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

By late afternoon, Paulson, unshaven and wearing jeans, was pacing the halls and pestering his staff with so many questions about the Fannie and Freddie proposal that his chief of staff, Jim Wilkinson, finally took him aside and said forcefully, “You’ve got to get out of our hair and let us do our jobs.”

To blow off steam, Paulson decided to take a quick bike ride around the near-empty Washington streets. He couldn’t stop thinking about the plan and what it might mean to his legacy: He, a Republican, a man of the markets, was going to ask for authority to invest U.S. taxpayer money in the two institutions that were perhaps most responsible for the housing boom and bust. On the other hand, after decades of political infighting over these two entities, he would have the opportunity to undo them. But would he actually need to use the authority that he was asking for? Would simply having the authority be enough to calm the markets? As he pedaled his bike, he hoped that would be the case.

When Paulson returned, Michele Davis, his communications chief, was trying to figure out where he could physically announce the proposal. “We can’t have reporters and camera crews in the building,” she said. “We could have you go outside on the steps.” Nason, walking over to a window, warned that the forecast called for a thunderstorm.

“I don’t know what to do,” she said, trying to figure out if they had a podium they could bring outdoors. “But you have to go home and change clothes,” she told Paulson, pointing at his rumpled jeans. “You can’t go out there like that.”

At 6:00 p.m., cleanly shaven and now dressed in a blue suit, Paulson walked out onto the Treasury’s steps to a podium that had been hauled downstairs from the fourth floor and addressed the swarm of reporters who had assembled hastily.

“Fannie Mae and Freddie Mac play a central role in our housing finance system and must continue to do so in their current form as shareholder-owned companies,” Paulson said, reading a statement. “Their support for the housing market is particularly important as we work through the current housing correction.

“GSE debt is held by financial institutions around the world. Its continued strength is important to maintaining confidence and stability in our financial system and our financial markets. Therefore we must take steps to address the current situation as we move to a stronger regulatory structure.

“To ensure the GSEs have access to sufficient capital to continue to serve their mission, the plan includes temporary authority for Treasury to purchase equity in either of the two GSEs if needed.”

Minutes after he finished, thunder rumbled in the distance. Soon the skies opened up.

Paulson could tell the hearing on Tuesday morning was going to be hostile the moment he took his seat to the right of Bernanke and Cox. His announcement on the Treasury steps had done little to shore up confidence. In fact, it seemed to be undermining it even further, creating confusion in the marketplace about what this new “authority” he was seeking really meant. Freddie ended down 8.3 percent, to $7.11, while Fannie lost 5 percent, falling to $9.73 on Monday. He knew he needed to start spinning fast, as much for Congress as for the markets.

“Our proposal,” he explained to the Senate Banking Committee, “was not prompted by any sudden deterioration in conditions at Fannie Mae or Freddie Mac… . At the same time, recent developments convinced policy makers and GSEs that steps are needed to respond to market concerns and increase confidence by providing assurances of access to liquidity and capital on a temporary basis if necessary.”

As he was barraged with questions, Paulson emphasized the “temporary” nature of the authority he was seeking, hoping to win over the congressmen. “It is very intuitive,” he said, “that if you’ve got a squirt gun in your pocket, you may have to take it out. If you have got a bazooka, and people know you’ve got it, you may not have to take it out.”

Some panel members, however, were not buying that justification.

“When I picked up my newspaper yesterday, I thought I woke up in France,” said Senator Jim Bunning, the Kentucky Republican. “But no, it turned out it was socialism here in the United States of America. The Treasury secretary is now asking for a blank check to buy as much Fannie and Freddie debt or equity as he wants. The Fed purchase of Bear Stearns’ assets was amateur socialism compared to this… . Given what the Fed and Treasury did with Bear Stearns, and given what we are talking about here today, I have to wonder what the next government intervention into the private enterprise will be? More importantly, where does it all stop?”

Clearly frustrated by what he was hearing, Paulson struggled to articulate his defense. “I think our idea is that, that by having the government provide an unspecified backstop, the odds are very low that it will be used and the cost to the taxpayers will be minimized.”

“Do you think we can believe exactly what you’re saying, Secretary Paulson?” Bunning replied patronizingly.

“I believe everything I say and that I’ve been around markets for a long time—” Paulson began to reply before Bunning cut him off.

“Where is the money going to come from if you have to put it up?” Bunning asked.

“Well, obviously, it will come from the government, but I would say—”

“Who is the government?” Bunning asked indignantly.

“The taxpayer,” Paulson acknowledged.

“Secretary Paulson, I know you’re very sincere in your proposal,” Bunning continued. “But come January, you will be gone, and the rest of us will be sitting at these tables—or at least most of us—and we all have to be responsible to the taxpayer for what we have done.”

A socialist. Mr. Bailout . Hank Paulson believed he was fighting the good fight, a critical fight to save the economic system, but for his efforts he was being branded as little less than an enemy of the people, if not an enemy to the American way of life. He couldn’t understand why no one could see how bad the situation had really become. That afternoon another faction had joined the group of antagonists: The hedge funds were furious with him for having convinced Christopher Cox at the SEC to begin cracking down on improper short selling in the shares of Fannie and Freddie, as well as seventeen other financial firms, including Lehman.

With Bob Steel gone, he felt he had been left on his own to confront the biggest challenge of his tenure. He valued his staff, whom he regarded as a remarkably intelligent group, but questioned whether he had enough firepower to wage what he could see was quickly becoming a heated war. That afternoon he left a message for Dan Jester, a forty-three-year-old retired Goldman Sachs banker who had been the firm’s deputy CFO and was now living in Austin, Texas, managing money, mostly his own. Paulson had depended heavily on Jester, a long-haired “ human calculator,” when he was the firm’s CEO, and he hoped he might be able to convince Jester to come out of retirement to help him work on the GSEs.

The night before, feeling somewhat desperate, he had also placed a call from home to Ken Wilson, an old friend from Dartmouth whom he had persuaded to leave Lazard for Goldman a decade earlier. As head of the financial institutions group, Wilson was Goldman’s top adviser to other banks and respected as an éminence grise throughout the industry. Paulson so respected his judgment that he had put Wilson in an office near his own on the thirtieth floor of 85 Broad Street.