$700 billion from the Trouble Asset Relief Program of 2008 was barely enough to insulate banks from their losses. By itself, TARP was insufficient to guarantee that US banks would not fail. Due to the regulatory conditions attached to TARP, banks who accepted the publicized bailout would have difficulty getting additional loans. Without additional capital, many US financial institutions would risk collapse. Paradoxically, banks could not ask congress for even more funds because TARP, already being rejected once, barely passed in 2008. The only way to insure the survival of US Banks is a significant injection of capital with no strings attached.
But how was this even possible with such severe public backlash against the financial sector?
The answer is the strategic and tactical leadership from Henry Paulson which turned impossibility into solution. A request for information under the Freedom of Information Act revealed that the Federal Reserve loaned 7.7 trillion dollars to US banks which allowed banks not only to stay afloat but also sustain profits.
There are four ways to push an agenda that has stalled in the face of opposition. You can convert your opponents, compromise, shave off parts of your plan to make it more accommodating, or you could attempt to ram it through. These first three options require patience and time, but with the survival of the US financial industry teetering on an edge—time was a luxury Paulson did not have. So he took the last option and proceeded to redefine what it meant to “ram” your plan through.
Ramming it through requires covering your base and making sure you have enough people in your corner to provide active support. Luckily, Paulson was put on a team with two leaders of the Federal Reserve and developed a strong relationship with Bernanke and Geithner because of it. In addition to the resources of the Fed behind him, Paulson was essentially given complete control over economic policy and with it, widespread popular acclaim.
But even with this much political clout, passing TARP proved difficult when countless numbers of Americans called their congressmen to reject the bill. Paulson realized that pushing for an even larger bailout through congress would be impossible. Having a bounded set of choices, his best option was to go to Bernanke, the “lender of last resort.” The Federal Reserve, however, typically makes emergency loans significantly more expensive than market value to discourage banks from reckless speculation. But because of Paulson’s special relationship with Bernanke and Geithner, the loans were given out at 0.01% interest.
Ramming an agenda through requires governing from the center which could lead to a sense that everything is being pushed by an inner circle. That is why keeping this loan program secret was top priority. The Treasury’s TARP investment would evaporate unless they were supported by additional loans. However, if Congress knew about the clandestine lending, they would have structured the lending programs very differently. Furthermore, if investors knew, they would have avoided banks that borrowed from the Fed and the banks that needed additional loans could have collapsed due to their reluctance to borrow.
Timing was critical to Paulson’s success and he knew the right moment to push his agenda. To prevent media detection most of the biggest transactions were carried out when everyone had their eyes on Congress at the end of 2008. JP Morgan received $59 billion to acquire Bear Sterns and Morgan Stanley took $107 billion that September — just to name a few. The secret was broken only after a two year lawsuit and a judicial order to release 29,000 Federal Reserve documents.
