Thirty-eight hours after Scott Brown’s smack-upside-the-head victory in the race for Ted Kennedy’s former Senate seat, Barack Obama took the podium in the Diplomatic Reception Room at the White House. Hovering behind him was Paul Volcker, the former Fed chair and (for months, largely ignored) Obama economic adviser; far off to the side stood Treasury Secretary Tim Geithner. In the wake of Brown’s win, the prospect of passing health-care reform—and the rest of Obama’s first-term agenda—suddenly seemed dim. So the president had decided to pursue the obvious, logical course: He had decided to change the subject.
The topic to which Obama now shifted was financial reform, in particular to the matter of speculative, big-casino activity by the nation’s banks. “I’m proposing a simple and common-sense reform, which we’re calling the Volcker Rule—after this tall guy behind me,” Obama declared. “Banks will no longer be allowed to own, invest, or sponsor hedge funds, private-equity funds, or proprietary trading operations for their own profit, unrelated to serving their customers. If financial firms want to trade for profit, that’s something they’re free to do. Indeed, doing so—responsibly—is a good thing for the markets and the economy. But these firms should not be allowed to run these hedge funds and private-equities funds while running a bank backed by the American people.”
As Obama spoke, Volcker, whose jowly countenance usually runs the full spectrum from mournful to hangdog, beamed like a 3-year-old who’d just been handed a brand-new toy firetruck; Geithner wore the expression of a kid whose puppy had been run over by a real one. Kremlinologists instantly deconstructed the tableau, speculating that Geithner, long leery of the premise of the Volcker Rule, had lost an internal power struggle. That he’d fallen out of favor with Obama. That, as an A-list economics writer put it, “His days must now be numbered.”
In fact, Geithner had, by then, made his peace with the Volcker Rule. After being overruled by his boss, he had been tasked with designing the proposal so it would be sound policy—and though Geithner still doubted it would do much good, he was now convinced it wouldn’t do much damage, either. He also saw the political upside to endorsing the idea. For months, Volcker had been waging a public campaign on behalf of his scheme, suggesting that the administration was being too soft on Wall Street, lending ammunition to those on the left who felt the same. At least now, the secretary reasoned, the old man would pipe down.
But Geithner considered the timing of the announcement miserable, on the grounds that it would be perceived by the media and Wall Street as a clumsy bid by Obama to gin up some man-of-the-people juju in reaction to the Brown debacle. When Treasury aides voiced this concern, however, it was dismissed by the White House’s political operation. “After Massachusetts,” replied communications director Dan Pfeiffer on a staff conference call, “if [Robert] Gibbs and I wear purple ties, that will be seen as political, too.”
Wall Street’s reaction to the unveiling of the Volcker Rule came swiftly and was even harsher than Geithner had feared. The Dow promptly plunged 213 points, with bank stocks leading the way down. “It was like the White House said, ‘Okay, we lost Massachusetts, health care is screwed, so let’s go after Wall Street,’ ” says the CEO of one of the nation’s biggest banks. “And for a lot of Wall Street people, it was like, ‘Okay, first you slap us in the face, now you kick us in the balls. Enough is enough. I mean, we’re done.’ ”
On May 20, the Senate passed its bill to reregulate Wall Street by a vote of 59-39, complete with a (watery) version of the Volcker Rule. The story of the legislation’s passage can be told in a number of ways: a tale of conflict or compromise, triumph or capitulation. But on any reading, that story is only the climactic chapter in a larger narrative: how the masters of the money game fell out of love with—and into a state of bitter, seething, hysterical fury toward—Obama.
The speed and severity of the swing from enchantment to enmity would be difficult to overstate. When Obama was sworn into office, Democrats on Wall Street rejoiced at the ascension of a president in whom they saw many qualities to admire: brains, composure, bi-partisan instincts, an aversion to class-based combat. And many Wall Street Republicans—after witnessing the horror show that constituted John McCain’s response to the financial crisis—quietly admitted relief that the other guy had prevailed.
Today, it’s hard to find anyone on Wall Street who doesn’t speak of Obama as if he were an unholy hybrid of Bernie Sanders and Eldridge Cleaver. One night not long ago, over dinner with ten executives in the finance industry, I heard the president described as “hostile to business,” “anti-wealth,” and “anti-capitalism”; as a “redistributionist,” a “vilifier,” and a “thug.” A few days later, I recounted this experience to the same Wall Street CEO who’d called the Volcker Rule a testicular blow, and mentioned I’d been told that one of the most prominent megabank chiefs, who once boasted to friends of voting for Obama, now refers to him privately as a “Chicago mob guy.” Do all your brethren feel this way? I asked. “Oh, not everybody—just most of them,” he replied. “Jamie [Dimon]? Lloyd [Blankfein]? They might not say Obama’s a socialist, but they come pretty close.”
You might opine that such extreme opinions reflect a certain insensitivity to the prevailing political climate—to the fact that millions of people on the left, on the right, and in the middle would like to see Obama throttle the bankers with his bare hands. Do the moneymen not get this? Or do they not care? “It’s both,” says one of the city’s most politically savvy private-equity players. “The analogy is to a doctor who’s giving a shot. The fact that the child is screaming doesn’t mean he’s not doing the right thing. Financial markets are in fact essential to the healthy operation of our economy. So for a lot of these guys, the fact that people are screaming doesn’t mean they’re doing something wrong.”
For Obama, Wall Street’s cluelessness is a source of intense frustration—“He’s like, ‘What the fuck, you guys?’ ” says a White House official—and its ire toward him one of the cruelest paradoxes of his presidency. Rather than bowing to bailout rage or indulging the yearning for what Geithner calls “Old Testament justice,” Obama believes, justifiably, that he has taken a moderate approach to dealing with the financial system. On arriving in office, he chose to shore up the banks, not nationalize them. The regulations he has advocated aren’t punitive or radical. Despite the occasional burst of opprobrium, his stance has been one he summed up pithily at a meeting with the heads of the largest banks: “My administration is the only thing between you and the pitchforks.”
Yet now Obama stands accused by Wall Street of leading the pitchfork brigade, even as the soldiers in that battalion assail him for being in Wall Street’s pocket. Having labored to strike a delicate balance, he has managed to incur the wrath of both hoi polloi and the lords of finance. The political perils of this dynamic are obvious enough. And though the passage of regulatory reform may help assuage the anger of the masses, his relationship with Wall Street will be harder to mend—if mendable it proves to be.
Obama and Wall Street’s first date, as it were, took place on December 4, 2006, in a midtown conference room belonging to George Soros. The Illinois senator was still deciding whether he would run for president, and was testing the waters with a handful of the city’s heaviest fund-raisers. In one sense, Obama’s performance was underwhelming, seriously lacking polish. But in another, this worked to his advantage. “He was allergic to sound bites and canned responses,” recalls Orin Kramer, a prominent hedge-fund manager and Democratic buckraker. “On a human level, I think that’s a quality people found extremely attractive.”
Though history will rightly note the role of the web in the fund-raising machine that Obama built during his campaign, in the early days Wall Street was more important, providing not just millions of dollars but start-up credibility. By Election Day, according to the Center for Responsive Politics, three of the top seven institutions in terms of bundled donations to Obama were New York megabanks: Goldman Sachs, Citigroup, and JPMorgan Chase, with UBS AG and Morgan Stanley a little further down in the top twenty.
In the course of collecting checks from the bankers, Obama began consulting several of them as informal advisers, notably Jamie Dimon, the CEO of JPMorgan Chase, and Robert Wolf, the CEO of UBS Group Americas. Over the September weekend when Lehman Brothers’ fate was decided in a marathon meeting at the New York Fed—run by Geithner, who was its president, Treasury Secretary Hank Paulson, and Fed chairman Ben Bernanke—it was Wolf who kept Obama informed, ducking out of the sessions to call the candidate on his cell phone.
Obama’s deft handling of the financial crisis sealed his victory. But his close-range dealings with the players involved—including near-daily calls with Paulson, frequent talks with Bernanke, and conversations with a widening orbit of Wall Street players including former Treasury secretary and then–Citigroup poobah Robert Rubin—had to make him wonder if he’d won a booby prize. By the time Obama began his transition, the onset of a second Great Depression, complete with bank runs and widespread failures of financial institutions, seemed terrifyingly plausible. All of which meant that his most important domestic-side Cabinet selection would be his Treasury secretary.
Rarely in the annals of presidential transitions has a short list been shorter. Though Obama thought highly of Dimon and Wolf, the blowback from naming a Wall Street chief as Treasury secretary would have been atomic. And though the idea was floated of giving Volcker the job on an interim basis, picking an 81-year-old with a penchant for straying off-message (i.e., speaking his mind) and lame-duck status seemed a recipe for trouble. In Obama’s eyes, that left two options: Larry Summers or Geithner. Summers, a past occupant of the post who’d emerged as candidate Obama’s dominant economic adviser, badly wanted the job. But his confirmation would have been problematic thanks to his controversial tenure as president of Harvard and his part-time job at hedge fund D. E. Shaw and Co. And then there was his famously abrasive personality. “Fifty percent of the people Obama asked about Larry said no fucking way,” remembers an Obama adviser.
Obama barely knew Geithner, having met him secretly at a W hotel in Manhattan in the waning days of the campaign and then for a 65-minute job interview. But they formed a quick and instinctive bond. Born two weeks apart in 1961, both had grown up overseas and possessed the same cool detachment, love of sports, and relentless discipline. That Geithner had worked side by side with Paulson during the crisis was seen by Obama as an enormous asset. Here was a guy who understood the financial system inside out, who knew the Wall Street kingpins, grokked their psyches, had their confidence. And here was an appointment the markets would applaud, no small thing at that still-precarious moment.
Obama was right about the last point. When word of the selection hit the airwaves, the Dow jumped 6.5 percent. But it would be the last smattering of applause he’d hear for Geithner—from Wall Street or anywhere else—for a long, long time.
Even after a year and a half in one of the highest-profile jobs in America, Geithner remains as misunderstood a major figure as Washington has ever seen. The confusions are many, but none has been more pervasive or unshakable—and also symptomatic of the problems that have bedeviled him—than the conviction that he’s a banker.
It was Geithner who called this to my attention when I visited him recently at the Treasury. At 48, he is small and slender, a wispy presence in his cavernous, ornate office. We were talking about how the left views the White House, and Geithner noted, “There’s a myth about the president being in this vise grip, being pulled to the right by me and Larry, that I’ve worked at Goldman Sachs all my life.”
The idea that Geithner is a Goldman alumnus has been repeated by everyone from congressmen to people asking him questions in online forums. Geithner has tried to dispel the misapprehension, but the effort may be futile. One night over dinner with White House chief of staff Rahm Emanuel, Emanuel’s wife, Amy Rule, remarked that Geithner “must be looking forward to going back to that nice spot you have waiting for you at Goldman.”
The only people more chagrined by the idea that Geithner was a Wall Street insider than Geithner himself are actual Wall Street insiders. “No one here would ever hire Tim to run a business, because he doesn’t understand how to run a business,” says one hedge-fund operator. “He’s a good guy, a smart guy, with a good heart. But he’s, you know, a regulator.”
The shallowness of Wall Street’s regard for Geithner became clear in the wake of his disastrously maladroit public debut in February 2009, when he outlined his (far from fully baked) plan to halt the banking crisis. The first reaction was the market’s: It plummeted 382 points. The second was that of the market’s movers and shakers: They started baying for his head.
The irony here was rich, of course, since Geithner’s stabilization scheme would turn out be strikingly favorable to Wall Street. From the outset, his aim was never to punish the banks. Quite the contrary, it was to save them—by pouring money into them, restoring confidence in them, treating them with kid gloves. Nor was his goal to restructure the financial system. It was to prevent the existing system from collapsing and then strengthen the rules governing its operation. In all this, Geithner was betraying the extent to which he shared Wall Street’s mind-set, even if he wasn’t a creature of it. “His office was there and he was deeply enmeshed in that culture and he had those relationships,” says one of his best friends. “That part of the critique is fair.”
In the administration’s early months, Geithner’s orientation often put him at odds with White House political mavens, including David Axelrod, who were acutely attuned to the electorate’s retributive impulses. And it occasionally stoked conflict with Summers, who had become the director of Obama’s National Economic Council and was slightly more hawkish than Geithner on the banks. In a recent piece in The Atlantic, for example, Joshua Green reports that Summers pushed to have Ken Lewis fired as Bank of America’s CEO. But Geithner disagreed, arguing that doing so would roil the markets and make it harder for BofA and other banks to raise private capital. Obama sided with Geithner.
A bigger debate was over the question of whether to nationalize the weakest banks, which were thought by many to be insolvent. A number of the members of Obama’s economic team began leaning in the direction of taking over at least a couple of the most troubled institutions. Geithner suspected that some of his colleagues were channeling ideas fed to them by pals of theirs at hedge funds, many of which were licking their chops over the prospect of buying a boatload of distressed assets in the event of nationalization or some similar scheme. More to the point, Geithner also believed that if the government started taking over banks, it would turn into a costly quagmire.
After countless rehearsals of the options, Obama wanted to hear a broader range of voices. So in April, a dinner was set up at the White House with the president and a clutch of big-name economists: Paul Krugman, Joseph Stiglitz, Jeffrey Sachs, Alan Blinder, Kenneth Rogoff. “That turned out to be a defining moment in the debate,” Geithner told me. “Partly because they were all disagreeing with each other, and partly because they knew what they were against but not exactly what they were for and what it entailed—except Krugman. He was the only one willing to say, ‘Look, there’s a good case for nationalizing, but if you do, you have to understand two things: One, it’s incredibly expensive, it’ll cost trillions; and two, you have to guarantee everything.’ ” Once again, Obama cast his lot with Geithner.
Indeed, the president’s support for his Treasury secretary has been unwavering. (Axelrod would laugh at rumors that Geithner was about to get the boot: “Don’t these people realize they have a man-crush on each other?”) And Obama’s loyalty has been repaid with results. Geithner’s stabilization plan is now widely regarded as having worked—mainly thanks to the once-derided “stress tests” that he imposed on the banks, which showed the world that their circumstances weren’t as dire as many feared and let them raise the requisite capital to get back on their feet. By this spring, the big banks had paid back virtually all the TARP money they’d received, and the cost of the bailout to taxpayers was smaller than that of the S&L crisis of the early nineties.
Yet the success of the Geithner plan did nothing to stem the populist tide swelling in the country. Actually, you could argue that it did the opposite. A surging stock market and the return of Wall Street to hyperprofitability sent a galling message to Main Street: The scoundrels who caused the financial crisis were flying high again, having paid no price for their perfidy. And because it was Geithner who had assisted them in getting airborne, he deserved nearly as much scorn—and received it in many quarters on the left.
Tim Geithner: “There’s a myth about the president being in this vise grip, being pulled to the right by me and Larry, that I’ve worked at Goldman Sachs all my life.”
Geithner considers such thinking illogical. His objective was to rescue the economy from ruin, and if the “price” was that a bunch of bankers benefited, he was happy to pay it. But Geithner was smart enough to realize that the simmering wrath of voters could complicate the politics around his efforts considerably. So the secretary ventured to Harlem to ask Bill Clinton’s advice as to what might be done to cool the cauldron. According to Jonathan Alter’s new book, The Promise, Clinton told him that his options were limited.
“You could pull Lloyd Blankfein into a dark alley and slit his throat,” Clinton said, “and it would satisfy [people] for two days, and then the bloodlust would rise again.”
Geithner may not have had a motive to take the blade to Blankfein, but he certainly had ample opportunity. Official Treasury calendars for the first seven months of 2009 show that Goldman’s CEO had either spoken on the phone or met with the secretary a staggering 22 times. The frequency of the contacts owed nothing to conspiracy (or a previous employment contract). It reflected Blankfein’s alpha-dog status in the industry—a designation that he and JPMorgan’s Dimon both ostentatiously lay claim to. “No one asked them to be our role models, no one voted them in,” says a rival CEO. “But they’ve graciously decided to take that on.”
Blankfein and Dimon share the crown warily, uneasily. At a recent industry event in Washington, Dimon was giving a presentation and struggling with his laptop when Blankfein cracked from the audience, “I’m feeling a bit better about my competitive position”—to which Dimon cheekily shot back, “Just doing God’s work up here, Lloyd.”
Like most Wall Street honchos, Blankfein and Dimon are Democrats and once-upon-a-time Obama fans. After getting to know the candidate, whom he’d met years earlier when they both were living in Chicago, Dimon was so smitten that he brought his family to Washington for three full days during the inauguration. And while Blankfein’s connection was less personal, no corporation in America crammed more dough into Obama’s campaign coffers than Goldman.
It didn’t take long, though, before both men were having qualms about Obama and his team. In mid-March 2009, when the news broke about AIG executives’ having scored $165 million in bonuses even as their firm’s implosion threatened to trigger a worldwide financial apocalypse, Wall Street watched as Summers declared that although the bonuses were “outrageous,” the sanctity of contracts meant that nothing could be done—only to see Obama announce the next day that he’d instructed Geithner to use “every single legal avenue” to recoup the cash. In short order, the House, in a lather, pushed through a bill to tax bonuses of executives at bailed-out firms at 90 percent. (It died a silent death in the Senate.)
For Blankfein, Dimon, and other Wall Street bigwigs, the episode was worrying on two levels. “First, the White House decides in this blatant way to politicize the issue,” explains a financial-industry lobbyist. “Second, they overshoot the target and the thing gets away from them. It made people realize there’s no adult in charge. If Bob Rubin or Hank Paulson were Treasury secretary, they would have walked into the Oval Office and said, ‘Mr. President, I know you’d like to do this, I know your political advisers want you do this, but I’m sorry, you can’t do this.’ ”
Eleven days later, Obama summoned the heads of the thirteen biggest banks to the meeting at the White House where he positioned himself between them and the pitchforks. The bankers told Obama they wanted to be out from under TARP as soon as possible so that there would be no encumbrances regarding compensation. Obama laid out conditions for exiting the program: passing the stress tests, raising fresh funds to bolster their balance sheets, and showing restraint on bonuses. When the bankers replied that limits on bonuses and pay would hinder their ability to compete for talent, Obama said curtly, “Be careful how you make those statements, gentlemen. The public isn’t buying that.”
Blankfein and Dimon, say people close to them, didn’t enjoy the tone or substance of that meeting or others. Though Blankfein kept mum about his irritation, Dimon opened fire with a stream of potshots at the administration and its policies. At a conference in New York in June, he read aloud a fake missive to Geithner: “Dear Timmy, we are happy to be able to pay back the $25 billion you lent us. We hope you enjoyed the experience as much as we did.”
As summer turned to fall, Goldman, JPMorgan, and the rest began furiously lobbying against the White House’s financial-reform bill as it moved through the House, and in particular against Obama’s proposal for a new consumer-protection agency. (In the first three quarters of the year, the industry spent $344 million on its efforts to soften the legislation.) Dimon, despite his frequent invitations to the White House, began complaining about a lack of access. “If you don’t want us to lobby, give us a seat at the table” became his mantra, punctuated with complaints about the paucity of people inside the administration with a Wall Street background. In September, he and Blankfein were conspicuous no-shows when Obama delivered a major speech on financial reform at Federal Hall—an absence interpreted by the industry and the White House as a signal of their growing displeasure.
Considering the lengths to which the administration had just gone to rescue Wall Street from collapse, all this behavior might strike a (rational) person as ungrateful and even churlish. One explanation for it revolves around the industry’s endemic twin defects: short-termitis and amnesia. “Wall Street is focused on the next five minutes or the last five minutes,” says Roger Altman, a deputy Treasury secretary under Clinton and now chairman of the boutique investment bank Evercore Partners. “At the end of Obama’s speech at Federal Hall, he said that this community must remember the debt it owes to the taxpayers. But I’m not sure most of Wall Street does remember.”
Another, not inconsistent, theory is that the money changers aren’t merely forgetful but mildly deluded. “They’ve created a narrative where irrational actions by a few people plus the nature of government intervention forced them to do things inconsistent with their free-market philosophy and regular way of handling their business,” offers a Democratic financier. “So, yes, they took the TARP money, but only because they had to. None of them are sitting there saying to themselves, ‘You know, I was responsible for this crisis. Therefore, I’m really grateful to the government that it stepped in.’ This is not the narrative they have in their heads.”
But one of the city’s most successful hedge-fund hotshots offers a different surmise: “The majority of Wall Street thinks, ‘Hey, you lent us money. We did a trade. We paid you back. When you had me down, you could have crushed me, you could have done whatever you wanted. You didn’t do it! So stop your bitching and stop telling me I owe you, because I already paid you everything! The fact that I’m making money now is because I’m smarter than you!’ I think that’s where you’ve got this massive disconnect. In simple human terms, the government is saying, ‘I saved your life, and all you did was thank me once. You should be calling me every day: Thank you. Thank you.’ The guy who saved the life expects more. And the guy whose life is saved says, ‘I already thanked you!’ ”
Obama could be forgiven for expecting greater reciprocity from the bankers—something more than the equivalent of a Hallmark card and a box of penny candy. He had, after all, done more than saved their lives directly by continuing the bailout policies formulated by Paulson and Geithner. He and his team could credibly claim to have kept the world economy from falling off a cliff. Yet with the unemployment rate still near double digits, Obama had (and still has) received scant credit from the public for what was arguably his signal accomplishment. At the same time, the one thing that almost every slice of the electorate would have applauded wildly—the sight of the president landing a few haymakers on Wall Street’s collective jaw—was an opportunity that the president had largely forsworn.
The issue that most sorely tested Obama’s restraint was that of Wall Street bonuses. Emanuel and Axelrod had reams of data showing that this was by far the hottest of populist hot buttons—and one that could inflict collateral damage on the White House. One day in the winter of 2009, Emanuel was meeting with a senior Goldman executive and offered some Rahmian advice. “You don’t fucking get it!” he said. “You’re making $600,000 a year and you think you’re a fucking saint—because you were making $50 million before. But as far as the guy across the street thinks, you’re still a fucking pig! Reduce it to zero and he’ll love you!”
Oh, how history might have been different if that dude, and the rest of his chums, had only listened. Instead, last October, news broke that Goldman was planning to award $23 billion in bonuses to its executives at year’s end. Suddenly, a story that had been simmering all year hit the boiling point—and it indeed proved to be a problem for Team Obama. By December, Axelrod’s polling gurus were seeing clear signs in their numbers that the president was perceived as being too close to the Wall Street greedheads.
That month, Obama appeared on 60 Minutes and proclaimed, “I did not run for office to be helping out a bunch of fat-cat bankers on Wall Street.” Railing against “massive profits and obscene bonuses” and demanding, “We want our money back,” he unveiled in January a tax on the 50 biggest banks that would raise $90 billion over ten years to cover bailout losses. And, finally, he rolled out the Volcker Rule.
A Private-Equity Executive: “They’re not accustomed to being engaged in politics this way … Their skin isn’t toughened. They actually take it personally. This is a profession with a lot of smart people, but who aren’t necessarily terribly introspective.”
For much of Wall Street, this triple blow constituted the final rupture with Obama. Unpleasant as the policies were in the view of the financiers (Dimon: “Using tax policy to punish people is a bad idea”), what seemed to upset them even more was the shift to a more hostile tone (Dimon: “The incessant broad-based vilification of the banking industry isn’t fair, and it is damaging”). To Wall Street, what was going on was crystal clear: Obama had succumbed entirely to the dictates of his political handlers.
“For all the criticisms about Clinton being political, the fact is that in the economic arena, his decisions were driven predominantly by the policy considerations,” says a Wall Street graybeard who knows both 42 and 44. “During the first year, Obama was a lot like that; he withstood a lot of political pressure to nationalize the banks and so on. But this red-hot vituperativeness signals that something has changed.”
It’s fair to point out that Obama’s rhetoric hasn’t always been either red-hot or icy-cold toward the bankers: Recall his comments that he didn’t “begrudge” Blankfein and Dimon their titanic bonuses; that he “know[s] both those guys, they are very savvy businessmen.” It’s worth noting, too, that there are those around Obama who think that the outrage he does express is genuine. According to Alter’s book, “Obama … told a friend that the angriest he got as president in  was when he heard Blankfein say that Goldman was never in danger of collapse.”
What’s not in dispute is that the feelings of rupture are mutual. “[Obama] thinks the Wall Street guys are just disconnected from reality,” says a White House official. “He still takes the meetings with them, but his attitude now is like, ‘Whatever.’ ”
Tim Geithner, too, finds himself in the odd position of battling with an industry toward which he’s never felt an ounce of antipathy; in private, he now half-mockingly refers to the megabank CEOs as “the warlords.” A Washington Mandarin to his core, Geither has been ineffective at winning over either Wall Street or Main Street. His experience during his tenure has provided him a wrenching political education, but one not unlike Obama’s—which, in a way, has only strengthened the bond between them.
To a greater extent than most realize, Geithner and his people at Treasury have been more than the architects of the administration’s policy on financial reform: They have been its main legislative strategists and tacticians. When it came to Volcker Rule, Geithner’s worries had little to do with a reluctance to annoy the bankers. Instead, they were based on a sense of confidence that the politics of reform were already breaking the administration’s way. On the day of the Scott Brown earthquake in Massachusetts, the Treasury secretary happened to be talking with a senior Senate Republican who told him that, no matter what the outcome of health care, he was sure that the GOP would lose five to ten votes on the Senate bill.
But the announcement of the Volcker Rule wound up providing an added political boost. For the banks and the Republicans, the core of their legislative strategy had been to try to stall out the clock until November. But together with the bank tax, the Volcker Rule had the effect of ringing the industry’s bell, of elevating the issue and making the opposition realize that the White House was picking up momentum. More than that, it split the industry between those directly affected by Volcker and those who were not.
And yet, for a brief moment in the middle of April, it appeared that the Republicans were coalescing (or trying to coalesce) around the same kind of lockstep opposition to financial reform that they employed in the health-care fight. Then came the filing by the SEC of civil-fraud charges against Goldman. At that moment, any real chance that financial reform would somehow be derailed vanished into the ether.
From Treasury’s perspective, however, the Goldman suit was a mixed blessing. “It’s been helpful in the sense that, broadly speaking, it propelled this stuff forward,” says a senior Treasury official. “But it’s been awful in that the left sort of got buoyed by it and started coming forward with more stuff that in some sense is complicating.”
Geithner makes no secret of his ideological disposition when it comes to reform. “I care about us passing something good and strong,” he tells me. “And my feeling is that you have to do this from the center.”
What that’s meant in practice is that Geithner’s team spent much of its time during the debate over the Senate bill helping Senate Banking Committee chair Chris Dodd kill off or modify amendments being offered by more-progressive Democrats. A good example was Bernie Sanders’s measure to audit the Fed, which the administration played a key role in getting the senator from Vermont to tone down. Another was the Brown-Kaufman Amendment, which became a cause célèbre among lefty reformer such as former IMF economist Simon Johnson. “If enacted, Brown-Kaufman would have broken up the six biggest banks in America,” says the senior Treasury official. “If we’d been for it, it probably would have happened. But we weren’t, so it didn’t.”
Treasury also devoted its share of effort to warding off more-populist proposals from inside the White House political shop. But, as was the case with the bank-rescue plan, Geithner found that Obama was nearly always on his side. “I’ve talked to the president a lot about this, and I always find him reassuring,” Geithner tells me. “He says, ‘You focus on getting the policy right. That’s our obligation. If we lose that basic commitment, it looks like we’re putting politics ahead of substance. You lose everything.’ ”
Though the Senate bill will still need to be reconciled with the House measure, it’s all but impossible to imagine that what emerges will be regarded as moderate by Wall Street. At Goldman and elsewhere, the belief is strong that the case against Wall Street’s most storied firm was politically motivated; lately, Blankfein has taken to trashing Obama to his friends in unusually brutal personal terms. Dimon—who is fond of declaring, “I’m a patriot!” in meetings with White House officials—recently described himself publicly as “a wavering Democrat.”
And even those less bruised than them have found the experience traumatizing. “They’re not accustomed to being engaged in politics this way,” says a private-equity investor. “Their skin isn’t toughened. They actually take [the attacks by Obama] personally. This is a profession with a lot of smart people, but who aren’t necessarily terribly introspective. They think they actually deserve to make all this money. So any attack on their livelihood is, ahem, unpleasant.”
Maybe it was inevitable that the dewy-eyed affair between Wall Street and the White House would so quickly and nastily come a cropper. For more than 30 years, the approach of every administration to the financial industry has been either laissez-faire or actively deregulatory. On the left, much blame is placed at the feet of Clinton, Rubin and his then-deputy, Summers, but in truth they were merely part of a continuum that stretched back to Jimmy Carter. Considering how close the financial system came in 2008 to Armageddon, the consensus for imposing new rules and greater order was nearly universal (among the sane, at least). Yet that does little to lessen the sense of shock—of violation, really—that Wall Street feels.
On the left, of course, the response to this will be John McEnroe–esque: You cannot be serious! Beyond the reflexive, ridiculous howling in certain quarters of the blogosphere—the J’accuses that Rubin is still working his will through a network of slavish moles within the administration for example—there is a credible argument advanced by serious critics such as Johnson and economist Nouriel Roubini that the Obamans have now missed two once-a-century opportunities for a root-and-branch reformation of a financial system that remains as dangerously unstable as ever. Calling the Dodd bill’s fixes “cosmetic,” Roubini said the other day, “There is a risk of ending up in another crisis, as the world found itself in the Depression in 1933.”
Whatever the effects of the bill, among them will be neither an end to the too-big-too-fail doctrine nor any curb on what the sharpest Wall Streeters see as the central threat to the system’s stability: excessive financial leverage. Geithner, Summers, and Obama had little interest in tackling those matters, not because they are indentured servants to Wall Street but because at heart they are all technocrats who believe the system doesn’t need to be rebooted or downsized, merely better supervised.
There are those who reckon that, what with the wailing and gnashing among both the plutocrats and the populists, Obama has actually found the political sweet spot. “Main Street is mad at the president because he’s too close to Wall Street, and Wall Street is mad at him because he’s too populist,” Altman says. “Therefore, almost by definition, he’s in the right place.”
Yet the political and financial implications of the rift between Obama and Wall Street may be significant. Already, Goldman, JPMorgan, UBS, and many other financial-services firms are shifting their contributions toward the GOP. Not long ago, a big-time Obama Wall Street fund-raiser asked his go-to guy at one of the megabanks that had lavishly supported the candidate in 2008 what level of donations the president might expect from the firm’s people in 2012. The answer was less than a tenth of the previous total. When the fund-raiser conveyed this fact—which he deems “astonishing”—to one of Obama’s political operatives, he was told, “You don’t have to worry. Money is never going to be a problem for Obama.”
“The truth is,” the fund-raiser says, “he may or may not be right. Meaning, you can imagine Obama might get enough of the energy back, but he might not. There’s a risk factor there. To be that casual and dismissive about it, you know, I think that captures a part of it where there is a certain arrogance of power—like, ‘We can do it without them.’ Well, it might be that you can do it without them, but it’s a dangerous way of thinking.”
But Wall Street, too, is engaged in some seriously perilous (and mildly deranged) thinking, which reflects not just its political naïveté but its all-distorting insularity from … reality. The populism now stirring in America is bipartisan, ecumenical. No politician of any stripe can afford to ignore it. The Republicans running in 2012 will be contending with or catering to it, too; they’re unlikely to offer Wall Street any safer harbor than Obama has. Yet the best barricade against the pitchfork platoons is an improving economy. And if it comes, not only will Obama stand a good chance of reelection, Wall Street’s amnesia may well kick in—just in time to fall in love all over again.