Bought and Paid For

by Charles Gasparino

  Rubin may have influenced Geithner and Summers to support Pandit, and the firm’s return to profitability (it earned $4.4 billion during the first quarter of 2010), seem to have given him job security. But to this day, FDIC chief Sheila Bair cannot bring herself to accept Pandit as someone who can adequately lead Citigroup, with its massive size and still billions of dollars in problematic loans and investments, completely back to health. More than any other bank, Citigroup’s recent good fortunes, Bair has told people, were the function not of good management but mainly of a combination of factors beyond its control, such as record-low interest and the bailout mechanisms created during Bush’s last term and extended under Obama.

  Pandit never sold much of the vast and unwieldy pieces of the Citigroup empire that he promised; thus he still manages a huge mess of a bank. What happens once the Fed begins raising interest rates and Citigroup’s traders can’t make up for losses on loans and other investments? What happens if the economy, which based on GDP is slowly improving but based on unemployment of nearly 10 percent is struggling, takes a dramatic turn for the worse and falls once again into recession, as some economists (including Alan Greenspan) began predicting in mid-2010?

  The FDIC, after all, is ultimately responsible to cover all those deposits at Citi, some $800 billion worth, if it faces another crippling crisis where out-of-work consumers fail to repay their loans and the bank once again faces steep losses.

  Vikram Pandit, no matter how many times Bob Rubin comes to his defense, simply isn’t up to the task, Bair believes.

  Maybe worse, Bair has never forgiven Pandit for a conversation the two had back in 2008, at the height of the banking crisis, when Citigroup believed it had managed to bail itself out by joining forces with Wachovia, a troubled but deposit-rich bank headed by former Goldman vice chairman and Bush administration Treasury official Bob Steel. To make the deal work, the federal government said it would guarantee some of the losses on Wachovia’s holdings of toxic loans and other securities, and Citigroup would benefit from a cash cushion of tens of billions of dollars in customer deposits that it could borrow from in a pinch.

  Without telling Pandit, Bair gave the green light for another bank to step in and buy Wachovia. That bank was Wells Fargo, which not only outbid Citigroup for Wachovia but agreed to do the deal without government assistance.

  Pandit was woken up in the middle of the night with the news, just days before his deal with Wachovia was supposed to become official. One person with knowledge of his reaction described it as “bat shit,” in his subsequent conversations both with Steel and with Bair.

  Inside Morgan Stanley, Pandit’s old firm, the rumor began to spread that Pandit had lost his temper with Bair in an expletive-laced conversation, something Bair won’t deny (Pandit described it as “testy”). Whatever was said, throughout 2009 and into 2010, Bair went on the offensive against Pandit, forcing him to remove his CFO and placing his own job in jeopardy were it not for his support from Geithner and Summers.

  As I pointed out earlier, Pandit may not be a talented CEO, but he is lucky; Bair’s power in regulatory circles has receded of late (she’s expected to step down at the FDIC after the end of the year), and he knows how to grovel. Pandit continues to speak openly about the need to pass financial reform and how much progress his masters in the Obama White House and in Congress have made in crafting legislation that will protect the financial system.

  But no amount of kissing up to Congress and bowing to the Obama economic team can change the fact that Pandit’s Citigroup is still a monumental mess—too big and lumbering to make the type of money he’s promising and, of course, too worrisome for the regulators just to let die.

  “Tom, you care about your relationship with Rahm Emanuel more than you care about Morgan Stanley!” That was the analysis of an increasingly desperate Michael Paese, a lobbyist at Goldman Sachs who was imploring Tom Nides to use his considerable clout with the White House to get the president and the Democrats to ratchet back the class warfare and some of the more onerous aspects of the financial reform package as it neared completion in the spring of 2010.

  The financial reform legislation as it came together in mid-July 2010 was a Rube Goldberg contraption containing more than two thousand pages of amendments and rules that the senior executives at the top banks had a hard time figuring out.

  One of the great things about Wall Street is that even as it said it accepted the broad outlines of financial reform, it continued to fight over the very important details—in Goldman’s case whittling down the Volcker rule as much as possible, particularly its provisions on prop trading, and, it hoped, receiving a respite from the political attacks, which had hit Goldman and Blankfein harder than anywhere else.

  These days Paese, a former top aide to House Financial Services Committee chairman Barney Frank, was on speed dial from Blankfein, who wanted constant updates on his efforts and the politics surrounding the firm’s image problems, and how that was shaping the new reform legislation. Paese, who has long experience working on Wall Street and in government positions that influence Wall Street, was particularly valuable to Goldman because of his ties to Frank, who was now emerging as the principal coauthor of the banking bill, along with Chris Dodd.

  But Paese was increasingly powerless, as was the rest of the Street, in getting the people he had most power with—the ruling Democrats—to back off not only financial reform’s harshest rules but also the anti-Wall Street talking points, which almost always began with some Goldman bashing.

  What was particularly hard for Paese, Blankfein, and the rest of Goldman’s senior management to accept was how Goldman was being used by the administration. Every political attack on the firm and the numerous investigations into its business practices had a single objective: to squeeze not just Goldman but also the rest of the Street into submission and force it to accept financial reform’s most onerous provisions.

  Paese had reported back to Blankfein that he suspected Dodd was being prodded by the president’s political advisers to keep the Volcker rule in place, though it was unclear whether it would make the final cut. As for the name-calling, the only thing he could do was lobby against it or convince people like Nides, who had a direct pipeline to people like Rahm Emanuel, to lobby against it.

  That’s what he was doing today.

  Nides said he would do all he could, and not just because someone at Goldman was telling him to do so. He was under fire from his boss as well to do something to turn down the volume of the attacks. John Mack had retired as CEO of Morgan Stanley effective January 1, 2010, turning over the top job to his number two, James Gorman. He was still chairman of the firm and still powerful. He traveled the world helping Morgan win investment-banking deals, and he spent a lot of time talking to people in Washington.

  Mack earned kudos from people like Warren Buffett for saying things that most Wall Street executives wouldn’t: that the pay packages of the past decade (which he had benefited from) were too high and that Wall Street was addicted to risk taking. In fact, Mack had gone without a bonus for the past three years of the financial crisis and while Blankfein had been trying to convince the world that Goldman hadn’t been bailed out, Mack had been thanking the taxpayers for the bailout. And in that context, he couldn’t fathom taking a bonus this year.

  And yet, as Mack was finding out, it wasn’t enough. “People just fucking hate us,” Mack told Nides, before reminding Nides that the public’s hatred of Wall Street was growing because “your friends are fucking us,” meaning his Democratic Party pals, who seemed to relish holding Wall Street responsible for everything from the financial collapse to the influenza epidemic at the turn of the century.

  Mack and Nides had been friends for twenty years, and yet if there was anything that created a small degree of tension in their relationship it was, first, that Nides began to immediately kiss up to Mack’s replacement, Gorman—“I’m amazed how fast Nides had his head up James Gorman’s ass when he took my job,”
Mack remarked—and second was the notion that somehow Nides’s friend, the man whom Nides had implored Mack to jump party lines and support, President Obama, was “fucking” Wall Street and Morgan in particular. The firm wasn’t in Goldman’s league in terms of lop-sided support of Obama in campaign contributions, but Mack had been one of the first of the CEOs who supported Bush to throw his support to the Democrats back in 2007, initially to Hillary Clinton and then to Obama.

  And he didn’t just say a couple of nice things about the Democratic agenda on the PBS television show hosted by his friend Charlie Rose. Mack opened up the firm to Obama fund-raisers—not an easy thing to do at white-shoe Morgan Stanley, which had often leaned Republican. He went before Congress, apologized for the firm’s risk-taking activities, spoke out against executive pay, and kept his mouth shut (not easy for Mack, given his own rep for having a sharp temper) when he was being called a fat cat.

  Nides initially corrected Mack—he wasn’t friends with the president. Rather, he was friends with the president’s chief of staff, Rahm Emanuel, whom he spoke to constantly on this very subject. He then reminded Mack of Emanuel’s response: They say they’re the only ones standing between us and the angry mob of pitchfork-carrying Tea Partiers.

  Mack’s own response, I am told, went something like this: With friends like these, who needs enemies?

  That’s what Blankfein was saying as he was sitting in his New York office when word came from his attorneys that the case Goldman had thought it could convince the SEC not to bring had been brought.

  Without even a warning, the SEC had filed civil fraud charges against Goldman for, on behalf of a client, packaging a toxic security derived from a mortgage bond, shorting it (betting the security would decline), and then selling the same investment to other unsuspecting clients. The announcement sent Goldman’s stock down more than 12 percent—wiping $12 billion out of the firm’s market value. By the end of the day, the Dow Jones Industrial Average had lost 125 points on trader speculation that the case against Goldman was just the beginning of a larger assault on the Street to hold the bailed-out firms accountable for the financial meltdown of 2008.

  On its face, the case itself seemed like a microcosm of why the public so hates Wall Street: greedy billionaires screwing each other and then screwing themselves so much that they needed to be rescued by the average taxpayer. Specifically, Goldman, the SEC said, had caused investors to lose as much as $1 billion by failing to disclose that the bonds it was selling were constructed in such a way as to be doomed to fail, and that failure was one of the contributing factors in the entire banking system meltdown.

  Back in late 2006, the now-famous short seller John Paulson came to Goldman with an idea: to create an investment (a collateralized debt obligation, or CDO, that would come to be named Abacus) that would help him make money if housing prices fell, as he predicted. The rest of the Street, still drinking the Kool-Aid and believing that housing prices would never fall, either didn’t grasp the potential or saw ethical conflicts that made them shy away.

  In fact, of all the firms Paulson approached, it would be the one with the reputation for being maybe the most ethically challenged player on the Street, Bear Stearns, ironically enough, that said no for ethical reasons, as Greg Zuckerman describes in his book The Greatest Trade Ever: “[Bear Stearns] worried that Paulson would want especially ugly mortgages for the CDOs, like a bettor asking a football owner to bench a star quarterback to improve the odds of his wager against the team.” Bear’s Scott Eichel would tell Zuckerman, “It didn’t pass our ethics standards; it was a reputation issue, and it didn’t pass our moral compass.”

  But Goldman’s moral compass pointed in only one direction: toward cash. In typical Goldman fashion it (correctly) smelled a huge payday: Goldman was the only large Wall Street firm to short all those esoteric housing bonds that would doom the rest of the Street, which hoarded them on their balance sheets. More than that, Goldman began peddling the flip side of Paulson’s investment to its clients, telling them to buy the security because it would rise in value.

  Of course, it didn’t, and Paulson became a billionaire several times over and Goldman made a mint in 2007. Blankfein walked away with a paycheck of nearly $70 million.

  But now Blankfein was paying the price. As the charges hit the wire services and the television screens, Goldman executives could hardly believe what was happening. Work basically stopped as bankers and traders turned up the volume on their television sets to hear the breakdown of the charges. Goldman, meanwhile, ordered extra security in and around the firm’s Lower Manhattan headquarters to protect employees from possible angry protests.

  The worst thing about the day, as far as Blankfein was concerned, was that he knew that in the past, Goldman’s lawyers would have found a winning argument. The one they were using, of course, wasn’t half bad. It was Goldman’s contention that it didn’t matter whether or not Paulson had helped pick the investments going into the bond—he couldn’t be sure of their true toxicity, as no one was. Remember, this was taking place in late 2006 and early 2007. The financial crisis hadn’t yet begun, and many smart people believed the housing market would continue to flourish.

  In selling the bonds, Goldman argued, the firm had been dealing with smart people who knew all the risks (the types of mortgages involved had been disclosed in the bond’s lengthy offering document), even if Goldman hadn’t told them a savvy short seller had been involved in creating the secutiy.

  With the white-shoe law firm Sullivan & Cromwell putting all that together, the SEC would have caved and moved on to its usual fare of backlogged cases against small penny-stock operators while allowing the big Wall Street firms to do what they pleased.

  But as Lloyd Blankfein and the rest of the Street were discovering, times were changing. The public wanted Wall Street blood, and Goldman, the most hated firm on the Street, was as good a target as the SEC could get for another reason as well. It was hardly a coincidence that the day the SEC announced its Goldman case, Obama held a news conference stating emphatically the need to reform sleazy Wall Street practices by pushing the still-formulating Dodd financial reform bill through Congress, where just about every Republican in the House and the Senate was opposed to much of what the reform package offered, largely on the grounds that for the sound and fury, it accomplished very little. The banks still had a sponsor in Big Government and that protection meant the mindless risk taking that led to the financial crisis would return someday.

  That didn’t stop Obama from publicly pushing the legislation. In fact, he seemed to be growing bolder by the day in his insistence that the reforms were necessary and in his Wall Street attacks, even if his poll numbers didn’t rebound. It seemed that the mild-mannered politician who had said all the right things to his buddies on Wall Street during the campaign, and benefited from their campaign contributions, had gone back to his roots as an aggressive community organizer, a Robin Hood looking to take from the rich so he could spread the wealth to everyone else.

  But a careful examination of Obama’s deeds, rather than his words, shows just how much Wall Street has gained from his brand of economics. Despite turbulent markets, JPMorgan reported nearly $5 billion in second-quarter profits in 2010, Bank of America more than $3 billion, while Goldman earned $613 million, but that takes into account onetime charges for a regulatory settlement and changes in UK tax law. Without those charges Goldman would have earned closer to $2 billion, even as it accumulated $9 billion for 2010 bonuses.

  Putting aside the nasty names and the Volcker rule, the list of benefits the Street has received from Obama are amazing: guarantees on firms’ debt; active participation of the government in the bond markets, propping up the prices of debt still held on the firms’ books; and, of course, the continuation of “too big to fail.”

  For all the bankers’ obsession over the name-calling and worries about the pending Dodd bill a key point was lost on everyone. The whole reason financial reform was even discussed
was because banks were making so much money at a time when average people were out of work. While Obama’s plans to save the banks were doing wonders, his plans to revive the economy weren’t. The Main Street employment numbers, as bad as they are, like many government statistics, were also inaccurate (especially when the government in power has an incentive to misrepresent them). For example, the spring 2010 unemployment numbers are distorted by the creation of countless temporary jobs for the 2010 census. Just how many is impossible to say, as the New York Post discovered: The Census Bureau has been “hiring” and “firing” the same workers many times over; each time a given worker is “rehired,” it counts as another job in the employment numbers. Meanwhile, for Wall Street there’s a hiring binge as the firms seek out experienced bankers, traders, and brokers. The cheap money and the bank bailouts have fueled the stock market to remain well above the ten thousand barrier as measured by the Dow through the first half of 2010. Goldman, for all the bile directed its way, is quietly putting aside enough money to match or possibly surpass its titanic 2009 bonus pool. Blankfein, Dimon, and their counterparts really are crying all the way to the bank, as Obama uses his old friends on the Street as a foil to pass his agenda and keep the Republicans from gaining control of the House and the Senate. Hollywood couldn’t have written a better script.

  “They’re going to keep calling us names all through the midterms, but why should we care?” a senior executive at JPMorgan Chase advised Dimon one afternoon after being briefed by his sources in Washington about how the White House is expected to play the financial reform bill as a necessary check on Wall Street.

  Jamie Dimon is an imposing man—he’s about six feet tall and broad shouldered, and to complement his ruggedly handsome features he has what’s best described a boxer’s nose. He works long hours, tries to hit the gym several days a week, and demands the same from his senior management team.