One 77-year-old’s search for the truth: 9/11, election fraud, illegal wars, Wall Street criminality, a stolen nuke, the neocon wars, control of the U.S. government by global corporations, the unjustified assault on Social Security, media complicity, and the "Great Recession" about to become the second Great Depression. "The most important truths are hidden from us by the powerful few who strive to steal the American dream by keeping We the People in the dark."
Michael Hudson: Thatcher deregulated banking and made London the center of speculation and financialization - April 9, 13
Bio Michael Hudson is a Wall Street Financial Analyst, Distinguished Research Professor of Economics at the University of Missouri, Kansas City and author of Super-Imperialism: The Economic Strategy of American Empire (1968 & 2003), Trade, Development and Foreign Debt (1992 & 2009) and of The Myth of Aid (1971). His most recent book is "Beyond the Bubble."
Over drinks at a bar on a dreary, snowy night in Washington this past month, a former Senate investigator laughed as he polished off his beer.
"Everything's fucked up, and nobody goes to jail," he said. "That's your whole story right there. Hell, you don't even have to write the rest of it. Just write that."
I put down my notebook. "Just that?"
"That's right," he said, signaling to the waitress for the check. "Everything's fucked up, and nobody goes to jail. You can end the piece right there."
Nobody goes to jail. This is the mantra of the financial-crisis era, one that saw virtually every major bank and financial company on Wall Street embroiled in obscene criminal scandals that impoverished millions and collectively destroyed hundreds of billions, in fact, trillions of dollars of the world's wealth — and nobody went to jail. Nobody, that is, except Bernie Madoff, a flamboyant and pathological celebrity con artist, whose victims happened to be other rich and famous people.
This article appears in the March 3, 2011 issue of Rolling Stone. The issue is available now on newsstands and will appear in the online archive February 18.
The rest of them, all of them, got off. Not a single executive who ran the companies that cooked up and cashed in on the phony financial boom — an industrywide scam that involved the mass sale of mismarked, fraudulent mortgage-backed securities — has ever been convicted. Their names by now are familiar to even the most casual Middle American news consumer: companies like AIG, Goldman Sachs, Lehman Brothers, JP Morgan Chase, Bank of America and Morgan Stanley. Most of these firms were directly involved in elaborate fraud and theft. Lehman Brothers hid billions in loans from its investors. Bank of America lied about billions in bonuses. Goldman Sachs failed to tell clients how it put together the born-to-lose toxic mortgage deals it was selling. What's more, many of these companies had corporate chieftains whose actions cost investors billions — from AIG derivatives chief Joe Cassano, who assured investors they would not lose even "one dollar" just months before his unit imploded, to the $263 million in compensation that former Lehman chief Dick "The Gorilla" Fuld conveniently failed to disclose. Yet not one of them has faced time behind bars.
Instead, federal regulators and prosecutors have let the banks and finance companies that tried to burn the world economy to the ground get off with carefully orchestrated settlements — whitewash jobs that involve the firms paying pathetically small fines without even being required to admit wrongdoing. To add insult to injury, the people who actually committed the crimes almost never pay the fines themselves; banks caught defrauding their shareholders often use shareholder money to foot the tab of justice. "If the allegations in these settlements are true," says Jed Rakoff, a federal judge in the Southern District of New York, "it's management buying its way off cheap, from the pockets of their victims."
To understand the significance of this, one has to think carefully about the efficacy of fines as a punishment for a defendant pool that includes the richest people on earth — people who simply get their companies to pay their fines for them. Conversely, one has to consider the powerful deterrent to further wrongdoing that the state is missing by not introducing this particular class of people to the experience of incarceration. "You put Lloyd Blankfein in pound-me-in-the-ass prison for one six-month term, and all this bullshit would stop, all over Wall Street," says a former congressional aide. "That's all it would take. Just once."
But that hasn't happened. Because the entire system set up to monitor and regulate Wall Street is fucked up.
Just ask the people who tried to do the right thing.
Here's how regulation of Wall Street is supposed to work. To begin with, there's a semigigantic list of public and quasi-public agencies ostensibly keeping their eyes on the economy, a dense alphabet soup of banking, insurance, S&L, securities and commodities regulators like the Federal Reserve, the Federal Deposit Insurance Corp. (FDIC), the Office of the Comptroller of the Currency (OCC) and the Commodity Futures Trading Commission (CFTC), as well as supposedly "self-regulating organizations" like the New York Stock Exchange. All of these outfits, by law, can at least begin the process of catching and investigating financial criminals, though none of them has prosecutorial power.
The major federal agency on the Wall Street beat is the Securities and Exchange Commission. The SEC watches for violations like insider trading, and also deals with so-called "disclosure violations" — i.e., making sure that all the financial information that publicly traded companies are required to make public actually jibes with reality. But the SEC doesn't have prosecutorial power either, so in practice, when it looks like someone needs to go to jail, they refer the case to the Justice Department. And since the vast majority of crimes in the financial services industry take place in Lower Manhattan, cases referred by the SEC often end up in the U.S. Attorney's Office for the Southern District of New York. Thus, the two top cops on Wall Street are generally considered to be that U.S. attorney — a job that has been held by thunderous prosecutorial personae like Robert Morgenthau and Rudy Giuliani — and the SEC's director of enforcement.
The relationship between the SEC and the DOJ is necessarily close, even symbiotic. Since financial crime-fighting requires a high degree of financial expertise — and since the typical drug-and-terrorism-obsessed FBI agent can't balance his own checkbook, let alone tell a synthetic CDO from a credit default swap — the Justice Department ends up leaning heavily on the SEC's army of 1,100 number-crunching investigators to make their cases. In theory, it's a well-oiled, tag-team affair: Billionaire Wall Street Asshole commits fraud, the NYSE catches on and tips off the SEC, the SEC works the case and delivers it to Justice, and Justice perp-walks the Asshole out of Nobu, into a Crown Victoria and off to 36 months of push-ups, license-plate making and Salisbury steak.
That's the way it's supposed to work. But a veritable mountain of evidence indicates that when it comes to Wall Street, the justice system not only sucks at punishing financial criminals, it has actually evolved into a highly effective mechanism for protecting financial criminals. This institutional reality has absolutely nothing to do with politics or ideology — it takes place no matter who's in office or which party's in power. To understand how the machinery functions, you have to start back at least a decade ago, as case after case of financial malfeasance was pursued too slowly or not at all, fumbled by a government bureaucracy that too often is on a first-name basis with its targets. Indeed, the shocking pattern of nonenforcement with regard to Wall Street is so deeply ingrained in Washington that it raises a profound and difficult question about the very nature of our society: whether we have created a class of people whose misdeeds are no longer perceived as crimes, almost no matter what those misdeeds are. The SEC and the Justice Department have evolved into a bizarre species of social surgeon serving this nonjailable class, expert not at administering punishment and justice, but at finding and removing criminal responsibility from the bodies of the accused.
The systematic lack of regulation has left even the country's top regulators frustrated. Lynn Turner, a former chief accountant for the SEC, laughs darkly at the idea that the criminal justice system is broken when it comes to Wall Street. "I think you've got a wrong assumption — that we even have a law-enforcement agency when it comes to Wall Street," he says.
In the hierarchy of the SEC, the chief accountant plays a major role in working to pursue misleading and phony financial disclosures. Turner held the post a decade ago, when one of the most significant cases was swallowed up by the SEC bureaucracy. In the late 1990s, the agency had an open-and-shut case against the Rite Aid drugstore chain, which was using diabolical accounting tricks to cook their books. But instead of moving swiftly to crack down on such scams, the SEC shoved the case into the "deal with it later" file. "The Philadelphia office literally did nothing with the case for a year," Turner recalls. "Very much like the New York office with Madoff." The Rite Aid case dragged on for years — and by the time it was finished, similar accounting fiascoes at Enron and WorldCom had exploded into a full-blown financial crisis. The same was true for another SEC case that presaged the Enron disaster. The agency knew that appliance-maker Sunbeam was using the same kind of accounting scams to systematically hide losses from its investors. But in the end, the SEC's punishment for Sunbeam's CEO, Al "Chainsaw" Dunlap — widely regarded as one of the biggest assholes in the history of American finance — was a fine of $500,000. Dunlap's net worth at the time was an estimated $100 million. The SEC also barred Dunlap from ever running a public company again — forcing him to retire with a mere $99.5 million. Dunlap passed the time collecting royalties from his self-congratulatory memoir. Its title: Mean Business.
The pattern of inaction toward shady deals on Wall Street grew worse and worse after Turner left, with one slam-dunk case after another either languishing for years or disappearing altogether. Perhaps the most notorious example involved Gary Aguirre, an SEC investigator who was literally fired after he questioned the agency's failure to pursue an insider-trading case against John Mack, now the chairman of Morgan Stanley and one of America's most powerful bankers.
Aguirre joined the SEC in September 2004. Two days into his career as a financial investigator, he was asked to look into an insider-trading complaint against a hedge-fund megastar named Art Samberg. One day, with no advance research or discussion, Samberg had suddenly started buying up huge quantities of shares in a firm called Heller Financial. "It was as if Art Samberg woke up one morning and a voice from the heavens told him to start buying Heller," Aguirre recalls. "And he wasn't just buying shares — there were some days when he was trying to buy three times as many shares as were being traded that day." A few weeks later, Heller was bought by General Electric — and Samberg pocketed $18 million.
After some digging, Aguirre found himself focusing on one suspect as the likely source who had tipped Samberg off: John Mack, a close friend of Samberg's who had just stepped down as president of Morgan Stanley. At the time, Mack had been on Samberg's case to cut him into a deal involving a spinoff of the tech company Lucent — an investment that stood to make Mack a lot of money. "Mack is busting my chops" to give him a piece of the action, Samberg told an employee in an e-mail.
A week later, Mack flew to Switzerland to interview for a top job at Credit Suisse First Boston. Among the investment bank's clients, as it happened, was a firm called Heller Financial. We don't know for sure what Mack learned on his Swiss trip; years later, Mack would claim that he had thrown away his notes about the meetings. But we do know that as soon as Mack returned from the trip, on a Friday, he called up his buddy Samberg. The very next morning, Mack was cut into the Lucent deal — a favor that netted him more than $10 million. And as soon as the market reopened after the weekend, Samberg started buying every Heller share in sight, right before it was snapped up by GE — a suspiciously timed move that earned him the equivalent of Derek Jeter's annual salary for just a few minutes of work.
The deal looked like a classic case of insider trading. But in the summer of 2005, when Aguirre told his boss he planned to interview Mack, things started getting weird. His boss told him the case wasn't likely to fly, explaining that Mack had "powerful political connections." (The investment banker had been a fundraising "Ranger" for George Bush in 2004, and would go on to be a key backer of Hillary Clinton in 2008.)
Aguirre also started to feel pressure from Morgan Stanley, which was in the process of trying to rehire Mack as CEO. At first, Aguirre was contacted by the bank's regulatory liaison, Eric Dinallo, a former top aide to Eliot Spitzer. But it didn't take long for Morgan Stanley to work its way up the SEC chain of command. Within three days, another of the firm's lawyers, Mary Jo White, was on the phone with the SEC's director of enforcement. In a shocking move that was later singled out by Senate investigators, the director actually appeared to reassure White, dismissing the case against Mack as "smoke" rather than "fire." White, incidentally, was herself the former U.S. attorney of the Southern District of New York — one of the top cops on Wall Street.
Pause for a minute to take this in. Aguirre, an SEC foot soldier, is trying to interview a major Wall Street executive — not handcuff the guy or impound his yacht, mind you, just talk to him. In the course of doing so, he finds out that his target's firm is being represented not only by Eliot Spitzer's former top aide, but by the former U.S. attorney overseeing Wall Street, who is going four levels over his head to speak directly to the chief of the SEC's enforcement division — not Aguirre's boss, but his boss's boss's boss's boss. Mack himself, meanwhile, was being represented by Gary Lynch, a former SEC director of enforcement.
Aguirre didn't stand a chance. A month after he complained to his supervisors that he was being blocked from interviewing Mack, he was summarily fired, without notice. The case against Mack was immediately dropped: all depositions canceled, no further subpoenas issued. "It all happened so fast, I needed a seat belt," recalls Aguirre, who had just received a stellar performance review from his bosses. The SEC eventually paid Aguirre a settlement of $755,000 for wrongful dismissal.
Rather than going after Mack, the SEC started looking for someone else to blame for tipping off Samberg. (It was, Aguirre quips, "O.J.'s search for the real killers.") It wasn't until a year later that the agency finally got around to interviewing Mack, who denied any wrongdoing. The four-hour deposition took place on August 1st, 2006 — just days after the five-year statute of limitations on insider trading had expired in the case.
"At best, the picture shows extraordinarily lax enforcement by the SEC," Senate investigators would later conclude. "At worse, the picture is colored with overtones of a possible cover-up."
Episodes like this help explain why so many Wall Street executives felt emboldened to push the regulatory envelope during the mid-2000s. Over and over, even the most obvious cases of fraud and insider dealing got gummed up in the works, and high-ranking executives were almost never prosecuted for their crimes. In 2003, Freddie Mac coughed up $125 million after it was caught misreporting its earnings by $5 billion; nobody went to jail. In 2006, Fannie Mae was fined $400 million, but executives who had overseen phony accounting techniques to jack up their bonuses faced no criminal charges. That same year, AIG paid $1.6 billion after it was caught in a major accounting scandal that would indirectly lead to its collapse two years later, but no executives at the insurance giant were prosecuted.
All of this behavior set the stage for the crash of 2008, when Wall Street exploded in a raging Dresden of fraud and criminality. Yet the SEC and the Justice Department have shown almost no inclination to prosecute those most responsible for the catastrophe — even though they had insiders from the two firms whose implosions triggered the crisis, Lehman Brothers and AIG, who were more than willing to supply evidence against top executives.
In the case of Lehman Brothers, the SEC had a chance six months before the crash to move against Dick Fuld, a man recently named the worst CEO of all time by Portfolio magazine. A decade before the crash, a Lehman lawyer named Oliver Budde was going through the bank's proxy statements and noticed that it was using a loophole involving Restricted Stock Units to hide tens of millions of dollars of Fuld's compensation. Budde told his bosses that Lehman's use of RSUs was dicey at best, but they blew him off. "We're sorry about your concerns," they told him, "but we're doing it." Disturbed by such shady practices, the lawyer quit the firm in 2006.
Then, only a few months after Budde left Lehman, the SEC changed its rules to force companies to disclose exactly how much compensation in RSUs executives had coming to them. "The SEC was basically like, 'We're sick and tired of you people fucking around — we want a picture of what you're holding,'" Budde says. But instead of coming clean about eight separate RSUs that Fuld had hidden from investors, Lehman filed a proxy statement that was a masterpiece of cynical lawyering. On one page, a chart indicated that Fuld had been awarded $146 million in RSUs. But two pages later, a note in the fine print essentially stated that the chart did not contain the real number — which, it failed to mention, was actually $263 million more than the chart indicated. "They fucked around even more than they did before," Budde says. (The law firm that helped craft the fine print, Simpson Thacher & Bartlett, would later receive a lucrative federal contract to serve as legal adviser to the TARP bailout.)
Budde decided to come forward. In April 2008, he wrote a detailed memo to the SEC about Lehman's history of hidden stocks. Shortly thereafter, he got a letter back that began, "Dear Sir or Madam." It was an automated e-response.
"They blew me off," Budde says.
Over the course of that summer, Budde tried to contact the SEC several more times, and was ignored each time. Finally, in the fateful week of September 15th, 2008, when Lehman Brothers cracked under the weight of its reckless bets on the subprime market and went into its final death spiral, Budde became seriously concerned. If the government tried to arrange for Lehman to be pawned off on another Wall Street firm, as it had done with Bear Stearns, the U.S. taxpayer might wind up footing the bill for a company with hundreds of millions of dollars in concealed compensation. So Budde again called the SEC, right in the middle of the crisis. "Look," he told regulators. "I gave you huge stuff. You really want to take a look at this."
But the feds once again blew him off. A young staff attorney contacted Budde, who once more provided the SEC with copies of all his memos. He never heard from the agency again.
"This was like a mini-Madoff," Budde says. "They had six solid months of warnings. They could have done something."
Three weeks later, Budde was shocked to see Fuld testifying before the House Government Oversight Committee and whining about how poor he was. "I got no severance, no golden parachute," Fuld moaned. When Rep. Henry Waxman, the committee's chairman, mentioned that he thought Fuld had earned more than $480 million, Fuld corrected him and said he believed it was only $310 million.
The true number, Budde calculated, was $529 million. He contacted a Senate investigator to talk about how Fuld had misled Congress, but he never got any response. Meanwhile, in a demonstration of the government's priorities, the Justice Department is proceeding full force with a prosecution of retired baseball player Roger Clemens for lying to Congress about getting a shot of steroids in his ass. "At least Roger didn't screw over the world," Budde says, shaking his head.
Fuld has denied any wrongdoing, but his hidden compensation was only a ripple in Lehman's raging tsunami of misdeeds. The investment bank used an absurd accounting trick called "Repo 105" transactions to conceal $50 billion in loans on the firm's balance sheet. (That's $50 billion, not million.) But more than a year after the use of the Repo 105s came to light, there have still been no indictments in the affair. While it's possible that charges may yet be filed, there are now rumors that the SEC and the Justice Department may take no action against Lehman. If that's true, and there's no prosecution in a case where there's such overwhelming evidence — and where the company is already dead, meaning it can't dump further losses on investors or taxpayers — then it might be time to assume the game is up. Failing to prosecute Fuld and Lehman would be tantamount to the state marching into Wall Street and waving the green flag on a new stealing season.
The most amazing noncase in the entire crash — the one that truly defies the most basic notion of justice when it comes to Wall Street supervillains — is the one involving AIG and Joe Cassano, the nebbishy Patient Zero of the financial crisis. As chief of AIGFP, the firm's financial products subsidiary, Cassano repeatedly made public statements in 2007 claiming that his portfolio of mortgage derivatives would suffer "no dollar of loss" — an almost comically obvious misrepresentation. "God couldn't manage a $60 billion real estate portfolio without a single dollar of loss," says Turner, the agency's former chief accountant. "If the SEC can't make a disclosure case against AIG, then they might as well close up shop."
As in the Lehman case, federal prosecutors not only had plenty of evidence against AIG — they also had an eyewitness to Cassano's actions who was prepared to tell all. As an accountant at AIGFP, Joseph St. Denis had a number of run-ins with Cassano during the summer of 2007. At the time, Cassano had already made nearly $500 billion worth of derivative bets that would ultimately blow up, destroy the world's largest insurance company, and trigger the largest government bailout of a single company in U.S. history. He made many fatal mistakes, but chief among them was engaging in contracts that required AIG to post billions of dollars in collateral if there was any downgrade to its credit rating.
St. Denis didn't know about those clauses in Cassano's contracts, since they had been written before he joined the firm. What he did know was that Cassano freaked out when St. Denis spoke with an accountant at the parent company, which was only just finding out about the time bomb Cassano had set. After St. Denis finished a conference call with the executive, Cassano suddenly burst into the room and began screaming at him for talking to the New York office. He then announced that St. Denis had been "deliberately excluded" from any valuations of the most toxic elements of the derivatives portfolio — thus preventing the accountant from doing his job. What St. Denis represented was transparency — and the last thing Cassano needed was transparency.
Another clue that something was amiss with AIGFP's portfolio came when Goldman Sachs demanded that the firm pay billions in collateral, per the terms of Cassano's deadly contracts. Such "collateral calls" happen all the time on Wall Street, but seldom against a seemingly solvent and friendly business partner like AIG. And when they do happen, they are rarely paid without a fight. So St. Denis was shocked when AIGFP agreed to fork over gobs of money to Goldman Sachs, even while it was still contesting the payments — an indication that something was seriously wrong at AIG. "When I found out about the collateral call, I literally had to sit down," St. Denis recalls. "I had to go home for the day."
After Cassano barred him from valuating the derivative deals, St. Denis had no choice but to resign. He got another job, and thought he was done with AIG. But a few months later, he learned that Cassano had held a conference call with investors in December 2007. During the call, AIGFP failed to disclose that it had posted $2 billion to Goldman Sachs following the collateral calls.
"Investors therefore did not know," the Financial Crisis Inquiry Commission would later conclude, "that AIG's earnings were overstated by $3.6 billion."
"I remember thinking, 'Wow, they're just not telling people,'" St. Denis says. "I knew. I had been there. I knew they'd posted collateral."
A year later, after the crash, St. Denis wrote a letter about his experiences to the House Government Oversight Committee, which was looking into the AIG collapse. He also met with investigators for the government, which was preparing a criminal case against Cassano. But the case never went to court. Last May, the Justice Department confirmed that it would not file charges against executives at AIGFP. Cassano, who has denied any wrongdoing, was reportedly told he was no longer a target.
Shortly after that, Cassano strolled into Washington to testify before the Financial Crisis Inquiry Commission. It was his first public appearance since the crash. He has not had to pay back a single cent out of the hundreds of millions of dollars he earned selling his insane pseudo-insurance policies on subprime mortgage deals. Now, out from under prosecution, he appeared before the FCIC and had the enormous balls to compliment his own business acumen, saying his atom-bomb swaps portfolio was, in retrospect, not that badly constructed. "I think the portfolios are withstanding the test of time," he said.
"They offered him an excellent opportunity to redeem himself," St. Denis jokes.
In the end, of course, it wasn't just the executives of Lehman and AIGFP who got passes. Virtually every one of the major players on Wall Street was similarly embroiled in scandal, yet their executives skated off into the sunset, uncharged and unfined. Goldman Sachs paid $550 million last year when it was caught defrauding investors with crappy mortgages, but no executive has been fined or jailed — not even Fabrice "Fabulous Fab" Tourre, Goldman's outrageous Euro-douche who gleefully e-mailed a pal about the "surreal" transactions in the middle of a meeting with the firm's victims. In a similar case, a sales executive at the German powerhouse Deutsche Bank got off on charges of insider trading; its general counsel at the time of the questionable deals, Robert Khuzami, now serves as director of enforcement for the SEC.
Another major firm, Bank of America, was caught hiding $5.8 billion in bonuses from shareholders as part of its takeover of Merrill Lynch. The SEC tried to let the bank off with a settlement of only $33 million, but Judge Jed Rakoff rejected the action as a "facade of enforcement." So the SEC quintupled the settlement — but it didn't require either Merrill or Bank of America to admit to wrongdoing. Unlike criminal trials, in which the facts of the crime are put on record for all to see, these Wall Street settlements almost never require the banks to make any factual disclosures, effectively burying the stories forever. "All this is done at the expense not only of the shareholders, but also of the truth," says Rakoff. Goldman, Deutsche, Merrill, Lehman, Bank of America ... who did we leave out? Oh, there's Citigroup, nailed for hiding some $40 billion in liabilities from investors. Last July, the SEC settled with Citi for $75 million. In a rare move, it also fined two Citi executives, former CFO Gary Crittenden and investor-relations chief Arthur Tildesley Jr. Their penalties, combined, came to a whopping $180,000.
Throughout the entire crisis, in fact, the government has taken exactly one serious swing of the bat against executives from a major bank, charging two guys from Bear Stearns with criminal fraud over a pair of toxic subprime hedge funds that blew up in 2007, destroying the company and robbing investors of $1.6 billion. Jurors had an e-mail between the defendants admitting that "there is simply no way for us to make money — ever" just three days before assuring investors that "there's no basis for thinking this is one big disaster." Yet the case still somehow ended in acquittal — and the Justice Department hasn't taken any of the big banks to court since.
All of which raises an obvious question: Why the hell not?
Gary Aguirre, the SEC investigator who lost his job when he drew the ire of Morgan Stanley, thinks he knows the answer.
Last year, Aguirre noticed that a conference on financial law enforcement was scheduled to be held at the Hilton in New York on November 12th. The list of attendees included 1,500 or so of the country's leading lawyers who represent Wall Street, as well as some of the government's top cops from both the SEC and the Justice Department.
Criminal justice, as it pertains to the Goldmans and Morgan Stanleys of the world, is not adversarial combat, with cops and crooks duking it out in interrogation rooms and courthouses. Instead, it's a cocktail party between friends and colleagues who from month to month and year to year are constantly switching sides and trading hats. At the Hilton conference, regulators and banker-lawyers rubbed elbows during a series of speeches and panel discussions, away from the rabble. "They were chummier in that environment," says Aguirre, who plunked down $2,200 to attend the conference.
Aguirre saw a lot of familiar faces at the conference, for a simple reason: Many of the SEC regulators he had worked with during his failed attempt to investigate John Mack had made a million-dollar pass through the Revolving Door, going to work for the very same firms they used to police. Aguirre didn't see Paul Berger, an associate director of enforcement who had rebuffed his attempts to interview Mack — maybe because Berger was tied up at his lucrative new job at Debevoise & Plimpton, the same law firm that Morgan Stanley employed to intervene in the Mack case. But he did see Mary Jo White, the former U.S. attorney, who was still at Debevoise & Plimpton. He also saw Linda Thomsen, the former SEC director of enforcement who had been so helpful to White. Thomsen had gone on to represent Wall Street as a partner at the prestigious firm of Davis Polk & Wardwell.
Two of the government's top cops were there as well: Preet Bharara, the U.S. attorney for the Southern District of New York, and Robert Khuzami, the SEC's current director of enforcement. Bharara had been recommended for his post by Chuck Schumer, Wall Street's favorite senator. And both he and Khuzami had served with Mary Jo White at the U.S. attorney's office, before Mary Jo went on to become a partner at Debevoise. What's more, when Khuzami had served as general counsel for Deutsche Bank, he had been hired by none other than Dick Walker, who had been enforcement director at the SEC when it slow-rolled the pivotal fraud case against Rite Aid.
"It wasn't just one rotation of the revolving door," says Aguirre. "It just kept spinning. Every single person had rotated in and out of government and private service."
The Revolving Door isn't just a footnote in financial law enforcement; over the past decade, more than a dozen high-ranking SEC officials have gone on to lucrative jobs at Wall Street banks or white-shoe law firms, where partnerships are worth millions. That makes SEC officials like Paul Berger and Linda Thomsen the equivalent of college basketball stars waiting for their first NBA contract. Are you really going to give up a shot at the Knicks or the Lakers just to find out whether a Wall Street big shot like John Mack was guilty of insider trading? "You take one of these jobs," says Turner, the former chief accountant for the SEC, "and you're fit for life."
Fit — and happy. The banter between the speakers at the New York conference says everything you need to know about the level of chumminess and mutual admiration that exists between these supposed adversaries of the justice system. At one point in the conference, Mary Jo White introduced Bharara, her old pal from the U.S. attorney's office.
"I want to first say how pleased I am to be here," Bharara responded. Then, addressing White, he added, "You've spawned all of us. It's almost 11 years ago to the day that Mary Jo White called me and asked me if I would become an assistant U.S. attorney. So thank you, Dr. Frankenstein."
Next, addressing the crowd of high-priced lawyers from Wall Street, Bharara made an interesting joke. "I also want to take a moment to applaud the entire staff of the SEC for the really amazing things they have done over the past year," he said. "They've done a real service to the country, to the financial community, and not to mention a lot of your law practices."
Haw! The line drew snickers from the conference of millionaire lawyers. But the real fireworks came when Khuzami, the SEC's director of enforcement, talked about a new "cooperation initiative" the agency had recently unveiled, in which executives are being offered incentives to report fraud they have witnessed or committed. From now on, Khuzami said, when corporate lawyers like the ones he was addressing want to know if their Wall Street clients are going to be charged by the Justice Department before deciding whether to come forward, all they have to do is ask the SEC.
"We are going to try to get those individuals answers," Khuzami announced, as to "whether or not there is criminal interest in the case — so that defense counsel can have as much information as possible in deciding whether or not to choose to sign up their client."
Aguirre, listening in the crowd, couldn't believe Khuzami's brazenness. The SEC's enforcement director was saying, in essence, that firms like Goldman Sachs and AIG and Lehman Brothers will henceforth be able to get the SEC to act as a middleman between them and the Justice Department, negotiating fines as a way out of jail time. Khuzami was basically outlining a four-step system for banks and their executives to buy their way out of prison. "First, the SEC and Wall Street player make an agreement on a fine that the player will pay to the SEC," Aguirre says. "Then the Justice Department commits itself to pass, so that the player knows he's 'safe.' Third, the player pays the SEC — and fourth, the player gets a pass from the Justice Department."
When I ask a former federal prosecutor about the propriety of a sitting SEC director of enforcement talking out loud about helping corporate defendants "get answers" regarding the status of their criminal cases, he initially doesn't believe it. Then I send him a transcript of the comment. "I am very, very surprised by Khuzami's statement, which does seem to me to be contrary to past practice — and not a good thing," the former prosecutor says.
Earlier this month, when Sen. Chuck Grassley found out about Khuzami's comments, he sent the SEC a letter noting that the agency's own enforcement manual not only prohibits such "answer getting," it even bars the SEC from giving defendants the Justice Department's phone number. "Should counsel or the individual ask which criminal authorities they should contact," the manual reads, "staff should decline to answer, unless authorized by the relevant criminal authorities." Both the SEC and the Justice Department deny there is anything improper in their new policy of cooperation. "We collaborate with the SEC, but they do not consult with us when they resolve their cases," Assistant Attorney General Lanny Breuer assured Congress in January. "They do that independently."
Around the same time that Breuer was testifying, however, a story broke that prior to the pathetically small settlement of $75 million that the SEC had arranged with Citigroup, Khuzami had ordered his staff to pursue lighter charges against the megabank's executives. According to a letter that was sent to Sen. Grassley's office, Khuzami had a "secret conversation, without telling the staff, with a prominent defense lawyer who is a good friend" of his and "who was counsel for the company." The unsigned letter, which appears to have come from an SEC investigator on the case, prompted the inspector general to launch an investigation into the charge.
All of this paints a disturbing picture of a closed and corrupt system, a timeless circle of friends that virtually guarantees a collegial approach to the policing of high finance. Even before the corruption starts, the state is crippled by economic reality: Since law enforcement on Wall Street requires serious intellectual firepower, the banks seize a huge advantage from the start by hiring away the top talent. Budde, the former Lehman lawyer, says it's well known that all the best legal minds go to the big corporate law firms, while the "bottom 20 percent go to the SEC." Which makes it tough for the agency to track devious legal machinations, like the scheme to hide $263 million of Dick Fuld's compensation.
"It's such a mismatch, it's not even funny," Budde says.
But even beyond that, the system is skewed by the irrepressible pull of riches and power. If talent rises in the SEC or the Justice Department, it sooner or later jumps ship for those fat NBA contracts. Or, conversely, graduates of the big corporate firms take sabbaticals from their rich lifestyles to slum it in government service for a year or two. Many of those appointments are inevitably hand-picked by lifelong stooges for Wall Street like Chuck Schumer, who has accepted $14.6 million in campaign contributions from Goldman Sachs, Morgan Stanley and other major players in the finance industry, along with their corporate lawyers.
As for President Obama, what is there to be said? Goldman Sachs was his number-one private campaign contributor. He put a Citigroup executive in charge of his economic transition team, and he just named an executive of JP Morgan Chase, the proud owner of $7.7 million in Chase stock, his new chief of staff. "The betrayal that this represents by Obama to everybody is just — we're not ready to believe it," says Budde, a classmate of the president from their Columbia days. "He's really fucking us over like that? Really? That's really a JP Morgan guy, really?"
Which is not to say that the Obama era has meant an end to law enforcement. On the contrary: In the past few years, the administration has allocated massive amounts of federal resources to catching wrongdoers — of a certain type. Last year, the government deported 393,000 people, at a cost of $5 billion. Since 2007, felony immigration prosecutions along the Mexican border have surged 77 percent; nonfelony prosecutions by 259 percent. In Ohio last month, a single mother was caught lying about where she lived to put her kids into a better school district; the judge in the case tried to sentence her to 10 days in jail for fraud, declaring that letting her go free would "demean the seriousness" of the offenses.
So there you have it. Illegal immigrants: 393,000. Lying moms: one. Bankers: zero. The math makes sense only because the politics are so obvious. You want to win elections, you bang on the jailable class. You build prisons and fill them with people for selling dime bags and stealing CD players. But for stealing a billion dollars? For fraud that puts a million people into foreclosure? Pass. It's not a crime. Prison is too harsh. Get them to say they're sorry, and move on. Oh, wait — let's not even make them say they're sorry. That's too mean; let's just give them a piece of paper with a government stamp on it, officially clearing them of the need to apologize, and make them pay a fine instead. But don't make them pay it out of their own pockets, and don't ask them to give back the money they stole. In fact, let them profit from their collective crimes, to the tune of a record $135 billion in pay and benefits last year. What's next? Taxpayer-funded massages for every Wall Street executive guilty of fraud?
The mental stumbling block, for most Americans, is that financial crimes don't feel real; you don't see the culprits waving guns in liquor stores or dragging coeds into bushes. But these frauds are worse than common robberies. They're crimes of intellectual choice, made by people who are already rich and who have every conceivable social advantage, acting on a simple, cynical calculation: Let's steal whatever we can, then dare the victims to find the juice to reclaim their money through a captive bureaucracy. They're attacking the very definition of property — which, after all, depends in part on a legal system that defends everyone's claims of ownership equally. When that definition becomes tenuous or conditional — when the state simply gives up on the notion of justice — this whole American Dream thing recedes even further from reality.
Friday, January 07, 2011
Obama Renews Commitment to Complete Destruction of the Middle Class - Meet the
New Economic Death Squad
Sticking with my New Year’s resolution to not participate in journalism of appeasement, this article and headline will definitely not be picked up by the appeasers. The unfortunate truth that they don’t want to acknowledge is that Barack “Banana Republic Bankster Puppet” Obama has bowed to his masters yet again.
For the people still delusional enough to believe anything that the psychological operation known as Barack Obama says, this will just be more facts for you to ignore. So turn away now and go watch some “reality” TV - the economy is recovering, tax cuts for multi-millionaires will help everyone, exporting jobs to South Korea will be great for the middle class, the oil in the Gulf of Mexico is 75% cleaned up, seafood from there is perfectly healthy, health insurance rates are declining, the “situation” in Afghanistan is improving, non-combat troops are leaving Iraq, your civil liberties are just fine and a unicorn will soon give you a magical ride over the rainbow. Just click your heels together and the American dream will continue, after this message from our sponsors:
If, on the other hand, you live in the real world, Obama’s latest cabinet appointments are yet another blatant sign that he is absolutely committed to destroying what is left of the middle class. Obama is doubling down on the side of the financial terrorists. Enter Bill Daley and Gene Sperling - a JP Morgan, Goldman Sachs one-two punch to send battered and bruised Americans to the canvas for a final ten-count.
The announcement of Bill Daley, JP Morgan Chase’s czar of “government affairs” (lobbying), as Obama’s new Chief of Staff may sound bad on the surface, but if you dig into Daley’s background, it gets, as George W would say, “downright evil.” Other than spending the past seven years serving Jamie Dimon at JP Morgan, Bill Daley was also a Chamber of Commerce chair. While at the Chamber, Daley “played a major role in opposing the regulation of derivatives” and signed the now infamous Chamber of Commerce manifesto to destroy middle class America.
And we’re just getting warmed up… Daley was Clinton’s NAFTA czar (job exporting specialist) and he even has deep ties to the organization responsible for creating the explosion in CEO pay, all-time record-breaking inequality of wealth and shipping millions more jobs overseas, The Business Roundtable. They just released the following statement:
“Business Roundtable has a strong relationship with Mr. Daley and has worked with him in the past on many issues important to both business and the broader economy, such as the successful ratification of NAFTA. Mr. Daley can continue to be an important partner in our fight…. We look forward to continuing our work with Mr. Daley in his new position.”
Let’s also mention that he played a pivotal role in creating the housing crisis, was on the board of Fannie Mae, opposed financial reform, supported health insurance companies, fought for Pharma interests, lobbied for telecommunications companies and adamantly opposed the Consumer Financial Protection Bureau. He even railed against post-Enron accounting and auditing laws… P.O.P… that was the sound of the vein in my head bursting.
But wait… it gets even better! As a board member of the think tank “Third Way,” Daley took a strong interest in cutting “entitlements” like Social Security and Medicare. He is a proud member of the Council on Foreign Relations and serves on the Boards of Directors of Merck & Co., one of the world’s largest pharmaceutical companies, and he is on the board of . . . wait for it . . . Boeing. Yes, the Pentagon-Wall Street-Pharma nexus is complete. You may now run the White House.
Boeing certainly does love Wall Street. For those of you out of the loop, you may not recall that the most powerful and destructive WMD that Boeing executives ever helped develop was the CDO, that’s a Collateralized Debt (Damage) Obligation. Do you remember that guy Edward Liddy? Liddy and Bill Daley were both Boeing board members, before Liddy temporarily moved to Goldman Sachs where he oversaw their Audit Committee. Liddy was the person who had the most knowledge of Goldman’s CDO exposure insured through, what was that company’s name?… Oh, AIG. Yeah, that was it. Then, Hank “Pentagon-Watergate-Goldman” Paulson unilaterally made Liddy the CEO of AIG, before teaming up with Tim “Kissinger-Rubin-Summers-IMF” Geithner to flush $183 billion tax dollars down the “too big to fail” drain. And then… after the government was finished pumping our tax dollars to financial terrorists through the AIG SPV, Liddy scurried back to the board of Boeing where he could have cocktails with his ole pal Billy-Boy Daley. Yep, Goldman, JP Morgan, Boeing and the destruction of the US economy, birds of a feather…
But I digress, this all happened so long ago, who even remembers this stuff? It all sounds too conspiracy theory for me anyway.
Seriously though, this appointment shows you how arrogant this criminal racket is in their power. Through Daley, JP Morgan and friends will now control Obama’s information flow and schedule. But don’t take my word for it, as you might have noticed, I’m completely biased against the people who are raping this country. When it comes to financial terrorists, my commitment to being fair and balanced goes right out the window. So let’s see what others are reporting…
To throw a little light on this deal with the dark side, Paul Blumenthal from the Sunlight Foundation focuses on the ever-spinning revolving door between Washington and Wall Street:
The revolving door shouldn’t spin again for William Daley
“A Daley selection, which has been hailed by banks, would plant an official emissary from Wall Street into one of the most important jobs in Washington.
The President once told a meeting of bankers that he was ‘the only thing standing between you and the pitchforks.’ That apparently wasn’t good enough. Picking Daley would send the message that the pitchforks–normal people–matter less than the continued flow of campaign donations from the uber-wealthy. Barack Obama raised $39 million from the finance, insurance and real estate sector in his 2008 bid for President, the most raised from this sector by anyone in one cycle seeking political office in the United States ever.
Even more problematic than the need to corral donors for 2012 is that Daley’s presence would allow him to control the time of the President. Daley could choose who the President sees and what information gets to the President. Based on the praise the financial sector has for the Daley selection, it is clear who those people are and what that information would be.” [read more]
That old-fashioned investigative reporting outlet ProPublica focuses on Daley’s Chamber days:
Obama’s New Chief of Staff a Top Banker With Strong Chamber Ties
Obama has named Bill Daley his new chief of staff… a current JPMorgan Chase executive…. Daley has strong ties to the Chamber of Commerce, which opposed the financial reform bill that was a cornerstone of the administration’s agenda last year. From Kevin Connor, co-director the Public Accountability Initiative, a nonprofit research organization:
‘From 2005 to 2007, he co-chaired a Chamber of Commerce committee on financial (de)regulation. The ‘Commission on the Regulation of Capital Markets in the 21st Century’ eventually became the Chamber’s Center for Capital Markets Competitiveness, which played a prominent role in attacking derivatives regulation and consumer protections last year. The Hill called the group one of the ‘loudest voices on financial legislation’ —and they weren’t exactly singing the praises of reform efforts.
Daley also signed on to a March 2009 Chamber manifesto on ‘Restoring Confidence in US Capital Markets,’ the Chamber’s opening PR move in the financial reform debate.’
The new chief of staff has publicly opposed the concept of an independent consumer financial protection agency….” [read more]
Those are some of the many financial ties, but let’s not forget the Boeing connection.
This just in:
Pentagon delays F-35, buys more Boeing fighters
“The Pentagon overhauled the Lockheed Martin Corp F-35 fighter program for the second time in a year and said it would buy 41 Boeing Co F/A-18 warplanes over the next three years….” [read more]
Wow, that paid off real quick! Probably just a coincidence though. No conflicts of interest to see here, or anywhere else for that matter. Move along…
Gene Sperling
Now, for the icing on the cake, Obama’s pick to replace Larry Summers as his top economic advisor is Tim Geithner’s right-hand confidant, former Goldman executive and Rubin disciple Gene Sperling. Sperling was also a Clinton-Rubin-Summers compadre who held this same position under Clinton, playing a direct role in implementing the very policies that fueled our current crisis.
As Wikipedia succinctly states:
“As director of the NEC. Sperling was a principal negotiator with then-Treasury Secretary Lawrence Summers of the Financial Modernization Act of 1999, also known as the Gramm-Leach-Bliley Act. Gramm-Leach-Bliley repealed large portions of the depression-era Glass-Stegall Act allowing banks, securities firms and insurance companies to merge.” [read more]
Sperling is another Council on Foreign Relations member and has worked for the Brookings Institution. He even made some dough off of CIA Ponzi scheme mastermind Allen Stanford. I won’t even go down that rabbit hole, here’s William Alden’s recent take on him:
Gene Sperling Made Millions On Wall Street As Economy Tanked
“Gene Sperling, a leading contender for a top economic post in the White House, made millions on Wall Street even as the economy faltered. The adviser to Treasury Secretary Tim Geithner is near the top of President Barack Obama’s list of candidates to replace Larry Summers as director of the National Economic Council… By appointing Sperling, the president would fuel perceptions that his administration is overly close to Wall Street, installing a policymaker who has not only overseen monumental deregulation of the financial sector, but has also Sperling worked under Rubin in the early Clinton years, when Rubin was NEC director. In Clinton’s second term, during Sperling’s own tenure as NEC director, Congress repealed the Glass-Steagall Act, prompting a rule-easing that allowed Citigroup to become the world’s largest financial services company.
Citigroup later required a $45 billion taxpayer bailout.
‘He saw nothing at all wrong with the pattern of growth we had in place in the ’90s,’ Dean Baker, co-director of the Center for Economic and Policy Research in Washington, said of Sperling. ‘He was not thinking at all critically, seeing that there were even any issues here.’” [read more]
As for Sterling’s most recent achievement, he played a lead role in extending tax cuts to the richest 1%.
What a resume! Let’s put this guy in charge. You can’t even make this shit up. Could Obama have found any more corrupt and incompetent Wall Street thugs than this?
To end on a more positive note, albeit another sad development, at least these appointments have further exposed who the Democratic party partisan hacks are. Howard Dean, the man who is supposed to be the “Progressive left” challenger to Obama in 2012, adamantly supports Bill Daley as Chief of Staff, calling his appointment a “huge plus.”
Ouch, that’s a bitter pill for Progressives to swallow. And Mother Jones’ David Corn has come out in support of Gene Sperling.
Say it ain’t so! Perhaps I should have just taken the blue pill…
– David DeGraw is the founder and editor of AmpedStatus.com. He is the author of The Economic Elite Vs. The People of the United States. His new book is The Road Through 2012.
Goldman Sachs and other big banks aren't just pocketing the trillions we gave them to rescue the economy - they're re-creating the conditions for another crash
On January 21st, Lloyd Blankfein left a peculiar voicemail message on the work phones of his employees at Goldman Sachs. Fast becoming America's pre-eminent Marvel Comics supervillain, the CEO used the call to deploy his secret weapon: a pair of giant, nuclear-powered testicles. In his message, Blankfein addressed his plan to pay out gigantic year-end bonuses amid widespread controversy over Goldman's role in precipitating the global financial crisis.
The bank had already set aside a tidy $16.2 billion for salaries and bonuses — meaning that Goldman employees were each set to take home an average of $498,246, a number roughly commensurate with what they received during the bubble years. Still, the troops were worried: There were rumors that Dr. Ballsachs, bowing to political pressure, might be forced to scale the number back. After all, the country was broke, 14.8 million Americans were stranded on the unemployment line, and Barack Obama and the Democrats were trying to recover the populist high ground after their bitch-whipping in Massachusetts by calling for a "bailout tax" on banks. Maybe this wasn't the right time for Goldman to be throwing its annual Roman bonus orgy.
Not to worry, Blankfein reassured employees. "In a year that proved to have no shortage of story lines," he said, "I believe very strongly that performance is the ultimate narrative."
Translation: We made a shitload of money last year because we're so amazing at our jobs, so fuck all those people who want us to reduce our bonuses.
Goldman wasn't alone. The nation's six largest banks — all committed to this balls-out, I drink your milkshake! strategy of flagrantly gorging themselves as America goes hungry — set aside a whopping $140 billion for executive compensation last year, a sum only slightly less than the $164 billion they paid themselves in the pre-crash year of 2007. In a gesture of self-sacrifice, Blankfein himself took a humiliatingly low bonus of $9 million, less than the 2009 pay of elephantine New York Knicks washout Eddy Curry. But in reality, not much had changed. "What is the state of our moral being when Lloyd Blankfein taking a $9 million bonus is viewed as this great act of contrition, when every penny of it was a direct transfer from the taxpayer?" asks Eliot Spitzer, who tried to hold Wall Street accountable during his own ill-fated stint as governor of New York.
Beyond a few such bleats of outrage, however, the huge payout was met, by and large, with a collective sigh of resignation. Because beneath America's populist veneer, on a more subtle strata of the national psyche, there remains a strong temptation to not really give a shit. The rich, after all, have always made way too much money; what's the difference if some fat cat in New York pockets $20 million instead of $10 million?
The only reason such apathy exists, however, is because there's still a widespread misunderstanding of how exactly Wall Street "earns" its money, with emphasis on the quotation marks around "earns." The question everyone should be asking, as one bailout recipient after another posts massive profits — Goldman reported $13.4 billion in profits last year, after paying out that $16.2 billion in bonuses and compensation — is this: In an economy as horrible as ours, with every factory town between New York and Los Angeles looking like those hollowed-out ghost ships we see on History Channel documentaries like Shipwrecks of the Great Lakes, where in the hell did Wall Street's eye-popping profits come from, exactly? Did Goldman go from bailout city to $13.4 billion in the black because, as Blankfein suggests, its "performance" was just that awesome? A year and a half after they were minutes away from bankruptcy, how are these assholes not only back on their feet again, but hauling in bonuses at the same rate they were during the bubble?
The answer to that question is basically twofold: They raped the taxpayer, and they raped their clients.
The bottom line is that banks like Goldman have learned absolutely nothing from the global economic meltdown. In fact, they're back conniving and playing speculative long shots in force — only this time with the full financial support of the U.S. government. In the process, they're rapidly re-creating the conditions for another crash, with the same actors once again playing the same crazy games of financial chicken with the same toxic assets as before.
That's why this bonus business isn't merely a matter of getting upset about whether or not Lloyd Blankfein buys himself one tropical island or two on his next birthday. The reality is that the post-bailout era in which Goldman thrived has turned out to be a chaotic frenzy of high-stakes con-artistry, with taxpayers and clients bilked out of billions using a dizzying array of old-school hustles that, but for their ponderous complexity, would have fit well in slick grifter movies like The Sting and Matchstick Men. There's even a term in con-man lingo for what some of the banks are doing right now, with all their cosmetic gestures of scaling back bonuses and giving to charities. In the grifter world, calming down a mark so he doesn't call the cops is known as the "Cool Off."
To appreciate how all of these (sometimes brilliant) schemes work is to understand the difference between earning money and taking scores, and to realize that the profits these banks are posting don't so much represent national growth and recovery, but something closer to the losses one would report after a theft or a car crash. Many Americans instinctively understand this to be true — but, much like when your wife does it with your 300-pound plumber in the kids' playroom, knowing it and actually watching the whole scene from start to finish are two very different things. In that spirit, a brief history of the best 18 months of grifting this country has ever seen:
CON #1 THE SWOOP AND SQUAT
By now, most people who have followed the financial crisis know that the bailout of AIG was actually a bailout of AIG's "counterparties" — the big banks like Goldman to whom the insurance giant owed billions when it went belly up.
What is less understood is that the bailout of AIG counter-parties like Goldman and Société Générale, a French bank, actually began before the collapse of AIG, before the Federal Reserve paid them so much as a dollar. Nor is it understood that these counterparties actually accelerated the wreck of AIG in what was, ironically, something very like the old insurance scam known as "Swoop and Squat," in which a target car is trapped between two perpetrator vehicles and wrecked, with the mark in the game being the target's insurance company — in this case, the government.
This may sound far-fetched, but the financial crisis of 2008 was very much caused by a perverse series of legal incentives that often made failed investments worth more than thriving ones. Our economy was like a town where everyone has juicy insurance policies on their neighbors' cars and houses. In such a town, the driving will be suspiciously bad, and there will be a lot of fires.
AIG was the ultimate example of this dynamic. At the height of the housing boom, Goldman was selling billions in bundled mortgage-backed securities — often toxic crap of the no-money-down, no-identification-needed variety of home loan — to various institutional suckers like pensions and insurance companies, who frequently thought they were buying investment-grade instruments. At the same time, in a glaring example of the perverse incentives that existed and still exist, Goldman was also betting against those same sorts of securities — a practice that one government investigator compared to "selling a car with faulty brakes and then buying an insurance policy on the buyer of those cars."
Goldman often "insured" some of this garbage with AIG, using a virtually unregulated form of pseudo-insurance called credit-default swaps. Thanks in large part to deregulation pushed by Bob Rubin, former chairman of Goldman, and Treasury secretary under Bill Clinton, AIG wasn't required to actually have the capital to pay off the deals. As a result, banks like Goldman bought more than $440 billion worth of this bogus insurance from AIG, a huge blind bet that the taxpayer ended up having to eat.
Thus, when the housing bubble went crazy, Goldman made money coming and going. They made money selling the crap mortgages, and they made money by collecting on the bogus insurance from AIG when the crap mortgages flopped.
Still, the trick for Goldman was: how to collect the insurance money. As AIG headed into a tailspin that fateful summer of 2008, it looked like the beleaguered firm wasn't going to have the money to pay off the bogus insurance. So Goldman and other banks began demanding that AIG provide them with cash collateral. In the 15 months leading up to the collapse of AIG, Goldman received $5.9 billion in collateral. Société Générale, a bank holding lots of mortgage-backed crap originally underwritten by Goldman, received $5.5 billion. These collateral demands squeezing AIG from two sides were the "Swoop and Squat" that ultimately crashed the firm. "It put the company into a liquidity crisis," says Eric Dinallo, who was intimately involved in the AIG bailout as head of the New York State Insurance Department.
It was a brilliant move. When a company like AIG is about to die, it isn't supposed to hand over big hunks of assets to a single creditor like Goldman; it's supposed to equitably distribute whatever assets it has left among all its creditors. Had AIG gone bankrupt, Goldman would have likely lost much of the $5.9 billion that it pocketed as collateral. "Any bankruptcy court that saw those collateral payments would have declined that transaction as a fraudulent conveyance," says Barry Ritholtz, the author of Bailout Nation. Instead, Goldman and the other counterparties got their money out in advance — putting a torch to what was left of AIG. Fans of the movie Goodfellas will recall Henry Hill and Tommy DeVito taking the same approach to the Bamboo Lounge nightclub they'd been gouging. Roll the Ray Liotta narration: "Finally, when there's nothing left, when you can't borrow another buck . . . you bust the joint out. You light a match."
And why not? After all, according to the terms of the bailout deal struck when AIG was taken over by the state in September 2008, Goldman was paid 100 cents on the dollar on an additional $12.9 billion it was owed by AIG — again, money it almost certainly would not have seen a fraction of had AIG proceeded to a normal bankruptcy. Along with the collateral it pocketed, that's $19 billion in pure cash that Goldman would not have "earned" without massive state intervention. How's that $13.4 billion in 2009 profits looking now? And that doesn't even include the direct bailouts of Goldman Sachs and other big banks, which began in earnest after the collapse of AIG.
CON #2 THE DOLLAR STORE
In the usual "DollarStore" or "Big Store" scam — popularized in movies like The Sting — a huge cast of con artists is hired to create a whole fake environment into which the unsuspecting mark walks and gets robbed over and over again. A warehouse is converted into a makeshift casino or off-track betting parlor, the fool walks in with money, leaves without it.
The two key elements to the Dollar Store scam are the whiz-bang theatrical redecorating job and the fact that everyone is in on it except the mark. In this case, a pair of investment banks were dressed up to look like commercial banks overnight, and it was the taxpayer who walked in and lost his shirt, confused by the appearance of what looked like real Federal Reserve officials minding the store.
Less than a week after the AIG bailout, Goldman and another investment bank, Morgan Stanley, applied for, and received, federal permission to become bank holding companies — a move that would make them eligible for much greater federal support. The stock prices of both firms were cratering, and there was talk that either or both might go the way of Lehman Brothers, another once-mighty investment bank that just a week earlier had disappeared from the face of the earth under the weight of its toxic assets. By law, a five-day waiting period was required for such a conversion — but the two banks got them overnight, with final approval actually coming only five days after the AIG bailout.
Why did they need those federal bank charters? This question is the key to understanding the entire bailout era — because this Dollar Store scam was the big one. Institutions that were, in reality, high-risk gambling houses were allowed to masquerade as conservative commercial banks. As a result of this new designation, they were given access to a virtually endless tap of "free money" by unsuspecting taxpayers. The $10 billion that Goldman received under the better-known TARP bailout was chump change in comparison to the smorgasbord of direct and indirect aid it qualified for as a commercial bank.
When Goldman Sachs and Morgan Stanley got their federal bank charters, they joined Bank of America, Citigroup, J.P. Morgan Chase and the other banking titans who could go to the Fed and borrow massive amounts of money at interest rates that, thanks to the aggressive rate-cutting policies of Fed chief Ben Bernanke during the crisis, soon sank to zero percent. The ability to go to the Fed and borrow big at next to no interest was what saved Goldman, Morgan Stanley and other banks from death in the fall of 2008. "They had no other way to raise capital at that moment, meaning they were on the brink of insolvency," says Nomi Prins, a former managing director at Goldman Sachs. "The Fed was the only shot."
In fact, the Fed became not just a source of emergency borrowing that enabled Goldman and Morgan Stanley to stave off disaster — it became a source of long-term guaranteed income. Borrowing at zero percent interest, banks like Goldman now had virtually infinite ways to make money. In one of the most common maneuvers, they simply took the money they borrowed from the government at zero percent and lent it back to the government by buying Treasury bills that paid interest of three or four percent. It was basically a license to print money — no different than attaching an ATM to the side of the Federal Reserve.
"You're borrowing at zero, putting it out there at two or three percent, with hundreds of billions of dollars — man, you can make a lot of money that way," says the manager of one prominent hedge fund. "It's free money." Which goes a long way to explaining Goldman's enormous profits last year. But all that free money was amplified by another scam:
CON #3 THE PIG IN THE POKE
At one point or another, pretty much everyone who takes drugs has been burned by this one, also known as the "Rocks in the Box" scam or, in its more elaborate variations, the "Jamaican Switch." Someone sells you what looks like an eightball of coke in a baggie, you get home and, you dumbass, it's baby powder.
The scam's name comes from the Middle Ages, when some fool would be sold a bound and gagged pig that he would see being put into a bag; he'd miss the switch, then get home and find a tied-up cat in there instead. Hence the expression "Don't let the cat out of the bag."
The "Pig in the Poke" scam is another key to the entire bailout era. After the crash of the housing bubble — the largest asset bubble in history — the economy was suddenly flooded with securities backed by failing or near-failing home loans. In the cleanup phase after that bubble burst, the whole game was to get taxpayers, clients and shareholders to buy these worthless cats, but at pig prices.
One of the first times we saw the scam appear was in September 2008, right around the time that AIG was imploding. That was when the Fed changed some of its collateral rules, meaning banks that could once borrow only against sound collateral, like Treasury bills or AAA-rated corporate bonds, could now borrow against pretty much anything — including some of the mortgage-backed sewage that got us into this mess in the first place. In other words, banks that once had to show a real pig to borrow from the Fed could now show up with a cat and get pig money. "All of a sudden, banks were allowed to post absolute shit to the Fed's balance sheet," says the manager of the prominent hedge fund.
The Fed spelled it out on September 14th, 2008, when it changed the collateral rules for one of its first bailout facilities — the Primary Dealer Credit Facility, or PDCF. The Fed's own write-up described the changes: "With the Fed's action, all the kinds of collateral then in use . . . including non-investment-grade securities and equities . . . became eligible for pledge in the PDCF."
Translation: We now accept cats.
The Pig in the Poke also came into play in April of last year, when Congress pushed a little-known agency called the Financial Accounting Standards Board, or FASB, to change the so-called "mark-to-market" accounting rules. Until this rule change, banks had to assign a real-market price to all of their assets. If they had a balance sheet full of securities they had bought at $3 that were now only worth $1, they had to figure their year-end accounting using that $1 value. In other words, if you were the dope who bought a cat instead of a pig, you couldn't invite your shareholders to a slate of pork dinners come year-end accounting time.
But last April, FASB changed all that. From now on, it announced, banks could avoid reporting losses on some of their crappy cat investments simply by declaring that they would "more likely than not" hold on to them until they recovered their pig value. In short, the banks didn't even have to actually hold on to the toxic shit they owned — they just had to sort of promise to hold on to it.
That's why the "profit" numbers of a lot of these banks are really a joke. In many cases, we have absolutely no idea how many cats are in their proverbial bag. What they call "profits" might really be profits, only minus undeclared millions or billions in losses.
"They're hiding all this stuff from their shareholders," says Ritholtz, who was disgusted that the banks lobbied for the rule changes. "Now, suddenly banks that were happy to mark to market on the way up don't have to mark to market on the way down."
CON #4 THE RUMANIAN BOX
One of the great innovations of Victor Lustig, the legendary Depression-era con man who wrote the famous "Ten Commandments for Con Men," was a thing called the "Rumanian Box." This was a little machine that a mark would put a blank piece of paper into, only to see real currency come out the other side. The brilliant Lustig sold this Rumanian Box over and over again for vast sums — but he's been outdone by the modern barons of Wall Street, who managed to get themselves a real Rumanian Box.
How they accomplished this is a story that by itself highlights the challenge of placing this era in any kind of historical context of known financial crime. What the banks did was something that was never — and never could have been — thought of before. They took so much money from the government, and then did so little with it, that the state was forced to start printing new cash to throw at them. Even the great Lustig in his wildest, horniest dreams could never have dreamed up this one.
The setup: By early 2009, the banks had already replenished themselves with billions if not trillions in bailout money. It wasn't just the $700 billion in TARP cash, the free money provided by the Fed, and the untold losses obscured by accounting tricks. Another new rule allowed banks to collect interest on the cash they were required by law to keep in reserve accounts at the Fed — meaning the state was now compensating the banks simply for guaranteeing their own solvency. And a new federal operation called the Temporary Liquidity Guarantee Program let insolvent and near-insolvent banks dispense with their deservedly ruined credit profiles and borrow on a clean slate, with FDIC backing. Goldman borrowed $29 billion on the government's good name, J.P. Morgan Chase $38 billion, and Bank of America $44 billion. "TLGP," says Prins, the former Goldman manager, "was a big one."
Collectively, all this largesse was worth trillions. The idea behind the flood of money, from the government's standpoint, was to spark a national recovery: We refill the banks' balance sheets, and they, in turn, start to lend money again, recharging the economy and producing jobs. "The banks were fast approaching insolvency," says Rep. Paul Kanjorski, a vocal critic of Wall Street who nevertheless defends the initial decision to bail out the banks. "It was vitally important that we recapitalize these institutions."
But here's the thing. Despite all these trillions in government rescues, despite the Fed slashing interest rates down to nothing and showering the banks with mountains of guarantees, Goldman and its friends had still not jump-started lending again by the first quarter of 2009. That's where those nuclear-powered balls of Lloyd Blankfein came into play, as Goldman and other banks basically threatened to pick up their bailout billions and go home if the government didn't fork over more cash — a lot more. "Even if the Fed could make interest rates negative, that wouldn't necessarily help," warned Goldman's chief domestic economist, Jan Hatzius. "We're in a deep recession mainly because the private sector, for a variety of reasons, has decided to save a lot more."
Translation: You can lower interest rates all you want, but we're still not fucking lending the bailout money to anyone in this economy. Until the government agreed to hand over even more goodies, the banks opted to join the rest of the "private sector" and "save" the taxpayer aid they had received — in the form of bonuses and compensation.
The ploy worked. In March of last year, the Fed sharply expanded a radical new program called quantitative easing, which effectively operated as a real-live Rumanian Box. The government put stacks of paper in one side, and out came $1.2 trillion "real" dollars.
The government used some of that freshly printed money to prop itself up by purchasing Treasury bonds — a desperation move, since Washington's demand for cash was so great post-Clusterfuck '08 that even the Chinese couldn't buy U.S. debt fast enough to keep America afloat. But the Fed used most of the new cash to buy mortgage-backed securities in an effort to spur home lending — instantly creating a massive market for major banks.
And what did the banks do with the proceeds? Among other things, they bought Treasury bonds, essentially lending the money back to the government, at interest. The money that came out of the magic Rumanian Box went from the government back to the government, with Wall Street stepping into the circle just long enough to get paid. And once quantitative easing ends, as it is scheduled to do in March, the flow of money for home loans will once again grind to a halt. The Mortgage Bankers Association expects the number of new residential mortgages to plunge by 40 percent this year.
CON #5 THE BIG MITT
All of that Rumanian box paper was made even more valuable by running it through the next stage of the grift. Michael Masters, one of the country's leading experts on commodities trading, compares this part of the scam to the poker game in the Bill Murray comedy Stripes. "It's like that scene where John Candy leans over to the guy who's new at poker and says, 'Let me see your cards,' then starts giving him advice," Masters says. "He looks at the hand, and the guy has bad cards, and he's like, 'Bluff me, come on! If it were me, I'd bet everything!' That's what it's like. It's like they're looking at your cards as they give you advice."
In more ways than one can count, the economy in the bailout era turned into a "Big Mitt," the con man's name for a rigged poker game. Everybody was indeed looking at everyone else's cards, in many cases with state sanction. Only taxpayers and clients were left out of the loop.
At the same time the Fed and the Treasury were making massive, earthshaking moves like quantitative easing and TARP, they were also consulting regularly with private advisory boards that include every major player on Wall Street. The Treasury Borrowing Advisory Committee has a J.P. Morgan executive as its chairman and a Goldman executive as its vice chairman, while the board advising the Fed includes bankers from Capital One and Bank of New York Mellon. That means that, in addition to getting great gobs of free money, the banks were also getting clear signals about when they were getting that money, making it possible to position themselves to make the appropriate investments.
One of the best examples of the banks blatantly gambling, and winning, on government moves was the Public-Private Investment Program, or PPIP. In this bizarre scheme cooked up by goofball-geek Treasury Secretary Tim Geithner, the government loaned money to hedge funds and other private investors to buy up the absolutely most toxic horseshit on the market — the same kind of high-risk, high-yield mortgages that were most responsible for triggering the financial chain reaction in the fall of 2008. These satanic deals were the basic currency of the bubble: Jobless dope fiends bought houses with no money down, and the big banks wrapped those mortgages into securities and then sold them off to pensions and other suckers as investment-grade deals. The whole point of the PPIP was to get private investors to relieve the banks of these dangerous assets before they hurt any more innocent bystanders.
But what did the banks do instead, once they got wind of the PPIP? They started buying that worthless crap again, presumably to sell back to the government at inflated prices! In the third quarter of last year, Goldman, Morgan Stanley, Citigroup and Bank of America combined to add $3.36 billion of exactly this horseshit to their balance sheets.
This brazen decision to gouge the taxpayer startled even hardened market observers. According to Michael Schlachter of the investment firm Wilshire Associates, it was "absolutely ridiculous" that the banks that were supposed to be reducing their exposure to these volatile instruments were instead loading up on them in order to make a quick buck. "Some of them created this mess," he said, "and they are making a killing undoing it."
CON #6 THE WIRE
Here's the thing about our current economy. When Goldman and Morgan Stanley transformed overnight from investment banks into commercial banks, we were told this would mean a new era of "significantly tighter regulations and much closer supervision by bank examiners," as The New York Times put it the very next day. In reality, however, the conversion of Goldman and Morgan Stanley simply completed the dangerous concentration of power and wealth that began in 1999, when Congress repealed the Glass-Steagall Act — the Depression-era law that had prevented the merger of insurance firms, commercial banks and investment houses. Wall Street and the government became one giant dope house, where a few major players share valuable information between conflicted departments the way junkies share needles.
One of the most common practices is a thing called front-running, which is really no different from the old "Wire" con, another scam popularized in The Sting. But instead of intercepting a telegraph wire in order to bet on racetrack results ahead of the crowd, what Wall Street does is make bets ahead of valuable information they obtain in the course of everyday business.
Say you're working for the commodities desk of a big investment bank, and a major client — a pension fund, perhaps — calls you up and asks you to buy a billion dollars of oil futures for them. Once you place that huge order, the price of those futures is almost guaranteed to go up. If the guy in charge of asset management a few desks down from you somehow finds out about that, he can make a fortune for the bank by betting ahead of that client of yours. The deal would be instantaneous and undetectable, and it would offer huge profits. Your own client would lose money, of course — he'd end up paying a higher price for the oil futures he ordered, because you would have driven up the price. But that doesn't keep banks from screwing their own customers in this very way.
The scam is so blatant that Goldman Sachs actually warns its clients that something along these lines might happen to them. In the disclosure section at the back of a research paper the bank issued on January 15th, Goldman advises clients to buy some dubious high-yield bonds while admitting that the bank itself may bet against those same shitty bonds. "Our salespeople, traders and other professionals may provide oral or written market commentary or trading strategies to our clients and our proprietary trading desks that reflect opinions that are contrary to the opinions expressed in this research," the disclosure reads. "Our asset-management area, our proprietary-trading desks and investing businesses may make investment decisions that are inconsistent with the recommendations or views expressed in this research."
Banks like Goldman admit this stuff openly, despite the fact that there are securities laws that require banks to engage in "fair dealing with customers" and prohibit analysts from issuing opinions that are at odds with what they really think. And yet here they are, saying flat-out that they may be issuing an opinion at odds with what they really think.
To help them screw their own clients, the major investment banks employ high-speed computer programs that can glimpse orders from investors before the deals are processed and then make trades on behalf of the banks at speeds of fractions of a second. None of them will admit it, but everybody knows what this computerized trading — known as "flash trading" — really is. "Flash trading is nothing more than computerized front-running," says the prominent hedge-fund manager. The SEC voted to ban flash trading in September, but five months later it has yet to issue a regulation to put a stop to the practice.
Over the summer, Goldman suffered an embarrassment on that score when one of its employees, a Russian named Sergey Aleynikov, allegedly stole the bank's computerized trading code. In a court proceeding after Aleynikov's arrest, Assistant U.S. Attorney Joseph Facciponti reported that "the bank has raised the possibility that there is a danger that somebody who knew how to use this program could use it to manipulate markets in unfair ways."
Six months after a federal prosecutor admitted in open court that the Goldman trading program could be used to unfairly manipulate markets, the bank released its annual numbers. Among the notable details was the fact that a staggering 76 percent of its revenue came from trading, both for its clients and for its own account. "That is much, much higher than any other bank," says Prins, the former Goldman managing director. "If I were a client and I saw that they were making this much money from trading, I would question how badly I was getting screwed."
Why big institutional investors like pension funds continually come to Wall Street to get raped is the million-dollar question that many experienced observers puzzle over. Goldman's own explanation for this phenomenon is comedy of the highest order. In testimony before a government panel in January, Blankfein was confronted about his firm's practice of betting against the same sorts of investments it sells to clients. His response: "These are the professional investors who want this exposure."
In other words, our clients are big boys, so screw 'em if they're dumb enough to take the sucker bets I'm offering.
CON #7 THE RELOAD
Not many con men are good enough or brazen enough to con the same victim twice in a row, but the few who try have a name for this excellent sport: reloading. The usual way to reload on a repeat victim (called an "addict" in grifter parlance) is to rope him into trying to get back the money he just lost. This is exactly what started to happen late last year.
It's important to remember that the housing bubble itself was a classic confidence game — the Ponzi scheme. The Ponzi scheme is any scam in which old investors must be continually paid off with money from new investors to keep up what appear to be high rates of investment return. Residential housing was never as valuable as it seemed during the bubble; the soaring home values were instead a reflection of a continual upward rush of new investors in mortgage-backed securities, a rush that finally collapsed in 2008.
But by the end of 2009, the unimaginable was happening: The bubble was re-inflating. A bailout policy that was designed to help us get out from under the bursting of the largest asset bubble in history inadvertently produced exactly the opposite result, as all that government-fueled capital suddenly began flowing into the most dangerous and destructive investments all over again. Wall Street was going for the reload.
A lot of this was the government's own fault, of course. By slashing interest rates to zero and flooding the market with money, the Fed was replicating the historic mistake that Alan Greenspan had made not once, but twice, before the tech bubble in the early 1990s and before the housing bubble in the early 2000s. By making sure that traditionally safe investments like CDs and savings accounts earned basically nothing, thanks to rock-bottom interest rates, investors were forced to go elsewhere to search for moneymaking opportunities.
Now we're in the same situation all over again, only far worse. Wall Street is flooded with government money, and interest rates that are not just low but flat are pushing investors to seek out more "creative" opportunities. (It's "Greenspan times 10," jokes one hedge-fund trader.) Some of that money could be put to use on Main Street, of course, backing the efforts of investment-worthy entrepreneurs. But that's not what our modern Wall Street is built to do. "They don't seem to want to lend to small and medium-sized business," says Rep. Brad Sherman, who serves on the House Financial Services Committee. "What they want to invest in is marketable securities. And the definition of small and medium-sized businesses, for the most part, is that they don't have marketable securities. They have bank loans."
In other words, unless you're dealing with the stock of a major, publicly traded company, or a giant pile of home mortgages, or the bonds of a large corporation, or a foreign currency, or oil futures, or some country's debt, or anything else that can be rapidly traded back and forth in huge numbers, factory-style, by big banks, you're not really on Wall Street's radar.
So with small business out of the picture, and the safe stuff not worth looking at thanks to the Fed's low interest rates, where did Wall Street go? Right back into the shit that got us here.
One trader, who asked not to be identified, recounts a story of what happened with his hedge fund this past fall. His firm wanted to short — that is, bet against — all the crap toxic bonds that were suddenly in vogue again. The fund's analysts had examined the fundamentals of these instruments and concluded that they were absolutely not good investments.
So they took a short position. One month passed, and they lost money. Another month passed — same thing. Finally, the trader just shrugged and decided to change course and buy.
"I said, 'Fuck it, let's make some money,'" he recalls. "I absolutely did not believe in the fundamentals of any of this stuff. However, I can get on the bandwagon, just so long as I know when to jump out of the car before it goes off the damn cliff!"
This is the very definition of bubble economics — betting on crowd behavior instead of on fundamentals. It's old investors betting on the arrival of new ones, with the value of the underlying thing itself being irrelevant. And this behavior is being driven, no surprise, by the biggest firms on Wall Street.
The research report published by Goldman Sachs on January 15th underlines this sort of thinking. Goldman issued a strong recommendation to buy exactly the sort of high-yield toxic crap our hedge-fund guy was, by then, driving rapidly toward the cliff. "Summarizing our views," the bank wrote, "we expect robust flows . . . to dominate fundamentals." In other words: This stuff is crap, but everyone's buying it in an awfully robust way, so you should too. Just like tech stocks in 1999, and mortgage-backed securities in 2006.
To sum up, this is what Lloyd Blankfein meant by "performance": Take massive sums of money from the government, sit on it until the government starts printing trillions of dollars in a desperate attempt to restart the economy, buy even more toxic assets to sell back to the government at inflated prices — and then, when all else fails, start driving us all toward the cliff again with a frank and open endorsement of bubble economics. I mean, shit — who wouldn't deserve billions in bonuses for doing all that?
Con artists have a word for the inability of their victims to accept that they've been scammed. They call it the "True Believer Syndrome." That's sort of where we are, in a state of nagging disbelief about the real problem on Wall Street. It isn't so much that we have inadequate rules or incompetent regulators, although both of these things are certainly true. The real problem is that it doesn't matter what regulations are in place if the people running the economy are rip-off artists. The system assumes a certain minimum level of ethical behavior and civic instinct over and above what is spelled out by the regulations. If those ethics are absent — well, this thing isn't going to work, no matter what we do. Sure, mugging old ladies is against the law, but it's also easy. To prevent it, we depend, for the most part, not on cops but on people making the conscious decision not to do it.
That's why the biggest gift the bankers got in the bailout was not fiscal but psychological. "The most valuable part of the bailout," says Rep. Sherman, "was the implicit guarantee that they're Too Big to Fail." Instead of liquidating and prosecuting the insolvent institutions that took us all down with them in a giant Ponzi scheme, we have showered them with money and guarantees and all sorts of other enabling gestures. And what should really freak everyone out is the fact that Wall Street immediately started skimming off its own rescue money. If the bailouts validated anew the crooked psychology of the bubble, the recent profit and bonus numbers show that the same psychology is back, thriving, and looking for new disasters to create. "It's evidence," says Rep. Kanjorski, "that they still don't get it."
More to the point, the fact that we haven't done much of anything to change the rules and behavior of Wall Street shows that we still don't get it. Instituting a bailout policy that stressed recapitalizing bad banks was like the addict coming back to the con man to get his lost money back. Ask yourself how well that ever works out. And then get ready for the reload.
