Too Big to Fail [233]
Paulson was hunched over his telephone, straining to hear Bernanke and Geithner on the speakerphone. It was late Wednesday, and the Treasury staff was already girding for another all-nighter.
Bernanke was making his frustration clear; he didn’t believe the crisis could be solved by individual deals or some one-off solution. “We can’t keep doing this,” he insisted to Paulson. “Both because we at the Fed don’t have the necessary resources and for reasons of democratic legitimacy, it’s important that the Congress come in and take control of the situation.”
Paulson agreed in theory but was concerned that Bernanke was underestimating the political calculus. “I understand that you guys don’t want to be fighting this fire alone, but the worst outcome would be if I go ask, and they tell me to screw off,” Paulson said. “We will then show that we’re vulnerable and we don’t have the armaments we need.”
“There are no atheists in foxholes and no ideologues in financial crises,” Bernanke, trotting out a phrase he had tried out on some Fed colleagues a day earlier, told Paulson, trying to persuade him that intervention was necessary.
Paulson agreed but said if they were going to proceed, he wanted to promote his plan to have the government buy toxic assets, a solution that he thought would be the most politically palatable, because it would be comparable to the Resolution Trust Corporation of the late 1980s. Congress created the RTC in 1989 to handle the more than $400 billion in loans and other assets held by 747 failed savings and loans as part of the S&L crisis. The RTC had been the recipient of a wide range of loans, properties, and bonds from the failed thrifts. Like the predicament Paulson currently faced, some of the assets were good but most were bad, and some, including construction and development loans, had no discernible market. The task was daunting: L. William Seidman, the RTC chairman, initially estimated that even if the agency sold $1 million of assets a day, it would take three hundred years to dispose of everything. By the time the RTC completed its job in 1995, a year ahead of its deadline, the cost to the taxpayers was nearly $200 billion (in 2008 dollars)—a much lower tab than what many had feared at the time the agency had been created.
Paulson thought the idea had merit and was buoyed by an op-ed in the Wall Street Journal that morning touting a similar plan by Paul A. Volcker, the former chairman of the Federal Reserve; Nicholas F. Brady, a former U.S. Treasury secretary; and Eugene A. Ludwig, a former U.S. comptroller of the currency.
“This new governmental body would be able to buy up the troubled paper at fair market values, where possible keeping people in their homes and businesses operating. Like the RTC, this mechanism should have a limited life and be run by nonpartisan professional management,” they wrote. “The pathology of this crisis is that unless you get ahead of it and deal with it from strength, it devours the weakest link in the chain and then moves on to devour the next weakest link.”
On Thursday morning, Tom Nides, who lived in Washington and commuted every week to New York, woke up early at the Regency Hotel and went to the gym. As he read the New York Times on an elliptical machine, he nearly fell off when he came upon the front-page story, which ran under the headline: “As Fears Grow, Wall St. Titans See Shares Fall.”
Directly in the middle of the story was a quote, citing two people who had been briefed on merger talks between Morgan Stanley and Citigroup, saying that John Mack had told Vikram Pandit, “We need a merger or we’re not going to make it.”
Nides couldn’t believe Mack even said that. He had been in the room for one of the calls with Pandit and it didn’t go like that, he thought. Morgan Stanley, Nides knew, could not afford that sort of coverage, whether or not it was true. The more