Will the economy take a hit as interest rates rise on bonds to attract buyers, meaning higher interest rates on everything from mortgages to credit cards? Don’t ask Jamie Dimon, Vikram Pandit, Brian Moynihan, Lloyd Blankfein, or any of the other members of Wall Street’s brain trust.
The smartest, most powerful men in American finance and their firms remained largely silent on the biggest financial issue of the day—the economic impact of Obamacare—even as a national debate was raging on talk radio, cable television, and the editorial pages of the country’s biggest newspapers.
The rating agencies, Moody’s, Standard & Poor’s, and Fitch, after the embarrassment of failing to warn about the housing bubble were almost equally silent, unless, of course, you count their tepid remarks assessing the slightest possibility that the spending of Obamanomics could cause them to downgrade the status of the U.S. government’s triple-A rating someday long in the future. After all, who at the rating agencies is going to risk offending the entire U.S. government, not to mention all the agency’s clients, the big banks that provide the vast majority of their business while they feast off government handouts?
It’s just another example of what “bought and paid for” is all about.
At bottom, the Street knows that the profits it reaps from its relationship with Big Government are worth being called names. Much of the negative populist rhetoric from the general public and from politicians is recognized by Wall Street as just that, rhetoric.
Likewise, the heads of Goldman Sachs, JPMorgan Chase, Morgan Stanley, Citigroup, and Bank of America—the survivors of the 2008 crash—were coming to the conclusion in late 2009 and early 2010, as the broad outlines of the president’s Wall Street regulation began to take shape, that they might not like everything that appeared in the new financial reform legislation (which, as this book goes to press, was recently signed by the president), but they liked most of it—around “80 percent” of it, according to an executive at JPMorgan.
Why so much? It’s quite simple. The president may want the banks to give a little more back in the form of higher taxes (that they will just pass on to consumers) or better disclose their trades of the complex securities known as derivatives, but the bill all but assures that the mutually beneficial relationship between DC and Lower Manhattan remains largely untouched.
In the end, both Wall Street and Washington are getting what they wanted: Obama counters the public’s perception that he’s too soft on Wall Street while being careful not to offend his rich banker friends too much, so he can still tap their campaign cash for the 2012 presidential election. And Wall Street suffers a little in the form of tightened regulation, but even the most free-market of Wall Street kingpins acknowledge, at least in private, that some bill was going to have to be paid after they nearly brought down the global economy. In the meantime, they’ve had two years (or more) to reap many tens of billions of dollars in profits (in that sense, the financial crisis has actually been a net positive for Wall Street), while most important, even though some reduction in profit from the financial reform bill will certainly take place, the key mechanisms that have been the drivers of their historic profits (and bonuses) will remain to generate future returns.
For Goldman, JPMorgan Chase, Citigroup, and the rest, that special too-big-to-fail status is tantamount to the power to print money—because they are guaranteed such protection, they can borrow cheaply to make the risky trades that have returned the firms to record profits.
What better way, if you’re the president of the United States, to pay off your largest supporters?
For all the press coverage of the administration’s attacks against Wall Street, of Obama’s call for more new regulations (did the president ever meet a regulation he didn’t like?), there is much that Wall Street would like in the bill and a lot more that they like in Barack Obama.
And while Wall Streeters like Gary Cohn, with his assault on Harry Reid, and Jamie Dimon, with his increasingly negative feeling toward the Democrats, have made no secret of their distaste for the rhetoric coming from Washington that paints the typical Wall Street executive as a greedy tycoon, they, like the rest of their staff, can fully appreciate what the president is doing: using Wall Street as a whipping boy for an outraged public but doing little to disturb the status quo as he looks for the same support for his 2012 campaign that he received for his 2008 effort. As one senior JPMorgan Chase executive told me as this book goes to press: “He’s already cutting back on the name-calling and soon will be looking for money.”
Exactly so: Being bought and paid for means that you serve the needs of your benefactor, whatever those needs may be.
8
MONEY WELL SPENT
“There’s no guarantee we’regoing to be paying that much in bonuses,” explained an increasingly exasperated Lucas van Praag. “Trust me.”
The problem for Goldman’s expensive mouthpiece was that no one was trusting either him or his employer much these days. The firm had basically bragged it didn’t need the bailout money it had been given, something that even Obama found offensive, not to mention Goldman’s former CEO Hank Paulson, who had written the initial bailout check when he was George W. Bush’s Treasury secretary. Now Goldman was once again trying to downplay the obvious: The firm set aside $23 billion during 2009 in bonus money.
And somehow, according to Van Praag, not all of that money would find its way into the pockets of Goldman’s risk-taking traders. Or Blankfein himself, who was making Van Praag defend the absurd to the point that the flack’s reputation among reporters had fallen to Nancy Pelosi-like levels of unpopularity. Stories began to appear that chronicled his various equivocations. A fake Twitter account was created in his name, mocking his British-accented defenses of the firm, and the press attention began to unnerve Van Praag.
“I would just love to be on an island somewhere and forget about all of it!” he moaned to a couple of friends one afternoon just after the McClatchy news service published a lengthy exposé raising questions about how the firm had “benefited from the housing crash” while the rest of the nation suffered.
The story was basically a rehash of much of what was known about how Goldman had profited off the housing collapse. While Americans were being foreclosed on, Goldman traders in 2007 were getting rich, in some cases shorting, or betting, that mortgage bonds would decline in value even as it sold similar securities to its clients. Goldman officials, including CFO David Viniar, one of the key people at the firm who had devised this strategy, kept assuring reporters, analysts, or anyone who would listen that it was nothing more than a hedging technique to reduce risk. Ironically, while the firm was reducing risk it was also mysteriously increasing profits, so much so that Blankfein walked away with a record bonus that year.
The McClatchy story didn’t have the gravitas of a Wall Street Journal exposé or the sensationalism of the one from Rolling Stone, but it hit a nerve. The McClatchy news service was decidedly Middle American, with thirty newspapers in fifteen states reaching over two million people. Bashing Goldman Sachs suddenly became a mainstream sport as the article was picked up by television and radio shows across the country.
Despite the fact that they had become the most hated people in America, by early 2010, Wall Street bankers and traders and the posh restaurants in New York that catered to them were flourishing. It was standing room only at the expensive eateries—Campagnola, San Pietro, and the Four Seasons—where the bonus babies were spreading their wealth. As predicted, 2009 had been a really good year, at least for Wall Street. In fact, it had been its fourth best ever in terms of overall compensation and on par with what Wall Streeters had made in 2004, when the markets were raging.
The joy extended not just to the partners at Goldman, with its titanic bonus pool, but also to Morgan Stanley, which despite its near-death experience at the end of 2008 found it could easily pay its new CEO, James Gorman, $15 million for 2009, even as it boasted that John Mack, now the chairman and the man who had sa
ved the company during the crisis, would forgo his bonus for a third year in a row. (The firm later disclosed that Mack earned a “salary” of about $1 million, or $939,000 to be exact.)
Even lowly Citigroup, which because of its size and the fact that the government still owned 27 percent of the firm in spring of 2010, was not doing as well as the other banks, still found ways to pay its people handsomely. And a near revolt among traders and brokers at Merrill Lynch who hated working for the Charlotte, North Carolina-based executives at still-wobbly Bank of America was quelled by generous bonus packages—the vast majority of them in cash despite the media-publicized myth that firms were handing out their bonuses in restricted stock that couldn’t be cashed in for a number of years as a way of incentivizing their traders toward long-term goals. The final 2009 bonus tally appearing during the first quarter of 2010 went something like this: With all eyes on Goldman’s money making, Bank of America seemed to escape media attention as the firm that paid out the most money to its executives in 2009. Blankfein and company, who were obviously hypersensitive to being singled out not only as the great Satan of Wall Street but as its most highly paid devil worshippers, came in midrange while the real shocker was Citigroup, which topped the bonus payment charts.
The most bailed out of the big firms was making money again (who couldn’t in this environment?), so much so that at the end of 2009 it joined Bank of America as the last two firms to officially repay TARP. Now, breathing a small taste of freedom (the government was trying to unwind the stake it had taken in the company as part of the bailout), the bank was free to pay its people like real Wall Streeters again.
While other firms paid more than half of the bonus grants in stock, Citi handed out much more generous cash awards, signaling that for all the improvement Pandit was boasting about, its shares weren’t likely to trade much higher than the $3.50, at least for the foreseeable future.
When Wall Street had doled out some $20 billion in cash bonuses just months after the bailouts the previous year ($123 billion in overall compensation), the president had described it as “shameful.” Now he had even more choice words for his Wall Street friends. But they, at least for the moment, seemed not to have a care in the world. And they traded that way. For all the PR talk about how the big firms had learned their lesson and scaled back on risk, just the opposite seemed to be the case: Goldman Sachs took more risk in 2009 than it did in 2008, allowing it to earn a profit of $100 million per day in 131 trading days—a Wall Street record. Its results so far in 2010 meant it would likely meet or surpass that record, and the rest of the banks weren’t far behind.
They weren’t far behind in their arrogance, either, as they brushed aside suggestions that their firms’ profits and their traders’ bonuses were primarily the result of Big Government. Goldman, meanwhile, continued to offer the most brazen defense of its success, as Lucas van Praag and the firm’s PR staff trotted out their tiresome reasoning that the traders at Goldman were just better and smarter than the rest of the Street.
That may be true, but it’s also like bragging you’re the tallest midget in the room. The reality for Wall Street was something the bankers either didn’t want to admit or couldn’t bring themselves to concede: that in the era of Obamanomics they were now in a sense reduced to highly paid bureaucrats being bailed out by Big Government, granted enormous wealth because of government handouts and certain to face more regulation from Washington.
But they were still highly paid, and on Wall Street that’s often all that matters.
“This has been a very good year—very good,” boasted one investment banker at Merrill Lynch who specialized in getting municipalities to issue more debt, which they were doing, at Wall Street’s behest, like never before. Tax revenues were going down because of the great recession, but borrowing had skyrocketed, and not just for municipal projects. The shell game of municipal finance was that all that bond money got thrown in a big pot, and much of the financing went to plug budget gaps.
While bankers at Merrill Lynch (now part of Bank of America) were making money feeding the needs of Big Government, bankers at Goldman were both counting their massive year-end bonuses and trying to ignore the company’s notoriety, which seemed to grow by the day among average Americans thanks to the McClatchy wire service story and many others.
“Why the fuck should we care?” a senior Goldman executive asked me at the time. “Our clients don’t read the fucking McClatchy wire service.”
He was right—the typical Goldman client read the New York Times and the Wall Street Journal. McClatchy, with its newspapers in South Carolina and Sacramento, was beneath Goldman Sachs, which had former CEOs who were Treasury secretaries and cabinet members, the kind of people whom Fortune 500 CEOs looking to hire an investment bank care about.
But as Blankfein and his team were starting to discover, Goldman’s “clients” were no longer the guys paying the bill—they were the public officials who were making the rules about how much money the firm could make and whether the subsidies it had feasted on during the past year would continue.
Barack Obama didn’t create the financial crisis in 2008, but he certainly created the uneven economic situation of 2009 and 2010 that allowed Wall Street to make so much money while America had to suffer through another dismal year of low employment.
Was Obama just tone deaf when it came to the economy, or just plain financially incompetent? Or was he so ideological in his approach to government that he ignored the suffering of average Americans who were out of work to spend his time pushing for a health-care entitlement and promising higher taxes on individuals, entrepreneurs, and small businesses while the jobless rate remained steady at around 10 percent?
No one will ever know, except maybe Obama himself. One thing is certain: The guy who appeared so smart and poised during the campaign couldn’t seem to get his arms around some simple economic facts, namely that his policies offered none of the massive incentives to most businesses that they offered the favored few, namely the banks and brokerage firms (and a few large companies like General Electric that embraced his social agenda of “green jobs”), no matter how many times he called them names. A factory in South Carolina won’t hire additional workers if management expects more taxes (as Obama was promising), bigger entitlements (like health care), and higher energy costs.
But on Wall Street the incentives were everywhere, including, most prominently, low interest rates and increased government protection. By the spring of 2010, Wall Street was doing what it had done in the post-meltdown period: trading even more mortgage debt and racking up monster profits. At Goldman Sachs, so much of the firm’s profit was derived in one form or another from bond trading that even executives inside the firm compared the situation with the firm’s precrisis heyday, the only difference being that Goldman, like the rest of the Street, was feasting off a market that was being directed almost solely by the very visible hand of government (even if every major bank had by now boasted that it had repaid the bailout money given to it during the dark days of 2008 and early 2009).
In early 2010, President Obama’s Treasury Department proudly announced that Citigroup’s repayment of its TARP money and the government’s planned sale of its 27 percent stock ownership of the firm would net the American taxpayer some $8 billion. But like most things involving Obamanomics, the devil is in the details. The Treasury’s analysis ignored the costs of hundreds of billions in “ring-fenced” assets (a term used mostly to describe the billions in toxic mortgage debt) that Citigroup held and that the American taxpayer had guaranteed against failing, as well as other programs designed to make life easier for the bankers. For the bankers, ignoring Obama’s radical past while demonizing Sarah Palin at their Manhattan cocktail parties had its benefits. The technocrats at the Obama Treasury Department and at the Fed—whose chairman, Ben Bernanke, was a Bush appointee who had earned the support of his new left-wing boss—would say that this program was needed to remove the toxic debt sitting at depresse
d prices on the banks’ balance sheets. They will tell you all the government programs were freeing up capital so businesses could borrow and expand. But the average American small businessman would tell you the programs weren’t working and that despite positive economic growth, the banks were still nearly as tight-fisted with their money as they were during the financial crisis.
Election years bring lots of surprises, and none bigger for Wall Street than the resurrection of Paul Volcker as the 2010 midterms approached. The aged former chairman of the Federal Reserve was supposed to serve as nothing more than window dressing for the Obama administration—his early support had given Obama much-needed assurance in economic circles that the candidate wasn’t the flaming liberal that his detractors tried to portray him as.
Volcker, a committed Democrat, had, after all, first been appointed as Fed chairman by president Jimmy Carter, had been reappointed to run the Fed in the early 1980s by conservative icon Ronald Reagan, and is credited with taming the economic malaise of the late 1970s and early 1980s—so-called stagflation, the lethal combination of high unemployment and high inflation. Volcker squeezed inflation by raising interest rates to historic highs, and he did it with brass balls. When called before Congress to answer for the 20 percent interest rate he had imposed and the consequent economic despair it was causing, he rolled a cheap cigar in his mouth and calmly but firmly explained that it was the necessary medicine for years of excess. And he was right. The short-term pain of high unemployment ultimately gave way to long-term economic gain. Once inflation fell, so did interest rates, and when combined with the Reagan tax cuts the economy took off on a decadelong boom.
Volcker had since left the Fed and continued on as a consultant, but one that was decidedly anti-Wall Street. Unlike his successor, Alan Greenspan, he hated the newfangled financial alchemy that spread though the banking system in the 1990s, the newfangled bonds, and most of all the newfangled banks—and he constantly and continuously let the world know it. He showed particular contempt for Citigroup. By commingling investment banking, risk-taking traders, and customer deposits under one roof, Volcker thought Citi had become a disaster waiting to happen, no matter how much its founders, Sandy Weill and Bob Rubin, were initially celebrated. And based on the events of 2007 and 2008, he was right.
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