Bought and Paid For (14 page)

Big Government's alliance with Wall Street, of course, has historical roots, including many that I have uncovered during my long career as a reporter. These roots long predate Jesse Jackson's Wall Street Project and the historic Orange County, California, bankruptcy filing. In fact, Orange County was just one instance of how Wall Street and Big Government have worked arm and arm, often to the detriment of the average taxpayer, not just on the local level but on the state and national levels as well.

Rating agencies like Moody's Investors Service, Fitch, and Standard & Poor's slapped all those fictitious triple-A ratings on the mortgage debt, enabling the Wall Street firms to sell the bonds that allowed banks to meet the requirements of the Community Reinvestment Act, which hands out loans as part of the social policy goals of Big Government. While they were doing that, the raters became the useful idiots of the tax-and-spenders at the state and local level. Despite broad public support for lower taxes and smaller, more efficient government, the rating agencies all but threaten states to keep taxes high or face downgrades in their debt ratings.

And of course, on the national level, the alliance between Big Government and Wall Street has been responsible for bailout after bailout.

It's important to remember that the embrace of Wall Street and its largesse is a bipartisan sin. The George W. Bush administration cut taxes but not the size of the U.S. government, and Wall Street prospered through the issuance of government debt and through the continued use of the mortgage-backed security to further the housing policies that began in the Clinton years and continued under Bush.

But George W. Bush never proclaimed himself to be the president of change, to be the leader who would set the greed merchants on Wall Street straight even while he all but promised to make them rich. That distinction belongs to Barack Obama alone.

Obama made good use of his time in Chicago, cultivating financial as well as political connections. And few were more important than Jamie Dimon.

When he took the top job at Bank One, Dimon moved his family to the Second City and enticed his Citigroup cronies to join his new firm, which he vowed would one day match the size and strength of Citigroup, and he immersed himself in the midwestern political culture. While in Chicago, he forged his close ties to Rahm Emanuel, to the ruling Daley family (he went on to hire one of the Daleys as a top executive), and, according to Dimon himself, to a young state senator named Barack Obama. It's no coincidence, either, that shortly after their first meeting, Dimon made donations to a number of Chicago-based charities that no doubt were and remain close to the then-future president's heart. Dimon serves on the board of the University of Chicago, to which he donated $1 million, and he also gave money to the Museum of Contemporary Art Chicago, Big Brothers Big Sisters of Chicago, the Chicago Community Foundation, and the Chicago Public Education Fund.

And Obama's close friend and future chief of staff Rahm Emanuel was linked closely to Wall Street as well, having worked for Goldman Sachs and receiving a salary of $3,000 per month in the early 1990s to “introduce us to people,” as one Goldman partner said at the time. And that's exactly what he did, and more.

The overall market for the derivatives traded by the big investment houses and used by big corporations and Big Government to massage earnings and debt levels exploded (well into the tens of trillions of dollars) between 1998 and 2008—that is, until the financial system collapsed as these financial products that had been invented to reduce risk pushed the financial system to the breaking point.

Much has been said and written about this period of excess, which allowed America to go on a spending spree. The conventional wisdom in the media is that everything that caused the crisis was the result of deregulation, the free-market sin of allowing unscrupulous bankers to lend to risky “subprime” borrowers, letting the Wall Street traders run wild without adult supervision, and maybe most of all the explosion of various new forms of debt and “derivatives” of that debt that made Wall Street so rich while the wages of average American stagnated. In 1989 the total amount of the derivatives market stood at $2.4 trillion. Twenty years later the markets had undergone a radical transformation with more than $450 trillion worth of complex derivatives contracts being held by various financial players.

The proponents of these newfangled financial products said they had a proven societal benefit. The risk reduction that derivatives created allowed those risky subprime borrowers to buy homes through the magic of Wall Street financial engineering, such as the mortgage bond and its various iterations, like the collateralized debt obligation.

The great financial collapse of 2008 occurred after a period of reduced regulation of mortgage lenders, Wall Street, and its traders, but Wall Street's historic implosion was equally the result of large government bailouts, which had the cumulative effect of allowing the big Wall Street firms to skirt the full consequences of their risk-taking actions. In other words, government didn't just let Wall Street run wild; it virtually condoned Wall Street's wildness by bailing it out whenever it ran into trouble. For example, in 1998, the Federal Reserve slashed interest rates, creating free money for the brokers whose risk taking had led to large losses. Ten years later, the federal government, as we all know, would play a direct role via bailouts in ensuring that the Street survived the downside of gambling.

What's more, the men at the center of this massive government subsidy for Wall Street gambling would benefit mightily from this protection and continue to do so even today, as they shuttle back and forth between Wall Street and key jobs in the federal government. They include Emanuel, now the president's chief of staff (and according to some, the second-most-powerful man in America, behind the president himself ) but formerly a lobbyist for Goldman Sachs; Larry Summers, formerly deputy Treasury secretary, Treasury secretary, and adviser to the giant hedge fund D.E. Shaw and now a chief economic aide to the president; and a man who more than anyone else epitomizes all that is wrong with the alliance of Big Government and Wall Street: Robert Rubin.

Known by his friends simply as Bob, Robert Edward Rubin is a short but intense man who speaks in a commanding yet understated tone. Those who know him describe him as part intellectual, part risk-taking gambler. According to the
New York Times
, when he worked at Goldman in the 1980s, he would pester coworkers with questions during holidays and even called a colleague to ask a mundane question during the second half of the Super Bowl. He seemed too intellectual to be sitting at the trading desk, making bets like a professional Vegas gambler.

But Rubin saw trading as the key to success on Wall Street as the Street's traditional lines of business, such as advising companies on stock deals or mergers and acquisitions, began to show lower and lower profit margins because of increasing competition. Trading, however, couldn't be commoditized, especially at a firm like Goldman, which recruited the best and the brightest from top-ranked schools. The Goldman trader (so those at the firm believed) was far superior to the competition because he was simply smarter and would be willing to trade against even his own clients for the greater good of the firm (something that, as we'll see, would land the firm in hot water in 2010).

The art of risk taking was Rubin's forte, and he instilled it in a generation of future Goldman leaders, people like bond trader Jon Corzine (who would go on to run the firm before embarking on a political career as a liberal U.S. senator and governor of New Jersey) and a commodities salesman named Lloyd Blankfein, who, like Rubin, openly embraced risk.

Bob Rubin was a trader through and through, and in his mind, men like him were essential to the survival of modern Wall Street. It came as no surprise to any of his colleagues at Goldman that amid the clutter of his office, one thing stood out: a photo of former Goldman chief Gus Levy, the legendary trader who began the firm's push into the wild side of the Wall Street business model many years earlier.

Rubin graduated from the London School of Economics and received a law degree from Yale. But he made his fortune during his nearly three decades at Goldman Sachs, mostly in the trading pits, as an “arbitrageur”—a fancy Wall Street term for someone who takes big bets in the markets by trading debt and other esoteric securities.

During this time, he was active both in Democratic Party politics and among the Wall Street elite, where he helped set the financial business's lobbying agenda. Under Rubin, Goldman would hire numerous young and talented politicos, mainly Democrats, including a young Rahm Emanuel as a “consultant,” to help the firm win lucrative investment-banking contracts from municipalities and businesses. When he retired from Goldman as its chairman, he took a job as the chief economic adviser to President Bill Clinton, and shortly after that he made his greatest “contributions” to public service as Clinton's Treasury secretary.

Rubin has earned kudos for prodding the Clinton administration to cut the nation's deficit through a massive tax increase, initially slowing economic growth and igniting a massive rally in the bond markets—which just happened to benefit Rubin's old firm, Goldman Sachs, along with the rest of Wall Street. Economists are divided, mainly along ideological lines, over whether the Clinton tax increases did indeed help spur the massive economic recovery that began in 1995 or whether it was the result of political gridlock in Washington, where the Republican-run Congress blocked many of Clinton's spending initiatives and forced him to govern from the center, enacting policies that the far Left hated, such as cuts in capital gains taxes and welfare reform.

Either way, one thing is certain: Bob Rubin was Wall Street's inside guy within the Clinton administration, where he appointed top officials who believed, as he did, that Big Government and Big Finance could work and prosper together. The massive amounts of debt sold by the federal government to finance that Big Government needed to be auctioned first to the Wall Street firms, which took healthy fees before they sold it to their customers. Likewise, municipal governments needed Wall Street to underwrite their debt, and as in the case of Orange County, pump up returns with fancy, and risky, bets on the markets.

Meanwhile, Rubin's massive risk taking on Goldman's trading desk was being replicated across Wall Street and could only be accomplished through government policies in one form or another. Sometimes it would take more than just Federal Reserve interest-rate cuts to save Wall Street, as Rubin himself began to argue in early 1995, just as Bill Clinton appointed him Treasury secretary.

“The objective of promoting United States exports, jobs, security of our borders, in our judgment, is being accomplished,” Rubin said in 1995. He was describing what was at the time the largest intervention by the U.S
.
government in the free markets in memory. In January of that year, the bond markets had seized up with the sudden devaluation of the Mexican peso. America's southern neighbor, a major trading partner, was on the verge of default, and Wall Street panicked.