The Weekend That Changed Wall Street

he was the chairman and CEO of Goldman Sachs, a firm he had joined back in 1974. A Christian Scientist and a family man, he was a quiet, though influential, player in corporate America long before becoming secretary.
Paulson’s job, arriving at the Fed, was to convince the CEOs that the solution was up to them. “Everyone thought good ol’ Hank would be there with the money as he was with Bear Stearns,” a source at the Treasury told me. “And they weren’t going to believe otherwise until Hank told them in person.”
In truth, the federal government did not have the authority to lend money to failing institutions, only to institutions that were solvent. The reason a Bear Stearns backstop had been possible in March was because a highly solvent institution, JPMorgan, took over. The Fed could not have loaned money to Bear Stearns directly, but it was able to do so with JPMorgan’s help. Paulson was essentially paving the way for a similar setup with Lehman Brothers and a solvent savior such as Bank of America or Barclays—with one difference. He wanted the backstop to come from the private sector.
The third man on the team, Christopher Cox, was the “grim reaper.” His primary task was to shepherd Lehman Brothers through a bankruptcy proceeding, if that was to become necessary. At fifty-five, Cox had worn many hats in his career, including a stint at the Reagan White House and seventeen years as a California congressman. The accomplishments of his professional life were set against the backdrop of remarkable personal crises that underscored his ability to make a comeback. In 1978 he was paralyzed from the waist down in an off-road Jeep accident. He eventually regained the use of his legs, though he was often in pain, even thirty years later. Then, shortly after he became SEC chairman, Cox was diagnosed with cancer. He battled the illness while maintaining a heavy work schedule, and by 2008 was deemed fully recovered.
But while there was much to admire about Cox personally, a chorus of criticism followed him throughout 2008. As the government’s primary watchdog, the SEC looked ineffectual in its failure to spot the looming crisis and prevent it. As he joined Geithner and Paulson at the Federal Reserve, Cox had to know his reputation was on the line.
The CEOs were sitting around a long table in the conference room on the first floor when Paulson, Geithner, and Cox walked in. The mood was restless and uncertain. These men were not accustomed to collaborating, and while the call to do so was not completely unprecedented, it wasn’t something you’d see in other industries. Imagine, for example, General Motors and Ford being pressured to save Chrysler, or NBC and Fox forking over the funds to save CBS. It just wouldn’t happen. But the financial industry was more interrelated. One drowning company could sink them all. Faced with that reality, they had to put aside their modus operandi—to try to kill one another—and start to work together.
Ironically, the last time the Wall Street companies had been called upon to rescue one of their own, Lehman Brothers had been deeply involved as well. It was 1998. Robert Rubin was Treasury secretary, William McDonough was New York Fed president, and Dick Fuld was four years into his tenure as Lehman CEO. A giant hedge fund called Long-Term Capital Management was on the brink of collapse, having lost $4.6 billion in the space of a few months. Since most of the Wall Street firms had ties to Long-Term Capital, the Federal Reserve feared that a failure would have a traumatic ripple effect. In particular, Lehman was vulnerable. The Wall Street firms got together in a consortium and put their money on the table. Several firms pledged $300 million each, including Barclays, Chase, Goldman Sachs, Merrill Lynch, Morgan Stanley, and JPMorgan. Fuld pledged $100 million on behalf of Lehman, saying he couldn’t afford to do more. Long-Term Capital Management was saved, and Fuld got a lot of credit within his own company for bringing Lehman back from the brink. Notably, Jimmy Cayne at Bear Stearns refused to give any money, irking his colleagues.
Geithner opened the meeting. In his quiet, unemotional voice he laid out a gloom-and-doom scenario of what a Lehman fall might mean for the rest of them. Paulson spoke second, telling the men flat out that he didn’t have the legal authority to save Lehman. That was up to the people around the table. Initially, there was push back. Wasn’t there something the feds could do, without having to rely on the banks for a rescue? But very soon these men, who were top professionals, pivoted and said, “Okay, how can we manage this?” They had all done deals with Hank Paulson in the past, and one thing they knew about him was that when he said “We’re not bailing Lehman out” he meant it. Paulson never showed his gun without using it.
Chris Cox spoke last, describing how the SEC would manage a bankruptcy, if one were to happen. No one wanted to go there, but it was Cox’s job to take them if necessary.
Although all the news and theorizing were about Lehman, Fuld was nowhere to be seen. He wasn’t invited to the Fed because the discussions were about him and his firm. But that didn’t mean there wasn’t a lot of speculation about what he was up to. Moody, passionate, and proprietary about his company, Fuld was fully engaged on the thirty-first floor of the Lehman Brothers building at the top of Times Square. His lieutenants were at his side, trying to work every last-minute angle. Those close to Fuld said that he believed with all his heart that if things turned bad they could orchestrate a deal similar to that of Bear Stearns. It never occurred to anyone, least of all Fuld, that the government would not be there to catch Lehman if it fell. An aura of denial filled Lehman’s executive