Too Big to Fail [102]
Gelband looked at him quizzically and replied, “No, no. This has to do with Bart.”
On the Fourth of July weekend, Hank and Wendy Paulson were walking along the beach on Little St. Simons Island when they spotted a loggerhead sea turtle laying its eggs in the sand. For nature lovers like the Paulsons, it was an extraordinary moment, and they stopped to marvel at the sight. Paulson had flown down to the tiny island, just off of Georgia’s coast and some sixty miles south of Savannah, to relax with his wife after what had seemed like a whirlwind of travel and work. The island, a sanctuary for unusual birds and reptiles, is where he liked to go to clear his head; he liked it so much that the Paulsons bought up three quarters of the ten-thousand-acre property starting in 2003 for $32.65 million.
The European trip had been a success. His speech in London about the need to build a safety net for investment banks in order to prevent a failure from reverberating throughout the system had attracted a great deal of notice, and at the reception afterward at 10 Downing Street, Gordon Brown, the prime minister, congratulated him “for thinking ahead and getting out in front of the problem.”
Still, as Paulson walked the shore, he was finding it difficult to unwind. He continued to have deep misgivings about the economy in the near term and had stated as much on his trip: “The U.S. economy is…facing a trio of headwinds: high energy prices, capital markets turmoil, and a continuing housing correction.” Apart from his general systemic concerns, though, Paulson’s immediate worry was Lehman Brothers. He had spoken to Fuld from his cabin on the island earlier in the day, and it was becoming clearer to him that the firm was unlikely to find a buyer. Most of the large sovereign wealth funds in the Middle East and Asia had been stung by investments they had made in other U.S. banks back in December and wouldn’t be likely to invest in Lehman, at least not in the present. Paulson feared that Fuld could soon run out of options.
However much these concerns preoccupied Paulson, he kept them to himself; he never discussed business with Wendy. The topic of Lehman was off-limits within the family for another reason: Hank’s younger brother, Richard Paulson, worked as a fixed-income salesman in Lehman’s Chicago office. They purposely avoided discussing the matter whenever they spoke, but he knew that if Lehman were to fail, his brother could lose his job.
Paulson was also grappling with another potential setback: He might be losing his deputy, Bob Steel, who was on the short list to run Wachovia, the giant Charlotte-based bank that had just ousted its CEO after reporting a $708 million loss tied to the housing market. Paulson and Steel had talked about the prospect in June, when things were calmer, and Paulson had even encouraged him to pursue the position. But now it looked as if it was actually going to happen, leaving Paulson with a big hole to fill. The timing could not have been worse: Steel’s jurisdiction included Fannie Mae and Freddie Mac—the government-sponsored enterprises (GSE) that had been the engine of the real estate boom and were now becoming undone.
By the time Paulson had flown back home on a private chartered jet to Dulles Airport on Monday afternoon, his worst fears were being realized. The financial markets were in a meltdown, but for reasons Paulson could not quite put his finger on. Freddie tumbled as much as 30 percent on Monday, before recovering to end down 17.9 percent. Fannie shares slid 16.2 percent, to their lowest level since 1992. Other financial stocks were suffering as well; Lehman shares closed down more than 8 percent. As he tried to absorb all that, Steel announced that he had gotten the job, and it would be announced publicly on Tuesday.
At home that night in his living room, Paulson paged through the piles of faxes that had been sent to him by his assistant at Treasury. One of them was the report that had set off the panic: Bruce Harting, an analyst at Lehman Brothers, wrote that revised