Mexico, Federal Reserve Policy and Danger Ahead for Emerging Markets

On August 27th, I had the opportunity to address the Aspen Institute, UNIFIMEX and PWC in Mexico City during a Q&A with Patricia Armendariz. Subsequenty, on August 28th, I gave the opening talk at the annual IMEF conference. The main issues of concern to local Mexican banks, as well as to Mexico's central bank, are:

1) How the Federal Reserve's (and to a lesser extent ECB's and People's Bank of China) policies and actions have, and wlil continue to impact their currency and interest rate levels, and

2) The risks posed by the structural, and ongoing problems of too-big-to-fail banks, which remain as much a US as a Mexican problem as manifested by heightened economic, market and financial stress.

I posted the slides from my talk here, including the ten main risks that Mexico (and really all countries) are facing today, as well as the four factors of volatility that I have spoke about many times before. Much uncertainly emanates from central bank policy and the associated artificial stimulation of mega banking institutions and capital markets throughout the world. There is no foreseeable remedy to the long-term damage already caused, and that will continue to grow in the future.

What follows is a related piece that I co-authored with researcher, Craig Wilson that first appeared in Peak Prosperity:

Too big to fail is a seven-year phenomenon created by the most powerful central banks to bolster the largest, most politically connected US and European banks. More than that, it’s a global concern predicated on that handful of private banks controlling too much market share and elite central banks infusing them with boatloads of cheap capital and other aid. Synthetic bank and market subsidization disguised as ‘monetary policy’ has spawned artificial asset and debt bubbles - everywhere. The most rapacious speculative capital and associated risk flows from these power-players to the least protected, or least regulated, locales.  

The World Bank and IMF award brownie points to the nations offering the most ‘financial liberalization’ or open market, privatization and foreign acquisition opportunities. Yet, protections against the inevitable capital outflows that follow are woefully inadequate, particularly for emerging markets.

The financial world has been focused largely on the volatility of countries like China and Greece recently. But Mexico, the third largest US trading partner (after Canada and China), has tremendous exposure to big foreign banks, and the largest concentration of foreign bank ownership of any country in the world (mostly thanks to NAFTA stipulations.)

In addition, the latitude Mexico has provided to the operations of these foreign financial firms means the nation is more exposed to the fallout of another acute financial crisis (not that we’ve escaped the last one).

There is no such thing as isolated “Big Bank” problems. Rather, complex products, risky practices, leverage and co-dependent transactions have contagion ramifications, particularly in emerging markets whose histories are already lined with disproportionate shares of debt, interest rate and currency related travails.

Mexico has benefited to an extent from its proximity to the temporary facade of US financial health buoyed by Fed policy, but as such, it faces grave dangers should any artificial bubble pop, or should the value of the US dollar or US interest rates rise.

There are other clouds forming on Mexico’s horizon. In the past month, the Mexican stock market has fallen 6 percent. Its highs were last seen in September, 2014. Shares in the nation’s largest builder, Empresas ICA SAB, just fell to a 12-year low as lower growth expectations.


Because of currency misalignments based on central bank machinations, the Mexican Peso sits near all time lows vs. the US dollar. The Central Bank of Mexico just announced a currency boosting round of $8.6 billion of Pesos over the next two months, with likely more to come. This impinges upon its reserves. (Source)

Mid-level Mexican financial firms will struggle with access to credit should the air in the tires of this global liquidity boosting exercise continue to leak out. Other problems loom on Mexico’s horizon based on a host of interrelated factors.

These include the potential of capital flight, liquidity loss, over-reliance on external debt and investors, oil price declines (oil revenues account for about one-third of Mexico’s federal government budget), economic downturn in the US or Mexico, and rising volatility due to central bank policy shifts impacting interest rates and currency relationships, geo-politics, credit defaults, or additional big bank crimes.

The high concentration of large banks in Mexico and in the US presents extra systemic risk. Local Mexican firms and individuals, as well as foreign investors should consider these co-mingled factors and hedge against them for protection.

Capital Flight due to US Rate Hikes, Real or Anticipated

The possibility of US rate hikes, or even the threat of them, could freeze demand for non-US stocks and bonds - everywhere. If we learned anything from the US financial crisis, economic hardship in Greece and other Southern European countries, and the rout in the Chinese stock market, it’s that capital flight, particularly leveraged capital flight, can crucify an economy, especially high debt burdens accentuate the process.

Mexico, though somewhat protected from financial upheaval during the first leg of the 2008 financial crisis, may be the next victim of capital’s mercurial tendencies for that very reason. Mexico’s relative stability and liberalized financial markets have invited more foreign capital through these channels, which means more can leave to return to headquarter countries, or seek opportunities elsewhere, in emergencies.

In addition, heightened “de-risking” (or the reducing of counter-party agreements and cross-border remittances between the US and Mexico) will impact future remittance flows. Though de-risking practices are officially designated to thwart money launderers and drug-dealers – the true effect of the closing of bank branches or reduction of services that enable remittance flows burdens the population and the local banks that rely on them.

Big Bank Concentration and Counterparty Risk

Mexico’s domestic bank concentration problems have marginally improved since the financial crisis, but not by much. As of 2014, just five of Mexico’s private sector banks hold 72 percent of all financial assets. The top two, Banamex, a unit of Citigroup Inc., and BBVA Bancomer, a unit of Spain's Banco Bilbao Vizcaya Argentaria SA, hold 38 percent of all assets. (Source) (Source)

Concentration has accelerated in the US. Since the financial crisis, the Big Six US banks (JPM Chase, Citigroup, Bank of America, Goldman Sachs, Wells Fargo and Morgan Stanley) have grown in terms of assets, deposits, cash, trading assets and derivatives volume.

In terms of counter-party risk, from a credit and derivative perspective, the fewer banks operating in any sphere, the greater the risk that a collapse in any one of them triggers a domino effect in the others. The main foreign banks in Mexico, and those engaging in business with Mexican banks, can quickly close services and shift capital and credit from the country, or place barriers to retrieve it, in a pinch.

Ongoing US Bank Bailouts and Mexican Fallout

The US Federal Reserve buying program, though officially over, has rendered the Fed the largest hedge fund in the world, with a $4.5 trillion book of securities, more than a dozen times the figure of seven years earlier. The mortgage backed securities component remains at about $1.5 trillion, up from zero seven years ago.

Mexico was fortunate not to have been on the US bank radar screen to receive, or be induced to borrow against, the $14 trillions of dollars of toxic US-bank made assets. US bankers mostly focused on selling these subprime assets into Europe. Thus, Mexico escaped the fallout that countries like Greece and Spain felt.  

Still, Mexico’s financial conditions are showing increasing signs of weakness, despite comparatively low inflation and, as a result, the ability to keep interest rates around 3 percent (the same as in Chile) below those in Columbia and Peru.

Aside from business problems, the amount of people living in poverty in Mexico increased from 49 million in 2008 to 53 million in 2012. In addition, Mexico came in last of the 34 countries examined by the Organization for Economic Co-operation and Development OECD for inequality. The combination of poverty and inequality on the ground, plus incoming instability on a business and banking basis could prove a disastrous mix in Mexico (and in the US) in the face of possible rising interest rates, a strengthening dollar in the near-term, or enhanced volatility.

EM Debt Defaults and Bond-Stock Divergence

Credit default risk looms as well. The amount of corporate and bank debt issued since the Fed embarked on its zero-interest rate and QE policy and pushed it on the world, has escalated. Thus, rising interest rates or corporate defaults in the US would impact Mexican (and other EM) corporate bond prices and default rates.

The divergence between credit-risk as reflected by rising high-yield bond spreads (up from seven year lows in mid-2014) and equities is predominantly predicated on the 60 percent drop in oil prices this year, which as of August 20th, hit a six and a half year low. The energy sector represents 15 percent of the high yield market.

Energy stocks have dropped nearly thirty percent. If commodity prices continue falling, other sectors and the stock markets would be more effected. Countries reliant on oil revenues, such as Mexico where 30 percent of the federal budget is based upon them, are impacted directly from profit loss and secondarily by defaults. (Source)

According to a recent report issued by the Institute of International Finance,  “Corporate Debt in Emerging Markets: What should we be worried about?”, emerging market (EM) non-financial corporate debt rose to a record high of 83 percent of GDP, up from 67 percent in 2009.  The total size of the EM non-financial corporate bond market has more than doubled to $2.4 trillion in 2014 vs. 2009.

Between 2015 and 2017, about $645 billion of that debt is set to mature with US dollar denominated bonds comprising $108 billion of that figure. Meanwhile, the volume of non-performing loans and general debt payment burdens have risen on US dollar strength, meaning EM banks, particularly those exposed to high degrees of foreign-currency lending, are increasingly in trouble.

Figure 1 - Source: BIS, IMF, OECD, McKinsey, IIF; Brazil, China, Czech Rep., Hungary, India,
Indonesia, Mexico, Poland, Russia, Saudi Arabia, South Africa, Thailand, Turkey.

The low or zero interest rate policies from the FED, ECB and even EM central banks have propelled this issuance, particularly in the EM non-financial corporate segment, even in countries where public debt issuance hasn’t also skyrocketed.

Of the $1.7 trillion EM in non-financial corporate debt raised since 2009 in  the international markets, about 30 percent ($510 billion) was in foreign currency, 80 percent of that ($430 billion) was in US dollars. The more reliant on external borrowing, the less stable a borrowing country’s financial situation becomes, and the more prone its firms are to downgrades or defaults as a result of external or internal weakening.

The report notes that higher foreign-currency risk exists in countries like Brazil, Mexico and Korea. In addition, a number of EM countries are holding cash reserves in domestic bank accounts from large percentages of proceeds raised offshore. They would be forced to withdraw from these funds to support currency weaknesses to service debt, which could increase the funding risk of EM banks.

What This All Means

This level of global inter-connected financial risk is hazardous in Mexico, where it’s peppered by high bank concentration risk. No one wants another major financial crisis. Yet, that’s where we are headed absent major reconstructions of the banking framework and the central bank policies that exude extreme power over global economies and markets, in the US, Mexico, and throughout the world.

Mexico’s problems could again ripple through Latin America where eroding confidence, volatility, and US dollar strength are already hurting economies and markets.

The difference is that now, in contrast to the 1980s and 1990s debt crises, loan and bond amounts have not just been extended by private banks, but subsidized by the Fed and the ECB.  The risk platform is elevated. The fall, for both Mexico and its trading partners like the US, likely much harder.


In a World of Volatility and Artificial Liquidity for Banks, Update your Cash Strategy

(This piece originally appeared at Peak Prosperity.)

Global central banks are afraid. Before Greece stood up to the Troika, they were merely worried. Now it’s clear that no matter what they tell themselves and the world about the necessity or even righteousness of their monetary policies, liquidity can still disappear in an instant. Or at least, that’s what they should be thinking.

The Federal Reserve and US government led policy of injecting liquidity into the US and then into the worldwide financial system has resulted in the issuance of trillions of dollars of debt, recycling it through the largest private banks, and driving rates to 0% -- or below. The combined book of debt that the Fed and European Central Bank (ECB) hold is $7 trillion. None of that has gone remotely into fixing the real global economy. Nor have the banks that have ben aided by this cheap money increased lending to the real economy. Instead, they have hoarded their bounty of cash. It’s not so much whether this game can continue for the near future on an international scale. It can. It is. The bigger problem is that central banks have no plan B in the event of a massive liquidity event.  

Some central bank entity leaders have admitted this. IMF chief, Christine Lagarde for instance, warned Federal Reserve Chair, Janet Yellen that potential US rate hikes implemented too soon, would incite greater systemic calamity. She’s not wrong. That’s what we’ve come to: a financial system reliant on external stimulus to survive.

These “emergency” measures were supposed to have healed the problems that caused the financial crisis of 2008 -- the excessive leverage, the toxic assets wrapped in complex derivatives, the resultant credit and liquidity crunch that occurred when banks lost faith in each other. Meanwhile, the infusion of cheap money and liquidity into banks gave a select few of them more power over a greater pool of capital than ever. Stock and bond markets skyrocketed as a result of this unprecedented central bank support.

QE-infinity isn’t a solution -- it’s a deflection. It’s a form of financial subterfuge that causes extra problems. These range from asset bubbles to the inability of pension and life insurance funds to source longer term less risky long-term assets like government bonds, that pay enough interest for them to meet liabilities. They are thus at risk of rapid future deterioration and more shortfalls precisely because they have nothing to invest in besides more risky stock and lower-rated bond markets.

Even the latest Bank of International Settlement (BIS) 85th Annual Report revealed the extent to which global entities supervising the banking system are worried. They harbor growing fears about greater repercussions from this illusion of market health (echoing concerns I and others have been writing about for the past seven years.)

The BIS, or bank for the central banks was established during the global Great Depression in 1930 in Basel, Switzerland, when bank runs on people’s deposits were the norm. The body no longer buys into zero-interest rate policy as an economic cure-all. In their words, “Globally, interest rates have been extraordinarily low for an exceptionally long time, in nominal and inflation-adjusted terms, against any benchmark. Such low rates are the remarkable symptom of a broader malaise in the global economy.”

They go on to note the obvious, “The economic expansion is unbalanced, debt burdens and financial risks are still too high, productive growth too low, and the room for maneuvering in macroeconomic policy too limited. The unthinkable risks becoming routine and being perceived as the new normal.”

These are troubling words coming from an organization that would have much preferred to deem central bank policies a success. Yet the BIS also states, “Global financial markets remain dependent on central banks.” Dependent is a strong word. How quickly the idea of free markets has been turned on its head.

Further, the BIS says, “Central bank balance sheets remain at unprecedented high levels; and they grew even larger in several jurisdictions where the ultra low policy rate environments were reinforced with large purchases of domestic and foreign assets.”

Central banks are not yet there, but rising volatility is indicative of the accelerating approach to the nowhere left to go mark from a monetary policy perspective. This, after seven years of a reckless Anti-Main Street, inequality and instability inducing, policy.

Not only have the major banks been the main recipient of manufactured liquidity, they have also received consolidated access to our deposits, which they can use like hostages to negotiate future bailout situations. Elite bankers moan about the extra regulations they have had to endure in the wake of the financial crisis, while scooping up cash dispersed under the guise of stimulating the general economy.

Central banks seek fresh ways to keep the party going as countries like Greece shut down banks to contain capital flight, and places like Puerto Rico and multiple states and municipalities face economic ruin. But they are clueless as to what to do.

In this cauldron of instability and lack of leadership, cash is the one remaining financial possession that Main Street can translate into goods, services and security. That’s why private banks want more control over it.

Banks Want Your Cash For Their Latent Emergencies

One of the most inane reasons cited for restricting cash withdrawals for normal people is that they all might turn out to be drug dealers or terrorists. Meanwhile, drug-dealing-money-laundering terrorists tend to get away with it anyway, by sheer ability to use a plethora of banks and off shore havens to diffuse cash around the globe.

Every so often, years after the fact, some bank perpetrators receive money-laundering fines.  For average depositors though, these are excuses for a bureaucracy built upon limiting access to cash whether from an ATM (many have $500 per day limits, some have less) or an account (withdrawals above a certain level get reported to the IRS).

As Charles Hugh Smith wrote at Peak Prosperity recently, there’s a difference between physical cash (the kind you can touch and use immediately) and the electronic kind, associated with your bank balance or credit card cash advance limit.  If you hold it, you have it – even if keeping it in a bank means it’s probably slammed with various fees.

Banks, on the other hand, can leverage your deposits or cash, even while complying with various capital reserve requirements. That’s not new. But the expanding debates about how much of your cash you get to withdraw at any given moment, is.

The notion of a bail-in, or recourse to people’s deposits, is related to the idea of restricting the movement, or existence, of physical cash. Bail-ins, like any cash limitations, imply that if a bank needs emergency liquidity, your deposits are the place to find it, which has negative repercussion on your own solvency. This is exactly what the Glass-Steagall Act of 1933, coupled with the creation of the FDIC sought to avoid – banks confiscating your money at the worst possible times.

The ‘war on cash’ is thus really a war on the difference between the money you can hold on to and the money the banks can take away from you. The existence of this cash debate underscores the need for a personal policy of cash extraction from the big banks. If you don't have one, consider creating one sooner rather than later.



Jeb! All In! The Bush Dynasty (And Banker Friends) Go For Round Three 

[This piece has been adapted and updated from my book All the Presidents' Bankers: The Hidden Alliances That Drive American Power, now out in paperback. An intro by TomDispatch is here.] 

It’s happening. As expected, dynastic politics is prevailing in campaign 2016. After a tease about as long as Hillary’s, Jeb Bush (aka Jeb!) officially announced his presidential bid last week. Ultimately, the two of them will fight it out for the White House, while the nation’s wealthiest influencers will back their ludicrously expensive gambit.

And here’s a hint: don’t bet on Jeb not to make it through the Republican gauntlet of 12 candidates (so far). After all, the really big money’s behind him. Last December, even though out of public office since 2007, he had captured the support of 73% of the Wall Street Journal’s “richest CEOs.” Though some have as yet sidestepped declarations of fealty, count on one thing: the big guns will fall into line. They know that, given his family connections, Jeb is their best path to the White House and they’re not going to blow that by propping up some Republican lightweight whose father and brother weren’t president, not when Hillary, with all her connections and dynastic power, will be the opponent. That said, in the Bush-Clinton battle to come, no matter who wins, the bankers and billionaires will emerge victorious.

The issue of political blood and family lines in Washington is not new. There have been four instances in our history in which presidents have been bonded by blood. Our second president John Adams and eighth president John Quincy Adams were father and son. Our ninth president William Henry Harrison and our 23rd president Benjamin Harrison were grandfather and grandson. Theodore and Franklin Delano Roosevelt were cousins. And then, of course, there were our 41st and 43rd presidents, George H.W. and George W.

If Jeb becomes the 45th president, it will be the first time that three administrations share the same blood and “dynastic” will have a new meaning in America.

The Bush Legacy

The Bush political-financial legacy began when President Ronald Reagan chose Jeb’s father, George H.W., as his vice president. Reagan was also the first president to choose a Wall Street CEO, Donald Regan, as Treasury secretary. Then-CEO of Merrill Lynch, he happened to be a Bush family friend. And talk about family tradition: once upon a time (in 1900, to be exact), Jeb’s great-grandfather, George Herbert Walker, founded G.W. Walker & Company. It was eventually acquired by -- you guessed it! -- Merrill Lynch, which was consumed by Bank of America at the height of the 2008 financial crisis.

That merger was pressed by, among others, George W. Bush’s Treasury Secretary (and former Goldman Sachs chairman and CEO), Hank Paulson. It helped John Thain, Paulson’s former number two at Goldman Sachs, who was by then Merrill Lynch’s CEO, out of a tight spot. Now chairman and CEO of CIT Group, Thain is also a prominent member of the Republican Party whosponsored high-ticket fundraisers for John McCain during his 2008 campaign. Expect him to be there for Jeb. Paulson endorsed Jeb for president on April 15th. That’s how these loops go.

As vice president, George H.W. co-ran a task force with Donald Regan dedicated to breaking down the constraints of the 1933 Glass-Steagall Act, so that Wall Street banks could become ever bigger and more complex. Once president, Bush promoted deregulation, while reconfirming Alan Greenspan, who did the same, as the chairman of the Federal Reserve. In 1999, after President Bill Clinton (Hillary!) finished the job that Bush had started by overseeing the repeal of Glass-Steagall, banks began merging like mad and engaging in increasingly risky and opaque practices that led to the financial crisis that came to a head in George W.’s presidency.  In other words, it’s a small world at the top.

The meaning of all this: no other GOP candidate has Jeb's kind of legacy political-financial power. Period. To grasp the interconnections between the Bush family and Wall Street that will put heft and piles of money behind his candidacy, however, it’s necessary to step back in time and see just how his family helped lead us to this moment of his.

Bush Wins

By the time George H.W. Bush became president on January 20, 1989, the economy was limping. Federal debt stood at $2.8 trillion. The savings and loan crisis had escalated. Still, his deregulatory financial policies remained in sync with those of the period’s most powerful bankers, notably Citicorp chairman John Reed, Chase (now JPMorgan Chase) Chairman Willard Butcher, JPMorgan chief Dennis Weatherstone, and Bank of America Chairman Tom Clausen.

With the economic odds stacked against him, Bush also remained surrounded by his most loyal, business-friendly companions in Washington, who either had tight relationships with Wall Street or came directly from there. In a preordained arrangement with President Reagan, Bush retained Nicholas Brady, the former chairman of the board of the blue-blood Wall Street investment bank Dillon, Read & Co., as Treasury secretary.

Their ties, first established on a tennis court, extended to Wall Street and back again. In 1977, after Bush had left the directorship of the CIA, Brady even offered him a position at Dillon, Read & Co. Though he didn’t accept, Bush later enlisted Brady to run his 1980 presidential campaign and suggested him as interim senator for New Jersey in 1982. The press dubbed Brady Bush’s “official confidant.”

The new president appointed another of his right-hand men, Richard Breeden (who had drafted a “Blueprint for Reform” of the banking industry as directed by a task force co-headed by Bush), as his assistant for issues analysis and later as head of the Securities and Exchange Commission (SEC). Then, on February 6, 1989, Bush unveiled his plan to rescue the ailing savings and loan (S&L) banks. Initial bailout estimates for 223 firms were put at $40 billion. It only took the Bush administration two weeks to raise that figure to $157 billion. On the offensive, Brady stressed that this proposal wasn’t a bailout. Instead, it represented “the fulfillment of the Federal Government’s commitment to depositors.”

A few months later, under Alan Greenspan’s Fed, JPMorgan Securities, the investment banking subsidiary of JPMorgan Chase, became the first bank subsidiary since the Great Depression to lead a corporate bond underwriting. Over the next decade, commercial banks would issue billions of dollars of corporate debt on behalf of energy and public utility companies as a result of Greenspan’s decision to open that door and Bush’s deregulatory stance in general. A chunk of it would implode in fraud and default after Bush’s son became president in 2001.

The S&L Blowout

The deregulation of the S&L industry between 1980 and 1982 had enabled those smaller banks, or thrifts -- focused on taking deposits and providing mortgages -- to compete with commercial banks for depositors and to invest that money (and money borrowed against it) in more speculative real estate ventures and junk bond securities. When those bets soured, the industry tanked. Between 1986 and 1989, 296 thrifts failed. An additional 747 would shut down between 1989 and 1995.

Among those, Silverado Banking went bankrupt in December 1988, costing taxpayers $1.3 billion. Neil Bush, George H.W.’s son, was on the board of directors at the time. He was accused of giving himself a loan from Silverado, but denied all wrongdoing.

George H.W.'s second son, Jeb Bush, had already been dragged through the headlines in late 1988 for his real estate relationship with Miguel Recarey Jr., a Cuban-American mogul who had been indicted on one charge of fraud and was suspected of racking up to $100 million worth of Medicare-related fraud charges.

Meanwhile, the president was crafting his bailout plan to stop the S&L bloodletting. On August 9, 1989, he signed the Financial Institution Reform, Recovery, and Enforcement Act, which proved a backdoor boon for the big commercial banks. Having helped stuff the S&Ls with toxic real estate products, they could now profit by selling the bonds that were constructed as part of the bailout plan, while the government subsidized the entire project. Within six years, the Resolution Trust Corporation and the Federal Savings and Loan Insurance Corporation had sold $519 billion worth of assets for 1,043 thrifts that had gone belly up. Key Wall Street banks were involved in distributing those assets and so made money on financial destruction once again. Washington left the public on the hook for $124 billion in losses.

The Bush administration and the Fed’s response to the S&L crisis (as well as to a concurrent third-world debt crisis) was to subsidize the banking system with federal and multinational money. In this way, a policy of privatizing bank profits and socializing their losses and risks became embedded in the American political system.

The New Banking Game in Town: “Modernization”

The S&L trouble sparked a broader credit crisis and recession. Congress was, by then, debating the “modernization” of the financial services industry, which in practice meant breaking down remaining barriers within institutions that had separated deposits and loans from securities creation and trading activities. This also meant allowing commercial banks to expand into nontraditional banking activities, including insurance provision and fund management.

The Bush administration aided the bankers by advocating the repeal of key elements of the Glass-Steagall Act. Related bills to dismantle that Depression-era act won the support of the House and Senate banking committees in the fall of 1991, though they were defeated in the House in a full vote.  Still, the writing was on the wall. What a Republican president had started, a Democratic one would soon complete.

In the meantime, the Bush administration was covering all the bases when it came to the repeal of Glass-Steagall, which would be the nail in the coffin of decades of banking constraint. As commercial bankers pushed to enter non-banking businesses, Richard Breeden, Bush’s SEC chairman, began championing the other side of the Glass-Steagall divide -- fighting, that is, for the rights of investment banks to own commercial banks. And little wonder, since such a deregulation of the financial system meant a potential expansion of Breeden’s power: the SEC would be tasked with monitoring the growing number of businesses that banks could enter.

Meanwhile, Wendy Gramm, head of the Commodity Futures Trading Commission (CFTC), promoted another goal the bankers wanted: unconstrained derivatives trading. Gramm had first been appointed chair of the CFTC in 1988 by Reagan (who called her his “favorite economist”) and was then reappointed by Bush. She was determined to push for unregulated commodity futures and swaps -- in part in response to lobbying from a Texas-based energy trading company, Enron, whose name would grow far more familiar to Americans in the years to come. While awaiting legislative approval, bankers started sending their trading exemption requests to Gramm and she began granting them.

9/11 Overshadows Enron

In early 2001, in the fading light of the rosy Clinton economy and an election result validated by the Supreme Court, the second President Bush entered the White House. A combination of Glass-Steagall repeal and the deregulation of the energy and telecom sectors under Clinton catalyzed a slew of mergers that consolidated companies and power in those industries upon fabricated books. The true state of the economy, however, remained well hidden, even as it teetered on a flimsy base of fraud, inflated stocks, and bank-created debt. In those years, the corporate and banking world still appeared glorious amid so many mergers. But the bankers’ efforts to support those transactions would soon give way to a spate of corporate bankruptcies.

It was the Texas-based energy-turned-trading company Enron that would emerge as the poster child for financial fraud in the early 2000s. It had used the unregulated derivatives markets and colluded with bankers to create a slew of colorfully named offshore entities through which the company piled up debt, shirked taxes, and hid losses. The true status of Enron’s fictitious books and those of other corporate fraudsters nonetheless remained unexamined in part because another crisis garnered all the attention. The 9/11 attacks at the World Trade Center, blocks away from where many of Enron’s trading partners were headquartered (including Goldman Sachs, where I was working that day), provided the banking industry with a reprieve from probes. The president instead called on bankers to uphold national stability in the face of terrorism.

On September 16, 2001, George W. famously merged financial and foreign policy. “The markets open tomorrow,” he said. “People go back to work and we’ll show the world.” To assist the bankers in this mission, Bush-appointed SEC chairman Harvey Pitt waived certain regulations, allowing corporate executives to prop up their share prices as part of a plan to demonstrate national strength by elevating market levels.

That worked -- for about a minute. On October 16, 2001, Enron posted a $681 million third-quarter loss and announced a $1.2 billion hit to shareholders' equity. The reason: an imploding pyramid of fraudulent transactions crafted with banks like Merrill Lynch. The bankers were now potentially on the hook for billions of dollars, thanks to Enron, a client that had been bulked up through the years with bipartisan support.

Amid this financial turmoil, Bush was focused on retaliation for 9/11. On January 10, 2002, he signed a $317.2 billion defense bill. In his State of the Union address, he spoke of an “Axis of Evil,” of fighting both the terrorists and a strengthening recession, but not of Enron or the dangers of Wall Street chicanery.

In 2001 and again in 2002, however, corporate bankruptcies would hit new records, with fraud playing a central role in most of them. Telecom giant WorldCom, for instance, was found to have embellished $11 billion worth of earnings. It would soon supplant Enron as America’s biggest fraud of the moment.

Bush Takes Action

On July 9th, George W. finally unveiled a plan to “curb” corporate crime in a speech given in the heart of New York’s financial district. Taking the barest of swipes at his Wall Street friends, he urged bankers to provide honest information to investors. The signals were now clear: bankers had nothing to fear from their commander in chief. That Merrill Lynch, for example, was embroiled in the Enron scandal was something the president would ignore -- hardly a surprise, since the company’s alliances with the Bush family stretched back decades.

Three weeks later, he would sign the Sarbanes-Oxley Act, purportedly ensuring that CEOs and CFOs would confirm that the information in their SEC filings had been presented truthfully. It would prove a toothless and useless deterrent to fraud.

And then the president acted: on March 19, 2003, he launched the invasion of Iraq with a shock-and-awe shower of cruise missiles into the Iraqi night sky. Two days later, by a vote of 215 to 212, the House approved his $2.2 trillion budget, including $726 billion in tax cuts. Shortly thereafter -- a signal to the banking industry if there ever was one -- he appointed former Goldman Sachs Chairman Stephen Friedman director of the National Economic Council, the same role another Goldman Sachs alumnus, former co-Chairman Robert Rubin, had played for Bill Clinton.

By the end of 2003, grateful bankers were already amassing funds for Bush’s 2004 reelection campaign. A bevy of Wall Street Republicans, including Goldman Sachs Chairman and CEO Henry Paulson, Bear Stearns CEO James Cayne, and Goldman Sachs executive George Herbert Walker IV (the president’s second cousin), became Bush “Pioneers” by raising at least $100,000 each.

The top seven financial firms officially raised nearly three million dollars for George W.’s campaign. Merrill Lynch emerged as his second biggest corporate contributor (after Morgan Stanley), providing more than $586,254. The firm’s enthusiasm wasn’t surprising. Donald Regan had been its chairman and the Bush-founded investment bank G.H. Walker and Company, which employed members of the family over the decades, had been absorbed into Merrill in 1978. Merrill Lynch CEO Earnest “Stanley” O’Neal received the distinguished label of “Ranger” for raising more than $200,000 for Bush’s reelection campaign. It was a sign of the times that O’Neal and Cayne hosted Bush’s first New York City reelection fundraiser in July 2003.

Government by Goldman Sachs for Goldman Sachs

The bankers helped tip the scales in Bush’s favor. On November 3, 2004, he won his second term in a tight election. By now, bankers from Goldman Sachs had saturated Washington. New Jersey Democrat Jon Corzine, a former Goldman Sachs chairman and CEO, was on the Senate Banking Committee. Joshua Bolten, a former executive director at the Goldman Sachs office in London, was director of the Office of Management and Budget. Stephen Friedman, former Goldman Sachs chairman, was one of George W.’s chief economic advisers as the director of the National Economic Council. (He would later become chairman of the New York Federal Reserve Board, only to resign in May 2009 amid conflict of interest charges concerning the pile of Goldman Sachs shares he held while using his post to aid the company during the financial crisis.)

Meanwhile, from 2002 to 2007, under George W.’s watch, the biggest U.S. banks would fashion nearly 80% of the approximately $14 trillion worth of global mortgage-backed securities (MBS), asset-backed securities, collateralized debt obligations, and other kinds of packaged assets created in those years. And subprime loan packages would soon become the fastest-growing segment of the MBS market. In other words, the financial products exhibiting the most growth would be the ones containing the most risk.

George W. would also pick Ben Bernanke to replace Alan Greenspan as chairman of the Federal Reserve. Bernanke made it immediately clear where his loyalties lay, stating, “My first priority will be to maintain continuity with the policies and policy strategies during the Greenspan years.”

In 2006, two years after persuading the SEC to adopt rules that enabled many of the “assets” being created to be undercapitalized and underscrutinized, the president selected former Goldman Sachs CEO Henry Paulson to be his third Treasury secretary. Joshua Bolten, who had by then had become White House Chief of Staff, arranged the pivotal White House meeting between the two men that sealed the deal. As Bush wrote in his memoir, Decision Points, “Hank was slow to warm to the idea of joining my cabinet. Josh eventually persuaded Hank to visit with me in the White House. Hank radiated energy and confidence. Hank understood the globalization of finance, and his name commanded respect at home and abroad.”

Under Bush, Paulson, and Bernanke, the banking sector would buckle and take the global economy down with it.

Goldman Trumps AIG

Insurance goliath AIG stood at the epicenter of an increasingly interconnected financial world deluged with junky subprime assets wrapped up with derivatives. When rating agencies Fitch, S&P, and Moody’s downgraded the company’s credit worthiness on September 15, 2008, they catalyzed $85 billion worth of margin calls. If AIG couldn’t find that money, Paulson warned the president, the firm would not only fail, but “bring down major financial institutions and international investors with it.” According to Bush’s memoir , Paulson convinced him. “There was only one way to keep the firm alive,” he wrote. “The federal government would have to step in.”

The main American recipients of AIG’s bailout would, in fact, be legacy Bush-allied firms: Goldman Sachs ($12.9 billion), Merrill Lynch ($6.8 billion), Bank of America ($5.2 billion), and Citigroup ($2.3 billion). Lehman crashed, but Merrill Lynch and AIG were saved. The bankers with the strongest alliances to the Bush family (and the White House in general) needed AIG to survive. And it did. But the bloodletting wasn’t over.

On September 18, 2008, George W. would tell Paulson, “Let’s figure out the right thing to do and do it.” He would later write, “I had made up my mind: the U.S. government was going all in.” And he meant it.  During his last months in office, the Big Six banks (and marginally other institutions) would thus be subsidized by an “all-in” program designed by Bernanke, Paulson, and Geithner -- and later endorsed by President Barack Obama.

The bankers’ unruliness had, however, already crippled the real economy. Over the next few months, Bank of America, Citigroup, and AIG all needed more assistance. And in that year, the Dow Jones Industrial Average would lose nearly half its value. At the height of the bailout period, $19.3 trillion in subsidies were made available to keep (mostly) American bankers going, as well as government-sponsored enterprises like Fannie Mae and Freddie Mac.

As George W. headed back to Texas, the economy and markets went into free fall.

The Money Behind Jeb

Jump seven years ahead and, with the next Bush on the rise and the money once again flowing in, it’s still the age of bankers. Jeb already has three mega super PACs -- Millennials for Jeb, Right to Rise, and Vamos for Jeb 2016 -- under his belt. His Right to Rise Policy Solutions group, which, as a 501(c)(4) nonprofit, is not even required to disclose the names of its donors, no less the size of their contributions, is lifting his contribution tally even higher. None of these groups have to adhere to contribution limits and the elite donors who contribute to them often prove highly influential. After all, that’s where the money really is. In the 2012 presidential election, the top 100 individual contributors to super PACs and their spouses represented just 1% of all donors, but gave a staggering 67% of the money.

Of those, Republican billionaire Sheldon Adelson and his wife, Miriam, donated $92.8 million to conservative groups, largely through “outside donor groups” like super PACs that have no contribution limits. Texas billionaire banker mogul Harold Simmons and his wife, Annette, gave $26.9 million, and Texas billionaire homebuilder Robert Perry coughed up $23.95 million. Nebraska billionaire (and founder of the global discount brokerage TD Ameritrade) John Joe Ricketts dished out $13.05 million. Despite some early posturing around other candidates with fewer legacy ties, these heavy hitters could all end up behind Bush 45. Dynasties, after all, establish the sort of connections that lie in wait for the next moment of opportune mobilization.

“All in for Jeb” is the mantra on Jeb’s official website and in a sense “all in,” especially when it comes to national bankers, has been something of a mantra for the Bush family for decades. With a nod to his two-term record as Florida governor, Jeb put it this way: “We will take command of our future once again in this country. I know we can fix this. Because I've done it.”

Based on Bush family history, by “we” he effectively meant the family’s billionaire and millionaire donors and its cavalcade of friendly bankers. Topping that list, though as yet undeclared -- give him a minute -- sits Adelson, who is personally and ideologically close to George W. In April, the former president was paid a Clintonian speaking fee of $250,00 for a keynote talk before the Republican Jewish Coalition meeting at Adelson’s Las Vegas resort. While Adelson has expressed concerns about Jeb’s lack of hawkishness on Israel when compared to his brother, that in the end is unlikely to prove an impediment. Jeb is making sure of that.  He recently told a gathering of wealthy New York donors that, when it came to Israel, his top adviser is his brother. (“If you want to know who I listen to for advice, it’s him.”)

Let’s be clear.  The Bush family is all in on Jeb and its traditional banking allies are not likely to be far behind.  There is tradition, there are ties, there is a dynasty to protect.  They are not planning to lose this election or leave the family with a mere two presidents to its name.

The Wall Street crowd began rallying behind Jeb well before his candidacy was official.  Private equity titan Henry Kravis hosted a 25-guest $100,000-per-head gathering at his Park Avenue abode in February, one of six events with the same entry fee. In March, Jeb had his first Goldman Sachs $5,000-per-person event at the Ritz Carlton in New York City, organized by Dina Powell, Goldman Sachs Foundation head and George W. Bush appointee for assistant secretary of state.  A more exclusive $50,000 per head event was organized by Goldman Sachs exec, Jim Donovan, a key fundraiser and adviser for Mitt Romney who is now doing the same for Jeb.

And then there’s the list of moneyed financiers with fat wallets still to get behind Jeb. New York hedge fund billionaire Paul Singer, who donated more than any other conservative in the 2014 election, has yet to swoop in.  Given the alignment of his foreign financial policy views and the Bush family’s, however, it’s just a matter of time.

With the latest total super PAC figures still to be disclosed, we do know that Jeb’s Right to Rise super PAC claims to have raised $17 million from the tri-state (New York, New Jersey, and Connecticut) area alone so far. Its head, Mike Murphy, referred to its donors in a call last week as “killers” he was about to “set loose.” He intimated that the July disclosures would give opponents “heart attacks.” Those are fighting words.

Sure, all dynasties end, but don’t count on the Bush-Banker alliance going belly up any time soon. Things happen in this country when mountains of money begin to pile up. This time around, the Bush patriarchy will call in every chip. And know this: Wall Street will be going “all in” for this election, too. Jeb(!) and Hillary(!) will likely split that difference in the primaries, then duke it out in 2016. Along the way, every pretense of mixing it up with the little people will be matched by a million-dollar check to a super PAC. The cash thrown about in this election will be epic. It’s not the fate of two parties but of two dynasties that’s at stake.