A (3:20)
But the market is fragile, and confidence on the trading floors can disappear in moments. To keep the other banks on their side, Fault will need something more than just assurances. He'll need proof that his company can survive a story strong enough to restore faith in Lehman Brothers for good. You're listening to the first episode of this American scandal season with Wondery. Plus, you can binge the remaining episodes, listen to new episodes early, and explore more exclusive seasons completely ad free. Start your free trial of Wondery in the Wondery app, Apple podcasts, or Spotify Today. From Wondery. I'm Lindsey Graham, and this is American sc. In the spring of 2008, the long and highly profitable boom on Wall street ended in spectacular fashion. The investment bank Bear Stearns collapsed, and its shattered remains were picked up by rival JPMorgan Chase for just $2 a share. When Lehman Brothers CEO Dick Fuld heard that price, he thought the phone call had cut off and missed the rest of the number. Just a year earlier, Bear Stearns shares were trading for $170. $2 couldn't possibly be right. But it was. The deal had been pushed through by the US Treasury Secretary, Hank Paulson. With $29 billion in emergency government loans, it was a vast amount of money. But Bear Stearns was just the smallest of Wall Street's big five investment banks. The the cost of bailing out any of the others would be far higher. This is episode two. Lehman is different. It's the morning of March 17, 2008. At the headquarters of Lehman Brothers in New York, CEO Dick Foale gathers his top executives in the conference room on the 31st floor. For hours, he's been taking calls with other Wall Street CEOs, trying to convince them to keep trading with Lehman. But while he's been talking, Lehman's share price has plunged by 48%. And Fuld has now realized he can't do it all himself. Looking around the room, he lays out his plan. The company will mount a media blitz to crush the negative rumors that are threatening to pull Lehman down. Interviews will be lined up with the Wall Street Journal, the Financial Times, and Barron's. And while that's happening, Fuld wants every other executive available on the phones, targeting the hedge funds that are pulling back from Lehman. In public and in private, these executives are to hammer home the same simple Lehman has plenty of liquidity. Lehman is safe. But the truth is more complicated than that. Lehman's balance sheet is drowning in real estate assets no one wants to buy or can even accurately price. But selling those assets won't be necessary if the executive team can just restore the market's confidence in Lehman. If investors don't try to pull out their money, the firm doesn't need cash. And if it doesn't need cash buyers, Lehman can just sit on its toxic assets and ride out the crisis. So as Lehman executives contact every reporter and hedge fund manager they know, the company's stock begins to claw back some of its losses. By the end of the day, Fuld's plan seems to be working. After dropping nearly 50% in that morning's trading, the stock closes out only 19% down on the day. It's Lehman's lowest stock price in nearly five years, with all the gains of the real estate boom wiped out in less than 24 hours. Yet inside the firm, the executives are proud of their efforts. They're determined to keep the momentum going because they know this is just the beginning. Tomorrow will be an even greater test. On March 18, 2008, two days after the collapse of Bear Stearns, Lehman is set to release its latest earnings report. The call was planned weeks earlier, but now it carries an even greater weight. What was once a routine quarterly financial report has suddenly become a referendum on Lehman's survival. Investors from every corner of Wall street and beyond will be watching. The earnings call will be hosted by the firm's chief financial officer. The hope inside Lehman headquarters is that it will calm markets, prove the firm's solvency, and show everyone that Lehman has the liquidity it needs to survive. But that's a tall order. Not everyone at the company is convinced that their cfo, Erin Callen, is up to the challenge. Callan has been with Lehman for 12 years. She began her career at the firm as one of its many tax lawyers, but quickly climbed the ranks. Still, when Lehman went looking for a new CFO in 2007, few predicted the job would go to Callen. In the company's entire 150 year history, she was the first woman to sit on the firm's 15 member executive committee. But despite her obvious intelligence and career success, many skeptics on Wall street whispered that she was out of her death. She was only 41 years old and had no background in accounting. It didn't help that she was also a striking blonde who wore stiletto heels and name brand outfits. To her most cynical critics, that all meant that she was just a diversity pick who had been chosen to look good on camera. But Callen has never been deterred by naysayers. Soon after her appointment, Conde Nast Portfolio magazine published a profile that called her the most powerful woman on Wall Street. And ever since, Callan has been determined to live up to the title. But she knows today's upcoming earnings call will be the biggest test of her career so far. Sitting at her breakfast table, she studies the Wall Street Journal. One headline reads, lehman finds itself in the center of the storm. She lays the newspaper aside, downs her coffee, and then goes to get ready. She slips into a tailored black suit chosen by her personal shopper. She blows out her hair, mentally rehearsing every talking point dozens of times. And then finally, she's ready to step into the storm herself. When she arrives at the office, Dick Foale pats her on the back and wishes her luck. She heads into a conference room with only the firm's treasurer at her side. Then, at 10am sharp, she dials into the call. Over 11,000 investors, analysts and journalists are listening in. Callan takes a deep breath and then begins. She starts by acknowledging the volatility and uncertainty in the market. But her voice is even and controlled as she pivots to drive home the company's key message. Lehman has plenty of liquidity and is still posting a profit. The $489 million it made the previous quarter is admittedly smaller than usual. But Callen reminds the listeners that this is Lehman's 55th consecutive quarter of profits, and that's not a record many companies can boast. She then guides analysts through the balance sheets, her every word carefully chosen. And when her presentation is finally over, she opens the call to questions. She responds to them with an instant command of the facts, her voice radiating the one thing Wall street craves the most right. Confidence. By the time the call wraps, Callan's voice is raw and she is mentally drained. She leans back in her chair and the room is silent. Then she hears applause. Executives spill into the room and give her high fives. Then Dick Fauld storms in, grinning for the first time in days. He jokes that she shouldn't have hung up on the call as long as she was talking. Lehman's stock kept rising. The company's recovery continues all day. And at Lehman headquarters, there's an electricity in the air that feels like hope. By the closing bell, its stock price is up almost $15. In percentage terms, it's the biggest one day gain since Lehman went public. Despite all the cruel whispers of the Wall street cynics, Callen seems to have calmed the storm. But beneath the triumph, buried deep in the company's balance sheets, there is a dirty Lehman has far more debt than it's publicly admitted. For the past seven years, every quarter, the company has been using an accounting trick known internally as a repo 105 transaction. This involves Lehman temporarily selling billions of dollars worth of securities for cash. That cash is used to pay down debts and make the headline figures in the company accounts look better. But then, once the reports are published, the deals are quietly reversed. Just weeks before this latest quarterly earnings call, Lehman repeated the trick. It temporarily moved $49 billion worth of debt off its books just long enough to report better numbers. But in a few days time, those debts will return when the firm buys the securities back. These transactions are so secretive that even people at the very top of Lehman, including Dick Foale, don't seem to know about them. But despite these accounting slice of hand, some in the finance world are still suspicious about Lehman's health. One of those skeptics is 39 year old David Einhorn. He's the head of his own firm, Greenlight Capital. His hedge fund only has seven analysts and a handful of support staff, but it manages over $6 billion in assets and and has an average annual returns of over 25%. So when Einhorn speaks, Wall street generally listens. And months ago he noticed several small hedge funds with stakes in mortgage backed securities had collapsed and he asked his team to investigate. Usually his firm was known to spend weeks researching a single company. But after the sudden collapse of these hedge funds, there wasn't time for that. So instead, Einhorn ordered a rapid survey of all Laws street firms with large investments in mortgage backed securities. Internally, the project was codenamed the Credit Basket. And Einhorn's team soon came up with a list of 25 companies it felt were at risk. Lehman Brothers was among them. So at that moment, Einhorn took a closer look at Lehman's numbers. And the more he dug, the more suspicious he became. He started to believe that Lehman was using accounting maneuvers to inflate its Profits. So he had Greenlight take a short, short position on the company, essentially a bet that the stock is overvalued. A trader borrows a share from a broker and sells it on the open market. Eventually, the trader will have to buy that share back and return it to the broker. If on that date the stock in question is worth less than the price the trader sold it for, they can pocket the difference. But if it's worth more, they can be left exposed to enormous losses. Einhorn, though, was convinced that a correction in Lehman's stock price would be coming soon. And he didn't keep that opinion to himself either. At the Value Investing Congress conference in November 2007, Einhorn led a presentation suggesting that Lehman's debt to asset leverage was approaching 31:1 and the company's financial outlook couldn't possibly be as strong as it claimed. Executives at Lehman quickly arranged a conference call with Einhorn to try and address his concerns. But the meeting only deepened his doubts. When Einhorn asked how frequently Lehman was reassessing the value of the mortgages on the firm's balance sheet sheet, he got a contradictory answer. Some executives insisted that they were revalued every day, but others claimed it happened quarterly. Lehman CFO Erin Callan was on the call, but she never acknowledged the inconsistency or tried to correct it. That was four months ago. But Einhorn hasn't been able to let it go. And in the wake of Lehman's latest earnings report, he gathers his team of young hedge fund managers for a debrief. All right, everyone, quiet down. Quiet down. All right, so what are your thoughts on Lehman? There's a silence in the room until a young analyst chimes in. Well, we were just discussing it. We think Callan sounded solid, actually. I mean, if she's right, Lehman could be undervalued. There could be an opportunity here. I'm sorry. You're new here, right, Jason? Yes, sir. I started last week. Well, welcome to Greenline. So you think Callen's numbers were solid? The balance sheet looked clean. I think we should reevaluate. Where are you from, Jason? From Montana. Grew up outside Missoula. Well, I grew up outside Milwaukee, which means neither of us are from here. So, Jason, I want to teach you something about Wall Street. Something I had to learn when I first came to New York. Numbers are the purest thing we have. They're sacred, in my opinion. But sometimes you can't trust them. Wall street guys like to manipulate them, to tell a story, and our job is to catch them in the actual. You think Aaron Callan was lying? No, not necessarily. Not. Not on purpose. But do you know about her background? She's a tax lawyer. She's never run a Treasury desk, but she was very confident. Confidence is not the same thing as truth. And frankly, I don't believe a single word she said. Last time I spoke with Callan, she couldn't answer even simple questions about Lehman's financials, no matter what training she's had since. I still think they're hiding something. So we should continue to short them? Yes, we should continue to short them. The young analyst looks around the room at the others. He isn't sure whether David Einhorn is paranoid or brilliant. The implications of his claim are serious, though if he is right, one of Wall Street's largest and most prestigious firms has been built on a lie. And they're going to be the ones to expose it. Hello, American Scandal listeners. I have an exciting announcement. I'm going on tour and coming to a theater near you. The very first show will be at the Granada Theater in Dallas, Texas on March 6th. It's going to be a thrilling evening of history, storytelling and music with a full band behind me as we look back to explore the days that made America. And they aren't the days you might think. Sure, everyone knows July 4, 1776. But there are many other days that are maybe even more influential and certainly more scandalous. So come out to see me live in Dallas or for information on tickets and upcoming dates, go to americanhistorylive.com that's americanhistorylive.com Come see my days that Made America tour live on stage. Go to american historylive.com. While Lehman Brothers scrambles to project confidence on Wall street, down in Washington, D.C. the shockwaves from the growing financial crisis has put Treasury Secretary Hank Paulson under siege. When Bear Stearns was on the brink of bankruptcy, Paulson played a key role in brokering the deal to sell the company. In a single weekend, the government facilitated the merger with JPMorgan Chase. Greasing the deal with $29 billion in government financing, the Fed invoked rarely used emergency powers meant only for unusual and exigent circumstances. It was a bold move for the administration of President George W. Bush. As a Republican, Bush had championed the free market and the virtues of laissez faire economics throughout his political career. And while the government supported the Bear Stearns deal with an emergency loan rather than a direct cash bailout, the optics are still difficult for the Bush administration. Making matters worse, only a Few years ago, Hank Paulson was the CEO of Goldman Sachs, New York's largest investment bank. So now many people suspect he's bailing out his old Wall street buddies at the expense of the American taxpayer. But Paulson is convinced he did the right thing. The collapse of Bear Stearns had to be contained to protect the rest of the economy, and the US Government was the only party with the means and resources to take action. Now, though, Paulsen's priority is making sure no other Wall street giants go under. And despite his positive recent earnings call, he is especially worried about Lehman Brothers. So with pressure mounting, Paulson calls Lehman CEO Dick Fuld directly. Former adversaries in the business world, the two men have become friends in recent months, and now he urges Fuld to immediately seek fresh capital. His firm's survival may depend on it. Fuld reassures Paulson that he already has a plan to do that. He's got a proposal ready for one of the most powerful names in finance. The billionaire investor Warren Buffett. Hearing this, Paulson's relieved. A quick private sector solution would spare him the political headache of more government intervention. So he promises Fauld he'll do whatever he can to help get the deal with Buffett over the line. And on March 28, 2008, Buffett gets the call from Dick Faulder. Buffett is in the Omaha headquarters of his firm, Berkshire Hathaway. His desk is a plain wooden one, the same his father used. Because despite his vast wealth, Warren Buffett is not one to show off. Maybe that's why he's never much liked Wall Street. Its brash displays of wealth and consumption have often seemed tawdry to him. Still, he's willing to listen to what Dick Fuld has to say. Fuld's voice is urgent but composed. He explains that Lehman is looking to raise between 3 and 5 billion dollars in fresh capital. He talks about the strength of the firm and what an opportunity this would be to become part of Lehman's long history. And despite his doubts about Wall street types like Fauld, Buffett finds the pitch persuasive. He says that under the right terms, he might consider it. A 9% dividend would do the trick on a $4 billion investment. That would be an annual return to Buffett of almost $360 million. The call ends amicably, with both men agreeing to run the numbers and the and think it over. But then, moments after finishing the call with Fuld, Buffett's phone lights up again. This time, it's Hank Paulson on the line from Washington. He emphasizes just how rattled the markets are right now. But he says that word of Buffett investing in Lehman might be enough to steady Wall street all on its own. Buffett leans back in his chair. Two back to back calls are clearly orchestrated. He wonders if this isn't really an investment opportunity at all, but a piece of theater, an attempt to borrow his reputation to pacify nervous traders in New York. So he tells Paulson that he's going to consider what Fuld said. But it's not his business to save Wall Street. That's the government's job. After these calls, Buffett flips through Lehman's financial reports until late into the evening. That's when the phone rings again. It's Fuld wanting to talk numbers. But then, to Buffett's confusion, the conversation takes a strange turn. Fauld seems to have misunderstood Buffett's original offer. Now he says a 9% dividend in exchange for the investment is too much and won't agree to it. But those are the terms Buffett wants, and he has no intention of agreeing to anything less. The two men talk in circles, the mistrust between them growing with every minute, so that by the time Buffett hangs up the phone, any prospect of a deal with Lehman has slipped away. He won't be coming to that company's rescue anytime soon. Having been rejected by Warren Buffett, Dick Fuld takes his search for capital elsewhere. He makes discreet calls to other prominent investors and fund managers to raise the 4 billion he thinks he needs. But short sellers like the hedge fund manager David Einhorn are still taking the company down. Over the last few months, Einhorn has become a very public thorn in Lehman's side. What began as a bet on the company's share price has become something of a personal crusade. When Einhorn first went public with his doubts, there weren't many on Wall street who wanted to believe him. But now, in the wake of Bear Stearns collapse, the mood has shifted dramatically. Einhorn claims that from a balance sheet and business mix perspective, Lehman Brothers is not that different from Bear Stearns. This directly contradicts what Lehman executives have been telling everyone since Baer's collapse. They are still insisting that Lehman is better capitalized, better managed and better placed to weather this crisis. So Einhorn's criticism and all the people who seem to be listening to him are an ongoing source of irritation for Lehman. Determined to neutralize these persistent critics, Lehman's top team arranges another call with Einhorn and to make Lehman's case fault, puts forward what he believes is his most persuasive executive. This isn't a job for hitting his aggressive style. So instead, the responsibility falls once again on Lehman CFO Aaron Callan. And she takes a call in her office. Hi, David, this is Aaron. Good to talk to you again.
