A Joint Decision to Act: It Must Be Big and Fast

Treasury Secretary Henry M. Paulson Jr., Federal Reserve Chairman Ben S. Bernanke, and Securities and Exchange Commission Chairman Christopher Cox met congressional leaders Thursday.
Treasury Secretary Henry M. Paulson Jr., Federal Reserve Chairman Ben S. Bernanke, and Securities and Exchange Commission Chairman Christopher Cox met congressional leaders Thursday. (By David Brody -- Bloomberg News)
By Lori Montgomery, Neil Irwin and David Cho
Washington Post Staff Writers
Saturday, September 20, 2008

Early Thursday morning, Treasury Secretary Henry M. Paulson Jr. sipped Diet Coke from a disposable cup in his large office overlooking the White House. Behind him, four flat-screen computer monitors flashed the latest financial data from around the world. Eight aides huddled nearby.

For months, Paulson had been running from crisis to crisis, engineering rescues for disintegrating firms. Now a cataclysm was rapidly enveloping global markets, triggering a run on money-market funds that once had been considered safe investments. Paulson decided there was only one way to stop it: The U.S. government must intervene big and intervene fast.

Across town, Federal Reserve Chairman Ben S. Bernanke had come to the same conclusion. Together they joined in on an 8:30 a.m. conference call with other top economic policymakers to sketch out what would become the most sweeping public intervention into the private economy in modern history. They thought their plan could soothe the hysteria. But first, they would have to sell it to a restless Congress in the middle of a fractious political campaign.

That decision led to a late-night meeting in the U.S. Capitol, where Paulson and Bernanke warned congressional leaders that they must take urgent action to prevent a global meltdown. The two men provided only a broad outline of their plan; yesterday, lawmakers still had many questions. And though Democratic leaders vowed to approve legislation next week giving the Treasury expansive new powers, it remains unclear whether they have the votes to do it.

The discussion of a broader market bailout, which is estimated to cost taxpayers at least $500 billion, began in earnest on Monday as Treasury and Fed officials were working to rescue insurance giant American International Group. Few, if anyone, believed that the effort -- a stunning $85 billion takeover that effectively nationalized one of the world's largest insurance firms -- would stem the financial crisis. More had to be done. But what?

This account draws from interviews with federal officials, lawmakers and congressional staffers who participated in the meetings. Many spoke on the condition of anonymity because much of the discussions occurred in private meetings.

Bernanke had been leaning toward comprehensive government action for some time. But he didn't want to spend any more of the Fed's money without the blessing of Congress. Paulson was more reluctant about putting taxpayer dollars at risk. He also worried that if he laid out a plan and Congress balked, markets would twist in the wind and fall into further turmoil.

But the massive disruption of the financial system on Tuesday and Wednesday quickly dissolved any lingering doubts. The AIG rescue hadn't calmed nerves. In fact, there appeared to be a run developing on money-market mutual funds, a $3.5 trillion pool of savings that was supposed to be nearly as safe as cash but lacks any government guarantee. If money-market funds failed, ordinary people stood to lose huge sums, stirring wider panic. Meanwhile, shares of Morgan Stanley and Goldman Sachs Group, the last two freestanding investment banks, sunk as investors bet they would collapse just as their rivals had. Commercial banks stopped lending to each other. The stock markets dove.

It was time to act.

Bernanke leaned into the Polycom speaker phone on his coffee table. With New York Fed President Timothy F. Geithner and Securities and Exchange Commission Chairman Christopher Cox on the line, the normally mild-mannered economics professor said loudly and forcefully that the government must buy up troubled mortgage debt if there was any hope of bringing stability to the world financial system.

Paulson had no choice but to pull the trigger. After the conference call ended, Paulson and his staff fleshed out their plan and walked one block west to the White House for a 3:30 p.m. meeting with the president. They laid out the proposal. They explained that it would almost certainly attract fierce opposition from some quarters on Capitol Hill. Bush cut them off.

The country was facing a difficult situation that required urgent action, he told Paulson. Don't even think about the politics, the president said. Just do what you need to do.

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