All the Presidents' Bankers (78 page)

The next day, the New York Fed authorized a loan of up to $85 billion to AIG (the size of its margin calls by the big banks) in return for a 79.9 percent equity interest. On October 8, it provided an additional $37.8 billion in liquidity against securities. Total AIG subsidies reached $182 billion.
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The main US recipients of AIG’s bailout were strongly allied firms: Goldman Sachs with $12.9 billion, Merrill Lynch with $6.8 billion, Bank of America with $5.2 billion, and Citigroup with $2.3 billion. Some foreign banks that had trading relationships with them, including Société Générale and Deustche Bank, got about $12 billion each. Barclays got $8.5 billion, and UBS got $5 billion.
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Lehman crashed. Merrill and AIG were saved in two different ways. The selective bailout behavior echoed that of the Panic of 1907, when the big New York bankers let the Knickerbocker Trust Company—with which they had fewer personal and financial ties—tank but got the government involved to help save the American Trust Company. The bankers with the strongest political alliances needed AIG to survive. And it did.

Bankers’ Bailouts and Citizens’ Pain

On September 18, 2008, Bush told Paulson, “Let’s figure out the right thing to do and do it.” He later wrote, “I had made up my mind: the US government was going all in.”
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The Big Six firms (and marginally other institutions) were subsidized by a program designed by Bernanke, Paulson, and Geithner. The trio deemed the
bailout and bank subsidization as a matter of public interest, essential steps to divert a Great Depression. But the main recipients were the big bankers, not everyday Americans, who were unable to renegotiate their mortgage loans as easily as the bankers received backing.

An initial rejection of the bailout package provoked a 778-point drop in the Dow on September 29, 2008. Paulson had dramatically gotten down on one knee three days earlier to beg Democratic house speaker Nancy Pelosi to get her party to pass the bailout. Congress bowed to this chief banker on behalf of all his former colleagues and compatriots, and approved a $700 billion congressional bank bailout package. The Troubled Asset Relief Program, also known as TARP, was part of the Emergency Economic Stability Act of 2008, signed by Bush on October 3.
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Considered by much of the media and Congress as the total bailout, it comprised just 3 percent of the full bank bailout and subsidization program. According to Bush, “TARP sent an unmistakable signal that we would not let the American financial system fail.”
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The market rose after the intervention was announced, as it had temporarily done in October 1929. But this time, intervention came from the government—not from the bankers. The Dow shot up 936 points, the largest one-day rise in stock market history. The euphoria would be equally illusory and temporary.

As it had during the days of the original Big Six, the bankers’ unruliness had crippled the real economy. By October 30, 2008, US real GDP fell at a 0.3 percent annual rate, the second negative quarter in a row.
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Housing prices plummeted. Foreclosures and unemployment escalated.

Over the next few months, Bank of America, Citigroup, and AIG needed more assistance. And over the year, the Dow lost nearly half its value. At the height of the bailout period, $19.3 trillion of subsidies were made available to keep (mostly) US bankers going, as well as government-sponsored enterprises like Fannie Mae and Freddie Mac. The Big Six received a combined $870 billion in bailouts, not including multitrillion-dollar subsidies from various Federal Reserve lending facilities and other guarantees.
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But first, an election loomed.

Obama: The Preferred Choice for Bankers

Bankers believed Democratic candidate Barack Obama would help them more than his opponent, John McCain—particularly at Goldman Sachs, Obama’s largest corporate contributor for the 2008 election.
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Contributors Goldman Sachs and JPMorgan Chase ranked sixth and seventh, respectively, throughout Obama’s political career.
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Plus, Obama had Robert Rubin in his
corner. According to investigative journalist Greg Palast, billionaire Penny Pritzker had introduced then-Senator Obama to Rubin at a Chicago “ladies who lunch” event. Later, Rubin opened the “doors to finance industry vaults” for Obama.
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Obama raised more than three times as much from the banking and finance industries during the 2008 campaign as McCain.

In classic Democratic Party fashion, Obama promised to “rein in Wall Street forces and their risky practices” while taking their contribution money. (Republicans tend to take the money without such promises.) Obama won in a decisive victory. Bankers would visit the White House more frequently than they did when his predecessor was in office, and his administration, in partnership with the Federal Reserve, would continue subsidizing bankers while talking up the importance of jobs creation.
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At the end of 2008, liquidity remained tight and bankers still couldn’t move their worst assets. So on December 16, 2008, the Federal Reserve cut rates to an all-time low of 0 percent, down from 1 percent and 0.25 percent earlier in the year, thereby initiating Bernanke’s zero-interest rate policy. No American catastrophe since the Fed was created had evoked such a policy. Even during World War II, rates didn’t remain as low for as long; this was a true reaction and capitulation to financial warfare.

On January 9, 2009, shortly before Obama took office, Rubin announced his retirement from Citigroup. In a letter to Citigroup CEO Vikram Pandit, Rubin wrote, “My great regret is that I and so many of us who have been involved in this industry for so long did not recognize the serious possibility of the extreme circumstances that the financial system faces today.”
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At the time, Citigroup was existing on $346 billion in various federal subsidies, including a $301 billion asset guarantee and $45 billion of TARP.
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Rubin remained cochair of the Council on Foreign Relations.
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Upon taking office, Obama called Wall Street bankers’ $18.4 billion in 2008 bonuses “shameful.” “There will be time for them to make profits, and there will be time for them to get bonuses,” he said at an Oval Office appearance. “Now’s not that time. And that’s a message that I intend to send directly to them.”
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The message might have gotten lost in translation. For 2009, cash bonuses rose 17 percent over 2008, to $20.3 billion, on the back of Washington-created, taxpayer-provided subsidies, despite a crippled economy.

Obama’s Favorite Banker

Obama’s economic policy appointments could have been made by Bill Clinton. (Maybe they were; as I explained in the Preface, Obama’s records
will not be fully revealed for decades.) Clinton’s selections had all promoted banking deregulation during his presidency.

For Treasury secretary, Obama chose New York Fed chief and bailout architect Tim Geithner. Larry Summers would be chief economic adviser. William Dudley, former Goldman Sachs CEO and chairman of the New York Fed’s board of directors, assumed Geithner’s slot.
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Rahm Emanuel, having served time as an investment banker after his years working in the Clinton administration, was selected Obama’s chief of staff.

Geithner’s contact with bankers intensified in his early months as Treasury secretary, as bankers remained scared. Between January 2009 and March 2010, he spoke with Lloyd Blankfein at least thirty-eight times, more than with any congressperson. (Blankfein visited the White House fourteen times in 2011.) During his first five months in office, Geithner communicated with elite financial CEOs at least seventy-six times.
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As for the new king of Wall Street, Dimon had established ties with the new president years earlier. According to the
New York Times,
Dimon first met Obama during his 2004 Senate run “at a living room discussion with about 10 pro-business Democrats,” and donated the maximum of $2,000 to his campaign.
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Dimon had spent several years in Obama’s hometown of Chicago while running Bank One (Obama was a state senator at the time). Dimon had also contributed to the campaigns of Obama’s first chief of staff, Rahm Emanuel. In addition, both were Harvard grads: Dimon obtained an MBA in 1982, and Obama graduated with a JD in 1991 (Obama became the eighth president to have graduated from Harvard).
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In July 2009 the media dubbed Dimon Obama’s “favorite banker.” Dimon made at least sixteen trips to the White House and met at least six times with Obama between February 2009 and March 2012, including thirteen trips in 2011.
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Obama also kept about $1 million of his own money parked at JPMorgan Chase Private Client Asset Management.
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During the fall of 2009, with the economy still a shambles, Obama levied harsh words on the bankers’ role in the financial crisis at Federal Hall on Wall Street.
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Up to that point, top bankers had visited the Obama White House twelve times. By 2012, the figure had risen to fifty-nine. Obama’s words didn’t change alliances; instead, the frequency of interactions appeared to have increased.

Crisis and Popular Anger

As Obama entered his second year, the economy remained a mess. Absent the bankers’ desire to renegotiate mortgages for their hurting customers, nearly
five million home foreclosures had been initiated since the beginning of 2008. Standing at 7.9 percent when he took office, the official unemployment rate shot as high as 10 percent, though the figure rose to around 17 percent when actual unemployment and underemployment were considered.
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Meanwhile, the new Big Six consumed cheap capital, parlaying it into stocks and derivatives as opposed to deploying it to restructure the population’s debt or issue small business loans to stimulate the economy.
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In August 2009, Obama renominated Bernanke, whom he called the “architect of the recovery,” as Fed chair. In January 2010, the Senate reconfirmed him by a vote of 70 to 30, the lowest vote for a Fed chair since the Fed was created. The bankers knew that with Bernanke’s reconfirmation, their support would continue.
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The $700 billion TARP package accounted for about 3 percent of the government’s and Federal Reserve’s creative largesse during the Bush-Obama presidencies. More than $19 trillion in bailouts and subsidies had been deployed at the height of the crisis to bolster the industry and its toxic assets before various aid avenues were eventually closed. Of that figure, the New York Fed and Federal Reserve made available $8.2 trillion in loans and asset guarantees; the Treasury Department provided $6.8 trillion in subsidies and bailouts; and the FDIC initiated a $2.3 trillion liquidity guarantee program to keep the wheels of bank capital greased. Jointly, the Fed and Treasury agreed to buy $1.3 trillion of assets, a figure that grew as the Fed expanded its “money-printing,” bond-buying program. The most powerful bankers left the repercussions of their irresponsible and fraudulent practices behind them, save for some fines.
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In February 2010, Obama told
Bloomberg Businessweek
that he didn’t begrudge Blankfein and Dimon their $17 million and $9 million bonuses (respectively), saying, “I know both those guys, they are very savvy businessmen.” Indeed, they were savvy and politically aligned enough to beat their competitors to recovery. Wall Street posted its second best year in its history in 2010.
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Globally, economic conditions were abysmal. Throughout the Middle East and parts of Europe, youth unemployment topped 25 percent; in some places, it was double that figure.
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Country after country, from Greece to Spain to Ireland, struggled under immense debt and crippled economies. Governments pushed through austerity measures in conjunction with the supranational banks to make up for the debt incurred by losses from toxic securities, in the wake of a fraudulently stimulated global housing market. The general rage pushed people to the streets, from demonstrations in the Middle East and Europe to the US-launched Occupy movements, where anger was aimed at the bankers and the politicians who favored them.
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Dodd-Frank and the Changing Nature of Power

The Obama administration’s response to the crisis was the Dodd-Frank bill, an 848-page colossus also known as the Wall Street Reform and Consumer Protection Act.
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Despite its girth and public-oriented title, it did not alter the banking landscape. It did not separate banks’ speculative and derivatives-churning abilities from their federally backed deposit side. And it did not remove a single financial conglomerate “service” or practice, as Glass-Steagall had in 1933. A litany of correspondence between lawmakers and lobbyists did nothing to ensure that another meltdown would be avoided.

The bill was riddled with holes punched out by bank lobbyists with Washington connections: forty-seven of fifty Goldman Sachs lobbyists had previously held government jobs (or were “revolvers”). In addition, forty-two of forty-six JPMorgan Chase lobbyists in 2010 were revolvers, as were thirty-five of Citigroup’s forty-six.
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President Obama signed the bill into law on July 21, 2010.

Beneath the surface, a critical presidential power shift underscored the political theater and the partisan vote on the Dodd-Frank Act. In the 1930s, the Glass-Steagall Act had been “swiftly approved by both houses of Congress” with a resounding bipartisan vote.
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Sixty-six years later, the act that repealed it passed the Senate by another overwhelmingly bipartisan vote. In other words, FDR passed regulation across party lines that stabilized the banking sector with the support of certain major bankers and the population, and Clinton passed deregulation across party lines that destabilized the global financial arena with the support of (effectively) the same bankers.