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

Although Paulson hadn’t believed he would require in the immediate future the authorities that he had discussed that morning, the overall economic situation was beginning to become alarming. He called Josh Bolten at the White House to sound him out about pressing Congress for the authority he wanted; Bolten was encouraging. He also wanted Alan Greenspan’s advice, and after some confusion about tracking down Greenspan’s home phone number, Paulson and a half dozen staff members huddled over the Polycom on his desk to hear the former Fed chairman’s faint voice through the speaker.

Rattling off reams of housing data, Greenspan described how he considered the crisis in the markets to be a once-in-a-hundred-year event and how the government might have to take some extraordinary measures to stabilize it. The former Fed chairman had long been a critic of Fannie and Freddie but now realized that they needed to be shored up. He did have one suggestion about the housing crisis, but it was a rhetorical flourish befitting his supply-and-demand mind-set: He suggested that there was too much housing supply and that the only real way to really fix the problem would be for the government to buy up vacant homes and burn them.

After the call, Paulson, with a laugh, told his staff: “That’s not a bad idea. But we’re not going to buy up all the housing supply and destroy it.”

As Paulson took a seat in the small conference room next to his office to begin breakfast with Ben Bernanke, he was flushed and scarcely able to eat. “This is a real problem,” he said.

The front page of the New York Times had reported that morning that senior administration officials were “considering a plan to have the government take over one or both of the companies and place them in a conservatorship if their problems worsen.”

Someone had leaked the story about Fannie and Freddie.

Paulson, guzzling a can of Diet Coke as his oatmeal grew cold, couldn’t fathom why a member of the administration would be so foolish as to disclose the plans they had been considering. Whoever it had been, the leak was bound to undermine confidence even further, and Paulson was furious.

It had already been a long morning for Paulson, and it showed in his eyes. He had briefed the president in the Oval Office at 7:10 a.m.; had a conference call with Tim Geithner at 7:40 a.m.; checked in with Larry Fink of BlackRock to get his thoughts on what to do about Fannie and Freddie at 8:00 a.m.; and even squeezed in time to reach out to Dick Fuld five minutes later.

Soon after the stock market opened, Treasury staffers Jim Wilkinson and Neel Kashkari barged into the room, interrupting Paulson and Bernanke’s breakfast to tell them that the stocks of both Fannie and Freddie were sinking like a stone, down about 22 percent, and suggesting that Paulson put out a statement to calm the markets. Just as he had feared, the story in the Times had created a panic, with nobody certain what the implications of the government getting involved with Fannie and Freddie could possibly mean. Investors were recalling Paulson’s decision to press for the $2-a-share deal for Bear Stearns and asking themselves, Would that be the model?

Paulson agreed he needed to tamp down all the anxiety. By 10:30 a.m. Treasury issued a statement under Paulson’s name, stating: “Today our primary focus is supporting Fannie Mae and Freddie Mac in their current form as they carry out their important mission.” By using the phrase “in their current form,” Paulson was trying to send a signal that he had no plans to nationalize the companies, even though he knew he might ultimately have to seek the power to do so.

Still miffed by the leak, Paulson walked over to the White House as President Bush was preparing to go over to the Department of Energy on Independence Avenue for a briefing on oil and the energy markets. “Can I ride over with you, sir?” Paulson asked, and on the short trip there briefed Bush on the Fannie and Freddie situation. Bush, who had been a critic of the GSEs for years, was supportive of Paulson’s plan. As the motorcade arrived at their destination, Paulson suggested that when the president spoke to the press that afternoon he needed to tread carefully, fearful of spooking the markets even more. “Emphasize how committed we are to the stability of these organizations,” Paulson told him.

Although Freddie’s stock price would plunge as much as 51 percent that day, falling to as low as $3.89, and Fannie shares sank by as much as 49 percent, they managed to pare back their losses, with Freddie ending the session down only 3.1 percent and Fannie down 22 percent. Paulson, meanwhile, began calling congressional leaders to determine what it would take to get Treasury the authority to put capital into Fannie or Freddie or to backstop their debt.

Just as the market closed, Paulson had a call with Sheila Bair, the chairwoman of the Federal Deposit Insurance Corporation, who shared further dismaying news of the intense pressures in the mortgage market: The FDIC was about to seize IndyMac Bancorp, a mortgage lender, marking the fifth FDIC-insured bank failure that year and the biggest since the savings and loan debacle.

Recognizing that Fannie and Freddie could soon spin out of control, Paulson summoned his brain trust to his office at 4:15 p.m. and told them to get ready to work throughout the weekend on a way to stabilize the GSEs. His plan was simple: He wanted to ask for the authority to put money into Fannie and Freddie, in the hopes that he’d never actually have to use it.

“I want,” he instructed, “to announce a plan before the Asian markets open Sunday night.”

On Saturday morning, Fuld pulled up to John Mack ’s Tudor mansion in Rye, New York. Despite the beautiful weather, he was tense about the upcoming meeting. God help me, he thought, if this leaks . He could already imagine the headlines.

“Dick, good morning,” Mack said amiably as he greeted Fuld at the front door. Mack’s wife, Christy, stepped out to say hello as well.

The Morgan Stanley management team had arrived and were socializing in Mack’s dining room. There was Walid Chammah and James Gorman, the firm’s co-presidents; Paul Taubman, the firm’s head of investment banking; and Mitch Petrick, head of corporate credit and principal investments. They have probably been strategizing for hours , Fuld thought.

McDade showed up next, dressed in a golf shirt and khakis. McGee was running late.

On a table in the den, Christy had put out plates of wraps that she had ordered from the local deli and said, “Everything is all set for you guys.” As the group took their seats on sofas around a coffee table, an awkward silence followed; no one knew exactly how to begin.

Fuld looked at Mack as if to say, It’s your house, you start . Mack imperturbably glared back, You asked for the meeting. It’s your show .

“Well, I’ll kick it off,” Fuld finally said. “I’m not even sure why we’re here, but let’s give it a shot.”

“Maybe there’s nothing to do,” Mack said in frustration as he noticed the discomfort around the room.

“No, no, no,” Fuld hurriedly interjected. “We should talk.”

Fuld began by discussing Neuberger Berman, Lehman’s asset-management business and one of its crown jewels, as an asset that he would be prepared to sell. He also suggested that Morgan might buy Lehman’s headquarters on Seventh Avenue—the same building that had been Morgan Stanley’s until Philip Purcell, the firm’s former CEO, sold it to Lehman after 9/11. The irony would be rich.