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

At times, it felt like a three-ring circus that night, as senators, representatives, and staffers ducked in and out of meetings to hash out their differences. Some crowded into the narrow corridors outside of Boehner’s or Pelosi’s offices. As it got later, Boehner’s office all but turned into a pizza parlor. Just about everyone seemed to be eating a slice: plain, pepperoni, sausage, anchovy. I had never seen so many greasy cardboard boxes in my life.

Though tired, members and their staffs drove themselves hard. Clever retooling of language helped us bridge the gap between Democrats and Republicans on the proposed plan to insure bad assets. That was no easy matter. Kent Conrad had earlier called it “the worst idea ever.” But Barney Frank opened the door to a compromise by saying, “If a plan is acceptable to the secretary, the House Democrats will support it.”

We got to work on it. House Republicans wanted to be for something other than our approach. They insisted that we not only include the authority for insurance in the bill, but that we put an actual plan in place. But Conrad threatened to kill TARP if it included a workable insurance program, which he feared would saddle the government with huge unknown liabilities. Republicans wanted the law to require us to implement an insurance program.

We didn’t think the insurance idea was terrible, per se. It had just not been thought through. House Republicans asked us to draft the language, and Neel Kashkari explained to their staff the different ways you could price and score the insurance: you could limit it to $700 billion worth of assets, less premiums received, or you could limit it to $700 billion worth of premiums, which would be a very powerful program capable of insuring trillions of dollars in assets. Republicans chose to limit it to covering $700 billion in assets, aiming to protect the taxpayers through the premiums collected on the insurance.

Our compromise was to word the bill to require Treasury to set the insurance premium at a level that would ensure that “taxpayers are fully protected.” In other words, we would have to price the insurance at such an expensive rate that no one would use it. I explained how this language would work to Conrad and he was comfortable with it.

Harry Reid, responding to my earlier calls to him and to Obama about the lack of progress, had returned to the Capitol later that evening and spent time alone with Nancy Pelosi. Shortly after 11:00 p.m. the principal negotiators reconvened in the Speaker’s office, having worked out our major differences, with two exceptions. One was Nancy’s industry tax; the other was executive compensation. It was late and everyone was tired, but Nancy pushed us all to compromise.

“We can’t leave here,” she said. “The American people expect a deal. The markets expect a deal.”

Judd Gregg stayed to work on the tax with Nancy, Rahm, and Barney Frank, and the trio of Democrats agreed to his idea of making the language open-ended: if after five years of TARP taxpayers ended up behind, then the president at that time could propose that Congress enact a tax to have the industry pay for any losses generated by the program. We knew this would not unsettle the markets, which would see the provision as toothless.

Neel Kashkari and I met with Schumer, Dodd, and Baucus in Nancy’s conference room to find a solution for the impasse over executive pay. Schumer had been pushing to force banks to retroactively cancel all their golden parachute contracts. We said that was practically impossible. Finally, Schumer suggested, “What about no ‘new’ golden parachutes?” We hadn’t thought of that option, and we all took a break to discuss it.

Exhausted, I went back to the small office I was using and had a bout of the dry heaves in front of Judd Gregg. I wasn’t that sick, but I made a lot of noise, which seemed to galvanize Rahm Emanuel.

“We need to get everyone back together again and get this thing done,” he said.

Harry Reid came in and asked if I needed a doctor. I said no, I was just tired. It was around midnight, and I was sitting down and talking with Neel and Kevin Fromer when Schumer, Baucus, and Dodd entered the office. We agreed to Baucus’s provision to cap tax deductions on executive pay above $500,000 and to ban new golden parachutes for executives of failed companies. We took care to specify that firms needing special assistance should have tougher compensation restrictions than firms that were simply participating in TARP-related sales of assets. Neel grabbed a sheet of Nancy’s letterhead stationery, wrote out the basics of our agreement, and later made copies for everyone.

Finally, we had the framework of a deal: workable language on tranching; compensation restrictions for the executives of companies participating in TARP; multiple levels of oversight that nonetheless allowed us flexibility to act effectively; a provision for the government to receive warrants that could be converted into the stocks of participating companies; and a vague nod at recoupment through a potential industry tax. The language would be finalized that night, and the House would vote on the bill on Monday.

In a celebratory mood, Pelosi, Reid, Dodd, Frank, Schumer, and I walked together to Statuary Hall to announce the deal. As we approached a bank of microphones set up amid the marble images of famous Americans, Schumer put his arm around me, and I put my arm around him. Although I took this as a sign of camaraderie, he later told the press that he had had to steady me. I must have looked very tired.

I was pleased with our progress, but while I felt some relief, I knew that as yet nothing was finished. We still had to design the program, hire people, implement it, and do all of this in time to help the market. But things seemed better than they had in weeks. TARP was moving along, and Wachovia looked like it would soon be in new, safer hands.

Perhaps I should have foreseen the problems ahead, but for a moment that night, as I fell asleep, I just felt good.

When I rose a few hours later, I learned that Wells Fargo chairman Dick Kovacevich had spoken that morning over breakfast with Bob Steel and wanted to buy Wachovia outright. Wells appeared to be willing to pay a price above the market, which surprised me, considering the dire circumstances surrounding Wachovia. I was hopeful a deal could be reached by the end of the day. Wells was a rare exception in an industry littered with struggling banks. Although Wells had taken losses on credit cards and mortgages, it had maintained high lending standards when its competitors relaxed theirs. As a result, it was in a relatively strong position.

Meanwhile, up on the Hill, Kevin Fromer, Bob Hoyt, and Neel Kashkari were working against the clock to negotiate the many remaining details and turn them into legislative text. Getting the language just right was our most important task.

On Sunday evening I asked Ben Bernanke to make calls to help me drum up support for TARP from the House Republicans. I thought they were getting tired of hearing my voice—and of hearing the Democrats praise me. People had told me that Ben and the president might be more effective. The president gladly pitched in, but the exercise would prove very discouraging to him, because most of those he called ended up voting no. Ben had much the same experience with his list.

That night I briefed the president and Josh Bolten on Wachovia. I told them that I was cautiously optimistic that Wells would buy Wachovia, but noted that without a buyer, the bank would fail unless it received government support. The weakened market needed us to stand behind our major institutions.

I explained that for the first time in U.S. history, the government might have to invoke the imminent danger of systemic risk to bail out a bank. By law the FDIC could provide financial assistance to failing banks and thrifts as long as whatever method it used—a loan, say, or a cash contribution—cost less than outright liquidation. Congress had wanted to make sure that shareholders of these troubled institutions did not benefit from taxpayer money, and the FDIC Improvement Act of 1991 allowed only one way around the “least cost” requirement: if the FDIC believed that the institution’s failure would seriously hurt the economy or financial stability, it could invoke the “systemic risk” exception. Doing so required the approval of the Treasury secretary (after consultation with the president), two-thirds of the Federal Reserve Board, and two-thirds of the FDIC’s board of directors. Congress intended the exception to be used only in the most dire of circumstances, and it had never been invoked before.