Lehman Brothers | The Gorilla of Wall Street | 1

0:00American scandal uses dramatizations that are based on true events. Some elements, including dialogue, might be invented, but everything is based on historical research.

0:26It's October 6, 2008, in Washington, D.C. A black SUV pulls up outside the Rayburn House office building on Capitol Hill. Protesters crowd around a barricade. They wave signs scrawled with the words shame and crook as the former CEO of Lehman Brothers, Dick Fold, emerges from the car with his lawyer by his side. Fold hurries toward the white marble building while his lawyer tries to shield him from the jeering crowd. When they enter the hearing room, Fold takes a seat at a long mahogany witness table. A microphone, a single cup of water, and the House Committee on Oversight and Government Reform wait in front of him.

1:05Fould glances at his lawyer, who sits over to the side. They've rehearsed their story. Lehman Brothers was a victim of the financial crisis, not the cause. But now, sitting before the scowling members of Congress, Fould begins to sweat. He delivers his prepared statement and takes questions from the lawmakers. Fould has been giving answers for over an hour when Representative Peter Welch leans toward the microphone. Thank you, Mr. Fould, for being here today. There's a tragedy unfolding all across America. We're only just beginning to feel the pain. Wall Street and Lehman Brothers took a simple step in the American dream of family buying a home and turned it into a commodity to be sold and traded.

1:46And now, well, there was a whole series of bailouts. But the decision was made when it came to Lehman. There was going to be no governmental assistance. So, in fact, Lehman Brothers was treated differently than some of the other financial giants that were in similar circumstances. Do you have any understanding of why Lehman Brothers was allowed to fail, whereas other banks were the beneficiaries of multi-billion dollar bailouts sponsored by the Treasury Department? Well, clearly, I would have loved to have been part of that group that got that. But why were you allowed to fail when the rest were bailed out?

2:16That was a decision that was made at the Fed that Sunday afternoon. I wasn't there. You've got to be wondering, though, right? Why? Why Lehman Brothers? What was different about your company? Folds stares down at the table, blinking slowly. Congressman, I will wonder that until the day they put me in the ground. In front of members of Congress, Dick Fold insists he takes full responsibility for what happened to Lehman Brothers. And he says that if he could turn back the clock and do things differently, he would. But inside, an anger still simmers. The government saved everyone else, spending billions upon billions of dollars, but they let his beloved Lehman burn to the ground.

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4:39On September 15, 2008, the investment bank Lehman Brothers collapsed. But it wasn't just the firm's 25 ,000 employees who suffered. The implosion was the largest bankruptcy in history, a$600 billion disaster that threatened to pull down the global financial system with it. At the center of Lehman's dramatic demise stood its CEO, Dick Fold. Nicknamed the guerrilla for his ruthless leadership style, Fold had led the company to new heights in the early 2000s, but that only meant that when the market turned, Lehman had that much further to fall. Like so many other companies on Wall Street, Lehman had gorged himself on the profits created by soaring home prices and easy credit.

5:22The firm specialized in complex securities that bankers claimed diluted risk, but in fact only spread contagion throughout the entire financial system. And when the bubble burst, Fold and his executives insisted their firm was strong enough to survive, But they couldn't hide from the truth forever, and soon the U.S. government was faced with an almost impossible decision. Whether or not to bail out Wall Street from the consequences of its own greed. As people across the world struggled amid the worst economic downturn since the Great Depression, they demanded to know who was to blame for all the layoffs, the foreclosures, and the disappearance of their savings.

5:59They soon found the villain they were looking for. This is Episode 1, The Guerrilla of Wall Street.

6:08It's the summer of 1966 in an office building in downtown Denver, Colorado. 20-year-old Dick Fold is a part-time summer intern in a small trading outpost of Lehman Brothers. Eager to please, he darts between desks, clutching papers he's just copied. Fold is at the bottom of the pecking order, an errand boy, but he loves it here. The energy in the cramped office is electric. Cigarette smoke hangs in the air and phones ring off the hook as traders shout out the latest prices and deals. Fould pushes his hair back and wipes the sweat from his forehead as he presents the copies to one of the traders.

6:43Finishing a phone call, the man snatches them from Fould's hands and then curses. Fould has copied the wrong document. Fould's cheeks flush with embarrassment. His wealthy grandfather pulled strings to get him this internship, and now Fould fears he's letting him down. With a contentious sneer, the trader thrusts the copies back at him and says Fold needs to be better, faster, and smarter in order to work here. For a moment, Fold falters. This rebuke stings. But then something hardens behind his eyes. He straightens his back, meets the trader's glare, and says he'll prove himself. He returns to his desk, his jaw set, and gets back to work, more determined than ever.

7:21He's never experienced anything like Lehman before. The intensity of work makes him feel alive, and Fold only wants more. So after college, he follows up his internship in Denver with a permanent position at the company, this time at its main office in New York City. Although it was founded as a small general store in Alabama, Lehman Brothers had been based in New York since the 1860s. Having started out trading cotton, the company steadily expanded and began buying and selling a variety of raw materials. By the time Dick Fould starts working for the firm in the late 1960s, Lehman has developed into a full-fledged investment bank.

7:58It helps corporations raise capital by issuing stocks and bonds to investors, and its employees advise their clients on mergers, acquisitions, and asset management. Fould starts his career out in the commercial paper desk, trading what are effectively IOUs issued by companies. His salary is$6 ,000 a year, already$1 ,000 more than the average American. But Fold is eager to climb the ranks and earn more as quickly as he can. So on the trading floor, he soon gets a reputation as someone who isn't afraid to stand up to his colleagues, even his superiors. He shouts out his trades in a commanding, rapid-fire rhythm.

8:36Sometimes he gets so caught up in the moment that he swings his arm across the desk, sending papers flying. His aggression earns him a nickname, the Gorilla. And although he's not a tall man, Fold does have an intense physical presence. He's a weightlifter and a fitness buff. He loves competition and loves winning even more. So he embraces his new nickname and starts keeping a stuffed toy gorilla in his office. And throughout the 1970s, promotion follows promotion for the gorilla of Wall Street. Colleagues come and go, but Fold stays loyal to Lehman Brothers, even as the company itself alters.

9:12In the early 1980s, internal divisions at the top of Lehman threatened to tear it apart. Eventually, American Express steps in to acquire the struggling firm, and for 10 years, it tries to breathe new life into Lehman. But the two companies never really fit. In 1994, American Express cuts its losses, spinning Lehman off as an independent firm again. Few Wall Street observers believe it will survive on its own. What Dick Fould does. He stayed with the firm through all its ups and downs, And now he gets his reward, appointed Lehman CEO. It's everything he's wanted. Not yet 50 years old, he's climbed to the top of the tree.

9:49His new pay package is thousands of times what he made when he started out. But that first night after gaining the top job, when Ful gets home and climbs into bed, he feels his chest tighten. His lungs seem to stop working, and he gasps for air. He's having a panic attack. Ful has dedicated his career to Lehman Brothers, and now he holds the company's fate in his hands. the responsibility suddenly feels very overwhelming. But he doesn't let anyone else see his anxiety. After a sleepless night the next morning, he's back at his desk at Lehman's headquarters in Lower Manhattan as if nothing has happened.

10:24And soon he is remaking the investment bank in his own image. He recruits an inner circle that reflects his own upbringing and education, people from undistinguished backgrounds with barely an Ivy League degree among them. Fould wants a culture defined by his ethos of relentless hard work and fierce loyalty. Lunch breaks are frowned upon. Leaving early is unthinkable. Other banks are no longer the competition. They're the enemy. And every meeting, every deal, every trade must be devoted to beating them. Lehman Brothers will be the biggest, most profitable investment bank in the world. Fold's obsessive and relentless focus on work pays off.

11:00Having been near bankruptcy in 1994, by the turn of the millennium, Lehman is celebrating its 150th anniversary with record earnings. So all across Wall Street, Fold is recognized as a true leader. And on one of the darkest days in American history, many in the finance industry turned to him for guidance. Dick Fold is in New York on September 12, 2001. The day after 9-11, when the Twin Towers fell, Lower Manhattan is still shrouded with dust and smoke. Streets that are usually crowded with bankers and taxis are covered with ash. Sirens continue to wail and the air smells of burning metal. Standing out amid the destruction and chaos is the austere, orderly beauty of the New York Stock Exchange building.

11:45Inside, Dick Fould sits at a long oak table with a group of other Wall Street executives. They've come to decide when the market should reopen, and the room hums with a strange mix of business talk and stunned disbelief. One CEO turns to Fould and asks when he thinks Lehman will be able to start trading again. But Fould's usual bravado is gone. Lehman's headquarters was directly across from ground zero. From the windows of his company's trading floor, Fold's employees had watched in horror as the planes hit the World Trade Center. And now Lehman's headquarters is in ruins, its windows blown out, its floors coated in debris from the fallen towers.

12:22Fold turns back to the other CEO, telling him that they don't even know who's still alive yet. The room falls silent. For a man known as the Gorilla of Wall Street, it's a rare moment of public vulnerability. So Fold uncomfortably excuses himself and steps outside. He's joined by a colleague who quietly asks Fold what he wants to do. Fold's shock gradually gives way to resolve. He gives orders to set up makeshift offices for the firm's employees at the Sheraton Hotel on 7th Avenue. Then he begins work on a plan to buy Lehman Brothers a new home. Fold is determined that his company will rise from the ashes and defy the destruction and death of 9-11 to reach new heights.

13:00and less than a month later, he negotiates the purchase of a new 33-story tower in Midtown. This glittering skyscraper was built for rival bank Morgan Stanley, but since the terrorist attacks, Morgan Stanley has been re-evaluating his property portfolio and headcount in New York. Fold spied an opportunity. The$700 million deal will require Lehman to move out of its traditional home in Lower Manhattan, but Fold is looking to the future. He's intoxicated by the firm's rapid growth and is determined to push it even further. He's seen the money that's been made by rivals like Goldman Sachs, who are dipping their toes into the mortgage business, and he wants a piece of the pie.

13:40So Lehman begins underwriting mortgages and offering mortgage-backed securities as well. Then they venture into leveraged lending, providing loans to businesses with high debt and poor credit. This new strategy is lucrative, but it's also far more risky, and not all of Lehman's executives are happy with the decisions Fold is making. One day in June of 2005, a senior colleague tries to intervene. It's a warm summer evening and Lehman's top team is enjoying drinks at a rooftop oyster bar with spectacular views over Manhattan. Mike Gelban, Lehman's global head of fixed income, peers across the terrace and spots his boss, Dick Fold, is on his own for a moment.

14:17So cutting through the crowd, he takes a seat beside him. Hey, Dick, can I have a word? Only if you have a drink with me first. I just ordered another bottle. The waiter approaches with champagne. Hey, two glasses, please. No, no, no, I'm okay, thanks. Don't be ridiculous. Two glasses. This is the good stuff, Mike. The waiter pours their drinks, and Fold immediately takes his glass from the table and takes a sip. But Gelban doesn't touch his. Look, Dick, I'm worried about the real estate market. Oh, come on. It's a bubble. What are you talking about? The leveraging, the borrowing, the house prices, They just can't keep going up forever.

14:53What happens when families can't pay back their mortgages? The entire thing could collapse. There are trillions of dollars of leverage out there. Trillions, Dick. I think we have to rethink some things. Fold's face hardens. Your job isn't to tell me why we can't do things, Mike. I want you to tell me how we can. But this is a bubble. Like all bubbles, it's going to pop. I'm not sure we're prepared for that. I mean, the champagne's flowing now. There's a big hangover coming. You don't need to lecture me about risk. I'm not lecturing. There's not a single thing in life that doesn't carry risk. This isn't crossing the street we're talking about here, Dick.

15:27Mike, look at this view. This$500 vintage. You think they exist without rolling the dice? Risk is what got me here, and frankly, it's what got you here too. Best you remember that. And drink your damn champagne. Mike Gelban finally lifts his glass and downs the expensive champagne in one go. And he makes his excuses and leaves. As his colleagues continue to drink and eat oysters, Mike can't shake his sense of dread. It's like he's stuck on a runaway train. He can see the disaster on the track ahead, but there's nothing he can do to stop it.

16:04As Americans, we're constantly grappling with the fundamental question. Do we settle for the world as it is, or do we strive to create the world as it should be? Our answers tend to ebb and flow through the decades. But once, just after a war that nearly tore us apart, we came as close as we've come to answering it. And it's a story worth a closer look. I'm Michelle Obama, and I'm proud to announce Higher Ground's new podcast, Reconstruction, The Unfinished Promise. Guided by best-selling author Malcolm Gladwell and featuring my husband, Barack Obama, This limited series uncovers the untold stories of Reconstruction, what they mean for us today, and how our past can shape the future we choose to build.

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18:04It's 2005 and the U.S. housing market is booming. Following a recession in the early 2000s, the Federal Reserve slashed interest rates to revive the economy. This, combined with lax lending standards, meant that even those with poor credit ratings and little income could walk into a bank and come out with a loan for half a million dollars. Much of this cheap money flooded into property. Banks have already posted enormous revenues on the back of this real estate boom, and Lehman Brothers CEO Dick Fould wants to make sure his company profits from it as well. At the core of his new investment strategy are mortgage-backed securities.

18:40These are bundles of mortgages packaged up and divided into different tiers or tranches of risk and return profiles. Those who buy these packages receive the interest payments made by the homeowners. Those who sell them get an immediate cash injection to invest elsewhere. And at every point in the transaction, there are fees. It's a lucrative trade, but there is a problem brewing. These securities include countless subprime mortgages, loans that may never be paid back because the borrowers cannot afford them. The banks claim that as these mortgages have been packaged up and chopped into pieces, the risk associated with them has been diluted, spread out among all the other good mortgages.

19:18But in fact, all they've done is create a web of interconnected weak points that could potentially undermine the foundations of the entire financial system. But there are supposed to be defenses against risks like this. Credit rating agencies are meant to police the system, and in theory, they should flag these subprime mortgage-backed securities as potentially toxic assets. But they are seduced by money as well. Banks can shop around for the best ratings, and credit agencies compete against each other for their business. So eager for market share, firms such as Moody's stamp even the most precarious mortgage bundles with a gold standard AAA rating.

19:53This is a dangerous illusion, but it's so profitable that no one wants to stop it. There is at least one man who's not ignoring the problem, though. On July 10, 2006, Henry Hank Paulson is sworn in as Treasury Secretary. He spent the past seven years as CEO of Goldman Sachs, one of the world's largest investment banks. He steered it through its IPO when it became a publicly traded company in 1999 and led its expansion into new territories like Australia and China. That success made Goldman the envy of Wall Street. But Paulson knows a bubble is forming in the U.S. real estate market, and he believes as Treasury Secretary, it's now his duty to do something about it.

20:32If he's to take any meaningful action, though, he'll need the approval of his new boss, President George W. Bush. So in August 2006, he heads to the presidential retreat at Camp David. It's a humid summer morning in Maryland, and the cicadas are buzzing. Marine guards stand watch along the winding paths, breaking the quiet with a crunch of gravel under their boots. Inside the main lodge, the air is cool and smells of polished wood. Paulson takes a seat at the long table and opens the briefing binder before him. A few moments later, President Bush strides in. He greets Paulson with a slap on the back and a quick grin.

21:08How you doing, Hank? Welcome to Camp David. Thank you, Mr. President. It's an honor to be here. Someone get you coffee? We have some fine coffee here. Bush stops, noticing Paulson's somber expression. Oh, are you not happy to see me or something, Hank? Smile a bit. The economy's booming. You've got the easiest job in Washington. Well, sir, I wish that were true. The economy is overdue for a crisis, I believe. There's a lot of dry tinder out there. Dry tinder? What sort of tinder are we talking about? It's the subprime mortgage market, sir. Well, you may have to explain that one to me, Hank. I'm not one of your Wall Street boys, you know.

21:40Well, sir, essentially, it's higher-risk loans to folks with poor credit. All right, gotcha. And you're worried about foreclosures? I'm worried about contagion. I'm afraid that if this real estate bubble pops, then subprime mortgages could bring the entire financial system down. Bush stares at Paulson. You talk about some kind of crash, like the 1930s? You believe that? I do, sir. And I think we need to act before it's too late. Well, what's your thinking? My first priority would be to give regulators the power to wind down failing investment banks. Traditional banks have the FDIC and the Federal Reserve to protect them, with the authority to take them over and auction off their assets in an orderly fashion, but no such authority exists over the likes of Morgan Stanley, or Lehman, or Merrill Lynch, or Goldman Sachs, right?

22:24Or Goldman Sachs, precisely. I want similar wind-down authorities for all of them. Well now, Hank, you think if I'd come to you a year ago when you were still at Goldman and said, I want to put some kind of federal overseer above you, you're really telling me that you'd have welcomed that? Well, I could see the bubble developing, sir. It's partly why I took this job. And you want me to get the government into the business of taking over investment banks, Selling them for parts? You know, I'm a Republican, Hank. I believe in the free market. Well, I believe in free markets too, Mr. President. But even free markets need an emergency plan.

22:56Oh, I don't know, Hank. Paulson leans forward. Mr. President, I know no one else is talking about it. It's easier if everyone turns a blind eye. But the fallout from this could be, well, it could be catastrophic.

23:11Hank Paulson is something of a paradox. Once the highest-paid CEO on Wall Street, he's also a devout Christian scientist who claims not to care for material wealth. When he was in New York, he always preferred birdwatching in Central Park over black-tie galas. And while his Wall Street colleagues drove Bentleys as a passionate environmentalist, Paulson chose a Prius. Still, that didn't stop him from raising millions of dollars for the presidential campaign of oil man George W. Bush. And now, after 32 years at Goldman, Paulson finds himself embodying yet another contradiction. He is a crucial part of an administration that preaches the virtues of free markets, but he has inherited an economy that may demand bold and dramatic government intervention.