Nyer Financial Crisis Article

;h;nallmin ~ ~ ~ & , ~ ~ n , v e ; d d r o svraphont in cht rnarckhng b d . d wrote unp~bl;shdd. He @ufrom H dgumma m m laudc, and tamed a Ph.D. *ii~ economic^ a t

M.I.T. is an a p in h e economic Wall Streets mrpzid Uitt. SenatorJim his~ry of the Gmt Dcprmian Bunnhg, Repubban ofKen*, dad Both men were appointed by Presi- for the wornen t o m , and& hat

dent Ceoige W.Bmh, but, unlih the h b a i l O u m m a a a h i t y f o r i n u k .idmh%mtionkfi-ee-maker akdutists, rrdm sysmn." He s m x l , * s i put, they, &fig with Gdthner, considered it ia mialim: and told a Bbornbcrg themselves pa;lgnzatiss-pqmenfs o f ~ t h a t P a s D n w a s U ~ k t government acrian when marke~fail. minister of finmet in Chine"N 4 t l The mciimp had I q & t e d m n g h b i , an economics p m h at New RtpubIicm~,somcrirnes uneasily, bur Ymk Unbmitjs Scm Schml of Busiduring thc Bwh Admirhmthn,with its ness,vmdhadwarnedabourctLehousing and-rcgulatbn rhetoric and cuts in mar- bubble backin 2#4,dedaredthat 'socialginal tax tats, Erec-market propaneom ism is indeed dive and wldl in Amah," s e e d to bein thtir element Bemark's but with a twist: This is socialirm lbr thc predecessor at tht Fed, Alan Greasspan, rich, dx wdl c o k d , and Wd SWL" kept interwt ram exqtiodly low. Rtg ulators at the Securities and Exchange he previous afternoon, ScptemC a d s s ~ otobred n high Imragt at inkm I lth, Timothy Gdthner, at the vmncrtr t&,atultlxFdand the Fad- New York Fed, hail told Pautson and e d Deposit Insurance Cmpratiun &- Bemankc that Lchn~anw unlikely to arcd lax real-esnre krading standards. be able to open for businrss on Mondq. Housing prices shot up.In ~~, 2007, S m e its origirrs, ia aotton mdhg, tehr h t h J o n a l n d m t r ; a I A ~ d man had unduwritrcn countless mock a peak of1 4,093. U M by Berm&> aad bondoferhp,h d become a h c e in P s h n , orjusr h u t anyDne in .s poeition mcrgen and acquisitions, and was perofauthoriry. stn asset kbblehadg ~ ~ twa n haps best known for its bond index, he cquidcnt of the D u w Jones lndumial ribu us and historic pmprrions. That yea, the bubble had bzgun to Amage for st&. I n 2005 md 2006, ir deflate- Defaults among subprim-mn- was the h p t lrndenrdter of wbpiurrtgagebarrowma, anddm thc e W m o semritiep. ~ rare i n f ~ s t of m mortgage-backed ~ As mtly as 2007, L e h m Mle&ties s t a n d to d e . In an attempt p k d m tdprofits, thankf largely to i~ tu canrain the damage, Pauls~rland I m q e of *to o i ~m, m h g dm for c 3 e d c p&cM wer what many crm- c m y & k o f ~ l qidithadrhvry w d e d the greatest govemmtnt inm- dollws of Wr. Mmr of im a w t s were sion into markas and finance since chc funded by b m w c d money, and naw, ninewn-kink given the steep decl~nein mortgageIn Masch, 2008, the p m m e n t &- bxkd securities, no one hW thar dx ered the [ailing investment bank Bear assets were w n h thcir n o d vaiuc of Stcams in10 a merger wirh JFMorgan 6640 bum; k h a n ' s share price mu Chase, n deal that waa made possible hniny-fwr per cent from the p e by 929 biiion ofg~uernmentfinancing viousycar.Arunonirsasetswmahdy for b r Steams' muhid mrs.I n early r u d e r way, isLqudirl; w Mnishing,and Sctfft*, the T m - 4 the p- j ts st& price had fdeo by forty-tw pcr ut the pmiosliiday, ir awldn't SUP mmcnt-bad& private rnmpge agcn- cent j desF~eMaeandFreddicMac,pkdg- ' vive thcweckd. Global matdrets and the ing up to $200 in capital. Such financial v t e m werc fecr more f q d c interventions put taxpgyw moracy at risk thandscyhadlxeninMarch,&nk ~ n made d a m ~ k c r yof the nmvn of Steams faltwd, and Geithntr, waxning 'moral hazarv a guidiag principle of thatthe-ufakanhkwmrntcs which p i t s thaz unless %tors r u ~ w o u l d b c @ t eb d,& that an bear the cmsequenczs of their actions almtiw h d ro kfound Ohwist, he sa& thc damage almost m a i n l y would rhqwillacr n x k l d y , Public criticism of Padm md Ber- not bcontaincd llanke was scathing, The bailouts had Bern+ coming from a different brought into ma l p l e n t the Rephli- perspective,had &d at much the same lan rightwin&awwmqtampcring position. As a scholar oftht D e p d n ,

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maictingaedit.He had bunme a p ponenr of htcrvmingm prwide Lquidiq and enmuage lending. 1% q w d thar the risks a f i e n t attielack ofxtion had M J pintO apmlonged s h y hi cn h n h c r t m - n i n t i ~ k p t c r t ht

h a f~w d i n g it.

Paulmn had h& Cddman's Inmmrent-banking operatim, inchding mergers and acquisitions. As its chief ucautive, he had first opposed, then embraad, the %S decision, in 1999. to go public, showing both Atxjbiliy

and d e d h s s . ButasPaharwlBcrmnkr:sardm ~1septembnr 12th the morningrnin&dad reports hvJhicb ammpwsTreamy officials appeared to ay h a t P a d m wrutingwtrheplbityofanygovmment finmclal assistance to Lehman. Padson acknowledged to Bemankc dmt he hadauthorized the comments.He was under intense pbUtica1 p r r s ~h~ n ~ !~ the White House an$ Capitol Hill to curb the fum m r the rescue ofFannic Mac and Freddie Mac the prwiwrswcekcnd,as~astgntinuingmrmmto\w Bear Steams. h'lore imporrant,w p r i v a~ ~ ebushe had spokm with h u t apbing L . e h ws insisein on sum kind of g a m e n t funding. f 4cvmheJess, Padson assured Bcmankc, he was c a m m i d to findinga b u ~ . AU 9ummcr,Paubon had been prtssing Lehrnan's chairman d chidcu~artive, Richard S. FddJr.,ra find a buyw M

major investor for thr: h. Fuld, at

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s k y - m , was intensely awssive. He joined Letman Brothers in 1969, as a mdcr, and had mbquendy d&n Lehman's ambitious q m s b n . But Fdd had been slow 10 grasp the severit). of the firm's plight, h & n was fiustra~td that Fdd kept insisting an whnt Pauhfl darned unreaiisdc terms, including too

high a prim (Fuldskwyw did not reply to rapes&far comment for this mount.I As a result, Paulson had taken it upon himdfro find a b u ~and $ he had come up with two &OUS ~dndihtes:W of Arncrim and B d v , one of the @st barkin tbeUK. ~ ~ ~ ~ , h d W m K e n n a h Lewis*the chairman andC.E.0.ofBank of h e r i m . Lwv'i, a native of Walnut Grove, Mississippi..and a gradi~zreof ~ v i r h & e k e e m d w , d ~ ~ t hi cc h s t d a r g u e d t ~ r t h e ~ o Cf ~k q p State, hadjained a smd regional !eh, w+by rhegcrvlemmentreme oi md o k h a n d imritutiansst the dmc bank, North Carolina Narimal. in 1969,

as a r d i t a d y c , and had worked his d y h r : TI&, thcre's m, gmmment way up the nmhas the bank ~ o r m e d money." ir& into NatiansBmk Cbfporatian, 5~ dowing a succesion of ohm hrh and rhnfts and then, in 1998,into Bank Q! America, whose headquanerr were moved from Smt Francism to Charlotte. teiris h e thc W s C.E.O.in 2001. He hadrpeverfitinwirhhis W d S m o r

h a 1 crisis. Surely the lranlcws wouM rec~thatthchiI~0fLehnlanhper1 h y ~ 2 Dianiood " replicd.Wdll aed tbm d. py." He d P a h n ' s cammenrs ss Sincere but mi nwwiwily d&nitivt. Barhtistophtr Flowers, the billionzirt day would see what it could offer for nder of the privart-equ~vh Lehrnan; if &mww a gap, ma* the J. C. Flowers &Campany and a selfpvmmmt w d d ssp in after & desuibtd 'iou%+ p 2 dance? with an Tn the m e ofB n r Stearns, the Fad y e For faiIing banks, found himseli; Zelig-like, in the midst of the d ' s dtslSlenda, kspecded, md rumped,-wamth&zlvhow c h ,and hose ddhmade him a formidable c p n e n t in the inaiclte nloves or financial dmwm-in mrnc c a s as an

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\Vest Coast ~ U n R w Sand , once re- had re4ied on cmergmcy powers, bemarM,Tve bad :dl ofrhe f i ~ In can s d stowed by the Federal Reserve Act, in investment W n g aat the ~rsoment" hat ailow-itm lend in * u n d and exiU& comnlercidbanks,wfiich~de- gtnt c.iraumw: when the bans are posits and makc loans, investment k d s *wed to h e atiSacri6n* of the Fcd. mkc capid for a11 m y of h&al ser- JPhhrganhad guaran:ced Btar's d@avices, from ulldtnvriting stock and b n d lions until the d c a l d d bh n d h . B ~ n ~ ~nnd n k PRI r 11a-m offtriw. M managiq~corporate take. ..-, -- -&-Ib,. ....LB2-1:~ 1";":A..& --Lx: ~LI, i u ~ pl ; u+ i duand for t h e m s ~ lBank ~ . ofAm& was SMI d~ day befbac.rn enginem a sirnilar a commwcidb k, and Lithmsn wrs an Private&&rion,wheffbyB&of intfftment bank, bur Lcwis was in@ A m t i i ~ ~ o c B ~ w ~ u l d csstcd in it anyway-provided thar the hm.5qFor Lchman's &Isd me^+

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Faulson had utged M and Fuld to d i . Bank ofArncric-a wdimn wre now 6%m &errmile h w much g o v m mctw msistance the bank would need. khnwhik*hda$pFesldtnt, Bob D[mtlnd, an American, saw Mman as an oplmrrunity TO inctmc Bardays' U.S. investment-bankingopations. Paulson, in their first ~~Mbeen typi-

~mfmm~gd&,inothersas an dinwor. Flowers h e w Paulwn WCU,having spent twenty pan nr Goldman Sachs, and had worked with Bank of America offidakin the q r with N a r i o n s W Ht t&d regularly to Mauirce (Hank) Greenbcrg, the Emerchkf m t i w of thEgiant inmm mngfomerate A.I.G., and did busislesswith &us in h e burancc industry, apecidy executives at Germmys A U i m Earherin thcwack, a B m k a f h ica o f i d told Rwrvs that the finn was mnsidetingbuying Lehrnan and said d m ~ it wnnred him as P pBnntr in thc deat l k m md a Bank ofAmerica trm h d s p m t t t s E p ~ m n t ) - ' - h h ~ ma a t m i d m law officeping over lA-mds b k s . Its finaom turned out to k t k wm than Flowers had expected. n e e x p u r e to risky residential mongages was widely known, bur nor dx fkds $32billion pddhofcmmdal-real-estate asseeu, much of it of dubiaus qdg. Thcn an Al,G executive abked him tojoin a me&$ at A.IG.'s.hin Inrvpr

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i ~k) i w~ h &&. : jCj.~r., ~ttumA our, king s liquidity crisis, the d; of

disastrous bets made by jrs Financial * Products ~ & e n , k din Lodon.,'LI.G. F"rnantial Ptodura hrd brmrn~ nnr nf

a p10ducr s i m h m vrsurancc: the bujrr pays d~ company in nhunfor r of reinhmmmt in the went o defidr o n a ~ o r & a & ~ ~ . ~ f & e ~ d i f f u e n e c s s s i d c d a a ~ h r h e l i h d of default incraw4 k1.G. had mmmon &. Thm WBS d e n t fbr ro post collard with its swaps buyers, or countcrparties, to guarantee o'cntual rhisintherescutofLbng- #mC+ Management, in 1998, when William payment. A.I.G, had been a pionecr Mdhmqh, the prcsidcnt of tht Nw in &it-default mp,barely ten ycus York ~ . m t m r w nhd k s ta addm h e r , and since then had dhw~liu hu &k a b m tvpm a consotiurn, in order to spread the risk. l n other words, Wd Srreet'ssmrpt cornpctimrs would be ask& to put their

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mndate than L$rmsli.Githner smd that A.I.G. needed to 6 d a y t i a t e - ~ ~ tor mluuon, but hc a g e d to send some Fd off id^ Dver to mess h e riruarim.

Raven ~d Willurnstad alw, called Dirn011,rht C.E.O. 0fTpMoqan. Dimon was even more famfirl. As one

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'Call Warren Buffttt: Flowers told W d d ,and g a hirll ~ the number of' Buffar's p r i m phone. "Don't m w wait one m n d . " Buffcrta m w e d , nnd WJ1unstad de-

drcds of biions of dollars in exposure. The risk to A,I.G, from the huge P"fb!io had seemed minimal, since the klihoud ofdehdt irl anygiven trans-

finance officersreplid *kt's don't be

scribed the +&ty crisis. Buffert a s M mine qu&m and said h t he needert more lime. Lata, hc called b d m say Chat he might he intercstcd in somc of k1.G.'~businesses if thty were for sate, but he didn'r want to get invol\rd wirh rhe parent company. A L \ q d u m t to invest in compdcs w h m opentioas hr didrirthoroughlyundersrmd,n&tr ,aid

alarmk"

that A1.G.was m c o m w t e d . ~ u f f e r t

action was low. As a result, A.I.G. hadn't hedged irs own exposure to its srmp pordblic~,and was camjng enormous pmfits w the business. But duri q the sunvner of 2008, as inamsing n m k r s ofbot~vwmh a m e unabk ro pay their mortgdges, default ares rose. The US. ratings agencies began a wholrsale downgrade of mortgagebacked securities, triggwing demands rhac .kl .G. prwide eutr.-brger mmntr; of cohreral to buyers of irs swaps. It wasn't clear how A.I.G. could came up

v e t y u ~ ~ ~ p k ~ ~ t c p l i c d .

me tmiier didn't /iws iip t o the feastVr.' 1

"AU f know is if you &it pay six bil- did nor r e p n d to ~

Iian noa w#k pu'm going to haw same

Robert Willumstad,kI.G!s chiefexin as the groupwas e~ting smdwicha. Willurnstad, a r e d oldccutive, &d

ddbgnlcasnd m y t a r c i a g r o u p m t i v e wha lmt a suwcssion strug& had ahways w t e d ro run n Isrgr: public

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mcc rooms kbwers and his t a r n wcre grwn tku avn mlufmce m m ,where thy ad some k b G . finance officers ex-

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hat afternoon, Fed staff me~nberc calted a numher of Wall Srreet

and a s M them to attend an emergency meedng. brig the C.E.Q.,

w ~ f a m i be o n ; V h m Pandit,dCitipup', Brady Dougarl, of Credit Suissc compapy. H e got his chance in June, Group; John Thain, of MerriU Lynch: when tfie board ofAf.G.*t itr p k the Jnhn Mack o i M q a n Stanlq; and Woyd world's largest I tisumncc company&an&, M s sllcc~ssprarGoldrr1u1 ousted tit cbrn&ls chid. Witlurnstad, hb,As ont v e t m of the Long-Term w b bd been the board chairman had Capital Mallagernent rescue rrrnnrked. farmulitcd an a~nbiiousrcsaucmrinp T h a t kind of d l is n-w. e r g d nm." '

fin ankd, dozens ofinvatmetrt bark-

q u Ibr m comment

for hiis mount.)

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ul~lcrntri~~ it. but rhe derenordtion in tbc Fmarrcial Praductg division I W I IU ~ t

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h.b. r s made r k i r way dong ~\.ludrrl Lane, in lower Manhattan, and arered PL mr~w of P ~ P Ynrl. F ~ 4 r r JQPNfilr

b m (Underground. had fired JPMergrm to advise Wssance-style t in the bank's d r , is the L;ugem stdplt. b1.G. mdhelp it r& c9pitaL That mwning, wdumdm& of mommygold in the wrld.) Thc Nnrr &aspmadsheet.aa&ngtkcpmt Gcithner at the New Yotk Fed, con- Yo& Fed implmtn~the monerarl, plq mmpmjs cash flow and liquidity. The wned thar the ratings agencies were at by& Fedffal h r v t B o d inWashh p n , and oversea the b b in rhe mash-Awpjcctims s h d A.I.G. to s i n g ta d o w p p & A.I.G., map hpdqon h e se- tion's h a n d caprtnl.7 h d y Githncr k in dire need ofcapid. It wrs fmng a soon zs M+. York %-billion cash sh& by thc foUdHrlng w i t y ofcht b p d e , it wwld p m p r had bcaame president of the Fed, after a long c u m in the Tressuq Wedndav, a figure that would riw to more mlatcrd c&, rrf anywhen fmm $5billion &-w& and U 9 billion $13 billion to 118 billion. A1.G:s cesh D e p a m e n t , on the rrmmrnendatiun ol &is was patenti* ca&mphicwil- m o former Trwty Sccrctarie~Law~wetkafkht Ram W up from tfre figurs. lumstad rold M h r P a h t he ntcdedto rence Summers and Roberr Rubin. Alraise $20billion. A.I,B., m knsurance thou& he h d d q p s in h i a n Stub--,"bed r ~ aarnnOuth. 3 a &we," me of the A.I.G. -~,waecwnfdqrii~rnthcFds a d g o v t ~ m ch 111mstad

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~ d u a t dcgec e in Eart Asian M sand infernatid eco~lomicshvlm t kjohns Hopkins School of Admccd I n m a -

had been higMyvkible. and that inwtors i d . T h e hid v m mld to prcparc for a hlBdhdWaekp,ifnorapondsr,to~ L L h m a n ~ p t c r P t C r f ait3 d e n k E m so,he d, a Lehman The meeting ended at a b u t n hehaal Studies, kithner lacked a PhD. failure could be 'atastrophiqmand it and the m&to and an h1.B.A;he W qmience wwld k l y b e impos,tbk to containthe remnwne rhe noa morning. .-\ i J , l l F I ..,I~ :, L,,.I-:-, ~ ~ I~I, -.. . Anp .. . .. .:, 1. : . I I *: , ' C ILL,, I d &feltrhnthelack~dtbe&&robe dy. -@ Hm* H m p 6 m WbingALG.? r Ftd d e n t . But he seernad to ham no he snid, heir c o k t h well-berngturn4 trwbk holding his m in dim$si~ns on a wd-functioning market, m d thc t 8 A.M., thewall ~ m t C.E.O,s, t ivhh Swlmcrs and Banark, s a w h e s p u r p a s e ~ f ~ h e ~ ~ a A~ ~mi n m ~~n td s p r n s b i r t s , r t puncturing his remark with pfinity, mkt. assembltd in the Fed confirencc rmm, and h b y injeh.gsome blunt common LRhmanwasnfttheo~vulncrab6ein- xm~carryinp~~&andaumb&.Paulinto the dhm wmnmbank.Emifitfamda~, ~andGeibdtimB+u~lsthe .4 nurnber of the C,E.O.s brought w h o ~ b e n r x t w ~ a r u n , m d p m -m ~ b c r p t r b ~ a u b u t t h a t n r pti3timwitfiBaakofheriawerp con&ir chief financial offim to the meet- sibleruin? ~ n gS. m c d European banks, inchding P h n reminded the C.E.0.s that tinuing. I n either case,here hd to be a Deutsche Bank, R o d Bankof W a n d , L c h m a n w a s ~ t o o p t n h u~p~r i v a ~ m h t t i c n w E o r d x ~ ~ t s . and BNP Parihar, sent their ranking on Monday morning, so t h y had just The &f aecutivee werr. unsure h w officers who were in New Yak. The h y - q h t hclurs to resolve rtbc aisis. expmsive that solution might be. Aml Geirhntr divided the C.E.0.s into why should Wall S m c r firms finance a m m i q twk piam in a mnfkmoe room off thc b u i l d i r lobby. Padson was three working groups: thc first, led by ' mansaction to bcnrht a competitor likc uras Bardays? there, too, ad he mci Ceithner sat at a Gddman Sachs aad Credit Iarp recranpttlax table, surrounded by asked to vab# Lehman's mub urns Dimon spk up. "Look,we're all in a and assess the amount that c firms fix. This is mrn&ng we have to do in other govemmcnt ~ffichb. The chairman of the Secuities and \ ; v o u d h m ~ . T h e m d , w h i c h chebestintemtsofthe~~finanaal Exchange Comm ision, Christopher indudad M d Lynch, Citigmup, a d $)am* M o p n Sranky,was [told to mnaidermG e i k qph broke the group into C c n ; , w a d a I m ~ CWE,afbmraRet. publican crrngmgman who had repre- ious structum under which Lehman teams, sarylng that they dmvene mpid in sevvcrd hour^. When hey did, the sented O m n s Cuunty, California, for oould bt soM and its hd ZXSI m z n my a q wag on hand as a rcguhtor. since Lehman and other m c n t b& are subject to 5.E.C. o v a @ t . ~ e i t h n t ;thanked rhe bnkcss for NOT-QUITE *EMPTY- ENOUGH -NEST SYNDROME w i n g on short notice, then turned the '>: . . ' ~ntetingover rr, P a h a , who said that, despite the rescue$of Bear Stam and Fmnie and Freddie, hert would be no

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&sent h m the rn-. S t 4 here was Ijkely to be ;lpool ofL t h w h t mmctnqwswould not mke. I t d k to the C.E.0.s in t h e m to finall6g hat pool.

Padm now achowladges, as some the r o m mspctd, that tht p m meot was mare an~enabkto hnding a fcscuethanitlcton. Wcsaid,Wopublic moaq,'" he told mc. W e said dis publicly. We repeated it when thtst guys ianrc in. But to ourselm wc said, 'If here's a chance to put h puhk money arad PW a W r , we're open m it.'" Speaking for thc Fdcrdl Rcscme, Geithner noted rhnt Lehman's trouble tn

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bankers reported that theyw m thinking a b u t esrablishiig a revghing line ofmdir to suppon other hanks that might find t h d m in Lehmads @camenr. Bur Geithncr had asked them to faeus 41Lchan."You guys haw got to try h&.* he insisted. Thro~~ghout rhe da>swhen manbers of Lht various p u p s passed in the Fed corridors, they a d d one mother, 'Are you tr).ing harder?"

John Thain, dMurriU Lynch, worried, like rhe othm, that a rcsohrtion of the Lbrnan crisis would just shih the crisis to the next most dncrable bank

wbid mightwtil tx M

(with a f 2 9 . 4 - d o n contract). Each man also xceivtd milIisns in M e d l s t d ro

w ~ u l ds u d O'Nd Wantingro maintain some continuity, Thain kepr him on as president.

replace his Goldrran holding. Thain hired rhe Lm A n g c l ~dmramr M M i Earher &at %&miiig,Fleming had Smith to renovatehis o h and adjDining called Thain a r home, in Westchestcr codereact rooms, at a cost ofmore than a Couny.For 4, Flenling had m t l d million d o h to prepare various cmniingenq schemes It wasn't Thds pay at his spending, f ~ MeniIL r The best hope for a possihle tt!ough, that anno)& M d s rank and m c r was Bank ofAmerica, which had rwice rried ro ger MerriU

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jnm merger & but had been rebuffed. Now that Bank of America was negotiating to buy W a n , Fkrmngwascvenmoreinsi9tcnr. "It's h e rocd Krn Lewis," he said. In Thain's view, hlerrill just needed time far the market to stabilize in order to generate more earnings. Hethought that Fleming sounded hyteri cal, and suspected that Fleming's sudden eagerntrs ro sell the compaoy reflected, at leasr in part, -s:c?mcr,? z~h::
d

Thain, who is b f q - f - r , up in Ankh, IIlinojs, and fipr came to promintnce ar Gddman Sacb,

wfmhcUq~dly. Heirttimd~-jmd, with thick hair and brown C?'CS and a resemblance to Chk Kent Ht s d o d mgincering ar M.LT. and -rr*;*.le 4 . I M R 4 ".Ern

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bclngndehiefopenlig o&by h u h . HeMto h c ~ r n cchief executive of rhe troubled New York Srwk Exchange, successhlly rook it public, and gained a reputation as a

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. I o d d e r . Fleming>for his part, suspected thar Thain was resisting his s u g e s -

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tion in order to prom his job as Chief mcutivc.

L

aces that day, Lhm:~n

oficids mct with the team led by Goldman ~lmprwnd~. and Credir Suissc, which Mcrtillwasalsoinmwas rryjng to qum* the blt when it approached -1 didn't wme h t o sell /ht campy,"john Thn, "holen in Lehman's bn~ i n 2 0 0 7 . I t h a d ~ ~McrrilIL~d,iddBanAfA~a'sKktM.'Thutilancesheet-theamount udatl3n intpffslpdi n , * M said fired Sranlcy O'Ntat, w)m, by which IiabiIiries cxas chief euecuti% had made d a d m t s . The Lchmm M e d one of the J a r p x people discussad h e p m b underulirtrsofm o wmil &.~Jt was h h - a d ~ his fbrmer Goldmm lems on the Mmx b e e t , the quPriy of ties, a st r a w that proved disasn~us cokgues'--rmperiur manrser. "Hemudc their assetr, and the speafics ofh e liqwdwhen the housing bubble burs. M d s a point of making ir dew that the M A ity crisis, incktding a $5-&ioncohttral board ofTed Thain a S l 5 - d i o n s i p - p p l t w m i d t i o r to thc Wdman peo- cd thar week from JPMorgln Ghast. - Tr. I. 1 ;.+-1. . ---:,: , ,+I*f-. - f ,.: , VT,. ! * 1 ;-.I,: In L)ecernber. jusr as rhc subprime cnsis ws d q i p o h r 4 m the quaIity ofthe inA h w a d , the Goldma md Credit was d n g the firm's b h m sheet. frilBmctmand the pPIt at M c d Of Suissc team told the C.E.0.s that the Thain immediarcly gtaook up M e d s he had gaod reason to be, They *hole"v d to m n t to tens of'bidh i & M dturc by Etcruitingw, of kis were in the pof h h g tens of bil- lions of dollars. Lhmn's comrncrddformer c o l t q u ~ from s Goldman, with Iions of dollars." {Thain disputes this d - m a t e assew in @&, wrre &rg W gumntetsThomas M o n q , as h e tia an) c u r i a l m the firm's baoh at a far higher hcsd o f & M sslts and d i n g (with a reThe h i g k - d n g M d OW to vduc than was tealis~c.As one Wcip o d py prmckage of$39.4 d o n ) , and sw&c the mamition was G w Rm- pant pur it, T h e air kind of went out of Pmu b u s , as the had of global mtegy ing, who some at MerriU had thought the rmm." Thain was particularly un--?!

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with P m b u s , one of the Goldman hnks he had h i d aad P e ~ Kelly, r h l e r a r general counsel fbr operating bu sin-. "J dlh* thejle lPeayr going to kt Lchianp unk; he aid. Ramsideri% his d k r M d F I d g ,T h i n stepped outside the building and d e d Km Lp\vis a t home in North Carina, and told him, 4 think we should &KWS mnr smtcpicoptiahs."

L

ewisimncc&tdyAew~oN~cwY& and a few h o w kter a m & the d o ~ when r Thain arrived at Bank of A tnerica's corprate apartment, in the

mb&m~,theabn

coniidencc in the g u m r a . business

grew ten& s some pointed out that it 16.

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w~k. &j t ; v & ~ o w Scanlefs J o h n W p t i qa d r e d ' m s n d d tompbiuc'ssprwd,dhtfircd w a u M h a v e t o l x M e ~ L p b . &tht ~ t h a i brda q up, Mack p k d 7Brlin aside d proposal rhat *cy mat that Ewning. At about the same time, Gary Cohn, Goldman's president, told Perer h s ~ ~ r n i g h t b e i n r i n buying s 6in MerriU. Kraus and U t y agmd to go to Coldman's headquatters the naa'day. p s i splcdcl IV tile

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p ' s Jamie Dimanand M

+

and had P TmeWarnerCentcr.Thcwommwm +team,iolcludingthfimfs&t, alone. W c i e htemttd io having Bank ot'herica buy a 9-9-per-cen1 st& and

pur at our +al

a multi~ion-dollar

credit fdry," Thain &lid. 'I'm not interested in a s t s cot

h

9.9-p-cent

s mid.

" W 41 didn't come hrre to sell the npany,"Thain replied ' h r ' s what Tm interad iq' Lewis

Gci&na

wuuh be large, ole nsk w a s relat i d y h. B r i d qdations q u i d a sharebolder v ~ tto t approve such a guarantee. Sine B ~ ~ Jd ' E need to scure a guamntw fbr L e W s operatiom h a s bnga;samwthbefweadeaIdd

bc~thcBdyspcople*IlkdWaren Buffen. B&ws men&1c,upma pint. T could rake a I d at providing emaybc d fm b i n ofpmteaion," hc said, but he d d n ' c mnmit ro more. M t e r the 4,the Barckys bankers md *rs d d d that it was pointlessto p m e matter, If thtb d h9d

q m h on

to announce a piecemeal parantee, in

the phone hat moming wiph a Bar

which Barclap hanod thm billion, Buffen he barn, and so on, invesfm

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Bab Diamond, at Barclays' New Yolk wouldn't k d. No *re entity headquarters. Barclnys' C.E.0 .,JohnL wuldmeanunlirmredexposure,m Varky, was on the line in h d o o . As matter how &@t the risk Only a govhhaodmthnawq&Ncw e m m c n t d & t h a t . F ~ & T ~ e a Yo& Fad,their staff mcmbers g a k c d s q or r k Fcd buld jimpl) UJ d t r ~il around. w u backing Lehman's o h t i o n s until The prcvjousday, h u b a n had & the dd c b d , or und ttac sbarehoders wi tb his British counterpart, fistair approved,Thc Bardays bankers mre DrrIurg, the Chancellor d the Exche- obnvincedthptwlehagumtce wouldn't quer, to makt surt thdt British authori- Cosr U.S. C B X p F Wi#Wg. ties were d d c birh Ha+' in-

saidLewis pointed out that Bank oi heria,despiw its sh, m'tmu& at' uohwnentinapotcntidLdman w x c . a force on Wd Sweet. In Merrill, the Darling M pointed out h a t authority co~npanvw d d t s r a &bal pmmx in owr P h&w d i d nstcd with Brimin? r'

in weith mmageruent, a d M errill's vaunted wny of rerail brokers. T h i n , among others on Wall S w t , lilt thar L ~ w iand s other Bank of A m 6 em-

would mtinue as usual Odwwise. m7 , . . 7 ,

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s chance would have it, w f i i the New York Fed w a s addressing its w l m fimnrial chalkn- ~ i n rtv bI

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n e w accorded the deference shown a JPMnrgdn Chase or a Ci-p. Thain ~=ttd that they assemble teams t o pursue both options-the

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9.9-per-cent d x wid the lillwis w e d that ma+ ~siwuldn't d l a v n e eke abut a potenria dcal "Tw got t~ tell H dPadson,"Thain $.did. He was worried thar he would tx bhnd for ddeccing Bank of Anmica's inrereet away bra Lchmm. 1Ve're not going to pursue Lehrnan Brorhcrs: Lewis d. Vut go ahead, you fan tel Paulson." WnThainprtothcFed, h e W Rulson and told him that he'd met with Levis. " C dW

n said.

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& d m were being dead of& lators would be a&hg tough questiam and enovaad. Geichnet and his staff a h t risbfbc thc British tqqw. Paul- WTC warking out d t e r n p y quarters m turned to two OF his T m w a i k . on the tkittpmth Fkwrrrh.w lnnlr~d.e n-p and tfiatBriW rtgu-

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American~hulsonsaid ahe ubiquimus Christopher F I m and Now D i sprrke Cor the British. scnior ofid& from Bank of America, were h e r e to discuap the L b B - w r tomakt mder Eor Ldrmul,he ' W i t h d d r i o m . takeover. They had stayed up dl night The p h prwided an dqm d t i o n m s c r u I.&mm's ~ h k s , and d~ picr r rrh at d g w ~ r ~O~n~et B . ankdof~ ~ ~ M ~ t t a e y l H o u lf i d m a i n i u a k h m P n m c i t y , w h i & d ~ ica official rold Paulmn and Ge~thner. dubbad Newm and owned by Lehman's We m't do this wirhwt you.* He ql a ~ ~ l m l dht d~ .3 . would ~ ~ b y way- gtsted rhar the government beck a b u t thing &.The proprld would leaw a $M)biaiondLchman'sswrbkd~. s h d that B e edmocd at 815 or WhenFlowerswas]*lving,hetumcd v,"he sad. "Ha* $16 Won, for Hrhich funchgutrwld h m to F k h . 'By che w -tobefcund you k e n watching N.G.?' B a r d ah ~ w &at on M d y mornWhy, what's wrongat ALG .?*Pading someone would have t~ p m n t c c sonasked.Cdthnuhadmtn~nadthat Lehman's d e b until the d d &ad, as &re were sonaeliqurditgmbut PaulJPMorgan had done for Beu Stcarns. son had k u d & the N e w York Statr: If someone did so, d n d investors had immce m m m stepping in,

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in me h e oT*r Amcria to agree to 929 a share. a rethis," Flowers said. and pdcd out the invesrmcnt portfolio. Widurnstad csti- markably high price under thc circumspreadsheet he'd got fiom A.I,G. the mated thar A.J.G. needed $40 binion, stancts, 'If t h y hear h u t a Goldman twiae dx amount he had mentioned ear- Sachs did, t hey3bt spooked." Fleming day kxfore. They went back into the ofice, and lier. To raise thnr kind of money, he d w d to release any ofhis team. Shar?, R h n d e d the numbers. F h m needed gwwnrncnt support. Gtithner afterward, Thain called Fleming. The poinred out rhe looming multibillion- said that nene would be brthcoming. tone oftheir -change rwi iq.'Get pdollar *Ehortfd." ple d m here,"Thain ordcml, "Oh,my God!" Yaulson said. Fleming pdging1:t a g n d to wnd a couple ofpeople, hut there u.as 1 s dun He and Geithner asked their sraff people ro do some fast research on twenty-four Irwrs remaining M o r t the hen, at 8 A.M., John Thain re- markets opened, and Goldman, a mdiRLG.,which, asagiant i n m c e comm e dto Ken W s apamnenr tiond Merrill rival, was liable to walk pdny,wasnlt regulated byeither the Federal Rcscm and the F.D.I.C. or the to pmc dx rwmc o f M d Lynch by a w a y ~ i c s k n h g o t a g o o d l o a k a r S.E.C. Although its insurance opera- Bank of h e r i a , he s e n d that Lewis M d s b $ a n c e sheer. A Bankofhertions were covered by state insurance h a d p w n m o r t ~ t o m d c e a d c a . A s ica d e d d coUagse as wcl. Tcr some of q d a t m , it turned mt that A.I.C. did Lewis offered Thain cob, he seemed thm involved, $29 a share mri bqqnning have some federal s u e s i o n . Since it entranced by the pssibiity ofinstantly ro wrn wildly aptimisac owned a smd sdngs-and-loan, its op- becomingAmeh's h r p t rerail broker. era-ddonswcre repomd ro the Ofice of T h a i n w a s g r v w i n # ~ o u s , T h c ~ w s aulson had been at his desk r i r m swm, vying to otganize the day's Thrift Supemidon, which regulates night's meeting with John Mack and S. & L.s. But, when Fed officialscaUed other Morgan S ranley executives had schtduIe and mectinp;with Treasury the O.T.S.,officialshere seemedb 4 - madcitdearthath [organStanleymdn't m.At b u t @t, he tooka call from dcred by the qumions about AI.G.*sli- maw fast enough, Ht hadn't yet heard fohn Varlcy, &c Barclays chairman, in cpidiv. A.I.C. Financial Products, thc anything about the Goldman meeting London. hen under my. Bank ofAmerica might Hector Sanrs, the chief e~ccutiwo f mtcr ofthe problems,was not r&ted by the O.T.S., or by any American en- be thc only option*Lewis was emphatic Britain's Financial Wca Authoriy, felt tity. Although the 0,T.S. had m e d aboutonethug. W e ' r e o d y i n d i n that he had made it dew to Bardays d ~ t the F.S.Ad d not ~ppwvea deal thr A.l.G.'s board about inadequate risk buying a hundred per cent: h t said T h e n it can'r be a lowball price," put 3axIays at risk, and Bar&? had wtrswtrs+t, no one in the government aprcadily agreed. Although B a r d a ~119s pars ro have undersKIod the ptential Thain replid Lewis dhim that he wasn't oy- wrll capitaizsd, and rhc ESA thought it s q e of chc problem. The Fed ofieials would w r h t r the crisis, Sants did rmr needed to talk to R o k WiUurnsmd- ing to ~ M drm lthe chap. M e r ~ t h a l f a n h o u r , ~ k f t f o rbelieve that it was strong enough ro a b "We'd h e r get them in here this &erthe Fed. When he arrived, Kelly and sorb dl the risk Hewonid that do* so noon," P h n said When Willurnatad and other A1.G. Kraus rold him rhar G o h m had pro- might aigger a crisis in a d d e n r e in Baroffidds a r i d , Wiumstad mnfumed posed buying a c).9-pcr-ctnt stake in days that couU become self-mu ng. k1.G.'~liquidiry crisis. But he said that Mertillandpmvidinga 5 1 0 - W n lineof Bu&p is one of Britain's largest rcrd he w a s meeting with various private- c r e d j t - j w w h a t ' i h a i n h d ~ n ~ bids, with millions clt'dqmirors.Smts equin, h s . Despite the growing eash for originally. Goldman wanted to srart expected winethmgsirnilar to h e kind o f demands. A1.G. srill had enormous as- cxaminingMerrill'abkasmaspas- backing that JPMorgan Chase had received in the Bear Steams d&. It didn't sets, iwhtmg one of the woMs 1 - t sible. 'Let's get this gogoq:Thain mid Kelly d e d Greg Fleming, who- in marter to h a whether it m e h m the invesprccnt portfdk Bur many ofthtse assets were in Af.G.'s insurance buii- d r o w n nqotkingwith Bank a f h b a r k s meetingin N w York or tiom the nesses,whichrequired by the states ica, andaskedhim toscndaaamof MFT- F 4and he qyd Callurn blcCarthy,the rill bankers to the firm's hadquarrcrs* chairman of& F,S-4..ra m&e this dew to maintain assers f i d c n r ro meet insurance cbims.ThtNewY~rkinsurancc downtown,to hell, G o l hwith is due to Geithnef. McCarthy med tn convey the Brirish commhbner ww at tW.G.'so f f i e and concerns to Geithner in a d lon Sunday New York's governor was gening inmorning, mcmioning the issues about volved. The A.I.G. officials were optiBarclays' capital position. Hc also'tuld mistic about finding a way to free up Gri~hrmd w r the FAA lacked the ausome of those mw w that A-J..G.could meet the msh demands while it pursued thority to waive the shmhofdcr vole required for B m l a t ~o guarantee Leho k ways ro raise apid. man's opastions, Bur perhapsMcCd-y. Later h a t evening Widurnstad d b d in his understated Brirish manner. h e hTew York Fed. He knew that a LArn cbpticd Tallurn, you haw to deman bankruptcy was likely, and rhar it

ell, you should r a h a look at and o p i a b l e de*

W

P

ddr.'' Geihnef siJ."Are you ping ro appm h i s or not'. Youk t~otsaying I-Q )punrenot saying yeamHe felt thcy were talking in &&= One of the British pattidpanrs ~ d , " W e could ncvtr get Jarity" fiom the

rlrlerimls. When Cicithner briefed P h n and Christopher C o x an the exchange, Gdhner wds visibly angry. Why were the British raking h i s &st& w late in h e proeea? Githraer said that he had asked McCarthy three if he was

~ohlgrobIdckthedddncvergma sfmight answer.

Cwc d c d McCarthyand said, Tell me what your view is." The normally affable McCruthy seemed cool and detached. "Myresponsibility is that !VL uiidcr=tilnJ illr 11iinp thrr iwt to be done: he said. -1 don't sec them hap-g."

Caoc reprtcd to % h e r a d Paul*Hem'tbudge." Paulaan p a another d to Ahstair had bcm in @a coneact Darling, with Prime Fvlinisttr Goadon Bmwn and MKmhy. -

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this tm per cent ofthe brain? $car Stcmm It was obvious p u needed said. TVBS *You~rnundcrstandwehwa~JP'Morp to makc th ar hapgen. Now I don't how. ...Bur rhc thought was sponsibiy to rbc British timpyer: Dar- we didn't have ajPMqm. So oauld we thm just recapitalize LAhtnan and keep it At noon, S m m Shafian,%senioradtnffcepa ,-,+?? p.-lr. I :? t .,.. * T T * 7 % ~r u 4 n l . e mJl: L p q r ~ vrhr - q + - > - ~ ,, ;,-,.>

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rtmn a yurnt ot. colrtsiitlw~.h ~ u ~h ne American p i n t of&, thehe was naer a salid p@ that they auld respond to. The Brirish (and some on the h

er-

ican side) maintain that the issue of a dmreholder vote is a red herring. T h e british also fell thar they werC never presented with a deal that they could respnd to. Y t noi the h ~ &pint r>fAn&-An&an rchtio-ns,"one jxrson familiar with the conversations sap. L R W s C.E.O.,Di Fuld, had had m n t h s to find a buyer and Wt done so. Now that Bank o f h u i c - a had set its q h c s on Menill Lynch a d Raiclays was -hungup, ttreanlywy to k hwould be for the g o m m m m essentially hke an ~mershipstake-a step that w d d m t to n a t i o d h t h and one f o which ~ the governmentsays it did ~ r nhave authority.

-

htheTrcasuyoffidald~bedthe situation. "Tht madd had d w y been

A here war no reason think our mcmty would restore mntidence in hhrnan. As G Ethner ~ said, you cm't h d inta a run. So rhtre were d l y two issues: legal and pactid.P a h n insism &at we didn't haw the authority, and Iwon'tquestion dm.But, even jfw did have the autbority, it wasn't practical. All &c Fed money in the dwisn't goingto stop a run an LRhmanP Referring to a Lchman fdure, the Treasury official said, *Weknew it would be -a At b e same: time, after months ofturmoil, mpnc still owning Lkhman s t d or commercialpaper had to bt considered a s p r c u b r , Pahaps investors would stop h t the g w t m r l t wwld bnil out myward financial instinstion and adjust their risk- taking accordingly. *Everyb d y in some pmt oftheir brain *ght itwxsagddingforLchmmBmthem to gb under: the Trcasuiy o m d i waay m prto

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L n rhe chief e c u t i v t s of rht Wmetapinchardayaethc New York Fed, &cy e x p d G e i h c r and Paulson to tell them exactly how much they would be expected to cantribute to a L e h w rescue. Instead, Paulson, Gcichner, and Cox dl laokcd grim as they filed into the room, mslild by various Treasury and Fed smRrnernbers. "The Bardays deal has falen through: Paulm 4."IOUshould expect a Lehman bankruptcy.' Hastily summonad Sate that atierndan ;a the New York Fed, M w e y Miller, LeWS k d bank~~ptcy lawy"?joined a grwp of h a -=t i and ~sfid& from the T r q , the Fed, and the S,E.C. Tom Baxrer, the

general counsel br rhe H a v York Fed, hew by reireraw that the Barclays deal had Mlen apart. T h c was ~ no rescucforLth. W

s

the r ms q ? Milk asked.

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pany had to file for bankruptcy before the m a r k op~ncdon Monday morning. T h e alternative would have been h," Bmcr said. "Everyone would bh o r n that the ~ k e n c P rescue s 1, 9,: .. > T .;, . , ,.-,+ LC,#+- h7.J T;:?CI.lyiI?,{h7~?h7-!7 "You don't realize ihat p d r e say- dash for assets wor~dwide." As Miller, the bankruptcy lawyers, ing: Mi&r argued. *It's going to have and the L~htnanoficiala rttumd to r disabling cffccr on the markets and The nun step rvas banhprcy. You have to tile by midnight," Bmer said. MiUer and his lawyers hadn't even nmd drifting p a p . T h e day More, when hc heard from Fed officials, he

had put p

m on Cox to call the L h man boardand cnwuragc Leh~mnm file for b p q immediately. Cox feh rhar ir w inappropriate for the government to interfere in the board's dcision. In-

T - ~ J+P c t ~ p c c r r tl h ~*!-t I +mm had a "gmve responsibiiry,"a iiduc~av duty to shsrtholden. He told them thnr

the Treasury and the Fed Mmd rhnt

As Lehrnan 5 b a n h p t y wus being negofiated, 'wordp a d that the beadgr~artmwould k loclddmt~ and its rontmf~ seized Ernp/oyeustreamed out 4th bsrtliin~,wring oftkir~onalbeIm~~~~ps, destroy confidence in'the credit markets. If k h m a n goes down, it will he Armageddon." All the government officials lscd out,to discuss the timing of the bankruptcy, leaving rhc Lehrnan officids and lawyers to speculate abour their fate. When they returned, Bawr told him that rhey had not changed their view. Lehrnan Brothers should file bv midnighr. M y ? ' ' Miller persisted. There's no way that can happen. There's been no pepararion .* Raising hisvoice, he added, 3%just wnt tn underwand.*

An outsidc lawyer for the Fed rold MiUer that he wasn't being constnrctivc by conrinuingto argue, and B m r agreed. T h e decision h i l ~beenmade md it won't be misid."Baxfer said Fed oficjds didn't feel that they had irme to discuss the weekend's wenn in Jerd with Miller. Their goals were to make sure that Lehman officials and rheir lawyers understood that there would be no reprieve and rhat rhe com-

Lehman$ headq~~trters, in midtown, a bearded man mas pacing the sidewalk wming a p W that read "Down with Wall Smxttm Word had sprcad chat in rhc m n t ofbankmprcy the M d h gwould be lodred down and it, contentsseized. Employea wttc m i l i n g our,curying suit-, putlng rolling bags, a d n g off their

market rronditio~~s w r c such tl~arwhat they did would hca* ,fiect the market, and the timing was aitid *Are=you directing us to put Lehmn In bankruptcy? one d i m o r asked. Ctxx said no.Then there u.asa pause as hemnferred away hthe pl~one.When he rerumcd, a minute or m7r)htet Cau said. personal Monginp. "No, thc ultimate dcrision is \.murs. \\'e Whcn the group reached the board- can't interfere in corporate gwrrnancc." mom, on the hiq.-first floor, cfic dirtcBaxtw added, "But our preferenmwas tors were heady rite.Mer o made very dmr today at the Fcd." briefed the board on the government's After an hour of discoss~on,the d c t , Dick Fdd. the C.E,Q.,shook fiis hoard voted unan~mouslyto file for head. 7 don't know h o w this happed," banhprcy. he said. Another rlirecror asked plainFuld said, Y guess ths is p-y ." tively, T h q W c d out Bar-why nor usy FulBs stcxlerary am in and handed T.G.5efforts to raise mpitd or free him a m."Hala on," he said. "Some, w e r s tiom the regulated inhutthing unusual is going on. Chris Cox mce companies stalled as the company kept incseasingthe &marc ofcheamount wants t a a d d r e s s d ~ e M P The S.E.C. c!lairman, along with of capital it needed. I Yudcrstandablv, rm Baxter and S.E.C., Fed, and Trcmry one wanted to conhb~ire$20billion. only sraff people, was put through ro the to discover that it had wished as A.I.G.'s @rat rhc centrr ofthe table. Paulson a s h n d s continued to soar. But, h e r

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more hR ~ days D of nearty round-thedobc due ddpnct, Fimvkrs and his wll ~ werea ro make a propoml to rescue A.I.G. Flowers had enlist& rop officialshmsULianz,thegiantGermdn insurance company, who had flown to NcwYorkhtdaybef;o~.At3P.M.,Lhty inet with Willurnstad in the cotlfmncc m m outside his of&. Flowers proposed that his firm and Alliam buy AJ-G.fbr $2 a dm& (A.I.G. shares had c l o d on Friday at

nveh~.)Thcy would acquire the assets ofthe subsidiaia, but would dto be insdated h m the liabiities of the parent. Flotm and AUiam muidcontribute hve billion each in new capital. Flowers's offer was co~~ditioned on receiving Fed support. And there was mother condition: Wiumstad and A.LG.'s top management would lx replaced immediately by AUia1z w m w . w a d thqht dle p. m. p d was

iaUglldll~~. l i t~ i i a l i m r i v w ~ cI ~U his ~ &rts md asked him to ?me.

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hat&nmqMdLynchwded out the &mils of the company'ssate to Bar& of Am& It inrobed no cash but a share exchangethat did indeedd u e M d at M9 J share,The M d Lynch boanl. meeting by phone, a p p d the deal. JohnThin & ICm Lewis with the new. 'It was unanimous," he said. You have a deal," Around 730PM., Thain and his entourage walked from Menill, on Fifth Avenue, to the offices of Bank of h e r icn's legal firm. WachteU, Lipton, Rosen gL Kam, on Fifty-second Street, where Lewis and o h Bank o f h e r i c a executives were waiting. Bank of h e r ica's b o d had & unanimously ap-

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deal-Merrill bummer he ~ n c was e than like an execshareholders would receive no cashurivt ofa m e d n~onymuketh d { Bank of Amuiaa also had m e pmec- ~ e s u b j m t h e y ~ w a s t h e L h tion. If pmd rxlnrket coditions demi- man bankruptcy. The Bents' moneyorated, and Bank of America's stock market fwd owned hundredsof&IU declined, the prju of the Memill deal of dollars of Lehrnan debt securities. would drop acmrilingly. Flowers conThe eMtr Bent, dong with the firm': cluded that $29 a kwas a plausible late co-founder, Henry Brown, had inprice. (For this amim, which has oubse- vented ahe maney-matka bd, in 1970. qwntly bcen w i t k i d , Rowers and an and the cornpanis Primary Fund haa affiliated h u were paid $20 m a o n k g u n o p t i n g in 1971. At that h e . by Bank d k m ) yields on bank deposits were cap@ at A m d @ t o a c o m p h t h ~by~ about h e jm cat,but short-term U,S. the S.E.C.,the apemtnt a h includeda - Treasurybonds, which could be aaquired h e n t , not made public at the time, only in tm-thousanddoh irwements, that authorized b;nuscs to l x paid ro yieklingerght per cent. Kow, duds Mmille m p w fa Even dm& m & n t d B r a w n , e ~ n s m a l l i l m m Merrill's~wertn'tyetlaMwnforthe could participte in the higher yields ot full year (ultimately, the hiost more T v bonds by pooling amts. T h e inthan $27b h ) , the b e n t d h d mmmt9w m dm-& and siwe they for bonuses dm *do nor cxoaod $58 b:il- had brt-term mamities &err w s little value." Bankof Aoltn:a risk b r n chanpginterm mes. lion in now saps k t the dmmmt not disIn addition to U.S. Treasuriw, m e closad for " m m p c t i t i v e ~ n mmieymarkct funcls beean buving c m Lt't& Aawys ~ L h ~ l t i n wurlrulg ~ e d out rnerciill paper-rtorr-term debt t h d ~ the details, Thain and M s went to a crrmpanics we m fund their operatingexdcoderum m m to await news that p e w . By September of 2008, money they dsign the mcrgtr dmmmts. A &t funds had kcornc r 135-aiRion bottle of chilled champagne and rwo marlet, and many large coqmations had ghws had been y l a d in tbc mom to m e to reIy on them to meet their daytoast the mmphion ofthe dad.Thain t o d a y m s h t w a d s , s u c h ; l s ~ ~ Eelt thathhddone r h e h h c d for Untikt bank deposits, the funds weren't Mdssharcholdcrs.Ast$the@, c m e d by I c d d d e p i t insurance, but JlNVig grtw impatient, and d e d swieral t l l c y w e r c ~ d a s e q ~ d c . A n d ! Given &at it was a st&

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d m e s t ' o 2 s k w h e 2 c ~ p a p t r s ~ e r t . ~whynot? Inhmyears, thenet usetduc of funds available to the public had never rwo men signed, and then poured the fdcn Mowadokashahpthetchampagne. Neither one &d +g id possibility known as *braking the about M F future with Bank of Amtr- bucknMany funds caniod check-writing ica. Y Imk f b d to a grmr partnership privileges, helped to finance the fbdtral with M d Lynch," Lewis said, raising debt, and provided large corporations his glass. He grim& The champagne v(ith an important swrce of liquidity. waswarm. For years, the elder Btnt had insisted that money-market fundsshould w&c . I ...* .1. T** t . It ' l

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would soon be joining. "It was South versus North, t d t i o n a l banking-blue collar vem tht ~ bthe masters ~ of the uniww," one M d p-hcipmr re&. 1 began to get a hint of the rebenmlent toward W d Sweet. This acquisition was tinged with resentment that went beyDnd the numben. It was as if rhe tortoise had wen the hue, and they were not w q p d at hiding it." Ffmvcrs had just arrived frrrm A.1.G. ro d&wr a fairAess opioion on the 529

prioe for h k of h e r i c a shareholders.

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other firms made hugt profits, the Primary Fund b n buying highly rated commercial p a p as d. From N m m ber, 2007, dmugh the summer of 200s. of Idman seit k e a s e d i s curitits. Th& in pm to the higher yields from such assets, the Primary Fund's one-yea return was four per c e n e b w the m p a r a b l e rate fw Trtasurics, and h& even by moneymarker-find rmdarcls. Bsrh Mwdy's and SmM& P&s px triple-A *ITmore like the philosophy major and ingsmthePrimatyFtmdMvidualaad

rum R Bent, Sr., the chairman of tlie , Reserve Management Company, which ran the comtiy's oldest morpgrdthnd,had@arrivadin Rome, whem he was planning to az4brate his a e t h wedding anniversary, when his son, B ~ L Btnt T II, the firm's v i a 4 d r m a n , called him from New York. Ih his absence from the ofice, Bent rcIied on his 50% w k shod& length hair and bead made him look

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largc instinrriod 0ockr;dm the Bmtn w e d h t rer~empti~n f ~ m . d i t s ~ ~ o s e w n d y f 6 3 b ihud l - =dud t 36.5 billion. Aceording to thc minum, he descrikd W a s appeared h. h u t 12per an; of hose were in to bc a sun on the Primary Fund: But he Lehmao commercid papa and o h scdidn't mention that 5rare S t n q ttrefds curiris--enough. thmreticaily, to break eustdan bank, had d e d to r c p ~ rthat t the buck if the assets losr their value. the huge number oi redemptions had Even as Lehmm's situation dettrion i 1 ,I ?, 7' , ', was suspumluw connbcnr rhat me w e t s were s e w , I w uverdrdm, and h e ~~ank days before I&ng for his vacation, he overdraft privileges, according t~ the r

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functiand thr fund couldn't ~rindowthat$Ry+afrertheyclosed ~ down Bar S m m should k a&le to ash to meet redemption m p s bysellLchmn for the same typc of situation." hgirsmlyrLiquid~Asthtchicf It was now publicly known that Jlr inveshnentofficwput it, m r d q t o tht h w y Fund was to Lehmn's d p t o f the board m h g s , thig was failurt. Tmc Wamcr, which had $820 "&kiss ufdeatkRHe aka said,"Paulmn nndB&tody ftdaadthisup....I m&on in the fund, requmed &mpIS t)lat.rnm-hg.The Bents contacted don't think they thought this Goddx New York Fed at 750 A M . , d-damnod thvlg d m & , to outwhat ing to S.E.C. Qcuments, to ucpress w n - h e ripplccffbcts wtrld be," c e m a b o u t ~ m 1 s * ~ ~Eknt ~ n[ d d that the company d d

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market industry and 6n the Primary uy to scum additional finan- or inject eapital from the holding company, RcFund But the graviy of the a p p m d y serve Management. Thc b a r d w e d to hd yct to sinkin,judgingbm the tran- pursuc that saarqg. and &qmmsaipr of the Rm.m Management board tiw launched an t f h to smn thellvithmeeting at 8 AM., which wa% released by dramis and rasure shareholdera One t)K S.E.C. Bmt II suggcwtd r h r his fi- told a ditnt, amrrdrng to S.E.C.docutber p i d e : *You go1 more d g r than I ments, 'Wc have a badatop and arc going to e n w e that &c fund dots not did last &tP "Last nighr, I was sleeping on she break t kbuck* plane h New York tb Rome," his fiYet +l c end of the day d t m p t i o n her said, 1said t~ my wife, This is s u p quesa tomled more than S O billidn. posed to be a memorable trip: And she A little less than half that had been responded, Well, it certainly will be, fundedwish k w c Managwmnrpere r r" sonnel blaming the delays on the marBent U repcd &at, as ofthat mom- ket dlimits placed by Starc Street. As ing, rhc Prim? Fund was king 85.2 the chicfiitment offccr summed up hillion in dernption q m .In assess- the situation in a call to othct k r v e ingthe d u e of thc Wlman h o b , tht oficids, W s just fi~ckingb d c . . . .. * P r r l r . 4 . 1 t

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- hundred per cent of &cc value, even we're going to gcr through rhL. Bur, thou@, a m b g to the S.EC.,the iw- you know, I haven't seen h e m a r k t Iw dam the Bcnrs had seen mggcsted that like this in thirty years. Thio is, Iikc, therewnarcalmarkethIAmndebt -ion." and that bids ranged from faq-five to Nwerthtlw, at ter the market dosed cents. Ar a scmnd meeting, dK board Reserw Managemcnt rcportcd that it d e d nn ei+y cents an the doh, m- A d be able to rn~inmina nw assetvalue sibling the h n d to calculate n net asset of one dollar. d u e of 99.75 cents, which could be round& ro maintain rhe one-doh net hatevcr ofiicials at the R e r v e asset d u e . At the same time,tht bwrd Mamgment Gmpaoy h @ r decided not to try to d the securities of P a h n , when he renundm Washrwder m t marker d t i o n s . ingron he was greeted with ovuwhclmAt a dljd bud mcering, at 1 pm., ing praise for haling kt Lthman fail. a

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Calls to his office, hc says, some from memhrs ofCongfcss, were running ten to one in h r ofthc d&m. Tht gavemment had to draw .a line somewhere," ~IC Wajfh tJourndw~~tc in a11 &torial. Tmwy %mtqHank P 3 M b r e h d to blink won't get any second ,, ,." A~rcrrzpmng tu rrwucnt Ljubll. Paulson met with rtpwters in the White I-

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main confident in che soundness und the r e s h c t ofour h n c i a l system." Still, even as Paulmn was speakma, the b o w Jones IndusDial Average was boppmg. By the end of du day. it was down fwe hundred and four pints. or 4.4 per mt-rhe biggest oneday percentage drop since the h t day of trading after Septemk 11, XMT.Trader>, aware of A.I.G.'&mounting cdateral calls and the onping meetings at the

New York Fed, ~~ udoading pirions. A1.G. shucs droppod sixty-one

per cent. T h e lnsr remaining indtpendent invcstlnent bankg on Wall Street were hit hard, too.Morgdn Stanleyshara droppd fouereen p cent, and Coldman's rw& ptr mt.

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~nsaeutiw day, investnl~nrbanken filed into the New York Fed. "I don't think I can take another day of thid a Cddman b& told Lloyd Blankkii as they gm uut of the Gob mr. %'re getting out ofa Mercedcs to go ro the New York Federal Reserve," l-7 7 r:. .. ,. 7 . 4 n'v..' - ,.++ > . P

~e&h." T h e subject of d a y ' s meeting n-.~o A.J.G.,where cash was vanishing at an alarming rate. m e r e will be no public s u p r t " forA1.G.. Grjthner ;utl~ouncwl. He asked the bdms to +ore arr indusrry solution. Earlier, he had d f d &K Wdumsrad d said that he wanred hlm to appoint JPMviargan Chase. already for A.I.G., and Goldman SaAs ro organizt a spdiate of l x d s w reach a mlution. By now, all caf A.I.G.'s possible rescuers; had vanished. A person who

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spoke w i h poten rial bu,yers says. "They wcntframkeenlyinterestedtonot wanri~igto rouch it at any price." 1h 5 Phi.. the syndicate efforts had milapsed. Geithner had a Fed team tvurking on A.I.G., and at midnight he cmni'cncd the tam, some ofw1lose mcmbcra

"Don't do that," Geithner said. kets, but with little evidcnr effect.EuWhynot?WiUitrnstadasked.*Unless ropeancentrdbankerswcrealsoppyou m tell me h r c ' s s solution in p h , piing with the rapid deterioration ot 1 have vl obligadot~to sharchoklcm." credit markets and were dccply con"Don't do it. I'll get back to you." cerrled ablrut the impact of an A.I.G. &diner hung up. failare on European financial in3utuAn hour passed. Hearing nothing, tiwns and markets. Several European xvere partiupati~qby phone f;ornLVahWillurnstad gave the order to draw central bankers had spoken with Beringron. "Can we let it pi"he nskcd. down the credit litws. Then, ar e l m - nankc,urgingthe Fed to do whatever i t A.I.G. Fmcid P d d d to prevent an A.J.G. U L T ~the p r i m q s o w of fdure. r he m~npanjs current m u Scverd Fed st& mtmides, had a $500-billion bers, including the vicem d i t - ~ pportfolio s that chairmnn, Donald Kohn, fell outside the regthtoly and the governors Kevin lrurview of the Fed, the Wanh, Randall Kmmer, Treasury, and the S.E.C, and Elizabeth Duke. asThe company's failure to sembled in Bernanke's honor those conuacrs and of%=. Geidvler and Paulmake the paymen&would wn,padciptingbvphone, rcndtr ~ i u n ~ e r o ubanks s mrrd on iL1.G.; irnmiUKIother hnnrlzial inaimnenr f;li!*lrr r h ~eve- .

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uninsured and unhedged positions. This could precipitate a ctisis ofdepasitor confidence and a global ha& run with "potentially ritastroyhic utlforesccn

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man, with a substantial presence in derivatim and debt markers, as well as i~

uficinls Lter put it in a presentation to the Fed. ;\.I.G, did business in more than a hundred and &my countries, and had a hun-

insurance markets," Bcrnark htcr redled. 'Cim thc exrent ofthc exposures of major hnks around the world to k l . G . , and in light of the extreme fragility of the spstcm. there wa5 a Aw:c rq., 1. * \ > 1 r f-

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Lrbmaft i@ilurc was "tbtkiss cfdcath "fir Anterim ? oldtt~~ maaey~riurhtjund,mn try Brut R Rerli, Sr., a d his ion Bnrce Bent U,

enmtshd in the global firrdncial system, thirty, Geithner d c d and told him that t o ~ A t 2 A . h t . , G c i & n e r u r g c d e v e ~ - anemergeneymeeungwasundumyat the Fed in Washington about a porenone t o p m n r steep. rial solution. Willclmstad hastily reTUEJMY, SEPTEMBER IG scinded tire order. It was becwminr: clear to Geithner B you 1urii $85 hiIIim? and Bcmanke that government action morning, Willurnstad called was the only recourse. Every financial Geithner a p i n . He said that he institution w;as strugjing to d u e asses was planning t o draw down the hst of aat a time when there were fewer buyers A.1.G.kmdit lines that morning.T d - fvr them at my pricc. Enanrial instiurrs uld investors would recognize such tions were growing reluctant to lend to a step as desperation, making bank- one another, even overnight. That day, iuptcy all but inevitable. the Fed put 470 blUtun in to credit mar-

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giobd b d q pmc. if that had hPPred, it was not at all dew that we woukl haw been able to mop the W-

ing, grven the r m w and authoritiesw had adable at that time." GeithnerandPaulsonproposed extending an $85-billion loan that would be r o l l a d z e d by all 0 f h l . G . ' ~ aSSctb. A.I.G. did have several large, prohtabk businesses,itiduding its main insurance arm, which gave the Fed a legal basis for makin3 the loan. The government d d a h demand a nearly erghty-permcent equity s& in A.I.G. and would have the right to veto any dividend payments. There was greatr e l m , "one paru c i p recalls. ~ Tqlewueuncomfon-

able, We'd just crossed another h d q.A.I.G. wasn't n bank or a broker dealer but an insurance m m p y . Could we have let it go? No one had any i& what wwld happen ifw let a company this size GI. There was no precedent. We were aware that lors o w nnd investment banks w m countand might be at risk, but m did& do this to savr Goldman, or , *S or Deutscht bank Ar w a ii ~norrturnpiex. Wc were worried &our the households with

ment officialadded. "HankP a h n and the Treaswy were

u n i l a d y making ewnornic policy fbr the Adnrini&srion Thm was no i d u e n r x h m the White

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them through failure,bur we're nor duing wmething right ifwe're stuck with these

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espiw dons to shar&al$crs in thc Primary Fund, R m Bent 11re "A.I.G. is ahur to fail:Paukon told Bush, warning thar a ptmtid ~3Uapse ported tn the hdh t morning h r rewas likely to l x wrasmphic, especially demption requests as of 9 A.M. st& at wh i r n ~ stiU b hgldy ~ I &r the C f24,b bion He also told the tx~dthu

4Ol(k) p h , life-inswance pol id^, a d pensions." The d k w i i n land thirty minutes, There avws no real hasic fnr knt~winq

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sufficient collateral. Sd, Bernanke said reccnrly, 'Lehman was insolvent and didn'r haw the cohttral to stcure the m u n t of Federal h e w e lending that would haw k e n necessary to pmmt its collapse. Tn contrast, A.I.G. Financial Products was just one division of a big, global insurance mljany." But some Treaswand Fed parcidpfs m o g n i d S -t :-.r+ 9 J T. 1- !?7 k : l l ; ~IqnC . ~ 73 -ad-r mbp" w a ~ d app r wildly inconsiis~nc.uQpdte decisions u ~ r emade for apparently similar mmns,"the Trewmy official q. "It was hard to jusdfy. But A2.G. was another ordcr o f mapirude. It was a quantum M.Itwas so W n d anything we'd wcr envisimd." -:a

B & ~ e d P a & n a n d ~ s m g r c n m tnbPui s tbc n e c # s ~ ~ ~ i m n ~ t a c h to =A.L G.,buf lst miuh'llw4 wndm'ng, " . ~mmrw to tkpittt &e w can'r /dan im&&onfail w i t h i q$ctn'ng fbtd o i t rnnom)' &

Lehman failure. Bcrnanke explained hat diemoan, President Bush, ac- A.1.G .'s credit-dcfault swaps and the companied by Jwh Boltcn a d Jd'likely conquenc~sthat A.I.G.'a failwe Kapbn, his chiefafa d a n d deputy chief w d havc on maj~w U.S. and Europwn nf s t d , and by Keih Hennessey, the di- bath. He dso described h e limits on Jlc m o r of the National h n o m i c Coun- Feds powers to d 4 with an institution d,sat d m wirh Paulson and &mankc kA.I.G. in the Roosevelt Room of the W i r e "How have ~ v ccome to the point House. 'So whar is going on in our where we can't h i u l institution FdiIwithfmsncid system, andvrhata~ewegbi~~g put dYdng &c ttfholeeconomy? Bmh do?"Bush sltad. m n & d aloud Padson regularly delivered updates Bcrnanke reitcrated that whar had to the White HOUS,but f m the outbegun as a mbpnlrle-rnqpgc problm

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haw adequate cdpid to ?xyrbtLchman assets at par. The Beotr:were umnble to inject sly of their own personal hnds. conro repmrarion:: they had made the prwious day.

I1 told tl-te hml he h;ad ~dedthe New Yark Fed Im .;. . t . 1. ' - I . - - -1- . . .I At 3:45 P.M., Bsnr

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toral redemption r e q u ~ t were s now ap-

W b e n h a n k e a n d ~ f i n i s h e d , proximately S40 b i a n .With no bivem involvcd in defense issues. The econ- Bush said, "Sometimesyou haw to makc for the hmds l ~ h m a &ties, n the h a d omy rws secondary. One person who the tough decisions. Zfym think this has hd no &ice but to tvtc to reduce their worked with Bush for many years said, to bt done, yvu have my bWi."But, as MIUC to zera For rhc first rime in Llm " M y sense is, dw m e up in the find he me to leave, lu said, 'Someday you ,wars, the buck was ~Hioallybroken. The months aT an eip;hr-yea term. He was g ~ a r e p i n g r o r ~ e t d m d l m e h o w w cm m p y issued a terse press id-: s c ~ground down by Kaaina, the w in ended up with a qstem like this. I know The valw of the d e h wcurirm issued Iy Iraq. He was just out o f p , "A govern- dd is nor the timc to test them and pur Iahnwn Brothem Hrhdings, Im-. tiace wlur

mqqq pwm.BeFnanke pointed wt In the face of mounhg r&mptim. hat A1.G.stodt was one ofthe rm most money-mktt f d s mad tn sell nhatmr Xew Ynrk lime t a l a Ar .I muk, thu NAV od (he Primary Fund ,ekmiw as of 4:M n ~is. , Ifficklyhdd in 401(M rrtiremmtaocounts. rheyddfuld+br,butthurwm Reid put his fie in his hands. 7 l q e nt,buyers for all but tbe safest, s h m t 50.97 a s h i v . you u d m m d &is d m not m d m tm secutities. Early t hmorning, PadOfthe many W b I e conqiicnca of formd approval Qqges rn mke ac- son had a dkmbiing phone mnvmatio~~ he mid. ~Lxhmanfail~nooneseenlstohave with 1cfK-yM t , tk chief m t h t ~i thought a h i r the collapse d a money'Drr you have eighty-five billion?" G e d Elcmk lrnmclt qmrtcd that tbc market fund; it was a development that Repmenmtive Rarney F m k asked. apical marhwtre *wr)r b a q md Paul\ms "urlmticipatcd: a Fed official said. '? haw eight hundred billion: Ber- son said he underrtood that the comrmr(The S.E.C. eventually &urged the nanke &I,rcfcffillg 10 the Fds b cid-paper markets were under stress. Bents and the Rcsqve Management shat. YPhafs bad fkr GE: lmmtlt replied tikt. Con~p~ny with civil fr.iud ihr allegedly Senator Christopher Dodd twice mnst hwge cwprqtinnc. GE 11- rlw r w 5785 miliion). n11dheld by the Pflrnary Fund has hen valued at zeroeficEtiveasof4:00 P.M.

II hw ilow lile !-hiLMI tne wuloriry ro l¶kmd--papu U .h&d~IWcndl~& aLdIclllCl~u market to fund Irs dzy-tua b u t the fun83 h a n d m e . The Bmts M m , d & w n t r o l o f , a n ~ day apentione, including those of GF. countwed h t they didn't profit them- C0mpa"y. &arped that the Fed Capital, its hame nrm. GE wa: dws and wee simply trying to thc had m q e n q pwers to aid any coin- worried about its abiiry to ruU. over i t c fund" .dndpmct imwtm.They mmd pmy gs longus thcre wa a " m c r i s r dm-mdeb& and the prrvicrus day had and gave a brieftutorial on a G d t - h paid 3.5 per mt,much higher than norto dismiss the suit, which L pending.) d n ofthc F d s aurhokiq smnm. mal, for m m i g h t h. (The lowerate in the dmnmn, Willurnscad and Bernanke said thar even this step rated Ford Mmr Credit repcndyhdro LilPe GE, orha A.L.G. executives and their might not be ens+ Ltgislation au- pay 7.5 per cent) For a~mpa16~i hwyers ad dvhsqptbered in a confer- thorizing addirionalaid probably 4 the u n d v was as debilimting & ence r w m a u d e Wdurnstads office to lx neededaswU. 3 hqjhmtes. . mamint the t c m ofthe ptaposed lorn TtaeTrca~uy&ciadcddthe sitthat had jum arrived 6om the Fed. After uatiwc "Lchrnan Brorhm b e p the Rereadulg them, Rijchard k n i t , a p e r serw mllap, which btgpr the moneyat the h v h S h p n %&Bartmarket run,BO rhc money-mht fwd. letr, ~prcacnting AJ.G.'s basrd, ~ m e d sian d ~ ~ m a r k e e r h a~tbu)lamnmrci?lpper.Thtcomd to W ~ ~"Ym' drcnow . working hr dropped sharply, and m d i was ~ncreial-papermaker w on the brink oi the federal governmtnt," he said. 4hq halted in Russia Ncws that tht P $eS~on.Atthispinr,tht~s)sFund had brolrm the huck had dkd into r~mstdpafiutctionm$.Youtc*gfbur o m )rm m." The terms gave the government r querti~nthe safety and viabiliry uf thc trillion wt o f h prime b ~ o r ~ - m m t y 79,9-pr-mt stake and mddled A.I.G. global m ~ m a r l ainduq.Thcraue marker hn-and @vingit to the gar.t with an onemus i n m t rate of 11.5 pcr oFk1.G. gave the U.S. p m m e n t not ernmat in the form of T-MIS.That was cmr. only 79.9 per ccnt of k1.G.'~quity but &a1 p a p r e GE, C i w p . Wlliunstad's mIstarlt i n t m p d to also pfioriv OW k1.G.b b n d h a l d e ~ F a dl rhe commd-pmissuers. s q that tht Semrary ofthe Tmmq and wbowwldn'tbt~untilthcgprermntm This- w m i c risk Suddenly, you haw Mday-'I the d the N w Ysrk Flad were w a s ~ A ~ o f ~ r n aaglobal r bank on the line. Willurnstad and Beattic k e t f U n d a a w n e d ~ u r i h ~ ~ B L G .Harrifir as GE's simatian &ratend st* wdde to take t l ed l . Already, money-market redemption to become, P a u h had more immadiatc rXis is rhc only offer: C;eithner said. roqutm w m $urging, on T d y h q problems. Owmght, the mr of buymg T m r is no negotiation." they had been $33.8 billion, compared WE pxorection a p h t M o n p ~SmnF~ulsonjumped in: There is onr! with a tota of $4.9 biliion fbr h e entire l e y a a d G o b ~ h a Shon d ~ more condition. Sab, you're going to be p & w d k m * f U & d m @n mgeting M o w S d C J 5 indu&gFd&y, VVangunrd and srock, whi& hhbtedjohn Mack, who repkd." After Wiiumstad hung up, hc re- rushed m h s r a m m t s ~ W -d e d on tke S,E.C. to spec~twtbem~cerWrn."~ck mhd~&hbMingswcrrsafeand-\uould w~ ulation. Then was the danger of a cdmn he said. "Iinnor worlung f i the m a i n t h d r a r p c - d n u a - e * but 4pse in coniidmein both Galdmanand tbdtral gwp.nment.* that didn't seem to stem t)lt tide. Even Morgan S d e y , as had haylpcned with motew o n k m e , h d s that had no apo- Lhw. ~gd , am 0 ~a L e h m d ~ b d mre t. 6 pH., Inat dthe Houseand b n - s u r e r a p p u b M s m u i ~ ~ ~ M ate l&13hip, s u m m a d on short huge redemptions. Putnarn a n n o u d h t k ~ o f L & m n B & i n E u ~lcrtice,g a W i n h t c Mapdy Leader that it would close and liquidare the r o p e , w h i c h ; n J ~ ~ h e d g e f u n & . H a q Reidsoodkmocm m h a briefing Sl2.3-Mbn fnrtimtional %me Money "Igot panicked phone cPlls £ram hedge hy Paulson and Bernank. Paulsion an- ~ F ~ e c z n ~ & f U n d o w n efundc d the Treasury official says. T h w mdthat thc Fed hd ckcickd to Imri noLehmanarA1.G. tics sand main- cwldn't get their mufitits. That was no1 .4,l.C,$85 billiw and essentially seize &ed its 0ncdoll;u share due. (Share- ~ppdtobetheddSopwplestataed conwl of the c o m p ~ yunder the F d s h o l b ddnt lase ay money,) running on M o p Scad9 and Gold-

L

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thrat m cenr blow in let the

PIC

gan bunley shares ~cll,rwene-tour p r

cenr st~dGoldman k h s droppi nw1y fourteen per cenr; CNBC began running Morgan S d c y and Goldman st& quotes at the top of the m n , in what some d e d a *d& watch."Washingtot)

Mund dropped t h h c e n per cent,

2nd

Wachovia fell rwentylonc per cmt. 7 r was chaoric; Blankkin d s of the rumors about Goldman's sunival. -were paoplctdungdeep bmhs. including me fiom eimc w time.* HEwgrrid that a dqx in confidence, m n if l u l j d e d , 4b r n c a self-fufding

PVW'O$cer,

AtMorgan Snntcy,ir \mswm.The htdgc Funds + c k d a Morgan StanIcy uecurive d, and by Wdnesday thinp had m W a fever pitch. 'Evenone said rhe hmmenr-banking model

mc ytbing in the world is bothering mf. '

was destd," tongtime fried and clients ofJohn Mack d a d him m say that t h ~

The h e line broke down." Paulson obtained from a Treasuy I a ~a waivcr r ofconA;ct-oGntcrsr rcsuictionr on conversations a b u t government assistance for Goldman. The 1aw)er & rhar "themagnimde of the pcmmmr's interest" outweighed any ethirs m n m s . Over the ncxr few days, the Times has reporced, PauIson's d e n dar indicates that he spoke to Lloyd Bhnkfcin, Coldman's C.E.O., more than hve11t-ytimes and to Morgan Smley's fohn Mack a dQzen rimes. man Sachs.

..' ' ": .!.I!, .' ,!:-,! ;.White Hwx.~-as:jamedw i d ~ Tmnvy o W s for art a&qtn7 meting at 8 .GV. Bernankt, Kevin Wmh, and 0 t h Fed sd+rnembcrswere on the phone, as was Cci~hna, dong with his d, in New York. Paubon had k e n up most ofthe rught wtchgmrsws madeft. We're ar the precipice," Paulson told the p p . *Notlug is breaking our m y . \Ve ' e m nsdve 't h e p d l m of today we nced ro think oftornorrow.Wc n d toget &cad of this. It's &-, moving too quickly. This is the fbmcial equident of nar, and we're going to need wartime powers." Banankt and Gtirhm aged. Padson divided the group into reams. T h e pvcmmemneads money, and ir needs authriym P a b said. 7fyou had a blank sheer of d me what yw need."

P,

w,

werc sorry but hey had to withdraw their Thnr day, as inwsmrs rushed to the Morgan Stanley funds. "Dowhat YOU s a f q of short-m U.S. Tmmy h n d s , have to do,"he told them. yields on thee-month Treasury notes Thar ~ o o nMack , hued a memo dippad below zem. W e watched the rohistmpkryccs:"lis~ryclc;uramemnrkct for T & i very d+t Donald we're in the midst of a market con& Kohn, the F d s vice-chahan, r e d s . by fear and m m , and shon sellers zre "You knew thnrwas wmplctc panic, and dtiving our .sf& down,"Geithner and it was spmding," P a d m c& Mack that he had to fo11w At the White Housc, c a l l s w w e p - rhr l a d ofMetdl Lynch and find a paning in f m p throughout the financial ncr. Since rfic c d a p of Bear Steams, nr wdd,"Emsmngm mCOldraUing March, Gcithncr had periodically sugme: Keith Hcnms~y reds. Shtjtwere gested that the remailling investmenr a l l saying, We sce the beginning$of a banks h e bank holding con~panies, r u m m on the financial sygtcrn.' Thc @ng acccs ro che F d i h u n t win.I.~..c,

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Pwple were l i t d l y pulling their money out and putting ir in '3 ma-. Tmstq

dobr . u d u d u ~

L U LI.LCUILIWUJ A L ~ U I I .1v1

q r i r l g quhrion by djc Fed. M o q m

Stdy and Gofdman Sachs had

talkej

ram m t rqprivt!Pmplt I d c q abour it m rkir bd.but nding had in a Iw just to promt tlaeir money." h ~ p p d A. faster way ro the same end Gcithner said, 'lt's had to describe mulcl be for the investment hnnh ;so how bad it was and how bad it fit." Hc n~ugewithammurial bcank. &though gat a d h m a "titanof c)le hamid s)a- the big conuntreial bankc, with their large ttqbwhosaid htwawmiedbuthww dcposlror b, WIT still v i d as ~!idouxgfint.Hisvoice\mquaverirlg.M~able soofhquidity, black consid& hanging up,& h e r immediately called h e man back V n ' t call anyone else," G e i k m i d . T a n y u n ~h ~ y o u r m i t x , d~ scare l hl e sMt out of hem,*

h to be more pccahus rhan his own. And, indeed, Wachovia had to be saved in a mtler of wecks, a d Cirigroup mnrually had ro be m e d . $dl,Mack did s p k to V i Fanhe dajs m o i l wls rtflectedin the dit, o f C i t i p p , about a W b k rnw. U.S, markas, The DowJoncs aver- but rhgHitly wnduded that ir made no age dropped four hundredand hry-nine ense. Geithner suggested that Goldpaints; it had fallm wm per cent in just ~nan'sBhnkfein call Pandit. Blankfein three days of mdinq and was twenty- ma& the call, -8 rhm hc was sup-

T

their balance s

-

p r o b r and P & the student. Ber- can be surc wcwillconrhue~vanto nankds commcnts l a d a h ? fifaecn and srabihze our fmanriat markcrs an tinpm\v investor epnfidenct. ~ t c x p e c c i n g t v ~ h o m h i m . F a r hminutes,dPaulsan~tas~mris i put. Padit was aback that GQld- tiallydmtdncarchtcnd, hen staffers again huddied in ~~s office, Pauhn wantad 1 man &ought ir might be ~bleto buy Ciri, 'Got to go: he ~ dand, hung up. since ar rhe time Pmdit kit thar Citi was I to how what ideas they had corn up much s ~ ~ . w i h h ~ a and n Eurapean marketswwe 'Ihat &noan, Mack, speakmg to continuing to plunge, with banks md Bldfein, bemwnd the effect af short insurersW n g the brunt of the b. sdm &ox actions were unnetving int a c F c d g r o u p m d a t s i x ~ Briraio, announced a monthlong ban on vesron. The prwious weeked, at the that morning. They had dedded the short d h g in an d o f i to prevent the Fed, Black had cornphined abut the rlight before tha repetition would be kind of 'bear mids" h a t same blamed impaa of shon d m on b m ,and h + f d , s x r ~ s t n d o n t h c s m c far the Id in Lcbman's amk. Russia a&cd Bhnk6ein if he d d hpport ao IcFture.ThIrry saoonds into it, Paulsonin- had swgcndd trading hr the grwious &rt to get the S.E.C.to ban short Pen- temptad "Ben, 8en,BEn ..."Bcrmkc two days. Morgan Stanley shms had ins. B l d e i n had demurred. But now stoppad &ng. Tw done w m tbintt- plungad wmty-fbutpcr cent the pmi,I Paulson said. l'ou and I &&I go ow day. he aaid, We've rethought the 4 for a I mnp~nryban.~Thky.agreEdtopthes e e r h c ~ t a n d t h e n g o m C o n g m s Padson had just heard &at Bank of MGl~%urrqolPnly~bPckon with Pzulwn and Gwthner. tomght and a& for more autfBofitytyA At 1015 A.M., F m i h t Bush deliv- d t i n e s t o m e M d h M s W stes, slaving a McDonald's expansion t six h t evening, Bemankernwirh ered a twa-minute televised statement his top aides-Donald Kah; Lwin outside the OvaI Qfice, his kt public intoupdecaffietdrhkmcwn~with Wmh: b t t G.W the@ cwn- pronouncement sinre the skis began, S&&. (Batlkofherica djspltcsthis ~butMQoddsdidizmamano sel; and h%chdeSmith, the spkffper Whichcmchded: 4 s o d & Padson and Geichner @ciurginghchiscesto Frndathcrsomesof financial marbets continue tu deal a t d i t , a c d q to Bloo&rg.) p a w by spkerphont. *We cannot do wirhbur serious chdlenges. As our rmnt a a i o d i a Goldman v i e - p d n t dlis atone m p d hc mid Wc haw w & m o n % t r 8 r r , m y A d m i n l s r r ~ h k ~ r n Dan J-, go to Chgm and get same authority." m&ng thee chajlmp.TheAmcricanpeople whom P&n had b u # x to the TmPauhn hadn't yet dm any mnaete steps to clilist legidam to a u t h o i i a gmemmatmc P a h n reiteratedhis posed ro rtscue Citi, He was dumbfoundad when he discxrvcred that Pa&

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concernabout getringmngmsionalI d-

em ro go along. "I spokc to H a q and N 4 - H m y Reid d Nanry P&i, the House Speakcwhand the political dvkn.*hc 4."IfthzTmsqand the Fed say it's an emergency and we need help, and help datsnL m e , it Prrouid fur-

rhcr~ithemLts.Youdon"tgo publicuntil p " r e d l ? certatr pull get t h p ' r e asking f d

Bernanke was growing agitated. *Hank! Listen ra me,*he interrupted. W e are &ndp

ItwSrhcfiTSt timeFd&cialshd

heard him nise his voice. ITheFedisak+dmgalltharitcm wth r h e p 0 w e r s ~ v e h a v q " ~ c o n tinued One pareidpant recalled, "Ben gave an impaioned, hear, rigo~ousargument explaining rbr limips of wt authwiry and t k history of f i n a n d c r k in the U.S. and a W . * That history showad rhar &om to resalve Rlch aim ".are succasfuf ody when overwhelming fme from all parts of p m m c n t is brought to bear," the m c i p n r said 9 r was nn mcycbpdictow de bm." It w;ls as though &manke wee the

Thtre's somtbing you haven 't told m.'

sury hprmm h a t summer, reported charged issue of government ownership. Several p p k , however, noted rhat that one q m a c h would be fur tht gwemmcnt to inject capital d irectIy in ta hmw m major d i f f m bttween tanh d a ljnstiturion~'lhcsmdardway to fie dexate and the &rnrake mpital is to sell stock. There were b a l d stcuritis and ohm saucnuad asS on balancc sheets. Houses and naw no privdte b ~But, w . one panic- ~ F now i-*vt m . . ~:f q!*rq

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ry(.-F*n~

wp;cln"m

Fomnlon 61lr would have dte power to vote, a point management and the l m a ~of i ' mors, and, if tfie stake was big enough, control the company. Might this end up being "narionslizauonw? The politics l d c d awful. EYen so, Jester and most ofhis tam argued that thc approach ws simpk, tfficienr, md etiect'lve, and

L

wwld p r o m ~

g ~ p y m .

Ban.& had long bcm

that the

pwmncnt neededmany tmls to rwpond to the u-le, indudq h e abitiry ro buy 'bad mmparlies"as well a9 %adas-

sets."But P&n told Bemankc he feared that dim investments A d dfffabilize d t s and drive our priwte inwinon. Another optionw s tb r e m m thc bad assets frum balance s h e e ~ The , Resolution Trust Corporation, c m t d by Congress in 1989, had used -yet maw to buy and then auction off disrrewed estate from failing savinp-tmdbans. Thnugh some p p l e aiticizcd thc agency for dumping assm on the market roo quickly and selling at &sale p h , rhc appmch cmabMd a floor fbr rwlarare priccs. "Phisa p p d not ody had worked hthe par bur would avoid the

real

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Pauhn looked up. 'Could we?" "I chid so," Sh&n sd.

P m h n slammed hs hand d m w his desk T h e n that's what we're going to do," A few p a i t i c i p n m were aghast. The 4rL-r

r ~ ~ m p pFn-nlrerl

;t V . ~ C J Ckr--

wr any tun~mrungn ~ a d tor a mortpge

b.U.1.L. insured h k a c o w n t s d y up bsdroddebt, howwouldywMiutitand to a Rundtcd choumd d o h . Morewhat would the govcrnmnt pay? If the over, money-& hdsweren't bank a m m t was too smalI, k a & h h +its but invesment products with wwldlxdcMstated€y&cd~mdsub- higher risk and therehrt highcr resequent writtdowns, making the crisis nlms. By eliminating that risk, another worn. Iftod big, it w a simplya wader of cornentone of m o d h d was being d t h from mxpqers m h k s and other removed. financialins(itution~N d K d h i , an asBut orhen q u a i that the risk of not s i s t % n t T ~ s # r e c a r y a n d mddng ~ ~ ~m-g, or of dd~ngtw lide, was r m invmmcnt banker, who was the big farwofst,Faulwn embnced the Mdnes p t propnnent of rcmwing bad assets and simplia~of the notion. As someone from Mmce sheets, argued that the me said, i t "passedthe USA T+ test.* cbanics aodd ah!% !x wCkCd out onm Congress had givcn the Tmwq and the aulfon and Bema& renuned rn the Fed the authority tc act. R m l r Roam,j o i d rhis time by Srevcn S h h and othm who hd Chris Cwr, of tl# S.E.C.CriPresidcnt f o m d on liquidity issues prop& al- Dick Cheney was h there, along with lowing money-market funds ro borrow Bush, fiom the Fad,uskg thcir commaeiaIpaPaulson outlined the decision of the per and other asscts as collateral. But Treasury, backed by rhe Fed, to seek Paulson thoughr thar chis was too tcchni- legislation authorizing the purchase of cal for the average money-market-fimd billions of d o h in rroublcd mortgageinvestor and wouldilt be enough ro stopa backrd wets. "fr would be wise to go ro run.'Wha~wdd~wdoifyoumtto C o n p p Bemankc said, arguing hilt address aU the isrmcs? capid should lx approved by Congress W e d d ahvays just guarantee thc and dispmed by the appmpriate authormoney-& fun&," S h a h said. ity, the Tmsury, r a k t h by the Fed, an institution already doing all it could with h p o r n it had. "You're the rxptrcs, and 1 1 suppnrr you," Bush said. P a h launched into a discussion of rfie political issua and the need to w m over conservative Republicans as well as

P

the Demmtic leadership. The President inrmpted. "Hank,lct me worry abut the plidcs. You do wha

is right.*

As dspread that a marc comprehensive approach to the etijrs might be under way, SK& din near-tienzid tt;ldulg-?'he I)owd d up four hu~~drcd and tcn paints wittr the biggest swgr in &P=

., & Spe;rktr Ptld's t

confc~noem,overlooking the Mall. Afret photapphers and press representatives were asked to

in

" D ~ mit, n Aonq, I hate it w hyou @wme ihatJsb-qre lwk.'

7 P.M Bernanke, PnSon, and met with wqgmsicnal leaders

3 r dg u u p tL r are in dangtrofa broad ~ c m i&cpe, and action ncads to be &n w d y to head it off.- he said. We need the authoriv ;r.spd sptnd hundred billion." Cox invoked his formcr eollagucs' mrmuries ofSeptember Il th. W c did reu\c, k'rtcwolr ~

thgthmfortkgoodof aid. Thk is what has to

=he

even i f i t isjust &bean e l d o n " Bernnnkt pointed wr that he was a borian and a student ofthe Grat Deprmion. m ek11dof f1nill1tiawhpse that we're now on the brink of is always followed by a dcep, log reassion," he said. "IfWE mn'r able to head this OR, the next nua at ion of emnomists will be writing nor about the thirties but about this." Someone asked what the sccnari~

+n

&t

twked kBemankc was cautious, He didn't

rhe dxnger. *You wdd sec a twenty-perc-ent dcdine in the stack market, unemplo-meat at nine to ten per cent, the want to be accllscd of mggcrafmg

"Sotncday whenyou hme a .&dofy~uropwr andymfieltbe urge to mhi&mmr!vsay nojkrt b~causc you can, pu'l~undttstsnd."

&ihre of C.M., certainly, and other 1arse corporacc failures I t would be

bad.* The tone of the rwa most p o d men in rhe financial world was as &ght- of a&rs that F d later said he Found mng as their wurds. Qgations shifrtd M b l y depr€sing.ro Padson. 'Without a functioning banking What arc you going to do with the system, things will g t much warst on morley? Main 5 m d P a h n c o u n t e d He dm !'

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m,but re&& questions about how that would work Spcntxr Bachus, the l m h g m e m k of the H m e G d t tee on F m d Seniccs, asked hkljultingcapaal dircdy i n t o W . Paulson wid thar he wlould consider it. rlhc Icgislators pressed oil how mu& rnaluy would be II& h d m n hdy said, "Smmlhundred b i n mmmsevd hundred bilion."

laughter hdpod ltghten rhe mwd. The group agretd to make only brief;p n d comments about what w i discussed ar the meeting.

3.1~uldilldl i ~ i i & ~ h b r ~ 1a L~L&I C ) I b lid I I C ~~: ' I W W NA h d r ~ LHIhwawto be taken More the markets opened ing money-market h d s in their on Monday, or more tnajor institurions entirety, it fell to staff n~ernbcrsnt the Treasury to figure out how to make might*. And whatlivwrldhappen i f d icgrs- it happen. They had less than nventy-

four hom to implement a p m p m that PauImnpausadforamoment,% that ordinady d d have taken weeks of wGdhdpusatl.* sxudy, David biason. another z s l s r m r BarPeyFIankdWDoddindi- T - w v , ~ ~ * m o n e y catcd that Congress would q t c , m a r k funds to gauge their reaction, but with m m condihut. A e d h g to SFvlcral members of the actcutive comYou'vegot to understad, Mr. Sec- the T m , Majonty kader Rdd addad, rninec of the Inwtment Company Inremy," Barney Frank shd Tbh m o t You have m ik wha r pu're asking me sdtute, a national d a t j o n ofU.5. inbe seen as just a Wall Street b a h t . " to do. It takes me foity-eight hwrs to vestmcntrn~*dingV@ He said rhar aren~rivecompensation get the Repubbans to flu& the toilet.' Invesco, T. Rpwe Price, and Fidelity, imd foreclob'w needed KObe addcer;sed. The meeting h t e d nirrety minutes. opposed a federal insurance program, "There'stoo much anger our there,' he Reid Pdos'i and Paulwnagreed tos p k AU they wanted was a Fed hcihry thar n* ,ldded. at e presc canference Someone FIIT- WCIIIIIJi l d r l ~ ~ et ch ~ i lr i ~ ~ i d ;ie..-q-r '

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reassure i r that, if it came ro tht aid of M o p Stanley, it mutd count an U.S. our tinanad institutions ilnd dummmg government support. T h e Chinese our aot~clrny." wae tmdcrstandably cool to rhe prosNews of an insurance program for pect, since the China Invcstmmt Cormoney-market funds nnd a comprc- poration, an arm of the guvwnmtnt, hensivc approach ro the root causes of had already made a $5.6-billion inthe mbh-na matter how ill Mkdvestment in Morgan Stanley in 2007, ignited a cuphodc d y on Wall S m . and had watched the value of ia stake The Dow Jones awragc rose four hun- plug in the msuing financialturmoil. dred points. Chinese attempts to invest in some At ten-forty-five, President Bush, American cornpanics (such as the oil she M y Friday morning, the Treagury APnked by P a h n . h &> and b,producer Unocd) had caused a polI .,,?, I - , ? 1 7.' . . ' f .' p, r . . .' ,, ,.. ., f , .. .,, - - , .. ., h '

head oT Vaagwd, pcrd stttd, "'hats nor where the Secretary :si 3.mqlid.This is aboutconfidence, im.esmrs f d n g d e . Each rime we've h n p d for a break. we didn'r ga it. Wdrc usr ng f i M Most DeP funds a m d y agreed to p u t i e i p . They had little choice. Once Treasury an~ ~ c such e d a +an, and cvrn one fund participated in the guarantee program, in:might ahdon h d s w i h t nan, the

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Our s).srem of free cnrtrprk rests on the convirribnt h t rhe federalg~)vemmcnt shnuld interfere in the markctplae only whcn n#.wsary. Given thc p m a n o ~ state of today's financial mrkwtldt h r vital importance to the daily liw of the A d n pcoplc-government intervention 1s not only w a r ranted;it is m ~ i a l .

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Lam, Paulson spoke to his Chinese counterpart, Wang &han. the vicepremier for economic affairs. President Biish dm spoke to h i d e n t HuJinrao. According m one person briefed on that convtrsarion, Bush re& Hu chat thE U.S. was ddmsing the cri,tis and explained the policy step ir was raking. (A spokc6;pn far Bush dc-

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aulson k ltgklative team, clrafting the TARP ~egidatirn,mndtedwith OM& but stuck ra Pr~uhdsview that the bill had to -f 012 b q n g ass e rather ~ than an m&g direct capiM inwstmcnts-buying I 'bad assetsn rather than 'bad companies."The final draft was only a ftw p a p long. In k i o n 6, it stated:

n Friday aftcmmit, Paulrwn, in a aulson issued a statement reportinr on the previous night's meeting tdecon ferencc with Ccitbncr and Thc Secretary's ,~uthorityto putch.lsc ~ J l a ~ ~ a ~ f o r a u m m orhcr p r tFed - and S.E.C,officials, said that -gag-dmcd amets under dtir ACIshall br. hensive approach" ro I& the crisis. it was time for President Bwh to call limited to 5700.000.0@4,000ourstanding ar M e outlined a 'troubled-asset relief thc Chinese government jn an efbrt to ony me time.

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At last, the bi had a pricc t ~ gdes, ignarcd by Pautson on impulse: t h e worlditlde 111;uitetfix ~nongagc-backed ~ec.uririesw;tr a b u t S 1. .4 trihon: seven hundred billion was half that. "It was hip enough to make a difference," Paul501;

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TAR]' funds and 5420 billion in p a m n tees. Stabilizing A.I.G. cost taxpayers f 180 bdhon. To combat the crisis. the size of the Fcd's balance sheet-$850 billiun before the Lehrnan collapsegrew to $2 t d h o n . General Motors and Chysler tiled for bankruptcy protectlc~n, along with nearly a hundred and fift). orhcr public conipanies-an increahe uf

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21st, the Frderi~lResenx announced that (;olttnl;m S;~c.hsand hlorgm Sr;1nleyhad become b a d holding compmics, bringing to .in etd the mulition of indepcndc~~t irn.estmembankson Wd S a t . Despite tfie arrivalofthc Chulcse delegabon, Morg ~ Sn r d e y ultimately sold twenty-one pr cent of the company to the Japanese ba~ik,LIirsubi~hi,for $9 billion. "The Clirnese left in a h u t i a Morgan S d q rsccutive recidls. (The Chinese govr.rn~nentdedned to com~i~ent.) On T h y , Goldm:in Sachs announced that Warren Butlitt was Lu!.ing tive billion dolfars' \ v o d ot'prefemd s t d . On Wedilesday. ~ c l l d n l kraised another five billion in a public ofinnp; of corninon stock. The ;11oves staved,ff what had seemed the illl~nincntcollapse of the h s . ,+Ithaugh Barcla!+s did 110r buy all As John iWa& ofM01:qanS r a n / ~and , Lkyd Blnnkfein, ofGoIdntrln Sachs, a f Lrh man Brothers, it bought w h ~ r di.<cuicedtxrningtbeirjr~t~s iitlto bnnh bdding conipnies, they knew that fbesumivnl i t really wanted-Lehman's North ofboth bank wcrc al stakc. You begot to hartg it! thrre," Blankjin said Ailtrican investment-banking operations and its presencc on Wd Streeriorjwt S250 nill lion. It paid 93 -5 b i o n inject capital directly intn the banks, as more than a hundred per cent from the for L R h a n ' s Mathartan headquarters Bernanke, Cieithner, and some at Trea- previous year. Hy March of 2009, nearly and other real estatc. Bob Lliamond sury had su&ested all dung. On Octo- nineteen f~undrcdhedge funds had gone called the deal n "oncc-in-a-lifetime op- ber 13&, Paulson summoned t h e heads out of business. Bernsnke and Paulson both told me pmu~ity,"and just a few il~onthshrer of thc auntj s ninc moct ystemicdy B:u&!-s shuwd a g i n of 53.5 b i i o ~on l jmportant banks (including the newest that thc cff 'ectsof Lehinais coilapse were t l ~wansaction. t bank holdmg companies. ,Morgan Sm- worse than they anriapared, and they had Tkc illitid b i p s a n supprt for elner- ley and Goldman Sachs) and explained expected them to be bad. The question gency I c ~ t i w action tumed to hostility the terms on which thc government persists: Could Lehman's collapse have ;rice the $700-blltion number was at- would extend to them anrl othm a total been avoided? Paulsun and Bemankc haw t;~cheJ,ro the bill. Senators and represen- oj 5250 b&on in capid. (To avoid the argued that it couldn't.The Fed has statrotiver from borh parties reprred that taint o f "nationalization," the govern- utor). emergency powers ro lend to nond s horn constituents were w e r w h h - lnent tookpreferred stock, which curied banks, but ody against what it deems adequate collateral. Lehmul, unlike A.1.G., inel! ~ g w l s the t proposal. na voting rights.) On Septm~kr29th, the Huust voted During the next year, the rcccssion w ~ t hits healthy insurance businesses, d d ~hl e legislation. GloM markets went that, in Bemanke's words. illwitably fol- didn't have such collated. This ar-prrient d1c 011Sullday, September

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mcnt takeover of a collapsing Firm. The my day Lthrnan failed, dx assus from its brokcrd& ~ d o n s w wdeemed e ac+Ic zs d l m d fbr r series of shortterm multibillion-dollar loans from the Fed. In wda w insure an wdcrfy winding down. the Fed loaned the brokadealw unit S62.8 b i o n on Monday, Sepremk15rh, $47.7 billion on Tuesday, and $48.9 billian on W d d a y . (When Bardays h g h t the unit, it repaid the outstanding Fed loans.) I n testimony this

In the mpsc of her mind, a fluster of quail, tonic ofquail, each her own fiilure, b z y and flushed from briar by a panic

ammer,Wnsid,'TheFdwasable toloan~~mllartralpnddid h to h e l p f a c i l i e a ~ e ~ n a n d h a n k rupq,." (He did s+sm that a Fed loan wwld not have saved Wunm Brothus.) It s ~ c m s

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had plapd in the rrscue of B a r Steams. Had Padma said froni b orttser that a pxmmtnt-a99Lted d d was p&h, a buyer might haw emerged. Inmad, he pard to ia M i r e the politid costs-''

last year ass#sing ies cxpcmlre ta A.I.G. p ~&c firm wuld haw come summoned Wd WEI chicfmh Tday,iri9widelywDepcadhrtbcM- ~ q g that I dghtlyahcad ~ m ifA.1.G.had W. to rhc Fed,w)me he iaid cmphatidy that ~ ~ w a p i n d c c d a ~ ~wt thme m d d bt no gdvrmmcnt &mct, inrended nnd u n f b m n conqumnmHad an A.I.G. collapse rriggc~eda a had alrcacty bbcn indimred to dx p m dxnmonmoncy-mdahndnma~f @ObdN n Oil all hlh, if8 If h i s wag shyly a rough negotiating mc- a U - d d ~ h a w b b E n a v o i d s d . Y e t that Goldman's insurers couldn't hdave tic,Paulsonrrqhmartrplrayedhhhand. aving kmild mt havr- a made good on their contracts. But, in He suc& in gertin the Wall S m r &cbrcdwproblem:heroprwlahmagc such I~ ~ ha few d&dm t h s re c+mte, A d have pro- in t h e g l ~ ~ g s y s a m . h t m k r a i on - AI.G.dad swaps conmas hardly vidcd welcome plirical cnver hlik& sis nf Lchrnan's prqmrdons ro motivste w r ~ l dhaw matrered, ~incrbv then dl

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bailout, bur he failed TO=re a buytr. SiiU, 'down the TAW legislation dme h time. h e shut their h. Lehmm's f a b e and the h t h rehe cramt h. An ardejl sale of Lchrnan Thc cimmstances of M ~ & ro s d ~BnnkofAmaiaahoha~rrmainedw n a ~ w i r h ~ h W d S m main t , a mure ofw i d a p d r)uthc US.,and p i m p s &.British govcm- mnbim. The inconsistent trtatment of troversiatkwasapublicuproarow mr,rmght him bFcnwithin m h . If sa, Lebman and A.1.G., the unsatisfying the rcvelatjon thar Merrill paid 63.6 biim at the hrg)rept levelsofthe Amerim and pubkc aph?don-,and the mbmpent inbon~~mttedcatdcrsedTllteT&&h g m m m m t k c m s a brwthmk- &our-fice on the' TAP bgilwlGoldm b a n h Mootag md k sa l ~ o ing fdm m mmunicsff. injections of wpitd rather &an buylng got their g u m t e e s , 539.4 millian and Paulson, Geithner, and Bunankc reuric awt~-htllad public skepticism 529.4 &on respectively, wen thwigh, in da&tom-thin and, inevitably, a n s p i n y thdwies. The b u s ' s ax,it was mere dap from the t m n c y time he l q m work at M d until the chr limits that they W dto be feasible. one that has gained d ~ most And those limits, in lighr d the public fwjsses on c l l c role of Cddman k h s ? dcd was ananrwuncad. On January 22nd. haseilicyrcrwardbailouts of myknd,wm s i n c e ~ i s a f o r m c r ~ o f r h K t m~mawithJohnThinddcformidable. As thc Tmmy OW told firm and G o l b n was the largmt re- dhi resignation, Bank o f h a i c a me, With Lthman Brothers, you said cipient of payments (a r o d o f Sl2.9 bid- pubhdy blamed Thain for the bonus payhrnlvkethastophceitseKltwasadi- lion) hA1.G.a h it was rescued, But mtntr;, maintaining h a t they WE his dtmatT With Al-G.,psay you haw ro Goldman didn't haw a unique h a n - cisidn, not MS. rT)us dqjjfcdle tjct prm &e system, and that's a disaster! c i d m o t i v c f o r t h t ~ t r o that ~ the b u s ppmt8 were authorid It's a Hdmds rhoice. You're not go- A.I.G. Acmrdulg to Goldmm, h hy the document attached xo the m e r p . ing ra win." Even so, Gcithncr says, m s f d y h a d g a d ~ a n A J . G . ~ apecmtnt that Lwis s&$ That day, Ifwe had had the audmity to prevent a A review d an i n t e d document that CNBC rqxmed on Thain's $1.2-don s_vsrem rhreat, 1would uldw been pre- Goldman prepared on September 15th office modon Ficdingbearryed and ttn-

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