The Unwinding: An Inner History of the New America (44 page)

Kaufman was going to be a senator for just two years. No election hung over his every
move like a guillotine, so he didn’t have to start half his mornings with a fundraising
breakfast on K Street. Connaughton also felt liberated: he’d already cashed in once
and didn’t have to take calls from lobbyists while calculating his future employment
prospects. They both had the luxury to go after Wall Street without a thought for
the repercussions. “I’d be doing the same thing if I were running for reelection,”
Kaufman told the press, but Connaughton had been in Washington too long to believe
it. This was their moment, the first year of the Obama presidency, with the economy
hemorrhaging hundreds of thousands of jobs.

The previous October, in the last month of the campaign, Connaughton had picked up
signs from Kaufman that the Obama team wanted to bring Robert Rubin on as Treasury
secretary. “Don’t you realize that half the country wants to hang Bob Rubin?” Connaughton
asked when Kaufman expressed enthusiasm at the prospect. Kaufman would later say,
“It was like a car had broken down and we needed a mechanic.” Obama, inexperienced
in government and a novice in finance, seemed to believe that Rubin and his followers
were the only competent repairmen available.

No more proof was needed that the establishment (the one Clinton had invoked that
night in his private study) would emerge from the disaster in fine shape. The establishment
could fail and fail and still survive, even thrive. It was rigged to win, like a casino,
and once you were on the inside you had to do something dramatic to lose your standing,
like write a scathing op-ed (and even then you’d get a pass for expressing public-spirited
views unless you actually named names). Rubin was no longer viable for Treasury, but
his people were practically the only candidates under consideration by Obama, who,
after all, had fought his way into the establishment from farther back than any of
them. Michael Froman, Rubin’s chief of staff under Clinton, later a managing director
at Citigroup, introduced Rubin to Obama, and he continued working at the bank while
serving on Obama’s transition as personnel director, then collected a $2.25 million
bonus before joining the administration. Jacob Lew, another Citigroup executive, became
deputy secretary of state with a $900,000 bonus in his pocket. Mark Patterson, a Goldman
Sachs lobbyist, was hired as chief of staff at Treasury despite the lobbying ban.
Timothy Geithner, a Rubin protégé and the architect of the bailouts, was appointed
Treasury secretary and survived the revelation that he had flagrantly underpaid taxes
to the agency he was going to lead. Larry Summers, whose meaty fingerprints were all
over the pro-bank policies of the late nineties, and who earned millions in speaking
fees from various future bailout recipients, became the leading economic adviser at
the Obama White House. Even Rahm Emanuel, Obama’s chief of staff, a career public
servant, had made a cool $16.5 million at a Chicago investment bank in the thirty
months he spent between government jobs. All at the top of their field, all brilliant
and educated to within an inch of their lives, all Democrats, all implicated in an
epic failure—now hired to sort out the ruins. How could they not see things the way
of the bankers with whom they’d studied and worked and ate and drunk and gotten rich?
Social promotion and conflict of interest were built into the soul of the meritocracy.
The Blob was unkillable.

*   *   *

Connaughton watched all this with unease. He knew something about revolving doors
and mutual favors and the unconscious biases of the powerful. He, too, had steeped
in these worlds throughout his career—investment banking, Congress, the White House,
lobbying. Yet the financial crisis was a seismic event, causing substantial pain to
millions of people, and for once an angry public was paying attention. Now was the
time for Washington to take on Wall Street.

To have any impact, a senator had to choose just a few issues. He didn’t have room
in his schedule, or his head, for more. When they both worked for Biden, and Connaughton
wanted to bring something new to the senator’s attention, Kaufman used to say, “Jeff,
every time you want to put something into the boat, you have to take something out
of the boat.” From the outset Kaufman, who wasn’t even a member of the Banking Committee,
focused on two things: fraud, and the problem of “too big to fail.” He cowrote a bill
that authorized $340 million for hiring more FBI agents and funding federal prosecutors
to go after the fraudsters—not just petty mortgage originators in Long Beach and Tampa,
but top Wall Street executives who had concealed the damage until the whole edifice
collapsed. It was the Justice Department’s job to decide who should be investigated,
but presumably people like Lehman’s Dick Fuld and AIG’s Joseph Cassano and Merrill’s
Stanley O’Neal and, who knew, maybe Goldman’s Lloyd Blankfein himself. When the fraud
enforcement bill sailed through in May, and Kaufman (a mere freshman) was invited
to join the president onstage at the White House signing ceremony, he and Connaughton
thought they were getting somewhere.

In September, Kaufman and Connaughton asked for a meeting with one of Attorney General
Eric Holder’s deputies, Lanny Breuer, the assistant attorney general for the criminal
division. (He and Connaughton went back a decade, when they briefly overlapped at
Covington & Burling on Connaughton’s way out of the White House counsel’s office and
Breuer’s way in.) The pursuit of financial fraud hadn’t turned up a thing, and Kaufman
wanted to make sure that the Justice Department was on the case and using the money.
He planned to hold an oversight hearing to make sure. They met in Kaufman’s office
on the third floor of the Russell Building. Breuer explained that he was operating
under a lot of constraints, including a shortage of laptops. He said that he depended
on the “pipeline” of FBI investigators from around the country to bring cases.

Connaughton saw his opening. “Lanny, you need to go down into your pipeline and make
sure the FBI and U.S. attorney’s offices are making this a top priority. Shake your
pipeline hard and get it to bring you cases—don’t just sit back and wait.” Complex
fraud cases were too hard to make in the normal course of an overworked federal prosecutor’s
business. The perpetrators were sophisticated at erasing the traces and constructing
their defense even as they committed their crimes, abetted by well-paid lawyers and
accountants, later blizzarding investigators with irrelevant paperwork. Instead, something
like a task force should be set up to target each institution under suspicion, devote
a year or two to the investigation, take the time to learn what to look for, examine
every e-mail and IM. Connaughton referred back to his shared history with Breuer under
Clinton: “You need to be like Ken Starr. You need to target some of these guys like
they were drug kingpins, just like Starr targeted Clinton, and squeeze every junior
person around them until you can get one to flip.”

The meeting left him with the distinct sense that there was no great urgency at Justice.

Kaufman’s oversight hearing came in December. Breuer sat at the witness table, joined
by senior officials at the SEC and the FBI. They all said that they were on the case,
but they needed insiders who could testify about motive and intent. Just give us time.

Connaughton wanted to believe them. But 2009 slipped into 2010, and nothing happened.

*   *   *

In mid-January 2010, Connaughton and Kaufman traveled to New York to meet Paul Volcker,
the aging giant of the Federal Reserve. Volcker had crushed inflation under Carter
and Reagan by driving up interest rates so high that he induced a major recession.
The bankers loved him for it, and the farmers and construction workers blocked traffic
in Washington to denounce him. But Volcker was an eccentric member of the establishment.
He lived at the heart of the overlapping worlds of political and financial elites,
yet he had become such a scalding critic of Wall Street—the too-clever engineering,
the over-the-top pay—that he was now an internal dissident, officially respected,
unofficially distrusted. He once told a group of executives, “The most important financial
innovation that I have seen the past twenty years is the automatic teller machine …
I have found very little evidence that vast amounts of innovation in financial markets
in recent years have had a visible effect on the productivity of the economy. Maybe
you can show me that I am wrong. All I know is that the economy was rising very nicely
in the 1950s and 1960s without all of these innovations. Indeed, it was quite good
in the 1980s without credit default swaps and without securitization and without CDOs.”

Volcker made the perfect foil for Obama: he could be used to appease the reformers
and give cover with the establishment. The president appointed Volcker to lead his
economic advisory group, without taking the advice seriously. Volcker’s main proposal—to
ban banks from setting up hedge funds or private equity funds and from trading for
their own accounts with depositors’ money—was a half step back toward Glass-Steagall.
After six months, nothing had come of it.

Volcker sat down in his midtown conference room with the visitors from Washington
and said, “You know, just about whatever anyone proposes, no matter what it is, the
banks will come out and claim that it will restrict credit and harm the economy.”
Long pause from the little round face at the top of the long body, eyes magnified
by glasses, cagey creases running down either side of the mouth. “It’s all bullshit.”

Kaufman laughed. He admitted that his ambition was to restore Glass-Steagall fully.

“I won’t stand in the way of someone who wants to do something more dramatic,” Volcker
said.

The next week, Obama announced his support for what he called the Volcker Rule. He
was trying to jolt his presidency out of its lowest moment: Scott Brown had just been
elected to Ted Kennedy’s Senate seat, denying the Democrats their ability to defeat
the Republican filibusters that now dogged every last move the majority tried to make
on the Senate floor. The president’s health care bill appeared to be doomed. And more
Americans were unemployed than at any time since the Depression.

Connaughton thought the timing of the health bill was bad. For the better part of
a year it had been sucking up all the air in Washington, and exactly what did it have
to do with unemployment and the financial crisis? Maybe it was the southerner in him,
but he doubted Washington’s ability to write a multi-thousand-page bill that could
fix something as vast and complex as the health care system while the country was
falling apart. He would sit in on the Friday morning meetings of the Democratic chiefs
of staff in the Hart Building conference room, and listen to presidential aides enthuse
about the “optics” of White House health care meetings, the “messaging” campaign,
how well phrases like
cost cutting
had poll-tested—and there were weeks when the word
economy
wasn’t spoken once. But on health care Kaufman just followed the Democratic leadership.
What Connaughton cared about was Wall Street, and on that issue he and Kaufman went
their own way.

The senator in charge of the Wall Street reform bill was Chris Dodd, chairman of the
Banking Committee. Connaughton had disliked Dodd ever since 1995, when Connaughton
had urged Clinton to fight the corporations on the securities litigation bill (his
first taste of taking on Wall Street) and Dodd had been the one fighting back. Having
raised tens of millions of dollars in campaign money from Wall Street (almost a million
dollars in 2007–2008), Dodd was so deeply in its debt that many of his constituents
seemed to hold him personally responsible for the financial crisis. After it emerged
that he had received a sweetheart mortgage from Countrywide and approved millions
of dollars in bonuses from the bailout fund for executives at AIG, voters in Connecticut
expressed outrage. Dodd got the message and announced that he would retire at the
end of 2010.

That should have liberated him to go after Wall Street with Kaufman, but Connaughton
saw it the other way around. If Dodd had to face the voters again, he would have felt
pressured to shepherd through a tough bill. Instead, he was free to prepare for life
after the Senate, where the power of money would still hang over his career. You had
to think really hard before you took on the establishment, because there were a lot
of ways to build a very comfortable life if you went with the flow (like become the
top lobbyist for the movie industry, which was what Dodd would go on to do), but standing
against the establishment closed off a big part of America that otherwise would have
made room for you. You were in or you were out.

Dodd spent the entire winter negotiating with the Republicans behind the closed doors
of the Banking Committee, making concessions, insisting that he wanted a bipartisan
bill. But he never got anywhere—Richard Shelby of Alabama wouldn’t play ball, and
Bob Corker of Tennessee didn’t have the clout. The Volcker Rule became expendable,
Glass-Steagall was nowhere in sight. As the months dragged on, Connaughton began to
suspect that Dodd was negotiating with himself, using the Republicans and the ideal
of bipartisanship as a cover to weaken financial reform and end up with a bill Wall
Street could live with. Connaughton began to understand the supreme power of the committee
chair to decide what made it into a bill and what did not, whether amendments would
be added in committee or on the floor, which would survive and which would die. Since
his boss didn’t sit on the committee, Connaughton had little insight into the state
of play.

One day, he called up Jack Quinn at his old firm. “I can’t get to the Banking Committee,”
Connaughton said. “I assume you guys are having a hard time getting information about
the bill?”