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.