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

by Nomi Prins

  If Wall Street wants a “bad bank,” then we can be pretty sure of one thing: for the rest of us, it’s a bad idea. On January 28, 2009, Reuters reported that the Obama administration was considering creating a “bad bank,” which “cheered Wall Street and helped drive financial shares higher.”62 Of course, Wall Street was strongly in favor of a “bad bank” to buy its junk. Who wouldn’t want the chance to dump the old, to go about creating the new? That’s why spring cleaning was invented.

  “Wall Street likes the ‘bad bank’ stuff,” said Joseph Saluzzi, the cohead of equity trading at Themis Trading. “It’s still just a rumor, but a lot of people are betting on it being true, and they like the idea of it.”63

  A week later, Senator Chuck Schumer told Bloomberg News that “the Obama administration should provide guarantees for the toxic assets clogging lenders’ balance sheets, rather than set up a ‘bad bank’ to purchase them.” He cited two problems with the notion of a “bad bank.” “It would probably be very expensive, costing as much as $4 trillion,” he reasoned, and, “second, it’d be hard to value those assets.”64

  This is true. The idea of a “bad bank” lends credence to the idea that if only TARP had stayed on former treasury secretary Henry Paulson’s original course of buying up junk, things would have been better. The fact remains that whatever evaluation model you use for them, rounding up and dumping arbitrary amounts of toxic assets somewhere will not do more than calm the financial markets for the amount of time it takes people to realize there’s more where that comes from.

  Plus, guessing the value of toxic assets is a dangerous pursuit, which might seem obvious by now but the government has chosen not to acknowledge it in any meaningful way. “Meaningful” as in an objective evaluation of all of the toxic assets on all of the banks’ books: a complete show and tell and an external evaluation. That never happened. The government should not own or run what it does not understand and can’t therefore adequately manage or regulate.

  4. Fix the Entire Banking Foundation

  In this convoluted crisis, perhaps the most disturbing discussion is the one that we’re not having: a debate that clearly examines the very structure of the banking industry. Indeed, you can keep patching holes in walls forever, but if you don’t do something about a decaying foundation, sooner or later, you’ll be sitting in a pile of rubble (again), wondering what happened (again).

  This crisis, like the one that led to the Great Depression, was a perfect storm but not a random one. After all, it had happened before. Too much leverage. Too risky assets. Too few banks. Too little oversight. Each of these contributory factors was man made and avoidable.

  The solution in the 1930s was the New Deal, which didn’t simply fund problems; it found solutions. In fact, the only stability during the current crisis has come from the elements of the New Deal that haven’t been deregulated. FDR’s creation of the FDIC to insure customer deposits staved off a national bank run, even though for years banks have lobbied to reduce insurance payments to the FDIC.

  The New Deal meshed government rescue with economic restructuring and accountability. We deeply need that today. Sadly, it is as needed as it is unlikely. A more plausible outcome is that no meaningful regulation will be enacted to keep securitization technology from being used to create more complex assets or to place the most convoluted credit derivatives on exchanges, and, thus, corresponding capital requirements will not be increased. In a couple of years, after Goldman Sachs and others have sufficiently recapitalized themselves at the expense of government protection structures that were never meant for investment banks, these firms may even decide to go private, and the binge and bonus cycle will begin again. As Paulson rides off into the sunset, bags a book deal, or eventually heads to some new influential position elsewhere, the real cost of the financial system’s bailout will dog the Obama administration, particularly if it remains unwilling to dig into the structural legislation on which our current banking system resides.

  And Wall Street will regroup and revive. Even by the winter of 2008, echoes of “time to buy” had peeked through the darker commentary. Jim O’Shaughnessy, the chairman of O’Shaughnessy Asset Management, told a Reuters Investment Conference in December 2008 that none of today’s conditions are as bad as those that marked the 1930s Depression. “Much of the damage is out of the way,” he said. “Price alone would lead us to conclude that now is a fantastic time for investors with cash to move that cash into the stock market.”65 Bringing confidence into the economy by buying stocks does not change the core problems of the banking industry’s structure.

  While the second half of the bailout plan was being debated by Treasury Secretary Tim Geithner and Federal Reserve chairman Ben Bernanke, they expertly dodged multiple bullets of culpability for their roles in allowing such a catastrophically dumb and risky merger as Bank of America with Merrill Lynch. (Yes, Thain and Lewis deserve blame, but really, how could anyone not know that Merrill Lynch was having massive problems?)

  Again, it is convenient—and, let’s face it, satisfying—to crucify the leaders of the institutions that continue to blow up, like Thain and his $35,000 office commode, and not fix the structure that fosters the behavior of the heads of those firms.66

  But let’s not forget the legislative and regulatory environment that made it all possible. Because if we do, then just like after the Great Depression, the Savings and Loan Crisis, the Long Term Capital Management bailout, and the Enron and WorldCom scandals, we will encounter another crisis after we get through this one.67 How many trillions of taxpayer dollars does it take before we act to prevent the same disaster from happening again?

  As economist Dean Baker aptly told me, “There needs to be a limit to the size of the industry and its key players. If you have an economically powerful industry, you’ll have a politically powerful one. How do you get around a ‘too big to fail’ company, if at the end of the day these firms control regulators by controlling the regulatory legislation that gets passed? Even if you could argue that you have the best rules, if you don’t have the political structure to enforce them, they will not work.”68

  True, the proximity of Wall Street to Washington is not simply helping Wall Street titans get big bonuses through risky practices. If that were the case and it could be confined to the lives of the privileged, it would be one thing. But the consequences of their piracies have seeped into the greater economy, and that is not acceptable.

  Rather than allowing the creation of larger, riskier monsters, like Bank of America-Merrill Lynch or whatever combinations Goldman Sachs and Morgan Stanley become, we need a Glass Steagall-like reclassification of Wall Street, going in the direction of smaller, more regulated, less risky entities.

  Wall Street needs a total dissection, a purge, and a 100 percent disclosure of the risk on its current books, period. It also needs to bring in nonregulated entities like hedge funds, private equity funds, and off book gimmicks into open purview and tax policies.

  True, there are some things that can’t be changed. You can’t do much about greed. Even Stanley Weiser, the cowriter on Oliver Stone’s 1980s tale-of-the-times hit Wall Street, said, “If director Oliver Stone and I had a nickel for every time someone uttered the words ‘greed is good,’ we could have bought up the remains of Lehman Brothers.”69

  Everyone comes to Wall Street for the money. The ones at the top are there for the money and the power. No one comes for the ability to help humanity. If that were the case, they’d all be working for non-profits. To them, this period represents a setback. It’s Darwinian—this crisis is a winnowing of the herd. Some will never return. Others will reemerge from our current quagmire and thrive again.

  Weiser went on to say, “I wish I could go back and rewrite the greed line to this: ‘Greed is good. But I’ve never seen a Brinks truck pull up to a cemetery.’”70

  He is quite literally dead on. Greed kills. Greed is literally choking the life out of our country. So let’s adopt that same Darwinian attitu
de. Let’s acknowledge that our lives have been forever changed as a result of the financial crisis. And let us learn from this madness, so that we may thrive once again—thrive not because of unchecked greed and the false hope of endless profits, but rather let us thrive with a reliable, regulated system of checks and balances that ensures the possibility of growth for all.

  5. Don’t Capitalize Banks You Can’t Understand

  Between these punts at an explanation lies the true problem. It’s the same one that has been at the core of this crisis and that stemmed from the complete deregulation of the industry in 1999. As we have seen, the problem is that no one has a clue about the true nature of Citigroup’s books or the health of AIG’s. Or of Bank of America’s, Wells Fargo’s, or, for that matter, JPMorgan Chase’s, although its CEO Jamie Dimon maintains the best poker face. And why are we so in the dark? Because the banks were allowed to grow to be too big to regulate and too complex to decipher.

  The very idea that the government should capitalize these convoluted institutions, rather than separating out and concentrating on the specific divisions that are fully understandable and whose risks are quantifiable, defies logic. It has also proved to be tremendously inefficient and costly.

  No amount of equity injections or Geithner’s stress tests or private or public-government backed investment plans will change that. No one should think of nationalizing, as in taking over and running, anything he or she can’t quantify. Ever.

  You might buy a used car from a friend, but would you buy a bunch of them without finding out how many there are and what condition they’re in? If you end up with ten cars that won’t run, you’re in trouble. But what if it’s ten thousand?

  The fact remains that whatever evaluation model you use for these toxic assets, however you capitalize them, and whatever “bad bank” construct you go with, sequestering these assets somewhere will only pacify the financial markets for as long as it takes people to realize that “out of sight, out of mind” doesn’t solve the problem.

  Why? Because we’re still not even discussing the borrowing that Wall Street did on the back of those securities. Remember, Wall Street of the last ten years has been defined by an insane fixation on borrowing money whenever possible, even borrowing against wealth that doesn’t really exist. So, let’s just say that all of the banks borrowed up to ten times the amount those securities were once worth—a very conservative estimate, considering how hard banks worked to overturn the net capital rule in 2004, which enabled some banks to borrow up to thirty times what they had in their (already illiquid) wallets. Yet, as I’ve mentioned, even with that conservative estimate, we’re looking at a possible systemwide loss of $140 trillion. By that token, the $13 trillion of federal bailouts and loans, including the measly $700 billion in TARP money that the media likes to focus on, is a drop in a big scary bucket.

  As so many of the Americans forced into foreclosure already know, these “toxic assets” don’t live in isolation. They are like weeds overrunning a lawn. We can’t simply remove a section and assume that the lawn will automatically convert to pure grass. These assets have separate lives as collateral for other things: borrowing, credit derivatives, and so on. We must determine what they connect to, in order to decipher how much loss they represent. And that entails analyzing and reconstructing the whole system, as well as the assets within it.

  Before pouring more money into the banks and taking on more of their toxic assets in return for loans, we need to stop, take a breath, and evaluate the banks’ books. Even now, well after the TARP checks have been signed, it is important for taxpayers and economic experts to know what the banks’ books look like. And we still really don’t.

  Next, we need to dissect all banks into manageable, backable parts. We must take apart the supermarket banks and distinguish between consumer oriented and speculative banking. How? By bringing back a modern version of the bipartisan Glass Steagall Act of 1933. Wall Street screwed up then, and banks were given a choice. They could deal with citizens’ daily financial activities and be backed by the government, or they could go their own way and speculate to their greed’s content.

  By separating the banking landscape into less risky commercial banks that dealt directly with consumers (and their deposits and loans), and risky investment banks (that packaged, leveraged, speculated, and traded these loans and other complicated securities), the government capped its (and the public’s) potential losses. FDIC insurance only had to cover banks whose functions were finite. It made sense. Compared to the madness we’re in today, it makes almost too much sense.

  The same should apply for our current situation. The government should back only commercial banking activities. It should start, for example, by injecting capital directly into the loan principals of ordinary Americans. The government should not provide funding for speculation on the back of other people’s money or homes or to fix the problems that speculation creates. That’s a new bubble waiting to burst.

  And the government should definitely not be backing insurance companies, such as AIG, that overspeculated in credit derivatives on behalf of those banks. Plus, it should demand transparency, in regard not only to where our bailout money goes, but to what banks were doing with our deposit money to begin with.

  Sure, no bank wants to disclose all of its ugly information; no one wants to come face to face with the breadth and depth of potential losses. But neither is anyone in Washington asking for it. It must happen.

  6. Stop the Fed!

  We should start with the biggest, most secretive bank in the country, the Fed. Already, its informational stalemate has amounted to grand larceny. Its lack of transparency and cooperation will continue to ooze taxpayer money until there is a complete show and-tell of every book in the banking system. Only then will we know what the Fed has taken on its books, who it’s helping and by how much. To that end, please visit http://action.firedoglake.com/page/s/Fed1207 and join me in supporting H.R.1207 to audit the Fed.

  As German chancellor Angela Merkel said during a June 2, 2009, speech at a conference of the Initiative for a New Social Market Economy, “I view with great skepticism the powers of the Fed . . . and also how, within Europe, the Bank of England has carved out its own small line. . . . We must return together to an independent central bank policy and to a policy of reason, otherwise we will be in exactly the same situation in ten years’ time.”71

  The Fed’s secretive, far reaching power has destroyed any trust that once existed among banks and, as a result, has frozen credit. Why? Because with the Fed acting as mega money-supplier, banks don’t need to worry about the state of each others’ books. The Fed will take care of things. Transparency and trust are unnecessary.

  But we must move past the fear of the unknown. The losses sitting on the books of banks are enormous. Denying that fact doesn’t change it; all of the secrecy only enflames the crisis. But exposing the details, fixing the loans, and reconstructing the banking system will ultimately heal the crisis.

  Sadly, the rush to bigness that was blessed by the Fed and the prevailing idea that you have to save, and even grow, giant firms imply that no real lessons were learned. The way to avert a credit crisis is to regulate its source, to take away the ability for the financial system to leverage and trade itself beyond its capacity to absorb the risk that it will incur—and that will harm the entire economy. We cannot continue to let any financial institution become too big and complicated for the government to understand, particularly when the government is expected to save it from demise.

  Without regulatory mechanisms to curtail a credit monster borne of lax lending, packaging, leveraging, and trading, there will be no stabilization of our economy and the banking system and no end to the ongoing public fallout. How low must we go? Again, it’s time to learn from FDR already. Divide the banking system into regulatable, backable parts: the less risky commercial banks get government support; the risky investment banks and hedge and private equity funds don’t. Financial functiona
lity becomes transparent and useful, not merely speculative. People at the top could still get rich, just not as rich—and not at the cost of ravaging the general population and generations to come.

  Wall Street has operated in an environment with virtually no restrictions on the number of securities it could create—as long as it could drum up demand for them, no matter how spurious they were. Wall Street firms obliterated past rules to pile on extreme amounts of leverage, on and off their main books. They created a credit derivatives market in which contracts could be bought and paid for without any legitimate tie to underlying collateral. (It would be like buying and selling car insurance for the sheer hell of it, without owning a car or even being able to drive.) They operated on a highway with no speed limit. No wonder a great pile on crash occurred as soon as one car broke down.

  We need to set speed limits. We need a safer system. We need a complete reconstruction of the banking landscape along the lines of the Glass Steagall Act of 1933. FDR signed it to bring stability, transparency, and accountability to the financial sector, as well as to contain the expenses that the government would have to incur in order to rescue the financial sector from itself.

  Pour Some Sugar on It