Too Big to Fail [228]
“This is what we should do,” Kashkari told Paulson. He had been involved in HOPE NOW, one of the government’s early efforts at helping distressed homeowners, and had learned firsthand how difficult it would be to get the banks making new loans as long as they were carrying bad loans on their balance sheets. On the speakerphone from New York, where he still was embroiled in the AIG situation, Paulson’s adviser Dan Jester argued that the purchasing of assets was too cumbersome and recommended instead that capital be injected directly into the institutions. “The more bang for your buck is to put capital in,” he said, explaining that even if the market continued to fall, it would help the banks manage the downturn.
The difficulty with that approach, countered Assistant Secretary David Nason, was the specter of nationalization. If the government put money into firms, it became a de facto owner, which is precisely what most of the people in the room wanted to avoid. “Are people going to think we’re going to AIG them?” he asked, already using the government’s investment less than twenty-four hours earlier as a verb. Paulson had liked the “Break the Glass” idea when it had first been presented to him and was now leaning to move in that direction. AIG was a disaster they couldn’t afford to repeat, and buying the assets maintained a clear border between government and the private sector. The job now was to begin preparing the outlines of legislation for Congress. They were going to need a ton of money, and they were going to need it immediately.
He assigned Kashkari and a team of staffers the task of fleshing out the idea; “Break the Glass” might have been an interesting document in theory, but it lacked details and was far from executable. He gave them twenty-four hours to fill them in.
Before ending the meeting, Paulson asked, “How much is this going to cost?”
Kashkari, who had originally estimated the expense at $500 billion back in the spring, said gravely, “It’s going to be more. I don’t know, maybe even double.”
Dismissing everyone with a warning that their conversation had been confidential, Paulson then called Geithner to compare notes. “You cannot go out and talk about big numbers with regard to capital needs for banks without inviting a run,” Geithner told him. “If you don’t get the authority, I’m certain you’ll spark a freaking panic. You have to be careful about not going public until you know you’re going to get it.”
By midafternoon Wednesday, Morgan Stanley’s stock had fallen 42 percent. The rumors were flying: The latest gossip had the company as a trading partner with AIG, with more than $200 billion at risk. The gossip was inaccurate, but it didn’t matter; hedge funds continued to seek nearly $50 billion in redemptions. Hoping to poach Morgan Stanley’s hedge fund clients, Deutsche Bank was sending out fliers with the headline: “DB: A Solid Counterparty.”
John Mack was meeting with his brain trust, already anticipating what had become a grim end-of-day ritual. At 2:45 p.m., hedge funds would start pulling money out of their prime brokerage accounts, asking for all the credit and margin balances. At 3:00, the Fed window would close, leaving the firm without access to additional capital until the following morning. Then, at 3:02, the spread on Morgan Stanley’s credit default swaps—the cost of buying insurance against the firm’s defaulting—would soar. Finally, its clearing bank, JP Morgan, would call and ask for more collateral to protect it.
“It’s outrageous what’s going on here,” Mack almost shouted, arguing that a raid on Morgan Stanley’s stock was “immoral if not illegal.” Intellectually he understood the benefit that shorts provide in the market—after all, many were his own clients—but at risk now was his own survival.
Colm Kelleher, Morgan Stanley’s CFO, was more fatalistic—the short-sellers couldn’t be stopped, he believed, or even necessarily blamed. They were market creatures, doing