The Devil's Casino (31 page)

But the quick nationalization of
AIG
did not calm the markets, which found Paulson’s about-face on bailouts almost as troubling as the magnitude of the taxpayer subsidies needed to plug the gaping holes.

And how big were all those holes? No one knew. The worldwide market for mortgage-backed securities was about $1.4 trillion, and those had been effectively dead for months. But by Tuesday,
all
the markets were dead.

Despite full access to the Fed’s discount window, the safest banks and brokerages weren’t making overnight loans to one another—and in the rare event that they did, the interest rates they were charging one another were several percentage points higher than they ‘d ever been before.

News of the Reserve Primary Fund’s exposure to Lehman Brothers’ debt had flooded the money market industry with redemption demands. And at Washington Mutual, one of the most notorious banks to have gotten in on the boom in subprime mortgages, depositors were lining up around the block to close their accounts. (Some even apologetically brought baked goods to their favorite tellers.)

Paulson now saw there would be a run on the remaining securities houses, Goldman Sachs and Morgan Stanley. On Sunday, September 21, the Fed converted them to bank holding companies—which was what Lehman had asked for just weeks earlier and been denied.

But the mayhem continued, and Paulson had to find another solution. He reasoned that the only way to stem the panic would be for the government to start buying huge chunks of mortgage-backed securities.

On September 20, Paulson submitted to Congress his plan—drafted in bullet points on three sheets of paper—to buy up these toxic assets. Condemned on both sides of the aisle as a tin-eared, dictatorial document, it was rejected nine days later by the House. Another four days after it had been rewritten (and the markets had meanwhile swooned), the bill had grown to 451 pages and it passed—just barely. On October 3, President Bush signed into law the Emergency Economic Stabilization Act, more commonly known as the Troubled Asset Relief Program (
TARP
), which included Paulson’s suggestion—to the tune of $700 billion.

No one was happy. The country was now in a recession and taxpayers appeared to be paying for the lavish lifestyles of the clowns on Wall Street who had dragged them into this mess.

It didn’t appear that the public’s opinion of bankers could get any worse, but it did when Dick Fuld testified before Congress on October 6.

He did not help himself by peering over his half -moon spectacles rather than looking through them (he is very short-sighted), but both the language and the style of his testimony were appalling.

“This is a pain that will stay with me the rest of my life,” he said about Lehman’s fall. But he was far from ready to admit that the wounds were self-inflicted. Instead he blamed lax oversight, “sensational” media coverage, and the rumor-mongering of short sellers.

Henry Waxman, the committee’s pugnacious chairman, gave the broken banker an uncharacteristically measured rebuke. “I accept the fact that you’ re still haunted at night,” he told Fuld. “But you don’t seem to acknowledge you did anything wrong.”

On October 14, Paulson revised
TARP
so he could use some of the $700 billion to take direct equity stakes in the major financial institutions—regardless of whether the institutions wanted or needed the government to have such stakes. Buying up toxic assets was too complicated—and as the rapid demise of Fannie, Freddie, Lehman, and Bear had proven, there was too much room for fudging the numbers when it came to valuing them.

In the weeks following the Lehman bankruptcy, even large blue-chip corporations were getting charged near-usurious interest rates simply to fund day -to-day operations, and innumerable small businesses had their lines of credit pulled altogether. TARP was meant to provide banks with a liquidity cushion that would give them the confidence they needed to start lending again. But the financing also gave Congress the right to levy restrictions on Wall Street ‘s notoriously generous bonus pools and summon their executives to Washington for adversarial cross-examinations.

Why, Congress wanted to know, had the
AIG
bailout alone transferred $13 billion from the Fed into the coffers of Goldman Sachs—to say nothing of the incalculable profits it had reaped borrowing cheaply in its new status as a bank holding company? And where did the Fed get off signing contracts guaranteeing hundreds of millions of dollars in retention bonuses to the employees of the unit at
AIG
whose prolific sales of credit default swaps had left taxpayers holding the bag for $183 billion? Then there was John Thain at Merrill Lynch, who got his new boss, Ken Lewis, to approve more than $3 billion in Christmas bonuses for his team in November, only to turn around and disclose that Merrill would be reporting $15 billion in additional losses for the quarter—a burden that would naturally be shouldered by taxpayers, who had injected $45 billion into the new merged entity.

And that was just the start. Wall Street CEOs would spend much of the winter and spring getting grilled on Capitol Hill. In the harsh glare of the interrogation room, they would often concede that their pay had been excessive, that the incentives were out of whack, that the system needed to bolster the regulatory systems they had been lobbying for so many years to dismantle. They promised to clean up their acts.

But did they? Within a year Lloyd Blankfein was claiming that Goldman Sachs, the first bank to return its
TARP
funds, had not needed government aid in the first place and was never in danger of failing, even going so far as to joke to the
London Sunday Times
that he is doing “God’s work.” Tim Geithner, now the U.S. Treasury secretary, quickly told the media this was flat-out wrong.

After Blankfein came Dimon, then Morgan Stanley and Bank of America, and finally—almost unbelievably—the beleaguered Citigroup. As quickly as they could, they repaid their
TARP
funds and got back to business—and bonuses. In other words, the devil was back in the casino—and was eager to spin the wheel again.

The Lehman executive committee watched all this and fumed. It wasn’t fair; Blankfein had conceded as much back in September when he called Fuld to console him. “There was a flood coming; Bear was on the first floor of the building and you were on the second,” he told his vanquished rival. “We were on the fifth. The flood got stopped before it reached the fifth floor.”

Although he’d gotten out before the “summer of hell,” Joe Gregory was just as outraged as his colleagues. After all, he still had $232 million in stock tied up in the company, as well as millions in deferred compensation.

From the Huntington home office where he ‘d been forced to set up shop—and sell his helicopter—he called former colleagues and raged: “Not only did we get fucked, but people think we are the fucker!” He also told people that if he’d been left in his seat, he could have sorted out the situation; Bart McDade is to blame, he claims, for losing the firm.

Many Lehman people find it impossible to let go. “Sometimes I wake up and I think for a second that Lehman’s still alive; it’s like it was a person,” says Craig Schiffer. “For all the things that went wrong, there was something unique about it, something really strong and magical.”

Months later, there was still rage in the eyes of the men and women at Lehman who felt they’d been wrongly singled out and shot in the name, not of merely saving the economy, but, so they believed, saving Goldman Sachs.

“I’ m looking at a person who is responsible for this mess,” one Lehman senior manager said. “Switch on your TV and you’ ll see Tim Geithner.”

Many ex-Lehmanites believe Treasury and the Fed rushed the math that last weekend, and in Paulson’s haste to fix the bigger problems looming he made a massive mistake. Their marks to market, they claim, were not so overvalued—and as proof, they cite the increasing suspicion that the Lehman estate was robbed of a good $5 billion in its last-ditch deal with Barclays.

“I think it’s more a story of hubris than a tragedy,” a former executive committee member says. “There’s a long street of mistakes on Wall Street, and there’s a car that’s slowly rolling toward a cliff, and there’s this guy who gives the last little push, to make it topple down. . . . I mean is he the villain? Yes, on one level he is. But the guys who drove it to the edge are the ones who may deserve most of the blame.”

Kathy Fuld is a nice person. The trouble is, she thought everyone else on Wall Street was as nice as she is. They’ re not.

—Peter A. Cohen

W
hoever said it’s lonely at the top never consulted with Kathy Fuld, who quickly found that it can be lonely at the bottom as well. Her fall from grace and the social ostracism that followed were swift. After Lehman collapsed and her husband became a pariah (and a poster boy for the naked avarice of Wall Street), Kathy stopped getting calls from the wives of other CEOs. At a dinner party with Peter Cohen and his wife, Kathy burst into tears. “I didn’t realize these people weren’t actually my friends,” she said.

By the end of September, she had announced her intention to sell, at auction, the Fulds ‘ $20 million art collection. A month later, they sold 12 of their 16 Abstract Expressionist paintings for $13.5 million.

Months later, she quietly stepped down as vice-chair of the Museum of Modern Art’s illustrious board. “You need a lot of money to get to run the MoMA board,” explains an insider. And Kathy no longer had enough. The Fulds sold their 16-room Park Avenue apartment for $25.87 million. Like all the other Lehman Brothers wives, Kathy also paid a price for being married to the firm. She once told Karin Jack that her social duties meant she did not spend as much time as she would have liked with her twin daughters. She also confessed that she seldom saw her own family because they did not like Dick.

She was to soon learn that, as one former Lehman wife said, “When your husband leaves Lehman, you become a ghost.”

Her husband, Dick, eventually moved his office to the Time -Life Building at 1271 Sixth Avenue, where
Fortune
magazine is located, and where the remaining employees of Lehman Brothers Holding, Inc. helped direct the bankruptcy proceedings.

In early April 2009, he moved to offices at 780 Third Avenue, where he set up his new private equity venture, Matrix Advisors. “You can either look forward or look back,” he told friends. After six months of restless sleep, Fuld decided to look forward.

At a party in Greenwich, Connecticut, that summer, Dick Fuld looked deeply tanned and relaxed, far removed from the winter’s guilt and sleepless nights. He was charming and funny and wanted to talk about his children. But he held my arm in a vicelike grip when I told him I was trying to piece together the “jigsaw” of events that led to the Lehman bankruptcy. “Believe me,” he said, “so am I.”

On September 15, 2009, Fuld was reportedly “ambushed” at his Sun Valley home when a reporter rang the bell and said she had an important “family matter” to discuss. Fuld invited her in, and she pounced.

When she asked for a quote, he said, “Nobody wants to hear it. The facts are out there. Nobody wants to hear it, especially not from me.”

Joe Gregory also stayed out of public view. Reportedly, he sold his seven-acre estate in Manchester, Vermont. Former Lehman employees were appalled to read about his still-lavish spending habits in magazines such as
Vanity Fair
. He may have lost approximately $230 million in stock, but over the years he’d taken out at least that much.

Gregory’s healthy portfolio was in stark contrast to the finances of many of Lehman’s 26,000 employees, who lost everything. Everyone who worked there—from secretaries to managing directors to the CEO—received half of their pay in bonuses, paid in Lehman stock that could not be sold for at least five years.

Erin Callan was briefly saved by Rob Shafir, the former head of fixed income who had mistakenly worn “business casual” to a Lehman off-site and had quit in February 2007 and jumped to Credit Suisse, where he ran the firm’s American offices. In July 2008 he recruited Callan to run hedge funds there, because he’d been impressed by her when she had run that department at Lehman.

To the fury of former colleagues, Callan gave an interview to
Fortune
magazine in which she insisted that she hadn’t been forced out at Lehman. “It was clear in the 24 hours after we announced second-quarter earnings that the market reaction was just terrible, and there was a rising sense in the organization that a management change was needed. I went back to my office and decided I was willing to step down,” adding that she, “was lucky to get out.” She was implying, many thought, that she’d been very clever to get out when she had—as if it had been her choice, as if she’d had no responsibility for what had happened. “I couldn’t believe it when I read that,” seethed one former colleague. But her cocky attitude came to an abrupt end as lawsuits against Lehman, its board, and senior management flooded in. Angry investors wanted to know if they’d been sold a lie. All the institutions that had invested in the firm in 2008 now alleged that the marks had been false. Callan had been the CFO; she’d signed off on the financials and effectively promised that the company was in good health when clearly it wasn’t. This was now her potential legal jeopardy.

She quit Credit Suisse, retired to her house in the Hamptons, and dated the fireman she’d once bragged to her colleagues about. Friends said she had a breakdown of sorts. For a woman whose life had been her work, it was a sad outcome.

In an ironic twist, Michael Thompson, her former husband, landed on his feet: He ran his trading business and was happy.

Throughout 2009 the lawsuits against Lehman just kept rolling in. One board member told a friend, “I think we’ ll be in court forever over this.”

By November 2009, the cost of retaining the various advisers and examiners necessary to parse the many thousands of claims and counterclaims and go about the laborious work of liquidating the firm had crossed the half-billion-dollar threshold, with no end in sight.