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

At a burled wood table just off Pelosi’s office, two dozen congressmen gathered to meet with Paulson, Bernanke, and Christopher Cox, who had been invited more as a courtesy than anything else.

Pelosi began the meeting by welcoming them and thanking them for coming “on such short notice.”

Bernanke, who was known never to exaggerate, began by saying gravely, “I spent my career as an academic studying great depressions. I can tell you from history that if we don’t act in a big way, you can expect another great depression, and this time it is going to be far, far worse.”

Senator Charles Schumer, sitting at the end of the table, noticeably gulped.

Paulson, with a deep sense of intensity, went on to explain the mechanics of his proposal: The government would buy the toxic assets to get them off the banks’ books, which in turn would raise the value of the assets by establishing a price and make the banks healthier, which in turn would help the economy and, as Paulson repeatedly said, “help Main Street.”

Barney Frank, sitting next to Bernanke, thought Paulson’s reference to “Main Street” was a disingenuous ploy to line the pockets of Wall Street and provided no direct help for average Americans saddled with mortgages they can’t afford, foisted on them by the big banks being rescued. “What about the home owner?” he asked. “You aren’t selling this plan to a Wall Street boardroom,” he said derisively. “That’s right,” Christopher Dodd chimed in. Richard Shelby disapprovingly characterized the proposed program as a “blank check.”

Paulson said he understood their concerns. But he continued to play his “scare the shit out of them” card, insisting that it was absolutely necessary: “I don’t want to think about what will happen if we don’t do this.” He said he hoped that Congress could pass the legislation within days and promised to get a full proposal to them literally within hours.

“If it doesn’t pass, then heaven help us all,” Paulson said.

Harry Reid, sitting across from Bernanke, looked at Paulson with a sense of bemusement about the prospect that Congress would pass a bill of this magnitude that quickly. “Do you know what you are asking me to do?” he said. “It takes me forty-eight hours to get the Republicans to agree to flush the toilets around here.”

“Harry,” Mitch McConnell (R-Kentucky), who was deeply frightened by Paulson and Bernanke’s presentation, interjected, “I think we need to do this, we should try to do this, and we can do this.”

John Mack was still at his office in Times Square when Tom Nides, his chief administrative officer, told him the good news: His sources at the SEC had confirmed that the agency was preparing to finally put in place a ban on shorting financial stocks, affecting some 799 different companies. The measure would likely be announced the following morning.

Rumors of the pending action were already moving on the wires. James Chanos, perhaps the best known of the short-sellers, who had pulled his money from Morgan Stanley because of Mack’s support for the ban, was already on the warpath. “While this is all politically pleasing to the regulatory powers that be, the fact of the matter is that there has been no evidence presented of short-sellers circulating false market rumors to drive down the price of stocks,” he said.

That day, Morgan Stanley’s stock had fallen 46 percent, only to turn around in the last hours of trading, ending up 3.7 percent, or 80 cents. Between word of the government’s intervention and the short-selling ban, Mack was hoping that he’d finally have some breathing room.

He knew, though, that beneath the surface the firm was hurting. Hedge funds continued to seek redemptions. Other banks were buying insurance against Morgan Stanley’s going under, covering more than $1 billion. Within the past two days, Merrill Lynch had bought insurance covering $150 million in Morgan debt. Citigroup, Deutsche Bank, UBS, Alliance-Bernstein, and Royal Bank of Canada had all made similar moves to protect themselves from a collapse.

Mack knew that what the firm needed most was an investor to step up and take a big stake in the company to shore it up. “I don’t know how this happened,” he confided in Nides, searching himself. Morgan Stanley had been considered too conservative and Mack pushed the firm to take on more risk at exactly the wrong moment. And now here they were, in the perfect storm, on the cusp of insolvency.

Mack could think of only one investor who might be seriously interested in making a sizable investment in the firm: China Investment Corporation, China’s first sovereign wealth fund. Wei Sun Christianson, CEO of Morgan Stanley China and a fifty-one-year-old dynamo with close relationships throughout the government, had initiated discussions with Gao Xiqing, president of CIC, within the past twenty-four hours. She happened to be in Aspen at a conference with him hosted by Teddy Forstmann, the leveraged buyout king who coined the phrase “Barbarians at the Gate” in the late 1980s, during the bidding war for RJR Nabisco. CIC already held a 9.9 percent stake in Morgan Stanley, and Gao indicated to Christianson that he’d be interested in buying up to 49 percent of the firm. Gao had a major incentive to keep Morgan Stanley alive: He had invested $5 billion in the firm in December 2007, which was now worth half that. Another one of his major investments, in Blackstone Group’s IPO, was down more than 70 percent. If Morgan Stanley filed for bankruptcy, he might lose his job.

Mack and Nides discussed the deal, and while neither man was particularly interested, given their choices, they knew it might prove to be the only solution. Gao, whom Mack had come to know as a fellow Duke trustee, was planning to fly to New York Friday night to meet with them.

Earlier in the day, Mack had spoken with Paulson, who prided himself on his extensive Chinese contacts, trying to persuade him to make a call to the Chinese government to encourage them to pursue the deal. It was a tad unusual to ask the government to serve as a broker, but Mack was desperate. “The Chinese need to feel as if they are being invited in,” Mack explained. Paulson said he’d work on it and see if President Bush would be willing to call China’s president, Hu Jintao. “We need an independent Morgan Stanley,” he affirmed.

Nides, however, had a more cynical view of Paulson’s desire to protect Morgan Stanley. “He’ll keep us alive,” Nides told Mack, “because if he doesn’t, then Goldman will go.”

CHAPTER EIGHTEEN

Hoarse and a little haggard, Paulson made his way to the podium in the press room of the Treasury Building the morning of Friday, September 19, 2008, to formally announce and clarify what he had dubbed earlier that morning the Troubled Asset Relief Program, soon known as TARP, a vast series of guarantees and outright purchases of “the illiquid assets that are weighing down our financial system and threatening our economy.”

He also announced an expansive plan to guarantee all money market funds in the nation for the next year, hoping that that move would keep investors from fleeing them. But he had already gotten an earful that morning about that effort from Sheila Bair, chairwoman of the FDIC, who had called, furious she wasn’t consulted and anxious that the guarantee plan would backfire and investors would perversely start moving their money out of otherwise healthy banks and into the guaranteed money market funds. Paulson just shook his head; he couldn’t win.