To address those problems, Buffett proposed something he called the “Public-Private Partnership Fund,” or PPPF. It would act as a quasi-private investment fund backed by the U.S. government, with the sole objective of buying up whole loans and residential mortgage-backed securities, but it would avoid the most toxic CDOs. Instead of the government’s doing this on its own, however, he suggested that it put up $40 billion for every $10 billion provided by the private sector. That way the government would be able to leverage its own capital. All proceeds “would first go to pay off Treasury, until it had recovered its entire investment along with interest. That having been accomplished, the private shareholders would be entitled to recoup both the $10 billion and a rate of interest equal to that received by Treasury.” After that, he said, profits would be split three fourths to investors, one fourth to Treasury. His idea also had a unique way to protect taxpayers from losing money: Put the investors’ money first in line to be lost.
Buffett said he was so excited about this structure that he had already spoken to Bill Gross and Mohamed El-Erian at PIMCO, who had offered to run the fund pro bono. He had also been in touch with Lloyd Blankfein, who had likewise offered to raise the investor money on a pro bono basis. Finally, Buffett added, “I would be willing to personally buy $100 million of stock in this public offering,” which, he explained, “constitutes about 20 percent of my net worth outside of my Berkshire holdings.”
After reading the letter, Paulson was intrigued. He was still starting to lean in favor of injecting capital directly into the banks, but he thought maybe a program modeled after portions of Buffett’s proposal could be feasible as well. Paulson called Kashkari into his office; he had just named him interim assistant secretary for financial stability that morning, putting him in charge of the TARP plan. The appointment was already generating a firestorm, with accusations that Paulson was once again favoring his former Goldman Sachs employees. (At Goldman, meanwhile, none of the senior management seemed to know who Kashkari was, and some of them asked their assistants that morning to look though the computer system to find out.)
Paulson handed Kashkari Buffett’s letter. “Call him.”
“It is clearly a panic, and it’s a panic around the world,” John Mack, having flown to London, was telling his employees at their headquarters on Canary Wharf the morning of Wednesday, October 8. “So you think back how the regulators have done and what they have done—could they get ahead of this—you know it’s pretty hard because you really didn’t know how bad it was until it got worse….”
The stock market was cratering yet again amid renewed panic that the banking system—and the economy as a whole—were about to suffer further setbacks. Mack, who had gone to London in part to have dinner with his newest investors from Mitsubishi, was under perhaps the most pressure. He was exhausted, having spent much of the past week living on airplanes. In the wake of China Investment Corp.’s hasty departure from Morgan Stanley’s building after Gao found out the firm was about to do a deal with the Japanese, Mack flew to Beijing to try to repair relations. It was a diplomatic mission, intended to calm frayed nerves and to avoid what seemed as if it might turn into a minor international incident, given that Paulson had quietly gotten involved in the talks with the Chinese government originally. Just as important, CIC was still a large investor in Morgan Stanley, and Mack wanted to placate his foreign partners.
But for now, Mack wasn’t interested in anyone’s hurt feelings. He was glued to his stock price, which had fallen 17 percent the day before, as investors grew nervous that Mitsubishi might renege on its deal. After a week and a half of diligence and regulatory approvals, the investment still had not been finalized, and as Morgan Stanley’s stock price continued to drop, questions were raised about whether Mitsubishi would be better off simply walking away from the agreement. All they had on paper was a term sheet—no better than what Citigroup had signed with Wachovia. And Federal Reserve requirements wouldn’t allow the firms to complete the deal until Monday, leaving Morgan Stanley exposed to the gyrations in the stock market—and the possibility that Mitsubishi could pull out—until then.
Earlier that day Mitsubishi had released a statement in Tokyo saying: “We have been made aware of rumors to the effect that MUFG is seeking not to close on our proposed investment in, and strategic alliance with, Morgan Stanley. Our normal policy is not to comment on rumors. Nevertheless, we wish to state that there is no basis for any such rumors.”
That was all Mack needed to know; he trusted the Japanese and wanted to be confident that they wouldn’t withdraw. In his gut, however, he couldn’t help but be anxious.
Hank Paulson was about to officially change his mind.
It was Wednesday, October 8, and Ben Bernanke and Sheila Bair were on their way to meet with him in his office at 10:15 a.m.
He had finally determined that Treasury should make direct investments in banks, sufficiently persuaded by a growing chorus both inside and outside of Treasury to do so.
“We can buy these preferred shares, and if a company becomes more profitable, you will get a share of that as well,” Barney Frank said during a speech championing the idea of taxpayers becoming shareholders. Chuck Schumer was also in favor of the idea, stating, “When the market recovers, the federal government would profit.”
But perhaps the greatest indication that the concept was feasible came from abroad: The United Kingdom had announced plans to invest $87 billion in Barclays, the Royal Bank of Scotland Group, and six other banks in an effort to instill confidence after a near Lehman-like meltdown confronted them. In exchange, British taxpayers would receive preferred shares in the banks (including annual interest payments) that were convertible into common shares, so that if the banks’ prospects improved—and their shares rose—taxpayers would benefit. Of course, the plan was also a huge gamble, for the reverse was also true: If the banks faltered after the investment was made, a great deal of money stood to be lost.
Paulson and President Bush had been briefed by Gordon Brown on these plans on Tuesday morning at 7:40 by phone in the Oval Office. Now that the formal announcement had been made, Brown was being praised for his judgment to step in so decisively—often in favorable contrast to Paulson. “The Brown government has shown itself willing to think clearly about the financial crisis, and act quickly on its conclusions. And this combination of clarity and decisiveness hasn’t been matched by any other Western government, least of all our own,” Paul Krugman, the economist and New York Times columnist, wrote days later.
With the G7 ministers scheduled to be in Washington for the long Columbus Day weekend, Paulson began to think that he should take advantage of the occasion to once and for all make a bold move to stabilize the system. Still, he knew it could be unpopular politically. After he broached the idea with Michele Davis a week earlier, she only looked at him with a sense of bafflement and remarked, “There’s no way you’re going to say that publicly.”
Paulson had been discussing his shifting views with Bernanke, who had been a fan of capital injections from the start, and they were now in agreement. But they had been thinking about another program to go hand in hand with such an announcement: a broad, across-the-board program to guarantee all current and future unsecured debts of the banks. It would essentially remove any anxiety among investors who loan money to banks that they could ever get wiped out. By Bernanke’s estimation, announcing capital injections and a broad guarantee would be an effective enough economic cocktail to finally turn things around.