In March 2009, a newly sworn-in President Barack Obama faced a choice that split his advisers as they tried to stanch a hemorrhaging economy: Should he bail out Chrysler or let the automaker die?
Obama turned to Lawrence Summers, then his National Economic Council director and now a top candidate to be the next Federal Reserve chairman, who described with no equivocation how Chrysler’s demise could devastate the U.S. economy, according to former members of the White House auto task force. His analysis was convincing, and Chrysler received $12.4 billion in taxpayer money that helped save the company and thousands of jobs.
“The president had enormous respect for Larry’s judgment on this stuff,” Steven Rattner, who led the task force, said in an interview. Though Obama made his own decision and required that Summers defend his positions, “when Larry spoke -- like in the old E.F. Hutton commercial -- everybody listens. Including the president.”
Forged in the crucible of the worst economic meltdown in eight decades, Obama’s trust in Summers is the main reason why he’s one of two leading contenders to be the next Fed chief even as some lawmakers bristle at his abrasive manner and his ties to the financial industry.
Former administration officials compare Obama’s bond with Summers to that of a patient for a doctor who helped him survive a heart attack or of soldiers who’ve served in battle together. They recall the first half of 2009, with unemployment increasing each month, as a frightening time when they felt the pressure of every economic decision.
Summers, Fed Vice Chairman Janet Yellen and former Fed Vice Chairman Donald Kohn have been mentioned by Obama as candidates for the central bank post when Ben S. Bernanke’s term expires at the end of January. As he approaches a decision that may come as early as next month, the president is hearing from backers of Summers and Yellen ranging from White House aides to former advisers to lawmakers.
Working against Summers is a backlash within the Democratic Party against his role in President Bill Clinton’s Treasury Department on financial deregulation, which some say helped precipitate the 2008 market crisis. Those misgivings were underlined last month by a letter that Senate Democrats sent to Obama urging him to choose Yellen.
For Obama, the rescue turned out well for the company now called Chrysler Group LLC. U.S. sales at the carmaker, now majority-owned by Fiat SpA (F), have increased for 40 consecutive months.
The auto-industry bailouts, which also included about $50 billion for General Motors Co. (GM), buoyed the economies of Michigan and Ohio and were instrumental in the president’s victories over Republican Mitt Romney in those states in the 2012 election. Romney had opposed what he called a “bailout check” for the carmakers.
In the Chrysler debate, Summers’s point-by-point advocacy of the rescue helped frame Obama’s thinking, the officials said.
“Larry had a very direct and sophisticated economic analysis and description of why we needed to do this despite the fact that it was a very risky thing to do,” Ron Bloom, a former Obama adviser on manufacturing policy, said in an interview. “He didn’t sugarcoat it.”
Summers, 58, told the president that even though “there’s a real chance that this thing won’t succeed,” the consequences of not bailing out Chrysler could be much greater, said Bloom, now a vice chairman at Lazard Ltd. (LAZ)
While then-Treasury Secretary Timothy F. Geithner was the central actor in structuring the administration response to the financial crisis, Summers played the role of overseer. He led the president’s daily economic briefings in the Oval Office and was the person Obama turned to for updates on the economic firefights, including the auto bailouts, the $830 billion stimulus package, housing issues and financial regulation.
With Geithner, Summers “was really at the center of all those efforts, advising the president on bringing stability and returning growth to the economy,” said Michael Barr, who was then the Treasury’s assistant secretary for financial institutions.
Summers met regularly with staff around the table in his 16-by-17-foot West Wing office “that appeared to have been last renovated in the Eisenhower era” and had a view of a “white parapet perhaps two feet away,” Rattner wrote in his 2010 book, “Overhaul,” about the auto-industry rescue. Summers didn’t care because the office was close to the president’s, Rattner wrote.
Summers also had Obama’s confidence because of the breadth of his experience -- from his work on the Mexican and Asian financial crises in the 1990s to his understanding of the complexities of negotiating with Congress, one of the former Obama officials said.
Candidate Obama relied on this experience at the peak of the U.S. crisis in 2008, when the collapse of Lehman Brothers Holdings Inc. upended the race against Republican presidential opponent John McCain.
Obama’s campaign held emergency conference calls to brief the then-freshman U.S. senator with several outside advisers including Summers, former Treasury Secretary Robert Rubin, former Deputy Treasury Secretary Roger Altman and former Fed Chairman Paul Volcker.
Over the course of those calls, Summers became the person whom Obama asked to tee up the agenda and present an overview of the latest developments and call on other advisers for their contributions, according to former officials.
Summers mixed his economic smarts with political counsel.
According to Noam Scheiber in his book, “The Escape Artists,” in September 2008, a few days before Lehman’s collapse, the Obama campaign drafted a statement backing the Bush administration and “supporting the no-bailout stance” toward Lehman. Summers called campaign officials and convinced them not to release the statement, saying, “You’re going to regard it as a momentous error to have praised an act of folly.”
People familiar with the president’s decision-making said it was that period which informed his choice to put Summers in charge of the National Economic Council, where he remained until the end of 2010.
Summers’s “strategy is to apply very tough-minded economic rigor in support of the proposition that government can be a force for good in people’s lives,” Bloom said. “He is unrelentingly rigorous in making you or anyone else defend a particular policy as reasonably likely to actually accomplish its objectives.”
His instincts weren’t always right. Summers was skeptical of bank stress tests that Geithner promoted and thought markets would see them as a sham, Scheiber wrote in his book, citing a Summers aide. The Standard & Poor’s 500 Financials Index jumped 23 percent the week the test results were released.
A person familiar with the administration’s deliberations at that time disputed Scheiber’s assertion, saying Summers’s concerns centered on the implementation of the stress tests. Once that issue was addressed, Summers supported the tests and now regards them as a success, said the person, who requested anonymity.
While Summers said in a March 2009 speech that Obama’s response to the crisis would be guided by “the recognition that the risks of overreaction are dwarfed by the risks of inaction,” that principle wasn’t applied to address the collapse of the U.S. housing market.
The value of Americans’ real-estate assets didn’t start to rise until the third quarter of 2011, more than two years after the official start of the economic recovery, according to Federal Reserve data. As recently as the first quarter of this year, 19.8 percent of all U.S. homeowners owed more on their mortgages than their houses are worth, according to the most recent figures compiled by CoreLogic Inc. (CLGX), an Irvine, California-based real-estate data provider.
Summers’s thinking on housing policy evolved during his time in the administration, according to the person familiar with its deliberations. While he crafted the 2009 housing refinancing program, he later supported changing the terms to provide greater relief when it became clear that the money wasn’t moving to distressed homeowners swiftly enough.
If Obama selects Summers, the former aide he’s defended in front of lawmakers as the quarterback of the economic crisis response team, he’ll face obstacles. Democratic senators signaled last month that his confirmation could be rocky -- 19 of them and one independent signed a July 26 letter to the president praising Yellen, 67, and urging Obama to nominate her.
The effort surprised senior White House staff, leading the president’s aides to tell congressional leadership to give Obama the necessary political breathing room to make a decision.
“I tend to defend folks who I think have done a good job and don’t deserve attacks,” Obama said at an Aug. 9 news conference when asked about Summers and the perception among Democrats that he may have the edge over Yellen, who would be the first woman to lead the Fed.
A pitfall of picking Summers is the possible revival of a gender controversy he sparked while president of Harvard University from 2001 to 2006. He drew criticism from faculty and women’s groups after he said in a 2005 speech that “innate” differences between men and women could partially explain the shortage of elite female scientists.
There are also concerns raised about his earlier record on financial regulation and whether the policies he directed laid the groundwork for the 2008 crisis.
When he was deputy Treasury secretary in 1998, Summers helped thwart an effort by Brooksley Born, then-chairman of the Commodity Futures Trading Commission, to consider regulating over-the-counter derivatives. That market ballooned to a notional value of almost $600 trillion in 2007 from about $28 trillion at the time of Born’s proposal. Largely unregulated trades of those contracts helped fuel the 2008 crisis.
Senator Jeff Merkley, a Democrat from Oregon who signed the pro-Yellen letter, said in an interview last month that Summers is a ‘life-committed deregulator’’ and “there are a lot of questions that need to be asked” if Summers were nominated and came up for Senate confirmation. Merkley said he is “skeptical that his background is appropriate for the role of the head of the Fed.”
Summers has also worked as a paid consultant to financial firms including Citigroup Inc., Nasdaq OMX Group Inc. and hedge fund D.E. Shaw & Co. When Clinton nominated him to be Treasury secretary in 1999, he listed assets of about $900,000 and debts, including a mortgage, of $500,000. When he returned to serve in the Obama administration, he reported a net worth ranging from $7 million to $31 million.
In the Obama administration, if Summers’s economic acumen was unparalleled, the process wasn’t always smooth as the president’s economic team was rife with infighting.
During one Sunday meeting at the White House in March 2009, Geithner, Summers and others were debating in front of the president a plan to restart bank lending. A frustrated Obama said he was leaving for dinner and expected a decision when he returned later that evening.
In that first year of crisis, Summers usually leaned toward doing more, rather than less. Former economic officials said Summers’ reputation as standing in the way of a larger stimulus is unfair.
“Larry favored as big a stimulus package as could possibly be gotten through Congress,” said Rattner, who is chairman of Willett Advisors LLC. “Larry was simply dealing in the realm of the possible.” According to its website, Rattner’s firm is the investment arm for New York City Mayor Michael Bloomberg, founder of and majority owner of Bloomberg LP, the parent company of Bloomberg News.
In a December 2008 memo to President-elect Obama, Summers laid out his bigger-is-better view on fiscal stimulus.
“The rule that it is better to err on the side of doing too much rather than too little should apply forcefully to the overall set of economic proposals,” Summers wrote in the memo that Jared Bernstein, a former economic adviser to Vice President Joe Biden, posted on his blog in February 2012.
Summers ultimately offered Obama two options for the stimulus, Scheiber wrote: $600 billion and $800 billion. “Summers believed that a $1.2 trillion proposal, to say nothing of $1.8 trillion, would be dead on arrival in Congress because of political resistance,” he said.
Former aides said Summers applied that theory broadly to the administration’s crisis response efforts.
Toward the second half of his tenure as NEC director, Summers came to argue for additional stimulus, pitting himself against White House budget director Peter Orszag and Geithner while aligning himself with Council of Economic Advisers Chairman Christina Romer, according to a former administration official.
“For a guy who people sometimes say is difficult, he’s got an enormous number of people who worked with him, for him and around him who are strongly supporting him,” Rattner said.