The first sign Dodd wasn’t in the banks’ corner had come when he proposed pay caps for the bailed-out firms back in 2009, a move shot down by Wall Street’s friends in the administration, namely Geithner, according to people on Wall Street. But now Dodd had been given a broader mandate as the primary author of the new financial reform legislation, to be known as the “Dodd bill” on Wall Street because he took such a direct interest in the legislation and the president handed him so much control. In other words, Chris Dodd had Wall Street’s future in the palm of his hand, and that had the Street on edge. The big question was just how far he would go. Would Dodd embrace not just the Volcker rule in its most strict interpretation but also some of the more loony proposals that had cropped up during the last two years? Or would he play ball with Geithner and Summers?
Inside JPMorgan Chase, Dimon weighed the odds: Politically, Dodd was finished, thanks in large part to his association with the subprime lender Countrywide Financial, run by the controversial Angelo Mozilo. Dodd had received sweetheart loans from the bankrupt mortgage company, whose loans were responsible for the financial crisis, and he had been a major recipient of campaign cash from the disgraced mortgage lenders Fannie Mae and Freddie Mac. With his poll numbers dropping, Dodd had announced that he wasn’t running for reelection.
But he wasn’t going anywhere fast (his term ended in 2010), and his aides let it be known that after a long and distinguished career (nearly thirty-five years in public office), Dodd wanted a grand exit, something that he could point to as his legacy. That something, they said, was financial reform, and that made Dimon and the rest of the Street nervous.
As for banker bashing, that was here to stay as well. The Democrats, even ones whom Wall Street had considered real friends, like the usually pro-Wall Street senator from New York, Chuck Schumer, liked the idea of running against Wall Street and trying to tie the Republicans to the greedy bankers, even if those bankers were themselves Democrats.
Financial reform became their weapon of choice. It didn’t matter that the so-called proprietary trading that Volcker wanted to outlaw and the banks’ ownership of hedge funds and private-equity accounts weren’t at the heart of the financial crisis. Obama didn’t really care, several senior Wall Street executives told me, and he didn’t need to. It was the message that mattered to Obama and the rest of the Democratic leadership as the midterms approached, and that message was all about banker bashing in public while his lieutenants continued to assure Wall Street everything was just fine—even if it wasn’t.
The attacks on Wall Street, with particular emphasis on Goldman, kept coming, not just from the pols or from Rolling Stone or the McClatchy newspapers, but also from liberal documentary film producer Michael Moore, the New York Times, the Wall Street Journal, and all the cable news shows. Even the Wall Street Journal ’s right-of-center editorial page took aim. “Goldman will surely deny that its risk-taking is subsidized by the taxpayer—but then so did Fannie Mae and Freddie Mac, right up to the bitter end,” the Journal’s editorial writers opined. “An implicit government guarantee is only free until it’s not, and when the bill comes due it tends to be huge. So for the moment, Goldman Sachs—or should we say Goldie Mac?—enjoys the best of both worlds: outsize profits for its traders and shareholders and a taxpayer backstop should anything go wrong.”
The stories had legs because (a) they were true, but (b) they were also prodded and pushed by an unrelenting political attack. Goldman wasn’t the only firm to feel the heat: In fact, they all did. But as the rhetoric heated up from the president and his minions in Congress, the firm that had given the most to him and, of course, made so much money from his policies, remained public enemy number one.
In a sense, Goldman was crying all the way to the bank. It was making more money than ever. Its stock price was soaring. But the firm was in crisis as its success brought greater scrutiny and greater outrage from the public. Citigroup was a far greater culprit in the financial crisis, and cost taxpayers far more to save, than Goldman, which for all its faults had done the smart thing as early as 2006 when it began betting against the same housing bonds that two years later took down the system.
But somehow that logic failed to convince the growing ranks of Goldman’s detractors. The firm’s legendary access to politicians, even the Democrats it embraced with massive amounts of campaign cash, was now being cut off. “Goldman Sachs is radioactive” was the message the firm’s high-powered team of Washington-based lobbyists delivered to Blankfein back in New York.
“I never thought I would say this, but the Democrats are killing us. It’s a betrayal,” said one senior Goldman executive who was a lifelong Democrat.
Many of Goldman’s problems were self-inflicted. The firm’s latest media campaign, in which for the first time Blankfein had begun to field questions from reporters, backfired big time. Blankfein may have been the least media savvy of all the CEOs. In front of reporters he appeared stiff and highly scripted, as if he were trying to hide something. But the bigger problem was that Blankfein, as hard as he tried, couldn’t spin the obvious: that while the firm was the best of the lot, Goldman had also made the most of the vast handouts given as part of Big Government’s protection of Wall Street, and with every disclosure of the firm’s profits or its growing bonus pool, the public seethed.
By early spring of 2010, Blankfein had become obsessed with two issues: the prospect that the Dodd bill and the Volcker rule would become law and the name-calling from politicians looking to tap into the public’s distaste for Wall Street. As bad as it felt, Blankfein, like his cohorts on Wall Street, could take being called a fat cat every now and then, but by early 2010, he had realized that the name-calling was having a substantive impact.
The vilification made it that much easier to ram the Dodd bill and the Volcker rule through Congress, and that would mean Goldman would have to make some significant changes in its business model unless, of course, it could find a way to change the legislation before it became law.
It owned a bank with several billion dollars in deposits, so that might have to be sold, but even worse, Goldman would face stiff restrictions on its bread-and-butter trading business. Blankfein ordered his legal staff to study the matter. The result wasn’t good. If the Volcker rule was interpreted broadly, Goldman would have to scale back on its trading activities dramatically. The profits that had powered Goldman Sachs shares nearly to where they had been before the banking crisis began would decline by as much as 20 percent.
The legal analysis showed that there was a gray area in the legislation: It was unclear that all so-called proprietary trades were covered by the rule. Trades that began with a customer order might be exempt, depending on the rule’s interpretation. And interpretation was key: Would it be Geithner or Volcker himself interpreting the rule? No one knew.
It was one of the downsides of being too big to fail: The government control of trading might extend to Goldman because it was too big and too important to run free. And that’s why Blankfein was, according to one banker, “obsessed” with the looming Dodd bill. The only thing worse than running Goldman into the ground, as he nearly had in 2008, would be if he were the CEO who allowed the great institution to become a ward of the state. And that’s where the firm was heading.
In the past, Goldman’s words had carried a certain weight. Former Goldman executives have for years been littered throughout the government regulatory apparatus (the controversial decision to give Goldman one hundred cents on the dollar to cover its AIG liabilities and save the firm tens of billions of dollars was made by a Treasury Department bureaucrat who had worked at Goldman and held its stock, according to the New York Times). Even those bureaucrats in Treasury or the Fed or working for any of the Senate or House committees that provide oversight who hadn’t worked for Goldman probably wanted to in the future. Meanwhile, there was always the threat that if Goldman didn’t get its way there would be repercussions: Campaign contributions would disappear.
But times had changed. The pleas from the firm’s lobbyists carried less weight and more desperation. That’s because Blankfein believed that the name-calling had now spilled over into the policy arena; the public’s hatred of the bank was giving Dodd and the Democrats the ammunition they needed to push an anti-Wall Street bill.
More than that, Goldman was dealing with that potentially messy investigation into its business dealings during the bubble years: the “big short,” or how the firm had bet against the housing bubble by shorting certain toxic assets while it was selling those same assets to its customers in late 2006 and early 2007.
Now it wasn’t just pain-in-the-ass reporters at McClatchy who were turning the screws on the firm once lauded for its brains and guile as a market maker. The focus in Congress wasn’t about how smart Goldman had been in shorting the housing market but rather how scummy the firm had behaved in selling those securities to its clients.
Lloyd Blankfein has many skills: He’s one of the best risk managers on Wall Street, and if you talk to people he used to work for, like Bob Rubin when he ran Goldman in the 1980s, they will tell you that Blankfein worked extremely well with clients. But those skills don’t necessarily translate into being the public face of a major company that is under constant scrutiny, and that’s what many at Goldman were discovering as Blankfein began attracting more and more attention from the multitude of congressional committees and other public investigative bodies (the former treasurer of California, Phil Angelides, was heading something called the Financial Crisis Inquiry Committee, which was supposed to produce a report to Congress by the end of 2010 on the causes of the financial crash) delving into Wall Street, its abusive practices, and the banking collapse.
Inside Goldman, Blankfein’s team tried to spin their boss’s uneven performances in 2009 and one particularly uneven piece of testimony in early 2010 before Angelides’s committee as the best of a bad situation. There were no major gaffes, even if in one instance, while being grilled by Angelides about why Goldman had sold faulty mortgage-backed bonds to investors it was actually betting against, Blankfein appeared confused, adding that the firm had sold the toxic debt to “the most sophisticated investors who sought that exposure. . . . There were people in the market who thought it was going down and there were others who thought these prices had gone down so much they were going to bounce up again.”
Angelides’s response was significantly more coherent.
“Mr. Blankfein himself never admitted that there was any responsibility of Goldman Sachs to make sure the products themselves were good products. . . . That’s very troublesome.”
If Blankfein thought his attempt to cash in on the class-warfare mood of the country would work, he was wrong. The lame response only heightened the tension. Retired partners of the firm, powerful because they held so much Goldman stock, began grousing that Blankfein, with his odd looks and lack of public-speaking skills, shouldn’t be the public face of the company; the firm should reassign the chairman role to someone better suited to being grilled by angry politicians, as Morgan had done when it made the photogenic and articulate John Mack chairman while leaving the day-to-day management chores to the new CEO, James Gorman, a former McKinsey partner.
Blankfein angrily refused to budge, but the calls for him to at least give up part of his job (later there would be calls for him to step down altogether) intensified as more hearings followed. The Angelides committee made Goldman one of its prime targets. With anti-Goldman sentiment heating up, the commission let Goldman know that Blankfein or his number two, Gary Cohn, might be called back to better explain how the firm had made so much money while everyone else suffered so much.
Blankfein was doing a lot of explaining as 2010 wore on. Goldman was once again on a path toward record profits and bonuses. Its stock was soaring. But instead of telling the world how great the firm was, or how his management was making investors rich, he spent much of his time explaining how he wasn’t running the functional equivalent of a criminal organization.
That’s what Blankfein also tried to do in his annual letter to shareholders, when he began to portray a kinder, gentler Goldman. He and the sharp-tongued Gary Cohn, who mixed left-wing politics (he was an original Obama supporter) with a nasty streak (he has been known to tell colleagues to “fuck off”), appeared in a soothing photo together, smiling, as if they had just gotten done doing God’s work. This wasn’t the Goldman Sachs that clients complained about for its Darwinian trading culture of selling faulty investments during a mortgage bubble or the one journalists were now portraying as a wild gambling den that used its vast power to escape scrutiny for its wild ways. In the letter, Blankfein explained how much Goldman gave back to the community (certainly, he thought that would score points with the guys in Washington) by “investing in people and communities,” and how a Warren Buffett-inspired program to donate $500 million to small businesses was doing so much good (I couldn’t find a single small businessman who said the effort represented anything more than a drop in the bucket in terms of financing growth). He even managed to thank Big Government for aiding and abetting Goldman’s success over the past year. “By the end of 2009, owed in no small part to actions taken by governments to fortify the system, conditions across financial markets had improved significantly and to an extent few predicted or thought possible. Equity prices largely rebounded, credit spreads tightened and market activity was revitalized by investors seeking new opportunities, all of which imply renewed optimism, if not the beginnings of a potential recovery,” he wrote, while assuring the markets that Goldman’s focus wasn’t on screwing its clients but “on staying close to our clients and helping them to navigate uncertainty and achieve their objectives.”
Blankfein used the word “client” fifty-six times in the letter, compared to just seventeen times the year before. He could have used it a thousand times. It would have made no difference to the Securities and Exchange Commission, which believed Goldman’s contempt for customers was great enough that the staff of the commission sent “Wells notices” to the firm in March 2010.
The Wells notice is named after attorney John Wells, who created a formal process of alerting targets of SEC probes that they’re in the agency’s crosshairs. This one alerted Blankfein that the SEC’s enforcement staff had recommended to the full commission that a case be filed against the firm and a midlevel executive regarding a particular sleazy deal. The transaction in question was called Abacus: Goldman sold some highly toxic mortgage debt to two of its clients, withholding, according to the SEC staff, several key disclosures, including the fact that the brains behind the deal was a man named John Paulson, an investor who would make a name for himself by betting against housing debt. By not alerting customers to Paulson’s involvement, the SEC asserted, Goldman had duped the clients into thinking the deal was better than it really was.
Goldman’s lawyers were outraged. “Your case sucks!” was the message delivered to the SEC staffers and the commission, which was now weighing whether to approve the filing of civil charges. The case certainly had its flaws; for starters, Goldman might have screwed people, but it sold the deal to sophisticated investors and provided full disclosure on the type of collateral of which the Abacus debt was composed. If the two clients, a German bank and a large U.S. investor, didn’t know that the mortgages used in the deal were toxic, it’s because they never cared to check.
But at the commission, the case took on a life of its own. For all its holes, the case had some obvious merits: The casino that Wall Street had turned into was aided and abetted by some of the borderline sleazy business dealings Goldman had become famous for, namely dishing out investments its traders viewed as “shitty” (a word found in company e-mails regarding such investments) to clients, which for all their size and alleged sophistication had no idea what they were buying.
The case also had obvious political merits. The SEC, known as Wall Street’s top cop, is supposed to be an apolitical arm of government that enforces the nation
’s securities laws. And yet its leaders, including the chairman of the SEC, are appointed by the president and often enforce the laws within the context of the White House’s political agenda.
Running the SEC in 2010 was a lifelong Democrat named Mary Schapiro. After the black eyes the agency had taken for missing both the Bernie Madoff Ponzi scheme and the subprime crisis, Schapiro had vowed to turn things around. According to people close to the commission, investigators viewed charges against Goldman as a way to repair the commission’s battered reputation after these failures.
To be sure, Obama had given speech after speech attacking his predecessor, George W. Bush, for the lack of regulations that had allowed Wall Street to run wild and destroy itself and the economy. It didn’t matter to the president that his Treasury secretary, Tim Geithner, had been part of the same regulatory apparatus as president of the New York Fed or that Schapiro had been part of it as head of Wall Street’s self-regulatory organization, FINRA (the Financial Industry Regulatory Authority), where she earned $3.3 million in 2008 and took a $7.3 million “retirement” package when she left to join the SEC as its chair.
What mattered to the president was that, like Geithner, who dutifully carried out Obama’s plans to increase spending and raise taxes on small businesses to astronomical levels, Schapiro would carry out the president’s agenda in regulating Wall Street and attacking corporate America for political gain, which she did with gusto. Despite her own massive compensation as head of FINRA (Schapiro was paid millions to regulate firms that paid her salary through their annual dues), she began to mimic her boss’s criticism of high executive pay.
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