getting bailed out? >> there was almost two ces of obama. publicly he wanted to tell you that these were the fat cat bankers. privately he wanted to get them onboard. >> a global crisis... >> the bankers were fanning out across europe. investment banks such as goldman sachs were eager to lend to risky places such as greece. >> even convents are being sold derivatives. >> and a culture of greed. >> it's actually known as "casino banking." >> one loophole after another. >> they came down here like sharks to raw meat in the water. >> have i got a deal for you. >> "money, power and wall street" part two, tonight on frontline. >> frontline is made possible by contributions to your pbs station from viewers like you. thank you. and by the corporation for public broadcasting. major funding is provided by the john d. and catherine t. macarthur foundation, committed to building a more just, verdant, and peaceful world. and by reva and david logan, committed to investigative journalism as the guardian of the public interest. additional funding is provided by the park foundation, dedicated to heightening public awareness of critical issues. by tfrontline journalism fund, supporting investigative reporting and enterprise journalism. and the best exotic marigold hotel, in theaters this summer. >> so much for that election day euphoria... >> the economy has now lost 650,000 jobs just in the past three months... >> narrator: the inauguration was 76 days away. >> this was the most eventful and consequential presidential transition in american history. >> all eyes are now on barack obama to turn it around... >> narrator: in chicago, president-elect barack obama was watching the economy continue to collapse. >> this is like watching a train wreck in slow motion... >> the s&p 500 in an 11-year low... >> he had to start thinking about this the day after he was elected. >> and the losses just snowballed... >> narrator: at the start of his presidential quest, obama had chosen a dream team of reform-minded economists. >> and that team, for the most part, gathers around barack obama as he rises. and who have you got? you've got robert reich, the liberal labor secretary under bill clinton. you've got joe stiglitz, who, of course, called the crisis earlier than anyone. and at the center of it all, you've got all 6'8" of him, paul volcker. >> narrator: they had been advising him for months-- warning, really. >> obama at that moment gets a real glimpse of the future: disaster is coming. >> narrator: and in those first weeks after the election, his entire economic team was stunned by the bad news. >> we were all worried about what we were seeing. we knew that the credit system was pretty quickly headed towards something that looked a lot like seizure. >> narrator: unemployment was nearly 7% and climbing, the stock market was down more than 6,000 points. >> there was a growing sense of calamity. this could be the most climactic economic cris in all of american history, that we were that close to a complete meltdown. >> at the end of the conversation, there's basically no bright spots. and i say to the then-president- elect, "wow, that had to have been the worst economic briefing a new president's had in, you know, almost a century." and the president says, "that's not even my worst briefing this week." >> citigroup, which crumbled 26% today, was one of the biggest... >> narrator: just then, overleveraged and filled with toxic mortga assets, the megabank citigroup was failing. >> every option from a merger to a possible fail is on the table. citigroup stock fell 23%. >> it's a very dynamic situation, because the economy is melting. the bush administration is left or rapidly leaving the stage-- "this is beyond our kin to manage. we're going to be out of here in january." meanwhile, there's no one really to manage it. >> the federal government plans to pump billions of dollars into citigroup. >> the government rescued citigroup from the brink. >> narrator: george w. bush's treasury secretary henry paulson had already spent $125 billion bailing out wall street's largest banks. and now during the transition he would spend another $20 billion to keep superbank citigroup afloat. but it wouldn't stem the unfolding disaster. >> that period, when we go back and look at the history books, i think is going to be one of those periods where you look and go, "what were they doing? why did nothing happen? why was there no political will to do anything?" and the reason was very simple: there was nobody in charge. there really was nobody in charge. >> profits in the banking industry are plunging. >> there's news today of a federal bailout for a wall street investment firm... >> narrator: the economic meltdown had begun eight months before, in the middle of the election. >> are you fired up? are you ready to go? fired up! >> narrator: candidate barack obama had made the economy a key issue. >> 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 early in the campaign, he had traveled to new york to push for wall street to change its ways. >> i actually went down to the cooper union speech with him in his car. >> senator barack obama... (applause) >> 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 country 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. >> a 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 to the president's credit, that didn't stop him from laying out what he thought was going to be necessary. (applause) >> thank you. thank you. thank you. >> narrator: but now, during the transition in chicago, president-elect obama faced a crucial decision about the economy: what team would he put together to carry out his agenda? >> the rumors were swirling. "so, who's going to be secretary of the treasury? who's going to be the head of the nec? who's going to be what?" >> narrator: the decision would be an early signal. was the new president going to ally himself with those who wanted to reform wall street, or those who wanted to rebuild it? >> there's people on the left who are saying that obama should appoint someone who represents a tough-on-wall-street regulator, someone who's going to take wall street to the wood house on behalf of the treasury. >> paul volcker is extremely close to obama... >> narrator: their first choice was paul volcker. >> a kind of adviser in chief during this financial... >> narrator: feared on wall street, he was the reformers' guru, a former federal reserve chairman, a pro-regulation advocate, and an outspoken critic of the wall street banks. >> volcker was the main force for a historic change that has brought inflation rates down for 30 years now, and interest rates have been declining for 30 years. >> narrator: picking volcker would deliver on his campaign promises to reform the banks and get tough on wall street. but inside his transition team, there was also a more moderate faction-- veterans of the clinton administration. they had their own candidate. >> you could not afford to have anybody but the best, most knowledgeable person on the job with their hand on the wheel. tim geithner was the perfect person. >> narrator: tim geithner, the president of the new york federal reserve. during the financial crisis, he had led the bush administration's response on wall street. >> he's 47 years old, he looks like he's about 32. >> extremely smart, extremely aware of the stuff, very discrete, controlled. >> narrator: geithner's career took off in the clinton administration, a protégé of treasury secretary robert rubin. >> i knew he was a protégé of bob rubin. and i knew that he was, therefore, of and by and from wall street. he sees the economy as a practical matter, the way wall street sees the economy. and, therefore, tim geithner is going to reflect what wall street ultimately wants. >> narrator: and during the meltdown, he had engineered the bailout of bear stearns, had gone along with letting lehman go bankrupt. but then pushed for a more than $180 billion bailout of the insurance giant aig. >> 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: for obama, adding geithner, a key player during the bush administration, would be an unusual choice. but the two men had formed a personal connection the first time they met, just before the election. >> the meeting was secret because they didn't want things coming out about who might or might not be in the obama cabinet. >> people tell me it was like-- men tell me, who know about this-- "it was love at first sight." and i got this from both sides. people close to geithner said he was "smitten." >> narrator: they were almost exactly the same age, born just two weeks apart. >> geithner is an obama kind of guy. he's a no-drama guy himself. i mean, their personalities sort of meshed, to some extent. >> they had an almost immediate mind meld. they'd both grown up partly abroad. they both had a parent who worked for the ford foundation. and they had a similar worldview. >> narrator: according to geithner's official calendar, the meeting lasted only one hour. by now the financial crisis that started on wall street was going global. >> on the trading floors, turmoil. >> the global financial meltdown comes to iceland. >> today's was the nightmare scenario. >> we had a contagion that operated almost around the globe. the panic from lehman spreads to aig, spreads to morgan stanley, spreads to goldman sachs. suddenly ireland is having problems. suddenly the bank of england is-is bailing out banks. suddenly iceland is bankrupt. the govern... the state of iceland, it's bankrupt. an entire country! suddenly china has gone from being one of the world's highest growth countries to almost a no-growth country in the flash of an eye. that's contagion. >> wall street will once again be keeping a close eye on the incoming administration... >> narrator: back in chicago, obama had news he hoped would reassure the markets. >> timothy geithner... >> narrator: tim geithner would be his treasury secretary. >> this is the guy who's going to be the point man in leading us out of the worst economic period since the great depression. >> narrator: then, another insider-- former clinton treasury secretary larry summers-- would be the president's chief economic adviser. >> old hands from the clinton era. >> obama called him one of the great economic minds of our time. >> obama was always looking for establishment guys. he was looking for establishment input, even sort of establishment affirmation. he definitely was a guy for whom credibility with the establishment was something that he cared about. >> narrator: summers had been president of harvard and had made millions working at a hedge fund. >> well, he was told that appointing this team would present a problem. people will see it as reflecting the interests of the banks. "you're bringing in the same plumber that caused the problem. why do we believe that they're going to be fixing it, at least fixing it in the interest of the american people and not the interests of the bank?" >> narrator: but to obama's team, the choice signaled they intended to hit the ground running. >> i think the president's view was, "i got to have some people who can come in and are going to know what they're doing right away because it's such a dangerous moment." >> narrator: two-and-half months after he was elected... >> it's the inauguration day of the nation's first african american president. >> hundreds of thousands of people already... >> narrator: the president and his economic team arrived at the white house. >> i, barack hussein obama, do solemnly swear... >> narrator: now the financial crisis was theirs. >> it's like you're moving into a new house and the roof's on fire and the basement is flooded and there's gas in the kitchen, there's a dog in the back yard. the question is, how do you make this house livable? >> narrator: next door at the treasury department, tim geithner was also just moving in. he hadn't yet hired a staff. >> when you go to the website for treasury and you try and figure out who holds what position, and it says, "vacant, vacant, vacant, vacant, vacant." they're still learning, like, which keys go to which locks and how to get around the offices. and they're being asked to provide the plan that will save the world. >> narrator: one of geithner's top deputies, lee sachs, was there. >> our piece of it was, how do you stabilize the financial system? it was all about making sure that we stopped things from going off a cliff. you need a functioning banking system to have a functioning economy, and so we were charged with coming up with the plans to deal with that problem. >> narrator: just a few months before, geithner had been in and out of these rooms when the bush administration was spending billions of dollars to save the banks. but it hadn't been enough and the obama white house was under pressure to do something immediately. >> the white house tells geithner, "look, we've got to tell the american people something, we've got to tell the financial markets something. you know, ready or not, you guys are going to have to take this show public." >> i know how much pressure the president was feeling to produce, to show action, to do as much as possible to get out there with some appreciation of the magnitude of the problem and some sense of-of direction. >> narrator: on february 9, the president tried to do just that. he promised geithnerould deliver a plan to rescue the financial system. >> my secretary of the treasury, tim geithner, working with larry summers, my national economic adviser, and others, are coming up with the best possible plan... >> president obama set a high level of expectations. the impression from watching that press conference was, "tomorrow, secretary of treasury tim geithner is going to tell us what the plan is to save the world." >> and so, tomorrow my treasury secretary, tim geithner, will be announcing some very clear and specific plans for how we are going to start loosening up credit once again. >> the white house announces that tim geithner's got the plan to fix the banks, and he's going to present it. >> i'm trying to avoid preempting my secretary of the treasury. i want all of you to show up at his press conference as well. he's going to be terrific. >> the president said, "tim geithner is going to come with a plan and that plan is going to contain the magic bullet." >> narrator: but inside treasury, geithner wasn't ready. his speech was still not finished. and larry summers, the president's chief economic adviser, was not satisfied. >> the moment of reckoning is coming, and they're sending copies to larry summers. and summers writes back, "well, this doesn't sound like language a treasury secretary would use. you know, it sounds, you know, it sounds a little amateurish. it doesn't quite have the gravitas. you know, i don't think this is going to inspire confidence when you deliver." so they-they get very nervous and they tear that draft up and they're frantically reworking it. secretary geithner's time was up. >> you have everything set up-- a vip audience, cameras, all the press. markets are expecting something big, and they're expecting details. so the secretary walks out and frankly looked nervous. and he comes to the podium and there are two teleprompters there. >> thanks to all of you for coming here today. >> he starts his speech, but he's just not good athis yet. and so his head's turning from one teleprompter to the next, and he gave the whole speech going like this. >> our plan will help restart the flow of credit. it will help clean up and strengthen our banks. >> at that point, geithner had never given a national press conference. this was the country's first view of this guy who was, you know, put in place to rescue the country from this crisis. >> geithner was very inexperienced before, you know, the public eye. before he became treasury secretary, had never once appeared on television. >> geithner looked like he was about 12 years old. he is not a good public speaker, and he just seemed like he wasn't ready for prime time. >> first, we're going to require... >> narrator: geithner's plan centered on what he called a stress test... >> ...comprehensive stress test. this borrows the medical term. we want their balance sheets cleaner and stronger, and we are going to help this process by providing a new program of capital support for those institutions that need it. >> narrator: under the stress test, the government would examine the health of the country's biggest banks, and if necessary bail out those that were in the most trouble. >> they're going to go through and get some hard data, make as much of it public as possible and it'll be a confidence- building exercise for the banks. >> narrator: to many watching, however, geithner's plan seemed inadequate. >> it's a pretty bad flop. every cable network is showing the dow just collapsing hundreds of points as he's speaking. >> thank you very ch. thank you for coming. (applause) >> he gives his speech, he turns and walks away. and you could tell, even the vips, ben bernanke and everyone else are, "okay, well, i guess we leave now." there was a little bit of clapping, and it's over. >> the market responds by dropping almost 400 points the day he announces it. over 4% it drops that day. >> this is the guy who's going to be our secretary of the treasury... >> it did not go as well as anyone had hoped... >> narrator: in the wake of geithner's speech, the financial markets were near a ten-year low and still falling. >> this guy brings no credibility. >> maybe he doesn't understand it well enough to explain it to the rest of us. >> the markets reacted in a way that none of us would have hoped. expectations got way out of control. we shouldn't have let that happen, frankly. >> narrator: they'd been in office three weeks. already obama was being pressured to replace his young secretary of the treasury. >> there was instantly chatter in washington, "how long would he last? is he going to be the first one out the door? is obama going to have to find somebody else?" >> people start saying that this guy is in over his head and is just not the right guy for the job. >> everybody's calling for blood, right? they want this sacrificial lamb, and it's going to be geithner. >> narrator: but in the oval office, geithner mounted a spirited defense. he stood by his strategy for stress tests. >> the guy people describe is a different g