>> NARRATOR: It was on a cold March day in 2008 that the fear of a meltdown would become a reality.

>> ...are triggering fears of a financial meltdown on Wall Street.

Foreclosures rose to record highs.

>> NARRATOR: After the real estate bubble burst, it would only be a matter of time before investors would start to lose confidence in Wall Street's biggest banks.

>> It started with news that some Bear Stearns hedge funds... >> NARRATOR: Bear Stearns was the first to crack.

>> Pretty normal morning.

And then suddenly around 11:00 there's a tremor.

The stock starts to go down.

The CFO of Bear starts calling down to his desks, to the repo guys, the bond guys, "Anybody hear anything?

"Anybody know anything?

What is this?"

"Yeah, the rumor is that we're running out of cash, and that we might be in trouble."

>> ...leading this very sharp rally on Wall Street with the exception of Bear Stearns.

>> NARRATOR: The rumors swirling around Bear were about its massive investments in subprime mortgages-- what would become known as "toxic assets."

>> They were big in mortgages.

They were big in packaging them and creating securities out of them, buying them.

>> NARRATOR: The road to riches for Bear was simple-- buy hundreds of thousands of subprime mortgages, then bundle and sell them to investors.

But now the party was over.

Bear was spiraling out of control.

>> You've either got liquidity or you don't, so... >> It was nothing short of surreal.

>> Those are the kinds of concerns in this market-- concerns of confidence... >> You're watching on CNBC, et cetera.

I mean, they are talking about where you work.

>> Well, the only bank in the red right now, basically Bear Stearns, although it is dragging the rest of the financial markets down as well.

>> NARRATOR: The stock was in free fall, and the cash reserves were shrinking.

>> The stock started to go down.

More and more people called up and said, "I want my money out or I won't trade with Bear Stearns."

And it just completely unwound.

>> NARRATOR: Nearly bankrupt, the top brass at Bear called Wall Street super-lawyer Rodgin Cohen.

>> It became clear that they were having serious funding difficulties, and it had been very clear to me that a investment bank has a very short lifespan after it loses its liquidity.

>> NARRATOR: Cohen made an emergency call to Timothy Geithner, the president of the New York Federal Reserve.

>> Geithner understood that it was a vulnerable situation.

He said something like, "Believe me, I'll be on it," and that was really the phone call.

>> NARRATOR: Geithner was Bear's last chance.

>> Tim Geithner is at the Federal Reserve Bank of New York.

It's the epicenter of the financial system.

He is supposed to be the Fed's frontline general, field marshal in the financial markets.

>> He's 47 years old, he looks like he's about 32.

>> Extremely smart, extremely aware of the stuff, very discreet, controlled.

>> NARRATOR: Geithner realized he needed to know how bad Bear's books looked.

He dispatched a SWAT team of investigators from the Federal Reserve to Bear's headquarters.

>> Tim Geithner is frantically involved in trying to figure out what's going to happen if Bear melts down, and how you need to prevent it from going into free fall and dragging down the rest of the financial sector with it.

>> By midnight, by 1:00, 2:00 in the morning, everybody and their mother has teams at Bear: Morgan, the Fed, the SEC.

And they find out Bear is stuffed to the gills with toxic waste.

>> NARRATOR: Bear was party to complicated financial deals.

>> Nobody understood how subprime mortgages had proliferated through these things called credit default swaps.

And nobody understood how they'd kind of gotten into the blood of the financial system.

>> NARRATOR: Geithner learned that Bear had made credit default swap deals worth trillions of dollars all over Wall Street and around the world.

>> Because Bear Stearns was so indebted to so many other people, their failure to repay their debts, or pay their debts, would cause a cascade of other failures.

>> NARRATOR: Geithner saw what central bankers fear most: "systemic risk."

Bear was frighteningly interconnected with other banks up and down Wall Street.

>> No one knew what would be the ramifications.

Which other institutions were exposed?

Which other institutions would suffer runs?

>> NARRATOR: Bear Stearns, Geithner concluded, was "too big to fail."

A bankruptcy could undermine confidence in every major Wall Street firm.

>> They were all very afraid of the possibility of a bank failure.

They didn't know what it would lead to.

>> NARRATOR: The precipitous collapse of Bear Stearns had taken federal regulators almost entirely by surprise.

>> What became clear as you look at the record is the extent to which the people who were charged with overseeing our financial system really didn't have a sense of the risks that were embedded in that system.

They didn't see the fundamental rotting in the system that had manifested itself for years.

>> NARRATOR: A year later, Phil Angelides would chair the Financial Crisis Inquiry Commission.

In their report, the commission concluded regulators at the Federal Reserve, the SEC and other agencies ignored evidence that Wall Street was flirting with disaster.

>> You would think that the people who were in charge of our financial system would have a grip on the key risks that were in it.

And if they did, they would have moved, in a sense, to get a handle on those.

They had deliberately turned a blind eye to those problems.

>> NARRATOR: For three decades, Washington had steadily moved to a hands-off attitude towards Wall Street.

And with little oversight, inside these black boxes, Wall Street had created a host of complicated but lucrative financial products.

>> We had no regulation.

No federal or state public official had any idea what was going on in those markets.

It was a dark market.

There was no transparency.

>> They were making money, and they want to continue making money.

It was generating fees.

Transparency drives profits down, drives down transaction costs.

The banks don't want that, because they make their mone from transaction costs, and they like lots of non-transparency.

>> The story has continued to mushroom, and there are concerns among... >> NARRATOR: Now, with Bear failing, those dark markets threatened to bring down the American economy.

At 4:00 a.m., Tim Geithner picked up a phone and called the chairman of the Federal Reserve in Washington, Ben Bernanke.

>> Ben Bernanke is a highly, highly respected scholar, and not only a scholar of economics, but of the Great Depression.

>> If he weren't Chairman of the Fed, he'd be top of the list of people you'd be going to for advice and understanding in all this stuff.

>> NARRATOR: One of the Depression expert's biggest fears was being realized.

>> It was clear that this had to be contained.

There was no doubt in his mind.

He, more than anyone else, appreciated what would happen if it got out of control.

>> NARRATOR: Bernanke believed that just as in the Depression, a lack of confidence in the banks could bring down the entire economy.

>> You could see the credit default swap spreads widening.

And the market was telling you something was wrong.

>> Here we are, 90 minutes in, and it looked like it was going to be a big up day.

And Bear Stearns hit $30.

Two things... that was going around.

Bear Stearns now has market capital... >> NARRATOR: The next morning, Bernanke warned President George W. Bush's treasury secretary, Hank Paulson, of systemic risk to the financial system if Bear collapsed.

>> Paulson was picturing a 1,000-2,000 point drop in the Dow that Monday, possibly the failure in very short order of a number of other investment banks-- Lehman Brothers, Morgan Stanley and so on.

>> NARRATOR: Paulson thought he knew the markets well.

Only two years before, he had run Bear's largest competitor.

>> Paulson comes from the great breeds of Masters of the Universe that have come from Wall Street.

>> Henry Paulson came from Goldman Sachs.

He was a very powerful Wall Street figure.

>> NARRATOR: At Goldman he had overseen the growth of those complicated financial products and was always a champion of the free market.

>> Paulson does not have the mentality of a regulator.

He has the mentality of an investment banker-- that the market rewards and the market punishes, so you don't need a lot of regulation.

>> NARRATOR: A bailout of Bear Stearns was not Paulson's style, but Bernanke and Geithner believed it was too big to fail.

And by that weekend, options were dwindling.

>> It was a gut-check moment.

Do we feel like we can take the risk of letting it go?

They all looked at each other and just said, "I'm not ready to take that risk."

>> NARRATOR: They would use $30 billion of government mone to avoid a bankruptcy.

Tim Geithner would broker a fire sale of Bear Stearns to J.P. Morgan.

>> The Federal Reserve used powers that it had had, but had lain dormant since the Great Depression.

They basically took $30 billion, went to J.P. Morgan and say, "We'll give you $30 billion "if you buy this Bear Stearns, so it doesn't have to go out of business."

And they did.

>> What the New York Fed did was take all the bad stuff off the books of Bear Stearns and allow J.P. Morgan to purchase the good part of it.

It's kind of like if Uncle Sam had come in and taken all the vinegar and allowed J.P. Morgan to have the wine.

>> NARRATOR: Bailing out a major financial institution in crisis was something Tim Geithner had seen before.

It was taken from a playbook created back in the 1990s-- how to respond to a financial crisis.

>> Tim Geithner, going back even to his days in the Clinton administration, he's sort of known as a cool head in a crisis, and in how do you manage a really troubled financial system.

>> NARRATOR: In the Clinton administration, Robert Rubin was the treasury secretary, Larry Summers was his top deputy, and Undersecretary Tim Geithner was always in the room.

>> They had this bonding, unifying experience during the Clinton administration putting out these various crises, from Thailand to Japan to Indonesia.

Geithner was one of the guys who was sort of part of that SWAT team that understood how to react to a financial crisis.

>> NARRATOR: They engineered massive bailouts when American banks were threatened by financial turmoil overseas.

Working with the International Monetary Fund, they loaned hundreds of billions in countries like Mexico, Thailand and South Korea.

Rubin and Summers, along with Federal Reserve Chairman Alan Greenspan, became superstars of the financial world.

>> You had this infamous, now, Timemagazine cover with Bob Rubin, Larry Summers and Alan Greenspan, called "The Committee to Save the World."

And that just sums up the attitude of the times perfectly.

>> By the end of the Clinton administration, the folks in the Treasury-- Geithner, Summers, Rubin-- felt like there was an established playbook for dealing with a financial crisis.

The first thing you had to do was come in and flood the banks with money, so that they would keep lending, as difficult as that was to do politically.

>> NARRATOR: It was an approach Geithner took with Bear Stearns-- spending lots of mone to respond to a financial crisis.

But Treasury Secretary Henry Paulson thought Geithner's strategy might send a dangerous message.

He started publicly reminding Wall Street of one of the most basic tenets of the free market: moral hazard.

>> I'm as aware as anyone is of moral hazard.

I am also aware of... >> Moral hazard poses the question: if you bail somebody out of a problem they themselves cause, what incentive will they have the next time to avoid making the same mistake?

>> Paulson is out in public saying, "It's all on you now.

"This was a one-time only event.

"You're on your own now.

"We did it with Bear.

But now you're on your own."

>> There's news today of a federal bailout for a Wall Street... >> It's a fire sale for troubled Bear Stearns... >> NARRATOR: The bailout of Bear Stearns landed in the middle of an election year.

>> Are you fired up?

Are you ready to go?

Fired up?

>> NARRATOR: Barack Obama had already made the econom a key issue.

>> Because we've got eight years of disastrous economic policies.

That's what we're going to change when I'm president of the United States of America.

>> Obama very early realized that things were only going to get worse.

And so Obama made this decision, "The thing I'm going to run on "is that there is a problem in our economy, my opponent doesn't see it, and I can fix it."

>> NARRATOR: And right after the Bear Stearns crisis, he turned his attention to Wall Street.

He had an inside source-- the man in the pink striped tie.

>> We met for a little dinner, just him and I.

And, you know, I was hook, line and sinker.

I felt like here was a gu that could really bring this country together.

>> NARRATOR: Robert Wolf was a Wall Street power broker-- the chairman of UBS Americas, part of the giant Swiss Bank.

>> From that day on we started talking very, very often.

I don't know if it was once a week, three times a week, five times a week, emailing back and forth, but from that time on we started talking about the markets and the economy nonstop.

>> NARRATOR: And with Wolf's support, Obama decided to confront the bankers on their own turf.

>> I actually went down to the Cooper Union speech with him in his car.

>> Senator Barack Obama.

>> He was talking about the idea of making sure that the ethics of Wall Street was pure and that we were doing the business that we should be doing.

>> Thank you very much.

Thank you.

We let the special interests put their thumbs on the economic scales.

We've excused and even embraced an ethic of greed.

>> The Cooper Union speech was essentially Obama's effort to say to the Democratic Party and to the countr that he believed that we had to rein in Wall Street; we had to resume more aggressive regulation of Wall Street.

>> Instead of establishing a 21st century regulatory framework, we simply dismantled the old one.

In doing so we encouraged... >> NARRATOR: In the audience, Wall Street's power brokers were paying close attention.

>> He was sitting in the heart of the world financial center talking about regulation before we started talking about regulation.

>> Our free market was never meant to be a free license to take whatever you can get, however you can get it.

>> I would say the reaction wasn't great from Wall Street.

But, you know, to the President's credit, that didn't stop him from laying out what he thought was going to be necessary.

>> Thank you.

Thank you.

>> NARRATOR: The campaign continued, but over the next few months the news didn't get any better.

>> Profits in the banking industry are plunging.

>> The jobless rate in America has now soared to 6.1%.

>> NARRATOR: The markets were on the edge.

>> The Dow tumbled 240 points while the NASDAQ sank 46.

>> NARRATOR: At the White House, President Bush decided Secretary Paulson would handle the crisis.

>> This is an extraordinary period for America's economy.

>> President Bush, who's in the final months of his presidency, was receptive to letting Paulson decide the best wa to fix the problem.

In effect, he said to Paulson, "I've got your back.

"I'm going to get you whatever you need.

But you're the front-- you're the frontline general here."

>> NARRATOR: Paulson hoped the failure of Bear Stearns was an isolated event.

Wall Street was now on notice, and other banks would have to take care of themselves.

>> He was relatively sanguine.

And he thought, "Well, this is a one off.

"They screwed up but, you know, others aren't going to be quite that bad."

>> It felt like this was a crisis but not an uncontrollable one.

This was something that could be stopped.

A finger in the dike would end up working fine.

>> NARRATOR: Paulson told President Bush what was needed now was to rebuild confidence in the economy.

Bush's speechwriter Matt Latimer helped craft the message.

>> The attitude was to emphasize how good the economy was, how things were improving.

We'd have different bullet points and things we'd emphasize in speeches.

And over time, some of the bullet points stopped being relevant, or they were actually bad signs, so we took them off the list.

So the list of good news kept dwindling down.

>> I believe market conditions will continue to improve.

I am confident, because our economy is resilient and deep and competitive.

And I want Americans to be confident as well.

>> NARRATOR: Both Paulson and Bernanke insisted all was well.

>> We will work our way through these financial storms.

We will work our way through this cyclical movement that we have.

And the economy will return to good growth.

>> NARRATOR: It became known as the summer of assurances.

>> When will the economy turn around?

I'm not an economist, but I do believe that we're growing.

And I can remember, you know, this press conference here where people yelling "recession this, recession that," as if you're economists.

And I'm an optimist, you know?

I believe there's a lot of positive things for our economy.

>> NARRATOR: But there were strong warnings of what was to come.

>> A bullet had been dodged with Bear, but I think the more analytical people on Wall Street recognized that there were still a lot of bullets coming.

The prognosis for the near future was that there were still huge problems.

>> NARRATOR: That summer, as the financial crisis became increasingly obvious, there was no decisive action from those in charge.

>> That's one of the most striking parts of the story, is that, first of all, how little the people who were in charge of our system knew and/or did in the wake of this oncoming crisis.

And secondly, once the evidence was clear that the system itself was shaky and unsound, how there wasn't definitive and strong action to try to curb what was becoming a disaster for the country.

>> NARRATOR: When asked why the government did not do more that summer, Assistant Treasury Secretary Michele Davis said she and Paulson believed the government was powerless to prevent the looming crisis.

>> The American people expect the federal government to have the authority to prevent a disaster when they can see it coming.

And we don't have that authority.

We also all knew it was June, July of an election year.

There was not much realistic chance of actually somehow enacting new authorities.

So all we could do was look at the authorities we had and try to figure out what we could use.

>> These are the people who we charge with the responsibilit of monitoring.

They're the ones who are supposed to keep out for systemic risk in our country.

That's their job every day.

Why didn't someone stand up and say, "Wait a minute, this is a lot bigger than Bear Stearns"?

>> NARRATOR: By the fall, in New York City, on Wall Street, there was a palpable sense of unease.

>> And the number of U.S. banks in danger of failing is rising rapidly.

>> NARRATOR: But Wall Street didn't know where or when the panic would strike next.

>> Fears of a global liquidity crisis have intensified today, dropping stock prices.

>> ...predict 100 could close by year's end.

>> NARRATOR: Then it hit.

In the crosshairs, the world's fourth largest investment bank: Lehman Brothers.

>> ...true in the case of Lehman Brothers, shares of which... >> Lehman is quaking.

They're having to bring in a quarter of a trillion dollars a day, that goes out the next morning, just to survive.

>> NARRATOR: Back when the mortgage business was becoming the biggest casino on Wall Street, Lehman was one of the highest rollers, betting hundreds of billions of dollars.

Just like Bear Stearns, Lehman's bets had gone bad, and all over Wall Street they knew it.

>> Its stock price dropped 45% Tuesday.

>> ...percent loss for the Lehman Brothers, and many, many questions, including... >> They have zero leverage.

They have to do something soon, it's obvious.

>> NARRATOR: Dick Fuld ran the company.

On Wall Street they called him "The Gorilla."

>> It's like you poured a bull into a suit.

He just... he just can't stop being Dick Fuld.

And the whole firm came to be stamped with that.

>> NARRATOR: Many believed Fuld's Lehman Brothers was too big to fail.

And Fuld seemed to think neither Geithner nor Paulson would ever let it go under.

>> Dick Fuld is still believing in the orthodoxy.

Even though Paulson is saying publicly, "You're on your own," he's like, "What, are you kidding?

"If there's trouble, the government's going to come "and take us.

"They are going to come and do what we need to do, "because the world can't live without Lehman Brothers "at the center of the financial system.

It'll be a complete nightmare."

>> NARRATOR: And Fuld believed he had a possible all in Geithner.

He was one of their own.

He'd brokered the Bear deal, and he was a member of a very exclusive club.

>> The board of the New York Fed is made up of many of the titans of finance.

That's really, in a way, the ultimate club on Wall Street.

They determine who the president of the New York Fed is.

It's really the ultimate insider's institution.

>> Dick Fuld is on the board.

Jamie Dimon is on the board.

Tim Geithner is a quasi-Wall Street CEO.

You know, he has oversight over them, in some respects.

He works with them in other respects.

>> NARRATOR: Now on phone calls with Hank Paulson and Ben Bernanke, Geithner argued they might have to follow the bailout playbook.

>> Geithner tells Paulson, "I believe we are going to have "to put government money in.

"And you'll not have credibility if you say we're not going to do it and we are."

So we know there is that tension.

>> So Hank Paulson's sitting there.

And it turns out that we're having the largest crisis Wall Street has seen since the Great Depression.

And he's at the center of it.

And at this point the question becomes, what does Hank Paulson do?

>> NARRATOR: Paulson was under immense political pressure.

>> You had a conservative secretary of the Treasur and a conservative administration.

There was a lot of right wing criticism over Bear Stearns.

I had the Republican members of the Committee of Financial Services wanting to tear into Paulson and Bernanke for what they did to Bear Stearns.

>> Do you really think we can believe exactly what you're saying, Secretary Paulson?

>> I was sort of defending them against their own Republican colleagues.

You had people saying, "Hey, look.

"This is the market.

"If you don't let some people go belly up, then you lose the discipline of the market."

>> NARRATOR: Indeed, moral hazard seemed to be driving Paulson's decision.

>> At this point, he makes a critical decision because of this issue of moral hazard: that Lehman will be allowed to fail.

>> It was a very high stakes game of signaling that he was playing.

He wanted to show these guys, you know, all his old buddies on Wall Street, that they were going to need to step up and do something themselves.

>> NARRATOR: Friday night, September 12, 2008, after the markets closed, the heads of Wall Street's largest firms were summoned to the Federal Reserve Bank in New York.

This weekend would be a critical moment in the story of the meltdown.

>> About 4:00 or 5:00, the various officials from the Federal Reserve started phoning the bank chiefs, cell phones started going off, and they said, "You need to be down here at 6:00.

We want to talk to you."

>> I got a phone call about 5:00 saying, "Be at the Fed at 6:00" that evening.

I was in Merrill Lynch's midtown facilities.

And I live in Westchester, so I was trying to get out of the city early, because the traffic is always bad on a Friday night.

I went by myself.

And, for the most part, the CEOs of the large investment banks and commercial banks were all there by themselves.

>> So everybody converged.

At that point, it was just the CEOs of the main houses and very senior advisors.

>> You had about a dozen different CEOs there, and you have in there Tim, from the Fed.

You have Henry Paulson as the Treasury secretary.

>> NARRATOR: Paulson delivered the message: Lehman was in a death spiral, and there would be no government bailout.

>> They'd said to us we collectively had to find a solution for this.

And this is the important part-- the government was not going to provide any form of assistance.

>> NARRATOR: It didn't take long for candidate Obama to also hear the news.

At the time, he had a secret inside source.

>> I was speaking to the senator all along.

When we started talking Friday night, he was asking the tough question.

>> NARRATOR: UBS Chairman Robert Wolf was stepping out of the meetings to keep Obama up to speed.

>> He's saying, "Barack, this is bad.

"Lehman could go down, but AIG is right behind it as well as Merrill."

He lays it out.

>> I was clear that, you know, from my perspective, I think immediately we will see the markets and funding start to dry up, you'll see a lack of liquidity, and we're going to be in a situation of the unknown.

>> NARRATOR: The other Wall Street banks said they were not about to rescue Lehman.

But Paulson was standing firm.

There would be no bailout.

Geithner and Bernanke would go along.

>> Geithner should have been spending the summer of 2008 figuring out what to do if there was a Lehman.

And they didn't do that.

This is a historic failure.

They should not have been in a BlackBerry crisis environment in the fall.

They're essentially unprepared.

>> NARRATOR: By Sunday evening, it was over at Lehman Brothers.

The lawyers spent the night preparing the bankruptcy papers.

On Monday morning, Tim Geithner began his day working the phones.

His logs from the day show eight calls with Secretary Paulson.

The early vibrations from Wall Street weren't good.

>> Lehman announcing early this morning it will file for bankruptcy, confirming all those reports... >> It's been particularly unsettling for Lehman Brothers employees, 25,000 worldwide.

>> NARRATOR: Paulson headed to the White House to reassure the markets.

>> Good afternoon, everyone.

And I hope you all had an enjoyable weekend.

Yeah, yeah.

>> The Fed and the Treasury thought that Lehman could go under without causing a major conflagration.

And that it would be a big event, but it wouldn't cause a cataclysm.

>> But the American people can remain confident in the soundness and the resilience of our financial system.

Thank you very much.

>> NARRATOR: Paulson had bet the markets would take care of themselves.

He would soon discover he was wrong.

>> The stock market dropped by hundreds of points right from the open.

>> Everything freezes.

And that's what causes the crisis.

And it really started because Lehman Brothers went into bankruptcy.

>> Lehman collapses and there are shockwaves through the world financial system, all around the world.

Huge panic.

>> No bank wants to lend to any other bank, because they're afraid that the other bank won't be able to pay them back.

>> Turmoil in markets around the globe.

>> Why didn't the government save Lehman the way that it stepped in... >> NARRATOR: At Paulson's office, the telephones lit up.

Dozens of calls from around the country.

>> Hank was very nervous.

He was getting calls from large manufacturing companies that were struggling because of the credit markets being frozen.

The longer it went on, the more trouble the economy was going to be in.

>> Devastated by losses at mortgage investments, the brokerage is selling itself to Bank of America.

>> It's a tough day, man.

It's a tough day when less is more.

>> Yeah.

>> The system stopped.

All forms of payment froze when we got to the depth of the panic.

Banks wouldn't lend money to each other.

The first money market mutual fund in the United States, quote, "broke the buck."

Commercial paper, one of the most basic instruments in finance, that market failed.

>> Investors were shaken by Lehman's bankruptcy... >> NARRATOR: Geithner's logs show 55 phone calls this day.

Many told him what he already knew-- the decision not to bail out Lehman was at the heart of the expanding crisis.

>> The policy makers have sent inconsistent signals.

They saved Bear.

They didn't save Lehman.

So the marketplace doesn't know what to expect.

And there is no doubt that in the wake of Lehman, there's real panic in the marketplace.

>> I would say if the markets picked up signals that Washington was confused, that they read the signals very accurately.

I mean, there's no other way to look at it.

The only way to look at it was that they were making emergency decisions without a model, without a process, weekend to weekend.

>> NARRATOR: Paulson had made the tough decision and was now responsible for the consequences.

>> I'm sure that Paulson is sitting there, and he doesn't strike me as the most reflective guy necessarily, but he must have been sitting there, everybody was sitting there, saying, "My God, we may be presiding over the second Great Depression."

This is the utter nightmare of an economic policy maker.

You're sitting there, and you may have just made the decision that destroyed the world.

Absolutely terrifying moment.

>> NARRATOR: Inside the campaign, Barack Obama had been hearing about the meltdown in real time, with constant updates from his economic team.

>> Senator Obama was engaged before Lehman, but once Lehman hit, you know, I think he was all over it, thinking in a proactive and prospective wa of how this was going to impact the economy.

>> NARRATOR: And the candidate had another inside source: Hank Paulson.

>> Secretary Paulson and the administration are calling then-candidate Obama, and they're saying, "Look, we think the world is close to coming to an end and we really need your support."

>> NARRATOR: Obama was being briefed about a brand new crisis.

AIG, the world's largest insurance company, was collapsing.

>> When Lehman goes bankrupt, all of a sudden AIG says, "We're sitting on this huge deficit.

"We just promised to pay all these people "millions and millions of dollars if Lehman went bankrupt, "assuming that Lehman could never possibly go bankrupt.

And now Lehman has gone bankrupt."

>> NARRATOR: Obama was told that the failure of AIG was far worse than Lehman, and threatened a full-scale, worldwide depression.

>> AIG has problems that make everybody else's problems look like child's play.

>> AIG does not have the money in the bank to support the commitments it made.

>> AIG plunging.

At one point they were down 70%.

>> They faced the hammer of a credit rating agency downgrade.

>> NARRATOR: Once again Geithner and Paulson were only now learning the details about the hidden business dealings of a major Wall Street institution.

>> Everyone was having to learn all about AIG, you know, in real time, learn about the institution at the same time that they're having to make decisions.

And not even having the time to figure out who the big counterparties are, because you're faced with... it's Monday night, and if you don't do something in 24 hours, you're going to see the consequences.

>> Here's this... you know, this mammoth institution that turns out to have an enormous hole in it.

And, again, policy makers just come to grips with the extent of the challenges and the problems days before its imminent collapse.

>> NARRATOR: Geithner realized that if AIG went down, the consequences would be even worse than Lehman.

He argued for another bailout.

>> Tim Geithner thought that if they did not do everything they had to do to save AIG, as distasteful as it was, that they would be jeopardizing the global economy.

>> He certainly talks now of having stared into the abyss after Lehman and concluded that that was not going to happen again on his watch.

>> NARRATOR: Paulson, reeling, changed course again.

He'd support Geithner's rescue of AIG.

>> They swallow hard, and they do what they have to do.

And so much for moral hazard, right?

So much for moral hazard, because you can't let AIG fail.

>> They had to throw their principles out the door and save the economy.

And whatever criticism there would be of government intervention was a small price to pa for the deluge that would have occurred if AIG had collapsed.

>> NARRATOR: It was at this moment that Geithner faced a fateful decision.

One question was especially sensitive: should he punish the banks that were parties in AIG's toxic deals by making them take a financial hit?

On Wall Street it's called a "haircut."

>> There's this very delicate moment at that precise time when Geithner and others have the power to say, "Okay, we're going to save AIG.

"But the cost to you, Goldman Sachs, or Citi, or anyone else, "is that you have to take a haircut.

"You have to take a discount on your insurance policy.

"You know that you're going to claim your insurance.

"But instead of claiming 100% of it, I want you to agree right now you're only going to claim 50% of it."

>> NARRATOR: But that's not what Geithner decided.

The U.S. government, he said, had no choice but to pay off the big banks' claims against AIG at full value.

>> Geithner's entire recovery plan depended on confidence.

And if you suddenly start going in and giving haircuts, people are going to get upset.

They're going to be worried.

Investors are going to pull back right at the time when they needed investors to have enough confidence in these banks to put their money back in.

>> NARRATOR: The decision meant billions of dollars would flow to Wall Street's largest banks.

>> If the government hadn't intervened, those counterparties would have taken huge losses, so there was some leverage there.

You could have at least told them, you know, "You're going to take ten percent."

That would have helped.

But there was just willingness to kind of throw lots of money at the problem.

And I don't...

I think we threw more money at the problem than we needed to.

Absolutely.

>> NARRATOR: Geithner's bailout put the government on the hook for more than $180 billion.

Goldman Sachs and the other banks would each receive billions.

>> Stocks plunged again.

In the end, the Dow plummeted 449 points.

>> NARRATOR: Geithner had orchestrated the AIG rescue in only a few days, but it did not stop the meltdown.

>> This is Def-Con 4, whatever.

This was the complete nightmare.

By Wednesday, you'd basically had a complete shutdown of the world capital market.

It's just... no, this is absolute terror.

>> NARRATOR: Ben Bernanke called Hank Paulson at Treasury.

>> Bernanke basically calls up Paulson and says, "There's no endgame in sight that looks good.

"Things only look like they're going to get worse.

"We have to do something more direct, more direct involvement of government in the banking sector."

>> NARRATOR: Bernanke wanted Paulson to help convince Congress to initiate a massive bailout of Wall Street.

>> Bernanke says to Paulson, first of all he says, "You have to go to Congress.

We can't do this anymore on a case-by-case basis."

At that point, Paulson bowed to the inevitable.

One thing Paulson said to me in an interview is, "When the situation changes, you have to be willing to change with the situation."

>> NARRATOR: On Capitol Hill, the Democratic Speaker of the House Nancy Pelosi knew nothing about Bernanke and Paulson's plan for a Wall Street bailout.

>> I called him to say, "Mr. Secretary, can you be "to my office tomorrow morning at 9:00 so that you can brief the House Democratic leadership?"

And he said, "Madam Speaker, tomorrow morning will be too late."

>> NARRATOR: Paulson told the Speaker that he and Bernanke needed to come to Capitol Hill that afternoon.

>> On Thursday, late afternoon, they go to Nancy Pelosi's office.

And there's a meeting of the senior legislators from both parties in both House and Senate.

>> It was obviously a big meeting.

I had no idea I was going to hear what I heard.

>> The Secretary of the Treasury Paulson and the Chairman of the Fed came in and kind of dropped a bomb on the meeting.

>> They said they needed the authority to use $700 billion to unstop the credit markets.

>> Sitting in that room with Hank Paulson saying to us, in very measured tones, no hyperbole, no excessive adjectives, that unless you act, the financial system of this country and the world will melt down in a matter of days.

>> They came in, described a financial meltdown of epic proportions.

And when that was finished, the Chairman of the Fed said, "If we do not act now, we will not have an economy by Monday."

>> There was literally a pause in that room where the oxygen left.

>> And they said to us they needed it by Monday.

We said, "Well, that's not reasonable."

>> Harry Reid, the Senate Democratic leader, said, "This is the U.S. Senate.

We can't move that fast."

>> Paulson felt that he needed to move swiftly, and almost the economic equivalent of Shock and Awe.

>> We just had what I believe was a very productive meeting, where we heard from... >> It's as close to a blank check as you can get without actually asking for a blank check.

>> NARRATOR: Paulson wanted the $700 billion authorized immediately.

>> And predictably, the reaction on Capitol Hill was toxic.

They were furious.

>> America, you should be outraged about what Washington is about to do.

>> It is an unprecedented and unaffordable and unacceptable expansion of federal power that our kids... >> NARRATOR: Conservative Republicans in the House were in full revolt.

>> But this is essentially Mr. Paulson's bill to help his friends, and I can't buy it.

>> Many of us felt like we were being asked to choose between the slippery slope to socialism and the next Great Depression.

Not the kind of decision that you want to make at the snap of a finger.

>> NARRATOR: The bill was stuck, the markets plunging.

Suddenly, presidential politics intervened.

>> America this week faces an historic crisis in our financial system.

Tomorrow morning, I'll suspend my campaign and return to Washington... >> Out of the complete blue, John McCain gives some speech saying he's suspending his campaign and he's coming to Washington and he's calling a summit meeting, and he was going to solve all these problems for us.

There was a very delicate negotiation going on, and he was just throwing himself into the middle of it for no apparent reason.

>> I'm calling on the president to convene a leadership meeting from both houses of Congress, including Senator Obama and myself.

It's time for both parties to come together to solve this problem.

>> He was sort of throwing a Hail Mary pass to say, "Well, let's just...

I'll suspend my campaign "and we'll all go back to the White House "and we'll figure out what to do about this terrible economic crisis."

>> The President has invited senators McCain and Obama to the White House on Thursday.

>> The financial crisis affects the political campaign, and the campaign in turn affects the crisis.

>> Can this meeting, kind of a summit today with the president and Barack Obama... >> NARRATOR: On September 25, a hastily called meeting at the White House.

Paulson arrived first.

Within 20 minutes, Barack Obama, John McCain and prominent members of the House and Senate.

>> We go into the White House.

There was a division with everybody on one side, House and Senate Democrats, Senate Republicans and Treasury.

>> We are in a serious economic crisis in the countr if we don't pass a piece of legislation.

>> They sit around the Cabinet Room table, and President Bush says, "If we don't get the money flowing, "if we don't get the credit flowing, this sucker could go down," meaning the economy as a whole.

And then he opens it up.

>> McCain walks into the meeting with, like, a cue card with a couple things scribbled on it.

Obama doesn't even wait for McCain to start.

He just moves right in.

>> Senator Obama has been talking to Paulson, has been talking to Warren Buffett and Paul Volker and Larry Summers, and you know, and a host of other economic advisors.

>> Obama is prepared, and he talks about what needs to happen, and we'll pull together, and he's been...

He doesn't want to take over in a country which is in depression, so he's extremely supportive of this whole emergency bailout thing.

>> Senator Obama said, "Well, I'd really like to hear "from Senator McCain, because he's the person who called for this meeting."

>> McCain is fumbling with his cue cards.

He doesn't even barely get started.

Obama kind of patronizes him, saying, "I think Senator McCain has something to say."

McCain just melts on the spot.

>> Obama took charge, had authority.

John McCain had no plan, no strategy.

I don't think he understood what was happening, or didn't have a plan for what he wanted to accomplish.

>> President Bush whispered to Nancy Pelosi, who was sitting next to him, when McCain was talking, he said, "You guys are going to miss me."

And she kind of laughed.

>> The meeting ends up breaking up into a cacophony of shouting and screaming back and forth.

And Bush stands up and says, "Well, I've clearly lost control of this meeting," and he walks out.

>> And another Republican at the table joked to the person sitting next to him, "After this, even we're going to vote for Obama."

That was the level of Obama's dominance in this meeting.

>> It becomes the turning point, because McCain started this.

He suspended his campaign.

Obama did not suspend his campaign.

McCain promised some sort of dramatic action.

He sent mixed signals, and did not seem to have the authorit that a Commander in Chief should have.

And I don't think he ever really quite recovered from that.

>> NARRATOR: It would take another week, but in the end, Congress finally passed Paulson's bill.

>> The yeas are 263, the nays are 171.

The motion is adopted.

( applause) >> NARRATOR: Paulson now had $700 billion known as TARP-- Troubled Asset Relief Program.

>> TARP, like the AIG bailout, is just a manifestation of the mad scramble that has to take place to try to contain the damage from years of neglect in Washington and recklessness on Wall Street.

I mean, the bill finally came due.

>> NARRATOR: And that October, Paulson decided to use the mone in a dramatic way.

Secretary of the Treasury Paulson, the apostle of the free market and believer in moral hazard, would now initiate the largest government intervention in Wall Street since the Great Depression.

>> He was put in the position of doing the last thing he wanted to do, which was to step in directly with government capital into the banking system.

For him this is a step, this is a true crossing of the Rubicon.

>> NARRATOR: On October 12, he acted.

>> I got a phone call on Sunday from Secretary Paulson.

And he basically said, "Ken, I need you to be in Washington Monday."

And he said, "I really can't tell you a lot about it."

>> He said, "Be at the Treasury at 3:00 tomorrow."

I said, "Well, what's the topic?"

"You'll find out when you get there."

I said, "Well, who's coming?"

"You'll find out when you get there.

See you at 3:00."

Click.

>> NARRATOR: Seven other heads of the nation's largest banks received a similar summons.

>> They turn up at 3:00, and they all file into the conference room, which is across the hall from Mr. Paulson's office.

>> NARRATOR: Paulson got right down to business.

>> Because it's Paulson, who's not a man who beats around the bush, it became clear relatively quickly what he was proposing.

>> He says, "I've got here documents that sa "that the U.S. government is going to make an injection of capital into each one of your companies."

>> NARRATOR: Paulson was about to hand out billions of dollars.

>> He turned it over to Geithner and he said, "Okay, here's how much you're going to get."

And he went around the room, and he came to me and said, "$25 b-b-b-billion."

And then the rest of them.

And I almost fell out of my chair.

>> They go through in a very, very rapid wa that each of us is going to take this taxpayer money, the TARP money.

>> And he basically says, "You can't leave this room until you agree to take this money."

>> We're all going to do it for the good of the country, for the good of the system.

And it's not really discretionary.

>> NARRATOR: It was unprecedented.

In return for billions of dollars, the government would take an ownership stake in the banks.

But even with the financial system in free fall, some bankers fought back.

>> It was a very contentious meeting, lots of questions, lots of doubts.

>> NARRATOR: Richard Kovacevich, chairman of Wells Fargo, led the charge.

>> Kovacevich stood up and said, "I don't want the money.

"I don't need the money.

"I don't want the money.

I want to have nothing to do with this."

>> I don't know how much further we went before I was interrupted by Hank, who said, "Your regulator is sitting right next to me.

"And if you don't take this money, on Monday morning you will be declared capital deficient."

I was stunned.

>> NARRATOR: Paulson gave each man a single piece of paper spelling out the conditions.

>> Before they had to leave town that night they were told, "Return this document with your signature on it."

And all nine of them did so.

>> NARRATOR: The terms were extremely generous.

>> They don't have to modify any mortgages.

They don't have to put limits on their own salaries or their own compensation or their own bonuses.

They don't have to do anything differentl than they were doing before.

They don't even have to agree to major regulatory changes.

Basically, they are sitting fat and pretty and happy.

>> NARRATOR: Treasury Secretary Paulson had just given $125 billion to the nation's richest banks.

And it was only the beginning.

>> The real story of this financial crisis is probabl not so much whether the bailout was the right thing to do or the wrong thing to do.

The real question is, how did it come to be that this nation found itself with two stark, painful choices, one of which was to wade in and commit trillions of dollars to save the financial system, where we still end up losing millions of jobs, millions of people lose their homes, trillions of dollars of wealth is wiped away, and the other choice is to face the risk of total collapse?

That's the real story.

How did policy makers, our government leaders, the financial sector, maneuver this country into that kind of corner?

>> "Money, Power and Wall Street" continues online with a dynamic oral history.

>> Rotting in the system... >> 20 original interviews, including seven to watch at length.

>> This was incredibly new stuff.

>> First-hand testimony from deep inside the crisis.

>> To the president's credit... >> Navigate by theme or person.

>> ...cool head in a crisis.

>> Explore the personal experiences that shape current events and make histor at pbs.org/frontline.

For more on this and otherFrontline programs, visit our website at pbs.org/frontline.

Frontline's "Money, Power and Wall Street" is available on DVD.

To order, visit shoppbs.org or call 1-800-PLAY-PBS.

Frontline is also available for download on iTunes.

>> Trusted, in depth, independent.

PBS.