Too Big to Fail [287]
But there was another kind of fallout, too—one that had a far more profound effect on the American psyche than did the immediate consequences of the dramas being played out daily on Wall Street. In the days and weeks that followed the first payouts under the bailout bill, a national debate emerged about what the tumult in the financial industry meant for the future of capitalism, and about the government’s role in the economy, and whether that role had changed permanently.
A year later such concerns remain very much at the forefront of the national conversation. As this book was going to press, a raucous public outcry, complete with warnings about creeping socialism, questioned the government’s role not just in Wall Street, but in Detroit (since the bank rescue, the government also supplied billions of dollars in aid to two automotive giants, General Motors and Chrysler, to restructure in bankruptcy court) and in the health care system. Washington has also named an overseer, popularly known as a “pay czar,” to review compensation at the nation’s bailed-out banks.
One unexpected result of this new federal activism was that traditional political beliefs had been turned on their head, with a Republican president finding himself in the unaccustomed position of having to defend a hands-on approach. “The government intervention is not a government takeover,” President Bush asserted on October 17, 2008, as he sought to counter his critics. “Its purpose is not to weaken the free market. It is to preserve the free market.”
Bush’s statement seemed to sum up the paradox of the bailout, in which his administration and the one that followed decided that the free market needed to be a little less free—at least temporarily.
In some respects, Hank Paulson’s TARP was initially a victim of his own aggressive sales pitch. While the program was fundamentally an attempt to stabilize the financial system and keep conditions from growing worse, in order to win over lawmakers and voters it had been presented as a turnaround plan. From the vantage point of consumers and small-business owners, however, the credit markets were still malfunctioning. After hundreds of billions of dollars had been set aside to rescue banks, many Americans still couldn’t obtain a mortgage or a line of credit. For them the turnaround that had been promised didn’t come soon enough.
Even with the help of cash infusions some of the country’s major banks continued to falter. Citigroup, the largest American financial institution before the crisis, devolved into what Treasury officials began referring to as “the Death Star.” In November 2008 they had to put another $20 billion into the financial behemoth, on top of the original $25 billion TARP investment, and agreed to insure hundreds of billions of dollars of Citi’s assets. In February 2009 the government increased its stake in the bank from 8 percent to 36 percent. The bank that only a decade earlier had spearheaded a push toward deregulation was now more than one third owned by taxpayers.
Even among those who continued to believe in the bailout concept, there were lingering questions about how well Washington had acquitted itself, with the loudest debate focusing on one deal in particular.
In early 2009 the Bank of America–Merrill Lynch merger became the subject of national controversy when BofA announced that it needed a new $20 billion bailout from the government, becoming what Paulson declared “the turd in the punchbowl.” When it later emerged that Merrill had paid its employees billions of dollars in bonuses just before the deal closed, the public outrage led to a series of investigations and hearings that embarrassingly pulled back the curtain on the private negotiations that took place between the government and the nation’s financial institutions.
The September sale of Merrill Lynch to Bank of America had been presented as a way to save Merrill. But in the several months that it took the deal to close, Merrill’s trading losses