Too Big to Fail [22]
For a brief, shining moment, all seemed well at Lehman Brothers.
Outside Lehman, however, skeptics were already voicing their concerns. “I still don’t believe any of these numbers because I still don’t think there is proper accounting for the liabilities they have on their books,” Peter Schiff, president and chief global strategist of Euro Pacific Capital, told the Washington Post. “People are going to find out that all these profits they made were phony.”
Across town, a prescient young hedge fund manager named David Einhorn, who had just gotten off a red-eye flight from Los Angeles and had raced to his office to listen to the call that morning, was coming to the same conclusion: Lehman was a house of cards. He was one of those “hedgies” investors Fuld had railed about. And he was so influential, he could move markets just by uttering a sentence. He had already bet big money that the firm was more vulnerable than Callan was letting on, and he was getting ready to share his opinion with the world.
CHAPTER TWO
In a leafy enclave of northwest Washington, D.C., Hank Paulson was pacing back and forth in his living room, his cell phone sitting in its usual place, against his ear. It was Easter Sunday, exactly one week after the takeover of Bear Stearns, and Paulson had promised his wife, Wendy, that they’d take a bicycle ride in Rock Creek Park, the large public space that bisects the capital, just down the road from their home. She had been annoyed with him all weekend for spending so much time on the phone.
“Come on, just for an hour,” she said, trying to coax him out of the house. He finally relented; it was the first time in more than a week that he would try to take his mind off work.
Until his phone rang again. Seconds later, after hearing what the caller had to say, the Treasury secretary exclaimed, “That makes me want to vomit!”
It was Jamie Dimon on his speakerphone from his wood-paneled office on the eighth floor of JP Morgan’s headquarters in Midtown Manhattan, overlooking a barren Park Avenue. He had just told Paulson something the Treasury secretary didn’t want to hear: Dimon had decided to “recut” his $2-a-share deal for Bear Stearns and raise the price to $10.
The news wasn’t completely unexpected. Paulson, who could be relentless, had phoned Dimon virtually every day that week (interrupting his early-morning treadmill jog at least once), and based on those conversations, he knew a higher price for Bear was a possibility. In the days since announcing the deal, both men had become justifiably worried that disgruntled Bear shareholders would vote down the deal in protest of the low price, creating another run on the firm.
But Dimon’s decision still roiled Paulson. He had expected that if Dimon did raise the price, he’d hike it by no more than a few dollars—up to $8 a share, say, but not into double digits.
“That’s more than we talked about,” replied Paulson, who was now whispering into the phone in his unmistakable raspy voice, hardly able to believe what he was hearing. Just a week earlier, when Dimon had indicated that he was prepared to pay $4 a share, Paulson had privately instructed him to lower the price: “I could see something nominal, like one or two dollars per share,” he had said. The fact was, Bear was insolvent without the government’s offer to backstop $29 billion of its debt, and Paulson did not want to be seen as a patsy, bailing out his friends on Wall Street.
“I can’t see why they’re getting anything,” he told Dimon.
So far, nobody other than Dimon knew that the Treasury secretary of the United States of America was behind the original paltry sale price, and Paulson wanted to keep it that way. Like most conservatives, he still honored the principle of “the invisible hand”—that widely held, neoclassical economic notion that official intervention was at best a last resort.
As a former CEO himself, Paulson understood Dimon