by Ron Suskind
“What is this going to cost?” Reid asked.
“I’m not entirely sure yet,” Paulson said. “Somewhere in the hundreds of billions. Maybe five hundred.”
“If you think we can pass a bill to give you $500 billion, you don’t understand the Senate!” Reid shot back.
But the group had heard the desperation behind Paulson and Bernanke’s words and they knew that if things were really that bad, Congress would rise to the occasion. Senate Minority Leader Mitch McConnell was especially emphatic.
“This sounds like it needs to happen,” he said. “If that’s the case, we should do this. We can do this.”
Pelosi offered support from the House.
“We need to leave this room saying we will write a bill,” she said.
John Boehner agreed. “This is a national crisis,” he affirmed. “We need to rise above politics and show Americans we can work together. I will be here as long as it takes. Lock arms and get it done!”
But the group fell into two camps: those who took Paulson and Bernanke’s proposal as the Word of God, who thought they should proceed full steam ahead, and those who took the opportunity to demonize Wall Street and to complain about more massive government spending. In this latter camp with Reid was Republican senator Richard Shelby, who complained that it was a “blank check” for the Treasury.
Barney Frank chairman of the House Financial Services Committee, showed an incisive grasp of the issues at hand. “Who will be the operating entity?” he asked. “If we buy these assets, we will be the foreclosure agent. We need warrants.”
“We keep talking about buying up these complex securities,” Frank continued, “but we need to understand that at the bottom, these are made up of people’s mortgages.”
Just before the meeting broke, McConnell addressed what was clearly hanging over the politicians’ heads. “I know this is an election year,” he said, “and we need to be careful. As soon as this meeting lets out, we need to inform both presidential candidates and ask them not to politicize this debate.”
As noble as McConnell’s plea might have been, it was far too late. The crisis had already become wholly a political dogfight, and a full-fledged audition, for the presidency.
While Paulson and Bernanke were making their case for TARP on the Hill, John McCain was holding a rally in Cedar Rapids, Iowa, where the waters had finally receded. He was listening wearily to his running mate, who had gone from fresh new face to nationwide obsession almost overnight. She now threatened to swallow his campaign whole. Sarah Palin, for her part, was doing her best to redirect chants of “We want Sar-ah!” to enthusiasm for the top of their ticket, repeating a stale riff about the “courage” of the “maverick of the Senate.” Still, the chant persisted, echoing off into the distant future: “We want Sar-ah!”
A thousand miles away, in Española, New Mexico, Obama was campaigning to one of the most evenly split electorates. The state had gone for Gore in 2000 and Bush in 2004, each time by razor-thin margins. Obama by this point had realized how heavily economic issues were weighing on voters’ minds, and he tailored his speeches to the crisis. The next day, September 19, he would fly to Miami and kick off a weeklong blitzkrieg that would end, effectively, with him on his way to the presidency. From Florida, Obama endorsed the Fed-Treasury plan that Paulson had unveiled to the country only a few hours earlier.
“Today I fully support the effort of Secretary Paulson and Federal Reserve chairman Bernanke,” he said, having by then talked to leaders from the previous day’s meeting and heard that TARP was going to pass, and pass soon. “What we’re looking at right now is to provide the Treasury and the Fed with as broad authority as necessary to stabilize markets and maintain credit.”
McCain, meanwhile, had been running on unfettered markets and reduced government spending, two broad policies that TARP managed, at the same time, to contravene. He would be obliged to support TARP in the end. It was the only responsible stance, if an unpleasant one all the same. But Obama suspected that the program would meet with stiff opposition in McCain’s party and that his opponent would find it all but impossible to do the responsible thing and please his base. This turned out to be right, as McCain couldn’t manage to reframe the issues in a way that gave him a solid place to stand.
On the morning of September 19, Obama met with his economic team in Miami.
A shift in the group’s composition and tone had taken place. Their previous meeting, on July 28, included JPMorgan’s Jamie Dimon and Google CEO Eric Schmidt, two former Clinton secretaries in Bob Rubin and Bob Reich, and onetime Bush officials such as former SEC chairman Bill Donaldson and former Treasury secretary Paul O’Neill. But none of them carried the clout, at least not in the senator’s mind, that Volcker did. Obama started that meeting as he always did, with “Paul, you go first.”
This morning, though, Volcker had a scheduling conflict. He said he could stop by in Miami only briefly, before catching a plane to Europe. But if his presence wasn’t required, he could take a different flight and be available on the phone, as some other participants would be. Obama told him the photo op would be preferable. In the previous weeks, during a series of phone calls with this group of free-floating bigfoots, Larry Summers had risen to the fore. Volcker stayed a few minutes, offering his symbolic value of a man behind Obama, and then slipped away, as the reporters and photographers exited.
Summers took charge. It was a matter of neither experience nor expertise that pushed him to prominence. Among those present in person or on the conference call, Bob Rubin had more experience in both government and business. Paul O’Neill had actually run an industrial company, Alcoa, and was more of an original thinker. Warren Buffett had vastly more expertise in how the world’s markets actually worked. Summers was simply a master explainer, able to deftly boil down the complexities of matters economic and financial, and to put them in terms the nonexpert could understand. He was brilliant at cultivating the sense of control, even as events spun far beyond what could be managed with any certainty. That was his feat, an illusionist’s trick calling for a certain true genius: he could will into being the confidence that eluded others—those less self-assured and, maybe sensibly, on humbler terms with the complexities of the world.
To top it all off, Summers believed in the basic soundness of the financial industry. He was sympathetic to liberal ideas but not an advocate of major, systemic change. It was a comforting prospect to think the messy crisis, so far beyond the ken of most politicians, could be solved with a one-off intervention and a few modest reforms thereafter. It would not entail big risks, either in getting the reforms wrong and dragging down the economy with them, or in alienating wealthy allies. Though it was exciting to consider the brazen readjustments championed by progressive economists, such actions had the potential to rock a boat already listing dangerously—and to make powerful enemies. Lacking decades of expertise in the rocket science of modern economics, what sort of leader laid claim to the confidence with which to remake the entire system in grand Rooseveltian fashion?
Oliver Wendell Holmes, Jr., famously remarked that Roosevelt matched “a first-rate temperament” with “a second-rate intellect,” but it is undeniable that what Roosevelt lacked in probing, analytical brilliance, he more than made up for in those intangible qualities that distinguish leadership from technical expertise. He understood that the problems afflicting a nation are always in equal measure spiritual crises, and that there is never a clear distinction in politics between the practical and the symbolic. Obama, having risen to prominence on the strength of this very insight, would start disbelieving his own rhetoric as the economic crisis hit. It was, in more ways than one, a true crisis of confidence.
Larry Summers disagreed vehemently with Volcker on fundamental issues. Volcker saw the ad hoc response to each crisis—Bear Stearns, Lehman, Fannie and Freddie, AIG, and now possibly the car companies—as a dangerous program. “We can’t keep doing this over a weekend!” he said in frustration at
the July meeting, foretelling the disasters of September. Volcker saw that the credit system in the United States was broken. He thought they should set up a modern version of the Depression-era Reconstruction Finance Corporation, a government entity to guarantee smart, responsible lending to private companies. It was a way to slowly work the country off its high ledge of debt, Volcker said, and to kill off the business model of profitably selling debt without having to actually assume the risk, which then gets passed around like a hot potato. Across the table, Larry Summers just rolled his eyes.
The power of Summers’s derision is well known, and in grappling with a financial industry that had spent the prior decade pressing farther down the rabbit hole of complex math and tortured modeling, there was currency to the idea that someone’s expertise might be out of date. Volcker’s entire appeal was his anachronism, an old-school focus on fundamentals, which helped him cut through the mind-numbing logic and technical details with which financiers justified their terrifically risky and profitable operations. Even as Summers ruffled feathers on the team, polluting the group’s collegial atmosphere with his brusque, competitive manner, he was winning the battle for Obama’s trust. They were already fencing, collegially, like peers. Once the reporters were shooed away in Miami, so that the real meeting could start, Summers’s opening précis strayed into political analysis. “Larry, I didn’t bring you here for political advice,” Obama chided jovially, as Summers and others laughed. And then Summers pushed forward, taking charge. The senator’s electoral lead widened as the country’s crisis deepened and his cold-sweat moment arrived: he would have to lead the country through this darkness and back to light. In the midst of this crisis of confidence, Obama needed what Summers was offering.
On September 24, five days after the Miami meeting, John McCain suspended his presidential campaign. He said he was going to Washington to participate in the bailout talks. Obama didn’t bite. If the crisis had brought on his cold-sweat moment, it had also given him the political window in which to make his move. When McCain called a White House meeting the following day, bringing together Obama, Bush, Paulson, and top party brass, an odd gambit to demonstrate his own leadership, Obama was by all accounts—from both Democrats and Republicans—the far better prepared of the two. Having spent a year among Wolf and his Wall Street patrons, Obama could talk finance like a pro.
“Obama delivered a thoughtful, well-prepared presentation, sketching the broad outlines of the problem and stressing the need for immediate action,” Paulson later recalled. Others noted the senator’s calm focus and even “presidential” demeanor.
Obama knew he had McCain on the ropes. His opponent had called the meeting as a sort of trap, and Obama had responded with an unmistakable smackdown. He spoke without notes—didn’t need them—and a thought flitted through his mind: he knew this stuff.
“The Democrats will deliver the votes,” he asserted with confidence. McCain had no rebuttal. He just listened, aloof and irritable at his own meeting, his discomfort palpable. Obama noticed this and pressed his advantage:
“I’d like to hear what Senator McCain has to say, since we haven’t heard from him yet.” That qualifier was a jab, small and calculated. It was the presidential election, after all, and Obama intended to win this thing.
McCain fumbled through a few platitudes and political nonstarters. He was clearly uncomfortable engaging in any kind of serious discussion on the topic, reading clumsily from the single note card he’d brought with him.
News reports and photos of the meeting—a true leadership audition, in a crowded room of official Washington —were soon circling the global media, offering what felt like an unmanaged glimpse into government’s own assessment of who could best lead it through peril.
Here, in the Cabinet Room of the White House, Obama clearly won the prize of being the most presidential, followed by the oddly deferential Bush—who didn’t say very much and seemed perplexed about why the meeting had been convened—and McCain, in a distant third, who looked confused, as if he had stepped off at the wrong bus stop. Like several seminal moments that preceded it—the convention speech in 2004, the Iowa victory speech, the brilliant dissertation on race—this was an instant when the public refocused its gaze. The African American senator with little experience indisputably looked and acted like a president in a time of crisis.
When the discussion broke, the two political camps huddled in separate White House enclaves. The Democrats retreated to the Roosevelt Room to talk through the sticky task of reconciling politics with what looked like a once-in-a-lifetime crisis. In the middle of this, an exasperated Paulson burst into the room, begging them not to attack TARP.
Pelosi for one had had enough. Her speakership had been built on a groundswell of anti-Bush fervor, and she not only vehemently disliked the president and his team, but also didn’t trust them—their declarations or their motives.
“That’s bullshit, Hank,” she said.
Paulson knew the only answer here to Pelosi’s aggressive politics was prostration. He genuflected, clasping his hands together, and put it on the line.
“I’m begging you,” he said. “Please don’t let this fail.”
“I didn’t know you were a Catholic,” the Speaker remarked dryly.
The next night would see the first of three presidential debates, but it would hardly matter. As Obama and McCain argued in Oxford, Mississippi, the election had already been decided. Their conduct in the wake of the crisis was already showing in the polls. The weak numbers that had concerned Obama in the early part of the month were fading quickly. After September 25, the day he suspended his campaign, McCain would not lead again in a single major poll. The election had been clinched in ten days.
On September 29 the first incarnation of TARP failed in the House, 228–205. Just moments before the vote took place, Pelosi spent just two lines describing the bill before launching into a diatribe against the Bush administration.
“Seven hundred billion is a staggering number,” she said, “but only a part of the cost of the failed policies of the Bush administration.”
Paulson’s plea had failed. It was all politics on the Hill.
“When President Bush took office,” Pelosi went on, “he inherited President Clinton’s surpluses, four years in a row of budget surpluses.” As she continued, policy makers from both parties were working on their own multibillion-dollar stimulus plans, having come to a consensus on, at least, the necessity of action. “No regulation, no supervision, no discipline,” Pelosi persisted, “and if you fail, you will have a golden parachute and the taxpayer will bail you out. Those days are over. The party is over.”
Many Republicans would cite Pelosi’s use of her platform to denounce Bush as their reason for voting against the bill. It was a circus. Wall Street traders watched in horror as the Dow plummeted an all-time, one-day record: 777 points. Obama took the vote in stride. It was one of the country’s darkest hours and yet, in a little more than a month he would have the country feeling as good as it had in decades. But now, with the reality of victory in his grasp, Obama was left to contend with both an irony and a sobering truth. The former was that Obama’s year and a half relentlessly courting Wall Street’s titans, who had pocketed historic profits on the path to disaster, had inadvertently graced him with enough mastery of how money and risk was managed, and mismanaged, that he could best Bush and crush McCain in the Cabinet Room audition. All the better that none of the politicians gathered around the table seemed to recognize this much less bracing truth, known only to him and a handful of others: he wasn’t ready.
On October 13, Paulson summoned the CEOs of nine of the largest American banks to the Treasury Department’s large conference room to deliver a surprise ultimatum.
Getting them to come—without telling them why—had been a feat. But it was simply too risky to offer advance warning of what he was attempting: his intentions might leak and then his gambit might fail, a combination that would kill the confid
ence-building—the faith that government had this crisis under control—that was the very point of the meeting.
The night before, while streams of urgent e-mail invites were being sent to an array of corner offices, Paulson met with Bernanke, Geithner, and Sheila Bair at his office to work through strategy. The goal was to get credit flowing again. The financial system was gripped with fear. Institutions were hoarding assets. Geithner had been pressing, cajoling, even threatening the various banks to merge—to pool capital, and then slash duplicative staffs, all to no avail. The CEOs were all in self-protective mode, trying to avoid messy marriages. Bernanke, meanwhile, had been secretly opening the Fed coffers to all manner of financial institutions, and some nonfinancials as well, in the United States and abroad. Since the previous fall, nearly $400 billion in virtually free money had been passed out by the Fed. Still, the economy was starved of capital, like a thirsty man living off drops of water. The original plan, to use TARP funds to repurchase toxic assets from the banks, had been deemed too slow. It could take months. Without credit, the system would seize—as it had during the Great Depression—and the consequences could be unimaginable. Those at Treasury often thought of the call with Jeff Immelt in the panic after Lehman’s fall, when the General Electric CEO said that his company might not be able to fund operations and fill orders. The flow of credit, like blood through the circulatory system, is a precondition for the economy’s survival.
So instead Paulson, Bernanke, and Geithner decided they would use capital injections, giving each of the largest banks multimillion-dollar welfare checks that they would commit to use expressly for lending.
Or, at least that was the plan. Bair, as was her way, was skeptical. “How are you going to get the banks to take the money?” she prodded Paulson at the planning session. Paulson said he would threaten them, and that the institutions that needed the capital would drag along the few that didn’t. Why was it important for banks that didn’t need a capital injection to agree to take one? For cover. Paulson said he’d tell them they must take it so that their less fortunate brethren wouldn’t be marked as in desperate need of a government infusion. Such a decline of confidence in those institutions could trigger a “run.”
