Bought and Paid For (32 page)

Exactly so: Being bought and paid for means that you serve the needs of your benefactor, whatever those needs may be.

“T
here's no guarantee we'regoing to be paying that much in bonuses,” explained an increasingly exasperated Lucas van Praag. “Trust me.”

The problem for Goldman's expensive mouthpiece was that no one was trusting either him or his employer much these days. The firm had basically bragged it didn't need the bailout money it had been given, something that even Obama found offensive, not to mention Goldman's former CEO Hank Paulson, who had written the initial bailout check when he was George W. Bush's Treasury secretary. Now Goldman was once again trying to downplay the obvious: The firm set aside $23 billion during 2009 in bonus money.

And somehow, according to Van Praag, not all of that money would find its way into the pockets of Goldman's risk-taking traders. Or Blankfein himself, who was making Van Praag defend the absurd to the point that the flack's reputation among reporters had fallen to Nancy Pelosi-like levels of unpopularity. Stories began to appear that chronicled his various equivocations. A fake Twitter account was created in his name, mocking his British-accented defenses of the firm, and the press attention began to unnerve Van Praag.

“I would just love to be on an island somewhere and forget about all of it!” he moaned to a couple of friends one afternoon just after the McClatchy news service published a lengthy exposé raising questions about how the firm had “benefited from the housing crash” while the rest of the nation suffered.

The story was basically a rehash of much of what was known about how Goldman had profited off the housing collapse. While Americans were being foreclosed on, Goldman traders in 2007 were getting rich, in some cases shorting, or betting, that mortgage bonds would decline in value even as it sold similar securities to its clients. Goldman officials, including CFO David Viniar, one of the key people at the firm who had devised this strategy, kept assuring reporters, analysts, or anyone who would listen that it was nothing more than a hedging technique to reduce risk. Ironically, while the firm was reducing risk it was also mysteriously increasing profits, so much so that Blankfein walked away with a record bonus that year.

The McClatchy story didn't have the gravitas of a
Wall Street Journal
exposé or the sensationalism of the one from
Rolling Stone
, but it hit a nerve. The McClatchy news service was decidedly Middle American, with thirty newspapers in fifteen states reaching over two million people. Bashing Goldman Sachs suddenly became a mainstream sport as the article was picked up by television and radio shows across the country.

Despite the fact that they had become the most hated people in America, by early 2010, Wall Street bankers and traders and the posh restaurants in New York that catered to them were flourishing. It was standing room only at the expensive eateries—Campagnola, San Pietro, and the Four Seasons—where the bonus babies were spreading their wealth. As predicted, 2009 had been a really good year, at least for Wall Street. In fact, it had been its fourth best ever in terms of overall compensation and on par with what Wall Streeters had made in 2004, when the markets were raging.

The joy extended not just to the partners at Goldman, with its titanic bonus pool, but also to Morgan Stanley, which despite its near-death experience at the end of 2008 found it could easily pay its new CEO, James Gorman, $15 million for 2009, even as it boasted that John Mack, now the chairman and the man who had saved the company during the crisis, would forgo his bonus for a third year in a row. (The firm later disclosed that Mack earned a “salary” of about $1 million, or $939,000 to be exact.)

Even lowly Citigroup, which because of its size and the fact that the government still owned 27 percent of the firm in spring of 2010, was not doing as well as the other banks, still found ways to pay its people handsomely. And a near revolt among traders and brokers at Merrill Lynch who hated working for the Charlotte, North Carolina-based executives at still-wobbly Bank of America was quelled by generous bonus packages—the vast majority of them in cash despite the media-publicized myth that firms were handing out their bonuses in restricted stock that couldn't be cashed in for a number of years as a way of incentivizing their traders toward long-term goals. The final 2009 bonus tally appearing during the first quarter of 2010 went something like this: With all eyes on Goldman's money making, Bank of America seemed to escape media attention as the firm that paid out the most money to its executives in 2009. Blankfein and company, who were obviously hypersensitive to being singled out not only as the great Satan of Wall Street but as its most highly paid devil worshippers, came in midrange while the real shocker was Citigroup, which topped the bonus payment charts.

The most bailed out of the big firms was making money again (who couldn't in this environment?), so much so that at the end of 2009 it joined Bank of America as the last two firms to officially repay TARP. Now, breathing a small taste of freedom (the government was trying to unwind the stake it had taken in the company as part of the bailout), the bank was free to pay its people like real Wall Streeters again.

While other firms paid more than half of the bonus grants in stock, Citi handed out much more generous cash awards, signaling that for all the improvement Pandit was boasting about, its shares weren't likely to trade much higher than the $3.50, at least for the foreseeable future.

When Wall Street had doled out some $20 billion in cash bonuses just months after the bailouts the previous year ($123 billion in overall compensation), the president had described it as “shameful.” Now he had even more choice words for his Wall Street friends. But they, at least for the moment, seemed not to have a care in the world. And they traded that way. For all the PR talk about how the big firms had learned their lesson and scaled back on risk, just the opposite seemed to be the case: Goldman Sachs took more risk in 2009 than it did in 2008, allowing it to earn a profit of $100 million per day in 131 trading days—a Wall Street record. Its results so far in 2010 meant it would likely meet or surpass that record, and the rest of the banks weren't far behind.

They weren't far behind in their arrogance, either, as they brushed aside suggestions that their firms' profits and their traders' bonuses were primarily the result of Big Government. Goldman, meanwhile, continued to offer the most brazen defense of its success, as Lucas van Praag and the firm's PR staff trotted out their tiresome reasoning that the traders at Goldman were just better and smarter than the rest of the Street.

That may be true, but it's also like bragging you're the tallest midget in the room. The reality for Wall Street was something the bankers either didn't want to admit or couldn't bring themselves to concede: that in the era of Obamanomics they were now in a sense reduced to highly paid bureaucrats being bailed out by Big Government, granted enormous wealth because of government handouts and certain to face more regulation from Washington.

But they were still highly paid, and on Wall Street that's often all that matters.

“This has been a very good year—very good,” boasted one investment banker at Merrill Lynch who specialized in getting municipalities to issue more debt, which they were doing, at Wall Street's behest, like never before. Tax revenues were going down because of the great recession, but borrowing had skyrocketed, and not just for municipal projects. The shell game of municipal finance was that all that bond money got thrown in a big pot, and much of the financing went to plug budget gaps.

While bankers at Merrill Lynch (now part of Bank of America) were making money feeding the needs of Big Government, bankers at Goldman were both counting their massive year-end bonuses and trying to ignore the company's notoriety, which seemed to grow by the day among average Americans thanks to the McClatchy wire service story and many others.

“Why the fuck should we care?” a senior Goldman executive asked me at the time. “Our clients don't read the fucking McClatchy wire service.”

He was right—the typical Goldman client read the
New York Times
and the
Wall Street Journal
. McClatchy, with its newspapers in South Carolina and Sacramento, was beneath Goldman Sachs, which had former CEOs who were Treasury secretaries and cabinet members, the kind of people whom Fortune 500 CEOs looking to hire an investment bank care about.

But as Blankfein and his team were starting to discover, Goldman's “clients” were no longer the guys paying the bill—they were the public officials who were making the rules about how much money the firm could make and whether the subsidies it had feasted on during the past year would continue.

Barack Obama didn't create the financial crisis in 2008, but he certainly created the uneven economic situation of 2009 and 2010 that allowed Wall Street to make so much money while America had to suffer through another dismal year of low employment.

Was Obama just tone deaf when it came to the economy, or just plain financially incompetent? Or was he so ideological in his approach to government that he ignored the suffering of average Americans who were out of work to spend his time pushing for a health-care entitlement and promising higher taxes on individuals, entrepreneurs, and small businesses while the jobless rate remained steady at around 10 percent?

No one will ever know, except maybe Obama himself. One thing is certain: The guy who appeared so smart and poised during the campaign couldn't seem to get his arms around some simple economic facts, namely that his policies offered none of the massive incentives to most businesses that they offered the favored few, namely the banks and brokerage firms (and a few large companies like General Electric that embraced his social agenda of “green jobs”), no matter how many times he called them names. A factory in South Carolina won't hire additional workers if management expects more taxes (as Obama was promising), bigger entitlements (like health care), and higher energy costs.

But on Wall Street the incentives were everywhere, including, most prominently, low interest rates and increased government protection. By the spring of 2010, Wall Street was doing what it had done in the post-meltdown period: trading even more mortgage debt and racking up monster profits. At Goldman Sachs, so much of the firm's profit was derived in one form or another from bond trading that even executives inside the firm compared the situation with the firm's precrisis heyday, the only difference being that Goldman, like the rest of the Street, was feasting off a market that was being directed almost solely by the very visible hand of government (even if every major bank had by now boasted that it had repaid the bailout money given to it during the dark days of 2008 and early 2009).

In early 2010, President Obama's Treasury Department proudly announced that Citigroup's repayment of its TARP money and the government's planned sale of its 27 percent stock ownership of the firm would net the American taxpayer some $8 billion. But like most things involving Obamanomics, the devil is in the details. The Treasury's analysis ignored the costs of hundreds of billions in “ring-fenced” assets (a term used mostly to describe the billions in toxic mortgage debt) that Citigroup held and that the American taxpayer had guaranteed against failing, as well as other programs designed to make life easier for the bankers. For the bankers, ignoring Obama's radical past while demonizing Sarah Palin at their Manhattan cocktail parties had its benefits. The technocrats at the Obama Treasury Department and at the Fed—whose chairman, Ben Bernanke, was a Bush appointee who had earned the support of his new left-wing boss—would say that this program was needed to remove the toxic debt sitting at depressed prices on the banks' balance sheets. They will tell you all the government programs were freeing up capital so businesses could borrow and expand. But the average American small businessman would tell you the programs weren't working and that despite positive economic growth, the banks were still nearly as tight-fisted with their money as they were during the financial crisis.