Decision Points

by George W. Bush

  The implications were startling. From small-town banks to major international investors like China and Russia, virtually everyone who owned GSE paper assumed it was backed by the U.S. government. If the GSEs defaulted, a global domino effect would follow and the credibility of our country would be shaken.

  With Hank’s strong advice, I decided that the only way to prevent a disaster was to take Fannie and Freddie into government conservatorship. It was up to Hank and Jim to persuade the boards of Fannie and Freddie to swallow this medicine. I was skeptical that they could do so without provoking a raft of lawsuits. But on Sunday, September 7, Hank called me at the White House to tell me it had been done. The Asian markets rallied Sunday night, and the Dow Jones increased 289 points on Monday.

  I spent the next weekend, September 13 and 14, managing the government’s response to Hurricane Ike. The storm pounded Texas’s Gulf Coast early Saturday morning. The 110-mile-per-hour winds and 20-foot storm surge flooded Galveston, blew out windows in Houston, and killed more than 100 people. The worst storm to hit Texas since the Galveston Hurricane of 1900, Ike inflicted more than $24 billion in damage.

  That same weekend, a different kind of storm was battering New York City. Like many institutions on Wall Street, Lehman Brothers was heavily leveraged and highly exposed to the faltering housing market. On September 10 the firm had announced its worst-ever financial loss, $3.9 billion in a single quarter. Confidence in Lehman vanished. Short-sellers, traders seeking to profit from declining stock prices, had helped drive Lehman stock from $16.20 to $3.65 per share. There was no way the firm could survive the weekend.

  The question was what role, if any, the government should play in keeping Lehman afloat. The best possible solution was to find a buyer for Lehman, as we had for Bear Stearns. We had two days.

  Hank flew to New York to oversee negotiations. He told me there were two possible buyers: Bank of America and Barclays, a British bank. Neither firm was willing to take Lehman’s problematic assets. Hank and Tim Geithner devised a way to structure a deal without committing taxpayer dollars. They convinced major Wall Street CEOs to contribute to a fund that would absorb Lehman’s toxic assets. Essentially, Lehman’s rivals would save the firm from bankruptcy. Hank was hopeful that one of the buyers would close a deal.

  It soon became clear that Bank of America had its eyes on another purchase, Merrill Lynch. That left Barclays as Lehman’s last hope. But on Sunday, less than twelve hours before the Asian markets opened for Monday trading, financial regulators in London informed the Fed and SEC they were unwilling to approve a purchase by the British bank.

  “What the hell is going on?” I asked Hank. “I thought we were going to get a deal.”

  “The British aren’t prepared to approve,” he said.

  While Hank and I spoke all the time, those phone calls on Sunday—the supposed day of rest—always seemed to be the worst. It felt like we were having the same conversation again and again. The only thing changing was the name of the failing firms. But this time, we weren’t going to be able to stop the domino from toppling over.

  “Will we be able to explain why Lehman is different from Bear Stearns?” I asked Hank.

  “Without JPMorgan as a buyer for Bear, it would have failed. We just couldn’t find a buyer for Lehman,” he said.

  I felt we had done the best we could. But time had run out for Lehman. The 158-year-old investment house filed for bankruptcy just after midnight on Monday, September 15.

  All hell broke loose in the morning. Legislators praised our decision not to intervene. The Washington Post editorialized, “The U.S. government was right to let Lehman tank.” The stock market was not so positive. The Dow Jones plunged more than five hundred points.

  A panic mentality set in. Investors started selling off securities and buying Treasury bills and gold. Clients pulled their accounts from investment banks. The credit markets tightened as lenders held on to their cash. The gears of the financial system, which depend on liquidity to serve as the grease, were grinding to a halt.

  As if that weren’t enough, the American International Group, a giant insurance company, was facing its own crisis. AIG wrote property and life insurance policies and insured municipalities, pension funds, 401(k)s, and other investment vehicles that affected everyday Americans. All those businesses were healthy. Yet the firm was somehow on the brink of implosion.

  “How did this happen?” I asked Hank.

  The answer was that one unit of the firm, AIG Financial Products, had insured large amounts of mortgage-backed obligations—and invested in even more. With mortgages defaulting in record numbers, the firm was facing cash calls for at least $85 billion that it did not have. If the company didn’t come up with the money immediately, it would not only fail, it would bring down major financial institutions and international investors with it.

  The New York Fed had tried to line up a private-sector solution. But no bank could raise the kind of money AIG needed in such little time. There was only one way to keep the firm alive: The federal government would have to step in. Ben Bernanke reported that AIG, unlike Lehman, held enough collateral from its stable insurance businesses to qualify for an emergency Fed loan. He laid out the terms: The New York Fed would lend AIG $85 billion secured by AIG’s stable and valuable insurance subsidiaries. In return, the government would receive a warrant for 79.9 percent of AIG’s shares.

  There was nothing appealing about the deal. It was basically a nationalization of America’s largest insurance company. Less than forty-eight hours after Lehman filed for bankruptcy, saving AIG would look like a glaring contradiction. But that was a hell of a lot better than a financial collapse.

  With the AIG rescue, we had endured three weeks of financial agony. Day after day, the news kept getting worse. I’d go into a meeting with the Dow up two hundred points and come out thirty minutes later with it down three hundred. The markets were anxious, and so was I. I felt like the captain of a sinking ship. The Treasury, the Fed, and my White House team were working around the clock, but all we were doing was bailing water. I decided that we couldn’t keep going like this. We had to patch the boat.

  On Thursday, September 18—three days after Lehman declared bankruptcy—the economic team convened in the Roosevelt Room. Ben raised the possibility of another Great Depression. Then Hank and SEC Chairman Chris Cox laid out the plan: guarantee all money market deposits, launch a new lending vehicle to restart the commercial paper market, temporarily ban the short sale of leading financial stocks, and purchase hundreds of billions of dollars in mortgage-backed securities—the initiative that would become known as the Troubled Asset Relief Program, or TARP.

  The strategy was a breathtaking intervention in the free market. It flew against all my instincts. But it was necessary to pull the country out of the panic. I decided that the only way to preserve the free market in the long run was to intervene in the short run.

  “You’ve got my backing, one hundred percent,” I told the team. “This is no longer a case-by-case deal. We tried to stem the tide, but the problem is deeper than we thought. This is systemic.”

  The conversation moved to a discussion of all the difficulties we would face on Capitol Hill. “We don’t have time to worry about politics,” I said. “Let’s figure out the right thing to do and do it.”

  I had made up my mind: The U.S. government was going all in.

  I reflected on everything we were facing. Over the past few weeks we had seen the failure of America’s two largest mortgage entities, the bankruptcy of a major investment bank, the sale of another, the nationalization of the world’s largest insurance company, and now the most drastic intervention in the free market since the presidency of Franklin Roosevelt. At the same time, Russia had invaded and occupied Georgia, Hurricane Ike had hit Texas, and America was fighting a two-front war in Iraq and Afghanistan. This was one ugly way to end the presidency.

  I didn’t feel sorry for myself. I knew there would be tough days. Self-pi
ty is a pathetic quality in a leader. It sends such demoralizing signals to the team and the country. As well, I was comforted by my conviction that the Good Lord wouldn’t give a believer a burden he couldn’t handle.

  After the meeting, I walked around the Roosevelt Room and thanked everyone. I told them how grateful I was for their hard work, and how fortunate America was that they had chosen to serve. In the presidency, as in life, you have to play the hand you’re dealt. This wasn’t the hand any of us had hoped for, but we were damn sure going to play it as best we could.

  Hank and his team at Treasury pitched Congress hard on the financial rescue package. We proposed an appropriation of $700 billion—about 5 percent of the mortgage market, which we thought would be big enough to make a difference. Many legislators recognized the need for a large and decisive measure, but that didn’t diminish their shock or anger. Democrats complained that the executive branch was seizing too much authority. One Republican senator said our plan would “take away the free market and institute socialism in America.”

  In some ways, I sympathized with the critics. The last thing I wanted to do was bail out Wall Street. As I told Josh Bolten, “My friends back home in Midland are going to ask what happened to the free-market guy they knew. They’re going to wonder why we’re spending their money to save the firms that created the crisis in the first place.”

  I wished there were some way to hold individual firms to account while sparing the rest of the country. But every economist I trusted told me that was impossible. The well-being of Main Street was directly linked to the fate of Wall Street.

  If credit markets remained frozen, the heaviest burdens would fall on American families: steep drops in the value of retirement accounts, massive job losses, and further falling home values. On September 24, I gave a primetime address to the nation to explain the need for the rescue package. “I [understand] the frustration of responsible Americans who pay their mortgages on time, file their tax returns every April 15, and are reluctant to pay the cost of excesses on Wall Street,” I said. “But given the situation we are facing, not passing a bill now would cost these Americans much more later.”

  A few hours before I went on the air to deliver the speech, my personal aide, Jared Weinstein, told me John McCain needed to speak to me immediately. I asked John how he was feeling about the campaign, but he went directly to the reason for his call. He wanted me to convene a White House meeting on the rescue package.

  “Give me some time to talk to Hank,” I said. I wanted to make sure a White House meeting wouldn’t undermine my treasury secretary’s efforts to structure a deal with Congress. John said he was going to issue a statement. Minutes later, he was on TV. He called for the meeting and announced he was suspending his campaign to work full-time on the legislation.

  I knew John was in a tough position. He was trailing in the polls to Senator Barack Obama of Illinois, who had stunned Hillary Clinton in the Democratic primaries. No question the economic trouble was hurting John. Our party controlled the White House, so we were the natural target of the finger-pointing. Yet I thought the financial crisis gave John his best chance to mount a comeback. In periods of crisis, voters value experience and judgment over youth and charisma. By handling the challenge in a statesmanlike way, John could make the case that he was the better candidate for the times.

  I walked over to the Oval Office, where Josh Bolten was waiting with his deputy, Joel Kaplan, and Counselor Ed Gillespie. Nobody was keen on the idea of the meeting. Josh said Hank opposed it. But how could I say no to John’s request? I could see the headlines: “Even Bush Thinks McCain’s Idea Is a Bad One.”

  Conferring with Ed Gillespie (left) and Josh Bolten, two trusted aides and good friends, in the trying final months of the administration. White House/Eric Draper

  We notified Speaker Nancy Pelosi and Senate Majority Leader Harry Reid that the meeting would take place the next afternoon, Thursday, September 25. I called Senator Obama and told him I appreciated his interrupting his campaign schedule. “Anytime the president calls, I will take it,” he said graciously. I extended the invitation to the meeting and made clear it was not a political trap. He agreed to attend.

  At around 3:30 p.m. the next day, the participants began to arrive. Although I did not venture to the narrow parking strip between the White House and the Eisenhower Executive Office Building, I was told it looked like an SUV convention. Before the meeting started, I had a quick discussion with Senate Minority Leader Mitch McConnell and House Minority Leader John Boehner. We spent most of our time talking about how tough it would be to structure a deal that could garner Republican votes in the House. I told them it would be a disaster if Republicans killed the TARP bill and the economy collapsed.

  Just before I sat down in the Cabinet Room, I had a moment with Speaker Pelosi. I told her I planned to call on her after Hank and I had made our opening remarks. She clearly suspected that my motive was to sabotage the Democrats. Like a volcano ready to erupt, she said, “Barack Obama will be our spokesman.”

  I took my seat at the center of the large wooden table Richard Nixon had donated to the White House. Hank Paulson, Dick Cheney, Josh Bolten, and I represented the administration. The party leaders and key committee chairmen represented Congress. Presidential candidates McCain and Obama took their seats at opposite ends of the table. Members of our staffs were sardined into the room. Nobody wanted to miss the marquee event in Washington’s political theater.

  The emergency Cabinet Room meeting about the rescue package. White House/Eric Draper

  I opened the meeting by stressing the urgency of passing legislation as soon as possible. The world was watching to see if America would act, and both parties had to rise to the challenge. Hank gave an update on the volatile markets and echoed my call for speedy passage.

  I turned to the speaker. True to her word, she deferred to Senator Obama. He had a calm demeanor and spoke about the broad outlines of the package. I thought it was smart when he informed the gathering that he was in constant contact with Hank. His purpose was to show that he was aware, in touch, and prepared to help get a bill passed.

  When Obama finished, I turned to John McCain. He passed. I was puzzled. He had called for this meeting. I assumed he would come prepared to outline a way to get the bill passed.

  What had started as a drama quickly descended into a farce. Tempers flared. Voices were raised. Some barbs were thrown. I was watching a verbal food fight, which would have been comical except that the stakes were so high.

  Toward the end of the meeting, John did speak. He talked in general terms about the difficulty of the vote for Republican members and his hope that we could reach a consensus.

  After everyone had their chance to vent, I decided there was nothing more we could accomplish. I asked the candidates not to use the White House as a backdrop to issue political statements. I asked the members of Congress to remember we needed to show a united front to avoid spooking the markets. Then I stood up and left.

  Early in the afternoon of Monday, September 29, the House of Representatives held a vote on the financial rescue bill. The previous two days, our fifth weekend in a row spent dealing with the financial crisis, had been packed with negotiations. Hank and his Treasury staff—joined by Dan Meyer, my cool-headed legislative affairs chief, and Keith Hennessey, my tireless National Economic Council director—had shuttled back and forth to Capitol Hill, working to resolve the remaining issues on TARP. Late Saturday night, Speaker Pelosi and John Boehner told me they had the outlines of a deal. On Monday morning, I stepped onto the South Lawn to congratulate Congress and urge the agreement’s quick passage.

  Back in the Oval Office, I started calling Republican House members to lock in votes.

  “We really need this package,” I told one congressman after the next. They all had reasons why they couldn’t vote for it. The price tag was too high. Their constituents opposed it.

  “I just can’t bail out Wall Street,” one told me. �
��I’m not going to be part of the destruction of the free market.”

  “Do you think I like the idea of doing this?” I shot back. “Believe me, I’d be fine if these companies fail. But the whole economy is on the line. The son of a bitch is going to go down if we don’t step in.”

  At 2:07 p.m., the final vote on the bill was cast. It failed, 228 to 205. Democrats had voted in favor of the legislation, 140 to 95. Republicans had rejected it, with 65 votes in favor and 133 opposed

  I knew the vote would be a disaster. My party had played the leading role in killing TARP. Now Republicans would be blamed for the consequences.

  Within minutes, the stock market went into free fall. The Dow dropped 777 points, the largest single-day point loss in its 112-year history. The S&P 500 dropped 8.8 percent, its biggest percentage loss since the Black Monday crash of 1987. “This is panic … and fear run amok,” one analyst told CNBC. “Right now we are in a classic moment of financial meltdown.”

  Shortly after the vote, I met with Hank, Ben, and the rest of the economic team in the Roosevelt Room to figure out our next move. We really had only one option. We had to make another run at the legislation.

  My hope was that the market’s severe reaction would provide a wakeup call to Congress. Many of those who voted against the bill had based their opposition on the $700 billion price tag. Then they had watched the markets hemorrhage $1.2 trillion in less than three hours. Every constituent with an IRA, a pension, or an E*Trade account would be furious.

  We devised a strategy, lead by Josh Bolten, to bring the bill up in the Senate first and then make another run in the House. Harry Reid and Mitch McConnell quickly moved a bill with several new provisions intended to attract greater support, including a temporary increase in FDIC insurance for depositors and protections for middle-class families against the Alternative Minimum Tax. The core of the legislation—the $700 billion to strengthen the banks and unfreeze the credit markets—was unchanged.