Too Big to Fail
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Bob Steel had estimated that figure at 12 percent: Speaking at the Lehman Brothers Financial Services Conference on Tuesday, September 9, Steel said Wachovia still expects losses equal to 12 percent, though he said, “it’s still early days.” See “Wachovia Keeps Mortgage Loss View,” stock downgraded, AFX Asia, September 9, 2008.
his firm would not be making any investments: “We won’t be investing in U.S. banks under current circumstances,” Ryosuke Tamakoshi said in Tokyo on Tuesday, September 16, 2008. Takahiko Hyuga, Shingo Kawamoto, and Komaki Ito, “Japan Banks, Insurers Have $2.4 Billion Lehman Risk,” Bloomberg, September 17, 2008.
Gao reiterated his interest in buying 49 percent of Morgan Stanley: Christine Harper, “Morgan Stanley Said to Be in Talks With China’s CIC, Bloomberg, September 18, 2008.
the sale of Lehman Brothers to Barclays: Ben White and Eric Dash, “Barclays Reaches $1.75 Billion Deal for a Lehman Unit,” New York Times, September 18, 2008.
“You may approach”: The dialogue between Judge Peck and Harvey Miller was taken from the official court transcript, dated September 19, 2008.
Merging the “Houses of Morgan”: Chernow, The House of Morgan, 591.
“URGENT and Confidential”: Author obtained copy of e-mail.
chose Roger Altman: Morgan Stanley’s independent board members chose to hire Roger Altman as their adviser, but he only narrowly won the assignment over Christopher Lawrence, a banker at Rothschild.
“Decisions by the Secretary pursuant to the authority”: “Text of Draft Proposal for Bailout Plan,” New York Times, September 20, 2008.
“You know, there’s a chance I could lose this firm”: Mack later recounted this story to Bloomberg: “I said to my wife, when things were really crazy, ‘You know, there’s a chance I will lose this firm. But I would rather be doing this than sitting on a beach reading a book.’” See Lisa Kassenaar and Christine Harper, “Mack Tells Wife He May Lose Firm Before Brokerage Bid,” Bloomberg, January 26, 2009.
the headline “King Henry”: Newsweek, September 29, 2008.
a quote from Governor Jon Corzine: “There hasn’t been a consistent pattern…. We save Bear Stearns but not Lehman. The market is going to have a hard time sorting through what the underlying principle is.” Daniel Gross, “The Captain of the Street; Treasury Secretary Hank Paulson Has a Radical Game Plan for Beating America’s Financial Crisis,” Newsweek, September 29, 2008.
“If you were in your old job”: Tom Brokaw, Meet the Press, NBC, September 21, 2008.
“He understands Berkshire far better”: Buffett, from his 2003 chairman’s letter. See the annual report at http://www.berkshirehathaway.com/2003ar/2003ar.pdf.
it had used Morgan Stanley as adviser: “MUFG’s unsolicited bid, arranged by Morgan Stanley as its financial advisor, also illustrates how conservative Japanese companies are adapting to the cut and thrust of U.S. M&A.” Yuka Hayashi and Alison Tudor,” MUFG offers to buy UnionBanCal,” Wall Street Journal Asia, August 13, 2008.
Mitsubishi agreeing to buy as much as 20 percent: Louise Story, “Morgan Stanley Secures Japan Deal; Mitsubishi UFJ to Pay $9 billion for 21% Stake in U.S. Firm,” New York Times, October 1, 2008.
At 9:30 p.m. the news hit the wires: On September 21, 2008, the Federal Reserve released the following: “The Federal Reserve Board on Sunday approved, pending a statutory five-day antitrust waiting period, the applications of Goldman Sachs and Morgan Stanley to become bank holding companies.” See http://www.federalreserve.gov/newsevents/press/bcreg/20080921a.htm.
CHAPTER NINETEEN
“It would be a grave mistake”: Representative Barney Frank, appearing on Face the Nation, CBS, September 21, 2008.
Trott calling Buffett that Tuesday: Chris Blackhurst, “Billionaire Buffett and the Only Banker He Trusts,” Evening Standard (London), September 25, 2008.
Buffett buying $5 billion in Goldman Stock: Susanne Craig, Matthew Karnitschnig, and Aaron Lucchetti, “Buffett to Invest $5 Billion in Goldman,” Wall Street Journal, September 24, 2008.
Buffett meeting Sidney Weinberg: Schroeder, The Snowball, 62.
Winkelried’s salary: Joseph McCafferty, “Goldman Execs Earn $70M Plus,” Directorship. com; Joseph A. Giannone, “Goldman buys $58 mln Winkelried, Palm Fund Stakes,” Reuters, March 30, 2009.
Winkelried selling Nantucket property: According to the Town of Nantucket’s tax assessor’s office, Winkelried purchased 4.18 acres for $5 million in January 1999 and another 1.7 acres for $1.95 million later that September. Peter B. Brace, “Goldman-Sachs Executive Selling 5.9 Acres on Nantucket for $55 million,” Daily News Tribune, October 10, 2008; Christine Harper and Sharon L. Lynch, “Goldman’s Winkelried Lists Nantucket Estate for $55 Million,” Bloomberg, October 10, 2008.
“Total Abdication of Responsibility to the Public”: Andrew Ross Sorkin, “DealBook: Power Grab and a Roll of the Dice,” New York Times, September 24, 2008.
“What they have sent us is not acceptable”: “U.S. Lawmaker Dodd Says Treasury Plan ‘Unacceptable,’” Reuters, September 23, 2008.
“a terrible communicator”: Charles Babington and Julie Hirschfeld Davis, “Simmering GOP Upset They Were Kept in the Dark; Political Meltdown Came on the Heels of Financial One,” Associated Press, September 27, 2008.
“All of us around the table”: Press releases and documents, “Bush Pushes Financial Plan with Congressional Leaders, Candidates,” Voice of America, September 26, 2008.
“If money isn’t loosened up”: David M. Herszenhorn, Carl Hulse, and Sheryl Gay Stolberg, “Talks Implode During a Day of Chaos; Fate of Bailout Plan Remains Unresolved,” New York Times, September 25, 2008.
“Well, do we need to start from scratch”: Nedra Pickler, “Obama Says More Work Needed for Deal,” Associated Press, September 25, 2008.
“I didn’t know you were Catholic”: David M. Herszenhorn, Carl Hulse, and Sheryl Gay Stolberg, “Crunch Time as Washington Battles Impasse,” New York Times, September 27, 2008.
“You have been great at picking”: “‘In the Eye of the Storm’: Citi CEO Vikram Pandit Sees a Difficult Recovery Ahead,” Knowledge@Wharton, October 2, 2008. See: http://knowledge.wharton.upenn.edu/article.cfm?articleid=2068
Dimon’s $1.9 billion bid for WaMu: FDIC Press Release, “JPMorgan Chase Acquires Banking Operations of Washington Mutual,” September 25, 2008. http://www.fdic.gov/news/news/press/2008/pr08085.html
“You saw what happened earlier”: Deborah Solomon, Damian Paletta, and Greg Hitt, “US Seals Bailout Deal,” Wall Street Journal, September 29, 2008.
“Damn it. If you think you need”: Ibid.
“Let’s not get emotional.” Ibid.
“All we’re talking about is having Groucho”: Ibid.
Wachovia threatened with downgrade: David Enrich and Matthew Karnitschnig, “Citi, U.S. Rescue Wachovia—Latest Shotgun Deal Creates Nation’s Third-Largest Bank,” Wall Street Journal, September 30, 2008.
Citigroup acquiring Wachovia, Fed help: Ibid. See also Eric Dash and Andrew Ross Sorkin “Citigroup to Acquire Banking Operations of Wachovia; Crisis on Wall Street,” New York Times, September 30, 2008.
“They claim to be free market advocates”: Pelosi delivered this speech from the House floor on September 29, 2008. “Speaker Pelosi Speaks in Support of Emergency Economic Stabilization Act of 2008,” US Fed News, September 30, 2008.
“They wouldn’t have brought this bill”: Michele Davis, appearing on PBS’s Frontline, April 9, 2009.
Bailout being rejected 228 to 205: “US Bailout Plan Rejected,” The Nation, September 29, 2008.
“Citibank is honored to enter into a partnership”: From an ad which ran in USA Today that Friday, according to David Enrich and Dan Fitzpatrick, “Wachovia Chooses Wells Fargo, Spurns Citi,” Wall Street Journal, October 4, 2008.
Increasing FDIC insurance on new bailout bill: Meena Thiruvengadam, “Some Ex-FDIC Officials See No Reason to Hike Insurance Limit,” Dow Jones Newswires, October 3, 2008.
“This credit crisis has the power to grind”: Governor Schwarzenegger sent this letter to Paulson on October 2, 2008. “California letter asking for U.S. Treasury help,” Reuters, October 3, 2008.
“We have shown the world that the United States”: David M. Herszenhorn, “Bailout Plan Wins Approval; Democrats Vow Tighter Rules,” New York Times, October 3, 2008.
“If you haven’t discovered your role”: “The Guilty Men of Wall Street,” The Economist, October 14, 2008.
“I want to be very clear”: From transcripts of Fuld’s testimony on the causes and effects of the Lehman Brothers bankruptcy, Hearing of the House Oversight and Government Reform Committee, chaired by Representative Henry Waxman, Monday, October 6, 2008.
“Your company is now bankrupt”: Ibid.
“the majority of my compensation”: Ibid.
“Not that anyone on this committee cares about this”: Ibid.
“Some critics have worried that Treasury”: Author obtained Buffett’s letter to Paulson from a confidential source.
“We have been made aware of rumors”: “MUFG Issues Statement Regarding Transaction with Morgan Stanley,” Business Wire, October 8, 2008.
“We can buy these preferred shares”: Representative Barney Frank said to taxpayers in Providence, Rhode Island on October 8, 2008. Glenn Somerville, “Treasury Says Has Power to Inject Bank Capital,” Reuters, October 9, 2008.
UK investing $87 billion in banks: Banks eligible to participate included Abbey, Barclays Plc, HSBC Holdings Plc, Lloyds TSB Group Plc, Royal Bank of Scotland (RBS, HBOS), Nationwide Building Society, and Standard Chartered Plc. Ben Livesey and Jon Menon, “U.K. to Inject About $87 Billion in Country’s Banks,” Bloomberg News, October 8, 2008.
“The Brown government has shown itself”: Paul Krugman, “Gordon Does Good,” October 12, 2008.
“We Have The Check!!!” Author obtained copy of Kindler’s e-mail to Morgan Stanley staffers from a confidential source.
CHAPTER TWENTY
“Nick Calio just called me”: This and all following e-mails cited were obtained by Judicial Watch, a public interest group, in response to Freedom of Information Act requests it filed on October 16, 2008. For the first batch of e-mails see: http://www.judicialwatch.org/files/documents/2009/TreasuryDocsPart1.pdf.
A little after 2:00 p.m.: Confirmed by Christal West’s e-mail, sent at 10:55 a.m. on Monday, October 13, 2008: “There will be a principals only Meeting today prior to the 3:00 pm meeting with CEOs…. Principals Meeting 2:15 pm–3:00 pm Hank’s Office (Room 3330).”
“To encourage wide participation”: From “Talking Points” documents, also obtained by Judicial Watch.
Meeting background: Nina Easton, “How the Bailout Bashed the Banks,” Fortune, June 22, 2009.
“They’re all in”: This and all succeeding e-mails to the end of this Chapter come from the second batch of FOIA-requested e-mails, courtesy of Judicial Watch. See: http://www.judicialwatch.org/files/documents/2009/TreasuryDocsPart2.pdf
Geithner now read off the amounts: In its FOIA request, Judicial Watch also obtained signed contracts from the banks, with accepted allotments written in ink by the CEOs. See http://www.judicialwatch.org/files/documents/2009/Treasury-ParticipationCommitment.pdf
EPILOGUE
“animal spirits”: In his 1936 book, The General Theory of Employment, Interest and Money, John Maynard Keynes wrote: “Even apart from the instability due to speculation, there is the instability due to the characteristic of human nature that a large proportion of our positive activities depend on spontaneous optimism rather than mathematical expectations, whether moral or hedonistic or economic. Most, probably, of our decisions to do something positive, the full consequences of which will be drawn out over many days to come, can only be taken as the result of animal spirits—a spontaneous urge to action rather than inaction, and not as the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities,” p. 161.
“pay czar”: On June 10, in lieu of his much contested pay caps, Obama appointed Kenneth Feinberg to oversee and modify executive salaries and bonuses. Deborah Solomon, “Pay Czar Gets Broad Authority Over Executive Compensation,” Wall Street Journal, June 11, 2009.
“The government intervention is not a government takeover”: President George W Bush, “Remarks to the United States Chamber of Commerce,” Weekly Compilation of Presidential Documents, October 17, 2008.
Government increasing Citigroup stake/funds: Eric Dash, “U.S. Agrees to Raise Its Stake in Citigroup,” New York Times, February 28, 2009.
“the turd in the punchbowl”: According to an undisclosed official’s handwritten notes taken during a conference call in January 2009. Michael R. Crittenden and Jon Hilsenrath, “Bernanke Blasted in House—Political Heat Mounts on Fed as Grilling Over BofA Shows Ire at Its Interventions,” Wall Street Journal, June 26, 2009.
Shareholders voting for BofA–Merrill deal: Ieva M. Augstums and Stephen Bernard, “Merrill Lynch, Bank of America Shareholders Approve BofA’s Purchase of the Investment Bank,” Associated Press, December 5, 2008.
“How do they justify this outrage…?”: Michael D. Shear and Paul Kane, “Anger Over Firm Depletes Obama’s Political Capital,” Washington Post, March 17, 2009.
“We should hound them in the supermarket”: A few days after Cramer’s rant, AIG’s new chief, Edward Liddy, sent him a letter demanding a retraction and an apology to AIG employees. “It is one thing to criticize the executive leadership of AIG—that’s fair commentary,” he wrote. “But it is way out of bounds to incite people to confront and harass other AIG employees.” Shortly after, Cramer apologized on his show: “Sorry regular AIG guys. I did not mean you.” Heidi N. Moore, “AIG CEO Demands Apology from Mad Money’s Jim Cramer,” WSJ/Deal Journal, October 20, 2008.
“Is Goldman Sachs Evil?” Joe Hagen, “Is Goldman Sachs Evil? Or Just too Good?” New York, July 26, 2009.
“great vampire squid wrapped”: Matt Taibbi, “The Great American Bubble Machine,” Rolling Stone, July 13, 2009.
Goldman producing profit of $5.2 billion: On April 13, Goldman reported net earnings of $1.81 billion for its first quarter. Three months later, its second quarter earnings soared to $3.44 billion. See http://www2.goldmansachs.com.
Goldman’s VaR rising to record high: Christine Harper, “Goldman Sachs VaR Reaches Record on Risks Led by Equity Trading,” Bloomberg, July 15, 2009.
“emergency actions meant to provide confidence”: Department of the Treasury press release, “Secretary Geithner Introduces Financial Stability Plan,” February 10, 2009. See http://www.treasury.gov/press/releases/tg18.htm.
ALAN BLINDER “After the fact, it is extremely clear that everything fell apart on the day Lehman went under.”
“I never once considered”: Stephen Labaton, “Wall St. in Worst Loss Since ’01 Despite Reassurances by Bush,” New York Times, September 16, 2008.
“We didn’t have the powers”: Joe Nocera and Edmund L. Andrews, “Struggling to Keep Up as the Crisis Raced on,” New York Times, October 22, 2008.
“At first, the Treasury”: Michael Lewis and David Einhorn, “The End of the Financial World as We Know It,” New York Times, January 4, 2009.
“policy by deal”: Simon Johnson, “Systemic Risk: Are Some Institutions Too Big to Fail and If So, What Should We Do About It?” Testimony before the U.S. House of Representatives Committee on Financial Services during hearing held July 21, 2009.
“The problem in politics is this”: From a Barney Frank interview on CBS’s 60 Minutes that first aired on December 11, 2008.
“It is not the critic”: Theodore Roosevelt, “Citizenship in a Republic: ‘Man in the Arena.’” Speech at the Sorbonne, Paris, April 23, 1920.
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