On the brink: inside the race to stop the collapse of the global financial system by Henry M. Paulson

Author:Henry M. Paulson [Henry M. Paulson]
Language: eng
Format: epub
Tags: Biographie
ISBN: 9780755360550
Published: 2010-09-15T07:00:00+00:00

Tuesday, September 16, 2008

Monday, September 15, had been grim. But on Tuesday, all hell broke loose.

Normally I left home by 5:45 a.m., went to my gym, and ran hard on the treadmill. Then I’d do some core exercises until 7:45 a.m. Fifteen minutes later I was in the office. (Those 90-second showers of my childhood sure helped me keep to this pace.)

That morning, sensing trouble, I skipped my workout, as I would for weeks, and went straight to the Markets Room, on the second floor of the Treasury Building, to get a quick fix from Matt Rutherford. What I learned was disturbing. Though the LIBOR-OIS spread had eased, financial institutions including Washington Mutual, Wachovia, and Morgan Stanley were under severe pressure. (The CDS of the venerable investment bank would soar from 497 basis points Monday to 728 basis points—a higher level than Lehman Brothers had traded at before its failure.)

I soon heard from Dan Jester and Jeremiah Norton, who were helping Tim out with AIG. I needed them in Washington, but Dan, in particular, had won Tim’s confidence, and I had reluctantly agreed to let him stay at Tim’s request. They gave me a discouraging update. The rating agencies had slashed the insurer’s credit rating on Monday, forcing it to post additional collateral on its huge derivatives book. To my utter amazement and disgust, AIG’s liquidity needs had mushroomed. On Sunday, the company was looking for $50 billion; now it would need an $85 billion loan commitment by the end of the day. A private-sector solution appeared very unlikely.

AIG’s incompetence was stunning, but I didn’t have time to be angry. I immediately called President Bush to tell him that the Fed might have to rescue AIG and would need his support. He told me to do what was necessary.

Tim Geithner called to tell me that he had talked with Ben Bernanke, who was amenable to asking the Fed board to make a bridge loan if the executive branch and I stood behind him. He said he thought $85 billion would be enough but stressed that we had to move quickly: the company needed $4 billion by the close of business Wednesday. Even this breathtaking assessment would prove optimistic. By late morning, we had learned AIG needed cash to avoid bankruptcy by day’s end—the total would eventually reach $14 billion.

Tim, Ben, and I reviewed our options with great care in an hour-long conference call at 8:00 a.m. that included Fed vice chairman Don Kohn and governors Kevin Warsh and Elizabeth Duke. Whatever else happened, we could not let AIG go down.

Unlike with Lehman, the Fed felt it could make a loan to help AIG because we were dealing with a liquidity, not a capital, problem. The Fed believed that it could secure a loan with AIG’s insurance subsidiaries, which could be sold off to repay any borrowing, and not run the risk of losing money. These subsidiaries were also more stable because of the strength of their businesses and their stand-alone credit ratings, which were separate from the AIG holding company’s ratings and troubles.

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