by Ron Suskind
“Then, the next month, he says, ‘God is on our side.’ ”
Values define a culture. This was, finally, one set of values speaking sternly to another. Whitehead, on one leg, pushing ninety, was the reedy voice of a vanishing tribe and their something-beyond-profit code of conduct: you should be guided not by what you have a right to do, but by what is right to do.
Across the room, his friend Volcker—another prudent man, old but unbowed, who’d spent the last few years trying to trumpet to the herd about the right thing to do—was being surrounded by middle-aged admirers, men mostly, who’d gained unseemly wealth in financial services. Two hundred people were in attendance tonight and, of the men, most were Wall Streeters and assorted capital jockeys. The place was jammed with them. They admired Volcker, sure—but they also admired themselves. One man, a former fellow at International House now working for the Spanish megabank Santander, just couldn’t wait to tell Volcker he spoke four languages, as in “I was an American at IHouse, but I speak four languages!”
“Then you must have felt right at home there,” Volcker said acerbically, looking down at the man with disdain. The guy didn’t pick up the tone: he was too busy telling Volcker what a fabulous job he was doing at Santander preserving its sterling credit practices: “No, seriously, Paul, no CDOs, none.”
It’s never easy when your friends die off, or the standards of those you worked to emulate—the code of the “wise men” of the American century such as Averell Harriman or George Marshall; Citibank’s old lion Walter Wristen; or William McChesney Martin, Jr., the legendary Fed chairman; all of whom Volcker revered, and patterned his life after—get washed away. Whatever else those men did—and, no, they weren’t angels—they didn’t take the short money; they didn’t calculate the risk of getting caught. They were in it for the eulogy, where someone who really knew them would say what kind of life they’d lived. Volcker, Whitehead, and David Rockefeller will certainly be joining those men sometime in the not-too-distant future, probably before they have the indignity of witnessing another disaster born of craven and careless men.
Both Whitehead and Volcker now needed to be helped down a twisting flight of steps, as the crowd started to make its way toward the “Playhouse.” It’s a vast room—matching anything at Hearst’s San Simeon or Vanderbilt’s Biltmore—with twenty elegantly set tables of ten, with flowers and lit candles, arrayed under a vaulted ceiling. The Rockefellers and their guests once put on plays here, hence the name. The motif is neoclassical, the modern age’s attempt, across recent centuries, to recapture the intellectual and ethical accomplishments of ancient Greece. Yes, old John D. raped and pillaged to make that fortune. And rather than boast about it—what brilliance, admirable efficiency, and strong management technique—his sons, and then grandsons, such as David Rockefeller, spent their lives making amends.
In the lowlands beneath this hilltop, in every direction, America is furiously showing its particular character as a civilization.
In the hour since the start of this gala, twenty-five thousand gallons of oil had poured into the Gulf of Mexico. The BP disaster was already two months along, having turned into a dark, gushing nightmare of man’s penchant for unleashing forces he cannot control. Like so many other disasters in this period, the spill was the result of executives pushing themselves to the very edge of legal limits, and then beyond, in the name of short-term profit. Everywhere were disclosures of endemic regulatory malfeasance—one example after another of “regulatory capture,” all but identical to what underpinned the financial meltdown, where energy regulators served the companies they oversaw rather than a wider public interest.
The man who started the empire of oil was, of course, anything but a prince. It took enormous and ongoing effort—from Teddy Roosevelt’s trust-busting, breaking up Standard Oil of New Jersey, to Ida Tarbell’s fierce journalistic digging into Rockefeller’s corruptions—to rein in this prototypical corporate leviathan. Both Presidents Roosevelt—one Republican, the other Democrat—would have said, if they could still walk upright, that government should not be a friend of business; that business can take care of itself; and that government has more important work to do, to carry forward the “greatest good for the greatest number.” The Ancient Greeks, in their own unique way, would almost certainly have agreed.
As, suddenly, did much of the U.S. Senate. The triptych of the Goldman investigation, Blanche Lincoln’s surprise, and Levin’s smackdown of Blankfein seemed to have jerked many of the Democratic senators, and a surprising number of Republicans, out of a trance.
Clearly they were hearing from constituents displaying a surge of populist outrage that, if not quite so raw as it was with the AIG bonuses the previous year, was now more targeted and substantive. It took a while, but the public and the media were finally connecting what had gone wrong, across the many years leading up to the financial implosion, and what might be done.
The question: Was it too late? With the House’s bill complete and much of the Senate’s bill already shaped by long months of lobbyist-encouraged horse trading, panic had taken hold. Democratic senators started filing one amendment after another, in some cases with improbable Republican support.
Ted Kaufman, a lantern-jawed former chief of staff to Joe Biden, who was given the Delaware senator’s seat for two years when his old boss became vice president, introduced the SAFE Banking Act. It reined in the size of the largest banks by imposing size caps and limiting leverage. Kaufman, who cosponsored the bill with Ohio’s Sherrod Brown, was, by circumstance, a sort of throwback to an earlier era. He was smart about the ways of Washington, a former prosecutor, and he cared not one wit for the political dance of fund-raising and influence management. At the end of the year, he was going home to Delaware. As the Wall Streeters used to say about Volcker and some of the other economic advisers gathered around him during the campaign, Kaufman had “no handle,” nothing to grab. There was nothing he wanted. No self-interest to twist. The SAFE Banking Act was just a straight-up “too big to fail” amendment legally limiting the size of banks. How would the banks manage this? That was their problem. This was part of the act’s immediate appeal: its simplicity.
It imposed a 10 percent cap on any bank holding company’s share of the United States’ total insured deposits. It limited the size of nondeposit liabilities at financial institutions to 2 percent of U.S. GDP (and 3 percent for nonbank institutions), and, finally, set into law a 6 percent leverage limit for bank holding companies and selected nonbank financial institutions.
The banks immediately cried foul—that the act was unworkable and disastrous, that huge foreign banks would devour the U.S. banking sector, and that the act would dry up credit and banks’ ability to serve their customers. All of these were predicate threats to push senators into trying to describe how such a massive restructuring of the banks could be managed without any of these ill effects. This was, of course, a rhetorical strategy that banks and other large corporate “stakeholders” had used with great success for years: gin up fearful consequences, the more wild-eyed the better, and repeated with large marketing and advertising muscle, and then dig in, not budging, until their fears, real or not, were allayed.
All of a sudden it started not to work. Kaufman’s and Brown’s amendment to the financial reform bill received a glowing affirmation on the New York Times editorial page. Dodd and the Senate leadership tried to look the other way—they and the industry had worked all this out, with Geithner and Summers as cheerleaders. But senators started signing on, as the most liberal members, such as Sherrod Brown and Vermont’s Bernie Sanders, were joined by none other than Richard Shelby, the ranking Republican on the Senate Banking Committee, and his party’s leading voice in the chamber on banking issues; Nevada’s John Ensign; and Oklahoma’s Tom Coburn, arguably the Senate’s most conservative member. The banking lobby called a red alert, charging the chamber and not leaving senators’ offices until a deal was cut, and assurances of opposition obtained. The strateg
y was shock and awe, and then a push for a quick vote. A so-called snap vote on May 6, engineered by Dodd and other Senate leaders, took the amendment down 61 to 33.
Al Franken, a supporter of Brown-Kaufman, was outraged—and it wasn’t an act. Having been humbled by his protracted election recount, and wanting to counter his Saturday Night Live past with a métier of quiet seriousness, Franken finally stepped up. He had, months before, taken an interest in the role of rating agencies such as Moody’s and Standard & Poor’s.
As had been widely reported, banks would shop around lousy securities looking for the best rating, paying the rating agency in return for a desired rating. Franken saw the issue, as many did, as a clear conflict of interest. “If a failing student paid their teacher to turn their grade from an F into an A, everyone would agree that what the teacher had done was unethical.”
In early May, Franken put forth his proposal, dubbed the “Restore Integrity to Credit Ratings” amendment, and was, as well, greeted with bipartisan support. The amendment called for, among other things, every asset-backed bond issue to be rated by a government-created board, rather than having the bank choose the agency itself.
On May 13, Franken’s proposal passed the Senate 64–35. Franken, demonstrably liberal, also drew Republicans, including Grassley, the ranking Republican on Senate Finance; South Carolina’s Lindsey Graham; and Alaska’s Lisa Murkowski. In all, he managed a whopping 11 Republican votes, making the amendment one of the season’s most significant bipartisan votes—and only six months before what was due to be a heated midterm.
Of the four Democrats who voted against it, one was Chris Dodd.
Like Barney Frank, Dodd had played a complex role in the proceedings. Many were critical of the lame-duck senator for not being more aggressive in his reforms, alleging that his interests were inexorably linked with the lobby he so closely served. But Dodd remained steadfast, arguing that he simply wanted to produce the strongest possible bill that could feasibly withstand a vote. It wasn’t worth sacrificing reform to make incremental changes in specific amendments.
But no one was in the crosshairs quite like Blanche Lincoln. Banks attacked her in back rooms and hushed lunches with senators as being in “way over her head.” Her proposal to spin off derivatives would cause profound disruptions, and many speculated that she’d discard the proposal as soon as she won her primary. But her proposal became something of a third rail, electrified by the populist surge, such that no one could touch it, to kill it. “This is looking like a democracy,” Barney Frank said, even though he had doubts about the amendment. “Publicity has changed the debate.”
“Gazelles do better in daylight, that’s for sure,” Gensler effused.
On May 18, Chris Dodd, who had been working to undercut the Lincoln amendment with an alternative of his own, was forced to remove his proposal under populist anger. It was only two days before the Senate vote, and miraculously the Lincoln amendment remained intact. Lobbyists and both Democratic and Republican members massed for a final fight against the proposal.
But they were fighting on too many fronts. Carl Levin of Michigan and Jeff Merkley of Oregon had discovered that Dodd had discreetly gutted the Volcker Rule, and the two set to work trying to counteract Dodd’s efforts.
The Merkley-Levin Amendment articulated Volcker’s idea fully—and wrote it as law. No regulatory backsliding, once everything settled down.
There were legislative complications. The Republicans, in early May, invoked the “unanimous consent” rule, which essentially bars the introduction of new amendments until a final vote on the bill. Consequently, the usual process of discussing and vetting components of the amendment would have to wait until the very end of the process.
But now the end was coming fast. Sensing that their amendment would never see the light of day, Merkley and Levin, moving independently of leadership, used an esoteric parliamentary move and attached their amendment to one belonging to Republican senator Sam Brownback. His amendment, already scheduled for a vote, would exempt auto dealers from Elizabeth Warren’s Consumer Financial Protection Bureau. It wasn’t a pretty solution, but Merkley and Levin were determined to get the Volcker Rule, which did not exist in the House bill, into the Senate version.
The vote, and Merkley-Levin, appeared to be safe for the vote on May 20, the day of the Senate vote on the financial regulation package. However, the day before, Republicans, in concert with the Democratic leadership, withdrew the Brownback amendment—killing Merkley- Levin—in exchange for the inclusion of the Brownback proposal during the negotiations for the final reconciled House/Senate bill. The Volcker Rule, with teeth, was dead.
Dodd and Reid then carried it home. The Senate approved its financial-reform bill on May 20, 59 to 39.
The Senate’s bill was now placed side by side with the House’s bill in one of the most publicized conference committee sit-downs in years. With the Volcker Rule safely reduced, the battle became singularly about the Lincoln Amendment and its ban on traditional derivatives practices.
That amendment was sitting atop a house of cards. For one, Senator Lincoln was embroiled in a heated midterm primary, and many surmised that her ploy was a populist trick to lure progressive voters.
Meanwhile, Republicans across the spectrum had begun denouncing the amendment, specifically section 716, the component that would spin off derivatives trading, and were threatening not to vote for the conference bill if it included such language. Barney Frank, perhaps the most influential person in the conference process, even stated publicly that Lincoln’s proposal “went too far.”
On June 9 Lincoln had her primary and, after defeating her opponent, systematically began to deconstruct her own amendment. A series of exemptions scaled back her proposal.
Then like an angry zombie, the Volcker Rule wouldn’t die. Merkley and Levin were able to persuade the House leadership, under the auspices of Barney Frank, to grant them the same favor as Brownback with his auto dealers’ exemption. Their amendment was entered into the deliberative mix-and-match between House and Senate.
But on balance, what was left of the great spasm of springtime amendments, many of which had garnered bipartisan support, was very little.
Franken’s rating agency amendment was the last to go, with Frank quietly quashing the proposal in lieu of an SEC-overseen “study group.”
The “process” managed by Frank in the House and Dodd in the Senate had prevailed. Now they would largely decide what bill carried their names.
Paul Volcker flew down to Washington a few times during this congressional land war to talk to anyone who’d listen, to do what he could. But mostly he watched it from afar, feeling older than he’d felt in quite a while.
At Kykuit, heading down to the estate’s first-floor Playhouse, and the spectacular dinner that awaited him, he had said to his stairway helper, “That Merkley-Levin, that’s my amendment. It was a pretty good idea at the start, I thought. We’ll see how much of it can be saved.”
He’d been watching the slaughter, one amendment after another, each of them, in different ways, trying to restore features, or, at the very least, concepts once housed in Glass-Steagall.
Volcker marveled at how many of those amendments had drawn Republicans and Democrats together. He’d never been much of a partisan, of course—he’d served under presidents of both parties, had friends on both teams. Still, this seemed to warm him, and to harken back, he said, “to a time, I can remember, when we had quite a bit of that sort of thing, where Democrats and Republicans figured things out together, especially on the really important stuff that affects everyone, more or less, equally.”
Those last few words had a flaw in them, a fracture that he’d seen grow across nearly thirty years, where some of the very clever men who followed him into public service, and whom he’d see in the restaurants near his office in Manhattan, figured out how to make the “really important stuff” not actually “affect everyone, more or less, equally.”
Vol
cker is no fool—he practically saw this idea get developed, with a winning political strategy attached: that if you can reward a certain group of people in society you’ll be developing a very powerful constituency, small in numbers but awesome in might, and they’ll do just about anything to make sure you or someone like you is always in power.
Almost all the most meaningful reforms were designed to run counter to this idea of a few people being rewarded at the expense of many. One other thing “all the latest reforms” shared was they were all battered, or already buried, because none of them, including his amendment, “have really been supported by the president—not really.”
This left Volcker confused and suppressing a rise of bitterness in his throat. He’d been there for the president, doing whatever Obama wanted, and stepping up a few months ago, duly resurrected, as Obama called this modest attempt to restore sanity, and some safeguards and barriers that had been proven to actually work, “the Volcker Rule.”
“They say they’re for it, but their hearts are not in it.” And this gap between word and deed, between stated intentions and so little action, made Volcker think of a phrase that he knew Summers sometimes used—a couple of people had told him—“that the important thing is just to be caught trying.”
He’d always kept Obama and Summers separate—he liked Obama, didn’t think much of Summers—but this phrase troubled him, because it seemed to explain some things that he couldn’t find other explanations for.
He finally made it down the last step of two flights, and stopped to catch his breath. “I’m not dead yet. I talked to Barney; he’s with me.”
As for the president, it was back to the same thing Volcker had learned, with some reluctance, over the past two years. If Obama didn’t get involved and “show some enthusiasm,” Volcker said, the big changes that he, or anyone else, had suggested “just won’t happen. It’s that simple.”
Then Paul Volcker straightened up to his full height—a few inches off his relentlessly cited six foot eight, but just a few. The Playroom, its golden light beckoning from just a few feet ahead, was bustling as the diners, here to celebrate good works, found their tables and settled in.
