Bought and Paid For (45 page)

 

Leverage:
The use of borrowed money to enhance investment returns. Leverage was at the heart of the financial crisis, as many firms borrowed at enormous levels, in some cases $30 or more for every dollar they owned, to make speculative bets on the markets. Leverage can work both ways. On the way up it increases returns, but on the way down it can magnify losses. For example, if a trader has $10 and leverages at ten to one, he now has $100 to invest. If his bet goes up 50 percent, he's made $50—or 500 percent of his initial stake of $10. But if his bet goes down 50 percent, he's now in the hole $40—four times the amount of money he has on hand.

 

Moral hazard:
The fear that insulating a person or party from the results of risk taking will encourage more risky behavior. This was the primary argument against bailing out the financial institutions, who all made risky bets only to be saved in the end through taxpayer-financed bailouts.

 

Mortgage-backed security:
A type of bond that is backed by the underlying cash flow of various mortgages.

 

Municipal bond:
A type of bond that is issued by a state or local government. The interest is tax free, making it an attractive investment for wealthy people looking to shelter their income. “Muni” bonds are considered among the safest of all investments, but as Orange County illustrated, there is no such thing as a sure bet when it comes to investing.

 

Run on the bank:
The unexpected and rapid exit of deposits or cash balances from a financial institution. Bank runs occur when individuals lose confidence in the solvency of a particular financial institution. The most historically famous instances of runs on the bank occurred during the Great Depression, when rumors of insolvency at a bank would lead to long lines of customers waiting to withdraw their deposits—leading to just such an insolvency. Runs on investment banks are similar, except that the creditors are hedge funds and other large investors as opposed to ordinary individuals.

 

Savings and loan (S&L):
Savings and loans are commonly called thrifts and are federally insured financial institutions that take in deposits for the purpose of making real estate or other consumer loans. In the eighties and early nineties, lax lending standards and a slowdown in real estate cause the failure of a number of federally insured S&Ls
.

 

Securitization:
The process of structuring and redirecting the cash flow of an asset to create multiple securities. Securitization is at the heart of the credit industry, as bankers look to capture the cash flow of any type of receivable, be it a mortgage, credit card loan, or something else, and structure it into a separate security that can be bought or sold by investors.

 

Systemic risk:
The threat of a collapse of the entire financial system, as opposed to the failure of a single company or financial entity. It was the threat of systemic risk that drove the Fed and Treasury to take extraordinary steps in the midst of the financial crisis.

 

“Too big to fail”:
The notion that some institutions are so vital to the overall health of the economy that their failure would lead to a collapse of the entire financial system. Some would argue that “too big to fail” coddles banks and tacitly endorses risk taking. Others feel that following this approach saved the U.S. financial system from a complete meltdown. Few argue that, as things stand, in the event of a new crisis the U.S. government would still consider most of the major financial firms too big to fail.

 

Underwriting:
The process by which Wall Street firms bring to market either a debt or an equity security. Underwriters allow companies and governments to access public capital, either in the form of direct ownership or through structuring loans. Underwriting fees used to be the lifeblood of the securities industry, but they have since taken a distant back seat to trading revenues.

3
“$13.4” billion figure for Goldman Sach's annual earnings report.

5
“God's Work” from “Meet Mr. Goldman Sachs,”
Times
(London), November 8, 2009.

5
“10 percent unemployment” from the Bureau of Labor Statistics.

5
“vampire squid” from “The Great American Bubble Machine,”
Rolling Stone,
July 9, 2009.

6
“Fat Cats” from “Obama Slams Wall Street Bankers,”
Wall Street Journal,
December 14, 2009.

6
Description of Blankfein's upbringing from “Lloyd Blankfein, A Profile,”
Forbes,
December 16, 2009.

7
ShoreBank's ties to members of the Obama administration from “Wall Street Scrambles to Save ShoreBank
,
”
Wall Street Journal,
May 17, 2010.

7
“Valerie Jarrett sat on the board of Chicago Metropolis 2020” from
chicagometropolis2020.org
.

8
Eugene Ludwig's role in saving ShoreBank from “Goldman Joins Race to Save Chicago Bank,”
Wall Street Journal,
May 13, 2010.

8
“Greg Craig” from “Goldman Taps ex-White House Counsel,”
Politico,
April 19, 2010.

8
Various contributions to ShoreBank from “ShoreBank Close to Raising $125 Million in Private Capital,”
Wall Street Journal,
May 19, 2010.

9
Rahm Emanuel's ties to Goldman Sachs from “Goldman Will Be Sitting Pretty with Emanuel in the Obama White House,”
Washington Examiner,
April 21, 2010.

17
Description of meeting between Wall Street bankers and Obama from author's interviews with people who were present and confirmed by members who were there.

18
Description of Wall Street's financial support on Bush/Kerry election from
OpenSecrets.org
.

19
“Dimon's own 2009 compensation of more than $17 million” from “JPMorgan's Dimon Gets $17 Million Bonus,”
New York Times,
February 5, 2010.

20
Description of McCain's relationship with Wall Street from author's interviews with people close to the matter.

20
McCain's description of Wall Street as a “villain” and pledge to “change the way Washington and Wall Street” do business from McCain campaign statement, September 17, 2008.

21
Lawrence Summers's description of females' aptitude for math from “Summers's Remarks on Women Draws Fire,”
Boston Globe,
January 17, 2005.

23
Description of Obama's activities as a community organizer from “What Did Obama Do as a Community Organizer,”
National Review,
September 8, 2008.

23
“Other states vote; New York invests” from “How Barack Obama Struck Fund-Raising Gold,”
New York
magazine, April 15, 2007.

24
Gallogly's relationship with Obama from author's interviews with people close to the matter.

27
Number of meetings between Gallogly and Obama from POTUS Tracker,
Washington Post,
July 14, 2010.

27
Gallogly fund-raising totals from
Opensecrets.org
.

32
“Exceeded $300 million” from “As Bear Stearns Implodes, Warren Spector Keeps $382 Million,” Bloomberg, March 19, 2008.

33
“Impressed immediately” from author's interviews with people familiar with Spector's meeting with Obama.

34
Description of Gallogly's relationship with Volcker from author's interviews with people close to the matter.

34
“Rezko became literally” from “Obama and His Rezko Ties,”
Chicago Sun Times,
April 23, 2007.

37
“Cayne had publicly chastised” from “A Top Official at Bear Ousted Over Funds Implosion,”
New York Times,
August 6, 2008.

37
“Current scourge of Wall Street” from author's interviews with people in the meeting.

38
“Paid an ACORN Affiliate $800,000” from “Obama and ACORN
,
”
Wall Street Journal,
October 14, 2008.

38
“Mickey Mouse” from “ACORN Charged in Voter Fraud,” MSNBC, May 4, 2009.

38
“Most liberal U.S. Senator” from “Why Obama Was the Most Liberal,”
National Journal,
August 25, 2008.

38
“Obama had voted against” from “Obama's Record Shows Caution, Nuance in Iraq,”
Boston Globe,
March 20, 2007.

39
Reverend Wright's phrase “God damn America” from “Obama's Pastor Disaster,”
Orange County Register,
March 15, 2008.

39
“Jewish vote” from
The Daily Press of Newport News,
June 10, 2009.

39
Wright's comments on 9/11 from “Obama's Pastor: God Damn America, U.S. to Blame for 9/11,” ABC News, March 13, 2008.

39
Greg Fleming's recollection of Obama's dinner from author's interviews with people familiar with the meeting.

40
Obama and McCain campaign totals from
Opensecrets.org
.

41
Cavanaugh's contributions to Obama from author's interviews with executives at JPMorgan.

41
Description of Tom Nides's Democratic fund-raisers from author's interviews with people close to the matter.

44
“Obama rewarded these generous” from “How Barack Obama Struck Fund-raising Gold,”
New York
magazine, April 15, 2007.

45
Goldman, JPMorgan, and Bank of America not experiencing a single negative day of trading losses from
“ ‘
Perfect Quarter' at Four U.S. Banks Shows Fed-Fueled Revival,”
Bloomberg Businessweek,
July 19, 2010.

46
Steve Schwarzman's comments on McCain's lack of interest in hearing from Wall Street executives from author's interviews with people close to the matter.

46
Description of McCain's dislike of Wall Street from author's interviews with people familiar with the matter.

47
Account of former Merrill Lynch CEO John Thain's support of McCain from “Thain Is Good for McCain,”
Politico,
November 14, 2007.

48
Description of McCain screaming at former Treasury secretary Hank Paulson from author's interviews with people close to the matter.

50
Dimon's directing his senior staff to contribute to Obama from author's interviews with people close to the matter.

50
Goldman and JPMorgan Chase's campaign contributions for September 2008 from
Opensecrets.org
.

52
John Mack's endorsement of Hillary Clinton from “John Mack Backs Clinton,”
Bloomberg Businessweek
, April 27, 2007.

52
“Nanny-state paternalism” from “The Break-Up, Did Obama Just Dump His Best Friend on Wall Street?,”
New Republic
, June 17, 2010.

53
“well exceeds the already enormous $89 billion” from “This Bailout Is a Bargain? Think Again,”
New York Times
, April 16, 2010.

54
Average salary of financial CEOs in 2006 from “Is Goldman, Lehman Pay Set in Smoke-Filled Room?,”
Bloomberg Businessweek,
April 4, 2007.

54
Goldman, trading profits, and quarterly profit breakdown for Bank of America, Citigroup from SNL Financial.

56
“Helped repeal the Glass-Steagall Act” from “Congress Passes Wide-Ranging Bill Easing Bank Laws,”
New York Times,
November 5, 1999.

56
Larry Summers's total earnings from work at D.E. Shaw and subsequent speeches from “Hedge Fund Paid Summers $5.2 Million in Past Year,”
Wall Street Journal,
April 5, 2009.

61
“Citigroup was forced to sell Phibro” from “Citigroup Sells Phibro Unit to Occidental Petroleum,” Bloomberg, October 8, 2009.

63
Consumer loan statistics and banks' quarterly profit breakdowns provided by SNL Financial.

65
“$7,000 for every citizen in the city” from “Your Share of City's Sky-High Debt Is $7,153,”
Daily News,
January 23, 2009.

65
Michael Stamenson's “rattlesnake” quote and description of lavish lifestyle from “The Master of Orange County, a Merrill Lynch Broker Survives Municipal Bankruptcy,”
New York Times,
June 22, 1998.

66
“I would say Stamenson is” from ibid.

66
Description of Robert Citron including patronage of the Elks Club from “Ill-Fated Fund Manager: Mr. Main St., Not Wall St.,”
New York Times,
December 11, 1994.

67
Description of Wall Street consortium that financed Orange County from “Orange County, Calif., Makes Bankruptcy Filing,”
New York Times,
December 7, 1994.

67
Robert Citron's purchase of $100 million in swaps from “Market Place; in Orange County, Strategies Sour,”
New York Time,
December 5, 1994.

68
“$6.3 billion” in derivatives from ibid.

68
“Misappropriating public funds” from “Citron Pleads Guilty to Felonies,”
Los Angeles Times,
April 28, 1995.

68
“Joke” comment form Securities and Exchange Commission official from author's interviews with people close to the matter.

69
Merrill fine of $470 million from “The Master of Orange County, a Merrill Lynch Broker Survives Municipal Bankruptcy,”
New York Times,
June 22, 1998.