Blankfein, whose voice revealed to Geithner an almost panicked state, had also said that he was planning to raise capital and was certain that the firm would be able to do so from private investors. Maybe even Warren Buffett would be interested.
The waiter at Blue Fin had just brought several massive plates of sushi—spicy lobster rolls, pieces of yellowtail tuna, and tobiko—when Colm Kelleher’s cell phone rang. He had gone to get a late lunch with his Morgan Stanley colleagues, including James Gorman, Walid Chammah, and Tom Nides, and the group had been chatting about their plan to meet later that night with Gao Xiqing of China Investment Corporation, who was bringing an entire team to New York. With Wachovia effectively out of the picture, the Chinese were now their sole prospect.
When Kelleher looked down at the caller ID, he saw it was a number in Japan and walked to the corner of the restaurant.
Jonathan Kindred, president of Morgan Stanley’s securities business in Tokyo, greeted him and said excitedly, “This is interesting. I just got a call from Mitsubishi. They want to do the deal.” Mitsubishi UFJ, Japan’s biggest bank, was interested in buying a stake in Morgan Stanley.
The call had come completely unexpectedly, and totally unsolicited. Morgan Stanley’s management had actually ruled out calling Mitsubishi earlier in the week after its chairman, Ryosuke Tamakoshi, said publicly at a conference that following Lehman’s bankruptcy his firm would not be making any investments in the United States.
Kindred said he thought Mitsubishi was prepared to move quickly. But Kelleher, rolling his eyes, was skeptical. He had worked with other Japanese banks before and, in his experience, they had always lived up to their reputation as being slow, risk-averse, and deeply bureaucratic.
James Gorman’s eyes widened when Kelleher returned to the table with Kindred’s news. This could be exactly what they needed, he thought.
Kelleher only scoffed, “This is a waste of time, they’re never going to do anything.”
“Colm, I really feel they’re going to do something,” Gorman insisted. When Gorman worked at Merrill Lynch he had orchestrated a joint venture with Mitsubishi to combine their private banking and wealth-management businesses in Japan. He thought that the fact that Mitsubishi had initiated the call to express interest was an encouraging sign. “This stuff doesn’t happen by accident,” he said.
Kevin Warsh, the Fed governor, had taken the US Airways shuttle to New York late on Friday to help Geithner think through how to handle the upcoming weekend. Just as important, he would be Bernanke’s eyes and ears on the ground. As he and his driver made their way through traffic from LaGuardia Airport to the New York Fed, he received a call from Rodgin Cohen, who by now was advising both Wachovia on its talks with Morgan Stanley and Goldman Sachs on its bank holding company status. He told Warsh he had an idea—a potentially big one. It wasn’t a plan officially sanctioned by his clients, just a friendly suggestion from an old-timer in the business.
He suggested to Warsh that the government attempt a shotgun wedding between Goldman and Wachovia. He knew it was a long shot—the “optics,” he acknowledged, would be problematic, given Paulson had worked at Goldman for thirty years and been its CEO from 1999 to 2006 and that Wachovia’s CEO, Bob Steel, was a former Goldman man and Paulson’s former deputy at Treasury too—but it would solve everyone’s problems: Goldman would get the deposit base it had been seeking, and Wachovia would have its death sentence stayed.
Warsh listened to the proposal and, almost to his own surprise, liked it.
Gao Xiqing, dressed in a sporty turtleneck and blazer, arrived at Morgan Stanley with his team just after 9:00 p.m., having flown into New York with Morgan Stanley’s Wei Sun Christianson on a private jet from Aspen. He had been on a panel that afternoon with Carlos Slim, the Mexican billionaire, at Ted Forstmann’s gathering and had asked the moderator, Charlie Rose, to make certain the session didn’t run long so that he could reach the airport in time. Given the rumors in the newspapers, everyone at the panel knew exactly where he was headed.
Gao’s back was causing him so much pain that when James Gorman first went to introduce himself, he found Gao lying on the floor of a conference room on the fortieth floor, in the middle of a telephone call. Mack, ever the accommodating host, had a couch brought from the executive dining room for his guest to lie on.
Over dinner, ordered in from Mack’s favorite restaurant, San Pietro— again—they discussed a possible transaction. Alternating between standing up and lying down, Gao reiterated his interest in buying 49 percent of Morgan Stanley.
As he had told Christianson on the flight over, he now indicated that he was prepared to provide the firm with a credit line of as much as $50 billion and a nominal equity investment—no more than $5 billion, maybe less.
Mack was stunned. He had known the price that would be offered might be low, but to him this was absurdly so—it was effectively merely a loan. While it might help Morgan Stanley stay in business, Gao was clearly taking advantage of its weakened condition. To Gao, the offer presented a way to reset the price he had paid for the 10 percent stake he had acquired in Morgan Stanley in 2007, which was now worth far less. Unlike deals that other sovereign wealth funds had struck then, giving them the right to reset the value of the deal if the firms sold equity at a lower price later, CIC hadn’t had the presence of mind to insist on that stipulation. For some inexplicable reason, Gao had convinced himself that the agreement did include such a provision until Morgan Stanley got him a copy to show him that it didn’t.
However insulting Gao’s proposal, Mack recognized that his situation was desperate. Despite the market rally, the firm had continued to bleed cash. Kelleher had given him the cash balances and they were not good—about $40 billion in the tank. A few bad days could wipe them out, and most days lately had been bad ones.
Without many other options, Mack told Gao the firm would open its books to him. Gao had hired Sullivan & Cromwell’s seemingly omnipresent lawyer, Rodgin Cohen, as well as Deutsche Bank, to advise him, and both companies were already sending over teams to assist the Chinese. A sheet of paper marked “CIC” was affixed to the conference room door that would become Gao’s temporary office. Mack also had a physical therapist summoned to work on his bad back.
When Mack returned to his office and huddled with Christianson and his team, they were flabbergasted; Chammah initially thought he had misheard Christianson when she presented it.
“That’s a ludicrous ask,” Kelleher said. “They are being unreasonable.”
Gorman, trying to calm everyone down, said they should all hope it might just be an opening salvo: “They ask for the moon and then maybe they get more reasonable?”
It was just past midnight, and Courtroom 601 of the courthouse at One Bowling Green in Lower Manhattan was still packed with people standing shoulder to shoulder.
The occasion was the approval of the sale of Lehman Brothers to Barclays by a bankruptcy judge. While the rest of the world had already moved on to the fates of Morgan Stanley and Goldman Sachs, ten thousand Lehman employees’ jobs still lay in the balance. More than 150 lawyers, including some of the most prominent bankruptcy practitioners in the nation, were present on behalf of various creditors. Chelsea Clinton was in attendance, representing the hedge fund Avenue Capital.
The proceedings had begun at 4:36 p.m., and Judge James Peck had insisted that he would reach a verdict before leaving for the night. The urgency of getting the sale approved was growing more and more evident as with each passing hour the markets chipped away at the value of Lehman’s assets. Not only was the bankruptcy of Lehman, which had filed for Chapter 11 with $639 billion in assets, by far the largest in the nation’s history, but an unwinding of so complex a financial institution had never before been attempted.