EXCERPT: Henry M. Paulson Jr.'s: 'On the Brink'

I explained that we had teams of lawyers, bank examiners, computer specialists, and others on standby, ready to roll into the companies' offices and secure their premises, trading floors, books and records, and so forth. We had already picked replacement chief executives. David Moffett, a former chief fi nancial officer from U.S. Bancorp, one of the few nearly pristine big banks in the country, was on board for Freddie Mac. For Fannie Mae we'd selected former TIAA-CREF chief executive and chairman Herb Allison. (He was vacationing in the Caribbean, and when I reached him later and twisted his arm to come to Washington the next day, he'd initially protested: "Hank, I'm in my flip-flops. I don't even have a suit down here." But he'd agreed to come.)

White House staff had been shocked when we first suggested conservatorship for Fannie and Freddie, which had the reputation of being the toughest street fighters in Washington. But they liked the boldness of the idea, as did the president. He had a deep disdain for entities like Fannie and Freddie, which he saw as part of a permanent Washington elite, detached from the heartland, with former government offi cials and lobbyists cycling through their ranks endlessly while the companies minted money, thanks, in effect, to a federal entitlement.

The president wanted to know what I thought the longer-term model for Fannie and Freddie ought to be. I was keen to avoid any existential debate on the two companies that might bog down in partisan politics on the Hill, where Fannie and Freddie had ardent friends and enemies. "Mr. President," I replied, "I don't think we want to get into that publicly right now. No one can argue that their models aren't seriously flawed and pose a systemic risk, but the last thing we want to start right now is a holy war."

"What do you suggest?"

"I'll describe this as a time-out and defer structure until later.I'll just tell everybody that we're going to do this to stabilize them and the capital markets and to put the U.S.A. behind their credit to make sure there's mortgage fi nance available in this country."

"I agree," the president said. "I wouldn't propose a new model now, either. But we'll need to do it at the right time, and we have to make clear that what we are doing now is transitory, because otherwise it looks like nationalization."

I said that I had come to believe that what made most sense longer-term was some sort of dramatically scaled-down structure where the extent of government support was clear and the companies functioned like utilities. The current model, where profits went to shareholders but losses had to be absorbed by the taxpayer, did not make sense. The president rose to signal the meeting was over. "It will sure be interesting to see if they run to Congress," he said.

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