On the Brink (48 page)

While I went through my calls, people came in and out of my office giving me reports on the CEOs: Pandit had signed; Kovacevich signed but refused to fill in the dollar amount Wells would receive—a protest, I suppose, at being forced to take the money. Jamie Dimon gave his signature, but, I later learned, he told Bob Hoyt to hold his acceptance in escrow until everybody else had signed. (He also gave Bob his personal cell phone number, saying, “Call me and tell me when everything is done. Then throw this number away after you use it.”)

As we had hoped, each of the nine CEOs signed on that day, and we never had to reconvene.

And the day kept delivering good news. The torrid start overseas had spread to the U.S., reflecting market optimism about government actions to solve the global financial crisis. Even as we were meeting with the financial industry’s most important CEOs, the Dow posted its biggest-ever point gain, jumping 936 points, or 11 percent, to 9,388.

Shortly after I got the word that all the CEOs were on board for the CPP, Wendy called me from the White House. She was at the Columbus Day state dinner for Italian prime minister Silvio Berlusconi, and I had to strain to hear her voice over the background noise. She said that the cast of the Broadway show
Jersey Boys
was going to be singing some of my favorite Frankie Valli songs.

“The president wants you to get over here,” she said.

I told Wendy I would see her soon.

C
HAPTER 15

Tuesday, October 14, 2008

S
itting back and letting out a long deep breath is not what I do best. But on Tuesday, October 14—after we’d all been working nonstop since August to keep disaster at bay—I finally had a chance to exhale and let down my guard for a moment. Things were finally looking up. The day before, the nine biggest U.S. banks had agreed to accept $125 billion in capital from the government, European leaders had announced plans to fix their own banking problems, and no critical institution appeared to be on the verge of failure.

Early that morning, Ben Bernanke, Sheila Bair, John Dugan, and I held a press conference in the Treasury Building’s Cash Room to explain the previous day’s moves. I tackled the controversial issue of government intervention head-on, pointing out that we had not wanted to take such actions—arguably the most sweeping in banking since the Great Depression—but that they had been needed to restore confidence to the financial system.

World markets had responded enthusiastically. Japan’s Nikkei index soared by 14.2 percent, while the U.K.’s FTSE 100 rose 3.2 percent. In early trading, the Dow had jumped 4.1 percent to 9,794. Credit markets were stronger as well, as the LIBOR-OIS spread narrowed slightly to 345 basis points.

But no sooner had I returned to my office than one thorny issue I believed had been settled reared its head. Ken Lewis was on the phone, concerned about his deal with Merrill Lynch. With the markets stabilizing, the Bank of America CEO was worried that John Thain, who had sold Merrill only to prevent its failure, might now want to back out: after our weekend actions, Thain might have stopped believing that his firm’s survival depended on BofA. If that were the case, Ken wanted regulators to remember just how crucial to the country his decision to buy Merrill during the height of the crisis had been and to insist that Thain honor his contract.

“Ken,” I asked, “has John or anyone at Merrill indicated to you that they might want out?”

“No, I just have a concern.”

I heard him out and told him that I believed John would stay committed to the deal, but that I would pass his concerns on to Tim Geithner, and I did. I never mentioned them, however, to Thain.

In making critical decisions, finding the right mix of policy considerations, market needs, and political realities was always difficult. I tended to put politics last—sometimes to our detriment. To my mind, the bank capital program struck a perfect balance. It was designed to meet a market requirement, it addressed the problem of bank undercapitalization while safeguarding taxpayer interests, and it had been, I thought, brilliantly executed.

I expected the program to be politically unpopular, but the intensity of the backlash astonished me. Though the criticism from Republicans was muted, some conservatives, who had resisted TARP initially, felt betrayed, and their vocal dissatisfaction made me nervous. I knew that if the program turned into a political football and became an issue in the presidential campaign, the banks would get spooked and back away from the capital. Our efforts to strengthen the fragile system would collapse.

Fortunately, the candidates did not politicize the issue. On October 13, the night that the banks agreed to accept the money, I’d had a long phone conversation with an angry John McCain, who complained that we weren’t doing enough to deal with mortgages. He was also upset about the equity investments, but after we talked it out, I was confident he would not publicly attack our plans—and to his great credit, he did not, even though he was behind in the polls and might have been tempted to try to energize his campaign that way.

Democrats liked the program—some even took credit for it—but, joined by an ever-growing populist chorus, they began griping that banks were hoarding their new capital, not using it to increase lending. Before long it seemed that almost every member of Congress or business leader was directing his or her anger at the banks and their regulators. And this was before even one dollar of government money had landed on bank balance sheets.

John Thain didn’t help matters. Merrill reported a $5.1 billion third-quarter loss on Thursday, October 16. Referring to Merrill’s $10 billion government injection, he told analysts on a conference call that “at least for the next quarter, it’s just going to be a cushion.”

The day after he made his remarks, Nancy Pelosi and Barney Frank complained to me about Thain’s insensitivity. I got John on the phone, and I told him that although he was right in that Merrill wasn’t slated to get the capital until after its merger with BofA closed at year-end, he needed to be more politically aware. I asked that he clarify his statement publicly. He said he would look for an opportunity to do so, but would only comment if he was asked about it. I would have preferred a more proactive effort on Thain’s part. Then I heard that Chris Dodd planned to call the nine big-bank CEOs before the Senate Banking Committee to grill them about lending at an upcoming hearing. I managed to persuade him not to, arguing that if he did, he would so stigmatize and jeopardize the capital program that those first nine banks might back out.

I understood the need to get credit flowing again. In the Cash Room I had made sure to say that “the needs of our economy require that our financial institutions not take this new capital to hoard it, but to deploy it.” By requiring Treasury consent for share buybacks and increases in dividends, our program contained built-in incentives for the banks to retain capital, repair their balance sheets, and resume lending. But that would not happen overnight—after all, many businesses were reluctant to take out loans in an economic downturn. I didn’t think I could tell the banks how much to lend or to whom.

But politicians and the public became increasingly agitated in the midst of a hard-fought presidential campaign. They expected that our actions—meant to prevent bank failures—could also avert the recession and slow the wave of foreclosures already under way. Obama and McCain both denounced Wall Street’s greed as they traveled around the country. And no single issue inflamed people more than revelations of excessive executive pay—and perks. New York State attorney general Andrew Cuomo launched a high-profile probe of AIG’s corporate expenses, including a notorious post-bailout retreat for insurance agents at a California spa that generated a lot of fiery press coverage. People were outraged that banks that had received government aid were still planning to dole out lavish pay packages.

I empathized with their anger. People had seen the values of their homes and their 401(k)s plunge. We were in a deep recession, and many had lost jobs. Frankly, I felt the real problem ran deeper than CEO pay levels—to the skewed systems banks used that rewarded short-term profits in calculating bonuses. These had contributed to the excessive risk taking that had put the economy on the edge. I was convinced, for policy reasons and to quell public anger, that regulators needed to devise a comprehensive solution. I encouraged Ben, Tim, Sheila, and John Dugan to work on policy guidance for compensation, lending, foreclosures, and dividends that would apply to all banks, and not just those that took capital.

Jeff Immelt had come to my office on the 16th to make the case that the FDIC should guarantee GE Capital’s debt issues. He believed our new programs put GE at a huge disadvantage, making it difficult for the company to fund itself. Nonbanks like GE could tap the Fed’s Commercial Paper Funding Facility, but they weren’t eligible for TARP funds or the FDIC’s new debt guarantee, known as the Temporary Liquidity Guarantee Program. Why would investors buy GE debt when they could purchase the debt of other financial institutions with an FDIC guarantee?

“We are the ones out there making the loans that the banks aren’t, and we need help,” Immelt said. I knew he was right, and I said we would explore it with his finance team and the FDIC.

Following the success of the G-7 and the coordinated actions that had calmed the market, the White House revived plans for a summit at which President Bush could discuss the financial crisis with a broad range of leaders. I had made outreach to the developing world a priority and felt strongly, as did deputy secretary Bob Kimmitt, that if we were going to host a summit, it should include the members of the G-20. The president agreed. I asked Dave McCormick to work with the finance ministers to find common ground for the meeting, while the president put Dan Price in charge of preparations, including negotiating the summit communiqué with the other leaders’ representatives.

Then French president Nicolas Sarkozy made an impromptu call to President Bush requesting a meeting, along with European Commission president José Manuel Barroso, after the October 17 European Union–Canada Summit in Quebec City. Sarkozy and U.K. prime minister Gordon Brown had been sparring over which of them would lead reform efforts in Europe. Brown envisioned a new Bretton Woods–style gathering to overhaul the world economic order set in place during World War II. Sarkozy, who held the presidency of the European Union, had called for replacing the failed “Anglo-Saxon” model of free markets and advocated a major summit in New York, which he considered the epicenter of the problem.

The White House suspected that Sarkozy was looking to pull off a publicity coup on our home turf. President Bush invited him to a sit-down at Camp David, where a meeting could be better shielded from the media glare. The two agreed to get together on Saturday, October 18. French finance minister Christine Lagarde and I would join them, along with Secretary of State Condi Rice, who canceled a trip to the Middle East to attend.

On Friday afternoon, Wendy and I left by helicopter from the South Lawn of the White House, with the president and Laura Bush, Condi, and Steve Hadley and his wife, Anne.
Marine One
carried us over the Washington Monument and off to Camp David in half an hour. At about 4:00 p.m. Saturday, Sarkozy, Barroso, and Lagarde arrived. Thirty minutes later we were sitting down in the main lodge, Laurel, in the same homey wood-paneled conference room where I had made my first official presentation to the president back in 2006. While we met, Wendy took the opportunity to go looking for warblers.

Inside, Sarkozy was singing a sweet song of his own. Lively and articulate, the French leader used every bit of charm at his disposal to try to persuade President Bush to agree to a summit in New York on the order of the G-8, reasoning that the small group’s shared values would make it easier to agree on a plan.

Selling hard, Sarkozy said that hosting the summit would demonstrate President Bush’s leadership. The president agreed on the need for a meeting but insisted on a more inclusive group, such as the G-20, which included China and India. He wanted to focus on broad principles and a blueprint for regulatory and institutional reform. By contrast, Sarkozy was looking to put his stamp on a host of specific topics like mark-to-market accounting and the role of the rating agencies.

“That is not for us,” President Bush said. “We’re going to have our experts do that.”

The French leader came right back at him. “These experts are the ones that got us in trouble in the first place,” Sarkozy said, looking directly at me. He would later suggest that finance ministers shouldn’t even be in the room at the summit.

Sarkozy dominated the hour-long meeting in Laurel, but he must have left frustrated. He’d won agreement on a meeting—which we had already decided to hold—but little beyond that. In the end, President Bush, Sarkozy, and Barroso released a joint statement that said the U.S., France, and the European Union would reach out to other world leaders to hold an economic summit shortly after the U.S. elections.

As preparations for the summit got under way, the Europeans, with the exception of Gordon Brown, resisted meeting with the entire G-20. As a concession, President Bush agreed that Spain and the Netherlands—which were not members of the G-8 or G-20—could attend the gathering of the bigger group as guests of the EU presidency. Chinese president Hu Jintao was the first world leader to sign on. The Saudis expressed their reluctance, worried that they would be blamed for high oil prices, and pressed to make a big financial contribution to a fund for poorer countries, but I called Finance Minister Ibrahim al-Assaf and reassured him. On Wednesday, October 22, the White House was able to announce that President Bush had invited the leaders of the G-20, representing some 85 percent of the world’s GDP, to a November 15 summit in Washington to discuss the crisis.

That day brought other, much less welcome news when Tim Geithner told me that AIG would need a massive equity investment. I was shocked and dismayed. On September 16 the New York Fed had loaned the company $85 billion; then in early October it had extended an additional $37.8 billion. Now, Tim said, the company would soon report a dreadful quarterly loss, which would trigger rating downgrades; the resulting collateral calls would be disastrous. Initially, AIG had confronted a liquidity crisis; now it faced a severe capital problem. Tim believed the only solution was an injection of TARP funds.