It Takes a Pillage: An Epic Tale of Power, Deceit, and Untold Trillions

by Nomi Prins

  Global Flow, D.C. Dollars

  People don’t get elected to be CEOs or senior executives on Wall Street. There is no translucent democracy here. They win these positions through stealth, posturing, and ruthless combat. From the view at the top of the world’s most powerful global bank, it’s logical to want to grab the power and ability to shape the world beyond the firm’s confines. To go, as it were, global.

  One way to do that is to run the world’s central banks. On February 1, 2008, former Goldman managing director Mark Carney became the governor of the Bank of Canada (and ex officio chairman of the bank’s board of directors) less than five months after the Canadian dollar traded down to par with (equal to) the U.S. dollar for the first time in three decades.47

  Another way to go global is to run influential international economic consortiums and a central bank. Across the Atlantic, Mario Draghi was appointed to be the governor of the Bank of Italy on December 29, 2005, for a six year term; Draghi had served as vice chairman and managing director at Goldman Sachs International from 2002 until 2005.48 Considered a proponent of a more open policy toward international investors, Draghi stepped into the job after his predecessor, Antonio Fazio, resigned amid criticism over his handling of a takeover of a major Italian bank, Banca Antonveneta. Fazio had advocated takeover by another Italian bank over bids from international investors.49

  Draghi’s influence extended across the Atlantic into Paulson’s Treasury and the Bush administration. When Timothy Geithner was trying to make his international mark on repairing the economic crisis in his opening days as President Obama’s treasury secretary, Draghi would prove to be a key international connection.

  Draghi was considered the mastermind of a wider G20 plan to diffuse some of the dominant financial control from the United States. He, along with International Monetary Fund (IMF) chief Dominique Strauss Kahn, designed this plan to boost the IMF and the Financial Stability Forum (FSF) to a more powerful and prominent status in world government. At the G20 summit dinner at the White House on November 14, 2008, as international financial leaders were gathered to discuss the growing global economic recession, Draghi gave the main address. According to the daily Italian newspaper Il Giornale, he was the only central banker featured in the photo op of the twenty five participants. A day earlier, Draghi and Strauss Kahn had sent a joint letter to the G20 ministers and governors to specify how they saw the enhanced “roles of [their] respective bodies” going forward.

  Although the FSF, founded in 1999, is supposed to focus on global financial regulation among other things, it requires the support of the U.S. government, as do many other world institutions.50 The problem is that Draghi is the Robert Rubin of Europe, a big proponent of the same kind of deregulation of the international banking system that enables reckless transactions in the United States; his aim is to copy and bring this “freedom” abroad, which has the potential to do no less than infiltrate and bring down the global economy.

  Draghi built his financial chops as the director general of the Italian Treasury between 1991 and 2001.51 He chaired the committee that deregulated the Italian banking system through the Second Banking Directive of 1992, which became part of the Consolidated Law on Banking of 1993. Similar to the Glass Steagall Act of 1933, the Italian banking system had required that banks be separated into specialized functions since 1936. The Second Banking Directive was followed by the Consolidated Law on Finance of 1998.52 Both made it possible to merge risky and nonrisky banking activities; these laws paralleled the Glass Steagall repeal in the United States in 1999.

  Draghi also promoted looser stock market rules that allowed hostile takeovers. That philosophy helped him get the Central Bank of Italy governor slot. In early 2009, he proclaimed that tighter regulations were needed, but given his historical bent, it remains to be seen whether these mere words will be converted to action.53

  Robert Zoellick is another former Goldman Sachs executive who has an influential global role. On May 30, 2007, President Bush nominated Zoellick to replace the scandal plagued Paul Wolfowitz as head of the powerful D.C. based World Bank.54 Treasury Secretary Hank Paulson was prominent in the nomination ceremony. The World Bank, which acts as a lending bank to developing countries, attaches far stricter conditions for these loans than the U.S. government ever attached to TARP money or Fed loans for Wall Street banks.

  Zoellick had the Wall Street-Washington revolving door constantly spinning. He assumed office at the World Bank on July 1, 2007, from his post as managing director and chairman of Goldman Sachs’s Board of International Advisors Department, where he served from 2006 to 2007.55 Prior to that Goldman stint, he was Condoleezza Rice’s deputy secretary of state. But the deputy role was not something that fit his ambitions. His friends said he felt marginalized there, because his subordinates were managing more of the major international matters related to Iran, Iraq, and North Korea than he was.56

  At any rate, that position didn’t offer him the autonomy or influence that he had when he was a U.S. trade representative. At one point, D.C. buzz had it that Zoellick had been one of the contenders for the treasury secretary position vacated by John Snow in 2006, but as we well know, another Goldman power player, Henry Paulson, became President Bush’s pick for the post. So Zoellick trotted over to Goldman.

  You know a company is powerful when between the possibility of remaining somewhere in the State Department or returning to Goldman Sachs, the latter offers more of a spark. Bush rewarded Zoellick’s global ambitions when he selected Zoellick to head the World Bank.

  But why settle for merely controlling money when you can control money and have political power? The third way to run the world, in other words, is to exert political power over money. That’s what being treasury secretary is for!

  Before Goldman alumni Paulson and Rubin moved from the private sector to head the Treasury, Henry Fowler traveled in the opposite direction. He joined Goldman in 1969, following an illustrious career in the political arena that spanned three presidents: Truman, Kennedy, and Johnson. Fowler went from Washington to Goldman, where he remained until he retired in 1980. He guided the firm in developing its international advisors board, of which he remained a member for a number of years after retiring as general partner and from which a number of global economic and financial policy heavyweights have emerged.57

  Robert Rubin’s Always Up to Something

  Sometimes the call of Wall Street dollars is louder than the call of public service. Robert Rubin had a much broader impact on the nation as treasury secretary than he did during his tour at Goldman Sachs as cochairman.58 But he still got to play a part in something pretty big after he left the Treasury.

  In July 1999, Robert Rubin abruptly left the Beltway at the height of his prestige.59 On the day he resigned, after four years as Bill Clinton’s treasury secretary, Rubin’s explanation was relatively coy: “This has been a remarkable experience, but I was ready to go, ready to return to New York.” He said that he had “only some very vague plans about what to do next.”60 Things came into focus on September 17, 1999, when he told the New York Times that he would rejoin the financial world “in some fashion and in some serious way.”61

  He wasn’t kidding.

  Six weeks later, Rubin’s plan really sharpened when he nabbed a plum spot at Citigroup. His appointment there happened to come a few days after Congress and the Clinton administration agreed on the most massive piece of banking and financial deregulation in the country’s history, the repeal of Glass Steagall.62

  That’s totally a coincidence, I’m sure.

  Citigroup was the big winner in that legislation, and its CEO, Sanford “Sandy” Weill, was one of its strongest corporate proponents in a sea of formidable supporters. Rubin himself said that he played a role in ironing out the bill’s final version. But he claimed that had nothing to do with his joining the company that had pushed to break down the barriers that had kept risk away from regular bank depositors’ money for decades.63

&nbs
p; At Citigroup, Rubin received an annual base salary of $1 million and deferred bonuses for 2000 and 2001 of $14 million annually, plus options grants for 1999 and 2000 of 1.5 million shares of Citigroup stock.64 So, while those sweeping changes to the financial system were being confirmed by Congress, Rubin may not have been in Washington, but he was well placed to reap the rewards.

  Using the theories of free market competition, Citigroup lobbyists stressed that the barriers that kept American banks, investment banks, and insurance companies from merging—as their European counterparts were able to—had to be destroyed. Furthermore, the logic went, too much regulation had kept the U.S. banking system from reaching its full globally competitive potential. It was a refrain that had come up repeatedly during Rubin’s tenure as treasury secretary.

  Rubin went on to do great things—and to make $126 million in cash and stock—over the next decade.65 Whenever there was a major scandal or crisis brewing, Rubin was there from his vantage point in the bosom of the largest American bank. When Enron and WorldCom flamed out in bankruptcy and disgrace in December 2, 2001, and July 21, 2002, respectively—they’d held the top-two positions of all time biggest U.S. bankruptcies before being pushed down by Lehman Brothers and Washington Mutual in September 2008—Rubin was involved behind the scenes.66

  During that infamous period, rating agencies were criticized for not moving faster to make corporate downgrades when companies’ embellished earnings became suspect. (As we’ve discussed, these same rating agencies returned to the spotlight during the Second Great Bank Depression because they were paid to rate securities for clients who profited from those very ratings. More AAAs meant more sales for a rating agency’s clients, and more fees for the rating agency.) Rubin snapped to attention when Moody’s Investors Service said it was going to downgrade Enron, whose stock was in a free fall. Citigroup, after all, was a big Enron creditor. Rubin placed a well timed phone call on November 8, 2001, a month before Enron’s bankruptcy, to one of his pals in Washington, undersecretary Peter Fisher, who had been at the New York Fed while Rubin was the treasury secretary.67 He asked Fisher to call the ratings agencies on behalf of Enron. Fisher declined. Enron’s pending merger with Dynegy disintegrated, Citigroup lost the deal, and Enron filed for bankruptcy a month later—leaving Citigroup with lots of unpaid debts.

  A spokeswoman for the Treasury later said that what Rubin had actually asked Fisher was “what he thought of the idea of Fisher placing a call to rating agencies to encourage them to work with Enron’s bankers to see if there is an alternative to an immediate downgrade.”68 (Italics mine.) An investigation into these calls was launched soon afterward. Rubin was cleared by the Senate Governmental Affairs Committee. He told the Senate staffers that the phone call to Fisher was “not only proper, but I would do it again.”69

  And in one of those gray area, revolving-door legalities, it was true. But only because Bill Clinton, as one of his last acts as president, canceled an executive order that had prohibited officials from lobbying their own political stomping grounds on behalf of the private sector for five years after leaving office.70

  Rubin was also dead set against regulating derivatives during his time in Washington. But once these derivatives became the center of the economic disintegration in late 2008, Rubin demurred that he really wasn’t against regulation, it was just that his hands had been tied.71

  Having Influence Means Actually Influencing

  The Enron debacle may seem quaint compared to the subprime mortgage craziness, but rest assured, Robert Rubin was in the thick of that crisis, too. The Fed was a bit slow to gauge the true significance of the mortgage mess, as it has been reminded endlessly in the months since. After its regular monetary policy meeting on August 7, 2007, the Fed issued a statement indicating that the economy would continue to expand over the coming quarters:

  Financial markets have been volatile in recent weeks, credit conditions have become tighter for some households and businesses, and the housing correction is ongoing. Nevertheless, the economy seems likely to continue to expand at a moderate pace over coming quarters, supported by solid growth in employment and incomes and a robust global economy.72

  And with that, Ben Bernanke left interest rates unchanged. It turned out that wasn’t so good for Citigroup, which needed access to cheaper money because its losses were mounting. Enter Rubin. Thanks to the records that University of Pennsylvania’s Wharton School lecturer Kenneth H. Thomas obtained through a Freedom of Information Act request, we know that Rubin put in a call to Ben Bernanke the next day. The official explanation of the call was that Rubin wanted to tell Bernanke he was doing a good job and that he had made the right decision about not chopping rates.73

  But ten days later, on August 17, 2007, Bernanke cut the discount rate—the rate the Fed charges banks to borrow money—by half a percentage point to 5.75 percent.74 It would be the first of a series of cuts that ultimately hacked the federal funds rate—the rate at which banks lend to one another—down to zero and the discount rate to 0.25 percent by December 2008.75 We, of course, will never know what compelled Rubin to call Bernanke, but we can guess it wasn’t simply an irrepressible need to extend a compliment.

  At the time, Rubin’s former company Goldman was doing much better than Citigroup as the failing subprime markets continued to decrease confidence and credit, and slowly pile up the losses.76 Goldman, as we saw earlier, had sold its subprime CDO positions. Citigroup, however, had stuck itself in a nasty situation. Sure, Citigroup scooped up fees when it agreed to underwrite the CDOs, but it made the mistake of agreeing to put up 90 percent of the financing to back the CDOs in the event the credit markets dried up.77 As a result, Citigroup suffered a triple hit: losses on underlying subprime loans, losses on CDOs that contained the loans, and losses on options that it would buy back CDOs from various investors if these exhibited losses over a certain amount.

  The Citigroup board kicked out Charles Prince, and Robert Rubin became interim chairman of Citigroup in November 2007.78 Rubin held the position for a month, before Vikram Pandit stepped in as CEO in December 2007; Sir Win Bischoff slid over to Pandit’s chairman slot. Rubin then moved back to his role as chairman of the executive committee of the board.79

  Despite Rubin’s guidance, there was little Citigroup could do but lose money. During 2008, the firm posted billions of dollars of losses and write-downs.80 In August 2008, Rubin became a “senior counselor” of the firm, relinquishing his role as head of the board’s executive committee.81 Despite TARP capital injections of $25 billion on October 28, 2008, Citigroup shares had hit a thirteen year low by mid-November.82 To attempt to remedy the free fall, on November 23, 2008, the Treasury, the Fed, and the FDIC coordinated a seismic guarantee of $301 billion of toxic assets. That same day, the Treasury pumped another $20 billion of TARP money into the firm.83

  By early 2009, Citigroup was on the financial equivalent of life support. Its decay calls into question the competitive relevance of a big supermarket bank; Rubin’s push to bring about the deregulation allowed Citigroup to become too big to succeed. In the whirlwind of criticism surrounding the inability of Rubin and the other executives to keep Citigroup more solvent, Rubin resigned as the firm’s senior counselor on January 9, 2009.84 Citigroup had leveraged a pile of consumer deposits and had become the very prototype of disaster that the Glass Steagall Act of 1933 had been designed to prevent.

  Rubin wrote of his departure, “My great regret is that I and so many of us who have been involved in this industry for so long did not recognize the serious possibility of the extreme circumstances that the financial system faces today.”85

  Yet More Goldmanites in the Mix

  Goldman didn’t historically feed the government’s prestigious spots. But during the last few decades, as men were rising and needed somewhere to go while those below them nibbled at their feet, it became more crucial to carefully weigh one’s step beyond the elite Goldman circle. Washington and the political arena offered the same
sort of prestige and power, if not the money. But where else would you go, after you’ve exhausted tens of millions of dollars or so of annual compensation, if not to the Hill?

  There was another man whom Paulson plucked from Goldman Sachs to help him out as the economic crisis was growing in the middle of 2008. On July 21, 2008, Goldman Sachs Financial Institution’s chairman Kendrick Wilson got the D.C. nod to advise Paulson, his old boss, on the nation’s banking crisis, although all of Wilson’s experience was in merging and reorganizing banks, not in helping, say, homeowners facing foreclosures. While at Goldman, Wilson advised Bank of America on its takeover of Countrywide Financial, one of a series of dumb, and ultimately very expensive, moves by Ken Lewis, given the deterioration of Countrywide’s loan portfolio.86 He had also been advising Wachovia on what do with its loan portfolio,87 paving the way for his former Goldman colleague, Robert Steel, who took over the company in July 2008.88 Chummy, huh? So Wilson took a temporary leave—he didn’t even resign!—from Goldman Sachs to advise Paulson on what to do with the country’s banking crisis.89