Just inside the entrance to the U.S. Treasury, on the other side of a forbidding array of guard stations and scanners that control access to the Greek Revival building, lies one of the most beautiful interior spaces in all of Washington. Ornate bronze doors open inward to a two-story-high chamber. Chandeliers line the coffered ceiling, casting a soft glow on the marble walls and richly inlaid marble floor.
In this room, starting in 1869 and for many decades thereafter, the U.S. government conducted many of its financial transactions. Bags of gold, silver, and paper currency arrived here by horse-drawn vans and were carted upstairs to the vaults. On the busy trading floor, Treasury clerks supplied commercial banks with coins and currency, exchanged old bills for new, cashed checks, redeemed savings bonds, and took in government receipts. In those days, anyone could observe all this activity firsthand—could actually witness the government and the nation’s bankers doing business. The public space where this occurred became known as the Cash Room.
Today the Cash Room is used for press conferences, ceremonial functions, and departmental parties. And that’s too bad. If Treasury still used the room as it once did, then perhaps we’d have more of a clue about what happened to the billions of dollars that flew out of Treasury to selected American banks in the waning days of the Bush administration.
Last October, Congress passed the Emergency Economic Stabilization Act of 2008, putting $700 billion into the hands of the Treasury Department to bail out the nation’s banks at a moment of vanishing credit and peak financial panic. Over the next three months, Treasury poured nearly $239 billion into 296 of the nation’s 8,000 banks. The money went to big banks. It went to small banks. It went to banks that desperately wanted the money. It went to banks that didn’t want the money at all but had been ordered by Treasury to take it anyway. It went to banks that were quite happy to accept the windfall, and used the money simply to buy other banks. Some banks received as much as $45 billion, others as little as $1.5 million. Sixty-seven percent went to eight institutions; 33 percent went to the rest. And that was just the money that went to banks. Tens of billions more went to other companies, all before Barack Obama took office. It was the largest single financial intervention by Treasury into the banking system in U.S. history.
But once the money left the building, the government lost all track of it. The Treasury Department knew where it had sent the money, but nothing about what was done with it. Did the money aid the recovery? Was it spent for the purposes Congress intended? Did it save banks from collapse? Paulson’s Treasury Department had no idea, and didn’t seem to care. It never required the banks to explain what they did with this unprecedented infusion of capital.
Exactly one year has elapsed since the onset of the financial crisis and the passage of the bailout bill. Some measure of scrutiny and control has since been imposed by the Obama administration, but even today it’s hard to walk back the cat and trace the money. Up to a point, though, it’s possible to reconstruct some of what happened in the first chaotic and crucial three months of the bailout, when Treasury was still in the hands of Henry Paulson and most of the money was disbursed. Needless to say, there is no central clearinghouse for information about the tarp money. To get details of any kind means starting with the hundreds of individual recipients, then poring over S.E.C. filings, annual reports, and other documentation—in other words, performing the standard due diligence that the government itself failed to perform. In the report that follows, we have no more than dipped a toe into the morass, but one fact emerges clearly: a lot of the money wound up in the coffers of some very surprising institutions— institutions that should have been seen as “troubling” as much as “troubled.”
The intention of Congress when it passed the bailout bill could not have been more clear. The purpose was to buy up defective mortgage-backed securities and other “toxic assets” through the Troubled Asset Relief Program, better known as tarp. But the bill was in fact broad enough to give the Treasury secretary the authority to do whatever he deemed necessary to deal with the financial crisis. If tarp had been a credit card, it would have been called Carte Blanche. That authority was all Paulson needed to switch gears, within a matter of days, and change the entire thrust of the program from buying bad assets to buying stock in banks.
Why did this happen? Ostensibly, Treasury concluded that the task of buying up toxic assets would take too long to help the financial system and unlock the credit markets. So, theoretically, something more immediate was needed—hence the plan to inject billions into banks, whether or not they wanted or needed the money. To be sure, Citigroup and Bank of America were in precarious condition. So was the insurance giant A.I.G., which had already received an infusion from the Federal Reserve and ultimately would receive more tarp money—$70 billion—than any single bank. But rather than just aiding institutions in distress, Treasury set out to disburse money in a more freewheeling way, hoping it would pass rapidly into the financial system and somehow address the system-wide credit crunch. Even at this early stage, it was hard to escape the feeling that the real strategy was less than scientific—amounting to a hope that if a massive pile of money was simply thrown at the economy, some of it would surely do something useful.
On Sunday, October 12, between 6:30 and 7 p.m., Paulson made a series of calls to the C.E.O.’s of the biggest banks—the so-called Big 9—and asked them to come to Treasury the next afternoon for a meeting on the financial crisis. He was short on details, as he would be throughout the crisis. A series of e-mails obtained by Judicial Watch, a Washington public-interest group, offers a window on the moment. The C.E.O. of Citigroup, Vikram Pandit, had agreed to attend, but asked his staff to scope out the purpose. “Can you find out soon as possible what Paulson invite to VP [Vikram Pandit] for meeting at Treasury this afternoon is about?” a Citigroup executive in New York wrote the bank’s Washington office. When Citi’s high-powered lobbyist Nicholas Calio called Paulson’s office, he was told only that Pandit should attend.
Top Treasury staffers were likewise in the dark. Paulson’s chief of staff, James Wilkinson, sent out a 7:30 a.m. e-mail: “Can someone tell Michele Davis, [Kevin] Fromer and me who the ‘Big 9’ are?”
By midmorning, people finally had the names—Vikram Pandit, of Citigroup; Jamie Dimon, of J. P. Morgan Chase; Kenneth Lewis, of Bank of America; Richard Kovacevich, of Wells Fargo; John Thain, of Merrill Lynch; John Mack, of Morgan Stanley; Lloyd Blankfein, of Goldman Sachs; Robert Kelly, of the Bank of New York Mellon; and Ronald Logue, of State Street bank. Their destination was Room 3327, the Secretary’s Conference Room, on the third floor.
Paulson laid before them a one-page memo, “CEO Talking Points.” He wasn’t there to ask for their help, Paulson would say; he was there to tell them what he expected from them. To “arrest the stress in our financial system,” Treasury would unveil a $250 billion plan the next day to buy preferred stock in banks. Paulson’s memo told the bankers bluntly that “your nine firms will be the initial participants.” Paulson wasn’t calling for volunteers; he made it clear the banks had no choice but to allow Treasury to buy stock in their companies. It was basically a reverse holdup, with Paulson holding the gun and forcing the banks to take the money.
Some of the C.E.O.’s had misgivings, fearing that by accepting tarp money their banks would be perceived as shaky by investors and customers. Paulson explained that opting out wasn’t an option. “If a capital infusion is not appealing,” the memo continued, “you should be aware that your regulator will require it in any circumstance.” Paulson gave the bankers until 6:30 p.m. to clear everything with their boards and sign the papers.
Treasury had prepared a form with blank spaces for the name of the bank and the amount of tarp money requested. Each C.E.O. filled in the two blanks by hand—$10 billion, $15 billion, $25 billion, whatever—and then signed and dated the document. That was all it took.
But this was just the beginning. It’s one thing to call nine big banks into a room and give them what turned out to be a total of $125 billion. That required little more than a few hours. It’s quite a different matter to look out over the landscape of 8,000 other U.S. banks and decide which ones should get slices of the tarp pie. Moreover, the guiding principle was never clear. Was it to give money to essentially sound banks, so that they could help inject more money into the credit markets? Was it to pull troubled banks into the clear? Was it both—and more?
Regardless, the mechanism to disburse all this money even more widely was an entity called the Office of Financial Stability. Unfortunately, it wasn’t a functioning office yet—it was just a name written into a piece of legislation. To lead it, Paulson picked Neel Kashkari, a 35-year-old former Goldman Sachs banker who had followed Paulson to Treasury when he became secretary, in July 2006. Kashkari was an odd choice to oversee a federal bailout of private companies. A free-market Republican, he had downplayed the gravity of the subprime-mortgage crisis only months before his appointment, reportedly sending the message to one gathering of bankers, “There is no problem here.”
Kashkari and other Paulson aides cobbled together the Office of Financial Stability under immense time pressure. They press-ganged people from elsewhere in Treasury and from far-flung government departments. By the end of the year, there were more “detailees” on loan from other offices (52) than there were permanent staff (38). They were spread out all over Treasury, from the ground floor to the third. Some occupied space in leased offices six blocks away. It was a strange agglomeration of people—stretching from Washington to San Francisco—who had never worked together before.
There were no internal controls to gauge success or failure. The goal was simply to dispense as much money as possible, as fast as possible. When Treasury began giving billions to the banks, the department had no policies in place to ensure that the banks were using the money in ways that met the purposes of the program, however defined. One main purpose, as noted, was to free up credit, but there was no incentive to lend and nothing to stop a bank from simply sitting on the money, bolstering its balance sheet and investing in Treasury bills. Indeed, Treasury’s plan was expressly not to ask the banks what they did with the money. As the Government Accountability Office later learned, “the standard agreement between Treasury and the participating institutions does not require that these institutions track or report how they plan to use, or do use, their capital investments.” When the G.A.O. asked Treasury if it intended to ask all tarp recipients to provide such an accounting, Treasury said it did not—and would not. “There’s not a bank in this country that would lend money under [these] terms,” Elizabeth Warren, the chair of a Congressional Oversight Panel that was eventually charged by Congress with overseeing tarp activities, would tell a Senate committee.
There wasn’t even anyone within the tarp office to keep track of the money as it was being disbursed. tarp gave that job—along with a $20 million fee—to a private contractor, Bank of New York Mellon, which also happened to be one of the Big 9. So here was a case of a beneficiary helping to oversee a process in which it was a direct participant. Most of the tarp contracts—for everything from legal services to accounting—were awarded under an expedited procedure that government watchdogs regard as “high-risk,” because it lacks a wide array of routine safeguards. In its first three months of operation, the Office of Financial Stability awarded 15 contracts worth tens of millions of dollars to law firms, fiscal agents, management consultants, and providers of various other services. There was enormous potential for conflicts of interest, and no procedure to deal with them. When the possibility of conflict of interest was raised, two of the contractors voiced vague promises to maintain an “open dialog” and “work in good faith” with Treasury, and left it at that.
When Henry Paulson unveiled the bank-rescue plan, he emphasized that it wasn’t a bailout. “This is an investment, not an expenditure, and there is no reason to expect this program will cost taxpayers anything,” he declared. For every $100 Treasury invested in the banks, he maintained, it would receive stock and warrants valued at $100. This claim proved optimistic. The Congressional Oversight Panel that later reviewed the 10 largest tarp transactions concluded that Treasury “paid substantially more for the assets it purchased under the tarp than their then-current market value.” For each $100 spent, Treasury received assets worth about $66.