Former Treasury Secretary Henry M. Paulson says the British “screwed” the United States by backing out on a proposed deal to buy Lehman Brothers at the height of the global financial crisis in the fall of 2008.
In excerpts from his new book, “On the Brink,” published in The Wall Street Journal, Paulson, himself a former investment banker, details the chilling 48 hour period before the Lehman bankruptcy and the behind the scenes plays on Wall Street and at the Federal Reserve in New York City that failed to stave off disaster.
CEOs from many of the world’s major banks had agreed to support a proposal under which Barclays, the British bank, would assume most of Lehman’s operations, save for a $52 billion “pile” of bad real-estate and private-equity investments.
This would have wiped out Lehman's preferred and common shareholders, but paid off most of its debt and kept the investment bank operational.
“To make the deal work, Barclays wanted the consortium of Wall Street firms to agree to loan up to $37 billion to a special purpose vehicle that would hold the assets,” writes Paulson.
But U.K. regulators, at the Financial Services Authority (FSA), balked at the deal.
Hours later, Paulson got on the phone with British Finance Minister Alistair Darling, who wanted an update on Lehman.
“I told him we were stunned to learn that the FSA was refusing to approve the Barclays' transaction,” writes Paulson.
“He made it clear, without a hint of apology in his voice, that there was no way Barclays would buy Lehman. He offered no specifics, other than to say that we were asking the British government to take on too big a risk, and he was not willing to have us unload our problems on the British taxpayer.”
That disaster has for nearly a year and a half spoiled the risk appetite in finance, leading to fewer major deals than otherwise would have been clinched, reports The Wall Street Journal.
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