Too Big to Fail [125]
They began their battle plans on the weekend of Auguest 23. Herlihy and a team of Wachtell, Lipton lawyers came to Washington on a half-dozen different Delta and US Airways shuttles in order not to arouse suspicion. Paulson walked them through the game plan, assisted by Dan Jester, the lanky Texan who had joined Treasury less than a month earlier. The hope was that like megamergers that are often completed over the course of a single three-day weekend to protect against a leak impacting the stock market, they could take Fannie and Freddie over during the Labor Day holiday, which was the following weekend.
The lawyers and the Treasury officials spent several hours debating possible tactics, relevant statutes, and the structures of each of the companies. Jester and Jeremiah Norton, another staffer at Treasury, outlined a plan to put capital into Fannie and Freddie, and an actual mechanism to take control of them, via the purchase of preferred stock and warrants.
But Paulson soon realized that the Labor Day target was going to be impossible. One of the lawyers had noticed that Fannie’s and Freddie’s regulator from the Federal Housing Finance Agency, James Lockhart, had written letters to both companies over the summer saying that they were considered adequately capitalized. “You’ve got to be kidding me,” Paulson replied, when he heard about the letters. Treasury could face resistance from the GSEs’ supporters in Congress and from the companies themselves if the government were to reverse itself apparently arbitrarily. The companies’ claims that they were well capitalized and the regulator’s endorsement would both have to be challenged.
“That’s intangibles and all the stuff that I would call bullshit capital,” Paulson complained.
“We need to reconstruct the record,” Jester announced about the Federal Housing Finance Agency letters.
“Right, right,” Herlihy chimed in. “We need new letters that are pretty bad—or at least accurate.”
The Federal Reserve was then asked to provide examiners, and they would spend the next two weeks going through the books, desperately trying to document the capital inadequacies at Fannie and Freddie.
As the Treasury team went around the table, one issue kept getting raised about pushing forward with a takeover: What if the boards of the two companies resisted?
“Look, trust me,” Paulson said. “You don’t believe me, but I know boards, and they’re going to acquiesce. When we get done talking with them, they’ll acquiesce.”
On the morning of Tuesday, August 26, Paulson walked over to the White House and was escorted downstairs to the basement of the West Wing, where he was given a seat in the five-thousand-square-foot Situation Room. At 9:30 President Bush was beamed onto one of the large screens from his ranch in Crawford, Texas, for a secured videoconference with Paulson. After some brief pleasantries, Paulson laid out his plan to mount the equivalent of a financial invasion on Fannie and Freddie. Bush told him he could proceed with the preparations.
As Labor Day weekend approached, the Treasury team and its advisers started to plot the actual details of the dual takeover. They knew they would have to move quickly, with military precision, and in secrecy before the GSEs could start rallying their supporters in Congress. They wrote scripts specifying exactly what they would tell the companies and their boards. They wanted to make certain that there could be no compromises, no delays. Internally, Treasury officials talked about offering Fannie and Freddie two doors: “Door 1, you cooperate; Door 2, we’re doing it anyway.”
On Thursday morning, August 28, Bob Willumstad and AIG’s head of strategy, Brian Schreiber, walked into JP Morgan’s headquarters at 270 Park Avenue and, escorted by