On the Brink (21 page)

I had been unable to reach Senator Dodd over the weekend. On Monday I heard he was scheduling a hearing for the following day, and I was mildly offended that he had not discussed this with me first. At that point, I considered congressional hearings to be a waste of time. I’d never seen any piece of legislation get done there, never saw any compromise get worked out at a hearing. I only saw politicians making statements meant to be seen back home.

“This is a crisis,” I told Dodd on the phone. “How are we going to resolve this in a hearing? All we’ll do is spook the markets.”

“Trust me, Hank. We’re going to use the hearings to build support and to build market confidence.”

It turned out we were both correct. There was no way something this big could have passed the Senate without a hearing. But the hearing sure didn’t help the markets.

The response on the Hill to our proposed legislation ranged from skeptical to hostile. The GSEs had plenty of friends in Congress. Many lawmakers didn’t believe we needed new powers, while others didn’t like putting the government behind those agencies. The tax committees objected because our request for unlimited authority to purchase securities and buy equity would require the federal debt limit to be waived; that had to be worked out with House Ways and Means chairman Charlie Rangel.

Richard Shelby’s and Barney Frank’s people assured us that they wouldn’t let the GSEs fail, but the battle lines were drawn. Dodd wanted more foreclosure relief, and House Democrats were adamant about the block grants.

Even as they teetered, the GSEs still had remarkable influence. We wanted to buy equity on the open market if need be, but the GSEs persuaded Dodd to write the language in such a way that we had to get their consent first.

Before the Tuesday morning Senate Banking Committee hearing, Kevin Fromer and Michele Davis, assistant secretary for public affairs and director of policy planning, pounded me about what I should say—and, even more important, what I should not say. They agreed that I was right to emphasize the importance of GSEs to the availability and cost of mortgage financing and to helping homeowners stay in their homes or purchase new ones. “But Hank,” Michele said, “you can’t say that the GSEs are ‘orders of magnitude’ more important than HOPE for Homeowners.” Angry Republicans opposed to HOPE for Homeowners might conclude the president and I would accept anything to get emergency legislation and GSE reform. I left for the Hill determined to bite my tongue.

Before the Senate Banking Committee, Ben Bernanke and I stressed the need to strengthen the weak housing market. I maintained that the bigger and broader our powers, the less likely we would be to use them and the less it would cost taxpayers.

“If you want to make sure it’s used, make it small enough and it’ll be a self-fulfilling prophecy,” I said. Then I uttered the words that would come back to haunt me within a matter of months: “If you’ve got a squirt gun in your pocket, you may have to take it out. If you’ve got a bazooka, and people know you’ve got it, you may not have to take it out. By having something that is unspecified, it will increase confidence, and by increasing confidence it will greatly reduce the likelihood it will ever be used.”

Kentucky Republican Jim Bunning was far from convinced, declaring that “the Fed’s purchase of Bear Stearns’ assets was amateur socialism compared to this.” He asserted that “every time we propose and do something, it always gets used. And you want an unlimited amount used.”

I had walked into the hearing hoping to reassure investors. But contentious comments by a few senators and the skeptical tone of most of the others had a big impact. By day’s end, Fannie’s shares plunged 27 percent, to $7.07; Freddie’s sank 26 percent, to $5.26.

I spent the next day, Wednesday, July 16, in a grinding marathon of meetings and phone calls. In the afternoon, I met with GOP congressional leaders—Senators Mitch McConnell of Kentucky and Jon Kyl of Arizona, and Representatives John Boehner of Ohio and Roy Blunt of Missouri—in the Oval Office with the president and vice president.

It was an extraordinary meeting. These were the administration’s best friends on the Hill. They, and much of the White House staff, opposed the Democrats’ foreclosure legislation for philosophical reasons. And with elections approaching, they were alert to the rising sentiment among taxpayers against helping delinquent homeowners. But the president understood the seriousness of the GSE emergency, and after they aired their complaints, he said firmly, “We’ve got to get this done.”

It was a tremendous act of political courage. It was as if, in the last days of his administration, the president were suddenly switching sides, supporting Democrats and opposing Republicans on matters that went against the basic principles of his administration. But he was determined to do what was best for the country.

Boehner summed up the strangeness of the moment when he said: “I’m prepared to say something supportive about the urgency of moving a bill; I just won’t vote for it.”

Later I met with the entire House Republican Conference in a basement room at the Capitol. The meeting—my first with the group since becoming Treasury secretary—had been set up to let members blow off steam, but that didn’t make it any more pleasant. That crowded room of angry House Republicans was a preview of what I would later see with the Troubled Assets Relief Program.

One member after another walked up to the microphones. They were irate about both the GSE situation and the proposed foreclosure legislation, and they were understandably upset that the bill’s affordable housing fund could funnel money to anti-GOP activist groups like the Association of Community Organizations for Reform Now (ACORN). I must have listened to eight or ten speeches about that. Over and over I explained how critical the capital markets were to the economy, how important the GSEs were to housing, how we were getting real reform that was going to make a difference.

That caucus meeting showed me just how difficult this legislation was for the House Republicans to stomach. Even if the block grants had not been in the language, a lot of these Republicans wouldn’t have voted for the bill. It was going to take the Democrats to get it passed, which was why Nancy Pelosi could demand the block grants as her pound of flesh.

I went straight from that meeting to the Russell Senate Office Building, where I sat down with Chris Dodd, Richard Shelby, and Spencer Bachus. The issue before us was how to move the legislation.

Although we were in one of Dodd’s offices, the main player was Shelby, who hammered me on specifics: “You haven’t told us how much equity you would put in. You haven’t told us whether you’re going to use this liquidity support. You’re asking for an unlimited amount of money, and you haven’t told us how you are going to use it. I’m trying to get there, but I’ve never seen anything like this. Convince me again.”

Shelby was right. Even though we said we never intended to use it, we were asking for an unprecedented blank check—and Congress was understandably wary of signing one over to us. In fact, I don’t know if any executive branch agency had ever before been given the authority to lend to or invest in an enterprise in an unlimited amount. All I could do was argue that the extraordinary and unpredictable nature of the situation warranted the authority in this case.

The day had drained me, but that evening there was a dinner at the White House in honor of Major League Baseball. Hall of Fame players, lawmakers, and administration officials all mingled in the elegant East Room, with its bohemian glass chandeliers, parquet floors, and grand piano.

I reveled in the guest list, which included former Chicago Cubs second baseman Ryne Sandberg. My table included Hall of Fame Baltimore Orioles third baseman Brooks Robinson, but my wife’s table was even more noteworthy. The White House had chosen to seat Wendy next to Senator Bunning, the Hall of Fame pitcher, who had jumped all over me at the Banking Committee hearing the day before.

I showed Wendy the place card. “Someone’s got to be making a joke here,” I said.

But as it turned out, the senator could not have been more gracious to my wife. He and I even chatted a little bit after dinner. He told me that his differences with me weren’t personal, and I complimented him on his baseball prowess.

The next morning I was back working the phones. I conferred with John Spratt, who led the House Budget Committee, and Ways and Means chair Charlie Rangel about how we could make the legislation work fiscally. Their committees were reluctant to exempt the new authorities from the debt ceiling, which meant no blank check for Treasury. But with help from Rangel and Spratt we were able to raise the debt ceiling by $800 billion concurrent with our legislation—giving us a great deal of headroom.

Later I had an important call with Shelby—at least 20 minutes, a long time for me and a near eternity for him. When I hung up, I told Kevin Fromer, “I’m sure I’ve got him.”

“What did you do?” he asked.

“I took your advice,” I said.

Kevin had repeatedly told me that Shelby was worried that we would go easy on the GSEs and just prop them up, regardless of their problems. As I recounted to Kevin, “I told him, ‘You don’t know me, Senator. If I find a problem, I’m going to deal with it. I’m a tough guy.’”

I needed to go back and forth with Dodd and Frank to resolve a number of issues, one of which was absolutely critical. Dodd was resisting our demand to make the Fed a consultative regulator. With Barney’s help, Dodd reluctantly agreed to this, but only until December 31, 2009, when the temporary authorities expired.

On July 23 the Housing and Economic Recovery Act (HERA) passed the House, 272 to 152. Three days later the Senate approved the bill, 72 to 13.

It was, as Shelby and others had said, an unprecedented accomplishment. The legislation gave us broad discretion to provide financial support to the GSEs as we saw fit. The terms and conditions of the support were left almost entirely to the discretion of the Treasury secretary, giving us ample flexibility to structure investments and loans in any way that made sense. The legislation did not impose any limitations on the amount of that support, except that it would not be exempt from the debt ceiling and that we would need the GSEs to approve any equity investment we made in them. All told, it was perhaps the most expansive power to commit funds ever given to a Treasury secretary.

I didn’t seek this power for its own sake, of course, but because we faced a national emergency. I hoped that we would never have to use our new authorities.

With all the attention on the GSEs, I still kept an eye on Lehman’s travails, speaking regularly with Dick Fuld about his options. The best of these was to sell his firm, and Bank of America was the most likely buyer. BofA had taken a look at the firm and passed the month before, but I thought I’d see if anything had changed. So on one of my calls with Dick, I suggested that he give the Charlotte-based bank another try and that he not use an intermediary but instead personally approach its CEO, Ken Lewis.

“Ken respects people who are direct,” I remember telling him. “You won’t be able to look at yourself in the mirror unless you have gone the extra mile here.”

Dick made the call and met with Lewis in late July. He called me with an enthusiastic report.

“Ken really liked me,” he said. “We have a lot in common—we’re both guys with a chip on our shoulder. He’s going to take a hard look at it.”

But nothing came of their subsequent meeting.

Meanwhile, there was no grand signing ceremony for HERA. The president wasn’t enthused—nor, frankly, was I—with the many provisions we had to accept, and he believed that a ceremony would upset House Republicans. To assuage them, he made a point of saying he was reluctant to sign the bill and was only doing so on the Treasury secretary’s strong recommendation.

So, after weeks of speeches, meetings, behind-the-scenes negotiations, and sleepless nights for me and my staff, HERA was finally signed shortly after 7:00 a.m. on July 30 in the Oval Office, before a tiny group of administration officials, including Housing and Urban Development secretary Steve Preston, and Federal Housing Administration commissioner Brian Montgomery, Jim Lockhart, David Nason, and me.

“I want to thank all the congressmen here,” the president joked, but he wasn’t taking a potshot at the absent Republicans. On the contrary, he so empathized with their frustrations that he had not invited anyone from Congress to attend.

With HERA in place, we launched an immediate analysis of the true financial condition of Fannie and Freddie. The Fed and the Office of the Comptroller of the Currency sent in examiners, and Treasury set out to hire an adviser to conduct a full review of the GSEs’ financial positions and capital strength, and to develop alternatives for addressing the situation.

We selected Morgan Stanley, whose CEO, John Mack, offered to provide a team for free. You might think that hiring advisers for free would be simple, but nothing is simple in Washington. We had no time for a normal bidding process, so we had to use what’s known as a limited competition. Then there was the conflict-of-interest issue: any firm we picked would be boxed out of doing business with the GSEs for an extended period of time and would have to work without legal indemnification. Merrill Lynch and Citigroup also offered to work for free, but only Mack was willing to accept the whole unattractive package. He also offered us an extraordinary team that included two of his top people, Vice Chairman Bob Scully and financial institutions chief Ruth Porat.

John had been one of my fiercest competitors when I was at Goldman, but he became one of my biggest allies when I was at Treasury. He understood that fixing the GSEs was critical to easing the credit crisis and to softening the economic blow of the housing decline.

In mid-summer I had lost a key member of my team when Bob Steel left to take over as CEO and president of Wachovia. Then David Nason, who had been planning to leave for a while—first, after his heroic efforts on the Blueprint for regulatory reform, then after his even more important work in getting HERA passed—finally made his break, though he would return before long at a critical time.