Too Big to Fail [10]
As Lehman’s stock continued to plummet, Fuld was second-guessing not only this decision but countless others. He had known for years that Lehman Brothers’ day of reckoning could come—and worse, that it might sneak up on him. Intellectually, he understood the risks associated with cheap credit and borrowing money to increase the wallop of your bet—what is known on the Street as “leverage.” But, like everyone else on Wall Street, he couldn’t pass up the opportunities. The rewards of placing aggressively optimistic bets on the future were just too great. “It’s paving the road with cheap tar,” he loved to tell his colleagues. “When the weather changes, the potholes that were there will be deeper and uglier.” Now here they were, potholes as far as the eye could see, and he had to admit, it was worse than he’d ever expected. But in his heart he thought Lehman would make it. He couldn’t imagine it any other way.
Gregory took a seat in front of Fuld’s desk, the two men acknowledging each other without uttering a word. Both leaned forward when CNBC ran a crawl along the bottom of the screen asking: “Who Is Next?”
“Goddamit,” Fuld growled as they listened incredulously to one talking head after another deliver their firm’s eulogy.
Within an hour, Lehman’s stock had plunged by 48 percent.
“The shorts! The shorts!” Fuld bellowed. “That’s what’s happening here!”
Russo, who had canceled his family’s vacation to Brazil, took the seat next to Gregory. A professorial sixty-five-year-old, he was one of Fuld’s few other confidants in the firm besides Gregory. On this morning, however, he was fanning the flames, telling Fuld the latest rumor swirling around the trading floor: A bunch of “hedgies,” Wall Street’s disparaging nickname for hedge fund managers, had systematically taken down Bear Stearns by pulling their brokerage accounts, buying insurance against the bank—an instrument called a credit default swap, or CDS—and then shorting its stock. According to Russo’s sources, a story making the rounds was that the group of short-sellers who had destroyed Bear had then assembled for a breakfast at the Four Seasons Hotel in Manhattan on Sunday morning, clinking glasses of mimosas made with $350 bottles of Cristal to celebrate their achievement. Was it true? Who knew?
The three executives huddled and planned their counterattack, starting with their morning meeting with nerve-wracked senior managers. How could they change the conversation about Lehman that was going on all over Wall Street? Every discussion about Bear, it seemed, turned into one about Lehman. “Lehman may have to follow Bear into the confessional before Good Friday,” Michael McCarty, an options strategist at Meridian Equity Partners in New York, told Bloomberg Television. Richard Bernstein, the respected chief investment strategist for Merrill Lynch, had sent out an alarming note to clients that morning: “Bear Stearns’s demise should probably be viewed as the first of many,” he wrote, tactfully not mentioning Lehman. “Sentiment is just beginning to catch on as to how broad and deep the credit market bubble has been.”
By midmorning Fuld was getting calls from everybody—clients, trading partners, rival CEOs—all wanting to know what was going on. Some demanded reassurance; others offered it.
“Are you all right?” asked John Mack, the CEO of Morgan Stanley and an old friend. “What’s going on over there?”
“I’m all right,” Fuld told him. “But the rumors are flying. I’ve got two banks that won’t take my name”—Wall Street–speak for the stupefying fact that the banks wouldn’t trade with Lehman. The newest rumor was that Deutsche Bank and HSBC had stopped trading with the firm. “But we’re fine. We’ve got lots of liquidity, so it’s not a problem.”
“Okay, we’ll trade with you all day,” Mack assured him. “I’ll talk to my trader. Let me know if you need anything.”
Fuld began reaching out to his key deputies for help. He called the London office and