FM: Was the capital infusion better than the original plan?
BI: The capital infusion was better but they did not need the legislation to do the capital infusion. The basic message was you don’t need to do this and I gave them a four-step program for what they could do. One was to put more capital in the banks. They ordered the nine largest banks to take capital. Probably only one or two needed it. It set off a whole political firestorm. They also scared the public. It was after the TARP was enacted that the bottom fell out of the stock market and the economy.
FM: Why were they so sure there was no other option?
BI: Paulson, the President, Congressional leaders and the Fed panicked [when they] said that. They kept on saying that hour after hour. Somebody was on the airwaves saying it [would] be financial Armageddon if [it wasn’t passed]. What kind of crisis management is that? They panicked. They let Lehman go down and then they wiped out the $20 billion of bondholders at WaMu on the heels of that and the markets froze up. They said ‘Oh my God what did we do? How do we fix it’? And somebody cooked up this horrible scheme to buy toxic assets. When I say somebody, it sounds awfully like a Wall Street plan. You got to get rid of these troubled assets on our books and Paulson was a creature of Wall Street.
FM: This crisis first broke in the summer of 2007. What should the various regulators have been doing in the summer of 2007 to prepare for this?
BI: They should have been doing a lot of things. They should have been figuring out if Bear Stearns itself was in trouble and how to deal with that. They should have been in there examining Bears Stearns [and asking] how bad is this, is it insolvent or is it just a liquidity problem. If it is just a liquidity problem, how do we solve it? Take Continental IL. We did a joint agreement among the seven largest banks in the FDIC and the Fed. The Fed would loan money to Continental, the FDIC would do a capital infusion in which the seven largest banks would participate. We lined up a public private partnership to shore up Continental and give the markets confidence and that bought us time to come up with some type of a permanent solution. They could have been doing that back in 2007, planning for what happens if Lehman goes, if Bear Stearns goes or Merrill Lynch. I can see how they might not have looked at AIG in 2007, maybe they even had warning signs of that one, but they sure had warning signs on the rest of them. It didn’t take a genius.
FM: There are folks saying what they did saved our financial system.
BI: That is a lie perpetrated by those who dreamed up the idea and sold it to a doubting public and Congress. TARP wasn’t even used for its intended purpose. Everything that was done to resolve this crisis could have been done without TARP, including the capital infusions. They did the four-point plan and the Fed provided a lot of liquidity and those are the things that resolved the crisis together with stopping the failures and making it clear that the largest banks were going to be protected. That became clear when the FDIC negotiated a deal to allow Citigroup to take over Wachovia without any creditors of Wachovia being wiped out. That transaction didn’t occur because Wells Fargo stepped in and bought Wachovia without any assistance but the FDIC reached a hand shake deal to allow Citigroup to acquire Wachovia with substantial FDIC assistance and no haircut to creditors. That was a loud and clear message that this was done, the government is stepping in to protect the system. That is what they waited way too long to do.
They were roundly criticized for bailing out Bear Stearns. Even though they failed, it was viewed as a bailout because the shareholders got something and the creditors of Bear Stearns were protected. There was a lot of criticism. Not from me. I had concerns with how they did it but the fact that they did do it, I thought was essential to keeping some kind of calm and order. There was a lot sensitivity that they could not keep on doing it. There were hawks and doves in the government. The hawks saying ‘impose some discipline and let them fail.’ The doves saying ‘no we have to stabilize the system.’ And neither one could win the day.
I had three issues with [the Bear Stearns deal]. It wasn’t clear to me why they had to fail it at all. Was Bear Stearns just a liquidity problem or was it truly insolvent? If it was just a liquidity problem why didn’t they just keep the Fed credit line in place? It was spectacular when they failed it and dramatic and unsettling, not as unsettling [as it would have been] if they let it [completely] fail. It probably would have caused less of a story if they kept the liquidity line in place. Then they did a privately negotiated deal with JP Morgan (as far as I could see) instead of bringing in other bidders. The other question I have is why didn’t they taken more time, bring in more bidders and get a better deal. Then came Indy Mac and they let it fail. The uninsured depositors and all other creditors took a hit so the hawks won on that one. The next transaction was Fannie Mae and Freddie Mac. The problem with that one was that they told us for three months that it was in fine [shape], no problem it didn’t need government help and then all of a sudden on a weekend they put it in conservatorship but the hawks won again because they wiped out the common and preferred stockholders, which was terribly unsettling to the markets. The preferred stock was held by a lot of foreign governments but it was also held by 2,700 smaller banks and they wiped out those investments that had been rated by the bank agencies at a 20% risk weighting, so they were considered almost riskless investments and they wiped them out and wiped out a lot of smaller banks with it.