By David Cho, Steven Mufson and Tomoeh Murakami Tse
Washington Post Staff Writers
Sunday, September 13, 2009
J.P. Morgan Chase for the first time convened its board in Washington this summer, calling the directors to a meeting at the downtown Hay-Adams hotel, then dispatching them to Capitol Hill for meet-and-greets.
Last month, a firm run by the billionaire investor Wilbur Ross hired the head of Washington's top mortgage regulator to pick through the wreckage of the housing bust looking for bargains.
And the world's largest bond fund, Pimco, which has traditionally assessed the risk of any new investment according to five financial criteria, recently added one more: the impact of any change in federal policy.
As financial firms navigate a life more closely connected to government aid and oversight than ever before, they increasingly turn to Washington, closing a chasm that was previously far greater than the 228 miles separating the nation's political and financial capitals.
In the year since the investment bank Lehman Brothers collapsed, paralyzing global markets and triggering one of the biggest government forays into the economy in U.S. history, Wall Street has looked south to forge new business strategies, hew to new federal policies and find new talent.
"In the old days, Washington was refereeing from the sideline," said Mohamed A. el-Erian, chief executive officer of Pimco. "In the new world we're going toward, not only is Washington refereeing from the field, but it is also in some respects a player as well. . . . And that changes the dynamics significantly."
Washington has become a dominant player. Over the past year, the Federal Reserve and the Treasury have injected trillions of dollars into frozen financial markets, snapping up unwanted bonds, extending guarantees to banks and slashing interest rates.
Three times as much U.S. taxpayer money has gone into propping up a single firm, insurance giant American International Group, as the world spent a decade ago during the financial rescue of South Korea, then the world's 11th-largest economy. And the emergency bailout of financial firms that Congress approved last year has cost nearly as much as the first five years of the war in Iraq.
Now the Treasury and the Federal Reserve are embroiled in everything from credit cards and home loans to auto manufacturing, from overseeing executive pay to shaping boards of directors.
In response, senior executives of major financial companies are traversing the Beltway to meet lawmakers in person for the first time. Firms such as Fidelity Investments, BNY Mellon and even Goldman Sachs, which has prospered in the crisis relative to many other banks, are opening additional offices or bulking up their staffs in the capital.
For decades, the federal government has played a key role in financial markets through regulation, public spending and monetary policy. But the government has now established itself as never before as the most dynamic actor in the still ailing economy. That prominence is sure to fade as the rescue programs wind down. Yet Wall Street executives say the legacy could be enduring.
The relationship "has changed in the sense that it's clear that every one of the firms, including Goldman Sachs, recognizes that they would not exist today had the government not stepped in when it did," one former senior bank executive said.
Aiming to avoid a repeat of the crisis, Obama administration officials, meanwhile, remain determined to overhaul the regulation of financial firms and markets. These measures, if enacted, would affect the essence of these businesses, altering what kind of activities they could pursue, how they would be shut down if they ran into trouble, and how much capital they must maintain, which directly influences profitability and their ability to lend.
"This crisis has and will fundamentally change the relationship between Wall Street and Washington for decades to come," said Richard H. Clarida, an assistant Treasury secretary under President George W. Bush who is now an economics professor at Columbia University. "It's often said that Wall Street is no longer the financial capital, that it's Washington, D.C., and that's certainly true. I don't think this is destined to change. I think this is going to be a fact of life."Washington Calling
Before the financial crisis, BlackRock's chairman Laurence Fink would speak with federal officials at most a few times a month, for instance when they called him in New York for information about mortgage markets or pensions funds or other areas in which his company was active. But now, as the chief executive of the nation's largest asset manager, Fink says he talks to officials at least once a day. He plans to open an office in Washington by next year to influence policy and has hired the lobbying powerhouse of Quinn Gillespie & Associates.
Three decades ago, Fink was a pioneer in bundling large numbers of mortgages, then slicing up these packages and selling off shares as securities. More recently, firms packaged subprime loans, which soured when the housing market collapsed, igniting the crisis.
So the Treasury and Fed have tapped Fink's expertise. BlackRock emerged as one of their principal advisers as the agencies bailed out major companies and tried to put a price on their toxic assets. BlackRock is also managing tens of billions of dollars worth of AIG assets for the government. In August, officials selected the company to help arrange the purchase, partly using taxpayer money, of toxic assets from banks.
"We made ourselves available on issues that many people don't understand," Fink said.
Although BlackRock, which avoided the plague of toxic assets, has turned to Washington by choice, some firms have been forced to Washington.
Take Citigroup, which has allowed its general counsel to move his office from Midtown Manhattan to a penthouse atop a historic Beaux-Arts building on Pennsylvania Avenue. The bank, whose executive board chairman was former Treasury secretary Robert E. Rubin, is no stranger to Washington. But badly hit by toxic assets during the mortgage meltdown, Citigroup received $45 billion in infusions from the Treasury and in return gave the government a majority ownership.
Steps from the Citigroup offices, Lone Star Funds, a Dallas-based private-equity fund, has opened an office on 13th Street Northwest for its general counsel and a banking executive as the firm seeks to expand its investments in distressed assets.
"The federal government has really become a central figure in commerce . . . and we wanted to make sure we're really in tune with them and readily accessible," said Michael Thomson, Lone Star's general counsel and a Treasury official in the Clinton administration. "I predict we'll maintain a presence here moving forward. We'll change the way we do business in the U.S."
So, too, for Fink, who said much hinges on his relationship with Washington. He often has talked to White House chief of staff Rahm Emanuel, Treasury Secretary Timothy F. Geithner and his predecessor, Henry M. Paulson Jr. Fink was among the first regulators reached out to when they needed urgent advice on pricing exotic securities or predicting the global fallout from the failure of large financial firms like Lehman Brothers.
"We are going to be spending more time inside the Beltway, either by helping the government or, if we are asked, shaping policy and decisions," Fink said. "It is beholden on us on behalf of our clients to have input in Washington."The Talent Search
Some firms are bringing Washingtonians to them.
A year ago, James B. Lockhart III was the top federal regulator overseeing Fannie Mae and Freddie Mac when the Bush administration seized the two mortgage finance companies, saving the home loan market from collapse. When Lockhart said last month that he would step down from the Federal Housing Finance Agency, he was snapped up quickly. Today he is vice chairman of WL Ross, which is looking to make money by buying mortgage assets and loans cast off by lenders as unprofitable.
Officials such as Lockhart have become hot commodities. The revolving door between government and business is not new, and connections inside Washington have long been a calling card in the private sector. But some executives say the qualification Wall Street now covets is a fine-grain understanding of how regulators are managing the mortgage market and planning for its transformation.
Lockhart's "expertise is what we are interested in," said Wilbur Ross, who hired the former regulator. "He's looked at an awful lot of mortgages, given the regulatory background he has. We are very interested in his expertise as opposed to his connections."
Other former federal officials are scrambling for a piece of the action. Joseph J. Murin, former president of Ginnie Mae, which guarantees securities linked to government-backed mortgages, and former Federal Housing Administration commissioner Brian Montgomery, set up a consulting shop on L Street in mid-August.
The office door of their firm, the Collingwood Group, still has no sign. The walls are bare. Last week the coffee machine arrived, but not the filters. But calls are coming in from bankers and other investors outside Washington who are looking, for instance, to buy or sell loan portfolios and want someone with trained eyes to help evaluate their worth.
For Ross's firm, the government itself has become a vital business partner. The company, for instance, recently bid on a portfolio of toxic mortgages that came from a failed bank and were auctioned off by the Federal Deposit Insurance Corp. The Treasury also selected WL Ross to manage government efforts to buy distressed mortgage-backed securities.
"Washington is the new Wall Street," Ross said. "No major capital transactions appear to occur without the intervention of Washington. To the degree that becomes a permanent part of the landscape is the question."A Changed Relationship
Out of sight is not out of mind.
In their Los Angeles office, the managers of bond giant Pimco hold three-hour meetings four times a week to analyze investments, evaluating factors like growth potential and creditworthiness. Decisions made 3,000 miles to the east also loom large. "We're having to think much more about the role of government in the economy," said el-Erian, the chief executive.
For example, Pimco projected late last year that the Fed, seeking to support the residential mortgage market, would intervene and buy home loans. So the bond firm invested in mortgages, benefiting when the Fed indeed acted. By contrast, Pimco avoided buying General Motors bonds in the months before the government bailed out the automaker. Pimco feared bondholders would suffer in a federal takeover, and they later did.
As much as financial firms have watched Washington, the federal government has been using its new leverage to demand intelligence from Wall Street about prospective deals, major hirings and executive compensation.
Never before have public officials been in a position to extract these private details, and that change alone testifies to the new terms of this relationship.
As a leading financial lobbyist put it: "The industry is bending over backward to give policymakers at Treasury and elsewhere a heads-up on . . . any big thing that's going on."
Tse reported from New York.