“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.