The Unwinding: An Inner History of the New America (35 page)

In his capacity as resident wise man, he urged Citigroup, as he had once urged Goldman
Sachs, to take more trading risks with its huge balance sheet. He also advised that
the risks needed to be carefully managed. After that, he didn’t pay much attention
while, between 2003 and 2005, Citigroup tripled its issuing of collateralized debt
obligations and mortgage-backed securities stuffed full of bad loans from places like
Tampa, where people whose incomes had been flat for years had all their wealth in
their houses and used them as cash machines. By late 2007, the bank had forty-three
billion dollars in CDOs on its books.

Most of it turned out to be worthless, and in 2008, when the financial crisis hit,
Citigroup practically became a ward of the state. Its losses reached sixty-five billion,
it needed two huge helpings of bailout money, and it was the only bank that the U.S.
government seriously considered nationalizing.

Rubin had spent his career trying to harmonize his and Wall Street’s interests with
America’s, and when that became impossible in 2008, he disappeared. He refused almost
all interview requests, and on the few occasions when he spoke publicly, he brushed
aside any blame. “I don’t feel responsible, in light of the facts as I knew them in
my role,” he said. “Clearly, there were things wrong. But I don’t know of anyone who
foresaw a perfect storm.” Even Alan Greenspan admitted that he had been wrong, but
the pride that had always been masked by humility would not allow Rubin to do it.

In January 2009, having earned $126 million for his decade of advice, doubling his
net worth, Rubin resigned his position at Citigroup. In April 2010, he was called
to testify before the Financial Crisis Inquiry Commission in Washington. The panel
included Brooksley Born, and when she asked Rubin about regulating derivatives, Rubin
hastened to agree with her every word. He did not appear calm and steady. Sitting
in his rumpled suit at the witness table, he looked anxious and red-eyed, as if he
hadn’t slept well. He explained to the commission, “The executive committee of the
board, which you just referred to my being chairman of, was an administrative body.
It didn’t have a decision. What it did was it met between board meetings. Those meetings
were very infrequent. And it wasn’t a substantive part of the decision-making process
of the institution.”

“I don’t know that you can have it both ways,” said Philip Angelides, the chairman
of the commission. “You either were pulling the levers or asleep at the switch.”

Rubin said that, as a board member, he couldn’t have known all the positions held
by the biggest bank in the world.

“You were not a garden-variety board member,” Angelides replied. “To most people,
chairman of the executive committee of the board of directors implies leadership.
Certainly, fifteen million dollars a year guaranteed implies leadership and responsibility.”

Rubin mentioned that he had refused a bonus in 2007 (not out of any sense of guilt,
but selflessly, so that the bank could use the money for other purposes).

Angelides said, “You’ll be the only one in the end who can make an assessment of your
responsibility.”

When the three-hour hearing was over, Robert Rubin hurried from the room.

JEFF CONNAUGHTON

Connaughton didn’t notice the bubble. In 2007 he sold his Mexican condo, tripling
his purchase price for a huge profit. With that and his big payday from the firm’s
sale, he began looking for another vacation property, another condo to flip. He kept
hearing about a stretch of coastline in Costa Rica called Mal País, a surf paradise
with world-class beaches. Gisele Bündchen, the Brazilian supermodel, had built a house
there, and it was becoming an off-the-map vacation sanctuary for Hollywood stars.
Prices were soaring. He flew down that summer and looked at a pair of spectacular
adjacent properties on a hillside over the Pacific. He decided to buy both, thinking
to build a house on one, flip it, and, with the profit, build a villa for himself
on the other lot.

One of Connaughton’s clients at Quinn Gillespie was Genworth Financial, a private
mortgage insurer. People there began telling him about an epidemic of foreclosures
around the country. They warned him not to buy real estate until 2009 at the earliest.
Biden was running for president again, and Connaughton joined the campaign and traveled
to Des Moines, where a city councilman told him that one of the top three issues in
Iowa was foreclosures. Connaughton relayed the message to a Biden staffer: the growing
housing crisis should be a focus. (In the seventies, when Biden was still a freshman
senator, Hubert Humphrey advised him, “You have to pick an issue that becomes yours.
You should become Mr. Housing. Housing is the future.”) The idea went nowhere. The
candidates weren’t talking about foreclosures.

Connaughton ignored the warnings, too. In the fall of 2007, at the top of the market,
he closed on the Costa Rican lots for almost a million dollars. He knew that the land
was overvalued, but he expected it to become even more so. When the price of Dutch
tulips is doubling every month and you think you can get in before it quadruples,
is that rational or irrational behavior? “It was greed,” he said.

For fifteen years, Connaughton had raised more money for Biden than anyone else in
Washington, and he joined Biden’s second presidential campaign as treasurer of its
political action committee, Unite Our States. The effort was doomed from the start.
Biden was basically winging his stump speech, which was essentially his résumé—outstanding
at one stop, disjointed the next. And he still hated the money game. When a young
staffer got into his car one day, holding a list of names, and announced, “Okay, Senator,
time to do some fundraising calls,” Biden said, “Get the fuck out of the car.” He
believed that strong debate performances would bring him more money than personal
calls. The politician who had converted Connaughton to his cause thirty years earlier
with a speech in Tuscaloosa was a consistently powerful presence onstage with his
more popular rivals, Hillary Clinton, John Edwards, and Barack Obama. But he was nowhere
in the polls.

Connaughton spent December in Iowa. Every two years, members of Washington’s permanent
class migrated to various spots around the “real America,” where “real people” lived,
and campaigned for their team. They built chits that way, and they got back in touch
with what it meant to be a member of a party. In 2000, Connaughton held a Gore sign
at an intersection in Wassau, Wisconsin, at six in the morning, while all the black
motorists and half the women gave the thumbs-up, white men shot him hateful looks,
and a school bus driver with a load of children in back actually flipped him off.
In 2004, he spent three weeks knocking on doors around South Dakota for Tom Daschle,
the Senate minority leader—ten hours a day, bone-tiring work. The poverty shocked
him: many trailers in Rapid City had rotted-out floors exposing the dirt below. The
nicer mobile homes were voting Republican: “Daschle’s gone Washington.” He met Lutheran
women who thought the senator’s position on abortion was hypocritical—one thing in
South Dakota, another in Washington—and who were so passionate that they came closer
to converting him than he did to converting them. Abortion was one of the very few
issues that could blow up on a politician back home—no one knew or cared how a senator
voted on the Private Securities Litigation Reform Act.

Near the Pine Ridge reservation, a Native American woman told Connaughton, “You only
care about us once every four years.” It burned a hole right through him because he
knew it was true—the plight of people like her moved him every presidential election
cycle, and then he forgot about them. He tried to organize a donation of computers
to community centers in the poor areas, but no one in the Daschle operation followed
up. Out here in the middle of the country he felt no energy, none of the entrepreneurial
spirit of the coasts and big cities, as if all the molecules had come to a rest. At
night he would collapse at his hotel, where the bar was crowded with Washington lobbyists
who were temporarily in South Dakota for the same reason. That November, Daschle lost.

On the campaign trail in 2007, Connaughton began spending occasional time with Biden.
Once, before a fundraising event, they were alone together—Connaughton mustering his
usual smile, saying how good it was to see the senator, crisply informing him about
the group he was about to address. Biden suddenly looked at Connaughton with a question
in his eyes, as if to ask, “Why are you like this with me? Why aren’t we friends?”
And he even started to say something. “Why are you, why can’t we…?” Connaughton left
Biden’s words hanging in the air. In three seconds the hosts would walk in, and, more
than twenty years after “Just gimme what you got,” there was too much to say, and
it was probably too late.

A campaign like Biden’s was an exercise in collective self-delusion. Ted Kaufman,
who was a senior adviser to Biden, told Connaughton, “In a presidential campaign,
you’re either faking it or you’re dead.” On January 3, 2008, Connaughton monitored
the Iowa caucus vote at a high school near Waterloo. About eighty people stood in
Barack Obama’s corner, sixty in Hillary Clinton’s, and six in Joe Biden’s. He finished
fifth in Iowa, with 0.9 percent, and dropped out that night. He requested from his
staff a list of the people who had helped his campaign the most. Connaughton ranked
third.

He had been faking it for a long time, and what he felt was overwhelming relief. He
closed an imaginary ledger on three decades of his life. He was done with Biden.

Later that month, Connaughton flew down to Costa Rica and went out for dinner with
his architect and an American developer. The developer had just come from meetings
of the loan committees of Lehman Brothers and Merrill Lynch in New York. “Both companies
are technically insolvent,” he said.

“What? I don’t believe it,” Connaughton said.

The developer explained that the banks were sitting on assets whose current value
was exceeded by their liabilities. Connaughton still resisted. If it was true, everything
he had learned in business school about efficient markets, everything he had learned
in law school about the standards of disclosure at banks, about the professional duty
of the lawyers and accountants they hired to reveal material information and protect
investors, was bullshit. He believed in those institutions—he had to.

“I predict we’re going into a three-year recession,” the developer went on. Connaughton
continued to argue. Much later, he wished that the man had reached across the table,
seized him by the jacket, and shouted, “I know you just met me, but think hard about
this: both firms are technically insolvent. Believe me, you need to act! Sell everything
you own before it’s too late!”

When he returned to Washington, Connaughton picked up a new book titled
The Trillion Dollar Meltdown
, by a former banker named Charles R. Morris. It argued that overleveraged banks and
debt-strapped consumers with unaffordable mortgage payments were creating a credit
bubble that would soon pop and create a global financial calamity. Connaughton read
the book and tossed it aside.

That March, Bear Stearns failed. Connaughton kept an eye on his stocks, where he had
most of his wealth in a globally diversified portfolio. The markets were falling,
but not precipitously. He expected at most a 10 percent correction. It was never easy
to time getting out and back in just right. He stayed put as the Dow dropped toward
10,000.

In September, Lehman Brothers went bankrupt, the rest of Wall Street poised to perish
with it. Charles R. Morris’s meltdown—now two trillion dollars—happened faster than
anyone could have imagined. Within a few months, Connaughton’s stock portfolio and
his property in Costa Rica had lost almost half their value.

But during the same months, his political stock rose to its peak. On November 4, Joe
Biden was elected vice president of the United States. By the end of the year, Connaughton
was headed back into government.

TAMMY THOMAS

In early 2008, a little over a year after Tammy lost her job at the factory, a man
named Kirk Noden asked her to meet him for coffee. Noden was a professional organizer.
He had grown up not far from Youngstown, gone to college at Kent State, and worked
organizing neighborhoods in Chicago and Birmingham, England. When he returned from
overseas in 2006 and came to Youngstown, he tried to do what he had done in other
places, following the Saul Alinsky model of community organizing: round up the troops
in your group, march down to city hall or the local developer’s office, and shake
the tree to get resources for the neighborhood. That approach came out of an earlier
era, the middle of the twentieth century, when power was more consolidated and centralized
in the cities. After a year of trying, Noden realized that the model was irrelevant
in Youngstown. There were no resources to be shaken loose. The tax base had collapsed.
The mayor had very little power. Industry was a ghost of its former self. The centers
of power were elsewhere—in some ways, they were spread around the globe. Youngstown
was so damaged, beyond anything he had expected, that it forced Noden to think in
a new way.

He consulted with the Wean Foundation—old steel money from Warren—which, unlike other
elites and institutions, had moved beyond nostalgic illusion and was pursuing rather
radical ideas for the resuscitation of the Valley. In the summer of 2007, Noden and
Wean decided to start a new community organization, the Mahoning Valley Organizing
Collaborative, which would become the basis for a statewide effort to fight the causes
of decline—the loss of jobs, inequities based on class and race—as well as the effects.
All the large institutions in Youngstown were distrusted, because they had failed:
industry, unions, banks, churches, every level of government. The only way to bring
about change in the Valley was block by block.