The Other Plot to Wreck America

Posted on January 10, 2010 by

“Americans must be told the full story of how Wall Street gamed and inflated the
housing bubble, made out like bandits, and then left millions of
households in ruin. Without that reckoning, there will be no
public clamor for serious reform of a financial system that was as
cunningly breached as airline security at the Amsterdam airport.
Without reform, another massive attack on our economic security is guaranteed.
Now that it can count on government bailouts, Wall Street has more
incentive than ever to pump up its risks — secure that it can keep the
bonanzas while we get stuck with the losses.”

Editor’s Note: Frank Rich, along with Gretchen Morgenstern
(see Why All Earnings Are Not Equal) have been doing a fabulous job as the fourth estate in our society.

Combined with the latest Mother Jones articles (see The REAL Bailout: $14 Trillion), the truth is not only coming out, it is becoming understandable.

Despite the complexity of the securitization chain applied to residential
mortgage loans, it is now clear how and why Wall Street stole from
investors, stole from homeowners and ran away with the money.

It is getting equally clear that the losses and the profits are illusory
IF the companies that screwed the American citizens are held
accountable for their actions. It is also clear that Paul Volcker,
although marginalized by the the economic team in the Obama
administration is speaking the truth. Obama would do well to take stock
of what is REALLY happening out there because this time the country is
far ahead of its leaders.

January 10, 2010 New York Times
Op-Ed Columnist

The Other Plot to Wreck America

THERE may not be a person in America without a strong opinion about
what coulda, shoulda been done to prevent the underwear bomber from
boarding that Christmas flight to Detroit. In the years since 9/11,
we’ve all become counterterrorists. But in the 16 months since that
other calamity in downtown New York — the crash precipitated by the
9/15 failure of Lehman Brothers — most of us are still ignorant about what Warren Buffett called
the “financial weapons of mass destruction” that wrecked our economy.
Fluent as we are in Al Qaeda and body scanners, when it comes to
synthetic C.D.O.’s and credit-default swaps, not so much.

What we don’t know will hurt us, and quite possibly on a more devastating scale than any Qaeda attack. Americans
must be told the full story of how Wall Street gamed and inflated the
housing bubble, made out like bandits, and then left millions of
households in ruin. Without that reckoning, there will be no
public clamor for serious reform of a financial system that was as
cunningly breached as airline security at the Amsterdam airport.
And without reform, another massive attack on our economic security is guaranteed.
Now that it can count on government bailouts, Wall Street has more
incentive than ever to pump up its risks — secure that it can keep the
bonanzas while we get stuck with the losses.

The window for change is rapidly closing. Health care, Afghanistan
and the terrorism panic may have exhausted Washington’s already limited
capacity for heavy lifting, especially in an election year. The White
House’s chief economic hand, Lawrence Summers, has repeatedly announced
that “everybody agrees that the recession is over” — which is
technically true from an economist’s perspective and certainly true on
Wall Street, where bailed-out banks are reporting record profits and
bonuses. The contrary voices of Americans who have lost pay, jobs,
homes and savings are either patronized or drowned out entirely by a
political system where the banking lobby rules in both parties and the
revolving door between finance and government never stops spinning.

It’s against this backdrop that this week’s long-awaited initial public hearings of the Financial Crisis Inquiry Commission are so critical. This is the bipartisan panel that Congress mandated last spring to investigate the still murky story of what happened in the meltdown. Phil
Angelides, the former California treasurer who is the inquiry’s
chairman, told me in interviews late last year that he has been busy
deploying a tough investigative staff and will not allow the
proceedings to devolve into a typical blue-ribbon Beltway exercise in
toothless bloviation.

He wants to examine the financial sector’s “greed, stupidity, hubris
and outright corruption” — from traders on the ground to the board
room. “It’s important that we deliver new information,” he said. “We
can’t just rehash what we’ve known to date.” He understands that if he
fails to make news or to tell the story in a way that is comprehensible
and compelling enough to arouse Americans to demand action, Wall Street
and Washington will both keep moving on, unchallenged and unchastened.

Angelides gets it. But he has a tough act to follow: Ferdinand Pecora, the legendary prosecutor
who served as chief counsel to the Senate committee that investigated
the 1929 crash as F.D.R. took office. Pecora was a master of detail and
drama. He riveted America even without the aid of television. His
investigation led to indictments, jail sentences and, ultimately, key
New Deal reforms — the creation of the Securities and Exchange
Commission and the Glass-Steagall Act, designed to prevent the
formation of banks too big to fail.

As it happened, a major Pecora target was the chief executive of
National City Bank, the institution that would grow up to be Citigroup.
Among other transgressions, National City had repackaged bad Latin American debt as new securities
that it then sold to easily suckered investors during the frenzied
1920s boom. Once disaster struck, the bank’s executives helped
themselves to millions of dollars in interest-free loans. Yet their own
employees had to keep ponying up salary deductions for decimated
National City stock purchased at a heady precrash price.

Trade bad Latin American debt for bad mortgage debt, and you have a
partial portrait of Citigroup at the height of the housing bubble. The
reckless Citi executives of our day may not have given themselves
interest-free loans, but they often walked away with the short-term, illusionary profits while their employees were left with shredded jobs and 401(k)’s. Among those Citi executives was Robert Rubin, who, as the Clinton Treasury secretary, helped repeal the last vestiges of Glass-Steagall after years of Wall Street assault. Somewhere Pecora is turning in his grave

Rubin has never apologized, let alone been held accountable. But
he’s hardly alone. Even after all the country has gone through, the
titans who fueled the bubble are heedless. In last Sunday’s Times,
Sandy Weill, the former chief executive who built Citigroup (and
recruited Rubin to its ranks), gave a remarkable interview to Katrina
Brooker blaming his own hand-picked successor, Charles Prince, for his
bank’s implosion. Weill said he preferred to be remembered for his
philanthropy. Good luck with that.

Among his causes is Carnegie Hall, where he is chairman of the
board. To see how far American capitalism has fallen, contrast Weill
with the giant who built Carnegie Hall. Not only is Andrew Carnegie remembered for far more epic and generous philanthropy than Weill’s — some 1,600 public libraries,
just for starters — but also for creating a steel empire that actually
helped build America’s industrial infrastructure in the late 19th
century. At Citi, Weill built little more than a bloated gambling casino. As Paul Volcker, the regrettably powerless chairman of Obama’s Economic Recovery Advisory Board, said recently, there is not “one shred of neutral evidence” that any financial innovation of the past 20 years has led to economic growth. Citi, that “innovative” banking supermarket, destroyed far more wealth than Weill can or will ever give away.

Even now — despite its near-death experience, despite the departures
of Weill, Prince and Rubin — Citi remains as imperious as it was before
9/15. Its current chairman, Richard Parsons, was one of three
executives (along with Lloyd Blankfein of Goldman Sachs and John Mack
of Morgan Stanley) who failed to show up at the mid-December White House meeting
where President Obama implored bankers to increase lending. (The trio
blamed fog for forcing them to participate by speakerphone, but the
weather hadn’t grounded their peers or Amtrak.) Last week, ABC World
News was also stiffed by Citi, which refused to answer questions about
its latest round of outrageous credit card rate increases and instead
e-mailed a statement blaming its customers for “not paying back their loans.” This from a bank that still owes taxpayers $25 billion of its $45 billion handout!

If Citi, among the most egregious of Wall Street reprobates, feels
it can get away with business as usual, it’s because it fears no
retribution. And it got more good news last week. Now that Chris Dodd
is vacating the Senate, his chairmanship of the Banking Committee may fall next year to Tim Johnson of South Dakota,
home to Citi’s credit card operation. Johnson was the only Senate
Democrat to vote against Congress’s recent bill policing credit card

Though bad history shows every sign of repeating itself on Wall
Street, it will take a near-miracle for Angelides to repeat Pecora’s
triumph. Our zoo of financial skullduggery is far more complex, with
many more moving pieces, than that of the 1920s. The new inquiry does have subpoena power, but its entire budget, a mere $8 million, doesn’t even match the lobbying expenditures for just three banks (Citi, Morgan Stanley, Bank of America) in the first nine months of 2009. The
firms under scrutiny can pay for as many lawyers as they need to stall
between now and Dec. 15, deadline day for the commission’s report.

More daunting still is the inquiry’s duty to reach into high places
in the public sector as well as the private. The mystery of exactly
what happened as TARP fell into place in the fateful fall of 2008
thickens by the day — especially the behind-closed-door machinations
surrounding the government rescue of A.I.G. and its counterparties.
Last week, a Republican congressman, Darrell Issa of California, released e-mail showing that officials at the New
York Fed, then led by Timothy Geithner, pressured A.I.G. to delay
disclosing to the S.E.C. and the public the details on the billions of
bailout dollars it was funneling to its trading partners. In this
backdoor rescue, taxpayers unknowingly awarded banks like Goldman 100
cents on the dollar for their bets on mortgage-backed securities.

Why was our money used to make these high-flying gamblers whole
while ordinary Americans received no such beneficence? Nothing less
than complete transparency will connect the dots. Among the big-name witnesses that the Angelides commission has called for next week is Goldman’s Blankfein. Geithner, Henry Paulson and Ben Bernanke should be next.

If they all skate away yet again by deflecting blame or mouthing pro
forma mea culpas, it will be a sign that this inquiry, like so many
other promises of reform since 9/15, is likely to leave Wall Street’s
status quo largely intact. That’s the ticking-bomb scenario that truly
imperils us all.

Filed under: CDO, CORRUPTION, Eviction, GTC | Honor, Investor, Mortgage, bubble, currency, foreclosure, securities fraud | Tagged: , , , , , , , , , , , , , , , , , , , |



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