Former Treasury secretary Summers adapts his style

On a warm Monday in late April, the president dined with some of the sharpest critics of his handling of the financial crisis. Just that morning, one of his guests, Nobel prize winner Paul Krugman had complained in his New York Times column that the administration "will probably let the bankers off with nothing more than a few stern speeches."

For roughly 90 minutes, over plates of savory roast beef and the first lettuce from the new White House vegetable garden, President Obama and some of the nation's leading economists debated the fine points of bank restructuring and financial bailouts. The half-dozen attendees included another Nobel prize winner, Joseph Stiglitz; former Federal Reserve Board governor Alan Blinder; Harvard University's Kenneth Rogoff; and Jeffrey Sachs of Columbia University.

The dinner represented an unusual moment in official Washington: a president, breaking bread with impassioned, well-credentialed opponents of his signature policy initiative. To some, the episode also underscored a key question about a rumpled figure at the table, who was uncharacteristically quiet much of the evening. As director of the National Economic Council, Larry Summers, 54, is charged with ensuring that the president hears all sides of the complex financial and economic issues confronting him. It's an unlikely role for the opinionated Summers, a brilliant, bulldozing former Treasury secretary with a reputation for chewing through dissenting voices with the same fervor he brings to an undefended buffet table.

"Larry's a debater, and he wants to win," said Stiglitz.

In a 40-minute interview in his West Wing office, Summers says placidly, "I'm trying to make sure the president has access to the best thinking he can have."

"There is a sense within the Treasury Department and within the White House that the changes to U.S. markets are actually going to be less than people expect. Not only are we not headed to European-style socialism, we're not even headed that far from where we were," says David Rothkopf, a Washington, D.C., consultant who worked with Summers in the Clinton administration.

A born economist

Summers was almost literally a born economist. Both of his parents were economists; two uncles won Nobel Memorial Prizes in Economic Sciences. He entered the Massachusetts Institute of Technology at age 16, did graduate work at Harvard University and eventually became one of the youngest tenured professors in Harvard's roughly 350-year history.

A brilliant academic career led to top policy jobs at the World Bank and then in the Clinton administration, where he eventually succeeded Robert Rubin as Treasury secretary.

Summers was deeply involved in the U.S. handling of financial crises in Mexico, Asia and Russia during the 1990s and was a forceful advocate of open markets and deregulation.

After leaving government, Summers returned to Harvard in 2001 as president of the university. It was a rocky interlude, ultimately undone by comments he made in 2005 casting doubt on women's innate aptitude for science and math. The remarks ignited a fierce gender controversy, and Summers resigned the following year. Whatever personal angst the incident caused, his exile turned out to be a profitable one. He took a part-time position advising hedge fund managers at D.E. Shaw & Co. in New York that paid more than $5 million.

Along the way, Summers earned a "yes, but" reputation. Universally regarded as an almost uniquely brilliant economist, he was equally widely seen as arrogant and brusque. A favorite tactic was to finish the stories or arguments of others, which saved time but left legions of irritated associates in his wake. "He's just very direct and to the point. … He'd be much less exciting to talk to if he weren't so clear-headed and direct," says Rogoff, a Harvard colleague.

Summers realized by the late 1990s that his pile-driving approach was counterproductive, and he learned to throttle back. But doubts resurfaced when Obama opted to put him in a job at the NEC requiring the skills of an "honest broker" rather than return him to Treasury. Friends say Summers was determined to prove the skeptics wrong by running an even-handed policy process.

"It's been a remarkable transition stylistically from where he was 20 years ago, even 10 years ago. Stylistically, it's like night and day," says David Smick, CEO of financial advisory firm Johnson Smick International, who's known him since the late 1980s.

Still, Summers can sometimes appear to be a man feigning calm rather than possessing it. And he remains a controversial figure within the Democratic Party, where some see his enthusiasm in the 1990s for market solutions and deregulation as having sown the seeds that sprouted into today's crisis. Along with then-Treasury secretary Robert Rubin, Summers opposed regulating derivatives, including credit default swaps, and supported repealing the Glass-Steagall Act, which prohibited banks from simultaneously engaging in investment and commercial activities.

"I think he shares the blame," says economist Dean Baker of the Center for Economic and Policy Research, a left-of-center Washington, D.C., think tank.

Summers acknowledges some regrets, though with caveats. If he had known that unregulated derivatives would mushroom and that regulators would remain spectators, he would have acted. "With hindsight, all of us with involvement in financial policy wish we had done more to forestall problems," he says.

His allies say Summers has become the indispensable man of Obama administration policymaking, a sort of economic consigliere for the president. If Obama decides to replace Fed Chairman Ben Bernanke when his term expires at the end of January, Summers is a likely successor.

"He can provide one-stop shopping for analytical rigor on a breadth of economic and financial matters like no one else in the world," says Gene Sperling, a counselor to Treasury Secretary Timothy Geithner.

No champagne yet

Summers' modest West Wing office provides few hints of his prominence. There's a small corner refrigerator stocked with Diet Cokes. A wall-mounted photo of Obama and his economic SWAT team at work. Another signed "Al Gore." But as head of the NEC, a Clinton administration creation, Summers enjoys ample amounts of that key Washington currency: presidential face time. Every morning, he makes the short journey down one level to the Oval Office, where he leads a daily economic briefing for Obama, an innovation the new president put in place to keep tabs on the metastasizing financial crisis.

"There were periods when every day — one way or another — was about the financial crisis," Summers said in an interview. "But as there's been a little bit of a return to normality, there's been a little bit more of a movement toward a broader range of topics."

In the daily briefings, also attended by other top policymakers, including Geithner, Summers isn't shy about making his own preferences known. But the goal is to make sure the president hears all the arguments — before a decision is made, not afterward when the talking heads on cable TV begin picking it apart.

In the administration's early days, one question surrounded the interaction between Geithner and Summers. There was talk that rival Treasury and White House power centers would jostle for policy supremacy. So far, if the process hasn't been perfect, there's no indication of the sort of institutional paralysis that has bedeviled other administrations. "They battle intellectually sometimes, but in a very friendly and collegial way. … Each is the one the other would most want to reach consensus with," Sperling says.

On this day in mid-May, Summers' briefing includes developments in the Treasury bond market, an update on General Motors' march toward bankruptcy court and the financial unraveling of the state of California. Later, for someone with his fingers in just about every aspect of the worst financial crisis since the Depression, Summers appears relaxed. Obama is tied up with his nomination of Sonia Sotomayor to the Supreme Court, so for the moment, the intense presidential spotlight has lifted from the economic team.

The economic data lately, though mixed, have been better than during the white-knuckle months in late 2008 and early 2009, when the prospect of a global cataclysm akin to the Great Depression seemed very real. Both the U.S. and global economies are still shrinking, but at a less rapid rate.

Summers welcomes the relative improvement but is keeping the champagne corked. "I don't think there's anything that gives any grounds for serenity or complacency," he says.

In the interview, he sketches a comprehensive strategy linking the administration's ambitious health care and energy agendas to economic recovery. The president has been criticized for trying to do too much at once: repair the nation's banks, auto companies and insurers while simultaneously reforming the health care system and promoting green technologies and energy independence.

But Summers makes clear that health care and energy reforms are meant to have essential economic consequences.

"The last two economic expansions have been more bubble-driven than fundamentals-driven. So addressing this most serious of recessions in a maximally effective and credible way requires setting the stage for a different kind of expansion," Summer says.

By lowering costs, health care reform "will act as a spur to business investment." Likewise, resolving uncertainty over future energy costs will unlock pent-up corporate investment in "greener" systems. The idea is that surging investment can fill the hole in the economy left by the collapse of consumer spending — as soon as this year.

It's a coherent vision. But there are doubts about whether those reforms will actually occur this year, whether even if they do, businesses will be quite so optimistic about potential cost savings, and about how much new investment will result at a time when so much excess capacity already exists in the economy.

"They're hoping that investment will save the day, especially in 'green' technology, that increased government investment will produce attractive opportunities, and the investment community will step forward and that will compensate for a real pullback in consumption. … I wonder if he's going to have a timing problem," Smick says.

Strategic concerns

These doubts are among the factors increasing the likelihood of a second Obama administration stimulus package. Rogoff, a Republican, calls it "inconceivable" that there won't be a second stimulus about as big as the $787 billion legislation passed earlier this year.

Worries about the economic strategy are matched by brewing doubts about whether the administration is prepared to do enough to prevent a return to business-as-usual on Wall Street. In this view, the nation's largest financial institutions became too big and too politically powerful. Stiglitz, a longtime Summers critic, says the administration has made the too-big-to-fail problem worse by shoveling money at the biggest banks while encouraging weaker institutions to merge into larger entities. "The regulatory structure we're going to end up with is going to be less effective in dealing with the problem than we'd like," he says.

Administration allies, such as Rep. Barney Frank, D-Mass., chairman of the House Financial Services Committee, bluntly dismiss such concerns and say political support remains strong for far-reaching changes in financial industry oversight.

Summers is certainly aware of the challenges ahead. "We've learned from the last two cycles," he says, "that memories are short and that when the good times start rolling, people get complacent and do imprudent things."