The list held the names of nine companies that Hank Paulson and Tim Geithner, at the time the Treasury secretary and the New York Federal Reserve president, planned to draft as the leaders of a parade of banks to get capital injections as protection against the financial panic. Paulson had spent Sunday evening calling the CEOs of the firms with a next-day summons to Washington. But by Monday morning, top Treasury staff and the arriving executives remained in the dark about the 3 p.m. meeting Paulson had insisted they attend. In one e-mail out of a series obtained through the Freedom of Information Act by the conservative group Judicial Watch, Citigroup (C, Fortune 500) CEO Vikram Pandit's deputies suggested sending someone else in his place. "If this is a briefing of industry group, I don't think VP can go back to DC. If it is something else we need to know," wrote Citi vice chairman Lewis Kaden. But the Treasury wanted to maintain the element of surprise, saying in a midday news release only that the executives were there to "work out details" of the $700 billion bank rescue plan Congress had passed days earlier.
0:00/4:22Bailout culture clashBy then, everyone knew the rescue plan by the acronym TARP, for Troubled Asset Relief Program, and its passage through Congress had been a tormented affair, with the stock market collapsing after an initial thumbs-down by the House. When TARP finally passed, it was supposed to jump-start the lifeless credit markets by deploying taxpayer money to help banks shed toxic assets that were crushing their balance sheets.
The government, however, changed its mind. At this dramatic Monday meeting, TARP morphed into something altogether different -- a more direct program in which the Treasury would pump fresh capital into the system by buying preferred shares of individual banks. And in the months that followed, TARP would morph again and again, especially in terms of political perceptions that became a perplexing new hazard for the more than 500 banks, thrifts, and other financial institutions that had signed up for the deal.
Pandit, among the last to arrive, was joined that afternoon by eight other titans of the shaken world of American finance, including J.P. Morgan Chase (JPM, Fortune 500) CEO Jamie Dimon, Bank of America (BAC, Fortune 500) CEO Ken Lewis, Wells Fargo (WFC, Fortune 500) chairman Richard Kovacevich, and Morgan Stanley (MS, Fortune 500) CEO John Mack. As the men checked in at the Treasury entrance, department staff scrambled to figure out how to keep the media at bay, but by that point the whole financial world was watching. "There are cameras at the gate," headlined an e-mail that was quickly followed by a decision to corral the media into Lafayette Park across the street, from which they would snap pictures of the bankers emerging with $125 billion more than they had when they went in.
Inside Treasury, some of the bankers initially balked at Paulson's offer, but he wasn't taking "no thanks" for an answer. "We don't believe it is tenable to opt out because doing so would leave you vulnerable and exposed," he said, according to his talking points. At 4:01 p.m., just one hour after the meeting started, Wilkinson e-mailed an update to the White House: "We are there except for one. This deal will get done." Treasury staffers had set up individual offices for the bankers so that they could call their boards and other colleagues without leaving the building. By 6:25, all nine executives had scrawled their signatures on single white sheets of Treasury paper, inserting the amount, in tens of billions, that they had been told to accept. "We now have 9 out of 9," wrote Wilkinson. The next day the Treasury issued a press release declaring, "These healthy institutions have voluntarily agreed to participate."
Was the rescue program necessary? We can probably assume that those signatures helped stave off a far more damaging economic collapse. Some banks, notably Citigroup, wouldn't be alive in their current form without TARP funding. But for those that had a choice (or think they did), accepting taxpayer dollars was a decision that came with costs to their reputation as well as damage to their view of Washington politicians, most notably Congress.
Eight months into a program designed as a three-year capital infusion, the banks allowed to leave TARP are doing so. On June 17, 10 large U.S. banks, including five of the original nine, announced that they had repaid a total of $68 billion in bailout funds, following $2 billion in repayments by smaller banks. The rush to the exit door by relatively healthy banks means that TARP is on the way to becoming what Treasury has always insisted it wasn't: government welfare, a taxpayer-funded propping-up of failed institutions. While taxpayers can't be expected to be sympathetic to complaints from a sector that vaporized hundreds of billions of dollars, it's worth understanding their motivations as they bail out of the bailout or chafe within its strictures. This is a story exploring the point of view of the often vilified parties on the receiving end of a historic experiment in government intervention, one of many that will play out in the coming years. Banking executives say this is what they've learned:
A signed deal with Treasury is not a done deal. If taxpayer dollars are on the line, Congress will have something to say, and that something holds the force of law.Populism isn't good for business -- but it's the overriding sentiment in Congress today, fueled by a 24/7 news cycle that feeds on outrage. The House actually passed a 90% tax on bonuses, which died only when the headlines had moved on.Good intentions don't control the message. The Treasury website still insists the TARP capital-injection program is "not a bailout." But amid a backlash against Wall Street, TARP transformed from a seal of approval to what J.P. Morgan's Dimon called "a scarlet letter."The strings attached are not always obvious in the heat of crisis but emerge as major disadvantages in a normal competitive environment.What starts out as all-for-one breaks down as participants pursue their self-interest. Treasury boasted that the first nine banks moved "quickly and collectively." It didn't last.The experience has reminded business leaders why the government is considered a rescuer of last resort. As they repay TARP money, executives at stable institutions are vowing they will never again be tethered to a fickle Washington and a vindictive Congress. In normal times, that would merely be a sign of the free market's healthy skepticism toward government. But these aren't normal times -- the Obama administration needs the private sector to pitch in: healthy banks to lend more than they might otherwise; prospective investors to buy the illiquid assets weighing down lenders. And what happens if "there's another crisis and the private sector doesn't trust the government. What will we do?" asks a former top bank regulator. The bad blood runs deep.
Four months after signing Paulson's term sheets, CEOs from the same nine banks were hauled before a House committee to be derided by one lawmaker as "captains of the universe" and told by another that "no one trusts you anymore." Within days financial institutions that were encouraged to accept taxpayer money under one set of rules issued by the Treasury would be subjected to a new set of rules issued by Congress. They were shamed into canceling corporate events -- "employee recognition" outings in their minds but "lavish junkets" in the language of posturing politicians. (Who got hurt the most? Probably workers in the travel and hotel industries.) Customers called their bankers, angry that the institutions had been "bailed out" and demanding their own bailout from burdensome mortgages and credit cards. "There was this belief that this was free money," says Wells Fargo CEO John Stumpf. "But it was not a bailout, and we never asked for it."
Executives now refer to the "reputational risk" of participating in government-funded programs, while Treasury Secretary Geithner worries that the "stigma" associated with TARP funds is preventing needed capital from getting into the lending pipeline. According to a study by the investment bank Piper Jaffray, shares of those banks that accepted TARP funds suffered compared with those that did not. "Public, investor, and government perception toward recipients has turned negative," the study concluded. Among stable banks there is a "recognition that participating in a government program with a subsidy is not necessarily a good choice," says former Sen. John Sununu, a member of the congressional panel overseeing TARP.
In the TARP saga, executives list a range of complaints: Dimon, whose J.P. Morgan Chase has a global workforce of nearly 225,000, has called the restrictions on hiring foreigners "a complete and utter disgrace." Every executive interviewed complained that Congress's pay limits were driving away top talent. But mostly they complain about the unpredictability that Congress injected into their operations. "Whoever gets TARP will be punished after the fact," Kovacevich told Fortune. "Is this good policy? Does any of this make any sense?" Further down the size spectrum, CEO Tom Geisel of New Jersey-based Sun Bancorp (SNBC) (assets: $3.6 billion) says he wasn't prepared for the changing terms of the deal. "When we signed the contract, the biggest risk was the fact that we didn't know what we didn't know," says Geisel, whose bank stayed out of the subprime business. "The government was a partner that could do whatever it wanted. That's not a partnership. I've never signed a document like that before in my life, and I'll never sign one again."
The Treasury, which is legally authorized to change TARP terms at will, was not the primary source of the problem: It was Congress. From issuing new rules on compensation to high-level talk of nationalizing the banks, the turmoil in Washington stirred an uncertainty in the financial sector that can't have helped recovery efforts. Says former Treasury chief of staff Wilkinson: "Institutions need to know the rules, and the rules keep changing."
TARP began as a three-page document that Hank Paulson rushed to Congress in September, during the worst week of the financial crisis. The next month, after critics urged that the toxic-asset plan should be replaced with a capital-injection campaign similar to Britain's approach, Paulson came around to the new idea. Once embraced, Treasury was determined to make it happen. "We would rather have erred on the side of getting too much capital into the system than too little," Neel Kashkari, the Treasury official who ran the program until May, told Fortune. From the outset, it was billed as an effort to shore up the financial system, not individual banks. Recalls Stumpf: "There was a sense that we were in this together." However, the results of this spring's stress tests suggest that at least some of those big banks did need the government's cash after all. Wells Fargo and Bank of America were among 10 banks told to raise more private capital, as was Citigroup, which is turning over a one-third ownership stake to the government, making it a virtual ward of the state.
While the original nine were told they had no choice but to accept, others did have a choice -- yet soon lined up at the door, having faced mounting losses and worries about financing. Nonbanks American Express (AXP, Fortune 500) and CIT Group (CIT, Fortune 500) converted into depository institutions to qualify for TARP. Community banks mounted a lobbying campaign to be included. "I guess my invitation got lost in the mail," Camden Fine, CEO of the Independent Community Bankers Association, joked to a Treasury official on learning of the Oct. 13 meeting. By January hundreds of banks, thrifts, and other financial institutions were in the system, encouraged by Treasury, which sent out the message that only healthy banks need apply. Treasury was approving applications at a rapid clip, despite a cost to the banks of the 5% annual preferred stock dividend, which would rise to 9% if not paid in five years.
Even though taxpayers stood to profit under those terms, lawmakers from both parties were nursing their own frustrations -- over constituents unable to get loans, over Paulson's sudden shift in direction, over the torrent of federal rescue money Treasury was unleashing with minimal congressional input before the fact. "It was like a fire hose," recalls Rep. Scott Garrett (R-N.J.). "They were being totally dismissive" of alternatives.
The event that set off the populist tsunami -- and forever changed the public view of TARP banks -- came days after the inauguration of a new President, one who had campaigned against the "greed" of Wall Street. On Jan. 29, New York state comptroller Thomas DiNapoli issued his annual report on Wall Street compensation, which concluded that bonuses in 2008 had fallen 44% over the previous year. But what caught everyone's attention is that they still totaled $18.4 billion, even at a time when the companies were collapsing from their bad bets. New President Obama condemned the bonuses as "shameful" and "irresponsible." Lawmakers picked up on the theme, generating headlines and passing an amendment to the 2009 stimulus bill to impose new compensation rules on executives whose banks had signed on to TARP.
Lawmakers mined it for good theater. CEOs from each of the nine banks that had signed the initial deal were summoned Feb. 11 before the House Financial Services Committee, where lawmakers demanded an accounting of the taxpayer money they had accepted. Arrayed across the dais as cameras rolled, the nine men were lashed with scolding and sarcastic gibes like the one by Rep. Michael Capuano (D-Mass.): "Basically you come to us today on your bicycles after buying Girl Scout cookies and helping out Mother Teresa, telling us, 'We're sorry, we didn't mean it, we won't do it again, trust us.' " Of course, some bankers haven't done themselves any favors by continuing to enjoy perks like the use of company jets for personal trips while accepting TARP money, as the Wall Street Journal reported.
Participation in TARP by healthy banks began to decline as banks began to witness the political costs. That dropoff accelerated a few weeks later, after it was disclosed that bailed-out AIG (AIG, Fortune 500) was planning to give its executives $165 million in retention payments and the House responded with its confiscatory 90% tax on bonuses. "The media goaded Congress," recalled Rep. Melissa Bean (D-Ill.), an influential member of the House Financial Services Committee and one of six Democrats who resisted the goading. "That created fears."
Eighty banks withdrew their TARP applications or declined the funds after being approved. Others, like Geisel's Sun Bancorp, began returning their money in March and April. "What began as a positive partnership between business and government to get the economy back on track quickly became politicized," he says. In Geisel's case, he was initially encouraged by regulators to acquire weaker banks, but Congress, steeped in a big-is-bad sentiment, was threatening to amend the program again to add a series of hurdles to acquisitions.
By then the collective spirit was unraveling, and the big banks wanted out too. When top bankers met in March with Obama in the White House, J.P. Morgan's Dimon reportedly presented Geithner with a fake check for $25 billion, the amount of his bank's TARP investment. Geithner didn't accept the souvenir, and Obama didn't accept their protests either. "Be careful how you make those statements, gentlemen. The public isn't buying that," Politico reported Obama saying. "The anger, gentlemen, is real."
No wonder the White House was concerned. The stigma attached to TARP was beginning to affect other relief efforts the administration was trying to get off the ground. Analysts blame the initial lackluster performance of the Term Asset-Backed Securities Loan Facility -- designed to bolster student, auto, and credit card loans -- in part on political fears. Another program still hasn't gotten off the ground, one that was the original intent of the TARP bill: The Public-Private Investment Program to lift toxic assets (now redubbed "legacy" loans and securities) from the banks' balance sheets has had trouble attracting investors. Pricing assets is one obstacle, but investors are also reticent about making money off a government program. "Who wants their employees subjected to death threats and their homes picketed?" asked a hedge fund executive in a pointed reference to the AIG bonus debacle.
The lesson for Wall Street is hard to miss: Profiting off a government-subsidized program is a recipe for a political nightmare. Prospective investors "correctly believe that if they were to make a profit, Congress would come along and claw them back," says Peter Wallison, co-director of financial policy studies at the conservative American Enterprise Institute.
So has TARP done its job? "It was one of the largest government appropriations in history," says Thomas Chen, CEO of the investment bank Piper Jaffray. "And a mere seven months later we're letting capital be returned on the basis that the problem is fixed. So you have to ask: (1) Has it all been fixed?, or (2) Was it necessary in the first place?" Chen believes the program had a short-term calming effect on the economy -- more than a financial effect. Says Thomas Nides, Morgan Stanley's chief administrative officer: "The original concept was to accomplish one thing: to stop us from going off the cliff, to send a clear message that the government was not going to let the system collapse. For that I give them an A+."
Paulson's team has acknowledged that Treasury officials should have communicated better with Congress as the program expanded, bringing lawmakers onboard with the message that was communicated to the nine CEOs on that Monday afternoon: We're all in this together. "We were trying to get the political will to prevent the financial system from collapsing," says Kashkari. "But our political system is better at cleaning up after a mess than reaching consensus to prevent one."
Our political system is also fraught with turmoil and unpredictability. Capitalism, however, thrives on contractual certainty. The Obama White House has drawn many lessons from the Great Depression -- insisting, for example, that the crisis demonstrated the need for early, bold, and large-scale government intervention. But that era also holds lessons about the costly unpredictability of government rules. In her 2007 history of the Great Depression, The Forgotten Man , which became a hot book this spring among conservatives, author Amity Shlaes argues that the economy took longer than it should have to recover in the 1930s and contends that F.D.R.'s stated strategy of "bold, persistent experimentation" spawned fear of commitment in the markets.
That is the theme that TARP veterans return to time and again -- sanctity of contracts, the importance of certainty in market rules. This is American business culture, one that is at odds with the vicissitudes of American political culture. Right now Congress thinks it knows better. But too much bold, persistent experimentation just might undercut the recovery lawmakers say they want.
--Reporter associates: Alyssa Abkowitz, Marilyn Adamo, and Adam Lashinsky
