How ‘The Roof Caved In’ on Wall Street

“And Then The Roof Caved In” by CNBC reporter David Faber details what really happened to cause the greatest economic collapse since the Great Depression. An excerpt.

Prologue: ‘On the Verge’
It’s September 14, 2008, the second week of the NFL season. After being out for the day, I’ve returned home with my family and am hoping to settle into the couch to enjoy the day’s late game. But I know that’s probably not going to happen. Try as I might to convince myself otherwise, this Sunday is far from typical. Ever since I left the office on Friday, I had been nervously awaiting this moment, when I could begin to make phone calls to try to find out whether the financial world that I have covered for the last 22 years is a thing of the past.

When I left my office at CNBC’s headquarters on Friday, it was clear the storied investment bank Lehman Brothers was in deep trouble. I had been reporting on its worsening plight for months. Lehman had been battling a crisis of confidence that began in the earliest days of the credit meltdown. A financial company such as Lehman, which is exchanging vast sums of money every minute with other financial companies, must maintain the trust of those with whom it does business. The minute that trust disappears, as it did earlier in the year with Lehman’s competitor Bear Stearns, the firm is unable to meet its obligations. In other words, it’s lights out. The concern among investors and, most importantly, the firms with whom it did business, was that Lehman was not being honest about the value of the assets on its balance sheet.

The firm had played big in the mortgage industry and many did not believe Lehman’s endless claims that it was marking its real estate-related assets at their appropriate value.

There had been plenty of days over the last year when Lehman was free of the rumors and doubt that would color its future. But, like a cancer that retreats into submission, yet still lurks within, Lehman had never been able to fully shake the concerns about its balance sheet. For Lehman, the last few weeks had seen the cancer return with a vengeance, and, as I left work late on Friday, it seemed certain the 114-year old investment bank would be sold. If a sale couldn’t be arranged, it was far from clear that Lehman could keep operating. That would mean only one thing: bankruptcy.

I pulled the phone to my lap, but still kept the football game on, somehow hoping it would all blow over. As I began to review my list of contacts to determine whom to call, my mind went back to a meeting I had with Lehman’s chairman and CEO Richard Fuld only three months earlier. I had not seen Fuld for years and we both agreed it might be a good time to get reacquainted. And so, late one June afternoon, I headed to Fuld’s office in midtown Manhattan to try to get a better understanding of what was truly going on at the firm he had led for the previous 14 years. A day earlier, the firm had reported a second-quarter loss of $ 2.8 billion and said it was raising $6 billion in new capital. Lehman was certainly not in good shape, but it seemed poised to survive.

Nwehrkamp

Fuld did most of the talking. He seemed to be testing out a new approach to explaining why his firm was going to thrive in the years ahead. I sat respectfully as he droned on, talking about Lehman’s global franchise and all the ways it could make money beyond the financing of real estate. Fuld is a tough guy. But as I sat back and listened to him pontificate on the merits of the firm he had shaped, he seemed out of touch, as though he were not fully entrenched in the new reality of the financial world: a reality in which every firm had become suspect.

Toward the end of our meeting I asked Fuld why he went ahead with a $22 billion deal to finance and buy the giant real estate investment trust Archstone, a deal that compounded its holdings of real estate. It was a deal Lehman could have exited. Whereas doing so would have hurt the firm’s reputation, it would have saved it billions in potential losses in what was already an uncertain real estate market. Exiting the Archstone deal would have also saved Lehman from endless conjecture on just how much money it was losing from the deal — conjecture that contributed to a lack of confidence in the firm’ s solvency. Fuld seemed surprised at the question. “It was a good deal,” he told me. “We still think it’s a good deal.” I really thought the question might prompt a bit of self-reflection or even self-criticism. But that was Dick Fuld. He believed. Two days after our meeting, Fuld would fire his longtime number two, Joe Gregory, and his chief financial officer, Erin Callan.

A few quick calls had me now somewhat up to speed with what was developing. Lehman had been having conversations with both Bank of America and Barclay’s about an acquisition, but as the weekend came to a close there was no deal. The key reason was that the U.S. government was making it clear it would not step in to take on any of Lehman’s bad assets. Without a government assist, would-be buyers were leery. What had seemed improbable on Friday and inconceivable during my meeting with Fuld only a few months earlier, was now likely: Lehman Brothers was about to go bankrupt.

It was only the start of the longest night of my career.

For weeks prior to that Sunday evening, I had also been following the startling decline of another company that was far less visible than Lehman Brothers, but far more important to the health of the world’s financial system. American International Group (AIG) was the world’s largest insurance company. It was built by a man named Maurice Greenberg into the greatest single powerhouse the insurance industry had ever known. In many countries around the world, Greenberg had written the laws that would govern the sale and use of insurance. AIG was for many years among the most valuable financial companies in the country. Its market value was routinely above $150 billion. But in 2006, the then 81-year-old Greenberg had been forced from the company after New York’s Attorney General Eliot Spitzer accused him of wrongdoing. AIG would never be the same. Many of the risks the company took on during Greenberg’s reign were risks that he alone may have fully understood. Still, there were few who had any true concern about its financial health.

As a reporter, you tend to follow your sources. While the world was chasing the rapid decline of Lehman, I found myself far more interested in what was going on at AIG. That was because a handful of people I have known for years were involved with the company’s travails. AIG had suffered from a series of quarterly losses. Its stock had sunk dramatically. And in the weeks leading up to that Sunday night, it had lost $50 billion in market value. Still, while the idea that Lehman Brothers could go bankrupt had been contemplated by the many investors and trading counterparties that relied on it, few if any of those same constituencies would ever have thought about such a fate befalling the massive AIG.

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It was a call that same night that I’ll never forget. The voice on the other end of the phone was calm. I was calling to get some insight into any of the night’s developing stories and hoped this source might be able to provide it. I remembered this person had done work for AIG and asked whether there was any concern at the insurer about what might happen with a Lehman bankruptcy.

“That’s not their concern,” was the reply.

“Why not?” I asked.

“Because they are on the verge themselves.”

I thought I must have misheard. “On the verge of what?”

“What do you think?”

Yep, it was going to be a very long night.

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