Last Man Standing (43 page)

Executives in J.P. Morgan’s investment bank first became antsy about Lehman’s collateral in June. The investment bank’s chief risk officer, John Hogan, called Lehman’s head of risk management, Chris O’Meara, and asked for $5 billion in additional collateral. Lehman dragged its feet, and not until August did it hand over a package of loans that it said was worth $5 billion. JPMorgan Chase’s executives disputed that valuation, and the debate was never actually resolved.

By the time September rolled around, the JPMorgan Chase executives were even more nervous about Lehman’s collateral, and the company’s
chief risk officer, Barry Zubrow, demanded another $5 billion. It was late in the day on Thursday, September 4, Zubrow recalled, and he was dressed and ready to head to the U.S. Open to watch a quarterfinal match between Andy Roddick and the Serbian Novak Djokovic. That $5 billion never made it to JPMorgan Chase.

On Sunday, September 7, the government seized Fannie Mae and Freddie Mac, placing these giants—which held or guaranteed $5.4 trillion in mortgages—in conservatorship. Dimon was meeting with his operating committee in Washington when the news broke, and different groups of JPMorgan Chase’s executives had made calls on Secretary of the Treasury Hank Paulson and various leaders of the House and Senate. Dimon and Dick Fuld—Lehman’s CEO—had a brief conversation in which Dimon told Fuld that if the terms were cheap enough, his firm
might
be interested in providing funding by buying some preferred shares of Lehman. But he made no promises.

On Tuesday, September 9, the investment bank’s co-CEO Steve Black—who was in Washington with Dimon—decided he needed to speak to Fuld as well. “Our intraday exposure was massive and we didn’t have enough collateral to support it,” Black recalls. “With what was going on in the markets, any rational human being would say, ‘Holy shit, that’s not right.’ So I called Dick and told him we needed more collateral to continue to be comfortable with Lehman. We even worked with them to create a mechanism so it didn’t have to come right out of their liquidity by agreeing to a three-day recall.” Black ultimately asked for
another
$5 billion, and after some haggling by Fuld, agreed to take $3 billion.

Fuld was still largely in denial at this point, perhaps because the government had stepped in to help Bear, so why wouldn’t it do the same for Lehman if the situation came to that point? When Fuld spoke to Black on Tuesday, Black told him that one of his few remaining options looked to be to get a consortium of investors together to rescue the firm, as had been done for Long-Term Capital Management. But the Federal Reserve would need to get involved in herding those cats, and Black suggested that Fuld should be getting those conversations going as
soon as possible. Fuld replied that such a move would be terrible for Lehman’s shareholders, and he didn’t see how he could go ahead with it. “Dick, no one is going to help you keep Lehman Brothers in business just to be good guys,” Black said. “They’re going to help you because it’s in their own self-interest. For that to happen, your shareholders are going to have to pay the ultimate price.”

“So then why should I do it?” asked Fuld. “I didn’t say you should do it,” Black replied. “But I’m telling you if you’re getting close to the brink, that’s what you should be thinking about.” Fuld told Black that he had been talking to Citigroup’s CEO, Vikram Pandit, about a possible investment from Citi, and that Citi had a team coming over to comb through Lehman’s books that night. Did Black want to send his own team? “I’ll send some people over,” Black replied, “but I don’t think there’s going to be anything we can do for you.” That evening the head of investment banking, Doug Braunstein, and the risk chief, John Hogan, went to Lehman and came back confirming Black’s inclination. There was nothing JPMorgan Chase would—or could—do.

Fuld told Black that he had decided to “preannounce” the company’s third-quarter results the next day, including the fact that the investment bank forecast a $4 billion loss in the quarter. Black was flabbergasted. “They had nothing to say,” he recalls. “They had no plan. They got on the call and said that they didn’t need any new capital, but it was obvious that they did. And they had some plan to spin off their real estate holdings, but that wasn’t until February, and people needed to hear some good news right then and there. That was the beginning of the end.” The next day, credit default swaps on the company’s debt went for $800,000, higher than those of Bear Stearns right before its demise.

On Friday, September 12, Jane Buyers-Russo, head of JPMorgan Chase’s investment banking team that covered financial institutions, called Lehman’s treasurer Paolo Tonucci and told him that JPMorgan Chase no longer felt comfortable lending to Lehman Brothers on an unsecured basis and that the company wanted the $5 billion Zubrow had requested, and wanted it now. Other customers, lenders, and trading partners were doing exactly the same thing, and by the end of the
day, Lehman was facing exactly the same problem Bear had run into six months before. If it didn’t find an investor willing to give it a substantial infusion of cash over the weekend, it was likely to fail.

That night, Lehman’s bankers huddled with their advisers at Lazard. The next morning, Wall Street’s chieftains were once again summoned to the Federal Reserve Bank of New York, and Dimon, Steve Black, and Barry Zubrow all participated in all-day meetings on both Saturday and Sunday with Goldman’s Lloyd Blankfein, Morgan Stanley’s John Mack, and Merrill’s John Thain. The goal was to either find a buyer for Lehman or concoct a solution that would soften the blow of a bankruptcy. “There will be no bailout for Lehman,” Paulson told the CEOs. “The only possible way out is a private-sector solution.”

A logical buyer of Lehman was someone who wanted a major investment bank and didn’t have one. With Bear Stearns, JPMorgan Chase had
two
investment banks, and so there was no interest whatsoever coming out of 270 Park Avenue. “For us, the close-down would have been astronomical,” said Dimon, referring to the mass layoffs and shuttering of duplicate facilities such a deal would have necessitated. Although no one officially acknowledged that both Britain’s Barclays PLC and Bank of America were taking a very serious look at buying Lehman, Dimon, like everyone in the room, knew the scuttlebutt. What Paulson and Geithner asked the assembled group to consider was another solution in case no deal came to pass. Could the banks put together a financing facility, for example, or a loss-bearing facility of some sort that would allow Lehman to continue functioning?

The meeting was nearly a reprise of the meetings about Long-Term Capital Management a decade previously. Three people were at both meetings—Dimon, John Thain (then representing Goldman Sachs), and Morgan Stanley’s chief, John Mack. The difference for Dimon was that in 1998, he was there as Sandy Weill’s emissary. In 2008, he was his own man.

At one point, there was talk of a $70 billion financing package. At another, every CEO in the room was asked how much pain his company could bear if forced to eat a portion of Lehman’s losses. “Any one of us would have put in $500 million or some number like that, just to stop
the event from happening,” recalls Dimon. “We knew it was going to be painful for the Street and for the world. The problem was, even if we’d gotten to some number, it wouldn’t have been big enough to stop it from happening. Because it was unwinding. People were pulling their money out.”
Fortune
later reported that Dimon chastised two reluctant participants, Bank of New York and BNP-Paribas: “You’re either in the club or you’re not. And if you’re not you’d better be prepared to tell the secretary why not.”
Fortune
reported that when John Mack later suggested letting Merrill fail as well, Dimon is said to have replied, “John, if we do that, how many hours do you think it would be before Fidelity would call you up and tell you it was no longer willing to roll your paper?”

Bank of America eventually pulled out of the running for Lehman when it snapped up Merrill Lynch in a $50 billion deal that ended a 94-year run for the investment bank. The sole remaining buyer, Barclays, ran into regulatory headwinds and was forced to end its pursuit of Lehman on Sunday, September 14.

Dimon called a board meeting that evening, and told the members that Lehman’s end was near. “We think we are going to be fine, in terms of our bank,” he told his directors, according to the author of
Fool’s Gold
, Gillan Tett. “But it’s going to be very, very ugly for others. Worse than anything that any of us have seen in our lives.” Shortly after midnight, the 158-year-old Lehman—which had been founded as a dry goods store and cotton trader in Montgomery, Alabama—filed for bankruptcy. “As long as I am alive this firm will never be sold,” Fuld had said in 2007. “And if it is sold after I die, I will reach back from the grave and prevent it.” He was right. It was not sold—it went bust. The world’s stock markets crashed as a result. The Dow Jones fell by 504 points on Monday, September 15. (Barclays later bought a number of Lehman’s assets, but not the entire firm.)

Lehman’s failure set off a chain reaction. Reserve Primary Fund, a $64 billion money market fund that had been heavily invested in Lehman’s debt, broke the buck—its net asset value fell below the crucial level of $1 per share—and nearly collapsed, sparking mass withdrawals. About $500 billion was withdrawn from money market funds in the two weeks that followed Lehman’s collapse. On Tuesday, September 16,
the government chose to rescue the insurance giant AIG with an $85 billion loan, just one day after Lehman had been deprived of such largesse. (By April 2009, the total amount thrown at AIG was $162.5 billion and climbing.) The firm was later mocked on
Saturday Night Live
for sending executives on a swank retreat just days after receiving the bailout funds. The next day, the Dow fell another 499 points. Investors, it seemed, were losing their last vestiges of faith in the system.

On Friday, September 19, Hank Paulson and the Fed’s chief, Ben Bernanke, floated a bailout proposal to Congress that was not rejected out of hand. But the next day, Paulson sent a
three-page
document to the House of Representatives asking for hundreds of billions of dollars, with little or no detail as to how those funds might be spent. On Monday, Congress rejected the flimsy plan, sending the Dow Jones down another 778 points. That same day, Goldman Sachs and Morgan Stan-ley—the last two investment banks—found themselves the object of some very unwanted attention, and decided the time was ripe to convert to bank holding companies in order to secure permanent access to Fed funding in times of stress.

With Goldman and Morgan Stanley choosing, in effect, to become banks, the era of investment banking had come to an end. Of the five major investment banks, three were now gone (Bear, Lehman, and Merrill) and two had thrown in the towel (Goldman and Morgan Stanley). An era of unregulated excess appeared to have come to a close.

Despite all its collateral calls, JPMorgan Chase ended up undercollateralized after Lehman’s failure. (Lehman turned over $8 billion worth of securities in the final analysis.) Still, Wall Street churned with chatter about how Jamie Dimon had sent Lehman over the edge. Steve Fishman of
New York
magazine later reported that Fuld told an associate, “They drained us of cash. They fucked us.” Another of Lehman’s executives laid the blame squarely on Dimon himself. “Jamie Dimon was doing whatever was in his own personal interest. He knew the consequence [of the collateral calls] was a huge blow to us, and he didn’t give a shit.”

“That’s not true,” says Dimon. “I spoke to Dick periodically over those last couple of weeks, and not once did he complain. You have to
keep in mind that everyone and their mother was raising collateral on other people. And some of our collateral calls weren’t even for us—they were for investors that we represented. If Dick had ever called Steve Black or me and said, ‘Hey, this is unfair,’ or ‘Give us a little more time,’ we absolutely would have considered it.”

Other executives at JPMorgan Chase are less circumspect. “They didn’t go bankrupt because of us,” said one. “They went bankrupt because they did nothing for six months, and then did a fucked-up conference call. And then they try to blame David Einhorn, the Fed, and us. It’s pathetic.”

Neither Dimon nor Black thinks Fuld actually said what
New York
had reported. “We didn’t force everything that we could have,” says Steve Black. “We could have stopped financing them, but we worked with them. The idea that we put Lehman out of business is just absolute horseshit.”

With the perspective of time, former Lehman executives acknowledge this. One investment banker who was subsequently hired by Nomura Holdings in London expressed the tangled emotions surrounding the demise of the firm. “On the one hand, you could say J.P. Morgan was protecting their interests,” he said. “But on the other hand, they were fully aware of the implications of what they were doing and you might say they bit off their nose to spite their face. By doing what they did, they knew they were forcing us into a bankruptcy or someone else’s hands. One way or another, they were taking out a competitor. But I bet they never thought we’d go bankrupt. I don’t think anybody had any indication that Paulson would let us go. My sense is that there’s not a lot of animosity toward Dimon, though. Maybe he was a dick for doing it. Maybe he made a mistake. But would anybody else have made a different decision? I don’t think they would have. They had fiduciary duties
and
they had the opportunity to step on the throat of a competitor. This isn’t Little League, so you do it if you can.”

In another, less widely noted, example of JPMorgan Chase flexing its muscles, in September the company briefly stopped doing business with Chicago’s Citadel Investment Group because of excessive poaching of JPMorgan Chase’s employees by Citadel. After it hired a sixth person,
the cohead of the investment bank, Steve Black, called Citadel’s head, Ken Griffin, and told him that JPMorgan Chase no longer wanted anything to do with Citadel. One day later, when it appeared that the market didn’t buy the argument about poaching—concluding instead that Citadel might be in deep trouble and JPMorgan Chase was just the first to know—Black rescinded the no-business order, but said that it would be reinstated if Griffin made one more hire. “Steve and I thought, ‘Oh, God, this is not the right time for this,’” recalls Dimon. “It was intramural politics, but people were reading it the wrong way. It just wasn’t the right time to make a stink on our part.”