The Financial Crisis: the FRONTLINE interviews
Money, Power, & Wall Street
sponsored by Duke Sanford School of Public Policy
How prepared were our Treasury and the Fed -- [then-Treasury Secretary Hank] Paulson, [Chairman of the Federal Reserve Ben] Bernanke, [then-President of the Federal Reserve Bank of New York Tim] Geithner in New York -- before this crisis? What did you guys find?
Woefully unprepared. I think that was for me one of the biggest revelations of the year-and-a-half investigation that we undertook. What became clear as you look at the record is the extent to which the people who were charged with overseeing our financial system really didn't have a sense of the risks that were embedded in that system that could collapse our financial system and, ultimately, our economy.
And there's instance after instance where the folks who were in charge, who were charged with protecting the public, are caught completely by surprise. Of course, in 2007, in the spring and summer of 2007, Hank Paulson and Ben Bernanke reassure the public consistently that there is really no chance that the problems in the subprime market will spill over into the larger economy. And of course that turned out to be wholly wrong.
A good example is in July of 2007, when one of the first real signals of trouble to come happens, and that is the hedge funds that are run by Bear Stearns blow up. And then there is a meeting at the Fed about the implications of that. And what you read when you see what happened in that meeting is the view is that Bear Stearns is relatively unique, when, in fact, now we know that the holdings of major investment firms in these toxic subprime securities was pervasive.
You see that it's only in August of 2008 the Treasury claims that it fully understands the depth of the problems at Fannie Mae and Freddie Mac, literally weeks before the government decides to seize those entities. It is only a month before Lehman collapses that the New York Federal Reserve, the Federal Reserve Board of New York, decides that it had better look into the derivatives positions of Lehman Brothers, who had 900,000 derivatives contracts, and only one month before they said, "We'd better get a handle on this."
And of course then they're afraid to ask for the information from Lehman, lest they set off panic in the marketplace.
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 --
Which regulators?
I think the Fed was probably number one.
Bernanke.
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 --
What's your personal assessment of Hank Paulson, [Treasury secretary, 2006-2009]?
I know Hank very well, and I have a lot of respect for Hank.
But yet you said he made a big mistake.
I think he made a huge mistake.
Several.
Yes.
So what's your assessment of him? What's the flaw?
Well, I think, first of all, it's very hard to put yourself in someone else's shoes when going through a crisis, etc. And I want to say again, I don't think there was anybody not trying to do the right thing. I mean, you can make mistakes because you're consciously doing the wrong thing, or you can just make mistakes --
Yeah, and I'm not even suggesting that by any means. I want to say another thing: Every weekend for a while, they were working on a troubled institution. These people were like zombies -- 24 hours and so on.
Early on, does everyone quite understand the mess that they've inherited? What's the feeling around the economic team? ...
... At the beginning, we were really focused on trying to get our arms around what was causing the problem, the magnitude, whether it was institutions, markets, housing, etc.
So we spent a lot of that early time working with the outgoing administration, some of the regulatory agencies, we worked very closely with the Fed [Federal Reserve], the FDIC [Federal Deposit Insurance Corp.], to make sure that we had as many facts as we could.
Back at the time, there was a lot of noise. Estimates in the private sector as to what the size of the hole was differed by a trillion dollars, and in order to craft a plan, you really had to have a better sense of what the facts were as opposed to what the noise was. ...
Was there ever a point where there was [the] feeling that this crisis ... was going to just take over the entire administration, and that all the hopes of other important things to do would have been lost? ...
The president inherited quite a full plate of problems. This was clearly one of the biggest items on his plate, but he also inherited two wars.
The financial crisis was a big component of this, but the economy itself was really falling out of bed. It was declining at over a 7 percent annual rate; we were losing 700-plus thousand jobs a month. The year before he took office, I think the country lost something on the order of 3 million jobs. ...
You were the go-between guy between the Bush administration and the Obama transition team. ... Did it give you a window in on how the Bush folks had been operating? Had they basically already left town to some extent because they knew that this was really somebody else's problem?
Actually no, not at all. I give [Treasury Secretary] Hank Paulson and his team a ton of credit for what they did. Things were moving at lightning speed, we were making battlefield decisions, and he was excellent about reaching out to the Obama team very early on.
In fact, before the election he reached out to both the [Sen. John] McCain [R-Ariz.] folks and to the Obama folks to talk about what was going on, make sure that everyone was up to speed. He knew that the decisions that he was making then were decisions that we were going to have to live with going forward. ...
That to some extent surprises a lot of people, including a lot of the Republicans that are now running for president, it seems. ... How much of a belief was there in the same necessary steps between the Republican and the Democratic side at that point?
... The steps that Secretary Paulson and his team took were I thought, even with hindsight, as you look back you would agree with 85 percent of those decisions.
I don't know if they would come up with a higher number, frankly, and they were absolutely necessary but not sufficient to deal with the whole problem. There just wasn't time. It wasn't for any fault of theirs.
This problem was complex, multifaceted, and they took the first steps which were key, and they deserve a lot of credit for it, but I think the other steps that we took after that were also necessary. …
... The transition was taking place out of this secret headquarters in Dupont Circle. ... What was the headquarters like? ...
... For the economic team there were ... seven or eight offices, and when we first got there, most of them were empty. As people got nominated and chosen, it started to fill in. ...
There was a lot going on at the time. There was a team working on what the stimulus package should be, how big, what elements, etc. There was our team focused on the financial crisis. There was the auto team focused on the auto companies. ...
Would Obama wander through or sit down with you guys? ...
When we started he was still out in Chicago. Then at some point he migrated to the area, to the transition building and had an office down the corridor in the corner. And sure, he would come in.
So it was sort of like a mini-White House for an administration yet to take power.
I suppose.
On that point, were they overstating the problem? Were they panicked?
No, I don't think they were. They were not -- well, I don't know whether they were overstating the problem or not. It was their execution that was wrong. They caused the panic by very poor execution.
So let me say, but I think another issue is that Hank was an investment banker, right? That's his background. That's what he knows.
He was at Goldman Sachs.
So if you're sitting -- and you probably think you run a pretty good bank, right? You've been there for whatever, 30, 40 years, and when he saw that every investment bank was in trouble, and he thinks he runs a pretty good institution or whatever, he just I think assumed then everybody else had to be in trouble, because we know how to run things and we're good, and so it can't be our fault; it must be the world's coming to an end. Possibly, and therefore maybe been easier to convince.
And I'm sure he was talking to investment banks at least more than he was talking to us. And again, I'm not -- I think you can make mistakes still trying to do the right thing. And I have no doubt everybody was trying to do the right thing. I don't want to give any indication, and I really believe that this is --
But I think they did exactly the wrong thing.
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. ...
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. ...
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.
... What were your conversations with [Treasury Secretary Henry "Hank"] Paulson about this problem like?
Initially, I had really no interaction with Hank. ... As the crisis unfolded, Hank started becoming more engaged. But what really got their attention on loan modifications was when we started getting action at the state level, and California moved ahead with a loan-modification program -- working with us -- of the kind that we had urged.
That was really the catalyst. When they realized that the states were going to start going ahead in kind of a piecemeal fashion, we did get Treasury more engaged, and they did end up instituting a loan-modification program.
But again, it was half a loaf. It was voluntary and there wasn't accountability. ... I'd had it with people making public commitments to do something and not doing it, so I wanted very detailed disclosure to find out if the loans were actually being restructured, and we didn't get that.
They also allowed the interest terms to be extended only for five years. They still allowed the servicers to do an individual, loan-by-loan negotiation, which we didn't think there was the time or the resources to do. And servicers, as we can see now, didn't have the staff or capability to do this kind of loan-by-loan thing, but that was what was ... permitted in this agreement.
So it helped. I think we probably got several hundred thousand more loan [modifications] done with that than without it, but it wasn't the really aggressive response that we thought was needed.
... What was the effect of what happened as far as Bear to the rest of the financial sector, to the rest of Wall Street? ...
Bear had always been somewhat of an outlier, so there were those who said: Well I'm pleased; Bear got its comeuppance after all. The shareholders are basically wiped out. Management is displaced, etc.
I think the less emotional and more analytic people on Wall Street said: We are very pleased that the government did step in and that Chase stepped in, because we don't know what could have happened had Bear gone down.
... Basically [Wall] Street felt a bullet had been dodged.
The Street did believe that a bullet had been dodged with Bear, but I think the more analytical people in Wall Street recognized that there were still a lot of bullets coming, and they began to attempt to reduce their risk exposures. ...
... With this amazing crisis hitting, the moves that [Paulson] was making, were they viewed as the right moves? ...
Secretary Paulson was certainly far better known by Wall Street than either Geithner or [Federal Reserve Chairman Ben] Bernanke; after all, he had been CEO of Goldman Sachs. He was very highly regarded by his peers.
The general view was that he understood extremely well the financial situation, and importantly for a crisis, he was a very decisive individual. Those two qualities, I think, made the ideal person. If you go back, it's hard to think of who would have been his equal, much less his better. ...
"The FRONTLINE Interviews" tell the story of history in the making. Produced in collaboration with Duke University’s Rutherfurd Living History Program. Learn more...
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