All the Presidents' Bankers (68 page)

The bankers battened down their hatches and refused to respond to federal threats or promises of rewards for “good behavior.” As the World Bank said in its annual report, “the hard reality is that less debt has been forgiven in 1989 than in 1988, and that the amount of resources marshaled to finance debt relief is pitifully small.”
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Economic Suffering

As the 1980s drew to a close, unemployment soared and the economy limped, just as they had when the decade began. The Brady plan turned out to be a bust; the bankers ignored the senators’ pleas, as Reed, Preston, and Weatherstone effectively forced the government to back them. The glut of debt that the banking sector had spewed into the world absent full repayment left them in the position of needing to find another “game.” While pundits and economists debated the impact of deficits and tax policy on the general economy, it remained the bankers’ actions that had driven an immense bubble of bad debt domestically and internationally, with sizes that far overshadowed the US deficit.

As former undersecretary of the Treasury Paul Craig Roberts had warned Don Regan in August 1986, and later wrote in a
Wall Street Journal
piece on October 28, 1986, “A stronger force than tax cuts was operating on U.S. Capital outflows.”
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Roberts noted that “a fundamental change in the lending practices of U.S. banks” was the critical factor. “Money-center banks were heavy lenders to the Third World, expecting rising commodity prices such as oil and copper to service and repay loans. When [price] inflation collapsed, the bankers realized that they had overexposed their capital and stopped lending.”
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The deluge of bank debt combined with recessionary economies inevitably accelerated economic suffering throughout the world. In the United States, 614 out of 3,200 thrifts had collapsed by the end of the 1980s (the most
since the Great Depression), costing the US government more than $85 billion, as larger banks swept in to pick up their remains and enhance their own customer base in the process. Another 429 would fail during the first half of the 1990s, bringing the total to 1,043 failures.
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Moreover, the federal government and Fed response to the third world debt crisis, S&L bailout, and 1987 stock market crash was to subsidize the banking system with federal and multinational money. The bankers had succeeded in pushing the presidency to back losses domestically and from a foreign lending perspective in ways that would have been embarrassing to the bankers of an earlier era. They had succeeded in privatizing their profits and socializing the costs of failure. This financial policy had officially become US domestic and foreign policy.

Bank leverage ratios and risk-taking decisions, already growing, increased exponentially as a result, only to be later compounded by derivatives and other complex financial instruments. Bankers now wielded enormous power to alter the economic and financial nature of the world in more extreme ways, and with more money at stake, than ever before. No longer was there even a pretense of alignment with domestic concerns or collaboration with the White House, except as fodder for arguments about why the biggest banks should be allowed to increase in size. If anything, it was the other way around. Financial voracity and the bankers’ quest for power, enabled by an increasingly subordinated Washington, had trumped reason and would continue to do so in the 1990s.

CHAPTER 17

T
HE
E
ARLY TO
M
ID
-1990
S
: K
ILLER
I
NSTINCT
, B
ANK
W
ARS
,
AND THE
R
ISE OF
G
OLDMAN
S
ACHS

“Some men know the price of everything and the value of nothing.”

—Oscar Wilde

T
HE 1990S WERE A DECADE THAT RAN ON TECHNOLOGICAL STEROIDS, FROM THE
sheer speed at which financial transactions took place to the dot-com mania that Federal Reserve Board chairman Alan Greenspan dubbed “irrational exuberance.”
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With the Cold War over, America lacked a great external enemy. There was no major national distraction to divert the tide of the global dispersion of US financial power, no public interest to protect against outside enemies in reality or in rhetoric. There were no restraints on the drive for self-interested accumulation or the final dismantling of banking rules in the name of
American competitiveness. The moneyed elites were now full-fledged gladiators with no business need for a social compass but every need for a warrior spirit. The men running Wall Street didn’t come from families with famous names on the high-society circuit; they were men who fought for power in their firms and around the world without such attachment to lineage.

The conundrum for these bankers was that Europe’s banks had reemerged as true challengers thanks to the global expansion of firms like UBS in Switzerland, Deutsche Bank in Germany, and Barclays in Britain. Fearful of losing their position in the hierarchy of financial influence, US bankers demanded domestic deregulation with increasing intensity—while embracing far riskier practices.

It was America versus the world, only now financial products and more substantive mergers and derivatives trading augmented the spread of political doctrines. The assumption was that “democratic capitalism,” the ideology that merged US political goals with financial ones, had successfully defeated more “socialistic” international commerce, trade, and business doctrines. The proof was increasingly evident in the extreme divergence of US CEO pay versus that of average American workers and their global counterparts. Big balance sheets bolstering the most powerful US banks were as important as large weapons arsenals. In this war of international opportunism, the American government remained keen to aid and invest. As President Bush’s policies gave way to Clinton’s, the White House yielded to more bankers’ demands—just as they had in the 1980s but with a much greater degree of completion and higher global stakes.

The Continuing S&L Crisis

In May 1990, Chase chairman and CEO Willard Butcher met with President Bush to discuss his views about America’s global competitive position. Butcher and his international advisory committee saw real opportunity to finance reconstruction efforts in post-Communist Eastern Europe, which would augment their other international business. Butcher wanted to ensure that Bush was on board with the foreign policy initiatives that would be necessary to complement his plan, which entailed supplementing standard lending with more complex deals across borders, including the use of derivatives markets.

Bush was receptive. As Butcher later wrote him, “You are just as we think of you: warm, articulate, committed and concerned not only about the American people but about the state of the world.”
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President Bush didn’t respond personally. With lobbyists and lawyers inserting themselves into the political-financial complex, the personal connections characterized by gestures like Johnson’s thank-you phone calls and Eisenhower’s carefully crafted letters had become relics of another time.

Instead, Roger Porter, assistant to the president for economic and domestic policy, replied that Bush “enjoyed the session very much.”
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But that was all that the Chase bankers needed to push forward; it had become enough that agendas were “understood” among all parties.

On the domestic front, by mid-1990 Bush’s S&L bailout plans were hitting severe legal speed bumps. Wall Street firms eyed the legal circus like vultures before swooping in for a kill. In a May 7 letter to C. Boyden Gray, counsel to the president, John Aldridge, a prestigious attorney who advised the Bush administration on failed S&L asset liquidations—and represented an array of big bank clients on the private side—remarked, “We are going to have to enlist the aid of the commercial banking industry in order to spread this problem across a base sufficiently broad to deal with the problem.”
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Aldridge submitted a bid to the Resolution Trust Corporation on behalf of his clients, who sought to act as financial advisers on the nonperforming assets. “If our bid is accepted,” he wrote Gray, “We hope to be of assistance to the RTC in engineering the ‘early victory.’”
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There was no altruism in the bankers’ intentions. The assistance was in fact a play for buying cheap assets that could be repackaged and sold to investors at substantial profits. “Victory” meant optimum wealth extraction in the process.

Both investment and commercial banks viewed the episode as a means to purchase bargain-basement S&L assets and restructure them into new securities imbued with profit. The backing of the RTC, which carried with it the implicit guarantee of the US government, rendered the prospect less risky and more lucrative.

Meanwhile, lawsuits and indictments were piling up, including against President Bush’s son.
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The Justice Department flexed its judiciary muscle against banks run by less powerful men than those at the helm of the major Wall Street firms. From October 1988 to August 1990, the department filed 274 indictments involving 403 defendants. Of those, 316 were convicted for S&L frauds or losses involving sums of more than $100,000.
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The massive cleanup operation of the S&Ls, however, neglected to serve as a warning bell for looming precarious practices.

The New Game in Town

The S&L trouble sparked a broader credit crisis and recession. On September 21, 1990, Chase Manhattan took a $1 billion hit and fired 5,000 employees because of real estate and emerging market fallout.
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Manufacturers Hanover cut 1,400 workers. Citibank reported a $457 million loss for 1991.
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Citibank chairman Reed admitted later that “a horrible real estate portfolio and inappropriate capital and reserves” caused the situation.
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But he maintained his opposition to any corrective regulations.

Like other banks, Chase was also reeling from property-related losses, including on a massive set of loans to Donald Trump for which Chase, Citibank, and others had considered concocting a bailout to provide temporary forgiveness of Trump’s interest payments.
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Troubled LDC loans rounded out Chase’s problems from overzealous debt extensions, though these did not receive the same potential support as Trump.
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Thomas Labrecque, the newly selected chairman and CEO of Chase—who had leapfrogged over a bunch of men when he replaced Butcher—also came out gunning against other regulations.
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He wanted banks to be permitted to engage in more nonbanking activities. This, despite the crushing blows the industry was taking for various maneuvers that had already pushed such boundaries.
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Labrecque added his own flourish to the global competition arguments that influential bankers were using to promote deregulation. On April 3, 1990, he testified before the Senate Banking, Housing, and Urban Affairs Committee that “US banks have lost market share in the core businesses of banking, are less efficient, more risky, and less capable of serving the needs of our customers and the nation’s economy.”
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Something had to be done regarding the breadth of banking services offered under one roof—for the sake of America!

The congressional committee was debating the so-called modernization of the financial services industry, which in practice would mean breaking down remaining barriers separating deposits and loans from securities creation and trading activities within the same institution. This also meant allowing commercial banks to expand into nontraditional banking activities, such as insurance provision and fund management. Key testimony came from Robert Downey of Goldman Sachs, also representing the Securities Industry Association, and Labrecque, also representing the American Bankers Association and the Association of Bank Holding Companies.
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These hearings became showcases for the competition arguments of the biggest bankers, but they were not the only means by which the bankers
sought to capture power over the political system. Their forays before various committees, supported as they were by presidential leanings, were more aggressive and demanding than they had been in the past, when they had to play defense in response to concerns about the industry. Another piece of the deregulatory puzzle was critical to their ambitions: reentering the stock market business so that commercial bankers could issue and trade shares for their corporate clients, as they had in the 1920s. Later that fall, on September 20, 1990, the Federal Reserve Board approved J. P. Morgan & Company’s application to trade corporate stocks. In doing so, the Fed dismantled the element of the Glass-Steagall rule that separated banking and securities businesses.
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