The date: September 19, 2008
The players: Henry Merritt Hank
Paulson Jr — The 74th treasury secretary of the US, Neel T Kashkari — assistant treasury secretary for financial stability, Kevin I Fromer — assistant treasury secretary for legislative affairs.
The motive: To decide on the amount of money to ask the US Congress for the bailout of the collapsing American financial system.
The dialogue:
“What about $1 trillion?” Kashkari said.
“We’ll get killed,” Paulson said grimly.
“Okay,” Kashkari said. “How about
$700 billion?”
“I don’t know,” Fromer said. “That’s better than $1 trillion.”
“There’s around $11 trillion of residential mortgages, there’s around $3 trillion of commercial mortgages, that leads to $14 trillion, roughly 5% of that is $700 billion,” said Kashkari.
And that, ladies and gentlemen, is how the big round number, for the biggest financial bailout in history of mankind was decided.
“The number was made up out of thin air. It was literally Hank Paulson and his team sitting around in a room trying to figure out how much money they could possibly get the Congress to give them,” says Andrew Ross Sorkin, reporter and columnist from The New York Times and most recently, the author of the best selling, fly in the wall account of the initial days of the financial crisis: Too Big To Fail - Inside the Battle to Save Wall Street (The dialogue above has been reproduced from the book). In this interview, Sorkin speaks to DNA on the days leading to the start of the financial crisis and why Wall Street still hasn’t learnt its lessons. Excerpts:
Why did Paulson and Geithner let Lehman Brothers go under? They saved just about everything before and after that...
There were a couple of reasons. The first piece of it was that frankly, they had run out of time and that there was enormous amount of political pressure that Paulson, in particular, was under to not be Mr Bailout. On the fateful Sunday (September 14, 2008) what happened was once Barclays (which was trying to buy out Lehman Brothers) was gone, Paulson thought he had run out of options. Also they (Paulson and Timothy Geither, then president of the Federal Reserve Bank of New York, now Paulson’s successor at the treasury) determined that there was no collateral Lehman had, so they felt that they couldn’t lend.
I also think there was an element of frustration with Dick Fuld (the CEO of Lehman Brothers) and with Lehman Brothers. Paulson had been pushing on them for months and months and months to do something and he felt that they hadn’t. In the final pieces, the regulators let Lehman fail because the CEOs involved in the rescue effort who were around the table that weekend at the Federal Reserve, all were telling the regulators that they had lowered their exposure, and that it would be okay, and that the world would survive without Lehman Brothers.
Why was Lehman unable to do a deal on its own with Warren Buffett, or Barclays Bank, which was interested in buying them or for that matter even Bank of America, which ultimately bought Merrill Lynch?
The problem for Lehman was that they started looking for a buyer way too late. And they didn’t want to accept a low price. There were probably opportunities to have sold the firm or got in a major equity investment much earlier in the year 2008, and would have been even better if they had been looking in late 2007, when some of the other banks raised money. But they didn’t. So by the time they really started looking, the market had turned sour and there were many questions about the way they valued their books.
And what about Warren Buffett?
There was this secret conversation back in March 2008, where Warren had spoken about trying to buy a stake in Lehman Brothers and Fuld did not want to do it and frankly, Buffett did not want to do it either because the terms weren’t going to be good enough, but he was also worried about the business. Everybody was worried about what was on the books of Lehman Brothers. Nobody knew how bad it really it could be.
Would the crisis have panned out differently if Lehman had been rescued?
There is no question in my mind that the greatest mistake that the government made in all of this was letting Lehman Brothers go. Had they not let Lehman go under, the crisis would not have been as nearly as deep. That is not to say that there would have been no crisis at all, because remember, AIG was going to be next and that they would have had to deal with one of these. And by the way, it’s possible that if they had bailed out Lehman Brothers, they would have felt that they couldn’t have bailed out AIG. So it is all very difficult to judge what would have happened, because it is hypothetical. But letting Lehman go on its own was by miles the biggest mistake.
How did the government come around to rescuing AIG a few days after they let Lehman go under?
The reasons for saving AIG were much clear than the reasons for saving Lehman Brothers. AIG had so many counterparties there was a feeling that if you let AIG go, you were going to put a dozen other banks and institutions out of business and really put pressure on economies not just in the US, but around the world.
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