It Takes a Pillage: An Epic Tale of Power, Deceit, and Untold Trillions

by Nomi Prins

  Instead, Geithner threw a bone to Paulson by praising his tactics before stressing how he, Geithner, would do better. “The actions your government took were absolutely essential,” he said, “but they were inadequate. The force of government support was not comprehensive or quick enough to withstand the deepening pressure brought on by the weakening economy. The spectacle of huge amounts of taxpayer assistance being provided to the same institutions that help caused the crisis, with limited transparency and oversight, added to public distrust. This distrust turned to anger as boards of directors at some institutions continued to award rich compensation packages and lavish perks to their senior executives.”16

  Geithner’s statement reminded me of a tried and-true corporate ascension tactic. When you get someone else’s spot, talk down everything that person did. If you fail, you blame it on his or her mistakes. If you succeed, you get the corner office and a larger bonus.

  In addition, promising transparency is a perennial vow of rotating Washington leaders. During the Second Great Bank Depression, it was the buzz promise of choice, just as stressing the need for “corporate governance” was common during post Enron 2002. Under Geithner, the Treasury Department’s idea of transparency was to add more columns to its spreadsheets, but it did not add a column presenting an evaluation of what each TARP investment is actually worth, or what is lost. That’s not transparency. That’s not change. That’s deflection and illusion.

  There are certain things you’re expected to say when you take office, particularly during a crisis. With the prevalent public disdain of Wall Street and distrust of all things financial, what you promise is oversight, transparency, and reform. How you act, though, tells the real story.

  On January 27, 2009, Geithner laid out some new rules to keep Wall Street lobbyists out of the Emergency Economic Stablization process, make information about the bailout more transparent by putting it on the Internet, and constrain executive compensation.17 On the same day, however, he appointed Mark Patterson, a former Goldman Sachs lobbyist, as chief of staff at the Treasury. Goldman Sachs had already received $10 billion in TARP money and a $12.9 billion “cut” from the money the government lavished on AIG.18

  Patterson got the prime spot in the Treasury through a glaring loophole in the executive order on lobbyists that President Obama had issued a week earlier. The order contained a “revolving door ban” that prohibited government appointees from lobbying or creating regulations or contracts related to their former employer for a period of two years from their appointment. But it neglected to cover the other side of the door, which still allows lobbyists—and CEOs such as Henry Paulson and Robert Rubin—to hop directly to a government area, after servicing or lobbying for a company directly related to their Washington post.19

  That’s like letting the fox into the henhouse, and then locking the door so it can’t get out.

  Ethics aside, Geithner went on to more practical matters in late April 2009. He outlined several steps of his master plan to fix the financial mess. The first was to make banks clean up and strengthen their balance sheets.20 This he would do by administering a “stress” test to nineteen banks.21 The test would entail asking the banks to tell the Fed—whose job it had been to monitor adequate bank capital all along—how many losses they’d incur if, say, the unemployment rate rose to 8.4 percent by 2009 and to 8.8 percent by 2010. Unfortunately, by the time the test results came back, the actual unemployment rate had surpassed Geithner’s pessimistic projection; it hit 8.9 percent on May 7, 2009. The next month it jumped even higher, to 9.4 percent on June 5, 2009.22 That the most adverse unemployment scenario for 2009 was reached as test results were coming in didn’t bode well for the way in which the Fed came up with its hypothetical situations. Furthermore, the banks had a lot of input into the construction of the stress tests and were in charge of providing their own pricing, with no external objective evaluation under the various scenarios. That’s like asking a high school student who wants to get into a good college to design his or her own SAT test. Sure, there’s a chance he or she will design it to be impossibly difficult, but it’s highly unlikely. During FDR’s time, once the banks were shut, external regulators came in to assess the health of the ones that would reopen; the banks themselves weren’t considered trustworthy enough. But that’s another forgotten lesson.

  In the second step of Geithner’s plan, he promised to bring together the various government agencies that deal with banks to determine an appropriate risk level. And the last main pillar of his plan was for the Treasury Department to team up with the Federal Reserve to commit up to $1 trillion to help get credit flowing again.23 The Federal Reserve would continue to scoop up lousy assets from bank books in return for lending them money; as I mentioned earlier, the Fed had already been (stealthily) doing a lot of this scooping, to the tune of several trillion dollars. As we have seen, the Federal Reserve hides behind its status as an independent entity, with both public and private aspects—although, of course, the private ones give cover to the banks. Further details revealed that this $1 trillion would be part of a “public private partnership” that would lend money at a six-to-one ratio to private investors—they put up $100, the government gives them $600—to buy the assets they didn’t want before, but with much more government help to do so. In practice, this meant that the government would capitalize hedge funds that used to borrow money from firms such as Bear Stearns to buy complex securities.24

  In mid-June 2009 the Obama administration released details of its new “rules of the road” financial regulations in an eighty-eight-page white paper. It was billed as the most sweeping overhaul of the financial system since the Great Depression. But it was, for the most part, a deck chair rearrangement. The plan consolidated certain regulatory agencies, notably getting rid of the Office of Thrift Supervision, and created a new Financial Services Oversight Council chaired by the Treasury Department, which seemed utterly redundant; slapping a new layer of regulatory bureaucracy on an increasingly complex banking system seemed more an exercise in appearances than action. Though Obama blamed the financial crisis on a “culture of irresponsibility,” the absolute worst part of his new proposals expanded the authority of the Fed. It’s like rewarding the king of this irresponsible culture with a larger kingdom. The most positive part of the plan was the suggested creation of the Consumer Financial Protection Agency. Which is why it had bank lobbyists immediately up in arms.

  Tight Credit, Loose Talk

  Washington promised us that if we bailed out the banks, we would be rewarded with looser credit and perhaps a more stable economy. But that was a myth, one that deflected deeper inspection of the nature of the bailouts. Perhaps that’s why the focus of congressional and media ire consistently returned to the credit myth, and everyone bemoaned, Why, oh why, isn’t the Treasury money being used to loosen credit, as promised? Instead, people should have questioned the root cause of the supposed necessity for a bailout to begin with.

  Unfortunately, the notion of loosening credit, because capital was being soaked on impact, was itself a lie. In addition, the first phase of TARP didn’t go toward shoring up mortgage loans for homeowners facing foreclosure, despite the frenzy of debate on this topic in Congress before the Emergency Economic Stabilization Act was passed. A move to slow foreclosures might have stopped the toxic assets from being so toxic, because it would have meant more money flowing into them and would have helped homeowners simultaneously. But, no, banks didn’t want to do that—not if they could push Washington to take their junk. Banks used TARP to plump up their own competitive infrastructures, period. Their main priority was survival. Following that, they wanted to sidestep any future tightening of regulations. Somewhere as an afterthought came the notion of helping the little people.

  Plus, first of all, the people getting the money never promised to do anything useful with it. And, second, recall that the guy who was giving out the initial money, Paulson, overpaid $78 billion for preferred shares and racked up ap
proximately $157 (rounded) billion in additional losses in the first six months of the Treasury part of the bailout.25 Third, the entity giving out the most money, the Fed, was doing so without accountability or line item transparency. Fourth, Congress was either neglecting or badly performing its duty to protect the public by having numerous hearings on bonuses and no hearings at all about just what the hell firms were doing that gave them the ability to bestow such grand bonuses.

  I really wish they’d have a hearing titled, “What should we do to make sure this doesn’t happen again?” Or, “What should we do to rein in the Fed’s and the Treasury’s dispensing of bailout money and cheap loans to the banking systems under the guise of helping the public?”

  Or, “Why do we keep talking to Wall Street leaders about how to fix the economy they wrecked?” I wish we could have millions of people march in front of Congress with signs saying, “Stop the Madness! Stop the Bailout! Stop the Bank Supremacy!” and have it spur intelligent debate and legislation, as citizens did earlier in our country’s history.

  Bigger Isn’t Better: Bring Back Glass Steagall

  Neither the Fed nor the Treasury Department (under Paulson and Geithner), nor Congress questions the logic of not only allowing but promoting the merger of weak and nontransparent financial firms during a crisis period.

  But let me ask you, suppose you were making coffee in the morning—something I’ve been doing a lot while trying to wrap my head around this mess—and in your fridge sat two cartons of milk. One was stamped a day past fresh and smelled kind of bad, and the other was two days past and smelled worse. Would it occur to you to mix the two, to get a better chance of filling your mug with nonspoiled milk? Of course not.

  The idea of mixing poorly functioning banks is not quite as simple as mixing spoiled milk, but logic tells us it is not the best plan. And not only was gut instinct ignored again and again, but so were all the signs that merging certain banks would end in disaster. The Bank of America and Merrill Lynch merger was a train wreck, driving the stock of an already weakened mega bank into the ground. The December 31, 2008, merger of Wachovia and Wells Fargo wasn’t a much better idea.26 A month after the marriage, Wells posted a $2.55 billion fourth quarter loss, and Wachovia lost $11.2 billion during the same period. (Which Wells chose not to include in its bottom line. Why? Because it didn’t have to.)27

  The JPMorgan Chase-Washington Mutual-Bear Stearns government backed bargain merger, negotiated by Jamie Dimon, did a bit better because Dimon had the government shoulder most of the risk for losses.28 But still, on October 15, 2008, JPMorgan Chase posted a net loss, including $95 million related to the Bear Stearns merger, despite the government’s $29 billion backing of Bear Stearns’s bad assets (on which the government took a $1.2 billion charge, or “hit” against loan reserves).29 To be fair, JPMorgan Chase also booked an after tax $581 million gain on Washington Mutual’s operations related to this acquisition, which closed on September 25, 2008, but much of that was due to a lucrative tax loophole tied to deferred losses.30 A similar loophole was used by Wells Fargo when it acquired Wachovia—one that also made the acquiring bank’s books look a lot healthier than they actually were.

  It is illogical to spend money to save institutions that are individually weak and thus will be weaker together. It doesn’t make sense to merge risk- and debt-laden companies with each other and hope that the outcome will somehow be stronger, leaner, more stable, and transparent.

  And yet even with all of the recent Washington talk about “real reform,” there has been no serious discussion of how we have “reformed” our way into this mess. With the passing of the Gramm Leach Bliley Act in 1999, Washington sealed our collective fate. As we have seen, a gleeful bipartisan effort repealed the Glass Steagall Act of 1933—a piece of legislation that had effectively prevented such mergers (particularly of the investment bank-commercial bank variety) and saved the country a lot of grief (and money) for more than six decades.

  The rush to mergers is part of the reason the banking system is collapsing under the weight of its own incestuous impulse to combine risky overleveraged entities into bigger ones, backed by government and taxpayer money. This insanity has not only continued; it was promoted by the very same agencies that are supposed to be regulating it, namely, the Federal Reserve and, to a much lesser extent, the Office of Thrift Supervision.31 It was these entities, in charge of regulating their respective corners of the financial world, that approved mergers that created those too big-to-fail institutions. Worse, in the fallout from the Second Great Bank Depression, instead of slamming on the merger brakes, they sped things up and gave the green light to new mergers—you know, the ones that are failing. It’s not surprising that we can’t have an honest debate about the problems of mergers if nearly all of the enablers don’t think there are any problems with mergers!

  This nonsensical overconcentration of the industry has to stop. At least, this one aspect of Glass Steagall must be resurrected. Legally, too much concentration in the banking sector violates the intent, if not the necessary formalized legislation, of antitrust law. Financially, it’s a damn expensive mess to clean up.

  Self Regulation Is Not the Answer

  It should be apparent, but it isn’t to Washington, that Wall Street firms should be treated with suspicion or at least cynicism when they offer to regulate their enormous personal bonuses or their firms’ excessive leverage.

  With artfully articulated disdain, President Obama told a roomful of reporters gathered at the Oval Office that he was incensed that the Street would pay out $18.4 billion in 2008 bonuses, even though no bank ended the year in better shape than it had started it.

  And when I saw an article today indicating that Wall Street bankers had given themselves $20 billion worth of bonuses—the same amount of bonuses as they gave themselves in 2004—at a time when most of these institutions were teetering on collapse and they are asking for taxpayers to help sustain them—that is the height of irresponsibility. It is shameful.

  But he also said that as a solution, he’d have a “conversation” with “these folks on Wall Street to underscore that they have to start acting in a more responsible fashion.”32

  Why? You can’t simply have a chat with them. You can’t merely wrist slap the very people who wrote the rules and paid themselves before the catastrophic fallout and expect them to change their collective mind set. The most you can expect is the kind of scripted faux remorse that Wall Street CEOs provided to Congress after this news. These executives are very gifted at saying just what they need to, when they need to. It doesn’t mean anything. Believe me. I lived and worked and breathed with Wall Street executives for years. I’ve seen them lie with nary a facial muscle moving. I’ve been at meetings that centered on strategizing about lying.

  Wrist slaps don’t work with Wall Street. In my first book, Other People’s Money, I wrote about the shallowness of the Eliot Spitzer-led Wall Street settlement that sought to shake up the Street and temper its imbedded conflicts of interest, because it didn’t address the structure of Wall Street, either. Fines only wind up somewhere else on the bank books, as expenses to be tax deducted.

  Spitzer’s personal ethics aside, his investigation annoyed Wall Street about as much as a mosquito bite would. By April 2003, the SEC had taken over his investigation that had examined, among other things, analysts who touted the stellar health of a firm’s clients, despite obvious decay, fraud, and brazen scandals. The investigation was sparked by the Enron and WorldCom scandals and wound up costing the industry $1.4 billion in fines.33

  As part of the settlement, these fines did not come with any admission of guilt. They did come with promises that more disclaimers would accompany the analysts’ public statements. Basically, analysts could still tout the stocks of their firm’s clients; they merely had to mention that those companies were clients (which was obvious anyway and meant that the settlement settled nothing).

  In particular, Citigroup, Merrill Lynch, and Credit Su
isse were accused of fraud. The same firms that paid fines related to their deceptive practices are the ones—such as Lehman Brothers and Bear Stearns and Merrill Lynch, particularly—that died while burning through trillions of dollars in market value, that posted billions of dollars of write downs (as did Citigroup, Bank of America, UBS, Credit Suisse, and Goldman Sachs), and that inhaled our public bailout money and loans.

  Then the media, of course, condemned all of the practices that led to the fines. Congress talked about them. And life went on as usual—except Wall Street also went on to use high risk loans to fuel record growth, profits, and compensation from 2004 to 2006, instead of relying on the telecom and energy industries to extract fees and profits.

  Clearly, the firms did not take very seriously statements by then SEC head William Donaldson (and former CEO of investment bank Donaldson, Lufkin & Jenrette, DLJ). Back then, Donaldson declared, “The cases also represent an important new chapter in our ongoing efforts to restore investors’ faith and confidence in the fairness and integrity of our markets.”34

  The main difference was that Wall Street, the banks, and the Fed and Treasury vaporized more money in 2008 and 2009 than during the scandals of the early part of the millennium. Six years and a massive full-scale global economic implosion later, Obama SEC head appointee Mary Shapiro echoed Donaldson’s vows almost to the letter, except for a few Mad Lib adjustments, promising “commitment to investor protection, transparency, accountability, and disclosure” and emphasizing that the SEC “must play a critical role in reviving our markets, bolstering investor confidence, and rejuvenating our economy.”35