I flew out of Washington Friday at 4:00 p.m. for a weekend break, knowing only too well that the legislation signed by President Bush at 2:30 p.m. that afternoon had bought us little time. If anything, the financial markets and the economy were in worse shape than they had been before TARP’s passage.
Congress and the markets expected immediate results, but it was going to take weeks to launch a program to buy toxic assets from banks. Since Monday, world financial markets had taken a drastic turn downward. European banks were teetering, the credit markets remained frozen—with the vital commercial paper business all but shut down—and stock prices had fallen sharply. The SEC’s ban on short selling would expire in a few days. I had directed my team to craft a plan to provide capital to banks, but we didn’t yet know how such a program might work.
No doubt about it, this would be a working weekend. But at least I would be working on Little St. Simons Island, one of my favorite places on earth. For 27 years Wendy and I, and our family, had come regularly to this narrow stretch of land off Georgia’s Atlantic coast. It had changed little in that time. Never developed, its beautiful forests and marshes were blessed with an abundance of wildlife.
We touched down on neighboring St. Simons Island and drove five miles to the marina. Most folks traveled to Little St. Simons Island by motorboat—you can’t reach it by car—but Wendy and I preferred to kayak, and we left Washington’s concerns behind for an hour as we paddled the three and a half miles to the island, arriving just in time to see the sunset. Walking to our lodge through the refreshing salt air, Wendy assured me that I would sleep well that night, and I began to unclench a little. If nothing else, I had made it to the weekend.
Saturday, October 4–Sunday, October 5, 2008
The next morning at dawn I headed out with my fly rod and fishing gear to Bass Creek to catch some redfish. Standing in warm, knee-deep water, surrounded by shorebirds, I caught and released half a dozen redfish on a clouser minnow fly. I felt like myself for the first time in a long while—just Hank Paulson, out fishing.
But I was soon back to business. Tim Geithner called after I returned to the lodge and told me that we needed to make a strong, unequivocal public statement backing our financial institutions.
I agreed. But how could we do so in terms that the market would believe? The President’s Working Group gave us an excellent platform, we decided. The Treasury, Federal Reserve, FDIC, and SEC could stand together and commit themselves to coordinated action in the crisis.
Tim and I set Treasury and New York Fed staff to work. We wanted to outline clearly the powerful tools that government agencies now possessed to deal with the crisis, specifically highlighting the broad authorities—and deep pockets—granted Treasury by the TARP legislation, as well as the FDIC’s ability to protect depositors and guarantee liabilities by invoking systemic risk, as it had with Wachovia.
All weekend, drafts of a statement moved back and forth. I managed to wedge in a little more fishing, but I spent three or four hours at a crack on calls with Ben Bernanke and Tim, and my team at Treasury.
I also kept a wary eye on the Citigroup–Wachovia–Wells Fargo triangle, discussing the increasingly complicated situation with Ben and Tim. Citi was demanding that Wells Fargo drop its $15.1 billion offer for Wachovia, claiming it breached Citi’s own deal. News reports quoted Citi CEO Vikram Pandit as calling the deal illegal, so I assumed a lawsuit was forthcoming.
On the plus side, Wachovia, despite its abundant problems, had attracted two major banks and would be saved from failure. But one of those banks, Citi, had troubles of its own, having written down $19 billion of bad assets in the first six months of the year. We were concerned that Citi might be hurt if its deal with Wachovia disintegrated—and this time the institution under attack would be one of the biggest financial services companies in the world.
I flew back to Washington Sunday evening and got on a conference call with my staff about 7:00 p.m. Among other things, Dave McCormick filled us in on developments in Europe, and it was clear we needed to move fast on the PWG statement as well as on our capital and illiquid asset purchase programs.
Over the weekend, French president Nicolas Sarkozy’s summit of European leaders had failed to produce the desired unity that would calm the markets. Quite the contrary: participants squabbled publicly over how far they should go to support their most important financial institutions. Then on Sunday night, continental time, while Germany arranged a $68 billion rescue for troubled lender Hypo Real Estate, Chancellor Angela Merkel had said her country would guarantee personal savings accounts, a proposal that by some calculations would have affected $1 trillion of savings.
Dave had been talking to his counterparts overseas, trying to get a grasp on the German situation. We hoped that Merkel’s comment was just a “moral guarantee” intended to reassure her markets, not a hard, two-year guarantee like the one the Irish parliament had approved the previous week.
“This is going to move quick and force us to do some things we may or may not want to do,” I said.
Usually when I got to Treasury in the morning, I stopped in the Markets Room. On Monday, though, I went straight to McCormick’s office to check on Europe.
“Things are in complete disarray,” he told me.
The U.K. was fuming. The British press was reporting that the country’s financial officials were upset that Merkel had given no indication of her plans. The U.K. feared Merkel’s “beggar thy neighbor” policy could cause a domino effect, potentially destabilizing banking systems across Europe as each country enacted its own guarantees to prevent money from leaving to seek safer havens. It wouldn’t be long before we had to follow suit.
President Bush’s deputy chief of staff Joel Kaplan echoed Dave’s concerns when I spoke to him later that morning.
“Hank, it seems to me we’re going to have to do something to match the Europeans,” he said.
“You’re probably right,” I said.
That morning we released the PWG statement. We affirmed our commitment to coordinated forceful action, vowing to move with “substantial force on a number of fronts.” Alluding to the FDIC authorities on Wachovia, we asserted that we would stand behind our systemically important institutions. Though the statement was intended to reassure the markets, it fell flat.
However, I’m not sure any statement would have made a difference that day. Asian and European markets plummeted in reaction to European banks’ problems and concerns that TARP would not provide a quick enough fix in the U.S. Once our markets opened, the reports were equally frightening: the Dow fell sharply—in little more than an hour it was off 578 points, or 5.6 percent. The LIBOR-OIS spread would hit a near all-time high of 288 basis points before contracting slightly; a month earlier, it had stood at 81 basis points.
The disarray prompted the White House to debate whether President Bush should call a meeting of world leaders to tackle the crisis. I believed the key was to quickly find a solution to prevent a meltdown, but I did not think a summit was the way to do that—it could expose political divisions among countries, and this would further destabilize the markets. Over lunch on Monday I told Steve Hadley, Keith Hennessey, and Dan Price, the president’s talented and energetic assistant for international economics affairs, that any such meeting with world leaders should be held after our presidential election, albeit as soon as possible.
“This crisis will only get worse before it gets better,” I said.
Instead of meeting with his peers, I suggested President Bush call his fellow heads of state to urge them to send their finance ministers to the upcoming G-7 gathering ready to forge a solution. The International Monetary Fund and the World Bank were holding their annual get-togethers in Washington the next weekend. This meant that the G-20, which included representatives of both developed and emerging nations—including China, India, and Russia—would be in town. We decided to ask the chairman of the G-20, Brazilian finance minister Guido Mantega, to gather the group on Saturday.
On Monday I announced that Neel Kashkari would lead our TARP efforts as interim assistant Treasury secretary for financial stability. I made this an interim appointment because we were working to identify and vet permanent candidates acceptable to Obama and McCain.
Neel, who combined toughness with an engineer’s precision, was doing a typically fine job building a staff and organizational structure to move things forward. That morning he and his team had finished a 40-page PowerPoint presentation, outlining a massive undertaking. He had teams working on everything from hiring asset managers to figuring out how to conduct the auctions.
Although the Dow rallied late on Monday, it ended up below 10,000 for the first time in four years. Worldwide, more than $2 trillion in stock market value had evaporated. The uncertainty surrounding the fight for Wachovia hurt all financials. Early in the day Citi had reacted to its jilting by filing a $60 billion lawsuit, but agreed midday to freeze the litigation until Wednesday. Wachovia dropped nearly 7 percent, while Citi fell more than 5 percent, and Wells Fargo almost 3 percent. Credit default swaps on Morgan Stanley hit 1,028 basis points.
After the close, Bank of America reported a 68 percent drop in earnings for the third quarter and announced plans to raise $10 billion in equity. I knew that the next day would bring a fresh attack on bank stocks.
Early Tuesday morning I walked to the White House for a conference call with President Bush and British prime minister Gordon Brown, who told us that his government planned to inject capital into U.K. banks. He wanted our support and promised to coordinate with us. Brown also told the president that he should consider gathering the leaders of the G-20 together to deal with the problem. The president took in that suggestion, but his first priority was to ensure a good G-7 finance ministers’ meeting and come up with a coordinated plan of action.
Europe continued to suffer. Iceland, facing default on its obligations, had taken over two of its three largest banks and was negotiating a loan from Russia. Despite the country’s small population of some 300,000, its commercial banks had expanded aggressively to the point where their assets were several times greater than Iceland’s GDP. Now the entire country was caught in a liquidity squeeze, adding to the general jitters about Europe.
Something had to be done. The credit markets remained locked up, endangering businesses—and employment—around the world. On Tuesday, the Fed made another attempt to thaw the markets, unveiling its new Commercial Paper Funding Facility. The Fed’s first venture into the commercial paper market had been directed toward asset-backed paper issued by financial institutions. This new approach created a special purpose vehicle to buy three-month paper from all U.S. issuers, vastly improving the liquidity in the market. The new facility represented a radical move by the Fed, but Ben Bernanke and his board knew that extraordinary measures had to be taken.
That afternoon I moved a capital program one step further when Neel, Dan Jester, and I met with President Bush and a large contingent of White House staff in the Roosevelt Room. I had kept the president and his people up to date on equity investments, so he wasn’t surprised when presented with our thinking in greater detail.
From the start of the credit crisis, I had been focused on bank capital, encouraging CEOs to raise equity to strengthen their balance sheets. TARP had continued this focus. Banks were stuffed with toxic assets that they could unload only at fire-sale prices, which they were reluctant to do. By buying such assets at auction, we reasoned, we could jump-start the market, allowing banks to sell those bad assets in an orderly fashion, getting better prices and freeing up money to lend.
Initially, when we sought legislative flexibility to inject capital, I thought we might need it to save a systemically important failing institution. I had always opposed nationalization and was concerned about doing something that might take us down that path. But now I realized two crucial things: the market was deteriorating so quickly that the asset-buying program could not get under way fast enough to help. Moreover, Congress was not going to give us any more than the $700 billion we had, so we needed to make every dollar go far. And we knew the money would stretch much further if it were injected as capital that the banks could leverage. To oversimplify: assuming banks had a ten-to-one leverage ratio, injecting $70 billion in equity would give us as much impact as buying $700 billion in assets. This was the fastest way to get the most money into the banks, renew confidence in their strength, and get them lending again.
David Nason, Jeremiah Norton, and Dan Jester were working on a capital program, sorting through a variety of issues, from the type of instrument we might use to matters of pricing and other terms. They were moving quickly, but I wanted them to move even faster, and they grew accustomed to my asking for updates several times a day.
Because we were focused on supporting healthy institutions as opposed to rescuing failing ones, we considered a program in which the government would match any money the banks raised from private investors. We also explored different ways of taking an equity stake. Buying common stock would strengthen capital ratios, but common shares carried voting rights, and we wanted to avoid anything that looked like nationalization.
So we were leaning toward preferred stock that did not have voting rights (except in very limited circumstances) and could be repaid in full even if common shares substantially declined in value. Preferred is senior in priority to common stock and receives higher dividends, another bonus for the public.
We laid all of this out for the president, who listened with his usual attentiveness and concern.
“Are you still going to buy illiquid assets?” he asked.
“That’s the intent,” I said.
“You need to recognize where Congress and the American people are,” he said. “You are going to need to communicate this well.”
President Bush was right, but this dilemma haunted me throughout the crisis—how to make the public understand the grave situation we faced without inflaming the markets even further.
Certainly, we appeared to be facing an all-out run on the system. On Tuesday, fueled by concerns over bank stocks, the Dow tanked again, falling 508 points, or 5.1 percent, to 9,447; while the S&P 500 dropped below 1,000 for the first time since 2003. Bank of America’s shares plunged 26 percent, to $23.77. Morgan Stanley fell another 25 percent, to $17.65, raising the question of whether Mitsubishi UFJ would still want a deal.
I didn’t know how much more stress the system could bear.
It turned out that Angela Merkel’s Sunday night statement that Germany would stand behind its bank deposits was intended only as a confidence-building pledge, not as an announcement of government action. Germany would not authorize a guarantee as Ireland had. On Wednesday, the British government announced its own plan, a £500 billion ($875 billion) program to shore up its banking system. Eight banks, including the Royal Bank of Scotland and HBOS, had initially agreed to participate in the program.
The markets needed all the help we could give them. On Wednesday, in an unprecedented action, six central banks, including the Fed, the Bank of England, and the European Central Bank, all reduced policy interest rates. This was the first time in history that the Fed had coordinated a rate reduction with other banks; its federal funds rate target now stood at 1.5 percent.
European markets briefly rallied, but U.S. stocks opened lower despite these moves. LIBOR-OIS spreads soared to 325 basis points from 289 basis points the day before. And we could see the problems spreading to the emerging markets: on Wednesday, Indonesia’s stock exchange stopped trading after its main index fell 10 percent.
Given the global sweep of the problem, I knew there weren’t going to be any silver bullets for solving it. Rather, we would need to take a range of actions on a sustained basis.
While Jester and Nason worked through the details of a plan to make direct equity investments in banks, I watched the Europeans warily. We thought they might turn to a wave of defensive actions, including guarantees, not only for depositors but for unsecured bank borrowings. With fear rampant, such guarantees might help restore confidence in their banks, but they would put our banks at a disadvantage unless we did something similar.
We were seemingly watching a run on the global banking system, and we needed a blunt instrument to stop it the way our earlier guarantee of the money market funds had halted a panic in that sector. A week earlier Tim had suggested trying to get legislative authority for even more sweeping guarantees in the TARP legislation. That would have been impossible. But, as we’d noted in the PWG statement, the FDIC had the power to guarantee the debt of an individual bank.
We needed to know what the FDIC was prepared to do. After consulting with Tim, I called Sheila Bair.
We were facing a national emergency, and the Europeans were almost certain to act, I told her. Their economies were all disproportionately dependent on their banking systems: European bank assets were more than three times the size of the euro zone’s GDP, while U.S. bank assets were roughly the same size as our GDP. I asked Sheila if there was any way the FDIC could publicly commit to backing unsecured bank borrowings.
While Sheila understood the gravity of the situation, she worried that the FDIC didn’t have enough resources or the ability to assess the risk to its fund. She said she was prepared to work with me on this issue. I decided to strike while the iron was hot and proposed a meeting in my office with her and Ben, who was also eager to have a broad-based FDIC guarantee.
It was midmorning on that overcast fall day when Ben, Sheila, and I sat down together in my office, with Tim plugged in on my speakerphone from New York. I told Sheila that what she had done with Wachovia had been incredibly important. What if we applied elements of that approach more broadly?
“We’re looking to make a strong statement that we are not going to let any systemically important institutions go down,” I said.
I asked if the FDIC would be prepared to guarantee the debt of any such institution. Tim added that a broad guarantee was necessary to demonstrate a forceful commitment to protect our financial system.
I knew we were asking a lot. By law the FDIC had to use the least costly method to provide financial assistance to a failing bank, unless it invoked the systemic risk exception because it believed that an institution’s failure would seriously hurt the economy or financial stability. Now we were looking for an action that applied to all banks, not just an individual bank, and a guarantee that applied to new unsecured borrowings for bank holding companies, not just the insured institutions they owned. We weren’t going to reach an agreement today, but we needed to make progress.
Understandably, Sheila was very protective of the FDIC fund. “We only have about $35 billion, Hank.”
“If we don’t act, we are going to have multiple bank failures,” I said, “and there won’t be anything left in your fund.”
“This is vital,” Ben said.
We talked about the need for a broad guarantee of bank liabilities. Sheila finally indicated that she would keep working with us. After the meeting, I immediately sent her some draft language suggesting that “the FDIC, with the full support of the Fed and the Treasury, will use its authority and resources, as appropriate to mitigate systemic risk, by protecting depositors, protecting unsecured claims, guaranteeing liabilities, and adopting other measures to support the banking system.” I called Joel Kaplan with an encouraging update. “We may be getting there,” I said.
But I’d spoken too soon. Before long I got an e-mail from Sheila saying that she wasn’t certain she could move forward on this plan. I knew that I had overreached a bit and that my suggested language on an FDIC guarantee was too broad and general. When I called Joel again, however, I told him that I would keep working on Sheila, and that I had faith that she would come around.
In the meantime, I was determined to make a more definitive public statement about the need for capital injections, and with Michele Davis’s help I drew up a detailed update on the financial markets since TARP’s passage. I didn’t want to be too explicit—after all, we still didn’t have a program—but I wanted to build on the PWG’s statement on Monday.
“The markets want to hear that we are going to inject capital, but the politicians and the public don’t want to hear it,” she advised. “We should let the air out of the balloon a little bit at a time.”
At 3:30 p.m., during a live news conference, I released a four-and-a-half-page statement that, in describing our powers under TARP, made a point of listing first the ability to inject capital into financial institutions. I also noted that it probably would be several weeks before we made our first asset purchase. Because we still didn’t have a capital program in place, I didn’t allow a Q-and-A period. I’m sure that annoyed the press, which hadn’t had a chance to grill me since TARP had passed.
Neither my financial markets update, the British bank bailout, nor the central bank rate cuts cheered the morose markets. The Dow fell another 189 points to 9,258, and bank stocks suffered most. Bank of America’s shares dropped 7 percent, and Morgan Stanley’s fell 4.8 percent to $16.80; its CDS were above 1,100.
Adding to market woes, AIG was again bleeding. A few days earlier the company had said that it would sell everything but its property/casualty businesses to pay off its government debt. Now, it had run through most of its $85 billion loan—in barely three weeks. On Wednesday afternoon, the Federal Reserve announced it would lend an additional $37.8 billion to the company, secured by investment-grade bonds. It astonished me that not even $85 billion had been enough to stabilize the insurer.
I spoke to John Mack, and he was beside himself that the SEC’s short-selling ban would expire at midnight—before he could complete his deal with Mitsubishi UFJ. He wanted to know what Chris Cox planned to do. I agreed that the timing was terrible, but the fact was that Cox had painted himself into a corner during his TARP testimony when he promised that the SEC would lift the ban right after the legislation passed. I wondered how Morgan Stanley would pull through. The bank’s position had weakened since September 22, when it announced the investment from Mitsubishi UFJ. Its shares were now barely half that day’s price of $27, depressed by market fears that the deal would never happen. I, too, had my doubts.
With the G-7 coming to town, Ben Bernanke and I knew we would be very busy all weekend, so we moved our Friday breakfast ahead a day. In the small conference room off my office, we grimly reviewed the dire situation in the U.S. and the need to move quickly. We agreed that we needed to outline a bold, credible plan to restore market confidence.
I briefed Ben on Treasury’s progress with the capital program and guarantees. He filled me in on the Fed’s progress in fashioning a more expansive commercial paper funding facility that would be available to all highly rated issuers, including industrial companies. Days earlier, Ben had suggested using TARP money, but I had declined. I hadn’t wanted the revamped commercial paper facility to be TARP’s first program, and we needed to save the funds, not use them for programs the Fed could fund itself. But Ben’s idea had set me thinking, and I had asked Steve Shafran to work on a facility for the frozen consumer loan market using a structure similar to what Ben had suggested, a facility in which TARP would bear the risk of the first losses.
During our quick meal, we previewed the G-7 meeting, and Ben gave me a thoughtful memo listing nine specific actions we could take to support our critical institutions. The ideas Ben suggested had already been under discussion or were in earlier drafts of our planned G-7 communiqué. This didn’t surprise me given how closely Treasury and the Fed had been working together on these issues—including the previous weekend when we were drafting the PWG statement.
I thanked him and after breakfast asked Dave McCormick to see if he could use any of Ben’s words in the draft communiqué for the G-7 meeting. He incorporated Ben’s ideas into the appendix, which we titled “The Action Plan.”
That morning I met in my small conference room with Mervyn Davies, chairman of Standard Chartered Bank. He proudly told me that Standard Chartered would not participate in the U.K. plan. It did not need government capital, he said.
Afterward he took me aside and asked in a low voice about Citigroup and GE. “Are either of those two going down?” he asked. “What we hear isn’t good.”
This jolted me. Obviously Citi had problems, but this was the first time I’d heard the chairman of another major bank speculate that it might fail. And even though I’d had concerns about GE, I had assumed that with the Fed now buying commercial paper, the company would weather the crisis. I had a high regard for Mervyn; I trusted his judgment and greatly appreciated his candor. It also occurred to me that he might be viewing GE as a concerned counterparty.
That day Treasury was consumed with preparations for the G-7 meeting starting the next afternoon. Dave McCormick headed the effort, and in a stroke of diplomatic inspiration, he suggested that I invite Sheila Bair to the group’s Friday dinner, where we would be discussing the Swedish and Japanese experience in dealing with massive bank failures. I called her that morning and told her how important the G-7 was going to be: the Europeans needed reassurance about the U.S. government’s commitment to our important financial institutions. I asked if she would give a presentation to all the assembled central bankers and finance ministers, take them through the FDIC’s powers, and explain how she had used these to solve the Wachovia crisis. She readily agreed.
At noon Dan Jester and David Nason came to my office to review their progress on the capital program to help domestic financial institutions. They took several of us through their proposed term sheet, soliciting my decisions on a few sticky issues. They had chosen to abandon the idea of the government’s matching the capital raising of the banks, and I agreed. Matching made great political sense, but the market was effectively closed for bank equity offerings, and there was no point in trying something the market would not accept. I also approved their recommendation that we take preferred stock to balance the sometimes inconsistent goals of stabilizing the system while protecting the taxpayer: banks would get needed capital without raising the specter of nationalization.
We also debated limits on executive compensation. I agreed with my political advisers—Michele Davis, Kevin Fromer, and Bob Hoyt—that TARP’s most stringent restrictions should apply. This meant, for example, that rather than just eliminating golden parachutes in the new contracts of certain executive officers, the top officers of banks accepting capital would have to forgo any such payments in existing contracts as well; they would also have to provide for clawbacks of pay if financial statements were found to be materially inaccurate.
There were a few outstanding issues. We needed to get bank regulators to sign off on the treatment of the capital for regulatory purposes, and I also wanted to nail down a pricing mechanism that would ensure widespread participation while keeping the program voluntary. But overall I felt confident we finally had the framework for a workable approach.
In any case, we needed to get a capital program together immediately to help the financial system. The short sellers had wasted little time justifying John Mack’s worries, returning to the market on Thursday to drive shares of both Morgan Stanley and Merrill Lynch down 26 percent. Morgan Stanley’s CDS still hovered around 1,100 basis points.
The bad news continued to pour in from around the world. By Thursday morning, Iceland had shuttered its stock market and seized the country’s biggest bank, Kaupthing. The two next-biggest banks were also now under government control. LIBOR-OIS spreads had ballooned to a new record of 354 basis points.
I had a very long, difficult call with the president that afternoon, partly to discuss his role in the G-7 and G-20 meetings that weekend. He was looking for any ray of hope on the financial front. He had done everything that I had recommended, including politically unpopular actions that went against Republican principles, and here we were, worse off than ever. He pressed me about the capital program and asked, “Is this what it’s going to take to end this thing?”
“I don’t know, sir,” I admitted, “but I hope it’s the dynamite we’ve been looking for.”
I felt unhappy that nearly a week after TARP’s passage, I still had mostly bad news to deliver. Europe had big problems; seven countries had already had to rescue banks. I continued to be concerned about Citigroup, GE, and, most of all, Morgan Stanley, with the Mitsubishi UFJ deal still in question. Even though President Bush always encouraged me to be candid, this was a low moment for me. Later that day Josh Bolten called to empathize, and to reiterate the president’s support.
“I just wonder, Hank, why, after all the steps we’ve taken to stabilize the market, are the markets not responding?”
“Josh, I wonder exactly the same thing,” I said.
Late in the day Citigroup dropped its bid for Wachovia, saying it would not block a merger with Wells Fargo (though its $60 billion lawsuit would continue). On the surface this provided a shred of good news, but after my conversation with Mervyn Davies I had to wonder what would happen to Citi now that its problems were harshly illuminated.
As the demands of the crisis grew, I had made Dave McCormick, the undersecretary of international affairs, my point man on Morgan Stanley. Though only in his early 40s, Dave was a seasoned manager and great communicator, able to work with finance ministers as well as their deputies.
First thing Friday morning, I went to Dave’s office. “We are really going to have to get something done with Morgan Stanley,” I told him.
Dave had been working with Japanese finance officials to try to move the Mitsubishi UFJ deal along. The Japanese bank appeared to be pulling back from its agreement. The U.S. bank’s shares had fallen so far that Mitsubishi UFJ was worried that if it invested, the U.S. government might step in and wipe out its position.
“I know it may not be the most dignified thing in the world,” Dave said, “but you’re going to have to lean on them. The market doesn’t think this deal is going to close.”
The G-7 ministers were arriving in Washington as we spoke, and, as was customary, I had a bilateral meeting with the Japanese finance minister, Shoichi Nakagawa. It was scheduled for noon, and I told Dave I would broach the Morgan Stanley issue then.
The session in my small conference room with Finance Minister Nakagawa dealt mainly with the major issues we were confronting; among other things, he strongly believed that the U.S. should inject capital into our banks, as Japan had done in the 1990s.
Then I turned the conversation to Mitsubishi UFJ’s agreement with Morgan Stanley. “We believe,” I said, “that this transaction is very important to the stability of the capital markets.”
Friendly and dynamic, Nakagawa was Japan’s fourth finance minister in two years, and like all of us he carried a heavy load. He didn’t commit to pushing the Mitsubishi UFJ deal along, but he agreed to focus on the issue, and that was the most I had hoped for.
The G-7 ministerial meeting began at 2:00 p.m. that afternoon. We gathered in the Cash Room, which was adorned with the flags of our respective countries. Ben and I sat side by side facing our counterparts from the world’s major economies. They were arrayed around a huge rectangle of tables: central bank head Masaaki Shirakawa and Finance Minister Nakagawa from Japan, Axel Weber and Peer Steinbrück from Germany, Christian Noyer and Christine Lagarde from France, Mario Draghi and Giulio Tremonti from Italy, Mark Carney and Jim Flaherty from Canada, Mervyn King and Alistair Darling from Britain. Jean-Claude Trichet from the European Central Bank was also there, along with World Bank president Bob Zoellick and Dominique Strauss-Kahn, managing director of the IMF. As a group we had wrestled with difficult challenges, but the stakes had never been so high, nor our collective mood so dark.
Before the meeting both Ben and Dave McCormick had warned me that the Europeans were angry about Lehman Brothers; many attributed their deepening problems to its failure. Nonetheless, I was surprised to see Trichet pass out a one-page graph that illustrated the dramatic increase in LIBOR-OIS spreads post-Lehman. Then, using uncharacteristically forceful language, he said that U.S. officials had made a terrible mistake in letting Lehman fail, triggering the global financial crisis.
Trichet was not alone in his sentiments—other ministers, including Nakagawa and Tremonti, pointed to the problems caused by Lehman in their opening remarks. It was the first time, though far from the last, that I heard global political leaders use this sort of rhetoric to blame the U.S. government for their financial systems’ failings as well as our own. It was obvious to me that AIG and some other financial institutions had been on their own paths to failure, independent of Lehman. So, too, were banks in the U.K., Ireland, Belgium, and France. Lehman’s collapse hadn’t created their problems, but everyone likes a simple, easy-to-understand story, and there was no doubt that Lehman’s failure had made things worse.
Not wanting to seem defensive, I kept my response simple. My goal was not to justify our actions, but to be sure we left this meeting unified in our desire for a coordinated global response to our problems.
“Lehman,” I said, “was a symptom of a larger problem.” I noted that the U.S. had not had the ability to put capital into Lehman and that there had been no buyer for the firm. Now, with TARP, I pointed out, we had the power to act.
Mervyn King would pick up on this theme, reminding the ministers that “Lehman is the proximate cause, but it’s not the fundamental cause” of the current market crisis. Mervyn was as keen, I think, as I was to move from pointing fingers to linking hands to get out of the mess we were in.
During our discussions, Mervyn and some of the others suggested that to help give the market confidence we should do something different and more forceful with the communiqué. Business as usual would not create the impact we wanted.
Mervyn thought that the draft communiqué lacked punch and that we should shoot for something much briefer that could fit on one page. I agreed.
As the speakers went on, I watched Dave McCormick, who was sitting next to me, scribble out a new draft communiqué. He handed it to a staff member, who quickly brought back a typed version that I thought was just right. I suggested to my colleagues that we try this shortened version, and they agreed. Dave disappeared with his fellow deputies, returning in less than half an hour with a new draft.
The deputies had drawn up a concise, powerful statement—so concise and powerful that it went through only one round of changes by the ministers. In a few brief sentences including five bullet points, we showed our resolve:
The G-7 agrees today that the current situation calls for urgent and exceptional action. We commit to continue working together to stabilize financial markets and restore the flow of credit, to support global economic growth. We agree to: 1. Take decisive action and use all available tools to support systemically important financial institutions and prevent their failure. 2. Take all necessary steps to unfreeze credit and money markets and ensure that banks and other financial institutions have broad access to liquidity and funding. 3. Ensure that our banks and other major financial intermediaries, as needed, can raise capital from public as well as private sources, in sufficient amounts to re-establish confidence and permit them to continue lending to households and businesses. 4. Ensure that our respective national deposit insurance and guarantee programs are robust and consistent so that our retail depositors will continue to have confidence in the safety of their deposits. 5. Take action, where appropriate, to restart the secondary markets for mortgages and other securitized assets. Accurate valuation and transparent disclosure of assets and consistent implementation of high quality accounting standards are necessary.
Once we had the five-point plan, the group’s mood changed. We’d started out with gloominess and finger pointing, but suddenly we felt ready for action. This handful of words solidified our resolve and set the stage for our future moves.
Energized, we walked out onto the steps of the Treasury’s Bell entrance, facing the White House visitor center, for our customary “class photo.” It was midafternoon, the sun was shining, and even the sound of a group of demonstrators chanting “Arrest Paulson!” couldn’t dim my mood. Peer Steinbrück leaned over and said to me, “It sounds like we’re in Germany.”
As if to underscore the importance of our meetings, Friday was astonishingly volatile in the markets. The Dow plunged 8 percent, or 680 points, to below 8,000 in the first seven minutes of trading, then rebounded by 631 points in the next 40 minutes. After slumping again, it roared up 853 points to 8,890 just after 3:30 p.m. before plummeting to 8,451, for an overall loss of 128 points on the day. It was the culmination of a terrible week: the Dow and S&P 500 both closed down 18 percent, while the NASDAQ fell 15 percent. It was the worst week for stocks since 1933.
In the credit market, the LIBOR-OIS spread had reached a shocking 364 basis points, and investors fled once more to safe Treasuries. Morgan Stanley ended the day in single digits, at $9.68, with its CDS topping the 1,300 mark.
Considering the day’s horrific numbers, I realized two things: One, if it didn’t close its deal with Mitsubishi UFJ, Morgan Stanley was dead. Two, we would have to work through the weekend to get the capital program going. The markets would not be satisfied by general statements and encouraging words. We needed to show real action—and fast.
Fortunately, I was making progress with Sheila on the bank guarantee. After a couple of conversations, she had sent over a good proposal, and we were nearly there. She was prepared to guarantee new liabilities, not existing ones.
But we needed Sheila to stretch further. She wanted to guarantee the debt only of banks, not of bank holding companies, and she wanted to limit coverage to 90 percent of the principal. But many of these institutions issued most, if not all, of their debt at the holding company level. A guarantee would allow them to roll existing paper into more-secure longer-term debt and gain some breathing room. Sheila was concerned that the breadth of the holding company guarantee would increase the risk to her fund. We argued that this view was too narrow. If the big banks’ holding companies defaulted on their unsecured debt, the stress on the entire banking system would be enormous, leaving her with the very same unattractive choices that she was trying to avoid.
Early the next morning President Bush met with the G-7 finance ministers and central bankers at the White House. This was a great gesture. The president had never attended, or participated in, a G-7 event before, but he had a gift for setting people at ease, and he was warm and friendly, speaking with bracing humility and frankness.
“This problem started in America, and we need to fix it,” he said. He talked about going back to his hometown of Midland, Texas, where people would ask why he was bailing out Wall Street. He didn’t like it any better than they did, but he said he had answered: “We have to do it to save your jobs.” Now he told the finance ministers and central bankers that he wanted to fix the problem while he was still president, to make things easier for his successor, regardless of who that was.
The president’s directness clearly pleased the group in the Roosevelt Room; we followed him to the Rose Garden and stood behind him as he delivered a short speech acknowledging the severity of the crisis and outlining the government’s efforts to solve it.
While I spent the day on phone calls and one-on-one meetings with finance ministers, the Treasury team plugged away on the capital purchase program. At 3:00 p.m. I met in the large conference room with Ben, Joel Kaplan, Tim Geithner, and my Treasury people. Tim had come to Washington Friday evening at my request—not in his capacity as head of the New York Fed, but as a superb organizer who would work with Treasury and help us put forward some specific proposals.
Sheila was there as well. As we worked to finalize the FDIC debt guarantee, she had begun to push for another new guarantee, this one of bank transaction accounts, the non-interest-bearing accounts companies keep.
These were radical steps—ones that I would never have considered in other times—but we needed action this weekend. Tim was visibly impatient, and I felt a great sense of urgency. I pushed so hard during the meeting that afterward, both Kaplan and Jim Wilkinson took me aside and said I was moving too fast. These steps needed to be analyzed more carefully, and they felt my approach had discouraged dissent. I told them that if I had waffled one bit, we wouldn’t have a program to debate.
To be frank, I hated these options, but I didn’t want to preside over a meltdown. I asked Tim to lead the group in developing programs we could implement immediately, and, typically, he rolled up his sleeves and dug right in. We also asked David Nason, who had the most thorough knowledge of bank guarantees at either the Fed or Treasury, to act as devil’s advocate on the plan to ensure a thorough vetting.
Shortly after the meeting, Dave McCormick and Bob Hoyt came into my office. Dave said, “We’re having trouble buttoning down the Morgan Stanley situation with the Japanese. I think Mitsubishi still wants to make the investment, but they are going to need more assurance.” McCormick had been talking with representatives of Mitsubishi UFJ and the Japanese government to let them know we were watching the situation closely. He’d learned that the Japanese bank was worried that if the U.S. bought equity in Morgan Stanley, we would dilute its investment. It was a reasonable concern, and he had indicated that Treasury would structure any subsequent investment to avoid punishing existing investors. Dave and Bob suggested writing a note on Treasury letterhead to reassure the Japanese.
The G-20 summit wouldn’t take place for another month, but we had asked its members to meet in Washington that weekend to discuss the financial crisis. At 6:00 p.m. these finance ministers and central bankers met at IMF headquarters, a few blocks from the White House. I made the first presentation, striving to be direct and humble about our failings, while emphasizing the very positive outcome at the G-7 and the U.S.’s commitment to fixing our problems. Jean-Claude Trichet followed me and echoed the success of the G-7.
I left the room for a few moments, and as Guido Mantega delivered his prepared remarks, I surprised everyone by striding back into the room accompanied by President Bush. It was astonishing for a U.S. president to drop in like that on a group of finance ministers and central bankers. Mantega paused to let the president speak.
As he had that morning, the president acknowledged America’s role in the problems we faced, adding, “Now is the time to solve this crisis.” Then he stepped aside to let Mantega resume. The Brazilian minister said, “If you don’t mind, I’m going to speak in Portuguese, my native language.”
President Bush replied, “That’s okay, I barely speak English.”
The group laughed appreciatively, and I knew the surprise visit had been a good idea. People needed to be reassured of our resolve, and the president had done just that in his own disarming way.
When I got home, Wendy told me Warren Buffett had been trying to reach me. I intended to get back to him right after dinner, but I could barely keep my eyes open and went straight to bed afterward, falling into a deep sleep. When the phone rang later that evening, I fumbled to pick it up.
“Hank, this is Warren.”
In my grogginess, the only Warren who came to mind was my mother’s handyman, Warren Hansen. Why is he waking me up? I thought, before realizing it was Warren Buffett on the other end of the line.
Warren knew I was working on a capital program, and he had an idea. We had been struggling with the issue of pricing. We needed to protect the taxpayer while encouraging a broad group of banks to participate; our objective was not to support particular institutions but the entire system, which was undercapitalized. Warren suggested asking for a 5 or 6 percent dividend to start on the preferred shares, then raising the rate later.
“The government would make money on it, it would be friendly to investors, and then you could step up the rate after a few years to encourage the banks to pay back the government,” he explained.
I fought back my exhaustion and sat for a half hour or so in the dark on a chair in my bedroom, mulling over this idea. I knew, of course, that as an investor in financial institutions, including Wells Fargo and Goldman Sachs, Warren had a vested interest in this idea. But the truth was I was looking for an approach just like his: an investor-friendly plan that would protect the taxpayer and stabilize the banking system by encouraging investments in healthy institutions. Considering two-tier structures similar to Warren’s, my team had been leaning toward a 7 or 8 percent dividend. But as I went back to sleep, I was convinced Warren’s was the best way to make a capital purchase program attractive to banks while giving them an incentive to pay back the government.
This Warren turned out to be quite a handyman, too.
Shortly after 9:00 a.m. Sunday, I called Jeff Immelt at GE to feel him out about the government guarantee on bank debt that we’d been debating. Because it was not a bank, GE would not be eligible for such a program and might be disadvantaged competitively.
“I don’t think we can do anything for GE,” I said, “but would you rather we do it or not do it?”
“That’s an easy question,” he said. “Maybe a lot of my guys would disagree with me, but the system is so vulnerable you should do whatever you can do, and we’ll be better off than if it hadn’t been done. And if we’re not, it’s still something you’ve got to do.”
Jeff’s answer impressed me. How many other CEOs in his position would have taken such a broad perspective?
The Treasury team had once again worked late into the night—this time on the capital purchase and guarantee programs, and at 10:00 a.m. a weary but highly focused group gathered in my large conference room. We were joined by Ben Bernanke, Tim Geithner, Sheila Bair, Joel Kaplan, and Comptroller of the Currency John Dugan. For the next three hours, we sweated out the details of the plan we would unveil the next day.
I briefly recounted my conversation with Buffett, saying that I now favored using preferred stock with a dividend starting at 5 percent and increasing eventually to 9 percent. The regulators agreed to tweak their rules to allow this to qualify for tier-1 capital treatment for bank holding companies that already had substantial amounts of preferred stock.
Now that we had a plan, I was ready to debate it. Playing his assigned role as devil’s advocate, David Nason argued that the FDIC guarantee would distort the market. Every time you put the U.S. government behind one group’s paper, he said, you made it harder for another. In this case, we would crowd out industrial firms, or financial institutions that weren’t bank holding companies, making it harder for them to raise money. In the end, all of us, including David, believed that this was a step we needed to take.
Sheila continued to express doubts—the FDIC, after all, was plowing new ground. She wondered how appropriate it was to extend the guarantee to the debt of bank holding companies, rather than just to FDIC-insured banks. And she pressed to charge banks more to insure their unsecured debt. Tim maintained that the fee had to be low enough to encourage participation. Because I had a good working relationship with the FDIC chair, I met with Sheila alone several times that afternoon when the tension between Tim and her got too high or to reassure her that she was doing the right thing.
“Our whole financial system is at risk, and if everything goes down, so will your fund. The last thing everybody will ask is, ‘What happened to the FDIC fund?’” I remember saying. “Your decision will prevent a financial calamity, and Ben and I will support you 100 percent.” I also pointed out, “If we price this properly, you will make a lot of money.”
Extending the guarantee to the liabilities of bank holding companies was absolutely essential but a very difficult decision for Sheila. I told her that Treasury would use TARP to prevent bank holding companies from failing.
“I know how important this is. We’ve done a lot of work on it at the FDIC,” Sheila said. Despite her wavering, she finally agreed, acknowledging the support from Treasury and the Fed.
We decided to gather again late in the afternoon to nail down details as well as our plan for implementation. The capital and the guarantee programs had to be clear, easy to understand, and attractive. News was circulating that the U.K. would formally announce Monday that it was taking majority stakes in the Royal Bank of Scotland and HBOS. We had received a copy of the U.K.’s capital plan, and its terms were more punitive than the ones we were discussing.
The key for us was how to get as many institutions as we could to sign up for the capital purchase program (CPP), which is what we called our plan to inject equity into the banks. We settled on equity investments of 3 percent of each institution’s risk-weighted assets, up to $25 billion for the biggest banks; this translated into roughly $250 billion in equity for the entire banking system.
We wanted to get ahead of the crisis and strengthen banks before they failed. To do this, we needed to include the healthy as well as the sick. We had no authority to force a private institution to accept government capital, but we hoped that our 5 percent dividend—increasing to 9 percent after five years—would be too enticing to turn down.
We had designed the equity program so that banks would apply through their individual regulators, which would screen and submit applications to a TARP investment committee. But rather than wait for these applications to come in, we decided to preselect a first group, advising them as to how much capital their regulators thought they should take.
After the disastrous week we’d just finished, we needed to do something dramatic. So I thought we should launch the program by bringing in the CEOs of a number of the biggest institutions, getting them to agree to capital infusions, and quickly announcing this to the markets. Public confidence required that they appear well capitalized, with a cushion to see them through this difficult period.
We reasoned that if we got these major banks together, other banks would follow. The weaker institutions would not be shamed, and the stronger institutions could say they did it for the good of the system. If only weaker banks took capital, it would stigmatize—and kill—the program.
Treasury played no role in picking the first group of banks. That was done by the New York Fed, aided by the OCC. They chose systemically critical banks that together held over 50 percent of U.S. deposits. These were the four biggest commercial banks, JPMorgan, Wells Fargo, Citigroup, and Bank of America; the three former investment banks, Goldman Sachs, Morgan Stanley, and Merrill Lynch; and State Street Corporation and Bank of New York Mellon, two major clearing and settlement banks that were vital to the infrastructure. We thought it would be great news for the market to hear on Tuesday morning that these banks had agreed to accept a total of $125 billion in capital, or one half of the CPP.
It was up to me to call the bank chiefs and invite them to Treasury the next afternoon: Ken Lewis, Vikram Pandit, Jamie Dimon, John Thain, John Mack, Lloyd Blankfein, and Dick Kovacevich, who, as chairman of Wells Fargo, was the only non-CEO invited. We also invited State Street’s Ronald Logue and Bank of New York Mellon’s Robert Kelly. I wouldn’t tell them what the meeting was about—I simply said that it was important, that the others were coming, and that it ultimately would be good news. Kovacevich hesitated a bit—he had to come from San Francisco—but like everyone else agreed to meet on very short notice.
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.
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.”
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.