TED’S FIRST DAY in the Senate was January 16, 2009. Biden and fellow Delaware senator Tom Carper escorted Ted onto the Senate floor, where Vice President Dick Cheney (in one of his last official acts) swore him into office. For the rest of Ted’s time in office, the official photograph of Ted’s large family standing in the Old Senate Chamber—where the Senate met from 1810 to 1859—had a “Where’s Waldo?” quality. Admiring visitors (mostly Democrats) almost always did a double take when they suddenly spotted Dick Cheney standing next to Ted, Biden, and Ted’s wife, Lynne.
After Ted had been sworn in, I watched from the Senate gallery as Senator Carper made generous welcoming remarks about Ted. We had hundreds of people waiting for Ted at a reception, and I could tell he was trying to figure out how to leave. Ted told me later Biden grabbed his arm and said, “Ted, you can’t leave while Senator Carper is speaking.” So Ted listened to Senator Carper. Ted had never before spoken on the Senate floor, so Biden grabbed Ted again and whispered, “Ted, when he finishes, pick up the microphone, right here” on one of the desks in the back “and say something nice about Senator Carper.” So Ted picked up the microphone and said some nice things about Senator Carper. Then Ted went to the party and everyone commented, “Boy, you really looked like you knew what you were doing on the Senate floor.” Ted said, “Well, if you’re going to be staffed, you might as well be staffed by a vice president.”
Each time Ted did something as a senator for the first time, it was an emotional milestone. His first caucus lunch (held on Tuesdays) with the other Democratic senators. His first vote. His first floor speech. We all had lumps in our throats. For every Senate staffer, Ted was a kind of hero, the one who had made it. All those years he had waited in the wings, all those times he had stayed behind, while Biden had gone to the Senate floor, the hearing room, the TV interviews, were behind him.
In January, Senator Kaufman and I walked over to the Judiciary Committee hearing room for the first time. Once there, Ted mentioned his views on prosecuting Wall Street fraud to Bruce Cohen, chief counsel to the committee’s Chairman, Pat Leahy (D-VT), and then to Leahy himself. The timing was perfect. Leahy and Senator Chuck Grassley (R-IA) had been working on a bill entitled the Fraud Enforcement and Recovery Act, known as FERA. FERA was designed to give $165 million in additional resources to investigators and prosecutors to target financial fraud in connection with the financial crisis. Leahy immediately asked Ted whether he wanted to join as the third coauthor, and so the legislation became a Leahy-Grassley-Kaufman bill. Maybe we would pass a bill with “Kaufman” on it, after all. And this was only our first day. We’d said to Delawareans: Ted will hit the ground running. He did.
Leahy scheduled a hearing—styled as “The Need for Increased Fraud Enforcement in the Wake of the Economic Downturn”—to demonstrate the need for the additional funds. The witnesses included John S. Pistole, deputy director of the Federal Bureau of Investigation, and Rita Glavin, acting assistant attorney general for the Criminal Division of the U.S. Department of Justice. It was one of Ted’s first hearings as a senator, and we’d worked carefully on his opening statement, which he practiced out loud in his office. The staff also suggested questions for Ted to ask, but Ted was determined to wing it and only ask brief questions based on what he learned at the hearing. Privately he said he was determined not to bloviate for the cameras, as he’d seen so many other senators do over the decades, but instead actually use the hearing as a learning experience.
Biden, a former stutterer, used to go through a speech draft and draw a slash after each phrase where he wanted to pause and breathe. It helped him not to rush his delivery and to give the statement a more natural-sounding rhythm. Ted did the same thing, striking with his pen a bit nervously as he worked his way through the pages.
When we arrived at the hearing, Leahy and Grassley were the only senators there. Ted’s place along the curved committee dais was at the end of the Democratic quarter-moon, and that’s where his nameplate was resting. Leahy motioned for Ted to sit next to him, so I walked over and grabbed the nameplate and brought it over before taking my seat along the wall, just behind my new boss. Chairman Leahy, as a courtesy, let Senator Grassley speak first. Leahy, a former prosecutor himself, went next. He recalled the Savings and Loan crisis of the 1980s and early 1990s and how the Judiciary Committee had helped to “rebuild the Department of Justice’s ability to enforce fraud laws” after that national fiasco. As for the current financial crisis, Leahy believed that lax supervision in the mortgage industry had created an atmosphere of “Hey, come on in, fraud is welcome,” and that “Wall Street financiers” had contributed to the disaster. Looking squarely at the witnesses, he concluded by saying that if anyone involved in the crisis committed fraud, “I want to see them prosecuted, and I want to see them go to jail.” Then it was Ted’s turn.
Ted began: The behavior of Wall Street bankers, credit rating agencies, mortgage brokers, and others all over the country came together in a complicated “confluence of factors” that led to the financial crisis. “I just have one overriding question,” Ted said, pausing for dramatic effect. “Was any of that behavior illegal?”
The answer, he knew, was complicated. “As Attorney General Eric Holder said at his swearing in ceremony, ‘only by drilling down’ into Wall Street actions can we get to the bottom of it.” Ted wanted to ensure that Congress gave investigators and prosecutors all the resources they needed to determine—repeating his main question—“whether any behavior was illegal.”
In her testimony, Acting Assistant Attorney General Glavin laid out an impressive array of activist adjectives: the financial crisis demanded an “aggressive” and “comprehensive” response by law enforcement, a “vigorous” effort. She assured the committee that the department understood, as the attorney general had said, that it “must reinvigorate” its capacity to investigate financial fraud.
Leahy elicited an important comparison from Deputy Director Pistole. After the S&L crisis, the FBI had had 1,000 agents and analysts working on twenty-seven strike forces to target criminal activity. At the time of this hearing, Pistole said, the FBI had only 240 agents targeting financial fraud. And the fraud potentially involved in the current financial crisis, Pistole said, “dwarfs” that of the S&L crisis. Pistole also reminded the committee that the FBI had warned Congress several years ago about the increase in mortgage fraud. Pistole quoted the testimony in 2004 of former FBI Assistant Director Chris Swecker before the House Financial Services Sub-Committee:
If fraudulent practices become systemic within the mortgage industry and mortgage fraud is allowed to become unrestrained, it will ultimately place financial institutions at risk and have adverse effects on the stock market.
What’s transpired since then, Pistole said, has been far worse than Swecker had predicted.
What had happened in fraud law enforcement since the S&L crisis and since Swecker’s prediction in 2004? Not only did the FBI have far fewer agents working on financial fraud, but, in the run-up to the disaster, the law enforcement and regulatory system had failed to heed clear FBI warnings that mortgage fraud could become epidemic.
When it was his turn to question, Kaufman stated the obvious: “Clearly there are not enough agents.” He wanted to know why. After 9/11, Pistole said, more than two thousand agents had been shifted to counter terrorism, and so the number of agents dedicated to investigating financial fraud was only a “fraction” of the number it had taken successfully to investigate S&L crimes. I cringed. No one would say it out loud, but America’s aggressive (and perhaps excessive) response to foreign-bred terrorism had left it vulnerable to a home-grown fraud attack.
Ted asked Pistole whether the FBI would assign more agents to fraud and how it intended to enhance its ability to investigate complex, sophisticated financial transactions. Pistole answered that a “cadre” of agents had “honed and refined” their ability to understand complex financial fraud in the Enron case. The FBI would build on this cadre by hiring and training new agents. But Enron was one company. The potentially fraudulent mortgages that Wall Street had bundled and resold as securities had pervaded the banking and insurance industry in the U.S. and abroad. The FBI’s then-dedicated resources looked inadequate for the mountain of potential fraud that needed to be investigated. Pistole testified that the FBI had already opened more than 530 corporate fraud cases, “including thirty-eight corporate fraud and financial institution matters directly related to the current financial crisis.” Thirty-eight directly-related cases sounded like a lot and gave us some comfort, although Pistole warned that “the increasing mortgage, corporate fraud, and financial institution failure case inventory is straining the FBI’s limited white-collar-crime resources.”
Ted next asked Acting Assistant Attorney General Glavin whether it mattered that some of the fraud may have occurred in the derivatives market, which was unregulated. Would that diminish a prosecutor’s ability to bring a fraud case against derivatives transactions? Glavin said no. Under federal mail-and-wire fraud statutes, for example, if you tell a lie over the phone or through the mail, you’re subject to criminal prosecution. That the market was unregulated shouldn’t matter.
After the hearing, in Ted’s view, Congress couldn’t pass FERA soon enough. Most of the bill had already been written by the time he joined Leahy and Grassley, so, with Leahy’s strong encouragement, Ted put himself at the head of sales.
First, we came up with a catchy theme: “People know that if they rob a bank, they’ll go to jail. Bankers should know that if they rob people, they’ll go to jail, too.” He wrote an op-ed for the Philadelphia Inquirer, which the newspaper headlined “Punish All Who Caused Crash” and ran next to a cartoon of a fat banker behind bars. He went to the Senate floor and thundered that this is a test of whether we have two justice systems in this country. The New York Times ran a Kaufman piece about FERA, which ended with the words: “For the markets to flourish again, the American people must be confident that we indeed have one system of justice in this country—whether for Wall Street or Main Street.”
One of my law school classmates, Carlos Watson, was cohosting a mid-morning show on MSNBC, so I asked him to invite Ted on. Ted was a natural and struck the tone of a sheriff: “If people on Wall Street broke the law, we need to throw ’em in jail.” More political and business shows on cable TV started inviting him on air. Not long after, the wife of another freshman senator met Ted and said to her husband, “He just got here, and he’s already on TV.”
In every TV interview, opinion piece, and speech, Ted made it clear that FERA funds would be used to catch the big fish on Wall Street who’d committed fraud, not small-fry mortgage hucksters. FERA, Ted said, was about “fighting the fraud on Wall Street, specifically in the buying, bundling, and selling of mortgage-backed securities.”
In early March 2009, all the freshman senators met with the Federal Reserve chairman and the Treasury secretary. Ted reported back that Bernanke and Geithner were very concerned. On March 2, AIG had reported it had recorded a $61 billion loss in the fourth quarter of 2008. The next day, Treasury had announced an additional $30 billion in assistance to AIG, on top of the $150 billion it had already extended. Ted and others were wondering, “How could AIG lose $61 billion?” Bernanke and Geithner simply didn’t know who held the credit-default swaps. There were similar problems in England, in Iceland, and at the Bank of Scotland. Ted said: “It was like a friend of mine who has this oak tree out in front of his house, a gigantic tree, and the tree is surrounded by a driveway. The roots were coming up and knocking out the driveway. But when they tried to put a new driveway in, they didn’t know where the roots went. The roots went all over. I think that’s how Bernanke and Geithner felt.” On March 9, a few days after that meeting, the stock market reached its post-crisis low, with the Dow at 6,547.
On April 27, the FERA bill sailed through the Senate (ninety-two to four). The House then passed a similar bill. Congress, on both sides of the aisle, wanted to appear tough on sophisticated financial crime. FERA wasn’t solely about adding resources. It included a few legislative tweaks that would help prosecutors in future cases. It also established the Financial Crisis Inquiry Commission, which was tasked with examining the causes of the financial crisis. But the heart of FERA, and the reason Kaufman promoted it so passionately, was its promise of substantial new resources to fight financial crime—resources needed to counteract the post-9/11 neglect of financial fraud.
We were thrilled to have chalked up a major legislative victory so soon, and for Ted to have played a significant role. Ted was invited to stand behind the president at the White House bill-signing ceremony on May 20, 2009, a rare and perhaps unprecedented honor for a freshman senator who had been in office for only four months. We felt good. We’d come into government determined to do something about financial fraud. And we’d already helped pass a landmark bill.
After the signing ceremony, our press release said: “Today marks a turning point for American confidence in our financial system. Our law enforcement agents and prosecutors will soon have the resources and training they need to find, prosecute, and jail those who committed financial fraud. Those who illegally lined their pockets and left investors—and millions of Americans—with the devastating consequences, will pay the price.”
We were naïve. The bloom started to come off the rose during the appropriations process, in which bills are passed to fund the spending amounts that prior legislation (like FERA) had only authorized. Although decades in Washington had taught Ted and me that authorization isn’t necessarily followed by appropriation, we were shocked to find that the Appropriations Committee wasn’t about to appropriate an additional $165 million to the Justice Department. Those funds would have to come from somewhere else, and there was simply no will or apparent ability to find them.
By that time, we’d hired Geoff Moulton as Ted’s chief counsel to the Judiciary Committee. Geoff had many years of experience as an assistant U.S. attorney in Philadelphia (for a time, he was Beau Biden’s boss) and had clerked on the Supreme Court for Chief Justice William Rehnquist. Geoff is a brilliant, even-keeled attorney. He was Ted’s representative to Senator Barbara Mikulski (D-MD), chair of the Appropriations Subcommittee for Commerce, Justice, and State Department budgets.
Geoff reported to Ted and me that he had argued calmly and repeatedly to the Mikulski staff that Congress had just responded to a national crisis—in a very high-profile way, with a signing ceremony with President Obama at the White House—by authorizing $165 million for additional investigators and prosecutors, who were urgently needed, and it would be unconscionable for the appropriators not to follow through. He even pointed out that Mikulski, who eventually had signed on as a FERA cosponsor, had trumpeted the $165 million in new resources in a press release of her own. Mikulski’s staff berated him, with the practiced aggression that no doubt came from daily sessions against dozens of senatorial claims on the public trough. Geoff, who’d never before worked in Congress or politics, was shocked at how emphatically the Mikulski staff shut its ears. Indeed, they argued in effect that FERA was irrelevant to the Appropriations Committee’s work. The investigation and prosecution of financial fraud would be funded at the level the Committee deemed appropriate, FERA be damned. There’s no more than $30 million extra, they said, and that’s it. Maybe they’d be able to find more in the next budgetary cycle, they said, but, for this year, $30 million would have to do.
Ted and I talked about whether we should go public, whether he should blow the whistle on Senator Mikulski and the appropriators for short-changing the needed law enforcement effort. We considered offering a floor amendment to the appropriations bill to force a vote that might shame Ted’s colleagues into fully funding FERA. Ted was far out on a limb, having first promoted and then celebrated FERA as providing huge new resources. We decided to keep our mouths shut. It didn’t seem to make sense to embarrass Senator Mikulski (and Leahy, since he couldn’t or didn’t do anything about it). What people say about Congress is true: You often decide to go along to get along.