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

by Ron Suskind

  New York Times columnist Paul Krugman had been developing both edges of the analogy since a few weeks after the September 2008 meltdown, when he wrote on his widely read blog that a temporary nationalization of the banks, as the Swedes had successfully done, was the only sound remedy to the crisis, but one that “won’t be possible until January 21”—when, he hoped, Obama would be president.

  Just as Obama was firmly opening a mid-October lead that would all but assure him the presidency, Krugman also won a prize, the Nobel Prize for Economics, which gilded the columnist with a rarified credibility ideally suited to the moment. While Krugman’s longtime competitor, Summers, assumed the role of senior economic adviser, Krugman was suddenly the voice, twice weekly, of the progressive alternative. While in Stockholm in mid-December to accept the prize, Krugman warned that the “scenario I fear is that we’ll see, for the whole world, an equivalent of Japan’s lost decade, the 1990s—that we’ll see a world of zero interest rates, deflation, no sign of recovery, and it will just go on for a very extended period,” a bleak outcome that might result if the United States followed Japan’s path of largely unconditional support for “too big to fail” banks.

  “Each morning at the economic briefing it was like we were debating Krugman,” said one attendee of the meetings. “Clearly Obama was reading Paul’s columns and related materials on this Sweden-versus-Japan split, and it made sense to him as both analysis and a guide for action.”

  All of which put Summers and Geithner—both of whom thought the country comparisons were overly facile and of limited application—in a bind. This was especially the case for Geithner, who was busy working through alternatives for a plan, any plan, to fix the financial system, a plan Obama was anxious to unveil.

  It wasn’t going to look much like Sweden. He and his thinly staffed Treasury considered one plan after another, including guaranteeing the assets of the banking system against extreme losses—a proposal whose price tag could approach $1 trillion—or forming an “aggregator bank” that would start buying toxic assets from banks with a large portion of the $350 billion currently left in TARP. The problem: Treasury officials estimated there may be as much as $2 trillion in toxic assets throughout the system. No one had that kind of money.

  The remedies were all asset-based. How, in short, to remove or nullify enough of the toxic assets on bank balance sheets—most of them securities tied to or backed by mortgages, many quite complex—so banks could begin to lend again, but do it in a way that didn’t seem like another massive government grant to help them earn their way out of a disaster they’d largely caused.

  With only a few days before Obama was due to offer news of Geithner’s solution at his first presidential press conference, Geithner’s team—at that point, pulling all-nighters—settled on a program the Fed had developed the previous fall: a public-private buyout fund. Investors’ capital would be leveraged up at about ten to one with loans from the government, which would act as a co-investor. If there were profits, the investors would do well; if not, their losses would be limited, but their involvement in what was clearly a sweet deal would help move the toxic fare out of banks and into a marketplace where it could be priced. At least, that was the idea.

  When Obama stepped into the East Room on the evening of February 9, he was carrying the surety of a man fast establishing his bearings. With approval ratings in some polls notched above 70 percent—CNN’s was a 76—he could now offer a display of strength in an area of weakness for his predecessor: the prime-time presidential press conference. Viewership was high, a 42 household rating. Just three weeks after the historic events on the Mall, people wanted to see the man they’d elected in action, and the live theater of thrust and parry with the Washington press corps is as close as the public tends to get. Obama was pumped up and ready. He’d been training for this for much of his adult life and, stepping to the lectern, he was brimming with explanations for how the world worked and what he was planning to do about it. For the first question—about whether his rhetoric about the economy was too bleak—he went with Japan: “The federal government is the only entity left with the resources to jolt our economy back to life,” he said, alluding to the soon-to-be-passed stimulus, and then warned that a failure to act “boldly and swiftly” in handling the failed banks could leave America looking like Japan. “They suffered what was called the ‘lost decade,’ where essentially for the entire nineties, they did not see any significant economic growth.”

  As to the specifics of those bold and swift actions—crucial to avoid Japan’s fate—he said the country would be hearing the next morning from his right-hand man.

  “Tomorrow, my Treasury secretary, Tim Geithner, will be announcing some very clear and specific plans for how we are going to start loosening up credit once again. And that means having some transparency and oversight in the system. It means that we correct some of the mistakes with TARP that were made earlier, the lack of consistency, the lack of clarity in terms of how the program was going to move forward. It means that we condition taxpayer dollars that are being provided to banks on them showing some restraint when it comes to executive compensation, not using the money to charter corporate jets when they’re not necessary. It means that we focus on housing and how we are going to help homeowners that are suffering foreclosure or homeowners who are still making their mortgage payments, but are seeing their property values decline.”

  Obama was just warming up, mentioning a moment later how “my immediate task is making sure that the second half of that money, $350 billion, is spent properly. That’s my first job. Before I even think about what else I’ve got to do, my first task is to make sure that my secretary of the Treasury, Tim Geithner, working with Larry Summers, my national economic adviser, and others, are coming up with the best possible plan to use this money wisely.”

  The president had not actually done that, at least not yet. There’d been discussions in the morning briefings about guiding principles and the president’s view about how policy should be shaped—views that Obama expressed eloquently, several times, across the coming hour.

  Principles, however, were not policies, and well along in the questioning, the New York Times’ Helene Cooper, who understood Obama better than most other reporters in the corps, pressed for specifics: “On the next bank bailout, are you going to impose a requirement that the financial institutions use this money to loosen up credit and make new lending? And if not, how do you make the case to the American people that this bailout will work when the last one didn’t?”

  The question was a bull’s-eye. Obama, for the umpteenth time across an hour, deferred to his Treasury secretary, who, of course, didn’t believe in imposing requirements on how financial institutions decide to apply their capital. “Again, Helene, I’m trying to avoid preempting my secretary of the Treasury. I want all of you to show up at his press conference as well,” Obama said to hearty laughter. “He’s going to be terrific.”

  The next morning, a standing-room-only crowd gathered in the high-ceilinged Cash Room at Treasury. Geithner was anything but terrific. The plan for government to encourage investors to buy up toxic assets—a program that would eventually be called PPIP, for Public-Private Investment Program—was offered only in generalities. It was so hastily assembled that Geithner’s team hadn’t worked out the crucial logistics, such as how the assets would be valued, using what yardsticks, or what terms would apply to investors. There were rumors that Geithner would address the fundamental issues on the sellers’ side of this equation—whether banks would get a reprieve in “mark-to-market” accounting for the assets they sold to the new fund. Without that, banks would have to take huge write-downs from such asset sales—forcing them to book heavy losses or even publicly acknowledge their insolvency. No remedy for that meant the public-private partnerships could be a bust.

  Geithner offered nothing on that score—no clear policy, after all, had been hashed out—though he did mention, almost in passing, a program for “s
tress-testing” the banks over the coming months, to show their soundness. But he was hard to listen to. He was sleep-deprived and nervous as hell, and it showed. His demeanor seemed shifty and small. MSNBC’s Mike Barnicle memorably described him as having the “eyes of a shoplifter,” darting fearfully to and fro.

  As laudatory reviews of Obama’s fortnight’s performance filled the news cycles, a wide and diverse audience now saw Geithner and winced. Minutes after he stepped before two huge American flags, looking like the losing candidate in a student council election, the equity markets began to tank. It didn’t stop. The confidence Obama seemed to impel was shattered by the man he’d hired. By 4:00 p.m. the Dow had dropped a stunning 378 points. Geithner was widely cited as the cause.

  This dissonance was the first glimpse of a gap between sunlight and shadow, between what the public saw and felt about the president—about his incisive intellect and unflappable demeanor, his command of issues and events, his charm and perspicacity—and what was happening inside the protected realm of the White House.

  The next morning, and the ones that followed in the coming weeks, the president would work his Japan-versus-Sweden analogy, as Geithner would parry this line of argument with his gentle verbal quickstep, offering qualifiers about how Sweden was different from America, and Japan was, too. There were many distinctions. Sweden had only six large banks. Japan had structural issues that were unique to its economy.

  Meanwhile, Summers backed off, steering clear of offering his own definitive position. The issue of whether to take down banks and restructure them was, after all, primarily the province of the Treasury secretary. Summers knew this: he once had that job, had wanted it again, was passed over in favor of his young friend, and now was waiting patiently for the prized job as Federal Reserve chairman when Bernanke’s term came up later in the year. Other than offering general comments about the effects of tighter credit on the wider economy, he gave ground, letting the embattled Geithner stand in the way of Obama’s evolving position and ardor.

  The president, Summers could see, was trying to establish enough mastery of some very complex issues so that he could act boldly and swiftly and, it was hoped, responsibly, on behalf of the American people.

  Summers knew it was better in any debate to let one’s opponent fully establish his position before you stepped up to the lectern. In others words, he who goes last usually has an advantage and, eventually, the last word.

  Obama, now as president, was busy going first, trying to figure out a way to be Roosevelt in the country’s hour of need.

  9

  Well Managed

  The black sedan was speeding back from Capitol Hill, down Pennsylvania Avenue and toward the White House. Tim Geithner, fresh from testifying before the House Budget Committee, was on the phone, and had been on call over the past few days. Citigroup, the largest diversified financial institution in the United States, was on the verge of collapse. The previous afternoon, in a heated conference call with Ben Bernanke and the other top financial officials in the United States, Sheila Bair, head of the FDIC, was pressing Geithner to “bite the bullet” and, with the FDIC’s help, do an orderly “resolution”—essentially, a controlled bankruptcy. Geithner fended her off, and then called Dick Parsons, the former Time Warner chief who was Citi’s new chairman—replacing Bob Rubin—to report where things stood. Since then, the situation had continued to deteriorate.

  Just that morning, March 5, Citi’s stock had dropped below $1 per share—less than the bank’s charge for a single ATM transaction. The bank, which had a stock price in the high $40 range in 2007, was now facing an upside-down balance sheet, with hundreds of billions in toxic assets and a market capitalization that was racing toward zero.

  If Citi collapsed in an unmanageable “run,” other banks would likely follow. It could easily be a Lehman repeat, plunging the economy even deeper into trouble. But it was also a test. The government could either add more capital, bailing out another troubled Wall Street giant, or it could show its ability to soundly unwind a big bank without sending the financial world into spasms. What was clear was that the government couldn’t stand by and do nothing.

  In the car, Geithner looked at that morning’s news. Late that afternoon, there’d be another conference call. Bair would be coming at him again.

  Sitting next to Geithner in the car was one of his top deputies, Alan Krueger, now the assistant Treasury secretary for economic policy and—in a term dating back to the eighteenth century—the “chief economist of the United States.” Another holder of that title was Paul Volcker, when he had this job in 1969.

  “You’ve got to fill in for me,” the Treasury secretary told Krueger as their sedan pulled onto the White House grounds. “I’ll just make a quick appearance, show everyone I was there, and then slip out. I don’t have time for this today.”

  Geithner was talking about the big Health Care Summit taking place at midday in the White House. The secretary, in other words, didn’t have time for what his boss considered the most important initiative of his presidency.

  A hundred yards away, at the Northwest Gate, John Podesta was pleading with White House security. He was certain his name was on the list.

  Sitting in his booth, the guard glanced over again at his computer screen. Sorry, no “Podesta” had been cleared. The former Clinton chief of staff shook his head in disbelief. He had once ruled these grounds. He began dialing numbers on his BlackBerry, one White House extension after the next, looking for someone, anyone, to get him clearance. No answers.

  Almost everyone of political consequence was already crowding beneath the gold-inlaid ceiling of the East Room. This morning was the grand opening of Obama’s adventure in self-governance: the mission to reform health care in America, a goal that had eluded nearly every president since Teddy Roosevelt. Today it was a combination of theater and intervention, with the new president assuming the role of therapist in chief, bent on saving a town addicted to conflict.

  The crowd in the East Room was buzzing with anticipation and nervous energy, like a feuding, far-flung family gathered at a rare reunion. Since word of this leaked out two weeks ago, the issue of who was and wasn’t on the guest list had become the stuff of controversy. Representative John Conyers, Detroit’s aging liberal African American dean, went so far as to squeeze Obama’s arm at an event and ask to be included—to no avail—touching off a flurry of online outrage that finally resulted in an invite.

  On the day’s schedule was a short speech by Obama, followed by an hour where everyone would break into work groups, and then a return to the East Room to begin sketching a way forward. In his Inaugural Address, Obama had said that in the election, America had chosen “hope over fear,” but already the town’s mandarins were whispering that he would need both of those important tools to squeeze anything like tangible progress from this rabble.

  No one knew this better than Podesta, who—having finally found someone to vouch for him with the guards—slipped quietly into a chair in the last row. He had worked in the White House during the last great battle to change a broken health care system. The Clinton crew, many now settling into roles in the current White House, tended to look back on those days a bit like General Pickett reflecting on his disastrous charge at Gettysburg.

  It was a slaughter. President Clinton had called together “the finest minds” and, under the guidance of the First Lady and Ira Magaziner, a Rhodes Scholar buddy, they produced a thousand-page opus on how to repair what was even then 11 percent of the U.S. economy. They had unveiled the plan with great fanfare, flags waving, brilliant men and women in analytical concert marching to Capitol Hill for its passage. The doctors and hospitals, insurers and drug companies, who were not included in the deliberations, waited for their moment and then, in unison, opened fire. It was a bloodbath. Health care reform, having sucked up all the town’s oxygen for nearly a year, collapsed instantly in a heap. The fledgling president seemed overmatched and confused, and the Democrats were s
hellacked in the ’94 midterms.

  Fifteen years later, Podesta tried to think about what was different this time and what was different between the two presidents. Carrying lessons from one era to another, Podesta said, was not simple math. It was more like calculus, with shifting variables. The key was to draw the right conclusions.

  In the early nineties, he said, “there was a real debate about the need for reform, but not anymore.” Pursuing the thought, he added, “That’s the fundamental change. The business community now comes to the discussion with a real urgency. They’re getting killed with what’s going on in respect to health inflation. It’s imperative that the system change. Everyone agrees on that.”

  But Podesta’s vantage point yielded insight into the most important variable, the central actor: the two-term president he had known intimately, as only a chief of staff can, and the new president, whom he had now seen in more executive actions, as head of Obama’s transition, than almost anyone, anywhere.

  “Clinton had—or rather has—an ability to synthesize competing positions, to command the room and arrive at ingenious versions of the middle ground, that’s often invisible to others,” Podesta said. Obama was different, though, and it took him a minute to parse just how, in a way that praised both men equally. “He draws people out of their comfort zone,” he said, “but he does it subtly, challenging them with his openness and his commitment to change. He ends up making them rise to the occasion. He doesn’t just synthesize and sell a solution. He finds opportunities in the larger body of players to create circumstances where change can happen.” He paused, thinking all this over, and then he got it to a single sentence: “He’s creating a space where solutions can happen.”