Decision Points

concerned about inheriting Bear’s portfolio of risky mortgage-backed securities. With Ben’s approval, Hank and Tim Geithner , the president of the New York Fed, devised a plan to address JPMorgan’s concerns. The Fed would lend $30 billion against Bear’s undesirable mortgage holdings, which cleared the way for JPMorgan to purchase Bear Stearns for two dollars per share. ****
    Many in Washington denounced the move as a bailout. It probably didn’t feel that way to the Bear employees who lost their jobs or the shareholders who saw their stock drop 97 percent in less than two weeks. Our objective was not to reward the bad decisions of Bear Stearns. It was to safeguard the American people from a severe economic hit. For five months, it looked like we had.

    “Do they know it’s coming, Hank?”
    “Mr. President,” he replied, “we’re going to move quickly and take them by surprise. The first sound they’ll hear is their heads hitting the floor.”
    It was the first week of September 2008, and Hank Paulson had just laid out a plan to place Fannie Mae and Freddie Mac , the two giant government-sponsored enterprises, into government conservatorship.
    Of all the emergency actions the government had to take in 2008, none was more frustrating than the rescue of Fannie and Freddie. The problems at the two GSEs had been visible for years. Fannie and Freddie had expanded beyond their mission of promoting homeownership. They had behaved like a hedge fund that raised huge amounts of money and took significant risks. In my first budget, I warned that Fannie and Freddie had grown so big that they presented “a potential problem” that could “cause strong repercussions in financial markets.”
    In 2003, I proposed a bill that would strengthen the GSEs’ regulation. But it was blocked by their well-connected friends in Washington. Many Fannie and Freddie executives were former government officials. They had close ties in Congress, especially to influential Democrats like Congressman Barney Frank of Massachusetts and Senator Chris Dodd of Connecticut. “Fannie Mae and Freddie Mac are not facing any kind of financial crisis,” Barney Frank said at the time.
    That claim seemed more implausible as the years passed. In my 2005 budget, I issued a more dire warning. “The GSEs are highly leveraged, holding much less capital in relation to their assets than similarly sized financial institutions,” the budget read. “…   Given the very large size of each enterprise, even a small mistake by a GSE could have consequences throughout the economy.”
    That summer, we made another run at legislation. John Snow worked closely with Senate Banking Committee Chairman Richard Shelby on a reform bill that would create a new regulator authorized to reduce the size of the GSEs’ investment portfolios. Senator Shelby, a smart, tough legislator from Alabama, pushed the bill through his committee despite unanimous Democratic opposition. But Democrats blocked a vote on the Senate floor. I am always amazed when I hear Democrats say the financial crisis happened because Republicans pushed deregulation.
    By the summer of 2008, I had publicly called for GSE reform seventeen times. It turned out the eighteenth was the charm. All it took was the prospect of a global financial meltdown. In July, Congress passed a reform bill granting a key element of what we had first proposed five years earlier: a strong regulator for the GSEs. The bill also gave the treasury secretary temporary authority to inject equity into Fannie and Freddie if their solvency came into question.
    Shortly after the legislation passed, the new regulatory agency, led by friend and businessman Jim Lockhart , took a fresh look at Fannie’s and Freddie’s books. With help from the Treasury Department, the examiners concluded the GSEs had nowhere near enough capital. In early August, both Freddie and Fannie announced huge quarterly losses.
    The implications were startling. From small-town banks to major international investors like China and Russia, virtually everyone who owned GSE paper assumed it was backed by the U.S. government. If the GSEs defaulted, a global domino effect would follow and the credibility of our country would be shaken.
    With Hank’s strong advice, I decided that the only way to prevent a disaster was to take Fannie and Freddie into government conservatorship. It was up to Hank and Jim to persuade the boards of Fannie and Freddie to swallow this