Paulson's Book on Financial Crisis: Insights on Lehman Collapse

One of the most awaited books on the financial crisis has to be former treasury secretary Henry Paulson's "On the Brink." He had the best seat in the house as the crisis unfolded. I am particularly interested in the events surrounding the collapse of my former employer, Lehman Brothers, and look forward to reading the book. Here are some extracts from the WSJ to whet your appetite:
Saturday, September 13, 2008
I called (Bank of America CEO) Ken Lewis, who reported that after closer inspection his people now believed that Lehman's assets were in even worse shape than they had thought the previous evening. It was increasingly obvious that he didn't really want to buy Lehman.I joined Tim [Geithner] in his office for a conference call with Barclays at about 8 a.m. Bank Chairman Marcus Agius and CEO John Varley were on the line from London, and (President) Bob Diamond was at Barclay's midtown Manhattan offices. Varley said they were working hard on a possible deal, but had serious concerns about some of Lehman's assets, and indicated Barclays would need to leave $52 billion of them behind. If Barclays gave us its best offer that day, we believed we could deliver a private-sector consortium that would fund whatever shortfall there was. Even as we spoke, the leaders of virtually the entire banking industry were assembling downstairs at the Fed.


We were scheduled to meet the Wall Street CEOs at 9 a.m. But just before then (Lehman Chairman and CEO) Dick Fuld called. I briefed him on my unpromising conversation with Lewis and told him that it was more important than ever that he work with Barclays. He expressed great disappointment, bordering on disbelief, at BofA's findings.

Addressing the CEOs, I tried to be totally open. "We're working hard on a transaction, and we need to know where you guys stand," I said. "If there's a capital hole, the government can't fill it. So how do we get this done?"
I can only imagine what was going through their minds. These were smart, tough businessmen and they were in a difficult spot. We were asking them to rescue one competitor by helping to finance its sale to yet another competitor.
(Morgan Stanley CEO) John Mack wanted to know why the government couldn't arrange another assisted transaction, like the Bear Stearns rescue. Tim quickly dismissed the possibility. "It's not a feasible option," he said. He made clear that the Fed could not lend against Lehman's dubious assets.
By evening the CEOs had agreed to support in principle a proposal under which Barclays would leave behind a pile of bad real-estate and private-equity investments and wipe out Lehman's preferred and common shareholders. To make the deal work, Barclays wanted the consortium of Wall Street firms to agree to loan up to $37 billion to a special purpose vehicle that would hold the assets.
I left the New York Fed before 9 p.m. optimistic about the prospects for a deal.

Sunday, September 14, 2008Tim spoke with Diamond after the Barclays board meeting, at 7:15 a.m. New York time, and Bob warned him that Barclays was having problems with its regulators. Forty-five minutes later, I joined Tim in his office to talk with Diamond and Varley, who told us that the FSA (Financial Services Authority of the U.K.) had declined to approve the deal. I could hear frustration, bordering on anger, in Diamond's voice.

We were beside ourselves. This was the first time we were hearing that the FSA might not support the deal. Barclays had assured us that they were keeping the regulators posted on the transaction. Now they were saying that they didn't understand the FSA's stance.
At 11 a.m., I went back upstairs, and soon got on the phone with (British Finance Minister) Alistair Darling, who wanted a report on Lehman. I told him we were stunned to learn that the FSA was refusing to approve the Barclays' transaction.

He made it clear, without a hint of apology in his voice, that there was no way Barclays would buy Lehman. He offered no specifics, other than to say that we were asking the British government to take on too big a risk, and he was not willing to have us unload our problems on the British taxpayer.

It was shortly before 1 p.m. when Tim, (Security and Exchange Commission Chairman) Chris (Cox) and I addressed the CEOs again. I was completely candid. Barclays had dropped out, and we had no buyer for Lehman.

"The British screwed us," I blurted out, more in frustration than anger. I'm sure the FSA had very good reasons for their stance, and it would have been more proper and responsible for me to have said we had been surprised and disappointed to learn of the UK regulator's decision, but I was caught up in the emotion of the moment.

Back in my temporary office on the 13th floor, a jolt of fear suddenly overcame me as I thought of what lay ahead of us. Lehman was as good as dead, and AIG's problems were spiraling out of control. With the U.S. sinking deeper into recession, the failure of a large financial institution would reverberate throughout the country—and far beyond our shores. It would take years for us to dig ourselves out from under such a disaster.