Confidence Men Part 6

In the panicked weeks of September, the only job of noteworthy public officials was to provide a buyer with the capacity to purchase Lehman Brothers. They mistakenly thought Barclays was such a buyer, even when their fellow regulators in the United Kingdom strongly suggested otherwise.

The entire "Lehman weekend" had been a waste of time.

The only bright spot was that it had kept John Thain occupied so Greg Fleming could sell the giant investment house out from under him, and avoid having Merrill collapse on top of Lehman.

After Paulson's mea culpa, all the CEOs slipped out to call their trading desks. Unwind Lehman trades as quickly as possible. That afternoon they'd all huddle to try to figure out how to control the damage to each of their firms.

Wolf slipped out and dialed Obama. "It's over, Barack. Lehman's dead. But this is probably just the start. AIG-they're bigger, more interconnected, and there's no way they'll survive."

"As bad as we thought it could be?" Obama said.

"Worse," said Wolf. "Much worse."

d.i.c.k Fuld of Lehman Brothers a.s.sembled his senior managers on Sunday afternoon and told them what they already suspected: the 158-year-old investment bank would have to file for bankruptcy the next day. Fuld was depressed and angry, but even more than that, as a Wall Street sovereign used to seeing reality bend to his will, he was in a state of shock. Speechless employees crowded his office on the thirty-first floor of Lehman's Seventh Avenue headquarters. As dusk settled, he tried to call Geithner at the Fed. They would never let Lehman fail. He was told Geithner was nowhere to be found.

At 1:45 a.m., a few hours into Monday, September 15, Lehman Brothers filed.

The prebankruptcy valuation of Lehman's a.s.sets was $639 billion, making it the largest bankruptcy in U.S. history-by a factor of six. (WorldCom came in next, at a mere $104 billion.) The numbers were off the charts: $40 billion in commercial real estate, $65 billion in residential real estate, another $100 billion tied up in CDOs, CDSs, and other exotic a.s.set-backed securities and derivatives. And yet for all the attention paid to mortgage securities and their derivatives, the most shocking number of all was that Lehman carried $300 billion in repos and their equivalent-nearly 50 percent of its total holdings.

Carmine Visone went to work on Monday morning as he had every Monday morning for thirty-seven years. He had kept tabs on what was happening. It wasn't hard. Just turn on the television. Everyone sat in front of screens the previous week: the computer screens at their desks; the flat screens on the walls.

He and other senior managers were on the phone, cursing and scheming all weekend. Now he went to the office in a daze.

What is it like to stand inside a collapsing world? Things that seem so solid-solid like the earth, as regular as a sunrise-and then nothing?

Fleming had scored the one suitor. He went home on Sunday night, hugged his wife, and wept.

Carmine, in this game of acey-deucey, was left looking out his twelfth-story window. The crowds still flowed up and down Fifty-fourth Street. Most of the people and cameras were gathered at the larger Lehman Building, the headquarters-five wide blocks across town, and down nine, on Forty-fifth and Sixth.

The lunch crowd was gathered at Bice, someone sitting at Carmine's table. How many lunches, over how many years? He was a throwback all right: he'd given his whole life to this company. Thirty-seven years. He walked in at twenty-one, worked in bookkeeping. Now, in a flash, he was a sixty-year-old man facing however many years he had left as the b.u.t.t of jokes, or worse. There'd be lawsuits-G.o.d, did he hate those f.u.c.kin' lawyers-and, worse, there'd be shame. Managing partner; real estate; Lehman Brothers. You've got to be kidding me. It's like a punch line.

How could he face the world-that world? So Carmine Visone started to work out the logistics. How to get the window open wide enough. That wouldn't be hard. He was as strong as three men; he could break it with his fist. He'd wait for an opening, to make sure he didn't hit anyone on the sidewalk. It was the honorable thing to do.

After some time pa.s.sed-he isn't sure how long-he got up and looked out his door and into the wider office. A last look. The secretaries were crying, boxing up their stuff. He watched them. It was their home, too. And G.o.d knows, they had no cus.h.i.+on, most of them. He had a lot more than they did: money in the bank, plenty of it, and Kathleen, and the nice house in Jersey. And from there it wasn't far, along the chain of references that make up a life, to see the U-Haul truck and all those poor b.a.s.t.a.r.ds he'd handed food to over the years, and how they thanked him and said, "G.o.d bless you," over and over, one cold night after the next. What would they all say if he jumped out a building as if he had nothing to live for?

And that's how all those hungry people returned the favor. Carmine Visone decided not to jump. With tears running down his cheeks, he began to pack up his box. After a few minutes, all he had left was to decide if he'd leave his jacket on its hanger behind the door. It didn't seem right to wear it out, like a guy in uniform with an appointment to keep.

He looked at the jacket for minute, maybe more. It had a nice st.i.tch, was a good shade of gray for him, and well made. And he'd paid cash for it. Grabbing the jacket, feeling the soft fabric in his hand, he seemed to remember that this was a way to find worth in this world, usually in the things you could touch.

He threw the jacket into his box. He'd go out like he came in: in s.h.i.+rtsleeves.

6.

The Rise.

The week of September 15 was a whirlwind in America that spread across much of the globe-one of those rare moments when foundations are uprooted, shown to be insubstantial. Modern market economies, those steadily growing organisms that have generated stunning wealth over the past two centuries, showed their soft underbelly: trust. What is a dollar bill but a piece of paper that one trusts will be honored as legal tender? What is an investment bank but a legal ent.i.ty that acts as a custodian and intermediary in the handling of money, or stands between parties in a trade? As buyers and sellers collide and couple in the vast global marketplace-with little to bind them beyond the self-interest of one party having money and the other needing it-the inst.i.tution makes certain that everyone honors his obligations, or legal remedies are triggered. That's their essential function. When the financial inst.i.tution itself can't honor its obligations, panic is uncorked. On Monday morning, clients of all kinds found that Lehman-or, more specifically, Lehman's London office, where $5 billion was housed-couldn't honor its obligations, not to everyone at once. Certainly anyone who has a pa.s.sing knowledge of banking or finance, or who has seen It's a Wonderful Life, knows that the obligations to everyone cannot be met all at once. All the money, either deposited or invested, isn't sitting in a closet, neatly stacked. It's out there working, invested in this or financing that-a plain, known fact that no one wants to hear at the moment their money is unattainable and trust vanishes.

When the inst.i.tution is America's fourth-largest investment bank, the fear, spreading like a contagion, is that other inst.i.tutions anchoring the global financial system will not be able to honor their obligations. By midday, eastern standard time, other investment banks started to see clients pulling their money out, and worried that more would follow. On Tuesday, Moody's and Standard & Poor's downgraded ratings on AIG, the world's largest insurer, which was the guarantor of eight million insurance policies with a face value of $1.7 trillion, and tens of trillions in swaps between financial inst.i.tutions. That same day, the Reserve Primary Fund, the venerable money market fund largely responsible for inventing the very concept, lowered its share price below one dollar-normally the guaranteed "a dollar in means a dollar back" net a.s.set value for money market funds-and halted redemptions. This so-called breaking the buck caused redemptions to be frozen at other money market funds, the safest, banklike investments that form the core of the commercial paper market, the short-term loans that companies have long used to fund expenses.

On Wednesday the Federal Reserve announced it was lending $85 billion to AIG, to prevent the insurer's having to file for bankruptcy, and began its preparations, to be announced the next day, to guarantee all money market funds. Meanwhile, a fleet of banks had announced they were taking drastic measures. Was.h.i.+ngton Mutual put itself up for sale, Morgan Stanley and Goldman Sachs watched their usually rock-solid share price drop by double-digit percents, and Wachovia thought its prospects were bleak enough to enter merger talks with Morgan Stanley. In a seventy-two-hour span, the Dow plummeted an unprecedented 1,100 points.

Spreading from investment banking to insurance, money market funds, commercial paper, and then commercial banking, it was a run-no different from depositors converging on the doorsteps of banks in 1929-across the global financial system. In chaos lies opportunity, and in this case, the two candidates for president were afforded a rare chance to show the nature and posture and a.s.suredness of leaders.h.i.+p. It was here, in their responses to the crisis, that Obama and McCain would starkly diverge, in temperament and public approval alike. McCain started the week with the same line from a week before: "the fundamentals of the economy are strong." Coming on the very day of Lehman's collapse, this attempt at surety or consistency seemed redolent of Bush's brittle brand of stay-the-course resolve in the face of any disaster. It was a sign of either stubbornness or ignorance, two qualities that made McCain look like a doddering old man.

Speaking in Elko, Nevada, on the seventeenth, Obama managed to frame the crisis within the context of his campaign, yet not reduce its startling scope. "What we've seen the last few days," he a.s.serted, "is nothing less than the final verdict on this philosophy, a philosophy that has completely failed. And I am running for president of the United States because the dreams of the American people must not be endangered anymore. It's time to put an end to a broken system in Was.h.i.+ngton that is breaking the American economy. It's time for change that makes a real difference in your lives."

Paulson had spent the weekend of crisis operating out of the Waldorf-Astoria hotel. By Thursday, September 18, the venue had changed back to Was.h.i.+ngton. He needed to sell lawmakers on the fact that the systemic risks the economy faced were not only catastrophic but imminent. At 3:30 p.m. he went to the White House and told the president that he intended to ask Congress for a huge sum of money with which to purchase toxic a.s.sets from the banks. Bush trusted Paulson on financial matters and gave his blessing to what would turn into the Troubled a.s.set Relief Program. Now it was a matter of winning over the legislators.

That evening, as a group of key policy makers gathered in Speaker of the House Nancy Pelosi's office, Paulson and Bernanke figured that their best shot at pa.s.sing TARP was to terrify this group, to make them all feel what these two men had been feeling for a week. Not a man known for histrionics, Bernanke opened the meeting on a dramatic note.

"I am a student of the Great Depression," he began. "Let me state this clearly. If we do not act in the next few days, this will be worse than the Great Depression." He let the statement sink in, just long enough for Senator Chris Dodd to gasp audibly, before he continued: "Investors have lost confidence in our capital markets. It is a matter of days before we will witness a series of catastrophic failures."

It was Senate Majority Leader Harry Reid who finally broke the ice.

"The markets were up," he remarked, demonstrating a thoroughgoing ignorance of the situation. Paulson's blood, meanwhile, was boiling. The only reason the markets had rebounded at all was that Wall Street was antic.i.p.ating a rescue plan at any minute! But Paulson knew he could not openly berate the lawmakers, even if they had no idea what they were talking about. He needed somehow to convince them that the issue's urgency was apolitical.

"This is a one-hundred-year situation," he explained. "We can't deal with it around the edges. There are a series of tactical things that need to take place or else all h.e.l.l will break loose." He wasted no time on that minutia. "This needs to be done by next week. It will take a comprehensive approach to deal with illiquid a.s.sets on the balance sheets of these inst.i.tutions. We are going to ask for the authority to purchase these toxic a.s.sets. This is neither a case of regulation or deregulation," he said, trying to distance himself from the image of the free-market demagogue that he knew the Democrats had of him. "The Treasury needs broad authority to purchase illiquid a.s.sets from the balance sheets of financial inst.i.tutions. It goes beyond Wall Street. At bottom these are mostly home loans. If we take care of these illiquid a.s.sets, I believe it will stabilize the system."

"What is this going to cost?" Reid asked.

"I'm not entirely sure yet," Paulson said. "Somewhere in the hundreds of billions. Maybe five hundred."

"If you think we can pa.s.s a bill to give you $500 billion, you don't understand the Senate!" Reid shot back.

But the group had heard the desperation behind Paulson and Bernanke's words and they knew that if things were really that bad, Congress would rise to the occasion. Senate Minority Leader Mitch McConnell was especially emphatic.

"This sounds like it needs to happen," he said. "If that's the case, we should do this. We can do this."

Pelosi offered support from the House.

"We need to leave this room saying we will write a bill," she said.

John Boehner agreed. "This is a national crisis," he affirmed. "We need to rise above politics and show Americans we can work together. I will be here as long as it takes. Lock arms and get it done!"

But the group fell into two camps: those who took Paulson and Bernanke's proposal as the Word of G.o.d, who thought they should proceed full steam ahead, and those who took the opportunity to demonize Wall Street and to complain about more ma.s.sive government spending. In this latter camp with Reid was Republican senator Richard Shelby, who complained that it was a "blank check" for the Treasury.

Barney Frank chairman of the House Financial Services Committee, showed an incisive grasp of the issues at hand. "Who will be the operating ent.i.ty?" he asked. "If we buy these a.s.sets, we will be the foreclosure agent. We need warrants."

"We keep talking about buying up these complex securities," Frank continued, "but we need to understand that at the bottom, these are made up of people's mortgages."

Just before the meeting broke, McConnell addressed what was clearly hanging over the politicians' heads. "I know this is an election year," he said, "and we need to be careful. As soon as this meeting lets out, we need to inform both presidential candidates and ask them not to politicize this debate."

As n.o.ble as McConnell's plea might have been, it was far too late. The crisis had already become wholly a political dogfight, and a full-fledged audition, for the presidency.

While Paulson and Bernanke were making their case for TARP on the Hill, John McCain was holding a rally in Cedar Rapids, Iowa, where the waters had finally receded. He was listening wearily to his running mate, who had gone from fresh new face to nationwide obsession almost overnight. She now threatened to swallow his campaign whole. Sarah Palin, for her part, was doing her best to redirect chants of "We want Sar-ah!" to enthusiasm for the top of their ticket, repeating a stale riff about the "courage" of the "maverick of the Senate." Still, the chant persisted, echoing off into the distant future: "We want Sar-ah!"

A thousand miles away, in Espanola, New Mexico, Obama was campaigning to one of the most evenly split electorates. The state had gone for Gore in 2000 and Bush in 2004, each time by razor-thin margins. Obama by this point had realized how heavily economic issues were weighing on voters' minds, and he tailored his speeches to the crisis. The next day, September 19, he would fly to Miami and kick off a weeklong blitzkrieg that would end, effectively, with him on his way to the presidency. From Florida, Obama endorsed the Fed-Treasury plan that Paulson had unveiled to the country only a few hours earlier.

"Today I fully support the effort of Secretary Paulson and Federal Reserve chairman Bernanke," he said, having by then talked to leaders from the previous day's meeting and heard that TARP was going to pa.s.s, and pa.s.s soon. "What we're looking at right now is to provide the Treasury and the Fed with as broad authority as necessary to stabilize markets and maintain credit."

McCain, meanwhile, had been running on unfettered markets and reduced government spending, two broad policies that TARP managed, at the same time, to contravene. He would be obliged to support TARP in the end. It was the only responsible stance, if an unpleasant one all the same. But Obama suspected that the program would meet with stiff opposition in McCain's party and that his opponent would find it all but impossible to do the responsible thing and please his base. This turned out to be right, as McCain couldn't manage to reframe the issues in a way that gave him a solid place to stand.

On the morning of September 19, Obama met with his economic team in Miami.

A s.h.i.+ft in the group's composition and tone had taken place. Their previous meeting, on July 28, included JPMorgan's Jamie Dimon and Google CEO Eric Schmidt, two former Clinton secretaries in Bob Rubin and Bob Reich, and onetime Bush officials such as former SEC chairman Bill Donaldson and former Treasury secretary Paul O'Neill. But none of them carried the clout, at least not in the senator's mind, that Volcker did. Obama started that meeting as he always did, with "Paul, you go first."

This morning, though, Volcker had a scheduling conflict. He said he could stop by in Miami only briefly, before catching a plane to Europe. But if his presence wasn't required, he could take a different flight and be available on the phone, as some other partic.i.p.ants would be. Obama told him the photo op would be preferable. In the previous weeks, during a series of phone calls with this group of free-floating bigfoots, Larry Summers had risen to the fore. Volcker stayed a few minutes, offering his symbolic value of a man behind Obama, and then slipped away, as the reporters and photographers exited.

Summers took charge. It was a matter of neither experience nor expertise that pushed him to prominence. Among those present in person or on the conference call, Bob Rubin had more experience in both government and business. Paul O'Neill had actually run an industrial company, Alcoa, and was more of an original thinker. Warren Buffett had vastly more expertise in how the world's markets actually worked. Summers was simply a master explainer, able to deftly boil down the complexities of matters economic and financial, and to put them in terms the nonexpert could understand. He was brilliant at cultivating the sense of control, even as events spun far beyond what could be managed with any certainty. That was his feat, an illusionist's trick calling for a certain true genius: he could will into being the confidence that eluded others-those less self-a.s.sured and, maybe sensibly, on humbler terms with the complexities of the world.

To top it all off, Summers believed in the basic soundness of the financial industry. He was sympathetic to liberal ideas but not an advocate of major, systemic change. It was a comforting prospect to think the messy crisis, so far beyond the ken of most politicians, could be solved with a one-off intervention and a few modest reforms thereafter. It would not entail big risks, either in getting the reforms wrong and dragging down the economy with them, or in alienating wealthy allies. Though it was exciting to consider the brazen readjustments championed by progressive economists, such actions had the potential to rock a boat already listing dangerously-and to make powerful enemies. Lacking decades of expertise in the rocket science of modern economics, what sort of leader laid claim to the confidence with which to remake the entire system in grand Rooseveltian fas.h.i.+on?

Oliver Wendell Holmes, Jr., famously remarked that Roosevelt matched "a first-rate temperament" with "a second-rate intellect," but it is undeniable that what Roosevelt lacked in probing, a.n.a.lytical brilliance, he more than made up for in those intangible qualities that distinguish leaders.h.i.+p from technical expertise. He understood that the problems afflicting a nation are always in equal measure spiritual crises, and that there is never a clear distinction in politics between the practical and the symbolic. Obama, having risen to prominence on the strength of this very insight, would start disbelieving his own rhetoric as the economic crisis. .h.i.t. It was, in more ways than one, a true crisis of confidence.

Larry Summers disagreed vehemently with Volcker on fundamental issues. Volcker saw the ad hoc response to each crisis-Bear Stearns, Lehman, Fannie and Freddie, AIG, and now possibly the car companies-as a dangerous program. "We can't keep doing this over a weekend!" he said in frustration at the July meeting, foretelling the disasters of September. Volcker saw that the credit system in the United States was broken. He thought they should set up a modern version of the Depression-era Reconstruction Finance Corporation, a government ent.i.ty to guarantee smart, responsible lending to private companies. It was a way to slowly work the country off its high ledge of debt, Volcker said, and to kill off the business model of profitably selling debt without having to actually a.s.sume the risk, which then gets pa.s.sed around like a hot potato. Across the table, Larry Summers just rolled his eyes.

The power of Summers's derision is well known, and in grappling with a financial industry that had spent the prior decade pressing farther down the rabbit hole of complex math and tortured modeling, there was currency to the idea that someone's expertise might be out of date. Volcker's entire appeal was his anachronism, an old-school focus on fundamentals, which helped him cut through the mind-numbing logic and technical details with which financiers justified their terrifically risky and profitable operations. Even as Summers ruffled feathers on the team, polluting the group's collegial atmosphere with his brusque, compet.i.tive manner, he was winning the battle for Obama's trust. They were already fencing, collegially, like peers. Once the reporters were shooed away in Miami, so that the real meeting could start, Summers's opening precis strayed into political a.n.a.lysis. "Larry, I didn't bring you here for political advice," Obama chided jovially, as Summers and others laughed. And then Summers pushed forward, taking charge. The senator's electoral lead widened as the country's crisis deepened and his cold-sweat moment arrived: he would have to lead the country through this darkness and back to light. In the midst of this crisis of confidence, Obama needed what Summers was offering.

On September 24, five days after the Miami meeting, John McCain suspended his presidential campaign. He said he was going to Was.h.i.+ngton to partic.i.p.ate in the bailout talks. Obama didn't bite. If the crisis had brought on his cold-sweat moment, it had also given him the political window in which to make his move. When McCain called a White House meeting the following day, bringing together Obama, Bush, Paulson, and top party bra.s.s, an odd gambit to demonstrate his own leaders.h.i.+p, Obama was by all accounts-from both Democrats and Republicans-the far better prepared of the two. Having spent a year among Wolf and his Wall Street patrons, Obama could talk finance like a pro.

"Obama delivered a thoughtful, well-prepared presentation, sketching the broad outlines of the problem and stressing the need for immediate action," Paulson later recalled. Others noted the senator's calm focus and even "presidential" demeanor.

Obama knew he had McCain on the ropes. His opponent had called the meeting as a sort of trap, and Obama had responded with an unmistakable smackdown. He spoke without notes-didn't need them-and a thought flitted through his mind: he knew this stuff.

"The Democrats will deliver the votes," he a.s.serted with confidence. McCain had no reb.u.t.tal. He just listened, aloof and irritable at his own meeting, his discomfort palpable. Obama noticed this and pressed his advantage: "I'd like to hear what Senator McCain has to say, since we haven't heard from him yet." That qualifier was a jab, small and calculated. It was the presidential election, after all, and Obama intended to win this thing.

McCain fumbled through a few plat.i.tudes and political nonstarters. He was clearly uncomfortable engaging in any kind of serious discussion on the topic, reading clumsily from the single note card he'd brought with him.

News reports and photos of the meeting-a true leaders.h.i.+p audition, in a crowded room of official Was.h.i.+ngton -were soon circling the global media, offering what felt like an unmanaged glimpse into government's own a.s.sessment of who could best lead it through peril.

Here, in the Cabinet Room of the White House, Obama clearly won the prize of being the most presidential, followed by the oddly deferential Bush-who didn't say very much and seemed perplexed about why the meeting had been convened-and McCain, in a distant third, who looked confused, as if he had stepped off at the wrong bus stop. Like several seminal moments that preceded it-the convention speech in 2004, the Iowa victory speech, the brilliant dissertation on race-this was an instant when the public refocused its gaze. The African American senator with little experience indisputably looked and acted like a president in a time of crisis.

When the discussion broke, the two political camps huddled in separate White House enclaves. The Democrats retreated to the Roosevelt Room to talk through the sticky task of reconciling politics with what looked like a once-in-a-lifetime crisis. In the middle of this, an exasperated Paulson burst into the room, begging them not to attack TARP.

Pelosi for one had had enough. Her speakers.h.i.+p had been built on a groundswell of anti-Bush fervor, and she not only vehemently disliked the president and his team, but also didn't trust them-their declarations or their motives.

"That's bulls.h.i.+t, Hank," she said.

Paulson knew the only answer here to Pelosi's aggressive politics was prostration. He genuflected, clasping his hands together, and put it on the line.

"I'm begging you," he said. "Please don't let this fail."

"I didn't know you were a Catholic," the Speaker remarked dryly.

The next night would see the first of three presidential debates, but it would hardly matter. As Obama and McCain argued in Oxford, Mississippi, the election had already been decided. Their conduct in the wake of the crisis was already showing in the polls. The weak numbers that had concerned Obama in the early part of the month were fading quickly. After September 25, the day he suspended his campaign, McCain would not lead again in a single major poll. The election had been clinched in ten days.

On September 29 the first incarnation of TARP failed in the House, 228205. Just moments before the vote took place, Pelosi spent just two lines describing the bill before launching into a diatribe against the Bush administration.

"Seven hundred billion is a staggering number," she said, "but only a part of the cost of the failed policies of the Bush administration."

Paulson's plea had failed. It was all politics on the Hill.

"When President Bush took office," Pelosi went on, "he inherited President Clinton's surpluses, four years in a row of budget surpluses." As she continued, policy makers from both parties were working on their own multibillion-dollar stimulus plans, having come to a consensus on, at least, the necessity of action. "No regulation, no supervision, no discipline," Pelosi persisted, "and if you fail, you will have a golden parachute and the taxpayer will bail you out. Those days are over. The party is over."

Many Republicans would cite Pelosi's use of her platform to denounce Bush as their reason for voting against the bill. It was a circus. Wall Street traders watched in horror as the Dow plummeted an all-time, one-day record: 777 points. Obama took the vote in stride. It was one of the country's darkest hours and yet, in a little more than a month he would have the country feeling as good as it had in decades. But now, with the reality of victory in his grasp, Obama was left to contend with both an irony and a sobering truth. The former was that Obama's year and a half relentlessly courting Wall Street's t.i.tans, who had pocketed historic profits on the path to disaster, had inadvertently graced him with enough mastery of how money and risk was managed, and mismanaged, that he could best Bush and crush McCain in the Cabinet Room audition. All the better that none of the politicians gathered around the table seemed to recognize this much less bracing truth, known only to him and a handful of others: he wasn't ready.

On October 13, Paulson summoned the CEOs of nine of the largest American banks to the Treasury Department's large conference room to deliver a surprise ultimatum.

Getting them to come-without telling them why-had been a feat. But it was simply too risky to offer advance warning of what he was attempting: his intentions might leak and then his gambit might fail, a combination that would kill the confidence-building-the faith that government had this crisis under control-that was the very point of the meeting.

The night before, while streams of urgent e-mail invites were being sent to an array of corner offices, Paulson met with Bernanke, Geithner, and Sheila Bair at his office to work through strategy. The goal was to get credit flowing again. The financial system was gripped with fear. Inst.i.tutions were h.o.a.rding a.s.sets. Geithner had been pressing, cajoling, even threatening the various banks to merge-to pool capital, and then slash duplicative staffs, all to no avail. The CEOs were all in self-protective mode, trying to avoid messy marriages. Bernanke, meanwhile, had been secretly opening the Fed coffers to all manner of financial inst.i.tutions, and some nonfinancials as well, in the United States and abroad. Since the previous fall, nearly $400 billion in virtually free money had been pa.s.sed out by the Fed. Still, the economy was starved of capital, like a thirsty man living off drops of water. The original plan, to use TARP funds to repurchase toxic a.s.sets from the banks, had been deemed too slow. It could take months. Without credit, the system would seize-as it had during the Great Depression-and the consequences could be unimaginable. Those at Treasury often thought of the call with Jeff Immelt in the panic after Lehman's fall, when the General Electric CEO said that his company might not be able to fund operations and fill orders. The flow of credit, like blood through the circulatory system, is a precondition for the economy's survival.

So instead Paulson, Bernanke, and Geithner decided they would use capital injections, giving each of the largest banks multimillion-dollar welfare checks that they would commit to use expressly for lending.

Or, at least that was the plan. Bair, as was her way, was skeptical. "How are you going to get the banks to take the money?" she prodded Paulson at the planning session. Paulson said he would threaten them, and that the inst.i.tutions that needed the capital would drag along the few that didn't. Why was it important for banks that didn't need a capital injection to agree to take one? For cover. Paulson said he'd tell them they must take it so that their less fortunate brethren wouldn't be marked as in desperate need of a government infusion. Such a decline of confidence in those inst.i.tutions could trigger a "run."

At 3:00 p.m. on the thirteenth, a Tuesday, the bankers filed into the conference room, several of them grousing about why they had been summoned to D.C. Paulson attempted his ultimatum.

"Let me be clear: if you don't take it and you aren't able to raise the capital that they say you need in the market, then I'm going to give you a second helping and you're not going to like the terms on that."

He paused, and reached for the high ground: "This is the right thing to do for the country."

Geithner then rattled off the amount each bank would be given. Bank of America: $25 billion; Citigroup: 25; Goldman Sachs: 10; JPMorgan: 25; Morgan Stanley: 10; State Street: 10; Wells Fargo: 25.

The quid pro quo, Paulson stressed, was that the banks use this money to lend. Nods all around.

But this initial receptiveness dissolved when John Thain, now technically an employee of Bank of America, mentioned the CEO's version of the "third rail."

"What kind of protections can you give us on changes in compensation policy?"

The Treasury was giving the banks cheap capital, in the midst of a crisis, and Thain was asking if their bonuses would be safe? CEO arrogance, though now tinged with a bit more unspoken desperation, had restored itself. The CEOs started to push back. What would the government demand in return for this "investment"-influence over operations, corporate decisions, and strategies? Though Thain was no longer a member of that exclusive club, he could still play the part-now they all were.

If nothing else, this prompted Bank of America's actual CEO, Thain's boss, to a.s.sert his primacy.

"I have three things to say," Ken Lewis intervened. "There's obviously a lot to like and dislike about the program. I think given what's happening, if we don't have a healthy fear of the unknown, then we're crazy."

"If we spend another second talking about compensation issues, we've lost our minds!"

And, finally, "I don't think we need to be talking about this a whole lot more . . . We all know that we're going to sign."

Slowly the tension subsided and the group acquiesced. The CEOs one by one took the plunge, allowing the federal government to essentially take a stake in their companies. By 6:00 p.m., all the bankers signaled that their boards had either approved or soon would approve the proposal. Signatures poured in. The government had handed $125 billion to nine banks, without conditions. Lending? Paulson's a.s.surance that the U.S. government would not intrude on the sovereignty of the banks receiving taxpayers' money would make the issue of what to do with the money a matter ultimately of CEO discretion.

Not every president gets an era. Bush "41" didn't. Reagan did, and of course FDR got his. Clinton yearned for his eight years in office to mark an era, but he sensed they fell short. He often said a president needs to have governed during a crisis to be considered "great." But clearly greatness calls for stiffer stuff than that. Bush II and LBJ got their eras, but in large part they saw their presidencies swallowed by t.i.tanic events, forces capable of crus.h.i.+ng best-laid plans and magnifying their errors of judgment.