During World Wars I and II, scores of CEOs and Wall Street titans streamed to Washington to take on responsibility for helping manage the war effort. By law, one could not be a government employee without being compensated, and yet with their pre-existing wealth it seemed untoward for them to draw the regular salary for a high government official. So they became dollar-a-year man, taking only a token wage for their jobs making the American war machine run.
In the fall of 2008, the U.S. government was waging a different type of war, on the great financial panic, a war effort that demanded a very particular type of financial and management expertise. Herb Allison, who died Sunday at age 69, was one of the men who came to town to fight it. He drew a regular government salary, but was in important ways the spiritual descendent of the executives came to Washington to fight the great wars of the past.
In September 2008, after a long career that earned him many millions of dollars as the chief executive of Merrill Lynch and TIAA-CREF, he was on the beach in the U.S. Virgin Islands. On a Thursday evening, he received a phone call from Ken Wilson, an aide to Treasury Secretary Hank Paulson. "You got to plan on packing your clothes and coming up," Wilson said, according to Andrew Ross Sorkin's exhaustive book on the crisis, "Too Big to Fail." The government was about to effectively nationalize Fannie Mae and Freddie Mac, and oust their CEOs. Paulson needed Allison to take over as the new CEO of Fannie, the trillion dollar company backstopping the U.S. housing market that was on the verge of going belly up.
"Look, Ken," Allison said from the beach that Thursday, according to Sorkin. "I want to help you guys, and so you have to let me know what to do. I don't have any clothes. All I have is shorts and flip-flops."
Sartorial hurdles overcome, Allison hurried to Washington and took on the job of leading the housing finance giant through a wrenching period. He had to find ways to encourage Fannie to step in to provide mortgage financing to support the housing market at a time private funding for mortgages was drying up. He had to do so while taking care to make the taxpayer bailout of the company as low-cost as possible. And he had to do it all with the help of an utterly demoralized staff whose once-prosperous company had become a synonym for failure (and who had seen the value of their stock options wiped away in one fell swoop).
And that was the easy part of Allison's time in Washington.
Nine months later, in June 2009, President Obama appointed him to be "assistant secretary of the treasury for financial stability," a bland-sounding title that belied its awesome power. Allison was the official charged with running the $700 billion bank bailout, the much-maligned Troubled Asset Relief Program, that Congress and the Bush administration had created during the darkest days of the 2008 crisis and the Obama administration was now executing.
People tend to debate the decisions that were made in deploying TARP resources, on how it helped mega-banks versus ordinary homeowners, and, on whether the fund did enough to rein in executive pay at banks that received financial help. Might having Wall Street veterans like Allison running the thing, men from the Wall Street establishment who were used to a world of multi-million dollar salaries, have made them less focused on those aspects? Very possibly. There are entirely legitimate debates over whether, both before Allison's time in charge and under his leadership, the treasury got those balances right.
But those debates obscure some other realities of the program, namely this: Just executing the bank bailout at all required building one of the largest investment funds in the world, from scratch, in the space of a few months and with the entire global economy teetering on the precipice. Just the technical challenges of getting the thing operating with even basic controls and accountability would tax any CEO. It may be unseemly that after Wall Street nearly destroyed the U.S. economy, it was a bunch of Wall Street types who came to Washington town to try to fix the problem. But it was also the case that if you want to set up $700 billion fund to buy preferred stock and warrants in banks, it's really only investment bankers who know how to do that.
Interestingly, after leaving the belly of the Washington beast in 2010, Allison concluded that the system of gigantic, too-big-too-fail banks--the kings of the Wall Street world in which he spent most of his career--is wrong-footed. He wrote a book called "The Megabank Mess," arguing that they should be broken up entirely. "I can see why it's kind of interesting that I was a leader in the industry and now am criticizing the structure and business models of the industry that I was part of building years ago," he said in a 2011 interview with American Banker. "But the real story isn't about me or leaders who later ran the megabanks during the boom and crash. It's about what's in the interests of the American public, what's needed to help stabilize and make more efficient the financial system in the United States."
The bank bailout was deeply offensive to the sensibilities of anyone who believes in either capitalism or basic fairness. It was also a key policy, along with interventionism by the Federal Reserve and fiscal stimulus, that averted the economic abyss. And it was in no small part the work of Herb Allison and other aging Wall Street types who made it work.