In Crucible of Crisis, Paulson, Bernanke, Geithner Forge a Committee of Three

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Wall Street in Turmoil

Global stocks have experienced wild fluctuations this week in the wake of the U.S. government's seizure of insurance giant American International Group, the failure of Lehman Brothers, the disappearance of Merrill Lynch as an independent company and reports the U.S. government will set up a government entity to take on bad debts from financial institutions.

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Before Paulson took office, there was radio silence between the Treasury and the New York Fed.

The two Treasury secretaries who preceded Paulson under the Bush administration had little Wall Street experience. Paulson's immediate predecessor, John Snow, even closed the Treasury's monitoring room, where staff members keep an eye on global stock, bond and currency markets around the clock, to save money.

Snow's contact with Bernanke, then in office just six months, was mainly limited to formal weekly breakfasts. There was little communication between Snow and Geithner.

That changed rapidly with Paulson.

A creature of the financial markets prone to firing off rapid phone calls to any potential source of information, he took to calling Geithner and Bernanke at all times of day, to bounce ideas off them or discuss the latest trouble spot in the markets.

"Overcommunication never hurts," Paulson said. "If it is something significant, I would just pick up the phone and call Ben. . . . One of the things I do is I create an atmosphere where I am so direct and so open and collaborative with people I trust that it brings out the same in them." (Bernanke and Geithner declined to speak publicly for this report, as is their custom.)

Paulson also revived the President's Working Group on Financial Markets to open communication with other regulators, including the Securities and Exchange Commission, and reopened the Treasury markets room, staffing it with employees detailed from the New York Fed.

He even showed advance texts of his speeches to Bernanke and Geithner. The first time, Paulson was surprised to get a heavily marked-up version from Geithner in return. Paulson set up a call, and the two went through the speech line by line.

Paulson and Bernanke kept up the weekly breakfasts, alternating the meal between their personal dining rooms at the Treasury and the Fed. The menu was always the same: juice, a Diet Coke for Paulson, and plain oatmeal with skim milk. "If I'm feeling wild and crazy, I may put a few raisins in there," Paulson said.

As the financial crisis began in August 2007, the phone calls became more frequent -- often quick, and unplanned. The three developed a Socratic style; one man would present an idea, and the others would challenge it, consider its flaws and ultimately find ways to tweak it.

Within the fraternity, the man who takes the lead depends on which agency is primarily responsible for the matter at hand.

Last fall, Paulson took charge in persuading leading banks and mortgage firms to modify the loans of homeowners at risk of foreclosure -- consulting Bernanke along the way.