As Credit Crisis Spiraled, Alarm Led to Action - Morningbull

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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.
That caused all kinds of stocks to begin rising. Sure enough, the S.E.C. followed suit the next day, placing a temporary short-selling ban on 799 financial stocks. A few hours later came the second event. At 3:01 CNBC reported the Treasury and the Fed were planning a giant fund to buy toxic mortgagebacked assets from financial institutions. Though there had been hints of this earlier in the afternoon, and stocks had started rising around 2:30, the wide dissemination set off a huge rally. In a 45-minute burst, the Dow gained another 300 points, closing the day up 410 points. Meeting on Capitol Hill Two hours later, Mr. Paulson and Mr. Bernanke trooped up to Capitol Hill for a somber session with Congressional leaders. “That meeting was one of the most astounding experiences I’ve had in my 34 years in politics,” Senator Schumer recalled. As the members of Congress and their aides listened, the two laid out their plan. They would begin offering federal insurance to money market funds immediately, in order to stop the run on money funds. In addition, the S.E.C. would institute a ban on short-selling of financial stocks. Although Treasury officials concede that the move was mostly symbolic — investors can still buy put options that have the same effect as shorting stocks — they did it mainly “to scare the hell out of everybody,” as one official put it. After Mr. Bernanke made his remark about the possibility that there might not be an economy on Monday without this plan, you could hear a pin drop. “I gulped,” Mr. Schumer said. Congressional leaders were nearly unanimous in saying that it needed to be done for the good of the country. Representative John A. Boehner of Ohio — the Republican House leader who a week later would lead the revolt against the plan — said it was time to put politics aside and move quickly, according to several participants. (An aide to Mr. Boehner denied that he voiced support for the plan, only that he made a plea for cooperation.)
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As Credit Crisis Spiraled, Alarm Led to Action - Morningbull

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