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

by Nomi Prins

  And yet the Federal Reserve kept approving mergers in the midst of the Second Great Bank Depression. The first was JPMorgan Chase’s acquisition of Bear Stearns in March 2008 for $1.2 billion, followed by Bank of America’s September 2008 acquisition of Merrill Lynch initially valued at $50 billion, the September 2008 JPMorgan Chase acquisition of WaMu for $1.9 billion, and rounded out by Wells Fargo getting Wachovia in a $12.7 billion deal announced in October 2008. Way to go, Fed, render the industry even more concentrated, with even bigger players. Really destabilize our future.

  The new big bank merger wave at the end of 2008 didn’t face any pushback on Capitol Hill, either. The few remaining regulations were ignored, such as the cap in the Riegle Neal Act that limited banks to less than 10 percent ownership of total U.S. deposits. As always, banks found legislative loopholes: the limit only applies to bank holding company mergers. Because JPMorgan Chase, for instance, acquired WaMu, a thrift, the limit didn’t apply. The deal got around the law because WaMu’s primary business, as a thrift, was to originate home mortgages, which it did using existing deposits.20 Never mind that the U.S. government considered WaMu’s holdings to be bank deposits. WaMu had $182 billion of customer deposits, and after the acquisition JPMorgan Chase had $900 billion in total deposits, the most of any bank in the country.21 Total deposits at savings and commercial banks during the summer of 2008 were about $7 trillion for the country, giving JPMorgan Chase roughly 13 percent of all deposits at the time.22

  Citigroup Buys Up Everything

  Financial titan Sandy Weill was one of the merger kings of the 1980s and the 1990s. After navigating a succession of top spots in firms from

  American Express to Travelers Insurance, he set his gaze on a choicer prize, Citicorp, and created the biggest supermarket bank in America. The new bank, Citigroup, would provide it all: insurance coverage and commercial and investment banking. All that Weill needed to do was repeal a major piece of Great Depression regulatory legislation: that Glass Steagall Act of 1933. So that’s what he set about doing.

  With incredible brazenness and the help of influential friends, on April 4, 1998, the boards of Travelers and Citigroup agreed to a $70 billion merger, a then illegal proposition under Glass Steagall.23 To push the deregulatory envelope and legalize the marriage, Weill held a news conference suggesting that Congress repeal Glass Steagall.24

  He had a powerful ally. Then Fed chairman Alan Greenspan proved receptive during a secret meeting with Citicorp and Travelers representatives, and he essentially cleared the deal.25 Trusting nothing to chance, Weill still needed to officially kill Glass Steagall, and lobbyists for Travelers and Citicorp fought hard to get it repealed.26 Their expenditures in 1998 reached $9 million, with seventeen lobbying reports filed under “banking” and eleven filed under “taxes.”27 The Citicorp-Travelers merger was completed October 8, 1998.28 Before that, in November 1997, Travelers bought Salomon Brothers and merged it with Smith Barney, already a Travelers affiliate.

  “Merging Smith Barney and Salomon Brothers accomplishes in a short time what it would have taken either of us a considerable time to build,” Smith Barney CEO and Weill protégé James Dimon said at the time of the Salomon pickup.29 A decade later, Dimon would be a financial titan in his own right and would pop up as a defiant character in today’s crisis.

  Citigroup became the world’s largest corporate-combo financial services company. It could do just about everything: sell you a mortgage, insure your life, and consolidate your ever increasing debt.30 Citigroup would also become the most valuable financial company, with a market capitalization of about $135 billion and $698 billion in total assets at the time of the merger.31

  Mergers don’t always result in good corporate governance, however. Sandy Weill stepped down as CEO at the end of 2003.32 The same year, Citigroup agreed to pony up $400 million to settle charges that it had manipulated research to land clients.33 The Citigroup board was also distinguished as the worst in the nation by the Corporate Library in 2003.34 Weill would stay on that board as chairman until 2006 and, as of 2009, still holds the title of chairman emeritus.35 Also in 2009, in light of the billions in bailout money going to Citigroup, Weill gave up a consulting gig that had allowed him to use a company jet, a car and a driver, and an office and earn as much as $173,000 yearly.36

  Big mistakes were made under Weill, and they continued after his resignation as CEO. Citigroup’s financial supermarket invested in subprime mortgages, which were considered a sure bet until suddenly they weren’t. The subprime mess effectively ended Citigroup’s supermarket model. In January 2009, Morgan Stanley acquired 51 percent of Citibank’s Smith Barney brokerage unit and paid $2.7 billion in cash up front.37 Vikram Pandit, Citigroup’s current CEO, announced plans to sell CitiFinancial, its consumer finance division, and Primerica insurance units in January 2009, dismantling a chunk of the supermarket Weill built.38

  Bank of America Works to Keep Up

  Ken Lewis spent most of his career rising through the ranks of Bank of America’s regional commercial bank divisions. He joined North Carolina National Bank (NCNB, the predecessor to NationsBank and Bank of America) in 1969 as a credit analyst in Charlotte and worked himself up to chairman, CEO, and president of Bank of America in April 2001.

  Lewis learned much from his forerunner, Hugh McColl, and reestablished Bank of America as an active political player and a merger maniac.39 McColl had Bank of America spend $4.6 million on lobbying efforts in 1998—the same year that talk of repealing Glass Steagall was heating up.40 In 1999, lobbying expenditures plummeted to $340,000.41 Under Lewis, lobbying expenditures from 2006 to 2008 were again ramped up, reaching $4.1 million in 2008.42

  Lewis and McColl suffered equally from merger fever, and advisers were paid handsomely to keep the fever boiling. As mentioned, Bank of America acquired FleetBoston Financial Corp for $49 billion on April 1, 2004. Goldman Sachs got $25 million as Bank of America’s advisers on the deal, while Morgan Stanley advised FleetBoston for the same amount. On January 3, 2006, Bank of America acquired MBNA Corp for $36 billion. Keefe Bruyette & Woods Inc. was paid $31 million in fees by Bank of America, and MBNA paid $40 million in fees to UBS Investment Bank and another $8 million to Perella Weinberg Partners. The next year, Bank of America acquired ABN AMRO North America Holding for $21 billion on October 1, 2007. Goldman Sachs, Morgan Stanley, and UBS Investment Bank each bagged $2 million for advising ABN.43

  Then, Bank of America had to go and buy Countrywide Financial. Fortunately for the firm, Countrywide was a comparatively cheap deal, announced on January 11, 2008, at $4 billion. Otherwise it could have really ripped the firm’s capital apart. On April 27, 2009, to distance its acquisition from the bad memories of 2008 and impending SEC indictments for its former leaders, Bank of America renamed its Countrywide arm “Bank of America Home Loans,” a move called “rebranding” in corporate land.

  For his merger efforts, Lewis netted $110 million in salary, stocks, and bonuses from 2001 to 2007.44 As we have seen, 2008 and 2009 did not treat him as kindly. Case in point, on September 15, 2008, Bank of America announced its biggest and dumbest acquisition of all, the purchase of Merrill Lynch in a $50 billion all stock deal.45 When the deal went through on January 1, 2009, Bank of America was trading at $33.74. Three weeks later, its stock price had lost 80 percent of its value, falling to $6.68.46 The only people to make money on the deal were Bank of America’s advisers, Fox Pitt Kelton and JC Flowers and Co., which each got $10 million.47

  It wasn’t only Lewis’s merger instincts that were under scrutiny; it was his decision to pay the bonuses of his marquee (for all the wrong reasons) acquisition, Merrill Lynch, even while Bank of America was getting bailouts left and right from the government.

  On March 17, 2009, the House Committee on Oversight and Government Reform requested Merrill Lynch’s records regarding those $3.6 billion in bonuses, which were agreed to before Bank of America bought Merrill.48

  Finger Interests, Ltd., a longtime Bank o
f America shareholder, led the charge to change Bank of America’s leadership at the bank’s April 29, 2009, annual shareholders meeting. Managing partner Jerry Finger said in a press release:

  We believe the board allowed management to pursue acquisitions that have permanently reduced shareholder value through dilution, particularly with the acquisition of Merrill Lynch approved by shareholders without access to full disclosure on December 5, 2008. The board—including its leadership—and management knew, or should have known, of massive fourth quarter losses at Merrill during October and November prior to the shareholder vote, but did not communicate those losses or amend the proxy that shareholders used to vote on the merger. Since the announcement of the merger, the market capitalization of Bank of America has fallen by over 80%.49

  Jerry Finger sort of got his wish for a leadership change: on April 30, 2009, it was announced that shareholders had voted to relieve Ken Lewis of his chairman duties, although he would keep his key CEO slot.50 It was Amy Wood Brinkley who took the bigger fall. On June 4, 2009, Bank of America announced that she was being forced out after eight years as chief risk officer and a thirty one-year tenure with the company.51 Brinkley had given up her bonus in 2008 but she still took home $37.2 million over the course of her term as chief risk officer. She was replaced by Greg Curl who, ironically, was the lead negotiator for the Merrill acquisition.52 So now Merrill’s guy is running risk at Bank of America. That’s comforting.

  JPMorgan Chase Wisely Waits for the Government’s Merger Assistance Under William B. Harrison’s leadership, commercial bank Chase acquired investment bank J.P. Morgan for $33.5 billion on December 31, 2000, a year after Glass Steagall was repealed.53 (Not to shy away from making a buck on its own deal, J.P. Morgan paid itself $58 million in fees, and Chase paid itself $50.5 million in fees.) With Harrison out of the picture, JPMorgan Chase CEO Jamie Dimon consistently stayed above the fray during the Second Great Bank Depression, as his firm avoided the thrashing that his main competitors, Citigroup and Bank of America, took.

  Before picking up the pieces of WaMu, which had been the nation’s biggest savings and loan bank until it disintegrated in September 2008, Dimon had been Sandy Weill’s right hand man for many years, having gotten his start as a gofer in the budget department at Shearson Hayden Stone under Weill.54 Dimon’s early career was defined by an undying loyalty to Weill. When Weill’s unkempt, cigar chomping style didn’t jibe with the crisply dressed, conventional executive culture at American Express in 1985, Dimon followed his mentor out the door.55 A little more than a year later, Dimon stood by Weill’s side to help rejuvenate Commercial Credit Company, a failing consumer loan outfit.56 But big egos can only coexist for so long. The inevitable falling out between Weill and Dimon was spawned in part when Dimon passed over Weill’s daughter, Jessica Bibliowicz, for a promotion at Travelers. The friction reached fruition when Dimon was asked to resign as Citigroup president in 1998.57

  Dimon rebounded nicely two years later, taking the chairman and CEO position at Bank One in March 2000. On July 1, 2004, JPMorgan Chase acquired Bank One for $59 billion. Bank One paid Lazard $20 million in fees, and JPMorgan Chase paid itself $40 million in fees.58 With the deal came Dimon, who took Harrison’s slot and became CEO and president on December 31, 2005.59 Between 2002 and 2007, Dimon netted $95 million in stocks, salary, and bonuses.60

  Under Dimon, JPMorgan Chase was a busy shopper in 2008, but the government had its back, so why not? It acquired Bear Stearns in an all stock deal valued at $236 million, announced on March 16, 2008, and completed on March 31, 2008, with the previously mentioned guarantee from the Fed to back up to $29 billion of Bear’s illiquid assets.61 JPMorgan Chase acquired WaMu for $1.9 billion—announced and effective on September 25, 2008, in a transaction facilitated by the FDIC.62

  In addition to the merger financing from WaMu, JPMorgan Chase received $25 billion in TARP money, used the FDIC’s Temporary Liquidity Guarantee Program to raise $40 billion of cheap debt, and got a half a billion dollars from the AIG bailout to cover its credit default swap exposure to AIG.63 No wonder it was able to reap $5.6 billion in net income in 2008.64 With all of that subsidization, Dimon was defensive about executive bonuses. When Obama called them “shameful,” Dimon responded, “I wish the president didn’t blanket everyone with the same brush,” during the Crain’s Future of New York City conference on February 4, 2009.65 That was a bit cheeky of Dimon, considering that the JPMorgan Chase stock price had fallen from $52.54 in May 2007 to $24.04 on February 4, 2009, before rebounding steadily on that public dime.

  Wells Fargo

  John Gerard Stumpf, CEO of Wells Fargo, kept the lowest profile of the big bank bunch. But he was still invited on March 29, 2009, along with other bankers, to speak with President Obama at the White House about the ongoing economic crisis and specifically about the problem of securities backed by toxic mortgages. Results of the meeting were vague, but Stumpf summed up the response from other executives while talking to reporters after the meeting. “The basic message is we’re all in this together,” Stumpf said. “We’re trying to do the right thing for America.”66

  Like Ken Lewis, Stumpf spent his career in mostly regional banks, working in Arizona and Texas before landing at San Francisco-based Wells Fargo, where he became the CEO in 2007. Once there, though, he got into the groove of big acquisitions.

  Under his tutelage, Wells Fargo acquired Wachovia in a $15.1 billion deal that was announced on October 3, 2008.67 Wachovia had endured a $5 billion run on its deposits a day after the WaMu failure.68 In just a year, Wachovia went from being the fourth placed bank in market value to near total collapse before Stumpf stepped in and upended a Citigroup agreement, facilitated by the FDIC, to take over Wachovia.69 Not as used to the big bucks as his compatriots are—from 2000 to 2007 he made between $1.4 and $5.3 million per year (though he was not named CEO until 2007)—Stumpf agreed to forgo his 2008 bonus.70

  It was only fitting, given his firm’s stock price. From a five-year high of $39.79 on September 19, 2008, Wells Fargo stock prices dropped to $17.22 on March 18, 2009. In March 2009, Wells Fargo cut its dividend 85 percent, and like JPMorgan Chase, Wells Fargo stocks rebounded. Wells was able to survive the crisis because it had focused on traditional commercial banking business and hadn’t gotten involved in as many risky endeavors and toxic assets.71

  AIG’s Outrageous Acts

  Then there was AIG. As we know, the American International Group, Inc., a ninety year old insurance behemoth that in 2007 had $1 trillion in assets and $110 billion in revenues, succeeded in sucking up taxpayer money where Lehman Brothers had failed. On September 16, 2008, the day after Lehman declared bankruptcy, AIG received $85 billion in taxpayer money. In exchange, the U.S. government took an 80 percent ownership stake and brought in a new CEO, former Allstate head Edward M. Liddy.72 AIG was an insurance company to the outside world, but it was a mammoth betting machine at its core. As I’ve mentioned, the legal reason the firm could get federal aid was that it was classified as a savings and loan company, and those little name changes can be really expensive for the public and really useful for a corporation.

  The external reasoning for the AIG bailout was that as the nation’s largest insurer, it was more important to the economic system’s overall viability than Lehman was.

  It didn’t hurt that AIG had some pretty tight relationships—of the credit default swap variety—with some powerful Wall Street players. Namely, Goldman Sachs and JPMorgan Chase.73 See, AIG owed these and other companies lots of money. Bank of America’s Merrill Lynch had $6.2 billion in exposure as an AIG counterparty.74 Goldman, an AIG counterparty since the mid 1990s, was exposed to the tune of $10 billion in mid September 2008. Even though it said that it had hedged this money with cash collateral and credit default swaps, Goldman still ended up getting $13 billion of the bailout money that went to AIG, while AIG stockholders saw their investments wiped out.75 This pumped up the money that Goldman got from the government directly throug
h TARP. In fact, Goldman managed to scrounge up more than its exposure required, considering by that time the firm had been hedged and pretty well protected. Nice looting job.

  “The ultimate taxpayer protection will be the stability this troubled asset relief program provides to our financial system, even as it will involve a significant investment of taxpayer dollars. I am convinced that this bold approach will cost American families far less than the alternative—a continuing series of financial institution failures and frozen credit markets unable to fund economic expansion,” Hank Paulson said on September 19, 2008, apparently deciding that he’d underestimated the severity of the financial crisis in July.76

  Yes, even to the man who only a few months earlier had been quite insistent that it wasn’t the government’s role to bail out Lehman Brothers, it became clear that on the surface anyway, the Treasury and the Fed had to do something.

  But why did the AIG bailout even happen? Well, the argument the Fed used was that if AIG went bankrupt, the whole banking industry would crumble, because global investment banks were on the hook for $50 billion worth of credit exposure to AIG. In reality, the Treasury and the Fed went on to dole out far more than $50 billion to keep AIG alive, so that math doesn’t exactly compute.