Debt Ceiling - GSE Abuse

7/25/2019 Debt Ceiling - GSE Abuse

1/109

Magazine

Obama vs. Boehner: Who Killed the DebtDeal?By MATT BAI MARCH 28, 2012

Almost immediately after the so-called grand bargain between President Obama

and the Republican speaker of the house, John Boehner, unraveled last July, the

two sides quickly settled into dueling, self-serving narratives of what transpired

behind closed doors. In the months that followed, some of Washingtons most

connected Democrats and Republicans told me in casual conversations that they

didnt know whose story to believe, or even what, exactly, had been on the table

during the negotiations. A few mentioned, independently of one another, that the

entire affair reminded them of Rashomon, the classic Kurosawafilm in which

four characters filter the same murder plot through their different perspectives.

Over time, the whole debacle became the perfect metaphor for a city in which the

two parties seem more and more to occupy not just opposing places on the political

spectrum, but distinct realities altogether.

There is a practical reason for this. Both sides knew that if the most crucial and

contested details of their deliberations became public, it would complicate

relationships with someof their most important constituencies in Washington

or worse. Its one thing for a Democratic president to embrace painful cuts in

Medicareand Social Securitybenefits, or for a Republican speaker to contemplateraising taxes, if they can ultimately claim that theyve joined together to make the

hard decisions necessary for the country; its quite another thing to shatter the

trust of your most ideological allies and come away with nothing to show for it.

Obama and Boehner have clung to their separate realities not just because its

useful to blame each other for the political dysfunction in Washington, but because

neither wants to talk about just how far he was willing to go.
http://topics.nytimes.com/top/reference/timestopics/people/o/barack_obama/index.html?inline=nyt-perhttp://topics.nytimes.com/top/reference/timestopics/people/b/matt_bai/index.htmlhttp://www.nytimes.com/pages/magazine/index.htmlhttp://www.nytimes.com/adx/bin/adx_click.html?type=goto&opzn&page=www.nytimes.com/yr/mo/day/magazine&pos=Frame4A&sn2=8aedd159/145f16b9&sn1=264c2a73/6f60b337&camp=FoxSearchlight_AT2015-1977447-May-G&ad=4.29-MaddingCrowd-96x60-NOW&goto=http%3A%2F%2Fwww%2Efandango%2Ecom%2Ffarfromthemaddingcrowd2015%5F173688%2Fmovietimeshttp://www.nytimes.com/adx/bin/adx_click.html?type=goto&opzn&page=www.nytimes.com/yr/mo/day/magazine&pos=Frame4A&sn2=8aedd159/145f16b9&sn1=264c2a73/6f60b337&camp=FoxSearchlight_AT2015-1977447-May-G&ad=4.29-MaddingCrowd-96x60-NOW&goto=http%3A%2F%2Fwww%2Efandango%2Ecom%2Ffarfromthemaddingcrowd2015%5F173688%2Fmovietimeshttp://www.nytimes.com/adx/bin/adx_click.html?type=goto&opzn&page=www.nytimes.com/yr/mo/day/magazine&pos=Frame4A&sn2=8aedd159/145f16b9&sn1=264c2a73/6f60b337&camp=FoxSearchlight_AT2015-1977447-May-G&ad=4.29-MaddingCrowd-96x60-NOW&goto=http%3A%2F%2Fwww%2Efandango%2Ecom%2Ffarfromthemaddingcrowd2015%5F173688%2Fmovietimeshttp://topics.nytimes.com/top/reference/timestopics/subjects/s/social_security_us/index.html?inline=nyt-classifierhttp://topics.nytimes.com/top/news/health/diseasesconditionsandhealthtopics/medicare/index.html?inline=nyt-classifierhttp://topics.nytimes.com/top/reference/timestopics/people/b/john_a_boehner/index.html?inline=nyt-perhttp://topics.nytimes.com/top/reference/timestopics/people/o/barack_obama/index.html?inline=nyt-perhttp://topics.nytimes.com/top/reference/timestopics/people/b/matt_bai/index.htmlhttp://www.nytimes.com/pages/magazine/index.htmlhttp://www.nytimes.com/pages/magazine/index.html


2/109

The Secret Negotiations Begin

Boehner's Cryptic Message

Decoding Boehner's Proposal

The Trouble Getting to 'Yes'

Enter the Gang of Six

A Costly Miscalculation

The Grand Bargain Within Reach

Cantor and the Counteroffer

Boehner Betrayed?

The Republican version of reality goes, briefly, like this: Boehner and Obama

shook hands on a far-reaching deal to rewrite the tax code, roll back the cost of

entitlements and slash deficits. But then Obama, reacting to pressure from

Democrats in Congress, panicked at the last minute and suddenly demanded that

Republicans accede to hundreds of billions of dollars in additional tax revenue. Afrustrated Boehner no longer believed he could trust the presidents word, and he

walked away. Obama moved the goal posts,is the Republican mantra.

In the White Houses telling of the story, Obama and Boehner did indeed settle

on a rough framework for a deal, but it was all part of a fluid negotiation, and

additional revenue was just one of the options on the table not a last-minute

demand. And while the president stood resolute against pressure from his own

party, Boehner crumpled when challenged by the more radical members in his

caucus. According to this version, Boehner made up the story about a late-breaking

demand as a way of extricating himself from the negotiations, because he realized

he couldnt bring recalcitrant Republicans along.Boehner couldnt deliver,is what

Democrats have repeatedly said.

In recent weeks, as it became clear that I was planning to write a more

nuanced and detailed account of the final week of negotiations, both sides but

primarily the speaker and his aides went out of their way to give extensive

accounts to reporters at other outlets, in an effort to reinforce their well-rehearsednarratives. And yet its possible now to get beyond these clashing realities. Over the

last several months, I spoke with dozens of people who were involved in or were

kept apprised of events that week, some of whom made available private

documents from that time, including the various offers and counteroffers. I

conducted most of these interviews on the condition that I would neither reveal

nor quote the people who spoke to me, so that they would feel free to speak
http://www.nytimes.com/2012/04/01/magazine/obama-vs-boehner-who-killed-the-debt-deal.html?pagewanted=all#9http://www.nytimes.com/2012/04/01/magazine/obama-vs-boehner-who-killed-the-debt-deal.html?pagewanted=all#8http://www.nytimes.com/2012/04/01/magazine/obama-vs-boehner-who-killed-the-debt-deal.html?pagewanted=all#7http://www.nytimes.com/2012/04/01/magazine/obama-vs-boehner-who-killed-the-debt-deal.html?pagewanted=all#6http://www.nytimes.com/2012/04/01/magazine/obama-vs-boehner-who-killed-the-debt-deal.html?pagewanted=all#5http://www.nytimes.com/2012/04/01/magazine/obama-vs-boehner-who-killed-the-debt-deal.html?pagewanted=all#4http://www.nytimes.com/2012/04/01/magazine/obama-vs-boehner-who-killed-the-debt-deal.html?pagewanted=all#3http://www.nytimes.com/2012/04/01/magazine/obama-vs-boehner-who-killed-the-debt-deal.html?pagewanted=all#2http://www.nytimes.com/2012/04/01/magazine/obama-vs-boehner-who-killed-the-debt-deal.html?pagewanted=all#1


3/109

candidly.

What emerged from these conversations is a clearer and often surprising

picture of exactly how close Obama and Boehner came to finalizing a historic

agreement, what exactly was in it and why it ultimately fell apart including a

revelation that illuminates Boehners thinking in those final hours and directly

contradicts a core element of the version he has told, even to some in his own

leadership.The truth here matters for more than its historical value. At the end of this

year, no matter how the presidential election turns out, the two parties will face yet

another Armageddon moment in the fight over debt and spending; this time, if

they dont settle on a plan to rein in the nations nearly $16 trillion debt, then a

series of onerous budget cuts worth about $1.2 trillion over 10 years, divided

between defense and other programs will automatically go into effect. If we

understand what really went on last July, then well have a better sense of howdifficult it will be for the two parties to stave off the coming political calamity and

why, too, the situation may not be quite as hopeless as it seems.

The Secret Negotiations Begin

You may recall that Washington last summer was verging on something

resembling cold-war hysteria. Republicans in the House were refusing to meet an

August deadline for increasing the nations debt limitby some $2.4 trillion unless

they got an equivalent amount of budget cuts in return, raising the prospect of a

default that, it was assumed, would send the financial markets into a death spiral.

Vice President Joe Biden and Eric Cantor, the House majority leader and

Boehners No. 2 in the Republican caucus, had been holding talks in hopes of

finding some preliminary agreement that might avert disaster, but those talks

broke down in late June, primarily over the issue of taxes; the two men and their

staffs had identified something like $2 trillion in cuts over the next decade, but the

White House wasnt going to make a deal that didnt include some new taxrevenue, and Cantor was adamant that raising taxes any taxes was a deal-

breaker.

By then, however, Obama and Boehner had themselves started meeting

furtively in the White House, in secret negotiating sessions that grew out of a

much-discussed golf outing in June. Over a few drinks at the clubhouse at Andrews

Air Force Base, Boehner suggested they might be able to use the impending debt
http://topics.nytimes.com/topics/reference/timestopics/subjects/n/national_debt_us/index.html?inline=nyt-classifier


4/109

crisis to achieve something ambitious and significant not just the kind of cuts

that Cantor and Biden were discussing, but fundamental reforms to entitlement

programs and the tax code too, a sweeping modernization of the federal budget.

The president agreed that they should try to get something started, but the

breakthrough that seemed to make a transformational deal possible didnt come

until mid-July, in the form of a cryptic e-mail.

Budget deals happen in much the same way you might haggle over thepurchase of a house: one side bangs out a proposed contract and sends it to aides

on the other side, who cross out some numbers and phrases and insert new ones in

their place, until the two sides ultimately iron out their differences, or until

someone delivers a final offer and walks away. In this case, Obamas principal

negotiators Jack Lew, then his budget director, and Rob Nabors, his top aide on

legislation sent a proposal to Boehners team that included $1.5 trillion in new

revenue over 10 years. The White House negotiators knew this had about as muchchance of happening as a meteorite falling on the Capitol, but the real question was

whether Boehner was willing to go some distance toward meeting them on the

revenue side of the ledger, or whether he would stick to Cantors hard line against

any form of new taxes.

When the response came back to Nabors, Boehners aides had, as expected,

struck the $1.5 trillion from the offer. But in its place they had inserted a strange

formulation: they were proposing to reducefederal revenue, compared to current

law, by $2.8 trillion. On the surface, this sounded like a flagrant rejection of what

the White House was proposing Youre asking for more in taxes, were giving

you less but in fact Boehner was speaking in complex code.

Boehners Cryptic Message

There are two base lines or sets of assumptions that policy makers

generally use when they try to make projections about future revenue, and in order

to understand some of the most critical moments in the negotiations, its necessaryto understand the arcane difference between them. One is current law, which

refers to whats supposed to happen in the years ahead, assuming that certain

temporary tax cuts or increases really do expire as planned. The other is current

policy, which refers to what the numbers would look like if you took the rules as

they are today and froze them in place. The most important difference between

these two projections has to do with the Bush tax cuts, which Obama and
http://topics.nytimes.com/top/reference/timestopics/subjects/t/taxation/bush_tax_cuts/index.html?inline=nyt-classifierhttp://topics.nytimes.com/top/reference/timestopics/subjects/f/federal_budget_us/index.html?inline=nyt-classifier


5/109

Congressional Republicans agreed to extend, temporarily, at the end of 2010.

Under current law, those tax cuts would expire at the end of this year, leading to

a projected total revenue of more than $39 trillion over the next decade. But few

people in Washington actually expected Congress to let most if any of the

Bush tax cuts lapse anytime soon, and through the more realistic lens of current

policy, under which all the tax cuts would remain in place, that same 10-year

number became something like $35.5 trillion, or $3.5 trillion less.In his offer, Boehner had used the higher, less relevant current law base line.

Then hed proposed lowering revenue by $2.8 trillion, which reduced the 10-year

number to just under $36.3 trillion. What mattered from the White House

perspective was that this number was about $800 billion morein revenue than

either party was actually expecting to generate under current policy.

This was an exceedingly convoluted way of coming at the tax question, and

even Nabors, who is one of a small number of genuine budget experts inWashington, wasnt sure, as he stared at Boehners language, whether it meant

what he thought it meant. Sitting in his spacious West Wing office, Nabors might

as well have been one of John F. Kennedys advisers in 1962, reading and rereading

the cable from Khrushchev, trying to divine the carefully worded message within.

He showed it to Lew, and they quickly reached the same conclusion: Boehner was

saying that he was willing to accept $800 billion more in tax revenue. Or, to put it

another way, Boehner was proposing to increase the governments haul by the

same amount you would get if you reversed Bushs tax cuts for the most affluent

Americans, but he was proposing to do it by lowering rates and eliminating

loopholes and subsidies instead a revenue increase by other means. There was

no other way to read this except to conclude that the speaker was now backing off

his partys hard line against additional revenue.

Excited White House aides suddenly felt that a deal might really be possible.

But even with more revenue now on the table, Boehner and Obama continued to go

back and forth over the Rubiks Cube-like structure of a comprehensive deal whether entitlement cuts would have to come before tax reform, whether most of

the cuts would accrue in the first decade or the second and so on. Meanwhile,

political pressure was building from inside Boehners leadership circle. Cantor,

who had heard about the Obama-Boehner talks only when Biden happened to

mention it, was nonplused at having been excluded and appalled that Boehner was

offering more revenue. He and others pressed the speaker to drop the idea of a


6/109

comprehensive deal, and on July 9, Boehner did just that, calling Obama at Camp

David to tell him that the grand bargain was dead. He issued a statement

immediately after, saying it was time for both parties to set their sights on a less

ambitious solution to the debt-ceiling crisis, which now loomed less than a month

away.

Except the speaker couldnt bring himself to settle for something less

ambitious. Five days later, on July 14, he called the president yet again.

Decoding Boehners Proposal

Why couldnt Boehner let it lie? Its a question that still puzzles a lot of his

closest allies in Washington, not to mention his fellow Republican leaders on the

Hill. Obamas reasons for chasing the grand bargain were clear enough. Not only

was he bent on avoiding a catastrophic debt default, but he needed to get out from

under the debt issue, to demonstrate that he cared about reducing deficits beforepublic concerns about government spending, stoked by rhetoric on the right,

overwhelmed his presidency. Boehners motives were less obvious. The speaker

occupied what may have been the toughest spot in Washington trying to control

a nihilistic rebellion in his own caucus while watching the approval ratings for

Congress fall into the teens, all the while surrounded by young, ambitious leaders

who doubted his ideological resolve. The last thing Boehner needed, you would

think, was to close his eyes and take a Thelma-and-Louise-style plunge with a

president whom no one in his party could stand.

Nothing better illustrated Boehners position than his clandestine, convoluted

overture to the president on taxes. The offer for $800 billion in additional revenue

as opposed to, say, $700 billion or $900 billion was no accident. On one hand,

Boehners people must have known that Obama probably couldnt settle for

anything less than that, because Democrats in Congress would demand that any

deal recoup the cost of Bushs least defensible tax cuts. At the same time, Boehners

aides had calculated that, at $800 billion, they could plausibly argue to their owncaucus that the government could raise more money without actually raising

anyones taxes.

How could you make that case? Boehner would argue that some sizable chunk

of that money if not all of it would come to the government as a result of

economic growth spurred by new, lower tax rates, and from better compliance,

since the new tax code would be less confusing. Thus, by this feat of actuarial


7/109

magic, Boehner contended that raising revenue did not require raising taxes, and

in fact would enable you to lower them. The math was debatable, certainly, but it

was a central tenet of any deal Boehner would negotiate.

But then, having worked out a theoretical way to get to the $800 billion that

he knew the White House needed, Boehner wasnt comfortable even putting the

figure down on a piece of paper. The idea of any new tax revenue was so heretical

to his party, and Boehner was so fearful of the reaction, that his aides feltcompelled to come up with a roundabout way of expressing the offer in terms that

few people in Washington would be able to decipher, just in case the paper should

fall into the wrong that is, his own partys hands. Boehner knew that his

position might well imperil his standing as speaker, whether it led to a deal or not,

and yet he was taking it anyway.

Boehner would later tell me that he was determined to do this because he was

tired, after 20 years in Washington, of seeing one Congress and one president afteranother ignore the coming explosion of spending on entitlement programs and the

growing public debt. He also shared Obamas view that a grand bargain would

actually be easier to pass than a smaller deal that if lawmakers were going to

have to make a bunch of politically explosive cuts, they were more likely to go

through with it if they could go tell voters that theyd achieved something truly

transformative. As Biden put it, Theres no point in dying on a small cross.

The Trouble Getting to Yes

But politics is often as much about self-perception as it is about policy, and it

wasnt hard to discern a more personal reason for Boehners attachment to the idea

of a grand bargain. Having fashioned himself as a reformer since coming to

Congress in 1991, Boehner was now 61, and with Congress flipping back and forth

between the parties, it wasnt a given that he would hold the speakership for more

than a few years. What would Boehners legacy be, or would he even have one?

Some speakers, like Tip ONeill or Newt Gingrich, carve out places in history asindispensable partners in creating momentous legislation. Others, like Denny

Hastert, are destined to be lost to the ages. Those who know Boehner say that what

he saw in the grand bargain was a chance to be remembered as a statesman who

helped set the country on a different course, rather than as a party functionary who

shakily presided over a fractious caucus.

Obama and Boehner had spent little time together before the talks began, and


8/109

they had only a vague sense of each other. Aides on both sides described a kind of

forced familiarity between the two men, who would begin meetings with the

shallowest of chatter Play any golf this weekend, John? before moving

quickly into the substance of budget politics. White House aides thought Boehner

looked as if there were someplace hed rather be, while Boehners aides were put

off by what they saw as Obamas lecturing style. Still, the two men

Midwesterners, former state legislators, introverts by nature and smokers by habit seemed to think they could trust each other.

In fact, when Boehner called back on that Thursday afternoon, the 14th, in

hopes of restarting the negotiations, it wasnt Obama but rather one of his chief

aides who Boehner had decided was the problem. For weeks leading up to the

breakdown in talks, Boehner and his top lieutenants Barry Jackson, his chief of

staff, and Brett Loper, his policy aide had been talking principally to Jack Lew

and Rob Nabors at the White House. But they had become exasperated with Lew,who, in their view, talked a lot but offered few concessions. Lew, whose detailed

knowledge of the budget outpaced anyone elses in the room, always seemed to

have a better idea than whatever Boehner was proposing, and these ideas seemed

to Boehner like more complicated ways of describing positions they had already

rejected. The problem with Lew, Boehner bluntly told the president when he called,

is that he just didnt know how to get to yes.

Boehner thought he had a better shot with Bill Daley, the presidents chief of

staff, and Timothy Geithner, the Treasury secretary. Daley had made a point of

reaching out to Boehner since joining the administration, and he was known to be

a pragmatist and a dealmaker. Geithner, clearly rattled by the possibility that

Treasury might default on its debt, had been issuing almost daily warnings to

Congressional leaders about the mounting fear in the markets. Send me Daley and

Geithner, Boehner told the president, and lets see what we can do.

The next afternoon, a Friday, Daley and Geithner went to the Capitol to meet

with Boehner and Cantor. In addition to requesting a change in negotiators,Boehners team had come up with a new, simpler way to structure the deal that

they hoped would eliminate some of the persistent conflicts over timing in the

earlier talks. Before, Boehner had wanted to legislate cuts in annual spending and

entitlements up front, while leaving tax reform for Congressional committees to

work out over a period of months a formulation that worried Obama and his

allies. But now the speakers team suggested that the two sides come up with a


9/109

framework of broad principles and specific target numbers on both the cuts and

revenue, and then let Congress work out all the details at the same time. Using that

template, the two sides quickly found a large swath of common ground. Two days

later, on Sunday afternoon, Boehner and Cantor went to the White House to

continue the conversation, and Obama joined the group after he returned from

church.

No one was under the illusion that a final agreement had been nailed downand was ready for signatures, but when Obama and Boehner shook hands that

afternoon, there was a general feeling that they would work through the remaining

details relatively easily. Before the meeting at last broke up, Obama mentioned to

the others that they would have to carefully think about how to roll out the deal, to

make sure that both sides were saying the same thing publicly. That night, Jackson

and Loper sent over a three-page proposal based on the discussions; in exchange

for agreeing to the $800 billion in additional revenue, they asked for more than$450 billion in combined cuts to Medicare and Medicaidover the next decade

alone, as well as a series of changes to Social Security, including a new formula for

calculating benefits and a higher retirement age.

There was no question that the framework negotiated by Obama, Daley and

Geithner and laid out in the Republicans offer sheet unsettled the stomachs

of some White House aides. No one liked the idea of acceding to Medicare cuts,

and most didnt think Social Security should be part of the deal at all. (Democratic

orthodoxy holds that Social Security has nothing to do with the federal debt, since

it generates its own revenue from the payroll tax.) But Obamas senior aides,

including the political adviser David Plouffe, had come to believe that a grand

bargain, however imperfect, was preferable to a smaller deal and far preferable

to a debt default. The debate now was about what it would take to get the votes.

Nabors and his legislative team had real doubts that Democrats in Congress would

go for anything close to what Boehner was asking for, and they were just as

skeptical that Boehner could get his own caucus behind it. As Jackson and Loperwaited anxiously at the Capitol for a counteroffer, the internal White House

discussions dragged on into Monday night.

Enter the Gang of Six

For more than six months, ever since Alan Simpson and Erskine Bowles, the

chairmen of Obamas fiscal commission, offered their stark recommendations for
http://topics.nytimes.com/top/reference/timestopics/subjects/f/federal_budget_us/index.html?inline=nyt-classifierhttp://topics.nytimes.com/top/news/health/diseasesconditionsandhealthtopics/medicaid/index.html?inline=nyt-classifier


10/109

remaking the budget at the end of 2010, a group of senators Mark Warner,

Richard Durbin and Kent Conrad on the Democratic side, along with the

Republicans Saxby Chambliss, Tom Coburn and Mike Crapo had been trying to

build some consensus around a plan. Over dozens of dinners and negotiating

sessions, some of which were held at Warners stately home in Alexandria, Va., the

so-called Gang of Six labored over a compromise they could sell to their colleagues,

while leaders of both parties eyed them warily.But a deal remained maddeningly out of reach, mainly because it was proving

impossible to bridge the distance between the two members of the gang who were

furthest apart on the ideological spectrum. Durbin, a member of the Democratic

leadership and a close friend of the presidents and the only avowed liberal in the

group was determined to protect tax credits for the poor and the working class.

Coburn, a rigid fiscal conservative from Oklahoma, wanted $130 billion more in

cuts to entitlements than the rest of the group. In May, Coburn excused himselffrom the deliberations in order to come up with his own deficit-slashing plan.

By mid-July, just as Boehner was preparing to invite Daley and Geithner up to

the Hill, the groups informal chairmen, Warner and Chambliss, decided they

couldnt wait any longer to share the gangs uncompleted work with the rest of the

Senate. They scheduled a briefing for senators only no staff on Tuesday

morning in the Capitol.

The White House knew about the briefing (Durbin had kept the West Wing

informed), but it didnt seem especially consequential to aides who were now

thoroughly immersed in their own secret negotiations. After all, the gang had made

noise about being close to a deal many times before, and nothing had ever come of

it. Even now, its members admitted to having only the broadest outline of a plan,

and the briefing was slated for 8:30, when most senators are still groping for coffee

or pounding the treadmill. Even Warner thought it was bound to be more of a

sideshow than a main event.

And so no one was more surprised than the gang members themselves whenalmost half the Senate, roughly divided between the parties, trickled in as Warner

and Chambliss outlined the new revenue and spending cuts in their emerging plan

to cut $4.6 trillion from the budget. The first one to rise, after the presentation was

finished, was Coburn. The unpredictable sixth man gave an impassioned

endorsement of the plan, telling his colleagues it wasnt perfect, but it was the best

they were going to accomplish. Then Durbin stood up and echoed the sentiment.


11/109

One by one, senators from both parties added their support.

Its not hard now to understand what happened in the room. As House

Republicans and the administration debated the debt, most of the Senate felt

sidelined and powerless. What the Gang of Six was offering was the promise of

action, a way for the Senate to re-emerge as a serious player in a national drama.

A Costly MiscalculationWord quickly traveled down Pennsylvania Avenue to the White House, where

Nabors, who was still honing a response to Boehners offer from Sunday night,

called Barry Jackson in the speakers office and asked what was going on. Jackson

wasnt sure. Within a few hours, though, the White House had the sense that

something important had shifted. More than 20 Republican senators, by some

counts, had stood up in favor of a plan that would raise more revenue, and Obama

thought he now had an opportunity to exert more pressure on House Republicansby highlighting the widening split inside their own party. Shortly after noon,

Obama took the unusual step of marching out to the briefing room to declare his

support for the Gang of Six, instantly elevating what was supposed to have been an

informal, sparsely attended briefing into the days national news. It was, in

retrospect, a costly miscalculation.

Even before the president had stopped speaking, it was beginning to dawn on

White House aides that what had looked like an opportunity was actually a serious

problem. Like Boehner, Obama was risking an insurrection in his own party once

the details of their plan became public. For a lot of Democratic lawmakers, even

conceding the central Republican point about the debt that it was the hallmark

of unsustainable government spending was a kind of apostasy. The way they saw

it, Republicans had created the deficit problem with ill-advised tax cuts and

disastrous wars, and now they were using it as a pretense to roll back social

programs for the poor and middle class. And as for Medicare, leading Democrats

on the Hill hoped to make it a pivotal issue in House and Senate races in 2012, nowthat Paul Ryan, the Republican chairman of the House budget committee, had

proposed replacing the program with a voucher system. (A sign in the window at

the Democratic headquarters in Washington read: Vote Republican, End

Medicare.) Why, they wondered, would the president want to forfeit that

advantage by agreeing now to cut those programs himself?

If it was never going to be easy for the White House to sell the grand bargain to


12/109

Democrats on the Hill, then the plan put forward by the Gang of Six was likely to

make it impossible. On the surface, the gang had proposed an overall revenue

increase of $1.2 trillion, 50 percent more than the $800 billion Obama and

Boehner were talking about. Democrats were bound to ask why the president had

settled for less in taxes than the Gang of Six did.

But once Obamas aides looked more closely at the numbers, they understood

that the political problem posed by the gangs plan was actually far worse. This iswhere the whole distinction between base lines current law and current

policy comes in again. The gang had settled on a base line that was somewhere

between current law and current policy; it had assumed the Bush tax cuts for

the most affluent were expiring, while the other tax cuts would persist. The White

House, meanwhile, had been calculating their figures based on current policy,

under which all the tax cuts would remain in place. This meant that when you

actually compared the two plans in an apples-to-apples way, the Gang of Six wasproposing to raise revenue by about $2 trillion $1.2 trillion more than the

president and the speaker had tentatively agreed to.

How could Obama possibly ask Democratic leaders to pass a deal with $800

billion in new revenue, when a bunch of Republican senators not to mention the

president himself, on national TV had just stood up to applaud a plan with $2

trillion attached? Never mind that the Gang of Six plan was little more than a

memo, with no chance of becoming an actual bill let alone passing the House or

Senate. Liberals would laugh the president out of the room. The numbers would

confirm the suspicion, already voiced by some lawmakers privately, that Obama

wanted a bipartisan victory too badly and would accept a deal on any terms, even if

it sold out his partys principles.

Early Tuesday afternoon, Nabors called Jackson, this time sounding grim.

They were going to have a problem on the balance between revenue and spending,

he said. Daley delivered a similar message to Jackson. What do we do now? he

wanted to know. The president just wouldnt be able to sell that deal to enough ofhis own senators and congressmen to get it across the finish line.

As White House aides would later present it, Boehners guys took this news

with equanimity, indicating they were skeptical but willing to talk. The speakers

aides, however, say they were reeling. A deal is a deal, a mystified Jackson told

Daley. He and Loper hoped the alarm in the White House might be a temporary

overreaction and that Obama might relent once he and Boehner had a chance to


13/109

talk. They were still trying to process what had happened when, later that night, an

e-mail from Rob Nabors popped into Jacksons in-box. The presidents

counteroffer had finally arrived.

The Grand Bargain Within Reach

For all the talk since last July about who blew up the deal, it has been difficult

to get a clear sense of what specifically the agreement was supposed to include.And so the three-page counteroffer that Rob Nabors sent to Barry Jackson and

Brett Loper that Tuesday night, which turned out to be the last set of numbers

exchanged between the two sides, represents the most detailed picture yet of what

a grand bargain might have looked like. Its a remarkable snapshot of the moment,

not for the points of contention it exposes, but rather because it illustrates how

much agreement Obama and Boehner had actually managed to find.

They had agreed to reduce discretionary spending meaning both the defensebudget and money used to finance the rest of the government by about $1.2

trillion over 10 years; it would be up to Congress to figure out how. They also

agreed to a list of programs from which they could cut at least $200 billion more in

the coming decade. These included an estimated $44 billion from pensions for

civilian and military employees of the government; $30 billion from Fannie Mae

and Freddie Mac; $33 billion from farm subsidies and conservation programs; and

$16 billion from reforming the Postal Service.

On entitlements too they had moved closer to a final deal. The White House

agreed to cut at least $250 billion from Medicare in the next 10 years and another

$800 billion in the decade after that, in part by raising the eligibility age. The

administration had endorsed another $110 billion or so in cuts to Medicaid and

other health care programs, with $250 billion more in the second decade. And in a

move certain to provoke rebellion in the Democratic ranks, Obama was willing to

apply a new, less generous formula for calculating Social Security benefits, which

would start in 2015. (The White House had rejected Boehners bid to raise theretirement age.) This wasnt quite enough for Boehner, nor was it as extensive as

what the Gang of Six had proposed. But the speakers team didnt consider the

differences to be insurmountable, assuming the two sides could also settle on a

revenue number.

The section on revenue, though, was one of two significant disagreements that

were less easily brushed aside. Boehners offer two days earlier, on Sunday,


14/109

included several points to which he believed Daley and Geithner had essentially

agreed. But in his counteroffer, written hours after the Gang of Six briefing, Obama

had made some extensive changes to this section. To the $800 billion figure, he

said he now wanted to add an amount equal to the cuts in Medicare and Medicaid

an additional $360 billion, at least for a total of $1.16 trillion in total revenue.

Aside from increasing the sheer amount, what Obama was doing, for the first time

in the negotiation, was explicitly linking the amount of new revenue to the cutsBoehner wanted in entitlement programs. In other words, Obamas new formula

meant that for every additional dollar in savings Boehner wanted to negotiate from

Medicare or Medicaid, he was going to have to add a dollar of revenue.

This in itself was certainly enough to throw the deal into jeopardy. But the

White House made still other changes that were problematic. Most notably,

Boehners team had insisted that when lawmakers sat down to design a new tax

code, the $800 billion in additional revenue had to be a ceiling rather than afloor in other words, the final number generated through tax reform couldnt

be more than $800 billion, but it could be less. Thats because, as part of revising

the code, Boehner intended to ask Congress for something called a macro

estimate of the grand bargains impact basically, a best guess as to the future

revenues that would accrue once the lower rates kicked in and the economy started

humming along. Democrats normally despise such projections, because they are

used to support the conservative theory of supply-side economics. But the macro

estimate was essential to Boehner; he needed it to make the argument that a

decent chunk of the additional revenue could come through growth and stepped-

up compliance, and thus Congress wouldnt need to actually raise anybodys rates

to get it done. Boehner left that Sunday meeting convinced that Geithner, in

particular, understood and accepted this condition.

But in his counteroffer, Obama had reversed the formulation so that the tax

revenue figure now at $1.16 trillion would be the minimum that rewriting the

code could achieve (a floor), rather than a maximum (a ceiling). With a slight turnof phrase, he rejected Boehners entire premise that growth could be counted on to

deliver some of the revenue. Boehner could seek all the macro estimates he wanted

if it made him feel better, but he wouldnt be able to use those estimates to lower

the amount of new tax revenue that Congress would need to collect.

White House aides would later insist that, despite their rough agreement on a

framework the previous Sunday, the discussion about tax reform had always been
http://topics.nytimes.com/top/reference/timestopics/subjects/e/economics/supply-side_economics/index.html?inline=nyt-classifier


15/109

fluid and unsettled, an ongoing negotiation in which both sides were still feeling

out each others limits. The Gang of Six briefing had no doubt complicated this

negotiation, they agreed, but it wasnt as if they had signed on to something and

then taken it back. If this is true, though, then its true only in the technical sense.

If you shake hands with a guy on the price of a car, and you agree to talk again after

the car has been inspected and the loan has been approved, you dont really expect

to show up and find out that car now costs $5,000 more. This is essentially whathappened to Boehner. What both Tuesdays panicky calls from the White House

and the subsequent counteroffer make clear is that Obama knew he was changing

the terms and felt he had no choice.

The other remaining area of contention had to do with the problem of

enforcement provisions, or triggers, in the deal. Because tax reform would take

some time for Congress to puzzle out, while the spending cuts were relatively

straightforward, the White House had been concerned from the start about beingdouble-crossed. How could Democrats be assured that the Republican-controlled

House wouldnt simply announce a deal, enact only the spending cuts they wanted

and then sabotage the revenue piece? The answer, Obamas team decided, were a

couple of triggers something both sides really hated that would

automatically kick in if they didnt come up with a version of tax reform that each

party could stomach.

Specifically, Obama had two triggers in mind. The first, for Democrats, would

have rescinded the Bush tax cuts for the highest earners. Boehner rejected this

idea. He pointed out that Democrats themselves would have little incentive to pass

tax reform if, by not passing it, they could achieve one of their most cherished

policy objectives the elimination of the Bush tax cuts.

The second trigger, to appease Republicans, would include an automatic $425

billion in cuts to Medicare and Medicaid over 10 years. But Boehner repeatedly

said that he wanted his own political trophy as a trigger, something that had the

same resonance for the right as the Bush tax cuts had for the left namely theelimination of the individual mandate, the central plank in Obamas health-care

law that required every American to be insured. Striking down the provision was a

top priority for the Tea Partiers in Congress, who saw it as evidence of Obamas

tyrannical tendencies. Obama wouldnt entertain the possibility. The argument had

been going on since the first round of negotiations between the two men and their

staffs, but now that a deal seemed imminent, the question of how to enforce it had


16/109

taken on a new urgency. At its core, the trigger debate was a matter of trust; each

man had to be assured that the other wasnt going to let his party renege on the

tax-reform agreement when the inevitable arguments arose. And because they

hadnt worked together much and barely knew each other on a personal level, the

only way for Obama and Boehner to feel reassured was if the political cost of

pulling out was intolerably high to both of them.

Obama and Boehner argued heatedly but respectfully over both sticking points the revenue number and the triggers during a two-hour meeting in the Oval

Office on Wednesday, July 20. By the next morning, both men were facing

rebellions on the Hill. The Timess Carl Hulse and Jackie Calmes had written a

front-page article disclosing the existence of the new round of talks and asserting

that a deal was very near. Arriving for the weekly lunch of the Democratic Senate

caucus, Jack Lew found himself berated by senators who were angered by the talk

of entitlement cuts in exchange for the relatively paltry $800 billion in tax money,and livid at having heard about it from The Times. Senator Harry Reid, the

majority leader, had been fully briefed (along with the House leader, Nancy Pelosi)

only the night before. He remained stonily and pointedly silent in the meeting,

while Lew absorbed one verbal blow after another.

At that very moment, Boehner was dialing Rush Limbaughs radio show,

unbidden, in an effort to quell the eruption on the right. It wasnt only the

additional revenue that conservatives hated. Having campaigned in 2010 against

Obamas health-care plan, which included future Medicare cuts, conservatives in

Congress were no more eager than Democrats to give the issue away in advance of

2012. (Their resistance to this part of the grand bargain highlighted what is

perhaps the central paradox of budget politics on the right: Republicans have

defined themselves almost entirely by their determination to reduce debt, but

virtually every means of actually getting there taxes, defense cuts, restructuring

entitlements strikes them as politically unpalatable.) There is absolutely no

deal, Boehner assured Limbaugh on air.And yet, even then, as powerful contingents in both parties rose up to oppose a

deal that was already tenuous, negotiations were proceeding amiably and apace. At

the White House that Thursday morning, July 21, Jackson, Loper, Nabors, Sperling

and Lew, among other aides, agreed to set aside the revenue question and focus on

hammering out some of the smaller discrepancies in the two offers. By now, a level

of trust had grown among them; the mere fact that they had exchanged so much


17/109

paper, and that none of it had been leaked to reporters or bloggers, seemed to

cement their working relationship. To hear aides on both sides tell it, anyone who

wandered into Naborss West Wing office would have thought they were moving,

inexorably and constructively, toward a final agreement.

In fact, Obama felt confident enough to tell Reid and Pelosi, during a meeting

in the Oval Office that Thursday evening, that a grand bargain was imminent. The

president told his Congressional leaders that he had given Boehner a choice: eitherthe two sides could go for the bigger bargain that Obama wanted, with the nearly

$1.2 trillion in revenue and the spending cuts they were already close to nailing

down, or they could do a smaller version, with the original $800 billion in revenue

but a smaller slate of cuts. Obama told Reid and Pelosi that he understood that this

would seem like a choice between a bad deal and a worse deal, but he wanted a

commitment from them that they would get behind the agreement. Neither of the

Congressional leaders was wild about the prospect, but they quietly pledged theydhave the presidents back.

Cantor and the Counteroffer

Like much of Washington, White House aides were perplexed by the

relationship between Boehner and the man who was 14 years younger and next in

line for his job, Eric Cantor. During one of a series of tense White House meetings

with Congressional leaders in July, Obamas aides had been stunned even a little

embarrassed to see Cantor, when asked for his opinion, directly contradict the

speaker in front of the president. He insisted that the caucus would not accept the

kind of sweeping deal that both leaders wanted. It struck Obamas aides as breach

of Washington decorum, and it appeared to betray deeper divisions inside the

Republican caucus. When Daley and Geithner were first invited by Boehner to his

Capitol office to restart the negotiations in mid-July, they were surprised to find

Cantor there too. It was one of the main reasons that the White House dared to

hope a deal might work. They assumed that Cantors presence meant that the twoRepublican leaders were now speaking with the same voice.

Cantor hadnt changed his mind about the grand bargain, however. Boehner

had invited him to the meeting, just as he had invited Daley and Geithner, and

there was little the majority leader could do in that situation other than accept.

And from Cantors perspective, it was better to be inside the room than not, which

is what had happened during the first round of talks, when for 10 days he had been


18/109

ignorant of the negotiations going on.

Cantors objections werent simply obstructionist. He didnt like the revenue

piece partly on principle, and partly because he thought it would reignite the

grass-roots insurgency that Washington Republicans had been desperately trying

to keep under control, endangering the re-election of some members. A fight over

taxes with the partys leaders arguing that government should get more money,

rather than less might lead to outright insurrection and a breakaway third party.Cantor also didnt trust the White House to stand by a deal, warning that they

would ultimately come back with more demands. Perhaps most important, Cantor

was highly skeptical that a grand bargain with Boehners $800 billion gambit

already being called a tax increase by The Wall Street Journals editorial page

had any chance of passing the House.

This last point hinted at what was perceived inside the caucus as Boehners

primary vulnerability. Boehner had traveled an idiosyncratic path to thespeakership, having never served as a House whip, the pivotal job of corralling and

counting votes. He wasnt much of a closer, either; the more aggressive tactics that

getting to yes sometimes required didnt come naturally to him. Boehner seemed

to believe that his prestige as speaker would carry the day on key votes, but already

that assumption had gotten him into trouble a few times, and other members of his

leadership team had little faith in his predictions. Before the Gang of Six fiasco,

Boehner estimated that he could round up something like 150 votes (out of 240

Republican members) for the grand bargain. Cantor and many other senior

Republicans thought the number could be less than half of that.

By Thursday afternoon, when Cantor entered Boehners office to consult on

their next move, the speaker was in something of a box. The White House position

was leaving Boehner little room to maneuver within his own caucus, and yet he was

loath to see the deal unravel after getting so close, and with so little time left before

the debt-limit standoff became a full-blown national crisis.

The speakers story about this moment in the negotiations has always beenremarkably consistent, and he and his aides have repeated it frequently in recent

weeks, including to me. The additional revenue that Obama demanded was a

nonstarter, he says. He did a gut check and decided that he could no longer

trust the president, who obviously didnt have the courage to stand behind the deal

they had made. And so Boehner had no choice but to walk away from the

negotiations. He and Cantor, of like mind, reached this conclusion together.


19/109

Its a clean story of a man standing by his conservative principles. And yet the

additional revenue wasnt, strictly speaking, a nonstarter. After all, Boehner

wanted a deal badly enough to stay at the table for 48 hours after Obama moved

the goal posts, which casts doubt on his claim that this breach of trust was an

obvious dealbreaker. And at some point that Thursday, Boehner and his most

senior aides at least entertained what would have been an astounding counteroffer

to the president.As part of a broader proposal, which has remained until now a closely held

secret, Boehner was apparently open to meeting the president at the new, higher

revenue target a concession that most likely would have meant abandoning the

idea that no taxes would have to be raised. Had that counteroffer ever made it to

Obamas desk, its not hard to imagine that the grand bargain would have gotten

done within 24 hours, at great political risk to both men. Whether it could have

passed the House whether, in fact, any deal would ever have reached thepresidents desk is a question that will never be answered.

What happened, instead, based on extensive reporting, was this: Boehner

raised the possibility of his counteroffer with Cantor on that Thursday afternoon,

and Cantor dismissed the suggestion out of hand. He had always warned that the

White House couldnt be trusted and would come back for more, and Obamas

reversal on the revenue number had vindicated that view. Cantor made it clear he

wasnt going to support any more counteroffers. He was pretty sure the caucus

wouldnt either. No longer was Cantor content to be the skeptic in the room. He

was now certain that the grand bargain was a practical impossibility.

Boehner talked to Obama a short while later. The president laid out the

options as he would later relay them to Reid and Pelosi: more revenue and a bigger

package, or the $800 billion and a smaller one. Boehner heard him out, but by

then he must have known, from his discussions with Cantor and others, that

neither option was going anywhere in his own caucus. It was one thing to risk your

speakership on a grand bargain, which Boehner had without question been willingand even eager to do. It was another thing to throw that speakership away with

little chance of success, which is what Obama was now asking of him.

The final act of the saga played out like the awkward undoing of a brief teenage

romance, minus the texting and Facebook un-friending. At about 10 p.m. that

Thursday, Obama placed a call to Boehners cellphone to check in; when Boehner

didnt pick up, the president left a voice-mail message. Late the next morning,


20/109

Obama casually asked Daley if hed heard from Boehner; Daley told him there was

no word, and he added that he couldnt reach any of the speakers aides either. And

so the president waited anxiously, wondering why the speaker wasnt returning his

call. As the hours passed, the mood in the West Wing turned from puzzlement to

concern to anger. By the middle of the afternoon, rumors began to reach the White

House from the Hill. Boehner had scheduled a briefing for reporters. He was telling

people the deal was dead, and he was meeting with Reid and Mitch McConnell, theRepublican leader in the Senate, to see if there was some other way to raise the

debt limit.

When Boehner finally called back late that Friday afternoon, it was a

perfunctory call between wounded suitors. Each man hung up and immediately

went out to tell his side of the story, offering the versions Obama moved the goal

posts, Boehner couldnt deliver that would soon become fixtures of Washingtons

double-sided reality. Both were essentially true, and yet incomplete.Why didnt Boehner call back earlier on Friday? Any kid who has ever traded a

Pokmon card knows that you dont walk away from a negotiation without at least

leaving your best offer on the table. Boehner would say that he had run out of time

and was certain Obama wouldnt budge. But theres a more persuasive theory,

which is that Boehner didnt want to talk with Obama because he feared exactly the

opposite that Obama would respond by offering him the original terms from the

previous Sunday, and that Boehner would then find himself trapped. He had to

now know that, despite his sense of himself as a persuasive statesman who could

get his caucus to follow his lead, he couldnt get any deal past even his own

leadership. It was safer for Boehner to walk away and accuse Obama of having

sabotaged the deal than to risk that Obama would retreat to the earlier terms on

which they had agreed, forcing the speaker to backtrack himself.

In the end, thats essentially what happened, anyway. The following day,

Congressional leaders informed Obama that they were ready to offer a deal on their

own. It would force another vote on the debt ceiling in 2012, and it would create asupercommittee of six lawmakers charged with finding massive spending

reductions; if the committee failed, a slate of painful cuts would go into effect at the

end of 2012. (Ultimately, the debt ceiling vote was pushed back to 2013, but the

rest of the bill passed.) Obama hated it and made his anger known to the

lawmakers who laid it out for him in the Oval Office. After that meeting, he called

Boehner yet again, asking if they could just go back to the previous Sundays


21/109

handshake agreement. Boehner told him it was time to move on.

Boehner Betrayed?

From Boehners perspective, its not hard to see why he came away feeling

Obama betrayed him. He had to have known that this was going to set my hair on

fire, Boehner told me when we sat together in his office on the first day of March.

He was seated in a leather chair by a marble fireplace, his cigarette smoldering inan ashtray at his side. Three aides sat nearby.

You have to understand, he went on, there were hours and hours of

conversation, and he would tell me more about my political situation than I ever

would think about it, all right? So when you come in and all of a sudden you want

$400 billion more he had to have known! Boehner shook his head, as if he was

still puzzled by it all.

Well, he didknow, the speaker finally decided. He had to have known thathe was driving this thing off a cliff.

And yet, in the end, while both leaders had profound reservations about a

grand bargain that would threaten their parties priorities, whats undeniable,

despite all the furious efforts to peddle a different story, is that Obama managed to

persuade his closest allies to sign off on what he wanted them to do, and Boehner

didnt, or couldnt. While Democratic leaders were willing to swallow either a deal

with more revenue or a deal with less, Boehners theoretical counteroffer, which

probably reflected what he would have done if empowered to act alone, never even

got a hearing from his leadership team.

Shortly before this article was published, Boehner issued a statement to me

saying there was zero chance of them actually making a counteroffer late that

week. But when I asked Boehner on the first day of March whether he had floated

his counteroffer past Republican leaders other than Cantor, his reply was more

ambiguous.

I dont know that it ever got that far, Boehner said after a pause. Eric and Iwere comfortable with where we were. Did we think we were out on a limb? Yes.

Did we think the president, if we came to an agreement, was going to be out on a

limb? Yes. But I dont think us sitting in this room with the rest of the leaders,

discussing exactly where we were . . . Im not going to say it didnt happen. But the

reason I feel that way is because I had a pretty good feel for what I thought the

reaction was. Later, he told me flatly, I look at what happened last summer as the


22/109

biggest disappointment Ive had as speaker.

Now, with another debt battle looming, the chance of resurrecting some kind

of grand bargain doesnt seem very promising. Obama and Boehner have spoken

only a handful of times. The administrations most driven dealmaker, Bill Daley,

never recovered from the episode, which poisoned his relationship with Harry

Reid, who blamed Daley for having kept him and other Senate leaders in the dark

as the negotiations unfolded. Daley resigned in January and was replaced by JackLew the guy whom Boehner and his aides tried to sideline.

When I talked to Boehner about the two potential crises coming at years end

(the possibility of automatic budget cuts and, weeks later, another vote on the debt

ceiling), he told me he was placing his hopes on getting a new president. I dont

see any real evidence that this president has the courage to lead, he growled. He

added that any comprehensive deal might be even harder to sell to his members

this time around.And yet the failed attempt at a grand bargain wasnt necessarily an

unmitigated disaster. The ugly, months-long process of trying to avoid a meltdown

over the debt ceiling may have further embittered a lot of ordinary Americans, but

it also forced policy makers on both sides to wrestle with their own capacity for

compromise. For weeks, in both the White House and in the speakers office, the

most influential aides in the country burrowed into spreadsheets and considered,

in unusually specific terms, what kinds of budget cuts and revenue numbers they

could live with.

They didnt get the sprawling deal they were after, but they did produce a

serious blueprint for bipartisan reform, a series of confidential memos that left

them just a few hundred billion dollars apart. That may sound like real money, and

it is, but when you consider that the government can get some $25 billion back just

by selling its broadcast spectrum, you begin to understand how bridgeable that

difference is. Whats clear now is that the only thing holding Washington back

from a meaningful step toward reducing debt and modernizing government isntany single policy dilemma, but rather the political dynamic that makes

compromise such a mortal risk.

That dynamic could change after November. And however counterintuitive

this may seem, it may be more apt to change if the cast of characters remains the

same. Assume for the moment that Mitt Romney is elected president and is forced

to confront, even before staffing his administration or taking the oath of office, an


23/109

imminent budget crisis. Romney would have been elected despite the deep

ambivalence of his own partys conservative base, whose support he would need in

order to govern, and who would be watching his every blink for proof of ideological

fealty. Does anyone really think he could risk infuriating that base, in his first move

as president-elect, by hammering out a compromise that increases tax revenue and

cuts Medicare?

Should Obama win re-election, on the other hand, he would face theimpending crisis knowing that he had just run the final campaign of his life and

that he had 18 months, at best, to solidify his legacy. Boehner might well find

himself, two years removed from the Tea Partyelections of 2010, with fewer

extremists in his own caucus. And for all their residual bitterness and mistrust,

they would both know that they still had a draft agreement that left them about 80

percent of the way there.

Near the end of our interview, I asked Boehner what he thought would happenwhen the two sides clashed again in several months. He took a drag on his

cigarette.

Were heading toward a very big moment, where big decisions are going to

have to be made about the future of our country, he said blandly. Then he

surprised me by rising quickly to his feet and clapping his hands. All right! he

said, reaching for my hand. He was through talking, at least for now.

Correction: April 15, 2012An article on April 1 about the debt-deal negotiations last summer misstated the effect

on revenue if some tax cuts enacted under George W. Bush were allowed to persist.

Those cuts, for taxpayers making $200,000 or less, would be more costly, not less,

than the cuts for the most affluent taxpayers.

Matt Baiis the magazines chief political correspondent. He last wrote about the former

weapons inspector Scott Ritter.

Editor: Joel Lovell

A version of this article appears in print on April 1, 2012, on page MM22 of the Sunday Magazine with the

headline: The Game Is Called Chicken.

2015 The New York Times Company
http://www.nytimes.com/content/help/rights/copyright/copyright-notice.htmlmailto:[email protected]://www.nytimes.com/2012/02/26/magazine/scott-ritter.htmlmailto:[email protected]://topics.nytimes.com/top/reference/timestopics/subjects/t/tea_party_movement/index.html?inline=nyt-classifier


24/109

OFFICE OF

NSPECTOR GENERAL

D E P A R T M E N T O F T H E T R E A S U R Y

WASHINGTON, D.C. 20220

August 24, 2012

OIG-CA-12-006

The Honorable Orrin G. Hatch

Ranking Member

Committee on Finance

United States Senate

SD-219 Dirksen Senate Office Building

Washington, DC 20510

Dear Senator Hatch:

This letter and its enclosures respond to your letters of October 18, 2011, and

January 18, 2012. In those inquiries, you asked the Council of Inspectors General

on Financial Oversight (CIGFO) to review the responses to inquiries that you made

to voting members of the Financial Stability Oversight Council (FSOC) in late July

and early August of 2011 regarding the debt limit.

Our response to your specific questions is provided as Enclosure 1. Your letters are

provided as Enclosure 2.

In preparing our response, we (1) obtained and reviewed relevant information and

documentation from the Department of the Treasury (Treasury) and (2) interviewed

Treasury officials including the Deputy Assistant Secretary for FSOC, the Deputy

General Counsel, senior counsel for the Treasury Office of Banking and Finance,

and the Director and Assistant Director of the Office of Fiscal Projections. This

work was performed by staff of the Treasury Office of Inspector General under my

direction. I shared a draft of this response with the members of CIGFO.

We are also sending a copy of this letter to the Honorable Max Baucus, Chairman,

Senate Committee on Finance. We would be pleased to brief you or members of

your staff on this response. If you have any questions, you may contact me at


25/109


26/109

Enclosure 1

Page 1

Response by the Chair of the Council of Inspectors General on Financial Oversight

and Inspector General of the Department of the Treasury

Request for Information Regarding the Debt Ceiling Issues of 2011

1. Determine whether Treasury was internally projecting, using its cash

projection models, that it would not have sufficient cash to meet all

projected incoming due obligations on July 28, 2011, or any day thereafter,

absent an increase to the debt limit.

We reviewed the Department of the Treasurys (Treasury) daily cash balance

projections as of July 21, 2011, for the period July 28 through August 31,

2011. Absent an increase to the debt limit, our analysis of these projections

showed that a sufficient cash balance would not be available to meet all

incoming due obligations by August 11. Furthermore, we noted that the cash

deficit would grow with each day that the debt limit was not raised. The

projections assumed that investors would be willing to rollover existing debt

that came due during the period. As shown in the August 2, 2011, Daily

Treasury Statement, Treasury had an ending cash balance of approximately

$54 billion. According to Treasury officials, had investors not been willing to

roll-over debt securities, the cash balance could have been exhausted almost

immediately because a payment of $87 billion would have been needed to

pay maturing Treasury securities on August 4, 2011.

Treasury officials stated that prior to August 2, 2011, they were concerned

about how investors in Treasury securities might react if the debt limit was

not raised by that date. The specific concern was that if the governments

borrowing authority were to expire on August 2, investors who ordinarily

would roll over maturing Treasury securities (that is, reinvest the proceeds of

maturing Treasury securities in new Treasury securities) might choose to

invest elsewhere.

Treasurys daily cash balance projections are calculated by the Office of the

Fiscal Assistant Secretary (OFAS) and updated on a regular basis. These

estimates are based on (1) projected receipts, (2) projected cash outlays for

government operations, and (3) projected net cash flows from marketable

and non-marketable securities activity.1Treasury officials told us that daily

1Marketable securities consist of Treasury bills, notes, bonds, and Treasury Inflation-ProtectedSecurities. After original issue by the Treasury, marketable securities can be bought and sold in the


27/109

Enclosure 1

Page 2




cash balance projections are inherently imprecise, as there are significant

variations in the amount of receipts and expenditures for any given day.

According to Treasury officials, the margin of error in these estimates at a

98 percent confidence level is plus or minus $18 billion for 1 week into the

future and plus or minus $30 billion for 2 weeks into the future.

2. Determine what Treasurys daily cash balance projections and daily

projections of incoming due obligations were from July 28ththrough

August 30th, 2011.

We reviewed Treasurys daily cash balance projections and daily projections

of incoming due obligations from July 28 through August 31, 2011, as of

July 21, 2011. Treasury makes these projections on a daily and monthly

basis. We were told that in the days leading up to the debt limit, OFAS ran

the daily projections multiple times per day as current information became

available. Furthermore, OFAS ran its daily projections under various policy

scenarios and finance assumptions. It should be noted that the monthly

projection we reviewed, which was run as of July 21, 2011, was predicatedon a resumption of borrowing on August 15. With that in mind, some

examples of daily cash balance point projections were as follows: $52.7

billion for July 28; $20.8 billion for August 4; -$0.8 billion for August 11;

and $56.5 billion for August 18. As discussed in our response item 1 above,

it should also be remembered that there are significant margins of error in

these point estimates.

financial marketplace, and ownership is transferable. Non-marketable securities, such as U.S.

Savings Bonds, are non-transferable securities issued by the government and registered to the

owner. They cannot be sold in the financial market, but they can be redeemed, subject to

restrictions. Other types of non-marketable securities include Domestic Series securities, Foreign

Series securities, Rural Electrification Authority securities, State and Local Government Securities,

and Government Account Series debt.


28/109

Enclosure 1

Page 3




3. On August 1st, was Treasury projecting (point estimate) that its operating

cash balance for August 2nd, 2011, would be below its projection of due

obligations in the absence of an increase in the statutory debt limit?

Based on our review of Treasurys daily cash balance projections as of

July 21, 2011, for the period July 28 to August 31, 2011, Treasurys

operating cash balance for August 2 would not be below its projection of

due obligations in the absence of an increase to the statutory debt limit. In

fact, based on the document we reviewed, Treasurys estimated daily cash

balance was $69 billion and $65.6 billion on August 1 and August 2,

respectively. Furthermore, a Treasury official told us that Treasurys daily

projection produced on August 1 showed that due obligations would not

exceed its operating cash balance for August 2. Another Treasury official

emphasized to us that Treasury had not stated that the government would

be out of cash on August 2, 2011. According to the official, Treasury stated

that the government would be out of borrowing authority on that date

absent an increase to the statutory debt limit. In this regard, Treasury

released statements on June 1 and July 1, 2011, where it announced, andreiterated, that borrowing authority would be exhausted on August 2, 2011.

We also noted that Secretary Geithner had publicly emphasized this point as

well.

4. Determine whether there were contingency plans developed by FSOC voting

member agencies for disruptions that could have occurred if the debt limit

had not been raised and the federal government defaulted or if there was a

credit rating downgrade on the U.S.

According to the Treasurys Deputy Assistant Secretary for FSOC, individual

FSOC members recognized the fiscal policy challenge, but there was no

collective initiative by FSOC to create an FSOC-directed/coordinated set of

contingency plans had the debt limit not been raised. He further stated that

although FSOC had conversations regarding the debt limit, creating such

contingency plans would be outside of FSOCs authority. FSOC does not

interpret its statutory mandate to recommend fiscal policy. According to the

Deputy Assistant Secretary for FSOC, FSOC is charged with identifying risks


29/109

Enclosure 1

Page 4




and responding to emerging threats to financial stability. In this regard, FSOC

did identify and report the threat to financial stability if the debt ceiling was

not raised. The Deputy Assistant Secretary for FSOC further stated that it is

FSOCs view that Congressional action was the clear response to the debt

limit.

Treasury, acting outside of its capacity as a FSOC member, considered a

range of options with respect to how Treasury would operate if the U.S. had

exhausted its borrowing authority. Treasury considered asset sales; imposing

across-the-board payment reductions; various ways of attempting to

prioritize payments; and various ways of delaying payments. We were told

that similar options had been evaluated by previous administrations during

debt limit impasses. That said, Treasury reached the same conclusion that

other administrations had reached about these optionsnone of them could

reasonably protect the full faith and credit of the U.S., the American

economy, or individual citizens from very serious harm. However, Treasury

officials told us that organizationally they viewed the option of delaying

payments as the least harmful among the options under review. Ultimately,the decision of how Treasury would have operated if the U.S. had exhausted

its borrowing authority would have been made by the President in

consultation with the Secretary of the Treasury.

The following describes the various options that were under consideration.

Asset Sales

Treasury officials rejected the option of selling the Nations gold to meet

payment obligations because selling gold would undercut confidence in the

U.S. both here and abroad, and would be destabilizing to the world financial

system. With respect to the portfolio of mortgage-backed securities owned

by Treasury, Treasury officials concluded that a fire sale of these assets

would be adverse to the interest of taxpayers and could jeopardize the still


30/109

Enclosure 1

Page 5




fragile housing market.2Similarly, with respect to investments received in

connection with the Troubled Asset Relief Program, Treasury officials

determined that a fire sale of these investments would not maximize value

for the taxpayer and could be detrimental to the economy in general. For

both legal and practical reasons, Treasury officials determined that the sale

of the governments portfolio of student loans was not feasible. Moreover,

even if Treasury had exercised these options, they would have bought very

limited time.

Across-the Board Payment Reductions

After reviewing various ideas for remaining within the debt limit by imposing

across-the-board payment reductions (such as cutting all payments by 40

percent or another amount necessary to remain within the debt limit),

Treasury officials concluded that such a payment regime would be difficult to

implement, as Treasurys payment systems are not designed to make such

across-the-board cuts.

Prioritization of Payments

Treasury officials stated that Treasury also reviewed the idea of attempting

to prioritize the many payments made by the federal government each day.

Treasury noted that it makes more than 80 million payments per month, all

of which have been authorized and appropriated by Congress. According to a

2The Housing and Economic Recovery Act of 2008 (HERA) authorized the Secretary of the Treasury

to purchase obligations and securities issued by the Federal National Mortgage Association (Fannie

Mae), the Federal Home Loan Mortgage Corporation (Freddie Mac), and the Federal Home Loan

Banks. Treasurys authority to make these purchases ended December 31, 2009. However,

Treasury was authorized to sell or otherwise exercise any rights received in connection with these

purchases, at any time. Under its HERA authorities, Treasury purchased and sold mortgage backed

securities guaranteed by Fannie Mae and Freddie Mac (these securities are referred to as agency

MBS). In total, before its purchase authority expired, Treasury acquired $225 billion of agency

MBS. Treasury started to sell its agency MBS in March 2011. As of July 2011, Treasurys reported

its agency MBS portfolio holdings were $82.9 billion. On March 19, 2012, Treasury announced the

completion of its sale of remaining agency MBS and reported that overall, cash returns of

$250 billion were received from the agency MBS portfolio through sales, principal, and interest.


31/109

Enclosure 1

Page 6




Treasury official, the payments cover a broad spectrum of purposes deemed

important by Congress. While Congress enacted these expenditures, it did

not prioritize them, nor did it direct the President or the Treasury to pay

some expenses and not pay others. As a result, Treasury officials determined

that there is no fair or sensible way to pick and choose among the many bills

that come due every day. Furthermore, because Congress has never

provided guidance to the contrary, Treasurys systems are designed to make

each payment in the order it comes due.

Delay of Payments

Treasury officials told us that it was the Departments organizational view

that the least harmful option available to the country at the time, of these

very bad options, was to implement a delayed payment regime. In other

words, no payments would be made until they could all be made on a day-

by-day basis. Even under this option, Treasury officials acknowledged that,

because the U.S. operates at a deficit, payment delays under such a regime

would have quickly worsened each day the debt limit remained at its limit,potentially causing great hardships to millions of Americans and harm to the

economy.

5. Provide any contingency plans identified in number 4 above.

As discussed in the response to number 4 above, there was no collective

initiative by FSOC to create contingency plans had the debt limit not been

raised. That said, Treasury officials did develop various options and

scenarios, and seemed to be settling in on a delayed payment regime.

However, we were told that there was never a final plan that was presented

to the President for approval. Accordingly, based on their description of

these documents, we considered them to be pre-decisional, working drafts

of options or scenarios, and therefore have no contingency plans to offer.

6. Determine whether the FSOC met its statutory mandate for collective

accountability for identifying risks and responding to emerging threats to


32/109

Enclosure 1

Page 7




financial stability and whether the FSOC reported on systemic risks

surrounding the debt limit impasse.

Based on our review of the applicable sections of the Dodd-Frank Wall Street

Reform and Consumer Protection Act (Dodd-Frank Act) and other relevant

documentation, we concluded that FSOC met its statutory mandate for

identifying, responding, and reporting on emerging threats and systemic risks

to the U.S. with regard to the debt limit impasse.

As mandated by Section 112 of the Dodd-Frank Act, the purpose of FSOC is

to identify risks that could arise from the material financial distress or

failure, or ongoing activities, of large, interconnected bank holding

companies or nonbank financial companies, or that could arise outside the

financial services marketplace [and] to respond to emerging threats to the

stability of the United States financial system.Section 112 also requires

FSOC to annually report and testify to Congress on, among other things,

potential emerging threats to the financial stability of the United States.

According to Treasurys Deputy Assistant Secretary for FSOC, FSOC met its

statutory responsibility in its 2011 Annual Report, where it highlighted the

clear need for the debt limit situation to be addressed. The official noted that

the risk to financial stability posed by a failure to raise the debt limit is

different than other risks to financial stability, as the ability to eliminate the

risk is entirely within the control of the U.S. government. If Congress had

not raised the debt limit, it was the view that this would have inflicted

significant harm on the U.S. and its citizens.


33/109

Enclosure 2

Page 1

Letters to the Chair of the Council of Inspectors General on Financial Oversight


Contents

October 18, 2011, letter from the Honorable Orrin G. Hatch ............................ 2

to Inspector General Thorson

Attachment A: July 27, 2011, letter from the Honorable Orrin G. Hatch ................. 9

to members of the Financial Stability Oversight Council

Attachment B: July 29, 2011, letter from the Honorable Orrin G. Hatch ................. 12

to members of the Financial Stability Oversight Council

Attachment C: August 1, 2011, letter from Secretary of the Treasury Geithner ....... 13

to the Honorable Orrin G. Hatch

Attachment D: July 28, 2011, letter from Chairman Matz, National Credit Union ..... 15

Administration to the Honorable Orrin G. Hatch

Attachment E: August 11, 2011, letter from the Honorable Orrin G. Hatch ............. 17

to Secretary Geithner

Attachment F: September 23, 2011, letter from Secretary Geithner ....................... 21

to the Honorable Orrin G. Hatch

January 18, 2012, letter from the Honorable Orrin G. Hatch ............................ 23

to Inspector General Thorson


34/109

Enclosure 2

Page 2




35/109

Enclosure 2

Page 3




36/109

Enclosure 2

Page 4




37/109

Enclosure 2

Page 5




38/109

Enclosure 2

Page 6




39/109

Enclosure 2

Page 7




40/109

Enclosure 2

Page 8

Letters to the Chair of the Council of Inspectors General on Fi

Documents

Debt Ceiling - GSE Abuse