“Everyone here lives in New York State [one of the highest taxed states in the country], so what makes you think this guy won’t raise your taxes to sixty percent?” Perella snapped. “In this economic environment, that’s crazy.”
For a second the room went quiet, and then someone leaned over and repeated what Mack and Fink told Perella earlier: “Oh don’t worry, Obama’s really a moderate.”
Moderate on Wall Street, yes, but Main Street was quickly coming to another conclusion about its new president. Soon after taking office, Obama was met with the beginnings of a backlash from average Americans against the elites who had gleefully led government’s expansion to unprecedented size, and maybe most of all against the Wall Street elite who had brought the country to financial ruin. They demanded accountability and expected Obama to deliver on his promises of hope and change.
So President Obama promised not to let the great financial collapse of 2008 pass without teaching Americans an important lesson: that everything we had been taught about the economy since the Reagan presidency, specifically that economies work best when they are unfettered by government, was wrong. Wall Street’s recklessness was exhibit A as Obama put capitalism on trial and, like Moses bringing his people to the promised land, President Obama said he would lead the American people to a new understanding of the limits of unfettered, unbridled capitalism.
It was, of course, more myth than truth. Wall Street’s greed had been subsidized by government for decades, thus allowing the casino that Wall Street became to grow and grow.
Even so, as he officially took office, and well into his first year as president, Obama swore to hold the Wall Street elite responsible for the financial collapse, and now for the smoldering economic collapse that took unemployment to nearly 10 percent. As unemployment grew seemingly by the day, the president and his advisers promised there would be no more reckless gambling—the stern hands of Big Government would make sure of that. There would be solid, responsible financial reform and, more than that, a reform of the economic mind-set; Wall Street businessmen would be held accountable as they never had been before, and they would be taught that there was a greater good than just making money. They would pay higher taxes (in fact, anybody making $250,000 a year would do so) and they would have to further subsidize his plans to level the playing field, namely his new government-subsidized health-care plan and the new stimulus package of $800 billion in spending projects (or, in his words, “shovel-ready jobs”) that would put Main Street back to work immediately.
What our new president didn’t say was that while these taxes would be distributed evenly among businessmen regardless of where they worked, the real benefits of “Obamanomics” would be distributed unevenly. The higher taxes to pay for his vast expansion of government would hit hardest the owners of so-called small businesses, the vast array of companies that fall clearly outside the Fortune 500 listing of the biggest employers in America. These companies may be called “small,” but when they’re taken together they represent a majority of jobs in America.
The common media stereotype of a small businessman is someone like Joseph Wurzelbacher, better known as “Joe the Plumber,” who was starting a plumbing business and during the presidential campaign chastised Obama for promising to raise his taxes (one of the promises Obama would eventually keep) and trying to redistribute wealth. But more typical small businesses are the ones that are considered the engine of the economy mainly because they are the ones that do most of the hiring when the economy recovers—not the giant firms that make headlines. These small businesses, according to stock market analyst Peter Sidoti, employ anywhere from two hundred to two thousand people per company. They have a stock market value of as little as $2 billion (which makes them “small” by comparison with larger firms but still important), and if Sidoti’s research was accurate, they were about to engage in a massive elimination of jobs, not jobs on Wall Street but those of ordinary, hardworking Americans.
Sidoti, it should be noted, has been a research analyst for thirty-five years, but of a caliber different from the more well-known Jack Grubman and Henry Blodget, the glitzy, publicity-hungry duo who will live in infamy for being thrown out of the financial business in 2003 after securities regulators found they placed positive recommendations on stocks of companies that their private e-mails showed they really didn’t believe in. Instead, regulators believed their recommendations were designed to win investment-banking deals; these same companies were kicking back huge fees to their firms (Citigroup and Merrill Lynch) for this business.
In contrast, Sidoti looks like an accountant. He keeps a low profile and is rarely seen without a nondescript dark suit and starched white shirt. He always seems to be sweating as if he is late to a meeting. Most important for his clients, Sidoti doesn’t do investment-banking work, which means he gets paid for making market calls that are right and alerting his clients to companies and stocks that will make them money.
Talk to his clients and they’ll also tell you he’s right most of the time.
During the first three months of 2009, Sidoti went out and began interviewing management at these small companies. The first thing Sidoti discovered was that of the six hundred “small” businesses he was researching, nearly all had survived the great recession in relatively good shape. He was pleased to tell his clients—mainly large institutional investors such as mutual funds and pension funds—that the stocks of these companies were looking pretty cheap. They had made it through the worst of the financial crisis with their balance sheets intact, and with economic growth now beginning to pick up, albeit at a tepid pace, their stocks looked cheap. (Just to recap, the Dow, after reaching an all-time high of 14,164 points in October 2007, a year before the financial collapse, eventually crashed a staggering 57 percent to only 6,626 points by March 2009.)
But the survival of these small businesses came at a larger price for the country: These companies were ensuring their survival simply by slashing jobs, tens of thousands of them, as they were doing now and would continue to do for the foreseeable future. Why were these companies shedding employment so fast? Sidoti discovered they were terrified of the higher taxes they were sure Obama was going to put in place, scared of his new “mandates” such as socialized health care, and simply full of disbelief that Obama’s $800 billion stimulus bill would actually put people to work and so spur spending and consumption. Instead, these companies were maintaining profit margins simply by cutting costs, and their biggest cost center was jobs.
Sidoti had been in the research business long enough to extrapolate what the vast reduction in employment by the six hundred typical small businesses he covers meant for the wider economy. First he had to gauge the impact of the president’s stimulus package, and he could sum it up in two words: a joke. The more he studied it, the more he realized that most of the money wasn’t going into infrastructure spending—“shovel-ready jobs” was the phrase the president and congressional Democrats threw around so often in trying to drum up public support for the massive spending spree on top of the bank bailouts and the automobile company takeovers. Instead, most of the cash was merely being transferred to state governments around the country, some of them the most inefficient enterprises (after, of course, the federal government) known to mankind. This was so they could plug their budget holes without cutting their massive layers of bureaucracy—i. e., they could keep the various state government employees (and the Democrat-supporting unions who represented them) employed.
In other words, as unemployment rose to nearly 10 percent (and to around 23 percent in the construction business thanks to the near absence of those “shovel-ready” projects the president had promised with his stimulus plan), the economic stimulus that Obama and his economic team predicted was a huge failure. Sidoti knew it, and so did the vast majority of the men and women who ran the small businesses he was researching. And that is why they were laying off so many of their workers: Taxes were about to explode, not just at the national lev
el but also at the state level, because the stimulus transfer provided nothing more than a onetime break (for governments) from the effects of the economic collapse. That money would eventually run out, and with the economy still in shambles, state and local government would begin a new round of tax increases.
So here was Peter Sidoti, a smart man who ran his own independent research firm on Wall Street that was decidedly not part of the Jamie Dimon/Larry Fink/Lloyd Blankfein economic elite, coming to the conclusion that the country was about to go through one of the most uneven and unfair economic recoveries in years. Thanks to its partnership with government, Wall Street had been allowed to gamble away almost everything, get bailed out, and because of this continued partnership, Sidoti heard through the Wall Street grapevine during the first three months of 2009, the big firms were beginning to make money once again. And all of this was occurring while the innocent bystanders of the financial collapse, the small businesses (and their workers), which now could not get loans from those same banks, needed to cut costs to survive and (they hoped) remain profitable during the great recession.
Sidoti, like most businessmen, believed that lower taxes often allow businessmen, those at both large and small companies, room to hire more people and get the economy rolling again. And yet, like the politicians in Washington, those in Albany, New York’s state capital, were promising just the opposite: continued aid to the businesses that had caused the collapse and penalization of the businesses that had done the right thing. So these businessmen did what any rational person who is not protected by government guarantees and crony capitalism would do: They would hoard cash by cutting jobs and investments in plant and equipment. Sidoti estimated they would slash as much as a third of their workforce in 2009, which, if true, meant that the recovery the president promised after his Democratic-controlled Congress passed and he signed the $800 billion stimulus package wasn’t really coming for a very long time, at least for average Americans.
As for Wall Street? Well, that’s another story.
“It’s total bullshit. He’s bluffing,” snapped Paul Miller, a veteran financial analyst for the Friedman, Billings, Ramsey Group. Miller was traveling through Fort Myers, Florida, on one of his ground assessments of the housing market. The beginnings of a recovery both for Main Street and Wall Street, according to the conventional wisdom, would start with a recovery in home prices, particularly in places like Florida, where housing speculation had reached astronomical levels during the bubble years. The reason? Like most Americans, Wall Street had invested heavily in housing. The bailout measures of 2008 and 2009 may have stabilized the financial crisis and prevented a complete collapse of the banking system, but those toxic housing bonds that had helped to cause the crisis in the first place were still on the books of the financial firms. If Wall Street were to recover, Miller and many others believed, those toxic bonds, filled with mortgages from places like Fort Myers, would have to recover first.
But what Miller was seeing wasn’t a recovery at all: Houses were sitting on the market, unbought, offered at a large discount from their purchase price amid continued defaults by those who had invested in the market, either with hopes of flipping for a quick profit or because they had borrowed far more than they could afford with the “generous” assistance of the big banks and Big Government. From just looking around Fort Myers, Miller wasn’t optimistic about Wall Street turning around anytime soon.
His profane reaction about bluffing came when he got an urgent message from his office: Vikram Pandit, the CEO of Citigroup, was saying that his company was about to make money again. Miller had long doubted the ever-optimistic statements from Wall Street CEOs; these CEOs, of course, were the same people who had plunged Wall Street into crisis with their bad bets in the bond markets and then spent 2007 and 2008 saying that the crisis was coming to an end, even as it nearly ended Wall Street.
The CEOs of the two major firms that went down in 2008, Bear Stearns and Lehman Brothers, were making positive statements about their firms’ condition on financial TV and in the newspapers right up until the end. In the case of Lehman Brothers, this was especially dramatic: On September 10, 2008, then CFO Ian Lowitt boasted to analysts of the strength of the firm’s liquidity; i.e., its abilities to meet its financial obligation with available funds. Five days later, on September 15, the firm collapsed and filed for bankruptcy. And as we’ve seen, Lloyd Blankfein of Goldman Sachs still to this day proclaims that his firm didn’t need the government money during the financial crisis, that it was “forced” on Goldman, and that the firm had been doing just fine through the entire debacle.
So Miller remained unconvinced, particularly because the guy making the statement was Vikram Pandit.
Pandit had survived as Citigroup’s CEO into the spring of 2009—but just barely. His bank, of course, was one of the largest recipients of government bailout money. In order to survive, Citigroup had needed not just one but two bailouts in the form of fresh capital from the federal government, and that doesn’t count billions of dollars in government guarantees on its holdings of toxic assets. Pandit, to be fair, had inherited much of Citigroup’s mess from his predecessors, Chuck Prince and Sandy Weill, the men who had created the Citigroup “empire” with the assistance of Bob Rubin.
“Vikram is the best person for the job, and we had several potential CEOs to chose from,” Rubin nervously explained in early 2009, just before he was forced out of Citigroup, when asked whether his support for Pandit as CEO could be counted among the myriad mistakes that he made during his decade at the company, when it went from the most powerful bank in the world to a virtual ward of the U.S. government.
Rubin was defending himself as Citigroup was forced to take another dose of bailout money, one that made the U.S. taxpayer the largest single shareholder of the big bank. Shares of Citigroup, which had traded near $60 during its glory days, were now hovering around $1. Outraged investors had pushed for Rubin’s ouster (he would leave in early January 2009), and they weren’t crazy about Pandit sticking around, either.
And with good reason: When Pandit replaced Prince in early 2008, he had refused to sell off vast pieces of the unwieldy bank, despite pressure from his investors, who saw nothing but losses for the next year and had begun selling Citigroup shares. And now he was conducting a fire sale of assets to drum up much-needed cash as regulators like FDIC chief Sheila Bair began threatening to end his short-lived career as CEO once and for all.
It was an odd decision for someone who had made it to the very upper echelon of Wall Street, not because of his personality (he’s considered among the least inspiring and charismatic of Wall Street executives) but because he was considered one of the smartest. He came to Wall Street with a PhD from Columbia University, and during his many years at Morgan Stanley earned a reputation for understanding incredibly complex financial products, particularly details that eluded more senior executives. And he knew how to make money. In order to get him to join the company, Citigroup purchased his hedge fund for nearly $800 million, even though a year later Citigroup closed the fund due to its poor performance.
That’s why it was so confounding that he started out by listening to Bob Rubin, one of the architects of Citi’s massive and bloated infrastructure and, in many ways, of the financial crisis itself. Rubin’s defense of Citigroup’s absurd business model was unyielding. Now Citigroup had created a massive dilemma for the federal government: If it let Citi fail, the taxpayer would have to cover part, if not all, of the $800 billion in customer deposits (because of deposit insurance), not to mention the systemic damage to the financial system when traders had to unwind a balance sheet of nearly $3 trillion.
Rubin’s miscalculation was based, of course, on the time-tested Big Government-Wall Street bailout recipe, where the government helps Wall Street by lowering interest rates, thus pumping massive amounts of liquidity into the system and reviving profits. Maybe a bank or two would fail; one immediately did, as Bear Stearns ended up imploding just a few
months after Pandit was named CEO of Citigroup. But Citigroup would survive and eventually thrive in this difficult environment because it had a base of customer deposits to draw on if money got tight (a benefit that not even the mighty Goldman Sachs possessed).
By the time the financial crisis reached full force, neither Pandit nor Rubin seemed as smart as his advanced degrees and their reputation had suggested. Citigroup had so many stashes of toxic assets that even top company officials had no idea how much crap it had on its balance sheet. It held some profitable businesses that could have been sold off at a profit—like its brokerage business, Smith Barney—but the time had already passed for Pandit to get top dollar if he tried to sell them.
So, stuck losing money and with nothing to sell, Pandit came crawling to the federal government (Rubin would deny playing any role in the negotiations) for as much bailout money as possible. He nearly lost his job over it, and yet he survived because no one else wanted to run a bank whose symbol on the NYSE is the letter C for “Citi,” but whose symbol among investors had become S for “shitty.”
Then something happened—Citi was back in the black just like in the good old days, at least if you believed Vikram Pandit. He claimed that the first quarter of 2009 was Citi’s best since before the financial crisis began to pick up steam. If Miller was skeptical, the market wasn’t. Shares of Citigroup, which had been trading below $2 (less than the price of a copy of the New York Times), were now moving higher—close to $5. That’s after the beleaguered banking behemoth logged five straight lousy quarters that produced a staggering $40 billion in losses.
And Pandit and Citi weren’t alone. Two days after Pandit announced his results, JPMorgan Chase’s Jamie Dimon, not to be outdone by his old bank, went on television and told CNBC’s Melissa Francis that he was optimistic that his bank, also one of the biggest recipients of TARP bailout money, would be profitable in the quarter as well. The remarks sent shares up over 4 percent to just over $20.
Bought and Paid For Page 14
