by Obama Barack
Already, some Democratic constituencies were asking why we weren’t being tougher on the banks—why the government wasn’t simply taking them over and selling off their assets, for example, or why none of the individuals who had caused such havoc had gone to jail. Republicans in Congress, unburdened by any sense of responsibility for the mess they’d help create, were more than happy to join in on the grilling. In testimony before various congressional committees, Tim (who was now routinely labeled as a “former Goldman Sachs banker” despite having never worked for Goldman and having spent nearly his entire career in public service) would explain the need to wait for the stress-test results. My attorney general, Eric Holder, would later point out that as egregious as the behavior of the banks may have been leading up to the crisis, there were few indications that their executives had committed prosecutable offenses under existing statutes—and we were not in the business of charging people with crimes just to garner good headlines.
But to a nervous and angry public, such answers—no matter how rational—weren’t very satisfying. Concerned that we were losing the political high ground, Axe and Gibbs urged us to sharpen our condemnations of Wall Street. Tim, on the other hand, warned that such populist gestures would be counterproductive, scaring off the investors we needed to recapitalize the banks. Trying to straddle the line between the public’s desire for Old Testament justice and the financial markets’ need for reassurance, we ended up satisfying no one.
“It’s like we’ve got a hostage situation,” Gibbs said to me one morning. “We know the banks have explosives strapped to their chests, but to the public it just looks like we’re letting them get away with a robbery.”
With tensions growing inside the White House and me wanting to make sure everyone remained on the same page, in mid-March I called together my economic team for a marathon Sunday session in the Roosevelt Room. For several hours that day, we pressed Tim and his deputies for their thoughts on the ongoing stress test—whether it would work, and whether Tim had a Plan B if it didn’t. Larry and Christy argued that in light of mounting losses at Citigroup and Bank of America, it was time for us to consider preemptive nationalization—the kind of strategy that Sweden had ultimately pursued when it went through its own financial crisis in the 1990s. This was in contrast, they said, to the “forbearance” strategy that had left Japan in a lost decade of economic stagnation. In response, Tim pointed out that Sweden—with a much smaller financial sector, and at a time when the rest of the world was stable—had nationalized only two of its major banks as a last resort, while providing effective guarantees for its remaining four. An equivalent strategy on our part, he said, might cause the already fragile global financial system to unravel, and would cost a minimum of $200 to $400 billion. (“The chances of getting an additional dime of TARP money from this Congress are somewhere between zero and zero!” Rahm shouted, practically jumping out of his chair.) Some on the team suggested that we at least take a more aggressive posture toward Citigroup and Bank of America—forcing out their CEOs and current boards, for example, before granting more TARP money. But Tim said such steps would be wholly symbolic—and, further, would make us responsible for finding immediate replacements capable of navigating unfamiliar institutions in the midst of the crisis.
It was an exhausting exercise, and as the session ran into the evening hours, I told the team that I was going up to the residence to have dinner and get a haircut and would expect them to have arrived at a consensus by the time I got back. In truth, I’d already gotten what I wanted out of the meeting: confirmation in my own mind that, despite the legitimate issues Larry, Christy, and others had raised about the stress test, it continued to be our best shot under the circumstances. (Or as Tim liked to put it, “Plan beats no plan.”)
Just as important, I felt assured that we’d run a good process: that our team had looked at the problem from every conceivable angle; that no potential solution had been discarded out of hand; and that everyone involved—from the highest-ranking cabinet member to the most junior staffer in the room—had been given the chance to weigh in. (For these same reasons, I would later invite two groups of outside economists—one left-leaning, the other conservative—who’d publicly questioned our handling of the crisis to meet me in the Oval, just to see if they had any ideas that we hadn’t already considered. They didn’t.)
My emphasis on process was born of necessity. What I was quickly discovering about the presidency was that no problem that landed on my desk, foreign or domestic, had a clean, 100 percent solution. If it had, someone else down the chain of command would have solved it already. Instead, I was constantly dealing with probabilities: a 70 percent chance, say, that a decision to do nothing would end in disaster; a 55 percent chance that this approach versus that one might solve the problem (with a 0 percent chance that it would work out exactly as intended); a 30 percent chance that whatever we chose wouldn’t work at all, along with a 15 percent chance that it would make the problem worse.
In such circumstances, chasing after the perfect solution led to paralysis. On the other hand, going with your gut too often meant letting preconceived notions or the path of least political resistance guide a decision—with cherry-picked facts used to justify it. But with a sound process—one in which I was able to empty out my ego and really listen, following the facts and logic as best I could and considering them alongside my goals and my principles—I realized I could make tough decisions and still sleep easy at night, knowing at a minimum that no one in my position, given the same information, could have made the decision any better. A good process also meant I could allow each member of the team to feel ownership over the decision—which meant better execution and less relitigation of White House decisions through leaks to The New York Times or The Washington Post.
Returning from my haircut and dinner that night, I sensed that things had played out the way I had hoped. Larry and Christy agreed that it made sense for us to wait and see how the stress test went before taking more drastic action. Tim accepted some useful suggestions about how to better prepare for possibly bad results. Axe and Gibbs offered ideas about improving our communications strategy. All in all, I was feeling pretty good about the day’s work.
Until, that is, someone brought up the issue of the AIG bonuses.
It seemed that AIG—which had thus far taken more than $170 billion in TARP funds and still needed more—was paying its employees $165 million in contractually obligated bonuses. Worse yet, a big chunk of the bonuses would go to the division directly responsible for leaving the insurance giant wildly overexposed in the subprime derivative business. AIG’s CEO, Edward Liddy (who himself was blameless, having only recently agreed to take the helm at the company as a public service and was paying himself just a dollar a year), recognized that the bonuses were unseemly. But according to Tim, Liddy had been advised by his lawyers that any attempt to withhold the payments would likely result in successful lawsuits by the AIG employees and damage payments potentially coming in at three times the original amount. To cap it off, we didn’t appear to have any governmental authority to stop the bonus payments—in part because the Bush administration had lobbied Congress against the inclusion of “claw-back” provisions in the original TARP legislation, fearing that it would discourage financial institutions from participating.
I looked around the room. “This is a joke, right? You guys are just messing with me.”
Nobody laughed. Axe started arguing that we had to try to stop the payments, even if our efforts were unsuccessful. Tim and Larry began arguing back, acknowledging the whole thing was terrible but saying that if the government forced a violation of contracts between private parties, we’d do irreparable damage to our market-based system. Gibbs chimed in to suggest that morality and common sense trumped contract law. After a few minutes, I cut everyone off. I instructed Tim to keep looking at ways we might keep AIG from dispensing the bonuses (knowing full well he’d
probably come up empty). Then I told Axe to prepare a statement condemning the bonuses that I could deliver the next day (knowing full well that nothing I said would help lessen the damage).
Then I told myself that it was still the weekend and I needed a martini. That was another lesson the presidency was teaching me: Sometimes it didn’t matter how good your process was. Sometimes you were just screwed, and the best you could do was have a stiff drink—and light up a cigarette.
* * *
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THE NEWS OF the AIG bonuses brought the pent-up anger of several months to an uncontrolled boil. Newspaper editorials were scathing. The House quickly passed a bill to tax Wall Street bonuses at 90 percent for people making over $250,000, only to watch it die in the Senate. In the White House briefing room, it seemed like Gibbs fielded questions on no other topic. Code Pink, a quirky antiwar group whose members (mostly women) dressed in pink T-shirts, pink hats, and the occasional pink boa, ramped up protests outside various government buildings and surfaced at hearings where Tim was appearing, hoisting signs with slogans like GIVE US OUR $$$$$ BACK, clearly unimpressed by any argument about the sanctity of contracts.
The following week, I decided to convene a White House meeting with the CEOs of the top banks and financial institutions, hoping to avoid any further surprises. Fifteen of them showed up, all men, all looking dapper and polished, and they all listened with placid expressions as I explained that the public had run out of patience, and that given the pain the financial crisis was causing across the country—not to mention the extraordinary measures the government had taken to support their institutions—the least they could do was show some restraint, maybe even sacrifice.
When it was the executives’ turn to respond, each one offered some version of the following: (a) the problems with the financial system really weren’t of their making; (b) they had made significant sacrifices, including slashing their workforces and reducing their own compensation packages; and (c) they hoped that I would stop fanning the flames of populist anger, which they said was hurting their stock prices and damaging industry morale. As proof of this last point, several mentioned a recent interview in which I’d said that my administration was shoring up the financial system only to prevent a depression, not to help a bunch of “fat cat bankers.” When they spoke, it sounded like their feelings were hurt.
“What the American people are looking for in this time of crisis,” one banker said, “is for you to remind them that we’re all in this together.”
I was stunned. “You think it’s my rhetoric that’s made the public angry?” Taking a deep breath, I searched the faces of the men around the table and realized they were being sincere. Much like the traders in the Santelli video, these Wall Street executives genuinely felt picked on. It wasn’t just a ploy. I tried then to put myself in their shoes, reminding myself that these were people who had no doubt worked hard to get where they were, who had played the game no differently than their peers and were long accustomed to adulation and deference for having come out on top. They gave large sums to various charities. They loved their families. They couldn’t understand why (as one would later tell me) their children were now asking them whether they were “fat cats,” or why no one was impressed that they had reduced their annual compensation from $50 or $60 million to $2 million, or why the president of the United States wasn’t treating them as true partners and accepting, just to take one example, Jamie Dimon’s offer to send over some of JPMorgan’s top people to help the administration design our proposed regulatory reforms.
I tried to understand their perspective, but I couldn’t. Instead, I found myself thinking about my grandmother, how in my mind her Kansas prairie character represented what a banker was supposed to be: Honest. Prudent. Exacting. Risk-averse. Someone who refused to cut corners, hated waste and extravagance, lived by the code of delayed gratification, and was perfectly content to be a little bit boring in how she did business. I wondered what Toot would make of the bankers who now sat with me in this room, the same kind of men who’d so often been promoted ahead of her—who in a month made more than she’d made in her entire career, at least in part because they were okay with placing billion-dollar bets with other people’s money on what they knew, or should have known, was a pile of bad loans.
Finally I let out something between a laugh and a snort. “Let me explain something, gentlemen,” I said, careful not to raise my voice. “People don’t need my prompting to be angry. They’ve got that covered all on their own. The fact is, we’re the only ones standing between you and the pitchforks.”
* * *
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I CAN’T SAY my words that day had much impact—other than reinforcing the view on Wall Street that I was anti-business. Ironically, the same meeting would later be cited by critics on the left as an example of how, in my general fecklessness and alleged chumminess with Wall Street, I had failed to hold the banks accountable during the crisis. Both takes were wrong, but this much was true: By committing to the stress test and the roughly two-month wait for its preliminary results, I’d placed on hold whatever leverage I had over the banks. What was also true was that I felt constrained from making any rash moves while I still had so many fronts of the economic crisis to deal with—including the need to keep the U.S. auto industry from driving over a cliff.
Just as the Wall Street implosion was a culmination of long-standing structural problems in the global financial system, what ailed the Big Three automakers—bad management, bad cars, foreign competition, underfunded pensions, soaring healthcare costs, an overreliance on the sale of high-margin, gas-guzzling SUVs—had been decades in the making. The financial crisis and the deepening recession had only hastened the reckoning. By the autumn of 2008, auto sales had plunged 30 percent to their lowest level in more than a decade, and GM and Chrysler were running out of cash. While Ford was in slightly better shape (mainly due to a fortuitous restructuring of its debt just before the crisis hit), analysts questioned whether it could survive the collapse of the other two, given the reliance of all three automakers on a common pool of parts suppliers across North America. Just before Christmas, Hank Paulson had used a creative reading of the TARP authorization to provide GM and Chrysler with more than $17 billion in bridge loans. But without the political capital to force a more permanent solution, the Bush administration had managed only to kick the can down the road until I took office. Now that the cash was about to run out, it was up to me to decide whether to put billions more into the automakers in order to keep them afloat.
Even during the transition, it had been clear to everyone on my team that GM and Chrysler would have to go through some sort of court-structured bankruptcy. Without it, there was simply no way that they could cover the cash they were burning through each month, no matter how optimistic their sales projections. Moreover, bankruptcy alone wouldn’t be enough. To justify further government support, the automakers would also have to undergo a painstaking, top-to-bottom business reorganization and find a way to make cars that people wanted to buy. (“I don’t understand why Detroit can’t make a damn Corolla,” I muttered more than once to my staff.)
Both tasks were easier said than done. For one thing, GM’s and Chrysler’s top management made the Wall Street crowd look positively visionary. In an early discussion with our transition economic team, GM CEO Rick Wagoner’s presentation was so slapdash and filled with happy talk—including projections for a 2 percent increase in sales every year, despite having seen declining sales for much of the decade preceding the crisis—that it rendered even Larry temporarily speechless. As for bankruptcy, the process for both GM and Chrysler would likely be similar to open-heart surgery: complicated, bloody, fraught with risk. Just about every stakeholder (management, workers, suppliers, shareholders, pensioners, distributors, creditors, and the communities in which the manufacturing plants were located) stood to lose something in the short term, which would be cause for pro
longed, bare-knuckle negotiations when it became unclear whether the two companies would even survive another month.
We did have a few things going for us. Unlike the situation with the banks, forcing GM and Chrysler to reorganize wasn’t likely to trigger widespread panic, which gave us more room to demand concessions in exchange for continued government support. It also helped that I had a strong personal relationship with the United Auto Workers, whose leaders recognized that major changes needed to be made in order for its members to hold on to their jobs.
Most important, our White House Auto Task Force—led by Steve Rattner and Ron Bloom and staffed by a brilliant thirty-one-year-old policy specialist named Brian Deese—was turning out to be terrific, combining analytical rigor with an appreciation for the human dimensions of the million-plus jobs at stake in getting this right. They had begun negotiations with the carmakers well before I was even sworn in, giving GM and Chrysler sixty days to come up with formal reorganization plans to demonstrate their viability. To make sure the companies didn’t collapse during this period, they’d designed a series of incremental but critical interventions—such as quietly guaranteeing both companies’ receivables with suppliers so that they didn’t run out of parts.
In mid-March, the Auto Task Force came to the Oval Office to give me their assessment. Neither of the plans that GM and Chrysler had submitted, they said, passed muster; both companies were still living in a fantasy world of unrealistic sales projections and vague strategies for getting costs under control. The team felt that with an aggressive structured bankruptcy, though, GM could get back on track, and recommended that we give the company sixty days to revise its reorganization plan—provided it agreed to replace both Rick Wagoner and the existing board of directors.
