IHT - Business - Published: September 21, 2008

By Peter Baker, Stephen Labaton and Eric Lipton

The hard-charging Henry Paulson Jr., left, and the academic Ben Bernanke have gone from being the odd couple of Washington to the power couple as they move to stabilize Wall Street.

WASHINGTON: For the past year, as the U.S. economy lurched from crisis to crisis, the chairman of the Federal Reserve, Ben Bernanke, had been warning Henry Paulson Jr., the Treasury secretary, that the worsening situation might ultimately require a sweeping government intervention.

Bernanke, a longtime student of the Great Depression, was acutely aware of what could happen if Washington did not act decisively enough.

Finally, the moment that called for action arrived Wednesday. Less than 24 hours after the Fed bailed out American International Group, the giant insurer, it was clear that the financial turmoil gripping Wall Street was only growing worse.

The ad hoc approach that Bernanke and Paulson had been trying was no longer enough.

Talking into the speaker phone on a coffee table in his office, Bernanke told Paulson that it was time to stop treating the symptoms by bailing out distressed companies and instead start attacking the root problem with a comprehensive strategy.

Congress would have to sign off, and it would fall to Paulson, as the envoy of the executive branch, to take the lead.

Paulson understood. He had been reluctant to send lawmakers a plan that might not pass, worrying that a rejection would only further damage the markets. During two conference calls Wednesday night and Thursday morning, he agreed that they had no choice.

“It just happened dramatically,” Paulson said during an interview Friday. “There was only one way that we could reassure the markets and deal with a very significant and broad-based freezing of the credit market. There was no political calculus. It was overwhelmingly obvious.”

Just like that, Bernanke, the reserved former Ivy League professor, and Paulson, the hard-charging former Wall Street deal maker, started what would be the government’s largest economic rescue in modern times, one that rivals the Iraq war in cost and at the same time may redefine Washington’s role in the marketplace for years.

The plan to buy $700 billion in troubled assets with taxpayer’s money was shaped by two men who did not know each other until two years ago and did not travel in the same circles, but now find themselves brought together by history. If Bernanke is the intellectual force and Paulson the action man of this unlikely tandem, they have managed to create a nearly seamless partnership as they rush to stop the financial upheaval and keep the economy afloat.

Along the way, they have cast aside the administration’s long-held views about regulation and government involvement in private business, even reversing decisions over the space of 24 hours and justifying them as practical solutions to dire threats.

“There are no atheists in foxholes and no ideologues in financial crises,” Bernanke told officials last week, according to one participant.

The improvisational nature of their effort has turned President George W. Bush and congressional Democrats into virtual bystanders, sometimes uncertain about what comes next and left to wonder about the new power dynamics in the capital.

Seemingly every time lawmakers tried to get a handle on what was happening and what role they might play with elections around the corner, Paulson and Bernanke would show up again on Capitol Hill for another evening meeting with another surprise development.

The two men have been working early and working late, tracking Asian markets and fielding calls from their European counterparts, then reconnecting with each other by phone eight or nine times a day, talking so often that they speak in shorthand.

Paulson has powered through the long days with a steady infusion of Diet Coke. Asked twice to testify by the Senate last week, he begged off.

“He told me he had like four hours of sleep,” said Senator Christopher Dodd, Democrat of Connecticut and chairman of the Senate’s Banking Committee.

But there were limits to Dodd’s sympathy. “The public wants to know what’s going on,” he said he replied to Paulson.

Bernanke has made a point of leaving the office by midnight to at least get some rest, but friends say the toll on him is clear as well.

Alan Blinder, a longtime friend and former vice chairman of the Federal Reserve, recalled seeing Bernanke at a conference last month in Jackson Hole, Wyoming. “He looked like he had the weight of the world on his shoulders,” Blinder said. “He did not say it. But you could just see it.”

And that was before last week.

Bernanke took office in February 2006 and Paulson five months later, arriving from starkly different directions. Bernanke, 54, had navigated the academic politics of the Princeton University economics department, where he served as chairman, by developing a conciliator’s style.

source: IHT

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