All the Presidents' Bankers (70 page)

Clinton, like every good Democrat, campaigned publicly against the bankers: “It’s time to end the greed that consumed Wall Street and ruined our S&Ls in the last decade,” he said. But equally, he had no qualms about taking money from the financial sector. In the early months of his campaign,
BusinessWeek
estimated that he received $2 million of his initial $8.5 million in contributions from New York, under the care of Ken Brody.

“If I had a Ken Brody working for me in every state, I’d be like the Maytag man with nothing to do,” said Rahm Emanuel, who ran Clinton’s nationwide fundraising committee and later became Obama’s chief of staff. Wealthy donors and prospective fundraisers were invited to a select series of small meetings with Clinton at the plush Manhattan office of the prestigious private equity firm Blackstone.
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Pounding the Pound

That fall, while the US election season kicked into high gear, European markets fell in disarray. Europe was trying to combine its currencies into
one exchange rate mechanism, and the countries that met the criteria into one trade economy. As the date for integration neared, speculators rushed to make money off any uncertainty or national economic discrepancies. One casualty was Britain.

Smelling blood and profit, George Soros had heavily borrowed sterling (around 6.5 billion pounds) and converted it into deutsche marks and francs (the “stronger” currencies), a trade that would profit if the pound fell. By midmorning on September 16, 1992, pound selling was so intense that Bank of England officials were buying two billion pounds of sterling an hour to keep it stable. News programs “used words such as ‘slaughter’ and ‘disaster’ to describe the situation.”
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Soros reaped about $1.5 billion on the trade. Britain raised interest rates twice to defend the pound. But the international trading community slammed the currency anyway. The Bank of England took a $40 billion hit between August and September.
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As Soros wrote in his book
Soros on Soros,
he went for the “jugular” on the British currency.
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He decided raising rates to defend the currency was an “untenable move” because otherwise “ganging up on it” wouldn’t have pushed the pound out of the exchange rate mechanism.
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Such is the way that traders justified their attacks on policies and populations, though the “Black Wednesday” crash and pound devaluation caused loan shocks, housing price crashes, and small business closures.

Major banks, including Citicorp, J. P. Morgan, Chemical Bank, Chase Manhattan, and Bank of America, made an extra $1 billion from currency trading that quarter, in various “copycat” trades.
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It would not be the last time the big banks profited from the economic inequalities and the wrath of speculators seeking profits from currency trades among the European countries. But it would be a signature turning point, indicating the power that bankers and financiers had over national governments when they wanted to take out an economic “hit.”

The turmoil provided a minor but inconsequential diversion from the US election. On November 3, 1992, Clinton beat Bush and businessman H. Ross Perot of the Reform Party. Though Clinton received only 43 percent of the popular vote, he amassed 370 of 538 electoral votes.
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His presidency would prove manna for the big bankers.

Sandy Weill’s Killer Instinct

After Bush lost the election, Wendy Gramm brought the matter of deregulated commodities trading to a quick vote. On January 14, 1993, with two of the
five CFTC seats vacant, she voted with the majority in a two-to-one decision to exclude commodity contracts from relevant oversight.

As a result, companies like Enron and various Wall Street commodity-trading desks were waived from important disclosure requirements. Six days later, as Clinton took the presidential oath, Gramm resigned from her CFTC post. Five weeks later, Enron appointed her to its board of directors and audit committee.
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Times had truly changed. No longer were family ties and inbred relationships the key to internal ascension at the nation’s biggest banks; a tough predatory, more sociopathic nature was required and rewarded. Mental combat, voracious killer instincts, and acquisitions of other banks (with their share of citizens’ deposits) propelled the banking elite to the top of their field. Huge compensations followed.

Sandy Weill mastered the art of accumulation by acquisition. Weill had the rags-to-riches American Dream story down pat. He played stickball as a kid, supported the New York Yankees, and joined Bear Stearns as a clerk in 1955.
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Five years later, he and three of his friends formed a boutique firm called Carter, Berlind, Potoma & Weill.

While serving as chairman of this firm, subsequently renamed Cogan, Berlind, Weill & Levitt (after Arthur Levitt, who was appointed by Clinton as head of the SEC in 1993), from 1965 to 1984, Weill conducted fifteen key acquisitions. In 1979, the firm became known as Shearson Loeb Rhoades, and was the second largest US securities brokerage firm, after Merrill Lynch. In 1981, Weill sold Shearson Loeb Rhoades to American Express for $930 million in stock, and in 1984, he became chairman and CEO of American Express’s insurance subsidiary, Fireman’s Fund Insurance Company. While at American Express, Weill also began mentoring his protégé, Jamie Dimon. Weill resigned in August 1985 because of internal battles.
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In 1986, Weill assumed the helm of Commercial Credit, and then purchased Travelers Insurance and his old brokerage, Shearson. In 1988, he paid $1.5 billion for Primerica, the parent company of Smith Barney.

The following year, benefiting from the fallout of the Milken-Boesky junk bond scandal, Weill acquired sixteen of Drexel Burnham Lambert’s retail brokerage outlets.
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In 1993, Weill reacquired his old Shearson brokerage from American Express for $1.2 billion, and took over Travelers Corporation in a $4.2 billion stock deal.
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Weill wasn’t the only banker growing his powerful empire through acquisitions, but during the 1980s and 1990s, he was the best. Under Clinton, he’d find more influence, and a superior ally.

Robert Rubin Comes to Washington

Clinton had met President Kennedy while on a Washington field trip as part of a Boys Nation delegation when he was seventeen years old. He even got to shake Kennedy’s hand.
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Though he would follow in Kennedy’s distant footsteps, he would learn from Kennedy’s banker-alliance mistakes, and choose his friends wisely.

Clinton knew that embracing the bankers would help him get things done in Washington, and what he wanted to get done dovetailed nicely with their desires anyway. To facilitate his policies and maintain ties to Wall Street, he selected a man who had been instrumental to his campaign, Robert Rubin, as his economic adviser.

In 1980, Rubin had landed on Goldman’s management committee alongside fellow Democrat Jon Corzine.
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A decade later, Rubin and Stephen Friedman were appointed cochairmen of Goldman Sachs.
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Rubin’s political aspirations met an appropriate opportunity when Clinton captured the White House. On January 25, 1993, Clinton appointed him as assistant to the president for economic policy. Shortly thereafter, he created a unique role for his comrade, head of the newly created National Economic Council.

“I asked Bob Rubin to take on a new job,” Clinton later wrote, “coordinating economic policy in the White House as Chairman of the National Economic Council, which would operate in much the same way the National Security Council did, bringing all the relevant agencies together to formulate and implement policy. . . . [I]f he could balance all of [Goldman Sachs’] egos and interests, he had a good chance to succeed with the job.”
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(Ten years later, President George W. Bush gave the same position to Rubin’s old partner, Friedman.
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)

Back at Goldman, Jon Corzine, co-head of fixed income, and Henry Paulson, co-head of investment banking, were ascending through the ranks. They became co-CEOs when Friedman retired at the end of 1994.
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Those two men were the perfect bipartisan duo. Corzine was a staunch Democrat serving on the International Capital Markets Advisory Committee of the Federal Reserve Bank of New York (from 1989 to 1999). He would cochair a presidential commission for Clinton on capital budgeting between 1997 and 1999, while serving in a key role on the BorrowingAdvisory Committee of the Treasury Department.
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Paulson was a well-connected Republican and Harvard graduate who had served on the White House Domestic Council as staff assistant to the president in the Nixon administration.
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Despite the problems of late 1992, 1993 was a banner year for banks. The St. Louis Fed reported, “U.S. commercial banks had their best year since World War II” and “balance sheets of commercial banks expanded at the briskest pace since 1986.”
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Clinton’s presidency would provide further firepower.

Throughout the 1990s, building power was essential to American financiers, not just domestically. US bankers feared their control over global finance could be upended by the euro and, even more than that, by European moves toward banking deregulation. Europe’s Maastricht Treaty had been signed on February 7, 1992. Under the treaty, European Union members agreed to adopt the euro as their common currency, drop trade barriers, and create a common defense and foreign policy.

Separately, Europe adopted its own version of Glass-Steagall repeal. A Commission of the European Communities “Second Banking Directive” had taken effect in early 1993. The EU decided that allowing banks and securities companies to merge would strengthen their global position, exacting what it believed to be a first-mover’s advantage in financial warfare. American bankers would not be sideswiped in the global financial stakes, nor would Clinton’s government.

In order to compete, American banks had to grow domestically and internationally, in every manner—in terms of people’s deposits, their total assets, different kinds of services (from loans to complex derivatives deals), and more global expansion buoyed by financial liberalization stemming from US trade policy.

NAFTA and Statewide Deregulation

Clinton had championed the North American Free Trade Agreement—which would create a free-trade zone between Canada, the United States, and Mexico—from the moment he arrived in Washington. The administration felt it was critical not only for the US economy but for its strategic interests, especially in light of the economic consolidation in Europe. On January 1, 1994, NAFTA took effect.

For bankers, one element of NAFTA—that of lending—was of minor importance. First, they had already plowed the region with respect to lending, and that had resulted in a debt crisis. Second, as John Donnelly, Chemical’s country manager in Mexico, summed it up on behalf of the industry, “Our top priorities are trading, foreign exchange, and advisory work. Lending is probably our bottom priority.”

Bankers were more interested in structuring complicated cross-border derivatives deals that had more “margin” (or money) in them than straight loans.
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They prepared to rush into the area, readying applications to set up a bevy of local and regional banks to act as local financial “command stations” within months of NAFTA’s passage.
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Inside US borders, the Clinton administration concentrated on breaking barriers to bank acquisitions across state lines. Such deregulation would benefit the nation’s largest banks and most powerful bankers, who could then accumulate more capital (from people’s deposits in more states) to eat up their smaller competitors.

On September 13, 1994, by a vote of ninety-four to four, the Senate joined the House in passing the Riegle-Neal Interstate Banking and Branching Efficiency Act, which permitted full interstate banking, though it also limited the amount of deposits any one bank could have to 10 percent of the total deposits of the United States.
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It was the first major pillar of Clinton’s deregulation policy. White House documents oozed a self-congratulatory tone, noting that the act broke “fifteen years of legislative gridlock on the issue.” The Clinton administration “has accomplished what had eluded the Carter, Reagan and Bush administrations,” enthused an internal memo.
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All that was missing was a posh event to cap off this victory. On September 29, 1994, at an afternoon ceremony in the Cash Room of the Treasury Department, about 170 guests gathered to do just that. Treasury Secretary Lloyd Bentsen opened the festivities by introducing two key American bankers: Richard Kovacevich, president and CEO of Norwest Corporation (now Wells Fargo), and Thomas Labrecque, chairman and CEO of Chase Manhattan Bank.

Labrecque spoke of the broad economic benefits of interstate legislation—including, of course, the enhancement of international competitiveness. Kovacevich, whose bank enjoyed a large presence in the Midwest, considered the bill essential to weathering economic downturns.
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Deregulation was again equated with US strength.

Seated in the audience were two other bankers whose “leadership,” Clinton remarked, helped make the act “a reality”: Mike Halloran, general counsel of Bank of America, and Hugh McColl, chairman of NationsBank. McColl was an old friend of Clinton’s, whom Clinton considered “one of the most enlightened bankers in America.”
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Kenneth Cline, a reporter for
American Banker,
wrote, “The chairman and CEO of NationsBank Corp. put more effort into lobbying for the [Interstate Banking Act] than any other banker in the country.”
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