Table of Contents
Title Page
Copyright Page
Dedication
Introduction
Chapter 1 - A SECRETIVE MEETING
Chapter 2 - THE LEFT SIDE OF WALL STREET
Chapter 3 - DEEP, DEEP ROOTS
Chapter 4 - “SO , DO YOU WANT TO COME TO THE ADMINISTRATION?”
Chapter 5 - “WE KNOW EACH OTHER FROM CHICAGO”
Chapter 6 - DOING GOD’S WORK
Chapter 7 - FAT CATS AND FAT BONUSES
Chapter 8 - MONEY WELL SPENT
AFTERWORD:
Acknowledgements
APPENDIX I - Key People
APPENDIX II - Key Firms, Government Departments, and Organizations
APPENDIX III - A Few Key Financial Terms and Concepts
NOTES
INDEX
SENTINEL
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First published in 2010 by Sentinel,
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Copyright © Charles Gasparino, 2010
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LIBRARY OF CONGRESS CATALOGING IN PUBLICATION DATA
Gasparino, Charles.
Bought and paid for : the unholy alliance between Barack Obama and Wall Street / Charles Gasparino.
p. cm.
Includes bibliographical references and index.
eISBN : 978-1-101-44371-2
1. United States—Economic policy—2009- 2. United States-Politics and government—2009- 3. Business
and politics—United States. 4. Global Financial Crisis, 2008-2009. 5. Finance—Government policy—United
States. 6. Obama, Barack. I. Title.
HC106.84.G37 2010
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2010026888
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To Austin Koenen:
A man of many talents, including not being afraid to speak his mind
A PARTIAL LIST OF WALL STREET FIRMS AND EXECUTIVES WHO MADE DONATIONS TO POLITICAL CANDIDATES SINCE 2008
Note: The dollar amounts given here do not reflect amounts raised from friends and family, and so understate the true size of the contributions; sums shown are total amounts from January 1, 2007, to June 2010. Note that the limit for personal contributions to a Presidential campaign is $2,400 but by giving to national committees and political action committees (PACs) as well as other organizations, that amount can be vastly exceeded.
INTRODUCTION
Lloyd Blankfein was exhausted. It was May of 2010, and the American public was furious at him for his role in the credit crisis currently plaguing the economy. After taking over Goldman Sachs as its CEO in 2006, Blankfein had transformed one of America’s largest investment banks into a Darwinian trading enterprise—generating billions of dollars in trading profits with little regard for competitors or even its own clients—and shepherded it through the recession relatively unscathed. Yet despite his and Goldman’s success, he had come to be viewed by many as nothing more than a greedy, deceitful, and manipulative traitor—out to make a buck no matter the consequences.
To make matters worse, the Securities and Exchange Commission (SEC) was threatening to charge the company with fraud involving its dealings in the lead-up to the financial crisis. Prior to the crisis, Goldman had made a fortune selling products known as “synthetic CDOs,” one of which was called Abacus. The SEC was alleging that Goldman had misrepresented Abacus to potential purchasers, telling them that ACA Management, an independent bond insurer, had reviewed the mortgages packed within the product, even though Goldman had failed to disclose to ACA (and to investors) that the hedge fund Paulson & Co., led by billionaire investor John Paulson, was trying to bet against (short sell) the product at the same time Goldman was encouraging clients to buy it.
Being hit with even a civil fraud charge (the SEC can’t put people in jail) could be a serious blow to any firm, and Blankfein was well aware of the potentially severe consequences he was facing as well. If the charges held up, Goldman would be forced to admit it had committed fraud—an act that usually serves as the kiss of death for a bank when important pieces of business are on the line. Not only would future business be lost; according to people close to the firm, Blankfein could be forced to resign.
But despite his trials, Blankfein had taken time out of his grueling schedule to help a firm that wasn’t a Goldman client, not even a prospective one. The firm was ShoreBank Corporation, a small community bank located in Chicago that lent money to inner-city businesses and was exploring the possibility of financing nascent and as-yet-unprofitable “green” businesses through so-called conservation loans and environmental banking, according to the bank’s Web site. The bank’s self-described mission was to “change the world.” And yet despite its seemingly good intentions, the bank’s urban commercial borrowers were suffering greatly from the lower property values and high unemployment that stemmed from post- financial crisis recession. Without Blankfein’s help (and the help of other major Wall Street firms) ShoreBank would follow the fate of dozens of other banks during the great recession and face almost certain collapse and government liquidation.
To be sure, helping out a struggling bank that wasn’t even a client was a most un-Goldman-like thing to do. Goldman dealt with only the biggest companies in corporate America or with superwealthy individuals (typically, those with $10 million or more to invest with the firm). More than that, this was a firm that had a reputation for screwing just about any company, clients included, when business was on the line. Goldman, of course, would deny that assertion. Even so, in the normal course of business, a bank like ShoreBank, with its modest funds and do-gooder reputation, wouldn’t even appear on Goldman’s radar as a potential customer.
Yet for some seemingly inexplicable reason, Lloyd Blankfein—who had a net worth close to $500 million and until recently had never heard of ShoreBank—started imploring his friends at other firms, like Mo
rgan Stanley, GE Capital, and others, to help this little bank. Not that Blankfein suggested there was money to be made here. Quite the contrary; it was simply the right thing to do.
To any casual observer, this puzzling scenario raises the question: Why would Blankfein possibly want to save ShoreBank?
First a little background. For Blankfein, it had been a good year—at least on paper. Goldman earned more than $13.4 billion in 2009, and now, nearly midway through 2010, the firm was well on its way to a repeat performance. But with success came a lot of controversy. Goldman, the most profitable firm on Wall Street, and among the most profitable firms in corporate America, had become the poster child for the inequalities of the American economy that followed the financial collapse of 2008.
That collapse was the result of a combination of government policies, reckless risk taking, and sheer greed. The big financial firms, including Goldman, created literally trillions of dollars’ worth of debt products based on mortgages that were given to people who couldn’t afford them, for houses that were way overpriced. When the housing market collapsed, the firms were left with tons of toxic housing debt on their balance sheets. One by one, they started to go under: First, Bear Stearns was rescued by the government, and then Lehman Brothers was allowed to fail. Following Lehman, the other firms (including Goldman), which had been in relatively better shape (but were by no means healthy), were now in the market’s crosshairs.
At that point the government, which at the time was being run by Republican president George W. Bush but would shift entirely to the Democrats when Barack Obama was elected president the following year, realized a true collapse of the entire financial system was a distinct possibility and stepped in to bail out the remaining firms.
Like the rest of Wall Street, Goldman had benefited from a bailout, funded entirely by taxpayer dollars, to survive. Yet since then, it had used a number of special privileges created by the Bush administration to help the big banks in the aftermath of the financial crisis to make more money than ever before. The profits of the big banks began rolling in just weeks after the 2008 bailout, yet the government support continued through 2009 and into 2010 as the programs remained firmly in place under the Obama administration. These included, among other perks, guarantees on the firms’ debt, superlow interest rates set and then left untouched by the Fed, changes in accounting rules that allowed the firms to create profits out of losses, and maybe most of all, the notion that the remaining banks, backed up as they were by the federal government, were too big to fail. In a desperate attempt to save the economy from total collapse, the government did for a handful of banks what the mob does for its highest, most important criminals: It made them, in effect, made men. This policy, known as too big to fail, asserted that some firms—including many of those responsible for the credit crisis—should not be allowed to collapse for fear that, if they did, the entire economy would follow.
It was an unprecedented assortment of government goodies that allowed Wall Street to survive and, after the initial threat of collapse had waned, thrive. They all made out like, for lack of a better word, bandits; even lowly Citigroup, after two rounds of federal bailouts, was profitable early in 2009, so much so that its CEO, Vikram Pandit, who was nearly pushed out as head of the firm a few months later, found job security and a second chance.
But Goldman was the most adept at gaming this no-lose system, executing a business plan based on government support that made it the envy of every other firm on the Street. Goldman, probably more than any other firm, was able to use its status as a government-protected business to gain access to billions of dollars of borrowed money at rock-bottom borrowing rates and then use those funds to buy bonds—many of which were the same as those that had helped cause the financial crisis but were now trading at just pennies on the dollar.
Thanks to new government guarantees, these once risky investments became sure bets because of another government program in which the Federal Reserve was snapping up mortgage-backed securities in the open market to help prop up their prices. According to the Fed’s Web site, the program is designed to “provide support to mortgage and housing markets,” the theory being that if the mortgage-bond market stabilizes, banks will increase their lending and housing prices will rise. But the biggest beneficiary of this program hasn’t been the average American homeowner (the housing market remains pitifully soft in many parts of the country) but the average big-bank bond trader, who profited by buying debt on the cheap and sitting back and watching his investments pay off thanks to a government payout.
And what about the men, including Blankfein, who ran these firms? They saw no problem with reaping profits at the expense of the American taxpayer. In their minds, they were doing “God’s work” (a phrase Blankfein would later make famous) simply by funneling billions of dollars each year throughout the markets in an effort to churn out trading profits and thus, in the end, fuel the economy. In their eyes, if they won, everyone won; and thus, if they failed, as they nearly all did in late 2008, everyone failed.
But as the economy stagnated and companies continued to lay off employees, only Wall Street seemed to be winning. While the banks that had been largely responsible for the recession were saved, the taxpayers who had funded these bailouts and government initiatives were suffering. The national unemployment rate was hovering at close to 10 percent; in fact, the only sector seeming to fare well was state, local, and federal government (which faced an estimated 3 percent unemployment) and the bailed-out Wall Street firms, which began hiring again just months after receiving the bailout money. With Wall Street benefitting from this unequal redistribution of wealth, the public wanted blood. And with Goldman benefitting the most, the firm and its CEO, Lloyd Blankfein, became public enemy number one.
Goldman, which enjoyed a pristine reputation with the national media as the firm that government turned to for advice and counsel, was suddenly portrayed as a villain or, as Matt Taibbi of Rolling Stone put it, “the great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.” The article crystallized America’s burgeoning hatred of Wall Street and deep-seated suspicion that the financial service industry was just out to screw regular people. Even President Obama, who had supported the bank bailouts and the subsequent federal policies (e.g., super-low interest rates) that led to the banks’ resurgence, had started changing his tune in the face of the public outrage. Just as Goldman was getting ready to celebrate the accumulation of some $25 billion in bonus money for 2009 (one report had Blankfein set to receive $100 million in compensation), Obama referred to the bailed-out bankers as “fat cats” enriching themselves at the public’s expense, even if his polices were mostly to blame.
Of course, the fattest of those fat cats, Lloyd Blankfein, took the focus on Goldman, and him, particularly hard.
It wasn’t just the insurmountable press attacks that had Blankfein telling people he felt like crap all the time (or as one friend told me at the time, “Lloyd always looks like shit”). It was also the notion that he, a man who had fought his way out of a Brooklyn, New York, housing project and up the ladder to the very pinnacle of high finance, was a greedy businessman feasting on taxpayers’ hard-earned money. Some polls showed that Wall Street had an approval rating lower than that of House Speaker Nancy Pelosi, who was unpopular with an amazing 80 percent of all Americans. In fact, Wall Street would have been happy with Pelosi’s lousy numbers; one poll conducted in the spring of 2010 gave it an unpopularity rating closer to 94 percent.
And now those low poll numbers, just as they would doom any political candidate, began to doom Blankfein and Goldman. In early May 2010, the Securities and Exchange Commission, led by Obama appointee Mary Schapiro, filed a civil fraud case against Goldman. The charge was the most serious regulatory attack on any Wall Street firm stemming from the financial crisis; it accused the firm of failing to disclose to its clients key pieces of information regarding an investment Gol
dman had sold back in 2007.
According to some of his acquaintances, Blankfein was outraged. His already long days at the office got considerably longer as he began marshaling all the firm’s resources to fight the charges, or at the very least whittle them down so the firm could settle in a palatable manner.
Blankfein’s problems were compounded because Goldman wasn’t completely out of the woods in terms of criminal inquiries, either; the U.S. attorney for the Southern District of New York, as well as New York attorney general Andrew Cuomo, were launching investigations at the same time that British regulators and even the securities industry’s self-regulator, the Financial Industry Regulatory Authority (FINRA) launched their own probes into the firm.
With Goldman enmeshed in a huge PR and legal debacle, Blankfein knew he needed a game changer, something that put the firm back in the good graces of the government and, most important, of the man who controls the government, President Obama. For the most part, Obama had been good to the banks—really good. They’d gotten everything they wanted in terms of bailouts and handouts and reaped enormous profits because of it. But now, realizing the public’s increasing anger, Obama came to the conclusion that he needed to change his tune or risk appearing completely out of touch with the national mood. So he and his fellow Democrats made banker bashing their pet project.
Amid this assault, ShoreBank’s demise presented a unique opportunity for Wall Street’s battered CEOs. After all, Obama hailed from Chicago, where the bank was based. He had earned his political chops there serving in local government and later as a senator. Obama had even once touted ShoreBank as doing God’s work, even though according to independent analysts I spoke to it hasn’t generated a profit in years. Judging by its financial troubles and unprofitability, the bank seemed to exist to lend money to poor people or investors who tried to spur economic growth in the inner cities, even if that growth didn’t really work out as planned. But it kept lending anyway and also began to pursue so-called green investing, or investing in businesses that are environmentally friendly even if those businesses lose money and generate few jobs.
Bought and Paid For Page 1
