by Matt Taibbi
But there was one benefit to this mess, and that was this: Goldman, through Litton, forgave entirely the smaller of Eljon Williams’s two mortgage loans. Meanwhile his other lender, ASC, agreed under public pressure to a modification, allowing Eljon and his family to return to a relatively low fixed rate. A religious man, Williams talks of the events that led to his keeping his home as though they involved divine intervention. “I prayed on it, and prayed on it,” he says. “And it happened.”
What is most amazing about the mortgage-scam era is how consistent the thinking was all the way up the chain. At the very bottom, lowlifes like Solomon Edwards, the kind of shameless con man who preyed on families and kids and whom even other criminals would look down on, simply viewed each family as assets to be liquidated and converted into one-time, up-front fees. They were incentivized to behave that way by a kink in the American credit system that made it easier, and more profitable, to put a torch to a family’s credit rating and collect a big up-front fee than it was to do the job the right way.
And, amazingly, it was the same thing at the very top. When the CEO of Goldman Sachs stood up in the conference room of the New York Federal Reserve Bank and demanded his money, he did so knowing that it was more profitable to put AIG to the torch than it was to try to work things out. In the end, Blankfein and Goldman literally did a mob job on AIG, burning it to the ground for the “insurance” of a government bailout they knew they would get, if that army of five hundred bankers could not find the money to arrange a private solution. In their utter pessimism and complete disregard for the long term, they were absolutely no different from Solomon Edwards or the New Century lenders who trolled the ghettos and the middle-class suburbs for home-buying suckers to throw into the meat grinder, where they could be ground into fees and turned into Ford Explorers and flat-screen TVs or weekends in Reno or whatever else helps a back-bench mortgage scammer get his rocks off. The only difference with Goldman was one of scale.
Two other things are striking about the mortgage-scam era. One was that nobody in this vast rogues’ gallery of characters was really engaged in building anything. If Wall Street makes its profits by moving money around from place to place and taking a cut here and there, in a sense this whole mess was a kind of giant welfare program the financial services industry simply willed into being for itself. It invented a mountain of money in the form of a few trillion dollars’ worth of bogus mortgages and rolled it forward for a few years, until reality intervened—and suddenly it was announced that We the Taxpayer had to buy it from them, at what they called face value, for the good of the country.
In the meantime, and this is the second thing that’s so amazing, almost everyone who touched that mountain turned out to be a crook of some kind. The mortgage brokers systematically falsified information on loan applications in order to secure bigger loans and hawked explosive option-ARM mortgages to people who either didn’t understand them or, worse, did understand them and simply never intended to pay. The loan originators cranked out massive volumes of loans with plainly doctored applications, not giving a shit about whether or not the borrowers could pay, in a desperate search for short-term rebates and fees. The securitizers used harebrained math to turn crap mortgages into AAA-rated investments; the ratings agencies signed off on that harebrained math and handed out those AAA ratings in order to keep the fees coming in and the bonuses for their executives high. But even the ratings agencies were blindsided by scammers who advertised and sold, openly, help in rigging FICO scores to make broke and busted borrowers look like good credit risks. The corrupt ratings agencies were undone by ratings corrupters!
Meanwhile, investment banks tried to stick pensioners and insurance companies with their toxic investments, or else they held on to their toxic investments and tried to rip off idiots like Joe Cassano by sticking him with the liability of default. But they were undone by the fact that Joe Cassano probably never even intended to pay off, just like the thousands of homeowners who bought too-big houses with option-ARM mortgages and never intended to pay. And at the tail end of all this frantic lying, cheating, and scamming on all sides, during which time no good jobs were created and nothing except a few now-empty houses (good for nothing except depressing future home prices) got built, the final result is that we all ended up picking up the tab, subsidizing all this crime and dishonesty and pessimism as a matter of national policy.
We paid for this instead of a generation of health insurance, or an alternative energy grid, or a brand-new system of roads and highways. With the $13-plus trillion we are estimated to ultimately spend on the bailouts, we could not only have bought and paid off every single subprime mortgage in the country (that would only have cost $1.4 trillion), we could have paid off every remaining mortgage of any kind in this country—and still have had enough money left over to buy a new house for every American who does not already have one.
But we didn’t do that, and we didn’t spend the money on anything else useful, either. Why? For a very good reason. Because we’re no good anymore at building bridges and highways or coming up with brilliant innovations in energy or medicine. We’re shit now at finishing massive public works projects or launching brilliant fairy-tale public policy ventures like the moon landing.
What are we good at? Robbing what’s left. When it comes to that, we Americans have no peer. And when it came time to design the bailouts, a monster collective project spanning two presidential administrations that was every bit as vast and far-reaching (only not into the future, but the past) as Kennedy’s trip to the moon, we showed it.
*Name changed for legal reasons.
*“Agency-backed” securities refers to securities backed by government-sponsored entities, e.g., Fannie Mae or Freddie Mac.
4
Blowout
The Commodities Bubble
IN THE SUMMER of 2008, Priscilla Carillo, a twenty-four-year-old living near San Bernardino, had some rough luck. She had been working as a temp at a warehouse and also going to school at Chaffey Community College, about forty minutes away from where she was living at the time. She was humping it back and forth in a beat-up Nissan Altima, making a go of it. She says her mom, thinking she was being helpful, had booted her out of the house when she turned eighteen, told her to make her own way. You know, the American way.
“I always thought Latinos lived with their parents until they were forty,” she says now. “I guess I was different.”
Then, at the beginning of 2008, Priscilla started to notice a problem. Gas prices were going up—way up. They were steaming past four dollars a gallon. Since the trip to her community college was a long one, it soon became unaffordable. She dumped school and went to work full-time. But then her temp agency went under and she lost her job. Now Priscilla was broke and unable to pay rent. In June and July 2008, she was living in her car.
“I’d park at a library or in a park or something,” she says now. “I didn’t know I couldn’t sleep in residential neighborhoods at night. I got picked up by the cops a bunch of times. They thought I was a prostitute. I told them, man, I’m just sleeping.”
Halfway across the country, at almost exactly the same time, a businessman named Robert Lukens was starting to feel a squeeze. He ran a contracting firm called Lukens Construction in Reading, Pennsylvania. Lukens had seven employees and his business had been in his family for three generations, founded by his father close to forty years back.
He hadn’t wanted to get into the family business, but circumstances made that decision for him. Way back in 1981 he’d moved to Richmond, Virginia, and in the space of a week had gotten married and then was laid off by Ryan Homes, one of the biggest contracting companies in America.
Now, with a new wife and no job, he reluctantly went back to work for his father, who had taken over Lukens Construction from his own father and with whom he had a difficult relationship. But father and son smoothed it out, stuck it out, and made it work. Some fourteen years later, in 1995, Robert Lukens took over t
he business himself, and in describing the firm he sounded like a man deeply proud of his family’s business. “We do high-end contracting, really nice work,” he says. Not cookie-cutter houses, he says, but custom additions and “lots of word-of-mouth referrals.” Heading into 2008, Lukens says, he was doing fine.
“But then all of a sudden I started having high energy costs,” he says. “Used to be I’d pay five hundred, six hundred dollars a week for gas. Now, in July of 2008, I’m suddenly paying twelve hundred dollars a week for gas. And not only that—all my vendors are suddenly hitting me with fuel costs. Used to be if I got a delivery of lumber, the delivery would be figured into the price. Now they’d hit me with a surcharge—a hundred and twenty-five bucks for the delivery or whatever. Lumber. Concrete. Stuff like that.”
About the same time that Lukens was seeing those price hikes, a biology student with dreams of becoming a doctor named Sam Sereda was heading home for the summer. Sereda was doing his undergrad at Gordon College on the North Shore of Massachusetts, but his home was in Sunnyvale, in the Bay Area out in California. Sereda was doing everything right in his young life. His grades were good, he was making money in his spare time by tutoring kids from Hamilton Wenham High in AP Bio. For the summer he had an internship set up with a Bay Area company called Genentech in San Francisco, and was planning on taking an advanced calc class at West Valley College in Saratoga, to pick up a few extra credits for his upcoming senior year.
“But then gas prices, they went from like three bucks to over four bucks a gallon,” he says now. “My family was going through some financial problems at the time, too. I ended up having to cancel the internship. The forty-minute drive was too long, it cost me too much money.”
The calc class went out the window, too. “Couldn’t afford that drive either,” he says now. “I ended up having to do twenty credits in one semester when I got back to Massachusetts. I know how this sounds, but with gas prices the way they were … my only real option for that summer was to sit in the house and do nothing. My brother was ill at the time—my family and I made the decision, the best thing for me was just to stay home.”
And while all of this was going on, a woman named Diane Zollinger was gainfully employed, no serious economic worries on the horizon. Her problem was that she lived in Montana. In Montana, everything is far from everything else. She had a good job in Bozeman, but Bozeman was thirty-five miles from her home in Livingston. She was driving seventy miles a day to work when the price of gas shot up to $4.85 a gallon. Her car got twenty-five miles a gallon. She was paying nearly seventy bucks a week for gas at the height of the oil spike that summer. “When the world crashed and I got laid off in November,” she says now, “we had more money in our pockets at the end of the day with me on unemployment.”
It didn’t matter where you lived or what you did for a living—in the summer of 2008, the cost of energy almost certainly hit you hard. There was no serious attempt by either the national media or the national political establishment to explain the cause of the problem. Most people assumed it had to do with some combination of shortages and/or increased demand from the Chinese industrial machine, and most TV reports were more than willing to encourage that perception, despite the fact that there were no long lines at the gas stations, no seventies-style rage-fests while waiting for gas, no obvious evidence of scarcity. We were told about a crisis of supply that existed somewhere other than where we could see it—someplace in the abstract.
“I remember watching CNN, and they were trying to tell us about shortages,” says Sereda. “They were showing lines in Canada, or somewhere else, someplace.”
I mostly spent that summer covering the McCain-Obama presidential campaign for Rolling Stone, during which time I heard varying explanations for why this gas price spike was happening, why people like Priscilla were suddenly living out of cars.
McCain, amazingly, spent all summer telling us reporters that the reason for the spike in gas prices was that socialists like Barack Obama were refusing to permit immediate drilling for oil off the coast of Florida.
Like all reporters that summer, I found my attention dominated not by interjections into the commodities market but by a seemingly endless series of made-up controversies involving either warring tribes within the Democratic Party (the Clintonicons versus the Obamaniacs) or blue/red hot-button issues like the Reverend Wright business.
But I do remember that gas was an issue, sort of, and it sort of got talked about by both candidates. I remember being in Kenner, Louisiana, on the night McCain de facto won the nomination and he gave a speech against a hideous puke-green background saying that “no problem is more urgent today than America’s dependence on foreign oil.” I remember the somber ads McCain started airing that summer talking about how “some in Washington are still saying no to drilling in America.”
I remember after that night, the press pool rolled out of its caged-in area after the speech and all us hacks were snickering in the bus about McCain’s latest whopper.
“What a bunch of bullshit,” one of them, a TV guy I’d known and disliked for years, said. “As if gas prices were going up because of an offshore drilling ban.”
“Yeah, nobody’s gonna buy that,” added another.
This went on for a few minutes. Campaign reporters love to rip the candidates they cover, it’s their favorite sport—until the candidate actually walks back into their section of the plane, at which point they go weak in the knees like high school girls and start kissing his skirts like he’s the pope. Anyway, at one point of this latest rip session about McCain’s drilling gambit, I piped in. “Hey,” I said. “Does anyone here actually know why gas prices are going up? I sure as hell don’t.”
There was a brief discussion at this, and theories were offered, but in the end it became clear that none of us in the pool had a fucking clue what was causing the gas spike. I later whispered to another print reporter: “Doesn’t that make all of us frauds? I mean, if we’re covering this stuff anyway.”
His answer: “You’re just figuring that out now?”
Later on, I was in Minnesota for the Republican convention in September of that summer and listening—squeezed up against a wall of other suckers with jobs as lousy as mine and with backgrounds in economics as shaky as mine—as McCain explained the problem in explicit terms:
Senator Obama thinks we can achieve energy independence without more drilling and without more nuclear power. But Americans know better than that. We must use all resources and develop all technologies necessary to rescue our economy from the damage caused by rising oil prices.
How about Barack Obama? He offered a lot of explanations, too. In many ways the McCain-Obama split on the gas prices issue was a perfect illustration of how left-right politics works in this country.
McCain blamed the problem, both directly and indirectly, on a combination of government, environmentalists, and foreigners.
Obama knew his audience and aimed elsewhere. He blamed the problem on greedy oil companies and also blamed ordinary Americans for their wastefulness, for driving SUVs and other gas-guzzlers. I remember him in the pivotal Pennsylvania primary, when Hillary had him running scared for a while, and he was honing a strategy of chalking up the high gas prices to greedy oil companies that, one supposed, were simply bumping up prices to pay for bigger bonuses.
“They have been in fat city for a long time,” Obama said in Wilkes-Barre during that campaign, referring to Exxon and other gas companies. “They are not necessarily putting that money into refinery capacity, which could potentially relieve some of the bottlenecks in our gasoline supply. And so that is something we have to go after. I think we can go after the windfall profits of some of these companies.”
Both candidates presented the solution as just sitting there waiting to be unleashed, if only one or the other would get the political go-ahead. McCain said the lower gas prices were sitting somewhere under the Gulf of Mexico. Obama said they were sitting in the bank accounts of
companies like Exxon in the form of windfall profits to be taxed.
The formula was the same formula we see in every election: Republicans demonize government, sixties-style activism, and foreigners. Democrats demonize corporations, greed, and the right-wing rabble.
Both candidates were selling the public a storyline that had nothing to do with the truth. Gas prices were going up for reasons completely unconnected to the causes these candidates were talking about. What really happened was that Wall Street had opened a new table in its casino. The new gaming table was called commodity index investing. And when it became the hottest new game in town, America suddenly got a very painful lesson in the glorious possibilities of taxation without representation. Wall Street turned gas prices into a gaming table, and when they hit a hot streak we ended up making exorbitant involuntary payments for a commodity that one simply cannot live without. Wall Street gambled, you paid the big number, and what they ended up doing with some of that money you lost is the most amazing thing of all. They got America—you, me, Priscilla Carillo, Robert Lukens—to pawn itself to pay for the gas they forced us to buy in the first place. Pawn its bridges, highways, and airports. Literally sell our sovereign territory. It was a scam of almost breathtaking beauty, if you’re inclined to appreciate that sort of thing.
The scam was a two-part squeeze. Part one was the commodities bubble, a completely avoidable speculative mania that drove oil prices through the roof. It is perhaps the first bubble in history that badly wounded a mighty industrial empire without anyone even realizing it happened. Most Americans do not even know that it took place. That was part of the beauty of the grift—the oil supply crisis that never was.
This was never supposed to happen. All the way back in 1936, after gamblers disguised as Wall Street brokers destroyed the American economy, the government of Franklin D. Roosevelt passed a law called the Commodity Exchange Act that was specifically designed to prevent speculators from screwing around with the prices of day-to-day life necessities like wheat and corn and soybeans and oil and gas. The markets for these necessary, day-to-day consumer items—called commodities—had suffered serious manipulations in the twenties and thirties, mostly downward.