Lehman Brothers | The Wolf at The Door | 3

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 early August 2008 at Lehman Brothers headquarters in New York City. Dick Foll, the investment bank's 62-year-old CEO, paces back and forth in his office. He can't stop looking at the door, because in a conference room just down the hall, his team is negotiating a deal with a Korea development bank, one that could save Lehman. But Fold isn't part of the talks. Lehman's team has convinced him he'll do more good outside the room. It's a classic negotiating technique. By claiming to need the CEO's approval, the Lehman team thinks they'll be able to push for better terms. But Fold is getting nervous.

1:04He hates not knowing what's happening and wonders if the negotiators are rushing the deal or getting the right price. Fould has been at Lehman for four decades and led it as CEO for almost 15 years, so it seems to him ridiculous that he'll have no say in his fate. Finally, he decides he can't take it any longer. He leaves his office and marches down the hall.

1:28Everyone stares, startled as Fould bursts in. Oh, please, no one get up. Mr. Sung, good to see you. Fold passes Lehman's stunned negotiators to shake hands with Min Yu Sung, who sits flanked by his lawyers and advisors. Oh, we were not expecting you, Mr. Fold. I don't mean to interrupt, I'm sorry. I just wanted to see how things were going, find out what you're doing to my company. Fold grins, trying to pretend it's a joke. He then takes a seat at the head of the table between the two negotiating teams. So, what's the latest? Well, I think you'll be pleased, Mr. Fold. Today, I received authorization from the Korean regulators to make an initial offer for Lehman.

2:06Well, I've heard you're interested in a controlling stake in Lehman, but only if we spin off our real estate assets. Is that right? That is correct. We're prepared to pay 25 % over book value, and we're valuing Lehman somewhere between$20 and$25 a share, a considerable premium over your current share price of$15.50. Your team has driven a hard bargain. Song directs a respectful nod across the table, but Fold leans forward. Well, that's too low. Your team has agreed to this. Well, they didn't check with me. It's too cheap. Sung blinks in confusion. Mr. Ful, and another thing, you're making a big mistake asking us to spin off the real estate.

2:44Those assets are undervalued. They're a tremendous opportunity here. We don't want any part of your commercial and real estate assets. I made that perfectly clear to your team from the start. Well, you should reconsider. Sung straightens up, unable to hide his irritation any longer. We have negotiated in good faith. Now, you want to rip up our deal? Hey, all right, all right. There's no need to get upset. Sung looks across the table at the Lehman negotiating team, and their faces are pale. Gentlemen, I'd like to thank you, but I believe our discussions are over. Sung turns to his colleagues and issues a sharp command in Korean.

3:18They all get to their feet as Fold scowls. Now, where are you going? We're leaving, Mr. Fold. Well, maybe we can look at 1.4 times book value. This is not about 1.25 versus 1.4. It's about how you do business. And that is not how we do business. Goodbye. Silence settles over the table as the men file out. Fold throws his hands up in frustration and calls out after them. What? That's it? You're just going back to Korea? No, come back. But the Korean businessmen don't come back. As the door closes behind them, the Lehman negotiating team erupts in anger towards Fold. This was a$5 billion offer that could have saved the firm from collapse, and now it seems dead.

4:03When the news leaks, Lehman Brothers stock plunges 45%, and all across Wall Street, investors panic because it's not just about Lehman. It's every investment bank. They can all feel it. Time is running out for everyone.

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5:36From Wondery, I'm Lindsey Graham, and this is American Scandal.

6:00Like many other firms on Wall Street, in the early 2000s, Lehman Brothers bet big on real estate. It sank billions of dollars into mortgage-backed securities and other complex debt-based products. But then in 2008, the property market turned. Investment bank Bear Stearns was the first to collapse, and soon Wall Street was asking if Lehman would be next. The company's CEO, Dick Fold, launched a desperate campaign to prove that Lehman was different, but the rot at the heart of its balance sheet could not be concealed forever. In early September 2008, the firm reported a staggering$3.9 billion loss.

6:37Lehman was tumbling toward bankruptcy. Fold clung to the hope that the company would be rescued by the authorities, but there was little appetite either at the White House or among the public for a bailout. As far as the government was concerned, it was time for Wall Street to clean up its own mess. This is Episode 3, The Wolf at the Door.

6:59It's Thursday, September 11, 2008, at the Treasury Department in Washington, D.C. In a corner office, Treasury Secretary Hank Paulson sits with Federal Reserve Chair Ben Bernanke. The blinds are half-drawn and the last streaks of afternoon sunlight angle down on a conference table covered with papers and reports. Only moments ago, the president of the New York Fed called with grim news. A bank run is underway on Lehman Brothers. The company's stock price already fell by 42 % yesterday, and it's dropping even further today as investors desperately try to unload their shares. Bernanke spent most of his career as an economics professor at Stanford and Princeton Universities.

7:40He specializes in the history of the Great Depression, and as he considers the news coming out of Wall Street, it all sounds worryingly familiar.

7:51Bernanke puts down another gloomy report and turns to Secretary Paulson. We're going to have to bail them out, Hank. No. Their liquidity is almost non-existent. There's no other option. There has to be another option. We intervene with Bear Stearns, and if we bail out every reckless firm on Wall Street, they'll expect us to save them every time. They'll become more irresponsible. So what? You just want to let Lehman fail? Because that's what we're talking about here. Paulson is silent for a moment. Well, what if we did? What's the worst case scenario? An economic catastrophe. But how do you know that?

8:26Because it's what happened in the Great Depression, Hank. The collapse of the banks deepened the crisis and made recovery even harder. But don't we risk simply rewarding bad behavior? I get that the moral hazard is a potential consequence, and I don't want to be handing these people money. But that's not the biggest danger right now. Paulson is silent. Bernanke shakes his head. Is this really the main reason you want to avoid government intervention? Yes. What else is there? Optics? Oh, don't be ridiculous. I don't know. Maybe you don't want to be the ex-Wall Street guy bailing out Wall Street.

8:59I don't care about my reputation. Can't you see? It's not just about this crisis. It's about the next one. Hank, this is not a teaching moment. Let's put out the fire first before we tell the children to stop playing with matches. I cannot emphasize this enough. Paulson stares down at the papers on the table between them. I still think there could be a private sector solution to this. Oh, Hank, there's always interest in an asset at the right price. I can guarantee that. We'd still need to provide billions in financing. No one's going to want to touch the mortgage-backed securities. All right, sure, but what if that money doesn't come from the government?

9:34Oh, what do you mean? We form a consortium. We collect a pool of capital from Wall Street's biggest banks and use that to buy up Lehman's toxic assets and grease the wheels. You want to ask Wall Street's most powerful figures to shell out their own money to help a rival? Have you met these guys? I am one of those guys, but think about it. Those CEOs all have skin in the game. You said it yourself. If Lehman fails, it'll be a catastrophe. We wouldn't be asking them for charity. We'd be giving them the chance to save themselves. While Hank Paulson and Ben Bernanke plan their rescue mission, 300 miles away at Lehman Brothers headquarters in New York City, the mood is grim.

10:16Employees with company stock are watching their net worth evaporate in real time. Almost everyone is convinced that come Monday, they'll all be unemployed. But while morale collapses on the lower floors, up on the executive level, Lehman CEO Dick Folds still believes he can save his firm. If a buyer can be found, the government will surely help. After all, Washington stepped in to facilitate J.P. Morgan's purchase at Bear Stearns earlier in the year. So when push comes to shove, Fould expects they'll do the same for Lehman Brothers. The company already has two potential buyers who are examining the accounts, Bank of America and the British firm Barclays.

10:55Fould tries to reach out directly to the leaders of both, but he can't get through to Bank of America's CEO Ken Lewis. He does manage to get a hold of Bob Diamond, the American CEO of Barclays Capital. Fould knows Barclays has been after a foothold in investment banking on Wall Street for a long time. So now, Fould hints to Diamond that this could be the time to grab a bargain. The two men agree to meet privately. Diamond suggests the Racket and Tennis Club, a discreet, members-only establishment on Park Avenue. But Fould says he can't leave the office, the press have camped outside for days, and he can't risk being photographed on his way out of the building.

11:32So instead, Fold offers to send a car to pick Diamond up and bring him directly to Lehman headquarters. He says the security team will then be able to meet Diamond and sprint him in through the back. Diamond accepts, and after a short drive and a clandestine trip in a freight elevator, the two businessmen are sitting across from each other in Fold's office. Both are tired. With everything that's going on, Fold is hardly sleeping, while Diamond only arrived in New York from London late the night before. Still, this is too important to let exhaustion get in the way. So Fold offers coffee for both of them, and they get to it.

12:06Neither thinks it'll be an easy deal to do. Diamond makes it clear that Barclays is only interested in Lehman if the terms are favorable. The price will have to be low. They don't want the company's toxic real estate assets, and it will all have to be agreed to before the markets open on Monday morning. Fold swallows, and the knot builds in the back of his throat. For months, he's fought to stay strong, to not appear weak in front of anyone. But now he realizes that by Monday, Lehman Brothers won't be his anymore. Either it'll be saved by another company like Barclays or Bank of America, in which case he'll have to step aside as CEO, or it'll just collapse.

12:44Fult has been at Lehman for nearly 40 years. In one way or another, these are his final days at the firm. Across the table, Diamond can sense the emotional toll that the situation is taking on Fold. So gently, he says that he can tell Fold is a good man. He clearly just wants the best for Lehman Brothers, and that's admirable. Fold appreciates him saying that. Still, the face-to-face talks between the two men end inconclusively. Diamond is eager to join his team, who are in a law office a few blocks away, digging into Lehman's numbers. Promising Fold he'll be in touch soon, he sneaks out of the building the same way he came.

13:20Fold can only hope the Barclays team works quickly. In the meantime, he'll try to get in touch with Bank of America again. But while Fold pushes for a deal from his end, across town, Treasury Secretary Hank Paulson's rescue mission is already underway. Paulson has enlisted the help of Timothy Geithner, the president of the Federal Reserve Bank of New York. Together, they work the foams, asking some of the biggest rivals, enemies, and egos in New York to come together and pool their resources to save Lehman. As expected, they encounter pushback. But their message to the executives is simple. If Lehman Brothers collapses, everyone on Wall Street will suffer.

13:57So as night falls over Lower Manhattan, a stream of executives heads to the Federal Reserve Building on Liberty Street. It's a procession of representatives from the most powerful institutions in finance, Goldman Sachs, Credit Suisse, Deutsche Bank, Citigroup, Merrill Lynch, and Morgan Stanley. They all meet in the conference room on the south corner of the building, where Hank Paulson stands at the head of a table. Once everyone's taken their seats, he clears his throat and gets straight to it. There are two potential bidders for Lehman Brothers. While these companies go unnamed, the CEOs scan the room and notice that both Barclays and Bank of America are absent from the meeting.

14:34It doesn't take a genius to work out why. Paulson then explains there is a pool of toxic assets on Lehman's books that the buyers won't touch. The group sitting around the table needs to figure out what to do with them. He makes clear that there will be no government money for the Lehman deal. Wall Street is going to have to finance this themselves. There are scoffs and murmurs around the room. Many of the executives have no interest in helping out either Bank of America or Barclays. Bank of America's CEO, Ken Lewis, has publicly disparaged some of their firms in the past. And Barclays is a foreign institution that's been trying to break into Wall Street and steal their business for years.

15:12But Paulson tries to emphasize that helping out a competitor will be much less unpleasant than letting Lehman fail. But he can already tell that the meeting is in danger of falling into a shouting match. Trying to maintain order, New York Fed President Geithner instructs the CEOs to break into three working groups. One will try to put a price on Lehman's toxic assets. The second group will design a structure for the shared investment pool. And the third group will prepare for the worst, the lights-out scenario. If Lehman is forced to file for bankruptcy, they need a plan to contain the damage.

15:45Paulson then closes out the meeting by commanding the CEOs to work with their teams through the night if need be. They're to gather again the following morning at 9 a.m. sharp. As the stunned CEOs shuffle from the conference room, Paulson glances out the window. It's a bustling Friday night in the city that never sleeps. People pass by on their way to restaurants and bars. Paulson thinks about how blissfully unaware they must be about what's unfolding a matter of yards away. They can't know that within the walls of the New York Fed are some of the most rich and powerful people in the country. Right now, they hold the fate of the entire global financial system in their hands.

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18:24It's early on September 13, 2008, when the Wall Street CEOs reconvene at the New York Fed. Some bring coffee, others donuts. They know it's going to be another long day. But not much has changed overnight. Both Bank of America and Barclays have told the federal authorities that they are still interested in buying Lehman Brothers. They have teams on standby, ready to sign an agreement. But neither company is willing to take on Lehman's toxic assets. And the government is standing firm. There will be no federal bailouts to facilitate the deal. So it all depends on the Wall Street executives meeting this morning.

19:01But in their discussions at the Fed, they again make little progress. The team examining Lehman's bad assets is having an especially hard time. They can't come to a conclusion about what the assets are worth. The executives are not specialists in analyzing balance sheets, and they don't even have their computers with them. So by lunchtime, the mood is tense. Out of earshot of federal officials, the bankers gathered around the buffet, mock Hank Paulson's voice and Tim Geithner's motivational mantras like, work harder, get smarter. But behind the jokes, everyone's anxiety is growing. The longer the talks go on without a breakthrough, the more they all worry that everything will collapse.

19:41It's at this point that the CEO of Merrill Lynch, John Thain, slips out of the Fed building in a quiet panic. Merrill shares have fallen over 60 % over the past year. And while Thain was locked away with the other executives yesterday, the company's stock tanked again. Because now that Lehman is circling the drain, it looks like traders are coming for Merrill next. Thane can't entirely blame them. His firm has the same disease as Lehman. Only a few months ago, it sold off more than$30 billion of toxic mortgages at a huge loss, just 22 cents on the dollar. But even after dumping all these assets, Merrill's balance sheet is still riddled with bad debt.

20:22So if Thane's company wants to avoid the same fate as Lehman and Bear Stearns. He needs to do something quickly. So after leaving the Fed building on Saturday evening, he calls Bank of America CEO Ken Lewis. Lewis is at his home in North Carolina, where he's been ducking calls from Dick Fold all day. But when John Thane calls, he picks up right away. And when he hears what Thane has to say, Lewis promises to be on the next flight back to New York. Only a few hours later, John Thane is heading to Bank of America's corporate penthouse at One Central Park.

20:58Thane waits for a tense moment outside a corporate apartment until Lewis opens the door. Ah, good to see you, John. Come on in. Thane steps inside. The luxury apartment is austere and characterless, with bare gray walls and anonymous furniture. It looks like Thane feels, but he's here on a mission. Well, Ken, thanks for getting to New York so fast. Well, you know how much I respect Merrill. You want something to drink? You look like you could do with one. No, no, I'm fine. Thanks. Well, take a seat. Well, Ken, I'm here because I know you're in talks to buy a Lehman, but I want you to forget about that.

21:35I'd like you to explore whether you'd have interest in buying a stake in Merrill instead. I see. I've been looking at Lehman's books all day, and it's just garbage from top to bottom. Well, Merrill has problem assets too, I believe. That's true, we do. I mean, who doesn't at this stage? But we've also done more than any other bank to purge them. Then why are you so eager to raise capital? Because I'm a realist, and I know if Lehman goes down, the sharks will come sniffing around Merrill next. But with Bank of America's muscle behind us, with the liquidity you can provide, they'll move on. Lewis says nothing, so Thane leans forward across the table.

22:09We employ 16 ,000 retail brokers. That's 16 ,000 direct lines to everyday individual investors, a network no other Wall Street firm can match. Think about how impactful that could be for Bank of America. Well, you know, I've had Dick Fogg calling me all day, six, seven times. Lehman could be undervalued. Oh, he's desperate. Trust me, you don't want anything to do with them, even at fire sale prices. I've always been interested in Merrill, but you have to understand, given the state of the street, the state of Merrill, I'd only be interested in buying 100%. Well, that's not on the table. I'm talking about a small stake to raise market confidence, provide liquidity.

22:47Well, I'm not interested in that. Okay, well, maybe we hone in on an exact number. I was thinking around 10%, but we can discuss. John, listen to me. I want to make this clear. As far as I'm concerned, it's a merger or it's nothing. Reluctantly, John Thain agrees to explore the full sale of Merrill Lynch to Bank of America. He and Ken Lewis spend the next half hour discussing strategy. Then Thane heads back to the New York Fed to break the news to Treasury Secretary Hank Paulson. He's dreading Paulson's reaction. Bank of America is one of Lehman Brothers' potential lifeboats, and Merrill Lynch is about to steal it.

23:24But to Thane's surprise, Secretary Paulson is thrilled by the news. He is increasingly hopeful that Barclays will step up to buy Lehman, and now Merrill will be safe too. Paulson's bold plan for a private solution to save Wall Street from itself seems to be coming together at the last moment. The next morning, at around 8 a.m., the exhausted Wall Street CEOs file back into the New York Fed building for a third straight day of talks. If no solution emerges before markets open on Monday, only 24 hours away, Lehman Brothers will collapse. Luckily, there's a reason to hope. Barclays is now officially ready to buy Lehman.