With Liberty and Justice for Some (12 page)

This unwillingness is easily explained. Our government institutions are so dominated by financial elites that the very idea that the former would hold the latter accountable under the law is ludicrous. Indeed, it is impossible—as impossible as, say, an employee firing his boss, a tenant evicting a building owner, or inmates punishing the warden. America’s financial elites have not only stockpiled vast amounts of material wealth but also acquired control over all the government and legal institutions that might stand in the way of their corruption and stealing.

To say such things about America, particularly in such stark terms, was once deemed radical and unserious; it was self-marginalizing. But no longer. The ability of financial elites to avoid any legal consequences even for the most egregious acts of wrongdoing is now so self-evident that it has been acknowledged even in the most establishment-sympathetic venues.

In April 2009, the second-highest-ranking Democrat in the United States Senate, Dick Durbin of Illinois, blurted out on a local Chicago radio station: “The banks—hard to believe in a time when we’re facing a banking crisis that many of the banks created—are still the most powerful lobby on Capitol Hill. And they frankly own the place.” Paul Blumenthal of the transparency group Sunlight Foundation emphasized the eye-popping dollar amounts behind Durbin’s comment.

Blumenthal offered just a “sampling” of what that money has bought:

It should have come as no surprise, then, that in April 2009—a mere six months after Wall Street was in such desperate straits that it needed almost $1 trillion in bailout money—Goldman Sachs reported a $1.8 billion profit for its first quarter. That summer, with serious understatement, the
New York Times
noted, “Goldman has turned the crisis to its advantage.” And in early 2010, as the unemployment rate hovered close to 10 percent, Goldman Sachs revealed that its earnings for 2009 had topped $13 billion.

Owners of Government

Of course, ownership of the government is not confined to Goldman or even to bankers generally; as we saw in the prior chapter, legislation in virtually every area is written by the lobbyists dispatched by the corporations that demand it, and its passage is then ensured by politicians whose pockets are stuffed with money from those same corporations. But Goldman’s dominance of political and legal institutions is particularly deep-rooted and thus offers a superb demonstration of how elites shield themselves from repercussions of their lawbreaking. Indeed, a straight line can be drawn between the government’s response to the financial crisis and the record profits Goldman enjoyed literally months later. Just consider the following sequence of events.

On September 25, 2008,
ABC News
reported that Goldman and its executives and employees had spent “more than 43 million dollars on lobbying and campaign contributions to cultivate friends and buy influence in Washington, D.C. since 1989.” Moreover,
ABC News
noted, “as a group, Goldman Sachs bankers have been the country’s top political campaign contributors this year and have given $29.5 million in contributions since 1989.” “They are almost in a class by themselves,” declared Sheila Krumholz, the executive director for the Center for Responsive Politics, which compiled the data.

The same week, the
New York Times
described one of the crucial secret meetings that shaped the federal government’s response to the financial crisis. Presiding over that gathering at the Federal Reserve Bank of New York was Bush treasury secretary—and former Goldman CEO—Hank Paulson. The primary topic of discussion was the imminent collapse of American International Group, the giant insurance corporation. AIG’s principal government regulator was absent from the meeting, but in attendance were a small number of Wall Street executives, including Lloyd Blankfein, Paulson’s successor as the CEO of Goldman Sachs. The AIG matter was of urgent concern to Blankfein because, as the
Times
put it, “a collapse of [AIG] threatened to leave a hole of as much as $20 billion in Goldman’s side.” The outcome of the meeting, of course, could not have been better for Goldman: “Days later, federal officials, who…initially balked at tossing a lifeline to A.I.G., ended up bailing out the insurer for $85 billion.”

Ordinarily, when a severely distressed company such as AIG is being saved by an infusion of capital, the party providing that money has significant leverage to negotiate with the failing company’s creditors. The rescuing entity can easily force those creditors to accept deep discounts on the failing company’s debt as a condition of the rescue. The reason for this is obvious. The party saving the distressed company simply tells the creditors: if you refuse to settle for a partial repayment of the money you loaned, then we will not rescue the company, it will collapse, and you might collect nothing at all. The U.S. government, when bailing out AIG, was thus in the perfect position to force those companies to which AIG owed the most money—including Goldman—to agree to substantial discounts and thereby make the bailout significantly cheaper. That was particularly true since many of those same creditors (again including Goldman) were themselves vying to receive multibillion-dollar bailouts, providing added leverage for government negotiators.

But in the case of AIG and Goldman, none of that happened. Not only was the insurance firm bailed out by the federal government, but—with the U.S. government essentially in control—it ended up paying off its debts at a rate of 100 percent; not a single penny of discount was negotiated. That meant that Goldman received the full amount due from AIG, in addition to the sums received directly from the government as part of its own bailout. That decision stood in rather stark contrast to the U.S. government’s dealings with the United Auto Workers in February 2009. There, the government insisted that it would only bail out the auto industry if the union agreed to massive reductions in contractually stipulated benefits.

A month after the UAW negotiations, a major controversy erupted when it was revealed that AIG executives—including many who had presided over the very transactions that had led to that firm’s near demise, a demise averted only with a major infusion of taxpayer money—were to receive millions of dollars in bonuses. The Obama administration insisted that it was powerless to stop those bonuses. When asked by George Stephanopoulos of
ABC News
to defend that claim, Larry Summers, one of Obama’s top economic advisers, righteously invoked noble legal principles: “We are a country of law. There are contracts. The government cannot just abrogate contracts.”

Stephanopoulos notably failed to ask why that same government could force the working-class, nonculpable, politically powerless autoworkers to accept major reductions in their contractual benefits as a condition for a bailout but could not do the same for the highly culpable, extremely wealthy AIG executives. Apparently, the sanctity of contract rights shields the entitlements of financial elites but is no barrier to forcing ordinary Americans to give up vested rights upon pain of losing their jobs.

The AIG bailout was just one of the steps leading to the record Goldman profits of 2009. In October 2008, Treasury Secretary Paulson announced his choice to manage the federal government’s $700 billion bailout of Wall Street: thirty-five-year-old Neel Kashkari, who had just recently come from Goldman Sachs to serve as Paulson’s assistant treasury secretary. As the
Wall Street Journal
put it when the appointment was announced, “The position confers substantial power on Mr. Kashkari.”

In November, Obama announced his selection of Timothy Geithner as treasury secretary. Geithner—a protégé of former Goldman CEO Robert Rubin—had served as chairman of the New York Fed for the prior five years and (as we shall soon see) had established a relationship with Wall Street that, for someone in that regulatory position, was unprecedentedly close and loyal. Shortly thereafter, Obama selected another Rubin protégé—Larry Summers—as director of the White House’s National Economic Council, a position that wields as much influence as any over the nation’s economic policy. Obama was certainly aware that back in the late 1990s, Summers had presided over a series of Wall Street–friendly deregulation reforms when he was Clinton’s treasury secretary. What’s more, according to the
Washington Post
, in the two years prior to joining the Obama administration Summers had received millions of dollars from Wall Street, including a paycheck for $135,000 from Goldman Sachs for a one-day visit in 2008.

And these appointees were not Goldman’s only friends in Washington. On December 14, 2008, the
New York Times
disclosed that a central role in securing the multibillion-dollar bailout for Wall Street had been played by Democratic senator Chuck Schumer. In the weeks following the bailout, meanwhile, Schumer had addressed a gathering convened by the buyout billionaire Henry Kravis and roughly twenty other finance industry executives. The New York Democrat had assured them that “crazy, anti-business liberals” would not interfere with the legislation they wanted, and subsequently received close to $150,000 in campaign donations from the businesses in attendance. The
Times
article, headlined “A Champion of Wall Street Reaps Benefits,” further detailed how Schumer, as head of the Democrats’ Senate Campaign Committee, had succeeded in “raising a record $240 million while increasing donations from Wall Street by 50 percent.” As the
Times
noted, that money “helped the Democrats gain power in Congress” and “elevated Mr. Schumer’s standing in his party.”

The banks’ largesse was amply rewarded. In return for Wall Street’s support, Schumer, who is often called a “liberal” Democrat, “embraced the industry’s free-market, deregulatory agenda more than almost any other Democrat in Congress, backing many of the key measures blamed for contributing to the financial crisis.” He took various steps “to protect industry players from government oversight and tougher rules” and “helped save financial institutions billions of dollars in higher taxes or fees.” The
Times
also noted that Schumer had a long record of enabling his Wall Street patrons to engage in precisely the kinds of transactions that led to the 2008 financial crisis: he had “succeeded in limiting efforts to regulate credit-rating agencies,” “sponsored legislation that cut fees paid by Wall Street firms to finance government oversight,” and “pushed to allow banks to have lower capital reserves.”

As the financial crisis progressed, the placement of Goldman executives in key positions continued apace. As part of the AIG bailout, for instance, the government brought in Ed Liddy to serve as the company’s CEO. Liddy had previously been a Goldman executive and still owned several million dollars of Goldman shares when he was appointed to run AIG and make vital decisions affecting its debts to Goldman.

On January 27, 2009,
USA Today
reported matter-of-factly: “Treasury Secretary Timothy Geithner picked a former Goldman Sachs lobbyist as a top aide Tuesday, the same day he announced rules aimed at reducing the role of lobbyists in agency decisions. Mark Patterson will serve as Geithner’s chief of staff at Treasury.” One of Patterson’s sterling successes as a Goldman lobbyist had come in 2007, when he had helped to defeat a Senate provision (sponsored by Obama, among others) to limit executive compensation. This state of affairs reflects what Desmond Lachman—American Enterprise Institute fellow, former chief emerging-market strategist at Salomon Smith Barney, and top IMF official; no radical he—described in the
Washington Post
as “Goldman Sachs’s seeming lock on high-level U.S. Treasury jobs.”

(Goldman’s choice to replace Patterson as its chief lobbyist was Michael Paese, the top staffer to Democratic representative Barney Frank. Paese had spent years helping Frank carry out his duties as chairman of the House Financial Services Committee, the committee responsible for oversight of Wall Street. Now, he would put his Washington Rolodex and his substantial influence in the halls of Congress at the service of Goldman’s legislative agenda.)

At roughly the same time, Reuters announced:

Many of the Wall Street–subservient legal changes that led to the 2008 crisis had been accomplished during the late 1990s, during the second term of the Clinton administration. Incredibly, neither the key role Gensler had played in that orgy of deregulation nor his subsequent return to Goldman were any impediment to his being once again empowered to oversee the very industry he had so loyally served the first time around (and which in return had then lavishly rewarded him). And this return was part of a pattern. The catastrophic spasm of deregulation in the late 1990s had been led by the former Goldman CEO Robert Rubin and then by Larry Summers, who both served as Clinton’s treasury secretary. Now, Summers, along with Gensler and fellow Rubin acolyte Tim Geithner, formed the top tier of Obama’s economics team as it managed the fallout from the financial crisis. As
Rolling Stone
’s Matt Taibbi put it, “The only thing to remember is that all the ones who got us into this mess—Rubin, Summers, Goldman in general—are now being put in charge of the cleanup by a president who spent most of 18 months on the campaign trail pledging to end the influence of money in politics.”