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

by Nomi Prins

  64 Leonnig, “How HUD Mortgage Policy Fed the Crisis.”

  65 Associated Press, “Report: Fannie Mae Manipulated Accounting,” MSNBC, May 23, 2006, http://www.msnbc.msn.com/id/12923225; Alt-A: “A classification of mortgages where the risk profile falls between prime and subprime. The borrowers behind these mortgages will typically have clean credit histories, but the mortgage itself will generally have some issues that increase its risk profile.” Investopedia, “Alt-A,” Forbes Digital, http://www.investopedia.com/terms/a/alt-a.asp.

  66 Leonnig, “How HUD Mortgage Policy Fed the Crisis.”

  67 Charles W. Calomiris and Peter J. Wallison, “Blame Fannie Mae and Congress for the Credit Mess,” Wall Street Journal, September 23, 2008, http://online.wsj.com/article/SB122212948811465427.html.

  68 Federal Reserve Bank of Kansas City, Subprime Loan Report, July 2008, http://www.kansascityfed.org/comaffrs/subprime/Omaha.07.02.08.pdf.

  69 Ashley Reed and Peter Gibson, “Things That Matter: The Australian Commercial Real Estate-Backed Securities Market,” RatingsDirect, March 20, 2003, http://www2.standardandpoors.com/spf/pdf/fixedincome/20030320_ThingsMatterAustCMBS.pdf.

  70 United States Senate Committee on Banking, Housing and Urban Affairs, Testimony of Professor John C. Coffee, Jr.: Hearings on Enhancing Investor Protection and the Regulation of Securities Markets, 111th Cong., 1st sess., 2009.

  71 Source: data from Thomson Reuters Financial, http://thomsonreuters.com/business_units/financial.

  72 Randall Dodd and Paul Mills, “Outbreak: U.S. Subprime Contagion,” Finance & Development (June 2008): 14-18.

  73 “FACTBOX-CDOs: ABS and Other Sundry Collateral,” Reuters, June 28, 2007, http://www.reuters.com/article/bondsNews/idUSN2834578820070628.

  74 Data from Thomson Reuters Financial, http://thomsonreuters.com/business_units/financial.

  75 Coughlin, Stoia, Geller, Rudman, & Robbins, LLP, “Coughlin Stoia Geller Rudman & Robbins LLP Files Class Action Suit against the Bear Stearns Companies, Inc.,” press release, March 17, 2008, http://www.csgrr.com/csgrr-cgi-bin/mil?case=bearste-arns&templ=cases/case-pr.html.

  76 Thomas S. Mulligan and Tom Petruno, “Lawsuit Accuses Bear Stearns of Fraud,” Los Angeles Times, April 12, 2008.

  77 KBC, “KBC Takes Decisive Measures to Reduce Volatility of Future Results and Pro-actively Publishes Third-Quarter Result Highlights,” press release, October 15, 2008, https://multimediafiles.kbcgroup.eu/ng/published/KBCCOM/PDF/COM_RVG_pdf_persbericht_15_10_08_EN.pdf.

  78 David Evans, “The Poison in Your Pension,” Bloomberg Markets, July 26, 2007, http://www.bloomberg.com/news/marketsmag/pension.html.

  79 Tim McLaughlin, “Ratings Downgrades Slam Fidelity’s Subprime CDO,” Boston Business Journal, April 18, 2008, http://www.bizjournals.com/boston/stories/2008/04/21/story9.html.

  80 Walden Siew, “Shrinking CDOM arket Hits Citi, Deutsche, TCW,” Reuters, October 1, 2007, http://www.reuters.com/article/pressReleasesMolt/idUSN2627921220071001.

  81 Jody Shenn, “CDO Market Is Almost Frozen, JPMorgan, Merrill Say,” Bloomberg, February 5, 2008, http://www.bloomberg.com/apps/news?pid=20601087&sid=aCk0Qr1f2Eew.

  82 Marcy Gordon, Associated Press News, “SEC Adopts New Rules for Credit Rating Agencies,” Talking Points Memo, December 3, 2008, http://www.talkingpointsmemo.com/news/2008/12/sec_adopts_new_rules_for_credi.php.

  83 Liz Peek, “The Last Word on What Went Wrong,” New York Sun, September 18, 2007, http://www.nysun.com/business/last-word-on-what-went-wrong/62836.

  84 Roben Farzad, “Let the Blame Begin,” Businessweek, August 6, 2007, http://www.businessweek.com/magazine/content/07_32/b4045048.htm.

  85 United States Security and Exchange Commission, “SEC Proposes Comprehensive Reforms to Bring Increased Transparency to Credit Rating Process,” press release, June 11, 2008, http://www.sec.gov/news/press/2008/2008-110.htm.

  86 United States House of Representatives Committee on Oversight and Government Reform, Chairman Waxman’s Opening Statement: Committee Holds Hearing on the Credit Rating Agencies and the Financial Crisis, 110th Cong., 2nd sess., 2008.

  87 David Teather, “The Woman Who Built Financial ‘Weapon of Mass Destruction,’ ” The Guardian, September 29, 2008, http://www.guardian.co.uk/business/2008/sep/20/wallstreet.banking?gusrc=rss&feed=business.

  88 Gretchen Morgenson, “Arcane Market Is Next to Face Big Credit Test,” New York Times, February 17, 2008, http://www.nytimes.com/2008/02/17/business/17swap.html?_r=1&hp&oref=login.

  89 Investopedia Staff, “Dissecting the Bear Stearns Hedge Fund Collapse,” Investopedia, http://www.investopedia.com/articles/07/bear-stearns-collapse.asp.

  90 Naohiko Baba and Paola Gallardo, “OTC Derivatives Market Activity in the Second Half of 2007,” Bank of International Settlements, May 2008, http://www.bis.org/publ/otc_hy0805.pdf?noframes=1.

  91 Deepak Moorjani, phone conversation with the author, April 29, 2009.

  92 Adam Davidson, “How AIG Fell Apart,” The Big Money, September 18, 2008, http://www.thebigmoney.com/articles/explainer/2008/09/18/how-aig-fell-apart.

  93 Janet Tavakoli, “Buyer Beware,” International Financing Review, October 25, 2003 (Super senior tranche: Typically the largest slice of a synthetic CDO, with the lowest risk, “though there is no market standard definition of super senior risk.” Sometimes referred to as having a quadruple A rating, rating agencies in fact do not recognize super senior tranches. Their risk is defined solely by the market), http://www.tavakolistructuredfinance.com/ifr2.html; “Collateral Postings Under AIGFP,” September 16, 2008 to December 31, 2008, http://www.aig.com/aigweb/internet/en/files/CounterpartyAttachments031809_tcm385-155645.pdf.

  94 Deepak Moorjani, phone conversation with the author, April 29, 2009.

  95 Charles Krauthammer, “Catharsis, Then Common Sense,” Washington Post, September 26, 2008.

  96 Black Coffee Briefings on the Warin Iraq, “Iraq: What Lies Ahead,” American Enterprise Institute for Public Policy Research, http://www.aei.org/events/filter.,eventID.274/transcript.asp.

  97 Senate Committee on Banking, Housing and Urban Affairs, Testimony of the Honorable Marc H. Morial, 110th Cong., 2nd sess., 2008; Eric Boehlert and Jamison Foser, comment on “Cavuto Suggests Congress Should Have Warned That ‘Loaning to Minorities and Risky Folks Is a Disaster,’ ” County Fair, comment posted September 19, 2008, http://mediamatters.org/items/200809190021.

  98 Frank Ahrens, “ ‘Moral Hazard’: Why Risk Is Good,” Washington Post, March 19, 2008; Jason Ryan, “Fraud ‘Directly Related’ to Financial Crisis Probed”; Randall Mikkelsen, “FBI Home Mortgage Probe Now Targets 19 Firms,” Reuters, April 16, 2008, http://www.reuters.com/article/governmentFilingsNews/idUSN1648358920080416.

  Chapter 3. Everybody Wants to Be a Bank

  1 Board of Governors of the Federal Reserve System, Federal Reserve Act, Section 13, August 13, 2008, http://www.federalreserve.gov/aboutthefed/section13.htm; Joshua Brockman, “Death of the Brokerage: The Future of Wall Street,” NPR, September 22, 2008, http://www.npr.org/templates/story/story.php?storyId=94894707.

  2 Deloitte LLP, “The Implications of Goldman Sachs and Morgan Stanley Becoming Bank Holding Companies,” Credit Crisis Advisory, Volume II, November 7, 2008, http://www.deloitte.com/dtt/newsletter/0,1012,sid %253D2212%2526cid%253D233238,00.html.

  3 U.S. Federal Reserve System, Bank Holding Companies and Financial Holding Companies, n.d., http://www.fedpartnership.gov/bank-life-cycle/grow-shareholdervalue/bank-holding-companies.cfm.

  4 Board of Governors of the Federal Reserve System, “Board Announces That Goldman Sachs and Morgan Stanley Transactions May Be Consummated Immediately,” press release, September 22, 2008, http://www.federalreserve.gov/ewsevents/press/orders/20080922a.htm.

  5 United States Federal Deposit Insurance Corporation, “FDIC Announces Plan to Free Up Bank Liquidity,” press release, October 14, 2008, http://www.fdic.gov/news/news/press/2008/pr08100.html.

  6 Andrew Bary, “How Do You Spell Sweet Deal? For Ban
ks, It’s TLGP,” Barron’s, April 20, 2009, http://online.barrons.com/article/SB124001886675331247.html?page=1; Reuters, “Morgan Stanley Taps TLGP Again with $475 Mln Deal-IFR,” Forbes, December 4, 2008, http://www.forbes.com/feeds/afx/2008/12/04/afx5779779.html.

  7 Associated Press, “Leveraged-Loan Accounting Gives Banks Edge,” Wall Street Journal, February 28, 2008, http://accounting.smartpros.com/x60907.xml.

  8 Kristin Jones, “Why Is Everyone Becoming a Bank Holding Company? It’s All about the Benjamins,” ProPublica, November 12, 2008, http://www.propublica.org/article/why-is-everyone-becoming-a-bank-holdingcompany-1112.

  9 Dean Baker, phone conversation with the author, January 30, 2009.

  10 Jon Hilsenrath, Damian Paletta, and Aaron Lucchetti, “Goldman, Morgan Scrap Wall Street Model, Become Banks in Bid to Ride Out Crisis,” Wall Street Journal, September 22, 2008, http://online.wsj.com/article/SB122202739111460721.html.

  11 The Goldman Sachs Group, Inc., Commission File Number No. 001 14965, Form 8 K, September 21, 2008.

  12 Morgan Stanley, “Morgan Stanley Granted Federal Bank Holding Company Status by U.S. Federal Reserve Board of Governors,” press release, September 21, 2008, http://www.morganstanley.com/about/press/articles/6933.html.

  13 Hilsenrath, Paletta, and Lucchetti, “Goldman, Morgan Scrap Wall Street Model, Become Banks in Bid to Ride Out Crisis.”

  14 Jones, “Why Is Everyone Becoming a Bank Holding Company?”

  15 FT Reporters, “Roubini: Anglo-Saxon Model Has Failed,” Financial Times, February 9, 2009, http://www.ft.com/ cms/s/0/7dce3c14 f6ba 11dd 8a1f 0000779fd2ac .html?nclick_check=1.

  16 Christine Harper, “Goldman Sachs Would Like to Repay Treasury, CFO Says (Update1),” Bloomberg, February 4, 2009, http://www.bloomberg.com/apps/news?pid=20601087&sid=a3xTcf52kEZM&refer=home.

  17 Kate Kelly and Robin Sidel, “Goldman, Others Getting Aid Are Eager to Pay It All Back,” Wall Street Journal, February 4, 2009, http://online.wsj.com/article_email/SB123379690541950257-lMyQjAxMDI5MzAzNjcwOTY2Wj.html.

  18 Lloyd Blankfein, “Do Not Destroy the Essential Catalyst of Risk,” Financial Times, February 8, 2009, http://www.ft.com/cms/s/0/0a0f1132-f600 11dd a9ed 0000779fd2ac.html.

  19 American Express, “American Express Granted Bank Holding Company Status,” press release, November 10, 2008, http://home3.americanexpress.com/corp/pc/2008/bhc.asp.

  20 Ibid.

  21 American Express, “American Express Third Quarter Revenues Rise Earnings Decline on Increased Credit Provisions,” press release, October 20, 2008, http://home3.americanexpress.com/corp/pc/2008/3q08.asp; American Express, “American Express Announces Reengineering Plan to Generate $1.8 Billion Cost Benefit in 2009,” press release, October 30, 2008, http://home3.americanexpress.com/corp/pc/2008/reeng.asp.

  22 American Express, “American Express Reports Fourth Quarter Earnings from Continuing Operations,” press release, January 26, 2009, http://home3.americanexpress.com/corp/pc/2009/4q08.asp.

  23 Phil Wahba, “Amex Shares Down 12 Percent as Investors Stay Nervous,” Reuters, November 13, 2008, http://www.reuters.com/article/hotStocksNews/idUSTRE4AC6EY20081113.

  24 American Express, “Grand Lido, Jamaica Vacation Packages by American Express Vacations,” http://www.americanexpressvacations.com/offers/superclubsgrandlidopbx.htm.

  25 Andrew Ross Sorkin, ed., “American Express to Become Bank Holding Company,” New York Times, November 10, 2008, http://dealbook.blogs.nytimes.com/2008/11/10/american-express-to-become-bank-holding-company.

  26 Federal Deposit Insurance Corporation, Gramm Leach-Bliley Act, Compliance Handbook, June 2006, http://www.fdic.gov/regulations/compliance/handbook/manual%20411.pdf.

  27 U.S. Department of the Treasury, “Treasury Provides TARP Funds to Local Banks,” press release: HP 1352, January 13, 2009, http://treas.gov/press/releases/hp1352.htm.

  28 Kenneth R. Binning, “Bank Holding Companies,” WIB/Carpenter & Company, n.d., http://www.wib.org/conferences__education/past_programs/2007_de_novo_bank_forum/handouts/binning_tues_pres.pdf.

  29 E mail response to the author from Banking Supervision and Regulation Board of Governors of the Federal Reserve System, February 28, 2009.

  30 MortgageOrb.com, “Ocwen Applies to Become Bank Holding Company,” South Florida Business Journal, December 1, 2008, http://www.mortgageorb.com/e107_plugins/content/content.php?content.2625.

  31 Business Wire, “Capmark Financial Group Inc. Reports Preliminary Fourth Quarter 2008 Results; Withdraws Bank Holding Company Application,” Reuters, February 25, 2009, http://www.reuters.com/article/pressRelease/idUS20059+26-Feb2009+BW20090226; Eye on the Bailout, “Bailout Recipients,” ProPublica, June 5, 2009, http://bailout.propublica.org/main/list/index.

  32 Ari Levy and David Mildenberg, “Discover Wins Federal Reserve Approval to Become Bank (Update 2),” Bloomberg, December 19, 2008, http://www.bloomberg.com/apps/news?pid=20601103&sid=aHi4BUux3q6M&.

  33 David Goldman, “AmEx: We’re Getting TARP, Too,” CNNMoney.com, December 23, 2008, http://money.cnn.com/2008/12/23/news/companies/american_express_tarp.

  34 Bloomberg News, “CIT Is Approved to Convert into Bank,” New York Times, December 22, 2008, http://www.nytimes.com/2008/12/23/business/economy/23cit.html.

  35 United States Senate Committee on Banking, Housing and Urban Affairs, Examining the State of the Domestic Automobile Industry, Hearings, November 18,2008, http://banking.senate.gov/public/index.cfm?FuseAction=Hearings.Hearing&Hearing_ID=0b8c3c92b599-46f4-90b3-7f4e37583268; United States Senate Committee on Banking, Housing and Urban Affairs, The State of the Domestic Automobile Industry: Part II, Hearings, December 4, 2008, http://banking.senate.gov/public/index.cfm?FuseAction=Hearings.Hearing&Hearing_ID=299be20f-5e40-4c5f-89ee-2ade064d4226.

  36 Board of Governors of the Federal Reserve System, “Approval of Proposal by GMAC and IB Finance to Become Bank Holding Companies,” press release, December 24, 2008, http://www.federalreserve.gov/newsevents/press/orders/20081224a.htm.

  37 U.S. Department of the Treasury, “Indicative Summary of Loans for Secured Term Loan Facility,” press release, December 19, 2008, p. 15.

  38 U.S. Department of the Treasury, “Treasury Announces TARP Investments in Chrysler Financial,” press release: HP 1362, January 16, 2009, http://www.treasury.gov/press/releases/hp1362.htm.

  39 Associated Press, “Obama to Set New GM Timeline,” Crain’s New York Business.com, March 30, 2009, www.crainsnewyork.com/article/20090330/FREE/903309997.

  40 Nomi Prins and Krisztina Ugrin, “Bailout Tally,” June 2009, http://www.nomiprins.com/bailout.html.

  41 Poornima Gupta and John Crawley, “Chrysler Files for Bankruptcy; Inks Fiat Deal,” Reuters, April 30, 2009, http://www.reuters.com/article/topNews/idUSTRE53S8F620090430?feedType=RSS&feedName=topNews& pageNumber=1&virtualBrandChannel=0.

  42 Nomi Prins and Krisztina Ugrin, “Bailout Tally,” June 2009, http://www.nomiprins.com/bailout.html.

  43 Kevin Krolicki and David Bailey, “GM Exits Bankruptcy,” Reuters, July 10, 2009.

  44 Associated Press, “FDIC: Cost of Bank Failures to Exceed $40B,” MSNBC.com, February 3, 2009, http://www.msnbc.msn.com/id/29002925.

  45 Louise Story, “Regulators Seize Mortgage Lender,” New York Times, July 12, 2008, http://www.nytimes.com/2008/07/12/business/12indymac.html?_r=1&scp=3&sq=Pasadena-based%20IndyMac&st=cse.

  46 Kathy M. Kristof and Andrea Chang, “IndyMac Bank Seized by Federal Regulators,” Los Angeles Times, July 12, 2008, http://articles.latimes.com/2008/jul/12/business/fi-indymac12.

  47 Richard Clough, “IndyMac Looks Like a Tough Sell: Billions in Deposits Already Have Been Withdrawn,” Los Angeles Business Journal, July 21, 2008, http://www.allbusiness.com/bankingfinance/banking-lending-credit-services-cash/11477757-1.html.

  48 Thrift Holding Company: “A unitary thrift holding company can engage in any business, including commercial or industrial activities; open branch offices anywhere in the United States; and put up to 20% of assets in commercial loans. As
thrift institutions, unitary savings and loan companies must hold at least 65% of assets in residential mortgages or mortgage securities.” AllBusiness.com, Holding Company Definition, Business Glossary, n.d., http://www.allbusiness.com/glossaries/holdingcompany/4948587-1.html.

  49 Greg Morcroft, “FDIC Sells Indy Macat $10.7 Bln Loss,” FoxBusiness, March 20, 2009, http://www.foxbusiness.com/story/markets/industries/finance/fdic-sells-indymac—bln-loss/.

  50 Federal Register, Rules and Regulations, vol. 73, no. 246, p. 78155-78162, FR Doc. E8 30222, December 22, 2008, http://edocket.access.gpo.gov/2008/E8-30222.htm.

  51 Federal Deposit Insurance Corporation, Statement of John F. Bovenzi on Promoting Bank Liquidity and Lending through Deposit Insurance, Hope for Homeowners, and Other Enhancements before the Committee on Financial Services, U.S. House of Representatives, February 3, 2009, http://www.fdic.gov/news/news/speeches/chairman/spfeb0309.html.