All the Devils Are Here [220]
That Thursday, September 11, John Gapper, the financial columnist for the Financial Times, wrote a column, only half tongue in cheek, with the headline “Take This Weekend Off, Hank.” Noting Lehman Brothers’ mounting troubles, and the likelihood of another long weekend for the Treasury secretary, he wrote, “[W]hen he has worked on weekends recently, the taxpayers have paid dearly.”
Paulson, of course, did work that weekend. Lehman, Merrill, WaMu, AIG—the vultures were circling all of them. Late Friday afternoon, Paulson flew to New York and spent the weekend at the New York Fed, in nonstop meetings with Fed officials and Wall Street CEOs, and they tried to stop what they all saw coming. By Monday morning, Lehman Brothers, unable to find a buyer—or to persuade the government to save it—was bankrupt. Merrill Lynch had been bought by Bank of America. Right behind them came AIG, which would be rescued by the government a few days later at an initial cost of $85 billion.
There was nothing the government, or anyone else, could do to hold it back any longer. Some thirty years in the making, the financial crisis had finally arrived. The volcano had erupted.
Epilogue: Rage at the Machine
On July 21, 2010, President Obama signed into law the Wall Street Reform and Consumer Protection Act, a 2,300-page, 383,000-word piece of legislation that marked, unquestionably, the biggest change in the regulation of the financial industry since the aftermath of the Great Depression. The law had been two years in the making, and most of it, in one way or another, was a reaction to the excesses that had led to the financial crisis.
The Federal Reserve would get new powers to look broadly across the financial system. A council of federal regulators led by the Treasury secretary would help ferret out systemic risk. A new consumer agency was created to help end the lending abuses and keep people from getting loans they could never hope to pay back. Under this new law, most derivatives will supposedly be traded on an exchange—meaning in the clear light of day, where prices and profits are transparent. The bill creates a process to liquidate failing companies, so that there is a reasonable alternative to bailouts. It outlaws proprietary trading at financial institutions that accept insured deposits—the so-called Volcker Rule. “Because of this law, the American people will never again be asked to foot the bill for Wall Street’s mistakes,” President Obama said. Well, maybe.
Footing the bill for Wall Street’s mistakes was precisely what the American taxpayer had been doing since September of 2008, in a hundred different ways. And Americans were angry about it. It wasn’t just the obvious examples—like the $182 billion in federal help that AIG required before it was over. The Federal Reserve guaranteed money market funds. It bought tens of billions of dollars of “toxic assets”—that was the culture’s shorthand for securitized subprime mortgages after the crisis—to help the banks get back on their feet. The FDIC, meanwhile, guaranteed all new debt issued by bank holding companies, without which they could not have funded themselves in the debt markets. Let’s face it: they were all now government-sponsored enterprises. And so they would remain, despite protestations to the contrary. Because as everyone learned with Fannie and Freddie, implicit government guarantees, whether they arise from a congressional charter or from the market’s belief that the government will stand behind a failing company, are awfully hard to take away.
It took a