Frank: A Life in Politics from the Great Society to Same-Sex Marriage (42 page)

I had, I confess, a secondary, political motive for trying to tamp down the indignation. In the short term, Democrats would have benefited from a very public airing of this bitter Republican civil war. But I feared that in the longer perspective, the big loser would be the public’s confidence in the fairness and competence of government. Given the circumstances we were in, there was no popular way for the government to stanch the economic bleeding. And I was certain the public would be more critical of the government’s disturbing but necessary actions than of the private sector’s irresponsibility that made them necessary. It would hardly do any good for our committee to stoke that fire. While right-wing Republicans would be most vehement, I knew that there were a few committee Democrats who would find the temptation to demagogue irresistible. Even the more responsible Democrats would be tempted to join in the criticism, albeit in a less ideologically sweeping fashion.

A large part of the problem was institutional. It is much easier for legislators to enhance their political standing by attacking executive branch actions than by defending them. When a president, or governor, or mayor does something, people who welcome the action understandably give credit to the official who undertook it. Media attention to a statement from Congressman X praising the president’s decision is a rarity. Committee members who use their time in a hearing to express their support for Secretary Y do not show up on television. I am not a regular Internet browser, but I would be very surprised if a clip of a senator being nice to an executive branch official ever went viral. In my forty years of legislating, the only occasion I can remember when my defense of a chief executive made the news, generated supportive mail, or earned any thanks was the Clinton impeachment.

In many individual cases, of course, legislative criticism of the executive branch is fully justified. Nonetheless, the cumulative effect of the incentive for legislators to denounce, deplore, and disagree is to strengthen the prevailing antigovernment attitude. I had not found many reasons to help Ronald Reagan with his agenda, but I did find common ground several times with George W. Bush’s appointees. As chairman, I had the right to decide when to hold hearings and how to structure them. This gave me a chance to counter my colleagues’ attraction to the attack mode, and I made the most of it—to the benefit of the Bush and later the Obama administrations.

*

As a longtime critic of the Fed, I was especially pleased by Ben Bernanke. I had no reason to think Bernanke would be very different from his predecessor when he became chairman in 2006. He had been Bush’s go-to guy for important economic appointments. But by 2010 he had joined Souter and Bair on my list of pleasant surprises from presidents named Bush.

In 2008, Bernanke departed from Greenspan’s path when he pushed the Fed to invoke its HOEPA authority and promulgate rules restricting the subprime market. It was firm evidence that he did not share Greenspan’s zealous antiregulatory stance and a welcome indication that he saw cooperation with Congress as important.

Turf battles are the occupational hazard of high executive officials, and treasury secretaries and Fed chairs have not always worked in perfect harmony. But Paulson and Bernanke came as close to that as is humanly possible. They combined a strong belief in the market with a recognition of the need for good regulation. My decision to work with them wholeheartedly was reinforced by their expressed commitment to work with Congress to establish a larger, more appropriate role for the public sector when things calmed down.

In the spring and summer of 2008, a pattern developed. Every other Friday afternoon or so, after the markets closed, Paulson would depress me with another phone call advising me of some looming disaster and seeking my reaction to his proposed response—which was usually supportive, sometimes a suggested tweak.

But one Friday he gave me good news. A constituent of mine, Yang Jianli, was a Chinese-born American citizen with a determination to bring democracy to China that made Don Quixote look fainthearted. He had gone to China, been arrested and expelled, and banned from ever returning. Undaunted, he reentered, illegally, and was promptly rearrested. His strong point was bravery, not discretion. This time the Chinese sent him to prison for a very long time—it was not clear for how long, as is typically the case in that closed society. I had joined in a variety of efforts to cajole, pressure, embarrass, and otherwise persuade the Chinese to release him and let him rejoin his family. Nothing worked until I decided to ask Paulson to help.

As secretary of the treasury, he was the lead official in the ongoing Chinese-American economic dialogue and had developed very good ties with his counterpart. After holding a meeting in my office with him, his top aides, and members of my staff to discuss financial issues, I asked everyone but him to leave, which probably induced serious agita among both sets of assistants. The fear that two principals left alone might come to an arrangement that omits appropriate attention to some important point is common in Washington. But they soon were reassured. Knowing that Paulson was about to leave for China, I outlined the situation regarding Yang Jianli, stressed the great distress it was causing his children and wife, and asked him to intervene. Although neither he nor I needed any additional incentive, I did note that this would be politically helpful to me at a time when I was under some criticism for collaborating with the administration in a way that some of my supporters thought inappropriately kind to the financial elite.

Paulson’s next phone call came while Jim and I were spending a weekend on Fire Island at the home of our friend Andy Tobias. He told me that he had succeeded, and that Yang Jianli was as we spoke on a plane to the United States. Chinese politics being what it was, he cautioned that he had no assurance that the decision to release him might not be overturned, and I should therefore say nothing until he had landed in San Francisco. Paulson himself had waited until the plane had left Chinese airspace to inform me. It proved to be of little use to me politically, because the human rights advocate who had been my interlocutor on the issue decided to announce the release himself, with no reference to me or Paulson. The good deed of which I was so proud went unpunished, but it also went largely unnoticed. Despite this political disappointment, the phone call I made to inform Yang’s family stands as one of the emotional highlights of my public life.

Within a month, the bad news phone calls returned, and with a vengeance. Jim and I were in New York for a Democratic Congressional Campaign Committee fund-raiser when Paulson called to tell me that Lehman Brothers was on the verge of collapse, and that this would be the most serious blow yet to the financial system. Later that evening, he called again with more reassuring news—Barclays Bank in England was prepared to rescue Lehman, just as JPMorgan had stepped in to take over Bear Stearns. He expressed relief for this transatlantic help; he had been unable to find any American bank to take on the burden. I cite this to refute the view that Paulson was intimidated by the fear of right-wing Republican criticism into letting Lehman fail. The next morning I learned that the British authorities had vetoed the Barclays option. And so another important firm disappeared, this time into bankruptcy.

When Lehman failed, the free-market fundamentalists had gotten their wish, but not many of them were happy with the consequences. The global shutdown of credit markets spread fear of a worldwide economic collapse. It was clear the government had to do something. I could not resist—candidly, I did not even try to resist—a loud “I told you so.” I noted that our experiment with the pure free market had lasted about twenty-four hours, and I announced that I would introduce a resolution declaring September 15 “Free Market Day.”

I had to make the most of this chance to taunt my conservative colleagues because my job was about to become degrees of magnitude harder, and equally less enjoyable. The next day, I joined the other congressional leaders in answering a summons from Bernanke and Paulson to an emergency meeting. I was not to get my life back for more than two years.

10

REFORMING WALL STREET

On Tuesday, September 16, Bernanke and Paulson summoned us to Harry Reid’s office to discuss the latest terrible news, and their response to it. Their plan came as a shock to us. With help from the Treasury, the Fed would advance $85 billion to the insurance giant AIG, in the hope of forestalling a general meltdown of the financial system.

AIG’s great success in selling actual insurance had produced great profits—more, we discovered, than they knew what to do with in a sensible way. As a result, they’d gone into selling “credit default swaps”—a security that became the poster child for Warren Buffett’s description of derivatives as “instruments of financial mass destruction.” The result was cataclysmic. (It is relevant to note that this problem was entirely of AIG’s doing. Not even the most devout free-market fundamentalist could think of a way to blame Fannie Mae and Freddie Mac for AIG’s recklessness.)

Paulson and Bernanke were not asking Congress for any action when they met with us. Nonetheless, what they were spending was a great amount, even by federal government standards, and their words startled us greatly. I have found it generally to be the case that when I do not understand some complex, unfamiliar transaction, most others don’t either, and I pride myself on being sufficiently self-assured to confess my ignorance. And so I asked Bernanke a simple question: “Where did you get 85 billion dollars?” Referring to a 1932 statute allowing the Fed to lend money, and to the total amount of money under its control, he replied in his usual calm manner: “I have
850
billion dollars.”

But the very next day, it turned out that the Fed’s largesse was not enough. The panic had become widespread, and even institutions that had been more careful than AIG about incurring debt would need some financial backstop to avoid collapse. Not even the wonderfully elastic Section 13(3) that Bernanke had cited could provide a deep enough money pot. “We are past the point of what the Feds and Treasury can do on their own,” Bernanke told his fellow administration officials.

This is where Congress had to come in. We reconvened on Thursday evening in Pelosi’s conference room to hear the bad news twins tell us that we had to appropriate hundreds of billions of dollars right away to prop up desperate firms—otherwise, there might not be a functioning economy by the next week. Paulson did not tell us exactly how many hundred billion he thought necessary, sensibly deciding to administer the terrible medicine in two doses. The next day he announced that his target was $700 billion. It was an admittedly arbitrary number, but it was of the approximate order of magnitude required while still being sufficiently short of $1 trillion to avoid complete political toxicity.

The response of the assembled congressional leadership was supportive, with the exception of the senior Senate Banking Committee Republican Richard Shelby. The economy was unmistakably in free fall, and no one—Shelby included—had any alternative plan to reverse it. Never in my career has Henny Youngman’s “Compared to what?” answered itself so conclusively.

We accepted the need for quick action, but the members unanimously told the administration officials that there was no way we could write the necessary bill in only a few days. We correctly assumed that an immediate announcement of our intention to act would sufficiently reassure the country—and the world. Speaking for Democrats, I also stressed the need for restrictions on top executives’ compensation. Their misjudgments had provoked the crisis. Why should they be the immediate beneficiaries of federal money to alleviate it? To my disappointment, Paulson resisted this request. His explanation for his opposition still stands as one of the worst things I have ever heard any responsible person say about the personal values of the leaders of the financial community.

Paulson did not defend the compensation levels of the industry’s leaders, nor did he say, as many were, that Congress had no right “meddling” in the matter. His objection was entirely pragmatic. If government assistance came with restrictions on compensation, Paulson warned, the executives’ resentment at this interference with their prerogatives would lead some of them to refuse to participate. And widespread participation was essential. If only the most troubled institutions took part, taking the money would become a self-fulfilling prophecy that the entity was on its last legs.

As the extraordinary Troubled Asset Relief Program took shape, Pelosi designated me the House Democrats’ lead negotiator. I was flattered but also uneasy. Making decisions for yourself can be hard when conflicting values and complex realities are involved. But making them as the delegate of some greater authority is infinitely harder. The question is no longer just what is the best way to reconcile the competing considerations but whether your balancing act will seem appropriate to those on whose behalf you are acting.

My self-doubt was compounded by the recognition that I had not yet fully mastered the subject matter. I joined the Banking Committee because I wanted to work for rental housing for low-income people. I added to this agenda my interest in making the World Bank and the International Monetary Fund more socially responsible. But I had never focused on the workings of private financial institutions, except when Massachusetts banks asked for help in coping with some legal quirk that was a problem for them. Since Massachusetts banking laws predated those of the country, there were sometimes glitches that needed fixing.

By the time of our negotiations, I prided myself on having become very well informed, but I was still self-administering my crash course. I needed help, both in representing the Democratic membership and on the substance of the bill. Fortunately, one of my colleagues supplied both. Rahm Emanuel had worked in the financial industry and was a member of the House Democratic leadership. I asked Pelosi if I could call on him to work with me. He agreed, and we immediately became a very effective team.