BEHIND THE SCENES
No Bailout: Feds Made New Policy Clear in One Dramatic Weekend
Tuesday, September 16, 2008; Page A01
When Treasury Secretary Henry M. Paulson Jr. flew to New York Friday evening, he brought only one change of clothes. And he planned to send a simple message to the powerbrokers of the financial world: No government bailouts would be offered to Wall Street.
Paulson ended up staying until Monday, relying on the Waldorf Astoria hotel to clean his clothes, while presiding over an unprecedented series of meetings that reshaped the financial landscape and sealed the fate of some of the biggest names in banking. On little sleep and with the underpinnings of world markets hanging in the balance, senior government leaders decided not to rescue Lehman Brothers and Merrill Lynch, forcing the former to file for bankruptcy protection and the latter to sell itself to Bank of America.
Accounts by insiders at the gathering show how senior government officials in a single weekend recast the debate about how the credit crisis would be addressed after the mammoth taxpayer bailouts of Fannie Mae and Freddie Mac this month, as well as investment bank Bear Stearns in March. These sources spoke on condition of anonymity because they either were not authorized to speak or described private conversations.
The dramatic events of the weekend were set in motion after investor confidence in Lehman Brothers slipped away over the last few weeks.
Paulson, who speaks daily to Wall Street chief executives over the phone, had been telling Lehman's chief executive, Richard S. Fuld Jr., that the firm had to consider either a broad restructuring or an outright sale ever since the firm announced a second-quarter loss of $2.8 billion in July.
In recent weeks, as problems intensified at Lehman, the Federal Reserve Bank of New York stepped up its contingency planning for what might happen to the financial system if the storied investment bank were to collapse.
By late last week, the firm's reckoning had come. Many on Wall Street said they thought the bank, after being in business for nearly 160 years, would not survive when markets opened Monday.
Some Wall Street executives had a hard time believing that the Fed and Treasury would let Lehman fail, assuming the government would step in at the last minute, just as it had in the case of Bear Stearns. In March, the Fed risked $29 billion to back J.P. Morgan Chase's buyout of Bear Stearns, a deal that was strongly endorsed by Paulson.
Friday morning, Paulson told his policy director Michele Davis and legislative affairs chief Kevin Fromer to send a message to Wall Street through the media that the government would not put up money in a deal for Lehman. Later that day, he flew to New York to drive home the point hard.
At about 6 p.m., in a large conference room just off the lobby on the ground floor of the New York Federal Reserve, Paulson sat at a long oval table with Securities and Exchange Commissioner Christopher Cox by his side. New York Fed Chairman Timothy F. Geithner sat directly opposite.
The meeting was open to chief executives only, and about 20 of these finance titans sat quietly around the table. The New York City subway, located below the room, periodically sent screeches and rumbles into the meeting.
Paulson, a former Goldman Sachs chairman, made an impassioned case: There would be no government money available for a Lehman Brothers buyout, he said. He had opened public coffers twice and was not prepared to do it again.