So Paulson creates this TARP [Troubled Asset Relief Program] plan. And I guess the way it is written out is he writes it on three pages, and then he goes to Congress and has to sell them on the disaster that is about to happen. What's your take on that moment?
Well, that moment was the result of everything that had preceded it, you know. And Hank Paulson came before a commission. He said that by the time he became Treasury secretary [in 2006], the toothpaste was out of the tube. In fact, he had been doing a lot of squeezing as the CEO of Goldman Sachs, and in many respects the toothpaste was out of the tube.
So, you know, TARP I think was just emblematic of the slow-footed response, the lack of grasping of the depth of the rot within the financial system. Again, I don't impugn people's motives here, but Hank Paulson is the same person who, throughout the spring of 2007, is assuring everyone. And he is Treasury secretary. He has been in the financial marketplace. He is assuring everyone that the subprime crisis will not spill over and there is little risk of that, as is Bernanke.
So look, TARP, like the AIG bailout, is just a manifestation of the mad scramble that has to take place to try to contain the damage from years of neglect in Washington and recklessness on Wall Street. I mean, the bill finally came due.
And when this TARP goes up before Congress, there's an enormous amount of anger, and it doesn't even pass the first time. I mean, what does that say?
Well, you know, I think the anger is partly born out of the fact that here we are in this crisis, and now policy-makers are asking for a large blank check, having previously underscaled, undersized and really underrepresented the scale of the challenge that our financial system faced. I think that was the real problem with TARP. But I think it is interesting. TARP gets a lot of attention because it was the one piece of this that actually went through the deliberative legislative process.
But it was just the tip of the iceberg. TARP was $700 billion. And it was just a piece of what ended up being trillions of dollars of assistance to the financial sector, much of which was not known [to] or seen [by] the public at large.
What if there had been no TARP fund?
Well, I should have said this. I have no issue if a financial institution needs money. It's not bankrupt, it's not failing, but it's got liquidity issues. It can be rescued; it can give back. If the government wants to give money to a financial institution to get them through a crisis, to make sure the crisis doesn't expand, they need the money, I have no issue with that. That's been done a lot over a long period of time.
My objection was that if you give it to people who are perceived not to need it, it's going to destroy confidence in the industry; it's not going to restore confidence in the industry. And that's exactly what happened. They exacerbated the panic. And it's evidence of the fact -- so we were told to take -- just think about this -- $25 billion that we never wanted and never used, paid it back within a year at a cost of $2.5 billion in interest and warrants out of our capital base. And our stockholders went from a stock price of $33 down to $7.80 in that period of time. And does anyone care about the thousands of stockholders who lost in some cases a very substantial part of their net worth for an untruth?
Did any of the other bankers speak up?
No, basically not. A couple of them signed the paper right away, gave it to them.
So they move paper in front of you.
Yeah, these two pages that Geithner read to us to sign. A couple signed it right away and went home. I can't remember other -- there were some minor questions about -- I can't remember what they were, but nothing that was important.
But in terms of questioning the move, you were the only banker in the room that questioned the policy?
Yes. But after what they did to me, I don't know what anybody else was going to question. (Laughs.) That's why I suspect that maybe some of them already knew what this meeting was all about or something. I don't know. I was shocked that no one else stood up. Remember, many of them there needed the money.
Bank of America, Citigroup. Anybody else need the money? Goldman?
The rumors were that Morgan Stanley and Goldman were next on liquidity.
That they were going to run out of cash to fund their operations.
You can determine by yourself.
So you walk out of the building.
No, no, we only have an hour to decide whether we were going to sign on with OCC saying, "This is a huge mistake," da da da. So I call my CFO and say: "Look, here's the situation. I don't think I can convince anyone not to do this. Call the three directors of our major committees, tell them what's going on. Tell them I don't see any choice if you want to do Wachovia. I've tried everything." And we discussed, you know: "Did you tell them this? Did you tell them that?" I was talking mostly with John Dugan of OCC at this time.
And just before the hour that we were given, I was the last to sign, and I signed. And I figured I have no choice. And I still think it was a terrible decision.
Now, the amazing thing to me -- keep talking about conventional wisdom -- is I believe that conventional wisdom is that TARP worked. But there's nothing in the facts that suggest that was the case. The Dow Jones, which I would say -- would you say Dow Jones is a pretty good indicator of investor confidence? So just take that: [It] fell from that day until early March of 2009, five months or so, fell 40 percent. Bank stocks fell 80 percent.
So if bank stocks fell 80 percent, is that increased confidence in the industry, or did it not increase confidence in the industry? It's pretty clear.
What did you say?
I was stunned. And I was going to say some things, and I decided not to say [them].
Well, share with us now what you --
But just think about this contradiction just for a minute.
I mean, you're upset.
I am more than upset.
So you're pissed.
Really pissed. I'm pissed because it's the wrong decision. See, it's not about Wells Fargo. If I believed that this would increase the confidence in us, I'd be right there.
So you think it was a dumb policy move.
One of the worst economic decisions in the history of the United States, because it's not going to work, and you're putting too big to fail in forever.
So you talked for a while. Paulson interrupts you and says again?
That the regulator is sitting right next to me.
Yes, Bernanke. I assume that's who he was referring to. He was on his left side. "And he will declare you capital-deficient on Monday morning." Now think about this contradiction: He admits at the beginning of the meeting you don't need it, but if you don't take it, we are going to not tell the truth to the American public that you really did need it. We're going to lie.
Translate for us what that means when the Fed tells a bank that they're capital-deficient.
Well, first of all, we had not closed on the Wachovia deal. This was October, and we wanted to close on Dec. 31. The first thing is, you cannot acquire somebody if you're capital-deficient, so number one. Number two, you can't do anything if you're capital-deficient. You can't grow. I mean, they'll put the conditions on you, but usually you can't grow; you can't buy anything; you might have to shrink; you can't pay dividends. Once they don't want you to do something -- once you're capital-deficient, anything they don't want you to do you don't do.
You might as well shut your office and go home.
And you're certainly not going to acquire Wachovia.
That's a threat.
No, it's not a threat; it's Godfather. What was the phrase? Give me a proposition I couldn't refuse?
"We're going to make an offer --"
Yeah, make an offer that you can't refuse.
That's what you were hearing.
Clearly. But the point I want to make is, I was arguing this was a mistake for America.
What did he say to that?
Well, there was no discussion. That's what I said. He said, "your regulator is sitting right over here. " Then he said, "Now, you can think about this." I also said: "I can't even make this decision. How can I make a decision on $25 billion without a board of directors?" He says, "You have an hour. Your regulator will come and talk to you. " In this case, it's the OCC for us. And give us your decision in an hour."
And basically the meeting was over.
And Geithner is talking as well?
Geithner is actually the one who I should say who gave us these -- that listed what the conditions were.
So Paulson makes this introduction and passes the baton to Geithner. And then he starts to list the kind of --
It was a two-page thing with not much in it. And even executive compensation came up. He said, "No, no, we're not in there." And he said and some people came up with, you know, "You got to tell us that we've got to make loans that we don't want to" -- "No, no, you keep your own lending decisions, etc., etc. This is to raise confidence
And then Geithner told us -- he turned it over to Geithner, and he said, "Here's how much you're going to get." And he went around the room, and “25 for you,” and he came to me, and said, "Twenty-five billion dollars." (Laughs.) And then the rest of them -- and I almost fell out of my chair. I said, and I think was looking at both Geithner and Hank. I said: "Hold up, just let me make sure I understand. You're going to give $25 billion to Wells Fargo, who is the only AAA-rated bank at this table. And you believe by giving $25 billion to Wells Fargo that that's going to increase the confidence level in the industry? Is that what I understand?"
And he said, "Yes." And I said: "I can't believe that you believe that. I think it's going to have the opposite effect, because if you give $25 billion to somebody that is AAA-rated and most people in the industry think has behaved in this crisis, they're going to think that Wells Fargo is even in trouble, and therefore the whole industry is in trouble. And it's going to cause the confidence level [in] the whole industry to go down."
And I said: "Furthermore, we're in Washington, D.C. There's kind of a political environment here, right? I can't believe that you believe that there isn't going to be a firestorm of protest from congressmen and senators, because if you're giving $25 billion to companies who do not need it, and you're not giving it to automobile companies and steel companies, and everybody else who was suffering, the senators from those states are going to go berserk. It makes no sense. So this is going to be a failure on your confidence." And then I don't know how much further we went before I was interrupted by Hank, who said: "Your regulator is sitting right next to me. And if you don't take this money, on Monday morning you'll be declared capital-deficient."
"Oh, " I said, " I misunderstood you. Where do I sign?" No…(laughs)
And so the meeting opens. What does he say? As much as you can remember, tell me what he said.
I’ll paraphrase it a little bit. He says: "Look, as you know, we're in the middle of a crisis. There's all kinds of issues and problems, and we're here today to talk about what we think we need to do to handle this crisis."
He says that "Some of you here today are in fine shape and have adequate capital, etc. And there are some of you here today that have inadequate capital."
Did he look at anybody in particular when he said that?
I remember when he was looking about adequate capital he was looking at me. At least I perceived he was. But everyone knew who needed it and who didn't, or at least pretty close. But he said: "The most important thing that you all benefit from is if there's confidence in the banking industry. And the banking industry, as we all know, is the engine that keeps the economy going. We have to have a vibrant banking industry, and we have to do everything possible to make sure that that is the situation. And it's at risk at the moment with what's going on."
And he said: "So what we're going to do is we're going to ask all of you to take some capital, enough capital such that this will lift the confidence level of the entire industry, because there will be sufficient capital by the industry, the leaders." And he said: "We'll do you first, and then we're going to be doing others. But we've got to take the biggest institutions first." And that, "you will all benefit. Whether or not you need this capital or you don't, you will all benefit because the confidence level of the industry will go up."
So let's walk through that meeting in mid-October 2008. How does it come about? Did you get a phone call?
So I'm playing with my grandkids on Sunday night and having dinner. And my wife answers the phone and says, "Hank Paulson's on the phone." So OK. He says, "Dick, I want you in Washington tomorrow, I don't know, 3:00 meeting," or something like that. And we were in the midst of acquiring Wachovia, and I said: "Well, Hank, I'd like to, but we're very busy. We're in the midst of Wachovia." He said, "Dick, I want you in Washington tomorrow at 3:00." "Oh," I said, "OK, I misunderstood you."
And so I jump on a plane, get into Washington at 3:00 in the morning, da, da, da. I don't even know what it's about. In fact, I had thought it was just a meeting with me. I used to meet with Hank every now and then. We used to talk about a lot of things. And there was a crisis, so he probably wants to do that.
And I won't tell you how I found out, but I found out that there was going to be eight other banks there by the time the meeting started, etc., or nine, or whatever the number was.
And so we walk into this meeting, and there's alphabetical order of banks. Because we're a W, we're at the end, on one side. And there's the regulators, Geithner and Bernanke and [then-FDIC Chair] Sheila Bair and [then-Comptroller] John Dugan and Hank on the other side. And there's some people around the rooms and so on.
So you're sitting there looking across the table. How does Hank look?
He looks like he's beat up. I thought it was like death [warmed] over. These guys were working so hard, no sleep.
You were shocked at how bad he looked.
You were talking to them during that period.
Well, yes. But I think the mistake that was made in terms of process was not talking more to people about what should be done and what are the ramifications if we do thus and so, and so on. And this culminated in the infamous October meeting when we were all called to Washington. And I believe the TARP [Troubled Asset Relief Program] decision of forcing people to take money they didn't want or didn't need was one of the worst economic decisions in the history of the United States.
Now, obviously, Hank was involved in that decision. My own intuition is that he was prodded to do that by others. Then he became convinced it was the right thing to do. But I don't think it was his idea or that he was the primary proponent of that process.
Who prompted him to do it?
I think regulators were the ones that were --
I think the Fed was probably number one.
Well, Geithner as head of the New York Fed. Most of this happened in New York. And New York Fed is a permanent member of the FOMC [Federal Open Market Committee] They're the operation that -- they do the transactions of issuing debt, Treasury debt and equity for the Fed and so on. So they're kind of the money market and capital markets engine for the Fed.
And I believe that they felt that the world was coming to an end and we had to save the world, and this was the way to save the world.
Do you think Geithner convinced Paulson?
I think a number of regulators, primarily the Fed, convinced Paulson that that's what they had -- remember, he came out with this toxic assets, they were going to use $700 billion for toxic assets.
And the second thing is --
Tell me the mood as you go into that [Monday] meeting [with Hank Paulson].
We had meetings over the weekend. It was at that point we learned that they were going to do these capital investments to these nine big banks. We were not involved with selecting the nine big banks. We were not involved with the dollar amount that they would get.
What did you think of that idea?
It took my breath away. I was also very surprised that they were going to basically force all of them to take it. The clear message at that meeting when they were all called in was, "You have to take this money." And a lot of them, probably most of them, didn't really need the money. ...
But the idea here was to get lending going again?
That was the stated idea. And we certainly emphasized that in terms of our debt guarantee program. I put this in my speeches and public statements and our guidelines for the program, that this money was to be used to support lending.
So are you on board at that point? Do you think it's a good idea?
No, I never thought any of this was a good idea. I think you do what you need to do.
So you're trying to be a team player even though you're considered not.
I’m trying to be a team player. There was action that was needed to stabilize the system. [If] I was a dictator, would I have done it differently? Yes, but that's really not the point. ... We did what we did and it did, in the short-term, work. It did stabilize the system, and you have to give Hank credit for that.
Longer-term did it meet expectations in terms of these big banks lending? No. Throughout the crisis we consistently saw the smaller banks, who didn't get all this money, were doing a lot better job of lending than the bigger banks. I think it prevented a worse credit contraction, but we still had a credit contraction. ...
It was tense. The weaker banks were happy to take it. The stronger ones, like [Wells Fargo Chair] Dick Kovacevich, didn't want it. I don't think Wells Fargo needed it.
What about Vikram Pandit?
Citi definitely needed it. ...
You're watching all [the Troubled Asset Relief Program negotiations] from the sidelines?
Pretty much. We were not really involved in their first attempt to get TARP passed. We got brought in later because they couldn't get the votes, and so one of the things they decided to do to get the votes was to increase the deposit insurance limit to $250,000. ...
So you had to agree to that?
Right. We had to buy in. They needed us to get the votes, so we got brought in at that point.
And that was throwing something out to Main Street?
That was the Main Street benefit. ...
I was summoned to a meeting. ... It was at Hank Paulson's office. I kept asking him what it was about. Nobody would tell me what it was about. I thought it was about TARP and how to spend the TARP money. ...
I go into the room, and there's Hank sitting there, Ben [Bernanke] sitting there, and Tim Geithner's on the phone. And they basically hand me a piece of paper that would have the FDIC announcing that they're going to guarantee pretty much all of the liabilities in the financial sector. So all the debt we're going to guarantee for banks and bank holding companies.
That was quite a thing, and I didn't want to do that. ... So I told them that I would have to think about that.
On the one hand, it's hard for the chairman of the FDIC to go in a meeting and be pointedly asked by the secretary of the Treasury and the chairman of the Fed to do something and to say no. But I bought for time. I played for time. ...
Was that a tense meeting?
I don't know if it was tense. I was so flabbergasted. At that point I didn't even have the wherewithal to fight back. I just played for time. I said, "I have to go talk to my board about it." ...
So anyway, I went back, talked to the board, my internal directors. They had the same reaction I did. They were incredulous.
What is that they're asking you to do?
... I didn't bring the text with me, but it basically said the FDIC would guarantee all the creditors of banks and bank holding companies, including the investment banks.
So they want your budget?
They want my budget. They wanted my legal authority ... to guarantee debt, guarantee bondholders. It's all about the bondholders.
Where was that money going to come from?
... That what was one of my questions.
One of the criticisms I got during the crisis was that all I cared about was the FDIC, and I didn't care about broader financial stability.
Well the FDIC was holding things together. … If people had lost confidence in the FDIC and started pulling their money out of banks, we would have been back in the Stone Ages. It would have been cataclysmic. I don't even want to think about what would have happened.
So this idea that by caring about the FDIC I wasn't caring about system stability I thought was ludicrous. I was very concerned about the credibility of the FDIC doing what it was supposed to do, which was insure deposits.
Now if I go out and insure all the debt and $13 trillion financial system, what kind of credibility was I going to have? Insured depositors are going to be saying, "They can't do all that."
So I told them that, and that was one of the many arguments I used subsequently to tell them we weren't going to do that. ...
So you're insuring, at the FDIC, Main Street?
But you're being asked by these three guys to insure Wall Street?
Pretty much. To insure the bondholders, and these are big Wall Street firms, pension funds, big bondholders, mutual funds.
Which props up Wall Street, but this is not your mandate?
... It's not anywhere close to our mandate. It was a real stretch in terms of legal authority, and it was a huge stretch in terms of our financial capability to make good on this. ...
So did you say no?
... We entered into a negotiation. Throughout the crisis ... another criticism was that I wasn't a team player, I was always difficult. I tried very hard to meet these folks halfway, even though I didn't agree with a lot of what was going on. ...
The markets were freezing up. Nobody wanted to lend to anybody after the Lehman failure, and I agreed there was a problem with the ability of financial institutions to roll expiring debt. ...
So ... we said we'll guarantee new debt. We will not guarantee the existing debt. That's there for loss absorption if these institutions go down. And then we're also going to charge money for it."
You wanted some moral hazard?
Yeah. Actually our original proposal was we'd only guarantee 90 percent of it. We wanted them to take 10 percent, and that was just a non-starter with both the Fed and the Treasury. They said that wouldn't work. They just refused. ...
So you signed?
We did. I think at the peak of the program it was about $330 billion worth of debt. Have not taken any losses on it so far. I don't think we will. And we did make money off of it.
I don't think that justifies that. There's so much of this, "Oh, we made money off of the bailout." I'm not sure overall we did make money off the bailouts because you have to look at Fannie and Freddie and AIG and GM and some of the other places where the government's still in pretty deep.
We also printed a lot of money, which could come back to bite us.
That’s true. This could have tremendous inflationary pressures down the road. ...
... Oct. 13, 2008 was the original meeting at the Treasury where [then-Treasury Secretary Hank] Paulson hands out the billions of dollars to all the different banks. ... Why couldn't they [agree] that a certain percentage of this was going to go to lending? ...
The so-called injection of capital that occurred in October 2008 had many strange things about it that I think could never be justified. They should have put conditions on the money that they were putting in. They could have said: Anybody who receives money can't pay out bonuses, has to use a fraction of this money for lending to small and medium-sized enterprises.
But there were other peculiar things about this. They said that all the banks had to take it whether they wanted it or not. And the reason they said that was they didn't want to signal that any bank was in particularly dire straits relative to others.
Now I thought we had an economic system where we have capital market discipline. Capital markets are supposed to make judgments about ... what's a good bank and what's not.
How do you make a judgment if you don't have information? And if the regulator has information that says you're about to go bankrupt, isn't that relevant to the capital markets? ...
[Former Wells Fargo Chair Richard] Kovacevich's point of view was he didn't want the money and he didn't think he should take the money because his bank didn't need the money. Do you have some sort of sentiment about that philosophy that he was pronouncing at that point?
... Unless you have an administration that's willing to be forceful with the "too big to fail" institutions, you don't have a real market economy. You don't have a level playing field. You don't have anything that resembles a market.
He may have been, in a sense, bluffing, saying: I don't need the money now. But by the way, I know that I'm too big to fail, and in three months' time if the markets turn out bad, I'll come back to you, but on my terms.
If we had an administration that had said: Take the money now, and if you don't take the money now under these terms, if you need to come back to us in six months' time, the terms are going to be very different, ... I suspect he would have taken it.
In the Oct. 13, 2008, when the bankers are all handed this $125 billion in various amounts, what kind of conditions were put on that money?
There were really not much. We had asked for commitments on loan restructurings for residential mortgages. There was a general commitment. There was no specific commitment.
But you had asked for this in your meetings prior when you talked to Paulson.
We had asked for that. ... But in fairness, I think here was the problem: They wanted everybody to take the money, and probably most of the banks around that table didn't need the money, right? ...
So Hank Paulson is worried that they're not going to take the money.
So they had to make it generous. And the reason they needed everybody to buy off was because there were a few institutions like Citi, Merrill Lynch, I think, Morgan and Goldman, they had at least been able to access private capital, but they were having some troubles too. But the rest of them probably didn't need it.
So to use your words just now, they were buying them off?
Well, buying them off in the sense that if they didn't get ... all the major institutions to take it, then the weak ones would have a big target on their forehead. ...
They didn't want the market to differentiate. They wanted to lump everybody in together, but that meant that they had to force the stronger banks who didn't need the money to take it. And that meant that they couldn't put many conditions or restrictions on it or otherwise the strong banks wouldn't take it.
So the federal government, essentially, the Treasury is begging?
Hank's a pretty forceful person. I would say he was pressuring. He was significantly pressuring.
But he had a weak hand in a sense?
He absolutely had a weak hand. ...
Let's be clear. Capital means they're going to give you money, billions of dollars, and in return you're going to give them some shares.
Well, I will tell you. I'm just repeating what he said, and we were kind of all nodding our heads and said, "Well, yes, if you believe that." And he said: "Basically we're going to do this capital -- you will not be able to repay it for three years. It's going to be at 5 percent interest rate. It will be preferred shares. We're going to take 15 percent once on that. After three years, if you haven't paid it back -- you can't pay it back before three years. After three years, if you haven't paid it back, then it goes up to 8 percent. You know, it will be basically no other really restrictions on it. We're not going to force you to change your lending practices. We're not going to force you to change your compensation practices. You will be able to do business as usual."
But basically you were getting this money from the government, and there were no conditions.
Why are bankers not lending money? ... The Treasury Department said, at least publicly, that [the TARP] money was then going to go through the system and banks would start lending money again. They paid bonuses at the end of the year. They sat on a lot of money. What they didn't do was lend money. ...
It's always difficult to tell whether TARP actually failed in the sense that you are discussing, because of what we don't know. It's the road not traveled. What we don't know is whether there would have been even more deleveraging and less lending without TARP.
You're speaking Obama's language now.
If that is what he's saying, then I guess I'm in good company. I do not fault TARP on that ground.
I think the problem is what you have already identified. There is so much concern about risk that banks simply aren't taking the risks that they would have just a few years ago. ... There is really a different lending culture, which isn't necessarily all bad. ...
Give me some sense of how these meetings are going at the FDIC that you participate in to resolve these and other issues?
There's only been one. There's a big push on transparency. It's all Web-cast. I think the very first meeting, there was a lot of give-and-take. A number of very capable people there. It is absolutely clear to me the FDIC is taking this very seriously, and they are continuously searching for the best process to build up an effective resolution system.
Certainly, [former FDIC Chair] Sheila Bair made a major effort. The current general counsel, Mike Krimminger, goes all over the world to work on this. The acting chair, Marty Gruenberg, is, I think, deeply committed to this. ...
Let's go to TARP [Troubled Asset Relief Program]. So Paulson and Bernanke, ... did they accurately define it to those in Washington in power, to those in Congress? Did they oversell it any? ...
I do not believe that Secretary Paulson and Chairman Bernanke oversold TARP. We were on the edge of an abyss, and it took something extremely dramatic to try and pull us back. It may have been the case that it could have been sold better. …
The forebear of TARP is a program in the '30s called the Reconstruction Finance Corporation, which put billions of dollars of preferred stock into the banking system and was, by all accounts, a highly successful program. I wish they would have gone back to that program and said: Look how well it worked; we're doing the same thing here.
I think the other failure in TARP was not that they went to direct capital injections, which made all the sense in the world, but that they didn't take maybe $200 billion of that $750 billion and put it directly to work in the housing markets, which could have helped a lot.
Because housing is the single most important factor in our economy. The housing market was a true disaster, and it could have been used to try and stabilize housing prices. That could have made a major difference going forward. ...
This is during the campaign. Did the politicians seem to understand the ramifications of what was really going on here? ...
I think for the most part, unlike a lot of what is going on today, that the leading members on both sides of the aisle acted responsibly in recognizing that they needed to act promptly and adopt the TARP legislation, which most understood was not going to be popular. But sometimes you have to rise above that, and that's why I call their actions responsible. ...
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