Promised Land (9781524763183)

by Obama Barack

  For similar reasons, the growth of the non-bank financial sector made Glass-Steagall’s distinction between investment banks and FDIC-insured commercial banks largely obsolete. The largest bettors on subprime mortgage securities—AIG, Lehman, Bear, Merrill, as well as Fannie and Freddie—weren’t commercial banks backed by federal guarantees. Investors hadn’t cared about the absence of guarantees and poured so much money into them anyway that the entire financial system was threatened when they started to fail. Conversely, traditional FDIC-insured banks like Washington Mutual and IndyMac got into trouble not by behaving like investment banks and underwriting high-flying securities but by making tons of subprime loans to unqualified buyers in order to drive up their earnings. Given how easily capital now flowed between various financial entities in search of higher returns, stabilizing the system required that we focus on the risky practices we were trying to curb rather than the type of institution involved.

  And then there were the politics. We didn’t have anything close to the votes in the Senate for either reviving Glass-Steagall or passing legislation to shrink U.S. banks, any more than we’d had the votes for a single-payer healthcare system. Even in the House, Dems were anxious about any perception of overreaching, especially if it caused the financial markets to pull in their horns again and made the economy worse. “My constituents hate Wall Street right now, Mr. President,” one suburban Democrat told me, “but they didn’t sign up for a complete teardown.” FDR may have once had a mandate from voters to try anything, including a restructuring of American capitalism, after three wrenching years of the Depression, but partly because we’d stopped the situation from ever getting that bad, our mandate for change was a whole lot narrower. Our best chance for broadening that mandate, I figured, was to notch a few wins while we could.

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  IN JUNE 2009, after months of fine-tuning, our draft legislation for financial reform was ready to take to Congress. And while it didn’t contain all the provisions the Left had been looking for, it remained a massively ambitious effort to revamp twentieth-century regulations for the twenty-first-century economy.

  At the core of the package was a proposal to increase the percentage of capital that all financial institutions of “systemic” importance—whether banks or non-banks—were required to hold. More capital meant less borrowing to finance risky bets. Greater liquidity meant these institutions could better weather sudden runs during a market downturn. Forcing Wall Street’s main players to maintain a bigger capital cushion against losses would fortify the system as a whole; and to make sure these institutions hit their marks, they’d have to regularly undergo the same kind of stress test we’d applied at the height of the crisis.

  Next we needed a formal mechanism to allow any single firm, no matter how big, to fail in an orderly way, so that it wouldn’t contaminate the entire system. The FDIC already had the power to put any federally insured bank through what amounted to a structured bankruptcy proceeding, with rules governing how assets were liquidated and how claimants divvied up whatever remained. Our draft legislation gave the Fed a comparable “resolution authority” over all systemically important institutions, whether they were banks or not.

  To improve consistency of enforcement, we proposed streamlining the functions and responsibilities of various federal agencies. To facilitate quicker responses in the event of a major market disruption, we formalized authority for many of the emergency actions—“foam on the runway,” our economic team called it—that the Fed and Treasury had deployed during the recent crisis. And to catch potential problems before they got out of hand, our draft legislation tightened up rules governing the specialized markets that constituted much of the financial system’s plumbing. We paid particular attention to the buying and selling of derivatives, those often impenetrable forms of securities that had helped intensify losses across the system once the subprime mortgage market collapsed. Derivatives had legitimate uses—all sorts of companies used them to hedge their risk against big swings in currency or commodity prices. But they also offered irresponsible traders some of the biggest opportunities for the kinds of high-stakes gambling that put the entire system at risk. Our reforms would push most of these transactions into a public exchange, allowing for clearer rules and greater supervision.

  The bulk of these proposals were highly technical, involving aspects of the financial system that were hidden from public view. But there was a final element of our draft legislation that had less to do with high finance and more to do with people’s everyday lives. The crisis on Wall Street couldn’t have happened without the explosion of subprime mortgage lending. And although plenty of those loans went to sophisticated borrowers—those who understood the risks involved with adjustable rate mortgages and balloon payments as they flipped Florida condos or purchased Arizona vacation homes—a larger percentage had been marketed and sold to working-class families, many of them Black and Hispanic, people who believed they were finally gaining access to the American Dream only to see their homes and their savings snatched away in foreclosure proceedings.

  The failure to protect consumers from unfair or misleading lending practices wasn’t restricted to mortgages. Perpetually short on cash no matter how hard they worked, millions of Americans regularly found themselves subject to exorbitant interest rates, hidden fees, and just plain bad deals at the hands of credit card issuers, payday lenders (many of them quietly owned or financed by blue-chip banks), used-car dealers, cut-rate insurers, retailers selling furniture on installment plans, and purveyors of reverse mortgages. Often they found themselves in a downward spiral of compounding debt, missed payments, shot credit, and repossessions that left them in a deeper hole than where they’d started. Across the country, sketchy financial-industry practices contributed to rising inequality, reduced upward mobility, and the kinds of hidden debt bubbles that made the economy more vulnerable to major disruptions.

  Having already signed legislation reforming the credit card industry, I agreed with my team that the aftermath of the crisis offered us a unique chance to make more progress on the consumer protection front. As it happened, Harvard law professor and bankruptcy expert Elizabeth Warren had come up with an idea that might deliver the kind of impact we were looking for: a new consumer finance protection agency meant to bolster the patchwork of spottily enforced state and federal regulations already in place and to shield consumers from questionable financial products the same way the Consumer Product Safety Commission kept shoddy or dangerous consumer goods off the shelves.

  I was a longtime admirer of Warren’s work, dating back to the 2003 publication of her book The Two-Income Trap, in which Warren and her coauthor, Amelia Tyagi, provided an incisive and passionate description of the growing pressures facing working families with children. Unlike most academics, Warren showed a gift for translating financial analysis into stories that ordinary folks could understand. In the intervening years, she had emerged as one of the financial industry’s most effective critics, prompting Harry Reid to appoint her as chair of the congressional panel overseeing TARP.

  Tim and Larry were apparently less enamored with Warren than I was, each of them having been called to make repeated appearances before her committee. Although they appreciated her intelligence and embraced her idea of a consumer finance protection agency, they saw her as something of a grandstander.

  “She’s really good at taking potshots at us,” Tim said in one of our meetings, “even when she knows there aren’t any serious alternatives to what we’re already doing.”

  I looked up in mock surprise. “Well, that’s shocking,” I said. “A member of an oversight committee playing to the crowd? Rahm, you ever heard of such a thing?”

  “No, Mr. President,” Rahm said. “It’s an outrage.”

  Even Tim had to crack a smile.

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  THE PROCESS OF getting Wall Stree
t reform through Congress was no less laborious than our adventures with the Affordable Care Act, but it didn’t receive nearly as much attention. Partly this had to do with the subject matter. Even members and lobbyists intent on killing the legislation kept a relatively low profile, not wanting to be seen as defenders of Wall Street so soon after the crisis, and many of the bill’s finer points were too arcane to generate interest in the popular press.

  One issue that did capture headlines involved a proposal by former Federal Reserve chairman Paul Volcker to prohibit FDIC-insured banks from trading on their own accounts or operating their own hedge funds and private equity shops. According to Volcker, this sort of provision offered a simple way to restore some of the prudential boundaries that Glass-Steagall had placed around commercial banks. Before we knew it, our willingness to include the “Volcker Rule” in our legislation became a litmus test among many on the left for how serious we were about Wall Street reform. Volcker, a gruff, cigar-smoking, six-foot-seven economist by training, was an unlikely hero for progressives. In 1980, as Fed chairman, he’d hiked U.S. interest rates to an unprecedented 20 percent in order to break the back of America’s then-raging inflation, resulting in a brutal recession and 10 percent unemployment. The Fed’s painful medicine had angered unions and many Democrats at the time; on the other hand, it had not only tamed inflation but helped lay the groundwork for stable economic growth in the 1980s and ’90s, making Volcker a revered figure in both New York and Washington.

  In recent years, Volcker had grown bluntly critical of Wall Street’s worst excesses, gaining some liberal admirers. He’d endorsed my campaign early, and I’d come to value his counsel enough that I appointed him to chair an advisory group on the economic crisis. With his no-nonsense demeanor, and his belief in free-market efficiency as well as in public institutions and the common good, he was something of a throwback (my grandmother would have liked him), and after hearing him out in a private meeting in the Oval, I was persuaded that his proposal to curb proprietary trading made sense. When I discussed the idea with Tim and Larry, though, they were skeptical, arguing that it would be difficult to administer and might impinge on legitimate services that banks provided their customers. To me, their position sounded flimsy—one of the few times during our work together when I felt they harbored more sympathy for the financial industry’s perspective than the facts warranted—and for weeks I continued to press them on the matter. At the start of 2010, as Tim grew concerned that momentum for Wall Street reform was beginning to lag, he finally recommended we make a version of the Volcker Rule part of our legislative package.

  “If it helps us get the bill passed,” Tim said, “we can find a way to make it work.”

  For Tim, it was a rare concession to political optics. Axe and Gibbs, who’d been filling my in-box with polls showing that 60 percent of voters thought my administration was too friendly toward the banks, were thrilled with the news; they suggested that we announce the proposal at the White House with Volcker on hand. I asked if the general public would understand such an obscure rule change.

  “They don’t need to understand it,” Gibbs said. “If the banks hate it, they’ll figure it must be a good thing.”

  With the basic parameters of our legislation set, it fell to House Financial Services Committee chairman Barney Frank and Senate Banking Committee chairman Chris Dodd, both twenty-nine-year veterans of Congress, to help get it passed. They were an unlikely pair. Barney had made his name as a liberal firebrand and the first member of Congress to come out as gay. His thick glasses, disheveled suits, and strong Jersey accent lent him a workingman’s vibe, and he was as tough, smart, and knowledgeable as anyone in Congress, with a withering, rapid-fire wit that made him a favorite of reporters and a headache for political opponents. (Barney once spoke to one of my classes while I was a student at Harvard Law, during which he dressed me down for asking what he apparently considered a dumb question. I didn’t think it was that dumb. Thankfully, he didn’t remember our first encounter.)

  Chris Dodd, on the other hand, came off as the consummate Washington insider. Immaculately dressed, his silver hair as shiny and crisp as a TV news anchor’s, always ready to roll out a bit of Capitol Hill gossip or an Irish tall tale, he’d grown up in politics—the son of a former U.S. senator, one of Ted Kennedy’s best friends, pals with any number of industry lobbyists despite his liberal voting record. We’d developed a warm relationship while I was in the Senate, based in part on Chris’s good-natured acknowledgment of the absurdity of the place (“You didn’t think this was actually on the level, did you?” he’d say with a wink after some colleague made an impassioned plea on behalf of a bill while actively trying to undermine said bill behind the scenes). But he took pride in his effectiveness as a legislator, and had been one of the driving forces behind such impactful laws as the Family and Medical Leave Act.

  Together, they made a formidable team, each perfectly suited for the politics of their chamber. In the House, a dominant Democratic majority meant that passing a financial-reform bill was never in question. Instead, our main task was keeping our own members on track. Not only did Barney have a firm command of the legislative details; he had the credibility inside the Democratic caucus to temper impractical demands from fellow progressives, as well as the clout to ward off efforts by more transactional Democrats to water down the legislation on behalf of special interests. In the Senate, where we needed every vote we could find, Chris’s patient bedside manner and willingness to reach out to even the most recalcitrant Republicans helped soothe the nerves of conservative Democrats; he also gave us a useful conduit to industry lobbyists who opposed the bill but didn’t find Chris scary.

  Despite these advantages, moving what came to be known as “Dodd-Frank” involved the same kind of sausage-making that had been required to pass the healthcare bill, with a flurry of compromises that often left me privately steaming. Over our strong objections, the car dealers won an exemption from our new consumer protection agency’s oversight: With prominent dealerships in every congressional district, many of them considered pillars of the community for their sponsorship of Little League teams or donations to the local hospital, even the most regulation-happy Democrat ran scared of potential blowback. Our effort to streamline the number of regulatory agencies overseeing the financial system died an inglorious death; with each agency subject to the jurisdiction of a different congressional committee (the Commodity Futures Trading Commission, for example, reported to the House and Senate Agriculture Committees), Democratic committee chairs fiercely resisted the idea of giving up their leverage over some part of the financial industry. As Barney explained to Tim, we could conceivably consolidate the SEC and the CFTC: “Just not in the United States.”

  In the Senate, where the need to get to the sixty-vote threshold in order to overcome a filibuster gave every senator leverage, we were left to contend with all sorts of individual requests. Republican Scott Brown, fresh off a victorious campaign in which he’d railed against Harry Reid’s various “backroom deals” to get the healthcare bill passed, indicated a willingness to vote for Wall Street reform—but not without a deal of his own, asking if we could exempt a pair of favored Massachusetts banks from the new regulations. He saw no irony in this. A group of left-leaning Democrats introduced with much fanfare an amendment that they claimed would make the Volcker Rule’s restrictions on proprietary trading even tougher. Except that when you read the fine print, their amendment carved out loopholes for a smorgasbord of interests—the insurance industry, real estate investments, trusts, and on and on—that did big business in these senators’ individual states.

  “Another day in the world’s greatest deliberative body,” Chris said.

  At times, I felt like the fisherman in Hemingway’s The Old Man and the Sea, sharks gnawing at my catch as I tried to tow it to shore. But as the weeks passed, the core of our reforms survived the amendment process remarkably intact. A
number of provisions introduced by congressional members—including improved disclosure of executive compensation in public companies, increased transparency in credit-rating agencies, and new claw-back mechanisms to prevent Wall Street executives from walking away with millions in bonuses as a result of questionable practices—actually made the bill better. Thanks to strong cooperation between our two lead sponsors, the conference to reconcile differences between the House and Senate versions of the bill saw none of the intraparty squabbling that had played out during the negotiations over healthcare. And in mid-July 2010, after a vote of 237–192 in the House and 60–39 in the Senate (with three Republicans voting “aye” in each chamber), we held a White House ceremony where I signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act.

  It was a significant triumph: the most sweeping change to the rules governing America’s financial sector since the New Deal. The law had its warts and unwanted compromises, and it certainly wouldn’t put an end to every instance of foolishness, greed, shortsightedness, or dishonesty on Wall Street. But by establishing the equivalent of “better building codes, smoke detectors, and sprinkler systems,” as Tim liked to describe it, Dodd-Frank would check a number of reckless practices, give regulators the tools to put out financial fires before they got out of hand, and make crises on the scale we’d just seen far less likely. And in the new Consumer Financial Protection Bureau (CFPB), American families now had a powerful advocate in their corner. Through its work, they could expect a fairer, more transparent credit market, and real savings as they tried to buy a house, finance a car, deal with a family emergency, send their kids to college, or plan for retirement.