Financial Crisis of 2008 Oral History

Hello everybody, and welcome. My name is Gene Fife. I’ve been a longtime chairman of the board of the Miller Center; a former colleague of Hank [Paulson], Josh [Bolten], and a few other guys who have been hanging their hat around the Miller Center over the years; and it’s a pleasure for me to be able to welcome you to this particular discussion.

When I first got associated with the Miller Center, I didn’t know much about oral histories and how they were formed. I thought you’d take a microphone, stick it in somebody’s face, and ask them some questions. I didn’t realize the amount of work that goes on behind the scenes before you get there, the research that our scholars put into it, the hours of effort and thought about the questions. What were the issues on this side of the political aisle and what were they on the other side? When you have the conversations with people and record their histories, it adds much more depth and substance, the thought that goes into it. A pretty important process.

The importance of oral histories is increasing, not decreasing, and there are a lot of reasons for that, technology being one. Very few people are taking notes now in meetings. Exposure to litigation and other things—Make sure you don’t leave any fingerprints of the conversation you’re having. The archives are no longer getting the kind of volume and the detailed information that you’d like to think would be there. So oral history supplements that to a degree. It also adds an element of intimacy and reflection from the people who were actually in the arena at the time. It gives you much more of a feeling that you’re learning from their experiences, and it’s an important learning lesson to have.

Now the Miller Center itself is dedicated to the study of the Presidency and to the governance of our nation. One way we try to do that is through the academic scholars that we have at the University of Virginia and other places as well, who dig into what went on in one administration or another, examine it in detail. And we do the oral history. We’ve been doing them since the Jimmy Carter era—every President since that time and their administrations—and they add a great deal of insight.

Now just to get the history is interesting. But the importance of it is to draw on the lessons and things that were learned. What do we discover when we go in and say, What worked? What didn’t work? What went wrong? Why did it go wrong? What do we do about it? How do we handle a crisis?

People like yourselves who have been in the arena understand exactly that additional element that doesn’t always get picked up in the press or in other ways that could influence what’s going on. So what we’re trying to do here, particularly with a subject as important as the financial crisis that we had back in ’08, is to learn what seemed to work. What were your reflections? What were the issues? What were the things that would really resonate with scholars that want to study it? We can convey that, in turn, to the audiences in the arena that are in the line of fire today, much less the past. Hopefully some students along the way will pick up on it as well.

But anyway, on behalf of the Miller Center, it’s a pleasure for me to welcome you. I hope you have a good session today. And have at it. Russell [Riley], you’re in charge. Russell is the cochair of the oral history department with Barbara Perry. These two people are rather remarkable folks. I think, Hank [Paulson], you’d be interested to know that they spent, what, five hours with Tim Geithner not too long ago. They’re digging into things with a lot of people who know what they’re talking about. Thanks a lot for being here.

Thank you, Gene. I appreciate that. As Gene said, I’m Russell Riley, the cochair of the Oral History Program, and I’ve been in communication with all of you. I really appreciate your taking the time to come and do this. It’s always a bit miraculous when you organize one of these sessions and they finally do come together after months and months of communications. And it’s a genuine pleasure to be at the table and have an opportunity to talk with you. What we’re trying to do is to create a free-ranging discussion among you about some very important topics from recent history. We didn’t ask you to come in with any prepared remarks, because the core element of oral history is responding to questions from the scholars here. We want you to feel free to intervene as you feel comfortable doing so.

Let me say just a word about the ground rules before we get started. We are conducting the proceedings under the typical ground rule of confidentiality of the proceedings, so nobody in here is allowed to report what anybody else says, except for your own words. We will prepare a transcript relatively quickly after the event and send that to you, and you’ll have an opportunity at that point to review your words and to let us know if there are any particular stipulations about passages of your own words that you’d like to have held onto for some considerable period of time. We’re doing this group interview as a supplement to a lot of the individual interviews that we’ve done for the [George W.] Bush 43 project, where Josh [Bolten] and Hank have already participated, among close to one hundred others.

The hope in doing both the group interview and capturing this on film is that there are ways of bringing this collective wisdom to public attention, apart from the history that we capture in the individual interviews, many of which will stay on ice for a very long period of time. So we hope that you will be amenable to opening up significant portions of this in relatively short order. There could be documentary use of it, although that’s unlikely, over the next year or two. There could be use within the institution, perhaps on the website, as we find particular lessons that we would like to draw out. But the core thing for you to understand is that unless and until we get your permission to use your words, we can’t use them, so we want you to feel perfectly free to speak candidly to history about your experiences.

I talked to a couple of you before we came in who said, “You know, I’ve never talked about this before.” That’s perfect for us. That’s exactly the reason for doing confidential oral history, because there are things that you will know and understand that nobody else will. That’s the most general ground rule.

Any questions about this before we proceed? Terrific.

The one other thing that I want to do is to acknowledge just a couple of people. They’re not here; they won’t know this. But there are folks at the Miller Center who have worked really hard to make this event possible, my four colleagues—Reid Forbes; Stefanie Georgakis Abbott; and then the two researchers who put together the briefing materials, Rob Martin and Bryan Craig. We get all the glory from these exercises; we get to come in and meet people and to talk with you, and they’re back in Charlottesville preparing for the next interview now. It’s at least important that their names be on the record and presented to you as important parts of this enterprise.

So as we were contemplating what we are doing today—I have managed to run off and lose my dog-eared copy of Hank Paulson’s book, which I’ve now read, I think, three times—but at some point in September when the crisis was at its peak, you report that President Bush said, “One of these days you people are going to have to come in here and explain to me how we got into this fix and what we can go about doing to repair it,” roughly translated. Our exercise today is to talk a little bit about how we managed to get into the problems of 2007 and 2008, and then certainly what we’ll do to fix it.

So with that, I’m going to turn it over to my colleague, Mike Nelson, who will be moderating the first session.

OK. The first question is for Josh Bolten. And that is, I wonder to what extent were the roots of the crisis not just in the world of finance, but also in the world of politics? Congressional Democrats were a strong constituency for Fannie [Mae (Federal National Mortgage Association)] and Freddie [Mac (Federal Home Loan Mortgage Corporation)], and obviously wanted to see more access to people who wanted to buy homes. And part of the Bush administration’s strategy for building a Republican majority was the ownership society, right? Which again included more and more people owning homes and presumably feeling more conservative and Republican-disposed as a result of being homeowners. The proliferation of mortgages to people who maybe could only pay them off if housing prices kept going up and up turned out to be the financial roots of this, but were the roots of those financial problems, to some extent at least, in politics shared by both parties?

Mike, thank you. I think it’s definitely true that politics contributed to the environment in which the problem that created the financial crisis grew up. You mentioned the ownership society, which was an important part of President Bush’s effort to expand Republican policy concerns beyond free markets and business interests to basically lifting all boats. And in the early-to-mid parts of the Bush administration, the President was very proud to say—as he was able to periodically—that the United States had the highest percentage of African American homeownership in the history of the United States, among other data points like that. But I don’t think the administration advertently went forward with a policy that said, “Boy, we want to extend mortgages to people who can’t afford to repay them.” That was never part of the equation, never part of the intent, and I think in reality, never part of the policy.

You mentioned Fannie and Freddie as though the defense of the growth of Fannie and Freddie, which was clearly one underlying problem in the crisis, was principally a problem on the Democratic side. It wasn’t. It was a bipartisan problem. Fannie and Freddie had been very effective in building up a constituency on Capitol Hill that Dan Meyer will remember very well, and Hank will as well.

I worked for them before I came into the White House to help build it up. [laughter]

I’d forgotten that. [laughter]

It’s like group therapy.

There probably was no better organized or more effective lobby in Washington on Capitol Hill, and even within the administration, than Fannie Mae and Freddie Mac. So the efforts that the Bush administration undertook—really starting early in the administration and extending through Hank’s tenure—to try to rein them in hit a very difficult wall on the Hill. And the disputes we had internally were not about whether Fannie and Freddie ought to be reined in. They were about what can we realistically get out of the Congress.

There were folks, Hank, who felt that you weren’t being aggressive enough, but I’m sure through your eyes, and my eyes as well, watching what was going on, you were getting the best you could out of the Congress. And it was not until at least the beginnings of the crisis were visible that it was possible for the administration to put through any legislation that actually put any restraints on the growth of Fannie Mae and Freddie Mac.

One final comment, though, Mike, and that is that my own view is that apart from Fannie and Freddie, the policy and political origins of this crisis have been exaggerated. There were so many origins of the crisis: in a credit bubble, in a housing bubble, in the growth of derivative products that many even sophisticated bankers on Wall Street themselves did not understand. There’s such a multiplicity of causes that I think for folks to focus only on the political or the government policy aspects of that is misguided.

This is a more general question. By the middle of 2007, the building blocks of the crisis were at least dimly—and in some cases, more than dimly—visible. Housing prices had declined. Derivatives markets were showing that asset-backed securities were likely to decline. There were many large financial institutions with large exposures to mortgage-backed securities, and both on and off balance sheet, and much of that was financed with short-term debt. The question is: What was the principal obstacle to putting all of that together and seeing that there was at least the potential for a new kind of bank run, where the run was on wholesale funding rather than retail depositors? Was it the dispersion of information among regulators? Was it the complexity of the system itself, or something else?

First of all, Paul, you’re right that matter of fact the crisis really hit, to the extent that we were all hands on deck, in the middle of 2007 when BNP [Banque de Nationale de Paris] Paribas had two funds implode. And so the question is: Why couldn’t we have done more earlier, and could we have done something that prevented the crisis from hitting as it did? My simple answer is no, we couldn’t have. The seeds had been sown for years before. The excesses had been building up. But let me try to give you a few explanations.

First of all, we were working with a balkanized, outdated regulatory system. The protections that had been put in place after the Great Depression were focused on the sorts of problems we dealt with in the Great Depression, and the depositor insurance and so on were designed to prevent runs. But what had happened was the financial system had changed dramatically—the modern financial system. Much of what was being done was outside of the banking system, and there was a great deal of securitization. There was a lot of business being done in what I would call the “shadow” banking markets. We had a big interbank lending market, the so-called “repo market.” We had very big money market funds.

The regulatory system didn’t give regulators oversight, the visibility into what was going on, or the authorities to deal with it. For instance, [Ben S.] Bernanke, Geithner, and I, and a lot of other people, had been focused on risks in the financial system from the time I first came to Washington. So at my very first meeting with the President at Camp David in July of 2006, the topic was that we’re due for a financial crisis. I was, of course, thinking of something much less than what we had. I didn’t see the epic panic, the once-in-every-75-year crisis we had.

Bernanke, Geithner, and I, and a lot of others, were working around the clock right from the middle of 2007. We were talking to the President on his ranch in Texas over the August vacation. He had a series of action steps to take when he got back. And I would say that we underestimated the extent of what we were dealing with every step of the way, even after we got the TARP [Troubled Asset Relief Program] authorities from Congress.

But if you look back on it—and we’ve looked back on it a lot—it’s hard to imagine what we would have done differently if we were clairvoyant that would have made a big difference. Because we didn’t have the sorts of authorities that it took to deal with the kinds of problems we were dealing with. We couldn’t force banks to raise capital. We did a lot of jawboning. From the time Bear Stearns went down onward, we knew we needed more authorities from Congress, but there was no way a Republican administration was going to go to Congress and get that—or any administration was going to go and get the kinds of authorities we needed. You know, even after Lehman had gone down, in the darkest days of the crisis, Congress voted down the TARP [Troubled Asset Relief Program] the first time.

Josh talked about Fannie and Freddie. We’d started working with Barney Frank. David [Nason] and I started working—while I was getting briefed for my confirmation hearings and was meeting with David Nason, the first thing he was talking to me about was Fannie and Freddie and the problems at Fannie and Freddie. The President gave us the go-ahead to start compromising with the Democrats to try to get something done in the fall of 2006. We got legislation from the House on Fannie and Freddie in 2007, but it took those institutions getting ready to implode for us to get the authorities we needed from Congress.

So the thing you need to understand is that it’s very, very hard. I’m looking back and saying, what are the lessons? Are there things you could do differently, things we could have learned? And to me, the biggest lesson by far is our regulatory system. We should never, ever have let that happen. Never. That’s the first lesson. Because it takes a very visible crisis to get Congress to act and do something this controversial and difficult. And then to get back to your question, a lot of the regulation of these mortgages that were being made was at the state level. The regulation was very, very diffuse. I think the horse was largely out of the barn, at least by the time I arrived in Washington, and I think these things are very difficult to predict.

Let me ask you this. When you become Treasury Secretary, you’re already worried about the possibility of a financial crisis, but did you see the origins of that crisis in the housing and mortgage market?

No, which is very interesting. I think that is a fantastic lesson for people to focus on. Because we had this big presentation at Camp David and I said, “Mr. President, there are a lot of excesses. I think we’re overdue for a crisis.” I was thinking of ones like I had been through in ’94 and ’98. To me, they were very, very serious things, but in the overall scheme of things, they weren’t that serious. He said, “What would cause it?” I focused on derivatives and I focused on hedge funds and the intersection with banks. Never once mentioned mortgages. Never. Now I’ve got my reason: Ben Bernanke had basically said he thought that this was a controllable area.

I’m a baby boomer, so I came up after World War II, with all of the housing programs we’d had to incentivize residential housing. Remember, 69 percent of Americans were homeowners when I arrived in Washington. It was extraordinary. But what we had had with the tax system, with the mortgage interest rate deduction, Fannie and Freddie, the Federal Home Loan Bank programs, yadda, yadda, yadda—what I had learned was that we had never had a nationwide decline in residential house prices. Right? So if you bought a pool of diversified residential mortgages, the biggest risk you’d have was you might get your money back too soon, because rates would drop and people would prepay. So I had missed that.

But I think the more relevant point is that these things are unpredictable in terms of the cause or timing. Because even right after the Camp David meeting, the President said, “Prepare for it,” and we said, “Yes, sir.” We convened the President’s Working Group on Financial Markets and we had all sorts of people working diligently, looking at all kinds of potential problems and doing all kinds of scenario analysis.

We never once focused on the repo [repossession] market, the money markets, and the shadow banking markets. So we were focusing on all kinds of things. There was great value in doing that, because we’d established working relationships and teamwork and got institutions working together. But I think we are making a mistake if we assume that we are going to be able to predict these things and that good regulation will prevent it. I think we have to think about this in terms of them being unpredictable in terms of timing and cause. Even when they hit, it’s very difficult to know whether you’re dealing with a severe one or one that isn’t as severe, and you deal with those differently.

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It seems that none of them are able to deal with financial innovation in any way. Even if what you design today is perfect for today, tomorrow the innovation in securitization and everything else is going to be so different that there’s no way that any regulator—no matter how well built—in Washington can keep up with that. And the other two things—Hank said one of them—is the conventional wisdom that plays into everybody’s mindset, whether you’re in the institutions, the markets, the regulators, the policy makers.

There were two pieces of conventional wisdom that everybody kind of took for granted because they had always been true: that home prices never decline nationwide all at once, so why would we suddenly question that; and that people might lose their jobs, but the one thing they’ll pay is their mortgage, because they don’t want to lose their house. They’ll give up their car; they’ll not eat; but the last thing that they don’t pay is their mortgage. But now suddenly you had no down payments and nobody had any equity. And guess what? That went out the window, too. So those two basic conventional wisdom things that were in everybody’s minds probably subconsciously had the effect of us not thinking it could ever get that bad. And down the road there will be some other piece of conventional wisdom that will blow up, too.

Can I ask a follow-up to that? In the run-up to the crisis, it was very striking to me—as someone who does a lot of work with property law, including mortgages—that this phrase “homeowner” kept being used uncritically, when the nature of being an owner—and you owe 100 percent, or close to it, of the house price—is very different. Was that ever flagged, that this whole concept of homeownership had shifted under our feet?

The lack of down payments—the behavioral difference—

You see, what happened is you can have too much of a good thing. There were so many well-intended incentives around homeownership that we saw something very unusual happen. We saw the American dream morph. It used to be you can come to this country and, based upon your work ethic and your ability, you can achieve a lot. It morphed into becoming homeownership. There were so many incentives, it was amazing. When I borrowed to build a home, which was a small home, in 1974—When I did that, the average home size was 1,700 square feet. At the time of the crisis, it was 2,700. So homeownership moved from being a shelter to an investment to a savings account. The people believed that this was the best way to save and build wealth. And so this is the case: I’ve always made the point that the root cause of every financial crisis is flawed government policy.

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Yes. So regulators missed it. Part of that, I think, has to do with regulatory capture. Part of that had to do with the complexity of the financial instruments and the derivatives and the leverage that was embedded in the system that the regulators didn’t understand. But I think part was regulatory capture.

I want to say one thing, briefly, to emphasize the point that Josh made, because we’re talking over and over and over again about the housing. That was the match that lit the fuse, but there was all kinds of dry tinder. This was an epic crisis. It had been building for some time. And there were all sorts of causes. We had had the Great Moderation. We had had interest rates at a very low level. You had money searching the globe for yield. Mispricing risk. You had huge global imbalances. We borrowed much too much, didn’t save enough. China, Germany, and Japan exporting huge amounts of capital, flooding into the U.S.

And then there were a lot of structural issues. You had a situation where the median—Well, look at what happened to middle-class wages going back decades, and income disparity. So it shouldn’t be surprising that household debt had doubled over the ten years preceding the crisis. People were borrowing more than they could afford to maintain a standard of living. I think housing was what lit the fuse, but there were big excesses. Europe was propping up the borrowing of Italy, Spain, Portugal, Greece, essentially with the Deutsche Mark, with the euro. And so they were borrowing too much, and China was exporting into that boom and exporting into our bubble.

I wonder if we could get back to the actual time when all of you, at one point or another, are realizing that this is a much more serious crisis domestically, and also internationally. So really this is a question that those of you who haven’t had a chance to speak yet—

In the way of the introductions, I’m Bob Bruner. I’m a member of the faculty at the university, and along with Michael Nelson, we form part of a larger group of faculty who are putting together a retrospective on the financial crisis of 2008. Our interest is in thinking about what we’ve learned in the ten years since the crisis, thinking about what we’ve fixed, and thinking about what remains to be fixed. [laughter] Your comments are quite to the point on this. Thank you very much.

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So for those we haven’t heard from yet, can you sort of put yourself back in the moment? When is it that you realized perhaps something of the magnitude of the crisis that was occurring nationally, and then I think to some degree, spreading around Europe as well?

Well, from an international perspective, the crisis evolved from the fall of 2007. I was relatively new to the Treasury—I came in August—but the fall of 2007 into 2008. And it was very much through the eyes of the Europeans, particularly in the early days: the problem was a U.S. problem that was being imported into Europe. So I don’t know how many meetings Hank and I had where it was very much around—the BNP Paribas and so forth, the subprimes—our problems being exported into the European system.

The tone of the meetings was very much around that problem in the fall and then early into 2008. Then it started to morph into a broader recognition that the problems were deeply seated in Europe in particular, and then ultimately expanded to fears of all holders of assets in the emerging markets and so forth. We can get into that if you’re interested. But the nature of our engagement from a U.S. perspective changed very much during that time frame, and we essentially internationalized to some degree our response, with really Hank playing the leadership role in doing so.

But what’s interesting, Dave—For instance, they were pointing the fingers at us. “It’s your disease,” but then you’d read over the weekend the Germans would be nationalizing a couple of Landesbanks, right? And of course they didn’t have anything to do with subprime. They kept saying we need more transparency in our system. And when we asked them about the transparency in the Landesbanks, they said there’s great transparency, they’ve just got too much risk. [laughter]

Well, the lack of transparency allowed them to delay—

Yes.

—I think, the recognition that the problems were deeply seated, within Europe in particular.

So the first systemically important institutions to really make it to the front page were investment banks. And so here’s a question about the existing regulatory system and what could have been done around the time of the “Bear Stearns weekend,” we’ll call it. After Bear Stearns had collapsed, what would have happened if someone had proposed that the other four large investment banks really ought to convert to bank holding companies, as of course was eventually done with the two ultimate survivors. Would they have said at that point in time, “No way, we’re not going to do it?” Would the Fed have been reluctant to do it?

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Let me give you another and a related answer to that, because after Bear Stearns went down we learned a lot. Even though the markets recovered, everybody on the Treasury team and Bernanke and Geithner were on high alert. We were concerned about Lehman; we were concerned we didn’t have the necessary authorities.

We had learned a lot. We learned you needed a buyer. We learned that it didn’t work even when you had a buyer unless they guaranteed the liabilities during the shareholder vote. And we’d learned that a Fed loan hadn’t worked; it barely got them to the weekend. And so Bernanke and I had even gone to Barney Frank and talked about can we get the authorities we need. And he said, “There’s no way you can get them unless you came up here. We think there’s going to be a catastrophe and Lehman’s going to fail.” And then, of course, Lehman would have failed.

But there is this story, or this hypothesis, going around, because apparently—and I was unaware of this, but—Lehman at some time had come to the Fed after Bear Stearns had gone down and said, “Make us a bank holding company.” And because the Fed had made Goldman Sachs and Morgan Stanley bank holding companies at the last minute, the question is, could you have made Lehman a bank holding company and forestalled the disaster?

Geithner has posted something on a Yale website that addresses that, but I will address that. It’s simple. I think the answer is, no way. I don’t think you could have put lipstick on Lehman or any investment bank and said they’re now a bank. If they’re a bank holding company, the only additional powers that gave the Fed was related to the bank within the entity. They had tiny banks, and any assistance would have to go to that bank. They couldn’t have gone to the broader enterprise where they had the problems. And Goldman Sachs and Morgan Stanley weren’t saved because they became bank holding companies. Unlike Lehman, they had been successful at raising capital. Goldman Sachs had a cornerstone investment in Warren Buffett. Lehman had Mitsubishi. They both had that capital—

Morgan Stanley.

Excuse me. Morgan Stanley had Mitsubishi. They both had that capital essentially raised.

Warren Buffett was quoted publicly as saying the reason that he had made the investment was because Treasury was up negotiating for the TARP and he thought they’d get the TARP. David knows that with Morgan Stanley—David had to work with the Japanese Finance Minister to get the Japanese to go ahead. I had to write a letter to the Japanese Finance Minister to go ahead with the Morgan Stanley deal. So again, I don’t believe, looking back, even after Bear Stearns, as concerned as we were—The Fed put examiners in every one of the investment banks’ offices to try to increase confidence. So I don’t think the bank holding company ploy would have worked when they just had tiny little banks inside a big securities enterprise.

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Just to change gears for a bit—Did it make any difference that an election took place in November of ’06 that brought in a Democratic Congress in 2007, by which time the next Presidential campaign had already begun? Did that change of party—which, as I recall, came as a bit of a surprise; it certainly wasn’t foreordained in 2006—did that make a difference?

Thank God. [laughter] That’s all I can say.

Thank God for what?

We got the TARP, you know? We saved the financial system. [laughter]

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I’ll jump in here—

Yes, the Senate was bipartisan.

I’ll jump in and defer to Dan. The Democratic takeover in ’06 was no surprise at all, but it was a shock. It really changed how we had to operate in the White House. And as you go back to that period, you have to remember that one of the reasons why Democrats took over the House is that things were going bad. Everything had turned sour in ’06. The war in Iraq and Afghanistan was going very badly. The economy was struggling. We were seeing the early parts of the underwater mortgage crisis. The political situation in Washington wasn’t—Well, I guess by today’s standards it was mild, but it was a bitter political scene.

Looking at this from the standpoint of the White House and the Oval Office, where I was hanging out most of the time, the Bear Stearns problem was just one of many that was going on. From our perspective inside the West Wing, it looked kind of like a one-off. There were a lot of different economic problems going on, and there were much bigger national security problems going on. We were just all grateful that Hank was over at Treasury to steward that properly.

The whole financial set of issues was just one issue that we were dealing with. We were trying to get immigration done. I didn’t come until after the Democrats had won the majority. I came—

Yes, that’s Dan trying to shift the responsibility. [laughter]—

No, but my point being, it was no surprise. When the Republicans were trying to repeal and replace Obamacare, they talked so much about how many times they brought that to a floor vote. It was the same pattern with the Democrats on the Iraqi War funding. We had 40-some votes in 2008 alone, I think, or maybe it was 2007—

2007.

—2007, on trying to defund or restrict war funding. It’s the exact same strategy. We were trying to pass free-trade agreements; we were trying to reauthorize PEPFAR [President’s Emergency Plan for AIDS Relief]. War funding, the war issue, was constant, and the Democrats were doing hearings and they were getting investigations geared up. So yes, and then this was going on, but at least from my perspective as the Leg [legislative] guy, it was their problem or his problem. I had other issues. It wasn’t until it got to the point of a legislative response—at least for me—Kevin [Fromer] and I had similar roles. He was at Treasury and I’m in the White House, so I think he was dealing with it a lot earlier than I was, but—

What Kevin can speak to, and I’d like to hear him speak to this, because to me, the fact that there was ultimately divided government and the Democrats felt responsibility for governing made a big difference. Then we had a President that encouraged us to work on a bipartisan basis. If that hadn’t happened, I don’t think we would have had the chance to work with [Nancy] Pelosi on the trade deals, Barney Frank on Fannie and Freddie, the stimulus. We had a chance to build relationships before the crisis hit.

Well, I think every White House responds to a change in party control of one or both bodies consistent with what they think they need to get done and to test that. One of the things that made a lasting difference in this conversation with Congress was the fact that when Hank came, in the summertime of 2006, I think there was a broad recognition of the kind of leadership that was brought to the Treasury, and then there was a concerted effort to make sure that he had good relationships with Members on both sides of the aisle. I remember doing that very, very early, after his confirmation. And one of my lessons learned is that you don’t do that at the expense of not being able to carry out something difficult later on down the road. So it was necessary, as it turns out, to have developed personal relationships.

I think the other pivotal conversation that led to success when it was absolutely critical was that stimulus discussion, when Congress approached Republicans and Democrats in a highly orchestrated way in December of 2007 and going into January in 2008 and had a very, very close and well-designed interaction with the leaderships of both the House and the Senate. Both the House and the Senate leadership understood what was being sought, the way, the sequence, in which it was going to be pursued, and what the overall objectives were. There was a lot of trust that I thought was built between the administration and a relatively new Democrat-controlled Congress at that point in time. I think that made a difference in terms of communicating over the course of 2008 and then having to do some very difficult things in the fall.

Well, I have a naïve question to ask about that very bill, the stimulus bill. That is, why did it end up including what amounted to almost doubling the loan guarantee that Fannie and Freddie were able to offer?

To me, that was one of the most painful things when it happened, because we were determined not to do that. And just when the deal was being cut, Kevin and I were together with the Senate Republicans. Richard Shelby said to me, “Promise me you’re not going to increase the limit.”

Conforming loan limit.

The conforming loan limit. And I said, “Of course not.” [laughter] So then Kevin and I went right from there to a meeting, just the two of us with [John] Boehner and Pelosi. We’re writing down everything, and we agree on everything. Pelosi looks at me and says, “Now we’re going to raise the conforming loan limit,” I said, “No, we’re not.” She looks at Boehner and says, “Should I show him, Hank?” And she shows me the note from Boehner that says, “Let’s roll Hank on the conforming loan limit.” [laughter] Fannie and Freddie were so deep into him it was amazing. To this day, I think Shelby always thought I was a liar. I asked Boehner to tell Shelby the truth. [laughter] I don’t know if he ever did. But after that, Shelby, I’ll tell you, could hardly get in the same room with me. [laughter] But there’s not one bit of exaggeration there.

By the way, to put all this, again, back into the bigger context, at the time that we were doing the stimulus package, bear in mind that we’re now facing a Congress where both houses are controlled by Democrats, and we are barely trying to get them to hold on in funding the President’s Iraq War effort. Around that same period, among even a fair amount of the military brass, the consensus was cut your losses and get out. The President was going back to the Congress and saying, “I’m doubling down. I’m going to pursue a surge in Iraq”—this hugely unpopular war—“and I’m doubling down and I need more money to do more of what hasn’t worked so far.”

Now it turned out to be an enormously courageous and, I believe, entirely correct decision in the end, but that’s the context in which Hank and Kevin and Dan [Meyer] were trying to negotiate with the Congress on what’s going to be in the stimulus package. Our leverage was very limited because we needed their help on so many other things. We ended up doing a number of things in the fiscal area that a normal Republican administration—and the Bush administration—otherwise would not have done.

But I would argue that that ended up in a way that worked to our advantage when it came to the crisis.

Yes. When it came time for the crisis we had built the channels—Hank had built the channels—that made it possible to reach a bipartisan deal, because we got the TARP with Democratic votes.

I think the channels and the relationships are very important; I’m not underestimating those. But I also think it was important that there was divided government, that they felt the responsibility that if they didn’t come through, it was going to be on them. They couldn’t just

sort of—

Yes.

—shrug it off on the majority.

Absolutely agreed.

They were more receptive to it. I think in fairness I’d like to say that if the Republicans were in the majority they would have done the right thing as well, but—

In the Senate they did.

In the Senate there was a much different mix. To this day you can see that on some of these issues. But the House would have been a real challenge if it was a Republican-controlled House, just because there was such a large group that they didn’t want to vote for a bailout. They just didn’t want to vote for a bailout, and saw it in those terms.

When did you begin to perceive a populist sentiment beginning to gain sway?

Well, [laughter] as soon as we started meeting with the Republicans. We were doing all sorts of meetings up there. Again, I’d be curious to get Hank and Kevin’s perspective on it, but we were doing meetings in the Senate, we were doing meetings in the House, and there was a palpable difference. If Hank went up to meet with the Republican Senators, they were very deferential. “What do we need to do? How is this going to work?” When he went up to meet with the House Republicans it was, “Don’t ask us to vote for that crap,” and, “We don’t trust you,” and, “You’re a Goldman Sachs guy.” It was again, like I say, a palpable difference in their attitudes toward the Secretary and toward the issue.

But I go back even further. I actually believe that this is an American phenomenon—not even as much populism. I look back over history, and there’s a red line in terms of putting government capital into an institution. I saw it with Lockheed. I saw it with Conrail. And as soon as it gets in, it’s, “How quickly can we get the government out?” It’s nationalism. It’s just very un-American. And yet you can do other things that are actually bigger incentives, guarantees and so on, and it doesn’t arouse the public. But the first time I really sensed populism was when [John] McCain picked Sarah Palin. I watched that, and to me, that was the first time I equated the antibailout with populism.

I just want to clarify something I said before. There was a real problem within the House Republicans. It wasn’t universal. All the leadership voted for TARP. All the leadership, from the moment we had that first meeting, was on board actually working with us on how to get it fixed. They had issues that didn’t work from Hank’s perspective, but it was offered in a sense of how do we get votes.

When you say “the leadership,” who do you—

Boehner—

Republican leadership.

Yes. Boehner—

Yes, very much so.

—[Roy] Blunt—

[Eric] Cantor.

Cantor.

Very much so. But it’s fascinating. Even today, if you look at the Republicans, the Republicans in the Senate—We had a majority of both Republicans and the Democrats. [Addison Mitchell] Mitch McConnell was working all the time to help us. He didn’t get out in front; he stayed behind. He put Judd Gregg out in front. He sort of got Shelby to step aside and let Judd Gregg get out in front. The same with John Boehner. He was supportive, but when we got the House Republicans together to talk, he would fire them all up talking about something they’d done in oil drilling and then he would let us talk about the TARP. He had Roy Blunt out front. So he was cautious himself, but he was working to help us. Even today it’s fascinating. The Republicans, some of the ones that were the most avid supporters, disappeared. They’ve got amnesia. [laughter] The Democrats want to take full credit, but the Republicans still have a problem.

So I’d like to, since we’re getting close to the hour, finish up with one of the sort of $64,000 questions of at least the early phase of the crisis, which is: What would have happened had Bear Stearns filed for bankruptcy rather than being acquired? And, as you all know, the critics say, “Well, that would have demonstrated that you really meant business when you told Lehman that they had to raise more capital.” Is there anything in the ten years since that time that has altered your view at all that the Bear Stearns resolution was the right way to handle it?

I’m talking too much, but I’m going to be brief and then let others who may disagree or agree join in. At the time we did Bear Stearns—To step back, Bernanke, Geithner, and I have different backgrounds and skill sets and so on, but throughout the crisis we were in immediate agreement that we shouldn’t let any institution that even looked like it was systemically important fail, because we were concerned about avoiding those risks. And so we did everything we could and saved Bear Stearns.

I look at it now and I’d say immediately afterward we were even more concerned. Because I remember thinking to myself, Boy, that’s a strong statement. People ought to really be pleased. David got me on the phone and said, “Hank, I think you better get on the phone and talk with the Finance Ministers of Germany, France, the U.K. [United Kingdom], and so on.” And they weren’t at all relieved. They were saying still, “You’ve got to make us confident about your other investment banks. Why shouldn’t we be telling all of our financial institutions to pull back? Why should they be touching anything that’s not a bank?”

I look at it now and I say if we had not stepped in, the hedge funds would have been on Lehman immediately. If Lehman had gone down in March or April, it would have been much worse than in September, because we hadn’t stabilized Fannie or Freddie yet. And there wasn’t a buyer for Merrill [Lynch] yet. And so I think from our perspective Bear got saved. We got criticized by the free-market types in Congress.

The markets got better. Stock prices traded up. We were more concerned after Bear than we were before Bear, by a lot. I think we dodged a bullet, and I think people that make that argument are well-meaning people. I think I would have made the argument if I wasn’t in finance. If I was an economics professor somewhere, I might have made that argument. But if you were right there in the markets talking to people and seeing the level of fear there was in the markets, to me it would have been worse.

Just to reinforce that, we had the April meetings of the World Bank and the IMF [International Monetary Fund], and I think we had all the bank CEOs [chief executive officer] come for a meeting and talk—[Richard S., Jr.] Fuld and all of those guys. They were panicky about the investor uncertainty and the hedge funds coming in in a very predatory way. Then we had a separate set of meetings with the central bankers and all the Finance Ministers, and it was exactly as Hank’s describing. The sense of fear was growing and palpable in a way that had the Bear Stearns thing not happened, it would have been, I think, exacerbated significantly.

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Secretary Paulson, in your book you note various meetings with President Bush and describe him as very much engaged, asking sharp questions. I’m sure Josh Bolten was in those meetings as well, in many cases. Can you think of particular examples of sharp questions he asked or suggestions he made or other ways in which he was personally shaping the actions of his administration?

Well, see, my comments related to the fact that he clearly understood markets. I remember even the first session in Camp David in July. I thought I was going to make the presentation and he’d sit there and listen to it and ask a few questions. But he asked all kinds of questions about derivatives. He clearly understood them, because he’d seen them used in the oil industry and so on. He was shocked at the fact that we were writing, and Wall Street was writing, derivatives. For instance, if someone wanted to protect themselves against a General Motors default, that they were looking to buy a derivative, but we had no idea how many derivatives had been written. It could have been many more derivatives than the bonds, but to protect yourself you had to show up with a bond. The President was asking really deep questions. I remember—REDACTEDTEXT REDACTEDTEXT—the Thursday when we were in the Roosevelt Room and getting authorization to go up and seek the TARP authority, I described money markets and the money markets imploding. We were considering various things, including a guarantee. He stopped and said, “Guarantee? That’s what you do? The markets will understand guarantee. Do the guarantee, right?” I was on the cell phone with you, as I stepped out and before it got back to the White House, saying, “Announce the guarantee today.” [laughter]

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Always he’d cut through. For instance, after Lehman went down and we explained how we tried everything and why, there was nothing we could do to save Lehman. He said, “Fine. I agree with you. But you’re going to need to explain why Bear Stearns and not Lehman. I know there’s a good answer and you’ve explained it to me, but you better get ready to explain it.” And when we went to him and said, “Guess what? Asset purchases aren’t the way to go, Mr. President. We’re going to need to put capital in the bank.” He said, “Wow. You’ve told the world you’re going to do asset purchases, but do whatever you have to do to save the economy. But you’re going to have to explain it. What’s your explanation going to be?” I said, “Well, we made a mistake. That’s my explanation. [laughter] And we’re going to put capital in the banks.” But he was very good.

He understood people. He was a people person, so he understood everybody’s makeup. And with me, he knew that I was very concerned and I was living under a lot of stress. I brought him bad news continually, and not once did he do what I would have done if the situation were reversed. [laughter] He always just encouraged me, bucked me up, reassured me I was the right person for the job. He trusted me completely. I was his wartime general. And so he was just terrific in terms of the psychology, always cool and calm under pressure, and I thought prepared to make really difficult decisions—decisions that were not popular with his base.

Josh, can I ask you a follow-up on this? Because you mentioned the surge a little while ago, and the interesting thing about the surge is, if I have this correctly, that was a decision that was made within the White House, that’s not outsourced to the Defense Department. You’re doing exactly the reverse of what the generals were suggesting.

Yes. On the surge, basically the Joint Chiefs had to be sold and then told by the President that’s what he was going to do.

Exactly. Why the difference in this instance? In one case, these vital decisions are centralized in the White House, and in the other case you’re relying on the team at Treasury. Why—?

It’s a good way to phrase the question. It actually wasn’t that different. The President’s view of his leadership role was to set the direction, set the overall objective and policy, and then leave the tactics to the experts. With respect to the Iraq War, the President never intervened with “We need to go into Erbil,” or something like that, or, “We need more troops here or there.” He was making the decision about: Are we in or are we out? Which poses the greater risk for the United States? In the case of the surge, he concluded that the risk to the United States and to global peace and prosperity was greater if we were out than if we doubled down and went in.

He was making the same kind of decisions with respect to the financial crisis. He had generals that he trusted: a Chairman in Hank, whom he trusted completely, and Ben Bernanke and Tim Geithner as a couple of the combatant commanders. He was asking probing questions in every meeting I was in, and Dave was in a bunch of them. Every meeting I was in he was asking good and probing questions, but he was not viewing it as his role to set the tactics, because that’s what belonged to the experts, to his field generals. But he was making the decisions about are we in or are we out.

Now the interesting thing that Hank mentioned a few minutes ago was this aversion to government ownership of private industry, this allergy to nationalization. The President had that himself. He felt it, and he also understood the politics of it. So part of the tough questioning that the President gave his field generals in almost every meeting was a demand to really justify any action that would look like the government was taking on the role of basically equity owner.

When Hank ultimately came back in the deepest throes of the crisis and said, “Asset purchases aren’t going to work; we’re basically going to have to inject equity,” the President knew at that moment that ideology and political preference had to be out the window, that his field generals were telling him that the only way we win this war is if we do something that makes all of us extremely uncomfortable. The President was all in on that as well.

The thing that I am really grateful to him and to Josh for, is that first of all, I had a year before the crisis to build a relationship with the President. And without that, I don’t think this would have worked. Josh worked very hard to make sure that happened before the crisis. The second thing is, I don’t think there ever was any real danger that a President would get his military together and try to plan battlefield strategy, but there are some Presidents that might have, when we were working on the crisis, made us have endless White House meetings and have all the advisors there and so on. The President didn’t do that. That was outsourced to Treasury. We coordinated with the White House. He actually sent people from the White House over. Joel Kaplan, who can’t be here today, was over there a lot of times meeting with us. So—

We actually called him an “embed.” [laughter]

Yes. I knew I could get to him whenever I wanted. I could get to him at 7 o’clock in the morning or before. I could go see him; I could get him on the phone, do whatever. He used us and he used Treasury, so we went through the processes ourselves rather than going through the processes with a whole lot of debate from outside people or political people who weren’t experts. And it made a big difference.

One final question.

There was a Presidential election going on, and maybe up to and including the Republican Convention that year, how was that affecting your ability to address this crisis without it spilling out into the headline political story of the year?

Well, let me jump in first and say that, as Dan will know, the Bush White House was not involved in the Presidential campaign of 2008 because we were in the unusual circumstance that both the Democratic and Republican candidates were running against the President. [laughter] So we were basically out. Other than the President’s very keen interest in the machinations of politics, which sort of made him disappointed that he wasn’t playing, we were sort of happy to put that aside. We had so much on our plate, and we needed to deal with it on a nonpolitical basis, and bent over backward to try to avoid anyone getting the appearance of the President making any national security or any major national economic decisions based on the campaign politics. He wasn’t making decisions in that way, and we also had to go to lengths to make sure that nobody perceived them in that way.

But it impacted what we did dramatically. Dan and Josh and Kevin and Michele were working with me every day, because as Josh said, both candidates were running against the current President, and it was a collision of markets and politics. Because if either Presidential candidate had come down against what we were trying to do, I don’t think we would have gotten the TARP authorities.

I was talking regularly with both [Barack] Obama and McCain. Obama was easier, because the crisis was playing in his favor. McCain’s campaign was flagging; the crisis was working against him. Foreign policy was his expertise, right? And so you would hear whenever there would be populist rhetoric, whenever he would start talking about using the word “bailout” or saying things that were dangerous, Josh advised me to work closely with Lindsey Graham, who was the bridge to McCain. I talked frequently with Lindsey. When things got dangerous, Lindsey had me talk with John McCain.

This may be one thing I decide to hold for a while, in terms of releasing it right now—but I had very, very difficult conversations with John McCain. He had quite a temper, and he told me what he thought about what we were doing a number of times in very strong terms. I told him in very strong terms how disastrous it would be for the country if he came out against what we were doing.

I look back at him as a hero now, because it would have been very easy for him to condemn, when he was losing, what we were doing. It was actually quite easy for President Obama to be supportive. Obama, whenever he talked to me, told me to be careful about McCain, because if McCain went too far, then he might have to also. So he always increased my sense of anxiety about McCain. Time after time when I thought we were feeling pretty good, the anxiety was about John McCain. But at the end of the day, John McCain was supportive. He helped with the House Republicans.

I think the election also impacted—made in some ways the TARP vote much more difficult. Michele advised me on communicating, and our communication was designed to stabilize the markets, make the markets feel comfortable, but Congress wanted you to alarm the markets. Rahm Emanuel always said, “You’ve got your market, and we’ve got ours.” Speak into the microphone and tell people it’s going to be economic Armageddon if they don’t vote for this. And yet we were not wanting to spook the markets. The election had a big impact. And the White House—Although the President stayed out of it, I received great advice from the President, from Josh, from Dan, and a lot of other people in the White House.

[Edward] Gillespie.

Ed. Oh, yes. Ed Gillespie. And Michele.

Russell, I assume we’re going to want to talk about the meeting that—

Absolutely.

—John McCain called, and I don’t know whether you want to do it before or after—

No, no. I think we’re going to save that for either the second or third session.

[BREAK]

Session 2

Well, here we are at session 2, and I’ll serve as moderator today for this second session, but I will quickly turn things over to my colleague, Bob Bruner, who is an expert on all things financial panic. But before we do that, we did want to turn back to Secretary Paulson. This is the name of the game in the world of technology. The recording for video ran out just as he was giving his very poignant and interesting answer for history about working with the two candidates in the 2008 election. So Secretary Paulson, you’re very kind to—

“Please repeat the part you don’t want on the record.” [laughter]

We’ve got it on the record in audio, but it was truly so historic and so poignant what you had to say, that if you don’t mind rethinking it—

Well, how can I possibly re-create it if it was so good? [laughter]

I know. It was so brilliant, but we know you can.

Well, I was making the point that this crisis was in many ways a collision of political forces and market forces. We had a national election, as Josh had said. John McCain was in the difficult position of also running against—We had both candidates running against George Bush, because President Bush was very unpopular at the time. The crisis in many ways worked politically in Barack Obama’s favor. It was something that was difficult for John McCain to deal with. John McCain’s campaign was flagging at different times during the campaign. He is a foreign policy expert. I don’t think he had a plan for dealing with the crisis, but he needed to show leadership.

I needed to talk with both candidates regularly, and the conversations with Barack Obama were much easier than they were with John McCain. Whenever John McCain’s rhetoric became dangerous, from my perspective—whenever he started to tell the public what they wanted to hear about not wanting bailouts, or talking about how maybe the TARP would give one person too much power, or so on—I needed to talk with him.

Josh had advised me that Lindsey Graham was the bridge to John McCain, so I talked regularly to Lindsey Graham. Lindsey told me when it was appropriate for me also to talk with John, which I did. And I made the point that some of the conversations I had with John McCain were very difficult ones, very difficult ones. He had a temper, as I think everyone knows. He was very candid. He told you what was on his mind. So he told me exactly what he thought of some of the things we were doing some of the time, and how it was hurting him. I fired back pretty directly.

I felt great anxiety about John McCain throughout the last couple months of the campaign, particularly when we were trying to get the powers from Congress. Because if he had come out against what we were doing, I don’t think we would have got the TARP—If either Presidential candidate had come out against what we were doing. Obama frequently would say to me, “You better be careful. You better watch your candidate,” as if he was my candidate. “You better watch what he’s saying, because if he goes too far, then I’m going to have to say some of those same things. Because the American people don’t like bailouts.” So that was the environment.

At the time, you know, I was so focused on preventing disaster, I looked at John McCain as a big problem. As I look back on it today, I am really, really grateful for John McCain. I view it as heroic that he didn’t do the easy thing politically and demagogue this. It would have been very, very easy for him when he was behind in the polls to tell the American public what they wanted to hear. And then we wouldn’t have got the TARP, in my judgment.

Thank you. Thanks so much. Bob, I’ll turn to you—

And that wasn’t as good as the first time [laughter]—

It was even better.

We’d like to turn in this session to the September-October time frame, the nadir of the crisis. But as a lead-in to that, from the last session, we were beginning to shape an understanding of the change in mood in the country around mid-2008. We heard some comments from Dan and Kevin, and I’d like to bring Michele into this as well. Change in sentiment—What were you hearing? And what were you seeing? I know you mentioned political conventions, the campaigns were reaching fever pitch going into the convention and shortly thereafter.

You mentioned the nomination of Sarah Palin as the Vice Presidential candidate on the Republican side, and that was the first alert that you really felt about the populist movement that was surging forward.

I said what I said about Sarah Palin. When John McCain selected Sarah, to me, that was the first sign of a populist moment. I remember vividly the first couple of conversations I had with her, because one of the conversations I had with John McCain, I think, was roughly after we put Fannie or Freddie into conservatorship. And boy, she got on the phone with me and she had all the rhetoric down. “Boy, you better have taken away their golden parachutes. I hope you fire the CEOs. The American people don’t like this. They don’t like bailouts.” She was very attuned to where the public was.

I think you also just started seeing more every day in various news coverage pictures of houses being foreclosed on. That started to become a real regular, recurring image across all kinds of media, and that just fed—That just showed you what the attitude was, what the fear was that was spreading.

And how did you, then—Did you have to readjust how you were thinking about the public at that point, and messages that you knew that you wanted to portray to them?

As Hank said earlier, we kind of knew all along that there were two audiences that wanted to hear very, very different things, and we had to pick one. Market stability was more important, so that you could get the economy back on track faster. So it was more of a challenge of try not to get bogged down in that, to not to be afraid to stick with what we knew we needed to do, and stay focused. We just kept staying focused on what we needed to communicate to market participants and to the Hill and to everyone else who was going to—

But you did tell me, while we did that, you did say to me, “Hank, you need to help the American people understand why this is relevant to them. This isn’t about saving the Wall Street banks. This makes a difference—”

Yes, yes.

“—on Main Street.”

We used to talk about trying to get into your speeches things about “the financial system is the plumbing of the economy” and just trying to make it more tangible and real to people. There was a lot of anxiety out there, and foreclosures were certainly creeping up, but they weren’t seeing that businesses were failing, or some of the things that these guys were anticipating if the situation got much worse.

But communication was very, very tricky. And I’m certainly not—If you’ve heard me give a speech, you know that’s not my number one thing. But it’s difficult to communicate to various audiences. I would say even terrific orators—President Obama never was able to make the country understand why we were doing what we were doing, and they were angry about the bailouts.

When people said to me, “Well, what about [Franklin Delano] Roosevelt? Roosevelt did it.” I haven’t read as much of Great Depression history. I’ve read some. When I talked to Ben Bernanke about it, he said, “Well, wait a minute. Roosevelt had a different strategy. He didn’t help [Herbert] Hoover. He wanted it to burn. And he let it burn.” And after it had burned to the ground and the financial system was burned to the ground, then his rhetoric was all over, “Blame the bankers. The bankers created this. These are the evil guys. Send them to jail.” That’s an easy communications strategy to have. But that strategy wouldn’t have worked for us.

He was making that populist argument.

Yes. He was making the populist argument. It made political sense, and maybe even economic sense if there wasn’t a financial system left, right? He had to reconstruct it. Fortunately, we didn’t let it burn. And we arrested it before we had a Great Depression–type event. Some of the things that we did that were the most successful were very, very unpopular, and the things that made them successful were the same things that made them unpopular. So it was just a different—

It was much harder to communicate in an environment where the problem hadn’t manifested itself yet. You all were in an effort to prevent it from happening. I just remember one anecdote—before the floor vote, being up at a Republican conference—and again, before the first vote, particularly, this was not a popular notion among a lot of House Republicans. I remember the current Speaker of the House, Paul Ryan, getting up and saying, “I came out here to work for Empower America”—which is a market-driven think tank. He said, “This is not why I came to Washington. But we should do this. And here’s the problem we’re going to have: We have to do this to avoid this crisis, and when we do it, we won’t get any credit for it, because nobody’s going to know we actually saved them from the crisis happening.” And he was absolutely right.

Yes.

There was this communication, almost a division of labor. The Secretary had to speak primarily concerning the markets and the confidence that needed to be reinforced there. When it came time to go into Congress, it had to be a different kind of a conversation, and they had to find a way to communicate this themselves. So their audience was obviously a completely different audience. We had to help them find whatever that voice was. And typically it was really about Main Street. You know, for them, taking unpopular actions in order to ensure stability for the United States economy was taking an action that was necessary to ensure that everyday working men and women would be able to continue to have jobs and stay in their homes and provide for their families, et cetera. They had a completely different message that they had to take.

I think initially, Members like Paul Ryan also objected viscerally to what the administration was proposing. But those who were closest to economics recognized, as he did when he—I think he called this the “Herbert Hoover moment” on the House floor—when the bill was initially debated and fell. Because he knew, and others did as well, that barring that type of action, there were going to be uncontrolled events that could not be forestalled, but for this type of intervention, which was obviously at odds with everything that many of them believed in, and frankly, many people sitting around this table.

All of us believed in. [laughter]

I don’t think there was any deviation in the sentiment that this was a highly unpopular thing to do and ask Congress to do. But there was a segment of the Republican caucus that recognized—It included the leadership; it included people like Paul Ryan—that it was a necessary evil, and that we had negotiated with the Democrats, who had the upper hand in the conversation, obviously, and were seeking to apply conditions to the assistance, which we had to ensure were not so onerous to prevent participation in the program itself. That was a big principle throughout the negotiations. But I think the national Presidential election by definition had just created a whole level of unnecessary complexity if you were in the trenches trying to figure out how to write the bill in a way that could be supported by both Republicans and Democrats at the end of the day.

No one understood this better than George W. Bush, who was, as Hank alluded to earlier, in every conversation, thinking about and talking about, How do we communicate these unpopular steps to the American people? The President was always focused on, How do we ensure that we have? not, How does popular opinion affect what we do? How do we make sure that popular opinion supports the right thing that we’re trying to do? But it was a very challenging environment in which to do it.

The President’s communications on this were pretty good. But unfortunately, the President’s ability to communicate at that point was dramatically diminished, because not only was he a lame-duck President in the waning months of his Presidency, when most Presidents tend to lose potency, but he was pretty unpopular. We look at 40 percent now as a terrible rating, and those of us who were there at the time think, What’s your secret? [laughter].

Yes.

How do you get your rating up to 40 percent? [laughter] Bush actually dipped into the 20s during this period in popular approval. We were in the midst of a Presidential campaign, as I said, in which both candidates were running against the President. He had the right points and he was communicating on them, but the American people had largely tuned him out.

He had great personal awareness. So he a number of times said, “I would try to help you, but if I tried to help you, I would hurt you. You’ve got to go up there and work with the Democrats. That’s one of the reasons why I brought you here. You’d have to have credibility with the Democrats as well as the Republicans.”

But the thing that helped also was how the President had always—If he, we, were committed to something, that’s what we did. To the Iraq point, leading into this, we have the confidence to know, we could go out and talk about—

Yes.

—something and do something and nobody was going to pull the rug out from under us. [laughter]

Oh, my gosh, yes.

There was a really amazing message discipline if you think back, which certainly did not happen after the transition, when you had White House people and the Treasury people all saying different things and creating all kinds of uncertainty. I guess that might have been more normal, [laughter] but we had the confidence to know that nobody in the White House was going to undermine what we were saying or argue with it publicly or privately, and that made it so that we could communicate very clearly and the market participants that we were trying to speak to believed it, because he had, we had, the credibility of the whole administration being on one page. I don’t think you can underestimate how important that was.

I do remember one moment in the September 18th meeting in the Roosevelt Room. That was the day you met with the President in the Roosevelt Room, and then that evening we had the meeting up in the Speaker’s office with the bipartisan, bicameral leadership and the Banking Committee folks. In that meeting—And it’s relevant to all, you’ve been talking about the President’s sensitivity to communicating. But at that meeting, I can remember, because that was the one where you and Bernanke came in and said, “Well, here’s what we’ve got to do.” There had been a lot of lead-up to that, but this was, “Here’s what we’ve got to do.” I remember you expressing a concern about, “I am worried about the politics of this.” And at that point, the President said, “Let me worry about the politics. You do what you’ve got to do.”

That was in the Oval, though. That wasn’t in the Speaker’s—

No, that was in the Roosevelt Room.

I was going to make that point. I remember him saying that, and I remember thinking—

He said it more than once.

Yes. [laughter]

And that’s what he said in great language that was quoted: “Go up there and tell ’em we’re fixin’ to have a crisis.” [laughter] Remember? “We’re fixin’ to have a crisis, and they need to act.”

I don’t know if now’s the appropriate time, but with regard to President Bush, he was unpopular at home—and a lame duck in some respects, but not internationally. He had been an eight-year President, he had these deep relationships there, and the world was looking to the United States to lead.

So the President was on the phone constantly with all the different leaders, and that sort of fell into two buckets. Do no harm, because there was lots of harm that could have been done by the Europeans. Hank was constantly talking to the Germans in particular, but the Europeans, the Chinese. Imagine had they started selling U.S. Treasuries or imagine if they started selling Fannie Mae and Freddie Mac paper. So there was initially a lot of do-no-harm kind of outreach where [Nicolas] Sarkozy flew over—You probably remember that—where Sarkozy wanted to have a separate meeting with the President, and the President was very reluctant to let Sarkozy have the stage to ultimately make whatever proposal. So there was a lot of—

Which is how we ended up at Camp David.

Right. With [José Manuel] Barroso and Sarkozy, so that the President could basically channel Sarkozy in a way that he wouldn’t do any damage. So there were initially a lot of things that Hank and the President and others coordinated to make sure that the bad things didn’t happen. And then subsequently, Hank and the President ultimately decided to begin to channel all of the energy toward a common agenda, which happened beginning in October, and then the November 2008 summit, where the President convened all the leaders. But that was where maybe on one hand he was somewhat hamstrung in terms of what he could do domestically. Internationally, he played a much more substantial role, and everyone was looking to him to lead among the other countries.

I would just add one thing to that. President Bush didn’t have broad popularity with the public overseas, but he had really good interpersonal relationships with all the leaders. All of them. I couldn’t think of any that he didn’t have a really strong relationship with.

So let’s turn to the nadir of the crisis. Some people would point to September. We begin the month by drawing Fannie and Freddie into conservatorship, and then there’s the Lehman weekend. The next day the pledge of support for AIG [American International Group Inc.] and the support for the money market mutual funds, and TARP goes to Congress. Imagine that you’re talking to people who hear this presentation 20, 50, 100 years from now and they’re trying to make sense about a consistency of policy during the month. You’ve heard it, but speak to that audience. They see no taxpayer money going into Lehman as the expressed policy.

There’s a new book by Laurence Ball, an economist at Johns Hopkins, who says Lehman was solvent, according to his analysis. I don’t hold a brief for his analysis, but he’s made that argument. So you have people questioning the consistency of policy, and then turning around and supporting AIG and very substantially intervening in companies and markets thereafter. Help the audience of the future understand your policy, and address the question of consistency.

OK. So to understand, you need to begin with where I started, which was, we had a regulatory system that was designed for a different day and age. It was designed to stop a panic that might begin the way it began in the Great Depression. It didn’t give us oversight or visibility over a huge part of the financial system, or the authorities to deal with that. And we learned, when we went through the Bear Stearns rescue, that it took a buyer to save Bear Stearns. It took actually a very well capitalized buyer, and it took a buyer that had the capability and willingness to guarantee all of the liabilities. The Fed loan didn’t work. It barely got us to the weekend. Even the merger agreement wasn’t going to work, despite the guarantee that if JPMorgan hadn’t increased the price.

But I guess I should start, to make it simple for people, to say that in terms of the consistency, Ben, Tim, and I were very consistent in our desire and our effort to save every institution that was systemically important. The policies looked inconsistent because we had different situations, and we dealt with them on an ad hoc basis to get through the night. And there were really four nonbanks that basically failed or almost failed before we got the TARP from Congress. There was Bear Stearns—and as I said, Bear Stearns, we had a buyer, and the Fed was able to make a loan to assist that buyer, but the Fed loan wouldn’t have worked without the buyer. There was one other failing nonbank that we were involved with, but it took no government support. That was Merrill Lynch, and they were acquired by Bank of America. If Bank of America had acquired Lehman or acquired someone else, then Bear Stearns would have failed, and it would have been worse than Lehman, because it was much bigger.

Lehman was bigger than Bear Stearns. It was disintegrating very quickly. There was no buyer for Lehman. At the end of the day it took a buyer that was going to be willing and had the capability and capacity to guarantee the liabilities. We didn’t have a buyer. A loan for Lehman. It wouldn’t have worked for two reasons. It wouldn’t have worked from the Fed’s standpoint, because the Fed standard—and here you have to talk with Ben Bernanke and Tim Geithner; they can speak more appropriately than I can—but the Fed standard had to be secured to the satisfaction of the Board. It wouldn’t work to have the Fed make a loan that was just to deal with the liquidity issue; there weren’t enough assets at Lehman Brothers to lend against and to make that any kind of loan that would have been permissible.

But the point that I make, and that Ben and Tim make, is that there is a separate standard, and the standard is what’s going to work from the market standpoint. In the middle of a panic, market participants make their own judgment about viability and solvency. And regardless of what the Fed may think, if they’re making any kind of a permissible loan, the market participants aren’t going to hang around if they believe that Lehman is insolvent or not viable. I’ll talk about Larry Ball in a minute, but despite what he may write in his book, there were no market participants—no one at that time that believed that Lehman was a viable entity.

AIG was a totally different situation. AIG was an insurance company. It had a massive liquidity shortfall at the holding company, but it had all these insurance companies that were perceived by both the Fed and by the market as being good, real businesses. They had independent credit ratings, good collateral for the Fed to lend against. There was no real business for the Fed to lend against at Lehman. These were really stable assets. So the view at the time, of both the market and the Fed, was that they could make that loan. Now as it turns out, months later, when the situation worsened, and the rating agencies got into AIG, you couldn’t have saved AIG without injecting capital. But at that time, we had the TARP.

Now the last question, which has to do with the Larry Ball book. And here, I have not read all of the economic analysis; I’m just going to recite here what Ben Bernanke has told me about the other economic analysis. But first of all, from my standpoint, it’s totally BS [bullshit] in my judgment that Lehman was solvent or viable at that time. I don’t know what Larry Ball goes through to support that point of view. Many other economists have done studies and come out with a very, very different viewpoint.

The buyers that were looking at Lehman at the time thought that there would be big losses, even after eating through the equity—tens of billions of dollars. The bankruptcy administrator, after the fact, thought that this company was insolvent. The British regulators—what came out from them afterward was that the company was insolvent. What Ball has done is—He’s a publicity hound. He had written a paper, and then he redid that in a book. He released it and he’s going to publicize it. And the press has jumped on it.

There have been, as I said, plenty of other studies. There’s a guy named Stephen Cecchetti who was a coauthor of some things earlier with Ball. He’s written a very, very substantive piece that takes exactly the opposite position and goes further, and makes a point that I subscribe to—a point that Ed Lazear, who was chairman of the Council of Economic Advisers and wrote a paper on, also believes. Ed calls it the “popcorn theory.”

But first of all, if you read what Cecchetti says, Cecchetti says, “Listen. There was all kinds of tinder all around when Lehman went down. Banks on the verge in Latin America. You had AIG and Merrill Lynch and WaMu [Washington Mutual, Inc.], and Citi [Citigroup, Inc.] and Wachovia weren’t far behind. So if somehow or other there had been a buyer or had been something for Lehman Brothers, it was just a matter of time before something else went down. At the end of the day the Fed didn’t have the fiscal authority. It takes fiscal authority. It takes real government money. It takes the capital or guarantee to stop the meltdown of a financial institution. The Fed had the ability to guarantee assets and inject capital for a bank. They didn’t for an investment bank.

Ed Lazear’s “popcorn theory” is that the crisis has been grinding on; the oven is heating up; there are all these kernels getting ready to pop. You had Lehman and AIG and Merrill pop at the same time, but there are a whole bunch of others that were getting ready to pop also.

Could I follow up on that? Secretary, in your book you say that prior to Lehman’s failure its customers had already begun to flee, causing the Fed to face the prospect of having to lend into a run.

Right.

I have to just say as a disclaimer that my economics knowledge is one year of college economics, micro and macro, and that’s it. I’m political science. But back to where we began this session, about what the people were thinking and how hard it was to explain what was happening in the investment banking world, I always think to the movie It’s a Wonderful Life, where there’s the run on George Bailey’s savings and loan. And people get that. They got it at the time; they can look back and get it now.

Those of you who are in this field can correct me, but isn’t there something to the fact that no more than 50 percent of the American people own stock, so Wall Street is just something that’s abstract to them? Yes, people were losing their homes. But this really rang true to me, that I understand what a run is. Could you talk about that a little bit more, perhaps, to dig into that concept?

Yes. Thank you. That’s a very good question. The most severe form of financial crisis is a panic, when you have runs. And let’s think of what happens in a panic. In a panic the market loses confidence in all forms of credit products, and investors quickly get to where the most scared investor gets to quickly. They flee to the safest and most liquid assets, so they go very quickly to Treasuries. And you find that any kind of market for any asset that’s perceived to be risky collapses, right? New credit dries up, which just really hurts homeowners, hurts jobs, hurts everyone, and so you’ve got this panic. What I tried to say early on—The regulatory apparatus that was put in place after the Great Depression was put in place to fight that war, the last war. And it didn’t work for the system we had to stop a panic.

I’ll just give you a sense of two things that really added to the panic here. First of all, we saw it in Bear Stearns. Because you had an investment bank that was just assuming they could continue to borrow against these risky assets. They had these hedge funds that had prime brokerage accounts, and they were taking the securities in the prime brokerage accounts—the hedge fund accounts—and borrowing against them overnight in the repo market at the same time they were making loans for 30 to 60 days to the hedge funds. Well, hedge funds aren’t going to stick around to see whether—You know, if they don’t think Bear Stearns is viable, they don’t care whether the Fed’s made a loan to Bear Stearns. It was going to take capital, and it was going to take a buyer.

With Lehman we had something that was particularly unfortunate happen that really, really accelerated the run. It was something that I—I had no idea that the bankruptcy practices were so different around the world. But in the U.S. system, customer accounts were sacrosanct. They were kept separate; they were segregated. We had always felt that if you had a customer account at any broker-dealer, no matter what happened to the broker-dealer, that was your money. And what happened after Lehman went down—the U.K. bankruptcy administrator grabbed their assets—customer accounts. And so the hedge funds took a look and said, “Wow. OK, why should we have money in any investment bank?” And so that also tended to accelerate the panic and the run.

So the difference—The way to think about the run was—Iin the movie you cited, or at the time of the Great Depression, the run would take place at a bank, right? And that’s why you have big-bank façades—you know, to give the image of—to make the public feel confident. And protections were put in place to save depositors at banks. The runs that we were facing weren’t—They hurt the public, but it wasn’t the public; it was professional investors. In some cases, it was their life insurance money and pension money and so on. It wasn’t all hedge funds. But any investor—If you’re a fiduciary, what’s the incentive to stick around and leave the money and say, “Well, I left the money there because I—You know, the Fed made a loan, and I thought that this institution would still be around.” There’s no incentive to take that risk. You’ve very quickly got to get to where you know you’re going to be safe.

So I showed you an article that appeared in today’s paper during the break and asked if I could ask you about it. This is a column by Andy Kessler in today’s Wall Street Journal. He argues that the decision to let Lehman fail was a—either motivated by politics or by something personal that you had toward Lehman. Again, not to particularly bless his point of view on this, but for the sake of helping an audience some years from now reflect on this event, can you speak—Was it—If it was politics, certainly that would be consistent with the mood shift that everyone was describing in mid-2008. You know, did you feel under political pressure to come to that decision?

So let me say first of all—I will get to that article, but, you know, this is for history, and I hate to dignify a piece of yellow journalism like that, right? But so I’ll say a couple of things. First of all, the politics were negative for everything we did, OK? And so I had people around me—as Michele knows—and we had people on our staff that were violently opposed to everything we did to rescue a systemically important institution—and for good reasons. They understood the politics. They didn’t understand—If you didn’t understand markets or what was at stake, it was hard to find what we were doing, you know, to be acceptable. I mean, we did a lot of objectionable things because they were less objectionable than the alternative. You know, I believe in markets, but I wanted there to be markets, you know, to believe in [laughter] when we got done. So we were working to save the system.

Now with regard to Lehman, the people around me know that I worried more about Lehman than anyone else. I mean, I always—I talked with the President regularly. When I was talking to the President about Fannie or Freddie, I was talking to him about Lehman, because I was worried we didn’t have the authorities. I can’t tell you the number of conversations I had with Dick Fuld, trying to convince him that we couldn’t guarantee liabilities and put in the capital, and he should take other actions. You know, there’s a number of people that want to personalize it. And I think there’s probably a group at Lehman that ten years after the fact—You know, they couldn’t raise their heads too far in the first five years, because they were being sued and being criticized for accounting irregularities and so on, and they want to blame someone. But no one could have tried harder than we did to save Lehman.

The no public money was a tactic. And it was a tactic that almost worked. We knew there was a limited number of buyers. That’s all there were. And we also knew that a Fed loan wouldn’t work without a buyer. And we knew that if a buyer felt that they could leave all the risky assets back for the Fed, that the Fed wasn’t going to be able to make a loan to save Lehman. So my communication was intended to maximize the chances that we could do something like we did for Bear Stearns. And everybody that was working with me knew it. Ben and Tim knew it. So what we were doing—At the same time we were working with the buyers and we were saying, “Identify the assets you want to leave behind,” we had a consortium of Wall Street banks saying, “If you don’t want Lehman to fail, we want you to take this risk.” And as I said, we almost got there, but we didn’t. And it turns out that the Lehman event catalyzed the political system and let us get the TARP. So again, it was tactics.

But again, our communication—and Ben has said the same thing that I have—After the fact, neither one of us stood up there and said—You know, we made it worse in terms of people questioning our motives, because we didn’t stand up there and say, “Hey, guess what? There’s not a single thing the United States of America could have done to save a disintegrating investment bank in the middle of a run.” Because we felt then Morgan Stanley would have gone the next day and then Goldman Sachs would have gone. And I had had John Mack on the phone with me—the CEO of Morgan Stanley—begging and pleading and saying, you know, “The shorts are all over us. Please. Anything you can do.” And so we were worried.

But personally, the day I left Wall Street, I severed every tie with Goldman Sachs—any economic tie, everything. I never have gone back to Wall Street. I—My whole motive was, you know, I’m the Treasury Secretary. If all I cared about was my reputation, I would say, “I don’t want to be Andrew Mellon.” I mean, I was focused on saving our economy. And so whoever the weakest link was, that was the one I was most concerned about. So the irony—an irony—that someone thinks that because I somehow or other didn’t like Dick Fuld, that I wanted Lehman to go down, rather than saying that, you know, maybe Dick Fuld didn’t do everything he might have done to save Lehman, I find rather ironic.

But that was the most difficult communications thing we faced—from the minute of the Bear Stearns weekend—as you said, Barney Frank said, “Well, just tell the world we’re going to have Armageddon and you’ll get what you need,” and we knew we couldn’t do that. And it was this constant chicken-and-egg problem: we can’t get the authorities we need without setting the world on fire, and if we set the world on fire, it’ll be too late [laughter] by the time we get the authorities we need. So we tried to walk this tightrope all summer long. And it sort of left this sense of mystery out there—that, well, maybe there is something in Hank’s back pocket. Maybe there’s another bazooka that can save Lehman at the last minute.

And so going into that meeting, it was—We needed to make it really clear, like, we’re not hiding something. There’s not something that we just didn’t tell you we could do. Because you were getting all these phone calls of, “Surely, there’s something. There’s something.” And we finally had to, like, face the reality of what we tried not to say all summer long. We had to tell people there was nothing that we could do that day. As you said, even the next day, we didn’t want to say, “Yes, we couldn’t have saved it. We didn’t have the powers because we weren’t ready to go ask for them.”

And Hank, I recall on that weekend you reported to the President that you thought there was one potential buyer in Barclays. And you came close. But ultimately, as much pressure as we could put on the U.K. government, they basically prevented Barclays from making the purchase.

Yes. So the U.K. government—At the time, I was angry at the U.K. government. I look back on it, I understand why. Barclays would have had to have been able to guarantee the assets during the shareholder vote. The U.K. government wasn’t willing to let them do that. It was just a—It was a tough situation. And you’re right; the political mood in Washington was, Don’t do it. Every call I had. I can’t tell you—I’m not going to name all the Senators that called me and said, “Please try to help Lehman. Dick Fuld’s a friend of mine. But whatever you do, don’t do a bailout.” [laughter] Or Chuck [Charles] Schumer was really beautiful: “Find a buyer, but make sure it’s not a foreign buyer, because I want to keep the jobs in New York.” [laughter]

So there’s no doubt that that’s where the political sentiment was. And Barney Frank made a joke, you know, afterward. He said—Lehman went down—“Monday was free-market day, right?” [laughter] And then Tuesday we bailed out AIG. And I understand—I’ve become sort of resigned to this point. Because unless someone was there—and unless you understand markets—to try to explain what I explained—about why a loan might work in one situation and why the Fed might be able to make a loan in one situation—And we had a—I think the easiest explanation was we had a buyer for Bear Stearns; we didn’t have a buyer for Lehman; and AIG was an insurance company that had a holding company on top of insurance companies, which were perceived to be good collateral, so it was perceived to have a viable business at the time we did this.

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Was there any thought given to asking the President to call the British Prime Minister as an intervention in the Barclays possibility?

We didn’t. We gave thought to the President to make a number of other international calls. That wouldn’t have made any difference. We knew the Prime Minister very well. Alistair Darling, who was the Chancellor of the Exchequer, was talking regularly with Gordon [Brown]. And the British did something which I think was not irrational from their standpoint. In other words, Barclays—You know, as I look at it now—At the time, Barclays was the only port in the storm. You know, B of A [Bank of America] wasn’t interested. Lehman had been all around the world. Everyone had looked under their hood, you know? And they hadn’t liked what they’d seen. So that’s why the—

It’s almost laughable that people are thinking that—Now it’s—Someone’s come up and said—Some economist has said, “Yes, I’ve studied it, and guess what? It was solvent.” So they had been around the world. Barclays didn’t have—It’s not like Barclays was particularly well capitalized themselves. And so if you’re looking at a financial system in the U.K. and you’re saying, “Do we want Barclays to take on Lehman in the middle of the crisis and guarantee all of those liabilities?” that wasn’t an irrational decision.

Matter of fact, when I made the last call—So, the very last call on that Sunday was from me to Alistair Darling. Chris [Christopher] Cox had talked with his counterpart. Tim Geithner had had numerous calls with the regulators he was dealing with. So I called Alistair Darling. And Alistair Darling—I mean, he was so far away from that. He wanted to know what we were going to do to protect them in the U.K. from the Lehman situation. I mean, he was—You know, it was just like he was in a different universe, the idea of somehow being persuaded. So this was, I think, a political decision that had gone up to the top and—in the U.K.

The only unfortunate thing, though, Hank—I think you’d agree—it happened at the last possible moment. So, like, that decision on that Sunday—

Yes.

—was that—There was a genuine thought that it might occur.

Oh, you’re right. That—

And so at that moment, then, the—

We felt misled.

Right.

And I felt greatly misled. Because we went to bed—We went to bed Saturday night, right—

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I came in first in the morning. We’re giving—We’re not quite at high-fives, but we’re almost—

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—you know, we’re saying we’ve done it.

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And it’s a little fuzzy, but what—There had been, like, different options that were being considered, and then everything had narrowed to that as the likely outcome, and then that fell apart, right?

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So I’m hearing two different things—

And Lehman was in disarray. Dick Fuld wasn’t part of any of this. The board had sort of taken him out of it. He was his office lobbing calls into us to try and find out what was happening. And you could imagine just how disconcerting that would be with any CEO having—I mean, my heart went out to the guy. That’s—I felt nothing but empathy for Dick. And matter of fact, the last time I called him was a couple weeks afterward—where he was calling and saying, “My God, I’m going to get blamed for all this, and I’m going to be sued.” And, “Please tell people I’m a good guy and I tried hard to save my company.” And I said, “Of course. I know that this is the last thing in the world you wanted to happen.” But—So this happened as—You know, I think, REDACTEDTEXT, that’s a very important part. It happened at the last minute.

But it’s only when I reflect and look back on it now that we had—We had known we didn’t have the necessary authorities from March. We developed different plans—contingency plans—to go to Congress, break the glass, and so on. We had no chance of going to Congress and getting the authorities. Only the President could make that decision. And the idea of going up there and saying, “We have a disaster on our hands,” and not getting them would have precipitated that which we—what we wanted to avoid. So we were pulling rabbits out of the hat. But even if we had pulled a rabbit out of the hat there—You know, if Barclays had done it, then Barclays would have teetered. And this would have done nothing to fix WaMu, to fix Citi, to fix Wachovia, to show—At the end of the day, we needed fiscal authorities. The Fed was equipped with liquidity authorities and some emergency authorities—temporary emergency authorities to guarantee liabilities or inject capital, if—you know, in an emergency, if—to avert a disorderly failure.

There may be—

Can I—

I’m sorry. Go ahead, Josh.

Can I just put one political gloss on this? And Hank, check my recollection on it—but Hank was using me as his intermediary to get to the President on, you know, at any hour, on the weekends, and so on. And we went into that weekend and several others—Hank, I think I have our understanding right, which was that in order for you to commit the government to anything, you needed the President’s approval.

Right.

If you were not going to do anything, you didn’t need the President’s approval; you did need to brief him at some point.

Right.

But you were not empowered to take any action that committed the Federal government—

Right. But I—

—unless you talked to the President.

That’s 100 percent certain. You’re right. But I also was 100 percent certain, if we had come to him and said, “We need to do it and we want to put in capital,” he would have said yes.

He would have said yes, but I recall we did not get the call—

I know. You didn’t get the call. And I had to call and explain. And that was—That’s Michele’s point. It was just a—It was such a relief that I never had to worry about, Will the President pull the rug out from under us? So we were working full time. I remember very well the calls I made on that Sunday. And some people—in Europe and elsewhere—were unhappy that I hadn’t gotten to them. I remember Christine Lagarde complained publicly after the fact that we hadn’t told her. Well, you know, she was—It was the middle of the night; she was asleep. Because we actually thought we had saved Lehman. But I remember having to get on the phone and call Members of Congress—calling first the President—talking to you and then the President and then talking with Mike [Michael] Bloomberg and talking with the leaders on both sides of the aisle. The Republicans’ conversations were very easy. They were, by God, were pleased. And the Democrats didn’t say much. They wanted to see which way the wind was blowing.

I guess because there’s now ten years out, this controversy over, was the Lehman situation treated rightly or not? I’d love it if you could address what I heard, some apparent contradictions. Secretary Paulson indicates that Barclays would have been crazy to acquire Lehman—

Oh, I didn’t say they’d—I just said it was not an irrational decision for them to have made.

OK. But—

For the regulators to have made.

For regulators to have made.

They came very close to making a deal. REDACTEDTEXT

Yes, they wanted to make the deal, I believe.

Right. But the regulators—

Regulators didn’t.

—didn’t.

Again, I’m wondering, was there a missing element here—that the deal could have happened with maybe one more—

No.

—straw on the pile of hay, and that would have been a call from the President?

No.

No?

Absolutely not. I would say that—I would say this: I think that I was—I had helped introduce the President to Gordon Brown. I knew Gordon Brown very, very well. And that—Gordon Brown was all over this. And the President of the United States asking him to have Barclays do that? There’s no way. And I would have done that in a minute if I thought it would have made any difference. But they were in a totally—

Alistair Darling and Gordon were like this. [gesture of togetherness] I had talked with them repeatedly during the crisis. When Gordon Brown went to see the President during the summer and wanted to talk about the crisis, the President sent him over to spend time with me. So I’m just certain that that was a decision that was made, and it was made because they were doing something that they felt was in their best interest. And I don’t think you get someone—even if you’re a head of state—you get someone, another head of state—to do something that they don’t believe is in their best interest.

And Alistair Darling’s been quoted a bunch of times, even in the last couple of weeks, saying they were already arms-deep in trying to figure out how to deal with the problems they already had. And this would have just made it worse.

The President—We lined up the President to make other calls. And we had him all ready to make the call to Hu Jintao, who was the President of China, on Morgan Stanley, if we thought that would have made a difference. And we were very close, and then the Chinese pulled back, and we were told that then it was pointless to make the call. As I said, I intervened—under David’s good work—with the Finance Minister of Japan on Morgan Stanley. But no, there was nothing—I’m totally convinced, there was nothing the President could have done on Lehman.

I was just going to say, Bob, before we leave this—and we have several, obviously, other questions to ask, to move beyond—But before we move beyond, in looking ahead to how history will look back on this era and this particular nadir of the crisis, I know that something that I turn to as a layperson in this field is the Frontline—I think it was made in 2012—called “Meltdown.” And that piece—that one-hour documentary on the meltdown—is done in layperson’s terms.

One of the things that they focus on is the label of the time of “moral hazard,” which I think by its definition is very easily comprehended by people, the view of if you reward bad behavior, people will engage in bad behavior if there’s no penalty for it. So to look ahead to Bob’s question, always, when people look back on this time, no doubt, people will be looking at that documentary, which will last forever online or whatever the technology is. So I just wanted to put that out, for those of you who were thinking about that term. Were you thinking about the term once it was introduced? And how do you see it now?

Well, I would say regulators think about moral hazard all the time. I’m a big believer in moral hazard, because it just—In lay terms, what “moral hazard” means to me is this: no matter how good regulation is, you never are going to be able to rely on regulation alone to prevent crises. And what it takes is to have all market participants being vigilant, to have skin in the game. So you want every counterparty, every creditor, every customer, every shareholder to be all over, looking at an institution, and to be vigilant. Because if the government steps in and bails out institutions when they’re not systemically important, you really create a moral hazard. And so I understand that.

I just would say to you that in the panic we had, moral hazard was not something that we were worried about in the case of Bear Stearns. Because in Bear Stearns, we really had the beginnings of a panic. And it’s not like investors weren’t already scared to death. They were already concerned. Bear Stearns—There’s no way we would have had the government intervene with Bear Stearns if the crisis had happened during anything like normal market conditions. That you could—There’s no institution that’s too big to wind down, but during a crisis, almost any one of size or the degree of complexity and interconnectedness of Bear Stearns can’t be wound down quickly without doing damage to the financial system.

So I tried to answer that question in the context of Bear Stearns and what we were dealing with. Because the context is what matters. And people were scared to death. I have no doubt that—What happens is, the hedge funds, when they were on Bear Stearns, they would bet that the shares were going to drop; they were going to bet that the credit spreads were going to widen. If Bear Stearns were to go down—They’re just like a pack of wolves—they’re on the next investment bank, making that same bet, if you let them win.

So what I said earlier is that I firmly believe we would have accelerated everything. But the difference is, don’t downplay the importance of the fact that Fannie and Freddie were nationalized when Lehman went down. I could only imagine how bad it would have been if Fannie or Freddie were unstable and Lehman had failed before we had nationalized Fannie or Freddie. So I think we benefited from having the extra time, and that moral hazard didn’t apply here—although I’m a big believer in moral hazard.

Can I make one quick comment about the moral hazard point? This goes to one of the principles that—Hank, you’ll recall the President saying he held no brief for Wall Street executives or for the shareholders of those firms.

Right.

And he was always asking, “What happens to the—Are we doing this intervention, guarantee, injection to protect the shareholders or the system?” And the answer was, the system. It bears repeating in all of this—That is lost on much of the public—that where—even where the rescues worked, the shareholders were either wiped out or very badly damaged.

Oh, and that’s a huge, huge point. And people—with Fannie or Freddie, we wiped out the shareholders, fired the CEOs, they lost their parachute. AIG, look what happened to the shareholders there, replace the CEO. Look what happened—

Bear Stearns, same.

Bear Stearns. So the fact is, no one was—But it still doesn’t—And Bear Stearns, I don’t think anyone was looking and saying, “Wow.” You know, Bear Stearns’s shares had been over 100, not—Remember, the deal was done at 10. I’m not saying—I don’t believe a lot of those investors are saying, “Wow, we have to be—We can invest in anything we want to invest in, because the government’s going to come in and save us.” [laughter] It just is—You know, these documentaries are so misleading sometimes. But this is a complex area.

Well, it would even cut the other way in the sense that the ability to raise capital from outside investors was somewhat impaired by the fact that they were worried that if the government did intervene that they’d lose their equity value. And so in the end, with the Mitsubishi thing just as an example, the invest—The Japanese were most worried about government intervention after the fact that then would diminish their equity value. And so that was the balancing act of trying to institute programs and policies that wouldn’t introduce the notion of moral hazard, but at the same time not be so punitive, or be designed in such a way that it would still encourage outside investors, which is ultimately what the programs did and ultimately why Mitsubishi came in to Morgan Stanley—in which Morgan Stanley could have been the next Lehman had that not happened.

Well, so this goes back to the communications point. In my own experience, you can have a conversation with someone and say, “You know, that March of 2008 wasn’t a happy time to be a Bear Stearns shareholder or executive,” and that’s a point typically they’ve never heard before. And so the question is, was there any hope of a communications strategy that would have said, “This was not a very happy event for them. It was good for the economy; not good for Bear Stearns.”

There was just too much happening at one time. Yes, I mean, we said that, but then we said 18,000 other things at the same time, because so many things were happening at once. [laughter]

And that really wasn’t the message we were trying to get across, because we were trying to increase confidence in our—and that’s David’s point—in our banks and investment banks. Part of the problem we had all the way along was that this whole conversation starts, basically, “Could you have done some earlier?” Then we go to Bear Stearns.

The fact is, we were working literally around the clock from August of 2007 onward. Months ahead of Bear Stearns, we had had three major financial institutions teetering—literally. Citigroup and Merrill Lynch replaced their CEOs, raised equity in what was considered to be very concessionary terms from the Middle East and from Asia. Morgan Stanley—John Mack kept his job; he fired his COO [chief operating officer]. And they brought in someone to come in on very concessionary terms. So investors were scared. There were no CEOs that wanted to raise common equity. When we said, “You’ve got to raise common equity,” they’d say, “Well, that’s going to be putting the scarlet ‘A’ on us. People are going to think we’re vulnerable.” I remember Wachovia explaining to me, “We will raise preferred, but we can’t raise common, because people may think we have the Citigroup disease—or the Merrill Lynch or the Morgan Stanley disease.”

So we were trying to persuade people to raise capital and trying to make investors comfortable with investing in these institutions, so we weren’t looking to stand up and say, “Boy, look how we crushed the investors on Bear Stearns.” But the story, which is recounted in the book, was, I probably injected myself too far into that negotiation, because I insisted early on that if the government was putting in some money, that the shareholders should get very little. So the initial JPMorgan bid was $2 a share, and the deal wasn’t going to get done. And then we all said, “Well, listen. We’re trying to save the economy, so it’s $10 a share.” So I was aware of moral hazard, but it certainly wasn’t the driver.

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The very word “authorities” brings me to at last my final question, which harkens back to some of the opening comments of the first session, and it refers to lessons. Here we are ten years later, and there’s been quite a vigorous discussion over the ten years about independent agencies and their discretion or the constraints on them. And, you know, Paul Volcker said that the interventions in this time period went out to the extreme boundaries of Congressional authority; the Tea Party said, way, way, way extended beyond authority; and of course critics on the left end of the political spectrum either said there should have been much more activism or the interventions weren’t tough enough on some of the affected parties. So I guess the question would be, how did this period of time shape your thinking about the authority, the legitimacy, granted to independent agencies—speaking particularly of those agencies dealing with the financial sector, but it could be with any aspect of government?

Well, I have one comment, which I think most of the people around the table would agree with. At the moment when you were staring into the abyss, the idea that we’d be sitting here ten years later and have the economy we have, the financial institutions and infrastructure we have, the absence of all the worst fears—that in and of itself is the headline, I think. [laughter] That’s the big picture. And then there’s a set of secondary questions about how we can avoid this and how people—And I think that it’s important that the headline doesn’t get lost, because if you believe—I think as we all believed at the time—that the consequences of not acting were so severe—If you believe that, and I think there’s lots of reasons to believe that, and then you step back and look at how those interventions—the Federal Reserve, Treasury, all the different authorities—have led to the set of outcomes that we’ve had across administrations, I think that’s the headline, and then you start to ask a set of subsequent questions. But I wouldn’t want that synthesis to get lost in the way you’re asking the question.

So I think that’s a valuable comment in response. So the United Kingdom has moved toward integrating its financial regulatory authorities in the ten years since. [The] Dodd-Frank [Wall Street Reform and Consumer Protection Act] has constrained the Fed to a larger degree—out of some concern for this overreach of the power and authorities of an independent agency.

The U.K. really adopted the model which we recommended. And when we laid that out in a speech in London in July, we had Mervyn King basically applaud what it was—David’s work. And so we think their model is a rational model. I would just come back and say that—and second David’s point. And we all have a conference at [the] Brookings [Institution] tomorrow, where there’ll be a number of charts and so on on the outcomes that basically show how much quicker we came back from this than other countries have come back from anything that’s like a comparable event, or how much quicker we came back than the Europeans because of our—You know, when something happens in the United States, we shine a light on it very brightly; we move quickly. You know, we recapitalized our banking system; we did a number of things that they didn’t do.

And so we can—The one area that I know you wouldn’t have unanimity around the table on is how are we set in terms of authorities going forward? You saw the—maybe you did or you didn’t—the op-ed that Ben Bernanke and Tim Geithner and I had yesterday. So I don’t think any of us believe the political system is going to work to give additional authorities right now. We think that the most important lesson is for people to just remember what we went through, and to make sure that they don’t take away the authorities that exist today, and to recognize how important capital is and how undercapitalized our banking system was.

Now maybe because even ten years later I still suffer from a bit of recency, I would like to have regulators armed with the tools necessary to put out a fire. You know, there’s an analogy that one of the guys who worked with Tim Geithner at his Treasury coined: when there’s a fire, you don’t want to have to go to Congress and get the fire engine, right, [laughter] and have them authorize the fire engine. And, you know, that’s a simplistic analogy, but in many ways, we felt like that’s what we had to do.

And so when I look at some of the tools that we used—like, for instance, take Bear Stearns. The Fed’s ability to make a loan under their emergency—Section] 13(3) loan—has been taken away on an individual basis. They would have to declare a systemic emergency and be able to make that broadly. I’m not sure the Fed was prepared to do that at the time Bear Stearns went down. You know, I felt we were looking into the abyss when the money market funds were melting down. And they were the source of commercial paper funding for so many of the big companies. And we used the Exchange Stabilization Fund to guarantee the money markets. Congress took that away.

I think one of the most valuable things that was done that gets the least publicity—and what was in some ways, for people that want free markets was, the biggest distortion was the FDIC [Federal Deposit Insurance Corporation] stepping in and guaranteeing the unsecured liabilities of bank holding companies throughout the system. That is gone with Dodd-Frank. There is the tool that we really wish we had had, the Orderly Liquidation Authorities. REDACTEDTEXT REDACTEDTEXT REDACTEDTEXT REDACTEDTEXT My view is this: that the presumption of that is they can be wound down without any government money. That’s the presumption. And I think that works in most cases. But I think one of the lessons of the crisis is, when you’re in a severe panic, that it takes government money to put out the fire. So I think the authorities probably are there if—if they’re twisted to work against Congressional intent. So I think a lot of that will depend on who’s sitting in the seat and how they use the authorities.

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And could I pause? We are coming toward the end of this session. We might want to open the next session to answer the Secretary’s question to you two. But thank you so much for this post-lunch—Those of us who teach know that it’s always difficult to teach in the post-lunch hour, and you all did such a great job. Thank you so much. And we’ll maybe take just a quick break, Russell, and then come back for our third and final session. Would that be all right?

Yes, perfect.

OK. Thank you.

[BREAK]

Session 3

Thanks to you all for coming back. I know we’ve got a hard stop at 4:15, so I want to start with REDACTEDTEXT. David McCormick was good enough to fly down, and he’s got to go back to New York and leave in just a few minutes, and I wanted to come back to him to say a few words about the international relations dimension. REDACTEDTEXT REDACTEDTEXT REDACTEDTEXT—Go ahead.

Great. So I’m a little bit of a broken record, but I just wanted to—I was just talking to Secretary Paulson about it at the break, and it would be interesting for you to draw others into this at some point, but I want to reinforce the point that at the ten-year point we can sit here and calmly have the conversation that we’re having now because everything has worked out far better than I think anyone would have expected. And I bet if you went back and asked everybody here about what were your expectations around where we would be from a stock market perspective or from an economy or unemployment or foreclosures or home ownership—every dimension—At least from my view, it’s a ten out of ten. And so as you reflect on this, it’s all around the margin of things that might have done better and how to avoid it in the future, because the outcomes are indisputably, at least in my view, great relative to what they might have been had Hank and Ben and then the President and others operated differently than they had.

On the international front, I’d say so much of the big work was done by others; I don’t want to overstate the importance of the international. But I do think there’s a couple of key points that Hank can elaborate on, and others. But that same weekend—I was going through your timeline and I was stunned by how much of everything was compressed into, like, two weeks, from mid-September to mid-October, and I couldn’t imagine all those things could have happened in that time frame. But the one big thing that happened was, a number of the policies that REDACTEDTEXT REDACTEDTEXT others were developing with Hank and the policies the international people were thinking about all converged, leading up to a big meeting in Washington on October 10th, which was the G7 [Group of Seven] meeting. And Secretary Paulson had been working with the U.S. team to come forward with a whole set of policy responses. And others around the world were really looking for U.S. leadership. And there was this pretty seminal meeting, from an international perspective, where we were trying to keep everybody in line.

These arcane statements take days of negotiation in advance, and there was this huge, long statement—and Michele may remember it. I brought it to Hank early in the morning of the 10th. And we all hated it. It was this huge, elaborate thing—“We will do this”—in paragraphs of text. And we got into this meeting—and these meetings are never really honest about what people are thinking—and this was an incredibly honest meeting, where everybody just sort of went at it and talked about what was going on, their politics, the German Finance Minister and how we were responding, and, you know, a little bit of finger pointing. And it was a very healthy, cathartic kind of meeting. And then Hank had some talking points that we had worked together on to elaborate. And we looked at the talking points and Hank said, “Why don’t we just make the statement the talking points?” There were, like, five talking points. And so we wrote up the talking points and it was, like, a paragraph. I ran it past Hank. He said, “OK, that’s good.”

We went outside with all the deputies, and then that became the statement. In the history of these meetings, it was probably the shortest statement ever. But it essentially said, “We’re going to all operate together on these five priorities,” which was around propping up our financial institutions and standing behind them and stimulus and a number of other things. And then that became on the international side, a little bit of a rallying cry. And then everything that followed over the next couple of days was described within the context of this common agreement. And then that became the basis for the engagement outside the G7 to the emerging markets and China.

And one of the big takeaways from all this was that this: The group that was working on the world economy prior to this was no longer the right group, and that the real group should include China and Brazil. And Secretary Paulson was very strong on that and went and talked to the President about it. The President agreed. And then that became the basis for the President reaching out to President Hu and others, and then that sort of brought the whole global community together under President Bush’s leadership and the world leaders in November. So it all happened in the course of, I guess, 30 days or something like that.

Yes, I mean, today, everybody treats the G20 [Group of 20] leader-level meeting as though it’s always been there.

Right.

It wasn’t there in 2008, and it got stitched together by David and a few others in a matter of just a few weeks.

Terrific.

Now Hank, do you want to say anything?

No, I would just say about the statement that came out at the G20, we couldn’t have come up with that statement until we got the TARP. And after the TARP vote, the market continued to deteriorate. And so when we had that G20 meeting—

G7.

—excuse me, the G7 meeting, there was chaos, really, all around the world leading into that meeting. And seven European nations had stepped in to bail out their banks. There were beggar-thy-neighbor policies. It was really a brutal time. In the statement—You know, I don’t have it right in front of me, but—there were five points. One, we were going to do whatever it took to keep systemically important things from failing. We were going to be prepared to put capital into banks if necessary. We were going to do things to help homeowners, provide liquidity in the markets, protect savers. So there were basic principles.

The other thing I would say about the G20—which I think is important for President Bush’s legacy—because oftentimes this gets confused and people think that President Obama set up the inaugural G20: This was very much in contention in terms of what group you were going to get together. Sarkozy and all the Brits, with the exception of Gordon Brown, wanted just to have it be the Europeans and the U.S. But the President recognized that this was a global economy now, and that big parts of the economy were taking place outside of the U.S.—that’s where a lot of the economic growth was coming from—and that the G20 was a route to go. And the question was, how could you have this, and were people going to support markets and really going to support market forces? And how would the Chinese behave? Et cetera. And those questions were all resolved positively.

And the last point, I would say, was, the Europeans not only wanted to have it be a smaller group; they wanted to hold the meeting at Wall Street, because they wanted to go there to—They wanted to blame the U.S. for it. And so Sarkozy was making the point very strongly to President Bush that they should go to Wall Street, and of course, wouldn’t that play beautiful to their political audience?

And this is, ironically—What happened was, the South Koreans and the Australians, the Brazilians—in many ways, we were more aligned with them than the Europeans. And so the whole thing actually took shape in a way that it gave the President and Secretary Paulson a big chance to sort of shape the outcome. It looks all smooth and easy in retrospect, if you go to the outcome. What happened is, all of that chaos got channeled, and it looked like the world was responding together, in unison—which, had it not been the case, it could have been much more disruptive.

But the other thing the President insisted on—which we loved, and it gets to the point that Josh made and a point that Michele made—When Sarkozy came to see him, and the President insisted on seeing him at Camp David, where it could be done quietly, he wanted to get the world leaders together right away to solve the problem. And the President said, “Wait a minute. We should be working through our experts, and when the experts agree, we should get together. But let’s not have a bunch of world leaders sitting around arguing about what we should be doing. Let’s solve it first.” And Sarkozy looked across the table at me and said, “Our experts are the ones that caused the problem.” [laughter] I still remember that. But with the President—The President held firm.

And you asked the political question. He also believed it should happen as soon as possible after the election, but it should happen after the election, not before. He wanted to take politics out of it. He was thinking about that the whole time. So we got together in Washington right after the election—I think it was, like, November 15th or something like that. And so again, the President had a really good sense of what was appropriate.

Terrific.

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I’m going to come back to him with this question. One of the things that we’re always concerned about when we’re doing oral history interviews is, what are these people good sources about? And those of you who worked with Hank Paulson are good sources about Hank Paulson. We’ve heard a lot from Hank and we’ve read his book, but what I’d like to know from you is, what were the attributes of the Treasury Secretary at the time that were instrumental in getting us from point A to point B? What was it you can tell us about his leadership style and about his personal traits and temperament during this time? We talked about President Bush, but it would be useful to know—both on Paulson and then if you’ve got some thoughts about your working relationships with Geithner and Bernanke, as well, that could be helpful.

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[laughter] The endless cycles of phone calls that we all sat through a lot. But that is part of what builds that loyalty and trust—and that makes you feel part of the solution and so engaged in such a cohesive team. And to be able to speak in a way that gave confidence to markets or gave a little bit more confidence to markets, you have to have the credibility and the trust of the people that you’re trying to reach. And he had that not because of some reputation, but because people felt like they knew who he was. And whether it was leaders on the Hill, people on Wall Street, people across the administration, they all felt like they knew you. And that was hard, because when you first got there, you didn’t know anybody. And you made a humongous effort to get to know everyone in town. And it was very purposeful. That relationship building and that over communication gave you the platform to do what you did.

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Josh, can I ask you from the White House Chief of Staff perspective what, in terms of traits and personal temperaments, engendered such confidence from the President?

All of the above. Completely agree with everything that REDACTEDTEXT and Michele have said. And those were the qualities that the President was looking for in his Treasury Secretary, which is why I recruited Hank as one of my first acts when I became Chief of Staff in early 2006, and why I didn’t take no for an answer twice.

Terrific.

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And another thing you did, which—you know, and I trusted you as a key to why I made the decision to go—was, you recognized that I needed to build a relationship with the President, and you also recognized that I’m an acquired taste. [laughter] You know, it takes a while for someone to get comfortable, so you—When we had meetings, the first meetings, my private time with the President, I looked around and there was, like, me and 12 other people in there, and you figured out how to have meetings with just the President and me and—or the three of us together—and put me in situations where I had a chance to build that relationship with him before the crisis hit.

Was the proximity of the Treasury to the White House an advantage in this instance?

Yes. I don’t think it’s a big thing. I mean, the Treasury Secretary can get from A to B pretty damn fast no matter where he is, but—yes, it helped. It helped that Hank was able to just to pop over. And during the financial crisis, he did. He would call and say, “I need to see the President,” and I’d say, “Ten minutes,” and he’d be there in five. [laughter]

Can we turn back to the role of the White House in the middle of a campaign and its—You had mentioned earlier that the President had made a decision to stay out of the Presidential election. And yet, one of the most well-publicized and most interesting developments—I thought, anyway—was this meeting between the candidates, Obama and McCain, at the White House. Can you speak a little bit more about how that came about—

Yes.

—what the objectives were and—

Dan Meyer, you had the date. It was September—

Twenty-fifth. It was the Thursday after the first meeting up in Pelosi’s office. Yes, it was the week after—one week to the day.

September 25th. Our efforts to get TARP passed were going poorly. I think, going back a couple of days from there to the day that Senator McCain announced that he would be suspending his campaign to come to Washington and help resolve the impasse on the financial crisis, I believe we were preparing the President to make an address to the nation—that this was the counterpoint to Hank’s calming the markets. It was the President’s job to try to calm the public and make the Main Street point that Michele was talking about. So it was a fairly important address.

And I remember being in the family theater in the East Wing of the White House—It’s a small place where maybe 30 people can watch a movie, but we used it periodically to practice for public-speaking events, and the President was there going over the speech. And my Blackberry went off, and it was a message from McCain’s campaign manager, Rick Davis [Jr.], who wanted to reach me urgently. And the President personally also was getting pinged, saying that McCain wanted to reach the President urgently. And we didn’t—We figured it can’t be that urgent, and we finished our preparation, probably another 15 or 20 minutes. I went back to my office to—the President and I compared notes and assumed that they were calling us about the same thing, and I said, “Well, I’ll go take my call. You can decide whether you want to take yours.” And we had had almost no communication with the McCain campaign during the course of the campaign, which was by design. The McCain campaign, as I said before, was basically running against President Bush, as was Senator Obama, and the President got that, and he knew that he would not have—He was preoccupied with noncampaign activities, and he knew he wouldn’t help McCain particularly by getting deeply involved. So I think it was only the second time I had ever spoken with Rick Davis. But he called to tell me that Senator McCain was at that moment headed to the press cameras and microphones to announce that he was suspending his campaign and was calling on Senator Obama to do the same, with the purpose of ending the chaos, bringing the country together, and so on—to resolve the political impasse over what needed to be done to resolve the crisis. And in particular, the impasse we were facing was over our request for—I guess at that point it was up to $700 billion—money for the TARP.

I immediately spotted this as a bad idea, because I could not figure out what the end game was. I thought we were making pretty good progress in bringing Republicans along, who were the bigger problem, and making sure that it did not become political so that Republicans and Democrats would split and make it harder to get the TARP. And so we—Hank had worked very hard; we had worked very hard not to make the TARP a not political issue, and here was McCain making it the centerpiece of the campaign all of a sudden. And I said, “This will not—I do not believe this will help us.” And he said, “Well, it’s too late. We’re doing it.” And I said, “What do you expect the outcome to be?” And Davis did not know. In other words, they were in full tactical mode. They were flailing as a campaign. They were—Just as they had with Sarah Palin as the Vice Presidential nominee, they were calling Hail Marys in the huddle. And it was clear to me that this was a Hail Mary, where this was just a bold, maverick kind of move—McCain’s signature—to try to shake things up and take him off of the defensive on the financial crisis.

I was unable—obviously unable—to dissuade Rick Davis from doing it. I walked down to the Oval Office to see the President, and the President—The first thing he said to me was that, “This is the stupidest idea I’ve ever heard.” [laughter] And he said it in a way that, you know, “So we’re not going to do the meeting.” And I said, “I don’t know how we can not do the meeting.” [laughter] If the Republican Presidential nominee announces that he wants to suspend his campaign and come help, I don’t know how we can say, “No, we’ve got this all in hand”—because we didn’t—and refuse his help, risk a further schism that Hank had been working hard to avoid with McCain. And I felt like we were basically cornered into having a meeting that, to me, made no sense at all. And in the end, it made no sense at all. [laughter] And I’ll let others discuss it, but it turned out—It ended up being what, in my eight years in the White House, was by far the most horrifying meeting I’ve participated in. [laughter]

And you called—and I still remember, I was sitting next to Michele, and we were with Ben Bernanke and Michelle Smith—the four of us. And there was a break in the hearings for the House.

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REDACTEDTEXT And so I said to Josh—I said, “You can’t let him do it. You can’t let him do it.” And he said, “How do we prevent it?” Because we were—We really felt we about had this thing coming together. And he said, “We can’t prevent it, and it’s going to happen.” And it was just stunning to me, because I said, We’re just about there and I just can’t believe it’s happening.

Before you get to the meeting, I’m going to just tell one other story. I get to Lindsey Graham. Lindsey said, you know, “I’m going to be there with him. I’ll do everything I can, but I can’t stop this. It’s his campaign, people. It’s going to happen.” So next thing I hear is—You know, we’re coming close to getting an agreement and the Senators—this is on the 25th when we met, so the—

Hank, can I pause you there and go back for one vignette?

Yes.

Which is, I then had to call Senator Obama’s campaign manager, [laughter] who—By that time, McCain had announced—

Yes.

—I had to call him and invite him to a meeting that we did not want. [laughter] And it was David Plouffe, whom I had never spoken with. And he was furious. And he was convinced that it was some kind of trick or plot that we had cooked up with McCain—that we were colluding with McCain to shake up what was an election trending their way. And I said, “Trust me. We have not colluded at any point in this campaign.”

There is no collusion. [laughter].

There is no collusion. And I don’t know whether I persuaded him, but one interesting thing they were worried about—or that they were mad about—was that they suspected that McCain was pulling this ploy in order not—

To get out of the debate.

—in order not to have a debate. And I said, “OK. We’re going to—It’s probably in our interest, as well, to get this meeting out of the way fast. We’re going to have this meeting on the first available date”—which I think was only two days later.

The debate was scheduled for the 26th.

OK. And so we had the meeting on the 25th.

On the 25th.

I said, “We will have this meeting before the debate, so it’s not an excuse not to participate in the debate.” And they sort of—He said, “Well, you know, I guess we have to participate, too.” So they were—[sound of siren] They were in a similar kind of corner as we.

So there’s a light flashing there, but I’ll go on. [laughter] I wasn’t there, but I had heard from Judd Gregg that the Senate—Republican Senators are having their regularly scheduled lunch, and they’re coming together on support. And John McCain comes into the room and basically says to them, “Anything any of you agree to makes no difference to me. I’m the leader of the party; I’m going to decide. You can’t agree to anything without me”—and [claps hands] marches out of the—that’s a paraphrase—and marches out of the meeting. And so I am now—anxiety level is really high. And so this is the day we’re going to have the meeting.

And so I called John McCain on the phone and I had a conversation with him like I’ve never had with anyone before, where I left—I let it all hang out. As did he. I basically said, “You’re the Presidential candidate. I’m just a lowly Treasury Secretary. But if you kill this deal, I’m going to go public and say you’re taking—It’s on you, and you’re taking the economy down with you.” I was only able to make that—and I think this will be held for a long time, but I think I also said to him, “And Ben Bernanke will do the same thing.” [laughter]

And so then I went over to see the President, because this was going to be a meeting where—It was a bicameral meeting in the Cabinet Room, but the first was just going to be with the Republican leadership and the President ahead of this. And I went over—and I still remember, it was his dining room, and there was a door that goes outside to the garden. And he had a cigar in his mouth. He wasn’t smoking, but he was chewing on it. And I went through with him in more detail what the conversation was with McCain than I’ll ever go through for anyone else, so—but so I went through in gory detail what the back-and-forth was with McCain. And I saw a smile come over [laughter] his face. So he actually—I didn’t think much was funny at that time. I was really beside myself.

And so then we went to the Oval. And it was a hard meeting, because your heart had to go out for John Boehner, right? Dan, you remember—

Yes, he was in a bad spot.

He went to say what—He just kept saying—Right?

Yes. So the context of this meeting, from my perspective—The really—Kind of the legislative phase of this kicked off—again, from my perspective—at that meeting on September 18th in the Roosevelt. The President says, “Go meet with the leadership.” We called up—I talked to Pelosi’s chief. “Can you host a meeting?” We did a bipartisan, bicameral meeting that night in her conference room that Hank and Bernanke came to. And we had the relevant Banking Committee leaders from both bodies—

No, Bernanke wasn’t there.

On that Thursday night meeting?

The night we asked for TARP authority.

What?

I’m talking about Thursday night.

He’s talking about the night we asked for TARP authority.

The first meeting.

Oh, the TARP authority. Oh, yes. TARP authority. I was thinking about the—

But my point was, [Christopher] Dodd went out of that meeting saying that’s the scariest meeting—

Right.

—he’d ever been involved with in his 30 years in Congress. You know, Hank and Ben Bernanke and others laid out the consequences if we didn’t act quickly. So basically our charge was—that they basically gave to you—was send us some legislation as quickly as possible. So that’s Thursday. Now we move—Sunday night—There’s negotiations going on all weekend. You’re all working on this. The legislation gets sent up Sunday, which is about three pages long—to which, you know, I jokingly say, “Send us $700 billion and don’t ask any questions.” It wasn’t a lot more than that. And so of course there’s a hue and cry—“Well, we’re not going to do that, but—” So then there’s a lot more conversations—

My story on that—and I’m sticking to it, because it’s true—was, Dodd said, “Don’t give us a fait accompli. Work with us on it.”

Yes.

So that’s what he said.

Exactly.

So we sent him an outline, and then he said, “Oh, look what they did. They want $700 billion with no accountability.”

That’s right. Now we go to Monday, Tuesday, Wednesday—and Josh has gotten this call. And there’s hearings going on that are being thrown together. Again, the context I want to establish here is, almost every meeting we’re in on this—and you can read it on Hank’s face, you can read on the President’s face—is, We have to get this done really fast, or the economy’s going to fail; the economic system worldwide is going to collapse. That’s kind of the context of every meeting. And so it’s like, Holy crap, you know? So people aren’t sleeping; they’re working through the night. We’re trying to get all of this done.

And I still remember, I was up in the Vice President’s office on the Senate side, which the Leg Affairs [Legislative Affairs] folks were allowed to use, and I got a call from you [Bolten], saying, “We’re going to do a bipartisan, bicameral meeting with Obama and McCain, the next day.” And it was like, What? [laughter] And I said, “Can you tell me why?” And he said, “Are you coming back down here?” “Yeah.” “OK, well, I’ll tell you why when you get back down here.”

The problem that Hank’s alluding to was that a lot of House Republicans didn’t like the idea of purchasing troubled assets. And so they had—again, the idea of a bank bailout. So they had this other idea of this insurance program that you could establish that—I’ll let Hank speak from himself, but it became clear from my perspective—the Leg guy—the Treasury didn’t think this was a very useful addition to the legislation, but eventually made it optional, so—

And to put that in context, they had no idea—They just opposed what we had. And so at the very end, Eric Cantor came up with this idea that there was no idea after we had asked for it. And we said, “So we’re supposed to go out to the whole world and say, ‘Guess what, now it’s not illiquid assets; it’s a guarantee’?” But that was only—The only way they came—The House Republicans didn’t come up with that idea. They had no idea, and then when we kept saying, “What’s your idea,” then Eric Cantor said, “How about a—”

Actually, Cantor—and I think Ryan worked on it with him—

Yes.

It was—but yes—

Yes. Yes.

—it was a last-second thing. And—well, of course, all of this was a last-second thing.

Yes.

But when the meeting got scheduled, McCain came to Washington that Thursday morning and met with the House Republicans, or a number of them. I was talking to staff continuously on this on both sides of the aisle—I talked to House Republican staff that morning, and it was clear that McCain had no idea of what he wanted to do with this meeting. To Josh’s point, it was just—He called an audible because the current play wasn’t working, right? This was consuming the politics of the moment, and their campaign was slipping away. And so, let’s go to Washington, and try to fix this so we can get back on track. That’s my view of what went on.

And I got a call from John Boehner’s policy person. Our approach to most of the bicameral, bipartisan leadership meetings was, you’d invite the Speaker and the leaders could bring one staffer with them to these meetings. So his policy guy calls me and goes, “I’m coming to your meeting this afternoon.” It was a 3 o’clock meeting, as I recall. And I said, “OK.” I said, “I’m surprised Paula [Nowakowski],” who was the chief, “isn’t coming, but—” And he said, “No, I’m not coming to staff Boehner; I’m coming to staff McCain.” And right there it was like, really? You know, as we had told both McCain and Obama, “You’re both sitting U.S. Senators. Don’t bring campaign staff. Bring official staff to this thing. This is not a campaign event.” And they both agreed to that.

But so now I get a call from Mike Sommers, who says, “I’m staffing McCain.” And I said, “Really? So nobody’s coming with McCain?” “No. He asked me to do this. We were at a meeting. He doesn’t under—” Basically, what my assessment was, this whole proposal that they were creating to try to attract Republican votes was not something McCain was familiar with, so he was bringing Sommers to help staff him for it.

And then when we got into the meeting, it was clear—I mean, do we want to get involved in that right now? There was the premeeting in the Oval—

The premeeting—You can make it simple, because we could spend all afternoon on this and we wouldn’t be talking about some of the important policy stuff. But the meeting in the Oval was very difficult, because Boehner kept saying, “I don’t have the votes.” He wasn’t arguing for any insurance program or anything; he just simply said, “I don’t have—”

And the other context to that was, Pelosi’s point of view was, “We’ll work with you on this, but I’m only putting up half of my caucus vote for it. You’ve got to get half of the Republicans in the House to vote for it.”

Yes. So she was—

So Boehner was under the gun to deliver half of his caucus.

And he kept saying, “I don’t have the votes. I don’t have the votes.” And for a long time—So we went right from there into the big meeting. And what hit me—and everyone here that was there should talk about it—but what hit me was, the Democrats came in really well organized.

Can I comment on that point?

Yes.

This was a Leg Affairs meeting, because it’s a bipartisan, bicameral Congressional meeting—so our staff was coordinating it with all of the people coming from the Hill. Senator Obama got there relatively early, and one of our staff people greeted him, as was the norm. And he said, “Is there a place where I can meet with the Democrats when they get here?” and being a very competent and accommodating person, she gave him the Roosevelt Room to meet in. And so when the Democrats came—you know, Pelosi, [Steny] Hoyer, Barney Frank, Harry Reid, Chris Dodd—the whole group of them had a premeeting. While we’re in the Oval, they had a premeeting in the Roosevelt Room. And so they did get organized. And then—

So they were organized, and we weren’t meeting with McCain, but we were meeting with the Republicans, and they were meeting. And so, as I recall it, the President started, and turned to me and asked me to talk about where we were with the TARP and I made the case.

And then normally, he would next go to the Speaker.

Yes, so he’d normally go to the Speaker. So he went to Nancy Pelosi, and she said, “No, I’m going to go to Barack Obama.”

Yes. She and Reid basically in unison said, “We’re deferring to Senator Obama.”

Yes. And—

At which point—at least my stomach dropped, because, OK, this is going to be political.

And he was skillful.

Yes, he was.

Because basically, he made the Republicans hate me. He basically said, you know, “We’ve been working hand-in-glove with Hank, and we’ve been trying to do all this, and we’re supportive, and—but we just need a few little things. We need him to do more for mortgage relief and we need to be a little bit tougher on bank bonuses, but I think we can get there.” And so then the President thought—since Obama had spoken, he thought he should go to McCain.

Exactly.

And he went to McCain, and McCain almost—You know, he basically said, “I defer.” You know, “I’m going to wait for—”

I remember his exact words.

I do, too.

What’d he say?

It was, “I’ll wait my turn.”

“I’ll wait my turn,” he said.

He said—At least the way I recall it was, “I’ve learned to respect seniority. I’ll go—I’ll wait till it’s my turn.”

OK.

Just like that. I like John McCain, all right? OK?

OK. OK. OK, I do, too. And I—You can like him, too, and still remember the way it happened—History, you know? [laughter] I don’t think we need to go into all the details, but there was a lot of arguing and back-and-forth and raucous kind of debate, where the Democrats were pointing the finger at a poor guy named Spencer Bachus who had agreed to some things that Boehner hadn’t wanted him to agree to, and it went back and forth. And so when they finally got to McCain at the end, McCain took out a notecard, and he read something very mild mannered which basically said he thought we should listen more to the House Republicans and work with them. And that’s what he said.

Then Barney Frank looked at him and started shouting at him and baiting him. He said, “That’s your plan? That’s what you came back here to do? This is what you called this meeting for? That’s your only idea?” And he started going—Then it all broke down. And then I remember the President saying, “I’ve clearly lost control of this and I’m going to end it.” The President is remembered for saying, “I’m going to end this, because a scene like this can’t take place in the Cabinet Room.”

And so then Shelby immediately goes tearing out—running out to the press and starts attacking our program and how bad it is, and the Democrats all went running—

I don’t remember it that way, but go—I’ll—

Maybe—You could be right. So—But the Democrats had adjourned to—Well, how do you remember it? Because you—

Well, so what happened was, when it—It got very contentious. At one point—To those of us who were sitting by the President, he turned around he did—You know, while he was President, Bush could do—He did one of these [gestures]. [laughter] And—

I was sitting next to the Vice President, and he was [laughter]—He couldn’t believe it.

Yes. It was a chaotic meeting. And poor Spencer Bachus—Actually, I think, in my view, he accidentally stepped in it when he was complimenting some of the things that had been added since the bill had originally been sent to the Hill, but it came out as if they were his ideas, whereas most of these ideas had come from the Democrats, so Pelosi became almost unglued. “You can’t be taking credit for what we got”—you know. And it got very hostile.

And then what was interesting is, toward—What precipitated McCain, who had deferred early, as you said, was, Senator Obama sought recognition again—Now this has been going on for I don’t know how long—half hour, 40 minutes—a lot of back-and-forth, and it’s not going well. And Senator Obama says, “Look, in fairness, I had my—I was able to say my piece. We still haven’t heard from John. We should give him a chance to speak, right?” [laughter] You know, he totally set him up. [laughter] And that’s when McCain read his three points—his talking points—off this card, which easily could have been read 40 minutes earlier.

Yes.

And—

Dan, something that neither you nor Hank mentioned that I recall was that Obama was very skillful in blaming the course of events on McCain—that he was able to describe a situation in which we were making good progress—

Yes.

—and McCain having called this meeting and come to Washington, the progress had seemingly disintegrated, and he was blaming McCain and our incompetence for having—for the—the bad situation.

And at the time, I believed it. You know, because that’s the way it looked to me. And I think afterward, in a funny way, this actually helped. Because what McCain did was, he got on board. And he called me the next day; he called Ben Bernanke the next day. He said it was going to take more work, but that he was doing what he could to be helpful with the House Republicans.

When the meeting ended, a bit chaotically, the President said, “That’s enough.” You know, “We’ve got to get together and try to get this done.” And there was a lot of—The hostility in the room was still—It was still a bit hot.

I recall people still shouting as the President was walking out of the room.

Exactly. He walked out.

Well, you know, I actually thought they were going to come to blows there at the end. I was—I literally couldn’t believe what I was watching.

So I, as I’m walking out—Some of the folks follow the President to the Oval; the other door leads to the lobby, so most of the participants go in there. And I was walking next to Hoyer, who was always very constructive. And Senator Obama was right there, and he turns and says, “Can we have that room back so we can meet?” And again, my assistant, Caroline, who still works for President Bush, said, “Oh, yes, the Roosevelt Room is available.” It’s like, No, don’t do this! [laughter] So then they go to the Roosevelt Room, and they’re really whipped up. And I didn’t—You know, it was—The Democrats went in there on their own. I went back to the Oval. And I—

You see me going in with the Democrats, right?

Well, no—And Hank’s right there, and the President—You know, I can’t remember how that all—I just remember saying, “The Democrats just went in the Roosevelt Room, and I think they’re going to blow this up.”

Yes.

They were very hot. And you said, “What should we do?” And I suggested you and Kevin go in there, because I don’t think—

Yes.

—they wanted somebody from President Bush’s team. And you had good relationships with them. And that’s—You can tell the story of when you went in, but that’s the famous story about going on one knee. And I felt bad afterward, because I think—I had used those words, and then you repeated them.

Well, but I had—I didn’t even—I just remember, I had the huge concern that they were, and—Because from my perspective, I guess part of it was political theater, and I can look at it now as political theater, but if you watched it, it was so vivid. And it was so vivid to see the people that were going to need to come together to get this thing done going at each other. And then to see the way it ended—You know, I could just see everything going up in smoke. And—

And so could I, which is why I think you going in there was such a key part of this. That’s why I wanted to mention it.

And what hit me when I went in there, which—Because it really—I don’t think of myself as being a naïve person. I’d been working with all of these people closely. I’d been talking with Barack Obama on the phone, you know, every day, every other day, talking with everyone that was in that room regularly. And they’d been sitting there saying these great things about me and what we were doing at that meeting. So when I went in there, I thought I would be welcome.

And when I walked in there, they were standing. They were all huddled around Senator Obama, just really talking. And when I got there, as I approached them—I forgot which one looked at me and said, “Wait, what are you doing here? Get out of here.” You know, I was persona non grata. And so it was with that that I—It was really just a chance to just lighten the mood, you know, where I dropped to one knee. And that’s exactly as written. When I said, “Don’t blow this up.” And she looked at me and smiled [laughter] and said, “We’re not the ones that are blowing this up.” And it was—But it was pretty clear to me then that they had seen what McCain was doing and they had turned it around and it—

The conclusion, because you had mentioned earlier—You going into that room, I thought—Because I thought they were going to go blow it up. It ended up that Hoyer went out and made a statement and Ed Gillespie went out—

Yes, yes.

—and made a statement to the cameras, and you wouldn’t have known there was any hostility.

Yes, yes. You wouldn’t have known it. And I’ll tell you this, because I do think—I see we’ve got half an hour, and I think there’s a lot of other topics that we can talk about that are maybe less interesting but more important than that one meeting. Because that one meeting turned out to work to our advantage, because John McCain was helpful. In any event, it happened, and they went back, they had their debate the next night, and John McCain didn’t do particularly well. He probably wished he’d spent more time preparing for the debate than coming back to Washington.

So in terms of the public perception of TARP, the fact that this was billed as both a wartime disaster—or kind of an emergency like a wartime—and you kept emphasizing that the economy was—

Yes.

—at risk in your judgment. But then we see all this political theater. And were you concerned about the voters being told on the one hand, “This is like Pearl Harbor,” but, Oh, we’re going to have all these days and days of showboating and horse-trading and—It’s almost like the fire department is demanding side payments to agree to turn on the spigot or something. Did that worry you at the time?

Of course it did. But you need to understand, as I said: this was a clash of politics and markets. And as Rahm Emanuel said to me, “You have your market; we have ours.” And it took me a while to get used to what you would see up on the Hill, where people would take you aside and say, “You da man! You’re doing great,” et cetera. “Don’t worry about what I’m going to say when I get on TV”—[laughter]—“when I’m talking to the voters.”

And part of what we were dealing with when we were up on the Hill was, there was a lag. So what had happened was, the markets had frozen. And when I say “markets,” I’m talking about obscure things like the LIBOR [London Interbank Offered Rate]-OIS [Overnight Indexed Swap] spread, you know, which halted the banks’ lending to each other. So credit had stopped. But that wasn’t apparent yet on Main Street. So Members of Congress—Repeatedly, people would say, “I don’t see any signs of a problem in my district.” And so that’s why it actually took the TARP being voted down the first time in the House and the markets dropping as far as they did—That was what it really took to get action.

And two weeks sounds like a lifetime in terms of markets, but in Congress, I mean—

Sixteen days?

—it was unreal to get it done that fast.

I agree with that.

Just to get it done that fast.

I’ve often commented on the fact that there’s so much focus on the dysfunction of Congress—and not without merit, a lot of times. This was completely the other way. A $700 billion program to solve a potential crisis passing—15 days or—from a Thursday to two weeks following Friday—

I tell you, one of the—The thing that I am most proud of is that twice—Twice, in record time, we had Republicans and Democrats—so it was bipartisan—came together to give the executive branch unprecedented authority. And I think that’s the last two times you can find Congress having done anything consequential that was controversial on a bipartisan basis. You may come up with some others; I can’t think of what they would be. And I don’t think that happens unless you’re building relationships on both sides, working across the aisle. So I look at it and I say, I may not have been great when it comes to making speeches, but when I got together with Members of the—and one-on-one, or when the caucuses, or I got together with the Senate Republicans—and I could say, “Lookit, I didn’t ask to come here. But I will tell you, I know more about this than any of you do. And if you don’t give us the authority, we’re going to be in deep doo-doo.” I think we were able to get things done. But it wasn’t easy for them.

And the smart Members—I mean, the point that Dan had made earlier, Paul Ryan’s point, Barney Frank had made the first night when we went up and asked for the authorities. He basically said, “You’re saying that we have a crisis. The economy’s going to drop, in a matter of weeks no matter what we do. So this is a really bad vote for us.” And we saw the lag work the other way. I think the reason President Obama gets a—maybe even a disproportionate—share of credit is because—Just like the markets, the capital markets freeze before the economy slows down; there’s a lag. And then once you stabilize the markets, there’s a lag before the economy picks up. And so the economy was turning down rather dramatically, even at a time when the markets were largely stable.

Let me pose one question, Mike, and then I’ll come back to you—

Very—Oh, go ahead.

In the interest of time, let me ask—Let me pose it this way: are there important components of the TARP story that are misunderstood or underappreciated? Is there anything that happens after these—

Maybe misunderestimated? [laughter]

Misunderestimated. [laughter] You see my eloquence—

I’m going to say one thing quickly on this, because I believe that what we did was innovative. It was unique. I don’t think it’s ever been done before in any country under any situation like this. But I think this is one of the reasons why it’s so unpopular. Because what we needed to do—what we wanted to do—was to go out and move very quickly to inject confidence into the whole system and to make a first big step to recapitalize the financial system. And there was no way the regulators could make the banks raise equity right now. The equity wasn’t there in the markets, so the banks couldn’t make anybody raise equity. And it was very hard to say which were the healthy banks and which were the shakier ones, because the situation was getting bad so quickly that a healthy bank could become a shaky bank.

So we came forward with something that hadn’t been done before, which was putting capital in on attractive terms. Rather than punishing the bankers, which the market wanted to see, or putting in tough compensation restrictions on bonuses, which we all would like to have done, we didn’t do it, because then the banks wouldn’t have taken the capital. So we did something with lightning speed. REDACTEDTEXT Dan was a key on a lot of this, and he and David were the ones that were telling me while we’re up there on the Hill that asset purchases weren’t going to work and that we needed to put capital in the banks.

And I think one thing that is not well understood was, after we got TARP, the market didn’t strengthen. The market went into a free fall. It was almost as bad, you know, in the week after we got TARP than the week before, so we had to move very quickly. REDACTEDTEXT REDACTEDTEXT REDACTEDTEXT

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So let me ask this. If you were designing something now, when we—I hope—do have time before the next crisis, would you—would the basic principle be asset purchases or recapitalization?

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Well, when we were—When we had to act, there was no choice. I mean, there was—To put out the fire, we needed something that could go quickly and that was powerful. And there was no choice. But I think the thing that—What we did which was really quite innovative was, rather than doing what the Europeans did and what countries traditionally do was to say, “OK, we’ve got the capital. And so now we’re prepared to prevent bank failures. We’re prepared to nationalize banks when they fail.” And so you’ve got then punitive terms. You do what we did with Fannie or Freddie or AIG. And you get a bunch of serial failures. And that’s what the Europeans did. And the British put capital in two banks just as they went down or were about to go down. That’s what happened on the Continent. And their banking system was undercapitalized for a long time.

And what happened with our program was, we put it in and the market loved it and everybody liked it at first. And Michele kept talking to me and said, “I’m worried that we’re going to use the N-word”—and the “N-word” was “nationalization.” Do you remember?

[laughter] Yes.

And it was nothing like a nationalization. Well, as soon as that came up, the program was stigmatized and people became very angry about it. And then that also worked to our advantage, because 700 banks had capital, and they wanted to be able to pay it back, and the Fed had a real lever in terms of what it could persuade them to do.

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Mike?

Just a quick question for the Secretary—and that is, when you had your heated phone call with Senator McCain, what did he say?

Listen, we’re done with McCain. We’ve got four or five other questions here.

I think the record is incomplete if you don’t give his—what he was saying.

Well, the record is, I don’t remember everything he said. I just remember that it wasn’t largely—As I said, he’s a foreign policy expert. So it was only clear that he was unhappy. He didn’t have a plan. He didn’t have another idea. But he was very unhappy with me and what we were doing. And so that was what it was—what was clear.

Yes. The striking conclusion from that meeting was—for a lot of us who worked for President Bush—and I think almost all of us probably voted for Senator McCain. Having said that, Senator Obama came in, got his people together, got them all basically on the same talking points. McCain showed up, appeared not to have even thought through how he was going to handle this meeting and come out of it. And when we were done, a bunch of us went down to Joel’s office—I don’t think you [Bolten] were in that one—and that was the conversation, you know, “I’m not for Obama, but I’m feeling a little better about an Obama Presidency relative to a McCain Presidency.” I hate to say that, but that’s how it felt.

But see, the interesting thing is, what appealed to the press and what appealed to the American people about John McCain was, what you saw was what you got. You went from the brain to the mouth. He was spontaneous. And he didn’t always think three or four steps ahead. And I’ve tried to say it nicely by saying he was a foreign policy expert, but I don’t think he’d spent any time on economic policy or on markets. And I’m quite sympathetic. I mean, his campaign was flagging, and—but we have all this stuff to cover on the transition and all the important policies, with a hard stop in 15 minutes.

Well, I have a big-picture question, then. How did your experiences fighting the financial crisis change your perceptions of American government and its institutions, especially Congress, the Federal Reserve, and the executive branch? And we can include the transition time in that. How did you see things?

On transition time, I believe—and as time goes on, I believe this even more—that we saw some of the worst behaviors—creating the crisis, including the lack of government adding the right regulatory policies in place, but the crisis brought out the best, OK—both in terms of Congress it brought out the best, in terms of the level of coordination, I saw interagency, bipartisan. And I’ve changed my mind and I’m actually convinced I’m right now on this interregnum period, the more I’ve thought about it and the more I’ve talked with Tim Geithner about it. Because at the time, I felt abandoned. There’s no doubt about it. That—I had been talking with Obama regularly—We talked with Obama and with McCain—and we said, “Let’s make sure we’ve got continuity. Tell us who you want to run the TARP. We’ll pick someone from each of your selections. We’ll vet them so they’re ready to go, so we’ll have continuity.”

But the day after the election—Dan [Daniel] Tarullo came and saw me and said, “You’ve had your last conversation with the President. There only can be one President.” But as I look at it now, they—and I look at what went on in the Obama administration after this period—By leaving us alone and trusting us to do the things that needed to be done—and we did some very difficult, important things, you know, in terms of—both those two guys were all over Citigroup and keeping them from going down the second time. B of A, where the night the President was making his farewell speech was the day that we had to prop up B of A as they completed this acquisition of Merrill Lynch, big quarterly loss, very unpopular. The President making—and it was the President who made it. It was Dan that helped negotiate the deal with the autos, but—the auto loan. And the Obama administration gets all kind of credit for bailing out the—and saving—the auto industry, but, you know, they wouldn’t have been saved if their finance arms hadn’t been totally restructured, which was done by the Bush administration; if that loan hadn’t been made to save them, with terms that were very consistent with what they needed to do to restructure them. So all of that was done.

I look at it now and say that they left us alone to do what needed to be done. The new President wasn’t going to be implicated in all of these unpopular things, which was smart for them. President Bush—you know, I’m sure you’ve heard this from everybody—he was so clear about the transition—everywhere. You were going to—We were planning for the transition months ahead. And so with this transition, he wanted it to really go smoothly. He actually agreed to take the political hit for calling—for the take down of the last tranche of TARP before he left.

And then I look and see what did the Obama administration do. You know, Barack Obama picked Tim Geithner as his Treasury Secretary. Ben Bernanke, who President Bush had picked, was there. And Geithner had been intimately involved in all of the things we were doing. And Tim had a battle on his hands. And I don’t know how much detail he went in with you, but he had all of the political people wanting to listen to their base and wanting to throw out the things that we’d done, disavow the things; Larry [Lawrence] Summers debating from internally to nationalize the banks. That leaked, and the bank stocks dropped almost to zero. And Tim ultimately won the day.

And they—We had great policy continuity. And I think the stress tests were the logical extension of our programs to stabilize the capital markets and recapitalize the banking system. Some of those on the other side of the table from me right now, and maybe right next to me, disagree with me, but I actually think the fiscal stimulus was very, very helpful. So I think we needed a stimulus to get—So you saw the stimulus; you saw the stress tests. And there was continuity. But the capital was largely out the door. What the stress tests showed was that the banks were in good shape. They had a very good first quarter.

I look at it and say that it couldn’t have worked any better, realistically. And so what I worry about in terms of the lessons—I think it took—How many things had to work out right? How did it work out that you had a President that was as focused on policy continuity and helping the next administration and being prepared to make all the politically difficult decisions—the last thing? Can you imagine that? President Bush—bailing out the auto industry or Bank of America? You know what he thought of Wall Street—and doing all that. And then to have an incoming President that picked Tim Geithner, despite the fact that he was implicated with us in all these other things. And I didn’t like a lot of the things he said, because politically, he kept blaming us for the problem and taking credit for the things we had done. But, you know, for the country, that was the best reasonable case. So that’s my pitch on that.

Yes, Josh, can you address the transition question?

I can. President Bush—and I was Chief of Staff in this last year—and early in 2008, President Bush had said to me he wants the best, most effective, most cooperative transition in the history of modern presidencies. I think he gave me the direction even before Bear Stearns—His rationale at the time was, this is the first transition when the country is actually under threat from terrorism and—we thought. But the same rationale applied here, and it just doubled the President’s commitment to have a good transition. We did. We had a superb transition with the Obama folks, who were extremely cooperative in the work we did. Months before the election, they had people organized, we were working with them to get clearances done and so on—much better organized than the McCain campaign, although I think the McCain campaign was correctly placing all of their emphasis on trying to win the election and not on what might happen after.

And so overall, I think the American people would have much to be proud of on both ends of that transition. But specifically, with respect to some of the things that Hank just talked about, I think Hank was a little bit charitable in weighting their interest in leaving us alone above their disinterest in being implicated in anything that we did. [laughter] I think the weight belongs on the latter.

Yes.

Really, for me, during the whole transition, those were the only disappointments. Where—to give one vignette, Hank, you will recall that—

Sunday after Thanksgiving, yes.

Sunday—exactly the one I was going to mention, where the experts at the White House and at the Treasury had concocted what I thought was a very effective—and everybody who looked at it thought was a very effective—plan to both rescue and reform the U.S. auto industry in one swoop that should have been acceptable across a relatively broad range of the political spectrum. And the one thing we wanted from the Obama administration to make this plan really work was: tell us who you want to run this program; we will name that person—under the Bush administration—and that person will transition through.

I invited my incoming counterpart, Rahm Emanuel—who, by the way, had been very helpful to us during the TARP legislation—to come to a meeting in my office to—for us to present these ideas and try to wrap it up. The first thing that happened was that they asked to move the meeting out of the West Wing over to Hank’s office, which I said was fine. This was—I now recall, Hank, it was the Sunday after Thanksgiving. And then Rahm wasn’t showing up. And it was Larry Summers—

Larry Summers.

—and a Leg person and a couple of others, and they basically stonewalled us.

Yes, they just—

They just never—They never responded. They never said yes; they never said no. And they left us to do whatever we were going to do on our own, which made it, I think, more difficult to execute on. But it worked out in the end. In the bigger picture, from the standpoint of the transition, I think they were skeptical of many of the—The incoming Obama administration was not as unified as the outgoing Bush administration was. They had not yet sorted out their real power structures—as between, for example, Geithner and Larry Summers.

Yes.

We had; Hank was in charge. And so we had the benefit of a clear policy direction. They weren’t so sure. They ended up in the right place, which was basically adopting almost everything that the Bush administration had done. And that contributed to the success.

But I’ll return to the last point Hank made, which is that there’s—In this story, there is a difference between the financial crisis, which was a crisis of confidence and a market crisis, and the economic crisis that followed it. And the financial crisis was basically over by the time President Obama was sworn in. It may not have been entirely clear that it was over, but the markets were calm; the situation was resolved. Even the auto industry was basically on the right path. And what we bequeathed to the Obama administration was a largely resolved financial crisis, but the economic crisis was yet to come.

Yes. They don’t view it that way. I think the facts—

That’s why I wanted to get that on the record. [laughter]

I think the facts—Because what happened—Bank stocks were still falling. I think the bank stocks were falling because they were debating nationalizing them, right? And so the stocks—The banks’ earnings were very strong by May, when they announced the stress tests, and that had started to leak out. But I do believe that they took the capital programs that were in place and they adapted them and they managed them really, really well.

But there is no doubt that part of the reason that their story sticks is that the same Republicans that had trouble voting for the things we have done no longer want to talk about this. It’s very unpopular. As I say, they’ve got amnesia. And the Democrats—One of President Obama’s big achievements is saving the country from a second Great Depression. I happen to think both Presidents played a role in that, but that the biggest role was George Bush as first responder.

And I remember him once telling me—when he came over after we had put capital into Citi, and I was really quite concerned that they might not make it. He came over to Treasury and he met with us. And he asked me if I was sleeping. And I said, “No, I’m not sleeping a lot.” And he said, “Why not?” And I remember saying, “I don’t want to be Andrew Mellon.” [laughter] And he thought that was pretty funny. And I didn’t think it was as funny. [laughter] And he said, “Lookit, we’re not”—he says, “We’re—Roosevelt won.” You know, “We’re the first responders.” And so in any event, that’s the way I look at it.

I think that’s a terrific place for us to stop. Do you want to—

Can I make one suggestion, Russell? I don’t know whether you’re—

I never cut off Josh, but—go ahead.

I don’t know whether you’re doing the Obama oral history or not—

It’s in progress.

All right. When you get to that and you discuss the financial crisis, quiz the Obama people carefully on what measures did the Obama administration take that stanched the financial crisis—

Well, I would say this: here’s what you want to—

—that were not otherwise already in place during the Bush administration.

I want to say—

Duly noted, Josh.

Turn off the TV cameras—This is what you want to—Excuse me a minute. [laughter] So this is what you want to quiz them on. They’ve got all kinds of measures. They’ll talk to you a lot about the measures. You want to quiz them on what capital the government actually had to put in. Because what you’ll find is, other than Citibank, OK, where they put in some capital and converted some preferred, there was no capital that had to go in. So their measures demonstrated that the job had been done. But they’ve got—they can dazzle you with programs.

I think every one of the programs that I’ve looked at was a good program, was really well conceived. And I think it was a great adaptation. So I applaud it. I don’t look at it and say, “Boy, they did all these things wrong.” I think it’s great. But I do think, when you strip it all away, you want to say, “OK, what more capital did you have to put into the system?” And they’ll say, “Well, we encouraged banks to raise money in the private sector.” And you’ll say, “Right. Why could they raise money in the private sector? Because the market had returned.” Right?

Well, I appreciate the tips, because we anticipate spending a good deal of time with them in the months and years ahead.

And we will encourage that.

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We’re happy that we could remedy that part of history today. [laughter] I’ve been doing oral history interviews for 20 years, and we never get to everything that’s on the agenda. It’s just baked into the process. I can also say that in 20 years, I’ve never had more fun than I’ve had today listening to you, and have found few things more illuminating than we’ve done. I appreciate your flexibility in getting this under way, the time particularly the two principals have given us already before we came in. We are greatly indebted to you for your willingness to contribute more to history. There’s a lot more for us to understand. We may come back to you here and there. I’ll certainly be back to you with a transcript at some point. But know how much we appreciate it, and how much we’ve profited from the devotion of your time today. So thank you.

[END OF INTERVIEW]