Anatomy Of A Crisis

Over the past several weeks, TOI has sought to bring you a sense of the tectonic
changes in the global financial order, and their impact on economies and people. In
our ‘Learning With The Times’ series, we have traced the origins of the meltdown—in
the US sub-prime loan crisis—as well as the reasons for the spread of fear to stock and
credit markets around the world. As the
situation assumes grave proportions, even in India, investors and to an extent
depositors are hitting the panic button. Many don’t follow business closely and are
spooked by economic jargon. That doesn’t mean they don’t want to know what’s
happening to their money. We therefore invited economist Abheek Barua to explain as
lucidly as possible the unfolding crisis, and what it means for all of us

If your palms start to sweat whenever you see the business

headlines or flip to a business channel, you might draw solace from the
fact you share these symptoms with millions. Investors across the
world are in a state of absolute panic. As they dump risky assets like
shares and rush to safe havens like gold and government bonds,
stock-markets and currencies across the world keep falling.
The origins of today’s crisis can be traced back to mid-2007 when
three things became clear. One, low income or sub-prime US
households that had borrowed heavily from banks and finance
companies to buy homes were defaulting heavily on their debt
obligations. Two, the size of this sub-prime housing loan market was
huge at about $1.4 trillion. Three, Wall Street’s financial engineers had
packaged these loans into really complicated financial instruments
called CDOs (collateralized debt obligations). American and European
banks had invested heavily in these products. However, no amount of
financial engineering could protect investors from one simple and
irrefutable principle—if these housing loans turned ‘bad’, the
instruments that were based on these loans would lose value. CDO
prices started plummeting as defaults on US home loans rose. Falling
prices dented banks’ investment portfolios and these losses destroyed
banks’ capital. The complexity of these instruments meant that no one
was too sure either about how big these losses were or which banks
had been hit the hardest.
Banks usually never hold the exact amount of cash that they need to
disburse as credit. The ‘inter-bank’ market performs this critical role of
bringing cash-surplus and cash-deficit banks together and lubricates
the process of credit delivery to companies (for working capital and
capacity creation) and consumers (for buying cars, white goods etc).
As the housing loan crisis intensified, banks grew increasingly
suspicious about each other’s solvency and ability to honour
commitments. The inter-bank market shrank as a result and this
began to hurt the flow of funds to the ‘real’ economy.
To cut a long story short, today’s financial crisis is the culmination of
these problems in the global banking system. Inter-bank markets
across the world have frozen over. Indian banks are in the middle of a
severe cash crunch. Wall Street blue-chips like Bear Stearns and
Merrill Lynch have been acquired by other more ‘solvent’ banks at
bargain-basement prices. Lehman Brothers, which had survived every
major upheaval for the past 158 years, went bust. Panic begets panic
and as the loan market went into a tailspin, it sucked other markets
into its centrifuge. The meltdown in stock markets across the world is
a victim of this contagion.
Some questions need answers at this stage. Why are the sensex and
the rupee getting hurt so badly by the woes of the American and
European banks? Their presence in India is minuscule compared to the
nationalized banks or the bigger private banks. A glance at Indian
banks’ balance sheets would show that their exposure to complex
instruments like CDOs is almost nil.
A word, ‘globalization’, and a phrase, ‘risk aversion’, should explain
why India has not been spared the contagion of the US and European
banking crisis. Global investors are seriously concerned about the
prospect of a great upheaval, if not a complete collapse in the banking
system in the developed world. This, they fear, would affect all
financial transactions in the near term. Going forward, this disruption
could trigger a global recession (that is about 3% growth in 2009 for
all economies put together). Agencies like the International Monetary
Fund have endorsed this view.

7% is realistic growth target

The upshot is that the global investment community has become

extremely risk-averse. They are pulling out of assets that are even
remotely considered risky and buying things traditionally considered
safe—gold, government bonds and bank deposits (in banks that are
still considered solvent). Emerging markets like India have over the
last few years offered spectacular returns but have always been
considered ‘risky’. It is not surprising that they have got the short
shrift in the flight to safe haven. Does India deserve to be treated
differently? Are we the victim of irrational ‘herd’ behaviour where
differences across economies are getting blurred in this mad rush to
safety? Yes and no.
It is true that our economy depends more on domestic rather than
external drivers, a fact that we keep touting endlessly. However, it is
also true that we have embraced ‘globalization’ fairly enthusiastically
over the past decade-and-a-half. This, from an economic perspective,
means two things. For one, we depend more on external markets to
sell our goods and services. In 1995-96, for instance, we sold 9.1% of
our goods abroad. In 2007-08, we sold 13.5% of our goods to foreign
buyers. It also means that we depend more on external funds to
support our growth.
In the last fiscal year alone, we borrowed $29 billion from foreign
lenders and got $34 billion of foreign direct investment. A global
recession would hurt external demand. ‘Risk-aversion’ among
international lenders could limit access to international capital. Both
India’s financial markets and the real economy will be hurt in the
process.
Suddenly, the 9% growth target does not seem that ‘doable’ any
more; we should be happy to clock 7% this fiscal year and the next.
The sell-off in the stock markets is not entirely the effect of global
contagion. To a degree, it reflects anxieties about our prospects of
future growth.
The blood-letting in the financial markets is unlikely to stop soon.
Governments and central banks (the RBI’s counterparts) are trying
every trick in the book to stabilize the markets.
They have pumped hundreds of billions of dollars into their money
markets to try and unfreeze their inter-bank and credit markets. Large
financial entities have been nationalized. The US government has set
aside $700 billion to buy the ‘toxic’ assets like CDOs that sparked off
the crisis.
Central banks have got together to co-ordinate cuts in interest rates.
None of this has stabilized the global markets. Thus, it is impossible to
predict when the haemorrhage will stop and what will stem it.
That said, history tells us that financial crises end as suddenly as
they start. I would not be surprised if by early next year, the worst of
the mayhem is over. The wounds that it leaves behind could, however,
take much longer to heal.TNN

Crisis hits India: Airlines seek $1bn bailout

Also Want 3-Year Moratorium On Loan Repayment

TIMES NEWS NETWORK

Bangalore: The global credit meltdown has hit home, and how. India’s
beleaguered airline sector has become the first industry to seek an
official bailout from the government. The Federation of Indian Airlines
(FIA) has asked for a $1 billion (about Rs 5,000 crore) interest-free
loan from the government to tide over the current crisis in addition to
many other fiscal sops and easing of regulatory measures. FIA, whose
members include Air India, Go Airlines, IndigGo, Jet Airways,
Kingfisher Airlines, Paramount Airways and Spicejet, also wants a
moratorium of three years on the repayment of the loan.
A fiercely competitive market, slowing passenger traffic, rising costs
and the current liquidity crunch has brought the industry to a stage
where it feels that if a bailout package is not on the cards then it
would need to substantially downsize. Simply put, many an airline will
be grounded which doesn’t sound implausible considering that the $6-
billion (Rs 30,000-crore) industry is expecting losses to mount to $2
billion (Rs 10,000 crore) this year. When asked if Kingfisher Airlines
had approached the government for a bailout package and for help till
the company was able to raise money, Vijay Mallya, chairman of the
company, said: ‘‘It was part of the presentation made to PM by FIA.’’
In a presentation made to the Prime Ministers Office, the FIA has
asked for the following:
Reduction in aviation turbine fuel (ATF) price to global levels. This is
to be brought about by eliminating excise duty of 8.24% and custom
duty of 5.14% on ATF by putting ATF under the category of declared
goods thereby limiting state sales-tax at 4% and by reducing the base
ATF prices to bring it in line with international levels. For the last
measure the government might need to consider a subsidy.
Reduction in landing and navigation charges. Specifically, the
industry wants a temporary relief of 50% on landing, terminal
navigation and route navigation charges for domestic operations for
the next two years. Also, that there should be no further increase and
creation of new charges at airports like user development fee (UDF),
introduction of Common User Terminal Equipment (CUTE), increase in
rentals.
Alteration in route-disbursal guidelines.
Self-handling to optimize the cost structure and quality of service.
Indian carriers’ argument is that there is precedent for such a
bailout both in India and abroad. After 9/11, the US airline industry
was given $5 billion in cash and another $10 billion in loan guarantees.
In 1999, the Indian telecom industry was allowed to migrate from
annual fee structure to a revenue sharing arrangement when telcos
started defaulting.
Most Indian carriers have been trying to raise money the past few
months. Mallya said recently that he wanted to raise $400 million (Rs
2000 crore). With the global credit situation worsening by the day, it
looks unlikely that any of the carriers will be able to raise funds in a
hurry or on their terms.

Jet to scrap Mumbai-Shanghai-San Francisco flight:

Citing the global financial crisis and slowdown as the main reason,
private air-carrier Jet Airways, on Friday said it would be discontinuing
its Mumbai-Shanghai-San Francisco service with effect from January
13 next year. However, passenger traffic between the two sectors
would be served via Jet Airways London Gateway in co-operation with
partner airlines, a Jet Airways press release said here. In light of the
downturn in major economies worldwide, more specifically in the US
and UK, Jet Airways plans to optimise its network, focusing more on its
established international gateways and routes, the release said.
AGENCIES

As the financial turmoil continues to batter world economies, triggering the

collapse of more number of financial institutions, the bailout packages from
different governments globally is nearing the USD 3-trillion mark - about three
times the size of Indian economy.

Continuing a spate of billion-dollar rescue plans, the UK administration last week

came up with a mammoth 500 billion pounds bailout package (about US$ 876
billion) primarily to shore up the fortunes of the nation's banking sector.

Earlier, the US government had moved the historic US$ 700 billion rescue plan,
in response to the deepening credit crisis which has seen the fall of Wall Street
icons like Lehman Brothers, Washington Mutual and the distressed sale of
Merrill Lynch.

Till date, the Bush administration alone has announced bailout packages to the
tune of over USD 990 billion.

Further, joining the likes of US and UK, Russia has approved a host of measures
estimated to be worth USD 86 billion to salvage the country's banks hit by the
credit squeeze.

Recent media reports said the Lower House of Russian Parliament Duma has
given the green signal for the billion- dollar rescue plan.

It would entail making about USD 50 billion available to banks and firms which
have to refinance foreign debt, the remaining amount would be given as loans to
banks.
Besides, a handful of European countries have also already announced packages
worth a similar amount in efforts to save their troubled financial entities.

The Last Days of Lehman Brothers

October 6, 2008, 8:28 am

Richard S. Fuld Jr. was under siege in mid-July. His renowned investment bank,
Lehman Brothers, was barraged with questions about whether the expanding
credit crisis would engulf the bank and wipe out investors.

Signs of worry abounded. The company’s shares had plummeted, its debt had
been downgraded, and investors were increasingly worried about a Lehman
default. It was a downward spiral that mirrored the demise of Bear Stearns
four months earlier.

Then, The New York Times’s Louise Story and Ben White write, Mr. Fuld, the
chief executive, had an idea to silence the rumors that seemed to crop up every
day. He would repaint the face of company as a commercial bank and ask to be
regulated by the Federal Reserve, thinking that might give Lehman a more stable
way to finance its operations.

But in an hourlong conference call with government officials, Mr. Fuld’s hope was
dashed when the president of the Federal Reserve Bank of New York, Timothy F.
Geithner, refused to change rules to enable quick benefit from the change Mr.
Fuld had sought.

In the months leading up to Lehman’s downfall, the proposal was just one of
many floated by Mr. Fuld as he embarked on a frenetic and increasingly
desperate attempt to keep his 158-year-old investment bank alive, according to
The Times, which cited interviews with five former senior Lehman executives and
one outsider who was intimately involved in its business dealings.

Looking for ways to save Lehman, Mr. Fuld called blue-chip companies and
discussed mergers with a competitor. He sent emissaries to Asia and the Middle
East looking for money. And he tried to find a commercial bank to buy the entire
company. But none worked.

Now, Mr. Fuld is likely to face some tough questions about the final months and
days of Lehman. He will discuss these lost opportunities in a Congressional
hearing on Monday, in his first public appearance since the company collapsed
last month and was sold off in pieces to buyers including Barclays and
Nomura.
Mr. Fuld still works for the bankrupt entity, which has come under fierce
criticism by customers who lost money, former employees whose severance
checks have stopped showing up and investors who think he failed to stop the
disaster. Among other things, he may be pressed in Washington to explain why
Lehman was publicly presenting a rosy outlook about its future while it privately
was scrambling for a solution to its deepening problems stemming from its
exposure to toxic subprime mortgages. Mr. Fuld declined to comment on Sunday.

Lehman is already facing preliminary inquires from federal prosecutors in the

Eastern and Southern districts of New York who are looking at statements the
company made about its own financial condition as well as whether it overstated
the value of its commercial real estate holdings, a person familiar with the matter
said.

Though Lehman was the smallest investment bank when it failed — and
regulators decided it was not too big to fail — its demise set off tremors
throughout the financial system that reverberate to this day. The uncertainty
surrounding its billions of dollars of transactions with banks and hedge funds
exacerbated a crisis of confidence. That contributed to the freezing of credit
markets that has forced governments around the globe to take steps to try to calm
panicked markets, including guaranteeing bank deposits.

“This is a humongous mess, and I think that is one of the reasons that the storm
came back so soon, and the mad dogs came chasing Goldman and Morgan
Stanley,” Roy Smith, a professor of finance at New York University, told The
Times. “It wasn’t obvious to me that Lehman should fail, but the control of
whether it failed was in the hands of the government.” Mr. Fuld was an
institution inside the Lehman institution. He had worked at the bank nearly 40
years, after starting as a clerk straight out of college. He rose to the top seat while
Lehman was owned by American Express, and he triumphantly took the
company public in 1994.

Lehman executives complain bitterly that any chance of keeping the firm alive
began to dissipate rapidly just after Labor Day when JPMorgan Chase, which
handled Lehman’s trades, came calling for more money. Lehman had put down
securities it believed were worth $6 billion during the summer to assuage the
bank’s concerns that its trades were risky. But JPMorgan thought those securities
had deteriorated in value, and asked for $5 billion in cash or liquid assets on
Sept. 4.

Over the course of the next week, JPMorgan requested more money from
Lehman. However, executives at the two companies disagree over how much
money was requested and whether the requests were reasonable. The dispute has
become part of a legal claim filed by creditors of Lehman.

By the weekend of Sept. 14-15, most Lehman workers knew the firm’s days as an
independent bank were over. Mr. Fuld continued fevered deal talks with Bank of
America and Barclays, but both banks dropped out by the end of the weekend.
Meanwhile, Wall Street executives at the Federal Reserve Bank of New York
quickly shifted conversations from preventing a bankruptcy of Lehman to dealing
with its consequences.

At the urging of federal officials, a group of remaining banks set up a $70 billion
private-sector fund designed to assist any contributor to the fund that ran into
trouble. And the Federal Reserve eased its restrictions on what investment banks
could pledge as collateral to borrow from the Fed. The programs were not open to
Lehman because the government reportedly deemed it too troubled, and Lehman
immediately filed for bankruptcy.

Lehman executives were furious, because the government had denied their
request in July to ease restrictions on collateral. That step might have paved the
way for Lehman to more easily become a bank holding company. And, worsening
the sting, Goldman Sachs and Morgan Stanley turned themselves into deposit-
taking commercial banks with the blessing of the Federal Reserve just one week
after Lehman collapsed.

“What they did to save Morgan Stanley and Goldman Sachs, they could have done
that for us, and in fact, we showed them the path,” one former Lehman executive
told The Times.

A spokesman for the Federal Reserve declined to comment Sunday, The Times
said.

Mr. Fuld’s attempts to attract investors actually had begun well before its
problems appeared. He had been trying since at least early 2006, seeking out
foreign investors in places where Lehman wanted to grow. He wanted each of
them to purchase a 5 to 10 percent stake in the company on the open market.

Lehman executives had lengthy discussions with the Citic Group, a large
Chinese bank; the Ping An Insurance Company of China; and Kuwait’s
sovereign wealth arm, but no one signed up. Ping An declined to comment this
past weekend, and Citic and the Kuwait officials could not be reached, The Times
said.

Around the same time, Mr. Fuld talked with Martin J. Sullivan, the then chief
executive of American International Group about selling all of Lehman to
the insurance giant. A.I.G., which itself would eventually would find itself in deep
financial trouble, declined to comment on Sunday.

The latest round of talks by Lehman to seek partners started in early 2007, in the
early stages of the subprime mortgage debacle. Those discussions went nowhere.
In early March of this year, Mr. Fuld stepped up the efforts to seek partners,
dispatching emissaries to China, where Lehman was considering purchasing two
banks, including Shanghai Aijian.
But things took a turn for the worse then Bear Stearns collapsed in mid-March,
leaving Lehman as the smallest and most vulnerable independent investment
bank. Mr. Fuld immediately raised $3 billion in capital, mostly from large public
companies. Days later, he held an intensive planning session. At that time, he
reviewed their options, including building or acquiring a deposit base, merging
with a large bank, or acquiring a smaller bank.

In May, Lehman began discussing a merger or sale to Barclays Capital, the British
bank that ended up purchasing the bulk of Lehman last month after Lehman’s
bankruptcy filing. Lehman was also in talks with Korea Development Bank,
the state bank of South Korea, for a strategic investment.

Those talks hit the newsstands in June, and investors, worried that Lehman
needed capital, battered its share price.

A hedge fund manager named David Einhorn also took to the news media with
criticism of Lehman, accusing company executives of playing down their
problems.

“Now it is clear that Lehman’s problems were their own doing,” Mr. Einhorn,
president of Greenlight Capital, told The Times Sunday night.

Days before second-quarter earnings, Mr. Fuld called on the billionaire investor
Warren E. Buffett, who would eventually purchase a stake in Goldman Sachs,
but Mr. Buffett was demanding terms that Lehman considered too onerous.

Mr. Fuld had better luck with others, raising a total of $6 billion from a group
including C. V. Starr & Company, the investment fund led by Maurice R.
Greenberg, the former head of A.I.G., and the state pension fund of New Jersey.

The stock kept falling, bringing its four-week loss to 47 percent by mid-June. At
that time, Mr. Fuld came up with about a dozen possible solutions for his
company, which included a conversion into a bank holding company, the sale of
commercial or residential mortgage assets, and spinning off parts of the
investment management division.

Meanwhile, Mr. Fuld kept looking for an investor that would quiet the skeptics,
focusing on those who might be interested in purchasing stakes of 15 to 25
percent of Lehman. He called General Electric, but talks went nowhere. About
the time that he was seeking government approval to form a bank holding
company, he also tried to woo Bank of America beginning in July. And he met
with John Mack, the chief executive of Morgan Stanley, in the following weeks
to discuss a merger. Mr. Mack decided he was not interested.

Mr. Fuld also approached HSBC — a British bank that had been on his list since
the April meeting. Also at the end of August, Mr. Fuld courted two sovereign
wealth funds in the Middle East.
But Lehman received no formal bids before its bankruptcy filing. It is unclear
what kept potential partners at bay.

In the wake of Lehman’s downfall, many of its former employees are left with
their lives in pieces. Mr. Fuld, for his part, has lost $800 million in company
stock as it fell from its peak just over a year ago. He and his wife have put some of
their art collection, worth millions of dollars, up for sale. but he still owns several
homes and his net worth is estimated to be around $100 million now.

Ordinary employees are not as well off. Among them are some 1,000 workers
who were laid off in the days before Lehman filed for bankruptcy. Last week, they
received letters from Lehman Holdings, the bankrupt entity, saying their
promised severance payments and health benefits would cease immediately.

Michael Petrucelli, who worked on commission as a salesman for Lehman’s

investment management division, said it was bad enough to lose his savings in
Lehman stock and his job, but the letter last week was the last straw. The decision
about their benefits rests with the bankruptcy judge.

“Life’s not fair. You pick yourself up and move on,” Mr. Petrucelli, 45, told The
Times in an interview at his home in Riverside, Conn. “But this is wrong, and this
I can’t stand for. They need to just do the right thing.”

The Road to Lehman’s Failure Was Littered With Lost Chances

By LOUISE STORY and BEN WHITE

Published: October 5, 2008

Richard S. Fuld Jr. was under siege in mid-July. His renowned investment bank,
Lehman Brothers, was barraged with questions about whether the expanding
credit crisis would engulf the bank and wipe out investors.

Signs of worry abounded. The company’s shares had plummeted, its debt had
been downgraded, and investors were increasingly worried about a Lehman
default. It was a downward spiral that mirrored the demise of Bear Stearns four
months earlier.

Then Mr. Fuld, the chief executive, had an idea to silence the rumors that seemed
to crop up every day. He would repaint the face of company as a commercial bank
and ask to be regulated by the Federal Reserve, thinking that might give Lehman
a more stable way to finance its operations.

But in an hourlong conference call with government officials, Mr. Fuld’s hope was
dashed when the president of the Federal Reserve Bank of New York, Timothy F.
Geithner, refused to change rules to enable quick benefit from the change Mr.
Fuld had sought.

In the months leading up to Lehman’s downfall, the proposal was just one of
many floated by Mr. Fuld as he embarked on a frenetic and increasingly
desperate attempt to keep his 158-year-old investment bank alive, according to
interviews with five former senior Lehman executives and one outsider who was
intimately involved in its business dealings, who spoke on the condition that they
not be named.

Looking for ways to save Lehman, Mr. Fuld called blue-chip companies and
discussed mergers with a competitor. He sent emissaries to Asia and the Middle
East looking for money. And he tried to find a commercial bank to buy the entire
company. But none worked.

Now, Mr. Fuld is likely to face some tough questions about the final months and
days of Lehman. He will discuss these lost opportunities in a Congressional
hearing on Monday, in his first public appearance since the company collapsed
last month and was sold off in pieces to buyers including Barclays and Nomura.

Mr. Fuld still works for the bankrupt entity, which has come under fierce
criticism by customers who lost money, former employees whose severance
checks have stopped showing up and investors who think he failed to stop the
disaster. Among other things, he may be pressed in Washington to explain why
Lehman was publicly presenting a rosy outlook about its future while it privately
was scrambling for a solution to its deepening problems stemming from its
exposure to toxic subprime mortgages. Mr. Fuld declined to comment on Sunday.

Lehman is already facing preliminary inquires from federal prosecutors in the

Eastern and Southern districts of New York who are looking at statements the
company made about its own financial condition as well as whether it overstated
the value of its commercial real estate holdings, a person familiar with the matter
said.

Though Lehman was the smallest investment bank when it failed — and
regulators decided it was not too big to fail — its demise set off tremors
throughout the financial system that reverberate to this day. The uncertainty
surrounding its billions of dollars of transactions with banks and hedge funds
exacerbated a crisis of confidence. That contributed to the freezing of credit
markets that has forced governments around the globe to take steps to try to calm
panicked markets, including guaranteeing bank deposits.
“This is a humongous mess, and I think that is one of the reasons that the storm
came back so soon, and the mad dogs came chasing Goldman and Morgan
Stanley,” said Roy Smith, a professor of finance at New York University. “It
wasn’t obvious to me that Lehman should fail, but the control of whether it failed
was in the hands of the government.” Mr. Fuld was an institution inside the
Lehman institution. He had worked at the bank nearly 40 years, after starting as
a clerk straight out of college. He rose to the top seat while Lehman was owned by
American Express, and he triumphantly took the company public in 1994.

Lehman executives complain bitterly that any chance of keeping the firm alive
began to dissipate rapidly just after Labor Day when JPMorgan Chase, which
handled Lehman’s trades, came calling for more money. Lehman had put down
securities it believed were worth $6 billion during the summer to assuage the
bank’s concerns that its trades were risky. But JPMorgan thought those securities
had deteriorated in value, and asked for $5 billion in cash or liquid assets on
Sept. 4.

Over the course of the next week, JPMorgan requested more money from
Lehman. However, executives at the two companies disagree over how much
money was requested and whether the requests were reasonable. The dispute has
become part of a legal claim filed by creditors of Lehman.

By the weekend of Sept. 14-15, most Lehman workers knew the firm’s days as an
independent bank were over. Mr. Fuld continued fevered deal talks with Bank of
America and Barclays, but both banks dropped out by the end of the weekend.
Meanwhile, Wall Street executives at the Federal Reserve Bank of New York
quickly shifted conversations from preventing a bankruptcy of Lehman to dealing
with its consequences.

At the urging of federal officials, a group of remaining banks set up a $70 billion
private-sector fund designed to assist any contributor to the fund that ran into
trouble. And the Federal Reserve eased its restrictions on what investment banks
could pledge as collateral to borrow from the Fed. The programs were not open to
Lehman because the government reportedly deemed it too troubled, and Lehman
immediately filed for bankruptcy.

Lehman executives were furious, because the government had denied their
request in July to ease restrictions on collateral. That step might have paved the
way for Lehman to more easily become a bank holding company. And, worsening
the sting, Goldman Sachs and Morgan Stanley turned themselves into deposit-
taking commercial banks with the blessing of the Federal Reserve just one week
after Lehman collapsed.

“What they did to save Morgan Stanley and Goldman Sachs, they could have done
that for us, and in fact, we showed them the path,” one former Lehman executive
said Saturday.
A spokesman for the Federal Reserve declined to comment Sunday.

Mr. Fuld’s attempts to attract investors actually had begun well before its
problems appeared. He had been trying since at least early 2006, seeking out
foreign investors in places where Lehman wanted to grow. He wanted each of
them to purchase a 5 to 10 percent stake in the company on the open market.

Lehman executives had lengthy discussions with the Citic Group, a large Chinese
bank; the Ping An Insurance Company of China; and Kuwait’s sovereign wealth
arm, but no one signed up. Ping An declined to comment this past weekend, and
Citic and the Kuwait officials could not be reached.

Around the same time, Mr. Fuld talked with Martin J. Sullivan, the then chief
executive of American International Group about selling all of Lehman to the
insurance giant. A.I.G., which itself would eventually would find itself in deep
financial trouble, declined to comment on Sunday.

The latest round of talks by Lehman to seek partners started in early 2007, in the
early stages of the subprime mortgage debacle. Those discussions went nowhere.
In early March of this year, Mr. Fuld stepped up the efforts to seek partners,
dispatching emissaries to China, where Lehman was considering purchasing two
banks, including Shanghai Aijian.

But things took a turn for the worse then Bear Stearns collapsed in mid-March,
leaving Lehman as the smallest and most vulnerable independent investment
bank. Mr. Fuld immediately raised $3 billion in capital, mostly from large public
companies. Days later, he held an intensive planning session. At that time, he
reviewed their options, including building or acquiring a deposit base, merging
with a large bank, or acquiring a smaller bank.

In May, Lehman began discussing a merger or sale to Barclays Capital, the British
bank that ended up purchasing the bulk of Lehman last month after Lehman’s
bankruptcy filing. Lehman was also in talks with Korea Development Bank, the
state bank of South Korea, for a strategic investment.

Those talks hit the newsstands in June, and investors, worried that Lehman
needed capital, battered its share price.

A hedge fund manager named David Einhorn also took to the news media with
criticism of Lehman, accusing company executives of playing down their
problems.

“Now it is clear that Lehman’s problems were their own doing,” Mr. Einhorn,
president of Greenlight Capital, said Sunday night.
Days before second-quarter earnings, Mr. Fuld called on the billionaire investor
Warren E. Buffett, who would eventually purchase a stake in Goldman Sachs, but
Mr. Buffett was demanding terms that Lehman considered too onerous.

Mr. Fuld had better luck with others, raising a total of $6 billion from a group
including C. V. Starr & Company, the investment fund led by Maurice R.
Greenberg, the former head of A.I.G., and the state pension fund of New Jersey.

The stock kept falling, bringing its four-week loss to 47 percent by mid-June. At
that time, Mr. Fuld came up with about a dozen possible solutions for his
company, which included a conversion into a bank holding company, the sale of
commercial or residential mortgage assets, and spinning off parts of the
investment management division.

Meanwhile, Mr. Fuld kept looking for an investor that would quiet the skeptics,
focusing on those who might be interested in purchasing stakes of 15 to 25
percent of Lehman. He called General Electric, but talks went nowhere. About the
time that he was seeking government approval to form a bank holding company,
he also tried to woo Bank of America beginning in July. And he met with John
Mack, the chief executive of Morgan Stanley, in the following weeks to discuss a
merger. Mr. Mack decided he was not interested.

Mr. Fuld also approached HSBC — a British bank that had been on his list since
the April meeting. Also at the end of August, Mr. Fuld courted two sovereign
wealth funds in the Middle East.

But Lehman received no formal bids before its bankruptcy filing. It is unclear
what kept potential partners at bay.

In the wake of Lehman’s downfall, many of its former employees are left with
their lives in pieces. Mr. Fuld, for his part, has lost $800 million in company
stock as it fell from its peak just over a year ago. He and his wife have put some of
their art collection, worth millions of dollars, up for sale. but he still owns several
homes and his net worth is estimated to be around $100 million now.

Ordinary employees are not as well off. Among them are some 1,000 workers
who were laid off in the days before Lehman filed for bankruptcy. Last week, they
received letters from Lehman Holdings, the bankrupt entity, saying their
promised severance payments and health benefits would cease immediately.

Michael Petrucelli, who worked on commission as a salesman for Lehman’s

investment management division, said it was bad enough to lose his savings in
Lehman stock and his job, but the letter last week was the last straw. The decision
about their benefits rests with the bankruptcy judge.
“Life’s not fair. You pick yourself up and move on,” said Mr. Petrucelli, 45, in an
interview at his home in Riverside, Conn. “But this is wrong, and this I can’t
stand for. They need to just do the right thing.”

White House Overhauling Rescue Plan

Ken Cedeno/Bloomberg News

“We will do what it takes to resolve this crisis,” President Bush said in the Rose
Garden on Saturday morning, flanked by finance ministers from the Group of 7
nations.

WASHINGTON — As international leaders gathered here on Saturday to grapple

with the global financial crisis, the Bush administration embarked on an overhaul
of its own strategy for rescuing the foundering financial system.

Two weeks after persuading Congress to let it spend $700 billion to buy
distressed securities tied to mortgages, the Bush administration has put that idea
aside in favor of a new approach that would have the government inject capital
directly into the nation’s banks — in effect, partially nationalizing the industry.

As recently as Sept. 23, senior officials had publicly derided proposals by

Democrats to have the government take ownership stakes in banks.

The Treasury Department’s surprising turnaround on the issue of buying stock in

banks, which has now become its primary focus, has raised questions about
whether the administration squandered valuable time in trying to sell Congress
on a plan that officials had failed to think through in advance.

It has also raised questions about whether the administration’s deep

philosophical aversion to government ownership in private companies hindered
its ability to look at all options for stabilizing the markets.

Some experts also contend that Treasury’s decision last month to not use
taxpayer money to save Lehman Brothers worsened the panic that quickly
metastasized into an international crisis.

The administration’s new focus was announced late Friday as part of a rescue
plan in coordination with six of the world’s richest nations. It came during a week
when the Dow Jones industrial average plummeted 18 percent, one of the worst
weeks in stock market history.

While the Treasury says it still plans to buy distressed assets, the scope of that
plan is unclear. Treasury Secretary Henry M. Paulson Jr. has refused to say
whether the capital infusion program for banks would be bigger than the original
plan to buy troubled assets.

Still, Treasury has directed Fannie Mae and Freddie Mac, the government-
controlled mortgage giants, to ramp up their purchases of hard-to-sell mortgage
bonds, in what could be a speedier and less formal process than the auctions
proposed by the Treasury.

Underscoring the gravity of the situation, President Bush convened an early

morning meeting at the White House on Saturday with finance ministers from
the Group of 7 industrialized countries.

“All of us recognize that this is a serious global crisis, and therefore requires a
serious global response, for the good of our people,” Mr. Bush said afterward in
the Rose Garden, flanked by the ministers, who are in Washington for the annual
meetings of the International Monetary Fund and the World Bank.

Mr. Bush said the countries had agreed to general principles to respond to the
crisis, including working to prevent the collapse of important financial
institutions and protecting the deposits of savers. But he offered no details on
other measures, suggesting that there were still differences among countries
about which steps to take to shore up their respective financial systems.

To some extent, the effort to agree on a coordinated plan is being driven less by
the hope that such measures will carry more punch than by the fear that nations
acting alone could destabilize the system.

Those worries grew in recent days when Iceland seized its three major banks,
which were failing, and appeared to guarantee the deposits of Icelanders over
those of foreigners. That provoked a fierce reaction from Britain, which is now in
talks with Iceland to get back the deposits of British citizens.

With the United States and Europe working together on ways to secure their
banking systems, economists are concerned that money may flow out of other
countries, particularly emerging markets, to Western countries if investors decide
that those markets are not as safe.

The United States sought to reassure these countries in a meeting on Saturday

evening of the Group of 20, which includes countries with large emerging
markets, like China and Russia.

“We want to reaffirm, reinforce our commitment that we’re going to take these
actions in a way that doesn’t undermine the economies of other countries,” said
David H. McCormick, the under secretary of the Treasury for international
affairs.

Like the United States, Britain plans to provide capital directly to banks. But the
United States and other countries have not adopted Britain’s proposal to
guarantee lending between banks as a way to unlock the credit market.

Germany has been reluctant to put state capital directly into banks, though
officials said there were signs of movement in that position on Saturday.
Europeans leaders were scheduled to meet in Paris on Sunday, amid reports that
Germany may announce a large rescue plan of its own.

Some experts said the delay in carrying out the Bush administration’s $700
billion bailout plan had only hurt its prospects for success.

“Even if it was adequate before, it’s not adequate now,” said Frederic Mishkin, a
professor of economics at Columbia University’s business school who stepped
down as a Federal Reserve governor at the end of August. “If you delay and create
uncertainty, the amount of money you have to put up goes up.”

As recently as late September, the idea of letting the government buy part of the
banking system had been unthinkable in the Bush administration. To many
officials, such intervention seemed like a European-style government intrusion in
the markets.

“Some said we should just stick capital in the banks, take preferred stock in the
banks. That’s what you do when you have failure,” Mr. Paulson told the Senate
Banking Committee on Sept. 23. “This is about success.”

Mr. Paulson told lawmakers it made more sense to jumpstart the frozen credit
markets with “market measures,” by which he meant buying up assets rather
than institutions. He staunchly resisted Democratic proposals to require that the
government receive an equity stake in the companies it was helping.
But on Friday, Mr. Paulson not only confirmed his intention to buy stakes in
banks but gave the idea central billing. “We can use the taxpayer’s money more
effectively and efficiently, get more for the taxpayer’s dollar, if we develop a
standardized program to buy equity in financial institutions,” Mr. Paulson said.

Treasury officials said they hoped to make the first capital investments within the
next two weeks. That would be earlier than any government purchases of
unwanted mortgage-backed securities. One reason for Mr. Paulson’s rapid
reconsideration was that global financial markets have been going downhill faster
than anyone had seen before.

Credit markets seized up and all but stopped functioning, making it impossible
for most companies to borrow money on more than an overnight basis. Bank
stocks plummeted, making it much more difficult to shore up their balance sheets
by raising more capital from investors.

Investors panicked as the House initially rejected the bailout bill on Sept. 29.
They panicked even more after Congress passed a bill on Oct. 3 that was packed
with sweeteners that added $110 billion to the price tag.

By the closing bell last Friday, the Standard & Poor’s 500-stock index had
suffered its worst week since 1933. A growing number of analysts argue that Mr.
Paulson’s original plan, called the Troubled Assets Relief Program, would have
been unhelpful and possibly unworkable. Some noted that Mr. Paulson presented
Congress a proposal that was only three pages long and that Treasury officials
have yet to provide details how the auctions will work.

As envisioned, the Treasury or its agents would hold so-called “reverse auctions”
in which financial institutions are invited to compete against each other in
offering to sell their mortgage-backed securities at a low price.

Though auctions are common for all sorts of products, including electricity that
utilities sell one another, experts said that mortgage-backed securities would pose
difficult headaches because they are extraordinarily complex, difficult to value
and come in almost limitless varieties.

The bonds for a single pool of mortgages are divided into more than a dozen
“tranches,” or slices, which have different seniority, different credit ratings and
different rules for being paid off. The performance of the underlying mortgages
varies greatly from one pool to another, even if both pools are made up of
seemingly similar loans.

“I am not aware that the Treasury Department presented any evidence on

auctions that have been successful when they are used for assets that are so
heterogeneous,” said William Poole, who retired in August as president of the
Federal Reserve Bank of St. Louis.
Because Fannie Mae and Freddie Mac, the mortgage giants, buy and sell
mortgage securities every day, they could absorb some of the hard-to-sell
securities without going through the untested auction process.

The Federal Housing Finance Agency, which last month seized the companies
and placed them into a conservatorship, lifted capital restrictions on them last
week and effectively gave them a green light to buy more mortgage securities of
all types, including those backed by subprime loans, given to borrowers with
weak credit.

The companies have a lot of money; Congress authorized Treasury to lend them
as much as $100 billion each as part of the rescue plan created for them. That
could free up money in the separate $700 billion bailout plan for injecting capital
directly into the banks. People familiar with the early planning efforts for a
systemic bailout said the chairman of the Federal Reserve, Ben S. Bernanke,
argued that it would be easier and more efficient to inject capital directly into
banks. But Treasury officials balked, in part because they were ideologically
opposed to direct government involvement in business.

But as the financial markets spiraled further downward during the last 10 days, a
growing number of top-tier institutions, including Goldman Sachs and Morgan
Stanley, became worried about their survival.

“The crisis in confidence goes way beyond the actual losses that will be incurred
from debt securities,” Mickey Levy, chief economist for Bank of America, said in
an interview on Friday. “It’s truly incumbent on policy makers to address that
crisis.”

Treasury officials began canvassing banks and investment firms about the
possibility of having the government buy stakes in them. The new bailout law
gave the Treasury the authority to buy up almost any kind of asset it wanted,
including stock or preferred shares in banks.

Industry executives quickly told Mr. Paulson that they liked the idea, though they
warned that the Treasury should not try to squeeze out existing shareholders.
They also begged Mr. Paulson not to impose tough restrictions on executive pay
and golden-parachute deals for executives who are fired.

Mr. Paulson heeded those pleas. In his remarks on Friday, he carefully noted that
the government would acquire only “nonvoting” shares in companies. And
officials said the law lets the Treasury write most of its own restrictions on
executive pay, and those restrictions can be lenient if they are applied to a set of
fairly healthy companies.

Rich Nations Pushing for Joint Financial Rescue

 Jim Lo Scalzo for The New York Times

Ben S. Bernanke, left, the Federal Reserve chairman, and Henry M. Paulson Jr.
met Friday in Washington with finance ministers.

WASHINGTON — The United States and six other nations that are among the
world’s richest agreed on Friday to a coordinated plan to rescue the financial
industry, but fell short of offering concrete steps to backstop bank lending on a
day when fear tightened its grip on investors from Wall Street to Hong Kong.

Treasury Secretary Henry M. Paulson Jr. said the United States would move
aggressively on one part of the plan by infusing American banks directly with
cash and taking ownership stakes in return.

In the five-point plan, issued after finance ministers met at the Treasury
Department, the Group of 7 countries broadly endorsed the idea of taking
ownership positions in banks — a strategy first adopted by Britain and now
emerging as a major part of the rescue effort in the United States.

But the nations were vague on how or when that will happen, and did not endorse
a proposal by Britain to provide coordinated guarantees of lending between
banks, as a way to shake loose credit markets.

The attempt at coordination came at the end of one of the worst weeks in the
history of Wall Street. The Dow Jones industrial average plunged 18 percent for
the week, and wildly swung more than 1,000 points on Friday alone before
settling down 128 points, or 1.5 percent.
Many investors had hoped the meeting of the finance ministers from the world’s
leading economies would result in more concrete steps to restore the paralyzed
credit markets, and lay out a blueprint for recapitalizing banks.

“This fell short,” said Adam Posen, the deputy director of the Peterson Institute
for International Economics. “It all seems to be moving toward direct injection of
capital, but why aren’t they just saying it?”

Mr. Paulson said the seven countries — the United States, Britain, Germany,
France, Italy, Canada and Japan — had committed themselves to five principles,
ranging from preventing the failure of important banks to protecting the bank
deposits of savers.

“People came together,” Mr. Paulson said at a news conference, noting that the
diplomatic language of such communiqués had been replaced by a plan “that’s
different, that’s to the point, that’s powerful.”

Treasury officials said the United States may embark on direct injections of
capital into banks within the next two weeks, even earlier than the government
plans to begin buying distressed assets from banks under the bailout plan that
President Bush signed just over a week ago.

Mr. Paulson said hopes for a grand global solution were naïve, given the
differences among countries. Indeed, other finance ministers had tried to reduce
expectations for the meeting.

“Don’t imagine that we’ll have a harmonized response that will be the same for
everybody because you can’t apply the same method to different market
situations,” the French finance minister, Christine Lagarde, said earlier in the
day.

The Group of 7 session was one of a flurry of meetings in conference rooms from
the Federal Reserve to the International Monetary Fund at which officials
discussed potential remedies for the financial system. The timing was fortuitous:
the world’s financial elite had gathered in Washington for the annual meetings of
the monetary fund and the World Bank.

But the pageantry and parties that normally characterize this gathering have been
replaced by an atmosphere of high drama and deep gravity — a 21st century echo
of Bretton Woods, the 1944 conference in New Hampshire at which the Allies
fashioned the financial institutions of the postwar era.

The discussions on Friday focused on the growing likelihood that the United
States and several major European countries would have to partially nationalize
their banking systems.
Germany remains deeply reluctant about such a course, according to people with
knowledge of the German position, because of fears that it would end up bailing
out the banks of its neighbors.

Such a step would have been unlikely here a week ago, too, but the swiftness of
events is forcing officials to throw out decades of conventional wisdom about how
free markets should operate.

Events also seem to have upended the Treasury’s plan to stabilize the financial
system by buying billions of dollars of troubled assets from the banks — a plan
that Mr. Paulson and his Treasury Department colleagues expended enormous
energy designing and selling to a skeptical Congress.

“The original Paulson plan didn’t hit the nail on the head,” said Kenneth S.
Rogoff, an economist at Harvard and an adviser to the Republican presidential
candidate, John McCain. “It’s one thing to go back to Congress six months later
and say ‘I didn’t ask for enough.’ It’s another to go back after six days and say ‘I
didn’t ask for enough.’ ”

The Treasury has been soliciting feedback about capital injections from Wall
Street chief executives, top hedge fund managers, and other big investors,
according to a senior banker briefed on the proposal.

One message the industry has given officials is that their plan should help strong
banks, rather than save deeply troubled ones. They have suggested tying the
eligibility for a government investment to a bank’s so-called Camel rating — a
measure used by regulators to grade an institution’s financial strength. Only
banks in the highest-rated categories would qualify for support.

Another suggestion is for regulators to effectively halt dividend payments for all
banks in which the government injects capital, this banker said. This would help
remove the stigma of lowering the dividend, and keep about $55 billion a year
from leaking out of the banking system.

The United States and Germany appear to be the pivotal players in determining
whether recapitalizing banks becomes a global standard, given that Britain has
already adopted such a plan, and France, Italy and Japan generally support it.
Japan recapitalized its banks after a financial crisis in the 1990s.

Before the meeting, Italy’s finance minister, Giulio Tremonti, criticized a draft of
the communiqué, saying it was too weak, and threatened not to sign it. The final
text was very different, he said.

Prime Minister Silvio Berlusconi of Italy raised eyebrows earlier in the day, with a
call for countries to shut their financial markets while the authorities drafted new
rules for the financial system — a suggestion that was rebuffed by the White
House and later disavowed by Mr. Berlusconi himself.
While the leaders managed to paper over any rifts by the time they emerged from
their meeting, their lack of agreement on a British-style guarantee of loans made
between banks worried economists.

If other countries do not follow the same course as Britain, they said, it could
destabilize the financial system, because money may flow to Britain from
countries without those same guarantees.

“You now have the full faith and credit of the British government standing behind
the banking system,” said Barry Eichengreen, a professor of economics at the
University of California, Berkeley. “The British could suck deposits from
continental Europe and even the United States.”