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

Mack, having already signed the agreement, called Roy Bostock, one of Morgan Stanley’s board members, hoping he could help calm the waters with the other directors over his impetuous decision.

“I want to give you a heads-up,” he told him. “We’re going to be having a board call in about twenty minutes or so. It’s going to be to approve accepting $10 billion in TARP money,” he said, before pausing. “But I already have.”

Bostock knew what was being asked of him. “I understand. The board will not throw an ax in the wheel here.”

When the Morgan Stanley call finally began, Bostock started by saying, “John, we didn’t have any choice but for you to sign that. It was the right thing to do.” Bostock called for a vote before there could be much discussion. “I’m in favor,” he began.

In stark contrast, Dimon’s tone when he spoke to his own board was bleak. “This is asymmetrically bad for JP Morgan,” he said, whispering into his cell phone. In other words, the money would help the weaker banks catch up to them. “But we can’t be selfish. We shouldn’t stand in the way.”

At 5:38, Bob Hoyt, while collecting the signed papers, shot an e-mail to the team, “On my way—that’s 5 down, 4 to go.”

Paulson, Geithner, Bernanke, and Bair sat in Paulson’s office, waiting. With the exception of Kovacevich’s grumbling, the meeting had gone well, much better than they had anticipated. They had effectively just nationalized the nation’s financial system, and no one had had to be removed from the room on a stretcher. Paulson, running his fingers over his stomach, as he always did when he was deep in thought, still couldn’t believe he had pulled it off.

Paulson had just gotten off the phone with Barack Obama—then the presidential front-runner—who had just finished up a speech about the economy in Toledo, Ohio, to tell him the news. He then tried John McCain, but couldn’t get through.

At 6:23 p.m. Wilkinson wrote to the team, “8 out of 9 are in… . [S]tate [S]treet is just waiting on board… . [W]e are basically done.”

Two minutes later, at 6:25 p.m., Wilkinson triumphantly reported the final tally from his BlackBerry: “We now have 9 out of 9.”

Kaplan, at the White House, replied, “Awesome.”

David Nason carried the signed papers down the hallway to Paulson.

Standing in the doorway of the secretary’s office, Nason paused for a moment as Paulson and his half dozen senior staffers took a minute to appreciate the significance of the moment.

“We just crossed the Rubicon,” he said.

EPILOGUE

In the span of just a few months, the shape of Wall Street and the global financial system changed almost beyond recognition. Each of the former Big Five investment banks failed, was sold, or was converted into a bank holding company. Two mortgage-lending giants and the world’s largest insurer were placed under government control. And in early October, with a stroke of the president’s pen, the Treasury—and, by extension, American taxpayers—became part owners in what were once the nation’s proudest financial institutions, a rescue that would have seemed unthinkable only months earlier.

Wiring tens of billions of dollars from Washington to Wall Street, however, did not immediately bring an end to the chaos in the markets. Instead of restoring confidence, the bailout had, perversely, the opposite effect: Investors’ emotions and imaginations—the forces that John Maynard Keynes famously described as “animal spirits”—ran wild. Even after President Bush signed TARP into law, the Dow Jones Industrial Average went on to lose as much as 37 percent of its value.

But there was another kind of fallout, too—one that had a far more profound effect on the American psyche than did the immediate consequences of the dramas being played out daily on Wall Street. In the days and weeks that followed the first payouts under the bailout bill, a national debate emerged about what the tumult in the financial industry meant for the future of capitalism, and about the government’s role in the economy, and whether that role had changed permanently.

A year later such concerns remain very much at the forefront of the national conversation. As this book was going to press, a raucous public outcry, complete with warnings about creeping socialism, questioned the government’s role not just in Wall Street, but in Detroit (since the bank rescue, the government also supplied billions of dollars in aid to two automotive giants, General Motors and Chrysler, to restructure in bankruptcy court) and in the health care system. Washington has also named an overseer, popularly known as a “pay czar,” to review compensation at the nation’s bailed-out banks.

One unexpected result of this new federal activism was that traditional political beliefs had been turned on their head, with a Republican president finding himself in the unaccustomed position of having to defend a hands-on approach. “The government intervention is not a government takeover,” President Bush asserted on October 17, 2008, as he sought to counter his critics. “Its purpose is not to weaken the free market. It is to preserve the free market.”

Bush’s statement seemed to sum up the paradox of the bailout, in which his administration and the one that followed decided that the free market needed to be a little less free—at least temporarily.

In some respects, Hank Paulson’s TARP was initially a victim of his own aggressive sales pitch. While the program was fundamentally an attempt to stabilize the financial system and keep conditions from growing worse, in order to win over lawmakers and voters it had been presented as a turnaround plan. From the vantage point of consumers and small-business owners, however, the credit markets were still malfunctioning. After hundreds of billions of dollars had been set aside to rescue banks, many Americans still couldn’t obtain a mortgage or a line of credit. For them the turnaround that had been promised didn’t come soon enough.

Even with the help of cash infusions some of the country’s major banks continued to falter. Citigroup, the largest American financial institution before the crisis, devolved into what Treasury officials began referring to as “the Death Star.” In November 2008 they had to put another $20 billion into the financial behemoth, on top of the original $25 billion TARP investment, and agreed to insure hundreds of billions of dollars of Citi’s assets. In February 2009 the government increased its stake in the bank from 8 percent to 36 percent. The bank that only a decade earlier had spearheaded a push toward deregulation was now more than one third owned by taxpayers.

Even among those who continued to believe in the bailout concept, there were lingering questions about how well Washington had acquitted itself, with the loudest debate focusing on one deal in particular.

In early 2009 the Bank of America-Merrill Lynch merger became the subject of national controversy when BofA announced that it needed a new $20 billion bailout from the government, becoming what Paulson declared “the turd in the punchbowl.” When it later emerged that Merrill had paid its employees billions of dollars in bonuses just before the deal closed, the public outrage led to a series of investigations and hearings that embarrassingly pulled back the curtain on the private negotiations that took place between the government and the nation’s financial institutions.

The September sale of Merrill Lynch to Bank of America had been presented as a way to save Merrill. But in the several months that it took the deal to close, Merrill’s trading losses ballooned, its asset management business weakened, and the firm had to take additional write-downs on its deteriorating assets. The public wasn’t informed about these mounting problems, however, and on December 5, shareholders of both companies voted to approve the deal at separate meetings.