Money, Power and Wall Street: Part Two (full documentary) | FRONTLINE

Money, Power and Wall Street: Part Two (full documentary) | FRONTLINE

>> Tonight on FRONTLINE, episode two 
of a four-hour special investigation. >> Shaky home mortgages are triggering 
fears of a financial meltdown.
  >> Inside Washington's struggle 
to respond to the meltdown. >> The dow tumbled 200… >> They were all very afraid of 
the possibility of a bank failure. They didn't know what it would lead to. >> Fears of a global liquidity 
crisis have intensified today. >> Inside the critical decisions. >> The policy makers have 
sent inconsistent signals   so the marketplace doesn't know what to expect. >> Turmoil in markets around the globe. >> My god we may be presiding 
over the second great depression. >> The politics of a bailout. >> They had to throw their principles 
out the door and save the economy. >> America you should be outraged 
about Washington is about to do. >> And the education of a future president. >> The economy is melting, the 
Bush administration is leaving   and all eyes are now on Barack 
Obama to turn it around.

>> Obama gets a real glimpse 
of the future disasters coming. >> Money, Power and Wall Street: episode two. Tonight on FRONTLINE. >>   It was on a cold March day in 2008 that the 
fear of a meltdown would become a reality. >> —fears of a financial meltdown on Wall Street— >> foreclosures rose to record highs— >> After the real estate bubble 
burst, it would only be a matter   of time before investors would start to lose 
confidence in Wall Street's biggest banks. >> It started with news that some 
Bear Stearns hedge funds would— >> The Case-Shiller home price index— >> Bear Stearns was the first to crack. >> Pretty normal morning. And then suddenly, 
around 11:00 o'clock, there's a tremor. The stock starts to go down. The CFO of 
Bear starts calling down to his desks,   to the repo guys, the bond 
guys, "Anybody hear anything? Anybody know anything? What is this?"   "Yeah, the rumor is that we're running out 
of cash and that we might be in trouble." >> —leading this very sharp rally on Wall 
Street, with the exception of Bear Stearns— >> The rumors swirling around Bear were about 
its massive investments in subprime mortgages,   what would become known as "toxic assets." >> They were big in mortgages. 
They were big in packaging them   and creating securities out of them, buying them.

>> The road to riches for Bear was simple,   buy hundreds of thousands of subprime 
mortgages, then bundle and sell them to   investors. But now the party was over, 
and Bear was spiraling out of control. >> You've either got liquidity or you don't, so— >> It was nothing short of surreal. >> But those are the kinds of concerns 
in this market, concerns of confidence— >> You're watching on CNBC, et cetera, I 
mean, they're talking about where you work.

>> Well, the only bank in the red 
right now, basically Bear Stearns,   although it is dragging the rest of 
the financial markets down, as well. >> The stock was in freefall, and 
the cash reserves were shrinking. >> The stock started to go down. More 
and more people called up and said,   "I want my money out" or "I won't trade with 
Bear Stearns." And it just completely unwound. >> Nearly bankrupt, the top brass at 
Bear called Wall Street Timothy Geithner,   the President of the New York Federal Reserve. Geithner was Bear's last chance. >> Tim Geithner is at the Federal Reserve bank 
of New York.

It's the epicenter of the financial   system. He is supposed to be the Fed's front-line 
general, field marshal, in the financial markets. >> He's 47 years old. He looks like he's about 32. >> Extremely smart, extremely aware of 
this stuff, very discrete, controlled. >> Geithner realized he needed to 
know how bad Bear's books looked.   He dispatched a SWAT team of investigators from 
the Federal Reserve to Bear's headquarters. >> Tim Geithner is frantically 
involved in trying to figure out   what's going to happen if Bear melts 
down, and how you need to prevent it   from going into freefall and dragging down 
the rest of the financial sector with it. >> By midnight, by 1:00, 2:00 in the morning, 
everybody and their mother has teams at Bear—   Morgan, the Fed, the SEC— and they find out 
Bear is stuffed to the gills with toxic waste.

>> Bear was party to complicated financial deals. >> Nobody understood how subprime mortgages had   proliferated through these things 
called credit default swaps.   And nobody understood how they'd kind of 
gotten into the blood of the financial system. >> Geithner learned that Bear had made credit 
default swap deals worth trillions of dollars   all over Wall Street and around the world. >> Because Bear Stearns was so 
indebted to so many other people,   their failure to repay their debts, or pay their 
debts, would cause a cascade of other failures. >> Geithner saw what central 
bankers fear most, "systemic risk."   Bear was frighteningly interconnected 
with other banks up and down Wall Street. >> No one knew what would 
be the ramifications, which   other institutions were exposed, which 
other institutions would suffer runs. >> Bear Stearns, Geithner 
concluded, was "too big to fail."   A bankruptcy could undermine confidence 
in every major Wall Street firm.

>> They were all very afraid of the possibility of   a bank failure. They didn't 
know what it would lead to. >> The precipitous collapse of Bear Stearns   had taken federal regulators 
almost entirely by surprise. >> What became clear, as you look at the record,   is the extent to which the people who were 
charged with overseeing our financial system really didn't have a sense of the risks 
that were embedded in that system. They didn't see the fundamental rotting in the 
system that had manifested itself for years. >> A year later, Phil Angelides would chair 
the Financial Crisis Inquiry Commission. In their report, the commission concluded 
regulators at the Federal Reserve,   the SEC and other agencies ignored evidence 
that Wall Street was flirting with disaster. >> You would think that the people 
who were in charge of our financial   system would have a grip on 
the key risks that were in it. And if they did, they would 
have moved, in a sense, to   get a handle on those. They had deliberately 
turned a blind eye to those problems. >> For three decades, Washington had steadily 
moved to a hands-off attitude towards Wall Street.

And with little oversight, inside 
these black boxes, Wall Street   had created a host of complicated 
but lucrative financial products. >> We had no regulation. No federal or state public official had any 
idea what was going on in those markets. It was a dark market. There was no transparency. >> They were making money, and they want to 
continue making money. It was generating fees. Transparency drives profits down, 
drives down transaction costs. The banks don't want that   because they make their money from transaction 
costs, and they like lots of non-transparency. >> The story has continued to 
mushroom, and there are concerns among— >> Now, with Bear failing, those dark markets 
threatened to bring down the American economy.

At 4:00 AM, Tim Geithner picked up 
a phone and called the chairman of   the Federal Reserve in Washington, Ben Bernanke. >> Ben Bernanke is a highly, 
highly respected scholar,   and not only a scholar of economics 
but of the Great Depression. >> If he weren't chairman of the Fed, he'd be 
top of the list of people you'd be going to for   advice and understanding in all this stuff. >> One of the Depression expert's 
biggest fears was being realized. >> It was clear that this had to be contained. There was no doubt in his mind. He, more than anyone else, appreciated 
what would happen if it got out of control. >> Bernanke believed that 
just as in the Depression,   a lack of confidence in the banks 
could bring down the entire economy. >> You could see the credit default swap   spreads widening. The market was 
telling you something was wrong. >> Well,   here we are, 90 minutes in, and it looked— it 
looked like it was going to be a big up day, but— >> The next morning, Bernanke warned President 
George W.

Bush's treasury secretary, Hank Paulson,   of systemic risk to the financial 
system if Bear collapsed. >> Paulson was picturing a 1,000 
to 2,000-point drop in the Dow   that Monday, possibly the failure 
in very short order of a number   of other investment banks— Lehman 
Brothers, Morgan Stanley, and so on. >> Paulson thought he knew the 
markets well. Only two years before,   he had run Bear's largest competitor. >> Paulson comes from the great breeds of masters 
of the universe that have come from Wall Street. >> Henry Paulson came from Goldman Sachs. 
He was a very powerful Wall Street figure. >> At Goldman, he had overseen the growth 
of those complicated financial products,   and was always a champion of the free market.

>> Paulson does not have the mentality of a 
regulator, he has the mentality of an investment   banker, that the market rewards and the market 
punishes, so you don't need a lot of regulation. >> A bailout of Bear Stearns was 
not Paulson's style, but Bernanke   and Geithner believed it was too big to fail. 
And by that weekend, options were dwindling. >> It was a gut check moment. Do we feel 
like we can take the risk of letting it go? They all looked at each other and just 
said, "I'm not ready to take that risk." >> They would use $3 billion of 
government money to avoid a bankruptcy. Tim Geithner would broker a fire 
sale of Bear Stearns to JP Morgan. >> The Federal Reserve used powers that it had had 
but had lain dormant since the Great Depression.

They basically took $30 billion, went 
to JP Morgan and say, "We'll give you   $30 billion if you buy this Bear Stearns, 
so it doesn't have to go out of business." And they did. >> What the New York fed did was 
take all the bad stuff off the books   of Bear Stearns and allow JP Morgan 
to purchase the good part of it. It's kind of like if Uncle Sam had 
come in and taken all the vinegar   and allowed JP Morgan to have the wine. >> Bailing out a major financial institution in 
crisis was something Tim Geithner had seen before. It was taken from a playbook created back in 
the 1990s, how to respond to a financial crisis. >> Tim Geithner, going back even to 
his days in the Clinton administration,   is sort of known as a cool head in a crisis, and in, you know, "How do you manage 
a really troubled financial system?" >> In the Clinton administration, 
Robert Rubin was the treasury secretary.   Larry Summers was his top deputy. And undersecretary Tim Geithner 
was always in the room. >> They had this bonding, unifying experience   during the Clinton administration 
putting out these various crises, from Thailand to Japan to Indonesia.

Geithner was one of the guys who 
was sort of part of that SWAT team   that understood how to 
react to a financial crisis. >> They engineered massive bailouts when   American banks were threatened 
by financial turmoil overseas. Working with the International Monetary Fund,   they loaned hundreds of billions in countries 
like Mexico, Thailand and South Korea. Rubin and Summers, along with Federal 
Reserve chairman Alan Greenspan,   became superstars of the financial world. You had this infamous now Time 
magazine cover with Bob Rubin,   Larry Summers and Alan Greenspan, called 
"The committee to save the world." And that just sums up the 
attitude of the times perfectly. >> By the end of the Clinton administration, 
the folks in the Treasury — Geithner, Summers,   Rubin — felt like there 
was an established playbook for dealing with a financial crisis. The first thing you had to do was 
come in and flood the banks with   money so that they would keep lending, as 
difficult as that was to do politically. >> It was an approach Geithner 
took with Bear Stearns,   spending lots of money to 
respond to a financial crisis.

But Treasury Secretary Henry Paulson thought   Geithner's strategy might 
send a dangerous message. He started publicly reminding Wall Street of 
one of the most basic tenets of the free market,   moral hazard. >> I'm as aware as anyone is of 
moral hazard. I am also aware of— >> Moral hazard poses the question, if you bail 
somebody out of a problem they themselves cause, what incentive will they have the next 
time to avoid making the same mistake? >> Paulson is out in public 
saying, "It's all on you now.

This was a one time only event," right? "You're on your own now. We did it 
with Bear, but now you're on your own." >> There's news today of a federal 
bailout for a Wall Street investment— >> It's a fire sale for troubled Bear Stearns. >> The bailout of Bear Stearns landed 
in the middle of an election year.

>> Are you fired up? Are you ready 
to go? Fired up! Ready to go! >> Barack Obama had already 
made the economy a key issue. >> —because we've got eight years 
of disastrous economic policies. That's what we're going to change when I'm 
president of the United States of America! >> Obama very early realized that 
things were only going to get worse. And so, Obama made this decision, 
"The thing I'm going to run on   is that there's a problem in our economy, my 
opponent doesn't see it, and I can fix it." >> And right after the Bear Stearns crisis, 
he turned his attention to Wall Street.   He had an inside source, the 
man in the pink striped tie. >> We met for a little dinner, just him and 
I, and you know, I was hook, line and sinker. I felt like here was a guy that could 
really bring this country together. >> Robert Wolf was a Wall Street power broker,   the chairman of UBS Americas, 
part of the giant Swiss bank. >> From that day on, we started talking very, 
very often.

I don't know if it was once a week,   three times a week, five times 
a week, emailing back and forth. But from that time on, we started talking 
about the markets and the economy nonstop. >> And with Wolf's support, Obama decided 
to confront the bankers on their own turf. >> I actually went down to the Cooper 
Union speech with him in his car. >> —Senator Barack Obama. >> He was talking about the idea of 
making sure that the ethics of Wall Street   was pure and that we were doing the 
business that we should be doing.

>> We let the special interests put 
their thumbs on the economic scales.   We've excused and even embraced an ethic of greed. >> The Cooper Union speech was essentially Obama's   effort to say to the Democratic Party and to 
the country that he believed that we had to   rein in Wall Street, we had to resume 
more aggressive regulation of Wall Street. >> Instead of establishing a 21st century   regulatory framework, we 
simply dismantled the old one. In doing so, we encouraged a 
winner-take-all, anything-goes— >> In the audience, Wall Street's power 
brokers were paying close attention. >> He was sitting in the heart of the world 
financial center, talking about regulation   before we started talking about regulation. >> A free market was never 
meant to be a free license   to take whatever you can 
get, however you can get it. >> I would say the reaction 
wasn't great from Wall Street. But you know, to the president's 
credit, that didn't stop him from   laying out what he thought 
was going to be necessary. >>   The campaign continued. But over the next few months, 
the news didn't get any better.

>> Profits in the banking industry are plunging— >> The jobless rate in America 
has now soared to 6.1 percent— >> The markets were on the edge. >> The Dow tumbled 240 points, 
while the NASDAQ sank 46. >> At the White House, President Bush decided 
Secretary Paulson would handle the crisis. >> President Bush, who's in the 
final months of his presidency,   was receptive to letting Paulson 
decide the best way to fix the problem. In effect, he said to Paulson, "I've got your 
back. I'm going to get you whatever you need. But you're the front— you're 
the front-line general here." >> Paulson hoped the failure of Bear Stearns was 
an isolated event. Wall Street was now on notice. And other banks would have 
to take care of themselves. >> He was relatively sanguine. And he thought, "well, this is"— 
you know, "This is a one-off. They screwed up, but you know, others 
aren't going to be quite that bad." >> It felt like this was a crisis,   but not an uncontrollable one.

was something that could be stopped. A finger in the dike would end up working fine. >> Paulson told President Bush what was needed 
now was to rebuild confidence in the economy.
  Bush's speech writer, Matt 
Latimer, helped craft the message. >> The attitude was to emphasize how good 
the economy was, how things were improving. We'd have different bullet points and 
things we'd emphasize in speeches. And over time, some of the bullet 
points stopped being relevant,   or they were actually bad signs, 
so we took them off the list. So the list of good news kept dwindling down. >> I believe market conditions 
will continue to improve. I am confident because our economy is 
resilient, and deep and competitive.

And I want Americans to be confident, as well. >> Both Paulson and Bernanke 
insisted all was well. >> We will work our way 
through these financial storms. We will work our way through this 
cyclical movement that we have. And the economy will return to good growth. >> It became known as the summer of assurances. >> When will the economy turn around? I'm not an 
economist, but I do believe that we're growing. And I can remember, you know, this 
press conference here where people   yelling recession this, recession 
that, as if you're economists. And I'm an optimist. You know, I believe there's a lot 
of positive things for our economy. >> But there were strong 
warnings of what was to come. >> A bullet had been dodged with Bear, 
but I think the more analytical people   on Wall Street recognized that there 
were still a lot of bullets coming.

The prognosis for the near future was 
that there were still huge problems. >> That summer, as the financial 
crisis became increasingly obvious,   there was no decisive action from those in charge. >> That's one of the most striking parts of 
the story, is that, first of all, how little   the people who were in charge of our system knew 
and/or did in the wake of this oncoming crisis. And secondly, once the evidence was clear that 
the system itself was shaky and unsound, how there   wasn't definitive and strong action to try to 
curb what was becoming a disaster for the country. >> When asked why the government 
did not do more that summer,   Assistant Treasury Secretary 
Michele Davis said she and Paulson believed the government was powerless 
to prevent the looming crisis. >> The American people expect the Federal 
government to have the authority to   prevent a disaster when they can see it coming. And we don't have that authority. We also all knew it was June, 
July of an election year.

There was not much realistic chance of 
actually somehow enacting new authorities. So all we could do was look at the authorities 
we had and try to figure out what we could use. >> These are the people who we charge 
with the responsibility of monitoring. They're the ones who are supposed to keep 
out for systemic risk in our country. That's their job every day. Why didn't someone stand up and say, "Wait a 
minute, this is a lot bigger than Bear Stearns?" >> By the fall, in New York City, on Wall 
Street, there was a palpable sense of unease.

>> —is up, gasoline's up, food prices 
up, stocks going way, way, way, way down— >> But Wall Street didn't know where 
or when the panic would strike next. >> Fears of a global liquidity 
crisis have intensified today— >> Then it hit. In the crosshairs, the world's 
fourth largest investment bank, Lehman Brothers. >> —true in the case of Lehman 
Brothers, shares of which— >> Lehman is quaking. They're having to bring 
in a quarter of a trillion dollars a day,   that goes out the next morning, just to survive. >> Back when the mortgage business was 
becoming the biggest casino on Wall Street,   Lehman was one of the highest rollers, 
betting hundreds of billions of dollars. Just like Bear Stearns, Lehman's bets had gone 
bad. And all over Wall Street, they knew it. >> —stock price dropped 45 percent Tuesday— >> Concerns about the company seemed 
unlikely to ease any time soon. >> —and many, many questions— >> They've got zero leverage.

They have 
to do something soon. It's obvious— >> Dick Fuld ran the company. On Wall 
Street, they called him "the gorilla.' >> It's like you poured a bull into a suit. 
He just— he just can't stop being Dick Fuld. And the whole firm came to be stamped with that. >> Many believed Fuld's Lehman 
Brothers was too big to fail,   and Fuld seemed to think neither Geithner 
nor Paulson would ever let it go under.

>> Dick Fuld is still believing in the orthodoxy. Even though Paulson is saying publicly, 
"You're on your own," he's, like, "What, are you kidding? If there's trouble, 
the government's going to come and take us. They are going to come and 
do what we need to do because   the world can't live without Lehman Brothers 
at the center of the financial system. It'll be a complete nightmare." >> And Fuld believed he had 
a possible ally in Geithner. He was one of their own. He'd brokered the Bear deal. And he was a member of a very exclusive club. >> The board of the New York Fed is made 
up of many of the titans of finance.

That's really, in a way, the 
ultimate club on Wall Street. They determine who the president 
of the New York Fed is. It's really the ultimate insiders' institution. >> Now on phone calls with 
Hank Paulson and Ben Bernanke,   Geithner argued they might have 
to follow the bailout playbook. >> Geithner tells Paulson, "I believe we are 
going to have to put government money in. And you'll have no credibility if you 
say we're not going to do it and we are."   So we know there's that tension. >> So hank Paulson's sitting 
there, and it turns out that   we're having the largest crisis Wall 
Street has seen since the Great Depression. And he's at the center of it. And at this point 
the question becomes, "What does hank Paulson do?" >> Moral hazard seemed to be 
driving Paulson's decision. >> At this point, he makes a critical decision 
because of this issue of moral hazard, that   Lehman will be allowed to fail.

>> It was a very high-stakes game 
of signaling that he was playing. He wanted to show these guys, you know, 
all of his old buddies on Wall Street,   that they were going to need to 
step up and do something themselves. >> Friday night, September 12th, 
2008, after the markets closed,   the heads of Wall Street's largest firms were 
summoned to the Federal Reserve Bank in New York. This weekend would be a critical 
moment in the story of the meltdown. >> About 4:00 or 5:00 o'clock, the 
various officials from the Federal Reserve   started phoning the bank chiefs. Cell 
phones started going off.

And they said,   "You need to be down here at 6:00 
o'clock. We want to talk to you." >> I got a phone call about 5:00 o'clock saying, 
"Be at the Fed at 6:00 o'clock" that evening. I was in Merrill Lynch's midtown facilities. 
And I live in Westchester, so I was trying   to get out of the city early because the 
traffic is always bad on a Friday night. I went by myself. And for the most part, the CEOs of the   large investment banks and commercial 
banks were all there by themselves. >> So everybody converged. At that point, it was just the CEOs of 
the main houses and very senior advisers. >> You had about a dozen different CEOs there. And you have in there Tim from the Fed. You have Henry Paulson as the treasury secretary. >> Paulson delivered the message. Lehman was in a death spiral, and 
there would be no government bailout. >> They'd said to us we collectively 
had to find a solution for this. And this is the important part. The government was not going to 
provide any form of assistance.

>> It didn't take long for candidate 
Obama to also hear the news. At the time, he had a secret inside source. >> I was speaking to the senator all along. When we started talking Friday night, 
he was asking the tough question. >> UBS chairman Robert Wolf was stepping out 
of the meetings to keep Obama up to speed. >> He's saying, "Barack, this is bad. Lehman could go down, but AIG is 
right behind it, as well as Merrill." He lays it out. >> I was clear that, you 
know, from my perspective,   I think immediately, we will see the 
markets and funding start to dry up. You'll see a lack of liquidity. And we're 
going to be in a situation of the unknown.


>> The other Wall Street banks said 
they were not about to rescue Lehman,   but Paulson was standing firm. There would be no bailout. Geithner and Bernanke would go along. >> Geithner should have 
been spending the summer of   2008 figuring out what to 
do if there was a Lehman. And they didn't do that. This is a historic failure. They should not have been in a BlackBerry 
crisis environment in the fall.   They're essentially unprepared. >> By Sunday evening, it 
was over at Lehman Brothers. The lawyers spent the night 
preparing the bankruptcy papers. On Monday morning, Tim Geithner 
began his day working the phones. His logs from the day show eight 
calls with Secretary Paulson. The early vibrations from 
Wall Street weren't good. >> —Lehman announcing early this morning it will 
file for bankruptcy, confirming all those reports.

>> —particularly unsettling for Lehman 
Brothers employees, 25,000 worldwide— >> Paulson headed to the White 
House to reassure the markets. >> Good afternoon, everyone. And I 
hope you all had an enjoyable weekend. Yeah. Yeah. Well, as you know— >> The Fed and the Treasury thought that 
Lehman could go under without causing a   major conflagration, and that it would be a 
big event, but it wouldn't cause a cataclysm.

>> But the American people can 
remain confident in the soundness   and the resilience of our financial system. Thank you very much. >> Paulson had bet the markets 
would take care of themselves. He would soon discover he was wrong. >> The stock market dropped by 
hundreds of points right from the open— >> Everything freezes. And that's what causes the crisis.

And it really started because Lehman 
Brothers went into bankruptcy. >> Lehman collapses, and there are shock 
waves through the world financial system,   all around the world, huge panic. >> No bank wants to lend to any other bank   because they're afraid that the other 
bank won't be able to pay them back. >> —turmoil in markets around the globe— >> Why didn't the government save Lehman 
the way that it stepped in for Bear Stearns? >> At Paulson's office, the telephones lit 
up, dozens of calls from around the country.

>> Hank was very nervous. He was getting calls from large 
manufacturing companies that   were struggling because of the 
credit markets being frozen. The longer it went on, the more 
trouble the economy was going to be in. —devastated by losses in mortgage investments— >> I know they're going to 
be asked to bail out AIG— >> It's a tough day, man. It's 
a tough day, but less is more. >> The system stopped. All forms of payment froze when 
we got to the depth of the panic. Banks wouldn't lend money to each other. The first money market mutual fund in the 
United States, quote, "broke the buck." Commercial paper, the most basic— one of the most 
basic instruments in finance— that market failed. >> Investors were shaken by 
Lehman's bankruptcy filing— >> Geithner's logs show 55 phone calls this 
day. Many told him what he already knew,   the decision not to bail out Lehman was 
at the heart of the expanding crisis. >> The policy makers have 
sent inconsistent signals.

They saved Bear. They didn't save Lehman. So the marketplace doesn't know what to expect. A nd there's no doubt that in the wake of 
Lehman, there's real panic in the marketplace. NARRATOR: Paulson had made the tough decision 
and was now responsible for the consequences. >> I'm sure that Paulson is sitting there— 
and he doesn't strike me as the most   reflective guy necessarily, but 
he must have been sitting there, everybody was sitting there, saying,   "My God, we may be presiding over 
the second Great Depression." This is the utter nightmare of an economic 
policy maker. You're sitting there,   and you may have just made the 
decision that destroyed the world. Absolutely terrifying moment. >> Yes, we can! Yes, we can! >> Inside the campaign, Barack Obama had 
been hearing about the meltdown in real time,   with constant updates from his economic team.

>> Senator Obama was engaged before Lehman. But once Lehman hit, you know, I 
think he was all over it, thinking   in a proactive and prospective way of 
how this was going to impact the economy. >> And the candidate had another 
inside source, Hank Paulson. >> Secretary Paulson and the administration 
are calling then candidate Obama, and they're saying, "Look, we think 
the world is close to coming to an end,   and we really need your support." >> Obama was being briefed 
about a brand-new crisis. AIG, the world's largest 
insurance company, was collapsing. >> When Lehman goes bankrupt, all of a sudden, 
AIG says, "We're sitting on this huge deficit. We just promised to pay all these people millions 
and millions of dollars if Lehman went bankrupt, assuming that Lehman could 
never possibly go bankrupt. And now Lehman has gone bankrupt." >> Obama was told that the failure of AIG was far   worse than Lehman and threatened 
a full-scale worldwide depression. >> AIG has problems that make everybody 
else's problems look like child's play. >> AIG does not have the money in the 
bank to support the commitments it made.

>> AIG plunging— >> At one point, they were down 70 percent— >> They face the hammer of a credit 
rating agency downgrade, which— >> Once again, Geithner and Paulson 
were only now learning the details   about the hidden business dealings 
of a major Wall Street institution. >> Everyone was having to learn all 
about AIG, you know, in real time,   learn about the institution at the 
same time that they're having to make decisions, and not even having 
time to figure out who the   big counterparties are because 
you're faced with— it's Monday night, and if you don't do something in 24 hours, 
you're going to see the consequences.

>> Here's this— you know, this mammoth institution 
that turns out to have an enormous hole in it. And again, policy makers just 
come to grips with the extent   of the challenges and the problems 
days before its imminent collapse. >> Geithner realized that if AIG went down, the 
consequences would be even worse than Lehman.   He argued for another bailout. >> Tim Geithner thought that if they 
did not do everything they had to do to   save AIG, as distasteful as it was, that they would be jeopardizing 
the global economy. >> He certainly talks now of 
having stared into the abyss   after Lehman and concluded that that was 
not going to happen again on his watch. >> Paulson, reeling, changed course again. 
He'd support Geithner's rescue of AIG. >> They swallow hard, and 
they do what they have to do.

And so much for moral hazard, right? So much for moral hazard 
because you can't let AIG fail. >> They had to throw their principles 
out the door and save the economy. And whatever criticism there would 
be of government intervention   was a small price to pay for the deluge that 
would have occurred if AIG had collapsed. >> It was at this moment that 
Geithner faced a fateful decision.   One question was especially sensitive. Should he punish the banks that 
were parties in AIG's toxic deals   by making them take a financial hit? On 
Wall Street, it's called a "haircut." >> There's this very delicate 
moment at that precise time   when Geithner and others have the power to say, "OK, we're going to save AIG, but the cost to 
you, Goldman Sachs, or Citi or anyone else,   is that you have to take a haircut.

You have to take a discount 
on your insurance policy. You know that you're going to go— 
you're going to claim your insurance,   but instead of claiming 100 percent of it, I want you to agree right now you're 
only going to claim 50 percent of it." >> But that's not what Geithner decided. The U.S. government, he said,   had no choice but to pay off the big 
banks' claims against AIG at full value. >> Geithner's entire recovery 
plan depended on confidence. And if you suddenly started going in and 
giving haircuts, people are going to get upset. They're going to be worried.

Investors are going to pull back right 
at the time when they needed investors   to have enough confidence in these 
banks to put their money back in. >> The decision meant billions of dollars 
would flow to Wall Street's largest banks. >> If the government hadn't intervened,   those counterparties would have taken huge 
losses, so there was some leverage there. At least tell them, you know, 
"You're going to take 10 percent." That just— that would have helped. But there was just willingness to kind 
of throw lots of money at the problem. And I don't— I think we threw more money at 
the problem than we needed to. Absolutely. >> Geithner's bailout put the government on 
the hook for more than $180 billion dollars. Goldman Sachs and the other banks 
would each receive billions. >> Stocks plunged again. In the 
end, the Dow plummeted 449 points— >> Geithner had orchestrated the AIG rescue in 
only a few days, but it did not stop the meltdown. >> —plummeting 504 point— >> This is DEFCON 4, whatever. This was the complete nightmare. By Wednesday, you'd basically had a complete 
shutdown of the world capital market.

It's just—   no, this is absolute terror. >> Ben Bernanke called Hank Paulson at Treasury. >> Bernanke basically calls up Paulson and says, 
"There's no end game in sight that looks good. Things only look like they're going to get worse. We have to do something more direct, more direct 
involvement of government in the banking sector." >> Bernanke wanted Paulson 
to help convince Congress   to initiate a massive bailout of Wall Street.

>> Bernanke says to Paulson— first of 
all, he says, "You have to go to Congress.   We can't do this anymore on a case-by-case basis." At that point, Paulson bowed to the inevitable. 
One thing Paulson said to me in an interview is,   "When the situation changes, you have to 
be willing to change with the situation." >> The ext day Paulson ad Bernanke traveled 
to capitol hill for an emergency meeting. >> On Thursday, late afternoon, 
they go to Nancy Pelosi's office.

And there's a meeting of the senior legislators 
from both parties in both House and Senate. >> It was obviously a big meeting. I had no idea I was going to hear what I heard. >> Secretary of the Treasury Paulson 
and the chairman of the Fed came in and   kind of dropped a bomb on the meeting. >> They said they needed the authority to use 
$700 billion to un-stop the credit markets.

>> Sitting in that room with Hank Paulson saying 
to us, in a very measured tones, no hyperbole,   no excessive adjectives, that, "Unless you act,   the financial system of this country and the 
world will melt down in a matter of days." >> They came in, described a financial 
meltdown of epic proportions. And when that was finished, 
the chairman of the Fed said,   "If we do not act now, we will 
not have an economy by Monday." >> There was literally a pause in 
that room where the oxygen left.

>> And they said to us they needed it by 
Monday. We said, "Well, that's not reasonable.' >> Harry Reid, the   Senate Democratic leader, said, "This is 
the U.S. Senate. We can't move that fast." >> Paulson felt that he needed to move swiftly and 
almost the economic equivalent of "shock and awe." >> We just had what I believe 
was a very productive meeting,   where we heard from the administration— >> It's as close to a blank check as you can 
get without actually asking for a blank check. >> Paulson wanted the $700 
billion authorized immediately. >> And predictably, the reaction 
on Capitol Hill was toxic. They were furious.

>> America, you should be outraged 
about what Washington is about to do! >> It is unprecedented and unaffordable   and unacceptable expansion of 
federal power that our kids— >> Conservative Republicans in 
the House were in full revolt. >> But this is essentially Mr. Paulson's 
bill to help his friends, and I can't buy it! >> Many of us felt like we were being 
asked to choose between the slippery   slope to socialism and the next Great Depression, not the kind of decision that you 
want to make at the snap of a finger.

>> The bill was stuck, the markets plunging. Suddenly, presidential politics intervened. >> America this week faces an historic 
crisis in our financial system. Tomorrow morning, I'll suspend my campaign 
and return to Washington after speaking— >> Out of the complete blue, John McCain gives   some speech saying he's suspending his 
campaign and he's coming to Washington, and he's calling a summit meeting and was 
going to solve all these problems for us.

There was a very delicate negotiation going on,   and he was just throwing himself into 
the middle of it for no apparent reason. >> I'm calling on the president 
to convene a leadership meeting   from both houses of Congress, 
including Senator Obama and myself. It's time for both parties to come 
together to solve this problem. >> He was sort of throwing a "Hail Mary" pass   to say, "Well, let's just— I'll suspend my 
campaign and we'll all go back to the White House, and we'll figure out what to do 
about this terrible economic crisis." >> The president has invited Senators McCain 
and Obama to the White House on Thursday— >> —reminder that the financial crisis affects 
the political campaign, and the campaign in turn— >> McCain is going to have this meeting, kind of a 
summit today with the president and Barack Obama— >> On September 25th, a hastily called meeting 
at the White House. Paulson arrived first. Within 20 minutes, Barack Obama, John McCain 
and prominent members of the House and Senate. >> We go there to the White House.

There is a division, with everybody 
on one side, House and Senate   Democrats, Senate Republicans and Treasury. >> We're in a serious economic crisis in the 
country if we don't pass a piece of legislation. >> They sit around the Cabinet Room 
table, and President Bush says, "If we don't get the money flowing, 
if we don't get the credit flowing,   this sucker could go down," 
meaning the economy as a whole. And then he opens it up. >> McCain walks into the meeting with, like, a 
cue card with a couple things scribbled on it. Obama doesn't even wait for McCain to start. He just moves right in. >> Senator Obama has been talking 
to Paulson, has been talking to   Warren Buffett and Paul Volcker and Larry Summers, 
and you know, a host of other economic advisers.

>> Obama is prepared and he talks about what 
needs to happen, and "We'll pull together," and   he's been— he doesn't want to take over in a country which is in depression, so he's extremely 
supportive of this whole emergency bailout thing. >> Senator Obama said, "Well, 
I'd really like to hear from   Senator McCain because he's the 
person who called for this meeting." >> McCain is fumbling with his cue cards. He doesn't even barely get started. Obama kind of patronizes him, saying, "I 
think Senator McCain has something to say." McCain just melts on the spot. >> Obama took charge, had authority. John McCain had no plan, no strategy. I don't think he understood what was happening,   or didn't have a plan for 
what he wanted to accomplish.

>> President Bush whispered to Nancy 
Pelosi, who was sitting next to him,   when McCain was talking, he said, "You guys are going to miss me." And she kind of laughed. >> The meeting ends up breaking into— 
into a cacophony of shouting and—   and screaming back and forth. And Bush stands up and says, "Well, I've clearly 
lost control of this meeting," and he walks out. >> And another Republican at the table 
joked to the person sitting next to him,   "After this, even we're going to vote for Obama." That was the level of Obama's 
dominance in this meeting. >> It becomes a turning point 
because McCain started this. He suspended his campaign. Obama did not suspend his campaign. McCain promised some sort of dramatic action. He sent mixed signals and did not seem to have the 
authority that a commander-in-chief should have. And I don't think he ever really 
quite recovered from that. >> It would take another week, but in the 
end, Congress finally passed Paulson's bill.

>> Yeas are 263, the nays are 171. The motion is adopted. >> Paulson now had $700 billion, known 
as TARP, Troubled Asset Relief Program. >> TARP, like the AIG bailout, is just a 
manifestation of the mad scramble that has to   take place to try to contain the damage from years of neglect in Washington and 
recklessness on Wall Street. I mean, the bill finally came due. >> And that October, Paulson decided 
to use the money in a dramatic way. Secretary of the Treasury Paulson, the apostle 
of the free market and believer in moral hazard,   would now initiate the largest government intervention in Wall Street 
since the Great Depression. >> He was put in the position of 
doing the last thing he wanted to do,   which was to step in directly with 
government capital into the banking system. For him, this is a step— this is 
a true crossing of the Rubicon. >> On October 12th, he acted. >> I got a phone call on Sunday from 
Secretary Paulson, and he basically said, "Ken, I need you to be in Washington Monday." And he said, "I really can't 
tell you a lot about it.' >> He said, "Be at the Treasury 
at 3:00 o'clock tomorrow."   I said, "Well, what's the topic?"
"You'll find out when you get there." I said, "Well, who's coming?" 
"You'll find out when you get there.

See you at 3:00," click. >> Seven other heads of the nation's 
largest banks received a similar summons. >> They turn up at 3:00 o'clock, and 
they all file into the conference room,   which is across the hall 
from Mr. Paulson's office. >> Paulson got right down to business. >> Because it's Paulson, who's not 
a man who beats around the bush,   it became clear relatively 
quickly what he was proposing.

>> He says, "I've got here documents 
that say that the U.S. government is   going to make an injection of capital 
into each one of your companies." >> Paulson was about to hand out billions dollars. >> He turned it over to Geithner. He said, "OK, here's how 
much you're going to get." And he went around the room, and he came to me 
and he said, "$25 billion b— b— b— billion." And then the rest of them.

And I almost fell out of my chair. >> They go through in a very,   very rapid way that each of us is going to 
take this taxpayer money, the TARP money. >> And he basically says, "You can't leave 
this room until you agree to take this money." >> "We're all going to do it for the good 
of the country, for the good of the system. And it's not really discretionary." >> It was unprecedented. In return for billions of dollars, the government 
would take an ownership stake in the banks. But even with the financial system in 
freefall, some bankers fought back. >> It was a very contentious meeting, 
lots of questions, lots of doubts. >> Richard Kovacevich, chairman 
of Wells Fargo, led the charge. >> Kovacevich stood up, said,   "I don't want the money. I don't need 
the money. I don't want the money. I want to have nothing to do with this.' >> I don't know how much further we went 
before I was interrupted by Hank, who said, "Your regulator is sitting right next 
to me.

And if you don't take this money,   on Monday morning, you will be 
declared capital-deficient." I was stunned. >> Paulson gave each man a single piece 
of paper spelling out the conditions. >> Before they had to leave 
town that night, they were told,   "Return this document with your signature on it." And all nine of them did so. >> The terms were extremely generous. >> They don't have to modify any mortgages. They don't have to put 
limits on their own salaries   or their own compensation or their own bonuses. They don't have to do anything differently than 
they were doing before. They don't even have to   agree to major regulatory changes. Basically, they are sitting 
fat and pretty and happy. >> Treasury Secretary Paulson had just given 
$125 billion to the nation's richest banks. And it was only the beginning. >>   The real story of this financial 
crisis is probably not so much   whether the bailout was the right 
thing to do or the wrong thing to do.

The real question is, how did it come to be   that this nation found itself with two stark, 
painful choices, one of which was to wade in and commit trillions of dollars to save the 
financial system, where we still end up losing   millions of jobs, millions 
of people lose their homes, trillions of dollars of wealth is wiped away,   and the other choice is to face 
the risk of total collapse. That's the real story. How did policy makers, 
our government leaders, the financial sector   maneuver this country into that kind of corner?.

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