So Now We Know Why Lehman Went Under

The New York Times published an edited extract from Andrew Ross Sorkin’s Too Big Too Fail (man, that book is so large, they can release a ton in advance and still have a book and a half of reading left over). This section is on some of Dick Fuld’s efforts to save Lehman.

The Japanese tell their children, “You should hear one thing and understand ten.” Sorkin’s snippet reveals quite a lot.

It was obvious to even outsiders in the late stages of the unravelling of Lehman was that Fuld missed possible deals because he set his price targets too high. One of the cardinal rules of dealmaking is everything can be solved by price. He probably could have unloaded Neuberger Berman and limped along for a while. He could have sold a stake to the Koreans. Would these moves in August have rescued the firm? As an independent player, no, but a sale of all or part of the firm still would have been a better outcome, and realistic conversations might have led to a sale of more operations, and saved more jobs. Bear’s employees did get something for their stock holdings, and a minority kept their jobs. Now Bear did get a government backstop, but that was after the investment bank was clearly terminal.

But three things are striking about the Sorkin-provided details:

First, Fuld (and presumably the underlying business) was desperate as of early July. Sorkin has Fuld arranging for contacts to be made to possible buyers like Bank of America on a Saturday. Huh? He was clearly flailing about, yet not offering a price or deal terms commensurate with his obviously panicked state.

Second, Paulson and Geithner were aware of Fuld’s desperation. The Wall Street Journal reported earlier that Fuld was calling Paulson almost daily (and suggested Paulson was somewhat puzzled). The Sorkin excerpt shows Fuld petitioning the Fed via Geithner to become a bank holding company:

Mr. Fuld’s outside lawyer, Rodgin Cohen, chairman of Sullivan & Cromwell, had recently suggested an idea to help stabilize the firm: to voluntarily turn itself into a bank holding company. The move, Mr. Cohen had explained, would make it easier for Lehman to borrow money from the Fed “just like Citigroup or JPMorgan.”

Mr. Cohen, a 64-year-old, mild-mannered mandarin from West Virginia, was one of the most influential and yet least well-known people on Wall Street. Pacing in his hotel room in Philadelphia before the wedding of his niece that night, he joined the call between Lehman and the New York Fed.

“We’re giving serious consideration to becoming a bank holding company,” Mr. 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 regulations.

Mr. Geithner, who was joined on the call by his general counsel, Tom Baxter, was apprehensive. “Have you considered all the implications?” he asked.

Mr. 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, Mr. 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.

Mr. Fuld ended his call deflated. Later that evening, Mr. Fuld called Mr. Cohen, finding his lawyer in the waiting room of a hospital, attending to a cousin who had become ill at the wedding.

Yves here. If Geithner and his colleagues didn’t get that Fuld was at the end of his rope, they were choosing to ignore an elephant in the room. Now they may have been completely unwilling to consider the petition and this was the easiest way to signal their opposition (taking Fuld through a long list of requirements, some of which presumably would have been pretty painful, was another message).

But this speaks to a question we have raised again and again: why was there no serious assessment of what a Lehman bankruptcy would mean? After Bear went down, everyone knew Lehman was next on the list, with Merrill and UBS also known to be wobbly. Why didn’t the Fed, Treasury, and SEC together demand certain types of information from all big US regulated capital markets players (including JP Morgan and Goldman, perceived to be the healthiest, so as not to be singling out the weaker members of the herd?). This is a massive oversight. Relying on luck, which is what assuming all would be well after the Bear debacle, is no substitute for having a strategy. There was clear urgency in July. Even a month of assessment and evaluation of options (it probably would have taken two weeks to orchestrate the information requests among the agencies) would have been better than nothing. But the Freddie/Fannie unwind was moving to front burner, that probably consumed a lot of available bandwidth.

And we have the third, and peculiarly most obvious point to anyone who has had some exposure to deals, but one that Sorkin does not bring forward: what the hell was Fuld doing trying to negotiate his own deals? This is a mistake CEOs make all the time, and it never ceases to amaze me.

Now why is it a bad idea for a CEO or for most principals to negotiate their own deals? Most people are terrible negotiators. And I have to tell you, most people in M&A are not as good as they think they are. They don’t really negotiate all that much. They structure deals, value them, sell, but a lot of the negotiating takes place through the lawyers (many of the key points are negotiated in the negotiations over reps and warranties and the details of the definitive agreement). Most M&A transactions do not have that much negotiating, relative to all the other stuff that goes on in a deal, for most professionals to get that much practice.

But CEOs on average are FAR less practiced at negotiating, and Fuld is by temperament and experience particularly poorly suited for that role. He comes out of commercial paper (which is a very simple “placement” business; negotiating was never a skill he had to develop), he was known for being hyper aggressive and surrounding himself with yes men; he’d have even less give and take on a daily basis than most top executives.

There are other reasons not to negotiate your own deal. Even if I were a good negotiator (and I’m not, but I am a good transaction tactician), I’m loath to negotiate on my own behalf, and many good negotiators I know try not to. You have too much at stake, you lose the detachment you need to be effective.

Another crucial reason is you have FAR more leeway going through a negotiator. They can explore ideas with the other side with far less of a sense of commitment than if principals deal directly.

The one exception to this rule is industries where people negotiate all day. I’ve have some clients in the media business (cable) and they are frighteningly good, since horse-trading is a much bigger part of the fabric of their business than in other fields.

Back to Fuld. I’m simply gobsmacked at how he carried on. For instance, why did Fuld speak to Geithner and Baxter? This was completely nuts, a display of ego and utter stupidity. Fuld has the best connected, most trusted (by the Fed, anyhow, which is what counts) BANK regulatory lawyer in the US in Rodg Cohen. I’m personally not a fan of the man (long story involving a client here, won’t bore you with details) but Cohen would be the guy to broker a deal like that. If anyone could have pulled it off, he could have. If Fuld felt he had to be on the call, he should have let Rodg lead and kept his bloody trap shut as much as possible. But instead he conducts the call with no Cohen, apparently not even any Cohen laying of the groundwork.

Now it may be that Sorkin has this wrong, that Cohen served up the idea only under duress and didn’t want to carry the message. That’s unlikely, since lawyers often are asked to serve up low-odds ideas. But given that Fuld made all the calls on all the deals Sorkin discusses here, it appears he insisted on making his own pitches.

And again, while Sorkin may have had to streamline to keep his very big book from tuning into a three volume saga, the number of proposals Fuld made in a short succession also suggests that Fuld was winging it, throwing out ideas to see what might stick. Yes, it’s a good idea to start with an elevator pitch, and then elaborate if you get an initial positive or at least neutral response, but there seems to have been NO thinking, no detail beyond the high concept. Again (and this is just common sense), there seems to have been little consideration of “what’s in it for the other side,” as in some concrete discussion of fit/synergies, at least an indication of an awareness of possible structural/organizational issues, etc. These all seemed to be seat of the pants with NO backup! Check this out:

Mr. Fuld decided to call his old friend John Mack, the chief executive at Morgan Stanley…Mr. Fuld asked candidly: “Can’t we try to do something together?” It was a bold question and Mr. Mack had suspected it was the reason for the call…

“We’ll come over to your offices,” Mr. Fuld, clearly anxious, said.

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

…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.

Bart McDade, Mr. Fuld’s new No. 2, showed up next, dressed in a golf shirt and khakis. Skip McGee, the firm’s head of investment banking, was running late; his driver got lost.

As the group took their seats on sofas around a coffee table, an awkward silence followed; no one knew exactly how to begin.

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

“Well, I’ll kick it off,” Mr. 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,” Mr. Mack said in frustration as he noticed the discomfort around the room.

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

He began by discussing the possibility of selling Neuberger Berman, Lehman’s asset management business and one of its crown jewels. 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 C.E.O., sold it to Lehman after 9/11. The irony would be rich.

“Well,” said Mr. Mack, not entirely sure what Mr. Fuld was proposing, “there are ways we can, you know, there are ways we can work together.” ….

But the meeting ended with no agreement and what seemed like no incentive to keep talking. “Was he offering to merge with us?” Mr. Mack asked after the Lehman executives departed.

“This is delusional,” Mr. Gorman told his Morgan Stanley colleagues.

Yves here. By virtue of having had Japanese clients, I have probably seen more offensively overpriced turkeys than the average person. But even with people peddling utter rubbish (which they no doubt knew to be utter rubbish), and the Japanese occasionally being so bold as to say so (Kansai Japanese do that) I cannot recall a meeting going every remotely as poorly as this one did. This is clumsy and embarrassing, and it is unfortunate that Sorkin either did not appreciate that, or that he felt that the narrative style he chose prevented him from saying so directly.

But it still makes for very voyeuristic reading.

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  1. Ed

    I think you do a disservice to traders, who sometimes are quite good negotiators. (My theory is that because traders are congenitally paranoid, they are scared of doing any deal that the other party seems to like. So when you have an ex-trader who is patient – as well as having learned to harness his paranoia – you can have quite a formidable negotiator.)

    Also, Fuld was a commercial paper guy – so basically, not much of a trading job at all – so, as I say, you do traders a disservice by placing Fuld in their ranks.

  2. Yves Smith Post author

    I’ve had a lot of traders as clients (FX, derivatives, emerging markets, hedge funds, money markets), and I have to beg to differ. Really good negotiators are quite deliberate about what style they adopt at any point in the negotiation (and these are amazing split second decisions on what chord to strike). They operate at two levels, they have a meta “what is the real game here and how do I play it” and can also keep the substantive bit going. That facility of being able to look from (at least) two vantages simultaneously and make a conscious choice about personal style (do I play jocular, reasonable, aggressive, etc.) is very rare. Too many people think mere aggression is effective negotiation (I am not saying you do necessarily, but some seeing your comment might infer that). Many of the best negotiators I have seen do quite the reverse, lull their opponents into false security, pretend to be less effective than they are, get them to make disclosures or agree on minor issues that sets the stage for larger concessions (these are simplifications of more complex strategies, but you get the drift).

    Traders pretty much without exception have only one style, and I have never run across one that has the multidimensional sense I have seen in top negotiators. It is not something they need or even encounter in their day job, it does not call for persuasion skills (they may, however, have a finely honed ability to detect weakness or hesitation, but the lack of persuasive/influence skills is a big gap, and severely limits their repertoire).

    You are 100% re CP, that CP is ONLY a placement function, no trading. That is an important correction, I will amend the post.

    1. Ed

      I agree that in terms of the full repertoire of negotiating skills, traders are not your likely candidates. My frame of reference is from working with an ex-trader who negotiated some relatively small-fry acquisitions for a large bank. He was very effective, and rarely aggressive (if folks here think that aggression is the default characteristic they should attach to traders, they perhaps shouldn’t believe the stereotypes!). So my frame is limited, no doubt you have a better sample from which to draw a conclusion, but I’d still argue that in the right circumstances – though probably not a mega transaction like selling an IB! – an ex-trader can cut it.

      One last point re. Fuld is that from all accounts he was deeply emotionally attached to the firm… so all the more reason to let Cromwell-Sullivan handle the negotiation.

  3. Ex-Lb

    The elephant in the room here is that in-house counsel was completely absent at both Bear and Lehman right before their respective demises, or at least, in the case of Lehman, terminally narcissistic and incapable of making any meaningful contribution to the firm short of holding a Town Hall touting his closeness to Fuld.

    At Bear, there was a pretty amazing General Counsel, Mark Lehman, who served on the Executive Committee through the end of the Nineties/early-2000s. But he got ill and was replaced by a real know-nothing [about Wall Street] litigator, as I understand it, who had the right credentials but none of the Street knowledge.

    Lehman’s Russo, a real piece of work formerly at Cadwalader, was easing out of his role as Counsel to the Executive Committee (or something like that) into the generic role of [useless, some might say] Elder Statesman, which consisted of featuring one of his homes in Architectural Digest, reporting for cable t.v. from Davos, Switzerland, listening intently to Fuld (in his own admission at the aforementioned Town Hall) whose office he faced for hours a day…squiring, well, ’nuff said.

    A lawyer who worked in the investment bank was selected (by another team of [want-to] know-nothings] apparently to take Russo’s place, but he was the quintessential yes-man, now at Barclays, by-the-by, and would not have served as a meaningful check on Fuld’s fantasies and was in fact probably conspiring with McDade to sell the shop and assure a position for himself somewhere as early as August.

    You are right, the CEOs themselves (Cayne, Fuld, guy who’s now at Guggenheim) should not have been negotiating on their own behalves, but they also should have put in place trustworthy deputies. At least Mack, by killing his enemies, for a while anyway, did that much.

  4. Siggy

    Your viewpoint as to what makes for a good negotiator is very much on point. I suspect that the reason that Sorkin appears to have missed the significance of the fiasco meeting is that he has no experience in the process of negotiating.

    What this snippet from Sorkin suggests is that Fuld failed in his pricipal duty to protect the interests of the shareholders. In a phrase, Lehman failed because Fuld failed. While Bear Stearns and Merrill effectively failed, Lehman absolutely failed.

  5. rd

    I don’t think that Fuld ever developed a BATNA (Best Alternative To Negotiated Agreement) in a logical, dispassionate way – he should have at least tried to bring out his inner Spock. If he had, he would have realized that his BATNA was really bad and he needed to have almost any type of agreement, even one that Paulson would ram down his throat a la Bear Stearns.

    I work in the engineering business that has a very structured hierarchy for making proposals and approving agreements of any sort. By having fixed policies in these areas, whoever is trying to do the negotiation almost always has the fallback that he has to go back to homebase to get it approved. That is very useful in providing arms length opportunities for thinking. The big guns usually only show up to the table when you are down to the final few brass tacks on a major deal.

    Maybe somebody could buy Richard Fuld a copy of “Getting to Yes.” Reading that book one weekend might have saved his company.

  6. Fresno dan

    “If Geithner and his colleagues didn’t get that Fuld was at the end of his rope, they were choosing to ignore an elephant in the room”

    This is from the Fed crew that thought “subprime was contained.” O, and didn’t that Geithner guy have some kind of financial/regulatory type job in New York?

  7. Susan Allen

    It is funny that Lehman thought acquiring a bank would save them. That’s exactly what mortgage giant Taylor Bean also tried, only to take a perfectly good bank down the tubes with them when they went. Lehman’s problem along with Bear was all the risky types of loans they had made taking up tons of their liquidity. The only reason Merill got saved (sort of) was their friends at the Feds or they would have gone too (they too pushed the interest only, option arm, products to the max) then acquiring First Franklin (a sort of subprime lender). Paulsen chose not to save Lehman bottom line. It wouldnt have mattered if Lehman’s CEO was the best negotiator in the world, his problem was he didnt have the friends in the right places…..

  8. kievite

    I think that Yves idea is unrealistic. How you can withdraw from the negotiations about the fate of the company where you are No.1 ? That’s a resignation in disguise. When the fate of the company is in stake to outsource the negotiation to lawyers is a little bit too much to ask.

    In a way, armchair generals always like to discuss what should have been done. It goes without saying that everybody consider himself to be a great strategist looking at the battlefield decisions after the battle ended. But at the heat of the battle choosing right strategy is a completely different sport. That’s why BATNA crap and other HBS ideas are pretty much useless.

    Correct BATNA presupposes correct forecasting of the future. Neither participant understood the real gravity of the situation and the real probability of the collapse. Another problem is that Fund experienced several “close to death” moments before and in all cases the company survived.

    An interesting side story here is that it was Geithner not Fuld (who at least initiated the conversation) who was the weakest link. As is some other episodes he looks like a person in the position that is way over his head. His remark “I’m a little worried you could be seen as acting in desperation” reveals typical for petty bureaucrats desire to preserve appearance over the substance.

    Fuld at least had the courage to initiate the move that would be a life saver for the company (as it was for GS later). But it was Geithner who killed the idea.

    IMHO by failing to grasp the gravity of the situation (and get the facts) Geithner (and Paulson) became equally responsible for the consequences.

    1. Yves Smith Post author


      There is a HUGE difference between “withdrawing from negotiations” and “letting the people best able drive them.’ My observation is save cases where the CEO is a good, experienced deal type (Jamie Dimon, having done a ton of deals under Weill would fit the bill), they are more likely to either derail a deal completely or unwittingly undermine the company’s position. You can have trusted emissaries and key staff do a lot the groundwork with frequent reports back to their principals. Or have the staff/emissaries take the lead in the conversation with the CEO in the room. CEO to CEO discussions are best kept to a bare minimum with groundwork well laid (as they do in geopolitics!)

      1. Derek Scruggs

        I think what Yves says is obvious. I sold my first company to a public company and, even though we were very small, I was only tangentially involved in the negotiations.

        Further, look at how Presidents do it. It’s not like Reagan and Gorbachev worked out all the details from the outset. Rather, they (as with all modern state leaders) gave their negotiators some broad principals to work toward and let them do the nitty gritty.

        One of the most powerful tools a negotiator has is the ability to say “I need to run this by my boss.” When the CEO is the negotiator, he basically throws that tool away. (Yeah, he still has the board, but that’s a totally different dynamic.)

  9. pebird

    I am not a Fuld fan, but don’t forget another possible scenario – that Geithner and Paulson had already worked through the LB BK scenario and they were willing to live with the consequences, and more likely prefer that outcome.

    As to Fuld “negotiating” – trying to FIND a deal is not the same as negotiating the terms of an agreement. There was NO deal to be had, much less negotiated. Geithner made it clear (read between the lines) that he wasn’t going to seriously consider it.

    Sure, you have more leeway with a negotiator, but that’s for traditional deals – when you want to change the rules (investment bank becoming holding company) you have to have the leadership involved. What – was a lawyer going to contact his counterpart at the New York Fed and have it eventually get to Geithner, leaking all the way up? Or send a lawyer directly to Geithner – talk about extreme arrogance. No, it had to be the top guys. This was not your normal “deal”.

    For something that crucial, and when it’s not business as usual and you think you are getting played big time, you make that call – you have to hear what the players are saying. And he did have Cohen there.

    What a coincidence that Goldman and JPM decide to become holding companies later on? Hmmmm, not a bad idea, Dick, we think we’ll run with it, except we don’t need to worry about having a bank already in place, thanks.

    I am more of the opinion that Fuld became increasingly desperate because he saw the firm being squeezed and couldn’t find out exactly why – he was searching for information as much as trying to find a place for LB to land, and everyone played Lehman about as well as could be.

    There is a theme out there that Fuld screwed this up – but if you have been in enough deals with all the assholes out there – if there is value being offered (and there was HUGE value in LB – its starting to leak out) you snap it up – unless you know something else is going on so you just aren’t about to touch it, and act dumb.

    1. Yves Smith Post author

      I don’t think you understand Rodg Cohen’s standing, nor the power of the general counsel of the Fed. Cohen has been broaching/brokering precedent-setting deals from a regulatory standpoint for DECADES. One I know of is Sumitomo Bank’s investment in Goldman, which was back in 1987. Trust me, Cohen has a closer, more active relationship with the Fed, particularly on regulatory matters, than any bank CEO, and Fuld was not primarily regulated by the Fed on top of that (only as a primary dealer). This is no mere lawyer, in other words.

      1. pebird

        Are you saying there would have been a different outcome if Fuld had Cohen determine if there was a deal available directly with Geithner? Do you really think the regulatory issues or technical structure was what screwed this up?

        It was Cohen’s idea to become a bank holding company – and Fuld had Cohen on the call with the NY Fed – what would Cohen have said differently than Fuld: “We’re giving serious consideration to becoming a bank holding company”.

        So Geithner says “Have you considered all the implications?” and “I’m a little worried you could be seen as acting in desperation”.

        This was NOT about regulatory structures or having the right guy do negotiation, this is about exactly what you point out in the comments in this post at 10/20/09 11:26

        “1. The result of the Lehman failure is an explicit ‘No More Lehmans’ policy. We are now backstopping the big capital markets players with NO controls. The official policy of privatized gains and socialized losses allows for institutionalized looting. You say this was a good outcome? The TARP, which was a financial coup (it explicitly sets the Treasury Secretary outside the reach of law) was a direct outcome of the Lehman collapse.”

        I completely agree – a financial coup does not just happen, it MUST be carefully planned, and these guys are smart and plan to the nth degree everyone’s potential move.

        Fuld was desperate because he had to act quickly, saw what was going on and could not believe it – LB was sacrificed so that the coup could take place. Lehman was inoculation against potential reform – create a crisis and take control.

        You might call this conspiracy theory – but I agree with you it was a financial coup.

        Fuld could have had God negotiating for him and Geithner still would have said “Have you considered all the implications?”

        1. Yves Smith Post author


          I do not buy that Lehman was taken out to create the opportunity for a financial coup. There is TONS of evidence that the Bush Administration was hoping to kick the can of the financial mess down the road to the Obama Administration. If that blew up on his watch, you’d have a one-term president (we may have that anyhow) with at least another 10, maybe 20 years of Republican control assured after that.

          Fuld never even took a serious briefing from Cohen! The fact that the Fed general counsel had to take Fuld through the implications was shocking. If this has been a serious discussion, the conversation (from a Cohen) would have been along the lines of, “Look, this is an unprecedented proposal, here’s why we think you need to consider it (details) and here’s how we think it could work (details).”

          You don’t broach a matter as serious as this with the Fed with no explanation of why this is in THEIR interest and plenty of evidence that you have thought it through and have a realistic plan as a starting point for….negotiation.

          1. pebird

            Well, that could be. Fuld was a NY Fed Director at the time – that had to be his last resort. As least Bear wasn’t an NY Fed owner.

            So, after the Bear bailout, Fuld tells the Financial Times on June 4th, 2008:

            “the Federal Reserve’s decision earlier this year to lend
            directly to investment banks should take questions about
            Lehman’s liquidity off the table”

            That must of pissed a few folks off, or at least give them a reason to not answer his calls.

            I really think that by the time of the Cohen/Geithner/Fuld call, that was a last gasp move – Fuld probably knew the answer before the call.

            I guess Geithner had enough time to think through the implications for GS and MS – so Cohen’s idea wasn’t entirely wasted.

        2. Derek Scruggs

          “Do you really think the regulatory issues or technical structure was what screwed this up? ”

          No. The personalities and temperament did. Cohen may not have been able to do a deal, but at least Fuld would’ve know one of the best in the business was trying to make it happen.

          You do not send your manager up to bat in the bottom of the 9th against Mariano Rivera. You send your best hitter.

  10. i on the ball patriot

    “But three things are striking about the Sorkin-provided details:”

    • First, what wonderful access to government those who buy politicians get, it never ceases to amaze me.

    • Second, how discussion of the details of rape can make the rapists appear simply as individuals involved in just another negotiation and deflect from their crime of rape.

    • Third, what a scam the ‘rule of law’ is.

    Deception is the strongest political force on the planet.

  11. Hugh

    Great post. That has got to be one of the classic ironic lines of all time, Geithner’s question to Fuld”

    “Have you considered all the implications?”

    Yves is exactly right. Why did the Fed and Treasury not ask the most basic question about what the consequences would be if one or more of the IBs failed? We often talk about the principals: Paulson, Geithner, Bernanke, Fuld, but all of these guys had staffs, all of their staffs had staffs. A request on information about exposures sent out to multiple firms might not even become public but even if it did it could have been cast as the Fed or Treasury just doing routine oversight to enhance market stability, blah, blah, blah. There was never a good reason, except gross incompetence, for Lehman to go down as it did.

    Geithner’s other line is almost as good:

    “I’m a little worried you could be seen as acting in desperation”

    WTF? “Seen as desperation”? Here again we have a total obliviousness to consequences. The problem wasn’t that Lehman might seem to be desperate. The real issue for Geithner was what if Fuld and Lehman were acting desperate because they had good reason to be desperate? And this clueless idiot is now our Treasury Secretary. Think about what the consequences are of that and Fuld might not be the only one in despair.

    Even if Sorking is doing a Woodward here, reporting conversations without any awareness of their meaning, he still is doing a service. It reinforces and confirms what we already suspected. On the Street, we had conmen who didn’t know how to unwind the con. In government, we had dopes, and dupes, and yet more conmen. It was and is a recipe for disaster.

  12. PH

    Sorkin was on Charlie Rose last night where he said Paulsen et al had literally hours to make the Lehman decision (and many others). The timing of the story above does not support that in my view.

    Also, I had to laugh at the “implications” of being a bank holding company outlined by Geithner’s GC Baxter. Goldman and JP Morgan are “more staid institutions” now?

  13. jake chase

    Assuming any of this conversation is reported accurately by a newspaper reporter who generally simply prints what he is fed, a better explanation is that decisions had already been made by Paulson and Geithner to let Lehman to go bust in order to grease the wheels for saving AIG. Remember it was AIG to which the important banks were exposed. I doubt there is anything Fuld could have done except to make one last derivative bet on the Ringgit and hope for the best.

  14. Michael Fiorillo

    Discounting the limitations of Sorkin’s kind of reporting, where insiders provide self-serving access, when done well it is engrossing – primarily, as Yves said, for its voyeuristic thrills, but also for the actual drama of the situation – but it’s ultimately a behavioral study of sharks in a pen, with little or superficial insight into the effects of the tides, currents and ecology of the overall system.

  15. Skippy

    Tis interesting when and what books are released and content resides with in, true too publishing house ethos a profit is sought. Personally I would like to see the cross-referencing deployed by Sorkin mapped to a wall and thrice checked. One can not believe for a moment that any individuals or party’s involved in such a debacle would be forthcoming to their faults in plain day light and hope to garner any sympathy’s.

    The facts of this epic fail will never see the light of day for the fear of retribution or admonishment’s, come on please, as if any one could find any semblance of empirical fact with regards to individuals that live lives of deception and deflection in the name of profit…shez

    Skippy…wire them up, inject truth serum and pipe in screams from down the hall, then I might buy the book…another novel is born.

  16. craazyman


    It is to journalism what pornography is to portraiture. A very narrow slice of the human condition, laid out like a ham sandwich. :)

    Tomorrow and tomorrow and tommorrow, creeps in this petty pace from deal to deal, and all our yesterdays light a fool’s way to the refrigerator.

    I need a beer.

    1. Skippy

      It is to journalism what pornography is to portraiture. A very narrow slice of the human condition, laid out like a ham sandwich.

      Yours or borrowed[?] for I would use it and name its author.


      1. craazyman

        It came to me fully formed after three glasses of $4 wine and a xanax — which is how I do most of my thinking. Use it Skip, no attribution required.

        And by the way, tell South not to lump Salvador Dali in with the Enfante Terrible — JM Basquiat. Dali was an immaculate draughtsman and master of light and form — a renaissance master type of guy — even if he looked ridiculous behind that mustache, and used classical perspective instead of the more adventurous formal methods of his contemporaries. Basquiat had pyrotechnical talent, but he was all Dionysus and no Apollo. And we know where that goes. They would trade 24 hours per day if they could have an IV put into them and a hooker in for an hour once and a while. LOL. But don’t you hate it when you get their bill.

  17. joebhed

    jeezum, it was the MONEY SYSTEM that was collapsing, manifestng itself at LB, and the reason they went under was not based on negotiating skills, but because they were the closest to this inverted pyramid as it began to topple.
    Quick – need about $750 SUPER-LARGE.
    There’s a fork in the road ahead.

  18. xav

    I’m not sure why Yves often acts like letting Lehman fail was a bad decision. If anything that was the best decision that Washington has taken since the beginning of the crisis.

    1. Yves Smith Post author

      With all due respect, you misrepresent my position, which I have set forth in a number of posts.

      1. The result of the Lehman failure is an explicit “No More Lehmans” policy. We are now backstopping the big capital markets players with NO controls. The official policy of privatized gains and socialized losses allows for institutionalized looting. You say this was a good outcome? The TARP, which was a financial coup (it explicitly sets the Treasury Secretary outside the reach of law) was a direct outcome of the Lehman collapse. And we have the ongoing cirmuvention of normal, Constitutional budgetary processes via the Treasury using the Fed as an off balance sheet vehicle to escape the Congressional appropriations process. I don’t see how this can be depicted as good, yet you apparently applaud it.

      2. Saying the powers that be should have assessed the outcome of a Lehman failure (which they clearly did not, you’d have to do real forensic work on their books to know how badly impaired they were) and assessed alternatives is not the same as saying they should have been rescued. You project on to me something I never said.

      3. Bailout and disorderly collapse are two ends of a spectrum. There were options in between (very limited support once BK declared to allow for an orderly unwind, having authorities push Fuld harder to sell assets that had value prior to dissolution, etc).

      1. Austrian Banker

        1) This is perverse logic to me. Why do we have law if as you say we should pervert it upon finding ourselves in some strange lands with a situation previously unforseen? You are taking future events and blaming it onto the fall of a corrupted institution “too big to fail but really too big to live” as a way of exconerating politicans (both in gov and in the CB)…as if they had no other way of dealing with it from that point.

        The real issue is that all these players have their certificates right out of Keynes university and they are playing the game according to that game plan. From that, nothing unexpected has happened, save this corporate failure maybe, yet by affixing blame to that point you are masking the real issue, that Keynesian politics is fraudulent and will inevitably lead to a total corruption of politics and economics.

        2) He never said any of that, you are putting words in Xav’s mouth.

        I agree with what Xav said. Ends justify the means is your rule of law.

        A society on the verge of collapse deserves the politicians it gets, is my take on it.

        1. pebird

          First of all, Lehman did not fail in any way that an “Austrian Banker” would approve of. Due to the interconnects, counterparty risks, time factors, Lehman was cut up and pieced out without any regard to what can remotely be considered a true bankruptcy process.

          Remember, if LB became a bank holding company, when they fail the government walks in, as an investment bank, as long as major creditors agree, its a free-for-all and the bankruptcy proceeding is kind of a post-mortum accounting exercise.

          If anything, the LB BK represents pseudo-moral hazard – it scared the public and the government, but the players who should have been adversely affected instead profited from LB’s demise.

  19. Jesse

    I’m a bit with ‘jake chase’ on this one.

    Even after reading this, I will stick with my gut instinct at the time. That is, the decision had already been made behind the scenes to let Lehman go down, if nothing else than to prove a point and facilitate other negotiations with the Congress to come.

    I have done quite a few deals in my time, from global servce and products contracts to R&D partnerships to full M&A, and one thing you always have to do is not only assess your own position and your potential dealmaker’s, but also the greater landscape of deals that are being made in and around you at the time.

    I think Fuld and Lehman were already twisting in the wind, and it was just a matter of what pieces the crows might take off before the jackals took them down, not for their own sake, but as an object lesson to the onlooking herd.

    1. Hugh

      Except of course that no such lesson was sent after the Lehman collapse. Indeed the message sent was an open ended commitment to “No more Lehmans.”

      Nor was this to grease the wheels for AIG, as Jake Chase maintains, or even Goldman. Lehman went bust on the Monday, September 15 and the AIG deal was announced the next day. This was almost certainly on an accelerated schedule brought on by Lehman. And the AIG deal was not a great deal except for Goldman but the fall of Lehman almost took out both Goldman and Morgan Stanley. It was why they had to convert so fast to bank holding companies, the following Saturday on the 21st (when the Fed accepted their applications).

  20. Jesse

    This is just an example. What were the results of the Credit Default Swaps settlements around Lehman? What were the collateral gains (did the beneficiaries really care about the collateral damage)?

    Never assume the other parties are negotiating in good faith. Always understand what they might have to gain or lose on a larger playing field.

    Some of the most fun I have had is negotiating deals in which my objective was to not make a deal, but rather, to accomplish something else under the appearance of a deal.

    International deals with other semi-official government entities was particularly like this. These jokers never have any of their own skin in the game, and are always owned by someone else with a plethora of motives. Sometimes a negotiation is just a means of perturbing the environment to see what echos back, so you can decide where the real deal might be.

    Fuld sounds like he was stomping around like an elephant. So he didn’t do himself much good. I think he might have, if he had looked for the right pressure points on the government. There was no one on the Street who wasn’t going to help him.

    Cui bono. Always.

    I wonder if this Sorkin piece has us looking at trees, and ignoring the forest.

    ‘Never waste a crisis.’

    1. Skippy

      Thanks for your time Jesse.

      I aways have time for your thoughts.

      Yes Fuld felt the friction around his neck and the jackals tongue about his loins, the combination of sensations must have weighed heavily upon his abilities.

      Skippy…enjoy your face-plant you deserve it.

    1. Austrian Banker

      Thanks for posting that link. It was very informative and instructive regarding the author’s objectives in writing the book, his personal views and his understanding of the issues came across very clearly.

      Yet, in doing so it is clear that the author is preoccupied with the facts and drama of a crimescene. By getting caught up with it he is totally consumed by the crimescene itself, never positing to ask himself or rendering himself even capable of answering why this came about. He comments on the quip by Bush as he was being briefed “Why did this come about?” saying at least Bush was being aware that he did not know. In fact the author is as clueless as Bush himself.

      Consequently, the book is a supreme manifestation of a false lead on the cause of the crisis. The people who were admitedly responsible in many different ways (supervision, trading, politically) are suddenly still (somehow) the good guys because they try their best (working in the publics interest) to clean up the mess they themselves were responsible for.

      Hedge funds, jumping in and playing the game according to its rules are instead part of the blame, for selfishly getting in there to make profit and protect themselves. None of the players in the years previously ever worked towards a profit motive, instead they were just misguided, “didn’t know what they were doing” or just mistakes?

      The real cause is that Keynes set the game plan here, money printing and government deficits are to blame. There is no free economy in the US, hasn’t been for decades and there certainly isn’t one now. You are progressively embracing a mercantilist economy with fascist and socialist ideals, just like Putin is doing.

      When the market goes against you, you do not let the market solve the problem, by either giving you capital or letting you be liquidated. Instead, you call the White house or the Kremlin, depending on where you are situated and work out an exception to the rule of law. Just like the mercantilists in the Middle Ages.

      This is what you get when you follow Keynes.

  21. Jesse

    “Except of course that no such lesson was sent after the Lehman collapse. Indeed the message sent was an open ended commitment to “No more Lehmans.”

    Hugh. that was the very message intended to be sent. The message was not for the banks. It was for Congress. I thought I made that clear.

    Goldman and Morgan converted to banks and no one really questioned it. AIG paid out at close to 100% and no one really questioned it. What, you want another Lehman!!?

    Never underestimate the power of theatrics and misdirection.

    Further I think we might be selling Dick Fuld a bit short on this one. He may have been rough around the edges, but he was no fool.

    How do you know he didn’t speak with his attorney who had tapped his Fed connecttions, and come back and told Dick,
    ‘sorry but my boys tell me its ‘bugger all’ (as marcello said). And so Dick ran around in desparation, refusing to believe it could happen to such a Wall Street institution.

    I absolutely believe this is a very viable scenario, given the players involved in the key positions, and to dismiss it may be naive. And the truth will not be discovered in the pages of Mr. Sorkin.

    Follow the money.

  22. Jesse

    Oh yes, and Hugh, didn’t we just discover that the timelines put forward by Tim and crew are a bit disingenuous? That while the events may have publicly appeared to be quite close in time, in fact the roots of those events go back some time?

    I realize that this implies some ‘forethought’ but this is what is implied by the maxim “never waste a crisis” and we are not talking about people who could ever be described as slow on the uptake, timid, or scrupulous.

    the model I have in my mind is something that might appear as a series of events unfolding in the movie The Godfather, rather than ‘oops, shit happens.’

  23. Bob the Horse

    Yves – what if Paulson and Geithner wanted Lehman to go bankrupt? Before Lehman, politicians were reluctant to vote through the various initiatives, e.g. TARP. Have you considered that Lehman was pushed over the edge to scare Congress? Why else would it be allowed to collapse in such a disorganised fashion?

  24. Anonymous Jones

    I’ve been partial to the “mastermind” or “puppetmaster” theories for a long time. I’ve certainly not been the only one, especially on this site.

    For instance, just before they let Lehman BK in Sept last year, I wrote this little (completely inaccurate) gem, “Just as I predicted with FNM and FRE (that Paulson was merely in a months long charade to make it appear that he was backed into a corner when all along he knew he would bail them out), I fear this whole weekend was another charade to again make it appear that he was forced to bailout LEH at a time when bailouts were becoming more and more unpalatable to the public. I think Paulson et al have known all along this doesn’t get done without a government backstop, and that’s exactly why they said at the very beginning on Friday that there would be no backstop. Why release that information to the public at the very beginning unless you are trying to manage the public’s expectations? At the end of the weekend, you go back to the public hat-in-hand and say “I tried, but it was just impossible. We needed to backstop LEH. There was no other solution.” I sincerely hope I’m wrong. But isn’t that exactly what happened with FNM and FRE?”

    So was I just wrong in fact or wrong in principle as well? Can you just substitute “AIG” for “LEH” and make my conspiracy theory correct? Was the “charade” just more set up for the AIG/Goldman bailout? I still don’t know why they tell everyone they’re not going to bail out LEH until the last minute, except to lay the groundwork for future bailouts of *someone*.

    Who knows? I certainly don’t.

    But it is clear from my Sept ’08 comment that I definitely felt at the time that the public’s expectations were constantly being managed. I was certainly not foresighted enough to see the true endgame, but it is a fascinating hypothetical nonetheless.

  25. DaveInDenver

    You all are analyzing the trees in the forest, without seeing the forest. Lehman was vaporized by derivatives, just like AIG, FNM, FRE, Amaranth, Refco (oh yeah, what happened to Refco?) and Enron.

    There was no possible way to save Lehman without throwing a LOT of money at it – before Paulson figured out he could hijack $700 billion from the Taxpayers to save GS/JPM et. al. using AIG to launder the money.

    Sure, maybe Fuld could have maximized the sale proceeds from doing a better job liquidating the parts, but the Lehman demise was going to be a Creditors’ Ball anyway you want to slice this up.

    It amazes how many really bright people overlook the big picture – the big picture being the REAL white elephant in the room in the form of derivatives.

    1. davidTHEicke

      But the derivatives did not just fall out of the sky and infected the system. They’ve been put there deliberately.
      My take on this is that Lehman was sacrifised for a new world order financial system to be put in place and derivatives are the reason and method by which this is being achieved.

  26. Alex

    Whatever the reasons for the demise of Lehman, your comment on Fuld’s inexperience at negotiating or in this case even proposing a deal rings true. At the very least he should have a set of proposals to Mack that had been talked through with his people. Just turning up and saying “I don’t know why we are here” is a deal killer if ever I heard one.

  27. Noumenon

    Not only is this a great post, Yves, but you have an amazing presence in the comments. Both your negotiation comment and your clarification about Lehman made me want to quote them elsewhere. Kudos to you.

    (By the way, the way you follow up quotes with “Yves here.” — that really works for me, I often get confused who’s writing, especially with nested quotes, at least on blogs that don’t have a very separate looking font for quoted text.)

  28. From the Fringe

    I agree Yves – terrific posts, and the “Yves here” notation is terrific, if for no other reason than the respect it shows and service it provides to your readers.

    I’m not throwing down any gauntlets here, but a couple of points for comparison to consider:

    1) Despite their great importance, I don’t believe that any of the negotiations under discussion here come close to the gravity of those between the Israelis and Palestinians. If you go back and study them, however, you’ll find that they have historically been held with the meticulous use of agents and intermediaries. Ehud Barak and Arafat never spoke face to face during actual negotiations. The entire exercise only went as far as it did because of the skills brought to the table by President Clinton.

    2) And just to buttress the earlier point about making parties feel trusting and at ease – consider the analogy of interrogation. The interrogator isn’t negotiating for the same kinds of benefits, but you better believe it’s a negotiation. When you examine how actual professionals conduct interrogations, though (and not the ad hoc kind assembled by the inexperienced CIA after 9/11) you find that it’s all about confidence building, establishing trust or the appearance thereof, and the employment of deliberate guile. If you want to read about how it’s really done, take a look at this article from the Atlantic (circa 2003):

    Or the original link:

    To go right to the section in question, search on the name Koubi.

  29. mulp

    Let’s see, Fuld got paid nearly half a billion because he’s so good at leading a firm; the maximum a president of the largest economy gets is maybe fifty million if he lives long enough, so clearly Fuld’s leadership, strategy, management, negotiation skills are clearly greater than FDR, Eisenhower, JFK, LBJ, Nixon, Ford, Carter, Reagan, Bush, Clinton, Bush, and Obama combined.


    Isn’t that why all those people like Fuld heading up those banks get paid so much?

    By the way, Fuld might not have paid attention to Paulson ousting Corzine from Goldman for committing Goldman to $300M to bailout LTCM, while Lehman put in only $100M. Paulson seems to have believed bailing out LTCM was wrong, while Fuld might have assumed he would be bailed out the same way LTCM was bailed out.

    In the meeting Fuld had with the other bankers, the person missing was Paulson telling the bankers “ok guys, this is a rerun of LTCM; time to cough up $500M each to prop up Lehman to keep the system from going down.”

  30. davidTHEicke

    Hello Yves,
    Actually i only came across this article this week, hence the late comment.

    Assuming the above conversation was exactly as described by Mr Sorkin and compared with the account by Mr McDonald, this part of his book also assumed to be true, from ca mid of june, Mr Fuld was not really the top man in the house anymore. “Bart McDade, Mr. Fuld’s new No. 2″…was not his
    new number 2 by personal preference, rather the new number 2 grabbed the chair via an internal coup,here is the story:

    So i think, this whole conversation is not really comparable to a proper meeting, with the attendants of both parties at least internally strong, together and well prepared.

    Mr Fuld probably really didn’t know why he was there as he still,i guess, strongly believed LB will get bailed out, maybe he was compelled by the “new leaders” to try and do something?

    by the way: I think Mr McDonald’s book is trash but for the account of the internal coup, which i do believe happened as described.

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