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

by Ron Suskind

  Frank, whose considerable ego had been piqued, offered no refutation—some of the derivatives offerings have thousand-page prospectuses, he said—before taking a halfhearted stab at modesty. “I think highly of Geithner and his staff, Ben Bernanke, Sheila Bair . . . um . . . Gary Gensler!”

  In his office in Washington, Gary Gensler looked up at the screen. Wall Street’s longtime cover story—derivatives and swaps are too complicated for anyone but them to understand—was at the core of “their leave us alone and let us charge whatever we decide” position. Of course, swaps and derivatives could be understood and regulated just like any other product. Gensler, in fact, was betting on it.

  He would have killed to be in New York today. He’d bucked for one of the senior appointed jobs, and may have had one if Hillary had won. But in the months since his confirmation, he was beginning to see how his side-step into the regulatory realm, and an agency, the Commodity Futures Trading Commission, that not one person in a hundred could cite, might work out just fine. He was, after all, a regulator—not a political actor, like those appointees close to the president who were, at this moment, snaking through Manhattan traffic in Obama’s motorcade, bound for Wall Street.

  As a regulator, he could take the lead on issues of his choosing, which is what he’d done over the summer. In June’s white paper on financial reform, many of the elements Frank was discussing on CNBC—resolution authority, a systemic risk regulator, a consumer agency—were noted. A key area, as well, was the regulation of derivatives. Despite what Geithner had said in his confirmation hearings, the white paper had not mentioned derivatives exchanges, only clearinghouses.

  Geithner might have demurred with Cantwell on the phone as the vote on his confirmation approached, saying he hadn’t meant to say he wanted to put derivatives on exchanges. But Gensler never did.

  In August, he released a public letter on the position of the CFTC chairman, saying he would push for “transparent exchange trading” of derivatives. He was staking out a position beyond that of the Treasury Department. Geithner expressed displeasure, in his typically passive-aggressive way. “You could have warned me,” he reportedly told Gensler.

  Barney Frank watched the give-and-take with acute interest. In an interview that the summer, he opined about Obama needing someone like a Joe Kennedy, Roosevelt’s first head of the newly formed SEC, because “we’re short on people who know how to play Wall Street’s games.” With all the anger at the industry, just about the only one of those people who could manage to slip through confirmation was Gensler. The idea that Geithner or Summers was like Joe Kennedy, something the president would later say, Frank found laughable.

  Wall Street was now watching Gensler carefully. When he said he wanted to put derivatives on exchanges, a collective shudder ran through the largest five banks, which controlled nearly 90 percent of the financial industry’s most lucrative, and dangerous, product. No matter how hard they pushed Geithner and various leaders of Congress not to tamper with their $40 billion a year in profits from selling shadowy, over-the-counter derivatives—whose secrecy, where buyer and seller were matched by an investment bank but never met, was the key to their profitability—Gensler kept pushing back. There was no way to control him. As a regulator, he was not directly susceptible to political pressure. And, in Gensler’s case, he wasn’t bucking for some future job on Wall Street. He had all the money he needed.

  But it was more than that. To friends and colleagues, Gensler had committed the cardinal sin: suggesting that the money Wall Streeters made was ill-gotten, that the source of the riches was not the “efficient distribution of capital,” as financial-sector CEOs liked to earnestly intone, but rather born of inefficiency.

  His favored analogy was to an hourglass. Goldman Sachs and one or two other banks, such as Salomon Brothers, figured out a way, in the early 1980s, to begin to capture the shifting sands of capital passing through the U.S. economy in an hourglass. Goldman, in effect, put its hands around the hourglass’s chokepoint. For every hundred grains of sand that flowed through the chokepoint, say, they’d take one grain. Other financial firms of all kinds “saw this and said, ‘Why should those guys have their hands around the only chokepoint,’ and they started to create their own chokepoints above and below. Next thing you knew, there were ten chokepoints, and for every hundred grains, ten grains were being taken out, then twenty.” By 2007, when the financial industry accounted for 41 percent of corporate profits in the United States, it was arguable that the figure was up to forty or so grains out of one hundred. The question was where did all those grains go, because at this rate the hourglass would soon be sandless. There was a twist covering that, too. Some of those forty grains went back into the domestic economy, from the consumption of that wealthy army managing the chokepoints. But lots of the wealth went into investments overseas, where returns were stronger than in the United States. And at the same time, the United States refilled the hourglass with sand, borrowing from other countries and going ever deeper into debt as it did.

  The profits in this process flowed disproportionately to the chokepoint kings, who were also called “financial intermediaries.” Not only did this type of intermediation not bring much value or growth to the U.S. economy, certainly not nearly as much as the intermediaries’ dizzying compensation would suggest, but some, including Volcker, would contend the group had used their positioning and leverage to create a kind of financial cartel. The huge modern derivatives market, of course, was among the greatest of the intermediaries’ inventions, where buyer and seller didn’t know each other, and no one could figure out the obligations that each intermediary faced. Systemically speaking, a clot in one of the forty chokepoints could slow or stop the flow of sand through the other thirty-nine—meaning the flow of cash and credit through the economy. That, Gensler said, was more or less what happened in 2007, starting the first stages of the recession in December and then culminating with the crisis of the fall of 2008.

  What Gensler and Volcker agreed on was that at this point government policy should be focused on how to reduce the might and number of these financial intermediaries. To use a phrase free-market deficit hawks had used for years, their idea was to “starve the beast,” constraining how Wall Street made its money and thereby forcing firms to shrink. The endgame, both Gensler and Volcker agreed, might be to push the intermediaries into a choice: if they wanted to keep their jobs, they would have to find ways to invest, in patient and meaningful ways, in American innovation and lasting economic growth.

  But Gensler went one step further than Volcker even. That was partly because, while Volcker had the luxury of moral high ground and the freedom of old age, Gensler had to do something harder: atone.

  “I’m not smarter than other people,” he said. “I didn’t invent anything, or build anything, or create lots of good jobs for people to make good lives for themselves in America. I was just lucky enough to be there early, to get my hands around the chokepoint and hold on tight.

  “There are people who are really hurting across the country,” he continued quietly. “And to say no one knew, or no one’s responsible, or we were all in this game together so buyer beware, is not right. The people who helped create the game, and I’m one of them, should say they’re sorry and start making amends.”

  Gensler didn’t say that sort of thing publicly, and if a Wall Street CEO had said it, which, speaking frankly, any number of them might have, it would have created havoc. Which is why the Street was handling the Gensler problem very delicately. Their lobbyists had advised them not to make a big stink about what Gensler had proposed, while saying they were in favor of regulation—you bet—and showing enthusiasm for things such as a systemic regulator or resolution authority. Yes, Washington could employ as many new regulators as it needed. But right now, as the industry, with government support, had begun to earn its way out of trouble, Washington shouldn’t tamper with the way Wall Street made its money. Not now. What was past was finally past, already
being forgotten as confidence returned. Add regulators if you want—regulators can be managed—but don’t turn our beloved market principles against us.

  “I don’t think we can let everything that happened be so easily forgotten,” said Gensler, polishing a speech he was due to give in Washington that afternoon, a speech no one would cover, with all of the focus on the goings-on in New York. “I mean, I just don’t. I think we have to reform the system. And yes, we’re talking in my little world about some paradigm shifts . . . It’s okay to talk about paradigm shifts, to bring everything onto transparent electronic markets so people can see where it trades, and see if they’re being ripped off, and can get a better price elsewhere. Then everybody says, well, but you’ll thwart innovation. I don’t think you thwarted innovation back when you had stock trading move to transparent exchanges. What it’ll do, like it did then, is kill off some overly fat margins. I call that progress.”

  Moving between the two capitals, Barack Obama reviewed his Wall Street speech aboard Air Force One.

  Another town, another speech. Only a week after the powerful health care address, its effect was already wearing off. In the days before the speech, Obama had repeatedly talked to Baucus—calling him over the weekend, as Baucus trolled Home Depot—asking him how close the Gang of Six was to an agreement on a plan that Obama could claim some ownership of. They’d all worked through the night. After months of waiting, with reporters camped outside Baucus’s office, the fabled bipartisan compromise seemed so close, right up until the afternoon of the health care speech. Obama hoped it would be a prize, a bipartisan prize he could deliver from the lectern. It didn’t happen. And a week later, it was as though nothing had happened—back to business as usual. Obama and half the Senate were now courting Maine’s Olympia Snowe, hoping she’d be the sixtieth vote needed to break a Republican filibuster. It was deflating.

  Obama had handed his political capital over to Max Baucus, the vanquisher of Daschle, and now the health care initiative was in shambles. Something might, at some point, emerge. But it would be a long, messy fight, and the dream of harnessing the breakthroughs in comparative efficiencies to reduce costs and expand coverage was mostly gone. In September, Orszag’s and Obama’s favorite integrated solution—to lower malpractice premiums if doctors used procedures within an evidence-affirmed “safe harbor”—died a quiet death. Doctors didn’t like to have their hands tied. At this point, with general disarray, they had plenty of clout to bring over a few of their favorite Democratic congressmen.

  But what stung the most was that Obama’s powers of oratory and persuasion, at their very best, hadn’t moved a single vote in the Senate.

  Now it was time for another speech, on the other defining event of his presidency, this one by choice. At 11:45 Obama and his White House entourage slipped through the side entrance of one of America’s most honored and auspicious structures: Federal Hall, a pillared, domed neoclassical temple that was the site, in 1765, where delegates of nine colonies met to challenge the Stamp Act. They drafted a letter to King George III and the British Parliament protesting what they dubbed “taxation without representation.” The Continental Congress of the Articles of Confederation had met here; George Washington was inaugurated on the steps, where a twenty-foot bronze statue of him now stands.

  As Obama’s team, including Geithner, collected themselves in a waiting room, the leaders of Wall Street milled about, convivially, in the main hall, with its marble floors beneath the tall dome. A year after their existential crisis, “too big to fail” had settled into what seemed like a day-to-day repose of “too big to worry.” The well-groomed gathering of men, and a spicing of women, chatted about summer vacations to exotic locales, purchases, recent and upcoming, the latest news on shareholder suits (their liability policies would cover them). One prominent banker, who asked not to be named, said, “For Washington to not demand anything when it saved us, even stuff that we know is for our long-term good, was one of the stupidest moves in modern times. I figured Obama understood that—it wasn’t a nuanced point—and that he’d act as we started to pull out of the abyss six months ago. But he didn’t, and I don’t know who to thank. I feel like I should go over and hug Tim. It’s a shame we can’t pay him, ’cause that’s a guy who really earned a big-time bonus.”

  Not all of Wall Street actually did show up. On this day, an economic equivalent, in the minds of many Americans, to the first anniversary of 9/11, Lloyd Blankfein decided he had something more important to do. Jamie Dimon was also otherwise engaged.

  At 12:10, Obama stepped to the lectern to perfunctory applause and delivered a scolding speech that no one much reacted to. Some of the men checked watches. The president’s rhetoric, once enough to reduce strong men to tears, had already been shorted. After all, he’d just given a spellbinding address to a joint session of Congress last week and hadn’t gotten one vote. With each word, the market value of his rhetorical capacity dropped.

  By 12:50 the president was gone, off to a few other meetings in New York before Air Force One left at 3:00 p.m.

  The younger men speed-walked to nearby offices or jumped in black sedans, leaving behind the older men, the last generation’s titans, who ambled down the long steps to street level. On balance, they’d been pushing for dramatic reforms since last fall. Leading them was Pete Peterson, the billionaire former head of Blackstone and commerce secretary under Reagan, who had spoken publicly and passionately about how moving from partnerships to publicly traded corporations in the early 1980s—allowing partners to take their money off the table and replace it with other people’s money, thereby severing the bonds of caution and shared risk—marked the moment Wall Street started to grow into a destructive force. “I know Tim Geithner very well and I’ve interviewed a lot of top people, in New York and Washington, and they all say that it’ll take another crisis before anything changes up here,” Peterson said.

  Behind him was Volcker, who threw an arm around Pete’s shoulder.

  “The crisis should have lasted a little longer,” he said. “It would have been better if Wall Street didn’t pull out of it so soon. Given us more time.”

  And off they walk together, as reporters yell at them: “Did you like what the president said?” “What should reform look like?”

  Scott Talbott, the ubiquitous spokesman for the Financial Services Roundtable, the trade association representing the one hundred largest banks, stood near the feet of George Washington, offering the industry’s position. “We solidly agree with the president. We agree with creating a system risk authority to oversee the entire industry. We agree with a regulatory authority to resolve non-depository institutions,” meaning financial firms as compared to commercial banks. “And we agree with the idea of transparency to protect the consumer, but we don’t feel the Consumer Financial Product Agency is the best way to do it.”

  The many agencies that regulate banks from Washington have their own consumer protection divisions, he elaborated, and those should simply be strengthened. Reporters crowded around and asked about changes in compensation, about making them more closely tied to long-term performance. Talbott said that firms were already doing that voluntarily. When pressed, he acknowledged just one was: UBS.

  But if one firm does it and the rest don’t, there will be flight from that firm to others.

  “Okay, I admit, that is a challenge. But if you force them all to do it, well, that’d be an antitrust violation!” Talbott added with a chuckle, surprising even himself.

  A few feet away, belly up to a barricade, a few dozen people with signs held out hope that they might still glimpse the president.

  Lynn Safford, with her husband, Dave, an advertising executive, and her son, Matt, was holding up a somewhat understated sign: “Regulate Government Spending.” They were from Austin, Texas, and had just come up from Washington, where they’d joined Glenn Beck, Sarah Palin, Michele Bachmann, and assorted Tea Party leaders for the “9/12 March on Washington,” a rally that drew tens of
thousands of conservative activists to the capital for speeches and a show of political force. It was now clear that the Tea Party, founded a mere seven months before with a televised rant by CNBC’s Rick Santelli, about how the government was “promoting bad behavior” by “subsidizing losers’ mortgages,” was building toward next year’s midterm elections. It had already developed a seemingly strong grassroots organization, and was generating ongoing excitement, drawing new members, with media events televised by Fox News.

  But the strength, and stickiness, of the movement was more in the excitement of its fast-forming community than in the slavishly transmitted visuals.

  It’s hard to know what ten letters President Obama was reading every morning, a practice that Axelrod said he did religiously to counter “his greatest fear, that he’ll lose touch with the people.” But he might have been edified, and forewarned, by reading about Lynn Safford’s transformation into an activist.

  She was a Glenn Beck watcher. She said she liked his passion, and found herself “checking out some of the things he’d been saying on the Internet, and a lot of it was on the money.” This had given her a feeling of both engagement and due diligence, albeit verifying the authenticity of a cable television character with often unsourced Internet data. But after a few months of watching and trolling, she’d asked herself, “How did we get to this place without me knowing it? Nothing was in balance anymore.”

  One day she ran out of her house in the early evening as her neighbor, a young father named Matt, was coming home from work.

  “I said, ‘How do you feel about the political arena right now?’ He looked at me like ‘why are you asking me about that?’ I said, ‘I’m not gonna sit in my house and scream alone.’ Then, you know what Matt said? He said, ‘I hate what’s going on!’ ”

  Matt and his wife would have joined the Saffords on the trip east, but they had a newborn at home.