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

But now, having just gotten off a conference call with Kevin Warsh and Jeff Lacker of the Federal Reserve of Richmond, which regulates Wachovia, he had a new problem: Despite Kovacevich’s indication to Steel just that morning that he wanted to reach an independent agreement, Kovacevich had called and stated that if he had to conclude the deal before Monday, he didn’t feel comfortable moving forward without government assistance. He was too unsure of the firm’s marks and couldn’t take the risk.

There was now within the government a de facto turf battle over Wachovia, given the involvement of Richmond, with Warsh and Geithner playing deal makers. And Sheila Bair at the FDIC had yet to take part: If Wachovia really were to fail, it would be her jurisdiction.

Geithner and Warsh set up a conference call to coordinate their efforts with Bair, the fifty-four-year-old chairwoman of the FDIC and one of their least favorite people in government. They had always regarded Bair as a showboat, a media grandstander, a politician in a regulator’s position whose only concern was to protect the FDIC, not the entire system. She was not, in their view, a team player. Geithner would frequently commiserate about Bair with Paulson, who shared a similar perspective about her. At times, Paulson had a genuine respect for her. “She comes to play,” he regularly said to his staff, but added, “When she is surrounded by her people, when she’s peacocking for other people or she’s worried about the press, then she’s going to be miserable.”

Bair, who had just ended a conversation with Warren Buffett (who she was hoping could help her track down Wells Fargo’s president, John Stumpf), joined a conference call late Sunday with Geithner, Warsh, and Treasury’s David Nason. Paulson, who was barred from talking to Steel, had tried to disentangle himself from this particular matter, expending his energy instead on TARP and receiving only irregular updates on the negotiation’s progress from Nason.

When Geithner suggested Bair should help subsidize any deal for Wachovia, she resisted the proposal firmly, stating in a lengthy soliloquy that the only way she would get involved was if she were to take over the bank completely and then sell it.

When she finished, there was an awkward silence. “Right, right, right,” Geithner said, almost mocking Bair.

Geithner countered that allowing the FDIC to take over Wachovia would have the effect of wiping out shareholders and bondholders, which he was convinced would only spook the markets. He was still furious with Bair for the way she had abruptly taken over Washington Mutual, which had had a deleterious effect on investor confidence. Given Paulson’s ongoing public efforts to support the banking system, he told her, that option was a nonstarter. Then Geithner, looking for another jar of money, asked Nason if Treasury could contribute to the effort, which could eventually amount to more than $100 billion.

“We’re still trying to get TARP passed,” Nason replied briskly. “We can’t be committing money.”

At 7:00 p.m., Bob Steel, waiting in a conference room at Sullivan & Cromwell’s Midtown offices, got a disturbing call from Kovacevich, who had been inexplicably out of touch for the past two hours and who had sounded oddly detached during their previous call.

Kovacevich now announced that he wasn’t prepared to move forward without government assistance. “We don’t make these kinds of loans, so we don’t understand them,” he explained. Steel, dumbfounded, thanked him, ended the call, and slumped down in his chair, wondering how he could have been rejected again. Citigroup was still on the sidelines, but he doubted they would raise their bid, especially if there was no competition. When he told his inner circle about the call with Kovacevich, he described it as “not an attractive fact.”

At around 8:00 p.m., Rodgin Cohen heard a rumor that Citigroup had been talking to the FDIC, which only led him to suspect that Citi was trying to orchestrate an FDIC takeover of Wachovia, one similar to the deal that JP Morgan had made for Washington Mutual. Furious, he rang Ned Kelly, upon whom Pandit relied for strategy. Only days before, Kelly had been appointed head of global banking for the bank’s institutional client business in a reshuffle that saw the departure of Sallie Krawcheck, who had once been one of the most powerful women on Wall Street.

“Okay, we need to talk,” Cohen began testily.

“Rodge, look, I wasn’t in touch with them, they just called me,” a defensive Kelly insisted. “I still have the same deal on the table.”

When Steel learned of their conversation he knew that he was, for all practical purposes, out of options, for Warsh had made it clear the bank couldn’t open Monday without a deal. In a last-ditch plea to remain independent, he called Sheila Bair at 12:30 a.m. with a proposal: Would the FDIC consider guaranteeing some of Wachovia’s most toxic assets in exchange for warrants in the bank?

At 4:00 a.m. Steel got the answer he had been dreading. Bair phoned to notify him that his bank had been sold to Citigroup by the government for $1 a share. The FDIC wouldn’t be completely wiping out shareholders, she said; she had succumbed to pressure from Geithner and agreed to guarantee Wachovia’s toxic assets after Citigroup accepted the first $42 billion of losses, declaring that the firm was “systemically important.”

Paulson stood alone in his office, watching the congressional coverage of his bailout bill on C-SPAN. After some additional compromise on Sunday, legislation had been drafted that was acceptable to all the parties and was now being put to a vote.

Pelosi, standing on the floor of the House, had just given an impassioned speech about the need to pass the bill, but had also used the moment as an opportunity to assail the Bush administration, Paulson, and Wall Street. “They claim to be free market advocates, when it’s really an anything-goes mentality,” she said of the Bush administration. “No regulation, no supervision, no discipline. And if you fail, you will have a golden parachute, and the taxpayer will bail you out… . The party is over in that respect. Democrats believe in a free market. We know that it can create jobs, it can create wealth, it can create many good things in our economy. But in this case, in its unbridled form, as encouraged, supported, by the Republicans—some in the Republican Party, not all—it has created not jobs, not capital; it has created chaos.”

Although a few members of Paulson’s staff were loitering nervously outside his office, afraid to go in, Michele Davis had no such qualms and joined him, the two of them intently following the tally of yeas and nays at the bottom of the screen. Paulson expected the bill to pass without a problem, as the markets had already priced in its approval. Five minutes into the allotted fifteen-minute voting window, however, the number of nay votes began to rise consistently. He knew that the measure was still very unpopular with House Republicans, as well as with a number of liberal Democrats, and lawmakers facing tight reelection races did not want to give their opponents any ammunition with just five weeks before election day. There was still time, however, for Pelosi and the Democratic leadership to turn the vote around.

“They wouldn’t have brought this bill to the floor if they didn’t think it could pass, if they didn’t have the votes lined up somewhere,” Davis reassured him. Paulson said nothing and only continued to stare at the screen as the margin of no votes grew wider and wider.