Wachovia Corp., the nation’s sixth-largest lender, was forced to sell, eventually going to Wells Fargo & Co.
As for BNY Mellon, the company chose to reimburse its clients invested in funds managed by affiliates and affected by the Lehman bankruptcy.That decision cost the bank $433 million. The senior officers and legal team also expect that their own compensation will be seriously reduced for some time to come, Biben says, because of new executive compensation rules demanded by Congress of all financial institutions.
Across the nation, the stock market plunged; banks stopped lending; airlines, automakers, media companies and others went in search of bankruptcy advice; hundreds of thousands of workers were laid off. The end of September marked the end of modern banking’s Gilded Age.
Boston University’s Hurley thinks that if Paulson and Bernanke could have a Lehman weekend do-over, they’d find a way to save Lehman. “They misjudged the repercussions,” Hurley says. “I think they know they blew it.”
One critic of the government is Ann Graham, who teaches banking law at Texas Tech University School of Law in Lubbock and is editor of the Banking Law Prof Blog. Saving Bear Stearns and not Lehman Brothers showed the lack of a consistent strategy for dealing with the crisis, Graham says. It was a “soap opera” approach, she adds, resulting in uncertainty throughout the economy.
The Lehman Weekend had changed the world of banking forever. More immediately, the credit markets were frozen; huge banks had no confidence in — and wouldn’t lend to — other financial institutions. “Those of us on the inside felt real fear. But there was this disconnect with the rest of the world. America was going on like nothing had changed,” says Biben.
Then the lesson sunk in, and not just with the lawyers or bankers. Biben recalls returning home from work one late night after Lehman fell. An old elevator in his building requires a human operator, and this night, one named Sergio was at the controls. When Biben stepped onto the elevator that night, Sergio asked, “Mr. Biben, what should I do with my 401(k)?” He wasn’t asking how to invest his money; he was asking if it was safe, Biben says. Fortunately, the money was in a safe institution, and Biben was able to reassure him. “That’s when it dawned on me that the crisis was finally striking the rest of America. They were getting it,” Biben says.
By Oct. 3, Congress got it, too, and passed the $700 billion bailout plan. Paulson quickly infused $147 billion into the nation’s nine largest banks in a stock purchase program, to ensure that they would keep functioning smoothly. BNY Mellon sought nothing — it ended the third quarter with $303 million in net income despite writing off a $726 million charge related to support agreements to keep their customers whole against Lehman and other losses. Biben says the bank felt it was “the right thing to do,” but it also made sense from a legal and public relations standpoint. While BNY Mellon did not ask for bailout money, Paulson allotted the bank $3 billion to ensure that it remains strong and to protect its crucial role on Wall Street.
With the Lehman crisis behind him, and awaiting difficult but acceptable fourth-quarter results, the usually upbeat Biben grows solemn as he looks back on his legal department’s efforts. His mind repeatedly goes to the words of one of his heroes, and everyone’s favorite wartime prime minister, Winston Churchill. In 1940, after France fell and as Churchill readied Britain to face Hitler’s onslaught, the prime minister proclaimed: “Let us therefore brace ourselves to our duties, and so bear ourselves that if the British Empire and its Commonwealth last for a thousand years, men will still say, ‘This was their finest hour.’ “
The Lehman Weekend was not a war, Biben concedes: “But all the investment banks and financial services as we had known them for the last two centuries were in very real jeopardy.” His bank’s lawyers worked through the long hours and weeks, while most of the bank’s employees, indeed most of the nation, remained totally unaware of the deepening peril. “This was,” Biben insists, his eyes moistening and his voice filling with emotion, “our finest hour.”
SHORING UP THE BIGGEST BANKS
In an effort to solidify the nation’s nine largest and strongest financial institutions, last fall the U.S. government took the unprecedented step of buying up $147 billion worth of preferred bank stock. Here is where the money went:
Name of Institution: Bank of America Corp.
3rd Qtr 2008* (earnings per share): $0.15
3rd Qtr 2007: $0.82
Amount (in billions): $15
Name of Institution: Bank of New York Mellon Corp.
Headquarters: New York
3rd Qtr 2008* (earnings per share): $0.72
3rd Qtr 2007: $0.67
Amount (in billions): $3
Name of Institution: Citigroup Inc.
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