On Thursday morning, Tom Nides, who lived in Washington and commuted every week to New York, woke up early at the Regency Hotel and went to the gym. As he read the New York Times on an elliptical machine, he nearly fell off when he came upon the front-page story, which ran under the headline: “As Fears Grow, Wall St. Titans See Shares Fall.”
Directly in the middle of the story was a quote, citing two people who had been briefed on merger talks between Morgan Stanley and Citigroup, saying that John Mack had told Vikram Pandit, “We need a merger or we’re not going to make it.”
Nides couldn’t believe Mack even said that. He had been in the room for one of the calls with Pandit and it didn’t go like that, he thought. Morgan Stanley, Nides knew, could not afford that sort of coverage, whether or not it was true. The more people who knew it, the truer it would become.
“Did you see this irresponsible piece of shit in the Times?” Nides asked when he got Mack on the phone. Mack, however, only read the Wall Street Journal, the Financial Times, and the New York Post, having canceled his Times subscription in protest after the Sulzberger family pulled its money from Morgan Stanley because one of its asset managers had decided to run a proxy contest against the Times ownership.
Now Mack had reason to be upset at the Times all over again. And he and his colleagues were furious with Pandit, who they were convinced must have leaked it.
“You didn’t say this, did you?” Nides asked.
“No, no,” Mack insisted. “I never said that; I definitely didn’t use those words.”
Nides knew he needed to challenge the veracity of the quote immediately. He was already getting calls from other news organizations.
“What fucking kind of reporter are you?” he berated one of the article’s authors, Eric Dash, when he reached him on his cell phone. “You have to rescind the story!”
Mack, meanwhile, prepared to address his employees for the second time in four days, eager to offer them reassurance, especially after the Times story. He had invited Eugene A. Ludwig, chairman of Promontory Financial Group and one of the authors of the editorial in the previous day’s Wall Street Journal advocating for an RTC-like structure, to join him this morning as his adviser.
Battling a cold, his glasses slipping down his nose, Mack stood on Morgan Stanley’s main trading floor, his speech piped in to its employees around the world. He spoke in a plain, unscripted manner, his North Carolina accent perhaps more pronounced than usual.
“You know you’ve seen the cash position, you’ve seen our earnings, ah, all that stuff, unlike what people said about other firms, ah, those numbers are real numbers,” he told them. “We’re clean, we’re making money. We made a lot of money the last eight days also. But it doesn’t make any difference. We deal in a market today that financial chicanery, rumor, and innuendo are much more powerful than real results.”
He related a phone conversation with a “a good friend,” a hedge fund manager who confided his fears about Morgan Stanley. Mack reassured the man, only to receive another call four hours later from the same fund manager about still another market rumor. “My point being, no matter what we say, there’s another rumor that pops up.”
Mack acknowledged that the firm was examining all its options, while expressing bewilderment at how the industry had been turned upside down.
“What I find remarkable is not too long ago, two months ago, four months ago, people said the Citibank model was broken—ah, complicated, big, global, unmanageable. And now our model’s broken. Is our model—and I include Goldman Sachs—is our model broken because we are not part of a bank? Is our model broken, because we’ve consistently in the last three quarters delivered good earnings? Is our model broken because we could not have regulators who stepped in and took strong stands? That might be the issue here.
“I think the issues are: How do you get through chaos? This is chaos. It pains me to go on the floor and see how you guys look.”
Mack then addressed the most sensitive issue for his employees—the selling of stock. According to SEC regulations, employees could sell only during certain designated periods, such as immediately following an earnings report—which meant at the present.
“I know this is a window period,” Mack said, “and I know some of you are very scared—well, maybe all of us are very scared. You want to sell stock, sell your stock. I’m not going to look at it and I don’t care. I’m not selling, and there, well, John, you’ve got a lot of it, you don’t have to worry about it … ah, you know, I do have a lot and I do worry about it, but I really care much more about your getting peace of mind. So if you want to sell, sell. Do it.”
When the time came for questions from the staff, Stephen Roach, Morgan Stanley’s unfailingly bearish economist, asked a pointed question about the shorts: “Short-sellers, John. Many, if not most of them, are clients of the firm. Put yourself in the room with one of these, quote, clients, unquote. What do you say to them?”
Mack drew a deep breath. “Well, um, I’ve thought long and hard about that, and my gut reaction is that I’m angry and I want to tell them what I think. And I don’t want to do business with you and all that other stuff. Then on my second breath, I say, you know, they have their job to do, that’s what they’re doing. I am not going to get pulled into that kind of discussion.
“And this is what I wanted to say, I put a note here about being angry. We can be angry, we are angry, we are upset, and we just have to deal with it. We are not here to beat up on clients and tell them how they deserted us and all of that stuff. We’re here to run this firm, work with our clients as best we can. Some don’t want to do business, we’ll deal with that later, let them go. Let’s stay focused on things that are productive. And venting and telling people what you think and calling them all the names you want to call them is not going to help us,” he said, punctuating the point by adding, “I love beating the shit out of people when they screwed us. But I’m not going there. And I don’t want you to go there.”
The panic at Goldman Sachs could no longer be denied. Perhaps the greatest sign of anxiety was the fact that Gary Cohn, Goldman’s co-president, who usually remained perched in his thirtieth-floor office, had relocated himself to the office of Harvey M. Schwartz, head of global securities division sales, who had a glass wall looking out to the trading floor. The door was left open; he wanted to see and hear exactly what was going on.
The Federal Reserve, along with the other central banks, had just announced plans to pump $180 billion to stimulate the financial system, but the scheme did not seem to be having any appreciable effect. Goldman’s shares opened down 7.4 percent. CNBC, which was airing on flat-screen TVs hanging from the walls of Goldman’s trading floor, had introduced a new “bug” on the bottom left-hand side of the screen that provocatively asked, “Is Your Money Safe?”
It was a question that Goldman clients were beginning to ask themselves. The firm’s own CDS spreads had blown out in a way the firm had never seen before, indicating that investors were quickly beginning to believe the unthinkable: that Goldman, too, could falter. In two days, Goldman’s stock had dropped from $133 to $108.
Every five minutes a salesman would tear into Schwartz’s office with news of another hedge fund announcing its plan to move its money out of Goldman and would hand Cohn a piece of paper with the hedge fund’s phone number so he could talk some sense into them. With Morgan Stanley slowing down its payouts, some investors were now testing Goldman, asking for $100 million just to see if they could afford to pay. In every case, Cohn would wire the money immediately, concerned that if he didn’t, the client would abandon the firm entirely.