On September 19, 2008, Paulson formally announced the “Troubled Asset Relief Program,” or “TARP” (449). He also announced an “expansive plan to guarantee all money market funds in the nation for the next year” (449). He did not mention how much the program would cost, which was now estimated at $700 billion, but even that was only a “guesstimate”: “The “relevant figure would ultimately be the one that represented the most they could possibly ask from Congress without raising too many questions” (450). They did end up asking for $700 billion, which, if it passed, would be the “largest one-time expenditure in the history of the federal government” (468). Paulson kept the proposed bill short—three pages—with “no oversight plan and virtually no qualifiers” (468). Even its “terse length” (468) made people nervous.

Even with the announcement of TARP, Mack knew he still needed to take action so that Morgan Stanley did not “go the way of Lehman” (450). Blankfein suggested that he consider becoming a bank holding company, as Goldman was considering. Mack knew that would help in the long run but wasn’t sure it could be accomplished fast enough.

Having reviewed Wachovia’s books on behalf of Morgan Stanley, banker Jonathan Pruzan had discovered that Wachovia was expecting a 19% “cumulative loss” (451). They decided to go ahead with their due diligence, as they had “nothing to lose” (451). It quickly became clear that a deal would not happen unless “the government provided cover” (453). With Wachovia “effectively out of the picture” (453), they decided to meet with Gao Xiqing of China Investment Corporation. They also found out “unexpectedly” (454) that Mitsubishi, Japan’s biggest bank, was potentially interested. Kelleher was skeptical because Japanese banks were typically “slow, risk-averse, and deeply bureaucratic” (454), but James Gorman believed Mitsubishi initiating the call was a sign of true interest.

Rodgin Cohen, who was advising Wachovia on its talks with Morgan Stanley and Goldman on its potential status as a bank holding company, called Fed governor Kevin Warsh and suggested that the “government attempt a shotgun wedding between Goldman and Wachovia” (455). He knew it was a “long shot,” but it would also “solve everyone’s problems: Goldman would get the deposit base it had been seeking, and Wachovia would have its death sentence stayed” (455). Warsh liked this proposal.

At Morgan Stanley’s meeting with Gao Xiqing, Gao offered a credit line up to $50 billion and a “nominal” (455) equity investment of $5 billion or less, for 49% of the company. Mack considered this “absurdly” (455) low. Gao, on the other hand, viewed this as a “way to reset the price he had paid” for 10% of Morgan Stanley in 2007, which “was now worth far less” (456). Morgan Stanley said it would open its books, and Gao hired Rodgin Cohen and Deutsche Bank to advise him.

When the sale of Lehman to Barclays was to be approved by a bankruptcy judge, hundreds packed the courtroom. Some of Lehman’s creditors argued that there was “no credible evidence” (457) that Barclays was paying fair value for Lehman. Lehman’s lawyer, Harvey Miller, insisted that the deal had to be approved right away. After about eight hours and three recesses, the judge agreed.

Blankfein was pushing the bank holding plan at Goldman, but he also had teams start investigating potential deals with HSBC, UBS, Wells Fargo, Wachovia, Citigroup, Sumitomo, and Industrial and Commercial Bank of China. Warsh was also encouraging Gary Cohn of Goldman to consider a deal with Citigroup, possibly in which Goldman would buy Citigroup instead of the other way around. Geithner then called Blankfein and “insisted” that he “immediately” call Pandit of Citigroup and “begin merger discussions” (460). Blankfein was “slightly shocked by the directness of the request” (460) but agreed. Pandit was surprised by the call. Geithner had “miscalculated” and assumed that Pandit would see the call as a “gift” (460), but Pandit had just been confused by it. When Geithner finally reached Pandit, he was furious that he had already turned Goldman down by then. He then pushed Pandit toward merging with Morgan Stanley, which he said he’d consider.

Meanwhile, Bob Steel of Wachovia figured out that the government was “trying to orchestrate a merger” (461) between Wachovia and Goldman. He was anxious about it but saw its potential merits. He contacted Blankfein and they agreed to meet. Goldman had agreed to entertain the idea, “on the condition the Fed would provide assistance,” and Warsh said they’d “strongly consider it” (467). Paulson had also told Blankfein to “take the talks seriously” (467). As with Morgan Stanley, Goldman’s biggest problem was trying to “determine the scope of the hole” (470). In terms of titles, “perhaps the most sensitive issue” (470), Blankfein proposed that Steel could be one of three co-presidents. Steel was “taken aback and slightly offended” (470), as he was already the CEO of a major bank.

Geithner then contacted Jamie Dimon and asked him to think about buying Morgan Stanley. When Mack called him, he said the same thing, but he talked about offering Morgan Stanley a credit line. Geithner was “frustrated” (463) by this, as he didn’t think it would be enough. Morgan Stanley ended up asking for a $50 billion line of credit, but they also suspected that JP Morgan was looking into buying them.

Meanwhile, Goldman had met with GE’s CEO, Jeffrey Immelt, and CFO, Keith Sherin. About half of GE’s profits in recent years had come from GE Capital, its finance company unit, and GE was concerned about what would happen if Goldman went under. The meeting ended with “some preliminary plans to raise capital—and an assurance to Immelt that Goldman was staying in business” (467).

Morgan Stanley ended up presenting an application for bank holding company status at the New York Fed. This would make short-term financing available through the Fed’s discount window, if Morgan Stanley “established a sufficient deposit base and submitted to various regulations” (469). At the same time, they were preparing to meet with JP Morgan, but because of the bank holding company possibility, they decided to “be selective” (474) about what they showed to JP Morgan. This would be “risky,” however, because instead of “burnishing the firm for a sale, they could unknowingly scare of a potential partner” (474). When JP Morgan arrived, they knew this “could be the most historic diligence session of their lives” (474). Within two hours, JP Morgan “decided to pull the plug” (475). They were “shocked that the assets that Morgan Stanley was offering as collateral were of such low quality, surely too low for JP Morgan to lend against” (475).

Paulson contacted Vice Premier Wang Qishan of China to encourage China to invest in Morgan Stanley, but Wang asked for a “commitment that the US government would guarantee any investment” (473). Paulson avoided making any promises but tried to be encouraging. A few hours later, communications chief Michele Davis showed Paulson a copy of Newsweek with the headline “King Henry” (473) and his picture. This was a “tacit acknowledgment” of his “enormous power”: “President Bush had taken a backseat” and “Paulson had become the de facto leader of the country in this time of crisis” (473).

When the JP Morgan/Morgan Stanley potential relationship was faltering, Goldman and Wachovia were making progress, except that Goldman wanted a “‘Jamie’ deal” (475). They would have to ask if the Fed would subsidize the deal by guaranteeing Wachovia’s most toxic assets. Meanwhile, Warren Buffett received a call from Byron Trott of Goldman, the only investment banker Buffett “truly trusted” (476). Trott mentioned that Goldman was “in talks to buy Wachovia, with government assistance” (476), and asked if he might want to invest in a combined Goldman-Wachovia. Buffett thought this was a “waste of time” (476) because the government would never get involved. Warsh said that if “Goldman would take the first loss on the deal,” the government “might well consider acting as a 0backstop” (477). Paulson also called Wachovia’s board, which seemed “risky” (478) given that they were in the middle of negotiating with Goldman and did not know Paulson had obtained an ethics waiver. The board interpreted this “surreal” call as though Paulson had just “ordered them to merge with Goldman” (478). Paulson’s chief of staff, Jim Wilkinson, also told Paulson that he should not provide Goldman with assistance because it would be a “public relations nightmare at the worst possible time” (478). Geithner, Bernanke, and Paulson ended up agreeing they could not support the deal, and Steel and Cohn were “flabbergasted” (480).

Mack received some good news that Mitsubishi might invest in Morgan Stanley, but Paulson called and said he had to do something fast, and the Japanese would not move that fast. He was also “distressed” (480) to hear that Goldman and Wachovia might reach a deal, not knowing that it was off. Paulson, in turn, decided to put pressure on JP Morgan to buy Morgan Stanley, but Dimon was resistant. Paulson said, “I might need you to do it” (481), and Dimon said he would consider it. Geithner had also decided that Morgan Stanley “would fail if it didn’t complete a deal” (482) by Monday. He had “threatened Mack” that he would deny the holding company request “unless he found a sizable investment or merged” (482). However, not everyone at the Fed agreed with Geithner’s “single-mindedness about merging banks” (482). Nevertheless, Paulson, Bernanke, and Geithner called Mack and told him he needed to do a deal by Monday. He was “dumbstruck” and called them out on whether this was “good public policy” (483).

When Gao heard that Morgan Stanley was talking to Mitsubishi, he was furious and took his entire team and left. Mack was able to reach a deal with Mitsubishi. Goldman and Morgan Stanley were also given bank holding company status, which was a “watershed event”: the two biggest investment banks had “essentially declared their business model dead to save themselves” (485).

As of September 22, Goldman and Morgan Stanley were the “last ones standing” (487) of the Big Five investment banks. Goldman’s stock continued to fall, as did the broader market. Trott suggested that they approach Warren Buffett again, and they did approach him with an “extraordinarily generous deal” (489), which Buffett agreed to in principle. This would also give Goldman a better chance of raising money from others, “on the back of Buffett’s investment” (489). They were concerned about a provision forbidding Goldman’s top four officers to sell more than 10% of their Goldman shares until 2011, or after Buffett sold his own. For one of the four, Winkelried, that would be a problem because he was having a “personal liquidity crisis” (489). He agreed, however, when Blankfein promised that the firm would help him with his financial troubles.

Meanwhile, John McCain had announced he was suspending his presidential campaign to help with the financial rescue plan. Paulson felt this would “only galvanize the House Republicans opposed to the rescue proposal,” and support for TARP was already “quickly waning in both parties” (491). Stephen Schwarzman told Paulson he had “announced the wrong plan” (491). The government would not be able to buy the assets quickly without “either screwing the taxpayers or screwing the banks” (491). It would not be able to force people to sell, when bank CEOs would “prefer to leave their bad assets on their books at depressed prices rather than have to realize a huge loss” (491). Plus, in-depth analysis of each asset package would take “weeks to months,” and in that time the economy would “go back into crisis” (491).

On September 25, leaders of both parties and the presidential candidates convened to try to “persuade House Republicans, who had been emboldened by McCain, to rejoin the negotiations and agree on a bailout,” but the meeting “quickly degenerated […] into a partisan fracas” (492). After the meeting, Paulson begged House speaker Nancy Pelosi to give him a chance to bring the Republicans around.

On September 26, Vikram Pandit of Citigroup found out that the FDIC had seized Washington Mutual, “making it the biggest bank failure in the nation’s history” (493). Pandit had bid on its assets, but Jamie Dimon had won it for $1.9 billion. He also reached out to Bob Steel of Wachovia, who was “eager to line up as many options as possible” (494). They weren’t able to make a deal because Pandit would only do it “with government assistance” (497), and even then, at only $1/share.

On September 27, Paulson and his team met with congressional leaders again. Paulson tried to scare them by mentioning Washington Mutual and ominously referring to “other companies—including large companies—which are under stress as well” (495). They immediately raised four objections: first, “oversight of the program, which the Democrats felt was severely lacking”; second, “limits on executive compensation for participating banks, a controversial provision that Paulson himself was convinced would discourage them from participating”; third, “whether the government would be better off making direct investments into the banks, as opposed to just buying their toxic assets”; and fourth, “whether the funds needed to be released all at once or could be parceled out in installments” (495). Paulson stressed that they couldn’t limit executive compensation because it would take too long for employment contracts to be renegotiated, but a congressional staffer’s suggestion to “block new golden parachutes” (496) got them over that hump.  

The same day, Geithner had proposed that Citigroup buy Wachovia in a deal under which Citigroup would cover “as much as $42 billion of losses” on Wachovia’s $312 billion portfolio, and anything beyond that the “government would absorb” (498). However, he was still hoping that Wells Fargo would make a deal “without government involvement” (499).

On September 28, Bob Steel and David Carroll of Wachovia met with Dick Kovacevich of Wells Fargo about potentially buying Wachovia. Steel “felt a deep responsibility to find a buyer quickly” (497). Standard & Poor’s and Moody’s had both threatened to downgrade its debt the next day, which would put “even more pressure” (497) on the bank. Kovacevich was interested and said his team would continue with its due diligence, but he ended up concluding that he would not do the deal “without government assistance” (498) if he had to get it done before Monday. Thus, there was now a “de facto turf battle over Wachovia” (499) within the government, with the Federal Reserve of Richmond getting involved as Wachovia’s regulator, and Sheila Bair of the FDIC being involved if Wachovia failed. Geithner and Warsh did not view Bair as a “team player” (499). When Geithner suggested that she should help subsidize a Wachovia deal, she “resisted the proposal firmly” (499), unless she could take over the entire bank and sell it. Geithner asked if Treasury could contribute, but Nason said it could not do so while it was still trying to get TARP passed.

Ultimately, the FDIC sold Wachovia to Citigroup for $1/share. The FDIC had also agreed to guarantee Wachovia’s toxic assets after Citigroup accepted the first $42 billion of losses. Steel was “frustrated with the paltry price of the deal,” but he was “proud to have at least saved the firm from failure” (504). Even after this deal was announced, Sheila Bair told him that Wells Fargo might offer $7/share with no government assistance. Wachovia’s board voted to accept that deal and back out of the Citigroup deal. Pandit was “irate” (504) when he heard this, especially since Wachovia had agreed not to accept any other offers. Regardless, Bair sided with Steel.

When TARP came to a vote, it was rejected 228 to 205. This caused the biggest one-day point drop ever in the Dow Jones Industrial Average. Paulson wanted to revive the bill, but Dan Jester and Jeremiah Norton at Treasury had decided that buying toxic assets would never work and that the government would have to “invest directly in the banks themselves” (502). Paulson was “starting to come around” (503) to this idea. The bailout bill passed on October 3 after a number of expiring tax breaks were added to it, along with an increase in the amount in individual bank accounts insured by the FDIC to $250,000 from $100,000. The bill had also gone from three pages to over 450 pages of “legislative legalese” (506).

On October 6, there was a congressional hearing to “examine the failure of Lehman Brothers” (508). Fuld took “full responsibility” for his decisions and actions, but “his audience had little use for his contrition, peppering him instead with questions about his compensation” (508).

That afternoon, Paulson received a letter from Warren Buffett explaining the problems with Paulson’s current plan and a solution. He proposed a “Public-Private Partnership Fund” (PPPF) that would “act as a quasi-private investment fund backed by the US government, with the sole objective of buying up whole loans and residential mortgage-backed securities, but it would avoid the most toxic CDOs” (510). The government would put up $40 billion for every $10 billion from the private sector. Proceeds would first pay off Treasury, then private shareholders at the same rate of interest Treasury received, and then profits would be split “three fourths to investors, one fourth to Treasury” (510). Buffett was willing to invest $100 million himself. Paulson was “intrigued” (511) and asked Kashkari to discuss it with Buffett.

On October 8, the “stock market was cratering yet again amid renewed panic that the banking system—and the economy as a whole—were about to suffer further setbacks” (512). Mack was meeting with Mitsubishi in London, but they were considering whether they “would be better off simply walking away from the agreement” (512). Mitsubishi did end up renegotiating the terms, but what Mack didn’t know was that Mitsubishi had reached out to the Federal Reserve seeking “assurances that the US government wasn’t planning to come in and make an investment in Morgan Stanley after it did” (518). The Fed reassured Mitsubishi that it would not be “negatively impacted any more than other shareholders by any future government intervention in the firm” (518). Because the funds could not be wired on Columbus Day, Mitsubishi executives ended up physically presenting a check for $9 billion to Morgan Stanley.

The same day, Paulson had changed his mind and decided that Treasury should “make direct investments in banks” (512). The United Kingdom had just done the same “in an effort to instill confidence” (513). Michele Davis had told him there was “no way” (513) he could announce such a plan publicly, given how unpopular it would be. He was also considering announcing an “across-the-board program to guarantee all current and future unsecured debts of the banks” (514). This seemed promising, and “[b]y Bernanke’s estimation, announcing capital injections and a broad guarantee would be an effective enough economic cocktail to finally turn things around” (514). However, the FDIC would have to give the guarantee, and Bair refused at that time.

On October 12, Treasury, Federal Reserve, and FDIC officials met to coordinate their efforts to stabilize the economy. Geithner had suggested that the strongest banks should also have to accept the capital injections, to “destigmatize” (517) participation. They also discussed making the program available to insurance companies. In terms of the FDIC guarantee, Bair ultimately agreed to it, which meant the government was providing an “unlimited backstop for an entire industry” (519). They also decided to assemble the bank CEOs together to create “peer pressure” (519) for them to accept the money.

Paulson’s decision to invite the “Big 9” Wall Street firms to Washington without providing any details “wasn’t going over particularly well” (522). The White House was also left out of the loop. Preparing for the meeting, Paulson and Geithner had decided that they needed to make clear that it was “not optional” (524) to participate in the capital injection. They would tell the firms that this was a “combined program (bank liability guarantee and capital purchase)” and that they needed to “agree to both” (524).

The meeting was “the first time—perhaps the only time—that the nine most powerful CEOs in American finance and their regulators would be in the same room at the same time” (526). Paulson and Geithner explained the plan, leaving the bankers “stunned” (527). The room “broke out in pandemonium” (528) at one point. Kovacevich was resistant to the plan, but Paulson threatened him, saying, “Your regulator is sitting right there. […] And you’re going to get a call tomorrow telling you you’re undercapitalized and that you won’t be able to raise money in the private markets” (528). Thain wanted assurances the government would not “retroactively change compensation plans” (528), but Treasury could not guarantee that Congress would not want to change the law. Mack was the first to sign; others decided to call their boards. They all ended up agreeing, which meant that the US financial system had effectively just been “nationalized” (530).