The Weekend That Changed Wall Street

opulence was starting to annoy some of his colleagues in the business. Several of them made comments to me that they wished he would stop throwing parties. Others questioned whether Schwarzman’s birthday bash and his company’s going public the same year represented the top for the industry.
That winter, I did a report from the World Economic Forum in Davos, Switzerland. I asked a group of very big names in finance what were the most important issues facing business. In retrospect the answers were mostly way off the mark:
Tom Russo, vice chairman, Lehman Brothers: “Avian flu: High risk, low probability, but if it should happen, people won’t come to work. We are trying to figure out how to run a firm from home.”
Martin Sullivan, CEO, AIG: “The threat of terrorism.”
Victor Chu, chairman, First Eastern Investment Group: “Bird flu. It would impact everything and you can’t prepare.”
Sergey Brin, co-founder, Google: “The environment and escalating disasters.”
It’s striking how much focus was on external calamity, as if terrorism and avian flu were the only forces capable of halting the phenomenal tide of growth and prosperity. The only one of so many I interviewed who said anything about banks being at risk was Deutsche Bank CEO Josef Ackermann. In reply to my question, he said, “Overleveraging in the real estate market.” Bingo! He got it. (Years later I asked Ackermann how he had been so prescient, and he told me that he would advise anyone who asked him that the two biggest problems to avoid in any successful economy were indebtedness and real estate bubbles. When I asked, “So, did you do anything about it?” he admitted, “We did a little, not a lot,” noting how competitive the market was then and how difficult it is to put the brakes on during a boom.)
In January 2007 I conducted another interview with David Rubenstein of the Carlyle Group. “What are your expectations for the year? Can this keep up?” I asked him. Rubenstein answered, “It’s hard to believe it can get any better.” He said that assuming there was no cataclysmic event like 9/11, he expected 2007 to be another big year.
That prediction, born of what—false optimism, bravado, blindness, deceit?—did not come true. Within weeks of Rubenstein’s remark, the gloom was setting in. It was going to be a very long year, and a very long fall to earth. This is the story of that fall.

ONE
Nightmare on Liberty Street
“Because of what he did with Bear Stearns, everybody thought good ol’ Hank [Paulson] would be there with the money.”
—A FORMER TREASURY DEPARTMENT OFFICIAL, IN AN INTERVIEW WITH MARIA BARTIROMO
SEPTEMBER 12, 2008
The Federal Reserve Bank of New York rises up from a narrow street in the financial district of Manhattan, a literal fortress of limestone and sandstone whose cavernous subterranean vault houses 25 percent of the world’s gold supply. The building is a commanding emblem of the security and size of the American economy, and few people enter its Liberty Street doors without feeling a power surge. When times are flush, they may even have an exhilarated spring to their step, happy to be at the center of prosperity. But the men who streamed out of the line of black cars on Liberty Street in the waning afternoon hours of Friday, September 12, 2008, did so with heads bent, battling gusting winds and a torrential downpour. To a man they were extremely grim. Their names were among Wall Street’s elite—Jamie Dimon, of JPMorgan Chase; Vikram Pandit, of Citigroup; Brady Dougan, of Credit Suisse; John Thain, now of Merrill Lynch; John Mack, of Morgan Stanley; Lloyd Blankfein, of Goldman Sachs; Robert Kelly, of Bank of New York Mellon; and Robert Wolf, of UBS Group. Waiting inside were the horsemen of the apocalypse—or, perhaps, the angels of salvation (no one knew then which it would be)—Treasury secretary Henry “Hank” Paulson, New York Fed president Timothy Geithner, and SEC chairman Christopher Cox. At issue that particular day was the fate of Lehman Brothers, the 158-year-old investment banking firm that formed one of the pillars of Wall Street. The men gathering faced the blunt reality that Lehman could not open for business the following Monday without a rescue—and that rescue was in their hands.
As the titans of capitalism plowed through the rain-drenched streets of lower Manhattan, each was filled with a deep inner turmoil. Several of them would later admit to me how troubled they were. John Mack, CEO of Morgan Stanley, who had earned the nickname “Mack the Knife” for his ruthless, unsentimental ability to slash costs and pursue profits, spoke softly as he recalled the sense of crisis. “The dominoes were falling,” he said, “and one of them was almost Morgan Stanley.” Every man present was likely feeling the same way—not just concern for Lehman, but dreading his own fate.
The meeting was called for 6:00 p.m., but the bad weather delayed it until nearly 7:00. Rain always means traffic bottlenecks in New York, especially on a Friday night. Mack described the ride down from the Morgan Stanley offices in midtown. “It was pouring, and traffic was stopped. I was worried that we wouldn’t get there on time. And my driver, who was an ex-policeman, said, ‘Hey, boss, do you see that bike lane over there? Does it go all the way down to the Battery?’ I said, ‘Yeah, I think it does.’ So we took the bike lane and got there in five minutes. That’s how important it seemed.”
Hank Paulson and a couple of associates had flown in from Washington, and their car crawled through the clogged streets. While he rode, Paulson worked the phone. For more than a week he had been trying to facilitate a behind-the-scenes deal with Lehman Brothers and one of two promising suitors—Bank of America and the British bank Barclays. It was no secret that BofA was the preferred buyer. Certainly,