All the Presidents' Bankers

by Prins, Nomi

  The Clinton administration supported what it dubbed “true” financial modernization, which would allow the new firm to retain a span of activities. The inner cabinet confidently expected Citigroup to be a “powerful force pressing for some legislation soon.”29 But there was a wrinkle.

  The Community Reinvestment Act

  Two weeks later, the National Community Reinvestment Coalition (NCRC) sent a letter to congressional leaders requesting an immediate halt on megamergers until the General Accounting Office could study their impact on reinvestment and consumer protection.

  The NCRC was concerned that the mergers in the pipeline, if approved without careful consideration, would harm the “dramatic progress of the last several years in community reinvestment.” Of particular concern were the pending Citicorp-Travelers merger and Bank of America–NationsBank merger, whose combined deposits would near the 10 percent limit in the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994.30

  This was not of great concern in the White House. Bank mergers had already resulted in massive industry concentration for the larger banks. In his April 29, 1998, testimony before the House Committee on Banking Services, Andrew C. Howe Jr., acting chairman of the FDIC, noted that “while 41 banking companies held 25 percent of domestic deposits in 1984,” only “11 companies accounted for that same 25 percent share by the end of 1997.” Adjusted to reflect the large pending mergers, “just 7 banking companies would hold 25 percent of domestic deposits.”31

  The administration tried to make it seem that all this was natural. A few weeks after the Citigroup announcement, Clinton stated that “the wave of mergers was probably inevitable,” and that “the government must make sure consumers are protected.”32

  On May 13, 1998, Reuters reported that the White House was fashioning a high-level group to examine the phenomenon. It was headed by merger supporter Gene Sperling and included Treasury Secretary Robert Rubin and his deputy Treasury Secretary Lawrence Summers (who was appointed as director of the National Economic Council and chief economic adviser for Obama in 2009). “Over $114 billion mergers involving U.S. companies had been announced in May alone, coming after a record $260 billion in mergers in April,” cited Reuters.33

  That list included several record-breaking marriages. In addition to the union of Travelers and Citicorp, SBC Communications and Ameritech had announced a $61 billion stock deal that would create the country’s largest telephone company. And Daimler-Benz was planning to buy Chrysler in a $50 billion deal, the largest cross-border transaction ever. By May 1998, “$614 billion worth of corporate mergers and acquisitions had been announced vs. a record $908 billion for all of 1997.”34

  In May 1998, the House had passed HR 10, the Financial Services Act of 1998 by a vote of 214 to 213.35 In September 1998, the Senate Banking Committee voted sixteen to two to approve related legislation. But that bill didn’t pass the broader Senate vote despite the push of Senate Banking Committee chairman, Alfonse D’Amato, a Republican from New York who was up for reelection.36

  D’Amato’s interests aligned with his Wall Street constituents. In return, Wall Street was his primary source of contributions. As the top Senate fundraiser from 1993 to 1998, D’Amato got $19 million—more than any other senator for his six-year cycle.37

  Dimon Gets the Axe

  In a September 1, 1998, letter to employees and customers, Reed was so sure that his merger would be approved that he announced “plans for our merger are absolutely on track.” Weill was so confident that he “established an office in Citicorp Tower complete with a working fireplace.”38 The combined firm would cut up to eight thousand staff by Christmas “in a first round of cost-cutting,” with more “likely” to come.39

  Three weeks later, Gene Sperling and Sarah Rosen were notified that the Citicorp-Travelers merger would be approved within the week and completed by October 8. In theory, the new Citigroup would divest its insurance underwriting business within five years. At the time of its announcement, the merger was worth $70 billion, but its value had since fallen to $43.8 billion.40 That drop did not appear to raise any alarm bells at the White House or the Fed.

  On September 22, Sperling received a memo from the Office of Public Liaison regarding his pending meeting with Weill and Reed, who were coming to Washington to express their concerns regarding the passage of HR 10.41

  “[They] are likely to raise three major points,” read the memo. The first: this was “the first time (in a long legislative history) all major financial associations agree on a reform bill.” Second, combinations like Travelers and Citicorp “will continue with or without HR 10.” Lastly, this was an excellent “opportunity to get a major laudatory public policy accomplishment under the nation’s belt.”42

  The meeting was unnecessary, as the administration was firmly on the duo’s side. As Lisa Andrews, deputy assistant secretary of public liaison, wrote Rubin, “Despite several near death encounters, HR 10 managed to survive thanks in large part to the extraordinary efforts of its core advocates: Merrill Lynch, Citicorp/Travelers and Nations’ Bank/Bank of America.”43

  In the opposition camp remained several community groups opposed to HR 10 on the grounds that it would weaken the Community Reinvestment Act.44 On September 23, eight hundred community groups and fifty national groups sent a signed letter to each senator requesting opposition to HR 10 because it “promotes concentration of economic power [and] undermines [the] CRA.”45

  The bankers were doing more than sending letters. They were sending funds. The prospect of full Glass-Steagall repeal, coupled with high stock prices, translated into gobs of lobbying money. Citigroup donated $13 million in political contributions from 1990 to 1998. In 1998, Bank of America forked over the most money in its history to the deregulation cause; 63 percent of it to the Republicans, the party that controlled the Senate Banking Committee. Bank of America chairman Hugh McColl directed $4.6 million in lobbying efforts in 1998 to repeal Glass-Steagall.46

  Yet Congress failed to pass final legislation before the end of its 1998 session primarily because legislators were focused on the midterm elections. Despite his Wall Street backing, D’Amato lost his seat to Democrat Chuck Schumer (who also had Wall Street’s support). Republican senator Phil Gramm of Texas became chairman of the Senate Banking Committee in 1999.47

  The banking sector suffered another internal political defeat. On November 6, 1998, Weill fired Jamie Dimon.48 Wall Street lore suggests the final contributing factor to Dimon’s ouster was an argument about the firm’s direction at a Citicorp and Travelers bonding boondoggle, which took place over four days of golf at a West Virginia resort.

  Shortly afterward, Weill summoned Dimon to their Armonk office and gave him the axe.49 There were lots of reasons given and surmised, from personal to political, but in the end Weill’s 2010 statement in the New York Times said all that needed to be said: “The problem was in 1999 he wanted to be C.E.O. and I didn’t want to retire.”50

  It was a classic case of ambition without sufficient outlet. But in the long battle for power and supremacy, Jamie Dimon would emerge the victor. He eventually wound up running what became the world’s most powerful bank, JPMorgan Chase. While Citigroup’s power faded after Weill’s departure, Dimon would eventually rule the financial world.

  The Euro and Bank Beasts

  After years of debates as to the merits of a consolidated currency amid so many disparate national economies, on January 1, 1999, the euro was officially born. A driving force behind the euro was the idea that Europe could regain financial superpower status and compete with the dollar by combining its national economies in the form of a united currency.

  Bankers in Europe, particularly at American company subsidiaries, were at first exuberant because their compensation would be tied to more European growth and deals than their New York brethren. Peter Sutherland, chairman of Goldman Sachs International, said that the monetary union is “the single most important political project” in more than forty year
s.51

  But in the months before the euro’s birth, derivatives bets ballooned as banks and hedge funds gambled on which countries would succeed in joining the union, and how quickly they would do so. As a result, these foreign markets were experiencing another wave of hell. The Asian crisis had morphed into a speculative attack on the Russian ruble, for similar reasons. Speculators knew that Russia would try to maintain its currency peg, and it would have to borrow to the hilt in foreign currency to do so.

  Speculators shorted the currency to near-death. With the ruble devalued, the country defaulted on its international loans on August 17, 1998. Citigroup’s third-quarter earnings fell $200 million, or 67 percent, due to Russian exposure and other world market turmoil. This time, George Soros lost $2 billion.52

  Hedge funds, capitalized by banks and massively leveraged (as they borrowed heavily to make their bets), took a big stake, too. But the bigger they were, the more protected from losses. The Fed, spurred by a set of personally invested CEOs, considered bailing out the hedge fund Long Term Capital Management to the tune of $3.65 billion as a result of leveraged bets that soured when the Russian crisis hit. LTCM’s gaggle of Nobel Prize–winning economists and exalted traders, including its head, Salomon Brothers bond trader John Meriwether, failed to recognize that highly leveraged trades can make tons of money if they work but can lose even more money, more quickly, if they don’t. New York Fed president William McDonough selected thirteen banks to participate in helping LTCM survive. (Lehman Brothers and Bear Stearns declined to be involved.) In September 1998, eleven banks put up $300 million each to keep LTCM from bankruptcy in return for 90 percent of the partners’ shares.53 They weren’t just saving LTCM; they were also protecting their own versions of LTCM’s trade. The last thing they wanted was to experience an unraveling in the markets that would hurt their own books. Within three weeks of the LTCM bailout, Greenspan cut rates by fifty basis points to make sure there was enough liquidity in the system to pave over the crisis.

  Big banks had made similar bets. But they held a government shield. As long as they had depositors’ funds, they would enjoy protection from losses from governments and supranational banks. They used this cushion to get further involved in derivatives transactions that were designed to make bets on the same types of European convergence trades that LTCM had done, and to seek profit from positioning these bets on peripheral countries joining the euro. Some banks, like Goldman Sachs, would even help countries like Greece by creating derivatives deals that shielded Greece’s true debt status, thereby helping it meet the criteria to join the currency union.

  The Fight Against the Euro Intensifies

  On February 12, 1999, Rubin addressed the House Committee on Banking and Financial Services, claiming that “the problem US financial services firms face abroad is more one of access than lack of competitiveness.”54

  This time, he was referring to the European banks’ increasing control of distribution channels into the European institutional and retail client base. Unlike US commercial banks, European banks had no restrictions keeping them from buying and teaming up with US or other securities firms and investment banks to create or distribute their products. He did not appear concerned about destruction caused by sizeable bets throughout Europe.

  Rubin stressed that HR 665 (the most recent version of HR 10), now called the Financial Services Modernization Act of 1999 and officially introduced on February 10, 1999, took “fundamental actions to modernize our financial system by repealing the Glass-Steagall Act prohibitions on banks affiliating with securities firms and repealing the Bank Holding Company Act prohibitions on insurance underwriting.”55

  Three days later, Rubin, Greenspan, and Summers landed on the cover of Time magazine as the “Committee to Save the World,” effusively lauded for their efforts to prevent a global economic collapse.56 The piece painted a violins-strumming picture of the trio of “marketeers” as financial saviors and cozy operators:

  When the three talk about their special relationship, they are hinting at how fortunate it is that they can work together instead of apart. Says Robert Hormats, vice chairman of Goldman Sachs International: There have been moments in the past year when it has been, as Churchill said, a very near thing. These guys kept a near thing from becoming a disaster. That has happened because the men feel that being at the right place at the right time also means doing the right thing, putting their egos aside and, in an almost antique sense of civic duty, answering the phone when it rings.

  Several European counterparts scoffed at the piece. As a high German financial official who played an active role in advising the Thai, South Korean, and Indonesian governments put it, “All those who experienced the Asian turbulence—from Thailand letting the baht float freely in early July 1997 to the turmoil spreading to South Korea and Indonesia—tell a very different story.”57

  The Gramm-Leach-Bliley Act Marches Forward

  On February 24, 1999, in more testimony before the Senate Banking Committee, Rubin pushed for fewer prohibitions on bank affiliates that wanted to perform the same functions as their larger bank holding company, once the different types of financial firms could legally merge. That minor distinction would enable subsidiaries to place all sorts of bets and house all sorts of junk under the false premise that they had the same capital beneath them as their parent. The idea that a subsidiary’s problems can’t taint or destroy the host, or bank holding company, or create “catastrophic” risk, is a myth perpetuated by bankers and political enablers that continues to this day.

  Rubin had no qualms with mega-consolidations across multiple service lines. His real problems were those of his banker friends, which lay with the financial modernization bill’s “prohibition on the use of subsidiaries by larger banks.” This technicality was “unacceptable to the administration,” he said, not least because “foreign banks underwrite and deal in securities through subsidiaries in the United States, and US banks [already] conduct securities and merchant banking activities abroad through so-called Edge subsidiaries.”58

  In a letter to Senate Banking Committee chairman Phil Gramm, Clinton briefly considered the ramifications of multipurpose financial mergers: “The bill could expand the ability of depository institutions and nonfinancial firms to affiliate, at a time when experience around the world suggests the need for caution in this area.”59 But that notion was subsequently dropped.

  Instead, he ended his letter with a plea for the Community Reinvestment Act: “I agree with you that reform of the laws governing our nation’s financial services industry would promote the public interest. However, I will veto the bill if it is presented to me in its current form.”60 It was as if providing loans to small communities, which should have been a given, made the idea of big banks running roughshod over the global financial sphere copacetic.

  The CRA was not an obstacle in bankers’ greater fight for banking deregulation. They knew that if banks could become bigger, they could lend to smaller communities and capture their business anyway. If they had to promise to do so, so be it; they would find a way to make money off that promise.

  On March 1, 1999, Gramm released a final draft of the Financial Services Modernization Act of 1999, or the Gramm-Leach-Bliley Act, and scheduled committee consideration for March 4.61 A bevy of excited financial titans including Sandy Weill, Hugh McColl, and American Express CEO Harvey Golub called for “swift congressional action.”62

  The Quintessential Revolving-Door Man

  The stock market continued its rise in anticipation of a banker-friendly conclusion to the legislation that would deregulate their industry. Rising consumer confidence reflected the nation’s fondness for the markets and lack of empathy with the rest of the world’s economic plight. On March 29, 1999, the Dow closed above 10,000 for the first time.63 Six weeks later, on May 6, 1999, the Financial Services Modernization Act passed the Senate.64

  It was not until that point that one of Glass-Steagall’s main assassins decided to leave Washing
ton. Six days after the bill passed the Senate, on May 12, 1999, Robert Rubin abruptly announced his resignation. As Clinton wrote, “I believed he had been the best and most important Treasury Secretary since Alexander Hamilton. . . . He had played a decisive role in our efforts to restore economic growth and spread its benefits to more Americans.”65 Clinton named Larry Summers to succeed Rubin.

  Two weeks later, BusinessWeek reported signs of trouble in merger paradise—in the form of a growing rift between Reed and Weill at Citigroup. As Reed said, “Co-CEOs are hard.” Perhaps to patch their rift, or simply to take advantage of a political opportunity, the two men enlisted a third person to join their relationship: none other than Robert Rubin.

  Rubin’s resignation from Treasury became effective on July 2. At that time, he announced, “This almost six and a half years has been all-consuming, and I think it is time for me to go home to New York and to do whatever I’m going to do next.”66 Rubin became chairman of Citigroup’s executive committee and a member of the newly created “office of the chairman.” His initial annual compensation package was worth around $40 million.67 It was more than worth the “hit” he took when he left Goldman for the Treasury post.

  Three days after the conference committee endorsed the Gramm-Leach-Bliley Bill, Rubin assumed his Citigroup position, joining the institution destined to dominate the financial industry. That very same day, Reed and Weil issued a joint statement praising Washington for “liberating our financial companies from an antiquated regulatory structure,” stating that “this legislation will unleash the creativity of our industry and ensure our global competitiveness.”68

  On November 4, the Senate approved the Gramm-Leach-Bliley Act by a vote of ninety to eight.69 (The House voted 362–57 in favor.70) Critics famously referred to it as the Citigroup Authorization Act.