by Ron Suskind
Saul Loeb/AFP/Getty Images
Obama holds a Rose Garden press conference with Treasury Secretary Tim Geithner and Harvard Law School professor Elizabeth Warren in September 2010 to announce that Warren would help “stand up” the new Consumer Financial Protection Bureau, but not be its first director. Warren, who came up with the idea herself, became a lightning rod for embracing “the kind of forceful activism,” as one White House official later said, “that some people had expected to see in the president.”
Bloomberg/Getty Images
In spite of the success of his campaign, Obama showed real weakness in managing his own White House. After historic midterm losses in the 2010 election, interim chief of staff Pete Rouse helped restructure the White House to fit Obama’s needs. Here Rouse looks on in January 2011 as the president announces his new chief of staff, Bill Daley.
Win McNamee/Getty Images
By early 2011, Obama felt that his understanding of the presidency, and the uses of “confidence,” had grown, and that he had grown with it. Debates are sure to rage—and history, finally, to judge—whether this represents evolution or dangerous compromise.
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Part II
HOME ALONE
8
A New Deal
Obama ascended to the presidency channeling FDR. Like the longest-serving American president, Obama also arrived in the middle of economic crisis—albeit several months, not several years, after it began. Just as Roosevelt’s administration set the standard for progressive agendas in the prior century, Obama hoped his would build on that foundation and then raise its own high bar for progressive agendas in the young new century.
Roosevelt laid out a famously aggressive program for his first one hundred days in office, passing, in this period, many of the laws that now define his presidency. With a huge wind at his back, he saw Congress accede to virtually all his priorities. In addition to the Emergency Banking and Glass-Steagall acts, which rapidly stabilized the banking industry, he established the Civilian Conservation Corps and Tennessee Valley Authority and, in addition, passed the Farm Credit, Truth in Securities, and National Industrial Recovery acts, among others. A few of Roosevelt’s signature laws would come later, but considering that his term in office lasted for more than twelve years, it is remarkable just how much of what now comprises Roosevelt’s legacy came in his first three months.
The hundred-day precedent has been the legislative standard for presidents ever since, so much so that Hillary Clinton mapped out her hundred-day strategy during the primary campaign. Obama acknowledged that he’d been studying Roosevelt’s first hundred days when he arrived at the White House, mentioning books—including The Defining Moment, an FDR biography by Jonathan Alter—he was reading. Like FDR, Obama had tools of action to work with: overwhelming popular support, Democratic majorities in both houses of Congress, and the latitude afforded by crisis.
Yet the transition’s heavy pregame planning meant that much had already been sketched. The pre-inaugural blueprint for financial reform—at this point a closely held document—laid out a fairly conventional set of changes that preserved the current structure of the financial and banking industries while largely beefing up the power of regulators to try to spot systemically dangerous institutions before they created a crisis, and granting them “resolution authority” to handle collapses such as Lehman in an orderly, bailout-free way. The stimulus plan, at roughly $800 billion, was similarly shaped by mid-January to be a middle-ground proposal that could curry bipartisan support. The bill, called the American Recovery and Reinvestment Act of 2009, was actually less ambitious than it might have looked at first blush. It was something of a hodgepodge, a hastily built plan that reflected the competing and unresolved ideas coursing through the barely formed administration.
It wasn’t as though the recession, and the need for stimulus, was itself a surprise. While the speed of the economic downdraft was startling, the question of how to construct an effective stimulus had been a subject of public discussion for almost a year.
Because states were so short on funds already, a lot of the money they’d receive would end up simply covering their normal budgetary outlays, saving the jobs of teachers, firefighters, and police officers. The tax cuts—going equally to all income strata in a nod to Republicans—were not as stimulatory as a host of other, more immediate direct-aid proposals in that many higher earners would use their bonuses to pay down debts or boost savings. Much of the infrastructure spending, meanwhile, was destined to languish unused, as it was made clear, even during the transition, that there were limits to how quickly money could be spent. Obama would own up to these concerns a year and a half later, admitting that he had learned “there’s no such thing as ‘shovel-ready’ projects.” Actually, he’d been warned of this well ahead of the bill’s unveiling.
Even Alice Rivlin, the famously clear-eyed economic adviser from early in the Clinton administration, was sounding an alarm after the proposal’s outlines became clear in late January. “A long-term investment program should not be put together hastily and lumped in with the anti-recession package,” she said, in a widely covered speech at the left-leaning Brookings Institution. “The elements of the investment program must be carefully planned and will not create many jobs right away.”
As a top official later said, looking back, “We should have spent more time thinking about where the money was being spent, rather than simply that there was this hole of a certain size in the economy that needed to be filled, so fill it. How each dollar is spent is almost as important as the gross number.” Another senior White House official acknowledged that, while there was a need for speed in getting something passed, “there’s no excuse for poor conceptualizing.”
Hastily constructed policy was matched by miscalculations of political strategy: all the accommodations to conservative principles and practice in the plan were never exchanged for hard commitments. On the way to his inauguration, Obama got word that Republicans in the House had committed, as a bloc, to oppose his stimulus plan.
But that was all before he raised his right hand. Obama’s predict-and-prepare navigation system—that finely tuned capacity to prefigure the outcomes, political and historical, before each footfall—would now begin to struggle with something that simply can’t be predicted: what it feels like to be president.
Duly sworn in and pacing the Oval Office—ushered there by enthusiasts whose ardor seemed immune to his efforts at expectation management—Obama began, from his first minutes in office, to improvise with his new, just-elected identity.
He was, after all, now the president. But how should a president, especially an inspirational figure named Barack Hussein Obama, act in a time of crisis?
A day after the inauguration, the president’s top domestic appointee took his first tentative steps into the blinding lights.
The demands of the job were daunting, greater, in many ways, than that of any recent Treasury secretary—and Tim Geithner’s experience was mostly in back rooms with bankers.
This was clear during the transition, as it was obvious that there’d be a mismatch between Geithner’s performance skills and the challenges that awaited him. There were several extended prep sessions for his confirmation hearings. Other key players during the transition, many of whom would soon assume their senior positions, fired questions at Geithner, attacking his recent action to bail out the banks, his positions on all but imponderable issues of regulation, his personal beliefs and history. “Are they really going to ask me this kind of stuff?” he groused after one heated exchange. Yes, and maybe worse, everyone agreed. Summers, feeling protective of anyone who once served under him in Clinton’s Treasury Department, offered sage advice: “Don’t anyone admit we did anything wrong,” he said during the prep sessions. Summers was referring to that administration’s late-1990s moves to undercut what was left of Glass-Steagall and then block the regulation of derivatives. This stance, of course, was o
f sufficient import that it might have merited presidential review and some political analysis. Obama, after all, had selected for his top domestic officials two men whose actions had contributed to the very financial disaster they were hired to solve.
It wasn’t as though Obama hadn’t heard pointed concerns on this very issue. At a meeting in December of 2008, Byron Dorgan, the longtime North Dakota senator who’d been a leader of the Democrats, used unusually direct language with the then president-elect about his top economic selections. “You’ve picked the wrong people,” he said to Obama, citing Geithner and Summers, both of whom Dorgan knew. “I don’t understand how you could do this. You’ve picked the wrong people!”
Tim Geithner walked into the Hart Senate Office Building, just a block northeast of the Capitol Dome, for his 10:00 a.m. confirmation hearing on January 21. The city was still collectively hungover from its frigid revelry, with scaffolding being disassembled and mountains of trash being hauled away. By the time Geithner arrived at his hearing it wasn’t even thirty degrees outside, but the Obama team had been working overtime for weeks to make certain he received a warm reception that morning from the Senate Finance Committee.
Again they turned to Paul Volcker, who sauntered into the hearing room on Geithner’s heels to give the young regulator his endorsement, even if it gave committee members a glimpse of what a Volcker Treasury might have looked like. Volcker’s assuredness was unmistakable. Fussing with his microphone in response to Max Baucus’s effusion of what a privilege it was to have him appear, Volcker quipped, to big laughs, that he supposed it’d “be even more of a privilege if you could hear me,” and then provided the gravity of a bona fide public-sector bigfoot of the sort America had not recently seen:
“You know, a good many years have passed since I last appeared before this committee, but during all of that time there’s never been a more critical time for the American economy and particularly for financial stability. And that’s true not just in the United States, but globally. To put it starkly, we are in a serious recession with no end clearly in sight. The financial system is broken. It’s a serious obstacle to recovery. There is no escape from the imperative need for the federal government to come to the rescue to right the economic and financial ship of state. The hard fact is several trillions of dollars will be necessary to be committed in a combination of budgetary expenditures and various guarantee and insurance programs and extensions of credit by the Federal Reserve.”
Several trillions of dollars. A true and stunning figure that no one had bothered, up to this point, to fix precisely.
After a few minutes, he turned to the young nominee, with an elegantly parsed endorsement. “Now, I can’t reasonably claim that any one person is absolutely indispensable, but as you address this nomination—as you address his nomination, consider that Mr. Geithner brings unique qualifications in terms of hands-on experience, recognition in financial markets, and the confidence in which he is held by the new president of the United States.”
Over the next two hours, there were times when Geithner clearly wished his mic had been off as well. He was conspicuously unprepared for prime time. Despite his demonstrable knowledge of regulatory process, he was squirrelly and inarticulate. In private, one-on-one, he could be charming, witty, and thoughtful, but in public, he was surprisingly arrhythmic, sometimes even fumbling over the basic financial lexicon.
It was understandable if his nerves were already frayed. For the past two weeks a senior Obama aide, Jim Messina, just named deputy chief of staff under Emanuel, had been locked in negotiations with his former boss, Max Baucus, over Geithner’s future. Messina was once chief of staff to Montana’s conservative Democratic senator, who now chaired Finance and often said he considered Messina “like a son.” That history would now prove crucial. Geithner owed back taxes, something revealed the previous October to Obama’s team as they vetted him as a prospective appointee. He’d improperly reported compensation when he worked from 2001 to 2004 for the IMF. He’d also deducted his children’s summer camps as a dependent expense. In sum, he had failed to pay $34,000 over a several-year period. Such oversights for an official slated to oversee the IRS would have been fatal for any number of past Treasury secretary appointees—raising the fire-or-ice choice of having to admit to either fraud or incompetence. Geithner went with the latter, saying he’d filled out his taxes using the software program TurboTax and had simply made a mistake.
In the midst of an economic crisis, however, it was time to cut deals. Baucus kicked off the hearing by preemptively relieving Geithner of responsibility in his tax mishandlings, calling them “innocent mistakes” and “sufficiently corrected,” and then pushed the discussion along to the substantive issues framed by Volcker.
But Geithner soon found himself in deep waters.
One committee member who wasn’t interested in cutting any deals with the White House waited to pounce. Washington’s progressive Democrat Maria Cantwell, a former businesswoman who was once a top executive with Internet media streaming giant RealNetworks, had learned the hard way about lax regulation and the destructive possibilities of “financial innovation.”
Not long after she arrived in the Senate in January of 2001, Cantwell was drawn into a local dispute that soon went global. Enron, the darling of Wall Street when she took office, was managing the world’s energy markets using many of the same derivatives strategies and trading tricks that would, years hence, collapse the real estate markets. Enron had, in essence, created a host of proprietary platforms for the trading of energy derivatives, complex securities that derived their value from assets such as barrels of oil and cubic feet of natural gas, or the anticipation of such hard assets from oil and gas leases. Acting as the middleman—market maker, proprietary trading adviser, manager of electronic derivatives exchanges—the company exerted enormous, and enormously profitable, influence over the world’s energy market. Washington state’s energy producers, who saw stunning price hikes (which Enron profited from), thought this influence was improper. Cantwell, fighting on behalf of the companies and the state’s strapped ratepayers, was told countless times by Enron and its Wall Street “efficient market” supporters “that this was too complicated,” she’d recall, “for anyone like me to understand. That ‘anyone’ meant a woman.”
It also might have meant “a senator.” Cantwell was virtually alone in those days fighting Enron. In late 2001 the company collapsed in the largest fraud in U.S. history, having used its market might to pump up earnings, cook its books, and defraud parties on all sides of the trades it controlled. Enron kept many of these activities hidden with the use of SPVs, or special-purpose vehicles, held off the balance sheet in much the same way that CDOs were kept in off-balance-sheet SPVs and funded by repos.
“In a ten-year-period of time, with one major regulatory loophole, derivatives have grown from being a $95 trillion industry to a $683 trillion industry . . . in ten years! This is what we are in America now,” she said, a huge derivatives market.
Of course, Enron was just the start. Cantwell’s state would take one of the most serious blows from the next crisis to emerge from derivatives trading and financial hubris. On September 25, 2008, with Paulson’s TARP proposal on the table, the government seized the bank holding giant Washington Mutual and placed it into receivership of the FDIC. The catalyst for the action was an old-fashioned bank run in which $16 billion in deposits were withdrawn over a ten-day period, at that time nearly 10 percent of the bank’s total deposits. JPMorgan Chase, ever proactive in the public-private dance, purchased WaMu’s bank subsidiaries from the FDIC for $1.9 billion.
The following day, September 26, WaMu formally filed for Chapter 11, sending shock waves from Cantwell’s state to the wider country.
Cantwell was incensed. In her mind, Paulson’s tough-love approach with WaMu was politically motivated. Allowing the bank to fail gave lawmakers a taste of the tumult that accompanied bankruptcy in the “too big to fail” era. She felt it was
a ploy, albeit drastic, to sell TARP to Congress.
“They were basically picking winners and losers,” she’d say later about the Paulson-Bernanke-Geithner trio. “They blew up WaMu . . . I’m not saying WaMu did everything right. But I’m listening to Jamie Dimon talk about how he’s going to make 27 percent profit in one year and basically take all the good assets and leave all the bad assets to be cleaned up. They won’t even offer to pay retirement benefits [to WaMu employees]. The whole thing is just a catastrophe.”
But now she’d get one of that trio at the hearing table, with his nomination on the line.
Summers’s rule for Geithner, “don’t admit to mistakes,” was the first of two. The other rule, in answering questions, was “don’t make policy.”
Cantwell’s goal was to undercut the latter proviso. She was displeased, as were several Democratic leaders, with the choice of Geithner and Summers. “The best tactic was to get them to say [in confirmation hearings] what they were willing to support, so that we could hold their feet to the fire [later],” she said, adding that she expected Geithner and Summers eventually to cave in to Wall Street, at which point she could start “raising hell about their lack of backbone.”
In concert with a cadre of progressives, Cantwell began her campaign to use the confirmation hearings to shape financial reform. When her turn came around, she grilled Geithner on exactly what he was planning to do to reregulate the financial industry, pressing him for specifics that left other committee members checking their briefing materials.
On her second turn, an hour later, she moved in for the kill. Cantwell noted that the previous fall, after the market’s meltdown, former SEC chairman Arthur Levitt admitted that the Commodity Futures Modernization Act, which Clinton-era regulators pushed through in 2000 to prevent the regulation of derivatives—over the objections of then–Commodities Futures Trading Commission chairwoman Brooksley Born—“was a mistake.” In fact, Summers, who was at the conference where Levitt made that admission, had followed Levitt out the door, chiding him, “You should never have said she (Born) was right!”