Bought and Paid For (2 page)

First a little background. For Blankfein, it had been a good year—at least on paper. Goldman earned more than $13.4 billion in 2009, and now, nearly midway through 2010, the firm was well on its way to a repeat performance. But with success came a lot of controversy. Goldman, the most profitable firm on Wall Street, and among the most profitable firms in corporate America, had become the poster child for the inequalities of the American economy that followed the financial collapse of 2008.

That collapse was the result of a combination of government policies, reckless risk taking, and sheer greed. The big financial firms, including Goldman, created literally trillions of dollars' worth of debt products based on mortgages that were given to people who couldn't afford them, for houses that were way overpriced. When the housing market collapsed, the firms were left with tons of toxic housing debt on their balance sheets. One by one, they started to go under: First, Bear Stearns was rescued by the government, and then Lehman Brothers was allowed to fail. Following Lehman, the other firms (including Goldman), which had been in relatively better shape (but were by no means healthy), were now in the market's crosshairs.

At that point the government, which at the time was being run by Republican president George W. Bush but would shift entirely to the Democrats when Barack Obama was elected president the following year, realized a true collapse of the entire financial system was a distinct possibility and stepped in to bail out the remaining firms.

Like the rest of Wall Street, Goldman had benefited from a bailout, funded entirely by taxpayer dollars, to survive. Yet since then, it had used a number of special privileges created by the Bush administration to help the big banks in the aftermath of the financial crisis to make more money than ever before. The profits of the big banks began rolling in just weeks after the 2008 bailout, yet the government support continued through 2009 and into 2010 as the programs remained firmly in place under the Obama administration. These included, among other perks, guarantees on the firms' debt, superlow interest rates set and then left untouched by the Fed, changes in accounting rules that allowed the firms to create profits out of losses, and maybe most of all, the notion that the remaining banks, backed up as they were by the federal government, were too big to fail. In a desperate attempt to save the economy from total collapse, the government did for a handful of banks what the mob does for its highest, most important criminals: It made them, in effect, made men. This policy, known as too big to fail, asserted that some firms—including many of those responsible for the credit crisis—should not be allowed to collapse for fear that, if they did, the entire economy would follow.

It was an unprecedented assortment of government goodies that allowed Wall Street to survive and, after the initial threat of collapse had waned, thrive. They all made out like, for lack of a better word, bandits; even lowly Citigroup, after two rounds of federal bailouts, was profitable early in 2009, so much so that its CEO, Vikram Pandit, who was nearly pushed out as head of the firm a few months later, found job security and a second chance.

But Goldman was the most adept at gaming this no-lose system, executing a business plan based on government support that made it the envy of every other firm on the Street. Goldman, probably more than any other firm, was able to use its status as a government-protected business to gain access to billions of dollars of borrowed money at rock-bottom borrowing rates and then use those funds to buy bonds—many of which were the same as those that had helped cause the financial crisis but were now trading at just pennies on the dollar.

Thanks to new government guarantees, these once risky investments became sure bets because of another government program in which the Federal Reserve was snapping up mortgage-backed securities in the open market to help prop up their prices. According to the Fed's Web site, the program is designed to “provide support to mortgage and housing markets,” the theory being that if the mortgage-bond market stabilizes, banks will increase their lending and housing prices will rise. But the biggest beneficiary of this program hasn't been the average American homeowner (the housing market remains pitifully soft in many parts of the country) but the average big-bank bond trader, who profited by buying debt on the cheap and sitting back and watching his investments pay off thanks to a government payout.

And what about the men, including Blankfein, who ran these firms? They saw no problem with reaping profits at the expense of the American taxpayer. In their minds, they were doing “God's work” (a phrase Blankfein would later make famous) simply by funneling billions of dollars each year throughout the markets in an effort to churn out trading profits and thus, in the end, fuel the economy. In their eyes, if they won, everyone won; and thus, if they failed, as they nearly all did in late 2008, everyone failed.

But as the economy stagnated and companies continued to lay off employees, only Wall Street seemed to be winning. While the banks that had been largely responsible for the recession were saved, the taxpayers who had funded these bailouts and government initiatives were suffering. The national unemployment rate was hovering at close to 10 percent; in fact, the only sector seeming to fare well was state, local, and federal government (which faced an estimated 3 percent unemployment) and the bailed-out Wall Street firms, which began hiring again just months after receiving the bailout money. With Wall Street benefitting from this unequal redistribution of wealth, the public wanted blood. And with Goldman benefitting the most, the firm and its CEO, Lloyd Blankfein, became public enemy number one.

Goldman, which enjoyed a pristine reputation with the national media as the firm that government turned to for advice and counsel, was suddenly portrayed as a villain or, as Matt Taibbi of
Rolling Stone
put it, “the great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.” The article crystallized America's burgeoning hatred of Wall Street and deep-seated suspicion that the financial service industry was just out to screw regular people. Even President Obama, who had supported the bank bailouts and the subsequent federal policies (e.g., super-low interest rates) that led to the banks' resurgence, had started changing his tune in the face of the public outrage. Just as Goldman was getting ready to celebrate the accumulation of some $25 billion in bonus money for 2009 (one report had Blankfein set to receive $100 million in compensation), Obama referred to the bailed-out bankers as “fat cats” enriching themselves at the public's expense, even if his polices were mostly to blame.

Of course, the fattest of those fat cats, Lloyd Blankfein, took the focus on Goldman, and him, particularly hard.

It wasn't just the insurmountable press attacks that had Blankfein telling people he felt like crap all the time (or as one friend told me at the time, “Lloyd always looks like shit”). It was also the notion that he, a man who had fought his way out of a Brooklyn, New York, housing project and up the ladder to the very pinnacle of high finance, was a greedy businessman feasting on taxpayers' hard-earned money. Some polls showed that Wall Street had an approval rating lower than that of House Speaker Nancy Pelosi, who was unpopular with an amazing 80 percent of all Americans. In fact, Wall Street would have been happy with Pelosi's lousy numbers; one poll conducted in the spring of 2010 gave it an unpopularity rating closer to
94 percent
.

And now those low poll numbers, just as they would doom any political candidate, began to doom Blankfein and Goldman. In early May 2010, the Securities and Exchange Commission, led by Obama appointee Mary Schapiro, filed a civil fraud case against Goldman. The charge was the most serious regulatory attack on any Wall Street firm stemming from the financial crisis; it accused the firm of failing to disclose to its clients key pieces of information regarding an investment Goldman had sold back in 2007.

According to some of his acquaintances, Blankfein was outraged. His already long days at the office got considerably longer as he began marshaling all the firm's resources to fight the charges, or at the very least whittle them down so the firm could settle in a palatable manner.

Blankfein's problems were compounded because Goldman wasn't completely out of the woods in terms of criminal inquiries, either; the U.S. attorney for the Southern District of New York, as well as New York attorney general Andrew Cuomo, were launching investigations at the same time that British regulators and even the securities industry's self-regulator, the Financial Industry Regulatory Authority (FINRA) launched their own probes into the firm.

With Goldman enmeshed in a huge PR and legal debacle, Blankfein knew he needed a game changer, something that put the firm back in the good graces of the government and, most important, of the man who controls the government, President Obama. For the most part, Obama had been good to the banks—really good. They'd gotten everything they wanted in terms of bailouts and handouts and reaped enormous profits because of it. But now, realizing the public's increasing anger, Obama came to the conclusion that he needed to change his tune or risk appearing completely out of touch with the national mood. So he and his fellow Democrats made banker bashing their pet project.

Amid this assault, ShoreBank's demise presented a unique opportunity for Wall Street's battered CEOs. After all, Obama hailed from Chicago, where the bank was based. He had earned his political chops there serving in local government and later as a senator. Obama had even once touted ShoreBank as doing God's work, even though according to independent analysts I spoke to it hasn't generated a profit in years. Judging by its financial troubles and unprofitability, the bank seemed to exist to lend money to poor people or investors who tried to spur economic growth in the inner cities, even if that growth didn't really work out as planned. But it kept lending anyway and also began to pursue so-called green investing, or investing in businesses that are environmentally friendly even if those businesses lose money and generate few jobs.

Blankfein knew all of this and more, namely that ShoreBank had direct ties to senior administration officials: Presidential senior adviser Valerie Jarrett sat on the board of Chicago Metropolis 2020, a civic organization run by Adele Simmons, one of ShoreBank's directors; Obama's own controversial green czar, Van Jones (who later resigned after reports linked him to controversial remarks about the September 11 terrorist attacks), was involved in one of ShoreBank's many projects. Eugene Ludwig, the former comptroller of the currency under President Bill Clinton who was a former ShoreBank director, had called many top Wall Street executives, including Blankfein, and explained all the societal “good” they could accomplish if they helped bail out the struggling, civic-minded bank.

Another layer of pressure came from Sheila Bair, the head of the Federal Deposit Insurance Corporation (FDIC), the federal agency in charge of taking over and liquidating failed banks. A Republican who was reappointed by the new president, Bair made it clear in her calls to various Wall Street executives that despite taking over more than two hundred banks since the financial crisis began, she didn't want to liquidate this one.

It didn't take Blankfein long to put together the pieces. Blankfein may be brutal in front of the press of congressional committees (check out his public appearances), but he knows that in politics, sometimes it pays to play nice. In fact, one of the first things he did as the regulatory noose began to tighten was hire former Obama counsel Greg Craig as a senior adviser. Craig knows better than anyone on Wall Street whom to cozy up to in the administration.

Knowing what he could gain from an investment in ShoreBank, Blankfein pledged $20 million of Goldman money to the troubled bank to help rescue it, and called around to his friends in corporate America to do the same. And it worked. GE Capital, the giant finance arm of General Electric Company, came up with $20 million, and Morgan Stanley threw in $10 million on top of the tens of millions already donated by JPMorgan Chase, Bank of America, and Citigroup.

Blankfein—who by some accounts was fighting for his job as he struggled against multiple regulatory probes, mounting shareholder lawsuits over the company's problems, and growing dissatisfaction inside Goldman over his management—had just fought to save a small bank in Chicago that had had a history of unprofitability and no signs of turning itself around. These weren't exactly the kind of maneuvers that had helped Goldman earn $12 billion in 2009.

But what if they were? What if the ShoreBank bailout, disguised as an act of charity at best and a desperate attempt to save Goldman's public image at worst, actually represents just one more example of how Wall Street and the government, namely Big Government, really work?

The fact of the matter is, when you strip away the name-calling and class warfare coming from the Obama administration, and when you ignore Wall Street's gripes about the new financial reform legislation that will put a crimp in some of its profits, these two entities are far more aligned than meets the casual eye. They coexist to help each other—in an unholy alliance against the American taxpayer.

This is why I decided to write
Bought and Paid For.
I've spent much of my career covering Wall Street, and I've always had a particular interest in the intersection of Wall Street and politics. My first big story, back in the early to mid-1990s, focused on the major scandal of that era, involving the issuance of municipal bonds, and showed how Wall Street used politically connected consultants, such as the young political operative turned senior White House chief of staff Rahm Emanuel, to win municipal bond business from their friends in government and induce municipalities to take on greater degrees of public indebtedness. (Emanuel left Goldman in the early 1990s to work in the Clinton White House.)