Bought and Paid For (37 page)

But it didn't, which raises the question of why the agency and its feckless bureaucrats deserve a second chance. The answer, at least according to Obama and his economic team, is that there is no limit to the amount of good the government can do.

Did Wall Street really care about this unprecedented government intrusion into what is supposed to be the free-market system? Not really. At bottom, the Dimons and Blankfeins, of course, cared about some of the costs associated with this intrusion—the Volcker rule being high on Wall Street's hit list—but not all that much about the ideology of having the government be the final arbiter of capital in a system that bills itself as the greatest free market known to mankind.

That's why, as the bill neared passage, when Goldman Sachs spent its last dime on lobbyists to water down the Volcker rule (the firm nearly doubled its lobbyist spending in the first quarter of 2010) and Jamie Dimon threw his last hissy fit, Wall Street threw its full support behind the bill. What the CEOs know and what most people don't understand is that Wall Street loves regulation—regulation may have costs, but it also serves and protects the rich and powerful, who have the means to mold the regulatory system as they see fit.

The trade-off for all this regulation is, of course, government protection, which is what makes the crony capitalism of the modern banking business really work. Despite assurance that the government would step in and “wind down” banks that took too much risk and were losing too much money to survive, implicit in just about every facet of the bill was that “too big to fail”—the notion that Citigroup, Bank of America, Goldman Sachs, JPMorgan, and Morgan Stanley are so large and intertwined in the global economy that they need to be monitored and propped up no matter how much money they lose—was here to stay.

Not only are the banks staying, but so are some of their worst managers. “Believe it or not, Vikram will survive,” was the assessment of Larry Fink one afternoon as he sat in San Pietro eating lunch and for a change not having to defend his support of the president. The concept of “too big to fail” has benefited every major bank, but none more than Citigroup and its ineffectual CEO, Vikram Pandit.

After being named CEO of Citi in early 2008, Pandit did little more than steer a sinking ship—one burdened by hundreds of billions of dollars' worth of toxic debt and loans—right into the ground, defying calls to sell pieces of his sprawling, ill-conceived financial empire.

“I had nothing to do with it,” remarked Robert Rubin when asked whether he used his connections in Washington to secure the mother of all bailouts for the firm he had helped create. Rubin made the statement to me nearly a year later and just weeks before he resigned in disgrace from Citigroup in early 2009, but people close to the firm say his influence was never far away when Citigroup was involved.

Rubin, these people say, played an advisory role in the bailout plan and continued to advise Pandit as he sought to remain in the CEO position for the rest of the year. If Rubin was to somehow preserve even a small part of his corporate legacy, he would have to preserve Pandit, whom he had helped make CEO in the first place. While investors saw a worthless CEO at the helm, Rubin argued that Pandit had made the most of a bad situation, and that's what he argued to policy makers in Washington, according to people close to the matter, when the bank's masters in the Obama White House had to decide if Pandit was up to the job.

Robert Rubin's reputation may have been toxic on Wall Street, but in Washington it continued to carry weight, particularly with his fellow travelers Geithner and Summers, who became Pandit's advocates to remain in the job even over the objections of other banking regulators, such as FDIC chief Sheila Bair.

Pandit helped his own cause through a combination of luck (as it turned out, not a lot of people on the Street really wanted the job), his vow to finally begin to unload pieces of Citigroup's massive bureaucracy (after initially resisting, Pandit sold Citi's brokerage unit to Morgan Stanley to help cover some of the losses that had accrued under his watch), and some skill at the art of sucking up to the Obama administration. Indeed, through 2009 and 2010, the Obama administration had no better ally in corporate America than Vikram Pandit, though GE CEO Jeffrey Immelt, whose company was making a killing off Obama's so-called stimulus infrastructure spending and green initiatives, was a close second.

Immelt, who friends say was absolutely giddy at the prospect of all those government checks going to GE, was now walking around company headquarters saying how “we're all Democrats now.” Pandit did one better. He simply chose to endorse every so-called banking reform advocated by the Obama White House, from caps on executive pay to the Dodd bill, proclaiming that the president could “count on me and the entire Citi organization” to support the new banking law no matter how ugly the process or the final product turned out to be.

As Dimon and Blankfein paid lip service to the need for financial reform, Pandit became the bill's Wall Street cheerleader, something that earned him the enmity of just about every CEO on Wall Street. “Citi supports prudent and effective reform of the financial regulatory system,” he told a congressional subcommittee in one of the most obvious suck-ups in modern American finance.

By now the Wall Street CEOs understood that it was their job during these hearings to bend over, take it in the rear, and get out of town as soon as possible. John Mack used to laugh that it had become an art form for him to keep his mouth shut and contain his anger and emotion while being grilled by lawmakers who didn't know a market maker from a ham sandwich. Even the notoriously hotheaded Jamie Dimon managed to play it cool when he gave testimony about the banking crisis.

But Pandit just didn't take his grilling—he all but begged for more. Jamie Dimon's JPMorgan took tens of billions of dollars in bailout money, but he continued to fly on the corporate jet and refused to apologize about it even when he was meeting President Obama. It was the cost of doing business, bailout or no bailout, Dimon told his senior staff. Pandit, on the other hand, apologized for using a corporate jet when asked about it by Congress. Not only did he “get the new reality,” which meant no more company jets, he meekly explained, he vowed to take nothing more than $1 in compensation until he returned Citi to profitability.

After this performance, several of his competitors likened his groveling to the scene in the movie
Animal House
when the inductees to the Omega frat shouted, “Thank you sir, may I have another?” as they were being spanked during a bizarre hazing ritual.

For all of that, Vikram Pandit, the worst CEO in banking, survived and, as this book goes to press, is likely to remain Citi's CEO for the foreseeable future.

Meanwhile, people who know him say being bailed out and nearly dethroned as the bank toppled hasn't chastened Pandit. Citigroup's stock continues to hover below $5 a share. Though the bank is profitable, it's hardly the global powerhouse it was during its glory days earlier in the decade. Even so, Pandit clings to the notion that Citi will return to its precrisis glory of cranking out an annual profit of around $20 billion. And in the meantime, he never misses an opportunity to prostrate himself before Congress or plead with Geithner and his masters at the Obama White House about how great things are at his lumbering giant of a bank if only it is given a chance, and to beg them to please get his one nemesis, FDIC chief Sheila Bair, off his back.

Rubin may have influenced Geithner and Summers to support Pandit, and the firm's return to profitability (it earned $4.4 billion during the first quarter of 2010), seem to have given him job security. But to this day, FDIC chief Sheila Bair cannot bring herself to accept Pandit as someone who can adequately lead Citigroup, with its massive size and still billions of dollars in problematic loans and investments, completely back to health. More than any other bank, Citigroup's recent good fortunes, Bair has told people, were the function not of good management but mainly of a combination of factors beyond its control, such as record-low interest and the bailout mechanisms created during Bush's last term and extended under Obama.

Pandit never sold much of the vast and unwieldy pieces of the Citigroup empire that he promised; thus he still manages a huge mess of a bank. What happens once the Fed begins raising interest rates and Citigroup's traders can't make up for losses on loans and other investments? What happens if the economy, which based on GDP is slowly improving but based on unemployment of nearly 10 percent is struggling, takes a dramatic turn for the worse and falls once again into recession, as some economists (including Alan Greenspan) began predicting in mid-2010?

The FDIC, after all, is ultimately responsible to cover all those deposits at Citi, some $800 billion worth, if it faces another crippling crisis where out-of-work consumers fail to repay their loans and the bank once again faces steep losses.

Vikram Pandit, no matter how many times Bob Rubin comes to his defense, simply isn't up to the task, Bair believes.

Maybe worse, Bair has never forgiven Pandit for a conversation the two had back in 2008, at the height of the banking crisis, when Citigroup believed it had managed to bail itself out by joining forces with Wachovia, a troubled but deposit-rich bank headed by former Goldman vice chairman and Bush administration Treasury official Bob Steel. To make the deal work, the federal government said it would guarantee some of the losses on Wachovia's holdings of toxic loans and other securities, and Citigroup would benefit from a cash cushion of tens of billions of dollars in customer deposits that it could borrow from in a pinch.

Without telling Pandit, Bair gave the green light for another bank to step in and buy Wachovia. That bank was Wells Fargo, which not only outbid Citigroup for Wachovia but agreed to do the deal without government assistance.

Pandit was woken up in the middle of the night with the news, just days before his deal with Wachovia was supposed to become official. One person with knowledge of his reaction described it as “bat shit,” in his subsequent conversations both with Steel and with Bair.

Inside Morgan Stanley, Pandit's old firm, the rumor began to spread that Pandit had lost his temper with Bair in an expletive-laced conversation, something Bair won't deny (Pandit described it as “testy”). Whatever was said, throughout 2009 and into 2010, Bair went on the offensive against Pandit, forcing him to remove his CFO and placing his own job in jeopardy were it not for his support from Geithner and Summers.

As I pointed out earlier, Pandit may not be a talented CEO, but he is lucky; Bair's power in regulatory circles has receded of late (she's expected to step down at the FDIC after the end of the year), and he knows how to grovel. Pandit continues to speak openly about the need to pass financial reform and how much progress his masters in the Obama White House and in Congress have made in crafting legislation that will protect the financial system.

But no amount of kissing up to Congress and bowing to the Obama economic team can change the fact that Pandit's Citigroup is still a monumental mess—too big and lumbering to make the type of money he's promising and, of course, too worrisome for the regulators just to let die.

“Tom, you care about your relationship with Rahm Emanuel more than you care about Morgan Stanley!” That was the analysis of an increasingly desperate Michael Paese, a lobbyist at Goldman Sachs who was imploring Tom Nides to use his considerable clout with the White House to get the president and the Democrats to ratchet back the class warfare and some of the more onerous aspects of the financial reform package as it neared completion in the spring of 2010.

The financial reform legislation as it came together in mid-July 2010 was a Rube Goldberg contraption containing more than two thousand pages of amendments and rules that the senior executives at the top banks had a hard time figuring out.

One of the great things about Wall Street is that even as it said it accepted the broad outlines of financial reform, it continued to fight over the very important details—in Goldman's case whittling down the Volcker rule as much as possible, particularly its provisions on prop trading, and, it hoped, receiving a respite from the political attacks, which had hit Goldman and Blankfein harder than anywhere else.

These days Paese, a former top aide to House Financial Services Committee chairman Barney Frank, was on speed dial from Blankfein, who wanted constant updates on his efforts and the politics surrounding the firm's image problems, and how that was shaping the new reform legislation. Paese, who has long experience working on Wall Street and in government positions that influence Wall Street, was particularly valuable to Goldman because of his ties to Frank, who was now emerging as the principal coauthor of the banking bill, along with Chris Dodd.