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

Joel Kaplan kept a block calendar on the wall of his modest White House office that showed the days left before the new administration swept in on January 20. Kevin Fromer, Dave McCormick, and I had come to the White House late on the afternoon of November 25 to talk about getting Congress to release the second half of TARP. Joel, Josh Bolten, and Keith Hennessey used the calendar to demonstrate how little time remained to get anything accomplished between annual government spending bills and dealing with the automakers.

Joel believed that the best course was simply to wait and let Obama take down the rest of TARP when he came into office. But since I had strongly advised both Joel and President Bush that this would be imprudent, he suggested that we try to link arms with the Obama team to act on TARP and autos in December. Joel, who doubled as the White House’s point man on autos, said we needed to deal with the carmakers, either through a TARP loan or separate legislation. We all understood that GM would file for bankruptcy by year-end if it didn’t get financial assistance.

To me, a 76-day transition period between administrations was a barbarically long time to be without adequate resources. Earlier in the afternoon I had called Rahm Emanuel to tell him we needed to take down the last $350 billion. “That is not good news,” he said, and he recommended that I call Larry Summers.

I got home shortly after 7:30 p.m. and was buoyed by the sight of my daughter, Amanda, her husband, Josh, and little Willa, my granddaughter. The next day we were all going to Little St. Simons Island for Thanksgiving. I only needed to hear Willa say, “Boppa, I want to cuddle,” then climb onto my lap with her blanket, to forget the credit crisis for a few minutes.

But soon I needed to call Larry Summers to explain that we didn’t have enough approved TARP money left to protect the system.

“What do you think you will need to get the rest?” he asked.

“I think we’ll have to give Congress some clarity on what we’re going to use it for,” I answered. “We’re going to have to commit to a mortgage relief program and a solution on autos.”

“Do you think it would be sufficient to say that there’s going to be a program spending up to $50 billion for mortgage relief and that Obama will determine what the program is?”

“I would far prefer that to proposing a program ourselves,” I said, knowing full well President-elect Obama would want to choose his own program.

Overall, Larry was noncommittal, but he asked whom on my staff the transition team could work with. I was hopeful the Bush and Obama teams would work together successfully on a plan.

By midmorning on Wednesday, Wendy and I were kayaking toward Little St. Simons Island, while Amanda, Josh, and Willa rode the ferry. The day was windy and refreshing, and the brisk salt air and exercise relieved much of my tension. We picnicked on the beach that afternoon, and I made a few more calls before turning off my phone for the first time since August.

I had one of my best Little St. Simons fishing days on Thanksgiving, followed by a turkey dinner on the beach. Standing on one of my favorite spots on earth—beside the ocean, surrounded by birds—and watching Willa spot a bald eagle, I felt for a moment that my problems weren’t that huge.

Friday morning, however, I turned my phone back on and spent much of the day on the phone. Josh Bolten had invited the Obama economic team to sit down with us on Sunday to discuss getting access to the rest of the TARP funds and to devise a solution for the automakers.

That weekend, Joel came up with a proposal: Car companies seeking government loans would present detailed plans for their future to a financial viability adviser, or “auto czar,” whose appointment would be agreed upon by President Bush and Obama. While the czar assessed the plans, Treasury would make a short-term bridge loan to the companies—say, to March 31. If an automaker failed to provide an acceptable plan, the adviser would create one, with options including a Chapter 11 reorganization. Joel’s proposal required that Obama publicly support the Bush administration’s policy that the automakers needed to be on a path for viability before they could get TARP money.

Getting the Obama team to meet proved to be a challenge. Rahm Emanuel declined to attend, and the president-elect’s people wanted the meeting to take place at Treasury rather than the White House, presumably so as not to appear to be working too closely with the Bush team.

The meeting was set for 4:00 p.m. the Sunday after Thanksgiving, in my office. Larry Summers arrived early, accompanied by Dan Tarullo, Obama’s economics adviser. As the former Treasury secretary walked around the anteroom of his old office, he paused in front of a large photograph of a gathering of former Treasury secretaries taken at a dinner George Shultz had given in my honor in 2006. Larry liked the picture so much we later made him a copy.

The Bush contingent consisted of Josh, Joel, Keith Hennessey, Commerce secretary Carlos Gutierrez, Dan Meyer, and me. The Obama team also included Mona Sutphen, future deputy chief of staff for policy, and Phil Schiliro, legislative affairs specialist. After a few pleasantries—and Larry’s request to keep these exploratory discussions confidential—Josh opened by saying I wanted Congress to give us access to the rest of TARP, and that would happen only if Obama led the effort. I laid out my suggestions for using the last tranche, which included a foreclosure program, the TALF, and funds for contingencies and future Obama programs. Joel outlined the plan for automakers.

Other than Larry, Obama’s people were quiet and seemed on guard. They asked a lot of questions but offered no suggestions for how we might work together. Though the meeting was polite, I quickly realized that we weren’t getting anywhere. Larry clearly didn’t like our idea for the car companies, preferring not to be bound by the Bush administration’s viability test and an independent auto czar. When the meeting ended, so did my hopes of getting Obama’s people to support me on getting the final tranche.

The next day, the markets turned ugly again, as the National Bureau of Economic Research announced that the U.S. was officially in a recession and had been for the past year. The Dow plunged 680 points, or 7.7 percent; frightened investors piled into 10-year Treasuries, pushing the yield down to 2.73 percent, the lowest point since the 1950s.

On Tuesday, GM and Chrysler sent letters to Congress asking for emergency loans of $4 billion and $7 billion, respectively. (Two days later the auto executives themselves would arrive, in fuel-efficient hybrids this time.) But House and Senate Republicans remained adamantly opposed to bailing out the automakers. That didn’t bode well for getting the final tranche of TARP. Democrats would not release it without an auto provision, and Republicans would not approve it if it contained an auto bailout.

The streets of Washington were cold and grim on the afternoon of December 2, when I left for Beijing to attend my final Strategic Economic Dialogue as Treasury secretary. We had two days of productive sessions, which included announcing a number of programs for the U.S. and China to cooperate on energy and the environment. We had selected these initiatives knowing they would hold bipartisan appeal in the U.S. and would help ensure the continuation of the SED into the next administration.

In my concluding meeting with President Hu Jintao in the massive Great Hall of the People, he emphasized the important contribution SED had made to strengthening U.S.-China relations, and he encouraged me to come back soon after I left Treasury. As was our custom, Hu and I then adjourned to a private meeting, where I assured him that the relationship between our countries would only improve and advised him to avoid protectionist moves on currency and trade.