Chapter 4

Belligerent Leadership and the Demise of Lehman Brothers

The tigers of wrath are wiser than the horses of instruction.

William Blake

On Wednesday, September 17, 2008, US Secretary of the Treasury Henry “Hank” Paulson had one of the most disturbing conversations he can remember.1 It was the “gorilla” of Wall Street on the line, former Lehman Brothers CEO Richard (Dick) S. Fuld.

A day earlier, Paulson had guided the bailout of American Insurance Group (AIG). Fuld was in total disbelief. How could Paulson have informed Fuld that federal bailouts were undesirable “moral hazards” and then rescue AIG in a landmark deal the day after? In fact, Paulson had insisted to Fuld that a federal bailout of Lehman was “illegal.”

Fuld desperately begged Paulson to reverse the Lehman failure. “I see you bailed out AIG,” Fuld said. “Hank, what you need to do now is let the Fed come into Lehman Brothers. Have the government come in and guarantee it. Give me my company back. I can get all the people back. We will have Lehman Brothers again.”2

In his biography, Paulson omitted to explain what he said next to Fuld, but history tells the story. Curiously, the US Treasury and Federal Reserve never rescued Lehman Brothers. One of the proudest banks in US history—a bank that had survived the Civil War, the Great Depression, and 1987’s “Black Friday”—was now entirely bankrupt.

Two figures predominately ran Lehman Brothers in the 1990s and throughout the financial crisis: Dick Fuld and Joe Gregory. ...

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