At a critical juncture in negotiations to forestall a Lehman bankruptcy, Jim Wilkinson emailed his buddy Jes Staley. Wilkinson, the Chief of Staff to Treasury Secretary Hank Paulson, and Staley, the head of JPMorgan Asset Management, knew perfectly well that their communications were unethical, if not illegal. But Wilkinson seemed intent on sabotaging the deal. Their covert emails, released by the Financial Crisis Inquiry Commission, frame a new backstory to Lehman’s demise: Saturday evening, September 13, 2008: 7:55 pm, Wilkinson to Staley: “Still here working!” 7:58 pm, Staley to Wilkinson: “Likewise. Can I call you later?” 8:03 pm, Wilkinson to Staley: “You bet. Happy to give you an update.” 8:41 pm, Staley to Wilkinson: “Just called.” 8:59 pm, Wilkinson to Staley: “Just called u back…left a voicemail…is there a better number to reach you on?” 10:45 pm, Staley to Wilkinson: “What are your people saying?” We don’t know what was said, but you can bet that lawyers for Lehman’s bankruptcy estate will subpoena the private phone records and email accounts of Wilkinson and Staley, who may face embarrassing questions in deposition. “JPMorgan’s top management were the ultimate insiders to the evolving crisis, enjoying real-time access to the key decision makers at the United States Treasury and the Federal Reserve Bank of New York,” alleges Lehman in its 41-count lawsuit against JPMorgan Chase. The complaint states: “JPMorgan leveraged its life and death power as the brokerage firm’s primary clearing bank to force LBHI [Lehman Brothers Holdings Inc.] into a series of one-sided agreements and to siphon billions of dollars in critically needed assets. The purpose of these last-minute maneuvers was to leapfrog JPMorgan over other creditors… The effect of JPMorgan’s actions taken with the benefit of unparalleled inside knowledge – was devastating. JPMorgan not only took billions of dollars more than it needed from LBHI, but it also accelerated LBHl’s freefall into bankruptcy by denying it an opportunity for a more orderly wind-down, costing the LBHI estate tens of billions of dollars in lost value.” The New York Fed had already circulated a plan to step into JPMorgan’s shoes, and act as Lehman’s primary clearing bank to provide intraday credit. The critical back-and-forth exchange between Wilkinson and Staley took place on Sunday, September 14, 2008: 7:46 am, Wilkinson to Staley: “Here at the fed now…looking like a wind down to me…what’s your sense?” 8:53 am, Staley to Wilkinson: “The issue here is can we end it a lehman. What’s the solution for Merrill? And who loses in the triparty unwind? And what will you guys do in the end. Jes” 9:00 am, Wilkinson to Staley: “No way govt money is coming in…I’m writing the usg coms plan for orderly unwind…also just did a call with the WH and usg is united behind no money. No way in hell Paulson could blink now…we will know more after thi ceo mtg this morning but I think we are headed for a winddown unless Barclays deal gets untangled” 9:11 am, Staley to Wilkinson: “I think the market can take the lehman unwind, but there needs to be a bid for Merrill early in the week. If Merrill goes, the whole 2a7 funding of Wall Street [i.e. financing commercial paper through money market funds] stops and the Fed will have to step in a bigger way. Its getting heated here. And I think people are getting that Paulson wont move. Jes” At that particular moment, Jes knew something that others on Paulson’s team did not. Seventeen minutes afterward, at 9:28 am, Paulson’s press secretary. Michele Davis, emailed The Financial Times to explain how the government could support an agreed-upon deal involving Barclays’ acquisition of Lehman, after a spin-off of $50 billion in mortgage assets financed by a consortium of Wall Street banks. The off-the-record message alluded to the Federal Reserve’s Primary Dealer Credit Facility, which was created at the time of the Bear Stearns bailout. A few minutes after Davis’s email, Paulson told everyone that the deal was dead. The roles played by Paulson and The White House were the unacknowledged elephants in the room on September 1st and 2nd, when the FCIC held hearings on the government’s decision to let Lehman go under. Apparently, no one wants to confront Paulson and his succession of contradictory fibs. “I never once considered it appropriate to put taxpayer money on the line in resolving Lehman Brothers,” he said on September 15, 2008, broadcasting his dishonesty to everyone who had worked with him over the prior week. Ten months later, he testified, “We were unable to find any buyer to come in and make the acquisition on an assisted basis or an unassisted basis.” But he reversed himself within a few minutes, after Rep. Mike Quigley, D-Ill, reminded him that Bank of America was willing to acquire Lehman, if it got sufficient financial help. “We went to Bank America repeatedly,’ he said, “and Bank America asked each time for more assistance and we had the — we had the private sector ready to fill the gap. But Bank America in my judgment was never serious about it,” he said. The private sector was, in fact, ready to fill the gap, so long as the U.S. government provided indirect financial support. The sticking point with Barclays and its UK regulator, the Financial Services Authority, was the U.S. government’s insistence that Barclays guarantee all of Lehman’s trading obligations as of Monday morning, September 15, 2008, before due diligence could be completed. This was too much for the FSA, which had insufficient time or information to adequately review the situation. Paulson put it this way: “The British screwed us.” Three days before Wilkinson wrote, “No way govt money is coming in,” Paulson, Bernanke and Geithner had agreed upon a written plan of action that clearly stated otherwise. Government support was available, but it would not be divulged until the last minute, after top Wall Street banks had been brought together in a room and pushed hard to provide the maximum level of private financing to avert a Lehman collapse. Both Geithner and Paulson had assured the FSA that government assistance might be available to support a Barclays acquisition. Because of the extreme sensitivity of the matter, none of the Wall Street banks would be given more than two hours notice to that fateful meeting, scheduled for 6:00 pm on Friday, September 12, 2008, at the New York Fed. But Wilkinson was blabbing his thoughts to others, including a headhunter in San Francisco. At 8:49 am on September 12, he emailed Abby Adlerman, a recruiter at Russell Reynolds in San Francisco, “…looks like Paulson will go to NYC to sort through this Lehman mess…can’t imagine a scenario where we put in gov’t money…we shall see…” [The ellipses are Wilkinson's.] The written gameplan, which distributed among Paulson, Bernanke and Geithner and their people, framed the issue of government support as follows: – We should have in mind a maximum number of how much we are willing to finance before the meeting starts, but not divulge our willingness to do so to the consortium. – Term of any liquidity support should be long enough to guard against a fire sale, but on a short enough fuse to encourage buyers of Lehman assets to come forward. Two months to a year in duration? – Preferable to style FRBNY commitment as much as possible as a backstop rather than lending, but we can’t attach too much of a subsidy to liquidity, or the consortium will not have sufficient incentives to act.
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David Fiderer: How Paulson’s Chief of Staff Worked To Sabotage The Deal To Save Lehman
