On the Brink (43 page)

Later, back in the office, I spoke again with Kevin Warsh and said, “I’ve got to tell Sheila.”

She hadn’t yet heard the official news. I knew she would take the new offer seriously and do what she had to do, placing a high priority on reducing the cost to the government. But I reminded her that she needed to be careful: the Wachovia-Citi deal had already been announced, and Wells had walked once before. She thanked me, and the next thing I heard, Wachovia had a new deal—with Wells.

Later I met with Neel Kashkari, Jim Wilkinson, and Joel Kaplan to tell them that in anticipation of TARP’s passing the next day, I was going to name Neel interim assistant Treasury secretary, in charge of running the new program. Though I was concerned that he might be perceived as just a junior Goldman Sachs banker who had come to Washington to work with me, naming him was an easy decision. Neel was well suited for the job: he was tough and brave, and knew how to get things done quickly.

On Thursday night, Wells Fargo made a bold offer of $15.4 billion that Wachovia’s board accepted. Wells Fargo planned to keep Wachovia intact, and though it estimated that it would take lifetime losses of $74 billion on Wachovia’s loan portfolio, it would seek no government assistance. To seal the deal, Wachovia issued Wells Fargo preferred stock worth 39.9 percent of its voting power.

The next morning, Citi responded with a statement saying that the transaction breached an exclusivity agreement Wachovia had signed the previous Sunday. Citi threatened to sue, but there was little that the Fed or the FDIC could do, as this was a private takeover and taxpayers were not at risk.

I had been exchanging calls with Tim, Sheila, and Kevin Warsh on the Wachovia situation when Nancy Pelosi called to say that although it had been a long fight, the prospect of TARP’s passing the House on Friday looked good.

The Speaker was right. At 1:22 p.m. on a sunny autumn afternoon, the House passed the Emergency Economic Stabilization Act of 2008 by a margin of 263 to 171, with 91 Republicans voting for the legislation. The yes votes included 32 more Democrats and 26 more Republicans than the first vote had.

Indeed, it was remarkable that in the closing days of its session, one month away from a hotly contested national election, a Democratic-controlled Congress had responded so quickly to the pleas of an outgoing, and unpopular, administration for a combination of spending authorities and emergency powers that were unprecedented in their scope and flexibility.

For the rest of the day, I took a host of congratulatory calls, but they all came with the same warning: move fast. French finance minister Christine Lagarde jarred me when she emphasized how shaky the European markets were. Europe’s banking problems had been building day by day. Ireland’s decision earlier in the week to guarantee bank deposits had caused money to flee the U.K. for safer Irish accounts; on Friday, Britain was forced to raise the limit on its own deposit insurance. French president Nicolas Sarkozy was convening an emergency minisummit in Paris the next day to deal with the financial crisis.

There was no time to savor our legislative victory. At home TARP’s passage failed to console the market: the Dow dropped 157 points, for a total of 818 points lost over the week.

Late on Friday, as I sat in my office, I told Michele Davis, “To put it mildly, I don’t feel ecstatic.” If anything, I believed we were still almost as vulnerable as when we first submitted TARP. The markets, after all, were much worse.

Acting on Michele’s advice, I emphasized in my public comments that it would take time to put a comprehensive plan together and that we would still need to use the combined powers of all the regulators.

I needed time to think in a quiet setting, so Wendy and I had decided to get away for the weekend—my first respite in weeks. Before I left Treasury, I asked Neel to figure out how soon we could begin to buy the banks’ toxic assets. And I made sure to tell Dan Jester and the rest of the team: “Figure out a way we can put equity in these companies.”

C
HAPTER 14

Friday, October 3, 2008

I
flew out of Washington Friday at 4:00 p.m. for a weekend break, knowing only too well that the legislation signed by President Bush at 2:30 p.m. that afternoon had bought us little time. If anything, the financial markets and the economy were in worse shape than they had been before TARP’s passage.

Congress and the markets expected immediate results, but it was going to take weeks to launch a program to buy toxic assets from banks. Since Monday, world financial markets had taken a drastic turn downward. European banks were teetering, the credit markets remained frozen—with the vital commercial paper business all but shut down—and stock prices had fallen sharply. The SEC’s ban on short selling would expire in a few days. I had directed my team to craft a plan to provide capital to banks, but we didn’t yet know how such a program might work.

No doubt about it, this would be a working weekend. But at least I would be working on Little St. Simons Island, one of my favorite places on earth. For 27 years Wendy and I, and our family, had come regularly to this narrow stretch of land off Georgia’s Atlantic coast. It had changed little in that time. Never developed, its beautiful forests and marshes were blessed with an abundance of wildlife.

We touched down on neighboring St. Simons Island and drove five miles to the marina. Most folks traveled to Little St. Simons Island by motorboat—you can’t reach it by car—but Wendy and I preferred to kayak, and we left Washington’s concerns behind for an hour as we paddled the three and a half miles to the island, arriving just in time to see the sunset. Walking to our lodge through the refreshing salt air, Wendy assured me that I would sleep well that night, and I began to unclench a little. If nothing else, I had made it to the weekend.

Saturday, October 4–Sunday, October 5, 2008

The next morning at dawn I headed out with my fly rod and fishing gear to Bass Creek to catch some redfish. Standing in warm, knee-deep water, surrounded by shorebirds, I caught and released half a dozen redfish on a clouser minnow fly. I felt like myself for the first time in a long while—just Hank Paulson, out fishing.

But I was soon back to business. Tim Geithner called after I returned to the lodge and told me that we needed to make a strong, unequivocal public statement backing our financial institutions.

I agreed. But how could we do so in terms that the market would believe? The President’s Working Group gave us an excellent platform, we decided. The Treasury, Federal Reserve, FDIC, and SEC could stand together and commit themselves to coordinated action in the crisis.

Tim and I set Treasury and New York Fed staff to work. We wanted to outline clearly the powerful tools that government agencies now possessed to deal with the crisis, specifically highlighting the broad authorities—and deep pockets—granted Treasury by the TARP legislation, as well as the FDIC’s ability to protect depositors and guarantee liabilities by invoking systemic risk, as it had with Wachovia.

All weekend, drafts of a statement moved back and forth. I managed to wedge in a little more fishing, but I spent three or four hours at a crack on calls with Ben Bernanke and Tim, and my team at Treasury.

I also kept a wary eye on the Citigroup–Wachovia–Wells Fargo triangle, discussing the increasingly complicated situation with Ben and Tim. Citi was demanding that Wells Fargo drop its $15.1 billion offer for Wachovia, claiming it breached Citi’s own deal. News reports quoted Citi CEO Vikram Pandit as calling the deal illegal, so I assumed a lawsuit was forthcoming.

On the plus side, Wachovia, despite its abundant problems, had attracted two major banks and would be saved from failure. But one of those banks, Citi, had troubles of its own, having written down $19 billion of bad assets in the first six months of the year. We were concerned that Citi might be hurt if its deal with Wachovia disintegrated—and this time the institution under attack would be one of the biggest financial services companies in the world.

I flew back to Washington Sunday evening and got on a conference call with my staff about 7:00 p.m. Among other things, Dave McCormick filled us in on developments in Europe, and it was clear we needed to move fast on the PWG statement as well as on our capital and illiquid asset purchase programs.

Over the weekend, French president Nicolas Sarkozy’s summit of European leaders had failed to produce the desired unity that would calm the markets. Quite the contrary: participants squabbled publicly over how far they should go to support their most important financial institutions. Then on Sunday night, continental time, while Germany arranged a $68 billion rescue for troubled lender Hypo Real Estate, Chancellor Angela Merkel had said her country would guarantee personal savings accounts, a proposal that by some calculations would have affected $1 trillion of savings.

Dave had been talking to his counterparts overseas, trying to get a grasp on the German situation. We hoped that Merkel’s comment was just a “moral guarantee” intended to reassure her markets, not a hard, two-year guarantee like the one the Irish parliament had approved the previous week.

“This is going to move quick and force us to do some things we may or may not want to do,” I said.

Monday, October 6, 2008

Usually when I got to Treasury in the morning, I stopped in the Markets Room. On Monday, though, I went straight to McCormick’s office to check on Europe.

“Things are in complete disarray,” he told me.

The U.K. was fuming. The British press was reporting that the country’s financial officials were upset that Merkel had given no indication of her plans. The U.K. feared Merkel’s “beggar thy neighbor” policy could cause a domino effect, potentially destabilizing banking systems across Europe as each country enacted its own guarantees to prevent money from leaving to seek safer havens. It wouldn’t be long before we had to follow suit.

President Bush’s deputy chief of staff Joel Kaplan echoed Dave’s concerns when I spoke to him later that morning.

“Hank, it seems to me we’re going to have to do something to match the Europeans,” he said.

“You’re probably right,” I said.

That morning we released the PWG statement. We affirmed our commitment to coordinated forceful action, vowing to move with “substantial force on a number of fronts.” Alluding to the FDIC authorities on Wachovia, we asserted that we would stand behind our systemically important institutions. Though the statement was intended to reassure the markets, it fell flat.

However, I’m not sure any statement would have made a difference that day. Asian and European markets plummeted in reaction to European banks’ problems and concerns that TARP would not provide a quick enough fix in the U.S. Once our markets opened, the reports were equally frightening: the Dow fell sharply—in little more than an hour it was off 578 points, or 5.6 percent. The LIBOR-OIS spread would hit a near all-time high of 288 basis points before contracting slightly; a month earlier, it had stood at 81 basis points.

The disarray prompted the White House to debate whether President Bush should call a meeting of world leaders to tackle the crisis. I believed the key was to quickly find a solution to prevent a meltdown, but I did not think a summit was the way to do that—it could expose political divisions among countries, and this would further destabilize the markets. Over lunch on Monday I told Steve Hadley, Keith Hennessey, and Dan Price, the president’s talented and energetic assistant for international economics affairs, that any such meeting with world leaders should be held after our presidential election, albeit as soon as possible.

“This crisis will only get worse before it gets better,” I said.

Instead of meeting with his peers, I suggested President Bush call his fellow heads of state to urge them to send their finance ministers to the upcoming G-7 gathering ready to forge a solution. The International Monetary Fund and the World Bank were holding their annual get-togethers in Washington the next weekend. This meant that the G-20, which included representatives of both developed and emerging nations—including China, India, and Russia—would be in town. We decided to ask the chairman of the G-20, Brazilian finance minister Guido Mantega, to gather the group on Saturday.

On Monday I announced that Neel Kashkari would lead our TARP efforts as interim assistant Treasury secretary for financial stability. I made this an interim appointment because we were working to identify and vet permanent candidates acceptable to Obama and McCain.

Neel, who combined toughness with an engineer’s precision, was doing a typically fine job building a staff and organizational structure to move things forward. That morning he and his team had finished a 40-page PowerPoint presentation, outlining a massive undertaking. He had teams working on everything from hiring asset managers to figuring out how to conduct the auctions.

Although the Dow rallied late on Monday, it ended up below 10,000 for the first time in four years. Worldwide, more than $2 trillion in stock market value had evaporated. The uncertainty surrounding the fight for Wachovia hurt all financials. Early in the day Citi had reacted to its jilting by filing a $60 billion lawsuit, but agreed midday to freeze the litigation until Wednesday. Wachovia dropped nearly 7 percent, while Citi fell more than 5 percent, and Wells Fargo almost 3 percent. Credit default swaps on Morgan Stanley hit 1,028 basis points.

After the close, Bank of America reported a 68 percent drop in earnings for the third quarter and announced plans to raise $10 billion in equity. I knew that the next day would bring a fresh attack on bank stocks.

Tuesday, October 7, 2008

Early Tuesday morning I walked to the White House for a conference call with President Bush and British prime minister Gordon Brown, who told us that his government planned to inject capital into U.K. banks. He wanted our support and promised to coordinate with us. Brown also told the president that he should consider gathering the leaders of the G-20 together to deal with the problem. The president took in that suggestion, but his first priority was to ensure a good G-7 finance ministers’ meeting and come up with a coordinated plan of action.