Lehman Brothers | The Reckoning | 4

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.

0:25It's 7.10 a.m. on September 15, 2008, in New York City. Secretary of the Treasury Hank Paulson sits on his bed in the Waldorf Astoria Hotel and rubs his face. He's only slept a few hours. All night long, his mind has been replaying the weekend that's just gone by. The British bank Barclays was ready to save Lehman Brothers. The most powerful CEOs of Wall Street came up with billions of dollars to support the deal, but then it all fell apart. Paulson was left with the choice of either funding another Wall Street bailout with government money or letting Lehman fail. He made his choice, and in the early hours of this morning, Lehman Brothers went bust.

1:05Now, Paulson has to deal with the fallout. But as he starts to get ready, his cell phone rings. It's the White House switchboard. A few moments later, Paulson is connected directly to President George W. Bush. Morning, Hank. How are you doing? Good morning, Mr. President. It's been a long weekend, but Lehman's bankruptcy is now official. They filed at 145 this morning. Yeah, I heard. How do you think the markets will react? Well, there's no precedent for a bankruptcy of this size, sir. But this isn't like Bear Stearns, at least. That came out of nowhere for a lot of people. They should be more prepared this time.

1:40The Asian and European markets are open, and they're only down slightly, so I'm cautiously optimistic. But I really wish it hadn't come to this, though. We had a deal ready to go. We just didn't anticipate that the British would disrupt it so late in the negotiations. I'm sure you tried everything you could. Downing Street could have forced it over the line. When I spoke to Chancellor Darling, he wasn't interested. And that clearly came from the top over there. I don't know Prime Minister Brown so well. If Tony was still in charge, I would have called. He always had my back. Well, in the end, sir, we were just simply out of options.

2:13Yeah, I understand. But look, I'm not going to pretend I'm happy about this situation, Hank. A lot of people might lose their shirts here, but you've made the right choice. You stood up for the free market. and we've sent a strong message that this administration is not in the business of bailouts. Well, thank you, Mr. President. I appreciate that. I think it is the right move. There's some good news, at least, about the sale of Merrill Lynch. The deal with Bank of America will secure its future, and that's a sign of underlying strength in the market, I think. One that will hopefully mitigate any panic.

2:43Yeah, that's good news. But what's this I'm hearing about AIG? Are they going to be the next Lehman? I've got the Wall Street Journal right here in front of me, and it says they're seeking to raise cash. Paulson goes pale. Over the past few days, it has become clear that the insurance giant AIG is in danger of collapse, but he doesn't want to alarm the president, so he picks his words carefully. Well, AIG could be a problem, sir, but there are meetings planned at the Fed here today. I think this week Wall Street has really shown that it's willing to step up to the plate. It didn't work out with Lehman, sadly, but I'm confident that was a unique situation.

3:17So you think AIG will be okay? All right, glad to hear it. And you're back in Washington later? I'll be there this morning, sir. All right, I'll speak to you then. Thanks for all your hard work, Hank. You're doing a great job. Hank Paulson sets down his phone and finishes getting ready. By this afternoon, he'll be in front of cameras in the press room of the White House. He'll have to defend his decision to let Lehman Brothers fail and try to convince the world that the American financial system is still stable, something Paulson isn't entirely sure he believes himself.

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5:38When Lehman Brothers collapsed in September 2008, many people praised Treasury Secretary Hank Paulson's decision not to intervene and prop up the company with government money. Politicians and commentators said that Wall Street had to face the consequences of its own greed, but within hours of Lehman's bankruptcy, another potential disaster emerged. The world's largest insurance company, AIG, was running out of money, Saving the company days after abandoning Lehman would be a glaring contradiction for the U.S. government, but letting AIG go under would devastate the already fragile global economy.

6:13So as a new panic gripped stock markets around the world, Hank Paulson had another brutal decision to make. This is Episode 4, The Reckoning.

6:26It's the afternoon of September 15, 2008, in Washington, D.C. Treasury Secretary Hank Paulson is ushered through the hallways of the White House by his chief of staff. They're headed toward the briefing room in the West Wing. Paulson's eyes are heavy from lack of sleep. He only arrived in D.C. this morning, but in a few minutes, he'll have to face the nation. As they walk, Paulson's chief of staff says that the reporters are sure to grill him, and it won't be easy. But this is also an opportunity to project strength and confidence to both the market and the wider public. Paulson just has to handle it right.

7:00Cameras flash as Paulson enters the press room. Dozens of reporters are here from every major news outlet around the world. Paulson steps up to the lectern and clears his throat, saying that he hopes everyone had an enjoyable weekend. A ripple of awkward laughter passes through the room. Then Paulson swallows and steadies himself. He briefly explains that although this is a difficult period in the markets, Americans should keep faith in the resilience of the financial system. He praises the work of his officials and those at the Federal Reserve. and he reiterates that he is working with regulators in the United States and abroad to take all necessary steps to maintain stability.

7:38Then he invites questions from the journalists. The first comes from a reporter who asks whether or not the government will ever intervene and rescue other companies in the future. Paulson answers smoothly, The Treasury's role is to ensure stability and order in the financial system. It will always take whatever action it decides is necessary to do that. But at the same time, the Treasury is aware it has a responsibility to the American taxpayers, who are ultimately paying the bills. And sometimes institutions must face the consequences of their own poor decisions. The reporter nods. It's an assured answer from Paulson.

8:13But the next question is less forgiving. Paulson is asked whether or not he accepts any personal blame for the situation. As Treasury Secretary, he's in charge. But the economy only seems to be getting worse on his watch. In his answer, Paulson can't help getting defensive. Leaning over the lectern and speaking faster, he says that he's playing the hand that was dealt to him. A lot of what he's trying to fix is the result of decisions made years ago. But then he thinks back to the advice from his chief of staff. Paulson takes a breath and reiterates that he's focused solely on the future. He can't change what happened in the past.

8:47Stabilizing the markets is what matters now. Yet as more questions come, Paulson's stomach tightens. He's on live television, reassuring the public that the economy is stable, but at the very same time, he knows the clock is ticking at AIG. And he can't help but think about what must be happening on Wall Street. Because hundreds of miles away from the White House, inside the marble halls of the New York Federal Reserve, exhaustion hangs in the air. The fourth consecutive day of emergency meetings has begun. Over the weekend, the CEOs of America's most powerful banks nearly saved Lehman Brothers.

9:21Now, though, their focus has shifted to AIG, a colossal insurance firm that is hemorrhaging money at an alarming rate. The president of the New York Fed, Timothy Geithner, has delivered a familiar message to the executives. There will be no public bailout. But the CEO's tempers are frayed, and they insist that AIG is not like Lehman. Its scale is vast. It has half a trillion dollars in insurance contracts that tie it to every major bank in the world. If it goes down, it could ignite a global crisis, one that could tear the financial system apart. But Geithner holds his ground. There won't be any taxpayer money for AIG.

9:59The talks continue through the day and into the night again. And by 2 a.m., eyes are bloodshot and patience is running out. The CEOs rallied to save Lehman, only to watch that deal collapse. But AIG is simply too big. Private money won't be enough to save it. And in the end, even Geithner must admit to himself, Wall Street can't fix this on its own. He dismisses the meeting and urges everyone to go get some sleep, because there's nothing more they can do now. Lehman's bankruptcy has already caused the biggest one-day decline in the market since the terrorist attacks on 9-11. But the crisis deepens as word of AIG's trouble spreads.

10:37The insurance company has only days, maybe even hours, before it follows Lehman into bankruptcy. So all around the world, stock prices tumble and markets seize up as financial institutions begin to hoard cash and stop lending to one another. As the global economy threatens to tumble into the abyss, Treasury Secretary Henry Paulson and Federal Reserve Chair Ben Bernanke request an urgent meeting with President George Bush.

11:07Paulson and Bernanke enter the Roosevelt Room at the White House and sit across from the President and some of his staffers. Bush sighs. Well, what's the latest, fellas? Paulson looks grave. AIG is about to fail, sir. Damn, how long do we have? Without intervention, perhaps only hours. The collapse will devastate almost every financial institution in the world. Bush shakes his head. Can someone tell me how we got to the point where we can't let one institution fail without it affecting the whole economy? Paulson can't answer. Well, what is it you want to do? We're going to need the Fed to step in and provide them with a loan.

11:45And how much are we talking? 80 to 90 billion dollars. Oh, you can't be serious. I'm afraid I am, sir. 90 billion? Hank, yesterday you stood down the hall in the press room telling America we weren't in the business of bailing out Wall Street. I've got to say, this sounds an awful lot like a bailout to me. Well, it would be a loan. I'm not sure many folk will make the distinction. We said we'd stand up against these guys. Now you want me to write them a$90 billion check. What happened to the free market? To consequences? Sir, you know I wouldn't be suggesting this unless I thought it was necessary.

12:18Unless I thought we had no other choice. But we let Lehman go for a reason, didn't we? The AIG is different. Bush looks at Paulson and Bernanke for a long moment and then sighs. Well, I'm not happy about this, fellas. But sometimes you have to make the tough decisions. If you think this has to be done, you have my blessing. Thank you, Mr. President. Bush stands to leave. But you know, Hank, someday you're going to need to tell me how we ended up with a system like this. We can't be doing something right if we're stuck with these miserable choices. After getting the go-ahead from President Bush, Hank Paulson and Ben Bernanke head straight to the Capitol building.

12:56They don't need congressional approval to loan money to AIG. The Fed can deploy its funds without it. But they do want leaders on the Hill to back the decision. They fear that if the different branches of government appear divided, the markets will only panic even more. So at 6 p.m. on September 16th, Paulson and Bernanke meet with congressional leaders in the Senate Majority Leaders Conference Room. They explain to members of Congress why government intervention is now necessary and the steps they intend to take to stabilize the markets. The Federal Reserve Act contains an important emergency provision, allowing the Fed to lend money in what the legislation calls unusual and exigent circumstances.

13:34This was the power Bernanke used to help bear Stearns, and now he plans to use it to save AIG as well. The Fed will lend up to$85 billion to AIG, and as collateral, they'll take an almost 80 % stake in the company. But before lawmakers can protest too much, Paulson and Bernanke insist that AIG will still be punished for its excessive risk-taking. As a condition of the loan, the CEO will be removed, and the Fed will impose a hefty 11.5 % interest rate. Still, members of Congress can't quite believe what they're hearing. At least with the Bear Stearns deal, there was a private company taking on most of the risk.

14:11The loan from the Fed just greased the wheels. With AIG, though, there is no buyer, and many in the conference room doubt the loan will ever be paid back. That means the government is effectively proposing to nationalize AIG. And that seems extraordinary for an administration that advocates small government and the rule of the free market, especially one that just let Lehman Brothers fail in similar circumstances. But Paulson defends the move. AIG is not like Lehman. It's the connective tissue of the global financial system, and they have to save it. Still, Paulson can tell that the lawmakers are far from convinced.

14:46So he shifts gears. He moves the conversation away from loans, securities, and money markets, and starts talking about the impact AIG's bankruptcy would have on everyday Americans. AIG is among the 10 most widely held stocks in 401ks. If the company goes bust, it's not just Wall Street fat cats who will suffer. Ordinary people will see their savings and retirement funds decimated. That's a sobering thought for the members of Congress. Because if there's one thing they know about politics, is that it doesn't matter if elected representatives are blameless or not, the finger will still be pointed at them if people get poorer.

15:22By the time the meeting ends, Paulson believes he has at least the understanding of those in the room, if not their full backing. It's better than nothing. So that night, the deal is formalized and the U.S. government effectively takes control of AIG. But this is only the first step in slowing the financial crisis. Early the next morning, two dozen exhausted staffers crowd into Paulson's office. Paulson is just as tired as they are, but he praises his team's work so far. Still, Despite all they've done, the world economy stands on the brink of disaster, and the crisis is moving faster all the time.

15:56There were several months between Bear Stearns and Lehman, days between Lehman and AIG, and it could now just be hours until the next catastrophe. And it's not just Wall Street that are feeling the heat. Paulson has just heard from the CEO of General Electric, one of the largest conglomerates in the world. It's in danger now, too. It's clear to Paulson that they have to quit firefighting. They have to stop trying to solve this crisis one failing bank at a time. What's needed is a systemic solution that will deal with tomorrow's problems and next week's, not just today's. Looking around at the pale, hollow-eyed faces staring back at him, Paulson says that they are in the financial equivalent of a war, and if they're going to win it, they're going to need special wartime powers.

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18:32By the middle of September 2008, it's clear that America and the world is in the midst of the biggest economic crisis since the Great Depression. After the fall of Lehman Brothers and the near collapse of AIG, even the largest investment banks on Wall Street are looking vulnerable. Shares in Morgan Stanley and Goldman Sachs are tumbling. But it isn't just the banks that are in trouble. The contagion is spreading to the rest of the economy, too. The Dow Jones Industrial Average is an index of 30 of the country's most prominent companies. It's now down 23 % below its level from the previous year.

19:04And boardrooms around the country are getting nervous. CNBC begins flashing stock prices across the screen like a grim scoreboard, part of what some call a death watch. The crisis that began in Wall Street's banks is now dragging the entire market down. And during the day on September 17th, 2008, Treasury Secretary Hank Paulson takes over 70 phone calls and meetings. He's asked his advisors at the Treasury and officials at the Federal Reserve to draw up a list of what new resources and powers they think they'll need. He's been gathering their responses all day, and as evening falls, Paulson's phone rings once again.

19:41It's Ben Bernanke, the chairman of the Fed. Bernanke is usually calm and analytical. He's a scholar of the Great Depression who used to be an economics professor at Stanford and Princeton. And when he was first considered for the job at the Fed, White House officials worried he didn't have the assertiveness required for the role. But now his voice is urgent. Hang, I've been thinking about this, and you're going to have to go to Congress. I was worried you'd say that. There's nothing more you can do under your existing powers? After the bailout of Bear Stearns and AIG, Morgan Stanley looks vulnerable, and after them, it's going to be Goldman Sachs.

20:14We just can't keep doing this. We don't have the necessary resources for one, but I also just don't think it's fundamentally democratic. The powers we're using under the Federal Reserve Act are meant for unusual and exigent circumstances, and I just don't think we can claim it's unusual if we keep doing it. Congress needs to step up and take charge. Well, look, Ben, I agree with you, but what if they say no? We can't let that happen. But it might. You know what these people are like. They're not economists, Ben. Half of them are damn lawyers. They probably would have blocked the AIG loan if they'd had the power.

20:44And where would we be then? Look, I understand that you guys don't want to feel like you're fighting this alone over there. But the worst outcome would be if I ask and Congress tells me no. We'll show the markets that we're vulnerable and we still won't have the powers we need. I won't say no if we explain it properly. Our Republicans are going to hate it no matter what we say. And so will plenty of Democrats, but for totally opposite reasons. That's probably true, but it doesn't mean they won't vote for it, though. You know the saying, there are no atheists in foxholes? Well, I don't think there are any ideologues in a financial crisis either.

21:14I don't know. I still don't think it's a good idea. If the Treasury and the Fed say it's an emergency and we need to help, but the help doesn't come, it's going to further destabilize the markets. We can't go public until we're certain we're going to get what we're asking for. Hank, listen to me. We're done, right? We are out of time. The Fed has stretched its powers to the limit, and I don't want to sound like a broken record, but just look at the Great Depression. Ben, I'm not one of your students. I know economic history. My point is that the lesson of these crises is clear. They are only resolved when every arm of the government comes together with nothing less than overwhelming force.

21:50We do not have a choice here, Hank, and neither do they. Once we explain that to Congress, they will not say no. Ben Bernanke continues his lecture for almost 15 minutes straight. He is a quiet man suddenly burning with conviction. Hank Paulson can only listen as Bernanke talks about the lessons he's drawn from a century of economic collapses. But when the call finally ends, Paulson still hasn't said whether or not he's going to take Bernanke's advice. It takes him a sleepless night. But by the time the sun rises over Washington the following morning, he's decided. Bernanke is right. They have no choice.

22:27So early in the morning of September 18th, Paulson tells Bernanke that they're going to Congress. But before either of them can head to the Hill, they must decide exactly what they're asking for. Paulson orders his top advisors to his office at the Treasury Building. Clutching spreadsheets, memos, and coffee, they gather chairs around a corner sofa. As Paulson takes his seat, they begin to debate how much money they'll need and the best way of using it. One staffer points out that the banks just need capital. Normally, they could simply sell stock to raise whatever money they needed. But no one's buying shares in banks right now, so the Treasury should step in.