And he knows at this point that if he wins the election, all of a sudden his first term is a completely different animal than he expected it to be. The goals of his first term had just been superseded, I suppose. I mean, is there a feeling of that?
I would say that the president -- the senator -- was very confident he was going to win the election, and so certainly he wanted to, one, get up to speed on what he would be inheriting, but two, the debate was going to turn to all about the economy, and so he was also getting prepared on the debate. He actually did debate prep right in the office next to me here at 1285, and when they were doing the debate prep, he was getting into real detail on understanding the agencies, the big banks, the contagion effect. And from where I sat, calling him a quick learner is an understatement. He got it very quickly and knew exactly what to start asking. ...
So take me to the speech. Tell me the effect the speech had, how you thought it went. [Former Fed Chair Paul] Volcker is there, too, and the importance of Volcker being there, standing behind him.
I mean, from where I sat, it was a fantastic speech, because he was sitting in the heart of the world financial center, talking about regulation before we started talking about regulation. The last real regulation was in the 1930s, so he was bringing this up, in some ways in a real visionary perspective. And then, let's face it, to have Paul Volcker and [former Securities and Exchange Commission Chair] Bill Donaldson in the front row, [New York City] Mayor [Michael] Bloomberg, real stalwarts of the industry in the front row, as well as all the CEOs around Wall Street there as well, I mean, that's a major statement.
And then all of his interviews afterward, all of them were about the economy. And I think it was a real pivotal moment for him where he was getting ahead of the pack, being able to talk about financial services. And I know that the people in the financial services were starting to give him a lot more respect of understanding what they were going through at that point. So it became, I think, like I said, a real pivotal moment for him where he was able to talk the talk and walk the walk in the financial service sector.
Tell us about the car ride, though. What were you talking about in the car?
On the Cooper Union -- the president at that point, when we were going in the car, he was talking about really the idea of reg reform, pre-Dodd-Frank [Wall Street Reform and Consumer Protection Act]. It was the idea of making sure that the ethics of Wall Street was pure and that we were doing the business that we should be doing. And he was also talking about the economy, and he was really the first one of all the then-nominees to really start talking with the business community about the economy. Everyone was still a little more on the war.
We were talking at that point about the housing market. We were talking about [it] a lot, because the housing market started to unravel, and we were talking a lot about regulatory and reg reform. Those were kind of the key things.
Let's skip on. In between, after Bear [Stearns] is the Cooper Union speech. You were involved in helping the senator at that point write the speech. What was the background of why he gave that speech, your involvement in it, why it was important for him to lay that on the table at that point in the campaign?
So the president gave two speeches that were pretty visionary if you kind of look backward. It was the NASDAQ speech and the Cooper Union speech. I was obviously involved with helping him think about some of the ideas, as well as others were. I actually went down to the Cooper Union speech with him in his car. We met that morning at a Midtown hotel and just spoke about a bunch of things. And after his Cooper Union speech he also had a bunch of interviews on business that day.
Tell me in more detail. So you're on the yacht? Why do you decide to call him? Where do you go on the yacht? What else is going on?
So we had really just docked on the yacht. It was the morning we were going onto the boat, and I wanted to call him before he started his day with his family for his birthday, and so I just called him and said: "Hey, Barack, I wanted to wish you a happy birthday. Hope you're going to have a great day, but I just want to talk to you about something." And for the most part until this time, I was a fund-raiser. We talked a little about business and family and other things, but I would have said that I was one of the key fund-raisers. And then I would say that birthday kind of flipped the switch, where I moved from being a fund-raiser to I would say one of his key economic advisers. I would portray it that Austan [Goolsbee] was really his economic guy and I was his financial markets guy, and the three of us started talking very often since that day.
And I called him and said, "Listen, I know that the debate today has been all about the war and foreign policy, but I'm telling you it feels to me like we're going to go back to the Clinton time where it's all about the economy, and let me give you my reasoning." And I started telling him that UBS is going to show big losses, a couple hedge funds may be liquidated, and you're going to start seeing -- it feels like there could be a bit of a contagion of a real deleveraging going on. Everyone is long housing and commercial real estate. Consumption at this country is 70-plus percent of GDP [gross domestic product], so you could see that psyche change a little.
And we started having a good conversation. He said, "You know what?" At that point, "Hey, Robert, we need to talk; we need to get you involved with Austan." And from that day on we started talking very, very often. I don't know if it was once a week, three times a week, five times a week, e-mailing back and forth, but from that time on we started talking about the markets and the economy nonstop. And then, obviously, the next big thing was the Lehman situation.
How important were his relationships with folks on Wall Street to begin with? He did get a lot of funding. It sort of helped start his campaign really. So what was his relation with the folks on Wall Street, and how important to him were those relations?
I think that certainly financial services is a large part of the economy, so of course you have to engage with the financial service sector, whether it's real estate, Wall Street, commercial banking, investment banking, insurance, all those different avenues. Secondly, for Democrats, New York and California, or the Tri-State area and California are key, as was Illinois for him, but those were really the three big key states for fund raising. And so you have to engage New York, and at that point you had Hillary, Sen. Clinton [D-N.Y.], and you also had Sen. [Christopher] Dodd [D-Conn.] running and some others in the Tri-State area, so he had to come often and meet people and engage.
I also think at that time, I believe I held the first fund-raiser for him in New York, which was in March '07, and, I don't know, we probably had a couple hundred people there, at $2,300 a clip, I think it was at the time, or $2,100. I forget what it was. And listen, people remember Sen. Obama from the famous speech he did at the Boston [Democratic National] Convention where he really brought the house down, and people wanted to meet him.
I'm not sure at that point whether he was being taken that serious as the next presidential candidate. I'm a Wall Street guy, so I look at in-trade. I think Hillary Clinton was running at 70 percent, and he was probably running at 1/10 of a percent. You had [then-Sen.] Evan Bayh [D-Ill.]; you had a lot of -- [former Sen. John] Edwards [D-N.C.], he was running 8 or 9. But people wanted to get to know who then-Sen. Obama was, because he was viewed as an exciting visionary for this country that people wanted to engage with. So it was not difficult getting people to meet Sen. Obama at that point.
Let's start off with how you get pulled into the administration. You're at the Economic Policy Institute. How do you get drawn in? Are you involved with the election?
I was involved with the campaign. I was what's called a surrogate, meaning that I was someone who the campaign would either send out or refer to interviews when it came to discussing their economics policy. And I was engaged in various debates during the campaign and certainly was one of the people that the media would talk to about the candidate's economic agenda.
And then, once he won, it's not unusual for surrogates to be offered a position, if they felt that you were someone who can help.
… What did you guys understand about what you were basically going to be inheriting? And how did that change as you got closer to the election?
We knew we were inheriting a recession. What we didn't know early on was just how deep that recession would be. As time went on, the extent to which the economy was just cascading off a cliff became more clear to us than it was in the beginning.
… How worried were you guys about what you were seeing?
We were all worried about what we were seeing. We knew that the credit system was pretty quickly headed towards something that looked a lot like seizure. And credit, in an economy like ours, is kind of like blood in the bloodstream of a biological organism. If credit freezes in an economy, you're looking at not just a recession but a protracted recession.
So we were recognizing that a recession was pretty certain. But worse than that, a recession that was going to have some real intractable attributes to it, having to do with the difficulty of a credit meltdown, along with the demand contraction which is going to lead to job losses and high unemployment. …
When does it become apparent that the economy would become probably the most important thing that would have to be dealt with throughout the first term?
I actually think a lot of that was pretty apparent during the campaign. Remember, when the president and the vice president were campaigning, the economic issues that were very troubling to the country at that time had very little to do with recession. They had everything to do with issues of inequality, the fact that the economy had grown over the Bush years, but lots of people were falling behind.
I mean, the middle class actually lost ground in the economic recovery during the Bush years. And that was something that the president and the vice president picked up very clearly on the campaign trail. …
What's the philosophy that Geithner has that sent him down this path?
I think it was what economists and sociologists call "cognitive capture." He thought along the mind-set of the banks, and if you're a banker, the most important thing in the world is the survival of your bank. Not the banking system, but your bank. That became the issue number one.
They were told: If you let the shareholders, the bondholders go, it will cause havoc, and we'll never be able to raise capital again. Nonsense. Countries have had their financial system go into turmoil. Banks have gone bankrupt. If it's a profitable activity to lend, which it is, money will come in. ...
How surprising is it to you when Obama takes power that he names Geithner as the Treasury secretary, and he brings back [Larry] Summers? ...
He was told that appointing this team would present a problem, because even if they gave the right advice, it will be tainted. People will see it as reflecting the interest of the banks and people who were linked to the deregulation, to the flawed policies. You're bringing in the same plumber that caused the problem. ...
Of course the real risk was that they would not give the right advice, and that would turn out to be the case. I wasn't surprised, because at that point it was already clear where he was getting his advice from, who he was listening to.
The only thing that was perhaps a little bit of a surprise was the disjuncture between "Change you can believe in," the slogan, and the team that was put in place, which was, yes, change a little bit from the Bush team, but only a little bit.
What happened? His Cooper Union speech, his speech that he did to NASDAQ the year before were all very progressive in tone, were very much on the fact that we had gone too far, that we had deregulated markets that need to be dealt with. ... Why the change? ...
Remember, the Cooper Union speech was made during the primary and before he became chosen as the Democratic nominee. It was also done before the collapse of Lehman Brothers, and it was at that juncture that the advice came in very strongly from Wall Street: Don't rock the boat. Don't do anything that would disturb the financial markets, because that will have dire consequences for the economy.
Not a surprise that [if] a majority of your advisers come from financial markets, you see things through the perspective of the financial markets. If you had as your advisers people from the real estate sector, if you had from a group of representatives of homeowners, you would have gotten a very different set of advisers who would say, "The first thing you need to do is to resuscitate the real estate market," or, "The first thing you do is to save homeowners from losing their homes." ...
Despite the fact that he's got [Former Fed Chair Paul] Volcker standing behind him, that [Austan] Goolsbee is his right-hand man, that [Former SEC Chair William] Donaldson is there, that [UBS CEO Robert] Wolf is there, that other people that seem to be more progressive in their attitudes are surrounding him. Why do you think that is? ...
I think there is a growing sense among people in a variety of different fields that his gut reaction is don't-rock-the-boat conservative. That doesn't mean that he's not liberal on many issues, but it's moving in the liberal tradition and a liberal direction in a very slow, step-by-step way. ...
Let's go back in history and then take it chronologically now. So 2007-2008, you're the chief economic adviser. When did you guys know that, lo and behold, we might be holding a bag of stuff we don't want to hold, coming up soon? What were you debating? What were you talking about? And how slowly did the conversation you were having get more and more serious about a possible crisis?
I would say there are about two different eras through the campaign. The first thing I'll note is way ahead of me, way ahead of any of the advisers or any of the people on Wall Street, then-candidate Obama was well, well ahead of the curve. He had sent letters to Secretary [of the Treasury Hank] Paulson and to [Chairman of the Federal Reserve Ben] Bernanke, asking them to look at subprime mortgages, that there could be a brewing crisis.
In the summer of 2007 and going into the fall, the president goes and gives a speech at NASDAQ in which he says: "Number one, Wall Street is not an island. If the middle class can't pay their mortgages, you may think that is not going to reach you, but I assure you it will. We're all in the same economy. I'm going to be for a middle-class agenda, and you shouldn't be against it. You should be for it. And number two, it doesn't make you anti-business or anti-market to be for stronger rules of the road and a sound regulatory financial system."
No two points were ever more worthy, and no two points were ever more central to a financial crisis than that. That was the fall of 2007. After Bear Stearns in March of 2008, we're in the middle of an epic primary campaign between [then-Sen. Hillary] Clinton and Obama. Obama goes and gives a speech with [former Fed chair] Paul Volcker sitting right in the front row at Cooper Union in which he goes through in great detail, "Here is how we should re-establish rules of the road and regulation of financial system."
It's March of 2008. In the audience are primarily political journalists who are all looking at each other and saying, "Why is he talking about Fed oversight?" It was not on the radar screen of the political system. But it was on the mind of the president, because everywhere he was going, this was the natural culmination of the public is losing trust in the financial system. And when you lose public trust in the financial system, what tends to happen is everyone pulls their money out. And that is the essence of what the financial crisis was.
So I would say the president was definitely concerned about the potential for crisis all throughout 2008 and demonstrated that [by] giving speeches on the subject. By the summer of 2008, in running up into Lehman, through Robert Wolf, [Obama adviser and president and COO of UBS Investment Bank], through some other connections of people that he was talking to as well as talking to the economists, people were on pins and needles, because we knew if the credit system collapses, the country could be in for a real bad recession.
And then, after the events of Lehman, the doors blew off. Then at that point, we knew we had had a series of midnight-to-3:00 a.m. phone calls throughout the summer comprised of a lot of major-league names in finance and economics. Paul Volcker, he didn't have a cell phone, and finally they demanded that he get a cell phone, because there were so many times we were trying to reach him at midnight or whatever time that he had to do that.
By the fall of 2008, Secretary Paulson and the administration are calling then-candidate Obama, and they are saying: "Look, we think the world is close to coming to an end, and we really need your support. What do you want to do?" Both of the candidates I think were thrown into positions that are normally reserved only for people that are already the president, where they are being pressed to publicly get up and say: "What are you going to do? What do you want us to do?"
I think it is to President Obama's credit. It wasn't a secret that the TARP, that the financial rescue or any of that stuff was unpopular. That was easily understood from the second it was getting announced. The question really was, despite that being tremendously unpopular, maybe the most unpopular thing the government has ever done, do we still have to do it? And there were certainly political people advising him: "No. Well, look, why can't we demonize this?" But the president said: "It's too dangerous. We can't do that."
So take us to the Sept. 25, '08, meeting in the White House: Obama, [candidate Sen. John] McCain, the congressional leadership, President Bush. How do view that meeting? What are you hearing about that meeting? Are you there?
In the run-up to that meeting, we're getting ready for the first big debate, which was going to be in Mississippi, and so much of the entire policy team -- economics as well as the political team -- are in debate prep in Florida. And we're intensively -- we're going through, and the first debate was going to be about international issues, so we're going through international finance, international trade. It's in the context that the world seems to be blowing up. And in the midst of debate prep at a very nice -- we're near some beach somewhere in Central Florida, everyone in the room just stands up and walks to the corners and gets on their cell phones.
And I'm looking at one of the other policy people, and I'm like: "What in the world is going on? What has happened here?" And John McCain has just announced that he is suspending his campaign, and they're going to come back to Washington. Now everyone is in total confusion. We're here for debate prep, but is there not going to be debate?
So then they commence to getting ready for the meeting in Washington. Now, the thing that everyone on our side -- I shouldn't say that. The thing that everyone in the Obama campaign and in the Obama Senate office was quite confused about was, it seemed like McCain had a plan. He was saying, "Look, let's come back, and let's hash out the details." When they got there, it turns out nobody had thought anything about it. So it seemed like it was going off the seat of the pants. And the president goes to that meeting and knows quite a lot about it, has been talking to Paulson, has been talking to many of the figures as well as consulting with Warren Buffett and Paul Volcker and [former Treasury Secretary] Larry Summers and a host of other economic advisers.
So they go to this meeting. They reiterate some of the positions, and Sen. Obama says: "Well, look, what is your guys' plan? What are you proposing? What are we going to do?" And the main thing that came out of that meeting from my perspective was confusion on our part of, where is this going? Have they lined up the votes for the proposals? What became the TARP, they had the idea, but the Republicans themselves didn't have the votes for it. So they appeared to be asking Sen. Obama: "We want to do this. Our own people are going to oppose it. Can you get the votes to support it?" That was a very confusing moment, I thought.
One thing, going back -- so the Cooper Union speech and the NASDAQ speech, how is Wall Street viewing this guy? He's got Volcker standing behind him a lot of times. He's got lots of aggressive economists around him. What's their theory about this guy?
I found in many of these venues that Sen. Obama is giving a message, which is really kind of a tough-love message to Wall Street in which he is saying: "We're not singling you out for pain, but you've got to get your act together, and if there is no public trust, capital markets can't function. And when you rip up the rules of the road, you're going to lose public trust."
He is getting a lot of blowback from Wall Street as people say, "Well, this is anti-market," or, "Why do you need to be so tough?," especially as it starts getting a little rockier on Wall Street itself. The markets start getting more riled. We have the Bear Stearns incident, and people start saying: "Well, you can't say this stuff. You shouldn't get up and talk about this, because you might scare people away."
And that established this -- it's always one of the classic tensions, in moments like this, of how brutally honest are you going to be? And then the other side saying: "Wait! Wait! Don't be brutally honest. You are going to drive even more people away." I would say the reaction wasn't great from Wall Street. But to the president's credit, that didn't stop him from laying out what he thought was going to be necessary.
This was a time when, of course, the reverberations were being felt about coming problems. Housing was going down the drain, and there were lots of problems that everybody understood were coming in one way or another. How did you see him as being able to play a role, someone that would be able to change things in a way that you thought would be much more positive than what was happening?
Yeah. I think you need to be careful. Having been through what we've been through it's easy to say, "Oh, we all knew what was coming our way." And we really didn't. I mean, there were certainly troubles -- we'd seen the big boom in house prices. We'd seen some uneasiness there in the fall of 2007, when we started to have the subprime crisis.
But in truth, for much of that period, the bigger issues seemed to be longer-run. If you think about it, candidate Obama, Sen. Obama was running on sort of long-run economic issues, like restoring prosperity to the middle class, dealing with the perennial problem of health care in the United States. He talked a lot about the budget deficit, about the need to transition to clean energy. Those are not dealing with an immediate crisis. They were about our long-run economic security and strength.
But it was -- I think where you really started to see his ability to deal with what's going to turn out to be the crisis was more during, actually, the actual campaign. So the primary's over. It's the fall of 2008. And I think we probably all remember maybe it was the first debate with [candidate Sen. John] McCain [R-Ariz.], where there was this on again/off again. It was shortly after the collapse of Lehman [Brothers], and the whole question of "Maybe we shouldn't be debating; we should be going and getting into Congress or something."
And I remember, I think it was Sen. Obama who said, "Really, a president has to be able to do many things at once, and we can debate and also get back to Washington and vote on anything that needs to be voted on." He obviously seemed like a cool head in the middle of a crisis and was already seeming like someone who could handle anything that was going to come our way.
So take us to then August. So things are getting worse. The housing market, everybody is realizing, is a problem that's not going to go away. Take us to what you were doing, where you were going, what was going on, and the conversations that sort of sent up all the red flags for you.
So all of a sudden July comes, and you get defaults in housing at a standard deviation versus the norm. Usually it was very small defaults, and all of a sudden you had it five, 10 times of what normal was. And recall at that time you had subprime, you had prime, you had all different types of housing finance going on. And then, like I said, UBS was looking at their own positions and started seeing that we had our own problems. And I think a lot of firms were starting to have problems where, you know, our goal as an industry is to be in the moving business, not in the warehouse business, and when things get less liquid, all of a sudden you get in the warehouse business. And so our position started to get more aged. And then the first week in August has kind of been a fun weekend. That's my wife's birthday, and a few days later it's Obama's birthday, so we exchange calls, so on and so forth. And he called my wife -- it was Aug. 1 -- for her birthday.
And then my wife and I were going on my friend's boat, who is a good friend of mine, worked at a hedge fund. And we started talking, and he was having his problems at the hedge fund on funding and on pricing, and at the same time I saw the bigger firms starting to have some problems, housing was starting to creak a little, and I just started to say to myself, "If I'm seeing this right, we're going to have some mass disruptions coming." And it just felt that way.
And I called the president that morning for his birthday, and jokingly: "Hey, happy birthday, Barack. Thanks for calling my wife."
When Lehman happens, that weekend, are you involved in telephone conversations with the campaign?
Yeah. I was involved in some conversations with the campaign. … I don't recall being on phone calls with the candidate then, but certainly the economics team was talking and trying to figure out what was coming down in real time.
Yeah, I mean, when you're in campaign mode like that, what you're trying to do with your team members is figure out what's going on here that's going to ripple through the economy in ways that people need to hear the candidate talking about.
So obviously, he can't go out and say, "Something's happening and I don't know what it is, but it sounds pretty bad." We have to try to give him some authoritative understanding of how this is breaking. And that's what we were trying to figure out.
How were both your bosses at sort of taking that in and turning it out and developing policy and being able to define it for the public?
I thought then, and I think even more so now, that President Obama has a pretty uncanny ability, nothing I would ever have expected for a Constitutional lawyer, to understand and explain the complexities of financial markets. When we used to brief him during these daily economic briefings early on in the administration, he actually wanted pretty granular information about yields on credit default swaps.
I remember once [former Federal Reserve Chair and Chair of President Obama's Economic Recovery Advisory Board] Paul Volcker joined us for a meeting in the Oval about this stuff, and afterwards he said to me, "I've never seen a president get into that level of economic minutiae about this stuff." And the reason was because the president, he was building an argument from the bottom up. He really wanted to understand what was going on in financial markets. Basically, his prescription was going to flow from a pretty deep diagnosis.
... What's his reaction? So you're on the telephone saying: "I've got a buddy here who has got some problems going on in Europe right now. I've been seeing stuff back at the office. I've got to warn you here." What's his reaction to this?
I think his reaction, one, he was thinking about what I was saying. He asked a few questions about the leverage and the size of the losses. And remember, UBS was 50 times levered at that point, but we weren't alone. All the firms were 35 to 55 times levered at that point, and everyone had different -- how they marked their positions was different. But let's just say if a company is levered and X percent of their book, 15 percent of their book is Level 3 assets, then you have a big part of your position that you just can't figure out how to mark.
And so I think it was not an awakening. I mean, this guy, the president was very savvy on business issues, so he asked the right questions right away. We talked about leverage, and we talked about pricing, and we talked about the losses and things like that. But I think for both him and I [sic], it was a moment that was a bit of a wow moment, because the truth is that soon thereafter the unraveling began. And we were talking about this possibility happening for probably 30 days before the Lehman crisis took hold.
So let's start, Professor Romer, when the 2007-2008 election campaign is taking place. You're very interested in some of the stuff that Sen. Obama, candidate at that point, is saying. What were your expectations? And why did you very much want to be involved?
I think, like many people, my first introduction to him had been his 2004 speech at the [Democratic National] Convention. And that certainly got my attention, and I said, boy, this guy has something. But I often say I actually, I fell in love with his website; that actually, if you looked at the original campaign website, certainly the economic policy was really awesomely good.
So everything from what he was proposing on energy to health care to education to all of those things, they were good economics. They were based on evidence; they were not doing the easy thing or the politically easy thing; that they were nuanced; they were smart. And that was where I first started to take notice, that I really like what this guy believes in. But I also like the way he thinks and the way he evaluates things, the way he approaches policy.
So that's really what made me incredibly enthusiastic.
So let's start with, how do you meet President, then-candidate Obama? How do you get to know him -- what kind of guy you think he is, what kind of leader you think he might become?
We met in the fourth quarter of '06, so I think it was September or October at [philanthropist] George Soros' offices. There was about a dozen people invited to hear then-Sen. Obama. I think he had a charity that night on underserved children up in Harlem, and so he came earlier for a little Soros meet-and-greet. I think he met with George first and then came in to sit with us. And I was really a wallflower in that meeting. It was Democratic political people who have been involved with Gore and Clinton and many people for many years to hear what the senator's views were on things. At that point, certainly he was not thinking of running for president, or if he was, that was not the pitch being made, and it was just kind of a get-to-know-you.
I didn't say anything in the meeting, which some people will say, "My, that's amazing that he didn't say anything in the meeting." But when we walked out I just handed the president -- the senator -- my card. He was with Jenny Yeager, who works on his campaign team, and I handed him this card and said, "I'd love to talk to you." And then that next morning I get a call to the office, and it was Sen. Obama saying, "Is Robert there?" And of course I said to my assistant, "Yeah, it's Sen. Obama." I actually said it a little differently. And we got on the phone, and he said: "Listen, I've heard about you. I want to get to know you. We should get together."
We agreed to try to get together, but then Thanksgiving came quickly and Christmas came quickly, and I was busy and he was busy, and before you knew it we said the best time to meet again would be in January. I said, "So when you get back from your trip to Hawaii, give me a call, and hopefully we can make it work."
Literally the Monday morning after New Year's I got a call from Sen. Obama: "Hey, we should get together." And we agreed to get together, I think it was around the first or second week in January. And we met at Olive's for a little dinner, just him and I, and we had a great conversation.
We were just talking about what's important to me as a person and to him as a person. We talked a lot about family. He has two children; I have two children. I have two boys; he has two girls. We talked a lot about health care. My dad was going through cancer; his mom passed away of cancer. We were talking about the war, why he was against it; I was against the war at that time. And we're both Ivy League guys; we're both athletes. So if you had that card, check off the 10 things, we checked off the 10 things. And he kind of intimated he's thinking of taking the next step, and I kind of said, "Listen, I'd love to talk more, and if it's something you want to do, I would love to think about getting onboard."
And then we had another dinner with a small group of people two weeks later in Washington, and I was hook, line and sinker. I felt like here was a guy that could really bring this country together. It's hard when you have young children, you're watching the State of the Union, and half sit down and half stand up, and you try to explain the respect of the presidency. So my view was to look to someone that can bring this country together, and I thought he was that person, and I still think he's that person today.
How scared on Wall Street were people that there was a completely new administration coming in?
There was a general view that the president-elect was a very smart person and was looked upon really as a source of hope. I think that some of the early nominations that he made were also comforting to Wall Street, such as Tim Geithner. I don't think that Wall Street at all looked upon the new administration coming in as a major threat.
Around [Sen. Obama] during the election were a lot of progressive economists. But then he picks Geithner and [Larry] Summers and holds on to Bernanke. Was that surprising? Explain how it was viewed by Wall Street.
I think that Wall Street viewed Geithner, Bernanke, Summers as a commitment by the incoming administration to balance a centrist view, not leaning way to the left. There were some of the economists -- they don't like to be reminded about it now -- who were strongly urging that the whole banking system be nationalized. That was a view which was I think short-sighted, but it was certainly loudly articulated. ...
Why do you think Geithner got the nod?
I think Geithner got the nod because of his superb performance during the crisis. ...
How different is this new administration and the policies that they're following? ...
... I would say the new administration has significant differences from the prior administration. ... The deregulatory ethos really which had existed for the prior nine or 10 years -- the new administration I think clearly sees the need for an enhanced regulatory system. ...
When do you call Obama? When do you sort of say, "Maybe I should talk to--"?
So I was speaking to the senator all along during that three-day period, but not that dissimilar to -- I was speaking to him prior to that period as well, although there were probably a few more calls that day than other days. He was privy to the meeting, based on, you know, everyone heard about the meeting. So, one, he was privy to the meeting; two, I believe he may have engaged Paulson or people at the Fed at that time. I think it may have been Paulson.
But I was letting him know that, "Listen, this is what could happen." We weren't talking as much about Lehman being saved, because if Lehman was saved and everything was fine, then it would be good. His questions were much more directed: "OK, what if Monday opens up and the announcement is a Lehman filing?" So when we started talking Friday night, he was asking the tough questions, not the rosy scenario. He was trying to figure out, "Well, what if it went the other way?" And the truth is, there was a lot of guessing going on. No one knew exactly what would happen that Monday morning.
For me, which [is] why, you know, we chatted earlier, why I think there's need for new regulations and a systemic regulator is as much as we talked about Lehman, for the most part neither the Fed nor the Treasury was the Lehman regulatory; it was the SEC at the time. I'm not so sure that they had the tools to be the regulator for a global financial institution like Lehman, who has a trillion-dollar balance sheet 35 times levered.
But at that time there were no tools. As things started to fall apart, Bank of America was going with Merrill, Barclays wasn't a possibility, what was the feeling in the room? What was the conversation that you were having with Obama about "You know what? We're in some trouble here"?
I think when we chatted on Sunday, I think it was a call where it was kind of a wow call: "Listen, Senator, Barclays pulled out. The U.K. government said no for the most part. There was an uncomfortable feeling of taking something on as big as Lehman without knowing really what's under the hood and how would they fund it and how would this would impact Barclays and this general system." And I said to the president, then-senator, we were talking, and he goes: "Well, what does this mean? What happens at the open?"
And I think none of us felt good about the open. No one knew whether it would be contained or not contained. There was a feeling that at that point, we were kind of trying to make sure we got our own funding that we needed, and that we could open and get our repos done and get the things we needed to do. And I would say at midday it's kind of, it was almost like, "OK, let's make sure we're protecting our own castle and getting our operations ready for that Sunday night of something we've never gone through before."
But the senator was asking about, "OK, well, what do you think this means?" And we were talking about AIG. Sunday night, [he] and I talked about AIG, and what does this mean for AIG, considering everyone knew they were the big elephant in the room. He was asking what type of contagion this would have, and I was clear that, from my perspective, although we had never seen anything, "I think immediately we will see the markets and funding start to dry up, you'll see a lack of liquidity, and we're going to be in a situation of the unknown." And the one thing about Wall Street is we can do very well in the known. Good or bad, we do well with clarity. In the unknown, things tend to freeze.
And that's kind of what happened. The markets started to freeze. People were nervous about other firms. Our funding at our firm and other firms started to -- everyone started to get nervous. The overnight commercial paper market became very tenuous. So we had a situation that got a little nervous, no question.
And then soon thereafter, the president -- then-senator, excuse me -- we had a call that week about AIG. I remember that he put a call together for us to talk about AIG, because during that week, I think it was at that point [New York] Gov. [David] Paterson had an announcement that they're going to give a loan of $20 billion to AIG, but most of the market knew that that loan wasn't anywhere near the size needed. And all of a sudden you started having nervousness about a run on AIG, and what did that mean.
And the president put a call together. It was myself and Volcker and I believe Robert Rubin and Larry Summers, [both former Treasury secretaries under Clinton], where we were talking about, "OK, what would happen if the contagion starts in on AIG?" And then we started to have calls the next week on -- it may not have been the next week -- but on Fannie and Freddie and how does this hit the agencies that do a lot of housing. So what I would tell you is this president was engaged before Lehman, but once Lehman hit, I think he was all over it, thinking in a proactive and prospective way of how this was going to impact the economy and the election.
Was there an understanding that, "My God, this thing could implode; the housing bubble might burst" and all of a sudden this campaign, this next term, whoever wins is going to be dealing with this big time? Is there that understanding at that point?
I think then-Sen. Obama felt like he needed to get ahead on the debate on the economy. I believe that he was grasping a real understanding of the big banks, the leverage in the system, and I felt like he understood that a lot was predicated on the housing market. So the conversations that we were having, along with Austan and a few others, I mean, we would get into the granularity. We would talk about derivatives and we would talk about the housing market and we would talk about Fannie [Mae] and Freddie [Mac].
So, from a guy who has been in this industry for at that point 27-, 25-plus years, there's no question that he was asking the right questions. It was making us think a lot. We were all doing a little extra research, knowing he was going to be calling us. I was reaching out to economists and research analysts about, "Hey, if this happens, what would that mean?," so on and so forth. But this was all leading up until the Lehman weekend.
"The FRONTLINE Interviews" tell the story of history in the making. Produced in collaboration with Duke University’s Rutherfurd Living History Program. Learn more...