Lawrence Summers spared President Barack Obama a political fight in his own Democratic Party at a time when the White House needs maximum political capital for a confrontation with Republicans over federal spending, the debt ceiling and dealing with Syria.
The president and his top advisers are now recalculating their options after the former Treasury secretary withdrew his name from consideration to be Obama’s nominee to replace Ben S. Bernanke as Federal Reserve chairman.
Summers’ decision followed an unprecedented campaign by several Democratic senators, including Jeff Merkley of Oregon and Sherrod Brown of Ohio, to stop a Fed nominee even before he was picked. While administration officials focused on Syria, the lawmakers pressured their colleagues to oppose Summers on the grounds that he was too lax on financial regulation.
“Any possible confirmation process for me would be acrimonious and would not serve the interests of the Federal Reserve, the administration, or ultimately, the interests of the nation’s ongoing recovery,” Summers, 58, wrote in a letter to Obama.
With Summers out of the running, Fed Vice Chairman Janet Yellen, 67, moves up on the list of candidates for the top Fed job, people close to the process said. Obama also has said he interviewed Donald Kohn, 70, a onetime Fed vice chairman. Former Treasury Secretary Timothy Geithner isn’t interested in the job, according to several people involved.
The people said Summers was Obama’s top pick all along, even though White House officials late last week insisted the president had yet to make a decision.
The president’s inner circle was divided over whether Obama should expend capital on a Summers confirmation fight. Unlike the drama playing out in public, it wasn’t a split along gender lines, according to the people, who asked for anonymity to talk about internal deliberations.
The split came down to those who figured that the battle would be too costly, including Chief of Staff Denis McDonough and senior adviser Valerie Jarrett, the people said.
The presidential advisers backing Summers mostly were those who worked alongside him during the peak of the 2009 financial crisis and felt they owed it to their former colleague to fight for him. They included the core of Obama’s economic team as well as most of the president’s female senior advisers, including deputy chief of staff Alyssa Mastromonaco and White House Counsel Kathryn Ruemmler, according to the people.
The decision on the next Fed chairman — Bernanke has indicated he’s not interested in serving a third term — is coming as investors are debating the speed at which the Fed will taper its $85 billion in monthly bond purchases. Traders had speculated that, given Summers’ past questioning of the effectiveness of quantitative easing, he may have pulled back the stimulus faster than other candidates such as Yellen.
With Summers out of contention, stocks rallied with Treasuries and the dollar weakened against all its major peers.
The Standard & Poor’s 500 Index jumped 0.8 percent, approaching its record high, at 10 a.m. in New York and the yield on 10-year U.S. Treasuries declined 10 basis points to 2.78 percent, the most in six weeks. The Bloomberg U.S. Dollar Index dropped 0.6 percent.
Democratic opposition to Summers’ possible nomination had been building, spurred in part by the efforts of Merkley and Brown, who placed calls to advocacy groups and used weekly caucus lunches to lobby fellow lawmakers to oppose Summers.
On Sept. 13, Senator Jon Tester, a Montana Democrat, announced he would oppose Summers, bringing the number of “no” votes on the Senate Banking Committee to three, including Merkley and Brown.
The pitch from Merkley and Brown to fellow Democrats was this, according to Senate Democratic aides: If you think you’re going to vote against Summers, speak up now, because it’s less embarrassing to Obama to stop Summers before he’s nominated than after a messy confirmation fight.
Senator Elizabeth Warren, a Massachusetts Democrat and critic of Wall Street, also was involved. She informed the White House last week that she would oppose Summers, according to a person familiar with the matter.
“Larry was not my first choice for Federal Reserve chair,” Warren said in an interview with Peter Cook on Bloomberg Television.
“I’m a big fan of Janet Yellen,” Warren said. “I think she’s terrific. She’s got the right experience, and I think she’d make a terrific Federal Reserve chair.”
Warren’s vote would have meant at least four Democrats on the banking panel were opposed to Summers. The White House would have had to rely on several Republican votes to get him through the 22-member committee.
The Democratic effort spilled into the open when a senator offhandedly acknowledged in late July the existence of a letter of support for Yellen. That letter, drafted and circulated by Brown, was signed by 20 senators.
The letter touched a nerve in the White House, and with Obama himself. He defended Summers days later in a closed-door meeting with Democrats on Capitol Hill, while mentioning that Kohn also was under consideration.
As Democratic opposition grew, Summers’ supporters say the White House didn’t effectively push back. Summers was left vulnerable to what some called a “perfect storm” of events: the delay in his formal nomination, the debate raging over Syria, and the upcoming budget fights with Congress, according to a person familiar with the matter.
In late August, the White House called on former administration officials Stephanie Cutter and Jim Messina to work to counter anti-Summers reporting without ever marshaling current administration officials, many of whom, including most of the economic team, supported Summers, according to people familiar with the situation.
A tight circle of the president’s advisers, convened to weigh various Fed candidates, stopped meeting once Syria dominated the agenda and Obama’s attention turned to the divisive debate over whether to begin a military strike in response to the Aug. 21 chemical weapon attack that killed more than 1,400 people.
While Obama’s aides insisted that the Fed chairman’s confirmation process wouldn’t get wrapped up in the budget fights set to start in September, Summers was emerging as collateral damage, the person familiar with the situation said.
The White House wouldn’t comment. “Like always, we will decline to discuss or comment on outside speculation around the personnel process,” said Amy Brundage, a spokeswoman.
Obama, in a statement, called Summers “a critical member of my team as we faced down the worst economic crisis since the Great Depression.” He touted his former economic adviser’s “expertise, wisdom and leadership” for helping guide the crisis response and nascent recovery.
Since June, when Obama indicated in an interview with Charlie Rose that he wouldn’t appoint Bernanke to another term, intrigue over whether the president would pick Summers or Yellen turned into a political process that Fed watchers called unprecedented.
The central bank is considering whether to begin to reduce the bond purchases that have fueled a four-year market rally. Bernanke’s term ends Jan. 31.
As signs over the past few months continued to point to Summers as the leading candidate, 40 percent of investors, analysts and traders who are Bloomberg subscribers saw Summers getting the job, according to a Bloomberg Global Poll.
Still, Yellen was viewed more favorably among investors, with 60 percent of respondents holding a positive view, compared with 37 percent for Summers. Thirty-five percent had a negative view of Summers, compared with 15 percent for Yellen.
Summers was pegged by his opponents as a deregulator for his support of loosened rules on the financial industry during President Bill Clinton’s administration.
In 1998, Summers, then-Fed Chairman Alan Greenspan and Treasury Secretary Robert Rubin, blocked efforts by Brooksley Born, then head of the Commodity Futures Trading Commission, to regulate the derivatives market. It later expanded to include the toxic instruments that led to the financial market crisis.
Summers also sought repeal of the Glass-Steagall Act, the Depression-era law separating commercial and investment banking.
Said Merkley in a July interview: “If you nominate someone who is a life-committed deregulator to be in a regulatory position, and if you believe regulation is necessary to prevent fraud, abuse, manipulation and so forth, then there’s a lot of questions to be asked: Why is this person appropriate?”
Even those who said they would support Summers voiced concern in interviews about the intraparty fight his nomination would cause in the weeks ahead. Democrats, who hold a 54-46 majority in the Senate, face negotiations on the budget and an increase in the debt ceiling.
“In light of everything he needs from Democrats on the Hill in the weeks and months to come, the last thing he can afford is to antagonize them over the Summers nomination,” Jim Manley, a former senior aide to Senate Majority Leader Harry Reid, said of Obama in a telephone interview.
A tough confirmation fight that split Democrats was an unwelcome possibility, three aides familiar with the discussions said. That message was conveyed to the White House by the camp opposed to Summers, according to one of the Senate aides.
Some Republicans were approached by the White House as late as last week as the administration tried to get a better sense of whether Summers could win the required support, one of the aides said. While the entreaties weren’t rejected, the potential price of the votes was considered too steep, as was the reliability of the Republican lawmakers.
“If they really thought they could pick up the Republican votes necessary to provide a comfortable margin they still can’t figure out what’s going on up on the Hill,” said Manley.
By Sept. 13, what was becoming apparent to the White House earlier in the week would be hammered home, when Tester of Montana released a statement announcing opposition to Summers.
Two days later, Summers’ letter arrived, on the five-year anniversary of the peak of the financial collapse that ushered in the crisis he had fought side-by-side with Obama to contain.
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