Nason’s cell phone rang. “Tim!” he shouted, checking the caller ID, before realizing he was interrupting Paulson’s soliloquy. Tim Geithner had been calling for updates nearly every hour.
Nason and Fromer tried again to calm Paulson down. They reiterated that it would be much more palatable politically to say that they were asking for temporary powers rather than permanent ones. And, as Fromer told him, “It’s a distinction without a difference,” explaining that during the period they had the authority, they could still make decisions that would be permanent.
Paulson, starting to recognize the value of the political calculus, relented. He told them to keep working on it and walked out as abruptly as he’d walked in.
Greg Curl, dressed in a blazer and slacks, arrived at Sullivan & Cromwell’s Midtown offices in the Seagram Building on Sunday afternoon, having flown up to New York from Charlotte that morning on one of the firm’s five private jets.
Taking a seat in the empty reception area, he waited for Fuld and Cohen to appear, uncertain about how fruitful the meeting could possibly be. While “The Boss” may have wanted to conquer the commercial banking world, he had an aversion to the fast-money investment banking business. “No, we wouldn’t use our petty cash to buy an investment bank,” he’d dryly said just a month earlier. Almost a year before, his own investment banking business, long considered an also-ran, showed a stunning 93 percent plunge in profit in its third quarter. At the time, Lewis had remarked that he “had had about all the fun he could stand in investment banking right now.”
Curl was soon escorted to a conference room, where he paid careful attention as Fuld walked him through his idea in greater detail. He wanted to sell a stake of up to a third of Lehman Brothers to Bank of America and merge their investment banking operations under the Lehman umbrella.
As Curl listened, he was dumbfounded, though characteristically gave no sign of what he was thinking. Far from the plea for help he had been expecting, the pitch he was hearing struck him as a reverse takeover: Bank of America would be paying Fuld to run its investment banking franchise for it.
Fuld also suggested that any investment would “ boost our stock price” overnight, creating even more value for Bank of America. He rationalized that buying a stake in Lehman—as opposed to buying the entire firm—would provide incentive for the firm’s savvy bankers to stay in their jobs. “You’re not going to be able to keep these people if they can’t see a financial upside,” he argued, making a relevant point about most full-bank mergers—namely, that the talent usually cashes out and leaves.
Curl nodded appreciatively throughout the presentation, before finally stating that the boss—Lewis—would be interested in entertaining the prospect of a deal only if he had a clear path to taking control of the firm in a reasonable amount of time.
Cohen, interjecting on behalf of Fuld, suggested that they should think about a time frame of two to three years, depending on how successful the investment was.
That was more along the lines of what Curl wanted to hear. He told them he was intrigued, but that he and Lewis had often disagreed about whether they should acquire an investment bank or continue buying up other commercial banks. “I don’t like the retail business,” Curl confided, “because of the susceptibility of litigation and attorneys general and regulators.
“I’d prefer a deal with you,” he continued, “but to be honest, Ken would probably prefer to buy Merrill or Morgan.”
Fuld was confused. What was Curl signaling?
“So do you think we have something here?” Fuld asked.
“I don’t know,” Curl said. “I need to talk to the boss. It’s obviously his decision.”
By late afternoon, Paulson, unshaven and wearing jeans, was pacing the halls and pestering his staff with so many questions about the Fannie and Freddie proposal that his chief of staff, Jim Wilkinson, finally took him aside and said forcefully, “You’ve got to get out of our hair and let us do our jobs.”
To blow off steam, Paulson decided to take a quick bike ride around the near-empty Washington streets. He couldn’t stop thinking about the plan and what it might mean to his legacy: He, a Republican, a man of the markets, was going to ask for authority to invest U.S. taxpayer money in the two institutions that were perhaps most responsible for the housing boom and bust. On the other hand, after decades of political infighting over these two entities, he would have the opportunity to undo them. But would he actually need to use the authority that he was asking for? Would simply having the authority be enough to calm the markets? As he pedaled his bike, he hoped that would be the case.
When Paulson returned, Michele Davis, his communications chief, was trying to figure out where he could physically announce the proposal. “We can’t have reporters and camera crews in the building,” she said. “We could have you go outside on the steps.” Nason, walking over to a window, warned that the forecast called for a thunderstorm.
“I don’t know what to do,” she said, trying to figure out if they had a podium they could bring outdoors. “But you have to go home and change clothes,” she told Paulson, pointing at his rumpled jeans. “You can’t go out there like that.”
At 6:00 p.m., cleanly shaven and now dressed in a blue suit, Paulson walked out onto the Treasury’s steps to a podium that had been hauled downstairs from the fourth floor and addressed the swarm of reporters who had assembled hastily.
“Fannie Mae and Freddie Mac play a central role in our housing finance system and must continue to do so in their current form as shareholder-owned companies,” Paulson said, reading a statement. “Their support for the housing market is particularly important as we work through the current housing correction.
“GSE debt is held by financial institutions around the world. Its continued strength is important to maintaining confidence and stability in our financial system and our financial markets. Therefore we must take steps to address the current situation as we move to a stronger regulatory structure.
“To ensure the GSEs have access to sufficient capital to continue to serve their mission, the plan includes temporary authority for Treasury to purchase equity in either of the two GSEs if needed.”
Minutes after he finished, thunder rumbled in the distance. Soon the skies opened up.
Paulson could tell the hearing on Tuesday morning was going to be hostile the moment he took his seat to the right of Bernanke and Cox. His announcement on the Treasury steps had done little to shore up confidence. In fact, it seemed to be undermining it even further, creating confusion in the marketplace about what this new “authority” he was seeking really meant. Freddie ended down 8.3 percent, to $7.11, while Fannie lost 5 percent, falling to $9.73 on Monday. He knew he needed to start spinning fast, as much for Congress as for the markets.
“Our proposal,” he explained to the Senate Banking Committee, “was not prompted by any sudden deterioration in conditions at Fannie Mae or Freddie Mac… . At the same time, recent developments convinced policy makers and GSEs that steps are needed to respond to market concerns and increase confidence by providing assurances of access to liquidity and capital on a temporary basis if necessary.”
As he was barraged with questions, Paulson emphasized the “temporary” nature of the authority he was seeking, hoping to win over the congressmen. “It is very intuitive,” he said, “that if you’ve got a squirt gun in your pocket, you may have to take it out. If you have got a bazooka, and people know you’ve got it, you may not have to take it out.”