by Prins, Nomi
According to Reagan’s former assistant secretary of the Treasury for economic policy, Paul Craig Roberts, “The Reagan administration had no banking agenda.” He said that “Reagan wanted to renew the economy so that pressure could be put on the Soviets to end the Cold War. Those were Reagan’s two main goals.”2
Wall Street commercial and investment banks and insurance companies were angling to obliterate the restrictions of Glass-Steagall and the Bank Holding Company Act so that they could acquire one another’s business, while relying on Glass-Steagall borders as lines of defense around the services they already provided to keep their domestic competitors out. The S&Ls and smaller financial firms sprinkled across the United States were battling the big commercial banks for depositors and borrowers and the right to invest in riskier assets. These bit players would prove no match for the commercial banks, which would thrive as their little brethren hit a crisis.
Alliances between the powerful bankers and Presidents’ Reagan and Bush would continue, but the relationships would be more perfunctory and less personal than in the past. They would also be less important, increasingly replaced by an implicit understanding that the perspective of free-market capitalism suited both Reagan’s political doctrine and the bankers’ expansionary agenda, and fortified by a growing group of well-paid lobbyists and lawyers working to deregulate policy to suit the bankers’ ambitions. The notion of “free market,” though, was code for freedom to dominate ever more “liberalized” countries from a financial perspective, to amass profits at the expense of the local populations. Global competition, cited as the reason to spread financial capitalism in ever riskier manners, was also a means to persuade Washington to back the bankers in preparing for whatever global atmosphere would follow the end of the Cold War. But just as in military wars, the country with the greatest financial arsenal (a nation of depositors and a government with parallel ideologies to the bankers) would dominate on the world scene.
As global recession loomed, additional clouds gathered on the economic horizon. On the international front, developing countries were treading water beneath waves of bank debt. Ultimately, US bankers would force a government- and multinational-entity-backed bailout of their third world loans. The deal, which brought harsh austerity measures in return for extra financial aid to the regions affected, would save the bankers billions of dollars.
Domestically, a burgeoning S&L bank crisis born of deregulation, fraud, and moves by Wall Street banks eager to “pump and dump” toxic securities into thrifts following Carter’s 1980 “reforms” (along with the ones Reagan offered in 1982) threatened to crush the national economy—battering the real estate market and the population’s confidence in banks, which had taken five decades to rebuild.
Once big banks stopped lending as much to developing countries, a new crop of chairmen reinvigorated their predecessors’ efforts to exploit regulatory loopholes at the state level so they could acquire noncommercial banking businesses as well as deposits across state lines. Rather than stopping them, a group of men within the Reagan administration, led by Vice President George H. W. Bush and his deregulation task force, pressed to convert these loopholes into national policy. They were aided by former Wall Street executives in cabinet roles and in the private sector. Meanwhile, investment and commercial banks fought both against one another and against the New Deal regulations that kept their businesses separated.
Merrill Lynch Chairman Donald Regan Becomes Treasury Secretary
Reagan won the presidency on a tide of campaign promises: ending the hostage crisis, cutting the deficit, reducing the size of government and the amount of regulations, and cutting taxes.3 Though his participation in the final hostage release negotiations was negligible, to the public it appeared that Reagan had facilitated the release of the hostages on his inauguration day. That provided a shot in the arm of the American body politic.
Reagan and his team wasted no time using the warm feelings of the public to usher through foreign and domestic policies—including the ones dealing with deregulation. Reagan’s unofficial group of advisers, or “kitchen cabinet,” was a cadre of about a dozen free-market-embracing businessmen.4 They had already selected Merrill Lynch chairman Donald Regan to be Treasury secretary in the fall of 1980. Reagan himself hadn’t proactively scouted the man who would run the world’s most powerful treasury. As Reagan later wrote in his autobiography, An American Life, “I had appointed Don Sec. of the Treasury on the advice of some of the members of my old kitchen cabinet in California; they called him a wizard on economic matters. [Don did] an outstanding job at the Treasury Department, especially by helping get tax reform off the ground and winning Wall Street support of [my] economic recovery program.” Like President Johnson, Reagan would cut taxes with the support of bankers.
The idea of running the Treasury had never crossed Regan’s mind before Reagan offered him the post. But Regan’s pedigree was unquestionable. A member of the elite Council on Foreign Relations, he graduated from Harvard University in 1940, entered the Marine Corps, and retired after World War II as a lieutenant colonel.
Regan had joined Merrill Lynch in 1946 and steadily rose through its ranks. In 1951 he was appointed to run the scandal-ridden trading department, which handled “10 [percent] of the total volume traded on the New York markets.”5 He replaced John Thompson as chairman when Thompson retired in January 1971.6
In the 1970s Regan’s political activity had been “marginal,” he later noted, consisting of personal donations to Republican candidates and voting in every election. In 1976, he backed Gerald Ford, whose primary opponent was Ronald Reagan. When Reagan campaigned in New York that fall, Regan was invited to meet him at “a small luncheon for Wall Streeters.” Regan’s memories of that first meeting consisted of a joke Reagan made about the pronunciations of their names.
Regan met him again in the spring of 1980, when Reagan was campaigning for the presidential nomination. Bill Rogers, whom Regan had put on the board of Merrill Lynch after Rogers resigned as Nixon’s secretary of state, suggested Regan support Reagan. Shortly thereafter, Regan was invited to a fundraiser at the elite New York City Sky Club. There, Reagan had difficulty remembering Regan, name pronunciation notwithstanding.
In September, once Reagan’s nomination was secured, he revisited New York. Bill Casey, Reagan’s campaign manager, suggested Regan help raise money. Along with John Whitehead, a Goldman Sachs partner who later became deputy secretary of state, Regan organized a $1,000 per plate fundraiser.7
Just before the election, a Wall Streeter in Reagan’s camp informed Regan that his name was on a shortlist of candidates for the Treasury secretary post. Another name was William Simon, who had served as Treasury secretary under Nixon and Ford. Once Simon withdrew, Regan’s name floated to the top, courtesy of Casey. On December 3, 1980, Regan was at home in Colts Neck, New Jersey, when the phone rang.
“Let me tell you why I’m calling,” Reagan said in his “whispery tenor”: “I’d like you to be my secretary of the Treasury.”
Regan said, “Thank you very much, I accept.”8
On January 20, 1981, Reagan formally nominated Regan to the post. Unlike Wriston and Rockefeller, who had rejected similar offers from Nixon and Carter because they were too engaged in conquering the postwar banking world, “The Wizard” accepted immediately. In the process, Reagan became the first president to hire a major Wall Street chairman to the post of Treasury secretary. Without having given the matter much thought, Reagan united the power of Wall Street and the presidency into 100 percent alignment.
At the time, the financial arena appeared unstable. The key bankers needed structural deregulation to come from Washington. It wasn’t so much that Regan was too connected to Wall Street to help the broader economy, as critics pointed out; it was the fact that his ideologies were glued to the experiences of his work there. His views on open competition, which by default would mean a conquering of competition by the larger banks, would drive another stake into
the heart of Glass-Steagall (even though he would be more known for his stance on tax and monetary policy during his term). Democrat Bill Clinton and Republican George W. Bush would repeat Reagan’s precedent with their own Treasury secretary choices culled from Goldman Sachs. Wall Street was officially in the White House.
Mass Deregulation Begins
A little over a week after he took office, on January 29, Reagan terminated Nixon’s wage and price regulatory program.9 From the onset, Reagan made his deregulatory agenda clear. After his first week in office, Reagan issued an executive order removing all controls on price and allocation of crude oil and refined petroleum.10
Deregulating the banks would prove more time-intensive. The nature of the banking system was such that the commercial and investment banks both wanted to expand their services, but more specialized groups like insurance companies, real estate boutiques, and thrifts were clamoring to preserve their piece of the pie. The administration, through Vice President George H. W. Bush and Treasury Secretary Regan, sided with the big boys—the commercial banks, with their large FDIC-insured deposit bases, lending prowess, and international aspirations. But toward the later years, the administration would also support their investment bank rivals.
In general, Reagan tended to avoid direct dealing with the elite financiers. Whereas Reagan was focused on ending the Cold War from a political perspective, the bankers felt they had already moved in that direction from a financial perspective, so they had no need to be deeply involved in Reagan’s plans for embracing glasnost, the Soviet policy that called for a more “open” political and financial atmosphere internally and externally. As for tax policies and the notion of “trickle-down economics” (also known as “Reaganomics”), those Reagan worked on through his Treasury secretaries. When prompted (as they were), the bankers supported Reagan’s tax policies. They had similarly supported Johnson’s tax cuts in the 1960s, but this was more of a self-serving decision than a public service one—it was a chip on the table for future favors. Besides, they were busy exploring innovative ways to dodge taxes through offshore entities anyway.
Reagan was barely involved in discussions with the bankers over deregulation. He was absent from negotiations and rarely copied on related correspondence. Instead he relegated these dealings to Bush and Regan. Regan later wrote that Reagan’s policy came in his speeches, and it was up to the people in his cabinet to execute the details. Banker demands were handled in a similar fashion.
The only banker with whom Reagan had established a personal relationship before entering the White House was A. W. “Tom” Clausen, who had chaired the California-based Bank of America. Reagan and his wife, Nancy, also maintained a friendly relationship with Clausen’s successor, Sam Armacost. Like Truman, Reagan had no prior need or opportunity to foster alliances with the East Coast, Wall Street banker sect beyond their fundraising prowess. He hadn’t been an inside Washington player, so there was no real occasion to achieve such closeness. Yet many of the moves that were made during his time in office would contribute to a major overhaul of the US banking system and helped pave the way toward a full repeal of the Glass-Steagall Act in 1999. Most of Reagan’s financial and banking policies would be defined in two ways: first, they would encompass the same tone of his deregulation policies for other industries; and second, they would push through the walls of Glass-Steagall. But Bush and Regan coordinated that aspect; accolades for financial deregulation initiatives and free-market dogma were only occasionally inserted into the president’s speeches.
In February 1981, a couple of weeks after his term began, Reagan appointed Bush and Regan to head a new task force on “regulatory relief,” code for “deregulation.” The group was self-charged with finding ways “to relieve the public of excessive and costly regulations.”11
This mission was positioned as consumer-friendly. The administration claimed, “Banking laws should be changed to enable the consumers of financial services, the banking industry, and the economy in general to enjoy the benefits of increased competition and greater efficiency in delivery of financial services.”12 In reality, the resultant wave of mergers served to consolidate power in the hands of the nation’s largest banks and their chairmen, effectively decreasing competition everywhere else.
Wall Street and Washington became a battleground between investment and commercial banks. Each camp stood on opposite lines of the Glass-Steagall Act. Both aggressively coveted each other’s territory.
Elizabeth Dole, Reagan’s public liaison assistant (and former member of the Federal Trade Commission and Nixon’s deputy assistant for consumer affairs), sought to prevent Reagan from getting caught in the financiers’ cross fire. Though “the commercial banking element is most likely to contain supportive individuals,” she wrote in a memo, “those responsible for inflicting the heaviest damage . . . are likely to remain hostile.”13
Rather than risk a negative media frenzy over any disagreements among the bank factions, which could reflect badly on Reagan, Dole chose to shield Reagan. So she recommended Regan deal with the Wall Street crowd instead.14 This “switch” would continue throughout Reagan’s presidency. It fit both men’s expertise perfectly. Reagan would hardly interact with the bankers over deregulation and had minimal social interaction.
Within three months of settling into the White House, Bush was decisively promoting the commercial bankers’ position. At a media briefing held on Tax Day 1981, he stressed their views as a key element of Reagan’s four-step economic recovery agenda. “The third ingredient of the economic program,” Bush proclaimed, “and one with which I am rather intimately involved, is the question of reducing the excesses of regulation.”15
Banker Policy Support
Reagan’s team was tactical about enlisting bankers and corporate leaders to support his policies, though. When it was time to garner muscle behind his tax and budget bill, the team recommended enlisting Citibank chairman Walter Wriston to help.
When David Rockefeller retired from his post as Chase chairman, Wriston became the undisputed king of Wall Street and chairman of the Business Council, succeeding GE chairman Reginald Jones. In January 1981, Reagan selected Wriston to serve on his Economic Policy Advisory Board.16
Reagan made the necessary phone call. “As you are aware,” he told Wriston, “the importance of this tax struggle transcends the bill itself, since it is only one element of our greater overall economic recovery program. The success of each element is crucial—spending cuts, tax rate cuts, regulatory relief and stable monetary growth. I hope I can count on your support.” Wriston responded: “I’m on board.”17
Reagan’s staff also recommended soliciting the support of Wriston’s friend George Shultz, president of Bechtel Group, for backup. He too rallied behind Reagan. It was not exactly a hardship for most corporate leaders to approve tax reductions. Bankers, however, expressed concerns about inflation ramifications.
Monetarist Wriston was particularly vocal on the matter of inflation. As he had pronounced in April 1980, “living with inflation is like living in a country where everybody lies.”18 He reiterated his anti-inflationary stance frequently and considered taming inflation far more important than cutting taxes. But in practice, he focused more of his time on abolishing New Deal constraints on commercial banking, which prohibited him from entering the insurance business and extending the bank’s reach across state lines. With banking deregulation tantamount, he traded the favor of supporting Reagan’s tax package.
Taking a page out of the Johnson handbook, the Reagan team peppered coalition building with friendly discourse. The strategy worked. At a press briefing on August 1, 1981, Chief of Staff James Baker III; Edwin Meese III, counselor to the president; and Treasury Secretary Regan announced, “We finally have a tax bill. . . . It’s a good tax bill. It’s about 95 percent of what the President wanted; a three-year across-the-board tax cut.”19
Whereas debate would ensue for decades as to the meaning and effectiveness of Reagan’s tax poli
cies, the manner in which support was garnered underscored the financial-political alliances with the business elite that Reagan could draw upon when necessary.
Shifting Bankers, Brewing Problems
Outside the US borders, bankers’ loans to developing countries had grown at an unprecedented rate and volume during the 1970s. The pace was almost certain to erupt in massive losses for banks and economic calamity for the indebted countries; it was just a matter of time. So it was fortuitous for Bank of America chairman Tom Clausen that just before noon on October 23, 1980, President Carter had summoned him to the White House to discuss the possibility of becoming president of the World Bank.20
By accepting the job, Clausen could execute a double save. First, he would leave his bank before its loan situation deteriorated further, as it inevitably would. Second, he could preside over an organization that could amass governments’ aid to help back those loans, or at least keep funds funneling into developing countries until a better solution presented itself.
It would be Reagan who officially appointed him. In April 1981, Clausen handed Bank of America, with its festering debt problems, to his protégé, Sam Armacost, and headed off to run the World Bank. Under Clausen, the World Bank would pressure the third world to adopt structural adjustment programs that would destabilize the region for decades, causing widespread economic decay. Revolts and bloodshed would accompany private companies racing into developing countries to take over once-nationalized industries and install private sector replacements through which they could extract profits and wealth.
