Courtesy of James Kwak at Baseline Scenario
“Geithner’s team spent much of its time during the debate over the Senate bill helping Senate Banking Committee chair Chris Dodd kill off or modify amendments being offered by more-progressive Democrats. A good example was Bernie Sanders’s measure to audit the Fed, which the administration played a key role in getting the senator from Vermont to tone down. Another was the Brown-Kaufman Amendment, which became a cause célèbre among lefty reformers such as former IMF economist Simon Johnson. ‘If enacted, Brown-Kaufman would have broken up the six biggest banks in America,’ says the senior Treasury official. ‘If we’d been for it, it probably would have happened. But we weren’t, so it didn’t.’”
That’s one passage from John Heileman’s juicy article in New York Magazine. It provides a lot of background support for what many of us have been thinking for a while: the administration is happy with the financial reform bill roughly as it turned out, and it got there by taking up an anti-Wall Street tone (e.g., the Volcker Rule), riding a wave of populist anger to the point where the bill was sure of passing, and then quietly pruning back its most far-reaching components. If anything, that’s a testament to the political skill of the White House and, yes, Tim Geithner as well.
There are two other things in the article I thought worth commenting on. Here’s one:
“Obama could be forgiven for expecting greater reciprocity from the bankers—something more than the equivalent of a Hallmark card and a box of penny candy. He had, after all, done more than saved their lives directly by continuing the bailout policies formulated by Paulson and Geithner. He and his team could credibly claim to have kept the world economy from falling off a cliff. Yet with the unemployment rate still near double digits, Obama had (and still has) received scant credit from the public for what was arguably his signal accomplishment. At the same time, the one thing that almost every slice of the electorate would have applauded wildly—the sight of the president landing a few haymakers on Wall Street’s collective jaw—was an opportunity that the president had largely forsworn.”
This is a theme you hear a lot these days — the idea that Obama (or Geithner) could have taken the easy political road and bashed Wall Street, but that would have been bad for the economy, so instead he acted like a man and saved the economy, even if it was bad for his poll numbers. But this little bit of mythologizing rests on a flawed premise. Yes, stabilizing the economy was a top priority in early 2009, and for the most part it worked. (Have you seen the CBO’s estimate of the impact of the stimulus on GDP growth rates? Hint: it’s big.) But that did not and does not preclude “landing a few haymakers on Wall Street’s collective jaw.” Just because you follow one set of policies in early 2009 to stabilize the economy, that doesn’t mean that in late 2009 and early 2010 you can’t then properly fix the financial system that caused the damage in the first place.
The other, and perhaps most important thing Heileman’s article shows is that Wall Street executives are a bunch of raving lunatics. Here’s one paragraph:
“Today, it’s hard to find anyone on Wall Street who doesn’t speak of Obama as if he were an unholy hybrid of Bernie Sanders and Eldridge Cleaver. One night not long ago, over dinner with ten executives in the finance industry, I heard the president described as ‘hostile to business,’ ‘anti-wealth,’ and ‘anti-capitalism’; as a ‘redistributionist,’ a ‘vilifier,’ and a ‘thug.’ A few days later, I recounted this experience to the same Wall Street CEO who’d called the Volcker Rule a testicular blow, and mentioned I’d been told that one of the most prominent megabank chiefs, who once boasted to friends of voting for Obama, now refers to him privately as a ‘Chicago mob guy.’ Do all your brethren feel this way? I asked. ‘Oh, not everybody—just most of them,’ he replied. ‘Jamie [Dimon]? Lloyd [Blankfein]? They might not say Obama’s a socialist, but they come pretty close.’”
This is wingnut, Tea Party, willful blindness to reality kind of stuff. Forget the whole issue of whether they should be grateful to Obama for first saving their banks from collapse and then toning down the reform bill so it (a) doesn’t break up their banks, (b) doesn’t meaningfully prevent them from engaging in proprietary trading, (c) says nothing of substance about compensation, (d) doesn’t set any hard capital requirements, (e) . . . The fact that they can see the policies this administration is pursuing and somehow think they are “anti-wealth” or “anti-capitalist” is as close to proof as you will find that they are deeply stupid, blinded by their self-interest, or both.
The White House/Treasury narrative is that they were the adults — they made the tough calls that needed to be made instead of taking the easy road politically. The Wall Street narrative is the exact opposite: the administration is a bunch of political hacks, not the adults you need to have in charge. Here’s what one lobbyist said about the AIG bonus controversy:
“First, the White House decides in this blatant way to politicize the issue. Second, they overshoot the target and the thing gets away from them. It made people realize there’s no adult in charge. If Bob Rubin or Hank Paulson were Treasury secretary, they would have walked into the Oval Office and said, ‘Mr. President, I know you’d like to do this, I know your political advisers want you do this, but I’m sorry, you can’t do this.’”
Bob Rubin and Hank Paulson, of course, were both former chairmen of Goldman Sachs.
Wall Street CEOs like to think they are the adults, the big men in the room, the ones who know how the world works. Well, you know what? They screwed up their own banks, the financial system, and the economy like a bunch of two-year-olds. Every single major bank would have failed in late 2008 without massive government intervention — because of wounds that were entirely self-inflicted. (Citigroup: holding onto hundreds of billions of dollars of its own toxic waste. Bank of America: paying $50 billion for an investment bank that would have failed within three days. Morgan Stanley and Goldman Sachs: levering up without a stable source of funding. Etc.) The financial crisis should have put to rest for a generation the idea that the big boys on Wall Street know what they’re doing and the politicians in Washington are a bunch of amateurs. Yet somehow the bankers came out of it with the same unshakable belief in their own perfection that they had in 2005. The only plausible explanation is some kind of powerful personality disorder.
The bankers also have this bizarre belief that the administration has somehow betrayed them — that this year’s supposed shift to the left constituted reneging on some kind of deal. But there have to be two parties to a deal — and what did the banks do for Obama? They didn’t put in place any kind of self-regulation — not when it comes to compensation, capital, risk management, securitization, derivatives, or anything. They didn’t cut back bonuses to merely outrageous levels, although Goldman did decide not to pay itself record bonuses when it could have. They fought the stress tests all the way to the end, too blind to realize that the stress tests, and the government guarantee they implied, were the key to their salvation.
The administration owed them nothing. The bankers are playground bullies who are used to getting their way and think that if they’re not getting their way, someone must be cheating them. But the government is the biggest bully on the playground. Congress and the president get to make up the laws; that’s what it says in the Constitution. The government doesn’t need to do a deal with Wall Street to regulate it. It always has the power to pass whatever law it wants regarding the financial sector; it doesn’t need permission (even if it acted that way for the past two decades). The bankers should be relieved that the administration happens to support policies that are relatively friendly to their interests. Instead, they are complaining as if the administration broke some kind of rule.
(Now, you could say Obama has a debt to Wall Street because of all the money it gave him in 2007-08. But I dare any Wall Street CEO to come out and say that. And besides, the politically rational thing to do is to look forward. And, as Politico reported, Wall Street has been shifting its money to Republicans recently.)
And so, in one corner, we have a bunch of Wall Street CEOs sulking, deluding themselves into thinking that Barack Obama is a socialist, and probably planning to give money to Sarah Palin (which would be a colossal blow to their own self-interest). In the other corner, we have Obama and Geithner wondering why those Wall Street CEOs aren’t showing more gratitude.
“‘[Obama] thinks the Wall Street guys are just disconnected from reality,’ says a White House official. ‘He still takes the meetings with them, but his attitude now is like, “Whatever.”‘
“Tim Geithner, too, finds himself in the odd position of battling with an industry toward which he’s never felt an ounce of antipathy; in private, he now half-mockingly refers to the megabank CEOs as ‘the warlords.’ A Washington Mandarin to his core, Geither has been ineffective at winning over either Wall Street or Main Street. His experience during his tenure has provided him a wrenching political education, but one not unlike Obama’s—which, in a way, has only strengthened the bond between them.”
Yes, they deserve more gratitude. They saved the bankers twice — once by protecting them from their own mistakes, and again by protecting them from Sherrod Brown, Ted Kaufman, and all the other “populists” who wanted fundamental changes in our financial system. As should be clear, for all my differences with Tim Geithner, I would rather have him calling the shots than Jamie Dimon or Lloyd Blankfein.
But Obama and Geithner should know better than to expect gratitude from a bunch of narcissistic, delusional crybabies. And in that sense, both parties to this toxic relationship — the Wall Street bankers and the Obama administration officials — deserve each other.
James Kwak is a former McKinsey consultant, a co-founder of a successful software company, and currently a student at the Yale Law School. He is not, never has been, and never will be a member of the Yale Law Journal. However, on December 11, 2009, he was named Grand Heresiarch of the Ancient, Hermetic, and Occult Order of the Shrill by Brad DeLong. He is a co-founder of The Baseline Scenario. He co-authored 13 Bankers: The Wall Street Takeover and the Next Financial Meltdown with Simon Johnson.