On the Brink (46 page)

Fortunately, I was making progress with Sheila on the bank guarantee. After a couple of conversations, she had sent over a good proposal, and we were nearly there. She was prepared to guarantee new liabilities, not existing ones.

But we needed Sheila to stretch further. She wanted to guarantee the debt only of banks, not of bank holding companies, and she wanted to limit coverage to 90 percent of the principal. But many of these institutions issued most, if not all, of their debt at the holding company level. A guarantee would allow them to roll existing paper into more-secure longer-term debt and gain some breathing room. Sheila was concerned that the breadth of the holding company guarantee would increase the risk to her fund. We argued that this view was too narrow. If the big banks’ holding companies defaulted on their unsecured debt, the stress on the entire banking system would be enormous, leaving her with the very same unattractive choices that she was trying to avoid.

Saturday, October 11, 2008

Early the next morning President Bush met with the G-7 finance ministers and central bankers at the White House. This was a great gesture. The president had never attended, or participated in, a G-7 event before, but he had a gift for setting people at ease, and he was warm and friendly, speaking with bracing humility and frankness.

“This problem started in America, and we need to fix it,” he said. He talked about going back to his hometown of Midland, Texas, where people would ask why he was bailing out Wall Street. He didn’t like it any better than they did, but he said he had answered: “We have to do it to save your jobs.” Now he told the finance ministers and central bankers that he wanted to fix the problem while he was still president, to make things easier for his successor, regardless of who that was.

The president’s directness clearly pleased the group in the Roosevelt Room; we followed him to the Rose Garden and stood behind him as he delivered a short speech acknowledging the severity of the crisis and outlining the government’s efforts to solve it.

While I spent the day on phone calls and one-on-one meetings with finance ministers, the Treasury team plugged away on the capital purchase program. At 3:00 p.m. I met in the large conference room with Ben, Joel Kaplan, Tim Geithner, and my Treasury people. Tim had come to Washington Friday evening at my request—not in his capacity as head of the New York Fed, but as a superb organizer who would work with Treasury and help us put forward some specific proposals.

Sheila was there as well. As we worked to finalize the FDIC debt guarantee, she had begun to push for another new guarantee, this one of bank transaction accounts, the non-interest-bearing accounts companies keep.

These were radical steps—ones that I would never have considered in other times—but we needed action this weekend. Tim was visibly impatient, and I felt a great sense of urgency. I pushed so hard during the meeting that afterward, both Kaplan and Jim Wilkinson took me aside and said I was moving too fast. These steps needed to be analyzed more carefully, and they felt my approach had discouraged dissent. I told them that if I had waffled one bit, we wouldn’t have a program to debate.

To be frank, I hated these options, but I didn’t want to preside over a meltdown. I asked Tim to lead the group in developing programs we could implement immediately, and, typically, he rolled up his sleeves and dug right in. We also asked David Nason, who had the most thorough knowledge of bank guarantees at either the Fed or Treasury, to act as devil’s advocate on the plan to ensure a thorough vetting.

Shortly after the meeting, Dave McCormick and Bob Hoyt came into my office. Dave said, “We’re having trouble buttoning down the Morgan Stanley situation with the Japanese. I think Mitsubishi still wants to make the investment, but they are going to need more assurance.” McCormick had been talking with representatives of Mitsubishi UFJ and the Japanese government to let them know we were watching the situation closely. He’d learned that the Japanese bank was worried that if the U.S. bought equity in Morgan Stanley, we would dilute its investment. It was a reasonable concern, and he had indicated that Treasury would structure any subsequent investment to avoid punishing existing investors. Dave and Bob suggested writing a note on Treasury letterhead to reassure the Japanese.

The G-20 summit wouldn’t take place for another month, but we had asked its members to meet in Washington that weekend to discuss the financial crisis. At 6:00 p.m. these finance ministers and central bankers met at IMF headquarters, a few blocks from the White House. I made the first presentation, striving to be direct and humble about our failings, while emphasizing the very positive outcome at the G-7 and the U.S.’s commitment to fixing our problems. Jean-Claude Trichet followed me and echoed the success of the G-7.

I left the room for a few moments, and as Guido Mantega delivered his prepared remarks, I surprised everyone by striding back into the room accompanied by President Bush. It was astonishing for a U.S. president to drop in like that on a group of finance ministers and central bankers. Mantega paused to let the president speak.

As he had that morning, the president acknowledged America’s role in the problems we faced, adding, “Now is the time to solve this crisis.” Then he stepped aside to let Mantega resume. The Brazilian minister said, “If you don’t mind, I’m going to speak in Portuguese, my native language.”

President Bush replied, “That’s okay, I barely speak English.”

The group laughed appreciatively, and I knew the surprise visit had been a good idea. People needed to be reassured of our resolve, and the president had done just that in his own disarming way.

When I got home, Wendy told me Warren Buffett had been trying to reach me. I intended to get back to him right after dinner, but I could barely keep my eyes open and went straight to bed afterward, falling into a deep sleep. When the phone rang later that evening, I fumbled to pick it up.

“Hank, this is Warren.”

In my grogginess, the only Warren who came to mind was my mother’s handyman, Warren Hansen.
Why is
he
waking me up?
I thought, before realizing it was Warren Buffett on the other end of the line.

Warren knew I was working on a capital program, and he had an idea. We had been struggling with the issue of pricing. We needed to protect the taxpayer while encouraging a broad group of banks to participate; our objective was not to support particular institutions but the entire system, which was undercapitalized. Warren suggested asking for a 5 or 6 percent dividend to start on the preferred shares, then raising the rate later.

“The government would make money on it, it would be friendly to investors, and then you could step up the rate after a few years to encourage the banks to pay back the government,” he explained.

I fought back my exhaustion and sat for a half hour or so in the dark on a chair in my bedroom, mulling over this idea. I knew, of course, that as an investor in financial institutions, including Wells Fargo and Goldman Sachs, Warren had a vested interest in this idea. But the truth was I was looking for an approach just like his: an investor-friendly plan that would protect the taxpayer and stabilize the banking system by encouraging investments in healthy institutions. Considering two-tier structures similar to Warren’s, my team had been leaning toward a 7 or 8 percent dividend. But as I went back to sleep, I was convinced Warren’s was the best way to make a capital purchase program attractive to banks while giving them an incentive to pay back the government.

This Warren turned out to be quite a handyman, too.

Sunday, October 12, 2008

Shortly after 9:00 a.m. Sunday, I called Jeff Immelt at GE to feel him out about the government guarantee on bank debt that we’d been debating. Because it was not a bank, GE would not be eligible for such a program and might be disadvantaged competitively.

“I don’t think we can do anything for GE,” I said, “but would you rather we do it or not do it?”

“That’s an easy question,” he said. “Maybe a lot of my guys would disagree with me, but the system is so vulnerable you should do whatever you can do, and we’ll be better off than if it hadn’t been done. And if we’re not, it’s still something you’ve got to do.”

Jeff’s answer impressed me. How many other CEOs in his position would have taken such a broad perspective?

The Treasury team had once again worked late into the night—this time on the capital purchase and guarantee programs, and at 10:00 a.m. a weary but highly focused group gathered in my large conference room. We were joined by Ben Bernanke, Tim Geithner, Sheila Bair, Joel Kaplan, and Comptroller of the Currency John Dugan. For the next three hours, we sweated out the details of the plan we would unveil the next day.

I briefly recounted my conversation with Buffett, saying that I now favored using preferred stock with a dividend starting at 5 percent and increasing eventually to 9 percent. The regulators agreed to tweak their rules to allow this to qualify for tier-1 capital treatment for bank holding companies that already had substantial amounts of preferred stock.

Now that we had a plan, I was ready to debate it. Playing his assigned role as devil’s advocate, David Nason argued that the FDIC guarantee would distort the market. Every time you put the U.S. government behind one group’s paper, he said, you made it harder for another. In this case, we would crowd out industrial firms, or financial institutions that weren’t bank holding companies, making it harder for them to raise money. In the end, all of us, including David, believed that this was a step we needed to take.

Sheila continued to express doubts—the FDIC, after all, was plowing new ground. She wondered how appropriate it was to extend the guarantee to the debt of bank holding companies, rather than just to FDIC-insured banks. And she pressed to charge banks more to insure their unsecured debt. Tim maintained that the fee had to be low enough to encourage participation. Because I had a good working relationship with the FDIC chair, I met with Sheila alone several times that afternoon when the tension between Tim and her got too high or to reassure her that she was doing the right thing.

“Our whole financial system is at risk, and if everything goes down, so will your fund. The last thing everybody will ask is, ‘What happened to the FDIC fund?’” I remember saying. “Your decision will prevent a financial calamity, and Ben and I will support you 100 percent.” I also pointed out, “If we price this properly, you will make a lot of money.”

Extending the guarantee to the liabilities of bank holding companies was absolutely essential but a very difficult decision for Sheila. I told her that Treasury would use TARP to prevent bank holding companies from failing.

“I know how important this is. We’ve done a lot of work on it at the FDIC,” Sheila said. Despite her wavering, she finally agreed, acknowledging the support from Treasury and the Fed.

We decided to gather again late in the afternoon to nail down details as well as our plan for implementation. The capital and the guarantee programs had to be clear, easy to understand, and attractive. News was circulating that the U.K. would formally announce Monday that it was taking majority stakes in the Royal Bank of Scotland and HBOS. We had received a copy of the U.K.’s capital plan, and its terms were more punitive than the ones we were discussing.

The key for us was how to get as many institutions as we could to sign up for the capital purchase program (CPP), which is what we called our plan to inject equity into the banks. We settled on equity investments of 3 percent of each institution’s risk-weighted assets, up to $25 billion for the biggest banks; this translated into roughly $250 billion in equity for the entire banking system.

We wanted to get ahead of the crisis and strengthen banks before they failed. To do this, we needed to include the healthy as well as the sick. We had no authority to force a private institution to accept government capital, but we hoped that our 5 percent dividend—increasing to 9 percent after five years—would be too enticing to turn down.

We had designed the equity program so that banks would apply through their individual regulators, which would screen and submit applications to a TARP investment committee. But rather than wait for these applications to come in, we decided to preselect a first group, advising them as to how much capital their regulators thought they should take.

After the disastrous week we’d just finished, we needed to do something dramatic. So I thought we should launch the program by bringing in the CEOs of a number of the biggest institutions, getting them to agree to capital infusions, and quickly announcing this to the markets. Public confidence required that they appear well capitalized, with a cushion to see them through this difficult period.

We reasoned that if we got these major banks together, other banks would follow. The weaker institutions would not be shamed, and the stronger institutions could say they did it for the good of the system. If only weaker banks took capital, it would stigmatize—and kill—the program.

Treasury played no role in picking the first group of banks. That was done by the New York Fed, aided by the OCC. They chose systemically critical banks that together held over 50 percent of U.S. deposits. These were the four biggest commercial banks, JPMorgan, Wells Fargo, Citigroup, and Bank of America; the three former investment banks, Goldman Sachs, Morgan Stanley, and Merrill Lynch; and State Street Corporation and Bank of New York Mellon, two major clearing and settlement banks that were vital to the infrastructure. We thought it would be great news for the market to hear on Tuesday morning that these banks had agreed to accept a total of $125 billion in capital, or one half of the CPP.

It was up to me to call the bank chiefs and invite them to Treasury the next afternoon: Ken Lewis, Vikram Pandit, Jamie Dimon, John Thain, John Mack, Lloyd Blankfein, and Dick Kovacevich, who, as chairman of Wells Fargo, was the only non-CEO invited. We also invited State Street’s Ronald Logue and Bank of New York Mellon’s Robert Kelly. I wouldn’t tell them what the meeting was about—I simply said that it was important, that the others were coming, and that it ultimately would be good news. Kovacevich hesitated a bit—he had to come from San Francisco—but like everyone else agreed to meet on very short notice.