Bought and Paid For (27 page)

What Steve Davis couldn't understand was the same thing millions of Americans were grappling with as well: a system that rewarded the miscreants at the expense of those who played it straight. As most Americans were taking care of their families, starting businesses, working in factories, and trying to make ends meet, Wall Street was gambling like mad, and now those gamblers were being given a second chance to gamble, a fresh bankroll from the taxpayers, with few, if any, personal consequences.

And instead of addressing the problem—instead of cutting off the umbilical cord that allowed this inequality to exist in the first place, the politicians chose to play upon the public's fears to gain cheap political points.

“She's such an asshole,” muttered a CEO from one of the big banks as he sat stone faced before one of their money inquisitors, according to a person with direct knowledge of the matter. The “she” the CEO (all the executives present publicly deny they were the responsible party) was talking about was Maxine Waters, the passionate far-left congresswoman from California, as she laid into the gathering of nine CEOs from the largest U.S. banks testifying before the House Financial Services Committee about the financial crisis. Waters had just derisively referred to the CEOs as “captains of the universe” before badgering them on whether they continued to make loans and whether they raised their credit card rates.

The irony of Waters's vitriol is that she, with other class-warfare types, was maybe just as responsible as the Wall Streeters for starting the crisis she was now investigating. Waters was a huge proponent of the Community Reinvestment Act and other measures that forced banks to lend to poor communities for housing. Those loans, of course, made their way into subprime housing bonds, which eventually went into default, thus igniting the great financial collapse of 2008. (Another irony: As this book was going to press, the House ethics committee was investigating whether she influenced the federal bailout of a bank her husband owns stock in.)

Aside from the “asshole” comment, Dimon Mack, and the other CEOs in attendance either kept their mouths shut during the grilling or dutifully answered the committee's often inane questions because they knew the inquisition was just the beginning. With the public outraged at Wall Street's recovery, Big Government needed to show it was on the case by scoring political points through “investigations,” i.e., public hearings like this one, designed to do little more than embarrass Wall Street CEOs. And of course, through something the president and his supporters increasingly began referring to as “financial reform.”

Goldman, for all the reasons listed above, became a familiar target. The SEC referred its case to the U.S
.
attorney's office for the Southern District of New York, the gold standard in white-collar prosecutions, which launched a preliminary investigation of its own. Even overseas regulators began to act. The British equivalent of the SEC, the Financial Services Authority, launched its own probe into the firm's business practices. Even the securities industry's self-regulator, the Financial Industry Regulatory Authority, launched a probe into why Goldman hadn't alerted investors that it faced so much regulatory scrutiny. And not to be left out of the action, New York attorney general Andrew Cuomo, who was announcing his candidacy to succeed the scandal-plagued David Paterson as the state's governor, joined in the Goldman bashing as he announced an investigation into whether Goldman and other firms pressured bond raters to hand out high ratings on mortgage bonds that ultimately turned toxic.

Name-calling from a president is particularly unbecoming, yet Obama increasingly began referring to the bankers who were his supporters as “fat cats” (without mentioning their past support of him, of course). The names of the various committees and subcommittees that began holding hearings soon began to blur, but not their primary target. Lloyd Blankfein made for a particularly enticing object of scorn, not just because he ran Goldman, or because his argument that Goldman hadn't been bailed out was so absurd, but also because he was so bad at public speaking. His various facial contortions, his deer-in-the-headlights gaze when asked tough questions, all seemed to make him a favorite punching bag for politicians eager for their time on camera.

And the hearings seemed to run on with no end in sight, primarily because Congress had so much material to deal with, particularly when it came to Goldman.

In private meetings with top Goldman executives, these same politicians, men like Senators Harry Reid and Carl Levin, continued to assure Goldman's lobbyists that their interest in the firm wasn't personal. On the contrary, the politicians liked Goldman and (it was understood) especially liked the money the firm handed out.

The media circus, with the name-calling, the hearings, and the investigations, was simply the price of doing business in the new world, and when all was said and done, it wasn't such a high price to pay given all the money Wall Street was making.

Meanwhile, just as Blankfein finished trying to explain to various committees just how on earth his traders could tout and sell to their best customers investments that they privately labeled as “shitty” in e-mails inside the firm, Goldman's role in another international debacle was slowly being uncovered as Greece—a country that seemingly has no direct ties to Wall Street—fell into a financial panic.

For decades, Goldman Sachs, especially its derivatives desk, had been working with the government of Greece. According to the
New York Times
, in November 2009 a team of bankers led by Goldman president Gary Cohn traveled to Athens to pitch the Greek government a type of transaction that would hide its obligations and allow it to push out its liabilities to the distant future. This wasn't the first time. In 2001, right after Greece gained entry to the European Union, Goldman had helped structure another complex deal intended to make Greece's finances appear to be in compliance with the strict rules for membership in the EU. For around a decade Goldman's derivatives desk—through the hocus-pocus of modern financial technology—was able to mask just how much the Greek government was borrowing, until, of course, it couldn't be masked anymore. In essence, the firm was able to use the same kind of financial wizardry that had allowed the banks that had gone under, like Lehman Brothers and Bear Stearns, to keep billions of dollars in bad debts from showing up on their balance sheets (until the very end), wizardry for which Greece had paid Goldman at least $300 million in fees over the years. These deals were essentially gimmicks designed to do nothing more than make a country that needed to borrow heavily to support its welfare look like it was fiscally sound. But like all such gimmicks, it didn't last forever.

By midspring of 2010, Greece had to fess up to decades of wild spending, heavy borrowing, and generally living beyond its means. If civil servants in the United States are sometimes perceived as getting fat off the public trough, it's nothing compared to Greece, where government employees (and a huge chunk of Greece's economy was run by the government) got paid fourteen months' salary for every twelve months of work. The country was a fiscal basket case—it owed money to everyone, with the British and the Germans at the top of a very long list of creditors. The country's economy was in such bad shape that it couldn't raise taxes (no one had money to pay them) and no one was crazy enough to lend it any more money. In other words, Greece was broke, and it was looking for a bailout to keep the country functioning.

But how did it get so bad? Greece was part of the European Union; it had given up its own currency, the drachma, years earlier in order to gain entry and use the euro. It had needed to meet the EU's quality standards to gain entry, which meant it couldn't just borrow to pay its bills, because the EU imposed public debt limits on its member nations. To be more accurate, Greece couldn't simply disclose how much it was borrowing if it was both to maintain those EU debt limits and fund its literal welfare state at the same time. So it turned to Wall Street for help, much as Orange County had back in the early 1990s.

What the slick salesmen who peddle these deals don't tell their clients, whether corporations or governments, is that such transactions can't actually eliminate the borrowing and debt payments to creditors, only conceal them for some time, and even when done with the best of intentions—e.g., staving off potentially crippling economic cutbacks until business conditions improve—derivatives are dangerous. A sudden change in interest rates can set off a chain reaction that turns those investment gains into losses, making the debt payments on already high levels of borrowing seem exponentially great.

Many government officials I have come across during my career make easy targets for investment bankers. They are largely unaware of these dangers because they're political appointees and as a result aren't schooled enough in the fine points of high finance to really know what they're buying. Even if they are savvy, like the finance officials in New York City who have been balancing budgets on gimmicks for years, they probably don't care about the long-term ramifications of their actions because they are serving a higher purpose, at least in their own minds. Their main goal is to keep government functioning—even in its often dysfunctional state.

In many ways, the officials in Greece who bought what Goldman and, to a lesser degree, JPMorgan Chase were selling them were almost no different from all those homeowners in the United States who helped instigate the financial crisis by taking out subprime loans on homes they should have known they couldn't afford and then defaulted when the payments came due. In other words, they were content to remain blissfully ignorant in the present even if it meant their future was threatened.

By the spring of 2010, Greece was broke and threatening to default on billions of dollars of its debt. Riots were breaking out in Athens as the Greeks, accustomed to the free health care and the incredibly generous benefits of a welfare state they couldn't afford, realized that the gravy train was coming to an end.

As of the writing of this book, Greece's finances are still is disarray, and Goldman, along with the other Wall Street firms, I am told, is still running around the world giving “advice” to countries on how to “manage” their finances, which usually means offering up ways to hide their largesse and postpone the inevitable payment that comes after a spending spree. Goldman makes sure, of course, to collect its own fees well before the collapse occurs.

It would be nice to think that this sort of stuff doesn't go on here in the good old U.S. of A. But so it does. As I previously mentioned, New York City has been finagling its books, often when Wall Street goes into a temporary downturn, for years. And as we saw in chapter 2, Orange County, California, was brought low by Wall Street just as Greece would be later. Is the United States heading down that same path? While the U.S
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government is hardly Greece, or even Orange County, there's no doubt that fiscal conservatives—on the left and the right—are starting to look at the nation's debt relative to its GDP and wonder: Where
are
we going to end up?