Andrew Sorkin - Too Big to Fail - The Inside Story of How Wall Street and Washington Fought to Save the FinancialSystem--and Themselves

At around 4:00 p.m. on Thursday, September 25, leaders of both parties and of the relevant committees crowded around the large oval mahogany table of the stately Cabinet Room of the White House, joined by the presidential candidates, senators McCain and Obama. Seated at the middle of the throng were the president, Vice President Cheney, and Hank Paulson. The group had been assembled in an attempt to persuade House Republicans, who had been emboldened by McCain, to rejoin the negotiations and agree on a bailout.

“All of us around the table take this issue very seriously, and we know we’ve got to get something done as quickly as possible,” Bush told the group. “If money isn’t loosened up, this sucker could go down,” he warned, referring to the nation’s economy.

But the meeting quickly degenerated from a promising effort to reach a consensus into a partisan fracas after the House Republican leader, John Boehner of Ohio, announced that House Republicans would not support the bailout, but would instead propose an alternative that would involve insuring mortgages with a fund paid for by Wall Street. When Democrats protested that such a plan would do nothing to address the current crisis, arguments erupted throughout the room, followed by finger-pointing and shouting, a spectacle that Cheney sat watching with a smile.

Obama, in an attempt to reach a compromise, asked, “Well, do we need to start from scratch, or are there ways to incorporate some of those concerns?” But by then it was too late for any effort to find a middle ground, and the meeting ended with the various factions leaving the room without speaking to one another.

As the deflated Treasury team made their way to the Oval Office a staffer stopped to inform Paulson that the Democrats were gathering in the Roosevelt Room across the corridor.

“I need to find out what they’re doing,” Paulson mumbled, disappearing before some of the staff even realized he was no longer with them.

He marched into the middle of the scrum of Democrats, who were furious at the House Republicans’ campaign to undermine the rescue plan. Paulson could see that it was only moments away from collapsing.

To break the tension, he went down on one knee before House speaker Nancy Pelosi.

“I beg you,” he said in a heartfelt plea, backed by a chorus of chuckles from the congressmembers, “don’t break this up. Give me one more chance to bring these people in.”

Pelosi tried to repress a smile at the sight of the towering Treasury secretary genuflecting before her and, looking down at him, quipped, “I didn’t know you were Catholic.”

At 4:00 a.m. on Friday morning, Vikram Pandit, Citigroup’s CEO, was puttering around his Upper East Side apartment, catching up on his e-mail. He had gotten only a few hours of sleep, having arrived home late after spending the day at the Wharton School in Philadelphia, where he had given a lecture in which he told the audience, “You have been great at picking exactly the right time to be at school.”

His in-box was almost full, with e-mail traffic among his inner circle sharing the latest news: Hours earlier the Federal Deposit Insurance Corporation had swooped in to seize Washington Mutual, which held more than $300 billion in assets—making it the biggest bank failure in the nation’s history. The FDIC had already run a mini-auction for WaMu, the largest of the savings and loans, requesting best bids a day before its announcement, just in case. The FDIC typically conducts seizures of troubled banks on Friday evenings, to allow regulators time over the following weekend to ready the institution to open under government oversight on Monday. But WaMu was deteriorating so rapidly—nearly $17 billion had been withdrawn in ten days—that the regulators had no choice.

Pandit, who had himself submitted an early bid for WaMu, learned that his rival, Jamie Dimon, had won the auction, paying $1.9 billion.

As Pandit made his way through the stream of e-mails, one from Bob Steel of Wachovia caught his eye. He knew that Steel had called his office earlier that week, and he imagined he knew the purpose of that call: Steel was probably interested in selling the firm. To Pandit, Wachovia was an attractive purchase because of its strong deposit base, which Citi, despite its mammoth size, lacked. But he knew instinctively that he would be interested in such a deal only if he could buy the company on the cheap.

“I’m sorry, I’ve been away,” Pandit e-mailed Steel at 4:27 a.m. “But I’m back, call any time.”

Minutes later, Steel, who was also awake, phoned him.

Having been abandoned at the altar the previous weekend by Goldman Sachs and Morgan Stanley—and with Kevin Warsh still pressuring him—Steel was eager to line up as many options as possible, suspecting that the upcoming weekend could well turn into another merger sprint. He had also reached out to Dick Kovacevich at Wells Fargo, whom he had run into in Aspen the previous weekend, and had scheduled a breakfast with him at the Carlyle Hotel on Sunday morning.

If everything worked out the way he hoped, he might well be able to set up an auction.

After the fiasco of Thursday’s meeting, Paulson and the White House agreed that they needed to do everything possible to resume the talks on the bailout. “Time,” Paulson warned Josh Bolten, “is running out.”

By 3:15 p.m. on Saturday, September 27, Paulson and his Treasury team were heading down the hall of the Hill’s Cannon House Office Building to conference room H-230, where they would meet with congressional leaders one more time, in hopes of fashioning a compromise.

Kashkari, in a huddle with the Treasury team before the gathering, reminded everyone that the biggest hurdle they faced was that Congress did not truly appreciate the severity of the economy’s problems. “We’ve got to scare the shit out of the staff,” he said, echoing Wilkinson’s instruction to Paulson earlier in the week. “Let’s not talk about the legislation,” he urged, and suggested instead that they focus on the potentially devastating problems they would all face if the legislation wasn’t passed.

When Paulson arrived in the conference room, which was across from Pelosi’s office, he took note of the presence of Harry Reid, Barney Frank, Rahm Emanuel, Christopher Dodd, Charles Schumer, and their staffs; only the speaker herself was absent.

To underscore the significance and sensitive nature of the meeting, an announcement was made that all cell phones and BlackBerrys would be confiscated to avoid leaks. A trash can was used as a receptacle for the dozens of mobile devices labeled with congressional staffer names on yellow Post-Its.

As the meeting came to order, Paulson, following Kashkari’s playbook, announced darkly, “You saw what happened earlier this week with Washington Mutual,” and, with as much ominousness as he could muster, added, “There are other companies—including large companies—which are under stress as well. I can’t emphasize enough the importance of this.”

The stern-faced lawmakers listened attentively but immediately raised what they considered to be four major obstacles to the plan: oversight of the program, which the Democrats felt was severely lacking; limits on executive compensation for participating banks, a controversial provision that Paulson himself was convinced would discourage them from participating; whether the government would be better off making direct investments into the banks, as opposed to just buying their toxic assets; and whether the funds needed to be released all at once or could be parceled out in installments.