Obama has made this argument on several occasions now, but it made its debut when he addressed the Business Roundtable earlier this month. It was one of those occasions where the venue for the message mattered nearly as much as the message itself. “What it said to me was, they know they have a problem with business, that they’re not in la-la land about that any more,” explained another Obama-friendly executive in the city. “But unless they fix the banks, nothing else matters. That’s what everyone is waiting for.”
Paul Volcker, you might think, would have some helpful ideas on that topic. On March 13, Volcker met Obama in the Roosevelt Room of the White House. Accompanying him were a half-dozen of Obama’s closest private-sector confidants, all members of the Economic Recovery Advisory Board that the president unveiled in February and that Volcker chairs. There was former SEC chairman William Donaldson, TIAA-CREF CEO Roger Ferguson, private-equity hotshot Mark Gallogly, hotel magnate Penny Pritzker, Yale CIO David Swensen, and UBS Group Americas CEO Robert Wolf.
Afterward, Obama would describe the meeting, with pristine vagueness, as being a discussion of “a wide range of issues, but with some particular focus on the financial markets.” In fact, the conversation revolved almost exclusively around the banks: how to get the toxic assets off their books and whether solving the financial crisis might require nationalizing some of them. Some were pro-nationalization; most were not. But Obama questioned all of them closely on the matter, pressing them for scenarios of what might unfold if the government went that far.
For Obama, the substance of the meeting may have been less important than the optics of it. In the worlds of finance and business, few figures are held in higher esteem than the towering, stoop-shouldered, marble-mouthed Volcker. So it has hardly gone unnoticed that he has lately seemed, ahem, less than thrilled with Team Obama. He has privately complained that Summers has frozen him out of the policy-making process. He has publicly criticized the sluglike pace of filling top jobs at Treasury as “shameful.” With the White House meeting, Obama had a chance to make Volcker happy—and in the process use him as a piece of photo-op arm candy, sending the message that the chairman remains standing, literally and figuratively, beside him.
Was Volcker placated? Maybe only momentarily. “He wants to have a real role,” says someone who knows him. “If they’re gonna call him an Obama adviser, he wants to really advise. He has no interest in just being window dressing.”
But Obama will need all the window dressing he can get if the administration’s bank-rescue plan is going to work. Though the details had yet to be announced as of this writing, the outlines of the plan seemed pretty clear. First, the government would create public-private partnerships, in which a handful of hedge funds and private-equity groups, backed with taxpayer dollars and guaranteed against big losses, would buy up the toxic assets from the banks. Once the banks’ balance sheets were cleaned up, the government would inject the necessary capital into those banks to keep them solvent until private investors stepped in to fund the newly healthy banks. At the same time, the government is administering the so-called stress tests to determine which of the nineteen biggest banks are dangerously undercapitalized and will require injections of government dough (in exchange for preferred stock) to stay afloat if the economy worsens.
Even (or especially) absent details, nobody has the faintest clue whether the plan will work. But everyone believes that, even if it does, the cost will be stratospherically high—likely upwards of $1 trillion, comprised of the $250 billion still in the kitty from Paulson’s original tarp program plus the $750 billion that the Obama budget warned Congress might be needed. The problem, politically speaking, is that the public appetite for ponying up for further bailouts is small and shrinking by the day, thanks in no small part to the depredations undertaken by AIG.
Considering all this, it might seem strange that Obama’s economic and political gurus seem to be straining mightily to avoid nationalization. The political rationale for the idea is obvious and potent. (I refer you to Paul Krugman et al. for the economic rationale—which is way above my pay grade.) The only way that the electorate is going to sign on to the level of spending necessary to keep the financial system from imploding is if there is some tangible upside for the taxpayer—as opposed to the current bailout paradigm, which Krugman refers to as “lemon socialism: Banks get the upside, but taxpayers bear the risks.”
There are those who believe that the administration grasps the point perfectly well. That nationalization is where it’s headed, slowly but surely. That the stress tests are really just a backdoor way into temporary government ownership of the current zombie banks—a means of providing a sense of order, consistency, and due process necessary to make nationalization seem an empirically based act of last resort.