Before the role playing began, Nason briefed Steel on a key development. He recounted some recent conversations he had had with the staff of Senator Richard Shelby, the ranking Republican on the Senate Banking Committee. “Shelby’s going to be difficult,” Nason warned.
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 ceiling on the amount of mortgages that Fannie Mae and Freddie Mac could buy. For days Shelby had not returned the secretary’s phone calls, until Paulson finally barked at his staff, “Doesn’t he know I am the secretary of the Treasury?”
They also knew they had to be wary of Senator Jim Bunning, well known as a “markets know best” purist. “Senator Jim Bunning, Republican. Kentucky,” Steel replied jokingly when a picture of Bunning was held up during Murder Board. “Everything we’re doing? Yes, it’s all bullshit. We’re socialists. Thank you, Senator.”
The Murder Board preparations continued until minutes before Steel left for the hearing. The key objective now was to protect Steel, and the Treasury Department, from any last-minute surprises. Staffers carefully checked that morning’s newspapers to make certain there was no new revelation about Bear Stearns or some harsh opinion from a columnist that a senator might quote that morning. Happily, there was nothing.
Steel made the short trip from Treasury to Capitol Hill in a Treasury car with his aides. The hearing room in the Dirksen Senate Office Building was already buzzing with activity, as camera crews set up their equipment and photographers tested the light. As Steel took his seat, he noticed that Alan Schwartz of Bear Stearns had already arrived, even though he was not scheduled to testify until that afternoon, and greeted him. To Steel’s immediate left was Geithner; to his right, Cox; and next to Cox, Bernanke. Seated in a single row were a group of men who, more than anyone else in the world, were being entrusted with solving its financial problems.
“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?”
The fireworks started almost immediately. Committee members were sharply critical of the regulators’ oversight of financial firms. 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 Street, they would better appreciate why we took the action we did.”
Then came the question Steel had prepped for: Had it been the Treasury secretary who determined the $2-a- share price?
“Well, sir, the secretary of the Treasury and other members of Treasury were active participants during this ninety-six hours, as you describe,” he replied. “There were lots of discussions back and forth.
“Also, in any combination of this type, there are multiple terms and conditions. I think the perspective of Treasury was really twofold. One was the idea that Chairman Bernanke suggested: that a combination into safe hands would be constructive for the overall marketplace; and, number two, since there were federal funds or the government’s money involved, that that be taken into account. And Secretary Paulson offered perspective on that.
“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. But with regard to the specifics, the actual deal was negotiated—transaction was negotiated between the Federal Reserve Bank of New York and the two parties.”
For the most part, the Fed, the Treasury, and the SEC held their own against the Banking Committee’s interrogation. But they did so largely by defending the Bear bailout as a once-in-a-lifetime act of extreme desperation, not as the expression of a nascent policy. Under the circumstances, it was a reasonable response to a run on a very large bank whose demise would disrupt the entire financial system.
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.
As he sat in a conference room down the hall from Senator Charles Schumer’s office watching the morning’s proceedings on C-SPAN, he strategized with his communications chief and trusted confidant, Joseph Evangelisti. How could he 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.”
Unlike Steel, Dimon had not engaged in any Murder Board role playing in his own Park Avenue office. Instead, he chose to do some last-minute preparation in the conference room, which had been lent to him by a Senate staffer so he wouldn’t have to wait in the gallery.
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.
The message he sought to convey was straightforward: Although Fed and Treasury officials may have deserved scrutiny for their actions, he hadn’t done anything out of the ordinary. It wasn’t his job to protect the interests of the U.S. taxpayer, only those of his shareholders. If anything, he was a little concerned that the Bear deal presented more problems for them than it was worth.
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. They had always had a bit of an obsession with him and tended to paint him as a glorified penny pincher, an executive who would cancel
