Of course, what none of the congressmembers nor the public knew was that TARP was being completely rethought within Treasury, as Jester, Norton, and Nason began developing plans to use a big chunk of the $700 billion to invest directly in individual banks.
Jester had flown back to his home in Austin for a brief respite, but he was constantly on his BlackBerry with Norton going over their various options. Norton and Nason, told by Treasury’s general counsel, Bob Hoyt, that they could not hire an outside financial adviser because of the inherent conflicts, made a series of outbound calls to Wall Street bankers on an informal basis to bounce various ideas off them about how to implement a capital injection program. Their call list included a cast of characters that had become well known to them through the recent spate of weekend deal making: Tim Main and Steven Cutler of JP Morgan, Ruth Porat of Morgan Stanley, Merrill Lynch’s Peter Kraus, and Ned Kelly of Citigroup, among others. They intentionally did not call anyone from Goldman Sachs, concerned that the conspiracy theory rumor mill was already in overdrive.
Norton and Nason asked them all the same questions: How would you design the program? Should the government seek to receive common or preferred shares in exchange for their investment? How big a dividend would banks be willing to pay for the investment? What other provisions would make such a program attractive, and what provisions would make it unappealing?
But Jester, Norton, and Nason knew they had precious little time to complete their planning. Even with TARP approved, the markets did not immediately respond by stabilizing. The Dow Jones Industrial Average, which had been up as many as 300 points before the start of the voting, closed down 157.47 points, or 1.5 percent. After the Wells Fargo deal for Wachovia was revealed, shares of Citigroup fell 18 percent, their sharpest decline since 1988. For the week, the Standard & Poor’s 500 stock index was down another 9.4 percent.
“I’m the ugliest man in America,” Dick Fuld, beside himself in a mix of sadness and anger, privately acknowledged to his team of advisers before they strode into a congressional hearing in Washington on Monday, October 6, that had been called to examine the failure of Lehman Brothers. The markets remained in turmoil, falling another 3.5 percent despite the passing of TARP, as investors continued to question whether the program would actually work.
As he entered, spectators were waving pink sign with handwritten scrawls proclaiming JAIL NOT BAIL and CROOK, and in case Fuld didn’t fully comprehend how he was perceived, John Mica, a Republican congressman, announced, “If you haven’t discovered your role, you’re the villain today. You’ve got to act like a villain.”
For the past several weeks Fuld had been in a depression deeper than any he’d ever experienced, pacing his home in Greenwich at all hours, taking calls from former Lehman employees who wanted either to scream at him or to cry. He continued to go to the office, but it was unclear even to him what he was doing there. He was, however, sufficiently self-aware to finally comprehend what had happened and to perceive the full extent of the vitriol that was now being directed at him. He wanted to be defiant, but he found he couldn’t. He was at times saddened and angry—angry at himself, and increasingly angry at the government, especially at Paulson, whom he saw as having saved every firm but his. His beloved Lehman Brothers had died on his watch.
He now said as much to the congressmembers. “I want to be very clear,” Fuld told the committee. “I take full responsibility for the decisions that I made and for the actions that I took.” He added, “None of us ever gets the opportunity to turn back the clock. But, with the benefit of hindsight, would I have done things differently? Yes, I would have.”
But his audience had little use for his contrition, peppering him instead with questions about his compensation. “Your company is now bankrupt, and our country is in a state of crisis,” Representative Henry Waxman said. “You get to keep $480 million. I have a very basic question for you: Is that fair?”
“The majority of my stock, sir, came—excuse me, the majority of my compensation—came in stock,” Fuld replied. “The vast majority of the stock I got I still owned at the point of our filing.” In truth, while he had cashed out $260 million during that period, most of his net worth was tied up in Lehman until the end. His shares, once making him worth $1 billion, were now worth $65,486.72. He had already started working on plans to put his apartment and his wife’s cherished art collection up for sale. It was a telling paradox in the debate about executive compensation: Fuld was a CEO with most of his wealth directly tied to the firm on a long-term basis, and still he took extraordinary risks.
As he spoke he struggled to gain any measure of empathy from his listeners, suggesting, “As incredibly painful as this is for all those connected to or affected by Lehman Brothers, this financial tsunami is much bigger than any one firm or industry.” He also expressed his great frustrations—with hedge funds for spreading baseless rumors, with the Federal Reserve for not allowing him to become a bank holding company over the summer, and ultimately with himself.
For a moment, as his testimony was winding up, he looked as if he was about to break down, but he steadied himself, as he had done at home virtually every day prior to the hearing. The room fell silent as the congressmembers leaned forward in their chairs, waiting for him to speak.
“Not that anybody on this committee cares about this,” Fuld said, putting his notes aside and surprising even his own lawyer by speaking so extemporaneously, “but I wake up every single night wondering, What could I have done differently?” On the verge of tears, he added, “In certain conversations, what could I have said? What should I have done? And I have searched myself every single night.”
“This,” he said gravely, “is a pain that will stay with me for the rest of my life.” And, he continued, he was baffled by why the government went to extraordinary steps to save the rest of the system but hadn’t done the same for Lehman.
“Until the day they put me in the ground,” he said, as everyone in the chamber hung on his words, “I will wonder.”
That Monday afternoon Hank Paulson received a private four-page, typed letter from his friend Warren Buffett. They had spoken over the weekend about Paulson’s current predicament—namely, that even though his TARP plan had been approved by Congress, it was not passing muster on Wall Street, where investors were beginning to worry that it would be ineffectual. Paulson had confided in him that he was considering using TARP to make direct investment in banks. Buffett told him that before he went down that path, he had some ideas about how to make a program to buy up toxic assets work that he would put in a letter, which he said would spell out both the problems with the current plan and a solution.
In the letter, Buffett, perhaps one of the clearest and most articulate speakers on finance, first explained the shortcomings of Paulson’s current plan:
“Some critics have worried that Treasury won’t buy mortgages at prices close to the market but will instead buy at higher ‘theoretical’ prices that would please selling institutions. Critics have also questioned how Treasury would manage the mortgages purchased: Would Treasury act as a true investor or would it be overly influenced by pressures from Congress or the media? For example, would Treasury be slow to foreclose on properties or too bureaucratic in judging requests for loan forbearance?”