussing Neuberger Berman, Lehman’s asset-management business and one of its crown jewels, as an asset that he would be prepared to sell. 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 CEO, sold it to Lehman after 9/11. The irony would be rich.
“Well,” said Mack, not entirely sure what 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? Were you able to sell them inside your marks? How much business has left the firm? McDade ended up doing more of the talking than his boss as he tried to answer them.
McGee, whose driver had gotten lost, finally arrived in the middle of the meeting, and Fuld gave him an anxious glare.
When Fuld’s cell phone started ringing, he excused himself and retreated to the kitchen, leaving the Morgan Stanley side perplexed: Was Lehman working on another deal at the same time?
What they didn’t know was that the caller was Paulson, at his Treasury office, checking on Fuld and updating him on his plans to propose a bill about Fannie and Freddie. Fuld was happy to hear that Paulson was seeking to stabilize the GSEs—he knew such a measure could help him as well.
When Fuld returned to the living room, he unexpectedly broke into the conversation, saying, “You know, with all these rumors going around about Lehman, I would hope that you won’t try to poach any of my people.”
The Morgan Stanley executives were taken aback.
Chammah, a Lebanese-born banker who spent most of his time running Morgan’s operations from London, retorted: “If you recall, you weren’t shy about building your European operation off of our talent.”
The meeting ended with no agreement and what seemed like no incentive to keep talking.
“What the fuck was that all about?” Mack asked after the Lehman executives departed. “Was he offering to merge with us?”
“This is delusional,” Gorman said. Taubman had other worries. Maybe they were being used to help Lehman goose its stock price? “We’re playing with fire here,” he warned them. “If I were their guys, I’d want to put my own spin on this.”
Fuld, discouraged but undeterred, drove from Mack ’s house to Lehman’s headquarters in Manhattan, racing down the Henry Hudson Parkway. He had scheduled a call with Tim Geithner for that Saturday afternoon. His outside lawyer, Rodgin Cohen, chairman of Sullivan & Cromwell, had recently suggested a new idea to help stabilize the firm: to voluntarily turn itself into a bank holding company. The move, Cohen had explained to Fuld, “would give Lehman access to the discount window indefinitely, just like Citigroup or JP Morgan have.” That, in turn, could take some of the pressure off investors worried about the firm’s future. It would also mean that Lehman would become regulated by the Federal Reserve of New York, which would have to sign off on the plan.
Cohen, a sixty-four-year-old mild-mannered mandarin from West Virginia, was one of the most influential and yet least well-known people on Wall Street. While soft-spoken and small in physical stature, he had the ear of virtually all the banking CEOs and regulators in the country, having been involved in nearly every major banking transaction of the last three decades. Geithner often relied on him to understand the Federal Reserve’s own powers.