Andrew Sorkin - Too Big to Fail - The Inside Story of How Wall Street and Washington Fought to Save the FinancialSystem--and Themselves

And now he could understand it: commercial paper and money markets—that was his bread and butter, Goldman’s specialty. The crisis was hitting close to home.

Across town, Kevin Warsh, a thirty-eight-year-old governor at the Federal Reserve, whose office was a few doors down from Bernanke’s, was having his own worries.

He was just finishing up a conference call with Bernanke and central bankers in Europe and Asia in which they explained what they had just done with AIG. Jean-Claude Trichet, the president of the European Central Bank, had been furious with them for their decision to “let Lehman fail” and was lobbying Bernanke to go to Congress to implement a large government bailout for the entire industry, to restore confidence.

But Warsh was nervous about a different issue: Morgan Stanley, where he had worked as an M&A banker before leaving seven years earlier to become special assistant to the president for economic policy. He could tell that his former firm was quickly losing confidence in the marketplace. To him, there was an obvious solution to its problems: Morgan Stanley needed to buy a large bank with deposits. His top choice? Wachovia, a commercial bank with a large deposit base that itself was struggling. Wachovia’s 2006 acquisition of Golden West, the California-based mortgage originator, was turning into a catastrophe, saddling the bank with a giant pile of bad debt that was beginning to reveal itself.

Given that no one at Treasury was allowed to talk to Bob Steel now that he had become CEO of Wachovia, worrying about that firm had become Warsh’s responsibility. And he increasingly had more to worry about: as a former deal maker himself, he knew that Wachovia, too, needed a partner desperately and he just might have to play the role of matchmaker. There is no way the bank will make it on its own, he thought.

But like Paulson with Goldman, Warsh had his own conflict-of-interest problem with Morgan Stanley, so he sought out Scott Alvarez, the Fed’s general counsel, and requested a letter clearing him to make contact with his former employer, based on an “overwhelming public interest.”

Warsh contacted Steel and instructed him to call Mack in twenty minutes, which left him enough time to give Mack a heads-up.

Warsh then called Geithner and asked, “Do you want me to call John? Or do you want to call John?”

They decided to call him together.

Despite its terminal illness, Lehman Brothers was bustling with activity. Legions of sleep-deprived, depressed traders, lawyers, and other employees were still working the phones and doing what they had to do before closing up the shop. Fresh in their minds was the memo that Dick Fuld had sent out the previous night: “The past several months have been extraordinarily challenging, culminating in our bankruptcy filing,” he wrote. “This has been very painful on all of you, both personally and financially. For this, I feel horrible.” To some angry employees, it was an extraordinary understatement that called to mind Emperor Hirohito’s famous surrender broadcast on August 15, 1945, when he told a stunned nation that “the war situation has developed not necessarily to Japan’s advantage.”

But later that day, Bart McDade, Skip McGee, and Mark Shafir, working off of four hours’ sleep in three days, were able to announce a welcome bit of good news: Though it was far too late to save the entire firm, Lehman had an agreement to sell its U.S. operations for $1.75 billion. The buyer was Barclays, Lehman’s onetime would-be savior, which ended up getting the part it wanted without having to acquire the whole firm. The deal would allow at least some of Lehman’s ten thousand employees in the United States to keep their jobs.

As McDade, McGee, and Shafir walked the floors, some employees stood up to applaud.

Mack knew what Bob Steel was calling about, and he was happy to speak with him. Both men were graduates of Duke and members of the university board, and not long after Steel had taken over at Wachovia, Mack had gone down to see him in Charlotte, to pitch Morgan Stanley as an adviser. No business had come out of the meeting—the bank had Goldman to help them sort through the Golden West quagmire—but the men realized they spoke the same language and agreed to stay in touch.

“Very interesting times,” Steel now said. “I imagine you’ve already heard from Kevin. He told me he thought we should connect.”

Steel went on, intentionally keeping the discussion vague until he gauged Mack’s intentions. “There might be an opportunity for us. We’re thinking about a lot of things. I think this could be the right time to talk. But we’d need to move fast.”

“I could see something,” Mack replied, intrigued but noncommittal. “What’s your timing?”

“We’re moving in real time,” Steel said.

Considering the meltdown in the markets, Mack thought it was at least worth talking. For Steel, a Morgan Stanley deal happened to be both commercially and personally attractive. All the tumult within the firm had left Mack without a clear successor. While he may not have wanted Mack’s job immediately, their mutual friend Roy Bostock, a Morgan Stanley board member, had privately hinted to Steel that a deal between Morgan Stanley and Wachovia could present an elegant solution to Morgan’s succession problems down the road. This could be Steel’s big opportunity to finally run a top Wall Street firm.

After speaking with Steel, Mack called Robert Scully, his top deal maker, and told him about the conversation. Scully had his doubts; he didn’t know much about Wachovia’s books, but what he did know alarmed him. He agreed, however, that at this point, no options could be automatically ruled out. Besides, Wachovia had one of the biggest, most solid deposit bases in the country, an extremely attractive feature as Morgan Stanley was watching its cash fly out the door.

Scully in turn called Rob Kindler, a vice chairman, to tell him that Dave Carroll, Wachovia’s head of business development, was coming to meet them on Thursday and get things started.

In the relatively straitlaced banker culture of Morgan Stanley, Kindler was an outlier—loud, indiscreetly blunt, and predisposed to threadbare old suits. In the 1990s, he had been a star lawyer at Cravath, Swaine & Moore, but he always preferred banking. He left law and originally joined JP Morgan. (A constant prankster, he soon had hats made with the slogan, “One Firm, One Team, Bribe a Leader,” mocking JP Morgan’s slogan of “One Firm. One Team. Be a Leader.”) Despite his idiosyncrasies, when it came to deal making, his advice was highly valued. Kindler didn’t initially like the notion of a Wachovia merger either, he told Scully, and took a reflexively cynical view: “Let’s put this in context for a moment: Bob Steel comes from Goldman; Wachovia’s investment bankers are Goldman; Paulson is obviously from Goldman. The only reason we’re having this meeting with Wachovia is because Goldman won’t do the deal!”

Scully had been thinking much the same thing but hadn’t been willing to say so. “I don’t know,” he said. “Seems like a bad idea.”