All the Presidents' Bankers (66 page)

On August 3, 1987, the Senate confirmed Greenspan as chairman of the Federal Reserve by a vote of ninety-one to two.
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A week later, at his swearing-in ceremony, Reagan declared, “Alan is making perhaps the most dramatic personal sacrifice of his career, taking his name down from the door of Townsend-Greenspan, the firm he guided as president and chairman for nearly thirty years.”
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But more important for US bankers’ power over international finance was what Reagan said after that. Merging the topics of the world marketplace,
Greenspan, and the two most important initiatives for bankers into one sentence, he stated, “With the entire globe becoming a single—[and highly competitive]—marketplace, Chairman Greenspan will play an important role in seeking solutions to the problems of developing countries . . . [and] he will be deeply involved in the restructuring and modernization of the American Banking System.”
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In his first testimony before Congress as Fed chair on October 6, 1987, Greenspan proclaimed the banking system “frozen within a regulatory structure fashioned some fifty years ago” and urged legislators “to come to grips with the difficult decisions that must be made to update our laws to the new circumstances of technology and competition.”
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And so he exemplified his full support for the nation’s largest bankers in Washington.

Market Crash

Despite structural fault lines emerging in the global financial system, the US stock market was unperturbed. The Dow hit 2,000 for the first time in January 1987 and reached 2,700 in August. Computer technology contributed to the buzz and the speed of the rise. Corporate takeovers that took stock out of circulation, rendering what was left or new more enticing (if not objectively more valuable) helped further buoy the market.

Adding to the party, on October 15, Reagan’s Council of Economic Advisers prepared a briefing titled “Record-Breaking Peacetime Expansion.”
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It noted that October 1987 marked the fifty-ninth month of the current expansion, setting the record for the longest peacetime expansion in US economic history. Real GNP had risen more than 20 percent, and real per capita disposable income was up 11 percent. Inflation stood at a third of its 1979–1980 rate, and the unemployment rate had declined by almost 5 percent since November 1982.
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Between mid-1982 and the fall of 1987, the stock market experienced its longest and sharpest bull market in fifty years. Daily shares traded on the New York Stock Exchange more than doubled, from 82 million in 1982 to 180 million in 1987. But the party was about to end with a sudden crash.

On “Black Monday,” October 19, 1987, the Dow plunged almost 23 percent.

Greenspan issued a career-defining statement before the markets opened the following morning. “The Federal Reserve, consistent with its responsibility as the nation’s central bank, affirmed today its readiness to serve as a source of liquidity to support the economic and financial system.”
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In other words, the Fed stood ready to bail out banks of tremendous size. Whereas
once the markets needed to know the private bankers would buy up shares to keep them afloat, now the Fed chief’s promise of cheap liquidity did the trick.

Only with that promise did Federal Reserve of New York president Gerald Corrigan urge certain banks to keep money flowing so that the system would appear stable. Banks and other companies began buying their own stock at the lower prices to bolster them up. At 1
P.M.
the Major Market Index futures market staged the largest rally in history.
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The extreme volatility of the move overshadowed anything that the bankers had done in past crash periods. Their Federal Reserve cavalry was firmly in place.

Greenspan looked golden for opening the Fed floodgates to the bankers. Five weeks after Black Monday, the
Wall Street Journal
headlined an article “Passing a Test: Fed’s New Chairman Wins a Lot of Praise on Handling the Crash.”
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Officially, the drop was blamed on “program trading” computers dumping blocks of stock at certain “sell” levels. Some publications attributed the crash to nonreasons like “the market needed a correction.” The whole event was an exercise in hiding the fact that a lot of fraud and debt had gone into building up those stock prices.

On October 23, 1987, Reagan appointed Bush’s friend Nicholas Brady, chairman of the politically connected Wall Street firm Dillon, Read & Company, to chair a three-member task force to investigate the crash and recommend future safeguards.
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Three months later, the task force released its 340-page report. Brady criticized Wall Street’s computer-driven trading practices that automatically dump large blocks of stock when prices drop significantly, amplifying declines.
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“The financial systems came close to gridlock,” the report stated, adding that “the experience illustrates how a relatively few, aggressive, professional market participants can produce dramatic swings in market prices.”
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Separately, President Reagan created another working group on financial markets (colloquially described as the Plunge Protection Team) on March 18, 1988.
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Its purpose was to further examine causes of the Black Monday crash while “enhancing the integrity, efficiency, orderliness, and competitiveness of [United States] financial markets and maintaining investor confidence.”
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In its interim May 1988 report, the working group, which included Greenspan and Commodity Futures Trading Commission chair Wendy Gramm, sent Reagan their recommendations. They suggested coordinating “circuit breakers” during times of high market volatilities, higher margins for stocks than for stock index futures, and continuing the working group.
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They did not address the high debt levels that crushed the market.

Black Monday proved nothing more than a pothole on the deregulation highway. It created an opportunity for Greenspan to appear brilliant for holding the banking sector together by opening the Fed faucets, which provided him with an even stronger reputational platform to help commercial banks gain reentry into more speculative businesses.

That summer, when Reagan announced the resignation of James Baker, who was moving over to become chairman of George Bush’s presidential campaign, and the nomination of Nicholas Brady as Treasury secretary, Reagan told Baker, “You’ve been a secret of our success. Now, Jim, go do it for George.”
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Like Regan, Brady was of prime Wall Street stock. His father, Clarence, and former Treasury Secretary C. Douglas Dillon were close friends. Clarence had fashioned Dillon, Read & Company into a Wall Street powerhouse in the 1920s. Like his buddy George Bush, Nicholas Brady was an avid athlete and Yale University graduate.
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Also, he was a proponent of deregulation.
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Bush Wins

By the time George H. W. Bush became president on January 20, 1989, the economy was limping again. Federal debt stood at $2.8 trillion. The S&L crisis had escalated. Still, his financial policies remained in sync with those of the period’s most powerful bankers, notably Citicorp chairman John Reed, Chase chairman Willard Butcher, JPMorgan chief Dennis Weatherstone, and BankAmerica chairman Tom Clausen.
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These bankers, in turn, continued to find in Bush and his core cabinet kindred deregulatory spirits. Though like Reagan, Bush rarely interacted directly with the Wall Street bankers, they did correspond liberally with Bush’s “people” before and during his presidency. By that point, the third world debt crisis had been simmering beneath various ineffective band-aids since 1982. Plus, the S&L industry was collapsing, the result of abject deregulation, an abundance of fraudulent real estate assets, and criminality. Into that cauldron of S&L and third world debt crises came the most critical demands for landscape changes in banking since the Great Depression.

With economic odds stacked against him, Bush remained surrounded by his most loyal, business-friendly companions, who had tight relationships with Wall Street or came directly from there. On January 27, 1989, Bush swore in Baker as his secretary of state. At the ceremony, he remarked, “Jim and I have been friends for a long time, going back perhaps more years than either of us would care to admit—long, really, before our public lives began.”
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In a preordained arrangement with Reagan, Bush retained Brady as Treasury secretary.
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Their ties, first established on a tennis court, extended to Wall Street and back again. In 1977, Brady had even offered Bush a position at Dillon, Read after Bush left the CIA. Though he didn’t accept Brady’s offer, Bush enlisted him to run his 1980 presidential campaign and suggested Brady as interim senator for New Jersey in 1982.
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The press dubbed Brady Bush’s “Official Confidant.”
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Bush appointed one of his right-hand men, Richard Breeden, who had drafted his task group’s Blueprint for Reform, as assistant for issues analysis and later as head of the Securities and Exchange Commission. Breeden proceeded to advocate deregulation from the entity established to protect the public from an overly reckless banking industry.
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Bush’s choice for Federal Reserve chairman was clear. He received a deluge of mail on the topic of reappointing Alan Greenspan—from average citizens and businessmen alike, with about 75 percent urging him to oppose the reappointment and 25 percent in favor of it.
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Undaunted, Bush reappointed Greenspan.
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Bush unveiled his plan to rescue the ailing S&L banks on February 6, 1989.
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Initial bailout estimates were put at $40 billion to rescue 223 firms. Two weeks later, the Bush administration raised the estimate to $157 billion. With public wrath decidedly against any kind of bailout, Brady adopted a more aggressive tack. On February 22, 1989, he issued an emotional press release themed “Never again”: “Never again should the nation’s savings and loan system . . . be put in jeopardy.” He promised that “the Administration’s plan meets these standards.”
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Brady, on the offensive, stressed that this proposal wasn’t a bailout. Instead, as he wordsmithed before a group of businessmen at the Dallas Chamber of Commerce, it represented “the fulfillment of the Federal Government’s commitment to depositors,” which “relies on a combination of industry and taxpayer funds.”
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Under Greenspan’s Fed, a few months later, J. P. Morgan Securities, the investment banking subsidiary of J. P. Morgan & Company, became the first bank subsidiary to lead a corporate bond underwriting since the Great Depression.
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On October 10, 1989, it won a bid to issue a $30 million bond for the Savannah Electric and Power Company.
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Over the next decade, commercial banks would issue billions of dollars of corporate debt on behalf of energy and public utility companies as a result of Greenspan’s decision to open that door.
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A chunk of it would implode in fraud and default when Bush’s son, George W. Bush, became president in 2001.

Third World Debt Crisis Redux

It was fitting for US bankers to turn toward the pursuit of domestic corporate debt issuance, given that developing countries now faced plummeting economies because of the financiers’ overzealous lending practices.

The world’s largest banks had dumped about $1 trillion in aggressively extended “recycled” loans into the least developed (mostly Latin American) countries. They now faced a tipping point: either these nations would default on all debt or work out some kind of agreement whereby a portion could be forgiven or subsidized while they figured out how to repay the rest. The bankers wanted to take as few hits as possible by enlisting the support of sovereign governments and multinational entities.

Since 1982, Latin American countries had transferred $184 billion to creditor countries and private banks, severely crippling them economically. By 1989, the region’s GDP per capita was 8 percent lower than it had been in 1980.

Financial conditions bore a striking resemblance to the period between World War I and World War II, when US bankers stressed the need for some forgiveness, or at least restructuring, of Germany’s debt at the hands of the US government. Doing that had allowed Germany and the European countries to which it owed reparations money to remain strong enough to accept more debt at the hands of the private banks (which, as discussed earlier, had devastating consequences). Now the same banks were repeating the demands, though with less finesse than their 1920s predecessors, pressing the White House to forgive their loans to the third world so that private loans could remain.

At an internal March 7, 1989, White House policy meeting on international debt, Brady stated that the Treasury would “attempt to create new incentives for commercial banks and debtor countries to negotiate voluntary debt reduction.” The incentives included “changes in bank regulations” and “using IMF and World Bank resources to support debt securitization proposals.”
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The stipulations favored the private bankers.

In his March 10 speech to the Bretton Woods Committee’s conference on third world debt, sponsored by the Brookings Institution, Brady publicly unveiled his plan.
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He called it “a cooperative global program which places special emphasis on debt reduction and stronger efforts to attract private capital” to resolve the crisis.
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Days before his speech, three hundred people had been killed in Venezuela amid violent protests over IMF austerity measures.
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