to the office of Harvey M. Schwartz, head of global securities division sales, who had a glass wall looking out to the trading floor. The door was left open; he wanted to see and hear exactly what was going on.
The Federal Reserve, along with the other central banks, had just announced plans to pump $180 billion to stimulate the financial system, but the scheme did not seem to be having any appreciable effect. Goldman’s shares opened down 7.4 percent. CNBC, which was airing on flat-screen TVs hanging from the walls of Goldman’s trading floor, had introduced a new “bug” on the bottom left-hand side of the screen that provocatively asked, “Is Your Money Safe?”
It was a question that Goldman clients were beginning to ask themselves. The firm’s own CDS spreads had blown out in a way the firm had never seen before, indicating that investors were quickly beginning to believe the unthinkable: that Goldman, too, could falter. In two days, Goldman’s stock had dropped from $133 to $108.
Every five minutes a salesman would tear into Schwartz’s office with news of another hedge fund announcing its plan to move its money out of Goldman and would hand Cohn a piece of paper with the hedge fund’s phone number so he could talk some sense into them. With Morgan Stanley slowing down its payouts, some investors were now testing Goldman, asking for $100 million just to see if they could afford to pay. In every case, Cohn would wire the money immediately, concerned that if he didn’t, the client would abandon the firm entirely.
The good news for Goldman was that withdrawals were only slightly outpacing inflows. To some extent it had been able to capitalize on the distress of others, as hedge funds needed to execute their trades
On the other hand, Stanley Druckenmiller, a George Soros acolyte worth more than $3.5 billion, had taken most of his money out earlier that week, concerned about the firm’s solvency. If word got around that a hedge fund manager of Druckenmiller’s reputation had lost confidence in Goldman, it alone could cause a run. Cohn called him and tried to convince him to return the money to the firm. “I have a long memory,” Cohn, who was taking this personally, told Druckenmiller, for whom he had even hosted a charity cocktail party in Druckenmiller’s honor in his own apartment. “Look, the one thing I’m doing is I’m learning who my friends are and who my enemies are, and I’m making lists.”
Druckenmiller, however, was unmoved. “I don’t really give a shit; it’s my money,” he shot back. Unlike most hedge funds, Druckenmiller’s did consist primarily of his own money. “It’s my livelihood,” he said. “I’ve got to protect myself and I don’t really give a shit what you have to say.”
“You can do whatever you want,” Cohn said in carefully measured tones. But, he added, “this will change our relationship for a long time.”
Half an hour before David Carroll and the Wachovia team were due to arrive at Morgan Stanley, Kindler called down to Scully. Kindler was in his office, peering out his window down at the camera crews camped outside the building.
“Why are we having him meet us here, of all places?” Kindler asked. “There’s reporters outside.”
“Don’t worry. It’ll be fine,” Scully, who took the precaution of sneaking Carroll in via the employee entrance on Forty-eighth Street, assured him.
Kindler’s sole objective was to get his hands on Wachovia’s mortgage book so that he could crack the tape— Wall Street-speak for examining the mortgages individually. That was the only way he could really understand Wachovia’s real value. This was no small undertaking: The tape contained $125 billion of loans, including all manner of bespoke adjustable rates, like “pick a pay,” which gave borrowers a variety of choices each month on how—and even how much—to pay. Among the options was a payment that covered only the interest on the loan.
Morgan Stanley also insisted on seeing Wachovia’s business plan, but Carroll balked at that request. “Our general counsel says it’s a real problem,” he said.
Kindler, convinced that Wachovia was trying to hide something, called Morgan’s general counsel, Gary Lynch, in a rage and told him to put the screws to his counterpart at Wachovia, Jane Sherburne.
“It’s a big legal issue,” she explained. “We can’t give over the data without disclosing it in the merger agreement if we do the deal.”
Lynch, too, was starting to suspect a problem.
Sherburne relented.
Lloyd Blankfein, his top shirt button undone and tie slightly askew, looked at his computer screen and saw in dismay that his stock price had dropped 22 percent to $89.29. Blankfein, who up until now had resisted pushing back against short-sellers, was becoming convinced that the pressure his stock was under was not an accident. He had just ended a call with Christopher Cox in which he had told the SEC chairman, “This is getting to be intentional. You know, you may need to do something here.”
In his e-mail in-box was another message from one of his traders saying that JP Morgan was trying to steal his hedge fund clients by telling everyone that Goldman was going under. It was becoming a vicious circle.
Blank fein had been hearing these rumors for the past twenty-four hours, but he had finally had enough. He was furious. The rumormongering, he felt, had gotten out of control. And he couldn’t believe JP Morgan was trashing his firm to his own clients. He could feel himself becoming as anxious as Mack had sounded when they spoke the day before.
He called Dimon. “We’ve got to talk,” Blankfein began as he tried to calmly explain his problem. “I’m not saying you’re doing it, but there are a lot of footprints here.”
“Well, people may be doing something that I don’t know about,” Dimon replied. “But they know what I’ve said, which is that we’re not going after our competitors in the middle of all this.”
Blankfein, however, wasn’t buying his explanation. “But, Jamie, if they’re still doing it, you can’t be telling them not to!” Trying to get his point across, Blankfein, a movie buff, started doing his own rendition of
“Jamie, the point is, I don’t think you’re telling them to do this, but if you wanted to stop them in your organization, you could scare them into not doing it,” Blankfein said.
Even in its panicked state, Goldman was still Goldman, and Dimon didn’t want a war. Within half an hour he had Steve Black and Bill Winters, co-chief executives of JP Morgan’s investment bank, send out a companywide e-
