When Morgan Stanley Almost Died

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 (MS) 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 (C) or JP Morgan (JPM). 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.

[Too Big to Fail, by Andrew Ross Sorkin, to be published this month by Viking]

Comments

[a fat panda:]

" Mack is clear-eyed and doing the right thing for his employees and his shareholders. But how close did his gamble come to failing? "

Felix,

This story simply shows that John Mack is a gambler. He wins some and loses some. Remember it was his previous gambles that drove his company close to failing. His effort here simply shows that he is willing to double or nothing all the way to the end.

Oct 05 08:50 AM

[klarsolo:]

Every management decision, even in non-banking sectors, deals with an uncertain future, only based on probabilities. That makes every manager a gambler of some sort. Only the stakes are sometimes higher, sometimes lower.


On Oct 05 08:50 AM a fat panda wrote:

> " Mack is clear-eyed and doing the right thing for his employees
> and his shareholders. But how close did his gamble come to failing?
> "
>
> Felix,
>
> This story simply shows that John Mack is a gambler. He wins some
> and loses some. Remember it was his previous gambles that drove his
> company close to failing. His effort here simply shows that he is
> willing to double or nothing all the way to the end.

Oct 05 10:45 AM

[bearfund:]

I have no love for any of these guys but anyone who tells Geithner to get fucked can't be a completely terrible human being.

Oct 05 11:52 AM

[Mad Hedge F...:]

bfe The retirement of John Mack as the CEO at Morgan Stanley truly marks the end of an era at the venerable, once white shoed investment bank. I knew John 30 years ago when he ran fixed income sales, and every bond salesman lived in terror of his very shadow. Don’t let his relaxed, easy going demeanor on TV fool you. He was truly aggression distilled, the head piranha in a river full of piranhas, and is the main reason I became an equity guy. The former Duke football player once had counters installed on his department’s phones to tally outgoing calls, and fired the least loquacious producers, earning the sobriquet “Mack the Knife.” Another time, when the firm was trying to muscle its way into a corner of the bond business, he spent months recruiting a top trader from another leading house, only to fire him on the first day. To a class of young incoming MBA’s he showed a slide of a heavily hirsute laughing man walking out of a shower, wearing only soap suds in the key areas, and told them “This is how we like to leave our clients, plucked clean and happy.” Jaws dropped when we realized it was a picture of him in his frat days. He surfed a massive wave of government and corporate debt issuance to the top of MS. When a prestigious golf club turned him down for membership, no doubt because of his Lebanese heritage, he set up his own. I shall leave the darker urban legends confined to the dustbin of history. Waleed Chama will take over as president of Morgan Stanley International, a more sober banker there never was. We traipsed around the Persian Gulf sheikdoms together in the old days, when the long range artillery from the Iran-Iraq war kept us awake at night at the Kuwait Hilton, and shark eaten bodies of soldiers would wash up on the beach every morning. John will hang on as chairman, which means playing golf full time with the firm’s largest clients. As for the stock, you can expect another double after its near death experience at $6, once the economy gets back to normal.

Oct 05 02:10 PM

[Anandakos:]

Felix,

Thanks for having the courage to advocate for better regulation.

My favorite is revoking deposit insurance from any depository institution which has more than 2% of national deposits or is a part of a larger group which does. It would have to be withdrawn over a period of time, of course, in order to prevent runs on the big banks.

But over that implementation period it would force them to retrench to a smaller size and force the breakup of the financial supermarkets which have so much inherent risk.

Yes, it <b>would</b> increase the risk of direct <b>banking</b... failure for each surviving individual bank, because they'd have less ability to cross-capitalize from unregulated siblings. And, they'd inevitably be more regional, since it would be impossible for a nationwide depository to have less than 2% of total deposits.

But it would greatly reduce the risk of infection from those same unregulated siblings and the temptation to inflate earnings by financial engineering gambles. It would reduce banking to the regulated utility it should be. There are <b>plenty</b> of talented bankers running regional banks and large credit unions who would be glad to step up to running the sorts of large regional banks that would survive. Let the Dimon's, Lewis's, Blankfein's, and Kovacevich's of the world run investment banks. There fill an important role in a truly free capitalist system, but gamblers like them should <b>never</b> have been allowed into the no risk world of FDIC and Fed backed commercial banking. Never.

One simple regulatory change with <i>enormous</... potential for restructuring.

Oct 05 02:56 PM

[Anandakos:]

Whoops. Apparently HTML tags are persona non grata on Seeking Alpha. Especially those with no matching closing tag......

On Oct 05 02:56 PM Anandakos wrote:

>
> Felix,
>
> Thanks for having the courage to advocate for better regulation.
>
>
> My favorite is revoking deposit insurance from any depository institution
> which has more than 2% of national deposits or is a part of a larger
> group which does. It would have to be withdrawn over a period of
> time, of course, in order to prevent runs on the big banks.
>
> But over that implementation period it would force them to retrench
> to a smaller size and force the breakup of the financial supermarkets
> which have so much inherent risk.
>
> Yes, it <b>would</b> increase the risk of direct <b>banking</b...
> failure for each surviving individual bank, because they'd have less
> ability to cross-capitalize from unregulated siblings. And, they'd
> inevitably be more regional, since it would be impossible for a nationwide
> depository to have less than 2% of total deposits.
>
> But it would greatly reduce the risk of infection from those same
> unregulated siblings and the temptation to inflate earnings by financial
> engineering gambles. It would reduce banking to the regulated utility
> it should be. There are <b>plenty</b> of talented bankers running
> regional banks and large credit unions who would be glad to step
> up to running the sorts of large regional banks that would survive.
> Let the Dimon's, Lewis's, Blankfein's, and Kovacevich's of the world
> run investment banks. There fill an important role in a truly free
> capitalist system, but gamblers like them should <b>never</b> have
> been allowed into the no risk world of FDIC and Fed backed commercial
> banking. Never.
>
> One simple regulatory change with <i>enormous</... potential for
> restructuring.

Oct 05 02:57 PM

[ryanclarke:]

I find it odd that you surmise the banks should not be nationalized and all is well at Morgan Stanley. Mitsubishi bailed out Morgan, right? You should ask yourself, "Who is going to bail out Mitsubishi?" Certainly not the Japanese government as that government is now defunct. How do I know as such? I tried to have a conversation with the Finance minister but I'm having a problem doing so ... as I have yet to find my Chineese manufactured shovel. But I will ... and all I have to do is dig a few feet, namely six, to do so AS HE'S DEAD! You should ask yourself, " How are the Mits going to sell their wheels to the Brits, now that Japan no longer gives a damn about their APPRECIATING currency?"

Oct 05 09:03 PM

[jago:]

"[...Paulson worried...] that Treasury bills were trading for less than 1 percent interest, as if they were no better than cash, as if the full faith of the government had suddenly become meaningless."

this is really sloppy. yes, short maturity tbills were at or near 0%, but it meant the demand was so strong that investors were willing to earn virtually no interest for the security of an obligation of the US government; quite the opposite of the author's statement.
later in the crisis, these rates actually were negative, reflecting fear to the degree that buyers would take a guaranteed loss to have tbills on the books, instead of money in the bank or at money market funds.

Oct 06 02:35 PM

[Fighting Yoda:]

Morgan Stanley etc were saved by the Fed. - all kinds of money and was poured into the system to prevent the collapse. So the deals that Mack may not at all have been significant to prevent the failure. Fed has essentially backstopped the market along with these new accounting rules, take money at zero APR and speculate. Well for now the system has been saved but the seeds have been sown for a even bigger collapse in the near future. The problem is bad debt - you can pretend it will get paid - but the reality is it can not get repaid - no one has the ability repay - CREs will come due in the near future, FHA is on the brink.

Oct 11 12:21 AM

[ebworthen:]

So...am I missing something...or if they had acted etically and responsibly with the money of individual investors none of the shouting and cussing and bailouts would need have happened, right?

May as well be a book about the cheerleading squad at a local high school standing up to the principle for their right to date the players and go on weekend romps with a school bus.

What a joke we have become....

Oct 11 02:36 AM

[ebworthen:]

I meant "ethical" and "principal", that is what happens when you are PISSED OFF.

I propose a new title for his book, and Wall Street itself:

"Too Big to Flail" with an "l".

Yes, let them die, put them out of their misery, don't bail the bastards out EVER.

Oct 11 02:38 AM

[bindlepete:]

I can not agree that "these crises come out of nowhere".

They are and were well heralded by phony valuations and over extension of leverage. The deaf and blind should not dance on Rail Road tracks.

However, if they choose to feed the vultures they should do it with their own money or do due dilligence on their counter parties.

Was there any sense of fiduciary responsibility? I would say no.

Oct 12 12:40 PM