Too Big to Fail [232]
“Okay. That’s not a bad idea,” Paulson agreed. “We’ve been talking about that. I could do that. What else do you got?”
“I would stop the ability of people to withdraw, you know, transfer their brokerage accounts,” Schwarzman continued. “Nobody really wants to transfer their account out of Goldman or Morgan. They just feel they have to do it so they’re not the last person on a sinking ship.”
“I don’t have the powers to do that,” Paulson replied.
“You could get rid of the ability for people to write credit default swaps on financial institutions,” Schwarzman offered as alternative, “which is putting enormous pressure on financial institutions.”
“I don’t have the powers to do that either,” Paulson protested.
Schwarzman, concerned that he wasn’t getting through to Paulson, replied, “Look, you’re going to have to announce something very big to rescue the system, some huge amount of money that gets utilized to address the problems of the system.”
“Well, we’re not ready to do that yet,” Paulson told him. “We’ve got some ideas,” he said.
“I don’t think that it’s relevant if you haven’t fully baked everything,” Schwarzman said, “You need an announcement tomorrow to stop the collapse and you’ve got to figure something out that will grab people’s attention.”
“What’s wrong?” John Mack asked in alarm as his CFO, Colm Kelleher, walked into his office late Wednesday, his face ashen.
“John,” Kelleher said in his staccato British inflections, “we’re going to be out of money on Friday.” He had been nervously watching the firm’s tank—its liquid assets—shrink, the way an airline pilot might stare at the fuel gauge while circling an airport, waiting for landing clearance.
“That can’t be,” Mack said anxiously. “Do me a favor, go back to the financing desk, go through it again.”
Every hour was bringing a new problem. The internal memo he had sent out earlier decrying short-sellers had started leaking out, and now several prominent hedge fund clients that used shorting strategies—some simply to hedge their exposures to other securities—were closing their Morgan Stanley accounts in protest.
“It’s one thing to complain, but another to put out a memo blaming your clients,” railed Jim Chanos, the short-seller who famously unearthed the problems at Enron. He had been a Morgan Stanley client for twenty years, but now he was making his displeasure known by pulling $1 billion from his account at the firm. Julian H. Robertson Jr., the founder of Tiger Management, one of the first and most successful hedge funds, called the firm apoplectically, though he stopped short of redeeming the money he kept with Morgan Stanley.
As annoyed as they might have been by the attack on shorts, the firm’s clients were about to become a good deal angrier. Mack was reviewing draft language for the statement he would publish the following day in support of Cuomo’s investigation into short selling. Though he knew full well that his language would infuriate his clients and send even more of them packing, Mack didn’t believe he had a choice but to lend his support:
Morgan Stanley applauds Attorney General Cuomo for taking strong action to root out improper short selling of financial stocks. By initiating a wide-ranging investigation of this manipulative and fraudulent conduct, Attorney General Cuomo is showing decisive leadership in trying to help stabilize the financial markets. We also support his call for the SEC to impose a temporary freeze on short selling of financial stocks, given the extreme and unprecedented movements in the market that are unsupported by the fundamentals of individual stocks.
Kelleher returned to Mack’s office thirty minutes after having been sent to review the firm’s balances again, slightly less shaken,