Summary
Highlights
As President-elect, Barack Obama faced an economy in freefall, with unemployment rising and the stock market plummeting. His economic team, including reform-minded economists like Robert Reich and Paul Volcker, were stunned by the severity of the crisis. The Bush administration's bailouts, including a $20 billion rescue of CitiGroup, did little to stem the disaster, leading to a period of instability and a lack of clear leadership.
Obama faced a critical decision regarding his Treasury Secretary. Paul Volcker, a pro-regulation advocate and critic of Wall Street, was the choice of reformers. However, a moderate faction favored Tim Geithner, president of the New York Federal Reserve, who had played a key role in the Bush administration's crisis response and had a strong connection with Obama. Geithner was ultimately chosen, with Larry Summers as chief economic advisor, signaling a focus on rebuilding rather than radical reform.
Upon taking office, the new administration was under immense pressure to act. On February 9th, President Obama announced that Tim Geithner would unveil a plan to rescue the financial system. However, Geithner's public announcement of his "stress test" plan, which aimed to evaluate the health of the biggest banks, was poorly received. His inexperienced public speaking and the lack of immediate, concrete details caused the stock market to drop significantly, leading to immediate pressure for his replacement.
Public anger at Wall Street and the bank bailouts was intense, leading to protests and congressional hearings where bank CEOs were publicly chastised. Some within the White House, including David Axelrod and Larry Summers, pushed for making an example of a CEO, like Ken Lewis of Bank of America, to signal accountability. Tim Geithner, however, opposed this, fearing it would destabilize the still-fragile banking system, advocating for a cautious approach.
Larry Summers believed Wall Street was fundamentally broken and advocated for bold, aggressive reform, including the potential nationalization or breakup of "too big to fail" banks. Geithner strongly disagreed, arguing that such actions would harm market confidence. This led to a six-hour showdown meeting with President Obama, where Geithner steadfastly defended his stress test approach against Summers's calls for more drastic measures.
The nation's top bankers were summoned to the White House, fearing dramatic reforms. However, President Obama adopted a pragmatic approach, choosing not to impose strict conditions or demand aggressive actions. The bankers, relieved, publicly expressed cooperation, while privately acknowledging that they had dodged a bullet. This decision, driven by Geithner's influence, meant business as usual for the banks, with almost no strings attached to the massive government aid they had already received.
It was later revealed that many large banks, including Morgan Stanley, CitiGroup, and Bank of America, had borrowed trillions of dollars from the Federal Reserve, far more than publicly known. This unprecedented intervention, providing over $7.7 trillion in loans, commitments, and guarantees globally, highlighted the severe but often concealed fragility of the financial system.
In May 2009, the government released the results of Geithner's stress tests, declaring the 19 largest banks fundamentally healthy. Geithner was hailed for saving the financial system at a low cost, solidifying his position. However, critics noted that while the financial sector rebounded, the middle class did not, leading to growing public anger.
The bank bailouts fueled the rise of the Tea Party movement, expressing widespread anger at government spending and the lack of accountability for banks. President Obama, initially focused on healthcare reform, faced increasing pressure to address Wall Street. His efforts to push for financial reform in September 2009 were met with disinterest from many Wall Street executives, who bypassed his speech, having recovered their power and influence.
With the banks recovered, their aggressive lobbying efforts significantly watered down proposed legislation. Despite Obama signing the Dodd-Frank Wall Street Reform and Consumer Protection Act in July 2010, many critics, including those within the White House, worried that the reforms were insufficient. Key issues like "too big to fail" banks, risky investments, and derivatives remained largely unresolved, raising concerns that the seeds for the next, potentially larger, crisis had been sown.