The Unwinding: An Inner History of the New America (45 page)

“I just spent forty-five minutes with Chris Dodd yesterday,” Quinn told him. Along
with the CEO of an insurance company he represented, Quinn had sat down with Dodd
and found out exactly what was going on. Connaughton, the key deputy of a senator
with a keen interest in financial reform, was clueless. He wrote to another chief
of staff, “I came into government to effect change on Wall Street, and now I realize
the profession I just left is having more input on the bill than I’m having from inside
the Senate.” The other chief wrote back, “That’s really sad.”

Connaughton cultivated a few reporters who agreed to protect his anonymity, and, as
“a senior Senate aide,” he began to go after Dodd in the press. “My understanding
is that Dodd is moving forward with a bill that includes concessions,” he told CNBC.
“I thought you made concessions to gain someone’s support. After four months of negotiations,
Dodd has made concessions to get Republicans to
consider
it. I truly don’t get it.” The same senior Senate aide told
Newsweek
, “One can only hope the president realizes what’s at stake.”

Kaufman decided to take his case to the Senate floor. With Connaughton and another
aide, he drafted a series of speeches on Wall Street excesses, the financial crisis,
and the failure to punish any of the culprits.

When a senator stood at his desk and read the speech that a staffer had just placed
on the mahogany lectern next to a glass of water, no one was listening. The presiding
officer of the Senate, some freshman of the majority party, was perched up in the
raised chair, reading his
New York Times
or scrolling through her BlackBerry. Otherwise, the senator gave his speech to an
empty chamber. Halfway through, the next senator with floor rights might appear through
the double doors at the back of the room and walk to his desk, where he would shuffle
through a prepared text that he hadn’t laid eyes on until that minute. No reporters
listened and took notes in the press gallery above the presiding officer’s chair—there
were just the unmanned C-SPAN cameras programmed to swivel and focus in tight on the
speaker, cutting out the rows and rows of empty desks. It was so rare for two senators
actually to listen to each other’s arguments and debate them that once, when Jeff
Merkley, a freshman from Oregon, happened to enter the chamber while a Democrat and
Republican were engaged in a lonely back-and-forth, he stopped and thought, “Wow,
that’s unusual—there’s a conversation occurring in which they’re making point and
counterpoint and challenging each other.” Thus the world’s greatest deliberative body
went about the business of the people in the year 2010.

Connaughton knew that no one would hear the speeches Kaufman gave, so they were written
in the form of long, detailed essays, full of historical explanations and hard polemics,
in the hope that they would be quoted on the Internet by allies—Arianna Huffington,
the MIT economist and blogger Simon Johnson—and circulated widely.

On March 11, Kaufman demanded of the empty chamber, “Given the high costs of our policy
and regulatory failures, as well as the reckless behavior on Wall Street, why should
those of us who propose going back to the proven statutory and regulatory ideas of
the past bear the burden of proof?” He went on, “The burden of proof should be upon
those who would only tinker at the edges of our current system of financial regulation.
After a crisis of this magnitude, it amazes me that some of our reform proposals effectively
maintain the status quo in so many critical areas.” He added that he didn’t trust
the regulators to do a better job of enforcing rules the next time a bank started
to implode. Congress had to do the job for them, by writing a bill with clear and
simple lines. Dodd’s bill wouldn’t solve the problem of too big to fail. “We need
to break up these institutions
before
they fail, not stand by with a plan waiting to catch them when they do fail.”

On March 15, after the release of the bankruptcy examiner’s report on Lehman Brothers,
which strongly suggested that fraud had led to the firm’s demise, Kaufman took to
the floor again. Sounding like Joe Biden in 1985, he said, “At the end of the day,
this is a test of whether we have one justice system in this country or two. If we
don’t treat a Wall Street firm that defrauded investors of millions of dollars the
same way we treat someone who stole five hundred dollars from a cash register, then
how can we expect our citizens to have faith in the rule of law?”

On March 22, the bill made it out of Dodd’s Banking Committee. There was a pale version
of the Volcker Rule, weak regulation of derivatives, and no clear lines about how
much liability banks could sustain. Connaughton and Kaufman drafted a biting critique.

“This is really going to piss off Dodd and the administration,” Connaughton warned
him.

“I’m speaking to the ages,” Kaufman said.

The speeches began to be noticed. The
News Journal
in Wilmington covered them on its front page and quoted them favorably in its editorials,
Time
magazine profiled Kaufman, and Huffington praised him. Dodd was sufficiently annoyed
to call from Central America, where he was leading a congressional delegation, and
tell Kaufman, “Stop saying bad things about my bill.” Connaughton spoke to Dodd’s
Banking Committee staff director, who reassured him: “Don’t worry about being critical.
Chris will be the one who gets to take the victory lap in the end.”

It was true. For starters, Dodd had the other committee chairmen on his side. He also
had the president’s top advisers. In early April, Larry Summers paid a visit to Kaufman’s
office and explained why the senator was wrong to want to break up the biggest banks.
Doing so would make America less competitive in the global financial race, and large
banks would actually be less likely to fail than small ones. Kaufman was determined
not to be steamrolled and kept interrupting Summers’s interruptions with a friendly
pat on the arm, citing Alan Greenspan to rebut Summers’s claims. A month later, it
was Geithner’s turn. Connaughton chatted with the Treasury secretary while they waited
outside Kaufman’s door and found him to be witty and light on his feet. When they
entered Kaufman’s office, Connaughton told his boss, “I’ve patted him down—he’s clean.”
Geithner was more conciliatory than Summers, explaining that the big banks would shrink
anyway under new international capital requirements. Kaufman said that regulations
had failed in the past, and the only foolproof way to prevent another bailout was
to limit the size of the banks. In the end, they agreed to disagree.

Finally, Dodd had the White House on his side—he had the president. Connaughton had
come back to the Senate imagining that Biden would be their key ally, and he urged
Kaufman to pick up the phone and ask his old friend to push Justice about the lack
of high-level prosecutions, push Treasury to get serious about financial reform. As
always, Kaufman was protective of Biden. Wall Street wasn’t Biden’s issue—it would
have taken up half the boat, and the boat was already full with Iraq, the stimulus,
and the middle class. Connaughton couldn’t get over the strangeness: their former
boss held down the second-highest position in the country, a few steps from the Oval
Office, and they couldn’t do a damn thing about Wall Street. The Republicans were
a lost cause, so Connaughton saved most of his bitterness for his own team. “You might
as well be beholden to the permanent class,” he said, “if you’re going to pull your
punches at a moment of national crisis.”

In late April, Kaufman and Sherrod Brown of Ohio introduced an amendment to Dodd’s
bill that would limit the nondeposit liabilities of banks to 2 percent of gross domestic
product. In effect, Brown-Kaufman would force banks that grew beyond a certain size
to be broken up. The two senators took to the floor and went back and forth without
a script. Spectacles perched on the end of his nose, Kaufman towered over his desk
and chopped the air and his trembling voice declaimed, “In 1933 we made a decision
that helped us through three generations. Why are we not passing legislation that’ll
work over the next two or three generations? Something that’ll work whether we get
a president who believes in the fact that we should have free markets or not? Whether
we have a good regulator or a bad regulator? Why should not the Senate of the United
States do its job?”

Connaughton was watching on TV in their Russell office, and his mind wandered back
down the years and he said to no one in particular, “He’s like Biden.” Later, Connaughton
sent Kaufman a note: “There’s nothing more honorable than standing up as the sole
dissenting voice on a matter of principle.”

Those weeks in the winter and spring of 2010 were the most intense of Connaughton’s
working life. He would get into the office by seven-thirty and keep going even after
he returned home at night, opening his laptop and reading till midnight. He spent
one whole weekend devouring the two-thousand-page Lehman bankruptcy examiner’s report
and then drafting Kaufman’s speech on it. It was as if an old idea of politics that
somewhere along the way had eluded him now returned—the years of drift and frustration,
the fundraising breakfasts and happy hours, the slow immersion in compromise, all
of it faded away and he was back where he had started in Tuscaloosa, dedicating himself
to the noblest calling of all.

But that had been three decades ago: years in which Washington was captured—
captured
—by the money power. He had been captured as well, and until now he hadn’t fully grasped
how much the “influence industry”—the lobbying, the media campaigns, the grasstops,
the revolving door—had transformed Washington. “When you go back into government,
you realize how dramatically asymmetrical it has become with the public interest.
Virtually no one walks in your door trying to educate you about the public’s argument.”
He had come to see himself as Jack Burden, the narrator of
All the King’s Men
—tainted and disillusioned by politics. Human nature remained constant, but when the
money got so blown out of proportion, it corrupted human behavior in a thousand little
ways. “Washington changed me,” he said. “And if it changed me, it must have changed
a lot of other people, too.”

There were three thousand lobbyists swarming Capitol Hill, urging Congress not to
do anything fundamental about the wreckage the banks had made. Who stood on the other
side? An angry but distracted public that didn’t know how to use the levers of power.
A handful of bloggers with influence among the persuaded. Back in the eighties, a
coalition of labor unions and trial lawyers and consumer advocates could put up a
fight, but by 2010 they were largely spent. An organization called Americans for Financial
Reform was pushing for a new consumer agency, but Connaughton had to call
them
and say, “Where are you guys? I don’t feel your presence on the Hill.” If the Brown-Kaufman
amendment had been a boon to corporate America, Connaughton would have been working
with a team of lobbyists, strategists, and industry leaders to build massive pressure
on the Hill. Instead, he was practically on his own.

*   *   *

Kaufman and Connaughton decided to address the fragility of the stock market. Though
it hadn’t caused the financial crisis, the market remained the point of entry for
millions of Americans into the world of finance, and it had taken their investments
down with it. Like credit, stocks were no longer what they had been when Connaughton
was in business school and on Wall Street. Instead of a few exchanges where men in
blue coats waved trade orders and shouted to be heard on the floor, the stock market
had become a computerized casino, with more than fifty venues around the country,
dominated by high-frequency traders—the sharks at the poker table—using advanced algorithms
to make thousands of trades a second and profit from tiny fluctuations in stock prices.
Connaughton spent months researching these new markets and was stunned by the opacity
of the electronic labyrinth. He was a pretty sophisticated investor, but he could
no longer say what happened to the trade orders he placed—and none of the insiders
seemed able to explain it, either. The ordinary investor was at an immense disadvantage,
the market vulnerable to extreme volatility, and the SEC years behind in monitoring
it.

Kaufman began pushing the SEC to improve its oversight of high-frequency trading,
and at first Connaughton thought they were getting somewhere. Mary Schapiro, Obama’s
choice to lead the commission, said that she shared Kaufman’s concerns and the SEC
would review the structure of equity markets. At one meeting, an official at the commission
told Connaughton, “Wow, it’s great to hear from someone who isn’t from the industry.”
No one walked through the commission’s doors on F Street, next to Union Station, other
than finance people with a gripe about a regulation. But as Wall Street aggressively
fought any but the smallest changes, inertia set in at the SEC, and, once again, nothing
happened.

May 6, 2010, was the day when Connaughton’s second life in government began to end.
In the early afternoon, the stock market suddenly plummeted seven hundred points in
eight minutes before reversing itself, with the momentary disappearance of almost
a trillion dollars in wealth. The flash crash, as it came to be called, was caused
by the kind of automated trading that Kaufman had warned about. A few hours later,
Kaufman was sitting in the presiding officer’s chair when Mark Warner, the Virginia
Democrat, explained to the Senate what had just happened. “I have become a believer,”
he said, and invited Kaufman to come down to the floor and essentially say to the
world, “I told you so”—which Kaufman did. Then he spoke up one more time for his amendment,
for a return to the rules and limits of the Glass-Steagall era.