Extortion (7 page)

To play this game best, an extortionist needs to sound convincingly threatening. Attorney General Eric Holder, despite having come from a law firm that represented many of the largest Wall Street firms, talked about criminal charges against individual Wall Street executives. And as the so-called Occupy Wall Street movement arose and occupied a park next to Wall Street, President Obama sounded supportive. According to the president, the protests and the civil disobedience reflected a “broad-based frustration about how our financial system works.”
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Democratic House leader Nancy Pelosi explained, “I support the message to the establishment, whether it’s Wall Street or the political establishment and the rest, that change has to happen.”
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Congresswoman Debbie Wasserman Schultz, head of the Democratic National Committee, added, “We understand their [Occupy Wall Street’s] frustration, we applaud their activism.”
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But time dragged on, without any criminal charges being brought. Soon the midterm election cycle loomed, and a major piece of financial regulation—the Dodd-Frank Wall Street Reform and Consumer Protection Act—moved toward passage. Wall Street money flowed to some of its fiercest critics in the 2010 election. That year, seven out of the ten top recipients of Goldman Sachs contributions, for example, were Democrats. Former Clinton secretary of labor Robert Reich declared that this was evidence that Wall Street was “bribing elected officials with their donations.”
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I would argue that Reich had the power equation wrong. It was the Permanent Political Class that threatened to cause severe damage to the financiers—not the other way around. As the late economics professor Peter H. Aranson puts it, “The real market for contributions is one of ‘extortion’ by those who hold a monopoly on the use of coercion—the officeholders.”
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The midterm election passed, and so did Dodd-Frank. But the extortion market continued. In mid-April 2011, executives at Goldman Sachs were worried. On April 13
, the Senate Permanent Committee on Investigations released a scathing report on alleged criminal conduct by Goldman and other firms during the financial crisis.
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The 635-page report created a panic.
Forbes
was soon reporting that Goldman executives were hiring white-collar defense attorneys.
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The Department of Justice was reportedly looking at possible criminal indictments.

In the weeks leading up to and following the report, a handful of Goldman executives poured more than $200,000 into the coffers of the Obama campaign and the Democratic National Committee. Three of those executives had never given to Obama before and had never even written large political checks.
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But now, in a non-election year, they were donating to the campaign. Goldman would learn that the Department of Justice had dropped its criminal investigation.
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Obama campaign advisers would also say publicly that their 2012 campaign strategy would involve “channeling anti–Wall Street anger” to their advantage.
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The message could not be more clear. The Democratic National Committee organized and promoted a March 7 White House dinner in the Blue Room for twenty “top Wall Street donors who could be key fundraisers” for Obama’s reelection bid,
as
Politico
put it. They discussed policies that would affect the financial industry.
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“This was not a fund-raiser,” insisted Press Secretary Jay Carney. And indeed, it would have been inappropriate to host an explicit fund-raiser at the White House. But it was scheduled to “solicit ideas about how to improve the economy,” according to
Politico
, and the line between explicit and implicit fund-raising can be awfully hard to draw.

A
Bloomberg
survey found that fully 77 percent of Wall Street executives believed Obama was “anti-business.”
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Many of his supporters on Wall Street were frustrated by his anti–Wall Street rhetoric and were vowing not to support him this time around. But what choice did they have? The money continued to flow. By July 2011, just as Goldman executives were making their donations, cash from Wall Street made up fully one-third of President Obama’s campaign money raised by bundlers.
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As CNBC put it at the time, “Obama is relying more on Wall Street to fund his re-election this year than he did in 2008.”

By January 2012, Wall Street bundlers had already raised $2 million more than they had raised for Obama in 2008. They made up the largest bloc of bundled contributors to his campaign.
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Many on Wall Street were furious with the rhetoric. Paul Levy of JLL Partners voted for Obama in 2008 but had become frustrated by the rhetoric. “If he’s busy attacking people with wealth, why does he want to go to fancy restaurants and fancy homes to have these events? If he wants to go where the people go, I’m happy to go where the people go.” Levy suggested a fund-raiser at McDonald’s.
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Robert Wolf had been a supporter of President Obama’s since 2007, when he had first met him as a candidate. Wolf had bundled for Obama in 2008 and now served as an informal adviser to the president during the first term. Some considered him a “First Friend” to the president. Wolf ran the U.S. banking operations of the giant Swiss Bank UBS, which was under investigation by the federal government on several fronts. The Internal Revenue Service was looking into allegations that the firm was helping U.S. citizens evade U.S. taxes. During a 2009 hearing, Senator Carl Levin claimed: “Swiss bankers aided and abetted violations of U.S. tax law by traveling to this country, with client code names, encrypted computers, countersurveillance training, and all the rest of it, to enable U.S. residents to hide assets and money in Swiss bank accounts.”
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At the same time the Department of Justice was investigating other financial matters that involved the conduct of certain UBS executives. The Securities and Exchange Commission also had several other probes of UBS underway.
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Through it all, Wolf continued raising money for President Obama. In February 2009, UBS entered into a deferred prosecution agreement with the DOJ relating to charges that it impeded the IRS by hiding taxpayer identities. Although UBS did pay some fines, they were largely seen as slaps on the wrist considering the legal charges the firm and its executives might have faced. The DOJ dropped the charges against UBS eighteen months later, after the firm provided identities and account information for about 4,450 of their U.S. customers.
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Other bundlers came from JP Morgan Chase, JP Morgan, Goldman Sachs, and Bank of America, all of which were under SEC investigation and possibly under Department of Justice investigation as well.
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Extortion usually implies that the victims are innocent. Blackmail is the term used when they are guilty. I am not suggesting that UBS was innocent of wrongdoing, or that the other Wall Street firms had nothing to answer for. But the government should regulate or prosecute wrongdoing—not turn it into an opportunity to make money. Consider the case of another Obama bundler, Jim Chanos of Kynikos Associates. Chanos had not bundled for Obama in 2008. But in 2011 the hedge-fund titan signed up to raise money for the president’s reelection. The SEC was investigating Kynikos because of a civil complaint filed against the firm in 2006 by the insurance and financial services firm Fairfax. Chanos bundled between $200,000 and $500,000 for the president’s 2012 reelection.
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In November 2012, the SEC closed its investigation of Kynikos.
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Pfizer vice president for policy Sally Susman was another Obama bundler for the 2012 election. In July 2011, Pfizer headquarters was scheduled to be the site of a fund-raiser for the campaign. Only after the
Boston Globe
asked campaign officials about the propriety of holding the event at a pharmaceutical company regulated by the government was it moved to the University Club.
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But Pfizer remained a cornerstone of the campaign’s bundling operations. All this took place as the drug giant was facing criminal investigation by the Justice Department over alleged violations of the Foreign Corrupt Practices Act going back some ten years. Susman, who is also Pfizer’s lead lobbyist, bundled more than $500,000 for the 2012 campaign.
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In August 2012, the drug giant was able to settle the criminal case with DOJ officials.
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History shows that making donations lessens the possibility that the SEC will ding you for a financial crime.
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How can we be sure that senior Justice Department officials, who raised money for the presidential campaign, won’t be influenced by the same thing?

There is no explicit quid pro quo here. It is all unspoken. Friends help friends get elected by raising money. And friends who get elected don’t like friends who helped them raise money going to jail.

Both political parties were trying to grab the public high ground while in the background extracting what they could. Senator Harry Reid criticized Republican senators for holding “backroom negotiations” with Wall Street executives over the Dodd-Frank financial reform bill. But when he made the charge, Reid had only recently himself held a fund-raiser in New York City organized by Goldman Sachs president Gary Cohn.
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Republicans, on the other hand, criticized Democrats for extorting Wall Street, while playing a similar game themselves.

Leading the tightrope walk with Wall Street for Obama was Broderick Johnson, who joined the Obama campaign as a senior adviser in the fall of 2011.
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Johnson had worked for Obama in 2008 and was tied in with Wall Street, for whom he had lobbied since 2007. During the 2008 financial crisis, Johnson had lobbied for the bailout of the Financial Services Forum, an industry association comprising the twenty biggest financial CEOs in the United States. He also lobbied directly for JP Morgan, Bank of America, Fannie Mae, and the investment firm J. C. Flowers & Company.
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Johnson’s role in the campaign was to be its “representative in meetings with key leaders” and to help “ensure that there is constant, open communication,” according to Obama 2012 officials.
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He was part of the campaign’s senior staff, helping to provide “an ear to the ground.”

In addition to representing financial industry and Wall Street firms, Johnson is an attorney. He was a perfect liaison between Wall Street firms facing government investigations and the campaign. As Johnson’s current consulting website explains, “From one end of Pennsylvania Avenue to the other, we communicate with key policy and decision makers on an ongoing basis to secure useful intelligence in support of our clients’ overall business strategies. As relevant government decisions are being made, our outreach efforts yield sharper insights as to what may be happening or what has to happen to ensure successful client driven outcomes.”
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Such is the language of the sophisticated Washington player. He works for Obama, he works for Wall Street, and somehow, the latter ends up giving a lot of money to the former.

But the extortion was a bipartisan endeavor. The heated anti–Wall Street rhetoric and the threats to tax financial services into oblivion were good for Republicans too. The GOP message: we will protect you from those madmen . . . for a price.

When John Boehner became Speaker of the House in January 2011, he was already an effective and efficient fund-raiser. Much of the money came from his district and from businessmen around the country. Wall Street money had been part of the mix but not in any sizable quantities. But 2011 would turn out to be a banner year for him, precisely because Wall Street was under fire and feeling the heat. And precisely because he was implicitly offering them protection, Boehner was able to raise large sums of money.

One of the most contentious issues in 2011 was over taxes paid by Wall Street investors. America’s tax code had always been straightforward about one thing: income should be taxed differently than interest and capital gains made off of investments. But that distinction was now under fire as “unfair” because investors were paying a lower percentage on their capital gains than middle-class Americans were on income from their jobs. The
New York Times
called it the “Most Unconscionable Tax Loophole” in America.
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President Obama, along with many Democrats in Congress, was threatening to change it. Particular attention was focused on one of the biggest winners in 2010, hedge-fund titan John Paulson, who pulled in $4.9 billion. Forget for a minute the policy question of whether a change in the capital gains rate is good or bad. Instead, see it for what it largely created: an opportunity for extraction by both sides who were offering “protection.”

Boehner was generally opposed to large tax increases. But in the spring of 2011, he indicated that he
might
be open to considering a change in the capital gains rate.

Boehner then went to Wall Street looking for money. Over a two-day period, June 8–9, he deposited 144 checks worth $274,800 in contributions from hedge-fund and finance executives.
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Thirty-five of those checks, totaling over $56,000, came from employees of a single hedge-fund group, Paulson & Company.
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Paulson execs had never given to Boehner before. Cantor Fitzgerald executives were also quite generous—and also had no prior history of supporting Boehner. But now they needed his “protection.” Would they have done so without this threat?