On the Brink (15 page)

The president reworked his speech, and when he flew to New York, Steel was waiting at the Wall Street Heliport. He hopped in the presidential limousine and briefed the president on the way to Midtown, bringing him up to date on Bear.

I got back on the conference call to say we had the president’s backing. Afterward Tim and I spoke privately. We were rushing this rescue through very fast. The Board of Governors of the Federal Reserve had not yet formally approved the loan, and we had not yet put out an announcement. But the market was about to open, so we needed to move rapidly.

We asked ourselves again what would happen if Bear failed. Back in 1990, the junk bond giant Drexel Burnham Lambert had collapsed without taking the markets down, but they had not been as fragile then, nor had institutions been as entwined. Counterparties had been more easily identified. Perhaps if Bear had been a one-off situation, we would have let it go down. But we realized that Bear’s failure would call into question the fate of the other financial institutions that might share Bear’s predicament. The market would look for the next wounded deer, then the next, and the whole system would be at serious risk.

I talked to Tim probably two dozen times between Friday and Sunday. We made a good team. Tim brought to the crisis a keen analytical mind and a great sense of calm, of deliberative process and control. He had great stamina and a welcome sense of humor. But although we were relying on the Fed’s powers to deal with Bear Stearns, it was uncharted water for him, and he relied on my market knowledge and my familiarity with Wall Street. Tim knew I understood the thought processes and the strengths and weaknesses of the Wall Street CEOs. I understood how to deal with boards of directors and shareholders. I knew how extraordinarily difficult it was to buy a company over a weekend with no time for due diligence. I also knew what it felt like to be afraid of losing your company, because I’d had that fear in 1994 at Goldman Sachs, when big trading losses had caused many spooked partners to withdraw their capital.

Tim had already explained the government’s plan to Bear CEO Alan Schwartz, but he was worried that Alan hadn’t completely grasped the consequences. The government didn’t put taxpayer money at risk without expecting something in return—in this case, essentially, control.

“Let’s make sure he understands, Hank,” I remember Tim saying. “You need to speak to him with force and clarity so he hears it from you and not just me.”

When I reached Alan, he sounded rattled, but it was clear that he was doing his best. I had great sympathy for him. He was a good investment banker and a highly regarded adviser to companies who had been thrust into a terrible situation that did not play to his strengths. When I called, he’d been meeting with his board, which was a fractious group.

“Alan,” I said, “you’re in the government’s hands now. Bankruptcy is the only other option.”

“Tim said the same thing to me,” he said. “I was nervous because when you called I thought maybe the rules were changing. Don’t worry. I got the message.”

Just before 9:00 a.m., JPMorgan announced that it would join with the Fed to lend to Bear Stearns for an initial period of up to 28 days. The release did not specify how much money would be lent.

I almost never let myself be scripted. I work best by writing down a few bullet points and two or three key phrases to use. Still, in a conference call soon afterward with the CEOs of all the major banks, I knew I had to be careful—I couldn’t order these bankers to do anything. But I had to make clear that if they pulled their credit lines from Bear, the investment bank wouldn’t survive the day. I told them that I understood they all had fiduciary responsibilities, but that this was an extraordinary situation and the government had taken unprecedented action.

“Your regulators have worked together to come up with a solution. We ask you to act in a responsible manner,” I said. “All of us here are thinking about the system. Our goal is to keep Bear operating and making payments.”

The group asked a lot of questions about the Fed’s emergency backstop. Tim and I let Jamie Dimon answer most of these. The bankers were nervous but obviously relieved, which gave me some comfort that Bear would make it through the day.

Initially, Bear shares rallied, but it didn’t take long for the market to weaken. During the morning, Bear’s stock plunged nearly in half, to below $30. The broader markets fell sharply, too, with the Dow Jones Industrial Average off nearly 300 points. For the day, the dollar hit a then-record low of $1.56 against the euro, while gold soared to a new high of $1,009 an ounce.

Despite the backing of JPMorgan and the Fed, doubts remained about Bear’s ability to survive. Its accounts continued to flee, draining its reserves further. We needed to get a deal done by Sunday night, before the Asian markets opened and the bank run went global.

That afternoon during a meeting on our housing initiatives, I asked Neel Kashkari if he was going to be around during the weekend, because we might need help on Bear. Neel said: “I have to imagine I’d be more useful to you in New York than sitting next to you in D.C.”

I agreed, but before he took off I said, “I am sending you to do something you are totally unqualified to do, but you’re all I’ve got.” I could always rib Neel because he was talented and self-confident.

He laughed. “Thanks, I guess.”

I called Jamie Dimon at 4:30 p.m. and told him we needed to get the deal done by the end of the weekend. Self-assured, charismatic, and quick-witted, Jamie had the ability to walk the line between being a tough businessman and knowing when to rein in his competitive instincts for the good of the financial system. He had the confidence of his board, which allowed him to make decisions quickly and stand by them. He said his team would move as fast as possible, but he knew better than to give me any guarantees.

President Bush had returned to Washington after his speech in New York and wanted an immediate briefing on Bear Stearns. When was JPMorgan going to buy the company? he asked. I told him I didn’t know, but I emphasized that something had to happen over the weekend or we would be in trouble.

In New York, Tim Geithner was growing increasingly concerned. After talking with Schwartz, he suspected that the Bear CEO didn’t realize that the day’s events had so compromised his firm that the timetable had to be accelerated. Schwartz, he said, was still operating under the illusion that he had a month to sell the company.

Tim suggested that he and I call Schwartz. “I think it will have a bigger impact if we do it together,” he said. We reached him at about 6:30 p.m. and told him we had to act faster.

“Why don’t we have more time?” Alan asked.

“Because your business isn’t going to hold together,” I explained. “It will evaporate. There will be nothing left to lend against if you don’t have a deal by the end of the weekend.”

After that difficult call, Tim and I agreed there was nothing else we could do that night. We agreed to talk in the morning.

That evening Wendy and I went to the National Geographic Society to see
The Lord God Bird
, a terrific documentary on the ivory-billed woodpecker, a bird so spectacular it made people say
Lord God!
Normally, I would have enjoyed this immensely, but I was preoccupied with Bear Stearns. Every time one of our friends from the environmental community came over, I would look right through them. Wendy got really upset with me.

“I understand that you’re under pressure,” she said, “but that’s no excuse for not being courteous to people.”

“I am being courteous to everyone,” I protested.

“You aren’t saying anything to them except ‘Hi.’”

I apologized, adding, “I’m worried about the world falling apart!”

Saturday, March 15, 2008

I woke up Saturday after another restless night, anxious about the need to find a solution for Bear Stearns that weekend. The first call I received was from Lloyd Blankfein, my successor as Goldman Sachs CEO. It was as unnerving as it was unexpected. It was the first, and only, time Lloyd called me at home while I was at Treasury. Lloyd went over the market situation with me, providing a typically analytical and extraordinarily comprehensive overview, but I could hear the fear in his voice. His conclusion was apocalyptic.

The market expected a Bear rescue. If there wasn’t one, all hell would break loose, starting in Asia Sunday night and racing through London and New York Monday. It wasn’t difficult to imagine a record 1,000-point drop in the Dow.

I talked to Tim Geithner shortly after, and we reviewed our plan for the day. We needed a buyer for Bear, and we agreed that JPMorgan was far and away our best candidate. We decided to speak with Jamie Dimon and Alan Schwartz throughout the day to press them to make sure their boards were actively engaged and getting the information they needed to conclude a deal by Sunday afternoon.

Under normal circumstances, I would have preferred to find multiple potential bidders to at least create the semblance of competition. But I didn’t believe there was another buyer for Bear Stearns anywhere in the world—and certainly not one that could get a deal done in 36 hours. Nonetheless, we considered every possibility we could.

Tim asked about Chris Flowers, the private-equity investor who had expressed interest in Bear Stearns. I’d known Chris for years. He’d been in charge of financial institutions’ banking at Goldman before striking out on his own. But I knew he didn’t have the balance sheet necessary to do a deal, and I told Tim it would be a waste of time to deal with Flowers. Seth Waugh, the North American head of Deutsche Bank, had also expressed some interest. I said I’d call Joe Ackermann, the Deutsche Bank CEO, but added that based on many conversations I’d had with him over the last seven months, I doubted he’d have any real interest. Joe had enough problems of his own.

The Swiss-born Ackermann was one of the most direct men I knew, a relentless competitor who was unafraid to exploit the perceived weakness of his rivals. He happened to be walking down Madison Avenue in New York when I reached him on his cell phone. True to form, he answered me with breathtaking bluntness.

“Buy Bear Stearns? That’s the last thing in the world I would do,” he exclaimed. He added that he had no interest in financing Bear, either. He’d held his funding together so far and had been a good corporate citizen, but he couldn’t continue. Then he asked me why Deutsche should do business with any U.S. investment bank.

This was not competitive zeal but fear speaking, and I was surprised by the level of worry I heard. I assured him that he didn’t need to be concerned about the other U.S. investment banks and that we were dealing with Bear.

Shuttling between JPMorgan’s and Bear’s offices—across the street from each other—Neel Kashkari gave me updates on the big bank’s due-diligence efforts. With me frequently patched in by phone, the teams labored in New York to push a deal along. I also talked to people in the industry to keep them in line. Lehman CEO Dick Fuld called me back from an airport in India, where he was on a business trip. Worried about his own firm, he asked if the situation was serious enough that he should come home.

“I sure wouldn’t be overseas right now,” I told him.

He asked if I could get him flyover rights from Russia. I explained that I didn’t have that kind of power, but emphasized that he should return.

All Saturday when Tim and I spoke to Jamie Dimon, the JPMorgan CEO would say things like: “We’re making progress. We’re optimistic, but there’s a lot of work.” It was nerve-wracking not to have an alternative. Finally, late in the day, we had an encouraging conversation with Jamie, during which it sounded as though he were going to do the deal—he just needed to work out a few more things with his board.

We left it with Jamie that he would continue to work with his directors. If there was a problem, he would get back to Tim first thing in the morning. Otherwise, we would talk a little later on Sunday. I slept well for the first time in days.

Sunday, March 16, 2008

The next morning I was booked on several Sunday talk shows to answer questions about the rescue. I spoke to Tim first thing. Neither of us had heard a word from Jamie, which was good news. I left for the TV studios around 7:30 a.m., making a mental note not to say a word about the negotiations and to stick to my carefully prepared talking points. I taped ABC’s
This Week
first. The host, George Stephanopoulos, zeroed in on what was on the public’s mind, asking whether we weren’t using taxpayer dollars to bail out Wall Street.

“We’re very aware of moral hazard,” I said, adding, “My primary concern is the stability of our financial system.”

“Are there other banks in a situation similar to Bear Stearns’s right now?” he wanted to know. “Is this just the beginning?”

“Well, our financial institutions, our banks and investment banks, are very strong,” I stressed. “Our markets are resilient, they’re flexible. I’m quite confident we’re going to work our way through this situation.”

And I was. In retrospect, as concerned as I was about the markets, I had no idea of what was coming in just a few months. Right then, however, I was optimistic that Jamie was on board, that we could settle the Bear Stearns problem and calm things down. But what I didn’t realize as I went from one show to another—after
This Week
, I was interviewed by Wolf Blitzer at CNN and Chris Wallace at Fox News—was that the situation had taken a turn for the worse. Neel had called Brookly McLaughlin, my deputy press secretary, with bad news. Brookly, who had accompanied me to the shows, wanted me to stay focused on the interviews, so it wasn’t until I was headed home, after 10:00 a.m., that she told me that there was a problem and asked me to contact Neel. He said JPMorgan wasn’t willing to proceed. I called Tim.

“It’s too much of a stretch for them,” Tim said.

JPMorgan thought Bear was too big and was particularly concerned with the firm’s mortgage portfolio. I was disappointed but not shocked. It was a bit unrealistic to believe that with no competition we could get JPMorgan to buy Bear Stearns over a weekend in the midst of a credit crisis. And Tim had already pushed Jamie to no avail.