Before there was Occupy Wall Street, there was R. Garth Studios' First Amendment T-Shirt Series and Reading List. One sculptor's effort to educate regarding exactly who it is that keeps handing us the shit sandwiches. Also, to publicly recognize those who are just assholes. Check out the entire line.
Read the list: Griftopia by Matt Taibbi (my personal favorite); Reckless Endangerment by Gretchen Morgenson & Joshua Rosner; Crash of the Titans by Greg Farrell; and All the Devils Are Here by Bethony McLean & Joe Nocera. Or check out the excerpts.
Reading Assignment: A must read or watch. Probably the most informative yet! The program is from Bill Moyers, who has full episodes.
The second program was shown on January 27, 2012 titled "How Big Banks Are Rewriting the Rule of our Economy." Watch the full video, read the transcript, or read the excerpts.
Chapter 2: The Biggest Asshole in the Universe
“Bad political systems on their own don't always make societies fail. Sometimes what's required for a real social catastrophe is for one or two ingeniously obnoxious individuals to rise to a position of great power—get a one-in-a-billion asshole in the wrong job and a merely unfair system of government suddenly turns into seventies Guatemala, the Serbian despotate, the modern United States.
“Former Federal Reserve chief Alan Greenspan is that one-in-a billion asshole who made America the dissembling mess that it is today. If his achievements were reversed, if this gnomish bug-eyed party crasher had managed to convert his weird social hang-ups into positive accomplishments, then today we'd be calling his career one of the greatest political fairy tales ever witnessed, an unlikeliest of ugly ducklings who through sheer pluck, cunning, and determination made it to the top and changed the world forever.
“But that isn't what happened. Greenspan's rise is instead a tale of a gerbilish mirror-gazer who flattered and bullshitted his way up the Matterhorn of American power and then, once he got to the top, feverishly jacked himself off to the attentions of Wall Street for twenty consecutive years-in the process laying the intellectual foundation for a generation of orgiastic greed and overconsumption and turning the Federal Reserve into a permanent bailout mechanism for the super-rich.
“Greenspan was also the perfect front man for the hijacking of the democratic process that took place in the eighties, nineties, and the early part of the 2000s. During that time political power gradually shifted from the elected government to private and semiprivate institutions run by unelected officials whose sympathies were with their own class rather than any popular constituency…[and] institutions subtly pushed the country's remaining private wealth to one side while continually shifting the risk and the loss to the public.
“Greenspan's rise to the top is one of the great scams of our time.
Chapter 7: The Great American Bubble Machine (top)
“During the winter of2008-9, when I was just feeling my way through the first story I was writing for Rolling Stone about tbe financial crisis, I started to notice something amusing. One of the keys to talking to sources about any subject is clicking with their sense of humor, and I was noticing that with a lot of the financial people I was calling, I was missing laugh cues whenever anyone mentioned the investment bank Goldman Sachs. No one ever just referenced “Goldman”; they would say, “those motherfuckers” or “those cocksuckers” or “those motherfuckers cocksuckersassholes at Goldman Sachs.” It was a name spoken with such contempt that you could almost hear people holding the phone away from their faces as they talked, the way you do with the baggie you have to pick up curbing your dog on the streets of New York….Goldman is not a company of geniuses, it’s a company of criminals. And far from being the best fruit of a democratic, capitalist society, it's the apotheosis of the Grifter Era, a parasitic enterprise that has attached itself to the American government and taxpayer and shamelessly engorged itself on us all.
“The first thing you need to know about Goldman Sachs is that it's everywhere. The world’s most powerful investment bank is a great vampire squid wrapped around the face of humanity, relentlessly jamming
“Most of us know the major players: Henry Paulson, George Bush's last Treasury secretary, who used to run Goldman and was the architect of a suspiciously self-serving plan to funnel trillions from the Treasury to a small list of his old friends on Wall Street. Bob Rubin, Bill Clinton's former Treasury secretary, spent twenty-six years at Goldman and later went on to become chairman of Citigroup- which in turn got a $300 billion taxpayer bailout from Paulson.
“There's John Thain, the asshole chief of Merrill Lynch who bought a $28,000 set of curtains and an $87,000 area rug for his office as his company was going broke; this former Goldman banker got a multibillion dollar handout from Paulson, who used billions in taxpayer funds to help Bank of America rescue Thain's sorry company. And Robert Steel, Goldmanite former head of Wachoyia, who scored himself and his fellow executives $225 million in golden parachute payments as the company was imploding. The heads of the Canadian and Italian national banks are Goldman alums, as is the head of the World Bank, the head of the New
“But any attempt to construct a narrative around all the former Goldmanites in influential positions quickly becomes an absurd and pointless exercise, like trying to make a list of everything. So what you need to know is the big picture: if America is circling the drain, Goldman Sachs found a way to be that drain-an extremely unfortunate loophole in the system of Western democratic capitalism, which never foresaw that in a society governed passively by free markets and free elections, organized greed always defeats disorganized democracy.
“The bank’s unprecedented reach and power has enabled it to manipulate whole economic sectors for years at a time, moving the dice game as this or that market collapses, and all the time gorging itself on the unseen costs that are breaking families everywhere-high gas prices, rising consumer credit rates, half-eaten pension funds, mass layoffs, future taxes to pay off bailouts. All that money that you're losing, it's goingsomewhere, and in both a literal and a figurative sense Goldman Sachs is where it's going: the bank is a huge, highly sophisticated engine for converting the useful, deployed wealth of society into the least useful, most wasteful and insoluble substance on earth, pure profit for rich individuals.
“It achieves this using the same playbook over and over again. What it does is position itself in the middle of horrific bubble manias that function like giant lottery schemes, hoovering vast sums from the middle and lower floors of society with the aid of a government that lets it rewrite the rules, in exchange for the relative pennies the bank throws at political patronage. This dynamic allows the bank to suck wealth out of the economy and vitality out of the democracy at the same time, resulting in a snowballingly regressive phenomenon that pushes us closer to penury and oligarchy at the same time.
“They have been pulling this same stunt for decades, and they're preparing to do it again. If you want to understand how we got into this crisis, you first have to understand where all the money went—and in order to understand that, you first need to understand what Goldman has already gotten away with, a history exactly three bubbles long…
“In other other words, Goldman made made out on the housing bubble twice: it fucked the investors who bought their horseshit CDOs by betting against its own crappy product, then it turned around and fucked the tax payer by making
“Again, while the world crashed down all around the bank in 2006, gross employee pay went up to $16.5 billion that year for 26,000 employees, an average of $634,000 per employee. A Goldman spokesman
25. Bill Clinton
35. Chris Dodd
43. Barney Frank
47. Goldman Sachs
50. Phil Gramm
51. Alan Greenspan
"Because Americans never understood the bigger picture. Almost 30 years ago, China faced a thorny question: what’s the fastest way to raise the standard of living for several hundred million people living in rural poverty? Beijing’s solution was to create huge “special economic zones”—whole cities, like Guangzhou, that pumped out everything from shoelaces to steel, and paid fantastic wages by Chinese standards but undercut American salaries. The result: Americans binged out on Chinese goods. Consumer confidence soared. We felt rich. When the U.S. government went into debt to pay for the war and social services for people who lost their jobs, China was only too happy to buy our notes, if only to keep the whole system going. The long-term goal was for a substantial Chinese middle class to emerge that would take our place in the distribution chain. But, unfortunately for Beijing, the timing didn’t quite work out. In the first 10 months of 2008, more than 15,000 factories closed in the Guangdong special economic zone alone. China currently holds $744 billion in U.S. Treasury bonds. Is it any wonder it’s having second thoughts about buying more?"
25. Bill Clinton (top)
"In a New York Times Magazine cover story by Peter Baker on May 31, 2009, Bill Clinton assessed his role in the financial meltdown. Regarding the Community Reinvestment Act, he dismissed charges that he had forced small banks to write mortgages to risky home buyers, calling this “totally off-the-wall crazy” and pointing out that community banks hadn’t had major problems. Regarding the repeal of the Glass-Steagall Act, he accepted some “indirect” responsibility for the aftermath of allowing banks to go into the investment business, but placed most of the blame on George W. Bush and the failure of the S.E.C. to do its job, although he still doesn’t think it “had much to do with this meltdown.” And as to the charge that he didn’t regulate derivatives, Clinton pleaded guilty, blaming himself for listening to Alan Greenspan, and adding that the S.E.C. and the credit-rating agencies were also at fault. But in a larger sense, this is all beside the point. The power of the American presidency lies in its moral authority. And in some ways, it’s impossible to separate Clinton’s personal ethos from everything that was to follow. From the selling of the Lincoln Bedroom to the blue dress, to “It depends on what your definition of ‘is’ is,” to the unprecedented pardoning of the fugitive Marc Rich, Clinton set the tone for the era of indulgence that followed—and followed through himself with his dubious financial associations. Clinton supporters will argue vociferously that none of this mattered, and that it was possible to separate the man’s personal peccadilloes from his performance in office. We’re willing to bet that’s what the bankers and the subprime lenders thought, too: None of it mattered, so long as you were making money. "
26. Collateralized Debt Obligations (top)
"This was the lipstick. Subprime mortgages were the pig. If you took a million subprime mortgages, sliced ’em up, and shuffled the pieces around into smaller, seemingly random groups, you’d get C.D.O.’s—collateralized debt obligations. The idea was that they lowered the risk involved, which allowed for AAA ratings. It was all modeled on a mathematical formula called the Gaussian copula function, which looked something like this: Pr [TA< 1, TB< 1] = F2(F-1 (FA(1)), F-1 (FB(1),) g). By 2006 some $4.7 trillion in C.D.O.’s had been sold. But there was just one small, tiny, little problem with the formula: it was based on “correlation,” meaning you could predict the future by looking at the past. And in this case, the gamma function—g—was deduced from projections that house prices would continue to rise indefinitely, at the same rate as they had in the recent past. Obviously, they didn’t. Which is why, when the first subprime mortgages began to default, the whole crazy apparatus that held up our financial high-wire act came tumbling down."
27. The Commodity Futures Modernization Act of 2000 (top)
"Because it removed federal oversight from derivatives like credit-default swaps.In April 1998, Brooksley Born found herself in a meeting of President Clinton’s Working Group on Financial Markets with Fed chief Alan Greenspan, Treasury Secretary Robert Rubin, and S.E.C. chairman Arthur Levitt Jr. Born, the 57-year-old head of the Commodity Futures Trading Commission, was pushing to regulate derivatives, which fell outside her purview because they were private contracts and not traded on any open market. But Greenspan and Rubin pushed back harder, arguing that regulation was a “deterrent to moving forward,” would drive the booming business overseas, and might call into question the legality of the trillion dollars in derivatives contracts floating around at the time. In the end, the Wise Men won the day. And although Born would continue to call for oversight in at least 17 congressional appearances, she was swatted back by Greenspan, who believed that regulating contracts “privately negotiated by professionals is unnecessary” and “hinders the efficiency of markets,” while Deputy Treasury Secretary Larry Summers bemoaned the harm it would bring to a “thriving market.” Ostracized, Born resigned. And over the next year, a stream of bankers lobbied Congress to keep regulation off the table. Finally, in June 2000, Senator Phil Gramm (Republican of Texas) introduced the Commodity Futures Modernization Act, which mainly aided Houston-based Enron’s ability to trade gas and electricity futures online but also removed credit swaps and derivatives from almost all federal and state regulation. The bill itself was never voted on in Congress or subject to open hearings. But in the final, frenzied moments of December 2000, with Congress rushing to pass a budget before the end of the session, and the country caught up in the Bush/Gore election saga, Gramm tacked it onto the end of the 11,000-page Consolidated Appropriations Act for FY2001 and Clinton signed it into law. By 2008 the worldwide derivatives market reached $530 trillion, and it would decimate Bear Stearns, A.I.G., and Lehman Brothers. In May 2009, 11 years after Brooksley Born lost out to Greenspan and Rubin, and with the American public having lost millions of jobs and billions in their retirement accounts, Tim Geithner announced the Obama administration’s plans to regulate credit-default swaps and derivatives."
32. Credit-Default Swaps (top)
"So what exactly are these things? And why did Warren Buffett call them “financial weapons of mass destruction”? Here’s the plain-vanilla explanation: MyBank has a package of loans from MidnightMortgageCo on its balance sheet. By law, MyBank has to have enough cash on hand—in reserve—to guarantee the loans. (This is known as the debt-to-capital ratio, and it limits the amount MyBank can lend.) Now, because MyBank would like to keep growing—to keep its stock price soaring upward—it needs to get those loans off the books, freeing up the capital to use elsewhere. So how does MyBank do this? Enter YourCo, and the credit-default swap. MyBank signs a private contract with YourCo, stipulating that MyBank pays YourCo fees—sort of like insurance premiums—so that if MidnightMortgageCo defaults, YourCo has to make MyBank whole on the loans. In other words, MyBank has swapped out its debt to YourCo—which, in a normal time, with sane lending practices, would represent minimal risk: MyBank gets to make more loans, YourCo pockets the premiums, and everybody meets at Cipriani for cigars and champagne. But because this is America, home to Baskin-Robbins, the financial industry came up with a zillion flavors, involving corporate bonds, hedge funds, student loans—virtually anything incorporating money and risk—and sprinkled ’em with toppings like “delta hedging” and “super-senior C.D.O. tranches.” The problem was that as private contracts, they weren’t regulated, and there was no central clearinghouse to keep track of everything. Lehman Brothers might have been buying them from A.I.G. and selling them to Bear Stearns. It was all intertwined and co-dependent, hence Buffett’s W.M.D. line. The first credit-default swaps were offered in 1997. (See entry No. 65, “The Morgan Mafia.”) By 2007, the market for C.D.S.’s had grown to $62.7 trillion—more than four times the size of the entire American economy."
35. Chris Dodd (top)
"Because he isn’t just what’s wrong with the system. He is the system. It’s depressing but not surprising that over the past 20 years, Chris Dodd received more than $13 million in campaign contributions from the financial industry. As the senior Democratic senator from Connecticut and a longtime member of the Senate Banking Committee—rising to chairman in 2006—he found that money comes with the territory. “It’s an ugly system, and I hate it,” Dodd has said. But what is surprising, and problematic, is the number of clear-cut conflicts of interest that Dodd seemed so oblivious to in his role overseeing our financial institutions.
Take Dodd’s two “Friends of Angelo” home mortgages. In 2003 and 2004, Dodd received two V.I.P. home loans from Angelo Mozilo’s Countrywide Financial that may have saved him as much as $75,000 in interest payments and fees. Dodd said he had no idea he was getting a break; testifying under oath before a Senate ethics-inquiry panel, the former Countrywide loan officer who oversaw the V.I.P. program disputed that. (The Senate Ethics Committee was focused on whether Dodd violated Senate gift rules, and should have declared Countrywide’s largess on his financial-disclosure forms. It’s noteworthy that Dodd did not testify under oath about any of this. When Senate investigators wrote to Dodd inquiring about his loans, they received a response signed by his attorney.) But while the committee ultimately cleared Dodd—asserting they found “no substantial credible evidence” that he was receiving preferential treatment because of his status as a senator—this misses the larger issue: Countrywide wasn’t just any lender. After entering into a “strategic agreement” with Fannie Mae in 1999, Countrywide became the mortgage mill that drove the growth and profits at the mortgage giant that Dodd had supported—in order to boost home ownership—during both the Clinton and the Bush years. Between 1989 and 2008, Dodd was the No. 1 recipient of campaign contributions from the mortgage giants. And just months before they were declared insolvent and taken over by the U.S. government, Dodd was still insisting that Fannie and Freddie were financially sound.
Then there’s Dodd’s involvement with A.I.G. By now we all know that Dodd didn’t write, or read, the “A.I.G. loophole” that was inserted into the federal stimulus package just before the bill passed. The amendment allowing A.I.G. employees to collect $165 million in bonuses came courtesy of Tim Geithner and the Treasury Department. And while it’s true that Dodd collected more than $280,000 in campaign contributions from A.I.G. between 1998 and 2008—a result, in part, of e-mails from Joe Cassano imploring his underlings to max out their contributions to the senator whose state headquartered A.I.G.’s Financial Products Division—that’s not the whole story. Between 2001 and 2004, Dodd’s wife, Jackie Clegg Dodd, served as a director of I.P.C. Holdings, Ltd., a Bermuda-based company that was a wholly owned subsidiary of A.I.G.—while Dodd was sponsoring the post-9/11 Terrorism Risk Insurance Act. The bill stipulated that if a terrorist attack caused more than $5 million in damages, most of the liability for the losses would shift from insurance companies like A.I.G. to the U.S. government. The bill had (and still has) the potential to save A.I.G. billions. It’s one thing to say your legislation isn’t influenced by campaign contributions, another to live under the same roof with someone who stands to profit from it.
Beyond the Countrywide and A.I.G. connections, there have been questions raised by the Hartford Courant about the finances surrounding Dodd’s purchase of a summer cottage on 10 acres in Ireland’s equivalent of the Hamptons, and his role shepherding President Obama’s health-care legislation through Congress. While Dodd sits on the Senate health committee, his wife Jackie sits on the board of two pharmaceutical companies, and Brookdale Senior Living, which describes itself as “the nation’s largest owner and operator of senior living communities” providing “independent living, personalized assisted living, Alzheimer’s and dementia care, rehabilitation and skilled nursing.” Jackie Dodd received more than $344,000 in salary, stock options, and director’s fees in 2008. The Dodds hired an ethics adviser to vet these arrangements. Jackie Dodd told the Hartford Courant that her marriage to the senator “probably makes me less attractive” to potential employers.
Addressing all of this, Dodd told Newsweek that “you can weave anything together” to make it look as if someone had done something wrong. And as Dodd supporters attest, as often as he’s been against regulating hedge funds, or authored a bill limiting shareholders’ rights to bring class-action suits, he’s sponsored other financial legislation that was unquestionably pro-consumer. Faced with terrible poll numbers in his upcoming 2010 re-election campaign, Dodd has been behind a flurry of legislation to rein in credit-card companies and help struggling home owners deal with toxic mortgages. And with his June 2009 release of a campaign video proclaiming that he’s now “making lobbyists cry,” it’s as if Dodd has suddenly remembered that while special interests may foot the bill for his campaigns, the people ultimately pull the lever in the voting booth.
Taken as a whole, Dodd’s connections to the financial world may well have only the “appearance” of impropriety. But if so, they represent the wide-screen, 3-D, surround-sound IMAX version."
42. The Four Horsemen of the A.I.G. Apocalypse (top)
"Maurice “Hank” Greenberg: Taking the reins after the death of A.I.G.’s founder in 1968, the volcanic Greenberg—who prided himself on being a micro-manager—spurred what had been a sleepy insurance company’s growth into a global thoroughbred with more than a trillion dollars in assets. It was bigger than Fannie Mae, Freddie Mac, Merrill Lynch, Lehman Brothers, or Bear Stearns and had an AAA credit rating, which enabled A.I.G. to borrow money at reduced rates. But Greenberg wanted more. In 1987, he set up the Financial Products division with two former Drexel Burnham Lambert traders (who had worked with Michael Milken), and A.I.G. went into the highly profitable credit-default-swap business. One of the Financial Products’ first hires—also from Drexel—was Joe Cassano, who eventually became president of the division and presented Greenberg with an even better way of making money: mortgage-backed collateralized debt obligations. Between 1998 and 2005, Cassano wrote a reported $40 billion in C.D.O.’s. But Greenberg had a bigger problem to deal with: an investigation by Eliot Spitzer uncovered a massive accounting scandal that A.I.G. eventually settled for $1.64 billion. Facing fraud charges, Greenberg was forced to step down as A.I.G.’s C.E.O. in March 2005. Eventually, most of the civil charges against him were dropped. (There were no criminal charges.) Testifying before the House Oversight Committee in April 2009, Greenberg insisted he’d played no role in A.I.G.’s credit debacle.
Martin Sullivan: Replacing his mentor in the C.E.O. saddle, the then 52-year-old Englishman (who joined A.I.G. when he was 17) rode the Financial Products division straight over a cliff. The housing market stalled, Cassano’s debt swaps and C.D.O.’s began to curdle, and A.I.G. was forced to put up billions in collateral against potential losses from its mortgage-backed derivatives. In December 2007, Sullivan assured investors that A.I.G.’s $1.1 billion in losses was “manageable.” Six months later, in June 2008, after the losses had been restated as $11.1 billion, the board sacked Sullivan—but not before Sullivan had ousted Joe Cassano with a $1-million-a-month consulting contract and approved the infamous retention bonuses for A.I.G. executives, along with negotiating his own $47 million severance package, which included $322,000 for the private use of A.I.G.’s jet, $41,000 for financial planning (!), and a $5 million “performance” bonus. This may explain why Portfolio magazine named him one of the worst C.E.O.’s of all time. Testifying before the House Oversight Committee in 2008, Sullivan refused to take any blame for A.I.G.’s downfall and declined to return the bonus.
Robert Willumstad: The silver-haired Willumstad had always wanted to run in the big-company-C.E.O. sweepstakes but was aging out of the boyish-C.E.O. demographic. He’d spent 40 years in banking, the last 18 understudying Sandy Weill, helping him create the modern Citigroup—but resigned two years after Weill departed, when he wasn’t named C.E.O. Landing as chairman of A.I.G.’s board of directors in 2006, he had honor and a title, but he wasn’t running the company. He finally got his shot in June 2008, when Sullivan was sacked. Taking over as C.E.O., he told a reporter he was “a very young 62” and outlined his 90-day goal to set A.I.G. on the road to recovery. Unfortunately, he didn’t last that long: by the end of the summer, A.I.G.’s losses had mounted to $26 billion; it was scrambling to raise tens of billions in collateral; its stock had fallen by more than 90 percent. (Curiously, a Bank of America analyst named Alain Karaoglan actually upgraded A.I.G. to “buy” during this period.) In September 2008, after another credit downgrade, and a week after declining to save Lehman Brothers, Treasury Secretary Hank Paulson decided A.I.G. was too big to fail and authorized an $85 billion federal bailout in return for 79.9 percent of the company. Paulson called to tell Willumstad he was out. Testifying before the House Oversight Committee a month later, Willumstad said, “Looking back on my time as C.E.O., I don’t believe A.I.G. could have done anything differently.” To his credit, he decided to forgo his $22 million severance package.
Edward Liddy: Appointed by his friend Paulson, the “retired” Liddy, 63, was a member of the board of directors of Goldman Sachs and a former C.E.O. of Allstate, where he was criticized for earning $137 million between 1999 and 2007 (including $14 million in stock that was described as “a tool for retaining executive talent”), while Allstate was underperforming its rivals. Taking the harness at A.I.G. for $1 a year, he was charged with restructuring the company, unwinding the default swaps, selling off assets, and repaying the bailout money. But from the minute he took over, he was beset by scandals, answering to Congress for things like the post-bailout $440,000 executive spa retreat, the $469 million in retention pay for his employees (later restated to $619 million), and the infamous $165 million in retention bonuses, which he first defended as contractually obligated (then he changed his mind). Liddy also came under attack for holding $3.3 million in restricted Goldman Sachs stock options that he had previously received as a member of Goldman’s board of directors. As A.I.G.’s losses continued to mount ($61.7 billion in the fourth quarter of 2008), the government continued to pour money into the firm. On May 13, 2009, when the federal commitment had reached $180 billion, Liddy told the House Oversight Committee that it might take “three to five years” to restructure A.I.G. and pay back the bailout money. By then, the affable and well-liked Liddy was tired of being a human piñata. A week after his congressional testimony, the $1-a-year man announced he was resigning after just eight months on the job. He told the Financial Times, “There were too many cooks in the kitchen.”"
43. Barney Frank (top)
"To hear Barney Frank tell it, he bears no responsibility for the housing bubble or for the failure of Fannie Mae and Freddie Mac. But his record as a member of the House Financial Services Committee tells a different story. As far back as 1991, Frank was pushing Fannie Mae to break its rules, lower its standards, and buy risky loans. As The Boston Globe reported in November 1992, he helped to convince Fannie Mae to make “substantial concessions” on its rules regarding multiple-family-home mortgages, despite data from Fannie itself showing that the “default rate on mortgages on two-family homes is twice that of single-family homes, and the rate for three-deckers is five times the rate for single-family dwellings.” During the Clinton years, the time when the foundation was being poured for the financial meltdown, Fannie and Freddie were growing by leaps and bounds. They underwrote more than a trillion dollars in mortgages, and Fannie reported double-digit growth, every year. In assessing what—if any—responsibility the Clinton administration had for the financial crisis, Clinton himself would later tell ABC News’s Chris Cuomo that “I think the responsibility that the Democrats have may rest more in resisting any efforts by Republicans in the Congress or by me when I was president to put some standards and tighten up on Fannie Mae and Freddie Mac.”
During the early years of the Bush administration, from 2001 to 2003, Fannie Mae dropped its lending requirements and began buying zero-down-payment and interest-only mortgages. Warren Buffett told investors that he dumped Fannie and Freddie’s stock because he was worried about potential “icebergs.” The Wall Street Journal criticized Fannie’s financial machinations in an editorial headlined “Fannie Mae Enron?”
A report from the Congressional Budget Office found that 37 percent of the benefits Fannie and Freddie received from their special relationship with the government—some $3.9 billion—went to enriching Fannie and Freddie executives and shareholders rather than reducing the cost of loans for home buyers. A member of the House Financial Services Committee, Richard Baker (Republican of Louisiana), warned that, if Fannie and Freddie’s growth was left unchecked, their combined outstanding debt would exceed the total of all public debt held by the U.S. Treasury in 2005. The president of the Federal Reserve Bank of St. Louis warned that Fannie and Freddie were undercapitalized and “posed a fundamental risk to the continuing stability of our financial system.” The head of Freddie Mac, Leland Brendsel, was forced to resign in the wake of a massive accounting scandal.
None of this happened under a rock. It was all covered by first-tier mainstream news organizations. So what was Barney Frank’s reaction to all of this? Was he worried about Fannie and Freddie’s finances? Was he concerned about their unchecked growth? Was he anxious about what would happen if Fannie and Freddie failed, and how it would affect not only the U.S. Treasury but also the pension funds and the mutual funds that held your retirement accounts and invested in Fannie and Freddie’s bonds?
On September 10, 2003, the House Committee on Financial Services met to hear the Treasury Department’s plea for a new, tougher regulator to oversee Fannie Mae and Freddie Mac. In Frank’s opening statement to the committee, he said:
I want to begin by saying that I am glad to consider the legislation, but I do not think we are facing any kind of a crisis. That is, in my view, the two government-sponsored enterprises we are talking about here, Fannie Mae and Freddie Mac, are not in a crisis. We have recently had an accounting problem with Freddie Mac that has led to people being dismissed, as appears to be appropriate. I do not think at this point there is a problem with a threat to the Treasury.
Two weeks later, the Financial Services Committee met to consider a bill that would implement the Treasury Department’s recommendations. Frank voted against it, saying: “I do not want the same kind of focus on safety and soundness that we have in O.C.C. [Office of the Comptroller of the Currency] and O.T.S. [Office of Thrift Supervision]. I want to roll the dice a little bit more in this situation towards subsidized housing.”
The bill died in the committee. And in the two years that followed, still more red flags appeared. The Fed released a report finding that Fannie and Freddie had done little to increase home ownership or reduce the cost of mortgages. Franklin Raines was forced out as C.E.O. of Fannie Mae after an investigation found that Fannie Mae was cooking its books to trigger executive bonuses. Alan Greenspan warned that, if Fannie and Freddie’s “expansion continues unabated” there was the possibility of risk to the entire financial system. As the drumbeat of these warnings continued, Fannie and Freddie were still operating under their old regulator. And Raines’s successor at Fannie Mae, Daniel Mudd, began engaging in what would later be described as “an orgy of junk mortgage development.”
So, again, how did Barney Frank react to all of this? In June 2005, virtually every major newspaper in America carried stories warning about the housing bubble. It was the subject of 15 articles in The New York Times alone. Yet here is how Barney Frank saw the world on June 27, when he delivered a speech on the House floor in favor of a resolution celebrating National Homeownership Month:
This is a very important resolution, particularly at this time, because we have, I think, an excessive degree of concern right now about home ownership and its role in the economy.
Four months later, in October 2005, the Finance Committee met yet again to consider legislation that would appoint a new overseer for Fannie and Freddie. As Stephen Labaton reported in The New York Times, the new regulator would “have the authority to set capital requirements, reject new business products being offered by the companies and limit their portfolio holdings.” This time, Frank voted for the bill in the committee, before he voted against it on the House floor.
What caused him to change his mind? Something about finance? Subprime mortgages? A loophole that would allow another set of Fannie and Freddie executives to walk off with yet another round of government-subsidized $90 million paydays?
Alas, the answer to all those questions is no. When the bill left the committee, it contained an amendment stipulating that 3 1/2 percent of Fannie and Freddie’s profits—around $350 million—would go to a fund to promote affordable housing. Nonprofit organizations could apply for the money and receive cash grants.
To be fair, more than 600 nonprofit and religious groups opposed the restrictions, including the N.A.A.C.P. and Catholic Social Services. As Frank mused to his colleagues on the House floor, he would vote against the bill because it “unequivocally says no faith-based institution may apply unless we have a faith-based institution that worships housing.” So what was really going on here? What was really at stake? Eventually, Frank got around to the crux of the matter: “All we are saying is that nonpartisan voter registration and get-out-the-vote should be permitted uses, in other words, what the gentleman from Ohio talked about. We had the gentleman from Florida read the ACORN Plan. That plan by ACORN would have made them ineligible to participate in this fund.”
Frank offered to compromise and said he would vote for the bill if the wording were changed to say that affordable housing should be only “one” of the grant applicant’s purposes, as opposed to its only purpose. On the House floor he argued:
Again, voting and residence are very closely linked in America. You vote from your home. In some cases you might vote in your home, if you are in an elderly development… . If you have a housing development, you cannot, under this manager’s amendment, help the old people in the development vote. You cannot invite somebody in to do voter registration. They can come in on their own, but you cannot cooperate. Again, I want to emphasize and I would say to my Republican friends, this is a bill that has a lot of bipartisan support. We have some partisan differences in other areas than housing, but this one got pretty bipartisan.
And this, in short, explains how a bill that was supposed to prevent the scandal-ridden Fannie Mae and Freddie Mac from causing a system-wide financial crisis somehow devolved into an argument about voter registration.
The bill passed the House by 220 to 196, with 99 percent of the Republicans supporting and 100 percent of the Democrats opposed. The Senate version never got out of the committee. In 2005, government-sponsored-enterprise reform was dead. On January 4, 2007, Frank became chairman of the House Finance Committee. But by then it was too late. The subprime mortgages had been written; the housing bubble had started to deflate. We had long passed the point of avoiding the catastrophe that was to come.
Frank’s defense of his record during the run-up to the crisis can be whiplash inducing. In one breath, he argues that he wanted to pass a bill reforming Fannie and Freddie but was thwarted by Republicans. In the next, he contends that, if the Republicans really wanted to appoint a tougher regulator, they were in the majority and surely could have done it—failing to mention that Republicans didn’t have the super majority necessary to override a party-line vote. Barney Frank believed—and still believes—that home ownership is a fundamental part of the American Dream. We all do. But to say he played no role in the housing bubble and bears no responsibility at all for the failure of Fannie Mae and Freddie Mac is, fundamentally, wrong. "
47. Goldman Sachs (top)
"Sometimes the bad guys don’t show up until late in the movie. During the height of the financial crisis, “the best and the brightest” at Goldman Sachs were pretty much flying under the radar. Sure, there was criticism about former Goldman C.E.O. Henry Paulson’s decision to liquidate Bear Stearns, and let Lehman Brothers fail—effectively eliminating what had been Goldman’s largest competitors. But nobody at Goldman Sachs was in the news for spending a million dollars to redecorate an office. (Merrill’s C.E.O., John Thain, had left Goldman—where he was president—to run the New York Stock Exchange in 2004.) Nobody working at Goldman Sachs was eviscerated by a congressional committee. (A.I.G.’s C.E.O., Edward Liddy, had stepped down as a Goldman director when Henry Paulson asked him to take over the ailing firm.) And while Goldman’s C.E.O., Lloyd Blankfein, did earn a magnificent $43 million in 2008—while letting 3,000 employees go—the numbers seemed like small cheese in an age of trillion-dollar deficits and 250,000 people getting thrown out of work each month.
But then, like the movie villain who makes one fatal mistake—the guy who overreaches and goes back to pull off that one last bank job—Goldman announced second-quarter 2009 profits of $3.44 billion, bringing the half-year total of money marked for employee compensation up to $11.4 billion, and all hell broke loose. Rolling Stone’s Matt Taibbi was out with an article that began by calling Goldman “a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.” He accused the firm of engineering every financial crisis since the Great Depression for its own enrichment, and pointed out that of the first $85 billion in bailout money Henry Paulson handed over to A.I.G., $13 billion was immediately passed along to Goldman Sachs, completely wiping out any losses Goldman would have suffered from A.I.G.’s meltdown. Following this, New York magazine’s Joe Hagan weighed in with a cover story noting that during an emergency meeting called at the New York Federal Reserve Bank to discuss the fate of A.I.G., Goldman employees or former employees were sitting on every side of the table, representing every side of the issue. And then The New York Times weighed in, capping an ongoing series of articles about Goldman’s influence with a front-page story alleging that Paulson had violated an ethics agreement he’d signed with the government by speaking with Blankfein dozens of times during the crisis, without a waiver. (Attracting less attention during all of this was the arrest of a former Goldman computer programmer for stealing the company’s proprietary high-speed trading software, which prosecutors said could be used to “manipulate markets in unfair ways.” Cue the black helicopters and conspiracy theorists. Does anyone have a picture of Blankfein stroking a cat in his lap?)
In the summer of 2009, Goldman went on a P.R. offensive, trying to polish the firm’s image. (The New York Post reported that Blankfein sent a memo asking his employees to avoid making big-ticket high-profile purchases.) But by then the damage had been done. Goldman was being referred to as “Government Sachs,” and blogs were filled with chatter that Goldman had “captured” the government, and had far too much influence. A far-from-complete list of Goldman alumni involved in the crisis includes Paulson, Clinton Treasury secretary Robert Rubin, Joshua B. Bolten (George W. Bush’s chief of staff, who recruited Paulson), Edward M. Liddy (C.E.O. of A.I.G.), Stephen Friedman (chairman of the New York Federal Reserve Bank), Neel Kashkari (brought in by Paulson to run the tarp program), and Robert K. Steel (a former Goldman vice chairman Paulson brought in to fix Fannie Mae, who left to become C.E.O. of Wachovia before it needed to be rescued by Wells Fargo).
So does Goldman represent some kind of nefarious conspiracy that controls our government? Or is it merely the world’s most successful social network? There’s an old expression that says, “If you’ve only got a hammer, every problem looks like a nail.” By the same token, if you climb the ladder to the top of Goldman Sachs, you’re going to have a Goldman perspective on the world. But maybe The Economist summed it up best when it advised, “What is good for Goldman Sachs might turn out to be good for America, but it might be best if the government could make an independent judgment.”
50. Phil Gramm (top)
"Former senator Phil Gramm’s entire view on banking and government can pretty much be illustrated by a single speech. “In Washington the buzzword today is ‘predatory lending,’” he told a room of cheering bankers in 2001, “but there are predatory borrowers.” In other words, it was the bankers who needed protection. And Gramm’s deregulation victories, which freed bankers to do business basically as they saw fit, enshrined Gramm as the bankers’ hero. Between 1989 and 2002, Gramm was the number-one beneficiary of campaign contributions from the commercial-banking industry. As chairman of the Senate Banking Committee, the Texas Republican pushed through his Gramm-Leach-Bliley Act of 1999—repealing the Depression-era lessons that had been incorporated into the Glass-Steagall Act of 1933 and clearing the way for modern banks to become hydra-headed behemoths that would later be called “too big to fail.” (See No. 84, Repeal of the Glass-Steagall Act.) His legislative end run with the Commodity Futures Modernization Act of 2000 (see No. 27) exempted credit-default swaps from regulation by the Commodity Futures Trading Commission and carved out something that would later become known as the “Enron loophole”—a provision that essentially removed online trading in energy futures from federal regulation and lit the way for Enron Online to manipulate California’s electricity prices in 2001. (Gramm’s 1992 re-election campaign was chaired by Enron C.E.O. Ken Lay; Gramm’s wife, Wendy, had pushed for these exemptions during her stint as commissioner of the Commodities Futures Trading Commission. Resigning in 1993, she joined Enron’s board of directors and sat on its audit committee, earning at least $1 million before the company self-destructed, in 2001—less whatever portion of the $13 million the directors paid from their personal finances to settle charges of insider trading.) Leaving the Senate in 2002, Gramm immediately reaped the benefits of his Glass-Steagall legislation, becoming vice chairman of the Swiss bank U.B.S. A.G.’s investment-banking arm. By 2005, Gramm was lobbying Congress, the Fed, and the Treasury Department at U.B.S.’s behest on banking and mortgage issues. In July 2008 he stepped down as co-chair and chief economic adviser to the McCain campaign after declaring that Americans were in a “mental recession” and had become “a nation of whiners.” Responding to Time magazine’s naming him one of the 25 people to blame for the financial crisis, Gramm insisted that the crisis wasn’t caused by deregulation but by “the politicization of mortgage lending.” Currently, Gramm remains vice chairman of U.B.S. A.G. In August 2009, the Swiss government settled a long festering dispute with the United States concerning U.B.S.’s refusal to release the names of some 52,000 American U.B.S. customers who may have been using the Swiss bank to avoid paying U.S. taxes. Under the terms of the agreement, U.B.S. will turn over information on 4,450 accounts to U.S. Internal Revenue Service, while the Swiss government agreed to review future requests involving U.S. customers at other Swiss banks, thus keeping their legendary privacy rules largely intact. According to the I.R.S., the 4,450 U.B.S. accounts may have held as much as $18 billion in untaxed U.S. funds."
51. Alan Greenspan (top)
"Because in the end, the Oracle had no clothes. In financial circles, Alan Greenspan was nicknamed “The Oracle” for the way his pronouncements could move markets. A positive statement about growth or interest rates from America’s chief banker sent stock markets soaring; a hint of pessimism about employment or the near-term financial outlook had the opposite effect. An ardent believer in free-market economics, and the idea that self-interest and allowing the marketplace to weed out bad actors and bad practices were more efficient than government regulation, Greenspan served five terms as the chairman of the Federal Reserve Board. He was nominated by Ronald Reagan in 1987 and succeeded by Ben Bernanke in February 2006, just as the real-estate bubble was starting to deflate. In the wake of 9/11 and the Internet bubble, he dropped interest rates to record lows to stimulate the economy. He’s been criticized for keeping the rates too low for too long, fueling the housing market with cheap money and promoting an appetite for risk on the part of bankers hungry for higher returns.
Defending himself in the 2009 documentary House of Cards, Greenspan told CNBC’s David Farber that if he had clamped down on the economy, “it would have generated a 10 percent unemployment rate.” And as to “suppressing subprime mortgages,” he asked, “Do you think that it would have gone over very well with the Congress, when it looked as though we were dealing with a major increase in home ownership?” There may be a grain of truth in this. But it doesn’t dismiss his high regard for the “financial weapons of mass destruction.” If unregulated derivatives—credit-default swaps and collateralized debt obligations—were at the center of what went wrong in the banking system, then much of the responsibility lies firmly on Greenspan’s shoulders. In the late 1990s, he argued strongly against government regulation of the derivatives market. (See No. 27, the Commodity Futures Modernization Act of 2000.)
In a 2005 speech to bankers in Chicago, he said, “The development of credit derivatives has contributed to the stability of the banking system by allowing banks, especially the largest, systemically important banks, to measure and manage their credit risks more effectively.” Yet in House of Cards, Greenspan conceded that “I’ve got some fairly heavy background in mathematics, but some of the complexities of some of the instruments that are going into C.D.O.’s bewilders me. I don’t understand what they’re doing.” Assailed by contentious questioning at a congressional hearing in October 2008, Greenspan offered up something of a mea culpa when he admitted that he was in a state of “shocked disbelief” at the way bankers had acted.
“I made a mistake in presuming that the self-interest of organizations, specifically banks and others, were such that they were best capable of protecting their own shareholders, and their equity in the firms,” he said. “I found a flaw in the model that I perceived is the critical functioning structure that defines how the world works.”
In a sentence, Alan Greenspan believed that as a society, we were all rational actors who would never succumb to infectious greed; bankers and borrowers would efficiently reject anything—and anyone—that endangered their livelihoods and risked destroying the system that provided their standard of living. In a word, he was wrong."
66. "Maximizing Shareholder Value" (top)
"Like so many other overused and ultimately empty business buzz-phrases that came before it—walking the walk, talking the talk, breaking down silos, fulfilling our promise, leveraging our synergies, owning our space, monetizing our content, eating our own dog food, and refocusing on our core business—the phrase “maximizing shareholder value” became the verbal tic used by C.E.O.’s to answer any uncomfortable question raised during a shareholders meeting or quarterly-earnings conference call.
68. Moody's, Standard & Poor's, and Fitch: The Credit-Rating Agencies (top)
"Because it was in their own self-interest to hand out all those AAA ratings. O.K., here’s the deal: I’ve got some really crappy subprime-mortgage-based C.D.O.’s that I need to lay off on ... oh, I don’t know ... Iceland. But I can’t get rid of them unless they’ve got an AAA rating. So what do I do? That’s right: I go to Moody’s, Standard & Poor’s, or Fitch, and pay them to rate this junk. (And maybe I hint that if they want more of my high-paying business, well ... ) So what do they do? They run it through some magic cleansing formula—they plug in a projection that house prices will continue to rise at 6 percent ... forever—and low and behold, the C.D.O. gets an AAA, I get a bonus, the rating agency gets more business, and Iceland is cool with it, so long as the housing market continues to defy gravity. Now, I know, I know, Kathleen Corbet, the former president of Standard & Poor’s, is going to jump up and down, insisting that this never happened at her company, on her watch. And you know what? She’s right. (Even if she was pushed out—I mean “resigned to spend more time with her family”—amid lots of conflict-of-interest criticism that caused S&P to announce it was taking 27 separate actions to bolster the firm’s “analytical integrity.”) So if anybody asks, that’s her story, and I’ll swear by it."
84. The Repeal of the Glass-Steagall Act (top)
"Here are the eight things you should know about the Glass-Steagall Act:
1) The bill was passed in 1933, after a congressional inquiry into the causes of the depression. One of the problems was that banks were both underwriting stocks, and selling them to their checking and savings account customers. To protect the public from this conflict of interest (i.e., pushing risky stocks off on their unwitting customers), the law mandated that commercial banks could no longer be in the investment banking business.
2) By the 1960’s, commercial banks and brokerage firms both felt these restrictions were limiting their growth, and began working to get them overturned. Their efforts were not altogether unsuccessful: In 1987, JPMorgan, Citicorp, and Bankers Trust successfully lobbied the Federal Reserve Board to allow commercial banks to underwrite mortgage-backed securities. One of Morgan’s directors who’d been advocating for these changes was Alan Greenspan, who would become head of the Federal Reserve Board in August 1987.
3) In April 1998, the merger of Citicorp and the Travelers Insurance Company (with its Smith Barney brokerage subsidiary) brought commercial banking, insurance, and investment banking together under one roof, and into direct conflict with Glass-Steagall. In response, Greenspan’s Fed gave the new conglomerate, Citigroup, two years to comply with the law – which, in realpolitik, meant that Citi would either have to spin-off Travelers and Smith Barney (crushing co-C.E.O. Sandy Weill’s dream of creating an all-purpose megabank) or find a way to get Glass-Steagall killed. Weill launched furious lobbying campaign, targeting Greenspan, Treasury Secretary Robert Rubin, congress, and the White House to get the law changed. In the run-up to the 1998 elections, the FIRE industries – Finance, Insurance and Real Estate – would spend almost $200 million on lobbying, and contribute more than $150 million to politicians who oversaw banking legislation.
4) In October 1999, President Clinton threatened to veto the legislation repealing Glass-Steagall until he was certain the banks wouldn’t cut back on mortgages to low- and middle-income neighborhoods. After weeks of contentious negotiations between Chris Dodd, Phil Gramm and the new Secretary of the Treasury, Larry Summers, a compromise was announced at 2:45 am on October 22 1999: Banks were prohibited from expanding into new businesses until they met the targets mandated by Clinton’s revised Community Reinvestment Act for the percentage of mortgages they were required to write in low-income neighborhoods. (See separate entry for Community Reinvestment Act.) The bill, known as the Gramm-Leach-Bliley Act passed the House by 362 to 57 and the Senate by 90 to 8. Clinton signed it into law on November 13. Citigroup was saved, Glass-Steagall was dead, and banks were free to start taking risks on things like Collateralized Debt Obligations.
5) Oh. We almost forgot to mention: After resigning as Clinton’s Secretary of the Treasury, Robert Rubin went to work for CitiGroup in late October 1999, where he would earn $126 million in cash and stock by 2009.. (And for those keeping track of these things at home, before joining the Clinton administration, Rubin had been co-chairman of Goldman Sachs.)
6) To this day, Bill Clinton defends both the Gramm-Leach-Bliley Act, and Phil Gramm, saying that he’s yet to see any real evidence that the repeal of Glass-Steagall played a role in the financial crisis.
7) On the other hand, the Nobel-laureate Joseph E. Stiglitz believes the repeal of Glass-Steagall brought the risk-taking culture of investment brokerage to commercial banking. And Elizabeth Warren, the Harvard law professor who currently chairs the congressional oversight panel on the $700 billion stimulus package and funds, likens the repeal of Glass-Steagall to “pulling the threads out of the regulatory fabric” that kept us safe from financial panic since the great depression.
8) But perhaps the most interesting perspective of comes from Lloyd Blankfein, C.E.O. of Goldman Sachs. “If you take an historical perspective,” he told The New York Times in 2007, discussing Goldman’s expanding range of financial services, and the benefits reaped by clients, “We’ve come full circle, because this is exactly what the Rothschilds or JPMorgan the banker were doing in their heyday. What caused an aberration was the Glass Steagall Act.’’ "
Excerpts from Bill Moyers' Crony Capitalism, Aired January 20, 2012 (top)
Excerpts from full transcript:
BILL MOYERS: President Bush, he was still in office then.
DAVID STOCKMAN: Yes.
BILL MOYERS: He said, I have to suspend the rules of the free market in order to save the free market.
DAVID STOCKMAN: You can't save free enterprise by suspending the rules just at the hour they're needed. The rules are needed when it comes time to take losses. Gains are easy for people to realize. They're easy for people to capture. It's the rules of the game are most necessary when the losses have to occur because mistakes have been made, errors have been made, speculation has gone too far. The history has always been -- and this is why we had Glass-Steagall and a lot of the legislation in the 1930s.
BILL MOYERS: Glass-Steagall was the provision --
DAVID STOCKMAN: The division of banks between the commercial banking and investment banking and insurance and other --
BILL MOYERS: So that you, the banker, could not take my deposits and gamble with them, right?
DAVID STOCKMAN: That's exactly right. And we need not only a reinstitution of Glass-Steagall, but even a more serious limitation on banks. And what I mean by that is, that if we want to have a way for, you know, average Americans to save money without taking big risks and not be worried about the failure of their banking institution, then there can be some narrow banks who do nothing except take deposits, make long-term loans or short-term loans of a standard, business variety without trading anything, without getting into all of these exotic derivative instruments, without putting huge leverage on their balance sheet.
BILL CLINTON: The American people either didn't agree or didn't understand what in the world I'm up to in Mexico.
DAVID STOCKMAN: I think it started with the bailout of the banks in 1994 during the Mexican Peso Crisis.
REPORTER: For investors it was a sight for sore eyes. Mexico's stock market actually soaring instead of plummeting for the first time in weeks. All this, an immediate reaction to news of a major international aid package - nearly half of it from Washington.
DAVID STOCKMAN: That was allegedly designed to help Mexico. It was $20 billion with no approval from Congress that was used, I think inappropriately out of a Treasury fund. And why were we doing this? It's because the big banks were too exposed to some bad loans that they had written in Mexico and elsewhere.
BILL MOYERS: Wall Street banks. U.S. banks.
BILL MOYERS: The Bush administration came to the rescue of some of the county's largest financial institutions, to the tune of 700 billion tax-payer dollars.
DAVID STOCKMAN: We elect a new government because the public said, you know, "We're scared. We want a change." And who did we get? We got Larry Summers. We got the same guy who had been one of the original architects of the policy in the 1990s, the financialization policy, the too big to fail policy.
DAVID STOCKMAN: Right. I don't think it's entirely a corruption of human nature. People have always been inconsistent and greedy.
DAVID STOCKMAN: No. I think we've learned no lessons. We really have not restructured our financial system. The big banks that existed then that were too big to fail are even bigger now. The top six banks then had seven trillion of assets, now they have nine or ten trillion.
BILL MOYERS: No one I know has a better understanding of the see-saw tension in our history between democracy and capitalism.
DAVID STOCKMAN: And I think it's important to put the word crony capitalism on there. Because free-market capitalism is a different thing. True free-market capitalists never go to Washington with their hand out. True free-market capitalists running a bank do not expect that every time they make a foolish mistake or they get themselves too leveraged or they end up with too many risky assets that don't work out, they don't expect to go to the Federal Reserve and get some cheap or free money and go on as before.
BILL MOYERS: So many people say, "We've got to get money out of politics." Or as you said, "Money dominates government today."
DAVID STOCKMAN: Well look, I think the financial industry, over the two or three year run up to 2010 spent something like $600 million. Just the financial industry, the banks, the Wall Street houses and some hedge funds and others. Insurance companies. $600 million in campaign contributions or lobbying.
BILL MOYERS: You just heard David Stockman say it could happen again. Do you think it could happen again?
GRETCHEN MORGENSON: It will happen again and the unfortunate fact is we did not fix the problem. The Dodd-Frank legislation which was supposed to be the fix-it for the enormous crisis that erupted in 2008 failed in so many ways to really address the major issues, the most important being too-big-to-fail, did virtually nothing to cut these big and impossible to manage banks down to size.
BILL MOYERS: Listening to both David Stockman and you, it. After what we've been through since 2008, the millions of lost jobs, the millions of foreclosed homes, the people whose pensions have been shrunk, you both are saying not only can it happen again, but it will happen again. I mean, I have to tell you it boggles my mind.
GRETCHEN MORGENSON: When I was living through it, watching it in terror literally at my desk at The New York Times because it really was on the precipice, there we were, I thought to myself, "We will address this because this is so frightening and so scary and so damaging to this country." And I thought we will address it because this is the big one.
BILL MOYERS: What's the answer? Why don't we have the reform we want?
GRETCHEN MORGENSON: Well, a big part of it is the money problem, that money -- the big powered, moneyed institutions are in control in Washington, there's no doubt about it. You and I don't have a lobbyist and so we are not represented in this melee, call it what you will, that happens, you know, when laws are created.
BILL MOYERS: Yes, I don't think they're going to but I think that's good advice. You do think as I do that Dodd-Frank is just too complex for effective enforcement, right?
GRETCHEN MORGENSON: Yes, you know that Glass-Steagall was 34 pages long.
BILL MOYERS: 34 pages?
GRETCHEN MORGENSON: The act that protected Americans from rapacious bankers for almost 70 years was about 34 pages long.
BILL MOYERS: And Dodd-Frank is 2,300 pages --
GRETCHEN MORGENSON: Way too complicated, all kinds of loopholes, right? You know, the more complex a law is the more you can probably finagle around it.
BILL MOYERS: Why should middle class people on Main Street care about how banks are regulated? What difference does it make to them?
GRETCHEN MORGENSON: It makes a tremendous difference, Bill, because it affects every part of their lives. When they have to pay higher fees to get access to their money that's a cost they can ill afford. When banks are luring them into loans that are poisonous and toxic, that are designed to make the bank money and designed not to help the borrower, that is a real concern.
GRETCHEN MORGENSON: It could not be more important to rein these institutions in because they affect every piece of your life. They affect your retirement, they affect your everyday expenses, whether you can put food on the table for your family.
BILL MOYERS: Since you've been covering capitalism, business and finance what's been the biggest change you've seen?
GRETCHEN MORGENSON: Previously I believed that bankers that presided over this kind of a train wreck would have wandered away from the scene, tail between their legs, ashamed, or the regulators would have cleaned house, fired the management, clawed back their compensation.
BILL MOYERS: What did you learn about crony capitalism in doing "Reckless Endangerment" based upon the mortgage industry business?
GRETCHEN MORGENSON: What I learned was going back in time and examining Fannie Mae and as you know that's the company that doesn't make mortgages, but it buys mortgages and it guarantees them. So it is a huge player in this business.
GRETCHEN MORGENSON: Well, it makes me angry because there has been no penalty. There has been no price for the people who created the mess. I thought there would be some sort of solution, some addressing of the problem, some punishment, penalty. Whatever you want to call it.
BILL MOYERS: Is there anything you see that makes you a little optimistic?
GRETCHEN MORGENSON: What makes me optimistic is that people are understanding this now, that Main Street gets it, you know, the thing that I found compelling about the Occupy Wall Street movement was that it seemed to be tapping into this anger. Previous to that there was just this kind of silence, you know, people were maybe too flabbergasted by what had gone on.
BILL MOYERS: The book is Reckless Endangerment, Gretchen Morgenson with her colleague, Joshua Rosner. Thank you, Gretchen, for being with us.
Excerpts from Bill Moyers' Crony Capitalism, Aired January 20, 2012 (top)
Episode 2 "How Big Banks are Rewriting the Rules of our Economy" broadcast on January 27th, 2012.
You're looking at the Banking Act of 1933, also known as Glass-Steagall. Glass Steagall was enacted during the Great Depression to prevent investment banks from ever again gambling with people's life savings, as they had before the market crash of 1929. Glass-Steagall protected us against a repeat of that calamity for seventy years. It's a little bitty thing -- just 37 pages -- for the big job it did for us. Glass-Steagall was still in force when Travelers and Citicorp went ahead with their merger. What made them think they could get away with it? Well, they had friends in high places. Friends who helped them exploit a loophole giving them two years to get rid of Glass-Steagall.
Among those friends, the laissez-faire, libertarian chairman of the Federal Reserve, Alan Greenspan; the right-wing Republican Senator from Texas, Phil Gramm, who once called Wall Street "a holy place," and later would become a high priest at the global banking giant, UBS; and the democratic Secretary of the Treasury, Robert Rubin, former co-chair of Goldman Sachs and tireless advocate of taking down Glass-Steagall. In the weeks before its repeal Rubin left government to join, are you ready for this, Citigroup's board, the very financial giant made possible by Glass-Steagall's elimination.
SENATOR TIM JOHNSON: (Speaking on Senate Floor) By eliminating the Glass-Steagall restrictions we free our financial services industry to maintain its place as the world leader...
SENATOR PHIL GRAMM: (Speaking on Senate Floor) We dominate the world financial market, and we've done it with one hand tied behind us because we have the greatest economic system in the history of the world. But we can untie that hand that we have had tied behind us. And we do it in this bill by repealing Glass-Steagall.
SENATOR BYRON DORGAN: (Speaking on Senate Floor) What does it mean if we have all this concentration and merger activity? Well, the bigger they are, the less likely this government can allow them to fail.
SENATOR BYRON DORGAN: (Speaking on Senate Floor) I think we will in ten years' time look back and say, "We should not have done that, because we forgot the lessons of the past."
BILL MOYERS: Senator Dorgan predicted disaster. Disaster's what we got in 2008.
BILL MOYERS: John Reed and many others say they were taken by surprise when the country's biggest financial institutions went bust in 2008. But it wasn't as if they hadn't been warned.
SENATOR BYRON DORGAN: (Speaking on Senate Floor) I believe that when this legislation is enacted...
BILL MOYERS: Remember Byron Dorgan? He sounded the alarm about the dangers of striking down Glass-Steagall. But his concerns were dismissed by Wall Street, by the Clinton White House and most of his own colleagues in Congress. But on the day of the vote, the Senator from North Dakota gave one of the most prescient speeches in our political history.
SENATOR BYRON DORGAN: (Speaking on Senate Floor) I worry very much that the fusing together of the idea of banking which requires not just safety and soundness to be successful but the perception of safety and soundness...to merge it with inherently risky speculative activity, is in my judgment unwise. I think we will in 10 years' time look back and say we should not have done that.
BILL MOYERS: Ten years later, 2008, your prophecy came true. Our financial system came crashing down, and taxpayers, as you had predicted, had to bail out the banks, just as you said we would. You take any pleasure out of being right?
BYRON DORGAN: No, I mean, there's no pleasure in this country for what happened, no pleasure for me to see. I mean, in many ways, it isn't, kind of, an irony that ten years after I predicted that ten years we might see massive bailouts, it happened. I didn't know that, but I just expected that we were creating real trouble for this country, really big trouble.
BILL MOYERS: What did you know that no one else knew?
BYRON DORGAN: I don't know that I knew something. I felt something very important about all of this. I you know, I had read what went on in the Great Depression, kind of understood what caused a collapse back then, and the unbelievable heartbreak and pain for this country.
BILL MOYERS: That's a great term for it. How did they create an avalanche here in Washington?
BYRON DORGAN: First of all, they have a lot of money. And they're interested in their own financial interests. And so, when they weigh in on something like repealing Glass-Steagall, they have money to advertise. They have money to persuade. They have money to get grass roots support. It became, kind of, a circus in the sense that this was not thoughtful. This wasn't a bunch of people in a room with the best minds in the country thinking what might be the consequences of doing this? If we really thought through what the consequences might be, having gone through a Great Depression once as a result of banks fused with risky ventures?
It was necessary to be repealed so that we could be competitive with the European banks. Of course, that was all nonsense. All complete nonsense, but they swallowed it hook, line and sinker. And everybody marched right off a cliff and repealed Glass-Steagall. And here we went, you know, we headed right towards an economic disaster.
BILL MOYERS: It had this fancy name. The Financial Services Modernization Act, but it's real purpose was to kill these banking protections, right?
\BYRON DORGAN: Oh sure. This country's been modernized before by special interests that wanted to get a bigger slice of the pie for themselves. But no matter what they called it here, the Modernization Act, this was the biggest financial interests of the country trying to grab more money for themselves.
And there's bipartisan responsibility for it. Alan Greenspan bears a significant part of the responsibility, I should say because he sat and watched it all on his hands when he had supervisory responsibility over the investment banks. But the Congress, the president-- what this country did was unthinkable.
BILL MOYERS: As he signed the bill, President Clinton handed the first pen to free market Republican Phil Gramm of Texas, who had worked long and hard to eliminate Glass-Steagall. It was later reported that another pen went to Sandy Weill at Citigroup.
BYRON DORGAN: Somebody ought to track that pen down and destroy it. There's no honor in what that pen did. I think if you were to rank big mistakes in the history of this country, that was one of the bigger ones because it set back this country in a very significant way and caused so much heartbreak and heartache and a near total collapse of the American economy. And it's not surprising what happened when we decided to eliminate the rules and provide a green light to say, do whatever you want to do.
It doesn't -- it just shouldn't have been surprising then, and it's not surprising to me now that we had a whole lot of interests that, you know, made this look like a bunch of hogs at a slop pail, you know, grunting and shoving to see who could get richer quicker. And that was at the expense of the American people.
BILL MOYERS: Meanwhile, go to our website BillMoyers.com. You'll see a letter there from Congressman Barney Frank, ranking member of the House Financial Services Committee. He responds to some of the things that were said last week about his namesake financial reform bill, Dodd-Frank. New York Times reporter Gretchen Morgenson who was with me for that discussion, responds on the website.
You also can take a look at our new Money and Politics page. There's some superb reporting there as well as interactive tools from our colleagues diligently connecting the dots and following the money.
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