From Dualist “No More Bailouts” to Nuanced Case-by-Case Frames

Specifications of Pragmatist Political Crisis Management: Nuanced depiction of events, no dichotomies

Specifications of Pragmatist Political Crisis Management: Usage of black-and-white dualisms

In the days before the Lehman decision was made, Treasury Secretary Paulson had widely communicated his position that there would be no public support for Lehman Brothers (Paulson 2010, 181). His press secretary intentionally leaked this position to reporters (Wessel 2009, 15; Paulson 2010, 186) leading to media reports that Paulson was “drawing a line in the sand” and excluding the possibility of another Bear Stearns solution (Zumbrun 2008; Wessel 2009, 15). As the New York Times reported on September 12:

“Treasury officials let it be known that, this time, they would not be putting any taxpayer money on the line. People with knowledge of the thinking of the Treasury secretary, Henry M. Paulson Jr., said Friday that he was opposed to providing taxpayer money to push through a deal that could save Lehman” (J. Anderson, Sorkin, and White 2008).

After Lehman had to file for bankruptcy Paulson was pushed by Jim Wilkinson, his chief of staff, to defend this position, with Wilkinson advising Paulson to emphasize that the Bush administration “is not in the business of bailouts” (Sorkin 2009, 234). During a press conference at the White House on September 15, Paulson reinforced his position, stating: “[…] I never once considered that it was appropriate to put taxpayer money on the line in resolving Lehman Brothers” (White House 2008b). When AIG was rescued with public money on the next day the government faced the problem of perceived inconsistency. As Blinder has highlighted: “The Lehman decision abruptly and surprisingly tore the perceived rulebook into pieces and tossed it out the window. Market participants were thus cut adrift, not longer knowing what game they were playing” (Blinder 2013, 128).

The way this perceived inconsistency was framed at first was by pointing to the differences of the Bear Stearns, Lehman Brothers and AIG cases. Bernanke has called the varying decisions “a different response to different circumstances” (Bernanke 2015, 292) and Paulson has framed the decision making process as a sequence of case-by-case decisions that took into account the diverse characteristics of each case: “[W]e have worked together on a case-by-case basis addressing problems at Fannie Mae and Freddie Mac, working with market participants to prepare for the failure of Lehman Brothers and lending to AIG so it can sell some of its assets in an orderly manner” (U.S. Congress 2008a, 27, also see 2008c, 37). And at the White House press conference Paulson remarked: “The situation in March and the situation and the facts around Bear Stearns were very, very different to the situation we are looking at here in September” (White House 2008b). The main difference between Bear Stearns and Lehman that was publicly identified by Bernanke and Paulson was that the markets were prepared for a Lehman fail (Financial Crisis Inquiry Commission 2011, 340). In his testimony before Congress shortly after the failing of Lehman Bernanke explained:

“In the case of Lehman Brothers, a major investment bank, the Federal Reserve and the Treasury declined to commit public funds to support the institution. The failure of Lehman posed risks, but the troubles at Lehman had been well known for some time and investors clearly recognized as evidenced for example by the high cost of insuring Lehman’s debt in the market for credit default swaps that the failure of the firm was a significant possibility. Thus, we judge that investors and counterparties had time to take precautionary measures” (U.S. Congress 2008b, 30).

Similar to the Bear Stearns case (see 5.1.3), Bernanke and Paulson also stressed the anti-dualist balance of two main concerns in their decisions: the systemic stability of the financial markets and

the problem of moral hazard. Especially for the AIG rescue they highlighted, as Bernanke put it, “that it is a very tough deal that we struck. We did that because we wanted to protect the taxpayer. At the same time, we were concerned about the implications for the markets of the failure of this large company” (U.S. Congress 2008b, 44). Treasury Secretary Paulson stressed the same point:

“Let me just say that, with regard to Freddie and Fannie and AIG, in case you or your constituents do not know, in those cases CEOs were replaced, the Government got warrants for 79.9 percent of the equity, golden parachutes were eliminated, strong action was taken” (U.S. Congress 2008b, 26, also see 2008a, 30).

From the perspective of our model of political crisis management, the findings are mixed for the (anti-)dualist dimension. On the one hand, Paulson's public absolute exclusion of any financial support for Lehman Brothers qualifies as dualist meaning making by evoking a strict black-and- white dualism, with Paulson communicating that he was “adamant that there will not be government money used in the resolution of the situation” (Lawder 2008). On the other hand, by emphasizing the case-by-case character of the decisions and its nuanced differences government officials also engaged in anti-dualist meaning making. At first, this anti-dualist emphasis of nuances and gray tones was also the key strategy to target the problem of perceived inconsistency. But as the next section will show, this framing strategy was later revised and replaced by a more principle- guided approach.