Decision Points

medicine. I was skeptical that they could do so without provoking a raft of lawsuits. But on Sunday, September 7, Hank called me at the White House to tell me it had been done. The Asian markets rallied Sunday night, and the Dow Jones increased 289 points on Monday.

    I spent the next weekend, September 13 and 14, managing the government’s response to Hurricane Ike . The storm pounded Texas’s Gulf Coast early Saturday morning. The 110-mile-per-hour winds and 20-foot storm surge flooded Galveston, blew out windows in Houston, and killed more than 100 people. The worst storm to hit Texas since the Galveston Hurricane of 1900, Ike inflicted more than $24 billion in damage.
    That same weekend, a different kind of storm was battering New York City. Like many institutions on Wall Street, Lehman Brothers was heavily leveraged and highly exposed to the faltering housing market. On September 10 the firm had announced its worst-ever financial loss, $3.9 billion in a single quarter. Confidence in Lehman vanished. Short-sellers, traders seeking to profit from declining stock prices, had helped drive Lehman stock from $16.20 to $3.65 per share. There was no way the firm could survive the weekend.
    The question was what role, if any, the government should play in keeping Lehman afloat. The best possible solution was to find a buyer for Lehman, as we had for Bear Stearns. We had two days.
    Hank flew to New York to oversee negotiations. He told me there were two possible buyers: Bank of America and Barclays , a British bank. Neither firm was willing to take Lehman’s problematic assets. Hank and Tim Geithner devised a way to structure a deal without committing taxpayer dollars. They convinced major Wall Street CEOs to contribute to a fund that would absorb Lehman’s toxic assets. Essentially, Lehman’s rivals would save the firm from bankruptcy. Hank was hopeful that one of the buyers would close a deal.
    It soon became clear that Bank of America had its eyes on another purchase, Merrill Lynch . That left Barclays as Lehman’s last hope. But on Sunday, less than twelve hours before the Asian markets opened for Monday trading, financial regulators in London informed the Fed and SEC they were unwilling to approve a purchase by the British bank.
    “What the hell is going on?” I asked Hank. “I thought we were going to get a deal.”
    “The British aren’t prepared to approve,” he said.
    While Hank and I spoke all the time, those phone calls on Sunday—the supposed day of rest—always seemed to be the worst. It felt like we were having the same conversation again and again. The only thingchanging was the name of the failing firms. But this time, we weren’t going to be able to stop the domino from toppling over.
    “Will we be able to explain why Lehman is different from Bear Stearns?” I asked Hank.
    “Without JPMorgan as a buyer for Bear, it would have failed. We just couldn’t find a buyer for Lehman,” he said.
    I felt we had done the best we could. But time had run out for Lehman. The 158-year-old investment house filed for bankruptcy just after midnight on Monday, September 15.

    All hell broke loose in the morning. Legislators praised our decision not to intervene. The
Washington Post
editorialized, “The U.S. government was right to let Lehman tank.” The stock market was not so positive. The Dow Jones plunged more than five hundred points.
    A panic mentality set in. Investors started selling off securities and buying Treasury bills and gold. Clients pulled their accounts from investment banks. The credit markets tightened as lenders held on to their cash. The gears of the financial system, which depend on liquidity to serve as the grease, were grinding to a halt.
    As if that weren’t enough, the American International Group , a giant insurance company, was facing its own crisis. AIG wrote property and life insurance policies and insured municipalities, pension funds, 401(k)s, and other investment vehicles that affected everyday Americans. All those businesses were healthy. Yet the firm was somehow on the brink of implosion.
    “How did this happen?” I asked Hank.
    The answer was that one unit of the firm, AIG Financial Products, had insured large amounts of mortgage-backed obligations—and invested in even more. With mortgages defaulting in record numbers, the firm was facing cash calls for at least $85 billion that it did not have. If the company didn’t come up with the money immediately, it