With Liberty and Justice for Some (13 page)

Just think about how this cycle works. People like Rubin, Summers, Patterson, and Gensler shuffle back and forth between the public and private sectors, taking turns as needed with their GOP counterparts. When in government, they ensure that laws and regulations are written to redound directly to the benefit of a handful of Wall Street firms, abolishing most regulatory safeguards that keep those behemoths in check. When the electoral tide turns against them, they return to those very firms and collect millions upon millions of dollars, profits made possible by the laws and regulations they implemented (or failed to implement) when they were in charge. Then, when their party returns to power, back they go into government, where they use their influence to ensure that the cycle keeps on going.

This is exactly what Simon Johnson meant when he proclaimed that “the finance industry has effectively captured our government.” And it’s what the economist Nouriel Roubini meant when he told the makers of the 2010 documentary
Inside Job
that Wall Street has “captured the political system” on “the Democratic and the Republican side” alike.

As time passed, the connections of Wall Street to the government officials guiding Obama’s economic policy became ever clearer. In April 2009, the
New York Times
conducted a thorough examination of Obama’s treasury secretary, Tim Geithner, during his prior job as chairman of the New York Federal Reserve from 2003 to 2008, where he had been charged with regulating Wall Street. The
Times
investigation found that during this “era of unbridled and ultimately disastrous risk-taking by the financial industry,” Geithner “forged unusually close relationships with executives of Wall Street’s giant financial institutions.” As a result, “his actions, as a regulator and later a bailout king, often aligned with the industry’s interests and desires, according to interviews with financiers, regulators and analysts and a review of Federal Reserve records.”

The
Times
article noted that New York Fed chairmen of the past typically avoided extensive professional reliance on—and especially social intermingling with—executives of the banking industry they were charged with overseeing. By contrast, Geithner’s connections to those executives were extraordinarily close. “Mr. Geithner’s reliance on bankers, hedge fund managers and others to assess the market’s health—and provide guidance once it faltered—stood out,” the
Times
wrote.

Examining Geithner’s calendars during his years at the New York Fed, the
Times
documented extensive social interactions with virtually every leading figure whom he was charged with regulating. “He ate lunch with senior executives from Citigroup, Goldman Sachs and Morgan Stanley at the Four Seasons restaurant or in their corporate dining rooms”; “attended casual dinners at the homes of executives like Jamie Dimon, a member of the New York Fed board and the chief of JPMorgan Chase”; “was particularly close to executives of Citigroup, the largest bank under his supervision”; kept in close touch with Rubin, whom he considered his “mentor”; and “met frequently with Sanford I. Weill, one of Citi’s largest individual shareholders and its former chairman, serving on the board of a charity Mr. Weill led.”

This list of Geithner’s friends forms a substantial portion of the top-ten Wall Street culprits responsible for the 2008 financial crisis. Predictably, these relationships did not incline Geithner to take action against their reckless ways; indeed, the opposite was true. As the
Times
delicately put it, “For all his ties to Citi, Mr. Geithner repeatedly missed or overlooked signs that the bank—along with the rest of the financial system—was falling apart.” To the extent that Geithner took action at all, it was to shield those financial firms from any meaningful government oversight: “As late as 2007, Mr. Geithner advocated measures that government studies said would have allowed banks to lower their reserves. When the crisis hit, banks were vulnerable because their financial cushion was too thin to protect against large losses.”

Yet despite this close collaboration with the very industry most responsible for the financial crisis—or, more likely,
because
of that collaboration—Obama chose Geithner as his treasury secretary to shepherd the country out of the crisis that his Wall Street friends had caused. Geithner’s failures as a regulator at the New York Fed were well known when Obama selected him. As the
New York Times
editorial page said at the time, Geithner was clearly one of the people who “played central roles in policies that helped provoke today’s financial crisis.”

That Obama was not only undeterred by Geithner’s close ties to Wall Street but likely motivated by them when making his selection is not particularly surprising. When running for president, Obama himself had been a major beneficiary of Wall Street’s largesse. In the midst of the primary war between Obama and Hillary Clinton, the
Los Angeles Times
reported that the two Democratic candidates, “who are running for president as economic populists, are benefiting handsomely from Wall Street donations, easily surpassing Republican John McCain in campaign contributions from the troubled financial services sector.” Consistent with Senator Schumer’s mutually beneficial relationship with Wall Street banks, the
Los Angeles Times
noted, “It is part of a broader fundraising shift toward Democrats, compared to past campaigns when Republicans were the favorites of Wall Street.”

Needless to say, large amounts of money are not lavished on political candidates out of pure-hearted generosity, but rather with an expectation that the donations will secure favorable treatment, and with an implied threat that failing to offer such preferential treatment will result in the future loss of financial support. For that reason, even in the best of times it would have been inconceivable for Obama to choose a treasury secretary who was unfriendly to Wall Street. During the financial crisis, when investment banks were vying with ordinary Americans for the federal government’s finite bailout funds, it was particularly imperative that the nation’s top financial official be a loyal servant of Wall Street. And in Geithner, that’s precisely what they got.

The ultimate result of all these job appointments and revolving doors was a textbook case of how the law can be manipulated to protect and advance the interests of the culpable parties. In September 2008, as the financial crisis was spiraling out of control, the Federal Reserve allowed Goldman (and a few other surviving institutions) to convert from an investment bank into a “bank holding company.” The
Wall Street Journal
claimed at the time that any firms that converted in this fashion would “come under the close supervision of national bank regulators, subjecting them to new capital requirements, additional oversight, and far less profitability than they have historically enjoyed.” The reason for this reduced profitability is that becoming a bank holding company involves a tradeoff. Such companies are able to borrow money much less expensively than investment banks and are able to take advantage of numerous other Fed facilities that investment banks cannot access; but in return for these preferred arrangements, the Fed requires—at least in theory, under the law—that bank holding companies refrain from engaging in a wide array of high-risk, high-return transactions such as derivative trading. In essence, they are obliged to avoid the very transactions that had long generated enormous profits for Goldman and other investment banks but that also caused the financial collapse.

Goldman desperately needed access to Fed resources in order to save itself, so its conversion to a bank holding company was not unexpected. But a mere nine months later, Goldman was boasting of what the
New York Times
called “blowout profits”—so much for the
Wall Street Journal
forecast of “less profitability.” As for allegedly greater regulations and capital restrictions, Goldman freely admitted from the start that it would not be hampered. “We don’t believe we’ll have to get out of any businesses,” said Lucas van Praag, a Goldman spokesman, to the
Deal.
Van Praag was right. The July 2010
Times
article reporting on Goldman’s outsize profits noted that its high-risk transactions were continuing, and included a concise summary of the situation from Roger Freeman, an analyst at Barclays Capital: “It is, in many respects, business as usual at Goldman.”

Goldman thus gave up nothing by being allowed to convert to a bank holding company, but the conversion did allow it access to large amounts of lending from the Federal Reserve. (Since then, the Fed has increased its balance sheet by $2 trillion while steadfastly refusing to disclose the beneficiaries of that credit.) In other words, the law that had always imposed a choice on all other companies—either enjoy a lack of regulation but no access to Fed lending as an investment bank, or enjoy Fed lending but be constrained by large amounts of regulation as a bank holding company—simply did not apply to Goldman. It was able to obtain all the benefits under the law while being subjected to none of the restrictions. No wonder, then, that Goldman booked billions of dollars in profits within months of the start of the financial crisis, even as the rest of America struggled with the worst financial hardship in many decades.

“Because Then You’d Find the Culprits”

With these facts assembled, is it even remotely possible to envision political officials using the force of law to hold financial elites accountable for serious wrongdoing? Such accountability is not only exceedingly unlikely but close to impossible. And the fact that the massive corruption, plundering, and illegality that caused the financial crisis has gone almost entirely without criminal investigation, to say nothing of punishment, proves that conclusively.

In April 2009, Bill Black, currently a professor of economics and law and formerly a federal securities regulator, appeared on
Bill Moyers Journal
on PBS and spoke about the unparalleled corruption of the collusion between the goverment and Goldman Sachs.

Black was even more incensed by the absence of any real investigation into what caused the financial collapse, who was responsible, whether crimes were committed, and whether indictments and criminal prosecutions were warranted. He expressed his incredulousness over the lack of investigations this way.

Given the extent of the economic damage, the absence of criminal proceedings against the culprits is indeed unfathomable—except when one considers that all the politicians who could meaningfully make such demands are captive to the very people who ought to be the targets. When Nouriel Roubini was asked in
Inside Job
why there have been no real investigations, he replied, “Because then you’d find the culprits.”

One year after the crisis exploded into public consciousness, a McClatchy article asked a similar question: “Why Haven’t Any Wall Street Tycoons Been Sent to the Slammer?” As the piece put it, “Millions of Americans have seen their home values and retirement savings plunge and their jobs evaporate,” but “what they haven’t seen are any Wall Street tycoons forced to swap their multi-million dollar jobs and custom-made suits for dishwashing and prison stripes.” Although the McClatchy reporter who wrote the article noted some Washington gossip and whispers about possible postcrisis prosecutions, he could point to none that were actually under way.

Indeed,
Columbia Journalism Review
, in assessing the McClatchy report, presciently argued that its reference to only vague, unattributed rumors of possible investigations strongly suggested that there were no real efforts to prosecute any crimes relating to the financial crisis.
CJR
’s Dean Starkman wrote: “Enough about the FBI ‘looking at,’ ‘launching probes of,’ and ‘investigating’ things. Let’s see it make a case for a change, or at least make a formal inquiry that would require disclosure.”