Of course, Goldman Sachs and Morgan Stanley aren’t commercial banks, so they don’t make loans. But that’s part of the absurdity of the bailouts. The casinolike firms that made all their money trading were treated the same as the real banks, like Citigroup, JPMorgan Chase, and Bank of America. These commercial banks are supposed to fuel the economy by safeguarding customer deposits and using that money to extend loans to companies looking to do business and to people looking to buy homes. But now these commercial banks were taking a page from Goldman’s investment-banking playbook, and instead of extending credit to cash-strapped small businesses or consumers, they were either hoarding the cash or trading bonds just like Goldman, by borrowing at superlow interest rates supplied by the government, buying up bonds on the open market, and pocketing the difference between what they paid to borrow and what their bonds were earning.
And since all the banks were now considered too large not to protect, they had a limitless supply of funds available to them. Creditors—the cash-rich hedge funds and pension funds that were lending in this market—had no problem lending money to the banks because if worst came to worst they were guaranteed to be paid back in full by the American taxpayer. As for the small businessmen who needed loans and credit to make ends meet (and to stop laying off workers), they were out of luck.
So as Blankfein prepared for the meeting, he expected a tongue-lashing at the hands of a president who, if nothing else, has proven to be adroit at sensing the public’s foul mood. Blankfein had finally realized just how much Goldman—the most successful of the big firms—made an enticing target. It had become the postbailout poster child for everything that was wrong with Wall Street, which for a time thrilled its competitors, like Morgan Stanley. “Better Goldman than us,” is what one Morgan executive told me at the time. But Mack was actually beginning to feel a little sorry for Blankfein as the Goldman CEO lamented the endless negative press coverage, the massive amounts of hate mail he received, and the vilification by public officials the firm had once supported. That’s when they both received an announcement that their flights were being canceled because of heavy fog.
Now Mack was pissed: “How the fuck am I supposed to get to this meeting?” he muttered as he dialed his assistant back at company headquarters to come up with an alternate plan. Blankfein did the same and they came to the same conclusion: There was no time to jump on the Amtrak, a three-hour ride to the White House not counting the time it would take to get to the train station. So they decided to phone it in—literally. They would “attend” the meeting by conference call. Later in the day, when news of their nonappearance hit the wires, Mack and Blankfein (along with Citigroup chairman Dick Parsons, who also didn’t attend) were criticized for not taking the meeting seriously enough and leaving earlier.
All Mack could think was that neither he nor the rest of Wall Street could catch a break.
Unlike Mack and Blankfein, Jamie Dimon continued to ride a fairly strong wave of positive publicity, so he felt perfectly comfortable taking his corporate plane to meet the president and arrived in Washington with a few hours to burn before the meeting. “Fuck it,” he would later snap in his characteristic who-gives-a-crap style, “that’s why we have the jet in the first place.” Dimon’s staff was actually given a heads-up about the topics in advance (one of the perks of being the reigning king of Wall Street): Obama would politely ask the banks to make more loans, keep bonuses under control, and try to work with the administration to make the world a better place.
Knowing the topics ahead of time helped Dimon plan his response. Unlike Mack and Blankfein, he wasn’t nervous or particularly worried about the president’s reaction; rather, he was almost praying for a bit of a confrontation. Over the past year he and Obama had grown close during his many White House visits, close enough that Dimon believed he could tell Obama that his anti-Wall Street attacks might win him a few more votes, but they weren’t good for the country. Dimon, like all the heads of the big firms, hated class warfare, even if he had voted for and supported maybe the biggest class warrior to hold the office of president in modern times.
And yet for all the premeeting drama, the event itself was fairly routine. Obama stuck to his script as it had been supplied to Dimon: He argued that the banks should lend more and said he was worried about bonuses. Despite Blankfein’s worst fears, the president didn’t engage in name-calling, nor did he single Goldman out in anyway. He even cracked a few jokes.
When it was over, the mood was still tense, as some of the CEOs and their minions said they were annoyed about being used as props in a photo op by the president.
“The guys at Goldman, JPMorgan, Morgan Stanley—anyone working at a major firm—hate being called crooks,” said one senior executive at Goldman as the nasty comments from Democrats and the president continued unabated for months through the winter and early spring of 2010.
“The public might hate us; they may consider the typical Wall Street executive a greedy gambler living large while the rest of the country suffers,” the executive continued, “but most of us are family people. We all went to the best schools. We give a lot of money to charity. We’ve worked hard our whole lives. And now we’re considered the worst that society has to offer. On top of that, the guys we helped put into office, including the president, remind the country of this every day. It just ain’t right.”
That’s one way to look at it. Another way was “Let’s just take the punishment and keep making money.” That was the general attitude inside JPMorgan in early 2010.
Dimon, of course, was still considered everyone’s favorite CEO, including the president’s, and, as most of the firms’ senior executives concluded, for all the name-calling, it was Obama’s policies that led to the firms’ massive profits in 2009 and into 2010. And it was his advisers, people like Geithner, Summers, and several others, who were still preventing financial reform from taking a dangerous turn as it simmered on the desk of its chief author, Senator Chris Dodd, for most of Obama’s first year in office.
By early 2010, none of the legislation being discussed proposed to break up the banks by bringing back Glass-Steagall, as many in Obama’s own party had called for. Such a remedy wasn’t advocated by the lefties alone; none other than Nouriel Roubini, the NYU economist who had predicted the housing collapse and Wall Street implosion, was advocating such a solution as a way to make the financial system less prone to excessive risk taking. Smaller banks would be forced to take smaller risks, Roubini argued, and if Glass-Steagall was brought back commercial banks wouldn’t be taking risks at all—that would be left to the Goldman Sachses of the world, which would no longer be protected by the federal government.
But Obama resisted, choosing instead to deal with Wall Street through words and limited action. That’s why, when early word came back to Wall Street from the White House that there would be financial reform in 2010, Wall Street wasn’t overly concerned. There would be things in the package that Wall Street wouldn’t like, but the protections and benefits of a partnership with Big Government were here to stay. The president, for all his class-warfare talk, knows how important Wall Street profits are to the economy and thus to him. Like any good politician, he wants to get reelected.
So while some bankers grumbled about being called a bunch of fat cats, others saw the bright side: It could have been worse, possibly much worse. Were it not for the financial crisis, John McCain might have been president, and what would that have meant? Would the old fighter pilot have surrounded himself with policy advisers close to Wall Street and the big banks? Almost certainly not.
Would McCain have allowed banks to get away with buying bonds instead of making loans to small businesses, the engine of any real recovery? Doubtful.
And would he have supported Ben Bernanke’s continued stewardship of the Federal Reserve after he famously missed the signs of the financial collapse, and allowed him to keep interest rates near zero (the driving force behind Wall Street’s profits) for yet another year? A
gain, doubtful at best.
So okay, Obama had called them fat cats, and Blankfein, Dimon, and Mack, like all of us, hate being called names, but the equivalent of a little schoolyard ragging was a small price to pay for being saved and allowed to make record amounts of money. And maybe, they figured, by not confronting them directly during his meeting, Obama was signaling that deep down he really wanted to “repair the relationship” with his old friends: “He knows he needs us if he wants to get reelected,” said a high-ranking public relations executive at JPMorgan Chase.
“If you get a pet rattlesnake, expect to be bitten.”
That’s what Congressman Spencer Bachus, a sophisticated, genteel southerner who represents the suburbs of Birmingham, Alabama, told a long line of Wall Street lobbyists and a few CEOs, including Dimon himself, who came to his office in the late winter and early spring of 2010 complaining about the man they’d helped elect a little more than a year earlier.
Bachus, a free-market conservative Republican, is the ranking Republican on the House Financial Services Committee. He’s also the counterweight to the famously liberal, and volatile, committee chairman, Barney Frank. Yet while Frank might gain headlines for his caustic style, Bachus’s understated tone belies a toughness that can spring at a moment’s notice, as he did during hearings on the troubled bond insurance business in the early days of the financial crisis in early 2008.
Back then, the star witness was Eliot Spitzer, the New York governor, whose office was supposed to be overseeing these companies. Spitzer became governor based on his record of cracking down on Wall Street abuse as New York’s attorney general. But Bachus asked Spitzer a simple yet direct question: Where were you when the insurers were taking so much risk? Spitzer could have answered the question in about a dozen different ways. But instead, he exploded, angrily blaming the problems of a New York- based insurance company on the lack of regulation coming from Republicans in Washington. It was vintage Spitzer: his hands flailing, saliva oozing from his mouth as he attacked what was a fairly innocuous question. Needless to say, his message was lost in the psychodrama. When it was over, Bachus simply remarked that Spitzer looked like he hadn’t gotten enough sleep the night before and was jacked up on too many cups of coffee.
He might have been right. It was later revealed that the night before, Eliot Spitzer brought a prostitute to his room in Washington’s upscale Mayflower Hotel. A few months later, Spitzer was forced to resign when “Hookergate” became front-page news.
Bachus still chuckles at the antics of Spitzer, now the disgraced former governor trying to make a comeback as a cable news talk show host, as he does over Wall Street’s grumblings about the “rattlesnake” known as Barack Obama. Of course, Bachus doesn’t really consider Obama a rattlesnake, just a committed liberal who was able to hide his radical agenda during the campaign. That was back when the financial crisis was threatening Wall Street. Bachus initially wasn’t in favor of the bailouts—he voted against the initial proposal by Hank Paulson because he believed all the money spent to save Wall Street’s bad investments would come out of the pockets of Main Street (as it eventually did). But in the end, the bailout bill passed as the crisis worsened, with Bachus and many other Republicans ultimately supporting the plan once they were convinced the financial system would collapse otherwise.
It was a bitter pill for him to swallow. He’s likely to get a primary challenge this fall from a conservative businessman and pastor, Stan Cooke, who has been endorsed by Sarah Palin’s brother and who no doubt will attack him on his vote, which Bachus ultimately viewed as necessary to save the banking system. What he doesn’t view as necessary was what happened next: the near-zero interest rates and other guarantees that have made Wall Street trading a no-lose proposition and the feckless fiscal policy of the Obama administration, which has increased spending, expanded government, and done little to actually improve the economy.
But as we’ve seen, even those responsible for these Wall Street-friendly policies changed their tune when they realized these programs were increasingly unpopular.
And with that realization, the Republican “rubes” in Congress, like Bachus, noticed something odd: The sophisticated Wall Street lobbyists and CEOs had suddenly become their friends. Lobbyists who had stopped by once a month now came by once a week. People like Dimon and Blankfein, who didn’t have time in between meetings with Rahm, Barney, Nancy (the Wall Streeters always seemed to refer to the Democratic leadership by their first names), and Obama himself, now fit Spencer Bachus and John Boehner into their schedules (though it is unclear if these executives feel comfortable enough to call Bachus by his first name).
Boehner, himself, wasted little time telling Dimon during one Capitol Hill visit that, if he wanted new friends, he better act like a friend and support the Republicans as the midterm elections approached. Jamie Dimon, the king of Wall Street, lifelong Democrat, proud liberal even from the seat of his limousine, suddenly began to feel powerless. It was such an odd feeling for Dimon. He had been able to call the shots through most of the financial crisis. He had been the go-to guy for advice when the president needed some.
Now he was abandoned by the people he had helped elect, who in his mind owed him so much. He couldn’t even turn to the New York delegation for help. Senator Chuck Schumer, once one of Wall Street’s biggest supporters, had joined the banker bashing, as had Senator Kirsten Gillibrand, who replaced Hillary Clinton when she became Obama’s secretary of state.
Gillibrand explained her position this way: “Seventy percent of New Yorkers hate Wall Street.”
Maybe the biggest disappointment was Representative Carolyn Maloney, who represents Manhattan’s Upper East Side, also known as the “silk stocking district” for its wealthy residents, including many Goldman Sachs executives who have given to her many campaigns. Yet Maloney had toyed with the idea of holding hearings on how Wall Street and Goldman Sachs in particular had helped Greece hide its massive debt through derivative transactions, setting the stage for the financial collapse of the country in early 2010. She backed off her Goldman focus, but only after Goldman lobbyists begged her to consider the ramifications for the firm of facing yet another congressional investigation.
Dimon was a Democrat, but he was also a pragmatist, and as the Left abandoned the Street, he led the Street in abandoning the Left, and began to write checks to politicians on the right. People close to Dimon say when he returned to JPMorgan Chase headquarters in New York following his meeting with Boehner, the word was out that the Republicans needed money, and fast.
While some Republicans felt giddy about Wall Street’s reversal and the campaign contributions it began to produce, Bachus saw it as part of a bigger pattern: Wall Street loves Big Government because it can feast off its programs, make money off its “infrastructure” spending, and earn its fees selling government bonds to finance deficit.
And yet “they always come calling here whenever they feel threatened,” Bachus said.
Aside from banker bashing, health-care reform became the president’s other obsession. As Obama used name-calling to prop up his faltering poll numbers, he was also using the notion of deficit reduction to legitimize his plans to socialize health care, which makes up 16 percent of the economy accounted for by health care. If you believe the administration and the Congressional Budget Office, “Obamacare” would cut the deficit by $136 billion over the next decade by reducing costs, particularly the costs of government subsidies already in place.
Most of the mainstream media barely questioned the analysis. On Wall Street, there was a different reaction.
“We have to do something, but not this,” remarked Tom Nides. Unlike most business reporters, Nides understands that even if you buy the CBO’s analysis, the $136 billion in savings over ten years comes out to around $13 billion a year, a drop in the bucket given the size of the U.S. economy: $14.2 trillion in 2009, as measured by GDP. Those much-touted promised savings would amount to only about one-tenth of 1 percent of
that GDP.
But more than that, in the relative blink of an eye, Obama had created a massive new government entitlement, which, given the history of entitlements, will almost certainly cost more than originally thought.
Others on Wall Street were becoming petrified. Privately, people like Larry Fink, who ran investment funds tied to the bond market, worried about the burgeoning budget deficit and, of course, what that might do to the bond markets, BlackRock’s specialty. “When [Obama] was making the rounds in 2007 and 2008, you never heard him talking about new entitlements, just how we need to get costs under control,” Fink commented to a friend about Obama’s new health-care initiative.
The word “privately” is important here: Fink’s BlackRock investment fund was among the biggest recipients of the administration’s postbailout largesse, receiving contracts to manage the bad debt of failed firms like Bear Stearns and AIG and an assortment of other programs. Nor was he alone.
The trillions of dollars in new debt needed to pay for Obamacare, and for everything else the president had and has in store for the nation, barely registered a peep of caution out of Wall Street’s biggest players—many of whom, after all, were making money financing Obama’s Big Government agenda. (One noticeable exception was Bill Gross, the CEO of mega-fund PIMCO.) Should the clients of Bank of America, JPMorgan Chase, Citigroup, Goldman Sachs, or Morgan Stanley be snapping up Treasury bonds in light of the massive amounts of debt needed to pay for the president’s agenda? Not one of Wall Street’s most powerful executives would venture a guess. In fact, for all his “concern” over the deficit, Fink proudly declared during a CNBC interview that the Obama administration had done a great job with the economy.
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