Too Big to Fail

by Andrew Ross Sorkin

  “I’m fine,” he said serenely, trying not to betray his concern.

  “You are too, too calm,” she observed. “Are you taking Valium or something?”

  Chammah had planned to go to Washington early on Saturday for a series of meetings with Mack and the G7 leaders, but decided to remain in New York throughout the morning in case there was any word from the Japanese. At noon, sufficiently satisfied that if they were going to drop the deal they would have contacted him by now, he headed to LaGuardia to hop a Delta shuttle. As he was walking down the jetway, his cell phone went off. Oh, shit, Chammah thought, here it comes.

  The call was indeed from Mitsubishi’s banker, but to Chammah’s surprise they reaffirmed their intention to go forward with the deal—but did add that they wished to renegotiate for more favorable terms that would give them preferred shares instead of common ones.

  “Are you still prepared to close on Monday?” Chammah asked.

  The answer was yes. A smile came over Chammah’s face. For a moment, the deal maker in him injected, “Is there a reason for $9 billion? Could it be larger?” In other words, he was asking if, since they were reopening the negotiations anyway, Mitsubishi would like to buy even more of the firm. But he knew he was getting ahead of himself.

  Rob Kindler, who had flown to Cape Cod, had just sent an e-mail to Ji-Yeun Lee back at the office. “Is all quiet?” he asked.

  Two minutes later, he got the reply: “It was until an hour ago. Call me.”

  Kindler flew back to New York as Chammah and Taubman rounded up the troops. It was imperative that they find a way to close this deal by Monday.

  By Sunday, they had revised terms—the deal had become more expensive for Morgan Stanley, but they were just happy to still have an investor. Mitsubishi would pay $7.8 billion of convertible preferred stock with a 10 percent dividend and $1.2 billion of nonconvertible preferred stock with a 10 percent dividend.

  There remained one complicating factor: Monday was Columbus Day, and since banks in both the United States and Japan were closed, a normal wire transfer was not possible.

  “How the fuck are we going to get this thing done?” Kindler, now back at headquarters, asked aloud.

  Taubman had a thought: “They could write us a check,” he said. Taubman had never heard of anyone writing a $9 billion check, but, he imagined, given the state of the world, anything was possible.

  At 10:00 on Sunday morning, October 12, Hank Paulson, dressed casually, took his place at the table in the large conference room across from his office. The room was overflowing with the government’s top financial officials and regulators. Ben Bernanke had arrived, as had Sheila Bair. Tim Geithner had flown down the day before to join the group. John Dugan, the comptroller of the currency, was present, as was Joel Kaplan, deputy chief of staff for policy at the White House. Paulson’s inner circle—including Nason, Jester, Kashkari, Davis, Wilkinson, Ryan, Fromer, Norton, Wilson, and Hoyt—had also taken their seats, though some of them had to be “back-benched” in chairs against the walls, because there was no room for them around the table.

  Paulson had called this meeting to coordinate the final details of a series of steps he had been working on to finally stabilize the system, and he wanted to go public with them. Sunday’s meeting was the second such gathering of this group; many of them had met the day before at 3:00 p.m. to sketch out the outlines of the plan.

  The multipart plan—which included the Treasury, Federal Reserve, and FDIC—was, as Paulson described it even that day, “unthinkable.” Based on the work of Jester, Norton, and Nason, he wanted to forge ahead and invest $250 billion of the TARP funds into the banking system. The group had settled on the general terms: Banks that accepted the money would pay a 5 percent interest payment. Paulson had decided that if the amount was any higher, like the 10 percent cost that Buffett had charged Goldman, banks would be unlikely to participate. Still, the rate would eventually become more expensive, rising to 9 percent after the first five years,

  Much of the debate about the program that morning was less about the numbers than the approach. “In the history of financial crisis in the U.S., you need to do three things: You need to harden the liabilities; you need to import equity; and you need to take out bad assets. This is one part of that plan,” Geithner said, to sell the group on the need for capital injections.

  He had suggested that the only way to make the program palatable to the weakest banks would be if the strongest banks accepted the money as well, “to destigmatize” participation in the program, and perhaps even mask the problems of the most endangered firms. Not everyone was in agreement on this point. “Let’s not destroy the strong to convince the world that the weak aren’t so weak,” Bernanke commented. There was the issue of using the TARP money efficiently; if it was directed to otherwise healthy companies, that would mean less money would be available to those institutions that needed it most. Before the meeting Geithner had had a conversation with Kevin Warsh on this same topic, who told him the stigma argument was a red herring. “There’s no fooling these markets. You aren’t going to fool them into thinking that everybody is equally good, bad, or indifferent.”

  Still, Geithner, along with Paulson, quickly prevailed on the group that the only way the program could become effective would be if they could persuade the biggest banks—banks like Goldman Sachs and Citigroup—to accept the money. As they started sketching out a list of firms they wanted to persuade to sign up on Day One, with plans to invite them to Washington on Monday to propose that they accept the investment, a question was raised about whether they should make the program available to insurance companies. David Nason suggested they invite MetLife to be a charter TARP participant.

  “How are we going to do that?” Geithner asked.

  “Well, you regulate them, Tim,” Nason said, to knowing smiles in the room.

  The debate about capital injections was playing out against the backdrop of Paulson’s own ongoing worries about the fate of Morgan Stanley. He had been back and forth on the phone with Mack, who he knew was trying to clinch a renegotiated deal. But he had also learned that the Japanese had reached out to the Federal Reserve, seeking assurances that the U.S. government wasn’t planning to come in and make an investment in Morgan Stanley after it did—fearing that if it did, it would wipe out all shareholders. When Warsh first called Geithner to tell him the news, his reaction was simple: “Fuck!” That afternoon they worked to write a letter to the Japanese government assuring them that Mitsubishi would not be negatively impacted any more than other shareholders by any future government intervention in the firm. Of course, Morgan Stanley was unaware of the government’s plans—or the extent of the back-channel conversations taking place between the governments to orchestrate the deal.

  Perhaps the biggest fireworks that weekend concerned the one unresolved portion of the plan that Paulson was still hoping to announce: the FDIC guarantee of all deposits. He and Bernanke had had lengthy discussions with Bair about the subject. At first, she had offered a compromise: The FDIC would provide the guarantee, but only to bank deposits, which left firms like Goldman Sachs and Morgan Stanley still exposed. But Bair seemed to be coming around; Paulson had put the full-court press on her, at one point taking her aside in his office and telling her, “I’ll make sure you get the credit.” For her part, she thought Paulson was under enormous political pressure to put the program into place, in part because a number of European governments were putting together similar facilities. The guarantee would end up being perhaps the largest—though often overlooked—part of the program. It put the government on the hook for potentially hundreds of billions, if not more, in liabilities, providing the ultimate safety net for the banking system.

  Nason and Paulson had been debating the guarantee issue all week. To Nason, it represented the “biggest policy shift in our history.” He told Paulson, “This is an enormous decision. It must be debated in front of everyone so that everyone’s nodding their heads in agreem
ent.”

  At one of the meetings that weekend, Geithner, who supported the guarantee, debated the issue with Nason, who played devil’s advocate but also had his own misgivings about the larger implications of the government effectively providing an unlimited backstop for an entire industry.

  Still, Geithner finally prevailed, and Bair agreed to the plan.

  The final piece of business would be to coordinate how they could invite the banks to Washington and what would be the best way to encourage them to accept the TARP money. There was agreement that if they could assemble all the CEOs in one room, the peer pressure would be so great that they’d be inclined to go along with the proposal.

  After deciding on a list of prospective banks, it fell to Paulson to call them. (He had gotten out of making the calls for the Lehman weekend, so it was his turn.)

  At 6:25 p.m. he returned to his office and began reaching out. His message was simple. He would tell the CEOs to come to Washington, but he would do everything he could to avoid providing any specific details about the reason for the invitation

  Lloyd Blankfein, at a client dinner Sunday night at the Ritz-Carlton in Washington for the International Monetary Fund weekend, made eye contact with Gary Cohn, and they both walked to the corner of the room.

  “Hank just called,” Blankfein said in a hushed tone, “and told me I have to be at Treasury tomorrow at three p.m.”

  “For what?” Cohn asked.

  “I don’t know.”

  “What did he tell you?” Cohn said, confused.

  “I pushed him, trust me, I pushed him,” Blankfein replied. “The only thing he told me is I’d be ‘happy.’”

  “That scares me,” Cohn said.

  “I knew it would really warm the cockles of your heart,” Blankfein said with a laugh.

  Ken Lewis was in his kitchen at his home in Charlotte on Sunday night, getting ready for dinner, when Paulson called.

  “Ken,” Paulson said with no introduction. “I need you to come to Washington tomorrow for a meeting at three p.m.”

  “Okay,” Lewis said. “I’ll be there. What’s this about?”

  “I think you’re going to like it,” Paulson said, so vaguely that Lewis knew not to follow up.

  At 7:30 a.m. on Monday, October 13, 2008, Rob Kindler was sitting in a conference room at Wachtell Lipton. He looked like hell, unshaven and still in his vacation khakis and flip-flops. He hadn’t slept in at least a day. He had come to Wachtell to personally pick up the check that he understood Mitsubishi would be delivering. With John Mack in Washington, it was left to him to complete the deal. He was somewhat anxious, for even though Mitsubishi had agreed to all the terms of the deal, he had never seen a physical check with nine zeros on it. He didn’t even know if it was possible. Maybe it would come as several checks?

  Kindler was expecting a low-level employee from Mitsubishi to deliver the final payment when he learned from Wachtell’s receptionist that a contingent of senior Mitsubishi executives, dressed in impeccable dark suits, had just arrived in the building’s lobby and was on its way upstairs.

  Kindler was embarrassed; he looked like a beach bum. He ran down the hall and quickly borrowed a suit jacket from a lawyer—but as he was buttoning the front he heard a loud tear. The seam on the back of the jacket had ripped in half. The Wachtell lawyers could only laugh.

  Takaaki Nakajima, general manager for the Bank of Tokyo–Mitsubishi UFJ, along with a half dozen Japanese colleagues arrived, for what they thought was going to be a deal-closing ceremony.

  “I didn’t know you were coming,” Kindler said apologetically to the bemused Japanese. “If I did, I would have had John Mack here.”

  Nakajima opened an envelope and presented Kindler with a check. There it was: “Pay Against this Check to the Order of Morgan Stanley. $9,000,000,000.00.” Kindler held it in his hands, somewhat in disbelief, clutching what had to be the largest amount of money a single individual had ever physically touched. Morgan Stanley, he knew, had just been saved.

  Some of the Japanese started snapping pictures, trying their best to capture the eye-popping amount on the check.

  “This is an honor and a great sign of your faith and confidence in America and Morgan Stanley,” Kindler said, trying to play the role of statesman in his disheveled state. “It’s going to be a great investment.”

  As the Japanese group turned to leave, Kindler, grinning from ear to ear, tapped out a BlackBerry message to the entire Morgan Stanley management team at exactly 7:53 a.m.

  The subject line: “We Have The Check!!!!!!”

  The body of the message was two words:

  “It’s Closed!!!!!!!!”

  CHAPTER TWENTY

  “Secretary Paulson’s office. Please hold,” Christal West said into her phone from outside Hank Paulson’s office.

  It was only 8:00 a.m., but she was already overwhelmed with calls. Paulson’s decision to invite the “Big 9” Wall Street firms to Washington, without giving them any hint of what the agenda might be, wasn’t going over particularly well.

  “Nick Calio just called me,” she typed in an e-mail to Paulson’s inner circle of advisers, referring to Merrill Lynch’s top lobbyist. “I told him what I told Thain’s office—that he should come and that no other information would be given out ahead of time…and that everyone had confirmed their attendance with HMP last night.”

  Heather Wingate, Citigroup’s lobbyist, was on another line, likewise trying to determine the purpose of the meeting. She had just received an e-mail from her boss, Lewis B. Kaden, a vice chairman at Citigroup, asking her to “find out as soon as possible what Paulson’s invite to VP [Vikram Pandit] for meeting at Treasury this afternoon is about? If this is a briefing of industry group, I don’t think VP can go back to DC. If it is something else we need to know.”

  Ah, Pandit! Paulson’s assistant knew just how her boss felt about him: He could be a difficult one.

  Jeffrey Stoltzfoos, a senior adviser at Treasury, took Wingate’s call, and immediately followed up with another e-mail to the team, complaining, “Apparently Vikram is trying to decide whether to come to DC or send someone in his place. I did not offer additional information to Heather, but I did let her know that we would call her or someone else within Citi to discuss.”

  Wall Street executives weren’t the only ones who were confused invitees; the White House, too, was left out of the loop about the details of Paulson’s summons. “Is it one meeting or nine meetings?” Joel Kaplan, White House deputy chief of staff for policy, asked Jim Wilkinson by e-mail.

  The gathering “will be a large meeting but also expecting smaller breakout meetings to make the case,” Wilkinson replied minutes later from his BlackBerry.

  It fell on West to see to it that all went smoothly. This was perhaps the most important meeting in history that had ever been held at the Treasury Building, and she was the coordinator. She shot an e-mail message down to Stafford Via, a senior adviser at Treasury: “We do need to figure out logistics. I think we need someone down outside the gate and just inside the door to direct them up to the 3rd Floor. Also, we can use the small conference rooms and diplomatic reception room for hold rooms if needed.”

  She called the Secret Service to see if they would close down Hamilton Place, for with all the photographers expected to show up, the event could well turn into a zoo. She got a firm no.

  At 9:19 a.m., she sent an e-mail to the assistants of all nine Wall Street CEOs, with instructions about what they should do after being dropped off on Fifteenth Street and Hamilton Place: “They should proceed on foot down Hamilton Place to the Gate to enter the building. They will need to show photo id (a driver’s license would be fine).” As she raced through what she needed to get done, West realized that she was missing one last thing. She had gotten the Social Security numbers and dates of birth of everyone but Ken Lewis, which she needed to get him cleared through Secret Service. She tried his office three times, but when no one picked up she decided to call his
home. “I just spoke with Mr. Lewis’s wife and have his DOB and SSN,” she wrote moments later to Lewis’s assistant.

  To almost no one’s surprise but everyone’s disappointment, news of the secret meeting started to leak. “I guess my invitation got lost in the mail,” Cam Fine, president of the Independent Community Bankers of America, wrote to Jeb Mason, the handsome Texan who was the Treasury Department’s liaison to the business community. “We do represent 5,000 banks with over one trillion in assets,” he wrote, adding a smiley emoticon. “A little financial humor Jeb—laugh a little.”

  Despite West’s best efforts, confusion still reigned. “Do you have a list of market participants attending the 3pm meeting?” Calvin Mitchell, head of communications for Geithner, wrote Wilkinson. “Are you guys confirming yet who’s invited?”

  Even an hour before the meeting the CEOs were still trying to sniff out what was really up. “Any ideas what the topics will be for the 3pm meeting with the CEOs?” Steven Berry, Merrill’s government relations person, e-mailed Wilkinson. “Thain was asking. Also room number? I will see Thain in about 15 min.”

  A little after 2:00 p.m., Ben Bernanke, Tim Geithner, and Sheila Bair assembled in Paulson’s office, their last chance to get on the same page before the big meeting. Paulson, his sleeves rolled up, took up in his usual chair in the corner, slumping just enough to suggest that he was pining for an ottoman: Geithner took the seat next to him; Bair settled on the blue velvet sofa; and Bernanke found a chair across from him. They were about to do what Paulson had been describing as “the unthinkable,” and their tension in the face of it was evident. Paulson himself looked visibly pained.

  “Okay,” he said, “has everyone seen the talking points?” Paulson waved the printed page with its half-dozen bulleted items before them all, and continued, “Let’s run through this.”