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The Wall Street Journal – The Weekend That Wall Street Died
Ties That Long United Strongest Firms Unraveled as Lehman Sank Toward Failure
With his investment bank facing a near-certain failure, Lehman Brothers Holdings Inc.’s chief executive officer, Richard Fuld Jr., placed yet another phone call to the man he thought could save him. Mr. Fuld was already effectively out of options by the afternoon of Sunday, Sept. 14. The U.S. government said it wouldn’t fund a bailout for Lehman, the country’s oldest investment bank. Britain’s Barclays PLC had agreed in principle to buy the loss-wracked firm, but the deal fell apart. Bank of America Corp., initially seen as Lehman’s most likely buyer, had said two days earlier that it couldn’t do a deal without federal aid — and by Sunday was deep in secret negotiations to take over Lehman rival Merrill Lynch & Co. Desperate to avoid steering his 25,000-person company into bankruptcy proceedings, Mr. Fuld dialed the Charlotte, N.C., home of Bank of America Chairman Kenneth D. Lewis. His calls so far that weekend had gone unreturned. This time, Mr. Lewis’s wife, Donna, again picked up, and told the boss of Lehman Brothers: If Mr. Lewis wanted to call back, he would call back.
Comment Here is a great passage we present without comment:
Sunday, Sept. 14
A few hours later, at 8 a.m., Mr. Thain arrived at the Time Warner Center for a second one-on-one meeting in Mr. Lewis’s corporate apartment. Over coffee, Mr. Thain made his case for a strong price for Merrill despite its stock’s recent fall.
At the same time, Merrill officials were huddled with Goldman bankers. Some members of Merrill’s team doubted that Goldman could save their firm by taking a 9.9% stake. Pete Kelly, a top Merrill lawyer, also had his reservations about letting rival Goldman see his firm’s books. Still, the sides set a late-morning meeting at Merrill’s offices.
At 9 a.m., the chiefs of finance arrived again at the New York Fed for a second day of meetings. By the time Mr. Thain arrived, the Merrill chief had a number of options in his back pocket.
Rolling up to the meetings at around the same time was Goldman’s chief, Mr. Blankfein. A Goldman aide, referring to days of meltdowns and meetings, carped to Mr. Blankfein: “I don’t think I can take another day of this.”
Mr. Blankfein retorted: “You’re getting out of a Mercedes to go to the New York Federal Reserve — you’re not getting out of a Higgins boat on Omaha Beach,” he said, referring to the World War II experience of a former Goldman head. “So keep things in perspective.”
We have a slightly different take on the meaning of the Lehman failure. Below is an excerpt from our December 11 conference call transcript:
A lot of people would argue that Lehman Brothers was the mistake that they made that caused the System to fall apart. But I would actually argue that it was part of a larger hole.
The week before Lehman Brothers, they nationalized Fannie and Freddie, and they bankrupted preferred shareholders. They made a political decision that preferred shareholders had to be bankrupted. They made a political decision to let Lehman go and see what happens. If they bailed out Lehman, then they probably would have done the same thing with AIG, let them go and see what happens two days later. If they bailed out both of them, then they probably would have let WaMu fail.
But the problem was that, over that period, they bankrupted shareholders and let shareholders fail. They bailed out some shareholders in AIG. And in the original terms of the deal at LIBOR plus 850, plus warrants for 80 percent of the company, I thought that it was nothing short of extortion.
In the case of WaMu, TPG owned WAMU and was trying to find a buyer for WAMU. And in the middle of the process, the FDIC stepped in and said, “You know what? This isn’t going to work. We’ll just give the company to JP Morgan,” just out of the blue.
So the problem is the question of, “Will stocks give you a good return?” It’s kind of like the argument that you have when investing in emerging markets. You have to trade off growth for rule of law. And the problem, I believe, is that we have so damaged rule of law, as to question, “If I buy into a financial firm, then what are my prospects that I am actually the owner of the firm?” This is why I think that Citibank was on its was to zero a couple of weeks ago before we had to bail them out again. This is because the minute that a financial firm runs into trouble, the perception is, “Uh-oh, the Treasury or Hank Paulson might step in and take the company away from me, and wind up giving me nothing. So I better get out now, even if the stocks hit $4 from $16, because it’s still $4. He could announce a deal over the weekend, where I get nothing. He’s done that a couple of times already.”
So we need to get past that. We need to have people say, “I am comfortable in investing in the Market, and I am comfortable that, as the owner of this company, I still have certain rights.” We need that more in financial firms than anything else because only then can we really get the financial markets to expand and then get lending to come back. But we are well away from that right now. Investing in a financial firm is a minefield because we don’t know what the Government is going to do the next time that a financial firm runs into trouble.
The announcement of what they did with Citi was a better deal than the previous ones. But we’ve got a history over the last three months that we are not sure. So it’s going to take some time before we can move forward.
So, yes, the Stock Market might provide some good places. But until we get the confidence to put our money in financials, then I think that that big cash hoard is going to sit on the sidelines.
A last thought for you – maybe the change of administration might do it.