JPMorgan Chase ended up saddled with a $13 billion settlement after it admitted to making 'serious misrepresentations' to mortgage investors. (photo: Seth Wenig/AP)
Why
the Banks Should Be Broken Up
By Matt Taibbi, Rolling
Stone
09 April 16
Bernie
or no Bernie, 'Times' columnist Paul Krugman is wrong about the banks
Paul
Krugman wrote an op-ed in the New York Times today called "Sanders Over
the Edge." He's been doing a lot of shovel work for the Hillary Clinton campaign
lately, which is his right of course. The piece eventually devolves into a
criticism of the character of Bernie Sanders, but it's his take on the causes
of the '08 crash that really raises an eyebrow.
By way
of making a criticism of the oft-repeated Sanders charge that the big banks
need to be broken up, Krugman argues that banks were not "at the heart of
the crisis."
This
is Krugman's assessment of who was responsible:
"Predatory
lending was largely carried out by smaller, non-Wall Street institutions like Countrywide Financial; the
crisis itself was centered not on big banks but on 'shadow banks' like Lehman
Brothers that weren't necessarily that big."
Forget
about the Sanders-Clinton race, because it's irrelevant to the issue. Krugman
is just wrong about this.
The
root problem of the '08 crisis lay in a broad criminal fraud scheme in the
mortgage markets. Real-estate agents fanned out into middle- and low-income
neighborhoods in huge numbers and coaxed as many people as possible into loans,
whether they could afford them or not.
Those
loans in turn were bought up by giant financial companies on Wall Street, who
chopped them up into a kind of mortgage hamburger. Out of this hamburger, they
made securities. These securities were then sold to institutional investors
like pension funds, unions, insurance companies and hedge funds.
In the
typical scenario, the investors buying these toxic mortgage securities weren't
told how risky the merchandise was. Many thought they were investing in
AAA-rated real estate, when in fact they were buying up the flimsy home loans
of part-time janitors, manicurists, strawberry pickers, people without ID or
immigration status, and so on.
There
were two major classes of victims in this scheme: homeowners and investors.
About five million people went into foreclosure after the crash, and investor
losses globally ran into the trillions. It was an unparalleled event in the
annals of white-collar crime.
Virtually
the entire financial industry had a hand in this. The ratings agencies were complicit because
they blessed a lot of these mortgage securities with high ratings when they
knew they didn't deserve them. Companies like AIG had a role because they
created a kind of pseudo-insurance for these mortgage securities that disguised
the risk they posed.
And
Krugman is right that companies like Countrywide and First Century, the sleazy
"mortgage originators" who sent teams of over-caffeinated real-estate
hustlers into neighborhoods offering crooked loans, were primarily responsible
for a lot of the street-level predatory lending.
But
Krugman neglects to mention the crucial role that big banks played.
The
typical arc of this scam went as follows: Giant bank lends money to sleazy
mortgage originator, mortgage originator makes lots of dicey home loans, the
dicey home loans get sold back to the bank, the bank pools and securitizes the
loans, and finally the bank sells the bad merchandise off to an unsuspecting
investor.
The
criminal scenario that was most common was a gigantic bank buying up huge
masses of toxic loans from a Countrywide or some other fly-by-night operation
and knowingly selling this crap as a good investment to some investor.
We
chronicled an example of this in "The $9 Billion Witness," the
story of JP Morgan Chase whistleblower Alayne Fleischmann, who lost her
job after trying to stop the bank from selling a parcel of bad mortgages. JP
Morgan Chase ended up saddled with a $13 billion settlement after it admitted
to making "serious misrepresentations" to mortgage investors.
What's
so baffling about Krugman's column is that there is a massive amount of
documentary evidence outlining this behavior, committed by virtually every
major bank in America. There was a $7 billion settlement paid
by Citigroup, which incidentally is the company that Bill Clinton originally
repealed the Glass-Steagall Act to create. Citi admitted to hawking merchandise
that violated their own internal credit guidelines.
Citi
also bilked investors out of huge sums, and we know a great deal about its
behavior because it too had a whistleblower, named Richard Bowen. Bowen sent the
SEC over 1,000 pages documenting "fraud and false representations given to
investors."
There
were virtually identical billion-dollar settlements involving Bank of America, Goldman Sachs (which
is now a bank holding company, remember) and Morgan Stanley (ditto).
Wells
Fargo's settlement is another blunt repudiation of Krugman's point, because in
the case of Wells, the bank itself was engaging in predatory lending at the
street level, not just selling crappy mortgages to investors.
Wells
had to pay $175 million to
settle charges of overcharging 4,000 minority homeowners in a case that
saw evidence come out that
the bank specifically targeted black customers (referred to in one office as
"mud people") for "ghetto loans."
Let's
not forget also that not only were the big banks intimately involved in the
signature fraud of the era — the creation and repackaging of toxic mortgage
loans — they were also involved in wide-ranging foreclosure abuses.
Companies
like Bank of America, Citi, Wells Fargo and Chase ended up being stuck
with an additional $25 billion settlement just
for the tawdry document-fudging "robosigning" scheme that helped
accelerate the foreclosure crisis.
And
did Krugman miss the other headlines from this era? Did he miss HSBC being
nailed for laundering hundreds of millions of
dollars for Central and South American drug cartels? How about
the money-laundering scandals involving Chase, the British Bank Standard Chartered,
the German Commerzbank AG and
others, in which banks washed cash for crooks and rogue states?
And
did he miss the LIBOR rate-rigging scandal that
forced the likes of Barclays, UBS, Rabobank, the Royal Bank of Scotland, and
Deutsche Bank to pay massive settlements for manipulating interest rates? How
about the Forex manipulations that led to still more settlements for
the likes of Goldman, BNP Paribas, HSBC and Barclays?
Krugman
would likely argue that all those little things like laundering money for
narco-terrorists, monkeying with world interest rates, and systematic cheating
in the currency markets had nothing to do with the crash.
He
would technically be correct in this. But the entire argument for breaking up
the banks, which incidentally didn't originate in the Senate with Bernie
Sanders or even Elizabeth Warren but with Ohio's Sherrod Brown and then-Delaware
Sen. Ted Kaufman, was conceived with the idea that leaving
over-large banks intact invited not only the potential for future bailouts, but
future regulatory problems.
As MIT
economist Simon Johnson pointed out in 2010, these
institutions have become so big that they can confront and defy the government.
Moreover the failure to punish the banks for the great mortgage frauds of the
crisis years left all of these companies with the knowledge that the
authorities were afraid to aggressively enforce the law, for fear of disrupting
a fragile economy.
When
UBS and HSBC escaped with slap-on-the-wrist settlements for the LIBOR and
money-laundering offenses, respectively, Sherrod Brown redoubled his efforts to
break up the banks,insisting that these episodes proved these companies were
now too big to be regulated. By 2013, Brown said, it was clear that
"these megabanks are out of control."
The
call to break up the banks is not some socialist clarion call to end
capitalism. (Well, it might be from Bernie, but not from everyone.)
In
fact, it's just the opposite. The lessons of the crash era are that these megabanks
have grown beyond the organic controls of capitalism. They were so big and so
systemically important in '08 that the government could not let them go out of business.
This
alone was an argument for breaking them up. The banks emerged from '08 with the
implicit backing of the federal government. They became quasi-state entities,
almost immune to failure. Not just Bernie Sanders worried about this. Voices as
diverse as Louisiana Republican David Vitter and
Krugman's own New York Times editorial board have argued for hard caps on
bank size.
What's
happened in more recent years, with LIBOR and the money-laundering scandals and
Forex and the London Whale episode and so on, is that these firms also proved
too "systemically important" to regulate and prosecute. They grew too
big not only for capitalism, but for criminal law.
When a
company is not only too big to fail, but too big to prosecute, it's too big to
exist. Krugman may believe otherwise, but he shouldn't pretend that others –
including his own paper – don't have legitimate concerns.
C 2015 Reader Supported News
Donations can be sent
to the Baltimore Nonviolence Center, 325 E. 25th St., Baltimore, MD
21218. Ph: 410-323-1607; Email: mobuszewski [at] verizon.net. Go to http://baltimorenonviolencecenter.blogspot.com/
"The master class
has always declared the wars; the subject class has always fought the battles.
The master class has had all to gain and nothing to lose, while the subject
class has had nothing to gain and everything to lose--especially their
lives." Eugene Victor Debs
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