Bought and Paid For (10 page)

Despite the seeming differences between these two groups, on some level most of today's Wall Street brass have more in common with Obama's young, idealistic supporters than meets the eye. The new breed of Wall Street executive is far more progressive, far more
liberal
, and thus believes to a far greater degree in his or her broader responsibilities to the country, to mankind, than his or her predecessors, who many assumed were myopically focused on their individual net worth and their firms' bottom lines.

Maybe that's why it seems Dimon has gotten along so well with Obama for the past year. Both are cut from the same cloth. Obama is the essence of a limousine liberal who distrusts the masses clinging to “their guns and their religion.” Dimon, despite his skills as a chief executive, isn't far behind. For a CEO who runs a company that does investment banking and safeguards customer deposits in branch offices across the country, Dimon isn't bashful about spouting the liberal talking points.

He has railed against measures to scale back illegal immigration, likening people who worry about border lawlessness to xenophobes who would have kept his grandparents from immigrating to the United States from Greece; he has called for increased spending on inner-city schools, some of the most free-spending, profligate bureaucracies in the country; he has advocated for increased spending on the country's infrastructure, despite the fact that the cities and states that do much of the road and bridge work can't afford to go into any more debt to pay for these projects. At work, he tells his staff that “giving back” to society is a necessary ingredient to being a Wall Street executive.

It's why shortly after taking over at JPMorgan Chase, Dimon began requiring executives to contribute substantially more in health-care premiums to subsidize their lower-wage colleagues. Similarly, Dimon has instituted what Noam Scheiber of the
New Republic
has described as “nanny-state paternalism” at the company. At a recent health-care conference, Dimon said, “[I]f a JPMorgan Chase employee has diabetes and we don't see claims for insulin and for eye exams, they get a phone call.”

All this is why his staff says when he retires he'll most likely become a college professor, a line they used whenever rumors have swirled that Dimon's close relationship with Obama would lead him to a job in the White House, possibly succeeding Tim Geithner as Treasury secretary.

Dimon isn't alone among the Wall Street life embracing progressivism. John Mack openly supports health-care reform (he and his wife have created a charity dedicated to promoting health-care reform and alternative medicine), and in 2007 he made waves by announcing that he had switched parties to endorse the Democrats, namely then-candidate Hillary Clinton for the 2008 election because of her record supporting that cause. He also serves as chairman of the board of one of New York's biggest hospitals (NewYork-Presbyterian).

Hank Paulson was an avowed environmentalist as CEO of Goldman Sachs before he led one of the greatest ever governmental interventions into the free markets as Treasury secretary. In that position he was one of the key architects of the now-infamous Wall Street bailout, which
New York Times
columnist Gretchen Morgenson estimated in one column well exceeds the already enormous $89 billion the Obama administration says it cost taxpayers.

In other words, these guys may drive around in limousines, but they proudly wear their liberalism on their sleeves. What may make them different from many of their liberal peers is that they rarely shy away from an opportunity to turn a profit, especially when turning that profit allows them to satisfy their social consciences at the same time.

With Barack Obama, Wall Street wasn't just betting on his new “hope and change” agenda, which, when boiled down, came right out of FDR's playbook from the 1930s: Big Government programs, taxes on small businesses, new entitlements, and more. They were betting that while Obama would lead America in his own liberal image, he would have no stomach for changing Wall Street's role in government; namely, its ability to make money through its partnership with Big Government.

It's a mutually beneficial relationship—and it always has been. As I've explained, the big Wall Street firms have earned huge fees underwriting America's debt binge by scooping up the Treasury's bonds and distributing those bonds across the globe. That government policy, begun under the Clinton administration, couldn't have been accomplished without Wall Street.

The mechanism that allowed the banks to lend so freely and give mortgages to millions of Americans who otherwise would not have qualified for a loan was in fact something called the mortgage bond, created, ironically, by BlackRock founder and CEO Larry Fink back in the early 1980s, when he was a Wall Street bond trader. The mortgage bond allowed banks to remove these risky loans from their balance sheets and put them into the hands of investors, and Fink went on to make a fortune from its broad acceptance in the banking business.

These bonds may have been the root cause of the 2008 financial crisis, but for years they were some of the most lucrative inventions Wall Street had ever come up with. They added trillions of dollars in profits to the bottom lines of the banks as home ownership soared.

And government, in turn, was happy. The stated social goal starting with the Clinton administration was to expand housing “penetration” (i.e., the percentage of the population that owned their own homes) from 60 percent to 70 percent, a dramatic increase that could be achieved only with the willing cooperation of the big banks in buying those mortgages from Fannie Mae, Freddie Mac, and elsewhere and putting them into bonds to sell to investors. So Wall Street made piles of money and Big Government saw its mission accomplished, all at the same time.

In 2006 Wall Street made so much money from these housing bonds that the average salary for the CEOs of the top seven firms was $50 million. Even though these same bonds turned sour just a couple of years later when their depressed values forced the banks that held them into near or total failure, the partnership between Wall Street and Big Government survived as the Bush administration set the stage for a bailout of Wall Street as the president's final act in office.

Just a couple of months after the bailouts, the Obama administration's policies—some of them held over from Bush's bailout and some of them new to the game—began to kick in, and Wall Street, fresh off nearly driving the country (and arguably the global economy) to ruin, began one of the greatest periods of profitability in years. No firm illustrated this better than Goldman Sachs. In the second quarter of 2009, while many Americans were pondering the possibility of the next Great Depression, Goldman rolled the dice and generated a then-record $8.3 billion in trading profits, enough to push the overall firm to a $3.1 billion quarterly profit. Goldman was not alone. After months of write-downs, in the first quarter of 2009 Goldman, Bank of America, Citigroup, and Morgan Stanley generated a combined $7.4 billion in profits. The next quarter was even better. Feasting off low interest rates from the Federal Reserve and generous government subsidies, those firms made nearly $11 billion in combined profit.

But these profits weren't derived from activities that actually helped the broader economy, such as investing seed capital in start-up companies or lending to small businesses, the original intention of the bailouts. Rather, the windfall came from essentially the
same
risk-taking activities that had led to the financial crisis—borrowing cheaply thanks to the low interest rates supplied by the Federal Reserve; using that borrowed cash to buy bonds, essentially financing Barack Obama's spending spree through the purchase of some Treasury bonds but mostly government-supported mortgage-backed securities (the government was now actively buying these beaten-down bonds as another way to help the banks holding them repair their balance sheets); and, of course, pocketing the immense profits.

In one sense the protections given to banks and the profits they produced can be seen as a form of hush money. Small-business owners and average citizens are now shocked and worried by the massive amounts of debt issued by the new administration for various programs, including the $800 billion stimulus package that fell far short of the administration's expectations. But there's been barely a peep from the financial experts on Wall Street, who downplayed the impact all this borrowing might have on the economy and the markets. Why would they do that? Wall Street has earned countless billions in fees from this activity. Not even a report in March 2010 from Moody's Investors Service, one of the big credit-rating agencies, that the United States might lose its triple-A rating could wake them from their stupor. And their silence doesn't end there. The big firms barely said a word about health-care reform, even as its passage in the spring of 2010 created a massive new entitlement on top of the already massive Obama spending plans and plans to raise taxes. After all, mandatory health care may hit small businesses hard in terms of higher taxes, but Wall Street's clients, the big pharmaceutical and insurance companies, will flourish because, under the law, those who remain uninsured will be guilty of a crime and as they receive insurance coverage they will undoubtedly use more medicine. And of course, when the government borrows money to finance this expensive new plan—well, you know who's raking in the fees on all that debt (here's a hint: it's not the National Small Business Association).

If this isn't enough to demonstrate the liberal mind-set of those on Wall Street, let me ask you a question: When was the last time a major Wall Street firm openly advocated tax cuts as a way to spur the economy? Tax cutting was something that even Obama's own economic adviser, Larry Summers, had once called for—that is, before he joined the spending-happy Obama administration. Summers is a particularly interesting example of the principle of “bought and paid for.” He was one of the architects of Wall Street's alliance with Washington. He was at the forefront of both the Wall Street bailouts and deregulation during the Clinton years—as deputy Treasury secretary under Clinton he helped repeal the Glass-Steagall Act, allowing the big banks to combine their risk-taking trading activities with the safeguarding of everyday customer deposits. The repeal of Glass-Steagall led directly to the creation of the megabanking giant Citigroup, which required one of the biggest bailouts during the financial collapse. Summers would later be well rewarded for his connections to Wall Street. He earned about $8 million at hedge fund D.E. Shaw and in speaking fees from financial companies between stints as the president of Harvard. In his new role as one of Obama's economic advisers, Summers, along with numerous other members of the administration, remains close to many of the top executives of the big firms.

Summers has been a White House sounding board for Wall Street during the past two years, but he isn't alone. Wall Street's friends are placed throughout the Obama cabinet, thus ensuring that Wall Street has had a huge say in the reshaping of the financial business in the aftermath of the 2008 collapse, including the current financial reform legislation. And despite Obama's calling the bankers “fat cats,” CEOs like Dimon and Blankfein had made numerous trips to the White House attempting to ensure that the president doesn't do anything that really costs them money. It's rather like letting the wolves guard the henhouse, only in this case the wolves gained access by making generous campaign contributions.

It's only fitting that the firm that went the most head over heels for Obama—Goldman Sachs—has emerged from the carnage as the most profitable of the big investment banks. After all, Goldman was feasting off Big Government and making huge profits. And Goldman has been the target of public outrage for handing out some $20 billion in bonuses nearly a year after the financial collapse, while nearly a quarter of all construction workers remain unemployed.