Henry Paulson - On the Brink - Inside the Race to Stop the Collapse of the Global Financial System

Although we were in one of Dodd’s offices, the main player was Shelby, who hammered me on specifics: “You haven’t told us how much equity you would put in. You haven’t told us whether you’re going to use this liquidity support. You’re asking for an unlimited amount of money, and you haven’t told us how you are going to use it. I’m trying to get there, but I’ve never seen anything like this. Convince me again.”

Shelby was right. Even though we said we never intended to use it, we were asking for an unprecedented blank check—and Congress was understandably wary of signing one over to us. In fact, I don’t know if any executive branch agency had ever before been given the authority to lend to or invest in an enterprise in an unlimited amount. All I could do was argue that the extraordinary and unpredictable nature of the situation warranted the authority in this case.

The day had drained me, but that evening there was a dinner at the White House in honor of Major League Baseball. Hall of Fame players, lawmakers, and administration officials all mingled in the elegant East Room, with its bohemian glass chandeliers, parquet floors, and grand piano.

I reveled in the guest list, which included former Chicago Cubs second baseman Ryne Sandberg. My table included Hall of Fame Baltimore Orioles third baseman Brooks Robinson, but my wife’s table was even more noteworthy. The White House had chosen to seat Wendy next to Senator Bunning, the Hall of Fame pitcher, who had jumped all over me at the Banking Committee hearing the day before.

I showed Wendy the place card. “Someone’s got to be making a joke here,” I said.

But as it turned out, the senator could not have been more gracious to my wife. He and I even chatted a little bit after dinner. He told me that his differences with me weren’t personal, and I complimented him on his baseball prowess.

The next morning I was back working the phones. I conferred with John Spratt, who led the House Budget Committee, and Ways and Means chair Charlie Rangel about how we could make the legislation work fiscally. Their committees were reluctant to exempt the new authorities from the debt ceiling, which meant no blank check for Treasury. But with help from Rangel and Spratt we were able to raise the debt ceiling by $800 billion concurrent with our legislation—giving us a great deal of headroom.

Later I had an important call with Shelby—at least 20 minutes, a long time for me and a near eternity for him. When I hung up, I told Kevin Fromer, “I’m sure I’ve got him.”

“What did you do?” he asked.

“I took your advice,” I said.

Kevin had repeatedly told me that Shelby was worried that we would go easy on the GSEs and just prop them up, regardless of their problems. As I recounted to Kevin, “I told him, ‘You don’t know me, Senator. If I find a problem, I’m going to deal with it. I’m a tough guy.’”

I needed to go back and forth with Dodd and Frank to resolve a number of issues, one of which was absolutely critical. Dodd was resisting our demand to make the Fed a consultative regulator. With Barney’s help, Dodd reluctantly agreed to this, but only until December 31, 2009, when the temporary authorities expired.

On July 23 the Housing and Economic Recovery Act (HERA) passed the House, 272 to 152. Three days later the Senate approved the bill, 72 to 13.

It was, as Shelby and others had said, an unprecedented accomplishment. The legislation gave us broad discretion to provide financial support to the GSEs as we saw fit. The terms and conditions of the support were left almost entirely to the discretion of the Treasury secretary, giving us ample flexibility to structure investments and loans in any way that made sense. The legislation did not impose any limitations on the amount of that support, except that it would not be exempt from the debt ceiling and that we would need the GSEs to approve any equity investment we made in them. All told, it was perhaps the most expansive power to commit funds ever given to a Treasury secretary.

I didn’t seek this power for its own sake, of course, but because we faced a national emergency. I hoped that we would never have to use our new authorities.

With all the attention on the GSEs, I still kept an eye on Lehman’s travails, speaking regularly with Dick Fuld about his options. The best of these was to sell his firm, and Bank of America was the most likely buyer. BofA had taken a look at the firm and passed the month before, but I thought I’d see if anything had changed. So on one of my calls with Dick, I suggested that he give the Charlotte-based bank another try and that he not use an intermediary but instead personally approach its CEO, Ken Lewis.

“Ken respects people who are direct,” I remember telling him. “You won’t be able to look at yourself in the mirror unless you have gone the extra mile here.”

Dick made the call and met with Lewis in late July. He called me with an enthusiastic report.

“Ken really liked me,” he said. “We have a lot in common—we’re both guys with a chip on our shoulder. He’s going to take a hard look at it.”

But nothing came of their subsequent meeting.

Meanwhile, there was no grand signing ceremony for HERA. The president wasn’t enthused—nor, frankly, was I—with the many provisions we had to accept, and he believed that a ceremony would upset House Republicans. To assuage them, he made a point of saying he was reluctant to sign the bill and was only doing so on the Treasury secretary’s strong recommendation.

So, after weeks of speeches, meetings, behind-the-scenes negotiations, and sleepless nights for me and my staff, HERA was finally signed shortly after 7:00 a.m. on July 30 in the Oval Office, before a tiny group of administration officials, including Housing and Urban Development secretary Steve Preston, and Federal Housing Administration commissioner Brian Montgomery, Jim Lockhart, David Nason, and me.

“I want to thank all the congressmen here,” the president joked, but he wasn’t taking a potshot at the absent Republicans. On the contrary, he so empathized with their frustrations that he had not invited anyone from Congress to attend.

With HERA in place, we launched an immediate analysis of the true financial condition of Fannie and Freddie. The Fed and the Office of the Comptroller of the Currency sent in examiners, and Treasury set out to hire an adviser to conduct a full review of the GSEs’ financial positions and capital strength, and to develop alternatives for addressing the situation.

We selected Morgan Stanley, whose CEO, John Mack, offered to provide a team for free. You might think that hiring advisers for free would be simple, but nothing is simple in Washington. We had no time for a normal bidding process, so we had to use what’s known as a limited competition. Then there was the conflict-of-interest issue: any firm we picked would be boxed out of doing business with the GSEs for an extended period of time and would have to work without legal indemnification. Merrill Lynch and Citigroup also offered to work for free, but only Mack was willing to accept the whole unattractive package. He also offered us an extraordinary team that included two of his top people, Vice Chairman Bob Scully and financial institutions chief Ruth Porat.

John had been one of my fiercest competitors when I was at Goldman, but he became one of my biggest allies when I was at Treasury. He understood that fixing the GSEs was critical to easing the credit crisis and to softening the economic blow of the housing decline.

In mid-summer I had lost a key member of my team when Bob Steel left to take over as CEO and president of Wachovia. Then David Nason, who had been planning to leave for a while—first, after his heroic efforts on the Blueprint for regulatory reform, then after his even more important work in getting HERA passed—finally made his break, though he would return before long at a critical time.