How the New York Times Hides the Truth About Wall Street's Catastrophic Misdeeds
The following piece is a co-exclusive with Wall Street on Parade.
The paper of record is in serious need of a fact checker when it comes to whether the Glass-Steagall Act could have prevented the financial crisis. Promoting ignorance could help sink the financial system -- again.
On April 8, 1998, the New York Times ran a slobbering editorial pushing for the repeal of the Glass-Steagall Act. It sounded like it came straight from Sandy Weill’s public relations flacks. Weill, head of Wall Street brokerage and investment firms Smith Barney and Salomon Brothers, as well as insurance company, Travelers Group, wanted to merge with a large commercial bank, Citicorp, owner of Citibank, and get his speculative hands on that pile of insured deposits.
The merger was illegal at the time under the Depression-era Glass-Steagall Act. The legislation was enacted after the 1929 stock market crash to keep speculative gambling on margin and risky underwriting of stocks away from conservative savers’ bank deposits. Jamie Dimon, today’s chairman and CEO of JPMorgan Chase, who just this year oversaw the blow up of $2 billion of insured depositors’ funds through risky derivatives trading, was Weill’s first lieutenant at the time of the merger and helped to mastermind the deal. The merged firm was called Citigroup.
The Glass-Steagall Act (formally known as the Banking Act of 1933) created the Federal Deposit Insurance Corporation (FDIC) and barred banks holding insured deposits from merging with securities firms or investment banks. The Travelers/Citicorp merger was also illegal under the Bank Holding Company Act of 1956 which barred bank and insurance company mergers.
The New York Times editorial gushed:
“Congress dithers, so John Reed of Citicorp and Sanford Weill of Travelers Group grandly propose to modernize financial markets on their own. They have announced a $70 billion merger — the biggest in history — that would create the largest financial services company in the world, worth more than $140 billion… In one stroke, Mr. Reed and Mr. Weill will have temporarily demolished the increasingly unnecessary walls built during the Depression to separate commercial banks from investment banks and insurance companies.”
What the New York Times calls “unnecessary walls” were the bulwarks that stood between the small investor and a rigged looting machine; between another Great Depression and a stable economy; between fair distribution of wealth and a nation with 46 million people living below the poverty level, including one in every five children; between a nation where people were proud to save to buy a few shares of stock and a nation that now reviles everything about Wall Street, from its lousy repentance to its obscene pay to its sappy regulators.
According to a CNN poll conducted October 14 - 16, 2011, 80 percent of Americans say Wall Street bankers are greedy; 77 percent say they’re overpaid; 66 percent say they are dishonest. And that’s likely just what’s fit to print.
Having greased the skids for the financial debacle, the New York Times, instead of doing an intense examination of how it got it so wrong, is now permitting the revisionist history of the crisis through the pen of its financial writer, Andrew Ross Sorkin, who doubles as a co-anchor at the serially conflicted CNBC.
On May 21, 2012, the Times published a piece by Sorkin titled, “Reinstating an Old Rule Is Not a Cure for Crisis.” The premise was that the Glass-Steagall Act would not have prevented the financial collapse -- the very claptrap coming out of the mouths of Wall Street lobbyists into the attentive ears of the Senate Banking Committee. The article put forth the following “facts.”
“Let’s look at the facts of the financial crisis in the context of Glass-Steagall.
“The first domino to nearly topple over in the financial crisis was Bear Stearns, an investment bank that had nothing to do with commercial banking. Glass-Steagall would have been irrelevant. Then came Lehman Brothers; it too was an investment bank with no commercial banking business and therefore wouldn’t have been covered by Glass-Steagall either. After them, Merrill Lynch was next — and yep, it too was an investment bank that had nothing to do with Glass-Steagall.
“Next in line was the American International Group, an insurance company that was also unrelated to Glass-Steagall.”
There are four companies mentioned in those five sentences and in every case, the information is spectacularly false. Lehman Brothers owned two FDIC insured banks, Lehman Brothers Bank, FSB and Lehman Brothers Commercial Bank. Together, they held $17.2 billion in assets as of June 30, 2008, 75 days before Lehman went belly up. Lehman Brothers Banks FSB is where Lehman handled its mortgage loan originations. When the FDIC approved the Lehman Brothers Commercial Bank application in 2005, it specifically noted that the FDIC-insured bank “anticipates acting as a derivatives intermediary, engaged in matched trading of interest rate products, primarily interest rate swaps, as well as forward purchase agreements and options contracts.”
Merrill Lynch also owned three FDIC-insured banks. At an FDIC symposium held at the National Press Club in 2003, Merrill Senior VP, John Qua, explained the banking side of Merrill as follows:
“Merrill Lynch conducts banking in the United States through two depository institutions – Merrill Lynch Bank USA, a Utah industrial loan corporation; and Merrill Lynch Bank and Trust, a New Jersey state non-member bank. We also own a federal savings bank that offers personal trust services to our clients. And we conduct significant banking activities outside the United States through banks in London, Dublin, Switzerland, and elsewhere. The combined balance sheet of our global banks is approximately $100 billion.”
Bear Stearns owned Bear Stearns Bank Ireland, which is now part of JPMorgan and called JPMorgan Bank (Dublin) PLC. According to JPMorgan, “It is the only EU passported bank in the non-bank chain of JPMorgan and provides the firm with direct access to the European Central Bank repo window. It has also been added to the JPMorgan Jumbo issuance programs to issue structured securities for distribution outside the United States.”
As for the statement that AIG was “an insurance company that was also unrelated to Glass-Steagall,” one has the initial reaction to cancel one’s subscription to the New York Times. AIG owned, in 2008 at the time of the crisis, the FDIC insured AIG Federal Savings Bank. On June 30, 2008, it held $1 billion in assets. AIG also owned 71 U.S.-based insurance entities and 176 other financial services companies throughout the world, including AIG Financial Products which blew up the whole company selling credit default derivatives.
What this has to do with Glass-Steagall is that the same deregulation legislation, the Gramm-Leach-Bliley Act that gutted Glass-Steagall in 1999, also gutted the 1956 Bank Holding Company Act and allowed insurance companies and securities firms to be housed under the same umbrella in financial holding companies.
AIG’s annuities are owned by moms and pops all over this country and around the world. In many cases, they represent a significant source of income to retirees. Had AIG been allowed to fail, state guaranty funds for insurance products could have been wiped out and the taint of buying insurance products would have damaged legitimate businesses for a lifetime.
For ongoing evidence as to why insured deposit banks cannot be under the same roof with speculating Wall Street firms, one need only look at what the largest banks in the U.S. are holding today. According to the Office of the Comptroller of the Currency which oversees national banks, as of December 31, 2011, inside the insured banks – not their broker-dealer components – were the following derivative holdings: $70.1 trillion at JPMorgan Chase; $52.1 trillion at Citibank; $50.1 trillion at Bank of America; $44.2 trillion at Goldman Sachs Bank USA.
These insured deposit banks have a tiny fraction of their derivative holdings in assets. For example, JPMorgan Chase has $2.3 trillion in assets in the insured bank. So why does it need to hedge to the tune of $70.1 trillion in derivatives? That’s the crux of the issue. It is not just hedging for the insured bank, it is hedging for its hedge fund clients and corporate clients and institutional clients in the investment bank as well as making proprietary bets to generate profits.
Why should the U.S. taxpayer, through the implied backstop of insured deposits, help JPMorgan make its rich clients richer or eat the losses when the bets go wrong?
Insured deposit banks were meant to function as lenders to individuals and businesses and provide the foundation for stable economic growth in the country. Today, as the recent blowup in the Chief Investment Office of JPMorgan Chase demonstrates, surplus insured deposits which are backstopped by the U.S. taxpayer are being deployed in exotic, illiquid derivatives. And these high-risk gambles are likely to blow up the system for the second time in a decade while the New York Times and Sorkin pedal egregiously bad data to the public.
Sorkin goes on in the article to make another factually indefensible statement:
“Citigroup’s problems are probably the closest call when it comes to whether Glass-Steagall would have avoided its problems. It gorged both on underwriting bad loans and buying up collateralized debt obligations…But Citi’s troubles didn’t come until after Bear Stearns, Lehman Brothers, A.I.G., Fannie Mae and Freddie Mac were fallen or teetering — when all hell was breaking loose.”
By taking Citigroup out of the lead role in the crisis, Sorkin also marginalizes the Glass-Steagall Act. But he’s dead wrong, again.
Bear Stearns got its emergency infusion from the Fed on March 14, 2008 and was bought out by JPMorgan Chase on March 16, 2008. Lehman failed on September 15, 2008; AIG, Fannie and Freddie were all rescued by the government in September 2008. Citigroup’s dire problems began as early as the summer of 2007 according to the Office of the Comptroller of the Currency, regulator of its national bank, and the press was writing about its drastic need for a bailout fund, proposed to be called the SuperSIV, in the fall of 2007. I wrote extensively about its desperate situation in November 2007.
Sorkin wrote the 2009 bestseller Too Big to Fail, a 600-page epic on the 2008 crash. How he researched the book without discovering these pivotal players owned insured deposit banks is mystifying.
According to Gabriel Sherman in a 2009 piece in New York Magazine, the book party for Sorkin, age 32 at the time, was attended by the titans of Wall Street: Jamie Dimon; John Mack, former head of Morgan Stanley; Steve Rattner, a former New York Times reporter who went on to become a Wall Street investment banker and private equity honcho; Ken Griffin, head of the behemoth Citadel hedge fund; and other luminaries.
Sherman reveals in the piece that one of Sorkin’s former editors at the Times called his work “thinly reported or loosely written.” That may not be a big deal if you’re writing gossipy stuff about Wall Street. But when the public has finally gotten the attention of Congress on the topic of restoring the Glass-Steagall Act to save the country from a potentially more apocalyptic meltdown, putting out a spectacularly inaccurate assessment of the role of Glass-Steagall undermines the safety and soundness of the United States.
The New York Times has financial writers who have been delivering consistently reliable information about Wall Street to the public for more than a decade; Gretchen Morgenson stands out in particular. It’s time to let those accurate writers weigh in on the Glass-Steagall Act.