Too Big to Fail

¶ … Big to Fail by Andrew Ross Sorkin

Andrew Ross Sorkin's book Too Big to Fail: The Inside Story of How Wall Street and Washington Fought to Save the Financial System -- and Themselves (Viking, 2009) presents a dramatic and informative account of the disastrous collapse of some of the nation's largest, wealthiest, and oldest financial firms on Wall Street. The book details the complex negotiations involving the heads of Lehman Brothers, Goldman Sachs, and officials in the federal government, some of whom had long previous relationships with those firms before assuming public-sector positions of trust. In some respects, that aspect of the story told by Sorkin may be the most significant as well as the least thoroughly investigated.

Specifically, U.S. Treasury Secretary at the time was Henry "Hank" Paulson, previously the CEO at Goldman Sachs was legally obligated to limit any involvement with his old firm after taking office in Washington. Without actually stating it, Sorkin seems to all but suggest that Paulson may have violated at least the spirit and perhaps the letter of that understanding. Referring to the plight of Lehman Brothers CEO Richard Fuld, Sorkin writes:

"Richard Fuld, as tightly wound as ever, was raging in his office on the morning of Thursday, July 10, 2008, to one of his lieutenants. Lehman Brothers' stock had opened down 12%, to an eight-year low, in response to a rumor that the Pacific Investment Management Company, the world's biggest bond fund, had stopped trading with the firm. Speculation also was swirling that SAC Capital

Advisors, Steven A. Cohen's hedge fund, was also no longer trading with Lehman.

"You've got to call these guys and get them to put out a statement," Mr. Fuld

said…The constant stream of bad news was hampering Mr. Fuld's efforts to raise more capital. He and his investment banking team had been reaching out to at least a dozen prospects -- Royal Bank of Canada, HSBC and General Electric

among them -- but was coming up empty. Increasingly desperate that morning

"I feel like I'm playing Whack-a-Mole," he complained to his peers -- Mr. Fuld

decided to call his old friend John Mack, the chief executive at Morgan Stanley,

the second-largest investment bank after Goldman Sachs."

Later, writing about a meeting of all the principals at Mack's mansion in Rye, New York, Sorkin continues:

"In the middle of the conversation, Mr. Fuld's cellphone rang, and to the amazement of the group, he excused himself and retreated to the kitchen. The Morgan Stanley side was perplexed: Was Lehman working on another deal at the same time? What they didn't know was that the caller was Treasury Secretary

Henry M. Paulson Jr., at his office, checking in on Mr. Fuld. When Mr. Fuld returned to the living room, the conversation continued. But the meeting ended with no agreement and what seemed like no incentive to keep talking. "Was he offering to merge with us?" Mr. Mack asked after the Lehman executives departed. "This is delusional," Mr. Gorman told his Morgan Stanley colleagues.

Mr. Taubman had other worries. Maybe they were being used to help Lehman goose its stock price? "If I were their guys, I'd want to put my own spin on this."

In combination, those passages (and other hints throughout the book) leave wide open the question about whether or to what degree the Treasury Secretary honored his legal obligation.