Charles Ferguson’s Oscar winning documentary film “Inside Job” came out in 2011. Why write a book on the same topic? Because, as Ferguson says on p. 1 of his new book, “Three years after a horrific financial crisis caused by massive fraud, not a single financial executive has gone to jail. And that’s wrong.”
Too big to fail, too big to jail.
I hope that the recent (March 2013) confiscation of depositors’ money from banks in Cyprus focuses everyone’s mind on who the guilty parties are in the banks’ collapse of 2007-08. Charles Ferguson has done more than most to name names and cite facts. The depositors did not cause the collapse of the international financial system. The banks and the banksters themselves did. Before US, UK and/or European depositors have their money confiscated, let’s be clear about who did what and who got away with how many millions of dollars if not hundreds of millions of dollars. Charles Ferguson’s Predator Nation is essential in this task.
We know what happened. Wages have been frozen at pre-1973 levels; people went into debt to maintain their standard of living, pay for college for their kids, and put food on the table. A housing bubble, aided and abetted by the low interest policies of Alan Greenspan at the Federal Reserve, combined with lax banking standards after 30 years of deregulation and the 1999 repeal of the Glass Steagall legislation of 1933, turned the capital markets into a casino. And like a casino, “the house” – Goldman Sachs, JP Morgan Chase, Bank of America, Citigroup, Wells Fargo – “the house” always wins.
Glass Steagall virtually assured the banks’ stability and the stability of the capital markets. It separated commercial banks which accept deposits from regular people from investment banks which use their partners’ own money to lend to businesses and business ventures.
Once Glass Steagall was repealed, insurance companies, commercial banks and investment firms could merge and use whatever monies they had coming in to place their bets in the high-stakes capital markets. Brokers/traders took small depositors’ money, and insurance premiums paid on homes, cars and lives, used it as collateral to lend out ten, twenty, or even thirty times their capital, thus risking money the depositors thought was safe and in the bank – not leveraged for risky but potentially very lucrative deals. Mortgage companies – Countrywide, New Century, and all the others, the large banks like Citibank, government-sponsored enterprises Fannie Mae and Freddy Mac, they all colluded to churn out as many home mortgages as possible. The big investment firms, JP Morgan Chase, Goldman Sachs, Citigroup, hedge funds, etc. then bundled these mortgages into packages, they “securitized” them, and sold them on the capital markets to pension funds, states and municipalities, unions, other banks, other hedge funds, and other countries. They took care to buy a AAA rating for some of their securitized bundles (the top tranche or slice as they called it) as many institutions can only buy AAA rated securities. The bottom tranche they sold as junk bonds; the middle tranche was difficult to sell so they bundled lots of middle tranches together and bought AAA ratings and sold them, too. These new securitized instruments are derivatives. The derivatives market has no regulations whatsoever.
John Paulson, the head of one hedge fund, went so far as to orchestrate the securitization of mortgages he knew would fail; he sold them; and then he bet against them in the stock market, he shorted them. And he made $4 billion dollars in 2007 alone doing that.
So these new financial institutions – a combination of commercial banks, investment banks and insurance companies – could all lend money to other big financial institutions holding only 10% or less as reserves to be used to pay out in case of failure. No one imagined that so many securities would fail at the same time. They also bought credit default swaps – a sort of insurance on their securities – to make these new derivatives – CDOs, MBSs, synthetic CDOs, etc. – to make them look absolutely safe. But unlike traditional insurance where one can only buy insurance on what one owns, investment firms can buy credit default swaps on securities that they do not own. If twenty different financial institutions buy credit default swaps on some security that fails, lots of people lose big. If a house burns down, the insurance company only has to cover it once, not twenty times to twenty different insurers.
One might expect Fannie Mae and Freddie Mac, government-sponsored enterprises to conduct themselves honestly and without fraud. But both Fannie and Freddie had gotten rid of government regulation by, as Ferguson explains: “…extraordinarily aggressive lobbying, patronage, revolving-door hiring, and flat-out deceit. . . . And they instituted the same compensation structures found universally in the financial sector, which provided large bonuses based upon short-term performance. And just to leave no stone unturned, they also engaged in massive accounting fraud to ensure that their publicly reported performance enabled them to collect those bonuses.” [p. 74] Franklin Raines, one-time CEO of Fannie Mae, collected more than $90 million dollars in bonuses in 2006, the same year that he as CEO of Fannie Mae was sued by the government for accounting fraud, and Fannie Mae paid a $400 million corporate fine.
The CEOs and top executives of these financial institutions – banks, mortgage lenders, hedge funds, investment firms, insurers – also had written into their contracts that even if they destroyed their firm they would get fantastically generous “golden parachutes” when they were removed from their job. See Stan O’Neal’s compensation package below.
Journalists, documentary film makers, academics and many others have documented the massive fraud that took place throughout the financial industry up until its implosion in 2007-08 — everyone except the US Justice Dept. We know that the 1% benefited from these fraudulent activities. We know that millions of poor, lower middle class and middle class working people and their families were thrown out of their home. Millions lost their jobs. But how well did the top guys do at the expense of millions of destroyed lives?
Goldman Sachs’ CEO during the economic crisis, Lloyd Blankfein, saved Goldman Sachs from bankruptcy by pressuring AIG to pay $20 billion that it owed to Goldman Sachs for credit default swaps. This almost caused AIG (American International Group) to crash, requiring a bailout by the U.S. government.
Henry (Hank) Paulson, Secretary of the Treasury under George W. Bush’s 2nd term, 2004-8, former CEO of Goldman Sachs before Blankfein, was instrumental in getting government regulators and the SEC to lower margin requirements (collateral that banks/financial institutions had to have on hand as a percentage of their loans, used to be 10%, Paulson got it changed to 5%, then to no limits letting banks/financial institutions judge for themselves their own level of risk. When he took his government job as Secretary of the Treasury that paid $183,500 per year, to avoid conflict of interest he had to sell his stock in Goldman Sachs, but because it was the government requiring him to sell his stock, he didn’t have to pay capital gains tax on it if he bought approved securities with the money. He sold $485 million worth of Goldman Sachs stock, totally tax free, thus saving $50 million.
Robert Rubin, former CEO of Goldman Sachs, Secretary of the Treasury under Clinton, CEO of Citigroup before the financial crisis, made $126 million as Chief Economist at Citigroup.
Lehman Brothers’ CEO during the economic crisis was Dick Fuld; he presided over the bankruptcy of Lehman Brothers and got away with $450 million dollars. Before the crash the top five executives of both Bear Stearns and Lehman Brothers had cashed in over $1 billion in stock in the preceding several years.
Bear Stearns’ CEO and Chairman of the Board, James Cayne, was forced out as CEO in Jan 2008; he got away with $600 million dollars. He sold Bear Stearns to JP Morgan Chase. Cayne had a $24 million dollar apt. at the Plaza Hotel in Manhattan, his own heliocopter, etc.
Merrill Lynch’s CEO during the economic crisis was John Thain.
Stan O’Neal was Merrill Lynch’s CEO from 2002-2006. O’Neal’s 2006 pay was just over $36 million, $19 million in cash, and compensation deferred to retirement to avoid taxes. In 2006 Merrill Lynch had revenues of $33.8 billion, pretax earnings of $9.8 billion; of which $6 billion went to bonuses At the end of 2007, Stan O’Neal was playing golf while his firm was collapsing. He was forced out, but he resigned and collected $161 million, $30 million in cash, $131 million in stock. He’s now on the board of Alcoa.
AIG’s Joseph Cassano was the head of AIG’s Financial Products division in London which sold CDSs. He got away with $200 million dollars.
The most notorious mortgage lender was probably Countrywide whose CEO Angelo Mozilo arranged lower-interest, advantageous loans to his political friends and his friends in Congress. He got out of the collapse of the housing market with $600 million dollars.
These are just a few facts and figures gleaned from Ferguson’s book. To my knowledge there is not a complete list of CEOs, top executives and their “winnings” during the mortgage bubble. Also to my knowledge there is not a complete list of the fines paid by the financial institutions during the years of deregulation and up until the bursting of the bubble, but the figures are breathtaking. Even more breathtaking are the profits made. The fines were no doubt chump change compared to the profits. As governments and the US government cut services and impose austerity, it would behoove the public to remember how much money those responsible for the crash got away with.
Ferguson has a short list of things that should be done in the final chapter of his book.
Improve educational opportunity and quality.
Bring the financial sector under control.
Control the impact of money on US politics.
Reform the tax system, both individual and corporate, so as to raise revenues, increase fairness, and mitigate against the formation of hereditary and financial oligarchies.
Greatly strengthen antitrust policy and the regulation of corporate governance.
Reform the economics discipline so that economists speak the truth and don’t just sell their influence to corporations.
Create a truly universally accessible, high-speed broadband internet infrastructure.
Ferguson warns of what the future might bring. One possibility is simply more of the same. “In this case” he says “America will be ruled by an ever more powerful oligarchy – roughly the top 1 percent – and will continue to function quite well for a sizable minority – roughly the top 10 percent – while becoming increasingly harsh for the majority of the population.” [p. 328] Ferguson doesn’t need to mention the results in the rest of the world – not so bad for the top 10 percent, but increasingly precarious if not outright lethal for the rest of the world.
We are in great danger. What happens is up to us. Ferguson encourages people “to take to the streets; support organizations such as Common Cause, Occupy Wall Street, and the Center for Responsive Politics; run for office themselves.” Individually, one “can save money; place our savings in local banks, credit unions, and mutual funds; invest prudently and ethically; and, above all, educate our children.” [p. 330]
I would go further. I would suggest we go to and stage a sit-in strike in the next country the US invades – be it Syria, Iran or North Korea. We should occupy Washington, D.C. until we get a single-payer health care system., tax reform, campaign finance reform, and the prosecution of those responsible. The stakes have never been higher. It’s our lives or their wealth, power and privilege.