PROLOGUE

Shortly after four o’clock on the afternoon of Wednesday, April 13, 2011, U.S. Treasury Secretary Tim Geithner walked down the hall from his office toward a large conference room facing the building’s interior. He was surrounded by a retinue of counselors and aides. When they arrived in the room—known around Treasury simply as “the large”—four people were seated at a long walnut table on the side near the door. Geithner and his entourage greeted them, then walked around to the far side and took their seats.

At first glance, Geithner gave the impression of the former Wall Street banker many Americans assumed him to be. He wore elegant suits and alpha-male ties. His spread collars suggested a Savile Row provenance. But, given a moment to focus, the eye noticed hints of something else. His shoes were a bit shabby. On his wrist he wore an old digital watch. The suit, upon closer inspection, was Brooks Brothers—off the rack. It had only seemed nattier because he was well-proportioned and boyishly trim. Geithner wasn’t an ex-banker after all. He was a lifelong bureaucrat.

This status gave him a measure of independence of which he was rightly proud. While friends and former co-workers moved seamlessly from government to business and back, Geithner had resisted the easy payday time and time again. “I never worked on Wall Street,” he told a group of congressional Democrats in early 2009. “I’ve worked in public service my whole life.” Where others might be cowed in the presence of bankers, knowing they might soon petition the lords of finance for a sinecure, Geithner could have fun at their expense. As an assistant secretary in the late 1990s, he had once met a delegation from Goldman Sachs to discuss an obscure business matter. “Well, this is a fucking ugly issue, isn’t it?” he said, before anyone else had uttered a word. The Goldman men laughed nervously.

But if Geithner’s actions were independent, his mind was perhaps less so. As a government official, Geithner cared deeply about the constituents he consulted with, be they Wall Street big shots, financial technocrats, or market pundits. They were the people with whom a successful bureaucrat must have credibility, and there were few thoughts more mortifying to Geithner than looking unsophisticated in their eyes. He labored over draft after draft of his speeches and parsed every word of his op-eds. Back in December 2008, while Geithner was preparing for his Senate confirmation hearing, an aide asked if his family would attend. “Money will not be daunted by that,” he said, waving off the suggestion. “Money” was an allusion to Wall Street and the people whose judgments Wall Street respected. He was keen to make a good impression.

By contrast, Geithner was decidedly less taken with those whose views he considered naive. And this explained his impatience with the group he was meeting today. The four visitors hailed from Standard & Poor’s, the credit rating agency. They had come to voice their concern about the U.S. budget deficit, which was darkening their mood about the creditworthiness of the United States.

It turned out that S&P and its ilk were a species that “money” held in exceedingly low regard. Long before the financial crisis of 2008, Wall Street had derided the rating agencies as hubs for intellectual mediocrities—the clock punchers that banks and hedge funds had passed over. Then, in the bubble years, the big banks’ financial engineers became expert at duping the agencies into blessing their dodgy mortgage securities, mostly by burying the agencies’ leaden-eyed analysts in self-justifying math.1 After the securities turned toxic and the agencies were justly vilified, their pleas of ignorance sounded all too plausible. Many of the S&P analysts weren’t even based in New York. One of the men tasked with rating the trillions of dollars in U.S. government debt worked from an office in . . . Toronto.

Now Geithner spoke to the credit raters with thinly concealed skepticism. A few days before the meeting, S&P had warned Treasury it intended to downgrade its “outlook” on U.S. bonds, the first step toward withdrawing the triple-A status that stamped the bonds as essentially riskless. Geithner made clear he wasn’t begging S&P to change its mind. The feeling inside Treasury was that, if S&P moved ahead with this decision, the company would embarrass only itself and not the U.S. government. In this vein, Geithner simply informed the visitors that his country’s economic performance had exceeded expectations on almost every measure S&P claimed to care about. As for the one where it lagged—the deficit—Geithner pointed out that the president had proposed cutting this by $4 trillion that very morning.

Truth be told, Geithner might have offered these comments a bit more humbly. While the economy had indeed outperformed S&P’s most recent predictions, it was still far from healthy. Some 14 million Americans were out of work, and the unemployment rate hovered above 9 percent. Millions had seen their homes foreclosed on or were in danger of defaulting on their mortgages. This was no doubt the work of the worst financial crisis in eighty years. But it was also the result of throwing too few resources at the problem. The administration’s $800 billion stimulus package, while critical, had been too small to lift the economy out of its rut. Struggling homeowners never got the help they needed to crawl out from under mounds of debt. At the moment Geithner spoke, the economy was close to stalling, with growth puttering along at a mere 1 percent. About the only part of the economy that resembled its former self was the financial sector, where the traders and bankers were approaching their precrisis-level bonuses.2 There had been plenty of resources for them.

The combination of these factors had arguably produced the worst of all worlds for the Obama administration: a country that took one look at the languishing economy and another at the recovery on Wall Street and concluded that its government had put big banks ahead of ordinary workers and homeowners. And so, a populist backlash that had initially targeted Wall Street increasingly took aim at Obama.

Generously, the S&P officials didn’t point any of this out. Instead, the de facto spokesman for the group, a mustachioed fellow named David Beers, confessed that the agency was mostly concerned about the prospects for bipartisan compromise. Beers and his colleagues didn’t think Republicans would take seriously the president’s plan for shrinking the deficit by raising taxes and scaling back programs like Medicare and Medicaid, whatever the theoretical overlap between the two parties.

At this, Geithner became somewhat dismissive. He asked how S&P could handicap a political debate in Washington. It was a rating agency, after all, not a polling firm. It’s not your “comparative advantage,” the secretary said. Then he gestured toward the Obama officials seated on either side of him—Jack Lew, the White House budget director; Neal Wolin, the deputy Treasury secretary; Bruce Reed, the vice president’s chief of staff—and explained that all of them had been top aides to Bill Clinton during the last stand-off between a Democratic president and a Republican Congress. “We said, ‘This is the way it worked in the nineties,’” recalled one administration official. “‘After a big election, when you have divided government, you fight a bit, then find a middle ground.’”3 Another recalled arguing, “When both sides had firmly committed to a goal and the public was in support of it, it eventually had to happen.”4

The message was unmistakable: Trust us, we’ve done this before. It was, in many ways, the message the Obama economic team had been conveying to skeptics and outsiders since its earliest days in office. Now the same sentiment underlay its decision to put aside the task of creating jobs for much of 2011 and seek a grand bargain with the GOP on the deficit.

But Beers wasn’t biting. Perhaps it was because he didn’t work in Washington. Perhaps it was that his grasp of congressional budgeting was weak. Or that his knowledge of public opinion was crude. Whatever the case, he couldn’t suppress his disbelief that a major deficit deal would be forthcoming. “We think the differences are too big,” he said. “You won’t be able to do it.” He proved to be the wise one in the room.

© 2011 Noam Scheiber