Lehman Brothers | Lehman is Different | 2

After the collapse of top Wall Street investment bank Bear Stearns, Lehman Brothers scrambles to convince the world it won’t be next, but dirty truths about the firm’s finances threaten to destroy what credibility it has left. Be the first to know about Wondery’s newest podcasts, curated recommendations, and more! Sign up now at https://wondery.fm/wonderynewsletter Listen to American Scandal on the Wondery App or wherever you get your podcasts. Experience all episodes ad-free and be the first to binge the newest season. Unlock exclusive early access by joining Wondery+ in the Wondery App, Apple Podcasts or Spotify. Start your free trial today by visiting wondery.com/links/american-scandal/ now. See Privacy Policy at https://art19.com/privacy and California Privacy Notice at https://art19.com/privacy#do-not-sell-my-info.

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Lindsay Graham?

  American scandal uses dramatizations that are based on true events. Some elements, including dialogue, might be invented, but everything is based on historical research.

• 0:26Lindsay Graham?

  It's early morning on March 17, 2008, in Times Square, New York City. The wind bites against the glass facade of Lehman Brothers headquarters as traders, analysts, and bankers stream inside. They clutch coffee cups, anxiety written on their faces, because yesterday, one of Wall Street's largest investment banks, Bear Stearns, suddenly collapsed, and now there are fears that Lehman could be next. A black Mercedes pulls up to the curb. The door swings open, and Lehman CEO Dick Fuld steps out. He walks briskly through the revolving doors and takes the elevator up to the 31st floor. Under Fuld's leadership, Lehman bet big on mortgage-backed assets, and despite mounting warnings that the real estate bubble was about to burst,

• 1:11Lindsay Graham?

  Fuld did little to change course. Now the company may be about to pay the price. The elevator door opens, and Fuld steps out into an executive suite that feels like a bunker under siege. Phones ring nonstop, screens flash red, voices are sharp and tense. Fuld goes to his corner office and logs into Bloomberg. Lehman shares are already down 21%. Fuld's jaw tightens as he does the math. He personally just lost about $90 million. Beside him, Fuld's phone buzzes with calls from reporters, analysts, even family members. He answers some callers, but ignores others. Then the name John Mack flashes across the phone screen. Mack is an old friend, but more importantly,

• 1:55Lindsay Graham?

  he's the CEO of Morgan Stanley. So this time, Fuld picks up the phone. John, how you doing over there, buddy? Well, I'm a little spooked, but we're holding up. I'm hearing a lot of rumors about Lehman, though. Yeah, the press is gunning for us. It's ugly. You got that right. But they smell blood in the water. Is it true some of the other banks have stopped trading with you? Yeah, there are two, Deutsche Bank and HSBC, but that's it. The American firms are still with me. Oh, good. All right, that's good. But look, Dick, I've got to hear from you. Is Lehman sound? John, how long have we known each other? I have to ask. You and I both know this mess has nothing to do with the balance sheets. Bear didn't die because of their real estate assets. The hedge funds destroyed them. They talked Bear down until everyone believed it was worthless.

• 2:40Lindsay Graham?

  And yesterday, those vultures were drinking mimosas down at the Four Seasons. Well, what if they come after you next? Oh, they'll try. And the press will help them, of course, but Lehman is too strong for that. We've got liquidity. We've got capital. Hey, the firm's been around for 150 years. We're not going anywhere. All right, that's good to hear. And I can rely on you, right, John? Morgan Stanley will keep trading with us? We got your back, buddy. If you say Lehman is sound, that's good enough for me.

• 3:08Lindsay Graham?

  It's critical for Dick Fuld and Lehman Brothers that other banks continue trading with them. Those deals keep money moving in and out of the company. They're the lifeblood that keeps an investment bank like Lehman alive. But the market is fragile, and confidence on the trading floors can disappear in moments. To keep the other banks on their side, Fuld will need something more than just assurances. He'll need proof that his company can survive, a story strong enough to restore faith in Lehman Brothers for good.

• 4:09Speaker 01

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• 4:46Lindsay Graham?

  From Wondery, I'm Lindsay Graham, and this is American Scandal.

• 5:10Lindsay Graham?

  In the spring of 2008, the long and highly profitable boom on Wall Street ended in spectacular fashion. The investment bank Bear Stearns collapsed, and its shattered remains were picked up by rival JP Morgan Chase for just $2 a share. When Lehman Brothers CEO Dick Fold heard that price, he thought the phone call had cut off and missed the rest of the number. Just a year earlier, Bear Stearns shares were trading for $170. $2 couldn't possibly be right. But it was. The deal had been pushed through by the U.S. Treasury Secretary Hank Paulson with $29 billion in emergency government loans. It was a vast amount of money, but Bear Stearns was just the smallest of Wall Street's Big Five investment banks.

• 5:55Lindsay Graham?

  The cost of bailing out any of the others would be far higher. This is Episode Two, Lehman is Different.

• 6:05Lindsay Graham?

  It's the morning of March 17, 2008, at the headquarters of Lehman Brothers in New York. CEO Dick Fuld gathers his top executives in the conference room on the 31st floor. For hours, he's been taking calls with other Wall Street CEOs, trying to convince them to keep trading with Lehman. But while he's been talking, Lehman's share price has plunged by 48%, and Fuld has now realized he can't do it all himself. Looking around the room, he lays out his plan. The company will mount a media blitz to crush the negative rumors that are threatening to pull Lehman down. Interviews will be lined up with The Wall Street Journal, The Financial Times, and Barron's, and while that's happening, Fuld wants every other executive available on the phones, targeting the hedge funds that are pulling back from Lehman.

• 6:49Lindsay Graham?

  In public and in private, these executives are to hammer home the same simple message: Lehman has plenty of liquidity. Lehman is safe. But the truth is more complicated than that. Lehman's balance sheet is drowning in real estate assets no one wants to buy or can even accurately price. But selling those assets won't be necessary if the executive team can just restore the market's confidence in Lehman. If investors don't try to pull out their money, the firm doesn't need cash, and if it doesn't need cash, Lehman can just sit on its toxic assets and ride out the crisis. So as Lehman executives contact every reporter and hedge fund manager they know, the company's stock begins to claw back some of its losses.

• 7:32Lindsay Graham?

  By the end of the day, Fuld's plan seems to be working. After dropping nearly 50% in that morning's trading, the stock closes out only 19% down on the day. It's Lehman's lowest stock price in nearly five years, with all the gains of the real estate boom wiped out in less than 24 hours. Yet inside the firm, the executives are proud of their efforts. They're determined to keep the momentum going because they know this is just the beginning. Tomorrow will be an even greater test. On March 18th, 2008, two days after the collapse of Bear Stearns, Lehman is set to release its latest earnings report. The call was planned weeks earlier, but now it carries an even greater weight.

• 8:14Lindsay Graham?

  What was once a routine quarterly financial report has suddenly become a referendum on Lehman's survival. Investors from every corner of Wall Street and beyond will be watching. The earnings call will be hosted by the firm's chief financial officer. The hope inside Lehman headquarters is that it will calm markets, prove the firm's solvency, and show everyone that Lehman has the liquidity it needs to survive. But that's a tall order. Not everyone at the company is convinced that their CFO, Erin Callan, is up to the challenge. Callan has been with Lehman for 12 years. She began her career at the firm as one of its many tax lawyers, but quickly climbed the ranks. Still, when Lehman went looking for a new CFO in 2007, few predicted the job would go to Callan.

• 8:57Lindsay Graham?

  In the company's entire 150-year history, she was the first woman to sit on the firm's 15-member executive committee. But despite her obvious intelligence and career success, many skeptics on Wall Street whispered that she was out of her depth. She was only 41 years old and had no background in accounting, getting help that she was also a striking blonde who wore stiletto heels and name-brand outfits. To her most cynical critics, that all meant that she was just a diversity pick who had been chosen to look good on camera. But Callan has never been deterred by naysayers. Soon after her appointment, Conde Nast Portfolio Magazine published a profile that called her "the most powerful woman on Wall Street." And ever since, Callan has been determined to live up to the title.

• 9:41Lindsay Graham?

  But she knows today's upcoming earnings call will be the biggest test of her career so far. Sitting at her breakfast table, she studies the Wall Street Journal. One headline reads, "Lehman Finds Itself in the Center of the Storm." She lays the newspaper aside, downs her coffee, and then goes to get ready. She slips into a tailored black suit, chosen by her personal shopper. She blows out her hair, mentally rehearsing every talking point dozens of times. And then finally, she's ready to step into the storm herself. When she arrives at the office, Dick Fuld passes her on the back and wishes her luck. She heads into a conference room with only the firm's treasurer at her side. Then at 10 a.m. sharp, she dials into the call. Over 11,000 investors, analysts, and journalists are listening in.

• 10:26Lindsay Graham?

  Callan takes a deep breath and then begins. She starts by acknowledging the volatility and uncertainty in the market, but her voice is even and controlled as she pivots to drive home the company's key message: Lehman has plenty of liquidity and is still posting a profit. The $489 million it made the previous quarter is admittedly smaller than usual, but Callan reminds the listeners that this is Lehman's 55th consecutive quarter of profits, and that's not a record many companies can boast. She then guides analysts through the balance sheets, her every word carefully chosen. And when her presentation is finally over, she opens the call to questions. She responds to them with an instant command of the facts, her voice radiating, "The one thing Wall Street craves the most right now: confidence."

• 11:11Lindsay Graham?

  By the time the call wraps, Callan's voice is raw, and she's mentally drained. She leans back in her chair, and the room is silent. Then, she hears applause. Executives spill into the room and give her high fives. Then Dick Fuld storms in, grinning for the first time in days. He jokes that she shouldn't have hung up on the call. As long as she was talking, Lehman's stock kept rising. The company's recovery continues all day, and at Lehman headquarters, there's an electricity in the air that feels like hope. By the closing bell, its stock price is up almost $15. In percentage terms, it's the biggest one-day gain since Lehman went public. Despite all the cruel whispers of the Wall Street cynics, Callan seems to have calmed the storm.

• 11:54Lindsay Graham?

  But beneath the triumph, buried deep in the company's balance sheets, there is a dirty secret: Lehman has far more debt than it's publicly admitted. For the past seven years, every quarter, the company has been using an accounting trick known internally as a repo 105 transaction.

• 12:11Lindsay Graham?

  This involves Lehman temporarily selling billions of dollars' worth of securities for cash. That cash is used to pay down debts and make the headline figures in the company accounts look better. But then, once the reports are published, the deals are quietly reversed. Just weeks before this latest quarterly earnings call, Lehman repeated the trick. It temporarily moved forty-nine billion dollars' worth of debt off its books, just long enough to report better numbers. But in a few days' time, those debts will return when the firm buys the securities back. These transactions are so secretive that even people at the very top of Lehman, including Dick Foul, don't seem to know about them. But despite these accounting slice of hand,

• 12:55Lindsay Graham?

  some in the finance world are still suspicious about Lehman's health. One of those skeptics is thirty-nine-year-old David Einhorn. He's the head of his own firm, Greenlight Capital. His hedge fund only has seven analysts and a handful of support staff, but it manages over six billion dollars in assets and has an average annual returns of over twenty-five percent. So when Einhorn speaks, Wall Street generally listens. And months ago, he noticed several small hedge funds with stakes in mortgage-backed securities had collapsed, and he asked his team to investigate. Usually, his firm was known to spend weeks researching a single company, but after the sudden collapse of these hedge funds, there wasn't time for that. So instead, Einhorn ordered a rapid survey of all Wall Street firms

• 13:38Lindsay Graham?

  with large investments in mortgage-backed securities. Internally, the project was codenamed "The Credit Basket", and Einhorn's team soon came up with a list of twenty-five companies it felt were at risk. Lehman Brothers was among them. So at that moment, Einhorn took a closer look at Lehman's numbers, and the more he dug, the more suspicious he became. He started to believe that Lehman was using accounting maneuvers to inflate its profits, so he had Greenlight take a short position on the company, essentially a bet that the stock is overvalued. A trader borrows a share from a broker and sells it on the open market. Eventually, the trader will have to buy that share back and return it to the broker. If on that date, the stock in question is worth less than the price the trader sold it for, they can pocket the difference.

• 14:23Lindsay Graham?

  But if it's worth more, they can be left exposed to enormous losses. Einhorn, though, was convinced that a correction in Lehman's stock price would be coming soon, and he didn't keep that opinion to himself either. At the Value Investing Congress Conference in November 2007, Einhorn led a presentation suggesting that Lehman's debt-to-asset leverage was approaching 31 to 1, and the company's financial outlook couldn't possibly be as strong as it claimed. Executives at Lehman quickly arranged a conference call with Einhorn to try and address his concerns, but the meeting only deepened his doubts. When Einhorn asked how frequently Lehman was reassessing the value of the mortgages on the firm's balance sheet, he got a contradictory answer.

• 15:05Lindsay Graham?

  Some executives insisted that they were revalued every day, but others claimed it happened quarterly. Lehman's CFO Erin Callan was on the call, but she never acknowledged the inconsistency or tried to correct it. That was four months ago, but Einhorn hasn't been able to let it go, and in the wake of Lehman's latest earnings report, he gathers his team of young hedge fund managers for a debrief.

• 15:29Lindsay Graham?

  All right, everyone, quiet down, quiet down. All right. So what are your thoughts on Lehman? There's a silence in the room until a young analyst chimes in. Well, we were just discussing it, and we think Callan sounded solid, actually. I mean, if she's right, Lehman could be undervalued. There could be an opportunity here. I'm sorry, you're new here, right? Jason? Yes, sir. I started last week. Well, welcome to Greenlight. So you think Callan's numbers were solid? The balance sheet looked clean. I think we should reevaluate. Where are you from, Jason? From Montana. Grew up outside Missoula. Well, I grew up outside Milwaukee, which means neither of us are from here. So Jason, I want to teach you something about Wall Street, something I had to learn when I first came to New York. Numbers are the purest thing we have.

• 16:12Lindsay Graham?

  They're sacred, in my opinion, but sometimes you can't trust them. Wall Street guys like to manipulate them to tell a story, and our job is to catch them in the act. You think Erin Callan was lying? No, not necessarily, not on purpose. But do you know about her background? She's a tax lawyer. She's never run a treasury desk. But she was very confident. Confidence is not the same thing as truth, and frankly, I don't believe a single word she said. Last time I spoke with Callan, she couldn't answer even simple questions about Lehman's financials. No matter what training she's had since, I still think they're hiding something. So we should continue to short them. Yes, we should continue to short them.

• 16:54Lindsay Graham?

  The young analyst looks around the room at the others. He isn't sure whether David Einhorn is paranoid or brilliant. The implications of his claim are serious, though. If he is right, one of Wall Street's largest and most prestigious firms has been built on a line, and they're going to be the ones to expose it.

• 17:15Speaker 02

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• 17:31Speaker 03

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• 18:01Speaker 04

  Hey, what's up, guys? It's Haley Bailey. Okay, I need to tell you about something. I just got YouTube Premium. It's got tons of awesome features like offline downloads, so I can download my favorite videos before I travel and watch them whenever I don't have Wi-Fi. Because we all know airplane Wi-Fi is the worst. I get ad-free, I get background play, and there's like a ton more in there. You should try it. If you like YouTube, you'll love YouTube Premium. So try YouTube Premium for two months free at youtube.com/premium. Trial eligibility varies. Terms apply. Cancel anytime. That's a mouthful.

• 18:41Lindsay Graham?

  While Lehman Brothers scrambles to project confidence on Wall Street, down in Washington, DC, the shockwaves from the growing financial crisis has put Treasury Secretary Hank Paulson under siege. When Bear Stearns was on the brink of bankruptcy, Paulson played a key role in brokering the deal to sell the company. In a single weekend, the government facilitated the merger with JP Morgan Chase. Greasing the deal with $29 billion in government financing, the Fed invoked rarely-used emergency powers meant only for unusual and exigent circumstances.

• 19:14Lindsay Graham?

  It was a bold move for the administration of President George W. Bush. As a Republican, Bush had championed the free market and the virtues of laissez-faire economics throughout his political career. And while the government supported the Bear Stearns deal with an emergency loan rather than a direct cash bailout, the optics are still difficult for the Bush administration. Making matters worse, only a few years ago, Hank Paulson was the CEO of Goldman Sachs, New York's largest investment bank. So now, many people suspect he's bailing out his old Wall Street buddies at the expense of the American taxpayer. But Paulson is convinced he did the right thing. The collapse of Bear Stearns had to be contained to protect the rest of the economy, and the US government was the only party with the means and resources to take action.

• 19:59Lindsay Graham?

  Now, though, Paulson's priority is making sure no other Wall Street giants go under. And despite his positive recent earnings call, he is especially worried about Lehman Brothers. So with pressure mounting, Paulson calls Lehman CEO Dick Fuld directly. Former adversaries in the business world, the two men have become friends in recent months, and now he urges Fuld to immediately seek fresh capital. His firm's survival may depend on it. Fuld reassures Paulson that he already has a plan to do that. He's got a proposal ready for one of the most powerful names in finance, the billionaire investor Warren Buffett. Hearing this, Paulson's relieved. A quick, private-sector solution would spare him the political headache of more government intervention.

• 20:42Lindsay Graham?

  So he promises Fuld he'll do whatever he can to help get the deal with Buffett over the line. And on March 28, 2008, Buffett gets the call from Dick Fuld. Buffett is in the Omaha headquarters of his firm Berkshire Hathaway. His desk is a plain wooden one, the same his father used. Because despite his vast wealth, Warren Buffett is not one to show off. Maybe that's why he's never much liked Wall Street. Its brash displays of wealth and consumption have often seemed tawdry to him. Still, he's willing to listen to what Dick Fuld has to say. Fuld's voice is urgent but composed. He explains that Lehman is looking to raise between three and five billion dollars in fresh capital. He talks about the strength of the firm and what an opportunity this would be to become part of Lehman's long history.

• 21:27Lindsay Graham?

  And despite his doubts about Wall Street types like Fuld, Buffett finds the pitch persuasive. He says that under the right terms, he might consider it. A 9% dividend would do the trick. On a $4 billion investment, that would be an annual return to Buffett of almost $360 million. The call ends amicably with both men agreeing to run the numbers and think it over. But then moments after finishing the call with Fuld, Buffett's phone lights up again. This time, it's Hank Paulson on the line from Washington. He emphasizes just how rattled the markets are right now, but he says that word of Buffett investing in Lehman might be enough to steady Wall Street all on its own. Buffett leans back in his chair. Two back-to-back calls are clearly orchestrated.

• 22:12Lindsay Graham?

  He wonders if this isn't really an investment opportunity at all, but a piece of theater, an attempt to borrow his reputation to pacify nervous traders in New York. So he tells Paulson that he's going to consider what Fuld said, but it's not his business to save Wall Street. That's the government's job. After these calls, Buffett flips through Lehman's financial reports until late into the evening. That's when the phone rings again. It's Fuld wanting to talk numbers. But then to Buffett's confusion, the conversation takes a strange turn. Fuld seems to have misunderstood Buffett's original offer. Now he says a 9% dividend in exchange for the investment is too much and won't agree to it. But those are the terms Buffett wants, and he has no intention of agreeing to anything less.

• 22:56Lindsay Graham?

  The two men talk in circles, the mistrust between them growing with every minute, so that by the time Buffett hangs up the phone, any prospect of a deal with Lehman has slipped away. He won't be coming to that company's rescue anytime soon. Having been rejected by Warren Buffett, Dick Fuld takes his search for capital elsewhere. He makes discreet calls to other prominent investors and fund managers to raise the $4 billion he thinks he needs. But short sellers like the hedge fund manager David Einhorn are still taking the company down. Over the last few months, Einhorn has become a very public thorn in Lehman's side. What began as a bet on the company's share price has become something of a personal crusade. When Einhorn first went public with his doubts, there weren't many on Wall Street who wanted to believe him.

• 23:41Lindsay Graham?

  But now, in the wake of Bear Stearns' collapse, the mood has shifted dramatically. Einhorn claims that from a balance sheet and business mix perspective, Lehman Brothers is not that different from Bear Stearns. This directly contradicts what Lehman executives have been telling everyone since Bear's collapse. They are still insisting that Lehman is better capitalized, better managed, and better placed to weather this crisis. So Einhorn's criticism, and all the people who seem to be listening to him, are an ongoing source of irritation for Lehman. Determined to neutralize these persistent critics, Lehman's top team arranges another call with Einhorn. And to make Lehman's case, Fuld puts forward what he believes is his most persuasive executive. This isn't a job for his aggressive style.

• 24:25Lindsay Graham?

  So instead, the responsibility falls once again on Lehman CFO Erin Callan, and she takes the call in her office. Hi, David. This is Erin. Good to talk to you again. Yeah, my pleasure. Well, I appreciate you taking the time today. I know you're busy. I understand you have some questions. You could say that. Well, hopefully, I can clear some of those out for you. All right. Well, I've been studying Lehman's balance sheet for the past year, and I don't think it adds up. Well, this will be news to my team. We have a lot of expensive accountants in the building. I'm sure you do. You'd have to, to try to pull something like this off. Callan swallows her irritation. Well, perhaps if there are specifics you'd like to discuss? Yeah, yeah, sure. So, well, for one, Lehman hasn't sufficiently written down

• 25:10Lindsay Graham?

  $6.5 billion worth of CDOs. CDOs are collateralized debt obligations. I know what CDOs are, David. Thank you. But we've been entirely transparent about our mortgage investments. Well, you've disclosed the amount of CDOs you hold, yes. I'm asking whether you've properly lowered the value of those assets on your balance sheet to reflect conditions in the market. Yes, we've written down 200 million to account for those losses. Yeah, but just last month, about 25% of your CDOs were given a junk rating. Well, what do you imply? Simple math. Lehman has a $6.5 billion pool of CDOs, and a quarter of that are below investment-grade assets. That's 1.6 billion's worth. So how can you justify only a 200 million write-down?

• 25:52Lindsay Graham?

  I can assure you, we've been upfront. We expect to recognize further losses next quarter. Einhorn is silent for a moment. You know, I gotta ask, does this work on other people? David, I don't know what you mean. Well, it's just like last time we spoke. All you can offer is inconsistencies and empty explanations. Callan shifts in her seat, struggling to contain herself. Look, David, we both know there's only one reason you're publicly comparing Lehman to Bear Stearns. Because they're similar. We are not. That's not it. If you make us look weak, you make money off your shorts. You need us to fail. Aaron, believe it or not, I don't take pleasure in the demise of other financial institutions. I have an ethical responsibility to tell the public when they are being misinformed.

• 26:37Lindsay Graham?

  Lehman is not insolvent. We just posted a $489 million profit. Paper profits don't mean a thing if you aren't being transparent about your debts. Now, I'm giving you the opportunity to own up here. David, you're not a detective, and we are not criminals. The numbers don't lie. But you don't understand them, do you? I am CFO. Didn't you used to be a competitive poker player, right? In my last tournament, I won over half a million. Well, of course you did. But what does that have to do with anything? Well, everyone knows that poker is about statistics, right? But it's also about understanding people. And you think I might be right about all this? Why would I think that? By the way you're acting, by the way you sound. It's how an inexperienced player acts when they're bluffing with a losing hand.

• 27:24Lindsay Graham?

  Soon after this tense phone call, Aaron Callan receives an email from David Einhorn. He tells her that he plans to reference their discussion in an upcoming speech. Callan replies angrily. But Einhorn insists that neither of them had any reason to think the conversation was confidential. Callan doesn't see it that way, and feels like she was set up, that Einhorn has tricked her. But she understands better now. There will be no more facades and no more civility, because from now on, it's open war.

• 27:55Speaker 05

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• 28:25Speaker 06

  Ghosts aren't real. At least, that's what journalist Tristan Redmond always believed. Sure, odd things happen in his childhood bedroom, but ultimately, he shrugged them off. Until he discovered that he wasn't alone, that everyone who lived thereafter him also had bizarre experiences they couldn't explain. And it gets even weirder. It just so happens that his wife's great-grandmother was murdered in the house next door. Is this ghost somehow connected to her murder? He decides to go where no son-in-law should, digging up a cold case and asking questions that nobody wants answered. Like, could his wife's great-grandfather have gotten away with the perfect crime? This is a podcast about family secrets, overwhelming coincidence, and the things that come back to haunt us.

• 29:10Speaker 06

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• 29:35Lindsay Graham?

  It's May 2008. The crisis on Wall Street is deepening, and Greenlight Capital's David Einhorn is about to take his public feud with Lehman Brothers to a new stage. Every year, hundreds of people pay $4,000 to attend the Sohn Investment Charity Conference in New York. Top investors are invited to discuss their ideas, their stock picks, and their general thoughts about developments in the market. This year, Einhorn is one of the speakers, and his talk is the most anticipated of the entire conference. Einhorn's conversation with Lehman Brothers CFO Aaron Callen has only reinforced his determination to expose the company. So he's decided that Lehman will be the centerpiece of his presentation. This won't be Einhorn's first public exposé of a failing firm.

• 30:19Lindsay Graham?

  Six years ago, at the same charity conference, he accused private equity company Allied Capital of cooking its books. He went onstage and dissected the firm's financial reports and questionable accounting practices. The next day, Allied shares dropped 11%. Einhorn's influence was so drastic that regulators investigated him, suspicious that he was trying to manipulate the market with his opinion. But eventually, it was Allied that was found guilty of fraud, and Einhorn who was vindicated. At only 33 years old at the time, Einhorn emerged with a reputation as a man who could destroy a company with a single PowerPoint presentation. Now, though, he's taking on an even bigger opponent.

• 31:00Lindsay Graham?

  On May 21, 2008, Einhorn sits in a packed auditorium in Manhattan's Time Warner Center. His palms are sweaty and his heart pounds as he does one last review of his notes. Around him sit over a thousand of Wall Street's elite fund managers, analysts, and bankers. Collectively, they manage over half a trillion dollars, and they all want to hear what Einhorn has to say. His presentation is scheduled for 4:05 PM, just after markets close in New York. It's a deliberate choice by the organizers, given the impact his speech could have. Lehman isn't a mid-sized private equity firm like Allied. It's one of Wall Street's biggest investment banks. Taking them down in public could ignite chaos.

• 31:44Lindsay Graham?

  But when the time comes, Einhorn is introduced, and he walks onstage to polite applause. He starts off his speech by recounting his battle with Allied Capital, reminding the audience of his track record. Then, with a click of his remote, slides about Lehman Brothers appear on the screen behind him. Murmurs ripple through the crowd as he takes apart Lehman's latest quarterly report, point by point. But then he gets more personal. Einhorn recalls Aaron Callen's performance for traders and analysts after Bear Stearns was sold. He says, "On the conference call that day, Lehman CFO Aaron Callen used the word 'great' 14 times, 'challenging' six times, 'strong' 24 times, and 'tough' once. She used the word 'incredibly' eight times.

• 32:28Lindsay Graham?

  I would use the word 'incredible' in a different way to describe the report." On the projection screen behind him, more numbers flash. According to Einhorn's calculations, there are discrepancies in Lehman's accounts that add up to billions of dollars. He insists that whatever Lehman claims, it's not the short sellers that are the cause of the company's difficulties, it's Lehman itself. At the end of his talk, Einhorn closes his notes and steps offstage. Whispers break out as the traders and the audience tap messages into their phones. Within moments, word is spreading to trading floors all over the world, Lehman Brothers is in trouble. When trading opens in New York the next morning, the company's shares immediately drop by 5%.

• 33:11Lindsay Graham?

  And in the two weeks that follow Einhorn's attack, panic simmers inside Lehman's gleaming offices. Executives huddle in crisis meetings as the company's stock continues to fall. CEO Dick Fuld again orders his top team to hit the phones and try to counter the market gloom. But despite Fuld's public bluster, behind the scenes, he knows that there is at least some truth in Einhorn's warnings. Lehman is running out of cash. Even after raising $4 billion from outside investors, the company needs more, but this time, it's far harder to find anyone willing to sink their money into Lehman. The most promising talks have been with the Korea Development Bank, a state-owned commercial and investment bank with experience in restructuring struggling businesses.

• 33:55Lindsay Graham?

  The negotiations have all been kept secret. Fuld fears that if they're made public and then fail, confidence in Lehman could fall even further. But someone does talk. On June 3, 2008, The Wall Street Journal publishes an article revealing Fuld's plans under the headline "Losses Push Lehman to Raise New Capital." "Korea Development Bank" isn't named, but Fuld is still furious, and he calls an emergency meeting with senior executives. He demands to know who leaked the story, but no one speaks up. Still raging, Fuld then gets the reporter on the phone. She's a journalist he's known for years, but with his voice low and scathing, he tells her that her seat at the table is gone. No one at Lehman Brothers, not even the PR department, is going to speak to the Wall

• 34:39Lindsay Graham?

  Street Journal ever again. Lehman's communications team is horrified. Fuld is making enemies with the most influential financial paper in the world at a time when Lehman needs all the friends he can get. But Fuld doesn't care. He's done playing defense. From now on, he's determined to be far more aggressive with Lehman's detractors, even if they come from within his own ranks. Because around the same time the company is reeling from David Einhorn's attack, Matthew Lee, a vice president in the Finance Division, sends a letter to senior managers. In it, he outlines six irregularities he says he's uncovered in Lehman's accounts. Among them are the Repo 105 transactions that Lehman has been using to massage its debt figures.

• 35:21Lindsay Graham?

  But no concrete action is taken to investigate or resolve these allegations properly. Instead, a few days after Lee sends his letter, the company terminates his employment. It pays him $300,000 to leave quietly and sign a non-disparagement agreement. Lehman claims it's part of a broader downsizing in the face of the financial crisis, but Matthew Lee believes the executive team is simply trying to silence an inconvenient whistleblower. Either way, Lehman successfully keeps the story out of the press, but it's not the firm's PR strategies that will decide its future. All eyes on Wall Street are on the company's next quarterly results, and on June 9, 2008, Lehman Brothers releases its latest earnings report.

• 36:04Lindsay Graham?

  The numbers are staggering and impossible for the company to explain away, because Lehman has lost $2.8 billion. Much of that was a result of an enormous write-down of now worthless mortgage investments. If anyone on Wall Street still had any doubts, it's now obvious even to them that David Einhorn was right. After the release of this most recent quarterly report, Lehman's stock plummets another 20%. At the firm's headquarters, there is panic. On every floor, in almost every office, the same thing is said: Something has to change. In the firing line are two of Dick Fold's closest allies: Company President Joe Gregory and CFO Erin Callan.

• 36:44Lindsay Graham?

  Many at Lehman Brothers blame them directly for the firm's predicament and believe nothing can improve until they are gone. Callan tries to put on a brave face, but on the afternoon of June 11th, 2008, she's in a meeting when Gregory steps in to ask for a word. With dread churning in her stomach, she follows him down the hallway to his office.

• 37:06Lindsay Graham?

  What's this about, Joe? Gregory gestures to a couch. Now, why don't you sit down? I wanted you to be the first to know: I'm leaving. Oh, it's for the good of the company. After last quarter's results, Dick's under a lot of pressure to make changes.

• 37:22Lindsay Graham?

  I understand. Thank you, though, for everything you've done for me. Gregory looks down. Well, there's something I need to ask you to do. What's that? Everyone in this building knows who I am. For the sake of company morale, if nothing else, I'm the one who's got to go. But the media, the public, they don't know me from Adam. Callan stares at him, understanding crystallizing in her mind. I see. You want me to resign as well? Now, you've been the public face of the firm. We should do it together. It'll make more of an impact, it's the only way I can see Lehman regaining any credibility. Have you spoken to Dick about this? Oh, he doesn't like it, but he'll come around. Well, I've already offered to resign once, after the whole Einhorn thing. He turned me down. I think he understands now. Callan shakes her head.

• 38:06Lindsay Graham?

  She's not angry, not yet. She just feels numb. Well, there'll be a lot of happy people here when the news breaks. They never wanted me in this job. Oh, no, no. Neither me nor Dick regret appointing you. I want you to know that. This is not your fault. You've still got a lot ahead of you. What about you? Where are you gonna go? Ah, well, I'm gonna retire, I guess. I don't know. I've been here 25 years. I barely even know what the outside world looks like anymore.

• 38:34Lindsay Graham?

  Erin Callan is at home the next morning when her departure from Lehman Brothers is announced. But she's stunned to see the newspapers don't report that she and Joe Gregory have resigned. Instead, journalists had clearly been told that they were fired. For Callan, this is a deep betrayal. She suspects it's been done to make Dick Fuld look ruthless and in control. Gregory was his closest ally. She was talked up as his protege. Getting rid of them sends a stronger message than simply accepting their resignations. But Callan can't stop thinking about all the sacrifices she's made over the past 13 years. Too late, she realizes that all that matters to Dick Fuld is Lehman Brothers, and he will do anything to keep it alive.

• 39:18Lindsay Graham?

  From Wondery, this is episode two of our four-part series on Lehman Brothers for American Scandal. In our next episode, as Dick Fuld desperately searches for new investors, Treasury Secretary Hank Paulson summons Wall Street's most powerful CEOs for an emergency summit to find Lehman Brothers a savior before it's too late. If you'd like to learn more about Lehman Brothers, we recommend the book Too Big to Fail by Andrew Ross Sorkin, A Colossal Failure of Common Sense by Lawrence G. McDonald and Patrick Robinson, and The Big Short by Michael Lewis. This episode contains reenactments and dramatized details, and while in most cases we can't

• 39:59Lindsay Graham?

  know exactly what was said, all our dramatizations are based on historical research. American Scandal is hosted, edited, and executive produced by me, Lindsay Graham, for Airship. Audio editing by Mohan Chazee, sound design by Gabriel Ghul, music by Thrun. This episode is written and researched by Olivia Thomas, fact checking by Alyssa Jung Perry, managing producer Emily Burr, development by Stephanie Jens, senior producer Andy Beckerman. Executive producers are William Simpson for Airship, and Jenny Lauer-Beckman and Marshall Louie for Wondery.

• 40:35Lindsay Graham?

  American Scandal is only possible because of listeners like you, so thank you. And don't miss an episode. Be sure to follow American Scandal on Audible or wherever you get your podcasts. And Audible subscribers can binge new seasons of American Scandal early and ad-free right now. Join Audible in the Audible app or by subscribing on Apple Podcasts. And to find out more about me, including my other podcasts, my live show, the history tours I'm arranging, and all sorts of other things, go to historyishuman.com. That's historyishuman.com.