by Ron Suskind
“I can’t tell you how much I’d love to play tennis, Alan,” Geithner said wearily. “I’d give anything.”
Geithner had a much more important match to prepare for, against Summers, for high stakes. That afternoon Geithner’s team gathered to finalize their battle plan. His proposed stress tests had evolved nicely. If the president could see them as forceful action to repair the banking system, and not just one more delay in dealing with this thorniest of issues, the stress tests would become the undisputed government policy.
But it would be a matter of both offense and defense, defend and attack. In his mind, Summers was just marshaling the arguments of amateurs, pundits, and politicians to cozy up to the president. He had no idea what the takedown of a bank looked like, and Bernanke, who did, was with Geithner. They, after all, would have to play an instrumental role in either the stress tests or any wider intervention.
Yet Geithner had other things to worry about. He’d been mentioned in every story on the AIG bonuses. He would have to face the Watergate question: What did he know and when did he know it? Geithner, himself, had become toxic.
And it was none other than Larry Summers who was on several of the Sunday morning talk shows essentially criticizing what Geithner had done, or not done, on the controversial bonuses.
“There are a lot of terrible things that have happened in the last eighteen months, but what’s happened at AIG is the most outrageous,” Summers said on ABC’s This Week. He reiterated a similar position that same day on another show, CBS’s Face the Nation, saying that the administration’s priority was safeguarding the American taxpayer. “No one cares about the shareholders of AIG. No one feels the slightest obligation to people who led us into these difficulties.”
Some felt that those “people” included Tim Geithner.
By late afternoon, the Roosevelt Room was already crowding up. People had come early to get a good seat. Everyone was there: Summers, Romer, Emanuel, Biden, Geithner, Axelrod, Jarrett, and the political team, folks from Treasury, teams from the CEA and the NEC, assistant to the president Phil Schiliro and his legislative affairs staff.
Geithner and Summers each laid out his case. The stress tests, Geithner asserted, would dispatch uncertainties in the markets and in American business and the wider consumer population, who needed to know if their financial system was secure. If banks failed the tests, it would be clear why; the tests would highlight their deficiencies and allow the government to decide whether to bail them out or take them through a prepackaged bankruptcy. What was more, as the banks worked through the tests, they would have to recognize and frankly assess their own true condition.
For his part, Summers used metaphors: “Tear the Band-Aid off, let the air in, and let the healing begin.” He kept up the medical analogies the president favored: “It’s time for radical surgery to save the patient, the U.S. economy.” He discussed how the “good bank, bad bank” model would work. The government would close down several troubled institutions, take them over for a brief period, and have the toxic assets placed in the bad bank run by the government. The “good bank” would be cleansed, with management and shareholders wiped out, and creditors entering negotiations about what they might recover.
The president, who’d heard Summers’s case two days before, cut him off.
Many of the largest banks were sitting on huge piles of toxic mortgage-related assets, he said, which put a drag on the flow of credit and created wider uncertainty in the economy. Meanwhile, he said, it seemed like the U.S. policy was “waiting and hoping,” having government support the banks in all sorts of ways, while everyone waited for the value of their assets to slowly recover—or for the banks with strong enough earnings to write them off. It was a riff he used at his first press conference, a month before, now expanded and directed. “As I understand it,” the president concluded, “that’s Japan.”
Well, sort of, Geithner said. But not exactly.
Summers’s retort was that, yes, more or less, that’s Japan.
Summers and Romer pointed out that the stress tests might be inadequate, easily gamed by banks and proving little; and also that they wouldn’t be done until May, too long to dawdle. Summers said Geithner’s policy was “watchful waiting,” in contrast to the one he and Romer were suggesting, which was “necessary surgery that shouldn’t be delayed any longer.”
“We’re not waiting for anything!” Geithner retorted. “We’re not talking about doing nothing. We are acting—with the stress tests!”
Implicit in Geithner’s “we” was Bernanke and the Fed, a crucial vote of confidence from one of the most powerful corners of government. But Romer, who had connections in the Fed herself, was ready.
“I’ve had a fair amount of contact with the Fed governors,” she said, “and there’s quite a bit of consensus in the Fed system that something needs to be done now, not later, some sort of resolution, along the lines of a ‘good bank, bad bank’ model.”
It was a direct hit on key underpinnings of Team Geithner’s strategy, in which the Treasury secretary implied that he was speaking for the Fed. Geithner glared across the table at her.
There was general talk of how much it would cost. No one had a firm figure. That depended on a host of estimates for which data were unavailable—data on the balance sheets of banks and on the depth of toxic assets across the banking system. Numbers were bandied about. A restructuring of the sagging banks could cost $700 billion. The costs could be stretched out across years. Some of the nonperforming assets in the Resolution Trust Corporation, the agency set up in 1989 to handle the savings-and-loan crisis, had been sold off quickly; others had been held for years. In any event, it would be real money, north of half a trillion.
The president’s enthusiasm was undimmed. The restructuring of the large insolvent banks, he said, would be a moment where the government could “strike a blow for prudence.” It would “begin to change the reckless behavior of Wall Street and show millions of unemployed Americans that accountability flows in both directions.”
Obama was finally pushing the argument above the ongoing disputes inside his economic team to a higher moral and ethical plane. Having absorbed the theatrics for several hours, he had seen enough. He said he wanted something large, something that changed the course of the economic ship. It was clear to everyone: he was leaning toward Summers and Romer.
But Geithner and the Treasury team took a new tack in the debate, and Summers engaged. They were still arguing.
“Look,” Obama said, with evident frustration. “I’m going to get a haircut and have dinner with my family. You’ve heard me. When I come back I want this issue resolved.”
And with that, he walked out.
Rahm Emanuel waited until the president was fully out of the room and then seized the floor.
“Everyone shut the fuck up. Let me be clear—taking down the banking system in a program that could cost $700 billion is a fantasy. With all the money that already went to TARP, no one is getting that kind of money through Congress, especially with this AIG bonus disaster.” He threw a hard glance at Geithner. “Listen, it’s not going to fuckin’ happen. We have no fucking credibility. So give it up. The job of everyone in this room is to move the president, when he gets back, toward a solution that works.”
Romer later said she felt like “I’d been punched in the stomach.” The president got it. He was striving, at last, in a Rooseveltian way, to take bold action. Emanuel had “waited until he left and then crushed it.”
Emanuel’s now-famous tactical dictum—“never let a crisis go to waste”—actually applied in this case, she felt. Not really to health care, which was more an issue of unsustainable trends than a true crisis. This was different. This was a real financial crisis, extending into the fortunes of everyone in the broader economy. After all that had happened starting with Reagan and deregulation, and three decades of the unfettered markets not dealing with the fundamental needs and hopes of a growing economy, now was the time�
��maybe the only time—for the government to step in to make crucial repairs. “This was the crisis that we shouldn’t let go to waste,” Romer said later. “Right there, Rahm killed it.”
Aides ran out to get food for dinner as Emanuel huddled with Geithner and then Summers, and then the both of them.
When the president returned at 8:00 p.m., Summers, on cue, took the floor.
“We had this very good discussion at the beginning of our meeting, but while you were away, Rahm made the point that there’s no chance of Congress approving any more TARP funds. So a broader, systemwide solution doesn’t seem possible. But it’s absolutely possible, Mr. President, to do Citi, just Citi. We can do that with the $200 billion currently sitting unused in the TARP account.”
Obama sat quietly, considering this for a moment. “Well, okay, so we do Citigroup and we do it thoroughly and well. That would show everybody that they can trust us in government to do a hard job, and do it right. And then we go back to Congress and get the money to do the wider job that really needs to be done.”
As the president processed this, Emanuel jumped in.
“At the same time,” he said, “we’ll have Tim do his stress tests so he can decide how to support the banks with his ‘Hobbit accounts.’ ” This was Emanuel’s catchphrase for programs with acronyms that sounded like something out of a Tolkien novel, such as TALF (Term Asset-Backed Securities Loan Facility) and PPIP (Public-Private Investment Program). Of course “support” was the right word. Emanuel had called it straight: Geithner’s plan was to support the existing structure, not change it.
Obama considered all this for a moment. After a long day of discussion and fierce debate, there seemed to be unanimity from his advisers. For the next few hours, as the evening waned, everyone talked through logistics.
After nearly five hours in the Roosevelt Room, the participants saw the weeks of debates settling into action. The stress tests, now well along in their construction, would move forward as the core of the U.S. government’s approach. But Treasury would also pull together a plan for how to “resolve” Citigroup as a first step to returning to Congress for money to take down other banks.
Geithner often said, “plan beats no plan.” The stress tests were now a plan. But what Summers and Romer were pushing, stoking the President’s enthusiasms, was not. It was a proposal, which was all they could muster with their staff and specific expertise. Only Treasury had the horsepower to pull together a plan for such a significant intervention by government. All balls were now in his court.
Obama thanked everyone and told them “to go get some sleep.”
The president had been well managed.
10
The Covenant
There was perhaps no better case study for how the “systemic” risk posed by the turbulence on Wall Street threatened the broader economy than what was happening six hundred miles west, in Motor City. The crisis in Detroit was ignited by New York. When credit tightened after Bear Stearns’ March 2008 fall, auto sales began to decline precipitously from their historic peak of seventeen million units in 2007.
By late March 2009, the question of what to do about the automakers had persisted for more than a year.
One of the hottest expanding markets for debt had long been the asset-backed securities for car loans, which, just like mortgages, had been securitized and swapped. Almost anyone who wanted a car could get a loan. After Wall Street’s crash in September, declining sales all but plummeted, dropping to a rate of nearly half the 2007 levels. Automotive CEOs flew to Congress in November in their private jets to plead for bailouts, were roundly reviled for their transportation choice, and later, with showy penitence, drove the eight hours from Detroit to D.C. for another hearing. In December, the Bush administration cleared a first cash infusion of $17.4 billion out of the TARP funds and kicked the matter to the White House’s next occupant.
The automakers presented an issue that was, in many ways, more straightforward than the dilemma about how to handle financial giants such as Citigroup. While the banks stood on the soft turf of confidence, subject to the ongoing brinksmanship between Washington and New York, the car companies at least rested on the firm ground of direct action: their fortunes rose or fell based on the sale of tangible goods in the marketplace.
By the early spring of 2009, though, crises in the two kingdoms, auto and finance, presented a wider choice: whether government, in its decisions to support or abandon each teetering industry, would look to correct some of the glaring imbalances that had grown up in American society across decades.
Detroit was still the capital of the country that made things the world wanted. It was, after all, the Mecca of the manufacturing revolution in the United States and, eventually, abroad. The early-twentieth-century assembly line innovations introduced the quintessential American product, a symbol of gleaming mobility, to the global market. The “Growing Together, Growing Apart” charts that Alan Krueger unfurled nearly three years earlier for a long-shot candidate could easily have carried attachments for the central role of cars in building that storied middle class. The seminal insight, in fact, might well be attributed to the petulant and flinty Henry Ford himself, who in 1908 was having trouble drawing men from many machine shops around Detroit to work on his newfangled assembly lines: they felt the work was dehumanizing, turning men into cogs on a wheel. He drew them in with wages they couldn’t resist (wages he cut later, once the plants were filled and the machine shops had vanished), along with a flourish of salesmanship, saying that men should be paid enough to afford to buy the product they built. The assembly line’s efficiencies dramatically lowered costs, the solid wages created a community of ready buyers, and the foundations of mass production and mass consumption were laid. The subtle codependency tucked within—that the nation and its economy flourish when workers earn enough to be active consumers—became the best-case justification decades later for many of FDR’s aid programs, including Social Security, and for the growth of unions, which bargained collectively for the higher wages and benefits that lifted lower-class laborers into the post–World War II middle class.
As is so often the case with progress, every solution creates a new problem, and one presented itself in the 1970s, as the world co-opted and started to improve upon American manufacturing techniques in factories manned with lower-wage workers. Even if Detroit’s giants knew how to respond, the slow-footed, legalistic union-management dialogue stood in the way of rapid change.
And that’s, of course, what almost every current debate in the White House and beyond was about: rapid change. Accommodating it is one of the great human capacities, but living through it can be the stuff of stress and, often, suffering.
Wall Street’s great modern innovation had been to profit from rapid change itself—and often drive it—without the complications of having to worry too much about outcomes.
Detroit, and much of the rest of America, didn’t have that luxury. In the cold spring of 2009, many Americans were actively wondering whether the country’s financial agents of change would have to start living lives of tough choices and hard consequences. Since late January, when the new president’s harsh words seemed to encourage righteous anger against Wall Street, a fair share of the busy public wondered if the new president would see any distinction between those who profited from change and those who were crushed by it, and whether he believed that government’s role was to forcefully, but smartly, impede actions of the former and ease the pain of the latter—to keep the American worker, both figuratively and literally, on the assembly line so he could buy what he produced.
What makes the morality play even richer is that Obama, just as he was calling the financial industry payouts “shameful,” brought on board a crew of private-equity specialists from Wall Street—led by Steven Rattner, named head of the Auto Task Force—to work alongside his market-oriented economic team to help frame a set of hard choices about what he might do.
By late March those choices were th
e stuff of fierce debate. The administration’s domestic policy was fast becoming a debate society run by Larry Summers. Obama would sit on high, trying to judge if there was any shared ground between the competing debate teams that might coalesce into a policy. The larger question simmering beneath each busy day was whether his growing inclination to seek consensus in these debate tournaments was a model for sound decision making, a crutch to delay, or avoid, the decisions only a president can make, or a recipe for producing half-measures—a pinch of this matched with a scoop of that—masquerading as solutions. After all, if the breadth of perspectives is wide enough to represent the fullest range of views, consensus is unlikely. If consensus is swiftly achieved, it probably means too few voices have been heard.
In the run-up to the big meeting on the auto bailouts, slated for March 26, the breadth of perspectives was actually quite narrow. Almost everyone of consequence considering the fate of General Motors and Chrysler for the past two months had been looking through the shared lens of market-oriented economics and a philosophical school of thought and action loosely called “private equity.”
That colorless term had, over the years, been substituted for a host of vivid precursors, such as “corporate raider,” “takeover artist,” or, in some cases, “greenmailer”—names for a group of financial provocateurs who emerged in the early ’80s to launch the era of financial innovation. Their leader, Michael Milken—like his debentured kindred Lew Ranieri—formed new ways to turn debt into tradable, highly liquid securities by floating low-grade, high-risk debt called junk bonds for that era’s “special purpose.” Specifically, they would pool the capital into takeover funds to back the assaults by raiders on public companies or their efforts to “place” highly leveraged capital. Whereas 1980s competitors such as Warren Buffett and Peter Lynch were looking for value hidden in public companies to “buy and hold” in the conventional effort to outsmart the markets, buyout firms such as Drexel Burnham Lambert, Forstmann Little, and Kohlberg Kravis Roberts claimed to be smarter about various companies than the executives who managed them. Sometimes the attacks would be hostile; other times, more a matter of making senior management offers they could not easily refuse—such as how to meet stunning performance measures quickly, get rich, or lose your company; or, for troubled companies, take this expensive capital as a last chance for your survival, and sign over everything, often including your home, as collateral. Either way, the private-equity play—to sell off assets, streamline operations, defund anything that wasn’t focused on short-term earnings, and then look to sell the company within three to five years—became the enduring modus for both takeovers and turnarounds. Although the flashy days of corporate raiders largely passed with the prosecutions in 1990 of Milken and, before him, his kindred such as Ivan Boesky, Martin Siegel, and Dennis Levine on various types of fraud, the private-equity model endured, and grew. In 2007, KKR was the world’s fourth-largest employer, if one added up all the companies that the firm and its investors controlled.