BILL MOYERS: Welcome to the JOURNAL. With all due respect, we can only wish those tea party activists who gathered this week were not so single-minded about just who's responsible for their troubles, real and imagined. They're up in arms, so to speak, against big government, especially the Obama administration.
But if they thought this through, they'd be joining forces with other grassroots Americans who will soon be demonstrating in Washington and elsewhere against high finance, taking on Wall Street and the country's biggest banks.
The original Tea Party, remember, wasn't directed just against the British redcoats. Colonial patriots also took aim at the East India Company. That was the joint-stock enterprise originally chartered by the first Queen Elizabeth. Over the years, the government granted them special rights and privileges, which the owners turned into a monopoly over trade, including tea.
It may seem a stretch from tea to credit default swaps, but the principle is the same: when enormous private wealth goes unchecked, regular folks get hurt - badly. That's what happened in 2008 when the monied interests led us up the garden path to the great collapse.
Suppose the Tea Party folk had dropped by those Senate hearings this week looking into the failure of Washington Mutual. That's the bank that went belly up during the meltdown in September 2008. It was the largest such failure in American history.
WaMu, as we were reminded this week, made sub-prime loans that its executives knew were rotten, then packaged them as mortgage securities, and pawned them off on unsuspecting investors.
SEN. CARL LEVIN: And that was your responsibility to make sure that the securities which went out to the investors were following notice to the investors of everything that they needed to know in order that the information be complete and truthful. That's what your testimony was, under oath.
DAVID BECK: It's a very real possibility that the loans that went out were better quality than Mr. Shaw laid out.
SEN. CARL LEVIN: And you don't -
DAVID BECK: A very real possibility.
SEN. CARL LEVIN: And there's a very good possibility that they were exactly the quality that he laid out, right? Is that right?
DAVID BECK: That's right.
SEN. CARL LEVIN: Okay. And you don't know, and apparently you don't care. And the trouble is, you should have cared.
BILL MOYERS: Then there's Lehman Brothers. During those black September days a year and a half ago, the Feds decided to let Lehman go. This led to America's biggest bankruptcy ever. In an admirable work of journalism this week, the New York Times reported that Lehman secretly controlled a company called Hudson Castle and used it to borrow money as well as to hide bad investments in commercial real estate and sub-prime mortgages.
But the week's award for sheer gall goes to a Chicago-area hedge fund called Magnetar, named after a kind of neutron star that spews deadly radiation across the galaxies. Thanks to the teamwork of the investigative reporting website "ProPublica," NPR's "Planet Money" project and "This American Life," we learned Magnetar worked with investment banks to create toxic CDO's - collateralized debt obligations - securities backed by sub-prime mortgages the management knew were bad. And then Magnetar took that knowledge and bet against the very same investments they had recommended to buyers. Selling short and making a fortune.
And late this week the Securities and Exchange Commission charged the godfather of Wall Street, Goldman Sachs, with fraud in earning a fifteen million dollar fee involving those complex CDO's, a hedge fund, and the housing market.
But, since we know all this, why is it so hard to hold Wall Street accountable? Even as we speak the banking industry and corporate America are fighting against financial reform with all the money and influence at their disposal Their effort is to preserve a system that would enable them to ransack the country once again.
So even if the Tea Party folks saw the light, what can ordinary Americans do?
That's the question I want to put to my guests, Simon Johnson and James Kwak. They have written this new book, 13 BANKERS: THE WALL STREET TAKEOVER AND THE NEXT FINANCIAL MELTDOWN. It's a must read - already a best seller -- and it couldn't have come at a better time. This book could change the debate over financial reform by tipping it in favor of the public.
Simon Johnson is a former chief economist at the International Monetary Fund. He now teaches at MIT's Sloan School of Management and is a Senior Fellow at the Peterson Institute for International Economics.
James Kwak is studying law at Yale Law School - a career he decided to pursue after working as a management consultant at McKinsey & Company and co-founding the successful software company, Guidewire. Together James Kwak and Simon Johnson run the indispensable economic website BaselineScenario.com
Welcome to you both.
Let me get to the blunt conclusion you reach in your book. You say that two years after the devastating financial crisis of '08 our country is still at the mercy of an oligarchy that is bigger, more profitable, and more resistant to regulation than ever. Correct?
SIMON JOHNSON: Absolutely correct, Bill. The big banks became stronger as a result of the bailout. That may seem extraordinary, but it's really true. They're turning that increased economic clout into more political power. And they're using that political power to go out and take the same sort of risks that got us into disaster in September 2008.
BILL MOYERS: And your definition of oligarchy is?
SIMON JOHNSON: Oligarchy is just- it's a very simple, straightforward idea from Aristotle. It's political power based on economic power. And it's the rise of the banks in economic terms, which we document at length, that it'd turn into political power. And they then feed that back into more deregulation, more opportunities to go out and take reckless risks and-- and capture huge amounts of money.
BILL MOYERS: And you say that these this oligarchy consists of six megabanks. What are the six banks?
JAMES KWAK: They are Goldman Sachs, Morgan Stanley, JPMorgan Chase, Citigroup, Bank of America, and Wells Fargo.
BILL MOYERS: And you write that they control 60 percent of our gross national product?
JAMES KWAK: They have assets equivalent to 60 percent of our gross national product. And to put this in perspective, in the mid-1990s, these six banks or their predecessors, since there have been a lot of mergers, had less than 20 percent. Their assets were less than 20 percent of the gross national product.
BILL MOYERS: And what's the threat from an oligarchy of this size and scale?
SIMON JOHNSON: They can distort the system, Bill. They can change the rules of the game to favor themselves. And unfortunately, the way it works in modern finance is when the rules favor you, you go out and you take a lot of risk. And you blow up from time to time, because it's not your problem. When it blows up, it's the taxpayer and it's the government that has to sort it out.
BILL MOYERS: So, you're not kidding when you say it's an oligarchy?
JAMES KWAK: Exactly. I think that in particular, we can see how the oligarchy has actually become more powerful in the last since the financial crisis. If we look at the way they've behaved in Washington. For example, they've been spending more than $1 million per day lobbying Congress and fighting financial reform. I think that's for some time, the financial sector got its way in Washington through the power of ideology, through the power of persuasion. And in the last year and a half, we've seen the gloves come off. They are fighting as hard as they can to stop reform.
SIMON JOHNSON: I know people react a little negatively when you use this term for the United States. But it means political power derived from economic power. That's what we're looking at here. It's disproportionate, it's unfair, it is very unproductive, by the way. Undermines business in this society. And it's an oligarchy like we see in other countries.
BILL MOYERS: And you say they continue to hold the global economy hostage?
JAMES KWAK: Exactly. Because what's happened- what we learned in 2008 were certain institutions are so big and so interconnected that if they were to fail, they would cause systemic shocks throughout the economy. That's essentially what happened in September 2008 when Lehman Brothers collapsed. And what's remarkable, and I think what essentially proves the point of our book is that almost two years later, nothing has changed.
Or the only thing that has changed is that these banks have gotten larger, more powerful, both economically and politically. And they've been flexing their muscles in Washington for the last year and a half. So Neal Wolin, the Deputy Treasury Secretary gave a blistering speech to the U.S. Chamber of Commerce in which he said, look, the financial sector has been spending more than one million dollars per day lobbying against the reforms we need to fix the financial system. Now, Simon and I think those reforms that the Administration has proposed do not go far enough. But we think they're certainly better than nothing. What Wall Street wants is they want nothing. They want to stop this in its tracks and go back to where we were five years ago.
SIMON JOHNSON: It's amazing, Bill. But this is this is politics and this is money. And you know, there's a ground game, which is campaign contributions, which are surging in. I'm sure on both sides of the aisle. And there's also the ideological space. It's amazing. The Chamber of Commerce that claims to represent the broad cross section of American business is siding with six big banks, who favor policies that are directly contrary to the interests of most of the membership of the Chamber of Commerce. And that's just not just me saying that. That's Neal Wolin. That's Treasury. That's the White House saying that now. Calling fortunately, they've come to the point where they're willing to call the Chamber of Commerce on that. But I don't know if that message is getting through to people.
JAMES KWAK: You see what the bankers have done is they have taken a basic principle which is more or less true. Which is that free financial markets do enable money to go to the places where people need it. But on top of that, they've erected a system that is indescribably complex. And gives many opportunities to make money at the expense of their customers, at the expense of their counterparties. Even at the expense of their own employers. So, one of the things that has happened has been that Wall Street finance has become so complex and the internal systems of Wall Street banks has become so complex that if you are a smart banker, who is out to maximize your own income, you can find the loopholes in the system and you can exploit them, even if it means taking money from your own-- from your own company
BILL MOYERS: You've been writing this week on your website-- about this hedge fund in Chicago that's made a lot of money. In effect, betting against the American Dream. What was that?
JAMES KWAK: Magnetar is a hedge fund which means that other people gave them money to invest. And their job is to make as much money as possible. And these were the smart guys in the room. They saw that the system was broken. And they found a specific way to exploit it. And they knew that they could go for example, they could go to Wall Street banks and the banks would collaborate in making these extremely toxic securities. Because they knew what the bankers incentives were. They knew that the banker's incentives were to do the deal, to do the transaction, to get the fees up front. And they knew that there was nobody watching out for the investors. There was nobody watching out to make sure that securities they manufactured were actually good securities. But essentially what they were doing is they wanted to short the housing market. And they shorted the market in such a way that they actually made the problem worse, because what they did is they encouraged they tried to create these very toxic securities explicitly so that they could then short those securities. And that's why in a sense, they were they were shorting the American Dream. But what the real story of Magnetar, I think, is that they were exploiting a system that was deeply broken.
So, we like to think that the financial system we have in Wall Street are set up so that as people try to make lots of money they are they are indirectly helping the economy by making sure their capital goes where it's needed most. What the Magnetar story shows us that this is a casino, where you can make money you can make money exploiting the weaknesses in the casino. And it has nothing to do with the American Dream. It has nothing to do with making sure that capital goes to the places where it's needed most. I have to say that we owe a great to debt to "ProPublica" and "Planet Money" and "This American Life" for uncovering this story
BILL MOYERS: Public radio's excellent program, "This American Life", did a terrific broadcast on this subject, based upon the ProPublica investigation that you talked about. And there's a song in it that I have to play for the two of you and for my audience. Take a listen.
UNIDENTIFIED MAN: Step one. You write a check for 10 million dollars. Hand the check to a Wall Street bank, and ask them to make us a CDO. Step two: they create the CDO, using risky stuff, very risky stuff, extremely risky stuff. Step three: other investors commit hundreds of millions of dollars to the CDO. Step four: we bet against the CDO, using a credit default swap. Step five: the housing market crashes. The CDO's value goes to zero, our bet pays off and we make hundreds of millions of dollars and before you can say step six, we're rich! We're going to bet against the American Dream, we're going to be on the winning team, purchase risky debt on a massive scale. Then place a bet that the debt will fail. Hundreds of millions for Magnetar, the economy collapsing like a dying star. No one will know till it's on NPR, and who cares? It's time to hit the town, this sucker could go down. The housing market's losing steam. And all we got to do to make our dreams come true is bet against the American Dream!
BILL MOYERS: You're smiling, James, but is it really that funny?
JAMES KWAK: Well for decades, we've been told that Wall Street and financial innovation were promoting the American Dream. And what they've I think what the show and the song have really hit the hit the nail on is that in fact, you can make even more money betting against the American Dream. And that's the kind of system we have today.
SIMON JOHNSON: My bumper sticker from this and I hope it does become a bumper sticker is, "Trust me, I'm a banker."
I mean, you need to break through there's a level of progress here, Bill. Which is when people can laugh about it. When people can break it down into pieces. When you've got the 60-second version. And you can hammer that. And people understand it. Then you're starting to fight back. This is about ideology. This is about belief. This is about these guys are smart. These guys are well paid. So they must know what they're doing. And that's wrong.
BILL MOYERS: You wrote on your website this week about how JPMorgan Chase lost $880 million on one of these kind of whacky obscure deals? But the executives still paid themselves millions of dollars in up front fees. And you conclude that bankers placed a ticking bomb on their own bank balance sheet. It exploded and personally they still made money.
JAMES KWAK: Exactly. Because this is an example so, this is from the "ProPublica" investigation of Magnetar. essentially the bankers at JPMorgan Chase involved in the transaction created a new CDO. A new collateralized debt obligation. Which was very, very toxic. And either they knew at the time that it was toxic, or they should have known, I have no way of knowing. JPMorgan decided to hold onto most of this toxic product they-- they had built. A billion dollars worth of toxic product. And then when the market collapsed, it turned out they lost $880 million on that position.
So, if we think about it, there are really two possibilities here. The bankers involved in the transaction either really thought that this was a good product and a good investment, in which case they're incompetent. Or they had- they may have doubts, they may have thought it was toxic, but they knew that the way the internal systems at JPMorgan Chase worked, they could get the fees front, they could get bonuses based on those fees, and leave the bomb for later.
BILL MOYERS: Somebody wrote on your blog this week, "If I were to buy an old house. Make some cosmetic improvements that mask an underlying rot. Got my insurance company to write an exorbitant homeowners policy exceeding any leans against the property. Then burned it down, wouldn't that be fraud?" Did you answer this guy?
JAMES KWAK: I haven't. That would
BILL MOYERS: Would you?
JAMES KWAK: That would be fraud.
BILL MOYERS: That would be fraud. So, explain to me how you manage to lose $880 million on your own company's money to make a quick buck for yourself and you get away with it?
JAMES KWAK: Well, I think that there are laws in this area. So, for any securities, there has to be-- for this type of security, there has to be a document which explains those securities. And that's a document that you give to the investors who might buy them. And there are laws governing those. And if you put in facts in there that that are materially false. That you know to be true, that is fraud. But I think the problem is that in many of these cases, I don't think that many of these people are criminals. I get a lot of criticism for saying that I don't think these people are criminals. But I think it's relatively easy to write these documents in such a way that you're not saying anything you know to be false. And so, they pass through, they pass through any kind of you avoid any possible criminal liabilities there. But yet, they can be misleading in a way that encourages people to buy them.
SIMON JOHNSON: I think it's actually worse in some instance, Bill. Certainly for offshore activities. Goldman Sachs was involved in hiding a lot of Greek government debt. They then sold new Greek government obligations to people in the United States as far as far as we understand it. And didn't reveal that they'd hidden the levels of the true levels of government debt. Now, that is withholding material information. That's a violation of rule 10B-5. and where is the legal process, you should ask, that holds them accountable for that? I've talked to lots of very good lawyers about this. And there are many complicated stories about why Goldman Sachs won't face any civil action or criminal action. There are huge loopholes in our legal system with regard to financial services that need to be closed.
BILL MOYERS: There were some interesting hearings, as I know you saw, before the Financial Crisis Inquiry Commission. And some of the first, some of the most interesting testimony came from the former honchos at Citigroup. Mr. Prince and Mr. Rubin. Take a look.
CHARLES PRINCE: Let me start by saying I'm sorry. I'm sorry that our management team, starting with me, like so many others, could not see the unprecedented market collapse that lay before us.
ROBERT RUBIN: My role at Citi, defined at the outset, was to engage with clients across the bank's businesses, here and abroad. Having spent my career in positions with significant operational responsibility at Treasury and, prior to that, at Goldman Sachs, I no longer wanted such a role at this stage of my life, and my agreement with Citi provided that I would have no management of personnel or operations.
ROBERT RUBIN: But almost all of us, including me, who were involved in the financial system, missed the powerful combination of factors that led to this crisis and the serious possibility of a massive crisis. We all bear responsibility for not recognizing this, and I deeply regret that.
PHIL ANGELIDES: The two of you, in charge of this organization did not seem to have a grip on what was happening. I don't know that you can have it two ways. You were either were pulling the levers or asleep at the switch.
BILL MOYERS: How can it be that a Robert Rubin, former Secretary of the Treasury, pulls down $100 million as a senior advisor to Citigroup and claims he doesn't know the risk that was involved in what he was trying to sell to clients and foreign officials? How can that be?
JAMES KWAK: I think there are two things. There's a narrow and a broad view of this. The narrow view is I think Rubin is actually not lying. I think it is true that Rubin did not know what the risks were. Although he certainly should have known what the risks were. And that's because he was fully subscribed to this ideology that free markets are good. That the market will take care of itself. That, he also suffered from a lot of the blindness that corporate officers and directors have. Corporate officers and directors manage these enormous organizations with tens of hundreds of thousands of people. They have very little idea what's going on. They're getting their information from subordinates, who are giving them a filtered view of the world. On the other hand, when he says, no one could have foreseen this. This is what I call an intellectual cover up. And I say that because it's very disingenuous. Over the past 20 years, these banks used their economic power and their political power to engineer an unregulated financial environment in which precisely this sort of thing could happen. And in that sense, I think that this was not an accident. It was not a natural disaster. It was not unforeseeable. It was the product of the efforts by the sector over the past 20 years to reshape Washington and to engineer an environment that would allow them to make as much money as possible. Simon talked earlier about money. And we know that the financial sector, especially Wall Street, has been, has made enormous contributions to both campaign contributions and lobbying expenses. But I think there were, there were two more potent weapons in their arsenal. One is the revolving door. So, we've seen an enormous number of people passing back and forth between Washington and Wall Street over the past 20 years. This is not a new phenomenon. It happens in every industry. But there are certain things that make it especially pernicious when it comes to finance. One is that, one is a question of incentives. So, compared to other industries, Wall Street can simply offer enormous amounts of money. I'm not saying that everyone did that. I'm not saying that even the majority of people did that. But that is, that is very clear.
BILL MOYERS: The New York Times has a story this week saying that 125 former members of Congress and staffers are now working for the financial industry in Washington. One of them is Michael Oxley, whose name is on one of the most important pieces of business legislation in the last 20 years. The Sarbanes-Oxley bill, which was designed to impose some very strict accounting rules after Enron on all of this. And there he is now, he's a lobbyist for the securities industry.
SIMON JOHNSON: But Bill, it goes even further and deeper than that. Robert Rubin was Secretary of the Treasury in the 1990s. He oversaw the deregulation. He fought hard against Brooksley Born, the only regulator in living memory who tried to prevent derivatives from getting out of control. He then went to Citigroup. He presided over this nonsense and this mess. He's now and he was he's clearly éminence grise of this administration. Mr. Geithner and Mr. Summers are his protégés. But that's, that's not all. Next week, the Hamilton Project, a project of the Brookings Institution founded by Mr. Rubin, will have a big public event. Probably Mr. Rubin's most prominent Washington appearance since the crisis broke. The headline act at this event will be Vice President Joe Biden. Now, maybe Mr. Biden will be taking on the view of finance that we all should fear greatly. But I'm not so optimistic.
BILL MOYERS: You know, I don't get it. Recently when "Newsweek" wanted to give big space to somebody to explain how we get out of this, who wrote the piece? Robert Rubin. I mean, are they locked into this worldview so that they cannot see the consequences of their own actions?
JAMES KWAK: Well, I think there are a couple things going on. One of the things we talk about in the book is how the Democratic Party became taken over by this Wall Street friendly view in the 1990s, which is, you know, extremely important, because in the 1980s, we had a deregulatory administration that was largely opposed by a Democratic Congress. And it became very convenient for Democrats, because if you believed in the ideology of finance, you could sincerely think, I am a Democrat, I am a servant of the poor and the working class. And yet, I can take campaign contributions from Wall Street, because I sincerely believe that Wall Street is doing what's best, what's in the interest of the country.
I think it's been exposed in the last year and a half that a lot of what Wall Street did was not in the best interest of the country, not in the interest of the people getting these subprime loans, not in the interest of the taxpayer who was paying for the immense fiscal costs of the financial crisis and the recession. But it's, there's a curious time lag going on in the, in the Wall Street, intellectual and political establishment, where they think they're still in 2005.
SIMON JOHNSON: As I travel around the country, Bill, I'm really struck by the fact that while people in Washington talk about populist anger in the country, most of what I encounter is legitimate, sensible anger. People actually understand what happened. They understand what went wrong. And they want to stop it. And the banks don't get this. The belief system on Wall Street is the same. Jamie Dimon, head of JPMorgan Chase, one of the most powerful men in the country. If you don't know his name, you should look him up because this is a man to fear.
BILL MOYERS: Very close to the President. Has dinner- lunch with the President.
SIMON JOHNSON: The President called him a savvy businessman, recently. Jamie Dimon told his shareholders, we just had probably our best year ever. They didn't have their best year ever. They went through crisis. They were saved like the rest of the financial system by the government, by the taxpayers, but that's not how they see it. That's not what they believe. That's really important. That belief must be shaken if we're to make any progress at all.
BILL MOYERS: But we can't compete with those lobbying dollars. We can't compete with this interlocking oligarchy that you say. That's a fact.
SIMON JOHNSON: Bill, in 1902, when Theodore Roosevelt took on the industrial trusts, nobody knew what he was doing. Nobody thought he could win. The Senate was called the Millionaires Club for a reason. And it wasn't even any theory. The antitrust theory, everything we know and believe about monopoly, why monopoly is bad for society, didn't really exist, certainly not in the mainstream consensus, when Roosevelt decided to take on J.P. Morgan, okay?
Ten years later, the mainstream consensus has shifted completely. People understood from the debate and from the struggle, from the fact- from the way the trusts fought back and the way they spent their money, they began to understand this was profoundly dangerous, politically and socially. 1912, everyone agreed that breaking up Standard Oil was a good idea. Had to be done. They broke into 35 companies, most of them did well. The shareholders actually made money. It's a very American resolution, Bill. And it's very clear that we've had this confrontation before in American history: Andrew Jackson against the Second Bank of the United States in the 1830s, Jackson won, barely; Theodore Roosevelt, the beginning of the 20th Century; FDR in the 1930s.
The American democracy was not given to us on a platter. It is not ours for all time, irrespective of our efforts. Either people organize and they find political leadership to take this on, or we are going to be in big trouble, okay? Now, I agree, we don't have Theodore Roosevelt. I agree. The only Senator who speaks complete truth and clarity on this issue is Ted Kaufman from Delaware, who's an appointed Senator, he got- he was appointed to Joe Biden's seat, and he's not running for reelection. He therefore doesn't care about the money. I take that point. But there are others. There must be others. We must find them and we must fund them, individually, sufficiently, to fight against this nonsense from the corporate sector.
I would like to emphasize, Bill, I'm a professional entrepreneurship, James is a successful entrepreneur. We're not anti-finance. We have many people endorsing the book, backing us, and you know, they, we put their blurbs in the book for a reason, who are from finance. Who really appreciate and understand this key point. Which is the complexity has gone too far. It's become dangerous. And we need to return our financial system to a simpler, more direct, easier to manage way.
BILL MOYERS: You both paid attention last week, to the hearings in Washington, on the Financial Crisis Inquiry Commission. Was there a theme that you heard emerge there?
JAMES KWAK: I think the biggest theme that I heard emerge was that this was an innocent mistake. So, what I mean by that is-
BILL MOYERS: You mean the collapse of 2008? All of this? What- was-
JAMES KWAK: Exactly.
BILL MOYERS: An accident?
JAMES KWAK: Yes, an accident in the sense that-
BILL MOYERS: Natural disaster?
JAMES KWAK: As we heard Chuck Prince say and Robert Rubin say, we couldn't see it coming. These were, there were risks that build up in the system, and our models didn't account for it. We're sorry that it happened. Not even, we're sorry that we did it. We're sorry that it happened.
And I think that this is, I mean, it's unfortunate if they really believe this. Because again, if we just take a very small example, one of the things that clearly went wrong is these banks were not able to manage their own risk. They did not know what positions they had. They did not know what market forces they were exposed to. You would think that should be the first job of a bank. And I don't think this was an innocent mistake. And I say that for this reason. It was in the bank's short term financial interest to underestimate their risk. Because if they had estimated their risk accurately, they should have had to set more capital aside, they would have been less profitable.
So, yes, it's possible that the CEOs of these banks honestly did not understand their risk positions. But that mistake-- there was an incentive behind that mistake. You know, banks never overestimate their risk. These mistakes always only go in one direction. Because that's the direction they have an incentive to make the mistake in.
BILL MOYERS: What do you mean they have an incentive to make a mistake?
JAMES KWAK: So, in the short term, a bank's profitability is going to depend on how much capital it has to set aside. So, in banking, if I have a certain position, I have to set aside a certain amount of capital to protect myself from that position going bad. If I think the position is less risky than it actually is, I'm going to set aside less capital to cover that position, and that's going to give me a higher profit margin.
If I'm the head of this bank, that means that in the short term, I'm going to have higher profits, higher stock price, more money for me, but I'm underestimating the risk of something blowing up several years down the line. But we know that the, essentially, the incentive systems within these banks favor short term profits over long term solvency.
SIMON JOHNSON: The most profound thing, observation, on this structure, inadvertent, I would say, observation, was by Chuck Prince, the former head of Citigroup. In July 2007, right before the whole structure began to crumble. He said, "As long as the music is playing, you've got to get up and dance." And that's a statement about the incentive structure. Saying, well, everybody's doing it. That's how we all make money. We've got to do it, too. I'm just a bank doing what all the other banks are doing. That's absolutely the heart of the problem. I would also say and tell you, and emphasize, these people will not come out and debate with us. The heads of these companies or their representatives, they will not come out. They're afraid. They don't have the substance. They don't have the arguments. We have the evidence. They have the lobbyists. And that's all they have.
BILL MOYERS: They've got the power, the muscle, the money.
SIMON JOHNSON: They have money.
BILL MOYERS: You just have the arguments. You just have the facts. On your side.
SIMON JOHNSON: Absolutely. That's exactly what it comes down to.
But if they thought this through, they'd be joining forces with other grassroots Americans who will soon be demonstrating in Washington and elsewhere against high finance, taking on Wall Street and the country's biggest banks.
The original Tea Party, remember, wasn't directed just against the British redcoats. Colonial patriots also took aim at the East India Company. That was the joint-stock enterprise originally chartered by the first Queen Elizabeth. Over the years, the government granted them special rights and privileges, which the owners turned into a monopoly over trade, including tea.
It may seem a stretch from tea to credit default swaps, but the principle is the same: when enormous private wealth goes unchecked, regular folks get hurt - badly. That's what happened in 2008 when the monied interests led us up the garden path to the great collapse.
Suppose the Tea Party folk had dropped by those Senate hearings this week looking into the failure of Washington Mutual. That's the bank that went belly up during the meltdown in September 2008. It was the largest such failure in American history.
WaMu, as we were reminded this week, made sub-prime loans that its executives knew were rotten, then packaged them as mortgage securities, and pawned them off on unsuspecting investors.
SEN. CARL LEVIN: And that was your responsibility to make sure that the securities which went out to the investors were following notice to the investors of everything that they needed to know in order that the information be complete and truthful. That's what your testimony was, under oath.
DAVID BECK: It's a very real possibility that the loans that went out were better quality than Mr. Shaw laid out.
SEN. CARL LEVIN: And you don't -
DAVID BECK: A very real possibility.
SEN. CARL LEVIN: And there's a very good possibility that they were exactly the quality that he laid out, right? Is that right?
DAVID BECK: That's right.
SEN. CARL LEVIN: Okay. And you don't know, and apparently you don't care. And the trouble is, you should have cared.
BILL MOYERS: Then there's Lehman Brothers. During those black September days a year and a half ago, the Feds decided to let Lehman go. This led to America's biggest bankruptcy ever. In an admirable work of journalism this week, the New York Times reported that Lehman secretly controlled a company called Hudson Castle and used it to borrow money as well as to hide bad investments in commercial real estate and sub-prime mortgages.
But the week's award for sheer gall goes to a Chicago-area hedge fund called Magnetar, named after a kind of neutron star that spews deadly radiation across the galaxies. Thanks to the teamwork of the investigative reporting website "ProPublica," NPR's "Planet Money" project and "This American Life," we learned Magnetar worked with investment banks to create toxic CDO's - collateralized debt obligations - securities backed by sub-prime mortgages the management knew were bad. And then Magnetar took that knowledge and bet against the very same investments they had recommended to buyers. Selling short and making a fortune.
And late this week the Securities and Exchange Commission charged the godfather of Wall Street, Goldman Sachs, with fraud in earning a fifteen million dollar fee involving those complex CDO's, a hedge fund, and the housing market.
But, since we know all this, why is it so hard to hold Wall Street accountable? Even as we speak the banking industry and corporate America are fighting against financial reform with all the money and influence at their disposal Their effort is to preserve a system that would enable them to ransack the country once again.
So even if the Tea Party folks saw the light, what can ordinary Americans do?
That's the question I want to put to my guests, Simon Johnson and James Kwak. They have written this new book, 13 BANKERS: THE WALL STREET TAKEOVER AND THE NEXT FINANCIAL MELTDOWN. It's a must read - already a best seller -- and it couldn't have come at a better time. This book could change the debate over financial reform by tipping it in favor of the public.
Simon Johnson is a former chief economist at the International Monetary Fund. He now teaches at MIT's Sloan School of Management and is a Senior Fellow at the Peterson Institute for International Economics.
James Kwak is studying law at Yale Law School - a career he decided to pursue after working as a management consultant at McKinsey & Company and co-founding the successful software company, Guidewire. Together James Kwak and Simon Johnson run the indispensable economic website BaselineScenario.com
Welcome to you both.
Let me get to the blunt conclusion you reach in your book. You say that two years after the devastating financial crisis of '08 our country is still at the mercy of an oligarchy that is bigger, more profitable, and more resistant to regulation than ever. Correct?
SIMON JOHNSON: Absolutely correct, Bill. The big banks became stronger as a result of the bailout. That may seem extraordinary, but it's really true. They're turning that increased economic clout into more political power. And they're using that political power to go out and take the same sort of risks that got us into disaster in September 2008.
BILL MOYERS: And your definition of oligarchy is?
SIMON JOHNSON: Oligarchy is just- it's a very simple, straightforward idea from Aristotle. It's political power based on economic power. And it's the rise of the banks in economic terms, which we document at length, that it'd turn into political power. And they then feed that back into more deregulation, more opportunities to go out and take reckless risks and-- and capture huge amounts of money.
BILL MOYERS: And you say that these this oligarchy consists of six megabanks. What are the six banks?
JAMES KWAK: They are Goldman Sachs, Morgan Stanley, JPMorgan Chase, Citigroup, Bank of America, and Wells Fargo.
BILL MOYERS: And you write that they control 60 percent of our gross national product?
JAMES KWAK: They have assets equivalent to 60 percent of our gross national product. And to put this in perspective, in the mid-1990s, these six banks or their predecessors, since there have been a lot of mergers, had less than 20 percent. Their assets were less than 20 percent of the gross national product.
BILL MOYERS: And what's the threat from an oligarchy of this size and scale?
SIMON JOHNSON: They can distort the system, Bill. They can change the rules of the game to favor themselves. And unfortunately, the way it works in modern finance is when the rules favor you, you go out and you take a lot of risk. And you blow up from time to time, because it's not your problem. When it blows up, it's the taxpayer and it's the government that has to sort it out.
BILL MOYERS: So, you're not kidding when you say it's an oligarchy?
JAMES KWAK: Exactly. I think that in particular, we can see how the oligarchy has actually become more powerful in the last since the financial crisis. If we look at the way they've behaved in Washington. For example, they've been spending more than $1 million per day lobbying Congress and fighting financial reform. I think that's for some time, the financial sector got its way in Washington through the power of ideology, through the power of persuasion. And in the last year and a half, we've seen the gloves come off. They are fighting as hard as they can to stop reform.
SIMON JOHNSON: I know people react a little negatively when you use this term for the United States. But it means political power derived from economic power. That's what we're looking at here. It's disproportionate, it's unfair, it is very unproductive, by the way. Undermines business in this society. And it's an oligarchy like we see in other countries.
BILL MOYERS: And you say they continue to hold the global economy hostage?
JAMES KWAK: Exactly. Because what's happened- what we learned in 2008 were certain institutions are so big and so interconnected that if they were to fail, they would cause systemic shocks throughout the economy. That's essentially what happened in September 2008 when Lehman Brothers collapsed. And what's remarkable, and I think what essentially proves the point of our book is that almost two years later, nothing has changed.
Or the only thing that has changed is that these banks have gotten larger, more powerful, both economically and politically. And they've been flexing their muscles in Washington for the last year and a half. So Neal Wolin, the Deputy Treasury Secretary gave a blistering speech to the U.S. Chamber of Commerce in which he said, look, the financial sector has been spending more than one million dollars per day lobbying against the reforms we need to fix the financial system. Now, Simon and I think those reforms that the Administration has proposed do not go far enough. But we think they're certainly better than nothing. What Wall Street wants is they want nothing. They want to stop this in its tracks and go back to where we were five years ago.
SIMON JOHNSON: It's amazing, Bill. But this is this is politics and this is money. And you know, there's a ground game, which is campaign contributions, which are surging in. I'm sure on both sides of the aisle. And there's also the ideological space. It's amazing. The Chamber of Commerce that claims to represent the broad cross section of American business is siding with six big banks, who favor policies that are directly contrary to the interests of most of the membership of the Chamber of Commerce. And that's just not just me saying that. That's Neal Wolin. That's Treasury. That's the White House saying that now. Calling fortunately, they've come to the point where they're willing to call the Chamber of Commerce on that. But I don't know if that message is getting through to people.
JAMES KWAK: You see what the bankers have done is they have taken a basic principle which is more or less true. Which is that free financial markets do enable money to go to the places where people need it. But on top of that, they've erected a system that is indescribably complex. And gives many opportunities to make money at the expense of their customers, at the expense of their counterparties. Even at the expense of their own employers. So, one of the things that has happened has been that Wall Street finance has become so complex and the internal systems of Wall Street banks has become so complex that if you are a smart banker, who is out to maximize your own income, you can find the loopholes in the system and you can exploit them, even if it means taking money from your own-- from your own company
BILL MOYERS: You've been writing this week on your website-- about this hedge fund in Chicago that's made a lot of money. In effect, betting against the American Dream. What was that?
JAMES KWAK: Magnetar is a hedge fund which means that other people gave them money to invest. And their job is to make as much money as possible. And these were the smart guys in the room. They saw that the system was broken. And they found a specific way to exploit it. And they knew that they could go for example, they could go to Wall Street banks and the banks would collaborate in making these extremely toxic securities. Because they knew what the bankers incentives were. They knew that the banker's incentives were to do the deal, to do the transaction, to get the fees up front. And they knew that there was nobody watching out for the investors. There was nobody watching out to make sure that securities they manufactured were actually good securities. But essentially what they were doing is they wanted to short the housing market. And they shorted the market in such a way that they actually made the problem worse, because what they did is they encouraged they tried to create these very toxic securities explicitly so that they could then short those securities. And that's why in a sense, they were they were shorting the American Dream. But what the real story of Magnetar, I think, is that they were exploiting a system that was deeply broken.
So, we like to think that the financial system we have in Wall Street are set up so that as people try to make lots of money they are they are indirectly helping the economy by making sure their capital goes where it's needed most. What the Magnetar story shows us that this is a casino, where you can make money you can make money exploiting the weaknesses in the casino. And it has nothing to do with the American Dream. It has nothing to do with making sure that capital goes to the places where it's needed most. I have to say that we owe a great to debt to "ProPublica" and "Planet Money" and "This American Life" for uncovering this story
BILL MOYERS: Public radio's excellent program, "This American Life", did a terrific broadcast on this subject, based upon the ProPublica investigation that you talked about. And there's a song in it that I have to play for the two of you and for my audience. Take a listen.
UNIDENTIFIED MAN: Step one. You write a check for 10 million dollars. Hand the check to a Wall Street bank, and ask them to make us a CDO. Step two: they create the CDO, using risky stuff, very risky stuff, extremely risky stuff. Step three: other investors commit hundreds of millions of dollars to the CDO. Step four: we bet against the CDO, using a credit default swap. Step five: the housing market crashes. The CDO's value goes to zero, our bet pays off and we make hundreds of millions of dollars and before you can say step six, we're rich! We're going to bet against the American Dream, we're going to be on the winning team, purchase risky debt on a massive scale. Then place a bet that the debt will fail. Hundreds of millions for Magnetar, the economy collapsing like a dying star. No one will know till it's on NPR, and who cares? It's time to hit the town, this sucker could go down. The housing market's losing steam. And all we got to do to make our dreams come true is bet against the American Dream!
BILL MOYERS: You're smiling, James, but is it really that funny?
JAMES KWAK: Well for decades, we've been told that Wall Street and financial innovation were promoting the American Dream. And what they've I think what the show and the song have really hit the hit the nail on is that in fact, you can make even more money betting against the American Dream. And that's the kind of system we have today.
SIMON JOHNSON: My bumper sticker from this and I hope it does become a bumper sticker is, "Trust me, I'm a banker."
I mean, you need to break through there's a level of progress here, Bill. Which is when people can laugh about it. When people can break it down into pieces. When you've got the 60-second version. And you can hammer that. And people understand it. Then you're starting to fight back. This is about ideology. This is about belief. This is about these guys are smart. These guys are well paid. So they must know what they're doing. And that's wrong.
BILL MOYERS: You wrote on your website this week about how JPMorgan Chase lost $880 million on one of these kind of whacky obscure deals? But the executives still paid themselves millions of dollars in up front fees. And you conclude that bankers placed a ticking bomb on their own bank balance sheet. It exploded and personally they still made money.
JAMES KWAK: Exactly. Because this is an example so, this is from the "ProPublica" investigation of Magnetar. essentially the bankers at JPMorgan Chase involved in the transaction created a new CDO. A new collateralized debt obligation. Which was very, very toxic. And either they knew at the time that it was toxic, or they should have known, I have no way of knowing. JPMorgan decided to hold onto most of this toxic product they-- they had built. A billion dollars worth of toxic product. And then when the market collapsed, it turned out they lost $880 million on that position.
So, if we think about it, there are really two possibilities here. The bankers involved in the transaction either really thought that this was a good product and a good investment, in which case they're incompetent. Or they had- they may have doubts, they may have thought it was toxic, but they knew that the way the internal systems at JPMorgan Chase worked, they could get the fees front, they could get bonuses based on those fees, and leave the bomb for later.
BILL MOYERS: Somebody wrote on your blog this week, "If I were to buy an old house. Make some cosmetic improvements that mask an underlying rot. Got my insurance company to write an exorbitant homeowners policy exceeding any leans against the property. Then burned it down, wouldn't that be fraud?" Did you answer this guy?
JAMES KWAK: I haven't. That would
BILL MOYERS: Would you?
JAMES KWAK: That would be fraud.
BILL MOYERS: That would be fraud. So, explain to me how you manage to lose $880 million on your own company's money to make a quick buck for yourself and you get away with it?
JAMES KWAK: Well, I think that there are laws in this area. So, for any securities, there has to be-- for this type of security, there has to be a document which explains those securities. And that's a document that you give to the investors who might buy them. And there are laws governing those. And if you put in facts in there that that are materially false. That you know to be true, that is fraud. But I think the problem is that in many of these cases, I don't think that many of these people are criminals. I get a lot of criticism for saying that I don't think these people are criminals. But I think it's relatively easy to write these documents in such a way that you're not saying anything you know to be false. And so, they pass through, they pass through any kind of you avoid any possible criminal liabilities there. But yet, they can be misleading in a way that encourages people to buy them.
SIMON JOHNSON: I think it's actually worse in some instance, Bill. Certainly for offshore activities. Goldman Sachs was involved in hiding a lot of Greek government debt. They then sold new Greek government obligations to people in the United States as far as far as we understand it. And didn't reveal that they'd hidden the levels of the true levels of government debt. Now, that is withholding material information. That's a violation of rule 10B-5. and where is the legal process, you should ask, that holds them accountable for that? I've talked to lots of very good lawyers about this. And there are many complicated stories about why Goldman Sachs won't face any civil action or criminal action. There are huge loopholes in our legal system with regard to financial services that need to be closed.
BILL MOYERS: There were some interesting hearings, as I know you saw, before the Financial Crisis Inquiry Commission. And some of the first, some of the most interesting testimony came from the former honchos at Citigroup. Mr. Prince and Mr. Rubin. Take a look.
CHARLES PRINCE: Let me start by saying I'm sorry. I'm sorry that our management team, starting with me, like so many others, could not see the unprecedented market collapse that lay before us.
ROBERT RUBIN: My role at Citi, defined at the outset, was to engage with clients across the bank's businesses, here and abroad. Having spent my career in positions with significant operational responsibility at Treasury and, prior to that, at Goldman Sachs, I no longer wanted such a role at this stage of my life, and my agreement with Citi provided that I would have no management of personnel or operations.
ROBERT RUBIN: But almost all of us, including me, who were involved in the financial system, missed the powerful combination of factors that led to this crisis and the serious possibility of a massive crisis. We all bear responsibility for not recognizing this, and I deeply regret that.
PHIL ANGELIDES: The two of you, in charge of this organization did not seem to have a grip on what was happening. I don't know that you can have it two ways. You were either were pulling the levers or asleep at the switch.
BILL MOYERS: How can it be that a Robert Rubin, former Secretary of the Treasury, pulls down $100 million as a senior advisor to Citigroup and claims he doesn't know the risk that was involved in what he was trying to sell to clients and foreign officials? How can that be?
JAMES KWAK: I think there are two things. There's a narrow and a broad view of this. The narrow view is I think Rubin is actually not lying. I think it is true that Rubin did not know what the risks were. Although he certainly should have known what the risks were. And that's because he was fully subscribed to this ideology that free markets are good. That the market will take care of itself. That, he also suffered from a lot of the blindness that corporate officers and directors have. Corporate officers and directors manage these enormous organizations with tens of hundreds of thousands of people. They have very little idea what's going on. They're getting their information from subordinates, who are giving them a filtered view of the world. On the other hand, when he says, no one could have foreseen this. This is what I call an intellectual cover up. And I say that because it's very disingenuous. Over the past 20 years, these banks used their economic power and their political power to engineer an unregulated financial environment in which precisely this sort of thing could happen. And in that sense, I think that this was not an accident. It was not a natural disaster. It was not unforeseeable. It was the product of the efforts by the sector over the past 20 years to reshape Washington and to engineer an environment that would allow them to make as much money as possible. Simon talked earlier about money. And we know that the financial sector, especially Wall Street, has been, has made enormous contributions to both campaign contributions and lobbying expenses. But I think there were, there were two more potent weapons in their arsenal. One is the revolving door. So, we've seen an enormous number of people passing back and forth between Washington and Wall Street over the past 20 years. This is not a new phenomenon. It happens in every industry. But there are certain things that make it especially pernicious when it comes to finance. One is that, one is a question of incentives. So, compared to other industries, Wall Street can simply offer enormous amounts of money. I'm not saying that everyone did that. I'm not saying that even the majority of people did that. But that is, that is very clear.
BILL MOYERS: The New York Times has a story this week saying that 125 former members of Congress and staffers are now working for the financial industry in Washington. One of them is Michael Oxley, whose name is on one of the most important pieces of business legislation in the last 20 years. The Sarbanes-Oxley bill, which was designed to impose some very strict accounting rules after Enron on all of this. And there he is now, he's a lobbyist for the securities industry.
SIMON JOHNSON: But Bill, it goes even further and deeper than that. Robert Rubin was Secretary of the Treasury in the 1990s. He oversaw the deregulation. He fought hard against Brooksley Born, the only regulator in living memory who tried to prevent derivatives from getting out of control. He then went to Citigroup. He presided over this nonsense and this mess. He's now and he was he's clearly éminence grise of this administration. Mr. Geithner and Mr. Summers are his protégés. But that's, that's not all. Next week, the Hamilton Project, a project of the Brookings Institution founded by Mr. Rubin, will have a big public event. Probably Mr. Rubin's most prominent Washington appearance since the crisis broke. The headline act at this event will be Vice President Joe Biden. Now, maybe Mr. Biden will be taking on the view of finance that we all should fear greatly. But I'm not so optimistic.
BILL MOYERS: You know, I don't get it. Recently when "Newsweek" wanted to give big space to somebody to explain how we get out of this, who wrote the piece? Robert Rubin. I mean, are they locked into this worldview so that they cannot see the consequences of their own actions?
JAMES KWAK: Well, I think there are a couple things going on. One of the things we talk about in the book is how the Democratic Party became taken over by this Wall Street friendly view in the 1990s, which is, you know, extremely important, because in the 1980s, we had a deregulatory administration that was largely opposed by a Democratic Congress. And it became very convenient for Democrats, because if you believed in the ideology of finance, you could sincerely think, I am a Democrat, I am a servant of the poor and the working class. And yet, I can take campaign contributions from Wall Street, because I sincerely believe that Wall Street is doing what's best, what's in the interest of the country.
I think it's been exposed in the last year and a half that a lot of what Wall Street did was not in the best interest of the country, not in the interest of the people getting these subprime loans, not in the interest of the taxpayer who was paying for the immense fiscal costs of the financial crisis and the recession. But it's, there's a curious time lag going on in the, in the Wall Street, intellectual and political establishment, where they think they're still in 2005.
SIMON JOHNSON: As I travel around the country, Bill, I'm really struck by the fact that while people in Washington talk about populist anger in the country, most of what I encounter is legitimate, sensible anger. People actually understand what happened. They understand what went wrong. And they want to stop it. And the banks don't get this. The belief system on Wall Street is the same. Jamie Dimon, head of JPMorgan Chase, one of the most powerful men in the country. If you don't know his name, you should look him up because this is a man to fear.
BILL MOYERS: Very close to the President. Has dinner- lunch with the President.
SIMON JOHNSON: The President called him a savvy businessman, recently. Jamie Dimon told his shareholders, we just had probably our best year ever. They didn't have their best year ever. They went through crisis. They were saved like the rest of the financial system by the government, by the taxpayers, but that's not how they see it. That's not what they believe. That's really important. That belief must be shaken if we're to make any progress at all.
BILL MOYERS: But we can't compete with those lobbying dollars. We can't compete with this interlocking oligarchy that you say. That's a fact.
SIMON JOHNSON: Bill, in 1902, when Theodore Roosevelt took on the industrial trusts, nobody knew what he was doing. Nobody thought he could win. The Senate was called the Millionaires Club for a reason. And it wasn't even any theory. The antitrust theory, everything we know and believe about monopoly, why monopoly is bad for society, didn't really exist, certainly not in the mainstream consensus, when Roosevelt decided to take on J.P. Morgan, okay?
Ten years later, the mainstream consensus has shifted completely. People understood from the debate and from the struggle, from the fact- from the way the trusts fought back and the way they spent their money, they began to understand this was profoundly dangerous, politically and socially. 1912, everyone agreed that breaking up Standard Oil was a good idea. Had to be done. They broke into 35 companies, most of them did well. The shareholders actually made money. It's a very American resolution, Bill. And it's very clear that we've had this confrontation before in American history: Andrew Jackson against the Second Bank of the United States in the 1830s, Jackson won, barely; Theodore Roosevelt, the beginning of the 20th Century; FDR in the 1930s.
The American democracy was not given to us on a platter. It is not ours for all time, irrespective of our efforts. Either people organize and they find political leadership to take this on, or we are going to be in big trouble, okay? Now, I agree, we don't have Theodore Roosevelt. I agree. The only Senator who speaks complete truth and clarity on this issue is Ted Kaufman from Delaware, who's an appointed Senator, he got- he was appointed to Joe Biden's seat, and he's not running for reelection. He therefore doesn't care about the money. I take that point. But there are others. There must be others. We must find them and we must fund them, individually, sufficiently, to fight against this nonsense from the corporate sector.
I would like to emphasize, Bill, I'm a professional entrepreneurship, James is a successful entrepreneur. We're not anti-finance. We have many people endorsing the book, backing us, and you know, they, we put their blurbs in the book for a reason, who are from finance. Who really appreciate and understand this key point. Which is the complexity has gone too far. It's become dangerous. And we need to return our financial system to a simpler, more direct, easier to manage way.
BILL MOYERS: You both paid attention last week, to the hearings in Washington, on the Financial Crisis Inquiry Commission. Was there a theme that you heard emerge there?
JAMES KWAK: I think the biggest theme that I heard emerge was that this was an innocent mistake. So, what I mean by that is-
BILL MOYERS: You mean the collapse of 2008? All of this? What- was-
JAMES KWAK: Exactly.
BILL MOYERS: An accident?
JAMES KWAK: Yes, an accident in the sense that-
BILL MOYERS: Natural disaster?
JAMES KWAK: As we heard Chuck Prince say and Robert Rubin say, we couldn't see it coming. These were, there were risks that build up in the system, and our models didn't account for it. We're sorry that it happened. Not even, we're sorry that we did it. We're sorry that it happened.
And I think that this is, I mean, it's unfortunate if they really believe this. Because again, if we just take a very small example, one of the things that clearly went wrong is these banks were not able to manage their own risk. They did not know what positions they had. They did not know what market forces they were exposed to. You would think that should be the first job of a bank. And I don't think this was an innocent mistake. And I say that for this reason. It was in the bank's short term financial interest to underestimate their risk. Because if they had estimated their risk accurately, they should have had to set more capital aside, they would have been less profitable.
So, yes, it's possible that the CEOs of these banks honestly did not understand their risk positions. But that mistake-- there was an incentive behind that mistake. You know, banks never overestimate their risk. These mistakes always only go in one direction. Because that's the direction they have an incentive to make the mistake in.
BILL MOYERS: What do you mean they have an incentive to make a mistake?
JAMES KWAK: So, in the short term, a bank's profitability is going to depend on how much capital it has to set aside. So, in banking, if I have a certain position, I have to set aside a certain amount of capital to protect myself from that position going bad. If I think the position is less risky than it actually is, I'm going to set aside less capital to cover that position, and that's going to give me a higher profit margin.
If I'm the head of this bank, that means that in the short term, I'm going to have higher profits, higher stock price, more money for me, but I'm underestimating the risk of something blowing up several years down the line. But we know that the, essentially, the incentive systems within these banks favor short term profits over long term solvency.
SIMON JOHNSON: The most profound thing, observation, on this structure, inadvertent, I would say, observation, was by Chuck Prince, the former head of Citigroup. In July 2007, right before the whole structure began to crumble. He said, "As long as the music is playing, you've got to get up and dance." And that's a statement about the incentive structure. Saying, well, everybody's doing it. That's how we all make money. We've got to do it, too. I'm just a bank doing what all the other banks are doing. That's absolutely the heart of the problem. I would also say and tell you, and emphasize, these people will not come out and debate with us. The heads of these companies or their representatives, they will not come out. They're afraid. They don't have the substance. They don't have the arguments. We have the evidence. They have the lobbyists. And that's all they have.
BILL MOYERS: They've got the power, the muscle, the money.
SIMON JOHNSON: They have money.
BILL MOYERS: You just have the arguments. You just have the facts. On your side.
SIMON JOHNSON: Absolutely. That's exactly what it comes down to.
No comments:
Post a Comment