Sam Seder had a great interview with Matt Taibbi (@mtaibbi), Political Reporter at Rolling Stone magazine yesterday, talking about his new piece the People vs. Goldman Sachs and his reaction to NY AG Schneiderman’s investigation into the big banks. What’s better than a great interview? The ability to get the transcript out there to our listeners so you can dig in! Full transcript at the link!
Listen to the full interview here.
Note: This is a rush transcript. This copy may not be in its final form and may be updated.
Sam Seder: On the phone Matt Taibbi of Rolling Stone Magazine. Welcome back to the Majority Report, Matt.
Matt Taibbi: What’s going on Sam?
SS: Not much. We should have played… We have a clip of your Megan McArdle thing. We’ll play it after you go. You were already there you remember what it was.
MT: Yeah I remember it.
SS: So let’s talk about this piece. I think you and hopefully our attorney general in New York state were the only two people in the country as far as I can tell you were paying attention to what the senate was doing. First tell us about this investigation. Who was investigating Goldman Sachs and a couple other of these banks and why?
MT: The Senate Permanent Subcommittee on Investigations which is headed by Senator Carl Levin of Michigan and Republican Senator Tom Coburn from Oklahoma. They did this huge two year investigation of the mortgage bubble and they focus on three companies; Washington Mutual, Goldman Sachs and Deutsche Bank and their results of the report just came out about a month ago and what they really did is that they drew this huge panoramic portrait of the fraud that went on in the years leading up to the crash in 2008 and they just looked specifically at those three case studies.
SS: You outline the findings, and we’ll talk about that, but how did Chuck Schumer allow this to happen? Honestly, you know – this investigative committee seems to have gone completely under the radar. I haven’t heard anybody talk about its existence, at least, you know in recent times. From a political standpoint how did… Am I so jaded that I find it hard to believe that anybody was working on this?
MT: It is a little bit surprising and I think that some of the people that I talked to on the hill were a little surprised at the aggressiveness of this report especially considering that it was somewhat genuinely bipartisan. I think Coburn’s office definitely had some input into this report and normally what you would expect from a bipartisan committee is a kind of agnostic historical review of the problem that kind of identifies issues but doesn’t sort of point the finger at an individuals. That’s exactly the opposite of what went on in this report. This report is a full-blown, balls-out, j’accuse type of thing where they’re really throwing the book at three companies and in particular one still thriving company in Goldman Sachs.
SS: And I want to just give you kudos for the French dropping on that.
MT: (Laughs)
SS: You get extra bonus points for that.
MT: I finally got some use out of that high school education.
SS: So we have this report, it’s come out -it’s a six hundred and fifty page report. It is interesting in that it’s bipartisan. It’s interesting that relative to the fiscal emergency report that came out, that blue ribbon commission, the Republicans didn’t issue their own competing reports because of the use of words like “fraud” or “wall street” or something like that and so we have this report. Tell me about the general surrounding… One of the things that came out of this was that there has been an incredible decrease in the oversight of this sector.
MT: Yeah, that’s one of the things the report talks about. And you have to go back in time here. If you go back to the late Eighties and the early Nineties regulation was done in a completely different way. Your typical bank had a regulator from, it might have been from the OCC, the Office of Controller of Currency, or the OTS, the Office of Thrift Supervision, or the FDIC, you would have somebody practically living on site at the banks going through your books, going through your loans because, you know, after all banks particularly personal banks are federally insured and so the state has an interest in making sure that everybody’s safe, that there isn’t a whole lot of deadly leverage on everybody’s books and that depositors are going to get paid.
SS: And they are Federally insured because we saw during The Great Depression, we saw what happened when you have banks making crappy loans and they go under. It wreaks havoc on the entire financial system.
MT: Absolutely, absolutely. And it creates a kind of third world situation where nobody’s… Everybody’s afraid to do business with everybody else because you always have to be weighing the solvency of all your business partners. Nobody wants to be in that situation and that’s why we put in controls but in the last twenty years or so they’ve kind of eroded that whole process through a series of a regulatory changes and by the time we got to the mortgage bubble, the years were talking about here, this process was almost completely voluntary. There were no longer people from the OTS or the OCC or the FDIC or the Fed sniffing around everybody’s books. They relied upon the banks themselves to essentially send voluntary disclosures to the regulators telling them about bad loans and other trends on the books and Goldman was one of the banks that kind of pushed for those changes.
SS: Quoting from your piece “In 1995 according to an independent study banking regulators filed 1837 referrals. During the height of the financial crisis between 2007 and 2010 just 72.
MT: Right, yeah. Again these banking regulators don’t have their own prosecutorial so the way they would build a case is the investigators would go through and gather all the evidence and then they would kind of hand it to the justice department and say, “Here, run with this.” There was a criminal case, and that’s how, for instance, during the S and L crisis they actually put 1700 or 1800 people in jail during that time period through this process. But as the stats you just cited show they essentially stopped doing that this decade. They really as a matter of course do not make referrals anymore and in fact when I called the OTS to ask about this they very humorously were offended and said what your statistics leave out is that we do a lot of verbal referrals. In other words we get on the phone and we tell somebody at the Justice Department, Hey you should check this out. This is not serious. It is no longer a serious process.
SS: Or to give them the benefit of the doubt maybe the bankers really, really, really complied.
MT: (Laughs) Right, right. Well I mean that was… we’re laughing about it but that’s kind of what everybody was depending on.
SS: “Just wanted you guys to know, we’re compiling. Everything’s fine. No problems here.”
MT: Nothing to see here.
SS: So let’s go now and focus on Goldman. These guys were able to essentially leverage extraordinary amounts of money. Lend as much as they want where they want whatever. What are the things that Goldman Sachs did that are now clearly elicit.
MT: I’m going to back up just a little tiny bit here and talk about the bigger picture just because it kind of plays into with what Goldman did. The chain of fraud here usually started with a company like Countrywide or New Century. So you have these gigantic warehouse lenders that were using every trick in the book to create as many loans as they could. You know they were doctoring applications. They were using White Out to substitute a good borrower’s information in place of a bad borrower’s. Or they were pushing people who could’ve gotten fixed rate loans into the more risky option ARM loans. They were taking people who weren’t citizens. They were faking credit scores. Doing all this stuff just to create loans because the banks had created this method of converting crappy loans like new subprime loans into AAA rated securities. They use these derivative structures called CDOs and just a whole bunch of hocus-pocus math that allowed them to take all that crap and turn it into AAA rated investments which are worth as much as treasury bills.
SS: And we should also say that at this point too that when Countrywide has no stakes in the loan being paid back because all they’re doing is basically servicing the loan in that moment and then selling the value of the note to somebody else they have no skin in the game.
MT: No, of course not. These guys were making these loans and they were getting rid of them ten minutes later and I’m not even exaggerating. They weren’t holding on to the stuff for any length of time. As soon as they were securitized, in other words, chopped up into little bits for sale into securities they were off the lender’s books and then they were on the books of a company like Goldman Sachs which then basically repeated exactly the same process. They got these loans and they were trying to move them quickly as possible to the next sucker down the line who was typically like either a pension fund or foreign bank or maybe another bank or a hedge fund and that was the scam. You took a whole bunch of really, really risky not very worthy subprime loans, you converted them magically into AAA rated securities and then you sold them to people all around the world as solid gold when of course they really were not. So that’s the backdrop.
SS: And we should say.. And I just want to point out one thing too in this dynamic because this is really important as we go in to talk about Goldman is that there was a lot of people out there who wanted to buy these things at that time and they were looking for some investment that was give them a higher return because we know that treasury bonds at that point were, and still, are kicking off very little interest and so there was a real market there that was sort of pre-existing in a way and in this function Goldman is acting as a sort of a broker, sort of like, “You want to buy this stuff, will go find for you.”
MT: It actually goes even farther than that. A lot of these companies were required to have a certain amount of AAA rated assets on their books to meet reserve requirements whether it’s insurance companies or other banks. I mean you have to have liquid cash assets on your books to meet regulatory requirements so a lot of these companies, these customers, like as you said that they wanted to have this stuff because it paid higher rates of return than treasury bills or municipal bonds or whatever else. So there was this huge vast market for this stuff that was actually deadly and toxic and not really worthwhile. So anyway Goldman was sitting atop a whole bunch of these assets. They had accumulated a huge long position by the end of December 2006 partially by accident because they had created this index to invest in mortgages and they had just bought a whole bunch of stuff that they intended to resell later but they were worried that they were going to get creamed on the mortgage market so they kind of engaged in this conscious strategy to unload all their crap on their clients and then they did that. Not only did they not tell their clients that they had this negative opinion of their inventory but they didn’t tell them also that they were betting against it at the same time and that’s kind of what Goldman did. They sold stuff that they knew was going to blow up and they bet against it at the same time. They didn’t tell their clients about it. And then when they got called to Washington they lied about it.
SS: Okay so now let’s unpack this little bit. At the end of 2006 Goldman has six billion dollars worth of these assets and they’re sitting there. Now a buddy of mine will say, “Well, look it’s their job to sell this. Everybody hedges against this stuff so everything that Tiabbi’s talking about that’s called business.” So how is this different from the pristine confines of just business?
MT: OK, well there’s two things here. Number one yes absolutely you do need to hedge and if you have a six billion dollar long position it certainly would make sense to create a six billion-dollar short position to offset that or a hedge of some kind so that you don’t have to take any losses. A broker-dealer doesn’t really want to be in the business of gambling. It really just wants to be making money on the on the commissions, the transactions. But Goldman went beyond that. They went beyond even and they ended up with a sixteen billion dollar short position. So they were no longer just hedging they were full-blown betting. They had come to the conclusion that this market was going to explode and they went well beyond hedging into this world where they were actually creating this huge bet and in fact there is an e-mail in one of the Levin Report documents were a very high ranking official says very openly, this is not a hedge. We’re making a bet here. So there’s that and there is also the fact that yes companies should be allowed to get rid of their bad inventory but you have to tell your clients if you are betting against them. That’s what we have security laws for. You’re not allowed to lie to people and say that you don’t have an interest in this. You have to disclose that.
SS: Talk about some of the representations they made about these assets that they sold to their clients because they told them that that this wasn’t stuff that they were holding in reserve. These weren’t bets that that actually Goldman Sachs had made. This was stuff that they were actually actively going out and finding as of the request of their clients.
MT: Right, yeah. In one deal for instance, in the Hudson deal, they told their clients that the assets in the deal had quote unquote, “been sourced from street.” In another words that they had gone out in the open market and bought this stuff. The reality was that this was all Goldman’s own inventory and that’s a highly pertinent fact. If you’re buying a bunch of securities from somebody you definitely would want to know that if the company owned the stuff itself and was desperate to unload it, that’s a fact you probably want to know, right? And that’s what they call a material fact and Goldman was definitely required to disclose that and they didn’t do it.
SS: So in this instance and I want to belabor this point because you know for those of us like myself don’t really fully grasp this stuff, Goldman was presenting themselves as a broker. There are people out there that have this stuff and we’re going to broker the deal as opposed to being an actual vendor. We have created these products. We have pooled these things. Could they get away with saying, well when we said that we bought these in the open market we did we just bought them in the open market a while back. What’s the distinction there?
MT: They actually made an argument similar to that in response to some of the investigators. In fact when one of the investigators asked one of Goldman guys like how can you tell your clients you bought this stuff off the street when in fact it came out of your own inventory. The Goldman answer was well, we are the street. If we are buying it from ourselves then that’s no different from buying it from the street. But that’s not really an answer. That’s just parsing semantics and trying to worm your way out of the reality of the situation.
SS: And so they also had an obligation, right, to tell their clients that they were betting against it and you can see that they sort of fudge that by telling their clients that their interests were aligned with their clients because they had bought six million of the offering without telling them that they had bet sixteen billion against it.
MT: It was actually two billion on that one. And you are absolutely right. In one of the deals they actually say affirmatively our interests are aligned with yours because look, we own six million dollars worth of this deal that we are selling you but they left out the part that they had done a two billion-dollar bet against it. And what’s amazing in that deal is that when some of the clients immediately started losing money, again this is like a car that doesn’t even make it to the first stoplight, the engine is already exploding as soon as it comes out of the lot and the client’s are instantly telling Goldman, Hey can you sell whatever’s left so we don’t get completely creamed. Goldman stalled and refused to sell because the lower this stuff went in value the more money they made, because they have this gigantic short position on the other side of it. And I know all this stuff sounds complicated and people are going to say well why should I care that one bank screwed another, but the problem is ultimately all of this fleecing ended up coming of our pockets because of the bailouts, because of the bailout of AIG. This ultimately is really just theft from all of us.
SS: And who were these clients that were buying the stuff. I mean was it just all hedge funds? Was it pension funds? Was it large institutions that, like you say, we need to have a certain amount of AAA assets on our books and this one is paying a much higher interest rate there, or theoretically will pay a higher interest rate than any other AAA product.
MT: It was a whole range of clients. In one of the deals the main client was Morgan Stanley and they lost, in the Hudson deal, they lost 960 million dollars on that deal, which again, like who cares, right? It’s Morgan Stanley. I’m not going to weep over them except that within a year the taxpayer was giving Morgan Stanley ten billion dollars to make up for its losses so you could pretty directly say that Goldman ended up taking that money out of the taxpayers pocket. In other cases there was a Korean hedge fund that bought into the notorious Timberwolf deal. I know I talked to some guys at a now defunct Australian hedge fund bought a 100 million dollars worth of this stuff at one point. Again that was another car that exploded right out of the lot and they were out of business within two months doing that deal. So it was people all around the world, big, big companies and small, well not small, but medium sized, and all variety.
SS: Now last year Goldman was sued by the SEC over something called Abacus.
MT: Right.
SS: And so how did they come out? Tell me the details of how does that different from what was found here?
MT: Well Abacus is part of this report. They definitely… there’s long section on Abacus in here. What did they do in Abacus? There was a hedge fund guy named John Paulson, sort of a viper short seller guy who realized the market was tanking, wanted to bet against it. So he goes to Goldman and he says I want you to help me put together a batch of the crappiest mortgages possible so that I can bet against them. But of course in order to do that you need to find somebody on the long side of the deal who will actually buy it so that Paulson can short it. So Goldman and Paulson work together to create this gigantic batch of really deadly mortgage assets. Then Goldman went overseas and found a pair of banks, one Dutch and one German who bought the bulk of this multibillion-dollar deal without telling the banks that in fact, the assets in the deal were selected specifically to lose by this guy John Paulson who was betting against them.
SS: So they vet these products and they choose them because they know they’re going to self-destruct.
MT: Right. They were specifically chosen to fail. That was the idea. And Goldman called this service “renting the platform.” In other words these foreign banks they wouldn’t have bought this deal if they knew that the guy and the other side was a hedge fund carnivore who was betting against them but Goldman essentially quote unquote “rented their good name” to John Paulson so that these banks would buy from Goldman who they assumed was neutral. And for this service Goldman only charged fifteen million dollars which is a very small amount of money to commit that kind of infraction but Paulson ended up making over a billion dollars on that deal.
SS: Well, good for him. I’m sure he must deserve it. you don’t make that kind of money unless you’re a really good person.
MT: (Laughs) Exactly.
SS: So when you hear this news that Eric Schneiderman is starting to investigate these guys do you know anything as to whether not this is the type of stuff he’s pursuing at this point?
MT: It’s in the general ballpark of that. I think that had more to do with CDO origination and some other things that were sort of mildly tangential. I think the things that I heard about this morning also involved defrauding the government so, you know, some of these banks were for instance charging the government for FHA properties that actually had paid actually a lot less in the open market to get them. So it’s a different thing. The general idea of going after banks and they’re the big ones; Bank of America, Citibank, and that sort of thing. That’s a good thing but what I was writing about in this piece is I think there was a highly symbolic moment last year when Goldman Sachs, which is the top company on Wall Street, when they came to Washington to talk about this stuff and they basically just brazenly lied in their testimony and just walked away from it, we are still waiting for the government’s full response on that and that’s what we are talking about.
SS: And this committee, do they formally refer it to the Department of Justice or do they just put it out there and say we’re done?
MT: No. They deliver it but they do not have a relationship with the Department of Justice. They’re in the same boat that we are. Levin, when the report was done, he wrote a letter to Eric Holder at the Justice Department and said hey, we think you should look into this. But that doesn’t mean that they’re going to do anything. They don’t have any special pull there, so we’re all in the same boat.
SS: Alright, well Matt Taibbi, thank you so much. The piece is in this month’s Rolling Stone. Folks I encourage you go read it. I think you can read it online or pick up the magazine. Why not pick up the magazine?
MT: Excellent Sam. Thanks very much.