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

by Ron Suskind

If Sheila Bair had especially strong feelings about Citigroup, she had her reasons. Bear Stearns had been rescued, Lehman had failed, Goldman had gamed everyone it met, JPMorgan had avoided the worst of mortgage-backed hell, as much by good luck as good management, but Citigroup was in its own special category. There was, after all, no bank that embodied past disasters and future risks like Citi. It essentially invented the concept of “too big to fail.”

  Anyone with a desire to understand banking in America need only follow the two-hundred-year arc of this institution, from its start in 1812 in New York to the $2 trillion behemoth that collapsed in 2008, with three hundred thousand employees, two hundred million customer accounts, and operations in one hundred countries.

  Citigroup, under its previous name, National City Bank of New York, was the country’s largest bank for much of U.S. history, and had been bailed out by the government many times.

  Not that the bank didn’t pioneer innovations, including checking accounts, negotiable CDs, unsecured loans, compound interest on savings accounts, and, of course, ATMs. It also was an innovator in the 1920s in creating the disastrous investment trusts, that era’s CDOs, that were at the center of the 1929 stock market crash and all but prompted Glass-Steagall so that banks, with depositors’ money, would never again operate as investment houses.

  While many smaller banks failed, National City Bank was propped up by FDR, as were other large banks, for fear that the overall system would collapse without them. But it was more than that. The bank, which was pilloried, along with its CEO, was always seen as a representative institution—what it did, or what was done to it, would serve as an example for others. No doubt other banks were ever attentive, following Citi’s lead as it invested in Latin American debt in the early 1990s (another government bailout) and in the late ’90s, as it was growing ever larger with acquisitions and mergers, culminating in the 1998 merger of Citicorp and the Travelers Group. That union, orchestrated by Sandy Weill and his deputy, Jamie Dimon, created a huge financial organism that provided virtually every function in the management of money and risk—from insurance to brokerage services, from investment banking to plain vanilla commercial paper, and every conceivable trading activity. Under one umbrella were brand names galore: Primerica, Travelers, Salomon Brothers, Smith Barney, Commercial Credit, with everything stamped “Citi.” More than sixty years after National City’s behavior helped prompt Glass-Steagall, Citi’s merger mania helped finally kill the already eroded separation between commercial and investment banks. Everyone, then, could be like Citi, and other banks didn’t disappoint.

  Not that this slaked Citi’s acquisitive thirst. Since 2003 the bank bought four credit card lenders and five mortgage lenders, ballooning up to $2.2 trillion in assets by 2007, roughly even with JPMorgan Chase and Bank of America—each, itself, a buffet of services and functions, if slightly less varied than Citi.

  And starting in 2004, Citi did what almost everyone else did: load up on CDOs, holding nearly $60 billion of them on its books by early 2008.

  The key was that the bank, after so many bailouts, was always seen as “too big to fail,” and took advantage of every feature that this designation provided, from a lower cost of credit to regulatory favoritism to a “might makes right” latitude in its all but indecipherable web of interlocking businesses. That’s what tends to happen, after all, at this size: the entity becomes impossible to manage. Sometimes banks end up on the right side of large market shifts, but often not. To be sure, the way the markets glorified the prowess of Jamie Dimon by the spring of 2009 was how they’d once felt about Sandy Weill.

  Citigroup, for its part, was haphazardly managed, going through four CEOs in just under a decade, with the last being Vikram Pandit, who oversaw institutional investments and trading at Morgan Stanley, and then ran a hedge fund, before becoming Citi’s CEO in December 2007.

  Pandit accepted a government check from Paulson’s Treasury the next fall—for $25 billion, like the other large institutions—but distinguished himself and his bank by returning just a month later, on November 24, for another $20 billion. More important, that same day, Treasury guaranteed $306 billion of Citigroup’s assets. It asked little in return for any of this—no management changes or restructuring. Just some warrants and preferred stock. This guarantee, so-called ring-fencing, allowed Citi to keep its enormous pile of nonperforming and illiquid assets—mortgage-related assets and a sinking, toxic haul of credit card debts—on its balance sheet and, with this government support, retain the illusion of solvency. Later, when pressed on this, Geithner cited the reason for this government largess, according to a report by TARP’s inspector general, “to assure the world that the Government would never let Citi fail.”

  Four months later, Sheila Bair was stressing that the government should now be sending the opposite message: destructive behavior could still, in some instances, draw a death sentence.

  In the conference call with the country’s top financial regulators at 3:00 p.m. on March 9, she stated her case, as she had on several such calls over the past week. Last fall’s ring-fencing was insufficient. The $306 billion wasn’t enough. In the ensuing months, Citi’s credit card defaults were rising, while the value of its toxic mortgage-related assets continued to drop. What had been on its balance sheets, after all, was not even the entire mess: many of the toxic CDOs were off the balance sheet, held in SIVs, structured investment vehicles, another Citi innovation from the late 1980s that had spread across the industry.

  FDIC analysts who’d examined the bank put the toxic load at roughly $600 billion out of a total of $1.6 trillion in assets. This figure, however, took into account the “intrinsic value” of the mortgage-related fare, rather than the harsher mark-to-market standard that everyone, everywhere, was ducking—and not without some justification. In the wildly oversaturated real estate market, even solid mortgage-backed assets would have trouble drawing a depressed price. The intrinsic standard accounted for some modest stabilization of the market at some point in the future.

  Many of those on the conference call—including John Dugan, the lead banking regulator in his role as head of the Office of the Comptroller of the Currency, or OCC; Bill Dudley, Geithner’s replacement as head of the New York Federal Reserve; and Ben Bernanke—were fearful that this “give” on the valuation by FDIC was a trap. Geithner, leading the call, felt “the markets wouldn’t respond well” to the intrinsic standard. Bair disagreed: it was eminently defendable, would help institutions get out of their bind of not being able to fully recognize the toxic loads on their balance sheets, and, of course, it was from the FDIC, not known for its charitable view on such matters.

  If, hypothetically, that $600 billion number were accepted, and Citigroup moved into some form of “resolution,” then, Geithner and others asserted, the FDIC would be on the hook for the whole amount. This game of brinksmanship had been another plotline of the conference calls: fine, if the FDIC wanted to take down Citi, it would have to bankrupt its own accounts to do it. The FDIC, which is supported by a tithing from the commercial banks it insures, would be overwhelmed by the cost and have to appeal to Congress for, well, a bailout.

  That was not the kind of resolution Bair envisioned. Now rubber was hitting highway. The FDIC’s specialty, of course, is shutting down banks. It’s been at it, over umpteen weekends, since the 1930s. Citi was huge, but its core was still a bank, and should be treated as such. That meant a prepackaged bankruptcy: the bank would be shut down; management thrown out; equity holders wiped out; troubled assets moved to a “bad,” or aggregator, bank; and a smaller but clean “good bank” would emerge, essentially a new entity that could accept investments and get on with business. The key to the equation was that, as in all bankruptcies, creditors would take a haircut. In this case it would be for a few hundred billion, which would lighten the amount of FDIC money that would be required.

  This was the key to the equation—to so many equations in this period, where debt had become sustenance
and its purveyors on Wall Street the richest community in human history. Geithner, on this point, would not budge. Debt was sacrosanct. No creditor would suffer. Bair was equally intransigent. Secured creditors, such as equity holders, of course, wouldn’t be wiped out, but they had to face consequences for lending money to an institution whose recklessness had led to its demise. They must, she said, “face some discipline.” Her point was that ultimately this would be seen as progress—as when someone finally got a needed operation—which would begin to restore long-term, sustainable confidence in the financial system. Debt was underpriced. Once it was priced properly, the healing could begin.

  Bernanke said little. He’d spent more than a year opening the Fed’s coffers to guarantee anything that moved to ensure that traditional market corrections, corrections in the pricing of risk, would not commence, at least not yet. Not that his efforts were resulting in the desired easing of credit by banks and other financial firms being supported by Fed dollars. They were just making money from the free money offered by the Fed, and sitting on the profits. Why, after all, would anyone lend when demand was zilch and America was overleveraged, stem to stern? Once the economy ticked up—maybe then. Of course, that couldn’t happen unless credit began to flow.

  Dugan, a holdover from Bush, whose OCC regulators for years visited banks and, generally, did not make a peep as the banks loaded up CDOs, said he was concerned about “how the markets will respond” to any actions against Citi.

  Around they went, gridlocked. Finally, Bair said that at the very least Pandit must go. He was essentially a fixed-income trader and a hedge fund manager. “We need a commercial banker at the top of this bank—someone who knows the business of banking. That’s one way to maybe get some lending started. It is mostly a bank, after all.”

  In terms of some accountability for reckless actions, Bair considered this a starting point. Geithner wouldn’t entertain even this fallback position. The government exchanged its $45 billion in direct aid and $306 billion in guarantees for a 36 percent ownership of Citi. Geithner, thinking about how that leverage might be used, said, “Maybe we suggest a few new directors and let them decide.”

  Dugan said he was concerned about how “the markets will react” to pushing out Pandit.

  Geithner, who’d chatted with Pandit a few hours before, added that maybe they could suggest that Vikram hire some more commercial bankers underneath him.

  Forty-five minutes passed—that was all for today. The men hung up. Bair, after she heard the clicks, wondered, as usual, what more she might have said.

  Geithner sat at his desk and signed forms allowing for various foreign acquisitions or investment in the United States, a system started thirty years before to review such activities through the lens of national security.

  A call had been scheduled at 4:05. His secretary asked if he was ready; it’s Vikram Pandit. Geithner told Pandit, as he did most days, where things stood.

  The next day, Bair got a call from Summers’s office. She was surprised. She didn’t talk to Summers all that often. Today, though, Summers was gracious and eager, particularly interested in discussing the basics of how a prepackaged bankruptcy might work on a bank like Citi. Bair ran through it.

  Summers was circumspect. He didn’t tell Bair that he and Romer were now, for the most part, in Bair’s camp and that they’d be in a “showdown” Sunday with Geithner about the future of big banks like Citi. He asked how deep the hole was—the hole that some funds, from somewhere, would have to fill if the bank were shut down and reopened. She said it was about $600 billion tops, and explained the “intrinsic value” calculus.

  He said Treasury seemed to think it was higher, more like $800 billion—a number so big it made bankruptcy more difficult. That higher number, of course, made Citi too big to fail.

  Without context, though, Bair couldn’t really discuss how these cost estimates could shape options and policy. She just considered it an informational call and told Summers to call anytime.

  On March 11, the AIG mess finally caught up with Tim Geithner—and it was ugly.

  The insurance giant had been given another $30 billion just several days before, on March 2, to shore up its operations, bringing the government’s total contribution to the firm up to a stunning $170 billion. That same day, AIG declared a fourth-quarter 2008 loss of $62 billion, easily the largest loss in U.S. corporate history.

  Geithner knew that bad was about to get worse. Soon the firm would be paying out those secret bonuses. Treasury had managed to avoid an incident in early February, by quietly reshaping the bill by Chris Dodd, but now they were coming to an actual payday.

  It would be a $165 million bonus dispersal, mostly to AIG’s top brass. Out of a total $450 million in bonuses, $55 million of which had already been paid, $230 million had yet to be paid out to AIG employees in 2009.

  But it wasn’t just the bonuses. Tucked in the disclosures AIG was due to make was a story that would carry another set of explosive numbers. The firm had used its bailout money to pay not just bonuses, but also much larger obligations on its credit default swaps to Goldman and other banks. Congressional committees, enlivened by Obama’s strong words of censure, were closing in on this point. On March 5—while Geithner was trying to handle Citigroup’s woes, and Obama was running his Health Care Summit—the Federal Reserve’s Donald Kohn, Bernanke’s number two, had testified before Dodd’s committee to the effect that he didn’t want to release which counterparties were being paid what with the AIG money because it would undermine “confidence” in the markets.

  The Fed in fact was pushing Geithner to keep his proposed stress tests confidential, so no one, except Treasury, would know how various banks had rated. But the dome of silence, central to the confidence game constructed between New York and Washington, was cracking. Bloomberg News reporters were hot on the trail of the AIG bonuses. Reporters from the Washington Post were not far behind.

  On Wednesday, May 11, Tim Geithner called Ed Liddy, whom the government, in consultation with Goldman Sachs, had placed atop AIG the previous fall. Liddy, a former Goldman executive, told Geithner that there was nothing to be done. The bonuses had to be paid.

  “We have to do something, Ed,” Geithner said.

  “They’re contracts, Mr. Secretary,” Liddy responded. “You can’t violate a contract.”

  Liddy said he would write a letter expressing why AIG needed to pay the bonuses, no matter how distasteful this seemed.

  Geithner hung up the phone.

  He knew he’d be drawn deeply into all this. He was the New York Fed chairman on watch when they had approved the AIG bonuses, the counterparty payments—all of it. The question of why he had let it get to this point, nearly six months after the arrangement was struck, and why he hadn’t alerted the president, still hung in the air.

  His schedule was also a problem. The stress-test proposals were proceeding apace. His whole team was working on them, led by Lee Sachs. But Geithner had to leave town. He had meetings over the weekend in Sussex, England, with finance ministers from the G20, twenty of the world’s strongest economic powers, in preparation of the full meeting with Obama and the others, scheduled for April 2.

  No one was more delighted about this than Larry Summers. He booked time with the president on Friday. His tough-love proposals were taking shape. Now he could sell them to the president while Geithner was far away, across the ocean.

  On Saturday, Romer’s team from the Council of Economic Advisers and Summers’s team from NEC met in the latter’s office. News of the AIG bonuses was now all over the papers, and it was Armageddon. The outrage at paying out what looked like a king’s ransom to executives of the companies whose “irresponsible” and “shameful” behavior, in Obama’s parlance, had wrecked the economy—and who had been saved only by taxpayer money—bled in every direction. Citigroup had gotten $50 billion in federal funds; Bank of America, $45 billion; JPMorgan and Wells Fargo, $25 billion each; and there were plenty more.

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nbsp; If anything, the news storm drove the Summers-Romer team even harder. This was precisely the problem, they said, when government forgot that its role was not to support failing businesses or use government funds to create private profits. It was time for a clean break. They spent the afternoon working through their proposal for government’s intervention in the financial system.

  In this area, Romer had particular strengths. Like Bernanke, she was an expert on the Depression, especially on the ways the Roosevelt administration had restructured the American financial system. The restructuring had yielded a kind of defining clarity to the managing of money and risk across four decades. But now, after thirty subsequent years of drift without this clarity, Obama had a chance to be Roosevelt. With Romer and Summers working in concert, matching her expertise with his rhetorical gifts, this might be the moment.

  The tension at this point was, at any rate, acute. Geithner felt that what Summers and Romer were doing was nothing short of reckless and that they were leading Obama down a path to disaster.

  Team Summers-Romer dialed up Team Geithner on an overseas call.

  Geithner and his deputies were on a plane back from Sussex. The call started cordially, but descended quickly into angry exchanges.

  As one of Geithner’s deputies told Romer, “Mommy and Daddy are fighting—can’t someone help us.”

  Apparently not.

  On Sunday morning, March 15, Alan Krueger ducked his head into Geithner’s office.

  “Tennis today? It’s nice out.”

  Geithner was a good player—a great athlete in fact, with a New York magazine article describing him as a “ ‘dauntingly fit’ stud on the tennis court.”

  While Obama favored golf, for the small group that managed U.S. economic policy, it was all about tennis. They’d all played high school tennis, some junior tournaments. Summers was a strong player. Gene Sperling, from Treasury, had played at the University of Michigan. The four often played doubles. Krueger was the best, still able to take games off of top college players.