Too Big to Fail [11]
Despite his recent infatuation with leverage, Fuld believed in liquidity. He always had. You always needed a lot of cash on hand to ride out the storm, he would say. He liked to tell the story about how he once sat at a blackjack table and watched a “whale” of a gambler in Vegas lose $4.5 million, doubling every lost bet in hopes his luck would change. Fuld took notes on a cocktail napkin, recording the lesson he learned: “I don’t care who you are. You don’t have enough capital.”
You can never have enough.
It was a lesson he had learned again in 1998 after the hedge fund Long-Term Capital Management blew up. In the immediate aftermath, Lehman was thought to be vulnerable because of its exposure to the mammoth fund. But it survived, barely, because the firm had a cushion of extra cash—and also because Fuld had aggressively fought back. That was another takeaway from the Long Term Capital fiasco: You had to kill rumors. Let them live, and they became self-fulfilling prophecies. As he fumed to the Washington Post at the time, “Each and every one of these rumors was proved to be incorrect. If SEC regulators find out who started these stories, I’d like to have fifteen minutes with them first.”
One of the people on Fuld’s callback list that morning was Susanne Craig, a hard-nosed reporter at the Wall Street Journal who had been covering Lehman for years. Fuld liked Craig and often spoke to her on “background.” But this morning she had called trying to convince him to be interviewed on the record. She pitched it as a way for him to silence the critics, to explain all the advance planning Lehman had done. Fuld, who hated reading about himself, thought it might be a good idea to participate. He regretted the way he handled the media during the Long Term Capital crisis. He wished he’d been more proactive from the start. “I want to do it right this time,” he told her.
By noon, Fuld and his lieutenants had formulated a plan: They would give interviews to the Wall Street Journal, the Financial Times, and Barron’s. They’d provide a little ticktock and color to Craig, about what was going on inside the firm, in the hopes that her editors would splash the story on the front page. They set up back-to-back sessions with the reporters starting at 3:00 p.m. The talking points were clear: The rumors were bogus. Lehman had ample liquidity, right up there with Goldman Sachs and Morgan Stanley. If the firm did need to make a payout, it was good for the money.
For the interview with Craig, Fuld was joined in a conference call by Gregory, Russo, and Erin Callan, the company’s new chief financial officer. “We learned we need a lot of liquidity and we also know we need to deal with rumors as they arise, not long after,” Fuld told the reporter. He also stressed the fact that, with the Fed window now open, Lehman was on much stronger footing: “People are betting that the Fed can’t stabilize the market, and I don’t think that is a very good bet.”
“We have liquidity,” Gregory reiterated. “But while we don’t need it right now, having it there alone sends a strong message about liquidity and its availability to everybody in the market.” That remark skirted the catch-22 involved with the Fed’s decision to make cheap loans available to firms like Lehman: Using it would be an admission of weakness, and no bank wanted to risk that. In fact, the Fed’s move was intended more to reassure investors than to shore up banks. (Ironically, one of Lehman’s own executives, Russo, could take partial credit for the strategy, as he had suggested it in a white paper he presented in Davos, Switzerland, at the annual capitalist ball known as the World Economic Forum, just two months earlier. Timothy F. Geithner, the president of the Federal Reserve Bank of New York had been in the audience.)
After wrapping up