Too Big to Fail [106]
Representative Dennis Moore, a Democrat from northeast Kansas, asked, “Do you still believe the GSEs pose a systemic risk to the economy?” Paulson replied: “I would say, Congressman, in today’s world I don’t think it is helpful to speculate about any financial institution and systemic risk. I’m dealing with the here and now.”
But by the time the market closed that day, the “here and now” had grown even worse, with more than $3.5 billion in the combined market value of Fannie and Freddie wiped out. Concerns were mounting about Fannie’s and Freddie’s debts and the rocky state of the mortgage-backed securities that the agencies had guaranteed. The markets were testing Washington’s resolve. How much chaos would the government tolerate before it stepped in?
Although Paulson hadn’t believed he would require in the immediate future the authorities that he had discussed that morning, the overall economic situation was beginning to become alarming. He called Josh Bolten at the White House to sound him out about pressing Congress for the authority he wanted; Bolten was encouraging. He also wanted Alan Greenspan’s advice, and after some confusion about tracking down Greenspan’s home phone number, Paulson and a half dozen staff members huddled over the Polycom on his desk to hear the former Fed chairman’s faint voice through the speaker.
Rattling off reams of housing data, Greenspan described how he considered the crisis in the markets to be a once-in-a-hundred-year event and how the government might have to take some extraordinary measures to stabilize it. The former Fed chairman had long been a critic of Fannie and Freddie but now realized that they needed to be shored up. He did have one suggestion about the housing crisis, but it was a rhetorical flourish befitting his supply-and-demand mind-set: He suggested that there was too much housing supply and that the only real way to really fix the problem would be for the government buy up vacant homes and burn them.
After the call, Paulson, with a laugh, told his staff: “That’s not a bad idea. But we’re not going to buy up all the housing supply and destroy it.”
As Paulson took a seat in the small conference room next to his office to begin breakfast with Ben Bernanke, he was flushed and scarcely able to eat. “This is a real problem,” he said.
The front page of the New York Times had reported that morning that senior administration officials were “considering a plan to have the government take over one or both of the companies and place them in a conservatorship if their problems worsen.”
Someone had leaked the story about Fannie and Freddie.
Paulson, guzzling a can of Diet Coke as his oatmeal grew cold, couldn’t fathom why a member of the administration would be so foolish as to disclose the plans they had been considering. Whoever it had been, the leak was bound to undermine confidence even further, and Paulson was furious.
It had already been a long morning for Paulson, and it showed in his eyes. He had briefed the president in the Oval Office at 7:10 a.m.; had a conference call with Tim Geithner at 7:40 a.m.; checked in with Larry Fink of BlackRock to get his thoughts on what to do about Fannie and Freddie at 8:00 a.m.; and even squeezed in time to reach out to Dick Fuld five minutes later.
Soon after the stock market opened, Treasury staffers Jim Wilkinson and Neel Kashkari barged into the room, interrupting Paulson and Bernanke’s breakfast to tell them that the stocks of both Fannie and Freddie were sinking like a stone, down about 22 percent, and suggesting that Paulson put out a statement to calm the markets. Just as he had feared, the story in the Times had created a panic, with nobody certain what the implications of the government getting involved with Fannie and Freddie could possibly mean. Investors were recalling Paulson’s decision