Bought and Paid For Page 3

  That was the last time I spoke with Austin Koenen. He died in his sleep a few days later of a heart attack. He was fifty-five years old.

  But if Austin Koenen were here today, he would tell me I haven’t done enough to explain how Wall Street and Big Government work so beautifully together; how, despite the notion that these alleged free-market capitalists really despise modern liberalism, Wall Street makes a mint when these pols get into office and how the American people get screwed by this unholy alliance.

  And he would be right, and that’s why I’m writing this book.

  Charles Gasparino

  July 2010

  1

  A SECRETIVE MEETING

  In June 2007, the credit crisis was starting to shake the foundations of Wall Street. Two hedge funds at Bear Stearns had imploded, their investment portfolios packed with esoteric bonds, igniting the first stirrings of what would become a massive financial panic unlike any since the Great Depression, a panic that would directly lead to the demise of two of the most historic American financial firms, Bear Stearns and Lehman Brothers. The rest of the country’s biggest commercial and investment banks, firms like Citigroup, Morgan Stanley, JPMorgan, Goldman Sachs, Merrill Lynch, barely survived and then only after an unprecedented government bailout.

  And yet astonishingly, the heads of some of these same institutions—people like then Lehman Brothers CEO Dick Fuld; Greg Fleming, the number two executive at Merrill Lynch, the nation’s largest brokerage firm; Larry Fink, the head of money-management powerhouse BlackRock; former Federal Reserve chairman Paul Volcker; Gary Cohn, one of the top executives at megabank Goldman Sachs; and mortgage-bond whiz Warren Spector, one of the heads of Bear Stearns—all seemed to be in a good mood. They were assembled around a large table in a private dining room at the Washington DC restaurant Johnny’s Half Shell to meet with an inexperienced but charismatic senator from Illinois: a then relatively unknown man named Barack Obama, who wanted their help in becoming the next president of the United States.

  Like most meetings at which the heads of the biggest banks assemble all in one place, this one was conducted in private. No press was allowed in, and it’s unclear if any of the men present even told their press departments that they would be at the meeting. But what wasn’t so private was the reason for the meeting. During the last presidential election, Wall Street had largely divided its support between the incumbent, George W. Bush, and his Democratic challenger, John Kerry. But the coming election, the heads of the Wall Street firms had told one another, would probably be different. All the polling showed the Democrats in the lead for both Congress and the presidency.

  And Wall Street loves a winner. But Hillary Clinton, the odds-on Democratic favorite at this point and the wife of former president Bill Clinton, wasn’t the winner the men at Johnny’s Half Shell were looking for. To be sure, most of the senior executives at the top firms were committed Democrats—despite the mainstream-media cliché that Wall Street is a bastion of country-club Republicans. A more accurate cliché would be that the executive suites of the big firms house some of the most rabid limousine liberals in corporate America, and Hillary Clinton made the most of the Street’s Democratic Party bias. Her Wall Street support included the CEOs of Wall Street’s most prestigious investment banks, Lloyd Blankfein of Goldman Sachs and a former Republican, John Mack of Morgan Stanley, and she was on her way to collecting nearly $750,000 in donations from Wall Street executives during the next three months, while Obama would pick up less than $200,000 during the initial stages of the campaign.

  Yet change was in the air, as the attendance at this restaurant showed. Many of Wall Street’s limousine liberals might have given money to Hillary Clinton out of a combination of ideology and convenience (2008, by all accounts, was supposed to be a big Democratic year given President Bush’s low poll numbers, the unpopular war in Iraq, and the burgeoning financial crisis), yet they weren’t crazy about supporting another Clinton for president. They had several reasons, but the primary one they shared with me back in 2007 had to do with her sense of conviction: Simply put, Hillary Clinton was considered too independent and ready to turn her back on Wall Street as soon as it became politically expedient.

  In fact, as the financial crisis grew in intensity throughout 2007, she began to lay the blame squarely at the feet of her Wall Street supporters. “Wall Street shifted risk away from the people who knew what was going on and onto the people who did not,” she said in a speech at the NASDAQ market headquarters in Midtown Manhattan.

  It didn’t matter that the financial crisis (rooted in the housing bubble, in which average Americans took out loans they couldn’t afford) began with policies instituted by her husband, who had prodded banks and the federal housing agencies Fannie Mae and Freddie Mac to expand mortgage lending to poor communities. It didn’t even matter that Wall Street was one of her biggest contributors. Hillary Clinton was one of the first national politicians to believe bashing Wall Street was a vote getter.

  Barack Obama, on the other hand, turned up the charm.

  The Wall Street liberals may say they favor leftist causes like gun control, abortion rights, the so-called green agenda, and higher taxes on the rich and on businesses (except, of course, their own). JPMorgan Chase CEO Jamie Dimon has told me repeatedly that he believes the “rich” need to pay their fair share of taxes, even when “rich” constitutes a family of four living in New York and earning $200,000 a year (a sum that doesn’t go far in New York, with its sky-high taxes, and that amounts to a sliver of Dimon’s own 2009 compensation of more than $17 million).

  But in fact, what the liberals on Wall Street love more than anything else are friends in very high places and the profits that they derive from managing those friendships—a function of the largesse of Big Government. Why else did big Wall Street firms whose bankers live in New Jersey make campaign contributions to help elect city and state officials in California? Every time one of these politicians approves a bond issue, the bankers collect a fee. Likewise, every time the federal government goes into debt to fund another entitlement, the big firms “underwriting” that debt (buying it from the government and selling it to investors) get rich. The presumed bastions of free-market capitalism—the heads of the firms who are responsible for ensuring the free flow of capital throughout the economy—love feasting on the government as much as the laziest civil servant.

  But Hillary Clinton, with her shrill voice, her oversexed husband, and, most of all, her vaunting political ambitions ever since her ill-fated and unwieldy attempt to remake health care early in her husband’s presidency, made the bankers all think twice. Could she really be trusted to deliver for them?

  The Wall Street fat cats of the Left certainly weren’t ready to fully endorse the Republican Party, either. Of the two men likely to win the GOP nomination, the longtime U.S. senator and self-proclaimed “maverick” John McCain was far too testy and independent for the control freaks running Wall Street, and Mitt Romney, the former private-equity tycoon who had become Massachusetts governor, hadn’t been able to gain much traction among voters.

  McCain would ultimately become the Republican presidential candidate, and his speeches during the campaign would prove the bankers’ early concern justified. He publicly supported the bailouts of the big banks during the darkest days of the financial crisis, but he would more than match Hillary Clinton in antibank rhetoric, proclaiming on the campaign trail that “Wall Street is the villain”; that if elected, he and his running mate, Sarah Palin, would “put an end to the reckless conduct, corruption, and unbridled greed that have caused a crisis on Wall Street”; and, perhaps most alarming for the Wall Street elite, that “we need to change the way Washington and Wall Street does business.”

  No, they were on the prowl for someone else: a breath of fresh air. They were looking for someone of intellect but also a voice of moderation. This would have to be a person who, if not an active part of the tight-knit Wall Street-Washington club, wouldn’t w
ant to do anything to rock the boat. For decades, Wall Street’s interests had been safeguarded by the coterie of bureaucrats who survived administrations, passing back and forth from Wall Street to Washington, and who always seemed to work with the Street’s best interests at heart—even if those interests were at the expense of the country’s larger needs. What the bankers wanted in a new president was someone who would keep this system safely intact.

  These bureaucrats were people like Robert Rubin, the former Treasury secretary and now a top figure at Citigroup; Hank Paulson, George Bush’s Treasury secretary and former CEO of Goldman Sachs; and Rahm Emanuel, a former Clinton administration official and Wall Street “political consultant” (whose main political advice for Goldman Sachs in the late 1980s and early 1990s had been how best to win underwriting assignments from municipalities in Illinois, like his hometown of Chicago) before he joined an investment banking firm and then became a congressman from Illinois. Others included Larry Summers, yet another former Treasury secretary, former head of the World Bank, a former Harvard professor (he had been president of the school but had been forced to resign after questioning the math aptitude of women), and a managing director of the hedge fund D.E. Shaw; and Timothy Geithner, the president of the New York Federal Reserve, who in that position was the banking system’s chief regulator after the Federal Reserve chairman himself, Ben Bernanke.

  Bernanke, for his part, was largely a copy of his former boss and predecessor, Alan Greenspan. During his long career in government and as an economist, Greenspan fancied himself a free-market guru and devotee of Ayn Rand, who favored putting the United States back on the gold standard, which meant the nation’s supply of money would be based on the amount of gold stashed away in Fort Knox. He was first appointed by President Reagan in the mid-1980s but survived through the Democratic administration of Bill Clinton primarily because he had long ago given up his free-market credentials, seemingly cheering on the Clinton tax increases during the early part of the administration, as well as the massive changes to the financial system Clinton advocated later on at Rubin’s behest.

  They were changes made under the guise of deregulation and largely supported by Republicans who considered themselves supporters of the free market, the grandest goal of all being the elimination of the Glass-Steagall Act, which forbade banks to mix trading activities with safeguarding of customer deposits. While the free-market nature of these efforts is still in debate, what isn’t in debate is the result: Massive banking empires were created, allowing financiers to merge risk-taking trading businesses with commercial banks that held federally insured bank deposits.

  The result? Companies like the gargantuan Citigroup, run by Sandy Weill, that were—as America was about to find out—so huge and carried so much bad debt on their books that their collapse would threaten to destroy the entire financial system. More than any single bureaucrat during the past three decades, Greenspan was truly Wall Street’s best friend. When the banks lost money, he made sure they never felt too much pain, lowering interest rates and pumping money into them whenever the markets snapped. It was a pattern he’d repeatedly used over the years, from the 1994 junk-bond crisis to his response in 1998 to the collapse of the hedge fund Long-Term Capital Management and later to the dot-com crash of 2000 and 2001.

  Now Wall Street was looking for a new friend, and it had its sights set on Obama, a newly elected U.S. senator from Illinois who long before he began a charm offensive with members of the Wall Street elite had started his political career in Chicago as a young “community organizer,” mobilizing people in poor neighborhoods to protest big companies who were moving their manufacturing jobs overseas (the protests were largely unsuccessful) and creating a jobs program for teenagers living in Chicago’s depressed South Side (which was moderately successful).

  As a local politician, he had earned some name recognition, and he gained even more as a U.S. Senate candidate from Illinois, when (on his way to a landslide victory) he gave a rousing speech at the 2004 Democratic National Convention.

  In that speech, he couldn’t help but express his fondness for Big Government. He waxed eloquent about how the government-run Federal Housing Administration program did so much good because it allowed his grandfather to buy a home after he returned from World War II. Of course, he failed to mention the role of other government agencies, Fannie Mae and Freddie Mac, in creating the housing bubble that, within four short years, would become a housing crash. He talked about how government had helped a child from Chicago’s South Side learn how to read. He added that the American people “don’t expect government to solve all their problems. But they sense, deep in their bones, that with just a slight change in priorities, we can make sure that every child in America has a decent shot at life, and that the doors of opportunity remain open to all.”

  Even so, from what they knew of him, the bankers felt that in this ambitious, charismatic young man they might have found their guy. The chatter among top Democratic fund-raisers on Wall Street was that Obama understood their importance and would do little to dismantle their power and influence over the nation’s economy. Despite his lack of experience in the big leagues, his time as a community organizer had taught the young Barack Obama about power—namely, how one’s relationships with influential people can make a difference. As reported by the National Review’s Byron York, one of Obama’s defining experiences as a community organizer came after suffering a setback in his effort to get asbestos removed from a housing project. York quotes an old friend of Obama’s summing up the future president’s reaction: “He said, ‘I need to go there [Harvard Law School] to find out more about power. How do powerful people think? What kind of networks do they have? How do they connect to each other?’ ”

  Another story, this time in New York magazine, quoted a law school friend of Obama’s, Julius Genachowski, as saying, “Other states vote; New York [i.e., Wall Street] invests.” It was a lesson the young candidate would take to heart. The same story contains an anecdote that illustrates just how much Obama had learned about how to sway Wall Streeters: In trying to persuade investment banker Robert Wolf to support him over Hillary Clinton, Obama arranged for a two-hour private dinner with Wolf on the night that George W. Bush was announcing his plan for the surge in Iraq.

  But before the Wall Street elite would endorse Obama, they needed to see what sort of mettle he had. The man largely responsible for convincing the bankers to meet with Obama was Mark Gallogly, a veteran investment banker. Gallogly is one of those Wall Street executives who rarely appear in the Wall Street Journal, nor even the Wall Street gossip rags, but are powerful in their own right. Gallogly grew up in a heavily Irish-Italian section of Providence, Rhode Island, and had been a lifelong Democrat. He had had a thirty-year career on Wall Street, the last sixteen as one of the top executives at the private-equity firm Blackstone, before starting his own private-equity firm that specialized in media deals.

  If the public face of Blackstone was the firm’s eccentric founding partner Steve Schwarzman (maybe best known for throwing a lavish, celebrity-filled birthday party for himself just weeks before Blackstone became the first private-equity firm to go public, pegging Schwarzman’s net worth at close to $6 billion), Gallogly was known as the silent partner who made the trains run on time.

  In so doing, he came to know just about everybody on Wall Street, and it didn’t hurt matters that during his years at Blackstone he had also become increasingly active in Democratic Party politics.

  A new generation of Wall Street leaders had begun filling the executive suites. They were men more like Jamie Dimon, a committed supporter of Democratic causes, than the old-line Republicans who used to control Wall Street. They all considered themselves to be capitalists, but they also believed they were progressives and were willing to use their money and clout to spread a left-of-center political agenda.

  Gallogly was cut from the same cloth, and he was all too eager to introduce the junior senator from Illinois to the mo
st powerful men in the world. He did so simply by telling them, “There’s someone I’d like you to meet.”

  With his fine features, neatly combed silver hair, and piercing blue eyes, Gallogly looked like a politician himself. But he was content to make his money as a banker while staying in the political background and quietly campaigning for others who looked poised to advance the Democrats’ agenda (and not incidentally, his interests and those of Wall Street). And in Obama he saw the complete package.

  As far as Gallogly was concerned, the man running for president wasn’t the Barack Obama that many on the right were now warning about as his campaign began to gain momentum in 2007. He wasn’t the guy who had sat idly by in the pews of Trinity United Church of Christ on the South Side of Chicago listening to the fiery Reverend Jeremiah Wright delivering anti-American and anticapitalist rants. Or the Barack Obama who associated with the socialist terrorist William Ayers (Ayers was a member of the Weather Underground, a terrorist group that bombed government buildings in the 1960s) on Chicago education reform.

  Gallogly had first met Obama in 2004 at a dinner with other senators after Obama was elected to the Senate, and the two had hit it off immediately. Gallogly found Obama to be an incredibly moderate person in terms of temperament and policy. He wasn’t anticapitalist, Gallogly believed; he just wanted to spread the wealth. He wasn’t anti-American; he just wanted an open dialogue so the country could get beyond the struggles of the past.

  More than that, he appeared truly smart.