Confidence Men Part 16

Krueger, for one, disagreed, and that very day he was due to have lunch with someone uniquely suited to edify him about the resolution of troubled banks: Andrea Borg, the Swedish finance minister.

Borg was in town with other finance ministers of the G20, the world's twenty largest economies, for a meeting at the World Bank. Of course, Sweden was the country that Obama said in many meetings he wanted to emulate.

At Equinox, a tony restaurant three blocks north of the White House that had become the destination of choice for lobbyists and their expense accounts, Krueger had Borg run through what Sweden did in 1991, when its financial system collapsed in the midst of an economic crisis, and what they had learned.

Borg, a tall, square-jawed father of three with a short ponytail, an earring, and a dark-suited seriousness, described how Sweden first supported the banks with infusions of cash. In fact, there were two bailouts of this type, supporting the banks and encouraging them to work out their problems and earn their way back to health. This didn't work.

Borg said they were careful about managing the banks' incentives. "You don't want to make the wrong things conditional," he said. In Sweden, the government decided how and when the banks, once they'd emerged from receivership, would pay back the government money. In many cases, the Swedish government retained equity control for a few years until they were certain the banks were truly healthy and stable. In the United States, he noted, the banks were paying back the TARP money as fast as they could even if it meant engaging in behaviors similar to what had gotten them into the crisis, just to wriggle free of the limits on compensation. "The compensation is an issue, but it shouldn't be related to the need for government support and control," he said. "They're separate issues."

He and Krueger discussed compensation issues-how to bring more serious regulation to payouts in the banking system, such as longer-term incentives and "clawback" provisions-and Borg said it was an ongoing problem, something he was working on even as they spoke.

In fact, Borg and former Swedish finance officials were in regular demand since the fall of 2008, when Bo Lundgren, Sweden's minister for fiscal and financial affairs during the 1991 crisis, met with investment bankers and regulators in New York. Obama's recent framing of "let's be like Sweden, not j.a.pan" was becoming a widely embraced a.n.a.lysis in both Europe and the United States.

But by dessert the conversation had shifted from the causes of economic crises in Sweden and America, a bloated and then collapsed financial system, to the lasting effects of economic distress and rising unemployment. During its banking crisis, Sweden's unemployment rate tripled, from 3 percent to 9 percent, in just over a year.

U.S. employers, feeling a p.r.o.nounced drop in overall demand, were cutting payrolls dramatically, Krueger said, maybe even more than the drop in demand would merit. Some data showed they were "using it as an opportunity to reduce costs," he said, with layoffs as well as wage reductions. Germany, Krueger mentioned, was busy creating tax incentives for employers to keep workers. Yes, Borg agreed, the Germans were indeed acting swiftly, "but we do it differently in Sweden." He described how strong unemployment benefits in Sweden actually freed employers to regularly lay off workers based on merit, job performance, or changes in corporate priorities or direction. Although the social safety net was strong and well funded, there was a social stigma for the able-bodied not to work in Sweden, and the unemployment rate, while not low-it had averaged a respectable 5.3 percent over the past thirty years-was weighted toward short-timers. Borg explained how people didn't like to be nonproductive, and there was no point adding possible dest.i.tution to that equation. "What we find is that the people who are fired are the ones who are soon out starting new businesses."

On the way back to Treasury, Krueger thought about this last twist, an inversion of the American model where limited unemployment benefits, usually capped at twenty-six weeks, were believed to stoke the urgency to find new employment-a ticking clock that got louder as the weeks pa.s.sed.

An eminent economist he knew well, Peter Diamond, from MIT, had for years been short-listed for a n.o.bel for his work with another economist on the unemployed, especially data that seemed to show that the out-of-work tended to kick into high gear, often finding jobs, right as their unemployment benefits were due to end. These findings had been crucial to the way politicians and public policy experts had for years viewed the unemployed as responsive to desperation.

The previous spring, while still at Princeton, Krueger launched one of the most ambitious unemployment studies in recent years: a plan to a.s.sess six thousand unemployed workers in New Jersey, using breakthroughs in behavioral economics to show how their emotional and rational architecture shifted across their full span of joblessness. The study was designed to yield insights into how best to treat the jobless, for both their own long-term well-being and that of the larger economy. After a year of deliberation, New Jersey gave it the green light. Of course, when Krueger first proffered the study in March 2008, unemployment was below 5 percent.

It was just now becoming clear inside the administration's upper reaches that the jobless rate-predicted by Romer, when the stimulus plan was being designed in December, to go no higher than 8 percent for 2009-would clearly rise above that estimate.

How high would it go? Orszag and Summers, who've both called Krueger the top labor economist in the United States, were already turning to him for a prediction, as well as for recommendations about what to do.

But Krueger, walking from the restaurant, was thinking more about the broad issues discussed at lunch, the larger decisions a society makes that shape its character.

Sweden, after two bailout attempts, and billions of kronor being pa.s.sed to its banks, made a choice that those who had created the financial crisis, who happened already to be the winners in that society, should not be kept whole and pushed toward a next round of profits by the government. Instead, the Swedes expanded benefits to match a trebling in the ranks of the jobless, restructured the banks-bringing a measure of pain that killed off speculation as a business model-and quickly earned a kind of confidence that they didn't have during the boom and bubble of the late 1980s. What did the government's tough-love decision do to the psyches of two out of every three jobless Swedes who lost employment because of a burst investment bubble? It had to be good, Krueger felt, and indeed Sweden's jobless rate fell swiftly from that peak of 9 percent. But America, with its diversity and boldness and headlong verve, wasn't much like Sweden.

Decisions about closing banks, Krueger ultimately felt, were not just about economic calculations. They were about moral choice.

"We lost the country with those AIG bonuses," he said later, and we never won them back. "I think the president was trying to win it back" by considering how to break up some of the biggest banks. In an hour, at 2:30 p.m., the ingeniously designed stress tests-a kind of federal rating agency whose judgments, if acted on by investors, would be backed by an implicit government guarantee-were to be unveiled. Krueger was sure they'd raise a lot of capital for the banks, but at some point the government would still need to step in.

In the meantime, he said, he was thinking about "how many jobless there would soon be and who will be lobbying for them."

When Obama took on three great challenges at once-the economic crisis, financial restructuring, and health care reform-it seemed no one had the temerity to say, "Mr. President, any one of those three would be more than enough to challenge a new president with so little executive experience."

The person who might have done that was not in the administration. He was in his Washington law office, on April 27, saying things he had planned to say to his friend Barack Obama in his role as president.

Tom Daschle was back in a lobbying capacity at Alston & Bird. He knew he'd messed up his taxes, which had meant withdrawing his nomination for the HHS job in early February. Daschle's sins were mostly accounting errors-the IRS was not much interested-but the penalty levied would be stiff: having to watch his nemesis, Max Baucus, move to center stage on health care reform, a move the Montana senator had executed with such force that he might well end up leading the whole town.

Even before the March 5 summit, Baucus was on the move, preempting Obama. Calling Geithner into a Finance Committee hearing on March 4 to talk about funding options to fill Obama's budgetary placeholder of $650 billion for a health care overhaul, Baucus offered proposals from his own "Call to Action" blueprint, and remarked that "the Director of the Office of Management and Budget [Orszag] said that the path to economic recovery is through health care reform. I agree, and I'm pleased that the president's budget addresses reform as an American imperative. This budget makes a good pitch for a down payment on health care reform," he added, but "my concern, frankly, is the viability of the down payment and how it will help Congress contain the costs a.s.sociated with reforming the health care system."

Daschle, meanwhile, was prepping Obama for his upcoming debut at the summit.

"How do you force the hospitals and doctors and insurers to come together?" Daschle recalled Obama asking him in the prep session. Daschle said he told the president to "talk about American resiliency and dare," his voice rose, "somebody to oppose him and DARE"-now the volume was up-"somebody to not be patriotic. He needs to do it first before it gets framed for him!"

Of course, Obama didn't do that.

"He performed admirably," Daschle acceded, "but the problem is that he hasn't been much on follow-through since. And it's gone dead and stale. The only thing he's got is a bunch of people on record that said at the thirty-thousand-foot level they are for it." Daschle has an ability to distill Washington politics into beautiful metaphors, and his airplane a.n.a.logy is spot-on.

"I look at it in terms of alt.i.tude. At the thirty-thousand level everyone is for it. You drop down to twenty-thousand level and you start to see people peel off; by ground level you are alone. That's inevitable. Unless you force them."

Meanwhile, Baucus was working his ground forces, framing the debate. Just a few days before, on April 23, he had launched a series of roundtable "workshops" in his committee room that were drawing overflow crowds, media coverage, and some ire-especially from "single-payer" proponents, who were concerned that Baucus would not be including their voice or proposals in his heavily attended colloquies.

Baucus was also speaking the language of bipartisanship-music, Daschle knew, to Obama's ears. Once an instrumental supporter of Bush's tax cuts, Baucus claimed close relationships with the more moderate Republicans, with whom he was largely indistinguishable on many issues. In this case, Daschle stressed, bipartisanship was a false G.o.d.

"I would say you aren't going to get any Republicans," he said. "It's going to be driven largely by the Democrats. I just don't see anyone willing to stay with it. The four or five most likely partic.i.p.ants are Chuck Gra.s.sley [R-Iowa], just because he and Baucus are so close, Bob Bennett [R-Colo.], because he's worked the issue so long, Mike Enzi [R-Wyo.], because he and Kennedy worked together. And the last two are Collins and Snowe [both R-Maine], but they don't bring anyone with them."

Over ten minutes, he ticked off razor-sharp profiles of his fellow Democrats, from North Dakota's Kent Conrad, the budget committee chair and deficit hawk; to Baucus's fellow Democrat from conservative Montana, Jon Tester; to Virginia's Jim Webb, the pugnacious former navy secretary; and a half dozen others, with what it would take to get them all in line and locked in.

Then the voice of the famously even-tempered Daschle started to quicken, like he was watching a party barge headed for a waterfall.

"But they need to be on the offensive. If they aren't, we lose. Even if it's just the Democrats-all those Democratic swing votes that in a heartbeat will oppose this if it looks like [Obama] is in a defensive posture.

"We could live with failure in '94 or '93, and we could live with it now. But we're going to pay a much higher price for failure this time than we did back then, in terms of cost quality and access. The price of failure keeps going up," he said, in a mirror image of what his protege said at the summit. But Obama saw the deepening medical cost crisis as nudging the providers toward consensus. Daschle dispatched that swiftly: more to lose, an existential struggle for providers, deeper intransigence. "In some ways, the problems of consensus building become even more difficult as these problems become more severe."

Counterintuitive, but incisive. A tenor of insight that you'd hear only in the advanced cla.s.s on health care reform, and the kind of advice Obama wasn't getting, certainly not from Daschle. Daschle hadn't spoken to Obama in any meaningful way for seven weeks, since that pre-summit prep session. It had been perhaps the most important month in fifteen years for health care reform-the Democrats' perennial cause and Daschle's pa.s.sion-and Obama's longtime mentor was on the outside looking in, his nose pressed to the gla.s.s.

This left Daschle perplexed and anxious. His attentiveness to Obama was without boundaries. Friends of Daschle's, who wondered if there'd been some sort of breach, got pushback from other wise men around town. Obama wasn't returning any of their calls. And it seemed that Emanuel, as he tightened control around Obama, was the heavy. "He convinced Obama that 'all Rahm, all the time' was all he needed," said one longtime Washington manager. "Obama didn't know how things were supposed to work, and Emanuel, running in every direction, wasn't going to tell him."

But there may have been more to it, something more personal. Having presided over Obama's formation, Daschle understood exactly what Obama knew and didn't know, and what he had yet to learn-and that's not always the person you want to see before you step onstage to meet unreasonable expectations.

That deep knowledge is a blessing and a curse, and hearing Podesta's elegant rendering of how Obama draws people out and creates a "s.p.a.ce where solutions can happen," Daschle paused, thinking it over. Yes, Podesta-another, if slightly lesser, Obama expert-had spoken the truth. But Daschle, speaking today with rare candor, spun it. "I'm seeing glimpses of that." He explained that in the campaign "I saw a man who listened. Sometimes people misunderstood that listening as an acquiescence to their point of view" and that, as president, on health care and other issues, "I think that same approach is happening on a larger scale. And again I think people are confusing that. I think what needs to happen is he needs to be very engaged. It really does require constant vigilance so that we can come to closure on some of these things."

Of course, Daschle had no idea that Obama had, that very week, embraced DeParle's Ma.s.sachusetts-like plan, nudging the his grand initiative away from actual health care reform-and with it Daschle's longtime pa.s.sions for reforming the medical delivery system and reining in costs through government-forced efficiencies-and inexorably toward health insurance reform.

All the same, he knew, as few others could, how overwhelmed Obama was at this point, and how "he's got ten wars at once. But that's part of leadership: he's gotta sort it out. If he wants health care to be part of his legacy, he's gotta do it. Pay the dues. I know all of these other things are important, but in the next four or five months it's going to be worth it to the country if we focus and stay on the offensive. Because he only has a short window."

A fully animated Daschle was now almost pleading.

"He doesn't have the luxury of coming back to this a year from now."

12.

Nowhere Man.

When Obama selected his B-team, he left in his wake a slew of jilted economists. The group was characterized largely by progressive, Keynesian thinkers, who soon enough began to question whether the stimulus was sufficient, and who launched forward from there in a wide expanse of op-eds, lectures, and interviews a.s.sessing and criticizing the president's first one hundred days.

With that milepost just two days away, Obama, on the evening of April 27, invited this Greek chorus of the noisy and moderately disaffected for a dinner at the White House.

For most in this group, a call from the White House, any call, was something to pine for; when it came, they tended to drop everything. Especially Joseph Stiglitz. Generally uninvolved during the campaign, the n.o.bel-winning economist hadn't heard a peep since Obama became president. His wife, phoned in her Pilates cla.s.s that morning by Summers's a.s.sistant, managed to get the message to Joe-arguably the world's most cited economist-by midafternoon, just in time for him to jump on a train to D.C.

For most of the others, the invites were a bit more decorous-coming a week ahead-and at 7:00 p.m. they gathered around the curve of a table in the residence. A Mensa murderers' row: Stiglitz; Harvard's Ken Rogoff, a specialist in the history of financial collapse; Jeffrey Sachs, Columbia University's globe-trotting guru of globalism; and Paul Krugman, whose daily blog and twice-weekly columns on the New York Times editorial page were quickly becoming the platform for a progressive government-in-exile. Across the table were Summers, Geithner, and Romer, protectively cl.u.s.tered around the president. Of course, all the economists knew one another. Krugman, Summers, and Sachs, in fact, were once graduate students together at MIT, where they had to work out the mathematical proof of how three people can each be the smartest person in a room at the very same instant.

Over roast beef and salad, with lettuce that Mich.e.l.le had grown in the White House's organic indoor garden, they carried on a somewhat tamer, private corollary of a conversation that had been conducted in public for months. This was early, though. Questions-what exactly was Obama thinking?-had started to harden into criticisms only in the past month or so, following the AIG bonus scandal, revelation of the billions in counterparty payments, the unconvincing surprise and then outrage voiced by both Obama and Geithner (who said that he didn't remember much about the bonuses), and the announcement of the coming stress tests.

Several of the economists had all but foretold the financial crisis and felt they'd not been given due credit or, at the very least, thought their precognition earned them the privilege of an audience with the president. The issue of credit was especially acute for Stiglitz. His n.o.bel, awarded in 2001, was for his work showing how markets can spin out of control when "imperfect information" is shared unequally by parties to a transaction, often giving an unfair advantage to one partic.i.p.ant. This is, more or less, the business plan for much of the subprime and derivatives market. Or, in Stiglitz's words, "Globalization opened up opportunities to find new people to exploit their ignorance. And we found them."

But at dinner, the famously acerbic Columbia professor was polite, happy to see Obama again in the flesh, making his points about why the stimulus should have been significantly larger, closer to $2 trillion, to fill the hole in the economy caused by the great crash. That comported with Romer's number about the size of the downdraft back in December, which was what brought her to the original estimate of $1.2 trillion, deriving from the view that each $1.00 of stimulus results in about $1.50 of GDP growth.

Rogoff was putting the finishing touches on a book with University of Maryland professor Carmen Reinhardt called This Time Is Different: Eight Centuries of Financial Folly, which looked at the remarkable similarities between bubbles and busts in sixty-six countries across centuries. He described the pattern over the roast beef: politicians ease regulations governing the financial system, which frees banks to use that lat.i.tude to lend and borrow money to crank up profits, which draws foreign investors and their cash to the exuberant country, which creates bubbles in commodities or real estate or stocks. Rogoff, on a darker note, mentions data on the aftermath of "financial crisis recessions," and how often policy makers overlook this one particular difference-a real one-in estimating how long and hard a recovery may be. Such estimates were not fully factored in the projections the administration made in December.

But this was Obama's show, and he moved around the table calling on people-Summers and Sachs, then Geithner, then Krugman-sometimes referring back to one of them and what they'd said. He said he mostly wanted to hear from his guests but spoke a bit himself, talking about his urgent desire to help the economy and the financial system, but defaulting to the position of Summers (mostly) and Geithner (always) that "my first principle, is to do no harm."

He then offered, to one and all, his most compelling "good listener" look-the thing that Daschle noted-and, as they spoke, the economists struggled to detect whether they'd gotten through to him, and if he seemed to be agreeing with any of what they'd said. One "yes, you're right!" and maybe the might of government would find a new direction.

That didn't happen. But all of sudden there was a ruckus, and in loped Paul Volcker, short of breath and mumbling about how long he'd sat on the tarmac in New York. Axelrod, who'd taken Volcker's chair when he didn't show, leapt up, and the giant Volcker slipped in just in time for dessert. Still puffing, he said nothing, and the president continued his rounds, well along into a second loop.

Obama's Socratic approach left one partic.i.p.ant feeling slighted. Romer, the sole female economist, reached down for her purse, took out a business card, and scribbled, "Either he acknowledges me soon or I'm leaving." She pa.s.sed it under the table to Summers, sitting next to her. She knew every one of the economists here. She had sat on panels with them, had spoken at testimonials for some of them, and she might as well have been serving them the food. Summers, who could do his math as well as Romer-they'd run in the same circles for twenty years-read the note and pa.s.sed it along under the table to Geithner, who read it himself, and then waited for a moment to pa.s.s it to Obama.

"Let's see now, Christy," the president said lightly, a moment later. "We haven't heard from you yet."

Romer cooled down quickly, invisibly, and after a moment she queried Krugman, an old friend, about j.a.pan. He had written a column about how j.a.pan, like the United States, had gone to zero interest rates. She knew that the president still felt there was no way to get more bang out of monetary policy, considering that rates couldn't go below zero, and now she egged Paul on to explain that if a fear of inflation can be created, people will expand borrowing at the same low rates, thinking that zero rates won't last much longer. Of course, this is what Romer had explained to the president in her job interview, when he'd opened with "we've shot our wad on monetary policy," referring to zero interest rates. He didn't seem to have retained it.

"That's very interesting, Paul," Obama said, looking with rapt fascination at the contrarian, and a suggestion of policy filled the room.

Two months before, Summers might not have thought to pa.s.s Romer's note along, but her grievance, along with those of other senior women, had recently spilled into the open. There was a nascent gender struggle in the White House. The women, Romer included, were tired of preparing for group meetings and watching the men talk to one another. Obama seemed to favor the men-especially Summers and Emanuel-and not the strong and accomplished women sitting nearby.

If Romer appeared to lead what one top official called "the women's movement," it may have been because of the added burdens of her regular exposure to Summers.

Two months earlier, after several key economic meetings from which she was excluded, Romer had gone to Emanuel's office saying she'd have none of it. He a.s.sured her she'd be included from that point forward and not have her access to key meetings or to the president interrupted. But many days there were issues. Summers seemed to take joy in trying to humiliate her in the morning economic briefing. "Sometimes it seemed like he was trying to make her lose her composure, and a few times he definitely succeeded," said someone who came to the morning briefs. "The president had a kind of 'now, now, Larry, be nice' response, which seemed to make Christy even angrier."

After one meeting, she stormed out of the Oval Office, letting out an audible gasp of distress in the hallway. Said one observer present: "Whether or not the president heard her, he didn't react."

When a task would come up, Obama would almost reflexively say, "Tim and Larry will handle that, always Larry and Tim, and I sort of wondered, aren't I supposed to be the third leg of the stool?" Romer later recalled.

Romer went to Valerie Jarrett, who had recently hosted a dinner for Romer with the First Lady and a few other women on the senior staff.

Jarrett told her that Obama's inner circle during the campaign was mostly men and that, with more women in top positions in the White House, the women's issues were "something we'd have to work through."

It was soon clear that it wasn't just Romer. The president had hired an array of strong-willed, accomplished women who felt the same way Romer did: ignored. Jarrett, one of the few West Wingers who had actual executive experience, started a women's group and opened lines of communication. Soon the complaints started to build. Many focused on Emanuel and Summers, both notoriously brusque, but even more abrupt and dismissive with women, several of the female staffers complained. There was a roundelay of lunches and dinners between several of the women and Larry and Rahm. When Orszag heard his name might have come up, for being dismissive to Nancy-Ann DeParle, he engaged as well.

Orszag, while sympathetic to the concerns of Romer and the other women, added another interpretation: "I think part of the problem was the lines of organization were so jumbled from the start that no one was quite sure of their role, or what they were supposed to be doing. What is the economic team? What is the health care team? What's our financial reform team? Often people weren't sure where they were supposed to be, who was leading some initiative, who should be included or not, consulted or not."

On the morning of May 7, Obama walked with a small contingent from the Oval Office next door to the Eisenhower Executive Office Building-until recently called the Old Executive Office Building. It was time to deliver the federal budget for 2010.

The past was catching up to him, over and over. After a brutal budget season, where he had to cut back on a wide array of priorities, the president faced a final indignity: over the weekend, projections of the deficit had risen one last time, by $90 billion.

For the fiscal year ending September 30, essentially Bush's last budget, the deficit rose from a February projection of $1.75 trillion to $1.84 trillion. For Obama's fiscal year 2010 budget delivered today, the projected deficit rose from $1.17 trillion-a number arrived after the president agreed to what he considered "basic essentials"-to $1.26 trillion.

That amounted to a deficit of 12.9 percent of GDP for the current year and 8.5 percent for next year, 2010-percentages that represented the largest since World War II and well beyond what economists roundly recommend, which are deficits no larger than 3 percent. With the new projections, Obama would now get under 3 percent at the very end of his current term, in 2013.

Each element of the three-part, budgetary equation-the size of the deficit, the projected condition of the economy, and the amount health care costs were expected to rise-was being factored every few days. On the second point, Romer's office issued a preliminary report supporting Obama's claim that the two-year, $787 billion stimulus package would save or create 3.5 million jobs by the end of 2010. In terms of health care, though, the news got worse, as Treasury released revised numbers showing that the administration's major proposal for raising revenue to pay for health care reform-a 28 percent limit on deductions for those in the two top income tax brackets-would only raise $267 billion, about $50 billion less than had been projected.

Obama had explanations for all of this loaded into the teleprompters in the Eisenhower Building's press room, but he was dealing with an audience-the world's bond markets-that really didn't really care much for explanations.

That was what was worrying him today. Like so many companies-including many that had faced trouble on Wall Street-the United States had recently become intently focused on the challenge of rolling over its debt. The level of U.S. debt held by foreign countries was unprecedented. The leverage that this might give them, and especially China, over the United States had been a much discussed fear since the Great Panic of '08. Over the past few months, though, another question had arisen: What if the United States held a Treasury auction and no one came? It seemed as though the so-called indirect buyers of T-bills, mostly foreign countries, were not showing up in their usual numbers and the U.S. government was having to pick up the slack.

With today's shifting numbers, Obama was growing concerned. He'd been briefed on the T-bill issue by Orszag, and how the disfavor of foreign T-bill buyers could be disastrous. He remembered, as many did, the notable exchange between Alan Greenspan and Bill Clinton in 1993, revealed in Bob Woodward's book The Agenda, when Clinton asked if his presidency would be determined by how he was seen by the bond market. Greenspan said, in fact, it would. Clinton eventually balanced the federal budget and became a darling of the bond markets, which graced the U.S. economy with about 2 percent in credit costs, which it had been holding back under the a.s.sumption that the federal government would never get its fiscal act together. When it did, and interest rates fell, borrowing and economic growth surged.

Now the United States, from the federal government to corporate offices to kitchen tables, was suffering from an inverse equation. With household debt at nearly 130 percent of GDP-up from 68 percent in 1992-sluggish growth, and enormous federal deficits up another $90 billion, what was needed was a ma.s.sive deleveraging. But not while the economy was limping. With the bad fiscal news he was about to deliver, Obama wondered how the next Treasury auction would go. Maybe no one would show.

As he and five officials from OMB milled about in a waiting room near the press center, Obama turned to Orszag with a request. "I'd really like you to write me a memo." The memo would detail what Obama's options were in the event of a fiscal crisis. What do we do in terms of policy adjustment to restore our credibility? Obama added: "And I'd like you to give it to me directly."

Orszag looked at him quizzically, making sure he'd heard right: the president wanted a memo that wouldn't get read first by Summers or Emanuel, or circulated by the White House's staff secretary, as was the traditional process. Orszag's mind raced. He knew that the new president had a great deal to learn, and might be resistant to the training program that both Emanuel and Summers were keeping him bound to.

"I hope that won't cause too much of a problem," Obama said, with a half-smile. "I don't want to get you into trouble."

"No, sir," Orszag said. "Will next week be soon enough?"

Obama nodded and, with a trace of uncertainty, added, "I guess I'm allowed to do this, right, to ask you for a memo?"

"Well," Orszag said, "you are the president."

Barack Obama nodded. Yes, he was actually the president. Then he walked into the glare of cameras to deliver that day's dose of bad news.

On May 8 the man hastily selected to be deputy Treasury secretary, after the nomination of Rodg Cohen was withdrawn, sat in front of the Finance Committee for his confirmation hearing. Neal Wolin, another in the long procession of Bob Rubin acolytes, had spent six years at Treasury during the Clinton administration and, as general counsel, headed up the team of lawyers that drafted Gramm-Leach-Bliley, which officially dismantled Gla.s.s-Steagall. His hearing was scheduled for a Friday, which, strategically speaking, is a good time to slip a nominee through: many senators travel to home states on Fridays. This was what Maria Cantwell was planning to do when one of her aides said Wolin was coming up. She was terse: "If I'm going to stay, you'd better pull together some strong material for me to grill him with."

Her aide did, and the next day she started with a frontal a.s.sault, contending that the administration was in "statutory violation" of TARP's April 30 deadline for the executive branch to offer reforms to ensure a similar financial catastrophe was not repeated. Then she pressed Wolin to admit that the actions of the Clinton administration to bar regulation of derivatives was a mistake-he wouldn't, saying only there was a need for "more robust regulation"-and pressed him about moving all derivatives onto transparent exchanges. He attempted to dodge the question by saying he agreed with whatever Secretary Geithner had said in his confirmation hearings.

To see that, even in May, another Treasury nominee from the Clinton days was busy ducking and dodging questions from a Democratic senator revealed unresolved issues inside the administration. Despite the president's publicly stated anger at Wall Street and its practices, Summers and Emanuel were sticking to their program, under which former officials from the Clinton era were never to admit to any errors in pushing deregulatory efforts. A counterstrategy, voiced by several of the president's political advisers, was for nominees who served under Clinton to express appropriate contrition, much like Richard Clarke's famous apology for the 9/11 attacks, which would allow for a truly "robust" discussion about what went wrong and how to fix it-a posture that fit with the president's public statements.

Instead, there was a gap between the president's words and the antic.i.p.ated deeds of former Clinton officials-virtually all of whom, save Geithner, profited mightily from financial services jobs during the Bush years. This had led to questions about where the president actually stood on economic issues that had drawn populist fury from both left and right.

As one Obama aide put it, "This was the height of stupidity. The nominees could have been leading the charge to make the needed changes, rather than looking like they were testifying under duress." He went on to point out that by simply acknowledging what everyone already knew-that in the last days of Clinton they were under intense pressure from lobbyists, and some of the money they made during the Bush years was probably ill-gotten-"we would have looked like leaders and might have even been about to draw to Washington a few more top Wall Street types" who could admit wrongdoing and then publicly commit to changing what they'd helped create.

One result of this self-protective playbook was to draw resistance from progressive Democratic senators to the prospective nominees, the outcome of which was now painfully clear: Obama had a woefully understaffed Treasury Department during four of the most important months of his presidency, a time when the opportunities were greatest to use a crisis to alter banking and finance in America.

This was a problem that Cantwell and the progressives hoped to resolve by getting past Geithner and Summers to meet directly with Obama. Based on his posture during the campaign, and public statements as president, they felt he was ready to correct long-standing imbalances in the way money and risk were managed-a problem with a host of devils in the details of law, regulation, and practice. But when, in late March, they finally made it to the Oval Office to lay out what they thought financial reform should look like-from executive compensation practices, to the dissolution of systemically dangerous companies, to the fast-growing industry, derivatives trading-Obama was noncommittal, saying he couldn't speak with that "level of specificity" about reform. He'd left the problem of blocked nominees untended.

By May, after months of playing this game, Cantwell had finally heard enough from the lawyerly Wolin.

"All right. I just want to be clear, because there are certainly a lot of different opinions floating around. In fact, the previous nominee for your position, Mr. Cohen, recently told a crowd in New York, 'As far as I'm concerned, I am far from convinced there was something inherently wrong with this system.' So I want to get it clear. There are a few people in the administration who still cannot say that it was a mistake, and these are the same people I think who are slow-walking, thinking that we are all going to forget about the regulatory reform that is needed. I can a.s.sure you, we are not going to forget what is needed. My patience is running out with the administration having to take five months to say that some of these things ought to be regulated, and how they ought to be regulated."

As to Wolin's dodge-that he'd support whatever Geithner had happened to testify about concerning derivatives-Cantwell countered with a bit of her back-channel conversation with the Treasury secretary regarding exchanges.

"I am not clear where the secretary really is on that issue, because in a private conversation after the hearing he said he did not mean exactly what he said at the hearing, and since then he has said to a group of colleagues that the administration still has not come out with" [a] policy.

But the law is the law-as Cantwell pointed out, citing the April 30 deadline-and it was decided that a group of senior administration officials should finally nail down some clear proposals.