;h;nallmin ~ ~ ~ & , ~ ~ n , v e ; d d r o

svraphont in cht rnarckhng b d . d

wrote unp~bl;shdd. He @u-
from H dgumma m m laudc,
and tamed a Ph.D. *ii~ economic^ a t
M.I.T. is an a p in h e economic Wall Streets mrpzid Uitt. SenatorJim had the D e p d n muchw o w
his~ry
of the Gmt Dcprmian Bunnhg, Repubban ofKen*, dad maictingaedit.He had bunme a p
Both men were appointed by Presi- for the wornen t o m , and& hat ponenr of htcrvmingm prwide Lquidiq
dent Ceoige W.Bmh, but, unlih the h b a i l O u m m a a a h i t y f o r i n u k and enmuage lending. 1% q w d thar
.idmh%mtionkfi-ee-maker akdutists, rrdm sysmn." He s m x l , * s i put, the risks a f i e n t attielack ofx-
they, &fig with Gdthner, considered it ia mialim: and told a Bbornbcrg tion had M J pintO apmlonged s h y
themselves pa;lgnzatiss-pqmenfs o f ~ t h a t P a s D n w a s U ~ k t hi cn h n h c r t m - n i n t i ~ k p t c r
government acrian when marke~fail. minister of finmet in Chine"N 4 t l ht
t h a f~w d i n g it.
The mciimp had I q & t e d m n g h b i , an economics p m h at New Paulmn had h& Cddman's In-
RtpubIicm~,somcrirnes uneasily, bur Ymk Unbmitjs Scm Schml of Busi- mmrent-banking operatim, inchding
during thc Bwh Admirhmthn,with its ness,vmdhadwarnedabourctLehousing mergers and acquisitions. As its chief
and-rcgulatbn rhetoric and cuts in mar- bubble backin 2#4,dedaredthat 'social- ucautive, he had first opposed, then
ginal tax tats, Erec-market propaneom ism is indeed dive and wldl in Amah," embraad, the %S decision, in 1999.
s e e d to bein thtir element Bemark's but with a twist: This is socialirm lbr thc to go public, showing both Atxjbiliy
predecessor at tht Fed, Alan Greasspan, rich, dx wdl c o k d , and Wd SWL" and d e d h s s .
kept interwt ram exqtiodly low. Rtg ButasPaharwlBcrmnkr:sardm
ulators at the Securities and Exchange
C a d s s ~ otobred
n high Imragt at in-T he previous afternoon, Scptem-
km I lth, Timothy Gdthner, at the
vmncrtr t&,atultlxFdand the Fad- New York Fed, hail told Pautson and
~1septembnr 12th the morningrnin-
&dad reports hvJhicb ammpwsTrea-
my officials appeared to ay h a t P a d m
e d Deposit Insurance Cmpratiun &- Bemankc that Lchn~anw unlikely to wrutingwtrheplbityofanygov-
arcd lax real-esnre krading standards. be able to open for businrss on Mondq. mment finmclal assistance to Lehman.
Housing prices shot up.In ~~, 2007, S m e its origirrs, ia aotton mdhg, teh- Padson acknowledged to Bemankc
r h t h J o n a l n d m t r ; a I A ~ d man had unduwritrcn countless mock dmt he hadauthorized the comments.He
a peak of1 4,093. U M by Berm&> aad bondoferhp,h d become a h c e in was under intense pbUtica1 p r r s ~h~ n
~ !~
P s h n , orjusr h u t anyDne in .s poeition mcrgen and acquisitions, and was per- the White House an$ Capitol Hill to
ofauthoriry. stn asset kbblehadg ~ ~ twa n haps best known for its bond index, he curb the fum m r the rescue ofFannic
ribu us and historic pmprrions. cquidcnt of the D u w Jones lndumial Mac and Freddie Mac the prwiwrswcek-
That yea, the bubble had bzgun to Amage for st&. I n 2005 md 2006, ir cnd,as~astgntinuingmrmmto\w
deflate- Defaults among subprim-mn- was the h p t lrndenrdter of wbpiurrt- Bear Steams. h'lore imporrant,w p r i -
gagebarrowma, anddm thc e W m o semritiep. ~ v a~
~ ebus- he had spokm with h u t
rare i n f ~ s t of m mortgage-backed
~ As mtly as 2007, L e h m Mle- apbing L . e h ws insisein on sum
&ties s t a n d to d e . In an attempt p k d m tdprofits, thankf largely to i~ kind of g a m e n t funding. f 4cvmhe-
tu canrain the damage, Pauls~rland I m q e of *to o i ~m, m h g dm for Jess, Padson assured Bcmankc, he was
3 e d c p&cM wer what many crm- c m y & k o f ~ l qidithadrhvry c c a m m i d to findinga b u ~ .
w d e d the greatest govemmtnt inm- dollws of Wr. Mmr of im a w t s were AU 9ummcr,Paubon had been prtss-
sion into markas and finance since chc funded by b m w c d money, and naw, ing Lehrnan's chairman d chidcu~ar-
ninewn-kink given the steep decl~nein mortgage- tive, Richard S. FddJr.,ra find a buyw
In Masch, 2008, the p m m e n t &- bxkd securities, no one hW thar dx M I major investor for thr: h.
Fuld, at
ered the [ailing investment bank Bear assets were w n h thcir n o d vaiuc of s k y - m , was intensely awssive. He
Stcams in10 a merger wirh JFMorgan 6640 bum; k h a n ' s share price mu joined Letman Brothers in 1969, as a
Chase, n deal that waa made possible hniny-fwr per cent from the p e mdcr, and had mbquendy d&n Leh-
by 929 biiion ofg~uernmentfinancing viousycar.Arunonirsasetswmahdy man's ambitious q m s b n . But Fdd had
for b r Steams' muhid mrs.I n early r u d e r way, isLqudirl; w Mnishing,and been slow 10 grasp the severit). of the
Sctfft*, the T m - 4 the p- j ts st& price had fdeo by forty-tw pcr firm's plight, h & n was fiustra~td
mmcnt-bad& private rnmpge agcn- cent j ut the pmiosliiday, ir awldn't SUP that Fdd kept insisting an whnt Pauhfl
desF~eMaeandFreddicMac,pkdg- ' vive thcweckd. Global matdrets and the darned unreaiisdc terms, including too
ing up to $200 high a prim (Fuldskwyw did not reply
in capital. Such financial v t e m werc fecr more f q d c
interventions put taxpgyw moracy at risk thandscyhadlxeninMarch,&nk to rapes&far comment for this mount.I
~ n made
d a m ~ k c r yof the nmvn of Steams faltwd, and Geithntr, waxningAs a result, Paulson had taken it upon
'moral hazarv a guidiag principle of thatthe-ufakanhk- himdfro find a b u ~and $ he had come
wmrntcs which p i t s thaz unless %tors r u ~ w o u l d b c @ t eb d,& up with two &OUS ~dndihtes:W of
that an
bear the cmsequenczs of their actions almtiw h d ro kfound Ohwist, he Arncrim and B d v , one of the @st
rhqwillacr n x k l d y , sa& thc damage almost m a i n l y would
barkin tbeUK.
Public criticism of Padm md Ber- not bcontaincd ~ ~ ~ ~ , h d W m K e n n a h
llanke was scathing, The bailouts had Bern+ Lewis*the chairman andC.E.0.ofBank
coming from a different
brought into ma l p l e n t the Rephli- perspective,had &d at much the same of h e r i m . Lwv'i, a native of Walnut
lan rightwin&awwmqtampcring position. As a scholar oftht D e p d n ,
Grove, Mississippi..and a gradi~zreof
~ v i r h & e k e e m d w , d ~ ~ t hi cc h s t d a r g u e d t ~ r t h e ~ o Cf ~k q p State, hadjained a smd regional
!eh, w+by rhegcrvlemmentreme oi md o k h a n d imritutiansst the dmc bank, North Carolina Narimal. in 1969,
as a r d i t a d y c , and had worked his d y h r : TI&, thcre's m, gmmment h a 1 crisis. Surely the lranlcws wouM rec-
way up the nmhas the bank ~ o r m e d money." ~thatthchiI~0fLehnlanhper-
ir& into NatiansBmk Cbfporatian, 1 h y ~ 2 Dianiood
" replicd.Wdll aed tbm d.
5~ dowing a succesion of ohm hrh py." He d P a h n ' s cammenrs ss Sin-
and rhnfts and then, in 1998,into Bank
Q! America, whose headquanerr were
moved from Smt Francism to Charlotte.
cere but mi nwwiwily d&nitivt. Bar-
day would see what it could offer for ch
htistophtr Flowers, the billionzirt
nder of the privart-equ~vh
Lehrnan; if &mww a gap, ma* the J. C. Flowers &Campany and a self-
teiris h e thc W s C.E.O.in 2001. pvmmmt w d d ssp in after & desuibtd 'iou%+ p 2 dance? with an
He hadrpeverfitinwirhhis W d S m o r Tn the m e ofB n r Stearns, the Fad y e For faiIing banks, found himseli;
Zelig-like, in the midst of the d ' s dtsl-
w. Slenda, kspecded, md rum-
ped,-wamth&zlvhow
c h ,and hose ddhmade him a formi-
dable c p n e n t in the inaiclte nloves or
financial dmwm-in mrnc c a s as an
~mfmm~gd&,inothersas
an dinwor.
Flowers h e w Paulwn WCU,having
spent twenty pan nr Goldman Sachs,
and had worked with Bank of America
offidakin the q r with N a r i o n s W
Ht t&d regularly to Mauirce (Hank)
Greenbcrg, the Emerchkf m t i w of
thEgiant inmm mngfomerate A.I.G.,
and did busislesswith &us in h e bur-
ancc industry, apecidy executives at
Germmys A U i m
Earherin thcwack, a B m k a f h -
ica o f i d told Rwrvs that the finn was
mnsidetingbuying Lehrnan and said d m ~
it wnnred him as P pBnntr in thc deat
l k m md a Bank ofAmerica trm h d
s p m t t t s E p ~ m n t ) - ' - h h ~ ma a t
m i d m law officeping over lA-mds
b k s . Its finaom turned out to k t k
\Vest Coast ~ U n R w Sand , once re- had re4ied on cmergmcy powers, be- wm than Flowers had expected. n e
marM,Tve bad :dl ofrhe f i ~ In can s d stowed by the Federal Reserve Act, e x p u r e to risky residential mongages
in investment W n g aat the ~rsoment" hat ailow-itm lend in * u n d and exi- was widely known, bur nor dx fkds $32-
U& comnlercidbanks,wfiich~de- gtnt c.iraumw: when the bans are billion pddhofcmmdal-real-estate
posits and makc loans, investment k d s *wed to h e atiSacri6n* of the Fcd. asseeu, much of it of dubiaus qdg.
mkc capid for a11 m y of h&al ser- JPhhrganhad guaran:ced Btar's d@a- Thcn an Al,G executive abked him
vices, from ulldtnvriting stock and b n
d lions until the d c a l d d tojoin a me&$ at A.IG.'s.h-
offtriw. M managiq~corporate take- bh n d h . B ~ n ~ ~nnd n k PRI
r 11a-m in Inrvpr 44nrhqrtv- ?ArC1ih1- +C. .-t-
.
. ..-, -- -&-Ib,. ....LB2-1:~ 1";":A..& --Lx: ~LI, i u ~ pl
; u+ i du- i ~k)i w~h &&.
: jCj.~r., ~ttumA our,
~ . ofAm& was SMI d~ day befbac.rn enginem a sirnilar
and for t h e m s ~ lBank king s liquidity crisis, the d; of
a commwcidb k, and Lithmsn wrs an Private&&rion,wheffbyB&of disastrous bets made by jrs Financial
intfftment bank, bur Lcwis was in@ A m t i i ~ ~ o c B ~ w ~ u l d ~ & e n , k din Lodon.,'LI.G.
* Products
csstcd in it anyway-provided thar the hm.5qFor Lchman's &Isd me^+ F"rnantial Ptodura hrd brmrn~ nnr nf

uc;.LllJ!~ s uuu &kio. ~liu hu &k a b m tvpm a con- a p10ducr s i m h m vrsurancc: the bujrr

d i
Faulson had utged M and Fuld to
.Bank ofArncric-a wdimn wre now
6%m &errmile h w much g o v m -
mctw msistance the bank would need.
khnwhik*hda$pFesldtnt, Bob D[-
mtlnd, an American, saw Mman as an
oplmrrunity TO inctmc Bardays' U.S.
investment-bankingopations. Paulson,
in their first ~~Mbeen typi-
sotiurn, in order to spread the risk. l n
other words, Wd Srreet'ssmrpt corn-
pctimrs would be ask& to put their
pays d~ company in nhunfor r
of reinhmmmt in the went o defidr
o n a ~ o r & a & ~ ~ . ~ f & e ~ -
r
d i f f u e n e c s s s i d c d a a ~ h r h e l i h d of default incraw4 k1.G. had
mmmon &. Thm WBS d e n t fbr ro post collard with its swaps buyers,
#
rhisintherescutofLbng- #mC+ or countcrparties, to guarantee o'cntual
Management, in 1998, when William payment. A.I.G, had been a pionecr
Mdhmqh, the prcsidcnt of tht Nw in &it-default mp,barely ten ycus
York ~ . m t m r w nhd k s ta addm h e r , and since then had dhw-
 -

mndate than L$rmsli.Githner smd

me tmiier didn't /iws iip t o the feastVr.'
drcds of biions of dollars in exposure.
The risk to A,I.G, from the huge
P"fb!io had seemed minimal, since the
klihoud ofdehdt irl anygiven trans-
action was low. As a result, A.I.G.
hadn't hedged irs own exposure to its
srmp pordblic~,and was camjng enor-
mous pmfits w the business. But dur-
i q the sunvner of 2008, as inamsing
n m k r s ofbot~vwmh a m e unabk ro
pay their mortgdges, default ares rose.
The US. ratings agencies began a
wholrsale downgrade of mortgage-
backed securities, triggwing demands
rhac .kl .G.prwide eutr.-brger mmntr;
of cohreral to buyers of irs swaps. It
wasn't clear how A.I.G. could came up
that A.I.G. needed to 6 d a y t i a t e - ~ ~ -
tor mluuon, but hc a g e d to send some
Fd off id^ Dver to mess h e riruarim.
Raven ~d Willurnstad alw, called
JWIXDirn011,rht C.E.O.0fTpMoqan.
Dimon was even more famfirl. As one
r e d s , "His message was:
- 4 % p p&au1 L 4UL18:b .b,. ..LA--
. <
u-,,-.A, aL.
This
X ~ U S . is urgent."
'Call Warren Buffttt: Flowers told
W d d ,and g a hirll ~ the number of'
Buffar's p r i m phone. "Don't m w wait
one m n d . "
Buffcrta m w e d , nnd WJ1unstad de-
scribed the +&ty crisis. Buffert a s M
mine qu&m and said h t he needert
more lime. Lata, hc called b d m say
Chat he might he intercstcd in somc of
k1.G.'~businesses if thty were for sate,
1 but he didn'r want to get invol\rd wirh rhe
parent company. A L \ q d u m t to in-
vest in compdcs w h m opentioas hr
finance officersreplid *kt's don't be didrirthoroughlyundersrmd,n&tr ,aid
alarmk" that A1.G.was m c o m w t e d . ~ u f f e r t
"AU f know is if you &it pay six bil- did nor r e p n d to ~ q u Ibr
m comment
Iian noa w#k pu'm going to haw same for hiis mount.)
v e t y u ~ ~ ~ p k ~ ~ t c p l i c d .
Robert Willumstad,kI.G!s chiefex-
ccutive, &d in as the groupwas e~ting
smdwicha. Willurnstad, a r e d old-
T
C.E.0.s
hat afternoon, Fed staff me~nberc
calted a numher of Wall Srreet
and a s M them to attend an
ddbgnlcasnd m y t a r c i a g r o u p emergency meedng. brig the C.E.Q.,
m t i v e wha lmt a suwcssion strug& w ~ f a m i be o n ; V h m Pandit,dCit-
had ahways w t e d ro run n Isrgr: publicipup', Brady Dougarl, of Credit Suissc
compapy. H e got his chance in June, Group; John Thain, of MerriU Lynch:
when tfie board ofAf.G.*t itr p k the Jnhn Mack o i M q a n Stanlq; and Woyd
world's largest I tisumncc company- &an&, M s sllcc~ssprarGoldrr1u1
ousted tit cbrn&ls chid. Witlurnstad, hb,As ont v e t m of the Long-Term
w b bd been the board chairman had Capital Mallagernent rescue rrrnnrked.
farmulitcd an a~nbiiousrcsaucmrinp T h a t kind of d l is n-w. e r g d nm."
' 1
1 . r

' i I I I u I 1 I W I IU
~ it. but rhe derenord-
ul~lcrntri~~ h.b. r s made r k i r way dong ~\.ludrrl
fin ankd, dozens ofinvatmetrt bark- tion in tbc Fmarrcial Praductg division Lane, in lower Manhattan, and arered
rn i n v w f n ~3 r d A 1 C
pri~*1t~-~nr(iw t o r * a m PL mr~w of P ~ P Ynrl. F ~ 4 r r JQP-
Nfilr

mcc rooms kbwers and his t a r n wcre had fired JPMergrm to advise Wssance-style t
111mstad b m (Underground.
grwn tku avn mlufmce m m ,where b1.G. mdhelp it r& c9pitaL in the bank's d r , is the L;ugem stdplt.
thy ad some k b G . finance officers ex- That mwning, wdumdm& of mommygold in the wrld.) Thc Nnrr
&aspmadsheet.aa&ngtkcpmt Gcithner at the New Yotk Fed, con- Yo& Fed implmtn~the monerarl, plq
mmpmjs cash flow and liquidity. The wned thar the ratings agencies were at by& Fedffal h r v t B o d inWash-
ash-Awpjcctims s h d A.I.G. to s i n g ta d o w p p & A.I.G., map h p n , and oversea the b b in rhe m-
k in dire need ofcapid. It wrs fmng a soon zs M+. hpdqon h e se- tion's h a n d caprtnl.7 h d y Githncr
%-billion cash sh& by thc foUdHrlng w i t y ofcht b p d e , it wwld p m p r had bcaame president of the York PJ-7

Wedndav, a figure that would riw to more mlatcrd c&, rrf anywhen fmm Fed, after a long c um in the Tressuq
$5billion &-w& and U 9 billion $13 billion to 118 billion. A1.G:s cesh D e p a m e n t , on the rrmmrnendatiun ol
~wetkafkht &is was patenti* ca&mphicwil- m o former Trwty Sccrctarie~Law-
Ram W up from tfre figurs. lumstad rold M h r P a h t he ntcdedto rence Summers and Roberr Rubin. Al-
--,"bed raise $20billion. A.I,B., m knsurance thou& he h d d q p s in h i a n Stub-
a &we," me of the A.I.G. -~,waecwnfdqrii~rnthcFds a d g o v t ~ m ch r ~ aarnnOuth. 3
~ d u a t dcgec
e in Eart Asian M sand
infernatid eco~lomicshvlm t

&feltrhnthelack~dtbe&&robe

into the dhm

kjohns
Hopkins School of Admccd I n m a -

&ir chief financial offim to the meet- sibleruin?

~ n gS. m c d European banks, inchding

m m i q twk piam in a mnfkmoe room

had been higMyvkible. and that inwtors i d . T h e hid v m mld to prcparc for a
hlBdhdWaekp,ifnorapondsr,to~ L L h m a n ~ p t c r P t C r
fait3 d e n k E m so,he d,
haal Studies, kithner lacked a PhD. failure could be 'atastrophiqmand it
.-\ i J , l l F I ..,I~ :, L,,.I-:-,
~ ~

dy. -@ -
I~I, -.. . Anp .. . .. .:, 1.

ivhh Swlmcrs and Banark, s a w h e s p u r p a s e ~ f ~ h e ~ ~ a A~ ~mi n

puncturing his remark with pfinity, mkt.
and h b y injeh.gsome blunt common
a Lehman

Hm*
r Ftd d e n t . But he seernad to ham no he snid, heir c o k t h well-berngturn4
trwbk holding his m in dim$si~ns on a wd-functioning market, m d thc
m,
and an h1.B.A;he W qmience wwld k l y b e impos,tbk to containthe remnwne rhe noa morning.
*
The meeting ended at a b u t n he-
and the

: . I I *:
h, ,
m&to

' C ILL,, I d
C . L h

H m p 6 m WbingALG.?
t 8 A.M., thewall ~ m t C.E.O,s,

LRhmanwasnfttheo~vulncrab6ein- xm~carryinp~~&andaumb&.Paul-
wmnmbank.Emifitfamda~, ~andGeibdtimB+u~lsthe

off thc b u i l d i r lobby. Padson was three working groups: thc first, led by ' mansaction to bcnrht a competitor likc
there, too, ad he mci Ceithner sat at a Gddman Sachs aad Credit
Iarp recranpttlax table, surrounded by asked to vab# Lehman's mub urns
other govemmcnt ~ffichb.

C c n ; , w a d a I m ~ CWE,afbmraRe-
t.

~ntetingover rr, P a h a , who said that,

despite the rescue$of Bear Stam and
Fmnie and Freddie, hert would be no

*,arc,:,
l'athn

MIL*
dh't
.' r 1

d l d b WLIC &NUpkiaild 3dTAbih

name them, but c m y n e
-rw-at q ~ c r r m p y tLw
l Aq*V-Y-
F

P,-rt--r
u * l u ~u! * Udrc;l.ku, uuul w r W t l ~ b V u 3 , )
&sent h m the rn-. S t 4 here was
Ijkely to be ;lpool ofL t h w h t
mmctnqwswould not mke. I t d k
to the C.E.0.s in t h e m to finall6g
hat pool.
'>: . T*
X

1
uras Bardays?
t
m ~~n td s p r n s b i r t s , r t -
assembltd in the Fed confirencc rmm,

.4 nurnber of the C,E.O.s brought w h o ~ b e n r x t w ~ a r u n , m d p m -m ~ b c r p t r b ~ a u b u t t h a t n r

pti3timwitfiBaakofheriawerp con-
P h n reminded the C.E.0.s that tinuing. I n either case,here hd to be a
Deutsche Bank, R o d Bankof W a n d , L c h m a n w a s ~ t o o p t n h u~p~r i v a ~ m h t t i c n w E o r d x ~ ~ t s .
and BNP Parihar, sent their ranking on Monday morning, so t h y had just
officers who were in New Yak. The h y - q h t hclurs to resolve rtbc aisis.
The &f aecutivee werr. unsure h w
expmsive that solution might be. Aml
Geirhntr divided the C.E.0.s into why should Wall S m c r firms finance a

Dimon spk up. "Look,we're all in a

and assess the amount that c firms fix. This is mrn&ng we have to do in
The chairman of the Secuities and \ ; v o u d h m ~ . T h e m d , w h i c h chebestintemtsofthe~~finanaal
Exchange Comm ision, Christopher indudad M d Lynch, Citigmup, a d $)am*
M o p n Sranky,was [told to mnaiderm- G e i k qph broke the group into
publican crrngmgman who had repre- ious structum under which Lehman teams, sarylng that they dmvene
sented O m n s Cuunty, California, for oould bt soM and its hd ZXSI
m z n my a q wag on hand as a rcguh-
tor. since Lehman and other m c n t
b& are subject to 5.E.C. o v a @ t .
~ e i t h n t ;thanked rhe bnkcss for
w i n g on short notice, then turned the
mpid in sevvcrd hour^. When hey did, the

NOT-QUITE *EMPTY- ENOUGH -NEST SYNDROME

. .. . I ' I
I
,
id

Padm now achowladges, as some

tn the r o m mspctd, that tht p m -
meot was mare an~enabkto hnding a
fcscuethanitlcton. Wcsaid,Wopublic
moaq,'" he told mc. W e said dis pub-
licly. We repeated it when thtst guys
ianrc in. But to ourselm wc said, 'If
here's a chance to put h puhk money
arad PW a W r , we're open m it.'"
Speaking for thc Fdcrdl Rcscme,
Geithner noted rhnt Lehman's trouble
 bankers reported that theyw m thinking
a b u t esrablishiig a revghing line ofmdir
to suppon other hanks that might find
t h d m in Lehmads @camenr. Bur
Geithncr had asked them to faeus 41Lc-
han."You guys haw got to try h&.*
he insisted. Thro~~ghout rhe da>swhen
manbers of Lht various p u p s passed in
the Fed corridors, they a d d one mother,
'Are you tr).ing harder?"
John Thain, dMurriU
Lynch, worried, like rhe
othm, that a rcsohrtion of
the Lbrnan crisis would
just shih the crisis to the
next most dncrable bank
wbid mightwtil tx M d Lewis," he said.
Thain, who is b f q - f - r ,
up in Ankh, IIlinojs,
and fipr came to promi-
ntnce ar Gddman Sacb,
wfmhcUq~dly.
Heirttimd~-jmd,
with thick hair and brown
C?'CS and a resemblance to
Chk Kent Ht s d o d m-
gincering ar M.LT. and
I M R 4 ".Ern
-rr*;*.le 4 .
I I
(with a f 2 9 . 4 - d o n contract). Each man w ~ u l ds u d O'Nd Wantingro main-
also xceivtd milIisns in M e d l s t d ro tain some continuity, Thain kepr him on
replace his Goldrran holding. Thain as president.
hired rhe Lm A n g c l ~dmramr M M
i Earher &at %&miiig,Fleming had
Smith to renovatehis o h and adjDining called Thain a r home, in Westchestcr
codereact rooms, at a cost ofmore than a Couny.For 4, Flenling had m t l d
million d o h to prepare various cmniingenq schemes
It wasn't Thds pay at his spending, f ~ MeniIL
r The best hope for a possihle
tt!ough, that anno)& M d s rank and m c r was Bank ofAmerica, which had
- rwice rried ro ger MerriU
A jnm merger & but had
been rebuffed. Now that
Bank of America was ne-
gotiating to buy W a n ,
Fkrmngwascvenmorein-
si9tcnr. "It's h e rocd Krn
In Thain's view, hler-
rill just needed time far
the market to stabilize in
order to generate more
earnings. Hethought that
Fleming sounded hyteri -
cal, and suspected that
Fleming's sudden eager-
ntrs ro sell the compaoy
reflected, at leasr in part,
-s:c?mcr,? z~h::<rz
I . , . I

head ot W s complex o d d e r . Fleming>for his

mnpp operations bcfort part, suspected thar Thain
bclngndehiefopenlig was resisting his s u g e s -
o&by h u h . HeMto tion in order to prom his
h c ~ r n cchief executive of job as Chief mcutivc.
rhe troubled New York
Srwk Exchange, success-
hlly rook it public, and
gained a reputation as a
L aces that day, Lhm:~n
oficids mct with the
team led by Goldman
~lmprwnd~. and Credir Suissc, which
Mcrtillwasalsoinm- was rryjng to qum* the
blt when it approached -1 didn't wme h t o sell /ht campy,"john Thn, "holen in Lehman's bn-
~ i n 2 0 0 7 . I t h a d ~ ~McrrilIL~d,iddBanAfA~a'sKktM.'Thutilancesheet-theamount
fired Sranlcy O'Ntat, w)m, udatl3n intpffslpdi n , * M said by which IiabiIiries cx-
as chief euecuti% had made d a d m t s . The Lchmm
M e d one of the J a r p x people discussad h e p m b
underulirtrsofm o wmil &.~Jt was h h - a d ~ his fbrmer Goldmm lems on the Mmx b e e t , the quPriy of
w that proved disasn~us cokgues'--rmperiur manrser. "Hemudc their assetr, and the speafics ofh e liqwd-
' ties, a st ra
when the housing bubble burs. M d s a point of making ir dew that the M A ity crisis, incktding a $5-&ioncohttral
board ofTed Thain a S l 5 - d i o n s i p - p p l t w m i d t i o r to thc Wdman peo- cd thar week from JPMorgln Ghast.
- Tr. I. 1 ;.+- -1. . ---:,: , ,+I*- f-.
--?! %.-4
I ' (
- f '7
,.: , VT,. ! * 1 ;-.I,:
In L)ecernber. jusr as rhc subprime cnsis ws d q i p o h r 4 m the quaIity ofthe in- A h w a d , the Goldma md Credit
was d n g the firm's b h m sheet. frilBmctmand the pPIt at M c d Of Suissc team told the C.E.0.s that the
Thain immediarcly gtaook up M e d s he had gaod reason to be, They *hole"v d to m n t to tens of'bid-
h i & M dturc by Etcruitingw, of kis were in the p- of h h g tens of bil- lions of dollars. Lhmn's comrncrdd-
former c o l t q u ~ from
s Goldman, with Iions of dollars." {Thain disputes this d - m a t e assew in @&, wrre &rg
W gumntetsThomas M o n q , as h e tia an) c u r i a l m the firm's baoh at a far higher
hcsd o f & M sslts and d i n g (with a re- The h i g k - d n g M d OW to vduc than was tealis~c.As one Wci-
p o d py prmckage of$39.4 d o n ) , and sw&c the mamition was G w Rm- pant pur it, T h e air kind of went out of
Pmu b u s , as the had of global mtegy ing, who some at MerriU had thought the rmm." Thain was particularly un-
netv-ebJWmgan ms M e d s deariog
hank too.
):i hrr;lrj;nl*'v lALr
1.8, i dl&:r & & ~ d ; l c dL l ~ c : u l V h Q p A l j ~ r r L s
with P m b u s , one of the Goldman
hnks he had h i d aad P e ~ Kelly, r
h l e r a r general counsel fbr operating
bu sin-. "J dlh* thejle lPeayr going to
kt Lchianp unk; he aid. Ramsid-
eri% his d k r M d F I d g ,T h i n
stepped outside the building and d e d
Km Lp\vis a t home in North Carina,
and told him, 4 think we should &KWS
mnr smtcpicoptiahs."
L ewisimncc&tdyAew~oN~cwY&
and a few h o w kter a m & the
Thain arrived at Bank of
d o ~ when
r
P and
A tnerica's corprate apartment, in the
TmeWarnerCentcr.Thcwommwm +team,iolcludingthfimfs&t,
alone. W c i e htemttd io having Bank
ot'herica buy a 9-9-per-cen1 st& and
pur at our +al a multi~ion-dollar
credit fdry," Thain &lid.
'I'm not interested in a
s t s h s mid.
" W 41 didn't come hrre to sell the
cot npany,"Thain replied
' h r ' s what Tm interad iq' Lewis
said-
Lewis pointed out that Bank oi
heria,despiw its sh, m'tmu& at' uohwnentinapotcntidLdman w x c .
a force on Wd Sweet. In Merrill, the Darling M pointed out h a t authority
co~npanvw d d t s r a &bal pmmx in owr P h&w d i d nstcd with Brimin?
in weith mmageruent, a d M errill's
vaunted wny of rerail brokers. T h i n ,
among others on Wall S w t , lilt thar
s other Bank of A m 6 em-
L ~ w iand
....
I I
I..-\-., . l . ~ Jlc,
n e w accorded the deference shown a
JPMnrgdn Chase or a Ci-p.
Thain ~=ttd that they assemble
teams t o pursue both options-the
9.9-per-cent d x wid the
lillwis w e d that ma+ ~siwuldn't
dl a v n e eke abut a potenria dcal
"Tw got t~ tell H dPadson,"Thain
$.did. He was worried thar he would tx
bhnd for ddeccing Bank of Anmica's
inrereet away bra Lchmm.
1Ve're not going to pursue Lehrnan
Brorhcrs: Lewis d. Vut go ahead, you
fan tel Paulson."
WnThainprtothcFed, h e W
Rulson and told him that he'd met with
Levis.
" C dW n said.
mb&m~,theabn coniidencc in the g u m r a . business
grew ten& s some pointed out that it would mtinue as usual Odwwise. m-
81FTmr +h.*Tw,*,.. 16. ,,+I I q ' ~ l , ~ l 6,.
,. . 1 , 1.. .: ' +
7 , . .
7 ,
p s i splcdcl IV tile w~k. &j t ; v & ~ -
ti^,^ wuuh be large, ole nsk w a s rela-
p ' s Jamie Dimanand M o w Scanlefs t i d y h. B r i d qdations q u i d a
J o h n W p t i qa d r e d ' m s n d d t approve such a guar-
sharebolder v ~ tto
tompbiuc'ssprwd,dhtfircd antee. Sine B ~ ~ Jd ' E need to s-
w a u M h a v e t o l x M e ~ L p b . &tht cure a guamntw fbr L e W s operatiom
~ t h a i brda
q up, Mack p k d 7Brlin h a s bnga;samwthbefweadeaIdd
aside d proposal rhat *cy mat that bc~thcBdyspcople*IlkdWar-
Ewning. At about the same time, Gary en Buffen. B&ws men&1c,upma
Cohn, Goldman's president, told Perer pint. T could rake a I d at providing
h s ~ ~ r n i g h t b e i n r emaybc
d fm b i n ofpmteaion," hc said,
i n buying s 6in MerriU. Kraus and but he d d n ' c mnmit ro more.
U t y agmd to go to Coldman's head- M t e r the 4,the Barckys bankers
quatters +
the naa'day. md *rs d d d that it was point-
lessto p m e matter, If thtb d h9d
had
a&n Gci&na
the phone hat moming wiph a Bar
q m h on to announce a piecemeal parantee, in
which Barclap hanod thm billion,
Buffen he barn, and so on, invesfm
Bab Diamond, at Barclays' New Yolk wouldn't k d. No *re entity
headquarters. Barclnys' C.E.0 .,JohnL wuldmeanunlirmredexposure,m
Varky, was on the line in h d o o . As matter how &@t the risk Only a gov-
hhaodmthnawq&Ncw e m m c n t d & t h a t . F ~ & T ~ e a -
9.9-p-cent Yo& Fad,their staff mcmbers g a k c d s q or r k Fcd buld jimpl) UJ d t r ~il
around. w u backing Lehman's o h t i o n s until
The prcvjousday, h u b a n had & the dd c b d , or und ttac sbarehoders
wi tb his British counterpart, fistair approved,Thc Bardays bankers mre
DrrIurg, the Chancellor d the Exche- obnvincedthptwlehagumtce wouldn't
quer, to makt surt thdt British authori- Cosr U.S. CBX p
F Wi#Wg.
ties were d d c birh Ha+' in-
A s chance would have it, w f i i the
New York Fed w a s addressing its
v b-
w l m fimnrial chalkn- ~ i n rt-
r' 181 . I . t 1 1;l ha I
B d ofE + d , & d m were being dead of&
and tfiatBriW rtgu-
lators would be a&hg tough questiam and enovaad. Geichnet and his staff
a h t risbfbc thc British tqqw. Paul- WTC warking out d t e r n p y quarters
m turned to two OF his T m w a i k . on the tkittpmth Fkwrrrh.w lnnlr~d.e n-p
' 4 1
r
r j b!c ~LJI,. 1IL ~ULZ.. t , ~ 1 LU1 ~ i l h i LK
i 11 i d ~ l ~ l f i ~I ,11&
, llloiiug, tliq HICLW I ~ J
American~hulsonsaid ahe ubiquimus Christopher F I
m and
Now D i sprrke Cor the British. scnior ofid& from Bank of America,
B - w r tomakt mder Eor were h e r e to discuap the L b
Ldrmul,he ' W i t h d d r i o m . takeover. They had stayed up dl night
&. The p h prwided an dqm d t i o n m s c r u I.&mm's ~ h k s , and d~ pic-
~ ~ ~ M ~ t t a e y l H o u lf i d r r rrh at d g w ~ r ~O~n~et B
. ankdof-
m a i n i u a k h m P n m c i t y , w h i & d ~ ica official rold Paulmn and Ge~thner.
dubbad Newm and owned by Lehman's We m't do this wirhwt you.* He q-
~ ~ b y way- gtsted rhar the government beck a b u t
l a ~ ~ l m l dht d~ .3 . would
thing &.The proprld would leaw a $M)biaiondLchman'sswrbkd~.
s h d that B e edmocd at 815 or WhenFlowerswas]*lving,hetumcd
$16 Won, for Hrhich funchgutrwld h m to F k h . 'By che w v,"he sad. "Ha*
-tobefcund you k e n watching N.G.?'
B a r d ah ~ w &at on M d y morn- Why, what's wrongat ALG .?*Pad-
ing someone would have t~ p m n t c c sonasked.Cdthnuhadmtn~nadthat
Lehman's d e b until the d d &ad, as &re were sonaeliqurditgmbut Paul-
JPMorgan had done for Beu Stcarns. son had k u d & the N e w York Statr:
If someone did so, d n d investors had immce m m m stepping in,
 .J
.. , .. ' 1 1 0"- " - ' a ' ""

ell, you should r a h a look at and o p i a b l e de* in me h e oT*r Amcria to agree to 929 a share. a re-
this," Flowers said. and pdcd out the invesrmcnt portfolio. Widurnstad csti- markably high price under thc circum-
spreadsheet he'd got fiom A.I,G. the mated thar A.J.G. needed $40 binion, stancts, 'If t h y hear h u t a Goldman
day kxfore. twiae dx amount he had mentioned ear- Sachs did, t hey3bt spooked." Fleming
They went back into the ofice, and lier. To raise thnr kind of money, he d w d to release any ofhis team. Shar?,
R h n d e d the numbers. F h m needed gwwnrncnt support. Gtithner afterward, Thain called Fleming. The
poinred out rhe looming multibillion- said that nene would be brthcoming. tone oftheir -change rwi iq.'Get p-
dollar *Ehortfd." ple d m here,"Thain ordcml,
"Oh,my God!" Yaulson said. Fleming pdging1:t a g n d to wnd a
He and Geithner asked their sraff couple ofpeople, hut there u.as 1 s dun
people ro do some fast research on twenty-four Irwrs remaining M o r t the
RLG.,which, asagiant i n m c e com-
pdny,wasnlt regulated byeither the Fed- W hen, at 8 A.M., John Thain re- markets opened, and Goldman, a mdi-
m edto Ken W s apamnenr tiond Merrill rival, was liable to walk
eral Rcscm and the F.D.I.C. or the to pmc dx rwmc o f M d Lynch by a w a y ~ i c s k n h g o t a g o o d l o a k a r
S.E.C. Although its insurance opera- Bank of h e r i a , he s e n d that Lewis M d s b $ a n c e sheer. A Bankofher-
tions were covered by state insurance h a d p w n m o r t ~ t o m d c e a d c a . A s ica d e d d coUagse as wcl. Tcr some of
q d a t m , it turned mt that A.I.C. did Lewis offered Thain cob, he seemed thm involved, $29 a share mri bqqnning
have some federal s u e s i o n . Since it entranced by the pssibiity ofinstantly ro wrn wildly aptimisac
owned a smd sdngs-and-loan, its op- becomingAmeh's h r p t rerail broker.

Thrift Supemidon, which regulates night's meeting with John Mack and P
era-ddonswcre repomd ro the Ofice of T h a i n w a s g r v w i n # ~ o u s , T h c ~ w s aulson had been at his desk r i r m
swm, vying to otganize the day's
S. & L.s. But, when Fed officialscaUed other Morgan S ranley executives had schtduIe and mectinp;with Treasury
the O.T.S.,officialshere seemedb 4 - madcitdearthath [organStanleymdn't m.At b u t @t, he tooka call from
dcred by the qumions about AI.G.*sli- maw fast enough, Ht hadn't yet heard fohn Varlcy, &c Barclays chairman, in
cpidiv. A.I.C. Financial Products, thc anything about the Goldman meeting London.
mtcr ofthe problems,was not r&ted hen under my. Bank ofAmerica might Hector Sanrs, the chief e~ccutiwo f
by the O.T.S., or by any American en- be thc only option*Lewis was emphatic Britain's Financial Wca Authoriy, felt
tity. Although the 0,T.S. had m e d aboutonethug. W e ' r e o d y i n d i n that he had made it dew to Bardays d ~ t
A.l.G.'s board about inadequate risk buying a hundred per cent: h t said the F.S.Ad d not ~ppwvea deal thr
wtrswtrs+t, no one in the government ap- T h e n it can'r be a lowball price," put 3axIays at risk, and Bar&? had
pars ro have undersKIod the ptential Thain replid rcadily agreed. Although B a r d a ~119s
s q e of chc problem. The Fed ofieials Lewis dhim that he wasn't oy- wrll capitaizsd, and rhc ESA thought it
needed to talk to R o k WiUurnsmd- ing to ~ M drm lthe chap. would w r h t r the crisis, Sants did rmr
"We'd h e r get them in here this &er- M e r ~ t h a l f a n h o u r , ~ k f t f o rbelieve that it was strong enough ro a b
noon," P h n said the Fed. When he arrived, Kelly and sorb dl the risk Hewonid that do* so
When Willurnatad and other A1.G. Kraus rold him rhar G o h m had pro- might aigger a crisis in a d d e n r e in Bar-
offidds a r i d , Wiumstad mnfumed posed buying a c).9-pcr-ctnt stake in days that couU become self-mu ng.
k1.G.'~liquidiry crisis. But he said that Mertillandpmvidinga 5 1 0 - W n lineof Bu&p is one of Britain's largest rcrd
he w a s meeting with various private- c r e d j t - j w w h a t ' i h a i n h d ~ n ~ bids, with millions clt'dqmirors.Smts
equin, h s . Despite the growing eash for originally. Goldman wanted to srart expected winethmgsirnilar to h e kind o f
demands. A1.G. srill had enormous as- cxaminingMerrill'abkasmaspas- backing that JPMorgan Chase had re-
sets, iwhtmg one of the woMs 1 - t sible. 'Let's get this gogoq:Thain mid ceived in the Bear Steams d&. It didn't
invesprccnt portfdk Bur many ofthtse Kelly d e d Greg Fleming, who- in marter to h a whether it m e h m the
assets were in Af.G.'s insurance buii- d r o w n nqotkingwith Bank a f h b a r k s meetingin N w York or tiom the
nesses,which- required by the states ica, andaskedhim toscndaaamof MFT- F 4and he qyd Callurn blcCarthy,the
to maintain assers f i d c n r ro meet in- rill bankers to the firm's hadquarrcrs* chairman of& F,S-4..ra m&e this dew
surance cbims.ThtNewY~rkinsurancc downtown,to hell, G o l hwith is due to Geithnef.
commhbner ww at tW.G.'so f f i e and McCarthy med tn convey the Brirish
New York's governor was gening in- concerns to Geithner in a d lon Sunday
volved. The A.I.G. officials were opti- morning, mcmioning the issues about
mistic about finding a way to free up Barclays' capital position. Hc also'tuld
some of those mw w that A-J..G.could Gri~hrmd w r the FAA lacked the au-
meet the msh demands while it pursued thority to waive the shmhofdcr vole re-
o k ways ro raise apid. quired for B m l a t ~o guarantee Leh-
Later h a t evening Widurnstad d b d man's opastions, Bur perhapsMcCd-y.
h e hTew York Fed. He knew that a LA- in his understated Brirish manner.
man bankruptcy was likely, and rhar it rn cbpticd Tallurn, you haw to de-
ddr.'' Geihnef siJ."Are you ping ro
appm h i s or not'. Youk t~otsaying I-Q
)punrenot saying yeamHe felt thcy were
talking in &&=
One of the British pattidpanrs ~ d ,
" W e could ncvtr get Jarity" fiom the
rlrlerimls.
When Cicithner briefed P h n and
Christopher C o x an the exchange,
Gdhner wds visibly angry. Why were
the British raking h i s &st& w late in
h e proeea? Githraer said that he had
asked McCarthy three if he was
~ohlgrobIdckthedddncvergma
sfmight answer.
Cwc d c d McCarthyand said, Tell
me what your view is." The normally
affable McCruthy seemed cool and
detached. "Myresponsibility is that
!VL uiidcr=tilnJ illr 11iinp thrr iwt
to be done: he said. -1 don't sec them
hap-g."
Caoc reprtcd to % h e r a d Paul-
sQn,*Hem'tbudge."
Paulaan p a another d to Ahstair
Darling, had bcm in @a coneact
with Prime Fvlinisttr Goadon Bmwn and
MKmhy. - .-
I .
'. I I
>

ad%"P a h 1 1 d. $car Stcmm It was obvious p u needed said. TVBS this tm per cent ofthe brain?
*You~rnundcrstandwehwa~JP'Morp to makc th ar hapgen. Now I don't how. ...Bur rhc thought was
sponsibiy to rbc British timpyer: Dar- we didn't have ajPMqm. So oauld we thm
tnffcepa just recapitalize LAhtnan and keep it At noon, S m m Shafian,%seniorad-
- q + - > - ~ ,, ;,-,.>
7 % ~r u 4 n l . e mJl: L p q r ~ vrhr ,-,+?? p.-l-
-,A,. r. I :? t .,.. * T
,- #! T * -

I 6 . 1 q " I 1 ' .

rtmn a yurnt ot. colrtsiitlw~.h ~ u ~h ne waay m pr- A here war no reason

American p i n t of&,
a salid p@
thehe was naer
that they auld respond
to. The Brirish (and some on the h
ican side) maintain that the issue of a
dmreholder vote is a red herring. T h e
british also fell thar they werC never
presented with a deal that they could
respnd to. Y t noi the h ~ &pint
r>fAn&-An&an rchtio-ns,"one jxr-
son familiar with the conversations
sap.
L R W s C.E.O.,Di Fuld, had had
er-
to think our mcmty would restore
mntidence in hhrnan. As G Ethner ~
said, you cm't h d inta a run. So rhtre
were d l y two issues: legal and pacti-
d.P a h n insism &at we didn't haw
the authority, and Iwon'tquestion
dm.But, even jfw did have the au-
tbority, it wasn't practical. All &c Fed
money in the dwisn't goingto stop
a run an LRhmanP
Referring to a Lchman fdure, the
Treasury official said, *Weknew it
w L n rhe chief e c u t i v t s of rht
Wmetapinchardayaethc
New York Fed, &cy e x p d G e i h c r
and Paulson to tell them exactly how
much they would be expected to can-
tribute to a L e h w rescue. Instead,
Paulson, Gcichner, and Cox dl laokcd
grim as they filed into the room, mslild
by various Treasury and Fed smRrnern-
bers. "The Bardays deal has falen
through: Paulm 4."IOUshould ex-
pect a Lehman bankruptcy.'

-
m n t h s to find a buyer and Wt done
so. Now that Bank o f h u i c - a had set its
q h c s on Menill Lynch a d Raiclays was
-hungup, ttreanlywy to
k hwould be for the g o m m m m
essentially hke an ~mershipstake-a
step that w d d m t to n a t i o d h t h
and one f o which
~ the governmentsays it
did ~ r nhave authority.
htheTrcasuyoffidald~bedthe
would be -a At b e same: time, after
months ofturmoil, mpnc still owning
Lkhman s t d or commercialpaper had
to bt considered a s p r c u b r , Pahaps
investors would stop
g w t m r l t wwld bnil out
~~ h t the
my-
ward financial instinstion and adjust
their risk- taking accordingly. *Every-
b d y in some pmt oftheir brain *ght
itwxsagddingforLchmmBmth-
Hastily summonad Sate that atier-
ndan ;a the New York Fed, M w e y
Miller, LeWS k d bank~~ptcylaw-
y"?joined a grwp of h a -=-
t i and ~sfid& from the T r q , the
Fed, and the S,E.C. Tom Baxrer, the
general counsel br rhe H a v York Fed,
hew by reireraw that the Barclays
deal had Mlen apart. T h c was
~ no res-
cucforLth.

-
situation. "Tht madd had d w y been em to gb under: the Trcasuiy o m d
i W s ms q ? Milk asked.
the r
Mw~wTww
- -a - 67
. -
+a 4 -* m..
 The nun step rvas banhprcy. You
have to tile by midnight," Bmer said.
MiUer and his lawyers hadn't even
nmd drifting p a p . T h e day More,
when hc heard from Fed officials, he
1, 9,: .. > T .;, . , ,.-,+
"You don't realize ihat p d r e say- dash for assets wor~dwide."
ing: Mi&r argued. *It's going to have
r disabling cffccr on the markets and
pany had to file for bankruptcy before
the m a r k op~ncdon Monday morn-
ing. T h e alternative would have been
h," Bmcr said. "Everyone would
bh o r n that the ~ k e n c P rescue
s to interfere in the board's dcision. In-
LC,#+- h7.J T;:?CI.lyiI?,{h7~?h7-!7
As Miller, the bankruptcy lawyers,
and the L~htnanoficiala rttumd to
had put p m on Cox to call the L h -
man boardand cnwuragc Leh~mnm file
for b p q immediately. Cox feh rhar
ir w inappropriate for the government
T - ~ J+P c t ~ p c c r r tl h ~*!-t I +mm
had a "gmve responsibiiry,"a iiduc~av
duty to shsrtholden. He told them thnr
the Treasury and the Fed Mmd rhnt

As Lehrnan 5 b a n h p t y wus being negofiated, 'wordp a d that the beadgr~artmwould k loclddmt~

and its rontmf~ seized Ernp/oyeustreamed out 4th bsrtliin~,wring oftkir~onalbeIm~~~~ps,

destroy confidence in'the credit mar-
kets. If k h m a n goes down, it will he
Armageddon." All the government offi-
cials lscd out,to discuss the timing of
the bankruptcy, leaving rhc Lehrnan
officids and lawyers to speculate abour
their fate. When they returned, Bawr
told him that rhey had not changed
their view. Lehrnan Brothers should file
bv midnighr.
M y ? ' ' Miller persisted. There's no
way that can happen. There's been no
pepararion .* Raising hisvoice, he added,
3%just wnt tn underwand.*
An outsidc lawyer for the Fed rold
MiUer that he wasn't being constnrctivc
by conrinuingto argue, and B m r agreed.
T h e decision h i l ~beenmade md it won't
be misid."Baxfer said
Fed oficjds didn't feel that they had
irme to discuss the weekend's wenn in
Jerd with Miller. Their goals were to
make sure that Lehman officials and
rheir lawyers understood that there
would be no reprieve and rhat rhe com-
Lehman$ headq~~trters, in midtown, a market rronditio~~s w r c such tl~arwhat
bearded man mas pacing the sidewalk they did would hca* ,fiect the market,
wming a p W that read "Down with and the timing was aitid
Wall Smxttm Word had sprcad chat in rhc *Are=you directing us to put Lehmn
m n t ofbankmprcy the M d h gwould be In bankruptcy? one d i m o r asked. Ctxx
lodred down and it, contentsseized. Em- said no.Then there u.asa pause as hemn-
ployea wttc m i l i n g our,curying suit- ferred away hthe pl~one.When he re-
-, putlng rolling bags, a d n g off their rumcd, a minute or m7r)htet Cau said.
personal Monginp. "No, thc ultimate dcrision is \.murs. \\'e
Whcn the group reached the board- can't interfere in corporate gwrrnancc."
mom, on the hiq.-first floor, cfic dirtc- Baxtw added, "But our preferenmwas
tors were heady rite.Mer o + made very dmr today at the Fcd."
briefed the board on the government's After an hour of discoss~on,the
d c t , Dick Fdd. the C.E,Q.,shook fiis hoard voted unan~mouslyto file for
head. 7 don't know h o w this happed," banhprcy.
he said. Another rlirecror asked plain- Fuld said, Y guess ths is p-y ."
tively, T h q W c d out Bar-why nor
usy FulBs stcxlerary am in and handed
him a m."Hala on," he said. "Some- A T.G.5efforts to raise mpitd or free
, w e r s tiom the regulated inhut-
thing unusual is going on. Chris Cox mce companies stalled as the company
wants t a a d d r e s s d ~ e M P kept incseasingthe &marc ofcheamount
The S.E.C. c!lairman, along with of capital it needed. I Yudcrstandablv, rm
Baxter and S.E.C., Fed, and Trcmry one wanted to conhb~ire$20billion. only
sraff people, was put through ro the to discover that it had wished as A.I.G.'s
@rat rhc centrr ofthe table. Paulson a s h n d s continued to soar. But, h e r
..!I- more hR ~ days D of nearty round-the-
tilt dobc due ddpnct, Fimvkrs and his wl-
x r l ~ werea ro make a propoml to
t'llt rescue A.I.G. Flowers had enlist& rop
In- officialshmsULianz,thegiantGermdn
,Ird insurance company, who had flown to
.I"' NcwYorkhtdaybef;o~.At3P.M.,Lhty
hat inet with Willurnstad in the cotlfmncc
b bdt m m outside his of&.
Flowers proposed that his firm
and Alliam buy AJ-G.fbr $2 a dm&
(A.I.G. shares had c l o d on Friday at
nveh~.)Thcy would acquire the assets
ofthe subsidiaia, but would dto be
insdated h m the liabiities of the par-
ent. Flotm and AUiam muidcontrib-
ute hve billion each in new capital.
Flowers's offer was co~~ditioned on re-
ceiving Fed support.
And there was mother condition:
Wiumstad and A.LG.'s top manage-
ment would lx replaced immediately by
AUia1z w m w .
w a d thqht dle p. m. p d was
l i t~
iaUglldll~~. i i a l i m r i v w ~ cI ~U his
~ Lt't& Aawys ~ L h ~ l t i n wurlrulg
&rts md asked him to ?me.
T hat&nmqMdLynchwded
out the &mils of the company'ssate
to Bar& of Am& It inrobed no cash
but a share exchangethat did indeedd u e
M d at M9 J share,The M d Lynch
boanl. meeting by phone, a p p d the
deal. JohnThin & ICm Lewis with
the new. 'It was unanimous," he said.
You have a deal,"
Around 730PM., Thain and his en-
tourage walked from Menill, on Fifth
Avenue, to the offices of Bank of h e r -
icn's legal firm. WachteU, Lipton, Ro-
sen gL Kam, on Fifty-second Street,
where Lewis and o h Bank o f h e r i c a
executives were waiting. Bank of h e r -
ica's b o d had & unanimously ap-
~ The 3qrrrill
t h rJr,-l Lqnkrre
-
--mm.r4
--I- JL .+.IL.c~c..I
+ U L I *CIA)
-&~
would soon be joining. "It was South
versus North, t d t i o n a l banking-blue
collar vem tht ~
of the uniww," one M d p-hcipmr
bthe masters
~ B
re&. 1 began to get a hint of the re-
benmlent toward W d Sweet. This ac-
quisition was tinged with resentment
that went beyDnd the numben. It was as
if rhe tortoise had wen the hue, and
they were not w q p d at hiding it."
Ffmvcrs had just arrived frrrm A.1.G.
ro d&wr a fairAess opioion on the 529
prioe for h k of h e r i c a shareholders.
Given &at it was a st& deal-Merrill bummer he ~ n c wase than like an exec-
shareholders would receive no cash- urivt ofa m e d n~onymuketh d {
Bank of Amuiaa also had m e pmec- ~ e s u b j m t h e y ~ w a s t h e L h -
tion. If pmd rxlnrket coditions demi- man bankruptcy. The Bents' money-
orated, and Bank of America's stock market fwd owned hundredsof&IU
declined, the prju of the Memill deal of dollars of Lehrnan debt securities.
would drop acmrilingly. Flowers con- The eMtr Bent, dong with the firm':
cluded that $29 a kwas a plausible late co-founder, Henry Brown, had in-
price. (For this amim, which has oubse- vented ahe maney-matka bd, in 1970.
qwntly bcen w i t k i d , Rowers and an and the cornpanis Primary Fund haa
affiliated h u were paid $20 m a o n k g u n o p t i n g in 1971. At that h e .
by Bank d k m ) yields on bank deposits were cap@ at
A m d @ t o a c o m p h t h ~by~ about h e jm cat,but short-term U,S.
the S.E.C.,the apemtnt a h includeda - Treasurybonds, which could be aaquired
h e n t , not made public at the time, only in tm-thousanddoh irwements,
that authorized b;nuscs to l x paid ro yieklingerght per cent. Kow, duds
Mmille m p w fa m. Even dm& m & n t d B r a w n , e ~ n s m a l l i l m m
Merrill's~wertn'tyetlaMwnforthe could participte in the higher yields ot
full year (ultimately, the hiost more T v bonds by pooling amts. T h e in-
-
than $27b h ) , the b e n t d h d mmmt9w m dm-& and siwe they
for bonuses dm *do nor cxoaod $58 b:il- had brt-term mamities &err w s little
lion in value." Bankof Aoltn:a risk b r n chanpginterm mes.
now saps k t the dmmmt
closad for " m m p c t i t i v e ~ n
not dis- In addition to U.S. Treasuriw, m e
mmieymarkct funcls beean buving c m -
,
~ e d out rnerciill paper-rtorr-term debt t h d ~
the details, Thain and M s went to a crrmpanics we m fund their operatingex-
dcoderum m m to await news that p e w . By September of 2008, money
they dsign the mcrgtr dmmmts. A &t funds had kcornc r 135-aiRion
bottle of chilled champagne and rwo marlet, and many large coqmations had
ghws had been y l a d in tbc mom to m e to reIy on them to meet their day-
toast the mmphion ofthe dad.Thain t o d a y m s h t w a d s , s u c h ; l s ~ ~
Eelt thathhddone r h e h h c d for Untikt bank deposits, the funds weren't
Mdssharcholdcrs.Ast$the@, c m e d by I c d d d e p i t insurance, but
JlNVig grtw impatient, and d e d swieral t l l c y w e r c ~ d a s e q ~ d c . A n d !
d m e s t ' o 2 s k w h e 2 c ~ p a p t r s ~ e r t . ~whynot?
- Inhmyears, thenet usetduc
d y ,just More 1 M., they arrived.Thc of funds available to the public had never
rwo men signed, and then poured the fdcn Mowadokasha- hpthet-
champagne. Neither one &d +g id possibility known as *braking the
about M F future with Bank of Amtr- bucknMany funds caniod check-writing
ica. Y Imk f b d to a grmr partnership privileges, helped to finance the fbdtral
with M d Lynch," Lewis said, raising debt, and provided large corporations
his glass. He grim& The champagne v(ith an important swrce of liquidity.
waswarm. For years, the elder Btnt had insisted
. I ...* .1.
,1 .-
that money-market fundsshould w&c
T** - t . It ' l
~ L . l l r l L d l ~U I
a LLLkUhi, Lur 1.1 *a
other firms made hugt profits, the Pri-
rum R Bent, Sr., the chairman of
, Reserve Management Com-
tlie
pany, which ran the comtiy's oldest
mary Fund b n buying highly rated
commercial p a p as d. From N m m -
ber, 2007, dmugh the summer of 200s.
morpgrdthnd,had@arrivadin it k e a s e d i
s of Idman se-
Rome, whem he was planning to az4- curitits. Th& in pm to the higher
brate his a e t h wedding anniversary,
yields from such assets, the Primary
when his son, B ~ L Btnt T II, the firm's
Fund's one-yea return was four per
v i a 4 d r m a n , called him from New
c e n e b w the m p a r a b l e rate fw
Trtasurics, and h& even by money-
York. Ih his absence from the ofice,
Bent rcIied on his 50% w k shod& marker-find rmdarcls. Bsrh Mwdy's
length hair and bead made him look and SmM& P&s px triple-A *IT-
more like the philosophy major and ingsmthePrimatyFtmdMvidualaad
largc instinrriod 0ockr;dm the Bmtn w e d h t rer~empti~n Calls to his office, hc says, some from
l - =dud t 36.5 billion. Aceording to
f ~ m . d i t s ~ ~ o s e w n d y f 6 3 b ihud memhrs ofCongfcss, were running ten
h. h u t 12per an; of hose were in thc minum, he descrikd W a s appeared to one in h r ofthc d&m. Tht gav-
Lehmao commercid papa and o h sc- to bc a sun on the Primary Fund: But he emment had to draw .a line somewhere,"
curiris--enough. thmreticaily, to break didn't mention that 5rare S t n q ttrefds ~IC Wajfh tJourndw~~tc in a11 &to-
the buck if the assets losr their value. eustdan bank, had d e d to r c p ~ rthat
t rial. Tmwy %mtqHank P 3 M b
Even as Lehmm's situation dettrio- the huge number oi redemptions had r e h d to blink won't get any second
nr , i 1 ,I ?- , 7' , ', ' . - ,, ,."
I-

connbcnr rhat me w e t s were s e w , I w uverdrdm, and h e ~~ank was suspumluw A~rcrrzpmng tu rrwucnt Ljubll.
, .. -
days before I&ng for his vacation, he overdraft privileges, according t~ the
.. . , . -n 1 ,: 'rr f ! il< ,& . T. I . ,
Paulson met with rtpwters in the White
!? 1 :, c . - ,, .-- *.$,; ,, -,, ,+.

,,:..a,.,.. ...,r'-l,,..c* .r .... . .u ,,... . .*... .

u Y L I . L..C.I. ..Ld
I 0-- *"- .-- ..-a .. ' . "11
-9
finanaal mnrmm, 'the Federal h r v e money. The credit markea were M y inmhd&&rightmw'~wc :f.
~rindowthat$Ry+afrertheyclosed functi- and thr fund couldn't
down Bar S m m should k a&le to ash to meet redemption m p s bysell- ~
work ORsome of the p s t excesses," he
aid. 'But the American p p l c m re-
+
;.$i
Lchmn for the same typc of situation." hgirsmlyrLiquid~Asthtchicf main confident in che soundness und the $
It was now publicly known that Jlr inveshnentofficwput it, m r d q t o tht r e s h c t ofour h n c i a l system." F;'
h w y Fund was to Lehmn's d p t o f the board m h g s , thig was Still, even as Paulmn was speakma, 7;
..
failurt. Tmc Wamcr, which had $820 "&kiss ufdeatkRHe aka said,"Paulmn
,,
the b o w Jones IndusDial Average was '&
m&on in the fund, requmed &mp- nndB&tody ftdaadthisup....I boppmg. By the end of du day. it was !#
IS t)lat.rnm-hg.The Bents contacted don't think they thought this God-
dx New York Fed at 750 A M . , d-damnod thvlg d m & , to
ing to S.E.C.Qcuments, to ucpress w n - h e ripplccffbcts wtrld be,"
outwhat * down fwe hundred and four pints. or
4.4 per mt-rhe biggest oneday per-
centage drop since the h t day of trad-
.ik

.a
(CT
B
c e m a b o u t ~ m 1 s * ~ ~Eknt ~ n[ d d that the company d d ing after Septemk 11, XMT.Trader>, :d,
>>.
market industry and 6n the Primary uy to scum additional finan- or inject aware of A.I.G.'&mounting cdateral - V-
Fund eapital from the holding company, Rc- calls and the onping meetings at the
3
But the graviy of the a p p m d y serve Management. Thc b a r d w e d to New York Fed, ~~ udoading pi- xs
hd yct to sinkin,judgingbm the tran- pursuc that saarqg. and &qmm- rions. A1.G. shucs droppod sixty-one
$3
saipr of the Rm.m Management board tiw launched an t f h to smn thellvith- per cent. ;L
meeting at 8 AM., which wa% released by dramis and rasure shareholdera One
t)K S.E.C. Bmt II suggcwtd r h r his fi- told a ditnt, amrrdrng to S.E.C.docu-
T h e lnsr remaining indtpendent in-
vcstlnent bankg on Wall Street were hit
. .*
i2-
tber p i d e : *You go1 more d g r than I ments, 'Wc have a badatop and arc hard, too.Morgdn Stanleyshara droppd d
did last &tP going to e n w e that &c fund dots not fouereen p cent, and Coldman's rw& P':
"Last nighr, I was sleeping on she break t kbuck* ptr mt. :$
plane h New York tb Rome," his fi- Yet +l c end of the day d t m p t i o n
her said, 1said t~ my wife, This is s u p quesa tomled more than S O billidn.
posed to be a memorable trip: And she A little less than half that had been A t 11A.M., br the fou&
~nsaeutiw
day, investnl~nrbanken filed into
*3'.,xi
responded, Well, it certainly will be, fundedwish k w c Managwmnrper-
e r r" sonnel blaming the delays on the mar-
the New York Fed. "I don't think I can
take another day of thid a Cddman
*:6;,
Bent U repcd &at, as ofthat mom- ket dlimits placed by Starc Street. As b& told Lloyd Blankkii as they gm .
-.
6 .
ing, rhc Prim? Fund was king 85.2 the chicfiitment offccr summed up uut of the Gob mr. ifi
-:.
hillion in dernption q m .In assess- the situation in a call to othct k r v e %'re getting out ofa Mercedcs to
ingthe d u e of thc Wlman h o b , tht oficids, W s just fi~ckingb d c . . .
.. * t ' P
1 r - r l r . - 4 . 1 a
. go ro the New York Federal Reserve,"
l-7 7 r:. .' - ,.++
.. ,. 7 . 4 n'v.- > . P

- -
a hundred per cent of &cc value, even we're going to gcr through rhL. Bur, ~e&h."
thou@, a m b g to the S.EC.,the iw- you know, I haven't seen h e m a r k t T h e subject of d a y ' s meeting n-.~o
Iw dam the Bcnrs had seen mggcsted that like this in thirty years. Thio is, Iikc, A.J.G.,where cash was vanishing at an
therewnarcalmarkethIAmndebt -ion." alarming rate. m e r e will be no public
and that bids ranged from faq-five to Nwerthtlw, at ter the market dosed s u p r t " forA1.G.. Grjthner ;utl~ouncwl.
cents. Ar a scmnd meeting, dK board Reserw Managemcnt rcportcd that it He asked the bdms to +ore arr indus-
d e d nn ei+y cents an the doh, m- A d be able to rn~inmina nw assetvalue rry solution. Earlier, he had d f d &K
sibling the h n d to calculate n net asset of one dollar. Wdumsrad d said that he wanred hlm
d u e of 99.75 cents, which could be to appoint JPMviargan Chase. already
round& ro maintain rhe one-doh net
asset d u e . At the same time,tht bwrd
hatevcr ofiicials at the R e r v e
W
Mamgment Gmpaoy h @ r
~~ for A.I.G., and Goldman SaAs
ro organizt a spdiate of l x d s w reach
decided not to try to d the securities of P a h n , when he renundm Wash- a mlution.
rwder m t marker d t i o n s . ingron he was greeted with ovuwhclm- By now, all caf A.I.G.'s possible
At a dljd bud mcering, at 1 pm., ing praise for haling kt Lthman fail. rescuers; had vanished. A person who
spoke w i h poten rial bu,yers says. "They
"Don't do that," Geithner said. kets, but with little evidcnr effect.Eu-
wcntframkeenlyinterestedtonot Whynot?WiUitrnstadasked.*Unless ropeancentrdbankerswcrealsopp-
wanri~igto rouch it at any price." 1h you m tell me h r c ' s s solution in p h , piing with the rapid deterioration ot
5 Phi.. the syndicate efforts had mi- 1 have vl obligadot~to sharchoklcm." credit markets and were dccply con-
lapsed. Geithner had a Fed team tvurk- "Don't do it. I'll get back to you." cerrled ablrut the impact of an A.I.G.
ing on A.I.G., and at midnight he cmn-&diner hung up. failare on European financial in3utu-
i'cncd the tam, some ofw1lose mcmbcra An hour passed. Hearing nothing, tiwns and markets. Several European
xvere partiupati~qby phone f;ornLVah- Willurnstad gave the order to draw central bankers had spoken with Ber-
ingron. "Can we let it pi"he nskcd. down the credit litws. Then, ar e l m - nankc,urgingthe Fed to do whatever i t
A.I.G. Fmcid P d - d d to prevent an A.J.G.
U L T ~the p r i m q s o w of fdure.
r he m~npanjs current m u - Scverd Fed st& mtm-
ides, had a $500-billion bers, including the vice-
m d i t - ~ pportfolio
s that chairmnn, Donald Kohn,
fell outside the regthtoly and the governors Kevin
lrurview of the Fed, the Wanh, Randall Kmmer,
Treasury, and the S.E.C, and Elizabeth Duke. as-
The company's failure to sembled in Bernanke's
honor those conuacrs and of%=. Geidvler and Paul-
make the paymen&would wn,padciptingbvphone,
rcndtr ~ i u n ~ e r o ubanks
s mrrd on iL1.G.; irnmi-
UKIother hnnrlzial inaim- nenr f;li!*lrr r h ~eve-
- . a'
- L-L,.l-&L .-&.-
1 b . 4 Y "U"Y. 1 l i ~ i Kt C I L w-
I~u
uninsured and unhedged ers, no lenders.
positions. This could pre- Letting R1.G. collam
cipitate a ctisis ofdepasitor dbe ~ ~ " k l :s~ .
confidence and a global w s even larger than Leh-
ha& run with "potentially man, with a substantial
ritastroyhic utlforesccn presence in derivatim and
consequences," as U . G . debt markers, as well as i~
uficinls Lter put it in a insurance markets," Bcr-
presentation to the Fed. nark htcr redled. 'Cim
;\.I.G, did business in more thc exrent ofthc exposures
than a hundred and &my of major hnks around the
countries, and had a hun- world to k l . G . , and in light
tired and sixteen thousmd of the extreme fragility of
cmployces and sevenry- the spstcm. there wa5 a
fn~amillinn n.latomPw in- .
Aw:c rq., 1. * \ > 1 r f- ..
l*Jl\ Ldd* Ad.. AM
.J~&~.L

the U.S. giobd b d q pmc. if that

As the disclicsion con - Lrbmaft i@ilurc was "tbtkiss cfdcath "fir Anterim ? oldtt~~ maaey- had hPPred, it was not at
tlnued, ;lm m w s merged ~riurhtjund,mn try Brut R Rerli, Sr., a d his ion Bnrce Bent U, all dew that we woukl haw
dmt A.I.G. was indeed tor, been able to mop the W-
b ~ qor
. at least roc, deeply ing, grven the r m w and
enmtshd in the global firrdncial system, thirty, Geithner d c d and told him that authoritiesw had adable at that time."
t o ~ A t 2 A . h t . , G c i & n e r u r g c d e v e ~ - anemergeneymeeungwasundumyat GeithnerandPaulsonproposed
one t o p m n r steep. the Fed in Washington about a poren- extending an $85-billion loan that
rial solution. Willclmstad hastily re- would be r o l l a d z e d by all 0 f h l . G . ' ~
TUEJMY, SEPTEMBER IG scinded tire order. aSSctb. A.I.G. did have several large,

B you 1urii $85 hiIIim? It was becwminr: clear to Geithner prohtabk businesses,itiduding its main
and Bcmanke that government action insurance arm, which gave the Fed a

Thrt morning, Willurnstad called was the only recourse. Every financial
Geithner a p i n . He said that he institution w;as strugjing to d u e asses
was planning t o draw down the hst of aat a time when there were fewer buyers
legal basis for makin3 the loan. The
government d d a h demand a nearly
erghty-permcent equity s& in A.I.G.
A.1.G.kmdit lines that morning.T d - fvr them at my pricc. Enanrial instiu- and would have the right to veto any
rrs uld investors would recognize such tions were growing reluctant to lend to dividend payments.
a step as desperation, making bank- one another, even overnight. That day, There was greatr e l m , "one par-
iuptcy all but inevitable. the Fed put 470 blUtun in to credit mar- u c i p recalls.
~ Tqlewueuncomfon-
able, We'd just crossed another h d - ment officialadded. "HankP a h n and them through failure,bur we're nor duing
q.A.I.G. wasn't n bank or a broker the Treaswy were u n i l a d y making wmething right ifwe're stuck with these
dealer but an insurance m m p y . Could ewnornic policy fbr the Adnrini&srion miserable choices,''
we have let it go? No one had any i& Thm was no i d u e n r x h m the White
what wwld happen ifw let a company
this size GI. There was no precedent.
We were aware that lors o w nnd in-
House."
"A.I.G. is ahur to fail:Paukon told D
espiw dons to shar&al$crs in
thc Primary Fund, R m Bent 11re
Bush, warning thar a ptmtid ~3Uapse ported tn the hdh t morning h r re-
vestment banks w m count- and x wrasmphic, especially demption requests as of 9 A.M. st& at
was likely to l
might be at risk, but m did& do this to whi r n ~ stiU b hgldy ~ C f24,b bion He also told the tx~dthu
I &r the
savr Goldman, or , *S or Deutscht
bank Ar w a ii ~norrturnpiex. Wc were
worried &our the households with
4Ol(k) p h , life-inswance pol id^, a d
pensions."
The d k w i i n land thirty minutes,
There avws no real hasic fnr knt~winq
.
,.,..... . . .. *.LW*.. ,. +* ,,#+d.. , ' 4 -- L

sufficient collateral. Sd, Bernanke said

reccnrly, 'Lehman was insolvent and
didn'r haw the cohttral to stcure the
m u n t of Federal h e w e lending that
would haw k e n necessary to pmmt its
collapse. Tn contrast, A.I.G. Financial
Products was just one division of a big,
global insurance mljany." But some
Treaswand Fed parcidpfs m o g n i d
S -t -:a:-.r+ 9 J T. 1- !?7 k : l l ; ~IqnC
. ~ 73
-ad-r mbp" w a ~ d ap-
p r wildly inconsiis~nc.uQpdte deci-
sions u ~ r emade for apparently similar
mmns,"the Trewmy official q. "It was B & ~ e d P a & n a n d ~ s m g r c n m tnbPui
s tbc n e c # s ~ ~ ~ i m n ~ t
hard to jusdfy. But A2.G. was another a c h to =A.L G.,buf lst miuh'llw4 wndm'ng, " . ~mmrw to tkpittt
ordcr o f mapirude. It was a quantum &e w can'r /dan im&&onfail w i t h i q$ctn'ng fbtd o i t rnnom)'
M.Itwas so W n d anything we'd wcr
envisimd." &
Lehman failure. Bcrnanke explained Resem Man%gemmt had not arrangcd

T hat diemoan, President Bush, ac- A.1.G .'s credit-dcfault swaps and the
companied by Jwh Boltcn a d Jd'likely conquenc~sthat A.I.G.'a failwe
Kapbn, his chiefafa d a n d deputy chief w d havc on maj~w U.S. and Europwn
any d t hdlityor i n j e d any rapid to
maintain the one-dollar net asset d u e .
Ad State $met had refused tomend ad-

-
nf s t d , and by Keih Hennessey, the di- bath. He dso described h e limits on Jlc ditional overdraft privileges to rhe fund.
m o r of the National h n o m i c Coun- Feds powers to d 4 with an institution The parent company, Restrvt, did vot
d,sat d m wirh Paulson and &mankc kA.I.G. haw adequate cdpid to ?xyrbtLchman
in the Roosevelt Room of the W i r e "How have ~ v ccome to the point assets at par. The Beotr:were umnble to in-
House. 'So whar is going on in our where we can't h i u l institution FdiIwith- ject sly of their own personal hnds. con-
fmsncid system, andvrhata~ewegbi~~g put dYdng &c ttfholeeconomy? Bmh ro repmrarion:: they had made the
do?"Bush sltad. m n & d aloud prwious day.
Padson regularly delivered updates Bcrnanke reitcrated that whar had At 3:45 P.M., Bsnr I1 told tl-te hml
. 1.1; -
to the White HOUS,but f m the out-
# '
begun as a mbpnlrle-rnqpgc problm
. $ . ' ,\ T'c ' I .. ' .T r;
that
*
he h;ad ~dedthe New Yark Fed Im
. . .I '
.;. . t . 1. ' - I . - - -1- -

mordinary degree. ~ u i s&

h himselfas to combat the problems on its own. toral redemption r e q u ~ t were
s now ap-
a wartime President, and hc was deeply W b e n h a n k e a n d ~ f i n i s h e d , proximately S40 b i a n .With no bivem
involvcd in defense issues. The econ- Bush said, "Sometimesyou haw to makc for the hmds l ~ h m a &ties, n the h a d
omy rws secondary. One person who the tough decisions. Zfym think this has hd no &ice but to tvtc to reduce their
worked with Bush for many years said, to bt done, yvu have my bWi."But, as MIUC to zera For rhc first rime in Llm
" M y sense is, dw m e up in the find he me to leave, lu said, 'Someday you ,wars, the buck was ~Hioallybroken. The
months aT an eip;hr-yea term. He was g ~ a r e p i n g r o r ~ e t d m d l m e h o w w cm m p y issued a terse press id-:
s c ~ground down by Kaaina, the w in ended up with a qstem like this. I know The valw of the d e h wcurirm issued Iy
Iraq. He was just out o f p , "A govern- dd is nor the timc to test them and pur Iahnwn Brothem Hrhdings, Im-. tiace wlur
 5785 miliion). n11dheld by the Pflrnary Fund mqqq pwm.BeFnanke pointed wt In the face of mounhg r&mptim.
has hen valued at zeroeficEtiveasof4:00 P.M. hat A1.G.stodt was one ofthe rm most money-mktt f d s mad tn sell nhatmr
Xew Ynrk lime t a l a Ar .I muk, thu NAV od
(he Primary Fund ,ekmiw as of 4:M n ~is. , Ifficklyhdd in 401(M rrtiremmtaocounts. rheyddfuld+br,butthurwm
50.97 a s h i v . Reid put his fie in his hands. 7 l q e nt,buyers for all but tbe safest, s h m t -
you u d m m d &is d m not m d m tm secutities. Early t hmorning, Pad-
Ofthe many W b I e conqiicnca of formd approval Qqges rn mke ac- son had a dkmbiing phone mnvmatio~~
~Lxhmanfail~nooneseenlstohave he mid. with 1cfK-yM t , tk chief m t h t ~i
thought a h i r the collapse d a money- 'Drr you have eighty-five billion?" G e d Elcmk lrnmclt qmrtcd that tbc
market fund; it was a development that Repmenmtive Rarney F m k asked. apical marhwtre *wr)r b a q md Paul-
\ms "urlmticipatcd: a Fed official said. '? haw eight hundred billion: Ber- son said he underrtood that the comrmr-
(The S.E.C. eventually &urged the nanke &I,rcfcffillg 10 the Fds b cid-paper markets were under stress.
Bents and the Rcsqve Management shat. YPhafs bad fkr GE: lmmtlt replied tikt.
Con~p~ny with civil fr.iud ihr allegedly Senator Christopher Dodd twice mnst hwge cwprqtinnc. GE 11- rlw r w
II U .h&d~IWcndl~& aLdIclllCl~u hw ilow lile !-hiLMI tne wuloriry ro l¶kmd--papu market to fund Irs dzy-tu-
a b u t the fun83 h a n d m e . The Bmts M m , d & w n t r o l o f , a n ~ day apentione, including those of GF.
countwed h t they didn't profit them- C0mpa"y. &arped that the Fed Capital, its hame nrm. GE wa:
dws and wee simply trying to thc had m q e n q pwers to aid any coin- worried about its abiiry to ruU. over i t c
fund" .dndpmct imwtm.They mmd pmy gs longus thcre wa a " m c r i s r dm-mdeb& and the prrvicrus day had
to dismiss the suit, which L pending.) and gave a brieftutorial on a G d t - h paid 3.5 per mt,much higher than nor-
d n ofthc F d s aurhokiq smnm. mal, for m m i g h t h. (The lower-

L ate in the dmnmn, Willurnscad and Bernanke said thar even this step rated Ford Mmr Credit repcndyhdro
orha A.L.G. executives and their might not be ens+ Ltgislation au- pay 7.5 per cent) For a~mpa16~i
hwyers ad dvhsqptbered in a confer- thorizing addirionalaid probably 4 the u n d v was as debilimting &
LilPe GE,
*
ence r w m a u d e Wdurnstads office to lx neededaswU. 3 hqjhmtes. .
mamint the t c m ofthe ptaposed lorn TtaeTrca~uy&ciadcddthe sit-
that had jum arrived 6om the Fed. After uatiwc "Lchrnan Brorhm b e p the Re-
readulg them, Rijchard k n i t , a p e r serw mllap, which btgpr the money-
at the h v h S h p n %&Bart- market run,BO rhc money-mht fwd.
1

I
letr, ~prcacnting
to W ~ ~"Ym'
AJ.G.'s basrd, ~ m e d
. working hr
drcnow A sian d ~ ~ m a r k e e r h a~tbu)lamnmrci?lpper.Thtcom-

the federal governmtnt," he said. 4hq halted in Russia Ncws that tht P -
d
dropped sharply, and m d i was ~ncreial-papermaker w on the brink oi
$eS~on.Atthispinr,tht~s)s-
4 o m )rm m." Fund had brolrm the huck had dkd into r~mstdpafiutctionm$.Youtc*gfbur
The terms gave the government r querti~nthe safety and viabiliry uf thc trillion wt o f h prime b ~ o r ~ - m m t y
79,9-pr-mt stake and mddled A.I.G. global m ~ m a r l ainduq.Thcraue t marker hn-and @vingit to the gar.-
with an onemus i n m t rate of 11.5 pcr oFk1.G. gave the U.S. p m m e n t not ernmat in the form of T-MIS.That was
cmr. only 79.9 per ccnt of k1.G.'~quity but &a1 p a p r e GE, C i w p .
Wlliunstad's mIstarlt i n t m p d to also pfioriv OW k1.G.b b n d h a l d e ~ F a dl rhe commd-pmissuers.
s q that tht Semrary ofthe Tmmq and wbowwldn'tbt~untilthcgprermntm This- w m i c risk Suddenly, you haw
the d the N w Ysrk Flad were w a s ~ A ~ o f ~ r n aaglobal r bank
- Mday-'I
on the line. Willurnstad and Beattic k e t f U n d a a w n e d ~ u r i h ~ ~ B L G .Harrifir as GE's simatian &ratend
st* wdde to take t led l . Already, money-market redemption to become, P a u h had more immadiatc
rXis is rhc only offer: C;eithner said. roqutm w m $urging, on T d y h q problems. Owmght, the mr of buymg
T m r is no negotiation." they had been $33.8 billion, compared WE pxorection a p h t M o n p ~Smn-
F~ulsonjumped in: There is onr! with a tota of $4.9 biliion fbr h e entire l e y a a d G o b ~ h a Shon d ~
more condition. Sab, you're going to be p & w d k m * f U & d m @n mgeting M o w S d C J 5
repkd." indu&gFd&y, VVangunrd and + srock, whi& hhbtedjohn Mack, who
After Wiiumstad hung up, hc re- rushed m h s r a m m t s ~ W -d e d on tke S,E.C. to spec-
~twtbem~cerWrn."~ck mhd~&hbMingswcrrsafeand-\uould
w~ ulation. Then was the danger of a cd-
mn he said. "Iinnor worlung f i the m a i n t h d r a r p c - d n u a - e * but 4pse in coniidmein both Galdmanand
tbdtral gwp.nment.* that didn't seem to stem t)lt tide. Even Morgan S d e y , as had haylpcned with
motew o n k m e , h d s that had no apo- Lhw.
A t. 6 pH., Inat dthe Houseand b n - s u r e r a p p u b M s m u i ~ ~ ~ M 0 ~a L e h m d ~ b d mre
ate l&13hip, s u m m a d on short huge redemptions. Putnarn a n n o u d h t k ~ o f L & m n B & i n E u -
~gd

~lcrtice,g a W i n h t c Mapdy Leader that it would close and liquidare the r o p e , w h i c h ; n J ~ ~ h e d g e f u n & .
, am

H a q Reidsoodkmocm m h a briefing Sl2.3-Mbn fnrtimtional %me Money "Igot panicked phone cPlls £ram hedge
hy Paulson and Bernank. Paulsion an- ~ F ~ e c z n ~ & f U n d o w n efundc d the Treasury official says. T h w
mdthat thc Fed hd ckcickd to Imri noLehmanarA1.G. tics sand main- cwldn't get their mufitits. That was no1
.4,l.C,$85 billiw and essentially seize &ed its 0ncdoll;u share due. (Share- ~ppdtobetheddSopwplestataed
conwl of the c o m p ~ yunder the F d s h o l b ddnt lase ay money,) running on M o p Scad9 and Gold-

'O$cer, mc ytbing in the world is bothering mf. '
man Sachs. The h e line broke down."
Paulson obtained from a Treasuy
I a ~a waivcr
r ofconA;ct-oGntcrsr rc-
suictionr on conversations a b u t gov-
ernment assistance for Goldman. The
1aw)er & rhar "themagnimde of the
pcmmmr's interest" outweighed any
ethirs m n m s . Over the ncxr few days,
the Times has reporced, PauIson's d e n -
dar indicates that he spoke to Lloyd
Bhnkfcin, Coldman's C.E.O., more
than hve11t-ytimes and to Morgan Sm-
ley's fohn Mack a dQzen rimes.
..' ' ": .!.I!, .' ,!:-,! ;.-
P,
White Hwx.~-as:jamedw i d ~ Tm-
nvy o W s for art a&qtn7 meting at
8 .GV. Bernankt, Kevin Wmh, and 0 t h
Fed sd+rnembcrswere on the phone, as
was Cci~hna, dong with his d, in New
York. Paubon had k e n up most ofthe
rught wtchgmrsws madeft.
We're ar the precipice," Paulson told
the p p . *Notlug is breaking our m y .
\Ve ' e m nsdve
't h e p d l m of today we
nced ro think oftornorrow.Wc n d toget
&cad of this. It's &-, moving too
quickly. This is the fbmcial equident of
nar, and we're going to need wartime pow-
ers." Banankt and Gtirhm aged. Pad-
son divided the group into reams. T h e
pvcmmemneads money, and ir needs au-
thriym P a b said. 7fyou had a blank
sheer ofw, d me what yw need."
thrat m cenr blow in let the PIC
gan bunley shares ~cll,rwene-tour p r
cenr st~dGoldman k h s droppi nw1y
fourteen per cenr; CNBC began run-
ning Morgan S d c y and Goldman st&
quotes at the top of the m n , in what
some d e d a *d& watch."Washingtot)
Mund dropped t h h c e n per cent, 2nd
Wachovia fell rwentylonc per cmt.
7 r was chaoric; Blankkin d s of
the rumors about Goldman's sunival.
-were paoplctdungdeep bmhs.
including me fiom eimc w time.* HEwgr-
rid that a dqx in confidence, m n if
l u l j d e d , 4b r n c a self-fufding
PVW-
AtMorgan Snntcy,ir \mswm.The
htdgc Funds + c k d a Morgan Stan-
Icy uecurive d, and by Wdnesday
thinp had m W a fever pitch. 'Even-
one said rhe hmmenr-banking model
was destd," tongtime fried and clients
ofJohn Mack d a d him m say that t h ~
werc sorry but hey had to withdraw their
Thnr day, as inwsmrs rushed to the Morgan Stanley funds. "Dowhat YOU
s a f q of short-m U.S. Tmmy h n d s , have to do,"he told them.
yields on thee-month Treasury notes Thar ~ o o nMack , hued a memo
dippad below zem. W e watched the rohistmpkryccs:"lis~ryclc;urame-
mnrkct for T & i very d+t Donald we're in the midst of a market con&
Kohn, the F d s vice-chahan, r e d s . by fear and m m , and shon sellers zre
"You knew thnrwas wmplctc panic, and dtiving our .sf& down,"Geithner and
it was spmding," P a d m c& Mack that he had to fo11w
At the White Housc, c a l l s w w e p - rhr l a d ofMetdl Lynch and find a pan-
ing in f m p throughout the financial ncr. Since rfic c d a p of Bear Steams, nr
wdd,"Emsmngm mCOldraUing March, Gcithncr had periodically sug-
me: Keith Hcnms~y reds. Shtjtwere gested that the remailling investmenr
a l l saying, We sce the beginning$of a banks h e bank holding con~panies,
r u m m on the financial sygtcrn.' Thc @ng acccs ro che F d i h u n t win-
-
1
.I.~..c, !UL.Y~ %\C).C -.\~cILLIILLII& J A&I.. dobr . u d u d u ~ L U LI.LCUILIWUJ A L ~ U I I .1v1
Pwple were l i t d l y pulling their money q r i r l g quhrion by djc Fed. M o q m
out and putting ir in '3 ma-. Tmstq Stdy and Gofdman Sachs had talkej
ram m t rqprivt!Pmplt I d c q abour it m rkir bd.but nding had
in a Iw just to promt tlaeir money." h ~ p p d A. faster way ro the same end
Gcithner said, 'lt's had to describe mulcl be for the investment hnnh ;so
how bad it was and how bad it fit." Hc n~ugewithammurial bcank. &though
gat a d h m a "titanof c)le hamid s)a- the big conuntreial bankc, with their large
ttqbwhosaid htwawmiedbuthww dcposlror b, WIT still v i d as ~!i-
douxgfint.Hisvoice\mquaverirlg.M~able so- ofhquidity, black consid&
hanging up,& h e r immediately called h to be more pccahus
their balance s
h e man back V n ' t call anyone else," rhan his own. And, indeed, Wachovia
G e i k m i d . T a n y u n ~h ~ y o u r m i t x ,
had to be saved in a mtler of wecks, a d
d~ l hl e sMt out of hem,*
scare Cirigroup mnrually had ro be m e d .
$dl,Mack did s p k to V i Fan-
T he dajs m o i l wls rtflectedin the dit, o f C i t i p p , about a W b k rnw.
U.S, markas, The DowJoncs aver- but rhgHitly wnduded that ir made no
age dropped four hundredand hry-nine ense. Geithner suggested that Gold-
paints; it had fallm wm per cent in just ~nan'sBhnkfein call Pandit. Blankfein
three days of mdinq and was twenty- ma& the call, -8 rhm hc was sup-
posed ro rtscue Citi, He was dumb-
foundad when he discxrvcred that Pa&

man &ought ir might be ~bleto buy Ciri,

since ar rhe time Pmdit kit thar Citi was
much s ~ ~
'Ihat &noan, Mack, speakmg to
.

Bldfein, bemwnd the effect af short

p r o b r and P &
~ t c x p e c c i n g t v ~ h o m h i m . F a r hminutes,dPaulsan~tas~mris
put. Padit was aback that GQld- tiallydmtdncarchtcnd,
the student. Ber- can be surc wcwillconrhue~vanto

'Got to go: he ~ dand, hung up. W

pm\v investor epnfidenct.

~~s
-
nankds commcnts l a d a h ? fifaecn and srabihze our fmanriat markcrs an tin-

hen staffers again huddied in

office, Pauhn wantad
to how what ideas they had corn up
n Eurapean marketswwe
w i h h ~ a and
continuing to plunge, with banks md
insurersW n g the brunt of the b.
i
1
I
I

sdm &ox actions were unnetving in-

vesron. The prwious weeked, at the T t a c F c d g r o u p m d a t s i x ~ Briraio, announced a monthlong ban on
that morning. They had dedded the short d h g in an d o f i to prevent the
Fed, Black had cornphined abut the rlight before tha repetition would be kind of 'bear mids" h a t same blamed
impaa of shon d m on b m ,and h + f d , s x r ~ s t n d o n t h c s m c far the Id in Lcbman's amk. Russia
a&cd Bhnk6ein if he d d hpport ao IcFture.ThIrry saoonds into it, Paulsonin- had swgcndd trading hr the grwious
&rt to get the S.E.C.to ban short Pen- temptad "Ben, 8en,BEn ..."Bcrmkc two days. Morgan Stanley shms had
ins. B l d e i n had demurred. But now stoppad &ng. Tw done w m tbintt- plungad wmty-fbutpcr cent the pmi- ,I
he aaid, We've rethought the 4 for a w* Paulson said. l'ou and I &&I go ow day. I

mnp~nryban.~Thky.agreEdtopthes e e r h c ~ t a n d t h e n g o m C o n g m s Padson had just heard &at Bank of

with Pzulwn and Gwthner. tomght and a& for more autfBofitytyA MGl~%urrqolPnly~bPckon
At 1015 A.M., F m i h t Bush deliv- d t i n e s t o m e M d h M s W -
1
A t six h t evening, Bemankernwirh ered a twa-minute televised statement stes, slaving a McDonald's expansion
his top aides-Donald Kah; Lwin outside the OvaI Qfice, his kt public intoupdecaffietdrhkmcwn~with
Wmh: b t t G.W the@ cwn- pronouncement sinre the skis began, S&&. (Batlkofherica djspltcsthis
sel; and h%chdeSmith, the spkffper Whichcmchded: 4 ~butMQoddsdidizmamano
s o d & Padson and Geichner @ci- urginghchiscesto Frndathcrsomesof
p aw by spkerphont. *We cannot do wirhbur financial marbets continue tu deal a t d i t , a c d q to Bloo&rg.)
serious chdlenges. As our rmnt a a i o d
dlis atone m p d hc mid Wc haw w & m o n % t r 8 r r , m y A d m i n l s r r ~ h k ~ r n Dan J-, a Goldman v i e - p d n t i
go to Chgm and get same authority." m&ng thee chajlmp.TheAmcricanpeople whom P&n had b u # x to the Tm-
Pauhn hadn't yet dm any mnaete
steps to clilist legidam to a u t h o i i a
gmemmatmc P a h n reiteratedhis
concernabout getringmngmsionalId-
em ro go along. "I spokc to H a q and
N 4 - H m y Reid d Nanry P&i,
the House Speakcwhand the political
dvkn.*hc 4."IfthzTmsqand the
Fed say it's an emergency and we need
help, and help datsnL m e , it Prrouid fur-
rhcr~ithemLts.Youdon"tgo
publicuntil p " r e d l ? certatr pull
get t h p ' r e asking f d
Bernanke was growing agitated.
*Hank! Listen ra me,*he interrupted.
W e are &ndp
ItwSrhcfiTSt timeFd&cialshd
heard him nise his voice.
ITheFedisak+dmgalltharitcm
wth r h e p 0 w e r s ~ v e h a v q " ~ c o n -
tinued One pareidpant recalled, "Ben
gave an impaioned, hear, rigo~ousar-
gument explaining rbr limips of wt au-
thwiry and t k history of f i n a n d c r k
in the U.S. and a W . * That history
showad rhar &om to resalve Rlch aim
".are succasfuf ody when overwhelm-
ing fme from all parts of p m m c n t is
brought to bear," the m c i p n r said 9 r
was nn mcycbpdictow de bm."
It w;ls as though &manke wee the Thtre's somtbing you haven 't told m.'
sury hprmm h a t summer, reported charged issue of government ownership.
that one q m a c h would be fur tht gw- Several p p k , however, noted rhat
emmcnt to inject capital d irectIy in ta hmw m major d i f f m bttween tan-
h d a ljnstiturion~'lhcsmdardway to fie dexate and the &rn-
rake mpital is to sell stock. There were b a l d stcuritis and ohm saucnuad as-
naw no privdte b ~But, w S on balancc sheets. Houses and
. one panic- ~ F now
i-*vt m . . ~:f q!*rq +P ry(.-F*n~ wp;cln"m
Fomnlon 61- lr would have dte power
to vote, a point management and the
l m a ~of L
i ' mors, and, if tfie stake was
big enough, control the company. Might
this end up being "narionslizauonw? The
politics l d c d awful. EYen so, Jester and
most ofhis tam argued that thc approach
ws simpk, tfficienr, md etiect'lve, and
wwld p r o m ~ g ~ p y m .
Ban.& had long bcm that the
pwmncnt neededmany tmls to rwpond
to the u-le, indudq h e abitiry
ro buy 'bad mmparlies"as well a9 %adas-
sets."But P&n told Bemankc he feared
that dim investments A d dfffabilize
d t s and drive our priwte inwinon.
Another optionw s tb r e m m thc bad
assets frum balance s h e e ~ The
, Resolu-
tion Trust Corporation, c m t d by Con-
gress in 1989, had used -yet maw
to buy and then auction off disrrewed
real estate from failing savinp-tmd-
bans. Thnugh some p p l e aiticizcd thc
agency for dumping assm on the market
roo quickly and selling at &sale p h ,
rhc appmch cmabMd a floor fbr rwl-
arare priccs. "Phisa p p d not ody had
worked hthe par bur would avoid the
" D ~ mit,
n Aonq, I hate it w hyou @wme ihatJsb-qre lwk.'
Pauhn looked up. 'Could we?"
"I chid so," Sh&n sd.
P m h n slammed hs hand d m w
his desk T h e n that's what we're going
to do,"
A few p a i t i c i p n m were aghast. The
* +1 F I . - J , 4rL-r r ~ ~ m p pFn-nlre-
rl ;t V . ~ C J Ckr--
wr any tun~mrungn ~ a d tor
a mortpge b.U.1.L. insured h k a c o w n t s d y up
bsdroddebt, howwouldywMiutitand to a Rundtcd choumd d o h . More-
what would the govcrnmnt pay? If the over, money-&
a m m t was too smalI, k a & h h +its
hdsweren't bank
but invesment products with
wwldlxdcMstated€y&cd~mdsub- higher risk and therehrt highcr re-
sequent writtdowns, making the crisis nlms. By eliminating that risk, another
worn. Iftod big, it w a simplya wader of cornentone of m o d h d was being
d t h from mxpqers m h k s and other removed.
financialins(itution~N d K d h i , an as- But orhen q u a i that the risk of not
s i s t % n t T ~ s # r e c a r y a n d mddng
~ ~ ~m-g, or of dd~ngtw lide, was
r m invmmcnt banker, who was the big farwofst,Faulwn embnced the Mdnes
p t propnnent of rcmwing bad assets and simplia~of the notion. As someone
from Mmce sheets, argued that the me said, i t "passedthe USA T+ test.*
cbanics aodd ah!% !x wCkCd out onm
Congress had givcn the Tmwq and the
Fed the authority tc act. P aulfon and Bema& renuned rn the
R m l r Roam,j o i d rhis time by
Srevcn S h h and othm who hd Chris Cwr, of tl# S.E.C.CriPresidcnt
f o m d on liquidity issues prop& al- Dick Cheney was h there, along with
lowing money-market funds ro borrow Bush,
fiom the Fad,uskg thcir commaeiaIpa- Paulson outlined the decision of the
per and other asscts as collateral. But Treasury, backed by rhe Fed, to seek
Paulson thoughr thar chis was too tcchni- legislation authorizing the purchase of
cal for the average money-market-fimd billions of d o h in rroublcd mortgage-
investor and wouldilt be enough ro stopa backrd wets. "fr would be wise to go ro
run.'Wha~wdd~wdoifyoumtto C o n p p Bemankc said, arguing hilt
address aU the isrmcs? capid should lx approved by Congress
W e d d ahvays just guarantee thc and dispmed by the appmpriate author-
money-& fun&," S h a h said. ity, the Tmsury, r a k t h by the Fed,
an institution already doing all it could
with h p o r n it had.
"You're the rxptrcs, and 1 1 suppnrr
you," Bush said.
P a h launched into a discussion of
rfie political issua and the need to w m
over conservative Republicans as well as
the Demmtic leadership.
The President inrmpted. "Hank,lct
me worry abut the plidcs. You do wha
is right.*
As dspread that a marc compre-
hensive approach to the etijrs might be
under way, SK& din near-tienzid
tt;ldulg-?'he I)owd d up four hu~~drcd
and tcn paints wittr the biggest swgr in
&P=
.,
& t 7 P.M Bernanke, PnSon, and
Spe;rktr Ptld's
in
met with wqgmsicnal leaders
confc~noem,over-
looking the Mall. Afret photapphers
and press representatives were asked to
reu\c, k'rtcwolr ~ 3 r dg u u p tL r
are in dangtrofa broad ~ c m i&cpe,
and action ncads to be &n w d y to
head it off.- he said. We need the author-
iv ;r.spd sptnd hundred billion."
Cox invoked his formcr eollagucs'
mrmuries ofSeptember Il th. W c did
thgthmfortkgoodof
=he aid. Thk is what has to
+n even i f i t isjust &be-
&t an e l d o n "
Bernnnkt pointed wr that he was a
borian and a student ofthe Grat De-
prmion. m ek11dof f1nill1tiawhpse
that we're now on the brink of is always
followed by a dcep, log reassion," he
said. "IfWE mn'r able to head this OR,
the next nua at ion of emnomists will
be writing nor about the thirties but
about this."
Someone asked what the sccnari~
twked k-
Bemankc was cautious, He didn't
want to be accllscd of mggcrafmg rhe
dxnger. *You wdd sec a twenty-per-
c-ent dcdine in the stack market, unem- "Sotncday whenyou hme a .&dofy~uropwr andymfieltbe urge to
plo-meat at nine to ten per cent, the mhi&mmr!vsay nojkrt b~causc
you can, pu'l~undttstsnd."
&ihre of C.M., certainly, and other
1arse corporacc failures I t would be
bad.*
The tone of the rwa most p o d
men in rhe financial world was as &ght- of a&rs that F d later said he Found laughter hdpod ltghten rhe mwd. The
mng as their wurds. Qgations shifrtd M b l y depr€sing.- group agretd to make only brief;p n d
ro Padson. 'Without a functioning banking comments about what w i discussed ar
What arc you going to do with the system, things will g t much warst on the meeting.
morley? Main 5 m d P a h n c o u n t e d He dm
!' t . a
ULUL. A U L ~ L L ~ l :r&J
b .u id~j
. b ~ c 3.1~uldilldl i ~ i i & ~ h b r ~ 1a L~L&I C ) I b lid I I C ~~: ' I W W NA
h d r ~ LHIhwaw-
m,but re&& questions about how to be taken More the markets opened ing money-market h d s in their
that would work Spcntxr Bachus, the on Monday, or more tnajor institurions entirety, it fell to staff n~ernbcrsnt the
l m h g m e m k of the H m e G d t - might*. Treasury to figure out how to make
tee on F m d Seniccs, asked hkl- And whatlivwrldhappen i f d icgrs- it happen. They had less than nventy-
jultingcapaal dircdy i n t o W . Paulson htbn W i n Congress?
four hom to implement a p m p m that
wid thar he wlould consider it. PauImnpausadforamoment,% that ordinady d d have taken weeks of
rlhc Icgislators pressed oil how mu& wGdhdpusatl.* sxudy, David biason. another z s l s r m r
rnaluy would be II& h d m n hdy BarPeyFIankdWDoddindi- T - w v , ~ ~ * m o n e y -
said, "Smmlhundred b i n mmmsev- catcd that Congress would q t c , m a r k funds to gauge their reaction,
d hundred bilion." but with m m condihut. A e d h g to SFvlcral members of the actcutive com-
You'vegot to understad, Mr. Sec- the T m , Majonty kader Rdd addad, rninec of the Inwtment Company In-
remy," Barney Frank shd Tbh m o t You have m ik wha r pu're asking me sdtute, a national d a t j o n ofU.5. in-
be seen as just a Wall Street b a h t . " to do. It takes me foity-eight hwrs to vestmcntrn~*dingV@
He said rhar aren~rivecompensation get the Repubbans to flu& the toilet.' Invesco, T. Rpwe Price, and Fidelity,
imd foreclob'w needed KObe addcer;sed. The meeting h t e d nirrety minutes. opposed a federal insurance program,
"There'stoo much anger our there,' he Reid Pdos'i and Paulwnagreed tos p k AU they wanted was a Fed hcihry thar
,ldded. at e presc canference Someone FIIT- WCIIIIIJi l d r l ~ ~ et ch ~ i lr i ~ ~ i d ;ie..-q-r
n*
' # I '
0 '-.* O*. '.' '4" ':;L~"L:.%~. >,A& LLL Irk&) L U L JLrdi LlsJ~r:& 1 1 i U l L j A i d
by~samdmkmnrridecdd-to Richard Sheby,of-.a kec funds owld be d c s p a b ' ~ .Nason
c a m -
the immtdiaee akin. He knew that ifthe tiveand themking Rcpubhcm on the told them, "You're gemngthis whether
gmwnnm~tmed to cq~ pay then no one Senate Banlring Committee,ni- you want it or notP
,-n 14;qIl S m ~ ~ v m *pLi f! i ~ r i -v*c- V*~TP 'Y'nH dnn't -rlqqnrr - , 1% , 1 "TI, " p , . ! . ' '- I ; - ,
-A,
.."I' 1' 8 .
 nan, the head oT Vaagwd, pcrd stttd, reassure i r that, if it came ro tht aid of
pplll-T-h 4rwlove
"'hats nor where the Secretary :si M o p Stanley, it mutd count an U.S.
'iiliqwd assets that arc wghing down
3.mqlid.This is aboutconfidence, our tinanad institutions ilnd dummmg government support. T h e Chinese
im.esmrs f d n g d e . Each rime we've our aot~clrny." wae tmdcrstandably cool to rhe pros-
h n p d for a break. we didn'r ga it. WdrcNews of an insurance program for pect, since the China Invcstmmt Cor-
usr ng f i M Most
DeP money-market funds nnd a comprc- poration, an arm of the guvwnmtnt,
funds
a m d y agreed to p u t i e i p . They hensivc approach ro the root causes of had already made a $5.6-billion in-
had little choice. Once Treasury an- the mbh-na matter how ill Mkd- vestment in Morgan Stanley in 2007,
~ ~ c such e d ignited a cuphodc d y on Wall S m . and had watched the value of ia stake
a +an, and cvrn one fund
participated in the guarantee program, The Dow Jones awragc rose four hun- plug in the msuing financialturmoil.
in:- might ahdon h d s w i h t dred points. Chinese attempts to invest in some
~~
she At ten-forty-five, President Bush, American cornpanics (such as the oil
M y Friday morning, the Treagury APnked by P a h n . h &> and b,producer Unocd) had caused a pol-
,, .
,.. ., f , .. .,, - - , .. ., h '
1 ..
7.' . . ' f .' p, r . . .' I .,,?, I - , ? . 3 0
,$ ,-1-

I I , I .. t .
L '

irm 'the
4 .I
0 '3 "

and stabin. of rhc icis economy,' he b q p , and mnt 011: Stanley worried some peopIe. But
$nbal fvlancjd system ." Our s).srem of free cnrtrprk rests on the Gcirhner wasn't cspeciallv concerned
convirribnt h t rhe federalg~)vemmcnt shnuld about which count& invested in Mor-
interfere in the markctplae only whcn n#.w- gan Stanley,as long as it mmpbd with
Cmeeting of
hris Cox convened an ernergen9
h e S.E.C.that eve*
to consider a ban on sharc sehg, which
sary. Given thc p m a n o ~ state of today's
financial mrkwtldt h r vital importance
to the daily liw of the A d n pcoplc--
applicable laws.
On Friday evening, More- Stan-
0l.mkfein and Mack felt was nneGessary government intervention 1s not only w a r l e y ~chief financial officer got z call
ranted;it is m ~ i a l .
to cave Coldman and Morpn Stwky* from the head of rhe firm's Tokyo
G)x was probably the mast fice-m- There w r e plenry of pbople around office, reporting thntMtd&hi U.F.J.,
' ket -0rimredof the group, and a ban on the President who just w a n d the free the largejapam bk,w interetcd
short selling went deeply apinsr the d e t ~o m&" Paulson told me. "Hc in negotiating a st&, JahnMack was
p i n . The abiligto dh - r ~profit W rmh m dl ofhat. Jic m d there wrvy, given whar hc percti~edas rhc
on a s t d s longkn sem to be a fk madm left for all ofus towork glacial pace ofJapanese dealmaking.
tolmarket inwry, &chg
as ~ - r i h with. People &nlt want tn hear t)ris.They Nonetheless, he said, "Stnd them
Lqrridiry and the h~~ofinfwmation. In don't like h. T h y w a n t to w him as 0wmm
F " . ,'., 1 . ,-,: * I 'P ,' 7-1 ' .$ ' -I

, .. *.. ..,. . .. . LI .-LA ,'"A.kb h.1,. * dLLi;dh~l1, i

d b] ~ . Kd UIC j 1 I I& d 11: I'LL L -
During calk char day and the prt-
h. chairman of the C.I.C.,arrived in New
. .I, 1.....,...t ..,, .... ET . TV ; I ., , . ,:; 7.9 ,L r.
1 '

one such d l , when COX raid tho'hc +tbbuykckLhnrcsand&~
wa. worried about unintended conse- shm positions, bur &c sintation of the
qwmcw, P a h g r w impatient."You nvr, firms r e m a i d desprare.
a n oart it out later.- he Ad. TOU have Soon Goldman's Blankfein called
ro s,ave them now or thefll be gone Ma& agah. What do you thinksftbSs
while wu're still thinking h u t it." bank-hoIdingcornpany idd" Blank-
.at;he meering that +, the S.E.C. fein asked. Geithmr was saying thar
cotnmissiancrs were informed chat rhe they sbuld complete the paperwork and
Tmwy and rhe Fed s u p p o d u p t ac- become bank holding compania thar
ir-* 10 light of t h i t , vrl t b hrt
~ t h t f)lc \rvr~krr.d7 drn't ?trn~-1lt.h3t dn ?
U.I;. had d e n a s i d w s q earl& h r Mack asked. Neither &owl-
cia!,the mmksionvoted unanimously m
rempody ban shon d n g in mt i h w
and ninety-nine financial s&,
dged to the other h a t h t was going to
pme it. But both knew that the sup
v i d aftheir fmns was at stake. You've
gat ro hang in there: Blankfein told
Mack. We're wry ppportive of you,
hzt if).ou go under tfiwe wiU be imme-
r M
diate preaw on us."
Lam, Paulson spoke to his Chinese
counterpart, Wang &han. the vice-
premier for economic affairs. President
Biish dm spoke to h i d e n t HuJinrao.
According m one person briefed on
that convtrsarion, Bush re& Hu
chat thE U.S. was ddmsing the cri,tis
and explained the policy step ir was
raking. (A spokc6;pn far Bush dc-
~ I I cl;ncd *n mmment.)
P
Fcd
aulson k ltgklative team, clrafting
the TARP ~egidatirn,mndtedwith
OM& but stuck ra Pr~uhdsview
that the bill had to -f 012 b q n g as-
s e rather
~ than an m&g direct capi-
I
inwstmcnts-buying 'bad assetsn
rather than 'bad companies."The final

J usr More rhe U.S. markem opened,

aulson issued a statement report-
inr on the previous night's meeting
n Friday aftcmmit, Paulrwn, in a
0
tdecon ferencc with Ccitbncr and
Thc Secretary's ,~uthorityto putch.lsc
draft was only a ftw p a p long.
In k i o n 6, it stated:

~ J l a ~ ~ a ~ f o r a u m m orhcr p r tFed- and S.E.C,officials, said that

-gag-dmcd amets under dtir ACIshall br.
hensive approach" ro I& the crisis. it was time for President Bwh to call limited to 5700.000.0@4,000ourstanding ar
M e outlined a 'troubled-asset relief thc Chinese government jn an efbrt to ony me time.
 At last, the bi had a pricc t ~ gdes- ,
ignarcd by Pautson on impulse: t h e
worlditlde 111;uitetfix ~nongagc-backed
~ec.uririesw;tr a b u t S 1. .4 trihon: seven
hundred billion was half that. "It was
hip enough to make a difference," Paul-
501; sa!s.
the legislation, much modified and ex-
panded to four hundrecl piges, passed,
on October 3rd. Troublcd assets" were
redefined to indude tiot jtiqt mortgage-re-
lnted assets but "myothir financial insrm-
tnent" deemed necessav to stabilize the
timcial v t c m .
111 the end, the T r e a b u t didn't buy
[he troubled assets. Instcad, it chose to
TAR]' funds and 5420 billion in p a m n -
tees. Stabilizing A.I.G. cost taxpayers
f 180 bdhon. To combat the crisis. the
size of the Fcd's balance sheet-$850
billiun before the Lehrnan collapse-
grew to $2 t d h o n . General Motors and
Chysler tiled for bankruptcy protectlc~n,
along with nearly a hundred and fift).
orhcr public conipanies-an increahe uf

L d1c 011Sullday, September

Frderi~lResenx announced that
21st, the

(;olttnl;m S;~c.hsand hlorgm Sr;1nleyhad

become b a d holding compmics, bring-
ing to .in etd the mulition of indepcndc~~t
'I
I
irn.estmembankson Wd S a t . Despite
tfie arrivalofthc Chulcse delegabon, Mor-
g ~ Sn r d e y ultimately sold twenty-one
pr cent of the company to the Japanese
ba~ik,LIirsubi~hi,for $9 billion. "The
Clirnese left in a h u t i a Morgan S d q
rsccutive recidls. (The Chinese govr.rn-
~nentdedned to com~i~ent.) On T h y ,
Goldm:in Sachs announced that Warren
Butlitt was Lu!.ing tive billion dolfars'
\ v o d ot'prefemd s t d . On Wedilesday.
~ c l l d n l kraised another five billion in a
public ofinnp; of corninon stock. The
;11oves staved,ff what had seemed the
'I
illl~nincntcollapse of the h s .
,+Ithaugh Barcla!+s did 110r buy all As John iWa& ofM01:qanS r a n / ~and , Lkyd Blnnkfein, ofGoIdntrln Sachs,
a f Lrh man Brothers, it bought w h ~ r di.<cuicedtxrningtbeirjr~t~s iitlto bnnh bdding conipnies, they knew that fbesumivnl
i t really wanted-Lehman's North ofboth bank wcrc al stakc. You begot to hartg it! thrre," Blankjin said
Ailtrican investment-banking opera-
tions and its presencc on Wd Streer-
iorjwt S250 nill lion. It paid 93 -5 b i o n inject capital directly intn the banks, as more than a hundred per cent from the
for L R h a n ' s Mathartan headquarters Bernanke, Cieithner, and some at Trea- previous year. Hy March of 2009, nearly
and other real estatc. Bob Lliamond sury had su&ested all dung. On Octo- nineteen f~undrcdhedge funds had gone
called the deal n "oncc-in-a-lifetime op- ber 13&, Paulson summoned t h e heads out of business.
pmu~ity,"and just a few il~onthshrer of thc auntj s ninc moct ystemicdy Bernsnke and Paulson both told me
B:u&!-s shuwd a g i n of 53.5 b i i o ~on l jmportant banks (including the newest that thc cff 'ectsof Lehinais coilapse were
t l ~wansaction.
t bank holdmg companies. ,Morgan Sm- worse than they anriapared, and they had
Tkc illitid b i p s a n supprt for elner- ley and Goldman Sachs) and explained expected them to be bad. The question
gency I c ~ t i w action tumed to hostility the terms on which thc government persists: Could Lehman's collapse have
;rice the $700-blltion number was at- would extend to them anrl othm a total been avoided? Paulsun and Bemankc haw
t;~cheJ,ro the bill. Senators and represen- oj 5250 b&on in capid. (To avoid the argued that it couldn't.The Fed has stat-
rotiver from borh parties reprred that taint o f "nationalization," the govern- utor). emergency powers ro lend to non-
d s horn constituents were w e r w h h - lnent tookpreferred stock, which curied banks, but ody against what it deems ad-
inel! ~ g w l s thet proposal. na voting rights.) equate collateral. Lehmul, unlike A.1.G.,
On Septm~kr29th, the Huust voted During the next year, the rcccssion w ~ t hits healthy insurance businesses,
d d ~hl e legislation. GloM markets went that, in Bemanke's words. illwitably fol- didn't have such collated. This ar-prrient
:-++r% tho
rn:~.q~l&~,r~r n,,,t.Avmqrtr,-rl rr..r.- 4 m-.-p ..d: I-7.-: ,! ax,,.-:,. . - ,,
.Im .-- -1 , r . , 0- P -

hundred and seventy-e~ghtpoints, and
csedirmarkes st+ bozen. B m l y Frank,
coa~puingCongres to a w a y x d child,
counscllrd a nearly disrraught P;lulson,
'Somrtimes you have to let the kid run
3i\,ny from home. He ge;ets h u n m , he
cotnes back" Tfianks to fierce lobbying,
inent to 9.7 percent. lhl: economic cri-
sis, rhe worst since thr: Depression,
destroyed household and retiremenr
savings, pensions, insurdice funds, and
endowments. Eighty-nine banks have
failed this ycar. Bank o i America and
Citigroup together got $90 billion in
15th, in a speech hy Bernanke and in a
statement attributed to Paulson by the
wire s e n k Market News International.
Y'here's no law that any of us could haw
used," P a h n reiterated to me.
Bur Lehman dearly had mme solid col-
lated, cven if not enowh for a govern-
mcnt takeover of a collapsing Firm. The
my day Lthrnan failed, dx assus from its
brokcrd& ~ d o n s w wdeemed e ac-
+Ic zs d l m d fbr r series of short-
term multibillion-dollar loans from the In the mpsc
Fed. In wda w insure an wdcrfy winding of her mind, a fluster
down. the Fed loaned the brokadealw of quail, tonic
unit S62.8 b i o n on Monday, Seprem- ofquail, each her own
k15rh, $47.7 billion on Tuesday, and fiilure,
$48.9 billian on W d d a y . (When Bar- b z y and flushed
days h g h t the unit, it repaid the out- from briar by a panic
standing Fed loans.) I n testimony this
ammer,Wnsid,'TheFdwasable
toloan~~mllartralpnddid
h to h e l p f a c i l i e a ~ e ~ n a n d h a n k - so they hover-
rupq,." (He did s+sm that a Fed loan mothex and daughter
wwld not have saved Wunm Brothus.) and daughter
It s ~ c m s that such collated nught and daughter--
ah haw b#nadequare to support a mcue large-bodied, terrified,
0 n ~ k S ~ m a d e l . though nobody
Padson and other regulators sues, wants them.
~,that~wsnobqrmplay
d K r d ~ f o r ~ t h a t ~ 0 ~ ~
had plapd in the rrscue of B a r Steams.
Had Padma said froni b orttser that a
pxmmtnt-a99Lted d d was p&h, a
buyer might haw emerged. Inmad, he pard to ia M i r e the politid costs-'' last year ass#sing ies cxpcmlre ta A.I.G.
summoned Wd WEI chicfmh Tday,iri9widelywDepcadhrtbcM- ~ q g that p ~&c firm wuld haw come
to rhc Fed,w)me he iaid cmphatidy that ~ ~ w a p i n d c c d a ~ ~wt I dghtlyahcad
~ m - ifA.1.G.had W.
thme m d d bt no gdvrmmcnt &mct, inrended nnd u n f b m n conqumnm- Had an A.I.G. collapse rriggc~eda
a had alrcacty bbcn indimred to dx p m dxnmonmoncy-mdahndnma~f @ObdN n Oil all hlh, if8 m,
If h i s wag shyly a rough negotiating mc- a U - d d ~ h a w b b E n a v o i d s d . Y e t that Goldman's insurers couldn't hdave
tic,Paulsonrrqhmartrplrayedhhhand. aving kmild mt havr- a made good on their contracts. But, in
He suc& in gertin the Wall S m r &cbrcdwproblem:heroprwlahmagc such I~ ~ ha few d&dmt ,
h s re c+mte, d
A d have pro- in t h e g l ~ ~ g s y s a m . h t m k r a i on - AI.G.dad swaps conmas hardly
vidcd welcome plirical cnver hlik& sis nf Lchrnan's prqmrdons ro motivste w r ~ l dhaw matrered, ~incrbv then dl
I. 4 . .... .
L.,-I.L.I. ,L,u.&
. -.b- r ....,,.., IL L + . ~ & ~ry
J. c r ~ i A&ILIA, r r lu.lu b&+ &ALL L i ~ ~ j Ubu il L d I l d i L . U L ) lb&&Ll

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