How to get rich(er)

Rolling Stone’s Matt Taibbi, in an article due in the next issue, is making waves by casting light on part of the financial bailout he says gave away billions of dollars to financial fatcats — and their spouses — who gamed a system designed to free up allegedly frozen credit markets.

In his article, Taibbi describes the TALF program — Term Asset-Backed Securities Loan Facility — in which “investors” put 10 percent down, the government puts up the other 90%, and assumes most of the liability.

Cue your Billy Mays voice, because wait, there’s more! A key aspect of TALF is that the Fed doles out the money through what are known as non-recourse loans. Essentially, this means that if you don’t pay the Fed back, it’s no big deal. The mechanism works like this: Hedge Fund Goon borrows, say, $100 million from the Fed to buy crappy loans, which are then transferred to the Fed as collateral. If Hedge Fund Goon decides not to repay that $100 million, the Fed simply keeps its pile of crappy securities and calls everything even.

This is the deal of a lifetime. Think about it: You borrow millions, buy a bunch of crap securities and stash them on the Fed’s books. If the securities lose money, you leave them on the Fed’s lap and the public eats the loss. But if they make money, you take them back, cash them in and repay the funds you borrowed from the Fed. “Remember that crazy guy in the commercials who ran around covered in dollar bills shouting, ‘The government is giving out free money!’ ” says Black. “As crazy as he was, this is making it real.”

But a comment attached to Taibbi’s article attempts to shift the discussion back to where it always seems to go. The meltdown wasn’t the fault of the “big” people, it was the fault of the “little” ones.

The article is very slanted. What really happened: greedy irresponsible Main Street got caught up in a real estate frenzy thanks to easy credit, predatory mortgage brokers, and the naive notion that “real estate never goes down”. Americans thought they could buy and flip homes forever with no doc loans. Wall Street didn’t underwrite or default on these subprime mortgages, but was only guilty of packaging and reselling them to greedy investors who thought that real estate never goes down. When the bottom inevitably fell out, investment banks like Goldman and Morgan took a hit but still had billions on their relatively healthy balance sheets. They reluctantly became commercial banks at the government’s urging so they could borrow from the Federal Reserve window, to improve consumer confidence and prevent a panic. The author’s reference to “billions in emergency loans” is actually what they borrowed at the Federal Reserve Bank Discount window, just like all commercial banks have routinely done since 1913. The TALF was open to everybody and without such government lending, Main Street wouldn’t have been able to get credit since 2008 when they started defaulting on mortgages and walking away from foreclosures. John Mack earned $41 million in 2006 and thus could easily afford a $13.5 million home in 2009 without government help. Once the crisis hit, he paid himself almost nothing for a couple of years before retiring as CEO. With the exception of Madoff, almost nobody from Wall Street is in jail, because almost nobody on Wall Street broke the law. Question is: why isn’t Main Street held responsible for defaulting on mortgages, credit cards, and student loans? Americans’ credit ratings go down but at the end of the day, unlike Wall Street, they don’t have to repay their loans.

  • Jim Shapiro

    There you go again, Bob. Advocating class warfare. πŸ™‚

  • MR

    This makes me think of a story on Marketplace last night, where George Soros talks about the overall financial system. From the interview:

    Brancaccio: You of all people are wondering if the financial sector creates benefits to society commensurate with its size in the economy?

    Soros: Obviously, we need financial services and obviously they are beneficial. But to have 7 or 8 percent of the GDP — that may be too much!

    Maybe the whole system is broken–both the system that allowed “Main Street” to do all those horrible things that the commenter talked about, but also “Wall Street,” that allowed too much risk to be concentrated in too few hands (among other things).

  • Tyler

    A guy I used to work with had a great idea – every 100 years, all the money in the U.S. is equally distributed among its citizens. Start from scratch.

  • Jim Shapiro

    Dear Tyler –

    Yea, but then the republicans would just be sure to remember to eliminate all health care and food benefits every 98 years. πŸ™‚

  • Jamie

    I’m looking forward to reading this article. I think it’s by the same guy who wrote a wonderful article a few months ago about what the Tea Party is all about.

  • Drae

    What about blaming Congress for forcing banks to make bad loans?

    Folks are plenty quick to blame Wall Street for any and all economic problems while Congress/Washington continue to get none of the blame and none of the scrutiny. And yet you can hardly blame people for trying to take advantage of the lending laws Congress passed.

    Milton Friedman suggested that there was an inverse to Adam Smith’s invisible hand – that those who worked for the public good would oftentimes create side effects that would harm and not help the public. I think the mortgage mess of the last decade is just one such example.

  • Jim Shapiro

    Dear Drae –

    I’m more of a Krugman/Stiglitz guy myself πŸ™‚

    But to answer some questions regarding who was to blame, you might find this film to be of some value: