Confidence Men: Wall Street, Washington, and the Education of a President

by Ron Suskind

  “Tops, we’d be producing just two million jobs, in all the areas: wind, solar, all renewables,” Goolsbee said. “And some of that will be offset by expected job losses in the oil sector, if we ever get that far.”

  It was a disappointing number. Others groped around for “sunrise” industries that might catch fire, with a targeted government subsidy lighting the match. It did not take long to settle on the health care sector, which was growing steadily as the population aged. That was where the jobs would be: nurse’s aides, companions to infirm seniors, hospital orderlies. The group bandied about ideas for how to channel job-seeking men into this growth industry. A need in one area filling a need in another. Interlocking problems, interlocking solutions. The Holy Grail of systemic change.

  But Obama shook his head.

  “Look, these are guys,” he said. “A lot of them see health care, being nurse’s aides, as women’s work. They need to do something that fits with how they define themselves as men.”

  For a politician, Obama laid claim to a heavy dose of the writer’s sensibility: an inclination to look, deeply and unsentimentally, at the inner workings of the human heart. As the campaign kicked up, this side didn’t appear very much, or certainly not as often as it did a decade before, when he finished writing Dreams from My Father, a book in which he deconstructs himself, piece by piece, and then rebuilds the corpus to display an extraordinary map of identity—with its many conflicts and comforts—in the modern world.

  This writerly instinct still popped up in times of need, and with it, a sort of empathetic acuity.

  As the room chewed over the non-PC phrase “women’s work,” trying to square the senator’s point with their analytical models, Krueger—who was chief economist at the Department of Labor in the mid-1990s at the tender age of thirty-four—sat there silently, thinking that in all his years of studying men and muscle, he had never used that term. But Obama was right. Krueger wondered how his latest research on happiness and well-being might take into account what Obama had put his finger on: that work is identity, that men like to build, to have something to show for their sweat and toil.

  “Infrastructure,” he blurted out. “Rebuilding infrastructure.”

  Obama nodded and smiled, seeing it instantly. “Now we’re talking. . . . Okay, let’s think about how that would work as a real centerpiece.”

  No longer sitting back, the senator proceeded to guide a discussion on how the nation’s decaying infrastructure was the Achilles’ heel of the U.S. economy; how the electrical grids people were building in Hong Kong and Mumbai were superior to ours; and how the states were strapped for cash, with tight budgets and statutory spending limits, leaving only the federal government to take up the cause. “Don’t even get me started about potholed highways and collapsing bridges,” Obama said. They talked logistics and scale: how to fund it, how to make it a sweeping national effort.

  And there it was: the mind of a man who hoped to be president, showing how it bent toward integration; coolly fitting disparate, competing analyses into a coherent whole and then seasoning this with a dollop of trenchant human insight. And just like that, a policy to repair the nation’s infrastructure was born. The federal government, in partnership with the private sector, would call upon the underemployed men of America to rebuild the country, and in doing so restore their pride.

  That such sweeping public works take time did not seem to be a disqualifier. Obama, Krueger, and the others believed they had what they needed to design and execute a well-considered plan to address the frailties of the U.S. economy and its workforce by building what the country desperately needed.

  Systemic problem, an integrated solution. This sort of thing got the senator fired up. And now he was ready to go.

  “Gotta preside over the Senate in fifteen minutes,” Obama said, spirits visibly lifted. He grabbed his jacket and glided to the door. “Good meeting. Real good.”

  Three hundred miles north, at the Stamford, Connecticut, headquarters of UBS, Robert Wolf looked through a glass partition from his office, which hung like an emperor’s balcony above the largest trading floor in the world. Below was a carpeted coliseum—a pit, two football fields long, of financial combat. The four-o’clock bell had just rung, ending market activity for the day and leaving an army of traders and assorted assistants to mill about, filing paperwork and straightening up.

  Wolf loved this moment: the end of a trading day. Though now chairman and chief operating officer of UBS Americas, the U.S. operation of the Swiss financial giant, Wolf was still a trader at heart. He missed the trading floor, its staccato beat and mathematical finality, and he missed this moment, when the day’s scorecards were tallied.

  Back in 1984, Wolf got his start at the Salomon Brothers trading desk right out of the University of Pennsylvania, where he played fullback. Work on the floor had felt like another contact sport. Trading stocks and bonds, Wolf discovered, was still just a game of inches—going head-to-head with someone on the other side of a trade. He made money fast, a bit quicker off the mark than others and able to match hustle with top-drawer math skills. When huge sums started flowing through the market in the mid-’80s, Wolf and his colleagues made one hell of a haul. But it was one hell of a haul by that era’s standards, certainly not enough for the mad men who had taken over trading operations at UBS.

  Or so Wolf now thought, as he watched the traders steer through the sprawl of cubicles below him. Had people just gotten so greedy, so lightheaded from excess, that they had started calling new plays from the huddle?

  Sure, he could think like a trader, but he was now a boss, a big one, above it all, and he needed to think well beyond each trading day, or even each quarterly report. Something had gone terribly wrong and, weeks before, in mid-July, he began digging through UBS’s books, looking for clues. He found that the company’s overall leverage ran at nearly sixty times capital. That meant for every dollar in core capital, UBS had borrowed almost $60 to bet with, and a huge amount of this had gone into the era’s risky new financial confections, especially those exotic securities attached to the mortgage market. Wolf knew that leverage was Wall Street’s dangerous addiction: it made the highs higher and the lows deadly. On the right side of a trade, leverage greatly multiplied your winnings. But as July progressed, Wolf began to wonder if he wasn’t gazing at a new definition of the wrong side.

  Although the housing market had begun slipping into distress by mid-2006—with rising foreclosures forcing the largest mortgage originator, Countrywide Financial, to spiral out of control in 2007—UBS traders had not been deterred from buying nearly $3 billion in mortgage-backed securities from JPMorgan in just the past month. Those securities were largely a particular kind of derivative—the term for anything that derives its value from an underlying asset—called collateralized debt obligations, or CDOs. Their value was based on pools of bundled mortgages. These mortgages looked, in theory, like reasonable investments. Historically, the risk in the mortgage market tended to be driven by local or regional issues: a factory closing could dramatically raise mortgage defaults in a town, just as the downturn of some large industry could bump up foreclosures in a region. By bundling together thousands of mortgages from across the country, that risk could be diversified. They were also sliced into tranches, a tower of different levels of anticipated risk, based on measures such as loan-to-value ratios or the credit rating of the borrower. What was the chance that mortgages in every part of America—small mortgages and jumbos; prime borrowers, with fine credit, and so-called subprimers—would all go south at the same time?

  “Only a remote possibility” was the official view inside most of the large financial firms, which tended to hold CDOs at the top of the tower that the rating agencies stamped AAA. Beyond that, their confidence in being able to handle such risk with complex hedging strategies—the algorithmic articles of faith Wall Street had been resting on for years—was still intact. Home values may drop, along with the CDOs resting on them, but at some
price, buyer and seller would meet. All the major trading positions, at all the big firms, were hedged to handle every step down that ladder.

  But something, Wolf felt, was amiss, something that stretched beyond trading strategies being deployed inside of each of the Wall Street firms. After he dropped his son off at summer camp in late July, as he watched the highway’s dotted line pass under his Mercedes, his mind raced. What if everyone were wrong, in the same way, at the same time? As soon as he got home he wrote a confidential note to the other top executives at UBS:

  On my 7 hour drive back from Maine, I had a lot of time to think about the current situation in the markets. I think that there is more than an outside chance of a fed ease—yes—a fed ease—(which few are calling for) to resolve the current problems. If price discovery continues to be unattainable in both the subprime, structured CDO and lower quality markets, and if bridges become non-liquefiable, then what we have is a “financing” dilemma. With balance sheets in the dealer communities very heavy and accurate pricing a non-starter, the Fed may need to ease to prevent an asset valuation free fall and bring liquidity into the marketplace. Just a different perspective than what many market pros are forecasting.

  Different indeed. Not that there wasn’t fear building on Wall Street. But in five terse sentences, Wolf had called it: a panic was ahead. A “financing dilemma” is investment-speak for bankruptcy and ruin. What kills investment firms, especially those living on borrowed money, is funding long-term assets, such as mortgages, with short-term liabilities, or loans, and then not being able to replace, or “roll over,” those short-term debts. Wall Street is the engine of this long-versus-short financing, but, since the 1970s, much of America had followed their lead. The company that financed its operations out of revenues—that old virtue of spending what you’ve got—was a rarity, especially among the large corporations. They all lived on short-term paper of every variety and flavor imaginable—paper that relied on the broad confidence in Wall Street and the nation’s largest banks, which had become increasingly interconnected and indistinguishable. Wolf saw what others were just waking up to: that this banking/finance sector had become the land of the dead—or undead—with firms needing short-term infusions of capital to survive each night’s rollover of debt, while not being able to stand the sunlight of “price discovery” of the diminished value of their long-term assets, such as CDOs. Once this don’t ask, don’t tell situation became clear to all, fear would reign, credit would start to freeze, and the Fed would have to step in by lowering interest rates to infuse new blood into the system as a whole.

  Lower interest rates prompt everyone, everywhere, to roll over debts of all kinds by replacing whatever is on their balance sheet with its equivalent at a lower rate. Making this the central tool of national policy was an innovation of previous Fed chairman Alan Greenspan, who followed every financial tremor—the 1987 market crash, the 1991 savings-and-loan crisis, the meltdown of Long-Term Capital Management in 1998, the bursting of the technology stock bubble in 2000—with a cut in rates. That’s what Ben Bernanke would have to do, Wolf wrote his colleagues, to boost the whole system. Or, more specifically, to keep large banks and financial houses from having to acknowledge that the declining value of hundreds of billions or more in unsellable assets meant they were already insolvent. Who would loan money to a dead company? Mostly unwitting pedestrians by way of their 401(k)s, in investment funds, pension funds, and retirement accounts of all stripes, or in the new infusions of debt they’d take on, at that slightly lower rate, through their credit cards and second mortgages—debts that, more and more, would never be paid back, because the point, for so many Americans, had not been their ability to pay debts, but just to carry them, for one more day. They’d been flocking to Wall Street’s debt rollover party for years—a rate cut means a whole new set of invitations—though few would realize it had become a vampires’ ball. They’d be devoured so Wall Street could live another day.

  In the long run, though, there is a problem with this model. The country—even the world—is only so big. The amount of money saved is finite. At some point, even vampires starve. They simply run out of fresh blood.

  That night, just a few hours after his economic briefing and turn presiding over the U.S. Senate, Barack Obama stood in front of the television, a man transfixed.

  It was like an omen, though he didn’t believe in such things. That same afternoon, in one of the most substantive economic policy meetings of his candidacy, he had come up with an anchor for his domestic policy, a sweeping proposal to rebuild the country’s crumbling infrastructure with the labor of a group whose fortunes were uncertain: America’s working-class men. It was government’s responsibility to ensure that the physical foundations of the country, on which its economy and way of life rested, were sound. The bridges and dams, the electrical grid, the highways—the condition and upkeep of these things could not be left to the private sector and profit motive alone. They never had been. If government did not step up soon, disaster would surely ensue.

  Now, flashing across the screen, one such disaster unfolded before Obama’s very eyes. During the evening rush hour, an eight-lane bridge across the Mississippi River in Minneapolis had collapsed, throwing some rush-hour drivers into the river 115 feet below and stranding others, by the hundreds, on the warped spans of wobbling roadway. Traffic cameras had recorded the moment of collapse, and now a national drama played out on television as emergency workers, guided by a post-9/11 response plan—in the event of a terrorist attack on the bridge—attempted to pull survivors from the water and rescue the stranded drivers.

  A yellow school bus, with sixty kids on a field trip to a water park, dangled its wheels over a severed crag of roadway. A teacher kicked open the back door and carried the kids, one by one, to safety. In some ways it was what all presidents must stand ready to do: carry those in need to safety.

  Reggie Love, Obama’s body man, ducked into the room. “Time for that call, Senator.”

  Obama picked up the phone.

  “Wolf, you there doing what a husband’s supposed to do?”

  Though they had known each other for only ten months, the two men had taken a shine to one another. They had met the past December, when Obama came to Manhattan to deliver a dinnertime speech on child poverty. That afternoon he’d stopped by the Midtown office of aging hedge fund guru and Democratic stalwart George Soros, who had assembled a dozen of New York’s top Democratic contributors. Obama had decided to run for the presidency only days before and had yet to announce. These money men—and they virtually were all men—were officially uncommitted, though most were expected to land in Hillary’s camp. Obama held forth in front of the group, talking about his vision for the country. Wolf was impressed and handed the senator his business card. Obama then surprised Wolf, calling him the next day. He said they should get together after the holidays, and they did. For two hours, over dinner in D.C., they talked about everything—Wolf’s life story, Obama’s hopes and goals—and found they were a good match: Obama, cerebral and cool, yet very much a guy’s guy; Wolf, a shoe salesman’s kid with a footballer’s build, Mensa-level math skills, and a big laugh. Wolf flew back to New York and went wild—called in every chit, grabbed Wall Street colleagues by the shirtsleeves, and, along with dialing for dollars, held two fund-raisers for Obama in New York, which netted the senator $500,000 apiece.

  Obama may have been 20 points behind, but largely because of Wolf and his merry band—many of them the smart ethnic kids whose trading culture had come to dominate Wall Street—he was beating Hillary in the so-called money primary.

  So the candidate was happy on this Wednesday night to call Wolf, who passed his cell phone across the linen tablecloth on the outdoor terrace at L’Escale, a pricey French restaurant in Greenwich, Connecticut.

  “Happy Birthday, Carol,” Obama purred to Wolf’s wife. “If he’s not treating you like a queen, you call me. I’ll straighten him out.”

  “No, Barack,” s
he said, clearly elated. “Tonight he can do no wrong.”

  The sun danced across the gentle waves of Long Island Sound three days later, on a warm Saturday morning, August 4, as the Wolfs stepped aboard a vessel owned by Sal Naro, Robert Wolf’s buddy and former employee.

  Naro had left UBS in 2005 to start a hedge fund, Sailfish, and had done well enough that the Wolfs and another couple—David Shulman, head of municipal bond trading at UBS, and his wife—were now making their way across the wide deck of a 110-foot Lazzara, a European-style yacht with four staterooms, a library, and an onboard water desalinator. It was supposed to be a two-night cruise, three days of floating bliss, but Wolf could tell right away that something was wrong.

  “Jesus, are you okay, Sal?” Wolf asked, grabbing Naro, also a former college football player, by his thick biceps. “You look like someone just killed your best friend.”

  “The world’s coming to an end, Wolfie,” Naro said, putting down his cell phone. “The nightmare is here.”

  Naro laid it out for Wolf, talking rapidly, trader to trader, terror in his voice. He had been on the phone nonstop for the past week and a half, since mid-July, when the French global insurance group AXA quietly released a notice that it was changing its policy on redemptions for its money market funds. Over the past forty years, money market funds had become the place where individuals and institutions deposited their excess cash, as they once had in banks. Searching for a solid, steady yield like everyone else, these funds naturally invested in CDOs, stamped with their triple-A ratings. AXA recognized that the expected drop in the value of their CDOs would mean enough decline in overall value that their money market funds would soon be worth less than the original contributions. AXA wanted to avoid a panic, and so it proceeded coyly, telling clients they could sell shares in AXA’s bond fund, which the company would buy back and hold until the price returned to an acceptable level. Keen observers such as Naro, who had spent twenty years in fixed income, saw clearly that this was not an isolated incident. AXA had invested in the same way as everyone else. It was just the first to own up to it. Others would soon follow suit and then . . . panic.