Back to Quack Off
Street's Bailout Hustle
Matt Taibbi for Rolling Stone
(Feb 17, 2010)
Goldman Sachs and other big banks aren't just pocketing the trillions we
gave them to rescue the economy - they're re-creating the conditions for
New York, NY
-- On January 21st, Lloyd Blankfein left a peculiar voicemail message on the
work phones of his employees at Goldman Sachs. Fast becoming America's
pre-eminent Marvel Comics supervillain, the CEO used the call to deploy his
secret weapon: a pair of giant, nuclear-powered testicles. In his message,
Blankfein addressed his plan to pay out gigantic year-end bonuses amid
widespread controversy over Goldman's role in precipitating the global
had already set aside a tidy $16.2 billion for salaries and bonuses
meaning that Goldman employees were each set to take home an average of
$498,246, a number roughly commensurate with what they received during the
bubble years. Still, the troops were worried: There were rumors that Dr.
Ballsachs, bowing to political pressure, might be forced to scale the number
back. After all, the country was broke, 14.8 million Americans were stranded
on the unemployment line, and Barack Obama and the Democrats were trying to
recover the populist high ground after their bitch-whipping in Massachusetts
by calling for a "bailout tax" on banks. Maybe this wasn't the right time
for Goldman to be throwing its annual Roman bonus orgy.
worry, Blankfein reassured employees. "In a year that proved to have no
shortage of story lines," he said, "I believe very strongly that performance
is the ultimate narrative."
Translation: We made a shitload of money last year because we're so amazing
at our jobs, so fuck all those people who want us to reduce our bonuses.
wasn't alone. The nation's six largest banks all committed to this
balls-out, I drink your
milkshake! strategy of flagrantly gorging themselves as America
goes hungry set aside a whopping $140 billion for executive compensation
last year, a sum only slightly less than the $164 billion they paid
themselves in the pre-crash year of 2007. In a gesture of self-sacrifice,
Blankfein himself took a humiliatingly low bonus of $9 million, less than
the 2009 pay of elephantine New York Knicks washout Eddy Curry. But in
reality, not much had changed. "What is the state of our moral being when
Lloyd Blankfein taking a $9 million bonus is viewed as this great act of
contrition, when every penny of it was a direct transfer from the taxpayer?"
asks Eliot Spitzer, who tried to hold Wall Street accountable during his own
ill-fated stint as governor of New York.
few such bleats of outrage, however, the huge payout was met, by and large,
with a collective sigh of resignation. Because beneath America's populist
veneer, on a more subtle strata of the national psyche, there remains a
strong temptation to not really give a shit. The rich, after all, have
always made way too much money; what's the difference if some fat cat in New
York pockets $20 million instead of $10 million?
reason such apathy exists, however, is because there's still a widespread
misunderstanding of how exactly Wall Street "earns" its money, with emphasis
on the quotation marks around "earns." The question everyone should be
asking, as one bailout recipient after another posts massive profits
Goldman reported $13.4 billion in profits last year, after paying out that
$16.2 billion in bonuses and compensation is this: In an economy as
horrible as ours, with every factory town between New York and Los Angeles
looking like those hollowed-out ghost ships we see on History Channel
Shipwrecks of the Great Lakes, where in the hell did Wall
Street's eye-popping profits come from, exactly? Did Goldman go from bailout
city to $13.4 billion in the black because, as Blankfein suggests, its
"performance" was just that awesome? A year and a half after they were
minutes away from bankruptcy, how are these assholes not only back on their
feet again, but hauling in bonuses at the same rate they were during the
to that question is basically twofold: They raped the taxpayer, and they
raped their clients.
line is that banks like Goldman have learned absolutely nothing from the
global economic meltdown. In fact, they're back conniving and playing
speculative long shots in force only this time with the full financial
support of the U.S. government. In the process, they're rapidly re-creating
the conditions for another crash, with the same actors once again playing
the same crazy games of financial chicken with the same toxic assets as
this bonus business isn't merely a matter of getting upset about whether or
not Lloyd Blankfein buys himself one tropical island or two on his next
birthday. The reality is that the post-bailout era in which Goldman thrived
has turned out to be a chaotic frenzy of high-stakes con-artistry, with
taxpayers and clients bilked out of billions using a dizzying array of
old-school hustles that, but for their ponderous complexity, would have fit
well in slick grifter movies like
The Sting and
There's even a term in con-man lingo for what some of the banks are doing
right now, with all their cosmetic gestures of scaling back bonuses and
giving to charities. In the grifter world, calming down a mark so he doesn't
call the cops is known as the "Cool Off."
appreciate how all of these (sometimes brilliant) schemes work is to
understand the difference between earning money and taking scores, and to
realize that the profits these banks are posting don't so much represent
national growth and recovery, but something closer to the losses one would
report after a theft or a car crash. Many Americans instinctively understand
this to be true but, much like when your wife does it with your 300-pound
plumber in the kids' playroom, knowing it and actually watching the whole
scene from start to finish are two very different things. In that spirit, a
brief history of the best 18 months of grifting this country has ever seen:
SWOOP AND SQUAT
most people who have followed the financial crisis know that the bailout of
AIG was actually a bailout of AIG's "counterparties" the big banks like
Goldman to whom the insurance giant owed billions when it went belly up.
less understood is that the bailout of AIG counter-parties like Goldman and
Sociιtι Gιnιrale, a French bank, actually began
before the collapse
of AIG, before the Federal Reserve paid them so much as a dollar. Nor is it
understood that these counterparties actually accelerated the wreck of AIG
in what was, ironically, something very like the old insurance scam known as
"Swoop and Squat," in which a target car is trapped between two perpetrator
vehicles and wrecked, with the mark in the game being the target's insurance
company in this case, the government.
sound far-fetched, but the financial crisis of 2008 was very much caused by
a perverse series of legal incentives that often made failed investments
worth more than thriving ones. Our economy was like a town where everyone
has juicy insurance policies on their neighbors' cars and houses. In such a
town, the driving will be suspiciously bad, and there will be a lot of
the ultimate example of this dynamic. At the height of the housing boom,
Goldman was selling billions in bundled mortgage-backed securities often
toxic crap of the no-money-down, no-identification-needed variety of home
loan to various institutional suckers like pensions and insurance
companies, who frequently thought they were buying investment-grade
instruments. At the same time, in a glaring example of the perverse
incentives that existed and still exist, Goldman was also betting
against those same
sorts of securities a practice that one government investigator compared
to "selling a car with faulty brakes and then buying an insurance policy on
the buyer of those cars."
often "insured" some of this garbage with AIG, using a virtually unregulated
form of pseudo-insurance called credit-default swaps. Thanks in large part
to deregulation pushed by Bob Rubin, former chairman of Goldman, and
Treasury secretary under Bill Clinton, AIG wasn't required to actually have
the capital to pay off the deals. As a result, banks like Goldman bought
more than $440 billion worth of this bogus insurance from AIG, a huge blind
bet that the taxpayer ended up having to eat.
the housing bubble went crazy, Goldman made money coming and going. They
made money selling the crap mortgages, and they made money by collecting on
the bogus insurance from AIG when the crap mortgages flopped.
trick for Goldman was: how to
insurance money. As AIG headed into a tailspin that fateful summer of 2008,
it looked like the beleaguered firm wasn't going to have the money to pay
off the bogus insurance. So Goldman and other banks began demanding that AIG
provide them with cash collateral. In the 15 months leading up to the
collapse of AIG, Goldman received $5.9 billion in collateral. Sociιtι
Gιnιrale, a bank holding lots of mortgage-backed crap originally
underwritten by Goldman, received $5.5 billion. These collateral demands
squeezing AIG from two sides were the "Swoop and Squat" that ultimately
crashed the firm. "It put the company into a liquidity crisis," says Eric
Dinallo, who was intimately involved in the AIG bailout as head of the New
York State Insurance Department.
It was a
brilliant move. When a company like AIG is about to die, it isn't supposed
to hand over big hunks of assets to a single creditor like Goldman; it's
supposed to equitably distribute whatever assets it has left among all its
creditors. Had AIG gone bankrupt, Goldman would have likely lost much of the
$5.9 billion that it pocketed as collateral. "Any bankruptcy court that saw
those collateral payments would have declined that transaction as a
fraudulent conveyance," says Barry Ritholtz, the author of
Instead, Goldman and the other counterparties got their money out in advance
putting a torch to what was left of AIG. Fans of the movie
recall Henry Hill and Tommy DeVito taking the same approach to the Bamboo
Lounge nightclub they'd been gouging. Roll the Ray Liotta narration:
"Finally, when there's nothing left, when you can't borrow another buck . .
. you bust the joint out. You light a match."
not? After all, according to the terms of the bailout deal struck when AIG
was taken over by the state in September 2008, Goldman was paid 100 cents on
the dollar on an additional $12.9 billion it was owed by AIG again, money
it almost certainly would not have seen a fraction of had AIG proceeded to a
normal bankruptcy. Along with the collateral it pocketed, that's $19 billion
in pure cash that Goldman would not have "earned" without massive state
intervention. How's that $13.4 billion in 2009 profits looking now? And that
doesn't even include the
direct bailouts of Goldman Sachs and other big banks, which
began in earnest after the collapse of AIG.
usual "DollarStore" or "Big Store" scam popularized in movies like
The Sting a huge
cast of con artists is hired to create a whole fake environment into which
the unsuspecting mark walks and gets robbed over and over again. A warehouse
is converted into a makeshift casino or off-track betting parlor, the fool
walks in with money, leaves without it.
key elements to the Dollar Store scam are the whiz-bang theatrical
redecorating job and the fact that everyone is in on it except the mark. In
this case, a pair of investment banks were dressed up to look like
commercial banks overnight, and it was the taxpayer who walked in and lost
his shirt, confused by the appearance of what looked like real Federal
Reserve officials minding the store.
a week after the AIG bailout, Goldman and another investment bank, Morgan
Stanley, applied for, and received, federal permission to become bank
holding companies a move that would make them eligible for much greater
federal support. The stock prices of both firms were cratering, and there
was talk that either or both might go the way of Lehman Brothers, another
once-mighty investment bank that just a week earlier had disappeared from
the face of the earth under the weight of its toxic assets. By law, a
five-day waiting period was required for such a conversion but the two
banks got them overnight, with final approval actually coming only five days
after the AIG bailout.
they need those federal bank charters? This question is the key to
understanding the entire bailout era because this Dollar Store scam was
the big one. Institutions that were, in reality, high-risk gambling houses
were allowed to masquerade as conservative commercial banks. As a result of
this new designation, they were given access to a virtually endless tap of
"free money" by unsuspecting taxpayers. The $10 billion that Goldman
received under the better-known TARP bailout was chump change in comparison
to the smorgasbord of direct and indirect aid it qualified for as a
Goldman Sachs and Morgan Stanley got their federal bank charters, they
joined Bank of America, Citigroup, J.P. Morgan Chase and the other banking
titans who could go to the Fed and borrow massive amounts of money at
interest rates that, thanks to the aggressive rate-cutting policies of Fed
chief Ben Bernanke during the crisis, soon sank to zero percent. The ability
to go to the Fed and borrow big at next to no interest was what saved
Goldman, Morgan Stanley and other banks from death in the fall of 2008.
"They had no other way to raise capital at that moment, meaning they were on
the brink of insolvency," says Nomi Prins, a former managing director at
Goldman Sachs. "The Fed was the only shot."
the Fed became not just a source of emergency borrowing that enabled Goldman
and Morgan Stanley to stave off disaster it became a source of long-term
guaranteed income. Borrowing at zero percent interest, banks like Goldman
now had virtually infinite ways to make money. In one of the most common
maneuvers, they simply took the money they borrowed from the government at
zero percent and lent it back to the government by buying Treasury bills
that paid interest of three or four percent. It was basically a license to
print money no different than attaching an ATM to the side of the Federal
borrowing at zero, putting it out there at two or three percent, with
hundreds of billions of dollars man, you can make a lot of money that
way," says the manager of one prominent hedge fund. "It's free money." Which
goes a long way to explaining Goldman's enormous profits last year. But all
that free money was amplified by another scam:
PIG IN THE POKE
point or another, pretty much everyone who takes drugs has been burned by
this one, also known as the "Rocks in the Box" scam or, in its more
elaborate variations, the "Jamaican Switch." Someone sells you what looks
like an eightball of coke in a baggie, you get home and, you dumbass, it's
name comes from the Middle Ages, when some fool would be sold a bound and
gagged pig that he would see being put into a bag; he'd miss the switch,
then get home and find a tied-up cat in there instead. Hence the expression
"Don't let the cat out of the bag."
in the Poke" scam is another key to the entire bailout era. After the crash
of the housing bubble the largest asset bubble in history the economy
was suddenly flooded with securities backed by failing or near-failing home
loans. In the cleanup phase after that bubble burst, the whole game was to
get taxpayers, clients and shareholders to buy these worthless cats, but at
One of the
first times we saw the scam appear was in September 2008, right around the
time that AIG was imploding. That was when the Fed changed some of its
collateral rules, meaning banks that could once borrow only against sound
collateral, like Treasury bills or AAA-rated corporate bonds, could now
borrow against pretty much anything including some of the mortgage-backed
sewage that got us into this mess in the first place. In other words, banks
that once had to show a real pig to borrow from the Fed could now show up
with a cat and get pig money. "All of a sudden, banks were allowed to post
absolute shit to the Fed's balance sheet," says the manager of the prominent
spelled it out on September 14th, 2008, when it changed the collateral rules
for one of its first bailout facilities the Primary Dealer Credit
Facility, or PDCF. The Fed's own write-up described the changes: "With the
Fed's action, all the kinds of collateral then in use . . .
securities and equities . . . became eligible for pledge in the
Translation: We now accept cats.
The Pig in
the Poke also came into play in April of last year, when Congress pushed a
little-known agency called the Financial Accounting Standards Board, or FASB,
to change the so-called "mark-to-market" accounting rules. Until this rule
change, banks had to assign a real-market price to all of their assets. If
they had a balance sheet full of securities they had bought at $3 that were
now only worth $1, they had to figure their year-end accounting using that
$1 value. In other words, if you were the dope who bought a cat instead of a
pig, you couldn't invite your shareholders to a slate of pork dinners come
year-end accounting time.
April, FASB changed all that. From now on, it announced, banks could avoid
reporting losses on some of their crappy cat investments simply by declaring
that they would "more likely than not" hold on to them until they recovered
their pig value. In short, the banks didn't even have to
actually hold on to
the toxic shit they owned they just had to
sort of promise to
hold on to it.
the "profit" numbers of a lot of these banks are really a joke. In many
cases, we have absolutely no idea how many cats are in their proverbial bag.
What they call "profits" might really be profits, only
millions or billions in losses.
hiding all this stuff from their shareholders," says Ritholtz, who was
disgusted that the banks lobbied for the rule changes. "Now, suddenly banks
that were happy to mark to market on the way up don't have to mark to market
on the way down."
One of the
great innovations of Victor Lustig, the legendary Depression-era con man who
wrote the famous "Ten Commandments for Con Men," was a thing called the
"Rumanian Box." This was a little machine that a mark would put a blank
piece of paper into, only to see real currency come out the other side. The
brilliant Lustig sold this Rumanian Box over and over again for vast sums
but he's been outdone by the modern barons of Wall Street, who managed to
get themselves a real Rumanian Box.
accomplished this is a story that by itself highlights the challenge of
placing this era in any kind of historical context of known financial crime.
What the banks did was something that was never and never could have been
thought of before. They took so much money from the government, and then
did so little with it, that the state was forced to start printing new cash
to throw at them. Even the great Lustig in his wildest, horniest dreams
could never have dreamed up
By early 2009, the banks had already replenished themselves with billions if
not trillions in bailout money. It wasn't just the $700 billion in TARP
cash, the free money provided by the Fed, and the untold losses obscured by
accounting tricks. Another new rule allowed banks to collect interest on the
cash they were required by law to keep in reserve accounts at the Fed
meaning the state was now compensating the banks simply for guaranteeing
their own solvency. And a new federal operation called the Temporary
Liquidity Guarantee Program let insolvent and near-insolvent banks dispense
with their deservedly ruined credit profiles and borrow on a clean slate,
with FDIC backing. Goldman borrowed $29 billion on the government's good
name, J.P. Morgan Chase $38 billion, and Bank of America $44 billion. "TLGP,"
says Prins, the former Goldman manager, "was a big one."
Collectively, all this largesse was worth trillions. The idea behind the
flood of money, from the government's standpoint, was to spark a national
recovery: We refill the banks' balance sheets, and they, in turn, start to
lend money again, recharging the economy and producing jobs. "The banks were
fast approaching insolvency," says Rep. Paul Kanjorski, a vocal critic of
Wall Street who nevertheless defends the initial decision to bail out the
banks. "It was vitally important that we recapitalize these institutions."
the thing. Despite all these trillions in government rescues, despite the
Fed slashing interest rates down to nothing and showering the banks with
mountains of guarantees, Goldman and its friends had still not jump-started
lending again by the first quarter of 2009. That's where those
nuclear-powered balls of Lloyd Blankfein came into play, as Goldman and
other banks basically threatened to pick up their bailout billions and go
home if the government didn't fork over more cash a
lot more. "Even if
the Fed could make interest rates negative, that wouldn't necessarily help,"
warned Goldman's chief domestic economist, Jan Hatzius. "We're in a deep
recession mainly because the private sector, for a variety of reasons, has
decided to save a lot more."
Translation: You can lower interest rates all you want, but we're still not
fucking lending the bailout money to anyone in this economy. Until the
government agreed to hand over even more goodies, the banks opted to join
the rest of the "private sector" and "save" the taxpayer aid they had
received in the form of bonuses and compensation.
worked. In March of last year, the Fed sharply expanded a radical new
program called quantitative easing, which effectively operated as a
real-live Rumanian Box. The government put stacks of paper in one side, and
out came $1.2 trillion "real" dollars.
government used some of that freshly printed money to prop itself up by
purchasing Treasury bonds a desperation move, since Washington's demand
for cash was so great post-Clusterfuck '08 that even the Chinese couldn't
buy U.S. debt fast enough to keep America afloat. But the Fed used most of
the new cash to buy mortgage-backed securities in an effort to spur home
lending instantly creating a massive market for major banks.
did the banks do with the proceeds? Among other things, they bought Treasury
bonds, essentially lending the money back to the government, at interest.
The money that came out of the magic Rumanian Box went from the government
back to the government, with Wall Street stepping into the circle just long
enough to get paid. And once quantitative easing ends, as it is scheduled to
do in March, the flow of money for home loans will once again grind to a
halt. The Mortgage Bankers Association expects the number of new residential
mortgages to plunge by 40 percent this year.
that Rumanian box paper was made even more valuable by running it through
the next stage of the grift. Michael Masters, one of the country's leading
experts on commodities trading, compares this part of the scam to the poker
game in the Bill Murray comedy
Stripes. "It's like
that scene where John Candy leans over to the guy who's new at poker and
says, 'Let me see your cards,' then starts giving him advice," Masters says.
"He looks at the hand, and the guy has bad cards, and he's like, 'Bluff me,
come on! If it were me, I'd bet everything!' That's what it's like. It's
like they're looking at your cards as they give you advice."
ways than one can count, the economy in the bailout era turned into a "Big
Mitt," the con man's name for a rigged poker game. Everybody was indeed
looking at everyone else's cards, in many cases with state sanction. Only
taxpayers and clients were left out of the loop.
same time the Fed and the Treasury were making massive, earthshaking moves
like quantitative easing and TARP, they were also consulting regularly with
private advisory boards that include every major player on Wall Street. The
Treasury Borrowing Advisory Committee has a J.P. Morgan executive as its
chairman and a Goldman executive as its vice chairman, while the board
advising the Fed includes bankers from Capital One and Bank of New York
Mellon. That means that, in addition to getting great gobs of free money,
the banks were also getting clear signals about
when they were
getting that money, making it possible to position themselves to make the
One of the
best examples of the banks blatantly gambling, and winning, on government
moves was the Public-Private Investment Program, or PPIP. In this bizarre
scheme cooked up by goofball-geek Treasury Secretary Tim Geithner, the
government loaned money to hedge funds and other private investors to buy up
the absolutely most toxic horseshit on the market the same kind of
high-risk, high-yield mortgages that were most responsible for triggering
the financial chain reaction in the fall of 2008. These satanic deals were
the basic currency of the bubble: Jobless dope fiends bought houses with no
money down, and the big banks wrapped those mortgages into securities and
then sold them off to pensions and other suckers as investment-grade deals.
The whole point of the PPIP was to get private investors to relieve the
banks of these dangerous assets before they hurt any more innocent
did the banks do instead, once they got wind of the PPIP? They started
worthless crap again, presumably to sell back to the government at inflated
prices! In the third quarter of last year, Goldman, Morgan Stanley,
Citigroup and Bank of America combined to add $3.36 billion of exactly this
horseshit to their balance sheets.
brazen decision to gouge the taxpayer startled even hardened market
observers. According to Michael Schlachter of the investment firm Wilshire
Associates, it was "absolutely ridiculous" that the banks that were supposed
to be reducing their exposure to these volatile instruments were instead
loading up on them in order to make a quick buck. "Some of them created this
mess," he said, "and they are making a killing undoing it."
thing about our current economy. When Goldman and Morgan Stanley transformed
overnight from investment banks into commercial banks, we were told this
would mean a new era of "significantly tighter regulations and much closer
supervision by bank examiners," as
The New York Times
put it the very next day. In reality, however, the conversion of Goldman and
Morgan Stanley simply completed the dangerous concentration of power and
wealth that began in 1999, when Congress repealed the Glass-Steagall Act
the Depression-era law that had prevented the merger of insurance firms,
commercial banks and investment houses. Wall Street and the government
became one giant dope house, where a few major players share valuable
information between conflicted departments the way junkies share needles.
One of the
most common practices is a thing called front-running, which is really no
different from the old "Wire" con, another scam popularized in
The Sting. But
instead of intercepting a telegraph wire in order to bet on racetrack
results ahead of the crowd, what Wall Street does is make bets ahead of
valuable information they obtain in the course of everyday business.
working for the commodities desk of a big investment bank, and a major
client a pension fund, perhaps calls you up and asks you to buy a
billion dollars of oil futures for them. Once you place that huge order, the
price of those futures is almost guaranteed to go up. If the guy in charge
of asset management a few desks down from you somehow finds out about that,
he can make a fortune for the bank by betting ahead of that client of yours.
The deal would be instantaneous and undetectable, and it would offer huge
profits. Your own client would lose money, of course he'd end up paying a
higher price for the oil futures he ordered, because you would have driven
up the price. But that doesn't keep banks from screwing their own customers
in this very way.
is so blatant that Goldman Sachs actually warns its clients that something
along these lines might happen to them. In the disclosure section at the
back of a research paper the bank issued on January 15th, Goldman advises
clients to buy some dubious high-yield bonds while admitting that the bank
itself may bet against
those same shitty bonds. "Our salespeople, traders and other professionals
may provide oral or written market commentary or trading strategies to our
clients and our proprietary trading desks that reflect opinions that are
contrary to the opinions expressed in this research," the disclosure reads.
"Our asset-management area, our proprietary-trading desks and investing
businesses may make investment decisions that are inconsistent with the
recommendations or views expressed in this research."
Goldman admit this stuff openly, despite the fact that there are securities
laws that require banks to engage in "fair dealing with customers" and
prohibit analysts from issuing opinions that are at odds with what they
really think. And yet here they are, saying flat-out that they may be
issuing an opinion at odds with what they really think.
them screw their own clients, the major investment banks employ high-speed
computer programs that can glimpse orders from investors before the deals
are processed and then make trades on behalf of the banks at speeds of
fractions of a second. None of them will admit it, but everybody knows what
this computerized trading known as "flash trading" really is. "Flash
trading is nothing more than computerized front-running," says the prominent
hedge-fund manager. The SEC voted to ban flash trading in September, but
five months later it has yet to issue a regulation to put a stop to the
summer, Goldman suffered an embarrassment on that score when one of its
employees, a Russian named Sergey Aleynikov, allegedly stole the bank's
computerized trading code. In a court proceeding after Aleynikov's arrest,
Assistant U.S. Attorney Joseph Facciponti reported that "the bank has raised
the possibility that there is a danger that somebody who knew how to use
this program could use it to manipulate markets in unfair ways."
after a federal prosecutor admitted in open court that the Goldman trading
program could be used to unfairly manipulate markets, the bank released its
annual numbers. Among the notable details was the fact that a staggering 76
percent of its revenue came from trading, both for its clients and for its
own account. "That is much, much higher than any other bank," says Prins,
the former Goldman managing director. "If I were a client and I saw that
they were making this much money from trading, I would question how badly I
was getting screwed."
institutional investors like pension funds continually come to Wall Street
to get raped is the million-dollar question that many experienced observers
puzzle over. Goldman's own explanation for this phenomenon is comedy of the
highest order. In testimony before a government panel in January, Blankfein
was confronted about his firm's practice of betting against the same sorts
of investments it sells to clients. His response: "These are the
professional investors who want this exposure."
words, our clients are big boys, so screw 'em if they're dumb enough to take
the sucker bets I'm offering.
con men are good enough or brazen enough to con the same victim twice in a
row, but the few who try have a name for this excellent sport:
reloading. The usual
way to reload on a repeat victim (called an "addict" in grifter parlance) is
to rope him into trying to get back the money he just lost. This is exactly
what started to happen late last year.
important to remember that the housing bubble itself was a classic
confidence game the Ponzi scheme. The Ponzi scheme is any scam in which
old investors must be continually paid off with money from new investors to
keep up what appear to be high rates of investment return. Residential
housing was never as valuable as it seemed during the bubble; the soaring
home values were instead a reflection of a continual upward rush of new
investors in mortgage-backed securities, a rush that finally collapsed in
But by the
end of 2009, the unimaginable was happening: The bubble was re-inflating. A
bailout policy that was designed to help us get out from under the bursting
of the largest asset bubble in history inadvertently produced exactly the
opposite result, as all that government-fueled capital suddenly began
flowing into the most dangerous and destructive investments all over again.
Wall Street was going for the reload.
A lot of
this was the government's own fault, of course. By slashing interest rates
to zero and flooding the market with money, the Fed was replicating the
historic mistake that Alan Greenspan had made not once, but twice, before
the tech bubble in the early 1990s and before the housing bubble in the
early 2000s. By making sure that traditionally safe investments like CDs and
savings accounts earned basically nothing, thanks to rock-bottom interest
rates, investors were forced to go elsewhere to search for moneymaking
in the same situation all over again, only far worse. Wall Street is flooded
with government money, and interest rates that are not just low but flat are
pushing investors to seek out more "creative" opportunities. (It's
"Greenspan times 10," jokes one hedge-fund trader.) Some of that money could
be put to use on Main Street, of course, backing the efforts of
investment-worthy entrepreneurs. But that's not what our modern Wall Street
is built to do. "They don't seem to want to lend to small and medium-sized
business," says Rep. Brad Sherman, who serves on the House Financial
Services Committee. "What they want to invest in is marketable securities.
And the definition of small and medium-sized businesses, for the most part,
is that they don't have
marketable securities. They have bank loans."
words, unless you're dealing with the stock of a major, publicly traded
company, or a giant pile of home mortgages, or the bonds of a large
corporation, or a foreign currency, or oil futures, or some country's debt,
or anything else that can be rapidly traded back and forth in huge numbers,
factory-style, by big banks, you're not really on Wall Street's radar.
small business out of the picture, and the safe stuff not worth looking at
thanks to the Fed's low interest rates, where did Wall Street go? Right back
into the shit that got us here.
trader, who asked not to be identified, recounts a story of what happened
with his hedge fund this past fall. His firm wanted to short that is, bet
against all the crap toxic bonds that were suddenly in vogue again. The
fund's analysts had examined the fundamentals of these instruments and
concluded that they were absolutely not good investments.
took a short position. One month passed, and they lost money. Another month
passed same thing. Finally, the trader just shrugged and decided to change
course and buy.
'Fuck it, let's make some money,'" he recalls. "I absolutely did not believe
in the fundamentals of any of this stuff. However, I can get on the
bandwagon, just so long as I know when to jump out of the car before it goes
off the damn cliff!"
the very definition of bubble economics betting on crowd behavior instead
of on fundamentals. It's old investors betting on the arrival of new ones,
with the value of the underlying thing itself being irrelevant. And this
behavior is being driven, no surprise, by the biggest firms on Wall Street.
research report published by Goldman Sachs on January 15th underlines this
sort of thinking. Goldman issued a strong recommendation to buy exactly the
sort of high-yield toxic crap our hedge-fund guy was, by then, driving
rapidly toward the cliff. "Summarizing our views," the bank wrote, "we
expect robust flows . . . to dominate fundamentals." In other words: This
stuff is crap, but everyone's buying it in an awfully robust way, so you
should too. Just like tech stocks in 1999, and mortgage-backed securities in
To sum up,
this is what Lloyd Blankfein meant by "performance": Take massive sums of
money from the government, sit on it until the government starts printing
trillions of dollars in a desperate attempt to restart the economy, buy even
more toxic assets to sell back to the government at inflated prices and
then, when all else fails, start driving us all toward the cliff again with
a frank and open endorsement of bubble economics. I mean, shit who
wouldn't deserve billions in bonuses for doing all that?
artists have a word for the inability of their victims to accept that
they've been scammed. They call it the "True Believer Syndrome." That's sort
of where we are, in a state of nagging disbelief about the real problem on
Wall Street. It isn't so much that we have inadequate rules or incompetent
regulators, although both of these things are certainly true. The real
problem is that it doesn't matter what regulations are in place if the
people running the economy are rip-off artists. The system assumes a certain
minimum level of ethical behavior and civic instinct over and above what is
spelled out by the regulations. If those ethics are absent well, this
thing isn't going to work, no matter what we do. Sure, mugging old ladies is
against the law, but it's also easy. To prevent it, we depend, for the most
part, not on cops but on people making the conscious decision not to do it.
the biggest gift the bankers got in the bailout was not fiscal but
psychological. "The most valuable part of the bailout," says Rep. Sherman,
"was the implicit guarantee that they're Too Big to Fail." Instead of
liquidating and prosecuting the insolvent institutions that took us all down
with them in a giant Ponzi scheme, we have showered them with money and
guarantees and all sorts of other enabling gestures. And what should really
freak everyone out is the fact that Wall Street immediately started skimming
off its own rescue money. If the bailouts validated anew the crooked
psychology of the bubble, the recent profit and bonus numbers show that the
same psychology is back, thriving, and looking for new disasters to create.
"It's evidence," says Rep. Kanjorski, "that they still don't get it."
the point, the fact that we haven't done much of anything to change the
rules and behavior of Wall Street shows that
we still don't get
it. Instituting a bailout policy that stressed recapitalizing bad banks was
like the addict coming back to the con man to get his lost money back. Ask
yourself how well that ever works out. And then get ready for the reload.
says: Note that none of the above scams described by reporter Matt Taibbi
could have occurred if the U.S. was on a true free market, non fractional
reserve, gold standard. We do not need a revised central bank or more Wall
Street regulations; gold money is the automatic regulator of all markets.)
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