Bought and Paid For

by Charles Gasparino

  The absurdity of the measure, as the Wall Street firms and their lobbyists tried to point out, was that it would impact far more than just the big Wall Street firms. Of course, everyone on Wall Street had used derivatives to gamble; credit-default swaps—those insurance policies on corporate debt—were traded incessantly during the financial crisis. Short sellers of bank stocks would buy them to panic investors into selling their shares of bank stocks; when investors saw a spike in CDS prices on Wall Street banks, they would sell their shares and the short seller would walk away with a handsome profit through a form of market manipulation.

  But the derivatives trading that the financial reform bill came down so hard on wasn’t originally developed as a trading tool for financial firms. Instead, its first application was in agriculture, where contracts on the future prices of grain, hogs, and other agricultural products allowed farmers and their customers to lock in prices in the future without worrying that wild swings in the commodities markets might wipe out their profits.

  Many other companies use similar financial products as well, to lock in volatile oil prices, for example, to hedge against counterparty risk (the chance that that one’s opposite party in a transaction might go bankrupt or be unable to deliver), or to protect against swings in the currency markets.

  But Lincoln, with her primary victory in hand and a tough general-election fight about to get under way, stubbornly stuck to her guns, and the amendment remained in the bill with a few modifications.

  So the word went out during the spring of 2010, not just at JPMorgan but across Wall Street, that the banks should keep moving. Even Citigroup, run by the ever-malleable Vikram Pandit and still technically owned by the Obama administration (as this book goes to press the Treasury Department is trying to sell its stake in the bank), began holding fund-raisers for Republicans, with 63 percent of all contributions going to Republicans during the first half of the year, compared with just 47 percent for all of 2008. Goldman, after contributing to Obama by a three-to-one margin in terms of campaign cash, began to evenly split its donations.

  Tom Nides’s friendship with Rahm Emanuel aided Morgan Stanley in landing some plum assignments—including acting as lead adviser on the new stock issued by GM and helping the Obama administration cash out of its bailout stakes in the automaker and Citigroup. But he couldn’t stop the fund-raisers held by bankers to support Republicans; 52 percent of all Morgan Stanley contributions went to Republicans, compared with just 47 percent in 2008. Moynihan may have relished his new friendship with the president, but the firm’s executives didn’t. Bank of America executives split their contributions in favor of Republicans 58 percent to 41 percent, campaign records through June show. This is a near complete reversal from 2008 contributions.

  By the middle of 2010, the tally of contributions told the story—more than two-thirds of all Wall Street contributions were now heading to Republican candidates.

  But the Republicans didn’t necessarily come cheap. In a meeting with Wall Street executives, huddled in a private room at the Peninsula Hotel in Manhattan, two key Republican senators, Mitch McConnell and John Cornyn, basically repeated what Dimon had been told by House minority leader John Boehner a few months earlier: They were willing to forgive past snubs, but Wall Street would have to continue to spread the wealth if Republicans were going to have a fighting chance to reverse the massive intrusion of government into the private sector, not just on Wall Street and in banking but also in the auto industry, health care, or any industry Obama had targeted to expand his leftist agenda. In terms of financial reform, the senators’ plan was to fight the most egregious antibusiness parts of the Dodd bill (they hated the too-big-to-fail aspect) and then bide their time until the midterm elections so they could add Republicans to the Senate and kill the most anti-free-market parts of the bill.

  But first they needed money. Neither McConnell nor Cornyn was particularly fond of Wall Street’s risk taking or the access the Street had enjoyed for so long with the current administration. They were well aware of how Wall Street had gone head over heels for the president, including support from Goldman executives who alone had donated close to $1 million to Obama during the 2008 election cycle (not counting cash given to the party and other soft-money accounts) as the firm earned $13.4 billion in 2009 thanks largely to Obama’s policies. That’s $13,400 in profits for every dollar the company gave directly to Obama—an extraordinary investment by any measure. Obama as president earned $400,000 in salary in 2009, while Blankfein took a massive pay cut but still walked away with around $9 million and Jamie Dimon earned about $17 million.

  Not bad for a year’s pay working for the nanny state.

  “By my estimate,” Jamie Dimon was overheard saying one afternoon in early July as the Dodd bill was starting to take its final shape, “I think we can get the costs of this thing down to 8 percent,” from original cost estimates of as high as 15 percent.

  After months of bluster, Dimon wasn’t exactly celebrating, but he was, according to people who know him, feeling like he and his bank had dodged a major bullet as the most onerous forms of the financial reform legislation—at least in terms of how they would impact the big banks—appeared to have been watered down. Paul Volcker, who had pushed for many of the strict measures that had appeared in earlier drafts, was disappointed, giving the near-final product a B, according to the New York Times.

  Maybe that’s why JPMorgan and its CEO joined the ever-compliant Vikram Pandit in pronouncing the legislation fit for public consumption. “We support the vast majority of what’s in this bill,” a JPMorgan spokesman assured me in June 2010. According to senior Wall Street executives, the cranked-up lobbying effort by JPMorgan and even Goldman (whose lobbyists had managed to break through the barriers of working for a firm considered toxic), just before President Obama signed the final product into law, had yielded significant benefits.

  The Volcker rule in its near-final form didn’t appear so ominous after all, which is why its author was so pissed and Goldman was feeling pretty relieved. The activity it was supposed to outlaw, proprietary trading, or trading using the firm’s own capital, became more a term of art than a strict definition, and given the way the rule was being written and interpreted by the lawmakers, banks would be able to engage in risky trades as long as the trades involved a customer order, as 90 percent of all trades do.

  JPMorgan’s nightmare of having to spin out its hedge fund and private equity businesses, the massive Highbridge Capital and One Equity Partners, also appeared to be watered down—the new and improved Volcker rule allowed the firm to keep its investment as long as it didn’t risk more than 3 percent of company capital in such investments, which, as Wall Street had discovered, might not be such a bad thing. The practical effect was that the firms could pull out their own money and still scoop up hefty management fees, and if the funds failed, they had no responsibility to bail out these investments, as Bear Stearns had been forced to do when its hedge funds imploded in 2007. Even Blanche Lincoln’s derivative spin-off proposal failed to live up to its billing: Firms could still buy, sell, and trade these complex products in house without having to create and finance separate subsidiaries. “It’s not a big change for commodities. It’s fine-tuning more than a material impact,” Blythe Masters, the head of JPMorgan’s derivatives unit, told the Financial Times.

  As the contents of the final bill became clearer, Dimon, a self-described “geek” who loves to quantify every management decision in terms of how much it will cost and how much it will help make his bank, joined Goldman in believing that the bill, as it was taking shape, had a limited downside for Wall Street and his bank in particular.

  While members of Congress and the president congratulated themselves on the bill’s progress (by mid-July, Dodd had corralled enough Senate votes for passage of a very compromised bill, while Barney Frank promised that the bill would have swift passage in the House before being signed into law later in the month by President Obama), and Wall S
treet breathed a sigh of relief, independent analysts wondered about the bill’s effectiveness.

  Writing in the Daily Beast, former SEC chief Harvey Pitt likened the bill to the Sarbanes-Oxley Act, the accounting overhaul passed by Congress in the wake of the Enron implosion, which had accomplished very little in ensuring that Wall Street complied with rules and regulations. “As it was with Sarbanes-Oxley, we’ll be told that our last economic crisis was someone else’s fault (but never Congress’) and all we really need is a hefty dose of legislative medicine,” Pitt wrote. “And ‘hefty’ doesn’t even begin to describe this dose of legislation. In 2,500 pages of dense prose, we’re about to receive legislation that could better be entitled ‘The Lawyers’ and Lobbyists’ Full Employment Act.’ Which begs the question, what’s the likely impact of Dodd-Frank?”

  Pitt’s answer: “Congress has labored mightily, and brought forth a mouse!”

  Here’s why: The banking system will be layered with new costs to pay for all the new mandates, which will be passed on to consumers in one way or another. Fees on ATM card transactions will be capped, but the banks are talking about doing away with free checking accounts. Banks might be forced to hold more capital in reserve to protect against market losses. If you think that’s such a good thing, consider the following: Because they have to hold more money, they will make less available to small businesses to expand and begin hiring again.

  The SEC’s new powers to regulate part of the financial business, like the rating agencies, which ineptly placed triple-A ratings on toxic debt and hid the burgeoning bond debacle, are hardly comforting given that the agency has missed so many other scandals in the past. The Fed may be the best of all regulators, and it receives some added enforcement powers, but this is the same agency that allowed Citigroup to buy and hold all those risky bonds that led to its near bankruptcy.

  More than anything, if you read though the bill’s 2,500 pages, you will notice that there’s not one reference to ending “too big to fail.” It’s hard to find a serious student of the 2008 financial collapse who doesn’t believe that the notion that government will protect, albeit by regulating, the big financial institutions wasn’t a major reason for the mindless risk taking by the banks that led to the meltdown. Yet if you read the bill (I haven’t, but Harvey Pitt has), it is still alive and well and ready to create the next crisis as traders view the protection of government as license to take risk.

  As the Wall Street Journal pointed out: “The Democrats who wrote the bill are selling it as new discipline for Wall Street, but Wall Street knows better. The biggest banks support the bill, and the parts they don’t like they will lobby furiously to change or water down.

  “Big Finance will more than hold its own with Big Government, as it always does, while politicians will have more power to exact even more campaign tribute. The losers are the overall economy, as financial costs rise, and taxpayers when the next bailout arrives.”

  Even worse, government will be intruding in the financial system more than ever before, based on the false premise that a lack of regulation caused the financial crisis, rather than the nanny state of bailouts over the past three decades (most notably in 2008) that let Wall Street believe consequences did not go hand in hand with risk taking.

  The two lawmakers who seem most destined to take credit for the legislation, Senator Chris Dodd, the head of the Senate Banking Committee, and his counterpart in the House, the inimitable Barney Frank, are preparing, I understand, for political stardom. Dodd in particular is viewing the bill as the cornerstone of his long political career, which is now coming to an end. But both have blood on their hands, so to speak; as the Wall Street Journal has pointed out, just a few years ago they were “cheerleaders for” the largesse of the government housing-bubble makers, Fannie Mae and Freddie Mac. Ironically, both Fannie and Freddie, now in receivership, remained untouched in all the reforming going on in Washington. In fact, the talk from Frank was to revive them in some way as the cost of their bailout neared $1 trillion.

  And what did Vikram Pandit say about financial reform?

  “America—and our trading partners—need smart, common-sense government regulation to reduce the risk of more bank failures, mortgage foreclosures, lost GDP and taxpayer bailouts. Citi embraces effective, efficient and fair regulation as an essential element in continued economic stability.”

  In other words, on Wall Street the nanny state lives, no matter how many times the protection of the financial sector by the federal government has been at the heart of the massive risk taking that has led to thirty years of booms and busts, and ultimately the recent great recession that may not be felt on Wall Street, but continues to squeeze the lives on Main Street.

  AFTERWORD:

  WHERE DO WE GO FROM HERE?

  “We’redone with lobbying, finished,” explained a senior JPMorgan Chase executive in mid-July 2010, about the firm’s and the industry’s position on the financial reform bill as it neared completion.

  Considering where it began, as nothing more than an exercise in futility, the bill could be seen as a major accomplishment. Wall Street would be forced to give up certain lucrative businesses—namely proprietary trading, even if it represents only a modicum of the risk taken by the banks on a daily basis. There would be greater oversight of the banks, even if lack of oversight was never really a problem in the past.

  At nearly the last moment, Republican senator Scott Brown, whose victory in Massachusetts caused the panic that led to the Democratic attacks against the bankers, proved to be a formidable obstacle to getting the bill passed due to his opposition of the bank tax Barney Frank had tried to insert to force Wall Street to clean up costs. But even that could be finagled.

  In the end, Frank agreed to forgo the tax and take the money from the government bailout funds known as TARP and Brown agreed to drop his opposition, ensuring the legislation’s passage.

  Brown’s opposition meant the bill missed its July 4 deadline to be signed into law by the president. What a pity. Wall Street used the holiday that celebrates the creation of our country and the vast freedoms endowed upon its people to regroup and figure out how to maneuver around the bill’s various edicts, thus influencing the Big Government it has manipulated, and that manipulates them.

  “There’s nine buckets in this thing and we have to figure how each of those buckets works for us over the next couple of months,” one senior banking executive told me on the eve of the bill’s passage.

  Wall Street, for all its worry over Obama’s various reforms and his verbal assaults, has done pretty well under this president, so why shouldn’t it expect, once all the smoke has cleared, to do well in the future? In fact, Wall Street hiring is up from last year and for all the alleged costs of the new law, banks continue to hire. Trading profits took a dip during the second quarter of 2010, but with interest rates low, Wall Street and the banks can’t help but print money for the foreseeable future, no matter how many “Volcker rules” are thrown at them.

  It won’t be that easy for the average American worker, or for the men and women who strive to create businesses on their own to keep the American worker employed. Small businesses are the backbone of our economy; every statistic shows that they employ as much as half of the American workforce and are the engine of any recovery. And yet they have no seat at the table when the goodies of Obamanomics are doled out. Meanwhile, Jamie Dimon is so confident he can limit the downside of financial reform because his bank, one of the largest and most powerful in the world, can grease the wheels of Big Government through campaign contributions and the hiring of lobbyists.

  Maybe that’s why in the midst of all the talk about the increased costs of financial reform, the New York Times in mid-July ran a story under the headline “Wall St. Hiring in Anticipation of an Economic Recovery.”

  Small businesses, as I’ve pointed out, enjoy no similar benefits because they enjoy no such access to Big Government. As a result, they will be paying higher taxes, will be
forced to dole out more benefits through the president’s entitlement agenda, and will be hiring fewer people than the crony capitalists who run and ruined our financial system.

  Obamanomics, as I’ve tried to explain in this book, may bode well for the banks, and megacorporations like GE, but it has been an unmitigated disaster for the average American worker by just about every measure available. The New York Times may choose to ignore the absurdity of his economic agenda, but I can’t; on the eve of Independence Day, unemployment fell from 9.7 percent to 9.5 percent, but only because few Americans are looking for work and the government hired thousands of people as temporary census workers. Businesses are making money; that’s a fact that the president keeps harping on as he proclaims the positive GDP numbers as proof his policies are producing results, even as he ignores the high unemployment numbers. But we don’t need the president to explain pretty simple economic facts; the reasons for the massive joblessness even as the economy grows were laid out by independent analyst Peter Sidoti in a New York Post column I wrote in January: Businesses are hoarding cash because they are afraid of the cost of Obamanomics—the taxes, entitlements, and massive amounts of spending that they will ultimately have to pay for.

  Put it all together and the hope and change Obama promised for most of the country has translated into despair and pain. If you don’t believe me, talk to a construction worker who faces the unemployment line because no one wants to take a risk and build in this economy, or the single mother who can’t find a job in sales because people aren’t buying stuff.

  Even some of Obama’s friends in the media and corporate America (aside from the beaten and bruised Wall Street crowd) are beginning to publicly denounce the folly in his approach to the economy. Writing in the Washington Post, journalist Fareed Zakaria reiterated what Peter Sidoti had predicted months earlier when he noted that “America’s 500 largest nonfinancial companies have accumulated an astonishing $1.8 trillion of cash on their balance sheets.”