CHAPTER TWO
In a leafy enclave of northwest Washington, D.C., Hank Paulson was pacing back and forth in his living room, his cell phone sitting in its usual place, against his ear. It was Easter Sunday, exactly one week after the takeover of Bear Stearns, and Paulson had promised his wife, Wendy, that they’d take a bicycle ride in Rock Creek Park, the large public space that bisects the capital, just down the road from their home. She had been annoyed with him all weekend for spending so much time on the phone.
“Come on, just for an hour,” she said, trying to coax him out of the house. He finally relented; it was the first time in more than a week that he would try to take his mind off work.
Until his phone rang again.
Seconds later, after hearing what the caller had to say, the Treasury secretary exclaimed, “That makes me want to vomit!”
It was Jamie Dimon on his speakerphone from his wood-paneled office on the eighth floor of JP Morgan’s headquarters in Midtown Manhattan, overlooking a barren Park Avenue. He had just told Paulson something the Treasury secretary didn’t want to hear: Dimon had decided to “recut” his $2-a-share deal for Bear Stearns and raise the price to $10.
The news wasn’t completely unexpected. Paulson, who could be relentless, had phoned Dimon virtually every day that week (interrupting his early-morning treadmill jog at least once), and based on those conversations, he knew a higher price for Bear was a possibility. In the days since announcing the deal, both men had become justifiably worried that disgruntled Bear shareholders would vote down the deal in protest of the low price, creating another run on the firm.
But Dimon’s decision still roiled Paulson. He had expected that if Dimon did raise the price, he’d hike it by no more than a few dollars—up to $8 a share, say, but not into double digits.
“That’s more than we talked about,” replied Paulson, who was now whispering into the phone in his unmistakable raspy voice, hardly able to believe what he was hearing. Just a week earlier, when Dimon had indicated that he was prepared to pay $4 a share, Paulson had privately instructed him to lower the price: “I could see something nominal, like one or two dollars per share,” he had said. The fact was, Bear was insolvent without the government’s offer to backstop $29 billion of its debt, and Paulson did not want to be seen as a patsy, bailing out his friends on Wall Street.
“I can’t see why they’re getting anything,” he told Dimon.
So far, nobody other than Dimon knew that the Treasury secretary of the United States of America was behind the original paltry sale price, and Paulson wanted to keep it that way. Like most conservatives, he still honored the principle of “the invisible hand”—that widely held, neoclassical economic notion that official intervention was at best a last resort.
As a former CEO himself, Paulson understood Dimon’s position perfectly well. He, too, wanted to restore calm to the markets, for it had been a nail-biter of a week. After the $2-a-share purchase price had been announced, Bear’s shareholders and employees had practically revolted, threatening to upend not just the deal but also the entire market. And in the hastily arranged merger agreement, Dimon had found a glaring error, which he blamed on his lawyers, Wachtell, Lipton, Rosen & Katz: Bear’s shareholders could vote against the deal, and JP Morgan would still be on the hook to guarantee its trades for an entire year.
Dimon recounted to Paulson how Ed Moldaver, a longtime broker at Bear—“an asshole,” in Dimon’s estimation—had publicly mocked him during a meeting Dimon had called to explain the transaction to Bear employees. “This isn’t a shotgun marriage,” Moldaver scowled in front of hundreds of Bear staffers. “This is more like a rape.”
In Washington, Paulson now revealed to Dimon that he was facing a similar revolt, for most people in government thought everyone on Wall Street was greedy and overpaid, and bailing them out was about as popular a notion as raising taxes. “I’m getting it from all sides,” he confided.
To make matters worse, it was a presidential election year. On Monday, a day after the Bear Stearns deal was announced, Democratic candidate Senator Hillary Clinton, who at the time had a slight lead in national polls, criticized the bailout, going so far as to link the Bush administration’s rescue of Bear Stearns to the problems in Iraq.
Barney Frank, the Democratic chairman of the House Financial Services Committee, was every bit as harsh. He, too, turned the deal into an indictment of Paulson’s boss, President Bush. “All these years of deregulation by the Republicans and the absence of regulation as these new financial instruments have grown have allowed them to take a large chunk of the economy hostage,” Frank complained. “And we have to pay ransom, like it or not.”
While attacking the rescue plan was one of the few completely bipartisan affairs in town, the Republicans hated it for different reasons. The conservatives believed that the marketplace would take care of everything, and that any government intervention was bound to make things worse. “First, do no harm!” they’d say, quoting Hippocrates’ Epidemics. A little blood might be spilled, but creative destruction was one of the costs of capitalism. Moderate Republicans, meanwhile, were inundated with complaints from their constituents, who wondered why the parties responsible for decimating their 401(k)s deserved any taxpayer money at all.
Everyone was calling it a “bailout”—a word Paulson hated. As far as he was concerned, he had just helped save the American economy. It was a bailout in the literal sense of bailing water out of a sinking boat, not a handout. He didn’t understand why no one in Washington could see that distinction.
At some level, though, he knew there would be hell to pay, no matter how correct his prognosis proved to be. While the president publicly praised him and the deal, Bush, privately, was livid. The president understood the necessity of the bailout, but he also appreciated how it would be politicized. “We’re gonna get killed on this, aren’t we?” he had asked Paulson, knowing full well that the answer was yes.
Paulson didn’t need to be reminded where the president stood on the issue. The Wednesday before the Bear deal, Paulson had spent the afternoon in the Oval Office advising Bush on the speech he would give that coming Friday to the Economic Club of New York at the Hilton Hotel. Bush had included a line in his remarks asserting that there would be no bailouts.
“Don’t say that,” Paulson insisted, looking over the draft.
“Why?” Bush asked. “We’re not going to have a bailout.”
Paulson broke the bad news to him: “You may need a bailout, as bad as that sounds.”
All in all, the situation had become Paulson’s worst nightmare: The economy had turned into a political football, his reputation was on the line, and he was stuck playing by Washington rules.
Henry Paulson’s understanding of how things worked in the nation’s capital was part of the reason he had turned down the job of Treasury secretary not once, but twice in the spring of 2006. He knew Washington; his first job after college had been at the Defense Department, and he had worked in the Nixon White House for a number of years after that. So he appreciated the risks that the job presented. “I will get down here and I won’t be able to work with these people, and I’ll leave with a bad reputation. Look at what people said about Snow and O’Neill!” he said. His predecessors, John Snow and Paul O’Neill, had both come to Washington as wizards of their respective industries but had departed with their legacies tarnished.