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

This Warren turned out to be quite a handyman, too.

Shortly after 9:00 a.m. Sunday, I called Jeff Immelt at GE to feel him out about the government guarantee on bank debt that we’d been debating. Because it was not a bank, GE would not be eligible for such a program and might be disadvantaged competitively.

“I don’t think we can do anything for GE,” I said, “but would you rather we do it or not do it?”

“That’s an easy question,” he said. “Maybe a lot of my guys would disagree with me, but the system is so vulnerable you should do whatever you can do, and we’ll be better off than if it hadn’t been done. And if we’re not, it’s still something you’ve got to do.”

Jeff’s answer impressed me. How many other CEOs in his position would have taken such a broad perspective?

The Treasury team had once again worked late into the night—this time on the capital purchase and guarantee programs, and at 10:00 a.m. a weary but highly focused group gathered in my large conference room. We were joined by Ben Bernanke, Tim Geithner, Sheila Bair, Joel Kaplan, and Comptroller of the Currency John Dugan. For the next three hours, we sweated out the details of the plan we would unveil the next day.

I briefly recounted my conversation with Buffett, saying that I now favored using preferred stock with a dividend starting at 5 percent and increasing eventually to 9 percent. The regulators agreed to tweak their rules to allow this to qualify for tier-1 capital treatment for bank holding companies that already had substantial amounts of preferred stock.

Now that we had a plan, I was ready to debate it. Playing his assigned role as devil’s advocate, David Nason argued that the FDIC guarantee would distort the market. Every time you put the U.S. government behind one group’s paper, he said, you made it harder for another. In this case, we would crowd out industrial firms, or financial institutions that weren’t bank holding companies, making it harder for them to raise money. In the end, all of us, including David, believed that this was a step we needed to take.

Sheila continued to express doubts—the FDIC, after all, was plowing new ground. She wondered how appropriate it was to extend the guarantee to the debt of bank holding companies, rather than just to FDIC-insured banks. And she pressed to charge banks more to insure their unsecured debt. Tim maintained that the fee had to be low enough to encourage participation. Because I had a good working relationship with the FDIC chair, I met with Sheila alone several times that afternoon when the tension between Tim and her got too high or to reassure her that she was doing the right thing.

“Our whole financial system is at risk, and if everything goes down, so will your fund. The last thing everybody will ask is, ‘What happened to the FDIC fund?’” I remember saying. “Your decision will prevent a financial calamity, and Ben and I will support you 100 percent.” I also pointed out, “If we price this properly, you will make a lot of money.”

Extending the guarantee to the liabilities of bank holding companies was absolutely essential but a very difficult decision for Sheila. I told her that Treasury would use TARP to prevent bank holding companies from failing.

“I know how important this is. We’ve done a lot of work on it at the FDIC,” Sheila said. Despite her wavering, she finally agreed, acknowledging the support from Treasury and the Fed.

We decided to gather again late in the afternoon to nail down details as well as our plan for implementation. The capital and the guarantee programs had to be clear, easy to understand, and attractive. News was circulating that the U.K. would formally announce Monday that it was taking majority stakes in the Royal Bank of Scotland and HBOS. We had received a copy of the U.K.’s capital plan, and its terms were more punitive than the ones we were discussing.

The key for us was how to get as many institutions as we could to sign up for the capital purchase program (CPP), which is what we called our plan to inject equity into the banks. We settled on equity investments of 3 percent of each institution’s risk-weighted assets, up to $25 billion for the biggest banks; this translated into roughly $250 billion in equity for the entire banking system.

We wanted to get ahead of the crisis and strengthen banks before they failed. To do this, we needed to include the healthy as well as the sick. We had no authority to force a private institution to accept government capital, but we hoped that our 5 percent dividend—increasing to 9 percent after five years—would be too enticing to turn down.

We had designed the equity program so that banks would apply through their individual regulators, which would screen and submit applications to a TARP investment committee. But rather than wait for these applications to come in, we decided to preselect a first group, advising them as to how much capital their regulators thought they should take.

After the disastrous week we’d just finished, we needed to do something dramatic. So I thought we should launch the program by bringing in the CEOs of a number of the biggest institutions, getting them to agree to capital infusions, and quickly announcing this to the markets. Public confidence required that they appear well capitalized, with a cushion to see them through this difficult period.

We reasoned that if we got these major banks together, other banks would follow. The weaker institutions would not be shamed, and the stronger institutions could say they did it for the good of the system. If only weaker banks took capital, it would stigmatize—and kill—the program.

Treasury played no role in picking the first group of banks. That was done by the New York Fed, aided by the OCC. They chose systemically critical banks that together held over 50 percent of U.S. deposits. These were the four biggest commercial banks, JPMorgan, Wells Fargo, Citigroup, and Bank of America; the three former investment banks, Goldman Sachs, Morgan Stanley, and Merrill Lynch; and State Street Corporation and Bank of New York Mellon, two major clearing and settlement banks that were vital to the infrastructure. We thought it would be great news for the market to hear on Tuesday morning that these banks had agreed to accept a total of $125 billion in capital, or one half of the CPP.

It was up to me to call the bank chiefs and invite them to Treasury the next afternoon: Ken Lewis, Vikram Pandit, Jamie Dimon, John Thain, John Mack, Lloyd Blankfein, and Dick Kovacevich, who, as chairman of Wells Fargo, was the only non-CEO invited. We also invited State Street’s Ronald Logue and Bank of New York Mellon’s Robert Kelly. I wouldn’t tell them what the meeting was about—I simply said that it was important, that the others were coming, and that it ultimately would be good news. Kovacevich hesitated a bit—he had to come from San Francisco—but like everyone else agreed to meet on very short notice.

Through all the discussion and planning, we hadn’t lost sight of Morgan Stanley’s plight. Dave McCormick had raised the idea of sending a letter to the Japanese that would highlight the principles underlying any policy actions we might take and indicate our intention of protecting foreign investors. This would give the Mitsubishi UFJ leadership and board some needed reassurance.

I liked the idea, so Dave called the CEO of Mitsubishi UFJ and ran the idea of a letter by him. Dave reported that the Mitsubishi UFJ executive seemed positive, if noncommittal. He and Bob Hoyt then drafted the letter. It did not mention Morgan Stanley by name, nor did we offer any specific commitments. In essence, it simply restated the signals we had been sending publicly, but it was on letterhead from the U.S. Treasury and that did the trick. Once I had approved the draft, Dave sent it to the Japanese Ministry of Finance, which promptly sent it on to Mitsubishi UFJ. We received word an hour or so later that this would get the deal done.