The Senate held a vote Wednesday night, and the bill passed 74 to 25. The House voted two days later, on Friday, October 3. I made another round of calls to wavering members. My warnings about the system going down had a lot more credibility this time. Thanks to strong leadership from Republican Whip Roy Blunt and Democratic Majority Leader Steny Hoyer, the bill passed 263 to 171. “Monday I cast a blue collar vote,” said one member who changed his position. “Today I’m going to cast a red, white, and blue collar vote.”
Days after I signed TARP, Hank recommended a change in the way we deployed the $700 billion. Instead of buying toxic assets, he proposed that Treasury inject capital directly into struggling banks by purchasing non-voting preferred stock.
I loathed the idea of the government owning pieces of banks. I worried Congress would consider it a bait and switch to spend the money on something other than buying toxic assets. But that was a risk we had to take. The plan for TARP had to change because the financial situation was worsening rapidly. Designing a system to buy mortgage-backed securities would consume time that we didn’t have to spare. Buying shares in banks was faster and more efficient. Purchasing equity would inject capital—the lifeblood of finance—directly into the undercapitalized banking system. That would reduce the risk of sudden failure and free up more money for banks to lend.
Capital injections would also offer more favorable terms for U.S. taxpayers. The banks would pay a 5 percent dividend for the first five years. The dividend would increase to 9 percent over time, creating an incentive for financial institutions to raise less expensive private capital and buy back the preferred shares. The government would also receive stock warrants, which would give us the right to buy shares at low prices in the future. All this made it more likely that taxpayers would get their money back.
On October 13, Columbus Day, Hank, Tim Geithner, and Ben revealed the capital purchase plan in dramatic fashion. They called the CEOs of nine major financial firms to the Treasury Department and told them that, for the good of the country, we expected them to take several billion dollars each. We worried some healthier banks would turn down the capital and stigmatize those who accepted. But Hank was persuasive. They all agreed to take the money.
Deploying TARP had the psychological impact we were hoping for. Combined with a new FDIC guarantee for bank debt, TARP sent an unmistakable signal that we would not let the American financial system fail. The Dow shot up 936 points, the largest single-day increase in stock market history.
TARP didn’t end the financial problems. Over the next three months, Citigroup and Bank of America required additional government funds. AIG continued to deteriorate and eventually needed nearly $100 billion more. The stock market remained highly volatile.
But with TARP in place, banks slowly began to resume lending. Companies began to find the liquidity needed to finance their operations. The panic that had consumed the markets receded. While we knew there was a tough recession ahead, I could feel the pressure ease. I had my first weekend in months without frantic calls about the crisis. Confidence, the foundation of a strong economy, was returning.
The financial crisis was global in scale, and one major decision was how to deal with it in the international arena. The turbulence came during France’s turn as head of the European Union. Nicolas Sarkozy, the dynamic French president who had run on a pro-American platform, urged me to host an international summit. I grew to like the idea. The question was which countries to invite. I heard that some European leaders preferred that we convene the G-7.***** But the G-7 included only about two thirds of the global economy. I decided to make the summit a gathering of the G-20, a group that included China, Russia, Brazil, Mexico, India, Australia, South Korea, Saudi Arabia, and other dynamic economies.
With Nicolas Sarkozy. White House/Eric Draper
I knew it wouldn’t be easy to forge an agreement among the twenty leaders. But with hard work and some gentle arm-twisting, we got it done.****** On November 15, every leader at the summit signed on to a joint statement that read, “Our work will be guided by a shared belief that market principles, open trade and investment regimes, and effectively regulated financial markets foster the dynamism, innovation, and entrepreneurship that are essential for economic growth, employment, and poverty reduction.”
It sent a powerful signal to have countries representing nearly 90 percent of the world economy agree on principles to solve the crisis. Unlike during the Depression, the nations of the world would not turn inward. The framework we established at the Washington summit continues to guide global economic cooperation.
The economic summit was not the biggest event of November. That came on Tuesday, November 4, when Senator Barack Obama was elected president of the United States.
My preference had been John McCain. I believed he was better prepared to assume the Oval Office amid a global war and financial crisis. I didn’t campaign for him, in part because I was busy with the economic situation, but mostly because he didn’t ask. I understood he had to establish his independence. I also suspected he was worried about the polls. I thought it looked defensive for John to distance himself from me. I was confident I could have helped him make his case. But the decision was his. I was disappointed I couldn’t do more to help him.
With John McCain. White House/Eric Draper
The economy wasn’t the only factor working against the Republican candidate. Like Dad in 1992 and Bob Dole in 1996, John McCain was on the wrong side of generational politics. At seventy-two, he was a decade older than I was and one of the oldest presidential nominees ever. Electing him would have meant skipping back a generation. By contrast, forty-seven-year-old Barack Obama represented a generational step forward. He had tremendous appeal to voters under fifty and ran a smart, disciplined, high-tech campaign to get his young supporters to the polls.
As an Obama win looked increasingly likely, I started to think more about what it would mean for an African American to win the presidency. I got an unexpected glimpse a few days before the election. An African American member of the White House residence staff brought his twin sons, age six, to the Oval Office for a farewell photo. One glanced up around the room and blurted out, “Where’s Barack Obama?”
“He’s not here yet,” I deadpanned.
On election night, I was moved by images of black men and women crying on TV. More than one said, “I never thought I would live to see this day.”
I called the president-elect to congratulate him. I also called John McCain to say he was a good man who’d given the race his best shot. Both were gracious. I told the president-elect I looked forward to welcoming him to the White House.
When I hung up the phone, I said a prayer that all would be well during my successor’s time. I thought about one of my favorite presidential quotes, from a letter John Adams wrote to his wife, Abigail: “I pray Heaven to bestow the best blessings on this house and all that shall hereafter inhabit it. May none but honest and wise men ever rule under this roof.” His words are carved into the mantel above the fireplace of the State Dining Room.
Months before the 2008 election, I had decided to make it a priority to conduct a thorough, organized transition. The first change of power since 9/11 would be a period of vulnerability, and I felt a responsibility to give my successor the courtesy of a smooth entry into the White House. The transition was overseen by Josh Bolten and one of his deputies, my talented former personal aide Blake Gottesman. They made sure the president-elect and his team received briefings, access to senior members of the administration, and office space in their new departments.
Part of the transition involved economic policy. The financial crisis brought one final decision point: What to do about the reeling American auto industry? The Big Three firms of Ford, Chrysler, and General Motors had been experiencing problems for years. Decades of poor management decisions had saddled automakers with enormous health-care and pension costs. They had been slow to recognize changes in the market. As a result, they
had been outcompeted by foreign manufacturers in product and price.
When the economy took a hit, auto sales dropped. Then the freeze in the credit markets stopped almost all car loans. Auto company stocks were battered in the stock market collapse of September and October. Their cash balances dwindled to dangerously low levels. They had little hope of raising new funds in the private markets.
In the fall of 2008, GM CEO Rick Wagoner started pressing for federal help. He warned that GM would fail, and then the other automakers would follow. I didn’t think it was a coincidence that the warnings about bankruptcy came right before the upcoming elections. I refused to make a decision on the auto industry until after the vote.
Six days after the election, I met with President-elect Obama in the Oval Office. Barack was gracious and confident. It seemed he felt the same sense of wonderment I had eight years earlier when Bill Clinton welcomed me to the Oval Office as president-elect. I could also see the sense of responsibility start to envelop him. He asked questions about how I structured my day and organized my staff. We talked about foreign policy, including America’s relationships with China, Saudi Arabia, and other major powers. We also discussed the economy, including the auto companies’ trouble.
With Barack Obama. White House/Eric Draper
Later that week, I sat down for a meeting with my economic team. “I told Barack Obama that I wouldn’t let the automakers fail,” I said. “I won’t dump this mess on him.”
I had opposed Jimmy Carter’s bailout of Chrysler in 1979 and believed strongly that government should stay out of the auto business. Yet the economy was extremely fragile, and my economic advisers had warned that the immediate bankruptcy of the Big Three could cost more than a million jobs, decrease tax revenues by $150 billion, and set back America’s GDP by hundreds of billions of dollars.
Congress had passed a bill offering $25 billion in loans to the auto companies in exchange for making their fleets more fuel-efficient. I hoped we could convince Congress to release those loans immediately, so the companies could survive long enough to give the new president and his team time to address the situation.
My point man on the auto issue was Secretary of Commerce Carlos Gutierrez. Born in Cuba, Carlos had immigrated to Florida as a boy. His parents moved to Mexico, where Carlos took a job driving a delivery truck for Kellogg’s. Twenty-four years later, Carlos became the youngest CEO in that company’s history and the only Latino CEO of a Fortune 500 company. He joined my administration in 2005 and did an outstanding job promoting trade, defending tax relief, and advocating for freedom in Cuba.
Carlos and the team pushed Congress hard to release the auto loans. We made progress in the House, but the Senate wouldn’t budge. The only option left was to loan money from TARP. I told the team I wanted to use the loans as an opportunity to insist that the automakers develop viable business plans. Under the loans’ stringent terms, the companies would have until April 2009 to become fiscally viable and self-sustaining by restructuring their operations, renegotiating labor contracts, and reaching new agreements with bondholders. If they could not meet all those conditions, the loans would be immediately called, forcing bankruptcy.
The deal drew criticism from both sides of the aisle. The head of the autoworkers’ union complained that the conditions were too harsh. Grover Norquist, an influential advocate for fiscal conservatism, wrote me a public letter. It read, “Dear President Bush: No.”
Nobody was more frustrated than I was. While the restrictive short-term loans were better than an outright bailout, it was frustrating to have the automakers’ rescue be my last major economic decision. But with the market not yet functioning, I had to safeguard American workers and families from a widespread collapse. I also had my successor in mind. I decided to treat him the way I would like to have been treated if I were in his position.
One of the best books I read during my presidency was Theodore Rex, Edmund Morris’s biography of Teddy Roosevelt. At one point near the end of his eventful tenure, Roosevelt exclaimed, “I knew there would be a blizzard when I went out.”
I know what he meant. The period between September and December 2008 was the most intense, turbulent, decision-packed stretch since those same months in 2001. Because the crisis arose so late in my administration, I wouldn’t be in the White House to see the impact of most of the decisions I made. Fortunately, by the time I left in January 2009, the measures we had taken had stabilized the financial system. The threat of a systemic collapse had passed. Once-frozen credit markets had begun flowing again. While the world still faced serious economic insecurity, the panic mentality was gone.
The following year brought a mixed picture. The stock market fell during the first two months of 2009 but ended the year up more than 19 percent. As banks rebuilt their balance sheets, they began to redeem government-owned shares. By the fall of 2010, the vast majority of the capital the Treasury injected into banks had been repaid. As the economy regains strength, more of that money will be repaid, plus dividends. A program derided for its costs could potentially end up making money for American taxpayers.
I’ve often reflected on whether we could have seen the financial crisis coming. In some respects, we did. We recognized the danger posed by Fannie and Freddie, and we repeatedly called on Congress to authorize stronger oversight and limit the size of their portfolios. We also understood the need for a new approach to regulation. In early 2008, Hank proposed a blueprint for a modernized regulatory structure that strengthened oversight of the financial sector and gave the government greater authority to wind down failing firms. Yet my administration and the regulators underestimated the extent of the risks taken by Wall Street. The ratings agencies created a false sense of security by blessing shaky assets. Financial firms built up too much leverage and hid some exposure with off–balance sheet accounting. Many new products were so complex that even their creators didn’t fully understand them. For all these reasons, we were blindsided by a financial crisis that had been more than a decade in the making.
One of the questions I’m asked most often is how to avoid another financial crisis. My first answer is that I’m not sure we’re out of the woods on this one yet. Financial institutions around the world are still unwinding their leverage, and governments are saddled with too much debt. To fully recover, the federal government must improve its long-term fiscal position by reducing spending, addressing the unfunded liabilities in Social Security and Medicare, and creating the conditions for the private sector—especially small businesses—to generate new jobs.
Once the economy is on firm footing, Fannie and Freddie should be converted into private companies that compete in the mortgage market on a level playing field with other firms. Banks should be required to meet sensible capital requirements to prevent overleveraging. The credit-rating agencies need to reevaluate their model for analyzing complex financial assets. And boards of directors must put an end to compensation packages that create the wrong incentives and reward executives for failure.
At the same time, we must be careful not to overcorrect. Overregulation slows investment, stifles innovation, and discourages entrepreneurship. The government should unwind its involvement in the banking, auto, and insurance sectors. As it addresses financial regulation, Congress should not infringe on the Federal Reserve’s independence in conducting monetary policy. And the financial crisis should not become an excuse to raise taxes, which would only undermine the economic growth required to regain our strength.
Above all, our country must maintain our faith in free markets, free enterprise, and free trade. Free markets have made America a land of opportunity and, over time, helped raise the standard of living for successive generations. Abroad, free markets have transformed struggling nations into economic powers and lifted hundreds of millions of people out of poverty. Democratic capitalism, while imperfect and in need of rational oversight, is by far the most successful economic model ever devised.
The nature of the presidency is
that sometimes you don’t choose which challenges come to your desk. You do decide how to respond. In the final days of my administration, I gathered my economic advisers for a last briefing in the Oval Office. I had assembled a strong, experienced team that was capable of adapting to the unexpected and making sound recommendations. We had done what we believed was necessary, knowing it would not always be popular. For some in our country, TARP had become a four-letter word. I believe it helped spare the American people from an economic disaster of historic proportions. The government made clear it would not let the economy fail, and the second Great Depression that Ben Bernanke warned about did not happen.
As I looked into the tired faces of the men and women of my economic team, I thought about all my administration had been through. Every day for eight years, we had done our best. We had given the job our all. And through every trial, we had been honored to serve the nation we love.
*Many small business owners are sole proprietorships, limited partnerships, or Subchapter-S Corporations, meaning they pay their business taxes at the individual income tax rates.
**The top 1 percent of taxpayers went from paying 38.4 percent of overall taxes to 39.1 percent, while the bottom 50 percent saw their share decrease from 3.4 percent to 3.1 percent.
***Debt-to-GDP is the average measured at the end of each calendar year. Average spending, taxes, and deficits are calculated for fiscal years, which end September 30. Thus, the average of four or eight fiscal years excludes the effects of any policies implemented in the last three months and twenty days of a presidential term. If full-year FY ’09 numbers were included in my averages, they would be: spending = 20.2%; taxes = 17.5%; deficits = 2.7%. This would incorporate spending for TARP and the initial auto loans as projected by Congressional Budget Office in January 2009. These figures overstate the additional spending, since the vast majority of TARP funding will be paid back.
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