The world's financial system teetered on the edge a year ago this weekend as regulators and bankers worked through the night at the Federal Reserve's offices in downtown New York on a last-ditch bid to rescue Lehman Brothers, Wall Street's fourth-biggest bank, and its oldest, from bankruptcy, writes Margareta Pagano.
The crisis meetings started at 6pm on the Friday, lasted through the night and into Sunday as the regulators tried to persuade Lehman's rivals to help find a solution to stop the bank being crucified by dealers when markets opened overnight in Japan. Attempts by Lehman's chief executive, Dick "Gorilla" Fuld, to persuade Barclays and Bank of America to take over the bank had collapsed by midday, while an effort by the Federal Reserve to organise a deal, which would have seen all Lehman's rivals putting up liquidity to take over its toxic assets in a "bad bank", didn't work.
By late Sunday night, it became clear that Lehman – even though it was a giant with assets of more than $639bn and hugely complex trading relationships with just about every other big financial firm – could not be saved. It had been obvious for many months (some date its nemesis to the collapse of Bear Stearns the previous March), that Lehman was going bust. Soon after the Bear Stearns rescue, investor confidence in Lehman was plummeting and through the summer shares in the investment bank haemorrhaged daily. According to insiders, the then US treasury secretary, Hank Paulson, had been pushing Fuld to do a deal with one of the white knights he had been trying to persuade to invest in or take over the bank. But, despite interest from Blackstone and the Koreans, Fuld wouldn't, or couldn't, pull off a rescue deal.
As the US authorities grappled with saving Freddie Mac and Fannie Mae, the giant American mortgage lenders, at the start of September, everyone in the markets believed the government would never let a bank as big as Lehman go to the wall. Quite why they were so convinced is a mystery, as Paulson, and the chairman of the Fed, Ben Bernanke, had warned there would be no public money on offer. No one believed them. Even as talks went through the night on the Sunday, Fuld and the Lehman top brass were still convinced that Washington would stump up with a "backstop". But Paulson remained intransigent, and in the early hours of Monday 15 September 2008, Fuld had to call in his lawyers asking them to file for bankruptcy – the biggest in US history, and, some say, one of the biggest mistakes in American financial history.
One year on, we look at what the main people involved in those tense events are doing today.
Hank Paulson: Then: US Treasury Secretary Now: Writing his memoirs
Henry Merritt 'Hank' Paulson Jnr, the 74th US Treasury Secretary, went from near-hero status as Hank the Hammer during the early part of 2008, for his role in holding together the banking system, to King Henry the Obstinate by the autumn. Many commentators not only blame Paulson for triggering the crash by his failure to save Lehmans but question his independence over the Tarp bailout plan; it was of particular help to his alma mater, Goldman Sachs – which benefited from the AIG bailout to the tune of $12.9bn.
Since handing over at the Treasury to Timothy Geithner when President Barack Obama came to power, Paulson is said to be locked away on his farm in Illinois writing his memoirs – due for publication in January – of one of the most momentous periods in financial history. He is expected to want to answer his critics by showing how letting Lehmans go to the wall was his only option to insert moral hazard into the banking system, and to explain why it was not possible to put together an orderly rescue of the bank. He has also taken on academic roles at Johns Hopkins University.
Paulson is an unpredictable man – a staunch Republican but also a staunch environmentalist. He has said his fortune will go to conservation causes as he believes handing it over to his children would be a burden to them.
John Thain: Then: Merrill Lynch Chief executive - Now: Retained by BoA, then sacked
Wall Street's 'Mr Fixit' commanded an annual salary that met even the most bloated of corporate expectations: $64m. Thain was sensible enough to realise that Merrill Lynch, of which he was chief executive, would suffer heavily – in all probability fail – should Lehman collapse, due to its similar risk profile.
However, his first instinct was to sell a stake to Goldman Sachs, where he had once been a star, before being persuaded by colleagues to accept a $50bn takeover by bigger rival Bank of America (BoA). That saved Merrill, but led to Thain's downfall. Initially retained, he soon fell out with BoA's boss, Ken Lewis, particularly after he demanded a 2008 bonus of up to $10m. The scale of Merrill's problems became ever more apparent, leaving Lewis with little choice but to sack Thain in January.
Thain is tainted by the saga – particularly by revelations that he spent thousands of dollars on a waste paper basket – and has tried to keep his head down. But the US political, legal and media establishment condemn him for advancing $5.8bn of bonuses to key Merrill employees ahead of the takeover's completion in January. Even so, he is unlikely to stay out in the cold for long.
Bob Diamond: Then: Barclays - President Barclays Capital Chief executive Now: Still sparkling at the bank
If anyone emerges from the crash smelling of roses, it has to be Bob Diamond, the ruthlessly ambitious American boss of Barclays Capital and president of Barclays Bank. The basketball-to-football fanatic pulled off the deal of the century; buying the US Lehman investment bank out of bankruptcy for a snip.
Diamond, and Barclays, had been staking out Lehman for months, had been in takeover talks with Dick Fuld right up until the last weekend, and was in New York for the crisis talks at the Federal Reserve.
But, according to inside reports, Barclays pulled out of the deal on the Sunday because Washington wouldn't guarantee Lehman until it could get the approval necessary from its shareholders in time to do the deal.
Whether this is the real reason or not, Diamond pulled off an even better deal, one which he describes as "transformational". He acquired Lehman's US assets for next to nothing and catapulted his bank into the big league. Today, at 57, Barclays' head-honcho runs one of the fastest growing investment-banking-to-capital-markets businesses in the world, but his ambition is to be even bigger; to be one of the biggest, beside giant US players such as Goldman Sachs and Morgan Stanley.
Ken Lewis: Then: Bank of America - Chairman & chief executive; Now: BoA Diminished role
This time last year, Ken Lewis bestrode BoA like a Colossus. As chief executive, he is still powerful, but shareholder anger over Merrill's huge losses led to him being stripped of the chairmanship.
Now Lewis and his fellow execs are fighting allegations of misleading shareholders over the scale of those losses. New York's Attorney General, Andrew Cuomo hinted last week that he was close to charging some of BoA's most senior management. BoA has insisted there was no wrongdoing. Also, in Congress, in June, former presidential candidate Dennis Kucinich produced an email from a Federal Reserve officer stating: "Lewis's claim that they were surprised by the rapid growth of [Merrill's] losses seems ... suspect."
But Lewis has offered to repay nearly half of the $45bn government money on the bank's balance sheet.
James Dimon: Then: JPMorgan Chase - Chairman & chief executive Now: Bigger and better
Few bankers have emerged from the financial mess with their reputations intact. Even fewer have enhanced their standing. Jamie Dimon, the chief executive of JPMorgan Chase, falls into the latter category.
The Harvard Business School graduate who helped Sandy Weill build Citigroup in the 1990s has used the financial crisis to grow his banking empire, snapping up once powerful Bear Stearns for a song before the full extent of the imbroglio was evident, later buying Washington Mutual too.
Unlike most of his peers, Dimon made sure JPMorgan stepped away from the table while others continued to play the risky sub-prime securitisation. Colleagues describe him as hugely outspoken and confident.
JPMorgan hasn't avoided all the fallout from the crisis. It was forced to borrow $25bn from the government's Tarp rescue fund last year. But in an interview last month, Dimon said: "We were never in jeopardy as a company. Tarp cost us several billion dollars. We didn't need it."
Richard Fuld: Then: Lehman Brothers - Chairman & chief executive Now: Radioactive
If Sir Fred Goodwin is the face of the credit crunch in the UK, then Lehman Brothers' former chief executive, Dick Fuld, fulfils the same role across the pond. Probably around the world.
The aggressive, highly competitive and combative Fuld, who went by the nickname, "The Gorilla" during his time at the helm of Lehman, says he felt "pummelled" by the tirade of abuse and anger that came his way in the wake of the collapse of the Wall Street institution.
He hasn't exactly helped himself in the PR war, "selling" his $14m Florida mansion to his wife for the princely sum of $100 – a move intended to safeguard the house in the likely event of personal lawsuits coming his way.
There will be plenty of mud-slinging this week, but Fuld, who says his mum still loves him, is already looking for reintegration into the business community. He's started a consulting firm called Matrix Advisors to advise on corporate deals, while he has "helped out" Alvarez & Marsal, a restructuring firm that is looking to decipher the mess left by the collapse of Lehman.
But rehabilitation looks unlikely.
Forbes, the American business bible, says that Fuld still has a radioactive reputation on Wall Street. Ongoing investigations into his part in the collapse of Lehman have left him pretty much ostracised.Reuse content