But four years earlier, Steel—now worth more than $100 million as a result of being a partner during Goldman’s IPO—had decided to retire, having worked in various senior positions but not being next in line to lead the firm. Though he always planned a triumphant return to the private sector, he wanted time to pursue public service, like many other Goldman alums. After establishing his public-sector bona fides, including a position as a senior fellow at the John F. Kennedy School of Government at Harvard, he accepted Paulson’s invitation to join him at Treasury as under secretary for domestic finance on October 10, 2006.
Now, as he entered the conference room with Scogin for one last round of Murder Board, he knew he had to be on his game. Treasury colleagues David Nason, chief of staff Jim Wilkinson, and Michele Davis, assistant secretary for public affairs and director of policy planning, were already seated with a small group across the table.
The burning question they all knew would be asked: What role had the government played in the negotiations that had led to the original $2-a-share price for Bear Stearns? None of the Treasury staffers had a clue as to what the other witnesses—JP Morgan’s Jamie Dimon and Bear’s Alan Schwartz—were going to say about what had actually occurred when they testified later in the day.
Steel knew that Paulson had pushed for a lower price to send the powerful message that shareholders should not profit from a government rescue. But no one at Treasury had ever confirmed that, and for Paulson’s and everyone else’s sakes, it would be best not to acknowledge what had really happened: On Sunday afternoon, March 16, Paulson had called Dimon and told him, “I think this should be done at a very low price.”
Steel knew he had to dodge that issue at the hearing. It was imperative, as Davis and others had stressed during Murder Board sessions and at other meetings, that he avoid getting drawn into a debate over whether $2 was the right price—or $10, for that matter. The key idea he had to focus on was Paulson’s overall concern that, because taxpayer money was involved, shareholders should not be rewarded. And more important, they encouraged Steel to remain adamant that Treasury had not negotiated the deal for Bear. If anything, he should deflect the question onto the Fed, which was the only government agency that legally could be party to such a transaction.
Before the role playing began, Nason briefed Steel on a key development. He recounted some recent conversations he had had with the staff of Senator Richard Shelby, the ranking Republican on the Senate Banking Committee. “Shelby’s going to be difficult,” Nason warned.
That was an understatement. Shelby was deeply unhappy with Paulson’s performance, not only because of the Bear Stearns bailout, but in response to another recent Paulson project: a provision in Bush’s economic stimulus package, introduced just days after the bailout, that raised the ceiling on the amount of mortgages that Fannie Mae and Freddie Mac could buy. For days Shelby had not returned the secretary’s phone calls, until Paulson finally barked at his staff, “Doesn’t he know I am the secretary of the Treasury?”
They also knew they had to be wary of Senator Jim Bunning, well known as a “markets know best” purist. “Senator Jim Bunning, Republican. Kentucky,” Steel replied jokingly when a picture of Bunning was held up during Murder Board. “Everything we’re doing? Yes, it’s all bullshit. We’re socialists. Thank you, Senator.”
The Murder Board preparations continued until minutes before Steel left for the hearing. The key objective now was to protect Steel, and the Treasury Department, from any last-minute surprises. Staffers carefully checked that morning’s newspapers to make certain there was no new revelation about Bear Stearns or some harsh opinion from a columnist that a senator might quote that morning. Happily, there was nothing.
Steel made the short trip from Treasury to Capitol Hill in a Treasury car with his aides. The hearing room in the Dirksen Senate Office Building was already buzzing with activity, as camera crews set up their equipment and photographers tested the light. As Steel took his seat, he noticed that Alan Schwartz of Bear Stearns had already arrived, even though he was not scheduled to testify until that afternoon, and greeted him. To Steel’s immediate left was Geithner; to his right, Cox; and next to Cox, Bernanke. Seated in a single row were a group of men who, more than anyone else in the world, were being entrusted with solving its financial problems.
“Was this a justified rescue to prevent a systemic collapse of financial markets,” asked Senator Christopher Dodd, the Connecticut Democrat and chairman of the committee, “or a $30 billion taxpayer bailout, as some have called it, for a Wall Street firm while people on Main Street struggle to pay their mortgages?”
The fireworks started almost immediately. Committee members were sharply critical of the regulators’ oversight of financial firms. More important, they questioned whether funding a takeover of Bear Stearns had created a dangerous precedent that would only encourage other firms to make risky bets, secure in the knowledge that the downside would be borne by the taxpayer.
Bernanke hastened to explain the government’s position: “What we had in mind here was the protection of the American financial system and the protection of the American economy. I believe that if the American people understand that we were trying to protect the economy and not to protect anybody on Wall Street, they would better appreciate why we took the action we did.”
Then came the question Steel had prepped for: Had it been the Treasury secretary who determined the $2-a-share price?
“Well, sir, the secretary of the Treasury and other members of Treasury were active participants during this ninety-six hours, as you describe,” he replied. “There were lots of discussions back and forth.
“Also, in any combination of this type, there are multiple terms and conditions. I think the perspective of Treasury was really twofold. One was the idea that Chairman Bernanke suggested: that a combination into safe hands would be constructive for the overall marketplace; and, number two, since there were federal funds or the government’s money involved, that that be taken into account. And Secretary Paulson offered perspective on that.
“There was a view that the price should not be very high or should be toward the low end and that it should be—given the government’s involvement, that that was the perspective. But with regard to the specifics, the actual deal was negotiated—transaction was negotiated between the Federal Reserve Bank of New York and the two parties.”
For the most part, the Fed, the Treasury, and the SEC held their own against the Banking Committee’s interrogation. But they did so largely by defending the Bear bailout as a once-in-a-lifetime act of extreme desperation, not as the expression of a nascent policy. Under the circumstances, it was a reasonable response to a run on a very large bank whose demise would disrupt the entire financial system.
Those circumstances, Geithner told the committee, were not unlike those of 1907, or the Great Depression, and he went on to draw a straight line between panic on Wall Street and the economic health of the country: “Absent a forceful policy response, the consequences would be lower incomes for working families; higher borrowing costs for housing, education, and the expenses of everyday life; lower value of retirement savings; and rising unemployment.”
So they’d done what they had to do for the good of the entire country, if not the world, as Steel explained. And thanks to their efforts, he confidently told the lawmakers, the hole in the dike had been plugged.