by Ron Suskind
Her aide did, and the next day she started with a frontal assault, contending that the administration was in “statutory violation” of TARP’s April 30 deadline for the executive branch to offer reforms to ensure a similar financial catastrophe was not repeated. Then she pressed Wolin to admit that the actions of the Clinton administration to bar regulation of derivatives was a mistake—he wouldn’t, saying only there was a need for “more robust regulation”—and pressed him about moving all derivatives onto transparent exchanges. He attempted to dodge the question by saying he agreed with whatever Secretary Geithner had said in his confirmation hearings.
To see that, even in May, another Treasury nominee from the Clinton days was busy ducking and dodging questions from a Democratic senator revealed unresolved issues inside the administration. Despite the president’s publicly stated anger at Wall Street and its practices, Summers and Emanuel were sticking to their program, under which former officials from the Clinton era were never to admit to any errors in pushing deregulatory efforts. A counterstrategy, voiced by several of the president’s political advisers, was for nominees who served under Clinton to express appropriate contrition, much like Richard Clarke’s famous apology for the 9/11 attacks, which would allow for a truly “robust” discussion about what went wrong and how to fix it—a posture that fit with the president’s public statements.
Instead, there was a gap between the president’s words and the anticipated deeds of former Clinton officials—virtually all of whom, save Geithner, profited mightily from financial services jobs during the Bush years. This had led to questions about where the president actually stood on economic issues that had drawn populist fury from both left and right.
As one Obama aide put it, “This was the height of stupidity. The nominees could have been leading the charge to make the needed changes, rather than looking like they were testifying under duress.” He went on to point out that by simply acknowledging what everyone already knew—that in the last days of Clinton they were under intense pressure from lobbyists, and some of the money they made during the Bush years was probably ill-gotten—“we would have looked like leaders and might have even been about to draw to Washington a few more top Wall Street types” who could admit wrongdoing and then publicly commit to changing what they’d helped create.
One result of this self-protective playbook was to draw resistance from progressive Democratic senators to the prospective nominees, the outcome of which was now painfully clear: Obama had a woefully understaffed Treasury Department during four of the most important months of his presidency, a time when the opportunities were greatest to use a crisis to alter banking and finance in America.
This was a problem that Cantwell and the progressives hoped to resolve by getting past Geithner and Summers to meet directly with Obama. Based on his posture during the campaign, and public statements as president, they felt he was ready to correct long-standing imbalances in the way money and risk were managed—a problem with a host of devils in the details of law, regulation, and practice. But when, in late March, they finally made it to the Oval Office to lay out what they thought financial reform should look like—from executive compensation practices, to the dissolution of systemically dangerous companies, to the fast-growing industry, derivatives trading—Obama was noncommittal, saying he couldn’t speak with that “level of specificity” about reform. He’d left the problem of blocked nominees untended.
By May, after months of playing this game, Cantwell had finally heard enough from the lawyerly Wolin.
“All right. I just want to be clear, because there are certainly a lot of different opinions floating around. In fact, the previous nominee for your position, Mr. Cohen, recently told a crowd in New York, ‘As far as I’m concerned, I am far from convinced there was something inherently wrong with this system.’ So I want to get it clear. There are a few people in the administration who still cannot say that it was a mistake, and these are the same people I think who are slow-walking, thinking that we are all going to forget about the regulatory reform that is needed. I can assure you, we are not going to forget what is needed. My patience is running out with the administration having to take five months to say that some of these things ought to be regulated, and how they ought to be regulated.”
As to Wolin’s dodge—that he’d support whatever Geithner had happened to testify about concerning derivatives—Cantwell countered with a bit of her back-channel conversation with the Treasury secretary regarding exchanges.
“I am not clear where the secretary really is on that issue, because in a private conversation after the hearing he said he did not mean exactly what he said at the hearing, and since then he has said to a group of colleagues that the administration still has not come out with” [a] policy.
But the law is the law—as Cantwell pointed out, citing the April 30 deadline—and it was decided that a group of senior administration officials should finally nail down some clear proposals.
Which they summarily did, in the Roosevelt Room. Geithner, Summers, Romer, and Krueger were among those around the table, along with Emanuel. The chief of staff, who was not particularly versed in these regulatory matters and, in any event, was not an elected official, took charge, acting presidential.
After listening to an hour of debate on the matter of what the outlines of reform should look like—just like hour after hour of debates involving the president—Emanuel took control of matters. “Okay, Tim, what the fuck do you need here?”
Geithner, a bit stunned, paused for a moment.
“Well, a systemic risk regulator [someone to watch the landscape for systemic risk inside institutions], resolution authority [the statutory power to take down a problematic institution], and leverage [higher capital requirements to ensure that banks don’t over-leverage themselves]. Those three things.”
Emanuel nodded. “Okay, let’s throw in the consumer financial agency, and everything else can be flushed.”
So it was decided. Everyone kind of shrugged. One participant in the deliberations thought about whether Emanuel had, in fact, simply made this decision, or whether he was just carrying out the wishes of the president, then concluded that “the president couldn’t have decided these things and told Rahm what to do. At the start of the meeting, there were too many variables to choose from. You would have needed some sort of decision-making algorithm.”
What does it take to lead the world’s most powerful nation?
That was the question David Axelrod was considering on May 8 in his smallish office in the West Wing.
“Someone said to me the other day that history produces great leaders. But I don’t think that’s quite right. I think the American people produce great leaders. The fact that they took a guy who was four years out of the Illinois Senate and made him the president, but insist that he run every mile of the race to get there, clear every hurdle, run every gauntlet—there’s a wisdom in that.”
Axelrod, as the intellectual architect of Obama’s victory—the first U.S. senator since Jack Kennedy to manage this leap—falls into the camp that believes primary combat, from coast to coast, is an ideal trial by fire. We live, after all, at a time when presidents largely govern from a blindingly lit public stage. A distinct advantage came in being a skinny target, with a public record of choices and outcomes thinner than that of most sitting governors. But the flip side of this, political inexperience, was rarely leveraged by Obama’s opponents to good effect. Much credit for this goes to Axelrod’s deftness, and rightfully so.
But now, five months along, he and his boss were furiously trying to run up steep and unforgiving learning curves. Which is why Axelrod was expending inordinate effort following Obama to meeting after meeting, assessing how the president’s personality traits, his skills, his inclinations, had matched thus far with the dictates of a job that, until a few months ago, was unfamiliar to both of them.
Since arriving in Washington, Obama had told Axelrod he felt it was imperative to keep his c
onnection with the people. “At times of crisis, it’s absolutely crucial. He gets ten letters a day and reads them faithfully, passes them around. Because his greatest fear was that he’d lose his ability to relate to the American people.”
Axelrod is a rumpled, large, soft-spoken man, unsusceptible to hyperbole except on the subject of his boss. He is sure that Obama will be one of history’s seminal presidents. He talked about how Roosevelt’s New Deal era reigned from the 1930s until 1980, and how “the last twenty-eight years we’ve been defined by Reagan. But I believe this is the start of a new era.” The key to that happening, he said, is whether Obama “can restore the values he formulated in the Inaugural. I have no doubt he has the bearing and the capacity. The question is, is the system too ossified to allow for change?”
He then talked about how surprisingly difficult the demands of the White House were, how the process of translating ideas into effective, coherent actions was daunting. Axelrod, speaking for Obama, called it a “Sisyphean task,” but “we haven’t dropped the boulder yet.”
At the same time, in his account of Obama’s qualities, he said, “One of the things that serves him so well in this job is not only his strong compass but this very sort of broad intellectual curiosity. He just fluidly moves from one thing to another.”
This quality, which Axelrod cited as a strength, several senior hands around Obama who’d served other presidents were now convinced was a liability. They seemed to be acting to fill the void, trying to direct Obama or simply acting on their own with whatever presidential legitimacy they could conjure. But what was the goal? In what direction should they be pushing him?
On that score, Axelrod’s mom offered assistance.
“When I talk to my eighty-nine-year-old mother about Roosevelt, who was her hero, she doesn’t talk about the FDIC or Social Security. She doesn’t talk about the New Deal. She says you always felt that there was someone watching over us. You felt like everything was going to be okay because he was . . . there.”
Axelrod thought all that over for a moment, as though his mother were sitting on the couch in his office. Channeling her, he’d stumbled upon a working definition of the saving confidence Roosevelt’s presence seemed to restore, year by year, across a desperate nation. The complex acts of government were not what Axelrod’s mother—twenty-five years old when Roosevelt died—recalled from her formative years, or what resonated with her in all the years to follow.
Are sound policies, enacted and demonstrably effective, a prerequisite for restoring such crucial confidence in this era? Axelrod wondered, as that evocative phrase, “someone watching over us,” ran through his head.
“Does the confidence come from the policies themselves, or maybe something more basic?”
He paused, perplexed. “I just don’t know.”
“How do you deleverage an entire economy?” Paul Volcker asked, in sort of a joke. “Verrrrry carefully.”
The hairless giant laughed quite a bit whenever he delivered some tough-love advice. His demeanor was important to his survival in the early 1980s, when he decided what was right and then did it. Inflation was running in the teens then and killing the U.S. economy. Something had to be done. So, with his cockeyed smile, a small, fat cigar, and a grumbling air of “I’m doing this for your own damn good,” he squeezed down on the U.S. economy. He was working the large tectonic plates beneath the landscape, tightening the money supply so stridently it pushed the country into the 1981–82 recession—the worst since the Great Depression, until 2007 took the honor. But he managed to tame the inflationary beast.
Now his focus was on the geological shifts of the debate: “the problem is we’re replacing private debt with public debt.” When people start lending again, and eventually they will, he said, the private debt is likely to be replenished. Then total debt will be even higher. How do you stop this?
“Well, right now, when you have your chance, and their breasts are bared, you need to put a spear through the heart of all these guys on Wall Street that for years have been mostly debt merchants.”
Had he told Obama this? Yes, of course. “Every time I say anything reasonably intelligent, the first thing people ask: ‘Have you told this to Obama?’
“I tell him whatever’s on my mind,” Volcker said. “Does he listen? I think so. But he’s usually sitting in a crowd.”
And, he added, don’t get “me started on the stress tests.”
It was May 11. A few days before, the Fed released its verdict on the stress tests. Almost half of the banks were listed as needing to raise more capital. Ten of the nineteen largest banks would need to raise, collectively, $74.9 billion in order to withstand the hypothetical scenario posed by the tests. At the top of the list, to no one’s surprise, was Bank of America, which alone was undercapitalized by $33.9 billion. Citigroup and Well Fargo followed not far behind. They’d have six months to raise roughly that amount of capital or face some added action, not clearly specified, by the Treasury.
Still, the results were met with a sigh of relief from many banks. Goldman Sachs and JPMorgan Chase and Morgan Stanley were all deemed “adequate”—signifying that they could withstand the worse of two projected scenarios for a potential recession—and industry heads all seemed to be patting one another on the back.
Ken Lewis, meanwhile, was in the vocal minority of those still aggrieved by the government’s role in the financial sector. Having been removed from his board chairmanship the previous week, he was speaking with investors on a conference call, still acting as CEO. “The game plan is to get the government out of our bank as quickly as possible,” he said, maintaining that Bank of America had no plans to convert the government stake into common stock. Instead, it would focus on repaying TARP, a feat already accomplished by two of the other three “Big Four banks.”
The Fed announced that under the tests’ “adverse” scenario, the losses by the nineteen banks could total $600 billion in 2009, the equivalent of 9.1 percent of the banks’ total loans.
Volcker was diametrically opposed to the concept.
“Now the bad banks will want money from the government,” he said, or will go out and try to raise it “to make themselves whole. And the good ones, with their government stamp of approval, can go out and raise money that everyone will be sure is government guaranteed. Oh, they’ll make plenty of money off of that.
“They have their buzzword: ‘systemic risk,’ ” he went on. “They love that one. All the money being spent on these institutions because they have systemic risk, and then you have to rationalize and justify all that money spent, and that’s where you get trapped . . .”
His voice trailed off and then he unleashed a big Volckerian idea: “I do not believe in focusing systemic risk on the safety of specific institutions.” He said it like a pronouncement, and looked back at the line to make sure it held up. “You focus your energy instead on developments in the marketplace that carry systemic risk, developments that cut across institutions and particular markets. The whole use of financial engineering is a systemic risk, in my view. It led among other things to subprime mortgages. That was a systemic risk that was not particular to an institution, though it brought some of them down. Credit default swaps have a systemic component, as do the many ways people leveraged themselves.”
Whether this is sound policy—banning certain activities and altering behavior, after all, are never easy—this is what original thinking looks like. The problem, clear to all, was that institutions that were too big—too systemically risky—to fail during the Great Panic, were today even larger and quite possibly more systemically dangerous. These banks, Volcker said, not only were susceptible to “moral hazard,” but worse, to keep up their earnings in a soft lending market, they’d need to rely, ever more, on being R&D labs for “financial innovation.” On that score, Volcker was blunt: it was mostly chicanery draped in the alluring obscurities of marketing and complex math. “The last financial innovation by the banks that really created producti
vity and efficiency was the ATM. Ironically, it was Citibank that really got it started.”
He laughed, a kind of wheeze where his shoulders pulled up and down: “It’s like what’s-his-name in the ad: they have to start making money the old-fashioned way, they have to actually earn it.”
What’s-his-name was John Houseman. The long-running ads, for Smith Barney, were first launched in 1982—just about the time Wall Street stopped making money the old-fashioned way and compensation began to rise precipitously. Five years later, when Reagan replaced Volcker for being insufficiently antiregulatory, the former Fed chairman began serving on corporate boards. By the mid-1990s he had started to refuse requests to be on compensation committees. Why?
“What I saw happening made me sick.”
In a cautionary tale about how regulation can create unintended nightmares if not thought through, he described how a tax code change in 1992 mandated that companies could deduct only $1 million in cash compensation, per employee, as an expense, and any compensation above that had to show that it represented “value-added.” This effort to limit deductions on high-end salaries prompted companies to put more compensation in stock options . . . right at the start of the strongest decade for rising stocks in a century. Compensation, already rising fast, accelerated its ascent in an environment of weak unions and shareholder rights, and lax ethical boundaries for directors.
“Once this sort of thing starts, it takes some real toughness to stop it,” Volcker said. “But someone should have. Because having people paid tens of millions for activities of no social or really economic value—or, as the crash shows, negative value—just tears a society apart, at all levels, top to bottom. Well, maybe not top.”
