• Choose a category
• All
• Classic-Fiction

connected Lehman to financial institutions and investors throughout the world. He feared

that these instruments, which usually served as risk mitigators, had the potential to

become transmitters of risk, and exacerbate the crisis.

"I didn't try, initially, to go into the gory details, and neither did Bernanke," he said later.

"I didn't want to scare the American public and make the panic worse, and create a bigger

economic hole because people were terrified."

By Monday afternoon, rumors were swirling about American International Group (AIG),

the market's single biggest seller of credit default swaps.

With AIG's liquidity hole topping $85 billion on Monday afternoon, it had to be bailed

out at a very heavy price.

Quickly, the Fed hammered out a take-it-or-leave-it deal: The government would get an

80 percent stake in the firm, its short -term line of credit with the Fed came at a doubledigit interest rate, and CEO Bob Willumstad--who had taken the helm only months

earlier in an attempt to engineer a last -minute turnaround--was out, to be hastily replaced

by Ed Liddy, the former CEO of Allstate Insurance.

But the quick nationalization of AIG did not calm the markets, which found Paulson's

about-face on bailouts almost as troubling as the magnitude of the taxpayer subsidies

needed to plug the gaping holes.

And how big were all those holes? No one knew. The worldwide market for mortgagebacked securities was about $1.4 trillion, and those had been effectively dead for months.

But by Tuesday, all the markets were dead.

Despite full access to the Fed's discount window, the safest banks and brokerages weren't

making overnight loans to one another--and in the rare event that they did, the interest

rates they were charging one another were several percentage points higher than they 'd

ever been before.

News of the Reserve Primary Fund's exposure to Lehman Brothers' debt had flooded the

money market industry with redemption demands. And at Washington Mutual, one of the

most notorious banks to have gotten in on the boom in subprime mortgages, depositors

were lining up around the block to close their accounts. (Some even apologetically

brought baked goods to their favorite tellers.)

Paulson now saw there would be a run on the remaining securities houses, Goldman

Sachs and Morgan Stanley. On Sunday, September 21, the Fed converted them to bank

holding companies--which was what Lehman had asked for just weeks earlier and been

denied.

But the mayhem continued, and Paulson had to find another solution. He reasoned that

the only way to stem the panic would be for the government to start buying huge chunks

of mortgage-backed securities.

On September 20, Paulson submitted to Congress his plan--drafted in bullet points on

three sheets of paper--to buy up these toxic assets. Condemned on both sides of the aisle

as a tin-eared, dictatorial document, it was rejected nine days later by the House. Another

four days after it had been rewritten (and the markets had meanwhile swooned), the bill

had grown to 451 pages and it passed--just barely. On October 3, President Bush signed

into law the Emergency Economic Stabilization Act, more commonly known as the

Troubled Asset Relief Program (TARP), which included Paulson's suggestion--to the

tune of $700 billion.

No one was happy. The country was now in a recession and taxpayers appeared to be

paying for the lavish lifestyles of the clowns on Wall Street who had dragged them into

this mess.

It didn't appear that the public's opinion of bankers could get any worse, but it did when

Dick Fuld testified before Congress on October 6.

He did not help himself by peering over his half -moon spectacles rather than looking

through them (he is very short-sighted), but both the language and the style of his

testimony were appalling.

"This is a pain that will stay with me the rest of my life," he said about Lehman's fall. But

he was far from ready to admit that the wounds were self-inflicted. Instead he