Confidence Men Part 15

"You only get one shot at this," Romer said. "You don't want to shoot low."

"Our credibility is being put on the line," Summers seconded.

The goal, however, was gentle optimism: that a turnaround for the industry could begin with acceptance of a slightly improved version of reality, and that the ensuing confidence-that things will turn out well-encourages actions to make it so. In this regard, the combatants ate chocolate Easter eggs and matzo as they debated matters of resurrection: how much capital banks should have on hand, given present circ.u.mstances, to allow the government to stamp them with a slightly improved version of reality. Summers and Romer said there was no way to precisely predict whether there would be a steady upward trend for the U.S. economy. It was wrong to bet the credibility, and the Treasury, of the federal government on such a prediction. If you got it wrong, you would be missing the best and maybe only opportunity to fix these banks so that credit would begin pumping again, in safe fas.h.i.+on.

At 10:00 p.m. the dispute over whether these stress tests were just the government's version of Kick the Can was starting to slow. Treasury had the upper hand. The tests were for them and the Fed to execute and shape. Gene Sperling left the room and returned with another box of matzo. Geithner, famished like the rest of them, shook his head.

"Don't do that," the Treasury secretary said. "Now we'll end up being here for another hour."

But, at this point, the subtext was clear. Deep down, it didn't matter how each bank was a.s.sessed in the stress test. The fact that each one would be given a "United States of Moody's" stamp, and told how much money the government recommended it raise, meant that anyone who invested in a bank should feel confident that they would recoup their losses in the event of a bankruptcy, care of Was.h.i.+ngton. Being able to sell this a.s.surance in the public markets meant banks would quickly raise enough money to pay back their TARP funds and explore new, commanding heights of profit. Whatever else was happening in the economy, the investment bankers in the room, such as Lee Sachs, could not help but sink into delicious fantasies of how the banks would now be able to earn their way to health and beyond.

Romer shook her head. She had too much context to feel celebratory at this prospect.

"After all that happened over the past two months-much less the last ten years," she said, looking back, the idea that the shareholders and executives of Citigroup and other banks "might now get rich with the help of the U.S. government was just unconscionable."

Yale Law School was as impressive today, with its soaring, centuries-old Gothic spires, as it was on the first day Greg Fleming arrived in 1988, fresh off his undergraduate days at Colgate. Now, years later, with two kids and money in the bank, it impressed him as a place where he might rediscover his ethical moorings.

Three and a half months before, on January 1, Bank of America and Merrill shareholders had approved the bank's $50 billion purchase of the investment firm.

It was already being called the "deal from h.e.l.l."

That price tag, of course, was only half the story. The buyout was supported by $118 billion in government backstops and an additional $20 billion negotiated in the brinksmans.h.i.+p-still largely opaque-between Ken Lewis and the team of Paulson and Bernanke in late December. Lewis pressed his case that Merrill's losses were worse than expected, and after the deal closed, a $15 billion loss was announced for Merrill, now Bank of America's largest division. This drew one round of lawsuits, followed by more, once revelations about Lewis's December ultimatums began to emerge, followed by a "good G.o.d, what's next" fear that crushed Bank of America's share price. By late January it had sunk by nearly 80 percent from where it was on Lehman weekend when the Merrill deal was hastily struck and signed, the handiwork of Greg Fleming.

By January, once the deal was inked, the key details, some of them unsavory, began to emerge in rough lockstep with the departures of senior Merrill executives, from John Thain, Merrill's CEO, to Fleming, the number two, and on down.

It was after all this, in late January, that word began to slip out-most likely from aggrieved Bank of America employees-about Merrill's last-minute bonuses of $3.6 billion, paid quickly before the brokerage firm changed hands.

Along with his invective about "shameful" practices, the president said that Wall Street should have the decency to "show some restraint."

The words about "shameful" practices and the need for restraint carried force, and stung Fleming. He liked the president and felt he was right: "It is a time for self-restraint," Fleming said, "for taming the 'animal spirits' of the street, and Was.h.i.+ngton is the only place with the power to make it happen."

Fleming thought often of his phone conversations with Obama from the New York restaurant in 2007. He knew he was now too controversial, as the man who sold Merrill, to merit an audience, but he daydreamed about how such a meeting might go, how he might help with that self-restraint by building a mix of barriers and incentives to get Wall Street refocused on fundamentals, on actually investing in the construction of a stronger American economy.

In fact, over the years, Fleming had built a strong case for how self-restraint might look-and it had cost him. He was paid $34 million in Merrill's b.u.mper year of 2006, but then took no bonus in 2007-a year Merrill CEO Stan O'Neal was paid $161 million-and then nothing from that $3.6 billion bonus pool in 2008. On that last score, Fleming convinced Thain and two other top executives to also go without pay. That last act may have proved to be salvation for the Merrill team in the days after Obama's "shameful" comments, as the fur flew.

In early February, New York attorney general Andrew Cuomo's office, which began investigating the MerrillBank of America deal, had subpoenaed Thain-who'd made more headlines by revealing he'd spent more than $1 million redecorating his office. The details, including an $87,000 rug, were tabloid fodder, and he quickly reimbursed the money.

Fleming, who was up next, received a legal letter from Bank of America telling him, in essence, not to cooperate with Cuomo, and that eternal silence was part of his exit agreement. Fleming leaked the letter, thumbing his nose at Bank of America, and then showed up at Cuomo's office on March 9 for a long day of depositions. He felt he could testify, and that he should. He'd forgone tens of millions in bonuses in 2007 and 2008. He was trying now to redeem himself.

And then he vanished to Yale to start a new life.

"Having nothing to hide is going to cost you these days on Wall Street," he said. "And maybe that's part of what went wrong. Look, I'm no prince. I want to make money as much as the next guy. But things got to the point where acting prudently-or, G.o.d knows, ethically-got you slaughtered, left behind. It made you the tortoise in a race where the hares were getting paid by the yard. We've got to figure out a way to reward slow and steady, prudence and sure-footedness so, like in that old story, sometimes the tortoise eventually wins."

Part of the battle Obama faced in translating values he espoused in his Inaugural Address-of his desire to usher in "an era of responsibility"-was to change what he and others often called the "culture of Wall Street." The features of that culture had thoroughly permeated the wider American culture. Wall Street's stars were cultural icons. The Street was a destination for the top students graduating from the top colleges for nearly three decades. It was the epicenter of the quick-kill, winner-take-all, by-any-means-necessary ethic.

Fleming, walking the Yale campus, was testing the undertow of that culture and what it might take to break free of its pull.

Escaping the staccato beat of New York, and getting some distance from the past two years, was a first step. The second was having to field questions from law students who were disinterested parties. Some were merciless. He had a buffer; he taught the cla.s.s with the help of another professor, and brought in others to be lightning rods: a steady procession of Wall Street players. They took the train two hours from New York to New Haven and, in cla.s.s after cla.s.s, sat for an hour of truth therapy before returning south.

Today, April 21, there was an array of lawyers and executives from top investment banks. The most consequential, and least imposing of them, was H. Rodgin Cohen, the managing partner of Sullivan & Cromwell. He was a small, soft-spoken man, but also the most powerful lawyer, deal maker, and consigliere in the financial industry. He had joined Sullivan & Cromwell out of Harvard Law School in 1970, become its chairman in 2000, and advised virtually every major bank in the United States and on Wall Street since.

At sixty-four he was hoping for a valedictory flourish to a storied career, with a few years as the deputy Treasury secretary. A Democrat, he had met Obama several times, liked him, given him money, and raised it. "Rodg" was getting close to retirement age at Sullivan; government would be a perfect fit. But last month it had become clear that his confirmation would turn troublesome. It wasn't so much what he had done, or how he'd profited from the past decade of Wall Street's excesses-which, of course, he had-as what he knew. That would be everything. He had advised everyone, and had often stood as the last counselor tapped before action. Under oath, he'd been asked about the AIG bonuses, Goldman's $13 billion counterparty payments, what d.i.c.k Fuld knew and when he knew it. Claiming lawyer-client privilege would have sounded like taking the Fifth Amendment. So he reluctantly withdrew.

But, sliding down in his chair in a lounge at Yale-students and other visiting Wall Street types crowded in from all directions-Rodg didn't weigh in, as expected, on ethical or moral issues. He was too concerned about the stress tests and too busy advising banks and his friends at Treasury about the perils and possibilities of their course.

"What's going to happen to banks if they are told they need to raise capital?" he proffered, in a reedy voice as soft and earnest as that of TV's Mr. Rodgers. "What will be the impact on a bank's stock price, its debt trading and counterparties?" These banks, he went on to say, will be able to say that if I can't raise capital on acceptable terms, I can turn to the government. But won't these banks be forced to move very quickly to raise capital at a time they are told they are capital deficient? The ultimate danger is that customers and counterparties will disengage, even if there is the a.s.surance of government capital, because who wants to deal with a bank that has been deemed "weaker" than its peer inst.i.tutions?

This was the position Wall Street had been pressing on Was.h.i.+ngton in the past two weeks. The government, Rodg said, "will be picking winners and losers," putting its stamp on strong versus weak. The ways this might affect Wall Street were indeed unique. With Chrysler or General Motors-with their tangible liquid a.s.sets, definable product lines, and measurable activities-the government's designation of healthy and unhealthy wouldn't make much difference. Stock prices might suffer, but vendor relations.h.i.+ps, the key to most manufacturing, would stay intact.

Wall Street was different. The financial products sold by the Street were virtually all the same: commodities, essentially, offered in many flavors by what, at its core, was a kind of capital cartel. The way the firms made money was by building and breaking alliances within this cartel, to gain small advantages and make their menu look freshened and reshaped for clients and customers. When a firm stumbled, customers tended to wake up, snapping out of a trance, to recognize that the real item in this mix was their hard-earned money-not some firm's claim to magical properties that effortlessly turned money into more money. But having nowhere else to turn-that's the way cartels work-these customers would fearfully leap to another firm with the click of a wire transfer. The practical outcome: when the government tags one inst.i.tution as weak, the others turn on it like piranhas.

Rodg thought all this over for a minute, doing the math.

"Another interesting part of the dynamic," he said, "is . . . not do you need capital, but how many others do as well? If you need it, and nineteen others also need it and take it, not so bad. But if only four or five take capital, it's much more of a winners-and-losers syndrome."

He is no doubt thinking about which of his clients, or other major banks, might fall in which category. Goldman and JPMorgan, for instance, could grow very strong feasting on four or five big banks that might be wounded by the government's vote of no confidence. In fact, both banks were already ahead of where they'd have been otherwise, having fed on the carca.s.ses of Lehman, WaMu, Bear Stearns, and the others. That was why they were already starting to post stronger-than-expected profits.

But what about the weight of toxic a.s.sets? One of the students asked. Under pressure to post strong earnings and sh.o.r.e up their capital, won't it be hard for banks to clear away those toxic a.s.sets so they can start lending again? Will any of these actions really restore confidence?

"Under the best of circ.u.mstances," Rodg concluded, "I think it's optimistic to a.s.sume the stress tests will fully restore confidence in the banking industry. Banks must still deal with their toxic a.s.sets . . . that's what this whole PPIP thing is all about. The key question is: Will we be able to see clearing prices-prices at which investors are willing to buy the a.s.sets-where banks are capable of selling them without creating too large a capital hole?"

The answer to that was probably no. This was the untenable bottom line that Rodg, like those at Treasury he'd been talking with, was having to face. It was, in fact, the underlying problem of the PPIP, the Public-Private Investment Program, and the stress tests more generally. While banks may go out to raise money, there weren't incentives powerful enough, anywhere, for most of them to sell off toxic a.s.sets at rock-bottom prices, marking them to market, and then having to reduce the values of entire real estate portfolios-just like when a house sells for a low price in a neighborhood and, as a "comparable," pulls down appraised values up and down the street.

In j.a.pan, banks wrote down the toxic a.s.sets at their own discretion-which meant slowly or not at all, even as they were pushed back to profitability by the government. The drag on their balance sheets hardened into a new normal, constraining the flow of credit for years. One of the points that Summers and Romer made in the big meeting on March 15 was, simply, if you give a public company an option, they'll tend to delay the pain rather than face it, especially when they can get all but free money from the Fed and push it into trading activities.

That dilemma would be left for another day. After two hours, Rodge and the others were on their way back to Wall Street. Fleming, too. He had a fund-raising dinner in New York that night-a gala to support New York's food banks, which were overcome with record numbers of hungry people, many of them newcomers to penury. The whole New York economy rested on the financial industry and the cash that had flowed from the pockets of those lucky enough to be part of the industry's bonanza. That the boom had been over for nearly a year meant that, up and down the line-from cooks to ma.s.seurs, caterers to the haberdashers-the city's providers of high-end goods and services were suffering.

The hope of the rest of the country-to get the large banks lending again-was not neatly aligned with the interests of New York, which was to get its banks to start earning money, by whatever means necessary.

Stopping by his office after the speech, Fleming was happy to be divorced from such bottom-line concerns. He said he'd begun talking to friends about starting "an inst.i.tute to examine how to restore ethical standards to investing." He figured he could base it at Yale and continue to draw Wall Streeters north to discuss "how to make prudence s.e.xy again." Not that he wasn't still logging hours on the cell phone to many of his old friends atop Wall Street. They'd come to New Haven to talk about what went wrong, about lessons learned, but they'd also talked with Fleming about Wall Street's hard, cut-to-the-marrow a.s.sessments of self-interest.

"What Rodg was really saying at the end is that it's optimistic-foolish, really-to think the banks will clear away what he calls those legacy a.s.sets. They'll never do it. There's too much of it, and in a down market the stuff is worthless.

"But even if they did, slowly across ten years, it won't cause them to start lending again, which is what real people in the real economy need. The big houses have too many other ways to make their money. They're going to do what's in their short-term interest, and lending out money into a soft market is not one of them."

He paused, stopping for a moment before getting into his modest car, kids' backpacks littering the seats. Fleming said the betting line from the inside players such as Rodg Cohen was that about half of the nineteen would pa.s.s the test, half wouldn't.

"Rodg is afraid right now, and so is the industry. That's why they're going down to Was.h.i.+ngton to try to keep the stress tests as easy as possible. Wall Street does 'greed' on its own; they don't need any help there. The card in Was.h.i.+ngton's hand is fear; they still have it. They shouldn't give that card up unless they get a lot in return. In fact, anything they want. This is not personal or about some shared principle. It's about negotiating well. That's all Wall Street, and a lot of people out there, respect."

Then he jumped in his car and headed for downtown Manhattan, to eat caviar and prime rib and write a check to feed the homeless.

Two days later, Fleming's nemesis, Ken Lewis, was blanketing the news. The New York attorney general's office had released transcripts of Lewis's sealed testimony about how the government had bullied him in December to keep the Merrill deal intact, under threat of dismissal for him and his board, and then gave him another $20 billion in TARP funds. The news was explosive, entrancing the news cycles with a glimpse of this strange, secret dance between Was.h.i.+ngton and Wall Street. Both sides had operated under legal obligations to act in ways that were transparent and accountable on behalf respectively of voters and consumers. But with their shared goal of projecting confidence-with confidence itself being both end and means-transparency was seen as carrying unacceptable risks. As the fears of September 2008 finally began to dissipate, readers and viewers tuning in to the case were treated to a tour of the shadow land where powerful impressions were manufactured. In a key pa.s.sage that roiled the news cycles, Lewis told Cuomo's investigators that he had been pressured by Paulson to keep silent about the deepening financial distress inside Merrill.

Q: Were you instructed not to tell your shareholders what the transaction was going to be?

A: I was instructed that "We do not want a public disclosure."

Q: Who said that to you?

A: Paulson.

Q: Had it been up to you would you [have] made the disclosure?

A: It wasn't up to me.

Q: Had it been up to you?

A: It wasn't.

With actions gamed for their effect, rather than the harder accountability that comes with transparency, the tough-minded decisiveness at the center of both good governance and sound business gets subtly corrupted.

With Lewis's disclosures now in sunlight, Fleming was receiving calls nonstop.

Of course, in Cuomo's investigation-officially probing the $3.6 billion in Merrill bonuses-Lewis testified after Thain and before Fleming. Back in his office at Yale, Fleming offered a view, from the very inside of the controversial deal, starting with the "material adverse change" clause.

"It's by no means clear that if we had a 'material adverse change' that they could exercise their rights under that clause. The clause is extremely complicated and wasn't negotiated well enough. And it's a Merrill-specific clause. What happened in October, November, and December was much more than Merrill-specific. The world went to h.e.l.l after Lehman went down. So there wasn't anything held back in diligence. Paulson and Geithner made the greatest mistake. The biggest mistake that was made, in spite of how hard they tried, was letting Lehman fail.

"The clause protects Merrill because [its] problems would need to be disproportionate. But the whole industry was in turmoil so it could claim to not be Merrill-specific."

Then Fleming took it another step, putting on his deal hat.

"I don't know why Lewis pushed to do this, didn't turn around and say [to Paulson], 'Okay, I'm going to do this, but I need to renegotiate and then I need the SEC or somebody to agree on some expedited revote.' I mean, you had the government at the table! I'm just amazed that [Lewis] didn't come back and try to renegotiate."

This was a fine rendition of why, several centuries ago, governments decided to pa.s.s laws about the fair and legal conduct of commerce-and then get the h.e.l.l out of the way. This was a dispute between two companies and their shareholders, for better or for worse. The a.s.sertion that "too big to fail" means "too big to exist"-soon to be voiced at a congressional hearing by a penitent Alan Greenspan-rested on an underlying principle that government shouldn't find itself "at the table," in Fleming's apt rendering, having to cut deals with banks it couldn't afford to let fail. Then deal points become destiny, with banks gaining, or losing, compet.i.tive advantages based on how successfully they managed their negotiations with a public ent.i.ty-a model that undermined the government's fundamental role as defender of practices and principles. Instead, it had become a case-by-case negotiator, with a bank's survival as the only hard-and-fast goal.

That afternoon, April 23, Barack Obama strolled into his Cabinet Room.

Waiting for him were the elite of Congress. Sitting around the huge mahogany table was the Democratic leaders.h.i.+p of both the House and the Senate, along with the Republican leaders.h.i.+p of both bodies. They were there to discuss the budget, which had been a steadily growing issue, starting in late winter.

Obama's needs were great, but as budgets always command, there were limits.

The huge financial obligations the United States had taken on during the Bush era were now colliding with the crises and diminished tax revenues left to his successor. The audacious agenda a.s.sumed by Obama had also meant enormous costs-most of them projected and yet to hit the balance sheet. The TARP fund for repairing the financial system still had, thankfully, $350 billion in it. But that figure was overwhelmed by Obama's $787 billion stimulus package and the combination of rising unemployment benefits and declining tax receipts from the ongoing recession. Tax receipts had in fact flattened in early 2008, just as costs began to dramatically rise. The cost of the war in Iraq was now diminis.h.i.+ng, but Afghanistan was more expensive-a wash. Health care costs continued to rise as the population aged and more people moved onto the Medicaid rolls in a depressed economy. The outcome was that the government's expenses were running $1.2 trillion ahead of its revenues for 2009, a number that was sure to continue to grow until the fiscal year's end on September 30. A version of these hard facts was revealed in late February, when the White House released its preliminary budget for 2010. Since then, in the traditional manner of budgetary brinksmans.h.i.+p, the White House's budget had been matched, mirrored, and contested by budgets in both the House and Senate.

Everyone knew audacity wouldn't be cheap, even with Obama's pledges to remain fiscally prudent. There were grand plans in the budget, of course, led by a request for another $750 billion in additional TARP funds for bailing out and restructuring the financial system and, of course, health care reform, with $650 billion penciled in. On the latter score, Orszag had special advantages. Models he had been working on since he was CBO director in 2007-largely accepted by the current CBO regime-showed that the government's efforts to use Dartmouth's "comparative effectiveness" findings and similar data could both improve care and save costs. Up to a point. When the CBO scored Obama's overall budget in late March, the projections weren't good: a deficit, over ten years, of $2.3 trillion more than the administration had predicted. Beyond that, the Obama administration had committed itself to a deficit cap of 3 percent of GDP, a level that the CBO felt would be exceeded every year until 2019, when it would be 5.7 percent.

Much would be unaffordable, and this meant new scrutiny on the cost of health care reform and the soundness-or "scoreability"-of its financial projections by independent a.n.a.lysts and, ultimately, by the Congressional Budget Office. The prospects were not good.

What the administration was finding, Orszag and others recalled, were the distinctions between campaign talk and governance. You could say all sorts of things during a campaign. In government there was a system-albeit an imperfect one-to "price" expectations, and equally to negotiate, in a step-by-step process, the new laws of the land.

That was what the leaders.h.i.+ps of the House and Senate were poised to discuss in the Cabinet Room, and they did so without much headway. The parties were seriously divided. The Republicans were starting to call this the most liberal, big-spending budget in decades. It was a "third wave" of progressivism, said their fiscal guru, Congressman Paul Ryan, to follow FDR's New Deal and LBJ's Great Society. The Democrats, though, still had the leverage. If there was Republican intransigence in the Senate, they could pa.s.s the bill through "reconciliation," a provision in which bills pertaining to the budget can be stripped of nonessential features and pa.s.sed with a simple majority, rather than with the new normal-driven by creative uses of the filibuster-of 60 votes.

Around they went, until a frustrated Obama improvised. Pa.s.sing this prebudget resolution, a nonbinding next step in the process, he said, "has got to be a bipartisan process. I think we all need to give." Blank stares from around the room. This was just the traditional partisan push and shove. You eventually found some midpoint and nudged the pieces forward on the board. It had been going on since Hamilton and Jefferson. "As a matter of fact," he continued, "here's an example: I think Democrats need to give up on medical malpractice. As an indication of my good faith, I'm willing to put that on the table."

But this was the table marked "budget." Medical malpractice was a completely different debate-conducted in an entirely different realm-about the nature of health care reform. The admirable idea of trading the sacred cow of medical malpractice, considering how strongly the Democrats were supported by the country's trial lawyers, for a sacred cow on the Republican side was the kind of grand bargain that might take a few weeks or months of secret, cross-party meetings. Though this group represented the congressional leaders.h.i.+p, most of those here were not their party's point players on health care reform.

This time Obama filled the s.p.a.ce and the silence.

"Okay, now, what are you giving?" he challenged the puzzled Republicans. "What is your reciprocal 'give' here?"

Not one person said a thing. One of the partic.i.p.ants later said the moment was "odd and surprising, like a scene from that movie Dave," where a man off the street suddenly winds up as president. Once the silence had become intolerable, an agitated Obama wrapped things up: "Look, guys, this is making my case. You talk about bipartisans.h.i.+p. Well, I just laid down a very tough deal, and not one of you responded with a similar concession. Bipartisans.h.i.+p is a two-way street!"

Some of what was driving Obama's improvisations was that, unbeknownst to the public, he still wasn't sure what sort of policy he actually wanted as the "top priority" of his presidency. If Obama had indeed created "a s.p.a.ce where solutions can happen" at the Health Care Summit six weeks before, it was by now clear, to one and all, that there'd been little forward motion to show since then.

Losing Tom Daschle in early February was a blow that the White House had yet to recover from. With his wide array of skills, a long history in Was.h.i.+ngton, and a close bond with Obama, Daschle would have been ideally suited to direct the health care battle. After former Kansas governor Kathleen Sebelius was picked to take Daschle's intended place, heading the Department of Health and Human Services, Nancy-Ann DeParle was hired, on March 2, to lead the initiative from inside the White House. Obama's idea was that they would work as a team. But the result, even after DeParle's arrival, was that no one was in charge. Orszag, arguably the White House's leading expert in this area, had his hands full running OMB and attending each day's morning economic briefings. Nonetheless, he protested to Emanuel in an e-mail: Listen, I can't run health care, but someone needs to.

But on Obama's desk this week was a seven-page memo from DeParle to help the president decide where he ought to stand on the seminal issue of health care. DeParle, a soft-spoken, Tennessee-bred Rhodes Scholar who, under Clinton, had run the Health Care Financing Administration-the ent.i.ty that oversees vast federal outlays to Medicare and Medicaid, and is now called the Centers for Medicare & Medicaid Services-wasn't the type to meaningfully challenge Orszag or Summers at the conference table. She was a tough-minded expert with very specific opinions. She was respectful of the Dartmouth data that so enlivened Obama and Orszag. But having been a board member for various health care industry firms, she understood how the mountains of stunning data about "comparative effectiveness" built around the Wennberg Variation, of better care at lower cost, were still seen as a declaration of war by most health care providers.

While Obama, and certainly Orszag, seemed ready to fight that war, DeParle's focus was on the lynchpin calculations involved in insurance reform. She directed Obama's attention to the only working model for reform in the country: Ma.s.sachusetts, whose health care overhaul bill pa.s.sed in 2005 under a brokered deal between then-governor Mitt Romney and the state's Democratic legislature. Those who viewed the Ma.s.sachusetts plan as already a compromise of principles, including Ted Kennedy, pointed out that the model-of an individual mandate, where citizens were required to purchase health insurance; of insurance exchanges, where they could choose from a wide array of policy options; and of government support for those who couldn't manage the cost of premiums-had been the "market-driven" Republican position during the Clinton initiative in 1993 and for the decade to follow. What's more, the centerpiece of that program, the individual mandate, was something Obama had drawn up short of endorsing during the campaign, much to the ire of Hillary Clinton, who called him "all talk, no action" on health care.

Now, DeParle, in her memo, stressed that Obama should embrace a plan much like that in Ma.s.sachusetts, driven by the teeth of a mandate, where individuals would be fined for not having health insurance. Obama, never much for the mandate, was concerned about legal challenges to it but was impressed by DeParle's coverage numbers. Without the mandate, the still-sketchy Obama plan would leave twenty-eight million Americans uninsured; with the mandate, the estimates of the number left uninsured were well below ten million. But the mandate, with its various features, was expensive, adding an estimated $287 billion across ten years to the total cost.

Which is why at the budget meeting on the twenty-third-and in the weeks to come-Obama was looking for lightning-strike gains on cost, such as tort reform. DeParle's focus, like that of the Ma.s.sachusetts plan itself, was on expanding coverage: how to get everyone in the tent. Obama had often said to Orszag that he believed coverage and cost needed to walk abreast-in an integrated, mutually supportive way-if health care were to work. But this week, as he found himself persuaded by DeParle's plan, he already saw how coverage would edge ahead of cost in the ordering of priorities.

The next morning, over at the Treasury Department, Tim Geithner was wild with single-mindedness: "I don't want even one molecule of energy spent on anything other than the stress tests!"

In the large conference room near Geithner's office, Treasury's senior staff looked on, wondering what'd gotten into him. He was never one for locker room speeches, even when a motivational moment arose.

"Actually, I believe energy is measured in 'ergs,' " quipped Krueger, to fill the awkward silence.

"Okay, then," Geithner shrugged. "Not one erg of energy."

His point was clear to all: Treasury had staked everything-including, quite possibly, Geithner's job as secretary-on the stress tests. Not much had worked up to now, from Geithner's clumsy explanation in February of how the rest of the TARP funds would be applied to, in March, the handling of the AIG bonus scandal.

Treasury desperately needed to appear, at long last, as if they could meet this period's crises like professionals, with matters firmly under control.

Friday, April 24, was the official start of that crucible, with the public debut of the stress tests. After living through a series of backroom deals from last fall that had blown up in his face by spring, Geithner was ever more convinced that the stress tests needed to be kept in sunlight. This was far from an issue of consensus. Bernanke and the Fed had recommended that they be kept confidential, just as they had pushed to keep secret how AIG allocated its bailout money, and-still successfully-which banks needed to rely on Fed funds and guarantees. But the distinct inst.i.tutional mandates of Treasury and the Fed-the former operating under the direct, day-to-day mandates of a duly elected president; the latter, sometimes called the "fourth branch" of government, designed to support the banking system and manage monetary policy with little public oversight-were now creating regular complications in their many joint efforts to right the economy. As public outrage grew about the alliances between Was.h.i.+ngton and Wall Street, the Fed's tradition of concealment drew deepening suspicion. Even Bernanke had to acknowledge this. Geithner's position-that the markets would respond to the stress tests' findings only if they were at least as transparent as a bond rating agency-ultimately prevailed, though it meant his tests would have to be cleverly constructed not to reveal their many sub-rosa calculations, even under intense scrutiny.

As the official administrator of the stress tests, it was the Fed's role today to offer a lengthy set of descriptions about the standards of measure for determining the soundness of the top nineteen banks, the first round of the process.

But by morning most of those yardsticks had already emerged.

There had been a steady succession of leaks across the preceding week. Each made news, creating enormous interest in the "stress tests," a quick-fire phrase that was fast seeping into common speech. Coverage of what they were, and what they might show, now spread far beyond the business pages to columnists, pundits, and CNBC alerts.

Around town, managers of the marketplace of ideas were duly impressed.

George Stephanopoulos, the former senior adviser to President Clinton who hosted ABC's This Week, complimented Stephanie Cutter, Treasury's spokeswoman, on what a brilliant job Treasury had done with "those targeted leaks." Cutter reported this to her bosses, who immediately saw the irony: they'd been bitterly complaining all week about the leaks, which they were sure were coming from sources in Sheila Bair's office and the FDIC.

Bair seemed to be everywhere. At the end of March, two days before Obama met with the thirteen bankers, the Kennedy Library named Born and Bair as the year's Profile in Courage Award winners. The citation noted that "Sheila Bair and Brooksley Born recognized that the financial security of all Americans was being put at risk by the greed, negligence and opposition of powerful and well-connected interests . . . The catastrophic financial events of recent months have proved them right. Although their warnings were ignored at the time, the American people should be rea.s.sured that there are far-sighted public servants at all levels of government who act on principle to protect the people's interests."

A moan could be heard that day from Geithner's office. Officially placing Bair in the company of the already celebrated Born-the brilliant and soft-spoken Jeremiah, a decade back, of a coming derivatives crisis-would only serve to embolden the FDIC chief.

But when it came to controlling information, there was one area in which Geithner's office had been successful. Key disclosures of what actually happened in the March 15 "showdown" never leaked. Bair didn't know, and never found out, that the president had been trying to push forward what the FDIC chairwoman was recommending. He wasn't successful, either.

Alan Krueger said one reason Treasury dragged its feet on a constructing a plan for Citigroup's resolution was Sheila Bair. They would have had to consult the FDIC chairwoman. After all, her agency is in the business of closing banks.

"The fear was that Sheila would leak it," Krueger said, in a comment echoed by others at Treasury. "And there'd be a run on Citi."

He added that this was one of many reasons: "It was more than just that. The bottom line is Tim and others at Treasury felt the president didn't fully understand the complexities of the issue, or simply that they were right and he was wrong, and that trying to resolve Citi and then other banks would have been disastrous."