How Washington Became Ruled By Wall Street

Former Treasury Secretary Henry Paulson Jr. (2006–2009) and current Treasury Secretary Steve Mnuchin. Both are former Goldman Sachs.

After the S&L crisis of the 1980s, over 1000 bankers went to jail.

After the meltdown in 2008, only one banker went to jail — an Egyptian national.

This new banker immunity did not happen by accident.

The bankers knew that politicians are a secondary power. The stronger and more subtle power lay in key personnel in government departments. As in all strategies, they also knew that propaganda is the essential foundation for victory.

Banker control of Washington is founded on this fiction: The best people to advise about regulating Wall Street are the people from Wall Street.

We know how well this strategy has worked out for Wall Street. Let’s look at how they do it.

Government Sachs

Goldman Sachs has so packed the Treasury Department with its alumni that journalists have rightly dubbed that department “Government Sachs”. Numerous articles have detailed the lopsided number of Goldman executives on that department at any one time. With the failure of Lehman Bros in September 2008, there was no doubt a full-scale economic meltdown was imminent. In October of that year, The New York Times ran a mock-up of the Treasury Department senior personnel showing 5 former Goldman execs in positions of power.

Treasury faces, from left: Steve Shafran (formerly of Goldman), Kendrick Wilson III (ditto), Henry Paulson Jr. (you guessed it), Edward Forst (yep) and Neel Kashkari (see a trend?) – (From The New York Times)

New York Post columnist John Crudele got hold of Paulson’s phone records for September 17 and 18th of that critical period. On the 17th, Paulson called Lloyd Blankfein, Goldman’s CEO five times. On the 18th Paulson called him six times; three of those calls were before the stock market opened. Did Goldman get an edge the rest of us didn’t that morning?”

Does it matter?

Recall the impotent outrage at the bankers keeping their sky-high bonuses after recklessly leading the country to the brink of economic chaos. That was no accident, but a result of having a Goldman man at the right place, at the right time so he could pull off a great bait and switch.

Paulson had convinced the Democratic-controlled Congress to pass emergency funding in the shockingly unprecedented amount of $700 billion by promising most of the funds would go to help homeowners in distress. The government would buy the mortgages in default from the banks, giving the banks the capital that they needed, and then would make arrangements so that the homeowners did not lose their homes.

As soon as Congress allocated the money to Paulson’s control with the stipulation that it go to homeowners, he convinced George W. Bush to override that term of the legislation, so it went primarily to banks instead.

More on how Paulson got the bailout funds diverted from Main Street to Wall Street in the Section How The Bankers Got Their Big Bonuses Protected in the article here.

BTW: At this point, it’s worth remembering that Michael Lewis showed us in The Big Short that the homeowners could make the mortgage payments at 3%. They only began to default when the higher rates of about 7% kicked in. Thus, the collapse of the mortgage market may have been avoided if the original plan had gone through: first, the mortgages would be bought from the banks at true market value (at a big discount) giving the banks some capital to meet the capital adequacy requirement; the mortgages would be reinstated at 3%. If the banks needed more, a top up could be considered so they could continue to make loans. However, an ex-Wall Street banker was in charge.

The Cornerstone Myth

Sadly, even well-meaning Democrats accept this lie. John Podesta served as co-chair to President-elect Barrack Obama’s transition team. Michael Froman, then an executive at Citibank, wrote to Podesta suggesting names that Citibank wanted for key positions in government departments, especially those that could influence banking policy. It got most of its choices appointed.

This is not to suggest for a moment that Podesta is in the pocket of the banks. Indeed, the opposite is more likely true. However, it demonstrates that even the best-intentioned Democrats, as in the Obama administration, were taken in by that banker propaganda.

How Wall Street Does It

They offer multi-million-dollar incentives for employees to join government departments that have influence over policies that govern Wall Street.

In 2009, some politicians were appalled to learn that Citibank had offered its COO, Jack Lew (Treasury Secretary 2013–2017) an incentive if he joined a government department at an executive level. Normally, if an executive leaves, he forfeits any retention bonus. But the wording of Lew’s contract with Citibank said he would get his full retention bonus if he left for government service. Lew had $250,000 to $500,000 in restricted stock vested after he left the bank, part of a $1.1 million golden parachute revealed during the confirmation process.

For its part, the bank replied, “Citi routinely accommodates individuals who wish to leave the firm to pursue a position in government or nonprofit sector.”

Bank incentives again became an issue when Antonio Weiss,(Counselor to the Secretary of the Treasury, 2015-present) a former investment banker at Lazard, disclosed that he would be paid $21 million in unvested stock and deferred compensation if he took the senior-level job in government. Usually, if an employee leaves, they have no right to unvested stock.

Most of the large banks have similar incentives to government service. Stanley Fischer, currently the vice chair of the Federal Reserve, had a similar clause in his Citigroup employment contract. U.S. Trade Representative Michael Froman received over $4 million in multiple exit payments from Citigroup when he left for the Obama Administration.

Legal geeks can read Goldman’s Incentive Plan filed with the SEC and see the carrot to go to government at paragraph 9.

Trump campaigned on draining the Washington swamp. His last TV ad, Argument for America, flashed the street sign of Wall Street as he promised to take power away from the corrupt establishment. Let’s see who he recruited to help him with this Herculean task. Fortune magazine gives us this summary of his new helpers from Goldman alumni:

“That list includes Goldman alumnus and Treasury Secretary Steven Mnuchin. It’s perhaps no longer surprising when a former Goldman banker is hired to the federal government, with Jim Donovan named the deputy secretary of the Treasury Department just Tuesday.”

The Corruption of the Most Influential of Economists

Economists, from left, R. Glenn Hubbard, left, Martin Feldstein, and William Rudin, greet then-Republican presidential candidate Donald Trump as he arrives to speak at the Economic Club of New York, Thursday, Sept. 15, 2016, in New York. (AP Photo/ Evan Vucci)

Sometimes politicians call upon the leading academic economists of the day for their opinion about bank policy. These politicians uncritically accept that, because these scholars are from respected universities, their testimony must be unbiased. Bankers knew that getting influence over these influencers was critical to cementing control of Washington.

We owe Charles Ferguson for exposing, in part four of his documentary Inside Job, just how thoroughly bankers have taken control of so many of these preeminent economists. His interview with former member of the Federal Reserve’s Board of Governors Professor Frederic Miskin of Columbia University reveals an additional dimension—an almost childlike innocence devoid of any understanding of ethics.

In 2006, while still on the Board of Governors, Mishkin authored a paper supporting Iceland’s economy. Its title says it all, Financial Stability in Iceland. In 2008, Iceland’s economy was one of the first to implode. How could this happen when one of the foremost economists of the day had given it a clean bill of health a mere two years prior?

When asked what research Mishkin had to support this conclusion of stability, Mishkin could only respond that he had talked to people and he trusted what he was told. Can you imagine what would happen if you handed in a research paper to your college professor and defended it by saying you were relying on what people told you?

Next, Ferguson pointed out that on Mishkin’s public CV, he describes this study as Financial Instability in Iceland. Mishkin’s only explanation: that must be a typo.

Then, Ferguson asked the question that might well explain why Mishkin didn’t do much digging of his own: How much was he paid to do the study? Although he didn’t reveal it in the study, this was not an academic piece; it was a marketing piece. He had been retained by the Icelandic Chamber of Commerce and paid $124,000 for the work.

While there is a clip of the Mishkin interview on YouTube, it’s better to watch the whole section in the documentary. Ferguson interviews other influential academic economists disclosing a strange belief that they do not have to reveal if they have gotten paid by the financial industry in the past when giving opinions about it.

There is an easy solution to counter this banker control. Every time an economist is called to testify at a government hearing, a member of Congress can ask if they have received money from the financial industry in any way over the past 10 years. If so, they should be disqualified, or at least labeled a lobbyist for the banking industry. Any politician could ask the question—But they will need some vigorous prodding by aware voters.

The Department of Justice

Of course, no control of Washington would be complete without the dominance of the department that gets to decide who gets charged with criminal offenses and goes to jail. And there is no better proof of the effective command that Wall Street has over the Department of Justice than looking at the number of bankers that suffered any consequences personally for all they did to bring on the 2008 near meltdown.

And bankers were doing much, much more. During this same 2008 period, bankers were involved with assisting drug lords and terrorists with money laundering and the high net worth with tax evasion.

I’ll begin with a story of an American born citizen who gave the IRS information that led to the collection of $400 million from US tax cheats, a Swiss bank that helped American citizens hide $20 billion worth of assets from the IRS, and a billionaire enjoying the California sun and hiding his assets in the Swiss bank to the extent of evading about $56 million in US taxes.

Who went to jail and who got sweetheart deals given their net worth?

If you’ve been reading my columns, the correct answer will jump quickly into your mind.

The American citizen, Bradley Birkenfeld, got sent to 40 months in jail; the Swiss Bank, UBS, got fined $670 million, not even 2% of its annual income. (If you were making $60,000 a year, that would be the equivalent of a $1200 fine.) The billionaire, Igor Olenicoff, a real estate developer, paid a fine of $56 million; presumably that included tax evaded plus a penalty. That result evokes the usual question: What if a black kid robbed a bank of $56 million?

Birkenfeld got punished because he ratted on a bank; a Swiss bank you might object, but nevertheless a sacred bank. UBS got a light slap on the wrist for the same reason; it’s a bank. Why a billionaire got such a light touch and did not get jail time, I cannot explain.

Sentencing guidelines call for a prison sentence of up to three years and one of six months was typically handed out, but the DOJ supported the recommendations of a probation officer of no jail for Olenicoff because it was his first offense and no one had suffered a monetary loss (What???).

A Legal Geek Interlude: Olenicoff’s sweetheart deal set a precedent: by what became known as the ‘Olenicoff defense’, billionaire tax invaders do not go to jail. For example, beanie baby tycoon, Ty Warner, who had evaded $53 million in taxes, also got probation.

Judges can impose jail time if they want no matter what the prosecution suggests. However, these two cases suggest that some judges don’t view multimillion-dollar tax evasion as a serious crime.

Birkenfeld’s revelations did much more good. The New York Times reported that “The disclosure of Swiss banking information …set off such a panic among wealthy Americans that more than 14,000 of them joined a tax amnesty program. I.R.S. officials say the amnesty program has helped recover more than $5 billion in unpaid taxes.” Birkenfeld did not share in any of that.

The Tale of Lucifer’s Banker

The man who singlehandedly broke the wall of Swiss bank secrecy (for a while)

Birkenfeld gave himself the title Lucifer’s Banker in his book. A fitting handle, as he knew all the sinister tricks of the secret tax evading world: the numbered bank accounts; the string of secret shell corporations to hide true ownership; and how to smuggle assets in and out of the US by methods that would make James Bond envious.

For examples of easy DIY schemes like the ones Birkenfeld peddled, see my blog The Paradise Papers: How Ridiculously Easy It Is To Avoid Taxes here.

His story is worth a retell.

One day, while diligently working at hiding assets for high net worth types at UBS, a colleague brought his attention to a posting on an obscure part of the UBS internal website. It was an opinion from a law firm that everything Birkenfeld was doing was illegal. Birkenfeld understood the treachery. If he got caught, he would be hung out to dry as a rogue employee who had been told not to do in writing what they had verbally told him to do. He quit, taking a treasure trove of data on US citizens customers with him in 2005.

In 2006 the US passed a new whistleblower protection statute for information given to the IRS. Birkenfeld flew to the US and presented a sample of his cache to the DOJ. It gave him a ‘Queen for a Day’ immunity deal. According to Swiss law, giving out bank information is a serious crime, vigorously prosecuted with lengthy jail time. However, if the banker is testifying pursuant to a subpoena, he cannot be charged. Birkenfeld asked the DOJ for a subpoena so he could bring more information. It refused.

A Geek Interlude: In the 19th-century cops carried whistles to alert the public of a dangerous situation. Ralph Nader is credited with applying it to people who disclosed illegal activity in the public interest.

So, Birkenfeld arranged for a Senate committee to subpoena him. He brought the rest of this data and told them in particular about his golden goose client Olenicoff. At the same time, he made a claim under the IRS whistleblower program.

When the DOJ learned of his testimony about Olenicoff, it arrested him claiming he had withheld information from it about his involvement with Olenicoff. Even though it had refused him a protective subpoena and he had revealed all before the Senate, the DOJ said he had not told it. Thus, he had violated their immunity agreement, and it charged him with conspiracy to defraud the IRS—and used all he had given it against him.

In 2012, on his release from prison, the IRS paid Birkenfeld $104 million for his information.

A Success in the Fight Against Government Prosecution of Bank Whistleblowers

A man walks past a logo of HSBC Holdings PLC at the bank’s headquarter in Hong Kong — March 2, 2009 (AP Photo/Vincent Yu)

There have been a number of bank employees who disclosed taxpayer evasion and avoidance: most have been Europeans. However, there has been the near media blackout in the US, so readers will be unfamiliar with their names. All have been persecuted by one European government or another with zealous campaigns to assassinate their characters. We will look at just one.

In 2006, Herve Falciani, a computer technician at HSBC Switzerland, who gave us the biggest banking leak in history, disclosed a list of 130,000 HSBC client names from various countries who had secret bank accounts. Switzerland laid charges for aggravated financial espionage, and he was sentenced, in absentia, to five years in jail. (Switzerland is still pursuing Falciani with vigor. As recently as April of this year, it asked Spain to extradite him—unsuccessfully.)

Soon, a break came for whistleblowers. A group of journalists, who had left jobs in the mainstream media to form an organization with the mind-numbing name of the International Consortium of Investigative Journalists (the ICIJ), decided to tackle government persecution of tax evasion whistleblowers. There were two problems: The first was protecting whistleblowers from prosecution; the second to make the mainstream media not only carry the stories— but in their headlines.

The result was the famous Panama Papers

A Geek Interlude: The name Panama Papers is an allusion to the Pentagon Papers disclosed by the grandfather of whistleblowers, Daniel Ellsberg, in 1971 revealing that former President Lyndon B. Johnson had systematically lied to Congress and the media about the extent of U.S. involvement in Vietnam. The Nixon administration saw Ellsberg charged with conspiracy, etc., but the prosecution lost all credibility when it became known that the famous White House Plumbers (of failed Watergate break-in fame) had broken into Ellsberg’s psychiatrist’s office to get evidence to discredit Ellsberg.

Journalists from 107 member organizations analyzed the Falciani documents to connect the dots tracing the bank account ownership through strings of shell corporations threaded through a series of secrecy jurisdictions. Using expert media techniques, the ICIJ reveal featured a number of prominent politicians and celebrities. The mainstream media could no longer ignore the extensive parallel world of offshore tax evasion, and the departments of justice have been powerless to punish this anonymous whistleblower. While he has exposed so many of the best political donors, he is now protected by the journalists.

Super All-Service Laundromats for Drug Lords and Terrorists Too

Lest we forget: While the bankers were speculating with our deposit money in the high-risk derivative market and creating the toxic CDOs that brought them outsized bonuses and the global economy to the brink of disaster, they were well occupied in other lucrative revenue-generating activities

In 2004, Wachovia (you may better remember it by its street name, “Walk over ya”, earned by its aggressive foreclosure and eviction practices) began laundering money for the Sinaloa Drug Cartel—of recent Shorty Guzman fame. By the time the FBI laid charges in 2009 ???, it had washed $378.2 billion sparkling clean for the use of the drug lords of this organization. Think of the premium a drug lord would pay a banker for this kind of service.

Lanny Breuer, head of the criminal division of the DOJ, invoked the Too Big to Fail Doctrine and accepted a fine of $160 million dollars by the bank. No banker suffered any clawback of the bonuses made by assisting the Mexican drug lords.

After the drug lords lost Wachovia, they found a new friend in HSBC.

BTW: The Hong Kong and Shanghai Banking Corporation (HSBC) was founded in 1865 in Hong Kong and Shanghai, when they were British colonies; hence it is a British not an Asian bank. Its head office has always been in London, but by virtue of Britain’s former colonial empire, it has long-established branches throughout the world.

Angered by this kiss of a deal for Wachovia, when the HSBC money laundering evidence first surfaced in 2011, the U.S. Senate Permanent Committee on Investigations of Homeland Security and Government Affairs investigated bank money laundering for about a year. It devoted one report exclusively to HSBC, released in July 2012 and available online.

The Senate report was a thunderbolt hurled by the infuriated senators at the complicit U.S. regulators, as well as the lawless banks. The committee found against HSBC:

• Money laundering for drug lords
• Money laundering for terrorist financiers, including al Qaeda
• Money laundering for organized crime, especially Russian
• Stripping data to assist in avoiding economic sanctions for countries such as Iran
• Providing banking services, including providing U.S. dollars, to banks in Saudi Arabia and Pakistan that had known links to terrorist organizations
• That U.S. regulators had given hundreds of warnings; the banks blatantly ignored them, and the regulators did nothing effective over an eight-year stretch.

It’s worth a look at the table of contents of the report alone, which is available online. It takes three pages to list all the HSBC violations.

But the power of the U.S. Senate proved powerless against the power of the banks.

With Lanny Breuer again at the helm, the bankers kept all they had gained from their money laundering; the bank paid a fine of $1.9 billion, which as one analyst noted is about five weeks of income for the bank.

In August 2013, investigative journalist Bethany McClean noted how these penalties do not punish. In a single month she noted the following headlines: “Ex Goldman Trader Found Guilty for Misleading Investors.” “Bond Deal Draws Fine for UBS.” “JPMorgan Settles Electricity Manipulation Case for $410 million.” “Deutsche Bank Net Profit Halves on Charge For Potential Legal Costs.” “US Sues Bank of America Over Mortgage Securities.” “Senate Opens Probe of Banks’ Commodities Businesses.” “US Regulators Find Evidence of Banks Fixing Derivatives Rates.” “Goldman Sachs Sued for Allegedly Inflating Aluminum Prices.”

A year later, because of the revelations of former JP Morgan banker, Alayne Fleischmann, 18 banks quickly settled actions alleging fraud negotiated directly with the AG himself, Eric Holder, for fines and no prosecutions. The acceptance was quick so that, as part of the deal, the Statements of Claims detailing the allegations and size of the fraud never became public. The banks managed the damage control so well, few people have ever heard of the banks’ acceptance of committing massive fraud regarding the CDOs pre-2008.

For more on the details of the Fleischmann evidence of fraud in the assembly of the CDOs see This Is Why Bankers Keep Getting Away With Fraud

How do the banks pull this off? Money, lots of it, of course. Members of the Treasury and the DOJ rise from civil service pay to banker level pay—if they have been good, kind and nice to the banks.

The Treasury Department: Jack Lew (Treasury Secretary 2009–2013) went to private equity firm Lindsay Goldberg; His predecessor Timothy Geithner (Treasury Secretary 2013–2017) became president of Warburg Pincus in 2014.

The DOJ: Both Lanny Breuer and Eric Holder were partners in Covington & Burling, a firm noted for defense of white collar crime, corporate and banking. The law firm’s clients have included many of the large banks Breuer and Holder declined to prosecute for their alleged role in the financial crisis. Both returned to that firm.

At this point, readers will undoubtedly comment about the donations to politicians, Super PACs and lobbyists. I haven’t dealt with those methods. There are many excellent articles emphasizing those direct influences on Congress. I don’t want to dilute the message of this piece that the overlooked civil service is often a greater power than Congress.

There is no doubt that the people named above are highly competent. However, they use that competence to ensure Wall Street always wins. A country needs people who will put their loyalty to the country above loyalty to their paycheck. The better underlying principle in hiring for senior government positions that influence bank policy is: They don’t come from Wall Street and they don’t go to Wall Street.

Even if banker alumni are eliminated from positions of power in government, there is still the major problem of banks being able to reward retiring civil servants, who have rewarded banks. Thus, ask every new non-banker candidate for these positions to agree not to take posts by which they could benefit from the entities they once regulated; or in the case of lawyers, to firms that represent Wall Street as lobbyists and/or defend banks and corporations on criminal charges, for five years after leaving government—That commitment would be a test of their loyalty to their country. There are plenty of other jobs that people with their skill and background could do after leaving government— although none would earn banker size pay.

All of this is so well-known that it has earned a name — the revolving door. Yet, while it has been going on for so long and is so extensive, not a single politician has tried to initiate a law to stop it. The urgent question is: What can be done to make some politician take this seriously?

For more on the banking system follow Jan at https://medium.com/@JanWeir1 and on Twitter @JanWeirLaw