Too Big to Fail: The Inside Story of How Wall Street and Washington Fought to Save the FinancialSystem--and Themselves

CHAPTER TEN

One afternoon in late June, Dick Fuld stepped into the bustling lobby of the Hilton Hotel on Sixth Avenue at Fifty-third Street. He was late, which made him even more anxious about the meeting he was about to attend. Within days of Bart McDade’s being named Lehman’s new president, he had made a startling demand of Fuld: He wanted to rehire Michael Gelband and Alex Kirk, the two senior traders Joe Gregory had fired. The men, whom Gregory used to call the “naysayers,” were among the most vocal opponents of the firm’s escalation of risk over the years.

“We need these guys,” McDade had told Fuld, regarding his decision. “They already know the positions,” referring to Lehman’s portfolio of toxic assets, which they still hoped to sell. And McDade said that both of them had the support of “the troops on the trading floor,” which was critical in restoring confidence.

McDade hadn’t given Fuld much choice in the matter. And, given that Fuld had just handed McDade authority over the day-to-day operations of the firm, he felt he had to go along with his wishes for the good of the firm, as embarrassing as it might be to have his own judgment challenged so publicly. Before he did, however, he told McDade, “Look, you’re not hiring either guy back until I talk to them.”

Now Fuld was on his way to a face-to-face with Gelband, whom he hadn’t seen in over a year.

The tension was palpable as they both took seats in a dark meeting room. “We need to clear the air,” Fuld said, acknowledging that there was still some unfinished business to resolve. “Let’s understand: You’re coming back. I want to fucking hear from you.”

Gelband, a broad six-footer with a closely shaved head, didn’t appreciate Fuld’s aggressive tone and had no patience for bullying or bluffing. As far as he was concerned, he was doing Fuld a favor by returning amid the turmoil. Indeed, ironically enough, before agreeing to come back to Lehman he had been recruited to take Joe Cassano’s job at AIG.

“How’s that, Dick?” he asked.

“The last time we talked, okay, not the last time, but when you were at the firm and you and I talked about your bonus, I got the sense that you were unhappy with it, and that pissed me off, because you made a shitload of money in 06,” Fuld said, pouring himself a glass of water.

Gelband thought this was an unusual way to begin a meeting that he believed had been intended as something of a reconciliation. They had had a frank discussion about his bonus the year that he left, when he had earned more than $25 million, but he didn’t remember having complained about it too vociferously. “That’s interesting, because I didn’t have a problem with my bonus,” Gelband said. “In fact, I was completely fine with it.”

“Well, that’s not what Joe told me,” Fuld said.

For a moment they set aside their differences and talked about the firm, reminiscing about the better times and reviewing Lehman’s prospects. It was clear the company would have to unwind its positions as quickly as possible and try to get the best possible price for them. Gelband said he would have to conduct an inventory of the assets to get a sense of their value. Fuld also told him that it was his intention to raise additional capital.

“There is just one thing you need to understand,” Gelband said as the meeting was coming to a close. “The one reason I am coming back is because of Bart.”

As Fuld knew, Gelband had been a longtime friend of McDade’s; they had been classmates at the University of Michigan Business School, and it was McDade who had helped Gelband get his initial job interview at Lehman. “Well, yes, Bart is going to be running the day-to-day business,” Fuld said, trying to sound nonchalant, “ but I hope it has something to do with me as well.”

Gelband looked at him quizzically and replied, “No, no. This has to do with Bart.”

On the Fourth of July weekend, Hank and Wendy Paulson were walking along the beach on Little St. Simons Island when they spotted a loggerhead sea turtle laying its eggs in the sand. For nature lovers like the Paulsons, it was an extraordinary moment, and they stopped to marvel at the sight. Paulson had flown down to the tiny island, just off of Georgia’s coast and some sixty miles south of Savannah, to relax with his wife after what had seemed like a whirlwind of travel and work. The island, a sanctuary for unusual birds and reptiles, is where he liked to go to clear his head; he liked it so much that the Paulsons bought up three quarters of the ten-thousand-acre property starting in 2003 for $32.65 million.

The European trip had been a success. His speech in London about the need to build a safety net for investment banks in order to prevent a failure from reverberating throughout the system had attracted a great deal of notice, and at the reception afterward at 10 Downing Street, Gordon Brown, the prime minister, congratulated him “for thinking ahead and getting out in front of the problem.”

Still, as Paulson walked the shore, he was finding it difficult to unwind. He continued to have deep misgivings about the economy in the near term and had stated as much on his trip: “The U.S. economy is … facing a trio of headwinds: high energy prices, capital markets turmoil, and a continuing housing correction.” Apart from his general systemic concerns, though, Paulson’s immediate worry was Lehman Brothers. He had spoken to Fuld from his cabin on the island earlier in the day, and it was becoming clearer to him that the firm was unlikely to find a buyer. Most of the large sovereign wealth funds in the Middle East and Asia had been stung by investments they had made in other U.S. banks back in December and wouldn’t be likely to invest in Lehman, at least not in the present. Paulson feared that Fuld could soon run out of options.

However much these concerns preoccupied Paulson, he kept them to himself; he never discussed business with Wendy. The topic of Lehman was off-limits within the family for another reason: Hank’s younger brother, Richard Paulson, worked as a fixed-income salesman in Lehman’s Chicago office. They purposely avoided discussing the matter whenever they spoke, but he knew that if Lehman were to fail, his brother could lose his job.

Paulson was also grappling with another potential setback: He might be losing his deputy, Bob Steel, who was on the short list to run Wachovia, the giant Charlotte-based bank that had just ousted its CEO after reporting a $708 million loss tied to the housing market. Paulson and Steel had talked about the prospect in June, when things were calmer, and Paulson had even encouraged him to pursue the position. But now it looked as if it was actually going to happen, leaving Paulson with a big hole to fill. The timing could not have been worse: Steel’s jurisdiction included Fannie Mae and Freddie Mac—the government-sponsored enterprises (GSE) that had been the engine of the real estate boom and were now coming undone.

By the time Paulson had flown back home on a private chartered jet to Dulles Airport on Monday afternoon, his worst fears were being realized. The financial markets were in a meltdown, but for reasons Paulson could not quite put his finger on. Freddie tumbled as much as 30 percent on Monday, before recovering to end down 17.9 percent. Fannie shares slid 16.2 percent, to their lowest level since 1992. Other financial stocks were suffering as well; Lehman shares closed down more than 8 percent. As he tried to absorb all that, Steel announced that he had gotten the job, and it would be announced publicly on Tuesday.

At home that night in his living room, Paulson paged through the piles of faxes that had been sent to him by his assistant at Treasury. One of them was the report that had set off the panic: Bruce Harting, an analyst at Lehman Brothers, wrote that revised accounting rules might require Fannie and Freddie to raise an additional $75 billion in combined new capital. The report revived all the fears about the two mortgage giants, reminding investors of how thin a cushion they had if the housing slump deepened. If confidence was eroding in the government-sponsored enterprises—businesses that the market believed had the implicit backing of taxpayers—the entire U.S. economy could be threatened.

Paulson could see that unease about Fannie and Freddie was growing. On CNBC’s Squawk Box that Tuesday morning, James B. Lockhart III, chairman of the Office of Federal Housing Enterprise Oversight, which regulated Fannie and Freddie, tried to calm the markets: “Both of these companies are adequately capitalized,” he said. “Both of these companies are managing through these issues and have tested management teams.”

Paulson had a one-word judgment of that assessment that he later shared with his staff: “Bullshit.”

For months Paulson and his team had been discussing ways to unwind Fannie and Freddie should a real crisis hit—he considered their situation far more important to the long-term health of the economy than Lehman’s or the other investment banks’. But he knew it was all too easy to get bogged down in the political fighting over the controversial companies that had made home ownership a near right during the boom. With its critics insisting that Fannie and Freddie were neck-deep in the subprime mess, Paulson had a year earlier called the debate over Fannie and Freddie “the closest thing I’ve seen to a holy war.”

While shares of the companies recovered on Tuesday from the Monday sell-off, both were still trading below $20, and there were other indications of nervousness. Credit default swaps on the debt sold by Fannie and Freddie—essentially, insurance—were trading at levels reserved for companies with credit ratings five levels below their own triple-A ratings, the highest a company could have. Those ratings were, in fact, more a reflection of the government’s implicit backing than the companies’ own fundamentals.

As Paulson and his staff prepared for a congressional hearing two days hence to discuss the fates of Fannie and Freddie, Steel stuck his head into the conference room next to his office.

“Okay, Hank. I’m taking off.”

Paulson glanced up for a moment. “Okay, Bob. I’ll see you later.”

“No, no,” said Steel. “I mean, this is it. I’m leaving.”

Finally realizing that Steel was bidding his farewells to the staff, Paulson got up to see his deputy off.

As they walked down the hall, Paulson joked, “You’re getting out just in time.”

Virtually from the moment that Congress created Fannie Mae (originally the Federal National Mortgage Association) in 1938, it was politically divisive. A product of the housing slump of the Great Depression and Franklin Delano Roosevelt’s New Deal, the company was formed to buy loans from banks, savings banks, and other lenders in order to promote home lending by reducing lenders’ risk and to increase the amount of capital available for housing. Republicans saw Fannie as a mere sinecure for their political opponents. In 1968, with a federal budget burdened by the costs of both the Vietnam War and the Great Society, Lyndon Johnson began the process of privatizing Fannie. As a sop to its critics, a rival company, the Federal Home Loan Mortgage Corporation, or Freddie Mac, was created in 1970.

Fannie and Freddie played the political game even more fiercely than their opponents, spending millions of dollars on armies of lobbyists on Capitol Hill. Each company was a revolving door for the powerful in Washington—both Republican and Democrat. Newt Gingrich and Ralph Reed, among others, worked as consultants for Fannie or Freddie; Rahm Emanuel was a board member of Freddie.

By the 1990s, Fannie’s chief executive could boast, without much exaggeration, that “we are the equivalent of a Federal Reserve system for housing.” At their pinnacle the two mortgage giants—neither of them an originator of loans—owned or guaranteed some 55 percent of the $11 trillion U.S. mortgage market. Beginning in the 1980s, the two companies also became important conduits for the business of mortgage-backed securities. Wall Street loved the fees it collected from securitizing all kinds of debt, from car loans to credit card receivables, and Fannie’s and Freddie’s portfolios of mortgages were the biggest honeypot around.

But in 1999, under pressure from the Clinton administration, Fannie and Freddie began underwriting subprime mortgages. The move was presented in the press as a way to put homes within the reach of countless Americans, but providing loans to people who wouldn’t ordinarily qualify for them was an inherently risky business, as telegraphed by the New York Times the day the program was announced:

“In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980s.”

The success of the two companies in both the financial and political arena inevitably fostered a culture of arrogance. “[We] always won, we took no prisoners and we faced little organized political opposition,” Daniel Mudd, then the president of Fannie Mae, wrote in a 2004 memo to his boss. That overconfidence led both companies eventually to move into derivatives and to employ aggressive accounting measures. They were later found by regulators to have manipulated their earnings, and both were forced to restate years of results. The CEOs of both companies were ousted.

Fannie and Freddie were still reeling from the accounting scandals when in March 2008, just days after the rescue of Bear Stearns, the Bush administration lowered the amount of capital the two companies were required to have as a cushion against losses. In exchange, the companies pledged to help bolster the economy by stepping up their purchases of mortgages.

But by that Wednesday, July 10, 2008, with investors unloading the stocks in droves, it was all coming undone. That afternoon William Poole, the former president of the Federal Reserve Bank of St. Louis, said unambiguously, “Congress ought to recognize that these firms are insolvent, that it is allowing these firms to continue to exist as bastions of privilege, financed by the taxpayer .”

“Unfuckingbelievable!” Dick Fuld exclaimed to Scott Freidheim as he sank deeper into his office chair.

Lehman’s stock had opened Thursday morning down 12 percent, to an eight-year low, in response to a rumor that Pacific Investment Management Company, the world’s biggest bond fund, had stopped trading with the firm. Another piece of speculation was swirling that SAC Capital Advisors, Steven Cohen’s firm, was also no longer trading with Lehman.

“I know it’s not true, you know it’s not true,” Fuld said to Freidheim. “You’ve got to call these guys and get them to put out a statement.”

It had been an excruciating week. With the continued market jitters over Fannie and Freddie—the result of Lehman’s own analyst’s report, no less—investors were also taking it out on the firm. Fuld couldn’t understand it; Lehman had taken its lumps in its previous quarter and raised new capital. Its balance sheet, he thought, was in better shape than it had been in a long time, reflecting Lehman’s decision to deleverage its investments—that is, reduce the amount of debt it used to make those investments.

To Fuld, it was the shorts who kept driving down the stock price, spreading false information about Lehman’s health. Fuld had been told by several people that the “whisper campaign” against the firm was emanating from one place: Goldman Sachs. It made Fuld sick. His son, Richie, worked at Goldman as a telecommunications banker.

He decided the time had come to call Lloyd Blankfein personally.

“You’re not going to like this conversation,” Fuld began. He said he had been hearing “a lot of noise” about Goldman’s spreading misinformation. “I don’t know that you’re not ordering this,” he said menacingly, as if trying to intimidate Blankfein into admitting it.

Blankfein, offended that Fuld would even attempt to bully him, said he knew nothing about the rumors and ended the call.

These conversations became almost daily occurrences. Days later, Fuld heard rumors that Credit Suisse was spreading rumors about Lehman. He jumped on the phone to Paul Calello, CEO of Credit Suisse’s investment bank. “I feel like I’m playing whack-a-mole,” Fuld told Calello.

The constant stream of bad news was not only affecting Lehman’s stock but was hampering Fuld’s efforts to raise more capital. Skip McGee’s investment banking team had been reaching out to at least a dozen prospects—Royal Bank of Canada, HSBC, and General Electric among them—but was coming up empty. The only suitor with any real interest continued to be the Korea Development Bank’s Min Euoo Sung, and though many executives on the thirty-first floor still had doubts about him, Fuld had directed the bankers to keep working on the Koreans. Indeed, he was even thinking about taking a trip to Asia himself to see Min in person to try to seal a deal.

Then it struck him: What about his old friend John Mack at Morgan Stanley, the second-largest investment bank in the country after Goldman Sachs? The firm had had an ugly second quarter, reporting a 57 percent decline in earnings from a year earlier, but it still had enough cash and buoyancy in its stock price to be able to make a deal.

Fuld and Mack had come up on Wall Street together, with Mack joining Smith Barney’s training program in 1968 before moving to Morgan Stanley in 1972, when it had just 350 employees. Like Fuld, Mack had begun his career in bond sales and trading. And again like Fuld, he had quickly made a name for himself. He was an effective salesman and someone who could be both charming and physically intimidating. Mack would stride through the trading floor and, seeing a chance to make big profits, would yell, “There’s blood in the water, let’s go kill someone!” Coming across a trader reading the Wall Street Journal at 8:00 a.m., he was known for saying: “I see that again, and you’re fired.” But, again like Fuld, he was also fiercely loyal to his people, once physically barring entry to the trading floor by upper management when he was still a trader.

Fuld called Morgan Stanley in New York and was transferred to Paris, where Mack was visiting with clients in the firm’s ornate headquarters, a former hotel on the rue de Monceau.

After some mutual disparagement of the markets, the rumors, and the pressure on Fannie and Freddie, Fuld asked candidly: “Can’t we try to do something together?”

Mack had suspected the reason for Fuld’s call, and while he didn’t believe there was much chance that he’d be interested in such a prospect, he was willing to hear Fuld out. There might at least be some assets that he would be interested in; he doubted he would want to buy the entire firm. Mack told him he would be flying back to New York on Friday and suggested they see each other on Saturday.

Fuld, clearly anxious to set up the meeting, said, “We’ll come over to your offices.”

“No, no, that makes no sense. What if someone sees you coming into the building?” Mack asked. “We’re not going to do that. Come to my house, we’ll all meet at my house.”

A harried Hank Paulson walked into room 2128 of the Rayburn House Office Building and took his seat. Today’s House Financial Services Committee hearing was scheduled to discuss “financial market regulatory restructuring,” but it was really just about Fannie and Freddie. Paulson also wanted to start laying the groundwork for obtaining authority from Congress to wind down these government-sponsored enterprises—if it became necessary, which he didn’t anticipate. Paulson had visited Barney Frank, the chairman of the hearing, earlier in the week and had been encouraged “to ask for what you need.” Frank had pledged to support him.

Now, as Paulson appeared before the committee with Ben Bernanke beside him, he made his case: “We’re going to need broader emergency authorities too—for the resolution or wind-down of complex financial institutions that don’t have federal deposit insurance,” he explained. “But that’s where we need to get. That’s what we’ve got to drive toward.”

Representative Dennis Moore, a Democrat from northeast Kansas, asked, “Do you still believe the GSEs pose a systemic risk to the economy?” Paulson replied: “I would say, Congressman, in today’s world I don’t think it is helpful to speculate about any financial institution and systemic risk. I’m dealing with the here and now.”

But by the time the market closed that day, the “here and now” had grown even worse, with more than $3.5 billion in the combined market value of Fannie and Freddie wiped out. Concerns were mounting about Fannie’s and Freddie’s debts and the rocky state of the mortgage-backed securities that the agencies had guaranteed. The markets were testing Washington’s resolve. How much chaos would the government tolerate before it stepped in?

Although Paulson hadn’t believed he would require in the immediate future the authorities that he had discussed that morning, the overall economic situation was beginning to become alarming. He called Josh Bolten at the White House to sound him out about pressing Congress for the authority he wanted; Bolten was encouraging. He also wanted Alan Greenspan’s advice, and after some confusion about tracking down Greenspan’s home phone number, Paulson and a half dozen staff members huddled over the Polycom on his desk to hear the former Fed chairman’s faint voice through the speaker.

Rattling off reams of housing data, Greenspan described how he considered the crisis in the markets to be a once-in-a-hundred-year event and how the government might have to take some extraordinary measures to stabilize it. The former Fed chairman had long been a critic of Fannie and Freddie but now realized that they needed to be shored up. He did have one suggestion about the housing crisis, but it was a rhetorical flourish befitting his supply-and-demand mind-set: He suggested that there was too much housing supply and that the only real way to really fix the problem would be for the government to buy up vacant homes and burn them.

After the call, Paulson, with a laugh, told his staff: “That’s not a bad idea. But we’re not going to buy up all the housing supply and destroy it.”

As Paulson took a seat in the small conference room next to his office to begin breakfast with Ben Bernanke, he was flushed and scarcely able to eat. “This is a real problem,” he said.

The front page of the New York Times had reported that morning that senior administration officials were “considering a plan to have the government take over one or both of the companies and place them in a conservatorship if their problems worsen.”

Someone had leaked the story about Fannie and Freddie.

Paulson, guzzling a can of Diet Coke as his oatmeal grew cold, couldn’t fathom why a member of the administration would be so foolish as to disclose the plans they had been considering. Whoever it had been, the leak was bound to undermine confidence even further, and Paulson was furious.

It had already been a long morning for Paulson, and it showed in his eyes. He had briefed the president in the Oval Office at 7:10 a.m.; had a conference call with Tim Geithner at 7:40 a.m.; checked in with Larry Fink of BlackRock to get his thoughts on what to do about Fannie and Freddie at 8:00 a.m.; and even squeezed in time to reach out to Dick Fuld five minutes later.

Soon after the stock market opened, Treasury staffers Jim Wilkinson and Neel Kashkari barged into the room, interrupting Paulson and Bernanke’s breakfast to tell them that the stocks of both Fannie and Freddie were sinking like a stone, down about 22 percent, and suggesting that Paulson put out a statement to calm the markets. Just as he had feared, the story in the Times had created a panic, with nobody certain what the implications of the government getting involved with Fannie and Freddie could possibly mean. Investors were recalling Paulson’s decision to press for the $2-a-share deal for Bear Stearns and asking themselves, Would that be the model?

Paulson agreed he needed to tamp down all the anxiety. By 10:30 a.m. Treasury issued a statement under Paulson’s name, stating: “Today our primary focus is supporting Fannie Mae and Freddie Mac in their current form as they carry out their important mission.” By using the phrase “in their current form,” Paulson was trying to send a signal that he had no plans to nationalize the companies, even though he knew he might ultimately have to seek the power to do so.

Still miffed by the leak, Paulson walked over to the White House as President Bush was preparing to go over to the Department of Energy on Independence Avenue for a briefing on oil and the energy markets. “Can I ride over with you, sir?” Paulson asked, and on the short trip there briefed Bush on the Fannie and Freddie situation. Bush, who had been a critic of the GSEs for years, was supportive of Paulson’s plan. As the motorcade arrived at their destination, Paulson suggested that when the president spoke to the press that afternoon he needed to tread carefully, fearful of spooking the markets even more. “Emphasize how committed we are to the stability of these organizations,” Paulson told him.

Although Freddie’s stock price would plunge as much as 51 percent that day, falling to as low as $3.89, and Fannie shares sank by as much as 49 percent, they managed to pare back their losses, with Freddie ending the session down only 3.1 percent and Fannie down 22 percent. Paulson, meanwhile, began calling congressional leaders to determine what it would take to get Treasury the authority to put capital into Fannie or Freddie or to backstop their debt.

Just as the market closed, Paulson had a call with Sheila Bair, the chairwoman of the Federal Deposit Insurance Corporation, who shared further dismaying news of the intense pressures in the mortgage market: The FDIC was about to seize IndyMac Bancorp, a mortgage lender, marking the fifth FDIC-insured bank failure that year and the biggest since the savings and loan debacle.

Recognizing that Fannie and Freddie could soon spin out of control, Paulson summoned his brain trust to his office at 4:15 p.m. and told them to get ready to work throughout the weekend on a way to stabilize the GSEs. His plan was simple: He wanted to ask for the authority to put money into Fannie and Freddie, in the hopes that he’d never actually have to use it.

“I want,” he instructed, “to announce a plan before the Asian markets open Sunday night.”

On Saturday morning, Fuld pulled up to John Mack ’s Tudor mansion in Rye, New York. Despite the beautiful weather, he was tense about the upcoming meeting. God help me, he thought, if this leaks. He could already imagine the headlines.

“Dick, good morning,” Mack said amiably as he greeted Fuld at the front door. Mack’s wife, Christy, stepped out to say hello as well.

The Morgan Stanley management team had arrived and were socializing in Mack’s dining room. There was Walid Chammah and James Gorman, the firm’s co-presidents; Paul Taubman, the firm’s head of investment banking; and Mitch Petrick, head of corporate credit and principal investments. They have probably been strategizing for hours, Fuld thought.

McDade showed up next, dressed in a golf shirt and khakis. McGee was running late.

On a table in the den, Christy had put out plates of wraps that she had ordered from the local deli and said, “Everything is all set for you guys.” As the group took their seats on sofas around a coffee table, an awkward silence followed; no one knew exactly how to begin.

Fuld looked at Mack as if to say, It’s your house, you start. Mack imperturbably glared back, You asked for the meeting. It’s your show.

“Well, I’ll kick it off,” Fuld finally said. “I’m not even sure why we’re here, but let’s give it a shot.”

“Maybe there’s nothing to do,” Mack said in frustration as he noticed the discomfort around the room.

“No, no, no,” Fuld hurriedly interjected. “We should talk.”

Fuld began by discussing Neuberger Berman, Lehman’s asset-management business and one of its crown jewels, as an asset that he would be prepared to sell. He also suggested that Morgan might buy Lehman’s headquarters on Seventh Avenue—the same building that had been Morgan Stanley’s until Philip Purcell, the firm’s former CEO, sold it to Lehman after 9/11. The irony would be rich.

“Well,” said Mack, not entirely sure what Fuld was proposing, “there are ways we can, you know, there are ways we can work together.” He wanted to segue the conversation to Lehman’s internal numbers, because even if nothing were going to come of the meeting, it would be helpful to Morgan Stanley to get at least a peek at what was going on inside the firm. The Morgan team began to throw out a barrage of questions: How are things marked? Were you able to sell them inside your marks? How much business has left the firm? McDade ended up doing more of the talking than his boss as he tried to answer them.

McGee, whose driver had gotten lost, finally arrived in the middle of the meeting, and Fuld gave him an anxious glare.

When Fuld’s cell phone started ringing, he excused himself and retreated to the kitchen, leaving the Morgan Stanley side perplexed: Was Lehman working on another deal at the same time?

What they didn’t know was that the caller was Paulson, at his Treasury office, checking on Fuld and updating him on his plans to propose a bill about Fannie and Freddie. Fuld was happy to hear that Paulson was seeking to stabilize the GSEs—he knew such a measure could help him as well.

When Fuld returned to the living room, he unexpectedly broke into the conversation, saying, “You know, with all these rumors going around about Lehman, I would hope that you won’t try to poach any of my people.”

The Morgan Stanley executives were taken aback.

Chammah, a Lebanese-born banker who spent most of his time running Morgan’s operations from London, retorted: “If you recall, you weren’t shy about building your European operation off of our talent.”

The meeting ended with no agreement and what seemed like no incentive to keep talking.

“What the fuck was that all about?” Mack asked after the Lehman executives departed. “Was he offering to merge with us?”

“This is delusional,” Gorman said. Taubman had other worries. Maybe they were being used to help Lehman goose its stock price? “We’re playing with fire here,” he warned them. “If I were their guys, I’d want to put my own spin on this.”

Fuld, discouraged but undeterred, drove from Mack ’s house to Lehman’s headquarters in Manhattan, racing down the Henry Hudson Parkway. He had scheduled a call with Tim Geithner for that Saturday afternoon. His outside lawyer, Rodgin Cohen, chairman of Sullivan & Cromwell, had recently suggested a new idea to help stabilize the firm: to voluntarily turn itself into a bank holding company. The move, Cohen had explained to Fuld, “would give Lehman access to the discount window indefinitely, just like Citigroup or JP Morgan have.” That, in turn, could take some of the pressure off investors worried about the firm’s future. It would also mean that Lehman would become regulated by the Federal Reserve of New York, which would have to sign off on the plan.

Cohen, a sixty-four-year-old mild-mannered mandarin from West Virginia, was one of the most influential and yet least well-known people on Wall Street. While soft-spoken and small in physical stature, he had the ear of virtually all the banking CEOs and regulators in the country, having been involved in nearly every major banking transaction of the last three decades. Geithner often relied on him to understand the Federal Reserve’s own powers.

For the past several months, Cohen had been speaking with Fuld almost daily, trying to help him formulate a plan. He was very familiar with bank failures and wanted to make sure Lehman would not become one of them. Cohen had spent many days in the summer of 1984 in a hot, windowless room in Chicago, trying to work out a rescue of Continental Illinois National Bank and Trust. “We have a new kind of bank,” Stewart McKinney, U.S. representative from Connecticut, announced that year. “It is called ‘too big to fail.’ TBTF, and it is a wonderful bank.” The $4.5 billion government rescue plan that emerged was shaped in large part by Cohen. Cohen, who had also advised the board of Bear Stearns in its takeover by JP Morgan, had organized the call with Geithner’s office.

Pacing back and forth in his hotel room in Philadelphia before the wedding of his niece that night, Cohen joined the call between Lehman and the Federal Reserve of New York.

“We’re giving serious consideration to becoming a bank holding company,” Fuld started out by saying. “We think it would put us in a much better place.” He suggested that Lehman could use a small industrial bank it owned in Utah to take deposits to comply with the necessary regulations.

Geithner, who was joined on the call by his general counsel, Tom Baxter, was apprehensive that Fuld might be moving too hastily. “Have you considered all the implications?” he asked.

Baxter, who had cut short a trip to Martha’s Vineyard to participate, walked through some of the requirements, which would transform Lehman’s aggressive culture, minimizing risk and making it a more staid institution, in league with traditional banks.

Regardless of the technical issues that would have to be faced, Geithner said, “I’m a little worried you could be seen as acting in desperation,” and the signal that Lehman would send to the markets with such a move.

Fuld ended his call deflated. He had worked his way through a checklist of every alternative he could think of, and nothing was sticking. He and McDade had even begun working up a plan to consider shrinking Lehman Brothers into a hedge fund with a boutique bank attached and trying to take the firm private, outside the glare of public investors. But he’d need to raise cash from someone even to do that.

Later that evening, Fuld called Cohen, finding his lawyer in the waiting room of a hospital, attending to a cousin who had become ill at the wedding. It was time to consider a different kind of deal, he told Cohen. “Can you reach out to Bank of America?”

Selling Lehman had always been anathema to Fuld—“As long as I am alive this firm will never be sold,” he had said proudly in 2007. “And if it is sold after I die, I will reach back from the grave and prevent it.” He had, however, longed to make a big acquisition. For a brief moment he came close to buying Lazard—so close that he had even settled on calling the firm Lehman Lazard—a purchase that might have been his crowning achievement, turning his scrappy bond-trading operation into a white-shoe firm with a global reputation. Fuld had held a meeting in his then-office at the World Financial Center on September 10, 2001, with William R. Loomis and Steve Golub of Lazard. They left the meeting with plans to continue their discussions. Then, of course, came 9/11.

Bruce Wasserstein, who later took over Lazard, tried to resurrect the discussions, but Fuld became so outraged by the price Wasserstein said he wanted—$6 billion to $7 billion—that their conversation quickly devolved.

“Clearly we don’t see value the same way,” Fuld derisively told him. To Fuld, Wasserstein, who had been branded “Bid-em up Bruce,” had just lived up to his name. “There’s just no way I could pay that.”

Still standing in the emergency waiting room of the hospital, Rodgin Cohen found Greg Curl, Bank of America’s top deal banker, on his cell phone in Charlotte, where the bank was based. Curl, a sixty-year-old former naval intelligence officer who drives a pickup truck, had always been a bit of an enigma to Wall Street. He had helped orchestrate nearly every deal Bank of America had made over the past decade, but even within the bank he kept to himself and was generally considered a tough read.

Cohen, who had dealt with Curl over the years but had never been able to take an accurate assessment of him, trod carefully, explaining that he was calling on behalf of Lehman Brothers.

“Do you have any interest in doing a deal? Of all the institutions we’ve been considering, you’d be the best fit,” Cohen said, promising that he could get Fuld on the phone if Curl was curious enough to have a conversation.

Curl, though intrigued to be getting a call on a Saturday night, was noncommittal; he could tell they must be desperate. “Hmm … let me talk to the boss,” he said. “I’ll call you right back.”

The boss was Ken Lewis, the silver-haired CEO of Bank of America, a hard-charging banker from Walnut Grove, Mississippi, who was on a mission to beat Wall Street at its own game. (When he was a child, two boys once ganged up on him; his mother, catching sight of the scrap, came out of the house and said, “Okay, you can fight him, but you’re going to have to do it one at a time.”)

A half hour later, Curl called back to say he’d hear them out, and Cohen set up a three-way call with Fuld through the switchboard at Sullivan & Cromwell.

After some brief introductions—the men had never met before—Fuld began with his pitch.

“We can be your investment banking arm,” Fuld explained, the idea being for Bank of America to take a minority position in Lehman Brothers and for the two to merge their investment banking groups. He invited Curl to meet with him in person to discuss the proposal further.

Curl, sufficiently intrigued, said he would fly up from Charlotte to New York on Sunday. While Fuld thought it odd that he wasn’t negotiating directly with Ken Lewis, there was a compelling reason for Curl to travel alone: Lewis could legitimately deny that he had ever spoken with Fuld, should the discussion leak.

Before signing off, Curl made certain to underscore his greatest anxiety: “We want to be absolutely sure this is confidential.”

At midmorning on Sunday, David Nason and Kevin Fromer were sitting on the couch in Nason’s office at Treasury, going over a draft of the proposal to petition Congress for the authority to inject money into Fannie and Freddie in the case of an emergency. The office was littered with sandwich wrappers and bags from nearby Corner Bakery Café. Most of the staff had been working since early Saturday morning and had gone home only to grab a few hours of sleep. The proposal had to be ready by 7:00 p.m.

Suddenly, Paulson walked into the office with a look of horror on his face and, holding up a page of the draft, bellowed, “What the fuck is this? ‘Emergency authority on a temporary basis?’ Temporary?” he said, almost shouting. “We are not going to ask for temporary authority!”

The draft provided for emergency authority for a period of eighteen months, the rationale for which Fromer, who was Treasury’s liaison to lawmakers, leaned forward and attempted to explain. “Look, you can’t ask Congress for permanent—”

Paulson rarely allowed himself to show his anger, but he now made no attempt to restrain it as he paced the room.

“First of all, this is my judgment to make, not yours,” he said. “Secondly, this is a half measure. I am not leaving my successor with the same shit that I’ve got. We are going to fix these problems. I am not pushing this crap down the road.”

Nason’s cell phone rang. “Tim!” he shouted, checking the caller ID, before realizing he was interrupting Paulson’s soliloquy. Tim Geithner had been calling for updates nearly every hour.

Nason and Fromer tried again to calm Paulson down. They reiterated that it would be much more palatable politically to say that they were asking for temporary powers rather than permanent ones. And, as Fromer told him, “It’s a distinction without a difference,” explaining that during the period they had the authority, they could still make decisions that would be permanent.

Paulson, starting to recognize the value of the political calculus, relented. He told them to keep working on it and walked out as abruptly as he’d walked in.

Greg Curl, dressed in a blazer and slacks, arrived at Sullivan & Cromwell’s Midtown offices in the Seagram Building on Sunday afternoon, having flown up to New York from Charlotte that morning on one of the firm’s five private jets.

Taking a seat in the empty reception area, he waited for Fuld and Cohen to appear, uncertain about how fruitful the meeting could possibly be. While “The Boss” may have wanted to conquer the commercial banking world, he had an aversion to the fast-money investment banking business. “No, we wouldn’t use our petty cash to buy an investment bank,” he’d dryly said just a month earlier. Almost a year before, his own investment banking business, long considered an also-ran, showed a stunning 93 percent plunge in profit in its third quarter. At the time, Lewis had remarked that he “had had about all the fun he could stand in investment banking right now.”

Curl was soon escorted to a conference room, where he paid careful attention as Fuld walked him through his idea in greater detail. He wanted to sell a stake of up to a third of Lehman Brothers to Bank of America and merge their investment banking operations under the Lehman umbrella.

As Curl listened, he was dumbfounded, though characteristically gave no sign of what he was thinking. Far from the plea for help he had been expecting, the pitch he was hearing struck him as a reverse takeover: Bank of America would be paying Fuld to run its investment banking franchise for it.

Fuld also suggested that any investment would “ boost our stock price” overnight, creating even more value for Bank of America. He rationalized that buying a stake in Lehman—as opposed to buying the entire firm—would provide incentive for the firm’s savvy bankers to stay in their jobs. “You’re not going to be able to keep these people if they can’t see a financial upside,” he argued, making a relevant point about most full-bank mergers—namely, that the talent usually cashes out and leaves.

Curl nodded appreciatively throughout the presentation, before finally stating that the boss—Lewis—would be interested in entertaining the prospect of a deal only if he had a clear path to taking control of the firm in a reasonable amount of time.

Cohen, interjecting on behalf of Fuld, suggested that they should think about a time frame of two to three years, depending on how successful the investment was.

That was more along the lines of what Curl wanted to hear. He told them he was intrigued, but that he and Lewis had often disagreed about whether they should acquire an investment bank or continue buying up other commercial banks. “I don’t like the retail business,” Curl confided, “because of the susceptibility of litigation and attorneys general and regulators.

“I’d prefer a deal with you,” he continued, “but to be honest, Ken would probably prefer to buy Merrill or Morgan.”

Fuld was confused. What was Curl signaling?

“So do you think we have something here?” Fuld asked.

“I don’t know,” Curl said. “I need to talk to the boss. It’s obviously his decision.”

By late afternoon, Paulson, unshaven and wearing jeans, was pacing the halls and pestering his staff with so many questions about the Fannie and Freddie proposal that his chief of staff, Jim Wilkinson, finally took him aside and said forcefully, “You’ve got to get out of our hair and let us do our jobs.”

To blow off steam, Paulson decided to take a quick bike ride around the near-empty Washington streets. He couldn’t stop thinking about the plan and what it might mean to his legacy: He, a Republican, a man of the markets, was going to ask for authority to invest U.S. taxpayer money in the two institutions that were perhaps most responsible for the housing boom and bust. On the other hand, after decades of political infighting over these two entities, he would have the opportunity to undo them. But would he actually need to use the authority that he was asking for? Would simply having the authority be enough to calm the markets? As he pedaled his bike, he hoped that would be the case.

When Paulson returned, Michele Davis, his communications chief, was trying to figure out where he could physically announce the proposal. “We can’t have reporters and camera crews in the building,” she said. “We could have you go outside on the steps.” Nason, walking over to a window, warned that the forecast called for a thunderstorm.

“I don’t know what to do,” she said, trying to figure out if they had a podium they could bring outdoors. “But you have to go home and change clothes,” she told Paulson, pointing at his rumpled jeans. “You can’t go out there like that.”

At 6:00 p.m., cleanly shaven and now dressed in a blue suit, Paulson walked out onto the Treasury’s steps to a podium that had been hauled downstairs from the fourth floor and addressed the swarm of reporters who had assembled hastily.

“Fannie Mae and Freddie Mac play a central role in our housing finance system and must continue to do so in their current form as shareholder-owned companies,” Paulson said, reading a statement. “Their support for the housing market is particularly important as we work through the current housing correction.

“GSE debt is held by financial institutions around the world. Its continued strength is important to maintaining confidence and stability in our financial system and our financial markets. Therefore we must take steps to address the current situation as we move to a stronger regulatory structure.

“To ensure the GSEs have access to sufficient capital to continue to serve their mission, the plan includes temporary authority for Treasury to purchase equity in either of the two GSEs if needed.”

Minutes after he finished, thunder rumbled in the distance. Soon the skies opened up.

Paulson could tell the hearing on Tuesday morning was going to be hostile the moment he took his seat to the right of Bernanke and Cox. His announcement on the Treasury steps had done little to shore up confidence. In fact, it seemed to be undermining it even further, creating confusion in the marketplace about what this new “authority” he was seeking really meant. Freddie ended down 8.3 percent, to $7.11, while Fannie lost 5 percent, falling to $9.73 on Monday. He knew he needed to start spinning fast, as much for Congress as for the markets.

“Our proposal,” he explained to the Senate Banking Committee, “was not prompted by any sudden deterioration in conditions at Fannie Mae or Freddie Mac… . At the same time, recent developments convinced policy makers and GSEs that steps are needed to respond to market concerns and increase confidence by providing assurances of access to liquidity and capital on a temporary basis if necessary.”

As he was barraged with questions, Paulson emphasized the “temporary” nature of the authority he was seeking, hoping to win over the congressmen. “It is very intuitive,” he said, “that if you’ve got a squirt gun in your pocket, you may have to take it out. If you have got a bazooka, and people know you’ve got it, you may not have to take it out.”

Some panel members, however, were not buying that justification.

“When I picked up my newspaper yesterday, I thought I woke up in France,” said Senator Jim Bunning, the Kentucky Republican. “But no, it turned out it was socialism here in the United States of America. The Treasury secretary is now asking for a blank check to buy as much Fannie and Freddie debt or equity as he wants. The Fed purchase of Bear Stearns’ assets was amateur socialism compared to this… . Given what the Fed and Treasury did with Bear Stearns, and given what we are talking about here today, I have to wonder what the next government intervention into the private enterprise will be? More importantly, where does it all stop?”

Clearly frustrated by what he was hearing, Paulson struggled to articulate his defense. “I think our idea is that, that by having the government provide an unspecified backstop, the odds are very low that it will be used and the cost to the taxpayers will be minimized.”

“Do you think we can believe exactly what you’re saying, Secretary Paulson?” Bunning replied patronizingly.

“I believe everything I say and that I’ve been around markets for a long time—” Paulson began to reply before Bunning cut him off.

“Where is the money going to come from if you have to put it up?” Bunning asked.

“Well, obviously, it will come from the government, but I would say—”

“Who is the government?” Bunning asked indignantly.

“The taxpayer,” Paulson acknowledged.

“Secretary Paulson, I know you’re very sincere in your proposal,” Bunning continued. “But come January, you will be gone, and the rest of us will be sitting at these tables—or at least most of us—and we all have to be responsible to the taxpayer for what we have done.”

A socialist. Mr. Bailout. Hank Paulson believed he was fighting the good fight, a critical fight to save the economic system, but for his efforts he was being branded as little less than an enemy of the people, if not an enemy to the American way of life. He couldn’t understand why no one could see how bad the situation had really become. That afternoon another faction had joined the group of antagonists: The hedge funds were furious with him for having convinced Christopher Cox at the SEC to begin cracking down on improper short selling in the shares of Fannie and Freddie, as well as seventeen other financial firms, including Lehman.

With Bob Steel gone, he felt he had been left on his own to confront the biggest challenge of his tenure. He valued his staff, whom he regarded as a remarkably intelligent group, but questioned whether he had enough firepower to wage what he could see was quickly becoming a heated war. That afternoon he left a message for Dan Jester, a forty-three-year-old retired Goldman Sachs banker who had been the firm’s deputy CFO and was now living in Austin, Texas, managing money, mostly his own. Paulson had depended heavily on Jester, a long-haired “ human calculator,” when he was the firm’s CEO, and he hoped he might be able to convince Jester to come out of retirement to help him work on the GSEs.

The night before, feeling somewhat desperate, he had also placed a call from home to Ken Wilson, an old friend from Dartmouth whom he had persuaded to leave Lazard for Goldman a decade earlier. As head of the financial institutions group, Wilson was Goldman’s top adviser to other banks and respected as an éminence grise throughout the industry. Paulson so respected his judgment that he had put Wilson in an office near his own on the thirtieth floor of 85 Broad Street.

“Ken, I really need help around here. I need some adults,” Paulson said when he reached him. “Bob Steel is gone. I’d like you to think about coming down here and joining my team.” Wilson, Paulson proposed, would be a “classic dollar-a-year man,” meaning that he would come on board as a “special adviser” for the nominal salary of $1 for the final six months of the administration. He suggested that Wilson take a leave from Goldman.

Wilson, who at sixty-one had already been considering retiring from the firm, said that he would think about it.

“I could use your help,” Paulson repeated earnestly. “I have lots of issues, um, lots of problems.”

Given all the gyrations in Lehman’s stock price and the nonstop rumors about its long-term viability, Fuld had scheduled a board meeting in July to update the firm’s directors on the progress he had been making on both fronts.

Lehman’s board was a strange mix of both the financially sophisticated and the truly naive; most had been old friends of Fuld’s or had been clients of the firm. They included Roger S. Berlind, a seventy-five-year-old theater producer, and Marsha Johnson Evans, sixty-one, a former navy rear admiral and head of the Red Cross; until two years earlier, the eighty-three-year-old actress and socialite Dina Merrill had also been a member. Among the more experienced were Henry Kaufman, then eighty-one, who was a former chief economist at Salomon Brothers; John Akers, a former chief executive of IBM; and Sir Christopher Gent, sixty, former head of Vodafone PLC. Of the ten outside directors, four were over seventy-four years old.

For this meeting, Fuld had invited a guest to give a presentation. Gary Parr, a banker at Lazard, had been speaking with Fuld recently and suggested he could try to help the board if the directors needed independent advice.

The tall, bearded Parr was one of the most prominent of the bankers specializing in the financial services industry, having worked on many of the capital-raising efforts that companies like Morgan Stanley and Citigroup pursued in late 2007. Fuld may not have trusted Parr’s boss, Bruce Wasserstein, but he respected Parr.

Parr was asked by one of the directors to offer some perspective on how bad the market really was. An assured speaker, Parr launched into his regular skeptical boardroom speech.

“It’s tough out there,” he said forebodingly. “Having been through Bear Stearns and MBIA”—two former clients—“there are some lessons we’ve learned.” Trying to make certain that Lehman’s directors understood the gravity of the situation they were facing, he told them, “Liquidity can change faster than you can imagine,” suggesting they should not think Bear Stearns was a once-in-a-lifetime event. “Rating agencies are dangerous,” he went on. “Wherever you think you stand with the rating agencies, it’s worse… . And let me tell you, it’s difficult to raise money in this environment because asset prices are hard for outside investors to under—”

“Okay, Gary,” Fuld said, impatiently cutting him off in midsentence. “That’s enough.”

An awkward silence fell over the room for a moment. Some directors thought Fuld had become upset with the negative direction Parr had taken; others believed that he had rightly quieted him for shamelessly plugging his services. Within ten minutes, Parr had left the meeting.

An hour later, back in his office at Lazard in Rockefeller Center, Parr was informed by his secretary that Dick Fuld was on the phone.

“Goddamit, Gary!” Fuld screamed when Parr picked up the receiver, half expecting an apology. “What the hell are you doing trying to scare my board and advertising yourself to them like that? I should fire you!”

For a moment Parr didn’t respond. Frustrated that Lehman hadn’t yet signed an engagement letter, Parr snidely fired back, “Dick, that might be difficult because you haven’t hired us yet.” Then, collecting himself, he said, “I’m sorry. I didn’t mean to go down a path you didn’t want me to go.”

“You’ll never do that again,” Fuld said, and the phone went dead.

The next day, Fuld—perhaps fearing that he was beginning to become unwound—realized that berating Parr had been a mistake; the stress was beginning to get to him. In his mind he had cut off Parr for running an advertisement for Lazard, not for suggesting the firm was imperiled. But the damage had been done. He called Parr back, hoping to mend the relationship and to invite him for another meeting.

“Have you recovered from the phone call?” Fuld asked contritely.

Ken Wilson was standing in line at Westchester County Airport at 6:45 on the morning of Thursday, July 17, on his way to Montana to start a vacation and do some fly-fishing, when his cell phone rang.

“Kenny, we really need you,” President Bush told him. “It’s time for you to do something for your country.” Wilson and the president knew each other from Harvard Business School, but Wilson knew this call had not been the president’s idea. This was classic Paulson; he must be really hurting. If Paulson wanted something, he would keep going until he got it, even if it meant enlisting the highest authorities.

That weekend, Wilson, after talking it over with his colleagues at Goldman, called Paulson. “I’ll do it.”

On the evening of July 21, Paulson arrived for a dinner in his honor at the New York Fed, organized by Tim Geithner as an opportunity for the secretary to get together with Wall Street leaders—Jamie Dimon, Lloyd Blankfein, and John Mack among them.

The dinner would be the second gathering of Wall Street heavyweights he’d attended that day. He had earlier been to a private luncheon in his honor at the offices of Eric Mindich, a former protégé at Goldman Sachs who now ran a hedge fund called Eton Park Capital, where he pressed his case for the pending GSE legislation. Paulson was feeling slightly better about the overall situation, as both Wilson and Jester had agreed to join Treasury, and the prospects for the legislation’s passing were improving. And as he mingled among his former colleagues, he congratulated John Thain of Merrill, who days earlier had sold the firm’s stake in Bloomberg for $4.5 billion.

What still had Paulson worried, however, was Lehman, and particularly a secret meeting that had been scheduled for after the dinner: He and Geithner had helped orchestrate a private meeting between Dick Fuld and the boss, Ken Lewis, in a conference room at the NY Fed. Fuld had been ringing Paulson for the past two weeks about Bank of America, trying to get Paulson to make a call on behalf of Lehman.

“I think it’s a hard sell, but I think the only way you’re going to do it is go to him directly,” Paulson had told Fuld. “I’m not going to call Ken Lewis and tell him to buy Lehman Brothers.”

As the dinner was ending, Paulson walked over to Lewis and said affably, “Those were some good earnings,” reaching out to clasp Lewis’s hand and giving him a knowing look about the upcoming meeting. Although earlier that day Bank of America had reported a 41 percent slide in second-quarter earnings, the results were far better than what Wall Street analysts had expected. That positive surprise followed a series of stronger-than-expected earnings from Citigroup, JP Morgan Chase, and Wells Fargo, all of which were at least temporarily buoying the market.

When Paulson turned to leave and other executives started to get up and mill around, Geithner approached Lewis and, leaning close to him, whispered, “I believe you have a meeting with Dick.”

“Yeah, I do,” Lewis replied.

Geithner gave him directions to a side room where they could speak in private. Geithner had apparently already given Fuld the same instructions, because Lewis noticed him across the room looking back at them like a nervous date. Seeing Fuld start to walk in one direction, Lewis headed in the other; with half of Wall Street looking on, the last thing either of them needed was to have word of their meeting get out.

The two men eventually doubled back and found the room, but when Lewis arrived, Fuld was in the midst of a heated argument with a Fed staff member. It was only the second time the men had ever met, and the sharp tone of his hectoring startled Lewis.

For about twenty minutes Fuld explained how he pictured a deal might work, reiterating the proposal he had made to Curl a week earlier. Fuld said he’d want at least $25 a share; Lehman’s shares had closed that day at $18.32. Lewis thought the number was far too high and couldn’t see the strategic rationale. Unless he could buy the firm for next to nothing, the deal wasn’t worth it to him. But he held his tongue.

Two days later, Lewis called Fuld back.

“I don’t think this is going to work for us,” Lewis said as diplomatically as he could, while leaving open the possibility that they could discuss the matter again.

Fuld was beside himself as he called Paulson at 12:35 p.m. to relay the bad news. Now all he was left with was the possibility of the Koreans, and he pressed Paulson to make a call to them on his behalf—a request that Paulson, having already interceded with Buffett and Bank of America, was now resisting.

“I’m not going to pick up the phone and call the Koreans,” Paulson told him. “If you want to scare someone, call them up and tell them I said they should buy Lehman Brothers,” he said, explaining that his involvement would only heighten suspicion about the firm’s prospects. “Dick, if they call me and want to ask questions, I’ll do what I can to be constructive.”

It was just the latest bad piece of news of a very long day. That night, Bart McDade forwarded Fuld an e-mail from a trader with more speculation about where the negative rumors were coming from. “It is clear that GS [Goldman Sachs] is driving the bus on the hedge funds kabal [sic] and greatly influencing the downside momentum, LEH and others. Thought it was worth passing on.”

Fuld replied: “Should we be too surprised? Remember this, though—I will.”