It Takes a Pillage: Behind the Bailouts, Bonuses, and Backroom Deals from Washington to Wall Street

Once again, the Progressive Book Club offers us a new perspective on a large, critical issue.  This time, it’s the bank collapses, the prime lending scandal and the bailouts that followed, from It Takes a Pillage, by Nomi Prins.

The Second Great Bank Depression has spawned so many lies, it’s hard to keep track of which is the biggest. Possibly the most irksome class of lies, usually spouted by Wall Street hacks and conservative pundits, is that we’re all victims to a bunch of poor people who bought McMansions, or at least homes they had no business living in. If that was really what this crisis was all about, we could have solved it much more cheaply in a couple of days in late 2008, by simply providing borrowers with additional capital to reduce their loan principals. It would have cost about 3 percent of what the entire bailout wound up costing, with comparatively similar risk.

Just as great oaks from little acorns grow, so, too, can a Second Great Bank Depression from a tiny loan grow. But so you know, it wasn’t the tiny loan’s fault. It was everyone and everything that piled on top. That’s how a small loan in Stockton, California, can be linked to a worldwide economic collapse all the way to Iceland, through a plethora of shady financial techniques and overzealous sales pitches.

Here are some numbers for you. There were approximately $1.4 trillion worth of subprime loans outstanding in the United States by the end of 2007. By May 2009, there were foreclosure filings against approximately 5.1 million properties. If it was only the subprime market’s fault, 1.4 trillion would have covered the entire problem, right?

Yet the Federal Reserve, the Treasury, and the FDIC forked out more than $13 trillion to fix the “housing correction,” as Hank Paulson steadfastly referred to the Second Great Bank Depression as late as November 20, 2008, while he was treasury secretary. With that money, the government could have bought up every residential mortgage in the country—there were about $11.9 trillion worth at the end of December 2008—and still have had a trillion left over to buy homes for every single American who couldn’t afford them, and pay their health care to boot.

But there was much more to it than that: Wall Street was engaged in a very dangerous practice called leverage. Leverage is when you borrow a lot of money in order to place a big bet. It makes the payoff that much bigger. You may not be able to cover the bet if you’re wrong—you may even have to put down a bit of collateral in order to place that bet—but that doesn’t matter when you’re sure you’re going to win. It is a high-risk, high-reward way to make money, as long as you’re not wrong. Or as long as you make the rules. Or as long as the government has your back.

The Second Great Bank Depression wouldn’t have been as tragic without a thirty-to-one leverage ratio for investment banks, and, according to the New York Times, a ratio that ranged from eleven-to-one to fifteen-to-one for the major commercial banks. Actually, it’s unclear what kind of leverage the commercial banks really had, because so many of their products were off-book, or not evaluated according to what the market would pay for them. Banks would have taken a hit on their mortgage and consumer credit portfolios, but the systemic credit crisis and the bailout bonanza would have been avoided. Leverage included, we’re looking at a possible $140 trillion problem. That’s right—$140 trillion! Imagine if the financial firms all over the globe actually exposed their piece of that leverage.

But for $1.4 trillion in subprime loans to become $140 trillion in potential losses, you need two steps in between. The most significant is a healthy dose of leverage, but leverage would not have had a platform without the help of a wondrous financial feat called securitization. Financial firms run economic models that select and package loans into new securities according to criteria such as geographic diversity, the size of the loans, and the length of the mortgages. A bunch of loans are then repackaged into an asset-backed security (ABS). This new security is backed, or collateralized, by a small number of original home loans related to the size of the security. Some securities, for example, might be 10 percent real loans and 90 percent bonds backed by those loans. Some might be 5 percent real loans. Whatever the proportion, the money the mortgage holders pay to lenders on their loans is used to make payments on new assets or securities. Those securities, in turn, pay out to their investors.

During the lead-up to the Second Great Bank Depression, the securities themselves were a much bigger problem than the loans. Between 2002 and 2007, banks in the United States created nearly 80 percent of the approximately $14 trillion worth of total global ABSs, collateralized debt obligations (CDOs), and other alphabetic concoctions or “structured” assets. Structured assets were created at triple what the rate had been from 1998 to 2002. Bankers from the rest of the world created, or “issued,” the other 20 percent, around $3 trillion worth. Everyone was paid handsomely. In total, issuers raked in a combined $300 billion in fees. Fees can be made for all types of securitized assets, but the more convoluted they are, the riskier and more lucrative they become. Fees ranged from .1 percent to 0.5 percent on standard ABS deals and up to 0.3 percent for mortgage-backed securities (MBSs) and whole business securitization (WBS) deals. Fees were better for CDOs—between 1.5 and 1.75 percent for each deal, and higher for the riskier slices. All told, the $2 trillion CDO market alone netted Wall Street around $30 billion before CDO values headed south. Because U.S. investment banks were making huge profits from packaging churning loans and leveraging them, mortgage- and asset-backed security volume skyrocketed.

Investment banks, hedge funds, and other financial firms could use the $14 trillion of new securities as collateral against which to borrow money and incur more debt (leverage them). There is no way of knowing exactly how much was leveraged, because the players operated in an opaque system—that is, a system without proper regulatory oversight or enforcement to detect or curtail leverage. But a conservative estimate of the average amount of leverage is about ten-to-one, considering the roughly eleven-to-one leverage of the major commercial banks and the thirty-to-one leverage of investment banks. So, we’re talking about a system that ultimately took on $140 trillion in debt on the back of $1.4 trillion of subprime loans. How insane is that? And, it happened so fast.

In 2005, the mortgage on some little home in Stockton provided the capital for two or three ill-advised loans that soon disappeared into an ABS. But it was the global banks, the insurance companies, and the pension funds—particularly in Europe—that purchased the related ABSs. Like their U.S. counterparts, European financiers bought boatloads of ABSs with borrowed money. They also shoved them off-book into structured investment vehicles (SIVs) that required no capital charge and little reporting.

By the fall of 2008 those ABSs, CDOs, and all their permutations would be known as “toxic assets.” They were considered by many to be the major cause of Big Finance’s failures and losses. The push for TARP centered on ridding banks of these poisonous creatures. But make no mistake: toxic assets are not the same as defaulted subprime mortgage loans; loans are merely one of the ingredients that make up the assets. All the subprime loans in existence could have defaulted and the homes attached to them could have been devalued to zero (which didn’t happen), but without the feat of securitization, the banks wouldn’t have become nearly insolvent. Toxic assets became devoid of value, not because all the subprime loans stuffed inside them tanked, but because there was no longer demand from investors. If no one wants your Aunt Mary’s antique gold-plated, diamond-encrusted starfish, for all intents and purposes, it has no monetary value at the moment. This basic supply-and-demand concept is something our government apparently didn’t understand when it offered to take the toxic assets off the banks’ books. And the Fed, as we’ll see, doesn’t seem to care that it took on trillions of dollars’ worth of these assets.

Copyright © 2009 by Nomi Prins. All rights reserved. From It Takes a Pillage: Behind the Bailouts, Bonuses, and Backroom Deals from Washington to Wall Street by Nomi Prins.



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Haiti After the Quake + How to Help

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Haitian Earthquake Has Destroyed the Capital City   Mercy Corps

Haiti’s reconstruction by Haitians living aboard     For these noble goals, we ask that the government of the country in which we reside to task our pay check $10 per pay period for the next 50 years so that we can rebuild our dear Haiti.

Pat Robertson: APOLOGIZE

Support the UN’s Response to Haiti Quake Victims United Nations Foundation

Honor UN Peacekeepers in Haiti  Better World Campaign




By Nomi Prins


Dave Tohunga
Dave te tohunga8 years ago

There is an illusion, much like the $ value one and the evil terrorist one that people overlook... banks and govts are not people, they are concepts in peoples heads that function by consensus. To say a bank did this or a bank did that is to ignore that certain individuals in positions of authority chose to do this or that. Those people have personally benefitted enormously. They accept no responsibility for their choices or the harm they do.
On Thursday, September 11, 2008, between 9am and 11am four and a half trillion dollars were pulled out of the US economy via the automated national clearing house before the plug was pulled. If the plug had not been pulled there would have been a total global economic collapse that day. Monday 15th Bush went to the Capitol with an ultimatum... bail out the banks or martial law. There is a 'blackout' on this in the US media, as there is on the proof of chemical residue from nanothermite and nanothermate explosives available only to the US military. Chemical analysis of the dust is incontrovertable. It was an inside job & Building 7 & the finance dept of the Pentagon were the primary targets. Evidence of skullduggery by the very corporations bailed out in 2009 far greater than the ENRON scandal was destroyed in building 7's demolition and the prosecutions were dropped.
Corruption and criminal activity at the top in the USA did this and still they are unrestrained & act above the law & blame the poor?
Do your homework fo

Paul Puckett
Paul Puckett8 years ago

Deborah K - I don't disagree with your comment. If this thread is appropriate, or in another venue, I would love to hear how you believe the issues you raise can be solved. You know I'm a believer in Capitalism, I'm actually not a libertarian although the limited gov't part appeals to me, and my profile picture is me, for better or worse. None of that means that I believe in judging others based on general characteristics, or judging people at all. I don't know the solution, maybe nobody does. But I would be interested in your opinion.

Deborah K.
Deborah K.8 years ago

When I was a child I met at least one person who had been born into de jure slavery. I knew many people who were forced into sharecropping, which was what slavery morphed into after the Emancipation Proclamation. That is not by any stretch a distant past. I am only 60 years old. A lot of people bang the drum of it's-better-than-it-used-to-be, but never offer any statistical (or any) evidence to support that. It's one of those "conventional wisdom" things, which means it is an untruth propagated by those who think everyone else is too dumb to have a memory and/or to read. The libertarians, who are more disproportionately white males than they represent in the general population, want the government out of everything (except where it adversely affects or where it benefits them) and push capitalism (ala the Chicago Boys) and meritocracy in a country that was founded on and is maintained on wealthy, white male privilege, the antithesis of success or progress based on merit.

Paul Puckett
Paul Puckett8 years ago

Terrance, I'll grant you the point. In my area, they preyed on everybody fairly equally but if you're overall point is that racism is alive and well, I totally agree. Sorry to hear about the specific instance you mention.

I did not intend to imply that there is no racism in any industry, although I hope that it is better than it was in the not so distant past. Still, a long way to go.

TERRANCE N8 years ago

Paul- I must take issue with your point that banks did not target on the basis of race. A good example is a high black income district of Prince Georges in Maryland. It was discovered that this district contained alot of foreclosures, and alot of subprime loans dispite being a high income community.

It was found that even those blacks who could afford and qualitied for standard mortgages where still given subprime mortgages. I don't see why it is so far fetched to think that banks wouldn't discriminate on the bases of race. One, discrimination is easier to hide than blatant discrimination.Two, economics is a main vehicle to hide racism that still is prevelent in our society in spite of the progress made on other levels.

I am very encouraged by the progress made in our country in the area of race. The areas that still concern me are the corporate media depictions and comments based on race and the continued institutional prejudice that still exist.

It always amazes me how much further ahead the people are than our so-called leaders are in business and government on the issue of race.

Paul Puckett
Paul Puckett8 years ago

I agree, our system is not the best. Maybe we should try Capitalism, instead of a Federally Gov't distributor of favoritism and power. We haven't tried Capitalism yet, and taking money from private citizens is not socialism or communism, it's theft.

As I said on another thread, if the Fed Gov't wages war on Wall Street and the private sector, they will lose. Job losses will hit record levels and people will become fodder in a war government cannot win. Government get's all of it's revenue from taxes and their handy, dandy, printing press. Without private industry, government is bankrupt and will have no money to functioin. Government creates nothing, except an environment. That environment can be business friendly and most will be employed, or it can be government friendly and most will be impoverished. That tipping point is never permanent, and this economy was tipped. Recovery will occur when Gov't gets out of the way, something they rarely, if ever, do.

Greed is not only for money, it is also for power. The greediest people in America belong to two parties and both are located in DC.

BMutiny ThemIDefy

It is pretty obvious we need THE OLD RULES, PLUS SOME NEW ONES, to prevent this from happening any more.
And instead of REWARDING them with money{!!!}; their ASSETS NEED TO BE SEIZED, and DIVIDED AMONG THE INJURED PARTIES {i.e., people should all GET THEIR HOMES BACK}.

WON'T happen, tho. Y'know why?
'CUZ THAT WOULD BE CALLED "SOCIALISM" by the rich banksters and klepto-aristocracy making money hand-over-fist off of this state of affairs. They have EVERY REASON to want it to CONTINUE; and they have THE POWER TO BRING THEIR WISHES ABOUT.

Congresscritters AFTER their stint as errand-boys for the Corporations, have cushy jobs WAITING FOR THEM AS LOBBYISTS AND "CONSULTANTS" for various industries, including Banking. There is just a pipeline, from Congress DIRECT to the Corporation Head Offices. {So voting a Congressperson out of office, amounts to NO MORE than "kicking them upstairs", to an even BETTER, MORE LUCRATIVE job! [And one with perhaps even MORE power!] It does NOT "punish" them one single little teeniest bit!!!}

So we are SCREWED -- as long as we have the CAPITALIST SYSTEM. {There ARE alternatives to Capitalism; and they are not all Stalinist totalitarianism either! That is a fallacy, to say there are "only two" alternatives; when human ideas can be INFINITELY CREATIVE!}

Surely this System we have here is NOT "the best of all possible worlds"!!!

Paul Puckett
Paul Puckett8 years ago

Deborah K, if you are also an LLM or do any tax work, the home ownership push I'm talking about is embedded in the voluminous Federal Income Tax Code. Eminent Domain is pushing people out of areas of cities, in my opinion illegally, but that does not necessarily mean that the Gov't isn't pushing home ownership, at least in my opinion. Take a look at Barney Frank's speech on the house floor on June 27, 2005 on You Tube. He indicated a continuing commitment of government money and incentives to get people into home ownership. One example, but there are many from almost every congress person who has served in the last thirty years. Most eminent domain issues are local in nature, although the Feds do sometimes find something they want to take over. It happens quite a bit in the City I live in where the City wants to redirect property use.

Corporations should be held accountable, I agree. So should Gov't, and the voters generally get around to it.

B. Mutiny, I agree that deregulation was a factor. But hedge funds, credit default swaps, derivatives and many of the specific securities that led to the leveraging that made this crisis much worse were never regulated. They weren't subject to regulation at any time in the past.

Ironically, this congress has continued their exemption in almost every single bill that has either passed, in discussion, or was proposed. Wall Street lobby money is buying this congress, nothing new to DC.

BMutiny ThemIDefy

This is what happens when you DE-regulate.

Starting under that wonderful, terrific movie-actor-President Ronald Reagan, there was this mad rush to DE-REGULATE EVERYTHING, every industry, starting as I seem to remember, with the airline industry, leading to tons of {preventable} air accidents {and deaths}. Then it went on to Environmental everything, polluting and extractive industries, public safety {gutting the entities responsible for safety inspections}; and, also, the Banking industry was part of this DE-REGULATION insanity.....

Those original rules were put there FOR A PURPOSE, obviously. Anti-trust rules, strict guidelines for Banks, etc. The rules usually were put in place AFTER some disaster had shown the necessity of them.....

But while people were mesmerized by the feel-good rhetoric of a personable movie star, all this was going on under-the-counter, apparently un-noticed.....
NOW, just NOW the "payment is coming due".....

Should have been and could have been foreseen, WAS in fact foreseen, but whistle-blowers were IGNORED.... in the happy propaganda-filled trance our "leaders" and media were apparently in.....

Thank you for this article, this informative expose'. Read it and weep.....

Deborah K.
Deborah K.8 years ago

Paul P: The word "racism" does not appear anywhere in my post; I try very hard to not use such ad hominems because they involve circular thinking and, thus, explain nothing. Since I have not lived in every other country, I cannot know what goes on in them. I have, however, spent most of my life in inner cities where redlining by banks and insurance companies has gone on unabated for decades. In the law there is a technical distinction between general intent and specific intent, but the damages wrought by either are indistinguishable. If a particular result is foreseeable, then the person or corporation - corporations are considered persons after all - should be held accountable. If the U.S. government was truly encouraging home ownership, then tax monies would not be going towards destroying homes, e.g. in inner city areas coveted by sports team owners, Iraq, Palestine, and other manifest destinators. I saw dozens of beautiful houses demolished while living in Minneapolis in the name of the "war on drugs" and gentrification.

Deborah Kelly, J.D.