13 Bankers: The Wall Street Takeover and the Next Financial Meltdown
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Authors: Simon Johnson
PRAISE FOR SIMON JOHNSON AND JAMES KWAK’S
13 BANKERS
“The best explanation yet for how the smart guys on Wall Street led us to the brink of collapse. In the process, Johnson and Kwak demystify our financial system, stripping it down to expose the ruthless power grab that lies at its center.”
—Elizabeth Warren, Professor of Law, Harvard Law School; Chair, TARP Congressional Oversight Panel
“Too many discussions of the Great Recession present it as a purely economic phenomenon.… Simon Johnson was the first to point out that this was and is a crisis of political economy. His and James Kwak’s analysis of the unholy intertwining of Washington and Wall Street—a cross between the gilded age and a banana republic—is essential reading.”
—Niall Ferguson, Professor of History, Harvard University; Professor, Harvard Business School; and author of
The Ascent of Money
“A disturbing and painstakingly researched account of how the banks wrenched control of government and society out of our hands—and what we can do to seize it back.”
—Bill Moyers
“Essential reading for anyone who wants to understand what comes next for the world economy. Dangerous and reckless elements of our financial sector have become too powerful and must be reined in. If this problem is not addressed, there is serious trouble in all our futures.”
—Nouriel Roubini, Professor of Economics, Leonard N. Stern School of Business, New York University; Chairman of Roubini Global Economics
“Beautifully written and powerful. Ties the current financial crisis to a cycle of politics as old as the Republic, and to a pathology in our politics that is as profound as any that our Republic has faced. Required reading for the president, and anyone else who cares for this Republic.”
—Lawrence Lessig, Director of the Edmond J. Safra Foundation Center for Ethics, Harvard University
“Johnson and Kwak not only tell us in great detail how the crisis happened and what we must do to avoid another crisis, but they see the deeper political and cultural context that permitted carelessness and excess nearly to break the financial system and plunge us into a depression.”
—Bill Bradley, former U.S. Senator
“A chilling tale of the dangers of concentrated economic, intellectual, and political power. Even if you do not agree with everything the authors have to say, this book makes it clear why ending ‘too big to fail’ and reforming the institutions that perpetuate it are essential for our nation’s future economic prosperity and, more fundamentally, our democratic system.”
—U.S. Senator Jim Bunning
“This book is remarkable in its scope and conclusions. It places changes in financial services and the sector’s regulation over the last twenty years in the context of the last two hundred, and the comparison isn’t favorable. It’s the one book the president (and the Congress) should read.”
—George David, former Chairman, United Technologies Corporation
“A timely, informative, and important book. You may not agree with all the analysis, but the issues so clearly discussed are real, current, and vitally important. Financial industry reform must be undertaken soon; inaction, as the authors convincingly argue, would have dangerous consequences. This book explains it all, and it’s great reading.”
—Lawrence K. Fish, former Chairman and Chief Executive Officer, Citizens Financial Group
SIMON JOHNSON AND JAMES KWAK
13 BANKERS
Simon Johnson is Ronald A. Kurtz Professor of Entrepreneurship at MIT’s Sloan School of Management and a senior fellow of the Peterson Institute for International Economics. He is coauthor, with James Kwak, of
The Baseline Scenario,
a leading economic blog, described by Paul Krugman as “a must-read” and by Bill Moyers as “one of the most informative news sites in the blogosphere.”
James Kwak has had a successful business career as a consultant for McKinsey & Company and as a software entrepreneur. He is currently a student at Yale Law School.
ALSO BY SIMON JOHNSON
Starting Over in Eastern Europe:
Entrepreneurship and Economic Renewal
(with Gary Loveman)
FIRST VINTAGE BOOKS EDITION, JANUARY
2011
Copyright © 2010, 2011 by Simon Johnson and James Kwak
All rights reserved. Published in the United States by Vintage Books, a division of Random House, Inc., New York, and in Canada by Random House of Canada Limited, Toronto. Originally published in hardcover in slightly different form in the United States by Pantheon Books, a division of Random House, Inc., New York, in 2010.
Vintage and colophon are registered trademarks of Random House, Inc.
The Library of Congress has cataloged the Pantheon edition as follows:
Johnson, Simon.
13 bankers : the Wall Street takeover and the next financial meltdown / Simon Johnson and James Kwak.
p. cm.
1. Banks and banking—United States. 2. Bank failures—United States. 3. Finance—United States. 4. Financial crises—United States. I. Kwak, James. II. Title. III. Title: Thirteen bankers.
HG2491.J646 2010 332.10973—dc22
2010000168
eISBN: 978-0-307-37922-1
Author photographs © Anthony Armand Placet (Johnson) and
courtesy of the author (Kwak)
Cover photograph © Alex Ely/Getty Images
v3.1_r1
TO OUR FAMILIES
They were careless people, Tom and Daisy—they smashed up things and creatures and then retreated back into their money or their vast carelessness, or whatever it was that kept them together, and let other people clean up the mess they had made.
—F. Scott Fitzgerald,
The Great Gatsby
1
Contents
Cover
About the Author
Other Books by This Author
Title Page
Copyright
Dedication
Introduction: 13 Bankers
1 Thomas Jefferson and the Financial Aristocracy
2 Other People’s Oligarchs
3 Wall Street Rising: 1980–
4 “Greed Is Good”: The Takeover
5 The Best Deal Ever
6 Too Big to Fail
7 The American Oligarchy: Six Banks
Epilogue
Notes
Further Reading
Acknowledgments
INTRODUCTION
13 Bankers
My administration is the only thing between you and the pitchforks.
—Barack Obama, March 27, 2009
1
Friday, March 27, 2009, was a lovely day in Washington, D.C.—but not for the global economy. The U.S. stock market had fallen 40 percent in just seven months, while the U.S. economy had lost 4.1 million jobs.
2
Total world output was shrinking for the first time since World War II.
3
Despite three government bailouts, Citigroup stock was trading below $3 per share, about 95 percent down from its peak; stock in Bank of America, which had received two bailouts, had lost 85 percent of its value. The public was furious at the recent news that American International Group, which had been rescued by commitments of up to $180 billion in taxpayer money, was paying $165 million in bonuses to executives and traders at the division that had nearly caused the company to collapse the previous September. The Obama administration’s proposals to stop the bleeding, initially panned in February, were still receiving a lukewarm response in the press and the markets. Prominent economists were calling for certain major banks to be taken over by the government and restructured. Wall Street’s way of life was under threat.
That Friday in March, thirteen bankers—the CEOs of thirteen of the country’s largest financial institutions—gathered at the White House to meet with President Barack Obama.
*
“Help me help you,” the president urged the group. Meeting with reporters later, they toed the party line. White House press secretary Robert Gibbs summarized the president’s message: “Everybody has to pitch in. We’re all in this together.” “I’m of the feeling that we’re all in this together,” echoed Vikram Pandit, CEO of Citigroup. Wells Fargo CEO John Stumpf repeated the mantra: “The basic message is, we’re all in this together.”
5
What did that mean, “we’re all in this together”? It was clear that the thirteen bankers needed the government. Only massive government intervention, in the form of direct investments of taxpayer money, government guarantees for multiple markets, practically unlimited emergency lending by the Federal Reserve, and historically low interest rates, had prevented their banks from following Bear Stearns, Lehman Brothers, Merrill Lynch, Washington Mutual, and Wachovia into bankruptcy or acquisition in extremis. But why did the government need the bankers?