“What about $1 trillion?” Kashkari said.
“We’ll get killed,” Paulson said grimly.
“No way,” Fromer said, incredulous at the sum. “Not going to happen. Impossible.”
“Okay,” Kashkari said. “How about $700 billion?”
“I don’t know,” Fromer said. “That’s better than $1 trillion.”
The numbers were, at best, guesstimates, and all three men knew it. The relevant figure would ultimately be the one that represented the most they could possibly ask from Congress without raising too many questions. Whatever that sum turned out to be, they knew they could count on Kashkari to perform some sort of mathematical voodoo to justify it: “There’s around $11 trillion of residential mortgages, there’s around $3 trillion of commercial mortgages, that leads to $14 trillion, roughly five percent of that is $700 billion.” As he plucked numbers from thin air even Kashkari laughed at the absurdity of it all.
John Mack had been watching CNBC on Friday morning when he received a phone call from Lloyd Blankfein. Charlie Gasparino, still reveling in his scoop about the government’s toxic asset program, was arguing that it meant that Morgan Stanley would no longer be forced to do a deal, or at least not have to move as quickly.
Mack, laughing to himself, knew better; he had to get something accomplished by the weekend or Morgan Stanley could well go the way of Lehman Brothers.
“What do you think of becoming a bank holding company?” Blankfein asked Mack when he picked up the receiver.
Mack hadn’t really studied the issue and asked, “Would that help us?”
Blankfein said that Goldman had been investigating the possibility and explained to him the benefits—namely, that if they allowed themselves to be regulated by the Federal Reserve, they’d have unlimited access to the discount window and would have an easier time raising capital, among other things.
“Well, in the long run it would really help us,” Mack said. “In the short run, however, I don’t know if you can pull it off fast enough to help us.”
“You have to hang on,” Blankfein urged him, clearly still anxious about how punishing the markets had become, “because I’m thirty seconds behind you.”
Jonathan Pruzan, the Morgan Stanley banker who had been assigned to review Wachovia’s $120 billion mortgage portfolio—to crack the tape—finally had some answers. A team of Morgan bankers in New York, London, and Hong Kong had worked overnight to sift through as many mortgages as they humanly could.
“Now I know why they didn’t want to give us the tape!” Pruzan announced dourly at a meeting before they headed over to Wachtell Lipton to begin diligence on Wachovia. “It shows they’re expecting a nineteen percent cumulative loss.”
Just a week earlier, at a public presentation at Lehman’s conference, Bob Steel had estimated that figure at 12 percent. In fairness, Pruzan noted, the market had deteriorated markedly since then, and cumulative loss figures were inherently unreliable, because a bank could manipulate them up or down. Still, that big a discrepancy couldn’t be explained away easily. At best, Pruzan thought, Wachovia had been foolishly optimistic.
“You’ve got to be fucking kidding me,” Scully exclaimed. “We obviously can’t do this deal.”
To make it work, Morgan Stanley would have to raise some $20 billion to $24 billion of equity to capitalize the combined firm, a virtual impossibility under the current market conditions. Even so, the Morgan bankers decided not to cancel the all-day diligence session, as they figured they had nothing to lose. Morgan Stanley might well be able to take advantage of Paulson’s new plan to buy toxic assets from Wachovia and, indeed, investors had already bid up Wachovia’s shares that morning on precisely that expectation.
Thirty people each from Morgan Stanley and Wachovia showed up at Wachtell Lipton’s Fifty-second Street offices. Wachovia, purposely not using Goldman Sachs as an adviser for this project given its rivalry with Morgan Stanley, brought a new set of advisers from Perella Weinberg Partners: Joe Perella, the legendary financier; and Peter Weinberg, a former Goldman banker who was the grandson of Sidney Weinberg, the Goldman patriarch. As Weinberg came to shake Kindler’s hand, they could hardly believe they were even talking to each other under such dire circumstances. “What happened? How the fuck did we get here?” Weinberg asked aloud.
“God only knows. You can’t make this shit up,” Kindler said.
Within the first two hours of their work, however, something began to feel wrong to the Morgan bankers. Paulson’s TARP announcement had eased the climate of fear at Wachovia—which would likely be a huge beneficiary of the program because it could sell its most toxic assets to the government—and thus the urgency of rushing into a deal. Kindler became concerned that Wachovia was just buying time while the bank worked on another deal, probably with Goldman. Surveying the room, he announced to his colleagues, “Look at us. We’re the B team. This isn’t going to happen.”
The Wachovia team, meanwhile, had its own doubts about Morgan Stanley’s commitment. If this deal was so important to it, where were its top people? David Carroll, who was leading the Wachovia team, couldn’t understand why Colm Kelleher, Morgan’s CFO, was not involved.
By 2:00 p.m., the Morgan Stanley team had withdrawn from Wachtell and gone back to Times Square to consult with Mack.
“These guys are clearly disengaged,” Kindler told him. Scully described Wachovia’s mortgage book as “a $40 to 50 billion problem. It’s huge. The junior Wachovia team is not disputing our analysis.”
Kelleher, who had been keeping a careful watch over the firm’s dwindling cash pile, had just taken a look at Wachovia’s numbers for himself and observed, “That’s a shit sandwich even I can’t get my big mouth around.”
It became increasingly clear to everybody that the only way this deal was going to take place was if the government provided cover.
Mack, not having heard anything that soothed his nerves, had his secretary get Steel on the line. “You called us and said you wanted to go a hundred miles an hour,” he reminded him, his Southern manners starting to fray, “and I’m sensing from your team that there’s not the same urgency.”
Steel was apologetic. “You’re right,” he told Mack. “We’re not doing this for the next couple of days.”
They agreed they’d get back in touch, but before he hung up, Steel asked Mack for a favor. “It wouldn’t be helpful if it leaked out that we’re not talking,” he said.
“Fortress Goldman.” Tim Geithner had written those two words on a pad on his desk after a Friday-afternoon conversation with Lloyd Blankfein, who must have uttered the phrase a dozen times. It was his way of saying he wanted Goldman to remain a stand-alone institution.
Geithner had been concerned that Blankfein didn’t appreciate how perilous his situation actually was and had quizzed him about the firm’s financial health. Blankfein had said he was hopeful that Goldman would weather the crisis but had acknowledged: “It depends on what happens to the rest of the world.”
Geithner had also sounded Blankfein out about the bank holding company idea. While Blankfein was originally somewhat resistant, by now he had officially warmed up to it. He had become increasingly convinced that if the market knew that the Federal Reserve was behind him, it would instill confidence in investors. And after doing the math, by his estimate 95 percent of Goldman’s assets could already be pledged to the Fed’s discount window, so another 5 percent didn’t represent that big a hurdle. Rodgin Cohen, Goldman’s lawyer, had already discussed this with Geithner earlier in the day; of course, he’d have to sell Bernanke on the idea.