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

by Ron Suskind

  It worked. In the court of public opinion, Fleming was granted the time to get up to speed on Merrill’s inner workings, and the company’s sliding share price stabilized. His saving grace was convincing deniability: he had made the wrong career choice. He was a traditional investment banker, an expert in assessing the value of financial companies for sales, mergers, and the like. As Wall Street’s great debt-shuffling and power-trading operations grew to overwhelm the lower-margin business of actual investing, Fleming watched the raging river of fixed-income funds from across the world flow through the coffers of Goldman, Lehman, Bear, and eventually Merrill, on its way to slaking America’s seemingly bottomless thirst for debt.

  So it was credible that Greg Fleming, the odd man out in Stan O’Neal’s regime, didn’t know much about Merrill’s main line of business. A few weeks later, after conducting his own investigation—using dozens of auditors, poring over months of trading—Fleming announced publicly that the Journal report on fraud at Merrill had been false. (The paper subsequently published a clarification.) Merrill soon hired John Thain, a former second-in-command at Goldman, to take over as its top executive. Fleming, after all, had crucial work to do as an investment banker: sell off Merrill’s gems. Schmoozing in D.C. with top executives at the Financial Services Forum could, thereby, only be a good thing. Fleming was looking to unload Merrill’s prime assets, after all, and here was a roomful of potential buyers. Merrill’s position was not dissimilar to Sailfish’s the prior summer. The firm was glutted with a cancer of mortgage securities, namely $54 billion in mortgage derivatives, an astounding $51 billion of which it had purchased since the spring of 2006. To sell them in a market with no buyers, where their value upon sale would be marked to nearly zero, was suicide. This meant the company, leveraged thirty to one, needed to build up cash to offset the tanking value of its CDOs by selling its most valuable assets.

  As Bernanke now spoke, Fleming looked across the room, a plush little second-floor chamber in the Willard called The Nest. The Fed chairman was being circumspect, not saying very much. In the wake of Bear’s collapse Bernanke had opened up the Fed’s discount window to investment firms for the first time, and now the chairman ran a short tutorial on how investment houses would be treated differently from banks, which had been using the window almost since the Fed’s creation in 1913.

  It was not until the next session that afternoon that things picked up. Treasury secretary Hank Paulson arrived full of his famous manic energy. Most people in the room knew Paulson personally; until 2006 he had sat on the other side of the felt table, as the CEO of Goldman and himself a member of the Financial Services Roundtable. Today his message was that familiarity should not breed familial goodwill; contempt might be more appropriate.

  Everyone should know that the Bear Stearns deal was a special case, Paulson said firmly, “and not something we ever intend to repeat.” JPMorgan’s number two exhibited a look of studied indifference as glances were cast his way. All the executives by now had had a chance to look over the sweet deal offered to JPMorgan chief Jamie Dimon to buy Bear Stearns. Now everyone, thinking of any kind of merger or consolidation, wanted a “Jamie Deal.”

  Paulson said that there’d be no help coming from the U.S. government, and that they should all be out looking for capital anywhere they could find it. A second message: deleverage, and do it fast. But he assured them this was only to shore up their cushions of capital for some unseen, and unknown, threat. Based on his read at Treasury, he said, things were on the mend. The housing bubble had burst, he stressed, and housing values would not be dropping much further. Not that some mortgage toxicity didn’t still plague balance sheets, he acknowledged, but his bigger concern was the sluggish economy. He and President Bush had just pushed through a $168 billion stimulus in an attempt to jolt it. With stabilizing real estate values, a few more rate cuts, an opening up of the Fed discount window, and this stimulus package, the Treasury secretary said, “we should manage to get through this period just fine.”

  At one end of the table, Robert Wolf sat in silence. He knew this was what Paulson had to say. The whole game was about confidence, as it always was. Everything was fine—until it wasn’t. The government wouldn’t be coming to the aid of any more financial giants—until it did. Volcker and a few others who were encircling Obama were convinced the whole system was on the verge of collapse. Wolf wondered if he was the only one in this plush room who agreed.

  The CEOs had a blind spot, Wolf thought. With all their leverage, all it would take is one bad week, one speed bump, and they would be facing catastrophe. He thought about challenging Paulson with a targeted question, but he held back. Why bother? Though he never publicized it, people in the room knew he was Obama’s man. He had put his money on Team Obama washing away Team Bush, including Paulson and his gang. Wolf was waiting, betting on regime change.

  Fleming, at the other end of the table, shook his head, thinking of all he had been through in the prior year. For Paulson to point to “strong fundamentals” was to miss the point. It was really about trust, a loss of basic trust that Wall Street was resting on anything resembling firm ground. One rumor, one false report in the Wall Street Journal, and a ninety-four-year-old firm like Merrill had been brought to its knees overnight. Fleming was especially unconvinced by the secretary’s assertion that the real estate market had stabilized, that, as Paulson said, “the worst was over.” Had Treasury at least put together a what-if strategy?

  “Hank, what are you planning to do if the real estate situation happens to get worse, which of course it could, and bleeds through into the larger economy?” Fleming asked. “That could create real problems for quite a few large firms and trigger wider systemic issues.”

  Paulson glared at Fleming. This was precisely the sort of question, a worst-case-scenario question, that he had been steering the conversation away from.

  “I’m not responding to that,” Paulson said, his face growing red. Then he turned the heat on Fleming: “Listen, you better focus on Merrill! We’ll worry about the larger economy, which is doing fine. You worry about your shop.” He turned back to the larger group. “All of you should. We’re done with capital assistance from Washington. You’re on your own.”

  The room was quiet. No follow-up questions.

  In the days that followed, Fleming sized up the landscape for mergers and acquisitions, as he had been trained to do . . . starting right at home. His most pressing mission would be to assess the value of Merrill’s franchise and figure out what it might take to sell it. Word on the Street was that Lehman was in serious trouble. Fleming knew that Merrill was in trouble, but he also knew that there was only one institution with both the will and capacity at this moment to buy a large Wall Street investment house: Bank of America. One buyer, two banks. The question: Who would get there first?

  After the Financial Services Forum meeting, Hank Paulson returned to Treasury. His department had tried to project the image of engagement and competence, but behind the scenes they were accomplishing little.

  A top Treasury official who served under Paulson put succinctly what others would later reaffirm: “We mostly spun our wheels because there was no process at Treasury that could get much done. Everything had to be run through the frenetic, short attention spans of Hank. You needed to get him to focus, which was a battle, and then hold his attention with something catchy you said in the first sentence or that’d be that. Nothing would happen and weeks of work would be for naught.”

  The bottom line, the official added, was that “during the eight months since the credit markets first seized up, that first heart attack in August 2007, we at Treasury had done very little. Almost nothing, to be fair. We kicked into high gear for the frantic rush to sell off Bear Stearns, but that was an emergency. We had blown that time, those months when it was clear that real trouble was coming, and we’d done nothing of any real significance.”

  Now the clock was ticking. Several CEOs at the forum meeting had scheduled the
ir trip to D.C. strategically. If they had to spend a day in Washington, it was going to be the day after the forum event, when the finance ministers of the G7 countries, seven of the world’s largest economies, were in town. That night, April 11, there was going to be a dinner in Treasury’s ornate “Cash Room,” a grand two-story hall decked out with seven different types of marble. Under three sweeping brass chandeliers, Paulson and the G7 ministers dined with Jamie Dimon, John Thain, Morgan Stanley chief John Mack, Deutsche Bank CEO Joe Ackerman, and others.

  Paulson later recalled how he went around the room asking each of them how they had ended up at this difficult juncture.

  “Greed, leverage, and lax investor standards,” John Mack said. “We took conditions for granted and we as an industry lost discipline.”

  The CEO of TIAA-CREF, the enormous teachers’ pension fund, said the big funds used to think they “knew a lot more about these [mortgage-backed] assets” than they did. “But we’ve been burned, and until we see large-scale transparency in assets, we’re not going to buy.”

  Mervyn King, a short-tempered British regulator, quickly grew impatient with this sort of talk. “You are all bright people, but you failed,” he said. “Risk management is hard. So the lesson is we can’t let you get as big as you were and do the damage that you’ve done, or get as complex as you were, because you can’t manage the risk element.”

  King was half right—but only half. The banks had grown so big and fragile because they had created a host of profitable intermediary steps, separating risk from sound and sober assessment, from basic financial accountability. The risk had instead been passed around, sale by sale, until the marketplace itself held a kind of aggregated risk, a vast web of credit connections resting on nothing more solid than confidence.

  Two top Treasury officials, Neel Kashkari and Phillip Swagel, had already created a memo on bailouts that they called the “Break the Glass” Bank Recapitalization Plan—a ten-page apocalyptic scenario outline that would later provide the rubric for TARP. Its idea was straightforward: Treasury would purchase toxic assets from the banks, unwind them using a private-asset intermediary, such as BlackRock, and then sell them to maximize value for the people who would ultimately be on the hook: the taxpayers.

  Two days after the Cash Room dinner, Paulson looked at the memo with reticence. If they ever actually needed to implement the plan, he said, they would never get it through Congress. He was more skeptical of the plan’s political viability than he was concerned about its effect on the economy. And if word got out, it could send the markets into a panic.

  That was Paulson’s dilemma. To act in a responsible, preparatory way would show what the government was planning to do in the event of an emergency. This is something that firms could then factor into their risk models, which would affect everything from how banks or nonbanks invested their capital to how they structured, and protected, their pay packages. It was enough that Bernanke had opened up his discount window to investment banks, probably the most dramatic shift in Fed policy since the Great Depression. If anything, now was the time to match federal largess with firm boundaries. He had to show confidence that he expected no more disasters, and wasn’t planning for any more public funds to help Wall Street.

  As a Christian Scientist, Paulson fell back on the old standard: God helps those who help themselves. The group agreed that the potential havoc that this “Break the Glass” plan could wreak on the market, even just in undermining confidence, meant it needed to be closely guarded. In the meantime, Paulson would try to find market solutions to the impending disaster and preempt the gathering storm.

  What he did do was pick up the phone and call Dick Fuld, CEO of Lehman Brothers, which looked next in line to fall after Bear.

  “Dick,” he said, cutting to the chase. “You really need to find a buyer.”

  What amazed Obama was how big the whole circus had become, and how fast.

  By the third week in April, he was a global phenomenon, the focus of acute, almost frenzied attention, at the head of a wave.

  It had built, strong and steady, since Iowa. But coming out of Cooper Union, he was a man touched by the gods—the toast of both coasts, the media, the intelligentsia, Hollywood, Washington, and even Wall Street, which still knew how to invest with targeted might when a growth stock hit its stride. He’d been tested on race, and temperament, and had passed brilliantly with his stunning speech. Race issue: check. He’d pulled together a bipartisan economic team and leapt ahead of the pack on dealing with the country’s growing financial shakiness. Policy prescience: check.

  To be sure, with each stride there was a hedged bet being laid down by Middle America, wary by nature of the Harvard-trained darling of the elites and the rising tenor of the enthusiasm he was stoking.

  That skepticism was harvested with steady sure-handedness by Hillary Clinton, who was counted out after Obama’s string of victories in January and February. No, she wasn’t down, not yet. America loves a race, has a long history with buyer’s remorse, and always liked Hillary best when she was fighting for her life—as the First Lady, living through an adultery nightmare, and many times since.

  Obama wanted it to be over with. After his string of primary victories, he was way ahead on delegates, and ready to be the party’s putative standard-bearer. He was tired. He craved sleep. He missed the girls. Let it be over.

  But Texas and Ohio wouldn’t let that happen on March 4. He lost them both, big states. Texas was no surprise. But Ohio, the bellwether state in so many national contexts, seemed within his grasp. If he could beat her there, it would end. It didn’t, even after the Obama campaign spent nearly $20 million on media and organization.

  Obama was crestfallen, but he stayed cool and steady. On the night of his Ohio loss, his senior staff was waiting for the strong words of criticism. They never came. The road was long, he told them; they were doing their best. Losses like this would happen; they’d eventually make it. The most pointed he got: an offhand comment leaving the Ohio postmortem meeting, when he told Axelrod, “Now, tell me again what $10 million in advertising [in Ohio] got us.”

  For some on the staff, this equanimity was just shy of amazing, even unsettling. Obama was changing—his eyes now on the prize. Looking out on mobs crushed against barricades, reaching to touch him, to be healed, the campaign’s innermost circle started to use its nickname for him, Black Jesus. The pressure of hope and expectation, of almost religious fervor, seemed to quiet and settle him. To establish their bearings, that he was mortal, they’d tell stories of the sometimes tetchy, short-tempered candidate of a year before. A favorite was from June of 2007, when they were flying back and forth to Iowa while trying to squeeze in votes in the Senate. Obama was on the plane with Robert Gibbs and Reggie Love, grousing nonstop. This was foolish. Miserable. A waste of time.

  Gamely, Gibbs stepped in.

  “All right, Barack, just think of one thing you like about all this. Just one thing, and focus on it. Maybe that’ll help.”

  Obama was unreachable. “There is not even one thing I can think of. Not even one.”

  “Well, I can tell you one thing, boss,” said Reggie Love, the former Duke basketball player hired to be Obama’s aide in 2006, who was regularly getting mobbed by girls in Iowa gymnasiums. “I’m loving this! Hope that helps.”

  “No, it doesn’t, Reggie,” the senator mumbled, unmoved even by this strong showing of empathic esprit de corps.

  Now some senior staffers yearned for that grumbling guy, a guy they once knew, rather than the calm, Olympian presence looking down from on high, touching the outstretched hands of true believers.

  Then, on April 22, the night of the loss in Pennsylvania, bemusement about their sainted candidate began to sour into concern. You can’t win America just by taking the northeastern and California corridors, no matter how many times you appear on Charlie Rose. After a brutal six-week campaign, he’d lost Pennsylvania to Clinton by a whopping ten points. She was out of money, facing
the precipice of a “mathematical impossibility” in delegates, but heroically unbowed. “Tonight, more than ever,” she said, in her acceptance speech, “I need your help to continue this journey . . . We can only keep winning if we can keep competing with an opponent who outspends us so massively.”

  After Obama’s concession, his inner circle flew to Chicago for a crisis meeting. Forget about delegate counts. She was showing, to one and all, how beatable he was. News reports began to trot out Bill Clinton’s quote from January, about how the media were going easy on Obama, giving him a bye about voicing some generalized support for the Iraq War as a senator: “This whole thing,” Bill Clinton groused, “is the biggest fantasy I’ve ever seen.” Now the line, taken out of context, seemed to be a generalized critique of the Obama phenomenon.

  Republicans, meanwhile, were offering their own version, mentioning how little experience Obama had doing anything other than managing his own one-man narrative.

  In Chicago, at Obama’s house, Pete Rouse and Valerie Jarrett conferred with their man. The rest of the team was gathering in the living room. The three of them stood near the kitchen, an ideal trio, in its way.

  Valerie was the first among equals, with her role as part of the campaign but above it. As adviser, friend, protector, older sister, soul mate, and, in some ways, creator—the matchmaker, after all, of Barack and Michelle—she watched him evenly, asked how he was feeling. He didn’t need to say much. She knew he was in there, trying to work through the complex equations of his place at the center of all this noise, and she was happy to see Pete.

  Rouse was also separate from the campaign’s senior staff, but with a role of unique consequence and clout. At sixty-one, he was Obama’s Washington anchor—and a truly original character in the nation’s capital. He was Tom Daschle’s right-hand man, his chief of staff for twenty years, who rose—as Daschle became Senate majority leader in 2000—into a role that drew him the moniker “101st Senator.”