The Woodward Treatment.

The super-reporter Bob Woodward's strange take on the worm of the Fed.

It is one of the most compelling scenes in Bob Woodward's new book on the Federal Reserve:

On February 24, 1986, Federal Chairman Paul Volcker was threatening to resign. Four members of the Fed's Board of Governors--all appointees of President Ronald Reagan--staged a coup and voted 4 to 3 to the discount rate. Volcker was in the minority for the first time. Volcker announced that the board's mutinous majority were "going to have to do it on your own," and walked out, slamming the door behind him. Volcker then wrote a resignation letter in long hand. He felt the Fed had lost its independence. Pressures from the White House, not economic realities, were now reigning supreme at the central bank. But later that afternoon, (Fed Governor Manuel) "Johnson and the other three board members backed down. They agreed to reconsider, effectively rescinding the interest rate cut before it was announced. A Volcker resignation would be too unsettling."

The episode is one of many dramatic moments in Woodward's "Maestro: Greenspan's Fed and the American Boom," his latest in a series of books that look at America's most reclusive power centers, from the Supreme Court to the C.I.A.

But there's a problem with Woodward's retelling of the Volcker confrontation story. It's not altogether accurate, according to Fed officials who participated in or witnessed the incident. They say they reversed their decision to cut the discount rate at the meeting not because of Volcker's resignation threat but to give the Fed chairman time to persuade the Bank of Japan and German Bundesbank to join the Fed in a coordinated rate cut, which, in fact occurred ten days later. Indeed, Volcker had tracked down Bundesbank head Otto Pohl in Israel to beseech him to cut rates. But none of this appears in Woodward's book.

Nor does the reporter of Watergate fame make any mention in his book of then Vice Chairman Preston Martin, who was the coup's ringleader and the only member of the Gang of Four who would have liked to see Volcker resign--so Martin could fulfill his well-known ambition to become chairman himself.

Asked about the omissions in his version of the meeting, Woodward responded that in a 1992 on-the-record interview with former Fed Governor Wayne Angell, one of the Gang of Four, Angell said that he and Martin met privately with Volcker, after which the Board of Governors "met and reconsidered. And then we voted, in effect we voted not to cut the discount rate."

But Angell said Woodward misrepresented what actually happened. During the private meeting with Volcker, he says, he and Martin touched only briefly on the Chairman's resignation threat. Most of the meeting was spent discussing how long it would take to get the Bank of Japan and the Bundesbank to go along with a coordinated rate cut.

"I made the motion to cut rates at that meeting," Angell said. (Another official said it was Martin who raised the issue of cutting rates, although Angell did make the motion to do so.) "Woodward makes it sound like Johnson did it. And our decision to pull back wasn't motivated by Volcker's threat to resign. We didn't think he'd resign. My payoff matrix didn't even have that in there. We had a concern about what the rate cut would do to the dollar. Volcker said if we gave him ten days he could get the Bank of Japan and Bundesbank to join in. We got what we needed--a rate cut--and took the awkwardness off the table. I was very surprised at the way (Woodward) represented this."

Angell's lament is a common refrain among numerous current and former senior Fed officials who said they were inter viewed by Woodward for the book (although none are quoted on the record). They say Woodward did a good job of demystifying the Fed and writing an entertaining book for a general public that knows almost nothing about the workings of the powerful institution. But in the process, he took shortcuts to simplify and dramatize his story.

The result is a book that contains both minor errors, such as a misspelled name and improper Fed jargon, and major conclusions that are widely dismissed as exaggerated, such as a bitter rivalry between Fed Chairman Alan Greenspan and Vice-Chairman Alan Blinder, and Greenspan's influence on President Clinton's 1993 deficit reduction plan.

"Authors do tend to piece together stories and try to link them with a theme" said Angell, who even disagrees with the book's title, a metaphor for Greenspan as the grand conductor of the nation's economy. "Sometimes the theme goes too far. Woodward assumes the economy is inherently unstable and needs a Maestro to fine-tune it. I don't think that is the case. I don't think the economy is inherently unstable."

Fed insiders also complain that the book, unlike The Agenda, Woodward's best seller on Clinton's first year in office, plows a lot of old ground. While it offers insight into what Greenspan was thinking as he directed monetary policy (and Greenspan obviously was a primary source for the book), it doesn't contain any major revelations. Instead it is a compendium of Fed lore that has been making the rounds for some time: Greenspan's penchant for studying numbers while in the bathtub or the rather endearing story of the Chairman, known for his obtuse commentary, having to propose to his girlfriend, NBC reporter Andrea Mitchell, twice before she understood he'd asked her to marry him.

That a reporter with Woodward's reputation and skill at ferreting out high-level political gossip couldn't pry new secrets out of the Fed is proof of how hard it is for the uninitiated to penetrate the arcane business of central banking. "He doesn't live that whole world," said one former high-ranking Fed official whom Woodward interviewed. "Fundamentally, he got the nuts and bolts right. But it was obvious, even when he was interviewing me, that he's not comfortable with the subject. Monetary policy is not something he understands deeply. His book is a perfectly reasonable account of what goes on at the Fed and it was accurate in everything it said about me. But I didn't think he went into enough depth about the risks and trade-offs inherent in Fed policy."

Some insiders wonder whether Woodward delegated much of the monetary policy sections of the book to his research assistant, Jeff Himmelman. Woodward's Author's Note heaps effusive praise on the freshly minted Yale graduate, calling Himmelman his "full-time collaborator at every step of the book--reporting, writing, and editing." One wonders why Woodward didn't just give Himmelman a co-byline.

Asked about his contribution to the project, Himmelman said he put together the "initial draft of the biographical material on Greenspan at the end of the book's chapter on 1988," and did the same for other parts of the book. "Be sure, however, that the vast, vast majority of the book was drafted by Bob," he said.

In that case, Fed insiders are focused on the right author in debating whether Woodward really captured something as complicated as monetary policy correctly. Some of the criticisms, to be sure, are trivial. Woodward decides, for example, to use shorthand to explain interest rate increases. Instead of talking about the rate changes in terms of basis points, as the Fed governors usually do, or even in terms of "percentage point" increments, Woodward talks about interest rate increases in terms of 0.25 "percent," which is incorrect. If rates were going up or down by 0.25 percent, it would be a quarter of whatever the total interest rate was at the time. Another small point: Woodward spells the name of the new Treasury Secretary, Paul O'Neill, incorrectly as "O'Neil," when he reports on a 1995 meeting between President Clinton and a group of corporate CEOs who complained that Greenspan was keeping interest rates too high.

Insiders also differ with Woodward over whether Greenspan ought to be lauded for managing to steer the economy safely past the 1987 stock market crash, the Asian financial crisis, and other financial crises outside the Fed's explicit franchise. In some cases, they said, Greenspan was a smaller player than Woodward makes him out to be or he was just lucky.

Consider Woodward's version of the debate over Clinton's 1993 deficit-reduction plan. Woodward suggests that Clinton became convinced that he needed to reduce the deficit after a meeting with the Fed Chairman in Little Rock shortly before Clinton's inauguration. Later, Woodward writes, the administration was barely a week old when Treasury Secretary Lloyd Bentsen asked Greenspan to come to the White House for another session with Clinton. At the meeting, Greenspan warned the new President that he couldn't procrastinate on his effort to cut the deficit. Without action, Greenspan told the president, there could be "financial disaster." Clinton, Woodward, writes, "made it clear he had received the message." Greenspan recommended a deficit reduction target of $140 billion for 1997, according to a Treasury Department memo Woodward obtained. Ultimately that was the deficit-reduction number the Clinton administration adopted.

Former Fed officials and Clinton aides say Woodward, for the sake of his narrative, gave Greenspan a much bigger role in the plan than was actually the case. People close to the Fed Chairman say even he believes that Woodward overstated his influence on the Clinton plan, and that the President's determination to reduce the deficit did not turn on Little Rock or White House conversations with Greenspan.

"The notion of suggesting that Greenspan was a puppeteer behind deficit reduction just goes too far," said Laura D'Andrea Tyson, who headed Clinton's Council of Economic Advisers and later his National Economic Council.

Former Treasury Secretary Robert Rubin also has complained to colleagues privately that the deficit-reduction plan was in the works long before Greenspan came to Little Rock, where Clinton had kept Greenspan waiting for several hours because he forgot about his appointment with the Fed Chairman.

Responding to the critics, Woodward said the Fed Chairman's role shouldn't be underestimated: "The record shows that Greenspan's views were quite a potent weapon. The number he suggested was adopted. Because Clinton's economic and deficit reduction plan may turn out to be his most significant achievement, there will be a debate as all kinds of people clamor to take credit. It's an important and legitimate debate."

Another complaint with the book is that it glosses over Greenspan's missteps. The only mistakes Woodward records are those that the Chairman acknowledges himself. In 1991, when Greenspan realized he didn't have the votes to cut rates, he backpedaled. "Greenspan realized that he may have made a mistake in trying to move impulsively," Woodward writes.

Woodward also skims over Greenspan's endorsement of convicted Savings and Loan manipulator Charles Keating (who later had the charges against him dismissed) in 1985, when Greenspan was a private consultant. He accepts Greenspan's defense that "Keating hadn't done anything wrong at that point, or if he had, it wasn't detectable."

Woodward also writes about Greenspan's surprise that the subject of the stock market had not come up during his first meeting at the Fed, when he believed it should have been addressed. The episode makes it sound as if the Fed hadn't been watching the stock market until Greenspan made it a focal point. In fact, Fed researchers had done studies on the stock market for years.

Woodward said he didn't discuss the earlier research reports by the Fed because he was referring only to that specific meeting: "This is a book about Greenspan--and though your discussion of the FOMC's (Federal Open Market Committee) pre-Greenspan actions may be true--it's simply not what the book is about."

Another misimpression occurs when the book implies that the Fed was secretly contacted to bail out the American Savings & Loan Association in 1987, and that Manuel Johnson was alone in trying to find a buyer for the bank. In fact, a bevy of administration and banking officials were involved. Woodward said there is nothing in the book that implies that others weren't searching for a possible buyer of the bank: "The point of the passage is to set some context for the uneasiness that Johnson and others at the Fed felt during the weekend before the October 19, 1987 stock market crash."

One of the most fascinating sections of the book describes tensions between Fed Vice-Chairman Alan Blinder, who is jockeying to become Chairman, and Greenspan, who engages in Machiavellian politics to keep his would-be successor at bay. Former and current Fed officials said Woodward greatly overstated the rivalry to produce a more powerful narrative. "That section was bad," said one former Fed official. "They got along pretty well--they even played tennis. Blinder was frustrated because he never acquired the influence he wanted, but that wasn't Greenspan's doing. That's just the way the Fed is. Vice Chairmen aren't very powerful."

The book suggested that when Robert Rubin proposed that Blinder move to the Fed from the Council of Economic Advisers, Blinder made his decision based on status:

"Blinder had earlier declined appointment as one of the Fed's seven governors, but now he thought hard about Rubin's offer. The job at the Fed meant a step up in the Washington pecking order. A Fed governor was C-list, anonymous politically and socially, which was about where Blinder was with his current White House position. Vice-Chairman of the Fed would put him on the B-list. As he thought about whether to take the job, Blinder admitted to himself that he had a human foible, shared by many in Washington-status." Sources close to Blinder said it was unfair to suggest that a key reason Blinder wanted the Fed job was to enhance his social status. Blinder wanted the job so that he could have a hand in setting monetary policy at an interesting juncture for the economy. In fact, it was his eagerness to play a role that was the basis of his frustration in not having Greenspan's clout.

Woodward suggests that Blinder, as Vice-Chairman, believed he would be Greenspan's successor and he sought to draw a distinction between himself and the Chairman for that reason. But Fed sources close to the situation at the time said that the book is off base in treating Blinder as a serious Greenspan successor. "(Woodward) talked about Blinder as ar heir apparent," says a former Treasury official familiar with the situation. "Aside from maybe Blinder, it was never in anyone's wildest dreams (that Blinder should succeed Greenspan.) There was never a chance he'd get the job. It was preposterous--it bowled me over."

Another disputed incident in the book occurs on August 16, 1994, several days before Blinder's second FOMC meeting, when Greenspan came to see him in his office to discuss the economy. Greenspan wanted to raise interest rates fifty basis points, but Blinder said he thought twenty-five basis points, the standard Fed increase, would be enough given that the Fed had already raised rates four times since the beginning of the year. The two discussed their views on the economy and Blinder said he was willing to go with the larger rate increase if Greenspan was willing to explain the jump in a press statement that indicated no immediate additional rate increases were on the horizon. Greenspan agreed to release such a statement.

"He had promised Blinder a statement of some kind, and Blinder in turn gave the Chairman his vote" Woodward writes. "Greenspan knew that Blinder had essentially issued an ultimatum. Ultimatums were not useful around the Fed." Sources who were at the Fed at the time said the tenor of the conversation wasn't as dire as Woodward portrays. "The suggestion that (Blinder) gave Greenspan an ultimatum six weeks after he arrived at the Fed is absurd" says a former senior Fed official. "Woodward portrays the rift as if Greenspan foiled a threat to his preeminence at the Fed" says another. "That was never in question. Blinder just wanted to have a say in the discussions. He thought that we all would be talking as equals--economist to economist. He found out that the way it worked at the Fed was more like grad students and the professor. And Alan Greenspan was the professor."

Woodward, when asked about this, said there was no question that Greenspan considered Blinder's proposal an ultimatum. Blinder, for his part, said he doesn't remember it that way. There are other instances in which key players at the Fed take issue with Woodward's characterization of events. Woodward suggests Greenspan was behind a press release the Fed issued after the 1987 Black Monday crash to calm the markets. Sources familiar with the episode said Greenspan had in fact been agnostic about issuing a press release.

Similarly, when the head of the Securities and Exchange Commission, David Ruder, mused aloud to reporters that regulators were contemplating a temporary trading halt as the market kept falling, Woodward tells readers what Greenspan was thinking at the time. "Awfully dangerous to go on TV, Greenspan thought, if you didn't want to be quoted." In fact, Ruder hadn't planned to go on television at all. He was unexpectedly surrounded by a scram of reporters after a speech at the Mayflower Hotel. That isn't clear in Woodward's narrative.

Woodward also suggests that Greenspan was intent on giving a long-planned speech in Dallas the morning after the crash to convey a sense of business-as-usual, but that he cancelled it at the last moment to return to Washington. In fact, according to a Greenspan confidant, the Chairman had decided the night before to cancel the speech.

Among the most interesting sections of the book for Fed mavens are when Woodward talks about Greenspan's responses to financial crises, and reveals that Greenspan is less freemarket than his reputation. After the 1987 crash, for example, he authorized the Fed to act as guarantor of private-sector loans to prevent defaults. He also encouraged Treasury Secretary Rubin to bail out the Mexican government in 1995. When the Asian financial crisis arrived on U.S. shores, Greenspan supported a bailout of Long Term Capital Management out of concern that LTCM's failure would spark a broader market crash.

Fed officials also credit Woodward with successfully capturing the sometimes subtle and sometimes blunt ways Greenspan dominated the Fed, even if his account depends too heavily on the Chairman's version of events.

What Woodward failed to do was provide insightful analysis on how the Fed changed when Greenspan took over from Volcker, and whether Greenspan was purposeful or just lucky in the way he steered the Fed into a new era of transparency and economic dynamics.

"Woodward makes it sound like any other course than the one Greenspan took would have been a mistake and that's just not the case," said one former Fed official. "Greenspan turned out to be really right but at the time, the policy he followed wasn't in the data. It was as if someone goes to Las Vegas and puts $1,000 on Black 30 and then when they win they say they knew it would be Black 30 all along. There was a lot of luck involved in the way things turned out."

Woodward's response: grumbling from a Fed community unhappy that he was able to penetrate an institution that prides itself on its secretive ways. He said the negative reaction is similar to the way the intelligence community bristled over his book, Veil: The Secret Wars of the CIA 1981-1987.

As for any omissions and oversimplifications, Woodward said, "There is more to the Fed and monetary policy than can be squeezed into a 200-page book. This book is about how Greenspan does his job, not about a lot of other things going on off stage."

The comprehensive story about the Fed, apparently, will have to be left to another author.

Dina S. Temple-Raston covers the Federal Reserve for USA Today.