In FED We Trust Read Online Free Page B

1998 when the New York Fed had summoned the heads of Wall Street firms to prevent an untidy collapse of a hedge fund, Long Term Capital Management. That episode demonstrated how one large and leveraged institution, in this case a hedge fund that had recruited Nobel Prize-winning economists to hone its strategy, could threaten the entire financial system. But back then the Fed managed to cajole Wall Street firms into paying the tab; this time the problems were bigger and more widespread.
    Goldman and Credit Suisse, which had been working with Lehman for weeks, were assigned to look over Lehman’s commercial real estate assets to determine their worth. Everyone in the room believed their value to be far below the value Lehman had been carrying on its books. Their job was to look particularly at the assets no buyer would take, figure out “how big the hole is,” and devise some way to share the risk in order to get one of their competitors to buy the rest of Lehman.
    A third group was asked, in Geithner’s phrase, to “put foam on the runway” — that is, prepare for a Lehman bankruptcy.
    “Come back in the morning and be prepared to do something,” Geithner told them.
    Geithner and Paulson were asking a lot. They wanted the firms present to put in big bucks in the middle of a financial panic to strengthen a competitor, and they knew that Lehman wasn’t the end of the line. As the CEOs filed out of the conference room shortly before midnight, everyone was aware that even if Lehman were saved, big brokerage house Merrill Lynch and giant insurer AIG were next in line and perhaps Morgan Stanley, too. Or as Fed governor Kevin Warsh put it later: “We were running out of buyers before we were running out of sellers.”
    On Saturday morning, Bank of America executives told Paulson and Geithner that Lehman was in deeper trouble than they had realized just twenty-fourhours before: someone would need to take between $65 billion and $70 billion of smelly real estate assets if Bank of America were to buy the firm, it said.
    That was enough to convince Paulson, Geithner, and Warsh that Bank of America didn’t really want to do the deal. Their attention turned to Barclays, the British bank.
    All day Saturday, Paulson and Geithner talked in person and by phone with Barclays executives and fielded frequent calls from Lehman’s Fuld, who had been told to stay away. Paulson shuttled constantly between Geithner’s thirteenth-floor office and the first-floor conference room, where in excruciating detail he briefed executives from other firms on the latest developments.
    The group assigned to think through liquidating Lehman quickly concluded that their mission was impossible. So attention shifted toward “filling the hole,” somehow coming up with a way for a group of Wall Street firms to take the assets that Barclays didn’t want so a deal could be struck.
    But, the conversation made clear, no one was confident Lehman would be the last firm to be rescued. “If we’re going to do this deal, where does it end?” asked Morgan Stanley’s John Mack. Everyone knew AIG and Merrill Lynch were vulnerable. The big question hanging in the air: Would banding together to save Lehman reduce the odds that AIG or Merrill would also need rescuing, or were they in such deep trouble already that they would need rescuing anyway?
    To put pressure on the executives, Geithner emphasized the limits to the Fed’s and Treasury’s ability to shield them from the fallout of a Lehman bankruptcy. “You need to know,” Geithner told the CEOs, “that if we are unable to work out some solution, we do not have the capacity to insulate you or the system from the consequences.”
    The pressure from the government officials was intense. Paulson made it clear to Merrill Lynch’s John Thain — in front of his peers — that it was time for him to find a buyer. Paulson pulled Thain aside and said without nuance: find a buyer. Geithner reinforced the point.