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

Despite such concerns, the idea of government guarantees to stabilize the banks was appealing: just announcing, as we had ten days before, that we would guarantee money funds had calmed that critical corner of the market.

“What you really need is for the president to get the authority to guarantee any liabilities for financial institutions,” Tim said. He was probably right about this bold idea, but those of us dealing with Congress knew it would be impossible to get it approved. We were having enough difficulty winning temporary authority to invest in assets.

Later Tuesday afternoon, during another conference call, Sheila Bair weighed in. The FDIC chair also worried about the destabilizing impact of big transaction accounts’ leaving banks—after all, that was exactly what had happened to Wachovia—and she, too, strongly supported the idea of an unlimited transaction account guarantee.

Before the Senate took up TARP the next morning, the administration pressed for and received an increase in deposit insurance to $250,000.

On Wednesday, I joined Ben for his monthly lunch with the president. There was no agenda, and we spent much of the meeting talking about TARP’s legislative prospects and the fragile markets. I always told President Bush what was on my mind, and that day I said that even though Congress had not yet approved the asset-buying plan, Ben and I were beginning to think we might also need a program that would let us take direct equity stakes in financial institutions.

“You’re still going ahead with your illiquid asset purchase plan?” the president asked.

“Of course,” I said, adding, though, that we might have to move more quickly to stabilize the financial system.

President Bush knew that we weren’t exaggerating. Since September 18, when we had first presented our plan to buy toxic assets to him, the markets had deteriorated badly—far worse, and on a far wider scale, than any of us could have imagined.

Harry Reid pulled out all the stops in the Senate to get TARP approved on Wednesday night, October 1. Emphasizing the gravity of the occasion, he required all senators to vote while in their seats, and the bill, which was sweetened with tax extenders, energy provisions, and a mental health parity bill, passed by a solid bipartisan margin of 74 to 25.

With Senate approval, TARP’s success now depended once again on the House, where Barney Frank was working hard to push things along. To win Democratic votes, he pressed us to do something about homeowner relief. We were committed to foreclosure mitigation and pointed out that to the extent we bought illiquid assets we’d have more leverage in working with banks to that end. But I declined to give Barney a letter he requested explaining our position that he could use to reassure his caucus. There wasn’t much I could say in writing that I hadn’t said all along, and I was concerned a letter would annoy House Republicans, who opposed foreclosure mitigation, and end up costing us more votes than we gained.

Even as we pushed to gain House support, we got hit with a surprise when the Wachovia deal with Citi was suddenly thrown into doubt. I had heard from Ken Wilson that Wells might enter the picture again, and I had given Sheila and others a heads-up. Then on Thursday afternoon, while I was running on the treadmill at the gym, Ken phoned to tell me it was definite: Wells had called to say it was going to make a new offer for Wachovia. Wells had determined it would reap significant tax benefits from the deal.

“They’re coming in,” he said.

“Ken, first of all, they shouldn’t be coming to us, they should go to the Fed. I don’t want them calling me directly. Second, they jacked around with us before. They missed their chance. This deal has already been announced.”

“I’m just telling you that Wells Fargo is coming in, and as I understand it, they don’t want any government money,” Ken said. The bank was prepared to make a firm offer without any contingencies.

I stopped my workout and went to a small office in the gym. I quickly called Kevin Warsh, Tim Geithner, and Joel Kaplan to alert them to what had suddenly become an extraordinarily complex situation. Tim was furious. He believed that if the Wells proposal was accepted and the Citi agreement scrapped, it would undermine confidence in the government’s ability to make deals and would potentially destabilize Citi. These were real concerns. I knew Citi had problems of its own. However, the Wells offer was better for taxpayers—it required no public money.

Later, back in the office, I spoke again with Kevin Warsh and said, “I’ve got to tell Sheila.”

She hadn’t yet heard the official news. I knew she would take the new offer seriously and do what she had to do, placing a high priority on reducing the cost to the government. But I reminded her that she needed to be careful: the Wachovia-Citi deal had already been announced, and Wells had walked once before. She thanked me, and the next thing I heard, Wachovia had a new deal—with Wells.

Later I met with Neel Kashkari, Jim Wilkinson, and Joel Kaplan to tell them that in anticipation of TARP’s passing the next day, I was going to name Neel interim assistant Treasury secretary, in charge of running the new program. Though I was concerned that he might be perceived as just a junior Goldman Sachs banker who had come to Washington to work with me, naming him was an easy decision. Neel was well suited for the job: he was tough and brave, and knew how to get things done quickly.

On Thursday night, Wells Fargo made a bold offer of $15.4 billion that Wachovia’s board accepted. Wells Fargo planned to keep Wachovia intact, and though it estimated that it would take lifetime losses of $74 billion on Wachovia’s loan portfolio, it would seek no government assistance. To seal the deal, Wachovia issued Wells Fargo preferred stock worth 39.9 percent of its voting power.

The next morning, Citi responded with a statement saying that the transaction breached an exclusivity agreement Wachovia had signed the previous Sunday. Citi threatened to sue, but there was little that the Fed or the FDIC could do, as this was a private takeover and taxpayers were not at risk.

I had been exchanging calls with Tim, Sheila, and Kevin Warsh on the Wachovia situation when Nancy Pelosi called to say that although it had been a long fight, the prospect of TARP’s passing the House on Friday looked good.

The Speaker was right. At 1:22 p.m. on a sunny autumn afternoon, the House passed the Emergency Economic Stabilization Act of 2008 by a margin of 263 to 171, with 91 Republicans voting for the legislation. The yes votes included 32 more Democrats and 26 more Republicans than the first vote had.

Indeed, it was remarkable that in the closing days of its session, one month away from a hotly contested national election, a Democratic-controlled Congress had responded so quickly to the pleas of an outgoing, and unpopular, administration for a combination of spending authorities and emergency powers that were unprecedented in their scope and flexibility.

For the rest of the day, I took a host of congratulatory calls, but they all came with the same warning: move fast. French finance minister Christine Lagarde jarred me when she emphasized how shaky the European markets were. Europe’s banking problems had been building day by day. Ireland’s decision earlier in the week to guarantee bank deposits had caused money to flee the U.K. for safer Irish accounts; on Friday, Britain was forced to raise the limit on its own deposit insurance. French president Nicolas Sarkozy was convening an emergency minisummit in Paris the next day to deal with the financial crisis.