Some panel members, however, were not buying that justification.
“When I picked up my newspaper yesterday, I thought I woke up in France,” said Senator Jim Bunning, the Kentucky Republican. “But no, it turned out it was socialism here in the United States of America. The Treasury secretary is now asking for a blank check to buy as much Fannie and Freddie debt or equity as he wants. The Fed purchase of Bear Stearns’ assets was amateur socialism compared to this… . Given what the Fed and Treasury did with Bear Stearns, and given what we are talking about here today, I have to wonder what the next government intervention into the private enterprise will be? More importantly, where does it all stop?”
Clearly frustrated by what he was hearing, Paulson struggled to articulate his defense. “I think our idea is that, that by having the government provide an unspecified backstop, the odds are very low that it will be used and the cost to the taxpayers will be minimized.”
“Do you think we can believe exactly what you’re saying, Secretary Paulson?” Bunning replied patronizingly.
“I believe everything I say and that I’ve been around markets for a long time—” Paulson began to reply before Bunning cut him off.
“Where is the money going to come from if you have to put it up?” Bunning asked.
“Well, obviously, it will come from the government, but I would say—”
“Who is the government?” Bunning asked indignantly.
“The taxpayer,” Paulson acknowledged.
“Secretary Paulson, I know you’re very sincere in your proposal,” Bunning continued. “But come January, you will be gone, and the rest of us will be sitting at these tables—or at least most of us—and we all have to be responsible to the taxpayer for what we have done.”
A socialist. Mr. Bailout. Hank Paulson believed he was fighting the good fight, a critical fight to save the economic system, but for his efforts he was being branded as little less than an enemy of the people, if not an enemy to the American way of life. He couldn’t understand why no one could see how bad the situation had really become. That afternoon another faction had joined the group of antagonists: The hedge funds were furious with him for having convinced Christopher Cox at the SEC to begin cracking down on improper short selling in the shares of Fannie and Freddie, as well as seventeen other financial firms, including Lehman.
With Bob Steel gone, he felt he had been left on his own to confront the biggest challenge of his tenure. He valued his staff, whom he regarded as a remarkably intelligent group, but questioned whether he had enough firepower to wage what he could see was quickly becoming a heated war. That afternoon he left a message for Dan Jester, a forty-three-year-old retired Goldman Sachs banker who had been the firm’s deputy CFO and was now living in Austin, Texas, managing money, mostly his own. Paulson had depended heavily on Jester, a long-haired “ human calculator,” when he was the firm’s CEO, and he hoped he might be able to convince Jester to come out of retirement to help him work on the GSEs.
The night before, feeling somewhat desperate, he had also placed a call from home to Ken Wilson, an old friend from Dartmouth whom he had persuaded to leave Lazard for Goldman a decade earlier. As head of the financial institutions group, Wilson was Goldman’s top adviser to other banks and respected as an éminence grise throughout the industry. Paulson so respected his judgment that he had put Wilson in an office near his own on the thirtieth floor of 85 Broad Street.
“Ken, I really need help around here. I need some adults,” Paulson said when he reached him. “Bob Steel is gone. I’d like you to think about coming down here and joining my team.” Wilson, Paulson proposed, would be a “classic dollar-a-year man,” meaning that he would come on board as a “special adviser” for the nominal salary of $1 for the final six months of the administration. He suggested that Wilson take a leave from Goldman.
Wilson, who at sixty-one had already been considering retiring from the firm, said that he would think about it.
“I could use your help,” Paulson repeated earnestly. “I have lots of issues, um, lots of problems.”
Given all the gyrations in Lehman’s stock price and the nonstop rumors about its long-term viability, Fuld had scheduled a board meeting in July to update the firm’s directors on the progress he had been making on both fronts.
Lehman’s board was a strange mix of both the financially sophisticated and the truly naive; most had been old friends of Fuld’s or had been clients of the firm. They included Roger S. Berlind, a seventy-five-year-old theater producer, and Marsha Johnson Evans, sixty-one, a former navy rear admiral and head of the Red Cross; until two years earlier, the eighty-three-year-old actress and socialite Dina Merrill had also been a member. Among the more experienced were Henry Kaufman, then eighty-one, who was a former chief economist at Salomon Brothers; John Akers, a former chief executive of IBM; and Sir Christopher Gent, sixty, former head of Vodafone PLC. Of the ten outside directors, four were over seventy-four years old.
For this meeting, Fuld had invited a guest to give a presentation. Gary Parr, a banker at Lazard, had been speaking with Fuld recently and suggested he could try to help the board if the directors needed independent advice.
The tall, bearded Parr was one of the most prominent of the bankers specializing in the financial services industry, having worked on many of the capital-raising efforts that companies like Morgan Stanley and Citigroup pursued in late 2007. Fuld may not have trusted Parr’s boss, Bruce Wasserstein, but he respected Parr.
Parr was asked by one of the directors to offer some perspective on how bad the market really was. An assured speaker, Parr launched into his regular skeptical boardroom speech.
“It’s tough out there,” he said forebodingly. “Having been through Bear Stearns and MBIA”—two former clients—“there are some lessons we’ve learned.” Trying to make certain that Lehman’s directors understood the gravity of the situation they were facing, he told them, “Liquidity can change faster than you can imagine,” suggesting they should not think Bear Stearns was a once-in-a-lifetime event. “Rating agencies are dangerous,” he went on. “Wherever you think you stand with the rating agencies, it’s worse… . And let me tell you, it’s difficult to raise money in this environment because asset prices are hard for outside investors to under—”
“Okay, Gary,” Fuld said, impatiently cutting him off in midsentence. “That’s enough.”
An awkward silence fell over the room for a moment. Some directors thought Fuld had become upset with the negative direction Parr had taken; others believed that he had rightly quieted him for shamelessly plugging his services. Within ten minutes, Parr had left the meeting.
An hour later, back in his office at Lazard in Rockefeller Center, Parr was informed by his secretary that Dick Fuld was on the phone.
“Goddamit, Gary!” Fuld screamed when Parr picked up the receiver, half expecting an apology. “What the hell are you doing trying to scare my board and advertising yourself to them like that? I should fire you!”
For a moment Parr didn’t respond. Frustrated that Lehman hadn’t yet signed an engagement letter, Parr snidely fired back, “Dick, that might be difficult because you haven’t hired us yet.” Then, collecting himself, he said, “I’m sorry. I didn’t mean to go down a path you didn’t want me to go.”
“You’ll never do that again,” Fuld said, and the phone went dead.
The next day, Fuld—perhaps fearing that he was beginning to become unwound—realized that berating Parr had been a mistake; the stress was beginning to get to him. In his mind he had cut off Parr for running an advertisement for Lazard, not for suggesting the firm was imperiled. But the damage had been done. He called Parr back, hoping to mend the relationship and to invite him for another meeting.