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 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."
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.
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.
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.
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. ...
How has President Obama played on Wall Street?
Clearly there is a lot of unhappiness on Wall Street with the president. I probably am a fairly small minority, but I would disagree with the view.
... Why is the president unpopular on Wall Street?
... In part it's because of some of the rhetoric, some of the attacks on banks.
He called the bonuses shameful.
... I think you have to understand that politics are politics, and words like that will be used. ... There inevitably have to be times where he says things which are helpful politically, even if they are harmful to the other side. ...
But if you look at what he has done and what he has not done, that's where I am. I find him much more supportive of the financial system than I think he is given credit for. ...
... March 27,  is the famous meeting where the ... CEOs go down to the White House and Obama basically says: "I'm the only one between you and the pitchforks." The bankers go away thinking that they're in danger, they don't know what he's going to do, and they end up coming out realizing that lo and behold, he's going to support us. He's asking for lending, but he's not going to force us to do it. He's asking for control of compensation, but it's all voluntary. What's the importance of that moment and how it defines what the philosophy of this administration was?
It was a clear signal that ... there would be basically business as usual, with a little bit of pressure of social responsibility. You might call it "do the right thing."
Why we would expect the bankers, who had not done the right thing for so long, to suddenly reform wasn't clear. And what happened in the subsequent period has not given us a lot of confidence.
But I think in the months preceding, most of what had been said suggested that he didn't want to roil the markets. He didn't want to disturb the banks. He wanted them on their side so that things were as calm as possible. ...
There's another meeting, a March 27, 2009, meeting. I don't know if you were involved in that, but that's where the 13 bankers --
I was not there.
All right. So the 13 bankers go to Washington, and the president gives this bit of a speech saying, "I'm the one between you and the pitchforks." Explain the necessity to lay down the line, though also I think what the bankers came away from understanding with that is that he's always working with them rather than against them. Describe how that was sort of viewed, either from the Obama point of view or from the bankers' point of view, of how the relationship with Obama was evolving, and this was a tenuous point where they weren't quite sure where the administration was going. What was the perspective, from your point of view, of both sides?
I'm trying to think how to answer that. I'm not sure I have a good answer for that point. I would have a good answer for the relationship of financial services with the White House, but not at that point in time.
Before or after?
Well, give it to me now -- how that evolved and where we are now.
I think the relationship between our industry, the financial service, and the White House, I would say they have their good days and they have their not-so-good days. I would say for the most part, the industry supports major portions of the Dodd-Frank bill. They understand that there's a need for derivative transparency. They understand that there is a need for a systemic regulator. They understand the resolution authority. There would probably be more debate on the Volcker Rule [of Dodd-Frank] and also more debate on the Consumer Financial Protection Agency [CFPA]. But I think in general you would get the industry to say it's OK that we change some regulation.
I think from the White House perspective, what happens is the industry lobbies for those pieces they don't like. So they may not like 1 percent of a piece, but if you have a lot of different firms lobbying that 1 percent, it seems like they're lobbying a lot of different parts of the Dodd-Frank bill, so it has put a bunch of things on stall.
From that perspective, I think that the president wants a vibrant financial services industry, and the financial service wants a Dodd-Frank bill that they think is smart principles, that allows them to have their entrepreneurial spirit and allows us to service our clients the appropriate way. My guess is during the negotiation phase it's always not easy to strike the exact right balance. These conversations are not always that easy for me.
I like to joke and say I'm the Wall Street friend of the president, so part of this country may not like me because they don't like him, and those who like him may not like me because I'm on Wall Street. On the flip side, I think smart regulation works well, and I think that's where we need to get to, and I think a major part of Dodd-Frank makes a lot of sense, and the sooner we come to clarity on the direction it's going, I think we'll certainly figure out how to work within the system.
Why do you think it's so different for people to see it that way?
One, there's a natural tension between wealthy people and less wealthy people. Everybody would like to be more wealthy than they are, including wealthy people. ...
But frankly, I blame the administration for stirring up that. I think they're deliberately trying to run against things. Run against wealthy people. Run against Wall Street. Run against the economies. ...
So Obama is looking for someone to blame, this is what you mean?
Yeah, it was the traditional thing when you have a difficult problem to manage is find an outside enemy and blame the outside enemy. I think that's a lot of what they're doing. ...
I'm going to take you back to March 27  now, the White House meeting [when] the CEOs came to town, the bonus stuff is all on the front pages. And so they're worried, because they don't know where this president is going. The message that comes out is, the administration is not going to force them to lend in ways that they don't agree to. It's not going to deal with compensation questions.
Well, that's not quite accurate.
But the president says, "Hey, we're the only ones between you and the pitchforks." It seems that the bankers come out of that meeting though thinking, "Well, yes, he slapped us on the wrists, but in the end it still our decision." And the critics say this was the period of time when you should have kicked their butts. This is the period of time you could have come down on them.
The one point I disagree there has to do with compensation. We actually had rules enabling us and Ken Feinberg to provide oversight to their compensation decisions.
But you have a point. With hindsight, I'd say we should have tried to extract more from the banks, particularly in terms of lending. It was frustrating to be providing them with the resources they need to stay alive, and yet they didn't seem to be lending into the economy in ways that would have helped pull forward the recovery.
So how angry did this make the president?
The president -- I'll tell you. The bonus and the compensation stuff made him more angry than I'd ever seen him. I mean, oftentimes with President Obama, if he was annoyed, you knew it because he would say, "I'm annoyed." When it came to the bonus -- I remember him, like, really standing up out of his chair in the Oval Office during the AIG bonus compensation stuff and just being really pretty livid.
One thing he would not stand for was the American people being played for as chumps by these banks. And that was something he just really didn't like.
Some people will say, yeah, he might have been mad, but nothing came out that sort of forced him to change.
I think it's an unfair claim on compensation. Because on compensation, we put a guy named Ken Feinberg, the compensation czar, in the Treasury, and the man had oversight over these banks' compensation packages. That's a very big move in a capitalist economy.
I think where you could criticize us was that we didn't ask enough out of the banks in terms of their taking some of those bailout funds that were helping to reflate their books and lending back into the economy.
Now, at the time, remember, it was leverage that got us into this mess. So there is a bit of the hair of the dog that bit you there. And you have to be mindful of that dynamic, too.
Was there a surprise that Wall Street didn't come around though, that it didn't listen to the message, it didn't listen to reason, that they had such a tin ear when it came to bonuses?
That did not surprise me. [laughter]
Did it surprise others in the administration? I mean, Obama comes into this thing saying, We're going to work together. I can bring anybody around a table with me and I can convince them that the better-for-all is the better for the individual.
… For those who were less familiar with the compensation practices of Wall Street -- and not everybody knows about that sort of thing and the kind of granularity that became important -- yeah, they were surprised that after we saved their bacon, they ate our lunch. [laughter] It just seemed crazy.
To me, it was like, well, you know, that's what they do.
And did we lose an opportunity? Did we lose the leverage to use the power, that the banks were up against the ropes and they knew that we were saving their butts.
I think this line of critique has been overplayed. Yes, we lost an opportunity in the sense that we should have insisted on more lending back into the economy as a contingency on getting some of those bailout funds. But that's actually a relatively small part of the puzzle.
What we got was financial reform. And what we should insist on going forward as that reform is still being crafted and implemented, is that it be a very serious and real level of oversight. The lessons of the financial meltdown of 2007 and 2008, it's not clear yet whether they've been learned or not. It's like what is the Mao saying about the French Revolution? It's too soon to tell. [laughter]
It's a matter of whether we come out of this with a level of oversight that is strong enough to contain the inherent instability in these financial markets. And we're fighting tooth and nail around the implementation of Dodd-Frank on those very issues.
"The FRONTLINE Interviews" tell the story of history in the making. Produced in collaboration with Duke University’s Rutherfurd Living History Program. Learn more...