The implosion of Bear Stearns and the JPMorgan Chas (JPM)e deal engineered by the Fed hit Wall Street like a tsunami on Monday, Mar. 17. And the wave of distress crashed hard on Lehman Brothers (LEH). Rumors that Lehman would be the next investment bank to fall sent its shares plunging by as much as 48% during the day, to close at 31.75—a 19% drop and a 4 1/2-year low. That led to a new round of speculation that Lehman might be snapped up by a commercial bank such as HSBC (HBC), with dependable access to funding. But thanks to the Fed intervention in the credit markets and the relentless efforts of Lehman's top brass, especially new CFO Erin Callan, Ugly Monday gave way to Reassuring Tuesday. By the end of that day, Lehman shares had risen over 46%, to close at 46.49. When BusinessWeek went to press on Mar. 19, shares were back down a bit, but Lehman was on much safer ground.
So on Monday we all come into work, and the market is down sharply, Bear Stearns is being acquired for $2, and the rumors start: Lehman is next. Is Lehman next?
Categorically no. And I think the performance of our stock today [Tuesday, Mar. 18] is the market saying: You're not next. We have a very different story than the perception.
I don't even know if it's perception. It's really rumor. I mean, every time the markets are under pressure, Lehman is supposedly hanging on by its fingernails.
We fully anticipated that Monday was going to be a very, very difficult day for us, that we would be a top target, and we had a game plan to address it. But how do you get yourself out of that predicament? It just takes time and patience, proving ourselves in a tough environment.
How many so-called level three assets—those for which market values aren't readily available— does Lehman have on the books right now?
About $38 billion worth of assets are level three.
How critical for Lehman was the Fed opening up the discount window to investment banks?
It was a pretty historic event for our industry, and I think it was a great decision. Incredibly helpful. The Fed really acted in a very responsible way to try to address what certainly was starting to feel like a contagion of liquidity constraints. It was absolutely the right thing to do. In fact, we have used the window.
So you did go to the window?
Yes, we went tonight at 5 p.m. We wanted to test it out. There were some operational issues, and my understanding is Goldman may have [gone to the window, too].
Can you tell us about it? How does that work?
Well, you call your banking counterpart—we have to go through our clearing bank—and you just say: "Here's my collateral, and I'm interested in getting financing." The Fed was really encouraging people to go. So we thought we'd take some leadership. We had a strong day. We put our numbers out there. People knew our liquidity position, and so they wouldn't think of it as a sign of weakness. It was a little bit bold on our part, but I think it was the right call.
How much financing did you request?
We just did $2 billion, so it's a pretty small amount when you have a $375 billion balance sheet. But it was, I think, important as a statement, and it was very important in terms of making sure [the process] worked.
Should the Fed have opened this up a month ago? A lot of people feel that if it had, maybe Bear Stearns would not have gone down—and certainly not for $2 a share.
It's hard not to say that if the Fed had done this earlier, Bear Stearns wouldn't have gone the way it did. But outside of the context of a significant failure, it would have been a tough thing to do. I'm not sure you can really suggest that the Fed was slow. Maybe it took a significant event to get them over the hump of using that extraordinary regulatory power to make this kind of a decision. They debated a lot of issues about moral hazard. It's incredibly unfortunate the way the scenario played out for Bear Stearns, but I also am sympathetic to the challenges the Fed had in making the decision.
Is it fair to say JPMorgan took advantage of a crisis situation to get Bear on extremely beneficial terms?
Is it fair? Certainly it's a very smart deal for JPMorgan. But I think it will have reverberations for the industry that are unfortunate and that we'll be living with for a while.
How shocked were you when you saw the price for Bear?
Very shocked, because certainly I'd been getting a lot of feedback that it was $19 a share. That was kind of the story for at least 24 hours. So when one of my colleagues sent me an e-mail and said $2, I thought they had dropped a zero.
What does your gut tell you? Does this deal go through at this price?
It actually feels like it will, though not without some angst and debate and lawsuits.
I have a hard time understanding how things could change so fast and furiously for Bear. Can your business really reverse course like that in a 48-hour period, or was that perhaps a situation unique to Bear?
I think that will be the lingering question about our industry and our business model—and it should be. Liquidity is the thing that will kill you in a moment. It won't necessarily be writedowns. We obviously saw huge writedowns taken by other members of Bear's peer group, and they raised capital and came back for another day. So I think there were a number of factors related to how Bear managed its liquidity that were specific to that organization.
Let me ask you about this credit environment. How tough is it out there?
I think the market is worse than anybody who has been in the industry has seen for the better part of 40 years—including my CEO, Dick Fuld. What started in one or two asset classes in credit and fixed-income assets migrated over the course of the last six months into really virtually every asset class regardless of fundamentals and regardless of basic quality.