Lehman Brothers | The Gorilla of Wall Street | 1

American scandal uses dramatizations that are based on true events. Some elements, including dialogue, might be invented, but everything is based on historical research. It's October 6, 2008 in Washington, D.C. A black SUV pulls up outside the Rayburn House office building on Capitol Hill. Protesters crowd around a barricade. They wave signs, scrawled with the words, shame and crook, as the former CEO of Lehman Brothers, Dick Fould, emerges from the car with his lawyer by his side. Fould hurries toward the white marble building while his lawyer tries to shield him from the jeering crowd. When they enter the hearing room, Fould takes a seat at a long mahogany witness table, a microphone, a single cup of water, and a house committee on oversight and government reform wait in front of him. Fould glances at his lawyer, who sits over to the side. They rehearse their story. Lehman Brothers was a victim of the financial crisis, not the cause. But now, sitting before the scowling members of Congress, Fould begins to sweat. He delivers his prepared statement and takes questions from the lawmakers. Fould has been giving answers for over an hour when representative Peter Welch leans toward the microphone. Thank you, Mr. Fould, for being here today. There's a tragedy unfolding all across America. We're only just beginning to feel the pain. Wall Street and Lehman Brothers took a simple step in the American dream of family buying a home and turned it into a commodity to be sold and traded. And now, well, there was a whole series of bailouts. But the decision was made when it came to Lehman. There was going to be no governmental assistance. So in fact, Lehman Brothers was treated differently than some of the other financial giants that were in similar circumstances. Do you have any understanding of why Lehman Brothers was allowed to fail? Whereas other banks were the beneficiaries of multi-billion dollar bailouts sponsored by the Treasury Department? Well, clearly, I would have loved to have been part of that group that got that. But why were you allowed to fail when the rest were bailed out? That was a decision that was made at the Fed that Sunday afternoon. I wasn't there. You've got to be wondering, though, right? Why? Why Lehman Brothers? What was different about your company? Dick Fulde stares down at the table, blinking slowly. Congressman, I will wonder that until the day they put me in the ground. In front of members of Congress, Dick Fulde insists he takes full responsibility for what happened to Lehman Brothers. And he says that if he could turn back the clock and do things differently, he would. But inside, an anger still simmers. The government saved everyone else, spending billions upon billions of dollars, but they let his beloved Lehman burn to the ground. Audible subscribers can listen to all episodes of American Scandal ad-free right now. Join Audible today by downloading the Audible app. From Wondery, I'm Lindsay Graham, and this is American Scandal. On September 15, 2008, the investment bank Lehman Brothers collapsed, but it wasn't just the firm's 25,000 employees who suffered. The implosion was the largest bankruptcy in history, a $600 billion disaster that threatened to pull down the global financial system with it. At the center of Lehman's dramatic demise stood its CEO, Dick Fulde. Nicknamed the gorilla for his ruthless leadership style, Fulde had led the company to new heights in the early 2000s. But that only meant that when the market turned, Lehman had that much further to fall. Like so many other companies on Wall Street, Lehman had gorged itself on the profits created by soaring home prices and easy credit. The firm specialized in complex securities that bankers claimed diluted risk, but in fact only spread contagions throughout the entire financial system. And when the bubble burst, Fulde and his executives insisted their firm was strong enough to survive, but they couldn't hide from the truth forever. And soon the US government was faced with an almost impossible decision, whether or not to bail out Wall Street from the consequences of its own greed. These people across the world struggled amid the worst economic downturn since the Great Depression. They demanded to know who was to blame for all the layoffs, the foreclosures, and the disappearance of their savings. They soon found the villain they were looking for. This is Episode 1, The Gorilla of Wall Street. It's the summer of 1966 in an office building in downtown Denver, Colorado. 20-year-old Dick Fulde is a part-time summer intern in a small trading outpost of Lehman Brothers. Eager to please, he darts between desks, clutching papers he's just copied. Fulde is at the bottom of the pecking order, an errand boy, but he loves it here. The energy in the cramped office is electric. Cigarette smoke hangs in the air and phones ring off the hook as traders shout out the latest prices and deals. Fulde pushes his hair back and wipes a sweat from his forehead as he presents the copies to one of the traders. Using a phone call, the man snatches them from Fulde's hands and then curses. Fulde has copied the wrong document. Fulde's cheeks flush with embarrassment. His wealthy grandfather pulled strings to get him this internship and now Fulde fears he's letting him down. With a contentious sneer, the trader thrusts the copies back at him and says Fulde needs to be better, faster, and smarter in order to work here. For a moment, Fulde falters. This rebuke stings. But then something hardens behind his eyes. He straightens his back, meets the trader's glare, and says he'll prove himself. He returns to his desk, his jaw set, and gets back to work, more determined than ever. He's never experienced anything like Lehman before. The intensity of work makes him feel alive and Fulde only wants more. So after college, he follows up his internship in Denver with a permanent position at the company, this time at its main office in New York City. Although it was founded as a small general store in Alabama, Lehman Brothers had been based in New York since the 1860s. Having started out trading cotton, the company steadily expanded and began buying and selling a variety of raw materials. By the time Dick Fulde starts working for the firm in the late 1960s, Lehman has developed into a full-fledged investment bank. It helps corporations raise capital by issuing stocks and bonds to investors, and its employees advise their clients on mergers, acquisitions, and asset management. Fulde starts his career out in the commercial paper desk, trading what are effectively IOUs issued by companies. His salary is $6,000 a year, already $1,000 more than the average American. But Fulde is eager to climb the ranks and earn more as quickly as he can. So on the trading floor, he soon gets a reputation as someone who isn't afraid to stand up to his colleagues, even his superiors. He shouts out his trades in a commanding rapid-fire rhythm. Sometimes he gets so caught up in the moment that he swings his arm across the desk sending papers flying. His aggression earns him a nickname, the gorilla. And although he's not a tall man, Fulde does have an intense physical presence. He's a weightlifter and a fitness buff. He loves competition and loves winning even more. So he embraces his new nickname and starts keeping a stuffed toy gorilla in his office. And throughout the 1970s, promotion follows promotion for the gorilla of Wall Street. These come and go, but Fulde stays loyal to Lehman Brothers, even as the company itself falters. In the early 1980s, internal divisions at the top of Lehman threatened the terror to part. Eventually, American Express steps in to acquire the struggling firm, and for ten years it tries to breathe new life into Lehman. But the two companies never really fit. In 1994, American Express cuts its losses, spinning Lehman off as an independent firm again. Many Wall Street observers believe it will survive on its own. But Dick Fulde does. He stayed with the firm through all its up and downs. And now he gets his reward, a pointed Lehman CEO. It's everything he's wanted. Not yet 50 years old, he's climbed to the top of the tree. His new pay package is thousands of times what he made when he started out. But that first night, after gaining the top job, when Fulde gets home and climbs into bed, he feels his chest tighten. His lungs seem to stop working and he gasps for air. He's having a panic attack. Fulde has dedicated his career to Lehman Brothers, and now he holds the company's fate in his hands. The responsibility suddenly feels very overwhelming. But he doesn't let anyone else see his anxiety. After a sleepless night, the next morning, he's back at his desk at Lehman's headquarters in Lower Manhattan, as if nothing had happened. And soon he is remaking the investment bank in his own image. He recruits an inner circle that reflects his own upbringing and education, people from undistinguished backgrounds with barely an Ivy League degree among them. Fulde wants a culture defined by his ethos of relentless hard work and fierce loyalty. Lunch breaks are frowned upon, leaving early as unthinkable. Other banks are no longer the competition, they're the enemy. And every meeting, every deal, every trade must be devoted to beating them. Lehman Brothers will be the biggest, most profitable investment bank in the world. His obsessive and relentless focus on work pays off. Having been near bankruptcy in 1994, by the turn of the millennium Lehman is celebrating its 150th anniversary with record earnings. So all across Wall Street, Fulde is recognized as a true leader. And on one of the darkest days in American history, many in the finance industry turn to him for guidance. Dick Fulde is in New York on September 12, 2001. The day after 9-11, when the Twin Towers fell, Lower Manhattan is still shrouded with dust and smoke. Streets that are usually crowded with bankers and taxis are covered with ash. Sirens continue to wail and the air smells a burning metal. Standing out amid the destruction and chaos is the austere, orderly beauty of the New York Stock Exchange building. Inside, Dick Fulde sits at a long oak table with a group of other Wall Street executives. They've come to decide when the markets should reopen and the room hums with a strange mix of business talk and stunned disbelief. One CEO turns to Fulde and asks when he thinks Lehman will be able to start trading again. But Fulde's usual bravado is gone. Lehman's headquarters was directly across from ground zero. From the windows of his company's trading floor, Fulde's employees had watched in horror as the planes hit the World Trade Center. And now Lehman's headquarters is in ruins. Its windows blown out, its floors coated in debris from the fallen towers. Fulde turns back to the other CEO, telling him that they don't even know who's still alive yet. The room falls silent. For a man known as the Guerrilla of Wall Street, it's a rare moment of public vulnerability. So Fulde uncomfortably excuses himself and steps outside. He's joined by a colleague who quietly asks Fulde what he wants to do. Fulde's shock gradually gives way to resolve. He gives orders to set up makeshift offices for the firm's employees at the Sheraton Hotel on 7th Avenue. Then he begins work on a plan to buy Lehman Brothers a new home. Fulde is determined that his company will rise from the ashes and defy the destruction and death of 9-11 to reach new heights. And less than a month later, he negotiates the purchase of a new 33-story tower in Midtown. This glittering skyscraper was built for rival bank Morgan Stanley. But since the terrorist attacks, Morgan Stanley has been reevaluating his property portfolio and headcount in New York. Fulde spied an opportunity. The $700 million deal will require Lehman to move out of its traditional home in Lower Manhattan. But Fulde is looking to the future. He's intoxicated by the firm's rapid growth and is determined to push it even further. He's seen the money that's been made by rivals like Goldman Sachs, who are dipping their toes into the mortgage business and he wants a piece of the pie. So Lehman begins underwriting mortgages and offering mortgage-backed securities as well. Then they venture into leveraged lending, providing loans to businesses with high debt and poor credit. This new strategy is lucrative, but it's also far more risky. And not all of Lehman's executives are happy with the decisions Fulde is making. One day in June of 2005, a senior colleague tries to intervene. It's a warm summer evening and Lehman's top team is enjoying drinks at a rooftop oyster bar with spectacular views over Manhattan. Mike Gelban, Lehman's global head of fixed income, peers across the terrace and spots his boss, Dick Fulde, on his own for a moment. So cutting through the crowd, he takes a seat beside him. Hey, Dick, can I have a word? Only if you have a drink with me first, I just ordered another bottle. A waiter approaches with champagne. Hey, two glasses, please. No, no, no, I'm okay, thanks. Don't be ridiculous. Two glasses. This is the good stuff, Mike. The waiter pours their drinks and Fulde immediately takes his glass from the table and takes a sip. But Gelban doesn't touch his. Look, Dick, I'm worried about the real estate market. Oh, come on. It's a bubble. What are you talking about? The leveraging, the borrowing, the house prices, they just can't keep going up forever. What happens when families can't pay back their mortgages? The entire thing could collapse. There are trillions of dollars of leverage out there. Trillions, Dick. I think we have to rethink some things. Fulde's face hardens. Your job isn't to tell me why we can't do things, Mike. I want you to tell me how we can. But this is a bubble. Like all bubbles, it's going to pop. I'm not sure we're prepared for that. I mean, the champagne's flowing now. There's a big hangover coming. You don't need to lecture me about risk. I'm not lecturing. There's not a single thing in life that doesn't carry risk. This isn't crossing the street we're talking about here, Dick. Mike, look at this view. This $500 vintage. Do you think they exist without rolling the dice? Risk is what got me here. And frankly, it's what got you here, too. Best you remember that. And drink your damn champagne. Mike Gelban finally licks his glass and downs the expensive champagne in one go. And he makes his excuses and leaves. As his colleagues continue to drink and eat oysters, Mike can't shake his sense of dread. It's like he's stuck on a runaway train. He can see the disaster on the track ahead. There's nothing he can do to stop it. I'm Indra Vama, and in the latest season of The Spy Who, we open the file on Larry Chin, the spy who outplayed Nixon. For decades, Chin was embedded deep inside US intelligence. Then comes an opportunity. Richard Nixon's secret plan to reopen relations with China. Information Chin can place directly into Mao's hands. But the CIA has a weapon of their own. A Chinese mole ready to defect. How long until Chin's gig is up? Follow The Spy Who now wherever you listen to podcasts. Hello, I'm Matt Ford. And I'm Alice Levine. And we're the hosts of British Scandal. Now, Britain loves a royal scandal. Abdications, affairs, dodgy uncles. We've had the lot. But this series is about two brothers. Raised in palaces bound by tragedy. Supposed to be inseparable. So how did they end up barely speaking? Is it jealousy, the press, the firm? Or was this royal rift always inevitable? This is the story of Harry and Will's and the scandal that split the House of Windsor. Follow British Scandal wherever you get your podcasts or listen early and ad-free on Audible. It's 2005 and the U.S. housing market is booming. Following a recession in the early 2000s, the Federal Reserve slashed interest rates to revive the economy. This combined with lax lending standards meant that even those with poor credit ratings and little income could walk into a bank and come out with a loan for half a million dollars. Much of this cheap money flooded into property. Banks have already posted enormous revenues on the back of this real estate boom and Lehman Brothers CEO Dick Fault wants to make sure his company profits from it as well. At the core of his new investment strategy are mortgage backed securities. These are bundles of mortgages packaged up and divided into different tiers or tranches of risk and return profiles. Those who buy these packages receive the interest payments made by the homeowners. Those who sell them get an immediate cash injection to invest elsewhere. And at every point in the transaction, there are fees. It's a lucrative trade, but there is a problem brewing. These securities include countless subprime mortgages, loans that may never be paid back because the borrowers cannot afford them. The banks claim that as these mortgages have been packaged up and chopped into pieces, the risk associated with them has been diluted, spread out among all the other good mortgages. But in fact, all they've done is create a web of interconnected weak points that could potentially undermine the foundations of the entire financial system. But there are supposed to be defenses against risks like this. Credit rating agencies are meant to police the system and in theory, they should flag these subprime mortgage backed securities as potentially toxic assets. But they are seduced by money as well. Banks can shop around for the best ratings and credit agencies compete against each other for their business. So eager for market share, firms such as Moody's stamp even the most precarious mortgage bundles with a gold standard triple A rating. This is a dangerous illusion, but it's so profitable that no one wants to stop it. There is at least one man who's not ignoring the problem though. On July 10th, 2006, Henry Hank Paulson is sworn in as Treasury Secretary. He spent the past seven years as CEO of Goldman Sachs, one of the world's largest investment banks. He steered it through its IPO when it became a publicly traded company in 1999 and led its expansion into new territories like Australia and China. That success made Goldman the envy of Wall Street. But Paulson knows a bubble is forming in the US real estate market and he believes as Treasury Secretary, it's now his duty to do something about it. If he's to take any meaningful action though, he'll need the approval of his new boss, President George W. Bush. So in August, 2006, he heads to the presidential retreat at Camp David. It's a humid summer morning in Maryland and the cicadas are buzzing. Marine guards stand watch along the winding paths, breaking the quiet with a crunch of gravel under their boots. Inside the main lodge, the air is cool and smells of polished wood. Paulson takes a seat at the long table and opens the briefing binder before him. A few moments later, President Bush strides in. He greets Paulson with a slap on the back in a quick grin. How you doing, Hank? Welcome to Camp David. Thank you, Mr. President, it's an honor to be here. Someone get you coffee? We have some fine coffee here. Bush stops, noticing Paulson's somber expression. Oh, are you not happy to see me or something, Hank? Smile a bit, the economy's booming. You've got the easiest job in Washington. Well, sir, I wish that were true. The economy is overdue for a crisis, I believe. There's a lot of dry tinder out there. Dry tinder? What sort of tinder are we talking about? It's the subprime mortgage market, sir. Well, you may have to explain that one to me, Hank. I'm not one of your Wall Street boys, you know. Well, sir, essentially it's higher risk loans to folks with poor credit. All right, gotcha. And you're worried about foreclosures. I'm worried about contagion. I'm afraid that if this real estate bubble pops, then subprime mortgages could bring the entire financial system down. Bush stares at Paulson. You talk about some kind of crash, like the 1930s? You believe that? I do, sir. And I think we need to act before it's too late. Well, what's your thinking? My first priority would be to give regulators the power to wind down failing investment banks. Traditional banks have the FDIC and the Federal Reserve to protect them. The authorities take them over and auction off their assets in an orderly fashion, but no such authority exists over the likes of Morgan Stanley or Lehman or Merrill Lynch or Goldman Sachs, right? Or Goldman Sachs, precisely. I want similar wind down authorities for all of them. Well, now, Hank, you think if I'd come to you a year ago when you were still at Goldman and said, I want to put some kind of federal overseer above you? You really telling me that you'd have welcomed that? Well, I could see the bubble developing, sir. It's partly why I took this job. And you want me to get the government into the business of taking over investment banks, selling them for parts? You know, I'm a Republican, Hank. I believe in the free market. Well, I believe in free markets, too, Mr. President. But even free markets need an emergency plan. Oh, I don't know, Hank. Paulson leans forward. Mr. President, I know no one else is talking about it. It's easier if everyone turns a blind eye. But the fallout from this could be, well, it could be catastrophic. Hank Paulson is something of a paradox. Once the highest paid CEO on Wall Street, he's also a devout Christian scientist who claims not to care for material wealth. When he was in New York, he always preferred birdwatching in Central Park over Black Tie Gallas. And while his Wall Street colleagues drove Bentley's as a passionate environmentalist, Paulson chose a Prius. Still, that didn't stop him from raising millions of dollars for the presidential campaign of oilman George W. Bush. And now, after 32 years at Goldman, Paulson finds himself embodying yet another contradiction. He is a crucial part of an administration that preaches the virtues of free markets, but he has inherited an economy that may demand bold and dramatic government intervention. Paulson is convinced the housing bubble is ready to burst. And with almost every piece of the financial system now connected to every other, the risk is not contained to the real estate market. But despite Paulson's warnings, no decisive action is taken. Following this meeting at Camp David in August 2006, the Bush administration takes a wait-and-see approach. The president remains resistant to government interference in private markets, especially when his many backers on Wall Street don't want the party to end. So all Paulson can do is keep watch and look to sound the alarm as quickly as possible should the worst happen. Paulson is now an outsider. He's not on the ground in New York anymore. And despite all his Wall Street connections, he's worried that he might miss something important. So he makes an unlikely-seeming move. A month into his job as Treasury Secretary, he reaches out to one of his fiercest Wall Street rivals. Dick Fould is on a golf course in Idaho when the call comes in. Fould owns a 71-acre estate near the resort town of Sun Valley. This 11-bedroom property is one of his five homes and has a favorite refuge from the chaos of Wall Street. He's on the seventh hole and closing in on one of his best games. He lines up his drive and swings hard. The ball cuts through the pale blue sky in a perfect art. As Fould watches it disappear into the distance, his phone rings. Officially, cell phones aren't allowed on the course, but Fould ignores the rule. He tosses his club to his caddy and fishes his phone out of his pocket. He frowns. He calls from Hank Paulson and Fould can't imagine what the Treasury Secretary wants with him. He answers all the same. Paulson wastes no time in addressing the irony of the conversation. Half-laughing and half-serious, he admits that they've been trying to kill each other for years in the boardroom, but now he needs Fould's help. For a moment, Fould lets those words hang in the air. This is not what he expected from his old rival, but he likes the feeling of having something Paulson might need, so cautiously he tells him to go on. Paulson tells Fould that in his new role as Treasury Secretary, he needs eyes and ears. He can look up any official figures with just a click of a button, but those numbers never tell the whole story. They won't keep him up to date on all the trading floor rumors, the hunches and the fads that shape so much of the market. So he tells Fould that he wants to keep a line open between them to hear what's really happening on Wall Street. Fould is flattered by Paulson's proposal, but his first instinct is to distrust it. After all, this is the same man who's been trying to outmaneuver him for years. Sensing Fould's hesitance, Paulson presses on with more urgency, saying they need to share information, not fight each other. Standing there amid the silence of the Idaho Mountains, Fould looks at his golf ball glinting in the distance and weighs his options. Having a direct line to the Treasury Secretary could be useful for Lehman, even if it is Hank Paulson. So in the end, Fould agrees, and he and Paulson start talking regularly. They exchange information and share insights about developments in the industry, and what began as a tense conversation between two former adversaries becomes an unexpected friendship. But beneath the cordial messages, one thing does not change. Fould does not share Paulson's anxiety about the financial system. As far as he's concerned, he only needs to look at the accounts, and Lehman's revenues and profits prove that his company is stronger than ever. And if the market ever does turn, and they need a helping hand, well, that's what his new friend in Washington is for. MUSIC In 2006, Lehman Brothers stands at the pinnacle of Wall Street. The firm is now the world's largest underwriter of subprime mortgage-backed securities, the bundles of risky home loans that have been cut up, repackaged, and sold to investors. This business has brought Lehman's staggering rewards, breaking new company records for revenue and profit, and inside the firm's gleaming headquarters in New York, the mood is euphoric. Still, CEO Dick Fould pushes even harder. Lehman's leverage ratio closes in on 32 to 1, meaning that for every dollar the firm holds in capital, it owes another 32 to outside investors. That's a higher ratio than any of its major competitors. Fould says he understands the risk he's running. He knows, theoretically, that if people can't pay back their mortgages, the real estate bubble will eventually pop, mortgage-backed securities will plummet in value, and Lehman's assets will be worth even less. And if all the firm's creditors then demand their money back, Lehman will be in serious trouble. But right now, the profits are just too rich to resist. Fould admits it's all a little like paving a road with cheap tar, quick and easy. Potholes may appear when the weather changes, but that's a problem for the future. So day after day, Lehman keeps laying down more of that cheap tar, hoping a storm will never come. But by the end of 2006, the sky is darkening, far beyond the United States Financial Center in New York, mortgage default rates quietly tick upward. Housing prices begin to flatten for the first time in years, but the traders at Lehman keep working, their machines keep humming, and the cheer of the holidays and year-end bonuses help to mask any unease they might feel. But not everyone is distracted by their swollen paychecks. For Lehman's global head of fixed income, Mike Gelbin, even a $20 million pay package isn't enough to shake his concerns. He warns his colleagues again and again that the market is in more trouble than they know and that the housing bubble is about to burst. He has repeated meetings with Dick Fould and Joe Gregory, Lehman Brothers president, and Fould's most powerful ally at the firm. But time and again, he's ignored, and by early May 2007, Gelbin has had enough. Gelbin takes the elevator up to the executive suite on the 31st floor of Lehman's headquarters. Striding down the hallway, he walks straight into a conference room without bothering to knock. Sitting at the head of the table, surrounded by junior executives, Joe Gregory looks up in surprise. Uh, we're in the middle of a meeting here, Mike. I need to talk to you. Can it wait? No, it cannot. Okay, well, I guess you heard him, fellas. Give us the room, please. The other men in the meeting look around disgruntled, then pack up their things and leave. As the door shuts, Gregory shoots Gelbin a quizzical look. All right, Mike, what's so important? I can't do this anymore, man. Do what? For the past two years, I've been begging you to stop with these subprime mortgages. And we listened, we diversified. And to different types of real estate, I wouldn't call that diversification. Warned you over and over again that we are buying into a bubble and not once did you or anyone else listen to me. So if you don't make changes, then I will. Oh, what are you talking about? I'm done, I'm leaving the firm. Gregory blinks, taking a bag. You leave it? What, you want more money? No, it's not about the money, Joe. People can care about more things than money. And what's that supposed to mean? It means Greed is gonna drive this company into the ground. Gregory shakes his head. Oh, you know, Dick and I have talked about this. About what? Your attitude toward risk. You've been holding back and we've been missing out on deals as a result. What deals? We're handing out money like it's going out of fashion. Have you seen our leverage ratio? Look, our balance sheet is fine. You're bearing your head in the sand, you and Dick. Oh, come on, where's your loyalty to him? You've been at this company for 20 years, 23. So after 23 years, you're gonna insult Dick and me and all your other colleagues and just walk away? Joe, look, I love this company, I do. But I'm not gonna stay here and watch Lehman die. After handing in his resignation, Mike Gelband heads down to his office. By the time he's gathered his things, word has spread of his departure. And when he goes to leave, he's met by a line of colleagues. It seems everyone wants to shake his hand. Some are even in tears. Gelband is walking away from a coveted position, one of the highest paying jobs on Wall Street, but he has no doubt that he's making the right decision. His exit isn't mourned by Dick Fould, though. He's not seen eye to eye with Gelband for a while, and he figures that in his long history, Lehman Brothers has survived far worse. It came through the Civil War, two world wars and the Great Depression. And even if Gelband's right about the property bubble bursting, Fould thinks that Lehman's sheer size will protect it. Under Fould's leadership, Lehman has been woven into the fabric of the global economy, and the markets won't allow it to fail, neither will the U.S. government. So Fould barrels ahead with his strategy. And by the end of 2007, Lehman sits on $111 billion of real estate related assets and securities, more than double the amount it held just a year earlier. But the crunch that Treasury Secretary Hank Paulson feared, and that Mike Gelband long warned about, has finally arrived. As more and more homeowners default on their mortgages, the financial infrastructure Wall Street has built on top of them starts to crumble. The mortgage-backed securities Lehman trades are so complex, so tangled into the financial system, that no one can say with any certainty what they're actually worth. And without prices, there is no market. And without a market, there is no liquidity. The dominoes start falling faster and faster. And by early 2008, Wall Street is effectively paralyzed, and confidence is evaporating. But as the crisis deepens in New York, Dick Fould is half a world away in India. He's asleep on his private jet in an airfield outside New Delhi, where he's woken by hand on his shoulder. It's his wife Kathleen, who's accompanied him on this work trip. Fould stirs, disoriented for a moment. Her voice is sharp, Hank Paulson is on the phone, calling from Washington. He says it's urgent. Fould snaps away, and grabs the phone. Paulson's voice on the other end of the line is grave. He quickly tells Fould that Bear Stearns will either be sold or go bankrupt by Monday morning. Fould blinks, not sure he heard that right. Bear Stearns is one of the top five investment banks in the world, you can't go under. But Paulson declares with grim certainty that it's unavoidable, the bank is insolvent. Fould stares out the window at the runway lines, blinking against the morning sky. He thinks about Lehman's balance sheet back in New York, the towers of mortgage-backed securities stacked on his books. Then Paulson continues his tone hardening, and he gives Fould an order cloaked as a polite suggestion. Fould needs to abandon whatever deal he's trying to make in India, and return to New York right now. Bear Stearns' collapse will send shockwaves through the world's financial centers, and Lehman will be sure to feel the effects. Finally grasping the gravity of the situation, Fould asks Paulson if the US government can help him get clearance to fly his Gulfstream through Russian airspace. He says it will shave at least five hours off the flight time. Paulson just gives a short dismissive laugh. He couldn't even get that for himself. The call ends, and Fould is now wide awake. His mind racing, he lowers the phone, and turns to his wife to tell her the bad news. The trip is over, they have to head home. Global financial system may be on the brink of unraveling, and Lehman Brothers could be the next to fall. From Wondery, this is the first episode of our series on Lehman Brothers for Americans Game. In our next episode, Dick Fould scrambles to convince the world that his firm can survive. Inside the company, tensions are boiling over, Lehman's dirty secrets can't stay buried forever. If you'd like to learn more about Lehman Brothers, we recommend the book Too Big to Fail by Andrew Ross Sorkin. All the devils are here by Bethany McClain and Jonah Sarah, and A Big Short by Michael Lewis. This episode contains reenactments and dramatized details. And while in most cases we can't 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 Mohammad Shazi. Sound design by Gabriel Gould. Music by Thromp. This episode is written and researched by Olivia Thomas. Fact checking by Alyssa Jung Perry. Managing producer Emily Burke. Development by Stephanie Jens. Senior producer Andy Beckerman. Executive producers are William Simpson for Airship, and Jenny Lauer Beckman and Marshall Louie for Wondering. Follow American Scandal on the Audible app or wherever you get your podcasts. You can listen to all episodes of American Scandal, ad-free, by joining Audible. And to find out more about me and my other projects, including my live stage show, Coming to a Theater Near You, go to NotThatLindsayGram.com. That's NotThatLindsayGram.com.