Too Big to Fail: The Inside Story of How Wall Street and Washington Fought to Save the FinancialSystem--and Themselves

CHAPTER EIGHTEEN

Hoarse and a little haggard, Paulson made his way to the podium in the press room of the Treasury Building the morning of Friday, September 19, 2008, to formally announce and clarify what he had dubbed earlier that morning the Troubled Asset Relief Program, soon known as TARP, a vast series of guarantees and outright purchases of “the illiquid assets that are weighing down our financial system and threatening our economy.”

He also announced an expansive plan to guarantee all money market funds in the nation for the next year, hoping that that move would keep investors from fleeing them. But he had already gotten an earful that morning about that effort from Sheila Bair, chairwoman of the FDIC, who had called, furious she wasn’t consulted and anxious that the guarantee plan would backfire and investors would perversely start moving their money out of otherwise healthy banks and into the guaranteed money market funds. Paulson just shook his head; he couldn’t win.

As he stood in front of the press corps he did his best to sell the centerpiece of his plan, the TARP. “The underlying weakness in our financial system today is the illiquid mortgage assets that have lost value as the housing correction has proceeded. These illiquid assets are choking off the flow of credit that is so vitally important to our economy,” he explained, his tie slightly askew and looking paler and more tired than he ever had before. “When the financial system works as it should, money and capital flow to and from households and businesses to pay for home loans, school loans, and investments that create jobs. As illiquid mortgage assets block the system, the clogging of our financial markets has the potential to have significant effects on our financial system and our economy… .

“I am convinced that this bold approach will cost American families far less than the alternative—a continuing series of financial institution failures and frozen credit markets unable to fund economic expansion,” he asserted, clearly reading from his script, having never learned how to read from a teleprompter.

Evidently confident that Washington had finally brought the financial crisis under control—between Paulson’s TARP and Cox’s ban on shortsellers—the stock market had risen 300 points at the open and continued to hold its ground as Paulson spoke.

Paulson had intentionally chosen not to mention how much the program would cost; after a briefing earlier that morning from Kashkari, he now feared that he might actually need more than the $500 billion he had mentioned to the president a day earlier—a great deal more. Back in his office after the speech, he met with Fromer and Kashkari and debated what the precise cost might be.

“What about $1 trillion?” Kashkari said.

“We’ll get killed,” Paulson said grimly.

“No way,” Fromer said, incredulous at the sum. “Not going to happen. Impossible.”

“Okay,” Kashkari said. “How about $700 billion?”

“I don’t know,” Fromer said. “That’s better than $1 trillion.”

The numbers were, at best, guesstimates, and all three men knew it. The relevant figure would ultimately be the one that represented the most they could possibly ask from Congress without raising too many questions. Whatever that sum turned out to be, they knew they could count on Kashkari to perform some sort of mathematical voodoo to justify it: “There’s around $11 trillion of residential mortgages, there’s around $3 trillion of commercial mortgages, that leads to $14 trillion, roughly five percent of that is $700 billion.” As he plucked numbers from thin air even Kashkari laughed at the absurdity of it all.

John Mack had been watching CNBC on Friday morning when he received a phone call from Lloyd Blankfein. Charlie Gasparino, still reveling in his scoop about the government’s toxic asset program, was arguing that it meant that Morgan Stanley would no longer be forced to do a deal, or at least not have to move as quickly.

Mack, laughing to himself, knew better; he had to get something accomplished by the weekend or Morgan Stanley could well go the way of Lehman Brothers.

“What do you think of becoming a bank holding company?” Blankfein asked Mack when he picked up the receiver.

Mack hadn’t really studied the issue and asked, “Would that help us?”

Blankfein said that Goldman had been investigating the possibility and explained to him the benefits—namely, that if they allowed themselves to be regulated by the Federal Reserve, they’d have unlimited access to the discount window and would have an easier time raising capital, among other things.

“Well, in the long run it would really help us,” Mack said. “In the short run, however, I don’t know if you can pull it off fast enough to help us.”

“You have to hang on,” Blankfein urged him, clearly still anxious about how punishing the markets had become, “because I’m thirty seconds behind you.”

Jonathan Pruzan, the Morgan Stanley banker who had been assigned to review Wachovia’s $120 billion mortgage portfolio—to crack the tape—finally had some answers. A team of Morgan bankers in New York, London, and Hong Kong had worked overnight to sift through as many mortgages as they humanly could.

“Now I know why they didn’t want to give us the tape!” Pruzan announced dourly at a meeting before they headed over to Wachtell Lipton to begin diligence on Wachovia. “It shows they’re expecting a nineteen percent cumulative loss.”

Just a week earlier, at a public presentation at Lehman’s conference, Bob Steel had estimated that figure at 12 percent. In fairness, Pruzan noted, the market had deteriorated markedly since then, and cumulative loss figures were inherently unreliable, because a bank could manipulate them up or down. Still, that big a discrepancy couldn’t be explained away easily. At best, Pruzan thought, Wachovia had been foolishly optimistic.

“You’ve got to be fucking kidding me,” Scully exclaimed. “We obviously can’t do this deal.”

To make it work, Morgan Stanley would have to raise some $20 billion to $24 billion of equity to capitalize the combined firm, a virtual impossibility under the current market conditions. Even so, the Morgan bankers decided not to cancel the all-day diligence session, as they figured they had nothing to lose. Morgan Stanley might well be able to take advantage of Paulson’s new plan to buy toxic assets from Wachovia and, indeed, investors had already bid up Wachovia’s shares that morning on precisely that expectation.

Thirty people each from Morgan Stanley and Wachovia showed up at Wachtell Lipton’s Fifty-second Street offices. Wachovia, purposely not using Goldman Sachs as an adviser for this project given its rivalry with Morgan Stanley, brought a new set of advisers from Perella Weinberg Partners: Joe Perella, the legendary financier; and Peter Weinberg, a former Goldman banker who was the grandson of Sidney Weinberg, the Goldman patriarch. As Weinberg came to shake Kindler’s hand, they could hardly believe they were even talking to each other under such dire circumstances. “What happened? How the fuck did we get here?” Weinberg asked aloud.

“God only knows. You can’t make this shit up,” Kindler said.

Within the first two hours of their work, however, something began to feel wrong to the Morgan bankers. Paulson’s TARP announcement had eased the climate of fear at Wachovia—which would likely be a huge beneficiary of the program because it could sell its most toxic assets to the government—and thus the urgency of rushing into a deal. Kindler became concerned that Wachovia was just buying time while the bank worked on another deal, probably with Goldman. Surveying the room, he announced to his colleagues, “Look at us. We’re the B team. This isn’t going to happen.”

The Wachovia team, meanwhile, had its own doubts about Morgan Stanley’s commitment. If this deal was so important to it, where were its top people? David Carroll, who was leading the Wachovia team, couldn’t understand why Colm Kelleher, Morgan’s CFO, was not involved.

By 2:00 p.m., the Morgan Stanley team had withdrawn from Wachtell and gone back to Times Square to consult with Mack.

“These guys are clearly disengaged,” Kindler told him. Scully described Wachovia’s mortgage book as “a $40 to 50 billion problem. It’s huge. The junior Wachovia team is not disputing our analysis.”

Kelleher, who had been keeping a careful watch over the firm’s dwindling cash pile, had just taken a look at Wachovia’s numbers for himself and observed, “That’s a shit sandwich even I can’t get my big mouth around.”

It became increasingly clear to everybody that the only way this deal was going to take place was if the government provided cover.

Mack, not having heard anything that soothed his nerves, had his secretary get Steel on the line. “You called us and said you wanted to go a hundred miles an hour,” he reminded him, his Southern manners starting to fray, “and I’m sensing from your team that there’s not the same urgency.”

Steel was apologetic. “You’re right,” he told Mack. “We’re not doing this for the next couple of days.”

They agreed they’d get back in touch, but before he hung up, Steel asked Mack for a favor. “It wouldn’t be helpful if it leaked out that we’re not talking,” he said.

“Fortress Goldman.” Tim Geithner had written those two words on a pad on his desk after a Friday-afternoon conversation with Lloyd Blankfein, who must have uttered the phrase a dozen times. It was his way of saying he wanted Goldman to remain a stand-alone institution.

Geithner had been concerned that Blankfein didn’t appreciate how perilous his situation actually was and had quizzed him about the firm’s financial health. Blankfein had said he was hopeful that Goldman would weather the crisis but had acknowledged: “It depends on what happens to the rest of the world.”

Geithner had also sounded Blankfein out about the bank holding company idea. While Blankfein was originally somewhat resistant, by now he had officially warmed up to it. He had become increasingly convinced that if the market knew that the Federal Reserve was behind him, it would instill confidence in investors. And after doing the math, by his estimate 95 percent of Goldman’s assets could already be pledged to the Fed’s discount window, so another 5 percent didn’t represent that big a hurdle. Rodgin Cohen, Goldman’s lawyer, had already discussed this with Geithner earlier in the day; of course, he’d have to sell Bernanke on the idea.

Blankfein, whose voice revealed to Geithner an almost panicked state, had also said that he was planning to raise capital and was certain that the firm would be able to do so from private investors. Maybe even Warren Buffett would be interested.

The waiter at Blue Fin had just brought several massive plates of sushi—spicy lobster rolls, pieces of yellowtail tuna, and tobiko—when Colm Kelleher’s cell phone rang. He had gone to get a late lunch with his Morgan Stanley colleagues, including James Gorman, Walid Chammah, and Tom Nides, and the group had been chatting about their plan to meet later that night with Gao Xiqing of China Investment Corporation, who was bringing an entire team to New York. With Wachovia effectively out of the picture, the Chinese were now their sole prospect.

When Kelleher looked down at the caller ID, he saw it was a number in Japan and walked to the corner of the restaurant.

Jonathan Kindred, president of Morgan Stanley’s securities business in Tokyo, greeted him and said excitedly, “This is interesting. I just got a call from Mitsubishi. They want to do the deal.” Mitsubishi UFJ, Japan’s biggest bank, was interested in buying a stake in Morgan Stanley.

The call had come completely unexpectedly, and totally unsolicited. Morgan Stanley’s management had actually ruled out calling Mitsubishi earlier in the week after its chairman, Ryosuke Tamakoshi, said publicly at a conference that following Lehman’s bankruptcy his firm would not be making any investments in the United States.

Kindred said he thought Mitsubishi was prepared to move quickly. But Kelleher, rolling his eyes, was skeptical. He had worked with other Japanese banks before and, in his experience, they had always lived up to their reputation as being slow, risk-averse, and deeply bureaucratic.

James Gorman’s eyes widened when Kelleher returned to the table with Kindred’s news. This could be exactly what they needed, he thought.

Kelleher only scoffed, “This is a waste of time, they’re never going to do anything.”

“Colm, I really feel they’re going to do something,” Gorman insisted. When Gorman worked at Merrill Lynch he had orchestrated a joint venture with Mitsubishi to combine their private banking and wealth-management businesses in Japan. He thought that the fact that Mitsubishi had initiated the call to express interest was an encouraging sign. “This stuff doesn’t happen by accident,” he said.

Kevin Warsh, the Fed governor, had taken the US Airways shuttle to New York late on Friday to help Geithner think through how to handle the upcoming weekend. Just as important, he would be Bernanke’s eyes and ears on the ground. As he and his driver made their way through traffic from LaGuardia Airport to the New York Fed, he received a call from Rodgin Cohen, who by now was advising both Wachovia on its talks with Morgan Stanley and Goldman Sachs on its bank holding company status. He told Warsh he had an idea—a potentially big one. It wasn’t a plan officially sanctioned by his clients, just a friendly suggestion from an old-timer in the business.

He suggested to Warsh that the government attempt a shotgun wedding between Goldman and Wachovia. He knew it was a long shot—the “optics,” he acknowledged, would be problematic, given Paulson had worked at Goldman for thirty years and been its CEO from 1999 to 2006 and that Wachovia’s CEO, Bob Steel, was a former Goldman man and Paulson’s former deputy at Treasury too—but it would solve everyone’s problems: Goldman would get the deposit base it had been seeking, and Wachovia would have its death sentence stayed.

Warsh listened to the proposal and, almost to his own surprise, liked it.

Gao Xiqing, dressed in a sporty turtleneck and blazer, arrived at Morgan Stanley with his team just after 9:00 p.m., having flown into New York with Morgan Stanley’s Wei Sun Christianson on a private jet from Aspen. He had been on a panel that afternoon with Carlos Slim, the Mexican billionaire, at Ted Forstmann’s gathering and had asked the moderator, Charlie Rose, to make certain the session didn’t run long so that he could reach the airport in time. Given the rumors in the newspapers, everyone at the panel knew exactly where he was headed.

Gao’s back was causing him so much pain that when James Gorman first went to introduce himself, he found Gao lying on the floor of a conference room on the fortieth floor, in the middle of a telephone call. Mack, ever the accommodating host, had a couch brought from the executive dining room for his guest to lie on.

Over dinner, ordered in from Mack’s favorite restaurant, San Pietro— again—they discussed a possible transaction. Alternating between standing up and lying down, Gao reiterated his interest in buying 49 percent of Morgan Stanley.

As he had told Christianson on the flight over, he now indicated that he was prepared to provide the firm with a credit line of as much as $50 billion and a nominal equity investment—no more than $5 billion, maybe less.

Mack was stunned. He had known the price that would be offered might be low, but to him this was absurdly so—it was effectively merely a loan. While it might help Morgan Stanley stay in business, Gao was clearly taking advantage of its weakened condition. To Gao, the offer presented a way to reset the price he had paid for the 10 percent stake he had acquired in Morgan Stanley in 2007, which was now worth far less. Unlike deals that other sovereign wealth funds had struck then, giving them the right to reset the value of the deal if the firms sold equity at a lower price later, CIC hadn’t had the presence of mind to insist on that stipulation. For some inexplicable reason, Gao had convinced himself that the agreement did include such a provision until Morgan Stanley got him a copy to show him that it didn’t.

However insulting Gao’s proposal, Mack recognized that his situation was desperate. Despite the market rally, the firm had continued to bleed cash. Kelleher had given him the cash balances and they were not good—about $40 billion in the tank. A few bad days could wipe them out, and most days lately had been bad ones.

Without many other options, Mack told Gao the firm would open its books to him. Gao had hired Sullivan & Cromwell’s seemingly omnipresent lawyer, Rodgin Cohen, as well as Deutsche Bank, to advise him, and both companies were already sending over teams to assist the Chinese. A sheet of paper marked “CIC” was affixed to the conference room door that would become Gao’s temporary office. Mack also had a physical therapist summoned to work on his bad back.

When Mack returned to his office and huddled with Christianson and his team, they were flabbergasted; Chammah initially thought he had misheard Christianson when she presented it.

“That’s a ludicrous ask,” Kelleher said. “They are being unreasonable.”

Gorman, trying to calm everyone down, said they should all hope it might just be an opening salvo: “They ask for the moon and then maybe they get more reasonable?”

It was just past midnight, and Courtroom 601 of the courthouse at One Bowling Green in Lower Manhattan was still packed with people standing shoulder to shoulder.

The occasion was the approval of the sale of Lehman Brothers to Barclays by a bankruptcy judge. While the rest of the world had already moved on to the fates of Morgan Stanley and Goldman Sachs, ten thousand Lehman employees’ jobs still lay in the balance. More than 150 lawyers, including some of the most prominent bankruptcy practitioners in the nation, were present on behalf of various creditors. Chelsea Clinton was in attendance, representing the hedge fund Avenue Capital.

The proceedings had begun at 4:36 p.m., and Judge James Peck had insisted that he would reach a verdict before leaving for the night. The urgency of getting the sale approved was growing more and more evident as with each passing hour the markets chipped away at the value of Lehman’s assets. Not only was the bankruptcy of Lehman, which had filed for Chapter 11 with $639 billion in assets, by far the largest in the nation’s history, but an unwinding of so complex a financial institution had never before been attempted.

On this late summer evening, the courtroom was on the warm side—the windows were closed and, for lack of enough chairs, people had taken to sitting on the air vents. Lawyers from the firm representing Lehman, Weil Gotshal, carried in ice water.

Signaling to Harvey Miller of Weil Gotshal, Judge Peck said: “You may approach, if that’s what you’re doing. I can’t really tell. Frankly, with so many people in the courtroom, whenever I see the movement this way, I get a little concerned. Mr. Miller?”

Miller, even under these circumstances dapper in a gray suit, red tie, and blue shirt, outlined the deal: Barclays would pay $1.75 billion for Lehman’s North American operations. “This is a tragedy, Your Honor,” Miller said of what had happened to Lehman Brothers. “And maybe we missed the RTC by a week,” he added, referencing the development of the new TARP program. “That’s the real tragedy, Your Honor.”

“That occurred to me as well,” Judge Peck said sympathetically.

Many of the lawyers for Lehman’s creditors, however, were less charitable. They were furious about Lehman’s deal with Barclays, suggesting it was paying far too little and complaining about ambiguities in the purchase agreement. Daniel H. Golden of Akin Gump Strauss Hauer & Feld, representing an ad hoc group of investors holding more than $9 billion of Lehman bonds, pleaded with the court for a brief delay.

“There has simply been no credible evidence adduced at this hearing that the price that Barclays is paying for these assets represents fair value,” he said. “There’s no other testimony or evidence that suggests the other assets being purchased by Barclays represent fair value or an attempt to maximize value for creditors.”

Miller, taking umbrage at the mere suggestion that the deal wasn’t fair, shot back that the transaction had to be approved by the court immediately.

“I don’t want to use the melting ice cube” analogy, he said, the emotion showing on his face. But “it’s already half melted, Your Honor… . The things that have happened since Wednesday, make it imperative that this sale be approved. In the interest of all of the stakeholders, including Mr. Golden’s clients, they will benefit by this, Your Honor, because if the alternative happens, there will be very little to distribute to creditors, if anything.”

Nearly eight hours and three recesses into the hearing, after arguments by dozens of lawyers, several interruptions because of static from the speakers, and one brief aside about Judge Wapner’s The People’s Court, Judge Peck, moved by the enormity of trying to save what was left of a more than century-old firm, agreed to sign off on the Barclays deal.

“This is not simply approving the transaction because Mr. Miller is putting pressure on me to do so,” the judge explained. “This is not approving the transaction because I know it’s the best available transaction. I have to approve this transaction because it’s the only available transaction.”

With a heavy heart, he went on to offer a eulogy: “Lehman Brothers became a victim. In effect, the only true icon to fall in the tsunami that has befallen the credit markets. And it saddens me. I feel that I have a responsibility to all the creditors, to all of the employees, to all of the customers and to all of you.”

It was 12:41 a.m. when Judge Peck ended the hearing. As he stepped down from the bench, the courtroom, with at least several people moved to tears, erupted in a wave of applause.

Tim Geithner hadn’t slept well on Friday night, having decided to stay in one of the grim rooms on the twelfth floor of the Federal Reserve. By 6:00 a.m., he had returned back upstairs to his office dressed in an oxford dress shirt and sweatpants and begun puttering around the hallways in his stocking feet.

In his mind, he was already making battle plans. He had made it safely to the weekend, but he already was worried about what would happen on Monday if he didn’t find a way to save Morgan Stanley and Goldman Sachs.

“John’s holding on to a slim reed,” Paulson had told Geithner about John Mack’s perilous position on a phone call the night before. They had heard that Morgan Stanley had only about $30 to $40 billion left, but Paulson was also still anxious about Goldman Sachs, his former employer. “We’ve got to find a lifeline for these guys,” said Paulson, and they reviewed the possible options.

On a pad that morning, Geithner started writing out various merger permutations: Morgan Stanley and Citigroup. Morgan Stanley and JP Morgan Chase. Morgan Stanley and Mitsubishi. Morgan Stanley and CIC. Morgan Stanley and Outside Investor. Goldman Sachs and Citigroup. Goldman Sachs and Wachovia. Goldman Sachs and Outside Investor. Fortress Goldman. Fortress Morgan Stanley.

It was the ultimate Wall Street chessboard.

Lloyd Blankfein arrived at his office at just past 7:00 on Saturday morning. Even though he was still pushing his “Fortress Goldman” bank holding plan, he and Gary Cohn had assigned more than a half dozen teams to start investigating different deals: HSBC, UBS, Wells Fargo, Wachovia, Citigroup, Sumitomo, and Industrial and Commercial Bank of China.

Cohn had had another conversation on Friday with Kevin Warsh of the Federal Reserve who encouraged him to keep looking at merger options, especially at Citigroup. While it had never been made public, Goldman had explored the idea of merging with Citigroup several times over the past eighteen months but had never engaged in formal talks. Cohn and Warsh had discussed the possibility at least twice before, and even though Cohn always resisted the idea, he was intrigued.

Initially Cohn’s notion was that Citi should buy Goldman; he had even established an asking price. But Warsh suggested that Cohn approach it the other way around: Goldman should be the buyer. To Cohn that made no sense given that Citi was so much bigger. But what Warsh knew—and hadn’t yet shared with Cohn—was that Citigroup’s balance sheet had so many holes that its value was likely a lot lower than its current stock price.

As a result, the Fed was considering three possible outcomes for Citi, code-named “NewCo,” “Goldman Survivors,” and “Citi Survivors.”

Blankfein was reading an e-mail when John Rogers, the firm’s chief of staff, arrived. Blankfein pressed a secret button under his desk to open remotely the glass door to his office. (Paulson had installed the Inspector Gadget-like device when he was Goldman’s CEO.)

As he and Rogers were reviewing their own battle plans, Geithner called. In his usual impatient tone, he insisted that Blankfein immediately call Vikram Pandit, Citigroup’s CEO, and begin merger discussions. Blankfein, slightly shocked at the directness of the request, agreed to place the call.

“Well, I guess you know why I’m calling,” Blankfein said when he reached Pandit a few minutes later.

“No, I don’t,” Pandit replied, with genuine puzzlement.

There was an awkward pause on the phone. Blankfein had assumed that the Fed had prearranged the call. “Well, I’m calling you because at least some people in the world might be thinking that combining our firms would be a good idea,” he said.

After another few moments of uncomfortable silence Pandit finally replied, “I want you to know I’m flattered by this call.”

Blankfein now began to wonder if Pandit was putting him on. “Well, Vikram,” he said briskly, “I’m not calling with any flattery towards you in mind.”

Pandit hurriedly ended the call: “I’ll have to talk to my board. I’ll call you back.”

Blankfein hung up and looked up at Rogers. “Well, that was embarrassing. He had no idea what I was talking about!” From Blankfein’s perspective, he had done what he was asked to do, only to be shown up.

Blankfein phoned Geithner back immediately. “I just called Vikram,” he said testily. “As I think about it, you never told me whether Vikram was expecting a call, but I inferred it. He behaved as if he wasn’t expecting the call and he convinced me that he wasn’t expecting the call.”

Geithner had miscalculated—could Pandit not see the gift that was being handed to him? It defied all reason. But Geithner had no time to deal with anybody’s injured feelings. “Okay, I’ll talk to you later,” he said before hanging up. Blankfein sat there, wondering what the hell had just happened.

Alan Greenspan and his wife, Andrea Mitchell, the NBC News journalist, were mingling in the crowd outside the grand ballroom at the St. Regis Aspen Resort on Saturday morning, the second day of Teddy Forstmann’s weekend conference. They were all waiting for the next panel to begin, entitled “Crisis on Wall Street: What’s Next?” By Wall Street standards it was a star-studded event: The panelists included Larry Summers, the former Treasury secretary; Mohamed El-Erian, CEO of PIMCO, whose book When Markets Collide had just been published; CNBC’s conservative talk-show host Larry Kudlow; and perhaps the most intriguing, Bob Steel of Wachovia. Steel, who had considered canceling, had flown into Aspen that morning, leaving his home at 4:00 a.m. to arrive on time.

By the time the moderator, Charlie Rose, got to the Q&A portion of the panel, however, Steel was nervously checking his watch. Greenspan had entered a debate about the controversies of mark-to-market accounting, but Steel knew he had to get back to the East Coast immediately. The moment the panel ended, he tried to bolt out of the room but on the way out encountered Richard Kovacevich, the chairman of Wells Fargo, someone he thought could be a merger partner.

“I was going to call you next week,” Steel told him.

“Yes, I wanted to catch up,” Kovacevich replied.

“I’m running back to the airport. I’ll call you,” Steel promised.

Jumping into his black Jeep Wrangler on the way to the airport, he finally had a minute to check his BlackBerry and discovered that Kevin Warsh had sent him several e-mails urging him to contact him immediately.

“Listen, I have a call for you to make,” Warsh told Steel when he finally reached him. “We think you should connect with Lloyd!”

Steel, reading between the lines, was stunned: The government was trying to orchestrate a merger between Goldman Sachs and Wachovia! On its face, he knew that it could be a politically explosive deal, considering the two firms’ connections to Treasury. Paulson, he imagined, must be involved somehow. But, of course, Paulson wasn’t allowed to contact him directly. Steel was immediately anxious about the idea. If Goldman had really wanted to buy Wachovia, he thought, it would have done so long ago. After all, up until this week when he spoke to Mack, Goldman had been on Wachovia’s payroll as its adviser, and as such, knew every aspect of its internal numbers. So, if there was a bargain to be had, then Goldman hadn’t seen it. Still, Steel saw the merits in such a deal, and if it was being encouraged by the Federal Reserve, he imagined it might just happen.

“I spoke to Kevin, and he said to give you a call,” Steel began when he got through to Blankfein.

This call, unlike the Citibank fiasco, had been prewired. “Yes, I know,” Blankfein said. “We’d be interested in putting a deal together.”

Steel told Blankfein he was about to step onto Wachovia’s corporate jet and could be in New York by late that afternoon.

As his plane headed for the East Coast, Steel mused how a deal with Goldman would be something of a homecoming, even if it had come as a direct order from the government. Perhaps he could even wangle the chairman title.

Jamie Dimon had been hoping to be able to take his first day off in two weeks. That was until Geithner called him early Saturday morning and instructed him—the president of the New York Federal Reserve seldom suggested anything—to start thinking about whether he’d like to buy Morgan Stanley.

“You’ve got to be kidding me,” Dimon replied.

No, Geithner said, he was quite serious.

“I did Bear,” Dimon objected, referring to buying Bear Stearns. “I can’t do this.”

Geithner ignored his answer. “You’ll be getting a call from John Mack,” he said and hung up the phone.

Mack, who had had a similar peremptory call from Geithner, phoned Dimon five minutes later. Dimon reiterated that he didn’t want to buy Morgan Stanley, which he had already told Mack earlier in the week. But Dimon was under orders to try to help Mack, so the two rivals talked about whether JP Morgan could offer Morgan Stanley a credit line that might give it some breathing room. Dimon said he’d think about it and get back to him with a decision.

As soon as he got off the phone with Mack, Dimon called Geithner. “I talked to John,” he said. “We’re talking about getting him a credit line.”

“I don’t know if that’ll be enough,” Geithner said, frustrated at the news. His order had not been explicit, but he hinted heavily that the Federal Reserve very much wanted the two firms to form a union and wasn’t the slightest bit interested in any temporary measures.

Dimon immediately sent an e-mail to his operating committee, summoning them to the office, and within an hour, dressed in golf shirts and khakis, they had assembled in a conference room on the forty-eighth floor.

Dimon had a grimace on his face as he related the call he’d received from Geithner. Merging the “Houses of Morgan” was not a new idea but hadn’t come up in any serious fashion since June 20, 1973, when Morgan Stanley, JP Morgan, Morgan Guaranty, and the British Morgan Grenfell held a top secret meeting in Bermuda, code-named “Triangle,” at the Grotto Bay Hotel.

On a whiteboard Dimon used a black marker to sketch out what he had been thinking. “We can either buy them, buy part of them, or give them some type of financing.”

For the next two hours they went around in circles, considering their options. What parts of Morgan Stanley could be spun off? What parts could be warehoused (the term for buying a property, keeping it relatively intact if not in fact making it healthier, and then selling it later, when the market recovered)? Maybe they could buy Morgan Stanley, Dimon suggested aloud, and then create a new tracking stock for it?

But all these scenarios wound up circling back to the same problem: What, exactly, would they be buying? The overlap between the firms was enormous. And what were Morgan Stanley’s toxic assets really worth? These were all but unanswerable questions at that time.

John Hogan, JP Morgan’s chief risk officer, who had attended the meeting with Lehman Brothers the previous week, stepped out of the operating committee conference room and called Colm Kelleher and Ken deRegt at Morgan Stanley.

“I don’t know exactly what you guys have in mind, but under any scenario where we ‘help you,’ we’re going to need a bunch of information,” he said. “Could you go back and talk to Mack and find out exactly what it is that you’re expecting, that you’d like from us in terms of this ‘help’?” There was more than a little condescension in Hogan’s voice, and Kelleher and deRegt picked up on it immediately.

A half hour later Kelleher got back to Hogan with an outline for a request for a $50 billion line of credit. Kelleher was hoping that if JP Morgan did come through with an offer, Dimon would not be as punitive as CIC had been.

Hogan sent an e-mail to JP Morgan’s senior team with the subject line “URGENT and Confidential.” In it he spelled out the plan:

Pls plan to meet at Morgan Stanley’s offices at 750 7th Ave tomorrow at 9:30am. We don’t have the floor or room as yet—MS contact person is David Wong. The purpose of the meeting is for us to consider entering into a secured financing against a variety of different unencumbered assets at MS.

Geithner was by now seriously miffed. He had been trying to reach Pandit since eight in the morning and had just heard back from Blankfein, who had somehow actually managed to get through to Pandit again. The only problem was that Pandit had turned Goldman down, and Geithner hadn’t even had a chance to speak with him.

Finally, he got through to him.

“I haven’t been able to reach you for four hours,” Geithner barked into the phone. “That’s unacceptable on a day like today!”

Apologizing, Pandit explained that he had been talking to his team about the Goldman proposal, which they had ultimately rejected. “We’re concerned about taking on Goldman,” Pandit said, trying to explain his rationale for turning them down. “I don’t need another trillion dollars on my balance sheet.”

Geithner could only laugh to himself. “This is a bank,” Pandit said. “And a bank takes deposits and a bank has a prudency culture. I cannot envision a bank taking its deposits and investing them all in hedge funds. I know that’s not what Goldman is, but the perception is that they’d be taking deposits and putting them to work against a proprietary trade. That can’t be right philosophically!”

Having dispensed with pushing Goldman and Citigroup together, Geithner moved on to his next idea: merging Morgan Stanley and Citigroup.

Pandit had been considering that option, too, and while he was more predisposed to merging with Morgan Stanley, he still was reluctant. “It’s still not our choice to do this deal, but we could think about it,” he told Geithner.

By 2:00 p.m., John Mack was growing concerned that the talks with CIC were going nowhere. Gao hadn’t budged on what Mack was calling an “offensive” offer. He had no idea what Jamie Dimon would come up with, and he hadn’t heard anything from Mitsubishi.

Downstairs, Paul Taubman, the firm’s head of investment banking, was experiencing much the same panic as Mack. A disarmingly young-looking forty-eight-year-old, Taubman had worked his entire career at Morgan Stanley, rising to become one of the most trusted merger advisers in the nation, and could now only wonder if it was all going to come to an end this weekend.

Taubman and his colleague Ji-Yeun Lee were on the phone to Tokyo, where it was past midnight, with Kohei Yuki, his Morgan Stanley counterpart who was trying to coordinate talks with Mitsubishi.

“I think they’ve gone to bed for the night, we’ll pick it up in the morning,” Yuki said.

“That’s not going to work,” Taubman answered. “You need to call them at home and wake them up.”

There was a long pause; this was certainly a breach of Japanese protocol.

“O … kay,” he said.

“Listen, if you’re a senior executive, you’re not going to say, ‘You know what, I’m not going to wake my boss and I’ll just keep it to myself and then if it turns out that I missed the opportunity of a lifetime, how am I going to explain it to him if he wasn’t awakened?’”

Twenty minutes later, Yuki was back on the phone with Taubman. “I got him.” Mitsubishi was going to wake up its entire deal team and get working. In a conference room just two floors down, Morgan Stanley’s board had arrived, and things had grown tense quickly. Some had flown across the country to get there; others, like Sir Howard J. Davies, had flown in from London. The only person missing was Charles E. Phillips, president of the software giant Oracle (and a former Morgan Stanley technology analyst).

Kelleher had just finished giving a presentation on the firm’s finances, and it was not good. Charles Noski, a director and former chief financial officer of AT&T, asked him point-blank: “When do we run out of money?”

Kelleher paused and then said somberly, “Well, depending on what happens Monday and Tuesday, it could be as early as middle of the week.”

It was a shot across the bow. If this weekend didn’t go well, they’d all end up the targets of shareholder lawsuits. The independent board members, led by the lead director, C. Robert Kidder, decided they needed to hire an independent adviser and, after a short conversation, chose Roger Altman, the former deputy Treasury secretary and founder of the boutique bank Evercore Partners (and Dick Fuld’s former carpool-mate). He would advise the board on whatever transactions they would be presented with and provide a modicum of cover; in the event that whatever happened over the weekend led to legal battles, at least they would look like they were trying to be responsible.

After Mack came downstairs again Gene Ludwig, Mack’s outside consultant, explained the bank holding concept that they were pursuing. Ludwig said that he believed that Paulson would be motivated to protect them.

“If we go, Goldman goes,” he said, stating the obvious, at least internally, by that point. But then he added a new insight that the board hadn’t considered.

“And then GE will go.”

At Goldman Sachs, two of its top bankers, David Solomon and John Weinberg, had just returned from a morning meeting in Fairfield, Connecticut. They had met with Jeffrey Immelt, General Electric’s CEO, and Keith Sherin, its CFO.

Seated on Cohn’s couch, Solomon recounted the meeting to him. It was a complicated, and almost comical, situation: Solomon and Weinberg had traveled to Fairfield to advise its client on coping with the financial crisis, beginning with a plan to raise capital. One of Immelt’s primary concerns, however, was what would happen if its adviser, Goldman Sachs, went out of business.

General Electric was more about manufacturing than financial engineering, but roughly half of its profits in recent years had come from a finance company unit called GE Capital. Like most Wall Street firms, GE Capital relied on the short-term paper market and the confidence of investors worldwide, and Immelt was worried about how the fate of Goldman and Morgan Stanley might affect it. The meeting ended without much clarity, apart from some preliminary plans to raise capital—and an assurance to Immelt that Goldman was staying in business.

But Cohn was already thinking about Goldman’s talks with Wachovia. Cohn, speaking to Kevin Warsh of the Fed, had agreed to entertain the idea, but only on the condition the Fed would provide assistance; Warsh had said they’d strongly consider it. Cohn believed him: Paulson had spoken with Blankfein and told him to take the talks seriously. “If you go into this looking for all the problems and how much help you’re going to get, it’s never going to happen,” he said, adding, “You’re in trouble and I can’t help you.” In the meantime, Warsh instructed Cohn to make sure they could work out the personal dynamics.

“Let’s not waste our time on economics if you guys are never going to solve the social issues,” he said. “If you aren’t willing to accommodate them, if Bob’s not willing to do whatever, this isn’t going to happen.”

Steel was scheduled to land at Westchester County Airport in White Plains, a suburb of the city, in only a few hours, and Cohn walked into Blankfein’s office and made a suggestion.

“Lloyd, you should go pick Steel up at the airport,” Cohn said, believing it would be a gracious gesture to kick off the merger talks.

Blankfein looked seriously annoyed, having never felt that he got along with Steel particularly well ever since Paulson had made them co-heads of the equities division years earlier. “Do I have to?”

“Yes,” Cohn said firmly. “I would go with you but it would be awkward. You should go pick him up.”

Blankfein was still resistant. “Can you go by yourself?”

“No,” said Cohn, who considered Steel a friend. “I already have a very good relationship with him.”

Blankfein relented. He’d head to the airport.

For a moment Paulson felt he could breathe a sigh of relief. His team had finished the first draft of the TARP legislation and gotten a quick sign-off from the Office of Management and Budget to begin distributing it on the Hill.

Given that he had promised the congressional leadership on Thursday night that he could get them something to work on “ in hours,” he figured he’d make it succinct. Paulson; Kevin Fromer, his head of legislative affairs; and Bob Hoyt, his general counsel, had rushed to draft it, and it came in at just under three pages.

After much debate, Paulson’s team settled on the $700 billion figure that Kashkari had proposed the day before. If passed, it would be the largest one-time expenditure in the history of the federal government. Concerned about the potential for political interference, Hoyt had slipped several lines into the bill aimed at preventing it, as well as granting Paulson whatever powers he might need:

Decisions by the Secretary pursuant to the authority of this Act are nonreviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency. The Secretary is authorized to take such actions as the Secretary deems necessary to carry out the authorities in this Act … without regard to any other provision of law regarding public contracts… . Any funds expended for actions authorized by this Act, including the payment of administrative expenses, shall be deemed appropriated at the time of such expenditure.

It might have been too early to expect any feedback, but Treasury staffers were already excitedly forwarding copies to one another.

And the reaction was instant: Even inside the department there were worries that Paulson might look like he was overreaching. The three-page bill had no oversight plan and virtually no qualifiers. Its terse length alone was making people uneasy.

“So, have you seen the bill?” Dan Jester asked Jeremiah Norton, neither of whom had worked on the proposal.

“I’ve seen the talking points,” Norton replied.

“No,” said Jester, “That is the bill!”

Late Saturday afternoon, Colm Kelleher and Morgan Stanley’s deputy treasurer, Dave Russo, headed down to the NY Fed with their advisers, Ed Herlihy of Wachtell and Promontory’s Gene Ludwig, to present their application for bank holding company status.

In the thirteenth-floor reception area, two staffers approached them and asked, “Which of you is the CFO?”

“I am,” Kelleher said.

“You need to come with us by yourself.”

Kelleher mockingly bade farewell to his colleagues as he was escorted to a conference room where the New York Fed’s top leadership—William Rutledge, Bill Dudley, Terry Checki, and Christine M. Cumming—were assembled.

“Look,” Rutledge said, “if all else fails this weekend, will you agree to become a bank holding company?”

“What does that mean?” Kelleher asked, still somewhat unsure of the technicalities.

The benefits of a bank holding company were explained to him: Short-term financing would be available through the Fed’s discount window, provided Morgan Stanley established a sufficient deposit base and submitted to various regulations.

“Will you get your board to agree?” they asked Kelleher.

Kelleher now understood what this meeting meant: The Federal Reserve might be offering to save his firm. The tank might not reach empty after all. “Of course,” he replied.

Lloyd Blankfein, wearing slacks and a button-down shirt, was waiting in the Westchester County Airport parking lot when Bob Steel arrived. Always perfectly coiffed, Steel nonetheless looked as if he could use some sleep as he walked out of the terminal. He had already been awake for fifteen hours and his day was hardly done.

“What a birthday present!” Blankfein said to Steel brightly when he saw him. Blankfein, who turned fifty-four that day, was still hoping to get to a birthday dinner later that evening at Porter House New York, a steak restaurant, with his wife, Laura.

As they drove into the city they delicately began discussing the outlines of a deal and discussing their history together. Neither of them knew what to make of the merger idea or, for that matter, each other.

When they reached 85 Broad Street, Steel went directly to the thirtieth floor, where he used to spend a lot of his time. As he stepped into the conference room, he saw Chris Cole, who had been his firm’s adviser for the past five months. Now Cole would be on the other side, trying to buy Wachovia. Meanwhile, Steel’s own lawyer, Rodgin Cohen, was also Goldman’s lawyer. It had all become so confusing and rife with conflicts, but they all agreed that if they were going to do a deal, they’d have to reach an agreement by Monday morning.

Goldman’s biggest issue was, as it had been with Morgan Stanley, trying to determine the scope of the hole. Wachovia owned $122 billion of pay option ARMs, which Goldman Sachs quickly felt wasn’t going to be worth much. They each agreed to put teams on it to work up the numbers; Steel said he’d have his group fly up by morning.

Before decamping for the night, Blankfein invited Steel back to his office. He wanted to talk about titles, perhaps the most sensitive issue for men who often measure themselves as much by their business cards as by their wallets.

Blankfein said he was thinking of making Steel one of three co-presidents, along with Gary Cohn and Jon Winkelried; Steel would continue to manage Wachovia as the consumer arm of Goldman Sachs.

Steel was taken aback and slightly offended. He was already the CEO of a major bank; he’d been a vice chairman of Goldman and a deputy Treasury secretary in Washington. And now he was being asked to become one of three co-presidents?

“I’m not sure I want to be at the same level with Gary and John,” he said diplomatically. “But we’ll figure this out.”

“Is Jamie trying to buy us?” Gary Lynch, Morgan’s general counsel, asked Mack in the corridor outside his office.

“I don’t think so,” Mack said, explaining that they were simply negotiating with JP Morgan to extend a credit line to the firm. “Why do you ask?”

“Well, something strange is going on, then,” Lynch replied.

Lynch related that an outside lawyer for Morgan Stanley’s independent board members, Faiza J. Saeed, a partner at Cravath, had just informed him that JP Morgan had called a Cravath colleague seeking to hire her to work on a deal for Morgan Stanley. She had been a little vague, but she wanted him to clear the conflict, Lynch explained.

“Wow,” Mack said.

“Yeah, this is a nice way of sending a message.”

As dusk was setting, Hank Paulson was still in his office and had just gotten off the phone with Geithner. The news was not promising. Geithner told him that Morgan Stanley had no plan apart from what he called the “naked” bank holding company scenario. Geithner said he was uncertain whether any investor—JP Morgan, Citigroup, the Chinese, or the Japanese—would come through. And he was skeptical of the Goldman-Wachovia deal.

“We’re running out of options,” he told Paulson.

Paulson, who had been living on barely three hours of sleep a night for a week, was beginning to feel nauseated. Watching the financial industry crumble in front of his eyes—the world he had inhabited his entire career—was getting to him. For a moment, he felt light-headed.

From outside his office, his staff could hear him vomit.

Saturday night, John Mack returned to his Upper East Side apartment, still nursing a persistent cold he couldn’t shake. His wife, Christy, who had driven into the city from Rye to console him, was waiting up.

He was quieter than usual, wondering yet again how he would manage to raise billions of dollars in capital in only twenty-four hours. “You know, there’s a chance I could lose the firm,” he said, a sense of despair in his voice.

He needed some air, he told Christy, and decided to go on a walk. As he roamed up Madison Avenue, he realized that his entire adult life, his entire professional career was on the line. He had been in battles before—his losing fight with the firm’s former CEO, Philip J. Purcell, had been a notable one—but never anything like what he faced now. But this was not just about his personal survival; it was about the fifty thousand people around the globe who worked for him, and for whom he felt a keen sense of responsibility. Images of Lehman employees streaming out of their building the previous Sunday night carrying boxes of their possessions still haunted him. He needed to buck himself up. Somehow, he was going to save Morgan Stanley.

When he stepped into his living room a few minutes later, he admitted to Christy with a grateful smile, “I’d rather be doing this than reading a book in North Carolina.”

Even before the black Suburban had come to a stop in his driveway on Saturday evening, Hank Paulson was stepping out the door, his RAZR at his ear. His Secret Service agent, Jim Langan, preferred that Paulson wait inside until Langan got out of the vehicle, but Paulson had long since abandoned such protocol.

Paulson raced inside to get on a call with Vice Premier Wang Qishan in China. For the past day, he had been trying to coordinate the call to press his case for China to pursue an investment in Morgan Stanley. Originally, he had wanted President Bush to call China’s president and had spoken with Josh Bolten, the president’s chief of staff, about it. But Bolten had concerns about whether it was appropriate for the president to be calling on behalf of a specific U.S. company. He suggested that, at best, the president might be able to call and speak broadly about the financial industry, finding a subtle way to be encouraging. But before such a call could be made, Paulson needed to size up China’s true interest.

Paulson had scheduled the call with Wang for 9:30 p.m. He knew Wang well from his trips to China as the CEO of Goldman, and they had a comfortable rapport. He also knew it was highly unusual to be orchestrating a private market deal with another country, in this case the largest holder of U.S. debt. Before placing the call, Paulson had reached out to Stephen Hadley, assistant to the president for national security affairs, to get some guidance. The instructions: Tread carefully.

When Paulson was finally connected to Wang, he moved quickly to the topic at hand, Morgan Stanley. “We’d welcome your investment,” Paulson told Wang. He also suggested that one of China’s biggest banks, like ICBC, should participate, making the investment a strategic one.

Wang, however, expressed his anxiety about CIC becoming involved with Morgan Stanley, given what had happened to Lehman Brothers. “Morgan Stanley is strategically important,” Paulson said, suggesting he would not let it fail.

Wang remained unimpressed, asking for a commitment that the U.S. government would guarantee any investment. Paulson, trying to avoid making an explicit promise but also trying to assuage him, said, “I can assure you that an investment in Morgan Stanley would be viewed positively.”

Only a few hours later, Sunday morning, Paulson was back in the Suburban, where Michele Davis, his communications chief, was waiting. “You’re not going to like this,” she said as she pulled out a copy of the cover of the new Newsweek, which would appear on newsstands on Monday. Under the headline “King Henry” was a photograph of Paulson.

They were headed to an early taping of NBC’s Meet the Press to sell his TARP proposal with his fishing buddy, Tom Brokaw, who had temporarily taken over hosting responsibilities for the political talk show after Tim Russert died. From there they would head to ABC’s This Week and then to CBS’s Face the Nation.

Paulson skimmed through the article. It was a flattering profile, with the exception of a quote from Governor Jon Corzine, his old nemesis from Goldman, questioning his consistency. But more important, the cover was a tacit acknowledgment of the enormous power that Paulson now wielded, not only in America, but on the world stage. President Bush had taken a backseat; Paulson had become the de facto leader of the country in this time of crisis.

The power pleased him, but he also knew that it cut both ways. He discovered just how far it cut within minutes of the red light’s going on for the Brokaw interview, when the host lit into him about the lack of details in the TARP plan, the same lack of details that Treasury staffers had privately worried about the day before.

“If you were in your old job as chairman of Goldman Sachs and you took this deal to the partners,” Brokaw said, “they’d send you out of the room and say, ‘Come back when you’ve got a lot more answers,’ wouldn’t they?”

Kenneth deRegt, Morgan Stanley’s chief risk officer, was trying to put the best face on his firm’s finances as he prepared for the meeting with JP Morgan that morning, assembling lists of collateral that he hoped would be considered strong enough to lend against. But as he worked it began to dawn on both him and Ruth Porat, who ran the firm’s financal institutions group, that an unrestricted show-and-tell session with JP Morgan bankers might be counterproductive. If all went well, Morgan Stanley would become a bank holding company that very evening—a plan that JP Morgan was unaware of—giving it access to far more liquidity. So they decided to be selective about what they would and wouldn’t feature in the presentation and included only the bank’s collateral that they wouldn’t be able to pledge to the Fed, which represented some of the worst holdings on its books. It would be a risky move. Rather than burnishing the firm for a sale, they could unknowingly scare off a potential partner.

Braunstein, Hogan, and Black of JP Morgan arrived at 750 Seventh Avenue punctually at 8:45 a.m., bringing the firm’s general counsel, Steven Cutler, with them. Several dozen underlings had already arrived and were waiting. The location, a nondescript office building with no signage a block west of Morgan Stanley’s headquarters, was where the company typically held any meeting it wanted kept secret.

“This is highly confidential,” Hogan reiterated to the team as they set up in a meeting room that Morgan Stanley had provided. Braunstein was surprised that no coffee or food was provided for his team—Is this some kind of negotiating tactic?—and immediately sent an associate to Dunkin’ Donuts.

They all knew they were there for what could be the most historic diligence session of their lives. While Hogan had told them the meeting was about extending a line of credit to Morgan Stanley, they all knew that it could quickly turn into a full-blown merger, a transaction that would make the Bear Stearns deal look like Little League practice. War rooms were set up to review each major part of Morgan Stanley’s business—prime brokerage, real estate, principal investments, and commodities.

JP Morgan’s lawyers had expressed serious doubts to the team that they could pull off a deal like this in such a short compass of time. They kept referring to the problem of “perfecting security interests in less than twenty-four hours.”

In fact it wouldn’t take nearly that long: Within two hours, JP Morgan decided to pull the plug. They were shocked that the assets that Morgan Stanley was offering as collateral were of such low quality, surely too low for JP Morgan to lend against.

“This stuff is crap,” Hogan told Steve Black, JP Morgan’s president.

By midday, Goldman Sachs and Wachovia, which was represented by a half dozen executives whom Bob Steel had brought along, were making rapid progress toward completing a deal. Peter Weinberg, Bob Steel’s adviser and a former Goldman man, had constructed the outlines of an agreement in which Goldman would pay $18.75 a share for Wachovia’s shares in Goldman stock. The price represented the closing price of Wachovia’s shares on Friday.

There remained, however, one serious obstacle: Goldman wanted a “Jamie” deal. The next step was to go back to Warsh at the Fed and ask whether the Fed was prepared to subsidize the deal by guaranteeing Wachovia’s most toxic assets.

During a lull in the negotiations, Weinberg took a break and walked down the hall of the executive floor. As he passed a series of portraits of the firm’s past chief executives, he stopped when he reached Sidney Weinberg, his grandfather. Sidney Weinberg, who became a Goldman partner in 1927, represented the epitome of the old Wall Street, a business that had been defined by personal relationships and implicit trust, not leverage and ever more complicated financial engineering. His grandfather’s world had been obliterated over the past decade as firms sought to go public and began using shareholder money to place what had proved to be dangerously risky bets.

Jon Winkelried, Goldman’s co-president, was passing down the hall when he saw Weinberg gazing thoughtfully at the portrait.

“The world has really been turned on its head,” Winkelried said wistfully.

Warren Buffett was at his home in Omaha on Sunday when he received a phone call from Byron Trott, a vice chairman at Goldman Sachs. Buffett, who disliked most Wall Street bankers, adored Trott, a mild-mannered Midwesterner based in Chicago. Paulson had introduced the men years earlier, and Trott was now the only investment banker Buffett truly trusted. “He understands Berkshire far better than any investment banker with whom we have talked and—it hurts me to say this—earns his fee,” Buffett wrote in Berkshire Hathaway’s 2003 annual report. For Buffett, there is no more lavish praise.

Trott was calling Buffett with a proposition. For the past several weeks he had been trying in vain to persuade Buffett to make an investment in Goldman, but he had now come up with a new idea. He disclosed to Buffett that Goldman was in talks to buy Wachovia, with government assistance, and wanted to know whether Buffett might be interested in investing in a combined Goldman-Wachovia.

At first, Buffett wasn’t sure he was hearing Trott correctly. Government assistance? In a Goldman deal?

“Byron, it’s a waste of time,” he said in his folksy way, after considering the new configuration. “By tonight the government will realize they can’t provide capital to a deal that’s being done by the firm of the former Treasury secretary with the company of a retired vice chairman of Goldman Sachs and former deputy Treasury secretary. There is no way. They’ll all wake up and realize even if it was the best deal in the world, they can’t do it.”

John Mack had received some promising news Sunday afternoon: Mitsubishi looked like it would actually pull through and make a sizable investment in Morgan Stanley. A conference call had been arranged for Mack to speak with Mitsubishi’s chief executive, Nobuo Kuroyanagi, that evening.

Just as they were going over the details, however, Paulson called.

“John, you have to do something,” Paulson said sternly.

“What do you mean I have to do something?” Mack asked, his voice rising with impatience, explaining that he had just learned that the Japanese were inclined to do the deal. “You’ve been so supportive, you said we can get through this.”

“I know,” Paulson said, “ but you’ve got to find a partner.”

“I have the Japanese! Mitsubishi is going to come in,” he repeated, as if Paulson hadn’t heard him the first time around.

“Come on. You and I know the Japanese. They’re not going to do that. They’ll never move that quickly,” Paulson said, suggesting that he focus more on the deal with the Chinese or JP Morgan.

“No, I do know them. And I know I don’t agree with you,” Mack answered angrily. He explained that Mitsubishi had had a long-term relationship with the firm; it had used Morgan Stanley as an adviser during its hostile bid for a part of Union Bank in California earlier in the year. “Japanese rarely do a hostile,” Mack reminded him. “They hired us, they followed through and got it done, so they’ll come through for us.”

Paulson was still skeptical. “They won’t do it,” he said with a sigh.

“You and I disagree,” Mack sputtered, agreeing to keep him updated on his progress as he hung up the phone.

Calling the Fed’s Kevin Warsh out of a meeting to come to the phone, Gary Cohn outlined the preliminary Goldman-Wachovia terms for him. They had agreed to a deal at market—Friday’s closing price of $18.75—and considering that Wachovia’s stock had jumped 29 percent that day on the back of the TARP news, Cohn thought it was a generous concession.

But then he wound up for his big pitch: To complete the deal, he said, Goldman would need the government to guarantee, or ring-fence, Wachovia’s entire portfolio of ARM option mortgages—all $120 billion worth.

Warsh stopped Cohn in midsentence. “We’re just not prepared to do that,” he said. “We can’t look as if we’re just writing a blank check.” Warsh, who was still championing the idea of a merger, explained that they needed to think about the “optics” of the deal. He suggested that if they structured it so that Goldman would take a first loss on the deal—in the same way that JP Morgan had agreed to accept the first $1 billion of losses at Bear Stearns 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 shareholders. That’s my job. Just tell me what the fuck you want me to do, because I’m tired of running in circles.”

“I don’t know if it’s true, but we’re hearing Goldman is announcing a deal with Wachovia in the next twenty-four hours,” John Mack announced to the management team gathered in his office. He had just learned of the rumor from a director at the meeting with his board and was distressed by the possibility. After all, it had been only Friday that they were in merger negotiations that didn’t seem to be going anywhere.

Taubman, the firm’s head of investment banking, was horrified. How could Goldman Sachs, Morgan Stanley’s most bitter rival, be willing to take on all of Wachovia’s toxic assets? he thought to himself. Hasn’t Goldman seen the massive hole in Wachovia’s balance sheet? Then it dawned on him. “Those fuckers probably have a deal with the government!” he exclaimed to the group. “It makes no sense unless the government is bailing out Wachovia and taking back a bunch of bad assets!”

Paulson had gotten word that the Goldman-Wachovia deal was off, which put even more pressure on him to find a solution for Morgan Stanley. To him, JP Morgan was the obvious answer. While Jamie Dimon might have been resisting Paulson’s overtures—Paulson had pressed the case with him several times already over the past day—Paulson now needed to apply some serious pressure.

“Jamie,” Paulson said when he reached him, conferencing in Geithner and Bernanke. “I need you to really think about buying Morgan Stanley. It’s a great company with great assets.”

Dimon had just finished having an impromptu meeting with Gao of CIC, who had come to see him to explore whether JP Morgan would be willing to work together on a bid for Morgan Stanley, with CIC buying additional equity in the firm and JP Morgan providing a credit line. But the meeting hadn’t gone anywhere.

Dimon, who had been anticipating that the government might try to foist the deal on him, was adamant.

“You’ve got to stop. This is not doable,” he said intently. “It’s not possible. I would do anything for you and for this country, but not if it’s going to jeopardize JP Morgan.

“Even if you gave it to me, I couldn’t do it,” Dimon continued, explaining that he thought the deal would cost the bank $50 billion and countless job losses.

“I don’t want to do it, and John doesn’t want to do it,” Dimon told him.

“Well, I might need you to do it,” Paulson persisted.

A few moments of silence passed until Dimon relented, but only slightly. “We’ll consider it, but it’s going to be tough,” he said.

The tension inside Morgan Stanley’s board meeting was becoming untenable. Roger Altman, the banker from Evercore who had been hired just twenty-four hours earlier to advise them, was telling them that they needed to think hard about selling the entire firm. He had painted a doomsday scenario, and it wasn’t sitting well with several directors in the room, who had become convinced that Altman was trying to get them to do a deal simply so that he could collect a big fee.

During a break, Roy Bostock spoke with C. Robert Kidder, the firm’s lead director: “We ought to fire that guy right now. Get him out of here. He is not helping.” Others were concerned that given his close ties to the government—he was the former deputy Treasury secretary and was still considered very well connected—that he might leak information about the firm’s health back to them. That, they thought, would explain why Geithner was putting so much pressure on Mack to do a deal. Though they did not know it, Altman had sent an e-mail to Geithner the night before telling him that he had gotten the assignment to work for Morgan, but he had not disclosed any of the details of the meeting.

Whether it was paranoia or just a lack of sleep, the discussion was becoming heated. Mack, who hadn’t been consulted when Altman was hired, was even more upset about his being there than some of the board members. “I don’t trust him,” Mack announced after he kicked Altman out of the board meeting temporarily. He said he thought they should be using Morgan Stanley’s own bankers to advise them if they really were going to sell the firm. He also told them he was worried about revealing the details of Morgan Stanley’s negotiations with Mitsubishi in front of Altman, reminding the directors that Evercore had a partnership with Mizuho Financial Group of Japan, one of Mitsubishi’s rivals.

“I don’t know what this guy is up to,” he said.

Geithner, still holding court from his office downtown, had become convinced that Morgan Stanley would fail if it didn’t complete a deal by the time the markets opened on Monday. He had threatened Mack earlier in the day that he would deny his request to become a bank holding company unless he found a sizable investment or merged. “Being a naked bank holding company won’t do it,” he warned. Like Paulson, Geithner thought Mack was misguided in his belief that Mitsubishi would come through for them in time. “What’s your Plan B? You need a Plan B,” he had nearly screamed into the phone.

Not everyone at the Fed was in agreement with Geithner’s insta-merger strategy, however. So unpopular was Geithner’s single-mindedness about merging banks that afternoon that some CEOs began referring to him as “eHarmony,” after the online dating service. “If we sell one more of these guys for a dollar,” Kevin Warsh complained, “this whole freakin’ thing is going to come undone.”

At about 3:30 p.m., John Mack’s assistant, Stacie Kruk, announced that Secretary Paulson was on the line. Mack took the call on the phone next to his couch. The New York Giants versus the Cincinnati Bengals game was playing on the TV behind him.

“Hi, John. I’m on with Ben Bernanke and Tim Geithner. We want to talk to you,” Paulson said.

“Well,” Mack said, “since you’re all on the line, can I put my general counsel on?”

Paulson agreed, and Mack hit the speakerphone button after the television was muted.

“Markets can’t open Monday without a resolution of Morgan Stanley,” he said in the sternest way he knew. “You need to find a solution, we want you to do a deal.”

Mack just listened, dumbstruck.

Bernanke, who was usually remote and silent in such situations, cleared his throat and added, “You don’t see what we see. We’re trying to keep the system safe. We really need you to do a deal.”

“We’ve spent a lot of time working on this and we think you need to call Jamie,” Geithner insisted.

“Tim, I called Jamie,” Mack replied, clearly exasperated. “He doesn’t want the bank.”

“No, he’ll buy it,” Geithner said.

“Yes. For a dollar!” Mack exclaimed. “That makes no sense.”

“We want you to do this,” Geithner persisted.

“Let me ask you a question: Do you think this is good public policy?” Mack asked, clearly furious. “There are thirty-five thousand jobs that have been lost in this city between AIG, Lehman, Bear Stearns, and just layoffs. And you’re telling me that the right thing to do is to take forty-five thousand to fifty thousand people, put them in play, and have twenty thousand jobs disappear? I don’t see how that’s good public policy.”

For a moment, there was silence on the phone.

“It’s about soundness,” Geithner said impassively.

“Well, look, I have the utmost respect for the three of you and what you’re doing,” Mack said. “You are patriots, and no one in our country can thank you enough for that. But I won’t do it. I just won’t do it. I won’t do it to the forty-five thousand people that work here.”

With that, he hung up the phone.

At Goldman Sachs the mood was slightly less tense. “We’re getting bank holding company,” Blankfein, having just spoken with Geithner, announced as Cohn walked into his office. “It’s going to happen.” When the Federal Reserve faxed over the draft of the press release, he could see that one other institution, which was purposely left blank, would be granted the same status. That must be Morgan Stanley, he thought. His Friday-morning call to Mack must have worked.

Cohn, sitting down on Blankfein’s couch, picked at an omelet, having not touched food all day. He could finally smile. They were finally out of the woods. Now all they needed to do was have the directors sign off on the execution of the application. They had set up a conference call with the entire board to start in five minutes.

When everyone was assembled on the line, Blankfein began, “I’ve finally got good news …”

When Gao returned to Morgan Stanley late that afternoon, he learned that the firm was engaged in merger talks with Mitsubishi. He had thought something was amiss earlier, because Mack had slowed down the negotiations, but he couldn’t believe Mack was about to do a deal with the Japanese! He thought the U.S. government had already blessed an agreement with CIC, based on Paulson’s conversation with Vice Premier Wang Qishan the night before. Furious, he pulled his entire team from the conference room and marched out of the building without even saying good-bye.

The Morgan Stanley bankers were still waiting to find out if the Mitsubishi deal was a go. The Fed, they had learned, was going to grant them bank holding company status, but Geithner was still insisting the firm needed a big investment by Monday as a show of confidence in the company. Mitsubishi had sent over a proposal, a “letter of intent,” to buy up to 20 percent of the firm for as much as $9 billion. But Taubman and Kindler knew that all they were getting was a letter; it wouldn’t be an ironclad contract, as they couldn’t get a full deal turned around quickly enough. But they were just hoping investors in the market would take the Japanese at their word and have more faith in them than Paulson or Geithner had.

As Kindler and Taubman were reviewing the letter, they laughed at all the news coverage about their weekend of whirlwind merger talks. Various media outlets had the news backward or were reporting old rumors. Gasparino declared on television that Morgan Stanley was about to do a deal with either Wachovia or CIC. “The most fucking dangerous man on Wall Street,” Kindler sighed.

Upstairs Mack was on the phone with Mitsubishi’s chief executive, Nobuo Kuroyanagi, and a translator, trying to nail down the letter of intent.

His assistant interrupted him, whispering, “Tim Geithner is on the phone; he has to talk to you.”

Cupping the receiver, he said, “Tell him I can’t speak now, I’ll call him back.”

Five minutes later, Paulson called. “I can’t. I’m on with the Japanese, I’ll call him when I’m off,” he told his assistant.

Two minutes later, Geithner was back on the line. “He says he has to talk to you and it’s important,” Mack’s assistant reported helplessly.

Mack was minutes away from reaching an agreement.

He looked at Ji-Yeun Lee, a banker who was standing in his office helping with the deal, and told her, “Cover your ears.”

“Tell him to get fucked,” Mack said of Geithner. “I’m trying to save my firm.”

“Thank God. We’re out!” Jamie Dimon exclaimed as he ran across JP Morgan’s executive floor into Jimmy Lee’s office, where the management team had camped out, waiting for their next orders as they bided their time watching the Ryder Cup and the New York Giants game, chowing down on steaks from the Palm.

“Mack just called,” Dimon said, breathing a sigh of relief. “They got $9 billion from the Japanese!”

At 9:30 p.m., the news hit the wires. Goldman Sachs and Morgan Stanley would become bank holding companies. It was a watershed event: The two biggest investment banks in the nation had essentially declared their business model dead to save themselves. The New York Times described it as “a move that fundamentally reshapes an era of high finance that defined the modern Gilded Age” and “a blunt acknowledgment that their model of finance and investing had become too risky.”