But this book isn’t so much about the theoretical as it is about real people, the reality behind the scenes, in New York, Washington, and overseas—in the offices, homes, and minds of the handful of people who controlled the economy’s fate—during the critical months after Monday, March 17, 2008, when JP Morgan agreed to absorb Bear Stearns and when United States government officials eventually determined that it was necessary to undertake the largest public intervention in the nation’s economic history.
For the past decade I have covered Wall Street and deal making for the New York Times and have been fortunate to do so during a period that has seen any number of remarkable developments in the American economy. But never have I witnessed such fundamental and dramatic changes in business paradigms and the spectacular self-destruction of storied institutions.
This extraordinary time has left us with a giant puzzle—a mystery, really—that still needs to be solved, so we can learn from our mistakes. This book is an effort to begin putting those pieces together.
At its core Too Big to Fail is a chronicle of failure—a failure that brought the world to its knees and raised questions about the very nature of capitalism. It is an intimate portrait of the dedicated and often baffled individuals who struggled—often at great personal sacrifice but just as often for self-preservation—to spare the world and themselves an even more calamitous outcome. It would be comforting to say that all the characters depicted in this book were able to cast aside their own concerns, whether petty or monumental, and join together to prevent the worst from happening. In some cases, they did. But as you’ll see, in making their decisions, they were not immune to the fierce rivalries and power grabs that are part of the long-established cultures on Wall Street and in Washington.
In the end, this drama is a human one, a tale about the fallibility of people who thought they themselves were too big to fail.
CHAPTER ONE
The morning air was frigid in Greenwich, Connecticut. At 5:00 a.m. on March 17, 2008, it was still dark, save for the headlights of the black Mercedes idling in the driveway, the beams illuminating patches of slush that were scattered across the lawns of the twelve-acre estate. The driver heard the stones of the walkway crackle as Richard S. Fuld Jr. shuffled out the front door and into the backseat of the car.
The Mercedes took a right onto North Street toward the winding and narrow Merritt Parkway, headed for Manhattan. Fuld stared out the window in a fog at the rows of mansions owned by Wall Street executives and hedge fund impresarios. Most of the homes had been bought for eight-figure sums and lavishly renovated during the second Gilded Age, which, unbeknownst to any of them, least of all Fuld, was about to come to a crashing halt.
Fuld caught a glimpse of his own haggard reflection in the window. The deep creases under his tired eyes formed dark half-moons, a testament to the four meager hours of sleep he had managed after his plane had landed at Westchester County Airport just before midnight. It had been a hellish seventy-two hours. Fuld, the CEO of Lehman Brothers, the fourth-largest firm on Wall Street, and his wife, Kathy, were still supposed to be in India, regaling his billionaire clients with huge plates of thali, piles of naan, and palm wine. They had planned the trip for months. To his jet-lagged body, it was 2:00 in the afternoon.
Two days earlier he had been napping in the back of his Gulfstream, parked at a military airport near New Delhi, when Kathy woke him. Henry M. Paulson, the Treasury secretary, was on the plane’s phone. From his office in Washington, D.C., some seventy-eight hundred miles away, Paulson told him that Bear Stearns, the giant investment bank, would either be sold or go bankrupt by Monday. Lehman was surely going to feel the reverberations. “You’d better get back here,” he told Fuld. Hoping to return as quickly as possible, Fuld asked Paulson if he could help him get clearance from the government to fly his plane over Russia, shaving the flight time by at least five hours. Paulson chuckled. “I can’t even get that for me,” Paulson told him.
Twenty-six hours later, with stops in Istanbul and Oslo to refuel, Fuld was back home in Greenwich.
Fuld replayed the events of the past weekend over and over again in his mind: Bear Stearns, the smallest but scrappiest of Wall Street’s Big Five investment houses, had agreed to be sold—for $2 a fucking share! And to no less than Jamie Dimon of JP Morgan Chase. On top of that, the Federal Reserve had agreed to take on up to $30 billion of losses from Bear’s worst assets to make the deal palatable to Dimon. When Fuld first heard the $2 number from his staff in New York, he thought the airplane’s phone had cut out, clipping off part of the sum.
Suddenly people were talking about a run on the bank as if it were 1929. When Fuld left for India on Thursday, there were rumors that panicky investors were refusing to trade with Bear, but he could never have imagined that its failure would be so swift. In an industry dependent on the trust of investors—investment banks are financed literally overnight by others on the assumption that they will be around the next morning—Bear’s crash raised serious questions about his own business model. And the short-sellers, those who bet that a stock will go down, not up, and then make a profit once the stock is devalued, were pouncing on every sign of weakness, like Visigoths tearing down the walls of ancient Rome. For a brief moment on the flight back, Fuld had thought about buying Bear himself. Should he? Could he? No, the situation was far too surreal.
JP Morgan’s deal for Bear Stearns was, he recognized, a lifesaver for the banking industry—and himself. Washington, he thought, was smart to have played matchmaker; the market couldn’t have sustained a blow-up of that scale. The trust—the confidence—that enabled all these banks to pass billions of dollars around to one another would have been shattered. Federal Reserve chairman Ben Bernanke, Fuld also believed, had made a wise decision to open up, for the first time, the Fed’s discount window to firms like his, giving them access to funds at the same cheap rate the government offers to big commercial banks. With this, Wall Street had a fighting chance.
Fuld knew that Lehman, as the smallest of the remaining Big Four, was clearly next on the firing line. Its stock had dropped 14.6 percent on Friday, at a point when Bear’s stock was still trading at $30 a share. Was this really happening? Back in India, a little over twenty-four hours ago, he had marveled at the glorious extent of Wall Street’s global reach, its colonization of financial markets all over the world. Was all this coming undone?
As the car made its way into the city, he rolled his thumb over the trackball on his BlackBerry as if it were a string of worry beads. The U.S. markets wouldn’t open for another four and a half hours, but he could already tell it was going to be a bad day. The Nikkei, the main Japanese index, had already fallen 3.7 percent. In Europe rumors were rampant that ING, the giant Dutch bank, would halt trading with Lehman Brothers and the other broker-dealers, the infelicitous name for firms that trade securities on their own accounts or on behalf of their customers—in other words, the transactions that made Wall Street Wall Street.
Yep, he thought, this is going to be a real shit-show.
Just as his car merged onto the West Side Highway, heading south toward Midtown Manhattan, Fuld called his longtime friend, Lehman president Joseph Gregory. It was just before 5:30 a.m., and Gregory, who lived in Lloyd Harbor, Long Island, and had long since given up on driving into the city, was about to board his helicopter for his daily commute. He loved the ease of it. His pilot would land at the West Side Heliport, then a driver would shuttle him to Lehman Brothers’ towering offices in Times Square. Door to door in under twenty minutes.