The financial crisis as described by Treasury insiders

The financial crisis—from Bear Sterns, to Fannie and Freddie, to Lehman and AIG, to the panic in money market funds and commercial paper markets, to TARP and beyond—is described by 3 top Bush Treasury insiders in this 75 minute video. Some highlights:

"We were afraid of a complete and utter collapse of the global financial system."

Treasury had great difficulty getting political support for new intervention authorities because hardly anybody on Capitol Hill understood the first thing about credit markets. Only when constituents told members they were going to do layoffs and curtail operations due to a lack of credit, and when the stock market tanked the day the House rejected the TARP legislation, did the necessary votes finally appear. Further TARP-like legislation would have no chance in the current Congress under present circumstances.

The idea to buy assets, which was the reason Treasury said it wanted TARP, was abandoned because the conditions kept getting rapidly worse, it was found that putting an asset purchase program in place would take too long, the Europeans announced they were going to aid their troubled banks with capital injections forcing Treasury into a matching program for US banks, and at Treasury, "we believed the banking system was fundamentally undercapitalized." (As we saw, the capital injections could be accomplished in days, not months.)

The Treasury team, who worked around the clock for months, still could never get ahead of events and were in a constant state of improvisation and reaction. Paulson told his team at one point, "We're doing this with duct tape and fishing wire."

Lehman was not saved because there was no private buyer who could be encouraged with some Treasury money to take over all of Lehman, because there was a clear lack of authority for the US to guarantee all $600 billion of Lehman's debt, and because there was no third alternative. Contrary to the speculation that Treasury wanted to send a signal that players should solve their own problems because they would not be bailed out, Treasury worked desperately all summer to try to save Lehman.

Washington Mutual was seized and worked out "by the book," using authorities and procedures that were designed for failing banks and had been used many times before. Wachovia got special treatment (thrown into the arms of BofA) because—to the surprise of Treasury—the credit markets had reacted very, very badly to the WaMu seizure. In other words, the markets were telling Treasury that seizure of Wachovia would push the system much further toward collapse, whereas Treasury had seen no such signal before WaMu. It was an art, not a science.

Treasury was frustrated with the leadership of financial institutions because they refused to accept the reduced value of their assets and liquidate at market prices. There are still asset valuation problems, and banks are necessarily shrinking their balance sheets, both of which keep new lending tight. But it was not intended that the TARP capital injections be used much for new lending—the major purpose became to provide "a buffer against losses," and this was TARP's major, and important, achievement.