Authors: Anita Raghavan
Tags: #Finance, #Business & Economics
And after the collapse of Lehman Brothers, Gupta had come to learn that the $10 million he had invested in the Voyager fund, a vehicle that was managed by Rajaratnam, had evaporated to nothing. He felt that it was Rajaratnam’s responsibility to make him whole; after all, Gupta was only a passive investor in the fund. The unflappable Gupta was so angry that he later contemplated suing Rajaratnam. Ultimately, he never took legal action. It would turn out to be a costly mistake.
It was around 10 a.m. on September 23, 2008, and Byron David Trott, a tall, silver-haired banker, sat in his New York office on the seventeenth floor of Goldman Sachs’s headquarters building, preparing for a call. As he glanced at the television screen hanging in his office, he saw his former mentor and boss, Hank Paulson, giving testimony before a congressional committee. Ever since the collapse of Lehman Brothers a week earlier, Paulson, who had become Treasury secretary in 2006, was ubiquitous, hitting the airwaves and Capitol Hill in a bid to impress upon Americans the magnitude of the financial crisis facing the country.
Trott turned away from the television and gave some thought to the call he was about to place. A few days earlier, at the behest of Goldman’s chief executive, Lloyd Blankfein, Trott had approached Warren Buffett, the most famed investor in America, and proposed he invest in Goldman Sachs. Blankfein, Goldman’s chief executive, personally asked Trott to sound out Buffett on the idea. Blankfein knew that Trott was the one person at Goldman who had a special line into Buffett, who made investments in a vast swath of companies across a wide array of industries through his investment vehicle, Berkshire Hathaway Inc. Trott had officially covered Buffett on behalf of Goldman’s investment banking division since 2002. He had done a number of deals for him since that time, and 2008 was shaping up to be a particularly busy year.
Trott knew that the original deal Blankfein wanted him to show Buffett would fall on deaf ears. There was not enough of a potential gain to tempt the “Oracle of Omaha” into taking the risk. As it turned out, Trott was right. The pitch to Buffett amounted to a fifteen-second conversation. Trott only hoped that today’s conversation would last longer.
It was a week and a day after the collapse of Lehman Brothers, and fear and chaos still ruled the stock markets. Financial stocks were in deep distress. Washington Mutual, the nation’s biggest savings and loan, was teetering on the brink, and lots of banks were staring into the abyss. By the end of the week, the Federal Deposit Insurance Corp. would step in and seize WaMu, making it the largest bank failure in US history.
Less than twenty-four hours earlier, Trott was wrapping up a client meeting in a Chicago suburb when his cell phone rang. It was Jon Winkelried, a friend and one of Goldman’s two copresidents. Winkelried told Trott that Goldman was preparing to launch a common stock offering of between $5 and $10 billion to raise capital.
Trott asked Winkelried if Goldman had lined up a cornerstone investor, a marquee name that would commit a significant amount of capital—about $2 to $3 billion in this case—to the offering. Often, in a public stock sale, if a company can persuade a well-regarded investor to commit a significant amount of money, then the stock is more likely to fly off the shelf because potential buyers, drawn by the presence of a savvy investor, are likely to follow.
Winkelried said Goldman had not lined up a cornerstone investor.
That’s a big mistake, Trott told his friend. Trott suggested he fly to New York at once and meet with Goldman executives to brainstorm about finding an investor. That evening, Trott caught a flight out of Chicago for New York.
At 9 the next morning, he met with Winkelried and Goldman chief financial officer David Viniar in the executive offices on the thirtieth floor of the bank’s headquarters building at 85 Broad Street. Blankfein, who was en route to LaGuardia Airport, where he was set to fly out to Washington, DC, for meetings, was patched in via telephone. Trott outlined for Blankfein, Winkelried, and Viniar the type of deal he thought Warren Buffett would be interested in. He still thought enticing Buffett to invest in a securities firm was a long shot. After all, Buffett had all but sworn off investment banks after his horrific experience with Salomon Brothers in the early 1990s. But Trott thought if there was a possibility of getting Buffett to invest in Goldman, the deal would have to be one that paid him a fat dividend.
Goldman’s top executives agreed to let Trott feel out Buffett and gave him the leeway to negotiate any deal. When Trott reached Buffett in Omaha, he was settling into a typical day. He had attended to some Berkshire Hathaway affairs in the morning, and soon he would be headed to Dairy Queen—a company Berkshire owned in its portfolio of companies—with his grandkids.
“Forget what we discussed in the past,” Trott told Buffett. “You and I both know you were not going to do that.” Goldman had a new deal in mind, Trott told Buffett, one that would involve the firm raising a large amount of money. Goldman wanted Buffett to be a cornerstone investor of significant size in the capital-raising move.
“I am listening,” Buffett said.
Trott said Goldman was prepared to offer Buffett an esoteric security—perpetual preferred shares with warrants—that paid Buffett a juicy dividend on a $5 billion investment and gave him the opportunity to buy additional shares of Goldman stock at a set price.
“I am still listening,” Buffett said. For Goldman, getting Buffett to buy a perpetual preferred security was important. It was considered Tier 1 capital, a measure used by regulators of a bank’s strength based on the ratio of core equity to assets. At a time when investors in financial services companies were obsessed with the amount of debt investment banks were shouldering, the raising of Tier 1 money would send a strong signal to the markets: Goldman was shedding its debt load.
For the privilege of getting Buffett to invest, and essentially bestowing upon the bank the security industry equivalent of the Good Housekeeping Seal of Approval, Goldman was prepared to offer Buffett a security paying a 10 percent dividend.
Buffett said he was prepared to accept the proposal on one condition. He insisted that the four senior executives of Goldman—Blankfein, Winkelried, Gary Cohn, and David Viniar—not sell any of their stock before his security was called or redeemed. It was vintage Buffett: he wasn’t going to put his money on the line if Goldman’s senior executives were not prepared to risk theirs. Buffett told Trott that he was headed to Dairy Queen and wasn’t to be disturbed until 2:30.
After hanging up, Trott reached Winkelried, who was on his way to the United Nations.
“I think Warren will do this,” he said.
The two agreed that they and Goldman’s other top executives—Viniar, its razor-sharp chief financial officer; Greg Palm, its powerful top lawyer; and John F. W. Rogers, a seasoned Washington insider and Blankfein’s consigliere—would meet on the thirtieth floor at 85 Broad Street at 12:30 to discuss the terms. The wisecracking Blankfein, who grew up in a federal housing project in East New York, would be patched in again, as he had been during the morning meeting. Then Trott, a veteran of Goldman who had started at the firm in 1982 and climbed its ranks, went off to teach a class on negotiating skills to the firm’s new managing directors and vice presidents.
It was shortly after 1 p.m. on Tuesday, September 23, when Lissette Jorgensen, a Goldman vice president who aspired to be a concert pianist before starting on Wall Street, got her marching orders. Her full-time position was to support Goldman’s powerful twelve-person board of directors. Jorgensen and her staff compiled materials for board meetings, looked after scheduling matters, and even scouted for locations where Goldman could hold its board meetings.
All morning the thirtieth floor, the executive floor at Goldman where Jorgensen sat, buzzed with activity. Trott, the banker from Chicago, was seen on the floor. He was holed up in a meeting with a couple of Goldman executives. Typically, when meetings were deemed top secret, they took place on the executive floor so fewer rank-and-file employees could see the comings and goings of important people. But to everyone on the floor it was clear something was up. What, exactly, no one knew.
A half hour earlier, at 12:30, Goldman’s top brass met and Trott outlined the terms of the deal he and Buffett had sketched out. “We all agreed it was a good deal to take,” said Trott years later. As soon as the meeting broke up, Jorgensen was told to reach out to all of Goldman’s board members and inform them that the bank planned to hold an emergency meeting of the board that afternoon. Goldman wanted to schedule the call before the market closed.
Jorgensen quickly hit the phones, reaching out to the executive assistants of Goldman’s board members. At first, when Jorgensen got in touch with Rajat Gupta’s secretary, Renee Gomes, Gomes said that Gupta had a conflict. He had an important governmental meeting that he couldn’t reschedule. It had been a back-to-back day for Gupta that had started practically at dawn. But about half an hour before the 3:15 p.m. board meeting was set to begin, Gomes got back in touch with Jorgensen. Her boss would be able to attend the board meeting via telephone.
Caryn Eisenberg, Raj Rajaratnam’s executive assistant, who sat just outside his glass-walled corner office, knew that one of her boss’s cardinal rules was that he was not to be disturbed during the first thirty minutes of the trading day, from 9:30 to 10 a.m., and during the last half hour of the trading day, from 3:30 to 4 p.m. Rajaratnam gave her instructions on how to handle calls that came in during those times. They were not to be put through unless the callers were on a list of about ten people that Eisenberg had inherited from his previous secretary, Anita Teglasi. Rajaratnam was ruthless about pruning the list and limiting it to people he wanted to hear from during the crucial opening and closing minutes of the market. From time to time, he would take people off the list and put new people on it.
Like many secretaries, Eisenberg scribbled some of the names in a notebook she kept. It wasn’t a complete tally and not all the names were correctly spelled. But the list helped her remember which callers she was supposed to put through. If Rajaratnam was on the phone or in a meeting, she was to pass him a note when they called. If he was not in his own office but somewhere in the Galleon offices that day, she was to find him and tell him of the call.
One of the names on the list was Rajat Gupta. Eisenberg had seen Gupta many times in the Galleon offices since she started working at the firm in January 2008. Gupta sometimes came to Galleon because he had appointments with Rajaratnam; at other times, he showed up unannounced. When he arrived without warning, Rajaratnam would sometimes instruct Eisenberg to lie and tell Gupta that he was not around. When the two men met, they generally got together behind closed doors in Rajaratnam’s corner office, not far from Galleon’s noisy trading desk. Rajaratnam sat close to his dozen or so most trusted traders. His office, with floor-to-ceiling glass walls, had a sliding panel that was typically kept open. Through the panel, Rajaratnam could bark buy and sell orders to his traders, who would then execute them at the best price available.
For some time, Galleon had been bearish on financial stocks. Even before the near collapse of Bear Stearns in March, Galleon had been taking negative bets on finance companies such as AIG and the mortgage brokers. The one bank that Galleon was favorably disposed toward was Goldman Sachs—a view that was confirmed when Goldman’s president, Gary Cohn, came in for a sandwich lunch in late July. Unlike with the other Wall Street investment banks, Galleon’s biggest concern with Goldman was not its exposure to bad mortgages but rather its risk to poor counterparties. At the lunch, attended by Rajaratnam and two of his colleagues, Cohn alleviated any concerns.
“None of our peers have the technology and risk management systems that we do,” Cohn boldly declared. “At the end of the day, the CEO of UBS has no idea how its risk assets have done. We know exactly what our risk assets have done and what our balance sheet looks like.” When asked what Goldman could do if its risk assets overwhelmed the bank’s capital base, Cohn replied that Goldman could buy an entity with steady capital like an insurance company or it could raise equity.
By September, though, Cohn’s bold predictions were starting to ring hollow. As the capital markets seized up, in the wake of Lehman’s collapse, and insurance companies were looking as troubled as banks, Galleon turned negative on Goldman. On September 16, Will Keaten, Galleon’s Goldman analyst, fired off an email laying out his thoughts on Goldman. The first sentence summed up his view. “I’d rather be short in this environment,” Keaten wrote. Internally, Galleon portfolios that once had used Goldman’s stock to hedge bearish positions in other financial services stocks now took negative bets on Goldman too.
Shortly after 3:54 p.m. on Tuesday, September 23, a minute after Gupta hung up from the Goldman board call, Gomes, Gupta’s secretary, dialed Rajaratnam’s direct line and a minute later patched in her boss, Gupta. He and Rajaratnam were going through a rough patch; for weeks Gupta had been trying to get information about his Voyager investment, but he was making no headway. He wanted to catch Rajaratnam before heading into his next meeting. As it happened, his was the only call to come into Rajaratnam’s direct line since 2:27 p.m. that day.
Eisenberg picked up the phone when it rang. The man on the other end of the line said he needed to speak to Rajaratnam urgently. Eisenberg could not identify the caller, except she knew that he was on the list of VIP callers jotted down in her red notebook. Rajaratnam was not in his office, but Eisenberg could hear his voice, so she put the call on hold and went to get him.
When Eisenberg told Rajaratnam that someone, one of the important callers, was on the phone and wanted to speak to him at once, Rajaratnam rushed back to his office and picked up the phone. The two had a fleeting conversation; it lasted thirty-five seconds at most. But as soon as Rajaratnam got off the phone, he summoned his lieutenant, Gary Rosenbach, into his office. More than a decade earlier it was Rosenbach who had helped Rajaratnam start Galleon.
Rosenbach walked into Rajaratnam’s office and closed the door. When he reappeared less than a minute later, he went to the trading desk, got on the phone, and shouted, “Buy Goldman Sachs. Buy Goldman Sachs.” He uttered the words not just once but a few times.