All the Presidents' Bankers (79 page)

In contrast, Dodd-Frank passed along party lines. Perhaps the 60 to 40 Senate vote showed that Obama was incompetent as a politician. Or maybe it showed that the power of the presidency to pass such legislation, even in the wake of a historic crisis, had waned considerably—or a combination of the two. Obama had no power to force a restructuring of Wall Street, nor did he appear to try. His speeches promoting sweeping reform were empty words uttered with practiced elocution, absent any of the details that FDR had explained so carefully to the nation. Not only that, Obama couldn’t persuade any politician across the aisle to support the act he promoted, even though it was toothless. He aligned with Wall Street in a haze of denial but did not, or refused to, consider the potential impact of promoting its desires. Worse, his spin on reform was accepted by most of his party and the press, though it
paled in comparison to the real reform of the 1930s, which had kept extreme financial crises at bay for the better part of the century.

According to Geithner, the Dodd-Frank Act represented the “most sweeping set of financial reforms since those that followed the Great Depression.”
¹⁴⁸
But that meant nothing either. The act left the Big Six bankers in a more influential position than before the Crash of 1929. It did nothing to alter their power and control; they held a record 60 percent of US deposits, consolidated during the fall of 2008 at the bequest of their Washington allies, the largest concentration of capital in US history.

The opportunity for real Glass-Steagall-type reform—the kind that revises the entire financial landscape and diffuses at least some of the power of private bankers to hurt the population—was blown again. But the entire exercise was as wrongly viewed as an unmitigated, world-saving success by Obama and his team as it was castigated by the Republicans, the party that had initiated the Pecora hearings, which revealed the extent of the damage unconstrained bankers could bring on the overall population. Meanwhile, after Lehman Brothers went bankrupt and Bear Stearns and Merrill Lynch were acquired by JPMorgan Chase and Bank of America, the largest banks had become bigger, and their leaders more powerful than ever before.

On the Campaign Trail

In the absence of true reform, an abundance of national debt was issued to bolster the banking system. From the beginning of 2009 through the end of 2011, Geithner added $2.4 trillion of US debt, but there was more to come.
¹⁴⁹
The US debt-to-GDP ratio rose to nearly 100 percent and would surpass 104 percent by 2012.
¹⁵⁰
The United States lost its triple-A debt rating in August 2011 amid painful equivocation on Capitol Hill, none of which addressed how much of that debt was created by the Treasury, punted through the banks, and landed on the Fed’s books as requested by its member banks. The country’s economic future and borrowing power had been compromised by the bankers’ actions with the advocacy of the White House, and no one said a word about it. Blame fell on the “weak economy,” not the explicit role of bankers in depleting it.

By 2011, JPMorgan Chase had surpassed Bank of America as the largest US bank, with nearly $4 trillion in assets.
¹⁵¹
Somewhere, the ghosts of the men who had traveled to Jekyll Island a century earlier were chuckling. Jamie Dimon had secured the financial crown that had belonged to J. P. Morgan without any of the family pedigree or style. He was placed on
Time
’s list of the hundred most influential people in 2006, 2008, 2009, and 2011.
¹⁵²

In the wake of the crash, Dimon remained the most vocal advocate of status quo. At a March 30, 2011, US Chamber of Commerce address, he warned that the “best system in the world” should not be destroyed by too many regulations. Imposing higher capital requirements on US banks, he said, would be “putting the nail in the coffin.”
¹⁵³
Global competition remained useful as an argument for less regulation.

By early 2012, Obama had reentered heavy campaign mode. Goldman Sachs had uncharacteristically miscalculated Obama’s chances and flipped to backing GOP challenger Mitt Romney.
¹⁵⁴
But knowing the stakes were high, Obama made sure to praise his old favorite banker on
The View
—that beacon of high-quality political discussion—calling Dimon “one of the greatest bankers we have.” In a sign of his own rising power in the political-financial game, and the shift away from having to maintain tight alliances with the president, Dimon did not contribute to Obama’s 2012 campaign.

On the campaign trail, Obama avoided addressing the first major post-Dodd-Frank blow-up, known as the “London Whale.” On April 6, 2012, JPMorgan Chase’s London office reported that its bad bet on corporate spreads through the derivatives market could cost the firm at least $5.8 billion.
¹⁵⁵
(Tony Blair was still on the firm’s payroll at the time; he received a $6.3 million mortgage loan from JPMorgan Chase in September 2012.
¹⁵⁶
)

Two months later, at a Senate hearing on the transaction, Dimon testified with the bored and sullen face of a teenager who crashed the family car and didn’t want to deal with his parents’ wrath. The senators treated him with kid gloves—they even asked Dimon for advice on running the economy.
¹⁵⁷
Yet when Dimon gave a speech at the Council on Foreign Relations in October 2012, he complained about his ordeal, saying, “When people do commit, you know, not fraud, but, you know, they make mistakes, you’re attacked by seventeen different agencies as opposed to, you know, in the old days, it would be the one who’s responsible for it.”
¹⁵⁸
He added, “[We] went through ’06, ’07, ’08, ’09, 2010, 2011, 2012, never lost money in a quarter. So we made a stupid error. I mean, if an airplane crashes, should we stop flying all airplanes? . . . [O]nly when I come to Washington do people act like, you know, making a mistake . . . should never happen.”
¹⁵⁹

A month later, Obama won his second term as president. The perils of the financial crisis were tidily swept under the rug as the president and his staff issued overly optimistic recovery claims. The Fed inhaled Wall Street’s assets and paid banks interest on their excess reserves, while keeping rates at zero. Several months later, the London Whale incident was repurposed and blamed on a decimal-point error in JPMorgan Chase’s evaluation reports, a
mistake for which Dimon emerged inculpable. His shareholders ensured he retained both his chairman and CEO roles. Obama and Dimon would continue their reigns and mutually beneficial alliance.

The Justice Department Goes Soft on Bankers

Many congressional hearings and investigations have probed the bankers’ practices since the crisis that began in 2007. Similar to the Pujo hearings after the Panic of 1907, though, they have resulted in nothing material against the bankers with the strongest political alliances. And unlike the impact of the 1932–1933 Pecora Commission hearings, no substantive regulatory act has passed to significantly alter their behavior. Though banks would end up paying various fines and legal settlements, that amounted to fractions of pennies on the dollar relative to their immense asset bases. Their structure and influence remained unaltered.

As of September 1, 2013, the SEC reported it had levied just $1.53 billion in fines and $1.2 billion in penalties, disgorgement, and other money relief against the big banks for their multitrillion-dollar global Ponzi scheme—or as the SEC put it, “addressing misconduct that led to or arose from the financial crisis.”
¹⁶⁰
Goldman paid a $550 million fine from the SEC for a similar allegation. The firm admitted no guilt for the related activities. Bank of America paid a $150 million fine without admitting any guilt for misleading shareholders regarding its payment of Merrill Lynch’s bonuses when it took over the firm. JPMorgan Chase eventually settled the London Whale probe with a $1.02 billion fine, greater than the fines it paid the government for all of its housing-related infractions. Though the firm admitted that it had violated banking rules by not properly monitoring trading operations, that kind of admission was akin to copping a misdemeanor plea while facing a major felony.

On August 1, 2013, a federal judge approved a $590 million settlement by Citigroup in a shareholder lawsuit accusing the bank of hiding billions of dollars of toxic mortgage assets.
¹⁶¹
On that same day, a jury found former Goldman Sachs banker Fabrice Tourre liable for his role in the Abacus deal, which lost some investors $1 billion. The ruling was dubbed a major victory for the SEC. “We are obviously gratified by the jury’s verdict and appreciate their hard work,” lead SEC lawyer Matthew Martens said.
¹⁶²

The Justice Department chose not to criminally prosecute the chairmen from Goldman or JPMorgan Chase (both of whom ranked in the top twenty for Obama’s career campaign contributors) or from anywhere else for creating
faulty CDOs, trading against them, dumping them on less knowledgeable investors, or otherwise speculating with capital supposedly siphoned off for more productive and less risky purposes.

Similarly, the Justice Department punted on prosecuting Jon Corzine, the former governor of New Jersey and a top-tier bundler for Obama. Steering his firm MF Global into an abyss, Corzine had bet more than $6 billion on European sovereign debt.
¹⁶³
The $1 billion MF Global “mistake,” the multibillion-dollar losses on bets made by Chase, the CDOs chosen by the firm’s biggest hedge fund clients that had been set up to fail—these were apparently just minor events in the scheme of making money and maintaining alliances. On October 31, 2011, MF Global filed
Chapter 11
, with $41 billion in assets and $39.7 billion in debt, the eighth largest bankruptcy in US history. Four days before the collapse, Corzine sent an email to an employee “to strategize how they could use customer segregated funds [and get JPMorgan Chase] to clear MF Global’s trades more quickly.” He avoided criminal fraud charges.

The general response of Obama and his cabinet toward Wall Street criminality and the sheer unsavoriness of its leaders showed the degree to which nothing had changed and the lack of commitment to reform. If nothing changes fundamentally in the banking landscape, more and larger crises are a given. The most powerful banks are bigger, more interconnected, and more reliant on cheap money and federal largesse than ever. Their leaders are unrepentant and unaccountable. Their political alliances require nothing of them anymore except some fines that can be easily re-earned.

Lucky 2013

By 2013, the major global banks were sitting on nearly $3.3 trillion of excess reserves (about $2 trillion for the US banks at the Fed and the rest at the European Central Bank), refusing to share their government aid with the citizens of the world.

By October 2013, the government was careening toward a debt cap of $16.49 trillion, and the weakness of the US political system relative to the financial one was demonstrated by a government shutdown over budget and ego squabbles. The Fed’s balance sheet had ballooned to a historic record of just over $3.7 trillion, comprised in part by $2.1 trillion of Treasuries, or nearly $2 trillion in
excess
bank reserves.
¹⁶⁴
These government debt securities were issued by the US Treasury, purchased by the banks, and then reverted as excess (nonrequired) reserves to the Fed—in other words, a nonproductive circle of extra national debt issued for no real reason. In addition, the Fed books
contained $1.34 trillion of mortgage-backed securities (following the establishment of an $85 billion per month mortgage-backed and Treasury securities purchase program, totaling more than $1 trillion per year).
¹⁶⁵
The size of the Fed’s books had increased by 25 percent since July 2011 and 50 percent since July 2009, and it stood at ten times the amount it had been in July 2008. All of this debt was held as means to prop up bond prices so the bankers could maintain higher values on their books of associated securities, and to keep rates low so that money remained cheap, under the guise of aiding the broad economy.

In numerous speeches, Bernanke condoned his zero-interest rate policy and “quantitative easing” bond-buying policies, which kept the rates at which banks borrowed money at zero. The bankers were certainly happy. They could use their money on other speculative ventures, and their remaining faulty mortgage-backed securities would be bought by the Fed.
¹⁶⁶
Their 2012 bonuses rose $20 billion, up 8 percent from 2011.
¹⁶⁷

The cycle of banker–White House alliances persisted. The Senate confirmed Obama’s choice of Jack Lew to succeed Tim Geithner as Treasury secretary on February 27, 2013.
¹⁶⁸
Lew was no stranger to big bankers either. In his prior role as Obama’s director of the Office of Management and Budget, he met often with Wall Street’s elite. Before that, he had served in the Clinton White House with Rubin, and with Summers during the Glass-Steagall repeal days.
¹⁶⁹

Like his mentor, Rubin, Lew had worked at Citigroup, where he served as chief operating officer of the alternative investments unit.
¹⁷⁰
He got paid $940,000 in early 2009, while Citigroup was inhaling bailout funds. He had served in the division that the SEC charged with hiding $39 billion of subprime debts in off-balance-sheet structured investment vehicles.
¹⁷¹
In Washington, he just might help Citigroup regain some of its old glory.

Banks Wrapping Up

By November 2013, four years after the Federal Crisis Inquiry Commission first convened (it went on to hold nineteen days of public hearings and review millions of pages of bank documents on the causes of the financial crisis), the total amount of SEC fines levied along with various, mostly mortgage-related, legal settlements for the six major US banks reached about $80 billion, or about 0.8 percent of their assets.
¹⁷²
Of that, only the $1 billion levied for JPMorgan Chase’s London Whale trade involved admission of a crime. The total figure was equivalent to one month of the Fed’s mortgage and Treasury securities purchase program, which entailed buying many similar potentially
questionable securities from the banks, thereupon aiding the funding of their “punishments.”