Obama and Wall Street - The New Legalist

(Mr. Ben Mah, author of America and China, America and the World, America in the Age of Neoliberalism, Financial Tsunami and Economic Crisis – The End of American Hegemony, and China and the World, is a frequent contributor to this website.)

The vetting of candidate Obama by the powerful financial elite of Wall Street began in a private dining room at a famous Washington restaurant in June 2007, well before the 2008 presidential election. Aside from Barack Obama, the junior senator from Illinois, who wanted to be the president of the United States, the attendees of this secretive meeting were Lehman Brothers CEO Dick Fuld; Larry Fink, head of the powerful hedge fund BlackRock; Greg Fleming, the number two man from Merrill Lynch, the nation’s largest brokerage firm; Gary Cohn, senior executive of Goldman Sachs; Warren Spector, the president of Bear Stearns and Paul Volcker, the former Chairman of U.S. Federal Reserve.^1.

At this meeting, Obama “expounded on his vision about the future of America, one unburdened by the politics of the past and one in which the financial sector and capitalism flourished.”^2. At once, Obama was able to display his oratorical skill, and “a chameleon-like quality that allows him to be all things to all people.”^2. As a politician, Obama gave the impression of moderate, centrist persuasion while quite being entertaining as well.

Obama never discussed government-sponsored health care or income distribution. He spoke about “helping the less fortunate” and about “getting health-care costs under control” and “the need for a strong financial sector.” Obama “proclaimed his respect for the principles this country was built on, including the virtue of hard work and, despite his leftist background, the business community.”^2. By the time the meeting ended, Obama had won the Wall Street bankers over, as he “impressed them as a man of the future, open to ideas and to wise advice.”^2.

Actually, the Wall Street bankers had other options, but they considered Republican candidate John McCain “far too testy and independent,”^3. as he had already declared on the campaign trail that “Wall Street is the villain” of the financial crisis, and that he would change the way Washington and Wall Street did business. McCain promised that he would “put an end to the reckless conduct, corruption, and unbridled greed that have caused a crisis on Wall Street.”^3.

As for Hillary Clinton, the other Democrat candidate, the financial elite at the meeting with Obama also found her “too independent and ready to turn her back on Wall Street as soon as it became politically expedient.” In a speech at the NASDAQ headquarters in New York, Clinton attacked Wall Street as she proclaimed: “Wall Street shifted risk away from the people who knew what was going on and onto the people who did not.”^3.

Consequently, Wall Street’s favorite candidate in the 2008 presidential election was Barack Obama, and the support of the Wall Street elite was “crucial to his victory. Obama raised a lot of money from individuals, but it was The Street’s initial support that was crucial to his success. Without Wall Street’s initial support, he doesn’t have credibility. That’s why Hillary was so freaked out when Obama started to woo Wall Street. It gave him the money to hold those mega-rallies that galvanized his support. It got the ball rolling and allowed Obama to access more people and raise more money. None of that would have happened without Wall Street support. No doubt about it. Without Wall Street, Obama would not be in power today,”^4. according to Jack Burkman, attorney and political strategist.

Altogether, Wall Street helped Obama raise over $100 million for his campaign. Even at the time of the financial crisis when Wall Street banks were on the verge of collapse, the money kept pouring into Obama’s campaign coffers. Goldman Sachs was the second-largest contributor to Obama, but it was money well-spent. As a matter of fact, “betting on Barack Obama may have been the best investment Wall Street made in 2008, or indeed ever.”^5.

Obama did not disappoint Wall Street, as he rewarded the bankers and eagerly filled key jobs in the administration with their surrogates, who included Tim Geithner as Treasury Secretary and Larry Summers as the President’s chief economic adviser. The Obama administration “quickly enacted policies that added to their bottom lines during the next two years and further supported the notion that the big banks must be kept alive at all costs.”^6.

The policies most beneficial to Wall Street included near-zero interest rates, as low interest rates enabled Wall Street banks to borrow funds from the Fed and lend it back to the government in the form of Treasury bond purchases for a healthy margin. Investment banks such as Goldman Sachs, and Morgan Stanley, like commercial banks, were allowed to borrow funds through the Fed’s discount window, as they have been treated like the commercial banks since the financial crisis.

Moreover, the Obama administration declared that the “too big to fail” policy enacted during the Bush years would not change. This policy gives an implicit government guarantee to the securities issued by Wall Street banks, making borrowing costs even cheaper.

The Obama administration justifies these policies by proclaiming that a healthy banking sector is in the national interest. Obama has often stated that without the financial strength of the big banks, American small and medium businesses would not be able to obtain loans and create jobs, therefore, without them there could be no economic recovery. The problem with this logic is that Goldman Sachs and Morgan Stanley never make loans to small business; they trade government securities, currencies and other debt-based instruments such as derivatives, futures and options for much of their income. As for the other big banks like Citigroup and Bank of America, they just copied the business model of Goldman Sachs and Morgan Stanley.^7.

Other measures adopted by Washington which were favorable to Wall Street banks in 2009 were the Fed purchase of $1.3 trillion in toxic assets on the open market and the accounting rule change. The “mark-to-market” accounting that forced Wall Street firms to mark down assets to actual market value almost pushed Wall Street firms to the brink of bankruptcy during the financial crisis. With the elimination of the “mark-to-market” rule, banks were able to avoid drastic write-downs as long as those securities were not being sold and remained on their books.^7.

Consequently, in the second quarter of 2009, amidst the Great Recession triggered by the financial crisis, “Goldman rolled the dice and generated a then-record $8.3 billion in trading profits, enough to push the overall firm to a $3.1 billion quarterly profit.”^8. Other Wall Street banks all experienced a profitable quarter, as they followed the Goldman model.

Unfortunately, contrary to the stated purpose of the bank bailout as enunciated by the Bush and Obama administrations, these profits were not generated by investing in the productive sectors of the U.S. economy, but rather from speculative activities, as previously stated.

By the end of 2009, there was growing anger against Wall Street elite among average Americans, as unemployment was still in the double-digit range, while Wall Street was talking about bonuses of billions of dollars. After all, it was “the Wall Street elite who had brought the country to financial ruin. They demanded accountability and expected Obama to deliver on his promises of hope and change.”^9.

Accordingly, Obama chose a television interview “to draw a strong rhetorical distinction between himself and the men who had destroyed the economy.”^10. Notwithstanding the fact that the men who had destroyed the economy also happened to be his key campaign contributors. Although his administration’s policy had made it possible for Wall Street firms to enrich themselves shortly after the crisis, Obama “sounded as if he were as perplexed and angered as anyone about the turn of events.”^10. He attacked firms like Goldman Sachs for excessive bonuses, and severely criticized the bankers for their greed. “And he said he didn’t get elected to help ‘fat cat’ Wall Streeters make money while the rest of the country suffered.”^10. Understandably, Obama failed to disclose that it was same fat cats who put him in office that he met with them in private regularly.

As a matter of fact, the following morning the president held a meeting with members of the fat cats—the Wall Street banking CEOs after the interview was put on the air. At this meeting, the president’s tone was completely different from the TV interview, as he only stressed the importance of lending to business, and did not engage in name-calling. He did not mention Goldman Sachs once and even cracked a few jokes. Obviously, Obama’s tough words were only meant for the public audience, as in dealing with Wall Street, he chose his words carefully with limited action. The Wall Street elite concluded that “the president, for all his class warfare talk, knows how important Wall Street profits are to the economy and thus to him. Like any good politician, he wants to get reelected.”^11.

Realistically, Obama was the most attractive choice for Wall Street, as the bank CEOs realized that if John McCain was elected, he would not choose policy advisers with ties to Wall Street or let Wall Street continue the business as usual of buying bonds and not lending money to business. Nor would McCain renew the appointment of Bernanke as Chairman of the Federal Reserve, which had maintained interest rates at zero percent for a long period of time. After all, it was Obama’s policy that allowed Wall Street to have a record profit amidst the great recession and banking bailout. To some CEOs in the audience, the president’s reluctance to use confrontation in that meeting was a signal that he wished to “repair the relationship” with his key campaign financial supporters. “He knows he needs us if he wants to get reelected,” opined a high-ranking public relations executive at JP Morgan Chase.^11. After the meeting, it can safely be concluded that “much of the negative populist rhetoric from the general public and from politicians was recognized by Wall Street as just that, rhetoric.”^12.

However, in the wake of the electoral loss in the Senate seat held by Teddy Kennedy in Massachusetts and his low opinion poll numbers, President Obama tried to repair his credibility with financial reform and started listening to one of his economic advisers—Paul Volcker after ignoring him for more than a year. And part and parcel of financial reform was the Volcker rule, which prohibited Wall Street banks from engaging in speculation by participating in proprietary trading, or trading with its own capital. The Volcker rule further excludes hedge funds or private equity funds for the banks, as their deposits are protected by the Federal Deposit Insurance Corporation (FDIC).

The news of the inclusion of the Volcker rule was greeted with dismay by Wall Street bankers, as in recent years, financial speculation has been the major part of their business. However, Treasury secretary Tim Geithner and White House chief economic adviser Larry Summers, Wall Street’s best friends in the administration, had quietly assured Wall Street CEOs “that they had all but killed the most pernicious parts of the Volcker proposal, namely the call to end proprietary trading and the provision to limit how much the firms can place of their own capital in the hedge funds and private equity.”^13.

Thus, thanks to Geithner and Summers, the Volcker rule in the current form was practically dead. Meanwhile the president has no hesitation carrying on with his usual rhetoric of bank bashing publicly while privately implementing his Obamanomics: “Bankers make bundles while everyone else suffers.”^14.

Sadly, the U.S. style of democracy is alive and well in America, where candidates are only too willing to respond to the bidding of the rich and the powerful, who have the final say in policy matters in the American political system. Unfortunately, President Obama’s relationship with Wall Street amply testifies to this assertion.