The good news for Goldman was that withdrawals were only slightly outpacing inflows. To some extent it had been able to capitalize on the distress of others, as hedge funds needed to execute their trades somewhere. When Steve Cohen of SAC Capital transferred several billion over to Goldman, traders began to whoop it up on the floor.
On the other hand, Stanley Druckenmiller, a George Soros acolyte worth more than $3.5 billion, had taken most of his money out earlier that week, concerned about the firm’s solvency. If word got around that a hedge fund manager of Druckenmiller’s reputation had lost confidence in Goldman, it alone could cause a run. Cohn called him and tried to convince him to return the money to the firm. “I have a long memory,” Cohn, who was taking this personally, told Druckenmiller, for whom he had even hosted a charity cocktail party in Druckenmiller’s honor in his own apartment. “Look, the one thing I’m doing is I’m learning who my friends are and who my enemies are, and I’m making lists.”
Druckenmiller, however, was unmoved. “I don’t really give a shit; it’s my money,” he shot back. Unlike most hedge funds, Druckenmiller’s did consist primarily of his own money. “It’s my livelihood,” he said. “I’ve got to protect myself and I don’t really give a shit what you have to say.”
“You can do whatever you want,” Cohn said in carefully measured tones. But, he added, “this will change our relationship for a long time.”
Half an hour before David Carroll and the Wachovia team were due to arrive at Morgan Stanley, Kindler called down to Scully. Kindler was in his office, peering out his window down at the camera crews camped outside the building.
“Why are we having him meet us here, of all places?” Kindler asked. “There’s reporters outside.”
“Don’t worry. It’ll be fine,” Scully, who took the precaution of sneaking Carroll in via the employee entrance on Forty-eighth Street, assured him.
Kindler’s sole objective was to get his hands on Wachovia’s mortgage book so that he could crack the tape—Wall Street-speak for examining the mortgages individually. That was the only way he could really understand Wachovia’s real value. This was no small undertaking: The tape contained $125 billion of loans, including all manner of bespoke adjustable rates, like “pick a pay,” which gave borrowers a variety of choices each month on how—and even how much—to pay. Among the options was a payment that covered only the interest on the loan.
Morgan Stanley also insisted on seeing Wachovia’s business plan, but Carroll balked at that request. “Our general counsel says it’s a real problem,” he said.
Kindler, convinced that Wachovia was trying to hide something, called Morgan’s general counsel, Gary Lynch, in a rage and told him to put the screws to his counterpart at Wachovia, Jane Sherburne.
“It’s a big legal issue,” she explained. “We can’t give over the data without disclosing it in the merger agreement if we do the deal.”
Lynch, too, was starting to suspect a problem. Are Wachovia’s numbers worse than anyone knows? he wondered to himself. “Well, we can’t do the deal without seeing the data,” he told her.
Sherburne relented.
Lloyd Blankfein, his top shirt button undone and tie slightly askew, looked at his computer screen and saw in dismay that his stock price had dropped 22 percent to $89.29. Blankfein, who up until now had resisted pushing back against short-sellers, was becoming convinced that the pressure his stock was under was not an accident. He had just ended a call with Christopher Cox in which he had told the SEC chairman, “This is getting to be intentional. You know, you may need to do something here.”
In his e-mail in-box was another message from one of his traders saying that JP Morgan was trying to steal his hedge fund clients by telling everyone that Goldman was going under. It was becoming a vicious circle.
Blank fein had been hearing these rumors for the past twenty-four hours, but he had finally had enough. He was furious. The rumormongering, he felt, had gotten out of control. And he couldn’t believe JP Morgan was trashing his firm to his own clients. He could feel himself becoming as anxious as Mack had sounded when they spoke the day before.
He called Dimon. “We’ve got to talk,” Blankfein began as he tried to calmly explain his problem. “I’m not saying you’re doing it, but there are a lot of footprints here.”
“Well, people may be doing something that I don’t know about,” Dimon replied. “But they know what I’ve said, which is that we’re not going after our competitors in the middle of all this.”
Blankfein, however, wasn’t buying his explanation. “But, Jamie, if they’re still doing it, you can’t be telling them not to!” Trying to get his point across, Blankfein, a movie buff, started doing his own rendition of A Few Good Men: “Did you order the Code Red? Did you say your guys would never do anything?” Dimon just listened patiently, eager not to get Blankfein even more wound up.
“Jamie, the point is, I don’t think you’re telling them to do this, but if you wanted to stop them in your organization, you could scare them into not doing it,” Blankfein said.
Even in its panicked state, Goldman was still Goldman, and Dimon didn’t want a war. Within half an hour he had Steve Black and Bill Winters, co-chief executives of JP Morgan’s investment bank, send out a companywide e-maiclass="underline"
We do not want anyone at JP Morgan capitalizing on the irrational behavior that’s going on in the market toward some of the U.S. broker-dealers. We are operating as business as usual with Morgan Stanley and Goldman Sachs as counterparties. While they are both formidable competitors, during this period, we do not want anyone approaching their clients or employees in a predatory way. We want to do everything possible to remain supportive of their business and not do anything that would impact them negatively.
We do not believe anyone has engaged in any inappropriate behavior, but we want to underscore how important it is to be constructive during this time. What is happening to the broker-dealer model is not rational, and not good for JP Morgan, the global financial system or the country.
Around midday, Hank Paulson reviewed the latest term sheet that his staff had drafted overnight on the issue of dealing with toxic assets, hoping it would be acceptable to present to Congress. His inner circle had assembled in his office, pulling up chairs around a corner sofa.
“It looks much better,” he said, turning the pages. “It’s very simple.” He paused and scanned the bleary-eyed faces in the room. “I want to reiterate that we have to get this up to the Hill quickly,” he said. “We need to keep this simple, very simple. And we have to do it in a way that we encourage, ah, banks and financial institutions to want to participate. We don’t want to have punitive measures with this. This is about recapitalizing our banks and financial institutions setting a price for assets.”
There was just one more issue to deal with, perhaps the most important of alclass="underline" the price tag.
While the toxic-asset program made sense in theory, for it actually to work, for it to be effective, Paulson knew they’d need to buy large swaths of toxic securities from the nation’s largest banks. The cost was going to be enormous, and it would be perceived, both within and outside of the Washington Beltway, as another bailout.