On the first day of the Financial Crisis Inquiry Commission, Phil Angelides demonstrated a gift for powerful and memorable metaphor: accusing Goldman Sachs of essentially selling defective cars and then taking out insurance on the buyers. Lloyd Blankfein and the other CEOs looked mildly uncomfortable, and this image reinforces the case for a tax on big banks – details to be provided by the president later today.
But the question is: How to keep up the pressure and move the debate forward? If we stop with a few verbal slaps on the wrist and a relatively minor new levy, then we have achieved basically nothing. We need people more broadly to grasp the dangerous financial “risk system” we have created and to agree that it needs to be dismantled completely.
One way to do this would be for the Commission to call key people from Citigroup to testify.
This would not be as part of a large panel with other firms. This would be a drill down into the history, structure, and attitudes involved in building what became the country’s largest bank – and then in driving it into the ground. My full proposal is on the Daily Beast today, but in summary I would question Vikram Pandit and Chuck Prince at length and then pull in Sandy Weil and Robert Rubin.
This is not about the individuals; it’s about the system. But the only way that broader mainstream opinion will change is if it sees and hears from the people who thought they had everything under control. And – let’s face it – Citi has been at the center of all major international financial crises over the past 30 years; its alumni have top positions in our administration; and no one thinks it is a well-run organization.
It’s the human dimension of big bank hubris that will grip the popular imagination. That and the great fortunes they accumulated at your expense.
By Simon Johnson
The Baseline Scenario 
It would have been cuter if you had titled it “The Citi THAT Never Weeps” from the lyric in Sinatra’s “New York, New York”.
It says “sleeps” in the song but obviously a cute play on words…. anyway… not much to add here
rubin’s model at goldman sachs became the design for most money center banks and investment banking firms. barney frank and chris dodd should be interrogated under oath about there role in the mortgage mess and demands for support to fanny mae. these folks were the authors of the financial meltdown and now are looking to point the blame elsewhere. it will all come out if the investigation includes the media with a couple of current day bernstein and woodward muckrakers as there is plenty of muck to wade through.
Simon,
I have been reading your posts since you opened this sight, and clearly remember you suggesting, pleading, even begging for Congress to ensure upside for the taxpayer. Isn’t it they who have failed us miserably?
I agree we could debate the morals of certain participants, but the fact is that the political environment is an important consideration in trading decisions, crisis or not, and we can’t write after-the-fact tax laws based on who won and who lost.
All your readers love to bash GS, but they paid us back, with interest (+23% annualized return). Has GM paid us back? Will they? Yet they are excluded from this morning’s new TARP tax. The reason given is that it was the bank crisis that led to GM’s failure. Who are we kidding? Where is your post on the hubris of the big auto makers?
I think this crisis has proved that “Too big to fail” exists, and should be dealt with. I just don’t like how we have chosen the “canary in the coal mine” theory, and singled out one source for our pain, rather than choosing the “one boulder started the avalanche” theory, and accurately making all involved accountable. Who repealed Glass-Steagall (I know it was so CITI could buy Travelers/SB), who signed the Commodity Futures Trading Act of 2000 (ensuring deregulation of the CDS market), where did mortgage originating go awry (California)? These are questions you used to ask. Now you just talk about GS and BoA.
Christopher Dodd, the chairman of the Senate Banking Committee, when speaking about Paulson and Bernanke asking for the $750 B TARP funds, claims he had “no idea what they were going to say” (see: PBS Frontline, Inside The Meltdown). If that’s true, he should have been fired on the spot. BS, LEH, Fannie, Freddie, and AIG were all gone! My point being, you never called him out. Why?
Congress played the hedge fund game with the big boys, and got schooled, let’s be mad at them. And if we want to hold a grudge, CITI, JPM, GS, and BoA all payed back TARP (I know they we still hold equity and provide credit guarentees), take a look at GM and Chrysler. That’s where our performance is lagging.
It is interesting that there must be something in the water at CitiBank, and its predecessor National City Bank that drives CEO’s crazy. Recall that Charles Mitchell the CEO from 1921 to 1933 was held to be largely responsible for the great depression. His successor drank the same cool-aid. This does show that some how a corporate culture can endure many thru several generations of employees. FYI National City was Hatti’s central bank for a while after 1910, more bad works from the same source. It is just interesting that history repeats itself at the same institution
The $750 billion in direct assistance the big investment banks and AIG received (minus the money the automakers received) is just the tip of the bailout iceberg. There’s also the interest rate spread subsidy, the myriad Fed programs to take toxic assets off the balance sheets of troubled institutions, and the federal government’s implicit and explicit guarantee of TBTF institution’s liabilities to take into consideration. The real price of the government’s actions over the past two years has been the opportunity cost of providing essentially free credit to the FIRE side of the U.S. economy while squeezing the productive side (note, I’m not saying that the FIRE side of our economy is completely useless, only that its primary purpose is to facilitate production of actual goods and services, not to create goods and services itself). If the United States is going to recover the federal government needs to stop showering the FIRE side of U.S. economy with resources and start investing in the part of the economy that actually produces things. We can argue about the details of how this should be done, but I think it’s clear that the auto makers belong in the category of industry that actually produces things.
I agree with a lot of your statement, but have to take issue with one thing: whether banks paid back TARP or not, they still made this mess. They were still a major catalyst in this. Focus should remain on them and not be distracted by car companies. Car companies didn’t cause the crisis.
Let’s deal with the causes of the crisis first, then deal with extracting ourselves from the car company mess as a separate issue.
So Blankfein dissembles by saying GS “professional investor” clients insisted on gambling in the big casino, and GS was more than happy to provide the venue and gaming tables. Not only that, GS gambled on the opposite side of the table with them. But heck, it’s the core of a brilliantly self-interested business model……and so what if GS helped blow up the economy. It was just business as usual and nothing illegal at all about it!
When will these institutions and their leaders be held accountable in a meaningful way? American citizens are boiling mad, and I hear there’s been a run on pitchforks at the local hardware store.
I would say our economy and society are a bit too car dependent, and that investment in production should be in raw materials manufacturing and energy tech. The older car companies that are dying dug their own graves. Ford’s healthy on its own; seems to me the problem was that GM and Chrysler didn’t know how to run a business and should fail for it.
My condolences to their employees, but how about instead of propping up an industry that needs to shrink a bit, we put those workers back to work on the things we will ALWAYS need made. Regardless of what we manufacture next, there will be demand for energy, steel, silicon, and a myriad of other materials. Not to mention modern food production needs a major overhaul that might involve less diesel power and more human power.
There’s plenty of places to put people to work if two of the big car companies fail. Let’s put money in to getting them out there to do it.
I appreciate some of your thoughts. While I sound defensive, my guess is that we agree on “too big to fail”, and I think a manufacturing base is essential. In addition, I realize that the TARP has many moving parts, and is likely a long way from being closed.
That said, I feel as though too much of our time is being spent villifying those whom Washington DC and the media want to shift accountability for our problems. There is plenty of responsibility to go around, as this web site used to point out, and an effective solution must be an all inclusive effort, not discriminately writing retro-active tax laws to punish the few who are percived to be the sourcce of our woes.
One last point on manufacturing. I have always believed in the American worker, a belief supported by the fact that Toyota can build a car, cheaper, faster, and better in Tennessee, than GM can in Michigan. Why is that? And is that part of the problem? The productivity of the American worker is NOT the problem.
A talk about the auto space must include the unions. A talk about healthcare must include frivolous law suits. etc….. Are lawyers capable of this?
“The democracy will cease to exist when you take away from those who are willing to work and give to those who would not.”
Thomas Jefferson
Whether banks paid back TARP or not, they are still now operating under the explicit guarantee of the American taxpayer. Even the CEO’s yesterday acknowledged that the US Government would not let the banksters fail.
That guarantee has costs for all of us even if, by some miracle, we don’t have to bail out their sorry butts any time soon.
It causes distortions in investment, power, access, moral hazard and risk assessment that ought to be anathema to any free marketeer.
Especially seeing the starboard side of the commission, I’d like to hear from Hon. Sen. Phil “professor” Gramm.
We should all find it difficult to seperate Michigan from Wall St, or any industry rom Wall St. This is a popular perception that is being sold to us that is simply not true. They are one in the same.
To you point, I am not trying to absolve the financial industry from any responsibility, just from ALL of it.
Fix the banks. I agree. That has to include asking who was in the White House when Glass-Steagall was repealled, who signed the commodity future trading act of 2000, and so on……. Who is incentivised to do what. Ask that and you’ll have to agree that we need to reform the reformers.
No matter how much Congress poses with these hearings, the bottom line is that these banks and the tier of banks just below them got TARP money to cover their butts for bad decisions, added it to their capital balance sheet, and used the excuse of financial crisis to bankrupt and destroy small businesses and banks across the country that were not in default on their loans until the bigger institutions stripped them of their ability to continue their projects. Then the banks foreclosed, swooped in with connected individuals and firms,who then bought up those properties for pennies on the dollar. Those actions affected multiple layers of businesses, small banks, and thousands of jobs.
Simon, I’ve been listening/reading/watching(on TV/PC) you for a couple of years and I’ve thought you possess one of the sharpest minds in any venue. While I agree with your proposal for continuing the investigation and your statement that “it’s about the system,” I find that rather like seeing the forest but missing the trees. The other comments (so far, 6) seem to exhibit the same “error” or the reverse, seeing a few trees and missing the forest.
The “problem” is systemic but that system _IS_ primarily composed of people. The people you mention, among others, as well as the people and organizations JTA’s comment references, among others, _ARE_ significant pieces of that system, but not all of it. The fact is that our entire culture has devolved into individuals whose primary concern is to garner, for themselves, a larger share of the “pie.” All other priorities rescinded. Most certainly Mr. Blankfein, Mr. Dimon, et.al. do not possess the least concern or regard for the majority of the citizenry. I’ll even contend they don’t have any regard for their “senior” employee’s, to whom they “award” large bonuses, beyond how much more those players “contribute” to increasing the personal wealth of those CEOs! The same is true for the vast majority of our elected “representatives” at every level of government.
Perhaps more importantly, my father always said “It takes two to tango.” If such a large portion of our population wasn’t “solely” concerned with “getting rich quick,” or being “content” to work for “peanuts,” the scams and schemes of these “financial titans” or those of Madoff and his ilk could not “succeed.” We, as a nation, have become a “producer” of nothing but shit and most all only “want” to do is sling it at others. If that’s not “proof” that we “evolved” from monkeys, I don’t know what is.
So, we’re left with the dilemma of changing a nation-wide (global?) mind-set that has been “carefully” programmed and propagated for more than a few decades (centuries?). Alas, the only “sure-fire” solution I can think of is termed “extinction.” Have a wonderful day.
I understand the guarantees, even if I doubt there necessity. And we should all agree that TARP funds were taken regardless of whether or not they were needed. My point is that it was the responsibility of those who made the guarentees them to ensure we benefitted from them. Last fall the US became a gigantic hedge fund, and followed Warren Buffet into a trade. We just negotiated terms poorly, and sold too soon. Now we want to regulate bonuses and invent new taxes to make up for the costs we incurred that you mention above.
In terms of the free markets, I am a huge believer, and agree that last fall we veered from this system. Why? This was not to save a few rich guys on Wall St. It was not to save AGI. Absolutely not! Think about who deregulated markets, who made maoney cheap, who benefitted from the decade 1997 – 2007, and what did they have to lose if systemic risk swept through “Main St”. We can let a bank go under, but not if it takes down a school district in Wisconsin with it. The TARP was created because those entrusted with guarenteeing our upside played a huge role in the unfolding crisis, and that’s bad for votes.
“got TARP money to cover their butts for bad decisions”
The question is …..who’s bad decisions?
Who repealled Glass-Steagall so CITI could buy Travelers / SB?
Who left the CDS market unregulated?
If everyone who had a mortgage/ car loan/ credit card right now was paying it, would we be in this mess?
Who rated subprime AAA?
Who originated mortgages to people they knew couldn’t pay them?
Who bought CDO’s because they thought it was free money, but never really looked into what they were buying?
I’m not letting the banks off th hook, but they’re holding up their end of the solution. Is anyone else?
I realize that the TARP has many moving parts
JTA,
I don’t think NKlein is talking about TARP or any of it’s moving parts. I’m pretty certain he’s pointing to all the new lending facilities the Fed opened in the last three years to prop up FIRE. Here’s some of the alphabet soup of new lending facilities have made a joke of the Fed’s balance sheet, TAF & PDCF & TALF & TSLF.
Don’t forget Walter Wriston, who nearly brought down the world in 1982.
Your distinction is valid. Point taken.
The origination of these programs spans Dec. 2007 – Nov 2008, with the TSLF and TALF coming last, as the crisis took hold, and they are clearly seperate from TARP itself. The band aid on the broken leg.
Were they created to prop up the reserves of troubled banks, of keep liquidity flowing to to the undeserved masses?
“Were they created to prop up the reserves of troubled banks, of keep liquidity flowing to to the undeserved masses?”
The former.
“I’m not letting the banks off the hook, but they’re holding up their end of the solution. Is anyone else?”
As I pointed out earlier, the “solution,” is for the people of the United States to invest their capital in productive enterprises. Granted, defining a “productive enterprise,” is difficult to accomplish, but so far I’ve seen very little evidence that the largest banks in the U.S. are in any way interested in making these kinds of investments. Take Goldman Sachs for example. As several contributors to the comments section of this blog, most notably Jack_Chase, have pointed out over the past several months, the overwhelming source of profits for Goldman Sachs has been carry trades, short selling CDO products their own employees marketed to customers (who admittedly should have known better) that subsequently blew up, and other kinds of proprietary trading in the OTC derivative market. Now we could probably spend all day having an argument over what does or does not constitute a “good investment,” but to argue that using the resources of the United States government to fund this sort of behavior is more productive than giving a relatively tiny subsidy to the big three auto-makers is the height of silliness.
Yep, the problem with the economy is that all of a sudden somewhere between ten and fifteen percent of the population decided they weren’t willing to work anymore. Very nuanced analysis you got there. Tell me, what percentage of GM’s cost structure is labor costs? How are health care costs in Texas doing now that they’ve capped the amount of money that can be awarded in malpractice suits?
Mild simplification of the automotive industry?!?!?
Ford isn’t out of it yet, their fall started earlier than GM’s, and they still owe for it. No one remember how they leveraged the blue oval?!?!? YES. It’s up for collateral. They went through a similar process as GM did, just did it without gov’t assistance resulting in a longer changeover.
Not sure which America you live in, but the America I see isn’t in the business of manufacturing anymore, and as far as any of the other goods you mentioned, we’re behind the curve (energy) or overpriced (steel). Along that line, anyone need coal?!?!? lol!!!
The only out we have is if the dollar drops significantly enough to effectively lower the costs of doing business here.
Canadians have their share of financial, insurance and real estate skeletons (FIRE) to be sure and a complacent electorate with low economic literacy, but as a democracy we get the government we deserve just as you do… You have 2 political parties with no choice otherwise; Canada has a minority government for the last 4 years or so and that is how we like it…no confidence in any one party.
I don’t believe in funding GS’s carry trades, but we turned the US into a giant hedge fund, and it was clearly in our best interests for GS to continue being successful. They didn’t break the law, they did what they have always done, which doesn’t mean they are morally sound, but we knew what they were before we gave them the money. So why did we do it? If it was to save GS, I am completely opposed, and if it was to avoid the total collapse threatened by systemic risk, I am still opposed, and I want all responsible parties to pay their share, including GS. My point is that for Dodd, Frank, and Obama (and Simon and Kwak) to go on TV everyday and call bankers “criminals” is just not right. They had as much to do with the crisis as any bank, and there is no accountability for them. If Lloyd Blankfein’s pay offends you, then by all means, don’t look at the compensation package of as US senator or congressman! But that’s one testimony we’ll never see on CSPAN.
PS. I know labor’s contribution to GM’s cost structure is between 10% and 20%. Its not the only problem, but is defimitely a problem. Toyota makes a much better car, faster and cheaper in Tennessee than GM does in Michigan. The point being, the American worker is not the problem, allowing him to work is.
How do we get folks focused on the problem? Unfortunately, money still talks. While we need a president to help focus public attention on the problem, at the current time we don’t have one. Maybe that will change, but I’m not holding my breath until he gets pushed in that direction. What we need is cubic money!
We need a media assault as never before. Buy time, tell the story. Put it in paid ads until the networks and the cable channels, that need whatever they can find to fill time, discover a movement founded on substance. It will take doners, in the first instance, willing to cough up 6,7 to 8 figures (the other side has many). It will take an organized pool of experts to appear on short notice whenever and wherever requested and to draft op-ed pieces for major and minor markets throughout the country. It will take speakers going to campuses everywhere to deliever the message they don’t get in econ classes or elsewhere, except possibly for some tweady curmudgeon of a sociology professor who really can’t explain the substance of the process that brought us here. (I know, I almost became one. Instead, I eventually went to law school and, among other things, spent 26+ years in the enforcement division at the SEC.)
This isn’t going to happen because we all vent on blog sites. But it can happen if we get organized, find financial backing and push this agenda forward as vigorously as possible. The public, in their guts, knows who is reponsible for this mess, but they are moving toward supporting the protector of the causes, the Republican party. The scales will drop from their eyes only when our side has the same heft and depth on the bench as those who are beholden to the US Chamber, Koch money and all the other fat cat interests that brought us to the brink of financial collapse.
Anyone up for the challenge?
“relatively tiny subsidy to the big three auto-makers”
$30 B alone to GM!
GS $10 B. MGS $10 B. JPM $25 B. WFC $25 B.
Tiny relative to what?
“using the resources of the United States government to fund this sort of behavior ”
Over the last 5 years, who made money, GM or GS?
How many GS employess spend their days in a job bank?
If behavior that makes money offends you, consider relocating. It is what has seperated us from the rest of the world, it is what allows us to live longer, healthier lives, it is the means through which we trade honor for honor, value for value, effort for effort, it is what makes us great.
And by the way,
“Were they created to prop up the reserves of troubled banks, of keep liquidity flowing to to the undeserved masses?”
The former.
You’re wrong about that. Think about it. Go back and read congressional testimony. The gentleman from Mass. told TARP bank CEOs directly: “Get that money out on the streets!”
If you give a bank money because you think its illiquid, then tell that bank to lend that money out, wouldn’t it then continue to be illiquid? Yes, but it will probably win you some votes. Forget the fact that people couldn’t afford the debt they had already incurred.
Ask yourself why?
“If we stop with a few verbal slaps on the wrist and a relatively minor new levy, then we have achieved basically nothing.” Actually, we will have achieved VIRUTALLY NOTHING! Taxing them is a nice idea (as discussed in the earlier post), but I think that the Financial Crisis Inquiry Commission should keep the exectuves tied up giving testamony every business day until September. Maybe they’d get tired of living with family (their brothers-in-arms) on Capital Hill, and relent. At least this would completely exhaust their spins (so transparent thusfar) on how their activities did not cause the collapse, and how their bonuses are justified. Gosh, who the f___ to they think they’re talking to. We get it, ok? You all are Satan’s representative in America. And, doing a terrific job. Behelzabub would be (and is) proud of you’re redefining greed as a primary deadly sin.
I will never understand how these financial egomaniacs can act so innocent (they must have graduated from the Julliard school in acting).
colinc, thanks, saving your comment for use in a future anthropology class.
JTA: “All your readers love to bash GS, but they paid us back, with interest…”
Please, do not parrot the banksters as much of what they say is not true. Yes we all know the banksters say they paid the tarp back. However, that was not the only money they received from the taxpayers!
GS, and others, placed bonds WITH a full US government guarantee, thereby significantly LOWERING GS’s cost of capital. Those bonds are still there.
Also, the infamous 100% AIG payback: $ 12 billion for GS alone. Also, it appears that GS had bought a lot of CDS against AIG before the crisis, which they sold with a huge profit when the CDS prices rose. Apparently GS somehow (wink, wink) knew what the market at that time didn’t know …..
Hence, GS and the others have NOT paid us back.
+
JTA: “Who repealed Glass-Steagall (I know it was so CITI could buy Travelers/SB), …..”
Well we ALL know it was Clinton, with the strong lobbying by Greedscam, Rubin, Geithner. The inportant point however is, that it was not just so that CITY could by Travelers. CITY had already bought Travelers!! At that time it was illegal, however nothing was done. Glass-Steagall was repealed AFTER the fact!!
You’re welcome, deebs, and thank you (I think)! :) I hope it helps you “ace” the course!
JTA, also of note: GS was made a ‘bank holding’, in name only.
Now, they borrow money, almost interest free from the FED, turn around and lend that money to the Treasury (who needs the money to pay for the crisis they caused!), and get 3% interest.
The FED has created a record steep yield curve. GS borrows the money for free, and we the people pay them 3% interest.
How can you ever say they paid us back, when in clear fact they did not, plus when we pay them!!!
Carol, Carol, Carol,
The chronologic order of events was 1. announcement of CITI / Travelers deal. 2. Repeal of G-S. 3. Close of CITI deal.
More importantly, Glass-Steagall in theory was gone long before this time period, a point well documented by PBS’s FRONTLINE, in a piece titled “The Long Demise of Glass-Steagall”.
http://www.pbs.org/wgbh/pages/frontline/shows/wallstreet/weill/demise.html
We both know Sandy didn’t just role out of bed and say “let’s try to buy CITI?” Before? After? It was done so CITI could buy Travellers.
Back to the point, I don’t care that it was Clinton, or a republican or a democrat, my point is that it wasn’t GS. Our financial political complex put the wheels in place for this to occur, and are now bending over backwards to blame someone else.
If you lent me $100, with the agreement that I would pay you $10 in interest, and I used the money to make $1,000,000, would I then owe you more than the originally agreed upon $10. NO! Would you have preferred the market go down after TARP had been put into place? NO! This is now about the redistribution of wealth, and the politically savy assignment of blame. That’s it.
GS repaid their TARP obligation, with interest. It’s over. They broke no laws. They owe you nothing.
I believe in “Too Big To Fail”, so break ’em up. Regulate the CDS market. Re-instate Glass-Steagall. Do whatever you want. Just don’t puish peolple for making money. It is what has seperated us from the rest of the world, it is what allows us to live longer, healthier lives, it is the means through which we trade honor for honor, value for value, effort for effort, it is what makes us great.
Tarbender, turn off Fox and away from RedState.com and acquaint yourself with a fact or two. Fact-free right-wing blather like yours should be banned.
“And – let’s face it – Citi has been at the center of all major international financial crises over the past 30 years; its alumni have top positions in our administration; and no one thinks it is a well-run organization.”
Looks like Goldman Sachs is going to have to share the award for Vampire Squid of the Year.