Bought and Paid For

by Charles Gasparino

  But the article struck a nerve, mostly because Goldman couldn’t spin the one essential truth: that the Big Government Goldman had helped to put in place with the rest of Wall Street was in turn helping it create the massive profits and bonuses it now enjoyed. Bonus money is set aside every quarter by the firms, and it didn’t take long for analysts and the financial press to sniff out that 2009 would be a great year. Goldman was on its way to amassing some $23 billion in bonus money, which by past calculations meant Blankfein was on track to beat his 2007 compensation of $68.5 million and possibly earn as much as $100 million. The other big firms wouldn’t match Goldman’s performance, but based on the level of profits being amassed on their trading desks, 2009 was destined to be a great year all around.

  “Someone making one hundred million dollars is taking too much risk, and that can’t be tolerated under the legislation,” Wall Street’s “pay czar,” Ken Feinberg, boomed after I asked him why he forced Citigroup to basically fire a trader who demanded what was due to him under his contract.

  Feinberg, a voluble, straight-talking lawyer, had gained a degree of fame as the special administrator of the 9/11 victims’ compensation fund, where he decided how much money victims of the terrorist attack received from the federal government.

  Now he was earning a degree of infamy, at least on Wall Street, for being the special administrator of something else: Wall Street salaries. Under TARP, the president can appoint a “special master” to determine the propriety of bonuses doled out to top Wall Street executives.

  As long as the firms remained in what they referred to as “the roach motel” of TARP, Feinberg was their master as far as the compensation of their senior personnel was concerned. And much of Feinberg’s analysis on pay revolved around risk—he believed high compensation, even if it was subsidized by the federal government, indicated the taking of outsized risk.

  “Andy Hall [the $100 million bonus Citigroup trader] was taking too much risk,” he added, with his voice rising, “and that’s not allowed under the law!”

  Feinberg is one of the most engaging people I have ever met in government. He’s smart, funny, and above all fair. But he also scared the daylights out of Wall Street, because he built his reputation on being above political influence and, as he showed he would do in the Citigroup case, he was willing to stand up to anyone, even the ultrapowerful Lloyd Blankfein and Jamie Dimon.

  “He’s out of his fucking mind!” an executive at JPMorgan Chase told me after hearing the news about Hall, one of the most prominent commodities traders on Wall Street. As it turned out, Citigroup was forced to get rid of not just Hall but his entire trading business because it made so much money.

  And with that, the entire Street, Citigroup included, made a mad dash for the exits of the roach motel.

  With so much money flowing in, the firms now demanded approval to repay the government’s TARP money. Citigroup was the basket case of the banking system, but it too could repay its bailout money and began developing plans to do so before the end of 2009.

  Just months after being saved by the government, Dimon, Blankfein, and Mack spent countless hours on the phone with people like Emanuel, Geithner, and many lesser bureaucrats explaining how strong their balance sheets had become, even if many analysts believed the financial system, just a few months after the meltdown, wasn’t yet on firm footing.

  At first the administration balked at all the requests; the system was too fragile, Geithner argued. The bank “stress tests” to determine the strength of their balance sheets hadn’t been completed, even if the firms referred to them as “feather tests” for the low bar set to pass these examinations. Then the adminstration seemed to balk at every firm except Goldman, which was showing the strongest profits and, of course, was making use of its continued power inside the halls of government.

  “If those bastards think they’re going to let Goldman out and not us, they’re crazy,” said a senior executive at Morgan Stanley when word began to leak that Goldman had the green light to repay the $10 billion it had received under TARP. “Jamie Dimon is going to go bat shit.”

  And he did. In meetings with administration officials, including regular meetings with the president himself, Dimon turned up the heat: His firm just couldn’t be competitive with Feinberg breathing down his neck. (More than that, how would he pay himself?)

  When you meet with the president on a regular basis, it becomes rather easy to get what you want, as Dimon was now discovering. Obama may not have been the most economically sophisticated president in recent history, but he did lean on Dimon for advice from time to time, with Dimon making regular trips to the White House to dispense his economic wisdom.

  It’s unclear how the president’s near-socialist leanings gelled with Dimon’s liberal but more market-driven philosophy, but it appears Dimon’s advice on compensation hit home.

  Along with Goldman and JPMorgan Chase, Morgan Stanley was among the first firms to repay the TARP money, and therefore it was free to pay its bankers and traders any way it saw fit. But there was little celebration; Mack made sure of that. While Lloyd Blankfein and his inner circle were counting their winnings and the days before they could once again cash those big bonus checks, Mack saw the coming tsunami of bad publicity and was busy trying to figure out how to act. He began calling up Blankfein, asking how he would handle the PR firestorm when it came—and it was only a matter of time before it came. Blankfein, Mack would later remark, either didn’t know or didn’t care about the fallout.

  It was around this time that Mack took a trip down to Washington to meet some friends in the Obama administration. In mid-2009, the administration was preoccupied with issues other than Wall Street bonuses, namely the economy, which continued to lose jobs, the twin wars in Iraq and Afghanistan, and the president’s falling poll numbers. Even so, Mack worried about an increase in the attention being paid to the inequality of Wall Street’s resurgence, with Wall Street pay surging while Main Street suffered from 10 percent unemployment.

  At one point he asked Larry Summers, Obama’s chief economic adviser, for advice. Summers wasn’t as attached to Wall Street as was his mentor Bob Rubin, who had just retired from Citigroup after becoming the target of populist ire over his role at the bailed-out bank, but he wasn’t an innocent bystander, either. Before joining the administration, Summers had worked for D.E. Shaw and had walked away with $8 million for strategic advice and speech making before joining the Obama team. Not bad for a couple years’ work.

  Mack’s question involved Wall Street’s bonus pool, namely what the Obama administration wanted firms like Morgan Stanley to do. Mack was asking for guidance now instead of waiting because the press attention to the issue of bonuses and bailouts was starting to grow.

  But Summers, according to what Mack has told people, didn’t seem fazed by the prospect of massive Wall Street bonuses, as the firms began to repay TARP money to the government. When Mack asked him for guidance, Summers shot back, “How would it look for government to be giving private businesses guidance on something like compensation?” Other than the so-called pay czar, Ken Feinberg, who was mandated by Congress to regulate the compensation of the top twenty executives at firms that hadn’t yet repaid TARP money, the administration wanted nothing to do with the issue. At least that was the impression Summers left with Mack. Wall Street, as far as Summers and his boss were concerned, could just do what it liked when it came to bonuses, the few people subject to the TARP restrictions aside.

  In other words, Wall Street really did have a friend in one of the most liberal presidents since FDR.

  6

  DOING GOD’S WORK

  By the end of 2009, the outrage over Wall Street’s evil ways seemed to be growing by the day. Much of it was fueled by anger over the Street turning into a profit machine (funded by the American taxpayer) just over a year after the record taxpayer bailouts. Then add on top of that the reports that the firms were getting ready to hand out record bonuses to their bank
ers and traders. In another era Lloyd Blankfein would have been showered by love letters from his clients and shareholders. He was running the most successful firm on the Street, having turned a loss in the last quarter of 2008, the peak of the crisis, into four consecutive quarters of massive profits. Goldman had earned about $13.4 billion in 2009, projected to do at least that much or even better in 2010, and was now setting aside $23 billion for company bonuses to its bankers and traders.

  But Blankfein had to hold off on the celebration. With the bailouts of 2008 still fresh in the public’s mind, Goldman had come to embody all that was wrong with the American economy and the president’s approach to it. Unemployment remained high—the “official” unemployment rate (which most economists agree understates the actual level of unemployment) hovered around 10 percent, even as economic growth (as measured by the nation’s GDP) was signaling that the great recession was nearing its end. But the GDP didn’t reflect the true state of the country, where the president’s plan to revive Main Street—an $800 billion stimulus program of so-called shovel-ready jobs—had been a colossal flop, unless of course you worked in government, where unemployment continued to remain low. Or unless you worked on Wall Street, which just a little more than a year after the 2008 collapse and bailout was flourishing, thanks to its ties to Big Government and the myriad benefits that government doles out—but only to the politically connected. Citigroup, JPMorgan Chase, Bank of America, Morgan Stanley, and Goldman Sachs in particular were printing money, mainly on their trading desks, where they could borrow at next to nothing and invest risk free in bonds because they were “too big to fail.”

  How on earth has Goldman Sachs (as well as one of its chief competitors, JPMorgan) managed to amass so much in profits so soon after the financial system nearly collapsed? We’ve explored some of the answers already, but here’s one we’ve haven’t yet discussed: Technically, Goldman Sachs is a commercial bank. A commercial bank is the kind that you and I keep our money in, with ATMs, tellers, and the rest, as opposed to an investment bank, which arranges for the flow of massive amounts of money between governments and corporations and undertakes highly risky trading activity for profit.

  Try opening a checking account at Goldman or Morgan Stanley or finding an ATM in the lobby of their headquarters in Manhattan. Good luck. And by the way, neither bank is offering debit cards anytime soon, at least as far as I know. Even so, during the height of the financial crisis both Goldman and Morgan Stanley became bank holding companies, and with that earned not just the protection of the Federal Reserve but also all the benefits that come with being a bank, including access to the Fed window for emergency borrowing and government guarantees on the firms’ long-term debt, which allows the firms to borrow cheaply.

  The classification was designed to stave off panic in the financial markets—lines of credit were drying up, and without access to capital to trade and invest, Goldman would have followed Lehman and Bear into extinction. But now that the crisis was over, these benefits amounted to nothing short of a huge taxpayer subsidy for the firm’s shareholders, as their stock started to climb back to its pre-banking crisis levels, and the bankers and traders at the firm, who would be entitled to big bonuses at the end of the year.

  By the start of 2009, Obama began to sense the public’s growing anger and said of bankers’ pay: “[There’s a time] for them to make profits, and there will be time for them to get bonuses. Now’s not that time. And that’s a message that I intend to send directly to them.” If Obama ever intended to send that message, he clearly never followed through, because just a year later, Goldman has used all the taxpayer-subsidized benefits allotted to the firm—in effect a taxpayer subsidy—to amass enormous riches.

  Executives at the Wall Street firms were now admitting that behind the eye-popping numbers was the growing likelihood of the mother of all paydays. Barring the Fed’s raising interest rates (Bernanke vowed he wouldn’t, and based on that pledge, Obama was eager to reappoint him and push for his Senate confirmation) or the Treasury removing the banks’ protected too-big-to-fail status, Wall Street seemed to be on course for a record year. The firms would be more than able to repay the TARP money, their executives bragged, which meant they would not have their salaries capped by Obama’s executive pay czar, Ken Feinberg, and could dish out bonuses any way they saw fit.

  How did the banks justify this publicly? Goldman continued to argue that it was the first firm to repay the $10 billion loan it had received during the financial crisis (it would be followed by JPMorgan, Morgan Stanley, Bank of America, and finally Citigroup) and that it was the firm best prepared to withstand the financial meltdown in 2008—both of which are undoubtedly true—and, of course, that it didn’t really need all those billions in bailout money.

  The others went to the public with the standard line that they were no longer wards of the government, that they weren’t being bailed out anymore, so what was the harm in compensating the people responsible for their trading profits?

  Word of the spin even caught their best friend in the White House by surprise. Barack Obama, as well as key members of his cabinet, owed the big Wall Street firms many things, including their tireless support during the campaign. But as he heard the PR spin repeated on business television and on the business pages of major newspapers, even Obama and key cabinet members were blown away by the arrogance, people close to him say.

  Obama’s reaction to the bonus news and Wall Street’s spin may have been best chronicled by journalist Jonathan Alter in his book The Promise. “ Let me get this straight,” Alter quotes Obama as saying as he heard the big firms rationalize making so much money so soon after the bailouts and while the special privileges continued. “They’re now saying that they deserve big bonuses because they’re making money again. But they’re making money because they’ve got government guarantees.”

  Obama might have projected verbal outrage, but actions speak louder than words, and his policies all but ensured that the banks would make so much money through 2009 that bonus pools would swell to astronomical levels. Those policies, combined with the banks’ PR chiefs’ spin, only compounded the public’s distaste for Wall Street and the double standard the president privately recognized but did little to correct.

  The biggest beneficiary of the bailouts and the postbailout environment once again was Goldman Sachs, which has a long history of figuring out ways to profit beyond its competitors. No matter how many times the firm attempted to say that the bailout money was forced down its throat (in reality the firm digested $10 billion worth without a hiccup) or that it hadn’t benefited from the AIG bailout, a simple question remains unanswered: If Goldman didn’t need handouts to survive 2008, why didn’t it just return the cash to taxpayers?

  That was because, thanks to the various rescues, Goldman eked out a small profit for 2008, around $2.3 billion. As a small sign of contrition, Blankfein, whose net worth is at least $1 billion, chose not to take a bonus that year, but others at the firm did: Goldman handed out nearly twice as much in bonus money as it made in taxpayer-induced profits. Yet the firm’s profits in 2009 were now likely to be six times larger, and based on prior bonus calculations tied to the firm’s performance, the CEO’s compensation could approach $100 million, 50 percent more than his $67 million bonus in 2007. That’s right, Lloyd Blankfein was on track to earn nearly $100 million as Goldman’s government-supported profit making grew to new heights.

  Those in Goldman’s orbit benefited as well. Consider the windfall received by Warren Buffett, the legendary investor who had sunk $5 billion into Goldman during the dark days of the financial crisis, literally a week after Hank Paulson began handing his crony capitalists the bailouts that wouldn’t end for the next four months. The deal gave Buffett the option to buy Goldman Sachs stock at $115 a share, and as Goldman shares headed toward $180, Buffett had earned nearly $3 billion.

  Buffett, like Blankfein, was a big supporter of President Obama, and for all his folksy charm and past
appreciation for fiscal prudence, he never once commented on the irony of the fact that he, one of the greatest capitalists of all time, was benefiting not just from the bailout money but also from the continued largesse of hardworking Americans, whose taxpayer dollars were being showered upon the big banks. Even so, Buffett, safely ensconced in Omaha, escaped being a target of the populist ire, but Blankfein and Goldman did not.

  That populist ire—and how it’s being played by various politicians—is something that Goldman truly hates. There is an interesting irony with Goldman; investors believe the firm is the most ruthless of the big Wall Street investment houses in terms of trading against their customers’ best interests. And yet inside Goldman, top executives, led by Blankfein, believe theirs is the most ethical of the big firms. To them, being called a crook is a deadly slur, as Democratic senator Harry Reid discovered one afternoon when Goldman president Gary Cohn cornered him at a fund-raiser at Goldman’s headquarters in Manhattan and said, “Who do you think you are, coming here asking for money while you trash us?”

  Reid was now in a particularly tight spot: Like most Democrats, he was taking his cues from the White House, and banker bashing was one of his election-year talking points (2010 being a year when many House and Senate seats were up for grabs). At the same time, he needed money, lots of it, because his support of the president’s unpopular heath-care plan and other measures gave him a Wall Street-like approval rating in Nevada, a moderate- to conservative-leaning state he had represented for two terms.

  In other words, if Reid was to win a third term, he needed Wall Street money nearly as much as he needed to bash Wall Street bankers and traders.

  What’s even more ironic about this episode is that Cohn himself had invited Reid in to Goldman to visit with the firm’s bonus-stuffed traders a couple of weeks earlier. Part of the reason why Cohn agreed to the request was that the Goldman president was a committed Democrat—one of the Street’s earliest supporters of Obama. But Cohn had his reasons too, and he wanted Reid and the rest of the Democratic Party to understand that Wall Street, Goldman in particular, was pretty tired of being used and abused.