Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession (49 page)

In 2005, David Urban, chief operating officer of Firebird Management LLC, New York, wrote about the decline of Wilkes-Barre, Pennsylvania, where he had grown up: “The manufacturing base had been hollowed out decades before. … In the mid to late 1980’s, banks from Pittsburgh and Philadelphia moved into the area pursuing their growth strategy by attempting to offer branch banking services on a statewide basis. All of the major banks were bought up and in the ensuing consolidations the back office and service jobs were cut in the area. The downtown fell into disrepair while corrupt politicians argued and pointed fingers over who was to blame while fattening the pockets of their supporters. The young people, as I was one, left the area to pursue better opportunities after high school since we did not see any value in staying behind. There were no growth industries and the jobs remaining were mainly family businesses or chain restaurants.”
²⁶

In 2009, the zany infatuation with “GDP growth,” no matter what the source, continues. Over 40 years ago, Robert Kennedy said that the gross national product “measures everything … except that which makes life worthwhile.”
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Proxmire’s Fear: The Leveraged Too-Big-To-Fail Megabank

The end was near. Stephen Schwatzman’s Blackstone Group paid $39 billion for Sam Zell’s Equity Office Properties. Zell had cashed out. Schwartzman started selling the properties immediately. Others were playing Russian roulette, borrowing as much as they could as fast as they could.

²⁵
John Brooks,
The Go-Go Years
(New York: Weybright and Talley, 1973), p. 177.
²⁶
Gloom, Boom & Doom Report
, December 9, 2005.
²⁷
Robert F. Kennedy, Remarks at the University of Kansas, March 18, 1968.

Senator William Proxmire foresaw the conflict of interests when he interrogated Alan Greenspan in 1987, though the senator probably did not imagine the “massive amount of liquidity” that now poured into buying and trading some of the largest corporations in the world. During the first quarter of 2007 (December 2006 through February 2007), the balance sheet assets of Goldman Sachs, Lehman Brothers, Morgan Stanley, and Bear Stearns rose by $237 billion, a $1 trillion annual rate and a 34 percent annualized growth rate.
²⁸
Goldman Sachs had a bigger balance sheet than the Fed’s.
²⁹
These were brokerage firms, not commercial banks.

Commercial and investment banks opened hedge funds; the largest hedge fund in the world was at Goldman Sachs.
³⁰
Privateequity firms launched hedge funds. Banks opened privateequity funds. All were buying and selling property—housing developments, ports, power grids, hotel chains, airports, railroads, and highways. All were paying one another: hedge funds borrowing from brokers; investment banks buying mortgages from commercial banks; LBO firms borrowing from commercial banks; LBO firms paying investment banks for underwriting services. Kohlberg Kravis Roberts, Henry Kravis’s firm, paid investment banks $837 million for advice during the first 11 months of 2006.
³¹
The U.S. securities industry paid itself $455 billion between 2003 and 2007.
³²
This was a much more concentrated form of asset inflation than housing. The casing of the cocoon had to remain solid. The level of credit and profits rose inside the casing.

Stephen Schwartzman collected billions of dollars from Blackstone’s IPO.
³³
This was a big media story, although it’s not clear why, since he had been collecting billions for quite a while.
³⁴
Time
called him one of the “100 most influential people.” His sixtieth birthday party in February 2007 was the place to be. Guests included CNBC’s Maria Bartiromo, perhaps the most familiar face in trading rooms during the boom years other than Alan Greenspan. She was accompanied by her husband, Jonathan Steinberg, son of Saul Steinberg.
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²⁸
Doug Noland, “Credit Bubble Bulletin,” Prudent Bear Web site, April 20, 2007, p. 10.
²⁹
Goldman Sachs Group Inc. and Subsidiaries, condensed Consolidated Statements of Financial Condition (Unaudited), released April 3 or 4, 2007, for quarter ending February 28, 2007: total assets, $912 billion. Federal Reserve’s total assets on February 28, 2007: $853 billion: Federal Reserve Statistical Release H.4.1, March 1, 2007.
³⁰
Alistair Barr, “Goldman Is Now World’s Largest Hedge Fund Manager,”
MarketWatch
, June 21, 2006.
³¹
Edward Evans, “KKR to Pay Most in Fees in Record Year for Buyouts,” Bloomberg, January 4, 2007.
³²
Christopher Wood, “Greed & Fear,”
CLSA Asia-Pacific Markets
, August 22, 2008.
³³
Justin Fox, “Blackstone: Too Rich for Congress,”
Time
, June 28, 2007.
³⁴
Barbara Kiviat, “The Time 100: Steven Schwarzman,”
Time
, April 30, 2007.

Saul’s is a cautionary tale. His insurance company, Reliance Holdings, was forced into bankruptcy; his Old Masters collection was auctioned. He sold his 36-room duplex at 740 Park Avenue—first owned by John D. Rockefeller—to Stephen Schwarzman in 2000.

By the time of Schwarzman’s party, private equity—a term that was as unfamiliar to the public as IPO was before 1995—attracted wide attention, as well it might, since no company was too big to buy and then dismiss the employees. The
Financial Times
produced a Special Report with the title: “Barbarians or Emperors?”
³⁶
CFO
magazine described Goldman Sachs’s $20 billion private equity fund as “Gargantuans at the Gate.”
³⁷

Politicians were foaming and ranting about private equity. This is the moment, as we’ve seen before, when politicians take charge and shut the casino—Saul Steinberg’s attempt to buy Chemical Bank; Kohlberg Kravis Roberts’s gathering of 400 dealmakers to celebrate to celebrate the RJR takeover—the script is clear.

But it didn’t happen.
The elected representatives came to their senses. The members of House of Representatives could no longer represent; they were beholden to Fannie Mae, hedge funds, and private equity. It was not only contributions but their own futures that were at stake. The ex-pols used to cross the street and join lobbying firms. Now they hitched onto a hedge fund, privateequity firm, or both (these were growing more difficult to tell apart). Or they joined banks. Phil Gramm, former Republican senator from Texas, was vice chairman of UBS (United Bank of Switzerland); Robert Rubin, secretary of the treasury under President Clinton, served as a director at Citicorp. Leading politicians from the Clinton and two Bush presidencies had joined hedge funds or privateequity firms. A roll call in mid-2007: Lawrence Summers (secretary of the treasury, Clinton administration, and former voting member of the Harvard Corporation’s then-$29 billion endowment) joined D.E. Shaw, a $25 billion hedge fund,
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President George H. W. Bush, James Baker (secretary of the treasury and state, Reagan administration; secretary of state, Bush I), and former British Prime Minister John Major, all served the Carlyle Group in different capacities; Former President Bill Clinton marketed a retail hedge fund in his spare time.
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Former Vice President Al Gore
⁴⁰
and Madeline Albright (secretary of state, Clinton)
⁴¹
launched their own hedge funds as well.

³⁵
Dan Ackman, “Forbes Face: Saul Steinberg,”
Forbes.com, June 18, 2001.
³⁶
Financial Times, S
pecial Report “Private Equity: Barbarians or Emperors?” April 24, 2007.
³⁷
Stephen Taub, “Gargantuans at the Gate,”
CFO.com,
April 23, 2007.

The Pinnacle

The tendency for politicians to join hedge funds or LBO firms rather than Wall Street banks was for a good reason: they paid better. Average weekly pay for investment bankers in New York was $16,849 a week. In Fairfield County, Connecticut, where hedge funds are more concentrated, average weekly pay was $23,846 a week.
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In 2006, the top 100 hedge fund managers in the world each earned an average of $241 million.
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The hedge fund capital is Greenwich, Connecticut, a 40-minute train ride from Manhattan. For decades, it has been home to corporate CEOs, stockbrokers, and investment bankers who boarded the 8:01 to Grand Central Station. The commute was reversing. In 2006, approximately 10 percent of the world’s hedgefund money was managed from offices in Greenwich. Analysts and traders caught the 5:09 (a.m.) from Grand Central to Greenwich. These offices commanded rents nearly 30 percent higher than prime office space in New York.

³⁸
Marcella Bombardieri, “Ex-Harvard Chief Joins Hedge Fund Company,”
Boston Globe,
October 20, 2006.
³⁹
William Hutchings, “Bill Clinton Endorses Quadriga’s Retail U.S. Hedge Funds,”
efinancialnews.com,
which is: Dow Jones financial news online, March 10, 2005. “Bill Clinton, the former U.S. president, is set to open a New York retail outlet for the products of Quadriga, the Viennese hedge fund manager that was last year stopped from selling its products in Germany by the local regulator because it had no banking licence.[sic]”
⁴⁰
www.generationim.com.
⁴¹
Otis Bilodeau, “Madeleine Albright Raises $329 Million for New Fund,” Bloomberg, January 18, 2007.
⁴²
David Cay Johnston, “Pay at Investment Banks Eclipses All Private Jobs,”
New York Times
, September 1, 2007. This was calculated by the Bureau of Labor Statistics for the first quarter of 2006.
⁴³
“Richest Hedge Fund Managers Get Richer,”
CNNMoney,
April 9, 2007.

Hedgefund managers, generally quick to trade, buy, and dispose, demonstrated the same relish in bulldozing houses built in the 1920s for Rockefellers, Havemayers, and Greenways. The teardown, knockup construction turned North Street into a traffic jam of road graders, dump trucks, and wrecking balls. Tudor mansions with 6,000 square feet fell; 15,000-square-foot trophy homes scampered up. (That is the size of an industrial warehouse.) When the 15,000-square-foot pile was deemed inadequate, 20,000-, 25,000-, and 30,000-square-foot havens from humanity rose both east and west. Paul Tudor Jones II built a testament described as “a cross between Tara and a national monument.” Steve Cohen’s house resembled Windsor Castle from the air, and was littered with Gaughins, Van Goghs, Hirsts, and Warhols. Standard features in Greenwich included indoor basketball and squash courts, dishwashers from Asko, windows from Zeluck, basements with wine cellars, waterfalls, hockey rinks, panic rooms, and patios and polo fields surrounded by English country gardens.

The staffing never stopped—chauffeurs, butlers, maids, Scottish nannies, sommeliers, decorators, lighting-control specialists, stonemasons, carpenters, marble cutters, personal trainers, Zen masters, and fashion assistants. Seven-figure gardening bills require estate superintendents, irrigation specialists, and hedge trimmers.

The trickle-down effect runs to the busloads of housekeepers, busboys, gardeners, pool boys, masseurs, hairdressers, and manicurists who made the reverse commute from New York.
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The Bottom

At the other end of the Great Distortion, house prices were out of reach, so terms had been relaxed. The “2 and 28” mortgage—a two-year “teaser” rate that adjusted (“reset”) for the next 28 years—was booming. Since the 2/28 was fairly new to the market, the consequences were not well understood in 2006. (Better put: there were few who let on that they anticipated the inevitable.) The resets would hit hard in 2007.

⁴⁴
Nina Munk, “Greenwich’s Outrageous Fortunes,”
Vanit y Fair,
July 2006; Tom Wolfe, “The Pirate Pose,”
Portfolio.com
, May 2007; Philip Shishkin, “Out with the Old: Storied Mansions Fall in Greenwich,”
Wall Street Journal
, April 12, 2008;
Greenwich Time
newspaper.

Sam Zell’s observation in 2005 that the “enormous monetization of hard assets has created a massive amount of liquidity” put food on the table, but for how long? More Americans were liquefying their equity and monetizing the proceeds. Since 2001, the GDP had grown by $2.5 trillion; over $800 billion of home equity had been withdrawn in 2005. This was equal to 9 percent of Americans disposable income, in a country where wages were basely rising. ACNielson published a report that described Americans as “among the world’s most cash-strapped people.”
⁴⁵
With 22 percent of Americans having no money left after they paid for essential living expenses, the U.S. ranked number one among 42 countries for “saving futility.”
⁴⁶

The new Federal Reserve chairman gave a speech in June 2006. He proclaimed: “U.S. households have been managing their personal finances well.”
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It seemed as though Greenspan had never left.

⁴⁵
Les Christie, “Americans: World’s Worst Savers,”
CNNMoney.com
, January 25, 2006.
⁴⁶
Ibid.
⁴⁷
Ben S. Bernanke, “Increasing Economic Opportunity: Challenges and Strategies,” speech at the Fifth Regional Issues Conference of the Fifteenth Congressional District of Texas, Washington, D.C., June 13, 2006.

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2007

New York Times
: [T]here are at least 15,000 professional economists in this country, and you’re saying only two or three of them foresaw the mortgage crisis?

James K. Galbraith: Ten or 12 would be closer than two or three. . . . It’s an enormous blot on the reputation of the profession. There are thousands of economists. Most of them teach. And most of them teach a theoretical framework that has been shown to be fundamentally useless.

—
New York Times Sunday Magazine
, November 2, 2008