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

by Ron Suskind

  The YouTube video of the speech soon replaced Wright’s on the media loop, closing the issue. It was, however, a moment of growth for the emerging candidate. Though, later, many would claim credit for approving the race speech, all Obama’s top aides advised against his giving it. They said either don’t do it now, or don’t do it at all. Obama shucked them off, all of them. He knew what he could do from a dais. He told them he’d need a weekend to write it; their job was to prepare the terrain for him to deliver it.

  In the yin of crisis, he seemed to spot the yang of opportunity.

  Which was what Obama was hoping to do today, a cool early-spring day in Manhattan, as he raced toward Cooper Union, a major economic speech in hand and Robert Wolf at his side. The intervening eight months since Wolf’s early warning had played out in ways neither man could have imagined. By this time, late March 2008, everyone was eager to get close to Obama. But Wolf had been there, a true believer, before the senator won the nation’s popularity contest. That counted for a lot. The two had developed an easy rapport in the meantime and discussed loan securitization with the same chummy informality they enjoyed when talking about the Bulls and Knicks.

  As an adviser, Wolf had been quietly upping his game, passing along to Obama the analyses of UBS’s economists and staying up nights to do his own research, digging beneath the era’s accepted wisdom. In another memo to his fellow bosses at UBS, this one in January, Wolf predicted that the financial markets would soon collapse, causing a severe recession with at least two quarters of starkly negative growth. He had a bleaker view than most, both at UBS and inside Team Obama, but the presidential candidate listened to him attentively as he ran through his analysis.

  “Barack,” Wolf now quipped, “you’re doing pretty much the same speech you did in the fall—when no one gave a shit.”

  “No doubt,” Obama agreed. “But a lot has changed since then.”

  No doubt.

  Just two weeks before, on March 16, JPMorgan agreed to buy Bear Stearns, which was teetering on the brink of collapse, for a measly $2 a share. Sweetening the deal was the Fed, which guaranteed to fund up to $30 billion of Bear Stearns’ least liquid assets. Now, as the new Democratic front-runner arrived at Cooper Union, site of a famous 1860 speech that catapulted Lincoln toward the presidency, crowds and press clogged the streets of Lower Manhattan: another emergency, another big speech.

  Standing above the rest, lighthouse tall, was a grinning Paul Volcker. Volcker had been hovering around the campaign since the prior summer, but having endorsed Obama only in January, this would be his debut as an official adviser. Over the years, the eighty-year-old former Fed chairman had become a figure of grumbling, unassailable credibility. His decision to tighten the money supply in the early 1980s had plunged the country into a recession, but also finally ended a decade of stubborn inflation. Though a hugely controversial decision at the time, it was now seen as the tough-love approach that laid the groundwork for years of economic growth. Volcker had nonetheless been replaced by Reagan in 1987 for not being a strong proponent of deregulation. It had been, and still was, Volcker’s view that without serious “rules of the road,” backed by the law, firms would find ways to profit that put the markets at risk. It turned out to be a prophetic stance, from the 1987 market crash on, and proved only more so in the current election year. Volcker now saw reregulation as a matter of the country’s economic survival.

  Since his victory in Iowa, Obama had been drawing top economic talent from both parties. Volcker’s graybeard twin today was William Donaldson, a Republican who served under Nixon and Reagan and was George W. Bush’s 2003 pick to head the SEC. On the other side of the ideological aisle was economist Laura Tyson, former Council of Economic Advisors chair under Clinton and one of the few leading figures to predict disaster from a soon-to-burst housing bubble. Next to her was Robert Reich, the peripatetic former labor secretary, who collided with Bob Rubin and his minions in the early days of the Clinton administration. Robert Wolf and Austan Goolsbee rounded out the team.

  The advisers all agreed on at least one thing: the disequilibrium of consumption and production in the United States had led Wall Street and the federal government, in their dicey modern partnership, to overcompensate with easy credit, which had led to underpriced risk across the economic landscape. The team was racking their brains for what to do about it. No one was quite sure how to deleverage the world’s largest economy.

  The speech, like Obama’s best, managed to weigh the ideological with the pragmatic. He could simultaneously mix neo-Rooseveltian rhetoric (“a free market was never meant to be a free license to take whatever you can get, however you can get it”) with the practical endorsement of competent governance (“We’ve put in place rules of the road to make competition fair and open, and honest, we’ve done this not to stifle but rather to advance prosperity and liberty”). The subject didn’t carry the deep personal insights, and subtle confessions, that his race speech did, but within months his analysis would form a starting point for reforms.

  “The concentration of economic power and the failures of our political system to protect the American economy and the American consumers from its worst excesses have been a staple of our past: most famously in the 1920s, when such excesses ultimately plunged the country in the Great Depression. That is when government stepped in to create a series of regulatory structures, from FDIC to the Glass-Steagall Act, to serve as a corrective, to protect the American people and American business.”

  The latter, Glass-Steagall, was, in essence, repealed in 1999 when the Gramm-Leach-Bliley Act, with support from Bill Clinton’s team of Bob Rubin acolytes, led by then–Treasury secretary Larry Summers, withdrew the original provision preventing bank holding companies from owning other financial companies. In particular, it affirmed the recent merger of Citigroup and Travelers, two unique financial entities that would not have been able to consummate their merger, a vast entity that Rubin would soon sit atop as chairman.

  Obama now spoke of repairing and restoring a regulatory framework. In particular, he envisioned a broad swath of new regulations that would be able to properly monitor the chimerical nature of Wall Street. Across the board, he saw a new structure of oversight, from increasing the purview of the Federal Reserve to setting in place consumer protections based on a broader principle that “we need policies that once again recognize that we are in this together. And we need the powerful, the wealthiest among us—those who are in attendance here today—we need you to get behind that agenda.”

  The coverage of the speech, this time, was heavy and laudatory. Obama remarked several times from the dais, “As I said last fall at NASDAQ . . . ,” and the point was lost on no one. He had called it, just as he had with Iraq. He’d been ahead of the pack, ahead of everyone, and only now were events and consensus catching up to him. Interviewers lined up, cheek to jowl—Charlie Gibson of ABC, Maria Bartiromo of CNBC, staff writers from the Times and Journal. Obama seemed to have taken his game to another level: in the zone, every shot a swish.

  “Barack Obama’s speech on the financial crisis was a remarkable breakthrough,” gushed Robert Kuttner, the tough-minded editor of The American Prospect. Kuttner had, up until then, been reserved in his enthusiasm for Obama. But no longer. “First he connected all the dots—between the complete dismantling of financial regulation, the declining economic opportunity and security for ordinary people, the current financial meltdown, and the political influence of Wall Street as the driver of these changes. Astounding! I wish I had written the speech. It is this kind of leadership and truth telling that is the predicate for the shift in public opinion required to produce legislative change.

  “The speech was Roosevelt quality: the president as teacher-in-chief,” Kuttner continued. “Those who felt that Obama was capable of real growth that will transcend the campaign’s early and somewhat feeble domestic policy proposals should feel vindicated. The speech was courageous, in that it goes well beyond the current Democ
ratic Party consensus, and one can only wonder about the reaction of some of Obama’s own financial backers.”

  Several of those financial backers were gathered two weeks later on April 11 in a hotel ballroom in Washington for a meeting of what might well be the world’s most exclusive club: the Financial Services Forum. Its members were the CEOs of many of the very largest financial institutions in America. Together they controlled $20 trillion, roughly the annual GDP of the United States and China combined.

  The forum’s semiannual meetings usually drew a majority of the CEOs, but at this particular spring meeting in 2008, only about half of them had shown up. Many of those absent found themselves instead on corporate jets to China and the Persian Gulf, on their way to meet with the heads of those states’ sovereign-wealth funds to plead for capital infusions. This close to Bear Stearns’ implosion, the sense of urgency among Wall Street’s top executives was so great that they had decided to pass up a private session with Treasury secretary Hank Paulson and Ben Bernanke to meet instead with Saudis and Kuwaitis and Chinese government officials. Paulson and Bernanke might tell them what the U.S. government would do in the event of a financial death spiral, but the Kuwaitis could tell the CEOs just how much, at today’s prices, it would cost them to avoid this fate.

  One forum attendee, however, was especially happy to be in the mix: Greg Fleming, Merrill Lynch’s number two. He was just glad to still be employed at Merrill, the company that in 1914, with its first storefront offices, essentially invented the brokerage business in America. As he gazed now across the crowd of senior executives waiting for Ben Bernanke in the conference room at the venerable Willard Hotel, Fleming could not help but consider how much had changed in the past two years, since the spring of 2006.

  Thinking back across those two years, he could neatly mark both time and distance traveled—for himself, his industry, and the wider country—with two dinners.

  The first: in May 2006. That’s when Merrill’s headstrong CEO, Stanley O’Neal, took Fleming out to dinner to tell him he was planning to fire a friend of Fleming’s. The executive, Jeff Kronthal, who was the head of fixed income at Merrill, had noticed that the number of new mortgage holders not making even a single payment—a typically tiny number, less than 1 percent—had more than doubled in just a few months. A longtime risk manager who had once worked at Salomon Brothers, Kronthal dug into some CDO bundles and saw just how dramatically underwriting standards had collapsed. He recommended that Merrill reduce its exposure in mortgage derivatives, which at the time was only $4 billion. But these mortgage derivatives were also the company’s profit engine—as they were for the rest of Wall Street—and the risk-averse Kronthal stood in the way of those profits. O’Neal told Fleming he hoped to replace Kronthal with an executive whose background lay in sales.

  Fleming strongly opposed the move, contending that Kronthal was a man of good character and that if he said there was a problem, O’Neal, who had no background in risk management, would do well to listen. By the time the entrées were served, the two men were sitting in tense silence. O’Neal eventually cut Fleming off midsentence to call for the check. Soon after, Kronthal was fired, and under O’Neal’s management the company would go on to add an astonishing $50 billion in CDOs between the summer of 2006 and the late spring of 2007.

  That latter date was around the same time that Fleming got a call about the second of the two dinners, this one with Barack Obama. Fleming, raised by two teachers in upstate New York, had been a lifelong Democrat. When his friend Mark Gallogly, the billionaire number two at Blackstone, the huge private-equity firm, called to say he was organizing a Washington dinner for Obama, Fleming jumped at the opportunity.

  On June 20, 2007, two dozen executives slipped inconspicuously from Manhattan to D.C. and gathered in a private room at Johnny’s Half Shell, a pricey spot on Capitol Hill known for its barbeque shrimp, Asiago cheese grits, and Maryland crab cakes, which run thirty bucks a pair. It was a first encounter with Obama for most of them, including Paul Volcker, who had expressed an interest in meeting the junior senator. Gallogly, who had been greatly impressed with Obama, sent the former Fed chair a packet of reading material on the senator, including his two books. Now, as Obama moved lightly through the crowd of money men, Fleming managed to score a little face time, chatting with him over drinks. The two men, both forty-five, seemed to hit it off. Fleming was a graduate of Yale Law School, and Obama, of course, Harvard Law, so naturally they had people in common.

  As everyone seated himself for dinner, the group went around the table doing introductions: Larry Fink, one of the inventors of mortgage-backed securities, who was now head of the huge asset-management firm BlackRock; Lehman CEO Dick Fuld; Gary Cohn, the sharp-minded chief operating officer at Goldman; the legendary Volcker. Then the head of fixed income and the putative number two at Bear Stearns took a stab at levity.

  “I’m Warren Spector of Bear Stearns, the current scourge of Wall Street.”

  This drew appreciative laughter from the room. Obama laughed, too. The failure of Bear’s two mortgage derivative–laden hedge funds had come in late spring, and since then debate had swirled around how the collapse should be viewed: as a one-off overreach in the mortgage derivative sector by Bear, or as the first of several implosions likely to hit mortgage derivative–heavy funds on Wall Street.

  If it turned out to be the latter, of course, that would mean the end of the line for some of those currently sizing up Obama. So that would never track. This was Wall Street, after all, where the world’s smartest people still flocked, where everyone’s risk-management team was still the best in the business, every firm’s traders still the most ingenious. Everyone knew there was trouble in mortgage-backed securities. But everyone in the room could still muster confidence, albeit with a bit of added effort. Financial innovation meant there was always a way to price and sell off risk, even for mortgage securities. The bottom line: those astronomical salaries for 2007—already looking like the best year Wall Street had ever known—were utterly justified. Or so the consensus went.

  The night was set up so Obama could play for the thousands these men gave in campaign donations—and the many thousands more they could compel their colleagues and friends to give—and he didn’t disappoint. He said, among other things, what they wanted to hear, that he believed unreservedly in private enterprise, the efficient and productive distribution of capital, and the “need for a strong financial sector.” Fleming watched from across the table, sitting next to his good buddy Larry Fink, a billionaire, like many of the men in the room. Fleming wasn’t in that league—not even close. But despite that, or because of it, he was ready to leap ahead of the pack, ever the self-made man. When questions over dessert turned to the only issue anyone there much cared about—whether Obama would raise taxes on the wealthy—Fleming jumped in: “I think, based on the way things have gone, it’s ridiculous to think that taxes shouldn’t go up.” No one there would have said this, but suddenly just about all the financiers nodded. Obama smiled. You could all but see him making a mental note: Fleming.

  Fleming was dining in Manhattan three months later with his family when the phone rang. He figured on ignoring it. It was his daughter’s birthday, and they were planning to follow up dinner with a Broadway show. He looked down at his vibrating BlackBerry and read, “Unknown Number.” He accepted the call.

  “I was impressed with what you said at the dinner,” Obama said, jumping right in. “Especially about taxes and everyone carrying their fair share.”

  A startled Fleming thanked the senator and, whispering an apology to his wife over the cupped mouthpiece, slipped outside the restaurant. They chatted for a few minutes, and Obama explained that he wanted Fleming to take a more significant role in his campaign, fund-raising and maybe more.

  Fleming paused. In the few months since their dinner in D.C., he had become aware of just what a catastrophe Merrill was facing. It was only in the past month that he’d begun to realize he’d been
more right than he had ever wanted to be: those mortgage derivatives could take the company down.

  “Sorry,” Fleming told Obama reluctantly. “There’s going to be an awful lot going on at Merrill in the coming months.” He explained that he had better not take on any extracurricular activities, though he would continue to be a contributor. The two men agreed to stay in touch, and Fleming wished Obama “all the luck in the world.” Both men would need it.

  A month later, in mid-October, Merrill chief Stan O’Neal was abruptly fired after the firm lost $2.3 billion in its third quarter. Fleming was named interim CEO, and about a month after that, in early November, the Wall Street Journal reported that Merrill had fraudulently handled its derivatives book. Fleming suddenly found himself in front of a crowded room of employees, reporters, and stock analysts. Greed had so quickly and thoroughly switched to fear—fear laced with a watch-your-back insecurity—that Merrill’s future, with its stock plummeting, seemed to rest on a few careful words to the gathered mob. Fleming managed it with a quip and a disarming shrug. He would not try to deny any reports he hadn’t had a chance to check out for himself. He said he was sure there was plenty going on inside of Merrill about which he was unaware.