When Morgan Stanley almost died

By Felix Salmon
October 5, 2009
Ryan Lizza in The New Yorker, but also Andrew Ross Sorkin, whose book excerpt in Vanity Fair -- all 12,000 words of it -- is now online in full.

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It’s a day for long readings: not only Ryan Lizza in The New Yorker, but also Andrew Ross Sorkin, whose book excerpt in Vanity Fair — all 12,000 words of it — is now online in full.

If the excerpt gives any indication of the quality of the book as a whole, Sorkin has succeeded in writing the book of the crisis, with amazing levels of detail and access. Many books end up having much less detail than the day-to-day journalism in the papers, choosing instead to concentrate on the bigger picture. This one, by contrast, has a lot of detail, and it’s worth reading the Q&A with Sorkin to get an idea of how much reporting went into it.

The VF excerpt covers a period which has been rather overshadowed, in retrospect, by the collapse of Lehman Brothers — the week after that epochal event, when Morgan Stanley came thisclose to failing. At the time, my predictions that Morgan Stanley was going to fail resulted in my getting a serious death threat, so I was interested to read Sorkin’s account of this period to see how close I had been. The answer is very: on Wednesday September 17, Morgan Stanley’s CFO calculated that the bank was going to run out of money by the end of the week, and that was just one of many life-threatening crises for the bank.

All manner of options were looked at, including really messy mergers with Wachovia or Citigroup or JP Morgan. Nothing looked remotely attractive. China’s CIC bank had cash to play with but didn’t seem overly keen to do a deal; Japan’s Mitsubishi was also interested, but culturally pretty much incapable of moving with speed and decisiveness over the course of a sleepless weekend.

And then there was the too-many-cooks problem: because Morgan Stanley was systemically important and its collapse would almost certainly cause Goldman to domino into failure as well, Tim Geithner and Hank Paulson and Ben Bernanke were all breathing down the neck of Morgan Stanley’s CEO, John Mack. None of them had had much sleep either, and they were making rushed and ill-thought-through decisions, like trying to get Goldman to merge with Wachovia or even buy Citigroup. The Goldman-Wachovia deal, pushed by the Fed, almost happened, until it was vetoed by the very people who had encouraged it in the first place.

In Sorkin’s telling, Wachovia CEO Bob Steel has a moment of minor glory shouting at the Fed’s Kevin Warsh over a speakerphone, but it’s John Mack who has the real brass balls, fighting with Paulson himself and telling Geithner to “get fucked” while he’s putting a deal together with Mitsubishi. Mack’s a hero of this story: while everybody else is panicking, Mack is clear-eyed and doing the right thing for his employees and his shareholders. But how close did his gamble come to failing? I asked Sorkin, who replied:

As you’ll see in the book in the chapter that follows the excerpted material, the Mitsubishi deal briefly almost falls apart two weeks later, leaving Mack anxious that the firm was imperiled all over again. Of course, in the end, the deal is completed and disaster averted.

Mack had only bad choices to make: Sell to JP Morgan for $1 a share, which would have meant at least 20k employees would be fired, if not more; sell half the firm to the Chinese for next to nothing, which likely would have meant he would have had to raise capital again because CIC was only prepared to contribute a couple of billion; or pursue the deal with Mitsubishi. Of those choices, he clearly made the right one, but as you said, things could have turned out very differently. One other thing to consider: In the book, I provide a scene inside Morgan Stanley’s board meeting that Sunday afternoon — it was edited from the excerpt for space — but the group was pretty unanimous in its view that it should pursue Mitsubishi, despite someone else in the room suggesting otherwise. (There’s a fun little surprise in that scene, so I won’t spoil it for you.)

I’m looking forward to reading the book, including the board-meeting easter egg. But this excerpt, more than anything else I’ve read in the orgy of one-year-later reminiscing, shows just how close the entire financial world came to collapse. It should be required reading for anybody in Congress who is breathing easily again and thinks that the worst is over and we don’t need to do too much in the way of regulatory reform. These crises can come out of nowhere, and it’s imperative that the next time round, we have institutions capable of dealing with them, instead of having to rely on dumb luck and the occasional deus ex machina from Japan.

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