The Alchemists: Three Central Bankers and a World on Fire (25 page)

Some of the reserve banks were distrustful, fearful that their colleagues in Washington would too readily sell out the Fed’s authority over small banks as a bargaining chip to ensure victory on other priorities. Kansas City Fed president Tom Hoenig and Richard Fisher, the politically connected president of the Dallas Fed, took it upon themselves to ring alarm bells among their fellow presidents in the Fed system.

In phone calls and at the Federal Reserve’s Conference of Presidents—a meeting at which the twelve heads of the regional banks discuss operational matters—Hoenig and Fisher delivered a stark message to their less politically attuned colleagues: The threat to our institution is real. We cannot count on the Fed governors in Washington to protect us. So deploy every political connection you have to try to make our case to Congress. “We need to be involved in supervision, and if you think it’s important, do something about it,” Hoenig later recalled telling his colleagues.

Each reserve bank had a twelve-member board of directors made up of private bankers, businesspeople, and other community representatives. These tended to be well-off, politically connected people—and there was an army of 144 of them in every corner of the country. Many of the reserve bank presidents asked their board members to make calls to lawmakers with whom they were friendly to encourage them to protect the Fed. Some called local bankers’ associations to ask them to lobby as well. (Others viewed this as an inappropriate cozying up to the industry they regulated.) The reserve bank presidents also began visiting Washington to meet with lawmakers to press their case. Some who were new to their jobs or had never been politically attuned met with legislators from their districts for the very first time, economists learning how to be lobbyists. By early 2010, Hoenig was a near-constant visitor to Washington, packing long days of meetings with members of Congress. He and his staff were sufficiently new to the art of lobbying that they often underestimated how long it would take to get from office to office among the complex of seven buildings where the legislators work.

The reserve bank presidents’ argument was simple: Stripping small-bank regulation from the Fed would amount to cutting the regional bank system off at the knees, leaving all the power in Washington and New York. “I felt it was important in my own heart,” said James Bullard, president of the St. Louis Fed. “This system is carefully designed to have a Washington component to the Fed and an important bank in New York, but also to get other representation around the country. It was part of the original compromise, and that seemed important to preserve.”

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D
emocratic lawmakers were starting to feel assailed. Their landmark health care legislation had passed the Senate in December, but only after a long and ugly battle. They were being attacked as tools of Wall Street interests—an image not helped by Dodd’s slow, consensus-driven approach to financial reform.

The recession may have technically ended, but the malaise had continued. At the end of 2009, the unemployment rate was a hair under 10 percent, still at its highest level since the 1980s. Against that backdrop, the unthinkable happened: In a special election held on Tuesday, January 19, 2010, a Republican was elected to the Senate in Massachusetts, the most liberal state in the nation, to fill the seat of the legendary Ted Kennedy, who had recently died of a brain tumor, thus costing the Democrats their sixty-seat supermajority.

There was a collective shock following the victory of Scott Brown against the hapless Massachusetts attorney general Martha Coakley, with Democrats scrambling to consider not only what might become of their entire legislative agenda, but also why their party had become so unpopular so quickly. The obvious answer was the economy, which had been wrecked by Wall Street. Which, the conventional wisdom went, had been aided and abetted by the Fed. Which was represented by Ben Bernanke. Coincidentally, it was less than two weeks before his term was set to expire on January 31—and while Obama had renominated him, he had yet to be confirmed by the Senate.

Two days after the election, Senate Democrats met for a weekly lunch to discuss their strategy. In a tense meeting, the more liberal members of the party, and even some of more middle-of-the-road temperament, were livid that at a time when voters were furious about the economy and Wall Street bailouts, legislators were being asked to confirm a guy who was responsible for both. “
Massachusetts was kind of a wake-up call
to many Democrats,” said Bernie Sanders that week. “People are disgusted and furious with Wall Street and with the state of the economy, and a number of Democrats have been scratching their heads, saying, ‘Why do we want to reappoint a guy who was a member of the Bush administration?’”

Byron Dorgan of North Dakota, no liberal bomb thrower, came out in opposition to Bernanke. He was followed by two farther-left senators, Barbara Boxer of California and Russell Feingold of Wisconsin. Most dangerous of all for the Fed chairman’s prospects, Richard Durbin of Illinois, a close ally of Obama and the number-two-ranked Democrat in the Senate—the majority whip, whose job it is to round up votes—was on the fence.

Much was at stake in Bernanke’s confirmation. Rejection would have left the Fed without a chairman at a time of nearly 10 percent unemployment and shaky confidence in the financial markets. In addition, having one of the president’s highest-profile appointments rejected by a Senate controlled by his own party would have been a major loss for Obama. A fight began.

“The White House political guys didn’t love Bernanke and weren’t in it with their hearts, so it was a struggle to get them engaged,” said one official involved with the effort. “But once they realized what a loss it would be for the president if the nomination went down, they got engaged.”

In the White House, Rahm Emanuel and David Axelrod, the president’s chief political adviser, began a campaign to lean on wavering senators. Emanuel, a man of manic intensity and with a deep Rolodex acquired from his days as a leader in the House of Representatives, worked the phones. So did the president himself, emphasizing the potentially disastrous impact to markets if Bernanke was rejected. Even Hillary Clinton, the popular secretary of state, mentioned the Bernanke confirmation in conversations with senators that were mainly about foreign policy matters.

Bernanke and his allies at the Fed were gearing up for battle in their own way. Like most of what came from the Fed, it was careful, methodical, and below the public radar. They set up a war room in Linda Robertson’s office, tracking what was known about how each senator was leaning and influence they might bring to bear on him or her. Would they like a meeting with Bernanke? Forty-two senators took the chairman up on the offer, unprecedented in the experience of Robertson and others with experience in confirmations. Might a nudge from a sympathetic industry group help? The Fed had discreet contacts with some key business lobbies that were locked into battle with the White House.

The U.S. Chamber of Commerce was intensely opposed to the president’s health care legislation, but the lobbying association’s head, Tom Donohue, was willing to go to bat for Bernanke. He called Republican senators. The Financial Services Forum, a group that represents the CEOs of the twenty largest Wall Street firms, asked some of its members to make calls to senators with whom they had relationships. Jamie Dimon, the charismatic chief of J.P. Morgan, worked the phones. Even Lloyd Blankfein, the chief executive of Goldman Sachs—a firm that was a political pariah even as it remained a financial powerhouse—made at least one call, to Senator Bob Corker.

If Bernanke’s job was going to be saved, it would be in part thanks to activism by executives of the country’s most loathed companies, the major banks that helped cause the crisis.

The largest companies in America weren’t the only Bernanke allies, however. On Thursday, January 22, Cam Fine of the Independent Community Bankers of America was out of town for a speech when he received an urgent text message: Durbin was thinking of coming out against the nomination. Fine returned to Washington and set up a war room in his office. His lobbying staff gathered intelligence about which senators were leaning for or against Bernanke; Fine called every one he thought might be willing to vote yes. The effort was driven by the belief that Bernanke, whatever his faults in the eyes of the small banks, would at least give them a fair shake.

“We didn’t always agree with Bernanke, but I was convinced that if it wasn’t him, we’d get some vice chair of Goldman Sachs running the Fed who didn’t know what a community bank was, and that worried me,” Fine said. “I’d much prefer an academic to a Wall Street trader.”

The battle over Ben Bernanke was no longer about whether the balding former economics professor was the best person to lead the central bank for the next four years. It was about whether the U.S. government would allow itself to be guided by sheer populist rage.

The anger came from both the left and the right. Progressive advocacy group MoveOn.org told its members, “Fed chair Ben Bernanke spent trillions to bail out Wall Street, but he’s turning a blind eye to regular Americans.” Tea Party–affiliated South Carolina senator Jim DeMint released a statement opposing Bernanke’s confirmation, maintaining that the Fed chair had “led the fight against bipartisan legislation in the House and the Senate to require a full audit of the Fed so Americans know what has taken place and what mistakes have been made.” Calls and e-mails bombarded Senate offices—fewer than during the debate over the financial bailout in the fall of 2008, staffers said, but not by a lot.

On Friday, January 23, Dodd and Senator Judd Gregg, a New Hampshire Republican, issued a joint statement saying they expected Bernanke to be confirmed. And little by little, in the form of written announcements and television interviews, the tide started to turn.

“To blame one man for the financial implosion is simply wrong,” said California Democrat Dianne Feinstein. Bernanke, “for reasons of stability and continuity, should be reconfirmed.”

Durbin made his decision, if reluctantly: “I have some misgivings about Fed policy and economic policy,” he said on
Face the Nation
on Sunday the twenty-fifth. “But I really do have to say, this man guided us through the worst economic crisis this nation has seen since the Great Depression.”

Republican leaders played the vote cagily. On one hand, it was clear that they would like anyone else Obama might nominate less than Bernanke. On the other, Bernanke had become anathema to their conservative base. And they seemed to enjoy making the Democrats sweat and making the president expend time and political capital on the confirmation battle. By holding back Republican votes, they could force more Democrats to vote for Bernanke, saddling the opposition with an unpopular vote. That helps explain this appearance on
Meet the Press
by Senate Republican leader Mitch McConnell:

“He’s going to have bipartisan support in the senate, and I would anticipate he’d be confirmed,” McConnell said.

“Will you vote for him?” asked David Gregory, the program’s host.

“He’s going to have bipartisan support.”

“But you won’t say how you’ll vote?” said Gregory.

“I’ll let you know in the next day or so.”

“You have concerns about his renomination?”

“I think he’s going to be confirmed.”

“But do you have concerns about his renomination?”

“Some of my members do, but I think he’s going to be confirmed.”

McConnell was right. On Thursday, January 28, barely a week after Bernanke’s nomination seemed to be falling apart, the Senate voted 70–30 to confirm him. Eighteen Republicans and twelve Democrats voted against the reconfirmation, in the narrowest margin of any Fed chair in history.

But the center held, and Ben Bernanke got four more years.

There was no time to celebrate. The battle was already shifting back to financial reform. The regional Fed presidents were in full-on lobbying mode, trying to keep their role overseeing banks. Their basic pitch: We’re the institutions that keep the Federal Reserve rooted in Main Street America. We’re the counterweight to the big-bank-loving, bailout-giving guys in Washington and New York. Dodd’s plan of putting only $50-billion-and-bigger banks under Fed oversight would create a system that was much more weighted toward big Wall Street interests.

“If you’re a central bank in Washington or New York but without this other network, you’re located in the nation’s political or financial capital and preserving that independence is harder because there’s no external ballast to balance those interests,” said Charles Plosser, president of the Philadelphia Fed. “We have two failed banks down the street here—the First and Second Banks of the United States—which failed precisely because they had no balance. Their charters were revoked by Congress because of the perception that they were run for bankers and politicians and that the interests of people outside Washington, Philadelphia, and New York were being overlooked, so when the Fed was created the core tenet was to decentralize authority.”

The reserve bank presidents pressed their case, calling and visiting lawmakers in Washington so aggressively that, according to one Senate aide, “Whenever I looked up, there seemed to be another of the regional Fed presidents in town.” Many of them were more natural politicians than Bernanke, and they had much more experience in the kinds of interactions of which retail politics is made. Part of their job, for example, was giving speeches at the local chamber of commerce, trying to persuade businesspeople of the rightness of their policy ideas.

Much of their time was spent explaining to members of Congress just what these little-understood reserve banks around the country actually do. One congressman visited Richard Fisher at his office at the Dallas Fed, full of anger at the Federal Reserve for its work supporting big Wall Street banks and having signed on to Ron Paul’s Audit the Fed bill. Fisher personally approved every discount-window loan the Fed made—even during the crisis, when the lending hit $9 billion a night—and as it happened, the day before, the discount window had extended credit to a bank in the congressman’s district.