by Ron Suskind
The $30 billion federal backstop that ultimately clinched the Bear Stearns deal had been Geithner’s handiwork, though Bernanke got the credit. They presented the circumstances of the rescue at the time as a once-in-a-lifetime emergency that called for unorthodox action. But that was dead wrong. Saying this repeatedly only forced the actual players driving the financial markets to have to decide why Geithner and Bernanke were lying or whether they were stupid.
Around 11:00 a.m., Geithner arrived at the Grand Hyatt Hotel on Park Avenue, speech in hand and fresh off his call to Jamie Dimon. He had given his talk the particularly dry title “Reducing Systemic Risk in a Dynamic Financial System.” But dry was, on balance, a good thing in the world of high finance.
The Economic Club of New York had long been a prestigious audience for industry bigwigs and esteemed economists. Almost exactly two months earlier, on April 8, fresh off of orchestrating the Bear Stearns rescue, Geithner had sat front and center to hear Paul Volcker eviscerate the Fed’s recent actions in that very deal.
The luncheon had been in honor of Volcker’s eightieth birthday, whose actual date was back in September 2007. The former Fed chairman stood behind the lectern, hunched and mumbling, delivering his first address at the club in thirty years. As he worked his way into the speech, however, he grew more impassioned, finally railing against those regulators who had allowed “excesses of subprime mortgages to spread into the mother of crises.” His voice rose to a thunderous pitch as he declared, “The financial system has failed the test of the marketplace!”
An audience member later asked him if he predicted a crisis of the dollar.
“You don’t have to predict it,” Volcker retorted. “You’re in it.”
By the summer of 2008, gloom and doom had become popular position for economists, but Volcker was in a category of his own. Geithner valued the man’s analysis and insight—everyone did—yet now he found himself implicated in exactly what Volcker found so reckless.
“The Federal Reserve,” Volcker had continued, enunciating clearly and slowly to underscore the importance of what he was about to say, “has judged it necessary to take actions that extend to the very edge of its lawful and implied power . . . and in the process transcended long-embedded central banking practices and principles.”
Was the former chairman implying that the Bear Stearns deal had been legally dubious? It was a tough criticism, coming from the venerable Volcker. The term “moral hazard”—describing the dangerous precedent of federal actions supporting reckless business practice—had become part of the Washington lexicon by this point. But that was still mostly noise. Volcker, on the other hand, just a month after the Bear Stearns rescue, was the first major voice to say that Bear Stearns was an investment firm free to make money as it saw fit, and to fail without pity. If this meant that the rest of Wall Street was forced, by existential fears, to suffer huge losses on its debt casino and start racing toward prudence to survive, so be it.
To think this way, you’d have to be able to imagine a world without Goldman Sachs.
Geithner, in this morning’s speech, offered his response to Volcker: that the Fed’s actions to shore up Bear Stearns and sell it to Jamie Dimon were sound and justified.
“The Fed made the judgment,” he said, “after very careful consideration, that it was necessary to use its emergency powers to protect the financial system and the economy from a systemic crisis.” He explained that they had done this “with great reluctance,” but that it had seemed “the only feasible option” to avert the crisis. “Our actions,” he continued, “were guided by the same general principles that have governed Fed action in crises over the years.”
What came next were mostly statements followed by hedges, and assertions carrying qualifiers. He threw a bone to the moral hazard crowd—“the management of the firm and the equity holders” at Bear Stearns “suffered very substantial consequence”—and then called “for a comprehensive reassessment of how to use regulation to strike an appropriate balance between efficiency and stability,” so the Fed and Treasury were not ginning up bailouts, weekend to weekend. Then he immediately walked away from this bit of “forewarned is forearmed” good sense to say that such a task would be “exceptionally complicated” and that “poorly designed regulation” might well “make things worse.”
That last line—in 2008 and onward—would widen into Geithner’s overarching dictum, a twist on Hippocrates and his doctor’s oath: “first, do no harm.”
After the speech—attended by a host of notable economists who were friends of Wall Street, including Martin Feldstein and Columbia Business School head R. Glenn Hubbard, chief of George W. Bush’s Council of Economic Advisers—a wide delegation from Wall Street was slated to meet with Geithner in a closed session to discuss credit derivatives.
As a prelude of sorts to that gathering, Geithner finished his speech, arguably the most important of his career, with a final qualifier about the limits of what any public official could do about the ultimate issue: “Confidence in any financial system,” he said, “depends in part on confidence in the individuals running the largest private institutions. Regulations cannot produce integrity, foresight or judgment in those responsible for managing these institutions.”
Shortly after 2:00 p.m. he proceeded to the Fed’s stately Liberty Room with executives from seventeen firms that represented more than 90 percent of credit derivatives trading, a market now with a nominal value of $68 trillion. Mentioning this meeting in his luncheon speech an hour earlier, he said they’d “outline a comprehensive set of changes to the derivatives infrastructure.”
The meeting was attended by Geithner’s full staff, along with executives from all the major banks. The New York Fed chief laid out his agenda for the group. Bullet point number one: The establishment of a central clearinghouse for credit default swaps.
This sounds like more than it was: a clearinghouse is just a place where, at each day’s end, the swaps can be valued, as when someone goes to the closing on the purchase of a house. But clearinghouses tend to demand that counterparties in a swap put up collateral, or show the clearinghouse, like a casino, that they can cover their bets. A central clearinghouse for CDSs is not so much a solution to regulation of the wildly profitable and potentially destructive world of derivatives as it is merely a good start.
After the session finished, the Fed released a terse overview of the group’s findings and commitments. There was no more mention of clearinghouses.
The waters were rising throughout the United States in the summer of 2008. Defaults on mortgages, car loans, and credit card payments were rising faster than they had at any point since the 1982 recession. Americans of every income level were quickly realizing that when bills are greater than income and credit gets scarce, the ground beneath your feet begins to liquefy.
The Obama campaign had scheduled an event to discuss this very issue for June 12, in Cedar Rapids, Iowa, when the water there began to rise, literally. Over the years, the Cedar River had been known to swell with heavy rains, but its hard red clay shoreline always held back the churning rapids. No one much bothered to sell flood insurance. Fire, yes; liability, of course. But everyone knew that the Cedar River rarely crested its bank.
Until now.
In her corner office overlooking the Harvard Law School quad, Elizabeth Warren watched the Iowa flood reports confirmed on Weather.com and CNN. She was supposed to be flying there the next day, but as dusk fell on the eleventh, she got the call: Cedar Rapids was out. The city was underwater.
“Dagummit,” she whispered, her go-to epithet—not considered one of the more satisfying ones; a holdover from her “no cussin’ allowed” Oklahoma upbringing. But she really was irked, since she had been looking forward to the trip for a while. Finally she would get to spend some substantive time with the candidate who had so piqued her curiosity and enthusiasm: Barack Obama.
The senator had had close friends at Harvard Law, such as Charles Ogletree, the e
steemed African American law professor who had taught both him and Michelle. But with regard to Warren, the sense of connection to Obama was more a matter of shared interests, a mutual fascination with how the law affected people on society’s bottom rungs, who might not know, off the top of their heads, just how many justices sat on the Supreme Court. At least it seemed to Warren that they shared this fascination. After two years spent working as a community organizer in South Side Chicago, Obama had attended law school in 1988, “to see,” as he later explained, “how power really operated in America.”
He found out—then spurned the road most took after law school, the well-worn path whereby a precious Harvard degree was traded in for a portion of that very power. Students such as Obama, the top students from top schools, generally went on to clerk for federal and appellate judges, the very best for Supreme Court justices. A few became professors, and an overwhelming majority took big salaries at corporate law firms. Obama instead returned to Chicago, armed with another credential to round out his core narrative as the wayward, loner kid who managed to rise up and seize one of the great prizes of the professional class: becoming editor of the Harvard Law Review. In Chicago, he started writing an autobiography—truly audacious for a thirty-three-year-old—and began his well-known journey in public life.
Thirteen years Obama’s senior, Warren was a bit further along on her own unlikely journey, which she began as the lone daughter of a down-on-their-luck Oklahoma family, the Herrings, who lost everything in the Depression and never quite recovered. The route from there to her professorship at Harvard Law was anything but conventional: her first child at nineteen; the better part of a decade following her husband, a high school beau, from job to job; a Rutgers law degree picked up along the way; then single motherhood in Houston after leaving her husband.
But the really unlikely part, the bit that started Warren down the path to becoming a household name, came in 1979, when as a professor at the University of Houston she started researching how bankruptcy law was going to be reshaped in a federal legal overhaul that same year. She set out to prove what the business community was, at that point, incensed about: people gaming the system, irresponsibly running up debts and then discharging them in court.
The reality she found, however, traveling from one courthouse to the next, was altogether different from the one she’d expected, and far more complex: the filings came overwhelmingly from working people who had suffered from mishaps and bad luck—illnesses, deaths of family members and spouses, divorces, and economic downdrafts that often swallowed communities whole. Page after page, Warren started to recognize the shadows of a past she had long ago left behind, that of her own struggling family and the families she grew up with in Oklahoma. As with Obama, Warren’s past and future suddenly came together in a powerful integration. Elizabeth Warren was once again Betsy Herring, native of Oklahoma City, up the hard way, now asking the country’s judges and legal barons a tougher set of questions about the nature and cause of financial ruin.
That was how Warren got her start. Thirty years hence, she was one of the leading bankruptcy experts in America, and certainly the most visible.
But at this point, in June 2008, with Bear Stearns escaping a true meltdown, and the particulars of the coming crisis wholly foreign to most Americans, an expertise in bankruptcy law and consumer lending was not the sort of thing to get you a national soapbox. So Warren hoped to get her message out behind the scenes—and to one person in particular.
By midday on June 12, the crowd that had gathered at the Illinois Institute of Technology, a smallish sprawl of aluminum and glass on Chicago’s South Side, was almost all reporters. One hundred and fifty of them, mostly with the traveling press, there to watch Obama and Warren chat with three Chicagoans in varying degrees of credit hell.
This was the event that the Obama campaign threw together in a matter of hours, as downtown Cedar Rapids slipped beneath the water.
One by one, each citizen told a story—they were surprisingly conventional stories of people overwhelmed by debt—as Obama listened patiently, asking a question or two.
When Warren finally spoke up, she recounted the first time she’d met the senator—then an Illinois state senator—at a 2003 fund-raiser in Cambridge and how “he had me at ‘predatory lending,’ ” a sure-laugh line. Then she and Obama ran through an array of the typical traps buried in deceptive credit card agreements: teaser rates in the low single digits that suddenly jump to 30 percent, the arbitrary lowering of cardholders’ credit limits in order to charge over-the-limit fees. Obama even appeared to know more than Warren about the details of one practice, called the “fair-play rule.” Warren looked on at the senator in amazement.
“In the interest of full disclosure,” he admitted quietly, “I’ve gone through this. I’ve had credit cards.”
Ears pricked, the reporters crowded in close. Throwing his lot in with those sitting around the table was a risky gambit. Their stories were the stories of millions across the country, but traditional judgment still looked down on those who took on debts they couldn’t repay. But Obama, and Warren beside him, were a pair of winners, those who had risen from humble beginnings and managed to overcome obstacles and mishaps, and maybe even errors. It was a bold and empathetic statement, challenging a censorious culture: Don’t be too swift to judge.
“We’ve just heard three examples of what I think most people would say is grossly unfair,” Obama said, citing the three participants. “But this is not atypical.” For good balance, he acknowledged the merits of the other side. “Part of why our debt crisis is so bad,” he continued, “is that some folks are making reckless decisions—racking up big credit card bills by purchasing flat-screen TVs and other luxury goods that they know they can’t afford.” The qualifier, as always with Obama, was there to help him earn his conclusion—a nod at both sides’ reasonableness in order to justify his authority in arbitrating between them. Here he was looking to redefine the basic notion of fairness. No mean task.
Warren, too, threw her weight behind a new framing. “We have a bunch of regulators in Washington,” she explained, “who see their job as protecting banks and see you folks as little profit centers for them.”
Then there was talk of Obama’s proposal for a Credit Card Bill of Rights and his 2005 opposition to a bankruptcy bill, which had given banks additional advantages and taken away consumers’ rights. All to the good, in Warren’s book, but then, the true lines of advantage and disadvantage were tough to draw. During the thirty-year credit binge, who in power hadn’t made money? Penny Pritzker, Obama’s national finance chair, had run Superior Bank, a Chicago-area savings and loan that had been among the pioneers in predatory lending. Since Jim Johnson’s resignation from Obama’s vice presidential search committee a week before, the McCain campaign had been busy talking about his special mortgage deals with his friend Angelo Mozilo, the man responsible for running Countrywide into the ground.
Warren knew all this, and she also knew, from years of battle, how difficult it was to frame arguments for debtors’ rights. No one had forced them to take money they couldn’t pay back. How could you blame the creditor, filling people’s desire for cash, even if it was just to set the interest hook into the debtors? Warren had come to view the whole system more elementally, in terms of its fundamental power imbalances. The average bank was strong, well funded, and skillful; the average consumer, much less so. Who was looking out for the little guy? No one, really.
But gazing now at Obama, who talked warmly, sympathetically, with those facing fiscal ruin, Warren couldn’t help but wonder if the country might soon have a president who would fight, really fight, for the little guy. After bidding the day’s three roundtable participants farewell, Obama called Warren over. He explained that he had another event, a speech at a nearby junior high school, but that he wanted to talk with her for a minute before he rushed off. Everyone kept their distance as the two spoke, leaving a wide perimeter.
“I w
ant to thank you for doing this,” Obama began. Then he looked at Warren intently. “So how did you think it went?”
She sighed, smiling. It had gone fine—better than fine. Would he not know that? She supposed he was really asking about how she thought he had connected with the guests in their distress.
“Frankly,” Warren said, “I can’t believe you understood all of this so well—what they felt each day and the stresses they faced, and really esoteric stuff, some things I barely know about how they get trapped in credit hell and can’t get out.”
Obama smiled. “I was talking to Michelle last night about what we were going to do today and I said, ‘You know, we’ve been there. We walked through this when we were young and trying to get ahead. This is not stuff from the streets. This is something middle-class people face.’ ” He paused, as a thought seemed to take shape. “I haven’t been living in this bubble very long,” he said softly. “I’m in it now, but not that long ago I had a real life.”
Elizabeth Warren would think about that man-in-a-bubble conversation all the way back to Cambridge and many times since. She would go on to become the country’s top consumer advocate, and Obama its president. He would preside over the worst financial crisis in generations, one that would develop, in large part, because financial firms and other creditors had retooled their business models to bleed the country’s consumers dry. But it would be a long time before Warren saw Obama again. He would go on to meet with hundreds of people in the meantime—financiers, bankers, Wall Street CEOs—but not her. And she would wonder, replaying that last conversation in her head, if it was really about the bubble or the character of the man inside the bubble, and if in Chicago she had seen what she hoped to see, rather than what was really there.
