Griftopia

The Preliminaries

• The reason why most voters will probably never understand bubble economics is that it’s hard as hell to understand.
  • As long as things like securitization, credit default swaps, collateralized debt obligations, etc. are not widely understood, the grifter class will skate on anything it does.
  • Most voters assume that Wall Street makes its money engaging in normal capitalist business and that any attempt to restrain is thinly disguised socialism.
    • And, the Tea Party has made anti-intellectualism a rallying cry, arguing against the idea that it’s necessary to ask the kinds of questions you need to grasp bubble economics.
• Understanding complicated financial instruments and how they were used is the difference between perceiving how Wall Street is a normal capitalist business, and seeing the truth of what it actually is: fraud and crime.
• The belief that total deregulation and pure capitalism is still the political mainstream is astonishing.
• There are two Americas: one for the grifter class and one for everyone else.
  • To most, the government is an all-powerful entity whose attention usually presages financial woe.
  • For the grifter class, the government is a lapdog that is a tool for making money.
  • The grifter class depends on these two positions getting confused. They want average people to believe that what the government is to him, it is also to JPMorgan Chase and Goldman Sachs.
    • Even though they almost destroyed the global economy through their greed and stupidity, we can’t shake the peasant mentality that says the best hope for our collective prosperity is in them creating wealth for us all.
      • That’s the core of trickle-down economics.
    • But the financial leaders and their political servants have reached the conclusion that our society is not worth saving and have absconded with whatever wealth remains. They don’t feed us, we feed them.

U.S. politics generally

• If our politics made any sense, we wouldn’t have two giant parties of roughly equal size fighting over the same 5% swath of undecided voters.
  • Instead, we would have a couple of bankers running against 280 million pissed-off credit card and mortgage customers, which is a more accurate demographic divide.
    • (The top 1% has seen its share of the nation’s wealth jump from 34.6% in 2007 to over 37.1% in 2009, while the wealth of overall Americans went from around $100,000 to $65,000.)

Alan Greenspan

• Alan Greenspan was the former Federal Reserve chair (a quasi-public institution that allowed a federally appointed banking official to control the amount of money in the economy).
  • He economically disemboweled the U.S. by creating the intellectual foundation for a generation of greed, turning the Federal Reserve into a permanent bailout mechanism for the super rich.

Objectivism and Ayn Rand (an antigovernment zealot and author of Atlas Shrugged). 

• Objectivism provided the entire intellectual context for the financial disasters of the early 21st century: the belief in self-interest as an ethical ideal and pure capitalism as the model for society’s political structure.
  • They rail against all government interference, but quietly ignore it when there are needs for things like military spending or bans on foreign drug reimportation.
• Greenspan despised government generally, but in 1968 he joined Richard Nixon’s campaign as an adviser.
  • He enjoyed pushing an image of economic genius, but his record reveals that he was wrong about almost everything he ever predicted.
  • Greenspan’s errors were often evidence of a fundamental misunderstanding of problems that led to huge disasters.
    • At one point, under President Ronald Reagan, Greenspan hiked up Social Security taxes by a trillion and a half dollars, four presidents spent all that money and when it was time to pay those promised benefits, Greenspan announced that it couldn’t be afforded, the money isn’t there.
  • In 1987, Greenspan was sworn in as the Federal Reserve chairman, beginning the Bubble Generation.

How the bubble economy works:

• Imagine the economy is a casino: investors bet on oil futures, subprime mortgages, Internet stocks, wanting to get rich quick.
• The major brokerages and investment banks are the house. They always win in the end, taking their cut in the form of fees and interest. They only make more money if the number of gamblers increases.
  • Maybe the oil futures you bought were never close to being worth $200 a barrel, but the fees you paid to Goldman Sachs to buy those futures were real. 
• Imagine that every time the bubble bursts and the gamblers go broke, the house borrows giant piles of money from the state for next to nothing.
  • The casino then lends out all that money to its recent customers, who do it all over again.
  • This time, the gambler is in worse shape because she’s not only lost her own money, she now owes the house for what she’s borrowed.
• That’s a simple view of what happened to the American economy under Greenspan.

Greenspan’s bubble economy

• The financial industry inflated one bubble after another, and each time the bubble burst, Greenspan printed money and dumped it back on Wall Street. 
  • It was a highly efficient method for converting the savings of random citizens into the concentrated holdings of a few private individuals.
• The basic idea behind the Fed’s regulation of money is to limit inflation and prevent recession by expanding and contracting the amount of money in the economy.
  • Theoretically tightening when there is too much inflation and loosening when credit goes slack and the lack of business stimulation threatens recession.
  • People who take too much risk are supposed to fail sometimes, but instead, Greenspan rescued Wall Street when they got too greedy.
• As chief overseer of banking activity the Fed was supposed to be the top cop, but Greenspan hacked away at his own regulatory authority: he diluted the Fed’s power to enforce margin requirements; restricted its ability to regulate derivative trades and prevent unlawful mergers.
• Greenspan pushed for a law that prevented state and federal governments from regulating things like collateralized debt obligations and credit default swaps.

Mortgages

Securitization and derivatives

• Instead of banks making loans and sitting on them until maturity, securitization allows banks to put mortgages into giant pools, to be diced up and sold to secondary investors as securities.
  • This allowed lenders to trade long-term income streams for short-term cash.
• But even with securitization, no one wanted to buy mortgages unless they were actually made to people unlikely to default.
  • To fix this, banks came up with derivatives, specifically, collateralized debt obligations. Banks took these big batches of mortgages, threw them into securitized pools, and created a multi-tiered payment structure.
  • Imagine a box with 100 home loans in it. Every month, those 100 homeowners put payments into the box.
    • Banks split the box into three levels and sold those shares to outside investors.
    • All those investors were doing was buying access to the payments the homeowners would make every month.
    • The top level is AAA-rated (credit risk of almost zero); the first to get paid.
• These derivative instruments allowed lenders to get around the loan-quality problem by hiding the crappiness of their loans behind the collateralized structure.
  • Now the appeal of a mortgage-based investment was, problematically, not based on the individual’s ability to pay on the long term.
• Many packages of mortgages were garbage, but 58% of them received a AAA-rating.
  • How? The result of the interdependent relationship between banks and the ratings agencies: Not only were the ratings agencies dependent financially on the banks that were cranking out these instruments that needed rating, they also colluded with the banks re what their models required of the banks to obtain an AAA-rating.

Welfare for Wall Street

• If Wall Street makes profits by moving money around and taking a cut here and there, this whole mess was a giant welfare program the financial services industry willed into being for itself. 
• It invented a mountain of money in the form of a few trillion dollars’ worth of bogus mortgages and rolled it forward for a few years.
  • This scheme involved crooks at every level: mortgage brokers falsified information on loan applications to secure bigger loans; loan originators cranked out massive volumes of loans with doctored applications; securitizers used harebrained math to turn terrible mortgages into AAA-rated investments.
    • And, ratings agencies signed off on that harebrained math and handed out AAA-ratings to keep the fees coming.
  • Scammers rigged FICO scores to make bad borrowers look like good credit risks.
  • Investment banks tried to stick pensioners and insurance companies with their toxic investments.
• We ended up subsidizing this as a matter of national policy. We paid for this instead of a generation of health insurance, an alternative energy grid, or roads and highways.

The commodities bubble

Why did gas prices increase? 

• Wall Street turned gas prices into a gaming table, and when they hit a hot streak we ended up making exorbitant involuntary payments for a commodity that one simply cannot live without.

The commodities bubble

• In 1936, President Franklin D. Roosevelt passed the Commodity Exchange Act, specifically designed to prevent speculators from screwing with the prices of day-to-day life necessities like wheat, corn,soybeans, oil, and gas. These were called commodities.
• These markets have two types of participants.
  • (1) People who either produce the commodities or purchase them (farmers or cereal companies, say) – physical hedgers.
    • The market is where wheat farmers meet with the cereal companies and do business, and it also allows these physical hedgers to buy themselves a little protection against market uncertainty via futures contracts.
    • For example, if you’re a cereal company and you want to buy corn at a max of $3 a bushel, and right now it’s selling at $2.90 a bushel, but you want to insulate yourself against the risk that prices skyrocket. 
    • So you buy futures contracts for corn that give you the right, say a year from now, at $3 a bushel.
      • If corn prices go up you can still buy corn at $3 a bushel. That’s the proper use of a commodities futures market.
  • (2) Speculators: to guarantee that the physical hedgers would have a place to buy or sell their products.
    • Say you bring your corn but the cereal company isn’t buying. A speculator comes in, buys your corn. She hangs on to it, and then a cereal company comes along. 
    • If there are no corn growers that’s okay, the cereal company can buy from the speculator at a slightly higher price.
    • If speculators could buy the whole crop, they could easily manipulate the price. Thus, there were position limits, which guaranteed that trading would be dominated by the physical hedgers.
• Commodities producers could look at the futures prices to get a sense of what to charge.
  • This system functioned well for 40 years, tightly regulated by the government.

The secret CFTC letters

• In the early 1980s, some Wall Street financial companies bought stakes in trading firms that held seats on various commodities exchanges.
  • Goldman Sachs bought a commodities trading company called J. Aron.
  • Those companies asked the government to lighten up about position limits.
    • J. Aron wrote to the Commodity Futures Trading Commission (the government agency overseeing this market) and asked for an exception to allow speculators to escape position limits and make transactions in unlimited amounts. Couldn’t J. Aron call itself a physical hedger too?
  • The CFTC agreed, and then speculative activity by these special companies became “bona fide hedging”–this was the beginning of the end for position limits and for the proper balance between physical hedgers and speculators.
• CFTC quietly issued 16 similar letters and those speculators took over the commodities market, gobbling up 80% of the activity on the commodities exchanges by 2008.
  • Much of this was secret. One of the CFTC chairs did not even know that those letters existed.

Index commodity speculation

• The letters created a massive government subsidy for those few companies that received the letters because they created a new kind of investment vehicle: index speculation. 
• The concept of index commodity speculation is when you invest in them, you’re not actually buying wheat or gas. You’re just betting that prices in these products will rise over time. You’re gambling on price.
• Prior to this time, there had been laws barring trusts and pension funds and such entities from investing in risk ventures. Then via the Uniform Prudent Investor Act of 1994, the trusts were not only not barred from investing in these things, they were duty bound to diversify as much as possible.
  • At the same time, the CFTC loosened the rules about who could buy and sell commodity futures.
    • You used to have to be accredited to trade commodities, but now there were all sorts of ways that outsiders could get into the new market. 
  • Coupled with the new interpretation of what investors should do to diversify investments, there was suddenly a huge inpouring of money into the commodity futures market.
• The concept of taking money from pension funds and dumping it into the commodities market is dangerous, especially because speculators were not supposed to buy enormous amounts of corn and sit on it for twenty years.
  • In commodities, nobody invests in prices going down. Index speculators lean to push prices up, only.
  • Imagine if someone continually showed up at car dealerships and asked to buy $500,000 worth of cars. She doesn’t care how many cars, just that amount.
    • Eventually, someone sells her one car for $500,000. Soon, people who come to the dealership to buy cars they actually plan on driving realize they’ve been priced out of the market. 
    • That’s what happens when index speculators pour money into commodities markets.
• From 2003 – 2008, the amount of money invested in commodity indices rose from $13 billion to $317 billion.
  • Commodity price increases had nothing to do with supply or demand. 
• The big investment banks convince the ordinary investor that oil prices are going up because of “fundamentals,” then they get all that money coming in, at which point their predictions about prices going up actually come true.
  • Then they make their own bets and make a fortune. Meanwhile we end up paying $4.50 a gallon for gas, just so they can make a few bucks trading on what amounts to inside information.

Sovereign Wealth Funds

• Sovereign wealth funds (SWFs) are essentially a giant state-owned pile of money that searches for things to buy (popular in the Middle East).
• Someone called Taibbi, and told him that he was in a meeting where a U.S. investment bankers tried to sell the Pennsylvania Turnpike to a Middle Eastern SWF. The same for a toll highway in Indiana, the Chicago Skyway, etc.
  • They were all leased for 50 or 75 years or more in exchange for a lump-sum payment of a few billion, to patch a hole in a budget year.
• America is quite literally for sale, at rock-bottom prices, and the buyers increasingly are the people who scored big in the oil bubble.
  • Thanks to Goldman Sachs and other investment banks that artificially jacked up the price of gasoline over the last decade, Americans delivered a lot of their excess cash into the coffers of sovereign wealth funds.
  • For the average taxpayer, some of the money goes into the banks that disenfranchise her politically, and the rest of it goes into the pockets of Middle Eastern oil companies.
    • If the taxpayer is making less money now, she pays less in taxes, leaving the state in a budget shortfall. 
    • Then a governor like Ed REndell has to travel to the Middle East, trying to sell the Pennsylvania Turnpike to the same oil states who’ve been pocketing the taxpayer’s gas dollars.
    • It’s an almost frictionless machine from stripping wealth out of the heart of the country.
• In 2008, Mayor Richard Daley struck a deal with Morgan Stanely to lease all of Chicago’s parking meters for 75 years. The final amount of the bid was roughly $1.6 billion in a lump sum to be paid to Chicago for 75-years worth of parking meter revenue.
  • Daley had vastly undervalued the meter revenue. The meters were actually valued at about $5 billion over the life of the contract.
  • Ultimately, the city ceded control of their streets to an unaccountable private and partially foreign-owned company. Prices went from $0.25 an hour to $1.20/hour after that, with no power to close streets, remove or move meters, etc.

Health care reform

• Obamacare was designed as a straight money trade. The administration dealt billions in subsidies and premiums in exchange for the relevant industries’ campaign contributions for a few election cycles.

McCarran-Ferguson Act

• This Act lifted antitrust laws on insurance companies.So insurance companies, free of federal regulation, colluded to manipulate prices.
  • If a bunch of construction contractors decided to set the prices of bricks, they’d go to prison. But for insurance, it’s legal.
• Each time someone tries to amend or repeal McCarran-Ferguson, every single insurance industry lobbyist opposes it.

President Barack Obama

• Anything less than a full repeal of McCarran-Ferguson in a health care bill would be pointless. But instead of repealing a grossly anticompetitive law, the party decided to ensure private competition in the health insurance industry by creating a state-run insurance plan.
  • A system where customers, hospitals, and doctors are at the mercy of an unaccountable industry that can deny coverage or fix prices, resulting in ballooning costs that necessitated the call for health care reform in the first case.
• Obama’s chief of staff, Rahm Emanuel, sought to score a monster political win with the electorate and campaign funds at the same time.
  • Emanuel’s open bullying of groups like MoveOn and Unity ‘09 explains why there was virtually no left flank in the healthcare debate educating the public about the ramifications of things like the individual mandate.
• Wavering Democratic Caucus members took massive payouts and other concessions in exchange for votes, such as Mary Landrieu who agreed to vote for the bill in exchange for $300 million in extra federal spending.
• The Affordable Care Act presaged a revolutionary vision for America’s industrial economy, one in which companies compete not on price and quality but on political influence.

Goldman Sachs

• For Goldman, the most valuable item was its undeserved reputation for brilliance and efficiency.
  • When actually Goldman is a parasitic enterprise attached to the American government and taxpayer.
• The history of the recent financial crises is a history of the Who’s Who of Goldman Sachs.
  • Henry Paulson, George Bush’s last Treasury secretary, used to run Goldman and was the architect of a plan to funnel trillions from the Treasury to a small list of friends on Wall Street.
  • Bob Rubin, BIll Clinton’s former Treasury secretary, spent 26 years at Goldman and was Citigroup’s chairman (Citigroup got a $300 billion taxpayer bailout from Paulson).
  • John Thain, chief of Merrill Lynch (which got a multibillion-dollar handout from Paulson), used billions in taxpayer funds to help Bank of America rescue Lynch.
  • Robert Steel, Goldman former head of Wachovia, scored himself and his executives $225 million in golden parachute payments as the company imploded.
  • The heads of the Canadian and Italian national banks are Goldman alums, as is the head of the World Bank, the head of the New York Stock Exchange, the Treasury’s chief of staff, the last two heads of the New York Federal Reserve Bank (which is in charge of regulating Goldman), and many more.
• For years, it’s been gorging itself on the unseen costs that break families–high gas prices, rising consumer credit rates, pension funds, layoffs, taxes to pay for bailouts.
  • That money you’re losing, it’s going somewhere, and in literal and figurative sense it’s funneled to Goldman Sachs. It is a huge engine for converting useful societal wealth into the least useful waste–profit for rich people.
• Goldman was founded in 1882 by a  German Jewish immigrant named Marcus Goldman, who built it up with his son-in-law, Samuel Sachs. For a long time, they had relatively solid ethics and long-term thinking.
  • But Robert Rubin, Goldman CEO in the early 90s, became Treasury secretary under Bill Clinton.
    • Rubin stripped down financial regulation, with massive impacts that reverberated long after he was gone.
• For instance, banks had adopted strict underwriting standards after the Depression. No bank would take a company public unless it met certain conditions: it had to have existed for at least five years; it had to have been profitable for at least three years in a row; it had to be making money at the time of the IPO, etc.
  • Goldman threw these rules out the window. They signed up worthless.com and took it public five minutes into its existence. The public just assumed these companies met the banks’ standards.
    • Goldman manipulated the share price of new offerings and engaged in practices like spinning (offering executives of the newly public company shares at advantageous prices in exchange for promises of future underwriting business).
    • This artificially lowered the initial offering price and deprived ordinary investors of critical information–they had no way of knowing that Goldman played around with the price of newly public companies in order to secure other business.

2008

• After the bursting of the commodities bubble (another largely Goldman-engineered scam), Paulson let Lehman Brothers, one of Goldman’s last real competitors, collapse without intervention.
• The same weekend, Paulson green-lit a massive $80 billion bailout of AIG, a crippled insurance giant that owed Goldman Sachs $20 billion.
  • Paulson’s decision to intervene selectively in the market would radically reshape the competitive dynamic on Wall Street. 
  • In the end, only two of the top five investment banks on Wall Street wereleft standing: Goldman and Morgan Stanley.
• After the AIG bailout, Paulson announced a bailout for the financial industry, a $700 billion plan called the Troubled Asset Relief Program (TARP) and put a Goldman banker in charge.
  • To qualify, Goldman announced that it would convert from an investment bank to a bank holding company, which allowed it to access $10 billion in TARP funds and a whole galaxy of less conspicuous publicly backed funding sources.
    • Morgan Stanley announced the same move on the same day.
  • No one knows how much either bank borrows from the Fed, but by the end of the year the Fed lent upwards of $3 trillion.
  • Its conversion to a bank holding company also meant that its primary regulator was the New York Federal Reserve Bank, whose chairman was the former managing director of Goldman, Stephen Friedman.
    • Friedman was supposed to divest himself of his Goldman stock, but instead he bought $13 million worth in shares.
• When it came to Goldman Sachs, there wasn’t a free market at all. The government might let other players die, but it simply would not allow Goldman to fail.
  • Goldman Sachs paid $14 million in taxes in 2008, a tax rate of 1%.
  • Low taxes are due in large part to changes in the bank’s “geographic earnings mix.”
    • The bank moved its money around so that all of its earnings took place in foreign countries with low tax rates.
    • Thanks to our corporate tax system (see www.pithysummary.com/perfectlylegal/), companies like Goldman can ship their revenues offshore and defer taxes on those revenues indefinitely, even while claiming deductions on that same untaxed income.
    • A Government Accountability Office report found that between 1998-2005, ⅔ of all corporations operating in the US paid no taxes.
  • In 2009, Goldman announced a second-quarter profit of $3.44 billion–it posted the richest quarterly profit in its 140-year history.

So now what?

• Knowing about something and being able to do anything about it are two different things.
  • Banks like Goldman are largely shielded from the impact of public opinion because while the public’s only link to power is through the clumsy avenue of elections, a bank of this size has a whole network of intimate connections with direct access to policy.

• The public can press their elected representatives (who are heavily funded by these banks) but the bank has already moved on to five, six, seven new schemes since then, each shrouded in a layer of complexity that will take years for the public consciousness to penetrate.
• Tea Partiers rail against government power and liberals rail against corporate excess, and perhaps the two sides should wonder if the real problem might be a combination of the two.

• The beginnings of the Tea Party and what it says about America’s overall ability to understand and absorb politics
• How the Fed “created” money, especially during the Greenspan years
• Greenspan’s undermining of the Glass-Steagall Act, a Depression-era law that barred insurance companies, investment banks ,and commercial banks from merging
• Why enormous hedge funds bought up toxic waste mortgages, believing that the credit scores weren’t so bad, when it turned out that the FICO scores themselves were a scam
• The AIG implosion and bailout
• How Rahm Emanuel twisted arms and legs to achieve Obamacare
• A list of articles about Goldman’s behavior and its various lawsuits