Too Big to Fail

by Andrew Ross Sorkin

  First up, he explained, he would introduce everyone. Then, he said, he’d highlight the three pieces of the program: commercial paper; FDIC; and TARP, the acronym that would soon become synonymous with the word “bailout,” and one that he clearly had a hard time saying.

  “Then I’ll hand it over to you guys,” Paulson said, nodding in the direction of Bernanke and Geithner, who then rehearsed their lines about the commercial paper program. “From there, Sheila will take it,” he instructed, still annoyed with her for all of her complaining the night before about the loan-guarantee program.

  Finally, they got to the key provision: the equivalent of welfare checks, earmarked for the biggest banks in the nation.

  Paulson read the talking point aloud: “To encourage wide participation, the program is designed to provide an attractive source of capital, on identical terms, to all qualifying financial institutions. We plan to announce the program tomorrow—and—that you nine firms will be the initial participants. We will state clearly that you are healthy institutions, participating in order to support the U.S. economy.”

  They all knew that line was wishful thinking. Bernanke and Geithner had talked earlier in the day about whether the sum would be sufficient to sustain even one troubled bank, Citigroup, the nation’s largest, let alone solve a full-fledged financial crisis. Geithner, for one, had been especially anxious that Citigroup, as he had been saying for weeks, “was next.”

  Then they got to the question that Geithner and Paulson had been debating all day: How forceful could they be? Geithner had prevailed upon Paulson earlier to make accepting the TARP money as close to a requirement for the participants as possible. “The language needs to be stronger,” Geithner urged him. “We need to make clear that this is not optional.” Paulson agreed.

  The new talking-point language reflected Geithner’s changes. “This is a combined program (bank liability guarantee and capital purchase). Your firms need to agree to both,” it stated. “We don’t believe it is tenable to opt out because doing so would leave you vulnerable and exposed.”

  Just to drive home the point, one of the talking points warned, “If a capital infusion is not appealing, you should be aware that your regulator will require it in any circumstance.”

  They had already tried to game out which of the CEOs would be resistant. Pandit might be tough, but he’d take it, Paulson thought. Dimon was in the bag. Blankfein might get snippy, but he wouldn’t get in the way. Mack needed the money, so that should be easy. Lewis might put up a fight. The biggest wild card was Dick Kovacevich of Wells Fargo: Would he be the one to derail it?

  Paulson recounted how much trouble it had been just trying to get him to show up. “I could hardly get him on the airplane,” he told the group, who looked at him with a mixture of amusement and astonishment. “I just said, ‘Listen, the secretary of Treasury, the chairman of the Fed, the FDIC want you here! You better get here!” Everyone laughed, but got right back to business.

  “David,” Paulson said, pointing to David Nason, “will walk through the numbers.” And Bob “will go over the comp issues,” meaning the delicate conversation about the industry’s famously extravagant way of compensating, or paying, its medium to big producers.

  After that, Paulson explained, the plan was to sequester all the CEOs in separate rooms. “We let them think it over. They can talk to their boards. And we can answer their questions if they have them,” he said. “And then we’ll reconvene at 6:30 p.m.”

  “Let’s hope this works,” Paulson said encouragingly, as the group got ready to march down the hallway to, if not the biggest meeting of their careers, certainly the most historic.

  Outside the Treasury building every attempt that had been made to keep tight control over the meeting had become moot. Jamie Dimon had arrived at 2:15 p.m., some forty-five minutes early, and casually ambled down Hamilton as the group of camped-out photographers snapped picture after picture. “He caught us off guard!” Brookly McLaughlin, one of the press staffers, wrote to her colleague, who was trying to coordinate the logistics from her BlackBerry. Ron Beller showed up about ten minutes later; Kelly and Blankfein at about 2:43; and Mack and Pandit a few minutes after them. At 2:53, Lewis was still missing. Christal West was getting nervous until he finally arrived, with five minutes to spare, sneaking in through Paulson’s private entrance at the side of the building.

  At 2:59 Christal West sent an e-mail to the group: “They’re all in.”

  The centerpiece of the secretary’s imposing conference room is a twenty-four-foot-long mahogany table buffed to a high shine, with a Gilbert Stuart portrait of George Washington looming over it from one side of the room and a portrait of Salmon P. Chase, the secretary of the Treasury during Lincoln’s administration and the man responsible for putting the words “In God We Trust” on U.S. currency, from the other. Five chandeliers, lit by gas, hang from the vaulted rose-and-green ceiling. On the backs of each of the twenty leather and mahogany chairs positioned around the table is the U.S. insignia in the configuration of the sign for the dollar.

  The nine CEOs had already taken their seats, arranged alphabetically behind placards with their names, when Paulson, Geithner, Bernanke, and Bair entered. It was the first time—perhaps the only time—that the nine most powerful CEOs in American finance and their regulators would be in the same room at the same time.

  “I would like to thank all of you for coming down to Washington on such short notice,” Paulson began, in perhaps the most serious tone he had yet taken with them individually during the dramatic events of the previous weeks. “Ben, Sheila, Tim, and I have asked you here this afternoon because we are of the view that the United States needs to take strong decisive action to arrest the stress in our financial system.”

  Blankfein, who was sitting directly across from Paulson, quickly turned solemn, while Lewis leaned forward to hear better.

  “Over the recent days we have worked hard to come up with a three-part plan to address the turmoil,” Paulson explained.

  Just as they had rehearsed, Geithner and Bernanke now took the group through the new commercial paper facility, followed by Bair’s explanation of the FDIC’s plan to guarantee bank debt. Paulson saved the key announcement for himself.

  “Through our new TARP authority, Treasury will purchase up to $250 billion of preferred stock of banks and thrifts prior to year-end,” he said, with the gravity due the unprecedented measure. “The system needs more money, and all of you will be better off if there’s more capital in the system. That’s why we’re planning to announce that all nine of you will participate in the program.”

  Paulson explained that the money would be invested on identical terms for each bank, with the strongest banks in the country taking the money to provide cover to the weaker banks that would follow suit. “This is about getting confidence back into the system. You’re the key to that confidence.”

  “We regret having to take these actions,” he reiterated, and in case there was any confusion, he underscored the fact that he expected them to accept the money whether they wished to or not. “But let me be clear: If you don’t take it and you aren’t able to raise the capital that they say you need in the market, then I’m going give you a second helping and you’re not going to like the terms on that.”

  The bankers sat stunned. If Paulson’s aim had been to shock and awe them, the tactic had worked spectacularly well.

  “This is the right thing to do for the country,” he said in closing.

  Geithner now read off the amounts that each bank would receive, in alphabetical order. Bank of America: $25 billion; Citigroup: $25 billion; Goldman Sachs: $10 billion; JP Morgan: $25 billion; Morgan Stanley: $10 billion; State Street: $10 billion; Wells Fargo: $25 billion.

  “So where do I sign?” Dimon said to some laughter, trying to relieve the tension, which had not dissipated now that the bankers had learned why they had been summoned.

  At 3:19 p.m. Wilkinson, who was sitting in the back of the roo
m after inviting himself to the meeting, got an e-mail on his BlackBerry from Joel Kaplan, who was desperate to give President Bush some intelligence. “Gimme quick update—how is the reaction?”

  He didn’t know how to reply, as the outcome was not at all certain.

  Dick Kovacevich, for one, was obviously not pleased to have been given this ultimatum. He had had to get on a flight—a commercial flight, no less—to Washington, a place he had always found contemptible, only to be told he would have to take money he thought he didn’t need from the government, in some godforsaken effort to save all these other cowboys?

  “I’m not one of you New York guys with your fancy products. Why am I in this room, talking about bailing you out?” he asked derisively.

  For a moment no one said a word, and then the room suddenly broke out in pandemonium, with everyone talking over one another until Paulson finally broke in.

  Staring sternly at Kovacevich, Paulson told him, “Your regulator is sitting right there.” John Dugan, comptroller of the currency, and FDIC chairwoman Sheila Bair were directly across the table from him. “And you’re going to get a call tomorrow telling you you’re undercapitalized and that you won’t be able to raise money in the private markets.”

  Thain jumped in with his own question: “What kind of protections can you give us on changes in compensation policy?”

  Although his new boss, Lewis, couldn’t believe Thain’s nerve in posing the question, it was nonetheless the one that everyone present wanted to ask. Would the government retroactively change compensation plans? Could they? What would happen if there was a populist outcry? After all, the government would now own stakes in their companies.

  Bob Hoyt, Treasury’s general counsel, took the question. “We are going to be producing some rules so that the administration will not unilaterally change its view,” he said. “But you have no insulation if Congress wants to change the law.”

  Lewis, increasingly frustrated, could see the conversation needed to move along, and stated, “I have three things to say. There’s obviously a lot to like and dislike about the program. I think given what’s happening, if we don’t have a healthy fear of the unknown, then we’re crazy.”

  Second, “if we spend another second talking about compensation issues, we’ve lost our minds!”

  And finally, he said adamantly, “I don’t think we need to be talking about this a whole lot more,” adding, “We all know that we are going to sign.”

  Still, Kovacevich kept stirring in his seat. This is practically socialism!

  As Bernanke cleared his throat, the room fell silent again.

  “I don’t really understand why there needs to be so much tension about this,” he said in his professorial way. He explained how the country was facing the worst economy since the Great Depression and pleaded with them to think about “the collective good. Look, we’re not trying to be intimidating or pushy….”

  Paulson gave him a look as if to suggest, Yes, in fact, I am being pushy!

  John Mack, who had been sitting silently for most of the meeting, turned to Geithner and said, “Give me the paper.” Taking a pen from his breast pocket he signed the document and, with a flick of his finger, sent it sliding back across the table. “Done,” he exclaimed, thus unceremoniously certifying what Paulson hated calling a bailout.

  “But you didn’t write your name in,” Geithner pointed out. “You write it in,” Mack instructed, and Geithner penned the words “MORGAN STANLEY” in block letters at the top. “And you didn’t put the amount in,” Geithner protested.

  “It’s $10 billion,” Mack replied nonchalantly.

  Thain, looking at Mack in dismay, said, “You can’t sign that without your board.”

  “No?” Mack replied. “My board’s on twenty-four-hour notice. They’ll go along with it. And if they don’t, they’ll fire me!”

  Blankfein indicated that he, too, needed to speak with his board. “I don’t feel authorized to do that on my own,” he said, with everyone else agreeing that they, too, would need to go through proper channels.

  Dimon stood up, walked to the corner of the room near the window, and decided that he was going to convene a board meeting by phone right then and there. He called his assistant, Kathy, and told her to get the directors on the line. The other CEOs dispersed to separate conference rooms to call their offices.

  At 4:01 Wilkinson finally replied to Kaplan’s e-mail. “We are there except for one,” he wrote, referring to Wells Fargo. “This deal will get done.”

  Outside in the hallway, a huge grin was on Pandit’s face. “We just got out. They’re going to give us $25 billion, and it comes with a guarantee,” he said into the cell phone, sounding as if he had just won the Powerball lottery.

  Mack, having already signed the agreement, called Roy Bostock, one of Morgan Stanley’s board members, hoping he could help calm the waters with the other directors over his impetuous decision.

  “I want to give you a heads-up,” he told him. “We’re going to be having a board call in about twenty minutes or so. It’s going to be to approve accepting $10 billion in TARP money,” he said, before pausing. “But I already have.”

  Bostock knew what was being asked of him. “I understand. The board will not throw an ax in the wheel here.”

  When the Morgan Stanley call finally began, Bostock started by saying, “John, we didn’t have any choice but for you to sign that. It was the right thing to do.” Bostock called for a vote before there could be much discussion. “I’m in favor,” he began.

  In stark contrast, Dimon’s tone when he spoke to his own board was bleak. “This is asymmetrically bad for JP Morgan,” he said, whispering into his cell phone. In other words, the money would help the weaker banks catch up to them. “But we can’t be selfish. We shouldn’t stand in the way.”

  At 5:38, Bob Hoyt, while collecting the signed papers, shot an e-mail to the team, “On my way—that’s 5 down, 4 to go.”

  Paulson, Geithner, Bernanke, and Bair sat in Paulson’s office, waiting. With the exception of Kovacevich’s grumbling, the meeting had gone well, much better than they had anticipated. They had effectively just nationalized the nation’s financial system, and no one had had to be removed from the room on a stretcher. Paulson, running his fingers over his stomach, as he always did when he was deep in thought, still couldn’t believe he had pulled it off.

  Paulson had just gotten off the phone with Barack Obama—then the presidential front-runner—who had just finished up a speech about the economy in Toledo, Ohio, to tell him the news. He then tried John McCain, but couldn’t get through.

  At 6:23 p.m. Wilkinson wrote to the team, “8 out of 9 are in…. [S]tate [S]treet is just waiting on board…. [W]e are basically done.”

  Two minutes later, at 6:25 p.m., Wilkinson triumphantly reported the final tally from his BlackBerry: “We now have 9 out of 9.”

  Kaplan, at the White House, replied, “Awesome.”

  David Nason carried the signed papers down the hallway to Paulson.

  Standing in the doorway of the secretary’s office, Nason paused for a moment as Paulson and his half-dozen senior staffers took a minute to appreciate the significance of the moment.

  “We just crossed the Rubicon,” he said.

  EPILOGUE

  In the span of just a few months, the shape of Wall Street and the global financial system changed almost beyond recognition. Each of the former Big Five investment banks failed, was sold, or was converted into a bank holding company. Two mortgage-lending giants and the world’s largest insurer were placed under government control. And in early October, with a stroke of the president’s pen, the Treasury—and, by extension, American taxpayers—became part-owners in what were once the nation’s proudest financial institutions, a rescue that would have seemed unthinkable only months earlier.

  Wiring tens of billions of dollars from Washington to Wall Street, however, did not immediately bring an end to the chaos in the markets. Instead of rest
oring confidence, the bailout had, perversely, the opposite effect: Investors’ emotions and imaginations—the forces that John Maynard Keynes famously described as “animal spirits”—ran wild. Even after President Bush signed TARP into law, the Dow Jones Industrial Average would go on to lose as much as 37 percent of its value.

  But there was another kind of fallout, too—one that had a far more profound effect on the American psyche than did the immediate consequences of the dramas being played out daily on Wall Street. In the days and weeks that followed the first payouts under the bailout bill, a national debate emerged about what the tumult in the financial industry meant for the future of capitalism, and about the government’s role in the economy, and whether that role had changed permanently.

  A year later such concerns remain very much at the forefront of the national conversation. As this book was going to press, a raucous public outcry, complete with warnings about creeping socialism, questioned the government’s role not just in Wall Street, but in Detroit (since the bank rescue, the government also supplied billions of dollars in aid to two automotive giants, General Motors and Chrysler, to restructure in bankruptcy court) and in the health care system. Washington has also named an overseer, popularly known as a “pay czar,” to review compensation at the nation’s bailed-out banks.

  One unexpected result of this new federal activism was that traditional political beliefs had been turned on their head, with a Republican president finding himself in the unaccustomed position of having to defend a hands-on approach. “The government intervention is not a government takeover,” President Bush asserted on October 17, 2008, as he sought to counter his critics. “Its purpose is not to weaken the free market. It is to preserve the free market.”

  Bush’s statement seemed to sum up the paradox of the bailout, in which his administration and the one that followed decided that the free market needed to be a little less free—at least temporarily.