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Behind-Scenes Frenzy Led To Lehman Collapse

POSTED: 03:08 PM ET, 09/16/2008 by Derek Kravitz

The pressure-filled final days of negotiations between the Federal Reserve and Wall Street over the future of the now-bankrupt Lehman Brothers firm largely unfolded behind closed doors, as bankers grappled with whether to save the company as they argued for a federal buyout.

Through interviews with people briefed on the discussions, The New York Times painted a frenzied picture of the Federal Reserve caught "flat-footed" by the firm's demise, calling an emergency meeting Friday with a group of 10 to 15 Wall Street banks in Lower Manhattan to try and stave off Lehman Brothers' collapse.

Lehman's troubled investments are linked to the exotic mortgage-based securities that boomed in recent years and are now crashing, as explained in The Post's series on the history of the housing bubble.

Today, The Post's David Cho and Neil Irwin report that as Treasury Secretary Henry M. Paulson Jr. flew to New York for Friday's emergency meeting, 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."

But the decision wouldn't be an easy one, The Post reported (and Paulson ended up staying in New York until the following Monday, relying on the Waldorf Astoria hotel staff to clean his clothes).

Paulson was not inclined to help save Lehman after similar moves with Fannie Mae, Freddie Mac and Bear Stearns. The Wall Street Journal reported that Paulson felt such a buyout "would create a terrible precedent."

"Which other firms would take that as a cue to ask for U.S. government help -- and from what other industries? Detroit auto makers were already knocking at the door."

Paulson was also irked that Wall Street saw him as someone who would always ride to the rescue. And because Lehman's troubles have been known for a while, Paulson felt the market had had time to prepare," The Journal's Deborah Solomon, Dennis K. Berman, Susanne Craig and Carrick Mollenkamp reported.

Government officials had hoped a private-sector solution would be found, with two firms, Bank of America and Barclays, expressing interest over the weekend to buy Lehman Brothers and a consortium of Wall Street banks working to deal with the company's "bad" investments in a separate move. But, on Saturday, industry analysts said they saw a far worse picture of the company's assets than had been reported.

Bank of America began with plans to buy the troubled Merrill Lynch for about $50 billion and the last potential suitor, the British bank Barclays, was told by its regulator that it might be "overreaching" for Lehman Brothers. (The investment house has continued discussions to sell its broker-dealer operations to Barclays, The Wall Street Journal reports.) At this point, one person with knowledge of the discussions told The Times that Lehman was now a "dead bank walking."

As the company's bankruptcy filing loomed, Lehman Brothers traders resorted to counting down potentially their last moments on Wall Street, eating pizza and drinking beer in a corner of the fourth floor, sending out goodbye messages and planning trips to the unemployment office, The New York Times' Eric Dash reports.

By Derek Kravitz |  September 16, 2008; 3:08 PM ET Economy Watch
Previous: Key Witness Against Cocaine Cartel Dies of Natural Causes | Next: Campaign Mix, Price-Gouging Worries, $15B in DHS Contract Losses

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My wife worked at Lehman for 36 years - saw the millions in bonuses - now she may not get severence pay, or medical for life that was promised, and we planned for our future.
Little guy gets screwed again.

Posted by: Tony T | September 16, 2008 6:38 PM

Hey...I have a struggling small business. How about I get a government buyout for ...let's say...a measly $4 million?

Posted by: Jeff Powell | September 16, 2008 6:38 PM

Hey...I have a struggling small business. How about I get a government buyout for ...let's say...a measly $4 million?

Posted by: Jeff Powell | September 16, 2008 6:38 PM

If your wife worked at Lehman for 36 years and saw millions in bonuses why should we worry or you for that matter, savings.

Posted by: Sean | September 17, 2008 2:12 AM

Whatever may be the reasons for the collapse of lehman, it is really unfortunate. It is difficult to build empires and easy to smash them in a jiffy.

Posted by: H R Sampath Kumar | September 17, 2008 5:26 AM

is it really true that this sudden collapse of the lehman brothers is going to have a negative effect on many african countries?

Posted by: sifiso buthelezi | September 17, 2008 7:48 AM

Why doesn't paulson say (what the employees and rivals say and said all along), not just that the "market had time to prepare" but that Dick Fuld had all the time to prepare. That it was hubris. That because he led it for so long, he couldn't be wrong. If he had eaten humble pie 6 months ago, others would at least be eating their daily bread, rice, noodles, meat and potatoes. The employees, esp long term "older" loyals, didn't have all the time "to prepare" in a seriously damaged employment market in financial services and because they, likely foolishly now in hindsight, thought the Big Boys could be trusted to have a Plan B -- Plan A was laughed at. Too big to fail as a doctrine has long been in place to ameloirate a direct impact on pensioners and other "innocents" and to prevent a financial meltdown -- understandably not to save the tanned skins of the Wall Street Boys. Still, even in an investment bank, there is a majority without winter tans, those who are not invited to the party, who are the ones left cleaning up and paying for the clean-up with their savings. Tony's wife "saw millions in bonuses" - but surely going to her boss's bosses and their bosses: Sean likely misunderstands. Tony wouldn't have written as he did otherwise. In no other way is the demise of Lehman "unfortunate" as Sampath Kumar would believe. This, from one affected.

Posted by: CA | September 17, 2008 8:21 AM

ho hum, lots of bmw repos coming--good business for the tow companies--

Posted by: rencarl@verizon.net | September 17, 2008 9:35 AM

It's an example of more and more risky business for greed and govt.'s inability to look into ir-regularities.
It also re-visits the historical falls of wall-street.
But the truth is nobody could predict this much fall, for these financial firms, so now it's time to learn, not blame anyone.
How fast we can de-learn these falls, and rise again, is the important issue.

Posted by: singal. n. g | September 17, 2008 2:26 PM

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