Bought and Paid For (36 page)

But at the commission, the case took on a life of its own. For all its holes, the case had some obvious merits: The casino that Wall Street had turned into was aided and abetted by some of the borderline sleazy business dealings Goldman had become famous for, namely dishing out investments its traders viewed as “shitty” (a word found in company e-mails regarding such investments) to clients, which for all their size and alleged sophistication had no idea what they were buying.

The case also had obvious political merits. The SEC, known as Wall Street's top cop, is supposed to be an apolitical arm of government that enforces the nation's securities laws. And yet its leaders, including the chairman of the SEC, are appointed by the president and often enforce the laws within the context of the White House's political agenda.

Running the SEC in 2010 was a lifelong Democrat named Mary Schapiro. After the black eyes the agency had taken for missing both the Bernie Madoff Ponzi scheme and the subprime crisis, Schapiro had vowed to turn things around. According to people close to the commission, investigators viewed charges against Goldman as a way to repair the commission's battered reputation after these failures.

To be sure, Obama had given speech after speech attacking his predecessor, George W. Bush, for the lack of regulations that had allowed Wall Street to run wild and destroy itself and the economy. It didn't matter to the president that his Treasury secretary, Tim Geithner, had been part of the same regulatory apparatus as president of the New York Fed or that Schapiro had been part of it as head of Wall Street's self-regulatory organization, FINRA (the Financial Industry Regulatory Authority), where she earned $3.3 million in 2008 and took a $7.3 million “retirement” package when she left to join the SEC as its chair.

What mattered to the president was that, like Geithner, who dutifully carried out Obama's plans to increase spending and raise taxes on small businesses to astronomical levels, Schapiro would carry out the president's agenda in regulating Wall Street and attacking corporate America for political gain, which she did with gusto. Despite her own massive compensation as head of FINRA (Schapiro was paid millions to regulate firms that paid her salary through their annual dues), she began to mimic her boss's criticism of high executive pay.

That conflict of interest didn't seem to concern the Obama administration, nor did the president and his economic team seem much interested in FINRA's lousy record of cracking down on Wall Street abuse. Schapiro was seen as a loyal soldier, someone willing to carry out the president's wishes, as she did on so-called proxy access, when she fought for new rules that allowed Big Labor to have a greater say in who sits on corporate boards.

Now, at least as far as Goldman's attorneys were concerned, Schapiro was gearing up to use the case against Goldman to once again achieve the administration's larger aims, namely forcing Wall Street to accept financial reform (which the president was now actively pushing following his healthcare reform victory and while he was at it trying to score points with a general public as he geared up for the 2010 midterms.) The SEC's broadside would do wonders to inoculate Obama against the growing impression that he was too cozy with the likes of Jamie Dimon and Lloyd Blankfein.

Even so, Goldman's lawyers assured Blankfein that they had a strong case and could get the SEC to back off before it went before the full five-member commission (which includes Schapiro). But Blankfein wasn't taking any chances. He wanted the firm out of the news, and that meant begging everyone in Washington who had ever received a dime from the firm to turn down the Goldman hating.

But it wasn't that easy. Goldman's lobbyists reported back to company headquarters in New York that the firm's reputation in Washington had itself become so toxic that the firm, which for most of its existence had had the ear of every major decision maker in Washington, was now persona non grata.

Now no one in Congress or, even more so, in the White House wanted to be seen near a Goldman banker. Blankfein, a savvy commodities trader with a degree from Harvard Law, had been a master of the universe for a long time, having his way whenever he wanted, but he finally understood what it meant to be used. Perhaps for the first time in his life, Blankfein was getting a taste of what it's like to be on the wrong side of a trade.

Wall Street, which was also so used to getting everything it wanted, had finally discovered that there's a price to be paid when you're bought and paid for, as the big firms had been for the past year. Like spoiled children, CEOs like Dimon and Blankfein began to seethe as the Volcker rule remained in place and their friends in the administration, Geithner, Summers, and Emanuel, appeared powerless to prevent other measures from sneaking into the plan.

Senator Blanche Lincoln, an Arkansas Democrat and no expert on the finer points of the risk taking that led to the 2008 collapse, introduced an amendment she believed would make Wall Street and the world safer. Lincoln's plan was to force the firms to spin off their businesses that dealt in derivatives into separate units that must be capitalized with costly new stock. It didn't matter that many derivatives, such as interest-rate swaps, are used by corporations and municipalities to hedge risk rather than take risk, and thus her move would put the squeeze on cities, states, and, of course, businesses already burdened by the soured economy.

But the notion that she was screwing Wall Street sounded good, and the president's political staff (as opposed to his economic team) told Dodd that the amendment should remain. If Dimon was livid over the derivative plan, he went nuclear over another measure: an amendment to create a new consumer protection agency designed to protect bank customers from unscrupulous lenders. Goldman couldn't care less about the measure, but for JPMorgan, with its massive Chase banking unit, the move would cost countless millions in the way of extra compliance staff.

Dimon and his team now attempted to assess the damage the various measures packed into the still-formulating bill would cost his bank. The consumer protection agency would mean much higher legal and compliance costs; the derivative spinout would mean extra money to capitalize a new entity that would sell those products to JPMorgan's clients. JPMorgan didn't do much proprietary trading, but it did own a massive hedge fund and private equity unit that, at least for now, appeared to be something the firm might have to sell.

There were so many moving pieces to the bill, and language that still needed to be written, that no one, neither Dimon nor some of the smartest minds at JPMorgan, could estimate a real cost, which in the world of Jamie Dimon, an executive who demanded to know everything about anything, was a fate worse than death.

“What the fuck are you guys doing for us?” Dimon screamed into his telephone at JPMorgan headquarters in New York one afternoon after hearing about the mother lode of new amendments being inserted in the bill. “You guys are worthless!”

Part of working for Dimon, who is alternately brilliant and hotheaded, is managing his moods. His senior management team—most of them longtime associates—have been schooled in how to deal with Dimon's more than occasional expletive-laced outbursts. It's part of the deal: You want to work for the best, be prepared to get screamed at once in a while.

On the other end of the receiver was Kirsten Gillibrand, who, though not a JPMorgan employee, had grown close to Dimon since she had been chosen to replace Hillary Clinton as New York's junior senator. So close, in fact, that JPMorgan had held a series of fund-raisers for Gillibrand, a former corporate lawyer whom Dimon had met while she worked at the white-shoe law firm Davis Polk. Gillibrand was now up for reelection and sure to be challenged for her inexperience and connections to the Clinton HUD department, which, as we saw earlier, greatly contributed to the housing crisis. But she appeared to have the king of Wall Street firmly in her corner. When asked about Gillibrand by the
New York Times
, Dimon said she was “hard-working, constructive and understands the issues.”

That was before the Dodd bill began to take shape. Now, according to people with knowledge of the conversation, she was a “sellout” and “good for nothing,” “letting down her supporters.”

Gillibrand knew Dimon's temper, but she had never seen it on display like this and responded simply that there was little she could do because the country wanted Wall Street to be held accountable.

Gillibrand later complained to a Goldman executive that she had “never been chewed out” like that before. She wasn't alone. Dimon, I am told by people at JPMorgan, had similar choice words for New York's senior senator, Chuck Schumer, once Wall Street's most reliable protector (and biggest recipient of campaign cash), who was now playing the class warfare game himself, attacking his contributors as if he had never received a dime from Wall Street during his long political career and letting the least Wall Street-friendly planks of the reform bill remain without much push-back.

While the Democrats ran for cover, several prominent Republicans began to raise serious issues with the bill. U.S. Representative Peter King, a fiscal conservative and the son of a New York City cop, represents a district on Long Island, outside of New York City. King is one of Congress's few straight shooters (he refused to apologize for calling Michael Jackson a “pervert” and criticizing the coverage of the pop singer's death as “too politically correct”). So when politicians like Gillibrand and Schumer cowered amid the anti-Wall Street hysteria, King was blunt about the legislation: The costs associated with implementing all the so-called reforms would be passed on to consumers, he said. New York State, which needed all the tax revenue it could drum up from the banks, would suffer if Wall Street profits declined, as even the most rosy cost estimates showed that they would. The New York region would be placed at a competitive disadvantage in terms of jobs if, for example, derivatives must be traded on a public exchange, because the only public exchanges that could handle such trading are located in Chicago.

But all of this wouldn't be so bad if the legislation had some teeth to prevent another financial meltdown. Dimon, for his part, is the type of Wall Street executive who simply hates to lose anything, which contributed to his growing disgust with the bill. But as the various amendments and their proposed language started to make their way to the corner offices of the big firms, an internal JPMorgan analysis showed that if the worst things in the legislation became established law, it would shave a mere $3 billion off JPMorgan's annual earnings of close to $12 billion in 2009—significant, but hardly catastrophic.

That was even before the bank began saddling its depositors and customers with higher fees and surcharges, and before JPMorgan's savvy and well-connected lobbyists figured out how to work their away around the bill's various edicts and orders. In the end, the JPMorgan brass, like the rest of the banking system, know how to bend the rules. They've done it before, and as angry as they were with the Obama administration, they would kiss and make up so they could do it again.

And that's exactly what happened, because for all the hand-wringing over the Volcker rule, the legislation as it was taking shape included no requirement to break up the banks, no mandate to force Citi and JPMorgan Chase to spin off their trading businesses to protect depositors from excessive risk taking (a mandate that some had called for after the crisis and that Volcker himself had toyed with but in the end backed off from). Under the bill, the Fed would still regulate banks and Wall Street firms, giving them access to emergency borrowing power when they screwed up. The feckless SEC would still be the investment business's chief cop.

There would be “systemic risk regulators” and other government agencies that would both weigh risk taking at the banks and force the government into the financial system in an unprecedented manner. The firms would have to hold more capital to cover trading activities, but there would be loopholes for those that played ball with Big Government: Banks would be given breaks on the capital standard for so-called community-based or socially responsible lending. It didn't matter that years of such lending practices—pushed by the Community Reinvestment Act (CRA) and other government edicts—had helped bring the system to its knees in 2008.

Shockingly, Fannie Mae and Freddie Mac wouldn't be touched by the reform. In fact, as I write this, the Obama administration and Congress are feeding the monster once again, trying to revive the agencies, which are now completely wards of the state, with a bailout estimated at $1 trillion.

The Federal Reserve was looking like the big winner in the developing legislation, having gained near complete top-line regulatory control over the big banks with new and expanded powers to prevent another meltdown, the theory being that it didn't have enough authority already to stop some of the mindless risk taking. It did, of course. The Fed, for example, could have prevented Citigroup from keeping all those toxic mortgage bonds off its books, neatly tucked away in so-called structured investment vehicles that were moved back on the firm's balance sheet when they began losing money.