How Hank Paulson's Office Colluded With JPMorgan And Subverted Efforts To Rescue Lehman

In fact, it was clear that the government was prepared to provide financial support to keep a Lehman collapse from destabilizing the markets. Here's an excerpt from the highly confidential game plan circulated among staff members from the Fed and Treasury:

FRBNY to host. Paulson delivers introductory remarks (we script) and Treasury and FR staff recede to background to provide passive mediation at most. Lawyer present to provide antitrust protections.

Lehman senior staff (not Fuld) in a separate room, available to provide information if necessary. Lehman must also be prepared to open its books to representatives of the consortium as early as Friday night.

Participants told by Paulson that they have until opening of business in Asia (Sunday night NY time) to explore whether they can jointly come up with a credible plan to recapitalize Lehman to an extent necessary to enable an orderly winding down.

Paulson conveys willingness of the official sector to let Lehman fail.

FRBNY starts to communicate with foreign supervisors while meeting is taking place.

We would expect consortium members to break and reconvene for a period of up to 48 hours, in addition to sending a consortium team to Lehman for due diligence.

IV. FRBNY financial commitment (this section expected to be overhauled by Dudley, Schetzel)

We should have in mind a maximum number of how much we are willing to finance before the meeting starts, but not divulge our willingness to do so to the consortium.

Term of any liquidity support should be long enough to guard against a fire sale, but on a short enough fuse to encourage buyers of Lehman assets to come forward. Two months to a year in duration?

Preferable to style FRBNY commitment as much as possible as a backstop rather than lending, but we can't attach too much of a subsidy to liquidity, or the consortium will not have sufficient incentives to act.

Jes and Jim Play Phone Tag

As you can imagine, all of this was  highly sensitive information during a time of critical negotiations between the government and the banks. To say that it would be highly inappropriate for Paulson's Chief of Staff to chew the fat with a senior JPMorgan executive would be a gross understatement. And yet:

Saturday evening, September 13, 2008:
7:55 pm, Wilkinson to Staley: "Still here working!"
7:58 pm, Staley to Wilkinson: "Likewise. Can I call you later?"
8:03 pm, Wilkinson to Staley: "You bet. Happy to give you an update."
8:41 pm, Staley to Wilkinson: "Just called."
8:59 pm, Wilkinson to Staley: "Just called u back...left a voicemail...is there a better number to reach you on?"
10:45 pm, Staley to Wilkinson: "What are your people saying?"

The New York Fed had already circulated a plan to step into JPMorgan's shoes, and act as Lehman's primary clearing bank to provide intraday credit. The critical back-and-forth exchange between Wilkinson and Staley took place on Sunday: 

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