Too Big to Fail: The Inside Story of How Wall Street and Washington Fought to Save the Financial System from Crisis — and Themselves

by Andrew Ross Sorkin

The following year, Geithner was promoted to Treasury under secretary for international affairs.

When Summers would return to the Treasury building after his speech, Geithner would present Summers with the doctored news report as if it were the real thing, and then just watch Summers blow up, threatening to call the reporter and demand a correction until Geithner let him in on the joke.

Geithner, with his six-pack abs, had a game that matched his policy-making prowess. “Tim’s controlled, consistent, with very good ground strokes,” Lee

International Monetary Fund,

New York Fed.

The presidency of the New York Fed is the second most prominent job in the nation’s central banking system,

The New York bank is the government’s eyes and ears in the nation’s financial capital, in addition to being responsible for managing much of the Treasury’s debt.

the New York Fed is the only one whose president is a permanent member of the committee...

His idiosyncrasies notwithstanding, Geithner gradually grew into his job at the New York Fed, distinguishing himself as a thoughtful consensus builder.

To his way of thinking, the spreading of risk could actually exacerbate the consequences of otherwise isolated problems—a view not shared by his original boss at the Fed, Alan Greenspan.

“These changes appear to have made the financial system able to absorb more easily a broader array of shocks, but they have not eliminated risk,” he said in a speech in 2006. “They have not ended the tendency of markets to occasional periods of mania and panic. They have not eliminated the possibility of failure of a major financial intermediary. And they cannot fully insulate the broader financial system from the effects of such a failure.”

March 2008. —

Matthew Scogin poked his head into Robert Steel’s corner office at the Treasury Department. “Are you ready for another round of Murder Board?”

Hank Paulson had been scheduled to testify before the Banking Committee with Geithner, Bernanke, and Cox, chairman of the Securities and Exchange Commission, that morning of April 3, with Alan Schwartz of Bear Stearns and Jamie Dimon of JP Morgan to appear later. But Paulson was on an official trip to China that could not be postponed, so his deputy, Steel, would be there in his place.

Senate Banking Committee

His staff had been trying to help him prepare the traditional Washington way: by playing round after round of “Murder Board.”

Fannie Mae and Freddie Mac,

the so-called government-sponsored enterprises that bought up mortgages.

The GSEs, which were blamed for inflating the housing bubble, had been political and ideological hot buttons for decades, but...

One of the first causalities of the credit crunch was two Bear Stearns hedge funds that had invested heavily in securities backed by subprime mortgages. It was those mortgages that were now undermining confidence in the housing market—a

Quick-witted and handsome, Steel was actually a much better communicator than Paulson and would often upstage his boss, who couldn’t help stammering even at routine Treasury meetings. The two men had known each other since 1976, when Steel went to work at the Chicago office of Goldman Sachs after graduating from Duke University.

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,

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.

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.

What role had the government played in the negotiations that had led to the original $2-a-share price

JP Morgan’s Jamie Dimon and Bear’s Alan Schwartz—were

On Sunday afternoon, March 16, Paulson had called Dimon and told him, “I think this should be done at a very low price.”

The key idea he had to focus on was Paulson’s overall concern that, because taxpayer money was involved, shareholders should not be rewarded.

Senator Richard Shelby,

ranking Republican on the Senate Banking Committee.

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 c...

They also knew they had to be wary of Senator Jim Bunning,

or some harsh opinion from a columnist that a senator might quote that morning. Happily, there was nothing.

The hearing room in the Dirksen Senate Office Building

Alan Schwartz of Bear Stearns

To Steel’s immediate left was Geithner; to his right, Cox; and next to Cox, Bernanke.

“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?”

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 Stre...

“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.

For the most part, the Fed, the Treasury, and the SEC held their own against the Banking Committee’s interrogation.

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.

Jamie Dimon was searching for a metaphor.

best account for the low price he had paid for Bear without looking as if he had been given a gift, courtesy of taxpayers?

“The average person has to understand that we took a huge risk,” Evangelisti instructed him as they reviewed various approaches. “We’ve got to explain it in plain English.”

Dimon came up with a simple, clear line

that he thought explained the acquisition of Bear Stearns succinctly: “Buying a house is not the same as buying a house on fire.” That would do it; everyone would understand that.

It wasn’t his job to protect the interests of the U.S. taxpayer, only those of his shareholders.

Despite his public show of humility, Dimon was well aware of what a coup the deal had been for him. From the perspective of the financial media, at least, the Bear acquisition was viewed as a home run.