Ten Years After the Crash, We’ve Learned Nothing
Ten years ago, on Saturday, September 13th, 2008, the world was about to end.
The New York Federal Reserve was a zoo. Imagine NASA headquarters on the day a giant asteroid careens into the atmosphere. That was the New York Fed: all hands on deck, peak human panic.
The crowd included future Treasury Secretary Timothy Geithner, then-Treasury Secretary (and former Goldman Sachs CEO) Hank Paulson, the representatives of multiple regulatory offices, and the CEOs of virtually every major bank in New York, each toting armies of bean counters and bankers.
The asteroid metaphor fit. In the twin collapses of top-five investment bank Lehman Brothers and insurance giant AIG, Wall Street saw a civilization-imperiling ball of debt hurtling its way.
The legend of that meeting, as immortalized in hagiographic reconstructions like Andrew Ross Sorkin’s Too Big to Fail, is that the tough-minded bank honchos found a way to scrape up just enough cash to steer the debt-comet off course.
In Too Big To Fail, the “superstar” chief of Goldman, Lloyd Blankfein, along with “smart” Jamie Dimon of Chase, “fighter” John Mack of Morgan Stanley, and other titans brokered the deal of deals, just in time to stave off a Mad Max scenario for us all.
The plan included a federal bailout of incompetent AIG, along with key mergers – Bank of America buying Merrill, Barclays swallowing the sinking hull of Lehman, etc.
With respect to the fine actors in the film, the legend is bull.
There are more accurate chronicles of the crisis period, including the just-released Financial Exposure by Elise Bean of the Senate Permanent Subcommittee on Investigations, probably the most aggressive crew of financial detectives who sifted through the rubble over the past 10 years. Bean’s account of what went on at banks like Goldman, HSBC, UBS and Washington Mutual is terrifying to read even now.
But history is written by the victors, and the banks that blew up the economy are somehow still winning the narrative. Persistent propaganda about what happened 10 years ago not only continues to warp news coverage, but contributed to a wide array of political consequences, including the election of Donald Trump.
The most persistent myths about 2008:
Myth#1: The crash was an accident
In the early days of the crash, reporters were told the crisis particulars were probably too complex for news audiences. But metaphors would do. And the operating metaphor for 2008 was a “thousand-year flood,” a rare and inexplicable accident – something that just sort of happened.
It was even implied that the meltdown was due in part to irrational panic, “hysteria,” a fear of fear itself. When Lehman Brothers failed, the theory held, investors overreacted by freezing all lending, causing more disruptions and more losses. The economy was basically healthy, but fear had caused it to founder on a lack of confidence.
In Too Big to Fail, William Hurt plays Treasury Secretary Paulson as a saddened, wearied Atlas. He quips, early in the mess: “This is a confidence game,” and if Lehman Brothers failed, “all the other banks are gonna drop like dominoes.”
Poor Cynthia Nixon, who plays Treasury spokesperson Michele Davis, is heard responding, “Congress won’t move until we’ve already hit the iceberg.”
The film flashes to Lehman’s Dick “The Gorilla“ Fuld (played by James Woods in kinetic perma-jerk mode), who contrasts their fears with his overconfident weather report:
“Real estate always comes back,” he snorts, smugly fixing his tux. “I’ve seen this before. CEOs panic and they sell out cheap… The street’s running around with its hair on fire, but the storm always passes.”
This colorful language – dominoes, a confidence game, an “iceberg,” a “storm” – artfully disguised reality. This wasn’t weather coming at them, but the consequences of years of untrammeled criminal fraud.
Banks like Lehman had lent billions to fly-by-night mortgage mills like Countrywide and New Century. Those firms in turn sent hordes of loan hustlers into lower-income neighborhoods offering magical deals to anyone who could “fog a mirror,” as former Countrywide executive Michael Winston once put it to me. The targets were frequently minorities and the elderly.
Tales of mortgage swindlers guzzling Red Bulls and handing out easy loans in all directions began showing up in news reports as early as 2005. “It was like a boiler room,” one agent told the Los Angeles Times. “You produce, you make a lot of money… There’s no real compassion or understanding of the position they’re putting their customers in.”
These mortgage mills dispensed with due diligence, rarely bothering to verify incomes, identification, even citizenship. The loans were designed to have short, fragile lives, like fruit flies. They had to stay viable just long enough to be sent back to Wall Street and resold to secondary buyers, who took the losses.
It was a classic Ponzi scheme. So long as new loans were created and sold faster than the old ones failed, the subprime market made everyone rich. But the minute the market started to swing back the other way, everyone knew they would all crash to earth, Wile E. Coyote-style.
Paulson knew as well as anyone. Treasury and the other regulators received ample warning. Take the Office of Thrift Supervision (OTS), a regulatory arm of Treasury that happened to oversee two of the worst basket-cases, Washington Mutual and AIG. According to Bean, the OTS observed and ignored more than 500 deficiencies in mortgage practices just at WaMu in the years before the crash.
Even the FBI – not exactly an on-the-ball financial regulator, certainly not to the degree that Treasury or the Fed is expected to be – had warned as far back as 2004 that so-called “liar’s loans” were “epidemic” and would cause a “financial crisis” if not addressed.
CNN told the public of the FBI warning of a “next S&L crisis,” going so far as to identify the top 10 “hot spots’ for mortgage fraud” in: Georgia, South Carolina, Florida, Michigan, Illinois, Missouri, California, Nevada, Utah and Colorado.
All places that would later be rocked by mass foreclosures.
It took longer to get a car wash than a home loan in those days. I had one mortgage broker in Florida tell me he used to look for customers on the way home from work at night, at the beer cooler at his neighborhood 7-Eleven. His pitch was, “Hey, buddy, you like where you’re living?”
The end of this party was no confidence game. This was gravity: what went way up, coming way down.
The captain of the Titanic ignored one day’s worth of iceberg warnings and went down in history as an all-time schmuck for it. History commends him only for the honorable act of going down with his ship.
The titans of Wall Street ignored at least four years of warnings, escaped richer than ever, and in the end were lauded as heroes by the likes of Sorkin.
Myth #2: The crash was caused by greedy homeowners
Too Big To Fail shows Fuld on a rant:
“People act like we’re crack dealers,” Fuld (James Woods) gripes. “Nobody put a gun to anybody’s head and said, ‘Hey, nimrod, buy a house you can’t afford. And you know what? While you’re at it, put a line of credit on that baby and buy yourself a boat.”
This argument is the Wall Street equivalent of Reagan’s famous Cadillac-driving “welfare queen” spiel, which today is universally recognized as asinine race rhetoric.
Were there masses of people pre-2008 buying houses they couldn’t afford? Hell yes. Were some of them speculators or “flippers” who were trying to game the bubble for profit? Sure.
People pointing the finger at homeowners are asking the wrong questions. The right question is, why didn’t the Fulds of the world care if those “nimrods” couldn’t afford their loans?
The answer is, the game had nothing to do with whether or not the homeowner could pay. The homeowner was not the real mark. The real suckers were institutional customers like pensions, hedge funds and insurance companies, who invested in these mortgages.
If you had a retirement fund and woke up one day in 2009 to see you’d lost 30 percent of your life savings, you were the mark. Ordinary Americans had their remaining cash in houses and retirement plans, and the subprime scheme was designed to suck the value out of both places, into the coffers of a few giant banks.
A blizzard of post-2008 lawsuits involving pension funds testifies to this. One State Street fund lost 28 percent of its value. Plaintiffs like the Iowa Public Employees’ Union or an Electrical Workers’ Union in Illinois or even the Zuni Native American tribe in Arizona and New Mexico all lost millions because of mortgage investments.
Bean’s report makes it clear that when Senate investigators started to look through the records, they found that not only the companies themselves, but even their regulators saw the entire outlines of this con from the start.
“Other materials showed OTS supervisors downplaying the risk,” she writes, “highlighting bank profits and the speed with which banks sold the high-risk loans to Wall Street.”
In other words, nobody cared if the loans were shoddy. They were selling like hotcakes, generating lots of cash. Party on!
To this day, you’ll find people pushing the line that the crash was caused because Congress “forced everybody to go and give mortgages to people who were on the cusp.”
But nobody pushed banks to do anything. Homeowners were necessary parts of the scam. They were the straw in the Rumpelstiltskin scheme. If the Countrywides of the world had been worried about borrowers’ ability to pay, they would have, you know, checked.
It was a hot-potato game. Get a name on a piece of paper, then toss the loan from buyer to buyer until you found someone unsophisticated enough to take it.
All that brainpower in the New York Fed 10 years ago was searching for new takers for hot potatoes. They got the taxpayer to buy a lot, and got the Fed to buy more. They even used Fannie and Freddie as a backdoor bailout mechanism, buying up still more toxic assets. The banks themselves were the only ones who refused to take losses.
Myth #3: The bailouts were about saving capitalism
The deal those bankers cooked up was to save the banks from capitalism.
Losers must be allowed to lose. It’s the first and most important regulatory mechanism in a market economy.
But by 2008, the banks had simply grown too big and interconnected to allow normal market processes to take place.
These firms almost certainly would have died without help. In 2011, the Financial Crisis Inquiry Commission released a report quoting then-Fed chief Ben Bernanke as saying this about that fateful week in September 2008:
“Out of maybe the 13, 13 of the most important financial institutions in the United States, 12 were at risk of failure within a period of a week or two…”
Again, the legend is that the banks at the Fed that weekend were the healthy ones, saving us from the contagion of AIG and Lehman. This legend has been reinforced by constant propaganda about the banks being “forced” to accept bailouts like the TARP.
It’s a lie. Paulson and the other regulators repeatedly intervened to prevent the natural demises of these firms.
It wasn’t just small market-stopping moves, like when they banned short-selling to protect corrupt companies from smaller gamblers who’d wagered on their failure. Or the deal made on September 19th, 2008, when two companies that were not commercial banks, Goldman Sachs and Morgan Stanley, were given emergency commercial bank charters on a Sunday night, allowing the two plummeting giants access to lifesaving Fed cash the next morning.
The public to this day has no understanding of the scale of the intervention.
To put it in perspective, the War on Terror has cost America about $5.6 trillion since 9/11, or about $32 million an hour.
The bailouts probably dwarf that effort. Most studies suggest it was a world-war-level mobilization of cash, a generation of savings used to plug a single hole.
The Special Inspector General of the TARP put the gross government outlay at $4.6 trillion, with over $16 trillion in guarantees. Bloomberg concluded the rescue expenditure was $12.8 trillion. Fortune (which saluted the investment as hugely profitable for America in the end) put the number at $14 trillion. The Levy Institute at Bard College did probably the most extensive study, and put the number at $29 trillion.
An argument is frequently put forth that the government made a huge profit on the bailouts. This is an impossible stance to counter. It’s like trying to quantify how plaid something is.
Sure, in an environment in which the chief bailout recipients were allowed virtually limitless access to free capital; affirmatively non-prosecuted for severe regulatory violations (like rigging electricity prices or laundering money for drug cartels); repeatedly saved from crippling litigation by sweetheart settlements; and allowed to get financially well again overnight by feasting on direct cash injections, richly priced government-backed mortgages and other monster subsidies like the Quantitative Easing (QE) program… yes, in that universe, the bailout “earned” a profit. But for whom?
The real effect of the deal made that weekend has been a radical transformation of the economy. Previously, small banks traditionally enjoyed a lending advantage because of their on-the-ground relationships with local businesses. But the effective merger of the state with giant, too-big-to-fail banks has tilted the advantage far in the other direction.
Big banks post-2008 could now borrow much more cheaply than smaller ones, because lenders no longer worried about them going out of business. Some studies describe this “implicit guarantee” as a subsidy worth billions a year.
In 2012, Bloomberg put the number at $83 billion for just the top 10 banks. Fast-forward to last year. How much of the record $171.3 billion in profits earned by banks in 2017 was owed to the implicit guarantee?
The bank-state merger brokered 10 years ago this week socialized the risks of the financial sector, and essentially converted Wall Street into a vehicle for annually privatizing a big chunk of America’s GDP into the hands of a few executives. The same people who were minutes from being (deservedly) destitute 10 years ago are now a permanent aristocracy.
Just look at the numbers. The average finance-sector salary last year was over $375,000, or five times the rate of the rest of the private sector. While the rest of the economy mostly ran in place, just the average Wall Street bonus grew 17 percent in 2017, to $184,220, or about three times the median income for an American household.
The companies enjoy a vast smorgasbord of seen and unseen subsidies, even earning interest on their reserve capital (a trillion-dollar perk the Fed gave them after the crash, essentially paying banks to be banks). Most of the biggest banks pay little to no tax, a serious problem Trump has made worse.
The “merger” committed the governments of Europe and America to unwavering overt and covert support of the finance sector. Scandals of worsening gravity kept popping up after 2008 – from the flash crash to LIBOR to HSBC’s $850 million drug money-laundering fiasco – and regulators kept quietly making them go away. Just like actual aristocrats, employees of these firms do not go to jail, even for serious crimes they admit committing.
The crisis response dramatically accelerated two huge problems. First, we made Too Big To Fail worse by making the companies even bigger and more dangerous, through the supposedly ingenious litany of state-aided mergers arranged 10 years ago this weekend. Wells Fargo is bigger, Chase is bigger, Bank of America is way bigger. In the next crisis, letting losers lose will be even more unimaginable.
Secondly, an already-serious economic inequality issue became formalized. The people responsible for the crisis weren’t just saved, but made beneficiaries of another decade of massive unearned profits. Thanks to zero-interest-rate lending and QE and other subsidies, they are making more money than ever, in the new failure-proof profession known as banking with a government guarantee.
One market analyst this week described the business model of too big to fail banks in the post-bailout era as being like Brewster’s Millions:
“People at Goldman and JPM,” he says, “many of them do not understand the real reason they’ve been making money hand over fist the last nine or 10 years. If you were running one of these places you would have to really try – like every day – to fuck it up. It would have to be your sole mission when you got up in the morning. Like, ‘I’m off to go fuck things up.’”
Restoring compensation levels was one of the first and most urgent priorities of the bailout. Bonuses on the street were back to normal within six months. Goldman, which needed billions in public funds, paid an astonishing $16.9 billion in compensation just a year after the crash, a company record.
Outside Manhattan, the pain was just starting. In 2008, 861,664 families lost their homes, and homeowners lost a breathtaking $3.3 trillion in home equity (coincidentally, this was the TARP inspector’s estimate for the entire net outlay of the bailout). By 2011, a full 11.6 million homeowners were underwater on their homes.
Out there, in foreclosure – er, flyover – country, the only way out of the crisis was a big hit. You either foreclosed and lost your credit rating forever, or you sold your home, usually the chief investment in your life, at a gigantic loss. But a major principle of the bailout is that the banks never had to take any losses at all. Not one cent.
In the Fed’s bailout facilities, which were specifically designed to absorb the bad loans infecting the economy, the state bought toxic inventory at par, i.e. at full price. Regulators, in other words, didn’t even make the banks take a discount for loans on their books that were a) worthless, and b) may have been created in furtherance of a criminal scheme.
Not only did the state cough up $173 billion to pay AIG’s counterparties in September 2008 – paying full price on billions’ worth of AIG swaps to Goldman and the other gambling banks – but the news later emerged that “rescued,” post-bailout AIG paid $450 million in bonuses to the employees of AIGFP, the tiny swaps unit that had nearly destroyed the universe with its insane mismanagement and greed.
In other words, everyone in the upper echelon of the finance community got Paid In Full in the bailout, even the exact people who screwed up the worst. But outside Manhattan? It was like Warren Buffet’s partner Charlie Munger sneered: People should just “suck it in and cope.”
The biggest victims in this miserable story turned out to be poor, nonwhite, and elderly. One of the main things the financial press missed in its countless crash post-mortems is that the subprime scam was significantly about race. In its particulars, it was really just a rehash of ancient race crimes like “contract selling,” a predatory white-on-black home loan scam from the Jim Crow days that often involved no money down, but severely punitive rates.
The housing rush similarly involved no-money-down “100%” mortgage deals, often given by rich banks to poor minorities. The most infamous example was probably Wells Fargo’s efforts to push toxic “ghetto loans” on “mud people” in Maryland.
The housing bubble devastated black and Latino homeowners, disproportionately to white counterparts. The James Woods/Dick Fuld remark about crack dealing wasn’t far off. Subprime blighted minority neighborhoods with similar speed and ferocity. Debt was the crack of the early 21st century. And we bailed out the dealers.
For years since, pundits have been scratching their heads over the rise of “populism,” wondering why the public refuses to accept seemingly obvious economic plans like austerity. The money’s gone. Don’t they understand that belts need to be tightened?
One of the head-scratchers was bailout architect Ben Bernanke, who in 2015 had the stones to publish a memoir called The Courage to Act (his protégé Geithner’s self-congratulatory tome was called Stress Test).
Despairing at what the Times described as the “messy maw of democracy,” Bernanke asked: Why did the public keep embracing the bombast of politicians like audit-the-Fed advocates Bernie Sanders and Ron Paul (who only wanted to know where all those trillions went), when it could just be trusting the “orderly, thoughtful decision-making” of the bailout architects?
After being similarly confused by a lack of public enthusiasm for his renomination, Bernanke decided to accept the advice of an unnamed senator, who essentially told him that sometimes, you just have to “throw some red meat to the knuckle-draggers.”
Imagine how dense you’d have to be to need 10 years, and the election of Donald Trump, to realize this.
These are the people who got Trump elected. Popular media myths may insist otherwise, but people in charge have to be this clueless and arrogant in order for “Anyone but…” to have real ballot appeal.
“Anyone but” is what we got, and will get again, until someone gets serious about undoing the damage caused by that awful deal made 10 years ago this weekend.