A Champion of Wall Street Reaps Benefits
The New York Times by ERIC LIPTON and RAYMOND HERNANDEZ - December 14, 2008
“We are not going to rest until we change the rules, change the laws and make sure New York remains No. 1 for decades on into the future.”
— Senator Charles E. Schumer, referring to financial regulations, Jan. 22, 2007
WASHINGTON — As the financial crisis jolted the nation in September, Senator Charles E. Schumer was consumed. He traded telephone calls with bankers, then became one of the first officials to promote a Wall Street bailout. He spent hours in closed-door briefings and a weekend helping Congressional leaders nail down details of the $700 billion rescue package. The next day, Mr. Schumer appeared at a breakfast fund-raiser in Midtown Manhattan for Senate Democrats. Addressing Henry R. Kravis, the buyout billionaire, and about 20 other finance industry executives, he warned that a bailout would be a hard sell on Capitol Hill. Then he offered some reassurance: The businessmen could count on the Democrats to help steer the nation through the financial turmoil. “We are not going to be a bunch of crazy, anti-business liberals,” one executive said, summarizing Mr. Schumer’s remarks. “We are going to be effective, moderate advocates for sound economic policies, good responsible stewards you can trust.” The message clearly resonated. The next week, executives at firms represented at the breakfast sent in more than $135,000 in campaign donations.
Senator Schumer plays an unrivaled role in Washington as beneficiary, advocate and overseer of an industry that is his hometown’s most important business. An exceptional fund raiser — a “jackhammer,” someone who knows him says, for whom “ ‘no’ is the first step to ‘yes,’ ” — Mr. Schumer led the Democratic Senatorial Campaign Committee for the last four years, raising a record $240 million while increasing donations from Wall Street by 50 percent. That money helped the Democrats gain power in Congress, elevated Mr. Schumer’s standing in his party and increased the industry’s clout in the capital. But in building support, he has embraced the industry’s free-market, deregulatory agenda more than almost any other Democrat in Congress, even backing some measures now blamed for contributing to the financial crisis.
Other lawmakers took the lead on efforts like deregulating the complicated financial instruments called derivatives, which are widely seen as catalysts to the crisis. But Mr. Schumer, a member of the Banking and Finance Committees, repeatedly took other steps to protect industry players from government oversight and tougher rules, a review of his record shows. Over the years, he has also helped save financial institutions billions of dollars in higher taxes or fees. He succeeded in limiting efforts to regulate credit-rating agencies, for example, sponsored legislation that cut fees paid by Wall Street firms to finance government oversight, pushed to allow banks to have lower capital reserves and called for the revision of regulations to make corporations’ balance sheets more transparent.
“Since the financial meltdown, people have been asking, ‘Where was Congress? Why didn’t they see this coming? Why didn’t they provide better oversight?’ ” said Barbara Roper, director of investor protection for the Consumer Federation of America. “And the answer for some, including Senator Schumer, is that they were actually too busy pursuing a deregulatory agenda. Their focus was on how we have to lighten up regulation on Wall Street.” In recent weeks, Mr. Schumer has worked closely with the Bush administration to try to mitigate the damage to New York’s financial institutions. And as members of Congress and President-elect Barack Obama have called for new regulations to prevent future upheavals, Mr. Schumer has endorsed the need for reforms while still trying to make them palatable for Wall Street. Calling himself “an almost obsessive defender of New York jobs,” Mr. Schumer has often talked of the need to avoid excessive regulation of an industry that is increasingly threatened by global competition. At the same time, Mr. Schumer has cast himself as a populist who looks out for the middle class.
In an interview, Mr. Schumer said that until the recent market turmoil, he did not fully appreciate how much risk Wall Street had assumed and how much damage its practices could inflict on ordinary Americans. “It is a learning process, no question about it, an evolution,” he said, adding that he now believed that investors and homeowners must be better protected. But he defended his record. “Wall Street and Main Street are tied together,” he said. “Often times, they are not in conflict. When they are in conflict, I tend to side with Main Street.” While Mr. Schumer has taken some pro-consumer stances, his critics fault him for tilting too far toward Wall Street in balancing his responsibilities. “He is serving the parochial interest of a very small group of financial people, bankers, investment bankers, fund managers, private equity firms, rather than serving the general public,” said John C. Bogle, the founder and former chairman of the Vanguard Group, the giant mutual fund house. “It has hurt the American investor first and the average American taxpayer.”
Navigating the Street
Brash and brainy (perfect SATs and double Harvard degrees), Chuck Schumer, now 58, learned early in his career how to talk to the financiers and chief executives who would become a vital constituency for him. Though he did not grow up in that world — his father owned a small exterminating business in Brooklyn — he quickly showed a keen grasp of complex financial issues. And, recognizing how central Wall Street is to the city’s economy, he committed himself to keeping it strong. “So much of what happens in this town is because we are the world financial center,” Mr. Schumer said at City Hall in January 2007. “It helps support our museums, it provides the tax base for schools and health care. If we lose being the financial center, the rest goes down the drain.” Soon after arriving in Congress in 1981, Mr. Schumer snared a seat on the Financial Services Committee, which he viewed as the best way to help New York. While reliably liberal on many social issues, he established himself as a pragmatic Democrat willing to align with powerful business interests. Mr. Schumer’s political rise — he moved in 1999 to the Senate, where he now has a party leadership post — paralleled Wall Street’s growing influence in Washington. As more Americans invested in the markets and financial institutions had a greater global reach, the industry came to rival the manufacturing sector as a driving force of the United States economy. And in the 1990s, Democratic officials developed close links to a new generation of Wall Street leaders — labeled “New Moneycrats” by one author — who shared a free-market agenda.
Mr. Schumer became a magnet for campaign donations from wealthy industry executives, including Jamie Dimon, now the chief executive of JPMorgan Chase; John J. Mack, the chief executive at Morgan Stanley; and Charles O. Prince III, the former chief executive of Citigroup. And he was not at all reluctant to ask them for more. Donors describe the Schumer pitch as unusually aggressive: He calls repeatedly to suggest breakfast or dinner, coffee or cocktails. He enlists intermediaries to invite prospects to events and recruits several senators to tag along. And he presses for the maximum contribution — “I need you to max out,” he is known to say — then follows up by asking that a donor’s spouse and four or five friends write checks, too. “He was probably the kid that sold the most candy in grade school,” said Julie Domenick, a Democratic lobbyist who has given to the senatorial campaign committee. “He is not shy.” Mr. Schumer, in the interview, acknowledged his full-speed-ahead approach. “Any job I do, I work hard at and I try to succeed at,” he said. As a result, he has collected over his career more in campaign contributions from the securities and investment industry than any of his peers in Congress, with the exception of Senator John F. Kerry of Massachusetts, the Democratic nominee for president in 2004, according to the Center for Responsive Politics, which analyzed federal data. (By 2005, Mr. Schumer had so much cash in reserve that he shut down his fund-raising efforts.)
In the last two-year election cycle, he helped raise more than $120 million for the Democrats’ Senate campaign committee, drawing nearly four times as much money from Wall Street as the National Republican Senatorial Committee. Donors often mention his “pro-business message” and record of addressing their concerns. John A. Kanas, the former chief executive of North Fork Bank, said: “He would solicit my opinion, listen to my advice and he appeared to take it into consideration.” Lee A. Pickard, a lawyer representing clients including the Bank of New York, whose employees have been significant donors to Mr. Schumer and other Senate Democrats, turned to Mr. Schumer last year to successfully beat back a regulatory initiative by the Securities and Exchange Commission. “If you get Chuck Schumer on your side, you are O.K.,” he said. That may help explain why some of the wealthiest financiers in Manhattan attended the Sept. 22 breakfast hosted by Mr. Kravis at his office overlooking Central Park. A Republican with long ties to the Bush family, Mr. Kravis spent much of this year trying to help Senator John McCain, the eventual Republican nominee for president.
But last year, Mr. Kravis went to Capitol Hill to oppose a proposal that would have more than doubled taxes for executives at hedge funds and private equity firms like his, costing them up to $25 billion over 10 years. Mr. Schumer had said publicly he would support the measure only if it also applied to executives at energy, venture capital and real estate partnerships, and he introduced alternative legislation that would do just that. His position was identical to that of lobbyists for a group paid by Mr. Kravis and other finance industry executives.
The Schumer bill, called a “poison pill” by the leading Republican advocate of the tax increase, went nowhere after provoking opposition from an array of industries. At the breakfast meeting, Mr. Schumer, accompanied by fellow Senate Democrats Kent Conrad of North Dakota and Maria Cantwell of Washington, assessed the political landscape as debate over the bailout was beginning. “On the right, you have those who view any government intervention as a threat to free markets,” one executive recalled Mr. Schumer explaining. “On the left, you have people who choose to view this as a government handout to the rich. In the middle, you have everyone who knows and takes the Treasury secretary seriously and recognizes that if something is not done here, we could be staring into an abyss.” Within days, the businessmen sent out checks to the Senate campaign committee.
‘Their Go-To Guy’
To Christopher Cox, the Republican chairman of the Securities and Exchange Commission, the need for action was obvious in the spring of 2006. His agency, which would later be criticized for a 2004 ruling that let banks pile up debt, had grown deeply concerned about lack of oversight of the nation’s largest credit-rating agencies, like Standard & Poor’s and Moody’s Investors Service. Linchpins of the financial system, their ratings are vital to safeguarding investors by evaluating the risks of bonds and other debt. After the collapse of Enron and WorldCom, which had repeatedly been awarded favorable ratings, the agencies had agreed to meet voluntary standards.
But the S.E.C. concluded that those agreements were inadequate, so Mr. Cox urged Congress to give his agency oversight powers. “Without additional legislative authority, the S.E.C. will not be able to regulate in a thoroughgoing way,” he told the Senate banking committee at an April 2006 hearing. The plan drew broad, bipartisan support on Capitol Hill. But executives at the credit-rating agencies soon began pressing Mr. Schumer and other allies in Congress to block the proposal or at least limit its reach, according to current and former employees. “They knew Schumer would support them,” said one former Moody’s executive, who asked not to be named because he still works in the industry. “He was their go-to guy,” the executive said. While the Manhattan-based agencies were not significant campaign donors to Mr. Schumer or the Senate campaign committee, their lobbyists and many of their clients were.
At that time, revenues for the agencies were skyrocketing. The housing market was robust, and Wall Street investment firms were paying the agencies to rate various mortgage-backed securities after first advising the firms — and also collecting fees — on how to package them to get high credit ratings. It was an obvious conflict of interest, financial experts now say. Despite their high ratings, many of those securities, based on risky loans, would prove worthless, roiling markets and threatening financial institutions worldwide. But Mr. Schumer argued that the companies voluntarily met requirements to eliminate such possible conflicts. He suggested that regulators simply encourage competition and disclosure of agencies’ ratings methods. There was perhaps no need for an intrusive new law, he said in the spring of 2006. “They’ve implemented their codes of conduct,” Mr. Schumer told Mr. Cox at a Senate hearing. “They’re making good-faith efforts.”
Mr. Schumer could not stop the legislation from passing, but he managed to get the measure amended so that it explicitly prohibited the S.E.C. from regulating the procedures and methods the agencies use to determine ratings. Richard Y. Roberts, a former S.E.C. commissioner, said the amendment Mr. Schumer won was troubling, adding that it could block the S.E.C. from punishing a credit-rating agency that consistently issued unreliable ratings. Sean J. Egan, managing director of a small Pennsylvania agency, Egan-Jones Ratings, and a proponent of the tougher regulations, was more blunt. “The bill was eviscerated,” he said. “You have stripped away basic safeguards for the investors.” At times in Congress, Mr. Schumer has teamed up with Republicans, like former Senator Phil Gramm of Texas, who aggressively promoted a free-market agenda. Mr. Schumer pushed for the Gramm-Leach-Bliley law, passed in November 1999, which knocked down the walls between investment banks and commercial banks and allowed financial supermarkets to flourish. The law also weakened regulatory oversight by fracturing it among different agencies.
But those efforts mostly affect commercial banks and mortgage lending operations around the country and in New York, not the securities and investment businesses in Manhattan. “He built his career in large part based on his ties to Wall Street,” said Christopher Whalen, managing director of Institutional Risk Analytics, which advises investors on the regulatory system. “And he has given the Street what it wanted.” Mr. Schumer, though, has a surprising defender in Alfonse M. D’Amato, the onetime Republican senator he ousted. “Don’t take someone to task simply because a group has supported him politically and now he supports legislation that helps them,” Mr. D’Amato said. “The question is, is the legislation good or bad? With Chuck, it is clear he tries to do what is best for the state and city as a whole.”
Doling Out Criticism
For Mr. Schumer, Wall Street’s crisis has been especially painful to watch. “It is horrible, just awful,” he said in the interview. “And it affects everybody.” And he has already begun identifying those he faults for the devastation. Subprime lenders top the list, but he has lashed out with particular fury at the credit-rating industry, which he once defended but now says misled him and the investing public. “The work at these ratings firms was severely compromised, and the companies were some of the biggest contributors to the current financial crisis,” Mr. Schumer said earlier this month in response to an S.E.C. move that same day to tighten control over the agencies. “The lesson from this is that the three major firms’ stranglehold on the ratings industry must be loosened.” Mr. Schumer has also blamed the Bush administration for its push to ease rules. “After eight years of deregulatory zeal by the Bush administration, an attitude of ‘the market can do no wrong’ has led it down a short path to economic recession,” Mr. Schumer said on the Senate floor in September. He has not assigned responsibility to himself or fellow Democrats, saying he had no way of knowing of the misdeeds going on on Wall Street. “I wish I was omniscient,” he said. “I’m not.”
Since the economy began to fall apart, Mr. Schumer has joined others in calling for new regulations to combat abuses. He has proposed tougher rules for credit-rating agencies, even changing the way they are paid so they are compensated by investors, not by the companies they are evaluating. He has said he is open to imposing regulations on hedge funds, which currently operate with limited government oversight. And while he previously succeeded in limiting consumers’ rights to sue financial institutions, he says he now favors offering that remedy in certain circumstances. But he is also warning that any new rules must be carefully crafted so they don’t impose excessive burdens. “You need to provide safety and security to investors in order to attract them to the markets,” Mr. Schumer told Wall Street executives in a speech last month. “On the other hand, you must be sure that regulation does not snuff out the entrepreneurial vigor and financial innovation that drives economic growth and makes financial institutions successful and profitable.” And he is seeking some regulatory concessions for some Wall Street supporters. He has proposed, for example, that the government lift a cap on how big the giant banks can get, an issue important to institutions like JPMorgan Chase. Lifting the cap would allow the biggest banks to absorb weaker ones, but it would also limit competition and increase the risks to the financial system posed by failure of one of the giants.
Mr. Schumer is also calling for the adoption of European-style regulations that impose far fewer rules and instead require banks to meet certain performance standards, a system institutions generally prefer but some banking experts criticize as not rigorous enough. In recent weeks, Mr. Schumer has listened to Wall Street leaders for advice on what should come next. At a dinner at Morgan Stanley’s headquarters the night before the presidential election, John Mack, the chief executive, and a dozen top hedge fund officials talked with Mr. Schumer about possible changes affecting their industry. “People feel like he is going to be fair and reasonable,” said one Morgan Stanley executive, who asked not to be identified because the session was private. “He is mindful that this is a very big part of his constituency — Wall Street.” Griff Palmer contributed reporting from New York.