Volcker (43 page)

Volcker was no longer the banking watchdog in 1995, and although
he warned against excessive regulatory leniency, his focus lay elsewhere. He was the chairman of James D. Wolfensohn and Company, a boutique investment firm that offered strategic advice to companies such as American Express and Daimler-Benz.
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Volcker had joined the company in 1988, a few years after it was founded by the investment banker James D. Wolfensohn, and during his tenure as chairman it grew from two to ten partners.

In March 1995 he took over as chief executive when Wolfensohn was nominated as president of the World Bank. And a year later his partners negotiated the sale of the firm to Bankers Trust Company. Volcker wanted it to remain independent and small, but they saw an opportunity to cash out, which they did. According to the press, “Perhaps the most important acquisition for Bankers Trust is the services of Paul A. Volcker … [He] is expected to bolster the reputation of Bankers Trust, which has been tarnished in recent years.”
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The multimillion-dollar windfall gave Paul the opportunity to do something that was long overdue: pay tribute to Barbara, who was bedridden from complications of diabetes and arthritis. The couple endowed the Barbara Volcker Center for Women and Rheumatic Diseases at the Hospital for Special Surgery in New York City in 1996. The gift allowed the hospital to recruit Barbara's longtime physician Michael Lockshin as head of the center.
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Paul recalls, “This was one of the few sources of comfort to Barbara before she died in 1998. She deserved it.”
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Volcker withdrew from operating responsibilities when Wolfensohn and Company was sold to Bankers Trust, agreeing only to serve on the bank's board of directors, but his reputation for honesty and integrity drew numerous requests to rent his seal of approval. He could not refuse Fritz Leutwiler, the former head of the Swiss National Bank who had been so helpful during the Mexican crisis.

In the spring of 1996, Leutwiler asked his old friend to chair an “Independent Committee of Eminent Persons” to oversee the return of assets deposited in Switzerland by victims of the Holocaust. Swiss banks had a public relations problem that rivaled al-Qaeda's. The
New York Times
editorialized, “For decades the Swiss banking industry arrogantly thwarted inquiries about its role in the Nazi period, and effectively discouraged the relatives of Holocaust victims searching for long-dormant accounts.”
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Volcker promised justice before an investigating
congressional committee.
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“We are meeting more than fifty years after the end of the Holocaust, certainly one of the most shameful and brutal episodes in human history … The time has surely come for a full accounting.”

Volcker's willingness to tackle incendiary material brought another request for help, this one in 2002 from Arthur Andersen, the accounting firm that had certified the fraudulent financial statements of the bankrupt Enron Corporation. According to the press, Andersen turned to Volcker because he “may be one of the few public figures with enough prestige and moral authority in the world of finance to bring the giant accounting firm back to reputable standing.”
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And in 2005, Volcker was asked by the United Nations to investigate the oil-for-food scandal that involved the son of Kofi Annan, the UN secretary-general.
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They needed to cleanse the record and knew that only Volcker's independence could overcome the potential conflict of interest. And besides, they had heard that the price was right: Volcker charged a one-dollar fee in such cases.

Volcker avoided shades of gray and expected others to do the same, but he was usually disappointed. He had learned during his career at the Fed that color-coded signals gave bankers trouble—they understood that green means go and red says no, but they had great difficulty with yellow. And that is why he bristled when Goldman Sachs became a bank in September 2008. “The lines differentiating financial institutions had been blurred, but if Goldman wanted the commercial banking safety net it should look more like a bank, specializing in taking deposits and making loans, rather than like a hedge fund, geared to speculating on mispriced securities.”
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His opportunity to change the rules would come after the 2008 presidential election.

Volcker's presence in Washington grew when Barack Obama defeated John McCain in November 2008. Paul had endorsed the Illinois senator in February 2008, while Obama battled Hillary Clinton for the Democratic nomination. “After thirty years in government … I have been reluctant to engage in political campaigns. The time has come to overcome that reluctance … It is not the current turmoil in markets … that [has] impelled my decision. Rather, it is the breadth and depth of
challenges that face our nation … Among all the candidates, it is Barack Obama who has most clearly recognized those needs.”
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Obama capitalized on Volcker's stature during the campaign, seating the financial strongman immediately to his right, as photographers captured the moment, during a roundtable discussion in October 2008 with voters in Lake Worth, Florida.
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Other photos followed, but Obama invoked the Volcker seal most effectively during the final presidential debate, when McCain raised questions about some of Obama's associates. The Illinois senator shot back, “Let me tell you who I associate with. On economic policy I associate with Warren Buffett and former Fed chairman Paul Volcker … who have shaped my ideas and who will be surrounding me in the White House.”
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But the election changed the pecking order, despite the efforts of Austan Goolsbee, a friendly thirty-nine-year-old professor from the University of Chicago business school who had advised Obama during his 2004 Senate campaign and would eventually become chairman of the president's Council of Economic Advisers. Goolsbee, who made the trim president-elect look a little overweight, had successfully urged Obama to bring Volcker into the inner circle during the campaign and pressed for more of the same after the victory. “Immediately after the election, I urged Obama to appoint Volcker as treasury secretary, even for only a few years. He would have given us instant credibility both at home and abroad. But the transition team had been taken over by Clinton's people, and that hurt his chances.”
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Volcker's candidacy for treasury secretary had been rumored in the press and made considerable sense, despite his age.
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The Lehman bankruptcy in September 2008 had plunged America into a financial crisis that demanded bold initiatives, as when Jimmy Carter appointed Volcker as Fed chairman in 1979. And Volcker worked as though he were a thirty-year-old, spending nine-hour days in his Rockefeller Center office in New York City when he was not traveling the world like a financial Gandhi preaching monetary reform. When Warren Buffett recommended Volcker as treasury secretary to Obama's transition team, a young man replied, “He may be a little too old.” Buffett responded, “I think he's about my age.”
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Obama raised the topic with Volcker in a telephone conversation
after the election.
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“Paul, I'd like your reaction to some names for the top job at Treasury.”

“Okay,” Volcker answered, knowing this was either a courtesy call or a presidential probe of his availability. He doubted that Obama had time for courtesy calls.

“What about Tim Geithner?”

“He could do the job, but he might need some seasoning. Besides, that would leave the New York Fed without a president, and that is a big hole, especially now.”

“And Larry Summers?”

“He's already shown he can run Treasury, but we both know he may have a problem getting confirmed in Congress. And that's a diversion you certainly do not need, Mr. President.”

Obama then got to the point. “Would you serve for one or two years if I asked?”

Volcker relished the opportunity to confront the greatest crisis since the Great Depression and believed that “you never refuse a president's request to serve your country,” even at age eighty-one. He said: “Yes, but it's probably best to keep the time limit between us.”

“Of course,” the president-elect concurred, “and thanks.”

Volcker had said yes, but he knew that an offer was as likely as rain in San Diego. Both Geithner and Summers had worked at the Treasury in the Clinton administration, Summers eventually becoming treasury secretary with Geithner as his deputy. And Obama's transition team, which vetted all job candidates for the new administration, had become a Clinton outpost.

John Podesta, President Clinton's former chief of staff, who had joined the Obama campaign after Hillary Clinton had withdrawn from the race, served as cochairman of Obama's transition team. His staff included influential alumni from the Clinton Treasury, most prominently Michael Froman, a Harvard Law School classmate of Obama's who had been chief of staff for Robert Rubin, Clinton's treasury secretary.
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During his stay in Washington, Rubin, a former cochairman of Goldman Sachs, had championed financial deregulation to promote the globalization of American finance, first as a White House adviser
on economic policy and then as treasury secretary, where he groomed both Summers and Geithner. His son James S. Rubin was also on Obama's transition team.

The announcements on Monday, November 24, 2008, brought no surprises. Geithner, the forty-seven-year-old career civil servant, was appointed treasury secretary, and Summers, the fifty-four-year-old former president of Harvard University, was named head of the White House National Economic Council. They had been the front-runners and were young enough to play basketball with Obama. Volcker did not fit, and not just because he was too old to compete on the court and thought deregulation had gone too far. He scared them.

Volcker's independence conferred credibility but came with a price. He would speak his mind rather than spout the party line. The press called it “straying off message,” but it meant the same thing.
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Obama echoed that sentiment: “Paul … is held in the highest esteem for his sound and independent judgment. He pulls no punches. He seems to be fairly opinionated.”
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Volcker had been bypassed for the job of treasury secretary before, for the same reason, when Bill Clinton defeated George H. W. Bush in 1992. The post went to seventy-one-year-old Texas senator Lloyd Bentsen, who was later succeeded by Rubin. The
New York Times
commented that Volcker lost out because he was “unlikely to subordinate [his] own strong philosophies and ideas to the new President's.”
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Clinton could afford to reject Volcker without great consequence; there was no crisis of confidence threatening the American financial system then. But Obama faced a far more dangerous circumstance, certainly comparable in severity to Carter's in 1979, and exceeding Reagan's problem in 1983. And yet both Jimmy Carter and Ronald Reagan swallowed the entire Volcker package rather than succumb to political expediency.

Obama chose the easy way out.

The president-elect kept Volcker close by naming him chairman of a new structure, the President's Economic Recovery Advisory Board, designed to give Obama “expert advice outside the normal bureaucratic channels.”
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Stan Collender, a former staffer in the House and Senate Budget committees and partner in a public relations firm, said, “It also
rents some of Volcker's credibility until the president-elect can further establish some of his own.”
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The PERAB, as it was called, reported directly to Obama but had no resources or staff of its own. Volcker's office (which he never used) was in the Treasury Building, and his chief economist, Austan Goolsbee, had a full-time job on the Council of Economic Advisers in addition to his PERAB duties (perhaps a punishment to Goolsbee for straying off message with Volcker). Nevertheless, Volcker succeeded, with the help of Vice President Joseph Biden, in promoting the Rule that brought him before the Senate Banking Committee in February 2010.

Congress would test his resolve.

Volcker's proposed ban on commercial bank proprietary trading, a polite euphemism for speculation, almost died at 2:45 P.M. on Tuesday, February 2, 2010, while he sat before the microphone waiting to testify. Democratic senator Christopher Dodd, chairman of the Senate Banking Committee, who would eventually cosponsor the Dodd-Frank financial reform bill that would become law in July 2010, greeted Volcker.
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“We have a lot of work left to be done, so this debate is an important one and we welcome you today to share your thoughts.”
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He then turned the floor over to the ranking minority member of the committee, Republican senator Richard Shelby of Alabama.

Senator Shelby welcomed Volcker by recalling his own debut in the Senate in 1986, “when you were Chairman of the Federal Reserve.” Shelby then lobbed a Republican hand grenade. “I am quite disturbed by the manner in which the Administration has gone about introducing their latest proposals for consideration. We are more than a year into our deliberation on regulatory reform … [And now] seven months after the Administration first introduced [its] broad recommendations … this concept that we have before us today has been air-dropped into the debate.”
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Volcker swallowed hard and suppressed a grimace, knowing that he had proposed the ban on proprietary trading the previous June, more than eight months before, in a memo to the president.
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He had fought with Geithner and Summers since then to get his way. Shelby,
like almost all Republicans, and some Democrats, too, viewed Obama's embrace of the Volcker Rule as a political affair, an attack on the evils of speculation that would please everyone but the bankers on Wall Street. And the bankers would lobby their favorite members of Congress to avoid the proposed regulation.