All the Presidents' Bankers (54 page)

President Nixon signed the bill into law without fanfare on New Year’s Eve 1970. In fact, his inner circle decided against making a splash about it. They didn’t think the public would understand or care. Plus, they realized that there was a prevailing attitude that the Nixon administration had favored the big banks, and though it had, this was not something they wanted to draw attention to.
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The End of the Gold Standard

The top six banks controlled 20 percent of the nation’s deposits through one-bank holding companies, but second place in that group wasn’t good enough for Wriston, who noted to the Nixon administration that his bank was really the “caretaker of the aspirations of millions of people” whose money it held.
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Wriston flooded the New York Fed with proposals for expansion. His applications “were said to represent as many as half of the total of all of the banks.” The Fed was so overwhelmed, it had to enlist First National City Bank to interpret the new law on its behalf.
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By mid-1971, the Fed had approved thirteen and rejected seven of Wriston’s applications. His biggest disappointment was the insurance underwriting rejection. The possibility of converting depositors for insurance business had been tantalizing. It would continue to be a hard-fought, ultimately successful battle.

Around the same time, New York governor Nelson Rockefeller (David Rockefeller’s brother) approved legislation permitting banks to set up subsidiaries in each of the state’s nine banking districts. This was a gift for Wriston and David Rockefeller, because it meant their banks could expand within the state. Each subsidiary could open branches through June 1976, when the districts would be eliminated and banks could merge and branch freely.

Several months later, First National City Bank was paying generous prices to purchase the tiniest upstate banks, from which it began extending loans to the riskiest companies and getting hosed in the process; a minor David vs. Goliath revenge of local banks against Wall Street muscle.

By that time, the stock market had turned bearish, and foreign countries were increasingly demanding their paper dollars be converted into gold as they shifted funds out of dollar reserves. Bankers, meanwhile, postured for a dollar devaluation, which would make their cost of funds cheaper and enable them to expand their lending businesses.

They knew that the fastest way to further devalue the dollar was to sever it from gold, and they made their opinions clear to Nixon, taking care to blame
the devaluation on external foreign speculation, not their own movement of capital and lending abroad.

The strategy worked. On August 15, 1971, Nixon bashed the “international money speculators” in a televised speech, stating, “Because they thrive on crises they help to create them.”
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He noted that “in recent weeks the speculators have been waging an all-out war on the American dollar.”
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His words were true in essence, yet they were chosen to exclude the actions of the major US banks, which were also selling the dollar. Foreign central banks had access to US gold through the Bretton Woods rules, and they exercised this access. Exchanging dollars for gold had the effect of decreasing the value of the US dollar relative to that gold. Between January and August 1971, European banks (aided by US banks with European branches) catalyzed a $20 billion gold outflow.

As John Butler wrote in
The Golden Revolution
, “By July 1971, the US gold reserves had fallen sharply, to under $10 billion, and at the rate things were going, would be exhausted in weeks. [Treasury Secretary John] Connally was tasked with organizing an emergency weekend meeting of Nixon’s various economic and domestic policy advisers. At 2:30
P.M.
on August 13, they gathered, in secret, at Camp David to decide how to respond to the incipient run on the dollar.”
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Nixon’s solution, pressed by the banking community, was to abandon the gold standard. In his speech the president informed Americans that he had directed Connally to “suspend
temporarily
the convertibility of the dollar into gold or other reserve assets.” He promised this would “defend the dollar against the speculators.” Because Bretton Woods didn’t allow for dollar devaluation, Nixon effectively ended the accord that had set international currency parameters since World War II, signaling the beginning of the end of the gold standard.

Once the dollar was no longer backed by gold, questions surfaced as to what truly backed it (besides the US military). According to Butler, “The Bretton Woods regime was doomed to fail as it was not compatible with domestic US economic policy objectives which, from the mid-1960s onwards, were increasingly inflationary.”
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It wasn’t simply
policy
that was inflationary. The expansion of debt via the joint efforts of the Treasury Department and the Federal Reserve was greatly augmented by the bankers’ drive to loan more funds against their capital base. That established a
debt inflation
policy, which took off after the dissolution of Bretton Woods. Without the constraint of keeping gold in reserve to back the dollar, bankers could increase their leverage and speculate more freely,
while getting money more easily from the Federal Reserve’s discount window. Abandoning the gold standard and “floating” the dollar was like navigating the waters of global finance without an anchor to slow down the dispersion of money and loans. For the bankers, this made expansion much easier.

Indeed, on September 24, 1971, Chase board director and former Treasury Secretary C. Douglas Dillon (chairman of the Brookings Institution and, from 1972 to 1975, the Rockefeller Foundation) told Connally that “under no circumstances should we ever go back to assuming limited convertibility into gold.”
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Chase Board chairman David Rockefeller wrote National Security Adviser (and later Secretary of State) Henry Kissinger to recommend “a reevaluation of foreign currencies, a devaluation of the dollar, removal of the U.S. import surcharge and ‘buy America’ credits, and a new international monetary system with greater flexibility . . . and less reliance on gold.”
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With the dollar devalued, investors poured money into stocks, fueling a rally from November 1971 led by the “Nifty Fifty,” a group of “respectable” big-cap growth stocks. These were being bought “like greyhounds chasing a mechanical rabbit” by pension funds, insurance companies, and trust funds.
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The Chicago Board of Trade began trading options on individual stocks in 1973 to increase the avenues for betting; speculators could soon thereafter trade futures on currencies and bonds.

The National Association of Securities Dealers rendered all this trading easier on February 8, 1971, when it launched the NASDAQ. The first computerized quote system enabled market makers to post and transact over-the-counter prices quickly. With the stock market booming again, NASDAQ became a more convenient avenue for Wall Street firms to raise money. Many abandoned their former partnership models whereby the firm’s partners risked their own capital for the firm, in favor of raising capital by selling the public shares. That way, the upside—and the growing risk—would also be diffused and transferred to shareholders. Merrill Lynch was one of the first major investment bank partnerships to go “public” in 1971. Other classic industry leaders quickly followed suit.

Meanwhile, corporations were finding prevailing lower interest rates more attractive. Instead of getting loans from banks, they could fund themselves more cheaply by issuing bonds in the capital markets. This took business away from commercial banks, which were restricted by domestic regulation from acting as issuing agents. But bankers had positioned themselves on both sides of the Atlantic to get around this problem, so they were covered by the shift in their major customers’ financing preferences. While their ability to service corporate demand was dampened at home, overseas it roared.
Currency market turmoil also led many countries to the Eurodollar market for credit, where US banks were waiting. Thus, the credit extended through international branches of major US banks tripled to $4.5 billion from 1969 to 1972.

The market rally, cheered on by the media, was enough to bolster Nixon’s fortunes. In the fall of 1972, Nixon was reelected in a landslide on promises to end the Vietnam War with “peace and honor.” Wall Street reaped the benefits of a bull market, and more citizens and companies were sucked into new debt products.
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The Dow hit a 1970s peak of 1,052 points in January 1973, as Nixon began his second term.
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Nixon’s Personality and the Bankers

For the most part, Nixon resented the East Coast money establishment. Yet he maintained a warm relationship with Gabriel Hauge, president of Manufacturers Hanover, whom he had known since the Eisenhower era, when Hauge worked as Ike’s economic adviser. Hauge began informing Nixon of his economic opinions, as he had with Eisenhower. But Nixon didn’t respond by seeking them out, as Eisenhower had done, and soon the opinions stopped coming.
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The personal distance between Nixon and the Wall Street bankers cut both ways. For instance, Rockefeller had corresponded in some manner with Johnson every other week: through letters, meetings, notes, memos, invitations, and other event appearances. The two horse-traded their support for each other.

But when he tried similar tactics with Nixon, he found himself spurned more often than not. Still, he remained proactive about dropping by the White House, as he did on September 13, 1971, when he visited to discuss international economic developments and their policy implications.
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Rockefeller had a tremendous stake in aligning his intentions with those of the president. But it was harder to get a direct audience with Nixon. Rather than being able to meet with Nixon, he was asked three weeks later to submit a formal proposal on the matter, including an outline of his recommendations.
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The idea that he would be denied these types of personal meetings did not sit well with him. On October 18, Rockefeller requested a face-to-face meeting with Nixon. Again he was denied.

In general, comments to Nixon, including personal correspondence, were filtered through his aides. For instance, economic adviser Peter Flanigan sent Nixon a memo about Merrill Lynch chairman Don Regan for the dual purposes of policy discussion and providing money: “You will be interested to
learn that Don Regan shares the concern for the lack of growth in the money supply and has taken action to make his concern forcefully known in the right places,” Flanigan wrote. “You will also be happy to learn that the Merrill Foundation, of which Don Regan is President, has granted $100,000 to redo the reception area on the second floor of the White House.”
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Rockefeller’s Appointments and Wriston’s Ambitions

Nixon’s relative insularity may explain the frosty relationships between the White House and Wall Street in the early 1970s. This didn’t imply there was no relationship, just a colder one.

Both Wriston and Rockefeller received requests to become Nixon’s Treasury secretary, and both were insulted that the request didn’t come directly from Nixon. Though they cited conflicts of interest for turning down the post, it might have been conflicts of ego. Rockefeller, in fact, declined the offer twice—first in the fall of 1968 and then in January 1974, when he learned from General Alexander Haig that George Shultz was stepping down.

Among other disagreements, Rockefeller opposed Nixon’s price and wage controls. “My own inclination,” he said, “was to allow the markets to have free rein.”
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Perhaps more to the point, a Washington post would have been constrictive for a power broker like Rockefeller. Besides, with economic problems mounting, he didn’t want to become Nixon’s scapegoat. It turned out to be a wise decision.

Meanwhile, Wriston was determined to convince Wall Street that First National City Bank was better than any other bank. He had to find investors to raise more capital, and investors had to be persuaded that the returns were worth it. So Wriston made the bold move of promising a 15 percent return on equity throughout the 1970s. Considered gutsy at the time, Wriston’s promise held true. By 1972, First National City Bank shares had broken through a 20 percent return-on-equity barrier and were fast becoming one of the hottest plays on Wall Street. In the process, shorter-term stock market performance became more important than longer-term, more prudent behavior, and the rise of Wall Street analysts touting stocks to small investors soon followed.

Free-Market Float

As stocks prices rose, so did inflation. Democratic Congressman Wright Patman blamed the banks for inflaming this problem through rate
manipulation. Wriston retorted that the federal government’s efforts were making the banking industry “more volatile.”
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The Justice Department entered the fray when it launched an investigation into rate setting. When Wriston was interrogated, he explained that the practice of explicitly setting prime rates was obsolete anyway. Like many future bank leaders, he escaped unscathed from the allegations of rate manipulation.

On October 20, 1971, at the prestigious Fairmont Hotel in downtown Los Angeles, Wriston and Edward Palmer, his executive committee chairman, decided to unleash market forces that would dictate the level of the prime rates banks charged as interest on loans to their most “credit-worthy” customers. In a public statement, Palmer announced that he was responsible for the changes, but he was deliberately vague as to what they would be in practice.
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The practice of floating rates was considered a bold move for banks at the time.