All the Presidents' Bankers (62 page)

“Let me tell you why I’m calling,” Reagan said in his “whispery tenor”: “I’d like you to be my secretary of the Treasury.”

Regan said, “Thank you very much, I accept.”
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On January 20, 1981, Reagan formally nominated Regan to the post. Unlike Wriston and Rockefeller, who had rejected similar offers from
Nixon and Carter because they were too engaged in conquering the postwar banking world, “The Wizard” accepted immediately. In the process, Reagan became the first president to hire a major Wall Street chairman to the post of Treasury secretary. Without having given the matter much thought, Reagan united the power of Wall Street and the presidency into 100 percent alignment.

At the time, the financial arena appeared unstable. The key bankers needed structural deregulation to come from Washington. It wasn’t so much that Regan was too connected to Wall Street to help the broader economy, as critics pointed out; it was the fact that his ideologies were glued to the experiences of his work there. His views on open competition, which by default would mean a conquering of competition by the larger banks, would drive another stake into the heart of Glass-Steagall (even though he would be more known for his stance on tax and monetary policy during his term). Democrat Bill Clinton and Republican George W. Bush would repeat Reagan’s precedent with their own Treasury secretary choices culled from Goldman Sachs. Wall Street was officially in the White House.

Mass Deregulation Begins

A little over a week after he took office, on January 29, Reagan terminated Nixon’s wage and price regulatory program.
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From the onset, Reagan made his deregulatory agenda clear. After his first week in office, Reagan issued an executive order removing all controls on price and allocation of crude oil and refined petroleum.
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Deregulating the banks would prove more time-intensive. The nature of the banking system was such that the commercial and investment banks both wanted to expand their services, but more specialized groups like insurance companies, real estate boutiques, and thrifts were clamoring to preserve their piece of the pie. The administration, through Vice President George H. W. Bush and Treasury Secretary Regan, sided with the big boys—the commercial banks, with their large FDIC-insured deposit bases, lending prowess, and international aspirations. But toward the later years, the administration would also support their investment bank rivals.

In general, Reagan tended to avoid direct dealing with the elite financiers. Whereas Reagan was focused on ending the Cold War from a political perspective, the bankers felt they had already moved in that direction from a financial perspective, so they had no need to be deeply involved in Reagan’s plans for embracing glasnost, the Soviet policy that called for a more “open”
political and financial atmosphere internally and externally. As for tax policies and the notion of “trickle-down economics” (also known as “Reaganomics”), those Reagan worked on through his Treasury secretaries. When prompted (as they were), the bankers supported Reagan’s tax policies. They had similarly supported Johnson’s tax cuts in the 1960s, but this was more of a self-serving decision than a public service one—it was a chip on the table for future favors. Besides, they were busy exploring innovative ways to dodge taxes through offshore entities anyway.

Reagan was barely involved in discussions with the bankers over deregulation. He was absent from negotiations and rarely copied on related correspondence. Instead he relegated these dealings to Bush and Regan. Regan later wrote that Reagan’s policy came in his speeches, and it was up to the people in his cabinet to execute the details. Banker demands were handled in a similar fashion.

The only banker with whom Reagan had established a personal relationship before entering the White House was A. W. “Tom” Clausen, who had chaired the California-based Bank of America. Reagan and his wife, Nancy, also maintained a friendly relationship with Clausen’s successor, Sam Armacost. Like Truman, Reagan had no prior need or opportunity to foster alliances with the East Coast, Wall Street banker sect beyond their fundraising prowess. He hadn’t been an inside Washington player, so there was no real occasion to achieve such closeness. Yet many of the moves that were made during his time in office would contribute to a major overhaul of the US banking system and helped pave the way toward a full repeal of the Glass-Steagall Act in 1999. Most of Reagan’s financial and banking policies would be defined in two ways: first, they would encompass the same tone of his deregulation policies for other industries; and second, they would push through the walls of Glass-Steagall. But Bush and Regan coordinated that aspect; accolades for financial deregulation initiatives and free-market dogma were only occasionally inserted into the president’s speeches.

In February 1981, a couple of weeks after his term began, Reagan appointed Bush and Regan to head a new task force on “regulatory relief,” code for “deregulation.” The group was self-charged with finding ways “to relieve the public of excessive and costly regulations.”
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This mission was positioned as consumer-friendly. The administration claimed, “Banking laws should be changed to enable the consumers of financial services, the banking industry, and the economy in general to enjoy the benefits of increased competition and greater efficiency in delivery of financial services.”
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In reality, the resultant wave of mergers served to consolidate
power in the hands of the nation’s largest banks and their chairmen, effectively
decreasing
competition everywhere else.

Wall Street and Washington became a battleground between investment and commercial banks. Each camp stood on opposite lines of the Glass-Steagall Act. Both aggressively coveted each other’s territory.

Elizabeth Dole, Reagan’s public liaison assistant (and former member of the Federal Trade Commission and Nixon’s deputy assistant for consumer affairs), sought to prevent Reagan from getting caught in the financiers’ cross fire. Though “the commercial banking element is most likely to contain supportive individuals,” she wrote in a memo, “those responsible for inflicting the heaviest damage . . . are likely to remain hostile.”
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Rather than risk a negative media frenzy over any disagreements among the bank factions, which could reflect badly on Reagan, Dole chose to shield Reagan. So she recommended Regan deal with the Wall Street crowd instead.
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This “switch” would continue throughout Reagan’s presidency. It fit both men’s expertise perfectly. Reagan would hardly interact with the bankers over deregulation and had minimal social interaction.

Within three months of settling into the White House, Bush was decisively promoting the commercial bankers’ position. At a media briefing held on Tax Day 1981, he stressed their views as a key element of Reagan’s four-step economic recovery agenda. “The third ingredient of the economic program,” Bush proclaimed, “and one with which I am rather intimately involved, is the question of reducing the excesses of regulation.”
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Banker Policy Support

Reagan’s team was tactical about enlisting bankers and corporate leaders to support his policies, though. When it was time to garner muscle behind his tax and budget bill, the team recommended enlisting Citibank chairman Walter Wriston to help.

When David Rockefeller retired from his post as Chase chairman, Wriston became the undisputed king of Wall Street and chairman of the Business Council, succeeding GE chairman Reginald Jones. In January 1981, Reagan selected Wriston to serve on his Economic Policy Advisory Board.
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Reagan made the necessary phone call. “As you are aware,” he told Wriston, “the importance of this tax struggle transcends the bill itself, since it is only one element of our greater overall economic recovery program. The success of each element is crucial—spending cuts, tax rate cuts, regulatory relief
and stable monetary growth. I hope I can count on your support.” Wriston responded: “I’m on board.”
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Reagan’s staff also recommended soliciting the support of Wriston’s friend George Shultz, president of Bechtel Group, for backup. He too rallied behind Reagan. It was not exactly a hardship for most corporate leaders to approve tax reductions. Bankers, however, expressed concerns about inflation ramifications.

Monetarist Wriston was particularly vocal on the matter of inflation. As he had pronounced in April 1980, “living with inflation is like living in a country where everybody lies.”
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He reiterated his anti-inflationary stance frequently and considered taming inflation far more important than cutting taxes. But in practice, he focused more of his time on abolishing New Deal constraints on commercial banking, which prohibited him from entering the insurance business and extending the bank’s reach across state lines. With banking deregulation tantamount, he traded the favor of supporting Reagan’s tax package.

Taking a page out of the Johnson handbook, the Reagan team peppered coalition building with friendly discourse. The strategy worked. At a press briefing on August 1, 1981, Chief of Staff James Baker III; Edwin Meese III, counselor to the president; and Treasury Secretary Regan announced, “We finally have a tax bill. . . . It’s a good tax bill. It’s about 95 percent of what the President wanted; a three-year across-the-board tax cut.”
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Whereas debate would ensue for decades as to the meaning and effectiveness of Reagan’s tax policies, the manner in which support was garnered underscored the financial-political alliances with the business elite that Reagan could draw upon when necessary.

Shifting Bankers, Brewing Problems

Outside the US borders, bankers’ loans to developing countries had grown at an unprecedented rate and volume during the 1970s. The pace was almost certain to erupt in massive losses for banks and economic calamity for the indebted countries; it was just a matter of time. So it was fortuitous for Bank of America chairman Tom Clausen that just before noon on October 23, 1980, President Carter had summoned him to the White House to discuss the possibility of becoming president of the World Bank.
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By accepting the job, Clausen could execute a double save. First, he would leave his bank before its loan situation deteriorated further, as it inevitably would. Second, he could preside over an organization that could amass governments’
aid to help back those loans, or at least keep funds funneling into developing countries until a better solution presented itself.

It would be Reagan who officially appointed him. In April 1981, Clausen handed Bank of America, with its festering debt problems, to his protégé, Sam Armacost, and headed off to run the World Bank. Under Clausen, the World Bank would pressure the third world to adopt structural adjustment programs that would destabilize the region for decades, causing widespread economic decay. Revolts and bloodshed would accompany private companies racing into developing countries to take over once-nationalized industries and install private sector replacements through which they could extract profits and wealth.

According to the
New York Times,
when Clausen departed after thirty-one years with Bank of America, he told his stockholders, “I’m happy that it is in such sound and vital condition.”
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The true nature of the bank’s health would be revealed after he left.

Armacost, in turn, had exuded support for his fellow Californian Ronald Reagan, through the election and beyond. In return, Reagan appointed him to his Commission on Executive Exchange and the Private Sector Survey on Cost Control in 1982. When the president and first lady hosted Queen Elizabeth II’s visit to San Francisco on March 3, 1983, Armacost and his wife were invited to the reception.
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That April marked the end of another era. When David Rockefeller retired from Chase in April 1981, he passed the stewardship of the nation’s second largest bank to Willard Butcher, another international power broker with growing political ties.
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But Rockefeller didn’t relinquish his political inclinations or alliances just because he left the Chase chairman post.

In September 1981, Reagan appointed Rockefeller to be a member of his Commission on Executive Exchange.
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Two months later, Rockefeller reciprocated by inviting Reagan to make a major foreign policy address on the Caribbean Basin Initiative before the Americas Society, which he chaired.
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“Your appearance,” Rockefeller wrote Reagan, echoing his letters to Johnson two decades earlier regarding the Alliance for Progress, “would reinforce the mutual commitment of the public and private sectors in our nation to this hemisphere.”
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Six years later, at a White House briefing for the Council of the Americas, Reagan said, “The entire hemisphere owes its gratitude to the council, and in particular to your chairman, one of the great citizens of the Americas, David Rockefeller.”
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All his global gallivanting aside, Rockefeller left Butcher a mess, just as Clausen had done for Armacost. Bad loans and faulty deals that had gathered
under Rockefeller’s leadership plagued Chase from everywhere. Major foreign and domestic positions were blowing up, including the marquee crisis he left behind: Drysdale Government Securities.
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The firm held $4.5 billion of positions in government securities, a large portion of which was financed by Chase, along with various unclear amounts financed by other principal bank dealers. When Drysdale was unable to repay Chase, it faced going belly up. But the sheer size of its positions threatened the entire market, including all the other banks that had lent money to Drysdale.