On the Brink (38 page)

Although Boehner had been firm and direct about his support in our September 18 meeting with congressional leaders, he was less friendly and eager to work with us in this setting. He limited his comments to a short pep talk on the previous day’s tactical victory on offshore oil drilling. Then one member after another said the bill couldn’t pass without House Republicans, and there was nothing we could do to change their minds. It was an untenable situation. Afterward one member of Congress came up to me and said, “I’ve been talking about deregulation and free markets my whole life. You’re asking me to change my view, and there is no way I can do that.” That response applied to many in the group that morning.

Shortly afterward, Boehner and I went to Pelosi’s office and told her about the meeting. She wanted to get TARP passed, and she pressed Boehner: “What can you do? What ideas do you have?” He didn’t have much beyond Cantor’s insurance plan, which he acknowledged was not really well formulated. He mentioned the possibility of “pro-growth” ideas, but Pelosi said it was no time to be talking about “tax cuts for the wealthy.”

The House Financial Services Committee convened at 2:30 p.m. Some House hearings could be terrible—you never knew what was going to happen. But Barney Frank’s hearings were different. Always pragmatic and efficient, he made sure things moved along with a fair amount of decorum.

Nonetheless, Ben and I were besieged with questions from all sides. Why wouldn’t the government take stakes in the companies it helped? Why wouldn’t we put restrictions on executive pay? In fairness, this is how our representative government works. Some members were grandstanding, positioning themselves to help their reelection campaigns. But for the most part, the lawmakers were just doing their jobs, trying to understand in a very short amount of time a complex issue for which most had little preparation or background. And we were asking for a lot.

In the Senate hearing the day before, I had stood firm on the compensation issue, but I now realized that I would have to give some ground. I told the House panel that we would find a way to address executive pay.

Paul Kanjorski, the Pennsylvania Democrat who chaired the Capital Markets Subcommittee, said we still hadn’t made a convincing case. “The average American people don’t really know what you are really talking about when you say it is going to cost us far less than the alternative,” he said, noting that I needed to clearly explain the ramifications of an electronic run on the money market system. “When I talk to average Americans in my district and across this country, the sun came up today, they went to work today, they stopped and picked up gas today,” he went on, “and they are wondering what all the hullabaloo is about.” What, he pointedly asked me, was the alternative I referred to?

I answered this question as best as I could, given that Barney kept hustling the hearing along. But there was no doubt about it—the session wasn’t going well. Topping it off, Michele Davis got a message on her BlackBerry that John McCain was suspending his campaign to return to Washington to tackle the economic crisis. She passed me a note that said in part, “If you get a question, just say that you know that both Senators McCain and Obama recognize the seriousness of the situation.”

I turned around and looked at Michele, stunned. This was crazy. Even more incredibly, I had spoken to Lindsey Graham just minutes before walking into the hearing, and he hadn’t said a word about McCain’s coming back.

When the hearing recessed, I went into Barney’s office and called Josh Bolten to tell him in no uncertain terms that I thought it was dangerous for McCain to return. I was dumbfounded that the president had allowed it. Josh said the White House was equally frustrated. McCain wanted a meeting at the White House, and the president felt he had no choice but to accommodate him.

I called Obama right away. He said that he would try to be as constructive as possible but that the Democrats were doing their part and I had better keep in touch with McCain. The president was scheduled to give a major speech that evening making the case for TARP, but news of McCain’s decision to suspend his campaign dominated the rest of the afternoon. After the House hearing, I walked over to the Senate side of the Capitol to answer questions from the Senate Democratic Caucus. They were meeting in the Lyndon Baines Johnson Room, a huge room with a tiled floor and an imposing ceiling fresco, where LBJ had once reigned as majority leader. Harry Reid and the Democrats were waiting for me, but before I went inside, Joe Lieberman approached me.

“You’re doing great, Hank,” the Connecticut senator said, confiding that the Democrats wanted to exclude him from this meeting because he was supporting McCain. “I’m going to walk beside you, because they won’t throw me out if I go in with you.”

Ben was already there, and upon my arrival (Lieberman had already disappeared into the crowd), Reid went to the podium and told the group that we would answer questions. The first person to speak was John Kerry of Massachusetts, whom I had found to be consistently on the right side of the issues about the financial crisis. He said he was unsure that he wanted Ben and me there because there was a political element to everything, and suggested that the group first meet alone. But Reid refused, saying that questions needed to be answered. From the look of it, the entire caucus was there, though some seemed no more eager to vote TARP through than were House Republicans. Many were unhappy. At least a third were irate that the crisis was happening and were unwilling to agree to anything unless there were major modifications to the bill. One after another they spoke, occasionally asking a question but usually just attacking our proposal. I felt fortunate that Chris Dodd was chairing the Banking Committee because many of these senators liked and trusted him. But he had his work cut out for him.

Halfway through the session, I hit the wall. I had been going for days with little sleep and no exercise, hustling from one difficult meeting or conversation to another, and I ran out of gas. I realized I was going to get the dry heaves, and if I did that in front of people it would make for a bad news story, to say the least. So I made a poor joke.

“Excuse me,” I announced, standing at the podium. “I have to go get rid of some Diet Cokes.”

I rushed out of the room and into a bathroom stall, had a short bout of dry heaves, then returned to the meeting. Again, no one seemed to notice anything amiss, and I returned as Ben was responding to another irate senator.

Afterward Hillary Clinton told me to stick with Schumer if I wanted to get things done. I told her I would, but the fact was, Chuck and I had a serious disagreement about how the $700 billion should be allocated. I wanted Treasury to have access to the total amount right from the start, but Schumer wanted it doled out in tranches. I suspected he wanted to reserve part of the money for the next administration.

Before I went to bed that night, I watched President Bush address the nation from the State Floor at the White House. “Our entire economy is in danger,” he said, carefully explaining how we had gotten to that point: foreign investment in the U.S., easy credit, a housing boom, irresponsible lending and borrowing. It was his most substantive address yet on the financial crisis, and it was well delivered, but the last thought I had before I fell asleep was that even a speech by the president wouldn’t be able to sway the House Republicans.

Thursday, September 25, 2008

We’d devised TARP to save the financial system. Now it had become all about politics—presidential politics. The president, the leaders of both parties, and both candidates were scheduled to meet around 4:00 p.m. Thursday. I wondered what McCain could have been thinking. Calling a meeting like this when we didn’t have a deal was playing with dynamite.

Democrats, I later learned, had moved into high gear to devise a strategy to ensure that they emerged as the winners from McCain’s maneuver. They didn’t want to take the blame for TARP’s failure—and they didn’t want McCain to be able to claim credit for its success.

By midmorning, Democrats and Republicans from both houses were haggling over the bill’s provisions. Over the course of two hours or so, in the Foreign Relations Room, located below the vice president’s office on the Senate side, the negotiators agreed on several big items, including setting the size of TARP at $700 billion. TARP funds would not be immediately available to the administration but could be drawn down in tranches. Senate and House negotiators agreed on the need to place restrictions on executive compensation and to give Treasury warrants to purchase equity in companies participating in the program so that taxpayers could share in any possible gains they made.

Enough tentative progress had been achieved for Utah Republican senator Bob Bennett to get caught up in the moment as he emerged from the negotiation sessions around midday. He grabbed a microphone and told the press, “I now expect we will, indeed, have a plan that can pass the House, pass the Senate, be signed by the president, and bring a sense of certainty to this crisis that is still roiling in the markets.” Chris Dodd told reporters that he, too, was confident.

But there were problems with this scenario. It was a big stretch to say these negotiators had reached an actual agreement. And, in any case, House Republicans were not on board, and without them TARP was going nowhere. The math was simple. We would need 218 votes for House passage. Though the Democrats, with 236 members, held a clear majority, we weren’t going to get 100 percent of their votes, so we had to have some Republicans. But the only House Republican attending the morning negotiating session had been Spencer Bachus, the ranking Republican on the House Financial Services Committee. Afterward, he allowed that progress had been made. But he wasn’t in a position to deliver his colleagues.

Hour by hour the need for the legislation was becoming more urgent. The noose continued to tighten on the nation’s credit markets: by the close of trading, LIBOR-OIS spreads had widened to nearly 200 basis points, up 30 basis points from the day before. By comparison, they had been about half that level just after Lehman failed.

Then Washington Mutual went down—the biggest failure in U.S. banking history. While the legislators were negotiating, Sheila Bair called me around 11:00 a.m. to break the news that the FDIC was going to seize the bank, and that JPMorgan would pay the government $1.9 billion for the company, which had $307 billion in assets.

WaMu’s demise wasn’t a surprise. It had been struggling for months and had taken a catastrophic turn for the worse: Its CDS rates, already shocking at 2,742 on September 15, had nearly doubled to 5,266 on Wednesday, September 24, as the bank was hit by a run on deposits. Customers had withdrawn $16.7 billion over the preceding ten days.

Back in March, JPMorgan had wanted to buy WaMu, but its regulator, the Office of Thrift Supervision (OTS), and management had opted instead for a $7 billion capital investment from a group led by the private-equity firm TPG. This decision proved to be a mistake: an acquisition by JPMorgan would have stabilized the bank. Still, I had kept in close touch with Sheila and Ben Bernanke on WaMu and periodically talked with JPMorgan CEO Jamie Dimon.

Unfortunately, the WaMu solution wasn’t perfect, although it was handled smoothly using the normal FDIC process. JPMorgan’s purchase cost taxpayers nothing and no depositors lost money, but the deal gave senior WaMu debt holders about 55 cents on the dollar, roughly equal to what the securities had been trading for. In retrospect, I see that, in the middle of a panic, this was a mistake. WaMu, the sixth-biggest bank in the country, was systemically important. Crushing the owners of preferred and subordinated debt and clipping senior debt holders only unsettled the debt holders in other institutions, adding to the market’s uncertainty about government action. Banks were even less willing to lend to one another. In the future, I concluded, we were going to need to go beyond the standard FDIC resolution process for a failing bank.

At 2:25 p.m. I spoke with John McCain, who had just returned to Washington. The call did nothing to ease my mind.

“We have to protect the American taxpayers,” he told me, pointing out that nothing would get done in Congress without the House Republicans. They didn’t like our proposal and I needed to listen more carefully to them, he said.

“John, our system is on the edge,” I told him. “WaMu barely got bailed out today. Several other institutions are on the brink. If we don’t get something done soon, this economy is going to collapse.”

I was so concerned that McCain would do or say something rash that I resorted to a veiled threat: “I’m not a politician, but if you or anyone else does something that causes this system to collapse, it is not going to just be on me. I am going to go and say what I think to the American people.”

As soon as we finished up, I called Joel Kaplan at the White House to let him know that I’d had a tough conversation with the Republican presidential candidate. Not long after, Senator Judd Gregg called to confirm my worst fears about McCain’s return.

“Hank,” the New Hampshire Republican said, “I have just been in a meeting that took my breath away.”

McCain, it seems, had come to Washington to save the day, and became livid when he got off the plane to learn that a deal had apparently been reached without him. As Judd told me, McCain, with Lindsey Graham at his side, had come in late to the Senate Republican Policy Committee luncheon, held weekly in the Mike Mansfield Room on the second floor of the Capitol. McCain sat through part of a presentation by Bennett and a short one by Judd. Lindsey told the assembly of 40 or so senators, “It’s not right for any of you to reach an agreement, because there is no agreement unless John agrees.”

Then, Judd related, McCain had declared, “I don’t care what you people do, I am going to do what is right for the country.” The Arizona senator subsequently stormed out, leaving the Republican senators to finish their lunches, whether or not they had any appetite left.

Now I knew why McCain had seemed so angry when we’d spoken half an hour before.