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

Hank Paulson looked dispirited Tuesday morning as he walked into the main conference room across from his office in the Treasury Building, his team of advisers in tow: Tony Ryan, Jeremiah Norton, Jim Wilk inson, Jeb Mason, and Bob Hoyt. Their 10:00 a.m. meeting with Jamie Dimon and JP Morgan Chase’s operating committee had been set up weeks earlier as part of a series of all-day meetings the firm had scheduled to establish better relations with the government. That strategy had been devised by Rick Lazio, a former Republican representative from New York, whom Dimon had hired as executive vice president of global government relations and public policy. Internally, JP Morgan’s operating committee trips to Washington were jokingly referred to as “OC/DC.” With the financial system teetering, Dimon knew that there would be calls for tighter federal regulation of Wall Street and wanted to make certain that he had shaken all the right hands well in advance.

“Thanks for coming down here,” Paulson said somewhat sheepishly as he opened up the meeting. He was, in fact, still preoccupied with reaction to the takeover of Fannie and Freddie just forty-eight hours earlier. He believed that he had made exactly the right moves in orchestrating the affair, but investors hadn’t seemed to agree. Far from stabilizing them, as he thought they might, the markets seemed to be on the verge of tanking again.

Perhaps most grating of all was the reaction from Congress. He was particularly upset with Senator Dodd, whom he had personally briefed on Sunday, soon after the announcement. Dodd, he thought, had tacitly signaled his support, but the following day had publicly mocked him, quipping that his request for temporary powers—which Paulson had clearly indicated that he didn’t intend to utilize—was merely a big ruse. “[A]ll he wanted was the bazooka, he didn’t want to use it,” Dodd wryly observed to reporters in a conference call on Monday.

“We certainly accepted him at his word that that was all that was going to be necessary,” Dodd said. “Fool me once, your fault. Fool me twice, my fault.” And then Dodd openly raised the question that until then had only been whispered around Washington: “Is this action going to produce the desired results, or are there other actions being contemplated?”

Senator Jim Bunning, who had sparred with Paulson over the summer, going as far as to brand him a Socialist, was even more pointed: “Secretary Paulson knew more than he was telling us during his appearance before the Banking Committee. He knew that Fannie and Freddie were in an irreversible state of damage. He knew all along he was going to have to use this authority despite what he was telling Congress and the American people at the time.”

Paulson had allotted less than an hour to the JP Morgan meeting, even though he knew how important it was to Dimon. “I’ve been trying to encourage opening up the lines of communication between Wall Street and Capitol Hill,” he now told the bankers, explaining that when he ran Goldman, he hadn’t “appreciated how important it was to establish the right relationships in Washington.”

“Trying to get things done here ain’t as easy as it seems,” he said, his audience laughing at the clear reference to the nationalization of Fannie and Freddie.

He asked Dimon what he thought of the move. Dimon, who had encouraged Paulson to pursue the conservatorship, responded positively but diplomatically: “It was the right thing to do. We could see just how big the problem was becoming over the weekend,” and added that it had become clear that certain Fannie and Freddie bonds wouldn’t roll on Monday. Dimon tactfully avoided mentioning the fact that the stock market didn’t seem to be steadying.

“If you guys believe that, share it,” Paulson said before they got up to leave. “I could use the help. No one around here wants to listen to my analysis.”

After that singular plea for help from the Treasury secretary, JP Morgan’s top executives splintered into smaller groups to make several obligatory courtesy drop-bys on the Hill to their federal overseers. Charlie Scharf, head of the firm’s consumer business, and Michael Cavanagh, its new CFO, went to see Sheila Bair, head of the FDIC; Steve Black paid a visit to James Lock hart; and later in the day, there was a meeting scheduled with Barney Frank for several members of the team.

But the most important of the visits was Dimon’s, with the Federal Reserve’s Ben Bernanke. Dimon brought Barry Zubrow, the firm’s chief risk officer, along with him. Zubrow, a relative newcomer to JP Morgan, was quickly becoming one of its key executives. A former banker at Goldman Sachs, where he had worked for more than twenty-five years, he was a close friend of Jon Corzine, the deposed Goldman boss who had gone on to become governor of New Jersey. If anyone at JP Morgan understood the risks in the market as well as Dimon, it was Zubrow.

As Dimon and Zubrow entered the Federal Reserve’s Eccles Building on Constitution Avenue, Zubrow sneaked a quick look at his BlackBerry before passing through the security X-ray machine. He was alarmed at what he saw: Lehman’s stock had plunged 38 percent, dipping to about $8.50 a share.

In Lower Manhattan’s financial district, Robert Willumstad, AIG’s CEO, sat on the thirteenth floor of the Federal Reserve Bank of New York waiting to meet with Tim Geithner. With the markets in turmoil, he had returned to see Geithner to press him again to consider making the discount window available to his company. While Geithner may have spurned his abstract request last month, this time Willumstad had come with a more detailed proposal to turn AIG into the equivalent of a primary dealer like Goldman Sachs or Morgan Stanley—or Lehman Brothers. “It’s going to be a few minutes. He’s on the phone,” Geithner’s assistant told him.

“No problem, I have time,” Willumstad replied.

Five minutes passed, then ten. Willumstad looked at his watch, trying to keep from getting annoyed. The meeting had been scheduled to start at 11:15.

After about fifteen minutes, one of Geithner’s staffers, clearly embarrassed, came to speak with him. “I don’t want to hide the ball on you,” he said. “He’s on the phone with Mr. Fuld,” he revealed with a knowing smile, as if to indicate that Willumstad might be waiting a while longer. “He’s up to his eyeballs in Lehman.”

Finally, a half hour later, Geithner appeared and greeted Willumstad. Geithner was clearly overwhelmed, his eyes darting around his office as he nervously twisted a pen between his fingers. He had also just flown back from an international banking conference in Basel, Switzerland.

After some pleasantries, Willumstad explained the purpose of his request for this meeting: He wanted to change—no, very much needed to have —AIG’s role in the finance sector codified. He said that he wanted AIG to be anointed a primary dealer, which would give it access to the emergency provision enacted after Bear Stearns’ sale, and thus enable it to tap the same extremely low rates for loans available only to the government and other primary dealers.

Geithner stared poker-faced at Willumstad and asked why AIG FP deserved access to the Fed window, which, as Willumstad was well aware, was reserved for only the neediest of financial institutions, of which there were now far more than usual.