ON NOVEMBER 24, 2008, Governor Ruth Ann Minner of Delaware announced her intention to appoint Ted Kaufman to Joe Biden’s Senate seat. Upon accepting the appointment, Ted made it clear that he’d hold the office for only two years; he absolutely wouldn’t run in the special election that would determine his successor. He thought it best for the voters to pick Delaware’s next U.S. senator, without his using the advantages of incumbency to try to hold the seat.
He knew that, if he planned to run for election, he’d have to spend almost half his time preparing for a future campaign, and most of that working to raise the enormous number of dollars it takes to compete in a Senate election. After having been in and around the Senate for almost thirty-six years, he wanted to enjoy being a full-time senator—and explode out of the blocks for a two-year sprint on the issues he cared deeply about. He didn’t want to fundraise, play politics, or avoid making enemies. He wanted to be his own man, completely independent. In Washington: a rara avis.
Ted was truly motivated to work hard and make a difference. Initially, few outside Delaware perceived this, which, in hindsight, may have been a good thing. Many in Delaware respected him, but from the beginning they labeled him a placeholder—and, worse, a seat warmer—for Beau Biden, then the Delaware attorney general. Everyone saw Ted as the guy Biden most trusted not to run against his son in the special election. Biden, not known for his tact or sensitivity to the positions of others, didn’t help matters when he issued a long statement describing his son as, potentially, a great U.S. senator.
Ted had to defend himself against the placeholder label in every early media interview. I could tell the misperception stung, but, if anything, the denigration and condescension made him even more determined to disprove the cynics and make his days in office count. He was going to swing a big bat if he could get his hands around one. He told the Delaware media: “I’m not about having a bunch of bills with ‘Kaufman’ on them. What I’m about is, at the end of two years, being able to say that I tried as hard as I could to help make the country a better place.” For those who know Ted, that wasn’t blarney. It was as if he’d been waiting all those years, watching government and the country change, accumulating knowledge, storing up his life’s purpose until he had the opportunity to harness it to a just cause.
Ted Kaufman is, indeed, a humanitarian who cares deeply about the effect government can have on people’s lives. His father, a secular Jew, was a social worker and later became the deputy commissioner for public welfare for Philadelphia, (Someone had asked his father if he was disappointed that he was only deputy, and his father had said, “No, no, no,” and turning to his son, he said, “Ted, you want to be number two, you don’t want to be the number one.”) His mother was Irish Catholic and had been a social worker and teacher. Ted is a devout Catholic himself. Now that he was finally moving from being the number two to out front, he told a reporter he was most concerned about “people with power taking advantage of the powerless.”
Ted’s association with Biden began in 1972, when he ran the voter-turnout organization for Biden’s insurgent Senate campaign against a popular two-term Republican incumbent. The cause seemed hopeless, with polls before the election putting Biden thirty percentage points behind. Nevertheless, the upstart twenty-nine-year-old wound up winning narrowly. On the wall of his office, Ted kept a picture of the wild celebration that night and always said, “After that election, I’ll never, ever, again believe that anything is impossible.” Ted can tilt at windmills and genuinely believe he’ll slay a giant. Because he once did.
But behind this optimism was a savvy realism. At the very beginning of our time together, Ted gave me what I thought was a great piece of advice: identify each staffer’s strengths and use them; don’t expect people to repair their weaknesses and don’t assign them tasks they can’t do well. I suspected that this was something Ted had learned in part through his interactions with Biden: Take advantage of Biden’s strengths, because after years of trying, you’re never going to change his weaknesses. Ted, along with Biden’s wife, Jill, sister Valerie, brother Jimmy, and sons (when they became adults), tried to compensate for Biden’s weakness. They were the ones who exuded personal warmth towards staffers. They were the ones who called and stroked Biden’s big campaign contributors and fundraisers. They knew Biden would ignore every task he didn’t want to do and every person he didn’t want to deal with. So they filled in for him. Seen in a positive light, they were using their strengths to complement Biden’s; in a negative light, they were systematically enabling his weaknesses and worst habits.
Ted and I made an interesting pair. Both of us were insulated from the usual pressures of Washington. He didn’t have to raise a single dollar to get to the Senate or in the two years he spent there. For my part, I was older than most staffers and had already made my lucre from lobbying. So I too felt immune to Wall Street’s power and the social and cultural glue that coats the corridors of the Washington Establishment.
Ted was an engineer by training who also had an MBA from the Wharton School at the University of Pennsylvania and had worked in finance for the DuPont Company. After graduating from Alabama, I earned an MBA in finance from the University of Chicago and then spent four years working for Wall Street firms, first for Smith Barney and then for E. F. Hutton. I later went to Stanford Law School before working in the Clinton White House Counsel’s office. Ted had been investing for fifty years, I for twenty. Ted and I both saw ourselves as finance-savvy, even though we were in politics. For this reason, we thought very much alike and hit it off well.
Ted and I also had differences. One of them, I believe, reveals the deference that politicians—many of whom are extraordinary people whose breadth and depth of knowledge are often limited by the time drain of perpetual campaigning—show when dealing with hard-to-understand financial and economic issues and those who have mastered them. In October 2008, with the presidential election still roughly a month away, Ted and Mark Gitenstein (Ted’s co-chair of the Biden transition team) came back from an Obama-Biden pre-transition meeting audibly excited that Bob Rubin, the former Clinton treasury secretary, might return to serve as Obama’s. Ted and Mark were downright giddy. I wasn’t. Maybe because of my experience in Costa Rica, I was stunned about what Rubin’s excitedly anticipated return said about the Obama team. I feared it meant Wall Street in the White House. I feared that the people of this country would see right off the bat that one of Wall Street’s own would ensure a bank-friendly approach to economic policy and that no banker would be held accountable.
Incredulous, I asked Ted: “Don’t you realize that half the country wants to tar and feather Bob Rubin?” The New York Times, among others, had already reported on the extravagant compensation Citigroup had paid Rubin while he, ostensibly, had remained blind to the raft of rotten subprime mortgage products Citi had flogged to unsuspecting customers. Citi was, at that very moment, negotiating with the Bush economic team (with input from Obama advisors) to obtain a massive taxpayer bailout. And the Obama-Biden team thought Rubin deserved a promotion?
Even more stinging to me, as a fox-lobbyist, was seeing the foxes get free rein in the Obama henhouse. Ted and I watched closely, my disappointment growing and his optimism wavering. Michael Froman, Rubin’s chief of staff in the Clinton Treasury Department, was a managing director at Citigroup while serving as the personnel director for the Obama pre-transition and transition. And whom did Froman bring in to help him with the job of picking top appointees for the Obama administration? James Rubin, the son of Bob Rubin.
Tim Geithner, then the president of the New York Federal Reserve Bank, was also a Rubin protégé. In late November 2008, Geithner would help pave the way for the Citigroup bailout, one of the first acts of the Obama transition. This happened while Froman was in a key position to influence Geithner’s eventual appointment as treasury secretary. Froman would later trouser a $2.25 million bonus from Citigroup before departing to serve in the Obama administration.
Larry Summers, named director of the National Economic Council, had worked for Rubin at Treasury before succeeding him as secretary. He’d made more than $5.2 million in 2008 alone as a managing director of the hedge fund D. E. Shaw, and pocketed an additional $2.7 million in speaking fees from several future bailout recipients, including Goldman Sachs and Citi. At Treasury, Geithner’s aide Gene Sperling earned $887,727 from Goldman Sachs in 2008 for performing the service of “advice on charitable giving.” Geithner’s future chief of staff, Mark Patterson, was a full-time lobbyist for Goldman Sachs (which raises the question of what was meant when we lobbyists were banned from serving).
It’s no wonder that, if you ask almost any pollster, you’ll be told that most Americans perceive no difference between Wall Street and Washington. Both are populated by power elites. Both pursue interests that differ dramatically from the national interest. One group, determined to make as much money as possible, misleads investors and, after a devastating financial crisis, asks taxpayers to foot the bill. The other group (regardless of political party) primarily courts campaign contributions from the wealthy and powerful, and, for the most part, plots long-term plans for attaining wealth and comfort in the private sector. Once absorbed by DC, members of Washington’s Permanent Class serve as Wall Street’s handmaidens: When they’re in government they hire Wall Street alums for powerful government positions (after which the alums go back to Wall Street and make further millions). When they’re not in government, they’re working on Wall Street’s payroll.
Unfortunately for America, Obama and Biden (who pledged in his 1972 campaign never to own a stock or a bond) were both financially illiterate. In the presidential debates, Obama did a fair impersonation of someone who had grasped the elements of the crisis (far better than John McCain). Ted told me the Obama internal polling showed that voters believed strongly Obama had bested McCain in the debates on the issue of how to grapple with the financial crisis. It may not have been why he ran for president, but Obama won foremost because the American economy direly needed effective leadership in the White House.
Yet Obama wanted to outsource the job of restoring America’s financial health to Bob Rubin. Then, when Obama belatedly realized Rubin was toxic, he turned exclusively to Rubin’s disciples, either oblivious or fully cognizant that Rubin and Rubinites were behind much of the deregulation that helped make the financial crisis possible.
Ted, who later turned against Geithner and railed about regulatory conflicts of interest from the Senate floor, was slow on the uptake. In late 2008, he still thought Geithner was great and that Hank Paulson (Bush’s Treasury secretary) was the disaster. “Ted, how can that be?” I would ask. Paulson, Geithner, and Ben Bernanke (the Federal Reserve chairman) had been attached at the hip for every decision during the crisis. The difference between Paulson and Geithner was that Rubin had sprinkled his magic dust on Geithner, so Obama and his team were all cross-eyed for him.
Why did Obama turn to Wall Street from the beginning? Ted, who had attended the early transition meetings with President-Elect Obama and Vice President-Elect Biden, explained it this way: “It was like a car had broken down, and we needed a mechanic.” In my view, it was a disaster from the beginning, with no one in the Obama finance team to offer a different viewpoint. Obama essentially entrusted the repairing of the china shop to the bulls who’d helped ransack it.
Although I was going to be his closest advisor, Ted didn’t consult me on the question of which Senate committees to join. He told Senate Majority Leader Harry Reid that he wanted to be on the same committees as Biden: Judiciary and Foreign Relations. They were the two he knew best. I would’ve steered him toward the Banking Committee; outside it, he’d risk being shut out of financial reform. We’d simply never get enough information or have significant leverage.
From my lobbying days, I knew how the Banking Committee operated: Staffers gave lobbyists information about bills being drafted or what one senator had said to another (especially irresistible were scoops on the views of Chairman Chris Dodd or the ranking Republican, Senator Richard Shelby). The lobbyists passed the information on to their clients in the banking or insurance or accounting industry. The clients then forwarded a summary to their trade association or the Financial Services Roundtable. Sometimes within an hour, the news would be e-mailed to the entire financial-services industry and all of its lobbyists. With multiple leakers from the Banking Committee keeping K Street well informed, the banking world had complete transparency into bill drafting, while senators who didn’t serve on the Banking Committee stayed mostly in the dark.
Ted had never witnessed this side of the action. I had. But he caught on fast. At this time, he and I were learning, like everyone else, about the causes of the financial crisis and possible solutions. Because I knew prosecutors had all the tools they needed to pursue various types of fraud, I initially saw the crisis primarily as a law-enforcement matter. Somewhere in all this mess were people and firms who had broken the law, whether in isolated transactions or mass malfeasance.
I was determined that Ted (and Biden) should push for the establishment of a Justice Department task force—a strike force, really, of bank regulatory agency investigators, FBI agents, and prosecutors—dedicated to uncovering any fraud that had engendered the financial crisis. Ted was as gung-ho as I was.
In our early planning sessions, we discussed what had brought on the crisis. We knew the prevailing narrative. In 1999, Congress had repealed the Glass-Steagall Act, which had separated investment from commercial banking activities. Clinton’s economic team (including Rubin and Summers) had fought to ensure that derivatives would remain unregulated. We knew that policymakers had pushed banks and quasi-agencies like Fannie Mae and Freddie Mac to make housing affordable; that subprime mortgages were pooled and securitized; that the rating agencies blew it and gave these pools AAA ratings; and that banks were leveraging thirty- and fifty-to-one and buying up these soon-to-be-toxic assets. Credit default swaps were being written and traded to hedge these risks without any understanding of who was writing how much and without any regulation or oversight.
As Ted liked to say, Washington’s decades-long infatuation with deregulation had pulled all the referees off the football field. Then, the executives trusted to act in the best interests of shareholders had convinced themselves, against all reason and instinct, that they could engineer risk out of the system. Despite the fancy equations from the quants, the executives knew (or should’ve known) that they were gambling with shareholders’ money. Once executives and companies realized the problem, many buried their heads in the sand. In some cases, as we did in Iowa, they faked it until they were dead.
In Ted’s and my view, when confidence had been so shaken, when so much wealth had been destroyed, all options should be on the table for finding how best to reestablish wealth creation, restore public confidence, and protect investor interests. We believed Congress needed to restore the “solid edifices and critical pillars of our economic system”—which had crumbled, as even Alan Greenspan had admitted—wisely, carefully, and urgently.
Ted would focus from the beginning on enforcing the rule of law on Wall Street and restoring investor confidence in our financial markets, a crucial prerequisite for America’s future economic success. Along with creating jobs, what else should be a higher priority for America’s political leaders?