Too Big to Fail [227]
The entire economy, he said, was on the verge of collapsing. He had been on the phone that morning with Jamie Dimon, who had expressed his own anxiety. Paulson was no longer worried just about investment banks; he was worried about General Electric, the world’s largest company and an icon of American innovation. Jeffrey Immelt, GE’s CEO, had told him directly that the conglomerate’s commercial paper, which it used to fund its day-to-day operations, could stop rolling. He had heard murmurs that JP Morgan had stopped lending to Citigroup; that Bank of America had stopped making loans to McDonald’s franchisees; that Treasury bills were trading for under 1 percent interest, as if government-backed bonds were the only thing that investors could still trust.
Paulson knew this was his financial panic and perhaps was the most important moment of his tenure at Treasury, and possibly of his entire career. The night before, Bernanke and Paulson had agreed that the time had come for a systemic solution; deciding the fate of each financial firm one at a time wasn’t working. It had been six months between Bear and Lehman, but if Morgan Stanley went down, probably no more than six hours would pass before Goldman did, too. The big banks would follow, and God only knew what might happen after that.
And so, Paulson stood in front of his staff in search of a holistic solution, a solution that would require intervention. He still hated the idea of bailouts, but now he knew he needed to succumb to the reality of the moment.
“The only way to stop this thing may be to come up with a fiscal response,” he said. They needed to start thinking about what kind of program they could put together, and while he wasn’t sure that that approach would even be politically feasible, it had to be explored.
He told the staff that he knew and accepted that he would be subjected to an enormous amount of political flak; he had already been criticized for the bailout of AIG, with Barney Frank mockingly declaring that he was going to propose a resolution to call September 15—the day Lehman filed for bankruptcy—as “Free Market Day.” “The national commitment to the free market lasted one day,” Frank said. “It was Monday.”
Senator Jim Bunning, Republican from Kentucky, was decrying that “once again the Fed has put the taxpayers on the hook for billions of dollars to bail out an institution that put greed ahead of responsibility.” Richard Shelby, Republican from Alabama, added that he “profoundly disagrees with the decision to use taxpayer dollars to bail out a private company.”
The first order of business, Paulson said, was addressing the money market crisis. Steve Shafran, a former Goldman banker, suggested that the Treasury could simply step in and guarantee the funds. “We have the authority,” he said, citing the Gold Reserve Act of 1934, which set aside a fund, now totaling $50 billion, to stabilize essential markets. The key, Shafran said, was that all they needed to access it was presidential approval, bypassing Congress.
“Do it!” Paulson said, and Shafran slipped out of the room to put the process in motion.
There was, however, no such easy solution to begin stabilizing the banks. Phil Swagel, the wonky assistant secretary for economic policy, emphasized the necessity of being bold and not avoiding addressing the problems for fear of political fallout. “You don’t want to be running Japan,” he said.
Swagel and Neel Kashkari dusted off the ten-page “Break the Glass” paper they had prepared the previous spring: In the event of a liquidity crisis, the plan called for the government to step in and buy toxic assets directly from the lenders, thereby putting right their balance sheets and enabling them to keep extending credit. The authors knew that executing their plan would be complicated—the banks would fight furiously over the pricing of the assets—but it would keep the