Bought and Paid For (40 page)

Dimon, like Fink, believed he was supporting moderation when he put all his bank's resources behind Obama, and like Fink he now felt betrayed, people who know him tell me. Even worse, when it came to the business he worked in, Obama and the Democratic political elite he had supported really didn't distinguish between the firms that “did it right,” as he would tell his staff, and those that didn't. It was one thing for Blankfein to be branded a greedy bastard—in Dimon's mind Goldman is nothing short of a greed machine that screwed its clients for years with deals like Abacus and many others.

When Blankfein went before Congress to defend his firm's actions, Dimon was unconvinced by his excuse. “What they did was wrong, plain and simple,” he said.

And yet JPMorgan had become, at least in the rhetoric of the White House and the Democratic Party, a kinder, gentler version of the vampire squid.

That's when Dimon did something that once would have seemed unthinkable: He appeared to take the advice offered to him when he had met with House minority leader John Boehner just a few months earlier to complain about the direction of financial reform, and he and his firm began to support Republicans.

News spread through JPMorgan about fund-raisers being held for Republican candidates. Old friends like New York representative Carolyn Maloney, who represents the Upper East Side of Manhattan, and senators Chuck Schumer and Kirsten Gillibrand of New York felt the chill immediately in terms of a drastic reduction in Wall Street campaign contributions. The firm that had bent over backward for the Democrats in 2008 (62 percent of all JPMorgan campaign money had gone to the Democrats) was now doing the same for the Republicans, plowing just as much money into the campaigns of Republicans running for office as they did for Democrats during the first half of 2010, according campaign records.

Dimon began adding up in his head everything he had done for the administration: The political donations from JPMorgan had helped Obama get elected. His sage advice during the past year had helped an economically inexperienced president understand the markets. Emanuel had even called Dimon and asked him to call key senators and press them to approve Fed chairman Ben Bernanke's reappointment (and his potentially inflationary, albeit Wall Street friendly, policy of keeping interest rates near 0 percent), which he did.

Dimon had already directed his senior staff to begin spreading the wealth around—he may be a lifelong liberal Democrat, but he wasn't going to reward bad behavior—and he wasn't alone. Wall Street was now hedging not just its market bets but also its political bet on Obama and his agenda. By placing all their bets on Obama and his fellow travelers in Congress, they had helped elect the most liberal governing bodies in years, without a bipartisan check. To be sure, Big Government brought the banks enormous profits, but it had also brought them an uncertain future as banker bashing became the new politics of the Left. Now they began to hedge their bets in an unprecedented fashion. Contributions to key Democratic congressional committees fell by 65 percent. Dimon himself gave nothing to the committees, while making a $2,000 contribution to a Republican congressman. Blankfein, a longtime Democrat, went further: He called for a moratorium on all contributions from the firm until financial reform had been completed. “We don't want to be seen influencing the decision,” a firm spokesman said. But people inside the firm say the money was cut off to make a bigger point that the firm was tired of the attacks.

Another practical reason for the hedge was the changing political environment. With unemployment remaining abnormally high, by the late spring of 2010 political analysts like the prescient Charlie Cook and pollster Doug Schoen even began to predict the possibility of a Republican takeover of the House and Senate.

Obama's own poll numbers began to fall, meaning that the class-warfare attacks were not only not working, they were screwing both him and his party out of much-needed campaign cash. But instead of making up with their former contributors, the Democrats were only emboldened to ratchet up their Wall Street attacks. Barney Frank, for years a solid Wall Street vote in Congress despite his social liberalism, had joined the anti- Wall Street parade by introducing a bank tax to pay for the financial regulations few on Wall Street believed would ever work.

On Wall Street, the word back from the administration was that Geithner, Summers, and even Volcker were opposed to the initial amendment proposed by Arkansas Democrat Blanche Lincoln to force banks to spin out their derivatives businesses, even if she used the clause to successfully remind voters back home that she was keeping tabs on the greedy bankers in New York and won a tough primary challenge.

The absurdity of the measure, as the Wall Street firms and their lobbyists tried to point out, was that it would impact far more than just the big Wall Street firms. Of course, everyone on Wall Street had used derivatives to gamble; credit-default swaps—those insurance policies on corporate debt—were traded incessantly during the financial crisis. Short sellers of bank stocks would buy them to panic investors into selling their shares of bank stocks; when investors saw a spike in CDS prices on Wall Street banks, they would sell their shares and the short seller would walk away with a handsome profit through a form of market manipulation.

But the derivatives trading that the financial reform bill came down so hard on wasn't originally developed as a trading tool for financial firms. Instead, its first application was in agriculture, where contracts on the future prices of grain, hogs, and other agricultural products allowed farmers and their customers to lock in prices in the future without worrying that wild swings in the commodities markets might wipe out their profits.

Many other companies use similar financial products as well, to lock in volatile oil prices, for example, to hedge against counterparty risk (the chance that that one's opposite party in a transaction might go bankrupt or be unable to deliver), or to protect against swings in the currency markets.

But Lincoln, with her primary victory in hand and a tough general-election fight about to get under way, stubbornly stuck to her guns, and the amendment remained in the bill with a few modifications.

So the word went out during the spring of 2010, not just at JPMorgan but across Wall Street, that the banks should keep moving. Even Citigroup, run by the ever-malleable Vikram Pandit and still technically owned by the Obama administration (as this book goes to press the Treasury Department is trying to sell its stake in the bank), began holding fund-raisers for Republicans, with 63 percent of all contributions going to Republicans during the first half of the year, compared with just 47 percent for all of 2008. Goldman, after contributing to Obama by a three-to-one margin in terms of campaign cash, began to evenly split its donations.

Tom Nides's friendship with Rahm Emanuel aided Morgan Stanley in landing some plum assignments—including acting as lead adviser on the new stock issued by GM and helping the Obama administration cash out of its bailout stakes in the automaker and Citigroup. But he couldn't stop the fund-raisers held by bankers to support Republicans; 52 percent of all Morgan Stanley contributions went to Republicans, compared with just 47 percent in 2008. Moynihan may have relished his new friendship with the president, but the firm's executives didn't. Bank of America executives split their contributions in favor of Republicans 58 percent to 41 percent, campaign records through June show. This is a near complete reversal from 2008 contributions.

By the middle of 2010, the tally of contributions told the story—more than two-thirds of all Wall Street contributions were now heading to Republican candidates.

But the Republicans didn't necessarily come cheap. In a meeting with Wall Street executives, huddled in a private room at the Peninsula Hotel in Manhattan, two key Republican senators, Mitch McConnell and John Cornyn, basically repeated what Dimon had been told by House minority leader John Boehner a few months earlier: They were willing to forgive past snubs, but Wall Street would have to continue to spread the wealth if Republicans were going to have a fighting chance to reverse the massive intrusion of government into the private sector, not just on Wall Street and in banking but also in the auto industry, health care, or any industry Obama had targeted to expand his leftist agenda. In terms of financial reform, the senators' plan was to fight the most egregious antibusiness parts of the Dodd bill (they hated the too-big-to-fail aspect) and then bide their time until the midterm elections so they could add Republicans to the Senate and kill the most anti-free-market parts of the bill.

But first they needed money. Neither McConnell nor Cornyn was particularly fond of Wall Street's risk taking or the access the Street had enjoyed for so long with the current administration. They were well aware of how Wall Street had gone head over heels for the president, including support from Goldman executives who alone had donated close to $1 million to Obama during the 2008 election cycle (not counting cash given to the party and other soft-money accounts) as the firm earned $13.4 billion in 2009 thanks largely to Obama's policies. That's $13,400 in profits for every dollar the company gave directly to Obama—an extraordinary investment by any measure. Obama as president earned $400,000 in salary in 2009, while Blankfein took a massive pay cut but still walked away with around $9 million and Jamie Dimon earned about $17 million.

Not bad for a year's pay working for the nanny state.

“By my estimate,” Jamie Dimon was overheard saying one afternoon in early July as the Dodd bill was starting to take its final shape, “I think we can get the costs of this thing down to 8 percent,” from original cost estimates of as high as 15 percent.

After months of bluster, Dimon wasn't exactly celebrating, but he was, according to people who know him, feeling like he and his bank had dodged a major bullet as the most onerous forms of the financial reform legislation—at least in terms of how they would impact the big banks—appeared to have been watered down. Paul Volcker, who had pushed for many of the strict measures that had appeared in earlier drafts, was disappointed, giving the near-final product a B, according to the
New York Times
.

Maybe that's why JPMorgan and its CEO joined the ever-compliant Vikram Pandit in pronouncing the legislation fit for public consumption. “We support the vast majority of what's in this bill,” a JPMorgan spokesman assured me in June 2010. According to senior Wall Street executives, the cranked-up lobbying effort by JPMorgan and even Goldman (whose lobbyists had managed to break through the barriers of working for a firm considered toxic), just before President Obama signed the final product into law, had yielded significant benefits.

The Volcker rule in its near-final form didn't appear so ominous after all, which is why its author was so pissed and Goldman was feeling pretty relieved. The activity it was supposed to outlaw, proprietary trading, or trading using the firm's own capital, became more a term of art than a strict definition, and given the way the rule was being written and interpreted by the lawmakers, banks would be able to engage in risky trades as long as the trades involved a customer order, as 90 percent of all trades do.

JPMorgan's nightmare of having to spin out its hedge fund and private equity businesses, the massive Highbridge Capital and One Equity Partners, also appeared to be watered down—the new and improved Volcker rule allowed the firm to keep its investment as long as it didn't risk more than 3 percent of company capital in such investments, which, as Wall Street had discovered, might not be such a bad thing. The practical effect was that the firms could pull out their own money and still scoop up hefty management fees, and if the funds failed, they had no responsibility to bail out these investments, as Bear Stearns had been forced to do when its hedge funds imploded in 2007. Even Blanche Lincoln's derivative spin-off proposal failed to live up to its billing: Firms could still buy, sell, and trade these complex products in house without having to create and finance separate subsidiaries. “It's not a big change for commodities. It's fine-tuning more than a material impact,” Blythe Masters, the head of JPMorgan's derivatives unit, told the
Financial Times
.

As the contents of the final bill became clearer, Dimon, a self-described “geek” who loves to quantify every management decision in terms of how much it will cost and how much it will help make his bank, joined Goldman in believing that the bill, as it was taking shape, had a limited downside for Wall Street and his bank in particular.

While members of Congress and the president congratulated themselves on the bill's progress (by mid-July, Dodd had corralled enough Senate votes for passage of a very compromised bill, while Barney Frank promised that the bill would have swift passage in the House before being signed into law later in the month by President Obama), and Wall Street breathed a sigh of relief, independent analysts wondered about the bill's effectiveness.