On March 15, Treasury Secretary Tim Geithner and a top lieutenant named Lee Sachs were summoned to the Roosevelt Room for a three o'clock meeting with the president and his chief advisers. For Team Obama, early March had been the psychological low point of the financial crisis. The Dow had sagged to a post-crisis nadir of 6440, with the stock prices of banks like Citigroup and Bank of America stuck in remainder-bin territory. Nobel Prize-winning critics like Paul Krugman and Joseph Stiglitz had accused the administration of tinkering at the margins with its plan to purchase toxic assets from banks--or, worse, of catering to Wall Street. "[T]he administration would shower benefits on everyone who made the mistake of buying the stuff," Krugman thundered in his New York Times column.
The Roosevelt Room meeting was a drawn-out affair--the president stayed until five o'clock, then returned at seven for almost three hours. The motion on the floor was whether or not to abandon the Treasury plan. Though no adviser was eager to seize a major bank, some, like National Economic Council director Larry Summers, wondered if Treasury was underestimating the need for a more aggressive approach.
But Sachs and Geithner gradually defused these concerns. It was Geithner's habit to insist, "You could not want to do something that bold more than I do," before explaining why the boldest course was not, in fact, desirable. Sachs was, if anything, even more leery of nationalization. A trim, balding man in his mid-40s, Sachs had spent more than a decade at the investment bank Bear Stearns. He had the banker's penchant for funereal-looking suits, which sometimes clashed with his boyish expression and youthful voice. Around Treasury, Sachs was fond of comparing the decision to seize a large bank with the decision to invade Iraq. "There are hundreds of billions of dollars of value in these institutions," he'd say. "If you're going to go and destroy that ... you'd better know there are WMD there."
When liberals complained about a Wall Street conspiracy, Sachs was precisely the person they might have had in mind--had they even known he existed. Bearing the modest title of "counselor," he had no formal place in the Treasury hierarchy--meaning no confirmation hearings, no regular reports to Congress, no public profile. But he wielded enormous influence behind the scenes. Indeed, by the time the session broke up that evening, the White House had all but decided to stay the course. "In many ways, [the meeting] was a bit of a triumph for Tim, " says one administration official. "Lee was very much his wing man on that."
It is, of course, hardly surprising that the administration would turn to people like Lee Sachs to help navigate the crisis. There's simply no way to revive catatonic markets without first knowing something about them. But the flip side of this is to base trillion-dollar decisions on the advice of wealthy financiers deeply socialized in the mores of Wall Street. Conspiracy or not, how queasy should this make us?
Sachs was one of the first economic officials in the door at Obama transition headquarters. The financial crisis team in those days was "shockingly skeletal," one colleague recalls, and so, it fell to Sachs to survey the wreckage by shuttling between the Fed, the Bush Treasury, and a handful of agencies overseeing the banks. "I've got recollections of his feeling grim," recalls Summers, who had yet to arrive himself. "The more he learned, the worse it looked."
When Obama chose Geithner to be his Treasury secretary in late November, the nominee quickly put Sachs in charge of the crisis response. The two men had become friends in the Clinton Treasury Department and had remained close ever since. During the Bush years, they'd sometimes joined fellow Treasury alumni on an annual pilgrimage to the Nick Bollettieri Tennis Academy in Florida. Sachs and Geithner even competed together in a triathlon.
It was Sachs's job to hammer out the toxic-asset plan prior to the early February deadline Geithner had set. But, with less than two weeks to go, Sachs and his team decided it would be all but impossible for the government to buy the assets. There was simply no satisfying way to arrive at a price. "If you overpay for the assets, you'll get shit politically. If you underpay, no one is going to sell them to you," says one aide. The solution, the group concluded, was to piggyback on the pricing power of self-interested investors. If the investors put up money alongside the government, they'd have an incentive to price the assets fairly.
Though, by this point, there wasn't time to fill in the details, Geithner and Sachs insisted on sticking to their schedule. Every day brought more anxiety in the markets, and delaying seemed riskier than unveiling an incomplete plan. Still, no one had illusions that the process would be painless. Going into the rollout, says one colleague, Geithner told his staff that, in a crisis, "we had to be one government" and that different agencies "had to sign in blood, with no tribal conflict."
When Geithner announced the vague outlines of the plan on February 10, the reaction was brutal. Investors bid down the Dow almost 400 points, and pundits questioned his basic competence. Over the next several weeks, Treasury actually began wheeling out the more effective pieces of the financial fix--such as programs that expanded credit to consumers and small businesses. But, outside Treasury, Geithner couldn't shake the perception that he was ineffectual and overwhelmed. More than a few critics insinuated he was a pawn of Wall Street.
What these critics missed was that Treasury was prepared to take over the banks if necessary. But Geithner and Sachs had practical reasons for their lighter touch. "Lee's great strength is that he's exceptionally careful about thinking through implications of any particular choice," Geithner told me. "He's got a very good feel for markets and a sense of what practical considerations apply." The two men worried that nationalization would trigger an exodus of bank personnel. If that happened, it would leave the government with all the risks a bank was shouldering and all of its losses, but with no way to generate revenue--or, for that matter, to sell it back into private hands. These were the kinds of concerns that resonated at the March 15 meeting with Obama. "That was the moment it really hit a lot of people that, rather than Tim and Lee looking cautious, maybe they were thinking through the risks at a deeper level than other people were," says one administration official. (Sachs declined to comment for this piece.)
Though no one at Treasury is prepared to claim victory, the subsequent course of events seems to vindicate these impulses. On May 7, the Fed announced that the country's 19 largest banks were collectively short $75 billion in capital. Within a month, they'd raised more than $65 billion from investors. In early June, ten banks won permission to return $68 billion in bailout money.
One Friday night in February, Sachs was doling out assignments for yet another weekend of work when a member of his team piped up with bad news: Treasury's server would be down for eleven hours during the installation of a backup generator. There would be no e-mail, no access to key documents and data--none of the tools you take for granted when triaging a modern financial system. "It was like, 'Oh shit,'" recalls one of the officials. "The absolute last thing we needed."
Suddenly Sachs, who is about as mild-mannered a person as you'll meet in a yoga studio, began to mutter excitedly. "This is not going to happen, it's not going to happen," he repeated as he left the room. Fifteen minutes later, he reappeared with a twinkle in his eye: "It's fixed," he said. End times might be imminent; until then, Sachs's charges would have inboxes. "It was enormously funny," says the staffer. "This combination of assertive and self-effacing. ... The world was out of control, but he was asserting control over one little corner."
Sachs's inability to play the hard-ass without subtly mocking himself can make you wonder how he ascended the upper ranks of Bear Stearns, once among the more aggressive houses on Wall Street. By his late twenties, he was running Bear's corporate-debt underwriting division and mixing with such world-class vulgarians as Jimmy Cayne, the firm's former CEO. "The way in which the firm has been characterized is exaggerated," says one former colleague. "But, even if you accept that, he was still among the most soft-spoken people within the firm." In fact, Sachs's studious bearing was an asset. It created no enemies and made him "effective at representing the firm" with clients, recalls another colleague.
In 1997, Sachs decided he'd like to give Washington a shot. As an undergrad at Denison University in Ohio, he'd studied economics and political science and gotten himself elected student body president. He spent his first few years at Bear assuming he'd eventually leave for law school. But Bear kept making it worth his while to stay. Finally, he reached out to Mike Berman, a family friend and longtime Democratic power broker, who introduced him to the chief of staff of then-Secretary Robert Rubin. Sachs joined Treasury the following year as a deputy assistant secretary.
While it may be tempting to assume Sachs's caution with the banks reflects a sympathy for Wall Street, his intuition has often cut against moneyed interests. "He is a progressive guy," says one Obama official. "His instincts are with the little guy." That's certainly true of the initiative that took up much of Sachs's time during his first tour at Treasury, an effort to clarify the legal status of derivatives. (Administration lawyers worried that recent regulatory moves had cast doubt on the legality of contracts worth billions of dollars.) Today, many on the left regard the largely deregulatory measure, called the Commodity Futures Modernization Act (CMFA), as a symbol of Clinton administration cravenness. But Sachs earned a reputation as something of a CFMA hawk.
A derivative is basically a bet between two "counterparties" over the price movement of an asset, like a stock or commodity. The problem is that these bets link financial institutions in a complicated web: If one fails, it can bring down not just that company's counterparties, but all of their counterparties, too. To sever these links, Sachs wanted to mandate "centralized clearing," meaning the institutions would bet with a clearinghouse rather than directly with one another. "Lee pressed very hard--I give him credit--to make sure that we tried to bring these over-the-counter derivatives into clearing," recalls one Treasury colleague. But Alan Greenspan's Fed and the GOP-controlled Congress reflexively opposed the idea. If the administration wanted Congress to act (and some critics question the need), there was simply no way to get it done without caving on mandatory clearing.
Thanks to his resume and his relationship with Geithner, most Treasury watchers initially assumed Sachs would end up as under secretary for domestic finance, a top-ranking position. But, in March, The Wall Street Journal reported that Sachs would remain a counselor. It's not clear what precipitated the decision, but a Treasury spokesman says there were no vetting issues and that Sachs opted against taking it for unspecified personal reasons.
Whatever his formal title, it's hard to think of Sachs as anything other than Geithner's senior financial official--a position he'll retain for the foreseeable future. He is buying a house in Washington, and his family will move down from Westchester later this summer. Sachs is also staffing up--he now oversees a staff of a half-dozen aides, most of them plucked from Wall Street. (The team was deeply involved in the mid-July decision to withhold additional aid from CIT, the bank holding company then on the verge of collapse.)
The heavy reliance on informal counselors like Sachs does raise basic questions of accountability. For example, Treasury recently announced the nine money managers with whom it will partner to purchase toxic assets. The arrangement could prove highly lucrative, and competition for the slots was intense--Treasury received more than 100 applications. Given the potential for conflicts of interest, and the fact that we won't always have someone as widely respected as Sachs designing such a program, it might be nice if the person in his position had to undergo a full Senate scrubbing. (In fairness, Treasury's career staff vetted the applications and made the actual decisions.)
On the other hand, there's a reason Geithner has leaned so heavily on his counselors: His department simply lacks a reserve of financial-market expertise, even when fully staffed. Compared with the finance ministries of other countries, Treasury's regulatory role has traditionally been weak. That's made it a less than desirable destination for sharp Wall Street minds looking for public sector work. "Think about what the Treasury Department's here for," says one official. "To pay the bills, issue debt, collect taxes, that sort of thing. Institutionally, were we prepared to design a convertible-preferred security?"
Until recently, Treasury's lack of Wall Street heft wasn't necessarily a problem: Postwar recessions occurred when the Fed raised interest rates to prevent the economy from overheating, not when a bubble burst. But, as both Summers and Krugman have pointed out, recent recessions have followed progressively more serious financial turmoil--the S&L crisis of the late 1980s, the dot-com bust in 2000, and the current real-estate collapse. These recessions render the old playbook of lower interest rates and fiscal stimulus less effective and require a far more intricate government response.
Inevitably, it's Treasury that must lead in this terrifying new order. Which is why its limitations have become so glaring. "The Pentagon is geared up to fight two wars at once, that's the mission. The White House is a crisis management operation, it runs twenty-four hours a day," says one Treasury official. "We want that capability." And so, once the dust settles, Geithner is determined to put Treasury on a Pentagon-style footing. "One of things I hope to be able to do is leave a stronger institutional architecture in domestic finance with more depth in the career staff, more weight, more full-scale expertise in markets, regulatory policy, economics, the legal financial area," he told me. When that day comes, you probably still won't see much of Lee Sachs. But you can bet he'll be manning the situation room.
Noam Scheiber is a senior editor at The New Republic.