Al Franken, a supporter of Brown-Kaufman, was outraged-and it wasn't an act. Having been humbled by his protracted election recount, and wanting to counter his Sat.u.r.day Night Live past with a metier of quiet seriousness, Franken finally stepped up. He had, months before, taken an interest in the role of rating agencies such as Moody's and Standard & Poor's.

As had been widely reported, banks would shop around lousy securities looking for the best rating, paying the rating agency in return for a desired rating. Franken saw the issue, as many did, as a clear conflict of interest. "If a failing student paid their teacher to turn their grade from an F into an A, everyone would agree that what the teacher had done was unethical."

In early May, Franken put forth his proposal, dubbed the "Restore Integrity to Credit Ratings" amendment, and was, as well, greeted with bipartisan support. The amendment called for, among other things, every a.s.set-backed bond issue to be rated by a government-created board, rather than having the bank choose the agency itself.

On May 13, Franken's proposal pa.s.sed the Senate 6435. Franken, demonstrably liberal, also drew Republicans, including Gra.s.sley, the ranking Republican on Senate Finance; South Carolina's Lindsey Graham; and Alaska's Lisa Murkowski. In all, he managed a whopping 11 Republican votes, making the amendment one of the season's most significant bipartisan votes-and only six months before what was due to be a heated midterm.

Of the four Democrats who voted against it, one was Chris Dodd.

Like Barney Frank, Dodd had played a complex role in the proceedings. Many were critical of the lame-duck senator for not being more aggressive in his reforms, alleging that his interests were inexorably linked with the lobby he so closely served. But Dodd remained steadfast, arguing that he simply wanted to produce the strongest possible bill that could feasibly withstand a vote. It wasn't worth sacrificing reform to make incremental changes in specific amendments.

But no one was in the crosshairs quite like Blanche Lincoln. Banks attacked her in back rooms and hushed lunches with senators as being in "way over her head." Her proposal to spin off derivatives would cause profound disruptions, and many speculated that she'd discard the proposal as soon as she won her primary. But her proposal became something of a third rail, electrified by the populist surge, such that no one could touch it, to kill it. "This is looking like a democracy," Barney Frank said, even though he had doubts about the amendment. "Publicity has changed the debate."

"Gazelles do better in daylight, that's for sure," Gensler effused.

On May 18, Chris Dodd, who had been working to undercut the Lincoln amendment with an alternative of his own, was forced to remove his proposal under populist anger. It was only two days before the Senate vote, and miraculously the Lincoln amendment remained intact. Lobbyists and both Democratic and Republican members ma.s.sed for a final fight against the proposal.

But they were fighting on too many fronts. Carl Levin of Michigan and Jeff Merkley of Oregon had discovered that Dodd had discreetly gutted the Volcker Rule, and the two set to work trying to counteract Dodd's efforts.

The Merkley-Levin Amendment articulated Volcker's idea fully-and wrote it as law. No regulatory backsliding, once everything settled down.

There were legislative complications. The Republicans, in early May, invoked the "unanimous consent" rule, which essentially bars the introduction of new amendments until a final vote on the bill. Consequently, the usual process of discussing and vetting components of the amendment would have to wait until the very end of the process.

But now the end was coming fast. Sensing that their amendment would never see the light of day, Merkley and Levin, moving independently of leadership, used an esoteric parliamentary move and attached their amendment to one belonging to Republican senator Sam Brownback. His amendment, already scheduled for a vote, would exempt auto dealers from Elizabeth Warren's Consumer Financial Protection Bureau. It wasn't a pretty solution, but Merkley and Levin were determined to get the Volcker Rule, which did not exist in the House bill, into the Senate version.

The vote, and Merkley-Levin, appeared to be safe for the vote on May 20, the day of the Senate vote on the financial regulation package. However, the day before, Republicans, in concert with the Democratic leadership, withdrew the Brownback amendment-killing Merkley- Levin-in exchange for the inclusion of the Brownback proposal during the negotiations for the final reconciled House/Senate bill. The Volcker Rule, with teeth, was dead.

Dodd and Reid then carried it home. The Senate approved its financial-reform bill on May 20, 59 to 39.

The Senate's bill was now placed side by side with the House's bill in one of the most publicized conference committee sit-downs in years. With the Volcker Rule safely reduced, the battle became singularly about the Lincoln Amendment and its ban on traditional derivatives practices.

That amendment was sitting atop a house of cards. For one, Senator Lincoln was embroiled in a heated midterm primary, and many surmised that her ploy was a populist trick to lure progressive voters.

Meanwhile, Republicans across the spectrum had begun denouncing the amendment, specifically section 716, the component that would spin off derivatives trading, and were threatening not to vote for the conference bill if it included such language. Barney Frank, perhaps the most influential person in the conference process, even stated publicly that Lincoln's proposal "went too far."

On June 9 Lincoln had her primary and, after defeating her opponent, systematically began to deconstruct her own amendment. A series of exemptions scaled back her proposal.

Then like an angry zombie, the Volcker Rule wouldn't die. Merkley and Levin were able to persuade the House leadership, under the auspices of Barney Frank, to grant them the same favor as Brownback with his auto dealers' exemption. Their amendment was entered into the deliberative mix-and-match between House and Senate.

But on balance, what was left of the great spasm of springtime amendments, many of which had garnered bipartisan support, was very little.

Franken's rating agency amendment was the last to go, with Frank quietly quashing the proposal in lieu of an SEC-overseen "study group."

The "process" managed by Frank in the House and Dodd in the Senate had prevailed. Now they would largely decide what bill carried their names.

Paul Volcker flew down to Washington a few times during this congressional land war to talk to anyone who'd listen, to do what he could. But mostly he watched it from afar, feeling older than he'd felt in quite a while.

At Kykuit, heading down to the estate's first-floor Playhouse, and the spectacular dinner that awaited him, he had said to his stairway helper, "That Merkley-Levin, that's my amendment. It was a pretty good idea at the start, I thought. We'll see how much of it can be saved."

He'd been watching the slaughter, one amendment after another, each of them, in different ways, trying to restore features, or, at the very least, concepts once housed in Gla.s.s-Steagall.

Volcker marveled at how many of those amendments had drawn Republicans and Democrats together. He'd never been much of a partisan, of course-he'd served under presidents of both parties, had friends on both teams. Still, this seemed to warm him, and to harken back, he said, "to a time, I can remember, when we had quite a bit of that sort of thing, where Democrats and Republicans figured things out together, especially on the really important stuff that affects everyone, more or less, equally."

Those last few words had a flaw in them, a fracture that he'd seen grow across nearly thirty years, where some of the very clever men who followed him into public service, and whom he'd see in the restaurants near his office in Manhattan, figured out how to make the "really important stuff" not actually "affect everyone, more or less, equally."

Volcker is no fool-he practically saw this idea get developed, with a winning political strategy attached: that if you can reward a certain group of people in society you'll be developing a very powerful const.i.tuency, small in numbers but awesome in might, and they'll do just about anything to make sure you or someone like you is always in power.

Almost all the most meaningful reforms were designed to run counter to this idea of a few people being rewarded at the expense of many. One other thing "all the latest reforms" shared was they were all battered, or already buried, because none of them, including his amendment, "have really been supported by the president-not really."

This left Volcker confused and suppressing a rise of bitterness in his throat. He'd been there for the president, doing whatever Obama wanted, and stepping up a few months ago, duly resurrected, as Obama called this modest attempt to restore sanity, and some safeguards and barriers that had been proven to actually work, "the Volcker Rule."

"They say they're for it, but their hearts are not in it." And this gap between word and deed, between stated intentions and so little action, made Volcker think of a phrase that he knew Summers sometimes used-a couple of people had told him-"that the important thing is just to be caught trying."

He'd always kept Obama and Summers separate-he liked Obama, didn't think much of Summers-but this phrase troubled him, because it seemed to explain some things that he couldn't find other explanations for.

He finally made it down the last step of two flights, and stopped to catch his breath. "I'm not dead yet. I talked to Barney; he's with me."

As for the president, it was back to the same thing Volcker had learned, with some reluctance, over the past two years. If Obama didn't get involved and "show some enthusiasm," Volcker said, the big changes that he, or anyone else, had suggested "just won't happen. It's that simple."

Then Paul Volcker straightened up to his full height-a few inches off his relentlessly cited six foot eight, but just a few. The Playroom, its golden light beckoning from just a few feet ahead, was bustling as the diners, here to celebrate good works, found their tables and settled in.

Tonight, on this mountaintop, he was quite appropriately the master of ceremonies. He wanted to make a good show of it.

On June 17, Gary Gensler was carrying his jammed briefcase through Washington, D.C.'s Union Station, the century-old Beaux Arts landmark that had become a staple of his lengthy commute.

Financial reform was ticking down to zero hour, and already Gensler was preparing to write the new rules for what would be the "teeth" of derivatives reform.

The CFTC chair had become one of the busiest men in Washington, a man on a mission. While making his way through the train terminal, he heard a familiar voice.

"Gary? . . . Gary!"

Gensler paused briefly before placing the man walking toward him-Jon Voigtman, a former Goldman executive-and greeting him warmly.

Encounters like these had multiplied steadily as Gensler's profile had reached mythic status on the Street. Voigtman reverentially treated Gensler as such. Now at the Royal Bank of Canada, the younger Voigtman had come to town for a meeting on mortgage financing at the Treasury.

After a moment of small talk, Gensler began to place Voigtman. He'd been at Freddie Mac in the late '80s, then ran Lehman's mortgage finance operation from the late '90s until 2004, when he moved to Goldman. He was co-head of mortgage financing, the guys who pulled together buyers for all those mortgage-backed securities and helped create the era's famous CDOs and CDSs. Gary, who suddenly realized he was undersecretary of Treasury in 2000 when he'd first met Voigtman, soon launched into an insider's dialogue with a man who'd managed to be at every catastrophe-in-the-making for two decades.

"Let me ask you a question. From when you met me in 2000 to what you saw happen in '05, '06, '07, was it a fundamental change or did it just sort of get . . . bigger?"

Voigtman proffered that the era was marked by people who started entering the structured products in droves but didn't understand the business "coming into the game and [that] it wasn't about mortgages anymore."

Then, under Gensler's prodding, Voigtman got more specific: "2006, that was the year that sent a shudder through the business. Ten percent of the loans that we bought never made their first payments. That was in August '06. You knew by August '06."

"They wouldn't make the first payment."

"So," Voigtman continued, "the underwriter who sat down with that borrower forty-five days before got it wrong."

What's more, loans even worse than that 10 percent, the ones Goldman sent back to the underwriter, were "being financed at par," meaning they were being sold to someone else at full value.

Gensler waited before posing the question that Blankfein had repeatedly dodged.

"But by August of '06, when you knew, did you change the underwriting practices?"

Voigtman paused. Gensler was now a leader of the other team, a regulator. But then again, Voigtman was no longer at Goldman. He had left the firm in December of 2006 for his current employer, Royal Bank of Canada. Neither man had a complicating allegiance.

Voigtman shook his head: No, Goldman hadn't changed their underwriting. They took advantage of the unfolding disaster by adding more troops. "It became more compet.i.tive. We had more desks on the Street."

Then Voigtman ran through a dissertation on what Goldman knew and when they knew it. Specifically, he described how they knew there was trouble with CDOs long before August 2006.

In fact, it was in 2004 when they first saw underwriting standards start to decline and demand for the CDOs skyrocket. Voigtman explained that with overwhelming demand for the "long side," or upside, someone had to be "the short," taking the downside to "ensure liquidity." Goldman did that as fast as was humanly possible, and then some.

To keep the ball rolling, Goldman began improvising at breakneck speed.

They began fine-tuning the short-play, by helping create the "single-name CDS, which meant they could take out a short position, using the faux insurance of a CDS, on a single item in a bundle of mortgage-backed securities. As bundles were being sold at dizzying speed, Goldman could take out cheap insurance, paying out 100 to 1, on a single weak link inside the bundle. As things heated up in 2005, as demand for CDOs grew with the arrival of large players such as Fannie and Freddie and Pimco, "the deals would be oversubscribed" four times over. Rather than sending the money back to the unrequited buyer, "the smart guys at Goldman said, 'Hey, we can just synthetically fill their order.' " This freed Goldman from the terrestrial obligations of actually needing someone, somewhere, to underwrite an actual mortgage-a process that, even when sped up, couldn't keep up with demand. The bank started to sell, in essence, umpteen CDOs based on a single mortgage.

Even now, as he talked about the moment in Union Station five years later, you could see Voigtman's trader's blood begin to quicken. "The thing I loved about it is you had two views. If you didn't like an underwriting, the only thing you could do before was avoid buying it. But now you could actually have a view and take the short side if someone will take the long side."

Of course, in the frenzy starting in 2004, everyone except Goldman was preferring the long side. Whether or not their justification was "ensuring liquidity," making the market by going short, the fact was that by early 2005, Goldman was more short than long on mortgage securities. That's generally called a "directional bet": the firm's profits were rooted in the market falling as opposed to rising. Goldman's position has been that they were unwitting victims, like so many others. In fact, their desire to short the CDO market was so strong already by 2004 that they'd created the market by building up a huge position on short side of securities most everyone felt were likely to continue their AAA-stamped success. And then they went synthetic. Among those poor everyones would be Goldman clients, of course. At this point, every one of those clients had reason to ask what Goldman knew and when they knew it. Not from December 2007 forward, when Goldman's number two, David Viniar, said the firm first realized mortgage securities were going south, or even from August 2006 onward, when, as Voigtman had just revealed, they were seeing that stunning 10-percent rate of no mortgage payments at all.

But from 2004 onward. Because what Voigtman had just described to Gensler went far beyond the prudent hedging of downside risk. It was Goldman building customized weapons to take advantage of a unique, once-in-a-lifetime market-driven disaster that no one could have foreseen. No one except someone who had helped construct it, by providing the "liquidity" of a burgeoning menu of short-side products, to sate all the "upside" thirst in the world. Should Goldman have told clients, or the general public, its directional bet on CDOs? As a market maker, of course not. They're just making a market for people to follow their trading desires: playing a neutral role. If they have a strong feeling about where that market is headed, they keep that to themselves.

Voigtman had a train to catch, and so did Gensler. Before they parted, Gensler couldn't help but ask Jon if he thought any of the reforms Gensler had been fighting to enact would make any difference. "I think the whole dialogue is very, very healthy," Voigtman said, dodging the question.

Gensler was surprised and deflated. "What about derivatives?"

Voigtman managed to let Gensler down easy: "I honestly don't know what the impact is going to be."

Obama was looking relaxed, speaking to the crowded room of dignitaries on the afternoon of July 21. The topic was the economy, and his language was familiar. "For two years we have faced the worst recession since the Great Depression," he started, "a crisis borne of a failure of responsibility from the corridors of Wall Street to the halls of power in Washington."

He was finally signing into law the Dodd-Frank Wall Street Reform and Consumer Protection Act. In an economic briefing that very morning-with unemployment at 9.5 percent-he dismissed proposals to give tax breaks for construction projects as well as a program to create temporary federal jobs at a time when 700,000 census workers were leaving their jobs. Krueger's small business tax credit, finally proposed in January at $33 billion, was shrunk and folded into a smaller $18 billion hiring stimulus. After nearly a year of internal White House deliberations, with huge Democratic majorities in Congress, that would be the sum of the administration's effort on the jobs crisis. After the briefing he motored over to the Ronald Reagan convention center to sign what he called the most comprehensive reforms since Franklin Roosevelt faced down the banks in the 1930s. Financial reform-an issue that had drawn more embedded emotion, following Wall Street's meltdown, than most average citizens ever felt about their health insurance-was being called an empty vessel. Even those in the White House, which had labored for months to demonstrate the boldness of reform, were using more modest language following the act's pa.s.sage.

"For years," Obama continued, "our financial sector was governed by antiquated and poorly enforced rules that allowed some to game the system and take risks that endangered the entire economy."

To Obama's left were Chris Dodd and Barney Frank, the two men who had guided the bill through to the end. They had maneuvered the legislative process deftly, managing to get the bill pa.s.sed only months after the debacle of health care reform. Still, critics complained that the most substantial reforms-Merkley-Levin, Brown-Kaufman, Franken, and Blanche Lincoln-had all been systematically gutted during the shadier conference sessions.

Those amendments, complex and esoteric to the pa.s.sive onlooker, were all variations on the same melody: how to prevent the systemic risk of "too big to fail."

Lincoln's amendment had gone after derivatives, the steroids that fueled exponential growth in banks. Merkley-Levin's "Volcker Rule" spinoff had attempted to ban proprietary trading. Brown-Kaufman had tried to do away with opacity altogether, proposing simply to limit the size that bank holding companies could have.

One by one, in spite of bipartisan support, they had all failed.

The original language of the Lincoln amendment-specifically section 716-articulated that banks would need to spin off their derivatives trading desks, their most profitable business. Lincoln also stipulated that the derivatives dealers had to act as "fiduciaries," removing the conflict of interest similar to that of propriety trading.

An early exemption offered by Lincoln for small community banks was used as a wedge for other exemptions-which now flowed freely, with Lincoln's heated primary victory now behind her. At day's end, banks could move their derivatives operations into "subsidiary units," rather than spin them off. Wide swaths of derivatives-foreign-exchange swaps, interest-rate swaps, cleared CDSs, currency swaps-would operate largely as they had been, meaning that "about 90 percent of the derivatives market was exempted" from meaningful regulation, said derivatives expert Michael Greenberger, once Brooksley Born's deputy. Nonetheless, owing largely to Gensler's effort, most of the systemically dangerous over-the-counter derivatives, especially dealing with debt, would now have to be traded on exchanges, or so-called swap execution facilities, and pa.s.sed through clearinghouses to make sure one party backstops the trade. This was accomplished by seeming like "middle ground" compared to Lincoln's spinoff derivatives amendment, and by Gensler's literally running in a crouch behind the chairs of congressmen during the conference committee, explaining complex issues in a way that counteracted the expert persuasions of lobbyists. It was a role that drew criticism, but some gazelles were saved.

Meanwhile, the "Volcker Rule," or what was left of it, limped toward the finish line. Having never been given a vote in its first incarnation, the progressive duo of senators had managed to reintroduce language during the conference committee-language that Levin contended was stronger than the "Volcker Rule" originally proposed by the administration.

However, under pressure from Scott Brown, in exchange for his coveted Republican vote, the conference blunted the final push by Merkley and Levin. The rule was changed to allow banks to continue proprietary trading with defined limitations. The agreement ultimately struck would allow a bank to invest up to 3 percent of its tangible equity in hedge and private-equity funds, a stark contrast to the clear-cut separation Volcker had envisioned.

And 3 percent, in the world of behemoth bank holding companies, was no small figure.

Furthermore, several banks, including Goldman and Citi, estimated elements of the rule wouldn't affect them until 2022, a whopping ten years.

Journalist Matt Taibbi and economist Simon Johnson were outspoken in their criticisms. Paul Krugman blogged about the inept.i.tude of the bill. How could anyone expect such a clunky piece of legislation to properly regulate an industry solely dedicated to finding loopholes? Dodd and New York senator Charles Schumer were lambasted for their backroom deals helping to shield financial interests.

Even Barney Frank, crusading icon of the left, drew criticism. It was, after all, Frank who, with White House support, had gutted both the Franken and Lincoln amendments in conference and pushed against many of the more progressive structural reforms.

Still, in spite of its many flaws, Obama had a lot of items to tout in the law. It expanded the purview of federal regulators significantly, subjecting previously unexamined elements of the financial markets to oversight. It created a panel of federal regulators charged with detecting and implementing policies to prevent a "too big to fail," or "too systemic to fail," problem before it occurred-albeit a difficult mission. Perhaps most notable was Elizabeth Warren's Consumer Financial Protection Bureau, which survived the sausage making weakened but intact.

Obama's rhetoric, though, rested mainly on the intangible aspects of the bill. Wall Street should no longer be coddled by government. Dodd-Frank should be interpreted as a harsh rebuke on the practices that had led to the crisis.

Most of those practices, though, remained intact, and the prevailing sense was one of uncertainty. With an already expected backlash in the coming midterms, there were whispers among conservatives over how they would be able to cut down the bill after November. Hundreds of components of the bill were dependent on the complicated rule-writing process-especially the derivatives reform-that could take years to complete. With Republicans back in power, they would be able to slow and potentially derail many aspects of that reform.

Still, much like health care, it was a start. In one instance, government took on the burden of having everyone insured. Now it took on a mandate to attempt, at the very least, the regulation of the nation's central and signature industry. A t.i.tanic crisis, however, had come and gone, and neither Washington nor Wall Street had fundamentally changed. At least not yet.

After concluding his remarks, Obama-noticeably gaunt and appearing short of sleep-sat down and signed the bill as those a.s.sembled broke into applause.

Obama made his way to the elder statesman Paul Volcker. The two men hugged as, standing immediately behind Volcker, a clapping Elizabeth Warren cheered them on. Standing nearby was a crowd of people-congressmen, dignitaries, consumer advocates-who were waiting to meet her. They were huge fans.

And after a minute Barack Obama slipped out to get back to the White House.

19.

The Noise.

In a memo dated august 5, Pete Rouse outlined his final recommendations for revamping the White House's administrative structure. The memo, like its six predecessors, portended a clean sweep as soon as possible.

That same evening, Christina Romer, exhausted, announced her departure as chair of the Council of Economic Advisers. She was not the first major exit. Just a week before, Peter Orszag had left his post at OMB. Reports had surfaced that Larry Summers would be leaving by year's end. Obama's B-Team was on its way out.

Replacements for Romer and Orszag were easy. Austan Goolsbee, Obama's old friend and campaign ally, would replace Romer as chair at CEA. Meanwhile, Jack Lew, the man who many felt deserved the OMB post all along, replaced Orszag, having spent a year in purgatory at the State Department.

As members of the old team left and replacements started to fill their chairs, Obama-after six months of intensive managerial review with his trusted senior aide Rouse-started to sense the yield of that effort: a clean slate. An innermost circle around a president sees the man, up close, in ways that no one else can. But, even to this group, he is the president-someone not generally afforded the casual luxuries of doubt or confusion or common human frailty.

During so many days of crisis in his first two years, Obama often felt that performance pressure-having to play the part of president, in charge and confident, each day, in front of his seasoned, combative, prideful team, many of whom had, all together, recently served another president. As he confided to one of his closest advisers, after a private display of uncertainty, "I can't let people see that, I don't want the staff to see that."

And: "But I get up every morning. It's a heavy burden."

By August, there was increasingly little to do on the policy front.

Health care and financial reform, Obama's early legacy, were complete. The midterms, just ahead.

The sound and fury over health care had reached fever pitch, and then pa.s.sed, as polling began to show that the legislation was unpopular, but only marginally so. The coming midterms were going to hurt, no doubt, but there was an ease in the White House. What was done was done.