Too Big to Fail [118]
Just a week earlier the Senate had passed, and President Bush had signed into law, an act that gave Treasury the temporary authority to backstop Fannie and Freddie. Now the question that faced Paulson was: what to do with that authority?
He recognized that he had created an odd dilemma: Investors now assumed the government was planning to step in. That would make it even harder for Fannie and Freddie to raise capital on their own, as investors worried that a government intervention would mean they would get wiped out. Any sort of investment by the government increasingly seemed as if it could become a self-fulfilling prophecy. “Either investors are going to be massively diluted, given the amount of equity they are going to need, or [Freddie and Fannie] are going to be nationalized,” Dan Alpert, managing director of Westwood Capital LLC, had told Reuters that morning. “Without a larger equity capital base, they are going to be incapable of surviving.”
In a Treasury conference room, Anthony Ryan, assistant secretary for financial markets, briefed the bankers on the department’s work to date on the GSEs. Attending from Morgan Stanley were Robert Scully, fifty-eight, the firm’s co-president, who had worked on the government’s bailout of Chrysler nearly three decades earlier; Ruth Porat, fifty, the head of its financial institutions banking group; and Daniel A. Simkowitz, the forty-three-year-old vice chairman of global capital markets.
Ten minutes into Ryan’s presentation, Paulson walked in, looking slightly distracted. “Everyone’s going to scrutinize what we do,” he told the group as he tried to inspire and scare them simultaneously. “I’m going to work you to the bone. But I’m confident of this: It will be the most meaningful assignment of your career.”
Scully pressed Paulson to explain his rationale for the assignment. “Just tell us what you’re really looking to do here,” he said. “Do you want to kick the can down the road?”
“No,” said Paulson, shaking his head. “I want to address the issue. I don’t want to leave the problem unsolved.” He was adamant that the project not become another bureaucratic exercise in producing PowerPoint presentations that would just get filed away. “I, ah, we have three objectives: market stability, mortgage availability, taxpayer protection.”
Scully was still skeptical, certain there had to be some political calculus involved. And, with Freddie’s reported loss of $821 million that morning, doing nothing no longer seemed a viable option.
“Are there any policy options that are off the table or, alternatively, are there any stakes you have in the ground in terms of starting points and approaches to this problem that you’d like us to think about?” Scully probed.
“No, you have a clean sheet of paper,” Paulson said. “All options are on the table; I’m willing to consider everything.”
A young child’s squeal a few doors down suddenly halted the discussion. It was Paulson’s granddaughter, Willa, who was visiting that day and waiting in a small conference room across from his office. Paulson was about to catch a flight with his family to attend the Olympic Games in Beijing. It was, however, a working vacation—he had a busy set of meetings with Chinese officials—and as they all knew, he would be attached to his cell phone.
He apologized to the group for cutting the meeting short.
“I’ll be back in ten days,” he told them. “I want a lot of progress.”
In the first week of August, Min Euoo Sung, arrived in Manhattan from Seoul to continue talks with Lehman Brothers. The parties were still far from signing a final agreement, but they were inching closer to nailing down at least the outlines of one.
On that Monday, McDade, who remained skeptical that a deal would come to pass, walked over to Sullivan & Cromwell’s Midtown offices with his colleagues to begin formal negotiations. “They are