by Ron Suskind
The president looked on, asking questions about where different policies—health care, environment/energy—might move from here, how an “action plan” might proceed for each. But as the meeting stretched on, the issue of financial reform took center stage. Again, as in the March showdown about restructuring Citi and other large banks, the key interplay was between Emanuel, Summers, and Geithner, three men who, along with Orszag, were firmly guiding the White House. In that earlier instance, Emanuel had sided with Geithner against Summers’s enthusiasm, shared by Obama, for a broad and expensive restructuring of the financial system. Now it was Geithner and Summers against Emanuel. Both men said that undertaking financial reform now would “create an overhang of regulatory doubt” that would slow economic activity when they needed a restored and confident financial sector to drive economic activity.
Emanuel, certainly as attentive to Wall Street’s needs and concerns as the duo, was unconvinced. Wall Street always had a complaint, and left to its own devices, it probably wouldn’t be driving the recovery anyway. This had been a problem since the previous fall, when Paulson offered the first $125 billion in capital infusions to nine of the largest banks. The idea was that they’d lend the money out, which the banks had committed to trying to do. They didn’t, and until the economy rebounded, they wouldn’t. Maybe even not then, considering how weighted their operations still were toward exotic trading games and overseas investment. In other words, for something that was chimerical, a long shot, Geithner and Summers were sacrificing an opportunity to show bold leadership. The push for really tough financial reform would be political gold, Emanuel said, because it “had a sense of Old Testament justice.”
Others echoed this sentiment. Government’s role was not to make the banks profitable, but to stabilize them; that had been accomplished. Of course, the financial sector would grouse and moan and conjure fearful scenarios of being paralyzed by “regulatory overhang.” But anti–Wall Street sentiment still ran high. Congress was at the ready, offering, in this case, the prospect of bipartisan action. It was a rare moment, with populist energy in the two parties moving in concert, and with even traditionally antiregulatory Republicans saying now was a time for steely-eyed rules of the road for an out-of-control industry. Emanuel said that Republicans such as Alabama senator Richard Shelby, the party’s top player on banking issues, would be with them, and other Republicans as well: reforms could be pushed through quickly, possibly with big majorities.
The arguments shifted to and fro. Again Obama sat back, peppering each side with leading questions that might help them square the circle and reach consensus. Of course, there was no consensus. Emanuel, in a rare break from both Geithner and Summers—so often his back-channel partners in shaping White House policy—was offering up a more dynamic, carpe-diem model, where a settled but still weakened banking industry would learn who was boss. He was “thinking about this politically,” he said later, and “Old Testament justice” had its own, strong political track record.
As the meeting approached the hour-and-a-half mark, though, it was clear that Obama was leaning toward Summers and Geithner, who felt that regulatory actions would undermine confidence, rather than boost it. Any uncertainty, they felt, risked depressing economic activity. “Tim and Larry both argued against it,” Emanuel recalled. They believed “it would take a year at minimum, that the overhang of regulatory doubt would slow everything down, and the president sided with them.”
The result was inaction.
“I gave the president my view,” he said tersely.
Spend time with anyone who is officially larger than life, and they’re bound to be restored, hour by hour, to familiar human proportions.
How that shrinkage is managed, though, is crucial. As with so much else around Obama, this was not managed at all for either the thirteen bankers or the health care providers. Both groups had been granted extended face-to-face exposure to Obama. From there, the journeys of these two most powerful interest groups, each at the center of the two great tests of the Obama presidency, evolved along a similar arc. The health care providers were quaking with readily exploitable fear at the Health Care Summit, as were the thirteen bankers when they walked into their meeting. Obama went with hope and consensus, and then, as Daschle said, didn’t do much.
As summer arrived, that fear had gone from both groups. Obama may have created a “space” where solutions could happen, but when members of both interest groups saw him up close, and poked at him a bit, they found he exhibited certain human frailties that might be easily exploited. What they also saw—many of them managers in banking and health care with long experience—were that his words were not being translated into action. In fact, the actions of Obama’s top lieutenants often seemed to contradict their boss’s strong words and stated intentions.
While in many instances Obama expressed his desire to push forward major reforms to reorder and repair the financial system, the stress tests seemed to indicate otherwise. The banks were offered the sweet deals under Geithner’s “Hobbit” programs. The PPIP, or the Public-Private Investment Program, was an arrangement in which the government matched and backstopped private investors who wanted to buy up troubled assets, to get the toxicity off the banks’ balance sheets. No one even bothered to sign up. The stress tests had worked too well. With the government’s replacement of Moody’s and S&P, and with the assumption that anyone who invested in the federally endorsed banks would enjoy an implicit government guarantee, the banks quickly began to raise capital to repair their tier-one common capital shortfalls and pay back the TARP money. The incentives on that last part were quite acute: as soon as a bank paid back TARP funds it would wriggle free of the compensation caps—and steal talent from its competitors. Investing in the U.S. manufacturing or industrial sectors, and even in high tech, remained negligible, and there was no discernible bump in credit. The banks and their financial subsidiaries went back to earning money the way they had for much of the decade: through exotic, often computer-driven, trading.
In health care, Daschle’s fears of April—that if Obama didn’t step up and frame this debate, others would—became the hard realities of June. After the mishaps of the May letter on health care cost cutting—over what it meant and who’d said what—the realization dawning on the provider community was “What did it matter anyway?” The inability to frame and force acceptance of some of the era’s strongest cost-saving ideas, many of them percolating for nearly two decades, meant that the battle between the two sides in the debate—cost versus coverage—was firmly tilted toward the latter. Orszag and Zeke Emanuel continued to push their concept of an “evidence-based safe harbor,” an elegant construct where doctors could get by with lower malpractice premiums if they recommended procedures where there was actually evidence of effectiveness. In fact, the entire comparative-effectiveness mission, with its demonstrable cost savings, was under siege, as would be the case with any encampment left undefended. As Orszag, and later Obama, had long been saying, cost efficiencies are what should drive the expansion of coverage.
In an e-mail sent to the senior staff on June 8, Orszag elucidated how the cost argument was dissolving, both inside the White House and beyond it. Mostly, though, he and Zeke were left to watch as the expanded-coverage advocates—including Nancy-Ann DeParle—ascended. The unspoken default was to do coverage first, pushing the moral issue of universal coverage, and at some point in the future, maybe years from now, the expanded mandate would force a cost crisis that would finally bring all combatants to the table to change the way health care was delivered in America.
At that very moment, though, a visit to Max Baucus’s office would have shown where the real action was occurring. Baucus had been holding regular hearings that were tapping the providers, insurers, and consumer groups and drawing almost daily media coverage. But the key events were not transpiring during the long hours of demonstrative debate in the committee’s hearing room. They were happening in Baucus’s warren of staff off
ices: providers were slipping in and out of there at all hours of the day.
Coordinating the action from the White House was Jim Messina, Baucus’s former chief of staff, who was now deputy chief of staff under Rahm Emanuel. Messina’s familiarity with Baucus and his people, seen as an advantage by the White House, had the effect of granting him wide latitude to cut deals. Baucus’s interests and those of the White House, however, were not clearly aligned. The effect was forcefulness, but largely being led by Baucus.
Leading the way for the providers was, not surprisingly, Billy Tauzin. In June, Tauzin stood in Baucus’s outer office waiting to iron out some details inside. Indeed, he had just cut a ten-year deal whereby PhRMA would provide $80 billion in cost reductions to ensure that no one from government, in the forthcoming plan, had any say over pharmaceutical costs. Other providers were right behind him. The receptionist gave Tauzin his cue to proceed inside. He smiled. “Still cancer-free. Lucky me!” Indeed.
On June 16 at the White House, David Axelrod reached for the remote and turned up the volume. Obama was doing a press conference outside, about a hundred yards away. The first question was, not surprisingly, about Iran. The streets of Tehran had been exploding for the past week in violent demonstrations about President Mahmoud Ahmadinejad and his allies’ tampering with the current election. But beneath the bloody events was a startling subtext. Just ten days before, Obama had gone to Cairo to give one of his best, forward-leaning speeches. It was, in its way, a global corollary to the possibilities granted him on the domestic terrain at the start of his presidency. With demonstrations breaking across the globe, including in many Muslim-majority countries, when he won the election and, again, when he was sworn in, this was the speech everyone had been waiting for. It just was delayed, not happening until June 3.
Much like it was in the United States, the stunning speech was not followed with any carefully considered policy shifts. But what was clear was that the Iranians were leaping violently into some of the space Obama had created.
Those on the streets of Tehran, getting slaughtered by the hard-liner Ahmadinejad’s security forces, were clearly looking for some signal from Obama: some strong words of support, a suggestion that the United States was with them. The possibility that Obama could shape events across the world, especially in the Muslim world, with his words, was a victory that Americans had long been waiting for. In the global hearts-and-minds struggle, what could be more important?
The one question for a reporter was one word—“Iran?”—and the great hungry eye of the news turned to Obama. Everyone knew the subtext, and the news commentators, those who were actually paid to provide narration, could handle that. But just for good measure, Obama, as has so often been the case, decided to do a little narration himself.
“It was only—let’s see—I think seven hours ago or eight hours ago when I—I have said before that I have deep concerns about the election,” he began. “And I think that the world has deep concerns about the election. You’ve seen in Iran some initial reaction from the Supreme Leader that indicates he understands the Iranian people have deep concerns about the election. Now, it’s not productive, given the history of U.S.-Iranian relations, to be seen as meddling—the U.S. president meddling in Iranian elections. What I will repeat and what I said yesterday is that when I see violence directed at peaceful protestors, when I see peaceful dissent being suppressed, wherever that takes place, it is of concern to me and it’s of concern to the American people. That is not how governments should interact with their people.”
Obama paused as he crafted his finale.
“And my hope is, is that the Iranian people will make the right steps in order for them to be able to express their voices, to express their aspirations. I do believe that something has happened in Iran where there is a questioning of the kinds of antagonistic postures towards the international community that have taken place in the past, and that there are people who want to see greater openness and greater debate and want to see greater democracy. How that plays out over the next several days and several weeks is something ultimately for the Iranian people to decide. But I stand strongly with the universal principle that people’s voices should be heard and not suppressed. Okay? All right. Thank you, guys.”
Axelrod turned down the volume. The president, given a golden opportunity to use his bully pulpit to direct global events, had decided, instead, to do a bit of exposition about someone—a character named Barack Obama—who actually had no strong personal views on a rare democratic eruption in one of the world’s two or three mostly strategically important dictatorships. The broader problem, of course, was the administration’s lack of follow-through, where a stirring speech, Obama’s strongest suit, was not integrated into any plan of action.
While the president suddenly seemed to be of many minds about Iran, his top political adviser was single-minded, thinking about the possibilities of “moral energy.” “Clearly,” Axelrod said, “the president has been in a conversation with those people on the streets in Tehran, certainly and powerfully since his Cairo speech.” But, he wondered, was it possible to summon “a similar kind of moral energy on the domestic landscape, especially with health care. The question is how the president can talk over the heads of the interest groups and elected officials in Washington, right to the people, and make clear that health care is a moral issue.”
A few minutes later, in his tiny office across the alleyway from the White House in the Eisenhower Executive Office Building, Zeke Emanuel was considering his day.
The eldest of the Emanuel brothers, Zeke was such a renowned student that his two younger brothers, Rahm and Ari—the latter a power agent in Hollywood upon whom a central character in the show Entourage is modeled—decided “Why bother?” Now Zeke, a doctor with a PhD in medical ethics, faced the odd denouement of being seen as a threat, as unmanageable, by many in the White House run by his brother. It was soon clear why: Zeke had spent several decades arriving at his conclusions on health care. He had trouble giving them up.
And one of the hard truths about health care was that most Americans were reasonably satisfied with their current situation and fearful of change in an area of such consequence. He explained that most people who had coverage, sadly, didn’t care all that much about the one in eight who didn’t—folks who mostly just went to the emergency rooms, at great expense, for their basic care.
Zeke looked down at his schedule. He’d had a Health Care Reform Team meeting at 11:00 and had just gotten back from lunch with Jon Kingsdale, founder of the Massachusetts Health Connector, an agency that had helped implement that state’s 2005 reform. He’d go over legislative strategy in congressional liaison Phil Schiliro’s office at 5:00 and then meet with Vermont senator Bernie Sanders. He tore the schedule off the spindle and drew a bell curve, with A plus B on one side of the high hump and C down at the far tail.
“Do you know any chemistry? You know what that is? That might not be great art. This is the potential energy variant of a chemical reaction . . . so A plus B goes to C. But you need to add some energy to get over this hump, even if C is in a better space and it’s more stable and it’s better and everything is more hunky dory. Getting over this [hump]—the question is, in our system, can we get over this pain, to get to C?”
Where would this energy come from?
“The president . . . it’s the fact that everyone is scared of what we do if we don’t reform, how bad it will be. Being scared of losing coverage . . . or my kid won’t have coverage. It’s all those things; that’s the key. But you also need to believe in C.” That, of course, would be a clear, vivid, and credible representation of what the future would look like.
As the president sat down for his morning economic briefing on June 18, there was a self-congratulatory air in the Oval Office. The day before, with the release of Treasury’s eighty-eight-page white paper and a host of appearances and interviews by senior officials, the administration had taken its first, nascent steps on financi
al regulatory reform.
The president had led the brigade, with an interview on CNBC. “We want to do it right. We want to do it carefully. But we don’t want to tilt at windmills,” he said, in a comment that led the morning’s papers.
No windmill tilting, meaning nothing too dramatic, despite most news establishments swallowing the president’s top line about “the most sweeping set of regulations since the Great Depression.” There hadn’t really been any since then, so the bar was low. And it was further clear that the president wouldn’t be engaging forcefully with Congress or expending political capital on the matter.
The plan was not deep, but it was wide, touching on almost every part of the nation’s vast financial industry, from mortgages to capital requirements for banks, insurance regulation, and derivatives trading. It would give added regulatory authority to the Federal Reserve, create a new consumer financial products agency, like the one proposed by Elizabeth Warren, give the government power to take over troubled bank holding companies and investment firms, and require banks to keep a share, albeit only 5 percent, of the mortgage-backed securities they created and sold.
But early criticisms pointed out that the changes were around the margins, rather than fundamental or structural. There were no limits on size, no breaking up of large financial institutions, and no remedy for the “too big to fail” dilemma. Standard, plain-vanilla derivatives were destined for clearinghouses and some to be traded on exchanges, but the large, profitable shadow markets for OTC derivatives—the complex “bespoke” products—remained largely untouched beyond added obligations to have trades reckoned by clearinghouses. Several stories, one in the Wall Street Journal, said that Wall Street let out a sigh of relief.
More than the substance of reform, which Obama largely left to Treasury, the president was particularly taken with Elizabeth Warren, whom he’d seen on television. “Wow, she’s really something,” he said, one telegenic law school professor sizing up another. “Really good. We should get her out there more often.” Larry Summers and Anita Dunn, the communications chief, discussed for a moment how to get Warren more TV appearances, while Alan Krueger smiled to himself. It was good Geithner wasn’t present. He despised the crusading Warren, head of the commission that oversaw TARP, who had grilled Geithner mercilessly in front of her committee.