Bought and Paid For

by Charles Gasparino

  One thing neither side can dispute is how the Orange County bankruptcy displays in vivid detail the symbiotic relationship between Wall Street and Big Government, and all its disastrous effects. Stamenson had donated $4,000 to Citron’s successful reelection campaign, which helped ensure that the investment strategy would continue. He also would actually write Citron’s talking points for him when the treasurer made presentations about his management of the pools to Orange County’s board of supervisors.

  But despite the enormous cost to taxpayers, Orange County marked the beginning, not the end, of risk taking in the municipal market. The reason? Well despite the magnitude of the implosion—at their height the pools were valued as high as $8 billion—both government and Wall Street got off pretty easily.

  As a result, the market for financial products used by Robert Citron to keep his Big Government alive (for a time) continued to flourish, and Wall Street, like a dope pusher living on Park Avenue, couldn’t have been happier.

  3

  DEEP, DEEP ROOTS

  “Where’s Sandy, where’s Sandy?” Reverend Jesse Jackson nervously asked. He was huddled with some key advisers in a rather unusual setting for the controversial civil rights activist: a reception held inside the headquarters of Travelers Group, the massive brokerage and trading empire run by financier Sandy Weill.

  The year was 1997 and the reception was being held to commemorate Jackson’s new civil rights organization, the Wall Street Project. But there was much more at stake—for both Jackson and Weill—than the seemingly simple goal of Jackson’s group to create more diversity in the financial services industry.

  Weill wasn’t content with merely running a firm like Travelers, which combined selling insurance to consumers with peddling stocks and bonds to small investors through a brokerage unit, and of course doing its own trading and deal making.

  He had his eye set on creating the world’s ultimate “financial supermarket” by purchasing a large commercial bank and merging it with Travelers. Weill’s vision was to combine commercial banking, including customer deposits, with the risk-taking trading activities found at Wall Street firms like Goldman Sachs and Morgan Stanley. The profits would be huge, he predicted, because clients would shop at one place for all their banking and investment needs.

  But he faced formidable obstacles in creating his dream, which a few years later would turn into the nightmare named Citigroup. Under the Glass-Steagall Act, a deal of this nature would create something that was in violation of the law. To forge ahead with his plan, Weill would have to spend a few million dollars on lobbyists to get the law repealed once and for all.

  An even bigger challenge would be more political than financial: the government’s housing advocates, people like Congresswoman Maxine Waters and others, who would view the potential merger as an opportunity to demand major concessions from the company in exchange for their vote of approval. They would protest, hold hearings showing alleged racial disparity in lending practices, and force Congress to think twice before allowing the merger—unless Weill’s banking empire stepped up its lending to poor communities.

  But Sandy Weill had an answer to that as well: Jesse Jackson. The famed civil rights activist wasn’t above demanding that banks give more loans to the poor, even if the poor couldn’t repay them. Indeed, he had been using his stature inside Big Government, his access to key lawmakers, and now his friend President Bill Clinton to achieve his political and financial goals for years. Lately, he had developed a simple but lucrative new business model wherein he would threaten protests of the lack of diversity of various corporations, including, now, the big Wall Street firms. He labeled this latest campaign the Wall Street Project, whose purpose was to bring greater diversity to the nearly all-white and all-male power structure at the typical Wall Street firm. Jackson told me those firms that donated money to his new Wall Street Project were simply demonstrating their commitment to diversity. The firms that gave called the money the price of doing business and, in a rare moment of candor, a form of extortion.

  Jackson’s Wall Street Project had very little practical effect on the diversity of Wall Street—women and minorities remain largely absent from the senior ranks of the big firms. But the focus on Wall Street helped his organization reap many benefits. For the five or six years the Wall Street Project existed, the money from the banks to his various groups soared. “Blood money,” is how one senior Wall Street executive described the donations. It’s easy to understand why Jesse Jackson had his eyes set squarely on Wall Street’s blood money, with its vast riches from the 1990s stock market boom, its nearly all-white-male executive ranks, and its movement toward political correctness. The big Wall Street firms and banks that were feasting off the Internet bubble—selling stocks of dot-com companies (many of them eventually worthless) to small investors—as well as the Big Government—earning fees through selling its bonds to finance the nanny state, through municipal financing projects, and through the lucrative debt that an expansive housing policy creates—had found that those profits came at a price: the embrace of contemporary liberalism.

  Jimmy Cayne, the CEO of Bear Stearns, used to joke about how he could avoid an extended conversation with Jackson during the glory years of the Wall Street Project. “Rev. Jackson, I’m such a fan of yours,” Cayne said he’d told Jackson. “But the only money I can give you is from the Bear Stearns Charitable Foundation.” The foundation had it own executive director and management, so, as Cayne explained, the firm wasn’t the target of a shakedown; its foundation was.

  Jimmy Cayne may have dodged the bullet of having to deal directly with Jesse Jackson (Bear Stearns actually financed a minority-owned brokerage that donated significant sums of money to the Wall Street Project and benefited from Jackson’s push to force corporations to hire minority-owned brokerages as underwriters), but nearly every major firm had tagged diversity as a primary goal. Firms like Merrill, for instance, even encouraged gender- and race-based groups and clubs inside the firm, even if the senior ranks of the firms remained all white and largely male.

  All of this created a tremendous business opportunity for Jackson. He would scare the daylights out of Wall Street by showing how it violated not just its own diversity goals but also civil rights laws, unless, of course, the big firms made him rich (he was already a millionaire) by donating to his organization and by making sure that minority-owned firms that were part of the Wall Street Project gained access to the Big Government largesse that usually flowed only to the big firms, namely lucrative municipal bond contracts and other forms of corporate welfare.

  Weill’s idea was simple yet ingenious: Instead of fighting Jackson, he would partner with him. He would lend Jackson his name, his offices in Midtown and around the city, and one of Travelers Group’s lawyers, Harold Levy (who went on to become New York City schools chancellor), to raise money for Jackson’s Wall Street Project, which was supposed to promote diversity on Wall Street but did little more than promote Jesse Jackson. Weill would enlist his friends in the effort, including New York Stock Exchange CEO and chairman Richard Grasso, who gave Jackson and his civil rights group access to the famed floor of the NYSE to hold fund-raisers and access to his Rolodex of millionaires.

  And according to people who worked with Weill at the time, he would and did buy off Jackson with events like this one, held inside Travelers’ luxurious headquarters in Midtown Manhattan.

  It was a pretty odd scene. Corporate executives are usually the ones seeking out and kissing up to Jackson, fearing that they might be the next target of one of his patented shakedowns. But here was Jesse Jackson, an imposing figure in his own right, nervously waiting for the arrival of a short, overweight, and balding investment-banking chieftain.

  When Weill arrived at the event, he was surrounded by aides and a bodyguard. He shook some hands before making his way to Jackson, who promptly hugged him and thanked him for all his help. Weill thanked Jackson as well, and with good reason: Within the next year, Weill
would purchase banking giant Citicorp and merge it with Travelers to create Citigroup, and he would enlist Jackson to keep his mouth shut about the firm’s poor record in lending to minority communities and its near lily white management team and, equally important, to persuade friends in Washington to support the death of Glass-Steagall.

  Big Government’s alliance with Wall Street, of course, has historical roots, including many that I have uncovered during my long career as a reporter. These roots long predate Jesse Jackson’s Wall Street Project and the historic Orange County, California, bankruptcy filing. In fact, Orange County was just one instance of how Wall Street and Big Government have worked arm and arm, often to the detriment of the average taxpayer, not just on the local level but on the state and national levels as well.

  Rating agencies like Moody’s Investors Service, Fitch, and Standard & Poor’s slapped all those fictitious triple-A ratings on the mortgage debt, enabling the Wall Street firms to sell the bonds that allowed banks to meet the requirements of the Community Reinvestment Act, which hands out loans as part of the social policy goals of Big Government. While they were doing that, the raters became the useful idiots of the tax-and-spenders at the state and local level. Despite broad public support for lower taxes and smaller, more efficient government, the rating agencies all but threaten states to keep taxes high or face downgrades in their debt ratings.

  And of course, on the national level, the alliance between Big Government and Wall Street has been responsible for bailout after bailout.

  It’s important to remember that the embrace of Wall Street and its largesse is a bipartisan sin. The George W. Bush administration cut taxes but not the size of the U.S. government, and Wall Street prospered through the issuance of government debt and through the continued use of the mortgage-backed security to further the housing policies that began in the Clinton years and continued under Bush.

  But George W. Bush never proclaimed himself to be the president of change, to be the leader who would set the greed merchants on Wall Street straight even while he all but promised to make them rich. That distinction belongs to Barack Obama alone.

  Obama made good use of his time in Chicago, cultivating financial as well as political connections. And few were more important than Jamie Dimon.

  When he took the top job at Bank One, Dimon moved his family to the Second City and enticed his Citigroup cronies to join his new firm, which he vowed would one day match the size and strength of Citigroup, and he immersed himself in the midwestern political culture. While in Chicago, he forged his close ties to Rahm Emanuel, to the ruling Daley family (he went on to hire one of the Daleys as a top executive), and, according to Dimon himself, to a young state senator named Barack Obama. It’s no coincidence, either, that shortly after their first meeting, Dimon made donations to a number of Chicago-based charities that no doubt were and remain close to the then-future president’s heart. Dimon serves on the board of the University of Chicago, to which he donated $1 million, and he also gave money to the Museum of Contemporary Art Chicago, Big Brothers Big Sisters of Chicago, the Chicago Community Foundation, and the Chicago Public Education Fund.

  And Obama’s close friend and future chief of staff Rahm Emanuel was linked closely to Wall Street as well, having worked for Goldman Sachs and receiving a salary of $3,000 per month in the early 1990s to “introduce us to people,” as one Goldman partner said at the time. And that’s exactly what he did, and more.

  The overall market for the derivatives traded by the big investment houses and used by big corporations and Big Government to massage earnings and debt levels exploded (well into the tens of trillions of dollars) between 1998 and 2008—that is, until the financial system collapsed as these financial products that had been invented to reduce risk pushed the financial system to the breaking point.

  Much has been said and written about this period of excess, which allowed America to go on a spending spree. The conventional wisdom in the media is that everything that caused the crisis was the result of deregulation, the free-market sin of allowing unscrupulous bankers to lend to risky “subprime” borrowers, letting the Wall Street traders run wild without adult supervision, and maybe most of all the explosion of various new forms of debt and “derivatives” of that debt that made Wall Street so rich while the wages of average American stagnated. In 1989 the total amount of the derivatives market stood at $2.4 trillion. Twenty years later the markets had undergone a radical transformation with more than $450 trillion worth of complex derivatives contracts being held by various financial players.

  The proponents of these newfangled financial products said they had a proven societal benefit. The risk reduction that derivatives created allowed those risky subprime borrowers to buy homes through the magic of Wall Street financial engineering, such as the mortgage bond and its various iterations, like the collateralized debt obligation.

  The great financial collapse of 2008 occurred after a period of reduced regulation of mortgage lenders, Wall Street, and its traders, but Wall Street’s historic implosion was equally the result of large government bailouts, which had the cumulative effect of allowing the big Wall Street firms to skirt the full consequences of their risk-taking actions. In other words, government didn’t just let Wall Street run wild; it virtually condoned Wall Street’s wildness by bailing it out whenever it ran into trouble. For example, in 1998, the Federal Reserve slashed interest rates, creating free money for the brokers whose risk taking had led to large losses. Ten years later, the federal government, as we all know, would play a direct role via bailouts in ensuring that the Street survived the downside of gambling.

  What’s more, the men at the center of this massive government subsidy for Wall Street gambling would benefit mightily from this protection and continue to do so even today, as they shuttle back and forth between Wall Street and key jobs in the federal government. They include Emanuel, now the president’s chief of staff (and according to some, the second-most-powerful man in America, behind the president himself ) but formerly a lobbyist for Goldman Sachs; Larry Summers, formerly deputy Treasury secretary, Treasury secretary, and adviser to the giant hedge fund D.E. Shaw and now a chief economic aide to the president; and a man who more than anyone else epitomizes all that is wrong with the alliance of Big Government and Wall Street: Robert Rubin.

  Known by his friends simply as Bob, Robert Edward Rubin is a short but intense man who speaks in a commanding yet understated tone. Those who know him describe him as part intellectual, part risk-taking gambler. According to the New York Times, when he worked at Goldman in the 1980s, he would pester coworkers with questions during holidays and even called a colleague to ask a mundane question during the second half of the Super Bowl. He seemed too intellectual to be sitting at the trading desk, making bets like a professional Vegas gambler.

  But Rubin saw trading as the key to success on Wall Street as the Street’s traditional lines of business, such as advising companies on stock deals or mergers and acquisitions, began to show lower and lower profit margins because of increasing competition. Trading, however, couldn’t be commoditized, especially at a firm like Goldman, which recruited the best and the brightest from top-ranked schools. The Goldman trader (so those at the firm believed) was far superior to the competition because he was simply smarter and would be willing to trade against even his own clients for the greater good of the firm (something that, as we’ll see, would land the firm in hot water in 2010).

  The art of risk taking was Rubin’s forte, and he instilled it in a generation of future Goldman leaders, people like bond trader Jon Corzine (who would go on to run the firm before embarking on a political career as a liberal U.S. senator and governor of New Jersey) and a commodities salesman named Lloyd Blankfein, who, like Rubin, openly embraced risk.

  Bob Rubin was a trader through and through, and in his mind, men like him were essential to the survival of modern Wall Street. It came as no surprise to any of his colleagues at Goldman that amid the clutter
of his office, one thing stood out: a photo of former Goldman chief Gus Levy, the legendary trader who began the firm’s push into the wild side of the Wall Street business model many years earlier.

  Rubin graduated from the London School of Economics and received a law degree from Yale. But he made his fortune during his nearly three decades at Goldman Sachs, mostly in the trading pits, as an “arbitrageur”—a fancy Wall Street term for someone who takes big bets in the markets by trading debt and other esoteric securities.

  During this time, he was active both in Democratic Party politics and among the Wall Street elite, where he helped set the financial business’s lobbying agenda. Under Rubin, Goldman would hire numerous young and talented politicos, mainly Democrats, including a young Rahm Emanuel as a “consultant,” to help the firm win lucrative investment-banking contracts from municipalities and businesses. When he retired from Goldman as its chairman, he took a job as the chief economic adviser to President Bill Clinton, and shortly after that he made his greatest “contributions” to public service as Clinton’s Treasury secretary.

  Rubin has earned kudos for prodding the Clinton administration to cut the nation’s deficit through a massive tax increase, initially slowing economic growth and igniting a massive rally in the bond markets—which just happened to benefit Rubin’s old firm, Goldman Sachs, along with the rest of Wall Street. Economists are divided, mainly along ideological lines, over whether the Clinton tax increases did indeed help spur the massive economic recovery that began in 1995 or whether it was the result of political gridlock in Washington, where the Republican-run Congress blocked many of Clinton’s spending initiatives and forced him to govern from the center, enacting policies that the far Left hated, such as cuts in capital gains taxes and welfare reform.