'Too Big to Fail'

That's the title of Andrew Ross Sorkin's upcoming book that gets excerpted in the November issue of Vanity Fair. In the excerpt, Sorkin presents a detailed - and often riveting - account of how the government was desperately trying to save Morgan Stanley from going under. With Lehman already gone, the fear was that Morgan might be next, and after that Goldman Sachs.

[Former Treasury Secretary Hank] Paulson was no longer worried about just investment banks; he was worried about General Electric, the world's largest company and an icon of American innovation. Jeffrey Immelt, G.E.'s C.E.O., had told him that the conglomerate's commercial paper, used to fund its day-to-day operations, could stop rolling. Paulson had also heard murmurs that JPMorgan Chase had stopped lending to Citigroup; that Bank of America had stopped making loans to McDonald's franchisees; 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.

Paulson knew this was his financial panic. The night before, chairman of the Federal Reserve Ben Bernanke had agreed it was time for a systemic solution; deciding the fate of each financial firm one at a time wasn't working. It had been six months between the implosions of Bear Stearns and Lehman, but if 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.

[CUT]

The 50th-floor office of Goldman's fixed-income trading unit, in Lower Manhattan, was in near meltdown by lunchtime on Thursday. No trading was taking place, and the traders themselves were glued to their terminals, staring at the GS ticker as the market continued its swoon. Goldman's stock dropped to $85.88, its lowest level in nearly six years.

Jon Winkelried, Goldman's other co-president, had been walking the floors, trying to calm everyone's nerves. "We could raise $5 billion in an hour if we wanted to," he told a group of traders, as if to suggest that nothing was amiss. But just then, at one p.m., the market--and Goldman's stock--suddenly turned around, with Goldman rising to $87 a share, and then $89. Traders raced through their screens trying to determine what had been responsible for the lift and discovered that the Financial Services Authority in the U.K. had announced a 30-day ban on short-selling 29 financial stocks, including Goldman Sachs's.

The squawk boxes on Goldman's trading floor soon crackled to attention. A young trader found a recording of "The Star-Spangled Banner" on the Internet and broadcast it over the speakers to commemorate the moment. About three dozen traders stood up from their desks, placed their hands over their hearts, and sang aloud, accompanied by rounds of high-fives and cheers.

Sorkin, the NYT financial columnist, goes a long way toward dispelling the various Goldman-related conspiracy theories - the crisis was very real and at times out of control. Eventually, Mitsubishi stepped in to save the day for Morgan - and for Goldman.