Too Big to Fail [41]
“Was this a justified rescue to prevent a systemic collapse of financial markets,” asked Senator Christopher Dodd, the Connecticut Democrat and chairman of the committee, “or a $30 billion taxpayer bailout, as some have called it, for a Wall Street firm while people on Main Street struggle to pay their mortgages?”
The fireworks started almost immediately. Committee members were sharply critical of the regulators’ oversight of financial firms. More importantly, they questioned whether funding a takeover of Bear Stearns had created a dangerous precedent that would only encourage other firms to make risky bets, secure in the knowledge that the downside would be borne by the taxpayer.
Bernanke hastened to explain the government’s position: “What we had in mind here was the protection of the American financial system and the protection of the American economy. I believe that if the American people understand that we were trying to protect the economy and not to protect anybody on Wall Street, they would better appreciate why we took the action we did.”
Then came the question Steel had prepped for: Had it been the Treasury secretary who determined the $2-a-share price?
“Well, sir, the secretary of the Treasury and other members of Treasury were active participants during this ninety-six hours, as you describe,” he replied. “There were lots of discussions back and forth.
“Also, in any combination of this type, there are multiple terms and conditions. I think the perspective of Treasury was really twofold. One was the idea that Chairman Bernanke suggested: that a combination into safe hands would be constructive for the overall marketplace; and, number two, since there were federal funds or the government’s money involved, that that be taken into account. And Secretary Paulson offered perspective on that.
“There was a view that the pricve should not be very high or should be toward the low end and that it should be—given the government’s involvement, that that was the perspective. But with regard to the specifics, the actual deal was negotiated—transaction was negotiated between the Federal Reserve Bank of New York and the two parties.”
For the most part, the Fed, the Treasury, and the SEC held their own against the Banking Committee’s interrogation. But they did so largely by defending the Bear bailout as a once-in-a-lifetime act of extreme desperation, not as the expression of a nascent policy. Under the circumstances, it was a reasonable response to a run on a very large bank whose demise would disrupt the entire financial system.
Those circumstances, Geithner told the committee, were not unlike those of 1907, or the Great Depression, and he went on to draw a straight line between panic on Wall Street and the economic health of the country: “Absent a forceful policy response, the consequences would be lower incomes for working families; higher borrowing costs for housing, education, and the expenses of everyday life; lower value of retirement savings; and rising unemployment.”
So they’d done what they had to do for the good of the entire country, if not the world, as Steel explained. And thanks to their efforts, he confidently told the lawmakers, the hole in the dike had been plugged.
Jamie Dimon was searching for a metaphor.
As he sat in a conference room down the hall from Senator Charles Schumer’s office watching the morning’s proceedings on C-SPAN, he strategized with his communications chief and trusted confidant, Joseph Evangelisti. How could he best account for the low price he had paid for Bear without looking as if he had been given a gift, courtesy of taxpayers?
“The average person has to understand that we took a huge risk,” Evangelisti instructed him as they reviewed various approaches.