Too Big to Fail [158]
The New York Times was even worse: “But while the Treasury Department and Fed were working to broker an orderly sale of Lehman, it was unclear whether the Fed would stand behind any deal, particularly after the Bush administration took control of the nation’s two largest mortgage finance companies only days ago.”
No, that didn’t quite capture what they had been trying to convey, Paulson thought.
He turned to the Journal’s editorial page, where the air was typically more rarified, and was able to take solace, as conservatives so often had, in its hyperintellectual and at times harsh right-wing opinions. The typically unsigned editorial was called “Lehman’s Fate,” and its position was right out of Paulson’s playbook
“At least in the Bear case,” the Journal editorial read, “there was some legitimate fear of systemic risk. The Federal Reserve’s discount window hadn’t yet been opened to investment banks, and so there was some chance of a larger liquidity panic.
“That’s far less likely with Lehman. The discount window is now wide open to Merrill Lynch and Morgan Stanley, among others, and federal regulators have had months to inspect the value of Lehman’s assets and its various counterparties. If the feds step in to save Lehman after Bear and Fannie Mae, we will no longer have exceptions forged in a crisis. We will have a new de facto federal policy of underwriting Wall Street that will encourage even more reckless risk taking.”
Yes, yes, all true, Paulson thought as he finished the editorial. Still, it didn’t go far enough. He needed somehow to make it clear to all the banks that there would be no handouts, no more “Jamie Deals.” And he needed to do so in a way that would leave no room for misunderstanding.
When he arrived at the office Paulson walked down the hall into Michele Davis’s office and asked sullenly, “What do we do?”
“I’d rather say today that we don’t want to use our money and on Sunday night have to explain why we were backed into a corner,” Davis told him. “You want me to call Liesman?” she asked.
Liesman was Steve Liesman, CNBC’s economics reporter, known popularly as “The Professor.” Davis had a good relationship with him and had successfully leaked other information to him; Paulson considered him both intelligent and sympathetic to their cause. He could get the word out quickly and accurately.
Yes, the Professor, Paulson smiled. He’ll know what to do with this.
As Ed Herlihy sat in his office working on Bank of America’s bid, he kept his TV on mute, until at around 9:15 a.m. he saw the headline crawl across the bottom of CNBC’s screen—“Breaking News: Source: There will be no government money in the resolution of LEH situation”—and quickly turned up the volume to hear what Steve Liesman was telling David Faber, the network’s mergers reporter.
“Let me start here with a comment that I just got from a person familiar with Paulson, State Secretary Treasurer [sic], Hank Paulson,” Liesman explained. “He’s saying there will be no government money in the resolution of this situation.”
Herlihy turned the volume even higher.
“They’re saying there are two things that make the Lehman deal different,” Liesman continued. “The market’s been aware and had time to prepare for over six months, and the second is the PDCF, that is, the access of the investment banks to the Fed’s emergency window that exists now, to allow for an orderly process.”
It was a lot to take in, and the Professor turned the floor over to his colleague. “David, what do you think of that?”
“An interesting gamble,” Faber replied. “Would the government be willing to say, ‘Hey, you’re on your own?’ There’s divided opinion in terms of what the ultimate risk will be to the creditors, to everybody involved in the credit default swap market where Lehman certainly is a counterparty on many trades.”
Liesman added: “I’m sure the Federal Reserve is looking