The Devil's Casino_ Friendship, Betrayal - Vicky Ward [96]
need government assistance in July, Hank Paulson officially nationalized them six weeks
later, estimating that the cost of bailing them out would run around $200 billion.
It was finally clear even to the most casual observer that the housing and asset bubble had
burst--and that the damage would in no way be, as Federal Reserve chairman Ben
Bernanke had predicted a year earlier, "contained."
Observers had initially feared for Main Street's smaller community banks, but Fannie and
Freddie were also massive buyers and sellers of the mortgage-backed securities weighing
on the balance sheets of every Wall Street firm. If the two firms could go from getting a
clean bill of health from regulators in July to needing $200 billion six weeks later, what
did that foretell for everyone else with billions of dollars in mortgages on its books?
The question spooked James L. "Jamie" Dimon, the 53-year-old CEO and chairman of
JPMorgan Chase. Dimon learned first -hand the type of risk his more aggressive
competitors had piled on when he took over Bear Stearns in March. As the leader of
Lehman's official clearing bank--meaning cash and securities exchanges arranged by
Lehman actually took place at JPMorgan Chase--he was also partially privy to Lehman's
books.
Dimon had two disturbing conclusions: One, that Wall Street was so dependent on short term financing that any one of them could become the next Bear Stearns, and Two, that
he didn't have any more room on his balance sheet to rescue the next victim.
On Tuesday, September 9, right after the government seizure of Freddie and Fannie was
announced, Dimon reportedly sat down to lunch with Bernanke and warned him that he
was done bailing out banks. Dimon wanted to know if the Fed was ready to step in to
save Lehman.
"We' re working on a number of initiatives," Bernanke said vaguely. "We' re just trying to
stay ahead of this thing."
Dimon took the hint. If Lehman were to fail, JPMorgan would be stuck with those
securities and a massive loss of cash. So as a precautionary measure, it was going to need
to ask for more collateral from Lehman Brothers.
Dimon understood that any potential acquirer of Lehman would want at least some of the
potential losses subsidized by the Fed--what had come to be known as a "Jamie deal"
since he had gotten the central bank to guarantee $30 billion in Bear's bad loans back in
the spring. What few on Wall Street realized was that another Jamie deal would be
impossible to put together. The hole in Lehman's balance sheet was vastly bigger than
Bear's, and while the criticism of Paulson and Bernanke over the Bear Stearns deal had
largely come from the populist left, the Fannie-Freddie bailout had won them the enmity
of the right. (Their role in housing policy has long associated them with left -leaning
advocacy groups like ACORN.)
In other words, Hank Paulson was out of friends on Capitol Hill.
On the Tuesday afternoon after Dimon's lunch at the Fed, Dimon instructed his
investment banking chief, Steve Black, to call Dick Fuld. The gist of the call, Black later
said, was to gently warn Fuld that unless he could find a buyer fast, Lehman had to start
thinking in terms of arranging a Long-Term Capital Management style rescue.
And by the way, JPMorgan Chase was going to need another $5 billion in collateral.
When Lehman's senior management heard about JP Morgan's collateral calls they went
berserk. After consulting with McDade, Fuld decided there was only one way he could
survive: He would preannounce Lehman's earnings results and launch SpinCo into the
world in hopes of placating the market.
One person involved explained it this way: "In terms of capital, the feeling was that we
would have a capital hole at the time we did SpinCo, which would have been in the first
quarter of 2009. But we had the time between then and the first quarter of the next year. .
. . We could either fill it with the sale of Neuberger, which nobody wanted to