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

“You are too, too calm,” she observed. “Are you taking Valium or something?”

Chammah had planned to go to Washington early on Saturday for a series of meetings with Mack and the G7 leaders, but decided to remain in New York throughout the morning in case there was any word from the Japanese. At noon, sufficiently satisfied that if they were going to drop the deal they would have contacted him by now, he headed to LaGuardia to hop a Delta shuttle. As he was walking down the Jetway, his cell phone went off. Oh, shit, Chammah thought , here it comes.

The call was indeed from Mitsubishi’s banker, but to Chammah’s surprise they reaffirmed their intention to go forward with the deal—but did add that they wished to renegotiate for more favorable terms that would give them preferred shares instead of common ones.

“Are you still prepared to close on Monday?” Chammah asked.

The answer was yes. A smile came over Chammah’s face. For a moment, the deal maker in him injected, “Is there a reason for $9 billion? Could it be larger?” In other words, he was asking if, since they were reopening the negotiations anyway, Mitsubishi would like to buy even more of the firm. But he knew he was getting ahead of himself.

Rob Kindler, who had flown to Cape Cod, had just sent an e-mail to Ji-Yeun Lee back at the office. “Is all quiet?” he asked.

Two minutes later, he got the reply: “It was until an hour ago. Call me.”

Kindler flew back to New York as Chammah and Taubman rounded up the troops. It was imperative that they find a way to close this deal by Monday.

By Sunday, they had revised terms—the deal had become more expensive for Morgan Stanley, but they were just happy to still have an investor. Mitsubishi would buy $7.8 billion of convertible preferred stock with a 10 percent dividend and $1.2 billion of nonconvertible preferred stock with a 10 percent dividend.

There remained one complicating factor: Monday was Columbus Day, and since banks in both the United States and Japan were closed, a normal wire transfer was not possible.

“How the fuck are we going to get this thing done?” Kindler, now back at headquarters, asked aloud.

Taubman had a thought: “They could write us a check,” he said. Taubman had never heard of anyone writing a $9 billion check, but, he imagined, given the state of the world, anything was possible.

At 10:00 on Sunday morning, October 12, Hank Paulson, dressed casually, took his place at the table in the large conference room across from his office. The room was overflowing with the government’s top financial officials and regulators. Ben Bernanke had arrived, as had Sheila Bair. Tim Geithner had flown down the day before to join the group. John Dugan, the comptroller of the currency, was present, as was Joel Kaplan, deputy chief of staff for policy at the White House. Paulson’s inner circle—including Nason, Jester, Kashkari, Davis, Wilkinson, Ryan, Fromer, Norton, Wilson, and Hoyt—had also taken their seats, though some of them had to be “back-benched” in chairs against the walls, because there was no room for them around the table.

Paulson had called this meeting to coordinate the final details of a series of steps he had been working on to finally stabilize the system, and he wanted to go public with them. Sunday’s meeting was the second such gathering of this group; many of them had met the day before at 3:00 p.m. to sketch out the outlines of the plan.

The multipart plan—which included the Treasury, Federal Reserve, and FDIC—was, as Paulson described it even that day, “unthinkable.” Based on the work of Jester, Norton, and Nason, he wanted to forge ahead and invest $250 billion of the TARP funds into the banking system. The group had settled on the general terms: Banks that accepted the money would pay a 5 percent interest payment. Paulson had decided that if the amount was any higher, like the 10 percent cost that Buffett had charged Goldman, banks would be unlikely to participate. Still, the rate would eventually become more expensive, rising to 9 percent after the first five years.

Much of the debate about the program that morning was less about the numbers than the approach. “In the history of financial crisis in the U.S., you need to do three things: You need to harden the liabilities; you need to import equity; and you need to take out bad assets. This is one part of that plan,” Geithner said, to sell the group on the need for capital injections.

He had suggested that the only way to make the program palatable to the weakest banks would be if the strongest banks accepted the money as well, “to destigmatize” participation in the program, and perhaps even mask the problems of the most endangered firms. Not everyone was in agreement on this point. “Let’s not destroy the strong to convince the world that the weak aren’t so weak,” Bernanke commented. There was the issue of using the TARP money efficiently; if it was directed to otherwise healthy companies, that would mean less money would be available to those institutions that needed it most. Before the meeting Geithner had had a conversation on this same topic with Kevin Warsh, who told him the stigma argument was a red herring. “There’s no fooling these markets. You aren’t going to fool them into thinking that everybody is equally good, bad, or indifferent.”

Still, Geithner, along with Paulson, quickly prevailed on the group that the only way the program could become effective would be if they could persuade the biggest banks—banks like Goldman Sachs and Citigroup—to accept the money. As they started sketching out a list of firms they wanted to persuade to sign up on day one, with plans to invite them to Washington on Monday to propose that they accept the investment, a question was raised about whether they should make the program available to insurance companies. David Nason suggested they invite MetLife to be a charter TARP participant.

“How are we going to do that?” Geithner asked.

“Well, you regulate them, Tim,” Nason said, to knowing smiles in the room.

The debate about capital injections was playing out against the backdrop of Paulson’s own ongoing worries about the fate of Morgan Stanley. He had been back and forth on the phone with Mack, who he knew was trying to clinch a renegotiated deal. But he had also learned that the Japanese had reached out to the Federal Reserve, seeking assurances that the U.S. government wasn’t planning to come in and make an investment in Morgan Stanley after it did—fearing that if it did, it would wipe out all shareholders. When Warsh first called Geithner to tell him the news, his reaction was simple: “Fuck!” That afternoon they worked to write a letter to the Japanese government assuring them that Mitsubishi would not be negatively impacted any more than other shareholders by any future government intervention in the firm. Of course, Morgan Stanley was unaware of the government’s plans—or the extent of the back-channel conversations taking place between the governments to orchestrate the deal.

Perhaps the biggest fireworks that weekend concerned the one unresolved portion of the plan that Paulson was still hoping to announce: the FDIC guarantee of all current and future unsecured debts of the banks and bank holding companies. He and Bernanke had had lengthy discussions with Bair about the subject. At first, she had offered a compromise: The FDIC would provide the guarantee, but only to banks—not bank holding companies—which left firms like Goldman Sachs and Morgan Stanley still exposed. But Bair seemed to be coming around; Paulson had put the full-court press on her, at one point taking her aside in his office and telling her, “I’ll make sure you get the credit.” For her part, she thought Paulson was under enormous political pressure to put the program into place, in part because a number of European governments were putting together similar facilities. The guarantee would end up being perhaps the largest—though an often overlooked—part of the program. It put the government on the hook for potentially hundreds of billions, if not more, in liabilities, providing the ultimate safety net for the banking system.