Full Version: The Great Depression of 2008/2009
Common Ground Common Sense > Issues that Affect Our Lives > Job Market, Fiscal, and Economic Policies
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US Market
- The Reagan Counterrevolution by Peter Schiff
- Waiting for New Market Uncertainty to Settle by Tate Dwinnell
- Stock Market Cycles, Part 5: Secular Cycles by John Lounsbury
- It Might Be Impossible to Stop the Decline of Housing Prices by Steven Hansen
- Economy Loses 240,000 Jobs in October, Defines Obama's Challenges by Peter Morici
- The Chickens of Irresponsibility Come Home to Roost Under Obama's Reign by Enzio von Pfeil
- Does Obama Have What it Takes to Turn the Economy Around? by Jeff Pierce
- Ebbing Economic Tide is Lowering All Boats by Richard Shaw
- Insights from a Derivatives Salesman by Roger Ehrenberg
- Investors Face the Psychological Pressure by Tim Price
- Time to Reform the Fed by Larry MacDonald
- Buffett on Investing vs. Business by Nadav Manham
- Unemployment Rate Soars, Recovery Outlook Worsens by NuWire Investor
- Detroit is Hemorrhaging by Diane Lim Rogers
Stunned Icelanders Struggle After Economy´s Fall
By SARAH LYALL
REYKJAVIK, Iceland - The collapse came so fast it seemed unreal,
impossible. One woman here compared it to being hit by a train.
Another said she felt as if she were watching it through a window.
Another said, "It feels like you´ve been put in a prison, and you don´t
know what you did wrong."
This country, as modern and sophisticated as it is geographically
isolated, still seems to be in shock. But if the events of last month -
the failure of Iceland´s banks; the plummeting of its currency; the first
wave of layoffs; the loss of reputation abroad - felt like a bad dream,
Iceland has now awakened to find that it is all coming true.
It is not as if Reykjavik, where about two-thirds of the country´s
300,000 people live, is filled with bread lines or homeless shanties or
looters smashing store windows. But this city, until recently the center
of one of the world´s fastest economic booms, is now the unhappy
site of one of its great crashes. It is impossible to meet anyone here
who has not been profoundly affected by the financial crisis.
Overnight, people lost their savings. Prices are soaring. Once-
crowded restaurants are almost empty. Banks are rationing foreign
currency, and companies are finding it dauntingly difficult to do
business abroad. Inflation is at 16 percent and rising. People have
stopped traveling overseas. The local currency, the krona, was 65 to
the dollar a year ago; now it is 130. Companies are slashing salaries,
reducing workers´ hours and, in some instances, embarking on mass
layoffs.
"No country has ever crashed as quickly and as badly in peacetime,"
said Jon Danielsson, an economist with the London School of
Economics.
The loss goes beyond the personal, shattering a proud country´s sense
of itself.
"Years ago, I would say that I was Icelandic and people might say,
`Oh, where´s that?´ " said Katrin Runolfsdottir, 49, who was fired
from her secretarial job on Oct. 31. "That was fine. But now there´s
this image of us being overspenders, thieves."
Aldis Nordfjord, a 53-year-old architect, also lost her job last month.
So did all 44 of her co-workers - everyone in the company except its
owners. Some 75 percent of Iceland´s private-sector architects have
been fired in the past few weeks, she said.
In a strange way, she said, it is comforting to be one in a crowd.
"Everyone is in the same situation," she said. "If you can imagine, if
only 10 out of 40 people had been fired, it would have been different;
you would have felt, `Why me? Why not him?´ "
Until last spring, Iceland´s economy seemed white-hot. It had the
fourth-highest gross domestic product per capita in the world.
Unemployment hovered between 0 and 1 percent (while forecasts for
next spring are as high as 10 percent). A 2007 United Nations report
measuring life expectancy, real per-capita income and educational
levels identified Iceland as the world´s best country in which to live.
Emboldened by the strong krona, once-frugal Icelanders took regular
shopping weekends in Europe, bought fancy cars and built bigger
houses paid for with low-interest loans in foreign currencies.
Like the Vikings of old, Icelandic bankers were roaming the world
and aggressively seizing business, pumping debt into a soufflé of a
system. The banks are the ones that cannot repay tens of billions of
dollars in foreign debt, and "they´re the ones who ruined our
reputation," said Adalheidur Hedinsdottir, who runs a small chain of
coffee shops called Kaffitar and sells coffee wholesale to stores.
There was so much work, employers had to import workers from
abroad. Ms. Nordfjord, the architect, worked so much overtime last
year that she doubled her salary. She was featured on a Swedish radio
program as an expert on Iceland´s extraordinary building boom.
Two months ago, her company canceled all overtime. Two weeks
ago, it acknowledged that work was slowing. But it promised that
there would be enough to last through next summer.
The next day, everyone was herded into a conference room and fired.
Employers are hurting just as much as employees. Ms. Hedinsdottir
has laid off seven part-time employees, cut full-time workers´ hours
and raised prices. The Kaffitar branch on Reykjavik´s central
shopping street was perhaps half full; in normal times, it would have
been bursting at its seams.
While business is dwindling, costs are soaring. When the government
took over the country´s failing banks in October, Ms. Hedinsdottir´s
latest shipment of coffee - more than 109,000 pounds - was
already on the water, en route from Nicaragua. She had the money to
pay for it, but because the crisis made foreign banks leery of doing
business with Iceland, she said, she was unable to convert enough
cash into foreign currency.
"They were calling me every day and asking me what the situation
was, and they got really nervous," Ms. Hedinsdottir said of her
creditors. They got so nervous that they sent the coffee to a warehouse
in Hamburg, Germany, where it now sits while she tries to find the
foreign currency to pay for it.
Her fixed costs are no longer fixed. Five years ago, the company built
a new factory, borrowing the 120 million kronur - about $1.5
million - in foreign currencies. But the currency´s fall has increased
her debt to 200 million kronur. This summer, her monthly payments
were 2.5 million kronur; now they may be double that - the
equivalent of $38,500 in Iceland´s debased currency.
"My financial manager is talking to the banks every day, and we don´t
know how much we´re supposed to pay," Ms. Hedinsdottir said.
In a recent survey, one-third of Icelanders said they would consider
emigrating. Foreigners are already abandoning Iceland.
Anthony Restivo, an American who worked this fall for a potato farm
in eastern Iceland and was heading home, said all of the farm´s
foreign workers abruptly left last month because their salaries had
fallen so much. One man arrived from Poland, he said, then realized
how little the krona was worth and went home the next day.
At the Kringlan shopping center on the edge of Reykjavik, Hronn
Helgadottir, who works at the Aveda beauty store, said she could no
longer afford to travel abroad. But the previous weekend, she said,
she and her husband had gone for a last trip to Amsterdam, a holiday
they had paid for months ago, when the krona was still strong.
They ate as cheaply as they could and bought nothing. "It was strange
to stand in a store and look at a bag or a pair of shoes and see that
they cost 100,000 kronur, when last year they cost only 40,000," she
said.
In Kopavogur, a suburb of Reykjavik, Ms. Runolfsdottir, the recently
fired secretary, said she had worried for some time that Iceland would
collapse under the weight of inflated expectations.
"If you drive through Reykjavik, you see all these new houses, and
I´ve been thinking for the longest time, `Where are we going to get
people to live in all these homes?´" she said.
The real estate firm that used to employ Ms. Runolfsdottir built about
800 houses two years ago, she said; only 40 percent have been sold.
According to Icelandic law, Ms. Runolfsdottir and other fired
employees have three months before they have to leave their jobs. At
the end of that period, she will start drawing unemployment benefits.
Meanwhile, her husband´s modest investment in several now-failed
Icelandic banks is worthless. "They were encouraging us to buy
shares in their firms until the last minute," she said.
She feels angry at the government, which in her view has mishandled
everything, and angry at the banks that have tarnished Iceland´s
reputation. And while she has every sympathy with the hundreds of
thousands of foreign depositors who may have lost their money, she
wonders why the Icelandic government - and, in essence, the
Icelandic people - should have to suffer more than they already
have.
"We didn´t ask anyone to put their money in the banks," she said.
"These are private companies and private banks, and they went
abroad and did business there."
Despite all this, Icelanders are naturally optimistic, a trait born,
perhaps, of living in one of the world´s most punishing landscapes
and depending for so much of their history on the fickle fishing
industry. The weak krona will make exports more attractive, they
point out. Also, Iceland has a highly educated, young and flexible
population, and has triumphed after hardship before.
Ragna Sara Jonsdottir, who runs a small business consultancy, said
she had met for the first time with other businesses in her office
building. "We sat down and said, `We all have ideas, and we can help
each other through difficult times,´ " she said.
But she said she was just as shocked as everyone else by the
suddenness, and the severity, of the downturn. When the prime
minister, Geir H. Haarde, addressed the nation at the beginning of
October, she said, her 6-year-old daughter asked her to explain what
he had said.
She answered that there was a crisis, but that the prime minister had
not told the country how the government planned to address it. Her
daughter said, "Maybe he didn´t know what to say."
http://www.nytimes.com/2008/11/09/world/eu...iceland.html?_r
=3&oref=slogin&partner=rssnyt&emc=rss&pagewanted=print&oref=
slo
By SARAH LYALL
REYKJAVIK, Iceland - The collapse came so fast it seemed unreal,
impossible. One woman here compared it to being hit by a train.
Another said she felt as if she were watching it through a window.
Another said, "It feels like you´ve been put in a prison, and you don´t
know what you did wrong."
This country, as modern and sophisticated as it is geographically
isolated, still seems to be in shock. But if the events of last month -
the failure of Iceland´s banks; the plummeting of its currency; the first
wave of layoffs; the loss of reputation abroad - felt like a bad dream,
Iceland has now awakened to find that it is all coming true.
It is not as if Reykjavik, where about two-thirds of the country´s
300,000 people live, is filled with bread lines or homeless shanties or
looters smashing store windows. But this city, until recently the center
of one of the world´s fastest economic booms, is now the unhappy
site of one of its great crashes. It is impossible to meet anyone here
who has not been profoundly affected by the financial crisis.
Overnight, people lost their savings. Prices are soaring. Once-
crowded restaurants are almost empty. Banks are rationing foreign
currency, and companies are finding it dauntingly difficult to do
business abroad. Inflation is at 16 percent and rising. People have
stopped traveling overseas. The local currency, the krona, was 65 to
the dollar a year ago; now it is 130. Companies are slashing salaries,
reducing workers´ hours and, in some instances, embarking on mass
layoffs.
"No country has ever crashed as quickly and as badly in peacetime,"
said Jon Danielsson, an economist with the London School of
Economics.
The loss goes beyond the personal, shattering a proud country´s sense
of itself.
"Years ago, I would say that I was Icelandic and people might say,
`Oh, where´s that?´ " said Katrin Runolfsdottir, 49, who was fired
from her secretarial job on Oct. 31. "That was fine. But now there´s
this image of us being overspenders, thieves."
Aldis Nordfjord, a 53-year-old architect, also lost her job last month.
So did all 44 of her co-workers - everyone in the company except its
owners. Some 75 percent of Iceland´s private-sector architects have
been fired in the past few weeks, she said.
In a strange way, she said, it is comforting to be one in a crowd.
"Everyone is in the same situation," she said. "If you can imagine, if
only 10 out of 40 people had been fired, it would have been different;
you would have felt, `Why me? Why not him?´ "
Until last spring, Iceland´s economy seemed white-hot. It had the
fourth-highest gross domestic product per capita in the world.
Unemployment hovered between 0 and 1 percent (while forecasts for
next spring are as high as 10 percent). A 2007 United Nations report
measuring life expectancy, real per-capita income and educational
levels identified Iceland as the world´s best country in which to live.
Emboldened by the strong krona, once-frugal Icelanders took regular
shopping weekends in Europe, bought fancy cars and built bigger
houses paid for with low-interest loans in foreign currencies.
Like the Vikings of old, Icelandic bankers were roaming the world
and aggressively seizing business, pumping debt into a soufflé of a
system. The banks are the ones that cannot repay tens of billions of
dollars in foreign debt, and "they´re the ones who ruined our
reputation," said Adalheidur Hedinsdottir, who runs a small chain of
coffee shops called Kaffitar and sells coffee wholesale to stores.
There was so much work, employers had to import workers from
abroad. Ms. Nordfjord, the architect, worked so much overtime last
year that she doubled her salary. She was featured on a Swedish radio
program as an expert on Iceland´s extraordinary building boom.
Two months ago, her company canceled all overtime. Two weeks
ago, it acknowledged that work was slowing. But it promised that
there would be enough to last through next summer.
The next day, everyone was herded into a conference room and fired.
Employers are hurting just as much as employees. Ms. Hedinsdottir
has laid off seven part-time employees, cut full-time workers´ hours
and raised prices. The Kaffitar branch on Reykjavik´s central
shopping street was perhaps half full; in normal times, it would have
been bursting at its seams.
While business is dwindling, costs are soaring. When the government
took over the country´s failing banks in October, Ms. Hedinsdottir´s
latest shipment of coffee - more than 109,000 pounds - was
already on the water, en route from Nicaragua. She had the money to
pay for it, but because the crisis made foreign banks leery of doing
business with Iceland, she said, she was unable to convert enough
cash into foreign currency.
"They were calling me every day and asking me what the situation
was, and they got really nervous," Ms. Hedinsdottir said of her
creditors. They got so nervous that they sent the coffee to a warehouse
in Hamburg, Germany, where it now sits while she tries to find the
foreign currency to pay for it.
Her fixed costs are no longer fixed. Five years ago, the company built
a new factory, borrowing the 120 million kronur - about $1.5
million - in foreign currencies. But the currency´s fall has increased
her debt to 200 million kronur. This summer, her monthly payments
were 2.5 million kronur; now they may be double that - the
equivalent of $38,500 in Iceland´s debased currency.
"My financial manager is talking to the banks every day, and we don´t
know how much we´re supposed to pay," Ms. Hedinsdottir said.
In a recent survey, one-third of Icelanders said they would consider
emigrating. Foreigners are already abandoning Iceland.
Anthony Restivo, an American who worked this fall for a potato farm
in eastern Iceland and was heading home, said all of the farm´s
foreign workers abruptly left last month because their salaries had
fallen so much. One man arrived from Poland, he said, then realized
how little the krona was worth and went home the next day.
At the Kringlan shopping center on the edge of Reykjavik, Hronn
Helgadottir, who works at the Aveda beauty store, said she could no
longer afford to travel abroad. But the previous weekend, she said,
she and her husband had gone for a last trip to Amsterdam, a holiday
they had paid for months ago, when the krona was still strong.
They ate as cheaply as they could and bought nothing. "It was strange
to stand in a store and look at a bag or a pair of shoes and see that
they cost 100,000 kronur, when last year they cost only 40,000," she
said.
In Kopavogur, a suburb of Reykjavik, Ms. Runolfsdottir, the recently
fired secretary, said she had worried for some time that Iceland would
collapse under the weight of inflated expectations.
"If you drive through Reykjavik, you see all these new houses, and
I´ve been thinking for the longest time, `Where are we going to get
people to live in all these homes?´" she said.
The real estate firm that used to employ Ms. Runolfsdottir built about
800 houses two years ago, she said; only 40 percent have been sold.
According to Icelandic law, Ms. Runolfsdottir and other fired
employees have three months before they have to leave their jobs. At
the end of that period, she will start drawing unemployment benefits.
Meanwhile, her husband´s modest investment in several now-failed
Icelandic banks is worthless. "They were encouraging us to buy
shares in their firms until the last minute," she said.
She feels angry at the government, which in her view has mishandled
everything, and angry at the banks that have tarnished Iceland´s
reputation. And while she has every sympathy with the hundreds of
thousands of foreign depositors who may have lost their money, she
wonders why the Icelandic government - and, in essence, the
Icelandic people - should have to suffer more than they already
have.
"We didn´t ask anyone to put their money in the banks," she said.
"These are private companies and private banks, and they went
abroad and did business there."
Despite all this, Icelanders are naturally optimistic, a trait born,
perhaps, of living in one of the world´s most punishing landscapes
and depending for so much of their history on the fickle fishing
industry. The weak krona will make exports more attractive, they
point out. Also, Iceland has a highly educated, young and flexible
population, and has triumphed after hardship before.
Ragna Sara Jonsdottir, who runs a small business consultancy, said
she had met for the first time with other businesses in her office
building. "We sat down and said, `We all have ideas, and we can help
each other through difficult times,´ " she said.
But she said she was just as shocked as everyone else by the
suddenness, and the severity, of the downturn. When the prime
minister, Geir H. Haarde, addressed the nation at the beginning of
October, she said, her 6-year-old daughter asked her to explain what
he had said.
She answered that there was a crisis, but that the prime minister had
not told the country how the government planned to address it. Her
daughter said, "Maybe he didn´t know what to say."
http://www.nytimes.com/2008/11/09/world/eu...iceland.html?_r
=3&oref=slogin&partner=rssnyt&emc=rss&pagewanted=print&oref=
slo
- Be Very Afraid of Deflation by Alex Filonov
- Fed Watch: From Bad to Worse? by Tim Duy
- Parsing the Dismal October Employment Report by Zacks.com
- U.S. Economy: There Are No Problems, Only Solutions by James Quinn
- Consumer Spending and Recession by Stephen Hsu
- 'Yes We Can!' (As Long As We're Prepared) by Kip Herriage
- Recent Employment Data Didn't Capture the Negative Impacts by Jeff Miller
- U.S. Weekly Leading Index Now at Six Decade Low by Steven Hansen
- Welcome to Wall Street, Barack Obama by Prieur du Plessis
- October's Worst Stock Performers by eChristian Investing
- U.S. Future Inflation Gauge Tumbles to 81-Month Low by Steven Hansen
- Ending the Recession Debate: We're Already in One by Andy Sutton
- The Current Economic Crisis: Hell, Meet Handbasket by Doug Hornig
- The Long Case for Autos by Jack Miller
Interesting piece from Bloomberg on Dick Fuld and the last days of Lehman:
Fuld Solicited Buffett Offer CEO Could Refuse as Lehman Fizzled
By Yalman Onaran and John Helyar
Nov. 10 (Bloomberg) -- It was the afternoon of Sept. 9, and tensions were rising in the 31st-floor office of Lehman Brothers Holdings Inc. Chief Executive Officer Richard S. Fuld Jr.
That morning news broke that the Korea Development Bank had pulled out of talks to buy a stake in the New York-based securities firm. By 1 p.m., Lehman's already battered stock had plunged another 43 percent.
Fuld was rat-a-tatting orders to associates seated at a table in his corner office, one wall of which featured photographs of lions taken by the boss himself in Africa. Herbert ``Bart'' McDade, installed as president in June, Vice Chairman Thomas A. Russo and Chief Financial Officer Ian T. Lowitt had been in and out of Fuld's lair all morning. Now the CEO was staring daggers at responses he deemed too slow or too fuzzy to help right his listing ship, said a person familiar with events that day. And he was lashing out at the injustice of it all.
``Here we go again,'' Fuld erupted at one point, the person recalled. ``Perception trumping reality once more.''
It was vintage Fuld, a man so physically imposing, so volcanically explosive that, even at age 62, he scared underlings and competitors alike. He was raging on the captain's bridge, while a storm engulfed the company he had willed into becoming one of Wall Street's finest. Couldn't the short-sellers see how much he had done to shed bad assets? Couldn't they understand what a great franchise it still was?
Fuld was grounded enough in reality to know one thing: ``We've got to act fast,'' he said, ``so this financial tsunami doesn't wash us away.''
Financial Armageddon
Six days later -- 158 years after its founding as a cotton brokerage in Alabama -- Lehman Brothers was gone. Treasury Secretary Henry M. Paulson Jr. said he didn't want to use taxpayer money to save Lehman, as the government had done in March when it pledged $29 billion to facilitate the sale of failing Bear Stearns Cos. to JPMorgan Chase & Co. Federal Reserve Chairman Ben S. Bernanke insisted there was nothing the government could have done in the end, even though Fuld had warned that Lehman's collapse could trigger a financial Armageddon.
Fuld's failure to save Lehman, after rescuing it three times before, is a story about how the most indomitable man on Wall Street became addicted to leverage and intoxicated with the power it brought. It is a tale about the inability to repair a financial model wrecked by a lack of limits and transparency, a story pieced together from interviews with former Lehman executives and outsiders familiar with the firm. Isolated, surrounded by acolytes and unaware of the rivalries tearing his firm apart, Fuld was too prideful to accept the fast-eroding value of the empire he had built, too slow to cut a deal.
Biggest Bankruptcy
The end came after months of frantic activity to find a solution -- reaching out to, then spurning an offer from Berkshire Hathaway Chairman Warren Buffett; meeting with executives of banks on three continents, devising a last-ditch plan to spin off Lehman's toxic assets; and pleading with government officials.
Then, on the morning of Sept. 14, after a series of weekend meetings at the New York Fed, a private deal to save the firm from bankruptcy was hatched. The government persuaded a syndicate of banks to backstop a new entity that would take over $55 billion to $60 billion of Lehman's troubled assets, and London-based Barclays Plc agreed to acquire the rest of the firm, according to people familiar with the negotiations.
When the U.K.'s Financial Services Authority refused to sign off on the Barclays purchase late that morning, U.S. officials refused to take any steps to save the deal. At about 2 a.m. on Monday, Sept. 15, Lehman filed the biggest bankruptcy in U.S. history.
`Guilty Firm'
``Wall Street was giving the impression that after some bloodletting the crisis would be over, and the government bought that line,'' said Charles R. Geisst, author of ``100 Years on Wall Street'' and a finance professor at Manhattan College in New York. ``The thought was to make an example of a guilty firm, and Lehman just happened to be the next one in line.''
The Dow Jones Industrial Average fell 504 points on the day Lehman collapsed, triggering an increase in bank borrowing costs and a run on money-market funds and financial institutions around the world. By Tuesday, Paulson and Bernanke had reversed course, agreeing to an $85 billion bailout of foundering American International Group Inc., at the time the world's largest insurer. The government has since decided to make $250 billion of capital infusions to bolster major U.S. banks. Only Lehman has paid the ultimate price of the financial meltdown to date -- obliteration by bankruptcy.
Reputation in Tatters
It's little comfort to Fuld that he was right to forecast Armageddon and regulators were wrong. His reputation is in tatters; his days are filled with lawyers; three U.S. attorneys are investigating whether he misled investors about the firm's financial condition; his anger is palpable.
Fuld declined to be interviewed for this article as did his lawyer, Patricia Hynes of Allen & Overy.
In October, he appeared before the House Committee on Oversight and Reform wearing his emotions on the sleeve of his dark blue suit.
When asked why AIG was saved and Lehman wasn't, he leaned into a microphone, scowled and slowly replied: ``Until the day they put me in the ground, I will wonder.''
Here's the kind of year it has been for the man who went from being the toast of Wall Street to toast. In January he was hobnobbing with the elite at the World Economic Forum in Davos, Switzerland. Nine months later he was heckled all the way to his limo after testifying at a congressional hearing.
Fuld's Career
The fall of Lehman isn't another tale about an overmatched or under-engaged CEO. For the 16 years Fuld presided over Lehman, he was considered one of the industry's most skilled chief executives, boosting the firm's profit from $113 million in 1994 to $4.2 billion last year and multiplying its share price 20 times. Fuld was no E. Stanley O'Neal or Charles O. ``Chuck'' Prince, late of Merrill Lynch & Co. and Citigroup Inc. respectively, who'd gotten top jobs without being steeped in their institution's businesses. Nor was he a James ``Jimmy'' Cayne, who played bridge while New York-based Bear Stearns burned.
Fuld lived for and identified with his firm. It was his oxygen, a friend says. He had spent his entire career there, so his saga is also a story of Wall Street over the past four decades. When Fuld began working at Lehman in 1969, messengers lugged bags of stock certificates between brokers' offices to complete trades. His rise embodied the triumph of the trader and of the outsize bonus -- he took home about $300 million over the past eight years.
Starting on Lehman's commercial-paper desk, Fuld became a formidable fixed-income trader. He maintained a reputation as a keen risk manager until it became clear Lehman had taken on too many bad mortgage-related assets.
Quant Concoctions
The difference between risk management in the 1980s and in the new millennium was like the difference between playing checkers and three-dimensional chess. The instruments Lehman issued had become more complex than commercial paper, the stakes incomparably higher.
It was the same all over Wall Street. While CEOs of Fuld's generation spent their days in top-floor offices taking meetings, the firms' quants were downstairs cooking up synthetic financial gizmos and mind-bending trading strategies. What they concocted might produce monster profits -- or prove a Frankenstein's monster.
``Fuld took a franchise he'd built from almost nothing, brick by brick, and then trashed it in less than two years,'' said Sean Egan, president and founder of Egan-Jones Ratings Co. in Haverford, Pennsylvania. ``His biggest mistake was in not understanding the risks that had evolved since he was last active in debt markets. And he relied on the support of others whose interests were aligned with him.''
`The Gorilla'
A CEO needs good managers reporting to him to figure out the right risk-reward ratios and make the right decisions. Increasingly, Fuld wasn't getting good dope. He became isolated in recent years, people familiar with the firm's operations said. He countenanced little debate and delegated more responsibility to Joseph M. Gregory, 56, who became president and chief operating officer in 2004.
An intimidating figure -- he played in international squash competitions when he was younger and is still fit -- Fuld was known around the office as ``the Gorilla.'' His icy stare, people who worked at Lehman say, froze recipients with fear. No one wanted to tell Fuld something was wrong or to question how Lehman was run.
As it turned out, one of the lessons Fuld took away from Lehman's decline in the 1980s would contribute to its collapse in 2008.
Glucksman vs. Peterson
The earlier crisis grew out of a power struggle between two senior partners: Lewis Glucksman, who headed trading and was Fuld's mentor, and Peter Peterson, who ran investment banking. Glucksman maneuvered Peterson out of the chairmanship, setting off a rift between traders and bankers that so weakened the firm it wound up being acquired by American Express Co. in 1984.
It was traumatic for the partners, since the dispute cost them their independence and considerable income. When Lehman was spun off in 1994, Fuld vowed that no one would ever do unto him as Glucksman had done unto Peterson. For Fuld, that meant not having a strong No. 2.
Christopher Pettit, a longtime friend and ally of Fuld's, was forced out as chief operating officer when he balked at an executive reorganization in 1996. (He died three months later in a snowmobile accident.) Six years would go by before Fuld installed another chief operating officer. In the meantime, Fuld pushed potential rivals aside, say people familiar with the firm's operation. Michael F. McKeever, who ran investment banking, was stripped of his duties bit by bit and left in 2000. John Cecil, chief financial officer until 2000, was demoted to an adviser because he dared oppose Fuld, the people say.
Gregory's Role
The man Fuld finally appointed chief operating officer was Gregory, a trusted lieutenant who had worked at Lehman since 1974. He would make it his mission to keep Fuld's life uncomplicated by debate.
Any meeting with Gregory, say people who worked with him, was a soliloquy. The COO delivered lectures on matters as minute as improving the look of sloppy dressers. Management-committee meetings were conducted without discussion, attendees say.
The same was true of executive-committee meetings presided over by Fuld. While reviewing budgets for 2007, one committee member questioned the performance of a unit, according to a person who was in the room. Fuld stared at him coldly, then broke the silence: ``You've got some balls to say that, knowing how much I hate that topic.''
Authoritarian Climate
As Fuld returned to studying the papers in front of him, Gregory continued dressing down the committee member for his impertinence. He also upbraided him after the meeting, demanding that any objections be brought to Gregory privately and not voiced in front of the committee. Gregory didn't return calls seeking comment.
Word on proper comportment spread through the ranks. Fuld conducted an employee webcast every three months. He'd always end by asking if there were any questions. There rarely were.
The problem with this authoritarian climate was that when Lehman began to sputter, Fuld was cut off from dissenting opinion. Woe to the messenger who came to the 31st-floor bearing bad news.
The refusal of fixed-income chief Michael Gelband to play the yes-sir game cost him his job -- and Lehman one of its best risk managers. He was forced out by Gregory in May 2007, people familiar with the circumstances say. Four months later Gregory also shunted aside risk chief Madelyn Antoncic, when she fought for hedges on some of Lehman's investments. She was demoted to a peripheral government-relations job.
`Cheap Tar'
Gregory also set factions within Lehman against each other, the people say. New York executives, led by McDade, then head of equities, jousted with those in London, who gathered around international operations chief Jeremy M. Isaacs and who believed they deserved more power because the firm's top growth areas were outside the U.S. The intercontinental rivalry would prove a critical fault line for Lehman.
As cut off from information as Fuld may have been, it wasn't as if he didn't recognize the firm's problems. In November 2004, more than two years before the bull market reached its peak, Fuld was telling people around him that low interest rates and cheap credit would create a bubble that could one day pop.
``It's paving the road with cheap tar,'' he told colleagues in a meeting at the time. ``When the weather changes, the potholes that were there will be deeper and uglier.''
AIG Approach
Fuld also warned against taking on too much risk, such as leveraged loans, which are used to finance buyouts of firms, as Lehman tried to compete with commercial banks that used their bigger balance sheets to support investment banking operations. ``We're vulnerable if we throw our balance sheet around,'' Fuld said, according to a person at the meeting.
As early as March 2006, Fuld approached Martin J. Sullivan, then CEO of AIG, about a possible merger. Fuld saw Lehman becoming the investment banking unit of the insurer. A combination would have given Lehman a trillion-dollar balance sheet, funded by stable insurance premiums, which it could use to provide leverage to its clients, Fuld told his executive committee at an offsite at the Fairmont Turnberry Isle Resort & Club near Miami, according to a person who attended the meeting.
Sullivan wasn't interested, and the proposal didn't go beyond the initial contact, the person said. Sullivan, who left AIG in June 2008, didn't return calls seeking comment.
False Comfort
Lehman used its balance sheet to finance leveraged buyouts anyway. So did other Wall Street firms forced to compete with commercial banks, which were allowed to practice investment banking after the 1999 repeal of the Glass-Steagall Act.
Leveraged loans weren't Lehman's undoing, though. Fuld saw the dangers they posed and rid the firm of the riskiest ones in the fourth quarter of 2007, according to company filings.
What Fuld failed to do is take advantage of a rebound in the prices of fixed-income assets at the time to sell some of Lehman's $84 billion mortgage portfolio. He took false comfort in having hedged the firm's mortgage positions at the end of 2006. Because of the hedges, insiders say, Lehman executives were sanguine after the July 2007 implosion of two Bear Stearns hedge funds that had invested in subprime securities. Fuld even loaded up on mortgage-backed securities at the beginning of 2008, not seeing how vulnerable the firm would be when the subprime cancer metastasized to other asset classes.
Davos Predictions
The disconnect was on display at the World Economic Forum in Davos in January. On the one hand, Lehman Vice Chairman Russo, 65, presented a paper entitled ``Credit Crunch: Where Do We Stand?'' predicting the reset of interest rates on $550 billion of subprime mortgages in the next 12 months would trigger foreclosures and economic woe. On the other hand, Russo said it was no big deal for Lehman. ``Dick Fuld is very conscious of risk,'' he said in a Bloomberg TV interview. ``He's created a culture that's enabled us to do fine.''
Others weren't so sure. A Lehman employee of more than 20 years says she sat her subordinates down in January and told them to start considering options outside the firm.
By the end of the fiscal first quarter in February, after New York-based rivals Citigroup and Merrill had taken about $45 billion in writedowns, Lehman's mortgage portfolio had increased by 2 percent from the previous quarter. Associates say Fuld had concluded the market for mortgage-backed securities had hit bottom, and he didn't have people around him to warn about the spread of subprime troubles to so-called Alt-A mortgages -- those made to borrowers without full documentation -- and the commercial real estate market.
Callan Appointment
Roger Nagioff, 44, a London equities trader who succeeded Gelband as fixed-income chief, was struggling to learn the business as the subprime rout began. He quit in February 2008 after realizing he couldn't get his head around Lehman's mortgage-related positions, people close to Nagioff said.
Lehman also had a rookie chief financial officer. Erin M. Callan, a 43-year-old investment banker, had been elevated to the job in December by Gregory, although she had no experience in the company's treasury, a typical training ground for CFOs. Fuld went along with the appointment and allowed her to become the public face of Lehman because he trusted Gregory and didn't get involved in staffing decisions, people say.
On March 17, a day after the sale of Bear Stearns, Lehman shares fell as much as 48 percent in New York Stock Exchange trading on concern the firm would be Wall Street's next victim.
Counter-Punching
To Fuld, the idea was outrageous. The hit was a matter of wrong perceptions, not weak fundamentals. So he got on the phone with the firm's biggest clients to tell them Lehman was no Bear Stearns, and he ordered other executives to do the same.
This was pure Fuld: When bloodied, counter-punch. That's how he turned things around in 1998, when Wall Street rumors had Lehman over-exposed to the Russian currency collapse and the ``Asian flu.'' His jawboning with clients, regulators and others pulled Lehman's stock out of a spiral from $21 to $6.
This time around Fuld also reached out to Omaha billionaire Buffett, the man who had ridden to the rescue of Salomon Inc. in 1987, according to two people with knowledge of the approach. He asked investment banking chief Hugh ``Skip'' McGee, 49, to call David L. Sokol, chairman of Berkshire Hathaway-owned MidAmerican Energy Holdings Co., and see if Buffett might be interested in a stake in Lehman.
Spurning Buffett
The answer was yes, Sokol told McGee. So Fuld called the 78-year-old Buffett. Berkshire Hathaway would buy preferred shares that would pay a dividend of 9 percent and could be converted to common at the then-market price of $40, the people said. That was costlier than what other investors demanded, Fuld was told by associates, and he spurned the offer. A few days later, on April 1, Lehman sold $4 billion of convertible preferred stock to public investors with a 7.25 percent interest rate and a 32 percent conversion premium.
That meant those buying the convertibles were willing to pay one-third more than the market price for Lehman's shares if and when they wanted to convert. Buffett was willing to pay only the going price at the time, which would have meant more dilution for existing shareholders. A spokeswoman for Buffett declined to comment.
Fuld had saved some money, yet he rebuffed a Buffett stake, considered to be corporate America's Good Housekeeping seal of approval. Although that might have helped Lehman in the short run, it wouldn't have solved the firm's fundamental problem: Fuld needed to sell the entire mortgage-related portfolio at whatever price he could get and raise enough capital to cover the losses incurred in such a sale.
`Huge Brand'
Six months later Goldman Sachs Group Inc., the most profitable investment bank, agreed to even harsher terms with Buffett -- paying him a 10 percent annual return on a $5 billion investment. Yet the market had deteriorated so much by then that even the billionaire's blessing wasn't enough. Goldman's shares fell 36 percent in the two weeks after the deal was announced, only to recover after the government stepped in to buy stakes in the biggest U.S. banks.
Lehman's April 1 stock sale sent a signal that the firm continued to have access to capital and the confidence of investors and the government. Its shares rose 26 percent in the following three weeks. At a dinner at the Treasury Department on April 11, where Fuld chatted with Paulson, he came away with the impression, as he wrote in an e-mail to Russo that night, that we ``have huge brand with treasury'' and that Paulson ``loved our capital raise.'' The e-mail was later made public by U.S. Representative Henry A. Waxman, chairman of the House Committee on Oversight and Government Reform.
Finding a Buyer
Paulson would complain, in interviews with the New York Times and Charlie Rose after Lehman's demise, that he couldn't get Fuld off the dime in finding a buyer for Lehman. Brookly McLaughlin, a Treasury spokeswoman, said Paulson ``spoke to Fuld quite often'' between April and September. She wouldn't divulge the frequency or substance of their conversations. Fuld took Paulson's request to mean he should find a strategic partner to buy a stake in Lehman, which he was already searching for, according to people close to the CEO.
Why Fuld was unable to find a buyer for all or part of Lehman remains a matter of dispute. It was not for want of trying, although some people familiar with those efforts throughout the spring and summer say he was unwilling to accept the rapidly falling valuation of his firm.
``Dick was so proud of Lehman that he was slow to recognize that others didn't share that belief,'' said George L. Ball, chairman of Houston-based investment firm Sanders Morris Harris Group Inc. and a friend of Fuld's.
`Hurting Einhorn'
One obstacle, say people close to Fuld, is that he was more of an inside man. He didn't like to mingle with the Wall Street elite on the black-tie circuit. He didn't go in much for the genteel game of golf, preferring the sweaty game of squash, often on his own home court in Greenwich, Connecticut. He didn't care for public speaking.
Throughout the crisis, Fuld was too quick to blame his detractors for his own mistakes. David Einhorn, president of Greenlight Capital Inc., a New York-based hedge fund, became enemy No. 1 on May 21, when he went public with his analysis that Lehman was propping up its numbers with aggressive valuations and challenged CFO Callan's credibility.
The short-seller put pressure on Lehman's stock and aroused Fuld's ire. A May 26 e-mail to Fuld from Lehman executive David Goldfarb, released by Waxman's committee, suggested that the firm should use capital it was hoping to raise to buy back Lehman stock, ``hurting Einhorn bad!!'' Fuld's response: ``I agree with all of it.''
Bear Stearns Precedent
Meanwhile, the company's financial situation continued to deteriorate. The value of Lehman's residential-mortgage portfolio and commercial real estate assets kept declining as the prospect of recession grew. Nobody wanted to buy into Lehman -- at least not for the moment.
Even interested parties figured the price would keep coming down, as real estate valuations fell and Lehman got more desperate for cash. The Bear Stearns precedent, in which the government stepped in to facilitate a deal, also gave prospective buyers a reason to wait.
Lehman sold $16 billion, or about one-fifth, of its mortgage assets during the second quarter of 2008. Selling assets that nobody wanted meant taking significant losses. Market volatility had also rendered many of the hedges ineffective during the quarter. That led Lehman to announce a $2.8 billion second-quarter loss on June 9, its first since being spun off from American Express. Lehman also reported that it had raised another $6 billion in capital from investors.
Strategic Partner
The loss led Fuld to panic, say some people who interacted with him at the time. For the first time, he started worrying that he might lose the firm. McDade, 49, who as head of equities was instrumental in raising capital from trading clients, persuaded Fuld to promote him to president, ousting Gregory. Callan was also pushed aside, replaced by Lowitt, 44.
One of the first things McDade did was to bring back Gelband, 49, to help him sort out the mess. He also asked investment banking chief McGee to redouble efforts to find a strategic partner who would buy a stake of at least 10 percent.
While the firm had been in talks with potential partners in the previous three years -- including Japan's Mizuho Financial Group Inc. and China's Citic Group and Ping An Insurance (Group) Co. -- they were always with the intention of cooperation in Asia, where Lehman was weaker than most of its rivals.
GE, Citic, KDB
Now, as summer began, the stakes were higher. Talks began in July with executives at Bank of America Corp. One Lehman proposal was to merge with the investment banking unit of its Charlotte, North Carolina-based rival, which would own about 40 percent of the new entity. While CEO Kenneth D. Lewis wasn't keen on that idea, talks continued on other possible combinations, people familiar with the discussions said.
Fuld also reached out to General Electric Co. CEO Jeffrey R. Immelt, a fellow board member of the New York Fed. He said no. An overture to London-based HSBC Holdings Plc went nowhere. And Fuld came up empty after meeting in August with executives from Citic, China's biggest state-owned investment firm.
Only the Korea Development Bank seemed eager to make a deal. The bank's chief executive officer, Min Euoo Sung, had run Lehman's operations in Seoul until May. In early August, according to Lehman executives involved in the talks, KDB offered to buy 25 percent of the firm for $22 a share, about where the shares were trading at the time. Then talks bogged down on issues like how much management say the Korean bank would have and how Lehman's mortgage positions should be valued. By early September, Min was only willing to pay about $8 share, the executives said.
Codename Spinco
``The gap in assessing the size of potential writedowns was just too big,'' Min told reporters in Seoul on Sept. 16.
Some involved with the negotiations say Fuld and McDade didn't want to cede any management control and that Min grew concerned about further Lehman writedowns. Others say Min never had approval from his government to do a deal, so he kept lowering the price to make sure it wouldn't happen. Min told legislators in Seoul on Sept. 18 that Lehman was unwilling to accept less than $17.50 a share.
Meanwhile, worried that his lieutenants wouldn't be able to fetch a fair price from an investor, Fuld was pursuing another strategy. The plan his associates devised would offload Lehman's toxic commercial-mortgage portfolio to an independent company, codenamed Spinco. The new company's stock would be owned by Lehman shareholders, and its startup capital would be provided by the firm. While Lehman would have to raise fresh capital to replace what it transferred to Spinco, investors would be buying into an investment bank with a scrubbed balance sheet.
Management Shift
The U.S. Securities and Exchange Commission gave the plan initial approval, Lehman executives said. There was only one hitch: It would take at least three months to meet SEC requirements. Lehman didn't have three months.
The firm's announcement of another management shuffle on Sept. 7 hardly buoyed confidence. Isaacs, the international operations chief and former rival of McDade's, was out, as was Andrew J. Morton, global head of fixed income. Isaacs had actually resigned in June, although the announcement was delayed for three months at Fuld's request. His decision to leave the firm after McDade's ascension, at a time when he could have been instrumental in negotiating a foreign deal, only served to widen the rift between the London and New York offices.
Hedge Fund Squeeze
The beginning of the end came two days later when the KDB talks fell apart.
``The possibility of a Lehman deal wasn't big from the very beginning,'' Jun Kwang Woo, chairman of South Korea's Financial Services Commission, said after the collapse. Still, by Sept. 9, it was all Lehman investors had to pin their hopes on. With shares trading at $7.79 a share, below what KDB had been willing to pay a few days earlier, Lehman had a market value of $5.4 billion, one-sixth of what it had been a year earlier.
The cost of insuring Lehman's debt surged by almost 200 basis points after the KDB news, rising to 500, still not as high as where Bear Stearns's credit-default swaps were trading before its collapse. (A basis point equals one-hundredth of a percentage point.)
That caused Lehman's hedge fund clients to pull out, and short-term creditors cut lending lines. New York-based JPMorgan, Lehman's clearing agent for trades, demanded additional powers to seize cash and collateral in the firm's accounts.
$3.9 Billion Loss
The next day, Sept. 10, Fuld pre-announced quarterly results -- a $3.9 billion loss, after $5.6 billion of writedowns. He also said Lehman would auction off a majority stake in its asset-management division, and he revealed his Spinco plan. He was still talking defiantly.
``We have a long track record of pulling together when times are tough,'' Fuld said on a conference call with investors. ``We are on track to put these last two quarters behind us.''
Once again, Fuld was a step behind events. Before the day was out, Moody's Investors Service said it was reviewing Lehman's credit ratings and that it would downgrade the firm unless it made a deal with a strategic partner. Lehman's shares fell another 42 percent the next day to $4.22.
As things were spinning out of control, Fuld turned to the federal regulators with whom he had been talking since the demise of Bear Stearns.
He had approached Timothy F. Geithner, 47, president of the Federal Reserve Bank of New York, in July to see whether Lehman might become a bank-holding company, which would allow it to widen its funding base. Geithner was cool to the idea, according to a person familiar with the discussions, saying it wouldn't solve the problem of Lehman's troubled assets. Fuld never made a formal application.
Fed `Haircuts'
Now, Fuld went back to Geithner. With Lehman running out of cash -- it had only $1 billion left by week's end -- it had to borrow money from the Fed's broker-dealer facility by Monday if it wanted to stay in business. Again the New York Fed, on whose board Fuld sat until the day before, was of no help. He was told Lehman's assets didn't fit the criteria for collateral, Bernanke would later say. The Fed also raised its ``haircuts,'' or collateral requirements, a person familiar with the discussions said, making it harder for Lehman to borrow from the facility.
Meanwhile, Paulson was putting out the word there would be no more federal bailouts, that the government couldn't rescue every failing investment bank.
With the clock running out, Lehman executives reached out again to Bank of America. They also called Barclays, the second- largest U.K. bank by market value, and Nomura Holdings Inc., Japan's biggest brokerage. The message went out: Fuld was ready to sell.
Paulson's Pledge
On Sept. 12, one team of Lehman executives was camped out at the Lexington Avenue offices of New York-based law firm Simpson Thacher & Bartlett LLP, showing the firm's books to Barclays. Another group was at the Park Avenue office of Sullivan & Cromwell LLP doing the same for Bank of America. CEO Lewis agreed to the talks after Paulson urged him to consider a deal, a person with knowledge of the discussions said.
Two other Lehman executives -- McDade and Alexander Kirk, global head of principal investing -- were dispatched to the New York Fed on Liberty Street, where Geithner and Paulson had gathered a group of Wall Street leaders. There, Paulson reiterated that no taxpayer money would be used to save Lehman. He challenged the group to find a private solution to rescue the firm, saying it was in their own best interests.
Barclays Deal
One of the attendees, Merrill CEO John A. Thain, 53, took stock of his own company's best interests and initiated merger talks with Bank of America. Lewis had concluded on Friday that he couldn't do a deal with Lehman without government backing, which he thought would be forthcoming. After Paulson made it clear to Lewis that a government role wasn't in the cards, the Bank of America CEO pulled his team out of the Lehman talks.
That left only Barclays, since Nomura told Lehman it was unable to move fast enough. Fuld, who rarely left his office that weekend -- working the phones, fielding calls from deputies, talking to Barclays executives -- thought he had a deal Saturday night. Barclays was willing to buy Lehman for about $5 a share if it could leave behind the most troublesome assets, the ones Lehman had proposed spinning off into a separate company as well as some others Barclays didn't want.
Sunday morning brought a false dawn. Geithner and Paulson had talked a syndicate of banks into backstopping the creation of a new entity that would take over $55 billion to $60 billion of Lehman's problem assets, according to people with knowledge of the negotiations.
No Lifeline
Everyone was basking in what seemed a done deal until word came at 11:30 a.m. in New York that the U.K.'s FSA, which regulates that country's banks, refused to waive normal shareholder-approval requirements or to allow Barclays to guarantee Lehman's debts until obtaining that approval. The reason, people familiar with the decision say, was that Barclays lacked sufficient capital to absorb Lehman.
At that point, the only way to save the deal would have been for U.S. regulators to make the temporary debt guarantee. They didn't. Paulson, who told the New York Times he didn't have the authority to rescue Lehman, didn't answer questions about Sunday's events submitted by Bloomberg. Nor did Geithner.
Fuld thought Paulson was in his corner, he told a person familiar with events, even as the Treasury secretary publicly resisted spending taxpayer money to help Lehman. Fuld was stunned, the person says, when Paulson didn't throw him a lifeline at the end.
Failure's Furies
It was McDade who called Fuld from the Fed meeting on Sunday afternoon, not Paulson. Far from helping Lehman, Paulson, Geithner and other officials, including SEC Chairman Christopher Cox, began pressing Lehman to declare bankruptcy. McDade told them that would have serious repercussions for other firms. Wall Street executives gathered at the Fed said a bankruptcy wouldn't be the end of the world. Goldman Sachs and Morgan Stanley both had war rooms with charts detailing Lehman's subsidiaries and their exposure to each one, and they thought their potential losses would be limited.
No one, not even Lehman, knew what furies the firm's failure was about to unleash.
The end came at about 2 a.m. Sept. 15, when Fuld, out of running room, filed for bankruptcy. That day the Standard & Poor's 500 Index had its biggest daily drop since the September 2001 terrorist attacks, and bank-lending rates soared. Paulson, who was poised to let AIG fail, quickly re-thought the wisdom of that decision and approved an $85 billion bailout. He and Bernanke also went to Congress to push for a $700 billion federal bailout to buy bad assets from troubled banks.
Restless Nights
Only Lehman ended up in the wrong place at the wrong time.
Fuld was hard-pressed to explain his fate when he appeared in front of Waxman's committee on Oct. 6. To many of the congressmen's hostile questions and accusations, he had no answers. ``I wake up every single night,'' Fuld said, ``thinking, `What could I have done differently?'''
It might have ended differently had Fuld not risked so much on mortgage-backed securities. It might have ended differently had Fuld been willing to acknowledge Lehman's falling valuations. It might have ended differently if Fuld had made a deal in June, or July, or August.
That would have required acknowledging that time had run out on Wall Street's over-leveraged, overpaid gilded age. Instead, in his stubbornness and isolation, Dick Fuld failed to save the firm he lived for.
To contact the reporters on this story: Yalman Onaran in New York at yonaran@bloomberg.net; John Helyar in Atlanta at jhelyar@bloomberg.net.
Last Updated: November 9, 2008 20:10 EST
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Fuld Solicited Buffett Offer CEO Could Refuse as Lehman Fizzled
By Yalman Onaran and John Helyar
Nov. 10 (Bloomberg) -- It was the afternoon of Sept. 9, and tensions were rising in the 31st-floor office of Lehman Brothers Holdings Inc. Chief Executive Officer Richard S. Fuld Jr.
That morning news broke that the Korea Development Bank had pulled out of talks to buy a stake in the New York-based securities firm. By 1 p.m., Lehman's already battered stock had plunged another 43 percent.
Fuld was rat-a-tatting orders to associates seated at a table in his corner office, one wall of which featured photographs of lions taken by the boss himself in Africa. Herbert ``Bart'' McDade, installed as president in June, Vice Chairman Thomas A. Russo and Chief Financial Officer Ian T. Lowitt had been in and out of Fuld's lair all morning. Now the CEO was staring daggers at responses he deemed too slow or too fuzzy to help right his listing ship, said a person familiar with events that day. And he was lashing out at the injustice of it all.
``Here we go again,'' Fuld erupted at one point, the person recalled. ``Perception trumping reality once more.''
It was vintage Fuld, a man so physically imposing, so volcanically explosive that, even at age 62, he scared underlings and competitors alike. He was raging on the captain's bridge, while a storm engulfed the company he had willed into becoming one of Wall Street's finest. Couldn't the short-sellers see how much he had done to shed bad assets? Couldn't they understand what a great franchise it still was?
Fuld was grounded enough in reality to know one thing: ``We've got to act fast,'' he said, ``so this financial tsunami doesn't wash us away.''
Financial Armageddon
Six days later -- 158 years after its founding as a cotton brokerage in Alabama -- Lehman Brothers was gone. Treasury Secretary Henry M. Paulson Jr. said he didn't want to use taxpayer money to save Lehman, as the government had done in March when it pledged $29 billion to facilitate the sale of failing Bear Stearns Cos. to JPMorgan Chase & Co. Federal Reserve Chairman Ben S. Bernanke insisted there was nothing the government could have done in the end, even though Fuld had warned that Lehman's collapse could trigger a financial Armageddon.
Fuld's failure to save Lehman, after rescuing it three times before, is a story about how the most indomitable man on Wall Street became addicted to leverage and intoxicated with the power it brought. It is a tale about the inability to repair a financial model wrecked by a lack of limits and transparency, a story pieced together from interviews with former Lehman executives and outsiders familiar with the firm. Isolated, surrounded by acolytes and unaware of the rivalries tearing his firm apart, Fuld was too prideful to accept the fast-eroding value of the empire he had built, too slow to cut a deal.
Biggest Bankruptcy
The end came after months of frantic activity to find a solution -- reaching out to, then spurning an offer from Berkshire Hathaway Chairman Warren Buffett; meeting with executives of banks on three continents, devising a last-ditch plan to spin off Lehman's toxic assets; and pleading with government officials.
Then, on the morning of Sept. 14, after a series of weekend meetings at the New York Fed, a private deal to save the firm from bankruptcy was hatched. The government persuaded a syndicate of banks to backstop a new entity that would take over $55 billion to $60 billion of Lehman's troubled assets, and London-based Barclays Plc agreed to acquire the rest of the firm, according to people familiar with the negotiations.
When the U.K.'s Financial Services Authority refused to sign off on the Barclays purchase late that morning, U.S. officials refused to take any steps to save the deal. At about 2 a.m. on Monday, Sept. 15, Lehman filed the biggest bankruptcy in U.S. history.
`Guilty Firm'
``Wall Street was giving the impression that after some bloodletting the crisis would be over, and the government bought that line,'' said Charles R. Geisst, author of ``100 Years on Wall Street'' and a finance professor at Manhattan College in New York. ``The thought was to make an example of a guilty firm, and Lehman just happened to be the next one in line.''
The Dow Jones Industrial Average fell 504 points on the day Lehman collapsed, triggering an increase in bank borrowing costs and a run on money-market funds and financial institutions around the world. By Tuesday, Paulson and Bernanke had reversed course, agreeing to an $85 billion bailout of foundering American International Group Inc., at the time the world's largest insurer. The government has since decided to make $250 billion of capital infusions to bolster major U.S. banks. Only Lehman has paid the ultimate price of the financial meltdown to date -- obliteration by bankruptcy.
Reputation in Tatters
It's little comfort to Fuld that he was right to forecast Armageddon and regulators were wrong. His reputation is in tatters; his days are filled with lawyers; three U.S. attorneys are investigating whether he misled investors about the firm's financial condition; his anger is palpable.
Fuld declined to be interviewed for this article as did his lawyer, Patricia Hynes of Allen & Overy.
In October, he appeared before the House Committee on Oversight and Reform wearing his emotions on the sleeve of his dark blue suit.
When asked why AIG was saved and Lehman wasn't, he leaned into a microphone, scowled and slowly replied: ``Until the day they put me in the ground, I will wonder.''
Here's the kind of year it has been for the man who went from being the toast of Wall Street to toast. In January he was hobnobbing with the elite at the World Economic Forum in Davos, Switzerland. Nine months later he was heckled all the way to his limo after testifying at a congressional hearing.
Fuld's Career
The fall of Lehman isn't another tale about an overmatched or under-engaged CEO. For the 16 years Fuld presided over Lehman, he was considered one of the industry's most skilled chief executives, boosting the firm's profit from $113 million in 1994 to $4.2 billion last year and multiplying its share price 20 times. Fuld was no E. Stanley O'Neal or Charles O. ``Chuck'' Prince, late of Merrill Lynch & Co. and Citigroup Inc. respectively, who'd gotten top jobs without being steeped in their institution's businesses. Nor was he a James ``Jimmy'' Cayne, who played bridge while New York-based Bear Stearns burned.
Fuld lived for and identified with his firm. It was his oxygen, a friend says. He had spent his entire career there, so his saga is also a story of Wall Street over the past four decades. When Fuld began working at Lehman in 1969, messengers lugged bags of stock certificates between brokers' offices to complete trades. His rise embodied the triumph of the trader and of the outsize bonus -- he took home about $300 million over the past eight years.
Starting on Lehman's commercial-paper desk, Fuld became a formidable fixed-income trader. He maintained a reputation as a keen risk manager until it became clear Lehman had taken on too many bad mortgage-related assets.
Quant Concoctions
The difference between risk management in the 1980s and in the new millennium was like the difference between playing checkers and three-dimensional chess. The instruments Lehman issued had become more complex than commercial paper, the stakes incomparably higher.
It was the same all over Wall Street. While CEOs of Fuld's generation spent their days in top-floor offices taking meetings, the firms' quants were downstairs cooking up synthetic financial gizmos and mind-bending trading strategies. What they concocted might produce monster profits -- or prove a Frankenstein's monster.
``Fuld took a franchise he'd built from almost nothing, brick by brick, and then trashed it in less than two years,'' said Sean Egan, president and founder of Egan-Jones Ratings Co. in Haverford, Pennsylvania. ``His biggest mistake was in not understanding the risks that had evolved since he was last active in debt markets. And he relied on the support of others whose interests were aligned with him.''
`The Gorilla'
A CEO needs good managers reporting to him to figure out the right risk-reward ratios and make the right decisions. Increasingly, Fuld wasn't getting good dope. He became isolated in recent years, people familiar with the firm's operations said. He countenanced little debate and delegated more responsibility to Joseph M. Gregory, 56, who became president and chief operating officer in 2004.
An intimidating figure -- he played in international squash competitions when he was younger and is still fit -- Fuld was known around the office as ``the Gorilla.'' His icy stare, people who worked at Lehman say, froze recipients with fear. No one wanted to tell Fuld something was wrong or to question how Lehman was run.
As it turned out, one of the lessons Fuld took away from Lehman's decline in the 1980s would contribute to its collapse in 2008.
Glucksman vs. Peterson
The earlier crisis grew out of a power struggle between two senior partners: Lewis Glucksman, who headed trading and was Fuld's mentor, and Peter Peterson, who ran investment banking. Glucksman maneuvered Peterson out of the chairmanship, setting off a rift between traders and bankers that so weakened the firm it wound up being acquired by American Express Co. in 1984.
It was traumatic for the partners, since the dispute cost them their independence and considerable income. When Lehman was spun off in 1994, Fuld vowed that no one would ever do unto him as Glucksman had done unto Peterson. For Fuld, that meant not having a strong No. 2.
Christopher Pettit, a longtime friend and ally of Fuld's, was forced out as chief operating officer when he balked at an executive reorganization in 1996. (He died three months later in a snowmobile accident.) Six years would go by before Fuld installed another chief operating officer. In the meantime, Fuld pushed potential rivals aside, say people familiar with the firm's operation. Michael F. McKeever, who ran investment banking, was stripped of his duties bit by bit and left in 2000. John Cecil, chief financial officer until 2000, was demoted to an adviser because he dared oppose Fuld, the people say.
Gregory's Role
The man Fuld finally appointed chief operating officer was Gregory, a trusted lieutenant who had worked at Lehman since 1974. He would make it his mission to keep Fuld's life uncomplicated by debate.
Any meeting with Gregory, say people who worked with him, was a soliloquy. The COO delivered lectures on matters as minute as improving the look of sloppy dressers. Management-committee meetings were conducted without discussion, attendees say.
The same was true of executive-committee meetings presided over by Fuld. While reviewing budgets for 2007, one committee member questioned the performance of a unit, according to a person who was in the room. Fuld stared at him coldly, then broke the silence: ``You've got some balls to say that, knowing how much I hate that topic.''
Authoritarian Climate
As Fuld returned to studying the papers in front of him, Gregory continued dressing down the committee member for his impertinence. He also upbraided him after the meeting, demanding that any objections be brought to Gregory privately and not voiced in front of the committee. Gregory didn't return calls seeking comment.
Word on proper comportment spread through the ranks. Fuld conducted an employee webcast every three months. He'd always end by asking if there were any questions. There rarely were.
The problem with this authoritarian climate was that when Lehman began to sputter, Fuld was cut off from dissenting opinion. Woe to the messenger who came to the 31st-floor bearing bad news.
The refusal of fixed-income chief Michael Gelband to play the yes-sir game cost him his job -- and Lehman one of its best risk managers. He was forced out by Gregory in May 2007, people familiar with the circumstances say. Four months later Gregory also shunted aside risk chief Madelyn Antoncic, when she fought for hedges on some of Lehman's investments. She was demoted to a peripheral government-relations job.
`Cheap Tar'
Gregory also set factions within Lehman against each other, the people say. New York executives, led by McDade, then head of equities, jousted with those in London, who gathered around international operations chief Jeremy M. Isaacs and who believed they deserved more power because the firm's top growth areas were outside the U.S. The intercontinental rivalry would prove a critical fault line for Lehman.
As cut off from information as Fuld may have been, it wasn't as if he didn't recognize the firm's problems. In November 2004, more than two years before the bull market reached its peak, Fuld was telling people around him that low interest rates and cheap credit would create a bubble that could one day pop.
``It's paving the road with cheap tar,'' he told colleagues in a meeting at the time. ``When the weather changes, the potholes that were there will be deeper and uglier.''
AIG Approach
Fuld also warned against taking on too much risk, such as leveraged loans, which are used to finance buyouts of firms, as Lehman tried to compete with commercial banks that used their bigger balance sheets to support investment banking operations. ``We're vulnerable if we throw our balance sheet around,'' Fuld said, according to a person at the meeting.
As early as March 2006, Fuld approached Martin J. Sullivan, then CEO of AIG, about a possible merger. Fuld saw Lehman becoming the investment banking unit of the insurer. A combination would have given Lehman a trillion-dollar balance sheet, funded by stable insurance premiums, which it could use to provide leverage to its clients, Fuld told his executive committee at an offsite at the Fairmont Turnberry Isle Resort & Club near Miami, according to a person who attended the meeting.
Sullivan wasn't interested, and the proposal didn't go beyond the initial contact, the person said. Sullivan, who left AIG in June 2008, didn't return calls seeking comment.
False Comfort
Lehman used its balance sheet to finance leveraged buyouts anyway. So did other Wall Street firms forced to compete with commercial banks, which were allowed to practice investment banking after the 1999 repeal of the Glass-Steagall Act.
Leveraged loans weren't Lehman's undoing, though. Fuld saw the dangers they posed and rid the firm of the riskiest ones in the fourth quarter of 2007, according to company filings.
What Fuld failed to do is take advantage of a rebound in the prices of fixed-income assets at the time to sell some of Lehman's $84 billion mortgage portfolio. He took false comfort in having hedged the firm's mortgage positions at the end of 2006. Because of the hedges, insiders say, Lehman executives were sanguine after the July 2007 implosion of two Bear Stearns hedge funds that had invested in subprime securities. Fuld even loaded up on mortgage-backed securities at the beginning of 2008, not seeing how vulnerable the firm would be when the subprime cancer metastasized to other asset classes.
Davos Predictions
The disconnect was on display at the World Economic Forum in Davos in January. On the one hand, Lehman Vice Chairman Russo, 65, presented a paper entitled ``Credit Crunch: Where Do We Stand?'' predicting the reset of interest rates on $550 billion of subprime mortgages in the next 12 months would trigger foreclosures and economic woe. On the other hand, Russo said it was no big deal for Lehman. ``Dick Fuld is very conscious of risk,'' he said in a Bloomberg TV interview. ``He's created a culture that's enabled us to do fine.''
Others weren't so sure. A Lehman employee of more than 20 years says she sat her subordinates down in January and told them to start considering options outside the firm.
By the end of the fiscal first quarter in February, after New York-based rivals Citigroup and Merrill had taken about $45 billion in writedowns, Lehman's mortgage portfolio had increased by 2 percent from the previous quarter. Associates say Fuld had concluded the market for mortgage-backed securities had hit bottom, and he didn't have people around him to warn about the spread of subprime troubles to so-called Alt-A mortgages -- those made to borrowers without full documentation -- and the commercial real estate market.
Callan Appointment
Roger Nagioff, 44, a London equities trader who succeeded Gelband as fixed-income chief, was struggling to learn the business as the subprime rout began. He quit in February 2008 after realizing he couldn't get his head around Lehman's mortgage-related positions, people close to Nagioff said.
Lehman also had a rookie chief financial officer. Erin M. Callan, a 43-year-old investment banker, had been elevated to the job in December by Gregory, although she had no experience in the company's treasury, a typical training ground for CFOs. Fuld went along with the appointment and allowed her to become the public face of Lehman because he trusted Gregory and didn't get involved in staffing decisions, people say.
On March 17, a day after the sale of Bear Stearns, Lehman shares fell as much as 48 percent in New York Stock Exchange trading on concern the firm would be Wall Street's next victim.
Counter-Punching
To Fuld, the idea was outrageous. The hit was a matter of wrong perceptions, not weak fundamentals. So he got on the phone with the firm's biggest clients to tell them Lehman was no Bear Stearns, and he ordered other executives to do the same.
This was pure Fuld: When bloodied, counter-punch. That's how he turned things around in 1998, when Wall Street rumors had Lehman over-exposed to the Russian currency collapse and the ``Asian flu.'' His jawboning with clients, regulators and others pulled Lehman's stock out of a spiral from $21 to $6.
This time around Fuld also reached out to Omaha billionaire Buffett, the man who had ridden to the rescue of Salomon Inc. in 1987, according to two people with knowledge of the approach. He asked investment banking chief Hugh ``Skip'' McGee, 49, to call David L. Sokol, chairman of Berkshire Hathaway-owned MidAmerican Energy Holdings Co., and see if Buffett might be interested in a stake in Lehman.
Spurning Buffett
The answer was yes, Sokol told McGee. So Fuld called the 78-year-old Buffett. Berkshire Hathaway would buy preferred shares that would pay a dividend of 9 percent and could be converted to common at the then-market price of $40, the people said. That was costlier than what other investors demanded, Fuld was told by associates, and he spurned the offer. A few days later, on April 1, Lehman sold $4 billion of convertible preferred stock to public investors with a 7.25 percent interest rate and a 32 percent conversion premium.
That meant those buying the convertibles were willing to pay one-third more than the market price for Lehman's shares if and when they wanted to convert. Buffett was willing to pay only the going price at the time, which would have meant more dilution for existing shareholders. A spokeswoman for Buffett declined to comment.
Fuld had saved some money, yet he rebuffed a Buffett stake, considered to be corporate America's Good Housekeeping seal of approval. Although that might have helped Lehman in the short run, it wouldn't have solved the firm's fundamental problem: Fuld needed to sell the entire mortgage-related portfolio at whatever price he could get and raise enough capital to cover the losses incurred in such a sale.
`Huge Brand'
Six months later Goldman Sachs Group Inc., the most profitable investment bank, agreed to even harsher terms with Buffett -- paying him a 10 percent annual return on a $5 billion investment. Yet the market had deteriorated so much by then that even the billionaire's blessing wasn't enough. Goldman's shares fell 36 percent in the two weeks after the deal was announced, only to recover after the government stepped in to buy stakes in the biggest U.S. banks.
Lehman's April 1 stock sale sent a signal that the firm continued to have access to capital and the confidence of investors and the government. Its shares rose 26 percent in the following three weeks. At a dinner at the Treasury Department on April 11, where Fuld chatted with Paulson, he came away with the impression, as he wrote in an e-mail to Russo that night, that we ``have huge brand with treasury'' and that Paulson ``loved our capital raise.'' The e-mail was later made public by U.S. Representative Henry A. Waxman, chairman of the House Committee on Oversight and Government Reform.
Finding a Buyer
Paulson would complain, in interviews with the New York Times and Charlie Rose after Lehman's demise, that he couldn't get Fuld off the dime in finding a buyer for Lehman. Brookly McLaughlin, a Treasury spokeswoman, said Paulson ``spoke to Fuld quite often'' between April and September. She wouldn't divulge the frequency or substance of their conversations. Fuld took Paulson's request to mean he should find a strategic partner to buy a stake in Lehman, which he was already searching for, according to people close to the CEO.
Why Fuld was unable to find a buyer for all or part of Lehman remains a matter of dispute. It was not for want of trying, although some people familiar with those efforts throughout the spring and summer say he was unwilling to accept the rapidly falling valuation of his firm.
``Dick was so proud of Lehman that he was slow to recognize that others didn't share that belief,'' said George L. Ball, chairman of Houston-based investment firm Sanders Morris Harris Group Inc. and a friend of Fuld's.
`Hurting Einhorn'
One obstacle, say people close to Fuld, is that he was more of an inside man. He didn't like to mingle with the Wall Street elite on the black-tie circuit. He didn't go in much for the genteel game of golf, preferring the sweaty game of squash, often on his own home court in Greenwich, Connecticut. He didn't care for public speaking.
Throughout the crisis, Fuld was too quick to blame his detractors for his own mistakes. David Einhorn, president of Greenlight Capital Inc., a New York-based hedge fund, became enemy No. 1 on May 21, when he went public with his analysis that Lehman was propping up its numbers with aggressive valuations and challenged CFO Callan's credibility.
The short-seller put pressure on Lehman's stock and aroused Fuld's ire. A May 26 e-mail to Fuld from Lehman executive David Goldfarb, released by Waxman's committee, suggested that the firm should use capital it was hoping to raise to buy back Lehman stock, ``hurting Einhorn bad!!'' Fuld's response: ``I agree with all of it.''
Bear Stearns Precedent
Meanwhile, the company's financial situation continued to deteriorate. The value of Lehman's residential-mortgage portfolio and commercial real estate assets kept declining as the prospect of recession grew. Nobody wanted to buy into Lehman -- at least not for the moment.
Even interested parties figured the price would keep coming down, as real estate valuations fell and Lehman got more desperate for cash. The Bear Stearns precedent, in which the government stepped in to facilitate a deal, also gave prospective buyers a reason to wait.
Lehman sold $16 billion, or about one-fifth, of its mortgage assets during the second quarter of 2008. Selling assets that nobody wanted meant taking significant losses. Market volatility had also rendered many of the hedges ineffective during the quarter. That led Lehman to announce a $2.8 billion second-quarter loss on June 9, its first since being spun off from American Express. Lehman also reported that it had raised another $6 billion in capital from investors.
Strategic Partner
The loss led Fuld to panic, say some people who interacted with him at the time. For the first time, he started worrying that he might lose the firm. McDade, 49, who as head of equities was instrumental in raising capital from trading clients, persuaded Fuld to promote him to president, ousting Gregory. Callan was also pushed aside, replaced by Lowitt, 44.
One of the first things McDade did was to bring back Gelband, 49, to help him sort out the mess. He also asked investment banking chief McGee to redouble efforts to find a strategic partner who would buy a stake of at least 10 percent.
While the firm had been in talks with potential partners in the previous three years -- including Japan's Mizuho Financial Group Inc. and China's Citic Group and Ping An Insurance (Group) Co. -- they were always with the intention of cooperation in Asia, where Lehman was weaker than most of its rivals.
GE, Citic, KDB
Now, as summer began, the stakes were higher. Talks began in July with executives at Bank of America Corp. One Lehman proposal was to merge with the investment banking unit of its Charlotte, North Carolina-based rival, which would own about 40 percent of the new entity. While CEO Kenneth D. Lewis wasn't keen on that idea, talks continued on other possible combinations, people familiar with the discussions said.
Fuld also reached out to General Electric Co. CEO Jeffrey R. Immelt, a fellow board member of the New York Fed. He said no. An overture to London-based HSBC Holdings Plc went nowhere. And Fuld came up empty after meeting in August with executives from Citic, China's biggest state-owned investment firm.
Only the Korea Development Bank seemed eager to make a deal. The bank's chief executive officer, Min Euoo Sung, had run Lehman's operations in Seoul until May. In early August, according to Lehman executives involved in the talks, KDB offered to buy 25 percent of the firm for $22 a share, about where the shares were trading at the time. Then talks bogged down on issues like how much management say the Korean bank would have and how Lehman's mortgage positions should be valued. By early September, Min was only willing to pay about $8 share, the executives said.
Codename Spinco
``The gap in assessing the size of potential writedowns was just too big,'' Min told reporters in Seoul on Sept. 16.
Some involved with the negotiations say Fuld and McDade didn't want to cede any management control and that Min grew concerned about further Lehman writedowns. Others say Min never had approval from his government to do a deal, so he kept lowering the price to make sure it wouldn't happen. Min told legislators in Seoul on Sept. 18 that Lehman was unwilling to accept less than $17.50 a share.
Meanwhile, worried that his lieutenants wouldn't be able to fetch a fair price from an investor, Fuld was pursuing another strategy. The plan his associates devised would offload Lehman's toxic commercial-mortgage portfolio to an independent company, codenamed Spinco. The new company's stock would be owned by Lehman shareholders, and its startup capital would be provided by the firm. While Lehman would have to raise fresh capital to replace what it transferred to Spinco, investors would be buying into an investment bank with a scrubbed balance sheet.
Management Shift
The U.S. Securities and Exchange Commission gave the plan initial approval, Lehman executives said. There was only one hitch: It would take at least three months to meet SEC requirements. Lehman didn't have three months.
The firm's announcement of another management shuffle on Sept. 7 hardly buoyed confidence. Isaacs, the international operations chief and former rival of McDade's, was out, as was Andrew J. Morton, global head of fixed income. Isaacs had actually resigned in June, although the announcement was delayed for three months at Fuld's request. His decision to leave the firm after McDade's ascension, at a time when he could have been instrumental in negotiating a foreign deal, only served to widen the rift between the London and New York offices.
Hedge Fund Squeeze
The beginning of the end came two days later when the KDB talks fell apart.
``The possibility of a Lehman deal wasn't big from the very beginning,'' Jun Kwang Woo, chairman of South Korea's Financial Services Commission, said after the collapse. Still, by Sept. 9, it was all Lehman investors had to pin their hopes on. With shares trading at $7.79 a share, below what KDB had been willing to pay a few days earlier, Lehman had a market value of $5.4 billion, one-sixth of what it had been a year earlier.
The cost of insuring Lehman's debt surged by almost 200 basis points after the KDB news, rising to 500, still not as high as where Bear Stearns's credit-default swaps were trading before its collapse. (A basis point equals one-hundredth of a percentage point.)
That caused Lehman's hedge fund clients to pull out, and short-term creditors cut lending lines. New York-based JPMorgan, Lehman's clearing agent for trades, demanded additional powers to seize cash and collateral in the firm's accounts.
$3.9 Billion Loss
The next day, Sept. 10, Fuld pre-announced quarterly results -- a $3.9 billion loss, after $5.6 billion of writedowns. He also said Lehman would auction off a majority stake in its asset-management division, and he revealed his Spinco plan. He was still talking defiantly.
``We have a long track record of pulling together when times are tough,'' Fuld said on a conference call with investors. ``We are on track to put these last two quarters behind us.''
Once again, Fuld was a step behind events. Before the day was out, Moody's Investors Service said it was reviewing Lehman's credit ratings and that it would downgrade the firm unless it made a deal with a strategic partner. Lehman's shares fell another 42 percent the next day to $4.22.
As things were spinning out of control, Fuld turned to the federal regulators with whom he had been talking since the demise of Bear Stearns.
He had approached Timothy F. Geithner, 47, president of the Federal Reserve Bank of New York, in July to see whether Lehman might become a bank-holding company, which would allow it to widen its funding base. Geithner was cool to the idea, according to a person familiar with the discussions, saying it wouldn't solve the problem of Lehman's troubled assets. Fuld never made a formal application.
Fed `Haircuts'
Now, Fuld went back to Geithner. With Lehman running out of cash -- it had only $1 billion left by week's end -- it had to borrow money from the Fed's broker-dealer facility by Monday if it wanted to stay in business. Again the New York Fed, on whose board Fuld sat until the day before, was of no help. He was told Lehman's assets didn't fit the criteria for collateral, Bernanke would later say. The Fed also raised its ``haircuts,'' or collateral requirements, a person familiar with the discussions said, making it harder for Lehman to borrow from the facility.
Meanwhile, Paulson was putting out the word there would be no more federal bailouts, that the government couldn't rescue every failing investment bank.
With the clock running out, Lehman executives reached out again to Bank of America. They also called Barclays, the second- largest U.K. bank by market value, and Nomura Holdings Inc., Japan's biggest brokerage. The message went out: Fuld was ready to sell.
Paulson's Pledge
On Sept. 12, one team of Lehman executives was camped out at the Lexington Avenue offices of New York-based law firm Simpson Thacher & Bartlett LLP, showing the firm's books to Barclays. Another group was at the Park Avenue office of Sullivan & Cromwell LLP doing the same for Bank of America. CEO Lewis agreed to the talks after Paulson urged him to consider a deal, a person with knowledge of the discussions said.
Two other Lehman executives -- McDade and Alexander Kirk, global head of principal investing -- were dispatched to the New York Fed on Liberty Street, where Geithner and Paulson had gathered a group of Wall Street leaders. There, Paulson reiterated that no taxpayer money would be used to save Lehman. He challenged the group to find a private solution to rescue the firm, saying it was in their own best interests.
Barclays Deal
One of the attendees, Merrill CEO John A. Thain, 53, took stock of his own company's best interests and initiated merger talks with Bank of America. Lewis had concluded on Friday that he couldn't do a deal with Lehman without government backing, which he thought would be forthcoming. After Paulson made it clear to Lewis that a government role wasn't in the cards, the Bank of America CEO pulled his team out of the Lehman talks.
That left only Barclays, since Nomura told Lehman it was unable to move fast enough. Fuld, who rarely left his office that weekend -- working the phones, fielding calls from deputies, talking to Barclays executives -- thought he had a deal Saturday night. Barclays was willing to buy Lehman for about $5 a share if it could leave behind the most troublesome assets, the ones Lehman had proposed spinning off into a separate company as well as some others Barclays didn't want.
Sunday morning brought a false dawn. Geithner and Paulson had talked a syndicate of banks into backstopping the creation of a new entity that would take over $55 billion to $60 billion of Lehman's problem assets, according to people with knowledge of the negotiations.
No Lifeline
Everyone was basking in what seemed a done deal until word came at 11:30 a.m. in New York that the U.K.'s FSA, which regulates that country's banks, refused to waive normal shareholder-approval requirements or to allow Barclays to guarantee Lehman's debts until obtaining that approval. The reason, people familiar with the decision say, was that Barclays lacked sufficient capital to absorb Lehman.
At that point, the only way to save the deal would have been for U.S. regulators to make the temporary debt guarantee. They didn't. Paulson, who told the New York Times he didn't have the authority to rescue Lehman, didn't answer questions about Sunday's events submitted by Bloomberg. Nor did Geithner.
Fuld thought Paulson was in his corner, he told a person familiar with events, even as the Treasury secretary publicly resisted spending taxpayer money to help Lehman. Fuld was stunned, the person says, when Paulson didn't throw him a lifeline at the end.
Failure's Furies
It was McDade who called Fuld from the Fed meeting on Sunday afternoon, not Paulson. Far from helping Lehman, Paulson, Geithner and other officials, including SEC Chairman Christopher Cox, began pressing Lehman to declare bankruptcy. McDade told them that would have serious repercussions for other firms. Wall Street executives gathered at the Fed said a bankruptcy wouldn't be the end of the world. Goldman Sachs and Morgan Stanley both had war rooms with charts detailing Lehman's subsidiaries and their exposure to each one, and they thought their potential losses would be limited.
No one, not even Lehman, knew what furies the firm's failure was about to unleash.
The end came at about 2 a.m. Sept. 15, when Fuld, out of running room, filed for bankruptcy. That day the Standard & Poor's 500 Index had its biggest daily drop since the September 2001 terrorist attacks, and bank-lending rates soared. Paulson, who was poised to let AIG fail, quickly re-thought the wisdom of that decision and approved an $85 billion bailout. He and Bernanke also went to Congress to push for a $700 billion federal bailout to buy bad assets from troubled banks.
Restless Nights
Only Lehman ended up in the wrong place at the wrong time.
Fuld was hard-pressed to explain his fate when he appeared in front of Waxman's committee on Oct. 6. To many of the congressmen's hostile questions and accusations, he had no answers. ``I wake up every single night,'' Fuld said, ``thinking, `What could I have done differently?'''
It might have ended differently had Fuld not risked so much on mortgage-backed securities. It might have ended differently had Fuld been willing to acknowledge Lehman's falling valuations. It might have ended differently if Fuld had made a deal in June, or July, or August.
That would have required acknowledging that time had run out on Wall Street's over-leveraged, overpaid gilded age. Instead, in his stubbornness and isolation, Dick Fuld failed to save the firm he lived for.
To contact the reporters on this story: Yalman Onaran in New York at yonaran@bloomberg.net; John Helyar in Atlanta at jhelyar@bloomberg.net.
Last Updated: November 9, 2008 20:10 EST
http://www.bloomberg.com/apps/news?pid=206...amp;refer=home#
I think this is a very important Thread but it is becomming overwhelming. Trying to follow
it results in information over load. I wish some of you more knowledgable contributors would
throw in some summary statements occassionally and label them as such.
it results in information over load. I wish some of you more knowledgable contributors would
throw in some summary statements occassionally and label them as such.
Risky Business
Brooklyn Rail - New York,NY,USA
... I will note here only that the revival of the capitalist economy after this lengthy period of economic depression and physical destruction followed, ...
IMF update underlines speed of slide into global recession
Bay Area Indymedia - San Francisco,CA,USA
Talks of a full-blown economic depression is also being quietly discussed. At a meeting of the World Economic Forum in Dubai, one senior monetary official ...
Lessons from the Great Depression Survivors of the hardest times ...
The Southern - Carbondale,IL,USA
French, 92, remembers living in Mount Vernon, and later McLeansboro during the economic depression that started with the stock market crash in 1929. ...
Despite Recession Most Upbeat about Finances
PR Web (press release) - Ferndale,WA,USA
Despite a recessionary economy that threatens to become an economic depression, a new survey shows most are upbeat about their own financial situations. ...
Evidence of depression in China – communist regime announces a ...
India Daily - Whitehouse Station,NJ,USA
China today announced a whopping $570 billion stimulus package to boost domestic demand and a slew of macro-economic measures to ease credit crunch to ...
Don't link stimulus with trade pact: Obama staff chief
Reuters - USA
Democrats argue that is not enough to deal with what could be the worst economic slump since the Great Depression. Democratic leaders in Congress hope to ...
Obama's first economic lesson: blame Bush
Times Online - UK
Today, however, he may be able to stabilise the depression Next Saturday there will be a meeting of the leading economic nations, the G20, in Washington to ...
There is no chance of Obama to get America out of depression in ...
India Daily - Whitehouse Station,NJ,USA
What do expect from this leader who voted to handover $700 financial lollypop to those who are the root cause of the economic depression in America? ...
Brooklyn Rail - New York,NY,USA
... I will note here only that the revival of the capitalist economy after this lengthy period of economic depression and physical destruction followed, ...
IMF update underlines speed of slide into global recession
Bay Area Indymedia - San Francisco,CA,USA
Talks of a full-blown economic depression is also being quietly discussed. At a meeting of the World Economic Forum in Dubai, one senior monetary official ...
Lessons from the Great Depression Survivors of the hardest times ...
The Southern - Carbondale,IL,USA
French, 92, remembers living in Mount Vernon, and later McLeansboro during the economic depression that started with the stock market crash in 1929. ...
Despite Recession Most Upbeat about Finances
PR Web (press release) - Ferndale,WA,USA
Despite a recessionary economy that threatens to become an economic depression, a new survey shows most are upbeat about their own financial situations. ...
Evidence of depression in China – communist regime announces a ...
India Daily - Whitehouse Station,NJ,USA
China today announced a whopping $570 billion stimulus package to boost domestic demand and a slew of macro-economic measures to ease credit crunch to ...
Don't link stimulus with trade pact: Obama staff chief
Reuters - USA
Democrats argue that is not enough to deal with what could be the worst economic slump since the Great Depression. Democratic leaders in Congress hope to ...
Obama's first economic lesson: blame Bush
Times Online - UK
Today, however, he may be able to stabilise the depression Next Saturday there will be a meeting of the leading economic nations, the G20, in Washington to ...
There is no chance of Obama to get America out of depression in ...
India Daily - Whitehouse Station,NJ,USA
What do expect from this leader who voted to handover $700 financial lollypop to those who are the root cause of the economic depression in America? ...
Why Washington Cannot Prevent Depression by Martin D. Weiss, Ph.D.
Fear of depression is sweeping the nation.
Millions of Americans are consumed with anxiety, abandoning their old shop-till-they-drop habits, slashing their spending, trying desperately to pinch pennies for the coming hard times.
Thousands of bankers are snapping shut their coffers, tightening their lending standards, hunkering down in anticipation of a massive economic downturn.
Sophisticated investors also see the handwriting on the wall. They're pulling out of hedge funds, selling their mutual funds, rushing their money to the safety of Treasury bills.
Even the established media, often late to see the dangers, is beginning to speak out more loudly ...
CNN Money: "The rapid deterioration of labor markets points to a sharp decline in hours worked and output in the fourth quarter. This is likely to lead to a decline in personal consumption to the tune of 5% or so for that period. Since that makes up about 70% of the economy, the stage has already been set for real GDP to shrink at a more than 4% rate in the fourth quarter."
New York Times: "As dozens of countries slip deeper into financial distress, a new threat may be gathering force within the American economy — the prospect that goods will pile up waiting for buyers and prices will fall, suffocating fresh investment and worsening joblessness for months or even years. The word for this is deflation, or declining prices, a term that gives economists chills. Deflation accompanied the Depression of the 1930s. Persistently falling prices also were at the heart of Japan's so-called lost decade after the catastrophic collapse of its real estate bubble at the end of the 1980s."
The Wall Street Journal, USA Today, and hundreds of other newspapers around the world are all asking essentially the same question: Are we sinking into a depression? How bad will it be?
The answer, they say with unanimity, lies with Washington. That's why General Motors has suddenly switched PR tactics, now admitting it will run out of the cash it needs to stay in business. It wants a Washington handout.
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That's why dozens of major cities and states are saying the same thing. They want their share of the federal money too.
In this Washington-worship environment, you may even see Wall Street brokers drop their traditional embellishment of the news and begin stressing the negative — all for the sake of pressing the case for "bigger and better" federal bailouts.
The dire reality: Washington is not God. It cannot save the world. It cannot prevent the next depression.Hard to believe? Here's the proof:
Proof #1
The Debt Crisis, the Primary Catalyst
of the Economy's Decline, Is Far Too Big
for the U.S. Government to Control
The facts:
1. Based on the Federal Reserve's Flow of Funds report, there are now $52 trillion in interest-bearing debts in the U.S.
2. Based on estimates provided by the U.S. Government Accountability Office and other sources, it's safe to assume that there are also at least $60 trillion in contingency debts and obligations now starting to kick in — for Social Security, Medicare and other pensions.
3. Separately, the Bank of International Settlements reports that the total value of debts and bets placed worldwide (derivatives) is $596 trillion, or more than a half quadrillion!
In contrast, even after the most reckless outpouring of government bailouts in recent months, the total rescue money announced in the U.S. so far is $2.7 trillion — a huge, unwieldy amount, but still minuscule in comparison to the massive debt build-up.
The numbers are not directly comparable, but just to get a sense of the magnitude of the problem, compare the size of the debts and bets outstanding (the first three bars in the chart) with the size of the $2.7 trillion in bailout commitments thus far (barely visible in the chart).Still, most people insist,
"If only Washington can avoid the mistakes it made in the 1930s ... if only Washington can preemptively nip this crisis in the bud ... if only Washington can be our lender and spender of last resort ... Great Depression II will never come to pass."
What they don't see is the fact that the debt build-up in the U.S. today is far greater than it was on the eve of Great Depression I. Indeed, in the chart below, Claus Vogt, the editor of Sicheres Geld (the German edition of our Safe Money Report) shows how ...
Prior to the 1930s, the total debt in the U.S. was between 150% and 160% of GDP. Now it's close to 350% of GDP.
Moreover, he reminds us that this chart does not even include derivatives, which barely existed in the 1930s but which are now sinking banks deeply into the red.
Clearly the government bailouts are too little, too late to end this crisis. At the same time ...
Proof #2
The Cost of the Bailouts Is Too Much,
Too Soon for Those Who Must Finance It
With the economy already falling, Washington cannot — and will not — fund the bailouts with higher taxes. Nor will it do it by making major cuts in government expenditures. Instead, at this phase of the crisis, the government will try to finance its folly largely by borrowing the money.
And now it has started: Just last week, the U.S. Treasury department announced that it is borrowing $550 billion dollars in the fourth quarter, more than the entire deficit of fiscal year 2008.
Also last week, Goldman Sachs estimated that the upcoming borrowing needs of the U.S. Treasury will be a shocking $2 trillion — to finance the bailouts, to finance the existing deficit and to refund debts coming due. That's four times the size of the entire deficit.
This means you can expect an avalanche of new Treasury bond supplies, crowding out private borrowers and putting severe upward pressure on interest rates. And, needless to say, higher interest rates cannot end the debt crisis; they can only make it worse.
Proof #3
You Can Bring a Horse to Water
But You Cannot Make It Drink.
My father told me this story about President Herbert Hoover shortly after the Crash of '29 ...
Hoover was worried about the sinking U.S. economy. So he called the leaders of major U.S. corporations down to Washington — auto executives from Detroit, steel executives from Pittsburgh, banking executives from New York.And he said:
"Gentlemen, when you go back home to your factories and your offices, here's what I want you to do. I want you to keep all your workers. Don't lay any off! I want you to keep your factories going. Don't shut any down! I want you to invest more, spend more, even borrow more if you have to. Just don't do any cutting. So we can keep this economy going."Instead, the executives went back to their factories and offices and said to their associates:
"If the president himself had to call us down to Washington to lecture us on how to run our business, then this economy must be in even worse shape than we thought it was."They promptly proceeded to do precisely the opposite of what Hoover had asked: They laid off workers by the thousands. They shut down factories. They slashed spending to the bone.
And today, we're beginning to see precisely the same phenomenon:
Washington is prodding consumers to borrow more, spend more, and save less. But consumers are doing precisely the opposite, as we just saw from the October collapse in retail sales.
Washington is prodding bankers to dish out more mortgage money, give people continuing access to credit cards, even lend money to sinking businesses. But the bankers are also doing precisely the opposite, as we just saw in a recent Fed's survey of bank loan officers.
Why the reluctance to borrow and lend? Because most borrowers and lenders are finally beginning to recognize what really went wrong in the United States: Too much debt, not enough savings. They also recognize what they have to do about it: Try to cut back.
In response, Washington bureaucrats are rushing out, waving their arms frantically in the air, and shouting: "No! Don't do that! We want you to lend and borrow more — so we can keep this economy going."
But their pleas fall on deaf ears: No matter what the government says, it is the natural survival instinct of billions of people and businesses around the world that will determine the outcome: Depression and deflation.
Proof #4
Powerful Vicious Cycles
of Debts and Deflation
You ask: We've had these debts for many years, haven't we? So why are they suddenly such a huge disaster now?
The answer: Yes, debt alone is usually tolerable. It can persist and pile up for years. And as long as borrowers have the income — or as long as they can borrow from Peter to pay Paul — they can continue making payments, and life goes on.
Deflation alone is also not so bad. It can help make homes more affordable, a college education more achievable, a tank of gas easier to fill.
It's when debts and deflation come together that a depression is inevitable. That's what happened in the 1930s; and, in a somewhat different way, that's what's happening today.
We are witnessing powerful vicious cycles in which deflation brings down debts and debts help accelerate the deflation.
For example ...
- In the U.S. housing market, widespread mortgage delinquencies and foreclosures precipitate massive selling of real estate; massive real estate selling causes severe price declines; and the price declines, in turn, cause more delinquencies and foreclosures.
- On Wall Street, corporate bankruptcies — and the fear of more to come — precipitate the liquidation of common stocks, corporate bonds and virtually every kind of asset; the selling drives markets lower; and falling markets, in turn, cause more corporate bankruptcies.
- Consumers, small and medium-sized businesses, city and state governments, hospitals and schools, even entire countries are caught up in a similar downward spiral; slashing their spending, laying off workers, dumping assets, losing revenues, and slashing their spending still more.
Next, you ask: Why can't the U.S. government simply create more inflation? Why can't it do what the government of Germany did after World War I? Or what the government of Zimbabwe is doing right now? In other words, why can't it just print all the money it needs to buy up all the debts?
That takes me to the fifth and final reason the government cannot end the debt crisis, cannot stop the vicious cycle of debt default and deflation, cannot prevent a depression.
Proof #5
The Ultimate Power of Markets
Let's say I am Uncle Sam; I represent the U.S. government. And let's say you represent the investors of the world, especially investors in U.S. government bonds.
I issue the bonds to borrow money. You buy the bonds to loan me money, to finance the U.S. government.
Now let me ask one fundamental question: Who is really in control of this situation? You or me?
The answer is obvious: I do not control you. I cannot tell you what to buy or how much. You are the one in control of that decision.
You have great power — power that the creditors of Germany did not have after World War I and the creditors of Zimbabwe do not have today. You have the power of the market — a market for the government securities you own.
In fact, in order to run my government, I cannot even dream of raising the money I need without you or without that market.
I need you. I need you to hold the U.S. bonds you've already bought. Plus, I need you to buy more new bonds to finance all my new spending and deficits. You are my lender, my creditor, my benefactor. I must keep you happy. I cannot afford to do anything that will make you angry.
In fact, by allowing the evolution of this vast market for government securities, I have effectively transferred the ultimate power to make final, critical decisions from me — the government — to you, the investors in government securities. And ...
The power of the market is stronger than any politician or government bureaucrat. It is more powerful than any law. It is even more powerful than the gold standard.In order to raise money for the government, I must retain your confidence, your trust. To do that, I cannot run the printing presses or destroy your money. Instead, I have to let the deflation and depression run its course.
Bottom line: It's preposterous to believe that Washington can save every failing individual, company, country and government on this planet.
It's naive to believe that government gimmicks or trick — manipulating the currency, writing new laws, changing the banking structure — will be a match for billions of consumers in revolt, millions of investors desperate to sell and thousands of banks pulling in their horns.
The government cannot repeal the law of gravity or stop investors from dumping their assets.
It cannot turn back the clock or reverse decades of financial sins.
It cannot win the battle against depression.
It cannot stop the Dow or S&P from losing half their value from current levels, if not more.
It cannot stop the collapse in real estate, commodities, and corporate bonds.
U.S. will soon face second "Great Depression"
Renowned economist Khazin predicted U.S. financial crisis in 2000
By Yevgeniy Chernyx
Whatever decision Wall Street takes right now, the demand is going to fall. What will happen to these industries? In 2000, we estimated that 25 percent of the U.S. economy would disappear. Today, we think the number is closest to one-third — if not more. Continue
Renowned economist Khazin predicted U.S. financial crisis in 2000
By Yevgeniy Chernyx
Whatever decision Wall Street takes right now, the demand is going to fall. What will happen to these industries? In 2000, we estimated that 25 percent of the U.S. economy would disappear. Today, we think the number is closest to one-third — if not more. Continue
Who are the Architects of Economic Collapse? Will an Obama Administration Reverse the Tide?
by Michel Chossudovsky
Most Serious Economic Crisis in Modern History
The October 2008 financial meltdown is not the result of a cyclical economic phenomenon. It is the deliberate result of US government policy instrumented through the Treasury and the US Federal Reserve Board.
This is the most serious economic crisis in World history.
The "bailout" proposed by the US Treasury does not constitute a "solution" to the crisis. In fact quite the opposite: it is the cause of further collapse. It triggers an unprecedented concentration of wealth, which in turn contributes to widening economic and social inequalities both within and between nations.
The levels of indebtedness have skyrocketed. Industrial corporations are driven into bankruptcy, taken over by the global financial institutions. Credit, namely the supply of loanable funds, which constitutes the lifeline of production and investment, is controlled by a handful of financial conglomerates.
With the "bailout", the public debt has spiraled. America is the most indebted country on earth. Prior to the "bailout", the US public debt was of the order of 10 trillion dollars. This US dollar denominated debt is composed of outstanding treasury bills and government bonds held by individuals, foreign governments, corporations and financial institutions.
"The Bailout": The US Administration is Financing its Own Indebtedness
Ironically, the Wall Street banks --which are the recipients of the bailout money-- are also the brokers and underwriters of the US public debt. Although the banks hold only a portion of the public debt, they transact and trade in US dollar denominated public debt instruments Worldwide.
In a bitter twist, the banks are the recipients of a 700+ billion dollar handout and at the same time they act as creditors of the US government.
We are dealing with an absurd circular relationship: To finance the bailout, Washington must borrow from the banks, which are the recipients of the bailout.
The US administration is financing its own indebtedness.
Federal, State and municipal governments are increasingly in a straightjacket, under the tight control of the global financial conglomerates. Increasingly, the creditors call the shots on government reform.
The bailout is conducive to the consolidation and centralization of banking power, which in turn backlashes on real economic activity, leading to a string of bankruptcies and mass unemployment.
Will an Obama Administration Reverse the Tide?
The financial crisis is the outcome of a deregulated financial architecture.
Obama has stated unequivocally his resolve to address the policy failures of the Bush administration and "democratize" the US financial system. President-Elect Barack Obama says that he is committed to reversing the tide:
Obama says that he will be introducing an entirely different policy agenda which responds to the interests of Main Street:
Is Obama committed to "taming Wall Street" and "disarming financial markets"?
Ironically, it was under the Clinton administration that these policies of "greed and irresponsibility" were adopted.
The 1999 Financial Services Modernization Act (FSMA) was conducive to the the repeal of the Glass-Steagall Act of 1933. A pillar of President Roosevelt's "New Deal", the Glass-Steagall Act was put in place in response to the climate of corruption, financial manipulation and "insider trading" which resulted in more than 5,000 bank failures in the years following the 1929 Wall Street crash.
Bill Clinton signs into law the Gramm-Leach-Bliley Financial Services Modernization Act, November 12, 1999
Under the 1999 Financial Services Modernization Act, effective control over the entire US financial services industry (including insurance companies, pension funds, securities companies, etc.) had been transferred to a handful of financial conglomerates and their associated hedge funds.
The Engineers of Financial Disaster
Who are the architects of this debacle?
In a bitter irony, the engineers of financial disaster are now being considered by President-Elect Barack Obama's Transition Team for the position Treasury Secretary:
Larry Summers (left) and Timothy Geithner
At the time of writing, Obama's favorite is Larry Summers, front-runner for the position of Treasury Secretary.
Harvard University Economics Professor Lawrence Summers served as Chief Economist for the World Bank (1991–1993). He contributed to shaping the macro-economic reforms imposed on numerous indebted developing countries. The social and economic impact of these reforms under the IMF-World Bank sponsored structural adjustment program (SAP) were devastating, resulting in mass poverty.
Larry Summer's stint at the World Bank coincided with the collapse of the Soviet Union and the imposition of the IMF-World Bank's deadly " economic medicine" on Eastern Europe, the former Soviet republics and the Balkans.
In 1993, Summers moved to the US Treasury. He initially held the position of Undersecretary of the Treasury for international affairs and later Deputy Secretary. In liaison with his former colleagues at the IMF and the World Bank, he played a key role in crafting the economic "shock treatment" reform packages imposed at the height of the 1997 Asian crisis on South Korea, Thailand and Indonesia.
The bailout agreements negotiated with these three countries were coordinated through Summers office at the Treasury in liaison with the Federal Reserve Bank of New York and the Washington based Bretton Woods institutions. Summers worked closely with IMF Deputy Managing Director Stanley Fischer, who was later appointed Governor of the Central Bank of Israel.
Larry Summers became Treasury Secretary in July 1999. He is a protégé of David Rockefeller. He was among the main architects of the infamous Financial Services Modernization Act, which provided legitimacy to inside trading and outright financial manipulation.
Larry Summers and David Rockefeller
"Putting the Fox in Charge of the Chicken Coop"
Summers is currently a Consultant to Goldman Sachs and managing director of a Hedge fund, the D.E. Shaw Group, As a Hedge Fund manager, his contacts at the Treasury and on Wall Street provide him with valuable inside information on the movement of financial markets.
Putting a Hedge Fund manager (with links to the Wall Street financial establishment) in charge of the Treasury is tantamount to putting the fox in charge of the chicken coop.
The Washington Consensus
Summers, Geithner, Corzine, Volker, Fischer, Phil Gramm, Bernanke, Hank Paulson, Rubin, not to mention Alan Greenspan, al al. are buddies; they play golf together; they have links to the Council on Foreign Relations and the Bilderberg; they act concurrently in accordance with the interests of Wall Street; they meet behind closed doors; they are on the same wave length; they are Democrats and Republicans.
While they may disagree on some issues, they are firmly committed to the Washington-Wall Street Consensus. They are utterly ruthless in their management of economic and financial processes. Their actions are profit driven. Outside of their narrow interest in the "efficiency" of "markets", they have little concern for "living human beings". How are people's lives affected by the deadly gamut of macro-economic and financial reforms, which is spearheading entire sectors of economic activity into bankruptcy.
The economic reasoning underlying neoliberal economic discourse is often cynical and contemptuous. In this regard, Lawrence Summers' economic discourse stands out. He is known among environmentalists for having proposed the dumping of toxic waste in Third World countries, because people in poor countries have shorter lives and the costs of labor are abysmally low, which essentially means that the market value of people in the Third World is much lower. According to summers, this makes it far more "cost effective" to export toxic materials to impoverished countries. A controversial 1991 World Bank memo signed by of Chief Economist Larry Summers reads as follows (excerpts, emphasis added):
In the course of 1997, currency speculation instrumented by major financial institutions directed against Thailand, Indonesia and South Korea was conducive to the collapse of national currencies and the transfer of billions of dollars of central bank reserves into private financial hands. Several observers pointed to the deliberate manipulation of equity and currency markets by investment banks and brokerage firms.
While the Asian bailout agreements were formally negotiated with the IMF, the major Wall Street commercial banks (including Chase, Bank of America, Citigroup and J. P. Morgan) as well as the "big five" merchant banks (Goldman Sachs, Lehman Brothers, Morgan Stanley and Salomon Smith Barney) were "consulted" on the clauses to be included in the Asian bail-out agreements.
The US Treasury in liaison with Wall Street and the Bretton Woods institutions played a central role in negotiating the bailout agreements. Both Larry Summers and Timothy Geithner, were actively involved on behalf of the US Treasury in the 1997 bailout of South Korea:
The country was literally ransacked. Undersecretary of the Treasury David Lipton was sent to Seoul in early December 1997. Secret negotiations were initiated. Washington had demanded the firing of the Korean Finance Minister and the unconditional acceptance of the IMF "bailout".
A new finance minister, who happened to be former IMF and World Bank official, was appointed and immediately rushed off to Washington for "consultations" with his former IMF colleague Deputy Managing Director Stanley Fischer.
What we dealing with is an entire " old boys network" of officials and advisers at the Treasury, the Federal Reserve, the IMF, World Bank, the Washington Think Tanks, who are in permanent liaison with leading financiers on Wall Street.
Whoever is chosen by Obama's Transition team will belong to the Washington Consensus.
The 1999 Financial Services Modernization Act
What happened in October 1999 is crucial.
In the wake of lengthy negotiations behind closed doors, in the Wall Street boardrooms, in which Larry Summers played a central role, the regulatory restraints on Wall Street's powerful banking conglomerates were revoked "with a stroke of the pen".
Larry Summers worked closely with Senator Phil Gramm (1985-2002),chairman of the Senate Banking committee, who was the legislative architect of the the Gramm-Leach-Bliley Financial Services Modernization Act, signed into law on November 12, 1999 (See Group Photo above). (For Complete text click US Congress: Pub.L. 106-102). As Texas Senator, Phil Gramm was closely associated with Enron.
In December 2000 at the very end of the Clinton mandate, Gramm introduced a second piece of legislation, the so-called Gramm-Lugar Commodity Futures Modernization Act, which paved the way for the speculative onslaught in primary commodities including oil and food staples.
Under the FSMA new rules – ratified by the US Senate in October 1999 and approved by President Clinton – commercial banks, brokerage firms, hedge funds, institutional investors, pension funds and insurance companies could freely invest in each others businesses as well as fully integrate their financial operations.
A "global financial supermarket" had been created, setting the stage for a massive concentration of financial power. One of the key figures behind this project was Secretary of the Treasury Larry Summers, in liaison with David Rockefeller. Summers described the FSMA as "the legislative foundation of the financial system of the 21th century". That legislative foundation is among the main causes of the 2008 financial meltdown.
Financial Disarmament
There can be no meaningful solution to the crisis, unless there is a major reform in the financial architecture, implying inter alia the freezing of speculative trade and the "disarming of financial markets". The project of disarming financial markets was first proposed by John Maynard Keynes in the 1940s as a means to the establishment of a multipolar international monetary system. (See J.M. Keynes, Activities 1940-1944, Shaping the Post-War World: The Clearing Union, The Collected Writings of John Maynard Keynes, Royal Economic Society, Macmillan and Cambridge University Press, Vol. XXV, London 1980, p. 57).
Main Street versus Wall Street
Where are Obama's "Main Street appointees"? Namely individuals who respond to the interests of people across America. There are no labor or community leaders on Obama's list for key positions.
The President-elect is appointing the architects of financial deregulation.
Meaningful financial reform cannot be adopted by officials appointed by Wall Street and who act on behalf of Wall Street.
Those who set the financial system ablaze in 1999, have been called back to turn out the fire.
The proposed "solution" to the crisis under the "bailout" is the cause of further economic collapse.
There are no policy solutions on the horizon.
The banking conglomerates call the shots. They decide on the composition of the Obama Cabinet. They also decide on the agenda of the Washington Financial Summit (November
by Michel Chossudovsky
Most Serious Economic Crisis in Modern History
The October 2008 financial meltdown is not the result of a cyclical economic phenomenon. It is the deliberate result of US government policy instrumented through the Treasury and the US Federal Reserve Board.
This is the most serious economic crisis in World history.
The "bailout" proposed by the US Treasury does not constitute a "solution" to the crisis. In fact quite the opposite: it is the cause of further collapse. It triggers an unprecedented concentration of wealth, which in turn contributes to widening economic and social inequalities both within and between nations.
The levels of indebtedness have skyrocketed. Industrial corporations are driven into bankruptcy, taken over by the global financial institutions. Credit, namely the supply of loanable funds, which constitutes the lifeline of production and investment, is controlled by a handful of financial conglomerates.
With the "bailout", the public debt has spiraled. America is the most indebted country on earth. Prior to the "bailout", the US public debt was of the order of 10 trillion dollars. This US dollar denominated debt is composed of outstanding treasury bills and government bonds held by individuals, foreign governments, corporations and financial institutions.
"The Bailout": The US Administration is Financing its Own Indebtedness
Ironically, the Wall Street banks --which are the recipients of the bailout money-- are also the brokers and underwriters of the US public debt. Although the banks hold only a portion of the public debt, they transact and trade in US dollar denominated public debt instruments Worldwide.
In a bitter twist, the banks are the recipients of a 700+ billion dollar handout and at the same time they act as creditors of the US government.
We are dealing with an absurd circular relationship: To finance the bailout, Washington must borrow from the banks, which are the recipients of the bailout.
The US administration is financing its own indebtedness.
Federal, State and municipal governments are increasingly in a straightjacket, under the tight control of the global financial conglomerates. Increasingly, the creditors call the shots on government reform.
The bailout is conducive to the consolidation and centralization of banking power, which in turn backlashes on real economic activity, leading to a string of bankruptcies and mass unemployment.
Will an Obama Administration Reverse the Tide?
The financial crisis is the outcome of a deregulated financial architecture.
Obama has stated unequivocally his resolve to address the policy failures of the Bush administration and "democratize" the US financial system. President-Elect Barack Obama says that he is committed to reversing the tide:
"Let us remember that if this financial crisis taught us anything, it's that we cannot have a thriving Wall Street while Main Street suffers. In this country, we rise or fall as one nation, as one people." (President-elect Barack Obama, November 4, 2008, emphasis added)The Democrats casually blame the Bush administration for the October financial meltdown.
Obama says that he will be introducing an entirely different policy agenda which responds to the interests of Main Street:
"Tomorrow, you can turn the page on policies that put the greed and irresponsibility of Wall Street before the hard work and sacrifice of men and women all across Main Street. Tomorrow you can choose policies that invest in our middle class and create new jobs and grow this economy so that everybody has a chance to succeed, from the CEO to the secretary and the janitor, from the factory owner to the men and women who work on the factory floor.( Barack Obama, election campaign, November 3, 2008, emphasis added)
Is Obama committed to "taming Wall Street" and "disarming financial markets"?
Ironically, it was under the Clinton administration that these policies of "greed and irresponsibility" were adopted.
The 1999 Financial Services Modernization Act (FSMA) was conducive to the the repeal of the Glass-Steagall Act of 1933. A pillar of President Roosevelt's "New Deal", the Glass-Steagall Act was put in place in response to the climate of corruption, financial manipulation and "insider trading" which resulted in more than 5,000 bank failures in the years following the 1929 Wall Street crash.
Bill Clinton signs into law the Gramm-Leach-Bliley Financial Services Modernization Act, November 12, 1999
Under the 1999 Financial Services Modernization Act, effective control over the entire US financial services industry (including insurance companies, pension funds, securities companies, etc.) had been transferred to a handful of financial conglomerates and their associated hedge funds.
The Engineers of Financial Disaster
Who are the architects of this debacle?
In a bitter irony, the engineers of financial disaster are now being considered by President-Elect Barack Obama's Transition Team for the position Treasury Secretary:
Lawrence Summers played a key role in lobbying Congress for the repeal of the Glass Steagall Act. His timely appointment by President Clinton in 1999 as Treasury Secretary spearheaded the adoption of the Financial Services Modernization Act in November 1999. Upon completing his mandate at the helm of the US Treasury, he became president of Harvard University (2001- 2006).
Paul Volker was chairman of the Federal Reserve Board in the l980s during the Reagan era. He played a central role in implementing the first stage of financial deregulation, which was conducive to mass bankruptcies, mergers and acquisitions, leading up to the 1987 financial crisis.
Timothy Geithner is CEO of the Federal Reserve Bank of New York, which is the most powerful private financial institution in America. He was also a former Clinton administration Treasury official. He has worked for Kissinger Associates and has also held a senior position at the IMF. The FRBNY plays a behind the scenes role in shaping financial policy. Geithner acts on behalf of powerful financiers, who are behind the FRBNY. He is also a member of the Council on Foreign Relations (CFR)
Jon Corzine is currently governor of New Jersey, former CEO of Goldman Sachs.
Larry Summers (left) and Timothy Geithner
At the time of writing, Obama's favorite is Larry Summers, front-runner for the position of Treasury Secretary.
Harvard University Economics Professor Lawrence Summers served as Chief Economist for the World Bank (1991–1993). He contributed to shaping the macro-economic reforms imposed on numerous indebted developing countries. The social and economic impact of these reforms under the IMF-World Bank sponsored structural adjustment program (SAP) were devastating, resulting in mass poverty.
Larry Summer's stint at the World Bank coincided with the collapse of the Soviet Union and the imposition of the IMF-World Bank's deadly " economic medicine" on Eastern Europe, the former Soviet republics and the Balkans.
In 1993, Summers moved to the US Treasury. He initially held the position of Undersecretary of the Treasury for international affairs and later Deputy Secretary. In liaison with his former colleagues at the IMF and the World Bank, he played a key role in crafting the economic "shock treatment" reform packages imposed at the height of the 1997 Asian crisis on South Korea, Thailand and Indonesia.
The bailout agreements negotiated with these three countries were coordinated through Summers office at the Treasury in liaison with the Federal Reserve Bank of New York and the Washington based Bretton Woods institutions. Summers worked closely with IMF Deputy Managing Director Stanley Fischer, who was later appointed Governor of the Central Bank of Israel.
Larry Summers became Treasury Secretary in July 1999. He is a protégé of David Rockefeller. He was among the main architects of the infamous Financial Services Modernization Act, which provided legitimacy to inside trading and outright financial manipulation.
Larry Summers and David Rockefeller
"Putting the Fox in Charge of the Chicken Coop"
Summers is currently a Consultant to Goldman Sachs and managing director of a Hedge fund, the D.E. Shaw Group, As a Hedge Fund manager, his contacts at the Treasury and on Wall Street provide him with valuable inside information on the movement of financial markets.
Putting a Hedge Fund manager (with links to the Wall Street financial establishment) in charge of the Treasury is tantamount to putting the fox in charge of the chicken coop.
The Washington Consensus
Summers, Geithner, Corzine, Volker, Fischer, Phil Gramm, Bernanke, Hank Paulson, Rubin, not to mention Alan Greenspan, al al. are buddies; they play golf together; they have links to the Council on Foreign Relations and the Bilderberg; they act concurrently in accordance with the interests of Wall Street; they meet behind closed doors; they are on the same wave length; they are Democrats and Republicans.
While they may disagree on some issues, they are firmly committed to the Washington-Wall Street Consensus. They are utterly ruthless in their management of economic and financial processes. Their actions are profit driven. Outside of their narrow interest in the "efficiency" of "markets", they have little concern for "living human beings". How are people's lives affected by the deadly gamut of macro-economic and financial reforms, which is spearheading entire sectors of economic activity into bankruptcy.
The economic reasoning underlying neoliberal economic discourse is often cynical and contemptuous. In this regard, Lawrence Summers' economic discourse stands out. He is known among environmentalists for having proposed the dumping of toxic waste in Third World countries, because people in poor countries have shorter lives and the costs of labor are abysmally low, which essentially means that the market value of people in the Third World is much lower. According to summers, this makes it far more "cost effective" to export toxic materials to impoverished countries. A controversial 1991 World Bank memo signed by of Chief Economist Larry Summers reads as follows (excerpts, emphasis added):
DATE: December 12, 1991 TO: Distribution FR: Lawrence H. Summers Subject: GEPSummers stance on the export of pollution to developing countries had a marked impact on US environmental policy:
"'Dirty' Industries: Just between you and me, shouldn't the World Bank be encouraging MORE migration of the dirty industries to the Less Developed Countries? I can think of three reasons:
1) The measurements of the costs of health impairing pollution depends on the foregone earnings from increased morbidity and mortality.... From this point of view a given amount of health impairing pollution should be done in the country with the lowest cost, which will be the country with the lowest wages. I think the economic logic behind dumping a load of toxic waste in the lowest wage country is impeccable and we should face up to that.
2) The costs of pollution are likely to be non-linear as the initial increments of pollution probably have very low cost. I've always though that under-populated countries in Africa are vastly UNDER-polluted, their air quality is probably vastly inefficiently low compared to Los Angeles or Mexico City. Only the lamentable facts that so much pollution is generated by non-tradable industries (transport, electrical generation) and that the unit transport costs of solid waste are so high prevent world welfare enhancing trade in air pollution and waste.
3) The demand for a clean environment for aesthetic and health reasons is likely to have very high income elasticity. [the demand increases when income levels increase]. The concern over an agent that causes a one in a million change in the odds of prostrate cancer is obviously going to be much higher in a country where people survive to get prostrate cancer than in a country where under 5 mortality is is 200 per thousand.... "
http://www.globalpolicy.org/socecon/envronmt/summers.htm
In 1994, "virtually every country in the world broke with Mr. Summers' Harvard-trained "economic logic" ruminations about dumping rich countries' poisons on their poorer neighbors, and agreed to ban the export of hazardous wastes from OECD to non-OECD [developing] countries under the Basel Convention. Five years later, the United States is one of the few countries that has yet to ratify the Basel Convention or the Basel Convention's Ban Amendment on the export of hazardous wastes from OECD to non-OECD countries. (Jim Valette, Larry Summers' War Against the Earth, Counterpunch, undated)The 1997 Asian Crisis: Dress Rehearsal for Things to Come
In the course of 1997, currency speculation instrumented by major financial institutions directed against Thailand, Indonesia and South Korea was conducive to the collapse of national currencies and the transfer of billions of dollars of central bank reserves into private financial hands. Several observers pointed to the deliberate manipulation of equity and currency markets by investment banks and brokerage firms.
While the Asian bailout agreements were formally negotiated with the IMF, the major Wall Street commercial banks (including Chase, Bank of America, Citigroup and J. P. Morgan) as well as the "big five" merchant banks (Goldman Sachs, Lehman Brothers, Morgan Stanley and Salomon Smith Barney) were "consulted" on the clauses to be included in the Asian bail-out agreements.
The US Treasury in liaison with Wall Street and the Bretton Woods institutions played a central role in negotiating the bailout agreements. Both Larry Summers and Timothy Geithner, were actively involved on behalf of the US Treasury in the 1997 bailout of South Korea:
[In 1997] "Messrs. Summers and Geithner worked to persuade Mr. Rubin to support financial aid to South Korea. Mr. Rubin was wary of such a move, worrying that providing money to a country in dire straits might be a losing proposition..." (WSJ, November 8, 2008)What happened in Korea under advice from Deputy Treasury Secretary Summers et al, had nothing to do with "financial aid".
The country was literally ransacked. Undersecretary of the Treasury David Lipton was sent to Seoul in early December 1997. Secret negotiations were initiated. Washington had demanded the firing of the Korean Finance Minister and the unconditional acceptance of the IMF "bailout".
A new finance minister, who happened to be former IMF and World Bank official, was appointed and immediately rushed off to Washington for "consultations" with his former IMF colleague Deputy Managing Director Stanley Fischer.
"The Korean Legislature had met in emergency sessions on December 23. The final decision concerning the 57 billion dollar deal took place the following day, on Christmas Eve December 24th, after office hours in New York. Wall Street's top financiers, from Chase Manhattan, Bank America, Citicorp and J. P. Morgan had been called in for a meeting at the Federal Reserve Bank of New York. Also at the Christmas Eve venue, were representatives of the big five New York merchant banks including Goldman Sachs, Lehman Brothers, Morgan Stanley and Salomon Smith Barney. And at midnight on Christmas Eve, upon receiving the green light from the banks, the IMF was allowed to rush 10 billion dollars to Seoul to meet the avalanche of maturing short-term debts."Strong economic medicine" is the prescription of the Washington Consensus. "Short term pain for long term gain" was the motto at the World Bank during Lawrence Summers term of as World Bank Chief Economist. (See IMF, World Bank Reforms Leave Poor Behind, Bank Economist Finds, Bloomberg, November 7, 2000)
The coffers of Korea's central Bank had been ransacked. Creditors and speculators were anxiously awaiting to collect the loot. The same institutions which had earlier speculated against the Korean won were cashing in on the IMF bailout money. It was a scam. (See Michel Chossudovsky, The Recolonization of Korea, subsequently published as a chapter in The Globalization of Poverty and the New World Order, Global Research, Montreal, 2003.)
What we dealing with is an entire " old boys network" of officials and advisers at the Treasury, the Federal Reserve, the IMF, World Bank, the Washington Think Tanks, who are in permanent liaison with leading financiers on Wall Street.
Whoever is chosen by Obama's Transition team will belong to the Washington Consensus.
The 1999 Financial Services Modernization Act
What happened in October 1999 is crucial.
In the wake of lengthy negotiations behind closed doors, in the Wall Street boardrooms, in which Larry Summers played a central role, the regulatory restraints on Wall Street's powerful banking conglomerates were revoked "with a stroke of the pen".
Larry Summers worked closely with Senator Phil Gramm (1985-2002),chairman of the Senate Banking committee, who was the legislative architect of the the Gramm-Leach-Bliley Financial Services Modernization Act, signed into law on November 12, 1999 (See Group Photo above). (For Complete text click US Congress: Pub.L. 106-102). As Texas Senator, Phil Gramm was closely associated with Enron.
In December 2000 at the very end of the Clinton mandate, Gramm introduced a second piece of legislation, the so-called Gramm-Lugar Commodity Futures Modernization Act, which paved the way for the speculative onslaught in primary commodities including oil and food staples.
"The act, he declared, would ensure that neither the sec nor the Commodity Futures Trading Commission (cftc) got into the business of regulating newfangled financial products called swaps—and would thus "protect financial institutions from overregulation" and "position our financial services industries to be world leaders into the new century." (See David Corn, Foreclosure Phil, Mother Jones, July August 2008)Phil Gramm was McCain's first choice for Secretary of the Treasury.
Under the FSMA new rules – ratified by the US Senate in October 1999 and approved by President Clinton – commercial banks, brokerage firms, hedge funds, institutional investors, pension funds and insurance companies could freely invest in each others businesses as well as fully integrate their financial operations.
A "global financial supermarket" had been created, setting the stage for a massive concentration of financial power. One of the key figures behind this project was Secretary of the Treasury Larry Summers, in liaison with David Rockefeller. Summers described the FSMA as "the legislative foundation of the financial system of the 21th century". That legislative foundation is among the main causes of the 2008 financial meltdown.
Financial Disarmament
There can be no meaningful solution to the crisis, unless there is a major reform in the financial architecture, implying inter alia the freezing of speculative trade and the "disarming of financial markets". The project of disarming financial markets was first proposed by John Maynard Keynes in the 1940s as a means to the establishment of a multipolar international monetary system. (See J.M. Keynes, Activities 1940-1944, Shaping the Post-War World: The Clearing Union, The Collected Writings of John Maynard Keynes, Royal Economic Society, Macmillan and Cambridge University Press, Vol. XXV, London 1980, p. 57).
Main Street versus Wall Street
Where are Obama's "Main Street appointees"? Namely individuals who respond to the interests of people across America. There are no labor or community leaders on Obama's list for key positions.
The President-elect is appointing the architects of financial deregulation.
Meaningful financial reform cannot be adopted by officials appointed by Wall Street and who act on behalf of Wall Street.
Those who set the financial system ablaze in 1999, have been called back to turn out the fire.
The proposed "solution" to the crisis under the "bailout" is the cause of further economic collapse.
There are no policy solutions on the horizon.
The banking conglomerates call the shots. They decide on the composition of the Obama Cabinet. They also decide on the agenda of the Washington Financial Summit (November