Obama's Handling of the Crisis

... You were on the crisis management team. ... What did that mean?

We were asked to put together the financial stability plan. What were we going to do to stabilize the banking system, reopen credit markets, and get credit flowing again? Remember, at the time markets were falling hundreds of points a day. If you step back, the overwhelming objective was to stabilize the economy, turn the economy around. ...

Many people were saying we're headed toward the second Great Depression, and that was a very real fear and a real possibility. So our piece of it was how do you stabilize the financial system? Not because anyone had any great love for banks. It was all about making sure that we stopped things from going off a cliff. ...

... The public's perception is often very different than the realities on the ground. Your team and the president need to define the programs, the answers to questions in a way that the confidence levels remain high so that you don't go down on the slope. ...

It was tremendously complex, and each individual problem was complex in its own right. The combination of them was kind of like three-dimensional chess. ...

Early on, the president said, "Look, we are going to have to make some very difficult, unpopular decisions, but we're going to do things in a way that we think has the best chance of success, even if those decisions are going to be unpopular."

So we -- and this includes the secretary and others -- started to figure out what each of the necessary elements was going to be and make sure that each of them worked with the others.

One of the great challenges we have in all this has been explaining what we did and why we did it. I've reflected on that, tried to figure out why is it so difficult, and the only thing I can come up with is that there's no magic bullet, there's no silver bullet, there's no one big thing we can point to and say, "We did X, and that's what turned things around."

It actually was a series of programs and plans and policies designed to feed on each other and reinforce confidence across the board.

For instance, we had a plan to get capital back into the banks. It involved the stress tests and a capital backstop that we made available. We had a plan to deal with reopening credit markets. Something on the order of 40 or 50 percent of all credit before '08 was generated by these markets. The third thing we had to focus on was how do we deal with the legacy assets, the old loans that were on the books and clogging up the system.

If we left out any of those three, our judgment was that the whole plan would fail. So you had to have detailed plans to deal with the banks, you had to have detailed plans to deal with reopening credit markets, and detailed plans to deal with the legacy assets.

We announced the broad outlines of our plan in I think the second week of February [2009], and continued to fill in details each week after that until the markets finally saw all the details and saw how it all fit together. I think when the markets realized that, confidence began to come back.

You can look at price charts of various instruments that indicate the health of the system, and you can see the announcement effect each time we put out details, how things would bounce off of that. That confidence started to feed on itself, and at a certain point it took hold. That's when the fever broke.

... What do you think the public needs to hear from [the president] to better understand why so much was done that was important? ... What do you think he has to accomplish out there on the campaign?

... I think no one's better at this than the president. ... I think he has a lot to be proud of with respect to what he accomplished in the first handful of years of this administration. ...

The challenge is it is a very hard message to deliver, that we've accomplished all this. It's not nearly as much as we wanted to accomplish with respect to employment, although that's heading in the right direction, but without us, it would have been so much worse.

[Ranking member of the House Financial Services Committee] Barney Frank [D-Mass.] has that wonderful saying, that "It would have been worse without me" is not a great bumper sticker. It's true. You wouldn't get out there, I don't think, and say, "Independent studies suggest that there would have been 8.5 million fewer jobs."

It may be true and highly relevant, but people don't care about that. They're like, I don't have a job, or my brother doesn't have a job, or my neighbor doesn't have a job. So it is a hard message to deliver. ...

... Any part of this story that you think is essential to understand if you want to understand what you guys went through, what was accomplished?

... Some of the decisions that we had to make, that the president had to make, the secretary had to make, that were deeply unpopular and ... that people are to this day deeply angry about, those decisions were only made in the interest of what's best for the economy, Main Street, businesses, households. Everything we did, ... we viewed it through that prism.

I think if we could go back and correct some things with hindsight, I wish we had figured out a better way to communicate that that's what was driving us. ...

... June 2009, the president is going to announce a package of reforms that eventually becomes the Dodd-Frank [Wall Street Reform and Consumer Protection] Act. Coming up to that point, you believe the FDIC is going to have resolution authority.

Yes.

What happened there?

We got blindsided.

Again?

It was the story of my life.

Actually, the president asked me to come to a meeting with him and Tim and Larry to talk about the AIG bonuses. This was probably a couple months before. There was all this adverse publicity about these huge bonuses being paid out.

What was the president saying in the meeting?

He was clearly upset. He was really concerned that this had happened. ...

I think the whole country was upset about that.

Yeah, and rightfully so. So I told him at that meeting, "You need resolution authority for non-banks like AIG because with our resolution authority, we can repudiate these employment contracts. ... You can fire them. You can pay what you want to pay. You can figure out who you need to keep and who you don't, but you have no legal obligation to give them their jobs or pay them their bonuses."

The president liked that, and I think that was really the start of serious decisions about including resolution authority as part of the package of reforms that the White House would request.

Where were Geithner and Summers on that?

They were agreeing, and the early iterations of the white paper had basically an FDIC resolution mechanism in it.

It got changed. We didn't see the final draft until that meeting. We got it basically when the press got it.

In June?

Yeah, and I was flabbergasted when I saw it was not the FDIC process. It was a bailout process.

I was being put on the spot. I was asked to appear with all the regulators at a big press conference unveiling this thing. I had not seen it beforehand. I didn't agree with what was in it.

What was in it that upset you?

First of all, it didn't make the FDIC the resolution entity. Basically the Treasury Department would run it and decide who was going to be the resolver and all that. And I didn't really care for the non-banks, but for the banks and the bank holding company, it was really important for us to get that.

Because what good does it do me to have Citibank if somebody else has got the Citi holding company? It doesn't. They're all intertwined. So that was a problem.

But it was more. We had pushed for very tight prohibitions on bailouts. We didn't want any more one-off bailouts, and that language was lost. And there was a lot of flexibility to do what we thought were essentially bailouts in capital investments and all the things that we think in retrospect would have been better to do something else.

So they got unhappy with me. Tim got unhappy with me. I didn't say anything at that point, but when Barney Frank asked me to testify later about the bill, I gave him my honest views.

I thought there was too much flexibility for bailout authority, and both the House and the Senate ended up rewriting the resolution authority to make it more aligned with what we had suggested. So we ended up winning that battle.

But I was just blindsided. The president didn't know. The president thought that everybody had seen this thing and signed off on it. I talked to Rahm Emanuel afterwards. They had no idea that Treasury hadn't shown it to us until that meeting. ...

As far as you could tell, the president understood the issues?

That's right. I think he wanted to end bailouts. He wanted a bankruptcy-like resolution process that would impose accountability. I think that's what he wanted. I don't think that's what he got in the white paper that was unveiled that day.

But you'd have to get into the weeds to really pick up on how the thing had been restructured to really allow continued bailouts, which was unfortunate. It was not what the president wanted. ...

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.

Scary 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.

You had front row seats to a very important part of our history. Describe how you saw this president changed, what he learned, how he learned things, and how he changed over the time that you worked for him.

I wish I could give you a more sexy answer, but I don't think he really has changed all that much. It may be because, at root he's basically just a very smart pragmatist. I think he has a great capacity to take in information and recognize the lay of the land and what's possible, what isn't.

So if he's changed, it's that he recognizes just how much more narrow the partisan politics of today's Washington have made his options. In December 2008, he was very reasonably thinking big and imagining ways in which this crisis could be an opportunity for even transformative economic policy on investments.

In 2012, with the level of partisan dysfunction, he's got to realize something else. But the core of the man, to me, I don't think he's changed all that much. …

It sounds like this president more than any other president ever was involved with the economic debates daily.

Yes.

But if he had had other sort of views brought in, what do you think the result would have been?

I don't think the result or the outcome of policies would have been different, but it perhaps would have been better if the president had been exposed to more knock-down, real intense debates between economists with different viewpoints.

The way these things tend to work, and not just in this White House, is that you have those discussions and you sort of bring them to the president as "We have concluded." Or maybe there's some argument between this person and that person. In this case, perhaps there could have been more argumentation of that type in front of the president. But nothing was slow-walked.

To give you an example, once [I was] meeting with the president and a bunch of liberal economists. I'm not going to tell you the content of the meeting because that would be inappropriate. But I think the president learned something in that meeting that he wouldn't have if his team sort of filtered it and took it to him that way.

So if I had a chance to do some of this over again, I don't know anyone would listen to me, but I think I probably would have pushed to expose the president to more debates from different parties.

... Overall, how do you rate the decisions by the administration, by Geithner's Treasury Department and Bernanke's Fed?

If you judge the bailout by the fact that the banking system has survived, most of it, and that it's back paying bonuses, then you'd say it was a success.

If you judge the bailout on the criteria of has the banking system returned to lending, has the American economy been returned to health, has the problem of "too big to fail" banks been resolved, has the problem of non-transparency been resolved, you have to say we failed.

If you ask the question is the problem of moral hazard worse, you have to say we failed even more. Has the problem of the undermining of our democratic processes [been rescued]? You have to say we failed. ...