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CRISIS AND PANIC 

Morgan Stanley] had consistently opposed Federal Reserve supervision—[but after
Lehman,] those franchises saw that they were next unless they did something drastic.
That drastic thing was to become bank holding companies,” Tom Baxter, the New

York Fed’s general counsel, told the FCIC. The Fed, in tandem with the Department
of Justice, approved the two applications with extraordinary speed, waiving the stan-

dard five-day antitrust waiting period. Morgan Stanley instantly converted its 
billion industrial loan company into a national bank, subject to supervision by the
Office of the Comptroller of the Currency (OCC), and Goldman converted its 
billion industrial loan company into a state-chartered bank that was a member of the
Federal Reserve System, subject to supervision by the Fed and New York State. The
Fed would begin to supervise the two new bank holding companies.
The two companies gained the immediate benefit of emergency access to the dis-

count window for terms of up to  days. But, more important, “I think the biggest
benefit is it would show you that you’re important to the system and the Fed would
not make you a holding company if they thought in a very short period of time you’d
be out of business,” Mack told the FCIC. “It sends a signal that these two firms are go-
ing to survive.” 
In a show of confidence, Warren Buffett invested  billion in Goldman Sachs,
and Mitsubishi UFJ invested  billion in Morgan Stanley. Mack said he had been
waiting all weekend for confirmation of Mitsubishi’s investment when, late Sunday
afternoon, he received a call from Bernanke, Geithner, and Paulson. “Basically they
said they wanted me to sell the firm,” Mack told the FCIC. Less than an hour later,
Mitsubishi called to confirm its investment and the regulators backed off. 
Despite the weekend announcements, however, the run on Morgan Stanley con-
tinued. “Over the course of a week, a decreasing number of people [were] willing to
do new repos,” Wong said. “They just couldn’t lend anymore.” 
By the end of September, Morgan Stanley’s liquidity pool would be  billion. 
But Morgan Stanley’s liquidity depended critically on borrowing from two Fed pro-
grams,  billion from the PDCF and  billion from the TSLF. Goldman Sachs’s
liquidity pool had recovered to about  billion, backed by . billion from the
PDCF and  billion from the TSLF.

OVERTHECOUNTER DERIVATIVES: “A GRINDING HALT”
Trading in the over-the-counter derivatives markets had been declining as investors
grew more concerned about counterparty risk and as hedge funds and other market
participants reduced their positions or exited. Activity in many of these markets
slowed to a crawl; in some cases, there was no market at all—no trades whatsoever. A
sharp and unprecedented contraction of the market occurred. 
“The OTC derivatives markets came to a grinding halt, jeopardizing the viability
of every participant regardless of their direct exposure to subprime mortgage-backed
securities,” the hedge fund manager Michael Masters told the FCIC. “Furthermore,

when the OTC derivatives markets collapsed, participants reacted by liquidating
their positions in other assets those swaps were designed to hedge.” This market was