The Great Squid Hunt: On Matt Taibbi
The epic failure of America's financial system in 2008 was, among other things, a sobering gloss on the American romance with technical expertise. The tidal onrush of securitized debt that kept the housing bubble afloat was more than the simple byproduct of decades of deregulation in the nation's financial sector; it was also the handiwork of a new generation of market analysts known as the Quants. These ingenious souls harnessed arcane financial instruments like collateralized debt obligations (CDO) and credit default swaps (CDS) to magically scrub bad housing debt of all apparent risk as it was traded up the Wall Street food chain.
The rickety structure was bound to collapse, but the amazing thing is that even though the Quants and all their schemes have been exposed as fraudulent, the cult worship of market savants has gone on unabated. Look no further than the Obama administration, which met the challenge of leading the economy out of the worst recession in seventy years by retaining Ben Bernanke, the Fed chair who'd presided over the meltdown; promoting Timothy Geithner, a principal architect of the shoddy TARP bailout of Wall Street, to treasury secretary; and recruiting Larry Summers, a stalwart advocate of Clinton-era deregulation during his own treasury tenure, as its chief economic adviser. (Summers announced that he would decamp from his post at the head of the Council of Economic Advisers in September, only to return to that other citadel of technocratic hubris he had long ago captained and, not incidentally, helped steer into its own economic peril: Harvard University.) It was a bit like the government subcontracting all future deepwater drilling oversight to BP.
When the idolatry of the market, and market expertise, becomes this perverse and unchecked, the value of a stubborn autodidact like Matt Taibbi stands out in high relief. Heeding the shifting tenor of the times, Taibbi, a contributing editor for Rolling Stone, moved from the campaign beat into finance journalism shortly after the 2008 meltdown. At the outset, he muffed a few things. In his now (in-)famous July 2009 takedown of Goldman Sachs, which placed the investment house at the center of three signature market bubbles—the 1920s joint stock fiasco, the '90s Internet mania and the recent housing Guignol—he overstated the firm's power to drive markets while mischaracterizing crucial Goldman operations such as CDO exchanges as derivatives deals. But despite such missteps—which earned Taibbi the concerted scorn of most of the financial press—the brunt of his argument about Goldman's particular outsize role in the housing debacle has been proven correct, and has gained remarkable traction in our emerging and impressionistic understanding of the past decade of Wall Street larceny. When Taibbi quoted a hedge-fund operator as saying that Goldman's initiative to sell short on the same mortgage deals it systematically inflated in pitches to other investors was nothing less than "securities fraud," the same financial journalists derided Taibbi as an irresponsible naïf—until the SEC charged the bank with securities fraud for constructing just those kinds of deals, in a prosecution that eventually produced the largest civil settlement in the regulatory agency's history. After Goldman-brokered interest-rate swaps proved instrumental in the debt meltdown of the Greek economy in February, Atlantic business and economics editor Megan McArdle's earlier, airy dismissal of Taibbi's reporting on Goldman's hand in the interest-rate markets sounded like a grim joke: "No one, as far as I know, is now proposing that we need to curtail the use of interest-rate swaps." Well, perhaps someone should have.
In Griftopia, Taibbi revisits the whole Goldman saga, and does cop, in very general terms, to his past oversights, noting that in retrospect he and his Rolling Stone editors "left out quite a lot, a problem I've tried to rectify here by adding some to the original text." Happily, though, the pugnacious Taibbi—whom, I should note, I've edited but never met, and have previously defended in my own autodidactic and regrettably imprecise way—doesn't confine his new book to Goldman score-settling. Rather than burrowing further into the financial-press turf wars, Taibbi builds an account of bailout America around a broad indictment of the way the political class and the investor class intersect and sometimes collude. "What has taken place over the last generation," he writes, "is a highly complicated merger of crime and policy, of stealing and government.... The financial leaders of America and their political servants have seemingly reached the cynical conclusion that our society is not worth saving and have taken on a new mission that involves not creating wealth for all, but simply absconding with whatever wealth remains in our hollowed-out economy. They don't feed us, we feed them."
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It's a social contract that transcends the tedious partisan shadow play Taibbi dutifully recorded during the 2008 campaign, and at key points in Griftopia he underscores the painful irrelevance of our political process to the consolidation of a new political economy. The American electoral scene "grounds our new and disturbing state of affairs in familiar forty-year-old narratives," he observes. "The right is eternally fighting against Lyndon Johnson; the left, George Wallace." Meanwhile, "political power is simply taken from most of us by a grubby kind of fiat, in little fractions of a percent here and there each and every day, through a thousand separate transactions that take place in fine print and in the margins of a vast social mechanism that most of us are simply not conscious of."
These fine-grained transactions lie at the heart of the mortgage fiasco. For example, the interest-rate swaps that upended Greece and were a key factor in our housing market's collapse also midwifed an ingenious investment tool called the "CDO squared"—that is, a debt instrument composed wholly of other debt instruments. These contrivances allowed substandard BBB or lower mortgages to get nudged back up into AAA territory; and in the heat of a bubble, all that a broker of fluid capital usually needs to hear is the simple "AAA" incantation to set the geysers loose. As Taibbi explains, the Quants' brave new parcels of repackaged debt were also appealing to international bankers because of their transaction fees, measured in hundredth-percentage "basis points."
Taibbi brings home the dramatically out-of-kilter state of the bubble market by recounting the global investing adventures of an anonymous banker he calls Andy. (As Taibbi explains in a note on sourcing, he grants anonymity to sources in the financial industry in order to protect their professional standing. He uses anonymous sources mainly to confirm already reported details of the meltdown; in only one case—the back-room deal to bail out the moribund American International Group—does Taibbi rely on an anonymous source to break news.) As Taibbi sums up the process, CDO-squared transactions "allowed Andy's bank to take all the unsalable BBB-rated extras from these giant mortgage deals, jiggle them around a little using some mathematical formulae, and—presto! All of a sudden 70 percent of your unsalable BBB-rated pseudo-crap ('which in reality is more like B-minus-rated stuff, since [consumer lending] scores aren't accurate,' reminds Andy) is now very salable AAA-rated prime paper, suitable for selling to would-be risk-avoidant pension funds and insurance companies. It's the same homeowners and the same loans, but the wrapping on the box is different." At the crest of the bubble, another global banker, whom Taibbi calls Miklos, recalls fielding a bond deal offering him fifty basis points above the standard international borrowing rate, known as the London Interbank Offered Rate; he was then able to turn around and repackage the original bonds into a credit default deal with the now-infamous flamed-out-and-bailed-out AIG for ten points above the London rate. In other words, Miklos's bank would collect forty basis points—translating into millions in fees—for nothing more than rechristening debt instruments with different nomenclature. "It was so unreal, my bosses wouldn't let me book this stuff as profit," Miklos says now. "They just didn't believe it could be true." Miklos had lucked into the early part of a global run on these AIG-brokered deals—but it couldn't last. "Suddenly someone is buying like five hundred million dollars of this stuff and getting the same swap deal from AIG," he says. "I'm getting blown out of the water."
It's worth remembering, in the thick of all this surreal detail, that these wild market lurches happened because credit default insurance was completely unregulated: no bank had to show underlying assets to any counterparty, let alone to the public. "Wall Street is frequently compared by detractors to a casino," Taibbi writes in summing up this asinine state of affairs, "but in the case of the CDS, it was far worse than a casino—a casino, at least, does not allow people to place bets they can't cover."
The other deformed stepchild of deregulation in this set piece was, of course, AIG, the firm that became the CDS guarantor of first resort for profit-hungry investors. AIG was once a simple insurance company, but under the dispensation of the 1999 Gramm-Leach-Bliley law, which wiped out New Deal prohibitions against the consolidation of insurers, investment banks and commercial banks, AIG soon morphed into an extremely shortsighted purveyor of securitized debt. (Whether credit default swaps can technically be viewed as insurance is, rather hilariously, still a subject of controversy among state and federal regulators.) The AIG Financial Products division is already a byword for bubble excess in the nation's new financial lexicon; under the deranged leadership of division head Joe Cassano, the financial products team leveraged some $500 billion into the CDS market (thereby permitting Cassano to pocket $280 million during an eight-year period of his twenty-year run of the shop) before the gradual collapse of the housing market caused a run of collateral claims on all the default-swap debt as borrowers defaulted.