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Cashing In

Though Emanuel had made his name fundraising for other candidates, as the millennium approached he was still young and “had political aspirations of his own, which necessitated some financial security,” as Nina Easton explained in Fortune magazine. Easton quoted Rahm’s brother Zeke saying, “Money is not the be-all and end-all for him. . . . But he knew he needed money so that wouldn’t be a problem while he was doing public service.”1

Hence in October 1998 Emanuel left the White House for the private sector. He had no formal business experience or even an MBA, but he did have a “golden Rolodex” from his days in the Clinton White House and all his political fundraising.2 He was hired by the investment banking firm Wasserstein Perella and Company in Chicago in 1999. Bruce Wasserstein was a major Democratic donor, and according to the New York Times he called on John Simpson, the firm’s Chicago manager, to meet with Emanuel in Washington. After a three-hour dinner Simpson made Emanuel an offer.3 Soon the Emanuel family packed up and moved back to Chicago, where they bought a home in the leafy Ravenswood neighborhood on the city’s North Side.

Demonstrating that connections, energy, and assertiveness can count for more than expertise in this field, Emanuel ultimately earned more than $18 million in just two and a half years as an investment banker. The New York Times broke it down: $900,000 his first year; almost $1.4 million the second year; and $6.5 million in another half year, plus about $9.7 million in deferred compensation, bonuses, and equity boosted when the firm was sold in 2001 to Germany’s Dresdner Bank.4 Even for the high-rolling world of investment banking, Emanuel was spectacularly successful; his earnings put him in the top 5 percent of the profession.5

Emanuel’s major deals included the purchase of the home alarm company SecurityLink from SBC Communications, then run by his longtime friend and former White House colleague Bill Daley. In that nearly $500 million deal Emanuel represented the Chicago private equity firm GTCR Golder Rauner, whose chairman, Bruce Rauner, knew Emanuel through mutual connections and had encouraged him to try his hand at investment banking. Rauner would later become a key adviser and public backer when Emanuel became mayor of Chicago.6

Emanuel also worked on the $8.2 billion merger of the utilities Chicago Unicom and Philadelphia Peco, which created Exelon, the parent company of Commonwealth Edison and one of the country’s biggest power corporations. Former Unicom and later Exelon CEO John W. Rowe knew Emanuel from his Clinton White House days and contacted him personally about the merger. Afterward, the new utility laid off 3,350 workers, more than a tenth of its workforce.7

Other companies headed by high-profile Democratic donors who became Emanuel banking clients included Slim-Fast, the aviation company Avolar, the Chicago Board Options Exchange, and Loral Space and Communications.8

Ron Suskind, a Pulitzer Prize–winning former reporter for the Wall Street Journal, described Emanuel’s banking success in the 2011 book Confidence Men: “Insofar as it was always clear that he’d return to government, the compensation makes sense, said one former investment chief, a fan of Emanuel’s, who now works in Washington: ‘Paying someone who will be a future government official a lot of money for doing very little? On Wall Street we call that an investment.’”9

Emanuel also profited by serving on several boards of directors, including the Chicago Mercantile Exchange.10 During Emanuel’s mayoral campaign eleven years later, the exchange’s parent group would give him $200,000, his biggest single campaign donation.11 In 1999, the Chicago Sun-Times noted, Emanuel joined the boards of Rxdrugstore.com and Beautyjungle.com.12 The Sun-Times also reported that Emanuel was paid more than $250,000 over two years in the early 2000s by the advertising agency Young & Rubicam, where he served on the board.

And in 1999 Mayor Daley appointed Emanuel to the board of the Chicago Housing Authority, the agency that oversaw the city’s troubled public housing projects.13 When Emanuel joined the board, the authority was in the process of launching a highly controversial overhaul known as the Plan for Transformation, which involved tearing down all the public housing high-rises and replacing them with “mixed income” developments that included a third each of market rate, affordable, and public housing.14 Although most people agreed the high-rises had become extremely dilapidated and dangerous, there was great outcry among residents and fair-housing advocates over the plan. The city didn’t comprehensively track whether residents displaced from the developments ever got new housing with the subsidized vouchers they were given.15 Meanwhile, in some areas, the transformation was attractive to private developers, who were able to build market-rate housing on plots near downtown or the lakefront. The plan had already been crafted by the time Emanuel joined the board, but it’s likely that authority officials saw his business and real estate connections as an important asset while the authority was making deals with developers.

Freddie Mac

During his sojourn in the private sector, Emanuel also served on the board of Freddie Mac, the government-sponsored private mortgage company whose problems contributed to the economic crisis beginning in 2007.16

The colloquially named Fannie Mae and Freddie Mac were created by Congress to promote home ownership. Fannie was launched in 1938 to help fulfill the promises of the National Housing Act of 1934. The idea was that Fannie would purchase government-insured mortgages from lenders and sell those mortgages to other investors—in essence acting as a mortgage dealer. As it turned out, Fannie didn’t always resell the mortgages. It soon became a major mortgage holder and was later authorized by Congress to build and maintain a portfolio by using federal and private funds and selling shares and bonds.

Freddie Mac was created in 1970 to purchase mortgages from Savings and Loan (S&L) institutions, and over time its operations basically dovetailed with those of Fannie Mae. In short, by decreasing risk for private lenders and by helping to create a secondary market for mortgages, Fannie and Freddie were meant to motivate lenders to offer mortgages to people who might not otherwise be able to get financing to buy a home.17

Freddie Mac started trading on the New York Stock Exchange in 1989. Like Fannie Mae, it was considered a private company even though it enjoyed closer ties with the government than other mortgage companies. Fannie and Freddie were known as government-sponsored entities, or GSEs, with federal charters. The government was not obligated to back the debt incurred by Fannie and Freddie, but they were exempt from taxes and regulations imposed on other private corporations, and the Treasury Secretary had the option of buying their debt and making it the obligation of US taxpayers.18

In February 2000, Clinton appointed Emanuel to Freddie Mac’s board of directors for a term that expired in May 2001. In exchange, Emanuel got an annual payment and stock options. As the Chicago Tribune described it, Emanuel received “at least $320,000 for a 14-month stint at Freddie Mac that required little effort.” The board met only six times a year and Emanuel was not assigned to any committees, so he did not have to do much legwork to earn his stipend. The Tribune quoted fellow Freddie board member Neil Hartigan, a former Illinois attorney general, noting that “Emanuel’s primary contribution was explaining to others on the board how to play the levers of power.”19

Looking the Other Way

During the time Emanuel and other board members were supposed to be keeping tabs on Freddie Mac’s dealings, the GSE was carrying out behavior that government agencies would later deem illegal and unethical.

At the time Emanuel was on the board, Freddie Mac was profiting handsomely from the kind of risky investments (including subprime mortgage loans) that would later bring the financial system crashing down. Freddie Mac executives notified Emanuel and the other board members of a plan to misconstrue the nature of their profits to shareholders, with accounting tricks that would basically put current earnings on the books in future years, ensuring Freddie Mac would appear profitable and executives would get juicy bonuses for years to come even if the risky investments began to tank.20

The future of Freddie Mac was no small thing to gamble with. When the economic crisis started in 2007, Freddie and Fannie together had a stake in more than half of the nation’s home mortgages, for a total value of more than $5 trillion.21 Nearly every private mortgage lender in the United States depended on the GSEs to maintain liquidity in the market. Investors included countless US entities as well as foreign governments including China. So executives and board members knew well that jeopardizing the future stability of the institutions could have major economic and political ramifications across the globe.22

In 2007 the US Securities and Exchange Commission charged Freddie Mac with securities fraud for actions between 1998 and 2002 that included overstating its earnings by 30.5 percent in 2000 and 23.9 percent in 2001 to maintain its image as the consistently profitable “Steady Freddie.” In a press release SEC enforcement director Linda Chatman Thomsen said, “As has been seen in so many cases, Freddie Mac’s departure from proper accounting practices was the result of a corporate culture that sought stable earnings growth at any cost.”23

A 2003 federal investigation yielded a damning report by Office of Federal Housing Enterprise Oversight director Armando Falcon Jr. that ordered Freddie to pay $585 million in fines and legal fees and restate $5 billion worth of earnings. Among many other things, Falcon said that presidential appointees to the lenders’ boards—like Emanuel—played no “meaningful role” and should be eliminated.24

Falcon’s report accused Freddie’s board of directors (and senior management) of a “lack of attention” to the “corporate culture” and “tone at the top” that encouraged increasingly risky and deceptive maneuvers as a way to meet Wall Street expectations. The board and senior managers had “failed to establish and maintain adequate internal control systems.”25 And, Falcon said, the board “did not recognize red flags, failed to make reasonable inquiries of management, or otherwise failed in its duty to follow up on matters brought to its attention.”26

In April 2006 Freddie Mac was fined $3.8 million by the Federal Election Commission for illegally using corporate funds for political fundraising, including during Emanuel’s tenure on the board. Senior vice president for government relations Robert Mitchell Delk and head of congressional relations Clarke Camper had hosted eighty-five often lavish fundraising events that netted $1.7 million.27 The commission noted that the board of directors reviewed documents outlining the illegal fundraising activities, which were framed as “political risk management.” At the time, the fine was the commission’s largest civil enforcement settlement.

Most of Freddie Mac’s fundraising efforts were directed toward Republican candidates. An illegal $150,000 donation was made to the Republican Governors Association, and numerous fundraisers were held for Ohio Republican Michael G. Oxley, chair of the House Financial Services Committee.28 But Freddie also hosted events to support Democrats, including a fundraiser for Emanuel’s 2002 congressional campaign that netted a relatively paltry $7,000. Emanuel’s campaign also collected $9,500 from a lunch hosted by Freddie Mac CEO Leland Brendsel, later ousted because of the fundraising scandal. During the 2002 election cycle Emanuel collected a total of $25,000 in donations from people connected to Freddie Mac—more than twice the amount Freddie Mac–linked donors gave to any other candidate, according to the Chicago Tribune.29

Freddie Mac officials likely concluded their fundraising for Emanuel and other powerful politicians paid off. Once in Congress, Emanuel was appointed to a subcommittee with responsibility for oversight of Freddie Mac.30 His office has said he recused himself from any proceedings that would have raised conflicts of interest.31 Chicago Sun-Times political correspondent Lynn Sweet argued that was not good enough:

Emanuel told me he has no problem because he put his holdings into a blind trust and plans to recuse himself from any votes relating to Freddie Mac. “I chose to do something you don’t have to do,” he said, as if he deserved extra points. “I feel good about the actions I’ve taken to date,” he added. Emanuel had no business getting on the Capital Markets, Insurance and Government Sponsored Enterprises subcommittee as long as he had the Freddie Mac options—in blind trust or not. It would have been better if Emanuel sold the Freddie Mac shares he already owned before being sworn in last January and told Freddie Mac to forget about any future options to which he may be entitled.32

Meanwhile, congressional disclosure documents showed that Emanuel had sold between $100,000 and $250,000 worth of Freddie Mac stock on February 21, 2003, a few days before the stock’s value dropped by 10 percent and before revelations that Freddie was being investigated for possible criminal behavior.33 The sale smacked of insider trading. At the time members of Congress were exempt from insider trading laws, a situation that changed in spring 2012, when President Obama, with strong bipartisan support, signed the STOCK Act, which prohibits congressional legislators from trading based on nonpublic information.34

The website Business Insider noted in 2011, before the STOCK Act was passed, that Emanuel’s sales were “by no means illegal. . . . But the timing of the trades is certainly suspect, especially given Emanuel’s service on the board during the time period for which the federal government was investigating the actions of Freddie Mac executives.”35

Freddie and the Economic Crisis

The federal government ultimately took over the floundering Freddie Mac and Fannie Mae in 2008, promising to insure up to $300 billion worth of their loans.36 Emanuel was one of eighteen cosponsors of the Housing and Economic Recovery Act of 2008, which gave the government authority to do the takeover.37

In February 2009 the Obama administration committed to extend up to $400 billion to Fannie and Freddie to cover their losses.38 The administration lifted that cap in December of that year, just weeks before the December 31 deadline, after which a new bailout would have required congressional approval.39

The debacle drew increased scrutiny to Freddie and Fannie, including the period when Emanuel served on the board. And it brought into the public eye the lashing Freddie Mac had taken at the hands of federal watchdogs. Risky investments of the kind made during Emanuel’s board tenure were blamed in part for the collapse of Fannie and Freddie, meltdowns that played a significant role in the economic crisis.

In a letter written to Attorney General Eric Holder before the commitment of unlimited assistance to Fannie and Freddie, conservative pundit Grover Norquist, head of Americans for Tax Reform, and liberal Firedoglake blogger Jane Hamsher called for Emanuel to resign from the Obama cabinet and demanded that the Justice Department launch a federal investigation and empanel a grand jury. They wrote, “We believe there is an abundant public record which establishes that the actions of the White House have blocked any investigation into [Emanuel’s] activities while on the board of Freddie Mac from 2000 to 2001, and facilitated the cover up of potential malfeasance until the ten-year statute of limitations has run out.”40

Right-wing activists seized on Emanuel’s involvement with Freddie Mac to bolster their narrative of widespread “Chicago-style” corruption within the Obama administration. But it was really just another example of Emanuel’s longstanding ties to the financial sector, and of how his career had been built in part upon leveraging those ties for political and personal gain.

The ultimate takeaway of Emanuel’s time in the private sector may be this: although he had the political savvy and financial smarts to earn some $18 million in investment banking in a few years, those same qualities didn’t prevent him from standing by while people purportedly under his watch took a big gamble involving billions in taxpayer money and the homes of millions of Americans.