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

Early Sunday morning, I returned to Treasury and was not surprised to learn that we still had plenty of work to do. Once again, surrounded by the empty soda cans and half-eaten sandwiches of another frantic weekend, we raced against time to announce a deal before the Asian markets opened.

Still, progress was painfully slow. Some of the regulators complained that Citi lacked a sense of urgency. Bob Rubin called to say that Citi was not being given clear direction. The confusion came in part because Tim would not talk directly with the bank—we had lost a key negotiator. I asked Dan Jester and David Nason to take the lead on all calls with Citi from then on.

By evening, thanks in large part to Dan and David, we had made it work. We all agreed on the loss sharing on the $306 billion in identified assets. Citi would absorb the first $29 billion in losses in addition to its existing reserves of $8 billion, with the government taking 90 percent of the hit above that. The first $5 billion of government exposure would come out of TARP, and the FDIC would take the next $10 billion. The Fed would fund the rest with a non-recourse loan. To bolster Citi’s capital, the U.S. would invest $20 billion in return for perpetual preferred shares yielding 8 percent. It would receive an additional $7 billion in preferred shares as a fee for the guarantee, in addition to warrants equivalent to a 4.5 percent stake in the company.

Citi would face tough restrictions, including limits on executive compensation more stringent than those in our capital program. The bank would be prohibited from paying more than one cent per quarter in dividends on common stock for three years without U.S. government approval. Citi would also implement the FDIC’s IndyMac Protocol on mortgage modifications.

I was quite pleased with our solution, as I felt it validated my decision not to use TARP money to directly purchase illiquid assets. With another bank on the brink, we had needed a quick solution that used up as few of our scarce resources as possible. Had we bought Citi’s $306 billion of bad assets directly, we would have had to write a check from TARP’s fund. Instead, we creatively combined powers with other agencies and shared the risk of losses with the FDIC and the Fed.

Kevin Fromer and I called to update congressional leaders, who were glad to hear we’d averted disaster. But the Democrats made it clear I would now have to do something to help the automakers. Their message: “You can’t just take care of fat-cat Wall Street bankers and ignore the plight of working Americans.”

Early that evening, I called the president. I explained that we had fashioned a plan we believed the market would accept, enabling us to avoid a chain reaction of failures.

“Will it work?” he asked.

“I think so, but we won’t know until the morning.”

At 7:35 a.m. on Monday, I spoke again to the president, and I had good news to report. Asian stocks were flat overnight, but European markets were soaring, on their way to 10 percent gains. Now President Bush turned one of my favorite expressions on me.

“How many sticks of dynamite are you going to need to break this crisis?”

“I don’t know, sir,” I answered. “But the way things are going, I may have to put one in my mouth and light the fuse.”

After the president stopped laughing, I told him that I sometimes felt like Job. If something could go wrong, it would. But he told me, “You should welcome the challenge, Hank. Thank goodness the crisis happened when it did. Imagine if it had hit at the beginning of a new administration, when they were just learning how to work together.”

It was the start of a great morning. Citi’s shares jumped by more than 60 percent at the opening of trading. I was pleased that our rescue plan had punished the short sellers and thereby averted similar attacks on other banks.

Feeling as good as I had in weeks, I took a brief break from Washington to support Wendy. That evening, the Randall’s Island Sports Foundation in New York City was honoring her for her work in environmental education. Late in the afternoon, I flew to New York to attend the benefit dinner at the Plaza Hotel.

Wendy had been a great source of strength for me, bucking me up through the long string of crises, but the lengthy workdays and nonstop stress had robbed us of any quality time together. I went to the office early every morning and came home late, and if I didn’t get right on the phone, I often went straight to bed. Wendy and I rarely had dinner together, and when we did, I was distracted. Worst of all were the times I was physically present but mentally elsewhere. Wendy said she felt as if she’d lost her husband and best friend.

The evening also gave me a chance to reconnect with old friends, but during the predinner cocktail party I had to duck out of the room a few times to take calls, including two from Nancy Pelosi, who told me point-blank that it was politically impossible to rescue Citi and not help the automakers. She had until recently opposed bailouts for the car companies, which she considered poorly managed and which had done themselves no favors when their CEOs flew to Washington by private plane to beg for money. I reiterated my position that Congress should rescue them by amending earlier legislation that provided a $25 billion loan for fuel-efficiency improvements. I was worried that we didn’t have enough resources to take care of the financial system, much less the automakers, which couldn’t seem to come up with a plan for their long-term viability. Then I switched to the foremost issue in my mind—getting Congress to release the remaining tranche of TARP.

“We’re going to need more money from TARP,” I told her. “Do you realize what we just escaped with Citi?”

“It’s going to be very hard,” she said. “The American people don’t support it, and I don’t have the votes.”

I hoped Nancy would bite on my implied offer—agree to help release the remaining tranche, and we’d use some of it on the auto companies. But it was obvious that the politically astute Speaker didn’t want to do it. She knew that an auto bailout would depend on the Democrats—the Republicans were lined up against it—and she wanted me to fall on my sword by using TARP money for a very politically unpopular act.

At dinner, Wendy and I sat next to Mike Bloomberg, who was also receiving an award. When he spoke, the New York mayor graciously mentioned me, asserting that “no magic wand” existed to fix the financial crisis and that I had the support of everyone in the room. Wendy spoke so eloquently on teaching kids about nature that I wished I had taken some public speaking lessons from her.

The next morning, we caught an early flight to Washington. Back at Treasury, I stopped in the Markets Room and saw that the markets were reacting favorably to the Fed’s announcement of powerful new programs. One was the Term Asset-Backed Securities Loan Facility, or TALF. This program was the culmination of the efforts of the Fed, working with Steve Shafran at Treasury, to unclog the market for securitized consumer loans for cars, credit cards, college expenses, and small businesses. It was designed to pump $200 billion into the credit markets through a one-year loan facility set up by the Fed and backed by $20 billion of TARP funds.

The Fed also announced that it would buy up to $100 billion worth of debt issued by Fannie Mae, Freddie Mac, and the Federal Home Loan Banks, as well as $500 billion of mortgage-backed securities guaranteed by Fannie, Freddie, and the Government National Mortgage Association, better known as Ginnie Mae. Treasury had been purchasing GSE-guaranteed debt at a much more modest level, and the Fed’s announcement had an almost instantaneous effect: rates on 30-year mortgages dropped by as much as half a percentage point, while Fannie and Freddie securities increased in value, cheering capital markets. The Dow appeared set for another strong session. Over the past three days, it had surged 927 points, or more than 12 percent.