Thursday, April 17, 2014

“We are in great danger”: Ex-banker details how mega-banks destroyed America

"The power has only been more consolidated," warns Goldman Sachs veteran Nomi Prins in an interview with Salon


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“It no longer matters who sits in the White House,” former Goldman Sachs managing director Nomi Prins writes in her new book “All the Presidents’ Bankers: The Hidden Alliances That Drive American Power.” “Presidents no longer even try to garner banker support for population-friendly policies, and bankers operate oblivious to the needs of national economies. There is no counterbalance to their power.”
Prins, who also worked for Bear Stearns, Lehman Brothers and Chase Manhattan Bank, is now a fellow at the think tank Demos and a member of Sen. Bernie Sanders’ Federal Reserve Advisory Council. Salon spoke with Prins about a century of presidential coziness with bankers; Barney Frank’s defense of big banks’ power; and how to “break the alliances” before they “break us.” A condensed version of our conversation follows.
It’s no secret that big banks play a big role in shaping U.S. banking policy. Your book argues they play a big role in all kinds of areas, like foreign policy. How broad, deep and consistent is the role of big banks in U.S. policymaking?
Throughout the century that I examined, which began with the Panic of 1907 … what I found by accessing the archives of each president is that through many events and periods, particular bankers were in constant communication [with the White House] — not just about financial and economic policy, and by extension trade policy, but also about aspects of World War I, or World War II, or the Cold War, in terms of the expansion that America was undergoing as a superpower in the world, politically, buoyed by the financial expansion of the banking community.
And in what direction did that move policy? How did those policies become different than they would have without the bankers’ influence?
It was more a question of each group, in government and in the financial community, working together to push the same policies.
So, for example, in the beginning of World War I, Woodrow Wilson had adopted initially a policy of neutrality. But the Morgan Bank, which was the most powerful bank at the time, and which wound up funding over 75 percent of the financing for the allied forces during World War I … pushed Wilson out of neutrality sooner than he might have done, because of their desire to be involved on one side of the war.


Now, on the other side of that war, for example, was the National City Bank, which, though they worked with Morgan in financing the French and the British, they also didn’t have a problem working with financing some things on the German side, as did Chase …
When Eisenhower became president … the U.S. was undergoing this expansion by providing, under his doctrine, military aid and support to countries [under] the so-called threat of being taken over by communism … What bankers did was they opened up hubs, in areas such as Cuba, in areas such as Beirut and Lebanon, where the U.S. also wanted to gain a stronghold in their Cold War fight against the Soviet Union. And so the juxtaposition of finance and foreign policy were very much aligned.
So in the ‘70s, it became less aligned, because though America was pursuing foreign policy initiatives in terms of expansion, the bankers found oil, and they made an extreme effort to activate relationships in the Middle East, that then the U.S. government followed. For example, in Saudi Arabia and so forth, they get access to oil money, and then recycle it into Latin American debt and other forms of lending throughout the globe. So that situation led the U.S. government.
You note that banks played a significant role in supporting both the initial passage of Glass-Steagall, and decades later, the repeal of Glass-Steagall … You also write that the power of the president “receded relative to that of the bankers, during the post-Nixon period.” How do you explain those shifts?
The banking community — in particular Chase, led by David Rockefeller — expanded very aggressively into the Middle East to be involved in recycling petro-dollars. There also became a shift in the alignment of working with presidents [from] more public-interest and national-interest goals, and it became much more of a private goal club. And then they have this whole other pool of money, and that was an instigator to moving aggressively forward, and not necessarily needing to be fully aligned with public policy, either supporting it or having it.
But then, toward the ‘80s and ‘90s, they — because they had aggressively now recycled this oil money into Latin American debt, and realized they were facing a Latin American third-world debt crisis — they went back to the U.S. government, and to Reagan and George [H.] W. Bush, and said, “You know, we have a problem: We now need your support, we need you to back the World Bank; we need you to back the IMF; we need you to back us, because we don’t want to lose the money we just very aggressively recycled.”
So then they snapped back, and then they also realized — because they got that government support, and that bailout of third-world debt — they realized it was time to sort of push forward into dismantling aspects of regulation that had also bound them.
What we see in history is that whenever there are periods where bankers have lost money, they want to regroup and find ways in which they can make new money. And if regulations are in the way, then regulations must be dismantled.
And so through George Bush I’s administration, there was tremendous pressure to dismantle aspects of Glass-Steagall, and that culminated in the full repeal of the Glass-Steagall Act under Clinton. And the aftermath of that was — absent barriers to global activity, speculation mingled with the increase in derivatives activity, and the complexity of financial security and deals — we found ourselves in the crisis of 2008.
Your book argues that the nature of presidents’ closeness with bankers has changed, becoming less rooted in personal relationships. Is that kind of coziness harder to recognize or to root out?
One of the things that’s very noticeable for the first 60 or so years of the 20th century was the friendliness, the family connections, the co-yachting, the social events that presidents and bankers shared …
Joseph Kennedy, who had become, under FDR, the first head of the SEC, became the U.K. ambassador, and had this gala in London where his daughter Kathleen was introduced to society there. And his young son John F. Kennedy hung out with David Rockefeller, and the two established a relationship later on, through which Rockefeller tried to push John F. Kennedy to support the expansion of private capital into Latin America …
LBJ would invite bankers to his ranch just to hang out. Eisenhower would write these glowing letters to some of his friends at the Morgan bank about how he needed them, and how happy and grateful he was that they were on his side and so forth …
As the decades went on, as the protégés of these families and people came into moneyed institutions … they were less aligned with that past social grace, family connections and decorum, and it just became much more of an every man for his own … It made it much more functional than the notion of hanging out and enjoying each other’s company and being like-minded …
In the last couple decades, rather than just individuals linking into each other very directly, through visits to the White House or letters or so forth, they are augmented by lobbyists, lawyers and all sorts of hundreds of people in between the relationships, that pull all sorts of levers in Washington, to impact policies that are beneficial to the banking community.
Does that shift create a more sustainable basis for coziness between politicians and bankers, as it becomes more primarily a structural coziness rather than [also] a personal coziness?
Yes … In the beginning it was deeply personal and structural. And between the period of the Great Depression through the ’60s, it also served in a manner to enhance each other’s power, as well as American political and financial power globally. Whereas afterwards, the relationship having been altered from less personal into more functional, and more structural, it didn’t change the fact that the government and the bankers believe the same things, and believe that a strong — “competitive” was the word that was used frequently in the ’80s and ’90s — … banking structure in the United States led to a stronger position of America internationally as well. And the idea of, you know, personal humility or serving the public interest was not a factor anymore, as it had been when those were tighter, personal relationships, before that period.
So the bankers today … by nature of all of these decades of both cozy personal as well as structural relationships, as well as the complexity of the financial markets in general, have reached a position whereby they don’t share power as much with presidents and government, as they wield more power, by virtue of controlling so much capital and so much of an aspect of the national and international economy.
You yourself are a bank veteran. You document in your book, going through the Obama administration, the number of people with substantial banking experience who make it into policymaking positions. The argument gets made that those are the people that have the expertise to do the job. What do you make of that?
The corridor between Washington and Wall Street has long been traveled by bankers. The slight difference in past history was that they also served in positions not just in the Treasury or regulatory bodies, but they served in the Department of Defense and … various security offices as well.
The idea that only bankers can understand how to regulate banking, and have some sort of an inherent need to do that, has been this fallacy that has resulted in the crises which we’ve seen. The reality is if someone goes into Washington and realizes they can come out of Washington [later], make millions of dollars by gaining a position at a bank like Robert Rubin did … we’ve seen in many cases that enabling [the banks] is the chosen route …
Now, I have not been offered a position in Washington. I have been critical of Wall Street since I left, largely because of practices that they were developing when I was working in the banking industry. But voices like mine are not really sought in Washington, because there isn’t a true desire to reform the banking industry and protect the taxpayers and financial markets in general …
Some people will read your book and say that when you give the government a major role in regulating banks and other industries, regulatory capture by the likes of JPMorgan Chase, at the expense of smaller banks and customers, is just inevitable, and so the better alternative is to deregulate. What do you make of that argument?
Well, we don’t really have a field of highly regulated banks. We have a lot of rules, but we don’t have the same sort of regulation that we had back in the ‘30s, that separated the positive money from speculative trading and investments, as a result of the crash of 1929.
We don’t have an environment where what is promoted as reform in Washington — for example, the latest Dodd-Frank Act — is particularly effective. It hasn’t reduced the magnitude of complex securities, it hasn’t reduced the codependency, the co-risks of the derivatives that each of these large institutions has with each other. Stress tests for that codependency aren’t even part of the Federal Reserve’s major banking stress tests. They look at other aspects, like if there’s one default in one customer in one bank — that’s their only stress test for a massive codependency of risk that these banks yield.
So we aren’t really in a good regulatory position, so there’s really not much you can deregulate further.
So I would argue that we [had] a much more stable financial system, a stronger equality of wealth and economics in the country, from the ‘30s to the ‘60s, and banks were still able to make money, and America was still able to expand quite aggressively, in a much tighter regulatory platform. So the question is: What’s better for America? The idea of stabilizing the system by having more regulation that’s very structured, as opposed to hundreds of pages of rules with loopholes, which is what we have now,  [and] versus having unstructured regulation …
It’s safer and better economically to make regulations quite clear – you know, to take lobbyists out, to take lawyers out, to make them very, very clear: Your institutions cannot have these two bodies, period. Not “you sell off some,” not “certain proprietary trading is excluded” … No, as long as you have deposits, you cannot also use them for speculation, whatever you call it.
Barney Frank argued to me last year that, “If you look at the last few years, the big banks have very little political power, in the legislating we did, we did run into political power of the small banks and the credit unions. Any time in our legislation there was a differentiation in the way institutions were treated according to size, the small ones won.” Why do you disagree?
Because for the most part, small ones have gone out of business, or were taken over, and the concentration of the positive assets have continued to move towards the big banks. Every FDIC report indicates how the biggest banks have gotten bigger. So small banks may have small victories along the way, but the reality is that if you have a small collection of supermarket banks who dominate over assets, over deposits, over insurance policies, over money market funds, versus over trading, over the clients that they all have that perpetuate some of these activities beyond the banks themselves, then it’s hard to argue anyone else has really won in that equation.
Even going back to 1929, after the crash, there were six big banks … All of which continue to exist today. Whereas thousands of smaller banks, banks that were community-oriented, and farming-oriented, don’t exist anymore, or were acquired by the larger banks. I’m not quite sure how to look at the banking landscape or any of the reports, and see how small banks have been winners.
How does Barack Obama fit into the history that you assess in your book?
First of all, Obama’s economic and financial policy, Cabinet and advisers are largely retreads of the Clinton administration. So from the standpoint of the banking community, and connections to the banking community, there was very much an overlap, if not a complete overlap, of individuals who were all key to the deregulation of the banking industry, and who either came from, or now speak for, large sums of money through the banking industry …
The policies of not just lax regulation of banks, but subsidizing their failures — which the Clinton administration did after the 1994 Mexican Peso Crisis, and which the Bush administration even before that, did with the third-world debt crisis — was magnified many times under the Obama administration. His favorite banker was said to be — by the New York Times — Jamie Dimon. The number of visits, which I document in the book, between the White House and the key leaders of the big six Wall Street banks, increased five- to tenfold under Obama versus under George W. Bush.
Now, when he was campaigning he talked very strong about reforming Wall Street. And when the Dodd-Frank Act was signed in July 2010, he talked about it being the greatest reform since the Glass-Steagall Act of FDR’s time. But it was nothing remotely like that.
So the way I look at Obama is that his policies were a continuation of Clinton’s policies with respect to banking and finance, which were a continuation of George Bush’s policies, and Reagan’s policies, as they were actually shaped by Bush’s banking friends of the time.
Your book ends with a call to “break the alliances” before they “break us.” How could that be done?
Louis Brandeis, who wrote the book “Other People’s Money” back in 1910 … said at the time that money trusts had to be broken or they would break the country. And on a metaphorical basis he was right.
The fact that we have such a [disparity] of wealth, of income, of power today is because, even with the Glass-Steagall Act in between, the dismantling of it just created a tighter alignment, with more power over more capital, over the decades since it was dismantled, and that’s where we are today.
So I think we are in great danger of banks not just being too big to fail, but their leaders being too big to fail, as they take the tremendous subsidies they’ve received over the last few years. We’re in a much more precarious position.
How we break that, on a structural reform basis, like FDR did … We at least make interpretation not [in] the hands of lawyers and lobbyists, but clear-cut and concise, and we at least divorce deposits and taxpayers’ money from the game of finance.
We can’t really make individuals stop talking to each other, or make Obama or whoever the next president is — whether it’s Hillary Clinton or Jeb Bush or whoever — stop appointing bankers to their White House. But we can at least try and reform the system in a clear-cut way. And it’s not simple, and I’m not optimistic this is going to happen. I don’t know how optimistic Louis Brandeis was that it was going to happen back in 1910. We’re over a hundred years later, and the power has only been more consolidated, and the collaboration between leaders in government and leaders in banking has only increased the risk going forward.