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We do not want anyone at JP Morgan capitalizing on the irrational behavior that’s going on in the market toward some of the U.S. broker-dealers. We are operating as business as usual with Morgan Stanley and Goldman Sachs as counterparties. While they are both formidable competitors, during this period, we do not want anyone approaching their clients or employees in a predatory way. We want to do everything possible to remain supportive of their business and not do anything that would impact them negatively.
We do not believe anyone has engaged in any inappropriate behavior, but we want to underscore how important it is to be constructive during this time. What is happening to the broker-dealer model is not rational, and not good for JP Morgan, the global financial system or the country.
Around midday, Hank Paulson reviewed the latest term sheet that his staff had drafted overnight on the issue of dealing with toxic assets, hoping it would be acceptable to present to Congress. His inner circle had assembled in his office, pulling up chairs around a corner sofa.
“It looks much better,” he said, turning the pages. “It’s very simple.” He paused and scanned the bleary-eyed faces in the room. “I want to reiterate that we have to get this up to the Hill quickly,” he said. “We need to keep this simple, very simple. And we have to do it in a way that we encourage, ah, banks and financial institutions to want to participate. We don’t want to have punitive measures with this. This is about recapitalizing our banks and financial institutions setting a price for assets.”
There was just one more issue to deal with, perhaps the most important of all: the price tag.
While the toxic-asset program made sense in theory, for it actually to work, for it to be effective, Paulson knew they’d need to buy large swaths of toxic securities from the nation’s largest banks. The cost was going to be enormous, and it would be perceived, both within and outside of the Washington Beltway, as another bailout.
Paulson looked to Kashkari, who sat on the sofa to his left, for guidance.
The key concern at that moment was whether spending so much money would require them to have to ask Congress to increase the debt ceiling—a political flashpoint that would require Congress to vote to raise the amount of debt the country could take on. It had just increased that amount to $10.615 trillion in July.
As the group discussed the outlines of the proposed legislation, Kashkari’s view was that they ought to try to skirt the issue entirely. “I don’t know if that’s workable, not having a reference to the debt ceiling. Or why don’t we just say it’s not subject to a debt ceiling?”
“You can’t do that,” Paulson pointed out and then added, “I don’t want to go for the debt ceiling and fail. That’s the issue, and then people start focusing on it.”
“I did the analysis,” Phillip Swagel offered, reading from his notes. He had determined that they would need only $500 billion, but only if the situation didn’t grow any worse.
To Paulson, who thought of himself as fiscally conservative, the answer was obvious. “Okay, so I think the responsible thing is to go for the debt ceiling,” he said, instructing Kevin I. Fromer, assistant secretary for legislative affairs, whose job it was to work the Hill, to construct some new language.
“You can go after it but you don’t have to put it in this document,” Fromer replied, resisting Paulson’s request. “We never go up and propose legislation to do the debt ceiling. We just simply arrive at the fact that we have to do it and literally tell Congress they have to do it. They do it because they’re too scared not to do it. It’s just a question of optics.”
They decided that, for the time being, they wouldn’t mention the debt ceiling in the document itself but would address it later, ideally when Congress had already bought into the plan and it was too late to make a change.
Before wrapping up the meeting, Paulson raised one last problem: Wachovia, he said, might falter. He was getting back-channel messages from Kevin Warsh that the bank’s finances were in much worse shape than they believed. Everyone understood the significance of his statement. After all, Bob Steel, their former colleague, was its CEO.
“If Wachovia fails, I’m going to be trotting up to Congress again. So I’m hoping it happens after January!” he said to a roomful of laughs.
“Listen, Jamie just called me fishing around for something,” Colm Kelleher told John Mack midday Thursday as he marched into his office. “He said he was calling to see if he could be of help,” Kelleher added. “It was strange.”
James Gorman, the firm’s co-president, had just reported receiving a similar call, Mack replied, and Geithner had phoned earlier to suggest that he talk to Dimon as a possible merger partner too.
“It’s clear that for him to be calling us, he wants to do a deal,” Kelleher said. “Jamie is always hanging around the hoop. You know Jamie’s saying, ‘Let’s make friends with these guys before I eat them.’”
Mack was irritated by these suggestions; he didn’t particularly want to do a deal with Dimon, as he believed it would involve far too much overlap. But he decided to stop guessing what Dimon might be up to and ask him directly.
“Jamie, Geithner says I should call you,” Mack said abruptly when he reached Dimon on the phone a few minutes later. “Let’s get this out in the open: Do you want to do a deal?”
“No, I don’t want to do a deal,” Dimon said flatly, frustrated that this was the second call he had gotten that day from a competitor who was annoyed with him.
“Well, that’s interesting,” Mack retorted. “You’re calling my CFO and you’re calling my president, why would you do that?”
“I was trying to be helpful,” Dimon repeated.
“If you want to be helpful, then talk to me. I don’t want you calling my guys,” Mack said, hanging up the phone.
The fiftieth floor of Goldman’s fixed-income trading unit was in near meltdown by lunchtime on Thursday. No trading was taking place, and the traders themselves were glued to their terminals, staring at the GS ticker as the market continued its swoon. Goldman’s stock dropped to $85.88, its lowest level in nearly six years; the Dow had fallen 150 points. “The market is trading under the assumption that every financial institution is going under,” Michael Petroff, portfolio manager for Heartland Advisors, told Agence France-Presse that morning. “It’s now emotional.”
