How to Work Washington D C, or Whatever Pays
6-17-10 by Noam Schbeiber, author of The Escape Artists which is at googlebooks.com
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.