Panel Detail:

Wednesday, April 29, 2009
2:30 PM - 3:45 PM

Moderator:

Rick Newman, Chief Business Correspondent, U.S. News & World Report

"Why did Treasury let Lehman fail?" audience members asked the panelists. "That assumes it was a choice we made," replied David Nason, a former Treasury official.

That exchange and others came during the Q&A portion of a panel on how the Troubled Asset Relief Program, or TARP, came about.

Despite rumors of a Barclay's deal, there was no buyer at the table that was ready to guarantee Lehman's liabilities, Nason said. Bear Stearns was a different story because JP Morgan was willing to guarantee the liabilities, he said.

Audience members also wanted to know why the TALF program – short for Term Asset-Backed Securities Loan Facility – required assets to be rated by S&P, Moody's or Fitch, given that the agencies themselves helped contribute to the credit crisis.

"Hank (Paulson) used to say, 'We’re doing this with duct tape and fishing wire.' That’s what the ratings agencies are," Nason said, referring to the previous Treasury secretary. The ratings agencies are useful as third-party validation, he said.

Asked about Wachovia vs. compared with Washington Mutual, Nason said WaMu was handled according to the process the government has in place for failed depository institutions. What bewildered Nason was the market's surprise that bonds that had been trading at cents on the dollar also cleared at cents on the dollar. So when a similar situation arose with Wachovia, Nason said, there was considerable debate inside the Treasury Department about whether it should be handled the same way WaMu was. Ultimately, he said, they decided to do it differently because they thought doing otherwise would cause a major crisis in confidence in banks.

The discussion of the TARP program included a timeline of the "inflection points" leading up to Sept. 17, 2008, when the acronym was born. In April and May 2008, after JP Morgan acquired Bear Stearns, Treasury officials began considering whether the primary dealer credit facility was large enough to support investment banks. In July, Treasury became worried about bulge bracket investment banks, Freddie Mac, and Fannie Mae. Officials approached Congress for the ability to backstop the government-sponsored enterprises, and that bill was signed into law July 30.

"The entire month of September was an inflection point," Nason said, as he outlined the events of the conservatorship of the GSEs, the Lehman Brothers bankruptcy, the government investment in AIG, Bank of America’s acquisition of Merrill Lynch, and, ultimately, the creation of the TARP program.

Communicating the need for and the terms of the TARP program was a significant challenge, according to Kevin Fromer, another former Treasury official. It was difficult to sell the package to members of Congress and difficult for Congress people to communicate to their constituents. They returned to Washington angry because they were hearing that businesses in their districts were seeing credit tighten.

But the TARP program was not just about providing credit to the economy, Nason said. There was another major purpose: stabilizing the overall financial system. The reason Treasury officials approached Congress in the first place was to prevent the total breakdown of the financial system, and a significant portion of the program was intended to buffer against losses.

The panel's outlook for the next two years was not encouraging: double-digit unemployment through 2010 and continued valuation problems with many of the assets on banks’ balance sheets.

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