Too Big to Fail [104]
But in 1999, under pressure from the Clinton administration, Fannie and Freddie began underwriting subprime mortgages. The move was presented in the press as a way to put homes within the reach of countless Americans, but providing loans to people who wouldn’t ordinarily qualify for them was an inherently risky business, as telegraphed by the New York Times the day the program was announced:
“In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980s.”
The success of the two companies in both the financial and political arena inevitably fostered a culture of arrogance. “[We] always won, we took no prisoners and we faced little organized political opposition,” Daniel Mudd, then the president of Fannie Mae, wrote in a 2004 memo to his boss. That overconfidence led both companies eventually to move into derivatives and to employ aggressive accounting measures. They were later found by regulators to have manipulated their earnings, and both were forced to restate years of results. The CEOs of both companies were ousted.
Fannie and Freddie were still reeling from the accounting scandals when in March 2008, just days after the rescue of Bear Stearns, the Bush administration lowered the amount of capital the two companies were required to have as a cushion against losses. In exchange, the companies pledged to help bolster the economy by stepping up their purchases of mortgages.
But by that Wednesday, July 10, 2008, with investors unloading the stocks in droves, it was all coming undone. That afternoon William Poole, the former president of the Federal Reserve Bank of St. Louis, said unambiguously, “Congress ought to recognize that these firms are insolvent, that it is allowing these firms to continue to exist as bastions of privilege, financed by the taxpayer.”
“Unfuckingbelievable!” Dick Fuld exclaimed to Scott Freidheim as he sank deeper into his office chair.
Lehman’s stock had opened Thursday morning down 12 percent, to an eight-year low, in response to a rumor that Pacific Investment Management Company, the world’s biggest bond fund, had stopped trading with the firm. Another piece of speculation was swirling that SAC Capital Advisors, Steven Cohen’s firm, was also no longer trading with Lehman.
“I know it’s not true, you know it’s not true,” Fuld said to Freidheim. “You’ve got to call these guys and get them to put out a statement.”
It had been an excruciating week. With the continued market jitters over Fannie and Freddie—the result of Lehman’s own analyst’s report, no less—investors were also taking it out on the firm. Fuld couldn’t understand it; Lehman had taken its lumps in its previous quarter and raised new capital. Its balance sheet, he thought, was in better shape than it had been in a long time, reflecting Lehman’s decision to deleverage its investments—that is, reduce the amount of debt it used to make those investments.
To Fuld, it was the shorts who kept driving down the stock price, spreading false information about Lehman’s health. Fuld had been told by several people that the “whisper campaign” against the firm was emanating from one place: Goldman Sachs. It made Fuld sick. His son, Richie, worked at Goldman as a telecommunications banker.
He decided the time had come to call Lloyd Blankfein personally.
“You’re not going to like this conversation,” Fuld began. He said he had been hearing “a lot of noise” about Goldman’s spreading misinformation. “I don’t know that