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Too Big to Fail

May 2008. Lehman Brothers, the nation’s fourth-largest investment bank, is beginning to unravel. Thanks to its dependence on toxic real-estate assets such as subprime mortgages, the company’s stock has plummeted. Treasury Secretary Hank Paulson, a free-market advocate and former Goldman Sachs Chairman/CEO working for a Republican president, reluctantly gets involved in finding an investor to shore it up. After being prodded by Lehman CEO Dick Fuld, Paulson reaches out to the world’s richest man, Warren Buffett, whose eventual offer to Lehman proves unsatisfactory to Fuld. The next morning, Paulson has his weekly breakfast with friend and colleague Ben Bernanke, chairman of the Federal Reserve. The two men agree that Fuld needs to find a buyer for Lehman.

Friday, September 12. Paulson calls a meeting of CEOs from the country’s biggest banks – JP Morgan Chase, Goldman Sachs, Morgan Stanley, Merrill Lynch, and Citigroup – at the New York Federal Reserve, telling them that this is their problem and they need to fix it. He gives them until Sunday night, when the stock markets open in Asia, to find a solution – or else Lehman will be forced to close its doors. By Sunday, a potential solution seems to be reached: British company Barclays will buy up a large chunk of Lehman and the banks will contribute to the deal by throwing in billions of dollars. However at the 11th hour, the British Chancellor of the Exchequer impedes the plan and Lehman has no choice but to declare bankruptcy. Fuld, who has been kept out of the negotiations, is devastated.

As the news breaks Monday morning, Paulson is surprised that the public’s reaction is mostly positive – Main Street is satisfied that Wall Street has finally been taught a lesson by the Fed. The stock market appears to be stable, but within hours the aftereffects of the Lehman bankruptcy sends the market into a free fall. The crisis grows to encompass the insurance giant AIG. Bank-takeover expert Chris Flowers has been monitoring the company’s precarious position for the past week; again, Buffett is approached to invest, but concludes that AIG’s problems are too much for him to take on. As credit dries up, Paulson fields desperate calls from international regulators, CEOs and the head of GE. When the world’s largest company faces difficulty financing its daily activities, Paulson knows a tipping point is at hand.

Tuesday, September 16. At their weekly breakfast, Bernanke urges Paulson, looking worse for wear after not sleeping in days, to go to Congress for legislative approval on a plan for the government to rescue the banking system. They both fear an economic crisis worse than the Great Depression if AIG isn’t bailed out. It’s too late to undo the deregulatory atmosphere that led to the crisis, but if the government buys up toxic assets at a price tag of $700 billion, the economy might just have a chance to stabilize. Meanwhile, Federal Reserve president Timothy Geithner works on merging big banks in order to save them. With the 2008 presidential election just weeks away, the “mother of all bailouts” gets caught up in presidential politics. Both candidates demand a solution and John McCain, in a move that appalls Paulson and his staff, suspends his campaign to return to Washington. Paulson now must develop a bailout bill on which both House Republicans and Democrats will vote “yes,” and that the public can swallow. The first pass at the Troubled Asset Relief Program is defeated, but the revision, initially a three-page bill that has ballooned to the size of a phone book, finally passes on October 1. But Paulson and Bernanke recognize that buying up toxic assets isn’t a viable solution. They now have to do exactly what they loathe, give the banks capital injections. On October 13, Paulson, Geithner and Bernanke persuade nine major U.S. banks to take the money. Their hope is that the banks will use the cash to lend to Main Street and keep the economy flowing. The crisis has been averted, for now.

Fast forward to 2009. The nation is carrying the weight of a prolonged economic slump, while on Wall Street, huge bonuses are still paid out, as business continues as usual.