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

by Ron Suskind

  Volcker, at eighty-one, was one of the last strong voices of an older age, when ethical toughness was honored and adequately rewarded. He was part of the midcentury’s community of “prudent men,” referees on the field of play making sure conduct was fair and cheap shots led to real penalties—and to social sanction. Nothing was worth risking that.

  At the center of this community of professionals—lawyers, accountants, auditors—were the closely regulated banks, and Volcker felt it was time restore them, mostly as they had been before that wall between banking and investing was breached in the 1990s.

  “I tell you the argument we’re having now,” he said, “there are those like me who say the heart of this system ought to be the banking system, like it was historically, and it ought to be a service organization to take care of the basic needs for its clients . . . its big job is providing someplace for their money, transferring funds around the country, making loans, helping them with investments and the rest. They shouldn’t get off doing hedge funds and equity and trying to make all their money by trading. That’s my view. Then you get the banks closely supervised, as they have been historically, and hedge funds can go off and pretty much do their own thing, unless they get so big that they can mess everything up. You don’t worry about every hedge fund, or equity fund, and they’ll probably not make as much money as they used to, with more competition and without all those bank deposits to play with.

  “And, finally,” he added, “you have to deal with this business of some sucker gets a bad mortgage and the guy who sold it to him gets a commission, and the guy who sold it to that guy gets one, too. That’s just old-fashioned fraud. Now, the other view,” he said, summing up much of Geithner and Summers’s position, “is treat everybody alike. They’re either angels or robbers. You can’t tell which, and there’s no point making a distinction between the banking system and the others.

  “I think that’s just fundamentally wrong.”

  Taking a course like the one he outlined, creating actual structural changes—“explaining it to everyone, doing it, and letting people get on with their business”—he said, takes “a kind of tough love that’ll get Wall Street, and plenty of Washington, too, up in arms. But most people on Main Street would understand what you’re doing pretty quickly. And they’re the ones who actually elect you.”

  He’d told all this to Obama, in various ways. “I think Obama understands everything intellectually, very easily, near as I can see. What we don’t know is whether he has the courage to follow through. He understands it, but does he feel it in the belly?” Then he mumbled, “I don’t know.”

  He said he always liked that thing Obama said, about how the hardest thing to do in government is “to solve tomorrow’s problems with today’s pocketbook.

  “But he doesn’t do it!”

  What was happening was that Volcker was struggling to overlook the demonstrable facts: that by passing over him and his like-minded kindred for top Treasury and White House posts, Obama had shown his preference, one quite different from Volcker’s, on almost all these issues. The president’s preference, Volcker felt, was “first, do no harm”—a phrase he’d heard often in 1980, when he began to pinch off the money supply. The “do no harm” school, he said, “always sounds reasonable” in that it calls for delay, until matters worsen to the point “where there’ll be consensus that we need to act in a forceful way. But you never get that consensus, because many of the actors, the institutions and so forth, will follow their own self-interest right off a cliff.” Every policy of consequence, meanwhile, is going to “do some harm, short term—something government, mind you, can and should help cushion.” But there’s no other way “to create the larger good, something you look back on with pride.”

  That idea of accomplishment, something you could be proud of, reminded him of a breakfast he’d gone to a few months before that had helped him “see things more clearly, even at my age.” It was a breakfast of “right-thinking citizens” who were worried about the crumbling infrastructure in the country.

  “At the end of the breakfast, this old gray-haired old man says, ‘I know something about this. I’m a professor of civil reengineering at Princeton. And I was up at Yale the other day and they’ve given up teaching civil engineering. There are just two old geezers like me up at Harvard, and once they’re gone that’ll be it. There’s hardly an elite university in the United States that pays attention to civil engineering. What’s the result? We hardly know how to build bridges; they tend to fall down. It’s cost twice as much to build that new bridge across the Potomac as it would have cost if it was built in Europe . . . I assure you, I know . . . and besides our bridges are ugly and theirs are beautiful.’ ”

  Then something dawned on Volcker that he told the old engineer.

  “Well, I said, ‘The trouble with the United States recently is we spent several decades not producing many civil engineers and producing a huge number of financial engineers. And the result is shitty bridges and a shitty financial system!’ ”

  Volcker roared with laughter, until his eyes watered, and he took off his glasses to wipe them. Of course, he was talking about something very serious, about the choices people make in their lives, as well as those made by a nation.

  “It always used to bother me—not so much anymore, but for a long time—how I spent all my life in government, doing things that were so intangible. What’s there to show for it, what’s left behind?” he said in a soft grumble. “And I just thought, imagine saying, ‘There’s a goddamn bridge I built. Or I designed that building, or I shaped that beautiful landscape.’

  “I always wanted to build something in my life. All I did was stop inflation.”

  Volcker and Axelrod’s mother, in their words and posture, were both trying to summon a world where humility was rewarded and government—of, by, and for the people—stood above other competing realms in American life. New York, then like now, was the nation’s preeminent city. But Washington had, for the long American midcentury, won the title of capital, in a push-and-shove for primacy between the two cities since the founding of the Republic.

  That rise was in reaction to one disaster after the next. The first big financial bust of twentieth-century America, the Panic of 1907, resulted in the creation of the U.S. Federal Reserve Bank. The government, dangerously and more than a little embarrassingly, had been forced to turn to banking magnate John Pierpont Morgan to save the financial system. It hoped never to have to again. But it was not until the Great Depression that Washington really got serious about forcing prudence onto markets and into life.

  The banking industry of the 1920s had done all it could to undermine the country’s faith in it. By merging commercial and investment banks into “bank holding” companies, it had created hugely profitable conflicts of interest, which then in turn precipitated the collapse of 1929. But as destructive as their behavior had been, the economy needed functioning banks. So when Franklin Delano Roosevelt arrived in the White House almost four years later, his most pressing order of business was to restore Americans’ confidence in their banks.

  After such a dramatic collapse he knew he would have to do more than simply tell people the banks were now safe. Their confidence needed to be earned, not manufactured. So he crafted a grand trade-off: the federal government would insure deposits in those institutions that behaved themselves, that adhered to strict rules and limitations. The Glass-Steagall Act gave deposit insurance to banks that agreed to act like prudent men. At the same time it broke up the poisonous bank holding companies. Investment banks would still exist and could do as they liked, but no longer would they jeopardize the savings, and thus future, of the American people.

  The “prudent man” standard came from a landmark nineteenth-century legal decision in Harvard College v. Armory, the case of a money manager who had squandered a widow’s inheritance. The decision put in place the Prudent Man Rule, which established a fiduciary duty to invest the assets of a trust as a “prudent
man” might his own. By applying a similar standard to banks, Roosevelt would help promote the same sort of assurance in them that their fortresslike facades and heavy vault doors were there to inspire.

  Of all the changes that occurred on Roosevelt’s watch, one of the most important was the government’s realization that its role might not be simply to ensure certain rights, but also to protect and promote a kind of desirable balance, a virtuous equilibrium. The reforms enacted under FDR were different from those that had come before and shifted the basic balance of power between Washington and New York—between public and private, worker and owner, saver and speculator. The walls built were not regulatory guidelines, subject to the enforcement and diligence of bureaucrats, but laws tightly drafted and immovable, clear matters of legal and illegal, just as the founders had done with their “checks and balances” within government.

  The most oft-quoted line in FDR’s First Inaugural Address—“We have nothing to fear but fear itself”—was followed by stern words, all but forgotten to history, for the president’s enemies in New York: “Faced by failure of credit, they have proposed only the lending of more money. Stripped of the lure of profit by which to induce our people to follow their false leadership, they have resorted to exhortations, pleading tearfully for restored confidence. They know only the rules of a generation of self-seekers. They have no vision, and when there is no vision the people perish.”

  There are many ways to understand what “vision” here might mean: the inventor’s insight that creates a new technology or medicine, the leader’s foresight of his actions’ distant consequences, the prudent man’s reserve about the extent to which complexity can be mastered and the future known, people’s gut-level sense that something better lies down the path of hard work and fair play. The confidence of the nation rests on trust and can endure for years after this trust has been broken. But it cannot endure indefinitely if the foundation of trust is not at some point earned. Confidence is the immaterial residue of material actions: justly enforced laws, sound investments, solidly built structures, the well-considered decisions of experts and professionals. Confidence is the public face of competence. Separating the two—gaining the trust without earning it—is the age-old work of confidence men.

  Inside the White House that very day, May 11, President Obama stood at a lectern proud and firm, with a “coalition” of health care industry representatives around him. All the major players were there, all the bigs, from the American Medical Association, the American Hospital Association, the Advanced Medical Technology Association (medical devices), America’s Health Insurance Plans, and PhRMA, the drug lobby. Also represented: the Service Employees International Union, or SEIU, the country’s largest private-sector union.

  The president hadn’t done much since the Health Care Summit. Tom Daschle couldn’t get an audience. Max Baucus was moving forward in the Senate. Various groups in the House were working up their proposals. This was Obama’s next act.

  Over the previous week, health care reform czar Nancy-Ann DeParle, on board now two months, was working with Dennis Rivera, the health reform chief of SEIU, and Karen Ignagni, from the health insurers. They were trying to hammer out a number, a commitment for cost cutting that would serve as a target goal. This sort of thing had a long history. The industry had lined up to promise “voluntary” cost savings, in various coalitions, since Nixon was in office. Nothing had worked. But this time was different. At least everyone felt it was, for better or worse, depending on where they stood in the unfolding debate.

  The key distinction from 1993 was that the health care providers and the insurers were not moving in traditional unison. Insurance executives were building on their grand bargain, committing to ending unpopular underwriting practices, such as refusing coverage to those with preexisting conditions, and were encouraging Congress to adopt uniform federal regulations on their industry, which suffered from the logistics of having to craft their plans state by state. But it went deeper than that.

  The growth in costs was the beating heart of provider profits, not insurance profits. Higher medical costs, and the pushback against ever-rising premiums, put insurers in a squeeze. Their profit margins were now slightly lower than that of others in the health care community and, during a recession, destined to shrink further. This, and the existential threat that the so-called public option still posed, was nudging their self-interest toward the cost-cutting goals of the White House and consumer groups. Ignagni, to the surprise of Orszag and others, was in fact pushing for a high number on cost cutting and dragging along some of the reluctant providers.

  “Karen was pushing for a big number,” said a former senior official involved in the talks. “The fact that we didn’t seize the potential for a realignment, I think, showed the cost of not having someone like Daschle aboard. We were playing checkers. We needed to be playing chess.”

  And it was a big number that Ignagni, leading the coalition, hammered out with DeParle and Rivera: $2 trillion in health care cost savings over ten years.

  Excitement bubbled up through the White House. Orszag was given a green light to call Krugman. His column in the New York Times on May 10 went so far as to say the commitment, to be announced the following day, was “some of the best policy news I’ve heard in a long time.”

  After a meeting on the eleventh in the Roosevelt Room with Ignagni and representatives from the providers, Obama officially unveiled the commitment, laid out in a letter signed by the representatives. Strongly worded but vague on details, it asserted that, working together, these groups could save $2,500 a year for a family of four after five years, for a total of $2 trillion for the nation over ten years. Everyone agreed that there’d be no chance for health care reform with costs rising at the currently projected rate of 6.2 percent over the coming decade. If the industry could slice 1.5 percent per year from that growth rate, the gross numbers would be huge.

  Nailing down this commitment, Obama said, marked “a historic day, a watershed event.” The savings, he said, “will help us take the next and most important step: comprehensive health care reform.”

  Gibbs reiterated Obama’s forcefulness, saying the president had told the health care executives in their meeting, “You’ve made a commitment; we expect you to keep it.”

  It was textbook political calculus. Use the president’s aura to get the reluctant on the record, so that they either had to stick to their words or face humiliation for backing off.

  And then all hell broke loose. Leading members of each trade group—heads of hospitals, drug companies, device manufacturers—started calling their Washington representatives. There were heated exchanges as reality set in. Those running these businesses, accounting for 16.5 percent of GDP, said that such cost cuts were untenable. Already the stocks of the publicly traded companies were beginning to drop. The lobbyists countered that those executives out on the hustings didn’t just sit with the president. There had been two million people on the Mall four months ago. Something was going to happen, maybe something sweeping, the trade groups responded, and the hospitals, the doctors, the drug companies needed to be at the table to make it as good for each of them as it could be. And, of course, some of them were cursing Ignagni.

  It wasn’t long before calls started coming to DeParle from the industry associations: this commitment letter might get a few lead lobbyists fired! Soon she, Obama, and the senior staff were huddling. The question was raised about whether the president should offer a follow-up statement, hedging what he’d said. Obama was adamant. He wasn’t budging. A commitment is a commitment.

  On Wednesday, two days after the initial press conference, Obama was holding his ground. “These groups are voluntarily coming together to make an unprecedented commitment,” he said. “Over the next ten years, from 2010 to 2019, they are pledging to cut the rate of growth of national health care spending by 1.5 percentage points each year—an amount that’s equal to over $2 trillion.”

  Health care leaders were now
backpedaling as fast as they could, saying that they’d committed to slowing spending gradually and not to specific annual cuts.

  “There’s been a lot of misunderstanding that has caused a lot of consternation among our members,” Richard J. Umbdenstock, the president of the American Hospital Association, told the New York Times. “I’ve spent the better part of the last three days trying to deal with it.”

  The opposition to meaningful reform was in disarray, “stakeholders” shouting at their trade group chiefs, who were scrambling to back away from their stated positions, and pressure coming directly from an unyielding president. The mess was receiving plenty of coverage, too. Calls to the White House from providers meanwhile intensified. Their stance: either the president backs off, or there will be a war like was never known during Clinton’s day.

  It was a moment to embrace Ignagni, who’d been sitting mostly silently and seal a divide-and-conquer strategy, with the insurers joining the White House to force cost cuts among the providers.

  The interests of the insurers and the providers, of course, had never been neatly aligned. Before modern health insurance was developed in the 1940s, an individual could pay a doctor for his services or she couldn’t. When she couldn’t, the doctor, either out of an ethical obligation or the Hippocratic oath, would provide the services because it was . . . the right thing to do. Insurance changed all that. It created a buffer, removing morality from the equation. That awkward moment of payment, when the responsibility of health care provider was put front and center, was replaced by an omniscient third party to whom consumers paid premiums and from whom providers received payment. It was an elegant solution to an inelegant problem.

  But, as was the case with financial services, it ultimately created a severing of accountability and very real market inefficiencies. The consumers couldn’t directly feel the effects of poor pricing. The competition was lost, and an industry was steadily corrupted.