All the Presidents' Bankers

by Prins, Nomi

  Geithner’s contact with bankers intensified in his early months as Treasury secretary, as bankers remained scared. Between January 2009 and March 2010, he spoke with Lloyd Blankfein at least thirty-eight times, more than with any congressperson. (Blankfein visited the White House fourteen times in 2011.) During his first five months in office, Geithner communicated with elite financial CEOs at least seventy-six times.132

  As for the new king of Wall Street, Dimon had established ties with the new president years earlier. According to the New York Times, Dimon first met Obama during his 2004 Senate run “at a living room discussion with about 10 pro-business Democrats,” and donated the maximum of $2,000 to his campaign.133 Dimon had spent several years in Obama’s hometown of Chicago while running Bank One (Obama was a state senator at the time). Dimon had also contributed to the campaigns of Obama’s first chief of staff, Rahm Emanuel. In addition, both were Harvard grads: Dimon obtained an MBA in 1982, and Obama graduated with a JD in 1991 (Obama became the eighth president to have graduated from Harvard).134

  In July 2009 the media dubbed Dimon Obama’s “favorite banker.” Dimon made at least sixteen trips to the White House and met at least six times with Obama between February 2009 and March 2012, including thirteen trips in 2011.135 Obama also kept about $1 million of his own money parked at JPMorgan Chase Private Client Asset Management.136

  During the fall of 2009, with the economy still a shambles, Obama levied harsh words on the bankers’ role in the financial crisis at Federal Hall on Wall Street.137 Up to that point, top bankers had visited the Obama White House twelve times. By 2012, the figure had risen to fifty-nine. Obama’s words didn’t change alliances; instead, the frequency of interactions appeared to have increased.

  Crisis and Popular Anger

  As Obama entered his second year, the economy remained a mess. Absent the bankers’ desire to renegotiate mortgages for their hurting customers, nearly five million home foreclosures had been initiated since the beginning of 2008. Standing at 7.9 percent when he took office, the official unemployment rate shot as high as 10 percent, though the figure rose to around 17 percent when actual unemployment and underemployment were considered.138 Meanwhile, the new Big Six consumed cheap capital, parlaying it into stocks and derivatives as opposed to deploying it to restructure the population’s debt or issue small business loans to stimulate the economy.139

  In August 2009, Obama renominated Bernanke, whom he called the “architect of the recovery,” as Fed chair. In January 2010, the Senate reconfirmed him by a vote of 70 to 30, the lowest vote for a Fed chair since the Fed was created. The bankers knew that with Bernanke’s reconfirmation, their support would continue.140

  The $700 billion TARP package accounted for about 3 percent of the government’s and Federal Reserve’s creative largesse during the Bush-Obama presidencies. More than $19 trillion in bailouts and subsidies had been deployed at the height of the crisis to bolster the industry and its toxic assets before various aid avenues were eventually closed. Of that figure, the New York Fed and Federal Reserve made available $8.2 trillion in loans and asset guarantees; the Treasury Department provided $6.8 trillion in subsidies and bailouts; and the FDIC initiated a $2.3 trillion liquidity guarantee program to keep the wheels of bank capital greased. Jointly, the Fed and Treasury agreed to buy $1.3 trillion of assets, a figure that grew as the Fed expanded its “money-printing,” bond-buying program. The most powerful bankers left the repercussions of their irresponsible and fraudulent practices behind them, save for some fines.141

  In February 2010, Obama told Bloomberg Businessweek that he didn’t begrudge Blankfein and Dimon their $17 million and $9 million bonuses (respectively), saying, “I know both those guys, they are very savvy businessmen.” Indeed, they were savvy and politically aligned enough to beat their competitors to recovery. Wall Street posted its second best year in its history in 2010.142

  Globally, economic conditions were abysmal. Throughout the Middle East and parts of Europe, youth unemployment topped 25 percent; in some places, it was double that figure.143 Country after country, from Greece to Spain to Ireland, struggled under immense debt and crippled economies. Governments pushed through austerity measures in conjunction with the supranational banks to make up for the debt incurred by losses from toxic securities, in the wake of a fraudulently stimulated global housing market. The general rage pushed people to the streets, from demonstrations in the Middle East and Europe to the US-launched Occupy movements, where anger was aimed at the bankers and the politicians who favored them.144

  Dodd-Frank and the Changing Nature of Power

  The Obama administration’s response to the crisis was the Dodd-Frank bill, an 848-page colossus also known as the Wall Street Reform and Consumer Protection Act.145 Despite its girth and public-oriented title, it did not alter the banking landscape. It did not separate banks’ speculative and derivatives-churning abilities from their federally backed deposit side. And it did not remove a single financial conglomerate “service” or practice, as Glass-Steagall had in 1933. A litany of correspondence between lawmakers and lobbyists did nothing to ensure that another meltdown would be avoided.

  The bill was riddled with holes punched out by bank lobbyists with Washington connections: forty-seven of fifty Goldman Sachs lobbyists had previously held government jobs (or were “revolvers”). In addition, forty-two of forty-six JPMorgan Chase lobbyists in 2010 were revolvers, as were thirty-five of Citigroup’s forty-six.146

  President Obama signed the bill into law on July 21, 2010.

  Beneath the surface, a critical presidential power shift underscored the political theater and the partisan vote on the Dodd-Frank Act. In the 1930s, the Glass-Steagall Act had been “swiftly approved by both houses of Congress” with a resounding bipartisan vote.147 Sixty-six years later, the act that repealed it passed the Senate by another overwhelmingly bipartisan vote. In other words, FDR passed regulation across party lines that stabilized the banking sector with the support of certain major bankers and the population, and Clinton passed deregulation across party lines that destabilized the global financial arena with the support of (effectively) the same bankers.

  In contrast, Dodd-Frank passed along party lines. Perhaps the 60 to 40 Senate vote showed that Obama was incompetent as a politician. Or maybe it showed that the power of the presidency to pass such legislation, even in the wake of a historic crisis, had waned considerably—or a combination of the two. Obama had no power to force a restructuring of Wall Street, nor did he appear to try. His speeches promoting sweeping reform were empty words uttered with practiced elocution, absent any of the details that FDR had explained so carefully to the nation. Not only that, Obama couldn’t persuade any politician across the aisle to support the act he promoted, even though it was toothless. He aligned with Wall Street in a haze of denial but did not, or refused to, consider the potential impact of promoting its desires. Worse, his spin on reform was accepted by most of his party and the press, though it paled in comparison to the real reform of the 1930s, which had kept extreme financial crises at bay for the better part of the century.

  According to Geithner, the Dodd-Frank Act represented the “most sweeping set of financial reforms since those that followed the Great Depression.”148 But that meant nothing either. The act left the Big Six bankers in a more influential position than before the Crash of 1929. It did nothing to alter their power and control; they held a record 60 percent of US deposits, consolidated during the fall of 2008 at the bequest of their Washington allies, the largest concentration of capital in US history.

  The opportunity for real Glass-Steagall-type reform—the kind that revises the entire financial landscape and diffuses at least some of the power of private bankers to hurt the population—was blown again. But the entire exercise was as wrongly viewed as an unmitigated, world-saving success by Obama and his team as it was castigated by the Republicans, the party that had initiated the Pecora hearings, which revealed the extent of the damage u
nconstrained bankers could bring on the overall population. Meanwhile, after Lehman Brothers went bankrupt and Bear Stearns and Merrill Lynch were acquired by JPMorgan Chase and Bank of America, the largest banks had become bigger, and their leaders more powerful than ever before.

  On the Campaign Trail

  In the absence of true reform, an abundance of national debt was issued to bolster the banking system. From the beginning of 2009 through the end of 2011, Geithner added $2.4 trillion of US debt, but there was more to come.149 The US debt-to-GDP ratio rose to nearly 100 percent and would surpass 104 percent by 2012.150 The United States lost its triple-A debt rating in August 2011 amid painful equivocation on Capitol Hill, none of which addressed how much of that debt was created by the Treasury, punted through the banks, and landed on the Fed’s books as requested by its member banks. The country’s economic future and borrowing power had been compromised by the bankers’ actions with the advocacy of the White House, and no one said a word about it. Blame fell on the “weak economy,” not the explicit role of bankers in depleting it.

  By 2011, JPMorgan Chase had surpassed Bank of America as the largest US bank, with nearly $4 trillion in assets.151 Somewhere, the ghosts of the men who had traveled to Jekyll Island a century earlier were chuckling. Jamie Dimon had secured the financial crown that had belonged to J. P. Morgan without any of the family pedigree or style. He was placed on Time’s list of the hundred most influential people in 2006, 2008, 2009, and 2011.152

  In the wake of the crash, Dimon remained the most vocal advocate of status quo. At a March 30, 2011, US Chamber of Commerce address, he warned that the “best system in the world” should not be destroyed by too many regulations. Imposing higher capital requirements on US banks, he said, would be “putting the nail in the coffin.”153 Global competition remained useful as an argument for less regulation.

  By early 2012, Obama had reentered heavy campaign mode. Goldman Sachs had uncharacteristically miscalculated Obama’s chances and flipped to backing GOP challenger Mitt Romney.154 But knowing the stakes were high, Obama made sure to praise his old favorite banker on The View—that beacon of high-quality political discussion—calling Dimon “one of the greatest bankers we have.” In a sign of his own rising power in the political-financial game, and the shift away from having to maintain tight alliances with the president, Dimon did not contribute to Obama’s 2012 campaign.

  On the campaign trail, Obama avoided addressing the first major post-Dodd-Frank blow-up, known as the “London Whale.” On April 6, 2012, JPMorgan Chase’s London office reported that its bad bet on corporate spreads through the derivatives market could cost the firm at least $5.8 billion.155 (Tony Blair was still on the firm’s payroll at the time; he received a $6.3 million mortgage loan from JPMorgan Chase in September 2012.156)

  Two months later, at a Senate hearing on the transaction, Dimon testified with the bored and sullen face of a teenager who crashed the family car and didn’t want to deal with his parents’ wrath. The senators treated him with kid gloves—they even asked Dimon for advice on running the economy.157 Yet when Dimon gave a speech at the Council on Foreign Relations in October 2012, he complained about his ordeal, saying, “When people do commit, you know, not fraud, but, you know, they make mistakes, you’re attacked by seventeen different agencies as opposed to, you know, in the old days, it would be the one who’s responsible for it.”158 He added, “[We] went through ’06, ’07, ’08, ’09, 2010, 2011, 2012, never lost money in a quarter. So we made a stupid error. I mean, if an airplane crashes, should we stop flying all airplanes? . . . [O]nly when I come to Washington do people act like, you know, making a mistake . . . should never happen.”159

  A month later, Obama won his second term as president. The perils of the financial crisis were tidily swept under the rug as the president and his staff issued overly optimistic recovery claims. The Fed inhaled Wall Street’s assets and paid banks interest on their excess reserves, while keeping rates at zero. Several months later, the London Whale incident was repurposed and blamed on a decimal-point error in JPMorgan Chase’s evaluation reports, a mistake for which Dimon emerged inculpable. His shareholders ensured he retained both his chairman and CEO roles. Obama and Dimon would continue their reigns and mutually beneficial alliance.

  The Justice Department Goes Soft on Bankers

  Many congressional hearings and investigations have probed the bankers’ practices since the crisis that began in 2007. Similar to the Pujo hearings after the Panic of 1907, though, they have resulted in nothing material against the bankers with the strongest political alliances. And unlike the impact of the 1932–1933 Pecora Commission hearings, no substantive regulatory act has passed to significantly alter their behavior. Though banks would end up paying various fines and legal settlements, that amounted to fractions of pennies on the dollar relative to their immense asset bases. Their structure and influence remained unaltered.

  As of September 1, 2013, the SEC reported it had levied just $1.53 billion in fines and $1.2 billion in penalties, disgorgement, and other money relief against the big banks for their multitrillion-dollar global Ponzi scheme—or as the SEC put it, “addressing misconduct that led to or arose from the financial crisis.”160 Goldman paid a $550 million fine from the SEC for a similar allegation. The firm admitted no guilt for the related activities. Bank of America paid a $150 million fine without admitting any guilt for misleading shareholders regarding its payment of Merrill Lynch’s bonuses when it took over the firm. JPMorgan Chase eventually settled the London Whale probe with a $1.02 billion fine, greater than the fines it paid the government for all of its housing-related infractions. Though the firm admitted that it had violated banking rules by not properly monitoring trading operations, that kind of admission was akin to copping a misdemeanor plea while facing a major felony.

  On August 1, 2013, a federal judge approved a $590 million settlement by Citigroup in a shareholder lawsuit accusing the bank of hiding billions of dollars of toxic mortgage assets.161 On that same day, a jury found former Goldman Sachs banker Fabrice Tourre liable for his role in the Abacus deal, which lost some investors $1 billion. The ruling was dubbed a major victory for the SEC. “We are obviously gratified by the jury’s verdict and appreciate their hard work,” lead SEC lawyer Matthew Martens said.162

  The Justice Department chose not to criminally prosecute the chairmen from Goldman or JPMorgan Chase (both of whom ranked in the top twenty for Obama’s career campaign contributors) or from anywhere else for creating faulty CDOs, trading against them, dumping them on less knowledgeable investors, or otherwise speculating with capital supposedly siphoned off for more productive and less risky purposes.

  Similarly, the Justice Department punted on prosecuting Jon Corzine, the former governor of New Jersey and a top-tier bundler for Obama. Steering his firm MF Global into an abyss, Corzine had bet more than $6 billion on European sovereign debt.163 The $1 billion MF Global “mistake,” the multibillion-dollar losses on bets made by Chase, the CDOs chosen by the firm’s biggest hedge fund clients that had been set up to fail—these were apparently just minor events in the scheme of making money and maintaining alliances. On October 31, 2011, MF Global filed Chapter 11, with $41 billion in assets and $39.7 billion in debt, the eighth largest bankruptcy in US history. Four days before the collapse, Corzine sent an email to an employee “to strategize how they could use customer segregated funds [and get JPMorgan Chase] to clear MF Global’s trades more quickly.” He avoided criminal fraud charges.

  The general response of Obama and his cabinet toward Wall Street criminality and the sheer unsavoriness of its leaders showed the degree to which nothing had changed and the lack of commitment to reform. If nothing changes fundamentally in the banking landscape, more and larger crises are a given. The most powerful banks are bigger, more interconnected, and more reliant on cheap money and federal largesse than ever. Their leaders are unrepentant and unaccountable. Their political alliances require nothing of them anymore
except some fines that can be easily re-earned.

  Lucky 2013

  By 2013, the major global banks were sitting on nearly $3.3 trillion of excess reserves (about $2 trillion for the US banks at the Fed and the rest at the European Central Bank), refusing to share their government aid with the citizens of the world.

  By October 2013, the government was careening toward a debt cap of $16.49 trillion, and the weakness of the US political system relative to the financial one was demonstrated by a government shutdown over budget and ego squabbles. The Fed’s balance sheet had ballooned to a historic record of just over $3.7 trillion, comprised in part by $2.1 trillion of Treasuries, or nearly $2 trillion in excess bank reserves.164 These government debt securities were issued by the US Treasury, purchased by the banks, and then reverted as excess (nonrequired) reserves to the Fed—in other words, a nonproductive circle of extra national debt issued for no real reason. In addition, the Fed books contained $1.34 trillion of mortgage-backed securities (following the establishment of an $85 billion per month mortgage-backed and Treasury securities purchase program, totaling more than $1 trillion per year).165 The size of the Fed’s books had increased by 25 percent since July 2011 and 50 percent since July 2009, and it stood at ten times the amount it had been in July 2008. All of this debt was held as means to prop up bond prices so the bankers could maintain higher values on their books of associated securities, and to keep rates low so that money remained cheap, under the guise of aiding the broad economy.

  In numerous speeches, Bernanke condoned his zero-interest rate policy and “quantitative easing” bond-buying policies, which kept the rates at which banks borrowed money at zero. The bankers were certainly happy. They could use their money on other speculative ventures, and their remaining faulty mortgage-backed securities would be bought by the Fed.166 Their 2012 bonuses rose $20 billion, up 8 percent from 2011.167