[Note: These memos fell into my hands. I cannot guarantee their authenticity--RK]
To: Rahm Emanuel
Subject: The Banks
I'm concerned that I'm getting only one viewpoint on how to solve the banking crisis, from Larry and Tim. A kind of echo-chamber effect sets in where they talk mainly to Wall Street and to each other, and different views are not heard. Larry is a very effective gatekeeper.
They both seem convinced that bailing out outfits like AIG and Citigroup, using even more money both from Treasury and the Fed, is the only way to go. And nobody inside the administration is really challenging them on the economics.
The problem is that neither the financial markets nor public opinion is buying it. My recovery package can't work if the banks keep dragging down the economy, and time is not on our side. We're burning through money that will be very difficult to get Congress to replenish if we blow it this time.
We've had some good strategy conversations about the politics. Limiting executive pay helps. So do these trips outside Washington where we can identify with ordinary people. But the Republicans are eating our lunch on the A.I.G. bailout, and Lou Dobbs is making us look like allies of the people who caused the crisis. The press is full of stories about people from Countrywide and the hedge funds profiting a second time, as purchasers of underwater bonds. We can survive all that--if Larry and Tim's plan actually works. But I'm beginning to wonder.
Could you set up some conversations with some well informed people who have a different view? What's your advice on how to handle Larry and Tim? We can't very well go behind their backs. Larry is keeping a low profile, and letting Tim take all the heat even though Larry totally shares the approach. Tim is all alone. He doesn't have a senior sub-cabinet official confirmed yet to help him. A chorus is building calling for his head. Do we want to set up some very discreet one-on-one conversations with critics, or bring Larry and Tim in, too?
Also, Rubin is constantly on the phone to everyone. His fingerprints are all over this mess, but people still take him seriously. Is he looking out for the system, or for Citi and Goldman? I'm beginning to have buyer's remorse that we hired so many of his protégés.
To: The President
From: Rahm Emanuel
Re: A Second Opinion on the Banks
I share your concerns both on the optics and on the substance of the plan not working. Basically there are three views of how to proceed with the banks. One is the Tim/Larry approach: Lend money to hedge funds and private equity speculators to get purchases of securities from banks flowing again, so that bank lending resumes. The problem is that this does not sop up existing toxic bonds. The Street seems to have no confidence in it. And, appearance-wise, it looks like rewarding the bad guys.
The second approach is the good bank/bad bank strategy, where the bad assets are taken off the books of the banks, and they can resume operations again with clean balance sheets. The problem is that the taxpayer pays, it costs more money than we have, and the same bad actors keep running the banks. Alan Blinder makes the case for this approach, in Sunday's Times, about as well as anyone. But he didn't convince me.
The third approach is "conservatorship" or "receivership" (let's keep avoiding the N-word) where a government agency--probably an expanded FDIC--takes temporary charge of the big banks (the top four hold more than half of all the deposits). That way, the government cleans up the balance sheets, existing management goes, and we can break them up into manageable parts where no bank is too big to fail. The taxpayer shares the loss with the bondholders. Bank stockholders lose, but they've already lost upwards of 95 percent of the value of the shares.
I'm no expert on this, but the third option seems more likely to actually work, more likely to head off a full blown depression, is less costly to the taxpayer, and is far better politics.
The middle option is flawed--more expensive for taxpayers, more windfalls to speculators--but it's better than the Tim/Larry plan.
But I definitely agree that we should hear from more outside experts. Here's what I recommend:
Some of the best sessions in the campaign were the times when you put fifteen people with different views around a table, let them argue it out, and then you decided. As long as Larry and Tim are heading the economic team, we can't very well exclude them, but we should bring in others--and you should hear this argument in the raw, and not filtered.
This should be a very small event, and participants should be emphatically asked to keep the meeting confidential. It should not be a media event like the recent White House summits on fiscal responsibility and on health reform, where we papered over vast ideological differences for the sake of the appearance of consensus.
If we are not absolutely certain that this won't leak, then let's do it as several one-on-one conversations with you, maybe with Summers arguing the other side. Leaks from Summers or Geithner spinning dissent inside would be just as damaging as leaks from one of the outsiders. But if we can keep it confidential, there is no substitute for hearing the arguments hashed out by both sides. As participants, I'd recommend:
From the Administration:
Skeptics of the Geithner/Summers approach:
Joe Stiglitz, Columbia University
Paul Volcker, former Fed Chair, heads your outreach panel
Sheila Bair, heads FDIC
Nouriel Roubini, NYU
Elizabeth Warren, chair, Congressional Oversight Panel, Harvard Law
Damon Silvers, deputy chair, Congressional Oversight Panel, AFL-CIO
From the Fed:
Ben Bernanke, chair
Dan Tarullo, governor
Don Kohn, governor
As for others, Alan Greenspan is somewhat skeptical, but I'm not sure we need him in the meeting, and we certainly don't want self-interested people like Rubin. This is also not the time for bipartisanship; we can get Republican and Wall Street input at a separate meeting (in any case Geithner more or less speaks for Wall Street.) Paul Krugman has been very critical and ahead of the curve, if nasty to us, though his last column on the budget was kind to you (finally!) But he also plays a journalist role, and he might be tempted to use what he learned in a column, even indirectly. This also precludes people like Kuttner. He's very friendly to you, but he's been pretty hard on the economic team. I don't quite trust the guy.
Robert Kuttner is co-editor of The American Prospect and a senior fellow at Demos. His best-selling book is "Obama's Challenge: America's Economic Crisis and the Power of a Transformative Presidency."