before the Federal Reserve would step in and guarantee the next $29 billion—the government might well consider acting as a backstop.
As several of Wachovia’s board members milled about a Goldman conference room, waiting to get some feedback on the deal from Steel, Joseph Neubauer, the chairman and chief executive officer of ARAMARK Holdings Corporation, looked down at his cell phone, which was buzzing. It was Paulson.
Neubauer knew Paulson well; Goldman had been ARAMARK’s banker, taking it public and private a handful of times and making Neubauer—and the firm—millions of dollars. But Neubauer felt this was a risky call. Paulson, he thought, was not supposed to involve himself with anything related to Wachovia or Goldman, and here he was phoning him in the midst of perhaps the most transformative transaction either might ever pursue. Paulson had phoned Neubauer the day before to gauge whether a deal would ever be workable, but that had just seemed like an exploratory call. Now they were in the heat of negotiations. Paulson justified making the call because he wasn’t speaking directly with Steel, but Neubauer worried that in practical terms it seemed like a meaningless distinction.
“This is not just about Goldman Sachs,” Paulson told him. “I’m concerned about Wachovia. Aren’t you concerned?”
Paulson hadn’t told Neubauer that he had received an ethics waiver to get involved with matters relating to Goldman. Instead, he just continued to press him to take the Goldman bid seriously, worried that Wachovia’s board did not appreciate the severity of the situation in the world economy. “I think there should be a sense of urgency,” Paulson instructed him.
When Neubauer put the phone down, he looked up at the other board members.
“You’re not going to believe this. That was Hank.”
He didn’t need to explain to the directors why the call was so surreal. To many in the room, the Treasury secretary had just ordered them to merge with Goldman.
At Treasury, Jim Wilkinson, Paulson’s chief of staff, was by now practically sleepwalking down the halls. Paulson had just updated him on the Goldman-Wachovia talks and asked him for his counsel. Should the government provide assistance? Wilkinson, in his stupor, said he thought that it sounded like a reasonable idea.
But a half hour later, after a cup of coffee and further reflection, Wilkinson changed his mind. He realized that such a deal would be a public relations nightmare at the worst possible time, just as they were trying to pass TARP. Paulson would lose all credibility; he would be accused of lining the pockets of his friends at Goldman; the “Government Sachs” conspiracy theories would flourish.
Wilkinson ran back into Paulson’s office with Michele Davis.
“Hank, if you do this, you’ll get killed,” Wilkinson said frantically. “It would be fucking crazy.”
Ben Bernanke was being piped in over the Polycom speakerphone in Geithner’s conference room, where Jester and Norton from Treasury and Terry Checki, Meg McConnell, and William Dudley from the New York Fed were gathered around a conference table.
Warsh was reviewing the new terms of the Goldman-Wachovia agreement. Steel and Cohn had come back to him with a slight revision to the previous proposal, allowing for Goldman Sachs to take the first $1 billion of losses, per Warsh’s suggestion. Cohn and Steel said they were committed to completing the deal that afternoon if the government would agree to provide assistance. The boards of both companies had been put on standby.
The general view in the room seemed to be that it was a good transaction: It would give Goldman a stable deposit base at the same time it provided Wachovia with a powerful investment bank and top-notch management.
But Geithner was quick to point out its drawbacks. “Does it make Goldman look weaker than they are?” he asked—the same question that Blankfein had raised earlier in the day. Geithner also wondered whether the Fed should be the one loaning the money. Since Wachovia’s regulator was the FDIC, perhaps it ought to be the one to bear that burden.
Checki couldn’t believe the gall of Goldman’s request. “They’re still driving these negotiations as though they have leverage,” he said. But he opposed the merger for a different reason: He was concerned that neither side had enough time to make a thoughtful decision, referring to the situation as “the shotgun wedding syndrome.”
Bernanke listened to the debate without comment.
Then Bill Dudley, a former Goldman man himself who thought the deal was unattractive for the government, also raised the same objection that Buffett had raised just hours earlier: It would prove a public relations disaster for the government.
“What are we doing here? Look at all of the connections you’ve got: Treasury and Steel and me. Goldman is everywhere. We have to be careful.”
After Geithner and Bernanke called Paulson, all three agreed they just couldn’t support the deal.
When Warsh delivered the news to Steel and Cohn, both men were flabbergasted. They had spent the last twenty-four hours trying to formulate an agreement at the behest of the government and were now being told it could not be carried out.
“I’m sorry, I understand, I’m just as frustrated as you are, we just don’t have the money, we don’t have the authorization,” Warsh explained.
Steel, feeling particularly slighted, told Warsh that he felt as if he were running from one bride to another, trying to find the right marriage to save his firm. First Morgan Stanley, and now Goldman Sachs.
Cohn, realizing that the conversation was about to get testy, said, “I think I should step out.”
“No, you should listen to this,” Steel insisted, raising his voice for the first time. “You should sit here and listen to every goddamn word of this.”
Anxiously talking into the speakerphone in the center of the table, Steel became even more irate. “What do you want me to do? Tell me what to do. You can’t make this work, you don’t like this, you don’t like that. Do you want to do the Midtown deal?” he said, referring to Morgan Stanley. “Do you want me to call Citi? I’ve got to protect my
