The chief executives of the nine largest banks in the U.S. trooped into a gilded conference room at the Treasury Department at 3 p.m. on Monday. To their astonishment, they were each handed a one-page document that said they agreed to sell shares to the government, then Treasury Secretary Henry Paulson said they must sign it before they left.
The chairman of JPMorgan Chase, Jamie Dimon, was receptive, saying he thought the deal looked pretty good once he ran the numbers through his head.
The chairman of Wells Fargo, Richard Kovacevich, protested strongly that, unlike his New York rivals, his bank was not in trouble because of investments in exotic mortgages, and did not need a bailout, according to people briefed on the meeting.
But by 6:30, all nine chief executives had signed – setting in motion the largest government intervention in the American banking system since the Depression and retreating from the rescue plan Paulson had fought so hard to get through Congress only two weeks earlier.
What happened during those three-and-a-half hours is a story of high drama and brief conflict, followed by acquiescence by the bankers, who felt they had little choice but to go along with the Treasury plan to inject $250 billion of capital into thousands of banks – starting with them.
Paulson announced the plan on Tuesday, saying “we regret having to take these actions.” Pouring billions in public money into the banks, he said, was “objectionable,” but unavoidable to restore confidence in the markets and persuade the banks to start lending again.
In addition to the capital infusions, which will be made this week, the government said it would temporarily guarantee $1.5 trillion worth of new senior debt issued by banks, as well as insuring $500 billion in deposits in non-interest-bearing accounts, mainly used by businesses.
All told, the potential cost to the government of the latest bailout package comes to $2.25 trillion, triple the size of the original $700 billion rescue package, which centered on buying distressed assets from banks.
The latest massive show of government firepower is an abrupt about-face for Paulson, who just days earlier was discouraging the idea of capital injections for banks. Analysts say the United States was forced to shift policy in part because Britain and other European countries announced plans to recapitalize their banks and backstop bank lending. But unlike in Britain, the Treasury secretary presented his plan as an offer the banks could not refuse.
“It was a take it or take it offer,” said a person who was briefed on the meeting, speaking on condition of anonymity because the discussions were private. “Everyone knew there was only one answer.”
Getting to that point, however, necessitated sometimes tense exchanges between Paulson, a former chairman of Goldman Sachs, and his former colleagues and competitors, who sat across a dark-wood table from him, sipping coffee and Cokes under a soaring rose and sage-colored ceiling. This account is based on interviews with government officials and bank executives who attended the meeting or were briefed on it.
Paulson began calling the bankers personally on Sunday afternoon. Some were already in Washington for a meeting of the International Monetary Fund. The executives did not have an inkling of Paulson's plans. Some speculated he would brief them about the government's latest bailout program, or perhaps sound them out about a voluntary initiative. No one expected him to present his plan as an ultimatum.
Paulson, according to his own account, presented his case in blunt terms. The nation's largest banks needed to begin lending to each other for the good of the financial system, he said in a telephone interview, recalling his remarks. To do that, they needed to be better capitalized.
“I don't think there was any banker in that room who was going to look us in the eye and say they had too much capital,” Paulson said. “In a relatively short period of time, people came on board.”
Indeed, several of the banks represented in the room are in need of capital. And analysts said the terms of the government's investment are attractive for the banks, certainly compared with the terms that Warren Buffett extracted from Goldman Sachs for his $5 billion investment.
For Paulson, selling the bankers on capital injections may not have been as difficult as overhauling a rescue program that had originally focused on asset purchases from banks. In his interview, Paulson said the worsening conditions made a change in focus imperative.
“I've always said to everyone that ever worked for me, if you get too dug in on a position, the facts change, and you don't change to adapt to the facts, you will never be successful,” he said in the interview.
Paulson insisted that purchases of distressed assets would remain a big part of the program. But having allocated $250 billion to direct investments, the Treasury has only $100 billion left from its initial allotment of $350 billion from Congress to spend on those purchases.