On the Brink (53 page)

Afterward, I touched base briefly with Bob Rubin. “Things aren’t good,” he said in his typically low-key way. As its shares sank and the press speculated about a government bailout, Citi’s customers were increasingly nervous.

At lunch I listened to some of the members of the audience talk about the losses they and their friends had taken on their houses and in the market. They weren’t criticizing me—on the contrary, they thanked me for my hard work. But my doubts from the night before returned. I felt responsible for their suffering and for all that had gone wrong.

Uneasy, I spoke to Ken Lewis and Jamie Dimon at the airport before boarding my 4:00 p.m. flight. Both reported that the markets were tough and that everyone was watching Citi, whose shares ended the day down a further 26 percent, at $4.71. The broader markets were taking their worst hit in years. The Dow dropped 5.6 percent to 7,552, and the S&P 500 fell to its lowest close since 1997.

I buckled my seat belt before takeoff and began to sketch out a plan of attack for the next day. We had so much riding on a Citi rescue, and we had to find a way to discourage short sellers from turning on another bank. My mind churned. But the strains of the day had taken their toll on me, and I fell asleep before takeoff. I didn’t wake up until almost midnight, as we circled before landing. When we touched down on the runway, I remembered the president’s last words about Citigroup before I left the Oval Office a day earlier: “Don’t let it fail.”

Friday, November 21–Saturday, November 22, 2008

All day Friday, Citi’s regulators worked flat out, floating ideas to stave off disaster, from selling parts of the bank to strengthening its deposit base by combining it with another bank. Some wanted to replace Citi’s management and directors. I had strongly advocated installing new leadership at failing institutions and had even chosen the new CEOs for Fannie, Freddie, and AIG. But I wasn’t looking for scalps; I wanted to find solutions. And at Citi, Vikram Pandit had been CEO only since December 2007. Unless we had someone in mind who was better qualified and willing to take the job, I saw no point in discussing the matter.

“We can pound on Citi all day long,” I told my team. “But you know what? If they go down, it’s our fault. We’ve got to deal with it, and if we don’t, the American people will pay the price.”

During the last hour of trading, we got some uplifting news when NBC announced that Obama had picked Tim Geithner as his Treasury secretary. The markets exploded upward, with the Dow jumping 7.1 percent to close at 8,046, up 6.5 percent for the day. Citi surged by 19 percent, though it still closed down for the day at $3.77. Its credit default spreads were approaching 500 basis points, while those of JPMorgan, Wells, and BofA were all comfortably below 200 basis points.

Obama’s decision gratified me. Apart from reassuring investors, it meant, I felt, that many of our policies would be pursued, even if they were modified and rebranded. Indeed, I took the market’s rebound as a vote of confidence in what we’d been doing: the markets saw Tim’s nomination to succeed me as a sign of continuity.

When I called Tim to congratulate him, he said that the Obama transition wanted him to disengage from day-to-day activity at the New York Fed as soon as possible. The new economic team was meeting in Chicago that weekend, and the president-elect wanted him there. I pressed him not to go. We needed to come up with a rescue plan before Monday, and his presence was crucial as the bank’s primary regulator.

“I’ll do everything I can to be helpful,” I said. “But we need you on the job this weekend.”

To my relief, Tim agreed to remain in New York. But given his future position, he wouldn’t speak to Citi or any other bank.

By the time Tim, Ben, Sheila, John Dugan, and I conducted our first conference call, on Saturday at 10:30 a.m., Citi had submitted a two-page proposal to the OCC. The company wanted the government to insure more than $300 billion of toxic assets, including residential- and commercial-mortgage-related securities and troubled corporate loans.

We knew we couldn’t assume that Citi’s request would be enough to stabilize the markets. We needed to design a plan that would both appeal to investors and protect the taxpayer. And, in my opinion, we needed to put more equity into the company. Capital was the strongest remedy for a weak balance sheet, and the markets needed to see that the government was supporting Citi.

The OCC, FDIC, and New York Fed had set up offices at Citi’s headquarters and were scouring the $300 billion of assets to determine their true value. Jeremiah Norton, who happened to be in New York that Saturday, joined the on-site examiners. After he arrived, regulators handed him a memo that they had prepared after an all-night session with bank executives that said Citi, by its own estimates, would become illiquid by the middle of the next week. Regulators were frustrated, complaining that Citi executives were disorganized and unable to provide necessary information on the assets they wanted insured.

No one seemed more frustrated than Sheila, who at first suggested using the FDIC’s normal procedures for handling Citi. She proposed other, less costly strategies, such as closing Citi and putting the remains in the hands of a healthy bank. Clearly, she didn’t want the FDIC to pay for the losses at Citi, which had significant operations that were not insured by her agency.

I respected Sheila, who improved most programs we worked on together. But sometimes she said things that made my jaw drop. That morning she had said she wasn’t sure that Citi’s failure would constitute a systemic risk. She felt that Citi had enough subordinated debt and preferred stock to absorb the losses. She spoke as if Citi were just another failing bank and not a world leader—with $3 trillion in assets, both on and off its balance sheet—imploding in the midst of the worst economic conditions since the Great Depression.

“So,” she said, “why not let them go through the receivership process?”

Although I believed she was simply posturing, I replied, “If Citi isn’t systemic, I don’t know what is. And if we do anything less than a powerful response, it will send jitters through the whole market, and people could really put us to a test. I don’t have a lot left in TARP.”

We also had to consider Citi’s $500 billion of foreign deposits. Because foreign deposits were not protected by FDIC insurance, that money was more likely to run to avoid the risk of a bank failure, a major reason Citi’s liquidity was likely to evaporate in a few days.

I asked hypothetically if the FDIC could insure foreign deposits in an emergency; Tim believed it could, but Sheila didn’t think so. In my view, we couldn’t wait to find out. We needed to make another equity infusion in the company. I believed that if we acted forcefully now we had enough TARP capacity to prevent a Citi failure. But if the market’s confidence evaporated and the giant bank had to start unwinding all of its $3 trillion in assets in a hurry, the losses could spiral and shake the entire banking system down to its smallest players.

Sheila and I spoke one-on-one after the morning conference call broke up. “Hank, this is hard for me,” she said. She was dealing with a board that was skeptical about rescuing Citi and exposing the FDIC’s $35 billion fund to the company’s potential losses. And to do her job right, Sheila had an obligation to get answers to all the questions she was posing.

Through the afternoon, the New York teams made progress in valuing Citi’s problem assets and began work on a plan to insure potential losses, but this was no easy task given the large number of complex assets. Moreover, the FDIC had reservations about some of the valuations, because they used a different process from other regulators’. But Sheila promised to keep working toward a deal, and I felt sure we would have her support in the end.

That evening, British ambassador Nigel Sheinwald had invited Wendy and me to a dinner at his residence, adjacent to the British Embassy and just a short distance from our house. As we circulated during cocktails, friends and strangers approached, saying things like “I hope you’re getting some sleep.” This made me uncomfortable; I didn’t want to be thought of as poor Hank, the victim. I said to Wendy, “Do I look that bad?” She replied, “You should be grateful that people are being so supportive.”

As the hundred or so guests began to take their seats for dinner, I ducked into an empty room to check in with Ben Bernanke. We talked for about half an hour before I returned to the dining room. We agreed that Citi needed an equity investment from TARP, but I demurred when Ben raised the possibility of buying common stock; the idea was good corporate finance but bad public policy. Citi’s market value was only about $21 billion, and I pointed out that if we invested any meaningful amount in common stock, we would not only dilute shareholder equity and reward the short sellers, but also leave the government owning a large part of the bank. I could all too easily envision headlines about the nationalization of Citi. I told Ben I was leaning toward buying preferred stock.

Sunday, November 23, 2008

Early Sunday morning, I returned to Treasury and was not surprised to learn that we still had plenty of work to do. Once again, surrounded by the empty soda cans and half-eaten sandwiches of another frantic weekend, we raced against time to announce a deal before the Asian markets opened.

Still, progress was painfully slow. Some of the regulators complained that Citi lacked a sense of urgency. Bob Rubin called to say that Citi was not being given clear direction. The confusion came in part because Tim would not talk directly with the bank—we had lost a key negotiator. I asked Dan Jester and David Nason to take the lead on all calls with Citi from then on.

By evening, thanks in large part to Dan and David, we had made it work. We all agreed on the loss sharing on the $306 billion in identified assets. Citi would absorb the first $29 billion in losses in addition to its existing reserves of $8 billion, with the government taking 90 percent of the hit above that. The first $5 billion of government exposure would come out of TARP, and the FDIC would take the next $10 billion. The Fed would fund the rest with a non-recourse loan. To bolster Citi’s capital, the U.S. would invest $20 billion in return for perpetual preferred shares yielding 8 percent. It would receive an additional $7 billion in preferred shares as a fee for the guarantee, in addition to warrants equivalent to a 4.5 percent stake in the company.

Citi would face tough restrictions, including limits on executive compensation more stringent than those in our capital program. The bank would be prohibited from paying more than one cent per quarter in dividends on common stock for three years without U.S. government approval. Citi would also implement the FDIC’s IndyMac Protocol on mortgage modifications.

I was quite pleased with our solution, as I felt it validated my decision not to use TARP money to directly purchase illiquid assets. With another bank on the brink, we had needed a quick solution that used up as few of our scarce resources as possible. Had we bought Citi’s $306 billion of bad assets directly, we would have had to write a check from TARP’s fund. Instead, we creatively combined powers with other agencies and shared the risk of losses with the FDIC and the Fed.

Kevin Fromer and I called to update congressional leaders, who were glad to hear we’d averted disaster. But the Democrats made it clear I would now have to do something to help the automakers. Their message: “You can’t just take care of fat-cat Wall Street bankers and ignore the plight of working Americans.”

Early that evening, I called the president. I explained that we had fashioned a plan we believed the market would accept, enabling us to avoid a chain reaction of failures.

“Will it work?” he asked.

“I think so, but we won’t know until the morning.”

Monday, November 24, 2008

At 7:35 a.m. on Monday, I spoke again to the president, and I had good news to report. Asian stocks were flat overnight, but European markets were soaring, on their way to 10 percent gains. Now President Bush turned one of my favorite expressions on me.

“How many sticks of dynamite are you going to need to break this crisis?”

“I don’t know, sir,” I answered. “But the way things are going, I may have to put one in my mouth and light the fuse.”

After the president stopped laughing, I told him that I sometimes felt like Job. If something could go wrong, it would. But he told me, “You should welcome the challenge, Hank. Thank goodness the crisis happened when it did. Imagine if it had hit at the beginning of a new administration, when they were just learning how to work together.”

It was the start of a great morning. Citi’s shares jumped by more than 60 percent at the opening of trading. I was pleased that our rescue plan had punished the short sellers and thereby averted similar attacks on other banks.

Feeling as good as I had in weeks, I took a brief break from Washington to support Wendy. That evening, the Randall’s Island Sports Foundation in New York City was honoring her for her work in environmental education. Late in the afternoon, I flew to New York to attend the benefit dinner at the Plaza Hotel.

Wendy had been a great source of strength for me, bucking me up through the long string of crises, but the lengthy workdays and nonstop stress had robbed us of any quality time together. I went to the office early every morning and came home late, and if I didn’t get right on the phone, I often went straight to bed. Wendy and I rarely had dinner together, and when we did, I was distracted. Worst of all were the times I was physically present but mentally elsewhere. Wendy said she felt as if she’d lost her husband and best friend.

The evening also gave me a chance to reconnect with old friends, but during the predinner cocktail party I had to duck out of the room a few times to take calls, including two from Nancy Pelosi, who told me point-blank that it was politically impossible to rescue Citi and not help the automakers. She had until recently opposed bailouts for the car companies, which she considered poorly managed and which had done themselves no favors when their CEOs flew to Washington by private plane to beg for money. I reiterated my position that Congress should rescue them by amending earlier legislation that provided a $25 billion loan for fuel-efficiency improvements. I was worried that we didn’t have enough resources to take care of the financial system, much less the automakers, which couldn’t seem to come up with a plan for their long-term viability. Then I switched to the foremost issue in my mind—getting Congress to release the remaining tranche of TARP.