On September 23, 2008, Gerard LaRocca, a senior executive at Barclays Capital, the investment bank, got an emergency phone call from one of his employees in the bank's operations department. The employee was looking at Barclays' bank statement from its account with JPMorgan. There had been $7 billion in the account, and the employee had been authorized to move the cash from JPMorgan to the Bank of New York, which was Barclays' regular, or custodial, bank.
But now the money was gone.
Of course, there were a lot of ways you could lose money last September in the weeks following the bankruptcy of Lehman Brothers. Banks had stopped lending money, first to one another and then to everyone else. The stock market crashed, and trillions of dollars were evaporating from the economy. Lehman Brothers employees who had equity with the firm were left with nothing. But Barclays hadn't lost money in its dealings with Lehman Brothers. It was in the process of buying Lehman Brothers, the profitable portions of it anyway, in a deal that one of its traders likened to "hitting the lottery." It had done what it had set out to do when its executives had surveyed the once-in-a-lifetime wreckage of the American financial system in search of a once-in-a-lifetime opportunity, and the $7 billion was part of its spoils. It was more than money to Barclays; it was money that Barclays had won after struggle — won from battle with the dominant player in banking, JPMorgan Chase — and so the $7 billion's very existence was proof that Barclays had what it took to compete for preeminence in America and therefore around the globe. The $7 billion also happened to be in cash at a time when Barclays, along with just about every other bank in the world, needed it desperately.
The only problem with the $7 billion was that it was no longer there in the account managed by JPMorgan. It was lost. No, not lost — Barclays hadn't lost the $7 billion the way other banks were losing their billions, the result of bad bets, insane risks, overleveraging that expressed a feeling of institutional immunity when in fact it was an indication of systemic disease.
No, it was simpler than that, and also infinitely more complicated, given the sheer size of the sum.
The $7 billion had been taken.
I was waiting in front of a restaurant in Hell's Kitchen, on the West Side of Manhattan, when a hired car, gleaming and black but fairly modest as these things go — a Lexus — pulled up to the curb. One of the back doors opened and out stepped Bob Diamond, the CEO of Barclays Capital, who, upon seeing me, thrust both of his arms up in the air, fists closed, in a sudden and awkward expression of triumph.
I had met Diamond twice before, in his office, and he had been wary and constrained, to the point of seeming genially coiled. He is a trim and compact fifty-eight-year-old man who identifies himself as a Bostonian, as an Irish-Catholic, as a former teacher, and as a banker, and though he means to be approachable, he can come off as severe as, well, an Irish-Catholic teacher-turned-banker from Boston. There is, indeed, something almost priestly about him — the sense that he's using his ebullience to get you to mass. He has a long pink face and a long pink nose upon which he perches his rimless glasses. Under his gray eyes he shows fatigue with colorless dents instead of dark circles. He has a full head of coarse hair the color of a railroad spike, just now starting to turn gray at the temples. His body language is sprawling, aggressively relaxed, until it isn't — until, say, he's asked a question that puts him on the alert — and he contracts and snaps to. His modesty can appear pained and his informality studied. He has a habit of taking off his suit jacket and slinging it over his shoulder before sitting on the edge of one of the trading desks — a habit that his traders describe as his move, as in, "he has this thing he does with his jacket, when he wants to talk to us, it's his move..." See, everybody has a move, and that's what I was expecting when Bob Diamond got out of the black Lexus: a move, from a man in dogged control of himself. Instead, he pumped his fists to the sky, and he looked endearingly goofy and boyish — a conqueror somehow made innocent by the act of celebration.
Of course, Bob Diamond has plenty to celebrate, starting with his conquest. He is the man from an English bank who bought an iconic American one, after Lehman Brothers defaulted last September 15 on $613 billion of obligations and became the biggest bankruptcy in American history. He is the man who stayed calm in a time of chaos, who stayed ambitious when dreams were dying, who thought big when others thought only of survival, who viewed America as the prize when most of the globe was recoiling from its contagion, who contended with forces vastly stronger than himself and emerged vastly strengthened, who made a $45 billion bet and got everything he wanted, saving thousands of American jobs in the process. He won when everyone else was losing, or, to put it more bluntly, he's a winner in a historical moment defined by losers, and his only problem is that he is a banker who lives in a time when bankers are mistrusted, especially the happy ones.
Diamond is aware of this. The first time I met him, I asked him what his answer would be if someone sitting next to him on an airplane asked him what he did for a living. "I'm a banker," he said, before adding, "which used to be kind of cool." Was being a banker ever cool? Maybe not, but it was a profession that certainly conferred exactly what Diamond is at pains to embody — the status of the solid citizen, the kind of old-fashioned eminence that's rooted in community and a recognizable set of values. But that was before the expansion of the financial markets and the incessant movement of global capital redefined our notion of what a banker is, what a banker does, and what we might assume about his values. It is still possible to sit next to Bob Diamond on an airplane, because he is one of the few global financiers who will fly commercial. But Bob Diamond is one of the highest-paid bankers in the world, earning $42 million in 2007 before forgoing his bonuses in 2008. He became a British citizen, in addition to being a solid American one, and is such a regular at Davos that his decision to skip the financial summit this year was seen as an indicator of an era's end. He is no more still "a banker" than he's still "a Bostonian"; rather he is a member of the tiny global caste created in the last forty years or so by capitalism's elastic effect on the money supply and its acid one on national sovereignty. This is not to say that he's a bad guy, or that he's being disingenuous when he shows up to a photo shoot in the sackcloth of a plain navy-blue suit because he understands that his preferred pinstripes might make him a target. No, he's supposed to be a good guy, as good as a guy spearheading the consolidation of the world's banks is likely to get. Hell, in the events that begin with the death of Lehman Brothers and end with Barclays' purchase of its lucrative carcass, he was the underdog, though probably the richest and most resourceful underdog in the history of the world. And so this story — which is the story of Bob Diamond and Barclays and how capitalists behave when capitalism is under siege — provides a test case.
Last year we despised and distrusted and derided the bankers who failed. This year we're in the process of doing the same with the ones who succeed. But public opinion, like banking itself, is a zero-sum game, and one of these days we're going to have to decide whom we can live with: the banker hauled before Congress to shamefacedly account for his staggering losses, or the banker who travels the world with his fists in the air.
On September 12, 2008, the three masters of the United States economy — Treasury Secretary Henry Paulson, SEC Chairman Christopher Cox, and New York Fed President Timothy Geithner — called the half dozen masters of the universe to a weekend meeting at the downtown offices of the New York Fed. The meeting was, to say the least, not open to the public or to journalists; indeed, it was nothing short of cabalistic. The men who were called to the meeting were the CEOs and senior executives of Wall Street banks like JPMorgan Chase, Goldman Sachs, Morgan Stanley, and Citigroup. These were men invested with the consciousness that they knew how the world worked, and also that they ran it. On this day, though, their confidence, in themselves and in one another, was shaken; the week before, there had been a run on the 160-year-old investment bank Lehman Brothers, and they had come to the terrifying understanding that they were responsible not just for their own losses, but for one another's. They had established an empire of shared power by extending an empire of shared risk, and now they were realizing that the risk they'd passed off to others was in the process of coming home. And so the meeting's local focus was really a global one: They were being asked what they were willing to do to save Lehman Brothers. But they were really being asked what they were willing to do to save capitalism and themselves.
There were two CEOs at the meeting who had more at stake than anyone else. One was fifty-three-year-old Jamie Dimon of JPMorgan Chase, arguably the most powerful banker in the world. He was the private hand on the U. S. financial system, as Paulson and Cox were the public ones; and although his hand had for the most part a steadying effect, it was also very close to the till. What was at stake for Dimon in the Lehman crisis was, quite simply, cash: JPMorgan was Lehman's bank. It cleared Lehman's trades, which meant that the exchange of cash and securities arranged by Lehman's traders actually took place at JPMorgan. If Lehman failed, JPMorgan was, in Wall Street parlance, "exposed" — it would be stuck with the securities and the losses. During the previous week, Morgan had been advancing Lehman Brothers more than $100 billion a day in collateralized lending so that Lehman had the liquidity to cover its debts and stay in business, but the night before — September 11 — it had frozen $17 billion of cash and securities in Lehman's account and had, in the view of Lehman's executives, effectively finished it off. The execution came in the form of phone calls to a few key executives, and Dimon had earned their undying enmity by being on those calls but saying nothing.
The other executive with a lot at stake was, of course, Bob Diamond, and what he had at stake was his own ambition: He was looking to buy Lehman Brothers and thereby become a Wall Street player, a man who men like Jamie Dimon couldn't afford to ignore. And, indeed, on the morning of Sunday, September 14, the assembled masters agreed to admit Diamond into their company — agreed, that is, to let Bob Diamond save the global financial system by buying Lehman Brothers.
It didn't work.
The deal did not go through, the trade was not closed, and the bankruptcy filing of Lehman Brothers Holdings triggered a stock-market crash, a global bank run, and the destruction of trillions of dollars of capital. The meeting of minds and money that had been called to save capitalism didn't, and so people started writing capitalism's epitaph, or least epitaphs for capitalism in its most unfettered form. They even wrote about the meeting itself and how it proved that even the power of men like Dimon and Diamond has its limits.
What was not written about, however — what has never been written about because nobody knew about it — was a meeting that was held just a week later, in the offices of Weil Gotshal, the law firm providing Lehman its bankruptcy counsel. It was not so grand a meeting as the meeting held at the New York Fed, but it had as much to say about capitalism and how it was being reconstituted. Indeed, it was either the last meeting of capitalism's expansion or the first meeting of its contraction, for it pitted JPMorgan against Barclays in a kind of cage-match fight as the rest of the world was collapsing. In the seven days between those meetings, between the meeting at which Barclays failed to buy Lehman and the meeting at which its takeover of Lehman was completed, it became apparent that the two banks' primary concerns were less the survival of capitalism than who walked away with a big pile of cash.
In April 2008, Bob Diamond had received a phone call from one of the undersecretaries of the U. S. Treasury. His name was Bob Steel, and he was one of Diamond's friends. He'd worked for Henry Paulson at Goldman Sachs and now worked for him at Treasury, but in between he had served on Barclays' board. He had stayed in touch with Diamond through the market turmoil of the subprime-mortgage crisis as it unfolded early that year. Diamond says, "He made it very clear he had no official capacity to ask these questions, but he had two questions to ask me: Is there a price at which you'd take Lehman, and if so, what would you need for us to do?"
Now, you have to understand: Barclays is an old British name and an old British bank. It's been in business for 320 years. But Barclays Capital is a new investment bank. It's been in business twelve years, and Diamond has been running it from the start. When Barclays first hired him to run a new investment-banking business, 80 percent of its revenues were from its retail and commercial-banking business in the UK, which is to say the business side of a bank you see at an ATM machine or a branch office. He created Barclays Capital out of a threadbare remnant of corporate acquisition and amalgamation called BZW, and then after BarCap promptly lost hundreds of millions of pounds in the Russian debt crisis of 1998, he had to go before the Barclays board and ask if they wanted to stay in the business of investment banking at all. They did and wound up strengthening his hand. Since then, he has made a practice of building BarCap "organically" during times of stability and "strategically" during times of crisis, and by April 2008 he had succeeded in making Barclays the fastest-growing investment bank in the world, if not one of the biggest. Diamond lived in London and became not just a British banker but also a British citizen, rooting for Chelsea with the same privileged fervor he displayed for the Red Sox, Patriots, and Celtics. But he was still an American, and he still dreamed of America.
The subprime crisis that had begun in the summer of '07 gave him his chance to crack the American market. When he started Barclays Capital, he did so with the intention of competing with "American bulge-bracket firms," by which he meant the six or seven traditional American investment banks that had dominated global markets for the last thirty years — Goldman Sachs, Morgan Stanley, Merrill Lynch, and, yes, Lehman Brothers. By his own standard, he had failed — "for all our success we were still a second-tier firm in the U. S." — but he was convinced that he had failed because, while standing for free markets, the big U. S. investment banks were in fact "an oligopoly" that discouraged competition. He felt that crisis would deliver him opportunity, and when the subprime crisis fell at his own front door, he did two things: first, report his billions of losses to the board, and second, ask the board for money to begin building his business in America.
"It is only in times like these that organizations can improve their relative positions," he says. Still, he figured that he would start by luring the most talented traders from banks most shaken by the crisis. He never thought he'd be able to buy a bank outright — until JPMorgan bought Bear Stearns for some small percentage of its book value the week before Easter 2008, and then a few weeks later, Bob Steel called and asked him to name his price for Lehman Brothers. Barclays buying Lehman Brothers? It was as if Schweppes were being asked how much it was willing to pay for Pepsi-Cola.
And yet Diamond was not so sure he wanted the deal at all. There was overlap between the two banks in Europe, and there was "absolutely no track record of success" when one investment bank bought another — especially when a foreign investment bank bought an American one. Besides, he had done so much right at Barclays, when Lehman had done so much wrong. How could an investment banker famous for instituting a "no-asshole" rule at Barclays buy an investment bank whose all-asshole rule was just as strictly enforced?
"Our first impulse was no," he says. But when he started looking at the business Lehman Brothers had in the United States, he went back to the board and reminded them what Bob Steel had asked. "I said, 'Let's remember the question. The question was, What price? So let's say the price is a dollar. Are you going to tell me that this wouldn't be transformational?' "
At the time, his question was hypothetical. He didn't really expect that Lehman Brothers would be available for a dollar. He also didn't know — "I know now," he says — that Lehman's CEO, Dick Fuld, was already having conversations with Henry Paulson, and Paulson was telling him, in Diamond's paraphrase: Get a deal done — we're not going to bail you out.
On Thursday, September 11, 2008, a week that began with Henry Paulson's announcement that he was putting Fannie Mae and Freddie Mac into federal receivership, Paulson called Diamond to ask, officially, if he was interested in buying Lehman Brothers, which was enduring what one of its former executives called a "good old-fashioned bank run," couldn't get financing for its suspect assets, and had lost 70 percent of its value since the opening of trading that Monday. Diamond, who was in London for an investors' conference, took the call with his boss, John Varley, and with his two closest confidantes, BarCap COO Rich Ricci and BarCap president Jerry del Missier. Ricci and del Missier had both been with Diamond from BarCap's inauspicious beginnings. They asked Paulson if there was an American company also bidding on Lehman, because they were concerned about being used as a foreign stalking horse. Paulson said he couldn't promise exclusivity but told them to "come here and do your work." Diamond, Ricci, and del Missier took the last flights out of Heathrow for New York. They flew commercial.
On Friday, September 12, Diamond went to the Barclays building on Park Avenue, where he was picked up by Dick Fuld's chauffeur in Fuld's car. He was taken to the underground parking garage and then took the freight elevator to Lehman's executive floor — the thirty-first, known as "Club 31" for its extravagances — and met the beleaguered Fuld in his office. He found out that there was indeed another bank in the bidding for Lehman Brothers, Bank of America. With Ricci and del Missier, he then went to the offices of Lehman's bankruptcy attorneys, and even as Timothy Geithner was calling the richest financiers on the planet to the New York Fed's headquarters and challenging them to come up with a solution to Lehman's problems over the weekend, they waited till almost eleven o'clock before they engaged with Lehman executives. As they waited, they had a chance to look at Lehman's books and were amazed by what del Missier calls the "size and concentration of its positions" in commercial real estate and private-equity lending. Simply put, Lehman had taken an ownership piece in virtually every deal it had ever done, until it had a portfolio of $50 billion that was the most radioactive portfolio on Wall Street. And, as Ricci says, "We decide we don't want it." What they wanted was "to take Lehman at a price, without those assets." It was the principle that would hold them in good stead in the week to come: Get the good stuff. Don't worry too much about who gets the bad.
On Saturday, September 13, Diamond and the Barclays team went to the meeting at the Fed. The mission was clear: Save Lehman Brothers, hence Wall Street, hence the world, all in "business casual." Since he was making a bid, Diamond was off in one room; since he was also making a bid, Ken Lewis of Bank of America was off in another. The rest — Jamie Dimon, Lloyd Blankfein of Goldman Sachs, Vikram Pandit of Citigroup, et al. — were all discussing whether they wanted to pay to liquidate Lehman's radioactive portfolio, its $50 billion pile of crap. They decided they did. They decided they would. Barclays and Bank of America both bid for Lehman. Bank of America wound up asking for guarantees that Henry Paulson couldn't fulfill, since Paulson made it very clear he didn't want to do anything that smacked of a Lehman Brothers bailout. Ken Lewis went on to bid for Merrill Lynch, and Bob Diamond stood alone with his bid for Lehman Brothers. At the end of the day, the bid was accepted. A deal had been made. Barclays was buying Lehman Brothers. The world was saved.
On Sunday morning, all that remained was for the deal to be sent to the British regulatory body, the Financial Services Authority, for its approval. But there was a problem: A purchase of such magnitude required a shareholder vote. For that requirement to be waived, the FSA had to provide a waiver. The FSA declined. The deal was dead. Instead of being saved, Lehman Brothers was told to file for bankruptcy by Christopher Cox, the chairman of the SEC. The meeting that was designed to save Lehman Brothers ended with Merrill Lynch saved — purchased by Bank of America — and Lehman Brothers in Chapter 11.
There is still some suspicion, given what was to come, that Diamond never really wanted to buy a solvent Lehman Brothers — that he wanted to buy the bankrupt entity, and orchestrated a piece of subterfuge with the FSA. There is, however, not a Barclays executive who does not voice regret over the death of the deal that was on the table at the New York Fed, and Rich Ricci says that he and Diamond were "absolutely gutted." They went from the Fed to the bar at Smith & Wollensky, a macho New York steakhouse, where, Ricci says, "there was drinking involved." There, Diamond got a call on his cell phone. It was Bart McDade, Lehman's president. He told Diamond that Lehman Brothers Holdings, the bank, was going to file for bankruptcy. But Lehman Brothers North America, the broker-dealer, was still in business, and it was for sale. He wanted to know whether Diamond was still interested.
"I came back to work," Ricci says. "I came back over here [to 745 Seventh Avenue, Lehman Brothers' headquarters] at about four o'clock in the morning. Very little sleep. I started working with Bart on how this would work. And of course all hell broke loose Monday morning. The world sort of collapsed. And it was very odd here, very odd."
The crisis they had tried to avert was upon them, and upon the whole financial system. The Dow dropped 504 points that day, the bank-to-bank lending rate doubled, and the run that eradicated Lehman Brothers began to spread even to banks like Morgan Stanley and Goldman Sachs. The next day, one of the principal money-market funds wrote off its Lehman holdings as worthless, and the value of money-market shares dropped below a dollar for just the second time in history. At the end of the day, Henry Paulson announced the Treasury's $85 billion bailout of AIG.
Even amidst the chaos on those two days, Diamond and Ricci and McDade, together with teams of lawyers, bankers, analysts, and "deal guys," camped out on the thirty-first and thirty-second floors of the Lehman building. They were served food from the dining room on thirty-two; they didn't sleep. They knew, in the words of Skip McGee, who headed investment banking for Lehman and now for Barclays, that the value of Lehman Brothers was "melting like ice on a summer day. If we didn't do the deal when we did, there was no deal to be done."
At around noon on that Tuesday, Diamond left the building. He showered and grabbed a change of clothes. He called London and spoke to his boss and his board. Around three o'clock in the afternoon, he showed up with Bart McDade on one of Lehman's trading floors — the fourth. He was not wearing his jacket. He told the traders, over the intercom, that they had been bought, that they would continue to get paid, and that he would try to save the bulk of their jobs. Then, as if to remind the gathered traders that Diamond was their conqueror as well as their savior, the intercom played "God Save the Queen." This was the first public announcement that Barclays had purchased Lehman Brothers, and it was repeated on all seven trading floors and then in the auditorium. He got standing ovations and tears. The world had ended — was still ending — but Lehman, the cause of it all, had not. Diamond had done exactly what he set out to do, buying Lehman Brothers "at a price."
No, the price wasn't a dollar, but it was pretty close: He got Lehman's U. S. operations and its headquarters building for $1.75 billion, including the assumption of some liabilities and a $250 million fee. And Diamond was pretty damned proud of it — pretty damned proud of getting his price. I asked him once if, seen in retrospect, the Lehman Brothers acquisition was a "no-brainer," and this was his response: "If it was such a no-brainer, why did no one else bid for it? We're buying the U. S. broker-dealer of Lehman Brothers for $1.75 billion, which is roughly the price of this building, which we needed anyway. No one else bid. Where was Deutsche? Where was Credit Suisse? Where was Goldman Sachs? Where was Morgan Stanley? Where was HSBC? This is a U. S. bulge-bracket firm, operating at the very top level, and you're getting only the crown jewels."
And then, on Wednesday afternoon, Diamond heard from the Fed. There was yet another price to be paid.
Bob Diamond was in for the fight of his life.
There was something people said about Bob Diamond pretty much universally. Current executives, former executives, traders, and friends. Bob Diamond? Good guy, great with people. Charismatic. Has built a culture of decency at Barclays from the top down. Doesn't like to hear bad news, though. Will sometimes stand up and leave a meeting if the news is bad. Or will stop somebody midsentence — "Why are you telling me this?" So if you talk to Bob, you better tell him good news. Because Bob Diamond is a good-news guy.
It seemed like something to mention in an interview — the kind of softball question that gets someone to talk about himself. So I did. And I watched Bob Diamond's face change as if I'd ambushed him with secret documents. His hands, which had been poised in his pinstriped lap, closed into fists. He got up and went to his computer, then sat down again with his arms crossed. He had his glasses on, and he peered at me over the lenses. By force a smile flickered on his face, then went away.
"Who wants to hear bad news?" he said.
A lot of people think government action saved capitalism. It didn't. Capitalism saved capitalism.
A lot of people think the government didn't have any plans with regard to Lehman Brothers. It did. The plans just didn't work.
The government, in the form of the Federal Reserve, had two plans, in fact. It had Plan A and Plan B. Plan A was to find someone to buy Lehman Brothers. When that didn't happen — when that didn't happen because the Fed didn't want to fund the guarantees necessary to make it happen — they went to Plan B. Plan B was the Fed's plan to deal with a bankrupt Lehman Brothers. It was a plan to keep order in the markets once Lehman went out of business. It called for closing Lehman Brothers the holding company but keeping open its broker-dealer — the part of the operation that bought and sold securities. That way, the broker-dealer could close all its trades, and all the people doing business with Lehman Brothers could get paid. So on Monday night, September 15, the Federal Reserve began advancing the broker-dealer $45 billion a day to stay open. The idea was to keep people from freaking out.
People freaked out. The bankruptcy of Lehman Brothers was like an eclipse in the Middle Ages, a portent and a fulfillment of portent all at once. It was the darkness that had the power to burn and blind. The birds of the marketplace went quiet, and the dogs howled at the sun instead of the moon.
The Fed went from being in control of the situation to being as scared as anyone else. It was a bank, after all. Banks were scared.
And then, on Tuesday, Bob Diamond played "God Save the Queen" on the trading floors at Lehman Brothers. It was the one unalloyed triumph in a week of unnatural disasters, and the people at the Fed had nothing to do with it. They had not been consulted when the dealmakers were holed up on the thirty-first and thirty-second floors of Lehman Brothers. They found out about the deal only about an hour before everyone else did. They were, in the words of one Fed official, "surprised."
By Wednesday afternoon, they'd had some time to think about it, and the Fed's general counsel called the general counsel at Barclays. If you're going to do this, he said, you're going to have to step in for us on the funding. It was a request of sorts. But it was also a requirement. There were a series of meetings between Barclays and the Fed that day, and what was clear to one of the participants was the role that fear had started play. "It was understood that the Fed was desperate to get the Lehman trade off its books," he says. Another says simply: "They wanted to get paid."
Barclays had no objection to doing what the Fed was asking and even saw opportunity in taking over the funding. The Fed wanted out? Barclays was in. That was the good news. The bad news? As Lehman Brothers' bank, JPMorgan was also lending Lehman Brothers money. And JPMorgan wanted out, too.
Barclays Capital and JPMorgan are often presented as heroes of the crisis. Barclays bought what was left of Lehman Brothers when nobody else wanted to and saved thousands of jobs. JPMorgan operated as a quasi-public trust, its sheer size exerting a stabilizing force. Their CEOs even had similar names — Jamie Dimon and Bob Diamond. A few days before, they'd agreed on the proposition to create a liquidating trust for Lehman's toxic assets, with Jamie Dimon urging his Wall Street colleagues to fund it.
But the meeting at the New York Fed wasn't capitalism. It was about capitalism, and it was attended by capitalists. But it was a nearly collectivist exercise, with government inducing capitalists to cooperate for their own good and the good of one another.
Now, what happened later in the week, between Barclays and JPMorgan — now that was capitalism.
It wasn't a deal, you see. It was a trade. The Fed was involved with Lehman Brothers in that it was lending Lehman Brothers billions of dollars in return for collateral — sort of like a pawnshop loan. It wanted Barclays to take over that transaction — to be the one lending Lehman Brothers the billions of dollars in return for the same collateral. That was the trade.
What made the trade complicated was the fact that JPMorgan was also involved in a pawnshop loan with Lehman Brothers, advancing Lehman Brothers on average $69 billion a day. It had a lot of Lehman Brothers collateral and was looking for someone to take it. Specifically, it was looking for Barclays to take it. And it went into the trade with what a JPMorgan official calls a clear understanding that Barclays had agreed to step in for its funding and accept the assets it had on hand.
Barclays went into the trade with no idea how JPMorgan came to such an understanding. Rich Ricci and Gerard LaRocca figured that the collateral that Lehman Brothers had pledged to the Fed was of good quality. They suspected that the collateral that Lehman Brothers had pledged to JPMorgan was not as good.
They wanted the good stuff and only the good stuff.
JPMorgan wanted to give them the bad stuff.
This was an elemental Wall Street confrontation, and so, although Barclays' purchase of Lehman Brothers was supposed to be good for a Wall Street in grievous peril, it ended up a knife fight in an operating room.
The trade was supposed to be simple.
Barclays was supposed to wire $45 billion to Lehman Brothers. In return, Lehman would send $49.7 billion in assets back to Barclays. The difference in the value of the cash and the assets is called the "haircut," and it rewards the sender of cash for the risk it is taking.
There were, however, some problems.
First, the Fed was so eager — so desperate — to get its money back that it gave Barclays only one day to complete the trade.
Second, the trade was so large and put such a strain on the Wall Street infrastructure that nobody knew if it could actually be completed in a day.
Third, it was not simultaneous, as most trades are. In most trades, cash and assets are exchanged simultaneously at the bank where the money is changing hands — the so-called clearing bank. This trade was different, because the world was different. This trade was a fucking bet. Barclays was going to be sending the cash out first over the wire and waiting for the assets to come back.
And fourth, the clearing bank was JPMorgan, which gave it tremendous power. I mean, think of it: Morgan was going to have the money and the securities. So if you were Barclays, you had to trust JPMorgan.
Which leads us to the fifth problem:
It didn't.
The trade started out simply enough. On the morning of September 18, 2008, Barclays wired its first $5 billion to Lehman Brothers through JPMorgan. And then it waited to receive the collateral back. It took a long time. It took six hours to get $5.06 billion in collateral. Ricci's plan was to keep sending the cash $5 billion at a time and then make sure he got the collateral he wanted in return. But late in the afternoon there was a phone call from Bill Winters, the co-CEO of JPMorgan's investment bank. It was to Bob Diamond. Winters had a request, or maybe a challenge. Listen, he said, at the rate we're going, we're never going to get this done. Cut this $5-billion-at-a-time crap and let's get it over with. Send us $40 billion all at one time.
Diamond looked at Rich Ricci. The deal of the century would require the risk of the century. Your call, Ricci said.
Ricci wanted to keep sending the cash out $5 billion at a time. Forty billion dollars was a lot of fucking money. But he knew that this was Wall Street, that this was some kind of you-show-me-yours-I'll-show-you-mine moment. Winters was asking Diamond if he was in — all-in.
Your call, Ricci said.
On Wall Street, there are two kinds of jobs: back office and front office. The people who work in the back office support the people who work in the front office. The people who work in the back office are the analysts, the risk managers, the computer programmers. The people in the front office are traders. What separates the two kinds of jobs — what makes the front office so much more prestigious and lucrative than the back office — is risk. Risk is not just the lifeblood of Wall Street; it's the juice. If you can take risks, you get a front-office job; if you can't, you get a back-office job. Both are fine, but only one allows you to be a hero.
Bob Diamond had started in the back office.
In 1979, he took his first Wall Street job in Morgan Stanley's IT department. He did very well at it and became assistant to the CFO. But he could see what was happening on the Street, could see that banks like Goldman Sachs and Salomon Brothers were, in his words, "starting to take real risks." He had started his career on Wall Street just as the expansion of the risks banks were willing to take was about to change Wall Street forever, and he wanted to be part of it. So he accepted the assistant CFO job only on the condition that he'd get a chance to work in the front office. A year later, he got a job on the financing desk, as a so-called repo trader, doing the very same kind of pawnshop loans that Barclays was trying to do with Lehman Brothers. Repo traders are not heroes; most traders don't regard them as real traders, because they don't take positions, and their trades simply finance the trades that real traders make. "We still kid Bob about starting out on the repo desk," Ricci says, and if there's anything Diamond is sensitive about, it's his ability to take risks. He tells the story of being a young trader looking with pride at his book of trades because he'd never made a trade that lost money, until he realized that never losing money on a trade made him a loser on Wall Street, not a winner, because it meant he wasn't taking enough risk. He was shortchanging his company, shortchanging himself...
At about five minutes to seven, on September 18, 2008, Barclays Capital wired $40 billion to JPMorgan. In an instant, he had put his bank at risk. Bob Diamond was all-in.
Bob Diamond doesn't like to talk about it. He doesn't like talking about his role in the trade, figuring that there's no upside to a CEO commenting on a controversy. When he does talk about it, he's cagey. He doesn't even come out and say that there were talks with JPMorgan about assurances with regard to taking over JPMorgan's financing of Lehman; rather, he says that "if there were talks with JPMorgan, then I was in on them." When he's told the story of Bill Winters calling and challenging him to send the $40 billion all at once, he smiles shrewdly, while keeping his dead-level gaze, and says, "Well, if Rich Ricci told you that story, then it must be true." It's only when JPMorgan, through an official close to the trade, says that JPMorgan received assurances about the trade from senior Barclays executives, including Bob Diamond, that Diamond rouses himself into an unequivocal denial. Assurances to JPMorgan? There were no assurances, not from Diamond, nor from anyone else at Barclays.
What's clear from Diamond's cloaked admissions, however, is the fact that executives at the highest levels of both firms played a part in the trade of September 18 and 19. And when the official at JPMorgan speaks of the bank feeling deceived, it's clear he means that JPMorgan felt deceived by, among others, Bob Diamond himself.
There are two numbers you have to remember:
The first is $15.8 billion.
The second is $7 billion.
The $15.8 billion is the loan that Barclays extended to Lehman Brothers the night before, when the Fed forced the trade on Barclays. The payment of that loan led JPMorgan to believe it was going to have its way with Barclays — that Barclays was going to take over funding for Lehman Brothers, and also take the collateral JPMorgan was looking to get rid of. The bad stuff.
But a loan of this type has to be renewed every night. And late on Thursday, the back-office guys at JPMorgan notice that Barclays has not renewed the $15.8 billion loan.
A back-office guy at Barclays says that it's just an oversight, and the loan will be renewed. After all, Barclays has more to worry about than a $15.8 billion loan.
Barclays has to worry about the $40 billion. You see, it hasn't gotten the collateral back for it.
And although the Fed is working to keep open the wire — the electronic conduit for securities transfers — time is running out, and it is clear that Barclays is not going to get paid, not tonight anyway.
For the day, Barclays has sent $45 billion cash to Lehman Brothers via JPMorgan.
It's supposed to get $49.7 billion back in collateral.
It's gotten $42.7 billion.
It's short.
Barclays is fucked.
Diamond, it seems, has lost his bet.
And then, at one in the morning, there's a deal: JPMorgan agrees that it owes Barclays a lot of money. A custodial account is created at JPMorgan for just this purpose. It's Barclays' account. It's Barclays' cash: $7 billion.
Somebody wakes up Friday feeling they've gotten screwed. Take your pick: It could be JPMorgan, when it discovers that Barclays didn't pay the $15.8 billion loan, and Barclays explains that it was under no obligation to do so.
It could be Barclays, when it discovers that JPMorgan has frozen the account with the $7 billion.
So let's change our opening proposition:
Everybody wakes up Friday feeling they've gotten screwed.
And it's still early.
It's about 5:00 A.M., in fact, when Mike Keegan of Barclays tells Alex Kirk of Lehman Brothers that JPMorgan has started to freeze Lehman's assets. Keegan is, like a lot of the people Diamond has brought in to consummate the Lehman purchase, somebody who has been with Diamond a long time. He has, indeed, the honor of having been one of Diamond's first hires at Barclays Capital.
Alex Kirk is a Lehman managing director. Like a lot of the Lehman people who have been brought in to consummate the deal, he has the honor of being with the company only a few months and of being both a newcomer and a survivor. He has been asked by Lehman president Bart McDade to close the trade because Lehman's original closer, its mergers-and-acquisitions guy, quit the day before.
When Keegan tells him about the frozen assets, he tells Keegan, "Call Bob [Diamond] and Rich [Ricci]. Tell them we've got a problem. JPMorgan is not going to close. They're not going to sell you one thing you want."
He is a Lehman person, you see, and like all of the Lehman people, he has dealt with JPMorgan before. In the week leading up to Lehman's bankruptcy, the Lehman people saw how JPMorgan responded when threatened: like a raging, squatting behemoth, "seizing and freezing assets left and right," in the words of another former Lehman managing director.
"JPMorgan doesn't want to save the universe," he says. "JPMorgan wants to profit from the destruction of the universe."
To Lehman guys like Kirk, JPMorgan is nothing but a predator. And so he warns Keegan and Ricci:
You're going to have to rewrite the entire deal.
The deal, of course, is not a handshake agreement. And at the heart of the deal is the list of assets that Barclays has agreed to purchase from Lehman Brothers, consisting of thousands of securities. The list, like everything else in the deal, has to be approved by the bankruptcy-court judge after a hearing.
And the hearing is today, Friday afternoon.
At four o'clock.
It's now seven in the morning. Kirk is telling Keegan and Ricci that they have to rewrite the asset-purchase agreement in nine hours. That means going back to Lehman's books and finding securities that might actually be worth what Barclays is going to pay.
But the bigger problem is the $7 billion. One of the reasons the trade went slowly the night before was that the collateral that started coming over the wire was not the collateral that Barclays believed it was paying for.
It wasn't the good stuff, from the Fed.
It was, in the words of a Barclays executive, crap. As in, I know crap when I see crap.
Fortunately for Barclays, some of the Lehman people on hand recognized it. They should. They'd sold it. These were assets that bore the kind of name that historians will decry when they write of the last days of the Era of Expanding Risk:
RACERS.
Restructured Asset Certificates with Enhanced Returns.
They were issued with an Aaa rating from Moody's.
Now they were practically worthless, so worthless in fact that Lehman people had been warning Barclays people about them. Don't take the RACERS...
So Barclays rejected the collateral that JPMorgan was sending over.
"I don't know if Barclays knew that it was starting a holy war when it refused the collateral," says the former Lehman managing director. "But that's what happened. I think that JPMorgan got pissed because they're usually so clever at doing this stuff. Now it was being done to them."
But JPMorgan has a clever move left because it has the $7 billion — $7 billion is still a lot of money, and JPMorgan holds it hostage. If Barclays wants its money, it has to take the RACERS and pay the $15.8 billion.
The knife fight in the operating room has begun.
It's Sunday morning, one week after the most powerful bankers in the world tried and failed to save capitalism. That morning, Alex Kirk turns to Bart McDade and says, What are we going to tell people? How are we going to explain this?
What Kirk and McDade fear they are going to have to explain is unusual indeed:
Two days earlier, at a bankruptcy-court hearing that lasted eight hours and ended at close to one in the morning, Judge James Peck had approved the rewritten deal. He'd approved the deal because he deemed it significant to the markets, to "the national economy, and the global economy."
And now Kirk and McDade fear that they won't be able to close it. The deal of the century is on the brink of collapse.
The $7 billion is still frozen.
And JPMorgan won't return Barclays' calls.
Because JPMorgan is furious that Barclays didn't return its calls.
The world is ending in silence.
That night, however, there is an emergency meeting at the offices of Weil Gotshal, Lehman's bankruptcy lawyers. A Barclays contingent led by Rich Ricci is there on one side of the table. They don't even know if JPMorgan is going to show up. But it does, and the common assumption is that the Fed prevailed upon it to do so, at the highest levels. The JPMorgan contingent is led by its general counsel, Stephen Cutler. He looks at the assemblage on the other side and says: You didn't really think you could close without us, did you?
Some of the people at the meeting remember it for its mayhem — for JPMorgan "trying to bully Rich Ricci," and Ricci showing that he "doesn't bully well," and both sides eventually calling each other thieves.
But one of the lawyers remembers it as a "bunch of bankers yelling about what bankers usually yell about — money." And at the end, there was a settlement — "well, we thought there was a settlement," the lawyer says.
And so it was that sometime early on Monday morning, September 22, precisely one week after Lehman's bankruptcy filing ended the era of Wall Street expansionism, a trade was completed that began the era of global financial consolidation.
Lehman Brothers NA, the surviving broker-dealer of the bankrupt Lehman Brothers Holdings, sent a package of securities to Barclays Capital. Barclays Capital wired back cash, thereby obligating Lehman Brothers NA to pay it back by the terms of the repo contract.
As foreordained, Lehman Brothers NA defaulted. Barclays forgave the debt, taking possession of the company instead.
The trade was closed, and Bob Diamond had his prize, for his price.
One day later, Gerard LaRocca discovered that the $7 billion he thought was in the Barclays account at JPMorgan was no longer there.
You get the sense that they are still taken aback about what they had to contend with — the furies they unleashed — in their dealings with JPMorgan. They say they would never want to go through something like that again. They say that it was Wall Street hardball at its best and worst. They say that they've gone up against many Wall Street tough guys, but this was something different. This was inappropriate. This was ruthless. This was one firm making a bad situation much worse. This was a Wall Street giant exacerbating the distress of the markets. Sure, there were things that JPMorgan was unhappy about. It was unhappy about the deals it had on the books with Lehman Brothers and so it became unhappy about its deal with Barclays. But there was nothing that Barclays did that could have possibly justified JPMorgan taking its money.
In fact, by taking the money without warning or authorization, JPMorgan did something that was unprecedented.
But for all that — for all of JPMorgan's ruthlessness — Barclays won at every turn.
They won everything they wanted to win. They got the good stuff. They made sure someone else got the bad. They went by the simple if pitiless principle articulated by Rich Ricci:
"What happened was we then decided very consciously we were only going to take these liabilities, these assets. That's it. The rest of it is in the hands of the bank, of the court, and of the receiver... Now, certainly we're worried about the past and trying to help our clients. But we are under no obligation to settle those things because of the way bankruptcy works. We have the advantage of a clean slate going forward but the disadvantage of trying to deal with Lehman clients who want to talk about the past."
Compare that with how JPMorgan fared. JPMorgan went into the trade looking to unload its worthless Lehman assets, and looking to get Barclays to fund the operations of the Lehman broker-dealer.
Instead, an official speaking for JPMorgan admits, We kept the dregs, and didn't get paid. JPMorgan was not very happy with Barclays Capital.
And so, when the $7 billion went missing, perhaps it was inevitable that Bob Diamond's winning streak would continue. It was shocking to Barclays executives that the Fed wasn't able to just make JPMorgan give it back — wasn't able to convince JPMorgan to right such an obvious wrong. But when the Fed forensically reconstructed the trade and both sides were called upon to settle, Barclays got satisfaction: $1.3 billion in cash and $5.7 billion in securities.
Bob Diamond got everything he wanted, because he knew what he wanted. He named his price, and he got it.
"Was it fun?" I asked Bob Diamond.
It was one of those easy questions he didn't like. Hard questions he could answer with dignity, with his combination of priestly remove and priestly magnanimity.
The easy questions made him look a little queasy. He blanched a little bit, and his mouth tightened, like the knot of a skinny tie.
"I don't think there's any way you could describe anything we did over that period as fun," he said. "I think, in looking back, there's definitely things that we accomplished that we felt very gratified about — felt, gosh, given the situation, we really executed well. But there was no aspect of it — from the intensity, from vested interests on so many sides, from disagreements with people you trust and know well, to being frankly just plain tired — there was no aspect about it that could be described as fun. But we knew that when we started this process. We got on a plane Thursday night to come to New York. We understood the seriousness. We expected this to be one of the most intense experiences. We felt that if it wasn't something we were prepared to do, we should move aside."
They didn't move aside, of course. At no time did they ever move aside, and now Diamond was an American again. He moved to New York and went to work in the big building at 745 Seventh Avenue, which used to be the headquarters of an American investment bank called Lehman Brothers. Its facade used to throb with the color of lucre — Lehman green, in honor of all those employees who attested that they "bled green" — but now its pulse was Barclays blue. Dick Fuld used to go to work in the carved isolation of the thirty-first floor, but now Bob Diamond's office was made of glass and it was located in the corner of one of his trading floors. He had intended the purchase of Lehman Brothers to be "transformational" for Barclays, and for evidence of his success he didn't have to look much farther than just outside the walls that were his windows and the windows that were his walls. It wasn't just that Barclays Capital was now an American bulge-bracket firm in its own right; it wasn't just that out of the integration of Barclays and Lehman Brothers he had built what Jerry del Missier called a "flow monster" that kept capital moving with incredible efficiency. It was that in taking over Lehman Brothers, he had also allowed Barclays to be taken over, in what one Barclays trader called the "goddamnedest reverse takeover you ever saw." The culture at Lehman Brothers was American and aggressive, replete with its "animals" and its "killers," not to mention its jerks and assholes, and while Diamond cherished the culture he had built at Barclays from the beginning, he was willing to put it in play.
And so I asked him if the purchase of Lehman Brothers had been as transformational for him as it was for Barclays. Of course, being a journalist rather than a capitalist, I was thinking in sentimental terms — thinking that he might answer by speaking of what he'd lost, in terms of innocence, rather than what he'd gained, in terms of power and prestige. But his answer was right in front of me, as well as all around me. His jacket was off, slung on a chair. He was wearing a blue-striped shirt, with a green tie dotted with tiny emblems in the shape of Nantucket, where his father had once been the high school principal, and where he was flying that evening in a NetJet to spend the summer weekend at his mansion. His whole being was transformed and his innocence was the innocence of acquisition. He was transformed exactly as Barclays had been, and when, two weeks later, Barclays Capital announced — largely on the strength of its Lehman acquisition — a half-year profit of nearly $2 billion, Diamond's staid English bank stood with JPMorgan as one of the biggest investment banks in the world... or, as Ricci would have it, as "one of the big boys, for better or for worse."
