CHAPTER 16

Wednesday, November 19, 2008

Just one week after I had delivered a speech meant to reassure the markets, I headed to the Oval Office to tell the president that yet another major U.S. financial institution, Citigroup, was teetering on the brink of failure.

“I thought the programs we put in place had stabilized the banks,” he said, visibly shocked.

“I did, too, Mr. President, but we are not out of the woods yet,” I said. “Citi has a very weak balance sheet, and the short sellers are attacking.”

It was just after 1:00 p.m., and world markets were again in disarray, pummeled by investor worries about banks, automakers, and the overall U.S. economy. The U.K.’s FTSE 100 Index and the Frankfurt Stock Exchange’s DAX 30 Index had ended their trading sessions down nearly 5 percent, and the Dow was on course for a 5 percent slide of its own, to 7,997, its first close below 8,000 since March 2003.

All financial companies were under pressure, but Citi was being hammered the hardest. Its shares had already sunk 13 percent, on their way to a full-day plunge of 23 percent to $6.40, a fall of 88 percent from May 2007. Its credit spreads were also starting to balloon—they would hit 361 basis points that day, up from about 240 basis points the day before.

Arguably the best-known bank in the world, Citi had operations in more than 100 countries and more than $2 trillion in assets on its balance sheet. But the sprawling New York–based giant, built through multiple acquisitions, struggled with an unwieldy organizational structure and lacked a single unifying culture or clear business strategy. I’d long believed it had become almost too complex to manage.

In the boom years, Citi had built a substantial exposure to commercial mortgages, credit cards, and collateralized debt obligations tied to subprime mortgages. It carried more than $1.2 trillion in assets off its balance sheet, half of these related to mortgages.

I knew that Citi was the weakest of the major U.S. banks. For its size, the bank had a modest retail deposit base, particularly on its home turf. This made it more dependent on wholesale funding and foreign deposits, and hence more vulnerable to panic.

The market’s fears had intensified earlier that morning when Citi announced that it would wind down the last of its SIVs, bringing $17.4 billion worth of risky assets onto its books. This news followed the disclosure two days before that the bank was laying off 53,000 employees and had dropped plans to sell $80 billion of marked-down assets. Investors worried that Citi couldn’t find buyers for its toxic assets or might not be able to afford the write-down from a sale.

Notwithstanding Citi’s shakiness, I had been falsely reassured by the fact that the market had supported the bank for so long. Its sinking share price had tracked the decline in other financials, and Citi’s regulators had indicated that they were keeping close tabs on it.

But now the market had turned on Citi, and we would have to act quickly. Like that other troubled financial colossus, AIG, the New York bank was deeply enmeshed in a complicated web of ties to financial institutions and government entities all over the world.

“A collapse would be horrific,” I told the president. “We’ve said we will let no systemically important bank fail. We can’t let it happen now.”

“Aren’t there things you can do to save it?” the president asked.

I explained that we had the resources in TARP, but if Citi came unglued, it could trigger a chain reaction among the hundreds of financial institutions that were its customers and counterparties, and we didn’t have the wherewithal to deal with another run on the banking system. The Citi crisis proved that we needed to get Congress to release the rest of the TARP money, I said.

“It’s politically difficult, but we’re going to have to figure out how to do it,” I told him.

“Just don’t let Citi fail,” he replied.

With the president’s admonition on my mind, I flew to Los Angeles later that day. I was hesitant to leave Washington, but Nancy Reagan had long ago invited me to speak at the Ronald Reagan Presidential Library. I knew the markets were watching my every move: canceling the trip could spark rumors that might further endanger Citi. I arrived at the Westlake Village Inn in Simi Valley at about 9:30 p.m. and went to bed almost immediately in order to be rested for the morning.

Of all the rough nights I’d endured throughout the crisis, this one was by far the worst. Surrounded by photos of Ronald Reagan in the White House and at his Santa Barbara ranch, I lay awake, tormented by self-doubt and second-guessing.

November had been one rough month. Democrats were excoriating us over foreclosure relief and our decision not to buy toxic assets, while conservative critics continued to carp at the bailouts we’d been forced to undertake, which they slammed as nationalization or, worse, socialism. The markets were falling relentlessly. In the barely two weeks since Senator Obama’s election, the Dow had lost 17 percent.

But I felt we could point to any number of successes, from securing TARP’s passage to the money market fund guarantee, our efforts at international coordination, and the bank capital program. But that night as I tossed and turned, I wondered if my recent decisions had only added to the confusion, suspicion, and fear that so many citizens felt. In spite of all we had done, the country was heading deeper into an ugly recession, and one of its biggest banks was on the verge of collapse.

The rare bright spot in recent days had come with the G-20 leaders’ meeting on November 15. It was a signal achievement of President Bush’s to have brought together countries as diverse as Germany, Saudi Arabia, and Mexico to address the global financial crisis and shape a communiqué that embraced free-market principles while recognizing the need for financial reform. Even as some leaders of the developed countries apologized for the mistakes of our free-market system, their counterparts among the emerging nations warned of the dangers of overregulation. But overall, the meeting had been marked by earnest cooperation, with all the leaders rejecting protectionism and agreeing that reform efforts would be successful only if there were a commitment to free-market principles.

Once the leaders left, however, I had returned to unpleasant political realities, and on November 17 Ben and I were once again sitting at Nancy Pelosi’s long conference table, surrounded by Democratic representatives and senators. Looking around the room, I saw no friendly faces.

“Don’t you want to show those of us who voted for TARP that some of the money is going to foreclosure relief?” Nancy asked pointedly.

Although I assured the lawmakers I would keep working to find ways of reducing foreclosures beyond our loan modification plans, they weren’t convinced. This wasn’t political theater. It didn’t matter that TARP had been created as an investment program to prevent the collapse of the financial system or that we needed to conserve our limited resources in such a volatile market. They all wanted a spending program and a piece of me.

The next day, November 18, Ben, Sheila Bair, and I testified before Barney Frank’s Financial Services Committee. I had endured some rough hearings on Capitol Hill, but this was the toughest one chaired by Barney. He displayed four pages of excerpts from the TARP legislation that he said authorized aggressive action on foreclosures. New York Democrat Gary Ackerman said, “You seem to be flying a $700 billion plane by the seat of your pants.”

Maxine Waters piled on. “You, Mr. Paulson, took it upon yourself to absolutely ignore the authority and the direction that this Congress had given you,” she intoned.

Then, just a few hours later, Bob Rubin, now a board director and senior counselor at Citi, called to tell me that short sellers were attacking the bank. Its shares had closed the day before at $8.36 and were sinking deeper into single digits. I had known Bob for years, first as my boss and the former head of Goldman Sachs, then as Treasury secretary under President Bill Clinton. Always calm and measured, Bob put the public interest ahead of everything else. He rarely called me, and the urgency in his voice that afternoon left me with no doubt that Citi was in grave danger.

Thursday, November 20, 2008

Exhausted and demoralized, I gave up on sleeping and switched the hotel room television on to CNBC. Normally I didn’t pay much attention to the talking heads, but that morning I listened glumly as market participants and traders blamed the ongoing financial crisis on me and my decision to drop the asset-buying plan.

Feeling low, I made my first call of the day, at about 5:30 a.m. Pacific time, to Tim Geithner in New York.

“I feel responsible for this mess,” I told him.

“Hank, you’re doing your best. Don’t look back,” he said.

Tim’s steady, no-nonsense manner quickly braced me, focusing me on the crisis we faced. Speculators were pushing Citi’s credit spreads wider, while short sellers continued to drive its stock down. We needed to get our teams together. Ninety minutes later, Tim and I held a conference call with Ben, Sheila, and John Dugan.

“We’ve told the world we’re not going to let any of our major institutions fall,” Tim asserted. “We’re going to have to make it really clear we’re standing behind Citigroup.”

I left the inn for the Reagan Library. It was a beautiful Southern California morning, but I was too tense to enjoy it. Before my 11:00 a.m. speech, I toured the library, where the president’s writings were framed on the walls. I stopped to read his words, neatly written in longhand, and I reflected on what an extraordinary communicator he had been. He understood the immense power of a clear message, delivered simply and straightforwardly. And his message had been clear and simple. More than any other president, Ronald Reagan represented the free-market principles I had long believed in.

As I was about to address an audience of Reagan conservatives, I was struck by the irony of my situation. To protect free-enterprise capitalism, I had become the Treasury secretary who would forever be associated with government intervention and bank bailouts. The speed with which the crisis hit had left me no other choice, and I had set aside strict ideology to accomplish the higher goal of saving a system that, even with all its flaws, was better than any other I knew—I had been forced to do things I did not believe in to save what I did believe in. Now here I was, about to deliver a speech explaining these government bailouts to a gathering of conservative true believers in a shrine of free-market capitalism. And if that weren’t irony enough, I knew that if our rescue of Citi failed, all of our efforts to date would have been in vain.

A short while later I addressed the group, taking them through each step of the crisis and stressing the need for global regulatory reform. But I realized straightaway that my speech was too defensive and complex—and too long. The audience was friendly and supportive, but these were staunch Republicans who just hated bailouts. The one big round of applause I got came when I said we shouldn’t use TARP money to bail out the automakers.

Afterward, I touched base briefly with Bob Rubin. “Things aren’t good,” he said in his typically low-key way. As its shares sank and the press speculated about a government bailout, Citi’s customers were increasingly nervous.

At lunch I listened to some of the members of the audience talk about the losses they and their friends had taken on their houses and in the market. They weren’t criticizing me—on the contrary, they thanked me for my hard work. But my doubts from the night before returned. I felt responsible for their suffering and for all that had gone wrong.

Uneasy, I spoke to Ken Lewis and Jamie Dimon at the airport before boarding my 4:00 p.m. flight. Both reported that the markets were tough and that everyone was watching Citi, whose shares ended the day down a further 26 percent, at $4.71. The broader markets were taking their worst hit in years. The Dow dropped 5.6 percent to 7,552, and the S&P 500 fell to its lowest close since 1997.

I buckled my seat belt before takeoff and began to sketch out a plan of attack for the next day. We had so much riding on a Citi rescue, and we had to find a way to discourage short sellers from turning on another bank. My mind churned. But the strains of the day had taken their toll on me, and I fell asleep before takeoff. I didn’t wake up until almost midnight, as we circled before landing. When we touched down on the runway, I remembered the president’s last words about Citigroup before I left the Oval Office a day earlier: “Don’t let it fail.”

Friday, November 21–Saturday, November 22, 2008

All day Friday, Citi’s regulators worked flat out, floating ideas to stave off disaster, from selling parts of the bank to strengthening its deposit base by combining it with another bank. Some wanted to replace Citi’s management and directors. I had strongly advocated installing new leadership at failing institutions and had even chosen the new CEOs for Fannie, Freddie, and AIG. But I wasn’t looking for scalps; I wanted to find solutions. And at Citi, Vikram Pandit had been CEO only since December 2007. Unless we had someone in mind who was better qualified and willing to take the job, I saw no point in discussing the matter.

“We can pound on Citi all day long,” I told my team. “But you know what? If they go down, it’s our fault. We’ve got to deal with it, and if we don’t, the American people will pay the price.”

During the last hour of trading, we got some uplifting news when NBC announced that Obama had picked Tim Geithner as his Treasury secretary. The markets exploded upward, with the Dow jumping 7.1 percent to close at 8,046, up 6.5 percent for the day. Citi surged by 19 percent, though it still closed down for the day at $3.77. Its credit default spreads were approaching 500 basis points, while those of JPMorgan, Wells, and BofA were all comfortably below 200 basis points.

Obama’s decision gratified me. Apart from reassuring investors, it meant, I felt, that many of our policies would be pursued, even if they were modified and rebranded. Indeed, I took the market’s rebound as a vote of confidence in what we’d been doing: the markets saw Tim’s nomination to succeed me as a sign of continuity.

When I called Tim to congratulate him, he said that the Obama transition wanted him to disengage from day-to-day activity at the New York Fed as soon as possible. The new economic team was meeting in Chicago that weekend, and the president-elect wanted him there. I pressed him not to go. We needed to come up with a rescue plan before Monday, and his presence was crucial as the bank’s primary regulator.

“I’ll do everything I can to be helpful,” I said. “But we need you on the job this weekend.”

To my relief, Tim agreed to remain in New York. But given his future position, he wouldn’t speak to Citi or any other bank.

By the time Tim, Ben, Sheila, John Dugan, and I conducted our first conference call, on Saturday at 10:30 a.m., Citi had submitted a two-page proposal to the OCC. The company wanted the government to insure more than $300 billion of toxic assets, including residential- and commercial-mortgage-related securities and troubled corporate loans.

We knew we couldn’t assume that Citi’s request would be enough to stabilize the markets. We needed to design a plan that would both appeal to investors and protect the taxpayer. And, in my opinion, we needed to put more equity into the company. Capital was the strongest remedy for a weak balance sheet, and the markets needed to see that the government was supporting Citi.

The OCC, FDIC, and New York Fed had set up offices at Citi’s headquarters and were scouring the $300 billion of assets to determine their true value. Jeremiah Norton, who happened to be in New York that Saturday, joined the on-site examiners. After he arrived, regulators handed him a memo that they had prepared after an all-night session with bank executives that said Citi, by its own estimates, would become illiquid by the middle of the next week. Regulators were frustrated, complaining that Citi executives were disorganized and unable to provide necessary information on the assets they wanted insured.

No one seemed more frustrated than Sheila, who at first suggested using the FDIC’s normal procedures for handling Citi. She proposed other, less costly strategies, such as closing Citi and putting the remains in the hands of a healthy bank. Clearly, she didn’t want the FDIC to pay for the losses at Citi, which had significant operations that were not insured by her agency.

I respected Sheila, who improved most programs we worked on together. But sometimes she said things that made my jaw drop. That morning she had said she wasn’t sure that Citi’s failure would constitute a systemic risk. She felt that Citi had enough subordinated debt and preferred stock to absorb the losses. She spoke as if Citi were just another failing bank and not a world leader—with $3 trillion in assets, both on and off its balance sheet—imploding in the midst of the worst economic conditions since the Great Depression.

“So,” she said, “why not let them go through the receivership process?”

Although I believed she was simply posturing, I replied, “If Citi isn’t systemic, I don’t know what is. And if we do anything less than a powerful response, it will send jitters through the whole market, and people could really put us to a test. I don’t have a lot left in TARP.”

We also had to consider Citi’s $500 billion of foreign deposits. Because foreign deposits were not protected by FDIC insurance, that money was more likely to run to avoid the risk of a bank failure, a major reason Citi’s liquidity was likely to evaporate in a few days.

I asked hypothetically if the FDIC could insure foreign deposits in an emergency; Tim believed it could, but Sheila didn’t think so. In my view, we couldn’t wait to find out. We needed to make another equity infusion in the company. I believed that if we acted forcefully now we had enough TARP capacity to prevent a Citi failure. But if the market’s confidence evaporated and the giant bank had to start unwinding all of its $3 trillion in assets in a hurry, the losses could spiral and shake the entire banking system down to its smallest players.

Sheila and I spoke one-on-one after the morning conference call broke up. “Hank, this is hard for me,” she said. She was dealing with a board that was skeptical about rescuing Citi and exposing the FDIC’s $35 billion fund to the company’s potential losses. And to do her job right, Sheila had an obligation to get answers to all the questions she was posing.

Through the afternoon, the New York teams made progress in valuing Citi’s problem assets and began work on a plan to insure potential losses, but this was no easy task given the large number of complex assets. Moreover, the FDIC had reservations about some of the valuations, because they used a different process from other regulators’. But Sheila promised to keep working toward a deal, and I felt sure we would have her support in the end.

That evening, British ambassador Nigel Sheinwald had invited Wendy and me to a dinner at his residence, adjacent to the British Embassy and just a short distance from our house. As we circulated during cocktails, friends and strangers approached, saying things like “I hope you’re getting some sleep.” This made me uncomfortable; I didn’t want to be thought of as poor Hank, the victim. I said to Wendy, “Do I look that bad?” She replied, “You should be grateful that people are being so supportive.”

As the hundred or so guests began to take their seats for dinner, I ducked into an empty room to check in with Ben Bernanke. We talked for about half an hour before I returned to the dining room. We agreed that Citi needed an equity investment from TARP, but I demurred when Ben raised the possibility of buying common stock; the idea was good corporate finance but bad public policy. Citi’s market value was only about $21 billion, and I pointed out that if we invested any meaningful amount in common stock, we would not only dilute shareholder equity and reward the short sellers, but also leave the government owning a large part of the bank. I could all too easily envision headlines about the nationalization of Citi. I told Ben I was leaning toward buying preferred stock.

Sunday, November 23, 2008

Early Sunday morning, I returned to Treasury and was not surprised to learn that we still had plenty of work to do. Once again, surrounded by the empty soda cans and half-eaten sandwiches of another frantic weekend, we raced against time to announce a deal before the Asian markets opened.

Still, progress was painfully slow. Some of the regulators complained that Citi lacked a sense of urgency. Bob Rubin called to say that Citi was not being given clear direction. The confusion came in part because Tim would not talk directly with the bank—we had lost a key negotiator. I asked Dan Jester and David Nason to take the lead on all calls with Citi from then on.

By evening, thanks in large part to Dan and David, we had made it work. We all agreed on the loss sharing on the $306 billion in identified assets. Citi would absorb the first $29 billion in losses in addition to its existing reserves of $8 billion, with the government taking 90 percent of the hit above that. The first $5 billion of government exposure would come out of TARP, and the FDIC would take the next $10 billion. The Fed would fund the rest with a non-recourse loan. To bolster Citi’s capital, the U.S. would invest $20 billion in return for perpetual preferred shares yielding 8 percent. It would receive an additional $7 billion in preferred shares as a fee for the guarantee, in addition to warrants equivalent to a 4.5 percent stake in the company.

Citi would face tough restrictions, including limits on executive compensation more stringent than those in our capital program. The bank would be prohibited from paying more than one cent per quarter in dividends on common stock for three years without U.S. government approval. Citi would also implement the FDIC’s IndyMac Protocol on mortgage modifications.

I was quite pleased with our solution, as I felt it validated my decision not to use TARP money to directly purchase illiquid assets. With another bank on the brink, we had needed a quick solution that used up as few of our scarce resources as possible. Had we bought Citi’s $306 billion of bad assets directly, we would have had to write a check from TARP’s fund. Instead, we creatively combined powers with other agencies and shared the risk of losses with the FDIC and the Fed.

Kevin Fromer and I called to update congressional leaders, who were glad to hear we’d averted disaster. But the Democrats made it clear I would now have to do something to help the automakers. Their message: “You can’t just take care of fat-cat Wall Street bankers and ignore the plight of working Americans.”

Early that evening, I called the president. I explained that we had fashioned a plan we believed the market would accept, enabling us to avoid a chain reaction of failures.

“Will it work?” he asked.

“I think so, but we won’t know until the morning.”

Monday, November 24, 2008

At 7:35 a.m. on Monday, I spoke again to the president, and I had good news to report. Asian stocks were flat overnight, but European markets were soaring, on their way to 10 percent gains. Now President Bush turned one of my favorite expressions on me.

“How many sticks of dynamite are you going to need to break this crisis?”

“I don’t know, sir,” I answered. “But the way things are going, I may have to put one in my mouth and light the fuse.”

After the president stopped laughing, I told him that I sometimes felt like Job. If something could go wrong, it would. But he told me, “You should welcome the challenge, Hank. Thank goodness the crisis happened when it did. Imagine if it had hit at the beginning of a new administration, when they were just learning how to work together.”

It was the start of a great morning. Citi’s shares jumped by more than 60 percent at the opening of trading. I was pleased that our rescue plan had punished the short sellers and thereby averted similar attacks on other banks.

Feeling as good as I had in weeks, I took a brief break from Washington to support Wendy. That evening, the Randall’s Island Sports Foundation in New York City was honoring her for her work in environmental education. Late in the afternoon, I flew to New York to attend the benefit dinner at the Plaza Hotel.

Wendy had been a great source of strength for me, bucking me up through the long string of crises, but the lengthy workdays and nonstop stress had robbed us of any quality time together. I went to the office early every morning and came home late, and if I didn’t get right on the phone, I often went straight to bed. Wendy and I rarely had dinner together, and when we did, I was distracted. Worst of all were the times I was physically present but mentally elsewhere. Wendy said she felt as if she’d lost her husband and best friend.

The evening also gave me a chance to reconnect with old friends, but during the predinner cocktail party I had to duck out of the room a few times to take calls, including two from Nancy Pelosi, who told me point-blank that it was politically impossible to rescue Citi and not help the automakers. She had until recently opposed bailouts for the car companies, which she considered poorly managed and which had done themselves no favors when their CEOs flew to Washington by private plane to beg for money. I reiterated my position that Congress should rescue them by amending earlier legislation that provided a $25 billion loan for fuel-efficiency improvements. I was worried that we didn’t have enough resources to take care of the financial system, much less the automakers, which couldn’t seem to come up with a plan for their long-term viability. Then I switched to the foremost issue in my mind—getting Congress to release the remaining tranche of TARP.

“We’re going to need more money from TARP,” I told her. “Do you realize what we just escaped with Citi?”

“It’s going to be very hard,” she said. “The American people don’t support it, and I don’t have the votes.”

I hoped Nancy would bite on my implied offer—agree to help release the remaining tranche, and we’d use some of it on the auto companies. But it was obvious that the politically astute Speaker didn’t want to do it. She knew that an auto bailout would depend on the Democrats—the Republicans were lined up against it—and she wanted me to fall on my sword by using TARP money for a very politically unpopular act.

At dinner, Wendy and I sat next to Mike Bloomberg, who was also receiving an award. When he spoke, the New York mayor graciously mentioned me, asserting that “no magic wand” existed to fix the financial crisis and that I had the support of everyone in the room. Wendy spoke so eloquently on teaching kids about nature that I wished I had taken some public speaking lessons from her.

The next morning, we caught an early flight to Washington. Back at Treasury, I stopped in the Markets Room and saw that the markets were reacting favorably to the Fed’s announcement of powerful new programs. One was the Term Asset-Backed Securities Loan Facility, or TALF. This program was the culmination of the efforts of the Fed, working with Steve Shafran at Treasury, to unclog the market for securitized consumer loans for cars, credit cards, college expenses, and small businesses. It was designed to pump $200 billion into the credit markets through a one-year loan facility set up by the Fed and backed by $20 billion of TARP funds.

The Fed also announced that it would buy up to $100 billion worth of debt issued by Fannie Mae, Freddie Mac, and the Federal Home Loan Banks, as well as $500 billion of mortgage-backed securities guaranteed by Fannie, Freddie, and the Government National Mortgage Association, better known as Ginnie Mae. Treasury had been purchasing GSE-guaranteed debt at a much more modest level, and the Fed’s announcement had an almost instantaneous effect: rates on 30-year mortgages dropped by as much as half a percentage point, while Fannie and Freddie securities increased in value, cheering capital markets. The Dow appeared set for another strong session. Over the past three days, it had surged 927 points, or more than 12 percent.

Tuesday, November 25, 2008

Joel Kaplan kept a block calendar on the wall of his modest White House office that showed the days left before the new administration swept in on January 20. Kevin Fromer, Dave McCormick, and I had come to the White House late on the afternoon of November 25 to talk about getting Congress to release the second half of TARP. Joel, Josh Bolten, and Keith Hennessey used the calendar to demonstrate how little time remained to get anything accomplished between annual government spending bills and dealing with the automakers.

Joel believed that the best course was simply to wait and let Obama take down the rest of TARP when he came into office. But since I had strongly advised both Joel and President Bush that this would be imprudent, he suggested that we try to link arms with the Obama team to act on TARP and autos in December. Joel, who doubled as the White House’s point man on autos, said we needed to deal with the carmakers, either through a TARP loan or separate legislation. We all understood that GM would file for bankruptcy by year-end if it didn’t get financial assistance.

To me, a 76-day transition period between administrations was a barbarically long time to be without adequate resources. Earlier in the afternoon I had called Rahm Emanuel to tell him we needed to take down the last $350 billion. “That is not good news,” he said, and he recommended that I call Larry Summers.

I got home shortly after 7:30 p.m. and was buoyed by the sight of my daughter, Amanda, her husband, Josh, and little Willa, my granddaughter. The next day we were all going to Little St. Simons Island for Thanksgiving. I only needed to hear Willa say, “Boppa, I want to cuddle,” then climb onto my lap with her blanket, to forget the credit crisis for a few minutes.

But soon I needed to call Larry Summers to explain that we didn’t have enough approved TARP money left to protect the system.

“What do you think you will need to get the rest?” he asked.

“I think we’ll have to give Congress some clarity on what we’re going to use it for,” I answered. “We’re going to have to commit to a mortgage relief program and a solution on autos.”

“Do you think it would be sufficient to say that there’s going to be a program spending up to $50 billion for mortgage relief and that Obama will determine what the program is?”

“I would far prefer that to proposing a program ourselves,” I said, knowing full well President-elect Obama would want to choose his own program.

Overall, Larry was noncommittal, but he asked whom on my staff the transition team could work with. I was hopeful the Bush and Obama teams would work together successfully on a plan.

By midmorning on Wednesday, Wendy and I were kayaking toward Little St. Simons Island, while Amanda, Josh, and Willa rode the ferry. The day was windy and refreshing, and the brisk salt air and exercise relieved much of my tension. We picnicked on the beach that afternoon, and I made a few more calls before turning off my phone for the first time since August.

I had one of my best Little St. Simons fishing days on Thanksgiving, followed by a turkey dinner on the beach. Standing on one of my favorite spots on earth—beside the ocean, surrounded by birds—and watching Willa spot a bald eagle, I felt for a moment that my problems weren’t that huge.

Friday morning, however, I turned my phone back on and spent much of the day on the phone. Josh Bolten had invited the Obama economic team to sit down with us on Sunday to discuss getting access to the rest of the TARP funds and to devise a solution for the automakers.

That weekend, Joel came up with a proposal: Car companies seeking government loans would present detailed plans for their future to a financial viability adviser, or “auto czar,” whose appointment would be agreed upon by President Bush and Obama. While the czar assessed the plans, Treasury would make a short-term bridge loan to the companies—say, to March 31. If an automaker failed to provide an acceptable plan, the adviser would create one, with options including a Chapter 11 reorganization. Joel’s proposal required that Obama publicly support the Bush administration’s policy that the automakers needed to be on a path for viability before they could get TARP money.

Sunday, November 30, 2008

Getting the Obama team to meet proved to be a challenge. Rahm Emanuel declined to attend, and the president-elect’s people wanted the meeting to take place at Treasury rather than the White House, presumably so as not to appear to be working too closely with the Bush team.

The meeting was set for 4:00 p.m. the Sunday after Thanksgiving, in my office. Larry Summers arrived early, accompanied by Dan Tarullo, Obama’s economics adviser. As the former Treasury secretary walked around the anteroom of his old office, he paused in front of a large photograph of a gathering of former Treasury secretaries taken at a dinner George Shultz had given in my honor in 2006. Larry liked the picture so much we later made him a copy.

The Bush contingent consisted of Josh, Joel, Keith Hennessey, Commerce secretary Carlos Gutierrez, Dan Meyer, and me. The Obama team also included Mona Sutphen, future deputy chief of staff for policy, and Phil Schiliro, legislative affairs specialist. After a few pleasantries—and Larry’s request to keep these exploratory discussions confidential—Josh opened by saying I wanted Congress to give us access to the rest of TARP, and that would happen only if Obama led the effort. I laid out my suggestions for using the last tranche, which included a foreclosure program, the TALF, and funds for contingencies and future Obama programs. Joel outlined the plan for automakers.

Other than Larry, Obama’s people were quiet and seemed on guard. They asked a lot of questions but offered no suggestions for how we might work together. Though the meeting was polite, I quickly realized that we weren’t getting anywhere. Larry clearly didn’t like our idea for the car companies, preferring not to be bound by the Bush administration’s viability test and an independent auto czar. When the meeting ended, so did my hopes of getting Obama’s people to support me on getting the final tranche.

Monday, December 1–Sunday, December 7, 2008

The next day, the markets turned ugly again, as the National Bureau of Economic Research announced that the U.S. was officially in a recession and had been for the past year. The Dow plunged 680 points, or 7.7 percent; frightened investors piled into 10-year Treasuries, pushing the yield down to 2.73 percent, the lowest point since the 1950s.

On Tuesday, GM and Chrysler sent letters to Congress asking for emergency loans of $4 billion and $7 billion, respectively. (Two days later the auto executives themselves would arrive, in fuel-efficient hybrids this time.) But House and Senate Republicans remained adamantly opposed to bailing out the automakers. That didn’t bode well for getting the final tranche of TARP. Democrats would not release it without an auto provision, and Republicans would not approve it if it contained an auto bailout.

The streets of Washington were cold and grim on the afternoon of December 2, when I left for Beijing to attend my final Strategic Economic Dialogue as Treasury secretary. We had two days of productive sessions, which included announcing a number of programs for the U.S. and China to cooperate on energy and the environment. We had selected these initiatives knowing they would hold bipartisan appeal in the U.S. and would help ensure the continuation of the SED into the next administration.

In my concluding meeting with President Hu Jintao in the massive Great Hall of the People, he emphasized the important contribution SED had made to strengthening U.S.-China relations, and he encouraged me to come back soon after I left Treasury. As was our custom, Hu and I then adjourned to a private meeting, where I assured him that the relationship between our countries would only improve and advised him to avoid protectionist moves on currency and trade.

“China stands to gain more than anyone in the world by freeing up trade, and it stands to lose more than anyone by backsliding,” I said.

“We didn’t move as fast in a number of areas as you wanted us to,” Hu said. “But we don’t vacillate, and we will continue with reform and opening up.”

I left Beijing pleased with the success of the SED, but I was returning to an increasingly troubled economy. On December 5, the government reported November job losses of 533,000, for a total of almost 2 million jobs lost in the past year. The unemployment rate stood at 6.7 percent, versus 4.7 percent a year before. And the latest news from the auto industry was bleak. That morning, United Auto Workers president Ron Gettelfinger testified before Congress that “GM could run out of funds by the end of the year, and Chrysler soon thereafter.”

Wendy and I spent a restful day together on Saturday and attended the Kennedy Center Honors the next evening. A reception in the East Room of the White House preceded the event, and there I ran into Nancy Pelosi. I told her that circumstances might force us to notify Congress that we needed to draw down the last TARP tranche, perhaps over the holidays. She took my hand, which she always did when she was trying to charm.

“Please don’t,” she told me. “We don’t have the votes.”

While Nancy and I were chatting, I was surprised to see Clint Eastwood walking toward us. The actor, a friend of Nancy’s, would be speaking on behalf of honoree and fellow actor Morgan Freeman, and he said, “I don’t know what she’s talking to you about, but she’s stronger than you, Mr. Treasury Secretary. I suggest you do whatever she wants.”

I chuckled appreciatively. By then, no one understood Nancy Pelosi’s power better than I did.

Thursday, December 11–Wednesday, December 17, 2008

I wanted a chance to talk through the auto situation in a small setting, so Joel Kaplan and I had lunch alone with the president on December 11. The day before, the House had approved an emergency plan to speed $14 billion to the car companies without dipping into the TARP funds, but the administration-approved measure faced serious opposition among Senate Republicans. Vice President Cheney had joined a group of White House staff led by Josh Bolten that tried to persuade them to help the automakers. He said the GOP risked being labeled the party of Herbert Hoover if it allowed the companies to fail. But they refused to budge.

This would be one of our last lunches together. As usual, we ate in the president’s private dining room off the Oval Office. In my two and a half years at Treasury, I had noted how little these lunches varied. I normally ordered soup and either a chicken- or a tuna-salad sandwich. The president always ate the same thing: a little bundle of carrots, a chopped apple, and a hot dog in a bun. Wendy frequently accused me of inhaling my food, saying she had never seen anybody eat faster than I did. Then again, she had never eaten alone with the president—his food would be gone in five minutes. Sometimes we’d have low-fat soft frozen yogurt for dessert; other times the president would take out a cigar and chew on it.

For President Bush, an auto bailout was a bitter pill to swallow, especially as the last major economic decision of his administration. He disliked bailouts, and he disdained Detroit for not making cars people wanted to buy. But we were in the midst of a financial crisis and a deepening recession, and he recognized that if the giant companies were to declare bankruptcy, they would be doing so without advance planning or adequate financing for an orderly restructuring. The consequences for the economy would be devastating. It would create more panic, and it would crush auto suppliers and other carmakers—not just Chrysler and Ford, but also Honda’s and Toyota’s U.S. operations. Although the president didn’t explicitly say he would jump in to save the automakers, I knew he recognized—once again—the need for quick, decisive action.

Senator Bob Corker had tried to make legislation palatable to Senate Republicans but his efforts fell apart that night, largely because the auto unions refused the wage cuts that he proposed. When Democrats and Republicans failed to reach agreement, they went home for Christmas break having done nothing to bolster either automaker. Harry Reid was quoted as saying on the Senate floor, “I dread looking at Wall Street tomorrow. It’s not going to be a pleasant sight.”

He didn’t have to wait for Wall Street. Asian markets opened first and were sharply down: Japan’s Nikkei index fell more than 7 percent in midday trading, as did Hong Kong’s Hang Seng.

I had just arrived at the office at 7:00 a.m. the following morning when Joel called me. President Bush had decided to announce that he would consider using TARP funds to help the car companies. He was flying to Texas on Air Force One, and he wanted to get his statement out immediately, well before the U.S. markets opened. The statement had already been written; Joel wanted to make sure I was comfortable with it. I had just a few minutes to read it over, and I quickly said it was okay.

The statement did calm the markets, giving the White House some time to debate the next steps. Josh told me that the White House would control the process but that Treasury should run the negotiations with carmakers. I assigned Dan Jester, Steve Shafran, and Jim Lambright to develop the terms for the loans to GM and Chrysler. I encouraged the White House to make a quick decision. Since Congress had failed to act, TARP was the only tool we had before the companies ran out of funds, and there was nothing to be gained from dragging the process on.

Another big problem erupted early in the afternoon on December 17, when Ken Lewis called to tell me that Bank of America’s board had concerns about whether to go ahead with its $50 billion deal to buy Merrill Lynch. He said he had recently learned that Merrill Lynch’s fourth-quarter losses were expected to run to about $18 billion, pretax—way out of line with what he or anyone had expected. As a result, his board was considering invoking the material adverse change (MAC) clause to get out of the deal with Merrill Lynch. Common in merger arrangements, a MAC allows the buyer to break the agreement under extraordinary circumstances. But I knew that shareholders from both companies had already approved the deal, and I had never heard of a buyer successfully invoking a MAC after a shareholder vote. Moreover, this MAC clause was unusually favorable to Merrill Lynch in that it could not be invoked for a general deterioration in market conditions.

While I understood that December was shaping up as a bad month for banks, the $18 billion number shocked me. “This is a very serious matter,” I told Ken. “You need to come to Washington and meet with the Fed immediately.”

“I sure hope you’ll be there,” he told me.

We set up a meeting for 6:00 p.m. that evening at the Fed. Bob Hoyt, Jim Lambright, Jeremiah Norton, and I arrived early and conferred with Ben Bernanke, Don Kohn, and general counsel Scott Alvarez in Ben’s conference room. Surrounded by the portraits of former Fed chairmen that lined the walls, I learned that the Fed knew nothing about the expected size of Merrill Lynch’s losses but was aware that BofA was expecting to lose money in the fourth quarter and had a weak capital ratio. Ben and I agreed that we should take a tough line on the MAC, asking BofA for its legal justification. I shared my concerns about the market reaction to an $18 billion pretax Merrill Lynch loss for one quarter. If Merrill’s losses were truly of this magnitude, we faced a serious problem.

Ken Lewis arrived promptly at 6:00 p.m. with his chief financial officer, Joe Price, and newly minted general counsel, Brian Moynihan. Ken explained that BofA had recently learned that Merrill was expected to lose $18 billion in the fourth quarter and raised the possibility of invoking the MAC. Ben strongly pushed back on that, saying that doing so might lead to a run on the bank. Ken asked if he was talking about Merrill Lynch, and Ben replied, “No, both Merrill and Bank of America—out of a loss of confidence in management for putting themselves in this position.”

Someone raised the possibility of the government’s giving BofA a support package similar to Citi’s. Ben replied that Citi had received federal assistance because of systemic risk, not to facilitate the close of a merger. If a systemic risk existed after BofA’s merger with Merrill closed, we should address it at that time, Ben said.

Ben and I indicated that Treasury and the Fed were committed to preventing the failure of any systemically important institution. By the end of the meeting, BofA had agreed to work closely with the Fed to provide the necessary information so that we could better understand the situation; we, in turn, would give them more details of the structure of the Citi bailout. We left the meeting knowing we had a lot of work to do to get all the facts about the nature of the losses and what had caused them.

With the U.S. falling further into recession, I was deeply concerned about being caught short of funds. Merrill Lynch’s staggering fourth-quarter losses now threatened the viability of two huge institutions, with combined assets of $2.7 trillion, and raised the specter of a costly rescue of Bank of America. Add to that the impending auto bailout, and TARP would be drained even further. January 20 was only 33 days away, but that would seem an eternity if I didn’t have sufficient funds to deal with any crisis that arose.

I arrived at the office on Friday, December 19, at 7:15 a.m. with renewed determination to get Tim Geithner or Larry Summers to persuade Obama to work with us to take down the last tranche right after the holidays. The previous afternoon the president had given me his final instructions on the autos, and I had asked my Treasury team to negotiate through the night so that we could announce a deal before the market opened.

We had expected President Bush to announce his auto deal at 10:00 a.m., only to learn he would now do so an hour earlier. That left us scrambling to finalize the term sheet, which we did only two minutes before the president went on air from the White House. The government would loan Chrysler $4 billion and GM a total of $13.4 billion from TARP—with $4 billion of the GM loan dependent on Congress’s releasing the last tranche.

Although we wanted the car companies to restructure to increase their long-term viability, we would not be around to oversee these changes. So we crafted terms that would put the automakers on a path to reorganization through bankruptcy proceedings and would make it difficult for President Obama to avoid that outcome. We did this by requiring the companies to submit in mid-February restructuring plans to demonstrate how they would achieve financial viability and repay the loans. They would have to come up with a competitive product mix and cost structure; our terms required significant concessions by labor and creditors. If the conditions were not met by March 31, the government would call in the loan, forcing a restructuring under bankruptcy. We knew it would be almost impossible to win major concessions from all parties without this pressure.

After all the activity of the past few months, this was the first time Treasury had worked so closely with the White House, and I was very proud of my team for executing such a crucial deal so well in such a short period of time.

That same day, December 19, I learned from Ben that Bank of America had gone back to the Fed to say that the Merrill Lynch situation was getting worse: its estimated losses now stood at $22 billion pretax. Midafternoon I called Ken Lewis to find out how the losses had increased by $4 billion in two days. He said he was trying to understand that himself. I remained adamant that he needed to close the Merrill deal.

An hour later, Ben and I got on a conference call that included Ken and his BofA team and what seemed to be dozens of Fed officials from the Washington, Richmond, and New York Reserve banks. The New York Fed was represented by senior vice president Art Angulo and general counsel Tom Baxter.

Ken said that his board was still considering invoking the MAC, but the New York Fed officials pushed back hard, questioning its enforceability. I weighed in, offering my belief that invoking the MAC would pose a risk to BofA and the entire system. Ken raised the idea of using the clause to renegotiate the terms of the deal with Merrill, and I answered that this would cause the same concerns as invoking the MAC to get out of the deal: it would create an extended period of uncertainty in a market that already was being driven by fear. We agreed that we needed to learn more and that we would talk again early the following week.

The next afternoon, I flew to Colorado for a few days of skiing with my family over Christmas. On Sunday morning, Ken Lewis called me. The usually calm CEO sounded shaken. He reiterated that his board was concerned about Merrill’s losses and was still weighing the MAC. They needed to make a decision before the deal closed on January 1, he said. I told him that Treasury and the Fed were committed to saving any systemically important institution and reminded him that we would work on a support package, if needed. “You know how strongly we feel about this,” I said.

Since we had been so clear about our commitment to a government support program, I doubted that Ken was just testing us. Indeed, I concluded from earlier conversations that Ken himself was unsure about what kind of government help was appropriate or needed. He seemed to be having a difficult time with his board.

I got back to Ken later and again emphasized to him that the government would not let any systemically important institution fail; that exercising the MAC would show a colossal lack of judgment by BofA; that such an action would jeopardize his bank, Merrill Lynch, and the entire financial system; and that under such circumstances, the Fed, as BofA’s regulator, could take extreme measures, including the removal of management and the board.

“I understand,” Ken said. “Let’s de-escalate.”

The next day, Ben called me to tell me he had confirmed that Ken and BofA’s board were going ahead with the Merrill deal, but the board wanted a letter from the government committing to a support package.

“Ben,” I said, “that doesn’t make any sense.”

“I know,” he said.

“I will call Lewis back and handle it,” I said.

I called the BofA CEO and told him straightaway: “Ken, we can’t give you a letter.”

We had not yet committed to a plan for helping BofA, let alone worked out all the details of such a plan, I explained. Ben and I had already said publicly that we wouldn’t let a systemically important institution fail. A letter could only reiterate that stance. But Treasury would have to disclose the letter publicly, and that would only raise more concerns in the market. Ken said he understood and would tell his board.

On New Year’s Eve, I got another call from Ken. He said he was closing the Merrill Lynch deal the next day and told me that he trusted me to make sure the government would come up with a program for BofA.

The deal closed on January 1.

Last Days

Though we had worked out the TARP loans to the automakers, their stressed financial units presented another problem. GMAC Financial Services lacked sufficient capital, and Chrysler Financial had liquidity issues—as a result, neither unit could provide the credit that dealers and customers needed to get sales moving again. On December 29, Treasury announced a $5 billion capital infusion from TARP into GMAC, which had become a bank holding company, along with an additional $1 billion for GM to invest in GMAC. On January 16, Treasury committed $1.5 billion of TARP funds to Chrysler Financial, to make new loans to car buyers.

We worked hard to make sure the Obama team would have some breathing room when they settled into the White House, and no one cared more about this than President Bush. He went out of his way to make things easier for the new administration.

President-elect Obama understood that he would need the second half of TARP, but congressional opposition remained high, and he waited until the last possible moment to ask the president to notify Congress. He waited so long, in fact, that my colleagues in the White House had begun to hope that President Bush might be able to avoid having to ask for the money.

When Obama finally called on January 8, he asked if President Bush would be willing, if necessary, to issue a veto, because Obama didn’t want his first act as president to be a veto of Congress’s TARP disapproval. The president replied, “I don’t want my last action to be a veto. Let’s make sure a veto is unnecessary.”

On January 12, President Bush formally requested the second $350 billion from Congress. On January 15, the Senate voted to give the president-elect those funds.

Later that night, the Bank of America deal was completed, and the president gave his farewell address to the nation. It bothered me, and I am sure it bothered the president, that the administration’s final rescue would be made public in the same news cycle as his speech. The president’s staff was unhappy about the timing, but we could not delay the BofA announcement.

Bank of America’s deal closely resembled Citigroup’s. The government would invest $20 billion of TARP money in preferred stock paying an 8 percent dividend. BofA would absorb the first $10 billion of losses on a $118 billion pool of loans and mortgage-backed securities. Losses beyond that would be split 90/10 between the government and BofA. Like Citi, BofA would commit to mortgage modifications and more-stringent restrictions on executive compensation.

The deal was announced in the wee hours of January 16. Then at 7:00 a.m. BofA released its fourth-quarter earnings: a $1.79 billion loss for itself and a $22 billion pretax loss for Merrill. BofA shares would fall 14 percent to $7.18 on the day. Despite the damage, I was reassured. BofA was stable and Merrill had not failed.

That day was no less noteworthy—or busy—than its predecessors. Aside from BofA’s earnings announcement, we unveiled our investment in Chrysler Financial. Both of these deals were finalized in the early hours of the morning, concluding the last all-nighter at Treasury my team would endure. Citigroup also reported a shockingly high $8.3 billion loss for the fourth quarter, as well as a plan to split into two entities: Citicorp to serve as the global bank and Citi Holdings to hold an estimated $301 billion in troubled assets.

Although fourth-quarter earnings at the nation’s banks were as bad as I had feared, I was encouraged by what appeared to be a light at the end of the tunnel. Bankers throughout the country were telling me that the earnings environment had improved significantly in January. It didn’t surprise me that the banks could make good money with the government support programs and low interest rates. What surprised me was that it had taken so long.

Friday, January 16, was my last working day at Treasury. I am not a particularly sentimental man, and though we had all enjoyed an extraordinary camaraderie at Treasury, I had planned no parting words or special ceremony. Jim Wilkinson and Neel Kashkari came by in the later afternoon; they wanted to be with me in the last moments I was in the office. They seemed to expect some memorable valediction, but I told them, simply, I was never emotional about moving on.

Looking back now, I can’t help but be awed by the hard work and incredible dedication of the Treasury team, and those at the Federal Reserve, and in the many other government agencies, who gave selflessly in some of the darkest moments they or this country had ever seen.

As I prepared to leave office, I knew that we had succeeded in averting the collapse of the system. As controversial as TARP and our other actions had been, they had prevented a much greater disaster that would have caused far more pain to the American people.

I understood that many of my fellow citizens viewed the bailouts—if not the whole financial industry—with bitterness and anger. Though I shared some of their feelings, the crisis did not shake my faith in the free-market system. Yes, our way of doing things occasionally needs repairs and overhauls—that is true now more than ever—but I’ve yet to see an alternative to our system that can provide as many people not only with their needs but also with the promise of much better lives.

How many weekends and holidays did my team at Treasury give up during the crisis? What would have happened had I not been able to rely on their devotion, talent, and creativity?

As with my Treasury team, so with my colleagues in government. Ben Bernanke, Tim Geithner, Sheila Bair, Chris Cox, John Dugan, Jim Lockhart—at times we differed on philosophy and strategy, but I never doubted their dedication to this country or their commitment to taking the bold actions necessary to save the system. I was able to leave Treasury confident that, with Tim as my successor and Ben continuing to chair the Federal Reserve, many of our plans and programs would continue into the next administration.

I’d often found the political realities of Washington frustrating, but I had also met politicians willing to make unpopular decisions to serve the greater good. No one showed more courage than President Bush, who not only unstintingly supported me but set aside ideology, and often the preferences of some of his own staff, to do what needed to be done. This must have been personally difficult for him on many occasions, but he never let me see it.

As I left Treasury that last time and drove by the White House, which was busy with preparations for a new president, I took a moment to feel good about what we had accomplished.

We had been on the brink, but we had not fallen.