Kovacevich now announced that he wasn’t prepared to move forward without government assistance. “We don’t make these kinds of loans, so we don’t understand them,” he explained. Steel, dumbfounded, thanked him, ended the call, and slumped down in his chair, wondering how he could have been rejected again. Citigroup was still on the sidelines, but he doubted they would raise their bid, especially if there was no competition. When he told his inner circle about the call with Kovacevich, he described it as “not an attractive fact.”
At around 8:00 p.m., Rodgin Cohen heard a rumor that Citigroup had been talking to the FDIC, which only led him to suspect that Citi was trying to orchestrate an FDIC takeover of Wachovia, one similar to the deal that JP Morgan had made for Washington Mutual. Furious, he rang Ned Kelly, upon whom Pandit relied for strategy. Only days before, Kelly had been appointed head of global banking for the bank’s institutional client business in a reshuffle that saw the departure of Sallie Krawcheck, who had once been one of the most powerful women on Wall Street.
“Okay, we need to talk,” Cohen began testily.
“Rodge, look, I wasn’t in touch with them, they just called me,” a defensive Kelly insisted. “I still have the same deal on the table.”
When Steel learned of their conversation he knew that he was, for all practical purposes, out of options, for Warsh had made it clear the bank couldn’t open Monday without a deal. In a last-ditch plea to remain independent, he called Sheila Bair at 12:30 a.m. with a proposaclass="underline" Would the FDIC consider guaranteeing some of Wachovia’s most toxic assets in exchange for warrants in the bank?
At 4:00 a.m. Steel got the answer he had been dreading. Bair phoned to notify him that his bank had been sold to Citigroup by the government for $1 a share. The FDIC wouldn’t be completely wiping out shareholders, she said; she had succumbed to pressure from Geithner and agreed to guarantee Wachovia’s toxic assets after Citigroup accepted the first $42 billion of losses, declaring that the firm was “systemically important.”
Paulson stood alone in his office, watching the congressional coverage of his bailout bill on C-SPAN. After some additional compromise on Sunday, legislation had been drafted that was acceptable to all the parties and was now being put to a vote.
Pelosi, standing on the floor of the House, had just given an impassioned speech about the need to pass the bill, but had also used the moment as an opportunity to assail the Bush administration, Paulson, and Wall Street. “They claim to be free market advocates, when it’s really an anything-goes mentality,” she said of the Bush administration. “No regulation, no supervision, no discipline. And if you fail, you will have a golden parachute, and the taxpayer will bail you out… . The party is over in that respect. Democrats believe in a free market. We know that it can create jobs, it can create wealth, it can create many good things in our economy. But in this case, in its unbridled form, as encouraged, supported, by the Republicans—some in the Republican Party, not all—it has created not jobs, not capital; it has created chaos.”
Although a few members of Paulson’s staff were loitering nervously outside his office, afraid to go in, Michele Davis had no such qualms and joined him, the two of them intently following the tally of yeas and nays at the bottom of the screen. Paulson expected the bill to pass without a problem, as the markets had already priced in its approval. Five minutes into the allotted fifteen-minute voting window, however, the number of nay votes began to rise consistently. He knew that the measure was still very unpopular with House Republicans, as well as with a number of liberal Democrats, and lawmakers facing tight reelection races did not want to give their opponents any ammunition with just five weeks before election day. There was still time, however, for Pelosi and the Democratic leadership to turn the vote around.
“They wouldn’t have brought this bill to the floor if they didn’t think it could pass, if they didn’t have the votes lined up somewhere,” Davis reassured him. Paulson said nothing and only continued to stare at the screen as the margin of no votes grew wider and wider.
Kevin Fromer, Treasury’s legislative liaison, called anxiously from outside the House chamber. “This is going to fail.”
“I know,” Paulson mumbled dully. “I’m watching.”
Finally, at 2:10 p.m., after an unusually long period of forty minutes to count the votes, the gavel came down: The bailout was rejected 228 to 205. More than two thirds of the Republican representatives had voted against it, as had a large number of Democrats. Traders and investors had been watching the coverage also and started a frantic wave of selling. Stock prices plunged, with the Dow Jones Industrial Average tumbling 7 percent, or 777.68 points, its biggest one-day point drop ever.
For a moment Paulson was speechless. His plan, which he believed might be the most important piece of legislation he could ever propose—his effort at avoiding a second Great Depression—had failed. As his staffers, seeking to comfort him and one another, silently gathered in his office, he said simply, “We’ve got to get back to work.”
Within an hour he and his team were at the White House, meeting with the president in the Roosevelt Room and discussing plans for how to revive the bill.
Downstairs in the Treasury building, however, Dan Jester and Jeremiah Norton had their own ideas about the problem Paulson was facing. They had convinced themselves that the concept of buying up toxic assets was never going to work; the only way the government could truly make a difference would be to invest directly in the banks themselves. “This is crazy,” Norton said of the TARP proposal as he walked into David Nason’s office. “Do we really think this is the right approach?” Jester and Norton had made the case to Paulson before, but the politics of using government money to buy stakes in private enterprises, they knew, had gotten in the way. And once Paulson had gone public with his current plan it seemed as if it would be difficult for him to reverse course.
“If you feel that strongly, you need to tell Hank,” Nason said to him. “You can tell him I’m onboard with you.”
The next day Jester and Norton went to visit with Paulson. They laid out their case: Buying the toxic assets was too difficult; even if they ever figured out how to implement the program, it was unclear whether it would work. But by making direct investments in the banking system, Jester told him, they’d immediately shore up the capital base of the most fragile institutions. They would not have to play guessing games about how much a particular asset was worth. More important, Jester argued, most of these banks eventually would regain their value, so the taxpayer would likely be made whole. And, Jester continued, the current TARP proposal actually allowed Treasury to use it to make capital injections, even if it hadn’t been advertised as such.
Paulson, who had become somewhat disillusioned with the time it was taking to design and implement TARP, was starting to come around to Jester’s way of thinking. He had no idea how he’d sell it to the American public, and he knew that it would be anathema to the Bush administration, but he also knew it might be the most practical solution in a sea of bad options.
“Okay,” he sighed. “Why don’t you work something up? Let’s see what this would look like.”
As the sky grew dark, Bob Steel climbed the steps of Wachovia’s corporate jet at Teterboro Airport in New Jersey to head back to Charlotte. He had spent virtually the entire week in back-to-back meetings with Citigroup to coordinate the details of the merger, which they planned to herald in a full-page newspaper ad on Friday, declaring: “Citibank is honored to enter into a partnership with Wachovia … the perfect partner for Citibank.” While he was frustrated with the paltry final price of the deal, he was proud to have at least saved the firm from failure, and he knew that he had explored every possible option in trying to do so.