The Wall Street Job Report

Lehman Still Haunts Wall Street Efforts to Rebuild Broken Model

Christine Harper, Bloomberg, September 13, 2010

Two years after Lehman Brothers Holdings Inc. collapsed under $613 billion of debt, investors are questioning whether the investment-banking model that fueled record profits in the middle of the decade can be repaired.

Of 10 banks with large capital-markets business units, onlyGoldman Sachs Group Inc. and JPMorgan Chase & Co. are trading close to their price on Sept. 12, 2008, the last day of trading before Lehman filed for bankruptcy. Citigroup Inc. has lost 78 percent, and Bank of America Corp. is down 59 percent. The average is a 23 percent decline, more than double the 10 percent drop in the Standard & Poor’s 500 Index over the same period.

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Lehman’s Last Hours

Andrew Ross Sorkin, The New York Times, September 6, 2010

What really happened?

A week from Tuesday will be the second anniversary of Lehman Brothers’ bankruptcy and the ensuing panic that helped spawn the deepest recession since the Great Depression. Yet two years on, a mystery remains about the fateful weekend before Lehman’s fall.

Last week, during the Financial Crisis Inquiry Commission’s final hearings, entitled “Too Big to Fail,” two competing versions of events were revisited about the last frantic 72 hours of Lehman’s life: That the government did not have the legal “authority” to rescue the firm or, more conspiratorially, that the firm was knowingly killed because politics made it impossible to save.

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Nomura’s Schiffman Plans Hiring Push to Bolster U.S. Business

Serena Saitto, Bloomberg, June 17, 2010

Nomura Holdings Inc., Japan’s largest brokerage, may hire as many as 35 bankers in the U.S. this year, part of a push to become a global securities firm rivaling Goldman Sachs Group Inc. and Credit Suisse Group AG.

The firm plans to have about 100 bankers in the U.S. by the end of 2010, from about 65 currently, Glenn Schiffman, Nomura’s head of Americas investment banking, said in an interview this week at the firm’s New York headquarters at the World Financial Center. It has already recruited 50 bankers, he said.

Nomura is investing 250 billion yen ($2.74 billion) to expand in the U.S. after it bought Lehman Brothers Holdings Inc.’s Asian and European units in 2008. Chief Executive Officer Kenichi Watanabe (Above) said in April that he aims to transform Nomura, which generates most of its revenue in Japan, into a global financial firm.

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Henry Kaufman Resigns From Lehman Board: SEC Filing

Henry Kaufman (above)

Reuters, The New York Times, May 17, 2010

NEW YORK (Reuters) - Prominent Wall Street economist Henry Kaufman has resigned from the board of directors of bankrupt Lehman Brothers Holdings Inc, a regulatory filing showed on Monday.

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How Lehman's Hidden Inner Circle Brought the Bank Down

By Vicky Ward for The Huffington Post, March 28, 2010

Senator Spencer Bacchus, the top Republican on the House Financial Services Committee is quite right to write to Lehman bankruptcy examiner Anton J. Valukas and ask to review communications between the Federal Reserve and the Securities and Exchange Commission about Lehman Brothers Holdings Inc, in preparation for an April 20 hearing into the Valukas report. He wants to know what exactly the SEC found out while it was inside Lehman -- or more importantly what it missed.

In his letter to Valukas. Bacchus wrote that Lehman "used accounting gimmicks to hide its debt and mask its insolvency...More disturbing, the examiner's report also describes what appear to be significant failings on the part of officials" at the SEC and the Federal Reserve Bank of New York.

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Lehman Says Barclays Got $13 Billion Windfall In Sale

By Reuters for The New York Times, March 18, 2010

Lehman Brothers Holdings Inc fired new allegations at Barclays Capital Inc on Thursday, saying the British investment bank got a $13 billion "windfall" profit from its deal to buy Lehman's U.S. brokerage in September 2008.

In documents filed in U.S. bankruptcy court in Manhattan, Lehman claimed new evidence showed that, while Barclays said it had a "day one" accounting gain of $4.2 billion on the Lehman acquisition, in reality it received a $13 billion windfall "immediately upon acquisition."

Lehman filed for bankruptcy on September 15, 2008, the largest U.S. bankruptcy filing in history. Its flagship U.S. brokerage business was sold to Barclays for about $1.85 billion less than a week later in a hurriedly arranged deal.

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The fall of a Wall Street highflier

Patricia Sellers, CNNMoney.com, March 8, 2010

(Fortune Magazine) When Erin Callan talked, people listened.

Such was the case at least on the March 2008 weekend after Bear Stearns collapsed. Global markets were reeling. Many feared that Lehman Brothers would be the next to fail. And Callan, a tax-lawyer-turned-investment-banker who had rocketed to CFO of Lehman at age 41, was about to be tested.

Throughout the weekend and then on Monday from 5 a.m. on, Lehman's brass, including Callan, hunkered down in the firm's Manhattan headquarters, making phone calls in the hopes of calming investors and trading partners. Despite their efforts, Lehman shares tumbled 19% that day.

By Tuesday the onus had shifted to her. She'd been CFO for only three months, and now she was essentially being asked to save the firm. She'd have to explain Lehman's quarterly results.

That meant sitting in a conference room with just a speakerphone and one colleague, and convincing panicked shareholders that Lehman was not in fact facing Armageddon. Before the call, CEO Dick Fuld patted Callan on the back. "Good luck!" he said. "I was like, 'Oh, my God,'" she recalled. "Like it just hit me at that point: There's a lot of pressure here."

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Lehman Examiner Confronts Wall Street Secrecy to Unseal Report

David Scheer, Joshua Gallu and Linda Sandler, Business Week, March 4, 2010

(Bloomberg) -- A former federal prosecutor has filed his $38 million, 2,200-page report into the collapse of Lehman Brothers Holdings Inc. The lingering question: whether the public gets an uncensored view.

Anton Valukas, hired by the U.S. Trustee’s office to scrutinize the firm’s demise, wants the Federal Reserve, the U.S. government and at least eight financial firms to tell him by today whether they object to publishing records they marked “confidential.” U.S. bankruptcy Judge James Peck in Manhattan has final say on the decision.

The findings may offer a definitive look into the frenzied days of September 2008 as Lehman Brothers teetered on the brink of solvency, a drama that has spawned at least a half-dozen books. Valukas’s account is more than four times the combined length of reports issued by Enron Corp. examiner Neal Batson in 2002 and 2003, which gave ammunition to investors seeking to recover losses. Appendixes to Batson’s reports added more than 3,900 pages of evidence and analysis.

Valukas (Above), who declined to comment, “is balancing the parties’ need for protection with being able to substantiate what he’s finding,” said Nancy Rapoport, a University of Las Vegas professor who specializes in bankruptcy law. “The real risk is whether the report is going to be credible,” and for that, people need to see the evidence, she said.

Refco Redactions

Examiners often have trouble persuading interviewees to lift demands for confidentiality. Redacted or partially blacked- out reports were filed by examiners of Northwest Airlines Corp. and Refco Inc. in their bankruptcies.

Given the global economic fallout from Lehman’s collapse, banks and the government will probably face public backlash if they seek to block information, said Barbara Roper, director of investor protection at the Consumer Federation of America.

“It doesn’t really matter what the nuances of that position may be,” Roper said. “The public is going to respond negatively. A lack of transparency really feeds public distrust, and it also hampers our ability to understand what happened.”

Valukas, 66, reached agreements with more than 20 firms and U.S. entities last year allowing them to mark documents “confidential” or “highly confidential.” In a court filing last month, he said his report weaves in so much of those records it would be impractical to black out the references before publication. Releasing the report is in the public’s interest, he said.

E&Y, Tishman Speyer

Valukas sent letters to at least 14 companies and U.S. entities this year, asking permission to make some of their secret records public, court records show.

Recipients including the Fed, Ernst & Young LLP, HSBC Plc, Tishman Speyer Properties LP, the Office of Thrift Supervision and Lazard Ltd. declined to comment. Representatives for the U.S. Treasury, the Federal Reserve Bank of New York, Barclays Plc, JPMorgan Chase & Co. and Citigroup Inc. said they won’t block the full report’s release. Lehman has also waived confidentiality.

Valukas told the court last month that he has received a mix of reactions, with some parties waiving confidentiality, some asking for partial disclosure and some refusing to make information public. He didn’t identify any of them.

In a memoir published in January, former U.S. Treasury Secretary Henry Paulson wrote that as Lehman sought aid, bankers gathering at the New York Fed concluded the bank had overvalued assets by at least $37 billion.

‘Secret’ Windfall

Barclays was sued by Lehman and its creditors in November over an alleged “secret” $5 billion windfall profit made by buying Lehman’s North American brokerage. Barclays said in a Jan. 29 court filing that the chance of making a gain was known and approved by Lehman’s advisers.

Barclays, while waiving confidentiality, asked Valukas to keep private information supplied him that is “commercially sensitive” because it involves clients, said Michael O’Looney, a Barclays spokesman in New York.

U.S. regulators haven’t accused anyone at Lehman of wrongdoing.

The bankruptcy case is In re Lehman Brothers Holdings Inc., 08-13555, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

Lehman Bankruptcy Advisers Paid $641.9 Million in 16 Months

By Linda Sandler for Bloomberg.com, February 20, 2011

Lehman Brothers Holdings Inc., the investment bank liquidating in bankruptcy, paid its lawyers and other advisers $641.9 million in 16 months since September 2008, according to a regulatory filing.

The restructuring firm Alvarez & Marsal LLC, which provided Lehman with its current chief executive officer, Bryan Marsal, led the payments with $233 million in fees for “interim management” through January, according to the filing yesterday with the U.S. Securities and Exchange Commission.

Weil Gotshal & Manges LLP of New York collected $149.5 million for acting as the investment bank’s lead bankruptcy law firm. Milbank Tweed Hadley & McCloy LLP got $42.4 million for advising Lehman’s creditors’ committee.

Lehman and its affiliates reported cash holdings of $17.6 billion on Jan. 31, an increase from $17.2 billion a month earlier.

Lehman, once the world’s fourth-biggest investment bank, is liquidating in bankruptcy to pay creditors. Its payments to advisers haven’t faced major challenges such as those in the case of bankrupt automaker Chrysler LLC, which is using U.S. Treasury loans to wind itself down.

Lehman filed the biggest U.S. bankruptcy in September 2008 with assets of $639 billion. Creditors include UBS AG, the New York Giants and Abu Dhabi Investment Authority as well as individuals who hold Lehman bonds.

The case is In re Lehman Brothers Holdings Inc., 08-13555, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

Lehman Justice Isn’t Blind, It’s Unconscious

Jonathan Weil, Bloomberg, February 11, 2010

It is so widely accepted that Lehman Brothers Holdings Inc.’s balance sheet was bogus that even former Treasury Secretary Hank Paulson can say it in his new memoir. And still, the government hasn’t found anyone who did anything wrong at the failed investment bank.

How could that be, 17 months after Lehman collapsed and sent the global credit crisis into overdrive? While Congress and the White House dither about reforming the U.S. financial system, the wheels of justice are grinding so slowly, if at all, that it seems there’s no appetite in Washington for holding Wall Street executives accountable for anything.

In his new book, “On the Brink,” Paulson (Above) doesn’t point fingers at specific Lehman executives for violating any rules. He displays amazing candor, though, in describing how Lehman’s asset values were a gross distortion of the truth. It doesn’t take much imagination to figure out they didn’t get that way all by themselves.

For instance, why couldn’t the Federal Reserve arrange a government-assisted bailout for Lehman in September 2008, as it had done for Bear Stearns Cos.? Paulson tells us that Tim Geithner, then head of the New York Fed, “made clear that the Fed could not lend against Lehman’s dubious assets.” Meanwhile, Paulson said Lehman’s chief executive officer, Dick Fuld, “was still clinging to his belief in the value of his assets, but he was alone there.”

Math Class

Other banks, Paulson wrote, balked at an industry-backed rescue because “they knew that to make the math work, they would have to make a loan secured by assets worth much less than their stated value.” In describing one pile of bad investments, Paulson said these “had been carried by Lehman at $52 billion, but after their analyses the firms estimated their value at closer to $27 billion to $30 billion.”

In short, Paulson said, “the investment bank had been loaded with toxic assets worth far less than the value at which they were carried, creating a capital hole.”

Paulson’s account is as lucid an explanation of why Lehman blew up as anyone has written. It does leave you wondering, though, if it ever occurred to him to tell anyone at the Securities and Exchange Commission or the Justice Department that Lehman’s accounting might need to be investigated. His book provides no indication that he did.

Quite the opposite, Paulson said he felt terrible for Fuld and other Lehman executives: “It was impossible not to sympathize with him. After all, I had run a financial institution; he had been one of my peers.” Maybe a Treasury secretary who hadn’t been the CEO of Goldman Sachs Group Inc. would have viewed their plight less charitably. Paulson declined to comment for this column.

Out the Door

It wasn’t until after Lehman collapsed that the government began issuing grand-jury subpoenas. That explains why, on the eve of Lehman’s bankruptcy, dozens of employees were able to walk out the front door of Lehman’s midtown Manhattan headquarters carrying boxes full of files, on live TV no less. There’s no telling how much evidence was lost because the feds didn’t order the company to preserve documents sooner.

There’s the start of a pattern here, too. By mid-December 2008, after Bank of America Corp. shareholders voted to approve the purchase of Merrill Lynch & Co., Paulson and Federal Reserve Chairman Ben Bernanke had learned of billions of dollars of losses at Merrill that hadn’t been disclosed. This was before the acquisition was completed on Jan. 1, 2009.

Disclosure Issues

Neither Paulson nor Bernanke saw fit to tell the SEC. Nor did they press the companies’ executives to come clean with the public. They also took pains not to put their plans for rescuing Bank of America in writing, for fear that doing so would require the government to disclose the matter itself.

Eventually, the SEC and New York Attorney General Andrew Cuomo’s office did conclude that Bank of America had violated the disclosure rules. However, it’s doubtful the commission would have sued the bank had Cuomo not forced its hand by unveiling his own investigation’s findings last April, including the details about what Paulson and Bernanke knew and when.

The requirement that publicly owned corporations disclose complete and accurate financial reports is part of the bedrock of U.S. securities laws. Just as important is the promise that the government will enforce those laws when they’ve been broken. Undermine the public’s faith in either of those functions, and confidence in the capital markets crumbles.

There’s been much talk the past two years about moral hazard, which is the risk that companies and their investors will behave more recklessly when they believe the government will bail them out. Less has been made of a similar hazard: The danger that powerful companies won’t follow the law when their executives believe the government won’t hold them to it.

The latter risk threatens not only our economy, but our democracy. There’s every reason to believe both kinds are growing.

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“We believe we have the very best leadership team in financial services today, and a key to retaining that talent for the long term is to compensate our senior leaders competitively and to align their interests with those of our shareholders,” Stephen W. Sanger, who leads Wells Fargo’s compensation committee, said in a statement last December.

On pay, Wall Street seems to have reverted to its old ways. James P. Gorman, Morgan Stanley’s new chief executive, could receive $11 million to $13 million, even though the company posted an annual loss.

Mark Lake, a Morgan Stanley spokesman, said that Mr. Gorman received that compensation because, as president, he was responsible for integrating the vast Smith Barney brokerage unit and was the prospective chief executive.

Bank of America’s highest-paid executive was the chief architect of its ill-fated acquisition of Merrill Lynch, Gregory L. Curl. He was awarded more than $9.2 million in stock, most of which will be paid out monthly over the next three years.

Brian T. Moynihan, Bank of America’s new chief executive, will be paid about $6.1 million, thanks to a similar large stock grant.

Jefferies Group, a midsize investment bank that had a strong year, rewarded its top executives handsomely. And more pay is coming down the pike. In mid-January, Mr. Handler received a $39 million stock grant and another executive received about $29 million. The stock award, subject to certain performance goals, is payable over the next three years and will come on top of any salary and bonuses the executives get.

One of the highest-compensated financial executives for 2009 was paid well when he was employed — and then even more when he quit. After leaving Visa in July, Hans Morris, the company’s president, collected an exit package valued at $24 million.

“The ride is essentially over, and he is still getting grants,” said Brian Foley, an independent compensation consultant.

Bank of America E-Mails Show Lehman, Not Merrill Was Buy Target

Linda Sandler, Bloomberg, February 5, 2010

When Bank of America Corp.’s board met to approve the acquisition of an investment bank on Sept. 15, 2008, members thought they were going to buy Lehman Brothers Holdings Inc., not Merrill Lynch & Co., according to New York Attorney General Andrew Cuomo (Above, left).

The bank bought Merrill after examining its books for just 25 hours, Cuomo claimed. Shareholders approved the deal on Dec. 5, 2008. The acquisition closed Jan. 1, 2009, after Merrill losses had increased by billions of dollars, a change the bank didn’t disclose before the shareholder vote, Cuomo said.

“It’s the way we approved acquisitions that ticks me off the most!!!” director Chad Gifford later wrote in an e-mail about the last-minute switch, according to a securities-fraud complaint Cuomo filed yesterday in state court in New York. Lehman filed for bankruptcy on Sept. 15, 2008.

Cuomo’s complaint was filed against Bank of America, former Chief Executive Officer Kenneth Lewis (Top, Right) and ex-Chief Financial Officer Joe Price over their handling of the Merrill deal.

E-mails and written notes that were gathered by Cuomo for his investigation of the matter show personal reactions of executives as they learned of Merrill’s rising losses, which reached $16 billion before taxes by December 2008. They also show Merrill kept Price informed of the losses as they grew, yet he resisted pressure from his lawyers to disclose them to shareholders.

‘Read and Weep’

“Read and weep,” Bank of America accounting officer Neil Cotty wrote Price on Nov. 4, 2008, when Merrill’s financial reporting unit forwarded preliminary October results with a loss of $6 billion. The merger documents had already gone out to shareholders. Five days later, the October loss was put at $7.5 billion before taxes.

When Price asked in November for a review of whether the losses -- then $5 billion after taxes -- should be disclosed to shareholders, his general counsel Timothy Mayopoulos said they should.

An e-mail from Eric Roth, a partner at the bank’s outside law firm, Wachtell, Lipton, Rosen & Katz, sought research within his firm on “the duty to disclose,” according to the lawsuit.

Roth’s notes from a call with Wachtell Lipton partner Warren Stern say, “duty to bring to shareholders all info material to vote.” The firm told the bank it should disclose the losses, Cuomo claims.

The law firm was “marginalized” after that by the bank, which chose not to disclose the losses, Cuomo claimed. Mayopoulos was later fired by Price and replaced by Brian Moynihan (Bottom row), who later became CEO, Cuomo said.

‘Fair Reading’

“We believe a fair reading of all the evidence does not support these charges,” Robert Stickler, a spokesman for the Charlotte, North Carolina-based bank, said yesterday in a phone interview. “The SEC had access to all of the evidence and concluded there was no basis to charge any individuals nor to file a charge of fraud.”

Lawyers for Lewis and Price denied wrongdoing. Wachtell declined to comment in a statement.

When Bank of America prepared to disclose more write-downs after the merger in a Jan. 16, 2009, release, Gifford and another director, Thomas May, swapped e-mails on the belated notice to shareholders, according to Cuomo’s filing.

“Unfortunately it’s screw the shareholders!!” Gifford wrote.

May wrote back, warning about potentially embarrassing e-mails: “No trail.”

The ‘Downside’

Cotty warned Price in December e-mails that Merrill’s evaluation of its securities might be too optimistic, so there may be “downside” in its estimated results.

Lewis by then was worried about his job, according to an e-mail from Federal Reserve Bank of Richmond Senior Vice President Mac Alfriend that is cited by Cuomo.

Lewis “is worried about stockholder lawsuits; knows they did not do a good job of due diligence and the issues facing the company are finally hitting home and he is worried about his own job after cutting loose lots of very good people,” Alfriend wrote on Dec. 23.

Lewis didn’t want to tell shareholders of the pending government bailout and asked Fed Chairman Ben Bernanke “whether he could use as a defense” that the government didn’t want him to disclose it, according to an e-mail from Bernanke. “I said no,” Bernanke responded to Lewis.

The case is People of State of New York v. Bank of America, State Supreme Court (Manhattan).

On Wall Street, greed is still a good thing: Andrew Ross Sorkin

Vivek Kaul, DNAIndia.com, February 1, 2010

The date: September 19, 2008

The players: Henry Merritt Hank Paulson Jr — The 74th treasury secretary of the US, Neel T Kashkari — assistant treasury secretary for financial stability, Kevin I Fromer — assistant treasury secretary for legislative affairs. 
The motive: To decide on the amount of money to ask the US Congress for the bailout of the collapsing American financial system.

The dialogue: 
“What about $1 trillion?” Kashkari said. 
“We’ll get killed,” Paulson said grimly. 
“Okay,” Kashkari said. “How about 
$700 billion?”
“I don’t know,” Fromer said. “That’s better than $1 trillion.” 
“There’s around $11 trillion of residential mortgages, there’s around $3 trillion of commercial mortgages, that leads to $14 trillion, roughly 5% of that is $700 billion,” said Kashkari.

And that, ladies and gentlemen, is how the big round number, for the biggest financial bailout in history of mankind was decided.

“The number was made up out of thin air. It was literally Hank Paulson and his team sitting around in a room trying to figure out how much money they could possibly get the Congress to give them,” says Andrew Ross Sorkin (Above), reporter and columnist from The New York Times and most recently, the author of the best selling, fly in the wall account of the initial days of the financial crisis: Too Big To Fail - Inside the Battle to Save Wall Street (The dialogue above has been reproduced from the book). In this interview, Sorkin speaks to DNA on the days leading to the start of the financial crisis and why Wall Street still hasn’t learnt its lessons. Excerpts:

Why did Paulson and Geithner let Lehman Brothers go under? They saved just about everything before and after that...
There were a couple of reasons. The first piece of it was that frankly, they had run out of time and that there was enormous amount of political pressure that Paulson, in particular, was under to not be Mr Bailout. On the fateful Sunday (September 14, 2008) what happened was once Barclays (which was trying to buy out Lehman Brothers) was gone, Paulson thought he had run out of options. Also they (Paulson and Timothy Geither, then president of the Federal Reserve Bank of New York, now Paulson’s successor at the treasury) determined that there was no collateral Lehman had, so they felt that they couldn’t lend.

I also think there was an element of frustration with Dick Fuld (the CEO of Lehman Brothers) and with Lehman Brothers. Paulson had been pushing on them for months and months and months to do something and he felt that they hadn’t. In the final pieces, the regulators let Lehman fail because the CEOs involved in the rescue effort who were around the table that weekend at the Federal Reserve, all were telling the regulators that they had lowered their exposure, and that it would be okay, and that the world would survive without Lehman Brothers.

Why was Lehman unable to do a deal on its own with Warren Buffett, or Barclays Bank, which was interested in buying them or for that matter even Bank of America, which ultimately bought Merrill Lynch? 
The problem for Lehman was that they started looking for a buyer way too late. And they didn’t want to accept a low price. There were probably opportunities to have sold the firm or got in a major equity investment much earlier in the year 2008, and would have been even better if they had been looking in late 2007, when some of the other banks raised money. But they didn’t. So by the time they really started looking, the market had turned sour and there were many questions about the way they valued their books.

And what about Warren Buffett?
There was this secret conversation back in March 2008, where Warren had spoken about trying to buy a stake in Lehman Brothers and Fuld did not want to do it and frankly, Buffett did not want to do it either because the terms weren’t going to be good enough, but he was also worried about the business. Everybody was worried about what was on the books of Lehman Brothers. Nobody knew how bad it really it could be.

Would the crisis have panned out differently if Lehman had been rescued? 
There is no question in my mind that the greatest mistake that the government made in all of this was letting Lehman Brothers go. Had they not let Lehman go under, the crisis would not have been as nearly as deep. That is not to say that there would have been no crisis at all, because remember, AIG was going to be next and that they would have had to deal with one of these. And by the way, it’s possible that if they had bailed out Lehman Brothers, they would have felt that they couldn’t have bailed out AIG. So it is all very difficult to judge what would have happened, because it is hypothetical. But letting Lehman go on its own was by miles the biggest mistake.

How did the government come around to rescuing AIG a few days after they let Lehman go under?
The reasons for saving AIG were much clear than the reasons for saving Lehman Brothers. AIG had so many counterparties there was a feeling that if you let AIG go, you were going to put a dozen other banks and institutions out of business and really put pressure on economies not just in the US, but around the world.

Remember, BNP Paribas and many other French banks and other global banks were exposed to AIG. The other issue was that the Federal Reserve had determined — wrongly, but determined, none the less — that AIG had enough collateral to lend them money. The calculation was wrong because AIG didn’t have the collateral and at that time, the Federal Reserve thought it did and so the Fed lent the money. Interestingly, if you think who was around the table when they were discussing AIG: Goldman Sachs and JP Morgan.

Everybody at that table had as much incentive to say that AIG had as much collateral as humanly possible, whereas all the people who were around the table talking about Lehman Brothers during that weekend had every incentive to say that there was no collateral, because everybody wanted to buy Lehman for nothing.

Do you think AIG had overextended itself by going beyond its core business of insurance into exotic derivative products such as credit default swaps? 
Oh, absolutely! My favourite part of the whole book by the way, is when President Bush says to Paulson and Ben Bernanke: “An insurance company does all this?” Well, this one did. If you had asked 99% of the world ‘What does AIG do’, they would have told you it’s an insurance company. But it really was so much more. And that was a big part of the problem.

How did something like that happen? 
It was never regulated by the Federal Reserve or the Securities Exchange Commission (the stock market regulator). The way it works in the US is that there are statewide regulators. So let’s say if you run an insurance company in the state of New York, you will be regulated by the New York state insurance regulator. So the regulator was always looking into the subsidiaries of AIG. Nobody was looking at the parent company nor were they looking at AIG Financial Products, which was a separate unit, which ended up not being regulated. Most of the derivative trading that they did was so opaque that it was difficult for regulators to appreciate or comprehend how deep they were in these markets.

How did Paulson go from being “I can’t be Mr Bailout” to someone who rescued almost everybody?
It was very difficult for him getting his head around to the idea of rescuing everybody. But that Wednesday after the authorities had let Lehman go (September 17, 2008) and after they had saved AIG, when they saw that Morgan Stanley was next, and that Goldman Sachs was after that and that General Electric, the global conglomerate, could be in jeopardy…

We were at a moment were big and small companies potentially were not be going to able to make payroll the next week. And that’s why it was quite an extraordinary problem. And that was the awakening, a realisation that the only way to fix this would be to truly step into the bridge. He hated it and I mean literally, it was something that bothered him very much. But he felt that it was the thing they needed to do. And frankly, in the end, it was the right thing to do though we would be living with the repercussions of those decisions for years to come.

Do you think the Wall Street CEOs involved in the initial stages of the rescue had an idea that they were a part of history as it was being made?
I spent a lot of time with many of those participants and I think they did realise it. There were some of them who actually ended up taking notes at the meetings. And I asked them why they took notes, because most of these CEOs never take notes. At least one of them said to me that this was history in the making.

People at the helm of things at Wall Street are the best of the breed. Why do you think they didn’t see the crisis coming? 
Great question! This generation of leaders on Wall Street had never experienced failure like this before. The idea that the entire system could fall apart was beyond their comprehension. I would say it is like the failure of imagination. I am a journalist, you are a journalist and I would say that we are professional sceptics. If you are on Wall Street, a part of your job is to be a professional optimist. Really. Jamie Dimon a couple of weeks ago was on Capitol Hill and he was saying that when they built their models, they did not include the assumption of real estate prices falling. And it was just remarkable. It was just a lack of control, lack of oversight and a lack of imagination on what really could happen.

Did the Federal Reserve and Treasury officials realise the magnitude of the crisis when they initially started to deal with it? 
Oh, they missed it completely. The regulators missed it. Alan Greenspan missed it. Ben Bernanke missed it. Hank Paulson missed it. Tim Geithner missed it. Throughout the entire process, they were always behind, they could never catch a break. Everyday was worse than the day before. It was very difficult for them, but there is no question that like the people on Wall Street, they missed it too. And I always say one of the reasons for that is this sort of ‘groupthink’, where all of them come from the same background, and they think the same way.

The feeling that one gets from your book is that the entire rescue process in September was extremely haphazard. As Ben Bernanke put it and you quote in the book, “There are no atheists in foxholes and no ideologues in financial crises.”
Zero. You are absolutely right. There was no plan. They had thought about different contingency plans, but they never really, really, had a plan on how to deal with any of these things. Again, because they never really, truly comprehended that they were going to be in this place. And it is worrying for a lot of people when you realise that your elected officials didn’t have a plan. It’s nerve wracking.

How did the $700 billion bailout number happen?
That they made up. And that’s what I find so comical about it because the number was made out of thin air. It was literally Hank Paulson and his team sitting around in a room trying to figure out how much money they could possibly scare the Congress to give them. So the number had very little to do with what they thought they needed and everything to do with how much they thought they could get.

What was the most audacious rescue proposal you heard about during those days? 
The most audacious or surprising proposal in my mind was the effort to put Goldman Sachs and Citigroup together. When Tim Geithner had called up Llyod Blankfein and suggested that he call Vikram Pandit. To think now what would have happened had Goldman Sachs and Citigroup been merged is quite a thought. Citigroup, as you know, required a massive government bailout only months later.So if you had merged it with Goldman, the situation frankly might have been worse.

Most of Paulson’s team at the Treasury were ex-Goldman employees. Did that have an impact on the decisions they made? 
Yes and no. I do believe that the number of former Goldman employees clearly created as I said before, what I call the ‘groupthink’ about how they approached all these issues. And by the time Goldman was in trouble, clearly there was an effort to make sure that firm did not go under. But I don’t think that they did anything to try to advantage Goldman at the disadvantage of everybody else, despite all the conspiracy theories.

Would you say Wall Street was a victim of “a strategy that worked extraordinarily well right up until the moment it didn’t?”
Oh, 100%. On Wall Street, everything works until it doesn’t, and that’s what happened.

One of the things you say towards the end of the book is “the sad reality is that Washington typically tends not to notice much until an actual crisis is in hand.” Do you think things have changed since the crisis broke out?
It’s funny, [but] if you had asked me that question only a couple of weeks ago, I would have told you that things seem to be the same and sadly so.

Over the past couple of weeks here in the US, there has been a real popular outrage around the country on what’s going on in Wall Street. And President Obama has made a number of proposals to reign in Wall Street. It’s the first time we are seeing some of these things. I wish that they were more comprehensive, meaning he is kind of announcing one plan one week. It would be much better if there was a comprehensive plan. But I do think that Wall Street, as a result of these things, is going to change and you are already seeing a little bit with the incentives. The bonuses are coming down. They are being put more in stock. There is less leverage. But I will tell you that the ethos, the culture of Wall Street hasn’t changed. Greed, as Gordon Gecko said in the movie Wall Street, is still good.

What about the likes of Goldman and Morgan Stanley which survived the crisis. Are they still taking on the kind of risk as they did in the past? 
Morgan Stanley is clearly not taking the same kind of risk. They have changed their model quite substantially, in part, because they were not very good at taking risk. Goldman Sachs is still taking an enormous amount of risk, probably more so than just about any firm on Wall Street. It will be interesting to see whether the government really puts pressure on them to stop taking such risk.

Could you elaborate on this?
If you were to look at Goldman’s earnings, a disproportionate amount of their earnings comes from proprietary trading, trading for their clients. So they are taking on risks to do that whereas at the other firms, most of their revenues are coming either from advisory services or other types of businesses that don’t require enormous amount of risk. Goldman is still, at some level, operating with more risk on a day-to-day basis. In fact for Goldman, the value at risk, the kind of money at risk everyday, was actually higher last year than it was a year before the crisis.

How do you see this crisis playing out?
Oh boy! If I knew that, I wouldn’t be a journalist. (laughs)

But that is a question one needs to ask... 
’Know it is. I suspect that we are going to see more and more efforts at regulation over the next 12 months. I don’t know if they are going to have any teeth. I don’t know if the regulations are going to be significant or if they get watered down, but I do think it’s going to be a part of a national and global conversation about Wall Street and risk, for months, if not years to come. In the US especially, it does not look like that the economy is going to be coming back in a major way anytime quickly. I imagine that we are going to be bumping along the bottom for a very long time.

Two Days That Upended Wall Street

HENRY M. PAULSON JR., The New York Times, January 31, 2010

The following account of the tense 48 hours preceding the bankruptcy of Lehman Brothers is excerpted from former Treasury Secretary Hank Paulson's new book, "On the Brink."

Saturday, September 13, 2008

Early Saturday morning, I left the Waldorf-Astoria Hotel in Midtown Manhattan, climbed into a car, and sped down a deserted Park Avenue, arriving at the New York Fed just after 7 a.m.

We rode the elevator up to the 13th floor, where Tim Geithner had arranged for me to work in an office just down the hall from his own suite. I called (Bank of America CEO) Ken Lewis, who reported that after closer inspection his people now believed that Lehman's assets were in even worse shape than they had thought the previous evening. It was increasingly obvious that he didn't really want to buy Lehman.

I joined Tim in his office for a conference call with Barclays at about 8 a.m. Bank Chairman Marcus Agius and CEO John Varley were on the line from London, and (President) Bob Diamond was at Barclay's midtown Manhattan offices. Varley said they were working hard on a possible deal, but had serious concerns about some of Lehman's assets, and indicated Barclays would need to leave $52 billion of them behind.

I told Varley to focus on the biggest problems first—the assets he thought were going to be the most troubled—and tell us what he needed to take care of them. If Barclays gave us its best offer that day, we believed we could deliver a private-sector consortium that would fund whatever shortfall there was. Even as we spoke, the leaders of virtually the entire banking industry were assembling downstairs at the Fed.

We were scheduled to meet the Wall Street CEOs at 9 a.m. But just before then (Lehman Chairman and CEO) Dick Fuld called. I briefed him on my unpromising conversation with Lewis and told him that it was more important than ever that he work with Barclays. He expressed great disappointment, bordering on disbelief, at BofA's findings.

Addressing the CEOs, I tried to be totally open. "We're working hard on a transaction, and we need to know where you guys stand," I said. "If there's a capital hole, the government can't fill it. So how do we get this done?"

I can only imagine what was going through their minds. These were smart, tough businessmen and they were in a difficult spot. We were asking them to rescue one competitor by helping to finance its sale to yet another competitor.

(Morgan Stanley CEO) John Mack wanted to know why the government couldn't arrange another assisted transaction, like the Bear Stearns rescue. Tim quickly dismissed the possibility. "It's not a feasible option," he said. He made clear that the Fed could not lend against Lehman's dubious assets.

By evening the CEOs had agreed to support in principle a proposal under which Barclays would leave behind a pile of bad real-estate and private-equity investments and wipe out Lehman's preferred and common shareholders. To make the deal work, Barclays wanted the consortium of Wall Street firms to agree to loan up to $37 billion to a special purpose vehicle that would hold the assets.

I left the New York Fed before 9 p.m. optimistic about the prospects for a deal.

Anticipating another sleep-deprived night, I arrived back at the hotel exhausted. I went into the bathroom of my room and pulled out a bottle of sleeping pills I'd been given in Washington. As a Christian Scientist, I don't take medication, but that night I desperately needed rest.

I stood under the harsh bathroom lights, staring at the small pill in the palm of my hand. Then I flushed it—and the contents of the entire bottle—down the toilet. I decided I would rely on prayer, placing my trust in a Higher Power.

Sunday, September 14, 2008

I had gone to bed modestly optimistic about our chances of saving Lehman. The Barclays bid was proceeding, and Diamond had a board meeting scheduled for early that morning in London.

Tim spoke with Diamond after the Barclays board meeting, at 7:15 a.m. New York time, and Bob warned him that Barclays was having problems with its regulators. Forty-five minutes later, I joined Tim in his office to talk with Diamond and Varley, who told us that the FSA (Financial Services Authority of the U.K.) had declined to approve the deal. I could hear frustration, bordering on anger, in Diamond's voice.

We were beside ourselves. This was the first time we were hearing that the FSA might not support the deal. Barclays had assured us that they were keeping the regulators posted on the transaction. Now they were saying that they didn't understand the FSA's stance. At 10 a.m., we met with the bank chiefs again, and I told them we had run into some regulatory issues with Barclays but were committed to working through them. The CEOs presented us with a term sheet for the deal. They had agreed to put up more than $30 billion to save their rival. If Barclays had committed to the deal, we would have had industry financing in place.

At 11 a.m., I went back upstairs, and soon got on the phone with (British Finance Minister) Alistair Darling, who wanted a report on Lehman. I told him we were stunned to learn that the FSA was refusing to approve the Barclays' transaction.

He made it clear, without a hint of apology in his voice, that there was no way Barclays would buy Lehman. He offered no specifics, other than to say that we were asking the British government to take on too big a risk, and he was not willing to have us unload our problems on the British taxpayer.

It was shortly before 1 p.m. when Tim, (Security and Exchange Commission Chairman) Chris (Cox) and I addressed the CEOs again. I was completely candid. Barclays had dropped out, and we had no buyer for Lehman.

"The British screwed us," I blurted out, more in frustration than anger. I'm sure the FSA had very good reasons for their stance, and it would have been more proper and responsible for me to have said we had been surprised and disappointed to learn of the UK regulator's decision, but I was caught up in the emotion of the moment.

Back in my temporary office on the 13th floor, a jolt of fear suddenly overcame me as I thought of what lay ahead of us. Lehman was as good as dead, and AIG's problems were spiraling out of control. With the U.S. sinking deeper into recession, the failure of a large financial institution would reverberate throughout the country—and far beyond our shores. It would take years for us to dig ourselves out from under such a disaster.

All weekend I'd been wearing my crisis armor, but now I felt my guard slipping. I knew I had to call my wife, but I didn't want to do it from the landline in my office because other people were there. So I walked around the corner to a spot near some windows. Wendy had just returned from church. I told her about Lehman's unavoidable bankruptcy and the looming problems with AIG.

"What if the system collapses?" I asked her. "Everybody is looking to me, and I don't have the answer. I am really scared."

I asked her to pray for me, and for the country, and to help me cope with this sudden onslaught of fear. She immediately quoted from the Second Book of Timothy, verse 1:7—"For God hath not given us the spirit of fear, but of power, and of love, and of a sound mind."

McGraw-Hill, Moody's Dismissed From Lehman MBS Case

Chad Bray, CNNMoney.com, January 26, 2010

NEW YORK -(Dow Jones)- A federal judge dismissed McGraw-Hill Cos. (MHP) and Moody's Corp. (MCO) from a consolidated lawsuit related to mortgage-backed securities issued by Lehman Brothers Holding Inc. (LEHMQ).

U.S. District Judge Lewis A. Kaplan in Manhattan dismissed all claims against McGraw-Hill and Moody's in a ruling from the bench at a hearing Tuesday. The judge is expected to issue a written ruling at a later date.

"We are pleased that the judge granted our motion to dismiss in its entirety," said Steven Weiss, a McGraw-Hill spokesman.

The consolidated lawsuit related to more than $93 billion of mortgage-backed securities issued by Lehman over a 21-month period that ended in early 2007.

The mortgage-backed securities, known as offerings of certificates, were designed to be sold as AAA investment products to pension funds and insurance companies who were only permitted to purchase high-rated investment-grade securities, according to court filings.

"We are pleased that the judge dismissed all of the claims against Moody's in this case," said Michael Adler, a Moody's spokesman.

The lawsuit claimed in part that McGraw-Hill's Standard & Poor's unit and Moody's Corp.'s Moody's Investors Service unit didn't just provide ratings of the securities, but essentially served as "underwriters" by helping Lehman create and structure the securities.

"Our position is we're going to wait to see what he writes" before determining the next step in the case, said Joel Laitman, lead counsel for a group of holders of the securities who sued.

Lehman collapsed into bankruptcy in September 2008.

Wall Street Triage: Was Lehman Sacrificed So That AIG Had To Be Bailed Out?

By Raymond J. Learsy for the Huffington Post, January 10, 2010

To date, the American taxpayer has pumped $180 billion into AIG to spare it from becoming insolvent. A huge sum, especially in that many of these billions were used to pay down exotic derivatives to the likes of Goldman and a bevy of foreign banks. The derivatives were paid out at 100 cents on the dollar when their market value, before the government's intervention, was perhaps 40 cents, and probably a great deal less. Now we learn, through recent access to New York Fed documents and e-mails, that the New York Fed, at the time headed by Timothy Geithner, actively withheld details about those counterparty payments and "advised" AIG not to reveal the recipients or the counterparty billions disbursed. Only much later did a Congressional committee override the NY Fed's "guidelines' and force AIG to make this information public.

At the height of the crisis, Timothy Geithner was working in close tandem with then Treasury Secretary Paulson. Between September 18 and 21, 2008, Paulson called Geithner 28 times. Over a seven month period Paulson and Geithner spoke 416 times, whereas Paulson's contacts with Fed Chairman Ben Bernanke counted 286 calls.

Paulson was also in very close contact with Goldman Chairman Lloyd Blankfein, having had 19 telephone contacts with him over the period between September 18 and 21st alone. Geithner also had frequent phone contact with Blankfein.

Given the outcome of events -- the blow up of speculative mark to market derivative bets on housing mortgages, the billions at stake in counterparty obligations -- and given the direction and immensity of the government's support to AIG and who ended up being the ultimate beneficiaries, much still needs to be explained. To quote Edolphus Towns, Chairman of the House Committee on Oversight and Government Reform:

"More than one year after the first federal bailout of A.I.G., the American people continue to question where their tax dollars were really sent when the government rescued this company. I continue to believe that a comprehensive review of the rise and fall of A.I.G., and the involvement of counterparties can provide a useful vehicle to understanding how inadequate regulations, cheap money, risky business deals, and in some instances, corruption led to the current economic crisis."

The prospect that favoritism, collusive practices or outright corruption actually took place is exacerbated by the recent revelations that the Fed actively sought to hold back information on the billions of counterparty funds that went out of AIG's back door.

It raises the troubling question of whether the powers to be -- the Treasury and the New York Fed -- played a lethal yet clandestine form of Wall Street triage. To arrive at the point where AIG presented the government and the economy with a systemic risk of bringing down the whole system, could the scenario have been willfully orchestrated whereby everyone was too concerned or frightened to ask hard questions as billions were being dispensed to those with good friends in high places? The specter of disaster was ideally served by the bankruptcy of Lehman, which shook the financial world to its core. And to those who would have suffered billions of losses from an AIG bankruptcy, their exposure to Lehman obligations was as minimal as their exposure to AIG counterparty losses was great had AIG gone the way of Lehman. Lehman provided the ideal head fake, giving all that would be done to 'rescue' AIG an air of timely and necessary intervention.

But wait. Suppose all this was orchestrated first and foremost to spare the billions at risk by those holding AIG counterparty obligations. Would that not be tantamount to fraudulent conspiracy? Earlier in a post here, the question not asked was what were the context of the many phone calls between Hank Paulson,Treasury Secretary and former Chairman of Goldman Sachs, and Goldman Sachs Chairman Lloyd Blankfein, especially at the height of the dramatic events in Sept 2008? Was AIG discussed? Was counterparty exposure discussed? Was the bankruptcy of Lehman discussed? In what terms, and how much was communicated between the lines, the symbolic equivalent of nods and winks, given that both Paulson, with his prior association at Goldman, probably knew as much about Goldman's book as did Blankfein? All conspiracy theory, at worst? I would like to hope so, but with scores of billions at stake, funny things can happen.

These are all questions that should be asked both specifically and generally of the four poobahs, Lloyd Blankfein of Goldman Sachs, Jaimie Dimon of JP Morgan Chase, John J. Mack of Morgan Stanley and Brian T. Moynihan of Bank of America, appearing before the Congressional Financial Crisis Inquiry Commission later this week.

To quote Janet Tavakoli in the Huffington Post, "...it would be fair to make all of AIG's counterparties buy back the CDOs at full price and they can keep the discounted value themselves."

One last question. At Goldman, how were the year end bonuses impacted when including the profits generated by those traders who arranged the Fed's/AIG's buyback of those near worthless CDO's at full price, with taxpayers footing the bill??