Matt Taibbi, a contributing editor to Rolling Stone magazine known for his (how you say?) ascerbic (I was going to say f**k u style, but didn't want to push it), famously calling Goldman Sachs "a giant vampire squid wrapped around the face of hunamity, relentlessly jamming its blood funnel into anything that smells like money." The guy don't pull no punches, eh?
He came out with a new book Griftopia, reviewed by Peter Goodman in this Sunday's New York Times Book review section. Griftopia covers the pungent ground of the 2008 and counting financial disaster that sprang from the loins of Wall Street aided and abetted by many "tentacles".
We all know the polite, papered over explanation for the crisis. Profligate poor people and minorities borrowed money they could not pay back and weren't supposed to be homeowners anyway, simply to redecorate their wood paneled basements and koi ponds. Risk management was too complicated and regulators were merely government employees who couldn't possibly compete with Saville Row tailored Wall Street lawyers. So shrug your shoulders and say, what can you do? That's the price we pay for the free-wheeling casino of Wild West capitalism.
The truth is that the FIRE (finance, insurance, and real estate) divisions make huge bucketloads of money and are a disproportionately represented on the DJIA. They are major players writing financial legislation and they were certainly all present and accounted for back in the second half of 2008.
Let's look at one factor. At the time when A.I.G., the largest insurance company in the world, collapsed under the weight of its insurance claims (ahem I mean credit default swap obligations) and threatened to go bankrupt, the Treasury stepped in to bail it out without any authorization except what it conjured out of thin air. It simply willed the takeover.
You see, my children, in the old days (pre-2008) the government would only lend money to commercial banks which were more tightly regulated. Timothy Geithner decided to pay full price (100 cents on the dollar) to all AIG counterparties (even though some were willing to pay less). This especially benefited Goldman Sachs, also known as the company that created and sold poorly constructed collateralized debt obligations (CDOs) to unsuspecting investors (read: pension funds) in order to bet against them and collect both ways.
Ordinary people may think the bailouts to these "Too Big To Fail" banks are over but the lending library is stil open doling out cheap liquidity to TBTF banks like Citigroup. As far as I know, none of these banks have had to write off the bad "exotic financial vehicles" (like CDOs) on their balance sheets. No mark-to-market accounting, so you never know how solvent they really are. That's like lending money to your brother-in-law who assures you he's going to pay you back but you keep seeing repo men knock on his front door.
Because the banks know they are "To Big To Fail", they know the government won't let them fail, which allows them an advantage over all other smaller banks because they can borrow money more cheaply. And take more extreme risks with your money. They get paid upfront, so it doesn't matter how the deals they make unwind. And they're still in charge, more powerful than ever. There are less of them (the power is more concentrated) and as opposed to 2008, they know now the U.S. will bail them out undoubtably.
The losers in all of these speculative transactions are pension funds, the money set aside for your retirement. And people like Governor Christie of New Jersey are already making noises about defunding pension plans.
Our states, cities and municipalities which, because of the recession, have lost tax revenue and have had to institute severe austerity measures (like not fixing crumbling highways and bridges and selling off valuable properties) shoud be given the same opportunity as the TBTF banks: offered cheap money to be put to use right away for hiring people to work on capital projects. Employed people pay taxes, feel better about themselves and their families, and buy more things upon which they pay sales tax. That would increase revenue, and enable the entities to pay back the money with interest. In fact, in terms of human capital, compound interest.