In his book “Too Big To Fail: The Inside Story of How Wall Street and Washington Fought to Save the Financial System—and Themselves,” Andrew Ross Roskin reports that the government secretly tried to orchestrate a deal involving Goldman Sachs and Wachovia in the week following Lehman Brothers’ collapse.
The problem: Having the Fed backstop such a deal would be a PR fiasco, given Hank Paulson’s connection to Goldman, and then-Wachovia head Bob Steele’s connection to Goldman.
Vanity Fair put out a release on its excerpt:
In an excerpt from his forthcoming book, Too Big To Fail: The Inside Story of How Wall Street and Washington Fought to Save the Financial System—and Themselves, Sorkin reports that the deal, which was nearly consummated, would have merged Goldman Sachs and Wachovia. Henry M. Paulson, the Treasury secretary and former C.E.O. of Goldman, was deeply involved in the process, contacting both Lloyd Blankfein, Goldman’s current C.E.O., and a Wachovia board member, and strongly urged both to consider it. Wachovia’s C.E.O., Robert Steel, was a former vice-chairman at Goldman Sachs and Paulson’s former number two at the Treasury Department.
Sorkin reports that Warren Buffett was also contacted about investing in the merged company, but told a banker at Goldman that it would never happen. “By tonight the government will realise they can’t provide capital to a deal that’s being done by the former firm of the Treasury secretary with the company of a former vice-chairman of Goldman Sachs and former deputy Treasury secretary,” Buffett said. “There is no way. They’ll all wake up and realise, even if it was the best deal in the world, they can’t do it.”
Jim Wilkinson, Paulson’s chief of staff, realised that such a deal would be a public-relations nightmare at the worst possible time—just as they were trying to pass TARP. “Hank, if you do this, you’ll get killed,” Wilkinson frantically told his boss. “It would be fucking crazy.” Paulson, he said, would lose credibility; he would be accused of lining the pockets of his friends at Goldman; the “Government Sachs” conspiracy theories would flourish.
Rodgin Cohen, a Sullivan & Cromwell lawyer who was advising both Wachovia, on parallel talks with Morgan Stanley, and Goldman Sachs, on its bank-holding-company application, was the first to suggest that the government attempt a shotgun wedding between Goldman and Wachovia, Sorkin reports. He offered up the idea in a phone call to Kevin Warsh, a governor at the Fed, saying that it wasn’t an officially sanctioned plan by his clients, just a friendly suggestion from an old-timer in the business. He said he knew it was a long shot—the “optics,” he acknowledged, would be problematic, given that Paulson and Wachovia C.E.O. Robert Steel were both former Goldman men—but it would solve everyone’s problems: Goldman would get the deposit base it needed, and Wachovia would have its death sentence stayed.
According to Sorkin, Goldman co-president Gary Cohn had agreed to engage in talks with Wachovia only on the presumption that the Fed would help Goldman guarantee some of Wachovia’s most toxic assets. And Warsh, in a bold gesture, made a commitment that the Fed would strongly consider it. Paulson spoke with Blankfein and told him to take the talks seriously. “If you go into this looking for all the problems and how much help you’re going to get, it’s never going to happen,” he said, adding, “You’re in trouble, and I can’t help you.”
Much to their dismay, Cohn and Steel spent 24 hours working on a deal that they thought was near closure—and had the support of the Fed—but which ultimately died after Paulson, Bernanke and Geithner decided against pursuing it, in part, because of the “optics” of Goldman’s ties to the government. “I’m sorry. I understand—I’m just as frustrated as you are. We just don’t have the money; we don’t have the authorization,” Warsh explained.
At the same time, Sorkin reports, the Federal Reserve also tried to push Goldman Sachs and Citigroup together, but Vikram Pandit, Citi’s C.E.O., rejected the idea. “Well, that was embarrassing,” Blankfein exclaimed after he got off of one phone call with Pandit.
Meanwhile, the government demanded Morgan Stanley merge with J. P. Morgan, an idea that both John Mack, Morgan Stanley’s C.E.O., and Jamie Dimon, J. P. Morgan’s C.E.O., did not want to pursue, but both held brief talks at the government’s urging.
Paulson, Bernanke, and Geithner told Mack that he should be willing to sell his firm to J. P. Morgan for $1 a share. Mack, in an impassioned phone call with the three government leaders, rejected their demand: “There are 35,000 jobs that have been lost in this city between A.I.G., Lehman, Bear Stearns, and just layoffs. And you’re telling me that the right thing to do is to take 45,000 to 50,000 people, and put them in play, and have 20,000 jobs disappear? I don’t see how that’s good public policy.