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Matt Taibbi is angry. He is a Rolling Stone columnist who spent the last several years covering the financial crisis, and as an outside observer, is far more negative about the finance industry than anybody associated with it. Griftopia is a collection of columns and other research put together as a striking condemnation of what has happened to America in the last twenty years.
Taibbi’s main thesis is that the finance industry has, rather than produce real value, chosen to exploit value created by others by creating financial instruments. He digs into the mortgage crisis, the commodities bubble, urban privatization and health care and shows how these are all different facets of the same attitude – make a quick buck for yourself, and damn the long-term consequences. I don’t know if all of Taibbi’s allegations are accurate, but he strings his observations together into a compelling story of a country headed into oblivion, because we are letting these jerks get away with it.
Here’s Taibbi’s description of the bubble economy:
Imagine the whole economy has turned into a casino. Investors are betting on oil futures, subprime mortgages, and Internet stocks, hoping for a quick score. In this scenario the major brokerages and investment banks play the role of the house. Just like real casinos, they always win in the end – regardless of which investments succeed or fail, they always take their cut in the form of fees and interest. Also just like real casinos, they only make more money as the number of gamblers increases: the more you play, the more they make. And even if the speculative bubbles themselves have all the inherent value of a royal flush, the money the house takes out is real. … Bettors chase imaginary riches, while the house turns those dreams into real mansions.Now imagine that every time the bubble bursts and the gamblers all go belly-up, the house is allowed to borrow giant piles of money from the state for next to nothing. The casino then in turn lends out all that money at the door to its recently busted customers, who flock back to the tables to lose their shirts all over again. The cycle quickly repeats itself, only this time the gambles is in even worse shape than before; now he’s not only lost his own money, he’s lost his money and he owes the house for what he’s borrowed.
Taibbi shows how this played out in the subprime mortgage crisis, but also in several other areas:
Taibbi uses several more examples to demonstrate that Wall Street is a parasite getting fat by sucking profit out of others. It’s a short-term attitude that destroys value, rather than create value by producing goods and services. He ends the book by describing Goldman Sachs as a “vampire squid”, entwined with every aspect of the American economy and sucking value out of all of it without creating any value itself.
Griftopia is a withering tirade against what Wall Street has done to the American economy, and how the government and we, the people, have allowed it. It’s a quick read, and I recommend it for a different perspective on the recent financial crises than what is reported in more typical news channels.
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Much of the confusion about the the financial crisis comes from names that *sound* similar, but in reality have nothing but circumstance to do with each other. Case in point CDO’s and CDS’s:
The CDO (Collateralized Debt Obligation)was and is a “fund-of-funds” – some form of debt obligations “lumped together” ostensibly to mitigate risk by spreading it across a large number of instruments (much like a mutual fund that seeks to reflect general market conditions while lessening exposure to any one stock/company). Another approach and step is to recognize that much of the underlying obligations *are* bad, and so you split the value/payback into “tranches” – the top “tranches” would be paid back/paid off first, the second would be paid from most of the remaining, and the “bottom” tranch would only be paid *if and only if* the WORST, last remaining obligations in the fund paid off.
Unfortunately, the underlying debt obligation of most of these funds (mortgages) were far from “independent” bets – even when geographically diverse (combining florida with california, for example).This was made even worse by individuals and companies that rigged the choice of underlying mortgages to make the entire CDO toxic. Yet *why* would someone want to deliberately make a fund-of-funds toxic? This brings us to the tool-of-choice, the similarly initialed, but completely separate “CDS”.
The CDS (Credit Default Swap) sounds esoteric – which was the intent of the name – but this is just to hide that fact that it is *simple* and insurance policy – you “buy” a CDS that pays you when the “thing-being-insured” defaults – hence “credit default swap”. By changing the name, the legal restrictions and obligations of “insurance” could be avoided. Restrictions, like, having to actually own an asset to buy insurance on it. With a CDS, one could get insurance on anything – it would be like getting insurance on your neighbor’s house, or Intel’s factory, or, say, having a Condo but getting insurance on the entire complex.
This complicated loop is where the fun came in: Evil Broker Bob would ask Stupid Bank to create a $100MM CDO (call it “Global Crappy Fund”) for him. Through back-room deals and suggestions, Bob would cause the CDO to contain the worst crap possible. Why? Because with the “Tranches” mentioned above, Bob would have Tranch One (the top, “AAA” rated one) sold to Retirement Fund – about $70MM worth. Bob would have Tranche Two (maybe “A” or “A-” rated) sold to Hedge Fund – about $20MM worth. And Evil Broker Bob would keep $10MM worth, just the worst, crappiest, dung-heap Tranche (should be rated approx. ZZZ-, but likely “C”).
BUT
Evil Broker Bob would buy the CDS for the **entire CDO** – $100MM – even though he had only really put up $10MM himself to get Global Crappy Fund created.
When Global Crappy Fund fizzles out and dies it’s ignoble death, Evil Broker Bob walks away with $100MM for a $10MM investment – not a bad return. Stupid Bank gets it’s fees in advance, so what do they care? Retirement Fund and Hedge Fund ain’t too pleased, but hey, that’s market risk right?
It gets better. Who sells the CDS – the insurance policies? Why, it’s Stupid Bank – acting much like a bookie, taking the insurance bets. BUT a real bookie NEVER puts up his own money – the odds he quotes have nothing to do with the chance of the outcome -they reflect how much money *someone else* put up on each side of the bet, to keep the cash-flow (and risk flow) even – the Bookie just acts as middle man, never caring who wins.
Ah, but Stupid Bank only puts up their *own* money as risk – they take the “insurance payment” for selling the CDS, and for some reason choose to believe the Credit Rating they bought for the CDO – and *don’t* get someone else for the other side of the bet – in other words, Stupid Bank is also Stupid Bookie.
Oh, it gets better. Remember “CDS” instead of “insurance” – so anybody can play? Stupid Bank/Bookie takes *more* bets, selling CDS’s to anyone who wants it on the ***same*** CDO – often, 10, 20, 100 times. Hey, it’s easy money, right? the CDO has a Credit Rating, right? It’s just easy money, right?
When the CDO flops (and it will), not only is Evil Broker Bob owed $100MM for the price of his insurance premium – so are all of Bob’s friends who also got the word to get in on *this* deal.
Our economic crisis is *not* from people taking debt they couldn’t afford – although we did. The crisis is *not* from pretending that a collection of 100′s of mortgages and pretending it would behave differently than a single mortgage – it didn’t. **all** outstanding consumer debt – secured and unsecured – mortgages and credit cards – ***PALE*** in comparison to the size of the outstanding obligations from the CDS’s – the bets Stupid Banker/Bookie took – these bets are 100′s of times the size of the underlying debts that went into the CDO’s.
We could have paid off **all** the underlying consumer debt – mortgages and credit cards alike – for **far** less than the cost of the “bail-outs” – which are **all** about protecting Stupid Bank/Bookie from loosing their shirts paying off all of the bets they took – bets that brought them only a ***tiny*** amount of actual income.
Greedy morons, taking tiny profits, on stupid bets, without even laying off the risk of the bets. That is what Wall Street is – That is what the Bail-Out is – *that* is the ultimate corruption of the system. Wall Street plays “look-at-the-bunny” talking about the “debt-crisis” – it’s like a bookie complaining about a “slow-horse-crisis” – the problem ain’t the horse, it’s the bookie.
Rant over.
Taibbi has done good work reporting on the flat out criminality on Wall Street, but his chapter on the commodities spike (I won’t call it a bubble) falls flat.
First there’s the question of who’s a hedger and who’s a speculator. Airlines? Hedgers, obviously. They use the stuff. But hotel chains? Clearly a rise in the oil price hurts them. Can they hedge? What about breweries? Do they have to own their own trucks before they can hedge? How about pension funds? Inflation hurts their customers. Can they hedge for it?
Then there’s the question of counter-parties. Without enough access by speculators, hedgers have a harder time finding counter-parties in the market. Is this a good idea? Highly debatable.
And then the slight matter of globalization. We have the ability to regulate our futures markets to say “hedgers and their friends only, speculators go elsewhere please”. But that does not really restrict speculation. There are commodity exchanges all over the globe that will gladly take the business. And in 2008 all of them experienced the same rises in price. Can he really blame Wall Street for events that were echoing all over the globe?
As if that’s not enough, there’s the question of fundamentals. US gasoline consumption in 2008 declined by 3%, in response to the price more than tripling. It’s pretty weak to accuse speculators of bubbling up a price that everyone was continuing to pay for physical delivery and consumption.
And finally, he doesn’t understand the value of speculation. The first credible person to say “the world will be squeezed for oil some time after 2000″ published a paper to that effect in 1956. He was a geologist. The first statesman to raise that concern was Hyman Rickover, shortly afterwards. They got nowhere, and neither did anyone else who took up the torch. But in 2008 the speculators said “we think the world is at risk of an oil crunch, and we are betting large amounts of money on our hunch.” THAT made the country rise and take notice. And that is the value of speculation. To make money off a hunch, you have to enter a position in the market. In so doing, you put the existence of your hunch into the market data. And for something like commodities, market data are what people listen to.
So in short: good reporter, with good reporting, but still a shallow understanding of his bailiwick.