“I’ll tell you, the calmest person in the room was always the president,” one of the men in the meetings told me. In spite of the public perception that everyone’s hair was on fire in the days following Lehman’s collapse, that is not the picture he and others presented of that early period after the weekend that would change Wall Street. “Hank could be an excitable guy, and he wasn’t the only one, but the president kept trying to impress on us that we had to keep it on an even keel, think things through, not pull the trigger before we’d taken careful aim. It was an important message, because everything was happening so fast. The president’s attitude helped avoid a panic mode.
“This was not like the television show The West Wing,” he added, “where people are running through the corridors and yelling a lot. We didn’t yell. The meetings were very calm, very respectful. I can’t remember one meeting ever, even in the height of the crisis when it was very emotional, when there were shouting matches.
“Of course we were nervous. We literally thought we were on the verge of the Great Depression. But never, never in those meetings did you ever see emotion or anger or hysteria. Just didn’t happen. I think President Bush did a good job of keeping us steady, and saying, ‘Look, you guys, I want you to think this through, and before we do anything, you’re going to tell me what you’re doing and what it is you think we should be doing, and I want to hear the rationale.’”
One person in the room during many of these critical meetings was Ed Lazear, the president’s chief economic adviser. I asked him to give me a sense of what it was like during those days. “There was no average day,” he said. “We never knew what each day would bring. The volatility in the system was enormous—especially the market swings. It wasn’t crazy to have a five-hundred-point day, and there were even a couple of seven-hundred-point days. I knew when I woke up that every day was going to be at a minimum weird, and at a maximum horrible. What it wouldn’t be was a great day.”
Lazear’s mornings started around 5:15, and while he was still in bed he’d click on CNBC to see what was happening in the international markets. He’d sit in bed and start scribbling notes on the pad he kept on his nightstand. By 6:45 a.m. he was at the office briefing his colleagues and senior staff and making a plan for the day. “We always had a plan,” he told me, “even though we had no idea what new crises we’d have to face. We all agreed that we had to take whatever action was necessary to make sure that the market had confidence and that we could ensure that the firms that were so essential to credit and economic growth would survive.”
Lazear, an intense guy with a lively face and a shiny bald head, had been plucked from academia to serve the president. He was known as a brilliant economist and an unconventional thinker. When it came to the current financial crisis, he had a theory that was quite unique. He called it the popcorn theory, and he later explained it to me this way: “There were two ways of looking at the crisis. One was the domino view—and it was the most common. Everyone knows the domino theory. One domino topples, it knocks over the next one, knocks over the next one, and the whole thing crashes. Most people thought that was what was going on, and I even thought it myself for a while. When we were back trying to figure out how to prop up Bear Stearns, we actually thought if we kept that domino standing, others wouldn’t fall.
“But by May of 2008, I had switched my view to what I call the popcorn theory. Here’s how it works. When you’re making popcorn, you pour oil in the pan, add the kernels, and then, as the oil gets hot, the kernels start to pop. Now, suppose you take the first kernel out of the pan. It would not stop the other kernels from popping, because the oil is hot. They’re going to keep popping as long as the fire is going. Apply this theory to Lehman Brothers. We were all in favor of trying to save Lehman, but even if we’d succeeded, other kernels would keep popping—AIG, Washington Mutual, Wachovia, and so on. I’m not sure it would have prevented stock market damage because it wasn’t just Lehman; it was panic in the entire financial system. There was a fundamental problem in the system, and what you had to do was turn the heat off. Or alternatively, you could strengthen the pan—essentially capitalize the financial sector—to withstand all the popping going on inside.”
That, according to Lazear, was the reasoning behind the Troubled Asset Relief Program (TARP), an unprecedented effort to turn down the heat on a systemic crisis. “AIG was a big deal, but remember, there were lots of big deals going on right then,” Lazear recalled. “Merrill was a big deal; Lehman was a big deal; Fannie and Freddie were a big deal; AIG was a big deal; Washington Mutual and Wachovia were big deals. We had a lot of stuff on our plate at that point, and initially the strategy was to take them one at a time and try to deal with them and prevent any one of them from causing a collapse of the system. But we realized that the piecemeal approach was not an effective strategy.
“I’m an academic by training,” he said, “and the historical precedent for this was absent. We’d never seen anything like it. Even in the Great Depression, which people
