Confidence Men: Wall Street, Washington, and the Education of a President

by Ron Suskind

  For Orszag this was evidentiary heaven. With accountability and data-driven rigor, Dartmouth’s findings pointed the way toward improved treatment at lower cost. What could be better? Wennberg himself called medicine to that point “an unmanaged, evidence-free experiment.” And it was time to bring both management and evidence to bear. The government, as the biggest single source of medical payments, was clearly the sole body with the will and power to do this. If it could embrace even a fraction of the Dartmouth methodologies, health care would be improved and the federal budget rescued.

  By the time Orszag became head of the CBO in January 2007, he was carrying the Dartmouth charts to congressional meetings and preaching to anyone who would listen about the “evidence-based” cure for rising medical costs. Though he’d had only a few discussions with Obama during this period about health care, he was comforted to find that the senator knew about the Dartmouth revolution and could recite a variety of its key findings.

  Now, even though his meeting was not until ten o’clock the next morning, Orszag couldn’t help but be excited. The lame-duck Congress and administration had been phoning it in. The CBO’s docket was relatively light, and Orszag had made it his 2008 goal to take a crack at breaking down the fiduciary metrics of health care reform. In only a month, in December 2008, CBO would release its own health care tome, offering one of the most detailed analyses of what reforming medical finances would look like.

  The fiscal and evidentiary reform of health care consumed Orszag—so much so that now, on the plane to Chicago, he considered an ultimatum: he would accept the job offer only if Obama could look him in the eye and say that health care reform would top year one’s domestic agenda. He had heard through back channels, namely from Rahm Emanuel and Jason Furman, that Obama’s eyes were on this prize. But given the economic disaster of the last few months, Orszag was uneasy. Nothing was ever certain in politics, and his worries could be pacified only by his hearing it from Obama’s mouth.

  Deplaning in Chicago, Orszag flipped on his smartphone to check for e-mails and saw a note pop up from Michael Froman, Obama’s transition team hiring chief: Peter, the 10 a.m. meeting won’t be necessary. You are good to go for OMB.

  Orszag was dumbfounded. Good to go? Surely Obama would want to at least chat before offering him such an important job. Orszag called Froman immediately.

  “Michael,” he said, “I’m already in Chicago. It might not be necessary for OMB, but I really want to meet with Obama.”

  Froman seemed surprised. “Hmm. Let me see what I can do,” he said. “I’ll call you right back.” An instant later he did. “Okay! We’ll do it. See you tomorrow.”

  “Great, thanks,” Orszag managed, not quite sure what to think.

  That night, he dined with Austan Goolsbee in Chicago, but his mind was elsewhere. The logistics of leaving CBO, a job he loved, for OMB weighed heavily on him. He thought about his life at home with his boys, a single dad. But the allure of opportunity ultimately drew him back in. “If I’m going to do this,” he thought to himself again, “I need to know that health care is going to get done.”

  When he got to his meeting the next day, it took Orszag a few seconds to figure out why the shades in Obama’s transition office were drawn on a cloudy mid-November day. Of course, a security measure—this was no ordinary job interview.

  Obama was running five minutes late, so Orszag waited in a side office, feeling atypically nervous. OMB was a great opportunity, but he didn’t really know the guy. Minutes later Obama wandered into the office with Reggie Love. The three made their way into his office.

  “I want to be clear right off the bat,” Obama began. “This is not a job interview.”

  It was a phrase he had fallen into the habit of using. It seemed intended to be both disarming and inviting, the kind of management guru–speak Obama might have culled from the Peter Drucker books he was known to favor. But considering the seriousness of today’s interview, it couldn’t help seeming contrived and more than a little precious. Obama, who appeared so at home with himself in front of large crowds, sometimes had trouble sounding as authoritative and confident in small settings. Admirers read this as humility; detractors saw it as awkwardness. As was so often the case, people saw in Obama largely what they wanted to see.

  The pair moved now into the minutiae of policy specifics. While the budget would of course be Orszag’s top priority, the conversation gravitated naturally to health care.

  It took all of two seconds for Obama to say it: “I’m definitely committed to health care reform for my first year.”

  It was not just what he said that was convincing, Orszag recalled, but how he said it. His body shifted and settled with a kind of physical firmness. “He wanted health care reform to be his legacy,” Orszag said later. Though he did not think much of it at the time, it was an odd ambition to have before even taking the oath of office; a touch early, perhaps, to be considering your legacy. But, if anything, a singular, anxious focus on history’s arc had been evident in Obama since 1995, when he published his memoir at age thirty-three.

  In any case, they both knew and agreed on the whys of health care reform. It was the hows that were trickiest and that now occupied their next half hour. The Dartmouth team had recently found that correcting for practice variation across the country could lead to as much as $700 billion per year in savings. The cost issue might very well be the key, both to expanding coverage and to selling the necessity of reform. Obama said he wanted Orszag to assume an expanded portfolio as OMB chief, serving as the administration’s budget czar and also as the driving force behind health care reform.

  The week after the election had been notably brutal for the flailing economy. The Dow dropped a stunning 411 points the morning of Orszag and Obama’s meeting. Secretary Paulson had just made public a crucial decision regarding the recently enacted TARP: its $700 billion would no longer be put toward the purchase of the toxic “troubled” assets, as originally outlined, but be used instead to bail out the capital-short banking industry, with direct payments to troubled institutions.

  But for all this, the two never really discussed economic policy. Here was Obama at his most ideologically focused and his most aloof, chatting with one of his first appointments to the economic team about health care while the economy caved in. Well, maybe that was okay, Orszag considered. Ahead of him in the appointment line, he’d heard, was Jack Lew, widely believed to be a lock for National Economic Council chairman.

  This gave Orszag comfort. The NEC, created under Clinton in 1993 and first chaired by Bob Rubin, was designed as an apparatus for advising the president on economic matters. It would be a hugely important body in the midst of an economic crisis, and it called for a chairman with the greatest skill and wisdom, someone who could shape and nourish competing ideas about what to do to arrest the sliding economy and reverse its course. The quiet and brilliant Lew was a consensus favorite for the job. He’d been in Washington for decades, first as Tip O’Neill’s top policy adviser and then as special adviser to Clinton. After a bunch of key posts in the Clinton White House, where he negotiated the Balanced Budget Act of 1997, Lew served as OMB chief for the last two years of the president’s term. He was the perfect fit, and Orszag felt good knowing he would have such a strong team around him.

  As the meeting began wrapping up, Obama casually solicited Orszag’s opinion on the two men he was looking at for Treasury secretary: Larry Summers and Tim Geithner. Orszag was complimentary of both men, thinking that as long as Lew was quarterbacking the policy process from NEC, either would make an adequate secretary. Summers at NEC, acting primarily as an honest broker, didn’t make sense for an economist of his strong opinions.

  Now on the point of parting, Orszag summoned the courage to ask the one other question still tickling the back of his mind. He wanted to know if this White House would be more family-friendly than Clinton’s West Wing, where the hours were long, often stretching into late nights.

  “I’m
not worried about your work ethic,” Obama said.

  As Orszag was left to wonder what exactly his future boss meant, and what question exactly he was answering, Obama walked his new OMB chief out of the office. They exchanged parting formalities, and Orszag reiterated his excitement about joining the team. As they shook hands, Orszag realized he was looking forward to getting to know the man behind the curtain more intimately. The air of change that seemed to hover around the president-elect was heady—intoxicating, even. As the two separated, Obama tossed off one last cryptic joke, poking fun at Orszag’s pinstriped suit.

  “All you economists dress the same!”

  Obama’s offhand queries to Orszag about who should head Treasury were more than idle chitchat. In the weeks following the election, the president-elect had been seriously weighing the various pluses and minuses of three major contenders: Geithner, Summers, and the aging Volcker.

  But while Treasury secretary was the marquee job, it really came down to a more fundamental question of Team A versus Team B. The former, Team A, which had shepherded Obama to triumph, comprised Volcker, Goolsbee, Wolf, Reich, O’Neill, and Donaldson, all of whom were understandably confident of getting key jobs or advisory roles.

  The heft and credibility that Volcker lent Obama’s candidacy was hard to overstate. He had been there from the fall of 2007 on, offering the most powerfully disinterested guidance available, as an earthquake began to shake the U.S. financial system. Volcker had also been there at the birth of the contemporary economy, managing it as Fed chair from 1979 to 1987, and he seemed to know it like a parent might a child—a child who now, in adulthood, had gone terribly astray. Across those decades of maturation, Volcker had stayed actively involved, the independent-minded director of various companies and a steward of patient capital in his own investment work. From these vantages he’d watched how the management of money and risk had changed over the years.

  Besides all that, he was an old guy, plenty robust, but free from the standard set of public and private ambitions. He had little care for money and had lived happily, working with his longtime assistant, and soon-to-be wife, Anke Dening. His tenure as Fed chair, meanwhile, so long overshadowed by Alan Greenspan’s, was being appreciated afresh by the summer of 2008. As his successor, Greenspan had presided over two decades of a Miracle-Gro economy, in large part the result of cheap credit policies. When these turned out to have played a fundamental role in the 2008 crisis, the intelligentsia had swung back to Volcker, dusting off a record that suddenly looked like a finely aged vintage. Volcker’s invaluable asset could be summed up in a single phrase: tough love.

  The subtle and unsung value of the Volcker-led team was exactly the absence of what on Wall Street is called a “financial handle.” Reich and Tyson were public intellectuals whose standing in the marketplace of ideas came from their scruples about accepting money from the broader marketplace. Wolf viewed his status, as Obama’s buddy and top counselor with a job on Wall Street, as sacred. He would never even have thought to ask a favor of the guy, and as difficult as it might have been to place a UBS executive in a senior administration post, had the offer been made, Wolf told close friends, he would have left New York and done a “Nixon to China,” turning against type to use his financial savvy to regulate the industry that had so long employed him. Donaldson laid claim to a similar sort of integrity, as a Republican free-market champion and longtime Wall Streeter who had undergone a tough-minded conversion.

  But for all this, as the gravity of being elected president and the severity of the crisis bore down on him, Obama found himself leaning toward Team B. Sure, the other team brought to the table honesty and passion, but those bold visions of the campaign season had meanwhile resolved into the serious, often risk-averse business of actually governing. In the midst of a battering economic storm, it no longer seemed like the right time to be making waves.

  What Volcker understood, which made him extremely dangerous in the eyes of the banks, was that in order to stabilize America’s credit system, Wall Street’s great debt machine would have to be dismantled. If the industry was going to center its business on consumer debt products such as credit cards and mortgages, or a vast matrix of complex business-to-business lending, it would have to be treated more like regular old commercial banks and savings and loans. Boom-bust cycles in equities markets were one thing. A lot of wealth was lost during the stock market crashes of 1987 and 2000. But these two crises had proven far more manageable than the present one. People felt poorer, but a lot of their losses were paper profits. When busts occurred in debt markets, however, the results were dire. Debt is a legal contract, and its interest payments don’t budge. When payments can no longer be met, people lose their collateral—which is serious enough. But when the collateral itself loses value, creditors tend to realize losses they never guarded against. The collateral, after all, was the backstop. In the collapse of a big enough market—the housing market, say—the whole credit system can come crashing down with it.

  Volcker also saw that the recent profitability of Wall Street was directly tied to the riskiness of its behavior: the banks and investment houses had been making money hand over fist by investing in the boom-bust cycle for debt. On the consumer end, debt was temporarily underpriced to make it more attractive, so people had assumed more than they could afford. On the far other end, with the sale of debt securities to major institutional investors and the like, the riskiness of underlying debts was masked and massaged through financial innovation until these ticking time bombs could be sold as rock-solid, high-yield securities.

  Now that a lot of the bombs had gone off, it was time systematically to set off the rest, Volcker felt. How else could we feel safe moving forward? This meant accurately pricing the “toxic” mortgage-backed securities on which the credit system was resting. Even if prices were severely depressed, at least they would hit a floor. The result would be painful, no doubt, but moral hazard would be averted. And if executives who had sold the explosive debt products wound up in the streets, having to hire their own lawyers to fight off waves of legal suits, well, so much the better for discouraging such behavior the next time around.

  The competing team in this drama could hardly have disagreed more strongly. Heavy on former Clinton officials, many of whom swore allegiance to the former Treasury secretary and Citigroup chairman Bob Rubin, Team B believed the crisis called for delicate actions in support of a fragile banking system. Who knew what would happen if you started pricing mortgage securities correctly—which banks might find themselves on the verge of insolvency, or in its grasp? Team B had been moving forward with tactical clarity since September: the Volcker-led group must be stopped. Several people had complained, directly to Obama or within earshot, about how Volcker mumbled, how he had lost a step over the years and might not be able to handle the heavy demands of the secretary job. Goolsbee was unknown to the public and did not inspire surety or have much gravitas. As for Reich, Tyson, and Donaldson, their strong, fiery words might disrupt the shaky market. The first priority, Team B stressed, was to stand up a facsimile of the old system, to get Wall Street up and running and to restore faith in iconic American institutions. Credit needed to start flowing again. After that—and it might take a year or two—everyone could talk about sweeping reforms.

  Secretary Paulson had adopted Team B’s approach, infusing banks with capital and giving Wall Street what amounted to an early victory. But the game had hardly begun. If the new president chose to surround himself with Volcker’s A-Team, then a throw-them-out-on-the-street, rip-the-bandage-off scenario would be in the offing. The hopes of Rubin’s B-Team—many of whom had turned high-ranking posts under Clinton into Wall Street riches—came to rest on the two men challenging Volcker for the Treasury secretary job: Summers and Geithner.

  By the morning of November 11, when the president-elect had asked Orszag what he thought of the two candidates, they were in deep, side-by-side discussions with Obama. Several possible arrangements were
taking shape, offering an early glimpse of Obama’s managerial style and inclinations.

  One possibility would be to put Volcker in the top job of Treasury secretary and make Geithner his deputy. Once the markets had stabilized and the big structural reforms—conceptualized and shepherded by Volcker—were under way, Geithner could move up into the secretary job. He was better on the implementation side of things anyway.

  Obama liked Geithner personally. He brought youth and energy to the table and undisputed expertise on the particulars of the current crisis. Though his roots with the Clintonite B-Team were deep—he had served as an undersecretary of the Treasury under both Rubin and Summers—his arrival on the national stage, as a member of the new administration, would make him Obama’s man. When they met in October they chatted amiably for forty-five minutes, two charming but sometimes hard-to-read young men, both of whom had spent many youthful years overseas. After a few minutes, they figured out that Geithner’s father, a State Department official, had briefly worked with Obama’s mother, a coincidence that brought a warm glow to Obama. Geithner just needed a little seasoning.