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

by Nomi Prins

  Still, at least American Express is sort of like a bank, in that many of its customers are normal citizens. But then there’s this: its separate subsidiary, American Express Travel Related Services Co., Inc., got BHC status, too. This unit books high class holidays, resort hotel excursions, and other travel activities. Its Web site boasts of luxury vacations in resorts with “lofty marble entrance halls” and “luxurious suites on 22 acres of tropical gardens,” “award-winning cuisine,” “a pampering spa, and almost every land and water sport imaginable.”24 A BHC can offer all that? Really?

  Sure, the American Express subsidiary handles money, but so does everyone else in the country. To explain its decision, the Fed repeated, “Emergency conditions exist that justify expeditious action on this proposal.”25 What, someone had to rush off to Cabo, ASAP? Actually, it was less silly than it seemed, because travel agents had gotten the go ahead in the Gramm Leach Bliley Act to claim status as financial institutions.26

  Six weeks later, American Express’s BHC status paid a nice dividend when it announced it’d be getting a $3.9 billion belated Christmas gift from TARP. The money arrived on January 13, 2009, the same day that forty two other banks received a total of $11.4 billion.27

  In general, the Federal Reserve was only too willing to approve BHC requests—and it complied fast, which is the scary part. The normal BHC application process takes about thirty days.28 In American Express’s case, it took four.29 Simply put, TARP was the best deal in town. All that a firm in trouble had to do was change its status, apply, and cash its billion dollar checks. The bandwagon quickly evolved into a crowded bus, as everyone wanted to be a BHC. On November 15, 2008, loan servicer Ocwen Financial Corp. applied to the Dallas Federal Reserve to purchase Kent County State Bank and become a BHC.30 On December 8, 2008, Capmark Financial Group Inc. applied to become a BHC (as well as to TARP). But in February 2009, Capmark withdrew its BHC application, and as of June it had not received any TARP money.31

  Shortly after Capmark put in its BHC application, Discover Financial Services, the fourth largest credit card company in America (spun off from its former parent Morgan Stanley in June 2007), got approval to become a BHC. It had been the last stand alone consumer credit card company in the United States after American Express.32

  Century old commercial lender CIT Group became a BHC on December 22, 2008, and bagged $2.33 billion worth of TARP dollars on New Year’s Eve.33 Its stock had lost more than 80 percent of its value in 2008.34 It came to the government for more in July 2009.

  After execs for the big three automakers made an embarrassing plea for TARP bailout funds in front of the U.S. Senate Committee on Banking, Housing, and Urban Affairs on November 18, 2008, and a second plea on December 4, 2008, GM decided to take the easiest route of all.35

  So it applied for its financing arm, GMAC, to become a BHC. And sure enough, on Christmas Eve 2008, GMAC got Federal Reserve approval to become a BHC.36 Again, the Federal Reserve granted the application on an emergency basis, because of the “economic crisis.” GM had been green lighted for up to $13.4 billion in emergency loans a week earlier, on December 19, 2008. GM subsidiaries bagged another $6 billion from the TARP Automotive Industry Financing Program (AIFP) on December 29, 2008.37 Three days later, Chrysler Holding LLC got $4 billion from the AIFP, plus the firm got an additional $1.5 billion to finance new auto loans on January 16, 2009.38

  But even with taxpayer billions, the auto executives couldn’t get their companies on track. President Obama announced in late March 2009 that Chrysler and GM submitted subpar restructuring plans and were not worthy of more government help, while the administration simultaneously ousted GM CEO Rick Wagoner.

  “Neither GM nor Chrysler is viable and deeper sacrifices must be made, the White House indicated Sunday, setting the stage for a crisis in Detroit that will dramatically reshape the nation’s auto industry,” the Associated Press reported on March 30, 2009.39 As of late April 2009, the Treasury had poured a total of $32.7 billion in total loans to General Motors, GMAC, Chrysler Holding, and Chrysler Financial to help the firms avoid bankruptcy and that old “systemic risk” problem.40 Still, Chrysler LLC filed for bankruptcy on April 30, 2009, announcing a merger with Fiat, which got 20 percent control of the new company.41

  And it got worse. On June 1, 2009, GM declared bankruptcy and along with it, received $30 billion more in federal funds. So, all told, GM, GMAC, Chrysler Holding, Chrysler Financial, and New CarCo LLC (the entity the government created to deal with the auto mess) sucked up $92.4 billion in public money by the middle of 2009.42 And it wasn’t over. Just two days after GM went under, GMAC, its financial arm, got to take on $4.25 billion in additional debt! Try going to a bank and asking for a million dollar loan because you can’t pay off your college degree or your health care bills, and see how long it takes for the loan managers to stop laughing. Then in one of the fastest ever large bankruptcies, GM came back to life on July 10, 2009.43 It shed thousands of jobs in the process.

  What the Fed Created, the FDIC Cleaned Up

  All of this quick reposturing and loosening of federal protocol allowed big (and even not so-big) finance firms a legal avenue to get just about as much capital as they wanted. The government’s fast-and-easy money policy demonstrated two things. First, that the government was so scared it might upset the already weakened banking system that instead of slowing down the process by which firms could access its money, it let the Fed—the chief bank regulator—invite more firms to hang out under the federal bailout tent. Second, that the government didn’t stop to consider the consequences of all of this nominal reclassification.

  Big Finance, as we’ve seen, won out. It got its much needed capital, new legal titles that allowed it to access ever more capital, and knowledge that fear was a good way to simultaneously extract money and enact deregulation. It was almost the polar opposite of the government’s approach in 1933. The public lost this time around, and it was perfectly legal.

  While the Fed was creating new banks that would be backed by the FDIC, and the Treasury was doling out TARP money, the FDIC was, in fact, in the business of contraction, a more sensible reaction to failure. In 2008, the FDIC closed twenty five banks. Included was Pasadena based IndyMac, which first ran into trouble in late 2007 when it couldn’t find a buyer for a chunk of its Alt A mortgage loans. Alt A loans are rated one step up from subprime.44

  By the end of June 2008, customers were lining up in front of IndyMac, pulling out $1.3 billion in deposits as if it was 1929.45 Senator Charles Schumer’s (D NY) June 26, 2008, comment that IndyMac was having “serious problems” didn’t help.46 The FDIC took over the bank on July 11, 2008. It enlisted Lehman Brothers to find an acquirer, but considering that Lehman went bankrupt a couple of months later, that didn’t work out so well.47

  After cleaning up and restructuring loans on behalf of homeowners, the FDIC left the new, healthier IndyMac to private equity vultures. In early January 2009, the FDIC agreed to sell IndyMac to IMB HoldCo LLC, a thrift holding company owned by a group of private equity investors, led by former Goldman Sachs partner Steven T. Mnuchin of Dune Capital Management LP, for about $13.9 billion.48 The deal closed on March 19, 2009, with IMB putting together a federal savings bank called OneWest Bank to officially make the purchase, and the FDIC taking a $10.7 billion loss.49

  The idea that a bank that dealt primarily with a community of customers could be revamped to be the ward of a private equity firm with no desire to run a bank but every desire to restructure it and make a profit after FDIC interventions, doesn’t bode well for the future regulatory oversight of the banks the FDIC seizes. Once the FDIC sells them off with no strings attached the resulting institutions would technically become private entities—until the private equity firms decide to turn them public.

  By February 2009, the FDIC itself had to ask for a bigger credit line to stay alive through the onslaught of expected bank failures, which it had initially pegged on October 7, 2008, at a cost of $40 billion t
hrough 2013.50 So, the FDIC’s chief operating officer John F. Bovenzi testified at a House hearing on February 3, 2009, that the FDIC needed to triple its line of credit from the Treasury Department from $30 billion to $100 billion.51 But as bank conditions deteriorated more quickly in early 2009, the FDIC requested an extended credit line of up to $500 billion,52 which was authorized on May 20, 2009, and good until the end of 2010.53

  If You Can’t Beat Them, Buy Them

  The extra credit came none too soon for the FDIC. By mid-July 2009, it was taking over its fifty third failed bank for 2009. This milestone brought the total number of failed banks during 2008 and 2009 to seventy-nine. 54 The last time the bank landscape saw anywhere near as many bank failures was during the Savings and Loan (S&L) Crisis, which kicked into high gear in 1988.55 The government established the Resolution Trust Corporation (RTC) to dispose of the toxic assets acquired from the period’s failed institutions, all 1,043 of them (although keep in mind that twenty years of industry consolidation meant that the failed institutions of the Second Great Depression were a lot bigger than they were in the 1980s).56 Estimates on the total loss of the RTC fiasco to taxpayers ranged from $125 billion to $350 billion.57

  The difference was that the S&L assets were simple while the toxic assets that grew and festered before the Second Great Bank Depression were complex. With the S&L Crisis, you could at least understand which asset related to which property. There weren’t the oodles of layers and leverage that their progeny had two decades later.

  For the banks that lived through the S&L storm, the Second Great Bank Depression was another test, one for which government assistance would be a lifeline. Outside of the loan based banks, the investment banks that leveraged the packaged loans, and the supermarket commercial banks that did both, there was another breed of financial institution: the stand alone insurance company.

  By early 2008, they were finding that without adequate capital (read: actual money from actual people) to see them through their rapidly depleting reserves, they were facing extinction, and not all would be as lucky as AIG, which so far has gotten $182 billion in government help.58 Still, insurance companies had to turn to Uncle Sam for anything they could get. Because they couldn’t even bend themselves enough on paper to become BHCs, the other way to qualify for the TARP was by gaining status as savings and loan (S&L) companies. Indeed, even though we all knew AIG as a mammoth insurance company, it has technically been an S&L since 1999, when it bought a little S&L in Newport Beach, California.59 That’s the little loophole through which it bagged all of the public money.

  On January 8, 2009, insurance companies Hartford Financial Services Group Inc. and Lincoln National Corp. got approval from the Office of Thrift Supervision (OTS), an office of the U.S. Treasury that regulates and supervises the thrift industry, to acquire existing S&Ls and become thrift holding companies.60

  The 198 year old Hartford Financial Services Group had needed life support ten weeks earlier, when on October 30, 2008, it posted its worst quarterly loss ever, and its stock lost more than half of its value.61 This stunning plummet prompted its chairman and CEO Ramani Ayer to try to calm the market, stating, “Volatile credit and equity markets and the largest catastrophe in the past three years significantly affected our results. . . . The Hartford is financially strong with the liquidity and capital to meet our commitments to our customers.”62

  In early November 2008, despite holding out his hat for TARP money, Ayer again accentuated the positive, “The Hartford is financially strong and well capitalized.”63 By early February, he was still singing the firm’s praises in a letter to his shareholders, saying, “We finished 2008 well capitalized and well prepared to meet our commitments to our customers.”64

  In order to apply for TARP money, institutions had to prove they had some assets, and if they didn’t, they had to buy other banks that did.65 So, Hartford applied to acquire the Florida-based Federal Trust Bank for $10 million.66 Lincoln National also applied to become an S&L holding company with the Office of Thrift Supervision, and it simultaneously agreed to acquire Newton County Loan and Savings Bank and applied to TARP for money.67

  Buying these thrifts allowed insurers to qualify as S&L holding companies and made them eligible for TARP funds. The payoffs were huge. Hartford’s $10 million acquisition of Sanford, Florida-based Federal Trust Corp. entitled it to up to $3.4 billion of TARP capital.68 Lincoln National’s takeover of Newton entitled it to up to $3 billion, even though Newton County Loan and Savings Bank had only three full-time employees and $7.3 million worth of assets.69

  Hartford and Lincoln had followed the lead of two other insurance firms that had applied for acquisition approval from the OTS: Genworth Financial Inc., which had asked to buy the Inter Savings Bank; and Aegon NV, a Dutch firm that owns U.S. insurer Transamerica, which asked for permission to acquire Suburban Federal Savings Bank.70 On December 15, 2008, Aegon withdrew its application for participation in the TARP, as well as its application to the Office of Thrift Supervision to get a thrift charter.71 Suburban Federal failed on January 30, 2009. Its deposits were passed to another buyer, the Bank of Essex of Tappahannock, Virginia.72 Genworth filed its S&L holding company application on November 16, 2008. Three weeks later, Genworth announced it had reached an agreement with InterBank to help secure its TARP funds.73 Just as the Fed was giving out BHC status with lightning speed, the Office of Thrift Supervision was doing the same for insurance companies that were buying thrifts in order to become S&L applicants.

  It didn’t stop there. By early February 2009, the whole life insurance industry was trying to get access to TARP money, including two of the largest U.S. life insurers, MetLife and Prudential Life, which had been big investors in the collateralized debt obligation (CDO) market and needed government help to survive the consequences.74 MetLife claimed in February 2009 that its CDOs lost only $15 million because of subprime loan losses.75 Prudential’s Fixed Income Management had been an early CDO participant (starting in 1991) and a leading manager in the arena of packaged securities. The firm has managed twenty CDOs since entering the CDO market in 2000, totaling $9 billion in CDO capital, including debt and equity participation. It was selected to take over as manager for eight other CDO deals. According to Standard & Poor’s, Prudential was one of the world’s biggest CLO (collateralized loan obligation—another version of CDO) managers.76

  The Stage Is Set for Déja Vu

  TARP and the other means by which the federal government poured out our generosity to the banking sector led to quick mergers and more bailout access for an array of financial companies that never should have gotten federal backing, from speculative investment banks to risk taking life insurance companies that had invested too much in securities that were too good to be true. But the federal response to all of their grief was monetary assistance and a shocking lack of prudence, rather than taking the opportunity afforded by their weakened state to administer real reform. Thus, the stage remains set for a repeat occurrence of the Second Great Bank Depression.

  Why? The reason is terribly simple. History, particularly the Great Depression, has taught us that the desire to make money or gain power breeds bad habits. Yet our country is built on the premise that making money is on par with our inalienable right to pursue happiness. And the recent actions of our government have only strengthened the urge—and the ability—for financial firms and the political leaders who stack the decks in the financial firms’ favor to make money and become very, very happy.

  The BHC/FHC issue may seem complex, but the takeaway is that when the Gramm Leach-Bliley Act repealed the Glass-Steagall Act in 1999, which we will discuss in greater detail in chapter 6, it also opened the door for a variety of more complicated financial firms, ones that pursue a range of activities that have nothing to do with consumers or public welfare, to prosper from less government regulation. Again, it’s all perfectly legal.

  The Federal Reserve and the Office of Thrift Supervision—the regulating agencies tha
t are supposed to safeguard the public by keeping an eye on these BHCs and S&Ls—created an unstable environment in which more players needed to be watched. By not considering the consequences of their approvals, they allowed financial firms to easily become BHCs and insurance companies to become S&Ls when they should have exercised their ability and responsibility to say no. AIG became one of the most extensive and complex S&Ls, and would ultimately conspire with its regulators to extort hundreds of billions of dollars of public money. That’s a recipe for future disasters. So the stage is set for more government bailouts because any financial firms left standing, particularly ones that have the government sponsored stamps “BHC” and “FHC,” will be able to engage in every single one of the behaviors that led to the Second Great Bank Depression, even while being floated by government (read: public) money. That’s a very precarious position for all of us.

  4

  Government Sachs

  Hence that general is skillful in attack whose opponent does not know what to defend; and he is skillful in defense whose opponent does not know what to attack.

  —Sun Tzu, The Art of War

  If Machiavelli’s Prince had worked on Wall Street, he would have been the CEO of Goldman Sachs. In corporate America, money and power are commensurate with the prestige of the firm—and the prestigious firms have the most intense internal politics. Wall Street is built on a culture of corporate warfare, not the stereotype of frat boys challenging one another to beer pong tournaments, but a grueling daily struggle to navigate a limitless sea of competition. In this environment, the successful warriors work tirelessly to position themselves for every opportunity, catapulting over the weak, fending off opponents, and always—always—forming alliances with those who might prove useful later on.