Too Big to Fail [30]
On March 27, 2008, at 8:30 a.m., just three days after the “recut” Bear deal, Paulson and his lieutenants gathered for a meeting. He’d just arrived from his usual workout at Sports Club/LA in the Ritz-Carlton hotel a few blocks away. His brain trust, Bob Steel, Jim Wilkinson, David Nason, Michele Davis, Phillip Swagel, Neel Kashkari, and several others, crammed into his office on the third floor of the Treasury Building, which overlooked the White House’s Rose Garden and afforded dramatic views of the Washington Monument to the south.
Paulson took a chair in the corner of the high-ceilinged space, its walls already decorated with dozens of his wife’s photographs of birds and reptiles. Some staffers found seats on his blue velvet couch; others stood, leaning against his mahogany desk, with its four Bloomberg screens flickering on top.
Paulson held these meetings with his inner circle each morning at 8:30 a.m., except for every other Friday, when he had breakfast with Ben Bernanke, the chairman of the Federal Reserve. Paulson would have preferred to have the staff meetings start even earlier, but these were government workers, and he was already pushing them pretty far. Most of his senior team were being paid around $149,000 a year, though each of them could have potentially been making much more in the private sector.
As Paulson went around the room doing a postmortem on Bear, he stopped at David Nason. Nason, the thirty-eight-year-old assistant secretary for financial institutions, had joined Treasury in 2005 and was its resident policy-making brain. A Republican and free-market champion, Nason had been warning at these meetings for months about the possibility of another Bear Stearns–like run on one or more banks. He and other Treasury officials had come to recognize that Wall Street’s broker-dealer model—in which banks could count on ever-dependable overnight financing by other investors—was by definition a tinderbox. Bear had taught them how quickly a bank could crumble; in an industry whose lifeblood was simply the confidence of other investors, it could wane quickly at the hint of a problem. But however perilous the overall situation, Nason remained dead set against bailouts, a concept he couldn’t abide.
Instead, Nason told the group that Treasury had to concentrate its efforts on two fronts: obtaining the authority to put an investment bank through an organized bankruptcy, one that wouldn’t spook the markets, and more immediately, urging the banks to raise more money. In the previous six months, U.S. and European banks—including Citigroup, Merrill Lynch, and Morgan Stanley—had managed to bring in some $80 billion in new capital, often by selling their stakes to state-run investment funds—known as “sovereign wealth funds”—in China, Singapore, and the Persian Gulf. But it clearly wasn’t enough, and the banks had already been forced to tap the investors with the deepest pockets.
With the Bear Stearns situation seemingly behind them, Paulson focused his attention this morning on what he thought would be the next trouble spot: Lehman Brothers. Investors may have been mesmerized by Erin Callan’s performance at the earnings conference call, but Paulson knew better. “They may be insolvent, too,” he calmly told the room. He was worried not only about how they were valuing their assets, which struck him as wildly optimistic, but about their failure to raise any capital—not a cent. Paulson suspected