WASHINGTON — Early Thursday, Treasury Secretary Henry M. Paulson sipped Diet Coke in his office as four flat-screen computer monitors flashed the latest financial data from around the world.
For months, Paulson had been running from crisis to crisis, engineering rescues for disintegrating firms. Now a cataclysm was enveloping global markets, triggering a run on money market funds that had been considered safe. Paulson decided the U.S. government must intervene, and fast.
Federal Reserve Chairman Ben S. Bernanke had come to the same conclusion. They joined an 8:30 a.m. conference call with other policymakers to sketch out what would become the most sweeping public intervention into the private economy in recent U.S. history. They thought their plan could soothe the hysteria. But first, they had to sell it to Congress.
That decision led to a late-night meeting in the Capitol, where Paulson and Bernanke warned congressional leaders that they must act to prevent a global meltdown.
Democratic leaders vowed to approve legislation giving Treasury expansive new powers, but it remains unclear whether they have the votes.
The discussion of a broader market bailout, which could cost taxpayers at least $500 billion, began Monday as Treasury and Fed officials were working to rescue insurance giant American International Group.
This accounting draws from interviews with federal officials, lawmakers and congressional staffers who participated in the meetings. Many spoke on condition of anonymity because much of the discussions occurred in private meetings.
The government's rescue of AIG on Tuesday hadn't calmed the public's nerves. There appeared to be a run developing on money market mutual funds, a $3.5-trillion pool of savings that was supposed to be as safe as cash, but lacks any government guarantee. If money market funds failed, ordinary people stood to lose huge sums. Meanwhile, shares of Morgan Stanley and Goldman Sachs Group sunk as investors bet they would collapse just as their rivals had. Commercial banks stopped lending to one another. The stock markets dived.
It was time to act. Bernanke leaned into the speakerphone. With New York Fed President Timothy Geithner and Securities and Exchange Commission Chairman Christopher Cox on the line, Bernanke said the government must buy up troubled mortgage debt if there was any hope of stabilizing the world financial system.
