by Matt Taibbi
After a few hours of this—multiple witnesses and even some of the commissioners sounded similar themes—I started laughing a little. In America, every political issue, no matter how complicated, ultimately takes the same silly ride down the same rhetorical water slide. Complex social and economic phenomena are chopped up into pairs of easy-to-digest sound bites, with one T-shirt slogan for the Fox News crowd and one for the Democrats. And here in this FCIC hearing, two years after the crisis, it struck me that the two sides had finally settled on their T-shirt interpretations of the crash era.
The Republicans were going with this goofy story the Kohlhagens of the world were dumping on the public, that the financial crisis was caused by lazy poor people living in too much house. If you scratched the surface of Republican rhetoric two years later, that’s really all it was—a lot of whining about the Community Reinvestment Act of 1977 and Fannie and Freddie, with social engineering being the dog-whistle code words describing government aid to minorities. “Private enterprise mixed with social engineering” was how Alabama senator Richard Shelby put it.
The Democrats’ line was a little more complicated. They had no problem publicly pointing the finger at companies like Goldman Sachs as culprits in the mess, although behind closed doors, of course, it was Democratic officials like Geithner who were carrying water for Wall Street all along, arranging sweetheart deals like the Wachovia rescue and the Citigroup bailout (notable because Geithner’s ex-boss, former Clinton Treasury secretary Bob Rubin, was a big Citi exec). Barack Obama talked a big game about Wall Street, but after he got elected he hired scads of Goldman and Citi executives to run economic policy out of his White House, and his reform bill ended up being a Swiss cheese shot through with preposterous loopholes. The Democrats’ response to Wall Street excess was similar to their attitude toward the Iraq War—they were against it in theory, but in practice, they weren’t going to do much about it.
A few weeks after that FCIC hearing, there were a few more punctuation-mark moments in the history of the financial crisis. The aforementioned Dodd-Frank financial reform bill, a fiasco that would do nothing to stop too-big-to-fail companies from gambling with America’s money, passed and became law. And the SEC settled with Goldman Sachs for $550 million in the infamous ABACUS case, a move that was widely interpreted by Wall Street as the final shoe to be dropped in the area of postcrisis enforcement and punishment. The market had been down 100 points on the day the settlement was announced; it scrambled back to a loss of just 7 by the end of the day, buoyed by the Street-wide sense that there were no more enforcement actions coming. We were going back to business as usual.
Everyone, it seemed, wanted this story to be over. The reason was obvious. The financial crisis had been far too complicated and messy to fit into the usual left-right sound bites. It was a story that for a short but definite period of time had forced the monster of American oligarchy out from below the ocean surface and onto the beach, for everyone to see.
When the economy imploded, the country had for a time been treated to the rare spectacle of a perfectly bipartisan political disaster, with both Republicans and Democrats sharing equally in the decades-long effort at deregulation that opened the door to the Grifter era. And the crisis forced a nation of people accustomed to thinking that their only political decisions came once every four years to consider, for really the first time, the political import of regular or even daily items like interest rates, gasoline prices, ATM fees, and FICO scores.
The powers that be don’t want people thinking about any of these things. If the people must politick, then let them do it in the proper arena, in elections between Wall Street–sponsored Democrats and Wall Street–sponsored Republicans. They want half the country lined up like the Tea Partiers against overweening government power, and the other half, the Huffington Post crowd, railing against corporate excess. But don’t let the two sides start thinking about the bigger picture and wondering if the real problem might be a combination of the two.
Americans like their politics simple, but Griftopia is as hard as it gets—a huge labyrinth of financial rules and bylaws within which a few thousand bankers and operators bleed millions of customers dry using financial instruments that are far too complex to explain on the evening news. Navigating this mess requires a hell of a lot of effort and attention, and few politicians in either party have any appetite at all for helping ordinary people make that journey. In fact, the situation is just the opposite: they’d rather we latched on to transparently stupid Band-Aid explanations for what happened in 2008, blaming it on black homeowners or bad luck or a few very bad apples in companies like AIG.
By the time this book hits the shelves, the 2010 midterm elections will be upon us, at which time this dumbing-down process with regard to the public perception of the financial catastrophe should be more or less complete. The Tea Party and its ilk will have found a way to push the national conversation in the desired idiotic direction. Instead of talking about what to do about the fact that, after all the mergers in the crisis, just four banks now account for half of the country’s mortgages and two-thirds of its credit card accounts, we’ll be debating whether or not we should still automatically grant citizenship to the American-born children of illegal immigrants, or should let Arizona institute a pass-law regime, or some such thing.
Meanwhile, half a world away, in little-advertised meetings of international bankers in Basel, Switzerland, the financial services industry will be settling on new capital standards for the world’s banks. And here at home, bodies like the CFTC and the Treasury will be slowly, agonizingly making supertechnical decisions on regulatory questions like “Who exactly will be subject to the new Consumer Financial Protection Bureau?” and “What kinds of activities will be covered by the partial ban on proprietary trading?”
On these real meat-and-potatoes questions about how to set the rules for modern business, most ordinary people won’t have a voice at all; they won’t even be aware that these decisions are being made. But industry lobbyists are already positioning themselves to have a behind-the-scenes impact on the new rules. While the rest of us argue about Mexican babies before the midterms, hotshot DC law firms like Skadden, Arps, Slate, Meagher & Flom may have as many as a hundred lawyers working on the unresolved questions in the Dodd-Frank bill. And that’s just one firm. Thousands of lobbyists will be employed; millions of lobbying dollars will be spent.
This is how America works. Our real government is mostly kept hidden from view, and the truly weighty decisions about where our society is going and what rules it is going to live by are made mostly in private, by groups of anonymous lawyers and bureaucrats and lobbyists, government officials and industry reps alike.
As the crisis fades even further from public memory, it seems more and more likely that a whole range of monstrous and disturbing questions raised by the events of the last few years will go unanswered. The Wachovia deal was just one of a handful of massive interventions in the so-called private economy that were seemingly executed, in the proverbial smoke-filled back room, by a few dozen state officials in conjunction with a few counterparts on the private business side.
A few brief months in 2008 saw the following, among other things:
In March 2008, Treasury Secretary Henry Paulson put a shotgun to the head of dying Bear Stearns and forced it to sell out to JPMorgan Chase at the absurdly low price of $2 a share (later raised to $10 a share). Chase also got $30 billion in federal guarantees to take the deal. The $2-a-share number was so low that Morgan Stanley CEO John Mack, when he heard the news, publicly wondered aloud if it was a typo and the real number was $20 a share. A few months later, the FDIC seized failing commercial bank Washington Mutual, Inc., and immediately sold it to Chase for the comparably ridiculous price of $1.9 billion; Washington Mutual would later sue, claiming that the FDIC and Morgan conspired to lower WMI’s sale price for Morgan.
Paulson, a former Goldman Sachs employee, was in constant telephone contact with Goldma
n’s new CEO, Lloyd Blankfein, during a period in which Paulson was negotiating the AIG bailout, which of course led to at least $13 billion being transferred directly to Goldman Sachs, a major AIG counterparty.
Around the same time as the September AIG deal, Bank of America entered into a state-aided agreement to buy foundering Merrill Lynch, a company run by yet another ex-Goldmanite, the notorious asshole John Thain, who had become famous for buying an $87,000 rug for his office as his company quickly went broke thanks to its reckless mortgage gambling.
A few months later, in December 2008, B of A chief Ken Lewis discovered that Merrill had billions in previously unreported losses and tried to back out of the deal. He then went to Washington and had a discussion with Paulson, who apparently threatened to remove both the company’s management and its board if he didn’t do the deal. Lewis, whose bank had gotten some $25 billion in cash via the TARP bailout, emerged from that meeting with Paulson suddenly determined once again to go through with the shotgun wedding. A month or so later, Bank of America shareholders learned for the first time about the billions in losses and about the millions in last-minute bonuses paid out by Thain after shareholders voted—in one case, Thain paid former Goldman executive Peter Kraus a $25 million bonus on Merrill’s last days even though Kraus had only been at Merrill for a few months.
Lewis had since been placed under investigation, with New York attorney general Andrew Cuomo alleging that Lewis withheld information about the Merrill losses from shareholders at the direction of Paulson and Fed chief Ben Bernanke. “I was instructed that ‘we do not want a public disclosure,’ ” Lewis said.
There were other stories. The seemingly fortuitous late September 2008 coincidence of Warren Buffett deciding to pledge $5 billion to a then-foundering Goldman Sachs during the same week that the bank was miraculously rescued from possible bankruptcy by Geithner’s decision to allow it to convert overnight to bank holding company status—a decision that allowed Goldman to borrow mountains of free cash from the Fed. Or how about Barack Obama putting a sitting Citigroup official (Michael Froman) in charge of his economic transition team right at the time a ridiculously generous federal bailout of Citigroup was being negotiated by Geithner—whose appointment as Treasury secretary was announced the very day the Citi bailout was concluded?
You put all of these stories together and what you get is a bizarre snapshot of a national economy in which the old Adam Smith capitalist notion of companies succeeding or failing on their merits, with the price of their assets determined entirely by the market, was tossed out the window. In its place was a system in which mergers and bankruptcies were brokered not by the market, but by government officials like Paulson and Geithner and Bernanke, and prices of assets were determined not by what investors were willing to pay, but by the level of political influence of the company’s leaders.
At the outset of 2008, the five biggest investment banks in America were Morgan Stanley, Goldman, Bear Stearns, Lehman Brothers, and Merrill Lynch; by the end of the year, Morgan and Goldman had been rescued by late-night conversions to commercial bank status, Bear Stearns had been hand-delivered to JPMorgan Chase, bastard child Merrill Lynch and its billions in gambling losses had been forced on sorry-ass Bank of America, and Lehman Brothers had been allowed to die by Hank Paulson. The resulting financial landscape was far more concentrated than before, in both the investment banking sector (where the collapse of Bear, Merrill, and Lehman left Morgan and Goldman ascendant) and the commercial banking sector (since the crisis, Chase, Wells Fargo, and Bank of America all exceed the legal size limit of 10 percent of all American deposits).
A few years later, a country whose citizens purport to be mad as hell about growing government influence has still said little to nothing about that bizarre sequence of events in which the entire economy was rebuilt via this series of back-alley state-brokered mergers, which left financial power in America in the hands of just a few mostly unaccountable actors on Wall Street. We still know very little about what really went on during this period, who was calling whom, what bank was promised what. We need to see phone records, e-mails, correspondence, the minutes of meetings; we need to know what the likes of Paulson and Geithner and Bernanke were doing during those key stretches of 2008.
But we probably never will, because the country increasingly is forgetting that any of this took place. The ability of its citizens to lose focus so quickly and to be distracted by everything from Lebronamania to the immigration debate is part of what makes America so ripe for this particular type of corporate crime. We have voters who don’t pay attention, a news media that either ignores key subjects or willfully misunderstands them, and a regulatory environment that bends easily to lobbying and campaign financing efforts. And we’ve got a superpower’s worth of accumulated wealth that is still there for the taking. You put all that together, and what you get is a thieves’ paradise—a Griftopia.
NOTE ON SOURCES
Much of the information in this book relies upon interviews with industry professionals, government regulators, and members of Congress and their staff. Most of those people are named in the text, but a few are not. In most instances the use of anonymous sources is incidental—in the “Hot Potato” chapter, for instance, the characters “Andy” and “Miklos” are describing general industry practices and the decision to keep their identities anonymous was made strictly with the aim of protecting them from future professional difficulties. Similarly, there were sources in the chapter “The Outsourced Highway” whose employers would certainly be unhappy if they were aware that one of their own was talking to me, despite the fact that most of the information I got from those sources was very general in nature and not terribly sensitive.
Because information is so valuable in the financial services industry, being known as someone who talks to reporters can be fatal to the career of a young banker or trader; therefore, there were a number of occasions in the book when I kept identities secret solely to allow those sources to feel comfortable being candid in their explanations of how their businesses work. In almost every circumstance, from the commodities chapter where I spoke with commodities traders, to the mortgage chapter where I spoke to people like Andy and Miklos who worked on billion-dollar mortgage deals, to the Goldman Sachs chapter where I spoke with hedge fund managers and traders who had done business with that bank, the information I was after was about general processes, i.e., how things work in these businesses on a day-to-day basis. In only one part of the book, at the end of the “Hot Potato” chapter, where I talk about AIG, did I rely upon anonymous sources to provide new information about previously unreported material.
In that section, my sources were people who were involved, at a high level, with the negotiations to keep AIG’s subsidiary insurance companies solvent and prevent their seizure by state insurance departments. In the text I tried to emphasize that what I’m reporting in the book is the point of view of these particular actors in the story, who perceived that some of the counterparties to AIG’s CDS business may have been using the threat of massive collateral calls to AIG’s securities-lending business (which might have caused a widespread “Main Street” disaster involving thousands of personal insurance policies) as a lever to force AIG, and later on the Federal Reserve, to pay up. One of those sources, Eric Dinallo, the former head of the New York State Insurance Department, is named. But I had other high-ranking sources telling me a similar story. There are doubtless others who were involved in the AIG bailout who perceived things differently. But it is a fact that key actors in those events did perceive things in the way they are reported here, and I believe that is significant because it gets to the larger point in the book—that the responsibility for maintaining order and financial stability in our society has at times been transferred into the hands of private financial interests whom even top government officials believe to be capable of holding ordinary taxpayers hostage for profit.
The sourcing for the rest of the book is mostly self-explanat
ory, relying upon interviews with named sources or publicly reported material.
ABOUT THE AUTHOR
MATT TAIBBI is a contributing editor for Rolling Stone and the author of four previous books, including the New York Times bestseller The Great Derangement. He lives in Jersey City, New Jersey.