Downstairs, Paul Taubman, the firm’s head of investment banking, was experiencing much the same panic as Mack. A disarmingly young-looking forty-eight-year-old, Taubman had worked his entire career at Morgan Stanley, rising to become one of the most trusted merger advisers in the nation, and could now only wonder if it was all going to come to an end this weekend.
Taubman and his colleague Ji-Yeun Lee were on the phone to Tokyo, where it was past midnight, with Kohei Yuki, his Morgan Stanley counterpart who was trying to coordinate talks with Mitsubishi.
“I think they’ve gone to bed for the night, we’ll pick it up in the morning,” Yuki said.
“That’s not going to work,” Taubman answered. “You need to call them at home and wake them up.”
There was a long pause; this was certainly a breach of Japanese protocol.
“O…kay,” he said.
“Listen, if you’re a senior executive, you’re not going to say, ‘You know what, I’m not going to wake my boss and I’ll just keep it to myself and then if it turns out that I missed the opportunity of a lifetime, how am I going to explain it to him if he wasn’t awakened?’”
Twenty minutes later, Yuki was back on the phone with Taubman. “I got him.” Mitsubishi was going to wake up its entire deal team and get working. In a conference room just two floors down, Morgan Stanley’s board had arrived, and things had grown tense quickly. Some had flown across the country to get there; others, like Sir Howard J. Davies, had flown in from London. The only person missing was Charles E. Phillips, president of the software giant Oracle (and a former Morgan Stanley technology analyst).
Kelleher had just finished giving a presentation on the firm’s finances, and it was not good. Charles Noski, a director and former chief financial officer of AT&T, asked him point-blank: “When do we run out of money?”
Kelleher paused, and then said somberly, “Well, depending on what happens Monday and Tuesday, it could be as early as middle of the week.”
It was a shot across the bow. If this weekend didn’t go well, they’d all end up the targets of shareholder lawsuits. The independent board members, led by the lead director, C. Robert Kidder, decided they needed to hire an independent adviser and, after a short conversation, chose Roger Altman, the former deputy Treasury secretary and founder of the boutique bank Evercore Partners (and Dick Fuld’s former carpool-mate). He would advise the board on whatever transactions they would be presented with and provide a modicum of cover; in the event that whatever happened over the weekend led to legal battles, at least they would look like they were trying to be responsible.
After Mack came downstairs again Gene Ludwig, Mack’s outside consultant, explained the bank holding concept that they were pursuing. Ludwig said that he believed that Paulson would be motivated to protect them.
“If we go, Goldman goes,” he said, stating the obvious, at least internally, by that point. But then he added a new insight that the board hadn’t considered.
“And then GE will go.”
At Goldman Sachs, two of its top bankers, David Solomon and John Weinberg, had just returned from a morning meeting in Fairfield, Connecticut. They had just met with Jeffrey Immelt, General Electric’s CEO, and Keith Sharon, its CFO.
Seated on Cohn’s couch, Solomon recounted the meeting to him. It was a complicated, and almost comical, situation: Solomon and Weinberg had traveled to Fairfield to advise its client on coping with the financial crisis, beginning with a plan to raise capital. One of Immelt’s primary concerns, however, was what would happen if its adviser, Goldman Sachs, went out of business.
General Electric was more about manufacturing than financial engineering, but roughly half of its profits in recent years had come from a finance company unit called GE Capital. Like most Wall Street firms, GE Capital relied on the short-term paper market and the confidence of investors worldwide, and Immelt was worried how the fate of Goldman and Morgan Stanley might affect it. The meeting ended without much clarity, apart from some preliminary plans to raise capital—and an assurance to Immelt that Goldman was staying in business.
But Cohn was already thinking about Goldman’s talks with Wachovia. Cohn, speaking to Kevin Warsh of the Fed, had agreed to entertain the idea, but only on the condition the Fed would provide assistance; Warsh had said they’d strongly consider it. Cohn believed him: Paulson had spoken with Blankfein and told him to take the talks seriously. “If you go into this looking for all the problems and how much help you’re going to get, it’s never going to happen,” he said, adding, “You’re in trouble and I can’t help you.” In the meantime, Warsh instructed Cohn to make sure they could work out the personal dynamics.
In the meantime, Warsh instructed Cohn to make sure they could work out the personal dynamics.
“Let’s not waste our time on economics if you guys are never going to solve the social issues,” he said. “If you aren’t willing to accommodate them, if Bob’s not willing to do whatever, this isn’t going to happen.”
Steel was scheduled to land at Westchester County Airport in White Plains, a suburb of the city, in only a few hours, and Cohn walked into Blankfein’s office and made a suggestion.
“Lloyd, you should go pick Steel up at the airport,” Cohn said, believing it would be a gracious gesture to kick off the merger talks.
Blankfein looked seriously annoyed, having never felt that he got along with Steel particularly well ever since Paulson had made them co-heads of the equities division years earlier. “Do I have to?”
“Yes,” Cohn said firmly. “I would go with you but it would be awkward. You should go pick him up.”
Blankfein was still resistant. “Can you go by yourself?”
“No,” said Cohn, who considered Steel a friend. “I already have a very good relationship with him.”
Blankfein relented. He’d head to the airport.
For a moment Paulson felt he could breathe a sigh of relief. His team had finished the first draft of the TARP legislation and gotten a quick sign-off from the Office of Management and Budget to begin distributing it on the Hill.
Given that he had promised the congressional leadership on Thursday night that he could get them something to work on “in hours,” he figured he’d make it succinct. Paulson; Kevin Fromer, his head of legislative affairs; and Bob Hoyt, his general counsel, had rushed to draft it, and it came in at just under three pages.
After much debate, Paulson’s team settled on the $700 billion figure that Kashkari had proposed the day before. If passed, it would be the largest one-time expenditure in the history of the federal government. Concerned about the potential for political interference, Hoyt had slipped several lines into the bill aimed at preventing it, as well as granting Paulson whatever powers he might need:
Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency. The Secretary is authorized to take such actions as the Secretary deems necessary to carry out the authorities in this Act…without regard to any other provision of law regarding public contracts…. Any funds expended for actions authorized by this Act, including the payment of administrative expenses, shall be deemed appropriated at the time of such expenditure.
It might have been too early to expect any feedback, but Treasury staffers were already excitedly forwarding copies to one another.
And the reaction was instant: Even inside the department there were worries that Paulson might look like he was overreaching. The three-page bill had no oversight plan and virtually no qualifiers. Its terse length alone was making people uneasy.
“So, have you seen the bill?” Dan Jester asked Jeremiah Norton, neither of whom had worked on the proposal.
“I’ve seen the talking points,” Norton replied.
“No,” said Jester, “That is the bill!”
Late Saturday afternoon, Colm Kelleher and Morgan Stanley’s deputy treasurer, Dave Russo, headed d
own to the NY Fed with their advisers, Ed Herlihy of Wachtell, and Promontory’s Gene Ludwig, to present their application for bank holding company status.
In the thirteenth-floor reception area, two staffers approached them and asked, “Which of you is the CFO?”
“I am,” Kelleher said.
“You need to come with us by yourself.”
Kelleher mockingly bade farewell to his colleagues as he was escorted to a conference room where the New York Fed’s top leadership—William Rutledge, Bill Dudley, Terry Checki, and Christine M. Cumming—were assembled.
“Look,” Rutledge said, “if all else fails this weekend, will you agree to become a bank holding company?”
“What does that mean?” Kelleher asked, still somewhat unsure of the technicalities.
The benefits of a bank holding company were explained to him: Short-term financing would be available through the Fed’s discount window, provided Morgan Stanley established a sufficient deposit base and submitted to various regulations.
“Will you get your board to agree?” they asked Kelleher.
Kelleher now understood what this meeting meant: The Federal Reserve might be offering to save his firm. The tank might not reach empty after all. “Of course,” he replied.
Lloyd Blankfein, wearing slacks and a button-down shirt, was waiting in the Westchester County Airport parking lot when Bob Steel arrived. Always perfectly coiffed, Steel nonetheless looked as if he could use some sleep as he walked out of the terminal. He had already been awake for fifteen hours and his day was hardly done.
“What a birthday present!” Blankfein said to Steel brightly when he saw him. Blankfein, who turned fifty-four that day, was still hoping to get to a birthday dinner later that evening at Porter House New York, a steak restaurant, with his wife, Laura.
As they drove into the city they delicately began discussing the outlines of a deal and discussing their history together. Neither of them knew what to make of the merger idea or, for that matter, each other.
When they reached 85 Broad Street, Steel went directly to the thirtieth floor, where he used to spend a lot of his time. As he stepped into the conference room, he saw Chris Cole, who had been his firm’s adviser for the past five months. Now Cole would be on the other side, trying to buy Wachovia. Meanwhile, Steel’s own lawyer, Rodgin Cohen, was also Goldman’s lawyer. It had all become so confusing and rife with conflicts, but they all agreed that if they were going to do a deal, they’d have to reach an agreement by Monday morning.
Goldman’s biggest issue was, as it had been with Morgan Stanley, trying to determine the scope of the hole. Wachovia owned $122 billion of pay option ARMs, which Goldman Sachs quickly felt wasn’t going to be worth much. They each agreed to put teams on it to work up the numbers; Steel said he’d have his group fly up by morning.
Before decamping for the night, Blankfein invited Steel back to his office. He wanted to talk about titles, perhaps the most sensitive issue for men who often measure themselves as much by their business cards as by their wallets.
Blankfein said he was thinking of making Steel one of three co-presidents, along with Gary Cohn and Jon Winkelried; Steel would continue to manage Wachovia as the consumer arm of Goldman Sachs.
Steel was taken aback and slightly offended. He was already the CEO of a major bank; he’d been a vice chairman of Goldman and a deputy Treasury secretary in Washington. And now he was being asked to become one of three co-presidents?
“I’m not sure I want to be at the same level with Gary and John,” he said diplomatically. “But we’ll figure this out.”
“Is Jamie trying to buy us?” Gary Lynch, Morgan’s general counsel, asked Mack in the corridor outside his office.
“I don’t think so,” Mack said, explaining that they were simply negotiating with JP Morgan to extend a credit line to the firm. “Why do you ask?”
“Well, something strange is going on, then,” Lynch replied.
Lynch related that an outside lawyer for Morgan Stanley’s independent board members, Faiza J. Saeed, a partner at Cravath, had just informed him that JP Morgan had called a Cravath colleague seeking to hire her to work on a deal for Morgan Stanley. She had been a little vague, but she wanted him to clear the conflict, Lynch explained.
“Wow,” Mack said.
“Yeah, this is a nice way of sending a message.”
As dusk was setting, Hank Paulson was still in his office and had just gotten off the phone with Geithner. The news was not promising. Geithner told him that Morgan Stanley had no plan apart from what he called the “naked” bank holding company scenario. Geithner said he was uncertain whether any investor—JP Morgan, Citigroup, the Chinese, or the Japanese—would come through. And he was skeptical of the Goldman-Wachovia deal.
“We’re running out of options,” he told Paulson.
Paulson, who had been living on barely three hours of sleep a night for a week, was beginning to feel nauseated. Watching the financial industry crumble in front of his eyes—the world he had inhabited his entire career—was getting to him. For a moment, he felt light-headed.
From outside his office, his staff could hear him vomit.
Saturday night, John Mack returned to his Upper East Side apartment, still nursing a persistent cold he couldn’t shake. His wife, Christy, who had driven into the city from Rye to console him, was waiting up.
He was quieter than usual, wondering yet again how he would manage to raise billions of dollars in capital in only twenty-four hours. “You know, there’s a chance I could lose the firm,” he said, a sense of despair in his voice.
He needed some air, he told Christy, and decided to go on a walk. As he roamed up Madison Avenue, he realized that his entire adult life, his entire professional career was on the line. He had been in battles before—his losing fight with the firm’s former CEO, Philip J. Purcell, had been a notable one—but never anything like what he faced now. But this was not just about his personal survival; it was about the fifty thousand people around the globe who worked for him, and for whom he felt a keen sense of responsibility. Images of Lehman employees streaming out of their building the previous Sunday night carrying boxes of their possessions still haunted him. He needed to buck himself up. Somehow, he was going to save Morgan Stanley.
When he stepped into his living room a few minutes later, he admitted to Christy with a grateful smile, “I’d rather be doing this than reading a book in North Carolina.”
Even before the black Suburban had come to a stop in his driveway on Saturday evening, Hank Paulson was stepping out the door, his RAZR at his ear. His Secret Service agent, Jim Langan, preferred that Paulson wait inside until Langan got out of the vehicle, but Paulson had long since abandoned such protocol.
Paulson raced inside to get on a call with Vice Premier Wang Qishan in China. For the past day, he had been trying to coordinate the call to press his case for China to pursue an investment in Morgan Stanley. Originally, he had wanted President Bush to call China’s president and had spoken with Josh Bolten, the president’s chief of staff, about it. But Bolten had concerns about whether it was appropriate for the president to be calling on behalf of a specific U.S. company. He suggested that, at best, the president might be able to call and speak broadly about the financial industry, finding a subtle way to be encouraging. But before such a call could be made, Paulson needed to size up China’s true interest.
Paulson had scheduled the call with Wang for 9:30 p.m. He knew Wang well from his trips to China as the CEO of Goldman, and they had a comfortable rapport. He also knew it was highly unusual to be orchestrating a private market deal with another country, in this case the largest holder of U.S. debt. Before placing the call, Paulson had reached out to Stephen Hadley, assistant to the president for national security affairs to get some guidance. The instructions: tread carefully.
When Paulson was finally connected to Wang, he moved quickly to the topic at hand, Morgan Stanley. “We’d welcome your investment,” Paulson
told Wang. He also suggested that one of China’s biggest banks, like ICBC, should participate, making the investment a strategic one.
Wang, however, expressed his anxiety about CIC becoming involved with Morgan Stanley, given what had happened to Lehman Brothers. “Morgan Stanley is strategically important,” Paulson said, suggesting he would not let it fail.
Wang remained unimpressed, asking for a commitment that the U.S. government would guarantee any investment. Paulson, trying to avoid making an explicit promise but also trying to assuage him, said, “I can assure you that an investment in Morgan Stanley would be viewed positively.”
Only a few hours later, Sunday morning, Paulson was back in the Suburban, where Michele Davis, his communications chief, was waiting. “You’re not going to like this,” she said as she pulled out a copy of the cover of the new Newsweek, which would appear on newsstands on Monday. Under the headline “King Henry” was a photograph of Paulson.
They were headed to an early taping of NBC’s Meet the Press to sell his TARP proposal with his fishing buddy, Tom Brokaw, who had temporarily taken over hosting responsibilities for the political talk show after Tim Russert died. From there they would head to ABC’s This Week and then to CBS’s Face the Nation.
Paulson skimmed through the article. It was a flattering profile, with the exception of a quote from Governor Jon Corzine, his old nemesis from Goldman, questioning his consistency. But more important, the cover was a tacit acknowledgment of the enormous power that Paulson now wielded, not only in America, but on the world stage. President Bush had taken a backseat; Paulson had become the de facto leader of the country in this time of crisis.