Bought and Paid For

by Charles Gasparino

  And instead of addressing the problem—instead of cutting off the umbilical cord that allowed this inequality to exist in the first place, the politicians chose to play upon the public’s fears to gain cheap political points.

  “She’s such an asshole,” muttered a CEO from one of the big banks as he sat stone faced before one of their money inquisitors, according to a person with direct knowledge of the matter. The “she” the CEO (all the executives present publicly deny they were the responsible party) was talking about was Maxine Waters, the passionate far-left congresswoman from California, as she laid into the gathering of nine CEOs from the largest U.S. banks testifying before the House Financial Services Committee about the financial crisis. Waters had just derisively referred to the CEOs as “captains of the universe” before badgering them on whether they continued to make loans and whether they raised their credit card rates.

  The irony of Waters’s vitriol is that she, with other class-warfare types, was maybe just as responsible as the Wall Streeters for starting the crisis she was now investigating. Waters was a huge proponent of the Community Reinvestment Act and other measures that forced banks to lend to poor communities for housing. Those loans, of course, made their way into subprime housing bonds, which eventually went into default, thus igniting the great financial collapse of 2008. (Another irony: As this book was going to press, the House ethics committee was investigating whether she influenced the federal bailout of a bank her husband owns stock in.)

  Aside from the “asshole” comment, Dimon Mack, and the other CEOs in attendance either kept their mouths shut during the grilling or dutifully answered the committee’s often inane questions because they knew the inquisition was just the beginning. With the public outraged at Wall Street’s recovery, Big Government needed to show it was on the case by scoring political points through “investigations,” i.e., public hearings like this one, designed to do little more than embarrass Wall Street CEOs. And of course, through something the president and his supporters increasingly began referring to as “financial reform.”

  Goldman, for all the reasons listed above, became a familiar target. The SEC referred its case to the U.S. attorney’s office for the Southern District of New York, the gold standard in white-collar prosecutions, which launched a preliminary investigation of its own. Even overseas regulators began to act. The British equivalent of the SEC, the Financial Services Authority, launched its own probe into the firm’s business practices. Even the securities industry’s self-regulator, the Financial Industry Regulatory Authority, launched a probe into why Goldman hadn’t alerted investors that it faced so much regulatory scrutiny. And not to be left out of the action, New York attorney general Andrew Cuomo, who was announcing his candidacy to succeed the scandal-plagued David Paterson as the state’s governor, joined in the Goldman bashing as he announced an investigation into whether Goldman and other firms pressured bond raters to hand out high ratings on mortgage bonds that ultimately turned toxic.

  Name-calling from a president is particularly unbecoming, yet Obama increasingly began referring to the bankers who were his supporters as “fat cats” (without mentioning their past support of him, of course). The names of the various committees and subcommittees that began holding hearings soon began to blur, but not their primary target. Lloyd Blankfein made for a particularly enticing object of scorn, not just because he ran Goldman, or because his argument that Goldman hadn’t been bailed out was so absurd, but also because he was so bad at public speaking. His various facial contortions, his deer-in-the-headlights gaze when asked tough questions, all seemed to make him a favorite punching bag for politicians eager for their time on camera.

  And the hearings seemed to run on with no end in sight, primarily because Congress had so much material to deal with, particularly when it came to Goldman.

  In private meetings with top Goldman executives, these same politicians, men like Senators Harry Reid and Carl Levin, continued to assure Goldman’s lobbyists that their interest in the firm wasn’t personal. On the contrary, the politicians liked Goldman and (it was understood) especially liked the money the firm handed out.

  The media circus, with the name-calling, the hearings, and the investigations, was simply the price of doing business in the new world, and when all was said and done, it wasn’t such a high price to pay given all the money Wall Street was making.

  Meanwhile, just as Blankfein finished trying to explain to various committees just how on earth his traders could tout and sell to their best customers investments that they privately labeled as “shitty” in e-mails inside the firm, Goldman’s role in another international debacle was slowly being uncovered as Greece—a country that seemingly has no direct ties to Wall Street—fell into a financial panic.

  For decades, Goldman Sachs, especially its derivatives desk, had been working with the government of Greece. According to the New York Times, in November 2009 a team of bankers led by Goldman president Gary Cohn traveled to Athens to pitch the Greek government a type of transaction that would hide its obligations and allow it to push out its liabilities to the distant future. This wasn’t the first time. In 2001, right after Greece gained entry to the European Union, Goldman had helped structure another complex deal intended to make Greece’s finances appear to be in compliance with the strict rules for membership in the EU. For around a decade Goldman’s derivatives desk—through the hocus-pocus of modern financial technology—was able to mask just how much the Greek government was borrowing, until, of course, it couldn’t be masked anymore. In essence, the firm was able to use the same kind of financial wizardry that had allowed the banks that had gone under, like Lehman Brothers and Bear Stearns, to keep billions of dollars in bad debts from showing up on their balance sheets (until the very end), wizardry for which Greece had paid Goldman at least $300 million in fees over the years. These deals were essentially gimmicks designed to do nothing more than make a country that needed to borrow heavily to support its welfare look like it was fiscally sound. But like all such gimmicks, it didn’t last forever.

  By midspring of 2010, Greece had to fess up to decades of wild spending, heavy borrowing, and generally living beyond its means. If civil servants in the United States are sometimes perceived as getting fat off the public trough, it’s nothing compared to Greece, where government employees (and a huge chunk of Greece’s economy was run by the government) got paid fourteen months’ salary for every twelve months of work. The country was a fiscal basket case—it owed money to everyone, with the British and the Germans at the top of a very long list of creditors. The country’s economy was in such bad shape that it couldn’t raise taxes (no one had money to pay them) and no one was crazy enough to lend it any more money. In other words, Greece was broke, and it was looking for a bailout to keep the country functioning.

  But how did it get so bad? Greece was part of the European Union; it had given up its own currency, the drachma, years earlier in order to gain entry and use the euro. It had needed to meet the EU’s quality standards to gain entry, which meant it couldn’t just borrow to pay its bills, because the EU imposed public debt limits on its member nations. To be more accurate, Greece couldn’t simply disclose how much it was borrowing if it was both to maintain those EU debt limits and fund its literal welfare state at the same time. So it turned to Wall Street for help, much as Orange County had back in the early 1990s.

  What the slick salesmen who peddle these deals don’t tell their clients, whether corporations or governments, is that such transactions can’t actually eliminate the borrowing and debt payments to creditors, only conceal them for some time, and even when done with the best of intentions—e.g., staving off potentially crippling economic cutbacks until business conditions improve—derivatives are dangerous. A sudden change in interest rates can set off a chain reaction that turns those investment gains into losses, making the debt payments on already high levels of borrowing seem exponentially great.

  Many government officials I have c
ome across during my career make easy targets for investment bankers. They are largely unaware of these dangers because they’re political appointees and as a result aren’t schooled enough in the fine points of high finance to really know what they’re buying. Even if they are savvy, like the finance officials in New York City who have been balancing budgets on gimmicks for years, they probably don’t care about the long-term ramifications of their actions because they are serving a higher purpose, at least in their own minds. Their main goal is to keep government functioning—even in its often dysfunctional state.

  In many ways, the officials in Greece who bought what Goldman and, to a lesser degree, JPMorgan Chase were selling them were almost no different from all those homeowners in the United States who helped instigate the financial crisis by taking out subprime loans on homes they should have known they couldn’t afford and then defaulted when the payments came due. In other words, they were content to remain blissfully ignorant in the present even if it meant their future was threatened.

  By the spring of 2010, Greece was broke and threatening to default on billions of dollars of its debt. Riots were breaking out in Athens as the Greeks, accustomed to the free health care and the incredibly generous benefits of a welfare state they couldn’t afford, realized that the gravy train was coming to an end.

  As of the writing of this book, Greece’s finances are still is disarray, and Goldman, along with the other Wall Street firms, I am told, is still running around the world giving “advice” to countries on how to “manage” their finances, which usually means offering up ways to hide their largesse and postpone the inevitable payment that comes after a spending spree. Goldman makes sure, of course, to collect its own fees well before the collapse occurs.

  It would be nice to think that this sort of stuff doesn’t go on here in the good old U.S. of A. But so it does. As I previously mentioned, New York City has been finagling its books, often when Wall Street goes into a temporary downturn, for years. And as we saw in chapter 2, Orange County, California, was brought low by Wall Street just as Greece would be later. Is the United States heading down that same path? While the U.S. government is hardly Greece, or even Orange County, there’s no doubt that fiscal conservatives—on the left and the right—are starting to look at the nation’s debt relative to its GDP and wonder: Where are we going to end up?

  7

  FAT CATS AND FAT BONUSES

  With the election of Barack Obama, Wall Street thought it had everything it could want in a president, and the results rolled in with profits and paychecks. Meanwhile, the middle-class Americans who had voted for Obama were facing increased unemployment and higher taxes. The college students and young adults who had served as a driving constituency in Obama’s campaign were facing one of the worst job markets in decades. For these Americans, Obama had failed to deliver on his promises of hope and change, and they were demanding answers.

  As the anger continued into late 2009, Obama and his hand-picked team of Wall Street-supported advisers (Robert Rubin, Larry Summers, Tim Geithner) and those with strong Wall Street connections (Rahm Emanuel, Valerie Jarrett, and others) woke up and realized that unless the president somehow addressed the public’s outrage, it would be more than just those annoying Tea Party activists who would be voting against him and his buddies in Congress when the midterm elections came around the following year. And so Barack Obama, who had sounded so moderate, so reasoned, to Larry Fink, Jamie Dimon, and Tom Nides, all of a sudden began sounding like the guy who’d palled around with Bill Ayers and Reverend Wright for all those years back in Chicago. Instead of trying to work with them as promised, the president started using the bankers who had put him in office as his whipping boys the minute he needed them to advance his faltering political agenda.

  The real change occurred in late 2009, around the same time the White House conducted a poll that showed Obama’s approval ratings were slipping. The same poll found that nearly 90 percent of the people surveyed, on both the far left and far right, had a negative opinion of Wall Street, much higher than the president’s number.

  The polling came as Obama had been holding frequent meetings with Dimon over the state of the economy. In those private meetings, Obama sounded like a man from the Robert Rubin school of Wall Street-friendly economics: The best way to help the economy flourish is to help Wall Street banks succeed. The two met so frequently that the speculation about whether the president was considering appointing Dimon to replace current Treasury secretary Tim Geithner began to feel like a done deal in Washington and on Wall Street. Despite the rumors, the president has unswervingly supported Geithner, and his political adviser David Axelrod has even dismissed talk of a Dimon appointment by chalking the relationship up to nothing more than mutual admiration. “Don’t these people realize,” he said of the rumormongers, “they [Dimon and Obama] have a man crush on each other?”

  Robert Rubin had been meeting with Obama as well, and the worst thing he could say about the new president wasn’t that he seemed to hate Wall Street. Quite the contrary: He seemed to appreciate what a strong banking system could do, namely advance the liberal agenda by packaging mortgages into bonds so the government could grant home loans to people who couldn’t afford them.

  No, the worst thing Rubin thought about Obama was that he relied too heavily on advice from relative neophytes when it came to economic and financial matters. Among those people was Valerie Jarrett, a longtime Chicago attorney and lobbyist and friend of Obama’s who was now ensconced inside the White House and influencing many of Obama’s economic decisions.

  At least that’s what Rubin learned one afternoon when he cautioned Obama that despite his talent for politics, he was relatively unsophisticated when it came to economic matters.

  “That’s why I have Valerie,” Obama shot back.

  Larry Fink was coming to the same conclusion. BlackRock, his massive money-management concern, had benefited enormously, much to the envy of the rest of the Street, from the various postcrisis bailout payments, including $45.3 million to manage the assets of the Bear Stearns following its collapse and government bailout, $33 million to manage the assets that the Fed purchased from AIG, and $12 million to value the assets on Citigroup’s troubled balance sheets, as well as other business opportunities too numerous to quantify. Of course, those fees are relatively small. The real value in managing the government’s money is much greater: “Being in the flow of information—pricing information, knowing who’s buying and selling, will ultimately be more important than actual fees,” analyst Charles Peabody told Bloomberg News. Except for Goldman, no one had better knowledge of the markets than Larry Fink’s BlackRock.

  Critics would point to Fink’s early and unabashed support of Obama for his success at winning government contracts, while others with a more nuanced view would point to Fink’s financial acumen; he was a perfect choice to manage the Fed’s portfolio of bad debt from bailout victims like Bear Stearns because he’d been trading in these securities for years.

  But by late 2009, Fink was worried, and not just about the populism that had begun sweeping the country. According to friends and associates (Fink declined to comment), Larry Fink was having second thoughts about his support for Obama. The same guy who had promised moderation now promised an endless array of entitlements—from a government-run healthcare system and hundreds of billions of dollars more in stimulus to supplement the failed one Obama had pushed earlier in the year, had Fink concerned.

  “How are we going to pay for all of this?” Fink began asking friends. Fink knows a lot about how the government pays for stuff because he made his fortune as a bond trader. But he also knows that in order to spend so much, the government needs to borrow more, and there’s only so much borrowing our creditors, most prominently China, will allow before they start demanding concessions over and beyond much higher interest rates.

  All those promised entitlements demonstrated how few people inside Obama’s inner circle had real business experi
ence. To be sure, Summers and Emanuel had spent some time on Wall Street to make a few bucks before they went back to government, but that was about it.

  “It’s really shocking,” Fink remarked, before reminding himself that as bad as Obama might be, the McCain/Palin ticket would have been worse.

  Past presidents like Bill Clinton, George W. Bush, and, of course, Ronald Reagan had run large states before ascending to the presidency, so they knew how to balance a budget and otherwise govern; George H. W. Bush went into the oil business, becoming a millionaire by the age of forty before becoming vice president and president. His son George W. Bush had been both the governor of Texas and a businessman before his election.

  Barack Obama, in contrast, had been a politician for a relatively short period of time and had never before held an executive position. He was a legislator first and foremost, and his work outside of politics had been as a community organizer, where he fought against businesses rather than working with them.

  Yet as absurd as it may be for Valerie Jarrett—a political fixer from Chicago—to be determining how best to run the U.S. economy, she wouldn’t be the first or the last lobbyist to hold sway in the Oval Office. In fact, Jarrett may have never run a real business or started a company from scratch, but in reality neither had Bob Rubin or the other Wall Streeters who found themselves in positions of power as aides to various presidents, Republican and Democrat alike. She was simply doing what Bob Rubin, Hank Paulson, et al. had done for years: straddle the line between Big Government and Big Business. Not unlike Rubin and Paulson, she knew how the game was played because she had seen legions of politically connected bankers doing the same thing for years.