All the Presidents' Bankers (75 page)

By 2012, the Big Six held $9.5 trillion of assets, an amount equivalent to about 65 percent of US GDP.
²
Their combined trading revenues amounted to nearly 93 percent of the total trading revenues for all the other banks combined.
³
Systemic risk, even after the onset of the 2008 financial crisis and subsequent bailouts, had intensified. A rush of tepid reforms, from the Sarbanes-Oxley Act under Bush to the Dodd-Frank Act under Obama, were glorified for political purposes, but they were inconsequential considering the concentration of economic influence in the hands of a few megalomaniacs.

US bank chairmen’s rise through the ranks of international dominance had become akin to military strategy, whereas they had once operated in the realm of familial inheritance and lineage. To modern bankers, anything economically negative was a byproduct of chance or the business cycle, and anything positive was a byproduct of inherent genius—not the genius of collaboration, of which Louis Brandeis had spoken a century earlier, but of a more distinct sociopathic detachment from ordinary people. Bankers were ruthless in their egocentric competitiveness by the 2000s, and the effects were worse than decades earlier because they had witnessed the level at which they could rely on government subsidies and borrowed capital. The very threat of “catastrophic” consequences was enough to bring Treasury secretaries to their knees—literally. The Oval Office, no matter the party in charge, had become simultaneously fearful and blindly reverent of their power.

Bankers of the 2000s didn’t care who was president. They only needed the White House support in action, if not rhetoric. Into the 2000s, from Clinton to Bush to Obama, political parties and certain bank leaders changed. But the reckless greed animating the bankers’ mission did not, nor did their thirst for global supremacy. The crises of the 2000s were manifestations of the power bankers had captured by design, enabled by presidents unwilling to thwart or challenge it.

Bank Wars and Bank Leverage Intensify

Since the global competition argument had proved so successful for the Glass-Steagall abolitionists, Goldman Sachs chairman and CEO Henry Paulson adopted it on behalf of the investment bank community in one of the decade’s first financial hearings. Before Clinton left the White House, Paulson addressed Congress on the need for investment banks to increase their leverage. As former Treasury Secretary Robert Rubin had argued on behalf of the commercial bankers, Paulson stressed the need for investment banks to borrow more, and reserve less capital for emergencies, in order to “compete” with the world.

At a Senate hearing on February 29, 2000, Paulson urged the SEC to “reform its net capital rule” to allow the more “efficient use of capital.” He warned that existing capital constraints were the “most important factor in driving significant parts of our business offshore.” Reducing the limit of capital required to be reserved against risky trades, he reasoned, would enable American banks to “remain competitive with our foreign competitors’ risk-based capital standards.”
⁴
Implicitly, he was saying that US banks could “handle” the risk of their decisions, and thus should be allowed to take on more risk. It was a more complex version of the pre-Rubin competition argument. With structural deregulation complete, altering the very manner in which capital could be used was the next step toward national and international financial control.

The real problem Paulson and other investment bank titans faced was that they couldn’t rely on deposits and loans to back their bets, or so-called growth strategies. After the Glass-Steagall repeal, commercial banks augmented by investment banking and insurance arms could do just that. But stand-alone investment banks had three options: merge with a commercial bank and risk an internal political battle for control, find a way to make their capital stretch further, or do both. Investment banks like Goldman Sachs, Morgan Stanley, and Merrill Lynch fancied themselves more “innovative” and superior to commercial banks. Yet they faced a “competitive disadvantage” in the bank wars. Paulson wasn’t trying to empower the United States; he was trying to empower his firm.

Commercial bankers were increasingly entering investment bankers’ turf, engaging in trading, securities creation, and other investment banking activity, plus expanding. As a sign of this warrior state, by late 2000, Chase CEO William Harrison and J. P. Morgan CEO Douglas Warner had obtained Fed permission to merge their banks. The $28.6 billion stock deal closed on December 31, 2000.
⁵
This kind of acquisitive combat was characterized by terms like “clear winner” and “losers.” “There will be less than a handful of end-game winners,” proclaimed Harrison. “[JPMorgan Chase] will be an end-game winner.”
⁶

The value of JPMorgan Chase stock dove from $207 per share when the merger was announced to $157 per share when it closed. Four thousand people lost their jobs.
⁷
But this was not a concern of the Fed. A decade later, the value of JPMorgan Chase stock hovered around $40 a share. Value had not been created through a succession of highly compensated CEOs and chairmen or complicated deals—it had been destroyed.

This merger was particularly significant, for it represented not just a marriage of two major banks but the conclusion of the century-old House of
Morgan and Chase rivalry that shaped the nation’s financial landscape. Now, four of the oldest Eastern Establishment banks (Chase, J. P. Morgan, Chemical, and Manufacturers Hanover) were joined under one roof.

Winthrop Aldrich, who led Chase during the Depression and promoted the Glass-Steagall Act beside FDR, had chosen to retain the commercial bank side while spinning off the investment bank. He was posthumously awarded the whole shebang; commercial banking, investing banking, and the House of Morgan. His decision, which also had the effect of fostering US economic stability for decades, had paid off—but his prudence would not prevail.

9/11 Attacks Overshadow Enron Scandal

In late 2001, amid the fading light of Clinton’s rosy economy and an election result validated by the Supreme Court, President George W. Bush entered the White House. The true state of the economy remained hidden, teetering on a flimsy base of fraud, inflated stocks, and bank-created debt. The corporate and banking world appeared glorious amid so many mergers. But the bankers’ efforts to support these transactions would soon give way to a spate of corporate bankruptcies, the domestic complement to the havoc caused by the foreign debt crises of the 1980s and the currency crises of the 1990s.

As bankers bulked up their balance sheets with customer deposits in the post-Glass-Steagall merger period, they were able to secure more investment banking business, particularly from the energy and telecom sectors, in return for extending more credit, regardless of the integrity of the underlying collateral for those loans or their construction. Wall Street bankers helped clients mask their true debt levels through various means of profitable financial subterfuge. Some tricks were administered domestically and others internationally, such as the transactions Goldman Sachs created to hide debt for Greece so it could meet the EU’s criteria for accession.
⁸

But it was Texas-based energy-turned-trading company Enron that would emerge as the poster child for financial fraud in the early 2000s. Enron used the unregulated derivatives markets—and colluded with bankers—to create a slew of colorfully named offshore entities (or “special purpose vehicles,” in Wall Street jargon) where the company piled up debt, shirked taxes, and hid losses.

The true status of Enron’s fabricated books, and those of other corporate fraudsters, remained initially unexamined because of a more acute danger. The 9/11 attacks at the World Trade Center, blocks away from many of Enron’s trading partners, provided a temporary reprieve from probes.
⁹
Instead,
Bush called on bankers to uphold national stability in the face of terrorism. In an internal voicemail to Goldman employees the night of the attacks, CEO Henry Paulson urged the “people of Goldman Sachs” to stay strong.
¹⁰

On September 16, 2001, Bush took his opportunity to equate financial and foreign policy. “The markets open tomorrow, people go back to work, and we’ll show the world,” he said.
¹¹
To assist the bankers in this mission, Bush-appointed SEC chairman Harvey Pitt waived certain regulations to allow corporate executives to prop up their share prices as part of the plan to demonstrate national strength through market levels.
¹²
A month later, the spirit of unity was stifled. On October 16, 2001, Enron posted a $681 million third-quarter loss and announced a $1.2 billion hit to shareholders equity, due to an imploding pyramid of fraudulent transactions.
¹³

Bankers were potentially on the hook for billions of dollars at the hands of a client that had bulked up through bipartisan support. Aside from ties to Vice President Dick Cheney, Enron chairman Ken Lay had persuaded the Clinton administration to subsidize nearly $1 billion of its overseas projects. He had also persuaded big bankers to lend Enron big money. On October 25, 2001, Enron announced it had eaten through its $3.3 billion credit facility.
¹⁴

This prompted a group of JPMorgan Chase and Citigroup bankers to travel to Houston, where they attempted to fashion a last-minute merger deal with Dynegy, a Texas-based electric utility company. Dynegy agreed to buy Enron for $8 billion and provide it with $1.5 billion cash up front until the deal closed. That meant it would be supporting bank creditors.
¹⁵

But on November 8, 2001, the credit rating agency Moody’s informed Enron it would drop its rating below investment grade.
¹⁶
The move could hurt the merger and Enron’s credit-paying ability. Neither possibility appealed to the bankers. Moody’s received numerous calls from the financial elite, including Robert Rubin of Citigroup (who had once been offered an Enron board position by Lay), Michael Carpenter of Salomon Smith Barney, and William Harrison of JPMorgan Chase.
¹⁷
They assured Moody’s that they wouldn’t back out of the merger. They needed it more than Enron.
¹⁸

Citigroup was particularly exposed to possible losses. That day, Rubin called Peter Fisher, then undersecretary of the Treasury for domestic financial markets. He suggested Fisher intervene to keep Enron’s rating up. With measured words, Rubin later explained that he said that it was “probably” a “bad idea” for Fisher to pressure the rating agencies to delay downgrading Enron, and said he had only asked what Fisher “thought of the idea.”
¹⁹
In January 2003, a Senate committee deemed Rubin’s role in proposing the “idea” both legal and insubstantial.
²⁰

Rubin’s call didn’t change the outcome anyway. On November 28, 2001, Dynegy backed out of the merger.
²¹
Enron filed for bankruptcy on December 2, 2001, becoming the country’s largest bankruptcy at the time.
²²
Its original
Chapter 11
filing documents listed the twenty largest creditors, including Citigroup’s banking unit, Citibank, at $3 billion and Chase at about $2 billion.
²³

Corporate Corruption Unleashed

Amid this financial turmoil, Bush was narrowly focused on retaliation for 9/11. On January 10, 2002, he signed a $317.2 billion defense bill.
²⁴
In his State of the Union address, he spoke of the Axis of Evil, fighting the growing recession, and creating jobs, not of Enron or the dangers of Wall Street’s chicanery.
²⁵

Corporate bankruptcies hit new records in 2001 and again in 2002, with fraud playing a central role.
²⁶
Public opinion on the matter was so bad that in June 2002, Paulson endorsed the SEC’s demands for more funds, and said publicly, “I cannot think of a time when business overall has been in such low repute.” He went on to criticize US accounting standards for being so complex and “rule-based” that they were “leaving room for manipulation by unscrupulous management.”
²⁷
Rather than blame lax accounting standards for
enabling
manipulation by nefarious bankers, he blamed
too many
rules for allowing inappropriate conditions to exist. Thus, for Paulson, noninvestment bankers were the problem, not investment bankers.

About a month later, telecom giant WorldCom was found to have embellished its books by $3.7 billion (a figure that escalated to $11 billion worth of puffed-up statements.
²⁸
) It supplanted Enron as America’s biggest fraud—the firm’s subsequent bankruptcy kicked up a scandal surrounding its main banker, Citigroup’s Sandy Weill, and Jack Grubman, Weill’s highly compensated analyst, who touted WorldCom’s stock while it was crashing. WorldCom’s stock dove from $64.5 to $.09 per share.
²⁹
Workers’ pensions took a $4.4 billion hit.
³⁰
The firm ultimately paid a $750 million federal fine and a $2.25 billion civil penalty, and CEO Bernie Ebbers was slapped with a twenty-five-year prison sentence.
³¹
The frauds were so obvious that Bush didn’t consider bailouts, inadvertently forcing banks to deal with their own losses as they regrouped for fresh opportunities.

Bush Takes Action

Due to public wrath about corporate crime and the possibility that it would become an election issue—as well as the cozy relationship between the White
House and Ken Lay—Bush took another tack. At a March 2002 conference he called for regulations to be “clearer” (though not increased) and penalties for wrongdoing be “tougher.”
³²