The greatest fear during that time was that there would be a run on the investment banks triggered by rumors. True or not, fear would set in and cause people to run for cover and withdraw their money. There was also worry about short-sellers. The concern was so serious that Andrew Cuomo, New York’s attorney general, announced that he was launching an investigation into short-sellers. “Short-selling in and of itself is not illegal,” he explained to me, “and many people argue that it’s a productive part of the marketplace. There can be behavior that is illegal, however, if you’ve spread false information and are trying to drive down prices for your own economic benefit.” A type of short-selling, called naked short-selling, was being investigated by the SEC, and Cox announced a temporary ban on this practice.
Still, Morgan Stanley’s stock fell precipitously. In a single week after Lehman declared bankruptcy, the stock price dropped from the low thirties to the low teens. Mack had predicted a “run” on his bank, and now it was happening. In a memo to employees, he warned them to beware of short-sellers and to hold steady in a market controlled by fear and rumors.
During the week he called me to share his frustration. “Maria, when people turn on CNBC and see the headline scrolling across the screen, ‘Will Morgan Stanley make it?’ what do you think that does to us?” A normally calm guy, Mack was edgy and on the verge of anger.
Mack was constantly on the phone with Paulson and Geithner, as well as with Blankfein. The experience was one of humility, of recognizing that there were no real gods of finance. Everyone was vulnerable. It was one thing to point fingers at individual companies and say, “You did a bad job and you’re paying the price.” It was quite another to watch stable companies experiencing the aftershocks. There was no time for blame or regrets—only action.
“I don’t know if I got four or five calls a day from Hank Paulson, or ten calls,” Mack told me, “but he called me a number of times every day, as did Tim Geithner.” As the weekend neared, those calls took on greater urgency.
“What is plan B?” Geithner asked Mack. “You’ve got to find a partner.”
Mack and his people were working overtime to do just that. They were talking to the Chinese, to the Japanese, to Warren Buffett. They were talking to Pandit at Citigroup and Dimon at JPMorgan. As they headed into another weekend of all-nighters, Mack was running out of time.
Paulson called Saturday morning. “John,” he said, “we cannot have Monday morning open without a solution. It’s not just about Morgan Stanley; it’s about a financial meltdown on a global basis.”
Mack assured Paulson that he understood and that he was in serious discussions with the Japanese about a sizeable investment in Morgan. He and his team spent another night at Morgan Stanley’s midtown office.
Sunday morning Mack received a call from the big guns: Paulson, Geithner, and Bernanke. “We see things you don’t see,” Bernanke said. “This is much bigger than one firm.”
“What are you trying to say?” Mack asked cautiously.
“Call Jamie,” Geithner said. “He’ll buy your bank.”
“I’ve called Jamie. He doesn’t want it,” Mack replied.
“He wants it now,” Geithner said testily. “Call him. He’ll buy it.”
Mack was running out of patience. “Yeah, he’ll buy it for a dollar,” he said heatedly. Then he took a deep breath and made his voice very calm. “I have the utmost respect for the three of you,” he said. “What you do for this country makes you patriots. But I won’t do it.” And he put down the phone.
At Goldman Sachs, Blankfein was worried, although the wolves were not yet at his door. He’d told Mack earlier in the week, “You’ve got to hold on. I’m twenty seconds behind you.” He floated the idea to Mack, “Do you think if we were bank holding companies it would help us?” In the end, it turned out to be the solution Mack was looking for, and a way to stop the bleeding that Blankfein knew would ultimately bring him down as well.
On September 21, a mere week after Lehman’s fall, a new announcement shook the financial world. The last remaining investment banks, Goldman Sachs and Morgan Stanley, were changing their status to become bank holding companies. On the downside, they would be more strictly regulated, but on the upside they would have access to credit from the Federal Reserve Bank, along with consumer deposits to boost their capital balances.
It was the end of investment banking as it had operated. Goldman Sachs and Morgan Stanley were now more like conventional banks, limited in their ability to make high-risk (and highly lucrative) deals. They were humbled and brought to their knees. Just imagine: in March 2008 there were five great investment banks. Six months later there were none.
Mack wanted to get Morgan Stanley back to basics. He felt that the boom years had led to a loss of discipline in his firm and others. He told me that in the midst of the giddiness of success, “You need to have the discipline to look inward and ask whether this fits with our balance sheet, our capital, and our risk management. Are we stepping out of our comfort zone in investing and trading? The leadership needs to have the discipline to forego the business in the interests of stability—to say, ‘I know we may not be as profitable as some of our competitors, but we have a strategy and we’re going to stick with that strategy.’”
In the Roosevelt Room, a windowless workroom in the West Wing of the White House, dominated by a long, sleek table and high-back chairs, President George W. Bush sat with his top economic team and listened to the bad news. Paulson, Bernanke, and the president’s economic advisers sat around the table,
