The Weekend That Changed Wall Street

suite in the period leading up to the end.
Behind the drama being played out on Liberty Street and in midtown Manhattan was a fact few people realized. There was some personal animosity between Paulson and Fuld, based on their different backgrounds and temperaments. Paulson was a lifetime investment banker; Fuld was a lifetime commercial paper trader. A source told me of a dinner between the two men in the spring of 2008. “A lot of people in the press thought it was a warm and fuzzy dinner,” he said. “But it was actually very intense. At one point Dick Fuld lectured Hank Paulson, saying, ‘I’ve been in my seat a lot longer than you’ve been in yours. Don’t tell me how to do my job.’” How ironic that a few months later, Fuld would be so reliant on Paulson’s good graces.
Even before it reached full-crisis mode, Lehman had developed a credibility problem, and everyone in the room knew it. I, too, had been hearing the whispers for months. Larry McDonald, who was a vice president and a trader at the firm until 2008, did not mince words when he spoke to me of his former company; no question that as a “worker bee” at the firm, McDonald had an ax to grind. He had become one of the harshest critics of Lehman’s culture, even writing a book about it in 2009—A Colossal Failure of Common Sense. His view was not unbiased, but it did show how embattled many people down the ranks were feeling at Lehman during that period.
“There was a disconnect between the men in the ivory tower and the wonderful people who worked at the firm,” he told me. “Lehman Brothers, to me, was never rotten at the core. That’s where all the beauty was. It was rotten at the head. There was so much talent in the middle that tried to stop the madness. One by one, those who spoke up were silenced. At Lehman, you kept your head down and you did your job, or you lost both.”
McDonald painted a picture of a fiefdom where those in the royal suites were more interested in the aura of their personal wealth than the health of the company, and he said that this was especially true at the seat of power—the thirty-first floor of the Lehman building. “The thirty-first floor is one of the most mysterious places on earth,” McDonald confided to me. “Some people claim it resembles a Sotheby’s art collection facility—or a cross between that and a human resources pom-pom bonfire festival. You had people up there who were totally distanced from the trading floor, very concerned about their new memberships in the billionaires’ club—or I should say the $200 billion art club.” (In fairness, the space, including the art collection, was not unlike those of most Wall Street firms, but if viewed through a prism of disappointment and resentment, the lavish atmosphere might grate.)
McDonald claimed that Fuld took his eye off the ball years before the collapse, while many in the lower echelons of the company were issuing dire warnings. “As early as 2006, some of the most talented people at Lehman wanted us out of the subprime mortgage business,” he said. “We started seeing weird things happening—such as people missing their first mortgage payments. That was unprecedented. There was something wrong. It was like a slow-motion car wreck.”
Certainly, Fuld had his defenders at the firm. “To say Dick was not engaged is nonsense,” one of them told me. “Leading up to mid-September, he was working around the clock to save the firm. And he was getting absolutely no help from the SEC in dealing with the shorts and the rumors, or from other banks. Look at JPMorgan. They were the bank that facilitated Lehman’s trades. There’s a clause in the contract that basically gives them the right to ask for however much collateral they want. So they just started grabbing more and more and more collateral. And it was devastating.”
Robert Diamond was not a particularly emotional guy. His long face was pleasant but inscrutable. The president of British-owned Barclays Capital was known to be a cagey player, with the placid air common to members of large families. One of seven children, Diamond grew up in Concord, Massachusetts. Both of his parents were schoolteachers. Although Barclays was Britain’s premiere bank, Diamond retained an abiding love and loyalty for the home teams—the New England Patriots and the Boston Red Sox. He was, beneath the British flag, a quintessential Wall Street guy, who had cut his teeth at Morgan Stanley and had joined Barclays only after being passed over for the top job there.
On Friday, September 12, Diamond’s normally calm demeanor was shaken by the weight of phenomenal responsibility. He felt uncommonly emotional as he sat in a room on the fourth floor of the Federal Reserve, away from the main conference room where the CEOs were gathered. Diamond thought that he, in particular, was on the line because many people were looking to his company to rescue Lehman, and he just didn’t know if it could be done.
For more than a year Barclays had been actively pursuing growth in the United States, looking for the right vehicle. After the Bear Stearns fire sale, it occurred to Diamond that perhaps it could be the template for a deal, and the firm that came to mind was Lehman Brothers. He thought, “What an incredible opportunity.” He salivated thinking about Lehman’s thirty-two-story building and its ten thousand New York employees. But he wanted a distress price, and he wanted a government backstop—just like Jamie Dimon of JPMorgan got for Bear Stearns earlier in the year.
Diamond had many unofficial conversations with Hank Paulson and his people as the summer stretched into fall. These were “what if” discussions as Diamond felt his way on matters of procedure and price. In the days before the final weekend, the discussions intensified. Thursday, September 11, a team from Barclays had begun