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By Root 3628 0

was callable by lenders in days or at most weeks. Only $4 billion of equity supported $146 billion of debt. Dangling off the side of the balance sheet on any given day were tens more billions, perhaps as many as $50 billion a day, of uncleared trades—transactions executed, but not yet settled. These would stall midair. Salomon also had many hundreds of billions of derivative obligations not recorded anywhere on its balance sheet—interest-rate swaps, foreign-exchange swaps, futures contracts—a massive and intricate daisy chain of obligations with counterparties all over the world, many of whom in turn had other interrelated contracts outstanding, all part of a vast entangled global financial web. If the funding disappeared, Salomon’s assets had to be sold—but while the funding could disappear in a few days, the assets would take time to liquidate. The government had no national policy to provide loans to teetering investment banks because they were “too big to fail.” The firm could melt into a puddle overnight.25

Corrigan sat back in his chair, confident that once Salomon received Sternlight’s letter, management would understand the loaded gun cocked at its head, and would respond accordingly.

Within Salomon, after the press release and the Wall Street Journal story, rumors were running wild. Late Monday afternoon, it held an all-hands-on-deck meeting in its huge auditorium on its lowest floor. Nearly five hundred people crowded in, while hundreds, maybe more, from upstairs and from Salomon offices around the world, watched on television screens. Gutfreund and Strauss walked the audience through a baked-Alaska version of events, a crisp well-done meringue of a surface that hid the chilly surprise. Afterward, Bill McIntosh, the head of the bond department, was summoned upstairs to Gutfreund’s office, where he found Gutfreund, Strauss, and Marty Lipton, “three very scared men.” Earlier in the day he had been calling for Gutfreund’s head, but unexpectedly, they asked what he thought of the situation. McIntosh demanded more explanation; he felt the all-hands version and the press release had been misleading.26 He and assistant general counsel Zach Snow ended up getting drafted to write another press release.

The next morning, McIntosh and Snow began drafting. Around midday, McIntosh went to tell Deryck Maughan, the vice chairman of investment banking, who had just come back from running the firm’s Asian operations, what was going on. Maughan knew he was hearing the harbinger of a disaster. He went to find Snow and pounced on him, saying you’d better be telling the whole truth to a vice chairman.

But Snow had no intention of hiding anything from Maughan. He started talking, and a tale unfolded of what had transpired behind the scenes. He explained that in April, after Mozer made his first confession about the February auction, Meriwether had pleaded that Mozer not be fired, even though Feuerstein had said he believed Mozer’s actions were criminal in nature. Snow had been told—in confidence—about the situation. A month later, Mozer still ran the government desk; Feuerstein was nagging Gutfreund to come clean; Gutfreund was telling him that he would. But in fact no one had told the government. Meanwhile, Meriwether was charged with keeping an eye on Mozer, who had supposedly reformed.

Then Mozer had asked for funding to bid on more than one hundred percent of the two-year-note auction in late May. Even though some of the funding was supposedly to put in bids for customers, John Macfarlane, Salomon’s treasurer, had become alarmed. He thought it an obvious red flag and called a meeting with Snow and Meriwether. Snow had gone to Feuerstein, his boss, who agreed that it was an outrageous request. They had decided not to give Mozer the funds.27

But Mozer had secretly juggled the bids and money anyway.28 Managing to evade his overseers, he put in one suspicious bid and pulled off an enormous auction coup. Salomon wound up with eighty-seven percent of the Treasury bonds, and it and a small group of customers controlled the two-year