TED AND I OCCASIONALLY made the rounds in New York City, not only to meet with stock exchange and Wall Street executives, but also to visit key members of the financial media. We’d start in New Jersey at CNBC, where Ted sometimes would co-host Squawk Box or appear on Jim Cramer’s Mad Money. Then we’d head to the New York Times and meet with prominent financial journalists like Andrew Ross Sorkin, Gretchen Morgenson, and Louise Story. At the Wall Street Journal, we developed relationships with Scott Patterson and Geoff Rogow, who routinely broke interesting stories about stock trading. And we’d go to Bloomberg and Reuters, which also had leading financial reporters who were shaping the public’s views on Wall Street regulatory issues. We wanted these reporters and columnists to call Ted often as a go-to source for quotes.
On January 15, 2010, Ted and I were in New York and met with Paul Volcker, the legendary former Federal Reserve chairman, to talk about Wall Street reform. After Obama’s election, Volcker had been marginalized as an economic advisor but was still an advocate for strong financial reform. As Robert Kuttner of the American Prospect has written, “Volcker was a menace because he was counseling more constraints on bank powers than Summers and Geithner wanted. It speaks volumes about this administration that the most radical person in the room on the subject of banking reform was usually the former chairman of the Federal Reserve.” Former chairman Volcker received us graciously, stooped at the shoulders but still standing almost to his full six feet, seven inches in height then ushered us into his conference room. Volcker began, “You know, just about whatever anyone proposes, no matter what it is, the banks will come out and claim that it will restrict credit and harm the economy . . .” He took a long pause while Ted and I leaned in closer to hear what he’d say next.
“It’s all bullshit.” Ted and I laughed. We were relieved . . . and emboldened. Volcker outlined his idea for banning banks from engaging in high-risk proprietary trading. After 1999, when Congress repealed Glass-Steagall (the 1933 Depression-era law that separated commercial banks with their federally insured deposits from investment houses), banks with federally insured deposits had started trading for their own accounts, using excessive leverage and making risky bets, implicitly relying on a federal safety net to catch them if they failed. That needed to end, Volcker said.
Ted said he wanted to go further. In December, Ted had become an original co-sponsor of a bill introduced by Senator Maria Cantwell (D-WA) and former GOP presidential nominee Senator John McCain (R-AZ), to reinstate Glass-Steagall. Ted believed Congress had made a mistake in repealing it (indeed, long before 1999, the Federal Reserve had adopted rules—several over Volcker’s objection—that had begun to tear down Glass-Steagall’s limits). That led to a wave of financial-sector consolidation and the creation and growth of megabanks. Ted said Congress should restore what it had enacted in the 1930s and what had worked so well for so long to preserve financial stability (until first the Fed and then Congress unwisely dismantled it). Volcker said cagily, “Well I won’t stand in the way of someone who wants to do something more dramatic.” Volcker knew having Ted and others further out on the reform flank would make his own proposal seem like a comparatively centrist idea. As a strategic matter, Ted agreed. By being for Glass-Steagall, he could at least run interference for Volcker.
The next week, I was tipped off that President Obama would announce, in the wake of Scott Brown’s victory in the special election for the late Ted Kennedy’s Senate seat in Massachusetts, his support for legislation to impose a so-called Volcker Rule, exactly what Volcker had described to us the previous week. I immediately went to work on a speech, which Ted delivered on January 21, 2010, the same day as the president’s announcement, applauding the Volcker Rule and calling on the Senate to enact strong Wall Street reforms. In that speech, Ted laid out his views. He blamed Congress for repealing Glass-Steagall, thereby bringing to an end an era of responsible banking regulation and the beginning of an emerging laissez-faire consensus that markets could do no wrong. Over the past decade, inaction allowed derivatives markets to remain unregulated (even after the Fed had to orchestrate a multi-billion-dollar bailout of a hedge fund, Long Term Capital Management, which had used derivatives to leverage a relatively small amount of capital into trillions of dollars of exposure). The Fed and other banking regulators had ignored widespread instances of predatory lending and deteriorating standards for mortgage-origination. The Fed had been slow to write consumer protection rules. Bank regulators had relied on credit ratings and banks’ own internal analytical models when determining the amount of capital banks must hold. Moreover, regulators had essentially permitted banks to park the worst of their activities off their balance sheets at non-bank affiliates or entities created for this purpose. Finally, the multifarious bank regulatory agencies were poorly coordinated and badly captured by the industry. “Perhaps most importantly,” Ted stated, “this era of lax regulation allowed a small cadre of Wall Street firms to grow completely unchecked, without any regard to their size or the risks they took.”
It leaked from the White House that Biden had helped push President Obama to support the Volcker Rule; a faction in the White House apparently believed, belatedly, that Obama must at least be viewed by the voters as tougher on the banks. Maybe Ted’s activism was beginning to have an effect, through Biden, on Obama’s thinking. Ted even quoted Biden in his Volcker speech: “As Vice President Biden aptly and succinctly put it: ‘Be a bank or be a hedge fund. But don’t be a bank hedge fund.’” I was happy but skeptical. I knew Ted talked to the vice president, but Ted never told me about the substance of those conversations. Those stayed forever in Ted’s vault. That’s one of the reasons Biden trusted him so much.
That speech was the first time Ted used the phrase “too big to fail”—as recently popularized by Andrew Ross Sorkin’s book, which sat on Ted’s desk. In the next six months, he would practically wear it out, urging the Senate repeatedly to deal effectively with too-big-to-fail megabanks before they caused yet another disastrous financial crisis.
On a subsequent trip to New York, we met with Bill Dudley, the former chief economist at Goldman Sachs who is president of the New York Fed. Dudley was clear about what he believed needed to be done. In the past, he said, bank regulators had failed to require banks to hold sufficient capital reserves and had let these same investment banks and banks use too much short-term leverage. In the future, he continued, regulators can correct the problem by increasing capital and other regulatory requirements in proportion to bank size and interconnectedness. The largest of the megabanks would face the highest capital ratio requirement, providing the necessary incentive to restrain growth or even shrink.
It all sounded very simple and straightforward. Just one problem, Ted said. What if two or six or ten or fourteen years from now we have a new president, one who is deeply conservative or even libertarian? What if that new president appoints regulators who, just like those of the Alan Greenspan era, don’t believe in bank regulation? The pendulum may eventually (or even fairly soon) swing back to laissez-faire. As the shock wears off from the last crisis, Ted added, regulators may again become captive of politically powerful megabanks (they are today). Congress, Ted believed, must write clear statutory lines; otherwise, Dudley was asking Ted to trust the wisdom of future regulators, when neither Dudley nor Ted could even predict who those regulators will be. Dudley answered, as we’d predicted he would, by saying that bank capital requirements must be coordinated internationally with other nations’ regulators. We’re on it, he said. To Ted and me, that sounded too much like Congress had little to no role. His answer dodged Ted’s central point about future presidents appointing regulators Ted couldn’t know (and wouldn’t trust).
Back in the Senate, Ted had three great insights. First, this wasn’t a time for vague legislation that kicks the can back to the very regulators who’d failed in the lead-up to the crisis; Congress needed to draw hard statutory lines, just as it had during the Great Depression. Second, Wall Street’s inherent conflicts of interest had to be resolved through structural reform, such as by reinstating Glass-Steagall or imposing size and leverage limits. Third, he wanted to take the fight straight to the megabanks on too-big-to-fail, making Wall Street defend against structural reforms it opposed, at least to increase the chance that other provisions opposed by the banks, like the Consumer Financial Protection Bureau, would pass.
It’s true that Bear Stearns, Lehman Brothers, Merrill Lynch, and Goldman Sachs had all operated without a bank charter during the crisis—and had been at the center of it. But due to their extensive derivatives holdings, the risk of these non-bank institutions failing had become a threat to the entire financial system, and those that didn’t fail subsequently had sought bank charters and substantial Fed assistance. Ted believed that Congress needed to strike directly at the heart of the structural problems on Wall Street. Volcker’s proposal was at least a step in that direction. But Ted thought Congress should place strict limits on the size, leverage, and trading activities of behemoth financial institutions (both banks and non-banks).
In the fall of 2009, Chairman Dodd had begun drafting a proposed Democratic bill that built on a previous Treasury-White House proposal. On the issue of too-big-to-fail, the bill established a Financial Stability Oversight Council (presumably to foresee emerging systemic risks, but in reality not likely to be better at predicting the future than the existing President’s Working Group on Financial Markets); provided enhanced Fed supervision for banks and non-banks deemed to be systemically significant (in reality, the Fed already had such power); established so-called resolution authority, which would empower the FDIC to take over and resolve a failing institution (ignoring the reality that megabanks are global and U.S. authority stops at our borders); and tightened regulation of derivatives trading. The bill also called for the creation of a consumer financial protection bureau and contained myriad other provisions.
After months of drafting, Dodd presented it to the Banking Committee on November 19, 2009. It was a 1,139-page proposal, and the committee’s ranking member, Senator Richard Shelby (R-AL), lambasted it. He ripped into Dodd and the committee for not having developed an “exhaustive factual record” of what had caused the financial crisis. Then he labeled the draft bill a failure, one that would require a “complete rewrite” before it might gain Republican support. In particular, Shelby criticized the bill for institutionalizing the notion of too-big-to-fail—by creating a category of banks and non-banks deemed to be systemically significant—rather than ending it. On that issue, Shelby’s critique was similar to Ted’s (though Shelby proffered no alternative solution).
Dodd went back to the drawing board. He empowered four bipartisan pairs of Banking Committee members to work on different parts of the bill. Then, he began a closed-door negotiation seeking bipartisan consensus. For weeks and then months, quiet talks dragged on between Dodd and the Republicans. The House of Representatives had passed its bill in December 2009, but in the Senate, for months thereafter, there was no message, no bill, and no floor debate. Time crept by without a single senator saying anything publicly about Wall Street reform. At the same time, no Wall Street prosecutions were forthcoming from the Justice Department. To me, given that the country had been crippled by a devastating financial crisis, this long period of silence in its capital seemed bizarre.
Not coincidentally, it was during these months when the Tea Party, strongly opposed to the strenuous efforts of Obama and Congressional Democrats to pass a healthcare bill, grew deep roots. In my view, the Senate had waited far too long to turn to Wall Street reform. Frankly, I wasn’t that interested in healthcare reform and was surprised and disappointed that the Senate spent so much time on it. I didn’t know the issues, I had little to no confidence that the bill would do what its sponsors claimed it would do, and I was far more concerned about the health of the economy and pursuing Wall Street. To me, it didn’t feel like the right time to spend almost a year crafting major healthcare legislation. Ted believed strongly in passing healthcare reform. He also kept saying he wanted to be a “good soldier” for the president. He’d go to the floor repeatedly and make passionate arguments. I’d listen and bite my tongue.
Regardless, I attended an early July 2009 session when top White House aides David Axelrod and Jim Messina came to meet with the Democratic chiefs of staff about the urgency of passing healthcare. That morning, as usual, I’d watched CNBC’s Squawk Box. The recovering Dow had slipped from 8,736 on June 10 to 8,132 on July 10. It looked like the economic recovery was losing traction. I knew that millions of investors were deeply worried (I was sweating about my own portfolio) and that millions of others were still out of work.
Yet here were the president’s top emissaries and they weren’t talking about jobs or the economy. Messina said, “We talked to the president last night. And he said, ‘You know, I spent two years running for president. I visited all fifty states. I must have personally talked to two million Americans. And I want to give them healthcare reform.’” I thought, Obama may have spent two years running for president, but he’d won the election because the financial crisis hit and the economy went over a cliff. Shouldn’t we first fix a broken Wall Street and American economy? That was my rather nasty train of thought, that morning. I lacked the guts to say it out loud. The second message came from Axelrod: “And you need to pass healthcare before the August recess.” I was thunderstruck. Does anyone think that can happen that fast with something this complicated? Again, I wish I’d had the guts to say it. But this was the belly of the healthcare reform beast. Many of the people in the room had lived the dream of healthcare for all Americans for much of their careers. And, most importantly, Ted was a staunch supporter of passing healthcare.
I had spoken up once before. In April 2009, a White House communications staffer came to the Senate to talk about the healthcare message. He summed up nicely the three main points: Under the reform bill we’ll cut costs; if you like your doctor, you can keep him; and all Americans will receive quality, affordable healthcare. The White House had just held an event with executives from the pharmaceutical, health insurance, and other industries, at which this coalition announced it would favor healthcare reforms that cut costs in the coming decade by $2 trillion. That weekend, the editorial page of the Washington Post had been dubious about the event’s lack of detail on precisely how to cut the $2 trillion. So I raised my hand and asked the White House staffer about the editorial. His response: Yes, at some point we’ll have to worry about that. But weren’t the optics great? All these groups that used to oppose healthcare were now in favor of it. About a month later the Congressional Budget Office scored the first version of the Democratic healthcare bill. According to CBO, the first draft of the bill would cost taxpayers $1.6 trillion, not save $2 trillion. I immediately predicted (incorrectly) that healthcare reform was doomed.
Across America, people were still hurting and angry. And so the public’s anger directed itself at the Democrats, who were perceived as putting healthcare reform and the trillions it would cost (even if offset in the end by revenue raisers) over the need for economic recovery. And frankly I couldn’t blame them. I sat through too many meetings where dozens of issues were discussed but never the need for programs to create jobs and ensure economic recovery. Obama and the Democrats had taken their eyes off the ball. It erupted that August, when the Tea Party movement, already under way, had harshly criticized Democrats at town hall meetings. The three Republicans who’d been negotiating a healthcare bill with Democratic Senator Max Baucus—Chuck Grassley (R-IA), Mike Enzi (R-WY), and Olympia Snowe (R-ME)—came back with fear in their eyes and pulled out of negotiations.
In September, the Democrats—furious with Baucus for having wasted so much time with Republicans who clearly weren’t negotiating in good faith—were still in denial. Harry Reid took over the process and unveiled a healthcare plan that included a public option, even though he knew it would never pass. Reid was up for reelection and needed to appeal to the Democratic base. That caused months more of delay. It seemed like the Democrats and Obama were obsessed with healthcare reform when the rest of America was obsessed with jobs and economic recovery. Meanwhile, Wall Street reform, which Americans favored by wide margins, languished.
After the surprising win by Republican Scott Brown in Massachusetts and the Democrats’ loss of a 60-vote majority, many Democratic senators began to argue that the Democratic message must focus on two things: jobs and Wall Street reform. That, they believed, was our way back. The Democratic caucus seemed to have gotten the message, as Majority Leader Reid moved directly to a jobs bill. It was fruitless to negotiate with Republicans, many Democratic senators believed, because since the previous August (and, indeed, earlier than that) the Republicans had adopted a strategy of opposing everything. Even if the Democrats made concessions to Republicans in committee, the Republicans would filibuster the bill on the Senate floor.
When Senate Finance Committee Chairman Max Baucus nevertheless produced a jobs bill that he’d negotiated with Republicans, including tax extenders and other miscellaneous goodies for Corporate America, Ted reported that the Democratic caucus revolted. Senator Sherrod Brown (D-OH) stood up to say he was appalled that he’d first heard about the bill’s provisions from lobbyists on K Street (many of Baucus’s former staff work downtown). The Democrats directed the Majority Leader to strip those items from the bill, frame a strong jobs message around the bill, take it to the Senate floor, and dare the Republicans to filibuster and vote against it. The strategy worked. Five Republican Senators crossed the floor and voted with the Democrats, giving them the sixty-plus margin to break the filibuster and pass the bill.
It seemed obvious to Ted and me that that same approach should be the strategy for the Wall Street reform bill. The Republican caucus, carrying Wall Street’s water, would never give in. We needed a strong bill, a strong message, and a campaign to achieve broad public support. Polls showed that 67 percent of Republican voters believed Congress needed to “enact rules to rein in Wall Street excesses.” The same polls showed that the public believed, by two-to-one, that Obama Democrats favored the interests of Wall Street over Main Street. Only a strong reform bill and effective message campaign could turn around that negative perception, strong enough to compel four or five Republican Senators to cross the aisle and break a filibuster.
Dodd’s negotiations dragged on longer. Still, Ted didn’t expect to be a leader in the battle, whenever it finally came. Senators Cantwell and McCain had their Glass-Steagall bill. We expected Senator Jeff Merkley (a bright fellow freshman Democrat from Oregon) to be a leading pro-reform voice on the Banking Committee. In 1999, Senator Byron Dorgan (D-ND) had fought valiantly against the repeal of Glass-Steagall. And Senator Carl Levin (D-MI) would soon make his mark with his series of hearings in the Permanent Subcommittee on Investigations. We waited for other reformers to sound the battle cry. I prodded Cantwell’s and Merkley’s staffs especially to seize the opportunity for their bosses, they’d be heroes to millions of Americans. Weeks and months crept by, and Dodd still kept trying to give away provisions to gain Republican votes in committee. Cantwell went months without doing anything. Merkley decided to cooperate in the Banking Committee, so he didn’t take the lead until after the committee reported a bill and he and Senator Levin introduced their version of the Volcker Rule. And Byron Dorgan only belatedly began to take the lead.
Impatient for Senator Cantwell to move forward on her Glass-Steagall amendment, Ted and I went to see her. She had two staffers with her, and Ted and I sat down on her plaid silk couch. The meeting started, and Ted couldn’t hold back. He kept telling Senator Cantwell everything he had learned, all that he thought. How bad the Republicans were. How big the banks had gotten. How Washington had let the Depression-era laws crumble and fall, leading to disaster. I was beginning to get uncomfortable. Ted, who just a year ago had been determined not to get “senatorial disease,” barely stopped to take a breath. Finally Senator Cantwell interjected, “Ted, we need to get you more excited about this issue.”
Cantwell didn’t say it, but I suspected one of her problems was that Senator McCain, her amendment co-author, was facing a tough primary fight in Arizona. In a heated battle for Tea Party voters, no Republican could be perceived to be cooperating with a Democrat, so McCain had probably retreated from his initial enthusiasm. Ted finally let Senator Cantwell provide her views, but after that meeting, nothing ever came of the Cantwell-McCain amendment. Cantwell’s excuse to Ted later was that she couldn’t find any supporters beyond the usual reform-minded senators; apparently, because so many of the sitting Democratic senators had voted in 1999 to repeal Glass-Steagall, few wanted to admit they’d made a disastrous mistake.
Dodd continued to negotiate with Shelby, making concessions to the Republican side. After weeks of taking Republican ideas into the bill, the Banking Committee held a mark-up to consider the bill. Shelby again blasted the bill up one side and down the other. Publicly, Dodd tried to laugh this off. But it was becoming increasingly clear to his Senate colleagues that Dodd was using the Republicans to negotiate with himself, apparently because he wanted to give his Wall Street patrons the weakest bill that would pass. This time, at a meeting of the Democratic chiefs of staff, I spoke out. I was loud and emphatic: “Stop negotiating with Senator Shelby. He’s just a stand-in for Wall Street. Take a strong bill with a strong message to the floor. Americans want strong Wall Street reforms.” Yet the chiefs for other Democratic senators on the Banking Committee repeatedly said, “We’ll never get a bill that way. It has to be bipartisan.”
“Why?” I kept asking. Apparently some of the Democrats on the Banking Committee (not just Dodd) wanted a bipartisan bill, too. They were fantasizing if they thought the Republicans would ever support a bill, but they preferred to tell Wall Street that gaining Republican support was essential—code, in effect, for ending with a weaker bill.
Ted was speaking out at caucus meetings. When Democratic political operatives recommended to the caucus that its message be Democrats are “on your side,” Ted stood up to say: “I learned in politics a long time ago that people expect you to be what you say you are. Say you’re smart, you’d better be smart. Say you’re honest, be honest. If you say ‘on your side,’ you’d better be on their side. That can’t just be a slogan, it needs to be a test of the bill’s substance.”
I was getting increasingly incensed and frustrated, so I started attacking Dodd on background in the press. For example, on March 15, CNBC ran a story quoting me as a Senate aide:
Finally, there is concern that Dodd had drifted too far from key party positions on some issues in trying to find common ground.
“Dodd should be moving a strong bill with a well-orchestrated campaign and message behind it, calling the Republican bluff,” said another source, a senior Senate aide. “My understanding is that Dodd is moving forward with a bill that includes concessions. I thought you made concessions to gain someone’s support. After four months of negotiations, Dodd has made concessions to get Republicans to consider it. I truly don’t get it.”
At a subsequent meeting of the democratic chiefs, pollster Stan Greenberg, whom the chiefs had invited to make a presentation, undermined my repeated suggestions about the best political strategy. While the healthcare reform bill remained stalled, Greenberg told the chiefs he believed it would be best if the Senate passed any Wall Street reform bill (even a weak one) if just to prove they were capable of governing, rather than taking a strong stand against Wall Street and risk more gridlock. My frustration nearly boiled over. Healthcare reform isn’t popular; Wall Street reform is. If we take a strong stand against Wall Street, we’ll pass a bill. We should be most concerned about what voters will think in November, especially if the Democratic base believes that the Obama-Democrat version of Wall Street reform is weak.
I still didn’t know what was happening in the Banking Committee, where, it seemed, the negotiations were intense, secretive, and virtually round-the-clock. I called Jack Quinn and said, “I can’t get to the Banking Committee. I assume you guys are having a hard time getting information about the bill negotiations?” To my surprise, Jack replied, “Actually, I spent forty-five minutes yesterday with Chris Dodd.” He and the CEO of a client, which was concerned about provisions in the bill affecting systemically large non-banks, had a face-to-face meeting with Dodd, while I worked in the Senate and couldn’t get a scrap of information. I e-mailed one of my fellow Democratic chiefs: “I came into government to help shape change on Wall Street, and now I realize the profession I just left is having more input on the bill than I’m having from inside the Senate.” The chief responded, “That’s really sad.”
Ted had had enough. He was determined to go to the Senate floor and start speaking out strongly. I began working on a major speech. We wanted to lay out Ted’s views on the importance of ending too-big-to-fail. He wanted it to be the foundational document (a favorite Biden tactic) for all he would argue during the debate. We went through several drafts. Simon Johnson, the former chief economist for the International Monetary Fund and leading critic of too-big-to-fail megabanks, was standing by to tout the speech in his blog and on Huffington Post, where he served as a senior contributor. It took us longer than I’d planned. At one point, I e-mailed Simon: “This is threatening to become the speech that ate the Senator.”
I wanted it to read like a long-form essay, because I knew few people would hear it when Ted delivered it to an empty Senate chamber (unless casting a vote, senators are rarely on the Senate floor, usually leaving any speaker to talk solely to the presiding officer and C-SPAN cameras). Finally, Ted and I were comfortable with our magnum opus. And so on March 11, 2010, just a day after he signed onto the Merkley-Levin bill to restrict proprietary trading, Ted delivered his longest speech yet: “Wall Street Reform that Will Prevent the Next Financial Crisis.” It weighed in at 3,391 words (and that’s the shorter version Ted read on the floor; the longer version, at 6,572 words, was placed into the Congressional Record).
It was, as Simon put it that morning in a HuffPo “splash” above Ted’s picture, which filled my computer screen, “The Speech for Which We Have All Been Waiting.” Simon wrote, “We need a simple speech and a direct speech, most of all a political speech—about what exactly happened to our financial system, and therefore to our economy, and what we must do to make sure it can never happen again.”
The speech pulled no punches: “We are still far short of addressing some of the fundamental problems—particularly that of ‘too big to fail’—that caused the last crisis and already have planted the seeds for the next one. And this is happening after months of careful deliberation and negotiations.” The speech laid out a history of Wall Street, the “edifice” of regulations built during the Great Depression whose “protections and standards” were “methodically” removed, and a host of other factors which led to the 2008 crisis: the emergence of megabanks; the rise of shadow banking; the over-the-counter derivatives market; the expanding safety net; and the newer, more concentrated power of banks. Then Ted asked a “simple question”: After a financial crisis that devastated America, triggered a Great Recession, and necessitated a $2.5 trillion bailout (counting Fed loans, too), “Why should those of us who propose going back to the proven statutory and regulatory ideas of the past bear the burden of proof? The burden of proof should be upon those who would only tinker at the edges of our current system.”
The speech took the Dodd bill apart, noting the insufficiency of its resolution authority: “We need to break up these institutions before they fail, not stand by with a plan waiting to catch them when they do fail.” Ted described the bill’s banking provisions as reorganizing powers that regulators already possessed:
They could have sounded the alarm bells and restricted this behavior, but they did not. They could have raised capital requirements, but instead farmed out this function to credit rating agencies and the banks themselves. They could have imposed consumer-related protections sooner and to a greater degree, but they did not. The sad reality is that regulators had substantial powers, but chose to abdicate their responsibilities.
In short, the speech was an argument against incremental approaches; Ted proposed the need for radical surgery. Congress should draw hard lines: first, to rebuild the wall between the government-guaranteed part of the financial system and those investment banks that would remain free (within certain limits) to take on greater risk; and second, to put limits on the size, riskiness, and interconnectedness of systemically significant banks and non-banks. I sat there all morning watching Ted’s huge picture on Huffington Post, as e-mails started to roll in from across the Senate and downtown. “Wow.”
Just a week later, Arianna Huffington and two HuffPo reporters sat down with Ted in his Senate hide-away office for an interview. Six hours later, she posted an equally positive profile of Ted in her own column, headlined, “Celebrating Ted Kaufman, Accidental Leader” and leading with: “At a time when our political and financial landscapes are littered with villains and those unwilling to take them on, it’s refreshing to find someone in the halls of power that we can unabashedly celebrate. Enter Sen. Ted Kaufman of Delaware.” Arianna drew heavily on Ted’s views on too-big-to-fail and the rule of law, as this was also the week Ted had blasted government prosecutors for failing to charge Lehman Brothers executives for fraud and balance sheet manipulation. She wrote of his having delivered two “blistering speeches” in a week’s time, noting that Ted had emerged as “one of the Senate’s fiercest critics of Wall Street.” She also held up Ted as an example of what the political system would produce if we took money and fundraising out of the equation. Ted winced when he saw that, and he always denied that he had more courage to take on Wall Street than most of his colleagues because he never had to raise money. “I’d be doing the same thing if I were running for reelection,” he said to the press, over and over.
I never believed it. Ted never had to raise a single dime to get to office or stay there longer. That meant we didn’t have to begin our day—like other senators and their chiefs of staffs start practically every Tuesday, Wednesday, and Thursday morning—by going to a fundraiser breakfast, where Wall Street lobbyists would’ve chastised us for not working with Dodd. Other senators and their chiefs spend part of their day fielding phone calls from bundlers who raised big dollars for their campaigns. Or they spend hours placing calls to others asking for fundraising help. They agree to meet with bundlers who provided analyses of why this provision would harm credit and that provision would somehow hold back economic recovery. And these same chiefs might be worrying about their next job, just as I had years ago.
As a former lobbyist, I can remember talking to senators about an issue and seeing the wheels in their brains turning quickly: How will this affect my race? It may be a money issue, a vote issue, or both. And every two years when I went into the field to help a senator up for reelection, I remembered why senators had to think that way. If he or she was up against a well-funded opponent, every dollar spent on every ad counted.
Ted, on the other hand, was free to let his punches fly. So Arianna and Simon set out to raise Ted’s profile. In a reform movement, you need heroes. You need a narrative, with a hero who speaks the truth and bad guys who try to foil him. If Ted Kaufman hadn’t existed, Arianna and Simon would have had to invent him.
On March 22, the Dodd bill was voted out of the Banking Committee, with no Republican or Democratic amendments considered. No one on the committee as yet wanted his or her differences to be known publicly. Ted decided to denounce it on the Senate floor. We worked together on a nearly four-thousand-word speech, which included his most pointed criticism yet. It was a withering critique, straight from the shoulder. When we finished the draft, I asked him: “Are you sure? This is really going to piss off Dodd and the administration.” Without a hint of self-importance or exaggeration, Ted said: “I’m speaking to the ages.” In part, he said:
What walls will this bill erect? None. On what bedrock does this bill rest if the nation is to hope for another sixty years of financial stability? Better and smarter regulators, plain and simple. No great statutory walls, no hard divisions or limits on regulatory discretion; only a reshuffled set of regulatory powers that already exist. Remember, it was the regulators who abdicated their responsibilities and helped cause the crisis.
After his speech, Ted took the chair to preside over the Senate, and Dodd took to the floor to talk about his bill. To the casual C-SPAN viewer, it appeared that Dodd had likely heard Ted’s critique. The televised juxtaposition was striking, and Simon Johnson’s banner posting that day leading Huffington Post used this headline, clearly referring to Dodd: “Senator, Which Part of ‘Too Big to Fail’ Do You Not Understand?”
More media attention followed. On April 1, Yahoo’s Aaron Task did a piece on Ted; that same day, the New York Times editorialized on too-big-to-fail (and mentioned Ted); on April 2, an interview with Ted by Benjamin Sarlin appeared in the Daily Beast; on April 6, Newsweek’s Michael Hirsh weighed in with a Kaufman profile; and, two days later, Reuters’ Thomas Ferraro published his Kaufman profile. On April 8, Michael Scherer in Time wrote:
Instead of sailing quietly into oblivion, Kaufman has decided to make waves. Most notably, he is challenging his Senate colleagues—and the Obama administration—to get behind far tougher financial regulations than they have yet proposed, a move that has been unsettling to both bank lobbyists and White House aides.
Ted was clearly upsetting the Democratic strategy, which was to make the Republicans look like they were against any Wall Street reform, while the Democrats were for effective reforms. As Scherer wrote in Time, Ted was saying the emperor has no clothes:
As politics, his critique threatens to undermine the White House’s finely tuned election-year story line. To hear President Obama or his aides tell it, the coming Senate debate on financial regulatory reform will offer a clear choice to voters this fall between most Democrats who are defending the interests of Main Street and most Republicans who are in the pocket of Wall Street. Kaufman, by contrast, argues that neither party has yet shown much seriousness about undoing decades of deregulation, and non-regulation, that created the conditions for the financial collapse in the first place. “Little in these reforms is really new,” Kaufman says of the current White House-backed Democratic Banking Committee plan.
As he traveled around Delaware on the weekends, Ted perceived a change among voters. At a Common Cause dinner, he walked in and got a standing ovation. People in the hardware store would say, “Keep going after Wall Street!” He was pumped. He’d clearly struck a chord with a considerable portion of the state, although the banks (and Delaware’s political class) were very unhappy with him. One of Delaware’s top state officials visited me and castigated Ted for making Delaware look unfriendly to banks and business, which are crucial to its economy. Biden himself had been known among liberal critics as the senator from MBNA, at one time the largest credit card bank in Delaware and which had hired Biden’s son Hunter. Biden had been a leading proponent of a bankruptcy reform bill that had been favored by the credit card banks, a large employer in Delaware. I even used to hear complaints about that from Iowa voters. Now, Ted, Biden’s closest confidant, was campaigning daily against the interests of Wall Street banks (a different breed of cat than the smaller Delaware banks, which didn’t like Ted for it regardless). And while Ted would never admit it, I could tell (from hearing Ted’s half of phone conversations) that Biden secretly was cheering for Ted (the unleashed id to Biden’s ego).
Most unhappy was Chris Dodd. In April during a congressional recess, he called Ted from Central America and left him a voicemail: “Stop saying bad things about my bill.” Before returning Dodd’s call, Ted asked me to call Ed Silverman, Dodd’s staff director on the Banking Committee. Ted suggested I ask Ed in a nice way exactly how Ted can be for the changes he wants to the bill without being critical of it. “Ed, help me figure this out. How does Kaufman do that?” With Dodd trying to muzzle Ted, it was a smart strategy.
I didn’t know Ed and wondered whether he’d even take my call. But his receptionist and then his assistant, doubtless aware of Ted’s blistering speeches, put me right through to him. I said my lines. Ed said, “Oh, that’s just Chris feeling a little stretched. You guys are obviously free to keep saying whatever you want about the bill. I actually think you’re helping Chris because now he can say he’s got the Right and the Left upset with him, so he must be striking the right balance.” I pressed Ed on why Dodd kept negotiating with the Republicans: “It makes no sense; you’re just weakening the bill without picking up any votes.” Ed replied, “From the beginning Chris has wanted a bipartisan bill.” As our conversation ended, Ed said, “Don’t worry about being critical. Chris will be the one who gets to take the victory lap in the end.”
Ted was happy when I reported back. He wanted to maintain his friendship with Dodd (in part because Biden and Dodd are good friends and grew even closer during their ill-fated presidential bids). Then Dodd called Ted again, this time from Argentina: “I have a good bill. Will you please stop criticizing it.” Perhaps my call to Ed hadn’t worked after all. Ted told Dodd his bill didn’t end too-big-to-fail. When Dodd returned, Dodd talked to Ted again on April 13 and 14, with both of them repeating their positions. Ted stressed that he’d never said anything personally critical of Dodd, but that they had legitimate and important substantive differences. Ted ended by saying, “Let’s agree to disagree.” (Months later, during Dodd’s victory lap, he said in an interview, “It got pretty tense with people I like” and named a few Democratic senators, starting with Ted.)
I knew Dodd wanted to run over Ted like a speed bump. I was happy we were making life tougher for Dodd who, according to lobbyists I knew, was telling K Street that he’d be happy to throw some of the toughest provisions out of the bill, but that he couldn’t because Democratic senators in his own caucus had him pinned down. Ted’s flanking move was keeping a weak bill marginally stronger.
By mid-April, Ted’s was no longer the sole voice. Merkley and Levin had gotten excited about their Volcker Rule amendment. They also began to host meetings of progressive Democratic senators who thought Dodd’s bill was too weak. Dick Durbin (D-IL) tried to coordinate the input of senators who were dissatisfied with the Dodd bill. Al Franken (D-MN) had developed an amendment on credit rating agencies and conflicts of interest. Dorgan began pushing for a ban on naked credit default swaps (when speculators take a short position on a bond without owning the bond itself).
Blanche Lincoln (D-AR), the chair of the Agriculture Committee, which has jurisdiction over derivatives (futures markets originally existed to hedge commodities, especially agricultural commodities), had first worked out a compromise with the committee’s ranking Republican, Senator Saxby Chambliss (R-GA). Then she suddenly reversed herself and authored a much stronger derivatives-reform provision. For those following the action closely, Lincoln’s flip-flop was a particularly egregious political calculation. Lincoln had circulated a draft provision she’d negotiated with her Republican counterpart, which pleased Wall Street, then abruptly lurched to the left by authoring a much stronger approach. Because Arkansas’s lieutenant governor had challenged her in the Democratic primary, she seemed anxious to please the Democratic base. Was this the beginning of an anti-Wall Street political movement or just an Arkansas anomaly?
Cantwell suddenly came to life because she thought Dodd was being disrespectful of Blanche Lincoln (a female colleague). She reportedly stood up in the Democratic caucus and said as much. Harry Reid and Dodd backed down in a hurry. Lincoln’s derivatives provision went in the base bill. Dodd would just have to figure out a way to water it down in conference. (He did, with the acquiescence of Blanche Lincoln, who by then had won her primary and was cynically moving back to the right for the general election, which she lost.)
Senator Sherrod Brown (D-OH), who serves on the Banking Committee, had called Ted after his March 21 speech, and our two offices began collaborating to develop an amendment based on the ideas in Ted’s floor speeches. The Brown-Kaufman amendment to break up the megabanks became a rallying cry for reformers. The assets of the six largest U.S. banks, which just fifteen years before had equaled 17 percent of GDP, had grown in size to total almost two-thirds of the American economy. The biggest banks had concentrated far too much financial risk (and political power).
Called the Safe Banking Act of 2010, the Brown-Kaufman amendment would have put limits on the size of and leverage used by megabanks by:
We believed Brown-Kaufman was a more direct and simple way of achieving the goals of the Volcker Rule, which has subsequently proved difficult to define by regulation (and, eventually, enforce). Ted argued that the megabanks rely heavily on short-term financing like repos, trading liabilities, and commercial paper to finance their own inventories of securities, as well as their own book of repurchase agreements, which they provide to hedge funds through their prime brokerage business. The growth of those funding markets in the run-up to the crisis had been staggering. One report by researchers at the Bank of International Settlements estimated that the size of the overall repo market in the United States, the U.K., and the euro zone totaled approximately $11 trillion at the end of 2007. Incredibly, that was almost $5 trillion more than the total value of domestic bank deposits at that time, which was less than $7 trillion. The overreliance on such wholesale financing made the entire financial system vulnerable to a bank run, as during the Great Depression (before we instituted a system of deposit insurance and strong bank supervision). Remarkably, although there is a prudential cap on the amount of deposits the largest banks can hold, nothing limits bank liabilities like repos, which often must be rolled over every day. Brown-Kaufman would correct that problem by placing restrictions on the size of these liabilities at both bank and non-bank financial institutions.
Ted and Senator Brown argued that it’s particularly critical we impose such limits now that the federal safety net has been expanded to cover not just traditional commercial banking franchises, but also investment banks engaged primarily in speculative activities. Prior to the financial crisis, investment banks, by gorging on wholesale liabilities like repurchase agreements and commercial paper, were able to forty-times leverage a small base of capital into asset holdings that, in some cases, exceeded $1 trillion. With the purchase of Bear Stearns by J. P. Morgan Chase (with financial support from the government), the acquisition of Merrill Lynch by Bank of America (allegedly under pressure from the federal government), and the special dispensations that Goldman Sachs and Morgan Stanley had received from the Federal Reserve, all of the main Wall Street firms are now either part of bank holding companies or have become one themselves. Financial institutions whose deposits are federally insured and which enjoy permanent access to the Fed window should stick primarily to the business of banking. In short, Brown-Kaufman would force the largest megabanks to break apart.
I’d hoped that Ted could convince Biden to work within the White House to gain support for the Brown-Kaufman provision and try to convince President Obama to embrace effective structural reform. But considering the number of technocratic regulators in the Treasury Department, Fed, and economic team at the White House, that would have been a miracle.
As for the Treasury Department and Federal Reserve, Ted now really had their attention. The regulators and their fellow ideologues in the Obama administration were determined to stop Congress from drawing any hard lines. From the beginning, Treasury wanted no legislation that would tie its hands in negotiating international capital standards. I thought that was the height of technocratic arrogance. These people, who had been over-deferential to the banks before the disaster, didn’t want anyone—certainly not any legislator who might represent millions of Americans who had been crushed by the fallout—telling them what to do. I started telling reporters that passing an empty bill (one that simply reshuffled existing bank regulatory powers) would be tantamount to following an abdication of regulatory responsibility with an abdication of democratic responsibility. In the 1930s, Congress drew hard lines, and it worked. During the age of regulatory flexibility and international capital standards, disaster struck.
I continued to worry that Dodd would reach a deal any day. A Newsweek story quoted me as a senior Senate aide: “We’re gonna wake up one day, tomorrow or two weeks from tomorrow, and there’s going to be a deal between Dodd and the Banking Committee Republicans, and that will be the end of reform. One can only hope the president realizes what’s at stake.” The article was entitled “Oh, Barack, Where Art Thou? With the president AWOL, a too-quick return to normalcy could scuttle financial reform.” More than a year later, Frank Rich, in his first column for New York magazine after leaving the New York Times, wrote a stunningly fierce piece entitled “Obama’s Original Sin: The president’s failure to demand a reckoning from the moneyed interests who brought the economy down has cursed his first term, and could prevent a second.” Obama, in my view, deserves that kind of criticism. Everyone in the White House during this period told me Obama was deferring to Geithner. Biden, I later learned, wasn’t a factor. It was all in the Treasury Department. Obama, after insisting on a Consumer Protection Financial Bureau and having made his half-hearted move in favor of the Volcker Rule, had gone back to the sidelines. The rest would be decided in brutal power politics—and we know who had the muscle.
And where was Harry Reid? He was running for reelection in a tight race, so I asked one of his staffers: “How is Reid using the Wall Street issue in his campaign? It should be helping his reelection to favor a tough bill.” And what did I hear back? “He’s already raised so much money from Wall Street that he’s in no position to use it as a campaign issue.” Indeed, the money was coming in so fast from Wall Street’s coffers that someone asked Reid’s campaign staff: “Shouldn’t we talk about this from a campaign strategy perspective?” Nope, the answer came back. “Money is money.”
Dick Durbin, who at one point had said, “The banks own this place,” was number two in the Democratic leadership. Yet even Durbin said publicly that breaking up the banks was probably a “bridge too far.”