Confidence Men Part 17

Which they summarily did, in the Roosevelt Room. Geithner, Summers, Romer, and Krueger were among those around the table, along with Emanuel. The chief of staff, who was not particularly versed in these regulatory matters and, in any event, was not an elected official, took charge, acting presidential.

After listening to an hour of debate on the matter of what the outlines of reform should look like-just like hour after hour of debates involving the president-Emanuel took control of matters. "Okay, Tim, what the f.u.c.k do you need here?"

Geithner, a bit stunned, paused for a moment.

"Well, a systemic risk regulator [someone to watch the landscape for systemic risk inside inst.i.tutions], resolution authority [the statutory power to take down a problematic inst.i.tution], and leverage [higher capital requirements to ensure that banks don't over-leverage themselves]. Those three things."

Emanuel nodded. "Okay, let's throw in the consumer financial agency, and everything else can be flushed."

So it was decided. Everyone kind of shrugged. One partic.i.p.ant in the deliberations thought about whether Emanuel had, in fact, simply made this decision, or whether he was just carrying out the wishes of the president, then concluded that "the president couldn't have decided these things and told Rahm what to do. At the start of the meeting, there were too many variables to choose from. You would have needed some sort of decision-making algorithm."

What does it take to lead the world's most powerful nation?

That was the question David Axelrod was considering on May 8 in his smallish office in the West Wing.

"Someone said to me the other day that history produces great leaders. But I don't think that's quite right. I think the American people produce great leaders. The fact that they took a guy who was four years out of the Illinois Senate and made him the president, but insist that he run every mile of the race to get there, clear every hurdle, run every gauntlet-there's a wisdom in that."

Axelrod, as the intellectual architect of Obama's victory-the first U.S. senator since Jack Kennedy to manage this leap-falls into the camp that believes primary combat, from coast to coast, is an ideal trial by fire. We live, after all, at a time when presidents largely govern from a blindingly lit public stage. A distinct advantage came in being a skinny target, with a public record of choices and outcomes thinner than that of most sitting governors. But the flip side of this, political inexperience, was rarely leveraged by Obama's opponents to good effect. Much credit for this goes to Axelrod's deftness, and rightfully so.

But now, five months along, he and his boss were furiously trying to run up steep and unforgiving learning curves. Which is why Axelrod was expending inordinate effort following Obama to meeting after meeting, a.s.sessing how the president's personality traits, his skills, his inclinations, had matched thus far with the dictates of a job that, until a few months ago, was unfamiliar to both of them.

Since arriving in Was.h.i.+ngton, Obama had told Axelrod he felt it was imperative to keep his connection with the people. "At times of crisis, it's absolutely crucial. He gets ten letters a day and reads them faithfully, pa.s.ses them around. Because his greatest fear was that he'd lose his ability to relate to the American people."

Axelrod is a rumpled, large, soft-spoken man, unsusceptible to hyperbole except on the subject of his boss. He is sure that Obama will be one of history's seminal presidents. He talked about how Roosevelt's New Deal era reigned from the 1930s until 1980, and how "the last twenty-eight years we've been defined by Reagan. But I believe this is the start of a new era." The key to that happening, he said, is whether Obama "can restore the values he formulated in the Inaugural. I have no doubt he has the bearing and the capacity. The question is, is the system too ossified to allow for change?"

He then talked about how surprisingly difficult the demands of the White House were, how the process of translating ideas into effective, coherent actions was daunting. Axelrod, speaking for Obama, called it a "Sisyphean task," but "we haven't dropped the boulder yet."

At the same time, in his account of Obama's qualities, he said, "One of the things that serves him so well in this job is not only his strong compa.s.s but this very sort of broad intellectual curiosity. He just fluidly moves from one thing to another."

This quality, which Axelrod cited as a strength, several senior hands around Obama who'd served other presidents were now convinced was a liability. They seemed to be acting to fill the void, trying to direct Obama or simply acting on their own with whatever presidential legitimacy they could conjure. But what was the goal? In what direction should they be pus.h.i.+ng him?

On that score, Axelrod's mom offered a.s.sistance.

"When I talk to my eighty-nine-year-old mother about Roosevelt, who was her hero, she doesn't talk about the FDIC or Social Security. She doesn't talk about the New Deal. She says you always felt that there was someone watching over us. You felt like everything was going to be okay because he was . . . there."

Axelrod thought all that over for a moment, as though his mother were sitting on the couch in his office. Channeling her, he'd stumbled upon a working definition of the saving confidence Roosevelt's presence seemed to restore, year by year, across a desperate nation. The complex acts of government were not what Axelrod's mother-twenty-five years old when Roosevelt died-recalled from her formative years, or what resonated with her in all the years to follow.

Are sound policies, enacted and demonstrably effective, a prerequisite for restoring such crucial confidence in this era? Axelrod wondered, as that evocative phrase, "someone watching over us," ran through his head.

"Does the confidence come from the policies themselves, or maybe something more basic?"

He paused, perplexed. "I just don't know."

"How do you deleverage an entire economy?" Paul Volcker asked, in sort of a joke. "Verrrrry carefully."

The hairless giant laughed quite a bit whenever he delivered some tough-love advice. His demeanor was important to his survival in the early 1980s, when he decided what was right and then did it. Inflation was running in the teens then and killing the U.S. economy. Something had to be done. So, with his c.o.c.keyed smile, a small, fat cigar, and a grumbling air of "I'm doing this for your own d.a.m.n good," he squeezed down on the U.S. economy. He was working the large tectonic plates beneath the landscape, tightening the money supply so stridently it pushed the country into the 198182 recession-the worst since the Great Depression, until 2007 took the honor. But he managed to tame the inflationary beast.

Now his focus was on the geological s.h.i.+fts of the debate: "the problem is we're replacing private debt with public debt." When people start lending again, and eventually they will, he said, the private debt is likely to be replenished. Then total debt will be even higher. How do you stop this?

"Well, right now, when you have your chance, and their b.r.e.a.s.t.s are bared, you need to put a spear through the heart of all these guys on Wall Street that for years have been mostly debt merchants."

Had he told Obama this? Yes, of course. "Every time I say anything reasonably intelligent, the first thing people ask: 'Have you told this to Obama?'

"I tell him whatever's on my mind," Volcker said. "Does he listen? I think so. But he's usually sitting in a crowd."

And, he added, don't get "me started on the stress tests."

It was May 11. A few days before, the Fed released its verdict on the stress tests. Almost half of the banks were listed as needing to raise more capital. Ten of the nineteen largest banks would need to raise, collectively, $74.9 billion in order to withstand the hypothetical scenario posed by the tests. At the top of the list, to no one's surprise, was Bank of America, which alone was undercapitalized by $33.9 billion. Citigroup and Well Fargo followed not far behind. They'd have six months to raise roughly that amount of capital or face some added action, not clearly specified, by the Treasury.

Still, the results were met with a sigh of relief from many banks. Goldman Sachs and JPMorgan Chase and Morgan Stanley were all deemed "adequate"-signifying that they could withstand the worse of two projected scenarios for a potential recession-and industry heads all seemed to be patting one another on the back.

Ken Lewis, meanwhile, was in the vocal minority of those still aggrieved by the government's role in the financial sector. Having been removed from his board chairmans.h.i.+p the previous week, he was speaking with investors on a conference call, still acting as CEO. "The game plan is to get the government out of our bank as quickly as possible," he said, maintaining that Bank of America had no plans to convert the government stake into common stock. Instead, it would focus on repaying TARP, a feat already accomplished by two of the other three "Big Four banks."

The Fed announced that under the tests' "adverse" scenario, the losses by the nineteen banks could total $600 billion in 2009, the equivalent of 9.1 percent of the banks' total loans.

Volcker was diametrically opposed to the concept.

"Now the bad banks will want money from the government," he said, or will go out and try to raise it "to make themselves whole. And the good ones, with their government stamp of approval, can go out and raise money that everyone will be sure is government guaranteed. Oh, they'll make plenty of money off of that.

"They have their buzzword: 'systemic risk,' " he went on. "They love that one. All the money being spent on these inst.i.tutions because they have systemic risk, and then you have to rationalize and justify all that money spent, and that's where you get trapped . . ."

His voice trailed off and then he unleashed a big Volckerian idea: "I do not believe in focusing systemic risk on the safety of specific inst.i.tutions." He said it like a p.r.o.nouncement, and looked back at the line to make sure it held up. "You focus your energy instead on developments in the marketplace that carry systemic risk, developments that cut across inst.i.tutions and particular markets. The whole use of financial engineering is a systemic risk, in my view. It led among other things to subprime mortgages. That was a systemic risk that was not particular to an inst.i.tution, though it brought some of them down. Credit default swaps have a systemic component, as do the many ways people leveraged themselves."

Whether this is sound policy-banning certain activities and altering behavior, after all, are never easy-this is what original thinking looks like. The problem, clear to all, was that inst.i.tutions that were too big-too systemically risky-to fail during the Great Panic, were today even larger and quite possibly more systemically dangerous. These banks, Volcker said, not only were susceptible to "moral hazard," but worse, to keep up their earnings in a soft lending market, they'd need to rely, ever more, on being R&D labs for "financial innovation." On that score, Volcker was blunt: it was mostly chicanery draped in the alluring obscurities of marketing and complex math. "The last financial innovation by the banks that really created productivity and efficiency was the ATM. Ironically, it was Citibank that really got it started."

He laughed, a kind of wheeze where his shoulders pulled up and down: "It's like what's-his-name in the ad: they have to start making money the old-fas.h.i.+oned way, they have to actually earn it."

What's-his-name was John Houseman. The long-running ads, for Smith Barney, were first launched in 1982-just about the time Wall Street stopped making money the old-fas.h.i.+oned way and compensation began to rise precipitously. Five years later, when Reagan replaced Volcker for being insufficiently antiregulatory, the former Fed chairman began serving on corporate boards. By the mid-1990s he had started to refuse requests to be on compensation committees. Why?

"What I saw happening made me sick."

In a cautionary tale about how regulation can create unintended nightmares if not thought through, he described how a tax code change in 1992 mandated that companies could deduct only $1 million in cash compensation, per employee, as an expense, and any compensation above that had to show that it represented "value-added." This effort to limit deductions on high-end salaries prompted companies to put more compensation in stock options . . . right at the start of the strongest decade for rising stocks in a century. Compensation, already rising fast, accelerated its ascent in an environment of weak unions and shareholder rights, and lax ethical boundaries for directors.

"Once this sort of thing starts, it takes some real toughness to stop it," Volcker said. "But someone should have. Because having people paid tens of millions for activities of no social or really economic value-or, as the crash shows, negative value-just tears a society apart, at all levels, top to bottom. Well, maybe not top."

Volcker, at eighty-one, was one of the last strong voices of an older age, when ethical toughness was honored and adequately rewarded. He was part of the midcentury's community of "prudent men," referees on the field of play making sure conduct was fair and cheap shots led to real penalties-and to social sanction. Nothing was worth risking that.

At the center of this community of professionals-lawyers, accountants, auditors-were the closely regulated banks, and Volcker felt it was time restore them, mostly as they had been before that wall between banking and investing was breached in the 1990s.

"I tell you the argument we're having now," he said, "there are those like me who say the heart of this system ought to be the banking system, like it was historically, and it ought to be a service organization to take care of the basic needs for its clients . . . its big job is providing someplace for their money, transferring funds around the country, making loans, helping them with investments and the rest. They shouldn't get off doing hedge funds and equity and trying to make all their money by trading. That's my view. Then you get the banks closely supervised, as they have been historically, and hedge funds can go off and pretty much do their own thing, unless they get so big that they can mess everything up. You don't worry about every hedge fund, or equity fund, and they'll probably not make as much money as they used to, with more compet.i.tion and without all those bank deposits to play with.

"And, finally," he added, "you have to deal with this business of some sucker gets a bad mortgage and the guy who sold it to him gets a commission, and the guy who sold it to that guy gets one, too. That's just old-fas.h.i.+oned fraud. Now, the other view," he said, summing up much of Geithner and Summers's position, "is treat everybody alike. They're either angels or robbers. You can't tell which, and there's no point making a distinction between the banking system and the others.

"I think that's just fundamentally wrong."

Taking a course like the one he outlined, creating actual structural changes-"explaining it to everyone, doing it, and letting people get on with their business"-he said, takes "a kind of tough love that'll get Wall Street, and plenty of Was.h.i.+ngton, too, up in arms. But most people on Main Street would understand what you're doing pretty quickly. And they're the ones who actually elect you."

He'd told all this to Obama, in various ways. "I think Obama understands everything intellectually, very easily, near as I can see. What we don't know is whether he has the courage to follow through. He understands it, but does he feel it in the belly?" Then he mumbled, "I don't know."

He said he always liked that thing Obama said, about how the hardest thing to do in government is "to solve tomorrow's problems with today's pocketbook.

"But he doesn't do it!"

What was happening was that Volcker was struggling to overlook the demonstrable facts: that by pa.s.sing over him and his like-minded kindred for top Treasury and White House posts, Obama had shown his preference, one quite different from Volcker's, on almost all these issues. The president's preference, Volcker felt, was "first, do no harm"-a phrase he'd heard often in 1980, when he began to pinch off the money supply. The "do no harm" school, he said, "always sounds reasonable" in that it calls for delay, until matters worsen to the point "where there'll be consensus that we need to act in a forceful way. But you never get that consensus, because many of the actors, the inst.i.tutions and so forth, will follow their own self-interest right off a cliff." Every policy of consequence, meanwhile, is going to "do some harm, short term-something government, mind you, can and should help cus.h.i.+on." But there's no other way "to create the larger good, something you look back on with pride."

That idea of accomplishment, something you could be proud of, reminded him of a breakfast he'd gone to a few months before that had helped him "see things more clearly, even at my age." It was a breakfast of "right-thinking citizens" who were worried about the crumbling infrastructure in the country.

"At the end of the breakfast, this old gray-haired old man says, 'I know something about this. I'm a professor of civil reengineering at Princeton. And I was up at Yale the other day and they've given up teaching civil engineering. There are just two old geezers like me up at Harvard, and once they're gone that'll be it. There's hardly an elite university in the United States that pays attention to civil engineering. What's the result? We hardly know how to build bridges; they tend to fall down. It's cost twice as much to build that new bridge across the Potomac as it would have cost if it was built in Europe . . . I a.s.sure you, I know . . . and besides our bridges are ugly and theirs are beautiful.' "

Then something dawned on Volcker that he told the old engineer.

"Well, I said, 'The trouble with the United States recently is we spent several decades not producing many civil engineers and producing a huge number of financial engineers. And the result is s.h.i.+tty bridges and a s.h.i.+tty financial system!' "

Volcker roared with laughter, until his eyes watered, and he took off his gla.s.ses to wipe them. Of course, he was talking about something very serious, about the choices people make in their lives, as well as those made by a nation.

"It always used to bother me-not so much anymore, but for a long time-how I spent all my life in government, doing things that were so intangible. What's there to show for it, what's left behind?" he said in a soft grumble. "And I just thought, imagine saying, 'There's a G.o.dd.a.m.n bridge I built. Or I designed that building, or I shaped that beautiful landscape.'

"I always wanted to build something in my life. All I did was stop inflation."

Volcker and Axelrod's mother, in their words and posture, were both trying to summon a world where humility was rewarded and government-of, by, and for the people-stood above other competing realms in American life. New York, then like now, was the nation's preeminent city. But Was.h.i.+ngton had, for the long American midcentury, won the t.i.tle of capital, in a push-and-shove for primacy between the two cities since the founding of the Republic.

That rise was in reaction to one disaster after the next. The first big financial bust of twentieth-century America, the Panic of 1907, resulted in the creation of the U.S. Federal Reserve Bank. The government, dangerously and more than a little embarra.s.singly, had been forced to turn to banking magnate John Pierpont Morgan to save the financial system. It hoped never to have to again. But it was not until the Great Depression that Was.h.i.+ngton really got serious about forcing prudence onto markets and into life.

The banking industry of the 1920s had done all it could to undermine the country's faith in it. By merging commercial and investment banks into "bank holding" companies, it had created hugely profitable conflicts of interest, which then in turn precipitated the collapse of 1929. But as destructive as their behavior had been, the economy needed functioning banks. So when Franklin Delano Roosevelt arrived in the White House almost four years later, his most pressing order of business was to restore Americans' confidence in their banks.

After such a dramatic collapse he knew he would have to do more than simply tell people the banks were now safe. Their confidence needed to be earned, not manufactured. So he crafted a grand trade-off: the federal government would insure deposits in those inst.i.tutions that behaved themselves, that adhered to strict rules and limitations. The Gla.s.s-Steagall Act gave deposit insurance to banks that agreed to act like prudent men. At the same time it broke up the poisonous bank holding companies. Investment banks would still exist and could do as they liked, but no longer would they jeopardize the savings, and thus future, of the American people.

The "prudent man" standard came from a landmark nineteenth-century legal decision in Harvard College v. Armory, the case of a money manager who had squandered a widow's inheritance. The decision put in place the Prudent Man Rule, which established a fiduciary duty to invest the a.s.sets of a trust as a "prudent man" might his own. By applying a similar standard to banks, Roosevelt would help promote the same sort of a.s.surance in them that their fortresslike facades and heavy vault doors were there to inspire.

Of all the changes that occurred on Roosevelt's watch, one of the most important was the government's realization that its role might not be simply to ensure certain rights, but also to protect and promote a kind of desirable balance, a virtuous equilibrium. The reforms enacted under FDR were different from those that had come before and s.h.i.+fted the basic balance of power between Was.h.i.+ngton and New York-between public and private, worker and owner, saver and speculator. The walls built were not regulatory guidelines, subject to the enforcement and diligence of bureaucrats, but laws tightly drafted and immovable, clear matters of legal and illegal, just as the founders had done with their "checks and balances" within government.

The most oft-quoted line in FDR's First Inaugural Address-"We have nothing to fear but fear itself"-was followed by stern words, all but forgotten to history, for the president's enemies in New York: "Faced by failure of credit, they have proposed only the lending of more money. Stripped of the lure of profit by which to induce our people to follow their false leaders.h.i.+p, they have resorted to exhortations, pleading tearfully for restored confidence. They know only the rules of a generation of self-seekers. They have no vision, and when there is no vision the people perish."

There are many ways to understand what "vision" here might mean: the inventor's insight that creates a new technology or medicine, the leader's foresight of his actions' distant consequences, the prudent man's reserve about the extent to which complexity can be mastered and the future known, people's gut-level sense that something better lies down the path of hard work and fair play. The confidence of the nation rests on trust and can endure for years after this trust has been broken. But it cannot endure indefinitely if the foundation of trust is not at some point earned. Confidence is the immaterial residue of material actions: justly enforced laws, sound investments, solidly built structures, the well-considered decisions of experts and professionals. Confidence is the public face of competence. Separating the two-gaining the trust without earning it-is the age-old work of confidence men.

Inside the White House that very day, May 11, President Obama stood at a lectern proud and firm, with a "coalition" of health care industry representatives around him. All the major players were there, all the bigs, from the American Medical a.s.sociation, the American Hospital a.s.sociation, the Advanced Medical Technology a.s.sociation (medical devices), America's Health Insurance Plans, and PhRMA, the drug lobby. Also represented: the Service Employees International Union, or SEIU, the country's largest private-sector union.

The president hadn't done much since the Health Care Summit. Tom Daschle couldn't get an audience. Max Baucus was moving forward in the Senate. Various groups in the House were working up their proposals. This was Obama's next act.

Over the previous week, health care reform czar Nancy-Ann DeParle, on board now two months, was working with Dennis Rivera, the health reform chief of SEIU, and Karen Ignagni, from the health insurers. They were trying to hammer out a number, a commitment for cost cutting that would serve as a target goal. This sort of thing had a long history. The industry had lined up to promise "voluntary" cost savings, in various coalitions, since Nixon was in office. Nothing had worked. But this time was different. At least everyone felt it was, for better or worse, depending on where they stood in the unfolding debate.

The key distinction from 1993 was that the health care providers and the insurers were not moving in traditional unison. Insurance executives were building on their grand bargain, committing to ending unpopular underwriting practices, such as refusing coverage to those with preexisting conditions, and were encouraging Congress to adopt uniform federal regulations on their industry, which suffered from the logistics of having to craft their plans state by state. But it went deeper than that.

The growth in costs was the beating heart of provider profits, not insurance profits. Higher medical costs, and the pushback against ever-rising premiums, put insurers in a squeeze. Their profit margins were now slightly lower than that of others in the health care community and, during a recession, destined to shrink further. This, and the existential threat that the so-called public option still posed, was nudging their self-interest toward the cost-cutting goals of the White House and consumer groups. Ignagni, to the surprise of Orszag and others, was in fact pus.h.i.+ng for a high number on cost cutting and dragging along some of the reluctant providers.

"Karen was pus.h.i.+ng for a big number," said a former senior official involved in the talks. "The fact that we didn't seize the potential for a realignment, I think, showed the cost of not having someone like Daschle aboard. We were playing checkers. We needed to be playing chess."

And it was a big number that Ignagni, leading the coalition, hammered out with DeParle and Rivera: $2 trillion in health care cost savings over ten years.

Excitement bubbled up through the White House. Orszag was given a green light to call Krugman. His column in the New York Times on May 10 went so far as to say the commitment, to be announced the following day, was "some of the best policy news I've heard in a long time."

After a meeting on the eleventh in the Roosevelt Room with Ignagni and representatives from the providers, Obama officially unveiled the commitment, laid out in a letter signed by the representatives. Strongly worded but vague on details, it a.s.serted that, working together, these groups could save $2,500 a year for a family of four after five years, for a total of $2 trillion for the nation over ten years. Everyone agreed that there'd be no chance for health care reform with costs rising at the currently projected rate of 6.2 percent over the coming decade. If the industry could slice 1.5 percent per year from that growth rate, the gross numbers would be huge.

Nailing down this commitment, Obama said, marked "a historic day, a watershed event." The savings, he said, "will help us take the next and most important step: comprehensive health care reform."

Gibbs reiterated Obama's forcefulness, saying the president had told the health care executives in their meeting, "You've made a commitment; we expect you to keep it."

It was textbook political calculus. Use the president's aura to get the reluctant on the record, so that they either had to stick to their words or face humiliation for backing off.

And then all h.e.l.l broke loose. Leading members of each trade group-heads of hospitals, drug companies, device manufacturers-started calling their Was.h.i.+ngton representatives. There were heated exchanges as reality set in. Those running these businesses, accounting for 16.5 percent of GDP, said that such cost cuts were untenable. Already the stocks of the publicly traded companies were beginning to drop. The lobbyists countered that those executives out on the hustings didn't just sit with the president. There had been two million people on the Mall four months ago. Something was going to happen, maybe something sweeping, the trade groups responded, and the hospitals, the doctors, the drug companies needed to be at the table to make it as good for each of them as it could be. And, of course, some of them were cursing Ignagni.

It wasn't long before calls started coming to DeParle from the industry a.s.sociations: this commitment letter might get a few lead lobbyists fired! Soon she, Obama, and the senior staff were huddling. The question was raised about whether the president should offer a follow-up statement, hedging what he'd said. Obama was adamant. He wasn't budging. A commitment is a commitment.

On Wednesday, two days after the initial press conference, Obama was holding his ground. "These groups are voluntarily coming together to make an unprecedented commitment," he said. "Over the next ten years, from 2010 to 2019, they are pledging to cut the rate of growth of national health care spending by 1.5 percentage points each year-an amount that's equal to over $2 trillion."

Health care leaders were now backpedaling as fast as they could, saying that they'd committed to slowing spending gradually and not to specific annual cuts.

"There's been a lot of misunderstanding that has caused a lot of consternation among our members," Richard J. Umbdenstock, the president of the American Hospital a.s.sociation, told the New York Times. "I've spent the better part of the last three days trying to deal with it."

The opposition to meaningful reform was in disarray, "stakeholders" shouting at their trade group chiefs, who were scrambling to back away from their stated positions, and pressure coming directly from an unyielding president. The mess was receiving plenty of coverage, too. Calls to the White House from providers meanwhile intensified. Their stance: either the president backs off, or there will be a war like was never known during Clinton's day.

It was a moment to embrace Ignagni, who'd been sitting mostly silently and seal a divide-and-conquer strategy, with the insurers joining the White House to force cost cuts among the providers.

The interests of the insurers and the providers, of course, had never been neatly aligned. Before modern health insurance was developed in the 1940s, an individual could pay a doctor for his services or she couldn't. When she couldn't, the doctor, either out of an ethical obligation or the Hippocratic oath, would provide the services because it was . . . the right thing to do. Insurance changed all that. It created a buffer, removing morality from the equation. That awkward moment of payment, when the responsibility of health care provider was put front and center, was replaced by an omniscient third party to whom consumers paid premiums and from whom providers received payment. It was an elegant solution to an inelegant problem.

But, as was the case with financial services, it ultimately created a severing of accountability and very real market inefficiencies. The consumers couldn't directly feel the effects of poor pricing. The compet.i.tion was lost, and an industry was steadily corrupted.

For White House tacticians, like Emanuel, these were not pertinent matters. New polling showed that, unlike the debacle of the 1990s, the princ.i.p.al villain in the 2000s was no longer seen as government bureaucracy, but rather insurance profiteering. Leaning heavily on polling is common practice in virtually every administration, but as health care began to kick off in earnest, and the stakes were set, Emanuel and the political team became hyper-reliant on the polls.

Joel Benenson, Obama's head pollster, summed it up best in a speech at the Economic Club of Canada. Talking about the proposed "public option," a plan in which the government would set up an autonomous federal insurance program to compete in the market, Benenson said, "Initial reaction to it [years ago] wasn't as positive as it is now . . . But we figured out that people like the idea of compet.i.tion versus the insurance company, and that's why you get a number like seventy-two percent supporting it."

From a broader strategic a.s.sessment, this should not have been a surprise. As costs and pressures on the health care system rose, anger at the insurers would have to rise as well. That's their business model. They get paid to be the buffer-to be hated-so the doctors and hospitals don't have to be.

Rather than seizing this opportunity, the White House-without a clear strategic model on health care reform-blinked. Using insurers as the tip of their spear to drive down costs-the very thing providers had been fearing since the March summit-was not to be, even now, as Ignagni tried to put the spear in their hands. For the White House to align itself with insurers was seen as politically untenable. Just look at that poll data.

On May 14, DeParle told the New York Times' legendary health care reporter Robert Pear that the president, in his forceful statements on both Monday and Wednesday, was confused. "The President misspoke," she said. Then, a few hours later, she called back to say, now it was she who had just misspoken. "I don't think the president misspoke," she now said. "His remarks correctly and accurately described the industry's commitment."

The providers flip-flopped; now the White House had matched them. The hospitals, doctors, drug companies, and device makers were joyous. To them, the message was clear: the White House was not serious about cutting health care costs.

Peter Orszag worked several late nights on his specially ordered, back-channel report for the president on the fiscal crisis. The nut of the report: in case of a failed Treasury action driven by fears of a widening and unmet U.S. deficit, the government would immediately need to launch some revenue-generating programs. Those programs would have to be not only potent money raisers, but also seen as prudent by the bond markets. One action that would meet those dictates, Orszag wrote, was a strong tax on certain financial transactions. Though Wall Street was against this, most economists-and "show me the money" deficit hawks in the bond community-thought this was a good idea. Twenty years ago, Larry Summers did, too. So Orszag made sure to cite Summers's old paper in his footnotes.

The president received the report on May 15. It took just a few days for Summers to hear about it. He found out through Emanuel.

Orszag looked up from his desk. Summers had stormed over from the White House to Orszag's office, and his face was red with rage. It looked like he was about to burst a blood vessel.

He told Orszag he'd found out about the paper. He told him that he, Peter, knew the rules, no matter what the president had said. Everything was supposed to go through NEC. Then its chairman, Lawrence A. Summers, blew a gasket.

"What you've done is IMMORAL!" he shouted and stormed out.