Ten Years After the Crash, We've Learned Nothing
By Matt Taibbi, Rolling Stone
14 September 18
The great financial catastrophe of our times is still badly misunderstood,
and led to grotesque consequences, including the election of Donald Trump
Ten years ago, on Saturday, September 13th, 2008, the world was about to
end.
The New York Federal Reserve was a zoo. Imagine NASA headquarters on the day
a giant asteroid careens into the atmosphere. That was the New York Fed: all
hands on deck, peak human panic.
The crowd included future Treasury Secretary Timothy Geithner, then-Treasury
Secretary (and former Goldman Sachs CEO) Hank Paulson, the representatives
of multiple regulatory offices, and the CEOs of virtually every major bank
in New York, each toting armies of bean counters and bankers.
The asteroid metaphor fit. In the twin collapses of top-five investment bank
Lehman Brothers and insurance giant AIG, Wall Street saw a
civilization-imperiling ball of debt hurtling its way.
The legend of that meeting, as immortalized in hagiographic reconstructions
like Andrew Ross Sorkins Too Big to Fail, is that the tough-minded bank
honchos found a way to scrape up just enough cash to steer the debt-comet
off course.
In Too Big To Fail, the superstar chief of Goldman, Lloyd Blankfein, along
with smart Jamie Dimon of Chase, fighter John Mack of Morgan Stanley,
and other titans brokered the deal of deals, just in time to stave off a Mad
Max scenario for us all.
The plan included a federal bailout of incompetent AIG, along with key
mergers Bank of America buying Merrill, Barclays swallowing the sinking
hull of Lehman, etc.
With respect to the fine actors in the film, the legend is bull.
There are more accurate chronicles of the crisis period, including the
just-released Financial Exposure by Elise Bean of the Senate Permanent
Subcommittee on Investigations, probably the most aggressive crew of
financial detectives who sifted through the rubble over the past 10 years.
Beans account of what went on at banks like Goldman, HSBC, UBS and
Washington Mutual is terrifying to read even now.
But history is written by the victors, and the banks that blew up the
economy are somehow still winning the narrative. Persistent propaganda about
what happened 10 years ago not only continues to warp news coverage, but
contributed to a wide array of political consequences, including the
election of Donald Trump.
The most persistent myths about 2008:
Myth#1: The crash was an accident
In the early days of the crash, reporters were told the crisis particulars
were probably too complex for news audiences. But metaphors would do. And
the operating metaphor for 2008 was a thousand-year flood, a rare and
inexplicable accident something that just sort of happened.
It was even implied that the meltdown was due in part to irrational panic,
hysteria, a fear of fear itself. When Lehman Brothers failed, the theory
held, investors overreacted by freezing all lending, causing more
disruptions and more losses. The economy was basically healthy, but fear had
caused it to founder on a lack of confidence.
In Too Big to Fail, William Hurt plays Treasury Secretary Paulson as a
saddened, wearied Atlas. He quips, early in the mess: This is a confidence
game, and if Lehman Brothers failed, all the other banks are gonna drop
like dominoes.
Poor Cynthia Nixon, who plays Treasury spokesperson Michele Davis, is heard
responding, Congress wont move until weve already hit the iceberg.
The film flashes to Lehmans Dick The Gorilla Fuld (played by James Woods
in kinetic perma-jerk mode), who contrasts their fears with his
overconfident weather report:
Real estate always comes back, he snorts, smugly fixing his tux. Ive
seen this before. CEOs panic and they sell out cheap
The streets running
around with its hair on fire, but the storm always passes.
This colorful language dominoes, a confidence game, an iceberg, a
storm artfully disguised reality. This wasnt weather coming at them,
but the consequences of years of untrammeled criminal fraud.
Banks like Lehman had lent billions to fly-by-night mortgage mills like
Countrywide and New Century. Those firms in turn sent hordes of loan
hustlers into lower-income neighborhoods offering magical deals to anyone
who could fog a mirror, as former Countrywide executive Michael Winston
once put it to me. The targets were frequently minorities and the elderly.
Tales of mortgage swindlers guzzling Red Bulls and handing out easy loans in
all directions began showing up in news reports as early as 2005. It was
like a boiler room, one agent told the Los Angeles Times. You produce, you
make a lot of money
Theres no real compassion or understanding of the
position theyre putting their customers in.
These mortgage mills dispensed with due diligence, rarely bothering to
verify incomes, identification, even citizenship. The loans were designed to
have short, fragile lives, like fruit flies. They had to stay viable just
long enough to be sent back to Wall Street and resold to secondary buyers,
who took the losses.
It was a classic Ponzi scheme. So long as new loans were created and sold
faster than the old ones failed, the subprime market made everyone rich. But
the minute the market started to swing back the other way, everyone knew
they would all crash to earth, Wile E. Coyote-style.
Paulson knew as well as anyone. Treasury and the other regulators received
ample warning. Take the Office of Thrift Supervision (OTS), a regulatory arm
of Treasury that happened to oversee two of the worst basket-cases,
Washington Mutual and AIG. According to Bean, the OTS observed and ignored
more than 500 deficiencies in mortgage practices just at WaMu in the years
before the crash.
Even the FBI not exactly an on-the-ball financial regulator, certainly not
to the degree that Treasury or the Fed is expected to be had warned as far
back as 2004 that so-called liars loans were epidemic and would cause a
financial crisis if not addressed.
CNN told the public of the FBI warning of a next S&L crisis, going so far
as to identify the top 10 hot spots for mortgage fraud in: Georgia, South
Carolina, Florida, Michigan, Illinois, Missouri, California, Nevada, Utah
and Colorado.
All places that would later be rocked by mass foreclosures.
It took longer to get a car wash than a home loan in those days. I had one
mortgage broker in Florida tell me he used to look for customers on the way
home from work at night, at the beer cooler at his neighborhood 7-Eleven.
His pitch was, Hey, buddy, you like where youre living?
The end of this party was no confidence game. This was gravity: what went
way up, coming way down.
The captain of the Titanic ignored one days worth of iceberg warnings and
went down in history as an all-time schmuck for it. History commends him
only for the honorable act of going down with his ship.
The titans of Wall Street ignored at least four years of warnings, escaped
richer than ever, and in the end were lauded as heroes by the likes of
Sorkin.
Myth #2: The crash was caused by greedy homeowners
Too Big To Fail shows Fuld on a rant:
People act like were crack dealers, Fuld (James Woods) gripes. Nobody
put a gun to anybodys head and said, Hey, nimrod, buy a house you cant
afford. And you know what? While youre at it, put a line of credit on that
baby and buy yourself a boat.
This argument is the Wall Street equivalent of Reagans famous
Cadillac-driving welfare queen spiel, which today is universally
recognized as asinine race rhetoric.
Were there masses of people pre-2008 buying houses they couldnt afford?
Hell yes. Were some of them speculators or flippers who were trying to
game the bubble for profit? Sure.
Most werent like that most were ordinary working people, or, worse,
elderly folks encouraged to refinance and use their houses as ATMs but
there were some flippers in there, sure.
People pointing the finger at homeowners are asking the wrong questions. The
right question is, why didnt the Fulds of the world care if those nimrods
couldnt afford their loans?
The answer is, the game had nothing to do with whether or not the homeowner
could pay. The homeowner was not the real mark. The real suckers were
institutional customers like pensions, hedge funds and insurance companies,
who invested in these mortgages.
If you had a retirement fund and woke up one day in 2009 to see youd lost
30 percent of your life savings, you were the mark. Ordinary Americans had
their remaining cash in houses and retirement plans, and the subprime scheme
was designed to suck the value out of both places, into the coffers of a few
giant banks.
A blizzard of post-2008 lawsuits involving pension funds testifies to this.
One State Street fund lost 28 percent of its value. Plaintiffs like the Iowa
Public Employees Union or an Electrical Workers Union in Illinois or even
the Zuni Native American tribe in Arizona and New Mexico all lost millions
because of mortgage investments.
Beans report makes it clear that when Senate investigators started to look
through the records, they found that not only the companies themselves, but
even their regulators saw the entire outlines of this con from the start.
Other materials showed OTS supervisors downplaying the risk, she writes,
highlighting bank profits and the speed with which banks sold the high-risk
loans to Wall Street.
In other words, nobody cared if the loans were shoddy. They were selling
like hotcakes, generating lots of cash. Party on!
To this day, youll find people pushing the line that the crash was caused
because Congress forced everybody to go and give mortgages to people who
were on the cusp.
But nobody pushed banks to do anything. Homeowners were necessary parts of
the scam. They were the straw in the Rumpelstiltskin scheme. If the
Countrywides of the world had been worried about borrowers ability to pay,
they would have, you know, checked.
It was a hot-potato game. Get a name on a piece of paper, then toss the loan
from buyer to buyer until you found someone unsophisticated enough to take
it.
All that brainpower in the New York Fed 10 years ago was searching for new
takers for hot potatoes. They got the taxpayer to buy a lot, and got the Fed
to buy more. They even used Fannie and Freddie as a backdoor bailout
mechanism, buying up still more toxic assets. The banks themselves were the
only ones who refused to take losses.
Myth #3: The bailouts were about saving capitalism
The deal those bankers cooked up was to save the banks from capitalism.
Losers must be allowed to lose. Its the first and most important regulatory
mechanism in a market economy.
But by 2008, the banks had simply grown too big and interconnected to allow
normal market processes to take place.
These firms almost certainly would have died without help. In 2011, the
Financial Crisis Inquiry Commission released a report quoting then-Fed chief
Ben Bernanke as saying this about that fateful week in September 2008:
Out of maybe the 13, 13 of the most important financial institutions in the
United States, 12 were at risk of failure within a period of a week or two
Again, the legend is that the banks at the Fed that weekend were the healthy
ones, saving us from the contagion of AIG and Lehman. This legend has been
reinforced by constant propaganda about the banks being forced to accept
bailouts like the TARP.
Its a lie. Paulson and the other regulators repeatedly intervened to
prevent the natural demises of these firms.
It wasnt just small market-stopping moves, like when they banned
short-selling to protect corrupt companies from smaller gamblers whod
wagered on their failure. Or the deal made on September 19th, 2008, when two
companies that were not commercial banks, Goldman Sachs and Morgan Stanley,
were given emergency commercial bank charters on a Sunday night, allowing
the two plummeting giants access to lifesaving Fed cash the next morning.
The public to this day has no understanding of the scale of the
intervention.
To put it in perspective, the War on Terror has cost America about $5.6
trillion since 9/11, or about $32 million an hour.
The bailouts probably dwarf that effort. Most studies suggest it was a
world-war-level mobilization of cash, a generation of savings used to plug a
single hole.
The Special Inspector General of the TARP put the gross government outlay at
$4.6 trillion, with over $16 trillion in guarantees. Bloomberg concluded the
rescue expenditure was $12.8 trillion. Fortune (which saluted the investment
as hugely profitable for America in the end) put the number at $14 trillion.
The Levy Institute at Bard College did probably the most extensive study,
and put the number at $29 trillion.
An argument is frequently put forth that the government made a huge profit
on the bailouts. This is an impossible stance to counter. Its like trying
to quantify how plaid something is.
Sure, in an environment in which the chief bailout recipients were allowed
virtually limitless access to free capital; affirmatively non-prosecuted for
severe regulatory violations (like rigging electricity prices or laundering
money for drug cartels); repeatedly saved from crippling litigation by
sweetheart settlements; and allowed to get financially well again overnight
by feasting on direct cash injections, richly priced government-backed
mortgages and other monster subsidies like the Quantitative Easing (QE)
program
yes, in that universe, the bailout earned a profit. But for whom?
The real effect of the deal made that weekend has been a radical
transformation of the economy. Previously, small banks traditionally enjoyed
a lending advantage because of their on-the-ground relationships with local
businesses. But the effective merger of the state with giant,
too-big-to-fail banks has tilted the advantage far in the other direction.
Big banks post-2008 could now borrow much more cheaply than smaller ones,
because lenders no longer worried about them going out of business. Some
studies describe this implicit guarantee as a subsidy worth billions a
year.
In 2012, Bloomberg put the number at $83 billion for just the top 10 banks.
Fast-forward to last year. How much of the record $171.3 billion in profits
earned by banks in 2017 was owed to the implicit guarantee?
The bank-state merger brokered 10 years ago this week socialized the risks
of the financial sector, and essentially converted Wall Street into a
vehicle for annually privatizing a big chunk of Americas GDP into the hands
of a few executives. The same people who were minutes from being
(deservedly) destitute 10 years ago are now a permanent aristocracy.
Just look at the numbers. The average finance-sector salary last year was
over $375,000, or five times the rate of the rest of the private sector.
While the rest of the economy mostly ran in place, just the average Wall
Street bonus grew 17 percent in 2017, to $184,220, or about three times the
median income for an American household.
The companies enjoy a vast smorgasbord of seen and unseen subsidies, even
earning interest on their reserve capital (a trillion-dollar perk the Fed
gave them after the crash, essentially paying banks to be banks). Most of
the biggest banks pay little to no tax, a serious problem Trump has made
worse.
The merger committed the governments of Europe and America to unwavering
overt and covert support of the finance sector. Scandals of worsening
gravity kept popping up after 2008 from the flash crash to LIBOR to HSBCs
$850 million drug money-laundering fiasco and regulators kept quietly
making them go away. Just like actual aristocrats, employees of these firms
do not go to jail, even for serious crimes they admit committing.
The crisis response dramatically accelerated two huge problems. First, we
made Too Big To Fail worse by making the companies even bigger and more
dangerous, through the supposedly ingenious litany of state-aided mergers
arranged 10 years ago this weekend. Wells Fargo is bigger, Chase is bigger,
Bank of America is way bigger. In the next crisis, letting losers lose will
be even more unimaginable.
Secondly, an already-serious economic inequality issue became formalized.
The people responsible for the crisis werent just saved, but made
beneficiaries of another decade of massive unearned profits. Thanks to
zero-interest-rate lending and QE and other subsidies, they are making more
money than ever, in the new failure-proof profession known as banking with a
government guarantee.
One market analyst this week described the business model of too big to fail
banks in the post-bailout era as being like Brewsters Millions:
People at Goldman and JPM, he says, many of them do not understand the
real reason theyve been making money hand over fist the last nine or 10
years. If you were running one of these places you would have to really try
like every day to fuck it up. It would have to be your sole mission when
you got up in the morning. Like, Im off to go fuck things up.
Restoring compensation levels was one of the first and most urgent
priorities of the bailout. Bonuses on the street were back to normal within
six months. Goldman, which needed billions in public funds, paid an
astonishing $16.9 billion in compensation just a year after the crash, a
company record.
Outside Manhattan, the pain was just starting. In 2008, 861,664 families
lost their homes, and homeowners lost a breathtaking $3.3 trillion in home
equity (coincidentally, this was the TARP inspectors estimate for the
entire net outlay of the bailout). By 2011, a full 11.6 million homeowners
were underwater on their homes.
Out there, in foreclosure er, flyover country, the only way out of the
crisis was a big hit. You either foreclosed and lost your credit rating
forever, or you sold your home, usually the chief investment in your life,
at a gigantic loss. But a major principle of the bailout is that the banks
never had to take any losses at all. Not one cent.
In the Feds bailout facilities, which were specifically designed to absorb
the bad loans infecting the economy, the state bought toxic inventory at
par, i.e. at full price. Regulators, in other words, didnt even make the
banks take a discount for loans on their books that were a) worthless, and
b) may have been created in furtherance of a criminal scheme.
Not only did the state cough up $173 billion to pay AIGs counterparties in
September 2008 paying full price on billions worth of AIG swaps to
Goldman and the other gambling banks but the news later emerged that
rescued, post-bailout AIG paid $450 million in bonuses to the employees of
AIGFP, the tiny swaps unit that had nearly destroyed the universe with its
insane mismanagement and greed.
In other words, everyone in the upper echelon of the finance community got
Paid In Full in the bailout, even the exact people who screwed up the worst.
But outside Manhattan? It was like Warren Buffets partner Charlie Munger
sneered: People should just suck it in and cope.
The biggest victims in this miserable story turned out to be poor, nonwhite,
and elderly. One of the main things the financial press missed in its
countless crash post-mortems is that the subprime scam was significantly
about race. In its particulars, it was really just a rehash of ancient race
crimes like contract selling, a predatory white-on-black home loan scam
from the Jim Crow days that often involved no money down, but severely
punitive rates.
The housing rush similarly involved no-money-down 100% mortgage deals,
often given by rich banks to poor minorities. The most infamous example was
probably Wells Fargos efforts to push toxic ghetto loans on mud people
in Maryland.
The housing bubble devastated black and Latino homeowners,
disproportionately to white counterparts. The James Woods/Dick Fuld remark
about crack dealing wasnt far off. Subprime blighted minority neighborhoods
with similar speed and ferocity. Debt was the crack of the early 21st
century. And we bailed out the dealers.
For years since, pundits have been scratching their heads over the rise of
populism, wondering why the public refuses to accept seemingly obvious
economic plans like austerity. The moneys gone. Dont they understand that
belts need to be tightened?
One of the head-scratchers was bailout architect Ben Bernanke, who in 2015
had the stones to publish a memoir called The Courage to Act (his protégé
Geithners self-congratulatory tome was called Stress Test).
Despairing at what the Times described as the messy maw of democracy,
Bernanke asked: Why did the public keep embracing the bombast of politicians
like audit-the-Fed advocates Bernie Sanders and Ron Paul (who only wanted to
know where all those trillions went), when it could just be trusting the
orderly, thoughtful decision-making of the bailout architects?
After being similarly confused by a lack of public enthusiasm for his
renomination, Bernanke decided to accept the advice of an unnamed senator,
who essentially told him that sometimes, you just have to throw some red
meat to the knuckle-draggers.
It was only after the public elected Donald Trump that Bernanke had an
insight. He realized suddenly that growth is not enough (translation: the
rich getting richer for eight straight years did not please voters).
Economists, he now said, may actually have a responsibility to address
inequities in the economy, which he conceded might have been caused by a
proclivity toward top-down, rather than bottom-up, policies.
Imagine how dense youd have to be to need 10 years, and the election of
Donald Trump, to realize this.
These are the people who got Trump elected. Popular media myths may insist
otherwise, but people in charge have to be this clueless and arrogant in
order for Anyone but
to have real ballot appeal.
Anyone but is what we got, and will get again, until someone gets serious
about undoing the damage caused by that awful deal made 10 years ago this
weekend.