Money, Power and Wall Street: Part Two (full documentary) | FRONTLINE

Money, Power and Wall Street: Part Two (full documentary) | FRONTLINE

Show Video

>> Tonight on FRONTLINE, episode two  of a four-hour special investigation. >> Shaky home mortgages are triggering  fears of a financial meltdown.   >> Inside Washington's struggle  to respond to the meltdown. >> The dow tumbled 200... >> They were all very afraid of  the possibility of a bank failure.

They didn't know what it would lead to. >> Fears of a global liquidity  crisis have intensified today. >> Inside the critical decisions.

>> The policy makers have  sent inconsistent signals   so the marketplace doesn't know what to expect. >> Turmoil in markets around the globe. >> My god we may be presiding  over the second great depression. >> The politics of a bailout. >> They had to throw their principles  out the door and save the economy. >> America you should be outraged  about Washington is about to do.

>> And the education of a future president. >> The economy is melting, the  Bush administration is leaving   and all eyes are now on Barack  Obama to turn it around. >> Obama gets a real glimpse  of the future disasters coming. >> Money, Power and Wall Street: episode two.

Tonight on FRONTLINE. >>   It was on a cold March day in 2008 that the  fear of a meltdown would become a reality. >> —fears of a financial meltdown on Wall Street— >> foreclosures rose to record highs— >> After the real estate bubble  burst, it would only be a matter   of time before investors would start to lose  confidence in Wall Street's biggest banks.

>> It started with news that some  Bear Stearns hedge funds would— >> The Case-Shiller home price index— >> Bear Stearns was the first to crack. >> Pretty normal morning. And then suddenly,  around 11:00 o'clock, there's a tremor. The stock starts to go down. The CFO of  Bear starts calling down to his desks,   to the repo guys, the bond  guys, "Anybody hear anything? Anybody know anything? What is this?"   "Yeah, the rumor is that we're running out  of cash and that we might be in trouble." >> —leading this very sharp rally on Wall  Street, with the exception of Bear Stearns— >> The rumors swirling around Bear were about  its massive investments in subprime mortgages,   what would become known as "toxic assets."

>> They were big in mortgages.  They were big in packaging them   and creating securities out of them, buying them. >> The road to riches for Bear was simple,   buy hundreds of thousands of subprime  mortgages, then bundle and sell them to   investors. But now the party was over,  and Bear was spiraling out of control. >> You've either got liquidity or you don't, so— >> It was nothing short of surreal. >> But those are the kinds of concerns  in this market, concerns of confidence— >> You're watching on CNBC, et cetera, I  mean, they're talking about where you work. >> Well, the only bank in the red  right now, basically Bear Stearns,   although it is dragging the rest of  the financial markets down, as well.

>> The stock was in freefall, and  the cash reserves were shrinking. >> The stock started to go down. More  and more people called up and said,   "I want my money out" or "I won't trade with  Bear Stearns." And it just completely unwound.

>> Nearly bankrupt, the top brass at  Bear called Wall Street Timothy Geithner,   the President of the New York Federal Reserve. Geithner was Bear's last chance. >> Tim Geithner is at the Federal Reserve bank  of New York. It's the epicenter of the financial   system. He is supposed to be the Fed's front-line  general, field marshal, in the financial markets. >> He's 47 years old. He looks like he's about 32.

>> Extremely smart, extremely aware of  this stuff, very discrete, controlled. >> Geithner realized he needed to  know how bad Bear's books looked.   He dispatched a SWAT team of investigators from  the Federal Reserve to Bear's headquarters. >> Tim Geithner is frantically  involved in trying to figure out   what's going to happen if Bear melts  down, and how you need to prevent it   from going into freefall and dragging down  the rest of the financial sector with it. >> By midnight, by 1:00, 2:00 in the morning,  everybody and their mother has teams at Bear—   Morgan, the Fed, the SEC— and they find out  Bear is stuffed to the gills with toxic waste.

>> Bear was party to complicated financial deals. >> Nobody understood how subprime mortgages had   proliferated through these things  called credit default swaps.   And nobody understood how they'd kind of  gotten into the blood of the financial system. >> Geithner learned that Bear had made credit  default swap deals worth trillions of dollars   all over Wall Street and around the world. >> Because Bear Stearns was so  indebted to so many other people,   their failure to repay their debts, or pay their  debts, would cause a cascade of other failures.

>> Geithner saw what central  bankers fear most, "systemic risk."   Bear was frighteningly interconnected  with other banks up and down Wall Street. >> No one knew what would  be the ramifications, which   other institutions were exposed, which  other institutions would suffer runs. >> Bear Stearns, Geithner  concluded, was "too big to fail."   A bankruptcy could undermine confidence  in every major Wall Street firm.

>> They were all very afraid of the possibility of   a bank failure. They didn't  know what it would lead to. >> The precipitous collapse of Bear Stearns   had taken federal regulators  almost entirely by surprise. >> 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.

They didn't see the fundamental rotting in the  system that had manifested itself for years. >> A year later, Phil Angelides would chair  the Financial Crisis Inquiry Commission. In their report, the commission concluded  regulators at the Federal Reserve,   the SEC and other agencies ignored evidence  that Wall Street was flirting with disaster. >> You would think that the people  who were in charge of our financial   system would have a grip on  the key risks that were in it. And if they did, they would  have moved, in a sense, to   get a handle on those. They had deliberately  turned a blind eye to those problems. >> For three decades, Washington had steadily  moved to a hands-off attitude towards Wall Street.

And with little oversight, inside  these black boxes, Wall Street   had created a host of complicated  but lucrative financial products. >> We had no regulation. No federal or state public official had any  idea what was going on in those markets. It was a dark market. There was no transparency.

>> They were making money, and they want to  continue making money. It was generating fees. Transparency drives profits down,  drives down transaction costs. The banks don't want that   because they make their money from transaction  costs, and they like lots of non-transparency. >> The story has continued to  mushroom, and there are concerns among— >> Now, with Bear failing, those dark markets  threatened to bring down the American economy.

At 4:00 AM, Tim Geithner picked up  a phone and called the chairman of   the Federal Reserve in Washington, Ben Bernanke. >> Ben Bernanke is a highly,  highly respected scholar,   and not only a scholar of economics  but of the Great Depression. >> If he weren't chairman of the Fed, he'd be  top of the list of people you'd be going to for   advice and understanding in all this stuff. >> One of the Depression expert's  biggest fears was being realized. >> It was clear that this had to be contained. There was no doubt in his mind.

He, more than anyone else, appreciated  what would happen if it got out of control. >> Bernanke believed that  just as in the Depression,   a lack of confidence in the banks  could bring down the entire economy. >> You could see the credit default swap   spreads widening. The market was  telling you something was wrong. >> Well,   here we are, 90 minutes in, and it looked— it  looked like it was going to be a big up day, but— >> The next morning, Bernanke warned President  George W. Bush's treasury secretary, Hank Paulson,   of systemic risk to the financial  system if Bear collapsed. >> Paulson was picturing a 1,000  to 2,000-point drop in the Dow   that Monday, possibly the failure  in very short order of a number   of other investment banks— Lehman  Brothers, Morgan Stanley, and so on.

>> Paulson thought he knew the  markets well. Only two years before,   he had run Bear's largest competitor. >> Paulson comes from the great breeds of masters  of the universe that have come from Wall Street. >> Henry Paulson came from Goldman Sachs.  He was a very powerful Wall Street figure.

>> At Goldman, he had overseen the growth  of those complicated financial products,   and was always a champion of the free market. >> Paulson does not have the mentality of a  regulator, he has the mentality of an investment   banker, that the market rewards and the market  punishes, so you don't need a lot of regulation. >> A bailout of Bear Stearns was  not Paulson's style, but Bernanke   and Geithner believed it was too big to fail.  And by that weekend, options were dwindling.

>> It was a gut check moment. Do we feel  like we can take the risk of letting it go? They all looked at each other and just  said, "I'm not ready to take that risk." >> They would use $3 billion of  government money to avoid a bankruptcy. Tim Geithner would broker a fire  sale of Bear Stearns to JP Morgan.

>> The Federal Reserve used powers that it had had  but had lain dormant since the Great Depression. They basically took $30 billion, went  to JP Morgan and say, "We'll give you   $30 billion if you buy this Bear Stearns,  so it doesn't have to go out of business." And they did.

>> What the New York fed did was  take all the bad stuff off the books   of Bear Stearns and allow JP Morgan  to purchase the good part of it. It's kind of like if Uncle Sam had  come in and taken all the vinegar   and allowed JP Morgan to have the wine. >> Bailing out a major financial institution in  crisis was something Tim Geithner had seen before. It was taken from a playbook created back in  the 1990s, how to respond to a financial crisis.

>> Tim Geithner, going back even to  his days in the Clinton administration,   is sort of known as a cool head in a crisis, and in, you know, "How do you manage  a really troubled financial system?" >> In the Clinton administration,  Robert Rubin was the treasury secretary.   Larry Summers was his top deputy. And undersecretary Tim Geithner  was always in the room. >> They had this bonding, unifying experience   during the Clinton administration  putting out these various crises, from Thailand to Japan to Indonesia. Geithner was one of the guys who  was sort of part of that SWAT team   that understood how to  react to a financial crisis. >> They engineered massive bailouts when   American banks were threatened  by financial turmoil overseas.

Working with the International Monetary Fund,   they loaned hundreds of billions in countries  like Mexico, Thailand and South Korea. Rubin and Summers, along with Federal  Reserve chairman Alan Greenspan,   became superstars of the financial world. You had this infamous now Time  magazine cover with Bob Rubin,   Larry Summers and Alan Greenspan, called  "The committee to save the world." And that just sums up the  attitude of the times perfectly. >> By the end of the Clinton administration,  the folks in the Treasury — Geithner, Summers,   Rubin — felt like there  was an established playbook for dealing with a financial crisis.

The first thing you had to do was  come in and flood the banks with   money so that they would keep lending, as  difficult as that was to do politically. >> It was an approach Geithner  took with Bear Stearns,   spending lots of money to  respond to a financial crisis. But Treasury Secretary Henry Paulson thought   Geithner's strategy might  send a dangerous message.

He started publicly reminding Wall Street of  one of the most basic tenets of the free market,   moral hazard. >> I'm as aware as anyone is of  moral hazard. I am also aware of— >> Moral hazard poses the question, if you bail  somebody out of a problem they themselves cause, what incentive will they have the next  time to avoid making the same mistake? >> Paulson is out in public  saying, "It's all on you now. This was a one time only event," right? "You're on your own now. We did it  with Bear, but now you're on your own."

>> There's news today of a federal  bailout for a Wall Street investment— >> It's a fire sale for troubled Bear Stearns. >> The bailout of Bear Stearns landed  in the middle of an election year. >> Are you fired up? Are you ready  to go? Fired up! Ready to go! >> Barack Obama had already  made the economy a key issue. >> —because we've got eight years  of disastrous economic policies. That's what we're going to change when I'm  president of the United States of America! >> Obama very early realized that  things were only going to get worse.

And so, Obama made this decision,  "The thing I'm going to run on   is that there's a problem in our economy, my  opponent doesn't see it, and I can fix it." >> And right after the Bear Stearns crisis,  he turned his attention to Wall Street.   He had an inside source, the  man in the pink striped tie. >> We met for a little dinner, just him and  I, and you know, I was hook, line and sinker. I felt like here was a guy that could  really bring this country together. >> Robert Wolf was a Wall Street power broker,   the chairman of UBS Americas,  part of the giant Swiss bank.

>> From that day on, we started talking very,  very often. I don't know if it was once a week,   three times a week, five times  a week, emailing back and forth. But from that time on, we started talking  about the markets and the economy nonstop. >> And with Wolf's support, Obama decided  to confront the bankers on their own turf. >> I actually went down to the Cooper  Union speech with him in his car.

>> —Senator Barack Obama. >> He was talking about the idea of  making sure that the ethics of Wall Street   was pure and that we were doing the  business that we should be doing. >> We let the special interests put  their thumbs on the economic scales.   We've excused and even embraced an ethic of greed.

>> The Cooper Union speech was essentially Obama's   effort to say to the Democratic Party and to  the country that he believed that we had to   rein in Wall Street, we had to resume  more aggressive regulation of Wall Street. >> Instead of establishing a 21st century   regulatory framework, we  simply dismantled the old one. In doing so, we encouraged a  winner-take-all, anything-goes— >> In the audience, Wall Street's power  brokers were paying close attention. >> He was sitting in the heart of the world  financial center, talking about regulation   before we started talking about regulation. >> A free market was never  meant to be a free license   to take whatever you can  get, however you can get it. >> I would say the reaction  wasn't great from Wall Street.

But you know, to the president's  credit, that didn't stop him from   laying out what he thought  was going to be necessary. >>   The campaign continued. But over the next few months,  the news didn't get any better. >> Profits in the banking industry are plunging— >> The jobless rate in America  has now soared to 6.1 percent— >> The markets were on the edge. >> The Dow tumbled 240 points,  while the NASDAQ sank 46.

>> At the White House, President Bush decided  Secretary Paulson would handle the crisis. >> President Bush, who's in the  final months of his presidency,   was receptive to letting Paulson  decide the best way to fix the problem. In effect, he said to Paulson, "I've got your  back. I'm going to get you whatever you need. But you're the front— you're  the front-line general here."

>> Paulson hoped the failure of Bear Stearns was  an isolated event. Wall Street was now on notice. And other banks would have  to take care of themselves. >> He was relatively sanguine. And he thought, "well, this is"—  you know, "This is a one-off.

They screwed up, but you know, others  aren't going to be quite that bad." >> It felt like this was a crisis,   but not an uncontrollable one. This  was something that could be stopped. A finger in the dike would end up working fine. >> Paulson told President Bush what was needed  now was to rebuild confidence in the economy.   Bush's speech writer, Matt  Latimer, helped craft the message.

>> The attitude was to emphasize how good  the economy was, how things were improving. We'd have different bullet points and  things we'd emphasize in speeches. And over time, some of the bullet  points stopped being relevant,   or they were actually bad signs,  so we took them off the list. So the list of good news kept dwindling down.

>> I believe market conditions  will continue to improve. I am confident because our economy is  resilient, and deep and competitive. And I want Americans to be confident, as well. >> Both Paulson and Bernanke  insisted all was well. >> We will work our way  through these financial storms.

We will work our way through this  cyclical movement that we have. And the economy will return to good growth. >> It became known as the summer of assurances. >> When will the economy turn around? I'm not an  economist, but I do believe that we're growing. And I can remember, you know, this  press conference here where people   yelling recession this, recession  that, as if you're economists. And I'm an optimist.

You know, I believe there's a lot  of positive things for our economy. >> But there were strong  warnings of what was to come. >> A bullet had been dodged with Bear,  but I think the more analytical people   on Wall Street recognized that there  were still a lot of bullets coming. The prognosis for the near future was  that there were still huge problems.

>> That summer, as the financial  crisis became increasingly obvious,   there was no decisive action from those in charge. >> That's one of the most striking parts of  the story, is that, first of all, how little   the people who were in charge of our system knew  and/or did in the wake of this oncoming crisis. And secondly, once the evidence was clear that  the system itself was shaky and unsound, how there   wasn't definitive and strong action to try to  curb what was becoming a disaster for the country.

>> When asked why the government  did not do more that summer,   Assistant Treasury Secretary  Michele Davis said she and Paulson believed the government was powerless  to prevent the looming crisis. >> The American people expect the Federal  government to have the authority to   prevent a disaster when they can see it coming. And we don't have that authority. We also all knew it was June,  July of an election year. There was not much realistic chance of  actually somehow enacting new authorities. So all we could do was look at the authorities  we had and try to figure out what we could use.

>> These are the people who we charge  with the responsibility of monitoring. They're the ones who are supposed to keep  out for systemic risk in our country. That's their job every day.

Why didn't someone stand up and say, "Wait a  minute, this is a lot bigger than Bear Stearns?" >> By the fall, in New York City, on Wall  Street, there was a palpable sense of unease. >> —is up, gasoline's up, food prices  up, stocks going way, way, way, way down— >> But Wall Street didn't know where  or when the panic would strike next. >> Fears of a global liquidity  crisis have intensified today— >> Then it hit. In the crosshairs, the world's  fourth largest investment bank, Lehman Brothers. >> —true in the case of Lehman  Brothers, shares of which— >> Lehman is quaking. They're having to bring  in a quarter of a trillion dollars a day,   that goes out the next morning, just to survive. >> Back when the mortgage business was  becoming the biggest casino on Wall Street,   Lehman was one of the highest rollers,  betting hundreds of billions of dollars.

Just like Bear Stearns, Lehman's bets had gone  bad. And all over Wall Street, they knew it. >> —stock price dropped 45 percent Tuesday— >> Concerns about the company seemed  unlikely to ease any time soon. >> —and many, many questions— >> They've got zero leverage. They have  to do something soon. It's obvious— >> Dick Fuld ran the company. On Wall  Street, they called him "the gorilla.' >> It's like you poured a bull into a suit.  He just— he just can't stop being Dick Fuld. And the whole firm came to be stamped with that.

>> Many believed Fuld's Lehman  Brothers was too big to fail,   and Fuld seemed to think neither Geithner  nor Paulson would ever let it go under. >> Dick Fuld is still believing in the orthodoxy. Even though Paulson is saying publicly,  "You're on your own," he's, like, "What, are you kidding? If there's trouble,  the government's going to come and take us. They are going to come and  do what we need to do because   the world can't live without Lehman Brothers  at the center of the financial system.

It'll be a complete nightmare." >> And Fuld believed he had  a possible ally in Geithner. He was one of their own. He'd brokered the Bear deal.

And he was a member of a very exclusive club. >> The board of the New York Fed is made  up of many of the titans of finance. That's really, in a way, the  ultimate club on Wall Street. They determine who the president  of the New York Fed is.

It's really the ultimate insiders' institution. >> Now on phone calls with  Hank Paulson and Ben Bernanke,   Geithner argued they might have  to follow the bailout playbook. >> Geithner tells Paulson, "I believe we are  going to have to put government money in. And you'll have no credibility if you  say we're not going to do it and we are."   So we know there's that tension.

>> So hank Paulson's sitting  there, and it turns out that   we're having the largest crisis Wall  Street has seen since the Great Depression. And he's at the center of it. And at this point  the question becomes, "What does hank Paulson do?" >> Moral hazard seemed to be  driving Paulson's decision.

>> At this point, he makes a critical decision  because of this issue of moral hazard, that   Lehman will be allowed to fail. >> It was a very high-stakes game  of signaling that he was playing. He wanted to show these guys, you know,  all of his old buddies on Wall Street,   that they were going to need to  step up and do something themselves. >> Friday night, September 12th,  2008, after the markets closed,   the heads of Wall Street's largest firms were  summoned to the Federal Reserve Bank in New York. This weekend would be a critical  moment in the story of the meltdown. >> About 4:00 or 5:00 o'clock, the  various officials from the Federal Reserve   started phoning the bank chiefs. Cell  phones started going off. And they said,  

"You need to be down here at 6:00  o'clock. We want to talk to you." >> I got a phone call about 5:00 o'clock saying,  "Be at the Fed at 6:00 o'clock" that evening. I was in Merrill Lynch's midtown facilities.  And I live in Westchester, so I was trying   to get out of the city early because the  traffic is always bad on a Friday night.

I went by myself. And for the most part, the CEOs of the   large investment banks and commercial  banks were all there by themselves. >> So everybody converged.

At that point, it was just the CEOs of  the main houses and very senior advisers. >> You had about a dozen different CEOs there. And you have in there Tim from the Fed. You have Henry Paulson as the treasury secretary. >> Paulson delivered the message.

Lehman was in a death spiral, and  there would be no government bailout. >> They'd said to us we collectively  had to find a solution for this. And this is the important part. The government was not going to  provide any form of assistance.

>> It didn't take long for candidate  Obama to also hear the news. At the time, he had a secret inside source. >> I was speaking to the senator all along. When we started talking Friday night,  he was asking the tough question.

>> UBS chairman Robert Wolf was stepping out  of the meetings to keep Obama up to speed. >> He's saying, "Barack, this is bad. Lehman could go down, but AIG is  right behind it, as well as Merrill." He lays it out. >> I was clear that, you  know, from my perspective,   I think immediately, we will see the  markets and funding start to dry up. You'll see a lack of liquidity. And we're  going to be in a situation of the unknown.

>> The other Wall Street banks said  they were not about to rescue Lehman,   but Paulson was standing firm. There would be no bailout. Geithner and Bernanke would go along.

>> Geithner should have  been spending the summer of   2008 figuring out what to  do if there was a Lehman. And they didn't do that. This is a historic failure. They should not have been in a BlackBerry  crisis environment in the fall.   They're essentially unprepared. >> By Sunday evening, it  was over at Lehman Brothers.

The lawyers spent the night  preparing the bankruptcy papers. On Monday morning, Tim Geithner  began his day working the phones. His logs from the day show eight  calls with Secretary Paulson. The early vibrations from  Wall Street weren't good.

>> —Lehman announcing early this morning it will  file for bankruptcy, confirming all those reports. >> —particularly unsettling for Lehman  Brothers employees, 25,000 worldwide— >> Paulson headed to the White  House to reassure the markets. >> Good afternoon, everyone. And I  hope you all had an enjoyable weekend.

Yeah. Yeah. Well, as you know— >> The Fed and the Treasury thought that  Lehman could go under without causing a   major conflagration, and that it would be a  big event, but it wouldn't cause a cataclysm. >> But the American people can  remain confident in the soundness   and the resilience of our financial system.

Thank you very much. >> Paulson had bet the markets  would take care of themselves. He would soon discover he was wrong.

>> The stock market dropped by  hundreds of points right from the open— >> Everything freezes. And that's what causes the crisis. And it really started because Lehman  Brothers went into bankruptcy. >> Lehman collapses, and there are shock  waves through the world financial system,   all around the world, huge panic. >> No bank wants to lend to any other bank   because they're afraid that the other  bank won't be able to pay them back.

>> —turmoil in markets around the globe— >> Why didn't the government save Lehman  the way that it stepped in for Bear Stearns? >> At Paulson's office, the telephones lit  up, dozens of calls from around the country. >> Hank was very nervous. He was getting calls from large  manufacturing companies that   were struggling because of the  credit markets being frozen. The longer it went on, the more  trouble the economy was going to be in. —devastated by losses in mortgage investments— >> I know they're going to  be asked to bail out AIG— >> It's a tough day, man. It's  a tough day, but less is more.

>> The system stopped. All forms of payment froze when  we got to the depth of the panic. Banks wouldn't lend money to each other. The first money market mutual fund in the  United States, quote, "broke the buck."

Commercial paper, the most basic— one of the most  basic instruments in finance— that market failed. >> Investors were shaken by  Lehman's bankruptcy filing— >> Geithner's logs show 55 phone calls this  day. Many told him what he already knew,   the decision not to bail out Lehman was  at the heart of the expanding crisis. >> The policy makers have  sent inconsistent signals. They saved Bear.

They didn't save Lehman. So the marketplace doesn't know what to expect. A nd there's no doubt that in the wake of  Lehman, there's real panic in the marketplace. NARRATOR: Paulson had made the tough decision  and was now responsible for the consequences. >> I'm sure that Paulson is sitting there—  and he doesn't strike me as the most   reflective guy necessarily, but  he must have been sitting there, everybody was sitting there, saying,   "My God, we may be presiding over  the second Great Depression." This is the utter nightmare of an economic  policy maker. You're sitting there,  

and you may have just made the  decision that destroyed the world. Absolutely terrifying moment. >> Yes, we can! Yes, we can! >> Inside the campaign, Barack Obama had  been hearing about the meltdown in real time,   with constant updates from his economic team. >> Senator Obama was engaged before Lehman. But once Lehman hit, you know, I  think he was all over it, thinking   in a proactive and prospective way of  how this was going to impact the economy.

>> And the candidate had another  inside source, Hank Paulson. >> Secretary Paulson and the administration  are calling then candidate Obama, and they're saying, "Look, we think  the world is close to coming to an end,   and we really need your support." >> Obama was being briefed  about a brand-new crisis.

AIG, the world's largest  insurance company, was collapsing. >> When Lehman goes bankrupt, all of a sudden,  AIG says, "We're sitting on this huge deficit. We just promised to pay all these people millions  and millions of dollars if Lehman went bankrupt, assuming that Lehman could  never possibly go bankrupt.

And now Lehman has gone bankrupt." >> Obama was told that the failure of AIG was far   worse than Lehman and threatened  a full-scale worldwide depression. >> AIG has problems that make everybody  else's problems look like child's play. >> AIG does not have the money in the  bank to support the commitments it made.

>> AIG plunging— >> At one point, they were down 70 percent— >> They face the hammer of a credit  rating agency downgrade, which— >> Once again, Geithner and Paulson  were only now learning the details   about the hidden business dealings  of a major Wall Street institution. >> Everyone was having to learn all  about AIG, you know, in real time,   learn about the institution at the  same time that they're having to make decisions, and not even having  time to figure out who the   big counterparties are because  you're faced with— it's Monday night, and if you don't do something in 24 hours,  you're going to see the consequences. >> Here's this— you know, this mammoth institution  that turns out to have an enormous hole in it.

And again, policy makers just  come to grips with the extent   of the challenges and the problems  days before its imminent collapse. >> Geithner realized that if AIG went down, the  consequences would be even worse than Lehman.   He argued for another bailout. >> Tim Geithner thought that if they  did not do everything they had to do to   save AIG, as distasteful as it was, that they would be jeopardizing  the global economy. >> He certainly talks now of  having stared into the abyss   after Lehman and concluded that that was  not going to happen again on his watch.

>> Paulson, reeling, changed course again.  He'd support Geithner's rescue of AIG. >> They swallow hard, and  they do what they have to do. And so much for moral hazard, right? So much for moral hazard  because you can't let AIG fail.

>> They had to throw their principles  out the door and save the economy. And whatever criticism there would  be of government intervention   was a small price to pay for the deluge that  would have occurred if AIG had collapsed. >> It was at this moment that  Geithner faced a fateful decision.  

One question was especially sensitive. Should he punish the banks that  were parties in AIG's toxic deals   by making them take a financial hit? On  Wall Street, it's called a "haircut." >> There's this very delicate  moment at that precise time   when Geithner and others have the power to say, "OK, we're going to save AIG, but the cost to  you, Goldman Sachs, or Citi or anyone else,   is that you have to take a haircut. You have to take a discount  on your insurance policy. You know that you're going to go—  you're going to claim your insurance,   but instead of claiming 100 percent of it, I want you to agree right now you're  only going to claim 50 percent of it." >> But that's not what Geithner decided.

The U.S. government, he said,   had no choice but to pay off the big  banks' claims against AIG at full value. >> Geithner's entire recovery  plan depended on confidence. And if you suddenly started going in and  giving haircuts, people are going to get upset. They're going to be worried. Investors are going to pull back right  at the time when they needed investors   to have enough confidence in these  banks to put their money back in.

>> The decision meant billions of dollars  would flow to Wall Street's largest banks. >> If the government hadn't intervened,   those counterparties would have taken huge  losses, so there was some leverage there. At least tell them, you know,  "You're going to take 10 percent." That just— that would have helped.

But there was just willingness to kind  of throw lots of money at the problem. And I don't— I think we threw more money at  the problem than we needed to. Absolutely. >> Geithner's bailout put the government on  the hook for more than $180 billion dollars. Goldman Sachs and the other banks  would each receive billions.

>> Stocks plunged again. In the  end, the Dow plummeted 449 points— >> Geithner had orchestrated the AIG rescue in  only a few days, but it did not stop the meltdown. >> —plummeting 504 point— >> This is DEFCON 4, whatever. This was the complete nightmare. By Wednesday, you'd basically had a complete  shutdown of the world capital market. It's just—  

no, this is absolute terror. >> Ben Bernanke called Hank Paulson at Treasury. >> Bernanke basically calls up Paulson and says,  "There's no end game in sight that looks good. Things only look like they're going to get worse.

We have to do something more direct, more direct  involvement of government in the banking sector." >> Bernanke wanted Paulson  to help convince Congress   to initiate a massive bailout of Wall Street. >> Bernanke says to Paulson— first of  all, he says, "You have to go to Congress.   We can't do this anymore on a case-by-case basis." At that point, Paulson bowed to the inevitable.  One thing Paulson said to me in an interview is,  

"When the situation changes, you have to  be willing to change with the situation." >> The ext day Paulson ad Bernanke traveled  to capitol hill for an emergency meeting. >> On Thursday, late afternoon,  they go to Nancy Pelosi's office.

And there's a meeting of the senior legislators  from both parties in both House and Senate. >> It was obviously a big meeting. I had no idea I was going to hear what I heard. >> Secretary of the Treasury Paulson  and the chairman of the Fed came in and   kind of dropped a bomb on the meeting. >> They said they needed the authority to use  $700 billion to un-stop the credit markets.

>> Sitting in that room with Hank Paulson saying  to us, in a very measured tones, no hyperbole,   no excessive adjectives, that, "Unless you act,   the financial system of this country and the  world will melt down in a matter of days." >> They came in, described a financial  meltdown of epic proportions. And when that was finished,  the chairman of the Fed said,   "If we do not act now, we will  not have an economy by Monday." >> There was literally a pause in  that room where the oxygen left.

>> And they said to us they needed it by  Monday. We said, "Well, that's not reasonable.' >> Harry Reid, the   Senate Democratic leader, said, "This is  the U.S. Senate. We can't move that fast." >> Paulson felt that he needed to move swiftly and  almost the economic equivalent of "shock and awe."

>> We just had what I believe  was a very productive meeting,   where we heard from the administration— >> It's as close to a blank check as you can  get without actually asking for a blank check. >> Paulson wanted the $700  billion authorized immediately. >> And predictably, the reaction  on Capitol Hill was toxic. They were furious. >> America, you should be outraged  about what Washington is about to do! >> It is unprecedented and unaffordable   and unacceptable expansion of  federal power that our kids— >> Conservative Republicans in  the House were in full revolt.

>> But this is essentially Mr. Paulson's  bill to help his friends, and I can't buy it! >> Many of us felt like we were being  asked to choose between the slippery   slope to socialism and the next Great Depression, not the kind of decision that you  want to make at the snap of a finger. >> The bill was stuck, the markets plunging.

Suddenly, presidential politics intervened. >> America this week faces an historic  crisis in our financial system. Tomorrow morning, I'll suspend my campaign  and return to Washington after speaking— >> Out of the complete blue, John McCain gives   some speech saying he's suspending his  campaign and he's coming to Washington, and he's calling a summit meeting and was  going to solve all these problems for us. There was a very delicate negotiation going on,   and he was just throwing himself into  the middle of it for no apparent reason. >> I'm calling on the president  to convene a leadership meeting   from both houses of Congress,  including Senator Obama and myself. It's time for both parties to come  together to solve this problem.

>> He was sort of throwing a "Hail Mary" pass   to say, "Well, let's just— I'll suspend my  campaign and we'll all go back to the White House, and we'll figure out what to do  about this terrible economic crisis." >> The president has invited Senators McCain  and Obama to the White House on Thursday— >> —reminder that the financial crisis affects  the political campaign, and the campaign in turn— >> McCain is going to have this meeting, kind of a  summit today with the president and Barack Obama— >> On September 25th, a hastily called meeting  at the White House. Paulson arrived first. Within 20 minutes, Barack Obama, John McCain  and prominent members of the House and Senate. >> We go there to the White House. There is a division, with everybody  on one side, House and Senate   Democrats, Senate Republicans and Treasury.

>> We're in a serious economic crisis in the  country if we don't pass a piece of legislation. >> They sit around the Cabinet Room  table, and President Bush says, "If we don't get the money flowing,  if we don't get the credit flowing,   this sucker could go down,"  meaning the economy as a whole. And then he opens it up. >> McCain walks into the meeting with, like, a  cue card with a couple things scribbled on it. Obama doesn't even wait for McCain to start. He just moves right in.

>> Senator Obama has been talking  to Paulson, has been talking to   Warren Buffett and Paul Volcker and Larry Summers,  and you know, a host of other economic advisers. >> Obama is prepared and he talks about what  needs to happen, and "We'll pull together," and   he's been— he doesn't want to take over in a country which is in depression, so he's extremely  supportive of this whole emergency bailout thing. >> Senator Obama said, "Well,  I'd really like to hear from   Senator McCain because he's the  person who called for this meeting."

>> McCain is fumbling with his cue cards. He doesn't even barely get started. Obama kind of patronizes him, saying, "I  think Senator McCain has something to say." McCain just melts on the spot. >> Obama took charge, had authority.

John McCain had no plan, no strategy. I don't think he understood what was happening,   or didn't have a plan for  what he wanted to accomplish. >> President Bush whispered to Nancy  Pelosi, who was sitting next to him,   when McCain was talking, he said, "You guys are going to miss me."

And she kind of laughed. >> The meeting ends up breaking into—  into a cacophony of shouting and—   and screaming back and forth. And Bush stands up and says, "Well, I've clearly  lost control of this meeting," and he walks out. >> And another Republican at the table  joked to the person sitting next to him,   "After this, even we're going to vote for Obama." That was the level of Obama's  dominance in this meeting. >> It becomes a turning point  because McCain started this.

He suspended his campaign. Obama did not suspend his campaign. McCain promised some sort of dramatic action. He sent mixed signals and did not seem to have the  authority that a commander-in-chief should have. And I don't think he ever really  quite recovered from that. >> It would take another week, but in the  end, Congress finally passed Paulson's bill.

>> Yeas are 263, the nays are 171. The motion is adopted. >> Paulson now had $700 billion, known  as TARP, Troubled Asset Relief Program. >> 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 that October, Paulson decided  to use the money in a dramatic way.

Secretary of the Treasury Paulson, the apostle  of the free market and believer in moral hazard,   would now initiate the largest government intervention in Wall Street  since the Great Depression. >> He was put in the position of  doing the last thing he wanted to do,   which was to step in directly with  government capital into the banking system. For him, this is a step— this is  a true crossing of the Rubicon. >> On October 12th, he acted. >> I got a phone call on Sunday from  Secretary Paulson, and he basically said, "Ken, I need you to be in Washington Monday." And he said, "I really can't  tell you a lot about it.'

>> He said, "Be at the Treasury  at 3:00 o'clock tomorrow."   I said, "Well, what's the topic?" "You'll find out when you get there." I said, "Well, who's coming?"  "You'll find out when you get there. See you at 3:00," click.

>> Seven other heads of the nation's  largest banks received a similar summons. >> They turn up at 3:00 o'clock, and  they all file into the conference room,   which is across the hall  from Mr. Paulson's office. >> Paulson got right down to business. >> Because it's Paulson, who's not  a man who beats around the bush,   it became clear relatively  quickly what he was proposing. >> He says, "I've got here documents  that say that the U.S. government is   going to make an injection of capital  into each one of your companies."

>> Paulson was about to hand out billions dollars. >> He turned it over to Geithner. He said, "OK, here's how  much you're going to get." And he went around the room, and he came to me  and he said, "$25 billion b— b— b— billion." And then the rest of them. And I almost fell out of my chair.

>> They go through in a very,   very rapid way that each of us is going to  take this taxpayer money, the TARP money. >> And he basically says, "You can't leave  this room until you agree to take this money." >> "We're all going to do it for the good  of the country, for the good of the system.

And it's not really discretionary." >> It was unprecedented. In return for billions of dollars, the government  would take an ownership stake in the banks. But even with the financial system in  freefall, some bankers fought back.

>> It was a very contentious meeting,  lots of questions, lots of doubts. >> Richard Kovacevich, chairman  of Wells Fargo, led the charge. >> Kovacevich stood up, said,   "I don't want the money. I don't need  the money. I don't want the money. I want to have nothing to do with this.' >> 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 will be  declared capital-deficient." I was stunned. >> Paulson gave each man a single piece  of paper spelling out the conditions. >> Before they had to leave  town that night, they were told,   "Return this document with your signature on it." And all nine of them did so.

>> The terms were extremely generous. >> They don't have to modify any mortgages. They don't have to put  limits on their own salaries   or their own compensation or their own bonuses.

They don't have to do anything differently than  they were doing before. They don't even have to   agree to major regulatory changes. Basically, they are sitting  fat and pretty and happy. >> Treasury Secretary Paulson had just given  $125 billion to the nation's richest banks. And it was only the beginning. >>   The real story of this financial  crisis is probably not so much   whether the bailout was the right  thing to do or the wrong thing to do.

The real question is, how did it come to be   that this nation found itself with two stark,  painful choices, one of which was to wade in and commit trillions of dollars to save the  financial system, where we still end up losing   millions of jobs, millions  of people lose their homes, trillions of dollars of wealth is wiped away,   and the other choice is to face  the risk of total collapse. That's the real story. How did policy makers,  our government leaders, the financial sector   maneuver this country into that kind of corner?

2021-08-22 07:48

Show Video

Other news