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By Root 13533 0

deRegt, Morgan Stanley’s chief risk officer, was trying to put the best face on his firm’s finances as he prepared for the meeting with JP Morgan that morning, assembling lists of collateral that he hoped would be considered strong enough to lend against. But as he worked it began to dawn on both him and Ruth Porat, who ran the firm’s financal institutions group, that an unrestricted show-and-tell session with JP Morgan bankers might be counterproductive. If all went well, Morgan Stanley would become a bank holding company that very evening—a plan that JP Morgan was unaware of—giving it access to far more liquidity. So they decided to be selective about what they would and wouldn’t feature in the presentation and included only the bank’s collateral that they wouldn’t be able to pledge to the Fed, which represented some of the worst holdings on its books. It would be a risky move. Rather than burnishing the firm for a sale, they could unknowingly scare off a potential partner.

Braunstein, Hogan, and Black of JP Morgan arrived at 750 Seventh Avenue punctually at 8:45 a.m., bringing the firm’s general counsel, Steven Cutler, with them. Several dozen underlings had already arrived and were waiting. The location, a nondescript office building with no signage a block west of Morgan Stanley’s headquarters, was where the company typically held any meeting it wanted kept secret.

“This is highly confidential,” Hogan reiterated to the team as they set up in a meeting room that Morgan Stanley had provided. Braunstein was surprised that no coffee or food was provided for his team—Is this some kind of negotiating tactic?—and immediately sent an associate to Dunkin’ Donuts.

They all knew they were there for what could be the most historic diligence session of their lives. While Hogan had told them the meeting was about extending a line of credit to Morgan Stanley, they all knew that it could quickly turn into a full-blown merger, a transaction that would make the Bear Stearns deal look like Little League practice. War rooms were set up to review each major part of Morgan Stanley’s business—prime brokerage, real estate, principal investments, and commodities.

JP Morgan’s lawyers had expressed serious doubts to the team that they could pull off a deal like this in such a short compass of time. They kept referring to the problem of “perfecting security interests in less than twenty-four hours.”

In fact it wouldn’t take nearly that long: Within two hours, JP Morgan decided to pull the plug. They were shocked that the assets that Morgan Stanley was offering as collateral were of such low quality, surely too low for JP Morgan to lend against.

“This stuff is crap,” Hogan told Steve Black, JP Morgan’s president.

By midday, Goldman Sachs and Wachovia, which was represented by a half dozen executives whom Bob Steel had brought along, were making rapid progress toward completing a deal. Peter Weinberg, Bob Steel’s adviser and a former Goldman man, had constructed the outlines of an agreement in which Goldman would pay $18.75 a share for Wachovia’s shares in Goldman stock. The price represented the closing price of Wachovia’s shares on Friday.

There remained, however, one serious obstacle: Goldman wanted a “Jamie” deal. The next step was to go back to Warsh at the Fed and ask whether the Fed was prepared to subsidize the deal by guaranteeing Wachovia’s most toxic assets.

During a lull in the negotiations, Weinberg took a break and walked down the hall of the executive floor. As he passed a series of portraits of the firm’s past chief executives, he stopped when he reached Sidney Weinberg, his grandfather. Sidney Weinberg, who became a Goldman partner in 1927, represented the epitome of the old Wall Street, a business that had been defined by personal relationships and implicit trust, not leverage and ever more complicated financial engineering. His grandfather’s world had been obliterated over the past decade as firms sought to go public and began using shareholder money to place what had proved to be dangerously risky bets.

Jon Winkelried,