I pushed him. “Phil Gramm, who was then the head of the Senate Banking Committee, and until recently a close economic adviser of Senator McCain’s, was a fierce proponent of banking deregulation. Did he sell you a bill of goods?”
Clinton shook his head. “Not on this bill, I don’t think he did. On Glass-Steagall, like I said, if you could demonstrate to me that it was a mistake, I’d be glad to look at the evidence. This wasn’t something they [Republicans] forced me into. I really believed that given the level of oversight of banks and their ability to have more patient capital, if you made it possible for commercial banks to go into the investment banking business as Continental European investment banks could always do, that it might give us a more stable source of long-term investment.”
Back in the 1990s, the most fervent champion of the repeal of Glass-Steagall was Jamie Dimon’s old boss, Sandy Weill. It’s likely that only a guy like Weill, with such a remarkable storehouse of grit, and such a giant ego, could have made the impact he did.
In 1996 Weill, then the head of Travelers Insurance, proposed an unprecedented merger of Travelers and Citibank. Such a consolidation was not legal under Glass-Steagall. Weill, along with Citibank head John Reed, and with the tacit backing of Fed chairman Greenspan, began an aggressive campaign against Glass-Steagall that led to its repeal. He was shouting, in effect, “Mr. Clinton, tear down that wall!” The relentless assault on Glass-Steagall finally wore away all resistance in Congress and in the White House. From then on, whenever people talked about the 1999 repeal, Sandy Weill’s name was front and center.
Citigroup went on to become a virtual financial superstore—the largest and most complex banking operation in the world. Few could argue with Weill’s record of creating a powerhouse in global banking. He was actually ahead of regulation changes, nearly closing the deal with Travelers even before Glass-Steagall ended. But he also stitched together a company rife with conflicts, which created major problems during the peak of the markets when investment bankers were pushing for deals, analysts were recommending their stocks, and everyone was in bed together. It was said at the time that Weill was not above cronyism, such as the time he interceded with the admissions office of the elite 92nd Street Y preschool as a favor to analyst Jack Grubman, who simultaneously upgraded AT&T, later causing regulators to suggest he did it so that Citi could get at AT&T’s lucrative investment banking business. This would ultimately help to push Weill out.
When Weill was pressured to step down as CEO in April 2003, he handpicked his lawyer and closest lieutenant, Chuck Prince, as his successor. Although Prince was loyal to Weill and spent seventeen years in his service, he knew nothing about running a global organization with two hundred thousand people. The biggest criticism of Prince among insiders was that he was a lawyer, not a manager. Staffers told me that he rarely listened to advisers, including Weill, and the company faltered severely on his watch. Citigroup stock plummeted from a high of $57 per share to 97 cents during the worst of it. Prince was forced to resign in November 2007, as Citigroup’s value plunged. It was clear that Weill’s grand vision of a global superstore was being challenged.
With the legacy of Citigroup and other giants of finance and banking in tatters, people were frantically searching for someone to blame. In retrospect, for the broad market, it is clear that the biggest issue was too much easy money. Low interest rates created a very attractive environment to borrow. Too much liquidity had individuals borrowing more and more to buy homes, and Wall Street securitizing those loans to lock in bigger returns.
Greenspan, who had been Fed chairman for seventeen years before stepping down in January 2006, was a target of some who believed that he oversaw an era of irresponsibility that combined low interest rates with too-rapid growth. In late October 2008, he sat before the House Committee on Oversight and Government Reform, looking weary and showing his age.
Henry Waxman, the senior member of the committee, was in a take-no-prisoners mood. “You had the authority to prevent irresponsible lending practices that led to the subprime mortgage crisis,” he challenged Greenspan. “You were advised to do so by many others. Do you feel that your ideology pushed you to make decisions that you wish you had not made?”
Greenspan seemed agonized and defeated. “Yes, I found a flaw,” he answered honestly. “I don’t know how significant or permanent it is, but I’ve been distressed by that fact.” His mea culpa went mostly unappreciated. Congress was out for blood.
The standout image of this period was a line of chief executives—from the banks, the auto companies, and virtually every industry and enterprise—lined up at tables in hearing rooms, ready to take their slaps from Congress. There was plenty of political grandstanding in these hearings, because chief executives were easy targets. The public was expressing outrage, setting its sights on the men and women who had been in charge, and Congress was happy to shift the responsibility.
Humble pie was on the menu during these hearings, and in the middle of the bank crisis, the auto companies showed up wanting help.
“We obviously knew the auto companies were in trouble,” a White House official told me. “But what caught us by surprise is how inept they were at taking steps to prevent themselves from going into Chapter 11.” Some people in the Bush administration thought that might have been strategic—that the auto companies were holding out for the possibility of an Obama presidency and a friendlier environment. (As president, Obama would propose the banks pay into a fund to pay for their misdeeds but not force the autos to do the same, despite their own poor practices and poor management.)
“Whatever the reasons, they left themselves with no options,” a Treasury source said. “They came to us in late October and basically said, ‘You’ve got to give us money or we’re going to fail.’” Initially, the administration called their bluff. Instead of giving the auto companies a bailout, they would go to Congress and try to reallocate a $25 billion disbursement for green technology.
It soon became clear that the strategy would not work. The auto companies needed a bailout or they would be out of business by January. “They were helpless because there were no third parties,” one observer told me. “There was no Warren Buffett; there was no JPMorgan; there was no one there offering financing for the auto companies.”
The fate of America’s bedrock enterprises ate up the news cycles during the autumn months. The public was feeling increasingly angry, ripped off, and insecure. As average citizens watched their 401(k)s decline in value, and the worth of their homes plummet, it was natural to villainize the rich Wall Streeters who they perceived had played fast and loose with their money. Much of the public anger was focused on bonuses. Wall Street bonuses, paid in cash and stock options, were legendary. In good times, no one blinked an eye. Face it, when you’re making hundreds of millions of dollars for your firm and your investors, who’s going to complain? But once TARP and other government bailouts were under way, there was a growing chant that that Wall Street bonuses should be held up or, at the very least, capped. The new administration found a perfect target in the wealthy Wall Streeters who received bonuses. President-elect Obama and his lieutenants fueled the flames of the bonus uproar, and much of the media followed their lead with the simplistic narrative of working-class heroes versus fat-cat villains. Across the land, hardworking people whose compensation was directly tied to their performance, seethed on-air at the sight of executives in failing companies walking away with tens of millions in bonuses. The dispute about executive compensation became a forum for people to express their frustration with the system. In some ways it was a healthy check on the integrity of the financial system and a call to accountability for all business leaders. But in other ways it was an easy scapegoat for the new president to begin an attack on business, which continued well into the midterm election season.
Congress joined the fray. Barney Frank, chairman of the House Financial Services Committee, was angry when he said to me, “These are people who lost enormou
s amounts of money. How do you give a bonus to someone for having failed so badly, as many of these people did?” (Many people threw back Frank’s criticisms, as he had been such a staunch supporter of home ownership for every American, whatever it took, which helped bring about the crisis in the first place.)
At the height of the public outrage over executive compensation and bonuses, things got a little intense. Many Wall Street executives admitted to me that they had hired security companies to protect their families. It was jolting to wake up and find groups of strangers picketing in front of your house. No one doubted that desperation could lead to violence.
In some cases, however, the outrage was unwarranted. I had a source who had worked at AIG, and he got a relatively small bonus of $3,000. But his name was on the bonus list, and so he looked out his window one day and saw picketers and camera crews on his front lawn. He and his family were prisoners in their home for days. He didn’t deserve to be made a poster boy for corporate greed, but what happened to him is evidence of the depth of public anger.
Global investor Jim Rogers, who might have had sympathy for the struggling financial institutions, was instead blistering in his contempt. “You know what I would like to see happen?” he said to me. “I’d like to see them let these people go bankrupt, stop bailing them out. There are plenty of banks in America that saw this coming, that kept their powder dry and have been waiting for the opportunity to go in and take over the assets of the incompetent. Likewise, many, many homeowners didn’t go out and buy five homes with no income. Many homeowners have been waiting for this, and now all of a sudden the government is saying: ‘Well, too bad for you. We don’t care if you did it right or not, we’re going to bail out the one hundred thousand or two hundred thousand who did it wrong.’ I mean, this is outrageous economics, and it’s terrible morality.”
New York attorney general Cuomo also came out swinging, despite the fact that during the heyday of housing he was running HUD under President Clinton. In that capacity, Cuomo had supported broad home ownership, even though so many people did not have the means to buy homes. Now he was examining whether executives behaved properly, or whether their actions defrauded the public. I asked Cuomo, “Do you worry that politicians and the media have been fanning the flames of class warfare? The bonuses outrage and ‘business is bad’ theory seem to be obscuring other, perhaps more important, issues, like fixing the financial system and getting credit moving again.”
“That is a fair point,” he said thoughtfully. “People are rightfully upset about Wall Street abuses and excess. And we need to address those issues. But we also need to be very careful and not let that anger become counterproductive and a distraction. I also think Wall Street should be taking a long, hard look at the philosophy of incentive compensation. I don’t think bonuses are always bad. The question for Wall Street is, can it design incentives that promote the long-term health of the firms as opposed to just hitting short-term numbers?”
There were so many shock waves in the economy that nobody was wasting energy worrying about the fate of Lehman’s doomed executives. Still, it was an extraordinary tale of wealth destruction in a very short period of time. It was a devastating transition for many.
As one executive told me frankly, “In the last twelve months at Lehman, I made $14 million. But $12 million was in stock, and that was completely wiped out. Uncle Sam took a million.” He was left with $1 million to pay for a $14 million lifestyle. He had big bank account problems, including a very expensive house to unload. But he smiled and shrugged at his plight.
“Some people are pretty bitter, and they’ve filed claims and the like,” he told me. “My view is that’s how it’s supposed to work. If the shareholders get wiped out, everyone in the senior managing team should get wiped out. Now, you say, ‘Oh, well, this was different.’ Screw it. The management team and their interests should be aligned, and, in this case, they were, and they both got wiped out. That’s how it worked, and that’s how I think it should work.”
EIGHT
The Aftershocks
“I don’t think we really believed at the time, or understood at the time, just how bad it really was.”
—JOHN MACK, CEO OF MORGAN STANLEY, IN AN INTERVIEW WITH MARIA BARTIROMO, FEBRUARY 13, 2009
In his career, Bob Steel had worked the entire financial circuit—from investment banking (Goldman Sachs) to Treasury to the banking industry (Wachovia), with a couple years’ teaching school in between, but in the fall of 2008, he was feeling out of the loop. Steel, fifty-seven years old and North Carolina–raised, had worked for Hank Paulson as under secretary for domestic finance until the summer and now headed up Wachovia Bank. He’d gone in knowing that the bank had issues, but he was confident he could solve them. Now, less than one hundred days later, he was in talks to sell the bank. What a disaster! He would have liked to have discussions with his old colleagues at the Treasury, but it was against the law for him to contact them. He was on his own.
Steel found it hard to resist the metaphor of the raging seas. He told me that prior to the September collapse of Lehman, “It was getting increasingly uncomfortable. And I think that the weaker swimmers, the less strong institutions like Wachovia, found it more and more difficult as the water became choppier and the tide became stronger. It became more and more apparent to us, and to other institutions, that the world was going to be different. We were getting prepared for a period of tumult.”
As the fateful weekend in mid-September approached, Steel and his colleagues were already discussing the need to find a strategic investor.
The origins of Wachovia’s problems, deeply rooted in the subprime calamity, could be traced to the actions of a husband-and-wife team named Herb and Marion Sandler. At the height of the housing boom, the Sandlers ran a California-based mortgage company called Golden West Financial. Their specialty was option ARMs, loans that featured low teaser interest rates that later ballooned beyond the borrowers’ ability to pay. A special invention of the Sandlers’ was the “Pick-a-Pay” program. This allowed borrowers to pay low monthly amounts, delaying what they owed by adding to the loan principal. People ended up owing far more than their properties were initially worth.
In their glory days, the Sandlers were praised for their acumen: “Husband, Wife are Golden Duo,” raved Fortune in 2002. “Golden West Strikes It Gold with Principles,” headlined the Seattle Post Intelligencer in 2006. That year, Golden West Financial was acquired by Wachovia for $24 billion, and the Sandlers personally made $2 billion on the purchase.
Everyone thought it was a good deal. But at the time it was unknown that Golden West was neck deep in the subprime mess, and the whole thing was about to go under. The golden couple came to be known as “the toxic-mortgage king and queen.”
The Sandlers’ questionable tactics were outed in the media, including in a scathing feature on 60 Minutes, but they never took a fall for their business practices. They continued on, donating large sums of money to political candidates (mostly Democrats), funding the investigative journalism outfit ProPublica, and standing on the sidelines when Wachovia started to fail as a result of their actions.
On Friday, September 26, 2008, the run on Wachovia started. Alarm bells were ringing loud in Steel’s office. The day before, the FDIC had seized Washington Mutual. Steel was desperate. He had to find a buyer, and he had two potentials: Wells Fargo and Citigroup. On Sunday, Steel had breakfast with Dick Kovacevich, CEO of Wells Fargo, and he briefly thought that Kovacevich was ready to make a firm offer. But it never came. Meanwhile, the Fed was getting into the act, brokering a deal with Citigroup.
For an entire week it appeared that the Citigroup purchase was a done deal—all over but the toasting. Then, on Friday, October 3, Wachovia and Wells Fargo made a joint announcement, stating that Wachovia had accepted a Wells Fargo bid of $15 billion for the bank. Over at Citigroup, no one was amused. In fact, Citi was threatening legal action, saying it had already assumed risk. When I spoke with Steel an
d Kovacevich later that day, both men shrugged off Citi’s claim. “There was no merger agreement,” Steel said. I could tell he was delighted to be a part of Wells Fargo. “It’s a win-win,” he said. “Good for the government—not a penny of government money. Also, we have similar values and ethics, and operate in similar communities.”
I was curious about how Wells Fargo managed to rise above the devastation, and I asked Kovacevich. “We just didn’t make some of the mistakes that others did,” he said. “We still made some mistakes, and that’s very unfortunate. In some cases, we should have known better. In general—and I don’t know if I take much pride in this—we’re probably the least ugly of the ugly ducks because we did not participate in some of the excesses.”
Warren Buffett, Wells Fargo’s biggest shareholder, was on CNBC October 3 defending the deal. He was unconcerned about Citigroup’s threat of legal action. “I know it’s a better deal, obviously, for the Wachovia shareholders,” he said. “And I know that there is no company, there’s no banking institution, during the last six months, that has done a better job for its holders, for its depositors, and for its borrowers, than Wells. Wells has been lending more and more money. They’ve been pumping money into the economy during the last six months while other institutions have been contracting. So I think Wells is a wonderful home for Wachovia.”
The Weekend That Changed Wall Street Page 13
