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U.S. government officials, including Treasury Secretary Henry Paulson, New YorkFederal Reserve President Timothy Geithner, and Securities and ExchangeCommissioner Christopher Cox, were strongly criticized for their role in the Bear Sternsmerger with JP Morgan Chase. The criticism from elected government officials inWashington, D.C. in particular, was vicious. The Bear Sterns experience solidified theopinion of key government officials that they could not afford to be seen as bailing outany more investment banks. “I can’t be Mr. Bailout,” said Secretary Paulson.27By summer of 2008, all of the remaining major investment banks in New York werein distress. Losses on the mortgage-backed asset portfolios of the investment banks weremounting almost daily. Losses were particularly acute for Lehman Brothers. Lehmanhad booked a $2.8 billion loss for the second quarter of 2008. In an effort to improvethe firm’s liquidity, bankers inside Lehman turned souring real-estate investments intohighly-rated commercial paper, which they then used as collateral for cash. These secu-rities, called Fenway commercial paper, were dubbed as “goat poo” by bank insiders.28The Fenway commercial paper, named for Fenway Funding LLC (a subsidiary offinance company Fenway Capital), allowed Lehman to finance longer-term assets suchas real estate loans with loans from investors such as money-market funds.29The FenwayThis document is authorized for use only in Dr. Tapan Panda's CTA (Corporate Governance) course at O. P. Jindal Global University, from February 2018 to August 2018.
126Case Research Journal • Volume 32 • Issue 1 • Winter 2012commercial paper was tied, among other things, to loans that Lehman had made for aproject in California’s Mojave Desert.30Lehman used the Fenway commercial paper tohelp keep itself afloat in the summer of 2008.Looking for a merger to save the company, Lehman Brothers approached the bankMorgan Stanley. These talks quickly stalled. In desperation, Richard “Dick” Fuld, theChairman of the Board and Chief Executive Officer of Lehman Brothers, told his attor-ney to approach Bank of America about a deal.After several weeks of phone calls and haggling, Dick Fuld met with Ken Lewis, theCEO of Bank of America, at the offices of the New York Federal Reserve on Monday,July 21, 2008. This meeting was arranged by Henry Paulson and Timothy Geithner.31Several days after this meeting, Lewis called Fuld and told him that Bank of Americawasn’t interested, though he left the door open for further discussion. Other possiblebidders for Lehman included the Korea Development Bank and the British bankBarclays, but negotiations between these firms and Lehman also stalled, restarted andstalled.Matters were spiraling quickly out of control. To make matters worse, the problemswere not confined to the New York investment banks, and in fact appeared to be spread-ing. One area of particular concern was the two GSEs (Government SponsoredEnterprises) Fannie Mae and Freddie Mac, whose distress was becoming unmistakable.