Bought and Paid For (11 page)

“It's pretty amazing,” explained a twentysomething Goldman Sachs trader to me in 2009. “We're making money in so many different ways it's frightening.”

He was bragging about the enormous pool of wealth he and Goldman found themselves sitting in just months after the financial collapse had nearly destroyed his Wall Street career and forced him to use his Ivy League education and top-flight MBA to do something other than speculate on bond prices. But the federal government, first under George W. Bush and then under Barack Obama, had once again made the world safe—and highly lucrative—for speculators.

Beyond even just the direct and indirect bailouts, what the young trader was now bragging about was how policy makers had created a no-lose market for him and his trading buddies.

“We're making money with our eyes closed,” he laughed.

As he explained it, the gravy train began with what we've already covered, namely the Federal Reserve's policy of taking interest rates down to zero. This then lowered the cost that this trader and his many counterparts paid to borrow funds and invest them in whatever they wanted.

The government handouts included the new “too big to fail” policy, which the Obama administration made clear it wouldn't change from the Bush years. Under this policy, companies and investors with capital could lend to Goldman and the rest of the Wall Street banks without worrying that a bad bet here and there from the traders would put the firms out of business and cost them their investment. Why? Because any bank receiving this special designation would be bailed out by the U.S. taxpayer, and that protection was better than anything any insurance company could give them. As a consequence, Goldman's borrowing costs fell even further.

On top of all this there were the various guarantees the banks received— that the government wouldn't let them default on their own long-term debt and that the banks could borrow from the government. And as an added layer of protection, investment banks like Goldman and Morgan Stanley were now treated like ordinary commercial banks (though I've never known anyone to open a checking account at Goldman or the House of Morgan).

Yet by becoming commercial banks in name only, Goldman and Morgan had access to government funds through the Fed's discount window, something that had only been available to banks with traditional deposits.

Meanwhile, the American public was told that these measures were designed to save the banking system. After all, without big banks, where could small businesses—widely regarded as the engines of any economic recovery—get loans to expand and hire again? The problem was that small businesses couldn't get loans. The dirty secret was that Goldman and Morgan Stanley never made loans to small business and never will, and as for the big banks, like Citigroup and JPMorgan Chase? They were copying the business models of Goldman and Morgan Stanley, so instead of making money by lending to businesses, they were now trading bonds, which, with all these programs and gimmicks, were on a government-subsidized rally, as the young Goldman trader explained to me. “It's almost criminal,” he snickered.

Like most young men who go to Wall Street, this trader was drawn to Goldman Sachs for the opportunity to make millions, and after nearly losing it all, it didn't matter that he was getting rich off the American taxpayer or that Obama promised to squeeze entrepreneurs and small businesses with higher taxes. The young millionaire even explained that, thanks to a fat 2009 bonus, which was derived from all of these government gifts, he planned to retire early.

But Wall Street had help in another place too. The Financial Accounting Standards Board—the chief regulator of the accounting industry—basically stemmed the flow of losses at the big banks in April 2009 by relaxing rules that forced the firms to price (or “mark”) their assets at actual market value (as opposed to a “model” value, which allows firms to mark assets at whatever they feel they are worth). Before this change went into effect, this “mark-to-market” accounting had helped expose to the world the enormous degree to which Wall Street had become a gambling den rolling the dice in some of the most speculative securities ever created. This accounting rule had forced the firms to take losses on those securities by marking them to the actual, often near-zero values, even if they had no intention of selling those bonds any time soon. It was this type of accounting treatment that nearly forced them out of business in the fall of 2008, and now that hurdle was being removed. It's good to have friends in the right places.

Now the mark-to-market rule was gone, thanks to political pressure to relieve the banks of a massive burden during their time of alleged need. What's more, the Federal Reserve (with the support of Obama's Treasury secretary, Tim Geithner) spent most of 2009 purchasing on the open market $1.3 trillion of debt, much of it consisting of similar securities to the banks' depressed mortgage bonds while Geithner planned to have the Treasury subsidize hedge funds' purchases of mortgage bonds. All of this made the type of investing the Goldman trader was boasting about a no-lose proposition.

“Any way you look at it,” this trader boasted, “we're going to have an amazing year.”

The trader's comments were, of course, an honest and stark contrast to the absolute horseshit spin (forgive the blunt language, but there's no other way to describe it) coming out of his firm, and out of all the major firms. As the banks' PR flacks told it, all that money was being made the old-fashioned way—just by using brainpower and skill to game the markets.

Given all the money being made at Goldman, Lloyd Blankfein must have known he had the most to lose from profiting so soon after the bailouts. Goldman's bonus numbers in the spring of 2009 were on a record pace, and suddenly the big firm came up with a new PR campaign. While other Wall Street firms tried to downplay their near-death experience in 2008 or simply thank the American taxpayer for the bailouts, Blankfein chose to take it on directly and ordered his PR staff to rewrite history. As the flacks at Goldman put it, the firm had never really needed the bailout money that it had been given in 2008, nor did it need all the handouts it was receiving as the new administration took over. In other words, the Bush White House had forced it to be bailed out back in 2008, shoving $10 billion in capital down its throat on top of other measures, just as the Obama White House was forcing it to make so much money now.

When word of Goldman's new PR strategy, articulated by its sharp-tongued spokesman (and highly paid partner), Lucas van Praag, began to spread, even rivals at Morgan Stanley were shocked. “Why are they drawing so much attention to themselves?” one press official asked me.

At JPMorgan, Dimon's PR staff were more subtle than Goldman's (they shied away from arguing with reporters about whether the bank had needed to be bailed out), but they were nearly as duplicitous about JPMorgan's postbailout progress. The bank, they said, was simply “earning” its way out of the banking crisis.

If that was the case, if the Street really didn't need all these special programs, then why did it continue to use them? And why did they never cease to butter up the new president who was handing out free money? In fact, just the opposite appeared true. Dimon, who was now a regular visitor to the White House, spoke glowingly about how he first met Obama years earlier while he was the head of Bank One in Chicago (which he later merged with JPMorgan to become CEO) and Obama was an Illinois state senator. Sources inside JPMorgan say that during the presidential election, while Dimon's PR staff said he had to remain technically neutral, Dimon appeared to encourage his staff to funnel money to the Obama campaign and began briefing Obama on the banking crisis. If Obama seemed to be the better versed of the two presidential candidates on the intricacies of the banking system during those days, it was because he had Jamie Dimon, by most accounts the best manager on Wall Street, lending him a helping hand.

And that help continued. Dimon took his family to the presidential inauguration, and during Obama's first year in office, Dimon was seen around the White House so many times directly with the president that he became known in Washington as the “shadow Treasury secretary,” the man Obama trusted most when it came to the economy.

Meanwhile, the real Treasury secretary, Tim Geithner, was busy meeting with Lloyd Blankfein. The Goldman CEO didn't have the warm and fuzzy relationship with the president that Dimon had (no one, it should be pointed out, feels particularly warm around Blankfein), but he and Goldman had supported the president enough during the campaign that, like Dimon, Blankfein also had an open invitation to the White House. Records show that Blankfein met with Geithner a whopping twenty-two times in 2009, more than any other CEO.

What were they discussing? Spokesmen for Dimon and Blankfein characterize the meetings as casual visits to discuss banking policy and how it would affect Wall Street, which might well be true. But what they're leaving out are the details of those meetings. Those details, I am told, often centered around TARP (the Troubled Asset Relief Program)—the bailout program that injected hundreds of billions of dollars of capital into the banks following the collapse of Lehman Brothers in September 2008. Now that the firms were making money again, they were no longer worried about surviving; their big concern was how much they would thrive. And they couldn't thrive unless they could pay their traders bonuses that matched their performance, even if that performance was subsidized by the American taxpayer.

But under TARP, these bonuses were capped—as long as the firms owed that money to the government, the government's “pay czar,” a man named Ken Feinberg, limited the amount of money each firm could pay its top-earning traders. Feinberg was already sending a chill through Wall Street. Citigroup was forced to sell Phibro, its profitable commodities-trading unit, because Feinberg would not allow it to pay Andrew Hall, the head of the unit, the $100 million he was owed under his contract.

With all this in mind, Blankfein and Dimon spent more time in Washington than ever before. In addition to meeting with the president and Geithner (some of those “meetings” occurred over the phone), they met with members of Congress, including Democrat Chris Dodd, who ran the banking committee of the U.S. Senate, and Barney Frank, his counterpart in the House of Representatives. Blankfein and Dimon's pitch was pretty direct: Now that their firms were healthy again, they asked to be allowed to pay back the TARP money so they could pay their people what they (thought they) deserved.

But for some government officials, it wasn't as easy as just paying back the government's money with interest. The investment banks were still saddled with toxic debt that was being propped up by the feds. That TARP capital would be needed if the system went south again. Blankfein and Dimon had won over Geithner, their longtime friend; he gave them the sign-off, as did Ben Bernanke at the Fed. But Sheila Bair, the FDIC chief, was hesitant. She was, after all, the bureaucrat who would have to bail out the banks if the system seized up again, and she barely had enough money to handle the dozens of small community banks that were failing, it seemed, by the day.