It’s sad that you have to be something of a detective to decipher what passes for content at most major American news outlets. In the case of Michael Grunwald, however, we have a decent set of indicators about the normally hidden agenda. The Politico writer worked with Tim Geithner on his memoir. In fact, I believe he has said publicly that he didn’t know a lot about finance before meeting Geithner. So when Grunwald decides to leap into anything involving this topic, we can assume the end result is not altogether different than what it would look like if Geithner wrote it with his own byline.
The latest example is a nominal review of The Big Short, which is not really a review. It’s an attempt to steer the narrative of what happened, in the financial crisis and its aftermath, to territory that comforts elites. Geithner has repeatedly tried to rewrite that history, as a means to self-flatter about his actions, and to ensure that nothing more punitive or disruptive befalls our money center banks. This non-review review represents another chapter in that story.
I should say that I’m not wholly positive about The Big Short. I wrote when the film came out that it too often put those most powerfully and hideously affected by the crisis in the background. And Yves has admirably explained how the Michael Lewis source material gives too much hero status to the folks who created a wider crisis by creating a market for the worst of the subprime securities (and Lewis didn’t even find the real villains who perpetuated this). Granted, these are more issues with the book than the movie.
But again, Geithner/Grunwald doesn’t care about the movie; he wants to tell you how to think. In the Geithner/Grunwald view, the crisis was just a case of mass hysteria, no different than the Dutch tulip craze, which was financed with short-term capital and collapsed because of a panic. This implicates non-bank mortgage brokers in Florida, homeowners in Arizona, and anyone who came into contact with a mortgage or cash-out refinance from 1998 to 2006. As the saying goes, if everyone’s responsible, then nobody’s responsible.
This is flat wrong on a number of levels, a convenient lie to get people in government and on Wall Street off the hook for the greatest economic disruption since the Depression. The quickest example of this comes when Geithner/Grunwald misinterprets a key scene in the movie, by claiming that America is as deluded as a “Florida realtor who kept insisting that the start of the crash was ‘just a gully.'” But that realtor was a salesperson, perfectly knowledgeable about the state of the market, trying to dump her inventory. America, in this analogy, equates to the guys in the back of that realtor’s car, being spun a story about how housing was impervious to a downturn, how homeowners can always refinance their way out of trouble, how slicing up the mortgages into tranched securities make them as safe as cash. It’s a dishonest inversion of the facts to claim that Americans suffered from a miasma and weren’t actively defrauded.
Mike Konczal did some heavy lifting on the rest of this, showing how the numbers reveal the truth:
…if it was a general mania, you’d expect to see widespread losses among all kinds of mortgage players. But those losses were concentrated in subprime and especially CDOs. From the FCIC report:
Simply speaking, banks holding their own mortgages and government-backed credit (implicitly or explicitly) experienced nothing like the losses that financial securities saw. The bubble also wasn’t driven by consumers. As Adam Levitin and Susan Wachter found, the price of mortgages fell as the quantity increased, pointing to a supply-side movement rather than one driven by higher demand from housing-crazed individuals.
Honestly I would quote Konczal’s entire post if I could. We know that consumer demand didn’t drive the bubble, in part, because people who owned their homes outright in inner city Detroit and Cleveland were getting cold-called by originators. Cash-out refinances represented the majority of subprime mortgages, according to Nocera and MacLean in All the Devils Are Here. These people didn’t come looking for a mortgage, the brokers came looking for them.
We’ve actually seen a housing mania in America – in the LA area in the 1980s, in the S&L crisis to some extent. It wasn’t too bad. The use of mortgage securities and credit derivatives not only fueled the demand for more mortgages to expand bad loans from the regional to national level, it globalized the crisis.
The bubble can be described as a game of hot potato, where the spud symbolizes risk. The non-bank originators, under demands to send them as many mortgages as possible by Wall Street banks who controlled their warehouse lines of credit, passed the potato to Citi and Morgan Stanley and BofA. They passed the potato onto MBS investors, on the authority that these were safe assets, blessed by a corrupt set of rating agencies. They wouldn’t have made the purchase without 30 years of financial engineering, innovating the mortgage bond into something defined and free of prepayment risk. And the unsold tranches were chopped up into CDOs, with the sketchiest bits of mortgage securities julienned into something deemed safe. Without that stamp of approval, you could not possibly have built the bubble nearly as big. The hot potato game created warped incentives for every actor along the long chain of disintermediation, a defining feature of shadow banks. And the swaps and derivatives related more tangentially to this game, and designed to get a lot of people out of their bad trades, magnified the exposure.
It’s also not true that the big banks were “dumb money,” as Geithner/Grunwald puts it, because lots of hedge funds and most notably Goldman Sachs (see Magentar) made the exact same CDS trades that the few outsiders and weirdos did in The Big Short. And as Yves points out, they drove additional toxic subprime demand at the bubble’s peak, by creating time bomb bonds designed to fail. The idea that the banks were appropriately punished for all this because a few people at Washington Mutual lost their jobs (but not their bonuses) is comical. The traders who put together the schemes in real time to profit off the bubble and the crash, with their “IBGYBG” (I’ll be gone, you’ll be gone) mentality, are doing OK. The recklessness made a lot of sense for them.
Invariably, the adherents to the Stuff Happens school whitewash fraud by trivializing it. “Wall Street succumbed to the housing-is-bulletproof delusion,” says Grunwald. He ignores the fact that people on Wall Street have an affirmative obligation to know what’s going on; they represent and warrant the quality of the mortgages being sold, and they have an affirmative duty to avoid any complicity in any fraudulent transactions. Willful blindness is never an excuse.
This is a good time to segue into one of Geithner/Grunwald’s biggest whoppers in his narrative: “The fact that no Wall Street executives went to jail for their role in the crisis, despite a glut of politically ambitious prosecutors who would have loved to frog-march bankers into court in handcuffs, ought to suggest that their activities, however idiotic and irresponsible, were not provably illegal.” If nobody was arrested, there was no crime. This is something that a writer put in a story. Judy Miller must be happy that this gets her off the hook as the biggest dissembler in the history of journalism.
I should just copy-paste my entire book here as evidence to counter this claim, but my publisher probably wouldn’t like that, so let me preview by saying that there were provable cases – remember the millions of pieces of documentary evidence of false mortgage assignments and affidavits fabricated and forged to prove standing to foreclose and recompose chain of title? – that prosecutors ambitious to seek justice did attempt to bring, but the Justice Department shot them down. It happened. And one of the ways that happens is through starvation of resources and lack of emphasis, which former New York banking regulator Ben Lawsky once explained to… Geithner/Grunwald:
With Enron, we put together a whole big group of prosecutors from around the country, the best of the best. We put them in an office and gave them huge resources with the FBI and other agencies to do a really deep-dive investigation into exactly what took place. And that was just for one company. If we had, as a country, devoted the same proportional level of resources to reacting to the financial crisis — a group of maybe several hundred prosecutors and several thousand agents tasked with doing an investigation in the immediate aftermath — we may have seen different results… I guess what I’m saying is, I’ve worked in a U.S. attorney’s office, and there’s a real difference between having a bunch of U.S. attorneys around the country with often limited resources working on different aspects of the financial crisis, and putting together a nationwide task force where you devote very significant resources in one place with one leader who, frankly, probably reports to the top law enforcement officials in the country.
Lawsky is too kind to say that DoJ didn’t put the brakes on cases. I’ll hold my tongue on that for a few months.
(Fiderer also points out the FHFA cases showing clear evidence of securities fraud. I could add Fabulous Fab, the Clayton Holdings findings of poorly underwritten loans in the bond pools that banks used to negotiate after-the-fact discounts from the originators without telling their own investors, the failure to convey assets to the trusts that should have triggered 100% REMIC violations, etc, etc, etc.)
Geithner/Grunwald devotes the rest of his propagandizing to cheerlead for the bailouts and their aftermath. The word “homeowner” never appears in Geithner/Grunwald’s story, appropriately enough. As Konczal writes, “It’s nice to think that the thought of ‘hey, the bailouts made money’ is capable of keeping a homeless family warm at night, though that’s probably not the case.” These 6 million families, who could have been aided by the written commitment of $100 billion in TARP money Larry Summers promised to dedicated to mortgage relief (7 years later the government has spent $10 billion), are wiped out of the picture because they were abused: they had their hopes of lifeline bankruptcy reform to give them leverage over their mortgage servicer extinguished, had their loan modification applications lost, had their time sucked by hours of haggling and heartache, had their servicers turn a foreclosure mitigation program into a predatory lending program, had their homes effectively stolen with false evidence, and had their government hand out worse-than-nothing settlements over the layers of misconduct. There were losses in the crisis, and they were allocated, in the end, onto homeowners. And some investors, who end up paying both the losses of mortgage bonds AND the penalties for banks’ fraudulent conduct. These losses, and the balance sheet deleveraging that they required, stunted the recovery, in the absence of assistance from the Administration.
I could go on. Geithner/Grunwald is apparently thrilled that Dodd-Frank is causing banks to “break themselves up voluntarily to avoid some of the stringent new rules,” even though he wrote a whole article discounting bank size as a problem and opposing the idea of breaking them up. Geithner/Grunwald argues that nobody on Wall Street foresaw a bailout, but this little bit tossed into a 1991 update of the Federal Reserve Act suggests otherwise (h/t Matt Stoller).
Geithner/Grunwald salutes the clearing of derivatives, a reform brought into Dodd-Frank (against Geithner’s wishes) by Blanche Lincoln, who was scared of a progressive primary challenge, and he fails to mention that the biggest derivatives traders – all the big banks, incidentally – moved nearly all of their swaps trades overseas to avoid regulatory oversight (in this sense, Big Short director Adam McKay, who is being derided for saying that we didn’t get a real derivatives clearinghouse, is more right than wrong, actually). Geithner/Grunwald says the film “is appropriately brutal to Wall Street and the financial sector,” so he can point to that single line when people like me come after him for his concerted effort to throw Wall Street a lifeline.
This is far more than a movie review. It’s something that the finance lobby can forward people on Capitol Hill to subside any residual anger lawmakers (more appropriately, their constituents) might have from The Big Short and its fallout. It’s an attempt to mold history, to put a filter on the past so nobody will make any changes in the future. The elites who want the status quo to continue feel the debate slipping out of their hands. If they want to regain control, they’re going to have to do better than Geithner/Grunwald and his fairy tales.