by Prins, Nomi
Mirth abounded in Clinton’s White House. “Today Congress voted to update the rules that have governed financial services since the Great Depression and replace them with a system for the twenty-first century,” Summers said. “This historic legislation will better enable American companies to compete in the new economy.”71
There were some who expressed concern about this giant step backward in banking legislation and what it could mean going forward. “I think we will look back in ten years’ time and say we should not have done this but we did because we forgot the lessons of the past,” said Senator Byron Dorgan, Democrat of North Dakota. Senator Paul Wellstone, Democrat of Minnesota, said that Congress had “seemed determined to unlearn the lessons from our past mistakes.”72 But these warnings were ignored in the truly irrational exuberance of the moment.
Several days later, a broad coalition of consumer and community groups called for an investigation into the fact that Rubin was simultaneously job hunting and lobbying for legislation that would benefit his eventual employer.73 Retired government officials were prohibited from lobbying their former agencies on behalf of an employer for at least one year after leaving public service. Yet only four months had elapsed between Rubin’s resignation and his appointment to Citigroup’s board.
Rubin claimed that his decision to take a job at Citigroup had nothing to do with any work he had done in the government. “During the time I was Treasury secretary, my sole concern was to produce the best possible public policy,” he said. “I could not have cared less how anyone in the industry reacted to my position or my views.”74
Regardless of whatever his internal thinking was, history shows that Rubin was the quintessential revolving-door man, cultivating the appearance of working for the people while angling for private gain. He was instrumental in destroying the last vestige of the Glass-Steagall Act, which had prevented big banks from gambling with other people’s money and government guarantees. His ideology would be at the epicenter of mega-meltdowns and bailouts to come.
Beneath the surface of a massive deregulation victory, Reed and Weill continued having a tough time dealing with each other. Reed resigned in February 2000, though he didn’t do too shabbily in the process. According to Bloomberg, “From 1997 to 1999, Reed received salary and bonuses totaling $23.4 million, and a retirement bonus of $5 million.”75
Inequality and Heady Stock Prices
Clinton epitomized the vast difference between appearance and reality, spin and actuality. As the decade drew to a close, he basked in the glow of a lofty stock market, budget surplus, and the passage of this key banking “modernization.” It would be revealed in the 2000s that many corporate profits of the 1990s were based on inflated evaluations, manipulation, and fraud. When Clinton left office, the gap between rich and poor was greater than it was in 1992, and yet the Democrats heralded him as some sort of prosperity hero.
When he had resigned in 1997, Robert Reich, Clinton’s labor secretary, said, “America is prospering, but the prosperity is not being widely shared, certainly not as widely shared as it once was. . . . We have made progress in growing the economy. But growing together again must be our central goal in the future.”76 Instead, the growth of wealth inequality in the United States accelerated, as the men yielding the most financial power wielded it with increasingly less culpability or restriction.
By 2003, the number of households living on less than $2 a day would skyrocket.77 In addition, as economists Emmanuel Saez and Thomas Piketty reported, during the Clinton administration, the incomes of the wealthiest 1 percent of Americans increased by 98.7 percent, while the bottom 99 percent increased by only 20.3 percent.78
The power of the bankers increased dramatically in the wake of the repeal of Glass-Steagall. The Clinton administration had rendered twenty-first-century banking practices similar to those of the pre-1929 Crash. But worse. “Modernizing” meant utilizing government-backed depositors’ funds as collateral for the creation and distribution of all types of complex securities and derivatives whose proliferation would be increasingly quick and dangerous.
Eviscerating Glass-Steagall allowed big banks to compete against Europe and also enabled them to go on a rampage: more acquisitions, greater speculation, more risky products. The big banks used their bloated balance sheets to engage in more complex activity, while counting on customer deposits and loans as capital chips on the global betting table. Bankers used hefty trading profits and wealth to increase lobbying funds and campaign donations, creating an endless circle of influence and mutual reinforcement of boundary-less speculation, endorsed by the White House.
Deposits could be used to garner larger windfalls, just as cheap labor and commodities in developing countries were used to formulate more expensive goods for profit in the upper echelons of global financial hierarchy. Energy and telecoms proved especially fertile ground for investment banking fee business (and later for fraud, extensive lawsuits, and bankruptcies). Deregulation greased the wheels of complex financial instruments such as collateralized debt obligations (CDOs), junk bonds, toxic assets, and unregulated derivatives.
Glass-Steagall repeal led to unfettered derivatives growth and unstable balance sheets at commercial banks that merged with investment banks and at investment banks that preferred to remain solo but engaged in dodgier practices to remain “competitive.” In conjunction with the tight political-financial alignment and associated collaboration that began with Bush and increased under Clinton, bankers channeled the 1920s, only with more power over an immense and growing pile of global financial assets and increasingly “open” markets. In the process, accountability would evaporate.
Every bank accelerated its hunt for acquisitions and deposits to amass global influence while creating, trading, and distributing increasingly convoluted securities and derivatives. As the size of their books grew, banks increasingly provided loans or credit in exchange for higher-fee business, thereby increasing global debt and leverage. These practices would foster the kind of shaky, interconnected, and nontransparent financial environment that provided the backdrop and conditions leading up to the financial meltdown of 2008.
CHAPTER 19
THE 2000S: MULTIPLE CRISES, THE NEW BIG SIX, AND GLOBAL CATASTROPHE
“That’s why I’m richer than you.”
—Jamie Dimon, JPMorgan Chase chairman and CEO, February 26, 20131
AT THE DAWN OF THE TWENTIETH CENTURY, THE POWERFUL “BIG SIX” BANKERS used a major bank panic to help make the case for the establishment of the Federal Reserve, which could back them in future panics. Subsequently, during World War I, their alignment with Woodrow Wilson unleashed the current era of American financial and military dominance. This superpower position was solidified not just through America’s prowess in two world wars, but also through the intricate synergies between White House policies and Wall Street voracity, the nature of which remains tighter than in any other country.
Over the decades, the faces at the helm of America’s two poles of power changed (though certain bank leaders remained in their seats far longer than presidents), but the aspirations of the unelected financial leaders coalesced with the goals of the elected leaders—occasionally to the benefit of the US population, often to its detriment, but always to drive America’s particular breed of accumulation and expansionary capitalism.
In the new millennium, the most powerful banks were for the most part permutations of the original Big Six. Chase, J. P. Morgan, and Morgan Guaranty became JPMorgan Chase and Morgan Stanley; the National City Bank of New York and First National Bank became Citigroup. Goldman Sachs’s entry into the New Big Six stemmed from the close relationship between FDR and former Goldman senior partner Sidney Weinberg. Rounding out the New Big Six were Bank of America and Wells Fargo, which had broken into the East Coast clan over the years. But the chief bankers of the twenty-first century were more powerful than their ancestors by virtue of the sheer volume of global capital and derivatives they controlled (which could exceed
a quadrillion dollars globally by 2022). In addition, as the power of the president receded relative to that of the bankers during the post-Nixon period, the financial sphere had become more complex and the potential risk to the global economy of banker practices had become limitless. These mercenary bankers operated in a manner lacking public orientation or humility, whereas in the past this might have at least been an after- or adjacent thought.
The Bush and Obama presidencies represented a climax in the development of relationships and codependent actions that began with Teddy Roosevelt. But whereas Roosevelt, Wilson, FDR, Eisenhower, and Johnson had nursed synergies that enabled useful public-oriented legislation, Bush and Obama had become followers and reactors to bankers’ whims. By the 2000s, bankers no longer debated economic policy in thoughtful correspondences with presidents or Treasury secretaries, as they once had. Alliances abounded, but their character was more perfunctory. Top bankers visited the White House and attended government functions (more frequently under Obama than Bush), but their efforts were recklessly self-serving and one-sided. It would be unimaginable for JPMorgan Chase chairman Jamie Dimon to spend months running a food drive for people in war-torn countries, as his Chase chairman ancestor Winthrop Aldrich had, or to negotiate disarmament plans, as another ancestor, John McCloy, had. These millennial masters of capital reigned over worldwide economies from atop a mountain of customer deposits, debt, intricate securities, and opaque derivatives. Their power dwarfed central banks and presidents. Banks were not just too big to fail; certain bankers were too influential to restrain.
By 2012, the Big Six held $9.5 trillion of assets, an amount equivalent to about 65 percent of US GDP.2 Their combined trading revenues amounted to nearly 93 percent of the total trading revenues for all the other banks combined.3 Systemic risk, even after the onset of the 2008 financial crisis and subsequent bailouts, had intensified. A rush of tepid reforms, from the Sarbanes-Oxley Act under Bush to the Dodd-Frank Act under Obama, were glorified for political purposes, but they were inconsequential considering the concentration of economic influence in the hands of a few megalomaniacs.
US bank chairmen’s rise through the ranks of international dominance had become akin to military strategy, whereas they had once operated in the realm of familial inheritance and lineage. To modern bankers, anything economically negative was a byproduct of chance or the business cycle, and anything positive was a byproduct of inherent genius—not the genius of collaboration, of which Louis Brandeis had spoken a century earlier, but of a more distinct sociopathic detachment from ordinary people. Bankers were ruthless in their egocentric competitiveness by the 2000s, and the effects were worse than decades earlier because they had witnessed the level at which they could rely on government subsidies and borrowed capital. The very threat of “catastrophic” consequences was enough to bring Treasury secretaries to their knees—literally. The Oval Office, no matter the party in charge, had become simultaneously fearful and blindly reverent of their power.
Bankers of the 2000s didn’t care who was president. They only needed the White House support in action, if not rhetoric. Into the 2000s, from Clinton to Bush to Obama, political parties and certain bank leaders changed. But the reckless greed animating the bankers’ mission did not, nor did their thirst for global supremacy. The crises of the 2000s were manifestations of the power bankers had captured by design, enabled by presidents unwilling to thwart or challenge it.
Bank Wars and Bank Leverage Intensify
Since the global competition argument had proved so successful for the Glass-Steagall abolitionists, Goldman Sachs chairman and CEO Henry Paulson adopted it on behalf of the investment bank community in one of the decade’s first financial hearings. Before Clinton left the White House, Paulson addressed Congress on the need for investment banks to increase their leverage. As former Treasury Secretary Robert Rubin had argued on behalf of the commercial bankers, Paulson stressed the need for investment banks to borrow more, and reserve less capital for emergencies, in order to “compete” with the world.
At a Senate hearing on February 29, 2000, Paulson urged the SEC to “reform its net capital rule” to allow the more “efficient use of capital.” He warned that existing capital constraints were the “most important factor in driving significant parts of our business offshore.” Reducing the limit of capital required to be reserved against risky trades, he reasoned, would enable American banks to “remain competitive with our foreign competitors’ risk-based capital standards.”4 Implicitly, he was saying that US banks could “handle” the risk of their decisions, and thus should be allowed to take on more risk. It was a more complex version of the pre-Rubin competition argument. With structural deregulation complete, altering the very manner in which capital could be used was the next step toward national and international financial control.
The real problem Paulson and other investment bank titans faced was that they couldn’t rely on deposits and loans to back their bets, or so-called growth strategies. After the Glass-Steagall repeal, commercial banks augmented by investment banking and insurance arms could do just that. But stand-alone investment banks had three options: merge with a commercial bank and risk an internal political battle for control, find a way to make their capital stretch further, or do both. Investment banks like Goldman Sachs, Morgan Stanley, and Merrill Lynch fancied themselves more “innovative” and superior to commercial banks. Yet they faced a “competitive disadvantage” in the bank wars. Paulson wasn’t trying to empower the United States; he was trying to empower his firm.
Commercial bankers were increasingly entering investment bankers’ turf, engaging in trading, securities creation, and other investment banking activity, plus expanding. As a sign of this warrior state, by late 2000, Chase CEO William Harrison and J. P. Morgan CEO Douglas Warner had obtained Fed permission to merge their banks. The $28.6 billion stock deal closed on December 31, 2000.5 This kind of acquisitive combat was characterized by terms like “clear winner” and “losers.” “There will be less than a handful of end-game winners,” proclaimed Harrison. “[JPMorgan Chase] will be an end-game winner.”6
The value of JPMorgan Chase stock dove from $207 per share when the merger was announced to $157 per share when it closed. Four thousand people lost their jobs.7 But this was not a concern of the Fed. A decade later, the value of JPMorgan Chase stock hovered around $40 a share. Value had not been created through a succession of highly compensated CEOs and chairmen or complicated deals—it had been destroyed.
This merger was particularly significant, for it represented not just a marriage of two major banks but the conclusion of the century-old House of Morgan and Chase rivalry that shaped the nation’s financial landscape. Now, four of the oldest Eastern Establishment banks (Chase, J. P. Morgan, Chemical, and Manufacturers Hanover) were joined under one roof.
Winthrop Aldrich, who led Chase during the Depression and promoted the Glass-Steagall Act beside FDR, had chosen to retain the commercial bank side while spinning off the investment bank. He was posthumously awarded the whole shebang; commercial banking, investing banking, and the House of Morgan. His decision, which also had the effect of fostering US economic stability for decades, had paid off—but his prudence would not prevail.
9/11 Attacks Overshadow Enron Scandal
In late 2001, amid the fading light of Clinton’s rosy economy and an election result validated by the Supreme Court, President George W. Bush entered the White House. The true state of the economy remained hidden, teetering on a flimsy base of fraud, inflated stocks, and bank-created debt. The corporate and banking world appeared glorious amid so many mergers. But the bankers’ efforts to support these transactions would soon give way to a spate of corporate bankruptcies, the domestic complement to the havoc caused by the foreign debt crises of the 1980s and the currency crises of the 1990s.
As bankers bulked up their balance sheets with customer deposits in the post-Glass-Steagall merger period, they were able to secure more investment bank
ing business, particularly from the energy and telecom sectors, in return for extending more credit, regardless of the integrity of the underlying collateral for those loans or their construction. Wall Street bankers helped clients mask their true debt levels through various means of profitable financial subterfuge. Some tricks were administered domestically and others internationally, such as the transactions Goldman Sachs created to hide debt for Greece so it could meet the EU’s criteria for accession.8
But it was Texas-based energy-turned-trading company Enron that would emerge as the poster child for financial fraud in the early 2000s. Enron used the unregulated derivatives markets—and colluded with bankers—to create a slew of colorfully named offshore entities (or “special purpose vehicles,” in Wall Street jargon) where the company piled up debt, shirked taxes, and hid losses.
The true status of Enron’s fabricated books, and those of other corporate fraudsters, remained initially unexamined because of a more acute danger. The 9/11 attacks at the World Trade Center, blocks away from many of Enron’s trading partners, provided a temporary reprieve from probes.9 Instead, Bush called on bankers to uphold national stability in the face of terrorism. In an internal voicemail to Goldman employees the night of the attacks, CEO Henry Paulson urged the “people of Goldman Sachs” to stay strong.10
On September 16, 2001, Bush took his opportunity to equate financial and foreign policy. “The markets open tomorrow, people go back to work, and we’ll show the world,” he said.11 To assist the bankers in this mission, Bush-appointed SEC chairman Harvey Pitt waived certain regulations to allow corporate executives to prop up their share prices as part of the plan to demonstrate national strength through market levels.12 A month later, the spirit of unity was stifled. On October 16, 2001, Enron posted a $681 million third-quarter loss and announced a $1.2 billion hit to shareholders equity, due to an imploding pyramid of fraudulent transactions.13
