by Nomi Prins
Table of Contents
Title Page
Copyright Page
Acknowledgements
Introduction
The Causes of the Crisis
The Borrowing Chain
Expensive Failure
Chapter 1 - Where’d the Bailout Money Go, Exactly?
Paulson Loves Small Government for Big Reasons
Paulson Discovers Big Government for Little Friends
Two Hundred Billion Isn’t What It Used to Be
It Was Never about Fixing the Crisis
They Encouraged Banks to Sit on Their Money
They Spent It on Mergers and Paying Bills
They Secretly Gave Away Billions
No Money for Anyone Else
Geithner’s No Friend to Homeowners, Either
Chapter 2 - This Was Never about the Little Guy
Risk Models Built on Thin Air
Lazy Lending Legislation
How Lenders Created a Risk Free Business
More about Making Simple Loans into Complex Securities
Making Complex Securities into Incomprehensible Securities
Everyone Was Invited, Everyone RSVP’d, and Everyone Showed Up
Making Incomprehensible Securities into Inconceivable Insurance
The Cruelest Lie of All
Chapter 3 - Everybody Wants to Be a Bank
Will They Really Be More Regulated Now?
Not Only Investment Banks Can Be Banks
What the Fed Created, the FDIC Cleaned Up
If You Can’t Beat Them, Buy Them
The Stage Is Set for Déja Vu
Chapter 4 - Government Sachs
Oh, the Status
Genius or Really Lucky?
Mentors and Kings
Global Flow, D.C. Dollars
Robert Rubin’s Always Up to Something
Having Influence Means Actually Influencing
Yet More Goldmanites in the Mix
The End Game
Chapter 5 - We Already Have a Bad Bank: It’s Called the Federal Reserve
Chase Hunts a Bear with the Fed’s Rifle
Geithner Wasn’t Kidding
Giving Loans against “Non-Investment Grade Securities”
Remember: That $700 Billion Is the Smallest Part of the Bailout
The Silent Coconspirator
Controlling the Punch Bowl
The Last Banking Crisis
Advocating the Wrong Policies
“Had the Models Been Fitted More Appropriately”
Fighting the Fed
The Open Door Policy Is Now Closed
The Tag Team Bailout Approach
The Real Cost and Risk of the Bailout
Chapter 6 - Everyone Saw This Coming
A Law That Really Worked
Who Killed Glass-Steagall?
Senator Byron Dorgan Predicts We’ll Rue the Day
“An Awfully Big Mess”
The Bank Holding Company Bonanza
Chapter 7 - Bonus Bonanza
CEOs Dodge the Blame
Bank of America Acquires a Countrywide Can of Worms
Big Bonuses and Big Layoffs
What’s a Few Million in Bonuses When Your Losses Are in the Billions?
They Kept the Money
Conflict of Interest
Please Don’t Call It a Bonus
Bonuses Always Bounce Back
It’s the Complexity, Stupid!
Take V
Chapter 8 - Big Banks Mean Big Trouble
The History of Small Is Better
Too Big to Do Anything but Fail
Chapter 9 - Change, Really?
Tight Credit, Loose Talk
Some Solutions
Pour Some Sugar on It
Free Markets Aren’t Free
THE REAL NUMBERS: BAILOUT, TARP, AND CEO COMPENSATION
NOTES
INDEX
Copyright © 2009 by Nomi Prins. All rights reserved
Published by John Wiley & Sons, Inc., Hoboken, New Jersey Published simultaneously in Canada
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ACKNOWLEDGMENTS
To write a book in four months on a subject that’s such a moving target is intimidating. When data are not always readily available and those most involved with handling the crisis rarely say what they mean or act on what they say, it makes the endeavor especially daunting.
I would not have been able to complete this task without the support of, yes, a small village of people. First of all, I would like to express my heartfelt gratitude for the invaluable research work provided by Sara Abbas, Clark Merrefield, Don McAdam, and Krisztina Ugrin, who all clocked exceedingly long hours over the course of this project. In particular, Krisztina’s compilation of the bailout numbers was vital to my understanding the breadth of the Pillage. Clark’s sharp eye for detail and consummate editorial skills were critical in shaping the book through every stage, especially in the face of the constant barrage of information. Thanks also to Theresa Diamond and Ed Cole for their research work. Thanks to David Lobenstein, whose editorial advice during the earlier stages of this book was crucial. Thanks to my dear friend and agent, Mark Suroff, for always being there.
My special thanks to my editor, Eric Nelson at John Wiley & Sons, who reached out to me at the end of 2008 to write this book and whose outrage matched my own. I am also grateful to the rest of the fabulous team at Wiley, including production editor Rachel Meyers and freelance copy editor Patricia Waldygo. Thanks to my publicist, Celeste Balducci, for all of her dedication, as well as to the rest of Monteiro & Company.
My gratitude to Demos for all the support they’ve provided since I left Wall Street in 2002 and for t
he important contributions they make every day, especially Miles Rapoport, David Callahan, Tammy Draut, Carol Villano, Bob Kuttner, Lew Daly, and the man who never seems to sleep, Tim Rusch.
I’ve been fortunate to have the backing, inspiration and friendship of some wonderful people—writers, editors, and thinkers—over the years. Thanks to Megan Kiefer, Margaret Bustell, Viv Shelton, Deborah Dor, Francesca Lieb, Jessica Weizman, Karen Meola, Matt Suroff, Lynne Roberts, Robin Lentz, Marna Bunger, Doug Henwood, John Dizard, Michael Deibert, Tracy Quan, Colin Robinson, Andy Robinson, Monika Bauerlein, David Corn, Alleen Barber, Betsy Reed, Esther Kaplan, Andy Serwer, Michael Pollack, Suzi Weissman, Neil Weinberg, Walt Pavlo, Don Hazen, Amy Rowe, Jay Kramer, Natalie Schwartzberg, Tom Mackell, Harry Phillips, Jed Wallace, Jon Elliott, Ralph Nader, and Greg “the navigator” Della Stua. Thanks to my friends on the Street who remain in contact and keep me abreast of what’s going on.
My love and appreciation to my fiancé, Lukas Serafin, for being so supportive and reading through the many versions of this book with love and attention. Thanks to my family for putting up with my long hours, absences, and constant tirades about the subject matter.
Introduction
The More Wall Street Changes, the More It Stays the Same
If the thought of the government spending trillions of dollars on Wall Street’s screwups pisses you off, you’re not crazy. Can’t you think of a zillion better uses for the ridiculous sums of money that have been dumped into the laps of financial firms, whose execs made more in a minute than you do in a year, to support the system that they trashed? You’re not alone. You are living in the most costly and reckless period of American history. You have every right to understand how the quasi legal extortion happened and who was behind it. But it doesn’t stop there: you also deserve to know how to ensure this kind of pillaging stops and never happens again. You can and must demand a complete overhaul of the banking industry’s status quo. Our country wasn’t founded so that we, the people, could indefinitely support them, the banks.
Welcome to what I call the Second Great Bank Depression. Why that name? Because this period of economic chaos, loss, and global financial destruction was manufactured by the men who shaped the banking sector. They had help, of course. But this debacle is as man made and avoidable as the Great Depression was. If anyone in the Oval Office, in Congress, at the Federal Reserve, in the Treasury Department, or in the offices of any regulatory agency had done any serious preventative work, had exposed the murky Wall Street practices before they blew up in our collective faces, had contained reckless trading and borrowing activities, or had rendered financial firms smaller and more transparent—if any of these people had cared—the crash could have been avoided, or at least would have been less severe. Millions of jobs and trillions of dollars would have been spared. Billions of dollars of bonuses wouldn’t have rewarded the mostly legal but ridiculously risky practices that had such devastating effects.
The deluge of money pouring from all orifices of Washington into the banks gives tacit approval to the backward culture of banking—a world based on crazy compensation, counterproductive competition, and loosely regulated practices and laws. Yet it was all pushed by a select group of Wall Street power players, who move back and forth with all too much ease between our nation’s capital and the gilded realm of finance.
If it seems as if the culture of Goldman Sachs pervades the halls of Washington, that’s because the people of Goldman Sachs pervade the halls of Washington. That’s why, despite all the talk in Washington about reforming the system, the same execs who orchestrated its failures were the ones hobnobbing with the political leaders of both the Bush and the Obama administrations. In fact, Obama is even closer to the financial execs than Bush was. In early spring of 2009, Obama called a meeting with Wall Street’s heads to ask them to accept responsibility for causing the crisis and to commit to helping mitigate it.1 As if that admission would change the rules of their game.
That’s why we still have a bizarre and misplaced faith that huge corporations—which are designed for the sole purpose of making profits—are somehow able to act ethically and restrain themselves. That’s why the Federal Reserve continues to operate in cloak and-dagger mode, after it covertly and easily orchestrated the largest transfer of wealth from the American people to the banking system in the nation’s history. That’s why, as Henry M. Paulson left his treasury secretary post on January 20, 2009, he concluded that most of his “major decisions were right”—despite all of the losses that the banks had racked up and all of the lives that were hurt as a result.2
Unfortunately, no one prevented our collective disaster, even though many people, from economist Dean Baker to Senator Byron Dorgan to yours truly, called it correctly. Worse, despite a spew of indignation for the media’s cameras, Washington has collectively and in a bipartisan manner demonstrated the most knee jerk and expensive approach to groping toward financial stability in human history.
President Obama’s treasury secretary, Timothy F. Geithner, built on Paulson’s bailout notions when he had every opportunity to behave differently. The plan that Geithner first announced in a February 10, 2009, speech and unveiled in more detail six weeks later, on March 23, 2009, underscored the mentality of Washington’s disconnect from the public and attachment to Big Finance.3 The strategy he came up with to “fix” the financial system was to ask its most reckless and opaque companies—the ones that shirked the most taxes and took the most selfish and irresponsible risks—to buy up Wall Street’s junkiest assets in order to rid the system of its own clutter.
The worst part? The government would front them most of the money to do it.
Even without examining the plan’s details (short version: if the assets gain value, these companies win. If they lose value, the public covers the loss), there’s a greater insanity to this strategy. The firms that the government is asking to buy assets for the “common good” are dedicated to keeping transparency and regulations at a minimum in order to stack the deck in their favor to buy assets for the “common good.” Yes, the Treasury Department wants the shadiest operators to somehow make the system cleaner.
A friend of mine, who is a former partner at Goldman Sachs, once commented that finance is one of the few disciplines “based on the creation of absolutely nothing.” And that’s very true. Finance is based on the principle of continuously pushing nothing for something throughout the system as long as someone else is around to pay for it. Passing the buck comes in the form of extreme profits and bonuses during economic upswings, and it has continued afterward with the unprecedented bailouts that began in 2008. I know from experience that most of the people on Wall Street view making money as a game, one that is less (if you can imagine) about colossal paychecks and more about winning—status, position, and power. No one is ever “happy” about his or her bonus. If you admit you’re happy, senior management assumes it overpaid you. The rules that govern this competition have much more to do with internal politics than with anything related to the outside world. Pushing highly profitable transactions is merely a means toward an end. So what if, in practice, churning trillions of dollars of fabricated securities can take down the whole economy? That thinking comes into play only if it affects pay. Otherwise, what goes on inside a Wall Street investment bank on a day to-day basis simply doesn’t take ordinary people into account.
But if we don’t admit that these pay standards are manifested by a system that condones them, even when it pretends to be horrified, we will be missing the opportunity to tame and reconstruct the entire nature of Big Finance. If we don’t restructure Wall Street, there will always be lower economic lows for the public and greater financial highs for those who pillage from society.
The first step in the twelve-step program for addicts is to admit “that we were powerless over our addiction, that our lives had become unmanageable.”4 If that doesn’t happen, the program says, chances of recovery are bleak.
But Wall Street is not o
nly addicted to money. Unconscionable bonuses and ethics abound because its titans are also addicted to winning. They possess a hyper competitive instinct that propels them to lead their firms to become ever bigger—in profits, and in sheer size. This notion of manifest pecking order on the Street spurs irresponsible actions. Big bonuses for certain CEOs mean they’re beating out the other CEOs. The same goes for big mergers. Nowhere does size matter as much as it does on Wall Street. That always has and always will be true. That’s why external counterbalances are needed.