Too Big to Fail

by Andrew Ross Sorkin

  During a break, Roy Bostock spoke with C. Robert Kidder, the firm’s lead director: “We ought to fire that guy right now. Get him out of here. He is not helping.” Others were concerned that given his close ties to the government—he was the former deputy Treasury secretary and was still considered very well connected—that he might leak information about the firm’s health back to them. That, they thought, would explain why Geithner was putting so much pressure on Mack to do a deal. Though they did not know it, Altman had sent an e-mail to Geithner the night before telling him that he had gotten the assignment to work for Morgan, but he had not disclosed any of the details of the meeting.

  Whether it was paranoia or just a lack of sleep, the discussion was becoming heated. Mack, who hadn’t been consulted when Altman was hired, was even more upset about his being there than some of the board members. “I don’t trust him,” Mack announced after he kicked Altman out of the board meeting temporarily. He said he thought they should be using Morgan Stanley’s own bankers to advise them if they really were going to sell the firm. He also told them he was worried about revealing the details of Morgan Stanley’s negotiations with Mitsubishi in front of Altman, reminding the directors that Evercore had a partnership with Mizuho Financial Group of Japan, one of Mitsubishi’s rivals.

  “I don’t know what this guy is up to,” he said.

  Geithner, still holding court from his office downtown, had become convinced that Morgan Stanley would fail if it didn’t complete a deal by the time the markets opened on Monday. He had threatened Mack earlier in the day that he would deny his request to become a bank holding company unless he found a sizable investment or merged. “Being a naked bank holding company won’t do it,” he warned. Like Paulson, Geithner thought Mack was misguided in his belief that Mitsubishi would come through for them in time. “What’s your Plan B? You need a Plan B,” he had nearly screamed into the phone.

  Not everyone at the Fed was in agreement with Geithner’s insta-merger strategy, however. So unpopular was Geithner’s single-mindedness about merging banks that afternoon that some CEOs began referring to him as “eHarmony,” after the online dating service. “If we sell one more of these guys for a dollar,” Kevin Warsh complained, “this whole freakin’ thing is going to come undone

  At about 3:30 p.m., John Mack’s assistant, Stacie Kruk, announced that Secretary Paulson was on the line. Mack took the call on the phone next to his couch. The New York Giants versus the Cincinnati Bengals game was playing on the TV behind him.

  “Hi, John. I’m on with Ben Bernanke and Tim Geithner, we want to talk to you,” Paulson said.

  “Well,” Mack said, “since you’re all on the line, can I put my general counsel on?”

  Paulson agreed, and Mack hit the speakerphone button after the television was muted.

  “Markets can’t open Monday without a resolution of Morgan Stanley,” he said in the sternest way he knew. “You need to find a solution, we want you to do a deal.”

  Mack just listened, dumbstruck.

  Bernanke, who was usually remote and silent in such situations, cleared his throat and added, “You don’t see what we see. We’re trying to keep the system safe. We really need you to do a deal.”

  “We’ve spent a lot of time working on this and we think you need to call Jamie,” Geithner insisted.

  “Tim, I called Jamie,” Mack replied, clearly exasperated. “He doesn’t want the bank.”

  “No, he’ll buy it,” Geithner said.

  “Yes. For a dollar!” Mack exclaimed. “That makes no sense.”

  “We want you to do this,” Geithner persisted.

  “Let me ask you a question: Do you think this is good public policy?” Mack asked, clearly furious. “There are thirty-five thousand jobs that have been lost in this city between AIG, Lehman, Bear Stearns, and just layoffs. And you’re telling me that the right thing to do is to take forty-five thousand to fifty thousand people, put them in play, and have twenty thousand jobs disappear? I don’t see how that’s good public policy.”

  For a moment, there was silence on the phone.

  “It’s about soundness,” Geithner said impassively.

  “Well, look, I have the utmost respect for the three of you and what you’re doing,” Mack said. “You are patriots, and no one in our country can thank you enough for that. But I won’t do it. I just won’t do it. I won’t do it to the forty-five thousand people that work here.”

  With that, he hung up the phone.

  At Goldman Sachs the mood was slightly less tense. “We’re getting bank holding company,” Blankfein, having just spoken with Geithner, announced as Cohn walked into his office. “It’s going to happen.” When the Federal Reserve faxed over the draft of the press release, he could see that one other institution, which was purposely left blank, would be granted the same status. That must be Morgan Stanley, he thought. His Friday morning call to Mack must have worked.

  Cohn, sitting down on Blankfein’s couch, picked at an omelet, having not touched food all day. He could finally smile. They were finally out of the woods. Now all they needed to do was have the directors sign off on the execution of the application. They had set up a conference call with the entire board to start in five minutes.

  When everyone was assembled on the line, Blankfein began, “I’ve finally got good news…”

  When Gao returned to Morgan Stanley late that afternoon, he learned that the firm was engaged in merger talks with Mitsubishi. He had thought something was amiss earlier, because Mack had slowed down the negotiations, but he couldn’t believe Mack was about to do a deal with the Japanese! He thought the U.S. government had already blessed an agreement with CIC, based on Paulson’s conversation with Vice Premier Wang Qishan the night before. Furious, he pulled his entire team from the conference room and marched out of the building without even saying good-bye.

  The Morgan Stanley bankers were still waiting to find out if the Mitsubishi deal was a go. The Fed, they had learned, was going to grant them bank holding company status, but Geithner was still insisting the firm needed a big investment by Monday as a show of confidence in the company. Mitsubishi had sent over a proposal, a “letter of intent,” to buy up to 20 percent of the firm for as much as $9 billion. But Taubman and Kindler knew that all they were getting was a letter; it wouldn’t be an ironclad contract, as they couldn’t get a full deal turned around quickly enough. But they were just hoping investors in the market would take the Japanese at their word and have more faith in them than Paulson or Geithner had.

  As Kindler and Taubman were reviewing the letter, they laughed at all the news coverage about their weekend of whirlwind merger talks. Various media outlets had the news backward or were reporting old rumors. Gasparino declared on television that Morgan Stanley was about to do a deal with either Wachovia or CIC. “The most fucking dangerous man on Wall Street,” Kindler sighed.

  Upstairs Mack was on the phone with Mitsubishi’s chief executive, Nobuo Kuroyanagi, and a translator, trying to nail down the letter of intent.

  His assistant interrupted him, whispering, “Tim Geithner is on the phone; he has to talk to you.”

  Cupping the receiver, he said, “Tell him I can’t speak now, I’ll call him back.”

  Five minutes later, Paulson called. “I can’t. I’m on with the Japanese, I’ll call him when I’m off,” he told his assistant.

  Two minutes later, Geithner was back on the line. “He says he has to talk to you and it’s important,” Mack’s assistant reported helplessly.

  Mack was minutes away from reaching an agreement.

  He looked at Ji-Yeun Lee, a banker who was standing in his office helping with the deal, and told her, “Cover your ears.”

  “Tell him to get fucked,” Mack said of Geithner. “I’m trying to save my firm.”

  “Thank God. We’re out!” Jamie Dimon exclaimed as he ran across JP Morgan’s executive floor into Jimmy Lee’s office, where the management team had camped out, waiting for their
next orders as they bided their time watching the Ryder Cup and the New York Giants game, chowing down on steaks from the Palm.

  “Mack just called,” Dimon said, breathing a sigh of relief. “They got $9 billion from the Japanese!”

  At 9:30 p.m., the news hit the wires. Goldman Sachs and Morgan Stanley would become bank holding companies. It was a watershed event: The two biggest investment banks in the nation had essentially declared their business model dead to save themselves. The New York Times described it as “a move that fundamentally reshapes an era of high finance that defined the modern Gilded Age” and “a blunt acknowledgment that their model of finance and investing had become too risky.”

  CHAPTER NINETEEN

  On Monday, September 22, the day after Goldman Sachs became a bank holding company, Lloyd Blankfein, his face puffy with exhaustion, sat staring at a framed cartoon from Gary Larson’s The Far Side on his office end table. The drawing features a father and son standing in their suburban front yard and gazing over a fence at their neighbor’s house, where a line of wolves is in the process of entering the front door. “I know you miss the Wainwrights, Bobby,” the caption reads, “but they were weak and stupid people—and that’s why we have wolves and other large predators.”

  To Blankfein that pretty much summed up what had just happened to Wall Street: Had things worked out slightly different, Morgan Stanley, and perhaps even Goldman Sachs, could have ended up just like the Wainwrights.

  Of the Big Five investment banks, his own and Morgan Stanley were the last ones standing, but Goldman’s footing seemed increasingly unsteady. As the day wore on, Goldman’s stock price, unlike Morgan Stanley’s, was not stabilizing but continuing to plunge, falling 6.9 percent. Despite its having been designated a bank holding company—giving it virtually unlimited access to liquidity from the Federal Reserve—investors had suddenly become worried about whether Goldman would need more capital.

  After rising for two days the week before on hopes that TARP would save the economy, the broader market also was now moving again in the wrong direction. As investors had begun digesting the plan, they had come to realize that Paulson was going to have to do a better job of selling it if it was, as he intended, to renew confidence in the economy. To many Americans who had suffered substantial losses in their 401(k) plans, Wall Street simply didn’t deserve to be saved. “It would be a grave mistake to say that we’re going to buy up a bad debt that resulted from the bad decisions of these people and then allow them to get millions of dollars on the way out,” Barney Frank bellowed the day before. “The American people don’t want that to happen, and it shouldn’t happen.”

  But the politics of the bailout was hardly a subject that was at the top of Blankfein’s mind, given the more pressing concern of raising capital. He had assigned that task to Jon Winkelried, his co-president, who had put together a team over the weekend to reach out to potential investors in China, Japan, and the Persian Gulf. But their approach was scattershot, and they only received polite refusals from all of their potential targets.

  On Monday night Byron Trott, wondering why there had been no news from New York, called Winkelried from his office in Chicago.

  “It’s been way too quiet since the weekend. What’s going on?” he asked apprehensively.

  Winkelried told him that they were going to begin another round of calling investors on Tuesday with a new proposal to sell shares in the firm. With the market still seesawing, he said, he didn’t expect they’d be able to raise money from a single large source; given the conditions, it would have to come in smaller amounts from dozens of institutional investors.

  “Hold on,” Trott interrupted him. “You guys, you have to slow down here.”

  Trott, who was the firm’s closest—and perhaps only—conduit to Warren Buffett, suggested that they consider approaching him one more time. Since the previous Thursday, Trott had gone to Buffett with a number of different proposals to invest in Goldman, but the ever-circumspect financier had declined them all. Blankfein had encouraged Trott to propose a standard convertible preferred deal, in which Buffett would receive preferred shares with a modest interest rate, which could be converted into common shares at about a 10 percent premium to Goldman’s current stock price. But, as Trott had correctly predicted, there wouldn’t be enough upside to interest the Oracle. “In a market like this there’s no reason I can take the risk,” Buffett told Trott.

  On Tuesday morning, after consulting with Blankfein and the rest of the senior Goldman team, Trott called Buffett again with a new proposal. Buffett’s grandchildren were visiting Omaha, and as he was planning to take them to the local Dairy Queen (a chain owned by Berkshire), the conversation lasted no more than twenty minutes. Trott knew the only way Buffett would be willing to make an investment would be if he were offered an extraordinarily generous deal, which he now presented: Goldman would sell Buffett $5 billion worth of stock in the form of preferred shares that paid a 10 percent dividend. This meant that Goldman would be paying $500 million annually in exchange for the investment, which would also allow Buffett to convert his investment into Goldman shares at the price of $115 a share, about 8 percent lower than their current price. With those terms Goldman would be paying an even greater amount than what Buffett had asked of Dick Fuld back in the spring, a sum that Fuld had seemingly rejected.

  Relying on his gut, as always, Buffett quickly agreed to the outlines of the deal. Trott called Winkelried, reaching him just as he emerged from the Grand Central terminal on his way to the United Nations, where President Bush was scheduled to address the Sixty-third General Assembly, to tell him the good news.

  “I think Warren will do this!” Trott said excitedly.

  “Okay, stay where you are,” Winkelried told him. Trying to find a quiet spot on the congested, noisy sidewalks outside Grand Central, Winkelried called the office to set up a conference call with Goldman’s brain trust—David Viniar, Gary Cohn, David Solomon, and Blankfein, who had flown down to Washington for the day for meetings with lawmakers.

  Minutes later the group was assembled, and they began to discuss the Buffett deal. Just as important as the infusion of cash, they agreed, was the confidence that a Buffett investment would inspire in the market. Indeed, Winkelried said, the firm would be able to raise additional money from other investors on the back of Buffett’s investment.

  “Well, why wouldn’t we do it?” Viniar wondered.

  “We’re done,” Solomon said.

  Trott immediately set up a call for Blankfein to speak directly with Buffett, and after the two briefly reviewed the transaction, Buffett suggested that Goldman get the papers in order and send them to him, so they could announce the deal that afternoon after the market closed.

  Blankfein, who always liked to review every last detail, asked, “Would you like me to just do a download for you on things that I’m concerned about?”

  “No, it’s okay,” Buffett replied calmly. “If I were worried, I wouldn’t be doing this at all.” With that he rounded up his grandchildren and headed for Dairy Queen.

  Back at Broad Street, however, there was still one provision that troubled the group, a provision that Buffett had indicated would be a deal breaker: Goldman’s top four officers could not sell more than 10 percent of their Goldman shares until 2011, or until Buffett sold his own, even if they left the firm. He had explained his rationale for this condition to Blankfein by saying, “If I’m buying the horse, I’m buying the jockey, too.”

  That stipulation would not be an issue for himself, Cohn, or Viniar, Blankfein knew, but it would be a problem for Winkelried. Only forty-nine years old, he had recently been making noises about leaving Goldman and, while it was a secret within the firm, he was having his own personal liquidity crisis. Although Winkelried was debt-free, he was quickly running out of cash. Despite making $53.1 million in 2006 and about $71.5 million in 2007, most of it was in stock; in the meantime, he had been spending extraordinary sums. While he owned a 5.9-acre wat
erfront estate on Nantucket that he was preparing to put up for sale for $55 million, his real cash drain was Marvine Ranch, a horse farm he owned in Meeker, Colorado. Winkelried was a competitive “cutter” rider, and while the farm had won more than $1 million in prize money over the previous three years, it cost tens of millions of dollars to operate.

  Blankfein called him personally and, after assuring him that the firm would help him find a way out of his financial troubles, Winkelried agreed to Buffett’s condition. He was unhappy with the restriction, but he knew that the Buffett deal was best for Goldman.

  By the next morning Goldman had managed to sell an additional $5 billion of shares to investors on the news of the Buffett deal, and its stock rose more than 6 percent.

  Blankfein could finally relax. The wolves were no longer at the door.

  “Josh, I cannot believe this is happening!” Paulson shouted into his cell phone at Josh Bolten, the White House chief of staff and the man who had helped hire him. “No one checked with me on this. Ah, and, if we are going to keep doing bullshit like this, you, ah, you are going to need a new Treasury secretary!”

  Paulson, who had just concluded an entire afternoon of hearings on the Hill trying to persuade skeptical lawmakers to pass his TARP legislation, had just learned that John McCain, the Republican candidate for president, had announced that he was suspending his campaign to return to Washington to help work on the financial rescue plan. The crisis, which seemed only to be deepening, was now becoming part of the tactics of the presidential elections.

  To Paulson, as depressed as he was exhausted, it was just the latest reminder of the uphill battle he faced in getting his legislation approved. McCain’s return, he feared, would only galvanize the House Republicans opposed to the rescue proposal. If the Bush administration had no control over its presidential candidate—let alone the party itself—Paulson knew he was in trouble.