Former Wall Street Player Reveals the Inside World Behind Shady Bailouts to Bankers

By Joshua Holland and Nomi Prins, AlterNet. Posted October 30, 2009.

A former managing director at Goldman Sachs and now a razor-sharp financial muckraker (and regular AlterNet contributor), Nomi Prins understands the labyrinthine world of Wall Street finance, with all its warts, as well as anyone.

In her new book, It Takes a Pillage: Behind the Bailouts, Bonuses and Backroom Deals From Washington to Wall Street, Prins lays bare the whole fetid corpse of the burst mortgage bubble.

It wasn't reckless borrowers and their subprime loans that built the house of cards that has come crashing down around us over the past two years, but an out-of-control finance sector running on a perverse set of incentives that made it incredibly profitable to essentially throw caution to the wind and take on incomprehensible amounts of risk.

Prins exposes the revolving door between Wall Street and Washington and shows how it led to a Wild West mentality on "the Street" that allowed the whole casino to flourish for a time.

And she follows the trillions in direct bailouts, subsidized loans and guarantees shelled out by the taxpayers when the whole thing went belly up, shining a bright light on the shadowy deals that decided which institutions would crash and burn and which others would receive the support needed to stay afloat, feast on the corpses of the fallen and then go on to the record profits and fat bonuses Wall Street's survivors enjoy today.

AlterNet recently asked Prins about the book, where we are in the financial crisis and her views of where we're going.

Joshua Holland: Nomi, throughout the book you refer to the economic meltdown of 2007-09 as the "second Great Bank Depression." What do you mean by that -- give us a sense of the historic connective tissue that exists between these two periods of really intense economic upheaval?

Nomi Prins: I struggled with the appropriate term for this current crisis period but wanted to give credit to the banks that drove us into this whole period, hence the name. Both the Great Depression and the second Great Bank Depression were caused by the exact same thing -- underrestricted financial firms manufacturing products that were fabricated from fancy numbers, inflated with tons of debt on the back of little to substantiate it and sold to investors and each other by crafty salespeople and short-term-oriented greed-induced bankers.

Both are ultimately a result of a plethora of risky bank-led esoteric products and practices going bust on the American public.

Although, we don't have a 25 percent unemployment rate and bread lines today, we do have double-digit unemployment in 139 different metropolis areas (compared to 15 before last fall's bank crisis), the national unemployment rate is close to 10 percent (from 5.8 percent before last fall's crisis) and foreclosure figures are comparatively high for both historical periods.

The Great Depression was catalyzed by the 1929 stock market crash 80 years ago. The Second Great Bank Depression was catalyzed by an industrywide credit crunch, ignited by subprime-loan losses sitting beneath mounds of toxic assets.

So for both periods, it was an overzealous, overleveraged, underregulated banking system that brought the rest of the economy down.

JH: You do a great job detailing the regulatory changes that allowed the bankers to game the system -- the forks in the road that were and weren't taken by previous administrations. Tell me a little bit about that: What was your reaction when all these guys -- the [Ben] Bernankes and [Henry] Paulsons -- argued that nobody could have predicted the outcome of, for example, Congress passing Phil Gramm's Commodity Futures Modernization Act instead of the Predatory Lending Consumer Protection Act.

NP: Well, I wrote a whole chapter in my first book, Other People's Money, right after I left Goldman Sachs, predicting what would happen if you don't regulate credit derivatives, and from what I heard from through the Goldman grumblings at the time, Paulson wasn't thrilled with the book, but had he read it, it might have helped him.

Many people had warned of the ramifications of the Commodity Futures Modernization Act, it's just that no one running the Fed, Treasury Department or certainly any major financial institution cared. The risks were not discussed in the general tidal wave of free-market, megalobbied euphoria of the time.

The government, like any other collection of people, listens to its own. As I wrote in It Takes Pillage, with a revolving door into the government from companies like Goldman Sachs, and the lion's share of its economic advisers spouting the same free-market, deregulatory philosophy, the government is either getting exceptionally bad advice (or anti-citizen advice) by design or sheer willful neglect.

Either way, neither is good. Goldman Sachs, in particular has produced two Treasury secretaries, Robert Rubin under Clinton, and Paulson under [George W.] Bush, proving that partisanship is no match for Wall Street power and influence.

Stephen Friedman, former CEO of Goldman was also chairman of the New York Federal Reserve, while [current Treasury Secretary] Tim Geithner was president there, and they both presided over substantial Wall Street subsidies during the fall of 2008.

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Joshua Holland is an editor and senior writer at AlterNet.

Nomi Prins is a senior fellow at the public policy center Demos and author of It Takes a Pillage: Behind the Bailouts, Bonuses, and Backroom Deals from Washington to Wall Street.

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