A Fighting Chance (18 page)

Hands shot up. I called on one student who said something along the lines of “Hoard cash. Lots of it. Sell off the bad stuff fast, hang on to the cash, and try to ride out the storm.”

I said something like “Hmmm … Anyone else?”

All the hands went down. The student who’d answered had provided the textbook response. Why would I be looking for any other answer?

In the long silence, one student jumped, just a little. His hand went up.

I waited and let the silence stretch.

Another hand popped up and then another and another. Ultimately, about a third of the students had their hands up, and nearly all of them were smiling at the genius of the alternative, while the others looked on with puzzled expressions.

Finally, I let one of the students explain. The less obvious answer was to grow your bank as big as you possibly can, as fast as you possibly can. Even if it means taking on big risks. Even if it means overpaying to acquire smaller companies. Even if it means entering shaky or unprofitable markets. Do it anyway, so you can grow, grow, grow. And then—here’s the important part—borrow from everyone else to finance all that growth.

Why? Because a financial company that was truly gigantic and owed lots of money to lots of other big companies would be so important to the economy as a whole that the government would not let it fail. Throw in a few billion dollars of FDIC-insured checking accounts, and the government would always make sure that this megabank stayed in business.

Of course, reality was a lot more complex than a few words on a chalkboard. But the basic concept wasn’t rocket science, and we were hardly the first to figure it out. It took my students about two minutes to see how to build a bank that would be Too Big to Fail.

By the time TARP came along, pretty much everyone had grown to hate TBTF—except for the bankers who benefited.

Yes, our economy was crashing and the government needed to step in to stop the downward spiral. But the major banks didn’t need to be so big and interconnected—that part wasn’t inevitable. And the government made a huge mistake in
how
they handled the bailout.

I’d taught classes about business failure for nearly thirty years, so that’s my prism for looking at a company that’s in trouble. Typically, when a company is on the brink of bankruptcy, any rescue effort comes with lots of strings attached. CEOs get fired, shareholders get wiped out, creditors take a big haircut, and new business plans are drawn up—or there’s no new money.

A similar approach should have applied during the 2008 crash. And in the case of the insurance giant AIG, it almost did—until Treasury stepped in with nostrings TARP money.

As troubles mounted for AIG in August and September 2008, the process was under way. The company had gone to its creditors and asked them to write down the debts, and creditors were starting to fall in line for partial payment. No one would get 100 percent of what they were owed, but no one would get shut out, either.

But then the government bailed AIG out, and—
shazam!
—every creditor got 100 percent of what they were owed. In other words, the US taxpayers gave AIG’s creditors a better deal than they had already agreed to take. Goldman Sachs, for example, was one of AIG’s largest creditors, and they walked away with $12.9 billion. It must have seemed like Christmas in October—free money!

And it wasn’t just AIG. TARP sent truckloads of cash to the banks, but the banks gave virtually nothing in return—no haircuts for the creditors, no CEO firings, no promises to abandon risky trading. And that’s when Too Big to Fail went on steroids—not just a bailout, but a pain-free bailout.

TBTF allows the megabanks to operate like drunks on a wild weekend in Vegas. They can take on any kind of crazy risk—put $1 billion on black 22!—and if the bet pays off, the CEOs and the shareholders will be richer than kings. If it doesn’t pay off and the bank is wiped out, the taxpayers will foot the bill.

A nostrings-attached bailout created a Too Big to Fail monster, and I was pretty sure we’d be paying for that mistake for a long time.

Where Did the Money Go?

Six days after my appearance on
The Daily Show,
we got our first public hearing with Secretary Geithner. The exchange wasn’t especially revealing, but we thought it was an important step in our effort to shine more light on what was really going on.

The bailout had never been sold as just a Save the Banks plan. Instead, the American people were told that the bailout would make it possible for banks to start lending to small businesses again and to help relieve the foreclosure crisis. But once those nostrings-attached checks were distributed to the big banks, that promise evaporated like a tiny ice cube in the desert. Sure, Treasury would try out a few mortgage foreclosure programs here and there. And they would talk about small-business lending. But the actual policies were anemic. Despite the way that it was sold, TARP was about saving the banks, plain and simple.

So what did the big banks do with the money they got? Reports vary. Some put the money in their vaults and hunkered down. Others used the money to buy other banks or make other acquisitions—and grew their TBTF banks even bigger. They also did exactly the opposite of what TARP was supposed to encourage: they cut back on small-business lending and got even more aggressive in their efforts to foreclose on home mortgages.

Of course, even after Treasury started handing out TARP money, not all the banks got a big check. Many small banks were left out in the cold, trying desperately to get approval for relatively small infusions. Some died while waiting. By April 2009, nearly fifty small banks had gone completely under—and many more were drowning. Without access to credit, many of their small business customers went down, too.

The lost opportunity still makes me want to scream with frustration. Small business owners, home owners, men and women whose jobs had disappeared: these weren’t numbers on the page; these were millions of people who lost everything.

Late Nights at the GPO

In the middle of the maelstrom, COP was racing to turn itself into a proper organization. The old adage about building the plane and flying it at the same time was out-of-date. We were drawing up blueprints for a jet fighter while executing a catapult launch from an aircraft carrier.

By May, we had about twenty employees. Naomi Baum’s right hand was Tewana Wilkerson, another tough woman who also had extensive Capitol Hill experience. Steve Kroll, a brilliant and quirky lawyer who always wore a bow tie, and Sara Hanks, a tough-as-nails lawyer with years of experience in securities law, led our key investigations.

By the time we were done, we’d put together an eclectic crew. We hired investment bankers and government regulators, courtroom lawyers and economists, accountants and a Hollywood screenwriter (okay, he was a credit rating agency specialist before he went out to California). And we enlisted Wilson Abney, a well-respected ethics expert, to come out of retirement to help us.

The hodgepodge of backgrounds was deliberate. I figured we were facing an unprecedented crisis, and we needed as many good ideas as we could muster. Besides, some of us thought that “groupthink” had contributed at least in part to the crisis. A bunch of big-time financial titans running enormous financial companies had all approached their business in roughly the same way—and so had many of the banking regulators. In fact, there was a long tradition of executives and regulators moving back and forth between government and private sector jobs, which meant that the key players in the financial industry almost never received serious input from anyone with a different worldview. We figured COP could do better.

As we added staff, we needed an office for them to work in. Finding really good space in Washington to house a brand-new government organization on a moment’s notice was like looking for an affordable one-bedroom apartment with a nice view in Manhattan. Not an easy job, but possible. We turned up an unlikely landlord: the Government Printing Office.

The GPO was near the Capitol, on a side street near Union Station. The printing office does just that—it prints up Supreme Court opinions, laws, and other official documents. Its home is a huge factory that cuts and binds tons of paper every workday. Constructed in the 1860s, the building is heavy and square, with reinforced floors and thick outer walls that make it feel like a fortress.

In an earlier time, it took thousands of people to tend the huge printing presses and to bind and box up millions of documents. But like many other factories in America, the GPO had been changed by automation and computerization, and now there were far fewer human operators.

That’s how we ended up on the third and sixth floors of a working factory, set apart from the GPO employees by thin slabs of wallboard. Our conference room had an old lavatory on one wall. Damon swore we were in a converted men’s room, but I never confirmed that with our landlords. (We’d already rented the space, and I didn’t really want to know.) The elevators were slow and the space was quirky, but during the day the building was perfectly fine. At night, the factory floors were empty, with hulking pieces of machinery illuminated only by nearby streetlamps that cast dim light through the tall windows. When the COP staff worked late, we usually stayed huddled together in our brightly lit haven. But venturing to the restrooms on the other side of the vast, darkened factory floor—or outside to the deserted streets—triggered visions of every horror movie ever made.

The GPO’s management had installed closed-circuit television sets above the elevators to get messages to everyone. (“Congratulations, Norma, on twenty years of service!”) Some of these messages were accompanied by pictures. On my first visit to our new offices, I was greeted by a large television screen with a photo of a bigger-than-life rat. Confession: I have a morbid fear of mice and rats—I don’t even like squirrels. I actually screamed out loud when I saw that oversize rat up on the screen. This wasn’t a cute cartoon; it was a close-up of the thing. The picture was accompanied by a stern reminder to keep your lunch sealed up. Whenever I was in the office after dark, I would wonder about those rats. If everyone kept their lunches sealed up, what were the rats eating now?

The GPO staffers were gracious hosts. They were incredibly friendly and put up with our crazy hours. They helped us find furniture and erect more temporary walls. They offered tours to show off their work. Best of all, they rooted for us. Riding the elevators or walking down the hall, they cheered us on, telling us to go get the bad guys. And that’s what we tried to do.

More “Trust Us”

By law, the COP panelists’ work was temporary and part-time, with the understanding that all five of us would keep our regular jobs. During the spring of 2009, I continued teaching at Harvard and did a lot of flying back and forth between Boston and DC.

Whenever I flew home from Washington, Bruce would pick me up at Logan Airport, and then we’d head to the Summer Shack. The Shack is a big, boisterous place that features a giant chalkboard announcing the daily catch. When fried smelts are in season, they even serve those—not for me, but Bruce loves them.

We always sat in the same booth and started with the same order—light beer for me, Fisherman’s Brew for Bruce, and an order of fried clams to get us started. Sal Chillemi had worked at the Shack since it opened, and he would see us coming and bring the beer along with the menus. I always set aside a piece of cornbread to take home to Otis, who would gobble it down in a single bite.

Some nights I was elated, eager to tell Bruce about how we’d brought attention to this issue or turned up good data on that one. Other nights I was so frustrated, I could only spit out bits of stories. A few nights I was so depressed that I just leaned back in the booth with my eyes closed and pressed the beer mug to my forehead.

COP soon hit another “just trust us” moment with Treasury. Secretary Geithner had recently announced that the big banks would be subjected to “stress tests,” which were supposed to show whether the banks had enough capital to begin to stand on their own. The Federal Reserve would run the actual tests, and if the banks passed, the public could have more confidence in their stability—or at least that was the idea.

COP swung into action with a very direct question: Exactly how stressful are the stress tests? We lined up some first-rate experts to evaluate the test, and we were all ready to go when the Fed and Treasury informed us that they wouldn’t let us in the clubhouse door. Our access to the data they used to assess the banks would be severely limited; in fact, we couldn’t even get full access to the test they were using to score the banks. We pushed and pulled. We sent our lawyers. We asked nicely and not so nicely. But nothing worked. The stress test remained top secret.

When Treasury announced the results of the test, lo and behold, every bank was in good shape. Half were great, and half were a little bruised and needed to raise some more money, but they were all on the road to recovery. Secretary Geithner declared, “None of these 19 banks are at risk for insolvency.” Really? Once the results were announced and Treasury had reported that everyone was on the right path, we asked again: Now can we have more information about the test? Answer: Nope, not a chance.

Over and over during the spring and summer of 2009, we complained loudly and publicly about the Fed and Treasury refusing to give us information, but they wouldn’t yield. We still don’t know what was in those stress tests.

We pounded on the door to the house of TARP, but they hunkered down and never came out.

$8.6 Billion for the Taxpayers

In June 2009, Treasury started negotiating another round of deals with the big banks. As part of the original TARP arrangement, when the banks had borrowed money, they had promised to sell a certain number of shares of the banks’ stock to the government at a reduced rate. The idea was that if the bailout worked and the bank became profitable again, the taxpayers were guaranteed a bonus at some point in the future. Now the future was here, and some of the banks were ready to cut a deal with the government and give the taxpayers their bonus.