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Why Isn't Wall Street in Jail? -- a synopsis of Matt Taibbi's recent article and interview

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This report is based mostly on an interview that Amy Goodman recently did with Matt Taibbi.

"Nobody goes to jail," writes Matt Taibbi in the new issue of Rolling Stone magazine.   This is the lament of the financial-crisis era, "one that saw virtually every major bank and financial company on Wall Street embroiled in obscene criminal scandals that impoverished millions and collectively destroyed trillions of dollars of the world's wealth."   In his new article, Taibbi also explains how the American people have been defrauded by Wall Street investors and how the financial crisis is connected to the current situations in states like Wisconsin and Ohio, especially with regard to worker pensions there.

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By way of introduction to Matt's article, here are two sentences from a recent paper by economist Dean Baker, who concludes, "Most of the pension shortfall is attributable to the plunge in the stock market in the years 2007-2009.   Keep in mind that if pension funds had earned returns just equal to the interest rate on 30-year Treasury bonds in the three years since 2007, their assets would be more than $850 billion greater than they are today."

Consider also this quote from David Cay Johnston of   "The average Wisconsin pension is $24,500 a year, which is hardly lavish.   But what is stunning is that 15% of the money contributed to the pension fund each year is being funneled to Wall Street in fees," which is one reason why Matt keeps repeating the mantra, "Why isn't Wall Street in jail?"

"So, why isn't Wall Street in jail, Matt?"   So asked Amy Goodman in her recent interview with Taibbi.   Amy continued, "We're seeing these mass protests in Madison, Wisconsin, and elsewhere.   We see the working poor, the middle class, under tremendous stress all over the United States, and yet they're the ones who are being hit hardest, not Wall Street.   Explain what happened."  

Matt begins his reply by explaining that Governor Kasich was an employee for Lehman Brothers and was intimately involved with getting the state of Ohio's pension fund to invest in Lehman Brothers and buy mortgage-backed securities.   And of course Lehman Brothers lost all that money.   This, broadly, was really what the mortgage bubble and the financial crisis was all about:   It was essentially a gigantic criminal fraud scheme where all the banks were taking mismarked mortgage-backed securities, made up of very, very dangerous, toxic subprime loans.   The banks were in a sense chopping them up, reassembling them, and then packaging them as AAA-rated investment vehicles, then selling these rat-trap vehicles to state pension funds, to insurance companies, to Chinese banks and Dutch banks and Icelandic banks.   And, of course, these things, these vehicles, started blowing up, as rat-trap vehicles are apt to do, and all those pension funds then proceeded to go broke.   But what Kasich and other Republican governors are doing now is blaming the people who were collecting these pensions--they're blaming the workers, they're blaming the firemen, they're blaming the policemen--whereas, in reality, these workers were actually the victims of this fraud scheme, and certainly not the people responsible for planning the scheme or executing the scam that followed!   And the only reason that people aren't angrier about this, is that most of them don't yet fully understand what happened.   If these were car companies that had sold a trillion dollars' worth of profoundly defective cars to the citizens of the United States, and refused to recall them and fix those cars, there would be riots right now.   But these were mortgage-backed securities;   it's complicated;   most people don't understand it, and they're only now beginning to realize that they've been defrauded.

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It is somewhat difficult to fully grasp, so let's go over it again.   Explain again, in more detail, what the crime is.   Who has profited?   Who should be on trial and why?

The crime in all of this was simple fraud.   These banks had these billion-dollar pools of mortgages where, in some cases, 70 or 80% of the loans behind these mortgages were to people who had no proper qualifications for them.   Their credit score stunk, they had no decent job and sometimes no job at all, and/or they had no money to put down on the mortgage.   And then the banks were taking loans like this, mixing them with others, applying some hocus-pocus and turning the assembled packages into "AAA-rated investment vehicles."   Then they marketed these securities to, say, state pension funds, fraudulently portraying these securities as genuinely AAA-rated investments, which means that the credit risk on them was claimed to be almost zero.   In other words, they took mortgages that they knew were very, very risky and very, very likely to default, and they were going to the state of Wisconsin, the state of Ohio, the state of New York (among many other places), and saying, "Hey, this investment is as safe as United States Treasury bonds.   You should buy this, and you'll earn a little bit more than you'll earn if you buy T-bills."   The reality was, however, that they were just taking absolutely worthless stuff and "sticking it" to these investors, and then going back to their offices and essentially placing bets on how soon the junk they just sold would default!   This is no different than a used car dealer who makes superficial repairs to an internally damaged car, rolls back the odometer, and sells it to you as a great car, with not many miles on it, that's practically new and runs good.   It's a clear case of fraud in both cases.   And if, on top of that, the used car dealer were to somehow take out an insurance policy on the rolling death trap he just sold you, that would be analogous to what the banksters did when they purchased insurance on these other vehicles (mortgage-backed security vehicles of investment), from companies like AIG.   (More on this momentarily).

Talk about John Mack and Gary Aguirre.

Theirs is an amazing story because it demonstrates how far above the law some Wall Streeters are.   John Mack is one of the most powerful people on Wall Street.   Right now he's the chairman of the board at Morgan Stanley.   He used to be their CEO.  

Way back in 2001, when he was between jobs, he had left Morgan Stanley and was interviewing with Credit Suisse First Boston and this led to his involvement in a case that was investigated by the SEC.   Here's how it happened:

A hedge fund called Pequot made a very suspiciously timed investment in a company called Heller Capital, which no one else knew was about to be acquired by General Electric.   The hedge fund, Pequot, bought an enormous amount of Heller stock three weeks before GE's acquisition of Heller.   The timing suggested that Pequot had received advance word that GE was going to take over Heller, greatly raising the value of Heller stock, which Pequot then bought up quickly, in large amount, before the price rose.

Credit Suisse First Boston was Heller's investment banker.   As stated, John Mack was interviewing for the job with Credit Suisse a few days before Pequot made its purchases, and knew that Heller was about to be taken over by GE, and allegedly passed that information to the hedge fund guy who made those very timely purchases of Heller stock.   Problem is, that kind of communication is illegal.   It's called insider trading, which is a flagrant violation of SEC rules.   Under any normal circumstances, Mack would have been targeted for investigation by the SEC.   Why?   Because the indications are very strong that he is the one who passed on the "insider" information to Pequot that Heller was going to be bought out by GE.

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The SEC investigator who was about to investigate this deal was Gary Aguirre.   The Pequot hedge fund manager making the purchases of Heller stock was Art Samberg, a big star on Wall Street.   In fact, there are published articles raising the question of how Art Samberg manages his amazing returns year after year.   Well, this was a clue as to how:   he seems to have regularly violated SEC rules by receiving insider information on deals like the upcoming GE acquisition of Heller.

Anyway, this SEC investigator, Gary Aguirre, wanted permission to go interview John Mack, but his superiors at the SEC basically told him that he could not do that, and the reason they gave was that Mack has "powerful political connections."   At the time, you see, Mack was a "Ranger" (one of Bush's fundraising Rangers).   When Aguirre pressed the matter, he was fired by the SEC.

Talk about the high-level people involved, like Mary Jo White.

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Several years after receiving my M.A. in social science (interdisciplinary studies) I was an instructor at S.F. State University for a year, but then went back to designing automated machinery, and then tech writing, in Silicon Valley. I've (more...)

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