by Ron Suskind
As the official administrator of the stress tests, it was the Fed’s role today to offer a lengthy set of descriptions about the standards of measure for determining the soundness of the top nineteen banks, the first round of the process.
But by morning most of those yardsticks had already emerged.
There had been a steady succession of leaks across the preceding week. Each made news, creating enormous interest in the “stress tests,” a quick-fire phrase that was fast seeping into common speech. Coverage of what they were, and what they might show, now spread far beyond the business pages to columnists, pundits, and CNBC alerts.
Around town, managers of the marketplace of ideas were duly impressed.
George Stephanopoulos, the former senior adviser to President Clinton who hosted ABC’s This Week, complimented Stephanie Cutter, Treasury’s spokeswoman, on what a brilliant job Treasury had done with “those targeted leaks.” Cutter reported this to her bosses, who immediately saw the irony: they’d been bitterly complaining all week about the leaks, which they were sure were coming from sources in Sheila Bair’s office and the FDIC.
Bair seemed to be everywhere. At the end of March, two days before Obama met with the thirteen bankers, the Kennedy Library named Born and Bair as the year’s Profile in Courage Award winners. The citation noted that “Sheila Bair and Brooksley Born recognized that the financial security of all Americans was being put at risk by the greed, negligence and opposition of powerful and well-connected interests . . . The catastrophic financial events of recent months have proved them right. Although their warnings were ignored at the time, the American people should be reassured that there are far-sighted public servants at all levels of government who act on principle to protect the people’s interests.”
A moan could be heard that day from Geithner’s office. Officially placing Bair in the company of the already celebrated Born—the brilliant and soft-spoken Jeremiah, a decade back, of a coming derivatives crisis—would only serve to embolden the FDIC chief.
But when it came to controlling information, there was one area in which Geithner’s office had been successful. Key disclosures of what actually happened in the March 15 “showdown” never leaked. Bair didn’t know, and never found out, that the president had been trying to push forward what the FDIC chairwoman was recommending. He wasn’t successful, either.
Alan Krueger said one reason Treasury dragged its feet on a constructing a plan for Citigroup’s resolution was Sheila Bair. They would have had to consult the FDIC chairwoman. After all, her agency is in the business of closing banks.
“The fear was that Sheila would leak it,” Krueger said, in a comment echoed by others at Treasury. “And there’d be a run on Citi.”
He added that this was one of many reasons: “It was more than just that. The bottom line is Tim and others at Treasury felt the president didn’t fully understand the complexities of the issue, or simply that they were right and he was wrong, and that trying to resolve Citi and then other banks would have been disastrous.”
Krueger, for one, disagreed, and that very day he was due to have lunch with someone uniquely suited to edify him about the resolution of troubled banks: Andrea Borg, the Swedish finance minister.
Borg was in town with other finance ministers of the G20, the world’s twenty largest economies, for a meeting at the World Bank. Of course, Sweden was the country that Obama said in many meetings he wanted to emulate.
At Equinox, a tony restaurant three blocks north of the White House that had become the destination of choice for lobbyists and their expense accounts, Krueger had Borg run through what Sweden did in 1991, when its financial system collapsed in the midst of an economic crisis, and what they had learned.
Borg, a tall, square-jawed father of three with a short ponytail, an earring, and a dark-suited seriousness, described how Sweden first supported the banks with infusions of cash. In fact, there were two bailouts of this type, supporting the banks and encouraging them to work out their problems and earn their way back to health. This didn’t work.
Borg said they were careful about managing the banks’ incentives. “You don’t want to make the wrong things conditional,” he said. In Sweden, the government decided how and when the banks, once they’d emerged from receivership, would pay back the government money. In many cases, the Swedish government retained equity control for a few years until they were certain the banks were truly healthy and stable. In the United States, he noted, the banks were paying back the TARP money as fast as they could even if it meant engaging in behaviors similar to what had gotten them into the crisis, just to wriggle free of the limits on compensation. “The compensation is an issue, but it shouldn’t be related to the need for government support and control,” he said. “They’re separate issues.”
He and Krueger discussed compensation issues—how to bring more serious regulation to payouts in the banking system, such as longer-term incentives and “clawback” provisions—and Borg said it was an ongoing problem, something he was working on even as they spoke.
In fact, Borg and former Swedish finance officials were in regular demand since the fall of 2008, when Bo Lundgren, Sweden’s minister for fiscal and financial affairs during the 1991 crisis, met with investment bankers and regulators in New York. Obama’s recent framing of “let’s be like Sweden, not Japan” was becoming a widely embraced analysis in both Europe and the United States.
But by dessert the conversation had shifted from the causes of economic crises in Sweden and America, a bloated and then collapsed financial system, to the lasting effects of economic distress and rising unemployment. During its banking crisis, Sweden’s unemployment rate tripled, from 3 percent to 9 percent, in just over a year.
U.S. employers, feeling a pronounced drop in overall demand, were cutting payrolls dramatically, Krueger said, maybe even more than the drop in demand would merit. Some data showed they were “using it as an opportunity to reduce costs,” he said, with layoffs as well as wage reductions. Germany, Krueger mentioned, was busy creating tax incentives for employers to keep workers. Yes, Borg agreed, the Germans were indeed acting swiftly, “but we do it differently in Sweden.” He described how strong unemployment benefits in Sweden actually freed employers to regularly lay off workers based on merit, job performance, or changes in corporate priorities or direction. Although the social safety net was strong and well funded, there was a social stigma for the able-bodied not to work in Sweden, and the unemployment rate, while not low—it had averaged a respectable 5.3 percent over the past thirty years—was weighted toward short-timers. Borg explained how people didn’t like to be nonproductive, and there was no point adding possible destitution to that equation. “What we find is that the people who are fired are the ones who are soon out starting new businesses.”
On the way back to Treasury, Krueger thought about this last twist, an inversion of the American model where limited unemployment benefits, usually capped at twenty-six weeks, were believed to stoke the urgency to find new employment—a ticking clock that got louder as the weeks passed.
An eminent economist he knew well, Peter Diamond, from MIT, had for years been short-listed for a Nobel for his work with another economist on the unemployed, especially data that seemed to show that the out-of-work tended to kick into high gear, often finding jobs, right as their unemployment benefits were due to end. These findings had been crucial to the way politicians and public policy experts had for years viewed the unemployed as responsive to desperation.
The previous spring, while still at Princeton, Krueger launched one of the most ambitious unemployment studies in recent years: a plan to assess six thousand unemployed workers in New Jersey, using breakthroughs in behavioral economics to show how their emotional and rational architecture shifted across their full span of joblessness. The study was designed to yield insights into how best to treat the jobless, for both their own long-term well-being and that of the larger economy. After a year of deliberation, New Jersey g
ave it the green light. Of course, when Krueger first proffered the study in March 2008, unemployment was below 5 percent.
It was just now becoming clear inside the administration’s upper reaches that the jobless rate—predicted by Romer, when the stimulus plan was being designed in December, to go no higher than 8 percent for 2009—would clearly rise above that estimate.
How high would it go? Orszag and Summers, who’ve both called Krueger the top labor economist in the United States, were already turning to him for a prediction, as well as for recommendations about what to do.
But Krueger, walking from the restaurant, was thinking more about the broad issues discussed at lunch, the larger decisions a society makes that shape its character.
Sweden, after two bailout attempts, and billions of kronor being passed to its banks, made a choice that those who had created the financial crisis, who happened already to be the winners in that society, should not be kept whole and pushed toward a next round of profits by the government. Instead, the Swedes expanded benefits to match a trebling in the ranks of the jobless, restructured the banks—bringing a measure of pain that killed off speculation as a business model—and quickly earned a kind of confidence that they didn’t have during the boom and bubble of the late 1980s. What did the government’s tough-love decision do to the psyches of two out of every three jobless Swedes who lost employment because of a burst investment bubble? It had to be good, Krueger felt, and indeed Sweden’s jobless rate fell swiftly from that peak of 9 percent. But America, with its diversity and boldness and headlong verve, wasn’t much like Sweden.
Decisions about closing banks, Krueger ultimately felt, were not just about economic calculations. They were about moral choice.
“We lost the country with those AIG bonuses,” he said later, and we never won them back. “I think the president was trying to win it back” by considering how to break up some of the biggest banks. In an hour, at 2:30 p.m., the ingeniously designed stress tests—a kind of federal rating agency whose judgments, if acted on by investors, would be backed by an implicit government guarantee—were to be unveiled. Krueger was sure they’d raise a lot of capital for the banks, but at some point the government would still need to step in.
In the meantime, he said, he was thinking about “how many jobless there would soon be and who will be lobbying for them.”
When Obama took on three great challenges at once—the economic crisis, financial restructuring, and health care reform—it seemed no one had the temerity to say, “Mr. President, any one of those three would be more than enough to challenge a new president with so little executive experience.”
The person who might have done that was not in the administration. He was in his Washington law office, on April 27, saying things he had planned to say to his friend Barack Obama in his role as president.
Tom Daschle was back in a lobbying capacity at Alston & Bird. He knew he’d messed up his taxes, which had meant withdrawing his nomination for the HHS job in early February. Daschle’s sins were mostly accounting errors—the IRS was not much interested—but the penalty levied would be stiff: having to watch his nemesis, Max Baucus, move to center stage on health care reform, a move the Montana senator had executed with such force that he might well end up leading the whole town.
Even before the March 5 summit, Baucus was on the move, preempting Obama. Calling Geithner into a Finance Committee hearing on March 4 to talk about funding options to fill Obama’s budgetary placeholder of $650 billion for a health care overhaul, Baucus offered proposals from his own “Call to Action” blueprint, and remarked that “the Director of the Office of Management and Budget [Orszag] said that the path to economic recovery is through health care reform. I agree, and I’m pleased that the president’s budget addresses reform as an American imperative. This budget makes a good pitch for a down payment on health care reform,” he added, but “my concern, frankly, is the viability of the down payment and how it will help Congress contain the costs associated with reforming the health care system.”
Daschle, meanwhile, was prepping Obama for his upcoming debut at the summit.
“How do you force the hospitals and doctors and insurers to come together?” Daschle recalled Obama asking him in the prep session. Daschle said he told the president to “talk about American resiliency and dare,” his voice rose, “somebody to oppose him and DARE”—now the volume was up—“somebody to not be patriotic. He needs to do it first before it gets framed for him!”
Of course, Obama didn’t do that.
“He performed admirably,” Daschle acceded, “but the problem is that he hasn’t been much on follow-through since. And it’s gone dead and stale. The only thing he’s got is a bunch of people on record that said at the thirty-thousand-foot level they are for it.” Daschle has an ability to distill Washington politics into beautiful metaphors, and his airplane analogy is spot-on.
“I look at it in terms of altitude. At the thirty-thousand level everyone is for it. You drop down to twenty-thousand level and you start to see people peel off; by ground level you are alone. That’s inevitable. Unless you force them.”
Meanwhile, Baucus was working his ground forces, framing the debate. Just a few days before, on April 23, he had launched a series of roundtable “workshops” in his committee room that were drawing overflow crowds, media coverage, and some ire—especially from “single-payer” proponents, who were concerned that Baucus would not be including their voice or proposals in his heavily attended colloquies.
Baucus was also speaking the language of bipartisanship—music, Daschle knew, to Obama’s ears. Once an instrumental supporter of Bush’s tax cuts, Baucus claimed close relationships with the more moderate Republicans, with whom he was largely indistinguishable on many issues. In this case, Daschle stressed, bipartisanship was a false god.
“I would say you aren’t going to get any Republicans,” he said. “It’s going to be driven largely by the Democrats. I just don’t see anyone willing to stay with it. The four or five most likely participants are Chuck Grassley [R-Iowa], just because he and Baucus are so close, Bob Bennett [R-Colo.], because he’s worked the issue so long, Mike Enzi [R-Wyo.], because he and Kennedy worked together. And the last two are Collins and Snowe [both R-Maine], but they don’t bring anyone with them.”
Over ten minutes, he ticked off razor-sharp profiles of his fellow Democrats, from North Dakota’s Kent Conrad, the budget committee chair and deficit hawk; to Baucus’s fellow Democrat from conservative Montana, Jon Tester; to Virginia’s Jim Webb, the pugnacious former navy secretary; and a half dozen others, with what it would take to get them all in line and locked in.
Then the voice of the famously even-tempered Daschle started to quicken, like he was watching a party barge headed for a waterfall.
“But they need to be on the offensive. If they aren’t, we lose. Even if it’s just the Democrats—all those Democratic swing votes that in a heartbeat will oppose this if it looks like [Obama] is in a defensive posture.
“We could live with failure in ’94 or ’93, and we could live with it now. But we’re going to pay a much higher price for failure this time than we did back then, in terms of cost quality and access. The price of failure keeps going up,” he said, in a mirror image of what his protégé said at the summit. But Obama saw the deepening medical cost crisis as nudging the providers toward consensus. Daschle dispatched that swiftly: more to lose, an existential struggle for providers, deeper intransigence. “In some ways, the problems of consensus building become even more difficult as these problems become more severe.”
Counterintuitive, but incisive. A tenor of insight that you’d hear only in the advanced class on health care reform, and the kind of advice Obama wasn’t getting, certainly not from Daschle. Daschle hadn’t spoken to Obama in any meaningful way for seven weeks, since that pre-summit prep session. It had been perhaps the most important month in fifteen years for health care reform—the Democrats’ perennial cause and Daschl
e’s passion—and Obama’s longtime mentor was on the outside looking in, his nose pressed to the glass.
This left Daschle perplexed and anxious. His attentiveness to Obama was without boundaries. Friends of Daschle’s, who wondered if there’d been some sort of breach, got pushback from other wise men around town. Obama wasn’t returning any of their calls. And it seemed that Emanuel, as he tightened control around Obama, was the heavy. “He convinced Obama that ‘all Rahm, all the time’ was all he needed,” said one longtime Washington manager. “Obama didn’t know how things were supposed to work, and Emanuel, running in every direction, wasn’t going to tell him.”
But there may have been more to it, something more personal. Having presided over Obama’s formation, Daschle understood exactly what Obama knew and didn’t know, and what he had yet to learn—and that’s not always the person you want to see before you step onstage to meet unreasonable expectations.