Colossal Failure Of Common Sense Part 17

At that moment the Lehman negotiators had their backs to the wall down at the concrete fortress of the Federal Reserve on Liberty Street, which, ironically, stands atop the biggest stockpile of gold bars on earth, surrounded by every kind of security, machine-gun-toting armed guards, and metal detectors. Bart, Alex, and Jim Seery fought for the life of the old investment bank they all loved. But they had to fight in the lair of Hank Paulson, and they suspected he had already decided to let Lehman go. He had creatively saved Bear Stearns but would not do anything for Bank of America in their attempt at a Lehman takeover, and he was not about to help Barclays. The Brits still seemed to want something of Lehman, though not everything, and early Sat.u.r.day, having been there most of the night, they said a deal was possible, but they needed the approval of the Financial Services Authority (FSA), the British regulators in London.

Meanwhile, on another floor, Hank Paulson was in conference with Bank of America officials in their efforts to buy Merrill. To this day there are those who believe Hank was more interested in saving Merrill than he ever was in saving Lehman. Every few hours he fielded a call from Fuld, but the fact was, he disliked the man, and he believed that Lehman had arrogantly foisted most of their troubles upon themselves and should just go away.

Warnings that such a failure might lead to a world banking collapse concerned him but did not quite convince him he should step in and rescue them both. Hank took aside John Thain, his old friend and colleague from Goldman, now CEO of Merrill, and gave him a stern talking-to. Moments later Thain called Ken Lewis, CEO of Bank of America, at his home in Charlotte, North Carolina, and suggested a meeting. Perhaps unknowingly, perhaps unwittingly, and eerily similar to the BofA rescue of Countrywide months before, BofA and Merrill were being led to the altar in a marriage of convenience for someone. Some thought BofA was becoming the fifth branch of the U.S. government, JPMorganChase already being installed as the fourth.

But Lehman's position was not improving. They had teams of negotiators all over the building, in discussions with bankers and lawyers. Even Mark Walsh and his minions had arrived to help Barclays evaluate one of the most terrifying commercial real estate portfolios in the country. The Barclays guys were grilling Bart and Alex, trying to place a value on the corporation. One of their prime observations was "The Lehman valuations on these a.s.sets are insane-what the h.e.l.l was Fuld doing? Him and this Gregory character."

By Sat.u.r.day lunchtime, Barclays, unsurprisingly, had decided that whatever else they wanted, they did not want the Lehman commercial property empire. They were probably encouraged in this view by the findings of about three hundred other lawyers, accountants, and bankers who had also gazed in horror at the giant portfolio of concrete that d.i.c.k Fuld had so confidently praised on that Lehman conference call three days before. And everything was made more drastically difficult because Fuld, even when the writing was on the wall, had refrained from calling in the bankruptcy lawyers. Thus there had been no preliminary examination. The fact was, no one knew the answers to anything.

Right now all Fuld could do was drive the Lewis family nearly mad by calling the Bank of America boss every five minutes throughout that Sat.u.r.day. If it wasn't the longest day in Lehman's history, it was surely the longest day in the lifetimes of Ken and Donna Lewis.

By Sat.u.r.day night CNBC was talking openly about the demise of Lehman. They spoke as if the game was over, and anyone listening could have been in no doubt that Bank of America was out and the Barclays position was unpromising.

On Sunday morning, the streets around the Lehman headquarters were packed with reporters and television crews. A police line was established on the sidewalk as hundreds of Lehman employees began filing in, some carrying boxes, others with duffel bags. I took a walk along to my old office building just as the sorrowful procession of hardworking, talented staff members began to emerge one by one, holding their boxes.

I stood on the other side of the street and saw a few people I knew. Some of the women were in tears. Many of the guys were too upset even to look up. And the reporters crowded in on them shouting questions, demanding answers from people whose lives had just been shot to pieces, whose finances were decimated, lifestyles wrecked, in some cases, like mine, hearts broken.

I then saw Jeremiah Stafford cornered by the reporters. One of the toughest, fastest traders on Wall Street, whose expectations had been sky-high, he was just standing there with his box of possessions, wearing a Red Sox baseball cap. His life was in shreds, his dreams ruined, at least for the moment. I could see him fighting back the tears as he said how we had been expecting this for a while, but he and all of his closest colleagues would walk out with pride, knowing they had contributed. As he tore himself away from these intrusive strangers with their microphones and lenses and appalling sense of ent.i.tlement, he added, "It was a very great place to have worked." Right on, Jeremiah! He represents to me so much of what was right and so much of what was wrong with Lehman. There were so many talented traders like him, so many awesome hardworking investment bankers, salespeople, support people all over the globe. There were dozens and dozens of extremely profitable business engines and departments in the firm. It was like 24,992 people making dough and 8 losing it.

By now people were still arriving, driven by the fear that the Lehman bankruptcy might yet be so bad that the feds would move in and seize everything, bolting the doors, locking everyone out. But thus far Lehman had not filed, and while some may have thought there was still hope, most people knew it was over. Otherwise, why were there hundreds of media people camped outside the doors of 745 Seventh?

In fact, none of them knew about the single ray of hope that had glistened in one of the wood-paneled conference rooms of the Fed building shortly after nine-thirty that morning. Hank Paulson and the head of the New York Fed, Tim Geithner, had between them corralled a group of leading bank chiefs and convinced them to finance the SpinCo a.s.sets up to $40 billion. This was precisely what the guys from Barclays wanted to hear, and it effectively put a potential deal right back on track.

Bart McDade and Alex had, like everyone else, been at the Fed since 6:00 A.M. A.M. Mike Gelband was uptown at the law offices of Simpson, Thatcher, and Bartlett, Lehman's counsel, where they were tackling the ma.s.sive problem of due diligence. Just before ten o'clock, Bart e-mailed Mike informing him there was a deal: Barclays was making an acceptable offer for the firm. Mike Gelband was uptown at the law offices of Simpson, Thatcher, and Bartlett, Lehman's counsel, where they were tackling the ma.s.sive problem of due diligence. Just before ten o'clock, Bart e-mailed Mike informing him there was a deal: Barclays was making an acceptable offer for the firm.

Mike, who perhaps more than anyone had strived to save the bank that had outright rejected him, was almost overcome with relief. But twenty minutes later, his hopes were shattered. A new e-mail came in from Bart, announcing there had been a problem. In truth, there were two major holdups. The first was the British regulators, the FSA, who would not clear the deal because they had no wish to involve the British financial system with American difficulties. Hank Paulson himself had stepped in and talked with the regulators in London, but to no avail. Some have said that the FSA was willing to share the risk with the U.S. Treasury, but Paulson yet again said no.

The more pressing issue was Barclays shareholder approval. There was no way Hank was going to place a United States Treasury guarantee behind a deal that might face some kind of mutiny from British stockholders. And this deal needed to be done that day. Lehman did not have enough money to open for business on Monday, not without borrowing, and Jamie Dimon was simply not up to extending any more credit to Lehman. And so the great bankers of the United States stared down the twin barrels of two insurmountable problems, regulators and shareholders, while Barclays backed away.

No one could say they didn't give it everything, but the enmity between Paulson and Fuld shimmered below the surface. In the end, Fuld saw the Treasury boss as a Pete Peterson character, a smooth, highly educated Ivy League sports star, a dyed-in-the-wool investment banker who had risen effortlessly. Hank found d.i.c.k Fuld a somewhat graceless, arrogant character, devoid of humility even in this, Lehman's darkest hour.

And boy was it ever dark. Huge arc lights split the night out on Seventh Avenue, generators roared, and reporters shouted as the evening wore on. Media from all over the world were there, performing their dance of impending death: CBS, NBC, the BBC, Sky News, ITV. What's the mood like inside the building? How do you feel? How worried are you? What are the chances of a new job? What's the mood like inside the building? How do you feel? How worried are you? What are the chances of a new job? On this Sunday night their material was endless, because people were arriving all through the evening into the small hours, afraid of the lockout, afraid of losing years of mementos and personal possessions. On this Sunday night their material was endless, because people were arriving all through the evening into the small hours, afraid of the lockout, afraid of losing years of mementos and personal possessions.

The old distressed-bond trading department was united as it had not been for more than a year, since Mike and Larry left. Everyone was on the phone to everyone else, in a ma.s.s commiseration for the old firm. Everyone, in their own way, was upset: Joe, Ashish, Pete, Grossy Sch.e.l.l. But the two I recall being most hurt of all were a couple of the staunchest operators in the company: the hard-nosed ace salesman Terence Tucker, too distressed to talk, and Jane Castle, a hundred pounds of h.e.l.l, too upset to come to the phone.

I had a long conversation with Pete Hammack, and as ever, he had a.s.sembled the facts and arrived at the firm conclusion that, no matter what, Hank Paulson had to save Lehman Brothers. There was no choice, he felt, because the calamity would be too great for the financial system if he let it go.

"The issue is the credit default swaps," said Pete. "There's $72 trillion of them out there held by seventeen banks, and Lehman must be sitting on $7 trillion of them. Likewise, since Lehman is a prime broker, what happens to all the other prime brokerages if Hank lets Lehman go? Right there you're talking Armageddon." Pete had thought it through. "If a hundred hedge funds have prime brokerage accounts with Lehman Brothers," he said, "each with $500 million at stake, that's $50 billion of stocks that will possibly be liquidated. And that amount of selling will cause a tsunami. Worse yet, all of these hedge funds are leveraged five times, maybe ten. That's $500 billion of selling, bonds, stocks, RMBSs, CMBSs, CDOs, et cetera. That's a mega-tsunami on steroids. That's what we have created, and Hank has no option except to stop it from happening." No modern market has ever seen that type of selling.

Larry McCarthy did not share Pete's opinion. "We're dead," he told me with rich and characteristic cynicism, "because Hank and his guys have seen the books." Like me, he thought all hope was gone, though our reasons were slightly at variance. Personally, I thought Hank Paulson was going to do something like Custer's last stand, riding bravely in defense of capitalism at the head of his troops, and let the market do its worst. Trouble with that was everyone might get killed. Worse yet, the son of a b.i.t.c.h was going to do it with my money.

All my life I've been a laissez-faire Ronald Reagan/Margaret Thatcher capitalist, swearing by the market, taking the risks, and the devil take the hindmost. But this one time I was looking for a government rescue, and I wasn't going to get it.

Around eight on that Sunday night the Lehman negotiators returned to the office from the Fed building and went straight to the thirty-first floor. Bart McDade walked into d.i.c.k Fuld's crowded office and told him there would be no rescue, that it was over, that Lehman Brothers had been mandated to file for bankruptcy.

The Lehman CEO was dumbfounded. Lehman might easily go down for $660 billion, the largest bankruptcy in the history of the world.

Despite a growing feeling that the feds did not care one way or another whether Lehman lived or died, they decided to give it one more try-to phone directly the Brooklyn-born Tim Geithner, head of the Fed in New York. One more plea. One more appeal.

Fuld's legal counsel, Tom Russo, made the call in front of perhaps fifteen silent onlookers, the entire Lehman executive committee. It was 8:20 P.M. P.M. They tried reaching Geithner but could only get through to his number two at the New York Fed. But with the most momentous failure in the history of U.S. finance about to happen, no one could track down Geithner. They buzzed, paged, and rerouted. But Tim had gone to ground. It might have been just happenstance, but there was a melancholy feeling that it might equally well have been deliberate. In those empty minutes, the fighting heart of Lehman Brothers began to fall apart. They tried reaching Geithner but could only get through to his number two at the New York Fed. But with the most momentous failure in the history of U.S. finance about to happen, no one could track down Geithner. They buzzed, paged, and rerouted. But Tim had gone to ground. It might have been just happenstance, but there was a melancholy feeling that it might equally well have been deliberate. In those empty minutes, the fighting heart of Lehman Brothers began to fall apart.

But Mike Gelband and Bart were still in the game, and they decided there was one final card to play. It was a little embarra.s.sing, but still a slender chance. One of d.i.c.k's executive committee members was George Walker IV, a top-flight Ivy League investment banker with a Wharton MBA. He was also a cousin of the president of the United States, George W. Bush. They shared a great-grandfather. Walker, thirty-nine, was the firm's head of investment management, and understood with everyone the gravity of the situation, the decimation of his personal capital, the loss of his career. Now Mike Gelband stood before him and begged him to call the president, to ask his cousin to intervene.

Walker was scared. His shirt was absolutely soaked with sweat at the thought of calling the White House. "I'm not sure I can do this," he said. But Gelband knew they were drowning men. If George would not make the call, it really was over. Mike took him aside and told him flatly that if this phone call failed, it would "unleash the forces of evil into the global markets." It was the same message that had been delivered shortly before to Geithner's number two. George went white, almost overwhelmed by the responsibility now being foisted upon him.

"I'm not ordering you," said Mike. "I can't do that. I'm on my knees, George. Please, please make the call. It's our last shot."

Eric Felder, the fixed-income chief, too implored him, saying quietly, "We are looking at an unmitigated disaster on a global scale, George. They don't understand what they are doing. Like Mike, I'm begging you."

Walker, distraught, pacing the room, looked over to d.i.c.k Fuld, who was on the line to the SEC. And then he went into the library and telephoned the president of the United States of America. Mike heard him request a connection to the private quarters of the president. It was obvious the operator was trying to put this family member through, but the delay seemed interminable, and finally the operator came back on the line and said, "I'm sorry, Mr. Walker. The president is not able to take your call at this time."

George Walker had failed, but he'd done his best. And now they all gathered around d.i.c.k Fuld's desk for the last time. Earlier in the day, the famous bankruptcy lawyer Harvey Miller and his team from Weil Gotshal had arrived and were now preparing for a bankruptcy filing that would be six times larger than any other Chapter 11 case in U.S. history.

Bankers were suggesting the $660 billion number was not far off the mark. They were talking $40 billion commercial real estate and mortgages, $65 billion in residential real estate and mortgages, and $16 billion in high-yield leveraged-buyout debt-grand total $121 billion. In addition, there was another $300 billion worth of commercial paper, overnight repos, and Treasury debt. Lehman owed $100 billion more in stocks, corporate bonds, munic.i.p.al bonds, and commodities, and another $100 billion in CDSs, CDOs, CLOs, options (puts/calls), and hedges on the ABX and the HY-9.

In the small hours of the morning, around two o'clock, Lehman Brothers filed for Chapter 11 bankruptcy. The 158-year-old investment bank was gone. It was Monday, September 15, in the year 2008. It was indeed the largest bankruptcy in history.

Hank Paulson had just made the decision that would obliterate the world's economy.

Epilogue.

Written in Sorrow, Not Anger.

Hours after Lehman's attorneys filed for Chapter 11 bankruptcy, Hank Paulson stood in the West Wing of the White House, and there, with the Stars and Stripes draped behind him, announced to the world that he had elected to allow Lehman Brothers to fail.

He uttered words of a.s.surance to Americans everywhere that U.S. banks were safe and their deposits were insured by the FDIC. "I have played," he said, "the hand I was dealt." And he surely had, because in the hours that preceded that press conference he had made certain that the collapsing Merrill Lynch had been forced into the arms of Bank of America in one of the truly great marriages of convenience.

Immediately after the press conference ended, he was told the markets were tumbling. The Dow Jones Industrial Average went into a savage downward spiral, dropping 500 points on the day. Hank Paulson, the great Republican banker, had gone with his instincts, and now he wrestled with the momentous decision he had made. He was a man with a complete aversion to anything that smacked of nationalization, and he had made the call of a red-in-tooth-and-claw American capitalist. The fourth-largest investment bank on Wall Street had gone down. And the U.S. government had raised not one finger to save it. All around the world, the markets shuddered as Wall Street's tectonic plates began to rumble apart. Everyone was on edge, braced for a new shock, and there was not long to wait.

On Tuesday morning, September 16, right on the NYSE opening bell, shares in the world's biggest insurance corporation, AIG, slid 60 percent as a direct result of the Lehman bankruptcy. AIG had been an enormous player in the credit default swaps market and had taken billions of dollars' worth of bets against the failure of Lehman, simply because it seemed to them an absolute impossibility that it could ever collapse. They had promised all these people billions of dollars in payouts because it was unthinkable that Lehman could go down, but now it had. AIG did not have the cash to make the payouts they now owed. In addition, they had invested tens of billions insuring profits in the lethal CDO markets, which had collapsed with ma.s.s defaults by the mortgage holders. AIG was effectively insolvent.

On that Tuesday morning, the ratings agencies, suddenly quivering with self-righteousness, downgraded them, which required AIG to post collateral with its trading counterparties. Right there, AIG had a liquidity crisis. With the stock plummeting to a low of $1.25, 95 percent off its fifty-two-week high, the insurers were on the brink of bankruptcy.

Hank Paulson, who had just let the fourth-largest bank on Wall Street slip away, could not possibly allow the biggest insurance company in the world to go down the tubes with it. Against all of his capitalist instincts, he stepped in, and the Federal Reserve immediately announced the creation of a secured credit facility of up to $85 billion. In return, Ben Bernanke demanded and received an 80 percent stake in the corporation for the government. Bailout number four had just broken out, six months after Bear Stearns and nine days after Fannie and Freddie; the total of government guarantees was now at $314 billion. Strangely, Goldman Sachs CEO Lloyd C. Blankfein was the only major head of any Wall Street investment bank present in the AIG bailout discussions that day. Goldman was a large holder of AIG stock as well as an enormous counterparty to over $10 billion in AIG credit default swaps. A lot of Lehman employees still want to know why the Lehman rescue plan proposed over the weekend was so public, with more than eight investment and commercial banks looking under the Lehman kimono, while the expensive bailout of AIG just a few days later was so private.

But the biggest question on everyone's mind remains. How much did the Lehman failure cost the U.S. government in terms of ma.s.sive additional bailout funds for AIG? With Lehman in bankruptcy and all the forced selling it created in the markets, some say Lehman's failure cost tens of billions. No one knows. If Lehman was saved, do you really think it would have cost an initial $80 billion and subsequently $180 billion in taxpayer funds for the AIG bailout?

With Lehman's bankruptcy filing less than forty-eight hours old, the full impact of the disaster hit the world's financial markets. The biggest banks on earth were, collectively, terrified to lend to each other, because none of them had any confidence they would ever get their money back. If it could happen to Lehman, it could happen to anyone. The heart of the global banking system, the credit markets, was frozen solid. There was no possibility of anyone securing a loan for anything, especially the investment banks. The short-term paper market ceased to exist. The safest, most solid banks in the world were unable to borrow money.

This was not just a difficult time, with banks stopping to catch their breath. This was a meltdown, and commerce in the United States was rapidly stalling. Hank Paulson was facing the beginning of the global credit crunch, the very same one Mike Gelband had warned him about on the telephone from d.i.c.k Fuld's office seventeen months before.

Just then Hank was gazing with horror at one of those mysterious Wall Street insider's charts known in the trade as the TED spread, a measure that perceived credit risk in the general economy. It's the difference between the interest rates for three-month U.S. Treasury contracts-risk-free T-bills paying roughly 1.5 percent-and the interest banks charge each other for short-term loans, LIBOR, around 2 percent. Historically the TED spread hovers between 10 and 50 basis points (that's 0.1 percent and 0.5 percent)-a tiny difference, and a very dull little chart, occasionally worth checking. The day after AIG crashed, however, the TED spread went into orbit, shooting up 300 basis points. It broke the record set after the Black Monday collapse of 1987. Visions of the Great Depression of the 1930s danced before Hank Paulson's eyes. According to this chart, the banks had slammed an enormous interest rate on every dollar they loaned. Reason: they did not want to lend, and this explosion on the TED spread signified they were not joking. They'd made it impossible for anyone to borrow money.

Even the dying breed of America's AAA-rated companies-and by now there were only six of them left-could not borrow money at that price. It's probably worth noting that in 1980 there were more than sixty nonfinancial companies that held the highest possible rating. Now there were only Automatic Data Processing (ADP), ExxonMobil, General Electric, Johnson & Johnson, Pfizer, and Microsoft, and even these uncontested champions of the credit food chain were left without nourishment.

And the floor of the New York Stock Exchange was vibrating, leaping up and crashing down, overreacting to every snippet of news. Nothing was merely okay or a bit suspect. It was either cataclysmic or Christmas. News of the AIG government bailout sent the Dow up 154 points. But ma.s.s uncertainty, with no foreseeable solutions except government intervention, caused it to plummet 447 points the next day.

No one knew what to do. The only ray of clarity came from Ben Bernanke, who understood by now there was only one way forward-it might have been sideways, but at least it wasn't backward. The mild-mannered former Princeton professor understood that he and Hank now had to involve Congress and try to hold back the tide of financial disaster. There was no other way, and the creation of an emergency plan, drafted by the Treasury staff, was in Paulson's briefcase as he and Ben headed for Capitol Hill for the meeting that would suck the very oxygen out of the Senate conference room.

Because there, among the fourteen a.s.sembled senior U.S. senators, Hank Paulson uttered the home truth that more or less stopped the American government in its tracks. "Unless you act," he said, "the financial system of this country, and the world, will melt down in a matter of days."

No one spoke. And every last one of the a.s.sembled politicians remembers the moment when the conference room, behind the great ten-ton bronze doors of the Capitol, fell stone silent. This was no longer a discussion, a briefing, or a place for a financial decision. This was history. Whatever they elected to do would be remembered forever. Because Hank Paulson, in as many words, was plainly proposing the kind of action more readily a.s.sociated with Soviet Russia or Red China-the potential nationalization of U.S. banks. Not one person sitting at that long table doubted that they were about to be asked to find billions of dollars to save the financial inst.i.tutions. As with Fannie, Freddie, AIG-all in the last eleven days-that would mean dominant government equity in long-standing commercial corporations. Either that or America's most revered banks were about to go the way of Lehman. There could be no doubting the flat, calm severity of Hank Paulson's words. And the enormous intellect of Ben Bernanke plainly could find no alternative.

The senators remained hushed, all of them with conflicting thoughts rampaging through their minds. Yes? No? What if I do? What if I don't? Yes? No? What if I do? What if I don't?

The Treasury secretary opened his file and presented his plan-a $700 billion request for taxpayers' money, to be used to buy the toxic CDOs from the banks.

A rising murmur of both approval and disapproval was heard all around the table.

"And we need it by Monday," added Hank.

The great capitalist had bowed to the inevitable. The plan was briefly elaborated, and the senators agreed to study it and then place it before the House.

The mere news of the plan's existence caused the Dow Jones Industrial Average to rocket upward and close 410 points higher. On the following day, Friday, September 19, it gained 361 points more. Hope was in the air, and the Dow was managing to cling to that 11,000 support point. It held on Monday the twenty-second, but narrowly breached it on Tuesday the twenty-third, closing at 10,854.

By this time Barclays Bank was back in the game. They paid $250 million for the Lehman businesses they wanted, and another $1.5 billion for the skysc.r.a.per at 745 Seventh Avenue. This saved upward of ten thousand jobs and Barclays lost no time in removing every last vestige of the Lehman name from the building. Barclays' blue insignia was everywhere.

The hearing at the U.S. Bankruptcy Court on Bowling Green, right opposite Wall Street's charging bronze bull, was packed with lawyers, the press, and Lehman witnesses. Lehman's case was presented with haste. In place of the one hundred to three hundred pages that normally accompany a ma.s.sive Chapter 11 application for protection, Lehman's lawyers, Weil Gotshal & Manges, presented a fifteen-page doc.u.ment, alarming in its brevity, especially considering that this bankruptcy was bigger than WorldCom, Enron, Conseco, Texaco, Refco, Washington Mutual, United Airlines, Delta, Global Crossing, Adelphia, Mirant, and Delphi combined!

Weil Gotshal was called in far too late in the game, with little in the way of preparation by either the CEO or CFO of Lehman. Richard Fuld was playing his usual poker game until the bitter end; this time, the players included not just the Wall Street investment community but also Treasury Secretary Paulson.

Most likely, Henry Paulson knew that Lehman was not prepared for bankruptcy. But if Fuld tipped his hand and actually called Lehman's lawyers in for the normal three to four weeks of preparation for a bankruptcy of this size, then what little hope there was for a government bailout would have completely disappeared. Fuld was equally wary of tipping off the Street. He was afraid that if the shorts caught wind of Lehman's hiring counsel they would have then taken their short attack to a whole new level, blowing Lehman's credit spread on its debt deep into junk bond territory. But the lack of preparation for the bankruptcy meant that the haphazard selling of Lehman's global a.s.sets would be the fuel that fed the world's greatest financial crisis since the Great Depression of the 1930s.

No judge was ever more hara.s.sed than James Peck. a.s.sailed on every side by vested interests, both political and financial, he had to approve the sale of the Lehman a.s.sets to Barclays. Otherwise, the deal could have fallen apart, and that most likely would have forced a Chapter 7 liquidation. Thousands of more jobs would then have been lost.

And so, holding the skimpy doc.u.ment, pressured by the White House, the Treasury, and New York mayor Michael Bloomberg, Judge Peck sustained the Chapter 11 and approved the hurried sale, aware as he did so that the very bedrock of U.S. justice had been threatened. No judge should ever be subjected to political pressure, as he most surely had been.

All of this, of course, affected many of the former Lehman employees who were out of a job and whose money had already vanished. Their thousands of stock options were now worthless, and family after family was wiped out. Tragically, months and up to years of severance pay owed to thousands of Lehman employees was wiped out and not honored by the court and Barclays. But the damage was even more severe to my Lehman friends in Europe. Many have questioned why someone in Lehman moved as much as $8 billion from our European headquarters in London to New York shortly before the filing. Lehman executives have said the firm typically collects money from its global units and then disperses it every day, but serious questions will always remain. Employees in Europe were effectively locked out of their offices in what was essentially a liquidation of those business units. The pain to so many people I know in the United States and abroad was horrific. People I knew well were selling their houses, changing their children's schools, selling boats and SUVs. Even Joe Gregory had to sell his helicopter and his beachfront palace, and d.i.c.k Fuld's wife was selling art. Staff members who had bought real estate at the top of the market were in desperate trouble in the negative equity trap. And the reputations of d.i.c.k and Joe took a merciless hammering, because everyone now knew the CEO should have accepted the $23-a-share offer from the Koreans, the one Hank Paulson had recommended all those months ago. And if not that, surely Fuld should have grabbed the $18-a-share offer later in the year.

By now there were stories out in every financial publication that none of the Korean offers had even been taken before the board. Not for the first time, d.i.c.k Fuld had believed, with the implicit certainty of a medieval monarch, that he alone knew best, and so he'd rejected them out of hand-just another $19 billion blunder by the boss. And now there was nothing.

Meanwhile, the lawyers, trustees, and administrators were wrestling with the ma.s.sively unprepared Lehman bankruptcy. Because the lawyers had not been called in much earlier, there was a level of confusion about the Lehman finances not seen in this world since Chiang Kai-shek made off with the entire history of China, the treasures of the Forbidden City, to the island of Formosa in 1949. The Chinese are still arguing about that. But there was no argument at Lehman. The bankruptcy officials were gearing up to start the sale of the remaining a.s.sets at fast, careless, sloppy prices. Already no one cared. It was as if they just wanted to bury our 158 years of history and leave no trace. And in a sense there would be no trace, just a lifetime of bitterness among excellent Lehman economists who knew, beyond doubt, that none of it ever should have happened. Mike Gelband had, after all, blown the whistle, formally and publicly, sixteen months before Jamie Dimon had hooked JPMorganChase out of the disaster zone in October 2006.

The stock market gains before that weekend of September 2021 were instantly lost in the first two days of the following week, but the Dow hung on to the territory around the 11,000-point mark, sometimes a little up, sometimes a little down, while the politicians agonized over the possibility of bailing out the banks.

The bailout bill, with the backing of President Bush, was due before the House on Monday the twenty-ninth, and it did so in a tumult of polarization, as American politicians tried to decide who they were: U.S. capitalists, solid party-line congressmen, vote-with-your-heart liberals, or hard-nosed, pragmatic businessmen who had to make a tough but inevitable decision.

In the end, the American capitalists won. We'll see the banks nationalized over my dead body ... let 'em go, and let the markets do their worst We'll see the banks nationalized over my dead body ... let 'em go, and let the markets do their worst. The bill failed by a vote of 228205. It was cross-party chaos. And simultaneously, every major economist in the United States, both on Wall Street and in Washington, went into cardiac arrest. Because this was no dress rehearsal. This was Armageddon. The credit markets were frozen shut, the world was about to close down for business. And these comedians in Congress had just rejected the only chance there was of averting world nuclear meltdown on the financial markets-the influx of heavy U.S. dollars as designated by Uncle Sam, straight from the Treasury to the places where they were needed. Like everywhere.

President Bush rallied his men. Hank Paulson went straight to the White House, but not in time to prevent the Dow crashing by almost 800 points to a new low, 10,365. It was the closest the U.S. financial world had been to pure shock since Black Monday, October 28, 1929.

The bill would come in revised form before the Senate on Wednesday morning, October 1. And when it did, the real heavyweights of U.S. politics bludgeoned it through by 74 votes to 25. When the bill came back before the House, in an acrimonious few hours, two days later, it was voted into law 263171. This was just as well, because the markets were suffering a complete crisis of confidence. With the credit lines still frozen and no one sure what House Speaker Nancy Pelosi and her merry men were going to do next, the Dow had caved in another 500 points before that vote went through. Margin calls were raining in, hedge funds were going bust, and G.o.d knows what else.

The question was, would Hank Paulson's bailout bill save the world? Answer: not quite. On Monday, October 6, the first full trading day since the bill was pa.s.sed, the Dow crashed down through 10,000, with an intraday low of 9,525. It closed at 9,955 in a day packed with fear-laden trading and volatility, a day in which the Volatility Index (VXO) broke 50 for the first time since 1987. This wasn't volatility. This was hysteria.

There were no brakes, and on Tuesday, October 7, there was another collapse of the Dow. It went down more than 500 points on the day, closing at 9,447. No one could remember traders being this scared. But they found out what fear really meant two days later, on Thursday, October 9, when the Dow continued its free fall, losing 682 points on the day. The VXO ripped straight up to an all-time high of 64, and the closing bell sounded out a chilling death knell of 8,579 on the Dow.

No one on Wall Street slept a wink that Thursday night. No one who had even the remotest concept of the untold damage being inflicted on the economy could possibly have found rest. There were people who stayed in their offices for the whole night, waiting for the dawn, waiting once more for the thunder of the heavy artillery blasting the U.S. economy apart.

October 10 came in with fire and fury. The Dow collapsed, with a difference between the intraday high and low of over 1,000 points. The VXO registered an all-time squeal of terror, closing at 76.94. No one had ever seen anything like it. At the closing bell the Dow stood at 8,451. But it was not the number, it was the nerve-shaking up-down frenzy that got it there. And the whole world was petrified.

Remember that 2007 Wall Street mantra of decoupling-the theory so beloved of Lehman's thirty-first floor, the Fuld, Gregory, and Goldfarb conspiracy that allowed them to order the purchase of any d.a.m.n overseas item they pleased? You probably recall the Coeur Defense and all those worldwide hedge funds? All of it was predicated on the unshakable modern belief that the new globalization of the world markets meant that America and its success or failure scarcely impacted the remainder of the planet. The rest of the global markets, both in Europe and the East, had caught up. They were so big and powerful, the United States had ceased to matter as the main man on the block.

Well, around 10:00 A.M. on Friday, shortly after the morning rituals of Danish pastries, French croissants, and Italian coffee, someone took that theory and kicked it straight in the a.s.s, right into the middle of New York Harbor, directly into the sunlit gaze of the Statue of Liberty.

America was in trouble, and the world swooned. I hesitate to mention this, but several of them on the international stock markets were obliged to take time out to change their pants. Uncle Sam was in trouble, and no one could operate without him. The entire global economy collapsed in an undignified heap, whimpering and whining. The big fella was down. And what would now become of the rest?

Europe tanked first. Germany's DAX, the thirty blue chips, hit 4,308, down from a May high of 7,231. France's CAC-40, the forty top companies listed on the Paris Bourse, plummeted to 3,047 off a May high of 5,142. Spain's IBEX-35 index, the thirty-five most liquid stocks on the Madrid board, had fallen to 9,462 from 14,247. Ireland's ISEQ, the official list of equities on the Dublin exchange, dropped from a high of 6,460 to 2,751. Iceland was on its way to 677 from its May high of 4,942.

London's FTSE closed at 3,873; in May it had been 6,300. Russia's MICEX, their thirty largest companies, was closed on October 10, but the day before it had fallen to 637 from a May high of 1,966. China's CSI-300 had gone from 3,936 in May to 1,881. The Nikkei 225 closed at 8,115, having hit 14,343 on May 19. The Hang Seng Index in Hong Kong was at 14,398, from a May high of 25,822.

Nowhere was immune, no matter the distance from Wall Street. Australia's preeminent benchmark, the S&P/ASX-200 Index, had fallen just over 2,000 points from its May high and now closed at 3,960. Brazil had caved in from 73,440 to 33,230.

And this was only the beginning. The years of prosperity were over. The panic that marched on from the Lehman Brothers collapse became endemic. Iceland went bankrupt. The economy of Ireland crashed, making the short years of prosperity look like a mere blip in a poverty-studded history.

The economy in the United Kingdom very nearly collapsed. The Bank of England had to bail out the nation's lending banks. The Royal Bank of Scotland, which had so gamely chased Lehman up the table of subprime lenders, almost went bust for the exact amount it had loaned, and was saved by Great Britain's central bank.

Hank Paulson's $700 billion TARP (Troubled a.s.sets Relief Program) proved a life support for the two biggest banks in the world, Citigroup and Bank of America. It provided cash for General Motors and the other U.S. car giants to stay afloat. Goldman Sachs and Morgan Stanley also received funds.

But meanwhile, Paulson and Bernanke were shocked by the sheer scale of the events of that Friday afternoon, only twenty-five days after Lehman closed down. The level of trouble that had caused them to go to Congress in the first place now seemed magnified several times over, despite the government rescue, as the world's stock exchanges imploded, and the Treasury chief was under no illusions about the potential of the catastrophe. He had to move again. He and Ben Bernanke had, somehow, to force the U.S. banks back into liquidity mode.

In Ben's opinion that could only mean compulsory capital injection from the U.S. government directly into the banks. Hank Paulson was immediately against it, because such a plan hammered against every capitalist principle he'd ever had. Visions of Tiananmen Square stood before his eyes, especially, on its west side, the all-controlling Great Hall of the People, the largest central government building on earth. Hank loved China, but not that much.

By Sunday morning, Ben Bernanke had decided that if Hank had a better idea than capital injection, then let's hear it. But there was no better idea. There was no other idea. And on that afternoon, October 12, the Treasury secretary personally called every one of the chief executive officers of the nine biggest banks in the country and told them to report to his office in the Treasury Building, right next to the White House, the next day.

Right on time Monday morning, they all arrived-the CEOs of Citigroup, Merrill Lynch, Morgan Stanley, JPMorganChase, Goldman Sachs, Bank of America, Wells Fargo, Bank of New York Mellon, and State Street Corp. Inside the Treasury these icons of Wall Street were seated in alphabetical order on the other side of a huge table across from Hank Paulson and Ben Bernanke.

There was terrific tension in the air because these were Paulson's guys, men against whom he had competed when he headed up Goldman Sachs. Many of them were personal friends, and now he had to read them some kind of riot act. But he pulled no punches. He told them the U.S. banking system was in deep trouble, and he was not offering some kind of solution that warranted a general chat. His decision was not open to negotiation. The U.S. government was going to issue them a direct infusion of cash, tens of billions of dollars. And that would mean Uncle Sam was about to become a major shareholder in each one of the country's largest banks, right here, right now, in the Great Hall of Paulson.

Well, almost. But first there was a furious discussion, as was only to be expected. This conference table was capitalism incarnate. The idea of nationalization of the U.S. banking system was anathema to every one of the bankers sitting at it, though some recognized they were somewhat short of C-notes at that particular moment, especially Citigroup and Bank of America.

Anyway, it was all to no avail. The boss, working in harmony with the chairman of the Fed, had made up his mind. And now he produced from his file nine single sheets of paper, setting out the conditions for the transfer of cash in return for the major government stock holdings. Hank said he wanted every one of them back, personally signed by each CEO, before they left Washington, D.C., that night.

And all nine of them did so. The U.S. government had seized the reins of the financial world and taken a central role in the American banking system. Hank Paulson had taken a near-impossible journey, fighting his ideological hatred of government intervention in market problems. On that day, he effectively blew out $125 billion. And the following morning he stood before four giant American flags in the vast marble foyer of the Treasury and announced his decision to a waiting nation.

"Today, we are taking decisive actions to protect the U.S. economy," he said. "We regret having to take them."

At that moment Henry Merritt Paulson, who had spent his entire working life defending free markets, became the most interventionist Treasury secretary to hold the office since the Great Depression. And not even he could disguise his look of profound displeasure as he spoke.