Bought and Paid For Read online

  Blankfein knew all of this and more, namely that ShoreBank had direct ties to senior administration officials: Presidential senior adviser Valerie Jarrett sat on the board of Chicago Metropolis 2020, a civic organization run by Adele Simmons, one of ShoreBank’s directors; Obama’s own controversial green czar, Van Jones (who later resigned after reports linked him to controversial remarks about the September 11 terrorist attacks), was involved in one of ShoreBank’s many projects. Eugene Ludwig, the former comptroller of the currency under President Bill Clinton who was a former ShoreBank director, had called many top Wall Street executives, including Blankfein, and explained all the societal “good” they could accomplish if they helped bail out the struggling, civic-minded bank.

  Another layer of pressure came from Sheila Bair, the head of the Federal Deposit Insurance Corporation (FDIC), the federal agency in charge of taking over and liquidating failed banks. A Republican who was reappointed by the new president, Bair made it clear in her calls to various Wall Street executives that despite taking over more than two hundred banks since the financial crisis began, she didn’t want to liquidate this one.

  It didn’t take Blankfein long to put together the pieces. Blankfein may be brutal in front of the press of congressional committees (check out his public appearances), but he knows that in politics, sometimes it pays to play nice. In fact, one of the first things he did as the regulatory noose began to tighten was hire former Obama counsel Greg Craig as a senior adviser. Craig knows better than anyone on Wall Street whom to cozy up to in the administration.

  Knowing what he could gain from an investment in ShoreBank, Blankfein pledged $20 million of Goldman money to the troubled bank to help rescue it, and called around to his friends in corporate America to do the same. And it worked. GE Capital, the giant finance arm of General Electric Company, came up with $20 million, and Morgan Stanley threw in $10 million on top of the tens of millions already donated by JPMorgan Chase, Bank of America, and Citigroup.

  Blankfein—who by some accounts was fighting for his job as he struggled against multiple regulatory probes, mounting shareholder lawsuits over the company’s problems, and growing dissatisfaction inside Goldman over his management—had just fought to save a small bank in Chicago that had had a history of unprofitability and no signs of turning itself around. These weren’t exactly the kind of maneuvers that had helped Goldman earn $12 billion in 2009.

  But what if they were? What if the ShoreBank bailout, disguised as an act of charity at best and a desperate attempt to save Goldman’s public image at worst, actually represents just one more example of how Wall Street and the government, namely Big Government, really work?

  The fact of the matter is, when you strip away the name-calling and class warfare coming from the Obama administration, and when you ignore Wall Street’s gripes about the new financial reform legislation that will put a crimp in some of its profits, these two entities are far more aligned than meets the casual eye. They coexist to help each other—in an unholy alliance against the American taxpayer.

  This is why I decided to write Bought and Paid For. I’ve spent much of my career covering Wall Street, and I’ve always had a particular interest in the intersection of Wall Street and politics. My first big story, back in the early to mid-1990s, focused on the major scandal of that era, involving the issuance of municipal bonds, and showed how Wall Street used politically connected consultants, such as the young political operative turned senior White House chief of staff Rahm Emanuel, to win municipal bond business from their friends in government and induce municipalities to take on greater degrees of public indebtedness. (Emanuel left Goldman in the early 1990s to work in the Clinton White House.)

  In the mid-1990s I covered the research scandals, where, according to the SEC, the big firms and their analysts, like Henry Blodget, then of Merrill Lynch and now a business journalist, routinely supplied high ratings to companies so that their firms could win large and lucrative investment-banking assignments that increased their year-end bonuses. These research scandals were the subject of my first book, Blood on the Street. I later reported extensively on the politically motivated prosecution of former New York Stock Exchange chief Richard “Dick” Grasso by then New York attorney general (and later governor) Eliot Spitzer, the subject of my second book, King of the Club. In the fall of 2009, I published my third book, The Sellout, about the financial crisis and how it came to be.

  But now I’ve found a new, perhaps even more urgent topic. This book won’t dwell on the collapse of the big firms, which began with the fall of Bear Stearns and ended with the liquidation of Lehman Brothers, or on how the remaining Wall Street titans survived the 2008 financial collapse through an unprecedented taxpayer-financed bailout. It will, however, dwell on how these same taxpayers suffered the fallout from Wall Street’s demise: persistently high unemployment, massive amounts of debt, and a shrinking currency thanks to the Federal Reserve’s unprecedented policy of keeping interest rates near zero, while Wall Street prospered.

  As I discovered in the course of writing The Sellout, these issues are part of a bigger story: While the unbridled greed and lack of morals of many on the Street played a huge role (as legendary financier Teddy Forstmann told me, “Wall Street never had principles”), a critical part of the story, and one that the left-leaning mainstream media has generally chosen to ignore, was the role that government played in bringing about the downfall of the American economy and the propping up of the one business that caused the trouble in the first place.

  Without that in mind, it’s easy to see why Wall Street, even in its beaten-down and broken state, spared almost no expense to elect Barack Obama, who, as we shall see, promised a partnership with the Wall Street money men. Wall Street certainly got what it paid for: It has benefited disproportionately from that support in the two years since Obama became president. The big multibillion-dollar firms of Manhattan have been given guarantees no small businesses (the linchpins of our economy) would get, including but not limited to support from the Federal Reserve to keep interest rates near zero—a policy that President Obama fully endorses—which virtually guarantees titanic profits at places like Goldman Sachs even as small businesses are denied loans and unemployment remains close to 10 percent.

  And of course, the same bias that causes so many in the mainstream media to ignore the negative side of government often causes many of the best reporters to miss Big Government’s warped relationship with Big Business and Wall Street.

  For decades government has been enriching the thousands of white-collar Wall Street bankers at the expense of millions of ordinary Americans. It began in the 1970s, with the transformation of Wall Street from a musty advisory-driven business focused on matching up those with money to invest with those who needed it into a wild, risk-taking, anything-goes world where twentysomething recent college graduates were risking tens, even hundreds of millions of dollars each on increasingly exotic and difficult-to-understand bets.

  And there was no better investment to bet on than the mortgage bond. It not only allowed more people to get access to credit, but it also became Wall Street’s way of fueling Big Government’s desire to extend homeownership to almost everyone by giving banks the opportunity to extend mortgages to more and more people, regardless of whether they could afford them. The banks could make these loans and sell them to government-backed mortgage corporations, who would in turn sell them to Wall Street and then to investors. The invester demand was so great for the products that Wall Street invented increasingly risky and complicated new forms of mortgage bonds so they could make even more money. And the harder it was to understand a product, the more the bankers could charge for them.

  Despite their complexity, the mortgage bonds (and their more exotic cousins) were considered supersafe. Rating agencies slapped their much desired triple-A ratings on them and presto, investors had a supersafe bond. Yet mortgage bonds periodically did what other high-risk bonds do—they blew up. And each time, as
we’ll see, government stepped in to lend a hand.

  When it all came crashing down, all the blame in the mainstream, left-leaning media came down on the bankers—the ones who took helicopters to their weekend houses in the Hamptons, soaring over thousands of homes bought by investors without the money to pay back their loans—loans whose fat fees paid for the helicopter rides. But what the liberal media ignored was the other half of the story: that these bankers’ destructive risk taking was encouraged, enabled, and funded by politicians in Washington, politicians who had been bought and paid for by fat campaign checks from Lower Manhattan.

  To be fair, this wasn’t just a Democratic Party thing—politicians on both sides of the fence happily took Wall Street’s cash and ignored the broader interests of their voters in favor of keeping the money spigot wide open and flowing. But it was a Big Government thing: Wall Street made bundles off its role in fulfilling the dreams and desires of Big Government, even if those dreams became a nightmare and sent the nation into the worst recession since the Great Depression.

  This cozy relationship continues today, and as this book will demonstrate, it’s thriving more than ever before. It’s why Lloyd Blankfein will go out of his way to help ShoreBank, which for all intents and purposes would be a failed institution without the help of the Wall Street firms and a dose of government bailout money (sound familiar?) and it still may; as this book goes to press, the Federal Reserve has raised concerns about whether the Goldman-led bailout provides enough capital to maintain ShoreBank’s long-term viability. Even if ShoreBank does indeed die, as it should, the entire sordid episode underscores a larger point: Other small banks—hundreds of them since the financial collapse sparked the great recession—have been allowed to fail, as they should. But like the big Wall Street firms, ShoreBank has friends in high places, including a friend in the highest of places—Barack Obama—whom Blankfein knows, fears, and, maybe most important of all, ultimately respects. And with that, ShoreBank got a second chance.

  For all the rhetoric and apparent abuse Obama and his fellow Democrats heap on the big Wall Street firms, they’re still receiving money from the fat cats. In other words, despite the name-calling, the banks’ contributions to Obama have been money well spent. Elected on a message of change, a message of reversing the (supposedly) destructive policies of George W. Bush, Obama in fact has given Wall Street a free ride, while doing little more to help the broader economy.

  Of course, as I write this book, the economy, at least according to gross domestic product (GDP) and economic statistics, is improving. But how could it not, with the Fed pumping astronomical amounts of new money into it for the past two years?

  But even these modestly encouraging numbers can’t hide the fact that Obama and his political team have mismanaged the nation’s finances time and again, so much so that even as the economy is improving, businesses continue to refuse to hire back workers in sufficient numbers and unemployment remains high. And it’s clear that more than a year into his presidency, Obama’s twin policies of largely coddling the banks (despite the new financial reform legislation, which I will describe in more detail later) while running up massive deficits through huge entitlement programs won’t solve the problem anytime soon.

  The administration has instituted new spending programs of extraordinary magnitude (the ill-fated stimulus package, Obamacare, and planned climate-control legislation) that require the issuance of titanic amounts of new government debt (again, filling the coffers of the bankers, who earn fees from selling the debt) but little reason for businesses to begin hiring again.

  At the urging of Obama’s friends on Wall Street, the administration has left in place many of the same corrosive structures that led the financial system to near collapse in the first place, again (you get the picture) to the benefit of the bankers who’ve made fortunes—and continue to do so—while ordinary Americans have struggled.

  Even the president’s “financial reform” bill, which became established law in the summer of 2010, does little of the sort; sure, it makes grand gestures toward regulating the financial industry, including a new rule (the “Volcker rule”), created by presidential adviser Paul Volcker, that is supposed to root out the risky practices that led to the 2008 financial meltdown. But in practice it leaves firmly in place a landscape of policies that allow banks to play roulette with taxpayers’ money because in the end they are all “too big to fail.” The massive banks, like Citigroup, that mixed risk taking and safeguarding the deposits of average Americans haven’t been forced to break up, even though this very same business model (once outlawed because it opened taxpayers up to tremendous risk) was one of the main contributing factors to the financial meltdown in the first place.

  In these pages, I’m going to lay out the roots of Big Government’s relationship with Wall Street and how Wall Street views Barack Obama, despite his plans for even bigger government, as someone who will ensure their survival and profitability even if they have to endure a little name-calling along the way.

  But before I begin, I want to dedicate this book to the man who first alerted me to the unholy alliance between Big Government and Wall Street. I first met Austin Koenen in the early days of my journalism career, when I was a young reporter at the Bond Buyer, a newspaper that covered the market in bonds sold by cities and states allegedly to finance infrastructure. At least that’s what I was told by nearly every government official and banker I met during those formative years in my journalism career; together Wall Street and government were doing good things like helping the public get clean water, new bridges, and good highways.

  To borrow a phrase from a more contemporary executive, Lloyd Blankfein himself, these banks believed they were doing “God’s work.”

  But not Austin Koenen. He was an investment banker at Morgan Stanley who made his living brokering bonds issued by cities and states, and he saw the seedy side of the business about as often as he saw all the good things that municipal bonds allegedly did. And he wasn’t afraid to talk about it, particularly to reporters who wanted to listen. I was one of the few who did, a fact that I can only attribute to my own political bias against Big Government.

  Austin was hardly an ardent, small-government right-winger, but he did teach me how the connivance of Big Government and Wall Street really worked: In order for a firm to be considered to underwrite one of the municipal-bond sales, it must first contribute significant amounts of money to the politicians orchestrating the programs.

  This is how I discovered that Wall Street really didn’t have a conservative Republican political agenda, despite its media image as a bastion of right-wing free-market capitalism; it supported the candidates—on the left (e.g., far-left New York City mayor David Dinkins) or the right (e.g., his right-of-center successor, Rudy Giuliani)—who were good for business.

  During his long career on Wall Street, Austin would watch as the municipal bond business, created to help the American people by creating jobs building and repairing the nation’s infrastructure, morphed into a debt-creating monster, one that pushed for more and more spending on the part of government so that the banks could make more money. It was a never-ending cycle—the big banks donated oodles of money to the favored candidates, and in turn, the politicians threw business their way.

  Like a quick dose of heroin, debt makes Big Government feel good for a moment—until it wears off and the pain sets in later in even larger degrees. The problem Austin had was that many of his colleagues, men and women he had worked with for years and had once admired, really had no problem with being the financial equivalent of dope pushers.

  Austin would eventually leave the municipal bond business; it had changed radically over his long career, so much so, in fact, I think he felt that he had sold out a bit by staying in it as long as he had. New York City was the ultimate prize for any bond underwriter, and I recall one conversation I had with Austin where he told me he didn’t want to be part of the process that forced him to collect checks from his f
ellow bankers who lived in New Jersey to elect the mayor of New York, who was slowly bankrupting the city.

  So he took a job representing Morgan Stanley’s investment-banking business in China and became one of the first American bankers to set up shop over there. Austin described it as a “challenge,” and he loved challenges. Morgan created a partnership with the Chinese government to build infrastructure and make investments in the mainland. Austin laughed at one point that his “business partner is some general from the People’s Army.” Still, I always thought it was an odd fit for someone who wasn’t particularly fond of traveling and didn’t speak a word of Chinese. For all the money he made during his long career on Wall Street, he lived modestly in the same home for decades and loved to spend time with his wife and three kids.

  But more than that, he was Austin Koenen, the investment banker who couldn’t keep his mouth shut about the sins of investment banking and Big Government. So how could he keep his mouth shut while working with the Chinese Communists?

  He couldn’t, of course. “You know China will never have a real free market until it allows religious expression,” he sniped to me one afternoon, calling me long distance from Beijing to complain about the brutal repression of the government he was now forced to work with. I had since moved to the Wall Street Journal, and that made Austin proud. I covered many of the same issues I had while at the Bond Buyer, but on a much bigger platform.

  “You’re having impact,” he would say one day after I wrote a page-one story about the sleazy New York State bond issue to bail out the Shoreham nuclear plant. Even the New York Times was forced to follow the piece, both on its news pages and in an editorial. Before he hung up, Austin said he would be traveling back and forth a lot from China and we’d catch up over dinner. Then Austin reminded me about how important it was to stay on the story.