Bush’s statement seemed to sum up the paradox of the bailout, in which his administration and the one that followed decided that the free market needed to be a little less free—at least temporarily.
In some respects, Hank Paulson’s TARP was initially a victim of his own aggressive sales pitch. While the program was fundamentally an attempt to stabilize the financial system and keep conditions from growing worse, in order to win over lawmakers and voters it had been presented as a turnaround plan. From the vantage point of consumers and small-business owners, however, the credit markets were still malfunctioning. After hundreds of billions of dollars had been set aside to rescue banks, many Americans still couldn’t obtain a mortgage or a line of credit. For them the turnaround that had been promised didn’t come soon enough.
Even with the help of cash infusions some of the country’s major banks continued to falter. Citigroup, the largest American financial institution before the crisis, devolved into what Treasury officials began referring to as “the Death Star.” In November 2008 they had to put another $20 billion into the financial behemoth, on top of the original $25 billion TARP investment, and agreed to insure hundreds of billions of dollars of Citi’s assets. In February 2009 the government increased its stake in the bank from 8 percent to 36 percent. The bank that only a decade earlier had spearheaded a push toward deregulation was now more than one third owned by taxpayers.
Even among those who continued to believe in the bailout concept, there were lingering questions about how well Washington had acquitted itself, with the loudest debate focusing on one deal in particular.
In early 2009 the Bank of America-Merrill Lynch merger became the subject of national controversy when BofA announced that it needed a new $20 billion bailout from the government, becoming what Paulson declared “the turd in the punchbowl.” When it later emerged that Merrill had paid its employees billions of dollars in bonuses just before the deal closed, the public outrage led to a series of investigations and hearings that embarrassingly pulled back the curtain on the private negotiations that took place between the government and the nation’s financial institutions.
The September sale of Merrill Lynch to Bank of America had been presented as a way to save Merrill. But in the several months that it took the deal to close, Merrill’s trading losses ballooned, its asset management business weakened, and the firm had to take additional write-downs on its deteriorating assets. The public wasn’t informed about these mounting problems, however, and on December 5, shareholders of both companies voted to approve the deal at separate meetings.
Behind the scenes, Ken Lewis threatened to withdraw from the deal, but Paulson and Bernanke pressed him to complete it or risk losing his job.
As details of the drama leaked out John Thain became a quick casualty, with Ken Lewis firing him in his own office. He was soon recast from the hero who had saved Merrill into the source of its troubles, despite indications that Bank of America was aware of the firm’s problems and chose not to disclose them. Additional criticism was leveled at Thain when it emerged that he had asked the outgoing Merrill board for as much as a $40 million bonus. “That’s ludicrous!” shouted John Finnegan, the Merrill director who was on its compensation committee, when a human resources representative made the request. Thain has said that he knew nothing about it, and by the time a discussion about his compensation reached the full board, he had withdrawn any request for a bonus.
Nowhere was the public backlash more severe, however, than it was against American International Group. AIG had become an even greater burden than anyone expected, as its initial $85 billion lifeline from taxpayers eventually grew to include more than $180 billion in government aid. Geithner’s original loan to AIG, which he had said was fully collateralized, quickly looked to be no sounder an investment than a mortgage lender’s loan to a family with bad credit and no ability to ever pay it back.
Now that taxpayers were owners of AIG, lawmakers complained loudly about a $440,000 retreat for their independent insurance agents at the St. Regis Monarch Beach resort in Dana Point, California, and an $86,000 partridge-hunting trip in the English countryside. But the greatest ire was reserved for reports of millions of dollars in bonuses being awarded to AIG executives, as protesters swarmed its headquarters and its officials’ homes. President Obama asked, “How do they justify this outrage to the taxpayers who are keeping the company afloat?” while on his television program Jim Cramer ranted, “We should hound them in the supermarket, we should hound them in the ballpark, we should hound them everywhere they are.”
The widespread criticism gave rise to considerations about how to continue operating the business: Should decisions about how the company spent its money be made in reaction to popular opinion or with the goal of achieving profits? Edward Liddy, AIG’s new CEO, so frustrated with trying to serve two masters, left the company within eleven months of joining it.
There was also the issue of exactly how the AIG bailout money was used. More than a quarter of the bailout funds left AIG immediately and went directly into the accounts of global financial institutions like Goldman Sachs, Merrill Lynch, and Deutsche Bank, which were owed the money under the credit default swaps that AIG had sold them and through their participation in its securities lending program. To some extent this disbursement only bolstered the argument of critics who decried Paulson’s rescue as a bailout by Wall Street for Wall Street. (It didn’t help that foreign banks received some of the indirect aid, even though foreign governments hadn’t contributed to the rescue plan.)
Because Goldman Sachs was the largest single recipient of the AIG payments, receiving $12.9 billion, much of the anger quickly settled on it, as theories proliferated about what strings the firm might have pulled behind the scenes given its ties to Paulson and Treasury’s cast of Goldman alumni. In particular, the Goldman connection to AIG suggested to some that it was the reason that Treasury—or what people had started calling “Government Sachs”—had chosen to rescue the insurance giant and not Lehman. Goldman disputed claims that it benefited from the AIG rescue, contending that it had been “always fully collateralized and hedged ” in its exposure to the insurance company. (In fairness, it does appear that the firm had been so, despite a lingering whisper campaign to the contrary. And the $12.9 billion headline number is somewhat misleading; $4.8 billion of the amount transferred to Goldman was in exchange for securities that it had been holding.) That’s not to say Goldman did not have a vested interest in seeing AIG rescued, but the facts are slightly more complex than have often been presented by the media.
The news reports, however, kept feeding off one another and therefore missed the underlying truth: Paulson himself had had very little to do with the rescue of AIG; it was, rather, orchestrated by Geithner (and executed, in part, by Treasury’s Dan Jester). While the fact has often been overlooked, Geithner, by his very nature—as has been demonstrated throughout this book and in his subsequent policies as Treasury secretary—is as much a proactive deal maker as Paulson, if not more so.
Still, the conspiracy theories kept coming, and the narratives grew more elaborate. “Is Goldman Sachs Evil?” asked the cover of New York magazine. The writer Matt Taibbi created a new popular metaphor for the firm, describing Goldman in a Rolling Stone article as a “great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.”