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

“John’s holding on to a slim reed,” Paulson had told Geithner about John Mack’s perilous position on a phone call the night before. They had heard that Morgan Stanley had only about $30 to $40 billion left, but Paulson was also still anxious about Goldman Sachs, his former employer. “We’ve got to find a lifeline for these guys,” said Paulson, and they reviewed the possible options.

On a pad that morning, Geithner started writing out various merger permutations: Morgan Stanley and Citigroup. Morgan Stanley and JP Morgan Chase. Morgan Stanley and Mitsubishi. Morgan Stanley and CIC. Morgan Stanley and Outside Investor. Goldman Sachs and Citigroup. Goldman Sachs and Wachovia. Goldman Sachs and Outside Investor. Fortress Goldman. Fortress Morgan Stanley.

It was the ultimate Wall Street chessboard.

Lloyd Blankfein arrived at his office at just past 7:00 on Saturday morning. Even though he was still pushing his “Fortress Goldman” bank holding plan, he and Gary Cohn had assigned more than a half dozen teams to start investigating different deals: HSBC, UBS, Wells Fargo, Wachovia, Citigroup, Sumitomo, and Industrial and Commercial Bank of China.

Cohn had had another conversation on Friday with Kevin Warsh of the Federal Reserve who encouraged him to keep looking at merger options, especially at Citigroup. While it had never been made public, Goldman had explored the idea of merging with Citigroup several times over the past eighteen months but had never engaged in formal talks. Cohn and Warsh had discussed the possibility at least twice before, and even though Cohn always resisted the idea, he was intrigued.

Initially Cohn’s notion was that Citi should buy Goldman; he had even established an asking price. But Warsh suggested that Cohn approach it the other way around: Goldman should be the buyer. To Cohn that made no sense given that Citi was so much bigger. But what Warsh knew—and hadn’t yet shared with Cohn—was that Citigroup’s balance sheet had so many holes that its value was likely a lot lower than its current stock price.

As a result, the Fed was considering three possible outcomes for Citi, code-named “NewCo,” “Goldman Survivors,” and “Citi Survivors.”

Blankfein was reading an e-mail when John Rogers, the firm’s chief of staff, arrived. Blankfein pressed a secret button under his desk to open remotely the glass door to his office. (Paulson had installed the Inspector Gadget-like device when he was Goldman’s CEO.)

As he and Rogers were reviewing their own battle plans, Geithner called. In his usual impatient tone, he insisted that Blankfein immediately call Vikram Pandit, Citigroup’s CEO, and begin merger discussions. Blankfein, slightly shocked at the directness of the request, agreed to place the call.

“Well, I guess you know why I’m calling,” Blankfein said when he reached Pandit a few minutes later.

“No, I don’t,” Pandit replied, with genuine puzzlement.

There was an awkward pause on the phone. Blankfein had assumed that the Fed had prearranged the call. “Well, I’m calling you because at least some people in the world might be thinking that combining our firms would be a good idea,” he said.

After another few moments of uncomfortable silence Pandit finally replied, “I want you to know I’m flattered by this call.”

Blankfein now began to wonder if Pandit was putting him on. “Well, Vikram,” he said briskly, “I’m not calling with any flattery towards you in mind.”

Pandit hurriedly ended the call: “I’ll have to talk to my board. I’ll call you back.”

Blankfein hung up and looked up at Rogers. “Well, that was embarrassing. He had no idea what I was talking about!” From Blankfein’s perspective, he had done what he was asked to do, only to be shown up.

Blankfein phoned Geithner back immediately. “I just called Vikram,” he said testily. “As I think about it, you never told me whether Vikram was expecting a call, but I inferred it. He behaved as if he wasn’t expecting the call and he convinced me that he wasn’t expecting the call.”

Geithner had miscalculated—could Pandit not see the gift that was being handed to him? It defied all reason. But Geithner had no time to deal with anybody’s injured feelings. “Okay, I’ll talk to you later,” he said before hanging up. Blankfein sat there, wondering what the hell had just happened.

Alan Greenspan and his wife, Andrea Mitchell, the NBC News journalist, were mingling in the crowd outside the grand ballroom at the St. Regis Aspen Resort on Saturday morning, the second day of Teddy Forstmann’s weekend conference. They were all waiting for the next panel to begin, entitled “Crisis on Wall Street: What’s Next?” By Wall Street standards it was a star-studded event: The panelists included Larry Summers, the former Treasury secretary; Mohamed El-Erian, CEO of PIMCO, whose book When Markets Collide had just been published; CNBC’s conservative talk-show host Larry Kudlow; and perhaps the most intriguing, Bob Steel of Wachovia. Steel, who had considered canceling, had flown into Aspen that morning, leaving his home at 4:00 a.m. to arrive on time.

By the time the moderator, Charlie Rose, got to the Q&A portion of the panel, however, Steel was nervously checking his watch. Greenspan had entered a debate about the controversies of mark-to-market accounting, but Steel knew he had to get back to the East Coast immediately. The moment the panel ended, he tried to bolt out of the room but on the way out encountered Richard Kovacevich, the chairman of Wells Fargo, someone he thought could be a merger partner.

“I was going to call you next week,” Steel told him.

“Yes, I wanted to catch up,” Kovacevich replied.

“I’m running back to the airport. I’ll call you,” Steel promised.

Jumping into his black Jeep Wrangler on the way to the airport, he finally had a minute to check his BlackBerry and discovered that Kevin Warsh had sent him several e-mails urging him to contact him immediately.

“Listen, I have a call for you to make,” Warsh told Steel when he finally reached him. “We think you should connect with Lloyd!”

Steel, reading between the lines, was stunned: The government was trying to orchestrate a merger between Goldman Sachs and Wachovia! On its face, he knew that it could be a politically explosive deal, considering the two firms’ connections to Treasury. Paulson, he imagined, must be involved somehow. But, of course, Paulson wasn’t allowed to contact him directly. Steel was immediately anxious about the idea. If Goldman had really wanted to buy Wachovia, he thought, it would have done so long ago. After all, up until this week when he spoke to Mack, Goldman had been on Wachovia’s payroll as its adviser, and as such, knew every aspect of its internal numbers. So, if there was a bargain to be had, then Goldman hadn’t seen it. Still, Steel saw the merits in such a deal, and if it was being encouraged by the Federal Reserve, he imagined it might just happen.

“I spoke to Kevin, and he said to give you a call,” Steel began when he got through to Blankfein.

This call, unlike the Citibank fiasco, had been prewired. “Yes, I know,” Blankfein said. “We’d be interested in putting a deal together.”

Steel told Blankfein he was about to step onto Wachovia’s corporate jet and could be in New York by late that afternoon.