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

Late Saturday afternoon, Colm Kelleher and Morgan Stanley’s deputy treasurer, Dave Russo, headed down to the NY Fed with their advisers, Ed Herlihy of Wachtell and Promontory’s Gene Ludwig, to present their application for bank holding company status.

In the thirteenth-floor reception area, two staffers approached them and asked, “Which of you is the CFO?”

“I am,” Kelleher said.

“You need to come with us by yourself.”

Kelleher mockingly bade farewell to his colleagues as he was escorted to a conference room where the New York Fed’s top leadership—William Rutledge, Bill Dudley, Terry Checki, and Christine M. Cumming—were assembled.

“Look,” Rutledge said, “if all else fails this weekend, will you agree to become a bank holding company?”

“What does that mean?” Kelleher asked, still somewhat unsure of the technicalities.

The benefits of a bank holding company were explained to him: Short-term financing would be available through the Fed’s discount window, provided Morgan Stanley established a sufficient deposit base and submitted to various regulations.

“Will you get your board to agree?” they asked Kelleher.

Kelleher now understood what this meeting meant: The Federal Reserve might be offering to save his firm. The tank might not reach empty after all. “Of course,” he replied.

Lloyd Blankfein, wearing slacks and a button-down shirt, was waiting in the Westchester County Airport parking lot when Bob Steel arrived. Always perfectly coiffed, Steel nonetheless looked as if he could use some sleep as he walked out of the terminal. He had already been awake for fifteen hours and his day was hardly done.

“What a birthday present!” Blankfein said to Steel brightly when he saw him. Blankfein, who turned fifty-four that day, was still hoping to get to a birthday dinner later that evening at Porter House New York, a steak restaurant, with his wife, Laura.

As they drove into the city they delicately began discussing the outlines of a deal and discussing their history together. Neither of them knew what to make of the merger idea or, for that matter, each other.

When they reached 85 Broad Street, Steel went directly to the thirtieth floor, where he used to spend a lot of his time. As he stepped into the conference room, he saw Chris Cole, who had been his firm’s adviser for the past five months. Now Cole would be on the other side, trying to buy Wachovia. Meanwhile, Steel’s own lawyer, Rodgin Cohen, was also Goldman’s lawyer. It had all become so confusing and rife with conflicts, but they all agreed that if they were going to do a deal, they’d have to reach an agreement by Monday morning.

Goldman’s biggest issue was, as it had been with Morgan Stanley, trying to determine the scope of the hole. Wachovia owned $122 billion of pay option ARMs, which Goldman Sachs quickly felt wasn’t going to be worth much. They each agreed to put teams on it to work up the numbers; Steel said he’d have his group fly up by morning.

Before decamping for the night, Blankfein invited Steel back to his office. He wanted to talk about titles, perhaps the most sensitive issue for men who often measure themselves as much by their business cards as by their wallets.

Blankfein said he was thinking of making Steel one of three co-presidents, along with Gary Cohn and Jon Winkelried; Steel would continue to manage Wachovia as the consumer arm of Goldman Sachs.

Steel was taken aback and slightly offended. He was already the CEO of a major bank; he’d been a vice chairman of Goldman and a deputy Treasury secretary in Washington. And now he was being asked to become one of three co-presidents?

“I’m not sure I want to be at the same level with Gary and John,” he said diplomatically. “But we’ll figure this out.”

“Is Jamie trying to buy us?” Gary Lynch, Morgan’s general counsel, asked Mack in the corridor outside his office.

“I don’t think so,” Mack said, explaining that they were simply negotiating with JP Morgan to extend a credit line to the firm. “Why do you ask?”

“Well, something strange is going on, then,” Lynch replied.

Lynch related that an outside lawyer for Morgan Stanley’s independent board members, Faiza J. Saeed, a partner at Cravath, had just informed him that JP Morgan had called a Cravath colleague seeking to hire her to work on a deal for Morgan Stanley. She had been a little vague, but she wanted him to clear the conflict, Lynch explained.

“Wow,” Mack said.

“Yeah, this is a nice way of sending a message.”

As dusk was setting, Hank Paulson was still in his office and had just gotten off the phone with Geithner. The news was not promising. Geithner told him that Morgan Stanley had no plan apart from what he called the “naked” bank holding company scenario. Geithner said he was uncertain whether any investor—JP Morgan, Citigroup, the Chinese, or the Japanese—would come through. And he was skeptical of the Goldman-Wachovia deal.

“We’re running out of options,” he told Paulson.

Paulson, who had been living on barely three hours of sleep a night for a week, was beginning to feel nauseated. Watching the financial industry crumble in front of his eyes—the world he had inhabited his entire career—was getting to him. For a moment, he felt light-headed.

From outside his office, his staff could hear him vomit.

Saturday night, John Mack returned to his Upper East Side apartment, still nursing a persistent cold he couldn’t shake. His wife, Christy, who had driven into the city from Rye to console him, was waiting up.

He was quieter than usual, wondering yet again how he would manage to raise billions of dollars in capital in only twenty-four hours. “You know, there’s a chance I could lose the firm,” he said, a sense of despair in his voice.

He needed some air, he told Christy, and decided to go on a walk. As he roamed up Madison Avenue, he realized that his entire adult life, his entire professional career was on the line. He had been in battles before—his losing fight with the firm’s former CEO, Philip J. Purcell, had been a notable one—but never anything like what he faced now. But this was not just about his personal survival; it was about the fifty thousand people around the globe who worked for him, and for whom he felt a keen sense of responsibility. Images of Lehman employees streaming out of their building the previous Sunday night carrying boxes of their possessions still haunted him. He needed to buck himself up. Somehow, he was going to save Morgan Stanley.

When he stepped into his living room a few minutes later, he admitted to Christy with a grateful smile, “I’d rather be doing this than reading a book in North Carolina.”