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

But I felt we could point to any number of successes, from securing TARP’s passage to the money market fund guarantee, our efforts at international coordination, and the bank capital program. But that night as I tossed and turned, I wondered if my recent decisions had only added to the confusion, suspicion, and fear that so many citizens felt. In spite of all we had done, the country was heading deeper into an ugly recession, and one of its biggest banks was on the verge of collapse.

The rare bright spot in recent days had come with the G-20 leaders’ meeting on November 15. It was a signal achievement of President Bush’s to have brought together countries as diverse as Germany, Saudi Arabia, and Mexico to address the global financial crisis and shape a communiqué that embraced free-market principles while recognizing the need for financial reform. Even as some leaders of the developed countries apologized for the mistakes of our free-market system, their counterparts among the emerging nations warned of the dangers of overregulation. But overall, the meeting had been marked by earnest cooperation, with all the leaders rejecting protectionism and agreeing that reform efforts would be successful only if there were a commitment to free-market principles.

Once the leaders left, however, I had returned to unpleasant political realities, and on November 17 Ben and I were once again sitting at Nancy Pelosi’s long conference table, surrounded by Democratic representatives and senators. Looking around the room, I saw no friendly faces.

“Don’t you want to show those of us who voted for TARP that some of the money is going to foreclosure relief?” Nancy asked pointedly.

Although I assured the lawmakers I would keep working to find ways of reducing foreclosures beyond our loan modification plans, they weren’t convinced. This wasn’t political theater. It didn’t matter that TARP had been created as an investment program to prevent the collapse of the financial system or that we needed to conserve our limited resources in such a volatile market. They all wanted a spending program and a piece of me.

The next day, November 18, Ben, Sheila Bair, and I testified before Barney Frank’s Financial Services Committee. I had endured some rough hearings on Capitol Hill, but this was the toughest one chaired by Barney. He displayed four pages of excerpts from the TARP legislation that he said authorized aggressive action on foreclosures. New York Democrat Gary Ackerman said, “You seem to be flying a $700 billion plane by the seat of your pants.”

Maxine Waters piled on. “You, Mr. Paulson, took it upon yourself to absolutely ignore the authority and the direction that this Congress had given you,” she intoned.

Then, just a few hours later, Bob Rubin, now a board director and senior counselor at Citi, called to tell me that short sellers were attacking the bank. Its shares had closed the day before at $8.36 and were sinking deeper into single digits. I had known Bob for years, first as my boss and the former head of Goldman Sachs, then as Treasury secretary under President Bill Clinton. Always calm and measured, Bob put the public interest ahead of everything else. He rarely called me, and the urgency in his voice that afternoon left me with no doubt that Citi was in grave danger.

Exhausted and demoralized, I gave up on sleeping and switched the hotel room television on to CNBC. Normally I didn’t pay much attention to the talking heads, but that morning I listened glumly as market participants and traders blamed the ongoing financial crisis on me and my decision to drop the asset-buying plan.

Feeling low, I made my first call of the day, at about 5:30 a.m. Pacific time, to Tim Geithner in New York.

“I feel responsible for this mess,” I told him.

“Hank, you’re doing your best. Don’t look back,” he said.

Tim’s steady, no-nonsense manner quickly braced me, focusing me on the crisis we faced. Speculators were pushing Citi’s credit spreads wider, while short sellers continued to drive its stock down. We needed to get our teams together. Ninety minutes later, Tim and I held a conference call with Ben, Sheila, and John Dugan.

“We’ve told the world we’re not going to let any of our major institutions fall,” Tim asserted. “We’re going to have to make it really clear we’re standing behind Citigroup.”

I left the inn for the Reagan Library. It was a beautiful Southern California morning, but I was too tense to enjoy it. Before my 11:00 a.m. speech, I toured the library, where the president’s writings were framed on the walls. I stopped to read his words, neatly written in longhand, and I reflected on what an extraordinary communicator he had been. He understood the immense power of a clear message, delivered simply and straightforwardly. And his message had been clear and simple. More than any other president, Ronald Reagan represented the free-market principles I had long believed in.

As I was about to address an audience of Reagan conservatives, I was struck by the irony of my situation. To protect free-enterprise capitalism, I had become the Treasury secretary who would forever be associated with government intervention and bank bailouts. The speed with which the crisis hit had left me no other choice, and I had set aside strict ideology to accomplish the higher goal of saving a system that, even with all its flaws, was better than any other I knew—I had been forced to do things I did not believe in to save what I did believe in. Now here I was, about to deliver a speech explaining these government bailouts to a gathering of conservative true believers in a shrine of free-market capitalism. And if that weren’t irony enough, I knew that if our rescue of Citi failed, all of our efforts to date would have been in vain.

A short while later I addressed the group, taking them through each step of the crisis and stressing the need for global regulatory reform. But I realized straightaway that my speech was too defensive and complex—and too long. The audience was friendly and supportive, but these were staunch Republicans who just hated bailouts. The one big round of applause I got came when I said we shouldn’t use TARP money to bail out the automakers.

Afterward, I touched base briefly with Bob Rubin. “Things aren’t good,” he said in his typically low-key way. As its shares sank and the press speculated about a government bailout, Citi’s customers were increasingly nervous.

At lunch I listened to some of the members of the audience talk about the losses they and their friends had taken on their houses and in the market. They weren’t criticizing me—on the contrary, they thanked me for my hard work. But my doubts from the night before returned. I felt responsible for their suffering and for all that had gone wrong.

Uneasy, I spoke to Ken Lewis and Jamie Dimon at the airport before boarding my 4:00 p.m. flight. Both reported that the markets were tough and that everyone was watching Citi, whose shares ended the day down a further 26 percent, at $4.71. The broader markets were taking their worst hit in years. The Dow dropped 5.6 percent to 7,552, and the S&P 500 fell to its lowest close since 1997.

I buckled my seat belt before takeoff and began to sketch out a plan of attack for the next day. We had so much riding on a Citi rescue, and we had to find a way to discourage short sellers from turning on another bank. My mind churned. But the strains of the day had taken their toll on me, and I fell asleep before takeoff. I didn’t wake up until almost midnight, as we circled before landing. When we touched down on the runway, I remembered the president’s last words about Citigroup before I left the Oval Office a day earlier: “Don’t let it fail.”