• Choose a category
• All
• Classic-Fiction

folks at Treasury quickly renamed "ShitCo"--worried him.

"They came up with this goofy idea of the SpinCo," he recalled a year later in a room in

Johns Hopkins University in Washington, D.C., his brow furrowing with puzzlement. "I

just kept questioning Dick: 'Why do you think you can raise equity in your bad real estate

if you can't raise it in your company?' "

In other words, how could they expect to raise the money to pay ShitCo's prodigious bills

without committing securities fraud? The only remotely viable option the firm had

floated was through the sale of the asset management firm NeubergerBerman. But the

bankers had made clear that selling that was considered their funding option of last resort.

Essentially, what Lehman and/or SpinCo needed in the short term was an unlimited line

of cheap credit at the Federal Reserve discount window.

"Main Street" banks, with depositors, bank branches, and ATM machines, have access to

the discount window because their depositors are insured by the Federal Deposit

Insurance Corporation (FDIC), which in turn has the authority to seize, take over, and sell

off banks whose managers get too sloppy with the books. It was a long shot, but within a

matter of months both Goldman Sachs and Morgan Stanley would be scrambling to do

the same thing. So, with the help of a Sullivan & Cromwell lawyer, H. Rodgin "Rog"

Cohen, a Lehman team drafted a proposal called "The Impact of Becoming a Bank."

Lehman's SpinCo team--Fuld, Russo, McDade, Lowitt, Freidheim, Lessing, and Lehman

treasurer Paolo Tonucci--floated the idea on a conference call in July with the president

of the New York Federal Reserve Bank, Timothy Geithner. He instantly vetoed it.

On the fly, one person on the call remembers, Russo stepped in. "If you don't want us to

convert to a bank holding company," he pleaded with Geithner, "then let us make a onetime election, where we move certain assets, our mortgages and commercial real estate.

Move those assets to our Utah bank. We then can post to the window. And it's over. It's

over."

"You can formally apply," Geithner said tersely, according to someone on the call.

But there was little doubt that Lehman was light-years from meeting the qualifications

required to become a bank holding company. Approving the firm's application would

have hurt the Fed's reputation, according to a senior source there.

(It didn't help that Russo wasn't taken particularly seriously by government officials, who

called him "Radio Tom" for his penchant for babbling. "He transmits but he doesn't

receive," said one former Treasury official, who remembers holding the phone at arm's

length during some of Russo's more tedious monologues.)

Lehman applied, but the whole thing "was theater on their part," someone close to

Federal Reserve Chairman Ben Bernanke later said. Their application was rejected.

With the benefit of hindsight, however, Russo's idea looks pretty smart, concedes a

former Treasury staffer. "He was absolutely right to want to become a bank holding

company." But the Fed wasn't in the mood for such "outside-the-box" thinking just weeks

after the Bear Stearns bailout. What it really wanted Lehman to do was the same thing

Paulson wanted Lehman to do: Sell. Now.

But they also knew there were few, if any, buyers. Who would want to take on those

toxic assets?

"They went around the whole world, trying to find investors," Paulson said a year later. "I

essentially knew that they had been to everybody you could think of. No one wanted to

invest in them."

"If there were buyers for an investment bank, there were other firms with more attractive

franchises. With Bear Stearns, we had been very fortunate to have JPMorgan there as a

buyer.

And even if a buyer miraculously appeared, would Fuld actually commit to a deal that he

thought undervalued Lehman? Paulson was not sure that he would.

"Although Lehman was a storied old firm with a rich heritage, Dick was the guy who

had, in many ways,