Stress Test

  I did find some great people right away for jobs that didn’t require Senate confirmation. Mark Patterson, who guided me through my own confirmation, agreed to be my chief of staff. After spending most of his career as a staffer for Democratic senators, he had worked for a few years as a Washington hand for Goldman Sachs, which I knew would raise some eyebrows, but I didn’t care, because he was so outstanding. Patterson would set the tone for my hiring motto at Treasury: No jerks, no peacocks, no whiners. Lee Sachs, an incredibly thoughtful and knowledgeable financial wizard, would be my counselor on all financial market issues, with Matt Kabaker as his deputy. Gene Sperling, the policy savant who had run the National Economic Council during Clinton’s second term, also agreed to be my counselor. Gene would take the lead on tax and budget issues, while helping me navigate the intersection of policy and politics in Washington. Meg McConnell also helped out during those critical early days, but she hated Washington’s political and bureaucratic games, so she would return to the New York Fed after a few months.

  Because of my tax issues, my own confirmation hearing was delayed, which meant the new president would start his job without an appointed Treasury secretary in place to help him navigate the crisis. I felt like I had already let him down. But he called me one night—after I had fallen asleep—to tell me to hang in there, the controversy would pass. I don’t know what I had done to earn his confidence, but he made a point of trying to bolster mine.

  “I don’t care about this stuff,” he said. “You’re my guy.”

  ON INAUGURATION Day, the Obamas and the Bidens went to morning services at Saint John’s Church, along with the cabinet and other administration officials. Carole and I got to watch the charismatic pastor T. D. Jakes give a sermon on Daniel 3:19, the story of three Hebrews cast into a fiery furnace after refusing to worship false idols. Jakes compared the biblical fire to the economic inferno that now confronted the new administration; the Hebrews, he preached, survived the flames because they stood firm for what they believed was right.

  “You cannot change what you will not confront,” Jakes said. “The problems are mighty and the solutions are not simple. Everywhere you turn there will be a critic waiting to attack every decision you make.… But you cannot enjoy the light without enduring the heat.”

  It was an inspiring message. And as we made our way to the viewing stand at the Capitol, it was remarkable to look out at the millions gathering on the Mall, voting again, this time with their feet, for hope. It was a moving day. Carole and I sat with Chief Justice John Roberts at lunch, and we even stopped by an inaugural ball that night, because it felt like the thing to do.

  But I was still full of foreboding and darkness. My relatives had descended on Washington for the event, hoping to attend my swearing-in as well—my sister had flown in from Thailand—but my tax mess had scuttled those plans. I was embarrassed by the public debate about whether I was both venal and incompetent or merely incompetent. Mostly, though, I was thinking about the financial system, worrying about how to prevent it from combusting again, and how to get it working again.

  It was below freezing that day, but as Carole later said, it really did feel like we were walking into the fire.

  MY SENATE confirmation hearing was the next day. I didn’t want my family to stay for it, and I didn’t let my kids skip school for it, although Carole and my father came to support me. I knew it would be ugly. Republicans were having a field day with the idea that I wanted to raise America’s taxes without paying my own. And there wasn’t a lot of enthusiasm in either party for the financial rescues I had helped engineer. The Senate had just narrowly agreed to release the second tranche of TARP, with only fifty-two senators voting to avert another panic. After thirty-four Republican senators had supported giving the original TARP authority to the Bush administration, only six voted to extend the authority in the Obama administration. Despite the historic crisis, the President wasn’t going to get a honeymoon, and neither was I.

  New York Senator Chuck Schumer introduced me at the hearing. And Paul Volcker, who had agreed to chair the President’s new Economic Recovery Advisory Board, also testified on my behalf, lending his gravitas to my cause. But most of the three-and-a-half-hour grilling was pretty dismal. Republican Senator Jon Kyl of Arizona all but called me a liar, saying it was “incomprehensible” I could have been so clueless about my taxes, scoffing that my explanations “strain credulity,” pointedly reminding me that I was under oath.

  “Would you answer my question rather than dancing around it, please?” he demanded.

  The senators then submitted 289 additional written questions that I was supposed to answer that night, so the committee could vote the next morning. We had a team of staff working all night. I left at 2 a.m., and Patterson asked me to come back at 5 a.m. to review the draft answers; when I returned, we couldn’t buy coffee because nothing was open yet.

  And we did mangle one answer. Several senators asked if I would label China a “currency manipulator,” so I wrote an equivocating reply stating only that we would encourage China to let the yuan appreciate. I believed that using the manipulator label, especially before I was even confirmed, would be counterproductive, offending the Chinese and making them less likely to strengthen the yuan. But Obama had described China as a currency manipulator during the campaign, so in the early-morning confusion, my diplomatic dodge got replaced with his campaign rhetoric. The answer sent a provocative, unintended signal to a wary, ascendant power, complicating my early dealings with my Chinese counterparts. I would have to clarify in my early calls that no decision had been made, and that we would try to conduct our future diplomacy in private.

  I ended up developing very good relationships with the Chinese. It probably helped that I spoke some Mandarin, and that many top government officials—including Wang Qishan, my primary counterpart—had met my father during his time in Beijing for the Ford Foundation. I would help bury a bill by Senator Schumer to punish China for currency manipulation; I asked him if he wanted to call his legislation “Schumer-Hawley,” after the protectionist Smoot-Hawley bill that deepened the Great Depression. But behind the scenes, the President and I would put relentless pressure on the Chinese to let their currency rise. And over time, we helped persuade them that a stronger yuan served their own interests, improving the purchasing power of their growing middle class. The yuan would appreciate 16 percent in real terms during President Obama’s first term, and China’s trade surplus would be cut in half, to the considerable benefit of U.S. businesses and their workers.

  BY JANUARY 26, when the Senate finally voted on my nomination, I was the last nominee still working out of the transition office. The elaborate security apparatus was gone; the maintenance staff had already started knocking down walls and ripping out phone lines. Carole and my father watched the roll call on C-SPAN, as the Senate confirmed me 60–34, the narrowest margin for any modern Treasury secretary. I didn’t bother to watch. I was scared about the future and scarred by the process; I was bleeding more than Rahm had predicted. It was clear that I’d be starting my new job deeply damaged, surrounded by questions about my competence and integrity, at a time when the country needed confidence in both.

  We then drove to Treasury for my swearing-in ceremony in the historic Cash Room, where bankers and ordinary citizens used to come to exchange gold and bonds for U.S. currency. President Obama, Vice President Biden, Larry, and Ben were all there, along with many of Treasury’s career civil servants who had worked with me in the 1990s. I appreciated the support, but I couldn’t really enjoy the moment. It had never been my goal in life to get a big Washington job and the trappings that come with it, although I did think it was cool when I found out my Secret Service code name would be “Fencing Master.” I hoped I could be useful, but it was hard to get too excited when everything seemed to be going to hell.

  Our challenge, I said in my remarks, would be “to restore confidence in America’s economic leadership around the world.” The Pre
sident also spoke of the “devastating loss of trust and confidence” in U.S. financial markets.

  “You’ve got your work cut out for you,” he said.

  The next morning, I briefed the President in the Oval Office about the five big bombs we had to defuse—Fannie, Freddie, AIG, Citi, and Bank of America—as well as the deeper problems in the financial system. That was the meeting where I told him how bad things really were, and he told Larry and me that he wanted to rip off the Band-Aid, that he wanted a strategy to put a quick and definitive end to the crisis.

  Our skeletal team was working on it.

  OUR INTERVENTIONS in 2007 and 2008 hadn’t ended the crisis, so I spent much of the transition trying to figure out what would.

  The Fed, the Treasury and the FDIC had done a lot to stabilize the financial system. Our innovative credit and liquidity programs for banks and nonbanks, our backstops for commercial paper and money market funds, and our swap lines for central banks in developed and developing countries had all helped prevent complete financial collapse. We had avoided a number of devastating explosions by rescuing some huge firms, including the five bombs that were once again on the brink of failure. We had helped guide many of the system’s weakest links—Countrywide, Bear Stearns, Merrill Lynch, WaMu, Wachovia—into the arms of more stable partners. The Columbus Day capital injections and FDIC guarantees had eased the panic. The world’s most powerful government was now providing support, in various forms, for financial institutions and markets with more than $30 trillion in liabilities.

  So why was the financial system still falling apart?

  The most obvious catalyst was the collapse of the broader economy, reflected in the devastating decline of consumer and business confidence in the United States and around the world. American households lost 16 percent of their wealth in 2008, driven by falling home prices and stock prices, a decline five times larger than the 3 percent loss of wealth during the financial shock that precipitated the Depression in 1929. The disappearance of wealth, disposable income, and jobs was dragging down private demand, which further depressed asset prices, putting more pressure on banks to hoard liquidity and restrict credit, which in turn sucked more financial oxygen out of the economy. Economic distress meant more delinquent mortgages, which meant more troubled mortgage securities weighing down banks, which meant less lending and more economic distress. This vicious cycle of financial and economic contraction was gaining momentum, and no one was sure how it would end. Fear of a depression was making a depression more likely.

  Unemployment had climbed to 7.3 percent in December, as businesses slashed staff and canceled investments to prepare for tough times ahead. Circuit City filed for bankruptcy, following the Sharper Image, Linens ’n Things, and other familiar retailers. Manufacturers such as Boeing, Caterpillar, and Pfizer announced mass layoffs. The CEO of Corning, Inc.—which makes the Gorilla Glass found on smartphones and laptops, and which announced 3,500 layoffs that January—later told me he thought the corporate world had overreacted, cutting too far too fast out of fear of an uncertain future. But it was a terrifying time, and it was worse than anyone could yet comprehend. We thought we were losing about 500,000 jobs a month; the initial government estimates were later revised to more than 750,000. The initial GDP release estimated the economy had contracted at an annual rate of 3.8 percent in the fourth quarter of 2008; that was later revised to an 8.3 percent decline. Those numbers were depression numbers.

  The question was how we could turn things around. In a normal recession, loosening monetary policy to lower the cost of borrowing is a relatively quick and effective way to boost the economy. But the financial system is the conduit between the Fed and the economy, and the financial system was broken. In an epic financial crisis that followed a major credit boom, easy money had much less power. Interest rates were already effectively zero; most banks had little ability and even less desire to lend; businesses had little desire to borrow; and consumers already had too much debt. As central bankers say, it felt like the Fed was pushing on a string. It had begun the first round of quantitative easing, or QE1, buying GSE mortgage bonds to help reduce the cost and increase the availability of mortgages. This was an innovative way to do monetary stimulus at a time when short-term rates were as low as they could go; the Fed would later expand the program to Treasuries to try to drive down long-term rates more generally. It was helpful at a time when the economy was still struggling, but it would not be enough on its own.

  We needed an expansionary fiscal policy alongside expansionary monetary policy. A year earlier, Hank had helped forge a deal between liberal Democratic Speaker Nancy Pelosi of San Francisco and conservative Republican Minority Leader John Boehner of southwest Ohio for a $150 billion fiscal stimulus package, about 1 percent of GDP. But those tax rebate checks had been too small and too long ago. We were going to have to do much more to offset a year of recession and the huge loss of wealth that followed the financial panic of the fall. The Obama fiscal stimulus plan had already grown from $175 billion late in the campaign to more than $500 billion in early December, when Christy Romer pulled Larry and me into a conference room in the transition office and said we were still thinking too small.

  “This thing needs to be much bigger—at least eight hundred billion dollars,” she said.

  Larry and I agreed. We all wanted as much as the political system could deliver. Our constraint was Congress. At the time, $800 billion over two years was considered extraordinarily aggressive, twice as much as a group of 387 mostly left-leaning economists had just recommended in a public letter, more than the entire New Deal in inflation-adjusted dollars. And most of the Recovery Act—safety-net spending, tax cuts for workers, highway and subway repairs, aid to help states avoid layoffs and service cuts, and much more—seemed like solid stimulus. I wasn’t worried that some of its infrastructure projects might not be “shovel-ready”—or that some spending on Obama agenda items such as clean energy and medical research would take time to get into the economic bloodstream—because I thought the economy clearly would need support for a while. I just wanted the legislation passed quickly so that the money could start to flow.

  That would be harder than it should have been. Every major Republican and Democratic presidential candidate had proposed a stimulus package in 2008, but after the election, Republicans who happily voted for the Bush stimulus at a much less dire moment turned the Obama stimulus into partisan poison. The President tried to reach out to them, inviting them to the White House, visiting them on the Hill, accommodating their demands for $300 billion in tax cuts in the package. But when the House passed the Recovery Act in late January, every Republican still voted no. It was kind of rich to hear them thunder about runaway deficits after they spent eight years squandering the Clinton surpluses, leaving the country short on fiscal firepower to try to prevent a depression. And it was maddening to watch them try to obstruct a new Democratic president’s jobs bill in an economic emergency, after Democrats helped an outgoing Republican president pass TARP in a financial emergency. None of us expected a Washington lovefest, but we had hoped that some Republican support might be available for a new president who had inherited a crisis for the ages. The GOP’s reflexive opposition to the Recovery Act was a signal that we shouldn’t count on Republican cooperation going forward.

  In any case, fiscal stimulus and monetary stimulus were not my main responsibilities. Larry oversaw the Recovery Act. And now that I had left the Fed, I had no responsibility for monetary policy. At my going-away dinner at the Fed board, Richmond Fed President Jeff Lacker, the inflation hawk who was one of my most ardent critics, gave a funny and gracious speech reminding me I’d no longer be able to print money at Treasury. “That’s our job,” Lacker said. “Remember that.”

  But the credit markets were a central part of my responsibility, and they were frozen. I thought we could provide direct help to the broader economy if we could get credit flowing again to creditworthy borrowers.

  One
reason Americans can usually get a credit card or borrow at reasonable rates to buy a car or grow a business is that lenders can package the loans into “asset-backed securities” and sell them to investors. But after the Lehman panic, when no one knew what anything was worth, these securitization markets shut down. Investors stopped buying the loans, so many lenders stopped making them. The spreads on auto loans and student loans quickly tripled.

  In November 2008, the Fed had announced a new program designed to bypass the banks to kick-start the securitization markets: the Term Asset-Backed Securities Loan Facility. We designed TALF to create investor demand for high-quality asset-backed securities by accepting them as collateral for Fed loans. There was also a twist: Treasury would provide $20 billion from TARP to absorb losses on the securities, and the Fed would leverage that capital to provide $200 billion in financing to help investors buy them. Leverage had created a lot of problems, but now we could harness its power to stretch TARP dollars much further.

  When I started at Treasury two months later, the Fed was still trying to figure out how to design TALF. My team proposed expanding it to $1 trillion before it even started, while broadening it to accept securities backed by all kinds of consumer and business credit: equipment loans, small business loans, commercial mortgages, and perhaps even residential mortgages in addition to car loans, student loans, and credit card loans. Ben agreed.