The Wall Street Connection (1992 to 2016)
[This piece has been adapted and updated by Nomi Prins from chapters 18 and 19 of her book All the Presidents’ Bankers: The Hidden Alliances that Drive American Power, just out in paperback (Nation Books).]
The past, especially the political past, doesn’t just provide clues to the present. In the realm of the presidency and Wall Street, it provides an ongoing pathway for political-financial relationships and policies that remain a threat to the American economy going forward.
When Hillary Clinton video-announced her bid for the Oval Office, she claimed she wanted to be a “champion” for the American people. Since then, she has attempted to recast herself as a populist and distance herself from some of the policies of her husband. But Bill Clinton did not become president without sharing the friendships, associations, and ideologies of the elite banking sect, nor will Hillary Clinton. Such relationships run too deep and are too longstanding.
To grasp the dangers that the Big Six banks (JPMorgan Chase, Citigroup, Bank of America, Wells Fargo, Goldman Sachs, and Morgan Stanley) presently pose to the financial stability of our nation and the world, you need to understand their history in Washington, starting with the Clinton years of the 1990s. Alliances established then (not exclusively with Democrats, since bankers are bipartisan by nature) enabled these firms to become as politically powerful as they are today and to exert that power over an unprecedented amount of capital. Rest assured of one thing: their past and present CEOs will prove as critical in backing a Hillary Clinton presidency as they were in enabling her husband’s years in office.
In return, today’s titans of finance and their hordes of lobbyists, more than half of whom held prior positions in the government, exact certain requirements from Washington. They need to know that a safety net or bailout will always be available in times of emergency and that the regulatory road will be open to whatever practices they deem most profitable.
Whatever her populist pitch may be in the 2016 campaign — and she will have one — note that, in all these years, Hillary Clinton has not publicly condemned Wall Street or any individual Wall Street leader. Though she may, in the heat of that campaign, raise the bad-apples or bad-situation explanation for Wall Street’s role in the financial crisis of 2007-2008, rest assured that she will not point fingers at her friends. She will not chastise the people that pay her hundreds of thousands of dollars a pop to speak or the ones that have long shared the social circles in which she and her husband move. She is an undeniable component of the Clinton political-financial legacy that came to national fruition more than 23 years ago, which is why looking back at the history of the first Clinton presidency is likely to tell you so much about the shape and character of the possible second one.
The 1992 Election and the Rise of Bill Clinton
Challenging President George H.W. Bush, who was seeking a second term, Arkansas Governor Bill Clinton announced he would seek the 1992 Democratic nomination for the presidency on October 2, 1991. The upcoming presidential election would not, however, turn out to alter the path of mergers or White House support for deregulation that was already in play one iota.
First, though, Clinton needed money. A consummate fundraiser in his home state, he cleverly amassed backing and established early alliances with Wall Street. One of his key supporters would later change American banking forever. As Clinton put it, he received “invaluable early support” from Ken Brody, a Goldman Sachs executive seeking to delve into Democratic politics. Brody took Clinton “to a dinner with high-powered New York businesspeople, including Bob Rubin, whose tightly reasoned arguments for a new economic policy,” Clinton later wrote, “made a lasting impression on me.”
The battle for the White House kicked into high gear the following fall. William Schreyer, chairman and CEO of Merrill Lynch, showed his support for Bush by giving the maximum personal contribution to his campaign committee permitted by law: $1,000. But he wanted to do more. So when one of Bush’s fundraisers solicited him to contribute to the Republican National Committee’s nonfederal, or “soft money,” account, Schreyer made a $100,000 donation.
The bankers’ alliances remained divided among the candidates at first, as they considered which man would be best for their own power trajectories, but their donations were plentiful: mortgage and broker company contributions were $1.2 million; 46% to the GOP and 54% to the Democrats. Commercial banks poured in $14.8 million to the 1992 campaigns at a near 50-50 split.
Clinton, like every good Democrat, campaigned publicly against the bankers: “It’s time to end the greed that consumed Wall Street and ruined our S&Ls [Savings and Loans] in the last decade,” he said. But equally, he had no qualms about taking money from the financial sector. In the early months of his campaign, BusinessWeek estimated that he received $2 million of his initial $8.5 million in contributions from New York, under the care of Ken Brody.
“If I had a Ken Brody working for me in every state, I’d be like the Maytag man with nothing to do,” said Rahm Emanuel, who ran Clinton’s nationwide fundraising committee and later became Barack Obama’s chief of staff. Wealthy donors and prospective fundraisers were invited to a select series of intimate meetings with Clinton at the plush Manhattan office of the prestigious private equity firm Blackstone.
Robert Rubin Comes to Washington
Clinton knew that embracing the bankers would help him get things done in Washington, and what he wanted to get done dovetailed nicely with their desires anyway. To facilitate his policies and maintain ties to Wall Street, he selected a man who had been instrumental to his campaign, Robert Rubin, as his economic adviser.
In 1980, Rubin had landed on Goldman Sachs’ management committee alongside fellow Democrat Jon Corzine. A decade later, Rubin and Stephen Friedman were appointed cochairmen of Goldman Sachs. Rubin’s political aspirations met an appropriate opportunity when Clinton captured the White House.
On January 25, 1993, Clinton appointed him as assistant to the president for economic policy. Shortly thereafter, the president created a unique role for his comrade, head of the newly created National Economic Council. “I asked Bob Rubin to take on a new job,” Clinton later wrote, “coordinating economic policy in the White House as Chairman of the National Economic Council, which would operate in much the same way the National Security Council did, bringing all the relevant agencies together to formulate and implement policy… [I]f he could balance all of [Goldman Sachs’] egos and interests, he had a good chance to succeed with the job.” (Ten years later, President George W. Bush gave the same position to Rubin’s old partner, Friedman.)
Back at Goldman, Jon Corzine, co-head of fixed income, and Henry Paulson, co-head of investment banking, were ascending through the ranks. They became co-CEOs when Friedman retired at the end of 1994.
Those two men were the perfect bipartisan duo. Corzine was a staunch Democrat serving on the International Capital Markets Advisory Committee of the Federal Reserve Bank of New York (from 1989 to 1999). He would co-chair a presidential commission for Clinton on capital budgeting between 1997 and 1999, while serving in a key role on the Borrowing Advisory Committee of the Treasury Department. Paulson was a well connected Republican and Harvard graduate who had served on the White House Domestic Council as staff assistant to the president in the Nixon administration.
Bankers Forge Ahead
By May 1995, Rubin was impatiently warning Congress that the Glass-Steagall Act could “conceivably impede safety and soundness by limiting revenue diversification.” Banking deregulation was then inching through Congress. As they had during the previous Bush administration, both the House and Senate Banking Committees had approved separate versions of legislation to repeal Glass-Steagall, the 1933 Act passed by the administration of Franklin Delano Roosevelt that had separated deposit-taking and lending or “commercial” bank activities from speculative or “investment bank” activities, such as securities creation and trading. Conference negotiations had fallen apart, though, and the effort was stalled.
By 1996, however, other industries, representing core clients of the banking sector, were already being deregulated. On February 8, 1996, Clinton signed the Telecom Act, which killed many independent and smaller broadcasting companies by opening a national market for “cross-ownership.” The result was mass mergers in that sector advised by banks.
Deregulation of companies that could transport energy across state lines came next. Before such deregulation, state commissions had regulated companies that owned power plants and transmission lines, which worked together to distribute power. Afterward, these could be divided and effectively traded without uniform regulation or responsibility to regional customers. This would lead to blackouts in California and a slew of energy derivatives, as well as trades at firms such as Enron that used the energy business as a front for fraudulent deals.
The number of mergers and stock and debt issuances ballooned on the back of all the deregulation that eliminated barriers that had kept companies separated. As industries consolidated, they also ramped up their complex transactions and special purpose vehicles (off-balance-sheet, offshore constructions tailored by the banking community to hide the true nature of their debts and shield their profits from taxes). Bankers kicked into overdrive to generate fees and create related deals. Many of these blew up in the early 2000s in a spate of scandals and bankruptcies, causing an earlier millennium recession.
Meanwhile, though, bankers plowed ahead with their advisory services, speculative enterprises, and deregulation pursuits. President Clinton and his team would soon provide them an epic gift, all in the name of U.S. global power and competitiveness. Robert Rubin would steer the White House ship to that goal.
On February 12, 1999, Rubin found a fresh angle to argue on behalf of banking deregulation. He addressed the House Committee on Banking and Financial Services, claiming that, “the problem U.S. financial services firms face abroad is more one of access than lack of competitiveness.”
He was referring to the European banks’ increasing control of distribution channels into the European institutional and retail client base. Unlike U.S. commercial banks, European banks had no restrictions keeping them from buying and teaming up with U.S. or other securities firms and investment banks to create or distribute their products. He did not appear concerned about the destruction caused by sizeable financial bets throughout Europe. The international competitiveness argument allowed him to focus the committee on what needed to be done domestically in the banking sector to remain competitive.
Rubin stressed the necessity of HR 665, the Financial Services Modernization Act of 1999, or the Gramm-Leach-Bliley Act, that was officially introduced on February 10, 1999. He said it took “fundamental actions to modernize our financial system by repealing the Glass-Steagall Act prohibitions on banks affiliating with securities firms and repealing the Bank Holding Company Act prohibitions on insurance underwriting.”
The Gramm-Leach-Bliley Act Marches Forward
On February 24, 1999, in more testimony before the Senate Banking Committee, Rubin pushed for fewer prohibitions on bank affiliates that wanted to perform the same functions as their larger bank holding company, once the different types of financial firms could legally merge. That minor distinction would enable subsidiaries to place all sorts of bets and house all sorts of junk under the false premise that they had the same capital beneath them as their parent. The idea that a subsidiary’s problems can’t taint or destroy the host, or bank holding company, or create “catastrophic” risk, is a myth perpetuated by bankers and political enablers that continues to this day.
Rubin had no qualms with mega-consolidations across multiple service lines. His real problems were those of his banker friends, which lay with the financial modernization bill’s “prohibition on the use of subsidiaries by larger banks.” The bankers wanted the right to establish off-book subsidiaries where they could hide risks, and profits, as needed.
Again, Rubin decided to use the notion of remaining competitive with foreign banks to make his point. This technicality was “unacceptable to the administration,” he said, not least because “foreign banks underwrite and deal in securities through subsidiaries in the United States, and U.S. banks [already] conduct securities and merchant banking activities abroad through so-called Edge subsidiaries.” Rubin got his way. These off-book, risky, and barely regulated subsidiaries would be at the forefront of the 2008 financial crisis.
On March 1, 1999, Senator Phil Gramm released a final draft of the Financial Services Modernization Act of 1999 and scheduled committee consideration for March 4th. A bevy of excited financial titans who were close to Clinton, including Travelers CEO Sandy Weill, Bank of America CEO, Hugh McColl, and American Express CEO Harvey Golub, called for “swift congressional action.”
The Quintessential Revolving-Door Man
The stock market continued its meteoric rise in anticipation of a banker-friendly conclusion to the legislation that would deregulate their industry. Rising consumer confidence reflected the nation’s fondness for the markets and lack of empathy with the rest of the world’s economic plight. On March 29, 1999, the Dow Jones Industrial Average closed above 10,000 for the first time. Six weeks later, on May 6th, the Financial Services Modernization Act passed the Senate. It legalized, after the fact, the merger that created the nation’s biggest bank. Citigroup, the marriage of Citibank and Travelers, had been finalized the previous October.
It was not until that point that one of Glass-Steagall’s main assassins decided to leave Washington. Six days after the bill passed the Senate, on May 12, 1999, Robert Rubin abruptly announced his resignation. As Clinton wrote, “I believed he had been the best and most important treasury secretary since Alexander Hamilton… He had played a decisive role in our efforts to restore economic growth and spread its benefits to more Americans.”
Clinton named Larry Summers to succeed Rubin. Two weeks later, BusinessWeek reported signs of trouble in merger paradise — in the form of a growing rift between John Reed, the former Chairman of Citibank, and Sandy Weill at the new Citigroup. As Reed said, “Co-CEOs are hard.” Perhaps to patch their rift, or simply to take advantage of a political opportunity, the two men enlisted a third person to join their relationship — none other than Robert Rubin.
Rubin’s resignation from Treasury became effective on July 2nd. At that time, he announced, “This almost six and a half years has been all-consuming, and I think it is time for me to go home to New York and to do whatever I’m going to do next.” Rubin became chairman of Citigroup’s executive committee and a member of the newly created “office of the chairman.” His initial annual compensation package was worth around $40 million. It was more than worth the “hit” he took when he left Goldman for the Treasury post.
Three days after the conference committee endorsed the Gramm-Leach-Bliley bill, Rubin assumed his Citigroup position, joining the institution destined to dominate the financial industry. That very same day, Reed and Weill issued a joint statement praising Washington for “liberating our financial companies from an antiquated regulatory structure,” stating that “this legislation will unleash the creativity of our industry and ensure our global competitiveness.”
On November 4th, the Senate approved the Gramm-Leach-Bliley Act by a vote of 90 to 8. (The House voted 362–57 in favor.) Critics famously referred to it as the Citigroup Authorization Act.
Mirth abounded in Clinton’s White House. “Today Congress voted to update the rules that have governed financial services since the Great Depression and replace them with a system for the twenty-first century,” Summers said. “This historic legislation will better enable American companies to compete in the new economy.”
But the happiness was misguided. Deregulating the banking industry might have helped the titans of Wall Street but not people on Main Street. The Clinton era epitomized the vast difference between appearance and reality, spin and actuality. As the decade drew to a close, Clinton basked in the glow of a lofty stock market, a budget surplus, and the passage of this key banking “modernization.” It would be revealed in the 2000s that many corporate profits of the 1990s were based on inflated evaluations, manipulation, and fraud. When Clinton left office, the gap between rich and poor was greater than it had been in 1992, and yet the Democrats heralded him as some sort of prosperity hero.
When he resigned in 1997, Robert Reich, Clinton’s labor secretary, said, “America is prospering, but the prosperity is not being widely shared, certainly not as widely shared as it once was… We have made progress in growing the economy. But growing together again must be our central goal in the future.” Instead, the growth of wealth inequality in the United States accelerated, as the men yielding the most financial power wielded it with increasingly less culpability or restriction. By 2015, that wealth or prosperity gap would stand near historic highs.
The power of the bankers increased dramatically in the wake of the repeal of Glass-Steagall. The Clinton administration had rendered twenty-first-century banking practices similar to those of the pre-1929 crash. But worse. “Modernizing” meant utilizing government-backed depositors’ funds as collateral for the creation and distribution of all types of complex securities and derivatives whose proliferation would be increasingly quick and dangerous.
Eviscerating Glass-Steagall allowed big banks to compete against Europe and also enabled them to go on a rampage: more acquisitions, greater speculation, and more risky products. The big banks used their bloated balance sheets to engage in more complex activity, while counting on customer deposits and loans as capital chips on the global betting table. Bankers used hefty trading profits and wealth to increase lobbying funds and campaign donations, creating an endless circle of influence and mutual reinforcement of boundary-less speculation, endorsed by the White House.
Deposits could be used to garner larger windfalls, just as cheap labor and commodities in developing countries were used to formulate more expensive goods for profit in the upper echelons of the global financial hierarchy. Energy and telecoms proved especially fertile ground for the investment banking fee business (and later for fraud, extensive lawsuits, and bankruptcies). Deregulation greased the wheels of complex financial instruments such as collateralized debt obligations, junk bonds, toxic assets, and unregulated derivatives.
The Glass-Steagall repeal led to unfettered derivatives growth and unstable balance sheets at commercial banks that merged with investment banks and at investment banks that preferred to remain solo but engaged in dodgier practices to remain “competitive.” In conjunction with the tight political-financial alignment and associated collaboration that began with Bush and increased under Clinton, bankers channeled the 1920s, only with more power over an immense and growing pile of global financial assets and increasingly “open” markets. In the process, accountability would evaporate.
Every bank accelerated its hunt for acquisitions and deposits to amass global influence while creating, trading, and distributing increasingly convoluted securities and derivatives. These practices would foster the kind of shaky, interconnected, and opaque financial environment that provided the backdrop and conditions leading up to the financial meltdown of 2008.
The Realities of 2016
Hillary Clinton is, of course, not her husband. But her access to his past banker alliances, amplified by the ones that she has formed herself, makes her more of a friend than an adversary to the banking industry. In her brief 2008 candidacy, all four of the New York-based Big Six banks ranked among her top 10 corporate donors. They have also contributed to the Clinton Foundation. She needs them to win, just as both Barack Obama and Bill Clinton did.
No matter what spin is used for campaigning purposes, the idea that a critical distance can be maintained between the White House and Wall Street is naïve given the multiple channels of money and favors that flow between the two. It is even more improbable, given the history of connections that Hillary Clinton has established through her associations with key bank leaders in the early 1990s, during her time as a senator from New York, and given their contributions to the Clinton foundation while she was secretary of state. At some level, the situation couldn’t be less complicated: her path aligns with that of the country’s most powerful bankers. If she becomes president, that will remain the case.
Nomi Prins is the author of six books, a speaker, and a distinguished senior fellow at the non-partisan public policy institute Demos. Her most recent book, All the Presidents’ Bankers: The Hidden Alliances that Drive American Power (Nation Books) has just been released in paperback and this piece is adapted and updated from it. She is a former Wall Street executive.
Copyright 2015 Nomi Prins
In order to overcome massive US and world public opposition to new wars in the Middle East, Obama relied on the horrific internet broadcasts of ISIS slaughtering two American hostages, the journalists James Foley and Steve Sotloff, by decapitation. These brutal murders were Obama’s main propaganda tool to set a new Middle East war agenda – his own casus belli bonanza!
This explains the US Administration’s threats of criminal prosecution against the families of Foley and Sotloff when they sought to ransom their captive sons from ISIS.
With the American mass media repeatedly showing the severed heads of these two helpless men, public indignation and disgust were aroused with calls for US military involvement to stop the terror. US and EU political leaders presented the decapitations of Western hostages by the so-called Islamic State (ISIS) as a direct and mortal threat to the safety of civilians in the US and Europe. The imagery evoked was of black-clad faceless terrorists, armed to the teeth, invading Europe and the US and executing innocent families as they begged for rescue and mercy.
The problem with this propaganda ploy is not the villainy and brutal crimes celebrated by ISIS, but the fact that Obama’s closest ally in his seventh war in six years is Saudi Arabia, a repugnant kingdom which routinely decapitates its prisoners in public without any judicial process recognizable as fair by civilized standards – unless tortured ‘confessions’ are now a Western norm. During August 2014, when ISIS decapitated two American captives, Riyadh beheaded fourteen prisoners. Since the beginning of the year the Saudi monarchy has decapitated more than 46 prisoners and chopped off the arms and limbs of many more. During Obama and Kerry’s recent visit to Saudi Arabia, horrendous decapitations were displayed in public. These atrocities did not dim the bright smile on Barak Obama’s face as he strolled with his genial royal Saudi executioners, in stark contrast to the US President’s stern and angry countenance as he presented the ISIS killing of two Americans as his pretext for bombing Syria.
The Western mass media are silent in the face of the Saudi Kingdom’s common practice of public decapitation. Not one among the major news corporations, the BBC, the Financial Times, the New York Times, the Washington Post, NBC, CBS and NPR, have questioned the moral authority of a US President who engages in selective condemnation of ISIS while ignoring the official Saudi state beheadings and the amputations.
Decapitation and Dismemberment: By Dagger and Drones
The ISIS internet videos showing gaunt, orange-suited Western prisoners and their lopped-off heads have evoked widespread dismay and fear. We are repeatedly told: ‘ISIS is coming to get us!’ But ISIS is open and public about their criminal acts against helpless hostages. We cannot say the same about the decapitations and dismemberment of the hundreds of victims of US drone attacks. When a drone fires its missiles on a home, a school, wedding party or vehicle, the bodies of living people are dismembered, macerated, decapitated and burned beyond recognition – all by remote control. The carnage is not videoed or displayed for mass consumption by Obama’s high command. Indeed, civilian deaths, if even acknowledged, are brushed off as ‘collateral damage’ while the vaporized remnants of men, women and children have been described by US troops as ‘pink foam’.
If the brutal decapitation and dismemberment of innocent civilians is a capital crime that should be punished, as I believe it is, then both ISIS and the Obama regime with his allied leaders should face a people’s war crimes tribunal in the countries where the crimes occurred.
There are good reasons to view Washington’s close relation with the Saudi royal beheaders as part of a much broader alliance with terror-evoking brutality. For decades, the US drug agencies and banks have worked closely with criminal drug cartels in Mexico while glossing over their notorious practice of decapitating, dismembering and displaying their victims, be they local civilians, courageous journalists, captured police or migrants fleeing the terror of Central America. The notorious Zetas and the Knights Templar have penetrated the highest reaches of the Mexican federal and local governments, turning state officials and institutions into submissive and obedient clients. Over 100,000 Mexicans have lost their lives because of this ‘state within a state’, an ‘ISIS’ in Mexico – just ‘South of the Border’. And just like ISIS in the Middle East, the cartels get their weapons from the US imported right across the Texas and Arizona borders. Despite this gruesome terror on the US southern flank, the nation’s principle banks, including Bank of America, CitiBank, Wells Fargo and many others have laundered billions of dollars of drug profits for the cartels. For example, the discovery of 49 decapitated bodies in one mass in May 2014 did not prompt Washington to form a world-wide coalition to bomb Mexico, nor was it moved to arrest the Wall Street bankers laundering the ‘beheaders bloody booty’.
Obama’s hysterical and very selective presentation of ISIS crimes forms the pretext for launching another war against a predominantly Muslim country, Syria, while shielding his close ally, the royal Saudi decapitator from US public outrage. ISIS crimes have become another excuse to launch a campaign of ‘mass decapitation by drones and bombers’. The mass propaganda campaign over one crime against humanity becomes the basis for perpetrating even worse crimes against humanity. Many hundreds of innocent civilians in Syria and Iraq will be dismembered by ‘anti-terrorist’ bombs and drones unleashed by another of Obama’s ‘coalition’.
The localized savagery of ISIS will be multiplied, amplified and spread by the US-directed ‘coalition of the willing decapitators’. The terror of hooded beheaders on the ground will be answered and expanded by their faceless counterparts in the air, while delicately hiding the heads rolling through the public squares of Riyadh or the headless bodies displayed along the highways of Mexico … and especially ignoring the hidden victims of US-Saudi aggression in the towns and villages of Syria.
Having bungled the so-called independent review of foreclosure mistakes, the Obama administration has now decided that the best way to help homeowners is to have the banks—which were responsible for the foreclosure errors—examine the case files and decide how best to fix the situation.
In January, the Office of the Comptroller of the Currency (OCC) shut down the foreclosure review by independent consultants—which had already cost about $2 billion— after it was revealed that the banks had selected said consultants. The process also proved to be taking too long to resolve homeowner grievances, so the administration decided to reach a $3.6 billion settlement with the banks.
But before the money can be distributed to individuals wronged during the foreclosure crisis, more than four million cases need to be reviewed. Instead of federal regulators doing the work, they are trusting the financial institutions, including Bank of America and Wells Fargo, to do it properly this time.
Housing advocates, not surprisingly, are worried the banks will shortchange homeowners while they scrutinize their earlier mistakes. “The whole process has been a slap in the face to homeowners and a slap on the wrist to banks,” Isaac Simon Hodes, an organizer with Massachusetts-based Lynn United for Change, told The New York Times. “The latest development shows how there has been no accountability.”
The OCC has promised to check the bank’s work to ensure things go right this time.
- Big Banks Slither out of Mortgage Fraud Review with Minor Costs (alethonews.wordpress.com)
- Big Banks Put In Charge of (Their Own) Foreclosure Settlement Payout (reason.com)
After a year and a half of bungled work and plenty of criticism, the Obama administration decided to close down its review of mortgage fraud this week and order banks to pay a sum that consumer advocates say falls short of what’s fair.
The Independent Foreclosure Review was established 18 months ago to vet how banks handled home foreclosures and to compensate Americans for any wrongdoing.
In the end, federal regulators decided on an $8.5 billion settlement that banks must pay. But of this total, only $3.3 billion is actual cash, while another $5.2 billion represents “credits” that financial institutions will receive for avoiding future foreclosure.
The $3.3 billion in funds will be distributed to about 3.8 million borrowers who were eligible to have their foreclosures reviewed. That amounts to approximately $870 per homeowner.
The Office of the Comptroller of the Currency, one of the federal regulators that managed the review and negotiated the new settlement, would not reveal to the media how it decided on the $3.3 billion figure.
As for the review itself, the process was wrought with problems, starting with the fact that banks were allowed to hire “independent” consultants to review mortgage files—consultants who often turned out to have business relationships with the banks they were reviewing, thus creating potential conflicts of interest.
Why the Feds Won’t Prosecute the Big Wall Street Banks
Yesterday the Department of Justice and 49 state attorneys general announced the long anticipated $25 billion deal with 5 large Wall Street firms — Bank of America Corporation, JPMorgan Chase & Co., Wells Fargo & Company, Citigroup Inc. and Ally Financial Inc. — to settle foreclosure and mortgage servicing abuses. Unfortunately, the settlement is not yet 24 hours old and cracks are emerging.
Each major corruption settlement with Wall Street, and they are legion over the past 15 years, triggers a commemorative magazine cover. I keep some favorites handy.
The October 1996 cover of Registered Representative Magazine, the trade magazine for financial consultants and stock brokers, blared in 48 point bold red type: “How the NASD Was Corrupted.” That issue focused on the years of price fixing of stocks traded on the Nasdaq market by the biggest firms on Wall Street while the self regulatory body, the National Association of Securities Dealers, was dominated by the same firms and looked the other way. (Think SEC today.)
The Department of Justice, then under Janet Reno, had this to say about the settlement: “We have found substantial evidence of coercion and other misconduct in this industry. By providing for the random monitoring of traders’ telephone calls, we expect to deter future price fixing on Nasdaq.” At the time, Reno said the “law does not provide the Department with statutory authority to recover damages or monetary penalties in such cases.”
The next big corruption probe drew a giant green serpent wrapped around the street sign for Wall Street on the cover of BusinessWeek with the rhetorical question: “Wall Street: How Corrupt Is It?” That settlement collectively cost the big firms $1.4 billion for peddling fake stock research to the public to induce investors to buy bad companies while the same analysts called the firms “dogs” and “crap” in internal emails. The announcement of the deal came on April 28, 2003 from the SEC, the New York Attorney General of that day, Eliot Spitzer, the NASD, the New York Stock Exchange and state securities regulators — all gushing over how great this deal was for the public and how it was going to reform Wall Street.
New York Magazine has found an odd way of commemorating the crumbs available to illegally evicted and displaced children and families under the current settlement. The current magazine cover has a Wall Street guy clasping his… uh…private portfolio…with the headline: “The
Emasculation of Wall Street.” If Wall Street is being emasculated, you sure can’t tell it from yesterday’s settlement.
Not only did Wall Street settle its robo-signing, illegal foreclosures and servicing problems with the Department of Justice and 49 state attorneys general (Oklahoma settled independently) but lost in the headlines was that the two major regulators of national banks, the Office of the Comptroller of the Currency (OCC) and the Federal Reserve, also settled with the biggest Wall Street banks in a decidedly cozy deal that effectively lets them off without a monetary fine as long as they pay under the federal-state settlement agreement.
The OCC settled with Bank of America, Citibank, JPMorgan Chase, and Wells Fargo for a combined $394 million but here’s the cozy part: “the OCC agrees to hold in abeyance imposition of such penalties provided the servicers make payments and take other actions under the federal-state settlement with a value equal to at least the penalty amounts that each servicer acknowledges that the OCC could impose…”
The Federal Reserve issued monetary sanctions of $766.5 million against the parent holding companies: Bank of America Corp., Citigroup Inc., Ally Financial, Inc., JPMorgan Chase & Co., and Wells Fargo & Co. and two mortgage servicers GMAC Mortgage, LLC a subsidiary of Ally Financial, Inc., and EMC Mortgage Corporation, a subsidiary of JPMorgan Chase & Co. But again, the Wall Street firms can get off the hook for paying these sums by simply paying them under the $25 billion federal-state settlement.
The specifics of just what the state attorneys general agreed to is unknown, even to some of the attorneys general. According to the web site set up to inform the public about the settlement both the primary “Settlement Document” and the “Executive Summary” will be “coming soon.” Without those documents available for public perusal, there is the reasonable suspicion that the public has once again been feted to lipstick on a pig, as they like to say on Wall Street.
One striking problem is that California Attorney General Kamala D. Harris states on her web site and in this video that California is getting $18 billion. Florida Attorney General Pam Bondi
says on her web site that Florida is receiving $8.4 billion. Those two amounts would leave a negative figure for the other 47 states that agreed to the $25 billion deal.
There’s also something peculiar about the Federal Department of Justice and 49 states setting up an informational web site that ends in .com instead of .gov. Register.com shows the web site has used a privacy shield to block the name of the owner of the site.
Corporate media is reporting that the deal settles only foreclosure and servicing abuses. But this web site states: “The agreement settles only some aspects of the banks conduct related to the financial crisis (foreclosure practices, loan servicing, and origination of loans) in return for the second largest state attorneys general recovery in history and direct relief to distressed borrowers while they can still use it.” The Florida Attorney General concedes on her web site that the deal with the state includes loan origination issues. That may not sit well with residents of a state where massive loan origination frauds occurred.
I called the AG’s office in Massachusetts – historically a tough regulator when it comes to Wall Street. The spokesperson could not answer why loan origination is included on the settlement web site.
Why is mortgage loan origination a big deal? Because tens of thousands of consumers were victimized in a bait and switch racket, believing they were getting a fixed rate mortgage only to find out a few years down the road that they had an adjustable rate mortgage that reset and doubled or even tripled their monthly payment – making it impossible to stay in their home; an effective wealth stripping enterprise by Wall Street against decent, hardworking families across America.
Other abuses in loan origination abounded. The Federal Trade Commission took this testimony from Michele V. Handzel, a former Branch Manager for CitiFinancial, a unit of Citigroup. Ms. Handzel is comparing the practices of CitiFinancial after it acquired another firm, The Associates.
“CitiFinancial put much more pressure on employees than the Associates did to include as many credit insurance and ancillary products as possible on every loan….In fact, I feel that the credit insurance sales practices at CitiFinancial were worse than at The Associates. From January to June 2001, the policy was that no personal loan at CitiFinancial would be approved if it did not include some type of credit insurance, nor would a real estate loan be approved without some type of ancillary product…There were several internal measures in place to effectuate this policy. For instance, District Managers would frequently refuse to send a loan to underwriting if it did not include some type of insurance product. Moreover, loans that were closed and did not include any insurance would be identified by CitiFinancial’s internal insurance auditors, and the employee who closed the loan would be written up…Closings at CitiFinancial resembled those at The Associates – they were brief. Personal loan closings took approximately 10 minutes. Real estate loan closings took a little longer but also did not provide a lot of details about the loan. At CitiFinancial, I was instructed to do a ‘closed folder’ closing, meaning that information would be discussed orally first. Only after the borrower indicated that he wanted to sign would the employee open the folder and have the borrower sign the papers.”
In the past, Wall Street knew it could steal billions and settle with its easily maneuvered regulators for millions. It did this time and time again, never having to admit to any crime. Wall Street translated this to mean that crime was a lucrative profit center. This latest settlement raises the potential of this profit center. Wall Street now understands that it can steal trillions and settle for billions.
And just why is it that the Feds can’t or won’t prosecute the biggest of the Wall Street firms? Because they are the Federal Government’s bond brokers, the primary dealers who contractually agree to buy Treasury bills or notes or bonds at every U.S. Treasury auction. They may be serially corrupt, but Uncle Sam needs those contractual guarantees of its primary dealers to be sure it can pull off its debt auctions. And the U.S. government cannot engage in contracts with convicted financial felons.
And it won’t break up these bloated behemoths because big balance sheets are just what a government with $15 trillion in debt is looking for in a bond broker.
Pam Martens worked on Wall Street for 21 years. She spent the last decade of her career advocating against Wall Street’s private justice system, which keeps its crimes shielded from public courtrooms. She maintains, along with Russ Martens, an ongoing archive dedicated to this financial era at www.WallStreetOnParade.com. She has no security position, long or short, in any company mentioned in this article. She is a contributor to Hopeless: Barack Obama and the Politics of Illusion, forthcoming from AK Press. She can be reached at email@example.com
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