by Ron Suskind
That frustration had grown as details of the crisis began to trickle out. Outraged Americans, feeling proprietary about where their tax dollars had actually gone, were granted a first primer on the nature of credit default swaps. CDS had been an acronym bandied to and fro in conversation since the previous fall, but the term’s complexities remained murky to almost anyone who hadn’t spent years in finance. That seemed to have changed over the winter as the media offered explanations of how the vilified Goldman Sachs had, in essence, been paid $13 billion in bailout funds as a counterparty to AIG on swaps written to cover their CDOs, and another $6 billion from Société Générale, the French bank that Goldman impelled to be a front man so it could write even more swaps with AIG. Nearly $20 billion in tax dollars going to Goldman. CDSs, it was explained, were like insurance policies without reserves, where the holder could also make a wager on the fortunes of almost anything, as long as there was someone else, a counterparty, on the other side of the bet.
But the backlash had reached fever pitch by mid-March, when AIG announced the imminent disbursement of $165 million in bonuses, and news of the full, 100-cents-on-the dollar payments of federal bailout money to AIG’s counterparties created a kind of twin scandal that kept swirling over the ensuing two weeks.
Since mid-February there had been buses touring the houses of AIG executives, carrying demonstrators who would emerge to scream epithets and wave picket signs. The same went for the houses of financial industry lobbyists in D.C.: picketers with bullhorns. Proposals came from both sides of the aisle, buoyed by cable provocateurs from both Fox News and MSNBC—a rare example of ecumenical rage.
But the financial industry and its lobbyist protectors were even more aggrieved by how lawmakers were increasingly capitalizing on this outrage. Picketers and crank callers might yell, and several Wall Street banks might subsidize round-the-clock security for executives, but congressmen can pass laws.
Which is what the House did, on March 17, taxing at 90 percent any bonus above $1 million received by an employee of an institution that had received $5 billion or more in TARP funds.
Meanwhile, reports finally emerged, with White House fingerprints, that Senator Chris Dodd, who had taken more money from AIG than any other congressional official, had written and then withdrawn an amendment to the stimulus package in February that would have stopped the AIG bonuses. Dodd’s staff retaliated, saying that he’d quietly made the change at the behest of Geithner himself, who then countered a few days later, saying he’d been concerned about the overall legality of retroactively canceling compensation contracts for all the TARP recipients, rather than about the specifics of the AIG bonuses. None of it seemed to track.
Banking CEOs and their lobbyists watched this back-and-forth with intense interest—they saw it as Geithner having stood in the way of reckless congressional behavior—and they opened a fresh dialogue with the White House. Congress, they asserted, was out of control, ready to take actions that would cripple banks and throw the country into a deep depression.
Where the president himself stood was another question. He had just issued a statement that he now wanted Geithner to “use any legal means necessary to rescind the AIG bonuses,” a “legal means,” if found, that might well be extended to all the major banks. This, combined with Obama’s generally frosty language regarding the financial industry, had left the industry unsure of what to make of the new president.
But the lobbyists’ fears about the president’s strong words were calmed by calls to Treasury in March. Geithner, they found, was also concerned about congressional excesses. An idea was hatched: leading bankers would meet with the president. The bankers talked with the administration about ground rules and what message such a meeting might send—to the benefit of both the bankers and the president.
Which is why thirteen of the world’s most powerful financial executives, and a handful of their lobbyists, were milling about the State Dining Room the morning of Wagoner’s firing.
Despite Treasury’s assurances about Geithner’s sympathies, they were worried about what the president would demand simply because the masses wanted blood.
Until Obama arrived, everything was awkwardly convivial. Jamie Dimon, who’d spent years with Geithner in New York, had thought up an icebreaker, a way to keep things light, and handed the Treasury secretary an oversize novelty check made out for $25,000,000,000. Geithner smiled and joked about whether Dimon could make it a cashier’s check. Under the public spotlight, Geithner was uneasy, both ingratiating and defensive, speaking in short bursts between pregnant pauses. But here, in a roomful of bankers—his longtime constituents—he was loquacious and at ease. There was good news to report to the CEOs, many of whom he’d worked beside and socialized with for years. Just four days ago he’d unveiled his Public-Private Investment Program, or PPIP—one those “Hobbit” programs, as Emanuel chided—for the government to partner with private investors in a “no-lose” proposition for them to purchase the toxic assets from bank balance sheets. That, combined with the stress tests, which were coming along nicely, would help the banks survive intact, he told a few CEOs, and earn their way to good health.
Then the room quieted. Obama had arrived, and everyone settled around a bare mahogany table, a single glass of water, no ice, before each Queen Anne chair.
The president was cool, not particularly friendly, even though he’d spent many hours with some of the CEOs, such as Dimon, at fund-raising extravaganzas during the campaign.
“His body language made it very clear that he was the president, he was in charge,” said one of the participants, and that he wanted to hash things out—what he felt, what they saw. The discussion moved swiftly across topics, such as the general soundness of the overall system and how to jump-start lending, before it came around to what was on everyone’s mind: compensation.
The CEOs went into their traditional stance. “It’s almost impossible to set caps; it’s never worked, and you lose your best people,” said one. “We’re competing for talent on an international market,” said another. Obama cut them off.
“Be careful how you make those statements, gentlemen. The public isn’t buying that,” he said. “My administration is the only thing between you and the pitchforks.”
It was an attention grabber, no doubt, especially that carefully chosen last word.
But then Obama’s flat tone turned to one of support, even sympathy. “You guys have an acute public relations problem that’s turning into a political problem,” he said. “And I want to help. But you need to show that you get that this is a crisis and that everyone has to make some sacrifices.”
According to one of the participants, he then said, “I’m not out there to go after you. I’m protecting you. But if I’m going to shield you from public and congressional anger, you have to give me something to work with on these issues of compensation.”
No suggestions were forthcoming from the bankers on what they might offer, and the president didn’t seem to be championing any specific proposals. He had none: neither Geithner nor Summers believed compensation controls had any merit.
After a moment, the tension in the room seemed to lift: the bankers realized he was talking about voluntary limits on compensation until the storm of public anger passed. It would be for show.
Nothing to worry about. Whereas Roosevelt had pushed for tough, viciously opposed reforms of Wall Street and famously said, “I welcome their hate,” Obama was saying, “How can I help?” With palpable relief, the CEOs carried the discussion, talking, easily now, about credit conditions and how loan demand was soft because it should be: businesses were already overleveraged. “We don’t want to be making bad loans,” said one CEO, as his kindred from the more traditional banks, such as Minneapolis-based U.S. Bancorp or NatWest, nodded. “Much of our business is still old-fashioned lending.”
Even among this golden thirteen, there were class divisions. JPMorgan’s Dimon, Goldman Sachs’ Lloyd Blankfein, Morgan Stanley’s John
Mack, and Citigroup’s Pandit stood atop the global behemoths of Wall Street, making much of their money and their stunning compensation on everything but traditional lending. They ran vast trading and financial gaming operations, focused mostly on the largely depersonalized flows of debt. Although Dimon asked the first question, the Elite Four didn’t say much over nearly an hour, especially about the divisive issue of compensation.
There was, after all, no question that they and their kindred, who man the snowcapped peaks of private-equity and hedge funds, were the heirs to Milken. And that legacy is all about compensation, as anyone old enough to have been working on Wall Street in 1983—when all these CEOs were just getting started—could attest.
That year, Milken made $125 million. How much of a jump was it? The previous year, it was something of a scandal when John Gutfreund, the CEO of Salomon Brothers, made $3.1 million after, controversially, transforming his firm from a traditional Wall Street partnership, with the partnership’s money on the investment table alongside that of its clients, to a publicly traded company investing other people’s money.
Many Wall Streeters can remember, decades later, where they were when they read that morning’s Wall Street Journal about Milken and did a double take. Once their shock subsided, the great migration began to, by any means necessary, “be like Mike,” whose pay, incidentally, continued to rise.
The way this compensation frenzy raced through the professional class—from investment managers first, to their client CEOs, paid by complex options triggers and golden parachutes, to the handsomely paid lawyers and accountants who worked to make sure every practice could be defended as legal—is the real story of how America’s most precious asset, its human capital, flowed in a torrent across three decades into financial engineering.
Bank of America’s CEO, Ken Lewis—who made his money in an older, more linear fashion, by faithfully executing acquisitions for his charismatic boss, Hugh McColl, and then taking over Bank of America himself—glared at the Wall Streeters throughout the meeting. Lewis, who had long pined to use Bank of America’s girth in traditional banking to buy a Wall Street firm, got his wish, and more than he bargained for, when Greg Fleming engineered the bank’s purchase of Merrill Lynch. Six months later, Lewis’s bank was struggling to manage nearly a hundred thousand foreclosures and a host of homeowners’ suits, while its Merrill division, already catching the updraft of restored activities on the Street, was beginning to drive the bank’s earnings. Not that the Mississippi-raised CEO was expected to issue many quarters from his executive suite. The brusque Lewis, unfamiliar with the signaling system of shared interests between Washington and New York, had famously botched his conversation with Paulson and Bernanke in December, saying he needed more federal money or else he’d back out of the Merrill deal. Lewis, with the ink barely dry on his Wall Street pass, had interpreted matters too literally: New York clearly made money, with Washington as its guarantor, and he wanted his money now—or else. Paulson was incredulous. The “or else” of Bank of America’s retreat could make Merrill another Lehman and melt the fragile economy. Washington’s support, in any event, couldn’t be so bluntly reduced, like some covenant in a buyout deal that hadn’t been fulfilled. Lewis got his money, $20 billion, and then a welter of shareholder suits and investigations. He would soon be demoted, from CEO to chairman, and then ousted.
But as the conversation of shared interest moved forward, Lewis couldn’t help but blurt out that the banks shouldn’t all be painted with the same brush, that “we in traditional banking didn’t cause this disaster; it came from Wall Street!”
Silence. The issues of causation or urgent corrections in how the industry’s leaders on Wall Street made their money were on Congress’s agenda but not the administration’s, to the delighted surprise of many of those attending.
The thirteen bankers, terrified an hour before, now closed the discussion with Geithner about what they should say as they emerged into the enormous reportorial scrum gathered outside. Much of this was actually plotted ahead of time between bank lobbyists and the White House. Whatever happened inside the “people’s house,” they would emerge with the overall message that “we are all in this together.” And walking out of the portico, as the press crushed close, they said it, one after another.
That’s the one-line version of the covenant between Washington and successive White Houses (that Lewis, clumsily, tried to turn into a cashier’s check): “we’re all in this together.” Money will flow, as trillions of tax dollars had from capital to capital, D.C. to NYC, in the past year, but only under that gentle, inclusive phrase.
And then the CEOs boarded their private jets, convinced that they had nothing to worry about from the angry public and their congressional representatives.
“I think the administration agreed with our view that these crazy congressmen and their proposals to either nationalize the banks or cripple them with heavy taxes or compensation limits would throw the country in a deep depression,” said one of the bankers after the meeting. “Lots of drama, but at day’s end, nothing much changed.”
And that was the goal: not to change the relationship between the U.S. government and the financial industry that had evolved across thirty years.
It was clear to the banks that this special relationship had never been as imperiled as it was in March of 2009, a time in which the industry was still vulnerable and dependent on government.
Add in the scandals of AIG and outrage over counterparty payments, and there was no better time in a generation to deal directly with the way this crossroads industry—with the role of a utility that powers the economy—had grown dizzyingly huge and profitable while disastrously underpricing risk across the American landscape.
Those in Congress who saw this rare opportunity, and reached to seize it, were generally excluded from White House councils and debates. A group of leading Democratic senators led by North Dakota’s Byron Dorgan, along with Virginia’s Jim Webb, Iowa’s Tom Harkin, Michigan’s Carl Levin, California’s Dianne Feinstein, Vermont’s Socialist Bernie Sanders, and Cantwell—the latter two who had put a hold on Gensler’s nomination—had pressed to meet with Obama to discuss options for restructuring the collapsed financial industry since his inauguration.
As March arrived, an incensed Dorgan grabbed a speed-walking Emanuel in the halls of the Senate, all but shouting, “Where’s my meeting with the president?”
Emanuel promised to get it scheduled, but when Dorgan heard back, he could hardly believe what Rahm was offering instead: a meeting with Summers. The reason Dorgan and others in his group wanted to meet directly with the president was precisely because they felt that it was Summers, Geithner, and Gensler who had been instrumental in creating the antecedents of the current financial crisis. With the expectation of a Treasury white paper on financial reform coming sometime in the spring, Dorgan and the group fired off an angry letter to Emanuel on March 12: “I am reiterating our request to meet with the President so we may have some meaningful and timely input into the formulation of that program . . . We know the President will get plenty of advice from Larry Summers and Secretary Geithner on this subject. We want him to have the benefit of our advice on these matters as well.” When the senators finally got their brief meeting in the Oval Office on March 23 and laid out their proposals for rethinking the current regulatory model, Obama listened respectfully, but showed little reaction and offered no hint of the discussions that had been had in the marathon meeting of March 15.
In fact, the decision he had made in November to choose Geithner and Summers, and his penchant for wanting to convince his advisers of his rightness prior to making a major decision all but guaranteed that any such market interventions would place him in a position of having to out-debate much of his senior staff. That process, labored though it was, seemed to give Obama surety, a kind of hard-won confidence to act. A diverse array of perspectives is what presidents tend to want and, isolated in their White House bubble, often demand. Do
rgan and his senators were not the only ones having trouble getting to Obama. As a senior Obama adviser later said, “The president was concerned about showing his uncertainty, or his lack of acquired knowledge on lots of these policies, to his own advisers—much less people from the outside.” He was increasingly insulated by the end of March, with requests for meetings with him on domestic policies of all shapes being funneled to Summers. Larry would then decide if the interloper merited an audience with the president.
Of the many voices Obama was not hearing at this point, few might have proven as valuable as a longtime Massachusetts representative named Edward Markey. A thirty-three-year veteran of the House, Markey was chairman of the House Energy Committee and was known for his work on environmental legislation.
On March 19, a week before Obama met with the thirteen bankers, Markey spoke from the House floor as one of three dozen cosponsors of HR 1586, the bill that would levy a 90 percent tax on bonuses for any executive of a company receiving at least $5 billion in TARP funds who made more than $250,000. “This is March Madness,” he intoned. “You don’t blow the big game and then still get a trophy. Not one single penny of taxpayer funds should be used to reward the reckless executives whose irresponsible risk-taking has done massive damage to our economy. And this bill will ensure that they are not rewarded.”
Markey could bid fair claim to being farther ahead of the curve on the financial crisis than almost any elected official in Washington. As the youthful chairman of the House Subcommittee on Telecommunications and Finance from 1987 to 1995, Markey had held five oversight hearings on the risks that financial derivatives posed to the markets, and then introduced the Derivatives Market Reform Act of 1994, which would have regulated derivatives transactions by affiliates of insurance companies such as AIG. It was defeated, as were similar bills he introduced in 1995, 1999, and March 2008—all killed by the financial lobby.
