Confidence Men Part 2

The advisers all agreed on at least one thing: the disequilibrium of consumption and production in the United States had led Wall Street and the federal government, in their dicey modern partnership, to overcompensate with easy credit, which had led to underpriced risk across the economic landscape. The team was racking their brains for what to do about it. No one was quite sure how to deleverage the world's largest economy.

The speech, like Obama's best, managed to weigh the ideological with the pragmatic. He could simultaneously mix neo-Rooseveltian rhetoric ("a free market was never meant to be a free license to take whatever you can get, however you can get it") with the practical endors.e.m.e.nt of competent governance ("We've put in place rules of the road to make compet.i.tion fair and open, and honest, we've done this not to stifle but rather to advance prosperity and liberty"). The subject didn't carry the deep personal insights, and subtle confessions, that his race speech did, but within months his a.n.a.lysis would form a starting point for reforms.

"The concentration of economic power and the failures of our political system to protect the American economy and the American consumers from its worst excesses have been a staple of our past: most famously in the 1920s, when such excesses ultimately plunged the country in the Great Depression. That is when government stepped in to create a series of regulatory structures, from FDIC to the Gla.s.s-Steagall Act, to serve as a corrective, to protect the American people and American business."

The latter, Gla.s.s-Steagall, was, in essence, repealed in 1999 when the Gramm-Leach-Bliley Act, with support from Bill Clinton's team of Bob Rubin acolytes, led by thenTreasury secretary Larry Summers, withdrew the original provision preventing bank holding companies from owning other financial companies. In particular, it affirmed the recent merger of Citigroup and Travelers, two unique financial ent.i.ties that would not have been able to consummate their merger, a vast ent.i.ty that Rubin would soon sit atop as chairman.

Obama now spoke of repairing and restoring a regulatory framework. In particular, he envisioned a broad swath of new regulations that would be able to properly monitor the chimerical nature of Wall Street. Across the board, he saw a new structure of oversight, from increasing the purview of the Federal Reserve to setting in place consumer protections based on a broader principle that "we need policies that once again recognize that we are in this together. And we need the powerful, the wealthiest among us-those who are in attendance here today-we need you to get behind that agenda."

The coverage of the speech, this time, was heavy and laudatory. Obama remarked several times from the dais, "As I said last fall at NASDAQ . . . ," and the point was lost on no one. He had called it, just as he had with Iraq. He'd been ahead of the pack, ahead of everyone, and only now were events and consensus catching up to him. Interviewers lined up, cheek to jowl-Charlie Gibson of ABC, Maria Bartiromo of CNBC, staff writers from the Times and Journal. Obama seemed to have taken his game to another level: in the zone, every shot a swish.

"Barack Obama's speech on the financial crisis was a remarkable breakthrough," gushed Robert Kuttner, the tough-minded editor of The American Prospect. Kuttner had, up until then, been reserved in his enthusiasm for Obama. But no longer. "First he connected all the dots-between the complete dismantling of financial regulation, the declining economic opportunity and security for ordinary people, the current financial meltdown, and the political influence of Wall Street as the driver of these changes. Astounding! I wish I had written the speech. It is this kind of leadership and truth telling that is the predicate for the shift in public opinion required to produce legislative change.

"The speech was Roosevelt quality: the president as teacher-in-chief," Kuttner continued. "Those who felt that Obama was capable of real growth that will transcend the campaign's early and somewhat feeble domestic policy proposals should feel vindicated. The speech was courageous, in that it goes well beyond the current Democratic Party consensus, and one can only wonder about the reaction of some of Obama's own financial backers."

Several of those financial backers were gathered two weeks later on April 11 in a hotel ballroom in Washington for a meeting of what might well be the world's most exclusive club: the Financial Services Forum. Its members were the CEOs of many of the very largest financial inst.i.tutions in America. Together they controlled $20 trillion, roughly the annual GDP of the United States and China combined.

The forum's semiannual meetings usually drew a majority of the CEOs, but at this particular spring meeting in 2008, only about half of them had shown up. Many of those absent found themselves instead on corporate jets to China and the Persian Gulf, on their way to meet with the heads of those states' sovereign-wealth funds to plead for capital infusions. This close to Bear Stearns' implosion, the sense of urgency among Wall Street's top executives was so great that they had decided to pa.s.s up a private session with Treasury secretary Hank Paulson and Ben Bernanke to meet instead with Saudis and Kuwaitis and Chinese government officials. Paulson and Bernanke might tell them what the U.S. government would do in the event of a financial death spiral, but the Kuwaitis could tell the CEOs just how much, at today's prices, it would cost them to avoid this fate.

One forum attendee, however, was especially happy to be in the mix: Greg Fleming, Merrill Lynch's number two. He was just glad to still be employed at Merrill, the company that in 1914, with its first storefront offices, essentially invented the brokerage business in America. As he gazed now across the crowd of senior executives waiting for Ben Bernanke in the conference room at the venerable Willard Hotel, Fleming could not help but consider how much had changed in the past two years, since the spring of 2006.

Thinking back across those two years, he could neatly mark both time and distance traveled-for himself, his industry, and the wider country-with two dinners.

The first: in May 2006. That's when Merrill's headstrong CEO, Stanley O'Neal, took Fleming out to dinner to tell him he was planning to fire a friend of Fleming's. The executive, Jeff Kronthal, who was the head of fixed income at Merrill, had noticed that the number of new mortgage holders not making even a single payment-a typically tiny number, less than 1 percent-had more than doubled in just a few months. A longtime risk manager who had once worked at Salomon Brothers, Kronthal dug into some CDO bundles and saw just how dramatically underwriting standards had collapsed. He recommended that Merrill reduce its exposure in mortgage derivatives, which at the time was only $4 billion. But these mortgage derivatives were also the company's profit engine-as they were for the rest of Wall Street-and the risk-averse Kronthal stood in the way of those profits. O'Neal told Fleming he hoped to replace Kronthal with an executive whose background lay in sales.

Fleming strongly opposed the move, contending that Kronthal was a man of good character and that if he said there was a problem, O'Neal, who had no background in risk management, would do well to listen. By the time the entrees were served, the two men were sitting in tense silence. O'Neal eventually cut Fleming off midsentence to call for the check. Soon after, Kronthal was fired, and under O'Neal's management the company would go on to add an astonishing $50 billion in CDOs between the summer of 2006 and the late spring of 2007.

That latter date was around the same time that Fleming got a call about the second of the two dinners, this one with Barack Obama. Fleming, raised by two teachers in upstate New York, had been a lifelong Democrat. When his friend Mark Gallogly, the billionaire number two at Blackstone, the huge private-equity firm, called to say he was organizing a Washington dinner for Obama, Fleming jumped at the opportunity.

On June 20, 2007, two dozen executives slipped inconspicuously from Manhattan to D.C. and gathered in a private room at Johnny's Half Sh.e.l.l, a pricey spot on Capitol Hill known for its barbeque shrimp, Asiago cheese grits, and Maryland crab cakes, which run thirty bucks a pair. It was a first encounter with Obama for most of them, including Paul Volcker, who had expressed an interest in meeting the junior senator. Gallogly, who had been greatly impressed with Obama, sent the former Fed chair a packet of reading material on the senator, including his two books. Now, as Obama moved lightly through the crowd of money men, Fleming managed to score a little face time, chatting with him over drinks. The two men, both forty-five, seemed to hit it off. Fleming was a graduate of Yale Law School, and Obama, of course, Harvard Law, so naturally they had people in common.

As everyone seated himself for dinner, the group went around the table doing introductions: Larry Fink, one of the inventors of mortgage-backed securities, who was now head of the huge a.s.set-management firm BlackRock; Lehman CEO d.i.c.k Fuld; Gary Cohn, the sharp-minded chief operating officer at Goldman; the legendary Volcker. Then the head of fixed income and the putative number two at Bear Stearns took a stab at levity.

"I'm Warren Spector of Bear Stearns, the current scourge of Wall Street."

This drew appreciative laughter from the room. Obama laughed, too. The failure of Bear's two mortgage derivativeladen hedge funds had come in late spring, and since then debate had swirled around how the collapse should be viewed: as a one-off overreach in the mortgage derivative sector by Bear, or as the first of several implosions likely to hit mortgage derivativeheavy funds on Wall Street.

If it turned out to be the latter, of course, that would mean the end of the line for some of those currently sizing up Obama. So that would never track. This was Wall Street, after all, where the world's smartest people still flocked, where everyone's risk-management team was still the best in the business, every firm's traders still the most ingenious. Everyone knew there was trouble in mortgage-backed securities. But everyone in the room could still muster confidence, albeit with a bit of added effort. Financial innovation meant there was always a way to price and sell off risk, even for mortgage securities. The bottom line: those astronomical salaries for 2007-already looking like the best year Wall Street had ever known-were utterly justified. Or so the consensus went.

The night was set up so Obama could play for the thousands these men gave in campaign donations-and the many thousands more they could compel their colleagues and friends to give-and he didn't disappoint. He said, among other things, what they wanted to hear, that he believed unreservedly in private enterprise, the efficient and productive distribution of capital, and the "need for a strong financial sector." Fleming watched from across the table, sitting next to his good buddy Larry Fink, a billionaire, like many of the men in the room. Fleming wasn't in that league-not even close. But despite that, or because of it, he was ready to leap ahead of the pack, ever the self-made man. When questions over dessert turned to the only issue anyone there much cared about-whether Obama would raise taxes on the wealthy-Fleming jumped in: "I think, based on the way things have gone, it's ridiculous to think that taxes shouldn't go up." No one there would have said this, but suddenly just about all the financiers nodded. Obama smiled. You could all but see him making a mental note: Fleming.

Fleming was dining in Manhattan three months later with his family when the phone rang. He figured on ignoring it. It was his daughter's birthday, and they were planning to follow up dinner with a Broadway show. He looked down at his vibrating BlackBerry and read, "Unknown Number." He accepted the call.

"I was impressed with what you said at the dinner," Obama said, jumping right in. "Especially about taxes and everyone carrying their fair share."

A startled Fleming thanked the senator and, whispering an apology to his wife over the cupped mouthpiece, slipped outside the restaurant. They chatted for a few minutes, and Obama explained that he wanted Fleming to take a more significant role in his campaign, fund-raising and maybe more.

Fleming paused. In the few months since their dinner in D.C., he had become aware of just what a catastrophe Merrill was facing. It was only in the past month that he'd begun to realize he'd been more right than he had ever wanted to be: those mortgage derivatives could take the company down.

"Sorry," Fleming told Obama reluctantly. "There's going to be an awful lot going on at Merrill in the coming months." He explained that he had better not take on any extracurricular activities, though he would continue to be a contributor. The two men agreed to stay in touch, and Fleming wished Obama "all the luck in the world." Both men would need it.

A month later, in mid-October, Merrill chief Stan O'Neal was abruptly fired after the firm lost $2.3 billion in its third quarter. Fleming was named interim CEO, and about a month after that, in early November, the Wall Street Journal reported that Merrill had fraudulently handled its derivatives book. Fleming suddenly found himself in front of a crowded room of employees, reporters, and stock a.n.a.lysts. Greed had so quickly and thoroughly switched to fear-fear laced with a watch-your-back insecurity-that Merrill's future, with its stock plummeting, seemed to rest on a few careful words to the gathered mob. Fleming managed it with a quip and a disarming shrug. He would not try to deny any reports he hadn't had a chance to check out for himself. He said he was sure there was plenty going on inside of Merrill about which he was unaware.

It worked. In the court of public opinion, Fleming was granted the time to get up to speed on Merrill's inner workings, and the company's sliding share price stabilized. His saving grace was convincing deniability: he had made the wrong career choice. He was a traditional investment banker, an expert in a.s.sessing the value of financial companies for sales, mergers, and the like. As Wall Street's great debt-shuffling and power-trading operations grew to overwhelm the lower-margin business of actual investing, Fleming watched the raging river of fixed-income funds from across the world flow through the coffers of Goldman, Lehman, Bear, and eventually Merrill, on its way to slaking America's seemingly bottomless thirst for debt.

So it was credible that Greg Fleming, the odd man out in Stan O'Neal's regime, didn't know much about Merrill's main line of business. A few weeks later, after conducting his own investigation-using dozens of auditors, poring over months of trading-Fleming announced publicly that the Journal report on fraud at Merrill had been false. (The paper subsequently published a clarification.) Merrill soon hired John Thain, a former second-in-command at Goldman, to take over as its top executive. Fleming, after all, had crucial work to do as an investment banker: sell off Merrill's gems. Schmoozing in D.C. with top executives at the Financial Services Forum could, thereby, only be a good thing. Fleming was looking to unload Merrill's prime a.s.sets, after all, and here was a roomful of potential buyers. Merrill's position was not dissimilar to Sailfish's the prior summer. The firm was glutted with a cancer of mortgage securities, namely $54 billion in mortgage derivatives, an astounding $51 billion of which it had purchased since the spring of 2006. To sell them in a market with no buyers, where their value upon sale would be marked to nearly zero, was suicide. This meant the company, leveraged thirty to one, needed to build up cash to offset the tanking value of its CDOs by selling its most valuable a.s.sets.

As Bernanke now spoke, Fleming looked across the room, a plush little second-floor chamber in the Willard called The Nest. The Fed chairman was being circ.u.mspect, not saying very much. In the wake of Bear's collapse Bernanke had opened up the Fed's discount window to investment firms for the first time, and now the chairman ran a short tutorial on how investment houses would be treated differently from banks, which had been using the window almost since the Fed's creation in 1913.

It was not until the next session that afternoon that things picked up. Treasury secretary Hank Paulson arrived full of his famous manic energy. Most people in the room knew Paulson personally; until 2006 he had sat on the other side of the felt table, as the CEO of Goldman and himself a member of the Financial Services Roundtable. Today his message was that familiarity should not breed familial goodwill; contempt might be more appropriate.

Everyone should know that the Bear Stearns deal was a special case, Paulson said firmly, "and not something we ever intend to repeat." JPMorgan's number two exhibited a look of studied indifference as glances were cast his way. All the executives by now had had a chance to look over the sweet deal offered to JPMorgan chief Jamie Dimon to buy Bear Stearns. Now everyone, thinking of any kind of merger or consolidation, wanted a "Jamie Deal."

Paulson said that there'd be no help coming from the U.S. government, and that they should all be out looking for capital anywhere they could find it. A second message: deleverage, and do it fast. But he a.s.sured them this was only to sh.o.r.e up their cushions of capital for some unseen, and unknown, threat. Based on his read at Treasury, he said, things were on the mend. The housing bubble had burst, he stressed, and housing values would not be dropping much further. Not that some mortgage toxicity didn't still plague balance sheets, he acknowledged, but his bigger concern was the sluggish economy. He and President Bush had just pushed through a $168 billion stimulus in an attempt to jolt it. With stabilizing real estate values, a few more rate cuts, an opening up of the Fed discount window, and this stimulus package, the Treasury secretary said, "we should manage to get through this period just fine."

At one end of the table, Robert Wolf sat in silence. He knew this was what Paulson had to say. The whole game was about confidence, as it always was. Everything was fine-until it wasn't. The government wouldn't be coming to the aid of any more financial giants-until it did. Volcker and a few others who were encircling Obama were convinced the whole system was on the verge of collapse. Wolf wondered if he was the only one in this plush room who agreed.

The CEOs had a blind spot, Wolf thought. With all their leverage, all it would take is one bad week, one speed b.u.mp, and they would be facing catastrophe. He thought about challenging Paulson with a targeted question, but he held back. Why bother? Though he never publicized it, people in the room knew he was Obama's man. He had put his money on Team Obama washing away Team Bush, including Paulson and his gang. Wolf was waiting, betting on regime change.

Fleming, at the other end of the table, shook his head, thinking of all he had been through in the prior year. For Paulson to point to "strong fundamentals" was to miss the point. It was really about trust, a loss of basic trust that Wall Street was resting on anything resembling firm ground. One rumor, one false report in the Wall Street Journal, and a ninety-four-year-old firm like Merrill had been brought to its knees overnight. Fleming was especially unconvinced by the secretary's a.s.sertion that the real estate market had stabilized, that, as Paulson said, "the worst was over." Had Treasury at least put together a what-if strategy?

"Hank, what are you planning to do if the real estate situation happens to get worse, which of course it could, and bleeds through into the larger economy?" Fleming asked. "That could create real problems for quite a few large firms and trigger wider systemic issues."

Paulson glared at Fleming. This was precisely the sort of question, a worst-case-scenario question, that he had been steering the conversation away from.

"I'm not responding to that," Paulson said, his face growing red. Then he turned the heat on Fleming: "Listen, you better focus on Merrill! We'll worry about the larger economy, which is doing fine. You worry about your shop." He turned back to the larger group. "All of you should. We're done with capital a.s.sistance from Washington. You're on your own."

The room was quiet. No follow-up questions.

In the days that followed, Fleming sized up the landscape for mergers and acquisitions, as he had been trained to do . . . starting right at home. His most pressing mission would be to a.s.sess the value of Merrill's franchise and figure out what it might take to sell it. Word on the Street was that Lehman was in serious trouble. Fleming knew that Merrill was in trouble, but he also knew that there was only one inst.i.tution with both the will and capacity at this moment to buy a large Wall Street investment house: Bank of America. One buyer, two banks. The question: Who would get there first?

After the Financial Services Forum meeting, Hank Paulson returned to Treasury. His department had tried to project the image of engagement and competence, but behind the scenes they were accomplishing little.

A top Treasury official who served under Paulson put succinctly what others would later reaffirm: "We mostly spun our wheels because there was no process at Treasury that could get much done. Everything had to be run through the frenetic, short attention spans of Hank. You needed to get him to focus, which was a battle, and then hold his attention with something catchy you said in the first sentence or that'd be that. Nothing would happen and weeks of work would be for naught."

The bottom line, the official added, was that "during the eight months since the credit markets first seized up, that first heart attack in August 2007, we at Treasury had done very little. Almost nothing, to be fair. We kicked into high gear for the frantic rush to sell off Bear Stearns, but that was an emergency. We had blown that time, those months when it was clear that real trouble was coming, and we'd done nothing of any real significance."

Now the clock was ticking. Several CEOs at the forum meeting had scheduled their trip to D.C. strategically. If they had to spend a day in Washington, it was going to be the day after the forum event, when the finance ministers of the G7 countries, seven of the world's largest economies, were in town. That night, April 11, there was going to be a dinner in Treasury's ornate "Cash Room," a grand two-story hall decked out with seven different types of marble. Under three sweeping bra.s.s chandeliers, Paulson and the G7 ministers dined with Jamie Dimon, John Thain, Morgan Stanley chief John Mack, Deutsche Bank CEO Joe Ackerman, and others.

Paulson later recalled how he went around the room asking each of them how they had ended up at this difficult juncture.

"Greed, leverage, and lax investor standards," John Mack said. "We took conditions for granted and we as an industry lost discipline."

The CEO of TIAA-CREF, the enormous teachers' pension fund, said the big funds used to think they "knew a lot more about these [mortgage-backed] a.s.sets" than they did. "But we've been burned, and until we see large-scale transparency in a.s.sets, we're not going to buy."

Mervyn King, a short-tempered British regulator, quickly grew impatient with this sort of talk. "You are all bright people, but you failed," he said. "Risk management is hard. So the lesson is we can't let you get as big as you were and do the damage that you've done, or get as complex as you were, because you can't manage the risk element."

King was half right-but only half. The banks had grown so big and fragile because they had created a host of profitable intermediary steps, separating risk from sound and sober a.s.sessment, from basic financial accountability. The risk had instead been pa.s.sed around, sale by sale, until the marketplace itself held a kind of aggregated risk, a vast web of credit connections resting on nothing more solid than confidence.

Two top Treasury officials, Neel Kashkari and Phillip Swagel, had already created a memo on bailouts that they called the "Break the Gla.s.s" Bank Recapitalization Plan-a ten-page apocalyptic scenario outline that would later provide the rubric for TARP. Its idea was straightforward: Treasury would purchase toxic a.s.sets from the banks, unwind them using a private-a.s.set intermediary, such as BlackRock, and then sell them to maximize value for the people who would ultimately be on the hook: the taxpayers.

Two days after the Cash Room dinner, Paulson looked at the memo with reticence. If they ever actually needed to implement the plan, he said, they would never get it through Congress. He was more skeptical of the plan's political viability than he was concerned about its effect on the economy. And if word got out, it could send the markets into a panic.

That was Paulson's dilemma. To act in a responsible, preparatory way would show what the government was planning to do in the event of an emergency. This is something that firms could then factor into their risk models, which would affect everything from how banks or nonbanks invested their capital to how they structured, and protected, their pay packages. It was enough that Bernanke had opened up his discount window to investment banks, probably the most dramatic shift in Fed policy since the Great Depression. If anything, now was the time to match federal largess with firm boundaries. He had to show confidence that he expected no more disasters, and wasn't planning for any more public funds to help Wall Street.

As a Christian Scientist, Paulson fell back on the old standard: G.o.d helps those who help themselves. The group agreed that the potential havoc that this "Break the Gla.s.s" plan could wreak on the market, even just in undermining confidence, meant it needed to be closely guarded. In the meantime, Paulson would try to find market solutions to the impending disaster and preempt the gathering storm.

What he did do was pick up the phone and call d.i.c.k Fuld, CEO of Lehman Brothers, which looked next in line to fall after Bear.

"d.i.c.k," he said, cutting to the chase. "You really need to find a buyer."

What amazed Obama was how big the whole circus had become, and how fast.

By the third week in April, he was a global phenomenon, the focus of acute, almost frenzied attention, at the head of a wave.

It had built, strong and steady, since Iowa. But coming out of Cooper Union, he was a man touched by the G.o.ds-the toast of both coasts, the media, the intelligentsia, Hollywood, Washington, and even Wall Street, which still knew how to invest with targeted might when a growth stock hit its stride. He'd been tested on race, and temperament, and had pa.s.sed brilliantly with his stunning speech. Race issue: check. He'd pulled together a bipartisan economic team and leapt ahead of the pack on dealing with the country's growing financial shakiness. Policy prescience: check.

To be sure, with each stride there was a hedged bet being laid down by Middle America, wary by nature of the Harvard-trained darling of the elites and the rising tenor of the enthusiasm he was stoking.

That skepticism was harvested with steady sure-handedness by Hillary Clinton, who was counted out after Obama's string of victories in January and February. No, she wasn't down, not yet. America loves a race, has a long history with buyer's remorse, and always liked Hillary best when she was fighting for her life-as the First Lady, living through an adultery nightmare, and many times since.

Obama wanted it to be over with. After his string of primary victories, he was way ahead on delegates, and ready to be the party's putative standard-bearer. He was tired. He craved sleep. He missed the girls. Let it be over.

But Texas and Ohio wouldn't let that happen on March 4. He lost them both, big states. Texas was no surprise. But Ohio, the bellwether state in so many national contexts, seemed within his grasp. If he could beat her there, it would end. It didn't, even after the Obama campaign spent nearly $20 million on media and organization.

Obama was crestfallen, but he stayed cool and steady. On the night of his Ohio loss, his senior staff was waiting for the strong words of criticism. They never came. The road was long, he told them; they were doing their best. Losses like this would happen; they'd eventually make it. The most pointed he got: an offhand comment leaving the Ohio postmortem meeting, when he told Axelrod, "Now, tell me again what $10 million in advertising [in Ohio] got us."

For some on the staff, this equanimity was just shy of amazing, even unsettling. Obama was changing-his eyes now on the prize. Looking out on mobs crushed against barricades, reaching to touch him, to be healed, the campaign's innermost circle started to use its nickname for him, Black Jesus. The pressure of hope and expectation, of almost religious fervor, seemed to quiet and settle him. To establish their bearings, that he was mortal, they'd tell stories of the sometimes tetchy, short-tempered candidate of a year before. A favorite was from June of 2007, when they were flying back and forth to Iowa while trying to squeeze in votes in the Senate. Obama was on the plane with Robert Gibbs and Reggie Love, grousing nonstop. This was foolish. Miserable. A waste of time.

Gamely, Gibbs stepped in.

"All right, Barack, just think of one thing you like about all this. Just one thing, and focus on it. Maybe that'll help."

Obama was unreachable. "There is not even one thing I can think of. Not even one."

"Well, I can tell you one thing, boss," said Reggie Love, the former Duke basketball player hired to be Obama's aide in 2006, who was regularly getting mobbed by girls in Iowa gymnasiums. "I'm loving this! Hope that helps."

"No, it doesn't, Reggie," the senator mumbled, unmoved even by this strong showing of empathic esprit de corps.

Now some senior staffers yearned for that grumbling guy, a guy they once knew, rather than the calm, Olympian presence looking down from on high, touching the outstretched hands of true believers.

Then, on April 22, the night of the loss in Pennsylvania, bemus.e.m.e.nt about their sainted candidate began to sour into concern. You can't win America just by taking the northeastern and California corridors, no matter how many times you appear on Charlie Rose. After a brutal six-week campaign, he'd lost Pennsylvania to Clinton by a whopping ten points. She was out of money, facing the precipice of a "mathematical impossibility" in delegates, but heroically unbowed. "Tonight, more than ever," she said, in her acceptance speech, "I need your help to continue this journey . . . We can only keep winning if we can keep competing with an opponent who outspends us so ma.s.sively."

After Obama's concession, his inner circle flew to Chicago for a crisis meeting. Forget about delegate counts. She was showing, to one and all, how beatable he was. News reports began to trot out Bill Clinton's quote from January, about how the media were going easy on Obama, giving him a bye about voicing some generalized support for the Iraq War as a senator: "This whole thing," Bill Clinton groused, "is the biggest fantasy I've ever seen." Now the line, taken out of context, seemed to be a generalized critique of the Obama phenomenon.

Republicans, meanwhile, were offering their own version, mentioning how little experience Obama had doing anything other than managing his own one-man narrative.

In Chicago, at Obama's house, Pete Rouse and Valerie Jarrett conferred with their man. The rest of the team was gathering in the living room. The three of them stood near the kitchen, an ideal trio, in its way.

Valerie was the first among equals, with her role as part of the campaign but above it. As adviser, friend, protector, older sister, soul mate, and, in some ways, creator-the matchmaker, after all, of Barack and Mich.e.l.le-she watched him evenly, asked how he was feeling. He didn't need to say much. She knew he was in there, trying to work through the complex equations of his place at the center of all this noise, and she was happy to see Pete.

Rouse was also separate from the campaign's senior staff, but with a role of unique consequence and clout. At sixty-one, he was Obama's Washington anchor-and a truly original character in the nation's capital. He was Tom Daschle's right-hand man, his chief of staff for twenty years, who rose-as Daschle became Senate majority leader in 2000-into a role that drew him the moniker "101st Senator."

When Obama won his Senate seat in 2004, Daschle was losing his, after twenty-eight years.

One coming, the other going, they became fast friends, and Daschle persuaded much of his staff, from Rouse on down, to move from the most powerful office in the Senate to that of the bright young man from Illinois. This was unheard-of. First off, skilled and seasoned staffs in the Senate-and Daschle's was about the best-have never been known to be transferrable. But this one was. Daschle became Obama's mentor, with Obama's new chief of staff, Rouse, as his guide.

Obama leveled with them both when he arrived, telling Rouse, "I know what I'm good at and I know what I'm not good at. I can give a good speech." He continued, "But I don't know how to build a large staff and negotiate the potential pitfalls of being a relatively high-profile newcomer to the Senate." They set up a game plan for Obama. Rouse was a legendary memo writer. He handed Obama a black notebook, the "Senate Strategy," laying out how Obama would stay quiet, work hard, and try to learn the rhythms of how laws are made. Options were developed based on whether he decided to run for president. But they are all thinking of when-when would he run.

Everyone was. So to map the realm of possibility, and build up favors in the event of a dash for the presidency, Obama went on the road in 2006. He gave speeches, and wooed the auditoriums and banquet halls as every Democratic senator's handsomest-ever friend, and that's before he opened his mouth. Then it was time for decisions and-in what would soon become a storied encounter-he and Daschle sat in the kitchen area of a pricey Washington restaurant. Obama wanted to know if Daschle thought he was ready, wondering if he shouldn't wait and get more experience. After all, Obama had only one year actually walking the halls of Congress before he went on the banquet circuit, and of course he needed a lot more experience before becoming president. But the system was busted, terribly, and in this age of 24/7 pie fights that pa.s.s for political discourse, having a thin record for others to shoot at, to attack, may have been the only way to move forward. Daschle had just finished a race where Republican John Thune and his ops research staff picked at Daschle's twenty-six years of votes like the vulture at Prometheus' liver. All Daschle did, day after day, was try to explain away mischaracterizations of his record trumpeted on cable, online, and in ads, until he collapsed in defeat.

And maybe it was true-that there was simply no way a senator with any experience could win the presidency anymore, considering that none had managed it since John F. Kennedy. Obama, of course, was never able to fully internalize that answer. Within a year, he was already focused singularly on the presidency. By early 2008 he had been running for elective office for much of his adult life, mostly as a one-man show.

Now, after Pennsylvania, his managerial nascence was showing-and Pete Rouse, flying to Chicago, knew it.

He understood how Obama operated from moments when no one was looking, how unflinchingly loyal he was to everyone around him-grateful, really, that they were doing what they could on his behalf. His instincts were to always push for consensus, and then affirm it, usually with some trenchant twist that would make it his own. But Rouse knew that Obama, comfortable reaching for the sweeping concept, and trying to spot paths of historical consequence, was fairly easily managed. Which was what had been happening. He'd been deferring too much to political consultant David Axelrod and David Plouffe, his campaign director, and the wider staff. He was the candidate. They were the managers. So, fine, manage me. I've got plenty to keep me occupied.

Obama turned to Rouse, as the group beckoned from the other room. "Pete, what can I do here that I'm not doing?"

"Barack," Rouse said, looking hard at his friend. "You need to take ownership of this campaign."

Obama nodded. Ownership. Got it. That night was a big one in a little-noted area that often defines the fortunes of leaders: management skills. For all his intellectual firepower, Obama had none. Over the next few hours, and next few days, a new structure was set up. There would be a nightly phone call, led by Obama, with the senior staff, no matter where he was or what else competed for his time. The agenda for each night would be drawn up by Anita Dunn, who'd worked for everyone from Jimmy Carter to Daschle, had run Obama's precampaign political action committee in 2006, was now a political consultant, and had been called on by Obama to a.s.sist the campaign in early 2007. Axelrod was upset; he was being usurped. Despite his respect and affection for Axelrod-the man who had taken him to the Senate and now the precipice of the Democratic nomination-Obama, with Rouse's support, insisted. Dunn was in.

It was a lesson in management, care of Rouse. There are certain things the boss needs. And if he doesn't demand them, it's no one's fault but his own. The campaign righted itself from there. Obama began to understand the dynamic operating beneath him, some of it dysfunctional. The nightly calls solved next-day problems before they occurred, and the calls would be continued, religiously, through the presidential transition.

A first lesson. There would be many more to come.

Reflecting on this period in an Oval Office interview, Obama divided the management issue, like most others, along the great before-and-after divide of his life.

"I distinguish between the campaign and the presidency," he said. "In each one there were different phases. In the campaign, my management evolved partly because my position in the race evolved and my prospects evolved-in the same way that my secret service protection kept evolving." He described how his detail grew from eight agents to forty, after Iowa, to a "ma.s.sive enterprise by the time I won the nomination," and that "the same was true of the campaign" staff.

The president ran through the campaign's evolution: the core team of David Axelrod and David Plouffe; the eventual need to bring in Pete Rouse and Valerie Jarrett, to make sure everyone was "more disciplined"; and onward through the primaries and into the general election, as the campaign grew and became more organizationally complex. To be sure, he, as the candidate, was the one being managed down to the frenetic minute. But he needed to "own" it and guide it. As president, atop the most complex managerial organism on the planet, it would become much more difficult.

Carmine Visone looked out of his twelfth-story window at one of Lehman Brothers' Midtown Manhattan offices. On a warm late-April day, they'd put out the awning and the outdoor tables at Bice, his favorite Italian restaurant.

This was his seasonal ritual, for years. Reserve the corner table on the street, and watch from his office window. And at the appointed time, see if his lunch date had arrived and been seated. He hated to wait. Now he'd always show up five minutes after his dining companion, usually someone from another investment bank or real estate trust, had settled in, just in time for the Pellegrino to be served. As the manager of Lehman's vast real estate portfolio, Carmine had, he felt, at fifty-nine, waited plenty in his life. Let the other guy f.u.c.kin' wait.

If Greg Fleming was in an ideal perch to see the debt mess and enter a strange kind of footrace with Hank Paulson for Bank of America's favor, Carmine was the guy who had been around long enough to see exactly what had gone wrong from the bottom up.

But he'd never have called himself an old-timer. That he'd worked hard to preserve his youth was understandable: he'd been at Lehman for longer than some of his current colleagues had been alive. It was a different company and a different world back in 1971, when he filled out his application for a job as a bookkeeper, working in Lehman's bas.e.m.e.nt.

As a young tough on the streets of Brooklyn, Visone had gotten into his fair share of trouble, so it was a bit unexpected when he landed on his feet with a job at Lehman. His father was a bricklayer, an Italian immigrant who taught Carmine to a.s.sess value with the fundamental premise that "you're f.u.c.king worthless-you want to be something, you find something of value, take it into your hands, and hold on tight." As a young man and a big one at that, Carmine worked out furiously to transform himself, as a bodybuilder-he once won the "Mr. Tall Brooklyn" t.i.tle-and then worked his way up from there. When he was made a managing director at Lehman in 1988, he had been at the company seventeen years.

d.i.c.k Fuld, who had joined the company in 1969, two years ahead of Carmine, took him aside.

"You know, Carmine," he said, "I think this will be the last time a guy like you is named managing partner."

Carmine wasn't sure if he meant it to be a compliment, but he knew what Fuld was saying. It didn't take a rocket scientist. By then, the entire baby boom talent pool had started racing to the Street, and most of them had never met a bricklayer.