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

The CEOs listened intently, plying us with questions throughout. Some were more clearly enthusiastic than others. Dick Kovacevich indicated his discomfort, arguing that Wells Fargo was in good shape. It had recently acquired Wachovia and planned to raise $25 billion in private capital—exactly the amount regulators now wanted him to take from the government.

“How can I do this without going to my board?” I remember him saying. “What do I need $25 billion more capital for?”

“Because you’re not as well capitalized as you think,” Tim calmly replied.

I knew as well as anyone how this worked. Right up until they failed, even the weakest banks claimed that they didn’t need capital. But the fact was that in the midst of this crisis the market questioned the balance sheets of even the strongest banks, including Wells, which now owned Wachovia with all of its toxic option ARMs. Our banking system was massively undercapitalized, though many banks did not want to acknowledge it. Every bank in the room would benefit when we restored confidence and stability.

“Look, we’re making you an offer,” I said, jumping in. “If you don’t take it and sometime later your regulator tells you that you are undercapitalized and you have to raise private-sector capital but you are unable to do so, you may not like the terms if you have to come back to me.”

Ben joined in to say that the program was good for the system and good for everyone. He said the meeting had been very constructive and that it was important for us all to work together.

Later press reports would highlight the difficulties of the meeting, but it went much better than our expectations. These CEOs were smart people used to negotiating and raising issues. But for some, there was no discussion necessary.

“I’ve just run the numbers,” said Vikram Pandit. “This is very cheap capital. I’m in.”

“I don’t really think that all of us are the same, but it’s cheap capital,” Jamie Dimon pointed out. “And I understand it’s important for our system.”

John Thain and Lloyd Blankfein raised a number of issues concerning such matters as share buybacks, the size of the warrants, and the redemption of the preferred. John also asked a number of questions about executive compensation. “Will these terms change when a new administration comes in?” he asked. I told him that the CPP was a contract he could count on and that we were including all of the pay requirements specified in the TARP legislation. But we did note that there was no protection against any new legislation.

At this, Ken Lewis, who had been silent throughout the meeting, finally spoke up.

“I have three points,” he said in his soft-spoken way. “One, if we spend another second talking about executive compensation, we are out of our minds. Two, I don’t think we should talk about this too much. We’re all going to do it, so let’s not waste anybody else’s time. And three, let’s not focus on how this hurts or helps each of our institutions, because it’s going to have strengths and weaknesses for some—for example, the unlimited guarantee for transaction deposits is going to hurt us significantly. But let’s just cut the B.S. and get this done.”

Each CEO was handed a sheet of paper with our basic terms on it. The banks were asked to agree to issue preferred shares to the Treasury; to participate in the FDIC guaranteed-debt program; to expand the flow of credit to U.S. consumers and businesses; and to “work diligently, under existing programs, to modify the terms of residential mortgages, as appropriate.” There were empty spaces on the sheet where the CEOs were to write in the names of their institutions and the amount of capital they were getting from the government, as well as lines where they would sign their names and fill in the date.

John Mack signed his agreement right then, in front of all of us.

“You can’t do that without your board,” Thain said.

“I’ve got my board on 24-hour call,” Mack assured him. “I can get this done, no problem.”

Kovacevich, for his part, said he couldn’t get approval from his board that quickly. I said I wanted him to try.

The meeting ended by 4:10 p.m., just after the market had closed. We had arranged things so that each CEO could go off to an office in the Treasury Building and make the necessary calls to his board and top staff to analyze the offer and get the necessary approvals. David Nason and Bob Hoyt visited each of them and answered questions. I went back to my office and started calling the congressional leaders and the presidential candidates so they wouldn’t hear about the meeting through leaks.

On the whole, the Hill leaders were encouraging. Barney Frank understood immediately as I explained our action to him. Spencer Bachus had raised the idea of equity purchases in the early days of TARP and supported us, as did Chris Dodd. Nancy Pelosi couldn’t resist pointing out that the Democrats had wanted this all along. Roy Blunt, who had worked hard to rally Republicans behind TARP, noted, however, that “this is going to be a surprise to the country and to a lot of Republicans.”

After lending his support the day before, Jeff Immelt now called to tell me that the capital program would hurt GE. “We are actually lending, we’re bigger than most of these banks, and we’re being left behind,” he said. He told me his people were nervous. “I’m not trying to make you feel bad; I stand by what I said. We are better off with this program than without it. I just have to tell you, I’m worried about my company and our ability to roll over paper in the face of this.”

While I went through my calls, people came in and out of my office giving me reports on the CEOs: Pandit had signed; Kovacevich signed but refused to fill in the dollar amount Wells would receive—a protest, I suppose, at being forced to take the money. Jamie Dimon gave his signature, but, I later learned, he told Bob Hoyt to hold his acceptance in escrow until everybody else had signed. (He also gave Bob his personal cell phone number, saying, “Call me and tell me when everything is done. Then throw this number away after you use it.”)

As we had hoped, each of the nine CEOs signed on that day, and we never had to reconvene.

And the day kept delivering good news. The torrid start overseas had spread to the U.S., reflecting market optimism about government actions to solve the global financial crisis. Even as we were meeting with the financial industry’s most important CEOs, the Dow posted its biggest-ever point gain, jumping 936 points, or 11 percent, to 9,388.

Shortly after I got the word that all the CEOs were on board for the CPP, Wendy called me from the White House. She was at the Columbus Day state dinner for Italian prime minister Silvio Berlusconi, and I had to strain to hear her voice over the background noise. She said that the cast of the Broadway show Jersey Boys was going to be singing some of my favorite Frankie Valli songs.

“The president wants you to get over here,” she said.

I told Wendy I would see her soon.

Sitting back and letting out a long deep breath is not what I do best. But on Tuesday, October 14—after we’d all been working nonstop since August to keep disaster at bay—I finally had a chance to exhale and let down my guard for a moment. Things were finally looking up. The day before, the nine biggest U.S. banks had agreed to accept $125 billion in capital from the government, European leaders had announced plans to fix their own banking problems, and no critical institution appeared to be on the verge of failure.

Early that morning, Ben Bernanke, Sheila Bair, John Dugan, and I held a press conference in the Treasury Building’s Cash Room to explain the previous day’s moves. I tackled the controversial issue of government intervention head-on, pointing out that we had not wanted to take such actions—arguably the most sweeping in banking since the Great Depression—but that they had been needed to restore confidence to the financial system.