“You’re doing great, Hank,” the Connecticut senator said, confiding that the Democrats wanted to exclude him from this meeting because he was supporting McCain. “I’m going to walk beside you, because they won’t throw me out if I go in with you.” was already there, and upon my arrival (Lieberman had already disappeared into the crowd), Reid went to the podium and told the group that we would answer questions. The first person to speak was John Kerry of Massachusetts, whom I had found to be consistently on the right side of the issues about the financial crisis. He said he was unsure that he wanted Ben and me there because there was a political element to everything, and suggested that the group first meet alone. But Reid refused, saying that questions needed to be answered. From the look of it, the entire caucus was there, though some seemed no more eager to vote TARP through than were House Republicans. Many were unhappy. At least a third were irate that the crisis was happening and were unwilling to agree to anything unless there were major modifications to the bill. One after another they spoke, occasionally asking a question but usually just attacking our proposal. I felt fortunate that Chris Dodd was chairing the Banking Committee because many of these senators liked and trusted him. But he had his work cut out for him. through the session, I hit the wall. I had been going for days with little sleep and no exercise, hustling from one difficult meeting or conversation to another, and I ran out of gas. I realized I was going to get the dry heaves, and if I did that in front of people it would make for a bad news story, to say the least. So I made a poor joke.
“Excuse me,” I announced, standing at the podium. “I have to go get rid of some Diet Cokes.”rushed out of the room and into a bathroom stall, had a short bout of dry heaves, then returned to the meeting. Again, no one seemed to notice anything amiss, and I returned as Ben was responding to another irate senator. Hillary Clinton told me to stick with Schumer if I wanted to get things done. I told her I would, but the fact was, Chuck and I had a serious disagreement about how the $700 billion should be allocated. I wanted Treasury to have access to the total amount right from the start, but Schumer wanted it doled out in tranches. I suspected he wanted to reserve part of the money for the next administration. I went to bed that night, I watched President Bush address the nation from the State Floor at the White House. “Our entire economy is in danger,” he said, carefully explaining how we had gotten to that point: foreign investment in the U.S., easy credit, a housing boom, irresponsible lending and borrowing. It was his most substantive address yet on the financial crisis, and it was well delivered, but the last thought I had before I fell asleep was that even a speech by the president wouldn’t be able to sway the House Republicans. ’d devised TARP to save the financial system. Now it had become all about politics—presidential politics. The president, the leaders of both parties, and both candidates were scheduled to meet around 4:00 p.m. Thursday. I wondered what McCain could have been thinking. Calling a meeting like this when we didn’t have a deal was playing with dynamite., I later learned, had moved into high gear to devise a strategy to ensure that they emerged as the winners from McCain’s maneuver. They didn’t want to take the blame for TARP’s failure—and they didn’t want McCain to be able to claim credit for its success. midmorning, Democrats and Republicans from both houses were haggling over the bill’s provisions. Over the course of two hours or so, in the Foreign Relations Room, located below the vice president’s office on the Senate side, the negotiators agreed on several big items, including setting the size of TARP at $700 billion. TARP funds would not be immediately available to the administration but could be drawn down in tranches. Senate and House negotiators agreed on the need to place restrictions on executive compensation and to give Treasury warrants to purchase equity in companies participating in the program so that taxpayers could share in any possible gains they made. tentative progress had been achieved for Utah Republican senator Bob Bennett to get caught up in the moment as he emerged from the negotiation sessions around midday. He grabbed a microphone and told the press, “I now expect we will, indeed, have a plan that can pass the House, pass the Senate, be signed by the president, and bring a sense of certainty to this crisis that is still roiling in the markets.” Chris Dodd told reporters that he, too, was confident. there were problems with this scenario. It was a big stretch to say these negotiators had reached an actual agreement. And, in any case, House Republicans were not on board, and without them TARP was going nowhere. The math was simple. We would need 218 votes for House passage. Though the Democrats, with 236 members, held a clear majority, we weren’t going to get 100 percent of their votes, so we had to have some Republicans. But the only House Republican attending the morning negotiating session had been Spencer Bachus, the ranking Republican on the House Financial Services Committee. Afterward, he allowed that progress had been made. But he wasn’t in a position to deliver his colleagues. by hour the need for the legislation was becoming more urgent. The noose continued to tighten on the nation’s credit markets: by the close of trading, LIBOR-OIS spreads had widened to nearly 200 basis points, up 30 basis points from the day before. By comparison, they had been about half that level just after Lehman failed. Washington Mutual went down—the biggest failure in U.S. banking history. While the legislators were negotiating, Sheila Bair called me around 11:00 a.m. to break the news that the FDIC was going to seize the bank, and that JPMorgan would pay the government $1.9 billion for the company, which had $307 billion in assets. ’s demise wasn’t a surprise. It had been struggling for months and had taken a catastrophic turn for the worse: Its CDS rates, already shocking at 2,742 on September 15, had nearly doubled to 5,266 on Wednesday, September 24, as the bank was hit by a run on deposits. Customers had withdrawn $16.7 billion over the preceding ten days. in March, JPMorgan had wanted to buy WaMu, but its regulator, the Office of Thrift Supervision (OTS), and management had opted instead for a $7 billion capital investment from a group led by the private-equity firm TPG. This decision proved to be a mistake: an acquisition by JPMorgan would have stabilized the bank. Still, I had kept in close touch with Sheila and Ben Bernanke on WaMu and periodically talked with JPMorgan CEO Jamie Dimon., the WaMu solution wasn’t perfect, although it was handled smoothly using the normal FDIC process. JPMorgan’s purchase cost taxpayers nothing and no depositors lost money, but the deal gave senior WaMu debt holders about 55 cents on the dollar, roughly equal to what the securities had been trading for. In retrospect, I see that, in the middle of a panic, this was a mistake. WaMu, the sixth-biggest bank in the country, was systemically important. Crushing the owners of preferred and subordinated debt and clipping senior debt holders only unsettled the debt holders in other institutions, adding to the market’s uncertainty about government action. Banks were even less willing to lend to one another. In the future, I concluded, we were going to need to go beyond the standard FDIC resolution process for a failing bank. 2:25 p.m. I spoke with John McCain, who had just returned to Washington. The call did nothing to ease my mind.
“We have to protect the American taxpayers,” he told me, pointing out that nothing would get done in Congress without the House Republicans. They didn’t like our proposal and I needed to listen more carefully to them, he said.
“John, our system is on the edge,” I told him. “WaMu barely got bailed out today. Several other institutions are on the brink. If we don’t get something done soon, this economy is going to collapse.” was so concerned that McCain would do or say something rash that I resorted to a veiled threat: “I’m not a politician, but if you or anyone else does something that causes this system to collapse, it is not going to just be on me. I am going to go and say what I think to the American people.” soon as we finished up, I called Joel Kaplan at the White House to let him know that I’d had a tough conversation with the Republican presidential candidate. Not long after, Senator Judd Gregg called to confirm my worst fears about McCain’s return.
“Hank,” the New Hampshire Republican said, “I have just been in a meeting that took my breath away.”, it seems, had come to Washington to save the day, and became livid when he got off the plane to learn that a deal had apparently been reached without him. As Judd told me, McCain, with Lindsey Graham at his side, had come in late to the Senate Republican Policy Committee luncheon, held weekly in the Mike Mansfield Room on the second floor of the Capitol. McCain sat through part of a presentation by Bennett and a short one by Judd. Lindsey told the assembly of 40 or so senators, “It’s not right for any of you to reach an agreement, because there is no agreement unless John agrees.”, Judd related, McCain had declared, “I don’t care what you people do, I am going to do what is right for the country.” The Arizona senator subsequently stormed out, leaving the Republican senators to finish their lunches, whether or not they had any appetite left. I knew why McCain had seemed so angry when we’d spoken half an hour before.’d barely gotten off the phone when Barney Frank called to tell me that Spencer Bachus had just blown up the deal. Bachus had put out a statement saying he had not been authorized to cut any deals and that that morning there had been “no agreement other than to continue discussions.” later insisted to me that he had been acting on orders from Boehner, who must have understood that any agreement that was not supported by a critical mass of House Republicans was doomed to failure. wanted me to speak with Nancy Pelosi; the three of us got on the phone, and the two Democrats reamed me about Bachus. They basically wanted to know how they could get anything done with, as they said, Republicans behaving that way., the Republican leaders of both houses, John Boehner and Mitch McConnell, had been putting out statements asserting that there had been no agreement on a deal with the Democrats. of this confusion and contentiousness boded well for the upcoming meeting at the White House.Kaplan asked me to meet with President Bush before the bipartisan gathering in the Cabinet Room. The three of us stood on the terrace outside the president’s private dining room, and I watched George Bush chew on an unlit cigar on that damp, chilly afternoon. I told him of my exchange with McCain, and I saw a trace of a smile on his lips. He said that it was good that I had been firm. We were playing for big stakes. He said he sure hoped McCain knew what he was doing. As always, he tried to reassure me.
“Hank, we are going to get this done,” he promised. “There has to be some way Boehner can work this, and maybe I can help with the House Republicans.” hope that conversation gave me was quickly shot down when we walked into the Oval Office, where GOP leaders had gathered. Everyone was trying to be cooperative. McConnell said we had to try to make this happen. But Boehner said nothing had changed; he didn’t have the votes.
“We need to get there,” the president said, pressing him.
“I’m trying,” Boehner said, reflecting his caucus’s reluctance. “I don’t have the support.”along Boehner had said he couldn’t deliver the votes, and now it looked like he was falling down on the job. I think he blamed me for putting him in this position. He wouldn’t speak to me again until October 3, when Congress finally approved TARP. the Oval Office we walked down the short corridor to the Cabinet Room to join the Democratic leadership, Obama, and McCain. It was quite an august group that had been assembled to hash out a solution to the financial crisis. Arrayed around the oval mahogany table with the president, the vice president, McCain, Obama, and me were the members of the House and Senate leadership: Reid and McConnell, Pelosi and Boehner, Dodd and Shelby, Frank and Bachus, Durbin and Hoyer. Staffers filled the chairs lined up along the walls and in front of the French doors that opened out onto the Rose Garden. president started the meeting by saying that we had a common objective and that we needed to work together to act as quickly as possible to reach our goal. As he spoke, I felt a sharp foreboding as I surveyed this group of politicians who represented disparate interests and were in some cases uncompromising in their positions. The president asked me to speak, and I once again described the dire conditions in the market and the need for emergency powers. When I finished, the president said he had a simple test for making a decision on this: “If Hank Paulson and Ben Bernanke say it’s going to work and help stabilize the financial system, we are for it.” protocol, the president turned to call on the Speaker of the House. And when Pelosi spoke, it was clear the Democrats had done their homework and had planned a skillful response for McCain. Pelosi said that Obama would represent the Democrats, who, she pointed out, had been working with me in good faith to formulate a deal. Harry Reid agreed that Obama would speak for the Democrats. Obama delivered a thoughtful, well-prepared presentation, sketching the broad outlines of the problem and stressing the need for immediate action. He said the Democrats had been working closely with me; he ran through the rough terms of the morning’s discussion on the Hill, then mentioned the need for adjustments on oversight and executive compensation, as well as help for home-owners. He spoke without notes—much less a teleprompter—and spoke eloquently. “The Democrats will deliver the votes,” he asserted. he sprang the trap that the Democrats had set: “Yesterday, Senator McCain and I issued a joint statement, saying in one voice that this is no time to be playing politics. And on the way here, we were on the brink of a deal. Now, there are those who think we should start from scratch…. If we are indeed starting over, the consequences could well be severe.”, of course, there was no deal yet. Bachus had been maneuvered into giving credibility to the appearance of one. But he, Boehner, and McConnell had since issued statements disclaiming the idea that there ever had been a deal. Obama and the Democrats were skillfully setting up the story line that McCain’s intervention had polarized the situation and that Republicans were walking away from an agreement. It was brilliant political theater that was about to degenerate into farce. protocol, the president turned to McCain to offer him a chance to respond: “I think it’s fair that I give you the chance to speak next.” McCain demurred. “I’ll wait my turn,” he said. It was an incredible moment, in every sense. This was supposed to be McCain’s meeting—he’d called it, not the president, who had simply accommodated the Republican candidate’s wishes. Now it looked as if McCain had no plan at all—his idea had been to suspend his campaign and summon us all to this meeting. It was not a strategy, it was a political gambit, and the Democrats had matched it with one of their own., who had just gotten through telling us in the Oval Office that he didn’t have the votes, said he was trying to find a way to get House Republicans on board. “I am not talking about a totally new deal, but we do need to tweak the core part of the program,” he said. raised the idea of including Cantor’s unformed insurance plan. Obama asked me if it was consistent with what we were trying to do elsewhere, and I said it wasn’t. started to evaporate as the meeting broke into multiple side conversations with people talking over each other. Shelby waved a sheaf of papers, claiming they were from more than 100 economists who all thought TARP was a bad idea. He said we needed time to consider this plan. The president jumped in to say, “No, this is a situation where we need to act. We don’t have time to have hearings with a bunch of economists.” still hadn’t spoken. Finally, raising his voice over the din, Obama said loudly, “I’d like to hear what Senator McCain has to say, since we haven’t heard from him yet.” room went silent and all eyes shifted to McCain, who sat quietly in his chair, holding a single note card. He glanced at it quickly and proceeded to make a few general points. He said that many members had legitimate concerns and that I had begun to head in the right direction on executive pay and oversight. He mentioned that Boehner was trying to move his caucus the best he could and that we ought to give him the space to do that. He added he had confidence the consensus could be reached quickly. As he spoke, I could see Obama chuckling. ’s comments were anticlimactic, to say the least. His return to Washington was impulsive and risky, and I don’t think he had a plan in mind. If anything, his gambit only came back to hurt him, as he was pilloried in the press afterward, and in the end, I don’t believe his maneuver significantly influenced the TARP legislative process. number of people I respect on the Hill have a different view. They believe McCain ended up being helpful by focusing public attention on TARP and galvanizing Congress to action. And John later did try to find ways for House Republicans to support legislation. But Democrats absolutely did not want him to get any credit. They wanted the economic issue as their own. Accusing McCain of blowing up a nondeal was just hardball political tactics. But when it came right down to it, he had little to say in the forum he himself had called. Spencer Bachus chimed in to say that while he and House Republicans had not endorsed a deal, he was proud that House Republicans had been successful in including strong taxpayer protections. Pelosi jumped in, insisting vociferously that House Democrats were responsible for the taxpayer protections, not House Republicans. They began speaking over each other, as the president tried to restore order, and before long Pelosi and Bachus were yelling at each other. The room descended into chaos as the House and Senate members erupted into full-fledged shouting around the table. Frank started to loudly bait McCain, who sat stony-faced.
“What’s the Republican proposal?” he pressed. “What’s the Republican plan?”got so ridiculous that Vice President Cheney started laughing. Frankly, I’d never seen anything like it before in politics or business—or in my fraternity days at Dartmouth, for that matter., the president just stood up and said: “Well, I’ve clearly lost control of this meeting. It’s over.”everyone left the room, I was appalled and disheartened. Not only had I witnessed conduct I could never have imagined before, but we didn’t even have a deal. If anything, people seemed further apart than before. Democrats had gathered in the Roosevelt Room and I became concerned that they would say something inflammatory to the press when they left. So I decided to approach them and urge moderation. was huddled around Obama at the west end of the room, and when they saw me there was an uproar. They shouted at me to leave. I didn’t know what to do. Then, in an attempt at levity, I walked over to Pelosi and dropped to my knees, genuflecting at the altar of the Speaker of the House.
“Nancy,” I started to say.burst out laughing. “Gee, Hank, I didn’t know you were Catholic.”
“Don’t blow this up,” I said. It had been a difficult meeting, I acknowledged, but we all needed to come together.
“We’re not the ones trying to blow this up,” she said.13run on Wachovia began Friday morning, September 26. The North Carolina bank had been struggling for months, but once the FDIC had seized WaMu the day before, traders began treating Wachovia as if it were next in line to fall. Overnight its credit default swaps soared, and loyal institutional and corporate customers fled, emptying transaction accounts. By day’s end, $5 billion would be gone and shares of the bank would fall by 27 percent, to $10. collapse of WaMu was awful, but Wachovia was another order of magnitude altogether. With branches all over the country, from California to the Carolinas and up through the Northeast, it was the fourth-largest bank in the U.S. by assets, and the third by domestic deposits. Wachovia had grown rapidly through acquisitions. One of those purchases had proven to be its undoing: Golden West Financial, a big California savings and loan stuffed with option adjustable-rate mortgages. Wachovia had bought the thrift in 2006 at the peak of the housing boom. Wachovia’s long-term customers pulling their money, we at Treasury knew it was only a matter of time before it failed. That was unthinkable; our financial system could not have withstood its demise. But I had decided to keep at a distance from any negotiations. My former colleague Bob Steel had left in July to steer Wachovia through this crisis, and he would be breaking the law if he talked to me or anyone at Treasury on behalf of his bank. had reviewed Wachovia’s plight with Tim Geithner early in the morning, and it was very much on my mind at my regularly scheduled Friday breakfast with Ben Bernanke at the Fed. We were optimistic that Wells Fargo or Citigroup would step up and buy Wachovia. If not, the regulators had the necessary powers to deal with a failing bank, although I was confident that everyone understood the necessity of avoiding such an outcome. was still mulling over the strange events of the previous day, and what they might mean for TARP. After the disastrous Cabinet Room meeting, I had wondered if we’d ever get lawmakers to agree. It was a good thing, as Obama had said when we spoke by phone late Thursday evening, that the public hadn’t seen the indecorous partisan brawling, or there would have been no confidence left in the market. some good had come from that difficult day. As Ben had told me the night before, “I don’t know what you said to McCain, but whatever it was, it’s working. He’s now saying all the right things.” had also seen the beginnings of a bipartisan spirit at work on Thursday evening in a crowded, closed-door negotiating session on the Hill. We’d gone there after the Cabinet Room debacle, determined to make progress. The meeting was surprisingly productive, and I had left mildly optimistic. with WaMu’s collapse and the run on Wachovia, it was clear that the markets weren’t going to pause to see how TARP made out before punishing their next victim. Banks had stopped lending to one another, and the money markets remained all but frozen. McCain called midmorning. He sounded upbeat though apologetic about the previous day’s fracas. “Boy, what a difficult meeting,” he said. “The reason I didn’t say anything at the end was because it’s pretty hard to say anything with Barney Frank screaming at you.” struck a positive note, saying that the House Republicans were willing to talk if some of their ideas—he stressed the insurance plan in particular—were considered. “We need to come up with some way to let them get something,” he said., McCain had put himself in a sticky spot. The first presidential debate was scheduled for that night, and the Obama campaign appeared to have outmaneuvered John. When he’d suspended his campaign on Wednesday, McCain had called for the debate to be postponed to focus on cutting a rescue package deal. Obama had refused, scoring points by questioning why someone who wanted to be president couldn’t manage to both negotiate a compromise and run a campaign. Shortly after we spoke, McCain’s team announced that he would fly down to Oxford, Mississippi, for the debate. day I worked the phones, talking with Senate and House leaders, trying to get some traction on the issues in dispute while a Treasury team entered into a negotiating and drafting session with staff from multiple congressional committees. Wachovia’s shares fell relentlessly while its credit default swaps more than doubled to 1,560 basis points. Morgan Stanley moved back into the danger zone: its CDS had soared past the 1,000-basis-point mark. caught only part of the first presidential debate that night, but I was pleased to see that neither Obama nor McCain tried to score political points at TARP’s expense. Maybe, I hoped, the polarized parties would be able to come together long enough to do what was needed to save the system. had planned to return to Treasury early Saturday morning, but Kevin Fromer told me to stay home. “Rest up,” he said. “We’ve got to narrow the open issues down and get the agreements on paper.” He was certain that however rough it might still be, we had the makings of, as he said, “a piece of legislation.” His self-assurance rubbed off on me. was working in the sitting area of my bedroom when Nancy Pelosi phoned to raise a potentially contentious issue. The Speaker didn’t like the idea of taxpayers’ being on the hook for any part of this bailout, and she suggested taxing the financial industry so the government could get back any money it spent. This was the first I’d heard of this idea, but I could tell Nancy wasn’t trying to complicate the negotiations—clearly, she was having trouble with her caucus. But there was no way that the markets would accept her proposal. It would be like trying to save and punish someone at the same time. I told her I strongly disagreed with her idea but that I would work with her to find a solution. I hung up confident that we could do just that. were scheduled to work through the major open issues with congressional leaders that afternoon, but both the composition of the group and a free-for-all format spelled trouble. The key to legislation is getting the right people in the room. I wanted to keep it small and simple, and the Republicans agreed to send one representative from each chamber. But Senate Democrats were clamoring to be involved, and House Democrats also wanted their key players on hand. As the Banking Committee chair, Chris Dodd was the lead Senate negotiator. But Max Baucus wanted to weigh in on compensation; an increasingly assertive Chuck Schumer was taking the lead on TARP tranching; chairman of the Senate Budget Committee Kent Conrad was focused on oversight and insurance; and Rhode Island senator Jack Reed pushed the Democrats’ idea of taking equity warrants in companies that sold illiquid assets. arrived at the Dirksen Senate Office Building at about 2:00 p.m. and gathered in the vice president’s office for last-minute preparations before we headed up to Nancy Pelosi’s conference room and that same long table where, little more than a week before, Ben Bernanke, Chris Cox, and I had made our case for quick congressional action. Kevin Fromer, Neel Kashkari, Bob Hoyt, and I sat between Judd Gregg and Roy Blunt, the lead negotiators on the Republican side, facing House and Senate Democrats. Perhaps 30 staff members lined the walls. McConnell had put Gregg in charge of Senate GOP negotiations when Richard Shelby elected to sit out the debate. It was a fortunate, and inspired, choice. Judd was a respected New Hampshire conservative who possessed one of the sharpest minds in the Senate, knew the issues cold, and was a superb negotiator; he commanded the respect of Senate Republicans. He understood that the system was endangered and wanted results. Roy Blunt had taken Spencer Bachus’s place at the table, and this, too, pleased me. The Missouri congressman was a careful listener with a smooth manner, who would do a good job of representing House Republicans. Like Gregg, he knew we needed to get something done. Dodd opened with remarks about the importance of bipartisanship. I began by noting the increasing length of the proposed legislation and made clear we would not accept a bill that couldn’t work. The three-page outline we had sent up to the Hill had turned into a 40-page bill under Dodd and Barney Frank the previous weekend. Now it was more than 100 pages.
“We want to adopt something that works, but there is resistance within our caucuses,” Barney said diplomatically. He represented House Democrats, along with Rahm Emanuel. Charlie Rangel also attended. didn’t take long for the meeting to start getting out of hand. There were frequent interruptions, and people seemed unwilling to negotiate. We began with a contentious issue: executive compensation. Baucus and Frank were the main proponents of the Democratic view, but everyone had an opinion. Some, like Baucus, wanted to limit tax deductibility on the executives’ pay. Others wanted to be able to claw back compensation that was awarded on the basis of inaccurate financial statements. Schumer led the attack on golden parachutes, those generous payouts often given to fired or retiring executives. wasn’t about to defend golden parachutes, but we needed a solution that worked. Our priority was to buy assets quickly from as many banks as possible. To help make that happen, we wanted clear, easy-to-execute rules that would encourage participation. So I pushed to exempt smaller institutions from the rules while resisting the more complex compensation formulations that might deter bigger banks or be difficult to execute. I thought our stand made sense: we had been tough so far, forcing the CEOs of Fannie Mae and Freddie Mac to leave without their golden parachutes. By contrast, the Democrats were understandably looking for something that they could trumpet to reduce the political backlash they saw coming. nights before, Chris Dodd had run an orderly meeting, and we’d made real progress on many thorny issues. This meeting, however, was becoming increasingly loud and chaotic. Soon, perhaps in frustration at my stance—or just to be heard above the din—Baucus began yelling at me.
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