Nearly two years after the Wall Street meltdown drove the U.S. economy to the brink of collapse, and forced the U.S. government to prop up major financial institutions with hundreds of billions of dollars, House Speaker Nancy Pelosi now claims that the Bush Administration prohibited its own top officials who were handling the emerging crisis from briefing Congress until a complete financial collapse was only hours away.
In little-noticed statements to reporters over the last few weeks, Pelosi has alleged that the Bush administration knew well in advance of its intervention that the financial crisis would hit, and that Congress would need to authorize a historic and unpopular bailout – but that top officials, including then-Treasury Secretary Henry Paulson, told her that they had been barred from briefing Congress about true extent of the crisis.If accurate, the allegation could constitute a major indictment of the Bush administration, which may have worsened the crisis and resulting economic fallout by delaying the call for congressional action. Pelosi says the admissions from Bush administration officials that they had kept Congress in the dark came in private conversations between her and those officials in person and by phone. None of the other parties to those conversations would comment for this story. Nor is it clear if the Administration’s alleged decision not to brief Congress earlier was a calculated strategy to avoid spooking the already shaky financial markets thus hastening the crisis or, as Pelosi suggests, a political calculation in advance of the 2008 presidential elections, or a combination of the two.
During her weekly press conference on April 15, a reporter asked Pelosi a seemingly innocuous question about taxes. Pelosi prefaced her response with a fairly standard litany: explaining the dire state of the U.S. economy inherited by President Obama and setting the blame at the foot of the Bush administration. But she also added this: “When [then-Senator Obama] accepted the nomination in Colorado, the [Bush] Administration had kept from the public the idea that, in a matter of weeks, the financial community would be in crisis, and we would need to pass the TARP legislation.”
Much has been written about the days, weeks, and months leading up to the financial crisis, which culminated with Lehman Brothers declaring bankruptcy on September 14, 2008. We know, for instance, that Treasury officials in the Bush administration had conceived of a contingency plan along the lines of the TARP bailout months before they actually called for one: a “break the glass” Bank Recapitalization Plan. And it was no secret to anybody paying attention that the financial system had suffered major shocks throughout 2008. But Pelosi appeared to be saying that Paulson and others knew that the glass would have to be broken weeks before they begged her and other congressional leaders to step in.
To clarify, I followed up with her after that press conference.
Pelosi affirmed my interpretation of what she’d said.
She recounted to me the events of September 18, 2008 – some two weeks, she reminded me, after Barack Obama accepted the Democratic Presidential nomination in Denver. Lehman Brothers had just filed for bankruptcy four days earlier and the Federal Reserve had authorized the New York Fed to lend up to $85 billion to insurance giant AIG. That afternoon, she called Paulson to ask for a full briefing the next morning.
“They said, ‘That will be too late. That will be too late. Tomorrow morning, 9 o’clock will be too late,'” Pelosi recalled.
In a meeting that evening with Congressional leaders and staff, Paulson, Fed Chairman Ben Bernanke, and others offered a dire assessment, and made an appeal for intervention that ultimately resulted in TARP. Bernanke and Paulson beseeched the legislators to act quickly, warning that, the entire U.S. economy might collapse in days without rapid intervention. But Pelosi had a question. “I asked them, and said, ‘Why am I calling you – why didn’t you call me?,” Pelosi said.
In our initial conversation, that’s where Pelosi stopped: “You go ask them what their response was to that question.”
I reached out to Paulson multiple times over the last two weeks, but received no response*. Phil Swagel, who served as assistant secretary for economic policy at the Treasury department during the crisis, didn’t have an answer to the question Pelosi says she asked. But he insisted that the department made the call on TARP based on the shocks that hit Wall Street that week of the Lehman Brothers bankruptcy and no earlier. “From my perspective, the TARP proposal was put forward as a result of the events of the week of September 14, notably the stresses in money markets (money market mutual funds and commercial paper),” Swagel told me via email.
Unable to reach Paulson, I circled back to Pelosi last week. This time she agreed to elaborate: “Here’s what they said. They said, ‘We were not allowed to tell Congress, but since you called, we’re going to answer your questions.'”
Pelosi offered no hints as to why the Bush administration would prohibit its top lieutenants from speaking up about the need for federal intervention. Among their concerns might have been sowing panic that would have added further strains to financial markets already close to the breaking point. But Pelosi’s comments suggest, though she declines to go farther, that election year politics played into the equation.
In his book, On The Brink, Paulson recounts the events of September 18th and the days leading up to TARP. Paulson notes that, hours prior to the meeting, Pelosi sought to include fiscal stimulus in any recapitalization plan, and that during the meeting, House Financial Services Committee Chairman Barney Frank pushed to include pay restrictions for participating executives, but that he resisted both ideas.
Paulson acknowledges that Pelosi did indeed place the phone call that resulted in the briefing that evening.
“On my way to the White House, Nancy Pelosi called to ask about the market. She had wanted me to come up the following morn with Ben [Bernanke] to brief the Democratic leadership. I related just how bad things were and told her we would have to go to the Hill that night to ask for emergency powers. She asked why it couldn’t wait until the morning, and I replied it might be too late by then.
He does not, however, explain why the administration didn’t approach Congress unprompted.
A spokesman for former President George W. Bush had no comment on this story.
I asked Senate Banking Committee Chairman Chris Dodd last week about Pelosi’s charges and he said this is the first time he’s heard such an allegation raised. But he seemed mostly unsurprised. “I said to Hank Paulson, ‘Be Hank Paulson.'” Dodd told me. “If you listen to the White House, you’re going to mess this up.”
Two days after the September 18 meeting, the Treasury Department presented what came to be known as TARP to Congress. The original, three-page draft, would have ceded the Bush administration extraordinary authority to purchase assets from the private sector, barring oversight or judicial review. Congressional principals agreed to push ahead with a bailout, but refused to grant the executive branch all of the powers they were seeking. On September 29, House Republicans blocked the Emergency Economic Stabilization Act of 2008, pushing markets over a cliff and sending shudders through the White House and Wall Street. Days before, Paulson famously dropped to one knee and begged Pelosi to round up enough Democrats to pass the bill. But the Republicans ultimately delivered the votes they promised and TARP passed on round two, and was signed into law on October 3.
* Late update: Paulson spokeswoman Michele Davis emails to say “no one at Treasury ever felt in any way constrained by the White House from communicating with the Congress.”