20
02/11
Thain Says He Should Have ‘Grabbed, Shaken’ Paulson
Merrill Lynch & Co.’s former Chief Executive Officer John A. Thain said Wall Street leaders should have tried harder to convince U.S. regulators they needed to prevent the failure of Lehman Brothers Holdings Inc.
Banking chiefs weren’t “strong enough” during 2008 meetings in insisting that then-Treasury Department Secretary Henry Paulson reverse his opposition to a U.S.-led rescue of Lehman, Thain told the Financial Crisis Inquiry Commission, according to audio files released yesterday.
Lehman, based in New York, filed the largest bankruptcy in U.S. history, roiling markets and helping contribute to the bailout of insurer American International Group Inc. and the purchase of Merrill by Bank of America Corp. Days before Lehman’s September 2008 collapse, Paulson convened CEOs including Thain, Lloyd Blankfein of Goldman Sachs Group Inc. and Jamie Dimon of JPMorgan Chase & Co. to try to get the banks to help fund a rescue.
“We collectively, the group of us, we should have just grabbed them and shaken them and said, ‘Look, you guys cannot do this,’” Thain told FCIC interviewers in a Sept. 17, 2010, interview. “Allowing Lehman to go bankrupt was the single biggest mistake of the financial crisis.”
The banking executives, their firms weakened by the crisis, couldn’t be persuaded to contribute about $20 billion to backstop Lehman’s bad assets, Thain said. Had the U.S. provided that support, the $700 billion Troubled Asset Relief Program may not have been needed, he said. Barclays Plc or Charlotte, North Carolina-based Bank of America probably would have bought Lehman’s profitable operations, he said.
Credit Freeze “The complete freezing of the credit markets that came after Lehman made the situation much, much worse,” Thain said. “It would’ve been much less likely that TARP and all the things that followed would’ve been necessary if Lehman hadn’t been allowed to go bankrupt.”
Worried that the government wouldn’t help Merrill Lynch, straining under losses on mortgage-related securities, Thain called Kenneth D. Lewis, then-CEO of Bank of America, on September 13, 2008, to suggest a “strategic transaction.” Merrill’s board approved a $29-per-share deal, valuing the firm at about $50 billion, before the weekend’s end, Thain said.
Bank of America would later receive $45 billion in two rounds of government aid, some of which was needed because of losses on Merrill’s assets. The firm repaid the funds in 2009.
Lawmaker Criticisms Paulson allowed Lehman to fail because of political considerations, including lawmaker criticism of the Bear Stearns Cos. rescue, said Thain, who is now CEO and chairman of New York-based commercial lender CIT Group Inc.
The argument presented later by regulators that they lacked the legal authority to save Lehman was “never raised” during discussions with the CEOs at the Federal Reserve Bank of New York, Thain said.
Lehman’s collapse and AIG’s bailout the same week contributed to the biggest rewrite of financial rules since the Depression as lawmakers sought to limit risk and create a way to unwind risky companies. Financial firms have gotten bigger and more systemically important in the last decade, Thain said.
“They’re more interconnected, there are fewer of them, and there are zillions and zillions of derivative contracts that connect them, all contributing to the ‘too big to fail’ problem,” he said.
Curtis Ritter, a spokesman for CIT, declined to comment, and Michele Davis, a spokeswoman for Paulson, didn’t immediately return a call. In his book, “On the Brink: Inside the Race to Stop the Collapse of the Global Financial System,” Paulson said he told the CEOs not to expect government money because otherwise “some of them might think that Good Old Hank would come to the rescue.”