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The Breakup

Did Obama just dump his best friend on Wall Street?

Much has been made of the way Barack Obama has changed the sociology of the capital. There’s the shifting locus of social activity from Georgetown to Logan Circle, and the intrusion of two basketball hoops on the White House tennis court. But, even in Obama’s Washington, some of the old status symbols still matter. Take, for instance, the periodic ritual of the state dinner. In advance of such affairs, the most recent of which occurred in May, entrails-readers up and down the Amtrak corridor still scrutinize the guest lists. Invariably, they find hints about who the White House is courting (Chris Dodd, Anthony Kennedy) and who it may be shunning (no Lindsey Graham?). To this day, there’s still nothing like a state dinner sighting to shore up a hobbled official (Janet Napolitano), announce the arrival of an up-and-coming constituency (Univision anchor Jorge Ramos), or vouch for a wise man’s access (Mack McLarty … ?). The Salahis may be tacky, but fools they were not.

Coming as it did near the climax of the financial-reform fight, the May dinner held particular interest for a certain class of status-conscious gossip: Wall Street executives. Read one way, the guest list functioned as a crude, if not terribly surprising, guide to the administration’s financial-sector allegiances. Topping the list was Robert Wolf, CEO of UBS Americas, a longtime Obama fundraiser and confidant. Wolf was joined by James Gorman of Morgan Stanley, a firm with strong relationships at Treasury and the White House, and Brian Moynihan of Bank of America, whose bravery as a reformer Valerie Jarrett recently touted. Conversely, with his firm now shorthand for Wall Street double-dealing, no one should have been shocked to find Goldman Sachs CEO Lloyd Blankfein on the wrong side of the rope line.

But there was one invite decision that did seem vaguely curious: the omission of JP Morgan Chase CEO Jamie Dimon. Unlike Citigroup or Lehman Brothers, Dimon’s firm never teetered on the edge of collapse. Nor is JP Morgan run, à la Goldman, like a giant hedge fund backed by taxpayers. While the bank does have a significant trading operation, much of its revenue comes from dowdy loans to industrial companies and individual homeowners.

On top of which, Dimon is a longtime Democrat who traces his friendship with Obama back to Chicago, where he spent years running a predecessor company. For that matter, he’s not just any Chicago Democrat with ties to Obama, but one who’s spent the last few years painstakingly bolstering his bank’s presence in Washington. In 2007, Dimon famously told his board that the company’s government outreach was subpar and gave himself a “D” for his role in it. He elevated Bill Daley, the Democratic power broker who was then the bank’s Midwestern chairman, to his operating committee and handed him the government-relations portfolio.

This proved to be a coup when Obama won the presidency. Daley had doubled as the campaign’s co-chair. He’d been close to David Axelrod, Obama’s top adviser, for 30 years. He’d also helped revive the career of chief of staff Rahm Emanuel after Hillary Clinton exiled him from the White House inner sanctum in 1993. It was Daley who arranged to have Emanuel detailed to the administration’s NAFTA war room, which he oversaw. According to sources close to the administration, the Obama transition team approached Daley about becoming ambassador to China. (He declined.)

All of which is to say, if anyone should be attending a state dinner these days, it’s Dimon, whom The New York Times once dubbed “President Obama’s favorite banker.” And yet, as the months have passed, Dimon’s frustration over the direction of administration policy has become palpable. He sarcastically referred to Treasury Secretary Tim Geithner as “Timmy” at an industry event last June; in April, he derided the administration’s proposal for recouping bailout money as a “punitive bank tax.”

In turn, Team Obama has sometimes marveled at Dimon’s tone-deafness—“they don’t really understand how toxic they are,” one administration official complained to me—and distanced itself in ways subtle and not-so-subtle. It shut out the bank at key moments when crafting its financial overhaul and took a hard line when selling back the options on JP Morgan shares it acquired during the bailout. And then, there’s the state dinner snub. “It’s always easy to raise your profile in this environment,” says one politically astute financier. “It’s [not the same as] participating, making sure you’re in.” The executive continues: “Not being invited to the state dinner is not nice. They invited Bank of America.” In fact, one gets the sense that JP Morgan sees the White House elevation of Bank of America—a recent Bloomberg headline blared, “Moynihan Becomes Obama’s Top Wall Street Ally on Rules Overhaul”—as a thinly veiled reprimand.

It’s tough to make sense of all the back and forth. The White House has certainly styled itself as a bulwark against Wall Street excess. And Wall Street certainly bristles at the populist rhetoric and policy it sees emanating from the administration. But, as we reach the endgame on financial reform, just how frayed are Obama’s ties to the industry, really? When you consider the story of how the White House has treated its best friend on Wall Street, the relationship begins to resemble nothing so much as a high school romance. It turns out even the best friend doesn’t know if he’s been dumped.

Even among Wall Street Democrats, Dimon’s liberalism sometimes stands out. There are, for example, dozens of bank executives and money managers who fancy themselves progressives because they back gay marriage and buy carbon offsets, even as they equate income redistribution with socialism. Dimon, though a staunch civil libertarian, doesn’t define his progressivism so narrowly. “People are paying thirty percent taxes, forty percent taxes, making huge sums of money,” he told me in a recent interview. “You’ve got to stop complaining. It’s not just all about your own pocketbook.”

Dimon is a broad-shouldered, almost hulking presence, with a gray crown of hair and a face that can pass from stormy to serene and back in the course of a sentence. He spent his childhood in Queens, the grandson of a Greek immigrant, and at times still betrays an only-in-America-style wonderment at his family’s good fortune. “A lot of people died building this country,” he says earnestly. “All I’m saying is that people should acknowledge what this country gave them.” He speaks in a hurried staccato, with more than a hint of his outer-borough upbringing. He has the perpetually hoarse voice of a high school basketball coach.

There may be no better example of Dimon’s progressive instincts than JP Morgan’s approach to health care. When he took over as the company’s president in 2004, Dimon began requiring his highest-earning executives to pay substantially more in premiums than the average worker, so as to support their lower-paid colleagues. The company even features a strain of nanny-state paternalism. “[I]f a JP Morgan Chase employee has diabetes and we don’t see claims for insulin and for eye exams, they get a phone call,” he said at a recent health care conference. In the same speech, Dimon called for universal coverage and endorsed subsidies for those who couldn’t afford it.

In many ways, this is in keeping with the historical archetype of the Wall Street progressive. For over a century, the standard model of government engagement—largely refined at JP Morgan itself—involved a seamless blending of public and private interest. The tradition dates back to George Perkins, a top lieutenant to the company’s namesake and a friend of Teddy Roosevelt. As Ron Chernow notes in The House of Morgan, his history of the banking dynasty, Perkins was a prolific writer who helped promote Roosevelt’s evolving vision of bigness—big industrial trusts to power the economy and a big government to check them. Perkins dubbed it “socialism of the highest, best, and most ideal sort.” (Left unsaid was that the Morgans typically dominated the private side of this arrangement.) Successive generations of Morgan men faithfully hewed to this pattern, partly out of recognition that the country’s most powerful bank needed to be seen as acting in the nation’s interest so as to defuse populist resentment.

Dimon is as public-minded as any of his predecessors, arguably more so. “They played a constructive role during the crisis,” allows one administration official. At a meeting the day before Lehman collapsed, Dimon urged the assembled CEOs to pitch in for a private-sector bailout and started the bidding at $1 billion, according to Andrew Ross Sorkin’s Too Big to Fail. One month later, when Treasury Secretary Hank Paulson prevailed upon the chiefs of the nation’s nine biggest banks to accept $125 billion in government capital, he assumed Dimon would be a reliable “yes” even as many of his colleagues kvetched. “When the system is at the point of cardiac arrest, it’s a question of you got to do what you got to do,” Dimon told me. “You should not be selfish.” (It’s worth noting that JP Morgan did benefit from the crisis in a variety of ways, including gobbling up onetime rivals Bear Stearns and Washington Mutual at discount-rack prices.)

In certain respects, Dimon and JP Morgan have continued to be model citizens ever since. Back in 2008, Daley hired a veteran Democratic lawyer named Peter Scher to manage the company’s global government outreach day-to-day. Scher knew senior members of the Obama economic team from his tour as a Clinton administration trade official. He’d also managed John Edwards’s vice presidential campaign and stayed in regular contact after the 2004 election, helping Edwards beef up his foreign policy credentials and serving as president of his Center for Promise and Opportunity, an anti-poverty group. Scher would go on to achieve minor fame as the sage voice who, after learning of the Rielle Hunter affair, pleaded with Edwards to forgo a second presidential run.

Scher had been won over by Dimon’s belief, later articulated in a speech, that “[w]e corporate leaders have a responsibility to look beyond our own narrow, parochial interests ... [and] support policies that are good for our country.” Scher was part of a team that helped inject Dimon’s ideas into the health care debate. He brokered meetings with top administration officials on a range of issues, such as how to increase small-business lending.

And yet, for all his genuine desire to do good, Dimon stands apart from the archetype of the Wall Street progressive in one key way: The old Morgan men blurred the line between the bank’s interest and the country’s so thoroughly that even they couldn’t say where the first left off and the second began. The benefits of their relationships with government officials were usually unspoken, even unconscious, though they were no less real as a result. For his part, Dimon lacks the genteel grace of the famed Morgan partners. His manner doesn’t evince a patience for oblique, meandering courtships—he recently complained to a congressman that they were “legislating too much” before abruptly hanging up the phone. He is sometimes mystified by the ever-shifting coalitions that define Washington deal-making.

Unlike his Morgan predecessors, Dimon keeps two separate mental accounts—public and private interest—and is constantly, acutely aware of which actions fall where. When the two don’t conflict, Dimon is prepared to promote the public good as scrupulously as if he were president. But, when the public interest is at odds with JP Morgan’s, Dimon is not only the first to recognize it, he will weigh one against the other in near-clinical fashion. (Sorkin reports that Dimon stepped away from the October 2008 meeting with Paulson to tell his board the bailout would be “asymmetrically bad” for the company because it was healthier than its rivals.) If the costs to JP Morgan are more than incidental, or the threat to the financial system is less than existential, he will coolly resolve the tension in his own favor.

Dimon is plainly sincere when he urges his fellow CEOs to look beyond their parochial interests—he has done so over and over throughout his career. But looking beyond one’s parochial interests doesn’t preclude defending them as the need arises. And, over the last year and a half, Dimon has done so as fiercely and unapologetically as anyone on Wall Street, even when it’s meant taking on the party he helped put in power.

Outwardly, Dimon seemed to exult in the arrival of the Obama administration. He packed up his family and settled in for three days of inaugural festivities in Washington—a reception at the Mandarin Hotel one night, a dinner featuring the likes of Valerie Jarrett and Colin Powell the next.

Privately, though, he was concerned about what lay ahead. Dimon first made a name for himself helping to build what became Citigroup during the 1980s and ’90s. But, in 1998, when he was president and heir apparent to CEO Sandy Weill, the company abruptly fired him. The move came after months of bickering between the onetime mentor and protégé, but it still stung Dimon acutely. As he clawed his way back to the top of the industry, observers couldn’t help notice that he took special pride in besting his old firm. “His overwhelming desire was basically to prove that they were wrong to push him out,” says an administration official. Suddenly, the prospect of reform threatened everything he’d worked for.

While the country was buzzing over the inauguration, a group of lobbyists representing its biggest banks assembled in a sleek, wood-paneled conference room at the Washington law firm of Cleary Gottlieb to finalize their counter-strategy on reform. In moments of crisis, populists are almost always too quick to find cabals of bankers lurking around every corner. Cabals of bank lobbyists, on the other hand—well, that’s another story. Dimon’s troops had been at the center of the planning for months and helped lead the meeting.

The main component of the strategy involved derivatives, the financial instrument that allows investors to bet on the price movements of other assets, like stocks and bonds. The banks knew derivatives reform was coming: AIG had used them to bet on steadily rising housing prices, then suffered billions in losses when the real estate market tanked. Worse, AIG had nearly taken down several big firms on the other side of its bets when it couldn’t pay up. For the five major U.S. dealers that dominate the market—JP Morgan, Goldman Sachs, Citigroup, Bank of America, and Morgan Stanley—the problem was that derivatives represented billions in annual earnings. They wanted to limit the hit to their bottom line. (“Bank” and “dealer” are synonymous in this context.)

The solution was to embrace the practice of clearing—that is, posting collateral to a middleman, who can step in to make a company’s betting partners whole if the company melts down. To be sure, clearing was potentially costly: Research by the IMF suggests it could have forced the industry to raise an additional $200 billion in capital off the bat. But it was preferable to trading derivatives on exchanges, which would erode the margins the banks made connecting buyers and sellers and which many reformers were already advocating. The reason—and this is critical—is that the dealers reckoned they could finesse the new requirements and persuade Congress to exempt large classes of derivatives from them.

This is where a JP Morgan lobbyist named Kate Childress stepped in. Tall and blond, Childress had just joined the company. She was a Democrat in good standing—a former adviser to Chuck Schumer—and had worked on the Senate Banking Committee.

In regular conference calls hosted by an industry group in the weeks leading up to the Cleary Gottlieb meeting, Childress stressed the need to highlight the industrial companies that use derivatives to hedge risk rather than speculate-so-called “end users.” “JP Morgan, this was their ingenious contribution,” says one person on the calls. Anyone could see that the banks were reviled in the aftermath of the crisis. But the end users-like airlines, which use derivatives to lock in fuel prices—were sympathetic, and they hailed from every congressional district in the country. “What they wanted was, ‘Hey, let’s get the dopey end users to go out and be the face of reform,’” recalls another person who participated in the strategizing.“‘We don’t have the credibility.’”

Childress urged the other big banks to contact the chief financial officers of their corporate clients and warn that their derivatives could disappear or become prohibitively expensive unless they appealed to Congress. The other lobbyists assented. The hope, according to a source privy to the calls and to internal planning documents, was that pressure from end users would help preserve the status quo on the derivatives the dealers sold to firms like hedge funds—which is to say, many of their most lucrative bets. “What you really had was fear,” says this person, fear that the profits from derivatives would evaporate. “Anybody who has an idea was going to be listened to ... [and] Kate had conviction. She was very, very convincing.”

A handful of end users were on the initial calls and grumbled about their role in the plan. But, as a group, the end users did eventually become the public face of a well-financed campaign. Not long after the Cleary Gottlieb meeting, the bank lobbyists huddled again for a “pitch day” featuring a handful of p.r. firms. The firms were competing for a contract to boost the image of the derivatives industry by touting all the honest, job-creating end users who relied on them. Goldman and Credit Suisse joined JP Morgan in funding the blitz. (Citigroup and Bank of America steered clear of the p.r. project.)

Soon, the end users were flocking to Capitol Hill to plead for leniency. One congressional aide with years of experience in these issues told me he’d never heard the phrase “end user” before the summer, at which point it was cropping up everywhere. “From their perspective, that’s a fairly beneficial term. It seems to have caught on,” he said. By December, the campaign had paid dividends. The House passed a financial-reform bill that included an exemption not just for bona fide end users, but for any company that used derivatives to hedge “commercial,” “operating,” or “balance sheet risk”—a loophole wide enough to protect a variety of high-risk transactions among Wall Street firms. The industry assumed the regulations would weaken even further in the Senate, which is traditionally more industry-friendly.

To anyone paying attention, however, there were signs that the triumph could be short-lived. Last July, JP Morgan had invited Rahm Emanuel to appear at its board meeting in Washington. There was nothing especially sinister about the invitation. Emanuel had known Dimon since his days in the Clinton White House. He’d been friends with Daley even longer. In this case, both sides believed it would be helpful to compare notes on the economy. But, when news of the appearance hit The New York Times, Emanuel abruptly withdrew. By the time the House passed its reform bill five months later, the White House was at pains to avoid misjudging the popular mood again. The same weekend, Obama groused to “60 Minutes” that he “did not run for office to be helping out a bunch of fat cat bankers on Wall Street.”

If Dimon took these shots personally, it wasn’t hard to see why. On one level, the crisis brought him vindication. For years, he’d preached the virtues of conservative risk-management and a “fortress balance sheet” that would arm JP Morgan to withstand any turmoil it faced. He’d largely abstained as other banks gorged on subprime securities. When Weill’s chosen successor, Chuck Prince, resigned in disgrace from Citigroup in late 2007, Dimon was increasingly regarded as the industry’s best manager. “[His view is] the other guys screwed up—Citi and those idiots. We did well. Had I been there, they would have been fine,” says an administration official.

And yet, for all the adulation Dimon received on Wall Street, these distinctions largely eluded the public consciousness, to Dimon’s everlasting frustration. Indeed, if there was a common strand to Dimon’s comments after the crisis, it was his resentment over being viewed as a bailed-out CEO, when in fact he took the government money as an act of good faith—so that rivals who really needed it wouldn’t be stigmatized. (Of course, even JP Morgan’s unassailable balance sheet would have been assailed had the crisis spread further.) But, instead of being heralded for this public-mindedness, Dimon found himself the target of populist attacks and an escalating reform offensive. “The incessant broad-based vilification of the banking industry isn’t fair and it is damaging,” Dimon told The Wall Street Journal.

Around the time of Obama’s “fat cat” taunt, the Treasury Department began working to reverse the backsliding on derivatives. By late March, Treasury and its Senate allies had narrowed the loophole considerably. It narrowed even further as the White House weighed in after its health care success. Soon, Obama was vowing to “veto legislation that does not bring the derivatives market under control.”

At certain moments, the banks couldn’t tell if the administration was harnessing populist frustrations or getting pulled along by them. Administration officials seemed to relish pointing out the ways Wall Street was undermining reform. Deputy Treasury Secretary Neal Wolin dwelled on the “one point four million dollars per day already being spent ... by big banks and Wall Street financial firms” in a speech before the Chamber of Commerce. Whatever the case, the atmosphere was rapidly deteriorating. On a Sunday in mid-May, hundreds of protestors converged on Scher’s home in suburban Maryland.

The executives at JP Morgan reacted to these developments with growing dismay. Under Dimon, they’d heavily favored Democrats in their giving to congressional campaign committees. Last fall, the company held fundraisers for the campaign arms of both the House and Senate Republicans, according to sources familiar with the events. As one friend of Dimon’s told me recently, “It’s hard for him to support the people he thinks are out to crush his bank.”

Dimon’s lobbyists also dug in deeper. Congressional aides I spoke with proclaimed JP Morgan’s Capitol Hill contingent the most relentless in fighting reform. In April, Childress attended an event hosted by an industry group called the Financial Services Forum featuring Mark Wetjen, a senior aide to Senate Majority Leader Harry Reid. Reid had dispatched Wetjen to field questions from anxious industry officials, but Childress was not appeased. When it was her turn to speak, she grilled Wetjen so aggressively the other lobbyists in the room were practically speechless.

It’s doubtful that Jamie Dimon ever instructed his lobbyists to badger Senate staffers. And the company’s top government hands, Daley and Scher, are widely viewed as tactful. It’s their job to ease tensions in Washington, after all, not ratchet them up. But, given that members of the company’s high command visit the capital several times a month and take a hands-on role in the firm’s dealings there, it stands to reason that its rank-and-file operatives would channel their defiant stance.

If the story of JP Morgan and Barack Obama is the story of an awkward dance gone, well, painfully awkward, then the week leading up to Friday, January 22, may have been the most disorienting of all. Eight days earlier, the White House blindsided the banking industry by proposing a fee to recoup the $117 billion in government bailout money it deemed unlikely to be repaid. The fee would cost JP Morgan alone billions of dollars and prompted outrage up and down Wall Street.

Then, the following Thursday, two days after Scott Brown stunned the world by winning Ted Kennedy’s seat in Massachusetts, the White House unveiled the so-called Volcker Rule. The idea was to block federally insured banks from a lucrative activity known as proprietary trading—essentially making bets for their own bottom line. “When banks benefit from the safety net that taxpayers provide,” the president said, “it is not appropriate for them to turn around and use that cheap money to trade for profit.” He went on to denounce the “soaring profits and obscene bonuses” at banks that claimed they couldn’t afford to increase lending. The JP Morgan brass was alarmed.

The next day, though, it was as if all had been forgotten. The nomination of Ben Bernanke for a second term as Federal Reserve chairman was suddenly losing altitude in the Senate. For a brief moment, it looked like it might crash, something the administration feared could damage the financial markets. Treasury officials asked Scher if senior JP Morgan executives could call a few senators to help put the nomination back on track, which they agreed to do without hesitation. By the time the White House called the following Monday to invite Dimon to lunch, Bernanke’s nomination looked assured.

Which brings us to a final, enduring frustration for Dimon and JP Morgan: For all the friction in both directions, the company believes its relationship with the administration is actually far better than the White House and the media let on. One persistent source of annoyance is an April Wall Street Journal piece that played up a standoff between Emanuel and Daley over the administration’s proposed consumer agency. (Dimon et al say they aren’t wild about the consumer agency but have never been especially exercised by the idea; administration officials maintain that they encountered strong resistance from JP Morgan on the issue.) Dimon also chafes at the notion of a blowup during negotiations over the stock options Treasury acquired during the bailout, a staple of JP Morgan coverage this last year. “I think Tim Geithner and I would both say the same thing: It was not an issue,” Dimon told me. “We didn’t dig in on that thing.”

Broadly speaking, they have a point. Despite the occasional jab—or state dinner snub—the administration’s actions suggest it does consider JP Morgan to be a reasonable, often helpful interlocutor. In early June, for example, the Fox business website reported that JP Morgan had the “inside track” to become one of two lead underwriters for the government spinoff of General Motors. (Morgan Stanley will be the other.) The IPO is regarded as a real trophy on Wall Street; every major firm competed for the business. Suffice it to say, it’s hardly the kind of prize you bestow on public enemy number one.

Still, the aggrieved way in which Dimon takes the abuse Washington sometimes doles out suggests that the firm’s presence there will never be seamless. If you talk to Daley or Scher, they will instinctively minimize the company’s slights: Nothing they haven’t seen dozens of times, on either side of a government paycheck, maybe even instigated themselves. “We’re all adults,” says Daley. “We’ve all been through this stuff.” Scher seemed unfazed when I asked about the protestors who’d descended on his home last month. “I was mostly disappointed that these were the tactics the labor movement was now adopting,” he told me.

But there’s a part of Dimon that will never be at peace with playing the bad guy, never relent until he’s accorded due respect. “It’s never fair to punish everybody regardless of their behavior,” he told me at one point. “There are good banks and bad banks just like there are good politicians and bad politicians, and I’m not going to sit here and accept that somehow it’s OK.”

In fairness, Dimon is right: Tough-minded financial reform is a kind of collective punishment. It isn’t entirely fair to him. The mistake is to conclude that his singular successes justify the fight against it. In fact, they demonstrate the opposite. If every Wall Street executive were as exacting and farseeing as Dimon, Washington wouldn’t be obsessed with reform because the crisis wouldn’t have happened. But that’s obviously not the case. God help us if our plan going forward is to count on everyone acting like Jamie Dimon. Certainly Dimon himself, the preeminent risk manager of his generation, would never take such a chance. At least not if he were sitting on the other side of the table.

Noam Scheiber is a senior editor at The New Republic. 

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