by Obama Barack
McCain and his team must have known they needed to do something dramatic. And I have to give them credit—they sure did deliver. The day after our convention ended, Michelle and I, along with Jill and Joe Biden, were on the campaign plane waiting to take off for a few days of events in Pennsylvania when Axe rushed up to tell us that word had leaked of McCain’s running mate. Joe looked at the name on Axe’s BlackBerry and then turned to me.
“Who the hell is Sarah Palin?” he said.
For the next two weeks, the national press corps would obsess over that question, giving McCain’s campaign a much-needed shot of adrenaline and effectively knocking our campaign off the airwaves. After adding Palin to the ticket, McCain raked in millions of dollars in fresh donations in a single weekend. His poll numbers leapt up, essentially putting us in a dead heat.
Sarah Palin—the forty-four-year-old governor of Alaska and an unknown when it came to national politics—was, above all, a potent disrupter. Not only was she young and a woman, a potential groundbreaker in her own right, but she also had a story you couldn’t make up: She’d been a small-town basketball player and pageant queen who’d bounced among five colleges before graduating with a journalism degree. She’d worked for a while as a sportscaster before getting elected mayor of Wasilla, Alaska, and then taking on the state’s entrenched Republican establishment and beating the incumbent governor in 2006. She’d married her high school sweetheart, had five kids (including a teenage son about to be deployed to Iraq and a baby with Down syndrome), professed a conservative Christian faith, and enjoyed hunting moose and elk during her spare time.
Hers was a biography tailor-made for working-class white voters who hated Washington and harbored the not entirely unjustified suspicion that big-city elites—whether in business, politics, or the media—looked down on their way of life. If the New York Times editorial board or NPR listeners questioned her qualifications, Palin didn’t care. She offered their criticism as proof of her authenticity, understanding (far earlier than many of her critics) that the old gatekeepers were losing relevance, that the walls of what was considered acceptable in a candidate for national office had been breached, and that Fox News, talk radio, and the budding power of social media could provide her with all the platforms she needed to reach her intended audience.
It helped, too, that Palin was a born performer. Her forty-five-minute speech at the Republican National Convention in early September was a masterpiece of folksy populism and well-aimed zingers. (“In small towns, we don’t quite know what to make of a candidate who lavishes praise on working people when they’re listening, and then talks about how bitterly they cling to their religion and guns when those people aren’t listening.” Ouch.) The delegates were ecstatic. Touring with Palin after the convention, McCain spoke to crowds three or four times larger than what he normally saw on his own. And while the Republican faithful cheered politely during his speeches, it became clear that it was his “hockey mom” running mate they were really there to see. She was new, different, one of them.
A “real American”—and fantastically proud of it.
In a different time and a different place—say, a swing-state Senate or gubernatorial race—the sheer energy Palin generated within the Republican base might have had me worried. But from the day McCain chose her and through the heights of Palin-mania, I felt certain the decision would not serve him well. For all of Palin’s performative gifts, a vice president’s most important qualification was the ability, if necessary, to assume the presidency. Given John’s age and history of melanoma, this wasn’t an idle concern. And what became abundantly clear as soon as Sarah Palin stepped into the spotlight was that on just about every subject relevant to governing the country she had absolutely no idea what the hell she was talking about. The financial system. The Supreme Court. The Russian invasion of Georgia. It didn’t matter what the topic was or what form the question took—the Alaskan governor appeared lost, stringing words together like a kid trying to bluff her way through a test for which she had failed to study.
Palin’s nomination was troubling on a deeper level. I noticed from the start that her incoherence didn’t matter to the vast majority of Republicans; in fact, anytime she crumbled under questioning by a journalist, they seemed to view it as proof of a liberal conspiracy. I was even more surprised to witness prominent conservatives—including those who’d spent a year dismissing me as inexperienced, and who’d spent decades decrying affirmative action, the erosion of intellectual standards, and the debasement of Western culture at the hands of multiculturalists—suddenly shilling for Palin, tying themselves into knots as they sought to convince the public that in a vice presidential candidate, the need for basic knowledge of foreign policy or the functions of the federal government was actually overrated. Sarah Palin, like Reagan, had “good instincts,” they said, and once installed, she’d grow into the job.
It was, of course, a sign of things to come, a larger, darker reality in which partisan affiliation and political expedience would threaten to blot out everything—your previous positions; your stated principles; even what your own senses, your eyes and ears, told you to be true.
CHAPTER 9
IN 1993, MICHELLE AND I purchased our first home, in a Hyde Park condominium complex called East View Park. It was a lovely location, across from Promontory Point and Lake Michigan, with dogwood trees in the ample courtyard that bloomed a bright pink every spring. The three-bedroom apartment, laid out like a railcar from front to back, wasn’t large, but it had hardwood floors and decent light, and a proper dining room with walnut cabinets. Compared to the second floor of my mother-in-law’s house, where we’d been living to save money, it felt absolutely lavish, and we furnished it as our budget allowed, with a combination of Crate & Barrel couches, Ace Hardware lamps, and yard-sale tables.
Next to the kitchen, there was a small study where I worked in the evenings. Michelle called it “the Hole” because of the way it was always filled with stacks of books, magazines, newspapers, legal briefs I was writing, and exams I was grading. Every month or so, prompted by my inability to find something I needed, I’d clean the Hole in an hour-long frenzy, and I would feel very proud of myself for the three days or so it would take for the books and papers and other clutter to spring back like weeds. The Hole was also the only room in the apartment where I smoked, although once the girls were born, I took my foul habit outside to the slightly rickety back porch, where I’d sometimes interrupt families of raccoons foraging through our trash cans.
Kids reshaped our home in all sorts of ways. Foam childproofing pads appeared on the table corners. The dining room slowly became less about dining and more a repository for the playpens and brightly colored mats and toys that I found myself stepping on at least once a day. But instead of feeling cramped, the apartment’s modest size only amplified the joy and noise of our young family: splashy bath times and squeal-filled birthday parties and the sound of Motown or salsa coming from a boom box on the mantel as I spun the girls around in my arms. And while we noticed friends our age buying bigger houses in more well-off neighborhoods, the only time the idea of us moving came up was the summer when either one mouse or two (we couldn’t be sure) repeatedly scampered down the long hallway. I would fix the problem with repairs to a kitchen floorboard, but only after—with remarkable foolishness and a wiseass grin on my face—I had disputed the notion that two mice really qualified as an “infestation,” and Michelle in response had threatened to leave with the girls.
We paid $277,500 for the condo, with 40 percent down (thanks to some help from Toot) and a thirty-year fixed mortgage. On paper, our income should have comfortably supported our monthly payments. But as Malia and Sasha got older, the costs of childcare, school fees, and summer camps kept rising, while the principal on our college and law school loans never seemed to decrease. Money was perpetually tight; our credit card balances grew; we had little in the way of savings. So whe
n Marty suggested we consider refinancing our mortgage to take advantage of lower interest rates, I made a call the next day to a neighborhood mortgage broker.
The broker, an energetic young man with a buzz cut, confirmed that he could save us a hundred bucks or so a month by refinancing. But with home prices going through the roof, he asked if we had considered also using a portion of our equity to get some cash out of the transaction. It was routine, he said, just a matter of working with his appraiser. I was skeptical at first, hearing Toot’s sensible voice ringing in my ears, but when I ran the numbers and considered what we’d save by paying off our credit card debt, the broker’s logic was hard to dispute. With neither the appraiser nor the broker ever bothering to inspect our house, with me providing only three months of pay stubs and a handful of bank statements, I signed a few papers and walked out of the broker’s office with a $40,000 check and the vague feeling that I’d just gotten away with something.
* * *
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THAT’S HOW IT was in the early 2000s, a real estate gold rush. In Chicago, new developments seemed to pop up overnight. With home prices climbing at an unprecedented pace, with interest rates low and some lenders requiring just 10 or 5 percent—or even no money—down for a purchase, why pass up the extra bedroom, the granite countertops, and the finished basement that magazines and television shows insisted were standard measures of a middle-class life? It was a great investment, a sure thing—and once purchased, that same home could serve as your personal ATM, covering the right window treatments, that long-desired Cancún vacation, or making up for the fact that you didn’t get a raise last year. Eager to get in on the action, friends, cabdrivers, and schoolteachers told me they’d started flipping houses, everyone suddenly fluent in the language of balloon payments, adjustable-rate mortgages, and the Case-Shiller Index. If I cautioned them gently—real estate can be unpredictable, you don’t want to get in too deep—they’d assure me they had talked to their cousin or uncle who had made a killing, in a tone of mild amusement that implied I didn’t know the score.
After I was elected to the U.S. Senate, we sold our East View Park condo at a price high enough to cover our mortgage and home equity loan and make a small profit. But I noticed, driving home one night, that my mortgage broker’s storefront was now empty, with a big FOR SALE OR LEASE sign in the window. All those new condos in River North and the South Loop appeared unoccupied, even with developers offering buyers deeper and deeper discounts. A former staffer who’d left government to get her real estate license asked if I knew of any job openings—the new gig wasn’t panning out as she’d hoped.
I was neither surprised nor alarmed by any of this, figuring it was just the cyclical ebb and flow of the market. But back in D.C., I happened to mention the softening Chicago real estate market to a friend of mine, George Haywood, while we were eating sandwiches in a park near the Capitol. George had dropped out of Harvard Law to play professional blackjack, parlayed his skill with numbers and tolerance for risk into a job as a Wall Street bond trader, and had ultimately made a mint on personal investments. Being ahead of the curve was his business.
“This is just the start,” he told me.
“What do you mean?”
“I mean the entire housing market,” George said. “The entire financial system. It’s all a house of cards waiting to topple.”
As we sat in the afternoon sun, he gave me a quick tutorial on the burgeoning subprime mortgage market. Whereas banks had once typically held the mortgage loans they made in their own portfolios, a huge percentage of mortgages were now bundled and sold as securities on Wall Street. Since banks could now off-load their risk that any particular borrower might default on their loan, this “securitization” of mortgages had led banks to steadily loosen their lending standards. Credit rating agencies, paid by the issuers, had stamped these securities as “AAA,” or least risky, without adequately analyzing the default risk on the underlying mortgages. Global investors, awash in cash and eager for higher returns, rushed in to buy these products, pumping more and more money into housing finance. Meanwhile, Fannie Mae and Freddie Mac, the two giant companies that Congress had authorized to purchase qualified mortgages to encourage homeownership—and which, by virtue of their quasi-governmental status, could borrow money much more cheaply than other companies—were knee-deep in the subprime market, with their shareholders making money hand over fist as the housing market swelled.
All of this had contributed to a classic bubble, George said. So long as housing prices kept going up, everybody was happy: the family who could suddenly buy their dream house with no money down; the developers that couldn’t build houses fast enough to satisfy all these new customers; the banks that sold increasingly complex financial instruments at handsome profits; the hedge funds and investment banks that were placing bigger and bigger bets on these financial instruments with borrowed money; not to mention furniture retailers, carpet manufacturers, trade unions, and newspaper advertising departments, all of which had every incentive to keep the party going.
But with so many unqualified buyers propping up the market, George was convinced the party would eventually end. What I was noticing in Chicago was just a tremor, he told me. Once the earthquake came, the impact would be far worse in places like Florida, Arizona, and Nevada, where subprime lending had been most active. As soon as large numbers of homeowners started defaulting, investors would realize that a lot of mortgage-backed securities weren’t so AAA after all. They’d likely rush for the exits, dumping the securities as fast as they could. Banks that held these securities would be vulnerable to runs, and would probably pull back on lending to cover losses or maintain capital requirements, making it hard for even qualified families to get a mortgage, which in turn would depress the housing market even further.
It would be a vicious cycle, likely to trigger a market panic, and because of the sheer amount of money involved, the result could be an economic crisis the likes of which we hadn’t seen in our lifetimes.
I listened to all this with growing incredulity. George was not prone to exaggeration, especially when it came to money. He told me he had taken a hefty “short” position himself, essentially betting that the price of mortgage-backed securities would go way down in the future. I asked him why it was that if the risk of a full-blown crisis was so high, no one—not the Federal Reserve, or bank regulators, or the financial press—seemed to be talking about it.
George shrugged. “You tell me.”
When I got back to my Senate office, I asked some of my staff to check with their counterparts on the Banking Committee to see if anyone saw any danger in the spiking of the subprime mortgage market. The reports came back negative: The Federal Reserve chairman had indicated that the housing market was a bit overheated and due for an eventual correction, but that given historical trends, he saw no major threat to the financial system or the broader economy. With all the other issues on my plate, including the start of the midterm campaigns, George’s warning receded from my mind. In fact, when I saw him a couple of months later, in early 2007, both the financial and housing markets had continued to soften, but it didn’t seem to be anything serious. George told me that he had been forced to abandon his “short” position after taking heavy losses.
“I just don’t have enough cash to stay with the bet,” he said calmly enough, adding, “Apparently I’ve underestimated how willing people are to maintain a charade.”
I didn’t ask George how much money he’d lost, and we moved on to other topics. We parted ways that day not knowing that the charade wouldn’t last very much longer—or that its terrible fallout would, just a year and a half later, play a critical role in electing me president.
* * *
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“SENATOR OBAMA. This is Hank Paulson.”
It was a week and a half after the Republican National Convention, eleven days before my first scheduled debate with
John McCain. It was clear why the U.S. Treasury secretary had requested the call.
The financial system was in a meltdown and taking the American economy with it.
Although Iraq had been the biggest issue at the start of our campaign, I had always made the need for more progressive economic policies a central part of my argument for change. As I saw it, the combination of globalization and revolutionary new technologies had been fundamentally altering the American economy for at least two decades. U.S. manufacturers had shifted production overseas, taking advantage of low-cost labor and shipping back cheap goods to be sold by big-box retailers against which small businesses couldn’t hope to compete. More recently, the internet had wiped out entire categories of office work and, in some cases, whole industries.
In this new, winner-take-all economy, those controlling capital or possessing specialized, high-demand skills—whether tech entrepreneurs, hedge fund managers, LeBron James, or Jerry Seinfeld—could leverage their assets, market globally, and amass more wealth than any group in human history. But for ordinary workers, capital mobility and automation meant an ever-weakening bargaining position. Manufacturing towns lost their lifeblood. Low inflation and cheap flat-screen TVs couldn’t compensate for layoffs, fewer hours and temp work, stagnant wages and reduced benefits, especially when both healthcare and education costs (two sectors less subject to cost-saving automation) kept soaring.
