griftopia

Summer 2010: more financial crisis hearings in Washington, this time on the role of derivatives in causing the crash. It’s almost a packed house in the cavernous fifth-floor Senate conference hall in the Dirksen building, but the crowd is very lobbyist-heavy—not much press. The Gulf oil spill is the big disaster drama now, as the world has mostly moved on from the finance story. A year ago, I was seeing a lot of campaign-trail types at financial hearings on the Hill; now I’m the only political reporter I recognize in the crowd.
The witness before the Financial Crisis Inquiry Commission is one Steve Kohlhagen, a former Cal-Berkeley professor. Back in the nineties and the first years of the 2000s, he headed the derivatives and risk management desk at First Union, the predecessor to Wachovia—a megabank that, thanks in no small part to the failure of its mortgage-backed derivative holdings, disappeared from the face of the earth two years ago.
A Wachovia guy. I wonder what he’ll have to say about this mess.
The Wells Fargo–Wachovia merger was formally announced on October 12, 2008, the same day that Barack Obama had his infamous encounter with Samuel “Joe the Plumber” Wurzelbacher in Ohio. When the last McCain-Obama debate took place three days later in Hempstead, New York, there was plenty of talk about which candidate was a bigger buddy to middle America’s plumbers, but neither man bothered to mention that week’s sudden disappearance of the country’s fourth-largest commercial bank. In fact, the Wachovia deal was one of many gigantic crisis stories the public never heard much about—the bank was a perfect symbol of the third-world-style oligarchical backroom mergers of public and private interests that became common after the crash.
When Wachovia’s portfolio started to go up in smoke in the fall of 2008 thanks to the collapse of the housing boom, depositors started to pull money out of the bank. Seeing this, government officials like future Obama Treasury secretary Tim Geithner (then heading the New York Fed) and FDIC chief Sheila Bair declared the bank a “systemically important” institution, and started frantically searching for a buyer to rescue the firm.
Just like the JPMorgan Chase–Bear Stearns deal and the Bank of America–Merrill Lynch deal, in which taxpayers ended up subsidizing megamergers that left the banking sector even more concentrated and dangerous than before, in the Wachovia mess regulators like Geithner and Bair scrambled to find ways to use taxpayer money to bribe would-be buyers like Citigroup and Wells Fargo into swallowing up the troubled bank. They initially settled on a plan to use FDIC funds to subsidize a Citigroup rescue, but in early October backroom negotiations shifted and Wells Fargo announced that it was coming to Wachovia’s rescue.
Wells Fargo had originally balked at rescuing Wachovia. But two things happened that changed the bank’s mind. First, then–Treasury secretary Hank Paulson made a change in the tax code that promised to mean an almost $25 billion tax break for Wells Fargo. Then Congress passed the TARP bailout, which gave Wells Fargo a $25 billion cash injection. On October 3, the very same day the bailout passed, Wells Fargo decided it would help out the government and buy Wachovia after all, for a bargain price of $12.7 billion. The deal was formally announced a week or so later. “This is of course a very exciting moment in the long history of Wachovia and Wells Fargo,” said Wells Fargo’s chairman, Richard Kovacevich.
To recap: America’s fourth-largest bank goes broke gambling on mortgages, then gets sold to Wells Fargo for $12.7 billion after the latter receives $50 billion in bailout cash and tax breaks from the government. The resulting postmerger bank is now the second-largest commercial bank in the country, and, presumably, significantly more “systemically important” than even Wachovia was. Fattened by all this bailout cash, incidentally, postmerger Wells Fargo would end up paying out $977 million in bonuses for 2008.
Steve Kohlhagen, the witness at the FCIC hearing, has nothing to do with any of this, of course—he left First Union way back in George W. Bush’s first term. But as the former derivatives chief of one of the largest derivatives merchants in the country, he’ll certainly be worth listening to. Even if he isn’t directly guilty, I think, maybe Kohlhagen will break down weeping and confessing anyway, admitting that he sent Wachovia down the road to ruin by cramming its books full of deadly mortgage-backed CDOs. Or maybe he’ll apologize on behalf of Wachovia for forcing the American taxpayer to have to pay off Wells Fargo by the tens of billions to take flat-broke, disfigured Wachovia to the altar.
Or maybe not. After FCIC chairman Phil Angelides stumbles while introducing Kohlhagen—he forgets to call him “Doctor”—the former Wachovia chief leans forward and shakes his head generously. “ ‘Mister’ is fine,” he says.
Then he starts in about the causes of the financial crisis. Kohlhagen’s first point is that over-the-counter derivatives like the mortgage-backed CDOs that sank Wachovia and the credit default swaps that killed AIG had “absolutely no role whatsoever in causing the financial crisis.”
Uh-huh. He’s entitled to his opinion, I guess. But then he goes on:
“The cause of the financial crisis,” he says, “was quite simply the commitment by the United States government to bring home ownership to the next group of people who previously had not been able to own their own homes.”
There it is. The financial crisis, you see, had nothing to do with huge aggrandized financial institutions borrowing vast fuckloads of money and gambling it all away, knowing that the government would have to swoop in and rescue them if they failed. No, what sank the economy was poor black people who were pushed into buying houses they couldn’t afford by the government.
You have to have truly giant balls to stand up in a senatorial hearing room after your old bank was rescued by a $50 billion government bailout effort and blame the financial crisis on poor people on welfare, which is essentially what Kohlhagen was doing.
A few minutes later, the next witness, Albert “Pete” Kyle, a professor of finance at the University of Maryland, offered his analysis of the crisis. He cited as one of the chief causes “government mandates for home ownership,” and said that, in the way of a solution, we “need less emphasis on home ownership as an intrinsically desirable social goal undertaken for its own sake.”
After a few hours of this—multiple witnesses and even some of the commissioners sounded similar themes—I started laughing a little. In America, every political issue, no matter how complicated, ultimately takes the same silly ride down the same rhetorical water slide. Complex social and economic phenomena are chopped up into pairs of easy-to-digest sound bites, with one T-shirt slogan for the Fox News crowd and one for the Democrats. And here in this FCIC hearing, two years after the crisis, it struck me that the two sides had finally settled on their T-shirt interpretations of the crash era.
The Republicans were going with this goofy story the Kohlhagens of the world were dumping on the public, that the financial crisis was caused by lazy poor people living in too much house. If you scratched the surface of Republican rhetoric two years later, that’s really all it was—a lot of whining about the Community Reinvestment Act of 1977 and Fannie and Freddie, with social engineering being the dog-whistle code words describing government aid to minorities. “Private enterprise mixed with social engineering” was how Alabama senator Richard Shelby put it.
The Democrats’ line was a little more complicated. They had no problem publicly pointing the finger at companies like Goldman Sachs as culprits in the mess, although behind closed doors, of course, it was Democratic officials like Geithner who were carrying water for Wall Street all along, arranging sweetheart deals like the Wachovia rescue and the Citigroup bailout (notable because Geithner’s ex-boss, former Clinton Treasury secretary Bob Rubin, was a big Citi exec). Barack Obama talked a big game about Wall Street, but after he got elected he hired scads of Goldman and Citi executives to run economic policy out of his White House, and his reform bill ended up being a Swiss cheese shot through with preposterous loopholes. The Democrats’ response to Wall Street excess was similar to their attitude toward the Iraq War—they were against it in theory, but in practice, they weren’t going to do much about it.
A few weeks after that FCIC hearing, there were a few more punctuation-mark moments in the history of the financial crisis. The aforementioned Dodd-Frank financial reform bill, a fiasco that would do nothing to stop too-big-to-fail companies from gambling with America’s money, passed and became law. And the SEC settled with Goldman Sachs for $550 million in the infamous ABACUS case, a move that was widely interpreted by Wall Street as the final shoe to be dropped in the area of postcrisis enforcement and punishment. The market had been down 100 points on the day the settlement was announced; it scrambled back to a loss of just 7 by the end of the day, buoyed by the Street-wide sense that there were no more enforcement actions coming. We were going back to business as usual.
Everyone, it seemed, wanted this story to be over. The reason was obvious. The financial crisis had been far too complicated and messy to fit into the usual left-right sound bites. It was a story that for a short but definite period of time had forced the monster of American oligarchy out from below the ocean surface and onto the beach, for everyone to see.
When the economy imploded, the country had for a time been treated to the rare spectacle of a perfectly bipartisan political disaster, with both Republicans and Democrats sharing equally in the decades-long effort at deregulation that opened the door to the Grifter era. And the crisis forced a nation of people accustomed to thinking that their only political decisions came once every four years to consider, for really the first time, the political import of regular or even daily items like interest rates, gasoline prices, ATM fees, and FICO scores.
The powers that be don’t want people thinking about any of these things. If the people must politick, then let them do it in the proper arena, in elections between Wall Street–sponsored Democrats and Wall Street–sponsored Republicans. They want half the country lined up like the Tea Partiers against overweening government power, and the other half, the Huffington Post crowd, railing against corporate excess. But don’t let the two sides start thinking about the bigger picture and wondering if the real problem might be a combination of the two.
Americans like their politics simple, but Griftopia is as hard as it gets—a huge labyrinth of financial rules and bylaws within which a few thousand bankers and operators bleed millions of customers dry using financial instruments that are far too complex to explain on the evening news. Navigating this mess requires a hell of a lot of effort and attention, and few politicians in either party have any appetite at all for helping ordinary people make that journey. In fact, the situation is just the opposite: they’d rather we latched on to transparently stupid Band-Aid explanations for what happened in 2008, blaming it on black homeowners or bad luck or a few very bad apples in companies like AIG.
By the time this book hits the shelves, the 2010 midterm elections will be upon us, at which time this dumbing-down process with regard to the public perception of the financial catastrophe should be more or less complete. The Tea Party and its ilk will have found a way to push the national conversation in the desired idiotic direction. Instead of talking about what to do about the fact that, after all the mergers in the crisis, just four banks now account for half of the country’s mortgages and two-thirds of its credit card accounts, we’ll be debating whether or not we should still automatically grant citizenship to the American-born children of illegal immigrants, or should let Arizona institute a pass-law regime, or some such thing.
Meanwhile, half a world away, in little-advertised meetings of international bankers in Basel, Switzerland, the financial services industry will be settling on new capital standards for the world’s banks. And here at home, bodies like the CFTC and the Treasury will be slowly, agonizingly making supertechnical decisions on regulatory questions like “Who exactly will be subject to the new Consumer Financial Protection Bureau?” and “What kinds of activities will be covered by the partial ban on proprietary trading?”
On these real meat-and-potatoes questions about how to set the rules for modern business, most ordinary people won’t have a voice at all; they won’t even be aware that these decisions are being made. But industry lobbyists are already positioning themselves to have a behind-the-scenes impact on the new rules. While the rest of us argue about Mexican babies before the midterms, hotshot DC law firms like Skadden, Arps, Slate, Meagher & Flom may have as many as a hundred lawyers working on the unresolved questions in the Dodd-Frank bill. And that’s just one firm. Thousands of lobbyists will be employed; millions of lobbying dollars will be spent.
This is how America works. Our real government is mostly kept hidden from view, and the truly weighty decisions about where our society is going and what rules it is going to live by are made mostly in private, by groups of anonymous lawyers and bureaucrats and lobbyists, government officials and industry reps alike.
As the crisis fades even further from public memory, it seems more and more likely that a whole range of monstrous and disturbing questions raised by the events of the last few years will go unanswered. The Wachovia deal was just one of a handful of massive interventions in the so-called private economy that were seemingly executed, in the proverbial smoke-filled back room, by a few dozen state officials in conjunction with a few counterparts on the private business side.
A few brief months in 2008 saw the following, among other things:
In March 2008, Treasury Secretary Henry Paulson put a shotgun to the head of dying Bear Stearns and forced it to sell out to JPMorgan Chase at the absurdly low price of $2 a share (later raised to $10 a share). Chase also got $30 billion in federal guarantees to take the deal. The $2-a-share number was so low that Morgan Stanley CEO John Mack, when he heard the news, publicly wondered aloud if it was a typo and the real number was $20 a share. A few months later, the FDIC seized failing commercial bank Washington Mutual, Inc., and immediately sold it to Chase for the comparably ridiculous price of $1.9 billion; Washington Mutual would later sue, claiming that the FDIC and Morgan conspired to lower WMI’s sale price for Morgan.
Paulson, a former Goldman Sachs employee, was in constant telephone contact with Goldman’s new CEO, Lloyd Blankfein, during a period in which Paulson was negotiating the AIG bailout, which of course led to at least $13 billion being transferred directly to Goldman Sachs, a major AIG counterparty.
Around the same time as the September AIG deal, Bank of America entered into a state-aided agreement to buy foundering Merrill Lynch, a company run by yet another ex-Goldmanite, the notorious asshole John Thain, who had become famous for buying an $87,000 rug for his office as his company quickly went broke thanks to its reckless mortgage gambling.
A few months later, in December 2008, B of A chief Ken Lewis discovered that Merrill had billions in previously unreported losses and tried to back out of the deal. He then went to Washington and had a discussion with Paulson, who apparently threatened to remove both the company’s management and its board if he didn’t do the deal. Lewis, whose bank had gotten some $25 billion in cash via the TARP bailout, emerged from that meeting with Paulson suddenly determined once again to go through with the shotgun wedding. A month or so later, Bank of America shareholders learned for the first time about the billions in losses and about the millions in last-minute bonuses paid out by Thain after shareholders voted—in one case, Thain paid former Goldman executive Peter Kraus a $25 million bonus on Merrill’s last days even though Kraus had only been at Merrill for a few months.
Lewis had since been placed under investigation, with New York attorney general Andrew Cuomo alleging that Lewis withheld information about the Merrill losses from shareholders at the direction of Paulson and Fed chief Ben Bernanke. “I was instructed that ‘we do not want a public disclosure,’ ” Lewis said.
There were other stories. The seemingly fortuitous late September 2008 coincidence of Warren Buffett deciding to pledge $5 billion to a then-foundering Goldman Sachs during the same week that the bank was miraculously rescued from possible bankruptcy by Geithner’s decision to allow it to convert overnight to bank holding company status—a decision that allowed Goldman to borrow mountains of free cash from the Fed. Or how about Barack Obama putting a sitting Citigroup official (Michael Froman) in charge of his economic transition team right at the time a ridiculously generous federal bailout of Citigroup was being negotiated by Geithner—whose appointment as Treasury secretary was announced the very day the Citi bailout was concluded?
You put all of these stories together and what you get is a bizarre snapshot of a national economy in which the old Adam Smith capitalist notion of companies succeeding or failing on their merits, with the price of their assets determined entirely by the market, was tossed out the window. In its place was a system in which mergers and bankruptcies were brokered not by the market, but by government officials like Paulson and Geithner and Bernanke, and prices of assets were determined not by what investors were willing to pay, but by the level of political influence of the company’s leaders.
At the outset of 2008, the five biggest investment banks in America were Morgan Stanley, Goldman, Bear Stearns, Lehman Brothers, and Merrill Lynch; by the end of the year, Morgan and Goldman had been rescued by late-night conversions to commercial bank status, Bear Stearns had been hand-delivered to JPMorgan Chase, bastard child Merrill Lynch and its billions in gambling losses had been forced on sorry-ass Bank of America, and Lehman Brothers had been allowed to die by Hank Paulson. The resulting financial landscape was far more concentrated than before, in both the investment banking sector (where the collapse of Bear, Merrill, and Lehman left Morgan and Goldman ascendant) and the commercial banking sector (since the crisis, Chase, Wells Fargo, and Bank of America all exceed the legal size limit of 10 percent of all American deposits).
A few years later, a country whose citizens purport to be mad as hell about growing government influence has still said little to nothing about that bizarre sequence of events in which the entire economy was rebuilt via this series of back-alley state-brokered mergers, which left financial power in America in the hands of just a few mostly unaccountable actors on Wall Street. We still know very little about what really went on during this period, who was calling whom, what bank was promised what. We need to see phone records, e-mails, correspondence, the minutes of meetings; we need to know what the likes of Paulson and Geithner and Bernanke were doing during those key stretches of 2008.
But we probably never will, because the country increasingly is forgetting that any of this took place. The ability of its citizens to lose focus so quickly and to be distracted by everything from Lebronamania to the immigration debate is part of what makes America so ripe for this particular type of corporate crime. We have voters who don’t pay attention, a news media that either ignores key subjects or willfully misunderstands them, and a regulatory environment that bends easily to lobbying and campaign financing efforts. And we’ve got a superpower’s worth of accumulated wealth that is still there for the taking. You put all that together, and what you get is a thieves’ paradise—a Griftopia.

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