Too Big to Fail [226]
After speaking with Steel, Mack called Robert Scully, his top deal maker, and told him about the conversation. Scully had his doubts; he didn’t know much about Wachovia’s books, but what he did know alarmed him. He agreed, however, that at this point, no options could be automatically ruled out. Besides, Wachovia had one of the biggest, most solid deposit bases in the country, an extremely attractive feature as Morgan Stanley was watching its cash fly out the door.
Scully in turn called Rob Kindler, a vice chairman, to tell him that Dave Carroll, Wachovia’s head of business development, was coming to meet them on Thursday and get things started.
In the relatively straitlaced banker culture of Morgan Stanley, Kindler was an outlier—loud, indiscreetly blunt, and predisposed to threadbare old suits. In the 1990s, he had been a star lawyer at Cravath, Swaine & Moore, but he always preferred banking. He left law and originally joined JP Morgan. (A constant prankster, he soon had hats made with the slogan, “One Firm, One Team, Bribe a Leader,” mocking JP Morgan’s slogan of “One Firm. One Team. Be a Leader.”) Despite his idiosyncrasies, when it came to deal making, his advice was highly valued. Kindler didn’t initially like the notion of a Wachovia merger either, he told Scully, and took a reflexively cynical view: “Let’s put this in context for a moment: Bob Steel comes from Goldman; Wachovia’s investment bankers are Goldman; Paulson is obviously from Goldman. The only reason we’re having this meeting with Wachovia is because Goldman won’t do the deal!”
Scully had been thinking much the same thing but hadn’t been willing to say so. “I don’t know,” he said. “Seems like a bad idea.”
But Kindler couldn’t help himself and soon began to wrap his brain around the possibilities of the deal. “It could be good for us,” he told Scully. “It brings us a deposit base; a regional banking franchise. Let’s see how it plays out.”
Scully and Kindler got Jonathan Pruzan, co-head of Morgan Stanley’s financial institutions practice, to start running the numbers on Wachovia. The obvious concern was its gargantuan subprime exposure, some $120 billion worth. As the Wachovia due diligence got under way, Mack got a call back from Vikram Pandit, delivering what amounted to a soft no on the merger talks. “The answer is no. The timing isn’t right, but at some point we’d like to do something.”
Mack clicked off, exasperated. Wachovia was nobody’s idea of a dream date, but at the moment, it was the only girl at the dance.
“This is an economic 9/11.”
There was chilling silence in Hank Paulson’s office as he spoke. Nearly two dozen Treasury staffers had assembled there Wednesday morning, sitting on windowsills, on the arms of sofas, or on the edge of Paulson’s desk, scribbling on legal pads. Looming over them was a portrait of Alexander Hamilton, a copy of a portrait painted in 1792, when the young nation endured its first financial panic. A Treasury associate, William Duer, who also happened to be a personal friend of Hamilton’s, had used inside information to build up a huge position in government securities. When bond prices slid, Duer could not cover his debts, setting off a panic. Hamilton decided against bailing out his friend but did direct the Treasury to buy government securities, steadying the market—a long-forgotten but potentially instructive model of government intervention.
Paulson was seated in a chair in the corner, slouching, nervously tapping his stomach. He had a pained look on his face as he explained to his inner circle at Treasury that in the past four hours, the crisis had reached a new height, one he could only compare