THE UNITED STATES HAS BECOME MIRED in a complex web of economic instruments that are directly tied to the so-called “bubble” economy. Some economists held them as potential means to assist Americans buy homes, but others think these instruments have merely enabled fraudulent behavior that wrecked the U.S. economy.
By Matt Taibbi and Maria Armoudian, AlterNet
Posted on November 21, 2010, Printed on November 22, 2010 http://www.alternet.org/story/148941/
Making matters worse is the dearth of understanding among many in the public and the exploitation of that misunderstanding by particular politicians, according to author and journalist Matt Taibbi. His latest book, Griftopia: Bubble Machines, Vampire Squids and the Long Con That is Breaking America, identifies some of the personalities and looming problems within the troubled financial and political system.
Maria Armoudian: In Griftopia’s first chapter, you connect three important elements that are exacerbating our political and economic crisis. One is politicians’ rhetoric that feeds into the misunderstandings. Another is that mass media, when covering politics, tend to focus on the trivial, rather than the meaningful.
Matt Taibbi: Sure and I was part of that. The campaign press are trained to cover politics like a sports story because it’s a successful way to bring eyeballs to television. You present it as an ongoing conflict between these two great parties, red and blue, conservative and liberal, and the rhetoric is more and more heated with each successive electoral cycle. And we present it like a World Wrestling Entertainment smack-down showdown. Even if you watch the actual political shows, they’re even structured exactly like ESPN’s football analysis programs, where you have the anchor guy on one side and there are four commentators, two from each team. That’s the way we do the news; that’s the way we do politics, and we’re not really trained to look at a deeper, more nuanced story. That’s the reason we missed this finance thing because it doesn’t fit into that formula at all. It’s very complicated. It’s also not partisan. It’s not the fault of one side or the other. But it makes it hard for us to digest.
MA: And the rhetoric that you find that has been used over and over from politicians. Sarah Palin’s approach, you said, was right out of the playbook of Richard Nixon.
MT: Right. This is the whole silent majority idea is playing on this kind of Southern white resentment, this idea that, “we obey the law, we pay taxes, we work and somehow it’s all these other people that are reaping the benefits, these people who don’t want to work, these people who are immigrants, and they want to come and steal our social services.” That’s the same kind of idea, the silent majority. Hillary Clinton used some of the same rhetoric in her campaign as well, the “forgotten people” that she talked about. This rhetoric is very useful in getting people to not focus on what happened on Wall Street. It was creating resentment between white middle-class people. And lower-income minorities and the rich New Yorkers were never in the picture anywhere.
MA: How does the Tea Party fit in with your overall assessment of our economic disasters?
MT: I wrote Griftopia really as a crime book about what happened on Wall Street in the last ten or fifteen years. But the politics are an element of the crime, and there had to be a mechanism through which they could get ordinary people to not pay attention to what was going on. To me, the Tea Party was an example of exactly how that works. I see it as a phenomenon where Wall Street has found a way to convince ordinary people to back their political agenda and their deregulatory aims, under the rubric of “we’re going to get the government off our backs,” and it’s really, in the end, it’s just going to be off their backs, but ordinary people believe in it.
MA: People say they don’t want government and yet they still want all the services that government does. But they somehow don’t connect the dots, it seems.
MT: Right, they somehow want their food to be clean; they don’t want to drink poisoned water; they want to have cops to protect them from burglars, but they’re very attracted to this whole idea that the government causes all of our problems. As I travel around the country, most of the Tea Party people I talk to — a lot of them are small business owners. They have hardware stores or restaurants, and they see regulation as an ADA inspector or a health inspector coming to bother them and ring them up with little fines here and there. That’s their experience with government regulation. And so when they think about JP Morgan Chase and Goldman Sachs and regulating those banks, to them it’s the same thing. They have no idea that regulation for these big companies is really a law enforcement problem, that it’s not this little niggling health inspector type of business.
MA: I think the best description of the Tea Party that I have heard in a long time was when you said, they’re not crazy or necessarily always wrong, but they’re an anachronism, fighting a 1960s battle in a world run by 21st-century crooks.
MT: Right, the Tea Party is really geared up to fight the Johnson-era forced desegregation battle – busing or HUD housing. I was in Westchester County in New York where HUD was forcing this small, mostly white town to accept a low-income housing project. This is the kind of stuff that turns the Tea Party on, this whole idea of the interventionist government, activist judges. And yeah, there are some of those issues that are still extant, that are still being played out.
MA: But they’re small in comparison to the big problems that we’re facing.
MT: Yeah, this space age global financial thing dwarfs all of those issues in magnitude, and they just don’t get it. And there is no politician that’s speaking to them about it, which is the really depressing part.
MA: And overall, mass media have not really done a very good job of explaining this.
MT: Right, I think that part of the problem is that the people who cover this stuff for a living, the financial press, are geared toward a specific audience. That audience is people who are in the business. They have gotten out of the habit, if they were ever in it, of explaining any of it. And to draw on the ESPN analogy, its kind of ESPN is not for people who don’t understand sports. They don’t pause to explain the rules of football to you every two minutes. They assume you know what they’re talking about, and that’s exactly how the Wall Street Journal and the Financial Times operate. That’s why I think they were flat-footed a bit when the crisis happened because they didn’t have the tools to explain all this to everybody else.
MA: Another key point you have been making is that while political systems can be really problematic, it sometimes takes a guy at the top to help make this kind of mess. You identify Alan Greenspan as that person. You wrote, “His rise to the top is one of the great scams of our time.” How do you see this as the “perfect prism” through which to see American politics. RIGHT: Goldman-Sachs chief honcho, Lloyd Blankfein
MT: Alan Greenspan’s personality embodies the kind of contradiction in American politics. On the one hand we have this propaganda about how government has no place in the economy whatsoever: “There should be no regulation; the government’s only rule is armed forces and the police.” You hear all this talk in the Tea Party now about strict constitutionalists, that the government [should] abolish every department except for the army. Greenspan believed that on the surface, but at the same time that he was preaching this objectivist proto-capitalist religion, he was building a massive welfare state for Wall Street. It is a complete contradiction — “Get the government off our backs,” but also, “Let’s make the government into a permanent insurance policy for rich people.” All of those contradictions were in his personality.
MA: You connect him to the philosopher/author, Ayn Rand. Talk about her role in his philosophical development.
MT: She was this great novelist who wrote all these very ponderous long novels likeThe Fountainhead and Atlas Shrugged. The general theme of all of them was that there were two classes of people: the producers and the parasites. In her books, the producers were the great industrial figures who actually created businesses and commercial empires, and everybody was somehow feeding off of them. You were either making something, or you were a parasite. That ethos is still very much alive; it’s part of the Tea Party rhetoric. They talk about “water carriers and water drinkers” and split the world up into those two categories. Greenspan actually spent a lot of time with Rand, they had these little tea parties at her house, and he was under her tutelage. He was one of her protégés who directly carried the flame for her religion. But it was ironic that he ended up being the chief regulator of the economy that had been an anathema to everything that she believed, being a government regulator. Yet he somehow did it and didn’t feel contradicted about it.
MA: She doubted his commitment to her philosophy at a certain point too, according to your account, calling him a social climber.
MT: In the end she famously said, “I think Alan basically is a social climber.” He had already flirted with government by that time. He had gone to work for Nixon’s transition team. Although he tried to be loyal, in the end she turned against him and said some very bad things about him.
MA: Ultimately, you make Greenspan sound inept, not necessarily a bad guy, and that’s what led to the disasters under his watch.
MT: I think the most important thing with Greenspan as it pertains to the current problem is his attitude towards derivatives. He became the Fed chairman at the very beginning of the age of derivatives. This was right before the ‘87 stock crash, which was caused by derivatives. They were these computerized instruments that were pegged to derivative transactions. He completely missed the significance of that. In the early ‘90s, there was a series of disasters, including the Orange County disaster, that were caused by a variety of these instruments such as the interest rate swaps and foreign exchange swaps. Greenspan never understood this stuff. He thought that they were just tools for creating more liquidity, and he persistently went before Congress and said that we do not need more regulation of these instruments. Later on in the year 2000, he became a pivotal figure in affirmatively deregulating these forever in a law called the Commodity Futures Modernization Act. He was very much the driving force behind that, which then led to the mortgage crisis. That’s where derivatives really blew up and where we saw these collateralized debt obligations and other fancy devices that were created to disguise crappy sub-prime mortgages as AAA-rated debt. But he actually thought that they were harmless instruments that banks could use to make a little bit more money. He didn’t see the catastrophic potential.
MA: You’ve said that every country has scam artists; but only in a dying country, only at the low end of the most distressed third world, are people like that part of the power structure. Do you really mean that?
MT: I lived in Russia for ten years, and one of the things that attracts me to this Wall Street story was that it reminded me of what I had seen in Russia. In the former Soviet Union, I saw this incredible pessimism. There was no belief in the future because there was so much instability that people who had the ability to take anything, steal anything were doing it. They wanted to get the money and get out of the country as quickly as possible. They might steal the money from the government and buy a villa in France. That was the modus operandi in those years. That’s how I see the financial services industry in America with the mortgage scam.
It’s the same mindset, whether it was the guys at companies like Countrywide who were pushing people into bad loans when they qualified for good ones, or the banks who were immediately taking these loans and selling them off to pension funds and insurance companies knowing that they were going to explode, or the hedge fund guys who were intentionally creating masses of crappy loans to dump off on other people, or the ratings agencies who were rating stuff that they knew was crap. Then at the very top you had companies like Goldman Sachs and Deutsche Bank that were basically getting the taxpayer to buy this stuff through the bailouts, knowing that it was severely over-valued. It was the “let’s get what all we can right now before it all blows up” mindset that you see in a third world country.
TIME COVER: The select trio of scumbag banksters and frauds chosen by both Clinton and Obama to run the economy. From Left: Robert Rubin, Alan Greenspan, Larry Summers.
MA: You say that there’s another half — the outsourcing through foreign sovereign wealth funds. What are these funds, and how are they connected to all of this?
MT: This is an ancillary part of the story. A sovereign wealth fund is basically like a giant hedge fund that is government owned, and they’re particularly popular in the oil producing countries of the Middle East. You have a country like Saudi Arabia or the United Arab Emirates, for instance, that gets a lot of revenue from oil, and they put the excess cash in this giant fund that looks for investment opportunities around the world to grow itself bigger. My friend who works at one of these foreign funds called me and said, “I was in a meeting, and a bunch of guys from an American investment bank showed up with a slide projector and tried to sell me and my bosses the Pennsylvania Turnpike. They sat down, showed us all these pictures and said, ‘look the toll booths are in good shape the roads are paved and you should buy this thing.’” And they did try. The State of Pennsylvania shopped the Pennsylvania Turnpike for a period of time. They ended up not doing that deal, but there are cities and states all around the country that are doing these deals.
MA: So they are selling parts of the highways? What else?
MT: In Chicago, it’s the parking meters. They sold 75 years worth of parking meter revenue for the City of Chicago. The Abu Dhabi Investment Authority is at least a 26 percent owner in the Chicago parking meters now. Now there are no parking holidays in the city of Chicago. You have to pay meters on Lincoln’s birthday, on Christmas, Thanksgiving. If you’re an alderman and you want to have a street fair or something like that, you basically have to pay an exorbitant fee to the investors in order to have the right to hold a fair in your own neighborhoods. That’s happening all over the country. There are dozens of these deals going through.
MA: You’re very critical of Barack Obama’s handling of the financial system. You seem to think he doesn’t even measure up to Bill Clinton.
MT: I liked Barack Obama a lot during the campaign. I was very impressed by his intelligence. I thought his heart is really in the right place. He seemed like a good person. And he had this [great] effect on people. There tends to be this anti-intellectual vibe in American politics, and he had the opposite impact on voters; when he spoke to them, he convinced them to think about things a little bit, which is a rare talent in American politics. But he brought in a lot of guys from Wall Street to run his economic policy, like Bob Rubin, who was Clinton’s treasury secretary and one of the key figures of the financial collapse. He brought Rubin back in. They worked very hard to preserve the anti-trust exemption for the insurance industry in the health insurance bill. These companies have built-in subsidies that use the government to protect them from market forces, which was a key thing in the health insurance bill, this anti-trust exemption. So it was very disappointing.
MA: More recently, you have been following the courts, which in some cases, you think, are favoring mortgage companies over the homeowners. Describe what you saw in the courtrooms.
MT: I went to Jacksonville, Florida, and I was watching foreclosure proceedings. They had created these special courts that they’re nicknaming the “rocket docket.” Their mandate is to clear 25 cases an hour, so judges are spending just a few minutes on every case. The problem here is that this is very complicated. When these mortgages were issued, they weren’t normal mortgages like you might have had 20 or 30 years ago when one bank gave one person a loan, and then they held the loan until maturity. In the last 10 to 15 years, they were giving loans to people and then throwing them in big piles of loans and chopping them up into little bits, making securities out of them and then selling them off to foreigners or pensions or others. [Many of] these transactions were essentially fraudulent. They were presenting sub-prime mortgages as AAA-rated. Once they dumped these loans off on other people, they stopped doing the paperwork, [saying], “Why bother doing this the right way, or why bother being legal about it now?”
One hundred percent of the foreclosure cases that I saw had bad paperwork, and the foreclosing entity did not have the mortgage note. They could not prove that they actually owned this loan. If there is actually a lawyer present to point this out, usually the homeowner can beat the rap. I met people who were in their houses three and four years after their last payment. But 98 percent of the cases are unopposed, and the courts usually just rubberstamp these foreclosures, even when they’re not legal.
MA: You are also following some of the class-action lawsuits. I’m wondering why there aren’t more, if the fraud is as deep as you suggest it is. What do you know about the suits that are being filed and why there aren’t more?
MT: Well, they’re coming. One of the problems is that when they were selling these securities, they were typically selling them to groups of investors who were not organized. One person owned one 1/1000th or one ten thousandth of a pool of mortgages. It’s only now that those investors are getting together, organizing and realizing that the big banks took them for a ride. The banks are now getting sued from two sides: They’re getting sued by the investors, and they’re getting sued by the homeowners who are being foreclosed upon. There’s one suit in New Jersey against the Bank of America. It’s a class-action suit that basically charges them with using predatory loan practices or getting people into houses that they couldn’t afford or into risky loans when they could have had safe ones and then defrauding investors. There’s another suit in Kentucky that is a [racketeering] RICO suit. They’re using racketeering laws to try to get at this. So it is coming; there’s going to be a wave of lawsuits where people are going to try to recover their money from the banks.
MA: Ten years ago, it wouldn’t have been like this. Trace the changes over that period of time. Then tell us what you see that might be coming next.
MT: There were a couple of things. The big one is that they invented these derivative instruments, the process of taking big piles of loans and chopping them up into what’s called securitization. That’s actually been around since the ‘70s, but they didn’t have this way of taking those diced up loans and dividing them up into what they call tranches. They applied a very obscure math to these pools where they would basically say, “99 percent of the time, 28 percent of these loans will never fail, so therefore we can sell that 28 percent part as AAA.” They invented that tool in the late ‘90s. That’s when it all took off because now [they] could take a bunch of junk and sell it as AAA, which means that the credit risk is almost zero. They were never able to do that before the year 2000 or 1998, and that’s when this explosion happened.
MA: You’ve counted several bubbles in this book, including the Internet bubble, the housing bubble and the commodities bubble. How do you see the commodities bubble affecting consumer prices?
MT: In 2008 everybody remembers that gas prices went through the roof. That was what started this book is because I was at a McCain campaign event and he was giving that “drill baby drill” speech, and the reporters afterward were joking, “McCain, what a moron, as though this was what caused gas prices to go up, that we weren’t drilling in the Gulf of Mexico.” I said, “Well, do we know why gas prices are going up? I don’t know what causes it.” It turns out that it’s very complicated. It goes back to this problem of [deregulation]. They had a tightly regulated system in which most of the people who were buying and selling commodities had to be physical hedgers, according to the law, which means you are either physically producing or physically consuming oil or gas or soybeans or corn. Only a small percentage could be speculators, because you didn’t want speculators buying up the whole corn market and then dominating the prices.
But starting in the early ‘90s, a lot of companies went to the government and got exemptions to these rules. So over the course of about 10 or 15 years, the amount of speculative money in the market started to balloon. In 2003, there was $13 billion dollars worth of speculative money in commodities. By 2007 it was over $300 billion. That money was betting on the price of oil and corn to go up. And they did. Every single commodity saw a price increase in that four-year period, the average being 200 percent. It was a speculative bubble.
MA: You connect Goldman Sachs to these bubbles.
RIGHT: Like the a gangrenous fungus, Bob Rubin, Citigroup’s big wheel, and Alan Greenspan, keep popping up in most cabinets. The nation would have been far better off without their “expert” advice.
MT: Oh of course, Goldman was right in the middle of the commodities market. If you buy and sell commodities, you’re probably doing it on the Goldman Sachs commodities index. They are a major commodities trader. They were the first company to get one of those exemptions. Their subsidiary got the first one, and Goldman that was telling the entire world that oil was going to go up to $200 a barrel in 2008. It never got that high, but it did get to $149, which was, according to people I talked to, at least three or four times what oil was actually worth. Most people thought it was a supply and demand issue, but supply was up that year and demand was down and none of this was reported in the media.
MA: So we have systemic problems and the public is not getting the information to understand them. Politicians are not really educating the public about these things, and they are bailing out the companies that have acted badly. The media, too, are not really informing people, so it seems that many in the public are left with a simplistic understanding, rather than seeing the systemic issues and solutions. What do you see as the big solutions? What kind of impact would, say, campaign finance reform have?
MT: I think that’s absolutely true, and Arianna Huffington’s book has a section in it where she talks about how, on these issues, on this Wall Street stuff, Ted Kaufman from Delaware was the best guy in the Senate on all these issues. He was absolutely aggressive on everything from too-big-to-fail to high-frequency trading. And it’s not a coincidence that he didn’t run for reelection. What set him apart from everybody else was that he did not have to raise money. Because the financial services industry is the number one source of money for politicians, I think [campaign finance reform] would be a great place to start, if you were going to talk about what we can do. I mean there isn’t a whole lot we can do, but that’s one thing that would actually have at least a little bit of a concrete effect. It wouldn’t solve everything because even if you fixed the campaign contribution rules, a lot of these guys are going to go and work as consultants to Citi Group or Goldman Sachs after they leave office and that’s always going to be a temptation, but at least it’s someplace to start.
MA: Of course with the Supreme Court’s decision Citizens United, that will make it more difficult. And the Democrat-controlled Congress couldn’t even pass the Disclose Act. Now, the with Republican-controlled House, who don’t even like campaign reform, what might we see?
MT: For sure nothing’s going to happen for two years.
MA: The other issue is of course the media’s job of explaining issues, which most are not doing.
MT: It’s funny, my father’s a journalist; I grew up around journalists. When I was a kid, there had been a culture change in our business. Way back in the day, I think journalists were mostly working-class guys. A lot of them didn’t go to college; they either worked hard as paper boys or at a printer or something like that. A classic example is a guy like Seymour Hirsch, who was a career newspaperman. That’s where he started. It was a trade, not a profession. I think after All the President’s Men, journalism became sexy. By the time I was on the campaign trail, most of the people who were on the plane following the candidates around were Ivy League people. And they mean well, but they’re mostly turned on by proximity to power, and they like to have this insider status. That notion of being outsiders who police people in power has disappeared from the profession in general. It’s a subtle thing, but it definitely showed up in this crisis where class was such an unspoken issue.
MA: And the framing and tone for particular people and issues that is allowed in most media?
MT: Yeah, we always have to say, “Well, maybe the producers made a few mistakes, but we can’t be too harsh on them because they’re the people who create the jobs, and so we need to give them a break.” But I don’t need to give them a break; that’s not my job. They already have a break.
MA: You’ve not exactly been soft on them. So take a look forward now. Do you see another bubble coming?
MT: There are things that are troubling on the horizon. In researching the foreclosure story that I just wrote, one of the things we learned is that there’s a long way to go down for these mortgage-backed securities. A lot of the banks, the Federal Reserve and the government still own billions and billions of dollars worth. And they’re recognizing that at par or face value, the reality is they’re probably worth five or ten cents on the dollar. So eventually, there’s going to be some kind of reckoning there. The banks and the government are artificially propping up the market. You night have heard about quantitative easing. Right after the election, the Federal Reserve printed $600 billion new dollars basically to buy stuff; they’re buying mortgages; they’re buying treasury bills, and that is propping up the value of these securities. It’s a bubble-like situation where there’s a huge mass of overvalued stuff out there that people are getting themselves into, and when that collapses, it’s going to be ugly.
MA: I know you went to some of the Angelides Financial Crisis Inquiry Commission hearings. Do you see anything meaningful or corrective coming out of that set of hearings?
MT: Those hearings were great in the sense that they educated us a lot about what happened.
MA: Except for the fact that nobody heard them.
MT: That’s true, and then nothing was done about any of it, but at least there were factoids and things that leaked out. There was this great testimony by Keith Johnson about a month and a half ago. He was basically a researcher. He worked for a company that investigated ratings agencies and looked at the value of mortgage loans that these banks were buying, and he was the one who discovered that in about half of the cases, the loans did not meet normal underwriting standards. He had gone to the ratings agencies and told them about his findings, and they had all told him, “We’re not interested because we’ll lose our business if we start rating this stuff correctly.” So we’re getting a lot of stuff out of these hearings. The problem is that it doesn’t have legislative force. It’s great that we know it, but what’s the next step? We have to actually do something.
MA: And the Commission may propose solutions. Have you heard anybody propose worthwhile solutions?
MT: There are a lot of solutions out there that make sense. And a lot of them were proposed during the argument over Dodd-Frank, the Wall Street Reform Bill. The biggest one, the most important one to me was the Brown-Kaufman Amendment, which was Sherrod Brown and Ted Kaufman. Their idea was the mandatory breakup of companies when they get over a certain size, when they’re over 10 percent of national deposits or something like that. We have to break them up, I think, because the biggest problem is this too-big-to-fail issue because it places government in a position of being subservient to these companies. Also when they get that big, they have no incentive to behave responsibly because they know they’re going to get bailed out.
The other problem is that when you have a too-big-to-fail company, it allows them to borrow money more cheaply because if you’re lending to two banks, one that is too big to fail and one that isn’t, well the one that’s too big to fail knows it’s going to get its money back because the government’s never going to let it go under, so you’ll charge Goldman Sachs less than you’ll charge your local bank. That gives them an inherent competitive advantage. Cost of capital is everything in banking, so these companies are going to get bigger and bigger; small banks are going to get smaller and smaller, and it’s just going to increase the problem. So breaking the banks up is the biggest thing we have to do.
Maria Armoudian is a journalist, singer/songwriter and legislative consultant whose articles have been syndicated by the New York Times and the Los Angeles Times syndicates. She has written for Salon.com, Daily Variety, Billboard, the Progressive and Business Week among others. © 2010 Independent Media Institute. All rights reserved.
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