'Total Moral Surrender': Matt Taibbi Unloads on Wall Street, Inequality and Our Broken Justice System

His relentless coverage of Wall Street malfeasance turned him into one of the most influential journalists of his generation, but in his new book, “The Divide: American Injustice in the Age of the Wealth Gap,” Matt Taibbi takes a close and dispiriting look at how inequality and government dysfunction have created a two-tiered justice system in which most Americans are guilty until proven innocent, while a select few operate with no accountability whatsoever.

Salon sat down last week with Taibbi for a wide-ranging chat that touched on his new book, the lingering effects of the financial crisis, how American elites operate with impunity and why, contrary to what many may think, he’s actually making a conservative argument for reform. The interview can be found below, and has been lightly edited for length and clarity.

So, what is “The Divide”?

The book is really just about why some people go to jail and why some people don’t go to jail, and “the divide” is the term I came up with to describe this phenomenon we have where there are essentially two different criminal justice systems, one that works one way for people who are either very rich or working within the confines of a giant systemically important institution, and then one that works in another way for people who are without means. And that’s what the book is about.

A point you make in the book, though, is that the justice system is starting to treat people who aren’t poor or part of a marginalized group with a level of brutality we tend to think is only reserved for the oppressed.

I made a conscious decision to start the book with the story of Abacus Federal Savings bank, which is this little bank in Chinatown. The people who run that bank were not poor. They weren’t even what you would typically classify as members of the victim class … But why was that bank prosecuted and why was Goldman Sachs or Chase not prosecuted? What I was trying to get at was, in this new reality, [legal authorities] consider it not feasible to go after companies of a certain size, and [Abacus] is how small you have to be now to be targeted …

There was an SEC commissioner who talked about “shot selection,” like in basketball, [and] how you should go for the baskets with the greatest chance of scoring. So while it may be more satisfying to go after the bigger companies, you’re more likely to get a successful action against a smaller company.

So it’s not just about poor people, it’s also just about the way the regulatory system works. Bureaucracies organically flow toward the easier result, and the easier result is always a smaller company, an undefended person, a low-level drug dealer. They hesitate before it decides to proceed against a well-heeled, well-defended company [against which] they’re going to have to fight for years and years and years just to get the case in court … It’s not just about the poor, it’s more about how there’s a class that enjoys impunity and then there’s everybody else.

Do you think this is a new development?

Well, certainly the rich have always had it easier than the poor. I think that’s a story as old as a story can be. But what we’re seeing recently — and I tried as much as I could to trace this — is that there have been a couple recent developments that have significantly worsened the situation, both going back to the Clinton years: Clinton signs on to welfare reform, Clinton and the Democrats begin to court the financial services sector and begin to adopt deregulatory policies.

So now you have political consensus in both parties on both issues; both have the same approach to poverty, to people at the bottom, and they have the same approach to enforcement. And so what begins as deregulation of Wall Street concludes, ultimately, in potentially non-enforcement of crime; and what begins as being “tougher” on welfare cheats in the ’90s, and being tougher on the whole process of giving out benefits, devolves into something pretty close to the criminalization of poverty itself … And that’s just something that happens naturally when you have a political consensus, which is what we have now. Adding in the additional factors of the Holder memo —

Would you mind explaining the Holder memo?

Sure. Holder, as deputy attorney general in the Clinton years, outlined what was actually sort of a “get tough on crime” document. He gave prosecutors all these tools to go after big corporations. But, at the bottom [of the memo], he outlined this policy called “collateral consequences,” which was — all it really said was, if you’re a prosecutor and you’re going after a big corporation that employs a lot of people, and you’re worried about innocent victims, you can seek other remedies. Instead of criminally prosecuting, you can do a deferred prosecution agreement, a non-prosecution agreement or, especially, you can levy fines.

When he wrote that, it was nearly a decade before the too-big-to-fail era, but when he came back to office [as Obama's attorney general], this idea, which initially had been completely ignored when he first wrote it, suddenly [becomes] the law of the land now, insofar as these systemically important institutions are concerned. The administration’s come out and overtly talked about collateral consequences and talked about [how] they can’t go against companies like HSBC and UBS because they’re worried about what the impact might be on the world economy.

What’s interesting about it is that this idea suddenly matches this thing that happened with our economy where we have the collapse of the economy in 2008, [and] instead of breaking up these bad companies, we merged them together and made them bigger and more dangerous. Now they’re even more unprosecutable than before, now this collateral consequences idea is even more applicable. And that’s the reality we live in now; it’s just this world where if you can commit an offense within the auspices of a company like that, the resolution won’t be a criminal resolution, it will be something else.

The argument is similar to why they said they couldn’t prosecute people for torture: because the CIA is systemically important, because we can’t risk pissing off the national security community, because we can’t risk disturbing the national security system.

And where does it end? We’re sitting in the offices of “The Intercept” right now. What if you say you really want to pursue the illegal surveillance program? How could you do it? It’s a $75 billion mechanism that isn’t just contained in the United States. It’s across multiple countries; it doesn’t exist in any one place; it’s everywhere. If you were to move against the smallest member of the conspiracy, you’d have to involve thousands of people. It’s impossible to even conceive of what that kind of [system-preserving] approach would be.

So, yeah, that’s exactly what the situation is. We have companies that are essentially beyond the reach of what we would traditionally think of as the law, which is a crazy concept because, even back in the ’70s, it was reinforced in every American’s mind that even the president could be dragged into a criminal case. And now, we can’t even conceive of taking Lloyd Blankfein to court for lying to Congress.

An unspoken assumption undergirding this logic is the idea that these systems which we can’t mess with are actually working. As I’m sure you’re aware, former Treasury Secretary Tim Geithner’s memoir is now out, and in the reviews I’ve read, there’s something of a consensus view that the book shows how Geithner’s completely internalized the idea that the financialization of the economy is ultimately good for everybody. So when people bring up all the things he could have done but didn’t do, his response is, Well, this is a good system, basically, and the most important thing is to keep it functioning.

So what’s the answer to that?

I’d say it inevitably makes a more radical response necessary.

I mean, it’s funny, [Geithner's] shifting rationale … because the initial rationale, when Geithner first came to office and the economy was still fragile … is that he was concerned about the consequences of what he called “market-altering” prosecutions. He was worried that … if he were to suddenly delve into the dealings of a Countrywide — which might have the capacity to bring down Bank of America or AIG, which they were trying desperately to rehabilitate in its pseudo-nationalized state — [that] the economy was too fragile.

Well, we’re five, six years out of the crisis now, and the economy is ostensibly stabilized enough that we could theoretically entertain those kinds of prosecutions, but, exactly as you said, the rationale has kind of shifted to “This is a functioning system; it would cause too much damage to a fruitful and essentially functional international economy to take on these firms.” So we’ve kind of made the strategic decision to resolve these matters with this crude system in which [authorities] just take a check from HSBC for working with drug traffickers, or they take a check from UBS for raiding LIBOR. That’s much more radical than “Let’s not fuck with the economy while we’re still in the middle of a crisis.”

And additionally, by the way, part of Geithner’s justification for everything that happened is that the bailouts worked. And I think there’s a community of regulators who are in that camp, who feel like we did what we had to do to keep it all from falling down. So, they say, “Why would we want to go back and open that Pandora’s box again? We had to make these difficult decisions. The bailout was maybe distasteful, but it worked. So let’s not go and dig that all up again.”

But that conflates different issues. Do we give all these companies a pass for robo-signing? For mass perjury? Do we give them a pass for subprime mortgage fraud? Do we give rating agencies a pass for giving out phony ratings? That doesn’t make sense in terms of helping the economy become more functional and more able to serve the needs of everybody. All it really does is allow people to get away with crimes.

Some elites also argue — both in regard to the financial crisis as well as the torture regime — that we should be sympathetic to regulators or torturers because they were operating in a chaotic and stressful environment. We weren’t there, so we can’t judge, basically.

This is another thing that’s in my book. Lehman Brothers, right? So, this huge fiasco happens with the sale of Lehman Brothers to Barclays … Barclays bought off insiders at Lehman to basically to rig the sale in Barclays’ favor … And when the creditors who got screwed out of billions of dollars tried to get the courts to reopen the matter, the judge in the case, Judge Peck, explicitly came out and said, Well, it’s sort of like war, where one can talk about the fog of war, we can talk about the fog of Lehman. This is an extraordinary situation, things were happening, decisions were made. It’s exactly as you said, the justification essentially becomes: shit happens. And that’s crazy. It’s total moral surrender, and just like the torture issue, there’s the “How can you judge if you weren’t there?” idea. I mean, that takes away our ability to judge anything if that justification holds. That’s just crazy.

To make a reference to our shared alma mater [Bard College], this line of argument reminds me of something Hannah Arendt once wrote — I think it was in “Origins of Totalitarianism,” but I’m not sure — which was, essentially, that people are more able to make the right judgment about a situation when they’re not in it. When you’re not in the middle of something, you’re more able to see it from every angle and draw a fully informed, rational conclusion.

That’s absolutely true. There was a kind of collective Stockholm Syndrome that formed around the entire financial services sector and the regulatory sector. They were very much thrown together in the middle of this crisis, innocent and guilty alike, and they crafted this solution to get us all out of it. And things were learned about what had gone on before 2008, but they essentially collectively decided they weren’t going to look into those things because they weren’t a part of the solution for getting out of the crisis.

They were the wrong people to judge what was happening during that period. They really needed outside, independent observers to go in and look to see [whether] was this really fraud or [whether] was this market mania, overzealousness. And every sane observer who has looked at it has said it was fraud, it was mass criminality — and [the financial sector is] not really the people you would want to ask for an objective opinion about that stuff.

That view goes so strongly against the rationale Obama gave when he first announced his economic team. Critics said, “The people you’ve picked to fix this mess are the ones who created it to begin with!” And Obama and his team would say, “Well, who knows it better?”

Exactly — they brought in all the people who had helped to repeal the Glass-Steagall Act, who helped push through the Commodity Futures Modernization Act. Not only did they create too-big-to-fail essentially through the Gramm–Leach–Bliley Act but they … greatly accelerated the financialization of the economy with the total deregulation of the derivatives market. And these are the people you’re going to bring back to sit in judgment of what went on? They were the people who are screwing up to begin with — exactly the people youdon’t want to have looking at this thing.

I started covering this Wall Street story way back in late 2008, and, from the very beginning, I heard disappointment on Wall Street from financial professionals who said Obama had missed this teachable moment. Here’s this politician with these great communication skills, who could have come in and explained to people what had happened before 2008, that the banking sector had decided to massively engage in this totally socially useless activity of creating toxic mortgages and selling them off to people all around the world. And instead of doing that, instead of creating a modern-day Pecora Commission and getting to the bottom of it and creating new and safer vehicles for people to trade in, they just threw a bunch of money at the problem and brought in all the same hacks who had created the problem and tried to sweep it under the rug.

Naming your book “The Divide” — was that intended at all to be a nod toward “The Great Divergence”?

No, it wasn’t intended to be that. I really struggle with titles. And headlines also. “Spanking the Donkey” was a really good title. I liked that one a lot.

“The Divide” is a little bit more of a serious book [than my others]; there’s less humor and less of that kind of jokey narrative stuff than in anything else I’ve written. So I think it’s an appropriate title, it seems to me.

I bring it up because it feels like wealth inequality is kind of this specter that’s hovering above the whole discussion of the two legal systems.

It’s all related. The Thomas Piketty thing, why are people interested in that? Elizabeth Warren’s book, Michael Lewis’s book, what Glenn’s doing over there with “The Intercept” — it’s this growing story about institutional inequality that is getting more and more pronounced with each passing year. And the impunity of certain institutions and certain individuals is growing all the time. It’s a question that people are thinking about. Ten years ago, 15 years ago, you would never have seen a book like Thomas Piketty’s flying off the shelves, because it would have been too taboo for anyone to be asking out loud if there’s anything inherently dysfunctional about our form of corporate capitalism. But people are asking that question now because it’s just so obvious and ubiquitous. Not just in the criminal justice system that I’m writing about, but in everybody’s life now. So yeah, I think we’re all kind of talking about the same thing; it’s just we’re talking about different parts of it.

I think looking at its effect on the criminal justice system is especially useful, too, because it’s evidence of Piketty’s argument about how inequality isn’t just bad economically, but is corrosive to our values, it’s a problem —

Morally.

Yes, morally.

Morally, it doesn’t work anymore. You just cannot have a society where people instinctively know that certain people are above the law, because it will create total disrespect for authority among everybody else. And that’s completely corrosive. You need to have people believing in the system to some degree — even if it’s just an illusion, you need to have them believing. And that was … another thing I was trying to get to in this book, the difference between what happened in the Bush years, with the scandals with Adelphi and Enron and Tyco, and what happened now, [when] they just stopped seeing the necessity of keeping up appearances. They didn’t even make a few symbolic prosecutions, and so it leaves the entire public with this glaring statistic that there were no prosecutions and there was massive crime. How does that make anybody else feel? How does it make you feel when you pay a speeding ticket, you can’t write that off, but HSBC can write off its $1.9 billion fine for drug trafficking? People start to think about these things, and they start losing their faith in the system and it doesn’t work anymore. It’s funny, because when they talk about income inequality on the campaign trail and in these elections … They always talk about it in this unthreatening, antiseptic way, and it’s just so much more extreme than that. It’s much broader and more disgusting problem than the way they typically present it in our political debate. So that was another thing I was trying to do, was to try to bring out the grotesque nature of the whole thing.

To your point about accountability, it reminds me of what some Nixon supporters like Ronald Reagan said during Watergate, before Nixon resigned, about the president’s cronies: They did things that were illegal but weren’t,  you knowcrimes.

Exactly. I heard that and very similar expressions all throughout this process. They weren’t crime crimes. Like, what does that even mean? There’s a difference between committing a crime and just breaking the law? There really isn’t a difference, and especially — even when you dig under the surface of what the malefactors and the villains in my book did — they really were crimes. If you saw “Scarface” and that scene when Tony Montana is walking into the bank with his duffel bags full of money and walks out without the duffel bags, well, that’s what HSBC was doing, they were washing the money for murderers. Price fixing? I mean, c’mon, that’s what the mafia does. Bribery? The Jefferson County case where they’re bribing local officials to get them into bad swap deals? It’s organized crime.

But in many cases they’re paper crimes so they don’t seem so bad, or they’re merely enabling somebody who’s violent so they’re not the person with actual blood on their hands, or it’s pennies at a time from millions of people — the “Office Space” model of crime — so people don’t feel like it’s a big robbery. I mean, that’s a crazy distinction. It’s an Orwellian expression.

You know, with your comment about how people need to believe in the system to some degree, it occurs to me that in a fundamental way, you’re actually making a small-c conservative argument. You’re not saying we need to burn everything to the ground and start over, you’re saying we need to stick with the principles we supposedly all believe in.

People forget that all my sources come from Wall Street. They’re all capitalists, they’re all ardent capitalists. They grew up, their passion in life was reading Adam Smith and believing in that whole world. And I came into this story six years ago, whatever it was, not really knowing a whole lot about it, but certainly I never would have described myself as an ardent capitalist … When people ask me what the solutions are to these problems, for me, the fastest shortcut to everything being cleaned up is disentangling the government from its unnatural support of these too-big-to-fail institutions, forcing them to sink or swim on their own in the real free market. I never would have imagined myself making that argument five or six years ago, but that’s the argument … These people, not only are they not being prosecuted, but they’re not subject to the normal forces of the market anymore, and in a way that enables them even more … If you were to force these companies to sink or swim on their own they’d be vaporized instantly. We see this every time there’s any hint the government is going to stop bailing these companies out or may consider not doing it in the future — they lose billions of dollars in market capitalization overnight …

It’s a very conservative argument [I'm making]. I’m not advocating for socialism; I’m advocating for the “Schoolhouse Rock” version of what we were taught about democracy and capitalism, and we have a long way to go just to get back to that.