Evan Vucci / Greg Baker / Susan Walsh / AP / zokru / Andrey Novgorodtsev / r4films / Shutterstock / Katie Martin / The Atlantic

When America Stared Into the Abyss

The untold story of how America’s political leaders crossed the aisle to stave off financial collapse in 2008

The Treasury secretary’s voice exuded tension and urgency. “A very serious situation is developing,” Henry Paulson warned House Speaker Nancy Pelosi on the phone. “Nothing we can say will calm the situation until we come up with a policy that is overwhelming force!” Later that Thursday afternoon, Pelosi received the same dire message when she telephoned Federal Reserve Chairman Ben Bernanke; financial markets were seizing up, major Wall Street firms were on the brink of collapse, and the nation’s economy hovered perilously on the edge of an abyss. Pelosi recalls asking, alarmed, “If things are this bad, why aren’t you calling me?”

Paulson and Bernanke urgently requested the speaker to convene the bicameral congressional leadership to hear the George W. Bush administration’s proposed response to the rapidly accelerating crisis. Pelosi agreed to call a meeting the next day. That might be too late, Bernanke cautioned. Indeed, without swift action, there might not be an American economy by the end of the weekend.

Ten years ago this past September, financial markets imploded, threatening to collapse the entire U.S. economy and setting off an extraordinary, and improbable, collaboration between the deeply divided Congress and the Bush administration. Prospects for successful cooperation were inauspicious: a highly partisan atmosphere, significant divisions within each party, deep suspicions of the administration’s credibility, displeasure over Bush’s indifferent record on regulating the financial-services industry, and a national election just six weeks away. And yet, remarkably, a political system widely castigated as dysfunctional proved capable of passing an enormously expensive, complex, and contentious piece of legislation that prevented a second Great Depression. As a senior aide to Pelosi, I had an opportunity to witness both the unfolding of the crisis and the private discussions and negotiations that saved the American economy from the worst meltdown since the 1930s. As a historian, I fortunately recorded on legal pads those private conversations as they unfolded, revealing the strategies, tensions, and interactions that allowed political rivals and adversaries to avoid the abyss. I have given those notes to the Library of Congress. This article marks the first time those discussions have been revealed.

The remedy devised in two weeks, without the typically expansive committee deliberations that would have accompanied such a massive piece of legislation, was the Troubled Assets Relief Program. TARP was by no means a perfect, popular, or thorough response to the overall economic crisis. Many critics of TARP remain bitter at the lack of criminal prosecutions for misbehavior by executives in the securities industry. Indeed, for Americans of varying ideologies, TARP was not a solution but indisputable evidence of what was wrong with American politics. Still, 10 years later, it remains remarkable that a divided, distrusting, and often dysfunctional political system was able to fashion such a complex, if imperfect, response to the crisis. And that success raises the question of how today’s even more fractured and contentious system might respond should a comparable crisis occur.

The financial-services industry, as well as the political and regulatory systems designed to oversee it, had long ignored the gathering storm. In the 30 years before the crisis, the amount of debt held by the financial sector skyrocketed from $3 trillion to more than $36 trillion, “more than doubling as a share of gross domestic product,” according to the national commission appointed to investigate the origins of the collapse. Wealth had become hyperconcentrated in firms considered “too big to fail” without bringing down the entire economy. By 2005, the country’s 10 largest commercial banks held 55 percent of the nation’s assets, more than twice the concentration of a decade and a half earlier. In 2006, the profits of financial-sector corporations represented 27 percent of all corporate profits in the United States, nearly double the concentration in 1980.

Underneath the booming profits, however, was dangerous rot. Five of the largest firms—Bear Stearns, Goldman Sachs, Lehman Brothers, Merrill Lynch, and Morgan Stanley—had become dangerously over-leveraged. Bear Stearns had less than $12 billion in equity, with more than $380 billion in liabilities, leading up to its collapse in March 2008. Fannie Mae and Freddie Mac had a leveraged ratio of 75 to 1. By mid-September, as Lehman Brothers and the giant insurance corporation American International Group teetered on failure, many of the nation’s largest financial houses were saddled with hundreds of billions of dollars in toxic paper.

The commission appointed by Congress in 2009 to investigate the causes of the meltdown concluded that it “was the result of human action and inaction, not of Mother Nature or computer models gone haywire.” A “combination of excessive borrowing, risky investments, and lack of transparency put the financial system on a collision course with crisis.” And perhaps most tellingly, the commissioners determined, the crisis had been “avoidable.”

In the leadership meeting Pelosi convened after her phone calls with Bernanke and Paulson, the Federal Reserve chairman described a “very severe financial crisis—hundreds of billions in losses.” The administration was forced to turn to Congress, Bernanke declared, because the Fed was “no longer able to use the tools we have to maintain stability. It is a matter of days,” the chairman warned, before “a major meltdown [would occur] in the United States and globally.” Paulson agreed. “I’ve never seen anything like it,” he said. “Once in 100 years.”

Congress would have to authorize the Treasury to purchase the toxic assets. “If we don’t deal with it by next week, the country could collapse,” Paulson warned. The alternative, Bernanke predicted, was a “deep, long recession.” Congressional leaders, many of whom considered the two financial managers politically naive and partly responsible for the unfolding catastrophe, were stunned. Senate Majority Leader Harry Reid asked how much the purchase would cost. “Hundreds of billions,” Paulson admitted, and even then, it was inevitable that widespread foreclosures would cost millions of Americans their homes.

Democratic leaders immediately seized on the strategy of using Wall Street’s crisis to benefit millions of Americans on “Main Street” who were seeing their homes, savings, and jobs evaporate without generating any comparable urgent response. Congress had negotiated with Paulson and the Bush administration a meager $168 billion stimulus bill in February, but the law had minimal impact on the worsening recession. Pelosi and Senator Chuck Schumer of New York insisted that something like Paulson and Bernanke’s audacious proposal could only secure Democratic votes if it included billions of dollars in anti-recessionary spending to promote job creation, extend unemployment assistance, and fund other initiatives to reduce the “perception the bill is a [corporate] bailout.” Barney Frank, the chair of the House Financial Services Committee, also demanded restrictions on the exorbitant executive-compensation packages of financial-services companies to help secure the needed votes.

The administration and congressional Republicans reacted negatively to these efforts to expand the scope of the legislation. “We won’t get there if you take that approach,” Paulson admonished. The House Republican leader, John Boehner, agreed, advising the Democrats, “Don’t play politics.” Other Republicans raised their own concerns. Dick Shelby, the senior Republican on the Senate Banking Committee, skeptically described the administration’s proposal as “a blank check.” Reid explained that Democrats would also face challenges rounding up votes without incentives. “It’s political reality,” Reid declared in defense of the additional spending. Without the anti-recessionary provisions, Frank advised, “I can’t tell you the bill will pass.” After a tense moment, Paulson glumly responded, “Then God help us.”

The very short deadline for enacting the bill created additional tensions. “If you think the U.S. Senate will give you $500 billion next week,” Reid said, “that’s not happening! … Your timeline is unrealistic!” The majority leader knew that under Senate rules, he would need a 60-vote, bipartisan supermajority to pass such legislation, a tall order just weeks before a third of the Senate—along with the entire House—would face voters. “We can’t just take your word. We need [to conduct] hearings. It takes two weeks to pass a bill to flush a toilet” in the Senate, Reid said. “Well, if we don’t do this,” Paulson testily responded, “we are flushing the toilet on the American people.”

The challenge confronting Congress was complicated by another imminent deadline. At the same time the members of the House and Senate were being asked to pass a $700 billion TARP bill, they would have to approve a continuing resolution (CR)—also costing hundreds of billions of dollars—to keep the government open and operating after the beginning of the 2009 fiscal year on October 1. Although no connection between the two existed in Paulson’s view, the link was clear to key congressional leaders. “Paulson needs to understand there is nothing [on TARP] without an agreement on the CR!” cautioned Dave Obey, the House Appropriations chairman.

Not satisfied with speaking only to Paulson, Pelosi called President Bush the next day, their first conversation in months. She detailed the additional provisions she needed for “selling [the bill] to the American people,” not to mention to her own members. House liberals were also demanding independent oversight of the financial-services industry and tighter rules on fraud. Even Representative Ellen Tauscher, a former stockbroker, insisted on including significant reforms in corporate governance. “Let’s get it done” as soon as possible, Bush noncommittally responded, endorsing a “simple and lean” approach, but Pelosi refused to back down. “We need to get as much as we can,” she informed the president.

Pelosi knew she could not win liberal votes if she were perceived to be caving to Bush or the financial interests; indeed, the affluent speaker was rankled that she, like Bush, was being castigated for promoting a bailout “for our Wall Street friends.” She vigorously condemned the combination of “cowboy capitalism” that ran rampant in the financial firms as well as the Bush administration’s “anything goes” style of regulation that she blamed for engendering the crisis. “We are in this situation,” the speaker insisted, “… because no one has been watching the store.” Indeed, numerous leading Republicans (including Paulson and the presidential nominee John McCain) had asserted the soundness of the nation’s economy, although mortgage-related fraud had grown 20 times in the decade following 1996, and doubled again from 2005 to 2009. Even in September 2008, Paulson was still professing confidence that the chaos in the emerging subprime mortgage market could be controlled, and that the irresponsible behavior of a few on Wall Street was “undermining our otherwise sound financial institutions.”

It was evident to all that no bill could pass without bipartisan support, a tall order in the highly polarized Congress; on the eve of the election, neither party could afford to bear sole responsibility for what would undoubtedly prove an unpopular piece of legislation. Pelosi told Boehner that he would have to produce 100 votes from his conference, and that she would deliver the remainder. But House Republicans were deeply divided by the proposal from their own administration, and Boehner was skeptical that he could meet Pelosi’s demand—a sentiment he expressed on numerous occasions. “My people are looking for a reason not to support” the bill, he told her. If the bill included the Democrats’ anti-recessionary wish list, Boehner added in another conversation, “my people will run away.” He complained that he was receiving little help from other House Republican leaders and told Pelosi and Paulson the president was “in hiding.” Many in his caucus were even skeptical of the severity of the crisis, while others were content to let the financial firms fail. Wary of his ability to produce enough votes for a bailout bill, Boehner told Paulson to “cool your jets.” Boehner’s chief of staff and close confidante, Paula Nowakowski, said at the time that the minority leader was contemplating asking Bush to “hit the reset button” by creating a committee to study the crisis before passing legislation.

Administration negotiators were also exasperated by a plethora of conservative-generated TARP alternatives, including one from Chief Deputy Whip Eric Cantor that would have substituted a federal insurance plan for the bailout. Paulson dismissed these alternatives as “pretty ridiculous” and focused on crafting the legislation with Democrats. Meanwhile, on the Senate side of the Capitol, Paulson was “laying an egg” with the Senate Finance Committee, a top Boehner aide confided in me. White House Chief of Staff Josh Bolten told Democratic leaders their Republican counterparts were “horrid,” according to Reid, and Obama quoted Bush as having declared, “My problem is House Republicans.” According to a senior White House staffer, neither Senator Shelby nor the ranking member Spencer Bachus of Alabama was being helpful. The obstinacy of Bachus, said Paulson, was “disgraceful.”

Reid was flabbergasted to hear that even McCain was leaning against the bill. “We can’t pass a bill unless 80 percent of Republicans vote for it,” he told Pelosi, who called McCain’s opposition “just pathetic.” When McCain called Pelosi on September 24 to complain about the pace of the discussions, Pelosi sharply rebuked him. “We are making progress,” she said. “It is not accurate to say otherwise.” McCain then proposed a suspension of the presidential campaign and the convening of a bipartisan White House summit to hash out a legislative agreement. Pelosi was concerned that a White House meeting would cause delays. When Bolten called to invite her to attend the meeting, the speaker reproached him for capitulating to McCain’s “political stunt.” She instructed Paulson, “Tell the president to lead! … I will not allow Congress to look like it’s in disarray!” Later in the meeting, she reminded him, “The president never listened to us on Iraq … He never broaches disagreement.” Unless Bush embraced the TARP design they had fashioned together, she told the Treasury secretary, “we have wasted our time, and it is an insult to you.” Sardonically, Paulson noted, “I’m beyond that point.”

Schumer thought McCain’s suggestion was “just weird,” especially coming from someone who had offered little “except for an occasional, unhelpful statement, sort of thrown [in] from far away.” The Democratic presidential nominee, Barack Obama, was similarly skeptical of the meeting, which might force the postponement of his first debate with McCain, but he was also wary of rejecting the kind of invitation he might soon as president extend to congressional leaders. “We’ve got him boxed in … We have him on the ropes,” Obama said. “If we didn’t go, it would be a bad precedent,” he told Reid and Pelosi. They unenthusiastically decided to participate, and decided Obama would serve as their leader. However, they agreed, there would be no deal-making at the meeting, and the exit statement to the press would emphasize that it was the Republicans who needed to “get their ducks in a row.”

“We’ve got a serious economic crisis,” Bush declared to the participants around the enormous oval table in the Cabinet Room. “This meeting is an attempt to reach agreement quickly. I can’t tell you how important it is to get something done.” He cautioned against loading up the bailout with controversial provisions that could jeopardize passage, but he also signaled flexibility, adding that if Paulson and Bernanke signed off, “we’re for it. You damn sure don’t want to be the people who see it crater.” He made, I recall, a point of singling out Pelosi for her collaboration with administration officials.

Obama’s opening statement focused on the proposal under negotiation, while Boehner and Bachus again floated alternative approaches. Their ideas, like the insurance scheme, drew sharp rebukes from Frank and Reid, who accused the Republicans of leading negotiators “down a primrose path” only to throw up obstacles at the last minute. As the parties parried, Bush became increasingly restless. “It’s easy for smart guys to sit around,” he said, but “if money isn’t loosened up, this sucker could go down.” Although he had proposed the meeting, McCain remained silent for nearly an hour. A CNN reporter confidentially disclosed to me later that McCain’s campaign staff had feared that his presence in the meeting could be “political dynamite,” and a Boehner staff person privately expressed to me deep concern at the nominee’s lack of preparation, admitting he had requested staff assistance from Boehner only the day before the meeting.

After nearly every other principal had spoken, Obama turned to his rival. “We need to hear from John,” he declared, and all heads turned to the silent senator. McCain awkwardly stumbled through a rambling statement, thanking Bush for convening the meeting and declaring his support for the concerns expressed by other Republicans. Puzzled looks flew around the Cabinet Room.

Bush leaned over to the speaker then and whispered something in her ear.

Later, in the car returning to the Capitol from the meeting, Pelosi told me that Bush had said, “I told you you’d miss me when I am gone!”

“No,” Pelosi had dryly responded, “I won’t.”

After McCain concluded, vacuously urging, “concerns must be addressed,” Obama snapped, “That’s not an answer!”

“I don’t know what your proposals are,” pressed Frank.

Even Bush threw up his hands, declaring, “I don’t know what the hell they are!”

As the meeting broke up, McCain awkwardly edged past Obama, Reid, Pelosi, and staff people who were clustered in the narrow corridor leading to the West Wing reception area. Concerned that their discussion might be overheard, we moved into the nearby Roosevelt Room. Obama’s communications chief, Robert Gibbs, began sketching out a summary to offer the waiting press, who quickly reported that the meeting had been inconsequential.

Suddenly, I recall, the door opened, and a harried Paulson strode into the room. Quickly moving to Pelosi, he fell to one knee and solemnly bowed his head as though meeting a religious leader. He begged her not to “blow this thing up.”

Stunned by the scene, Pelosi tried to lighten the mood. “Why, Hank, I didn’t know you were Catholic!” she exclaimed to nervous laughter.

Afterward, Nowakowski told me the Republican leader was displeased with the outcome of the White House meeting and furious with Paulson for seemingly siding with Democrats against the GOP proposals. Perhaps, she mused, Pelosi should “start thinking” about a bill that could pass with only Democratic votes. Confidentially, a top White House aide admitted that Boehner’s conference was filled with “hardheads” and that the meeting had been awful, “chaos … typical of McCain world,” allowing others to “outmaneuver him.” I recall one Republican aide telling me, “The only person in the room who looked presidential was your guy,” Obama.

Democrats continued to insist on adding provisions, such as restricting executive compensation, that Republicans and some of their own Wall Street leaders, such as the former Treasury secretaries Robert Rubin and Larry Summers, opposed. But Pelosi was unwilling to bargain away a provision with widespread caucus appeal. “No one gets out alive without dealing with compensation,” she said. “It’s the only issue the American people understand.”

One cautious voice was raised among the Democratic leaders about the additional spending. Obama not only was hesitant to inflate the cost of the TARP bill or jeopardize its passage, but also did not want to prematurely pass a stimulus that he was hoping might serve as an early success for his likely administration in 2009.

On one key point, however, Democrats were united and unshakable. Companies that received TARP funding must agree to fully repay taxpayers, with interest, a stipulation remarkably absent in Paulson’s original three-page draft. Deficit-conscious conservatives in both parties were sympathetic to that goal of repayment, but questioned how any shortfall would be covered.

During a drafting session in the office of House Minority Whip Roy Blunt, the Senate’s combative Republican negotiator, Senator Judd Gregg, insisted funds not repaid by the companies be made up by reductions in domestic spending, which had played no part in creating the crisis. As the Pelosi staffer delegated to negotiating this section of the bill, I quickly dismissed Gregg’s proposal as totally unacceptable to the speaker, prompting a heated exchange between the two of us. Though I couldn’t write down his remarks in the moment, I remember them well. “You’re not listening to me!” Gregg exploded as other participants gaped. “Well, Senator, you’re not listening to me,” I replied, thoroughly enjoying a public spat with a hard-line senator.

Finally, I suggested, “Why don’t you go down the hall to the speaker’s office and see what she thinks of your idea to cut domestic spending?” With the Democrats chortling, Gregg testily strode off to pitch the idea to the speaker, returning a few minutes later, after what must have been a brief and very unsatisfactory conversation. “Okay, that isn’t going to work,” he acknowledged. Ultimately, the bill included a requirement that should a shortfall remain after five years, the president would be required to submit a plan to Congress to ensure that the program “does not add to the deficit or national debt.” (In fact, according to ProPublica, the government ended up making $31 billion in profit on its TARP investments.)

Paulson was inexperienced in the time-consuming gyrations of congressional negotiations and frustrated by the pace of the meetings. “People are just jammering … it’s going slower than I would like,” he complained. “I don’t want to be Andrew Mellon!” he told Pelosi, referring to Herbert Hoover’s despised Treasury secretary, who presided over the stock-market crash that preceded the Great Depression. Meanwhile, Boehner was struggling to sell the bill to Republicans. Despite the addition of what Bachus described as “ornaments” to assuage his conference, Boehner admitted to Pelosi and Paulson that there might be as few as 30 Republican votes—less than a third of his designated quota. “I can’t put enough lipstick on it to sell it,” he explained. He made a final effort at alternative approaches, including business-tax cuts, but Paulson and Pelosi responded coolly. Pelosi worried that reports of the inconclusive White House meeting had weakened her own vote count, which she believed was stuck below 110. Moreover, the public reaction remained ominously negative. Reid reported that his office had received 5,000 calls opposing the TARP plan, and only 20 in support.

Pragmatists at the White House moved in to take the upper hand in negotiations. On September 27, Representative Rahm Emanuel, a top Pelosi and Obama lieutenant, told Josh Bolten, “It’s time to call in the political play.”

Bolten responded, “Speaking as a political hack, I say, ‘Hallelujah!’”

But finalizing the details of the bill was only one of the challenges facing the leaders in both houses. When Reid and Pelosi met to discuss the parliamentary maneuvering that would be required to pass the bill, Reid dourly complained (as he often did) about the circuitous route—as many as nine time-consuming votes—Senate rules might require to secure passage. By contrast, he blithely estimated, Pelosi might secure as many as 300 votes in favor of the bill in the House.

An exasperated Pelosi knew she lacked anything approaching that number, and protested that the filibuster rules with which Reid had to contend left her “angry at the Senate.” Not to be outdone, Reid asserted, “I’m angry at the Senate.” He told her he might have to cut some deals she might find offensive to secure the 60 votes he would need. “You can’t be a virgin if … ” he began, but Pelosi waved him off.

“You don’t have to go any further,” she admonished.

Unease hung over the House chamber as the debate began on September 29. Blunt advised Pelosi, “Don’t count on the Republicans,” while Nowakowski advised that some Republicans would undoubtedly “beat their chests” in opposition. Bush, Vice President Dick Cheney, Paulson, and Bernanke continued to call House members, the White House liaison Dan Meyer reported, but there might be only 75 Republican votes for the bill. He asked for additional time to convince recalcitrant Republicans, but Pelosi, worried that her own members might begin to drift away, insisted that the vote go forward.

In a leadership meeting, Democratic Whip Jim Clyburn confidentially predicted that only half of the Democrats’ 235 members would support the bill, but far fewer if the Republicans produced only 75 of their own. Pelosi dispatched Barney Frank to meet with skeptical Democratic factions, including the liberal Hispanic and Black Caucuses, and the conservative Blue Dogs. Steeling himself for the onslaught of complaints, Frank asked, “When is the Asshole Caucus, and do I have to address them?”

Shortly after the New York stock market had opened that morning, Citigroup announced it was taking over the failing Wachovia Bank, and several central banks announced plans to shore up the credit markets. Neither action prevented the Dow from beginning a precipitous decline, a worrisome backdrop to the debate. In her statement in support of the bill on the House floor, Pelosi acknowledged, “We have a situation where on Wall Street, people are flying high. They are making unconscionable amounts of money. They make a lot of money. They privatize the gain. The minute things go tough, they nationalize the risk … they drive their firm into the ground, and the American people have to pick up the tab. Something is very, very wrong with this picture.”

She castigated Bush for squandering the $5.6 trillion surplus bequeathed him by President Bill Clinton on unpaid wars, tax cuts, and a Medicare expansion. “No regulation” and “fiscal irresponsibility, combined with an ‘anything goes’ economic policy, has taken us to where we are today,” she asserted. Now, she assured the skeptics in her caucus, “the party is over.” She promised that “before long, we will have a new Congress, a new president of the United States, and we will be able to take our country in a new direction.”

In his floor speech, Jerry Lewis, a well-respected Southern California Republican, offered a rationale for his recalcitrant fellow conservatives to support the bill. “Frankly, I’m furious,” he admitted. “The idea of spending taxpayer dollars to prop up risky investments keeps me awake at night. It goes against all the principles I have lived by.” But there was little choice. “Doing nothing will cause a potential catastrophe.”

The toughest selling job fell to Boehner, who had privately described the bill to Republicans as a “crap sandwich, but I’m going to eat it anyway.” His voice cracking as he spoke in the well of the House chamber, his cheeks streaked with the tears, he acknowledged, “Nobody wants to vote for this, nobody wants to be anywhere around it … I didn’t come here to vote for bills like this. But let me tell you this, I believe Congress has to act.” He pleaded with members on both sides of the aisle: “What’s in the best interest of our country? Not what’s in the best interest of our party [or] our own reelection.” His earnest plea received tepid applause, and then it was time to vote.

As the seconds ticked down on the 15-minute clocks flanking the chamber, it became evident that the bipartisan entreaties and White House pressure had failed. The bill was defeated by a vote of 205–228, a rare loss on the floor for Pelosi. Nearly 60 percent of Democrats (140 out of 235) voted “yea,” compared with just 33 percent of Republicans (65 of 198). Bush, who had called all 19 Republican members of his Texas delegation, had persuaded just four to support the bill. One of the Texas dissenters, Jeb Hensarling, denounced TARP as the first step “on the slippery slope to socialism.”

Anxiety over the fast-approaching election played a significant role in the defeat. Of 18 members in “toss-up” races, 15 voted against the bill, including all six freshman Democrats facing tight campaigns. Some voiced skepticism about the accuracy of the administration’s description of the crisis, recalling the misleading information provided Congress about weapons of mass destruction that was used to justify the war in Iraq. Many in the Hispanic and Black Caucuses proved unwilling to explain to their economically suffering constituents the massive spending for Wall Street, particularly since the bill contained little of what Democrats had sought for the jobless and those at risk of losing their homes.

In the cloakroom, stunned members watched the Dow Jones average plunge sharply lower. When the final vote was announced, the bottom fell out. Within minutes, the market had lost nearly 700 points off its opening, ending 778 points lower for the day, a record one-day point loss. By day’s end, $1.2 trillion in IRAs, pension funds, and savings was gone—nearly twice the size of the bailout package itself. The VIX index that chronicled market volatility, the so-called fear index, closed at the highest level in its 28-year history.

Some Republicans pointed to the partisan nature of Pelosi’s floor speech to explain their “no” votes. The combative Cantor blamed Pelosi’s “failure to listen and failure to lead” for turning Republicans against the legislation. The normally calm House majority leader, Steny Hoyer, who often touted his ability to work across the aisle with Cantor, uncharacteristically exploded, “I can’t believe the audacity of that SOB!”

Other Republicans dismissed the allegation that Pelosi’s remarks were irresponsible. Blunt told Hoyer that Pelosi’s speech should not be “a big issue.” I recall that California’s Mary Bono minimized the impact of the speaker’s remarks, telling me she was disgusted with colleagues who were putting party over country. Frank denounced the Republicans’ “level of pettiness,” paraphrasing their argument as “Speaker Pelosi talked badly, so screw the country!” But Republicans also pointed their fingers at liberal opponents, such as some in the Black Caucus who had cast votes against the bill. Pelosi was infuriated at the Republicans’ scapegoating of black members. “I would kick someone in the teeth if they said that,” she said. Emanuel, serving as an Obama liaison to the House, offered to have the nominee call disgruntled minority members to turn around their votes for the next effort.

For her part, Pelosi pointed her finger at Bush and the Republicans, whom she termed “dysfunctional.” “The Republicans did not honor their commitment, [and] we all look bad,” she asserted. “The president has no shtick,” she complained to Paulson. “What is going on in the Republican caucus to let the United States suffer this blow?” She counseled the White House’s Dan Meyer, “There isn’t another vote [for the bill] in our caucus” unless something on the order of a $65 billion stimulus was added, but Meyer predicted that such additions would only further diminish Republican support. “You don’t know that!” Pelosi protested, but she agreed for the moment to back off her effort to load up the bill, and even dismissed suggestions from an influential friend, the financier George Soros. “Everyone’s got a plan!” she said. Bolten admitted, “The Republicans blew it,” but Pelosi was unappeased. “If we don’t get more votes on your side,” she told him, “we have to have a different conversation.”

The swift negative reaction—nearly 90 percent of Americans in one poll believed the defeat would damage the economy—quickly led some members to question their vote. Hoyer reported that Bolten had found “much voter remorse” among Republicans, and one Blue Dog leader reported that many in his business-friendly group were “shaking in their boots” from the reactions in their districts.

The Senate now knew there would be enormous pressure for the House to pass anything the Senate approved so as to prevent a time-consuming “ping-pong” process that sent the legislation back and forth between the two sides of the Capitol. Reid quickly exploited the House’s failure to pass TARP by adding tens of billions of dollars in unrelated expenses the House had been balking at approving. Reid confidentially informed Pelosi his bill would extend a series of controversial energy tax credits, which he knew would displease many of her members. “This conversation never happened,” he told her. Boehner predicted the extenders would influence “dozens” of Republicans to switch their votes in support of the bill, but Pelosi angrily denounced these unrelated additions as “pork barrel for senators.”

“You dole out goodies over there,” she tersely told Christopher Dodd, the Senate’s Banking chairman, singling out a “disgraceful” coal-to-liquids development program favored by Obama. “We could do it, too, if we gave away tens of millions of dollars!”

Dodd did not deny the accusation. “Reid cared more about the extenders than he did the bailout,” he acknowledged.

The familiarity of the Senate’s maneuver caused House members to flare. “Reid screwed us, destroyed our leverage,” in the words of one House leader. “We’re being told it’s ‘our way or no way,’” complained Hoyer, declaring himself “a very unhappy camper” because of the way “the Senate jams us.”

Close to midnight on October 1, the Senate approved the TARP bill—including the $150.5 billion package of tax extenders—by a bipartisan 74–25 margin. The next morning, Pelosi told Boehner she was hemorrhaging votes, while the Ohioan asserted he was “doing a lot better,” although he still could not confirm he would reach his promised 100 votes. “There’s no reason to bring it up if it can’t pass,” she responded, advising him to toughen up his whip operation. “Call me when you have the votes. I don’t finger my members.”

As annoyed as she was at the Senate for larding up the urgent TARP bill, Pelosi also blamed House opponents. “It’s awful what the Senate put in, but we enabled them,” Pelosi told Hoyer. “It is like lifting an anvil to get [our] people to vote for unpaid tax cuts,” she told Bolten.

Now, instead of adding billions of dollars to create jobs or prevent foreclosures, as she had wished, the TARP bill would provide, at the insistence of the Senate, tens of billions of dollars not only for the energy producers’ industry but also for special interests, including racetrack facilities, wool manufacturers, and rum producers. Yet facing the inevitable, Pelosi brought up the Senate bill on October 3, and it passed 263–171. Democratic votes rose slightly, to 73 percent of caucus members, but Republicans contributed only 91 votes, still short of Boehner’s promise.

Working with the Republicans “turned out to be the biggest waste of time,” Pelosi charged. “We should have written the bill we wanted on the first night. We still didn’t get 100 Republican votes!”

The epic battle to pass the TARP legislation occurred under the most adverse of circumstances. The economy was in its most perilous state since the 1930s, a condition many Democrats blamed on the Bush administration—including the chief TARP negotiator, Henry Paulson—for having coddled Wall Street for seven years. The essence of the legislation was reviled by the public: hundreds of billions of taxpayer dollars for corporations whose reckless behavior had destabilized the economy and cost millions of Americans their homes and their jobs. Moreover, this unprecedented rescue operation occurred just weeks before a crucial election, offering candidates a grave choice: Oppose TARP and risk contributing to an economic catastrophe, or spend hundreds of billions of dollars to rescue the very corporate titans whose greed had provoked the crisis.

And yet, the Democratic-led Congress did function swiftly and on a bipartisan basis, notwithstanding a White House under Republican control. In two weeks, combative leaders with starkly different ideological outlooks, institutional interests, and electoral objectives were able to find common ground to avert a national catastrophe. Future historians may well regard passing TARP, under such hair-raising circumstances, as one of Congress’s finest hours. One can only wonder how successfully the contemporary Congress and White House might confront a comparable crisis.

There are several major explanations why the TARP rescue succeeded, and all contrast with our contemporary gridlock. TARP highlighted the value of experienced leaders. The “Big Four”—Pelosi and Reid, and Boehner and the Senate Republican leader Mitch McConnell—had to overcome serious cleavages within their own memberships while simultaneously defending their particular political and institutional roles.

The passage of the TARP bill also demonstrated the critical importance of frank communication between the executive and legislative branches. Even within the same party, as the Pelosi-Reid exchanges illustrate, there was tension and suspicion over the other’s motives and objectives. Yet as the conversations in this article reveal, deep-seated partisanship and institutional rivalry yielded to realistic collaboration. Equally frank communication existed among key staff whose long-standing relationships facilitated partnership even when their bosses appeared to be at loggerheads. My own close association with Nowakowski, of Boehner’s office, dated back seven years, to our serving as majority and minority staff directors of the Education and the Workforce Committee.

Perhaps no factor influenced the successful outcome more than the magnitude and urgency of the crisis itself, a common feature of periods of congressional achievement. The steadily worsening economy, rising unemployment, and loss of millions of homes since the February stimulus had not prompted a bipartisan response, and Republicans remained resistant to adding anti-recessionary initiatives to TARP. But the imminent collapse of key banking, investment, and insurance companies compelled joint action because the alternative was simply too dire to contemplate. As Mitch McConnell declared at the September 18 bipartisan leadership meeting, “If it means saving the country’s financial system, we can do it.”

Others, however, regard the bailout as a shameful example of how Congress acted only because of the urgent danger that jeopardized well-connected corporate interests. Indeed, promises made during the negotiations—to address the underlying causes of the crisis and its victims—proved less successful. Bush pledged investigations by the Securities and Exchange Commission, and an expanded Hope Now program to keep people in their homes, but there was little time or energy left in his administration for either. And while Obama and a Democratic Congress pushed through a stimulus bill even larger than TARP in February 2009, many in his party expressed disappointment at the administration’s slow pace in initiating foreclosure mitigation and job creation. Congress approved the Dodd-Frank Wall Street Reform and Consumer Protection Act less than two years later to establish safeguards against a recurrence of the behavior that led to the meltdown, but many critics complained that the necessary compromises needed to win passage left Wall Street insufficiently punished or regulated. By then, the crisis atmosphere that facilitated the TARP law had long since evaporated, and only three Republicans voted for the Dodd-Frank conference report in the House and the Senate.

For critics, TARP remains not an example of diligent public servants overcoming partisan and institutional interests, but indisputable evidence of what is wrong with American politics. Two and a half years after the crisis, 4 million families had lost their homes, and an additional 4.5 million were mired in foreclosure proceedings. The typical American household’s net worth remains nearly 20 percent lower than it was before the crisis, and nearly $11 trillion in household wealth has evaporated. It took nearly a decade for home-ownership rates to register an increase, and black ownership, which had reached a historic high in 2004, remains at its lowest level in nearly three decades. And yet, TARP supporters note, the nation averted plunging into an abyss that would have made each of those measures catastrophically worse.

More than any other factor—perhaps even more than Obama’s election or the enactment of health reform—TARP ignited a new level of partisanship and division that has debilitated American political institutions in the ensuing years. The law evoked a sense of betrayal: the political elite predictably rushing to aid the financial elite with the hard-earned tax dollars of the largely ignored working and middle classes. Indeed, what emerged from the ashes of the September 2008 meltdown was not only a revitalized Wall Street, with high salaries, stratospheric bonuses, and golden parachutes galore, but also the enraged Tea Party movement of 2009.

As the nation marked the 10th anniversary of the Paulson-Bernanke-Pelosi phone calls of September 18, 2008, efforts are under way to roll back many of the rules designed in the wake of the crisis. In May 2018, Trump’s Fed chairman, Jerome Powell, announced a weakening of the so-called Volcker Rule, which restricts bank actions that endanger investors, citing “overly complex and inefficient requirements.” Congress, with bipartisan support, has exempted many small and community banks from Dodd-Frank provisions. The effect of these retractions will likely “boost the profits of some of the industry’s biggest players,” one recent report concluded.

It is impossible to foresee whether this relaxation of regulations might allow a recurrence of the very misbehavior that brought the nation to the edge of the abyss only a decade ago. What seems beyond debate, however, is that the breakdown of comity between the White House and Congress, and the deepened levels of partisan distrust within the House and the Senate, would make it far more difficult today to replicate the actions of 2008 should a comparable crisis recur. The harsh reminder of how close the economy of the United States, and the world, came to a meltdown in 2008 should be more than sufficient reason for collaboration and pragmatism in politics rather than the perpetuation of the stultifying gridlock that has seized Washington.