On the Brink (47 page)

Through all the discussion and planning, we hadn’t lost sight of Morgan Stanley’s plight. Dave McCormick had raised the idea of sending a letter to the Japanese that would highlight the principles underlying any policy actions we might take and indicate our intention of protecting foreign investors. This would give the Mitsubishi UFJ leadership and board some needed reassurance.

I liked the idea, so Dave called the CEO of Mitsubishi UFJ and ran the idea of a letter by him. Dave reported that the Mitsubishi UFJ executive seemed positive, if noncommittal. He and Bob Hoyt then drafted the letter. It did not mention Morgan Stanley by name, nor did we offer any specific commitments. In essence, it simply restated the signals we had been sending publicly, but it was on letterhead from the U.S. Treasury and that did the trick. Once I had approved the draft, Dave sent it to the Japanese Ministry of Finance, which promptly sent it on to Mitsubishi UFJ. We received word an hour or so later that this would get the deal done.

Monday, October 13, 2008

Columbus Day was a holiday for many Americans, and it brought good news to the tired teams at Treasury. Mitsubishi UFJ and Morgan Stanley had finally completed their deal. The terms had been adjusted to reflect a lower value for the U.S. bank. For its investment, Mitsubishi UFJ would now receive convertible and nonconvertible preferred stock, giving it 21 percent of Morgan Stanley’s voting rights. Previously Mitsubishi UFJ would have acquired common and preferred. That morning a check for $9 billion was hand-delivered to the New York investment bank.

Europe delivered its own share of encouraging news. Anticipating our actions, leaders of the 15 euro-zone countries had agreed late Sunday night to a plan that would inject billions of euros into their banks through equity stakes; they also vowed to guarantee new bank debt through 2009. Monday morning, the U.K.’s FTSE 100 shot up nearly 325 points, or 8.3 percent, while German and French markets rose more than 11 percent. The three-month London interbank rate dropped 7 basis points to 4.75 percent, while the LIBOR-OIS spread narrowed slightly to 354 from Friday’s 364, reversing a monthlong steadily upward trend.

Before the London markets opened on Monday the U.K. government had effectively nationalized the Royal Bank of Scotland and HBOS, injecting billions of pounds of capital and taking seats on the banks’ boards. The U.K. program came with much greater government control and stiffer terms than ours: the British government fired the banks’ top executives, froze bonuses for executives, and imposed a 12 percent dividend on its preferred stock.

As a result, the U.K.’s biggest banks and healthiest banks—HSBC, Barclays, and Standard Chartered—all turned down the capital. We did not want that to happen in the U.S. To the contrary, we designed our plan to entice banks so that the broadest possible range of healthy institutions would accept capital.

Before the U.S. markets opened, Treasury staff and I sat down with General Motors CEO Rick Wagoner and a number of his executives, who hoped to get some government money for their struggling company. Rick had been calling me, trying to set up a meeting for some time, but I had declined to do so. I believed that TARP was not meant to bolster industrial companies but to prevent a collapse of the financial system. Commerce secretary Carlos Gutierrez attended the meeting in my office.

No one questioned that America’s automakers were in trouble. On September 30, President Bush had signed a $25 billion loan package to help the Big Three build cars that would meet federal fuel economy standards. Reports had recently surfaced that General Motors and Chrysler were discussing a merger.

Now the GM contingent brought dire news that the company faced a banklike run from creditors and suppliers who had not been paid on a timely basis. This liquidity squeeze, they contended, would result in GM’s failure—right, as it turned out, around the time of the presidential election. They were looking for a total of $10 billion: a $5 billion loan and a $5 billion revolving line of credit.

“We need a bridge loan to avoid a disaster and we need it quickly,” Wagoner said. “I don’t believe we can make it past November 7.”

He and his team may have sincerely believed this, but I knew better. I had worked with companies like GM long enough to know that they did not die quickly. A financial institution could go under immediately if it lost the confidence of creditors and clients, but an industrial company could stretch out its suppliers for quite a while. In any case, I was loath to do anything that might appear to reflect politics.

I told Wagoner that we took his situation very seriously but that he should continue to work closely with Carlos. “I have no authority to make a TARP loan to General Motors,” I said.

As soon as the GM delegation left, we went into high gear to prepare for the afternoon meeting with the banking CEOs. I was concerned about Jamie Dimon, because JPMorgan appeared to be in the best shape of the group, and I wanted to be sure he would accept the capital. I asked Tim to soften Jamie up ahead of time. To my relief, Tim had already done so, soliciting Jamie’s support without briefing him on our program. Jamie, he believed, would back us. The government principals—Ben, Tim, Sheila, John Dugan, and I—met one final time to go over the plan, deciding who would say what.

When the nine bankers arrived at Treasury for the 3:00 p.m. meeting—walking up the Treasury steps past a phalanx of TV cameras and photographers—we had our plan down cold. Once inside, they were directed to my large conference room. I’d had so many meetings in this room that its splendor and idiosyncrasies—the 19th-century furniture and chandeliers, the framed currency and tax seals on the oiled walnut walls—had become almost as familiar as my living room. But I wondered if our visitors found it strange to be working out 21st-century problems in such a historic setting and beneath the portraits of George Washington and Abraham Lincoln.

We took our seats at the long table, with Ben, Sheila, Tim, John, and me on one side, and the CEOs sitting across from us, arranged alphabetically by bank. Fortunately, given their dispute over Wachovia, this meant that Citi’s Pandit and Wells’s Kovacevich were at opposite ends of the table.

The men facing us constituted the top echelon of American banking, but their circumstances varied. Some, like Dimon and Kovacevich, represented comparatively strong institutions, while Pandit, John Thain, and John Mack had been struggling with losses and an unforgiving market. But I knew that even the strongest of them had to be worried about their futures—and they needed to realize that they were all in this together.

I opened the meeting, making clear that we had invited them there because we all agreed that the U.S. needed to take decisive action. Together, they represented a significant part of our financial system and thus had to be central to any solution.

I briefly described the use of the systemic risk exception to guarantee new senior debt, and the Treasury’s $250 billion capital purchase program. And I pointed out that we wanted them to contact their boards and confirm their participation by that evening.

“We plan to announce the program tomorrow,” I said, adding that we wanted to say publicly that their firms would be the initial participants.

When I was done, Ben emphasized how important our program was to stabilizing the financial system. Sheila explained the Temporary Liquidity Guarantee Program (TLGP), addressing issues of structure, pricing, and what types of debt would qualify. The FDIC, she said, would guarantee new unsecured senior debt issued on or before June 30, 2009, and would protect all transaction accounts, regardless of their size, through 2009.

Tim subsequently announced the capital amounts that regulators had settled upon just hours before: $25 billion for Citigroup, Wells Fargo, and JPMorgan; $15 billion for Bank of America; $10 billion for Merrill Lynch, Goldman Sachs, and Morgan Stanley; $3 billion for Bank of New York Mellon; $2 billion for State Street Corporation. In total, the nine banks would receive $125 billion, or half of the CPP.

In answer to a question, Tim emphasized that the capital and debt programs were linked: you couldn’t have one without the other.

David Nason took the bankers through the basic terms of the capital, explaining how much they would have to pay on the preferred, noting that there could be no increases in common dividends for three years, and describing limitations the program would impose on their share repurchase programs. Treasury would also receive warrants to purchase common shares with an aggregate exercise price equivalent in value to 15 percent of its preferred stock investment. Bob Hoyt outlined how executive compensation would work; the limitations would apply as under TARP, with no golden-parachute payments and no tax deductions on incomes above $500,000.

The CEOs listened intently, plying us with questions throughout. Some were more clearly enthusiastic than others. Dick Kovacevich indicated his discomfort, arguing that Wells Fargo was in good shape. It had recently acquired Wachovia and planned to raise $25 billion in private capital—exactly the amount regulators now wanted him to take from the government.

“How can I do this without going to my board?” I remember him saying. “What do I need $25 billion more capital for?”

“Because you’re not as well capitalized as you think,” Tim calmly replied.

I knew as well as anyone how this worked. Right up until they failed, even the weakest banks claimed that they didn’t need capital. But the fact was that in the midst of this crisis the market questioned the balance sheets of even the strongest banks, including Wells, which now owned Wachovia with all of its toxic option ARMs. Our banking system was massively undercapitalized, though many banks did not want to acknowledge it. Every bank in the room would benefit when we restored confidence and stability.

“Look, we’re making you an offer,” I said, jumping in. “If you don’t take it and sometime later your regulator tells you that you are undercapitalized and you have to raise private-sector capital but you are unable to do so, you may not like the terms if you have to come back to me.”

Ben joined in to say that the program was good for the system and good for everyone. He said the meeting had been very constructive and that it was important for us all to work together.

Later press reports would highlight the difficulties of the meeting, but it went much better than our expectations. These CEOs were smart people used to negotiating and raising issues. But for some, there was no discussion necessary.

“I’ve just run the numbers,” said Vikram Pandit. “This is very cheap capital. I’m in.”

“I don’t really think that all of us are the same, but it’s cheap capital,” Jamie Dimon pointed out. “And I understand it’s important for our system.”

John Thain and Lloyd Blankfein raised a number of issues concerning such matters as share buybacks, the size of the warrants, and the redemption of the preferred. John also asked a number of questions about executive compensation. “Will these terms change when a new administration comes in?” he asked. I told him that the CPP was a contract he could count on and that we were including all of the pay requirements specified in the TARP legislation. But we did note that there was no protection against any new legislation.

At this, Ken Lewis, who had been silent throughout the meeting, finally spoke up.

“I have three points,” he said in his soft-spoken way. “One, if we spend another second talking about executive compensation, we are out of our minds. Two, I don’t think we should talk about this too much. We’re all going to do it, so let’s not waste anybody else’s time. And three, let’s not focus on how this hurts or helps each of our institutions, because it’s going to have strengths and weaknesses for some—for example, the unlimited guarantee for transaction deposits is going to hurt us significantly. But let’s just cut the B.S. and get this done.”

Each CEO was handed a sheet of paper with our basic terms on it. The banks were asked to agree to issue preferred shares to the Treasury; to participate in the FDIC guaranteed-debt program; to expand the flow of credit to U.S. consumers and businesses; and to “work diligently, under existing programs, to modify the terms of residential mortgages, as appropriate.” There were empty spaces on the sheet where the CEOs were to write in the names of their institutions and the amount of capital they were getting from the government, as well as lines where they would sign their names and fill in the date.

John Mack signed his agreement right then, in front of all of us.

“You can’t do that without your board,” Thain said.

“I’ve got my board on 24-hour call,” Mack assured him. “I can get this done, no problem.”

Kovacevich, for his part, said he couldn’t get approval from his board that quickly. I said I wanted him to try.

The meeting ended by 4:10 p.m., just after the market had closed. We had arranged things so that each CEO could go off to an office in the Treasury Building and make the necessary calls to his board and top staff to analyze the offer and get the necessary approvals. David Nason and Bob Hoyt visited each of them and answered questions. I went back to my office and started calling the congressional leaders and the presidential candidates so they wouldn’t hear about the meeting through leaks.

On the whole, the Hill leaders were encouraging. Barney Frank understood immediately as I explained our action to him. Spencer Bachus had raised the idea of equity purchases in the early days of TARP and supported us, as did Chris Dodd. Nancy Pelosi couldn’t resist pointing out that the Democrats had wanted this all along. Roy Blunt, who had worked hard to rally Republicans behind TARP, noted, however, that “this is going to be a surprise to the country and to a lot of Republicans.”

After lending his support the day before, Jeff Immelt now called to tell me that the capital program would hurt GE. “We are actually lending, we’re bigger than most of these banks, and we’re being left behind,” he said. He told me his people were nervous. “I’m not trying to make you feel bad; I stand by what I said. We are better off with this program than without it. I just have to tell you, I’m worried about my company and our ability to roll over paper in the face of this.”