Former Wall Street Player Reveals the Inside World Behind Shady Bailouts to Bankers
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JH: But it didn't have to be that way. You argue that the "too big too fail" argument in the context of the Wall Street bailout wasn't so clear-cut. What might the Fed have done -- could it have just said 'No!'? Wouldn't it have devastated the whole economy if it had?
NP: The Fed could have said, no – or even said yes with a whole bunch of caveats, but instead chose to shout a big old YES -- with no strings attached.
I don't believe the economy would have tanked if AIG went bankrupt. Nor would individual insurance policy holders with AIG have lost their policies, which was a popular scare tactic at the time. In some sort of receivership situation, parts of AIG would have kept functioning, while others would be examined and possibly wound down. If that had occurred, we wouldn't be out the $182 billion we're still publicly out of/stuck with, because of AIG subsidies and guarantees, and we certainly wouldn't have written a $12.9 billion check to Goldman Sachs to cover its losses to AIG, which were predicated on contractual arrangements that would have been worthless had AIG gone bankrupt.
The government saved Goldman and others by backing AIG, and that simply wasn't necessary.
The Fed didn't have to allow Goldman and Morgan Stanley to become bank holding companies in a Sunday night fear feast on Sept. 21, 2008, and thereby solidifying the ability of those two firms to access federal subsidies and FDIC backing for new debt they issued.
The Fed definitely didn't have to allow, or better yet, encourage Bank of America to acquire Merrill Lynch, JPM Chase to acquire Bear Stearns and Washington Mutual, or Wells Fargo to merge with Wachovia. All of these megamergers are resulting in greater risk-taking than before the crisis.
What the Fed should have done, most importantly, is give the same, or greater, subsidies to individual or small businesses facing their own credit problems or home foreclosures. If that had happened, it would have been both cheaper and more humane, and it would have stabilized the general economy so that we wouldn't be seeing greater unemployment, record foreclosures and rampant credit deterioration a year after this massive bank bailout that was allegedly supposed to trickle down to help everyone else.
There's an item in the Federal Reserve Act, Item 33, that allows the Fed to use its powers in any way it sees fit (basically) in an emergency. It decided to use those powers to consolidate the bank landscape and bail out Wall Street. Instead, it should have used them to help individuals who are the true foundation of our national economy.
JH: The bailout was of course begun under Bush, but the new administration hasn't pursued a very different course in terms of staving off the next Great Bank Depression. In the book, you say, "Instead of instituting actual sweeping reform, Obama and Co. merely call their ideas reform." Why do you think that is -- is it just a testament to the power of the financial services industry, or the ideologies of the team Obama put together, one heavy with Wall Street vets?
NP: It is sadly, both. Obama never should have chosen Tim Geithner as his Treasury Secretary (incidentally he did so the day after the government handed a massive bailout guarantee to Citigroup, a firm Geithner had once argued didn't have to keep up the same risk-reporting level it had started post Enron anymore), nor have Larry Summers as a key economic adviser.