Too Big to Fail: The Inside Story of How Wall Street and Washington Fought to Save the FinancialSystem--and Themselves

CHAPTER THREE

On the evening of Wednesday, April 2, 2008, an agitated Timothy F. Geithner took the escalator down to the main concourse of Washington’s Reagan National Airport. He had just arrived on the US Airways shuttle from New York, and his driver, who normally waited outside of security for him, was nowhere to be found.

“Where the fuck is he?” Geithner snapped at his chief aide, Calvin Mitchell, who had flown down with him.

Geithner, the youthful president of the New York Federal Reserve, seldom exhibited stress, but he was certainly feeling it at the moment. It had been less than three weeks since he had stitched together the last-second deal that pulled Bear Stearns back from the brink of insolvency, and tomorrow morning he would have to explain his actions, and himself, to the Senate Banking Committee—and to the world—for the very first time. Everything needed to go perfectly.

“Nobody’s picking up,” Mitchell moaned as he punched the buttons of his cell phone, trying to reach the driver.

The Federal Reserve usually sent a special secure car for Geithner, who by now had grown accustomed to living inside the bubble of the world’s largest bank. His life was planned down to the minute, which suited his punctual, fastidious, and highly programmed personality. He had flown to the capital the night before the hearing precisely out of concern that something like this—a hiccup with his driver—would happen.

On the flight down he had studied the script he had been tinkering with all week. There was one point he wanted to make absolutely clear, and he reviewed the relevant passage again and again. Bear Stearns, to his thinking, wasn’t just an isolated problem, as everyone seemed to be suggesting. As unpopular as it might be to state aloud, he intended to stress the fact that Bear Stearns—with its high leverage, virtually daily reliance on funding from others simply to stay in business, and interlocking trades with hundreds of other institutions—was a symptom of a much larger problem confronting the nation’s financial system.

“The most important risk is systemic: if this dynamic continues unabated, the result would be a greater probability of widespread insolvencies, severe and protracted damage to the financial system and, ultimately, to the economy as a whole,” he wrote. “This is not theoretical risk, and it is not something that the market can solve on its own.” He continued refining those ideas, using the tray table to take notes until just before the plane landed.

Over the course of the weekend of March 15, it had been Geithner—not his boss, Ben Bernanke, as the press had reported—who’d kept Bear from folding, constructing the $29 billion government backstop that finally persuaded a reluctant Jamie Dimon at JP Morgan to assume the firm’s obligations. The guarantee protected Bear’s debtholders and counterparties—the thousands of investors who traded with the firm—averting a crippling blow to the global financial system, at least that’s what Geithner planned to tell the senators.

Members of the Banking Committee wouldn’t necessarily see it that way and were likely to be skeptical, if not openly scornful, of Geithner at the hearing. They regarded the Bear deal as representative of a major and not necessarily welcome policy shift. He’d already been the target of stinging criticism, but given the scale of the intervention, it was only to be expected. That, however, didn’t make having to listen to politicians throw around the term “moral hazard” any less galling, as if they hadn’t just learned it the day before.

Unfortunately, it wasn’t just a chorus of the ignorant and the uninformed who had been critical of the deal. Even friends and colleagues, like former Fed chairman Paul Volcker, were comparing the Bear rescue unfavorably to the federal government’s infamous refusal to come to the assistance of a financially desperate New York City in the 1970s (enshrined in the classic New York Daily News headline: “Ford to City: Drop Dead”). The more knowing assessments ran along the following lines: The Federal Reserve had never before made such an enormous loan to the private sector. Why, exactly, had it been necessary to intervene in this case? After all, these weren’t innocent blue-collar workers on the line; they were highly paid bankers who had taken heedless risks. Had Geithner, and by extension the American people, been taken for suckers?

Geithner did have his supporters, but they tended to be people who already had reason to be familiar with the financial industry’s perilous state. Richard Fisher, Geithner’s counterpart at the Dallas Fed, had sent him an e-mail: “Illegitimi non carborundum—Don’t let the bastards get you down.”

Much as he would have liked to, Geithner had no intention of announcing to the U.S. Senate that he had been surprised by the crisis. From his office atop the stone fortress that is the Federal Reserve Bank of New York, Geithner had for years warned that the explosive growth in credit derivatives—various forms of insurance that investors could buy to protect themselves against the default of a trading partner—could actually make them ultimately more vulnerable, not less, because of the potential for a domino effect of defaults. The boom on Wall Street could not last, he repeatedly insisted, and the necessary precautions should be taken. He had stressed these ideas time and again in speeches he had delivered, but had anyone listened? The truth was, no one outside the financial world was particularly concerned with what the president of the New York Fed had to say. It was all Greenspan, Greenspan, Greenspan before it became Bernanke, Bernanke, Bernanke.

Standing at the airport, Geithner certainly felt deflated, but for now it was mostly because his driver hadn’t appeared. “You want to just take a taxi?” Mitchell asked.

Geithner, arguably the second most powerful central banker in the nation after Bernanke, stepped into the twenty-person-deep taxi line.

Patting his pockets, he looked sheepishly at Mitchell. “Do you have cash on you?”

If Tim Geithner’s life had taken just a slightly different turn only months earlier, he might well have been CEO of Citigroup, rather than its regulator.

On November 6, 2007, as the credit crisis was first beginning to hit, Sanford “Sandy” Weill, the architect of the Citigroup empire and one of its biggest individual shareholders, scheduled a 3:30 p.m. call with Geithner. Two days earlier, after announcing a record loss, Citi’s CEO, Charles O. Prince III, had been forced to resign. Weill, an old-school glad-hander who had famously recognized and cultivated the raw talent of a young Jamie Dimon, wanted to talk to Geithner about bringing him on board: “What would you think of running Citi?” Weill asked.

Geithner, four years into his tenure at the New York Federal Reserve, was intrigued but immediately sensitive to the appearance of a conflict of interest. “I’m not the right choice,” he said almost reflexively.

For the following week, however, the prospect was practically all he could think about—the job, the money, the responsibilities. He talked it over with his wife, Carole, and pondered the offer as he walked their dog, Adobe, around Larchmont, a wealthy suburb about an hour from New York City. They already lived a comfortable life—he was making $398,200 a year, an enormous sum for a regulator—but compared with their neighbors along Maple Hill Drive, they were decidedly middle-of-the-pack. His tastes weren’t that expensive, save for his monthly $80 haircut at Gjoko Spa & Salon, but with college coming up for his daughter, Elise, a junior in high school, and his son, Benjamin, an eighth-grader behind her, he could certainly use the money.

He finally placed a call to his old pal Robert Rubin, the former Treasury secretary and Citigroup’s lead director, to make sure he hadn’t made a mistake. Rubin, a longtime Geithner mentor, politely told him that he was backing Vikram Pandit for the position and encouraged him to stay in his current job. But the fact that he had been considered for a post of this magnitude was an important measure of Geithner’s newly earned prominence in the financial-world firmament and a reflection of the trust he had earned within it.

For much of his time at the Fed, he had detected a certain lack of respect from Wall Street. Part of the problem was that he was not out of the central banker mold with which financial types traditionally felt comfortable. In the ninety-five-year history of the Federal Reserve, eight men had served as president of the Federal Reserve Bank of New York—and every one of them had worked on Wall Street as either a banker, a lawyer, or an economist. Geithner, in contrast, had been a career Treasury technocrat, a protégé of former secretaries Lawrence Summers and Robert Rubin. His authority was also somewhat compromised by the fact that, at forty-six, he still looked like a teenager and was known to enjoy an occasional day of snowboarding—and that he was given to punctuating his sentences with “fuck.”

Some Washington officials, journalists, and even a few bankers were charmed by Geithner, whose wiry intensity and dry, self-deprecating wit helped create the image of him as something of a policy-making savant: Although he often appeared distracted and inattentive during meetings, he would, after everyone had said his piece, give a penetrating analysis of the entire discussion, in coherent, flowing paragraphs.

Others, however, regarded these performances as what they saw as a form of controlling shtick. Every month the New York Fed would host a lunch for Wall Street chieftains, the very people his office oversaw, and every month Geithner would slouch in his seat, shuffling his feet, sipping a Diet Coke, and saying precisely nothing. He was as Delphic as Greenspan, one of his heroes, but he didn’t have the gravitas to pull it off, certainly not to an audience of major Wall Street players.

“He’s twelve years old!”

Such was the reaction of a nonplussed Peter G. Peterson, the former Lehman Brothers chief executive and co-founder of the private-equity firm Blackstone Group, upon first meeting Geithner in January 2003. Peterson had been leading the search for a replacement for William McDonough, who was retiring after a decade at the helm of the New York Fed. McDonough, a prepossessing former banker with First National Bank of Chicago, had become best known for summoning the chief executives of fourteen investment and commercial banks in September 1998 to arrange a $3.65 billion private-sector bailout of the imploding hedge fund Long-Term Capital Management.

Peterson had been having trouble with the search; none of his top choices was interested. Making his way down the candidates list, he came upon the unfamiliar name of Timothy Geithner and arranged to see him. At the interview, however, he was put off by Geithner’s soft-spokenness, which can border on mumbling, as well as by his slight, youthful appearance.

Larry Summers, who had recommended Geithner, tried to assuage Peterson’s concerns. He told him that Geithner was much tougher than he appeared and “was the only person who ever worked with me who’d walk into my office and say to me, ‘Larry, on this one, you’re full of shit.’”

That directness was the product of a childhood spent constantly adapting to new people and new circumstances. Geithner had had an army brat childhood, moving from country to country as his father, Peter Geithner, a specialist in international development, took on a series of wide-ranging assignments, first for the United States Agency for International Development and then for the Ford Foundation. By the time Tim was in high school, he had lived in Rhodesia (now Zimbabwe), India, and Thailand. The Geithner family was steeped in public service. His mother’s father, Charles Moore, was a speechwriter and adviser to President Eisenhower, while his uncle, Jonathan Moore, worked in the State Department.

Following in the steps of his father, grandfather, and uncle, Tim Geithner went to Dartmouth College, where he majored in government and Asian studies. In the early 1980s, the Dartmouth campus was a major battleground of the culture wars, which were inflamed by the emergence of a right-wing campus newspaper, The Dartmouth Review. The paper, which produced prominent conservative writers such as Dinesh D’Souza and Laura Ingraham, published a number of incendiary stories, including one that featured a list of the members of the college’s Gay Students Association, and another a column against affirmative action written in what was purported to be “ black English.” Taking the bait, liberal Dartmouth students waged protests against the paper. Geithner played conciliator, persuading the protesters to channel their outrage by starting a rival publication.

After college, Geithner attended the Johns Hopkins School of Advanced International Studies, where he graduated with a master’s degree in 1985. That same year he married his Dartmouth sweetheart, Carole Sonnenfeld. His father was best man at the wedding at his parents’ summer home in Cape Cod.

With the help of a recommendation from the dean at Johns Hopkins, Geithner landed a job at Henry K issinger’s consulting firm, researching a book for K issinger and making a very favorable impression on the former secretary of State. Geithner learned quickly how to operate effectively within the realm of powerful men while not becoming a mere sycophant; he intuitively understood how to reflect back to them an acknowledgment of their own importance. With Kissinger’s support, he then joined the Treasury Department and became an assistant financial attaché at the U.S. Embassy in Tokyo, where he ruled the compound’s tennis courts with his fierce competitiveness. The courts were also a place he could hold informal discussions with Tokyo correspondents from major publications, diplomats, and his Japanese counterparts.

During his tour in Japan, Geithner witnessed firsthand the spectacular inflation and crushing deflation of his host’s great bubble economy. It was through his work there that he came to the attention of Larry Summers, then the Treasury under secretary, who began promoting him to bigger and bigger responsibilities. During the Asian financial and Russian ruble crises of 1997 and 1998, Geithner played a behind-the-scenes role as part of what Time magazine called “The Committee to Save the World,” helping to arrange more than $100 billion of bailouts for developing countries. When aid packages were proposed, Geithner was automatically summoned into Summers’s office. In this respect Geithner was lucky; he happened to be a specialist in a part of the world that had suddenly become critical. He had also honed the diplomatic skills he had first displayed at Dartmouth, often mediating disputes between Summers, who tended to advocate aggressive intervention, and Rubin, who was more cautious.

When the South Korean economy almost collapsed in the fall of 1997, Geithner helped shape the U.S. response. On Thanksgiving Day, Geithner called Summers at his home and calmly laid out the reasons the United States had to help stabilize the situation. After much debate within the Clinton administration, the plan that emerged—to supply Seoul with billions of dollars on top of a $35 billion package from the International Monetary Fund and other international institutions—bore a close resemblance to Geithner’s original proposal. The following year, Geithner was promoted to Treasury under secretary for international affairs.

Geithner remained close to Summers, whom he used to play elaborate practical jokes on. More than once, when Summers was out giving a speech, Geithner would rewrite the wire news article about the presentation, purposely misquoting him. When Summers would return to the Treasury building after his speech, Geithner would present Summers with the doctored news report as if it were the real thing, and then just watch Summers blow up, threatening to call the reporter and demand a correction until Geithner let him in on the joke. The two men became so close that for years they, and other Treasury colleagues, went to a tennis academy in Florida run by Nick Bollettieri, who coached Andre Agassi and Boris Becker. Geithner, with his six-pack abs, had a game that matched his policy-making prowess. “Tim’s controlled, consistent, with very good ground strokes,” Lee Sachs, a former Treasury official, said.

When Clinton left office, Geithner joined the International Monetary Fund, and it was from there that he was recruited to the New York Fed. Despite having served a Democratic administration, Geithner was sold on the job by Peterson, a well-connected Republican.

The presidency of the New York Fed is the second most prominent job in the nation’s central banking system, and it carries enormous responsibilities. The New York bank is the government’s eyes and ears in the nation’s financial capital, in addition to being responsible for managing much of the Treasury’s debt. Of the twelve district banks in the Federal Reserve System, the New York Fed is the only one whose president is a permanent member of the committee that sets interest rates. Owing to the relatively high cost of living in New York, the annual salary of the New York Fed president is double that of the Federal Reserve chairman.

His idiosyncrasies notwithstanding, Geithner gradually grew into his job at the New York Fed, distinguishing himself as a thoughtful consensus builder. He also worked diligently to fill in gaps in his own knowledge, educating himself on the derivatives markets and eventually becoming something of a skeptic on the notion of risk dispersion. To his way of thinking, the spreading of risk could actually exacerbate the consequences of otherwise isolated problems—a view not shared by his original boss at the Fed, Alan Greenspan.

“These changes appear to have made the financial system able to absorb more easily a broader array of shocks, but they have not eliminated risk,” he said in a speech in 2006. “They have not ended the tendency of markets to occasional periods of mania and panic. They have not eliminated the possibility of failure of a major financial intermediary. And they cannot fully insulate the broader financial system from the effects of such a failure.”

Geithner understood that the Wall Street boom would eventually falter, and he knew from his experience in Japan that it was not likely to end well. Of course, he had no way of knowing precisely how or when that would happen, and no amount of studying or preparation could have equipped him to deal with the events that began in early March 2008.

Matthew Scogin poked his head into Robert Steel’s corner office at the Treasury Department. “Are you ready for another round of Murder Board?”

Steel sighed as he looked at his senior adviser but knew it was for the best. “Okay. Yeah, let’s do it.”

Hank Paulson had been scheduled to testify before the Banking Committee with Geithner, Bernanke, and Cox, chairman of the Securities and Exchange Commission, that morning of April 3, with Alan Schwartz of Bear Stearns and Jamie Dimon of JP Morgan to appear later. But Paulson was on an official trip to China that could not be postponed, so his deputy, Steel, would be there in his place.

Like Geithner, Steel was largely unknown outside the financial world, and he viewed his testimony before the Senate Banking Committee as presenting an opportunity, of sorts. His staff had been trying to help him prepare the traditional Washington way: by playing round after round of “Murder Board.” The game involved staff members taking on the roles of particular lawmakers and then grilling Steel with the questions the politicians were likely to ask. The exercise was also designed to help make certain that Steel would be as lucid and articulate under fire as he could be.

A seasoned and assured public speaker, Steel had appeared before congressional committees, but the stakes hadn’t been nearly as high. In addition to tough questions about what had come to be known as “Bear Weekend,” he knew another subject was likely to arise: Fannie Mae and Freddie Mac, the so-called government-sponsored enterprises that bought up mortgages. The GSEs, which were blamed for inflating the housing bubble, had been political and ideological hot buttons for decades, but never more so than at that moment.

With Bear Stearns’ failure, the senators might even begin connecting the dots. One of the first causalities of the credit crunch was two Bear Stearns hedge funds that had invested heavily in securities backed by subprime mortgages. It was those mortgages that were now undermining confidence in the housing market—a market that Fannie and Freddie dominated, underwriting more than 40 percent of all mortgages, most of which were quickly losing value. That, in turn, was infecting bank lending everywhere. “Their securities move like water among all of the financial institutions,” Paulson had said of Fannie and Freddie.

Quick-witted and handsome, Steel was actually a much better communicator than Paulson and would often upstage his boss, who couldn’t help stammering even at routine Treasury meetings. The two men had known each other since 1976, when Steel went to work at the Chicago office of Goldman Sachs after graduating from Duke University. Like Paulson, Steel came from a modest background, growing up near the campus of Duke University. His father serviced jukeboxes and later sold life insurance; his mother worked part time at a Duke psychiatry lab. At Goldman, Steel was an ambitious banker and rising star; he moved to London in 1986 to start the equity capital markets group there and help the firm gain a foothold in Europe.

But four years earlier, Steel—now worth more than $100 million as a result of being a partner during Goldman’s IPO—had decided to retire, having worked in various senior positions but not being next in line to lead the firm. Though he always planned a triumphant return to the private sector, he wanted time to pursue public service, like many other Goldman alums. After establishing his public-sector bona fides, including a position as a senior fellow at the John F. Kennedy School of Government at Harvard, he accepted Paulson’s invitation to join him at Treasury as under secretary for domestic finance on October 10, 2006.

Now, as he entered the conference room with Scogin for one last round of Murder Board, he knew he had to be on his game. Treasury colleagues David Nason, chief of staff Jim Wilkinson, and Michele Davis, assistant secretary for public affairs and director of policy planning, were already seated with a small group across the table.

The burning question they all knew would be asked: What role had the government played in the negotiations that had led to the original $2-a-share price for Bear Stearns? None of the Treasury staffers had a clue as to what the other witnesses—JP Morgan’s Jamie Dimon and Bear’s Alan Schwartz—were going to say about what had actually occurred when they testified later in the day.

Steel knew that Paulson had pushed for a lower price to send the powerful message that shareholders should not profit from a government rescue. But no one at Treasury had ever confirmed that, and for Paulson’s and everyone else’s sakes, it would be best not to acknowledge what had really happened: On Sunday afternoon, March 16, Paulson had called Dimon and told him, “I think this should be done at a very low price.”

Steel knew he had to dodge that issue at the hearing. It was imperative, as Davis and others had stressed during Murder Board sessions and at other meetings, that he avoid getting drawn into a debate over whether $2 was the right price—or $10, for that matter. The key idea he had to focus on was Paulson’s overall concern that, because taxpayer money was involved, shareholders should not be rewarded. And more important, they encouraged Steel to remain adamant that Treasury had not negotiated the deal for Bear. If anything, he should deflect the question onto the Fed, which was the only government agency that legally could be party to such a transaction.

Before the role playing began, Nason briefed Steel on a key development. He recounted some recent conversations he had had with the staff of Senator Richard Shelby, the ranking Republican on the Senate Banking Committee. “Shelby’s going to be difficult,” Nason warned.

That was an understatement. Shelby was deeply unhappy with Paulson’s performance, not only because of the Bear Stearns bailout, but in response to another recent Paulson project: a provision in Bush’s economic stimulus package, introduced just days after the bailout, that raised the ceiling on the amount of mortgages that Fannie Mae and Freddie Mac could buy. For days Shelby had not returned the secretary’s phone calls, until Paulson finally barked at his staff, “Doesn’t he know I am the secretary of the Treasury?”

They also knew they had to be wary of Senator Jim Bunning, well known as a “markets know best” purist. “Senator Jim Bunning, Republican. Kentucky,” Steel replied jokingly when a picture of Bunning was held up during Murder Board. “Everything we’re doing? Yes, it’s all bullshit. We’re socialists. Thank you, Senator.”

The Murder Board preparations continued until minutes before Steel left for the hearing. The key objective now was to protect Steel, and the Treasury Department, from any last-minute surprises. Staffers carefully checked that morning’s newspapers to make certain there was no new revelation about Bear Stearns or some harsh opinion from a columnist that a senator might quote that morning. Happily, there was nothing.

Steel made the short trip from Treasury to Capitol Hill in a Treasury car with his aides. The hearing room in the Dirksen Senate Office Building was already buzzing with activity, as camera crews set up their equipment and photographers tested the light. As Steel took his seat, he noticed that Alan Schwartz of Bear Stearns had already arrived, even though he was not scheduled to testify until that afternoon, and greeted him. To Steel’s immediate left was Geithner; to his right, Cox; and next to Cox, Bernanke. Seated in a single row were a group of men who, more than anyone else in the world, were being entrusted with solving its financial problems.

“Was this a justified rescue to prevent a systemic collapse of financial markets,” asked Senator Christopher Dodd, the Connecticut Democrat and chairman of the committee, “or a $30 billion taxpayer bailout, as some have called it, for a Wall Street firm while people on Main Street struggle to pay their mortgages?”

The fireworks started almost immediately. Committee members were sharply critical of the regulators’ oversight of financial firms. More important, they questioned whether funding a takeover of Bear Stearns had created a dangerous precedent that would only encourage other firms to make risky bets, secure in the knowledge that the downside would be borne by the taxpayer.

Bernanke hastened to explain the government’s position: “What we had in mind here was the protection of the American financial system and the protection of the American economy. I believe that if the American people understand that we were trying to protect the economy and not to protect anybody on Wall Street, they would better appreciate why we took the action we did.”

Then came the question Steel had prepped for: Had it been the Treasury secretary who determined the $2-a-share price?

“Well, sir, the secretary of the Treasury and other members of Treasury were active participants during this ninety-six hours, as you describe,” he replied. “There were lots of discussions back and forth.

“Also, in any combination of this type, there are multiple terms and conditions. I think the perspective of Treasury was really twofold. One was the idea that Chairman Bernanke suggested: that a combination into safe hands would be constructive for the overall marketplace; and, number two, since there were federal funds or the government’s money involved, that that be taken into account. And Secretary Paulson offered perspective on that.

“There was a view that the price should not be very high or should be toward the low end and that it should be—given the government’s involvement, that that was the perspective. But with regard to the specifics, the actual deal was negotiated—transaction was negotiated between the Federal Reserve Bank of New York and the two parties.”

For the most part, the Fed, the Treasury, and the SEC held their own against the Banking Committee’s interrogation. But they did so largely by defending the Bear bailout as a once-in-a-lifetime act of extreme desperation, not as the expression of a nascent policy. Under the circumstances, it was a reasonable response to a run on a very large bank whose demise would disrupt the entire financial system.

Those circumstances, Geithner told the committee, were not unlike those of 1907, or the Great Depression, and he went on to draw a straight line between panic on Wall Street and the economic health of the country: “Absent a forceful policy response, the consequences would be lower incomes for working families; higher borrowing costs for housing, education, and the expenses of everyday life; lower value of retirement savings; and rising unemployment.”

So they’d done what they had to do for the good of the entire country, if not the world, as Steel explained. And thanks to their efforts, he confidently told the lawmakers, the hole in the dike had been plugged.

Jamie Dimon was searching for a metaphor.

As he sat in a conference room down the hall from Senator Charles Schumer’s office watching the morning’s proceedings on C-SPAN, he strategized with his communications chief and trusted confidant, Joseph Evangelisti. How could he best account for the low price he had paid for Bear without looking as if he had been given a gift, courtesy of taxpayers?

“The average person has to understand that we took a huge risk,” Evangelisti instructed him as they reviewed various approaches. “We’ve got to explain it in plain English.”

Unlike Steel, Dimon had not engaged in any Murder Board role playing in his own Park Avenue office. Instead, he chose to do some last-minute preparation in the conference room, which had been lent to him by a Senate staffer so he wouldn’t have to wait in the gallery.

Dimon came up with a simple, clear line that he thought explained the acquisition of Bear Stearns succinctly: “Buying a house is not the same as buying a house on fire.” That would do it; everyone would understand that.

The message he sought to convey was straightforward: Although Fed and Treasury officials may have deserved scrutiny for their actions, he hadn’t done anything out of the ordinary. It wasn’t his job to protect the interests of the U.S. taxpayer, only those of his shareholders. If anything, he was a little concerned that the Bear deal presented more problems for them than it was worth.

Despite his public show of humility, Dimon was well aware of what a coup the deal had been for him. From the perspective of the financial media, at least, the Bear acquisition was viewed as a home run. They had always had a bit of an obsession with him and tended to paint him as a glorified penny pincher, an executive who would cancel the office’s newspaper subscriptions to cut costs—not a real financial visionary. Now, with JP Morgan leapfrogging to the very top of the banking business, Dimon was being regarded as something akin to the reincarnation of John Pierpont Morgan, the nineteenth-century financier who helped ease the Panic of 1907.

Dimon, the New York Times said, “has suddenly become the most talked about—and arguably the most powerful—banker in the world today.” For the Wall Street Journal he was “quickly becoming Wall Street’s banker of last resort.” Barron’s opted for a simple “All hail Jamie Dimon!”

With all the adulation he had been receiving, Dimon had become almost giddy at the prospect of speaking at today’s hearing. While most CEOs dread being hauled in front of Congress—Alan D. Schwartz of Bear Stearns had spent days reviewing his testimony with his high-powered Washington lawyer, Robert S. Bennett—Dimon considered his first chance to testify in front of Congress to be a signal honor.

The night before the hearing, he called his parents to make sure they would watch it on TV.

Jamie Dimon’s success is not an enormous surprise, as he is a third-generation banker. His grandfather had immigrated to New York from Smyrna, Turkey, changed his name from Papademetriou to Dimon, and found work as a stockbroker, which at the time was hardly considered a glamorous job. Jamie’s father, Theodore—who met his mother, Themis, playing spin-the-bottle when they were twelve years old—was also a broker, and a very successful one. Theodore had done so well that he was able to move his family from Queens to an apartment on Park Avenue, where he raised Jamie and his brothers, Peter and Ted. One day, when Jamie was nine years old, his father asked his sons what they wanted to be when they grew up. Peter, the eldest, said he hoped to become a doctor. Ted, Jamie’s twin, said he didn’t know. But Jamie knew and announced self-assuredly, “I want to be rich.”

After attending the Browning School on Manhattan’s Upper East Side, Jamie studied psychology and economics at Tufts University; later, at Harvard Business School, he developed a reputation—as much for his arrogance as for his intelligence. Just a few weeks into the fall semester of his first year there, the professor in an introductory class on operations was going through a case study on supply chain management at a cranberry cooperative. Midway through Dimon stood up and interrupted him with, “I think you’re wrong!” As the startled professor looked on, Dimon walked to the front of the class and wrote the solution to the supply problem on the blackboard. Dimon was right, the professor sheepishly acknowledged.

After a summer working at Goldman Sachs, Dimon sought career advice from the portly, cigar-chomping, serial deal maker named Sandy Weill. Jamie’s family had become close to the Weills in the mid-1970s, after Sandy’s brokerage firm acquired Shearson Hammill, where Dimon’s father was a top broker. While at Tufts, Dimon had even written a paper on the Hayden Stone takeover of Shearson, which his mother showed to Weill, who was impressed with its analysis.

“Can I show it to people here?” Weill asked Dimon.

“Absolutely,” Dimon replied. “Can I have a summer job?” Weill was happy to oblige.

After graduating from Harvard Business School, Dimon received offers from Goldman Sachs, Morgan Stanley, and Lehman Brothers. Weill invited Dimon to his Upper East Side apartment and made his own offer: a position as his assistant at American Express, where Weill was now a top executive after having sold Shearson for nearly $1 billion. “I won’t pay you as much,” Weill told the twenty-five-year-old, “but you’re going to learn a lot and we’re going to have a lot of fun.” Dimon was sold.

Weill and Dimon’s tenure at the company turned out to be brief. Although he once boasted that “the Jews are going to take over American Express!” Weill still found himself thwarted by the WASP hierarchy, unable to cut deals on his own. Increasingly frozen out by his colleagues and the board, he quit as president of American Express in 1985; Dimon, whose talents had been noticed by CEO James Robinson, was asked to stay. Dimon was at a point in his life where many in the same position might have opted for security; his wife had just given birth to their first child. But he decided to stick with Weill, even though Weill hadn’t yet settled on his next project and had taken space in a small office. As the months wore on and Dimon found himself watching Weill sleep off his martini lunches on their office couch, he wondered if he had made a bad bet. Weill couldn’t seem to get anything off the ground, and Dimon had asked himself whether his mentor had played his last hand.

Then, in the wake of Weill’s failed takeover of Bank of America, two executives at Commercial Credit, a subprime lender based in Baltimore, pitched him and Dimon on buying the company from its parent. Weill put up $6 million of his money to do the deal (Dimon invested $425,000), and the company was spun off, with Weill in charge. Dimon set himself up as the operations man, obsessively cutting costs. A lean-and-mean Commercial Credit became the cornerstone of a new financial empire, one that Weill and Dimon built through more than one hundred acquisitions. In 1988 the pair got their return ticket to Wall Street with the $1.65 billion acquisition of Primerica, the parent of the brokerage firm Smith Barney. A $1.2 billion purchase of Shearson from American Express followed in 1993.

Dimon’s reputation rose alongside Weill’s. They were a team: Weill, the strategist and deal maker; Dimon, more than twenty years his junior, the numbers cruncher and operations whiz. They had moved beyond mentor and protégé to something more like a long-married combative couple. In the Midtown Manhattan offices of Primerica, the chairman and the chief financial officer would argue ferociously, their voices booming down the corridors. In meetings Dimon would roll his eyes whenever he thought Sandy had said something foolish.

“You’re a fucking asshole!” Weill would yell at him.

“No, you’re the fucking asshole!” Dimon would shout back.

By 1996, after a $4 billion deal for Travelers, the company needed someone to run the combined asset-management operations. Weill was quietly pushing Dimon to promote his daughter, Jessica Bibliowicz, then thirty-seven, who was running Smith Barney’s mutual fund business. Dimon and Bibliowicz had known each other since they were teenagers, but she wasn’t considered a top-flight manager, and he had reservations about entrusting her with so powerful a job. A top executive took Dimon aside. “Promote her,” he warned Dimon. “You’re killing yourself if you don’t.” Dimon, however, was not persuaded and told Weill and others that she wasn’t ready for the job; they had better, more experienced executives in line.

The following year Bibliowicz announced that she was leaving the company. She didn’t blame Dimon for her decision but tried to emphasize the positive aspects of her departure, telling her father: “Now we can be father and daughter again.” But Weill was furious, and the relationship between him and Dimon would never be repaired, with tensions flaring with increasing frequency as the company continued its rapid expansion. Travelers acquired Salomon in 1997, and Weill made Deryck Maughan, a Briton who had helped steer Salomon Brothers through a Treasury bond scandal, the co-chief executive of Salomon Smith Barney, along with Dimon. This new power-sharing arrangement, although logical, greatly displeased Dimon.

A more injurious slight came after the $83 billion merger with Citicorp, the deal that rewrote the rules of the U.S. financial system as the last Depression-era barriers between commercial and investment banking—passed as the Glass-Steagall Act of 1933—were removed by a bill introduced by Republican senator Phil Gramm of Texas and Republican congressman Jim Leach of Iowa. Dimon had worked tirelessly to bring the deal to completion, yet when the time came to split the eighteen board seats of the merged company between Travelers and Citicorp, he found himself left out. He was made president of the company, but had only one direct report, the chief financial officer, Heidi Miller.

The untenable situation finally came to a head a few days after the new Citigroup reported a disappointing third quarter, the result of a summer of turmoil as Russia defaulted and the hedge fund Long-Term Capital Management nearly collapsed. That weekend had been set aside for a four-day conference for executives at the West Virginia resort of Greenbrier, capped by a black-tie dinner and dance. Around midnight a number of couples were trading partners on the dance floor. Steve Black, one of Dimon’s closest allies at Smith Barney, approached the Maughans and offered to dance with Maughan’s wife, a gesture that was intended as something of an olive branch, given the clashing factions within the company. But Deryck Maughan did not reciprocate, leaving Black ’s wife standing alone on the dance floor. A furious Black stomped off to confront Maughan.

“It’s bad enough how you treat me,” he shouted. “But you’re not going to treat my wife like that!” On the verge of hitting him, Black threatened, “I will drop you where you stand.”

Dimon attempted to intervene, tracking down Maughan as he was about to leave the ballroom. “I want to ask you a simple question. Either you intended to snub Blackie’s wife or you didn’t. Which is it?”

Maughan said nothing and turned to walk away. Incensed, Dimon grabbed him and spun him around, popping a button off his jacket in the process.

“Don’t you ever turn your back on me while I’m talking!” he shouted.

When Weill learned of the incident, he judged it inappropriate. A week later, he and his co-CEO, John Reed, summoned Dimon to the corporate compound in Armonk, New York, where they asked him to resign.

It proved to be both the worst and best thing that ever happened to Dimon. Just as Weill had done after leaving American Express, he took his time finding a new job, turning down a number of suitors—including, reportedly, the Internet retailer Amazon. Dimon knew little else outside of banking, and he waited for an opportunity in his field, finally accepting the top job at Bank One, a second-tier, hodgepodge operation based in Chicago. It was the launchpad he had been looking for, and he set out to streamline its operations and repair its balance sheet, to the point where he could engineer a deal with JP Morgan in 2004 that would put him in line to succeed William Harrison as CEO.

Once the proudest of Wall Street institutions, JP Morgan had fallen into the middle of the pack as its competitors had begun to outdo it. Dimon brought in his own team of expense cutters and integration experts and went to work. Salaries for the bank’s managers were slashed. Gyms were ordered closed. Phone lines were ripped out of bathrooms. Daily fresh flowers were eliminated. Executives visibly tensed when Dimon pulled out of his breast pocket a handwritten piece of paper that served as his daily to-do list. One side was an inventory of matters that he needed to address that day; the other was for what he called “people who owe me stuff.”

By 2008 JP Morgan Chase was being hailed as just about everything that Citigroup—the bank Dimon helped build—was not. Unlike Citi, JP Morgan had used scale to its advantage, rooting out redundancies and cross-selling mortages to checking account customers and vice versa. Dimon, who was paranoid by his very nature, understood the intricacies of virtually every aspect of banking (unlike many of his CEO peers) and also reduced risk; profits were literally squeezed out of each part of the company. Most important, as the credit crisis began to spread, Dimon showed himself to be infinitely more prudent than his competitors. The bank used less leverage to boost returns and didn’t engage in anywhere near the same amount of off-balance-sheet gimmickry. So while other banks began to stumble severely after the market for subprime mortgages imploded, JP Morgan stayed strong and steady. Indeed, a month before the panic erupted over Bear Stearns, Dimon boasted of his firm’s “fortress balance sheet” at an investors’ conference. “A fortress balance sheet is [sic] also a lot of liquidity and that we can really stress it,” he said, adding that it “puts us in very good stead for the future.

“I don’t know if there are going to be opportunities. In my experience, it’s been environments like this that do create them, but they don’t necessarily create them right away.”

An opportunity came sooner than he expected.

On Thursday, March 13, Dimon, his wife, and their three daughters were celebrating his fifty-second birthday over dinner at the Greek restaurant Avra on East Forty-eighth Street. Dimon’s cell phone, the one he used only for family members and company emergencies, rang early in the meal, around 6:00 p.m. Annoyed, Dimon took the call.

“Jamie, we have a serious problem,” said Gary Parr, a banker at Lazard who was representing Bear Stearns. “Can you talk with Alan?”

Dimon, in shock, stepped out onto the sidewalk. Rumors had been swirling about Bear for weeks, but the call meant things were more serious than he had realized. Within minutes, Alan Schwartz, the CEO of Bear Stearns, called back and told him the firm had run out of cash and needed help.

“How much?” a startled Dimon asked, trying to remain calm.

“It could be as much as $30 billion.”

Dimon whistled faintly in the night air—that was too much, far too much. Still, he offered to help Schwartz out, if he could. He immediately hung up and called Geithner. JP Morgan couldn’t come up with that much cash so quickly, Dimon told Geithner, but he was willing to be part of a solution.

The following day, Friday, March 14, the Federal Reserve funneled a loan through JP Morgan to Bear Stearns that would end its immediate liquidity concerns and give the firm twenty-eight days to work out a long-term deal for itself. Neither the Fed nor the Treasury, however, was willing to let the situation remain unsettled for that length of time, and over the weekend, they urged Dimon to do a takeover. After a team of three hundred people from JP Morgan installed themselves in Bear’s office, they brought their findings to Dimon and his executives.

By Sunday morning, Dimon had seen enough. He told Geithner that JP Morgan was going to pull out; the problems with Bear’s balance sheet ran so deep as to be practically unknowable. Geithner, however, would not accept his withdrawal and pressed him for terms that would make the deal palatable. They finally arrived at an agreement for a $30 billion loan against Bear’s dubious collateral, leaving JP Morgan on the hook for the first $1 billion in losses.

These final negotiations, not surprisingly, were of intense interest to the Senate Banking Committee. Had JP Morgan, realizing the leverage it had, driven an excessively hard bargain with the government, at taxpayer expense?

Dimon, looking almost regal with his silver hair and immaculately pressed white cuffs peeking out from his suit jacket, sounded neither apologetic nor defensive as he described the events leading up to the Bear deal. “This wasn’t a negotiating posture,” he stated calmly. “It was the plain truth.” In Dimon’s telling, the truth of the matter was clear—he and Geithner were the good guys who had saved the day, and against considerable odds. “One thing I can say with confidence,” he told the committee members. “If the private and public parties before you today had not acted in a remarkable collaboration to prevent the fall of Bear Stearns, we would all be facing a far more dire set of challenges.”

In the end, the day’s testimony produced no smoking guns, no legendary exchanges, no heroic moments. But it introduced to the American public a cast of characters it would come to know very well over the next six months, and it provided a rare glimpse into the small circle of players that sits atop the world of high finance, wobbly though it may have been at the time. The senators were a long way from being able to make up their minds about the Bear deal—how necessary had it really been? And had it really fixed a problem, or merely postponed a greater reckoning?

Of all the members of the Banking Committee, Bunning, with his strong free-markets bias, was the most critical—and perhaps the most prescient. “I am very troubled by the failure of Bear Stearns,” he said, “and I do not like the idea of the Fed getting involved in a bailout of that company… . That is socialism, at least that’s what I was taught.

“And what’s going to happen,” he added ominously, “if a Merrill or a Lehman or someone like that is next?”