Confidence Men Part 10

Cantwell was incensed. In her mind, Paulson's tough-love approach with WaMu was politically motivated. Allowing the bank to fail gave lawmakers a taste of the tumult that accompanied bankruptcy in the "too big to fail" era. She felt it was a ploy, albeit drastic, to sell TARP to Congress.

"They were basically picking winners and losers," she'd say later about the Paulson-Bernanke-Geithner trio. "They blew up WaMu . . . I'm not saying WaMu did everything right. But I'm listening to Jamie Dimon talk about how he's going to make 27 percent profit in one year and basically take all the good a.s.sets and leave all the bad a.s.sets to be cleaned up. They won't even offer to pay retirement benefits [to WaMu employees]. The whole thing is just a catastrophe."

But now she'd get one of that trio at the hearing table, with his nomination on the line.

Summers's rule for Geithner, "don't admit to mistakes," was the first of two. The other rule, in answering questions, was "don't make policy."

Cantwell's goal was to undercut the latter proviso. She was displeased, as were several Democratic leaders, with the choice of Geithner and Summers. "The best tactic was to get them to say [in confirmation hearings] what they were willing to support, so that we could hold their feet to the fire [later]," she said, adding that she expected Geithner and Summers eventually to cave in to Wall Street, at which point she could start "raising h.e.l.l about their lack of backbone."

In concert with a cadre of progressives, Cantwell began her campaign to use the confirmation hearings to shape financial reform. When her turn came around, she grilled Geithner on exactly what he was planning to do to reregulate the financial industry, pressing him for specifics that left other committee members checking their briefing materials.

On her second turn, an hour later, she moved in for the kill. Cantwell noted that the previous fall, after the market's meltdown, former SEC chairman Arthur Levitt admitted that the Commodity Futures Modernization Act, which Clinton-era regulators pushed through in 2000 to prevent the regulation of derivatives-over the objections of thenCommodities Futures Trading Commission chairwoman Brooksley Born-"was a mistake." In fact, Summers, who was at the conference where Levitt made that admission, had followed Levitt out the door, chiding him, "You should never have said she (Born) was right!"

Now Cantwell pressed Geithner.

CANTWELL: I want to go back to the regulatory reform issue, because it's so important. A former SEC chairman, Mr. Levitt, basically describes the CMFA, the credit-I mean the Commodities [sic] Futures Modernization Act-as-at least in the way he was talking about derivatives and credit default swaps-as a failure. Would you agree?

GEITHNER: Senator, I-a lot-a lot can . . .

CANTWELL: I'm sorry. I'm sorry. He used the word "mistake."

GEITHNER: It was a mistake? I don't think I agree with that, but I do agree that we're going to have to take a very careful look at the whole comprehensive framework of requirements, regulations, constraints, and incentives that exist for the inst.i.tutions that play a central role in those markets.

We want to make sure that the standardized part of those markets moves into a central clearinghouse and onto exchanges as quickly as possible.

Clearinghouses and exchanges. No one seemed to take much note, and Cantwell pressed forward to her next question.

Later that afternoon, in his temporary office at the Treasury Department, Gary Gensler trolled the newswires about the Geithner hearings.

Gensler knew that the White House would put all its weight behind the confirmation of Geithner and Summers. Their nominations might be called "too big to fail" in a time of crisis. For Gensler, only limited political capital would be expended.

Once a top economic adviser to Hillary Clinton, Gensler had been hustling to get a key spot on the Obama team since a few days after Clinton's concession in June 2008. If nothing else, since then, Gensler had been scoring high marks for indefatigable effort, having worked to raise money for Obama on Wall Street, gathered endors.e.m.e.nts from nearly three hundred CEOs, and, after the election, rushed to Chicago to help in any way he could with the transition.

Beyond his long history with Hillary, Gensler's problem was he carried the scarlet letters "GS" on his chest: Goldman Sachs. Just as academia had watched Larry Summers rise meteorically through its ranks, the banking industry had seen in Gensler its own shooting star. By age thirty, after an MBA from Wharton, he'd made partner at Goldman, one of the youngest in the firm's history. His eighteen-year career at the firm would wrap up by the time he was forty, as co-head of all Goldman's financial operations. That's when, in 1997, his longtime mentor, Treasury secretary Bob Rubin, persuaded him to come to Washington as, first, a.s.sistant secretary for financial markets, then undersecretary of domestic finance-jobs that oversaw the U.S. financial markets, government-sponsored enterprises such as Fannie and Freddie, federal lending, and the government's fiscal affairs.

One notch above Gensler, throughout, was Larry Summers. Down the hall, as a peer, was Tim Geithner. But Gensler had experience, having actually run the profit-gulping machinery of Goldman, that neither man could match. So, in 1998, when a Greenwich, Connecticut, hedge fund called Long-Term Capital Management-boasting two n.o.bel Prize winners-found itself on the wrong side of gargantuan derivatives bets on foreign currencies, it was Gensler who raced from a Rosh Hashanah dinner in Washington to get on a plane. What he found, of course, was a first harbinger of coming disasters. He called Rubin, then Treasury secretary, to tell him that the exposure of the rest of Wall Street to losses from LTCM could collapse credit markets. Soon, Wall Street t.i.tans gathered and agreed to share losses from LTCM and avert a widening crisis.

But Gensler, also involved in the late-1990s actions undercutting Gla.s.s-Steagall and the regulation of derivatives, was, by 2002, moving against the Clintonites' antiregulatory stance. Already independently wealthy, he a.s.sisted a longtime friend, Maryland senator Paul Sarbanes, in constructing what would become the Sarbanes-Oxley Act, legislation-reviled across corporate America-that mandated rigor and CEO accountability in the public filing for companies and heavy fines in the event of failure.

This long record of public service and enthusiastic recent efforts on behalf of Obama was just enough to boost Gensler, the son of a vending machine operator from Baltimore, to a modest slot on the ladder of appointments: chairman of the Commodity Futures Trading Commission, or CFTC.

The commission, originally created in 1974, was designed to take over responsibilities housed in the Department of Agriculture to regulate the trading of futures and options on a wide array of commodities, from cotton, corn, and wheat to meats and precious metals. The trading of futures contracts-which would eventually grow into the vast derivatives market of financial instruments-has a long history, with citations about the future delivery of products at a certain price dating back to Aristotle. In nineteenth-century America, when shortages or surpluses of agricultural products caused chaotic fluctuations in price, Chicago businessmen developed a market that allowed grain merchants to trade "cash forward" or "to arrive" contracts that they could use to insulate, or hedge, themselves against price changes. The problem with such contracts, which at the time were often handled as private, two-party agreements, is that they wouldn't be honored by a buyer or a seller if a price fluctuation were not to their liking. The Chicago Board of Trade was formed in 1848 to be an open, transparent market where such contracts could be traded and legally honored, and soon the contracts-which derived their value from some underlying a.s.set, such as bales of wheat-were themselves standardized.

While futures exchanges such as the Chicago Board of Trade established transparent and orderly platforms for trading these contracts, a separate issue of later "clearing" the trades (much in the way parties at a t.i.tle company meet to "close" on the sale of a house) was taken up, starting in 1883, by clearinghouses, for-profit firms that then proliferated. Clearinghouses (or, in a few instances, the exchanges themselves) stepped briskly into a natural role, a.s.suming, for a fee, the "risk" of a trade by first ensuring that the parties to a transaction had enough capital-money that they'd often have to post with the clearinghouse-to cover any foreseeable outcome on the trading floor.

This structure, which stayed sound and largely unchanged for nearly a century-even with some wild panics and swings in the prices of everything from gold to pork bellies-began to change in the 1970s with the development of financial futures. These allowed the trading of contracts on future fluctuations in interest rates. This market grew in fast evolutionary leaps for two decades, spreading to all manner of financial products, as the CFTC, built to deal with futures on the bales or barrels that eventually got delivered to someone, at a designated price, struggled to keep up.

A showdown of sorts occurred in 1998, when the CFTC's commissioner, Brooksley Born, said that something must be done to better regulate that already sizable world of financial derivatives. Born, once a pioneer in her own right as the first female editor of the Stanford Law Review, found herself across the table from a group of unsympathetic men: virtually every senior financial figure or regulator of that era, from Rubin and Summers to Alan Greenspan and then-SEC chairman Arthur Levitt. The financial services industry had been fighting with strength and success for more than a decade to keep their flash-fire terrain of financial derivatives separate from the rules-such as collateral and clearing requirements or standardized contracts and open trading exchanges-that governed the trading of sleepy "tangible" products. As the Internet was exploding, the financial services industry was developing its own virtual world of bets and swaps and hedges on the future prices of anything that could be stamped as having financial value, from a piece of paper to a promise. Born was unconvinced by their pitch of having created a brave new world. A financial product was still a product, she a.s.serted, every bit as sensitive to issues of price discovery, fair dealing, credit and collateral, shortages, gluts, and market panics as were silver or soybeans. Larry Summers, leading a regulatory vanguard of men, disagreed and was soon on the phone, from his office as deputy Treasury secretary, "with thirteen bankers." He brusquely lectured Born, telling her that her ideas for regulating financial derivatives were "going to cause the worst financial crisis since the end of World War Two!" The next meeting was face-to-face with all the men-including the trio of Greenspan, Rubin, and Summers-who said she must cease and desist. They said a golden age was dawning, in which sophisticated investment houses had created new, ingenious ways to manage risk. Born stared them down, quiet, sober, and unmoved. She'd spent her whole life as the lone woman in rooms of supremely confident men; she wouldn't budge. After the meeting, the Clinton administration's regulatory barons, egged on by Wall Street, went to Congress and had her agency neutered.

What followed was a Cambrian explosion of derivatives traded OTC, or "over the counter," in the dark pools managed by the investment banks, large commercial banks, and related financial firms. The derivatives could be crafted-by teams of beautifully compensated lawyers-to fit the needs of any company's balance sheet or the performance expectations of any fund, and then sold off to others as "investments," opening the way for enormous leverage and speculation to flow, often unwittingly, into the financial system. The firms were the matchmakers, finding one party whose need fit another's desire, and then charging each counterparty a fortune.

Gensler was now sitting in Born's chair-his second day on the job-though, before confirmation, he'd be in a temporary office inside Treasury. He understood as well as anyone in government the ins and outs of what they'd done in the late 1990s, and what drove the derivatives bonanza. Gensler always felt a touch of compet.i.tiveness with Geithner. They were friends who'd come up together under Clinton, but Geithner had never been an undersecretary, and if Hillary had won, Gensler might now have been in Geithner's shoes. What's more, after all his hustling, a hard fact-noted in the transition team's secret blueprint for regulatory reform-was the new administration's stance on the CFTC: that it should be folded into the larger SEC.

In short, Gensler was hustling for a job that had been slated for termination. And the displeasure that Maria Cantwell voiced to the administration weeks before about the nomination of Geithner was even more acute on the subject of Gensler, a Goldman Sachs alumnus who would now be overseeing the derivatives market that Goldman had so profitably, and disastrously, gamed.

Then something caught Gensler's eye: a pa.s.sing reference in a wire report about how Geithner had said, in response to Cantwell, that he was fully supportive of moving the standard part of those derivatives markets onto central clearinghouses and exchanges as soon as possible.

Gensler did a double take. Exchanges? Clearinghouses were in the regulatory blueprint they'd come up with during the transition. But not exchanges.

What Gensler knew was that Wall Street felt it could manage the "central clearing" that Geithner had mentioned that morning. Customers, or end users, trading financial derivatives would have to turn to clearinghouses, just like traders and hedgers of traditional commodities, to settle transactions and trading positions at day's end. This would mean that the issue of collateral would come up, especially if some counterparty were dangerously exposed on the wrong side of a trade, derivatives contract, or swap. This ensured a bustling growth curve for clearinghouses, accountants, lawyers, and the like. Though the clearinghouses would still operate in the dark pool, regulators would have a chance to nose around in their books to spot a perilous exposure that could melt the financial system, the sort of "systemic risk" Gensler found that day in 1998 when he visited Long-Term Capital Management.

But to force financial derivatives onto exchanges? Though it sounded innocuous, a push to standardize derivatives and force them onto open trading platforms is what Wall Street secretly, and rightly, feared.

If the particulars and prices of derivatives contracts and trades were posted like transactions on the New York Stock Exchange, it would destroy the fat margins banks made charging fees on these derivatives deals. As it stood now, only the middleman banks knew both sides of any deal, and this information advantage was powerful. Where buyer and seller were blind, the banks ruled, and they profited wildly-estimated to generate nearly $40 billion in profits a year-from their stranglehold on the derivatives cartel. The market for the most lucrative, customized over-the-counter derivatives was controlled by five large banks.

This opaque arrangement, the very opposite of an "efficient market," is what made derivatives so profitable-which cartels often are-and dangerous. It was also the information advantage, the financial equivalent of cla.s.sified information, that prevented regulators, and the wider marketplace, from seeing the depth and nature of various banks' exposure. This information could well have laid bare the ballooning problem of mismanaged risk, which in turn could have led to preemptive actions that would have headed off the financial crisis. Instead, invisible risk grew, impelling Warren Buffett to call derivatives "financial weapons of ma.s.s destruction." Like their battlefield equivalent, they combined secrecy with terrible destructive capability. Forced to be standardized and placed on exchanges, derivatives would soon be conventional products and Wall Street would lose its most prized profit center.

Gensler sat at his desk wondering what to do. Geithner and Summers, like many seasoned regulators and economists of this era, often appeared to understand the financial markets better than they actually did.

Did Geithner realize he'd just declared war on Wall Street? Even if it hadn't been picked up in the press, it was certainly something the lobbyists for the big banks wouldn't miss.

He walked a few doors down to Geithner's office.

"Tim, got a moment?"

In the late 1990s, Geithner would sometimes double-check his grasp of financial market intricacies against Gensler's long experience with an "oh, by the way" nonchalance.

Now it was Gensler with the question.

Geithner looked up: "Yeah, what's up?"

"I saw a wire story where you had that give-and-take with Cantwell. On the derivatives, you said you wanted derivatives in clearinghouses and trading on exchanges. Is that right?"

Geithner nodded. "Yeah."

"Great. I just wanted to make sure you said both, because I'll need to say the same thing."

"That's what I said," Geithner replied, and then turned back to his work.

Back in her office in the Dirksen Senate Office Building, Maria Cantwell huddled with her top aide on financial reform. Leaving the confirmation hearing that morning, he'd turned to her and said, "Did you hear what he said-he said clearing and trading on exchanges. That's huge." Cantwell was perplexed, unaware of the distinction and not sure she'd heard the word "exchanges" in any event.

Now the two of them looked over the transcript. There it was: "exchanges." Her aide then briefed Cantwell on the nuances of what it meant to try to standardize the customized world of derivatives and push them onto transparent trading platforms. It would kill Wall Street's margins. The sunlight of exchanges would cut out the middleman: firms could simply post their "ask" on some standardized derivatives contract-just like someone buying or selling stock-and see what kind of offer they got. They could compare prices and take the lowest one. The handcrafted derivatives product itself would be demystified and out in public, which would kill some of its less-than-pure appeal to clever corporate treasurers or fund managers.

Cantwell immediately got it. The next day, as the Finance Committee was about to convene to vote on whether they would recommend Geithner's confirmation to the full Senate, she called up Geithner's office.

"Yesterday, when you were testifying, did you really mean to say you want to push derivatives onto exchanges?" she asked.

Geithner paused. "No, actually I didn't," he said sheepishly.

Cantwell laughed under her breath. "Well, at least you're honest-I respect that."

Of course, she had Geithner testifying to mandatory exchanges under oath, as a condition of his confirmation, and now she could press Gensler to say the same when his turn came.

The Finance Committee hearing soon started. Though Baucus had cut his deal with a wildly popular president, some of the members couldn't resist speaking their minds.

"I am disappointed that we are even voting on this," said Senator Michael Enzi, the Wyoming Republican who, in general, had good relationships across the aisle. "In previous years, nominees who made less serious errors in their taxes than this nominee have been forced to withdraw."

Even Kent Conrad said that he would have voted against Geithner in normal times, but "these are not normal times."

So, in the latest twist of an improbable journey, Tim Geithner, after many disastrous instances of commission and omission in both the Clinton Treasury and the New York Fed, would now be saved from the ignominy of a failed nomination by the crisis itself.

As for Maria Cantwell, she voted yes as well-helping to recommend Geithner's confirmation to the full Senate by a vote of 18 to 5-because he admitted to a mistake. Not on the big issues of altering regulation in the late 1990s, which had helped unleash financial demons, but on a smaller issue of not knowing what he was saying under oath.

Less than a week into office, Barack Obama knew he had to make to a decision. The promise he'd made to Peter Orszag and others about fundamental health care reform being his top priority for year one needed to be reexamined.

The earth was shifting quickly beneath the White House, as it was beneath the feet of every American. Figures showed that the U.S. economy had lost nearly six hundred thousand jobs in December. January was looking just as bad.

It was an emergency the weight of which Obama felt acutely from the minute he first stepped into the Oval Office. The best-laid plans of a candidate antic.i.p.ating victory, or even a president-elect, now needed to be seen through the new eyes of a sitting U.S. president in the midst of a worsening crisis. The world looked different from Pennsylvania Avenue.

With negotiations on the stimulus under way, and pa.s.sage of something resembling the administration's package looking like a foregone conclusion, a meeting was set in the Roosevelt Room to discuss whether health care would still be job one.

And if not health care, then what?

There were two primary factions: the camp in favor of leading with financial regulatory reform, considering that a financial collapse would trigger economic catastrophe and that a full recovery, and sustained prosperity, could be possible only if the stimulus package were matched with a refashioned financial system; and the camp in favor of leading with health care reform, the multigenerational goal of liberals, and key to both balancing the federal budget and restoring America's middle cla.s.s. There was also a smaller, third camp, led by Carol Browner, the EPA chief under Clinton and now Obama's energy and environmental czar, in favor of leading with a bold environmental agenda, especially in attacking global warming, integrated with the building of a sustainable energy future.

Pressing the issue was a matter of the federal budget. By early February, Obama needed to decide what to include in his 2010 fiscal year budget. Whatever decisions he made, they would need to be reflected in the budget, a signal of the administration's policy intentions to Congress and the wider public.

But two of Obama's main voices on health care, senior adviser Pete Rouse and Tom Daschle, Obama's Health and Human Services designee, would not be in attendance. Rouse, though a Colby College graduate, had been born in New Haven and was an avid Yale hockey fan. He was missing the meeting to see his team play, his single concession to something other than work.

Like any good aide, Rouse did a little recon on what Obama could expect on health care.

"Mr. President, the deck is stacked against you."

He was referring to the people who would be there-princ.i.p.ally the economic team, several of whom had been on the fence about whether to begin with a health care battle. Now they were in concert: given the current economic crisis, it was a bridge too far.

Tom Daschle, the prime proponent of making health care reform a first-year mission, was unable to make it because his brother, Greg, was ill with brain cancer-a strain similar to the one afflicting Ted Kennedy. Daschle had been at the Duke University Hospital for the last few days, including Inauguration Day, sitting in the hospital room as Obama delivered his speech.

With Daschle out of town, Obama had lost more than an adviser. He'd lost the most ardent advocate of pursuing health care reform as quickly as possible.

In his stead was an array of economic advisers who were there to discuss how the fledgling president could hedge his plan to lead with health care.

The specific issue was over what sort of placeholder the president should put in his proposed budget for health care reform. Should it be left blank, or undesignated; should it be designated as a "middle ground" of $650 billion, or should it be a trillion? "Mr. President, you know I support health care reform, I've been pa.s.sionate about it for years," Peter Orszag said, appealing to sensibilities he and Obama had long shared. "But until the deficit is below three percent of GDP, it may be fiscally problematic."

This was particularly difficult for Orszag, who'd all but made health care reform in year one a precondition for his leaving CBO. But one of the reasons Orszag was always drawn to fundamental health care reform was budgetary: he believed that cost saving, using evidence-based breakthroughs and comparative effectiveness, would drive down health care expenditures and save the federal budget. Like fighting a war while cutting taxes, however, launching a new huge social program during a recession might be considered fiscally imprudent. The economic downturn was already prompting a decrease in tax receipts, while costs, for unemployment insurance and related programs, were skyrocketing. This meant that even without health care reform, albeit an essential repair for the country but not yet a day-to-day crisis, the deficit was due to rise.

Summers and Geithner echoed this concern, but Obama cut in.

"Who here does think we should include health care in the budget?" he asked.

Mark Childress, Daschle's chief of staff, meekly raised his hand.

"Thank you, Mark. I want you to channel Daschle."

But, after a few minutes, it was clear that Childress was no match for the heavyweights in the room. Every point he made was mercilessly dissected, with the triumvirate of Summers, Geithner, and Orszag parsing the fabric of his argument and then eviscerating it with numerical data.

After a while, Obama had seen enough of the bloodbath. "Okay, enough, enough . . . I'll be Daschle."

The president immediately addressed all the trio's arguments head-on, a.n.a.lyzing their weaknesses and strengths. Even professional interlocutors and trained debaters such as Summers were impressed. Obama thought that this reform was the ideal match for the stimulus: a temporary boost coupled with a long-term restructuring of every kitchen table's budget, and that of the federal government. He summed it up with issues of how to restore the underlying confidence of a people who lived with too little security and too much fear in their lives.

By the time the meeting was over, no one was challenging Obama. The other alternatives, such as financial regulatory reform or a sweeping environmental energy program, had barely been discussed.

Health care would be included in the proposed budget, with a placeholder of $650 billion. After so many meetings during the transition, where the president-elect tried, sometimes futilely, to guide his advisers toward consensus, this time he "channeled" his mentor, Daschle, and made up his own mind.

But the president knew what virtually no one else in the room realized: Daschle was in big trouble. Rouse and Obama had been talking in the past few days about their common friend. Daschle's recent history as a lobbyist for Alston & Bird left him vulnerable to attack if someone had enough desire. And Max Baucus did. He and Daschle were longtime rivals, and he was digging into everything he could find. After losing his Senate seat in 2004, Daschle also lost his crack staff, led by Rouse, and the precise and affectionate care they afforded him in managing every detail of his life. His last four years of private life, with residences in Washington and South Dakota, and a Bismarck accountant, had left behind plenty of loose ends. The one that Baucus joyously pulled was $128,000 in undeclared compensation for the use of a private car from a friendly corporation while Daschle was in D.C.-a detail soon to be released, spelling Daschle's demise.

Had the revelation of Daschle's tax problems preceded the more serious IRS shortfalls of Geithner, he might well have survived, and Obama would be looking for a new nominee for Treasury. But Baucus held the cards and dealt them with an eye toward a bigger prize: commanding the central position on any health care initiative, rather than being upstaged, once again, by the soft-spoken but unflinching Daschle.

What was clear to Obama, as he was whipping into line a group of savvy, argumentative advisers, is that he'd have to go forward without Daschle: his friend, guide, and teacher. It was no surprise that he played him with such force and pa.s.sion in this important meeting. The practical result was that health care reform would now be the first priority of the Obama presidency. A lifelong consensus builder had stumbled into the first, and often most difficult, lesson of every new president: advisers advise, presidents decide.

On January 29, after Wall Street reported a robust $18 billion in bonuses for 2008, about the same level as the profitable year of 2004, the president became incensed.

"How is this possible that they're paying themselves these bonuses when it was the government that bailed them out!" he said at the 9:30 a.m. daily briefing with his senior economic team. It was a rare moment, when his voice rose in true anger.

Obama, a man with little experience wielding power but the fastest of learners, said he wanted to make a statement. Soon there were cameras in the Oval Office. He spoke from the edge of his seat, eyes wide, with Geithner and Bernanke on either side, calling the bonuses "the height of irresponsibility-it is shameful.

"Part of what we're going to need is for the folks on Wall Street who are asking for help to show some restraint, some discipline, and some sense of responsibility," he said, clearly agitated. "There will be a time for them to make profits and a time for them to get bonuses. This is not the time."

Ben Bernanke, sitting next to Obama, was not so much outraged at the bankers' behavior; he'd been living and working in the midst of high-compensation bankers for years. As one of his aides said later, he was just upset that their taking such big bonuses, prompting outrage, could make his job of extending almost unlimited federal largess to the financial sector even more difficult.

Similarly nonplussed was Tim Geithner, on the president's other flank. During his confirmation hearings, Geithner mentioned that the administration was preparing rules to require that executives at companies receiving taxpayer money agree that any compensation above a certain amount-he did not specify how much-be "paid in restricted stock" that could not be liquidated or sold until the government had been repaid.

It was a low priority. Geithner didn't believe in compensation limits. In his experience, he'd never seen any that worked. On Wall Street, any firm with compensation barriers would just have its employees stolen by a compet.i.tor who was not similarly restricted.

What Geithner hadn't told Obama in their many hours together was that there was, not far away, a ticking time bomb on these explosive matters of compensation.

Bonuses of $165 million were due to be paid to AIG executives in mid-March. In the fall of 2008, Geithner presided over the issues of how-and how much-AIG would be permitted to compensate its employees, claiming that the payouts were "retention" bonuses to keep aboard employees who might be helpful in unwinding the derivatives mess AIG had helped weave.

Though Geithner later said he didn't remember any specifics about the AIG bonuses, the issue was being actively managed in February in the upper reaches of his Treasury Department. All across the capital, after all, legislators were impelled to action by the president's angry words. One of them was Chris Dodd, the Connecticut Democrat and chair of the Senate Banking Committee, who inserted an amendment sharply limiting executive bonuses for firms that had received bailout money into the nearly completed American Recovery and Reinvestment Act, the stimulus bill. It would sharply limit the bonuses for executives at inst.i.tutions that had received TARP funds until those funds were fully paid back. As the stimulus bill crested toward pa.s.sage, with surprising bipartisan support, a call came to Dodd from Geithner's office. The suggestion: How about only restricting those bonuses agreed upon after the bill's pa.s.sage that month? Their point was that to vitiate a contract retroactively would undercut the very sanct.i.ty of contracts everywhere. Any such new compensation provisions should be for contracts yet to be written. The move, however, would exempt those explosive AIG compensation contracts signed the previous year. Dodd quietly made the change.

Meanwhile, the president was looking for ways to turn his forceful words into action, to find expressions of his will, and outrage, in concrete policy. His venue for this search was the daily economic briefing, something that was announced two days after the inauguration as proof of his concern over the unfurling recession. Across many administrations since the end of World War II, there was a tradition of daily briefings about matters of intelligence and national security. It fell under a president's central responsibility of upholding the national defense.

It was Obama's idea that the economic security of Americans, at this time of crisis, was imperiled, meriting its own designated briefing.

But whereas the intelligence briefing, for instance, rests on a long-standing structure of teams inside CIA and Defense Intelligence upstreaming recommendations through a vetting and distilling process-now run by the relatively new office of the Director of National Intelligence-there was no similar process on the economic front. Not that there wasn't an available ent.i.ty. The National Economic Council was designed to be a corollary to the decades-old, heavily staffed National Security Council, which has a formalized process in which deputy princ.i.p.als (often number twos at departments) meet to discuss matters that are then upstreamed to the NSC princ.i.p.als, the heads of the major arms of government engaged in security, along with the highest-ranking domestic official, the Treasury secretary, all of whom help the president arrive at policy recommendations shaping America's role in the world.

The NEC, with a modest staff, had never matched that sort of process or rigor, partly because economics is not a neat fit for literal a.s.sessments of national security or the related a.n.a.lyses of gathered intelligence.

In fact, the productivity and effectiveness of the NEC were often the direct result of the organizational and conceptual abilities of its chief. Rubin, setting the mark early, was a generalist on economic and financial matters, with a talent for bringing in competing perspectives and synthesizing them into coherent recommendations.