you were putting on Ben.”
Paulson just smiled. “Maybe Ben will get there.”
Lloyd Blankfein had not been mollified by the market’s late turnaround, with Goldman’s stock ending the day up at $108, which was still better from its low of $86.31. In his office were Gary Cohn; David Viniar, the firm’s CFO; Jon Winkelried, the co-president; John Rogers; and David Solomon. He knew that until Morgan Stanley fell, Goldman was probably safe, though that was hardly a comfort.
Gary Cohn had been on the phone earlier in the day with Kevin Warsh of the Federal Reserve, brainstorming a way to get in front of the financial tsunami. Warsh threw out the idea that perhaps Goldman should be looking to merge with Citigroup, a fit that could solve major problems for both parties. Goldman could get a huge deposit base, while Citigroup would acquire a management team that investors could support.
Cohn had expressed his doubts about the suggestions. “It probably doesn’t work because I could never buy their balance sheet,” he explained. “And the social issues would be enormous.” The expression “social issues” was yet another Wall Street code for who would run the firm. Goldman’s management didn’t exactly have high regard for Pandit and his team.
“Don’t worry about the social issues,” Warsh told him. “We’ll take care of them.”
That was a not so subtle hint that if a deal was struck, Pandit might be out of a job.
But Blankfein wasn’t particularly interested in either alternative. Rodgin Cohen had been encouraging Goldman to think about transforming the firm into a regulated bank holding company, which JP Morgan and Citigroup were, giving them unlimited access to the Fed’s discount window. It was the same idea that Cohen had unsuccessfully pressed Geithner to consider for Lehman Brothers over the summer, and while Geithner had turned that proposal down, Cohen had become convinced that he might now rule differently given the grave state of the markets.
The notion of becoming a bank holding company had arisen at Goldman from time to time over the years, most recently at their board summer meeting in Russia, where they had discussed the necessity of holding more deposits. Blankfein appreciated that Goldman’s dependence on even a modicum of short-term financing made investors, in this highly charged environment, anxious, and that a deposit base provided a more stable source of capital. Blankfein had always resisted the idea, however, because it came with a hefty price tag in the form of increased regulatory oversight. But these were extraordinary circumstances, to say the least, and the CEO sensed that the world might be moving inexorably in that direction. Given that the bank already had temporary access to the Fed discount window, and that the Fed had literally placed several staffers inside Goldman to monitor the firm, Blankfein started to believe that the prospect of a little extra government regulation didn’t seem particularly onerous.
“This is only going to work if you scare the shit out of them.”
That had been Jim Wilkinson’s advice to Paulson before he and Bernanke left to meet with the congressional leadership at Nancy Pelosi’s office that evening. By Wilkinson’s reckoning, unless they could convince Congress that the world was literally going to come to an end, they would never receive approval for a $500 billion bailout package for Wall Street. Republicans would complain it was socialism; Democrats would carp about rescuing white-collar fat cats.
At a burled wood table just off Pelosi’s office, two dozen congressmen gathered to meet with Paulson, Bernanke, and Christopher Cox, who had been invited more as a courtesy than anything else.
Pelosi began the meeting by welcoming them and thanking them for coming “on such short notice.”
Bernanke, who was known never to exaggerate, began by saying gravely, “I spent my career as an academic studying great depressions. I can tell you from history that if we don’t act in a big way, you can expect another great depression, and this time it is going to be far, far worse.”
Senator Charles Schumer, sitting at the end of the table, noticeably gulped.
Paulson, with a deep sense of intensity, went on to explain the mechanics of his proposal: The government would buy the toxic assets to get them off the banks’ books, which in turn would raise the value of the assets by establishing a price and make the banks healthier, which in turn would help the economy and, as Paulson repeatedly said, “help Main Street.”
Barney Frank, sitting next to Bernanke, thought Paulson’s reference to “Main Street” was a disingenuous ploy to line the pockets of Wall Street and provided no direct help for average Americans saddled with mortgages they can’t afford, foisted on them by the big banks being rescued. “What about the home owner?” he asked. “You aren’t selling this plan to a Wall Street boardroom,” he said derisively. “That’s right,” Christopher Dodd chimed in. Richard Shelby disapprovingly characterized the proposed program as a “blank check.”
Paulson said he understood their concerns. But he continued to play his “scare the shit out of them” card, insisting that it was absolutely necessary: “I don’t want to think about what will happen if we don’t do this.” He said he hoped that Congress could pass the legislation within days and promised to get a full proposal to them literally within hours.
“If it doesn’t pass, then heaven help us all,” Paulson said.
Harry Reid, sitting across from Bernanke, looked at Paulson with a sense of bemusement about the prospect that Congress would pass a bill of this magnitude that quickly. “Do you know what you are asking me to do?” he said. “It takes me forty-eight hours to get the Republicans to agree to flush the toilets around here.”
“Harry,” Mitch McConnell (R-Kentucky), who was deeply frightened by Paulson and Bernanke’s presentation, interjected, “I think we need to do this, we should try to do this, and we can do this.”
John Mack was still at his office in Times Square when Tom Nides, his chief administrative officer, told him the good news: His sources at the SEC had confirmed that the agency was preparing to finally put in place a ban on shorting financial stocks, affecting some 799 different companies. The measure would likely be announced the following morning.
Rumors of the pending action were already moving on the wires. James Chanos, perhaps the best known of the short-sellers, who had pulled his money from Morgan Stanley because of Mack’s support for the ban, was already on the warpath. “While this is all politically pleasing to the regulatory powers that be, the fact of the matter is that there has been no evidence presented of short-sellers circulating false market rumors to drive down the price of stocks,” he said.
That day, Morgan Stanley’s stock had fallen 46 percent, only to turn around in the last hours of trading, ending up 3.7 percent, or 80 cents. Between word of the government’s intervention and the short-selling ban, Mack was
