CHAPTER 12

Monday, September 22, 2008

By Monday morning our $700 billion rescue plan had made news around the world. I got to the office early and went to the Markets Room to check the credit spreads on Morgan Stanley and Goldman Sachs. To my relief, the investment banks’ CDS had steadied, although the LIBOR-OIS spread was still under pressure. But there was no question we were tiptoeing on the razor’s edge. We needed to get this legislation done fast.

It would have been challenging enough to push TARP through in a nonelection year, but politics truly complicated our efforts. In the midst of a fiercely contested presidential campaign, Republicans were anticipating heavy congressional losses and were keenly sensitive to voter frustration with the Bush administration and with Wall Street. On Sunday, Senator Obama, who had made a number of public statements expressing his qualified support for our approach, indicated in a CNBC interview that he would want to make sure I was involved in the transition if he won. Senator McCain had also been relatively supportive.

But the economy had become the main issue in the presidential campaign, and Obama continued to hammer his rival for a comment he’d made on September 15 that “the fundamentals of our economy are strong.” McCain and Obama were within a few percentage points of each other in the polls and fighting heated battles in swing states. Obama was creeping ahead, and McCain was trying to distance himself from the Bush White House. He was slinging populist rhetoric on the campaign trail, excoriating Wall Street, talking about protecting taxpayers, and using the word bailout.

At a town hall meeting on Monday morning in Scranton, Pennsylvania, McCain told the crowd, “I am greatly concerned that the plan gives a single individual the unprecedented power to spend one trillion—trillion—dollars without any meaningful accountability. Never before in the history of our nation has so much power and money been concentrated in the hands of one person.”

I was concerned that McCain’s rhetoric could inflame public sentiment against TARP, so I turned to South Carolina senator Lindsey Graham, the candidate’s close friend and national campaign co-chairman. Lindsey called me midday to tell me John was at the tipping point, almost ready to come out against TARP. Was the plan necessary? he asked.

“Absolutely,” I said.

I went through all the reasons, emphasizing that I knew McCain’s support would be crucial in getting the Republicans to vote for the legislation. Lindsey urged me to speak directly with John, but I couldn’t get through to him. I tried Lindsey again a few hours later, and he reiterated his point. A number of McCain’s advisers disliked TARP and saw a political advantage in his opposing it.

“It’s so important you get to John,” I remember Lindsey telling me. “He has people pushing him the wrong way, and I’m trying to spend as much time as I can with him. I’ll make sure he calls you back.”

McCain called me within the hour, but it wasn’t a good conversation. “Hank, you’re asking for a lot of authorities,” he said. “The American people don’t like bailouts, and you know I’ve always been an advocate of the taxpayer.”

“In any normal circumstance I’d be with you, but right now I can’t tell you enough how fragile the system is,” I said, emphasizing that several big institutions were on the edge. “I’m going to really need your support to get something done—your public support.”

McCain was in a rush and had to hang up before I could get a commitment from him. I was so concerned about the conversation that I called Josh Bolten at the White House for advice. Josh assured me that Lindsey Graham understood the need for government action and was completely behind it.

“Stay close to Lindsey,” he said. “Just keep talking to him, keep that as a bridge to McCain.”

The uncertainty caused by Republican disenchantment with TARP helped drive the Dow down 373 points, wiping out Friday’s gains. Shares of Washington Mutual and Wachovia dropped sharply. On the plus side, Morgan Stanley’s and Goldman’s CDS spreads had narrowed considerably, indicating that the plan to turn them into bank holding companies had given them a little breathing room. It helped, too, that Mitsubishi UFJ had announced its intention to buy 20 percent of Morgan Stanley.

Still, we needed to sell TARP hard. As Treasury staff negotiated with congressional Democrats on the particulars, we felt we could not show any doubts about our approach or any openness to other ideas. Whenever anyone on the Hill asked the Treasury team if they had any other plans, the response was: “This is the plan.” If we had entertained other options, the process would have bogged down.

Executive compensation remained a sticking point. That evening when I met with my team—Kevin Fromer, Michele Davis, Jim Wilkinson, Neel Kashkari, and Bob Hoyt—to review the issue, we discussed the increasingly strident tone of the election campaign: “You hear what people are saying on the campaign trail. You listen to the candidates,” Michele said. “To get the votes, we’re going to need executive compensation restrictions.”

I told them I believed that we should take very tough positions with top executives of failing companies, as we had when we fired the CEOs of the GSEs and AIG. But to my mind, restricting pay could put us on a slippery slope with Congress. The whole idea of TARP was to encourage the maximum number of institutions to participate in our auctions and sell their bad assets. Those taking part would clean their balance sheets and attract new capital from private investors.

As we walked out of our meeting, Kevin Fromer warned me, “This is going to be tricky.”

I replied, “I would rather get nothing at all than get something that ties my hands so I know it won’t work.”

I held out for a few days, refusing to compromise and angering many on the Hill. But doing so allowed us to agree on a set of restrictions that the market accepted. Congress would make them much tougher after I’d left.

Tuesday, September 23, 2008

Ben Bernanke, Chris Cox, Jim Lockhart, and I were scheduled to appear before the Senate Banking Committee at 9:30 a.m. We knew it wasn’t going to be an easy session, and we knew we had to be prepared. Ben called me two hours before that to say he was concerned that we hadn’t been doing a good enough job of explaining what we needed. He wanted to make sure I was comfortable with the statement he planned to give.

Going into the hearing, I knew I had to choose my words carefully. We faced a real dilemma: To get Congress to act we needed to make dire predictions about what would happen to the economy if they didn’t give us the authorities we wanted. But doing so could backfire. Frightened consumers might stop spending and start saving, which was the last thing we needed right then. Investors could lose the final shred of the confidence that was keeping the markets from crashing.

I described the roots of the crisis, the bad lending practices that had hurt homeowners and financial institutions and caused a chain reaction that had spread to Main Street, where nonfinancial companies were having trouble funding their daily operations. I stressed the need for swift action, but I resisted when I was asked to describe what a meltdown would look like and to provide details on what it would mean to lose a retirement account or a job.

Ben was less hesitant to present an alarming scenario. “The financial markets are in a quite fragile condition, and I think absent a plan they will get worse,” he told the panel. “I believe if the credit markets are not functioning, that jobs will be lost, that our credit rates will rise, more houses will be foreclosed upon, GDP will contract, that the economy will just not be able to recover in a normal, healthy way.”

The Senate is more civilized than the House, but this was a long, difficult session. I didn’t get to speak until 90 minutes or so into the hearing, after the committee members had made their statements.

Over the course of the nationally televised, five-hour hearing, the senators expressed big concerns about moving too fast, about taxpayer protection, and about the broad powers I was requesting. This was understandable: we were asking for a lot—on short notice, and just weeks before Election Day. They fired questions at us, and the senatorial rhetoric blew hot and heavy. Jim Bunning denounced TARP as “financial socialism” and “un-American.” Richard Shelby criticized our ad hoc approach and our rush. And these, nominally, were our Republican friends.

As for the Democrats, Chris Dodd, whose advice we’d followed in sending up a bare-bones outline of legislation, took the opportunity to say, “This proposal is stunning and unprecedented in its scope and lack of detail…. It is not just our economy at risk, but our Constitution as well.”

Still, Chris was helpful in some ways. Reading the bill closely, he noted, “There’s nothing in here that would prohibit you from using the flexible notions and thoughts out there on how a better approach might work—an equity infusion, for instance.”

I responded, “Mr. Chairman,… you said it better than I did. I didn’t want to find myself in the position of being here, asking for these authorities. But under the circumstances, I think they’re better than the alternative…. Our whole objective here is going to be to minimize the ultimate cost to the taxpayer.”

To that point, we had put equity only in the GSEs and AIG, and we’d basically killed the shareholders of those companies. We didn’t want to give a whiff of support to speculation that we would inject equity, because we feared that such speculation would only drive bank share prices to zero before Congress had had a chance to vote on TARP. I left the hearing room knowing that we were still a long way from getting something done.

Senator Obama called afterward to touch base. I told him that it had been a tough hearing. He noted that the American people were not happy to see big compensation packages for an industry needing government help, and he warned me that I had to stay on top of my party if we wanted to make sure TARP passed. The Democrats, he said, were more inclined to support the legislation.

Meanwhile, I was getting reports from my people that the bill that was being worked on in the House and the Senate was getting longer and longer—and we hadn’t yet seen any resolution on the major issues: executive compensation, taxpayer protection, and oversight.

One of my worries lifted Tuesday when Goldman Sachs—which had overnight Sunday become the fourth-biggest U.S. bank holding company—had finally found its strategic investor. And they’d found the most credible investor in the world, Warren Buffett, who announced that he would invest $5 billion in perpetual preferred shares yielding 10 percent, with warrants to buy $5 billion worth of common shares. What cemented his decision was the prospect of TARP’s being passed. As he would say in an interview on CNBC the next day, “If I didn’t think the government was going to act, I would not be doing anything this week.”

But the markets were not as easily assuaged: stocks took another fall as the trading day closed, and the Dow finished down 162 points, at 10,854, as credit spreads continued to widen.

With investors like Buffett counting on TARP, we pressed ahead on our sales efforts. At 6:15 p.m. I sat down in John Boehner’s office with House Republican leaders. They disliked TARP but knew something needed to be done, and they kept trying to come up with an alternative. Boehner had already warned me that things were not going well in the GOP caucus. About a third of the House Republicans were facing tough elections and worried about losing their seats. Another third were so ideologically driven that they would never vote for TARP.

“The group you’re shooting for is the one-third in the middle,” Boehner told me. “And you’re fishing in a small pond.”

Boehner’s staff had set up a table with food in the back of the office, and people came and went as we grappled with how to deal with the crisis. I did more listening than speaking, trying to understand what Boehner was dealing with, and it dawned on me how difficult it was to reason with some people. The facts didn’t seem to matter to some in this group. I looked around and wondered where the votes would come from. Florida’s Adam Putnam was the most constructive—he suggested that I needed to tell people more explicitly how bad it would be if the financial system collapsed: massive unemployment, people living on the streets. Adam was right, but scaring the public to win support would only make things worse economically.

Virginian Eric Cantor, meanwhile, was pushing an insurance program. It wasn’t particularly well developed, but it was meant to avoid big government intervention. The plan, as I understood it, would have provided insurance to companies holding the frozen mortgage assets, allowing them to limit their losses. The firms would have had to pay insurance premiums to the Treasury Department for the coverage. By that evening I was at the end of my rope, and I lost it a little, making a sarcastic remark to Cantor about dropping our whole plan in favor of his insurance idea.

“We’ve gone to the American people, we’ve gone to Congress, we’ve put forward the best idea to deal with this problem, and we’ve got a good number of people that are supportive,” I remember saying. “And you want me now to go and say, ‘Hey, I’ve thought about it some more. I got a better idea. I’m going to go with Eric Cantor’s insurance program. That’s the idea to save the day.’”

I left Boehner’s office demoralized. A number of people pulled me aside, saying, in effect, “We believe this is a serious situation, but you’re not going to get the votes for this. You’re going to have to come up with another idea that works.”

Wednesday, September 24, 2008

After the gathering at Boehner’s office, I was not looking forward to meeting with the entire House Republican Conference the next morning. It was scheduled for 9:00 a.m. in the Cannon Caucus Room. By then, too, I’d heard all about the fiasco of the morning before, when Vice President Cheney, Josh Bolten, Keith Hennessey, and Kevin Warsh had traveled to the same room to argue for TARP only to endure a long, ugly meeting with angry Republicans.

Before I left for the GOP conference, Michele Davis and Kevin Fromer told me to present the lawmakers with something they could understand. I would have to make them see that the esoteric numbers on the screens of Treasury’s Markets Room translated into real danger for the average American. Credit markets were still in crisis. The squeeze in the Treasury market had become almost unimaginable. Fails to deliver had now reached a staggering total of $1.7 trillion—compared with $20 billion 12 days before.

Knowing how difficult this meeting was going to be, I asked Ben Bernanke to accompany me, and he readily agreed to do so. Speaking to the crowd in the grand meeting room with its deep red carpet and crystal chandeliers, we explained that the commercial paper market was nonexistent, and that financing was disappearing for big and small companies alike, endangering their ability to sustain normal activities. But it didn’t make a bit of difference to this group, which opposed big government intervention as a first step on the path to socialism. They lined up ten deep on both sides of the room, waiting for a microphone, and blasted us. Certain that their constituents opposed bailouts, they could not be persuaded to support TARP.

Although Boehner had been firm and direct about his support in our September 18 meeting with congressional leaders, he was less friendly and eager to work with us in this setting. He limited his comments to a short pep talk on the previous day’s tactical victory on offshore oil drilling. Then one member after another said the bill couldn’t pass without House Republicans, and there was nothing we could do to change their minds. It was an untenable situation. Afterward one member of Congress came up to me and said, “I’ve been talking about deregulation and free markets my whole life. You’re asking me to change my view, and there is no way I can do that.” That response applied to many in the group that morning.

Shortly afterward, Boehner and I went to Pelosi’s office and told her about the meeting. She wanted to get TARP passed, and she pressed Boehner: “What can you do? What ideas do you have?” He didn’t have much beyond Cantor’s insurance plan, which he acknowledged was not really well formulated. He mentioned the possibility of “pro-growth” ideas, but Pelosi said it was no time to be talking about “tax cuts for the wealthy.”

The House Financial Services Committee convened at 2:30 p.m. Some House hearings could be terrible—you never knew what was going to happen. But Barney Frank’s hearings were different. Always pragmatic and efficient, he made sure things moved along with a fair amount of decorum.

Nonetheless, Ben and I were besieged with questions from all sides. Why wouldn’t the government take stakes in the companies it helped? Why wouldn’t we put restrictions on executive pay? In fairness, this is how our representative government works. Some members were grandstanding, positioning themselves to help their reelection campaigns. But for the most part, the lawmakers were just doing their jobs, trying to understand in a very short amount of time a complex issue for which most had little preparation or background. And we were asking for a lot.

In the Senate hearing the day before, I had stood firm on the compensation issue, but I now realized that I would have to give some ground. I told the House panel that we would find a way to address executive pay.

Paul Kanjorski, the Pennsylvania Democrat who chaired the Capital Markets Subcommittee, said we still hadn’t made a convincing case. “The average American people don’t really know what you are really talking about when you say it is going to cost us far less than the alternative,” he said, noting that I needed to clearly explain the ramifications of an electronic run on the money market system. “When I talk to average Americans in my district and across this country, the sun came up today, they went to work today, they stopped and picked up gas today,” he went on, “and they are wondering what all the hullabaloo is about.” What, he pointedly asked me, was the alternative I referred to?

I answered this question as best as I could, given that Barney kept hustling the hearing along. But there was no doubt about it—the session wasn’t going well. Topping it off, Michele Davis got a message on her BlackBerry that John McCain was suspending his campaign to return to Washington to tackle the economic crisis. She passed me a note that said in part, “If you get a question, just say that you know that both Senators McCain and Obama recognize the seriousness of the situation.”

I turned around and looked at Michele, stunned. This was crazy. Even more incredibly, I had spoken to Lindsey Graham just minutes before walking into the hearing, and he hadn’t said a word about McCain’s coming back.

When the hearing recessed, I went into Barney’s office and called Josh Bolten to tell him in no uncertain terms that I thought it was dangerous for McCain to return. I was dumbfounded that the president had allowed it. Josh said the White House was equally frustrated. McCain wanted a meeting at the White House, and the president felt he had no choice but to accommodate him.

I called Obama right away. He said that he would try to be as constructive as possible but that the Democrats were doing their part and I had better keep in touch with McCain. The president was scheduled to give a major speech that evening making the case for TARP, but news of McCain’s decision to suspend his campaign dominated the rest of the afternoon. After the House hearing, I walked over to the Senate side of the Capitol to answer questions from the Senate Democratic Caucus. They were meeting in the Lyndon Baines Johnson Room, a huge room with a tiled floor and an imposing ceiling fresco, where LBJ had once reigned as majority leader. Harry Reid and the Democrats were waiting for me, but before I went inside, Joe Lieberman approached me.

“You’re doing great, Hank,” the Connecticut senator said, confiding that the Democrats wanted to exclude him from this meeting because he was supporting McCain. “I’m going to walk beside you, because they won’t throw me out if I go in with you.”

Ben was already there, and upon my arrival (Lieberman had already disappeared into the crowd), Reid went to the podium and told the group that we would answer questions. The first person to speak was John Kerry of Massachusetts, whom I had found to be consistently on the right side of the issues about the financial crisis. He said he was unsure that he wanted Ben and me there because there was a political element to everything, and suggested that the group first meet alone. But Reid refused, saying that questions needed to be answered. From the look of it, the entire caucus was there, though some seemed no more eager to vote TARP through than were House Republicans. Many were unhappy. At least a third were irate that the crisis was happening and were unwilling to agree to anything unless there were major modifications to the bill. One after another they spoke, occasionally asking a question but usually just attacking our proposal. I felt fortunate that Chris Dodd was chairing the Banking Committee because many of these senators liked and trusted him. But he had his work cut out for him.

Halfway through the session, I hit the wall. I had been going for days with little sleep and no exercise, hustling from one difficult meeting or conversation to another, and I ran out of gas. I realized I was going to get the dry heaves, and if I did that in front of people it would make for a bad news story, to say the least. So I made a poor joke.

“Excuse me,” I announced, standing at the podium. “I have to go get rid of some Diet Cokes.”

I rushed out of the room and into a bathroom stall, had a short bout of dry heaves, then returned to the meeting. Again, no one seemed to notice anything amiss, and I returned as Ben was responding to another irate senator.

Afterward Hillary Clinton told me to stick with Schumer if I wanted to get things done. I told her I would, but the fact was, Chuck and I had a serious disagreement about how the $700 billion should be allocated. I wanted Treasury to have access to the total amount right from the start, but Schumer wanted it doled out in tranches. I suspected he wanted to reserve part of the money for the next administration.

Before I went to bed that night, I watched President Bush address the nation from the State Floor at the White House. “Our entire economy is in danger,” he said, carefully explaining how we had gotten to that point: foreign investment in the U.S., easy credit, a housing boom, irresponsible lending and borrowing. It was his most substantive address yet on the financial crisis, and it was well delivered, but the last thought I had before I fell asleep was that even a speech by the president wouldn’t be able to sway the House Republicans.

Thursday, September 25, 2008

We’d devised TARP to save the financial system. Now it had become all about politics—presidential politics. The president, the leaders of both parties, and both candidates were scheduled to meet around 4:00 p.m. Thursday. I wondered what McCain could have been thinking. Calling a meeting like this when we didn’t have a deal was playing with dynamite.

Democrats, I later learned, had moved into high gear to devise a strategy to ensure that they emerged as the winners from McCain’s maneuver. They didn’t want to take the blame for TARP’s failure—and they didn’t want McCain to be able to claim credit for its success.

By midmorning, Democrats and Republicans from both houses were haggling over the bill’s provisions. Over the course of two hours or so, in the Foreign Relations Room, located below the vice president’s office on the Senate side, the negotiators agreed on several big items, including setting the size of TARP at $700 billion. TARP funds would not be immediately available to the administration but could be drawn down in tranches. Senate and House negotiators agreed on the need to place restrictions on executive compensation and to give Treasury warrants to purchase equity in companies participating in the program so that taxpayers could share in any possible gains they made.

Enough tentative progress had been achieved for Utah Republican senator Bob Bennett to get caught up in the moment as he emerged from the negotiation sessions around midday. He grabbed a microphone and told the press, “I now expect we will, indeed, have a plan that can pass the House, pass the Senate, be signed by the president, and bring a sense of certainty to this crisis that is still roiling in the markets.” Chris Dodd told reporters that he, too, was confident.

But there were problems with this scenario. It was a big stretch to say these negotiators had reached an actual agreement. And, in any case, House Republicans were not on board, and without them TARP was going nowhere. The math was simple. We would need 218 votes for House passage. Though the Democrats, with 236 members, held a clear majority, we weren’t going to get 100 percent of their votes, so we had to have some Republicans. But the only House Republican attending the morning negotiating session had been Spencer Bachus, the ranking Republican on the House Financial Services Committee. Afterward, he allowed that progress had been made. But he wasn’t in a position to deliver his colleagues.

Hour by hour the need for the legislation was becoming more urgent. The noose continued to tighten on the nation’s credit markets: by the close of trading, LIBOR-OIS spreads had widened to nearly 200 basis points, up 30 basis points from the day before. By comparison, they had been about half that level just after Lehman failed.

Then Washington Mutual went down—the biggest failure in U.S. banking history. While the legislators were negotiating, Sheila Bair called me around 11:00 a.m. to break the news that the FDIC was going to seize the bank, and that JPMorgan would pay the government $1.9 billion for the company, which had $307 billion in assets.

WaMu’s demise wasn’t a surprise. It had been struggling for months and had taken a catastrophic turn for the worse: Its CDS rates, already shocking at 2,742 on September 15, had nearly doubled to 5,266 on Wednesday, September 24, as the bank was hit by a run on deposits. Customers had withdrawn $16.7 billion over the preceding ten days.

Back in March, JPMorgan had wanted to buy WaMu, but its regulator, the Office of Thrift Supervision (OTS), and management had opted instead for a $7 billion capital investment from a group led by the private-equity firm TPG. This decision proved to be a mistake: an acquisition by JPMorgan would have stabilized the bank. Still, I had kept in close touch with Sheila and Ben Bernanke on WaMu and periodically talked with JPMorgan CEO Jamie Dimon.

Unfortunately, the WaMu solution wasn’t perfect, although it was handled smoothly using the normal FDIC process. JPMorgan’s purchase cost taxpayers nothing and no depositors lost money, but the deal gave senior WaMu debt holders about 55 cents on the dollar, roughly equal to what the securities had been trading for. In retrospect, I see that, in the middle of a panic, this was a mistake. WaMu, the sixth-biggest bank in the country, was systemically important. Crushing the owners of preferred and subordinated debt and clipping senior debt holders only unsettled the debt holders in other institutions, adding to the market’s uncertainty about government action. Banks were even less willing to lend to one another. In the future, I concluded, we were going to need to go beyond the standard FDIC resolution process for a failing bank.

At 2:25 p.m. I spoke with John McCain, who had just returned to Washington. The call did nothing to ease my mind.

“We have to protect the American taxpayers,” he told me, pointing out that nothing would get done in Congress without the House Republicans. They didn’t like our proposal and I needed to listen more carefully to them, he said.

“John, our system is on the edge,” I told him. “WaMu barely got bailed out today. Several other institutions are on the brink. If we don’t get something done soon, this economy is going to collapse.”

I was so concerned that McCain would do or say something rash that I resorted to a veiled threat: “I’m not a politician, but if you or anyone else does something that causes this system to collapse, it is not going to just be on me. I am going to go and say what I think to the American people.”

As soon as we finished up, I called Joel Kaplan at the White House to let him know that I’d had a tough conversation with the Republican presidential candidate. Not long after, Senator Judd Gregg called to confirm my worst fears about McCain’s return.

“Hank,” the New Hampshire Republican said, “I have just been in a meeting that took my breath away.”

McCain, it seems, had come to Washington to save the day, and became livid when he got off the plane to learn that a deal had apparently been reached without him. As Judd told me, McCain, with Lindsey Graham at his side, had come in late to the Senate Republican Policy Committee luncheon, held weekly in the Mike Mansfield Room on the second floor of the Capitol. McCain sat through part of a presentation by Bennett and a short one by Judd. Lindsey told the assembly of 40 or so senators, “It’s not right for any of you to reach an agreement, because there is no agreement unless John agrees.”

Then, Judd related, McCain had declared, “I don’t care what you people do, I am going to do what is right for the country.” The Arizona senator subsequently stormed out, leaving the Republican senators to finish their lunches, whether or not they had any appetite left.

Now I knew why McCain had seemed so angry when we’d spoken half an hour before.

I’d barely gotten off the phone when Barney Frank called to tell me that Spencer Bachus had just blown up the deal. Bachus had put out a statement saying he had not been authorized to cut any deals and that that morning there had been “no agreement other than to continue discussions.”

Bachus later insisted to me that he had been acting on orders from Boehner, who must have understood that any agreement that was not supported by a critical mass of House Republicans was doomed to failure.

Barney wanted me to speak with Nancy Pelosi; the three of us got on the phone, and the two Democrats reamed me about Bachus. They basically wanted to know how they could get anything done with, as they said, Republicans behaving that way.

Meantime, the Republican leaders of both houses, John Boehner and Mitch McConnell, had been putting out statements asserting that there had been no agreement on a deal with the Democrats.

None of this confusion and contentiousness boded well for the upcoming meeting at the White House.

Joel Kaplan asked me to meet with President Bush before the bipartisan gathering in the Cabinet Room. The three of us stood on the terrace outside the president’s private dining room, and I watched George Bush chew on an unlit cigar on that damp, chilly afternoon. I told him of my exchange with McCain, and I saw a trace of a smile on his lips. He said that it was good that I had been firm. We were playing for big stakes. He said he sure hoped McCain knew what he was doing. As always, he tried to reassure me.

“Hank, we are going to get this done,” he promised. “There has to be some way Boehner can work this, and maybe I can help with the House Republicans.”

Any hope that conversation gave me was quickly shot down when we walked into the Oval Office, where GOP leaders had gathered. Everyone was trying to be cooperative. McConnell said we had to try to make this happen. But Boehner said nothing had changed; he didn’t have the votes.

“We need to get there,” the president said, pressing him.

“I’m trying,” Boehner said, reflecting his caucus’s reluctance. “I don’t have the support.”

All along Boehner had said he couldn’t deliver the votes, and now it looked like he was falling down on the job. I think he blamed me for putting him in this position. He wouldn’t speak to me again until October 3, when Congress finally approved TARP.

From the Oval Office we walked down the short corridor to the Cabinet Room to join the Democratic leadership, Obama, and McCain. It was quite an august group that had been assembled to hash out a solution to the financial crisis. Arrayed around the oval mahogany table with the president, the vice president, McCain, Obama, and me were the members of the House and Senate leadership: Reid and McConnell, Pelosi and Boehner, Dodd and Shelby, Frank and Bachus, Durbin and Hoyer. Staffers filled the chairs lined up along the walls and in front of the French doors that opened out onto the Rose Garden.

The president started the meeting by saying that we had a common objective and that we needed to work together to act as quickly as possible to reach our goal. As he spoke, I felt a sharp foreboding as I surveyed this group of politicians who represented disparate interests and were in some cases uncompromising in their positions. The president asked me to speak, and I once again described the dire conditions in the market and the need for emergency powers. When I finished, the president said he had a simple test for making a decision on this: “If Hank Paulson and Ben Bernanke say it’s going to work and help stabilize the financial system, we are for it.”

By protocol, the president turned to call on the Speaker of the House. And when Pelosi spoke, it was clear the Democrats had done their homework and had planned a skillful response for McCain. Pelosi said that Obama would represent the Democrats, who, she pointed out, had been working with me in good faith to formulate a deal. Harry Reid agreed that Obama would speak for the Democrats.

Then Obama delivered a thoughtful, well-prepared presentation, sketching the broad outlines of the problem and stressing the need for immediate action. He said the Democrats had been working closely with me; he ran through the rough terms of the morning’s discussion on the Hill, then mentioned the need for adjustments on oversight and executive compensation, as well as help for home-owners. He spoke without notes—much less a teleprompter—and spoke eloquently. “The Democrats will deliver the votes,” he asserted.

Then he sprang the trap that the Democrats had set: “Yesterday, Senator McCain and I issued a joint statement, saying in one voice that this is no time to be playing politics. And on the way here, we were on the brink of a deal. Now, there are those who think we should start from scratch…. If we are indeed starting over, the consequences could well be severe.”

But, of course, there was no deal yet. Bachus had been maneuvered into giving credibility to the appearance of one. But he, Boehner, and McConnell had since issued statements disclaiming the idea that there ever had been a deal.

Now Obama and the Democrats were skillfully setting up the story line that McCain’s intervention had polarized the situation and that Republicans were walking away from an agreement. It was brilliant political theater that was about to degenerate into farce.

Skipping protocol, the president turned to McCain to offer him a chance to respond: “I think it’s fair that I give you the chance to speak next.”

But McCain demurred. “I’ll wait my turn,” he said. It was an incredible moment, in every sense. This was supposed to be McCain’s meeting—he’d called it, not the president, who had simply accommodated the Republican candidate’s wishes. Now it looked as if McCain had no plan at all—his idea had been to suspend his campaign and summon us all to this meeting. It was not a strategy, it was a political gambit, and the Democrats had matched it with one of their own.

Boehner, who had just gotten through telling us in the Oval Office that he didn’t have the votes, said he was trying to find a way to get House Republicans on board. “I am not talking about a totally new deal, but we do need to tweak the core part of the program,” he said.

He raised the idea of including Cantor’s unformed insurance plan. Obama asked me if it was consistent with what we were trying to do elsewhere, and I said it wasn’t.

Decorum started to evaporate as the meeting broke into multiple side conversations with people talking over each other. Shelby waved a sheaf of papers, claiming they were from more than 100 economists who all thought TARP was a bad idea. He said we needed time to consider this plan. The president jumped in to say, “No, this is a situation where we need to act. We don’t have time to have hearings with a bunch of economists.”

McCain still hadn’t spoken. Finally, raising his voice over the din, Obama said loudly, “I’d like to hear what Senator McCain has to say, since we haven’t heard from him yet.”

The room went silent and all eyes shifted to McCain, who sat quietly in his chair, holding a single note card. He glanced at it quickly and proceeded to make a few general points. He said that many members had legitimate concerns and that I had begun to head in the right direction on executive pay and oversight. He mentioned that Boehner was trying to move his caucus the best he could and that we ought to give him the space to do that. He added he had confidence the consensus could be reached quickly. As he spoke, I could see Obama chuckling.

McCain’s comments were anticlimactic, to say the least. His return to Washington was impulsive and risky, and I don’t think he had a plan in mind. If anything, his gambit only came back to hurt him, as he was pilloried in the press afterward, and in the end, I don’t believe his maneuver significantly influenced the TARP legislative process.

A number of people I respect on the Hill have a different view. They believe McCain ended up being helpful by focusing public attention on TARP and galvanizing Congress to action. And John later did try to find ways for House Republicans to support legislation. But Democrats absolutely did not want him to get any credit. They wanted the economic issue as their own. Accusing McCain of blowing up a nondeal was just hardball political tactics. But when it came right down to it, he had little to say in the forum he himself had called.

Then Spencer Bachus chimed in to say that while he and House Republicans had not endorsed a deal, he was proud that House Republicans had been successful in including strong taxpayer protections. Pelosi jumped in, insisting vociferously that House Democrats were responsible for the taxpayer protections, not House Republicans. They began speaking over each other, as the president tried to restore order, and before long Pelosi and Bachus were yelling at each other. The room descended into chaos as the House and Senate members erupted into full-fledged shouting around the table. Frank started to loudly bait McCain, who sat stony-faced.

“What’s the Republican proposal?” he pressed. “What’s the Republican plan?”

It got so ridiculous that Vice President Cheney started laughing. Frankly, I’d never seen anything like it before in politics or business—or in my fraternity days at Dartmouth, for that matter.

Finally, the president just stood up and said: “Well, I’ve clearly lost control of this meeting. It’s over.”

As everyone left the room, I was appalled and disheartened. Not only had I witnessed conduct I could never have imagined before, but we didn’t even have a deal. If anything, people seemed further apart than before.

The Democrats had gathered in the Roosevelt Room and I became concerned that they would say something inflammatory to the press when they left. So I decided to approach them and urge moderation.

Everyone was huddled around Obama at the west end of the room, and when they saw me there was an uproar. They shouted at me to leave. I didn’t know what to do. Then, in an attempt at levity, I walked over to Pelosi and dropped to my knees, genuflecting at the altar of the Speaker of the House.

“Nancy,” I started to say.

She burst out laughing. “Gee, Hank, I didn’t know you were Catholic.”

“Don’t blow this up,” I said. It had been a difficult meeting, I acknowledged, but we all needed to come together.

“We’re not the ones trying to blow this up,” she said.