In 2008, then-presidential candidate Senator Barack Obama took a tough line on Wall Street. It was a great time politically to do so, as fraud on Wall Street had created a global credit crisis the likes of which few Americans had ever seen and the economy was beginning to slide into what would later be termed the Great Recession. Millions of Americans would lose their homes and countless businesses would fold due to lack of access to credit and weak demand for their products and services.
It worked. Obama rode a wave of populist anger against Wall Street to become the 44th president of the United States. The problem? Barack Obama values Wall Street both in the abstract sense and as a matter of practical politics. His largest private donor in 2008 was Goldman Sachs and, despite being labeled a socialist by his opponents, his ideology has always skewed neoliberal.
So it was on November 9, 2008, fives days after the election, that Obama economic advisor Daniel Tarullo emailed Obama campaign senior advisor John Podesta a memo outlining the position Obama should take on the most controversial Wall Street bailout yet, the bailout of American International Group (AIG).
In the memo, published by Wikileaks, Tarullo advises that Obama should play both sides of the AIG bailout.
Tarullo says in the memo that he received a phone call that evening from Treasury Secretary Hank Paulson and Federal Reserve Chairman Ben Bernanke “informing me on a confidential basis that, before the markets open tomorrow morning, they will be announcing a significant restructuring of the AIG bailout package. They are taking this step in order to avoid what they asserted would be a systemic crisis.”
The terms for the AIG bailout were extremely favorable to AIG and led to widespread outrage from the public, especially when it became known that AIG’s counterparties such as Goldman Sachs would not lose a single dollar they invested in bankrupt AIG. Tarullo explains in the memo that Paulson and Bernanke were “not happy about having to do this,” and that he expects there to be “criticism from economic and market observers, because this restructuring has relaxed the terms of financing for AIG without additional taxpayer benefits.”
Tarullo then advises Podesta in the memo that he believes Obama should not criticize the deal but also keep his distance from it:
As to our reaction – we surely do not want to unnerve markets by saying anything that would suggest your Treasury Department would undo this modification after January 20. However, the combination of the questionable terms of the original Fed lending and failure to increase the effective stake of taxpayers as part of this deal means that we should avoid saying anything that would identify us with this move. Our position is perhaps best framed as regret that it was necessary to make these changes in the September arrangement.
In other words, support the bailout without supporting the bailout and feel free to lament that others felt they needed to do such a thing.
As many progressives would find to their dismay, this was the beginning of a pattern with President Obama and Wall Street. Obama, constantly pondering the complexities of his job like some a sort of DC Hamlet, would decry the greed and venality of the financial services industry only to then appoint Wall Street hacks to his cabinet and water down Wall Street regulations. He doth need be pragmatic, after all.
Daniel Tarullo’s advice to Podesta and the Obama campaign did not go unrewarded. On January 28, 2009 President Obama appointed Tarullo to the Federal Reserve Board.