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

by Ron Suskind

  It was an emergency the weight of which Obama felt acutely from the minute he first stepped into the Oval Office. The best-laid plans of a candidate anticipating victory, or even a president-elect, now needed to be seen through the new eyes of a sitting U.S. president in the midst of a worsening crisis. The world looked different from Pennsylvania Avenue.

  With negotiations on the stimulus under way, and passage of something resembling the administration’s package looking like a foregone conclusion, a meeting was set in the Roosevelt Room to discuss whether health care would still be job one.

  And if not health care, then what?

  There were two primary factions: the camp in favor of leading with financial regulatory reform, considering that a financial collapse would trigger economic catastrophe and that a full recovery, and sustained prosperity, could be possible only if the stimulus package were matched with a refashioned financial system; and the camp in favor of leading with health care reform, the multigenerational goal of liberals, and key to both balancing the federal budget and restoring America’s middle class. There was also a smaller, third camp, led by Carol Browner, the EPA chief under Clinton and now Obama’s energy and environmental czar, in favor of leading with a bold environmental agenda, especially in attacking global warming, integrated with the building of a sustainable energy future.

  Pressing the issue was a matter of the federal budget. By early February, Obama needed to decide what to include in his 2010 fiscal year budget. Whatever decisions he made, they would need to be reflected in the budget, a signal of the administration’s policy intentions to Congress and the wider public.

  But two of Obama’s main voices on health care, senior adviser Pete Rouse and Tom Daschle, Obama’s Health and Human Services designee, would not be in attendance. Rouse, though a Colby College graduate, had been born in New Haven and was an avid Yale hockey fan. He was missing the meeting to see his team play, his single concession to something other than work.

  Like any good aide, Rouse did a little recon on what Obama could expect on health care.

  “Mr. President, the deck is stacked against you.”

  He was referring to the people who would be there—principally the economic team, several of whom had been on the fence about whether to begin with a health care battle. Now they were in concert: given the current economic crisis, it was a bridge too far.

  Tom Daschle, the prime proponent of making health care reform a first-year mission, was unable to make it because his brother, Greg, was ill with brain cancer—a strain similar to the one afflicting Ted Kennedy. Daschle had been at the Duke University Hospital for the last few days, including Inauguration Day, sitting in the hospital room as Obama delivered his speech.

  With Daschle out of town, Obama had lost more than an adviser. He’d lost the most ardent advocate of pursuing health care reform as quickly as possible.

  In his stead was an array of economic advisers who were there to discuss how the fledgling president could hedge his plan to lead with health care.

  The specific issue was over what sort of placeholder the president should put in his proposed budget for health care reform. Should it be left blank, or undesignated; should it be designated as a “middle ground” of $650 billion, or should it be a trillion? “Mr. President, you know I support health care reform, I’ve been passionate about it for years,” Peter Orszag said, appealing to sensibilities he and Obama had long shared. “But until the deficit is below three percent of GDP, it may be fiscally problematic.”

  This was particularly difficult for Orszag, who’d all but made health care reform in year one a precondition for his leaving CBO. But one of the reasons Orszag was always drawn to fundamental health care reform was budgetary: he believed that cost saving, using evidence-based breakthroughs and comparative effectiveness, would drive down health care expenditures and save the federal budget. Like fighting a war while cutting taxes, however, launching a new huge social program during a recession might be considered fiscally imprudent. The economic downturn was already prompting a decrease in tax receipts, while costs, for unemployment insurance and related programs, were skyrocketing. This meant that even without health care reform, albeit an essential repair for the country but not yet a day-to-day crisis, the deficit was due to rise.

  Summers and Geithner echoed this concern, but Obama cut in.

  “Who here does think we should include health care in the budget?” he asked.

  Mark Childress, Daschle’s chief of staff, meekly raised his hand.

  “Thank you, Mark. I want you to channel Daschle.”

  But, after a few minutes, it was clear that Childress was no match for the heavyweights in the room. Every point he made was mercilessly dissected, with the triumvirate of Summers, Geithner, and Orszag parsing the fabric of his argument and then eviscerating it with numerical data.

  After a while, Obama had seen enough of the bloodbath. “Okay, enough, enough . . . I’ll be Daschle.”

  The president immediately addressed all the trio’s arguments head-on, analyzing their weaknesses and strengths. Even professional interlocutors and trained debaters such as Summers were impressed. Obama thought that this reform was the ideal match for the stimulus: a temporary boost coupled with a long-term restructuring of every kitchen table’s budget, and that of the federal government. He summed it up with issues of how to restore the underlying confidence of a people who lived with too little security and too much fear in their lives.

  By the time the meeting was over, no one was challenging Obama. The other alternatives, such as financial regulatory reform or a sweeping environmental energy program, had barely been discussed.

  Health care would be included in the proposed budget, with a placeholder of $650 billion. After so many meetings during the transition, where the president-elect tried, sometimes futilely, to guide his advisers toward consensus, this time he “channeled” his mentor, Daschle, and made up his own mind.

  But the president knew what virtually no one else in the room realized: Daschle was in big trouble. Rouse and Obama had been talking in the past few days about their common friend. Daschle’s recent history as a lobbyist for Alston & Bird left him vulnerable to attack if someone had enough desire. And Max Baucus did. He and Daschle were longtime rivals, and he was digging into everything he could find. After losing his Senate seat in 2004, Daschle also lost his crack staff, led by Rouse, and the precise and affectionate care they afforded him in managing every detail of his life. His last four years of private life, with residences in Washington and South Dakota, and a Bismarck accountant, had left behind plenty of loose ends. The one that Baucus joyously pulled was $128,000 in undeclared compensation for the use of a private car from a friendly corporation while Daschle was in D.C.—a detail soon to be released, spelling Daschle’s demise.

  Had the revelation of Daschle’s tax problems preceded the more serious IRS shortfalls of Geithner, he might well have survived, and Obama would be looking for a new nominee for Treasury. But Baucus held the cards and dealt them with an eye toward a bigger prize: commanding the central position on any health care initiative, rather than being upstaged, once again, by the soft-spoken but unflinching Daschle.

  What was clear to Obama, as he was whipping into line a group of savvy, argumentative advisers, is that he’d have to go forward without Daschle: his friend, guide, and teacher. It was no surprise that he played him with such force and passion in this important meeting. The practical result was that health care reform would now be the first priority of the Obama presidency. A lifelong consensus builder had stumbled into the first, and often most difficult, lesson of every new president: advisers advise, presidents decide.

  On January 29, after Wall Street reported a robust $18 billion in bonuses for 2008, about the same level as the profitable year of 2004, the president became incensed.

  “How is this possible that they’re paying themselves these bonuses when it was the government that bailed them out!” he said at the 9:30
a.m. daily briefing with his senior economic team. It was a rare moment, when his voice rose in true anger.

  Obama, a man with little experience wielding power but the fastest of learners, said he wanted to make a statement. Soon there were cameras in the Oval Office. He spoke from the edge of his seat, eyes wide, with Geithner and Bernanke on either side, calling the bonuses “the height of irresponsibility—it is shameful.

  “Part of what we’re going to need is for the folks on Wall Street who are asking for help to show some restraint, some discipline, and some sense of responsibility,” he said, clearly agitated. “There will be a time for them to make profits and a time for them to get bonuses. This is not the time.”

  Ben Bernanke, sitting next to Obama, was not so much outraged at the bankers’ behavior; he’d been living and working in the midst of high-compensation bankers for years. As one of his aides said later, he was just upset that their taking such big bonuses, prompting outrage, could make his job of extending almost unlimited federal largess to the financial sector even more difficult.

  Similarly nonplussed was Tim Geithner, on the president’s other flank. During his confirmation hearings, Geithner mentioned that the administration was preparing rules to require that executives at companies receiving taxpayer money agree that any compensation above a certain amount—he did not specify how much—be “paid in restricted stock” that could not be liquidated or sold until the government had been repaid.

  It was a low priority. Geithner didn’t believe in compensation limits. In his experience, he’d never seen any that worked. On Wall Street, any firm with compensation barriers would just have its employees stolen by a competitor who was not similarly restricted.

  What Geithner hadn’t told Obama in their many hours together was that there was, not far away, a ticking time bomb on these explosive matters of compensation.

  Bonuses of $165 million were due to be paid to AIG executives in mid-March. In the fall of 2008, Geithner presided over the issues of how—and how much—AIG would be permitted to compensate its employees, claiming that the payouts were “retention” bonuses to keep aboard employees who might be helpful in unwinding the derivatives mess AIG had helped weave.

  Though Geithner later said he didn’t remember any specifics about the AIG bonuses, the issue was being actively managed in February in the upper reaches of his Treasury Department. All across the capital, after all, legislators were impelled to action by the president’s angry words. One of them was Chris Dodd, the Connecticut Democrat and chair of the Senate Banking Committee, who inserted an amendment sharply limiting executive bonuses for firms that had received bailout money into the nearly completed American Recovery and Reinvestment Act, the stimulus bill. It would sharply limit the bonuses for executives at institutions that had received TARP funds until those funds were fully paid back. As the stimulus bill crested toward passage, with surprising bipartisan support, a call came to Dodd from Geithner’s office. The suggestion: How about only restricting those bonuses agreed upon after the bill’s passage that month? Their point was that to vitiate a contract retroactively would undercut the very sanctity of contracts everywhere. Any such new compensation provisions should be for contracts yet to be written. The move, however, would exempt those explosive AIG compensation contracts signed the previous year. Dodd quietly made the change.

  Meanwhile, the president was looking for ways to turn his forceful words into action, to find expressions of his will, and outrage, in concrete policy. His venue for this search was the daily economic briefing, something that was announced two days after the inauguration as proof of his concern over the unfurling recession. Across many administrations since the end of World War II, there was a tradition of daily briefings about matters of intelligence and national security. It fell under a president’s central responsibility of upholding the national defense.

  It was Obama’s idea that the economic security of Americans, at this time of crisis, was imperiled, meriting its own designated briefing.

  But whereas the intelligence briefing, for instance, rests on a long-standing structure of teams inside CIA and Defense Intelligence upstreaming recommendations through a vetting and distilling process—now run by the relatively new office of the Director of National Intelligence—there was no similar process on the economic front. Not that there wasn’t an available entity. The National Economic Council was designed to be a corollary to the decades-old, heavily staffed National Security Council, which has a formalized process in which deputy principals (often number twos at departments) meet to discuss matters that are then upstreamed to the NSC principals, the heads of the major arms of government engaged in security, along with the highest-ranking domestic official, the Treasury secretary, all of whom help the president arrive at policy recommendations shaping America’s role in the world.

  The NEC, with a modest staff, had never matched that sort of process or rigor, partly because economics is not a neat fit for literal assessments of national security or the related analyses of gathered intelligence.

  In fact, the productivity and effectiveness of the NEC were often the direct result of the organizational and conceptual abilities of its chief. Rubin, setting the mark early, was a generalist on economic and financial matters, with a talent for bringing in competing perspectives and synthesizing them into coherent recommendations.

  Though these were not Summers’s strong suits, he was now in charge of a crucial morning slot on the president’s schedule each day—at least for a few weeks or, at most, a few months. That’s what Emanuel anticipated. Rather than a session to hammer out policy, these daily economic briefings, he felt, were as much as anything for show—a statement of hourly purpose about the president’s central commitment to battling the economic crisis. They’d be phased out, Rahm figured, in a month or so.

  But Emanuel showed up, along with almost everyone with a senior role in domestic policy—at that point, almost entirely about the economy slide and financial collapse. Geithner, Orszag, and Romer all attended, along with Joe Biden’s economic policy chief, the progressive economist Jared Bernstein. Axelrod usually attended as well, as did the vice president.

  Of course, the meetings were run by Summers, who set the agenda and worked up briefing materials for the president to read, which the latter often did late the night before, after the girls were tucked in.

  And the president did his homework. Compared to the economic meetings during the transition, where he took notes and asked the infrequent question, Obama, now as president, was quite engaged. He was ready to own the key concepts and debate them, in the aim of arriving at what he called “best possible plans.”

  He ran into a united front, philosophically, of Summers and Geithner. Both men viewed the U.S. economy as a sick patient, but one with strong, and often improbable, recuperative powers. One of Summers’s favorite phrases—often echoed by Geithner—was that, as policy makers, they should rely on Hippocrates’ dictum “first, do no harm.”

  By early February it was clear that what the president hoped would be a debate society, organized by Summers but presided over—like a judge in a moot court competition—by Obama himself, was turning into Larry Summers’s economics seminar.

  The meetings often seemed impromptu, with the tenor of a free-form search for solutions, but Summers, knowing the well-worn steps of dozens of economic debates, seemed to guide discussion toward some waiting item on his syllabus. The NSC-style process of debating concepts through deputies and principals to arrive at some distillation of choices for a presidential decision, was, in essence, being done in Larry Summers’s head.

  This cribbing of Hippocrates was a formidable rhetorical stance and subtly difficult to refute. Virtually any action on a grand scale would carry unintended consequences, and maybe even intended ones, that would create damage to the short-term interests of some constituency. Meandering discussions about whether the intended consequences would outrun the unintended ones would quickly slip into theoretical
guesswork, while underselling the variable of how strong execution or persuasion—or, more succinctly, leadership—could help push proposals to surprisingly strong outcomes.

  Obama’s response to this cul-de-sac: outside readings. Rather than “first, do no harm,” by the first week in February his preferred phrase was “Sweden not Japan.”

  Though neither country’s experience is cleanly applicable to that of the United States, by far the world’s largest economy, the experience of each country seemed to present a set of choices.

  Sweden had deregulated its financial industry in the early 1980s, much like the United States, creating a bonanza of speculation in new securities tied to housing, and inflating a massive real estate bubble that finally burst in 1991. In circumstances that were eerily similar to those in the United States, credit then froze in an economy that was heavily overleveraged with debt. Values plummeted, from both a crisis of liquidity and a massive correction in inflated prices.

  After two rounds of bank bailouts, which seemed at first to be working only to prove inadequate, Sweden temporarily nationalized its banks. Shareholders were wiped out, management teams were generally ousted, troubled assets were auctioned off, and the banks reemerged with the government as a large equity owner. Crucially, though, confidence in the system was quickly restored. Sweden, with this tough-love approach, roared back to strong growth throughout the decade. The government reduced its ownership in the banks, year by year, as they slowly returned to health and sound practices. In essence, Sweden restored its banks by a kind of enforced prudence.

  At the same time, half a world away, Japan was experiencing a similar set of disasters from the bursting of its 1980s real estate bubble. The major difference? What Sweden had started—and then reversed—Japan kept doing: it kept bailing out its insolvent banks with government support and cash infusions. There were ups and downs across years, times when the banks seemed to be on the mend, and then fell back. The idea was for the banking system to stay intact and earn its way back to health by slowly reducing its toxic assets as it resumed lending. This never happened. Japan limped along for what was called its “lost decade,” the 1990s, with virtually no economic growth, a situation of sluggish economic activity that continues up until the present day.