Should Obama Have Been Tougher on Banks?

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.

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?

Mm-hmm.

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."

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?

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.