Journalist David Sirota's new podcast "The Meltdown", available on Audibles, begins with a reference to a scene in Raiders of the Lost Ark when Indiana Jones tells everyone they’ve been digging in the wrong place. Analysts, says Sirota, have been digging in the wrong place to explain the rise of Trump and the weakening of the Democratic Party.
Sirota begins with the obvious: Trump’s rise followed directly after the Obama administration. Is there a causal link.
We should look at Obama and his group’s response to the 2008 Crisis, especially in the first two years of his administation when the Dems also controlled Congress, not at the crisis, Sirota says — and so he does.
Sirota begins by recalling how powerless Obama looked when the AIG executives, who had brought the company to the brink of bankruptcy, and despite Obama protesting against it, took their multimillion dollar bonuses out of the bailout while banks evicted homeowners.
The AIG executives saw bank executives making a killing selling insurance without reserves and wanted to get into the game. Hey, insurance was AIG’s forte.
That inciting incident may well have been the beginning of loss of confidence in the Democratic Party as Sirota contends. It certainly calls for close examination. We must go back to the 1990s when bankers started making their present level of huge bonuses selling new financial products, one of which was the credit default swap (CDS). It's a form of mortgage default insurance; if the borrower doesn't pay, the insurer pays. Except the bankers didn't call it insurance so it wasn't regulated under the insurance act. That meant the bankers didn't have to put the premiums into a reserve in case of a claim, every cent of the premiums slid directly into the new bigger and bigger bonuses.
The AIG executives saw bank executives making a killing selling insurance without reserves and wanted to get into the game. Hey, insurance was AIG’s forte. It formed a separate company called AIG Financial Products so it would not be regulated as part of its insurance division. After all it wasn't called insurance, therefore it wasn’t insurance, so AIG, like the banks, could evade all those annoying government regulations and let the premiums flow directly into higher pay and bonuses for its execs too.
And if you're asking, did the government buy this ruse? Not only did they buy it, but in the mid 1990s when one regulator, Brooksley Born, suggested that she should look into these new financial products, Congress, at the insistence of Treasury, passed a law prohibiting her from doing so. The banks and AIG had to be free of pesky government regulations— because, to Democrat or Republican leader, government was the problem not the solution.
You may not have heard of Brooklyn Born. Because, as she was right about the dangers of derivatives including the CDS, she was relegated to obscurity. Only the economists and regulators who were wrong about the 2008 crisis were permitted to form the Democratic-controlled government's response.
One fateful day in late 2008, this global powerhouse lost $61.7 billion in one quarter. It needed a $180 billion cash injection with yesterday speed because this, a division of an insurance company of all businesses, didn’t have a penny put aside to satisfy claims.
Now, a bailout is a loan. If AIG had gone to a bank to ask for a loan for $180 billion, the bank would ask what the money was for. When the failing giant said 1.2 billion was going to pay bonuses, the bank would say, not a chance. It's a condition of the loan, that not a penny go to those guys who screwed up so badly for the past decade. Take it , less 1.2 billion, or leave it.
So, what did the Democratic-controlled government do? Did they tell the screw ups they had to repay the old bonuses based on premiums without reserves? Did they tell them no new bonuses from bailout money? Sirota recounts: When Congress passed the legislation approving the loan to AIG, Senator Dodd, who had received significant campaign donations from AIG, inserted a clause so that AIG could use the money for bonuses. When later confronted about why he did that, he replied that someone in Treasury told him he should do it.
What about the other Democrats who voted to pass the bill with this provision? Asleep at the switch?
At this point, Sirota has Neil Barofsky, the special counsel who oversaw the use of the bailout funds, comment on the Treasury Department’s culture. It was full of ex-Wall Streeters, he said. They were very bright, very dedicated, very likable and patriotic guys. And while they were deeply and truly concerned that their colleagues back on the Street would not get their bonuses in 2008, they had not the slightest concern about the millions of people who were losing their homes at that very time—in other words, charismatic sociopaths.
Barofsky made his own attempt to bring the method by which the Treasury Department defeated Obama's promise of hope and change to public consciousness in a book whose title says it all: Bailout: An Inside Account of How Washington Abandoned Main Street While Rescuing Wall Street. He explains in detail how Treasury, led by Timothy Geithner, sabotaged Obama's HAMP (Home Affordable Modification Program). But in spite of the detailed evidence, this book made no impact on the consciousness of the rank and file Dems. I’ll review Geithner’s method shortly.
Wall Street handsomely rewards those who reward it. Geithner went to his reward on leaving Treasury. He was made managing partner of German private bank Warburg Pincus.
Sirota points to another way Wall Street controls Treasury, one that has been identified for decades. Earlier investigative journalists have observed that there have been so many Goldman Sachs alumni in the Treasury Department that it should be dubbed, Government Sachs.
These former Wall Street wizards advise the government on financial policy — and implement that policy so when they don't agree with it, subvert it as they did to the Obama HAMP.
Obama allocated some $75 billion for homeowner relief under HAMP, but less than a billion of it reached them. Treasury did its part by making the regulations for qualification so complicated, the bankers, who were implementing the program, could easily find ways to disqualify applicants.
How Geithner Did It
The gigantic banker paychecks of recent decades come from a business model that few outside the banking industry comprehend. Commercial banks no longer keep mortgages that they arrange on their books. They gather them into a large collection worth, say, a billion dollars, and sell that package to large investors such as pension funds. The sale yields a huge amount of cash upfront for bigger banker bonuses.
Sirota calls them mortgage backed securities, but by the time they became a significant cause of the meltdown, they were folded into CDOs (Collaterized Debt Obligations).
Sirota explains, the pension funds couldn't administer the mortgage package, so the banks formed separate subsidiary corporations called mortgage servicers that performed all those functions including the decision of when to foreclose. Geithner gave the decisions of who could qualify for HAMP to these mortgage servicers—and on such terms that it was far more advantageous financially to the servicers to foreclose than modify. So you tell me what happened.
There was an additional reason the mortgage servicer’s were in a serious conflict of interest. The banker executives who controlled them, wanted foreclosures. They had formed separate corporations to scoop up the properties at fire sale prices. One outstanding example of the benefactors of this capitalism in action was Steve Mnuchin who, through his industry in foreclosing, got the title of the Foreclosure King followed by Secretary of the Treasury in the Trump administration.
Sirota tells the story of one applicant who owned a condominium. With her husband, she bought a house intending to sell the condominium and use the proceeds to pay down the mortgage on the house. But the market for condominiums in Florida tanked; her husband's business failed, and her daughter needed surgery. She and her husband could carry both mortgage payments, but had little money left over for much else so she applied to get a reduction or deferral of payments for a year or so.
When she followed up to see the progress of her application, the bank officer would tell her that they had not received her application. She continually mailed and faxed copies until, finally, the bank told her they had gotten her application, but she didn't qualify. The program was called Troubled Assets Relief Program (TARP), the bank officer told her. Priority was being given to help troubled assets, but she was still making payments. If she wanted to qualify, she had to become troubled and that meant not paying her mortgage installments for three months. That made no sense, but as that was necessary, she did it. At the end of three months, she got a foreclosure notice.
In case you think Sirota grabbed an exceptional case; no, it was the servicers’ standard operating procedure. Some 72% of applicants were rejected. As early as October, 2009, Diane Thompson of the National Consumer Law Center investigated and reported widespread evidence of both of these practices, and other nefarious ways, to reject applicants who were qualified. The Treasury Department ignored her warning.
Sirota has a warning of his own. The media was completely fooled by the bankers who claimed that the homeowners seeking mortgage relief help were deplorables, lazy people trying to get something for nothing, Reagan's welfare queens on steroids. Even Michael Lewis fell into this trap. In his The Big Short, he had hedge fund manager Mark Baum in a strip club interviewing one of these fictional mortgage recipients, a stripper who claimed to have borrowed to buy six houses.
The media was completely fooled by the bankers who claimed that the homeowners seeking mortgage relief help were deplorables, lazy people trying to get something for nothing, Reagan's welfare queens on steroids.
This amplified the famous Rick Santelli rant in response to the announcement of HAMP that these homeowners were people who were drinking the water not the ones who were carrying it.
In fact, most were average Americans who were caught in the downturn of the economy, many families in whom one of the breadwinners had lost their job and just needed some temporary help until the economy recovered. No one in the press seem to remember that under FDR, all of the bailout money went to the homeowners, none went to the banks and that, coupled with, what for the time were radical socialist measures like Social Security, produced a financial system that was stable until 2008.
This has been a sample of a few of the issues Sirota discusses to prove his thesis that the analysts who are looking for the causes of the switch from Obama to Trump are looking in the wrong place. He believes that Democrats see any review of the Obama administration’s role in causing the switch a taboo subject.
Indeed, Obama’s election represents a triumph over racism. He's a highly intelligent, charismatic leader. A lot of his supporters turn off at the slightest suggestion of any criticism directed at him — and it’s important to reach those types, not just progressives.
Sirota gives us example after example of what he calls the Obama administration defeating any policies that could restrict bank profitability in the response to the meltdown. The emphasis on Obama makes it look like it's his problem and it will no longer be a problem because he's gone. However, it was always the Treasury Secretary, in this case Geithner, and other senior Treasury officials who wield their dark power in favor of Wall Street. That has not stopped because Obama has gone. This elite favoritism is active whether Democrats or Republicans have the presidency or Congress, and is at work undetected as you read this.
For, as you read this, Biden has entrusted his mortgage modification plan to Treasury that in turn has trusted it to the mortgage servicers. It will take a decade before investigative journalists discover whether Biden has learned from history— or history has repeated itself.
It is not only wrong to assume that this control by Treasury is unique to the Obama administration, but also that it’s limited to that one department. Many of the top guys in Treasury, the SEC, the DOJ and the Fed constantly betray their country for the money, the magnificent money that Wall Street will lavish on them if they’ve been good boys and girls. By going to Warburg Pincus, Geithner transforming his six-figure salary into seven.
Until the departments are cleaned out of Wall Street alumni and wannabes, they will influence the policies, the wording of the legislation, and the implementation of any legislation that interferes with Wall Street profitability and the resulting spectacular banker pay— and if any of that fails, subvert it.
What Realistically Can Be Done
Sirota overturns so many rocks exposing so many vermin, there is a danger for readers to say, it’s all so corrupt we can’t do anything about it. Once the source of the corruption is identified, the solution becomes more obvious. It's a matter of selecting the most important issues and focusing on them In light of effective strategy. As military strategists say, You never grab your enemy by the sword, you look for their weakness.
Control of government civil service positions is one such issue. It is hard to justify that government officials are allowed to use their positions against the interest of their country and for their own personal wealth. To accept this is to accept that there are no Americans with both the competency to regulate the financial system and a strong moral compass.
Senior government officials are well paid and have a good pension; they don’t need the money (and if they do, they shouldn’t be in that position). It should be a term of their employment that they will never take a job with an organization that they regulated. That’s not too much to ask. Decades ago, journalists exposed this recurring interchange as the revolving door between Wall Street in Washington. Yet, no politician and no reform group has championed this simple reform.
That is the key to upsetting Wall Street’s control of Washington—and it is doable.
Sirota shows convincing evidence linking Trump’s triumph to Obama’s failure through sabotage mainly by the Treasury Department. He has a dug in the right place and broken through a taboo. Now for hope of effective change, this analysis has to be spread.