When America Stared Into the Abyss
The Treasury secretary’s voice exuded tension and urgency. “A very serious situation is developing,” Henry Paulson warned House Speaker Nancy Pelosi on the phone. “Nothing we can say will calm the situation until we come up with a policy that is overwhelming force!” Later that Thursday afternoon, Pelosi received the same dire message when she telephoned Federal Reserve Chairman Ben Bernanke; financial markets were seizing up, major Wall Street firms were on the brink of collapse, and the nation’s economy hovered perilously on the edge of an abyss. Pelosi recalls asking, alarmed, “If things are this bad, why aren’t you calling me?”
Paulson and Bernanke urgently requested the speaker to convene the bicameral congressional leadership to hear the George W. Bush administration’s proposed response to the rapidly accelerating crisis. Pelosi agreed to call a meeting the next day. That might be too late, Bernanke cautioned. Indeed, without swift action, there might not be an American economy by the end of the weekend.
Ten years ago this past September, financial markets imploded, threatening to collapse the entire U.S. economy and setting off an extraordinary, and improbable, collaboration between the deeply divided Congress and the Bush administration. Prospects for successful cooperation were inauspicious: a highly partisan atmosphere, significant divisions within each party, deep suspicions of the administration’s credibility, displeasure over Bush’s indifferent record on regulating the financial-services industry, and a national election just six weeks away. And yet, remarkably, a political system widely castigated as dysfunctional proved capable of passing an enormously expensive, complex, and contentious piece of legislation that prevented a second Great Depression. As a senior aide to Pelosi, I had an opportunity to witness both the unfolding of the crisis and the private discussions and negotiations that saved the American economy from the worst meltdown since the 1930s. As a historian, I fortunately recorded on legal pads those private conversations as they unfolded, revealing the strategies, tensions, and interactions that allowed political rivals and adversaries to avoid the abyss. I have given those notes to the Library of Congress. This article marks the first time those discussions have been revealed.
The remedy devised in two weeks, without the typically expansive committee deliberations that would have accompanied such a massive piece of legislation, was the Troubled Assets Relief Program. TARP was by no means a perfect, popular, or thorough response to the overall economic crisis. Many critics of TARP remain bitter at the lack of criminal prosecutions for misbehavior by executives in the securities industry. Indeed, for Americans of varying ideologies, TARP was not a solution but indisputable evidence of what was wrong with American politics. Still, 10 years later, it remains remarkable that a divided, distrusting, and often dysfunctional political system was able to fashion such a complex, if imperfect, response to the crisis. And that success raises the question of how today’s even more fractured and contentious system might respond should a comparable crisis occur.
The financial-services industry, as well as the political and regulatory systems designed to oversee it, had long ignored the gathering storm. In the 30 years before the crisis, the amount of debt held by the financial sector skyrocketed from $3 trillion to more than $36 trillion, “more than doubling as a share of gross domestic product,” according to the national commission appointed to investigate the origins of the collapse. Wealth had become hyperconcentrated in firms considered “too big to fail” without bringing down the entire economy. By 2005, the country’s 10 largest commercial banks held 55 percent of the nation’s assets, more than twice the concentration of a decade and a half earlier. In 2006, the profits of financial-sector corporations represented 27 percent of all corporate profits in the United States, nearly double the concentration in 1980.
Underneath the booming profits, however, was dangerous rot. Five of the largest firms—Bear Stearns, Goldman Sachs, Lehman Brothers, Merrill Lynch, and Morgan Stanley—had become dangerously over-leveraged. Bear Stearns had less than $12 billion in equity, with more than $380 billion in liabilities, leading up to its collapse in March 2008. Fannie Mae and
