* * *
Connaughton watched all this with unease. He knew something about revolving doors and mutual favors and the unconscious biases of the powerful. He, too, had steeped in these worlds throughout his career—investment banking, Congress, the White House, lobbying. Yet the financial crisis was a seismic event, causing substantial pain to millions of people, and for once an angry public was paying attention. Now was the time for Washington to take on Wall Street.
To have any impact, a senator had to choose just a few issues. He didn’t have room in his schedule, or his head, for more. When they both worked for Biden, and Connaughton wanted to bring something new to the senator’s attention, Kaufman used to say, “Jeff, every time you want to put something into the boat, you have to take something out of the boat.” From the outset Kaufman, who wasn’t even a member of the Banking Committee, focused on two things: fraud, and the problem of “too big to fail.” He cowrote a bill that authorized $340 million for hiring more FBI agents and funding federal prosecutors to go after the fraudsters—not just petty mortgage originators in Long Beach and Tampa, but top Wall Street executives who had concealed the damage until the whole edifice collapsed. It was the Justice Department’s job to decide who should be investigated, but presumably people like Lehman’s Dick Fuld and AIG’s Joseph Cassano and Merrill’s Stanley O’Neal and, who knew, maybe Goldman’s Lloyd Blankfein himself. When the fraud enforcement bill sailed through in May, and Kaufman (a mere freshman) was invited to join the president onstage at the White House signing ceremony, he and Connaughton thought they were getting somewhere.
In September, Kaufman and Connaughton asked for a meeting with one of Attorney General Eric Holder’s deputies, Lanny Breuer, the assistant attorney general for the criminal division. (He and Connaughton went back a decade, when they briefly overlapped at Covington & Burling on Connaughton’s way out of the White House counsel’s office and Breuer’s way in.) The pursuit of financial fraud hadn’t turned up a thing, and Kaufman wanted to make sure that the Justice Department was on the case and using the money. He planned to hold an oversight hearing to make sure. They met in Kaufman’s office on the third floor of the Russell Building. Breuer explained that he was operating under a lot of constraints, including a shortage of laptops. He said that he depended on the “pipeline” of FBI investigators from around the country to bring cases.
Connaughton saw his opening. “Lanny, you need to go down into your pipeline and make sure the FBI and U.S. attorney’s offices are making this a top priority. Shake your pipeline hard and get it to bring you cases—don’t just sit back and wait.” Complex fraud cases were too hard to make in the normal course of an overworked federal prosecutor’s business. The perpetrators were sophisticated at erasing the traces and constructing their defense even as they committed their crimes, abetted by well-paid lawyers and accountants, later blizzarding investigators with irrelevant paperwork. Instead, something like a task force should be set up to target each institution under suspicion, devote a year or two to the investigation, take the time to learn what to look for, examine every e-mail and IM. Connaughton referred back to his shared history with Breuer under Clinton: “You need to be like Ken Starr. You need to target some of these guys like they were drug kingpins, just like Starr targeted Clinton, and squeeze every junior person around them until you can get one to flip.”
The meeting left him with the distinct sense that there was no great urgency at Justice.
Kaufman’s oversight hearing came in December. Breuer sat at the witness table, joined by senior officials at the SEC and the FBI. They all said that they were on the case, but they needed insiders who could testify about motive and intent. Just give us time.
Connaughton wanted to believe them. But 2009 slipped into 2010, and nothing happened.
* * *
In mid-January 2010, Connaughton and Kaufman traveled to New York to meet Paul Volcker, the aging giant of the Federal Reserve. Volcker had crushed inflation under Carter and Reagan by driving up interest rates so high that he induced a major recession. The bankers loved him for it, and the farmers and construction workers blocked traffic in Washington to denounce him. But Volcker was an eccentric member of the establishment. He lived at the heart of the overlapping worlds of political and financial elites, yet he had become such a scalding critic of Wall Street—the too-clever engineering, the over-the-top pay—that he was now an internal dissident, officially respected, unofficially distrusted. He once told a group of executives, “The most important financial innovation that I have seen the past twenty years is the automatic teller machine … I have found very little evidence that vast amounts of innovation in financial markets in recent years have had a visible effect on the productivity of the economy. Maybe you can show me that I am wrong. All I know is that the economy was rising very nicely in the 1950s and 1960s without all of these innovations. Indeed, it was quite good in the 1980s without credit default swaps and without securitization and without CDOs.”
Volcker made the perfect foil for Obama: he could be used to appease the reformers and give cover with the establishment. The president appointed Volcker to lead his economic advisory group, without taking the advice seriously. Volcker’s main proposal—to ban banks from setting up hedge funds or private equity funds and from trading for their own accounts with depositors’ money—was a half step back toward Glass-Steagall. After six months, nothing had come of it.
Volcker sat down in his midtown conference room with the visitors from Washington and said, “You know, just about whatever anyone proposes, no matter what it is, the banks will come out and claim that it will restrict credit and harm the economy.” Long pause from the little round face at the top of the long body, eyes magnified by glasses, cagey creases running down either side of the mouth. “It’s all bullshit.”
Kaufman laughed. He admitted that his ambition was to restore Glass-Steagall fully.
“I won’t stand in the way of someone who wants to do something more dramatic,” Volcker said.
The next week, Obama announced his support for what he called the Volcker Rule. He was trying to jolt his presidency out of its lowest moment: Scott Brown had just been elected to Ted Kennedy’s Senate seat, denying the Democrats their ability to defeat the Republican filibusters that now dogged every last move the majority tried to make on the Senate floor. The president’s health care bill appeared to be doomed. And more Americans were unemployed than at any time since the Depression.
Connaughton thought the timing of the health bill was bad. For the better part of a year it had been sucking up all the air in Washington, and exactly what did it have to do with unemployment and the financial crisis? Maybe it was the southerner in him, but he doubted Washington’s ability to write a multi-thousand-page bill that could fix something as vast and complex as the health care system while the country was falling apart. He would sit in on the Friday morning meetings of the Democratic chiefs of staff in the Hart Building conference room, and listen to presidential aides enthuse about the “optics” of White House health care meetings, the “messaging” campaign, how well phrases like cost cutting had poll-tested—and there were weeks when the word economy wasn’t spoken once. But on health care Kaufman just followed the Democratic leadership. What Connaughton cared about was Wall Street, and on that issue he and Kaufman went their own way.
The senator in charge of the Wall Street reform bill was Chris Dodd, chairman of the Banking Committee. Connaughton had disliked Dodd ever since 1995, when Connaughton had urged Clinton to fight the corporations on the securities litigation bill (his first taste of taking on Wall Street) and Dodd had been the one fighting back. Having raised tens of millions of dollars in campaign money from Wall Street (almost a million dollars in 2007–2008), Dodd was so deeply in its debt that many of his constituents seemed to hold him personally responsible for the financial crisis. After it emerged that he had received a sweetheart mortgage from Countrywide and approved millions of dollars in bonuses f
rom the bailout fund for executives at AIG, voters in Connecticut expressed outrage. Dodd got the message and announced that he would retire at the end of 2010.
That should have liberated him to go after Wall Street with Kaufman, but Connaughton saw it the other way around. If Dodd had to face the voters again, he would have felt pressured to shepherd through a tough bill. Instead, he was free to prepare for life after the Senate, where the power of money would still hang over his career. You had to think really hard before you took on the establishment, because there were a lot of ways to build a very comfortable life if you went with the flow (like become the top lobbyist for the movie industry, which was what Dodd would go on to do), but standing against the establishment closed off a big part of America that otherwise would have made room for you. You were in or you were out.
Dodd spent the entire winter negotiating with the Republicans behind the closed doors of the Banking Committee, making concessions, insisting that he wanted a bipartisan bill. But he never got anywhere—Richard Shelby of Alabama wouldn’t play ball, and Bob Corker of Tennessee didn’t have the clout. The Volcker Rule became expendable, Glass-Steagall was nowhere in sight. As the months dragged on, Connaughton began to suspect that Dodd was negotiating with himself, using the Republicans and the ideal of bipartisanship as a cover to weaken financial reform and end up with a bill Wall Street could live with. Connaughton began to understand the supreme power of the committee chair to decide what made it into a bill and what did not, whether amendments would be added in committee or on the floor, which would survive and which would die. Since his boss didn’t sit on the committee, Connaughton had little insight into the state of play.
One day, he called up Jack Quinn at his old firm. “I can’t get to the Banking Committee,” Connaughton said. “I assume you guys are having a hard time getting information about the bill?”
“I just spent forty-five minutes with Chris Dodd yesterday,” Quinn told him. Along with the CEO of an insurance company he represented, Quinn had sat down with Dodd and found out exactly what was going on. Connaughton, the key deputy of a senator with a keen interest in financial reform, was clueless. He wrote to another chief of staff, “I came into government to effect change on Wall Street, and now I realize the profession I just left is having more input on the bill than I’m having from inside the Senate.” The other chief wrote back, “That’s really sad.”
Connaughton cultivated a few reporters who agreed to protect his anonymity, and, as “a senior Senate aide,” he began to go after Dodd in the press. “My understanding is that Dodd is moving forward with a bill that includes concessions,” he told CNBC. “I thought you made concessions to gain someone’s support. After four months of negotiations, Dodd has made concessions to get Republicans to consider it. I truly don’t get it.” The same senior Senate aide told Newsweek, “One can only hope the president realizes what’s at stake.”
Kaufman decided to take his case to the Senate floor. With Connaughton and another aide, he drafted a series of speeches on Wall Street excesses, the financial crisis, and the failure to punish any of the culprits.
When a senator stood at his desk and read the speech that a staffer had just placed on the mahogany lectern next to a glass of water, no one was listening. The presiding officer of the Senate, some freshman of the majority party, was perched up in the raised chair, reading his New York Times or scrolling through her BlackBerry. Otherwise, the senator gave his speech to an empty chamber. Halfway through, the next senator with floor rights might appear through the double doors at the back of the room and walk to his desk, where he would shuffle through a prepared text that he hadn’t laid eyes on until that minute. No reporters listened and took notes in the press gallery above the presiding officer’s chair—there were just the unmanned C-SPAN cameras programmed to swivel and focus in tight on the speaker, cutting out the rows and rows of empty desks. It was so rare for two senators actually to listen to each other’s arguments and debate them that once, when Jeff Merkley, a freshman from Oregon, happened to enter the chamber while a Democrat and Republican were engaged in a lonely back-and-forth, he stopped and thought, “Wow, that’s unusual—there’s a conversation occurring in which they’re making point and counterpoint and challenging each other.” Thus the world’s greatest deliberative body went about the business of the people in the year 2010.
Connaughton knew that no one would hear the speeches Kaufman gave, so they were written in the form of long, detailed essays, full of historical explanations and hard polemics, in the hope that they would be quoted on the Internet by allies—Arianna Huffington, the MIT economist and blogger Simon Johnson—and circulated widely.
On March 11, Kaufman demanded of the empty chamber, “Given the high costs of our policy and regulatory failures, as well as the reckless behavior on Wall Street, why should those of us who propose going back to the proven statutory and regulatory ideas of the past bear the burden of proof?” He went on, “The burden of proof should be upon those who would only tinker at the edges of our current system of financial regulation. After a crisis of this magnitude, it amazes me that some of our reform proposals effectively maintain the status quo in so many critical areas.” He added that he didn’t trust the regulators to do a better job of enforcing rules the next time a bank started to implode. Congress had to do the job for them, by writing a bill with clear and simple lines. Dodd’s bill wouldn’t solve the problem of too big to fail. “We need to break up these institutions before they fail, not stand by with a plan waiting to catch them when they do fail.”
On March 15, after the release of the bankruptcy examiner’s report on Lehman Brothers, which strongly suggested that fraud had led to the firm’s demise, Kaufman took to the floor again. Sounding like Joe Biden in 1985, he said, “At the end of the day, this is a test of whether we have one justice system in this country or two. If we don’t treat a Wall Street firm that defrauded investors of millions of dollars the same way we treat someone who stole five hundred dollars from a cash register, then how can we expect our citizens to have faith in the rule of law?”
On March 22, the bill made it out of Dodd’s Banking Committee. There was a pale version of the Volcker Rule, weak regulation of derivatives, and no clear lines about how much liability banks could sustain. Connaughton and Kaufman drafted a biting critique.
“This is really going to piss off Dodd and the administration,” Connaughton warned him.
“I’m speaking to the ages,” Kaufman said.
The speeches began to be noticed. The News Journal in Wilmington covered them on its front page and quoted them favorably in its editorials, Time magazine profiled Kaufman, and Huffington praised him. Dodd was sufficiently annoyed to call from Central America, where he was leading a congressional delegation, and tell Kaufman, “Stop saying bad things about my bill.” Connaughton spoke to Dodd’s Banking Committee staff director, who reassured him: “Don’t worry about being critical. Chris will be the one who gets to take the victory lap in the end.”
It was true. For starters, Dodd had the other committee chairmen on his side. He also had the president’s top advisers. In early April, Larry Summers paid a visit to Kaufman’s office and explained why the senator was wrong to want to break up the biggest banks. Doing so would make America less competitive in the global financial race, and large banks would actually be less likely to fail than small ones. Kaufman was determined not to be steamrolled and kept interrupting Summers’s interruptions with a friendly pat on the arm, citing Alan Greenspan to rebut Summers’s claims. A month later, it was Geithner’s turn. Connaughton chatted with the Treasury secretary while they waited outside Kaufman’s door and found him to be witty and light on his feet. When they entered Kaufman’s office, Connaughton told his boss, “I’ve patted him down—he’s clean.” Geithner was more conciliatory than Summers, explaining that the big banks would shrink anyway under new international capital requirements. Kaufman said that regulations had failed in the past, and the onl
y foolproof way to prevent another bailout was to limit the size of the banks. In the end, they agreed to disagree.
The Unwinding Page 33