“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.”
CHAPTER NINETEEN
On Monday, September 22, the day after Goldman Sachs became a bank holding company, Lloyd Blankfein, his face puffy with exhaustion, sat staring at a framed cartoon from Gary Larson’s The Far Side on his office end table. The drawing features a father and son standing in their suburban front yard and gazing over a fence at their neighbor’s house, where a line of wolves is in the process of entering the front door. “I know you miss the Wainwrights, Bobby,” the caption reads, “ but they were weak and stupid people—and that’s why we have wolves and other large predators.”
To Blankfein that pretty much summed up what had just happened to Wall Street: Had things worked out slightly different, Morgan Stanley, and perhaps even Goldman Sachs, could have ended up just like the Wainwrights.
Of the Big Five investment banks, his own and Morgan Stanley were the last ones standing, but Goldman’s footing seemed increasingly unsteady. As the day wore on, Goldman’s stock price, unlike Morgan Stanley’s, was not stabilizing but continuing to plunge, falling 6.9 percent. Despite its having been designated a bank holding company—giving it virtually unlimited access to liquidity from the Federal Reserve—investors had suddenly become worried about whether Goldman would need more capital.
After rising for two days the week before on hopes that TARP would save the economy, the broader market also was now moving again in the wrong direction. As investors had begun digesting the plan, they had come to realize that Paulson was going to have to do a better job of selling it if it was, as he intended, to renew confidence in the economy. To many Americans who had suffered substantial losses in their 401(k) plans, Wall Street simply didn’t deserve to be saved. “It would be a grave mistake to say that we’re going to buy up a bad debt that resulted from the bad decisions of these people and then allow them to get millions of dollars on the way out,” Barney Frank bellowed the day before. “The American people don’t want that to happen, and it shouldn’t happen.”
But the politics of the bailout was hardly a subject that was at the top of Blankfein’s mind, given the more pressing concern of raising capital. He had assigned that task to Jon Winkelried, his co-president, who had put together a team over the weekend to reach out to potential investors in China, Japan, and the Persian Gulf. But their approach was scattershot, and they received only polite refusals from all of their potential targets.
On Monday night Byron Trott, wondering why there had been no news from New York, called Winkelried from his office in Chicago.
“It’s been way too quiet since the weekend. What’s going on?” he asked apprehensively.
Winkelried told him that they were going to begin another round of calling investors on Tuesday with a new proposal to sell shares in the firm. With the market still seesawing, he said, he didn’t expect they’d be able to raise money from a single large source; given the conditions, it would have to come in smaller amounts from dozens of institutional investors.
“Hold on,” Trott interrupted him. “You guys, you have to slow down here.”
Trott, who was the firm’s closest—and perhaps only—conduit to Warren Buffett, suggested that they consider approaching him one more time. Since the previous Thursday, Trott had gone to Buffett with a number of different proposals to invest in Goldman, but the ever-circumspect financier had declined them all. Blankfein had encouraged Trott to propose a standard convertible preferred deal, in which Buffett would receive preferred shares with a modest interest rate, which could be converted into common shares at about a 10 percent premium to Goldman’s current stock price. But, as Trott had correctly predicted, there wouldn’t be enough upside to interest the Oracle. “In a market like this there’s no reason I can take the risk,” Buffett told Trott.
On Tuesday morning, after consulting with Blankfein and the rest of the senior Goldman team, Trott called Buffett again with a new proposal. Buffett’s grandchildren were visiting Omaha, and as he was planning to take them to the local Dairy Queen (a chain owned by Berkshire), the conversation lasted no more than twenty minutes. Trott knew the only way Buffett would be willing to make an investment would be if he were offered an extraordinarily generous deal, which he now presented: Goldman would sell Buffett $5 billion worth of stock in the form of preferred shares that paid a 10 percent dividend. This meant that Goldman would be paying $500 million annually in exchange for the investment; Buffett would also receive warrants allowing him to buy up to $5 billion of Goldman shares in the future at the price of $115 a share, about 8 percent lower than their price that day. With those terms Goldman would be paying an even greater amount than what Buffett had asked of Dick Fuld back in the spring, a sum that Fuld had seemingly rejected.
Relying on his gut, as always, Buffett quickly agreed to the outlines of the deal. Trott called Winkelried, reaching him just as he emerged from the Grand Central terminal on his way to the United Nations, where President Bush was scheduled to address the Sixty-third General Assembly, to tell him the good news.
“I think Warren will do this!” Trott said excitedly.
“Okay, stay where you are,” Winkelried told him. Trying to find a quiet spot on the congested, noisy sidewalks outside Grand Central, Winkelried called the office to set up a conference call with Goldman’s brain trust—David Viniar, Gary Cohn, David Solomon, and Blankfein, who had flown down to Washington for the day for meetings with lawmakers.
Minutes later the group was assembled, and they began to discuss the Buffett deal. Just as important as the infusion of cash, they agreed, was the confidence that a Buffett investment would inspire in the market. Indeed, Winkelried said, the firm would be able to raise additional money from other investors on the back of Buffett’s investment.
“Well, why wouldn’t we do it?” Viniar wondered.
“We’re done,” Solomon said.
Trott immediately set up a call for Blankfein to speak directly with Buffett, and after the two briefly reviewed the transaction, Buffett suggested that Goldman get the papers in order and send them to him, so they could announce the deal that afternoon after the market closed.
Blankfein, who always liked to review every last detail, asked, “Would you like me to just do a download for you on things that I’m concerned about?”
“No, it’s okay,” Buffett replied calmly. “If I were worried, I wouldn’t be doing this at all.” With that he rounded up his grandchildren and headed for Dairy Queen.
Back at Broad Street, however, there was still one provision that troubled the group, a provision that Buffett had indicated would be a deal breaker: Goldman’s top four officers could not sell more than 10 percent of their Goldman shares until 2011, or until Buffett sold his own, even if they left the firm. He had explained his rationale for this condition to Blankfein by saying, “If I’m buying the horse, I’m buying the jockey, too.”