At 4:00 a.m. on Friday morning, Vikram Pandit, Citigroup’s CEO, was puttering around his Upper East Side apartment, catching up on his e-mail. He had gotten only a few hours of sleep, having arrived home late after spending the day at the Wharton School in Philadelphia, where he had given a lecture in which he told the audience, “You have been great at picking exactly the right time to be at school.”
His in-box was almost full, with e-mail traffic among his inner circle sharing the latest news: Hours earlier the Federal Deposit Insurance Corporation had swooped in to seize Washington Mutual, which held more than $300 billion in assets—making it the biggest bank failure in the nation’s history. The FDIC had already run a mini-auction for WaMu, the largest of the savings and loans, requesting best bids a day before its announcement, just in case. The FDIC typically conducts seizures of troubled banks on Friday evenings, to allow regulators time over the following weekend to ready the institution to open under government oversight on Monday. But WaMu was deteriorating so rapidly—nearly $17 billion had been withdrawn in ten days—that the regulators had no choice.
Pandit, who had himself submitted an early bid for WaMu, learned that his rival, Jamie Dimon, had won the auction, paying $1.9 billion.
As Pandit made his way through the stream of e-mails, one from Bob Steel of Wachovia caught his eye. He knew that Steel had called his office earlier that week, and he imagined he knew the purpose of that calclass="underline" Steel was probably interested in selling the firm. To Pandit, Wachovia was an attractive purchase because of its strong deposit base, which Citi, despite its mammoth size, lacked. But he knew instinctively that he would be interested in such a deal only if he could buy the company on the cheap.
“I’m sorry, I’ve been away,” Pandit e-mailed Steel at 4:27 a.m. “But I’m back, call any time.”
Minutes later, Steel, who was also awake, phoned him.
Having been abandoned at the altar the previous weekend by Goldman Sachs and Morgan Stanley—and with Kevin Warsh still pressuring him—Steel was eager to line up as many options as possible, suspecting that the upcoming weekend could well turn into another merger sprint. He had also reached out to Dick Kovacevich at Wells Fargo, whom he had run into in Aspen the previous weekend, and had scheduled a breakfast with him at the Carlyle Hotel on Sunday morning.
If everything worked out the way he hoped, he might well be able to set up an auction.
After the fiasco of Thursday’s meeting, Paulson and the White House agreed that they needed to do everything possible to resume the talks on the bailout. “Time,” Paulson warned Josh Bolten, “is running out.”
By 3:15 p.m. on Saturday, September 27, Paulson and his Treasury team were heading down the hall of the Hill’s Cannon House Office Building to conference room H-230, where they would meet with congressional leaders one more time, in hopes of fashioning a compromise.
Kashkari, in a huddle with the Treasury team before the gathering, reminded everyone that the biggest hurdle they faced was that Congress did not truly appreciate the severity of the economy’s problems. “We’ve got to scare the shit out of the staff,” he said, echoing Wilkinson’s instruction to Paulson earlier in the week. “Let’s not talk about the legislation,” he urged, and suggested instead that they focus on the potentially devastating problems they would all face if the legislation wasn’t passed.
When Paulson arrived in the conference room, which was across from Pelosi’s office, he took note of the presence of Harry Reid, Barney Frank, Rahm Emanuel, Christopher Dodd, Charles Schumer, and their staffs; only the speaker herself was absent.
To underscore the significance and sensitive nature of the meeting, an announcement was made that all cell phones and BlackBerrys would be confiscated to avoid leaks. A trash can was used as a receptacle for the dozens of mobile devices labeled with congressional staffer names on yellow Post-Its.
As the meeting came to order, Paulson, following Kashkari’s playbook, announced darkly, “You saw what happened earlier this week with Washington Mutual,” and, with as much ominousness as he could muster, added, “There are other companies—including large companies—which are under stress as well. I can’t emphasize enough the importance of this.”
The stern-faced lawmakers listened attentively but immediately raised what they considered to be four major obstacles to the plan: oversight of the program, which the Democrats felt was severely lacking; limits on executive compensation for participating banks, a controversial provision that Paulson himself was convinced would discourage them from participating; whether the government would be better off making direct investments into the banks, as opposed to just buying their toxic assets; and whether the funds needed to be released all at once or could be parceled out in installments.
“Damn it,” Schumer thundered, annoyed that he couldn’t get a straight answer. “If you think you need $700 billion right away, you’d better tell us.”
“I’m doing this for you as much as for me,” Paulson replied, blanching at Schumer’s aggressive tone. “If we don’t do this, it’s coming down on all our heads.”
The conversation soon turned to executive compensation. While everyone in the room was aware of the potential political fallout over huge bonuses being paid out by firms requiring taxpayer rescue, it was Max Baucus, chairman of the Senate Finance Committee, who spoke to the issue. He made it abundantly clear that he was furious with Paulson for not having insisted on strict limits on compensation for the managements of banks that would take advantage of the program. In Baucus’s view the executives should be entitled to next to nothing—and at the very minimum they should be forced to give up golden parachutes and other perks.
As Baucus railed on, raising his voice until he was virtually shouting at the Treasury staff, Paulson finally interrupted him with, “Let’s not get emotional,” and tried to explain his rationale. The reason he was loath to put in executive compensation limits, he said, was not because he wanted to protect his friends but because he believed the measure was impractical. Banks, he said, would have to renegotiate all of their compensation agreements, a process that could take months, preventing them from accessing the program.
Paulson’s efforts to calm the group’s nerves with practical reasoning, however, didn’t appear to be working; other congressional leaders rushed in to express their own outrage, focusing now on the lack of oversight and accountability. While the three-page piece of legislation he had originally submitted the week before had since grown in size, it still contained little in the way of any watchdog provisions to guarantee that the program would be maintained properly. Paulson had been resisting the Democrats’ demands to appoint a panel that would not only oversee the program, but also have the authority to determine how it operated and made decisions, as he feared that it would inevitably become politicized. “All we’re talking about is having Groucho, Harpo, and Chico watching over Zeppo,” said Frank to laughter.
The conversation dragged on into the night, as the staffers from Treasury and Congress tried to find a middle ground, with only the same sticking points raised again and again.
“It’s impossible for us to go to hundreds of banks across the country and have them renegotiate all their employment contracts,” Kashkari said, reiterating why they couldn’t include more compensation curbs. “It’s just going to take too long; it’s impossible. So if they have golden parachutes, physically we can’t do it.”
One of Schumer’s staffers proposed a different approach. “Well, why don’t you just block new golden parachutes?”