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

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.

Paulson looked to Kashkari, who sat on the sofa to his left, for guidance.

The key concern at that moment was whether spending so much money would require them to have to ask Congress to increase the debt ceiling—a political flashpoint that would require Congress to vote to raise the amount of debt the country could take on. It had just increased that amount to $10.615 trillion in July.

As the group discussed the outlines of the proposed legislation, Kashkari’s view was that they ought to try to skirt the issue entirely. “I don’t know if that’s workable, not having a reference to the debt ceiling. Or why don’t we just say it’s not subject to a debt ceiling?”

“You can’t do that,” Paulson pointed out and then added, “I don’t want to go for the debt ceiling and fail. That’s the issue, and then people start focusing on it.”

“I did the analysis,” Phillip Swagel offered, reading from his notes. He had determined that they would need only $500 billion, but only if the situation didn’t grow any worse.

To Paulson, who thought of himself as fiscally conservative, the answer was obvious. “Okay, so I think the responsible thing is to go for the debt ceiling,” he said, instructing Kevin I. Fromer, assistant secretary for legislative affairs, whose job it was to work the Hill, to construct some new language.

“You can go after it but you don’t have to put it in this document,” Fromer replied, resisting Paulson’s request. “We never go up and propose legislation to do the debt ceiling. We just simply arrive at the fact that we have to do it and literally tell Congress they have to do it. They do it because they’re too scared not to do it. It’s just a question of optics.”

They decided that, for the time being, they wouldn’t mention the debt ceiling in the document itself but would address it later, ideally when Congress had already bought into the plan and it was too late to make a change.

Before wrapping up the meeting, Paulson raised one last problem: Wachovia, he said, might falter. He was getting back-channel messages from Kevin Warsh that the bank’s finances were in much worse shape than they believed. Everyone understood the significance of his statement. After all, Bob Steel, their former colleague, was its CEO.

“If Wachovia fails, I’m going to be trotting up to Congress again. So I’m hoping it happens after January!” he said to a roomful of laughs.

“Listen, Jamie just called me fishing around for something,” Colm Kelleher told John Mack midday Thursday as he marched into his office. “He said he was calling to see if he could be of help,” Kelleher added. “It was strange.”

James Gorman, the firm’s co-president, had just reported receiving a similar call, Mack replied, and Geithner had phoned earlier to suggest that he talk to Dimon as a possible merger partner too.

“It’s clear that for him to be calling us, he wants to do a deal,” Kelleher said. “Jamie is always hanging around the hoop. You know Jamie’s saying, ‘Let’s make friends with these guys before I eat them.’”

Mack was irritated by these suggestions; he didn’t particularly want to do a deal with Dimon, as he believed it would involve far too much overlap. But he decided to stop guessing what Dimon might be up to and ask him directly.

“Jamie, Geithner says I should call you,” Mack said abruptly when he reached Dimon on the phone a few minutes later. “Let’s get this out in the open: Do you want to do a deal?”

“No, I don’t want to do a deal,” Dimon said flatly, frustrated that this was the second call he had gotten that day from a competitor who was annoyed with him.

“Well, that’s interesting,” Mack retorted. “You’re calling my CFO and you’re calling my president, why would you do that?”

“I was trying to be helpful,” Dimon repeated.

“If you want to be helpful, then talk to me. I don’t want you calling my guys,” Mack said, hanging up the phone.

The fiftieth floor of Goldman’s fixed-income trading unit was in near meltdown by lunchtime on Thursday. No trading was taking place, and the traders themselves were glued to their terminals, staring at the GS ticker as the market continued its swoon. Goldman’s stock dropped to $85.88, its lowest level in nearly six years; the Dow had fallen 150 points. “The market is trading under the assumption that every financial institution is going under,” Michael Petroff, portfolio manager for Heartland Advisors, told Agence France-Presse that morning. “It’s now emotional.”

Jon Winkelried, Goldman’s co-president, had been walking the floors, trying to calm everyone’s nerves. “We could raise $5 billion in an hour if we wanted to,” he told a group of traders as if to suggest nothing was amiss.

But just then, at 1:00 p.m., the market—and Goldman’s stock—suddenly turned around, with Goldman rising to $87 a share, and then $89. Traders raced through their screens trying to determine what had been responsible for the lift and discovered that the Financial Services Authority in the U.K. had announced a thirty-day ban on short selling twenty-nine financial stocks, including Goldman Sachs. It was exactly what Blankfein and Mack had tried to persuade the SEC’s Christopher Cox to do.

The squawk boxes on Goldman’s trading floor soon crackled to attention. A young trader found a copy of “The Star-Spangled Banner” on the Internet and broadcast it over the speakers to commemorate the moment. About three dozen traders stood up from their desks, placed their hands over their hearts, and sang aloud, accompanied by rounds of high fives and cheers. The market was turning around, and our flag was still there.

Nine minutes later word began to spread that Paulson, too, was working on something big. “Treasury, Fed Weighing Wider Plan to Ease Crisis, Schumer Says” a Bloomberg headline read, buoying the market further.

At exactly 3:01 p.m. the market took off. Traders all over Wall Street turned up the volume when Charlie Gasparino of CNBC reported what he was hearing from his sources on Wall Street: The federal government was preparing “some sort of RTC-like plan” that would “get some or all of the toxic waste off the balance sheets of the banks and brokerages.” Taking “RTC” as code for “everything’s going to be all right,” traders pushed stocks higher immediately. Between the time Gasparino began his report and the segment ended, the market jumped 108 points, a brief respite from the steady downward spiral.

At the Treasury, Paulson and Kashkari had been on a conference call with Geithner and Bernanke for the past hour, trying to decide on a path of least political resistance for shoring up the banks. Bernanke, who seemed bothered by the plan, was arguing in favor of direct capital injections, a measure that had worked in other countries.