All the Presidents' Bankers (74 page)

On March 1, 1999, Gramm released a final draft of the Financial Services Modernization Act of 1999, or the Gramm-Leach-Bliley Act, and scheduled committee consideration for March 4.
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A bevy of excited financial titans including Sandy Weill, Hugh McColl, and American Express CEO Harvey Golub called for “swift congressional action.”
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The Quintessential Revolving-Door Man

The stock market continued its rise in anticipation of a banker-friendly conclusion to the legislation that would deregulate their industry. Rising consumer confidence reflected the nation’s fondness for the markets and lack of empathy with the rest of the world’s economic plight. On March 29, 1999, the Dow closed above 10,000 for the first time.
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Six weeks later, on May 6, 1999, the Financial Services Modernization Act passed the Senate.
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It was not until that point that one of Glass-Steagall’s main assassins decided to leave Washington. Six days after the bill passed the Senate, on May 12, 1999, Robert Rubin abruptly announced his resignation. As Clinton wrote, “I believed he had been the best and most important Treasury Secretary since Alexander Hamilton. . . . He had played a decisive role in our efforts to restore economic growth and spread its benefits to more Americans.”
⁶⁵
Clinton named Larry Summers to succeed Rubin.

Two weeks later,
BusinessWeek
reported signs of trouble in merger paradise—in the form of a growing rift between Reed and Weill at Citigroup. As Reed said, “Co-CEOs are hard.” Perhaps to patch their rift, or simply to take advantage of a political opportunity, the two men enlisted a third person to join their relationship: none other than Robert Rubin.

Rubin’s resignation from Treasury became effective on July 2. At that time, he announced, “This almost six and a half years has been all-consuming, and I think it is time for me to go home to New York and to do whatever I’m going to do next.”
⁶⁶
Rubin became chairman of Citigroup’s executive committee and a member of the newly created “office of the chairman.” His initial annual compensation package was worth around $40 million.
⁶⁷
It was more than worth the “hit” he took when he left Goldman for the Treasury post.

Three days after the conference committee endorsed the Gramm-Leach-Bliley Bill, Rubin assumed his Citigroup position, joining the institution destined to dominate the financial industry. That
very same
day, Reed and Weil issued a joint statement praising Washington for “liberating our financial companies from an antiquated regulatory structure,” stating that “this legislation will unleash the creativity of our industry and ensure our global competitiveness.”
⁶⁸

On November 4, the Senate approved the Gramm-Leach-Bliley Act by a vote of ninety to eight.
⁶⁹
(The House voted 362–57 in favor.
⁷⁰
) Critics famously referred to it as the Citigroup Authorization Act.

Mirth abounded in Clinton’s White House. “Today Congress voted to update the rules that have governed financial services since the Great Depression and replace them with a system for the twenty-first century,” Summers said. “This historic legislation will better enable American companies to compete in the new economy.”
⁷¹

There were some who expressed concern about this giant step backward in banking legislation and what it could mean going forward. “I think we will look back in ten years’ time and say we should not have done this but we did because we forgot the lessons of the past,” said Senator Byron Dorgan, Democrat of North Dakota. Senator Paul Wellstone, Democrat of Minnesota, said that Congress had “seemed determined to unlearn the lessons from our past mistakes.”
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But these warnings were ignored in the truly irrational exuberance of the moment.

Several days later, a broad coalition of consumer and community groups called for an investigation into the fact that Rubin was simultaneously job hunting and lobbying for legislation that would benefit his eventual employer.
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Retired government officials were prohibited from lobbying their former agencies on behalf of an employer for at least one year after leaving public service. Yet only four months had elapsed between Rubin’s resignation and his appointment to Citigroup’s board.

Rubin claimed that his decision to take a job at Citigroup had nothing to do with any work he had done in the government. “During the time I was Treasury secretary, my sole concern was to produce the best possible public policy,” he said. “I could not have cared less how anyone in the industry reacted to my position or my views.”
⁷⁴

Regardless of whatever his internal thinking was, history shows that Rubin was the quintessential revolving-door man, cultivating the appearance of working for the people while angling for private gain. He was instrumental in destroying the last vestige of the Glass-Steagall Act, which had prevented big banks from gambling with other people’s money and government guarantees. His ideology would be at the epicenter of mega-meltdowns and bailouts to come.

Beneath the surface of a massive deregulation victory, Reed and Weill continued having a tough time dealing with each other. Reed resigned in February 2000, though he didn’t do too shabbily in the process. According to
Bloomberg,
“From 1997 to 1999, Reed received salary and bonuses totaling $23.4 million, and a retirement bonus of $5 million.”
⁷⁵

Inequality and Heady Stock Prices

Clinton epitomized the vast difference between appearance and reality, spin and actuality. As the decade drew to a close, he basked in the glow of a lofty stock market, budget surplus, and the passage of this key banking “modernization.” It would be revealed in the 2000s that many corporate profits of the 1990s were based on inflated evaluations, manipulation, and fraud. When Clinton left office, the gap between rich and poor was greater than it was in 1992, and yet the Democrats heralded him as some sort of prosperity hero.

When he had resigned in 1997, Robert Reich, Clinton’s labor secretary, said, “America is prospering, but the prosperity is not being widely shared, certainly not as widely shared as it once was. . . . We have made progress in growing the economy. But growing together again must be our central goal in the future.”
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Instead, the growth of wealth inequality in the United States accelerated, as the men yielding the most financial power wielded it with increasingly less culpability or restriction.

By 2003, the number of households living on less than $2 a day would skyrocket.
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In addition, as economists Emmanuel Saez and Thomas Piketty reported, during the Clinton administration, the incomes of the wealthiest 1 percent of Americans increased by 98.7 percent, while the bottom 99 percent increased by only 20.3 percent.
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The power of the bankers increased dramatically in the wake of the repeal of Glass-Steagall. The Clinton administration had rendered twenty-first-century banking practices similar to those of the pre-1929 Crash. But worse. “Modernizing” meant utilizing government-backed depositors’ funds as collateral for the creation and distribution of all types of complex securities and derivatives whose proliferation would be increasingly quick and dangerous.

Eviscerating Glass-Steagall allowed big banks to compete against Europe and also enabled them to go on a rampage: more acquisitions, greater speculation, more risky products. The big banks used their bloated balance sheets to engage in more complex activity, while counting on customer deposits and loans as capital chips on the global betting table. Bankers used hefty trading profits and wealth to increase lobbying funds and campaign donations, creating an endless circle of influence and mutual reinforcement of boundary-less speculation, endorsed by the White House.

Deposits could be used to garner larger windfalls, just as cheap labor and commodities in developing countries were used to formulate more expensive goods for profit in the upper echelons of global financial hierarchy. Energy
and telecoms proved especially fertile ground for investment banking fee business (and later for fraud, extensive lawsuits, and bankruptcies). Deregulation greased the wheels of complex financial instruments such as collateralized debt obligations (CDOs), junk bonds, toxic assets, and unregulated derivatives.

Glass-Steagall repeal led to unfettered derivatives growth and unstable balance sheets at commercial banks that merged with investment banks and at investment banks that preferred to remain solo but engaged in dodgier practices to remain “competitive.” In conjunction with the tight political-financial alignment and associated collaboration that began with Bush and increased under Clinton, bankers channeled the 1920s, only with more power over an immense and growing pile of global financial assets and increasingly “open” markets. In the process, accountability would evaporate.

Every bank accelerated its hunt for acquisitions and deposits to amass global influence while creating, trading, and distributing increasingly convoluted securities and derivatives. As the size of their books grew, banks increasingly provided loans or credit in exchange for higher-fee business, thereby increasing global debt and leverage. These practices would foster the kind of shaky, interconnected, and nontransparent financial environment that provided the backdrop and conditions leading up to the financial meltdown of 2008.

CHAPTER 19

T
HE
2000
S
: M
ULTIPLE
C
RISES
,
THE
N
EW
B
IG
S
IX
,
AND
G
LOBAL
C
ATASTROPHE

“That’s why I’m richer than you.”

—Jamie Dimon, JPMorgan Chase chairman and CEO, February 26, 2013
¹

A
T THE DAWN OF THE TWENTIETH CENTURY, THE POWERFUL
“B
IG
S
IX
”
BANKERS
used a major bank panic to help make the case for the establishment of the Federal Reserve, which could back them in future panics. Subsequently, during World War I, their alignment with Woodrow Wilson unleashed the current era of American financial and military dominance. This superpower position was solidified not just through America’s prowess in two world wars, but also through the intricate synergies between White House policies and Wall Street voracity, the nature of which remains tighter than in any other country.

Over the decades, the faces at the helm of America’s two poles of power changed (though certain bank leaders remained in their seats far longer than presidents), but the aspirations of the unelected financial leaders coalesced with the goals of the elected leaders—occasionally to the benefit of the US population, often to its detriment, but always to drive America’s particular breed of accumulation and expansionary capitalism.

In the new millennium, the most powerful banks were for the most part permutations of the original Big Six. Chase, J. P. Morgan, and Morgan Guaranty became JPMorgan Chase and Morgan Stanley; the National City Bank of New York and First National Bank became Citigroup. Goldman Sachs’s entry into the New Big Six stemmed from the close relationship between FDR and former Goldman senior partner Sidney Weinberg. Rounding out the New Big Six were Bank of America and Wells Fargo, which had broken into the East Coast clan over the years. But the chief bankers of the twenty-first century were more powerful than their ancestors by virtue of the sheer volume of global capital and derivatives they controlled (which could exceed a quadrillion dollars globally by 2022). In addition, as the power of the president receded relative to that of the bankers during the post-Nixon period, the financial sphere had become more complex and the potential risk to the global economy of banker practices had become limitless. These mercenary bankers operated in a manner lacking public orientation or humility, whereas in the past this might have at least been an after- or adjacent thought.

The Bush and Obama presidencies represented a climax in the development of relationships and codependent actions that began with Teddy Roosevelt. But whereas Roosevelt, Wilson, FDR, Eisenhower, and Johnson had nursed synergies that enabled useful public-oriented legislation, Bush and Obama had become followers and reactors to bankers’ whims. By the 2000s, bankers no longer debated economic policy in thoughtful correspondences with presidents or Treasury secretaries, as they once had. Alliances abounded, but their character was more perfunctory. Top bankers visited the White House and attended government functions (more frequently under Obama than Bush), but their efforts were recklessly self-serving and one-sided. It would be unimaginable for JPMorgan Chase chairman Jamie Dimon to spend months running a food drive for people in war-torn countries, as his Chase chairman ancestor Winthrop Aldrich had, or to negotiate disarmament plans, as another ancestor, John McCloy, had. These millennial masters of capital reigned over worldwide economies from atop a mountain of customer deposits, debt, intricate securities, and opaque derivatives. Their power dwarfed central banks and presidents. Banks were not just too big to fail; certain bankers were too influential to restrain.