Believer: My Forty Years in Politics (47 page)

The fragility of the banks was a dark cloud hovering over the prospect of recovery. Obama didn’t have much patience for the bankers and speculators whose ruthless and reckless pursuit of personal gains he blamed for much of the crisis. He understood how angry the American people were at Wall Street for its costly excesses. Riding to its rescue was unquestionably bad politics, but he also knew that the country needed a flourishing financial sector, first to survive and then grow. “We have to fix this,” he told me, in the midst of the storm. “If we don’t, the whole thing falls apart.”

The responsibility for fixing it fell squarely on Geithner’s shoulders. At first blush, they weren’t particularly
big
shoulders. A slight man with an impish face and tousled hair, Geithner wasn’t an imposing figure in person or on television. Together, he and Summers looked a little like Laurel and Hardy. Yet Tim was a smart, strategic thinker who proved far tougher and more resilient than his boyish looks suggested—and he would need to be tough for the bruising battles ahead.

Geithner’s first major pronouncement on the banking crisis in early February fell well short of market expectations. It didn’t help that, on the eve of Tim’s speech, the president promised at a televised news conference that his treasury secretary would be “announcing some very clear and specific plans for how we are going to start loosening up credit once again.” Encouraged by the president’s comment, the frantic financial community anticipated aggressive steps to buy the toxic assets that littered their balance sheets. Instead, Geithner, nervous and unimposing, merely announced a general framework for action. The stock market plummeted upon the news. It was a striking reminder that, in our new roles, a few ill-chosen words could send armies marching and markets crashing. For the new secretary of treasury, it was a disaster. Weeks into the administration, the political community was already placing sell orders on Geithner. “I don’t think Tim’s going to make it,” Valerie confided, echoing the prevailing view in Washington.

The environment was so ugly that Tim asked me to call his wife, Carole, who had stayed behind in New York with their high school–age son. “She doesn’t get all of this and she’s really upset,” he said. “Can you just reassure her?”

Meanwhile, we still needed an answer on the banks, which was late in coming, in part, because of squabbling among our economic advisers. Summers and Christy Romer, who generally didn’t mix, were now allied in the view that we should buy the toxic assets and take over the worst of the failing megabanks, which the two believed were terminally ill. Geithner, who was less fatalistic about the underlying health of the banks, argued against “nationalization” on policy grounds. He also believed that such an approach would eventually run up against political impediments because it would require far more taxpayer money than Congress had authorized the administration to spend. While the team argued, the stock market continued to tumble and lending remained frozen. The bank crisis was a lead weight on the recovery, and the famously chill Obama was tired of waiting.

Determined to maintain his bond with the American people, the president had asked for ten representative letters each day from among the tens of thousands the White House received for him. The letters would be included in the thick packet of homework the president took back to the residence each night. After his children went to bed, he would cap off his already long and difficult day by reading dispiriting notes from struggling Americans who desperately feared for their families. Some had lost their jobs or homes. Others, small businessmen, were starving for loans. So many of them would detail their struggles and then plaintively ask the president, “Where’s my bailout?” Often he would respond by hand. Occasionally, he would phone the letter writer. Sometimes he would call me late at night. “I’m telling you, man, these letters just tear you up,” he said during one such conversation.

Moved by these stories of distress, Obama had had enough of the endless debate among his economic advisers. “We all look like we have our heads up our asses,” he told them. “I’m not going to be the president who sat here and fiddled while Rome burned. I’m tired of reading letters from people who are desperate for help and are looking to us for answers we don’t have.”

On Sunday, March 15, he summoned his economic advisers to a meeting, determined to force an answer on the banks. Despite the president’s obvious frustration, Geithner, Summers, and Romer continued to argue for several hours on the path forward. Finally, the president stood up. “I’m going to get a haircut and have dinner with my family,” he announced. “I’ll be back at seven. When I get back, I want a consensus.”

With the president gone, all hell broke loose. The problem, Tim argued, was that most banks were paralyzed because they didn’t know the full extent of their exposure to toxic assets. His bet was that the “stress test” audits would reveal to the banks and the world that most were in better shape than the markets feared. Once you wiped away the uncertainty, the banks would raise the private capital they needed to gird themselves against future crises. Larry and Christy remained skeptical and continued to favor aggressive action that would require more significant government intervention. Rahm clearly, repeatedly, and colorfully offered a dose of political reality, warning that we were not going to get “another fucking dime from Congress” for the banks. “Well, that’s no good,” Summers finally concluded. Geithner, red-faced with exasperation, exploded: “Well, welcome to my world, Larry!”

When the newly shorn president returned, the group had reached a grudging consensus. It was risky and depended on Geithner’s hopeful hunch about what the stress tests would reveal. If he was wrong—well, I pictured our administration like the wayward
Apollo 13
space capsule: instead of reentering the atmosphere and landing, we could skid off into the abyss, taking the economy with us.

Nationalizing the banks—and seeing the televised images of fired financial executives walking out of their offices with their belongings in cardboard boxes—would have better addressed the country’s fury, but Obama bought Geithner’s argument that such a step would carry significant economic risks and require more taxpayer dollars than Congress and the American people were willing to provide. Understanding the lousy politics, Obama placed a big bet on his embattled treasury secretary—and it would pay off, stabilizing the banks in a way that allowed the government to recoup taxpayers’ loans with interest.

Before that marathon Sunday meeting in the Roosevelt Room wound down, I raised another issue that struck me as a symbolic disaster.

The
Washington Post
had reported over the weekend that AIG, the giant insurer of banks at the heart of the financial meltdown, was poised to pay its executives $165 million in bonuses, despite record losses and a $170 billion in emergency government loans. I was outraged, and I was not alone. The bonuses would touch a raw nerve with a public already incensed by the avarice and recklessness they had seen. “This is going to be a huge problem,” I said, arguing that the president had to strongly condemn the bonuses, a sentiment he shared.

The White House had scheduled an event for the next day, the focus of which was on getting credit flowing again to small businesses. It would provide the president a natural opportunity to condemn the bonuses publicly, and he agreed to a statement that was direct and to the point: “[T]his is not just a matter of dollars and cents. It’s about our fundamental values. All across the country, there are people who are working hard and meeting their responsibilities every single day, without the benefit of government bailouts or multi-million dollar bonuses.” Contrasting AIG and the financial community with the struggling, responsible small business owners at his side—one of whom was keeping his doors open by working without pay—Obama concluded: “All they ask is that everyone, from Main Street to Wall Street to Washington, play by the same rules. That is an ethic that we have to demand.”

Over the Treasury Department’s objections, I had included a line calling on Geithner to explore every avenue to block the AIG bonuses. Treasury’s objections had been rather vague, but soon after the president spoke, I learned that Geithner had known about the bonuses well in advance. Worse, he and Summers had quietly lobbied against an amendment to the Recovery Act that would have significantly restricted the payment of bonuses at AIG and other firms receiving Troubled Asset Relief Program, or TARP, funds. They believed any retroactive steps would violate existing contracts. Their quiet lobbying, however, flew in the face of the president’s strong denunciation of the bonuses. It made the president look like a phony, posturing to a receptive public while his operatives took the opposite tack out of view.

I was livid, and confronted Geithner and Summers at one of Rahm’s morning meetings. Dancing around their subterfuge, they argued that it would be irresponsible, even illegal, for the administration to support “clawback” provisions denying the Wall Street players bonuses to which they were contractually entitled. Tim dismissed doing so as “Old Testament justice” that would satisfy the public bloodlust at the cost of the economy. “This would be the end of capitalism as we know it!” he barked.

“I hate to break the news, Mr. Secretary,” I replied, “but capitalism isn’t trading very high right now!”

 • • • 

Within months, Geithner’s stress test and recapitalization plan had helped stabilize the banks. Yet, to the frustration of the president and to millions of Americans seeking loans for their homes and businesses, the capital was still not flowing. The financiers, gun-shy after their near-death experience and discouraged by independent government supervisors who had dropped the ball before the crisis, had tightened their standards for loans in response.

Obama came to a morning meeting in the summer of 2009 with two clips from the same newspaper, one discussing the paucity of credit and the other announcing billions more in bonuses for Wall Street.

“I can only imagine how people feel about this,” Obama told us. “I know how I feel about it. Loans are down and now the bankers are doing well again—thanks, in part to us—and they’re
still
not lending!”

It would be an ongoing struggle.

So, too, would be housing. This was ground zero for the crisis. Millions who had taken easy-money loans were now in default, and with the rash of foreclosures, home values plummeted. Many Americans who had thought of their homes as their nest eggs now found them worth less than their outstanding mortgages. Plus, with massive layoffs, millions more were facing foreclosure. In the past, it was new home construction that helped lead America out of recessions. This time, the housing industry was down and out.

Obama returned to the issue again and again, and Treasury responded with an alphabet soup of programs called things such as HAMP and HARP. They set aside fifty billion dollars to help distressed homeowners refinance their loans at record low interest rates, part of an array of emergency measures undertaken to spur the economy. Yet much of the money never went out, and progress came at a glacial pace. Eventually, the aid would help millions, but the housing programs overpromised and underdelivered, as the president reminded us often.

“I get these letters every day from people who should qualify for the mortgage mitigation program but are still turned down by the banks,” Obama complained at one economic briefing.

“Mortgages are like unemployment,” Geithner responded. “It will trail.”

 • • • 

As we raced to pass the Recovery Act and restart lending, a third crisis was bearing down.

With credit markets frozen and car sales at their lowest level in a quarter century, the automotive industry was forced to shed four hundred thousand jobs in 2008. The iconic American companies GM and Chrysler, two pillars of Detroit’s Big Three, were reeling. Under pressure from foreign competitors and hobbled by dated product lines, heavy debt, and labor obligations, GM and Chrysler were buckling even before the recession. Now they were teetering toward an outright collapse.

The Detroit executives evoked about as much sympathy as their counterparts on Wall Street—particularly after traveling to Washington on private jets in the winter of 2008 to ask Congress to bail out their mismanaged companies. At our quiet urging, Bush had agreed to provide just enough loans from the TARP fund to keep GM and Chrysler alive for a few more months. With that life support now coming to an end, Obama had to decide what, if anything, to do.

In the first weeks of the administration, Obama formally assigned Steven Rattner, a prominent New York private equity investor, and Ronald Bloom, who’d helped advise labor on the restructuring of the American steel industry, to head an auto task force that would work through the knotty issues at each company and make recommendations on how to proceed. Rattner and Bloom looked like an odd couple. Bloom, the old union man, was a no-frills guy. Rattner, a former
New York Times
reporter, looked every inch the successful financier he had become. They were backstopped by a brilliant, young White House staffer, Brian Deese—who became so steeped in the workings of the auto industry that I would forever after call him Diesel.

By late March, after months of work and with the clock ticking, Rattner, Bloom, and Deese joined the daily economic briefing to report back to the president. For forty-five minutes, they put forth their findings and recommendations, which would require another sizable investment from the government—perhaps as much as eighty-eight billion dollars—to rescue GM and Chrysler. The government would buy a majority interest in GM as the company restructured; but Chrysler, the more fragile of the two companies, would need a partner to survive. Chrysler had announced a tentative partnership with Fiat two months earlier, but the details needed considerable work.

Behind schedule and frustrated by the lack of time to deal with such weighty considerations, Obama adjourned the meeting until that evening. “I am not going to decide the future of the American auto industry on the basis of a half-hour discussion. I have more questions.”