The way they dealt with -- we talk a lot with Democrats as well as Republicans about the pressure that they did or did not bring on the banks. Would it have changed the dynamics of the relationship with the banks if they had taken some harsher sort of decisions and tactics?
Well, to this day, we have not held those responsible for the decisions that they made and for the position that they put this country in, our economy, we -- first of all, they need to be held responsible, and then ultimately -- you know, I'm offended by the fact that the executives in so many examples even walked away with the bonuses ultimately, that [ranking member on the House Financial Services Committee Rep.] Barney Frank [D-Mass.] and Secretary [of the Treasury Tim] Geithner, they were working behind the scenes to make sure that those executives still got the bonuses. And you tell that to hardworking Americans all across this country, you know, they have a right to be offended, to be frustrated by what they saw happen.
Those banks needed to be held accountable. And I believe that if they would have been -- if we would have handled that differently, if they would have been forced to accept the situation in which they found themselves, and the decisions that they had made that found themselves, they would have had to make -- they would have, first of all, had to make different decisions. And I also believe that maybe it would have resulted in there being a change in the banking structure so we don't have just a small number of banks that are controlling so much of the banking in America. I'm a big believer in our independent and our community banks. And one of the unfortunate realities of where we find ourselves today is that independent community banks are being -- you know, the heavy hand of the federal government now has come down on them. And these are the guys, these are the bankers that are in the communities, know the communities, have the relationships, know when it's appropriate to take a risk. And I'm very concerned about their future over the next three to five years. How do they survive? And at the same time, the big banks are continuing to -- you know, they have the relationships. They have the money to handle the new regulations or come down here and try to get a change here or there that would protect their interest.
But yet there's a view out in Main Street -- I know you did, but did the administration completely understand the anger of Main Street that the banks got their bailouts but Main Street didn't?
Look, not only did they understand it, the president was running in the campaign in the fall of 2008. The president is really upset about that subject. We're having discussions about the subject of how tough can we be? What conditions can we impose? We saved these guys' bacon, and for them to turn around and sort of flout the rules or say, "We don't want you to re-regulate us," or, "We don't want to have any special responsibilities," is outrageous, is unbelievable.
But the thing you've got to remember is, we're taking over. and much of the TARP [Troubled Asset Relief Program] money is already out the door. They already have that money. And so we're constantly fighting the battle of trying to impose conditions for the use of TARP money that they already got at the end of the last administration.
Now, if you look at the auto companies, I think here is an example where, in order to get money, they are forced to satisfy some really brutal conditions. They are forced through bankruptcy. They have to dramatically cut their costs. They fire a large group of the senior management of these companies, and they are able to turn that around. Those are the kind of conditions that we're in some sense always wanting to apply. And the two things that were constantly in tension with that were [that with] money that was already out, it's hard to attach the conditions to, and going so far that you blow up the financial system would bring about exactly the thing we are trying to avoid.
So I don't know that every single thing is always exactly striking the right balance, but I do know that that wasn't lost on people at the time.
Volcker at some point he said that he wished that the crisis had gone on longer because more change could have occurred. ... This question of were there opportunities missed early on to leverage the power that the government had because they were saving the butts, basically, of the banks to make them do some things that in fact politically would have certainly been more helpful down the line and perhaps would have moved the system in ways that would be productive. Was there debate about that?
... In terms of wishing that the crisis had gone on longer, I can't imagine anyone actually really wished the crisis would go on longer, because while the house was on fire, we were losing millions of jobs, and it's all about stopping that as quickly as you can. That's what we were focused on.
This question about were we too easy on the banks is one I find a bit frustrating. ... Of the 15 largest financial institutions in this country before the crisis, only nine exist today as independent entities. The institutions that took the most risk, that got into the most trouble, are basically gone, whether that's Lehman Brothers, Washington Mutual, Bear Stearns.
AIG still exists, but in a very different form. Fannie Mae, Freddie Mac -- there are others. Wachovia, Merrill Lynch. These were big institutions that took big risks. They don't exist in the form that they did before.
So the notion that we saved, bailed out all these institutions I don't think really is right.
… Was there ever a feeling in the White House that more could have been done PR-wise to maybe take a slap at the banks here and there a little bit more so it didn't look like you were in bed. Because it seems like the reputation has been gotten that the administration didn't slap back.
It's funny you should say that because I remember people from the business community arguing that we're way too harsh and critical of them.
I mean, once I went on TV, when I was working for the White House, and I was talking about credit card reform. I was really talking about how we needed to make this more transparent for people, and there were some deceptive practices. I got back to my office and my phone rang, and it was one of the most prominent bankers on Wall Street -- I won't name names -- just reaming me out and saying how this administration is so anti-business.
So I find it curious to hear from one side now that we were so much in bed with these folks. That's certainly not the way they felt.
... 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. ...
So later in March, March 27 is this famous meeting of all the CEOs coming to Washington and meeting with the president. And the president makes a pretty stark sort of statement in the front, saying, "We're the only ones between you and the pitchforks." Were you involved in that meeting?
So you were there. What was it like? Were the bankers in some ways afraid of exactly what might happen? Give us the feeling of that meeting and the lessons learned on both sides from it.
I think in general in this period, I think the president by that point was in a tough position, right, because the banks had been a part of why we'd gotten into the mess that we were in. We were certainly having to do the Federal Reserve and the TARP, all of that, in the Bush administration; we'd had to do just extraordinary things. And there's a lot of anger at the financial system when the president comes into office.
And frankly, he was angry at the banks, too. I mean, look, he had all these things he wanted to do with health care and education and energy, and he was having to clean up this god-awful mess that had been created by a financial system that had absolutely gone a little bit crazy.
And to have bankers come and whine about "How can you be doing these things to us?," and whatever, that's definitely going to try anyone's patience. And I think the president was trying to convey that: "Listen, we understand the financial system is really important, and we understand no matter how much we want to hold our noses, we have to do this, because I care about the rest of the economy, and it's going to go down if you guys go down. But don't give me this junk of your life's so hard, because, for heaven's sakes, you're the reason we're in this mess."
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.
Your expert opinion as an economist as well as someone who saw it firsthand was that there was little alternative, that basically the path taken was what?
I think, number one, we, the Obama administration, attempted to put in as many tough conditions as we could, conditional on the view you can't put in so much that the whole thing still is going to fall apart, that people are going to try everything they can not to take part and take a risk that the system breaks down, because then the economy would be even worse. But that said, all pressures, in my view, we needed to and continue to need to put as much pressure to hold people accountable for the losses as we can.
So when this comes to a head in my mind is when the AIG guys, the very group that blew up and threatened to destroy the entire financial system, comes back and gets a bonus. And they hold up the firm, and they say, "Well, we're the only ones that know how to keep this from blowing up, so you give us our bonuses, or else we will blow up the world." And at that point somebody asked me, on the news, "Do you think they deserve a performance bonus?," and my answer was: "These guys deserve the Nobel Prize for evil. They don't deserve a bonus."
And they got back and they said, "You know, that was an overstatement." And yes, it was probably an overstatement. They at least deserved a nomination for the Nobel Prize for evil. And that, we're just dealing with that all the way around. It's not accurate and it's not fair to say that the administration just handed out money, didn't impose conditions and didn't think about it. That's not accurate. That's not true.
So in some ways, is the White House holding its nose as it is basically saving the asses of these guys?
Yeah, 100 percent the White House is holding its nose as it's trying to save these guys' bacon. And I think that was true from the previous administration as well, though I do wish that they had tougher conditions put on the people who got the money when they first did it. I think, to their credit, both the previous administration and the Obama administration are trying to do only that which is necessary to prevent a collapse, and they are absolutely not trying to aggrandize these guys.
Was there a feeling that the clock was ticking down and the amount of leverage was going to be lost and maybe we can do something about compensation?
There was certainly some discussion of that, I think. Again, I mean, I think both the president and certainly the economics team, we are, for all of the caricatures in the press, we are people that tend to believe in markets. We're happy to intervene in markets when we think somehow the private sector isn't working well. But this -- the thought that the government should be micromanaging pay and things like that, that's something that I think most of the economics team, that's not something we'd normally think. I don't think the government should be going to Google and saying, "Here's how you should be paying people." Usually market forces are the things that determine that.
So I think we certainly are cognizant of being good stewards of the public's money and making sure that we got paid back any of the TARP money and stuff like that. But I think this question of, "Gee, we've got them over the barrel; what can we force them to do?," I think is not good economics, and it's something that I think there was a lot of resistance to that kind of --
But you have the reputation of being someone that was in the administration who was fighting for more government intervention in the system to make it better.
So I was certainly fighting for what I described as the definitive cleanup. I wanted to make sure that those financial institutions were well capitalized, that they weren't hobbled going forward, because I wanted them to be strong enough to lend.
And that was certainly -- that was what I was interested in. And if it took more government action to do that, that was one thing, right? But it was never [that] I thought the government could do it better. It was, how do we make these institutions stronger, more stable, more secure, so that they feel able and willing to lend?
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.
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