As Credit Crisis Spiraled, Alarm Led to Action - Morningbull

Lloyd C. Blankfein, Goldman Sachs’s chief executive, had arrived at the
firm’s office on 85 Broad Street just before 7 a.m. Thursday, anticipating
another bad day. The investment bank’s stock had already been pummeled.
From nearly $250 a share last October, it had fallen to $114.50 on
Wednesday — after hitting a low of $97.78 that day.
One idea he had been exploring was to transform Goldman into a bank
holding company. Mr. Mack, meantime, was also considering such a move
for Morgan Stanley, and both were in separate discussions with the Fed.
There was safety in that notion — they would become depository
institutions regulated by the Fed and others — though it also meant they
would not be able to pile on as much debt as they had as investment banks.
That would hurt profits. But now profits were less pressing than survival.
Mr. Blankfein accelerated the planning.
By 1 p.m., the Dow had fallen another 150 points — meaning that in a day
and a half it was down nearly 600 points. Goldman’s stock dropped to
$85.88, its lowest in nearly six years.
Just then, a prankster piped “The Star-Spangled Banner” over the firm’s
loudspeaker system on the 50th floor. Fixed-income traders stopped and
stood at attention, some with hands on their hearts. Oddly, it was at
precisely that moment that the market — and Goldman’s shares — started
to rise.
The traders began to cheer.
Curbing Short-Selling
What happened? At 1 p.m. New York time, the Financial Services Authority
in Britain, which regulates that nation’s financial institutions, announced a
ban on short-selling of 29 financial stocks that would last at least 30 days.
“When I saw that, I knew we were about to have the mother of all short
squeezes,” said one hedge fund manager. Realizing that the S.E.C. was likely
to follow suit, hedge funds began “covering their shorts” — that is, buying
the stocks they had borrowed to short, even if it meant taking a loss.