In his new book, “Pity the Billionaire,” Tom Frank turns his mordant eye on the unlikeliest political development of the Obama presidency: how the crash of 2008 served to strengthen the political right. The deregulation of Wall Street, championed for 30 years by right-wing leaders, had led to an economic catastrophe so frightening that the country elected a liberal Democrat to the presidency. Yet two years later, the most conservative faction of the Republican Party, the Tea Party, had taken effective control of the House of Representatives, the regulation of Wall Street had stalled, and the champions of economic deregulation in Washington had emerged stronger than ever.
Frank, author of the bestselling book “What’s the Matter With Kansas?” provides a pithy and nuanced explanation of what he calls the “hard-times swindle.” He spoke with Salon from his father’s home in Kansas City, Mo.
Early in the book, you describe the moment in the spring of 2009 when free-market economics had been so thoroughly discredited that Newsweek could run a cover story proclaiming, “We’re all socialists now.” What happened? Why did that moment dissipate?
I saw that cover so many times [at Tea Party events]. For these people, that rang the alarm bell. I think the AIG moment [when the bailed-out insurance behemoth used taxpayer relief to dole out huge bonuses to its executives] was in some ways the high point of the crisis, when [the politics] could have gone either way. There was this amazing public outrage, and that for me was the turning point. Newsweek had another cover, “Thinking Man’s Guide to Populism,” and I remember this feeling around the country, that people were just furious. Somehow the right captured the sense of anger. They completely captured it. You could say they had no right to it, but they did. And one of the reasons they were able to do it was because the liberals were not interested in that anger.
I’m speaking here of the liberal culture in Washington, D.C. There was no Occupy Wall Street movement [at that time] and there was only people like me on the fringes talking about it. The liberals had their leader in Barack Obama … they had their various people in Congress. But these people are completely unfamiliar with populist anger. It’s an alien thing to them. They don’t trust it, and they have trouble speaking to it. I like Barack Obama, but at the end of the day he’s a very professorial kind of guy. The liberals totally missed the opportunity, and the right was able to grab it.
Looking back on it, I feel like people like myself were part of the problem. We sort of assumed with the Democrats in power, the system would correct itself.
One of the problems with liberalism in this country is that it’s headquartered in Washington and its leaders are a very comfortable class of people. Washington is one of the richest cities in the country, maybe the richest. It’s not a place that feels the crisis, that feels the economic downturn. By and large, the real estate market stayed OK. The city continued to boom. The contracts continued to flow. What we’re talking about here is the failure of modern liberalism. At one time it was a movement of working-class people. The idea that liberals wouldn’t feel economic pain was ridiculous. That’s who liberals were. No more.
You write that after Obama took office, “market populism was the only utopian scheme available to disgruntled Americans.” There was no liberal utopian scheme that said, “Here’s how we get out of this.”
There wasn’t even a Rooseveltian scheme, which was not utopian but very practical. Just to talk about Roosevelt would have been fantastic. One of the research points in the book that I thought was really interesting … was the history of the bailouts in 1932 and 1933 — when the Hoover administration did a lot of bailouts. We don’t remember that. [These bailouts] were massively unpopular for the same reason they were unpopular this time around: really blatant cronyism. We don’t remember that a big part of Franklin Roosevelt’s campaign [in 1932] was to be against these bailouts. There were maybe five newspaper articles in 2008 that mentioned this pre-history of the bailouts. It just never came up.
It was like the party’s muscle memory of the New Deal was lost. With Obama the muscle memory of the Democratic Party is the Clintonian technocracy of the 1990s.
That’s exactly right. Their message was: The technocratic way is going to solve our problems. Just leave it up to the experts who are going to figure a way out. [Obama and the Democrats] seemed to think they didn’t need to dirty their hands by making a populist appeal. They did a lot of good things — the stimulus package of 2008 was good thing — but they didn’t realize you have to sell something like that. They were like, “We know what the answer is: Keynesian stimulus. So let’s just do it.” They didn’t understand that this nation only adopted Keynesian stimulus spending back in the 1930s amidst this terrible wrenching experience, the Depression, and an enormous campaign [by FDR] to tell the nation why this was necessary.
If you don’t sell it — if you just do this spending — well, people have a lot of suspicion of government handouts. Government debt bothers people for very obvious reasons. [Obama] didn’t make any effort to make the argument. It was just “listen to the experts.” I have a quote from [Obama economic advisor] Christy Roemer where she says, “Things would be better if we listened to the experts.” And she’s one of the good guys, one of the best people in the Obama administration. That’s their view.
You have an interesting discussion about how the Tea Party movement mimics what was once the left-wing style. This seems to be the dominant mode: The right is saying, “We’re the revolutionaries. We’re taking on the powers that be.”
At first I thought it was a peculiarity of Glenn Beck, and then I noticed it across the board. They picked up this 1930s style and language, complete with utopianism, with this intense faith in an economic system that will solve all your problems and that represents you perfectly, this miraculous economic system … So [the right] is constantly talking about this infernal elite that controls government, controls corporations, and controls the academy, and that we have to wrench ourselves free.
So maybe it is true that the Obama technocracy is the infernal elite. Maybe not in the hellish way it is portrayed on the right, but in the sense that these are the defenders of bailouts, the defenders of the system.
I wouldn’t go too far with that, because I don’t think that is a way of understanding our modern world that can bear a lot of the weight. It is true that the Democrats completely imagine themselves as being the party of the professional class, and that is an elite. It’s not the elite, but it is an elite. The Democrats very definitely identify with academia. That’s the home of the professions, where they come from.
Still, I think that the conservative idea of revolting against the ruling class by holding up the market as an ideal is completely backwards. There is a ruling class in this country. But the notion that the free market is an act of rebellion against it seems pretty fanciful. I can say it stronger than that. It is absolutely preposterous.
At one point you talk about “a cognitive withdrawal from the shared world.” It seems like the modern digital communication revolution encourages this. “A cognitive withdrawal from the shared world” — that sounds like a description of the Internet.
This is where we’re going. You can now believe things that are demonstrably false and never be challenged, directly or indirectly. You can withdraw. That’s the end that the Internet is constantly pushing us toward. That’s what modern marketing is all about.
So it’s a technological phenomenon, but it’s also an ideological phenomenon, a product of the times we’re in. You saw this in the ’30s, especially on the left. People would be so committed to this economic utopia [communism]. They believed in it, and their faith in it was so great … It is a product of economic collapse. People are desperate. They think their entire way of life is crumbling around them, and they reach for … a utopian system where everything is explained.
This is the genius of Fox News. It is fun to watch, and if you agree with them, it’s very gratifying to watch — and on a level deeper than most TV entertainment. The message is “You’ve worked really hard. You played by the rules and now they’re disrespecting you. They won’t let you say the word ‘Christmas.’”
You finished this book around the time Occupy Wall Street started. Were you surprised by the emergence of the movement?
I was surprised. I thought the left’s moment had passed. That was almost exactly three years after the crash of September 2008, and it seemed like the expiration date had come and gone. I’m very pleased, but in a lot of ways the horse has already left the barn.
Is it possible for the Occupy movement to reverse the gains of the right?
I hope so, but I honestly don’t know. At the end of the day I doubt it. My liberal friends have been doubting the right for decades. They’re always saying, “There’s no way these guys can recover now after this screw-up. People will never come back to them after this.” But they keep coming back.
The right does seems to be a little bit on the defensive at the moment. The dominant narrative of last summer — government spending is the problem — has been lost. Occupy Wall Street has injected a change in discourse. People aren’t defensive when they talk about inequality.
Tell me about it. When I started writing about inequality 10 years ago, it … was not something for NPR Book Talk. It was not quite within the bounds of the acceptable. Now it is. And that’s a huge change.
The main thing that has to change is that Democrats and liberals have to be able to speak to the outrage, and that requires a complete change in the way they look at the world. The problem is that they’ve been going the other direction for 30 years. Ever since the right-wing backlash began, liberals have been making their own move to professionalism. [To voice outrage] would require them to reverse course. I would like to see that happen, but I don’t know how it’s going to happen.
I think one thing has happened: Middle-class or upper-middle-class liberals in Washington, all of a sudden we realize we are insecure. The system is not just screwed up for people out there who we sympathize with. It’s screwed up for us. Economic insecurity is now pervasive even in the professional class.
Professionals are feeling the heat. They’re not insulated from market forces, like the way the professions are supposed to be. The system is not working like that anymore. Maybe that is where the change will come from.
Another thing that I think changed things was the debt-ceiling debacle last summer. That scared everybody, and it was so patently the doing of the Tea Party Republicans in the House. That was a huge turning point.
The hostage taking?
They were holding a gun to the head of the nation’s economy. They did ruin the nation’s bond rating. And you could have had an unthinkable catastrophe if they had done what they were threatening to do. Things like that should be off the table in our politics. That was an outrage in its own way as great as the bailouts. It was a shocking moment.
Yet at the end of the book, you contemplate the right wing in power, and you suggest they might do exactly that — take actions they know would ruin the economy.
They might. They see the financial crisis as something we deserve, that we’ve spent beyond our means, and now we have to pay. In their minds, we need a recession to get back on track. They think we’re due for something like the 1930s, so why not make it happen?
You conclude by saying say that the problems that editorialists fret about — inequality, global warming and financial bubbles — will endure, but so will this utopian market populism, which you describe as chasing “the dream more vivid than life itself.” You have shown how entrenched those impulses are in American politics. Maybe part of the American pursuit of happiness is to “chase the dream more vivid than life itself. “
The right has discovered the magic against relativism. They have long inveighed against relativism, but now they’ve discovered they can say anything. They can endlessly withdraw into this world of utopian fiction and everything can be explained away. It’s like some kid discovering a new video game. It’s so awesome.
So what gives you hope?
I was out in Wisconsin earlier this year, when you had thousands of people surrounding the capitol every day. There were big days when they had a hundred thousand people, and then there were the off days where you had “only” a couple of thousand — and this went for day after day. That was really a hopeful moment for me. It was the predecessor to the Occupy movement. Let’s see if they can make a comeback when it gets warm again. I would love to see it happen.
“Inside Job,” Charles Ferguson’s Oscar-winning documentary film on how government, Wall Street and academia colluded to deliver us the worst financial crisis since the Great Depression, made a powerful case that something was very very rotten at the heart of the American political/economic nexus. His follow-up book, “Predator Nation: Corporate Criminals, Political Corruption, and the Hijacking of America,” can be considered the legal brief that dots every “i” and crosses every “t” in his argument. A tightly argued, profusely footnoted and deeply enraged castigation of everyone involved, “Predator Nation” isn’t just a factually unchallengeable account of how Wall Street blew up the global economy. It’s a denunciation, a call for justice and a warning: After getting away with the crime of the century, Wall Street still isn’t satisfied.
“If you have already got 96 percent of what you want,” Ferguson told Salon, “why not take the remaining 4? That’s where the culture of American finance is right now, and I think it’s really dangerous for the country.”
For at least 30 years the United States has been headed on the wrong track, handing over more power and wealth to a tiny percent of the American population at the expense of everyone else. But Ferguson’s story isn’t just focused on the greed and recklessness of the elite. It’s also about their criminality. The bankers who wrecked the financial system broke the law. And yet, amazingly, not only have the vast majority of responsible parties not been convicted of any crime — they haven’t even been charged. There have been a few settlements of fraud allegations with the Securities and Exchange Commission and other regulatory bodies and a smattering of slap-on-the-wrist fines, but nothing that comes close to a proper reckoning for the massive hardship and economic destruction that they caused.
Ferguson’s glowering rage spares neither political party. Clinton gets the blame for completing the process of financial sector deregulation, and George W. Bush is lacerated for his general incompetence. But Barack Obama is showered with a particularly aggrieved contempt. Obama, writes Ferguson, came into office with more hope invested in him than in any recent leader, and then proceeded to “betray” and “screw” his supporters by declining to bring Wall Street to account for its misdeeds.
“Predator Nation” hits bookstores on Monday, just in time to cash in on the headlines generated by the latest banking atrocity — JPMorgan Chase’s massively failed derivatives bet.
“Predator Nation” is an angry book. Were you this angry before you started making the film “Inside Job”?
No, I absolutely was not. I remember the first time I got any kind of inkling of what was to come was in August or September 2007, when Charley Morris sent me a copy of a galley proof of his book, “The Trillion Dollar Meltdown.” It was scary and powerful, but I couldn’t bring myself to believe it. I remember calling Charley and saying, “You lay out a very convincing case but really, these people aren’t that crazy, they aren’t that stupid. They are regulated. Can it really be this bad?”
And he said: “You just wait.” And boy, he was right.
It’s not that I thought that investment bankers were like Mother Teresa. I knew that they weren’t. But the degree of nakedness and extremity of the dishonesty and its pervasiveness was a huge shock to me. It turned out that many banks, on a very large scale, and without any disclosure, had created and sold securities with the intent of betting on their failure. And this was done with the knowledge and approval of senior management of all these banks, including the oldest and most traditional.
How do you explain this behavior? How did we get to a point where it was routine for Wall Street bankers to behave in ways that most Americans would consider frankly immoral?
I think this has its roots all the way back in the 1970s and the beginning of the era of deregulation. But there was a kind of inflection point during the five-year period between 1997 and 2003 — the late Clinton and/or early Bush administration — when all the rules just went away. You went from a period, a regime, where people did have at least some concern about going to jail, to a point where everything is legal, and derivatives couldn’t be regulated at all and nobody went to jail for anything. And looking back I would say that this period definitely started under Clinton. You absolutely cannot blame this on George W. Bush.
You say that everything is now legal, but in your book you dismiss Obama’s argument that he could not prosecute Wall Street bankers for criminal behavior because what they did was technically not illegal as “complete horseshit.”
I should be more precise. I should have said, “where everything was perceived as being legal.” There was no perception that, even when you were in fact violating the law, that there would be any legal jeopardy or legal consequence to what you were doing. And that was part of my surprise when I was making “Inside Job.” I really was surprised that people would so overtly and explicitly do things that 20 years previously probably would have gotten them landed in prison.
One can certainly argue that the penalties and prosecutions following the S&L [Savings and Loan] and insider scandals of the 1980s were vastly insufficient. No doubt about that. But there still were consequences. I don’t know whether [junk bond king] Michael Milken would have still done everything he did, if he knew that he was going to spend two years in prison and have about half of his wealth confiscated. Maybe he still would have made that bet, but still, clearly he had a few unpleasant days. And now, nothing, just nothing.
In your book, you have a laundry list of things you believe the bankers could be prosecuted for, everything from securities fraud to perjury to RICO Act violations. And then you point out, more than once, that during the Obama administration there have been no arrests or indictments of any firms or senior executives “related to causing the bubble or the crisis.” What’s your explanation for this? Is it as simple as the Obama administration being captured by the financial sector?
I’m not President Obama’s psychoanalyst, so I can’t speak to what goes on inside his head. But that is what I would say of the Obama administration generally. In the book I go through the list of his personnel appointments and it’s pretty clear.
But how do we square that with the negative Wall Street reaction to bank reform? You devote only one sentence in your entire book to Dodd-Frank, calling it “weak and ridiculously complicated.” But even so, House Republicans have introduced nine bills trying to repeal parts or all of it, Romney is campaigning on repealing the whole thing, and Wall Street hates it and has tried to kill every last part of it. There is clearly antipathy against Obama from the financial sector now, from Jamie Dimon on down, that wasn’t there when he got elected. If he was truly captured, why the antipathy?
Well, there is some antipathy. But he just held a very successful fundraiser at the home of the president of private equity group Blackstone. So the antipathy is not universal.
But you know, when I was in academia and also when I was running a software company I had a fair amount of contact with portions of the financial sector, investment banking industry, and the venture capital sector. And certainly they were already pretty rapacious and pretty politically conservative. But they would never then have said and done the things that they say and do now. I recently was at a dinner in New York City and one of the people there was a very, very successful man who is on the borderline between venture capital and private equity. And this guy went into an extended rant about how he was at a disadvantage because he had to pay 15 percent capital gains taxes. When I was first dealing with venture capitalists in a significant way, the capital gains tax rate was 28 percent, and nobody was complaining. Then they got them reduced to 20 under Clinton, and then later 15 under Bush. Plus, they got a rollover provision so if they took the proceeds of a venture capital investment and rolled it over into a new venture capital investment it was tax-free. At that point, we’ve reached nirvana, what more could there be?
But now we’re in this environment where this guy was loudly and aggressively complaining that he has to pay 15 percent to the government. And if that’s where you’re at, then of course you are going to complain about Dodd-Frank. You are going to complain about everything. If you have already got 96 percent of what you want, why not take the remaining 4? That’s where the culture of American finance is right now, and I think it’s really dangerous for the country.
Do you find it alarming that even after this huge crisis and even with a lot of populist anger on both the right and the left focused on Wall Street, Mitt Romney is running for president while promising to further deregulate Wall Street and repeal Dodd-Frank, and the polls show him neck and neck with Obama?
That is true, but I don’t think that Romney is going to get votes primarily or even secondarily for that. Most of the votes he is going to get will be because he’s religious, he’s against gay marriage, et cetera, all of these allegedly “values” issues — things like that and wanting to reduce taxes. That’s why he is going to get a substantial fraction of the popular vote. The reason he says he wants to roll back Dodd-Frank is not to get votes, it is to get money.
Ninety-nine percent of your book tells a story of how we’ve gotten ourselves into a bigger and bigger mess, and then you’ve got about a page and a half discussing what could be done to fix it. But your solutions — a legitimate third-party alternative, controlling the influence of money in politics, real tax reform, fixing education — it’s just really hard to see how we get from our current problems to those bullet points.
Yes. And we’re not. Not right now. I think it’s going to take things getting worse, either slowly or fast. Either we continue to melt away for another 25 years and then finally people wake up, or there might be another crisis. And maybe that will be sufficient. We’ll see. I don’t know. I’d be interested in your own view of this. I’ve had debates with several of my friends on this question. If Obama had really had the balls to try to do the various kind of things that he’d promised to do, or kinda sorta almost promised to do during his campaign, if he really made an effort, how far do you think he could have gotten in 2009?
At this point, I’m in the camp that believes that American government is completely broken. And we didn’t really find out how broken it was until Obama came in. In your book, you talk about Obama coming in withoverwhelming majorities, but he really only had 60 votes in the Senate from July 2009, when Al Franken was finally sworn in, to January 2010, when Scott Brown took over Ted Kennedy’s seat. And even the things that Obama did get through had to pass muster with a handful of very conservative Democrats. Nebraska’s Ben Nelson had control over the entire government. It’s a completely dysfunctional system. I think Obama severely underestimated what he was facing when he came in, and picked the wrong strategy of trying to go bipartisan, but it’s not as if he had the freedom to do what he wanted that Roosevelt enjoyed when he became president in 1932.
But there are an awful lot of things that the president can do even without the Congress. He didn’t have to choose the people he chose. He didn’t have to choose the attorney general he chose or the head of the criminal division of the Justice Department that he chose. I think that if he had said, I’m going to allocate $500 million to a special prosecutor’s office, and we’re going to find out what the fuck happened here, he could have done that.
There’s some talk now that JPMorgan’s disastrous bet on credit default swaps might lead to tighter regulation. I have to say, it was bizarre to be speed-reading your book while the Morgan news was causing post-traumatic stress flashbacks to the worst days of the financial crisis. Does what happened there fit into the narrative of “Predator Nation”?
I rather think so, yes. Mr. Dimon has long been largely correctly regarded as the best, most judicious, most careful steward of a major global bank. That he and his bank could make a mistake like this does not bode well. One thing that has actually not been widely discussed, somewhat to my surprise, in the commentary about all of this, is that this mistake — which it appears will cost them between $2 billion and $5 billion — this occurred in a very forgiving economic environment. If they made a mistake like this in September 2008, then things could look really quite different.
Does it qualify as criminal behavior?
There is some suggestion of criminality in the lack of honesty on disclosure of the positions and their potential implications. I can’t say; we don’t know enough yet. It certainly is the case that JPMorgan, although more prudent than many other banks over the last decade, has frequently been just as dishonest. It has done a number of extremely unethical things, some of which I mention in the book. So it wouldn’t be a surprise if they had not been forthcoming about this.
Do you think it will make any difference in how banks are regulated?
I fear not. Honestly. I’m sure that Mr. Dimon is momentarily chastised, and that JPMorgan will not be making any similar bets in the next couple of years. But is it going to change the overall posture of bankers and banking and is it going to change the regulatory environment in any significant way? I tend to doubt that. Unfortunately.
So where does this leave us? Your book is filled with a strong sense of personal outrage. How do you personally feel about the prospect that the only thing that could get us out of the mess we’re in is yet another crisis, perhaps even worse than the one we just lived through?
Personally, I am very fortunate. I have a very blessed life. I made some money earlier, I’m basically pretty financially secure. I can’t have private jets and private islands but I don’t have to worry about having a roof over my head or being able to eat well, unlike many people in this country going forward. And I do work that I love. I love making movies, I love writing books. Personally I’m fine.
But the country is not. But this happens to countries. This is not the first country it’s happened to. It’s not even the first time it happened to the United States. We’ll see whether we come out of it. Last time it happened we came out of it, eventually. It took a long time and it was very painful but eventually we came out of it. Will that happen again or not, I don’t know, I honestly don’t.
Let’s put JPMorgan Chase chairman, president and CEO James “Jamie” Dimon on trial. Mr. Dimon has a reputation for being the sagest guy on Wall Street and an expert at managing risk. JPMorgan emerged from the financial crisis not just unscathed but secure enough to step in and rescue Bear Stearns when the government asked it to. (He gets very mad when you say that his bank got bailed out by the government, and he insists that the government made him take all that free money.) Then his bank somehow accidentally lost billions of dollars last week, whoops! And he is really embarrassed, but not embarrassed enough to fire himself. So, let’s put him on trial and force him to explain what good he and his bank are.
The SEC is investigating the massive loss, but that will take a lot of time and the eventual report will probably be very difficult for novices to understand and probably they won’t put anyone in jail. Dimon might have to be hauled before Congress to answer questions, but no one watches congressional hearings, and no one likes members of Congress. I think a big televised prime-time tribunal would be best. And then maybe some JPMorgan shareholders, unemployed people, journalists and angry bloggers can just ask him some really simple questions about why he thinks JPMorgan shouldn’t be regulated at all.
While I am definitely endorsing a humiliating show trial, we don’t have to send Jamie Dimon to jail afterward, even if a jury of people who had their houses foreclosed on them find him guilty. The point of this is to mainly have him on the record, compelled to answer questions plainly and clearly, to an unfriendly audience of non-Davos people.
This very good explainer helps us to understand how exactly JPMorgan came to misplace billions of dollars, but it raises more questions than it answers. Questions like, “Wouldn’t it have been better if that $2 billion had been used for almost anything in the world besides shady mega-bank gambling that no one understands?” And, “Doesn’t it seem you guys could save a bit of money on salaries and so forth while still achieving basically the same results if you replaced your chief investment officer with some old people who play video slots all day?”
I am just not really clear on the role JPMorgan has in a healthy and functioning economy, whether it is making billions in high-stakes gambling or losing billions in high-stakes gambling. It seems like America was actually doing pretty well with there not being any such thing as credit-default swaps, which JPMorgan invented, in the 1990s, right before investment banks were allowed to merge with retail banks and do whatever they wanted with everyone’s money.
I’d also like Mr. Dimon to have to explain whether he knew he was about to have to admit to losing billions of dollars when, on May 3, he complained about the “discrimination” faced by bankers. Dimon also argued a few days later that the economy would’ve added twice as many jobs in the last 24 months if it weren’t for a “constant attack on business” from various unnamed hippies and government bureaucrats. I would like to know how many jobs were created when JPMorgan accidentally lost some unknown amount of money that is likely to end up being more than $2 billion? Also did Dimon lie during his first-quarter earnings call last month, or did he have no idea what sort of things his chief investment office was up to (even after their actions were reported in the press)? If he didn’t have any idea, shouldn’t he maybe step down to run a smaller bank, where he can keep a closer eye on everything? Dimon said initially that the stuff that lost all the money wouldn’t have violated the Volcker Rule, even though it plainly violates the spirit of the Volcker Rule but also he’s not sure if the bank broke any laws? Jamie, I think maybe you should consider retirement; this bank is too complicated for you.
Dimon gets so defensive when people trash banks and bankers because he thinks his bank makes the world a better place. He thinks that JPMorgan making as much money for itself as possible is good for everyone, because capitalism. Much as today’s super-rich, the .01 percent who are largely CEOs and financial industry professionals, are a bunch of rentiers who’ve convinced themselves that they are job-creating titans of industry, Dimon has convinced himself that his firm is making our economy function better instead of just playing incredibly complex computer games with unimaginable sums of other people’s money.
So let’s haul him before a judge (I would be fine with Judge Judy) and ask him to explain, without jargon, what positive role JPMorgan plays for the American and world economies that a few much smaller, less leveraged firms couldn’t also play while not being at risk of losing billions of dollars by accident in a “hedge” and sending world markets reeling.
I mean, I’m sure he’d never admit to any sort of culpability for our current morass (it’s the gubmint’s fault!) because he clearly believes his own bullshit and he’s never faced any sort of serious challenge to his viewpoint, but it still might be very good television.
Here is the most important sentence in Jamie Dimon’s Thursday afternoon conference call discussing JPMorgan’s colossal trading screw-up: “Just because we’re stupid doesn’t mean everybody else was.”
If you’re looking for the most easy-to-understand breakdown of how JPMorgan managed to lose $2 billion, read Marketplace reporter Heidi Moore’s fabulous explainer. Readers who fancy themselves financially sophisticated can ponder DealBreaker’s Matt Levine’s analysis. If all you want is a guide to the critics “flaying” Dimon’s hide, check out the New York Times’ DealBook.
But for our purposes right now, all you need to concern yourselves with is Dimon’s monumentally disingenuous self-castigation. Because Dimon is not stupid. Under his tenure, JPMorgan has been the best-run of the big banks. So Dimon’s self-criticism gets it all backward. The fact that JPMorgan was so very stupid is so very scary because we can rest assured that just about everybody else is doing things even more idiotic.
The whole point of the infamous “Volcker Rule” included in the Dodd-Frank bank reform act is to restrict the banking sector’s ability to clobber the economy by doing dumb things. As the Huffington Post’s Mark Gongloff noted, if a strict version of the Volcker rule had been in place, JPMorgan, quite possibly, would have been prevented from making a bet that would lose the bank $2 billion — or more.
However, the Volcker Rule is not yet in effect. The final details are still being hammered out, and the brutal truth is that financial sector lobbyists have almost undoubtedly ensured that the kind of “hedging” bet JPMorgan just made would be technically legal under the new rules. There’s a remote possibility that the blowback from Morgan’s disaster might strengthen the final version of the rule, but don’t hold your breath. The worst financial crisis in 80 years resulted in bank reform that at best can be categorized as tepid and perhaps fatally compromised. One bad stumble by JPMorgan that, lucky for us, doesn’t seem likely to ignite a system-wide crash isn’t going to make a dent in Washington regulatory policy.
On the other hand, there could well be real political repercussions. Because if anyone is going to come out of this mess looking even stupider than Jamie Dimon, it’s got to be Mitt Romney — the presidential candidate actively campaigning on a pledge to repeal Dodd-Frank.
Barack Obama has been rightly dinged from the left for his soft approach to Wall Street, but there’s a reason why Big Capital is shunning him and pouring money into Romney’s campaign. Romney’s answer to the financial meltdown is to do absolutely nothing; to abandon even any pretense of reining in Wall Street bad behavior, to return us to the pre-crash regulatory status quo.
That’s suicidal. The U.S. economy may well skip over JPMorgan’s folly without any serious long-term damage. But that’s not the point. What we learned from the financial crisis is that the real danger inherent in Wall Street’s endless orgy of speculative trading is the prospect that multiple bets could go bad simultaneously when there is a big external shock to the system — like the housing bust. That’s when a downturn becomes a crash.
I can’t say with certainty that Dodd-Frank will do a good job of protecting us from a replay of the great financial crash of 2008. But the prospect of electing someone as president who is promising Wall Street that he will let them blithely self-regulate? That seems even stupider than JPMorgan’s $2 billion bad bet.
This article originally appeared on
AlterNet.
When Mayor Rahm Emanuel introduced a “new and innovative” financing tool last month to help Chicago renovate failing infrastructure without precipitating another budget crisis, many in the city were understandably critical.
Chicagoans have already endured the notorious 75-year lease of their parking meters to a consortium headed by Morgan Stanley. That sale promulgated a system wherein the public is held hostage by private finance, due largely to the inclusion of arcane legal stipulations like “non-compete clauses” and “compensation events” in the language of the contract.
Ellen Danin, writing in the Northwestern Journal of Law and Social Policy relates that: “Chicagoans learned about compensation events when CBS reported that the city’s parking meter contract required reimbursement for events like repairing streets. Public records showed that in the first quarter of 2009, the city was liable to the parking meter contractor for more than $106,000 in lost income during the slow months for street repair and street closings for festivals, parades, and holidays, as well as repairs and maintenance. At that rate, it is not unreasonable to predict that Chicago will owe roughly $500,000 a year to the private contractor.”
The city essentially acts as an insurer for the meter merchants, with the return being a one-time injection of roughly a billion dollars that the previous mayor, Daley the Second, haphazardly exhausted on closing budget deficits in the waning years of his two-decade tour at the helm.
With the current infrastructure deal, Emanuel has repeatedly claimed that this is not privatization: This is not like the parking meter deal. Can the public believe him?
Here is how the “infrastructure trust” works: the city pays for upgrades to its roads, rail or schools with dollars pooled by Emanuel’s friends from the banking and investment world. Meanwhile, the city retains “ownership” of the infrastructure, though this comes at the cost of having to ensure a revenue stream for the fund. Emanuel’s favorite example is his $225 million pet project to green-retrofit some of the city’s older buildings. The savings on energy usage stemming from the renovations are then extracted and used to pay off investors. Of course, the city could also sell municipal bonds to raise necessary funds, and then use the savings in energy costs to pay the loan back at a much lower cost to taxpayers. But then Emanuel’s friends (and campaign donors) would not be the richer for it.
While the mayor bills his plan as “bold” and “innovative,” the reality could not be further from the truth. Public-private partnerships (PPPs) have been around for decades in various forms and their track record is replete with delays, cost overruns and prolonged legal battles. What’s more, the beneficiaries of these investment mechanisms are the same rapacious Morgan Stanleys and Goldman Sachs that gave us the mortgage-backed securities scandal and the ensuing recession. Using the economic malaise they created as cause, they have ratcheted up their advocacy of PPPs as a means of helping cash-starved public entities finance capital-intensive projects.
The upshot is that they are holding us hostage all over again. They are using infrastructure built over decades with public monies as collateral to extract profit off of the back of taxpayers. A cursory look at some past projects of this nature demonstrates that PPPs are often inefficient, overly costly and inherently unjust.
The London Tube Nightmare
The granddaddy of all PPP debacles is the London Underground. Metronet PPP is the brainchild of former Prime Minister Gordon Brown. The contract design kept London Underground in public hands while privatizing the renovation and renewal elements to the system. As with the Chicago parking meter deal, the contract was replete with virtually unintelligible legalese designed to give the private partners an advantage in court, while also rendering public scrutiny of the contract exceedingly difficult. Bureaucratic costs related to drawing up contracts with external bidders ultimately surpassed 500 million pounds.
In the Guardian, Christian Wolmar notes that “the idea that the PPP would keep costs down has also proved fanciful. It is a recipe for disputes, which often end up in the hands of expensive lawyers. During the first contract, there is a mega dispute brewing over Tube Lines’ failure to complete the resignalling of the Jubilee Line which should have been finished this month and is now set to take until the autumn, with numerous extra weekend closures. In addition, the arbiter’s report says that claims involving a staggering £727m have been laid by Tube Lines, £500m of which are still outstanding.”
As bloated contractual costs and project overruns spun out of control, Metronet ultimately collapsed in 2008. A year later, the entire PPP went down with it after an arbiter refused to allow funds for the other private partner, Tube Lines, to do further renovations. The final cost to taxpayers is estimated at somewhere between 170 million and 410 million pounds, which does not account for the inconvenience of relentless service stoppages and construction delays. Former London Mayor Ken Livingstone complained at the time: “We are being asked to write a blank cheque in order to prop up failing Tube Lines. In other countries this would be called looting, here it is called the PPP.”
Orange County’s Privatized HOV Lane
Almost equal in disrepute to the London Tube fiasco was the privatization of one high-occupancy vehicle (HOV) lane on California’s SR-91. In the early ’90s, the Orange County Transportation Authority (OCTA) proved incapable of procuring necessary funding for implementation of the new HOV using traditional revenue streams, so instead developed a private partnership to construct and manage the project, which opened December 27, 1995.
This contract included “non-compete” clauses that prevented the public from providing necessary maintenance to the adjacent free lanes. The California Department of Transportation hoped to add new lanes between SR-91 and another recently completed public toll road. These improvements would have violated the non-compete terms of the contract, though CalTrans argued there were overriding safety concerns that permitted them to proceed with the construction.
The ensuing public row served to turn opinion against the private toll lane. Ultimately, the outcry led to passage of Assembly Bill 1010, which authorized OCTA to acquire the lane for $207.5 million in 2003. California’s earliest experiment with private financing of a publicly controlled entity, like the London Tube, came crashing to a premature halt on the heels of widespread public outrage.
What is most telling is that popular frustration centered on a principal term of the contract, which was publicly available for viewing prior to approval. Once again, a common ploy of instigators of these contracts is rendering the terms so confusing as to limit public scrutiny. Meanwhile, the mainstream press tends to focus on the bottom line and avoid the esoteric legal mumbo jumbo, much to the detriment of an enlightened public.
The SDX
California, ever the epicenter of political innovation, was also the site of another one of the most significant PPP boondoggles. In this case, Australian investment group Macquerie led an assortment of banks that invested in a new expressway from San Diego to the Mexican border, beginning with the project’s commencement in 2000 and lasting until the contract expiry in 2042.
However, faced with the challenges of the housing crisis and wider economic slump, the project faced persistent toll revenue shortfalls and ultimately filed for bankruptcy last year. Meanwhile, the cost of the project jumped from $360 million to $843 million, while being delayed for over a year. In the bankruptcy proceeding, the South Bay Expressway LLC was created to administer the road and ultimately purchased by the San Diego Association of Governments (SANDAG) for $344.5 million.
This project received an initial $140 million boost from funds provided by the Transportation Infrastructure Finance and Innovation Act (TIFIA). TIFIA is designed as a tool to provide federal investment in PPPs. Interestingly, Rahm Emanuel cited the program as an example of a financing tool that his Infrastructure Trust is based on. However, this is a bit misleading, as TIFIA is composed entirely of federal funds used to augment existing finances for capitol projects. Meanwhile, Emanuel’s trust is composed of $1.7 billion in funds raised from private banks leveraged against a $200 million investment by the city.
Nonetheless, the two shortcomings of this project are particularly instructive. Its primary problem was the failure to meet the initial high-shooting projections initially set out. Traffic patterns are extremely difficult to accurately anticipate: a situation not helped by the backdrop of the worldwide recession and the location of this road in a region that was particularly burdened by the foreclosure crisis. The intrinsic uncertainty of usage of public infrastructure renders it a poor focal point for private, profit-driven investment. The reality is that parks, roadways and bridges require periodic capital investment irrespective of profitability. Public entities are far more well-equipped to finance these unreliable projects for the very reason that government is not motivated by profit.
The second problem this project faced by this PPP, like so many others, was its predilection to legal wrangles. SBX was involved in legal proceedings with InTrans, the toll system provider, and a number of construction related contractors. One source speaking with TollRoadNews called the governing contract a “sue-me contract” that was “made for litigation.” Given the immense costs seen by the London Tube PPP, this should come as no surprise. These projects seem to invite costly litigation just from their sheer complexity.
Toward Sustainable Investment in Infrastructure
PPPs are purported to make additional resources available for public expenditure on capital-intensive infrastructure projects. However, the opposite tends to be the case. A report published by the Public Services International Research Unit notes: “The great majority of PPP’s rely on a stream of income from payments by government – i.e. public spending…In a context where there are political demands to cut public spending, the existence of PPP’s creates greater threats to other spending on public services. This is because PPP’s create long-term contractual rights to streams of income, and so governments are legally constrained from reducing payments to PPPs.”
Even the International Monetary Fund warns that public investment in PPPs should be subject to strict scrutiny in a July 2009 publication: “Intervention measures should be consistent with the wider fiscal policy stance, be contingent on specific circumstances, and be adequately costed and budgeted.” The IMF also argues that PPPs related to weathering the economic crisis should include a “turn off” mechanism. A green paper published by the Commission of the European Communities in April 2004 even went further, recommending against PPPs as a tool to close any budget deficits. They argue that the mechanism should be employed primarily when the private entity is providing a specific field of expertise.
After all, why should anyone trust the same racketeers who precipitated the global economic crisis to make acute investment decisions on behalf of the people? All levels of government face serious fiscal constraints stemming from a range of causes, including the ongoing recession and regressive tax policy across the board. When financiers so generously offer to open up the purse strings to invest in pet infrastructure projects, the public response ought be: “No, thank you. Instead, we are going to raise the top marginal tax rate.” That would be a far more efficient and prudent way of beginning to tackle the fiscal crises in government.
In Newsweek, Peter Boyer and Peter Schweizer explore the question of President Obama’s Justice Department’s failure to press any major criminal charges against Wall Street. We learn, distressingly, that “finance-fraud prosecutions by the Department of Justice are at 20-year lows.” Ex-Countrywide whistle-blower Eileen Foster, to name one prominent critic of the Justice Department’s inaction, is still urging the Justice Department to do something about her former colleagues, but to no avail. What’s holding them back?
Well, a lot of things. For one, criminal cases for finance-related wrongdoing are hard and complicated to prosecute. The Justice Department is stocked with a lot of people with experience defending financial institutions — including Attorney General Eric Holder, a former partner at Covington & Burling, which represents many of the worst of the mega-banks. Plus, curiously, a lot of Goldman executives and other Wall Street types keep donating lots of money to Obama! (Though less money than they gave him in 2008.) The simple answer is that Holder, and Obama, seem to think that while Wall Street did a lot of stupid, venal things that ruined everyone’s lives, those things were largely … legal. Obama said as much to Rolling Stone: “In some cases, really irresponsible practices that hurt a lot of people might not have been technically against the law.” He might be not entirely wrong! Lots of horrible finance industry practices were and are perfectly legal. But we’ll never quite know whether the line was crossed until we … actually investigate.
So it’s all the odder that Wall Street is so damn mad at Obama, right?
In the only slightly oversimplified narrative of the financial crisis and subsequent recession as you and I and most non-billionaires understand it, Wall Street blew up the world economy, then got bailed out to the tune of billions of dollars, and then resumed being hugely profitable and irresponsible as everyone else suffered through foreclosures, massive debt and mass unemployment. In this narrative, the government, led at various points by members of both parties, did everything in its power to maintain the status quo on Wall Street, while offering primarily temporary relief and various ineffectual half-measures to everyone else. Eventually the Democrats passed some form of “financial regulation” that largely has not yet gone into effect and that will not do much to stem or reverse the financialization of our economy. (The SEC is way, way behind on implenting Dodd-Frank and seems in no great hurry to finish.) The president eventually began noting the existence of mass outrage toward the financial sector, but he did little to actually address that outrage beyond proposing a new tax bracket for millionaires.
So, based on all that, it is very hard to see what Wall Street is so mad about! But as I explained earlier today, most of these rich financial industry titans are also dumb, spoiled children. If anything, the president’s failure to treat the chicanery and fraud that led to the crisis as crimes worth prosecuting had the same effect that his failure to prosecute the architects of Bush’s torture regime had: It emboldened the wrongdoers, who are now convinced that they never did wrong. In this environment, the public’s real and justified outrage at Wall Street is wholly inexplicable to finance types, who blame it on the media and Obama’s occasional rhetorical populism. (He is making people hate bankers by pointing out that people hate bankers!)
Now, in lieu of subpoenas and indictments, we have mild criticism — Obama’s occasional off-message mentions of “fat cat bankers” or whatever — and those mild criticisms set off hysterical waves of paranoia and self-righteous fury. Because no one was hauled off in chains, the people who wreaked so much havoc think it’s actually been established that they did not do wrong.
So Obama has now not succeeded in cowing or placating Wall Street.
Thomas Frank 
A detail from the cover of "Predator Nation" 
Jamie Dimon (Credit: Reuters/Keith Bedford) 
Jamie Dimon (Credit: Reuters/Shannon Stapleton) 
Rahm Emanuel (Credit: AP/Jacquelyn Martin) 
(Credit: Reuters/Joshua Roberts) 
