Why didn’t the Obama Administration let Citigroup fail when it could?

by Eric Shierman

Over Christmas I finished reading Ron Suskind’s 500+ page indictment of Obama’s economic policies titled Confidence Men.

Writing from a progressive standpoint, Suskind is critical of Obama for being too indecisive, claiming that his lack of experience caused him to get “rolled” by his advisers. That was certainly the theme of the other book of this caliber on Obama’s first year Obama’s Wars by Bob Woodward. In Confidence Men, Suskind has produced a book that illuminates government policy in 2009 like Andrew Ross Sorkin’s Too Big To Fail did for 2008. Indeed it is like a sequel where everything Bush did bad, Obama managed to do worse.

The book is so long and so detailed, it is filled with a lot of news that did not get reported on, making me wonder how many people who wrote reviews for this book actually took the time to finish reading it. Most of its immediate release buzz centered on the claim by many of Suskind’s sources that the Obama administration has been a hostile work environment for women. It was this theme that co-host Mika Brzeniski came prepared to rebut when Suskind was on Morning Joe:

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Not unlike the media coverage of this book at its release, Suskind wanted to talk about weightier matters that he considered real news, but reporters wanted to talk about Obama’s jocular men’s locker room environment. That is all in there, and it is surprising. It starts off at the beginning of the book with Christina Romer’s first meeting with the president elect during the transition:

It was on a Friday, November 21, that Romer first entered Obama’s curtain-sealed office in Chicago. Unlike Orszag, she was nervous about meeting Obama and she hadn’t even come with any ultimatum or conditions about taking the Council of Economic Advisers job. She was just elated to get to know the guy.

But their first meeting would open on an odd note. Before exchanging hellos or even shaking hands, the president-elect delivered what seemed intended as a zinger.

“it’s clear monetary policy has shot its wad.”

It was a strange break from decorum for a man who had done so outstandingly well with women voters. The two had never met before, and this made the salty, sexual language hard to read. Later it would seem a foreshadowing of something that came to irk many of the West Wing’s women: the president didn’t have particularly strong “women skills.” The guy’s-guy persona, which the message team would use to show Obama’s down-to-earth side, failed to account for at least one thing: What if you didn’t play basketball or golf? Still, for the moment, the comment didn’t faze Romer. She was curious to hear what he thought.

“What do you mean?” she asked.

Obama extended his hand, now ready to greet her.

“I guess we need to focus on fiscal policy,” he said.

“No, you’re wrong,” Romer corrected him. “There’s quite a bit we can still do monetarily”

She later describes to her husband the encounter, “But David Romer was more blown away by her brazenness than anything. ‘The first thing out of your mouth was’ No, you’re wrong’?!” There are many more anecdotes like this that ultimately lead to a confrontational meeting with the president and the women working in the White House, but the greatest tragedy here is that time and time again the president ignored Romer’s advice. While gender discrimination is a serious charge, mismanaging economic policy ought to be considered serious too. She is constantly correcting his economic assumptions that are at times rather bizarre, but the one time she convinced him on a particular policy, the president was powerless to execute it. This is the strange story of Citi’s bailout that Suskind uncovered.

It started of course with the Bush administration. The Fed gave Citi discount window loans that it should not have as well as TARP, but the most revealing moment came when the Treasury was going to just give Wachovia to Citi with its losses indemnified. Wells Fargo put in a bid for Wachovia that would pay the FDIC for the assets and require no backstop from the Treasury. Tim Geithner, then head of the New York Fed, fought against Wells Fargo’s bid like he was a paid lobbyist for Citi. The Bush administration ended up siding with Shelia Bair, head of the FDIC, which ended up selling Wachovia to Wells Fargo.

That is all known, what Suskind has discovered is that later under Obama, it becomes clear that even with its TARP funds and discount window access, Citi was hopelessly insolvent and needed to be seized by the FDIC just as Wachovia, Washington Mutual, and hundreds of small banks have ever since, but Bair was blocked by Geithner again, this time successfully. Now as Secretary of the Treasury, Geithner remained Citi’s number one advocate. Suskind sums up these two sides this way:

[for Geithner] Debt was sacrosanct. No creditor would suffer. Bair was equally intransigent. Secured creditors, such as equity holders, of course, wouldn’t be wiped out, but they had to face consequences for lending money to an institution whose recklessness had led to its demise. They must, she said, “face some discipline.” Her point was that ultimately this would be seen as progress – as when someone finally got a needed operation – which would begin to restore long-term, sustainable confidence in the financial system. Debt was underpriced. Once it was priced properly, the healing could begin.

Instead of being dismantled, Citi got additional direct aid beyond TARP, the government got an equity stake in the company, and was never seized by the FDIC for insolvency. Geithner having much more clout in the Obama administration, Bair saw she was losing this one so she fell back to the position that at least Citi’s CEO Vikram Pandit should be fired:

Around they went, gridlocked. Finally in a conference call Bair said that at the very least Pandit must go. He was essentially a fixed-income trader and a hedge fund manager. “We need a commercial banker at the top of this bank – someone who knows the business of banking. That’s one way to maybe get some lending started. It is mostly a bank, after all.”

In terms of some accountability for reckless actions, Bair considered this a starting point. Geithner wouldn’t entertain even this fallback position. The government exchanged its $45 billion in direct aid and $306 billion in guarantees for a 36 percent ownership of Citi. Geithner, thinking about how that leverage might be used, said, “Maybe we suggest a few new directors and let them decide.”

What then follows is one of many anecdotes that paint a picture of corruption at the Treasury that goes all the way up to Geithner:

Geithner, who’d chatted with Pandid a few hours before, added that maybe they could suggest that Vikram hire some more commercial bankers underneath him.

Forty-five minutes passed – that was all for today. The men hung up. Bair, after she heard the clicks, wondered, as usual, what more she might have said.

Geithner sat at his desk and signed forms allowing for various foreign acquisitions or investment in the United States, a system started thirty years before to review such activities through the lens of national security.

A call had been scheduled at 4:05. His secretary asked if he was ready; it’s Vikram Pandit. Geithner told Pandit, as he did most days, where things stood.

While Geithner seemed to be a wholly-owned subsidiary of Citigroup, Romer was selling Larry Summers on Bair’s plan to seize and dismantle the insolvent bank. A convinced Summers set a meeting to advise the president. The president was an easy sell, wanting to do something bold that appeared to hold someone accountable. The meeting however was dragged out by heavy counterarguments from Geithner and his Treasury staff. What happened next follows a similar pattern to the kind of policy making Suskind has uncovered:

“Look,” Obama said, with evident frustration. “I’m going to get a haricut 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.

Rahm told everyone why this was all politically impossible, an argument punctuated with more swear words than a sailor. In conclusion he said “Listen, it’s not going to f****** happen. We have no f****** 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.”

More than any sexism, it was moments like these that Romer looks back on with the most disappointment:

Romer later said she felt like “I’d been punched in the stomach.” … 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 … 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 pm, Summers, on cue, took the floor.

“We had this very good discussion at the beginning of our meeting, but while you were away …”

Summers, Emanuel, and Geithner then proceeded to work the president hard from the idea of allowing any large banks to fail preventing the FDIC from resolving them. As an alternative, they offered the president the idea of having the Treasury department conduct “stress-tests” of the banks first and they could then have more information to later reassess how to go forward. Shelia Bair was not in the room, but Romer and her CEA colleagues who supported letting insolvent large banks fail suggested that Treasury ought to at least formulate a plan to resolve Citi as a test case. Obama grabbed on to that, to delay the major decision, conduct stress tests, and develop a prototype plan for Citi. A follow up meeting was scheduled at an April morning briefing to review Citi’s fate. What Suskind reports of that meeting is nothing short of remarkable:

In early April, Obama’s economic team congregated in the Oval Office for the morning briefing. All the key players were there, except Geithner. After a few moments, the president talked about a resolution plan for Citigroup as a key item in his arsenal, and wondered how close it was to completion. Christina Romer and Larry Summers glanced at each other. They had been talking for nearly a month about how the Treasury Department seemed to be ignoring the president’s clear, unequivocal orders involving Citigroup.

Geithner and his team were moving forward with their own favored policy, the stress tests, but they had done virtually nothing about a plan to wind down Citgroup.

Romer’s mind raced. Wouldn’t the president want to know if his orders had been ignored? Especially concerning one of the most important crisis he would have in office?

“I’m sorry, Mr. President,” she said, summoning her courage, “but there is no resolution plan for Citi.”

Obama looked at her, stunned. “Well, there better be!” he said.

Romer immediately felt Emanuel’s gaze. Something was clearly amiss.

When the meeting ended, Emanuel and Summers huddled. A short time later, Summers took Romer aside.

“You did something very consequential there, telling the president that there was no plan for Citi,” Summers said. “Rahm was incensed that you told him that. That Tim wasn’t here to defend himself.

That was on page 246 of Suskind’s book, but we never get any details about the follow up for the next three hundred pages. Geithner was more than able to defend himself. Somehow either he convinced the president to change his mind or he simply defied the president and the U.S. head of state folded like a cheap suit. Apparently few of Suskind’s sources even know what happened or where the decision to keep Citi on life support was made. The most he was able to uncover came from his final interview with the president which he quotes at length in the last chapter:

When asked about how agitated he was at his Treasury secretary when he found this out, Obama said, “I’ll be honest, I don’t recall the exact conversations.”

Then, recalling the matter – something never publicly disclosed – he said, “Agitated may be too strong a word. But I will say this,” he continued. “During this period, what we are increasingly recognizing is that there are no ideal options.”

It is hard to see what would have been less than ideal to letting Citi fail. His economic advisors explained how the Fed’s discount window could freely lend to solvent banks protecting them from contagion. Indeed we now know that this facility had assets of more than $7 trillion dollars dwarfing even TARP. If there was ever a moment to do the right thing and hold a poorly managed bank accountable this was it. Somehow the president was using a different analytical framework than the administration’s economists. This is probably the most glaring example of regulatory capture in American history.

The president was clearly withholding his real motives in that interview, hiding them in a fog of lost recollection, putting him in a position to appear incompetent as an executive and forcing Suskind, who would otherwise be sympathetic to the president, to conclude:

The Citibank incident, and others like it, reflected a more pernicious and personal dilemma emerging from inside the administration: that the young president’s authority was being systematically undermined or hedged by his seasoned advisors. On this issue, a matter perilously close to insubordination, the president was carful in his selection of each word: “What’s true is that I was often pushing, hard, and the speed with which the bureaucracy could exercise my decision was slower than I wanted. But I don’t think, it’s not clear to me – and I’ll have t reflect on this at some point – it’s not clear to me that that was necessarily because of a management problem, as it was that this is really hard stuff.”

It almost sounds like the Presidency was harder than he thought it would be. Let’s not forget he had no executive experience running anything. A Reagan or a Clinton he was not, because he was never a governor. Suskind just does not buy Obama’s plea that it’s all too hard to lead a White House:

This was an area where the dysfunctions of an often leaderless White House were most pronounced. In the period from the fall of 2009 to the spring of 2010 – when unemployment was just above or just below 10 percent, the highest level in nearly thirty years – the president and his economic team, led by Larry Summers, were locked in paralysis and constant “relitigation,” as the president often groused, over what to do. The policies that emerged from those endless hours were negligible. This was a central result of all the management woes. It wasn’t a matter of his policies not succeeding in Congress. Few policies of any real heft were even proposed.

Suskind is a respected journalist among the more progressive alternative media. This book is destroying Obama’s credibility with his own base. Take a look at his reception by John Stewart on the Today Show:

You have to give John Stewart credit, he does not get sucked into the sexism charges like the main stream media did, but takes up the question of propping up Citigroup directly in the second half:

The greatest risk for Obama is that progressives will read this book and realize Obama cannot deliver even with a progressive legislative branch, so having a guy like that in the White House is actually worse than having a Republican. If John McCain were president at least they would have retained a strong hold on Congress. Obama gave America the Tea Party, but with little to show for in exchange for the loss of Nancy Pelosi’s leadership in the House. One of the primary reasons Obama has taken on an almost quixotically combative partisan approach to governing in this election year is that he is deeply worried about his left-wing base. Obama’s handling of Citigroup was either corrupt or incompetent; he now needs to worry about Occupy Wall Street seeing him as part of the problem rather than a source of hope and change.

And yet, Geithner is still his Secretary of the Treasury! Not long after this meeting where Romer informed the president that Treasury had yet to formulate a resolution plan for Citigroup, the CEOs of the major banks were called in to a summit-type meeting in the state dining room. They entered the room intimidated and left confident. One of those CEOs described the situation to Suskind this way:

The thirteen bankers, and especially the half dozen titans from New York, returned to their corner offices that afternoon with very strong feelings about one man in Washington: Tim Geithner.

“The sense of everyone after the big meeting was relief,” said one of the bankers. “The president had us at a moment of real vulnerability. At that point, he could have ordered us to do just about anything, and we would have rolled over. But he didn’t – he mostly wanted to help us out, to quell the mob. And the guy we figured we had to thank for that was Tim. He was our man in Washington.”

In public life, constituencies are important. Geithner now had one: the powerful but reviled leaders of the nation’s largest banks. He’d have been loath to claim their backing, just as they’d have known not to be demonstrative with support. It was, after all, a bond of mutual desperation: both Geithner and his silent backers were fighting for survival. As one banking lobbyist said, “If Tim were fired, we’d be in trouble; we knew that.” Of course, he’d have plenty of job offers in New York.

Opposition to the bank bailout is something that both the Tea Party and the Occupy movement share. Keeping Citi on life support was not a free-market position, yet this policy has poisoned the political environment against well managed banks like Wells Fargo that could have taken up Citi’s market share in the wake of its failure. Now Wells Fargo has to share Citi’s plight as a target of protests just as it has to compete with this zombie bank to meet its payroll. This policy mistake and the failure of leadership that led to it ought to be held accountable. We have elections for this reason. Ron Suskind, as a progressive, has done yeoman’s work holding Obama accountable; the big question is will progressive voters do the same.

Eric Shierman is a partner at Creative Destruction Investment Partners, writes for the Oregonian under the pen name “Portland Aristotle” on the MyOregon blog, and is the author of the forthcoming book: A Brief History of Political Cultural Change. His articles can be read at:http://connect.oregonlive.com/user/PortlandAristotle/posts.html