The Divide: American Injustice in the Age of the Wealth Gap

by Matt Taibbi

  Greenberg, probably best known for his driving animosity toward Spitzer and for his hilarious postretirement effort to sue the U.S. government for giving AIG an insufficiently generous bailout, was one of the most powerful men on Wall Street in the 2000s. A felony conviction of him at any time, but particularly after the financial crisis, would have sent a powerful message to Wall Street that no one is above the law.

  Though four Gen Re executives and one AIG executive were ultimately indicted and convicted in the celebrated case, neither Spitzer nor the Justice Department could ever make a criminal case against Greenberg. One of the main reasons was that the lesser players in the case were given softball sentences, which left prosecutors with no leverage to roll any of the smaller fry into the really big fish.

  One particularly garish example involved Chris Garand, a senior vice president of the Stamford, Connecticut–based Gen Re. Garand was convicted on three counts of securities fraud, three counts of mail fraud, three counts of making false statements to the SEC, and one count of conspiracy to violate federal securities laws and commit mail fraud.

  Garand had lied to government investigators and helped concoct the scheme that helped AIG cover up its losses. Because of the sheer magnitude of the crime, federal sentencing guidelines actually permitted the judge—a Hartford, Connecticut, native named Christopher Droney—to fine Garand more than $29 million and give him, no joke, life in jail. (Well, technically it allowed Judge Droney to impose a sentence up to 160 years. But for all intents and purposes, Garand was facing life.)

  The Feds didn’t need Droney to go that far, but they wanted and needed Garand to get a stiff sentence, in order to secure his cooperation. Assistant U.S. attorney Ray Patricco said he sought a “substantial” prison term. Garand’s lawyers at the firm Proskauer Rose said the state was looking for six or seven years.

  But in March 2009, when it came time for Garand’s sentencing hearing, nearly eighty people showed up in the federal courtroom in Hartford, including Garand’s wife, Barbara (who reporters noted was a school board official in their suburban hometown of Saddle River, New Jersey), and his two daughters, aged fifteen and twenty-six. Garand’s friends and relatives reportedly cried audibly throughout the two-and-a-half-hour hearing, pleading with the judge, telling him that Garand was a man of charity, well respected, and that putting him in jail wouldn’t serve any purpose.

  Garand himself told the judge he was “profoundly sorry” (in the course of researching this book I would hear this term a lot; executives from HSBC would use exactly the same language four years after the Gen Re fiasco), while his wife, Barbara, pleaded for his freedom. “These past few years have caused a great deal of pain to our family,” she said. “Please don’t take him from us. Our lives are in your hands.”

  Many of the Gen Re and AIG defendants made similar appeals. Gen Re CEO Ronald Ferguson, after being caught up in the scandal, went the Chuck Colson route and started studying to become a minister, telling the judge that a light sentence would help him fulfill a “mission from God.” He said he wanted to “make a difference in the lives and comfort of others, the widows and the orphans, the lost and the least, and the left out.”

  As befits a higher corporate officer, Ferguson drew about five times as many supporters to his sentencing hearing as Garand (four hundred people, roughly), and he was portrayed in testimony as a “God-fearing family man who refuses even to swear, drink, or jaywalk.” Steal $600 million, sure, but not jaywalk.

  In the end, Droney was moved by the appeals for mercy and gave Garand a sentence of one year and one day. Ferguson, the alleged co-originator of the scheme, got two years. Even better, though, Droney allowed all five defendants to remain out of jail pending appeal, thereby removing any leverage the state might have to pressure them to cooperate.

  Perhaps inevitably, all five of the Gen Re/AIG defendants had their sentences vacated two years later on a series of absurd technicalities. In 2011 a federal judge, Dennis Jacobs, suggested that the government had prejudiced jurors against the defendants by talking at trial about stock losses at AIG during the time when AIG was blowing up and causing a financial crisis. This, said Judge Jacobs, “prejudicially cast the defendants as causing an economic downturn that has affected every family in America.”

  This was a ridiculous reason to let five people get away with a $600 million fraud, even if it were true. But it wasn’t. Judge Jacobs had his dates screwed up. The Gen Re defendants were convicted in February 2008, a good seven months before AIG became the national poster child for the imploding economy. Jacobs’s entire theory about “prejudicial” evidence was off by more than half a year.

  The moral of the story? Judges do listen to appeals for leniency, but only in selected cases. Sentencing guidelines in the Gen Re case gave a judge the power to help the state deliver convictions in one of the biggest criminal cases in the history of Wall Street. Instead, the prosecutors not only didn’t get the main target, they lost all the little fish, too. The whole thing ended in a big fat goose egg.

  “I mean, those guys could have gotten life. Life,” says the former federal prosecutor. “That would have been a little much, of course. But nothing? Seriously?”

  It’s impossible to say that the judge in the Gen Re case was wrong to be moved to leniency. Those defendants, who knows, might not have been flight risks, and they might very well not even have been risks to jaywalk. The system gives judges the power to make those determinations. But the reality is that in the squalid halls of courts like Schermerhorn, impossibly high bail is routinely dumped on less-well-off defendants and is just as routinely used (in conjunction with tricks like the “certificate of readiness” gambit) to pressure those defendants into guilty pleas and other forms of cooperation. In the Gen Re case, prosecutors needed the judge to do what judges do a million times a day in inner-city courts: stick to the draconian book. Instead, he treated the defendants like people deserving of mercy. It’s not that either way, in a vacuum, is wrong necessarily. It’s more that the two approaches don’t match, and there’s no way that can ever be right.

  * * *

  * How big a crime is a $600 million fraud? If one goes by FBI statistics, the Gen Re defendants’ fraud cost AIG shareholders more in damages than was stolen by all auto thieves in the entire American Northeast in the year 2009, the year after the Gen Re defendants’ convictions. Stealing a car in New York is grand larceny in the fourth degree and typically carries a sentence of up to four years. If the car is worth more, you might get grand larceny in the third degree, which takes it up to seven years. A luxury car worth more than $50,000 might get you as much as fifteen. At the very least, it’s safe to say that a lot of car thieves drew a lot more time than the Gen Re defendants. As one public defender explained it, “Car thefts, they do those by the book.”

  When one of the biggest bank heists ever took place right in the middle of the 2008 financial crisis, few people knew about it. Even to the victims, it was a secret for years. It was the perfect twenty-first-century crime—so broad in scale that it was practically invisible to the naked eye.

  For years after the 2008 crash, a lot of time and effort was spent debating the question of whether Wall Street was guilty of actual crimes, or whether its executives were merely greedy and irresponsible. Barack Obama himself clumsily staked out a heavily parsed, lawyerly position on the question on 60 Minutes.*1 But the question, as posed, mostly missed the point. The real issue wasn’t legal or illegal? but seen or unseen? While some of the most dangerous behaviors in American big business were indeed against the law, they were often, more importantly, outside the law, executed in an undefined legal space, in darkness.

  In high finance, a few arenas are subject to some light and transparency—regulated stock exchanges like the NYSE and the NASDAQ, for example, places fit for day traders and suburban retirees and other such PG-rated softies. But for the most part, high finance is a night game where anything goes. This is the legacy of a generation of brilliant lawy
ers who’ve turned Wall Street into a perfect black box, the industry surrounded by the legal equivalent of tinted windows.

  In the crash era, one story towers above the rest as a perfect example. The collapse of the Lehman Brothers investment bank and its subsequent lightning-speed, past-midnight-hour sale to the British banking giant Barclays was a sweeping two-act crime drama that overwhelmed the imagination of American law enforcement. Regulators simply couldn’t see through those tinted windows to make out the monstrous frauds, robberies, and conspiracies that were raging out of control within both companies. And afterward the courts were too overwhelmed by the scale of it to do anything but acknowledge what had taken place.

  This story began with simple, dumb greed and irresponsibility, progressed to frank illegality, and ended with a brilliant corporate mutiny and late-night merger that one former Lehman lawyer calls “the greatest bank robbery in history.” The two firms involved, Lehman and Barclays, were at the centers of both the 2008 crash and the worldwide LIBOR interest-rate-rigging scandal that exploded into public view four years later, making this the ultimate cautionary tale. If regulators at any point had stopped to take a really close look at either company, multiple disasters might have been averted.

  But nobody looked into either of those black boxes, at least not until it was too late. Lehman’s collapse ruined thousands of institutions and individual investors around the world. A too-late lawsuit failed to recoup the lost money, meaning the only thing left in the end was a long, twisting tale of testosterone-fueled catastrophe buried in a mountain of paper—case No. 12-2322, U.S. Court of Appeals for the Second Circuit, In re: Lehman Brothers Holdings, Inc.

  If you want to understand not only why Wall Street isn’t policed but why many believe it can’t be policed, you need only look carefully at this case. You can’t police what you can’t see, and you can’t see in the dark.

  THE BACKGROUND

  Imagine an ordinary low-level swindle. A con man comes to a town and opens a store. He then buys lavishly from all the local merchants, on credit, to stock his shelves. For a few weeks he does a booming business, selling his swag for cash. But suddenly, before his bills come due, he flees town with the cash, stiffing the local hayseeds who’ve been gullible enough to give him credit. The huckster shopkeeper who bilked his creditors by “fraudulent conveyance” was a common enough character in small-town American crime that some states had to adopt felony laws against that sort of thing.

  The Lehman story is exactly the same story, only the “town” here is the planet Earth, and the flight was an absurdly complex escape mechanism, a getaway so convoluted that some of the best lawyers in the world had trouble following it.

  First, Lehman executives ran up a $700 billion tab engaging in almost indescribably reckless and antisocial behaviors, borrowing on a grand scale to create and sell products so dangerous that they very nearly collapsed the world economy in 2008. But before the bank itself went bankrupt that same year, the hucksters who ran the shop quietly sucked the cash out of the company, leaving tens of thousands of people and institutions to which Lehman owed money—from foreign orphanages to the city of Long Beach, California—high and dry.

  The hucksters took the money out of the company in two ways. First, some of the principals who had helped ruin the company simply paid themselves hefty bonuses on the way out the door. Then, some of them came up with an even more inspired mechanism: they sold themselves to another big bank, the British firm Barclays. In this second part of the deal, key parts of which were executed literally in the middle of the night, billions of dollars were quietly moved into the coffers of Barclays and out of the reach of Lehman’s creditors. Simultaneously, the insiders from Lehman who had come up with the idea took lucrative jobs at Barclays, taking hundreds of millions in future bonus payments to do so.

  This is a hard story to follow. But if you keep that one image in mind, of a shopkeeper fleeing town in the middle of the night with borrowed profits, the collapse of Lehman Brothers—one of the great unpunished swindles of all time—starts to make sense.

  Lehman Brothers succumbed to fraud, bad decisions, and book-cooking, dying not of any one specific thing but more generally of corruption itself, in the manner of elderly mobsters or Soviet rulers.

  The company was founded by a pair of Bavarian-born immigrants to the American South, Henry and Emmanuel Lehman, who in 1850 set up a cotton-trading business based in Montgomery, Alabama. The pair moved north to New York less than a decade later and quickly expanded their business to include dealing in railroad bonds and investment banking. For the next century and a half, they and their descendants helped build America, helping finance or take public a long succession of foundational American corporations: F. W. Woolworth, Macy’s, RCA, Digital, B. F. Goodrich, Studebaker, even Halliburton.

  In the late 1970s and early 1980s, the company fell on hard times, as internal power struggles forced the ouster of some of its most talented executives, including former CEO Pete Peterson, and former M&A chief Stephen Schwarzman, who would later become two of the richest individuals in the world. The company briefly merged with American Express in the 1980s and was spun off again as an investment bank in the early 1990s. And then …

  And then it headed into the late 2000s led by one of the most unlikable characters in American business, a man whose very name sounds like a thesaurus entry for “grasping, narcissistic creep”: Dick Fuld. Nicknamed “the Gorilla,” Fuld is a tall, cavern-eyed, hollow-cheeked bully who was famous for his quick-twitch meanness, his screaming intransigence, and his apparently congenital inability to blame himself for any problem. Fuld is the kind of person who would fall drunk down a spiral staircase and then sue the architect for building blurry steps.

  Later on, after his firm collapsed, Fuld would never once publicly puzzle over his own mistakes. Instead, he said he would wonder “until they put me in the ground” why the government hadn’t bailed him out. His seemingly terminal lack of self-awareness left him desperately hated by the firm’s rank and file. In fact, in the weeks after he stepped down, Fuld would literally be punched out in the Lehman Brothers gym by one of his former minions, belted off a treadmill while wearing a heart monitor.

  In the years leading up to the crash, Fuld and his right-hand man, a goonish henchman named Joe Gregory, acquired dictatorial powers within the firm. You’ve heard of the good-cop/bad-cop routine: Fuld and Gregory were bad-cop/worse-cop. Fuld was the notorious self-obsessed attention hog, while Gregory was the guy who stalked the halls dressing down and/or firing people to strengthen Fuld’s grip on power. (Author and former Lehman executive Lawrence McDonald uses the word “shot” to describe Gregory’s firings, as in “He shot two equities guys.”)

  Throughout the 2000s, the two men used the Stalinist technique of gradually filling the administrative ranks of Lehman with patsies and neophytes who would be forced to lean on them for key decisions. Twice they put nonaccountants—Erin Callan and Ian Lowitt—into the CFO job, overseeing the firm’s accounting. Then they took one of their most talented financial strategists, Bart McDade—“our best risk taker,” explains McDonald—and put him in a relatively inconsequential job fixing the equities department.

  Fuld and Gregory wanted complete control over the company for a simple reason. They wanted to transform the bank’s entire financial strategy into a vehicle for maximizing their personal compensation. The more risk the bank took on, the more money they made in the short term, and that was what it was all about. It wasn’t enough to be the fiftieth- or sixtieth-richest guy on Wall Street. They wanted to personally be billionaires many times over, like the partners at Goldman or celebrated private equity chiefs like their departed betters, Steve Schwarzman and Pete Peterson.

  “In 1998 the balance sheet*2 was $38 billion. In 2005 it was like $400 billion. And in 2007 it was like $700 billion,” laughs McDonald. “This was all a plan to try to catch Goldman, to try to catch Peterson, to try to catch Schwarzman. It was just two guys, Dick a
nd Joe, who wanted so bad to catch those guys.”

  Expanding Lehman was easy during that decade’s exploding financial bubble. By the mid-2000s, the financial services industry had pushed all-in on a nuclear-powered poker game built around an irrationally escalating home housing market. Trillions of dollars were being gambled, and the pots kept getting bigger and bigger every day. But entering late 2006 and early 2007, some of the players at the table, already sitting on big stacks of winnings, began to think about cutting their losses and running. Reports had started trickling up from the ground about a potential disaster in the market for subprime residential mortgages, around which the whole game had been built, and the smarter players started planning their escapes.

  For instance, at a meeting in December 2006, some of Goldman Sachs’s most powerful executives concluded that they had too much exposure to subprime mortgages and had to start unloading the stuff, fast. Goldman needed to get “closer to home,” as its CFO David Viniar put it, and unload its “cats and dogs,” as CEO Lloyd Blankfein described the bank’s subprime holdings.

  So Goldman started unloading subprime in massive amounts, famously dumping as much of its toxic cargo as it could on unsuspecting clients.

  It was more or less exactly at this moment that Lehman decided to double down on subprime. “Right when Goldman and all those guys were having those meetings to get rid of this stuff, Dick and Joe were making the opposite decision,” says McDonald.