The Divide: American Injustice in the Age of the Wealth Gap

by Matt Taibbi

  On the other hand, welfare fraud was prosecuted like never before, and welfare fraud investigators multiplied like rats in every state of the country, forming unions and lobbying agencies.

  Bill Clinton’s political formula for seizing the presidency was simple. He made money tight in the ghettos and let it flow free on Wall Street. He showered the projects with cops and bean counters and pulled the cops off the beat in the financial services sector. And in one place he created vast new mountain ranges of paperwork, while in another, paperwork simply vanished.

  After Clinton, just to get food stamps to buy potatoes and flour, you suddenly had to hand in a detailed financial history dating back years, submit to wholesale invasions of privacy, and give in to a range of humiliating conditions. Meanwhile banks in the 1990s were increasingly encouraged to lend and speculate without filling out any paperwork at all, and eventually borrowers were freed of the burden of even having to show proof of income when they took out mortgages or car loans.

  Clinton’s “third way” political strategy, in which Democrats laid down their arms of business regulation, allowed his party to compete with the Republicans for the campaign contributions of the big banks on Wall Street. By 1996, Bill Clinton’s single biggest private campaign contributor would be Goldman Sachs, a distinction he would share with the next Democratic president, Barack Obama. The other side of the new strategy also stole the Republicans’ political thunder by preemptively bashing black dependency through the welfare issue, allowing Democrats to sink their fangs into a big chunk of Richard Nixon’s “Southern strategy” based on white voters in the South.

  This was canny politics for the Democratic Party, but it had an obvious consequence—a consensus. Now the political momentum in both parties traveled in the same direction. Both parties wanted to merge the social welfare system with law enforcement, creating a world that for the poor would be peopled everywhere by cops and bureaucrats and inane, humiliating rules. They wanted to put all the sharp edges of American life in that one arena, and they succeeded.

  And on the other hand, both parties wanted the financial services sector to become an endless naked pillow fight, fueled by increasingly limitless amounts of cheap cash from the Federal Reserve (literally free cash, eventually). If they turned life in the projects into a police state, they turned life on Wall Street into its opposite. One lie in San Diego is a crime. But a million lies? That’s just good business.

  She has long sandy hair, a big smile, and a booming voice, and when I first met her, Linda Almonte distantly reminded me of a somewhat louder, more manic version of Kate Hudson. We met in a tiny, foreclosure-ravaged Florida town called Satellite Beach, where she was living in her father’s ramshackle beach house, on a strip of weather-battered one-story pastel homes with sun-roasted brown or tan lawns. Walking in, I sat on a pleasant but worn couch in the house’s one main room; Linda’s three-legged rescue dog jumped on my lap, and two of her three children listened in as she began to tell her story.

  Linda was once very well-to-do, a champion shopper who splurged at malls and drove nice cars. She’d traveled all over the world as an executive for GE. She’d never thought much about politics or big-picture financial issues.

  A single mother, she was now living, temporarily anyway, with her retired Marine father, and her family was basically surviving off his Social Security checks. It was a long fall down, but it had actually been worse. Not long before I met her, she and her kids had been living in Kissimmee, Florida, and had been forced to go on public assistance.

  In Riverside, California, you get a hundred bucks and a thank-you for bringing a fraud case to light. When you scratch the same civic itch at JPMorgan Chase, you lose everything you own and end up living the life of a financial fugitive. Linda and her kids, when I met them, seemed like a family on the run. Her experience was an early precursor to the Edward Snowden story, and I was meeting her in the Sheremetyevo airport stage of her odyssey.

  She told me to whip out a notebook and get ready for a long story.

  “I first got to Chase,” she began, “by way of Washington Mutual.”

  She’d worked at WaMu as the vice president of enterprise operations, from 2004 till Washington Mutual was sold to JPMorgan Chase during the banking crisis of 2008. Hers was a sort of roving-fixer job, in which she and a team of executives would deal with potentially embarrassing messes as they popped up across the bank’s different administrative systems. In this capacity, she had traveled all across the country, moving her family from Melbourne, Florida, to Jacksonville to San Antonio to Seattle, then back to San Antonio, then back to Seattle—all in less than four years. Chasing banking crises made for a very peripatetic home life.

  “I was fixing defects,” she says now. “I was going everywhere.”

  At WaMu, at any given time, she worked on between one hundred and three hundred different projects, reengineering administrative systems to clean up messes and keep the bank from getting into trouble, legal or otherwise.

  This experience is part of the reason why, initially anyway, Linda was not terribly shocked by what she would end up seeing at Chase. All giant banks have major bureaucratic screw-ups from time to time, and it was her job to be aware of that, and to deal with these problems in a nonjudgmental way. She was a little like the financial version of a proctologist: if you think that bug you picked up in Tijuana is going to shock her, guess what, she’s seen it all before.

  Once the sixth-biggest bank in America, Washington Mutual in September 2008 collapsed in what was at the time the largest bank failure in our nation’s history. The bank had gone out of business thanks in large part to its mania for trading in fraudulent, designed-to-fail subprime mortgages. In fact, in 2003, in one of the most unintentionally prophetic statements in the recent history of high finance, then-CEO of WaMu Kerry Killinger had announced an audacious plan to turn his bank into a kind of Walmart of debt.

  “We hope to do to this industry what Walmart did to theirs, Starbucks did to theirs, Costco did to theirs and Lowe’s–Home Depot did to their industry,” he said. “And I think if we’ve done our job, five years from now you’re not going to call us a bank.”

  Killinger was exactly right. In exactly five years, people stopped calling Washington Mutual a bank. But it wasn’t because it revolutionized the industry, it was because it so completely gorged itself on phony loans that it went out of business.

  In his craven desperation to become the country’s great volume distributor of debt, Killinger, among other things, acquired one of the most corrupt companies on earth, a California-based subprime mortgage lender called Long Beach. In an era where companies like Countrywide and New Century set new standards for underwriting negligence, Long Beach was the worst of the bunch. It was completely indiscriminate, lending to anything that moved, falsifying income statements, faking credit scores, doing anything to get people approved.

  Over a four-year period, Washington Mutual and Long Beach teamed up to become a veritable factory of subprime mortgages, going from spinning $4.5 billion of subprime securitizations in 2003 to $29 billion in 2006. They would ultimately securitize more than $77 billion in subprime loans.

  WaMu knew that the loans it was getting from Long Beach were fraudulent. A Senate investigation later revealed that the bank had, among other things, done internal audits of two of Long Beach’s most productive loan officers. They found fraud in 58 percent of the loans coming from one of those officers’ operations and in 83 percent of the other’s. Instead of firing the two men, they were given prizes for loan production.

  Another internal bank review, in 2008, found that loan officers were literally manufacturing information for loan applications in order to speed things up—yet they weren’t fired.

  Why? Because they were doing their jobs. They weren’t in the business of making good loans. They were in the business of creating “assets,” and almost nobody created more assets than WaMu. The two problem officers were like toy factories that were ca
ught using edible lead paint on the products but also produced lots of toys at low cost. The wrong kind of parent company wouldn’t care, and WaMu was the wrong kind of parent.

  The Senate report also found that the bank intentionally chose failing loans to sell off and systematically hid negative information from the investors who bought these mortgage-backed securities. From the report:

  Documents obtained [show] … Washington Mutual selected loans for its securities because they were likely to default, and failed to disclose that fact to investors. It also included loans that had been identified as containing fraudulent borrower information, again without alerting investors when the fraud was discovered. An internal 2008 report found that lax controls had allowed loans that had been identified as fraudulent to be sold to investors.

  WaMu’s efficiency in creating bad loans was not what killed it. What killed it was its failure to efficiently get rid of its own defective product. The bank was dumb enough to get caught holding, or “warehousing,” too much of its own born-to-lose mortgage paper. So in 2008, when home prices declined and home defaults started to pile up, the bank suddenly split open like a ship hitting an iceberg.

  Seeing this, depositors and investors began to flee. In a ten-day period from September 15 to 25, customers pulled $16.7 billion in deposits out of the firm. A classic run on the bank had begun. In order to prevent a catastrophe in which the government and the FDIC would have to compensate thousands of wiped-out customers, the state, in the persons of such luminaries as Hank Paulson and Timothy Geithner, first seized the bank and then hastily arranged for it to be shotgun-wedded to JPMorgan Chase in an eleventh-hour backroom deal.

  In that highly sordid and mostly overlooked chapter in the history of the bailout period, WaMu and its $307 billion in assets were delivered by the state into the hands of Chase and its CEO, Jamie Dimon, for the preposterously low price of $1.9 billion, a bargain deal that was struck just a few weeks before Chase was given $25 billion in cash by the government as part of the TARP bailouts.

  This was Chase’s second sweetheart deal in less than a year. Six months before, in March 2008, Chase had “rescued” the imploding investment banking giant Bear Stearns, buying the venerable firm with the aid of $29 billion in guarantees extended by the New York branch of the Federal Reserve—whose chairman of the board of directors at the time was, get this, JPMorgan Chase CEO Jamie Dimon.

  That means that six months after Jamie Dimon was the lucky recipient of his own Federal Reserve bailout in order to acquire Bear Stearns, his bank was given another $25 billion in cash by the state to go on another shopping spree, cash he used, among other things, to buy Washington Mutual.

  Why would the state agree to give two of the jewel assets of the commercial banking world to Chase for almost nothing? What service was Chase providing? The official story was that it helped stabilize the markets, but another answer seems to be that Chase was swallowing up a potentially disastrous public scandal at a time when the markets couldn’t survive too many more of those.

  Both of these cozy deals, for Bear and for WaMu, allowed the state to conceal massive criminal conspiracies from the public and the markets by burying the toxic, fraudulently generated assets of these corrupt companies in the billowing skirts of a stable, “reputable,” too-big-to-fail company. In exchange, all Chase really had to do was cover up the mess by keeping the extent of the fraud and toxicity under wraps.

  All this is important background to Linda Almonte’s story. Because when Linda discovered that Chase itself was jumping headfirst into the business of knowingly unloading fraudulent assets onto the market, she would run to the government to blow the whistle, as any good citizen would.

  But Almonte had arrived at Chase in the first place only by means of a government-approved scheme to conceal toxic assets from the public. The company’s state-sanctioned job was to hide fraud from the public. So when she found more fraud at Chase, where was she supposed to go? To the same government that used Chase to cover up two earlier scandals?

  I first met Linda in the summer of 2011, about a year after she’d been fired from Chase, seven months after the low point of living off food stamps in the Kissimmee motel, and just a few weeks after her marriage had broken up. A pariah in her profession, she had been unable to get any kind of job, not even one waiting tables. She was still in a manic state. Her experience with Chase still clearly stung, and the story fairly spilled out of her mouth in a series of urgent monologues. She explained that when Washington Mutual went out of business at the peak of the crash in 2008, the new parent company, Chase, sent her to work at another one of its subsidiaries, a debt-buying and collections firm called NCO that Chase had acquired in 2006 for $950 million.

  The easiest way to explain the debt-buying business is to think in mafia terms. If you owe money to a bookie and he gets tired of trying to collect from you, he might sell your debt to some leg-breaking ex-boxer for twenty-five cents on the dollar. The boxer then shows up at your house and slams your hand in a car door until you pay.

  Everybody makes out. The bookie gets at least 25 percent of money that he thought was lost forever, a sunk cost. The boxer gets a 400 percent profit on a small investment. A win-win business.

  It’s the same with banking and, in particular, credit cards. You might open a credit card account with Chase, but if you go delinquent and Chase can’t get you to pay by normal means, it can sell your account for pennies on the dollar to a debt buyer like NCO—which is basically just a giant clearinghouse for lawyers (legal leg breakers) who earn their living filing lawsuits against delinquent borrowers.

  NCO is one of the biggest lawsuit factories in America, filing thousands of suits a year against delinquent holders of consumer credit accounts. “When you see someone has been sued by a bank, a lot of the time, it’s actually NCO,” says Almonte. She worked for NCO for that four-month period in 2009, helping the company coordinate communications among the vast network of collections lawyers to whom it farmed out its accounts. “I was the liaison between NCO and their attorney network of one hundred fifty-four firms,” she says.

  That experience of working for its major debt-buying subsidiary and liaising with attorneys is part of the reason Chase decided to bring Linda to San Antonio on May 16, 2009. Its plan was to put her in Chase’s credit card litigation department, a kind of bureaucratic way station for processing the accounts of Chase cardholders who had gone past a certain point of no return.

  A sprawling consumer operation with millions of customers, Chase maintains a giant centralized database called the System of Record.

  In the System of Record—think of it as a kind of all-knowing HAL from 2001: A Space Odyssey—the bank enters all kinds of account information, everything from the name and address of, say, a credit card holder, to his or her payment history, the current balance, the customer’s specific spending limit, and so on. Anytime anyone has contact with the customer, anywhere, the result of that contact gets entered into HAL’s memory.

  However, once Chase decides that a certain credit card customer is too delinquent in his payments and must be sued, HAL turns that person’s account over to the credit card litigation department. From that point forward, the department is responsible for maintaining everything to do with that account, from reading correspondence from the cardholder or the cardholder’s lawyer, to gathering information from the cardholder’s file to help Chase’s pit-bull lawyers sue the delinquent customer, to checking and rechecking the documents in those files if and when Chase decides it wants to sell the account to a leg-breaking debt buyer like NCO.

  Linda expected that her job at Chase credit card litigation would be roughly similar to the jobs she’d had at WaMu and NCO, liaising among multiple departments, troubleshooting administrative system problems, and in particular handling communications between Chase executives and company attorneys.

  But there were many things Linda didn’t know about the job she was taking. In her first months she claims she witness
ed fellow employees shredding correspondence from delinquent credit card holders, a practice she says sent many customers—some of whom may even have been agreeing to settlement offers—straight into litigation. She also claims that some of the shredded documents belonged to active-duty servicemembers in places like Iraq, who under federal law (the Servicemembers Civil Relief Act) cannot be sued for, among other things, credit card debt.

  “Guys … who were over in Iraq, we got default judgments against them and wiped out their bank accounts.” But she became even more concerned when, at a regular meeting of audit and compliance executives, she learned about the bank’s robo-signing practices.

  When a bank like Chase goes into court to sue a credit card holder, it must formally list the facts of the case: who owes what, how long the amount has been owed, when the account was opened, and so on. The procedures in every state are different, but at some point in the process, all states require an affidavit from the bank asserting these facts. The same process holds true, incidentally, for foreclosure filings. The files for all these court actions, be they credit card default suits or home foreclosures, include affidavits in which an ostensibly authoritative bank executive attests to the facts of the case.

  At Chase, those authoritative bank executives were low-ranking employees who also doubled as roving auditors of Chase’s out-of-house lawyers. In Linda’s office, there was a small cubicle island of these employees stationed about twenty feet from her. They were “late twenty-something and early thirty-something” workers and Linda gave me a list of their names. I would eventually see the same names with regularity on random visits to courthouses to look through public records of credit card lawsuits.