Matt Taibbi's Great Squid Hunt
The epic failure of America's financial system in 2008 was, among other things, a sobering gloss on the American romance with technical expertise. The tidal onrush of securitized debt that kept the housing bubble afloat was more than the simple byproduct of decades of deregulation in the nation's financial sector; it was also the handiwork of a new generation of market analysts known as the Quants. These ingenious souls harnessed arcane financial instruments like collateralized debt obligations (CDO) and credit default swaps (CDS) to magically scrub bad housing debt of all apparent risk as it was traded up the Wall Street food chain.
The rickety structure was bound to collapse, but the amazing thing is that even though the Quants and all their schemes have been exposed as fraudulent, the cult worship of market savants has gone on unabated. Look no further than the Obama administration, which met the challenge of leading the economy out of the worst recession in seventy years by retaining Ben Bernanke, the Fed chair who'd presided over the meltdown; promoting Timothy Geithner, a principal architect of the shoddy TARP bailout of Wall Street, to treasury secretary; and recruiting Larry Summers, a stalwart advocate of Clinton-era deregulation during his own treasury tenure, as its chief economic adviser. (Summers announced that he would decamp from his post at the head of the Council of Economic Advisers in September, only to return to that other citadel of technocratic hubris he had long ago captained and, not incidentally, helped steer into its own economic peril: Harvard University.) It was a bit like the government subcontracting all future deepwater drilling oversight to BP.
When the idolatry of the market, and market expertise, becomes this perverse and unchecked, the value of a stubborn autodidact like Matt Taibbi stands out in high relief. Heeding the shifting tenor of the times, Taibbi, a contributing editor for Rolling Stone, moved from the campaign beat into finance journalism shortly after the 2008 meltdown. At the outset, he muffed a few things. In his now (in-)famous July 2009 takedown of Goldman Sachs, which placed the investment house at the center of three signature market bubbles—the 1920s joint stock fiasco, the '90s Internet mania and the recent housing Guignol—he overstated the firm's power to drive markets while mischaracterizing crucial Goldman operations such as CDO exchanges as derivatives deals. But despite such missteps—which earned Taibbi the concerted scorn of most of the financial press—the brunt of his argument about Goldman's particular outsize role in the housing debacle has been proven correct, and has gained remarkable traction in our emerging and impressionistic understanding of the past decade of Wall Street larceny. When Taibbi quoted a hedge-fund operator as saying that Goldman's initiative to sell short on the same mortgage deals it systematically inflated in pitches to other investors was nothing less than "securities fraud," the same financial journalists derided Taibbi as an irresponsible naïf—until the SEC charged the bank with securities fraud for constructing just those kinds of deals, in a prosecution that eventually produced the largest civil settlement in the regulatory agency's history. After Goldman-brokered interest-rate swaps proved instrumental in the debt meltdown of the Greek economy in February, Atlantic business and economics editor Megan McArdle's earlier, airy dismissal of Taibbi's reporting on Goldman's hand in the interest-rate markets sounded like a grim joke: "No one, as far as I know, is now proposing that we need to curtail the use of interest-rate swaps." Well, perhaps someone should have.
In Griftopia, Taibbi revisits the whole Goldman saga, and does cop, in very general terms, to his past oversights, noting that in retrospect he and his Rolling Stone editors "left out quite a lot, a problem I've tried to rectify here by adding some to the original text." Happily, though, the pugnacious Taibbi—whom, I should note, I've edited but never met, and have previously defended in my own autodidactic and regrettably imprecise way—doesn't confine his new book to Goldman score-settling. Rather than burrowing further into the financial-press turf wars, Taibbi builds an account of bailout America around a broad indictment of the way the political class and the investor class intersect and sometimes collude. "What has taken place over the last generation," he writes, "is a highly complicated merger of crime and policy, of stealing and government.... The financial leaders of America and their political servants have seemingly reached the cynical conclusion that our society is not worth saving and have taken on a new mission that involves not creating wealth for all, but simply absconding with whatever wealth remains in our hollowed-out economy. They don't feed us, we feed them."
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It's a social contract that transcends the tedious partisan shadow play Taibbi dutifully recorded during the 2008 campaign, and at key points in Griftopia he underscores the painful irrelevance of our political process to the consolidation of a new political economy. The American electoral scene "grounds our new and disturbing state of affairs in familiar forty-year-old narratives," he observes. "The right is eternally fighting against Lyndon Johnson; the left, George Wallace." Meanwhile, "political power is simply taken from most of us by a grubby kind of fiat, in little fractions of a percent here and there each and every day, through a thousand separate transactions that take place in fine print and in the margins of a vast social mechanism that most of us are simply not conscious of."
These fine-grained transactions lie at the heart of the mortgage fiasco. For example, the interest-rate swaps that upended Greece and were a key factor in our housing market's collapse also midwifed an ingenious investment tool called the "CDO squared"—that is, a debt instrument composed wholly of other debt instruments. These contrivances allowed substandard BBB or lower mortgages to get nudged back up into AAA territory; and in the heat of a bubble, all that a broker of fluid capital usually needs to hear is the simple "AAA" incantation to set the geysers loose. As Taibbi explains, the Quants' brave new parcels of repackaged debt were also appealing to international bankers because of their transaction fees, measured in hundredth-percentage "basis points."
Taibbi brings home the dramatically out-of-kilter state of the bubble market by recounting the global investing adventures of an anonymous banker he calls Andy. (As Taibbi explains in a note on sourcing, he grants anonymity to sources in the financial industry in order to protect their professional standing. He uses anonymous sources mainly to confirm already reported details of the meltdown; in only one case—the back-room deal to bail out the moribund American International Group—does Taibbi rely on an anonymous source to break news.) As Taibbi sums up the process, CDO-squared transactions "allowed Andy's bank to take all the unsalable BBB-rated extras from these giant mortgage deals, jiggle them around a little using some mathematical formulae, and—presto! All of a sudden 70 percent of your unsalable BBB-rated pseudo-crap ('which in reality is more like B-minus-rated stuff, since [consumer lending] scores aren't accurate,' reminds Andy) is now very salable AAA-rated prime paper, suitable for selling to would-be risk-avoidant pension funds and insurance companies. It's the same homeowners and the same loans, but the wrapping on the box is different." At the crest of the bubble, another global banker, whom Taibbi calls Miklos, recalls fielding a bond deal offering him fifty basis points above the standard international borrowing rate, known as the London Interbank Offered Rate; he was then able to turn around and repackage the original bonds into a credit default deal with the now-infamous flamed-out-and-bailed-out AIG for ten points above the London rate. In other words, Miklos's bank would collect forty basis points—translating into millions in fees—for nothing more than rechristening debt instruments with different nomenclature. "It was so unreal, my bosses wouldn't let me book this stuff as profit," Miklos says now. "They just didn't believe it could be true." Miklos had lucked into the early part of a global run on these AIG-brokered deals—but it couldn't last. "Suddenly someone is buying like five hundred million dollars of this stuff and getting the same swap deal from AIG," he says. "I'm getting blown out of the water."
It's worth remembering, in the thick of all this surreal detail, that these wild market lurches happened because credit default insurance was completely unregulated: no bank had to show underlying assets to any counterparty, let alone to the public. "Wall Street is frequently compared by detractors to a casino," Taibbi writes in summing up this asinine state of affairs, "but in the case of the CDS, it was far worse than a casino—a casino, at least, does not allow people to place bets they can't cover."
The other deformed stepchild of deregulation in this set piece was, of course, AIG, the firm that became the CDS guarantor of first resort for profit-hungry investors. AIG was once a simple insurance company, but under the dispensation of the 1999 Gramm-Leach-Bliley law, which wiped out New Deal prohibitions against the consolidation of insurers, investment banks and commercial banks, AIG soon morphed into an extremely shortsighted purveyor of securitized debt. (Whether credit default swaps can technically be viewed as insurance is, rather hilariously, still a subject of controversy among state and federal regulators.) The AIG Financial Products division is already a byword for bubble excess in the nation's new financial lexicon; under the deranged leadership of division head Joe Cassano, the financial products team leveraged some $500 billion into the CDS market (thereby permitting Cassano to pocket $280 million during an eight-year period of his twenty-year run of the shop) before the gradual collapse of the housing market caused a run of collateral claims on all the default-swap debt as borrowers defaulted.
Leading the pack of collateral claimants was Taibbi's old nemesis, Goldman Sachs. What's more, as Cassano's division brutally unwound during the crazed 2008 run of Wall Street lenders on the firm, Goldman mounted a pincer-like assault on another troubled AIG division, Asset Management, whose woes jeopardized the health of the company's erstwhile core business of insurance—as well as the scores of state insurance and pension plans that were lashed to the mast of the sinking division. But as Taibbi explains in an illuminating account of the behind-the-scenes negotiations to rescue AIG from oblivion, the run on the company's Asset Management arm didn't really make sense, since its insurance securities, unlike the dismal CDS operation, still retained a good deal of underlying value.
At the time, federal and state regulators urged caution on creditors holding Asset Management paper, but Goldman was having none of it. In the conclave of bankers frantically convened to help determine AIG's fate, Goldman CEO Lloyd Blankfein insisted long and loudly, as one of Taibbi's informants put it, "that he wanted his fucking money." As a result, the deal's overseers faced a Hobson's choice: "Either the state would pour massive amounts of public money into the hole in the side of the ship, or the Goldman-led run on AIG's sec-lending business would spill out into the real world. In essence, the partners of Goldman Sachs held the thousands of AIG policyholders hostage, all in order to recover a few billion bucks they'd bet on Joe Cassano's plainly crooked sweetheart CDS deals."
The ultimate reasons for Goldman's hardline stance are still inscrutable, like much of the detail involving the AIG bailout, though it's hard to dispute Taibbi's dour assessment. In his view, Goldman's AIG ultimatum was like the Mafia's neighborhood business model as laid out in Martin Scorsese's Goodfellas: pump up a local restaurant or bar with supplies extorted from your protection-paying debtors, and when the thing is leached of its last profit, set it afire for the insurance money. "In the end, Blankfein and Goldman...did a mob job on AIG, burning it to the ground for the 'insurance' of a government bailout they knew they would get, if that army of five hundred bankers could not find the money to arrange a private solution." In this, Taibbi argues, Goldman was no different from the shakedown artists pumping out "no down payment" adjustable-rate mortgages to borrowers who had no earthly hope of making their adjusted ARM payments—"the kind of shameless con man who preyed on families and kids and whom even other criminals would look down on.... The only difference with Goldman was one of scale."
Such rhetorical flourishes can often seem excessive, and Taibbi can be something of a Hunter S. Thompson 2.0, both in his exuberant way with profanity (his analytically spot-on chapter on former Fed chair Alan Greenspan, for instance, bears the frattish title "The Biggest Asshole in the Universe") and his penchant for colorful metaphor (thanks to his 2009 Rolling Stone article about Goldman, he and the firm will forever be yoked together on Google with the expression "vampire squid"). Yet Taibbi is correct to insist that at a moment of maximum crisis, when other bankers as well as government regulators were feverishly trying to work out a scheme to stave off a ruinous run on insurance and pension funds, Goldman's behavior in the AIG episode makes sense only as a textbook example of gangster capitalism. And it's hard to avoid the corollary conclusion that a federal economic team that has extravagantly rewarded this bottom-feeding operation with virtually free money at the Fed discount window is a hopelessly corrupt police force, of the sort moviegoers might recall from Serpico or Training Day.
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It bears reminding that throughout the nation's history, the lords of finance have not hesitated to ransack the economy during a national emergency. In 1895, for instance, the nation was suffering an acute contraction of gold reserves, under the administration of Grover Cleveland—another stolid probusiness Democrat in the Clinton-Obama mold. As the nation's bankers hoarded their private reserves of gold, Cleveland grew increasingly desperate in his efforts to persuade investment titans to negotiate a gold-backed bond sale in order to prevent the already ruinous financial panic from escalating to a full-scale depression. Enter the financier J.P. Morgan—whose name lives on, fittingly enough, in Morgan Stanley, which together with Goldman is the only investment banking colossus left standing after the '08 calamity. Through his firm's extensive connections in London, Morgan assembled a syndicate of global bankers to rig a $65 million government-issued bond sale at what was then an unheard-of rate of 3.75 percent. When the hapless Cleveland staged an eleventh-hour meeting with the banking titan, a Treasury official informed him that, in the wake of the latest run, New York gold reserves had dwindled to $9 million. At that point, Morgan interjected: "Mr. President, the Secretary of the Treasury knows of one cheque outstanding for 12,000,000 dollars. If this is presented today it is all over."
Cleveland promptly caved to Morgan's demands; the overnight yield on the deal for the Morgan syndicate was placed at somewhere between $5 million and $9 million—real money back in 1895. Plus, there was an abundance of longer-term returns, which in structural terms at least, closely parallel the sort of deal-making Taibbi describes at the dark heart of the housing bubble some 110 years later. The Morgan "syndicate borrowed exchange in London, on its own credit, and thus sold bills for American currency, pegging the world exchange rate of the dollar at a point favorable to their gold operations," wrote muckraking journalist Matthew Josephson in his chronicle of the episode. "Morgan also supervised and controlled for several months the gold reserve of the Treasury. Every banking house and exchange dealer in New York having important European connections was bound to the undertaking by being given an allotment of the syndicate's bonds at profitable rates."
In retrospect, even Cleveland—a diehard gold bug—blanched at the scope of the shakedown. "I am afraid as we triumph our party loses and the country does not gain as it should," he confided to Thomas Bayard, the US ambassador to Britain. The insurgents within Cleveland's Democratic Party took a much harsher view. When the Morgan deal was announced, Nebraska Congressman William Jennings Bryan—a bitter foe of the gold standard who would supplant Cleveland as the party's national leader the following year—rose on the floor of Congress to denounce it as an illicit deal "with the representatives of foreign money loaners. It is a contract made with men who are desirous of changing the financial policy of this country...they come to us with the insolent proposition, 'we will give you $16,000,000, paying a proportionate amount each year, if the United States will change its financial policy to suit us.' Never before has such a bribe been offered to our people by a foreign syndicate."
The chief distinction between the present Gilded Age and its nineteenth-century forerunner is that the lines of extortion are reversed. Whereas Morgan and other private bankers used their own ample access to credit and gold reserves to shore up the public treasury on the most favorable terms they could dictate, now capital-starved lending institutions turn on one another in the scrum for government bailout money.
Also, Congress no longer harbors any crusading populist reformers like Bryan. Instead, we have the pasteboard populism of Tea Party conservatism, which tirelessly advertises its superior heartland virtues in pursuit of banker-friendly tax policies. As Taibbi dryly notes, one key bailout deal—the government-orchestrated merger of the failed Wachovia Bank with Wells Fargo—was 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...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."
Nor did either man note the exceedingly generous terms that Treasury Secretary Hank Paulson used to induce Wells Fargo to swallow Wachovia's toxic debt: $25 billion in bailout funds, together with an alteration in the tax code to net Wells Fargo another $25 billion or so. In other words, Taibbi writes, "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."
A populace habituated to a bubble economy and a political system fattened by its spoils isn't equipped to process a bubble's inevitable bursting. As Taibbi writes in the bleak concluding pages of Griftopia, the financial crisis briefly "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." And that, he rightly notes, isn't a thinkable outcome for the leaders of the American financial oligarchy. "If the people must politick," as he paraphrases their thinking, "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."
If this deadlock is ever to be broken, Taibbi's angry, astute and detailed indictment is a great starting point for citizens looking to shake off the past decades of pseudo-populist stupor stoked by the leaders of both major parties. Should the mobbed-up status quo continue to hold, well, then we should all recall that Martin Scorsese's de facto sequel to Goodfellas was Casino.