In recent days, in spite of public furor over huge bonuses paid at American International Group Inc., the administration has concluded that it needs the private sector to play a central role in fixing the economy. So over the weekend, the White House worked to tone down its Wall Street bashing and to win support from top bankers for the bailout plan announced Monday, which will rely on public-private investments to soak up toxic assets.
But weeks of searing criticism by politicians and the public had left bankers leery of working with the government. After brainstorming about what to do about that problem, the White House resolved to try to take control of the debate, according to several administration officials. In weekend television appearances, President Barack Obama and other administration officials tempered their criticisms of the financial sector.
President Obama met with members of the National Conference of State Legislature at the White House speaking adamantly about how his $787 billion dollar bailout must be used wisely and that wasteful spending will be avoided. Video courtesy of Fox News.
Meanwhile, Treasury Secretary Timothy Geithner and his colleagues worked the phones to try to line up support on Wall Street for the plan announced Monday. They told executives they don’t favor using the tax code to retroactively penalize specific individuals who had received bonuses, according to people familiar with the calls. They asked officials to sign on "in pencil, not ink," and to "validate" or "express support" for the plan, these people say.
Some bankers say they turned the conversations into complaints about the antibonus crusade consuming Capitol Hill. Some have begun "slow-walking" the information previously sought by Treasury for stress-testing financial institutions, three bankers say, and considered seeking capital from hedge funds and private-equity funds so they could return federal bailout money, thereby escaping federal restrictions.
"Our great challenge is to make clear that we can’t have an economic recovery without Wall Street, but these AIG bonuses make it that much harder," said David Axelrod, President Obama’s top political aide, in a recent interview.
The administration "is adjusting to find the right balance" between politics and policy, says Thomas Nides, chief administrative officer at Morgan Stanley. "The White House understands that to have a healthy Main Street, you need a healthy Wall Street."
Early in the Obama presidency, top banking executives were frozen out of internal discussions about how to fix the economy. In its first few weeks in office, the administration closely hewed to the anticorporate sentiment that was a campaign hallmark. As the White House began filling top economic posts, it largely avoided market veterans, or applied strings to their employment.
When Michael Froman, a Citigroup Inc. executive and Harvard Law friend of Mr. Obama, joined as a senior official in the White House, he gave to charity his year-end bonus. The White House says it didn’t require any Wall Streeters coming to Washington to forgo their bonuses. But, given the political explosion over large payouts to executives from companies receiving federal funds, a White House spokeswoman explains, officials "encouraged executives who come to work here to review their executive compensation."
In late January, as Treasury Secretary Geithner prepared his proposal for handling the banking crisis, administration officials avoiding seeking input from Wall Street. "Those people are tainted," said one aide at the time. "Why would we consult the very executives who got us into this mess?"
“Our history should give us confidence that we don’t have to choose between an oppressive government run economy and a chaotic, unforgiving capitalism. It tells us we can emerge from great economic upheavals stronger, not weaker.” Obama, March 27, 2008
Mr. Geithner’s speech unveiling the first bailout plan was widely panned for lacking specifics, and stocks dropped after the rollout. White House officials professed not to worry about the market decline and continued their attacks on corporate greed. In one television appearance, Mr. Axelrod said Wall Street was upset because it didn’t get "wheelbarrows of cash" in the Geithner proposal.
Mr. Obama and his aides regularly and publicly criticized financial firms for buying private planes and redecorating offices and hosting lavish parties. The talk was fueled in part by the results of surveys by New York pollster Joel Benensen, commissioned by the Democratic Party, which Mr. Axelrod regularly reviews. The polls consistently showed that the public blames big financial firms for the current mess, and is hesitant to offer aid.
"There’s a rebellion out there," says Mr. Axelrod. "Everyone but Wall Street knows the days of Gordon Gekko are over."
The administration’s initial approach contrasted with those of the last two White Houses. Robert Rubin left Goldman Sachs Group to become one of Bill Clinton’s top economic advisers, and convinced the new president that what was good for Wall Street was good for America. Under President George W. Bush, the administration "looked up to and admired Wall Street," says one banker. "The Obama folks don’t even like us."
Goldman Sachs President Gary Cohn saw the contrast in person when he visited Chief of Staff Rahm Emanuel in early March. Goldman executives wanted to be part of the dialogue reshaping their industry, according to one Goldman executive. Instead, Mr. Emanuel lectured about how Wall Street "mispriced risk" and then expected Uncle Sam to pay the price for it. "My shareholders are called taxpayers," said Mr. Emanuel, who had previously worked for about two years as an investment banker.
When chief speechwriter Jon Favreau began working on the president’s late-February joint address to Congress, he included draft language criticizing Wall Street for helping trigger the economic downturn and stating that "Americans are justifiably angry" at the banks — sentiments the president had expressed many times before.
Yet when Messrs. Favreau and Axelrod presented the draft in the Oval Office, Mr. Obama surprised them by saying he wanted to interject some balance to help encourage the financial industry to lend again, one official said.
“So I know how unpopular it is to be seen as helping banks right now, especially when everyone is suffering in part from their bad decisions. I promise you, I get it. But I also know that in a time of crisis, we cannot afford to govern out of anger or yield to the politics of the moment.” Obama, Feb. 24, 2009
The president cited a letter he had read a few days earlier — one that his office had selected from the mail that pours into the White House. The owner of a pontoon and fishing-boat manufacturing business in Missouri wrote that he had cut his payroll to 33 part-time employees, from 120 full-time. "During the past year, we have been turned down three times for loans necessary to secure operating capital," he wrote. "We are desperate."
Mr. Obama dictated to his aides new language for the speech. He tried not just to respond to the public fury, but to tamp it down, an adviser said. "I know how unpopular it is to be seen as helping the banks right now, especially when everyone is suffering in part from their bad decisions....I get it," he ultimately said in his speech. But he added: "In a time of crisis, we cannot govern out of anger."
The stock market continued to drop, causing some unease inside the White House. At one morning meeting of the senior staff in the Roosevelt Room, an official turned over in dismay a newspaper with a headline that blared: "Obama Bear Market."
In late February, the administration developed a new housing policy to help consumers stay in their houses. This time, it worked hard to get support from banks. Treasury officials invited executives from Wells Fargo & Co., Bank of America Corp. and J.P. Morgan Chase & Co., among others. Around the Treasury’s biggest conference table, they hashed out how the mortgage plan would work in practice for eight hours, ordering in pizza.
White House aides returned to some key Wall Street fund-raisers who had helped give credibility to Mr. Obama’s presidential campaign. Some had complained about lack of access in the early days of his White House, according to several of them. Among those called were Robert Wolf, president of UBS AG’s investment bank, and Mark Gallogly, co-founder of Centerbridge Partners, a New York private-investment firm. Both of them are plugged into the financial world and could support the policy on Wall Street.
Orin Kramer, an early Obama supporter who heads New Jersey’s state pension system, praised the administration’s effort on CNBC.
On March 10, Lawrence Summers, the chief White House economic adviser, met privately with financial executives for dinner at the U.S. Chamber of Commerce. A few days later in a speech, he said that the past decade contained "too much greed and too little fear....Today, however, our problem is exactly the opposite."
Early on, Obama aides had had little to do with Wall Street heavyweights such as J.P. Morgan Chase Chief Executive Jamie Dimon. On March 11, Mr. Dimon was ushered into the White House and Treasury Department, where advisers brain-stormed with him about how banks and markets would react to their emerging policies. The following day, at a White House meeting, business executives implored Mr. Obama to get credit flowing again. "All right," the president said, according to a transcript of the meeting. He’d have his people "talk to Jamie."
In recent weeks, the administration has been developing a consumer-lending facility aimed at increasing the availability of auto loans, student loans and credit cards. Its idea is to provide $1 trillion in financing to private investors who buy securities backing those consumer loans.
"Outreach is operating on all cylinders," says an administration official. Treasury officials have held conference calls with Ford Motor Co., General Motors Corp., Chrysler LLC, Sallie Mae Inc., BlackRock Inc. and other financial firms. In a call to one Wall Street firm, Treasury counselor Lee Sachs sought input on ways to "improve or enhance" Treasury programs in the works. Other Treasury officials also placed calls to senior executives at Morgan Stanley, Goldman Sachs and other firms.
The news that AIG had paid millions of dollars in bonuses to employees complicated White House efforts to improve relations with Wall Street. At first, the administration gave a tempered response. On a Sunday television show, Mr. Summers called the bonuses "outrageous," but added that "the government cannot just abrogate contracts."
“As a general proposition, you don’t want to be passing laws that are just targeting a handful of individuals. You want to pass laws that have some broad applicability. And as a general proposition, I think you certainly don’t want to use the tax code... to punish people.” Obama, March 22, 2009
But as the furor intensified, Mr. Obama’s words to Congress — "we cannot govern out of anger" — seemed to take on less importance. Last week, he was asked by reporters on the White House South Lawn whether anger was getting in the way of pushing through banking reforms. "I don’t want to quell anger," he replied. "I think people are right to be angry. I’m angry."
Bankers were shell-shocked, especially when Congress moved to heavily tax bonuses. When administration officials began calling them to talk about the next phase of the bailout, the bankers turned the tables. They used the calls to lobby against the antibonus legislation, Wall Street executives say. Several big firms called Treasury and White House officials to urge a more reasonable approach, both sides say. The banks’ message: If you want our help to get credit flowing again to consumers and businesses, stop the rush to penalize our bonuses.
Published in Wall Street Journal