Real Panic In Virtual Reality

October 9, 2009 (LPAC)—For a trip through the panicked mind-field of bankers and their regulators during the financial crisis of September 2008, it's hard to beat. We're talking about the excerpt in this month's Vanity Fair of Too Big To Fail, a book by Wall Street Journal reporter Aaron Ross Sorkin. The book, said to be "based on hundreds of hours of interviews with dozens of participants," paints a highly unflattering portrait of these so-called masters of the universe, at the point in which their world was disintegrating around them.

Facing what they saw as a potential chain reaction collapse of all the top Wall Street investment banks, the regulators leapt into a Keystone Kops-style mobilization to merge everything in sight. Tim Geithner, then the president of the New York Fed, was busily ordering the titans of Wall Street to call each other to discuss mergers, while the bankers were all looking to avoid taking over their bankrupt brethren and avoid being eaten themselves. After the failure of Lehman and the deal to merge Merrill Lynch into Bank of America, all eyes turned to Morgan Stanley as the next domino to fall.

"The panic was already palpable in John Mack's office at Morgan Stanley," which was being hit by huge withdrawals from its hedge fund clients, Sorkin wrote. "...[I]f Morgan Stanley went down, probably no more than six hours would pass before Goldman did, too. The big banks would follow, and God only knew what might happen after that."

Treasury Secretary Henry Paulson assembled his staff, telling them that an "economic 9/11" was underway, and that the entire economy was on the verge of collapsing. In addition to the banks, Paulson was worried about General Electric, which would be devastated by a collapse of the commercial paper markets.

"The panic at Goldman Sachs could no longer be denied," Sorkin wrote. Stanley Druckenmiller, the former guru at George Soros's hedge funds, had pulled most of his money out of Goldman, and the bank was afraid that if the word got around that Druckenmiller was bailing out, it could trigger a run that could bring down Goldman Sachs.

At the Fed, Governor Kevin Warsh was busy trying to work out a deal for Morgan Stanley to buy a big bank, to gain access to its deposit base. His top choice was Wachovia, but the deal fell apart when Morgan Stanley had a look at Wachovia's books. Said one Morgan Stanley executive: "That's a shit sandwich even I can't get my big mouth around."

Other deals under discussion had Goldman Sachs buying Citigroup, Goldman Sachs buying Wachovia, the Chinese buying a big piece of Morgan Stanley, JP Morgan Chase buying Morgan Stanley, and so on. At one point Geithner ordered Goldman Sachs CEO Lloyd Blankfein to begin merger discussions with Citigroup. So Blankfein called Citigroup CEO Vikram Pandit, only to find that Pandit was not expecting a call, and had no interest in merging with Goldman Sachs.

As deal after proposed deal fell through, the panic increased, but finally the Japanese stepped in with a $9 billion injection into Morgan Stanley — enough to stop the panic.

Ignore the financial history and read the Sorkin piece for its insight into the frame of mind of these fools, the guys who were at the same time assuring the public that everything was under control. They were lying then; and they're still lying now.

Contact: johnhoefle@larouchepub.com