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

"I don't think you can do something this drastic and not change the CEO," I replied. "Beyond that, frankly, I want to do as little as possible to change management."

"Our board will want to take a close look at this," Mudd said, attempting to push back.

Richard Alexander, the managing partner for Arnold & Porter, FHFA's outside counsel, replied: "I need you to understand that when these gentlemen"-- he meant Lockhart, Bernanke, and me -- "come to your board meeting tomorrow, it's not to have a dialogue."

"Okay," Rodge Cohen said, and it was clear he understood the game was over.

After the meeting, I made a few quick calls to key legislators. I had learned much, none of it good, since going to Congress in July for unprecedented emergency authorities to stabilize Fannie and Freddie. I had said then that if legislators gave me a big enough weapon -- a "bazooka" was what I specifically requested -- it was likely I wouldn't have to use it. But I had not known of the extent of the companies' problems then. After I had learned of the capital hole, I had been unable to speak about it publicly, so conservatorship would come as a shock, as would the level of taxpayer support. I was also very concerned that Congress might be angered that I had turned temporary authority to invest in Fannie and Freddie, which would expire at year-end 2009, into what effectively was a permanent guarantee on all their debt.

First up were Barney Frank, chairman of the House Committee on Financial Services, and Chris Dodd, his counterpart on the Senate Banking Committee. Barney was scary-smart, ready with a quip, and usually a pleasure to work with. He was energetic, a skilled and pragmatic legislator whose main interest was in doing what he believed was best for the country. He bargained hard but stuck to his word. Dodd was more of a challenge. We'd worked together on Fannie and Freddie reform, but he had been distracted by his unsuccessful campaign for the Democratic presidential nomination and seemed exhausted afterward. Though personable and knowledgeable, he was not as consistent or predictable as Barney, and his job was more diffi cult because it was much harder to get things done in the Senate. He and his staff had a close relationship with Fannie, so I knew that if they decided to fight, they would go to him.

As it turned out, the calls went well. I explained that what we were doing was driven by necessity, not ideology; we had to preempt a market panic. I knew their initially supportive reactions might change—after they understood all the facts and had gauged the public reaction. But we were off to a good start. Then I went into the meeting with Freddie. Dick Syron had brought his outside counsel, along with a few of his directors, including Geoff Boisi, an old colleague from my Goldman Sachs days.

We ran through the same script with Freddie, and the difference was clear: Where Mudd had been seething, Syron was relaxed, seemingly relieved. He had appeared frustrated and exhausted as he managed the company, and he looked like he'd been hoping for this to happen. He was ready to do his duty—like the man handed a revolver and told, "Go ahead and do it for the regiment."

He and his people mostly had procedural issues to raise. Would it be all right for directors to phone in or would they have to come in person? How would the news be communicated to their employees?

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