In October 2008, the CEOs of the nation's 13 largest banks, including Bank of America (NYSE:BAC), Citigroup (NYSE:C), JPMorgan Chase (NYSE:JPM), and Wells Fargo (NYSE:WFC), which collectively controlled (and still control) more than one-third of the country's deposits, lined up for a meeting at the Treasury department where they were told, in effect, how to manage their companies through the financial crisis.
Whether they wanted it or not (some didn't), the banks were given billions of dollars in taxpayer money and pushed into restrictions on how they could pay dividends and repurchase stock. It wasn't nationalization, but it was close.
One month later, Barack Obama was elected president. He would bring in a new set of economic advisors and a new cabinet to manage the banking sector.
Many thought he would install a staff bent on tough love -- even dismantlement -- of the banking sector. But that wasn't the case. Instead, the president surrounded himself with a team of Wall Street-friendly advisors, some of whom were seen as responsible for creating the mess banks were in. Larry Summers, Obama's new economic advisor, was a former Treasury Secretary involved with derivatives deregulation in the 1990s. Tim Geithner, then the new Treasury Secretary, was the former head of the Federal Reserve Bank of New York, tasked with overseeing Wall Street during the bubble.
Many didn't get it. Why would Obama surround himself with a group of advisors seen as culpable for a mess he was trying to clean up?
Last week, I asked that question to Ron Suskind, a Pulitzer Prize-winning author of the book Confidence Men, which describes the president's first two years in office. Here's what Suskind had to say (transcript follows):
Morgan Housel: Your book Confidence Men talks a lot about Obama's economic advisors and how, when he was running for office prior to 2008, he had this A Team of advisors that were good fresh-faced people that had good reputations with the public -- or no reputations, which was the good part -- and then when he was elected, he pushed them to the side and brought in a group of people who were in many ways, in the public's eye, responsible for the crisis; Larry Summers, Tim Geithner. What was the reason for bringing those people in that the public looked down upon?
Ron Suskind: I don't think we have a very succinct answer. We may have to wait for Obama's memoirs for that. But I have a pretty good sense of what went on.
I think when you get to be my age, some of these things become a bit impersonal. Power will exercise its prerogatives if it has the chance. It's not the issue of party, it's not the issue of some concept or ethical compass. If they can do it they will. There's a lot at stake here whether it's big profits for a company, or the presidency of the United States. And I think part of the key to the American model are the self-correcting features. That's the key to what makes this all work, both in the markets and in the public place.
Obama, essentially, in the spring of 2008 when he really took off after winning Iowa at the end of the year and now by the spring when he's giving that speech at Cooper Union in New York, I mean, it's like, 'touch the hem of my garment.' It's just crazy. He was like a messiah.
And around him he's got [former Fed chairman Paul] Volcker, the old warhorse who was really a champion of tough love. He chokes off interest rates, money supply, in 1979-1980, forces a recession to kill off the demon of inflation, and he's got no great love for Wall Street. You know, he said, 'The only great financial innovation I've seen in the last 20 years is the ATM.' I mean, the guy's great.
And Obama and Volcker, they cottoned each other. Volcker's like 'I like this guy.' It just was key for Obama. He had credibility with Volcker. And who else does he got? He's got Bill Donaldson the SEC chief under Bush who's feeling very confessional at this moment. He's got Laura Tyson who's a nice, honest broker. He's got Robert Wolf, the UBS chief, who was a Wall Street titan. He's got [Joseph] Stiglitz and Rice on the left; it's an ecumenical team of the type you'd want. Folks who are saying, 'I know we don't usually hang out with these guys or this women or this crowd, but we're nervous. The ship is going for a waterfall here. We're here to help.'
Well, Wall Street takes one look at this scene, of Obama and this team, and they say, 'If he gets to be president with that team around him, we on Wall Street are toast! It's going to be Roosevelt in 1933. They'll create a model, a restructuring, that will last another 50 years of diminished profits; often unreasonable and ill-gotten profits, but profits nonetheless. Do something!'
So [Wall Street's] idea was simply, 'get our team in close.' And there was actual discussion about this. 'Just get Larry Summers to the table.' Because Larry is a genius at managing these conference tables. He is a genius at it. And I think his particular skill is not so much in clarity of ideas like a Danny Kahneman as he's a rhetorical master. He's brilliant at framing arguments. And when Summers is in, you can see that everyone starts to follow.
Obama had a cold-sweat moment, there's no doubt about it. And he gets to October of 2008 and he's like, 'Oh my god. I think I'm going to win this thing. I'm going to have to tame New York, own Washington, keep us from a recession,' and I think he just took the advice of going with the pros from Dover rather than a much more robust team. And he went with Team B and not Team A. And that made an enormous difference, because he was fighting against them all the way through the first term.