On the Brink (40 page)

All 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.

I 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.

Saturday, September 27, 2008

I 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.

I 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.

We 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.

We 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.

Mitch 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.

Chris 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.

It 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.

I 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.

Two 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.

“Hank, you’re alone on executive comp. I’m not one to threaten, but you have to listen.”

We got word from outside the room that the press was already reporting on the scene inside. It was outrageous. Here I was dealing with a room full of Senate Democrats competing with one another to pound on me, while their staffers leaked to their press contacts, oblivious as to how that might affect the markets we were trying to save. We complained, and Rahm Emanuel acted quickly, confiscating the staff members’ BlackBerrys. It reminded me of the Old West, where everyone had to check their guns in at the saloon.

Rahm was looking for a solution, and he bluntly summed up the dilemma on executive compensation. “You need your market to work, and we need ours to work,” he said. “Golden parachutes are a problem.”

Rahm was right, as was Kent Conrad, who added, “We need something to go back and sell on executive comp.”

But there were too many competing voices to make progress. There was a similarly wide range of opinion on oversight matters, as well. Baucus wanted an inspector general specifically for TARP. Others wanted a congressional overseer; Conrad was pushing a Financial Stability Oversight Board, comprising me, Ben Bernanke, Chris Cox, Jim Lockhart, and HUD Secretary Steve Preston. We debated how closely this board would be involved in day-to-day activities. Everyone conceded that there were too many oversight bodies being proposed, but no one wanted to give up his favorite.

“We trust you,” Conrad assured me. “This isn’t aimed at you personally. We need more oversight.”

“I welcome it,” I responded. In fact, I thought strong oversight would protect TARP, and I was fine with Conrad’s idea of a board, although I pointed out that it ought to be consultative. If it got involved in micromanaging executive decisions, nothing would get done. “Let’s get oversight that works,” I said.

I wish now that I’d put my foot down and insisted on dropping one of those redundant oversight bodies, if only to save taxpayers money and make the program more workable. We would end up getting them all, and TARP was already under the eye of the Treasury’s existing inspector general’s office—not to mention the Government Accountability Office (GAO), Congress’s investigative arm, as well as numerous congressional committees.

In the middle of the meeting, House members had to leave to vote on a nuclear cooperation agreement between the U.S. and India. (It passed.) The senators, meanwhile, probed the specifics of the TARP plan, pressing on the $700 billion figure. How did we arrive at that number? I said it was the best estimate we could come up with, and the market would accept no less.

When the House members returned, we turned to the stickiest issue of the afternoon: the timing of the release of the TARP money. The Democrats were fairly certain Obama would win the election, and they didn’t want the Bush Treasury to be able to use all the money. They wanted to give us $250 billion or $300 billion and leave the new administration a say over the rest.

Chuck Schumer didn’t believe Congress would be willing to give the Bush administration $700 billion. I told him the markets needed to know the money was available, but he didn’t seem convinced. Treating our back-and-forth like a run-of-the-mill negotiation, he kept saying, “You probably won’t be able to use more than $100 billion.” I was trying hard to communicate with this group, and they with me, but we couldn’t seem to break through to one another, and tensions were rising.

I asked what would happen if we urgently needed more funds and didn’t have time to go back to Congress to ask for them. Barney quipped, “Then you’ll go back to Uncle Ben.” His one-liner broke the tension and gave us all a much-needed laugh.

Then Schumer said: “If you need more than $350 billion before January 20, you’ll use the Fed or call us back and ask for more.”

“You’re raising a congressional concern, but we need to protect the American people from financial disaster,” I said. “Geithner, Bernanke, and Warren Buffett will say your way won’t work.”

“You keep asserting that, but I don’t hear persuasive reasons. Explain to us why,” Max Baucus said.

I described again the terrible state of the markets. It was clear to me that we would need at least as much money as we were asking for and that it was crucial we send an unambiguous signal to the markets that the funds would be available unimpeded by any political concerns.

After a couple of hours, we broke for dinner, without having made progress on a single issue. Dodd wanted to return to this bargaining format later, but once away, I didn’t want to go back. In truth, the meeting seemed like a setup: these weren’t negotiations, they were just arguments. We were getting nowhere on the release of TARP money, and I felt that we were getting beaten up by a leaderless group of posturing Democratic senators. The fact that they had suggested that this same group should reconvene later meant to me that they either didn’t want, or didn’t know how, to reach a deal. We needed to break the logjam.

We adjourned to John Boehner’s conference room. I called Pelosi, Obama, and Reid, who was out of the building. There were just too many cooks in the kitchen, I said. The compensation proposals were unreasonable, and I believed they would backfire. I told Obama that his guys were blowing the negotiations, seemingly trying to one-up each other. He told me he would talk with Chris Dodd, then called me back about 45 minutes later to tell me that Dodd was optimistic that there had been progress.

A few days earlier, Obama had said to me, in one of our frequent calls, “Hank, I intend to be president, and I don’t want to preside over an economic wasteland. So let me know if we ever get to the point that I need to step in.” With TARP—and the safety of the financial system—on the line, I believed we had reached that point and I told him so. “These negotiations are a disaster,” I said. “The Senate Democrats aren’t taking them seriously. They don’t seem to understand the gravity of the situation.” I learned later that Obama called Harry Reid, who joined the negotiations later that evening.

My team and I decided to approach Barney Frank, who understood how important it was for TARP to be approved and that we would need GOP votes to get it done. Dan Meyer and Kevin Fromer found him on the third floor having dinner with his partner, Jim Ready, and asked him to meet with us.

Barney said he thought the two sides had been making progress, but when Dan and Kevin explained our view that it would be counterproductive to restart the previous meeting, he agreed to come to Boehner’s office to meet with me.

The discussion with Barney was much more productive than the afternoon session. With Keith Hennessey and Judd Gregg, we tackled the issue of tranching and quickly reached a breakthrough on the release of funds. Congress would release an initial $250 billion that could be increased to $350 billion if the president certified to Congress that it was necessary. To release the remaining $350 billion, Treasury would have to submit a report to Congress with details of its plans for the money. If Congress did nothing, the money would be released automatically after 15 days. To withhold the funds, Congress would have to pass legislation denying the release, then override a presidential veto.

Building on that success, we decided to try a new strategy for the night. We would separate the Democrats, treat each like a king, and hammer away in private on individual issues. We began a night of shuttle diplomacy. Negotiators crisscrossed the elegant marble expanse of the Capitol’s National Statuary Hall, once the meeting place of the House, to reach Boehner’s personal office, where we had set up our base.

While we were on Capitol Hill negotiating, FDIC and Fed officials were scrambling, as they had been all day, to find a buyer for Wachovia. The big bank was going down, and as I said to Judd Gregg during a break in the talks: “We’re doing this, but I can’t help thinking about Wachovia.” I knew that Wells Fargo and Citi had emerged as leading contenders for the North Carolina bank. Just before 8:00 p.m., I spoke to Sheila Bair to find out what was happening. She was optimistic, but nothing was going to be announced that day. Like Tim Geithner, she thought Wells Fargo was the most likely buyer.