On the Brink (34 page)

Chris raised the issue of a short-selling ban. Tim and Ben joined me in expressing support for a ban, which gave Chris the backing he needed to go to the rest of the commissioners for approval. We went through the need to guarantee the money market funds. I admitted that we still didn’t know exactly how the program would work. The complexities were enough to make your head spin, but I was firm: “We’ve got to go with this.”

Almost everyone liked the idea, but some were concerned that we were moving too fast. But frankly we had no choice but to fly by the seat of our pants, making it up as we went along. The alternative, waiting till we had figured out every angle, was untenable.

Before going to the White House, I called Ben and told him that the president was going to want to press him on the extent of his authorities, because the thought of being totally dependent on Congress was anathema to the administration. The president would want to know what the Fed could do if Congress didn’t grant us the powers we needed. I encouraged Ben to think expansively. “If the market thinks Congress is our last line of defense, and they turn us down, it will be fatal,” I said.

On my way to the White House, Nancy Pelosi called to ask about the market. She had wanted me to come up the following morning with Ben to brief the Democratic leadership. I related just how bad things were and told her we would have to go to the Hill that night to ask for emergency powers. She asked why it couldn’t wait until the morning, and I replied it might be too late by then.

“We need legislation passed quickly,” I said. “We need to send a strong signal to the market now.”

The Speaker immediately pushed to put stimulus spending into any bill. “Nancy, we’re racing to prevent a collapse of the financial markets,” I told her. “This isn’t the time for stimulus.”

A large group gathered in the Roosevelt Room at 3:30 p.m. to meet with the president. Ben, Chris, and Fed governor Kevin Warsh were there, along with a hefty contingent of White House and Treasury staff. Joel Kaplan had warned the president ahead of time that Ben and I were on edge.

I began by telling the president that the Fed and Treasury were preparing to take some extraordinary steps and that we were going to need to get special powers from Congress.

“Mr. President, we are witnessing a financial panic,” Ben put in. He vividly described what we were seeing in the markets, from the travails of commercial paper issuers to the difficulties in secured lending, and where this all might lead if we didn’t find a way to stop its spread now.

“Is this the worst crisis since the Great Depression?” the president asked.

“Yes,” Ben replied. “In terms of the financial system, we’ve not seen anything like this since the 1930s, and it could get worse.”

Individuals and companies were in imminent danger, I told the president: “Money market funds are on the verge of breaking. Companies are taking drastic measures to preserve their finances—not just the big banks, but also companies like General Electric and Ford.”

We had been dealing with these crises one at a time, on an ad hoc basis. But now we needed to take a more systematic approach before we bled to death. We all knew that the root cause lay in the housing market collapse that had clogged bank balance sheets with toxic mortgage assets that made them unwilling to lend. We were going to need to buy those bad assets where necessary, actions that required new powers from Congress and a massive appropriation of funds. In asking for this, we would be bailing out Wall Street. And that would look just plain bad to everyone from free-market devotees to populist demagogues. But not doing this would be disastrous for Main Street and ordinary citizens.

President Bush was very concerned about the money market funds and commercial paper markets because of how deeply they affected the average American’s daily life. As he said, “You’ve got to protect the guy in Midland, Texas, who wants to take $10,000 out of his money market fund to buy something.”

The president listened intently as we briefed him on the actions we planned to roll out: Treasury’s money fund guarantees and the Fed’s liquidity facility for asset-backed commercial paper. Although he had a genuine contempt for Wall Street and its minions, he did not let that stand in the way of what he thought had to be done. Just as he had swallowed hard to win Fannie and Freddie reform legislation in July, he now pushed his personal feelings aside.

“If we’re in the midst of a financial meltdown, all I’m asking is whether it will work,” President Bush said. He noted that we didn’t have time to worry about politics. We had to figure out the right thing to do and let Congress know that it needed to act.

“Tell the Hill we’re fixing to have a meltdown,” he said. “We just need to tell them that this is our strategy and be firm.”

I then asked Ben what the Fed could do if Congress refused to grant the powers we needed. I asked this because I knew that the president needed to hear the answer.

Ben insisted that, legally, there was nothing more that the Fed could do. The central bank had already strained its resources and pushed the limits of its powers. The situation called for fiscal policy, and Congress needed to make the judgment. President Bush pushed him, but he held firm.

“We are past the point of what the Fed and Treasury can do on their own,” Ben said.

President Bush had never wavered in backing us, but that day he was exceptionally reassuring. He promised that his entire team would work with us to get congressional action as quickly as possible. After the meeting began to break up, he walked around the Roosevelt Room patting people on their shoulders.

“We’re going to get through this,” he told us. “We have to get through this.”

I later learned that he took Michele Davis aside and said, “Tell Hank to calm down and get some sleep, because he’s got to be well rested.”

Leaving the meeting, I was more convinced than ever that we had to move fast on the money market guarantee. It was a step that we could take unilaterally. As soon as I returned to Treasury, I stopped by David Nason’s office and told him I wanted the guarantee announced in the morning, even if it couldn’t be finalized for weeks: we had to make clear right away what we were doing. I instructed David to work closely with Steve Shafran and make this his top priority.

The markets had gotten a badly needed shot of good news just before we went into the White House, when CNBC reported that Treasury was considering taking action to buy illiquid assets from the banks. The report also said that New York senator Chuck Schumer indicated that we would be announcing our plan later in the day. Stocks soared. In the last hour of trading, while we were in the White House, the Dow, down more than 200 points, surged 617 points to gain 410 points, or 3.9 percent, on the day.

Morgan Stanley’s shares were particularly volatile, closing at $22.55, up 80 cents, after having fallen by as much as 46 percent during the day. But credit markets continued to weaken. Morgan Stanley’s CDS were trading at 866 basis points, while its excess liquidity continued to drain away.

With Merrill Lynch seemingly secure in the arms of Bank of America, all eyes were on Morgan Stanley and Goldman Sachs. If either remaining investment bank failed, it would almost certainly bring down the other and touch off a worldwide run that would be catastrophic for the American people. And a failure was a very real possibility.

We had set a meeting with congressional leaders for 7:00 p.m., and as I rode up to the Hill, Ben called to review our strategy. I thought we were as well prepared as we could be. Ben would lay out the economic picture of what would happen if there were a systemic collapse. I would describe the powers we needed and provide some details. Kevin Fromer and I had agreed that we would need the authority to buy at least $500 billion of bad assets, but we didn’t want to commit to a number yet.

We were to meet in Nancy Pelosi’s conference room, adjacent to her office in the Capitol. Always smartly turned out, the Speaker of the House maintained an elegant, almost formal atmosphere, with fresh flowers and bowls of chocolates, that was quite removed from the rough-and-tumble of the floor. Once, when I walked in with a cup of Diet Coke, she’d said, “Oh, we don’t use plastic cups,” and an aide promptly handed me a very nice glass for my drink.

Ben and I conferred as we waited for the leaders to arrive. Chris Cox joined us. He was under heavy fire—at a campaign event earlier in the day, John McCain had said that if he were president, he would fire him. Soon the Hill’s most powerful leadership figures came in, including Nancy Pelosi, John Boehner, Barney Frank, House Majority Leader Steny Hoyer, ranking Financial Services Committee member Spencer Bachus, and Democratic Caucus chairman Rahm Emanuel from the House; and the Senate’s Harry Reid, Minority Leader Mitch McConnell, Majority Whip Dick Durbin, Chris Dodd, Richard Shelby, Chuck Schumer, and Democratic Conference secretary Senator Patty Murray.

We squeezed around the long table. I sat across from Nancy and Harry Reid, flanked by Ben and Chris. It was a long, tough meeting. Congress was about to break for recess in eight days, and no one was happy to be there. Ben described the severity of the crisis we faced, and I said that Treasury needed the money and powers to recapitalize the banks by buying toxic assets from their balance sheets.

Ben emphasized how the financial crisis could spill into the real economy. As stocks dropped perhaps a further 20 percent, General Motors would go bankrupt, and unemployment would rise—to 8 or 9 percent from the prevailing 6.1 percent—if we did nothing. It turned out to be a rather mild assessment of what would hit us (as I write, unemployment is now in double digits), but it was enough at the time to leave the members of Congress ashen-faced.

“It is a matter of days,” Ben said, “before there is a meltdown in the global financial system.”

The room erupted into questions. Everybody had an agenda to push or an opinion to voice. Spencer Bachus asked why we didn’t recapitalize banks by buying shares rather than assets. It was a good question, and I was glad he asked it, because it allowed me to emphasize my main point: the program wasn’t meant as a sop for failing banks. We wanted financial institutions to sell illiquid assets so we could develop a market for them. This would encourage the free flow of capital for healthy banks, help them clean up their balance sheets, and break the logjam of credit.

Speaking for the Democrats, Barney Frank laid out provisions that he wanted to see in the bill, including pay restrictions for executives at the companies receiving government money. “If they sell, you’re presumably doing them a service,” he said. “They should be willing to have restrictions.”

Though it didn’t surprise me that Barney made this point, I pushed back hard. To my mind, restricting compensation meant putting a preemptive stigma on the program. And that is exactly what I didn’t want to do. My priority was to get it off the ground fast so the system didn’t collapse while we were still negotiating. Tim, Ben, and I wanted a program that encouraged maximum participation. Hundreds of perfectly sound banks across the country had toxic assets they’d be better off unloading—if only they could. We didn’t want to discourage them from doing so, either by forcing their executives to take cuts in pay or by making it appear that participants, ipso facto, were all weak. They couldn’t afford that perception in the marketplace.

I would continue to resist pressure on compensation restrictions for several days. I was as appalled as anyone at Wall Street’s pay practices, particularly the flawed incentive structures, which we had tried to avoid at Goldman Sachs. When I was CEO, I did my best to align incentives with long-term performance. I knew compensation was too high industry-wide, but I couldn’t change that. We needed to be competitive if we were going to have the best people.

By removing the CEOs at Fannie, Freddie, and AIG, the government had already demonstrated that we weren’t going to reward failure, but in retrospect I was wrong not to have been more sensitive to the public outrage.

Understandably, the lawmakers pushed me to provide a dollar figure. But I was purposefully vague. “We don’t have the number yet, and we want to work with you on this,” I said. “It’s got to be big enough to make a difference.”

How big was “big,” they wanted to know.

“We need to buy hundreds of billions of dollars of assets,” I said. I knew better than to utter the word
trillion.
That would have caused cardiac arrest. “We need an announcement tonight to calm the market, and legislation next week,” I said.

What would happen if we didn’t get the authorities we sought, I was asked.

“May God help us all,” I replied.

By the end of the meeting, everyone, with the notable exception of Shelby, was supportive to some degree. The tumult in the market had forced a rare bipartisan consensus. The leaders appeared to understand that something had to be done and that the only way to do this was to present a united front.

“This is a worldwide problem,” Barney Frank said. “But we own it.”

Chris Dodd told me that he wanted the administration to cooperate in drafting the legislation; he didn’t want to be handed a fait accompli. The House and Senate needed to be able to sell any legislation we came up with, and the political calculus was tricky just weeks before an election. Averse to bailouts, voters would never grasp the pain of a meltdown unless they experienced it. As Barney put it: “No one will ever get reelected for avoiding a crisis.” Nancy Pelosi noted: “We have to position this as a stimulus and relief for the American homeowner.”

As we got ready to leave the nearly two-hour meeting, I was relieved at what soon became a public show of support and rather naïvely thought that legislation was going to be easier than I had first expected. But Harry Reid offered a more realistic assessment: “We can’t act immediately,” he said, noting that it usually took Congress weeks to get anything done.

Friday, September 19, 2008

I had been in my office for 15 minutes Friday morning when I received a call from an upset Sheila Bair, just after 7:00 a.m. We were scheduled to announce the money market fund guarantee in less than an hour, and in the rush we had not consulted with the FDIC chairman—or even notified her. She’d learned of our plans from press reports and was calling to complain. She said she knew I was under a lot of pressure, but it was outrageous that we had not checked with her first.