A $50 million margin call? I'll short Wall Street.

Friday, July 11, 2008. After the market closed.

Several buildings on Wall Street were brightly lit.

Goldman Sachs. 200 Broad Street. 50th floor.

5:20 PM.

Lloyd Blankfein sat behind his desk, holding a one-page risk control summary that Craig Smith had just handed him.

The summary is simple—a summary of today's declines in the global financial sector, Goldman Sachs' own stock price movements, and changes in CDS spreads.

Goldman Sachs fell 6 percent today. CDS spreads jumped from 148 to 187.

not good.

But it shouldn't be enough to keep him awake at night.

Goldman Sachs has the cleanest balance sheet on Wall Street.

He has spent a tremendous amount of time and effort over the past year and a half reducing his subprime exposure. If Wall Street is a sinking street, Goldman Sachs stands at the highest point.

It wasn't these numbers that made him sit in the chair and not immediately stand up to pour water.

It was that "coincidence".

Monday. A message from Farstar.

Tuesday and Wednesday. The market rebounded. Everyone said it was a false alarm.

He thought roughly the same thing; when he saw the letter, his first reaction was to assess what impact it would have on Yuanxing's holdings at Goldman Sachs.

The second reaction was to assess whether it would have a ripple effect on Goldman Sachs' reputation (after all, he had publicly endorsed Lu Ze at the Metropolitan Banquet).

The third reaction was—

Okay, his third reaction was, "This guy is building hype for his short position." Just like most people on Wall Street.

Then IndyMac went bankrupt.

Blankfein placed the risk control summary on the table.

He pulled open the drawer on his right—the locked drawer, the one only he had the key to. Inside were several documents he believed needed to be preserved long-term.

Confirmation of a CDS basket transaction from Farstar. Several months ago.

The printed copy of that open letter. He printed it out after Craig forwarded it to him on Monday morning.

He took the letter out and read it again.

The feeling of watching it the second time was completely different from the first time.

When he read it on Monday, his attention was mainly focused on "what this means for Goldman Sachs"—how much of a position Yuanxing held at Goldman Sachs' counter, whether this letter would cause market volatility and thus affect Goldman Sachs' proprietary trading, and whether the media hyping up the relationship between Goldman Sachs and Yuanxing would cause him trouble.

Now, as he reread the letter while IndyMac's body was still warm, his attention fell on some details he had previously overlooked.

"Bear Stearns' death is not a period, but a comma."

When he read that sentence on Monday, he thought it was a rhetorical device. It was a literary technique used by hedge fund managers to increase the persuasiveness of their writing.

Now he's uncertain.

If Bear Stearns is a comma, then IndyMac is the first word following the comma.

What is the second word?

Blankfein's fingers paused on the edge of the letter.

He thought of something.

The Metropolitan Banquet. June.

He led Lu Ze around the hall, introduced him to Geithner, and patted him on the shoulder.

At the time, he thought it was a smart social investment: bringing a rising star into Goldman Sachs' orbit.

Now he suddenly realized that the "pat on the shoulder" gesture might be interpreted in a way that he had never anticipated in some people's eyes:

Goldman Sachs and Farstar are in cahoots.

If in the future anyone—the media, Congress, or the SEC—wants to investigate whether "Yuanxing's open letter constitutes market manipulation," that image of someone patting someone on the shoulder will become an extremely sensitive symbol.

Blankfein mentally flipped the possibility over and over again.

No.

Thinking about these things now is too far ahead.

IndyMac is a savings and loan bank, not a Wall Street investment bank.

Its collapse, while validating some of the predictions made in the Far Star Letter, does not mean that everything mentioned in the Far Star Letter will happen.

The financial system is resilient. The Federal Reserve has the tools. The Treasury has Paulson.

He put the letter back in the drawer and locked it.

Then he picked up his personal phone.

I scrolled down to the name "Lance Walker" in my contacts.

His thumb hovered over the dial key.

He wanted to make that call. He wanted to hear Lu Ze's voice. He wanted to catch a clue about "what would happen next" from that voice that never seemed to convey any warmth.

The thumb remained there for about four seconds.

Then he put his phone down.

Do not hit.

He certainly wanted to know the answer, or to get some information from his conversation with Lu Ze.

But he suddenly realized that making that call was itself a sign of weakness.

Blankfein is the CEO of Goldman Sachs. He has hundreds of analysts, dozens of risk control experts, and the world's most powerful financial intelligence network.

He shouldn't need an external hedge fund manager to tell him the direction of the market.

If he makes that call, and if this gets leaked in any way, how will Wall Street interpret it?

"Goldman Sachs' CEO is consulting with Walker of Farstar about market trends."

No.

Absolutely not.

Blankfein stood up and put his phone in his pocket.

He walked to the window and looked at the Manhattan skyline, which was beginning to darken. In the distance, towards Park Avenue, the offices of Farstar Capital were probably still lit.

He thought about what the young man was doing at that moment, and then cleared the thought from his mind.

He turned and walked back to his desk, pressing the intercom: "Have Craig see me at eight tomorrow morning. I need a complete—comprehensive—stress test report on all of Goldman Sachs' exposures in the current market environment. Parameters set to the extreme."

Do what you're supposed to do. Don't depend on anyone.

This was the first rule Blankfein learned during his thirty years at Goldman Sachs.

Lehman Brothers. 745 Seventh Avenue. 31st floor.

At the same time.

"Bang."

The third crystal ashtray in Fuld's office this year has broken.

This time, the shards flew farther than before. One piece landed on the glass of the French windows, leaving a tiny scratch that was almost invisible unless you looked closely.

Fuld stood behind the desk, his chest heaving violently.

He had just slammed that ashtray onto the sofa—in the same spot, at the same angle, with even the same off-key roar squeezed from deep in his throat.

But today's roar is fundamentally different from the previous ones.

When he smashed the ashtray earlier, his anger was directed outward—at Eindhoven, at the short sellers, at those ignorant people who "didn't understand the true value of Lehman Brothers." That anger carried a twisted confidence: "They are wrong, I am right, and time will tell."

Today's anger is slightly different.

There is an element in his anger today that he is unwilling to admit but can no longer completely suppress.

fear.

IndyMac has gone out of business.

A bank. It really went bankrupt.

It wasn't a "decent death" like Bear Stearns, which was acquired by JPMorgan Chase for two dollars.

It was taken over directly by the FDIC. Depositors lined up to withdraw money, and an old lady was sitting on the steps in the TV footage.

And that damned open letter from Farstar, the one that nearly made him smash the ashtray again when he saw it on Monday—is now being quoted repeatedly around the world as an "accurate prophecy."

Lehman Brothers' stock price fell 24 percent today.

Twenty-four percent. One day.

It dropped from 17.80 to 13.45.

If it continues to fall at this rate for another day...

Fuld didn't want to settle this score.

He walked to the bar and poured himself a glass of whiskey.

My hands are trembling.

It's not very powerful, but it can make the spout of the wine bottle make a very slight clinking sound when it hits the rim of the glass.

He took a big gulp.

The strong liquor burned my throat, then exploded in my stomach with a brief, false warmth.

He put down his cup and walked to the window.

The lights of Manhattan spread out outside the window. Goldman Sachs' building was lit in the distance. Morgan Stanley's building was also lit.

They are all still alive.

And he—Richard Fuld, the man who worked at Lehman Brothers for forty years and transformed it from a second-rate bond brokerage into the fourth-largest investment bank on Wall Street—was standing in a building where the lights were still on, but it was unclear how much longer they would remain on.

He realized something that terrified him more than anger—

IndyMac was not mentioned in that open letter from Farstar.

It refers to "systemic risk".

IndyMac is just the first piece of evidence.

If that letter is correct—if systemic risk is real—

Lehman Brothers was not facing a "market sentiment problem".

Lehman Brothers was facing a tsunami that was approaching at an increasingly rapid pace and that no one could stop.

Fuld rested his forehead against the cold, floor-to-ceiling window.

His face was reflected in the glass. A 61-year-old face, utterly exhausted, a face that once inspired fear in everyone on Wall Street.

The expression on his face at that moment was one that even he himself did not recognize.

.....

Merrill Lynch. World Financial Center, Tower 4.

5:45 PM.

In John Sain's office, the air conditioning was turned up to the maximum.

However, the fabric on the back of his shirt, in the area between his shoulder blades, was completely soaked with sweat.

The dark blue fabric turned into a deeper, almost black color because it was wet.

Sain sat behind his desk with two documents spread out in front of him.

The document on the left is Merrill Lynch's latest internal balance sheet summary. Only three people are authorized to view this document—himself, the CFO, and the Chief Risk Officer.

The document on the right is an open letter from Farstar Capital.

This wasn't the first time he'd read the letter. He'd read it when it was sent out on Monday.

But when he read it on Monday, his attention, like most people on Wall Street, was focused on whether it was referring to Lehman Brothers.

The answer is clearly "yes". Every risk characteristic described in the letter—commercial real estate, Level 3 financing, short-term financing—is highly consistent with the profile of Lehman Brothers.

So on Monday, Saine felt the letter had little to do with Merrill Lynch. Lehman Brothers is Lehman Brothers, and Merrill Lynch is Merrill Lynch.

Then IndyMac went bankrupt.

Then CNBC created that comparison table—the risk indicators from Farstar's open letter vs. IndyMac's actual data—and it matched every single one.

Then Sain did something he hadn't done on Monday.

He compared every risk indicator in that letter with Merrill Lynch's own data.

He didn't have the analyst team do it. He did it himself. By hand. With a calculator.

Valuation of commercial real estate related assets.

Merrill Lynch's CDO holdings. The difference between the book value and his own estimated fair market value.

He finished calculating.

Then he put the calculator on the table and stared at the numbers on it for about ten seconds.

That number made him sweat even more on his back.

Level 3 assets as a percentage of shareholders' equity.

He doesn't need a calculator. He remembers the number.

190 percent.

It's higher than Lehman's 175.

Dependence on short-term financing.

Like Lehman Brothers, Merrill Lynch needed to borrow tens of billions of dollars daily in the overnight repurchase market to stay afloat.

Sain flipped the balance sheet summary over and placed it face down on the table.

He didn't want to look at those numbers anymore.

But those numbers won't disappear.

They will continue to exist on Merrill Lynch's balance sheet, deteriorating every day in an extremely slow but irreversible way, like an organ being eroded by some kind of chronic disease.

Thain only took over Merrill Lynch three months ago. Those bad debts weren't his doing. He was brought in by the board to "put out the fire."

That's fucking ridiculous. Isn't this going to kill him?

The fire was already causing a lot of trouble.

Today, IndyMac's collapse is like a sudden gust of wind, turning the flames he thought he could still control into a wall of fire approaching his feet.

He thought for a long time, then picked up the landline phone and dialed a number.

It rang three times.

"Feed?"

"Ken, it's me. John Thane."

Ken Lewis. CEO of Bank of America.

There was a pause on the other end of the phone.

It was about confirming the meaning of the name John Thain, CEO of Merrill Lynch, appearing on his phone.

"John. Long time no see." Lewis's voice carried the slow, polite tone typical of Southerners.

"Ken, I know the timing isn't good."

Sain's voice sounded a little tighter than he intended. He tried to slow his speech.

"But I'd like to meet you. Let's have a coffee."

"Of course. When?"

"The sooner the better."

There was another pause on the other end of the phone.

John,

Lewis's voice remained polite, but with an added layer of caution—the kind of sensitivity to subtext that comes from someone who has worked in the banking industry for thirty years.

"Is this a private reunion, or—"

"Ken."

Sain interrupted him. He didn't want to be too explicit on the phone. Phone calls could be recorded.

"Let's just have a cup of coffee. We can talk face-to-face."

There was a two-second silence.

"Okay. How about next Monday? I have a meeting in New York on Monday afternoon. It ends around four o'clock."

"Four o'clock. Okay. I'll choose the place."

"Okay, John. See you Monday."

Sain hung up the phone.

As he put the receiver back on the base, he noticed the sweaty marks left by his fingers on the plastic surface of the receiver.

He wiped it with his shirt cuff.

Then he stood up and walked to the window.

The surface of the Hudson River grew darker and darker in the twilight. The last rays of the setting sun disappeared over the river.

The only light in Sain's office was the cold white glow of the overhead fluorescent lights.

He turned around, walked back to the table, and pressed the internal phone button.

"Please call the CFO and the Chief Risk Officer to my office. Now."

He paused for a moment.

"Tell them to bring the complete balance sheet. Every single page."