I am trying to figure out why this blog, written by a complete amateur, is rated first on a Google Search of 'Roger Lowenstein Not Guilty'. My blog gets about 10 hits per day. Nobody reads it. And yet, it is ranked above notable websites staffed by experienced, educated real journalists and writers. I think something definitely is wrong with this picture, but I don't know what it is. Perhaps it has something to do with google owning both google and blogspot; possibly pushing blogspot articles above others. But I don't know. Here is my article anyways. Grain of salt, etc.
Roger Lowenstein has penned a gigantic "Je Defend!" of our financial system circa 2008, called "Wall Street, Not Guilty". Now I'm not a financier. I'm not a journalist. I didn't even pass Econ 101. I am just some guy with a bowl of macaroni and a Blogger account. But he says some things that just don't seem to make any kind of sense, whatsoever.
Now to give a little background as to why I should give a crap about Roger Lowenstein, the following should be said. Roger Lowenstein wrote one of the classic books on financial shenanigans. It is called "When Genius Failed". It is about this hedge fund named Long Term Capital Management that lost untold billions of dollars in 1998 when Russia defaulted on it's debt, at around the same time the Asian economies were having issues. LTCM lost so much money that the Federal Reserve asked the big banks to get together and bail it out in order to stop a worldwide economic meltdown.
Lowenstein's book is brilliant, a classic. One can see echoes of it in many of the books written about the crisis of 2008. In fact, a good number of them cite it. Lowenstein even had his own crisis book, called "The End of Wall Street", driving home the point that this thing called the 'American Investment Bank' ceased to exist in 2008. They had all either gone bankrupt or been bought out or changed their form to Bank Holding Companies.
But his new article is hard to understand. It just seems so at odds with almost every other crisis book. Not just in what he is saying, but in the things he says along the way to his conclusion. His basic theme seems to be that the folks on Wall Street haven't gone to jail because no crimes were committed. I don't particualrly agree with that. But I was interested to see his arguments. When I tried to read them, though, none of them seemed to make any sense to me. For example.
The most incompetent [executive], in my opinion, was Stanley O'Neal, the former CEO of Merrill Lynch, who remained blissfully unaware that Merrill held a devastating $50 billion of CDOs until it was too late.
Really? Stanley O'Neill was the hard ass CEO of Merrill Lynch, who fired all of his opponents, packed the board of directors with his allies, hired a bunch of loyal whiz kids, and drove Merill off the CDO cliff. As opposed to ... who? The other investment banks did very similar things, varying only in degree. Here is the difference: when O'Neal realized what he had done in 2007, he instantly tried to sell the company. The board of directors fired him for this; not necessarily for his losses. Instead, they hired John Thain to 'save the company'. Guess what Thain wound up doing, after a year of puttering about and watching the stock price dive? He did the exact same thing that O'Neal was fired for trying to do. He sold the company. Only this time, Thain had to sell during an emergency, on the 'Lehman Weekend', and he had to sell for some smaller fraction of what O'Neal was going to sell it for, to Bank of America. But, it wasn't "too late". Merill got sold. Lehman is the one where the CEO was "too late" - Secretary Paulson had practically begged CEO Fuld to sell Lehman over the past year, and Fuld had repeatedly refused.
Ponzi had no source of funds other than those from investors. Madoff was his carbon copy. But was all of Wall Street a copy, too? . . . Mortgage securities had an element of Ponzi . . . However, many companies would grind to a halt without refinancing. The reason they don't is that most have genuine income. . . being negligent and even reckless with a viable business is not the same as cooking up a scheme in which revenue never existed.
The problem is that 'Wall Street' was not merely about mortgage bonds. If it was, then according to a lot of people we would have just had a situation like "Subprime One", the period of the late 90s when several subprime lenders went bust, without taking down the whole system. The 'Wall Street' of 2005-2007, however, was made of much more than mortgages. It was made of the Synthetic CDO, which was in turn made from Credit Default Swaps. These were not created from 'mortgage payments'. They were created purely out of thin air; a CDS was a zero-sum game, and that is why many people in the industry called it 'gambling', including Lawrence McDonald, a bond trader at Lehman brothers. That is also why several people in the industry, including Lang Gibson, who worked at Merill's CDO shop, and Janet Tavakloi, who wrote two books about CDOs before they were cool, called the modern CDO business a 'Ponzi Scheme'; so did others inside of the industry. Large segments of the financial markets before 2008 were not "similar to" Ponzi schemes, they shared all of the key features of a Ponzi scheme, including being made of assets that did not really exist and that were marketed through fraud.
In deciding whether to bring a criminal case at Deutsche, Justice had to answer whether senior executives had intimate participation in the bad behavior. The question was complicated by the fact that Deutsche acquired the lending subsidiary only in January 2007
Yes, but if they were investigating Deutsche Bank's involvement in the Synthetic CDO market, they could have gone back futher a year or three and found DB neck deep in it. They could have noticed that Deutsche Bank management authorized their head CDO trader, Greg Lippman, to make huge short positions against the very same kinds of products they were selling. Or they could have read The Big Short by Michael Lewis, which takes us to the American Securitization Forum conference in Las Vegas, where Deutsche Bank's own officers were restricting its people from discussing the market; why? They were trying to sell garbage at the same time they were making garbage. The Levin / Coburn report from Congress dumps out more details, emails where Lippman coos about Magnetar Capital's "devious" strategy to short it's own junk. It is hard to understand how you couldn't argue that many people inside Deutsche Bank knew they were selling garbage products, and that mangement knew they knew, and that management tried to hide all of this.
This brings me to the hugest, most baffling argument in Lowenstein's bedtime story. It is the bizarre argument that "The Big Shorts" helped "mitigate" the crisis. This is an argument you will find nowhere else, that I am aware of, in any of the crisis books, or articles.
I wasn't a fan of Goldman's slickness in letting a short-seller design a collateralized debt obligation that Goldman marketed to clients, for which it was sanctioned by the Securities and Exchange Commission. However, its unsavory dealmaking should not obscure that in betting, correctly, against the housing market, it helped mitigate the crash. Had more firms done as Goldman and shorted mortgages, fewer unsound loans would have been issued.
This is contradicted by basically just about every book that even mentions the Synthetic CDO market and the Credit Default Swaps they were built on. The example that leaps to my mind is Pro Publica's series on Magnetar Capital (which helped Jesse Eisinger and Jake Bernstein win the first ever Pulitzer for a non-print series). But you could also look at The Big Short by Michael Lewis; and for a good stiff contrast you could read Yves Smith's rebuttal of The Big Short. They all basically say the same thing; the Big Shorts, like John Paulson, Kyle Bass, Magnetar, Lippman, Frontpoint Partners, Cornwall Capital, Whitebox Advisors, Scion Capital, etc etc, were all keeping the machine going. Some unwittingly, some on purpose. When they bought 'shorts', what they were really buying were Credit Default Swaps. Those swaps went into Synthetic CDOs. Those Synthetic CDOs were then sold as investments to pension funds and retirement funds, with help from the ratings agencies. That's why the system didn't crash in 06 and 07; it was propped up by people making bigger and bigger bets, and people buying the long side of those bets while thinking that they were buying good investments. The crash, as Lowenstein points out with Lehman, if much sooner, would have been much smaller. If there had been no mechanism for 'shorts' to be repackaged as 'solid investments', the thing system would have crashed sooner. This is not the paranoid ranting of a lunatic blogger; this is almost ver batim the argument made in just about every financial book that discusses the issue. Maybe I am missing something. I just find it really hard to understand where Mr. Lowenstein is coming from here.
Next, Lowenstein compares all of us haters out here to paranoid conspiracy theorists like the JFK "Conspiracy a go go" guy in Slacker. His boogeyman for the crisis is Angelo Mozilo. As Bethany McLean and Joe Nocera pour out in painful detail in "All the Devils are Here", Mozilo was just trying to keep up with what everyone else was doing; why then is he worse than the others? Mr Lowenstein does not explain this for us. And Mozilo, again, was not even involved in the Synthetic CDO market; I don't even know if he was invovled in the Credit Default Swap market.
But it's worth remembering that in the American legal system, people who merely act badly or unwisely do not do time.
I am wondering if Mr Lowestein lives in a 'Pre-OJ' world, where people pretended that the system was fair, and that defendants get treated equally no matter how much money they have or how well connected they are. The same justice department whose prudence he lauds, as this is written, has under indictment three people for Espionage Act charges, related to their alleged communications with reporters. Unprecedented cases, more than any previous president; an extreme use of a harsh law over trivial pieces of information. Two of them (Drake and Sterling) are out-and-out whistleblowers, who talked to reporters to reveal potential law violations and/or waste by the government. One, Stephen Kim, merely had a phone conversation in which he told a reporter how North Korea might react to sanctions, back circa 2009. The defendants face decades in prison and becoming felons. This is even as the President's senior staff leak like a sieve the details of Bin Ladin's killing over the TV.
The DA who went after Wall Street, Patrick Fitzgerald, faced serious criminal charges for his involvement in prostitution; meanwhile you can go watch Inside Job, by Charles Ferguson, in which a madam details how these same big bankers used company cards to purchase the services of prostitutes, and lied about them on their expense accounts. In the same film, a Wall Street psychologist describes rampant drug use amongst the Wall Street Elite. Normal people, when they become addicted to prostitutes, eventually get caught in sting operations and go to forced counseling or get put on sex offender registries. Prostitution and drug use are also described by Randall Lane, in the aforementioned The Zeroes; he also mentions companies that raise funds for charity and then fail to give that money to charity. Jimmy Cayne, former CEO of Bear Stearns, is an admitted pot smoker as revealed by Kate Kelly in the Wall Street Journal; meanwhile there are ordinary people in prison all over the country for years and years for having marijuana and other drugs on their person. Children even get suspended from school for having headache relief pills, thanks to 'zero tolerance' policies. A woman in Oklahoma just got several decades in prison for selling a tiny bag of marijuana. Why? The judge said she "felt no remorse".
If the ordinary person gets stopped without car insurance, they can go to jail. If you don't pay for health insurance, soon that too will be penalized by the government. And yet, the Monolines and AIG insurance company executives got away scott free. Reinsurance is almost completely unregulated. And hedge funds are now able to take out 'longevity swaps', profiting from the early demise of people whose life insurance policies they have 'bet' on, and 'cat bonds' to profit when people die in fires, earthquakes, and floods. If ordinary people did any of these things, they would be indicted under RICO laws.
I do not mean to go off on a tangent. But Mr Lowenstein has asserted that there were no crimes committed because there have been no indictments; I am attempting to show there are plenty of indictments of people who are under far less serious allegations, and the pattern always seems to be that if you are well connected to Wall Street you don't need to worry about consequences.
We are not wishing for an injust law enforcement agency to crack heads because we are angry. We are asking for what our founding fathers promised us, and what Obama lectures us about when we ask him about Bradley Manning; a nation of laws and not of men. A nation where justice is blind, and who you know that the way you make a living won't have an impact on how many years you spend in prison or whether you can never vote again or get blacklisted from employment. That's what happens to ordinary people every day when they break laws far, far, far less damaging to society than those broken by Wall Street.
And what of the ratings agencies? How is it legal for one group to pay another group to influence their ratings, which they have been authorized specifically by the Congress to produce, as Nationally Recognized Statistical Organizations? How is it legal for Warren Buffet, who had a stake in Moody's, to call products his own companies enabled and profited from, 'financial weapons of mass destruction'? What about all the Super Senior Tranches, which were not even technically rated, that people were selling as 'better than AAA'? This is something almost nobody mentions except Janet Tavakoli and the various research reports you can read about Synthetic CDOs - the top tranche, the vast majority of the CDO, was not rated by any ratings agency. People simply assumed it was 'better than AAA' because ratings agencies had been involved in deciding to rate the other parts of the CDO. If dozens of authors missed this point, which can be clearly seen by looking at a handful of CDO trade industry rags (like Total Securitization), then how could you expect the funds buying this stuff to get it? How could you expect AIG and the Monlines to get it?
What about the Collateralized Loan Obligation market, pumped to the brim with garbage from leveraged buyouts and shady private equity deals? What about the Monoline insurance companies - it was actually illegal for them to sell CDS against CDOs a couple of years back, and then magically that changed? And then all of a sudden, a shorter named Bill Ackman gets investigated by the SEC for poking around and asking questions about all this? How about the Auction Rate Securities frauds? How about the SPACs, which seem to resemble the "company made for some purpose yet to be determined" from the South Seas era bubble in Chancellor's "Devil Take the Hindmost"? Randall Lane describes these SPACs being promulgated in our own era. What about selling all of this to "non-sophisticated" investors, a clear violation of law?
Bribery is illegal. Fraud is illegal. Aiding and abetting and conspiracy are illegal. Lying under oath is illegal. Prostitution is illegal. Drugs are illegal. Patrick Fitzgerald said that if an attorney general couldn't bring a fraud prosecution after all the revelations of the Levin / Coburn report, then that AG should resign.
Wall Streets unassailability is not an isolated incident. We used to think that torture was illegal, that wiretapping was illegal, that 'illegal searches and seizures' were illegal, that Habeas Corpus meant indefinite detention was illegal, that 'targeted killing' of US citizens without trial or charges was illegal, and that kidnapping and rape were illegal... We have come to discover that those things are done anyways if the govermnent has a 'very good reason' for doing them. Can Lowenstein really blame us Hoi Polloi if we think the same sort of thing is going on with Wall Street too? When it has apparently become almost a branch of the government? The chairman of the FCC just quit to work for a company in whose favor he argued as a regulator. How can a logical, fair minded person not see a pattern here? When dozens of experts from the industry, including bond traders, hedge fund managers, CDO experts, academics, financial journalists, and a former District Attorney and Governor all say that crimes have been committed, how can you blame us Joe Blows for thinking that crimes have been committed?
I am a huge fan of When Genius Failed. It is a remarkable book. The End of Wall Street made a positve impression upon me as well. I am just not understanding what he has argued here, at all.
Update May 2011
Apparently, I am not completely insane.
Wall Street: Guilty As Charged, Richard Eskow, Huffington Post, May 2011:
There's overwhelming evidence that all of our largest banks systematically engaged in the filing of false documents to local courts in foreclosure hearings, which is perjury.
The End Of Wall Sreet Accountability: A Response To Roger Lowenstein, Anonymous Blogger, Daily Bail, May 2011:
Some notable critics, such as Bill Black, have concluded -- based on extensive research and long experience -- that financial crises, including this one, are almost always accompanied by what he calls "accounting and control fraud."
. . . many of the most angry observers and critics work in the financial services industry and either work on Wall St. or worked there in the past. Yves Smith, Larry Doyle, Barry Ritholtz and the founder of The Daily Bail come to mind.
In Praise of Sorkin’s Praise of Lowenstein’s Praise of Financial CEOs, By William K. Black, May 2011
The one thing [ratings agencies] could never do was actually review the credit risk of the securities they were rating. If they looked, they would document the endemic fraud and never get paid. If even a few rating agencies reported that fraud was endemic among liar’s loans the entire secondary market in nonprime loans would have collapsed and the rating agencies’ most lucrative source of fees would have disappeared.
" lenders “qualified” borrowers on the basis of their purported ability to repay the initial – far lower – “teaser” interest rate. An honest lender would not do so because it would ensure extreme default rates. Second, the very low rates delayed the defaults, optimizing and extending accounting fraud. The facts that the author report are not “classic signs of a bubble” but rather classic signs of accounting control fraud"
Why CEOs Avoided Getting Busted in Meltdown: William K. Black, May 10, 2011, Bloomberg Businessweek:
"Akerlof and Romer explained how bank CEOs can use accounting fraud to create a “sure thing” in the form of record short-term income, generated by making low-quality loans at a premium yield while making only minimal reserve allowances for losses. While it lasts, this fictional income allows the chief executive officer to loot the bank, which then fails, and walk away wealthy. . . . In criminology, we call these accounting-control frauds"
I plead the Fif, Dave Chappelle and writers, Chapelle's Show, Comedy Central (via dailybail/vimeo)
Wall Street, Not Guilty, Roger Lowenstein, Bloomberg Businessweek, May 12, 2011
Debunking Michael Lewis' The Big Short, Yves Smith, 3 25 2010, huffingtonpost.com
The Magnetar Trade, Jesse Eisinger and Jake Bernstein, ProPublica, Apr 9 2010