"Failure of Epic Proportions": Treasury Nominee Jack Lew's Pro-Bank, Austerity, Deregulation Legacy Juan Gonzalez & Amy Goodman Democracy Now January 11, 2013 http://www.democracynow.org/2013/1/11/failure_of_epic_proportions_treasury_nominee Former bank regulator William Black and Rolling Stone's Matt Taibbi join us to dissect the career of Jack Lew, President Obama's pick to replace Treasury Secretary Timothy Geither. Currently Obama's chief of staff, Lew was an executive at Citigroup from 2006 to 2008 at the time of the financial crisis. He backed financial deregulation efforts while he headed the Office of Management and Budget under President Bill Clinton. During that time, Clinton enacted two key laws to deregulate Wall Street: the Financial Services Modernization Act of 1999 and the Commodity Futures Modernization Act of 2000. Black, a white-collar criminologist and former senior financial regulator, is the author of "The Best Way to Rob a Bank Is to Own One." A contributing editor for Rolling Stone magazine, Taibbi is the author of "Griftopia: A Story of Bankers, Politicians, and the Most Audacious Power Grab in American History." JUAN GONZALEZ: President Obama is facing criticism for nominating another former Wall Street executive to become treasury secretary. On Thursday, Obama tapped his own chief of staff, Jack Lew, to replace Timothy Geithner. Lew was an executive at Citigroup from 2006 to 2008 at the time of the financial crisis. He served as chief operating officer of Citigroup's Alternative Investments unit, a group that bet on the housing market to collapse. Lew has also long pushed for the deregulation of Wall Street. From 1998 to January 2001, he headed the Office of Management and Budget under President Clinton. During that time, Clinton signed into law two key laws to deregulate Wall Street: the Financial Services Modernization Act of 1999 and the Commodity Futures Modernization Act of 2000. On Thursday, independent Senator Bernie Sanders of Vermont criticized Lew's nomination, saying, quote, "We don't need a treasury secretary who thinks that Wall Street deregulation was not responsible for the financial crisis." At a press conference at the White House Thursday, President Obama praised Jack Lew's record. PRESIDENT BARACK OBAMA: Jack has the distinction of having worked and succeeded in some of the toughest jobs in Washington and the private sector. As a congressional staffer in the 1980s, he helped negotiate the deal between President Reagan and Tip O'Neill to save Social Security. Under President Clinton, he presided over three budget surpluses in a row. So, for all the talk out there about deficit reduction, making sure our books are balanced, this is the guy who did it-three times. He helped oversee one of our nation's finest universities and one of our largest investment banks. In my administration, he's managed operations for the State Department and the budget for the entire executive branch. And over the past year, I've sought Jack's advice on virtually every decision that I've made, from economic policy to foreign policy. AMY GOODMAN: For more on the nomination of Jack Lew, as well as other news about Wall Street, we're joined by two guest. William Black, author of The Best Way to Rob a Bank Is to Own One_, he's associate professor of economics and law at the University of Missouri-Kansas City, former senior financial regulator. His recent 2446848.html">article for the Huffington Post is called "Jacob Lew: Another Brick in the Wall Street on the Potomac." We're also joined by Matt Taibbi, contributing editor for Rolling Stone magazine, his latest piece, "Secrets and Lies of the Bailout," which we'll talk about in a bit, author of Griftopia: A Story of Bankers, Politicians, and the Most Audacious Power Grab in American History. We welcome you both to Democracy Now! Professor Black, let's start with you. Your assessment of Jack Lew? WILLIAM BLACK: Well, on financial matters, Jack Lew has been a failure of pretty epic proportions, and he gets promoted precisely because he is willing to be a failure and is so useful to Wall Street interests. So, you've mentioned two of the things in terms of the most important and most destructive deregulation under President Clinton by statute. But he was also there for much of the deregulation by rule, and a strong proponent of it, and he was there for much of the cutting of staff. For example, the FDIC, the Federal Deposit Insurance Corporation, lost three-quarters of its staff, and that huge loss began under Clinton. And the whole reinventing government, Lew was a strong supporter of that. And, for example, we were taught-instructed by Washington that we were to refer to banks as our "clients" in our role as regulators and to think of them as clients. He goes from there to Wall Street, where he was a complete failure. You noted that part of what Citicorp did was bet that housing would fall. That was actually one of their winning bets. But they actually made a bunch of losing bets, as well. And the unit that he was heading would have not been permissible but for the deregulation of getting rid of Glass-Steagall under President Clinton. And you saw, as an example of Citicorp, why we shouldn't be doing this. Why would we create a federal subsidy where all of us, through the U.S. government, are on the hook for Citicorp's gambling on financial derivatives for its own account, you know, running a casino operation? That makes absolutely no public policy sense. Then he comes into the Obama administration, and he was disastrously wrong. He tried very hard to impose austerity on the United States back in 2011, which is-he wanted, you know, the European strategy, which has pushed the eurozone back into recession, and Spain, Greece and Italy into Great Depression levels of unemployment. And this is the guy, after all of these failures, who also is intellectually dishonest. He will not own up to his role and deregulation's role and de-supervision's role in producing this crisis-and not just this crisis, but the Enron-era crisis and the savings-and-loan debacle. JUAN GONZALEZ: Well, Matt Taibbi, your reaction to the nomination of Jack Lew by President Obama? MATT TAIBBI: I think there's a couple things. I agree with everything that Professor Black said. I think it's- the symbolism of this choice is, I think, very important for people, just the mere fact of picking somebody from Citigroup and from that same Bob Rubin nexus that Timothy Geithner came from. And, you know, you heard Barack Obama, as he's introducing Jack Lew, praising Tim Geithner as somebody who's going to go down in history as one of the great treasury secretaries of all time. I think what this tells everybody is that Jack Lew is going to represent absolute continuity with the previous treasury secretary, who had a very specific agenda when it came to Wall Street. And I think we're just going to expect more of the same, more of the same really being overt and covert support of these too-big-to-fail institutions that Lew worked for, Citigroup being the worst and most disastrous example of that kind of company. So I think it's-the choice of somebody from that particular firm is fraught with pretty upsetting symbolism for the country, I think. AMY GOODMAN: I want to go back to 2010, when Jack Lew appeared before the Senate Budget Committee for a confirmation hearing after he was nominated by President Obama to head the Office of Management and Budget. During the hearing, he was questioned by Senator Bernie Sanders. SEN. BERNIE SANDERS: Do you believe that the deregulation of Wall Street, pushed by people like Alan Greenspan, Robert Rubin, contributed significantly to the disaster we saw on Wall Street several years ago? JACK LEW: Senator, I-as when we discussed, I mentioned to you, I don't consider myself an expert in some of these aspects of the financial industry. My experience in the financial industry has been as a manager, not as an investment adviser. My sense is, as someone who has, you know, generally been familiar with these trends, is that the problems in the financial industry preceded deregulation. There was an increasing emphasis on highly abstract leveraged derivative products that got us to the point that, in the period of time leading up to the financial crisis, risks were taken. They weren't fully embraced. They weren't well understood. I don't personally know the extent to which deregulation drove it, but I don't believe that deregulation was the, you know, proximate cause. I would defer to others who are more expert about the industry to try and parse it better than that. AMY GOODMAN: That's Jack Lew responding to Bernie Sanders, who, when President Obama announced his nomination of treasury secretary-to treasury secretary of Jack Lew, Senator Sanders said, "We don't need a treasury secretary who thinks that Wall Street deregulation was not responsible for the financial crisis." Professor Black? WILLIAM BLACK: Well, I mean, we can agree that he lacks expertise in the area, but he was supposed to have expertise. This was supposed to be his area of expertise, both in his role as OMB head under Clinton, and then, of course, as being in the industry and actually implementing the fruits of this deregulation. So-and he has the history, in one sense, correct. He says the problem arose before deregulation. That's true that derivatives were already a problem before deregulation. And so, Brooksley Born proposes to deal with the problem by having a regulation to deal with credit default swaps. And then the Clinton administration, in league with Greenspan, in league with Phil Gramm, and with one of the important architects of all of this being Jack Lew, squashes Brooksley Born to destroy the proposed regulation and to pass something, the Commodity Futures Modernization Act-talk about a dishonest phrase-that not only said, "You, Brooksley Born, cannot go forward with this particular regulation," the statute actually said, "We hereby withdraw all regulatory powers to protect the nation, period. From the federal government, from the state and local governments, we exempt you from the gambling laws. We exempt you from the boiler room laws to prevent fraudulent operations." It's one of the most extraordinary abusive things in the world, heavily involved with AIG's ability to produce not just the disaster at AIG, but the disaster of credit-of the CDOs that blew up a larger portion of the world. And those CDOs would not have been possible without these credit default swaps. So, this is a guy who designed the disaster, participated in the disaster on Wall Street, was made rich by it. We haven't talked about the fact that he got a huge bonus for destroying-helping to destroy the world at Citicorp. And he got it through the bailout of Citicorp by the U.S. government. So he produces disaster, profits from the disaster, we pay him bonuses for causing the disaster, and then we have the absurdity of the president of the United States saying that this is a man with a track record of unmitigated success. It is exactly the opposite, in terms of finance. He is a worthy successor to Tim Geithner, in that he has screwed up everything substantively he has ever touched. JUAN GONZALEZ: William Black, I'd like to ask you about another aspect of Lew's portfolio: his stance on austerity. You have raised questions in terms of his continued support of austerity measures, as opposed to efforts by the government to stimulate the economy. Could you talk about that? WILLIAM BLACK: Yeah, and this is an irony, as well, in terms of the political aspects and Obama. So, under Lew, in his new incarnation a while back as OMB head of-for Obama, I have a piece that talks about how OMB under Obama sounds almost exactly like the tea party. So, it adopts all of their rubric about, you know, these terrible social programs, this terrible safety net and how it's going to imperil our nation, and what we need to do is be balancing the budget-in other words, austerity. Now, had Obama succeeded in following Lew's recommendation in July 2011, when they were trying to negotiate the so-called "grand bargain," which is really the grand betrayal of the safety net-unemployment in July 2011 was 9.1 percent. Austerity in the United States would have done just what it did in Europe. Unemployment would have surged. So, all through 2012, the election year, unemployment would have been going up well above 10 percent, quite possibly into the 11 and 12 percent range, which is where it is in Europe. Obama would have been toast; would have been no chance. He would have been crushed in the election. The Democrats would have lost control of the Senate, and such. And these folks, even today, are claiming that the failure to achieve the grand betrayal and to cut the safety net is their great disappointment. So, they not only tried to destroy themselves and the country, they are continuing to do that, and indeed, but for Harry Reid literally throwing the Obama administration's suggestion that they do cuts to the safety net in the fireplace and burning it up, they would have gotten it as part of this interim austerity deal that was just done about eight days ago. AMY GOODMAN: We're going to break, then come back to this discussion with William Black, professor at University of Missouri-Kansas City, and Matt Taibbi, Rolling Stone editor. "Secrets and Lies of the Bailout" [is] his latest piece. This is Democracy Now! Back in a minute. Four years after the massive bailout that rescued Wall Street, we look at the state of the financial sector with Rolling Stone's Matt Taibbi and former financial regulator William Black. In a new article for Rolling Stone, Taibbi argues the government did not just bail out Wall Street, but also lied on the financial sector's behalf, calling unhealthy banks healthy and helping banks cover up how much aid they were getting. The government's approach to the banks came under new scrutiny this week after it reached an $8.5 billion settlement for improprieties in the wrongful foreclosures on millions of American homeowners, including flawed paperwork, robo-signing and wrongly modified loans. The settlement will end an independent review of all foreclosures, meaning the banks could be avoiding billions of dollars in further penalties, in addition to criminal prosecution. [includes rush transcript] Filed under Wall Street, Financial Meltdown, Author Interviews, Matt Taibbi, William Black Guests: Matt Taibbi, contributing editor for Rolling Stone magazine and author of the book Griftopia: A Story of Bankers, Politicians, and the Most Audacious Power Grab in American History. His new article for Rolling Stone is "Secrets and Lies of the Bailout." William Black, associate professor of economics and law at the University of Missouri-Kansas City. A white- collar criminologist and former senior financial regulator, he is the author of The Best Way to Rob a Bank Is to Own One. JUAN GONZALEZ: We turn now to look at the state of Wall Street four years after the massive bailout and the news of this week's mortgage settlements with the major banks. Matt Taibbi has just written a new piece for Rolling Stone titled "Secrets and Lies of the Bailout." Also still with us is former financial regulator William Black, author of The Best Way to Rob a Bank Is to Own One. He is an associate professor of economics and law at the University of Missouri-Kansas City. Matt, beginning with you, the latest announcement of the agreement for some of the banks to pay several billion dollars now to-supposedly to homeowners who were cheated in one way or another in the foreclosure crisis? MATT TAIBBI: Yeah, I mean, I think this is just-to me, the most significant aspect of this is that it speaks to the failure of the government to address the foreclosure problem still, four and five years after the financial crisis. And one of the points I make in the piece I just wrote, "Secrets and Lies of the Bailout," is that foreclosure relief was originally written into the statute, the TARP statute, as a primary function of the original bailouts. It's right there in black and white, section 109, that TARP was supposed to provide all-a massive program of foreclosure relief, and they never got around to it. And the only bailout program that ever provided any foreclosure relief was HAMP, and that only- to date, they've only ended up spending about $3 [billion] or $4 billion out of all the bailout on that program. They have now-through litigation, there are these settlements that are starting to trickle in, but it's just too little, too late. And you contrast that with what happened at the beginning of the bailout, where the banks and the financial companies were instantly handed hundreds of billions, trillions of dollars of relief, and I think that that dichotomy is important for people to recognize, that the relief for ordinary people is still coming slowly and insufficiently years later, whereas relief for Wall Street came instantaneously and was excessive. AMY GOODMAN: The latest news about AIG, the board has decided not to sue the American people- MATT TAIBBI: Right. AMY GOODMAN: -for not bailing them out enough, not joining the former CEO, Hank Greenberg. MATT TAIBBI: I think they probably didn't want to become a Saturday Night Live routine this weekend, but yeah. AMY GOODMAN: Can you talk about the significance of this and what actually is going on? Greenberg, the CEO, the former CEO, is suing. MATT TAIBBI: Right, right, yes. This is a longstanding dispute between the former CEO of AIG, Hank Greenberg, and the government. And it's funny. If you actually read Greenberg's suit, there are some points in it that have a little bit of validity. I mean, it's still preposterous that Greenberg, who was, in a way, kind of like the Patient Zero of the financial crisis, because the scandal that he started at AIG back in the 2000-in the early 2000s. It was a reinsurance scandal where he was artificially inflating the balance sheet of AIG, that led to a downgrade of AIG, which led to the catastrophe of 2008, when the company went into- imploded. And that subsequently caused the entire financial crisis. You can really point to Hank Greenberg as maybe the guy who caused the financial crisis, and here he is suing the American government over the bailout. But one of the things he says in this-his lawsuit is that the bailout of AIG was not really a bailout of AIG, it was a bailout of the companies that were owed money by AIG, because they gave 100 cents on the dollar to all the companies-the counterparties of AIG, like Goldman Sachs and Deutsche Bank and Barclays, and that if he were in that position, he would have negotiated a much tougher deal. That's probably true. I mean, there's actually some validity to that point, that there's no way, under any rational circumstances, that those companies should have gotten 100 cents on the dollar for the money they were owed by AIG. JUAN GONZALEZ: William Black, I'd like to ask you about this whole issue of the mortgage settlement that was announced. It is really, to me, amazingly scandalous that, years later, justice has not been forthcoming for all of these homeowners who lost their homes. I think the settlement calls for about $3.5 billion in cash to some three million homeowners; that works out to maybe about $1,000 a homeowner. And here we had instances of banks, with the massive robo-signings, evicting people from homes that they didn't even legally own at the time. And the thing became such a mess that the government review ended up wasting about a billion dollars just on the consultants hired to review all the bank foreclosures. What do you make of this settlement? WILLIAM BLACK: So, the first thing is, this is more of what Matt and people like me have been writing about for years: the complete immunity of the elite Wall Street folks who caused this crisis through fraud, who became wealthy because of those frauds, and were then bailed out as a result of their frauds. None of them are being prosecuted. So we have admissions-and, by the way, this would have continued but for the discovery of this fraud. In other words, the banks weren't stopping it on their own. The robo-signing, that means what they were doing was lying systematically to the tune, typically, of the large places, of 10,000 times a month, so over 100,000 times a year, committing felonies that would lead to people being made homeless in America, in many cases. It's just an astonishing aspect that nobody has gone to prison for all of this and that they gave them one of the largest grants of immunity you'll ever see. Second thing, as you say, the money in the press reports is grossly inflated. There's only about $3 billion in cash. You're quite correct, that works out to less than $1,000 per victim. So it is exactly what Barofsky quotes Geithner as saying, that these housing programs were not designed for the victims; they were designed to, quote, "foam the runways" for the banks to reduce their loss exposure. So the rest of the supposed $5 billion in settlement is really just what in the commercial world we call "troubled debt restructurings," which are the things you would do anyway if the government didn't exist, because in most cases it's better for the bank not to have the default, to instead reduce the principal slightly. So, none of that is actually a bailout. None of it is actually a settlement. It's just the banks doing that which will profit maximize for the banks anyway. AMY GOODMAN: ...June, when JPMorgan Chase's Jamie Dimon testified on Capitol Hill. This is Oregon Democratic Senator Jeff Merkley questioning Dimon. SEN. JEFF MERKLEY: In 2008, 2009, your company benefited from half-a-trillion dollars in low-cost federal loans, $25 billion in TARP loans, of TARP funds, untold billions indirectly through the bailout of AIG that helped address your massive exposure in repurchase agreements and derivatives. With all of that in mind, wouldn't JPMorgan have gone down without the massive federal intervention, both directly and indirectly, in 2008 or 2009? JAMIE DIMON: I think you were misinformed. And I think that misinformation is leading to a lot of the problems we're having today. JPMorgan took TARP because we were asked to by the secretary of Treasury of the United States of America, with the FDIC in the room, head of the New York Fed, Tim Geithner, chairman of the Federal Reserve, Ben Bernanke. We did not, at that point, need TARP. We were asked to, because we were told-I think correctly so-that if the nine banks there-and some may have needed it-take this TARP, we can get it to the-all these other banks and stop the system from going down. We did not- SEN. JEFF MERKLEY: I'm going to cut you- JAMIE DIMON: We did not borrow from the Federal Reserve, except when they asked us to. They said, "Please use these facilities, because it makes it easier for other" - SEN. JEFF MERKLEY: We would all like to be asking- JAMIE DIMON: And we were not bailed out by AIG, OK? If AIG itself would have-we would have had a direct loss of maybe a billion or $2 billion if AIG went down, and we would have been OK. SEN. JEFF MERKLEY: Then you have a difference of opinion with many analysts of the situation who felt the AIG bailout did benefit you enormously. And I'm not going to carry that argument with you now. JAMIE DIMON: Well, but they're factually- SEN. JEFF MERKLEY: Sir- JAMIE DIMON: They're factually wrong. SEN. JEFF MERKLEY: Sir, this is not your hearing. I'm asking you to respond to questions. And I also only have five minutes. AMY GOODMAN: That was Oregon Democratic Senator Jeff Merkley questioning JPMorgan Chase's Jamie Dimon. Matt Taibbi, the significance of this exchange? MATT TAIBBI: Well, I think that's one of the things that's really interesting. And one of the things that I write about in this article is that this is what Neil Barofsky, the bailout inspector, calls the "original sin" of the bailout, which is this moment in time where- right after TARP was passed, where the government elected to call companies that were unhealthy and insolvent "healthy" and "solvent." When they scrapped the plan to buy up troubled assets-remember, TARP was the Troubled Asset Relief Program-well, they scrapped that idea a few days after the bill was passed and decided to just dump a whole bunch of money onto the balance sheets of these banks. This was called the Capital Purchase Program. They spent $125 billion right off the bat. It was spent on nine companies. And one of the things they said was, all of these companies are healthy and viable. And it turned out later, according to numerous sources, including all the SIGTARP reports, including-according to Barofsky and other sources, that they didn't even check to see if these companies were solvent at the time. They had no interest in discovering that, one way or the other. And, in fact, many of these companies were on the brink of failure at the time. Barofsky was told specifically that Morgan Stanley and Goldman Sachs were both on the brink of disaster when they were given this money. It's interesting that Jamie Dimon talks about how his company didn't need that Fed money. You know, it came out in the-in Bloomberg's Freedom of Information request, when they got all the data from the audit of the Federal Reserve, it came out that his company, at that time, in late 2008, had a $50 [billion] or $60 billion line of credit with the Fed on top of all the money they were getting through the TARP bailout, through the bailout of Bear Stearns and other facilities. So, apparently, they didn't need all that money, you know, that $100 billion or whatever it was they got from the federal government; it was just they were taking it because they were being polite, they were being-and they were asked to by the federal government. And this fiction, that they didn't need the money, that they were healthy all the time, the government-we not only gave them money, but we vouched for them, and now we're stuck vouching for them basically forever. And that's the ongoing bailout that has become the real problem. JUAN GONZALEZ: I wanted to ask William Black-in the deal that the Obama administration reached on taxes recently with the House Republicans, there hasn't been a lot of attention to the issue of what happened to carried interest. The hedge fund moguls of the world were most concerned about that, their abililty to evade taxes by having their payments as capital gains instead of actual fees and salaries. Could you talk about what the Obama administration did there? WILLIAM BLACK: Yeah. Let me mention just one thing, though, that fits to Matt's point. They also changed the accounting rules, so the banks didn't have to recognize their losses, so that they could hide them and pretend to be healthy. So that's a huge part of that story. As to taxes, you know, this was, again, a classic example of the Obama administration snatching defeat from the jaws of victory, where it had all the leverage and negotiated against itself once again. And so, yes, the wealthiest folks-and this is the irony, of course, is we're talking about the George Romneys of the world- I'm sorry, the Mitt Romneys of the world-I grew up in Michigan; I'm dating myself-are the principal beneficiary through the-something that is completely unsupportable, on any policy ground, which is this carried interest, which simply treats income as if it weren't income anymore for the wealthiest Americans who receive their money from running hedge funds. And that's continued. AMY GOODMAN: Let's end with the legacy of the outgoing treasury secretary, Timothy Geithner. On Thursday, President Obama praised his time in office. PRESIDENT BARACK OBAMA: Thanks in large part to his steady hand, our economy has been growing again for the past three years. Our businesses have created nearly six million new jobs. The money that we spent to save the financial system has largely been paid back. We've put in place rules to prevent that kind of financial meltdown from ever happening again. An auto industry was saved. We made sure taxpayers are not on the hook if the biggest firms fail again. We've taken steps to help underwater homeowners come up for air and opened new markets to sell American goods overseas. And we've begun to reduce our deficit through a balanced mix of spending cuts and reforms to a tax code that, at the time that we both came in, was too skewed in favor of the wealthy at the expense of middle-class Americans. So, when the history books are written, Tim Geithner is going to go down as one of our finest secretaries of the Treasury. AMY GOODMAN: That was President Obama. Professor Black, final seconds. WILLIAM BLACK: OK. First, Geithner is a principled person who caused the crisis. He was supposed to be the top regulator preventing it in New York and did nothing. Second, he has created crony capitalism, American style. Third, those regulations in fact will not prevent future crises and were designed to make sure they were not. And I agree strongly with Matt that the choice of Jack Lew is to not only produce continuity with Geithner's disastrous failed policies, but to signal the administration's desire to continue the bailout of Wall Street. AMY GOODMAN: Matt Taibbi? MATT TAIBBI: Yeah, I think the legacy of Tim Geithner is simple. He's the architect of "too big to fail." And that's going to be, historically, his legacy. When this all blows up-and it's going to blow up, for sure, because it can't-things can't continue the way they are right now-people are going to look back in history, and they're going to say, "Who was to blame for this?" And Timothy Geithner is going to be the guy who designed this entire system. JUAN GONZALEZ: Of course, and he will always be remembered as the first treasury secretary who neglected to pay his own taxes. MATT TAIBBI: Right, right, there's that, true, exactly. AMY GOODMAN: We want to thank you both for being with us. Matt Taibbi, a contributing editor at Rolling Stone, his latest piece, "Secrets and Lies of the Bailout." We'll link to it at democracynow.org. And William Black, professor of university-professor at University of Missouri-Kansas City. This is Democracy Now! We'll be back in a minute on this anniversary of the earthquake in Haiti. Stay with us. ___________________________________________ Portside aims to provide material of interest to people on the left that will help them to interpret the world and to change it. Submit via email: [log in to unmask] Submit via the Web: http://portside.org/submittous3 Frequently asked questions: http://portside.org/faq Sub/Unsub: http://portside.org/subscribe-and-unsubscribe Search Portside archives: http://portside.org/archive Contribute to Portside: https://portside.org/donate