Confidence Men Part 13

Geithner and Summers each laid out his case. The stress tests, Geithner a.s.serted, would dispatch uncertainties in the markets and in American business and the wider consumer population, who needed to know if their financial system was secure. If banks failed the tests, it would be clear why; the tests would highlight their deficiencies and allow the government to decide whether to bail them out or take them through a prepackaged bankruptcy. What was more, as the banks worked through the tests, they would have to recognize and frankly a.s.sess their own true condition.

For his part, Summers used metaphors: "Tear the Band-Aid off, let the air in, and let the healing begin." He kept up the medical a.n.a.logies the president favored: "It's time for radical surgery to save the patient, the U.S. economy." He discussed how the "good bank, bad bank" model would work. The government would close down several troubled inst.i.tutions, take them over for a brief period, and have the toxic a.s.sets placed in the bad bank run by the government. The "good bank" would be cleansed, with management and shareholders wiped out, and creditors entering negotiations about what they might recover.

The president, who'd heard Summers's case two days before, cut him off.

Many of the largest banks were sitting on huge piles of toxic mortgage-related a.s.sets, he said, which put a drag on the flow of credit and created wider uncertainty in the economy. Meanwhile, he said, it seemed like the U.S. policy was "waiting and hoping," having government support the banks in all sorts of ways, while everyone waited for the value of their a.s.sets to slowly recover-or for the banks with strong enough earnings to write them off. It was a riff he used at his first press conference, a month before, now expanded and directed. "As I understand it," the president concluded, "that's j.a.pan."

Well, sort of, Geithner said. But not exactly.

Summers's retort was that, yes, more or less, that's j.a.pan.

Summers and Romer pointed out that the stress tests might be inadequate, easily gamed by banks and proving little; and also that they wouldn't be done until May, too long to dawdle. Summers said Geithner's policy was "watchful waiting," in contrast to the one he and Romer were suggesting, which was "necessary surgery that shouldn't be delayed any longer."

"We're not waiting for anything!" Geithner retorted. "We're not talking about doing nothing. We are acting-with the stress tests!"

Implicit in Geithner's "we" was Bernanke and the Fed, a crucial vote of confidence from one of the most powerful corners of government. But Romer, who had connections in the Fed herself, was ready.

"I've had a fair amount of contact with the Fed governors," she said, "and there's quite a bit of consensus in the Fed system that something needs to be done now, not later, some sort of resolution, along the lines of a 'good bank, bad bank' model."

It was a direct hit on key underpinnings of Team Geithner's strategy, in which the Treasury secretary implied that he was speaking for the Fed. Geithner glared across the table at her.

There was general talk of how much it would cost. No one had a firm figure. That depended on a host of estimates for which data were unavailable-data on the balance sheets of banks and on the depth of toxic a.s.sets across the banking system. Numbers were bandied about. A restructuring of the sagging banks could cost $700 billion. The costs could be stretched out across years. Some of the nonperforming a.s.sets in the Resolution Trust Corporation, the agency set up in 1989 to handle the savings-and-loan crisis, had been sold off quickly; others had been held for years. In any event, it would be real money, north of half a trillion.

The president's enthusiasm was undimmed. The restructuring of the large insolvent banks, he said, would be a moment where the government could "strike a blow for prudence." It would "begin to change the reckless behavior of Wall Street and show millions of unemployed Americans that accountability flows in both directions."

Obama was finally pus.h.i.+ng the argument above the ongoing disputes inside his economic team to a higher moral and ethical plane. Having absorbed the theatrics for several hours, he had seen enough. He said he wanted something large, something that changed the course of the economic s.h.i.+p. It was clear to everyone: he was leaning toward Summers and Romer.

But Geithner and the Treasury team took a new tack in the debate, and Summers engaged. They were still arguing.

"Look," Obama said, with evident frustration. "I'm going to get a haircut and have dinner with my family. You've heard me. When I come back I want this issue resolved."

And with that, he walked out.

Rahm Emanuel waited until the president was fully out of the room and then seized the floor.

"Everyone shut the f.u.c.k up. Let me be clear-taking down the banking system in a program that could cost $700 billion is a fantasy. With all the money that already went to TARP, no one is getting that kind of money through Congress, especially with this AIG bonus disaster." He threw a hard glance at Geithner. "Listen, it's not going to f.u.c.kin' happen. We have no f.u.c.king credibility. So give it up. The job of everyone in this room is to move the president, when he gets back, toward a solution that works."

Romer later said she felt like "I'd been punched in the stomach." The president got it. He was striving, at last, in a Rooseveltian way, to take bold action. Emanuel had "waited until he left and then crushed it."

Emanuel's now-famous tactical dictum-"never let a crisis go to waste"-actually applied in this case, she felt. Not really to health care, which was more an issue of unsustainable trends than a true crisis. This was different. This was a real financial crisis, extending into the fortunes of everyone in the broader economy. After all that had happened starting with Reagan and deregulation, and three decades of the unfettered markets not dealing with the fundamental needs and hopes of a growing economy, now was the time-maybe the only time-for the government to step in to make crucial repairs. "This was the crisis that we shouldn't let go to waste," Romer said later. "Right there, Rahm killed it."

Aides ran out to get food for dinner as Emanuel huddled with Geithner and then Summers, and then the both of them.

When the president returned at 8:00 p.m., Summers, on cue, took the floor.

"We had this very good discussion at the beginning of our meeting, but while you were away, Rahm made the point that there's no chance of Congress approving any more TARP funds. So a broader, systemwide solution doesn't seem possible. But it's absolutely possible, Mr. President, to do Citi, just Citi. We can do that with the $200 billion currently sitting unused in the TARP account."

Obama sat quietly, considering this for a moment. "Well, okay, so we do Citigroup and we do it thoroughly and well. That would show everybody that they can trust us in government to do a hard job, and do it right. And then we go back to Congress and get the money to do the wider job that really needs to be done."

As the president processed this, Emanuel jumped in.

"At the same time," he said, "we'll have Tim do his stress tests so he can decide how to support the banks with his 'Hobbit accounts.' " This was Emanuel's catchphrase for programs with acronyms that sounded like something out of a Tolkien novel, such as TALF (Term a.s.set-Backed Securities Loan Facility) and PPIP (Public-Private Investment Program). Of course "support" was the right word. Emanuel had called it straight: Geithner's plan was to support the existing structure, not change it.

Obama considered all this for a moment. After a long day of discussion and fierce debate, there seemed to be unanimity from his advisers. For the next few hours, as the evening waned, everyone talked through logistics.

After nearly five hours in the Roosevelt Room, the partic.i.p.ants saw the weeks of debates settling into action. The stress tests, now well along in their construction, would move forward as the core of the U.S. government's approach. But Treasury would also pull together a plan for how to "resolve" Citigroup as a first step to returning to Congress for money to take down other banks.

Geithner often said, "plan beats no plan." The stress tests were now a plan. But what Summers and Romer were pus.h.i.+ng, stoking the President's enthusiasms, was not. It was a proposal, which was all they could muster with their staff and specific expertise. Only Treasury had the horsepower to pull together a plan for such a significant intervention by government. All b.a.l.l.s were now in his court.

Obama thanked everyone and told them "to go get some sleep."

The president had been well managed.

10.

The Covenant.

There was perhaps no better case study for how the "systemic" risk posed by the turbulence on Wall Street threatened the broader economy than what was happening six hundred miles west, in Motor City. The crisis in Detroit was ignited by New York. When credit tightened after Bear Stearns' March 2008 fall, auto sales began to decline precipitously from their historic peak of seventeen million units in 2007.

By late March 2009, the question of what to do about the automakers had persisted for more than a year.

One of the hottest expanding markets for debt had long been the a.s.set-backed securities for car loans, which, just like mortgages, had been securitized and swapped. Almost anyone who wanted a car could get a loan. After Wall Street's crash in September, declining sales all but plummeted, dropping to a rate of nearly half the 2007 levels. Automotive CEOs flew to Congress in November in their private jets to plead for bailouts, were roundly reviled for their transportation choice, and later, with showy penitence, drove the eight hours from Detroit to D.C. for another hearing. In December, the Bush administration cleared a first cash infusion of $17.4 billion out of the TARP funds and kicked the matter to the White House's next occupant.

The automakers presented an issue that was, in many ways, more straightforward than the dilemma about how to handle financial giants such as Citigroup. While the banks stood on the soft turf of confidence, subject to the ongoing brinksmans.h.i.+p between Was.h.i.+ngton and New York, the car companies at least rested on the firm ground of direct action: their fortunes rose or fell based on the sale of tangible goods in the marketplace.

By the early spring of 2009, though, crises in the two kingdoms, auto and finance, presented a wider choice: whether government, in its decisions to support or abandon each teetering industry, would look to correct some of the glaring imbalances that had grown up in American society across decades.

Detroit was still the capital of the country that made things the world wanted. It was, after all, the Mecca of the manufacturing revolution in the United States and, eventually, abroad. The early-twentieth-century a.s.sembly line innovations introduced the quintessential American product, a symbol of gleaming mobility, to the global market. The "Growing Together, Growing Apart" charts that Alan Krueger unfurled nearly three years earlier for a long-shot candidate could easily have carried attachments for the central role of cars in building that storied middle cla.s.s. The seminal insight, in fact, might well be attributed to the petulant and flinty Henry Ford himself, who in 1908 was having trouble drawing men from many machine shops around Detroit to work on his newfangled a.s.sembly lines: they felt the work was dehumanizing, turning men into cogs on a wheel. He drew them in with wages they couldn't resist (wages he cut later, once the plants were filled and the machine shops had vanished), along with a flourish of salesmans.h.i.+p, saying that men should be paid enough to afford to buy the product they built. The a.s.sembly line's efficiencies dramatically lowered costs, the solid wages created a community of ready buyers, and the foundations of ma.s.s production and ma.s.s consumption were laid. The subtle codependency tucked within-that the nation and its economy flourish when workers earn enough to be active consumers-became the best-case justification decades later for many of FDR's aid programs, including Social Security, and for the growth of unions, which bargained collectively for the higher wages and benefits that lifted lower-cla.s.s laborers into the postWorld War II middle cla.s.s.

As is so often the case with progress, every solution creates a new problem, and one presented itself in the 1970s, as the world co-opted and started to improve upon American manufacturing techniques in factories manned with lower-wage workers. Even if Detroit's giants knew how to respond, the slow-footed, legalistic union-management dialogue stood in the way of rapid change.

And that's, of course, what almost every current debate in the White House and beyond was about: rapid change. Accommodating it is one of the great human capacities, but living through it can be the stuff of stress and, often, suffering.

Wall Street's great modern innovation had been to profit from rapid change itself-and often drive it-without the complications of having to worry too much about outcomes.

Detroit, and much of the rest of America, didn't have that luxury. In the cold spring of 2009, many Americans were actively wondering whether the country's financial agents of change would have to start living lives of tough choices and hard consequences. Since late January, when the new president's harsh words seemed to encourage righteous anger against Wall Street, a fair share of the busy public wondered if the new president would see any distinction between those who profited from change and those who were crushed by it, and whether he believed that government's role was to forcefully, but smartly, impede actions of the former and ease the pain of the latter-to keep the American worker, both figuratively and literally, on the a.s.sembly line so he could buy what he produced.

What makes the morality play even richer is that Obama, just as he was calling the financial industry payouts "shameful," brought on board a crew of private-equity specialists from Wall Street-led by Steven Rattner, named head of the Auto Task Force-to work alongside his market-oriented economic team to help frame a set of hard choices about what he might do.

By late March those choices were the stuff of fierce debate. The administration's domestic policy was fast becoming a debate society run by Larry Summers. Obama would sit on high, trying to judge if there was any shared ground between the competing debate teams that might coalesce into a policy. The larger question simmering beneath each busy day was whether his growing inclination to seek consensus in these debate tournaments was a model for sound decision making, a crutch to delay, or avoid, the decisions only a president can make, or a recipe for producing half-measures-a pinch of this matched with a scoop of that-masquerading as solutions. After all, if the breadth of perspectives is wide enough to represent the fullest range of views, consensus is unlikely. If consensus is swiftly achieved, it probably means too few voices have been heard.

In the run-up to the big meeting on the auto bailouts, slated for March 26, the breadth of perspectives was actually quite narrow. Almost everyone of consequence considering the fate of General Motors and Chrysler for the past two months had been looking through the shared lens of market-oriented economics and a philosophical school of thought and action loosely called "private equity."

That colorless term had, over the years, been subst.i.tuted for a host of vivid precursors, such as "corporate raider," "takeover artist," or, in some cases, "greenmailer"-names for a group of financial provocateurs who emerged in the early '80s to launch the era of financial innovation. Their leader, Michael Milken-like his debentured kindred Lew Ranieri-formed new ways to turn debt into tradable, highly liquid securities by floating low-grade, high-risk debt called junk bonds for that era's "special purpose." Specifically, they would pool the capital into takeover funds to back the a.s.saults by raiders on public companies or their efforts to "place" highly leveraged capital. Whereas 1980s compet.i.tors such as Warren Buffett and Peter Lynch were looking for value hidden in public companies to "buy and hold" in the conventional effort to outsmart the markets, buyout firms such as Drexel Burnham Lambert, Forstmann Little, and Kohlberg Kravis Roberts claimed to be smarter about various companies than the executives who managed them. Sometimes the attacks would be hostile; other times, more a matter of making senior management offers they could not easily refuse-such as how to meet stunning performance measures quickly, get rich, or lose your company; or, for troubled companies, take this expensive capital as a last chance for your survival, and sign over everything, often including your home, as collateral. Either way, the private-equity play-to sell off a.s.sets, streamline operations, defund anything that wasn't focused on short-term earnings, and then look to sell the company within three to five years-became the enduring modus for both takeovers and turnarounds. Although the flashy days of corporate raiders largely pa.s.sed with the prosecutions in 1990 of Milken and, before him, his kindred such as Ivan Boesky, Martin Siegel, and Dennis Levine on various types of fraud, the private-equity model endured, and grew. In 2007, KKR was the world's fourth-largest employer, if one added up all the companies that the firm and its investors controlled.

And control is the key concept: a condition for a private-equity placement tends to be conditional employment or ouster of a company's "existing management," to be replaced by handpicked executives who will have the gumption-some would say ruthlessness-to drive a swift return for the new investors. But as the U.S. economy became less and less hospitable to quick investment returns in the past decade, private equity got busy sharpening its model. Charlie Hallac, a top deputy to Larry Fink at BlackRock and head of the firm's a.n.a.lytical arm, BlackRock Solutions, distilled it down with precision: "Of every twenty deals, the large, aggressive PE firm expects seventeen of the companies to fail under the added debt. Two have to survive and one has to hit big for the firm to have a fairly strong return on its PE fund. So that's three out of twenty."

It's hard to find any product, save crack cocaine, that causes ruin for 85 percent of its users. Those unfortunate companies-the seventeen out of twenty-lined up at bankruptcy courts that were thoroughly clogged, since the fall of 2008, had been unable to get "exit financing" to emerge from restructuring.

Just as Geithner's stress tests were being designed to stand in for Moody's, by rating which banks were healthy enough for new investors, the U.S. government formed an in-house private-equity division to examine how it might get a reasonable return on controlling "investments"-don't call them bailouts-in Chrysler or GM, or both, or let imminent bankruptcy take its course. Was.h.i.+ngton was becoming Wall Street.

By the third week in March, there was no clear decision on a path for either Chrysler or GM, but several strong options had taken shape. One was for the government to keep Chrysler alive long enough to arrange a sale to Fiat, with various sweeteners provided by the U.S. government. As for GM, the proposal was for a quick bankruptcy, where the manufacturer would be broken into a bad company, with many of the crus.h.i.+ng liabilities taken off the current balance sheet, and a good company, which would swiftly emerge from restructuring with a major government investment that it would, it was hoped, someday repay itself.

In other words, two private-equity plays, with the government as lead investor and the automakers standing in a rough parallel to Bear Stearns and Lehman: the smaller of the two, Chrysler, first on the chopping block, with its potential buyer, Fiat, hoping for federal funds or guarantees; and GM, like Lehman, generally viewed as too big to fail, as the largest U.S. automobile company in an economy where roughly one in ten workers worked for an automaker or a company that supplied them.

But while the investment banks were clearly at fault for their own demise-having profited handsomely from the very activities that ruined them-the issues of fault were more complex with the two automakers. Yes, both had been mismanaged in various ways over the past two decades-especially Chrysler, which was bought by Daimler, the German automaker, in 1998 for $36 billion. It limped through nine years of haphazard cost-cutting and s.h.i.+fting strategies until it was purchased in May 2007 by Cerberus Capital, a private-equity firm named, fittingly, for the three-headed dog that in Greek and Roman mythology guards the gates of Hades. The next year, as credit tightened, was indeed h.e.l.l for Cerberus, which was frantically slas.h.i.+ng and shoring up its positions, and looking for investors into the winter of 2008.

GM was a different story. When Rick Wagoner, a GM lifer, took the reins of the company in 2000, it was suffering from the poor performance of too many brands sold by too many dealers.h.i.+ps, and a steep "dependency ratio" of a steadily shrinking number of workers, as a result of layoffs and productivity gains, supporting an ever-larger number of retirees and their benefits. Wagoner accelerated the productivity gains, in the next few years cutting the GM workforce of four hundred thousand nearly in half and bringing the productivity-per-worker of GM plants in line with those from Toyota and Honda. As to the "dependency" imbalances, Wagoner was the lead negotiator on behalf of the Big Three, forging a 2007 agreement with the United Auto Workers on those crus.h.i.+ng retiree benefits. With lump-sum payments to the UAW amounting to $32 billion over the next decade, GM would transfer its health care benefits burden to the union to manage, which would release it from the often contentious union-versus-management deadlocks on medical costs and dramatically lighten the company's burdened balance sheet. As for the actual making of cars, the contract allowed new hires for all the Big Three to be paid about half of the $28-an-hour wage that was mandated in the existing contract-creating a lowered unit cost for production of each car. (Wages were about half of overall costs.) This was matched at GM, as at Ford, with a focus on fewer brands and better built models, which were showing steady traction in quality ratings and the wider marketplace.

The big difference was that Ford had engineered a $23 billion cash infusion in 2007, when the markets were still strong. It was a coin toss. Many said that it wasn't necessary and that General Motors, by staying lean, looking to earn its way to economic soundness, had made the right choice.

Neither company, of course, could have predicted the historic Wall Street meltdown stemming from the mortgage mess and sixty-times-capital leverage and the wild extension of credit, loaded up with exotic covenants and traps and hedges. It was a mind-set that long defined private equity and its debt-driven machinations every bit as much as it did repos and CDOs.

But the position of Obama's private-equity officials was, not surprisingly, that Wagoner and GM management were inbred and f.e.c.kless-the traditional stance of operators in private equity about "existing management" in virtually every industry for three decades. The Auto Task Force's Wall Streeters were the first and last word on the history, status, and culpability of the troubled automakers. As the internal debate crested toward the Oval Office, the dominant view inside the administration was that the car companies were significantly at fault for their own demise, and that the glories of financial engineering provided the only solutions.

Just before the scheduled meeting with the president, eight members of the economic team and the Auto Task Force met in Summers's office to hash out whether Chrysler should be saved or allowed to fail. After a few hours of discussion, Summers asked for a vote. The group was deadlocked. The strong case for liquidation came, surprisingly, from Austan Goolsbee, Obama's longest-standing economic adviser, who made the case that the death of Chrysler would nourish both GM and Ford with new customers and that both companies, pumping up production to meet heightened demand, would hire many of the ousted Chrysler workers. This could save GM. That a.n.a.lysis, with reams of underlying data, would normally have been sufficient to close a private-equity deal. But, suddenly, without a personal profit motive, Rattner and his Wall Streeters balked at the ouster of as many as three hundred thousand workers, the combined employment of Chrysler and its dependent suppliers.

Without a definitive recommendation, this group entered a wider circle, as more than a dozen advisers gathered with the president in the Oval Office on the afternoon of March 26.

Summers, as usual, led with a framing of the issues, until the president cut him off-"I read the memo, Larry"-and the discussion leapt forward to a central question raised in the briefing materials Summers had prepared: If Chrysler were to fail, would GM and Ford in fact profit from feeding off the corpse? Obama was intrigued by this. It was the kind of integrated solution that often caught his eye, where large, dysfunctional systems connect in such a way that one's adversity can be turned to the other's advantage. That stance, clever but ultimately of limited scope, avoids trying to alter the forces of rapid change-many of which, in this case, had resulted in a steady and disastrous drift for the country-in favor of looking for opportunities within those trends. Or, in Wall Street parlance, don't stand in the way of change, but rather use it. When it became clear that Goolsbee was the architect of this proposal, Obama began to look around the room. "Where's Austan?" Of course, Summers, the master of this debating society, had excluded his old rival from the meeting, prompting a frenzied few moments where staffers raced off to find Goolsbee and drag him, panting, into the meeting.

Goolsbee presented his case; Krueger was with him. The a.n.a.lysis was sound. As the two men spoke, Rattner's co-chairman of the Auto Task Force shook his head. Because the proceedings across two months had been about mostly financial engineering, Rattner's singular metier, Ron Bloom had been largely outmaneuvered in his leaders.h.i.+p of the task force.

Bloom had precisely the portfolio that was conspicuously absent from the upper reaches of the administration: experience beyond the traditional borders of the professional cla.s.s. His pa.s.sport was a collector's item stamped both by Wall Street, from his decade doing deals for Lazard Freres, and by organized labor, where he'd spent another decade as a senior adviser to the United Steelworkers of America, as a key agent of the restructuring of the U.S. steel industry. While he could be brutally frank about the foibles and delusions of the U.S. labor movement, his view of Wall Street's financial engineers was merciless. What's more, he saw a causal relations.h.i.+p between Wall Street's contemporary practices and the woes of the wider economy, in that the draw of highly remunerative financial engineering-rather than invention, innovation, job creation, and the building of sound products sold at a good price-had fundamentally reshaped the country. When he arrived a few months before, he had expected that Obama would do something to reverse that s.h.i.+ft. Now he wasn't so sure.

When Goolsbee talked about how Chrysler workers would be "absorbed," Bloom stepped into the fray.

"Mr. President, these are the reasons we can't kill this company. The damage to these communities and people will never be undone," Bloom said, drawing attention to the chasm between economic modeling and on-the-ground realities.

Rattner, having said almost nothing up to that point, mentioned that it had been a close call inside the task force-"it's fifty-one to forty-nine for liquidation" of Chrysler. Obama's secretary, Katie Johnson, then walked into the Oval Office with a note, indicating that the meeting was over. "I can't decide the future of the auto industry in twenty minutes," Obama said, exasperated, and it was agreed that the group would reconvene at 5:30 in the Roosevelt Room.

Now, in that new venue, more people came, including some of the political and communications teams, adding new voices to the debates on economic theory and practice. After a few minutes, Summers, despite his belief that Goolsbee's economic modeling was sound, sensed the tenor of the room and moved immediately-ahead of the president-to break the deadlock. "Mr. President," he said. "It's a close call, but I think we ought to save them."

But it wasn't Summers's decision to make. The economists continued to argue, as Obama looked on silently. Goolsbee continued to stress his position. "We need to do this for GM and Ford," he said. "These people"-meaning Chrysler's fired employees-"will have job subst.i.tution."

Bloom, who later commented, "There wasn't one guy in that room who'd spent any serious time having beers with real workers," was furious. "It just doesn't work that way," he said to the group, his voice rising. "Many of these people are nearing fifty and have been working in the auto business for twenty-five years. They get laid off, they won't get rehired-by anyone."

The discussion now broke beyond the bloodless norm of economic colloquy, of speculative predictions about corporate and consumer behavior with countless livelihoods at stake. While polls showed that the public strongly opposed the bailout of the auto companies, Emanuel said a Chrysler shutdown and economic fallout would have political consequences across the Midwest, and he began reeling off the names of congressmen who had Chrysler plants in their districts. Others, like Axelrod, offered comments about what the president's actions meant to people in trouble and equally to those watching from the sidelines.

"The president wasn't elected to be competent and pragmatic in managing policy debates with economists, who won't ever admit what they're doing is often guesswork, with a data sheet attached," Bloom later said, reflecting on the meeting. "He was elected to act decisively in a way that makes Americans-especially the American worker, who's been left behind for decades-feel something they haven't felt in a while, which is hope . . . Hope, because someone, finally, is fighting for them."

Bloom felt that this position was finally being heard in the aptly named Roosevelt Room, from someone who had little currency in the Larry Summers Debating Society.

"Mr. President, I don't think it's a close call," said Press Secretary Robert Gibbs, somewhat tentatively. While clearly not claiming expertise on the forces propelling the economy in recent years, Gibbs, along with Axelrod, was one of the few people present who understood the forces that had propelled Obama to the Oval Office. "What are we going to do when a guy walks out of the plant after we've shut it down, and he's holding a sign that says, 'I Guess I Wasn't Too Big to Fail.' "

With that one line, Gibbs had stumbled on a larger set of questions than prospective corporate behavior or gaming the financial system. Whose failure posed a greater threat to the nation: a Wall Street bank or the American worker? And when given a choice, shouldn't the government side with the powerless?

Obama had heard enough. "I've decided. I'm prepared to support Chrysler if we can get the Fiat alliance done on terms that make sense to us." Then, nodding to the Wall Streeters and market-oriented economists in the room, he added, "I want you to be tough, and I want you to be commercial."

The next day, Rick Wagoner arrived in Was.h.i.+ngton to work with the Auto Task Force through the "good company, bad company" design for GM's restructuring. Creditors of GM would be getting a "haircut"; their contracts would have been alterable under a bankruptcy proceeding anyway. Shareholders in the old GM would have to swap their shares for shares in the "good GM," in the hopes that it would someday succeed. Tens of billions in federal funds would cover the shortfall between a.s.sets and liabilities, and give the government effective owners.h.i.+p of the new GM that emerged.

The GM restructuring plan was discussed only briefly at the auto meeting the previous evening, with just a pa.s.sing mention of a key feature of the plan: that Wagoner, fifty-six, would be let go. The prevailing, market-centric view in the room-that, to paraphrase Summers, in the U.S. economy "people get what they deserve"-was so unanimous that no one raised an objection. That included the president. He had approved Wagoner's firing a few days before, on Rattner's recommendation.

Of course, what was in store for GM was similar to what the president had expressed interest in two weeks before for Citigroup. He might well have thought Wagoner's exit offered the appearance of balance, of evenhandedness. Citigroup CEO Vikram Pandit-and the chiefs of other banks that the president hoped would, sooner rather than later, be closed and restructured-would likely be on the street soon as well.

In a conversation Wagoner had with Rattner two weeks before, the GM chief graciously said, "I'm not planning to stay until I'm sixty-five, but I think I've got at least a few years left in me . . . But I told the last administration that if my leaving would be helpful in saving General Motors, I'm prepared to do it."

Considering that GM was in the final stages of a ma.s.sive, eight-year restructuring, clearing away many of the company's longest-standing problems, Wagoner never expected anyone to take him up on the offer.

Which is why he was stunned on the morning of March 27 as Rattner, sitting across from him at a table inside Treasury, slowly unsheathed the knife: "In our last meeting, you very graciously offered to step aside if it would be helpful, and unfortunately, our conclusion is that it would be best if you did that."

For a moment, Rick Wagoner was speechless.

He had just become the first CEO in U.S. history to be fired by a president.

At the same time that Rattner was firing Wagoner, a hundred yards due west, thirteen impeccably dressed men were gathering in the reception room for appointments in the West Wing.

They were the CEOs of the thirteen largest banking inst.i.tutions in the United States.

And they were nervous in ways that these men are never nervous. Many would have had to reach back to their college days, or even grade school, to remember a moment when they felt this sort of lump-in-the-throat tension.

As some of the most successful men in the country, they weren't used to being pariahs. They weren't sure how to act, either, especially in the presence of someone who had power over them, and may well decide to exercise it.

After all, they were indeed pariahs. The populist backlash against the financial sector-building steadily since September-was finally beginning to cause grave discomfort on Wall Street. As unemployment ballooned and credit tightened, the country began to look inward, toward the origins of the panic and its disastrous outcomes.

That frustration had grown as details of the crisis began to trickle out. Outraged Americans, feeling proprietary about where their tax dollars had actually gone, were granted a first primer on the nature of credit default swaps. CDS had been an acronym bandied to and fro in conversation since the previous fall, but the term's complexities remained murky to almost anyone who hadn't spent years in finance. That seemed to have changed over the winter as the media offered explanations of how the vilified Goldman Sachs had, in essence, been paid $13 billion in bailout funds as a counterparty to AIG on swaps written to cover their CDOs, and another $6 billion from Societe Generale, the French bank that Goldman impelled to be a front man so it could write even more swaps with AIG. Nearly $20 billion in tax dollars going to Goldman. CDSs, it was explained, were like insurance policies without reserves, where the holder could also make a wager on the fortunes of almost anything, as long as there was someone else, a counterparty, on the other side of the bet.

But the backlash had reached fever pitch by mid-March, when AIG announced the imminent disburs.e.m.e.nt of $165 million in bonuses, and news of the full, 100-cents-on-the dollar payments of federal bailout money to AIG's counterparties created a kind of twin scandal that kept swirling over the ensuing two weeks.

Since mid-February there had been buses touring the houses of AIG executives, carrying demonstrators who would emerge to scream epithets and wave picket signs. The same went for the houses of financial industry lobbyists in D.C.: picketers with bullhorns. Proposals came from both sides of the aisle, buoyed by cable provocateurs from both Fox News and MSNBC-a rare example of ec.u.menical rage.

But the financial industry and its lobbyist protectors were even more aggrieved by how lawmakers were increasingly capitalizing on this outrage. Picketers and crank callers might yell, and several Wall Street banks might subsidize round-the-clock security for executives, but congressmen can pa.s.s laws.

Which is what the House did, on March 17, taxing at 90 percent any bonus above $1 million received by an employee of an inst.i.tution that had received $5 billion or more in TARP funds.

Meanwhile, reports finally emerged, with White House fingerprints, that Senator Chris Dodd, who had taken more money from AIG than any other congressional official, had written and then withdrawn an amendment to the stimulus package in February that would have stopped the AIG bonuses. Dodd's staff retaliated, saying that he'd quietly made the change at the behest of Geithner himself, who then countered a few days later, saying he'd been concerned about the overall legality of retroactively canceling compensation contracts for all the TARP recipients, rather than about the specifics of the AIG bonuses. None of it seemed to track.

Banking CEOs and their lobbyists watched this back-and-forth with intense interest-they saw it as Geithner having stood in the way of reckless congressional behavior-and they opened a fresh dialogue with the White House. Congress, they a.s.serted, was out of control, ready to take actions that would cripple banks and throw the country into a deep depression.

Where the president himself stood was another question. He had just issued a statement that he now wanted Geithner to "use any legal means necessary to rescind the AIG bonuses," a "legal means," if found, that might well be extended to all the major banks. This, combined with Obama's generally frosty language regarding the financial industry, had left the industry unsure of what to make of the new president.

But the lobbyists' fears about the president's strong words were calmed by calls to Treasury in March. Geithner, they found, was also concerned about congressional excesses. An idea was hatched: leading bankers would meet with the president. The bankers talked with the administration about ground rules and what message such a meeting might send-to the benefit of both the bankers and the president.