Bought and Paid For

by Charles Gasparino

  In other words, these guys may drive around in limousines, but they proudly wear their liberalism on their sleeves. What may make them different from many of their liberal peers is that they rarely shy away from an opportunity to turn a profit, especially when turning that profit allows them to satisfy their social consciences at the same time.

  With Barack Obama, Wall Street wasn’t just betting on his new “hope and change” agenda, which, when boiled down, came right out of FDR’s playbook from the 1930s: Big Government programs, taxes on small businesses, new entitlements, and more. They were betting that while Obama would lead America in his own liberal image, he would have no stomach for changing Wall Street’s role in government; namely, its ability to make money through its partnership with Big Government.

  It’s a mutually beneficial relationship—and it always has been. As I’ve explained, the big Wall Street firms have earned huge fees underwriting America’s debt binge by scooping up the Treasury’s bonds and distributing those bonds across the globe. That government policy, begun under the Clinton administration, couldn’t have been accomplished without Wall Street.

  The mechanism that allowed the banks to lend so freely and give mortgages to millions of Americans who otherwise would not have qualified for a loan was in fact something called the mortgage bond, created, ironically, by BlackRock founder and CEO Larry Fink back in the early 1980s, when he was a Wall Street bond trader. The mortgage bond allowed banks to remove these risky loans from their balance sheets and put them into the hands of investors, and Fink went on to make a fortune from its broad acceptance in the banking business.

  These bonds may have been the root cause of the 2008 financial crisis, but for years they were some of the most lucrative inventions Wall Street had ever come up with. They added trillions of dollars in profits to the bottom lines of the banks as home ownership soared.

  And government, in turn, was happy. The stated social goal starting with the Clinton administration was to expand housing “penetration” (i.e., the percentage of the population that owned their own homes) from 60 percent to 70 percent, a dramatic increase that could be achieved only with the willing cooperation of the big banks in buying those mortgages from Fannie Mae, Freddie Mac, and elsewhere and putting them into bonds to sell to investors. So Wall Street made piles of money and Big Government saw its mission accomplished, all at the same time.

  In 2006 Wall Street made so much money from these housing bonds that the average salary for the CEOs of the top seven firms was $50 million. Even though these same bonds turned sour just a couple of years later when their depressed values forced the banks that held them into near or total failure, the partnership between Wall Street and Big Government survived as the Bush administration set the stage for a bailout of Wall Street as the president’s final act in office.

  Just a couple of months after the bailouts, the Obama administration’s policies—some of them held over from Bush’s bailout and some of them new to the game—began to kick in, and Wall Street, fresh off nearly driving the country (and arguably the global economy) to ruin, began one of the greatest periods of profitability in years. No firm illustrated this better than Goldman Sachs. In the second quarter of 2009, while many Americans were pondering the possibility of the next Great Depression, Goldman rolled the dice and generated a then-record $8.3 billion in trading profits, enough to push the overall firm to a $3.1 billion quarterly profit. Goldman was not alone. After months of write-downs, in the first quarter of 2009 Goldman, Bank of America, Citigroup, and Morgan Stanley generated a combined $7.4 billion in profits. The next quarter was even better. Feasting off low interest rates from the Federal Reserve and generous government subsidies, those firms made nearly $11 billion in combined profit.

  But these profits weren’t derived from activities that actually helped the broader economy, such as investing seed capital in start-up companies or lending to small businesses, the original intention of the bailouts. Rather, the windfall came from essentially the same risk-taking activities that had led to the financial crisis—borrowing cheaply thanks to the low interest rates supplied by the Federal Reserve; using that borrowed cash to buy bonds, essentially financing Barack Obama’s spending spree through the purchase of some Treasury bonds but mostly government-supported mortgage-backed securities (the government was now actively buying these beaten-down bonds as another way to help the banks holding them repair their balance sheets); and, of course, pocketing the immense profits.

  In one sense the protections given to banks and the profits they produced can be seen as a form of hush money. Small-business owners and average citizens are now shocked and worried by the massive amounts of debt issued by the new administration for various programs, including the $800 billion stimulus package that fell far short of the administration’s expectations. But there’s been barely a peep from the financial experts on Wall Street, who downplayed the impact all this borrowing might have on the economy and the markets. Why would they do that? Wall Street has earned countless billions in fees from this activity. Not even a report in March 2010 from Moody’s Investors Service, one of the big credit-rating agencies, that the United States might lose its triple-A rating could wake them from their stupor. And their silence doesn’t end there. The big firms barely said a word about health-care reform, even as its passage in the spring of 2010 created a massive new entitlement on top of the already massive Obama spending plans and plans to raise taxes. After all, mandatory health care may hit small businesses hard in terms of higher taxes, but Wall Street’s clients, the big pharmaceutical and insurance companies, will flourish because, under the law, those who remain uninsured will be guilty of a crime and as they receive insurance coverage they will undoubtedly use more medicine. And of course, when the government borrows money to finance this expensive new plan—well, you know who’s raking in the fees on all that debt (here’s a hint: it’s not the National Small Business Association).

  If this isn’t enough to demonstrate the liberal mind-set of those on Wall Street, let me ask you a question: When was the last time a major Wall Street firm openly advocated tax cuts as a way to spur the economy? Tax cutting was something that even Obama’s own economic adviser, Larry Summers, had once called for—that is, before he joined the spending-happy Obama administration. Summers is a particularly interesting example of the principle of “bought and paid for.” He was one of the architects of Wall Street’s alliance with Washington. He was at the forefront of both the Wall Street bailouts and deregulation during the Clinton years—as deputy Treasury secretary under Clinton he helped repeal the Glass-Steagall Act, allowing the big banks to combine their risk-taking trading activities with the safeguarding of everyday customer deposits. The repeal of Glass-Steagall led directly to the creation of the megabanking giant Citigroup, which required one of the biggest bailouts during the financial collapse. Summers would later be well rewarded for his connections to Wall Street. He earned about $8 million at hedge fund D.E. Shaw and in speaking fees from financial companies between stints as the president of Harvard. In his new role as one of Obama’s economic advisers, Summers, along with numerous other members of the administration, remains close to many of the top executives of the big firms.

  Summers has been a White House sounding board for Wall Street during the past two years, but he isn’t alone. Wall Street’s friends are placed throughout the Obama cabinet, thus ensuring that Wall Street has had a huge say in the reshaping of the financial business in the aftermath of the 2008 collapse, including the current financial reform legislation. And despite Obama’s calling the bankers “fat cats,” CEOs like Dimon and Blankfein had made numerous trips to the White House attempting to ensure that the president doesn’t do anything that really costs them money. It’s rather like letting the wolves guard the henhouse, only in this case the wolves gained access by making generous campaign contributions.

  It’s only fitting that the firm that went the most head over heels for Obama—Goldman Sachs—ha
s emerged from the carnage as the most profitable of the big investment banks. After all, Goldman was feasting off Big Government and making huge profits. And Goldman has been the target of public outrage for handing out some $20 billion in bonuses nearly a year after the financial collapse, while nearly a quarter of all construction workers remain unemployed.

  “It’s pretty amazing,” explained a twentysomething Goldman Sachs trader to me in 2009. “We’re making money in so many different ways it’s frightening.”

  He was bragging about the enormous pool of wealth he and Goldman found themselves sitting in just months after the financial collapse had nearly destroyed his Wall Street career and forced him to use his Ivy League education and top-flight MBA to do something other than speculate on bond prices. But the federal government, first under George W. Bush and then under Barack Obama, had once again made the world safe—and highly lucrative—for speculators.

  Beyond even just the direct and indirect bailouts, what the young trader was now bragging about was how policy makers had created a no-lose market for him and his trading buddies.

  “We’re making money with our eyes closed,” he laughed.

  As he explained it, the gravy train began with what we’ve already covered, namely the Federal Reserve’s policy of taking interest rates down to zero. This then lowered the cost that this trader and his many counterparts paid to borrow funds and invest them in whatever they wanted.

  The government handouts included the new “too big to fail” policy, which the Obama administration made clear it wouldn’t change from the Bush years. Under this policy, companies and investors with capital could lend to Goldman and the rest of the Wall Street banks without worrying that a bad bet here and there from the traders would put the firms out of business and cost them their investment. Why? Because any bank receiving this special designation would be bailed out by the U.S. taxpayer, and that protection was better than anything any insurance company could give them. As a consequence, Goldman’s borrowing costs fell even further.

  On top of all this there were the various guarantees the banks received— that the government wouldn’t let them default on their own long-term debt and that the banks could borrow from the government. And as an added layer of protection, investment banks like Goldman and Morgan Stanley were now treated like ordinary commercial banks (though I’ve never known anyone to open a checking account at Goldman or the House of Morgan).

  Yet by becoming commercial banks in name only, Goldman and Morgan had access to government funds through the Fed’s discount window, something that had only been available to banks with traditional deposits.

  Meanwhile, the American public was told that these measures were designed to save the banking system. After all, without big banks, where could small businesses—widely regarded as the engines of any economic recovery—get loans to expand and hire again? The problem was that small businesses couldn’t get loans. The dirty secret was that Goldman and Morgan Stanley never made loans to small business and never will, and as for the big banks, like Citigroup and JPMorgan Chase? They were copying the business models of Goldman and Morgan Stanley, so instead of making money by lending to businesses, they were now trading bonds, which, with all these programs and gimmicks, were on a government-subsidized rally, as the young Goldman trader explained to me. “It’s almost criminal,” he snickered.

  Like most young men who go to Wall Street, this trader was drawn to Goldman Sachs for the opportunity to make millions, and after nearly losing it all, it didn’t matter that he was getting rich off the American taxpayer or that Obama promised to squeeze entrepreneurs and small businesses with higher taxes. The young millionaire even explained that, thanks to a fat 2009 bonus, which was derived from all of these government gifts, he planned to retire early.

  But Wall Street had help in another place too. The Financial Accounting Standards Board—the chief regulator of the accounting industry—basically stemmed the flow of losses at the big banks in April 2009 by relaxing rules that forced the firms to price (or “mark”) their assets at actual market value (as opposed to a “model” value, which allows firms to mark assets at whatever they feel they are worth). Before this change went into effect, this “mark-to-market” accounting had helped expose to the world the enormous degree to which Wall Street had become a gambling den rolling the dice in some of the most speculative securities ever created. This accounting rule had forced the firms to take losses on those securities by marking them to the actual, often near-zero values, even if they had no intention of selling those bonds any time soon. It was this type of accounting treatment that nearly forced them out of business in the fall of 2008, and now that hurdle was being removed. It’s good to have friends in the right places.

  Now the mark-to-market rule was gone, thanks to political pressure to relieve the banks of a massive burden during their time of alleged need. What’s more, the Federal Reserve (with the support of Obama’s Treasury secretary, Tim Geithner) spent most of 2009 purchasing on the open market $1.3 trillion of debt, much of it consisting of similar securities to the banks’ depressed mortgage bonds while Geithner planned to have the Treasury subsidize hedge funds’ purchases of mortgage bonds. All of this made the type of investing the Goldman trader was boasting about a no-lose proposition.

  “Any way you look at it,” this trader boasted, “we’re going to have an amazing year.”

  The trader’s comments were, of course, an honest and stark contrast to the absolute horseshit spin (forgive the blunt language, but there’s no other way to describe it) coming out of his firm, and out of all the major firms. As the banks’ PR flacks told it, all that money was being made the old-fashioned way—just by using brainpower and skill to game the markets.

  Given all the money being made at Goldman, Lloyd Blankfein must have known he had the most to lose from profiting so soon after the bailouts. Goldman’s bonus numbers in the spring of 2009 were on a record pace, and suddenly the big firm came up with a new PR campaign. While other Wall Street firms tried to downplay their near-death experience in 2008 or simply thank the American taxpayer for the bailouts, Blankfein chose to take it on directly and ordered his PR staff to rewrite history. As the flacks at Goldman put it, the firm had never really needed the bailout money that it had been given in 2008, nor did it need all the handouts it was receiving as the new administration took over. In other words, the Bush White House had forced it to be bailed out back in 2008, shoving $10 billion in capital down its throat on top of other measures, just as the Obama White House was forcing it to make so much money now.

  When word of Goldman’s new PR strategy, articulated by its sharp-tongued spokesman (and highly paid partner), Lucas van Praag, began to spread, even rivals at Morgan Stanley were shocked. “Why are they drawing so much attention to themselves?” one press official asked me.

  At JPMorgan, Dimon’s PR staff were more subtle than Goldman’s (they shied away from arguing with reporters about whether the bank had needed to be bailed out), but they were nearly as duplicitous about JPMorgan’s postbailout progress. The bank, they said, was simply “earning” its way out of the banking crisis.

  If that was the case, if the Street really didn’t need all these special programs, then why did it continue to use them? And why did they never cease to butter up the new president who was handing out free money? In fact, just the opposite appeared true. Dimon, who was now a regular visitor to the White House, spoke glowingly about how he first met Obama years earlier while he was the head of Bank One in Chicago (which he later merged with JPMorgan to become CEO) and Obama was an Illinois state senator. Sources inside JPMorgan say that during the presidential election, while Dimon’s PR staff said he had to remain technically neutral, Dimon appeared to encourage his staff to funnel money to the Obama campaign and began briefing Obama on the banking crisis. If Obama seemed to be the better versed of the two presidential candidates on the intricacies of the banking system during those days, it was because he had Jamie
Dimon, by most accounts the best manager on Wall Street, lending him a helping hand.

  And that help continued. Dimon took his family to the presidential inauguration, and during Obama’s first year in office, Dimon was seen around the White House so many times directly with the president that he became known in Washington as the “shadow Treasury secretary,” the man Obama trusted most when it came to the economy.

  Meanwhile, the real Treasury secretary, Tim Geithner, was busy meeting with Lloyd Blankfein. The Goldman CEO didn’t have the warm and fuzzy relationship with the president that Dimon had (no one, it should be pointed out, feels particularly warm around Blankfein), but he and Goldman had supported the president enough during the campaign that, like Dimon, Blankfein also had an open invitation to the White House. Records show that Blankfein met with Geithner a whopping twenty-two times in 2009, more than any other CEO.

  What were they discussing? Spokesmen for Dimon and Blankfein characterize the meetings as casual visits to discuss banking policy and how it would affect Wall Street, which might well be true. But what they’re leaving out are the details of those meetings. Those details, I am told, often centered around TARP (the Troubled Asset Relief Program)—the bailout program that injected hundreds of billions of dollars of capital into the banks following the collapse of Lehman Brothers in September 2008. Now that the firms were making money again, they were no longer worried about surviving; their big concern was how much they would thrive. And they couldn’t thrive unless they could pay their traders bonuses that matched their performance, even if that performance was subsidized by the American taxpayer.

  But under TARP, these bonuses were capped—as long as the firms owed that money to the government, the government’s “pay czar,” a man named Ken Feinberg, limited the amount of money each firm could pay its top-earning traders. Feinberg was already sending a chill through Wall Street. Citigroup was forced to sell Phibro, its profitable commodities-trading unit, because Feinberg would not allow it to pay Andrew Hall, the head of the unit, the $100 million he was owed under his contract.