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

by Ron Suskind

  The hope of the rest of the country—to get the large banks lending again—was not neatly aligned with the interests of New York, which was to get its banks to start earning money, by whatever means necessary.

  Stopping by his office after the speech, Fleming was happy to be divorced from such bottom-line concerns. He said he’d begun talking to friends about starting “an institute to examine how to restore ethical standards to investing.” He figured he could base it at Yale and continue to draw Wall Streeters north to discuss “how to make prudence sexy again.” Not that he wasn’t still logging hours on the cell phone to many of his old friends atop Wall Street. They’d come to New Haven to talk about what went wrong, about lessons learned, but they’d also talked with Fleming about Wall Street’s hard, cut-to-the-marrow assessments of self-interest.

  “What Rodg was really saying at the end is that it’s optimistic—foolish, really—to think the banks will clear away what he calls those legacy assets. They’ll never do it. There’s too much of it, and in a down market the stuff is worthless.

  “But even if they did, slowly across ten years, it won’t cause them to start lending again, which is what real people in the real economy need. The big houses have too many other ways to make their money. They’re going to do what’s in their short-term interest, and lending out money into a soft market is not one of them.”

  He paused, stopping for a moment before getting into his modest car, kids’ backpacks littering the seats. Fleming said the betting line from the inside players such as Rodg Cohen was that about half of the nineteen would pass the test, half wouldn’t.

  “Rodg is afraid right now, and so is the industry. That’s why they’re going down to Washington to try to keep the stress tests as easy as possible. Wall Street does ‘greed’ on its own; they don’t need any help there. The card in Washington’s hand is fear; they still have it. They shouldn’t give that card up unless they get a lot in return. In fact, anything they want. This is not personal or about some shared principle. It’s about negotiating well. That’s all Wall Street, and a lot of people out there, respect.”

  Then he jumped in his car and headed for downtown Manhattan, to eat caviar and prime rib and write a check to feed the homeless.

  Two days later, Fleming’s nemesis, Ken Lewis, was blanketing the news. The New York attorney general’s office had released transcripts of Lewis’s sealed testimony about how the government had bullied him in December to keep the Merrill deal intact, under threat of dismissal for him and his board, and then gave him another $20 billion in TARP funds. The news was explosive, entrancing the news cycles with a glimpse of this strange, secret dance between Washington and Wall Street. Both sides had operated under legal obligations to act in ways that were transparent and accountable on behalf respectively of voters and consumers. But with their shared goal of projecting confidence—with confidence itself being both end and means—transparency was seen as carrying unacceptable risks. As the fears of September 2008 finally began to dissipate, readers and viewers tuning in to the case were treated to a tour of the shadow land where powerful impressions were manufactured. In a key passage that roiled the news cycles, Lewis told Cuomo’s investigators that he had been pressured by Paulson to keep silent about the deepening financial distress inside Merrill.

  Q: Were you instructed not to tell your shareholders what the transaction was going to be?

  A: I was instructed that “We do not want a public disclosure.”

  Q: Who said that to you?

  A: Paulson.

  Q: Had it been up to you would you [have] made the disclosure?

  A: It wasn’t up to me.

  Q: Had it been up to you?

  A: It wasn’t.

  With actions gamed for their effect, rather than the harder accountability that comes with transparency, the tough-minded decisiveness at the center of both good governance and sound business gets subtly corrupted.

  With Lewis’s disclosures now in sunlight, Fleming was receiving calls nonstop.

  Of course, in Cuomo’s investigation—officially probing the $3.6 billion in Merrill bonuses—Lewis testified after Thain and before Fleming. Back in his office at Yale, Fleming offered a view, from the very inside of the controversial deal, starting with the “material adverse change” clause.

  “It’s by no means clear that if we had a ‘material adverse change’ that they could exercise their rights under that clause. The clause is extremely complicated and wasn’t negotiated well enough. And it’s a Merrill-specific clause. What happened in October, November, and December was much more than Merrill-specific. The world went to hell after Lehman went down. So there wasn’t anything held back in diligence. Paulson and Geithner made the greatest mistake. The biggest mistake that was made, in spite of how hard they tried, was letting Lehman fail.

  “The clause protects Merrill because [its] problems would need to be disproportionate. But the whole industry was in turmoil so it could claim to not be Merrill-specific.”

  Then Fleming took it another step, putting on his deal hat.

  “I don’t know why Lewis pushed to do this, didn’t turn around and say [to Paulson], ‘Okay, I’m going to do this, but I need to renegotiate and then I need the SEC or somebody to agree on some expedited revote.’ I mean, you had the government at the table! I’m just amazed that [Lewis] didn’t come back and try to renegotiate.”

  This was a fine rendition of why, several centuries ago, governments decided to pass laws about the fair and legal conduct of commerce—and then get the hell out of the way. This was a dispute between two companies and their shareholders, for better or for worse. The assertion that “too big to fail” means “too big to exist”—soon to be voiced at a congressional hearing by a penitent Alan Greenspan—rested on an underlying principle that government shouldn’t find itself “at the table,” in Fleming’s apt rendering, having to cut deals with banks it couldn’t afford to let fail. Then deal points become destiny, with banks gaining, or losing, competitive advantages based on how successfully they managed their negotiations with a public entity—a model that undermined the government’s fundamental role as defender of practices and principles. Instead, it had become a case-by-case negotiator, with a bank’s survival as the only hard-and-fast goal.

  That afternoon, April 23, Barack Obama strolled into his Cabinet Room.

  Waiting for him were the elite of Congress. Sitting around the huge mahogany table was the Democratic leadership of both the House and the Senate, along with the Republican leadership of both bodies. They were there to discuss the budget, which had been a steadily growing issue, starting in late winter.

  Obama’s needs were great, but as budgets always command, there were limits.

  The huge financial obligations the United States had taken on during the Bush era were now colliding with the crises and diminished tax revenues left to his successor. The audacious agenda assumed by Obama had also meant enormous costs—most of them projected and yet to hit the balance sheet. The TARP fund for repairing the financial system still had, thankfully, $350 billion in it. But that figure was overwhelmed by Obama’s $787 billion stimulus package and the combination of rising unemployment benefits and declining tax receipts from the ongoing recession. Tax receipts had in fact flattened in early 2008, just as costs began to dramatically rise. The cost of the war in Iraq was now diminishing, but Afghanistan was more expensive—a wash. Health care costs continued to rise as the population aged and more people moved onto the Medicaid rolls in a depressed economy. The outcome was that the government’s expenses were running $1.2 trillion ahead of its revenues for 2009, a number that was sure to continue to grow until the fiscal year’s end on September 30. A version of these hard facts was revealed in late February, when the White House released its preliminary budget for 2010. Since then, in the traditional manner of budgetary brinksmanship, the White House’s budget had been matched, mirrored, and contested by budgets in both the House and Senate.

  Ev
eryone knew audacity wouldn’t be cheap, even with Obama’s pledges to remain fiscally prudent. There were grand plans in the budget, of course, led by a request for another $750 billion in additional TARP funds for bailing out and restructuring the financial system and, of course, health care reform, with $650 billion penciled in. On the latter score, Orszag had special advantages. Models he had been working on since he was CBO director in 2007—largely accepted by the current CBO regime—showed that the government’s efforts to use Dartmouth’s “comparative effectiveness” findings and similar data could both improve care and save costs. Up to a point. When the CBO scored Obama’s overall budget in late March, the projections weren’t good: a deficit, over ten years, of $2.3 trillion more than the administration had predicted. Beyond that, the Obama administration had committed itself to a deficit cap of 3 percent of GDP, a level that the CBO felt would be exceeded every year until 2019, when it would be 5.7 percent.

  Much would be unaffordable, and this meant new scrutiny on the cost of health care reform and the soundness—or “scoreability”—of its financial projections by independent analysts and, ultimately, by the Congressional Budget Office. The prospects were not good.

  What the administration was finding, Orszag and others recalled, were the distinctions between campaign talk and governance. You could say all sorts of things during a campaign. In government there was a system—albeit an imperfect one—to “price” expectations, and equally to negotiate, in a step-by-step process, the new laws of the land.

  That was what the leaderships of the House and Senate were poised to discuss in the Cabinet Room, and they did so without much headway. The parties were seriously divided. The Republicans were starting to call this the most liberal, big-spending budget in decades. It was a “third wave” of progressivism, said their fiscal guru, Congressman Paul Ryan, to follow FDR’s New Deal and LBJ’s Great Society. The Democrats, though, still had the leverage. If there was Republican intransigence in the Senate, they could pass the bill through “reconciliation,” a provision in which bills pertaining to the budget can be stripped of nonessential features and passed with a simple majority, rather than with the new normal—driven by creative uses of the filibuster—of 60 votes.

  Around they went, until a frustrated Obama improvised. Passing this prebudget resolution, a nonbinding next step in the process, he said, “has got to be a bipartisan process. I think we all need to give.” Blank stares from around the room. This was just the traditional partisan push and shove. You eventually found some midpoint and nudged the pieces forward on the board. It had been going on since Hamilton and Jefferson. “As a matter of fact,” he continued, “here’s an example: I think Democrats need to give up on medical malpractice. As an indication of my good faith, I’m willing to put that on the table.”

  But this was the table marked “budget.” Medical malpractice was a completely different debate—conducted in an entirely different realm—about the nature of health care reform. The admirable idea of trading the sacred cow of medical malpractice, considering how strongly the Democrats were supported by the country’s trial lawyers, for a sacred cow on the Republican side was the kind of grand bargain that might take a few weeks or months of secret, cross-party meetings. Though this group represented the congressional leadership, most of those here were not their party’s point players on health care reform.

  This time Obama filled the space and the silence.

  “Okay, now, what are you giving?” he challenged the puzzled Republicans. “What is your reciprocal ‘give’ here?”

  Not one person said a thing. One of the participants later said the moment was “odd and surprising, like a scene from that movie Dave,” where a man off the street suddenly winds up as president. Once the silence had become intolerable, an agitated Obama wrapped things up: “Look, guys, this is making my case. You talk about bipartisanship. Well, I just laid down a very tough deal, and not one of you responded with a similar concession. Bipartisanship is a two-way street!”

  Some of what was driving Obama’s improvisations was that, unbeknownst to the public, he still wasn’t sure what sort of policy he actually wanted as the “top priority” of his presidency. If Obama had indeed created “a space where solutions can happen” at the Health Care Summit six weeks before, it was by now clear, to one and all, that there’d been little forward motion to show since then.

  Losing Tom Daschle in early February was a blow that the White House had yet to recover from. With his wide array of skills, a long history in Washington, and a close bond with Obama, Daschle would have been ideally suited to direct the health care battle. After former Kansas governor Kathleen Sebelius was picked to take Daschle’s intended place, heading the Department of Health and Human Services, Nancy-Ann DeParle was hired, on March 2, to lead the initiative from inside the White House. Obama’s idea was that they would work as a team. But the result, even after DeParle’s arrival, was that no one was in charge. Orszag, arguably the White House’s leading expert in this area, had his hands full running OMB and attending each day’s morning economic briefings. Nonetheless, he protested to Emanuel in an e-mail: Listen, I can’t run health care, but someone needs to.

  But on Obama’s desk this week was a seven-page memo from DeParle to help the president decide where he ought to stand on the seminal issue of health care. DeParle, a soft-spoken, Tennessee-bred Rhodes Scholar who, under Clinton, had run the Health Care Financing Administration—the entity that oversees vast federal outlays to Medicare and Medicaid, and is now called the Centers for Medicare & Medicaid Services—wasn’t the type to meaningfully challenge Orszag or Summers at the conference table. She was a tough-minded expert with very specific opinions. She was respectful of the Dartmouth data that so enlivened Obama and Orszag. But having been a board member for various health care industry firms, she understood how the mountains of stunning data about “comparative effectiveness” built around the Wennberg Variation, of better care at lower cost, were still seen as a declaration of war by most health care providers.

  While Obama, and certainly Orszag, seemed ready to fight that war, DeParle’s focus was on the lynchpin calculations involved in insurance reform. She directed Obama’s attention to the only working model for reform in the country: Massachusetts, whose health care overhaul bill passed in 2005 under a brokered deal between then-governor Mitt Romney and the state’s Democratic legislature. Those who viewed the Massachusetts plan as already a compromise of principles, including Ted Kennedy, pointed out that the model—of an individual mandate, where citizens were required to purchase health insurance; of insurance exchanges, where they could choose from a wide array of policy options; and of government support for those who couldn’t manage the cost of premiums—had been the “market-driven” Republican position during the Clinton initiative in 1993 and for the decade to follow. What’s more, the centerpiece of that program, the individual mandate, was something Obama had drawn up short of endorsing during the campaign, much to the ire of Hillary Clinton, who called him “all talk, no action” on health care.

  Now, DeParle, in her memo, stressed that Obama should embrace a plan much like that in Massachusetts, driven by the teeth of a mandate, where individuals would be fined for not having health insurance. Obama, never much for the mandate, was concerned about legal challenges to it but was impressed by DeParle’s coverage numbers. Without the mandate, the still-sketchy Obama plan would leave twenty-eight million Americans uninsured; with the mandate, the estimates of the number left uninsured were well below ten million. But the mandate, with its various features, was expensive, adding an estimated $287 billion across ten years to the total cost.

  Which is why at the budget meeting on the twenty-third—and in the weeks to come—Obama was looking for lightning-strike gains on cost, such as tort reform. DeParle’s focus, like that of the Massachusetts plan itself, was on expanding coverage: how to get everyone in the tent. Obama had often said to Orszag that he believed coverage and cost needed to
walk abreast—in an integrated, mutually supportive way—if health care were to work. But this week, as he found himself persuaded by DeParle’s plan, he already saw how coverage would edge ahead of cost in the ordering of priorities.

  The next morning, over at the Treasury Department, Tim Geithner was wild with single-mindedness: “I don’t want even one molecule of energy spent on anything other than the stress tests!”

  In the large conference room near Geithner’s office, Treasury’s senior staff looked on, wondering what’d gotten into him. He was never one for locker room speeches, even when a motivational moment arose.

  “Actually, I believe energy is measured in ‘ergs,’ ” quipped Krueger, to fill the awkward silence.

  “Okay, then,” Geithner shrugged. “Not one erg of energy.”

  His point was clear to all: Treasury had staked everything—including, quite possibly, Geithner’s job as secretary—on the stress tests. Not much had worked up to now, from Geithner’s clumsy explanation in February of how the rest of the TARP funds would be applied to, in March, the handling of the AIG bonus scandal.

  Treasury desperately needed to appear, at long last, as if they could meet this period’s crises like professionals, with matters firmly under control.

  Friday, April 24, was the official start of that crucible, with the public debut of the stress tests. After living through a series of backroom deals from last fall that had blown up in his face by spring, Geithner was ever more convinced that the stress tests needed to be kept in sunlight. This was far from an issue of consensus. Bernanke and the Fed had recommended that they be kept confidential, just as they had pushed to keep secret how AIG allocated its bailout money, and—still successfully—which banks needed to rely on Fed funds and guarantees. But the distinct institutional mandates of Treasury and the Fed—the former operating under the direct, day-to-day mandates of a duly elected president; the latter, sometimes called the “fourth branch” of government, designed to support the banking system and manage monetary policy with little public oversight—were now creating regular complications in their many joint efforts to right the economy. As public outrage grew about the alliances between Washington and Wall Street, the Fed’s tradition of concealment drew deepening suspicion. Even Bernanke had to acknowledge this. Geithner’s position—that the markets would respond to the stress tests’ findings only if they were at least as transparent as a bond rating agency—ultimately prevailed, though it meant his tests would have to be cleverly constructed not to reveal their many sub-rosa calculations, even under intense scrutiny.