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by Sid Kirchheimer, AARP Bulletin, January 25, 2010
Nomi Prins used to be one of them. She climbed the Wall Street ladder to become a managing director at Goldman Sachs. From there, she witnessed behavior that led to the scrambling of many nest eggs, the nation’s recent financial collapse and now, President Obama’s determination to rein in big banking.
And because of what she saw during her tenure at several firms, and since then, Prins, like so many other Americans, is now angry: at her former banking colleagues who continue to get millions in bonus money—most recently, on your dime—while continuing the same practices that led to the economic fallout. She’s angry at Washington, which funneled trillions in taxpayers’ money into a broken banking system without really fixing it. And she’s angry at the irresponsible pre-crisis deregulation, the greed and thirst for power, and the current ignorance and arrogance of those who allow it all to continue.
Even before the economic meltdown—and despite earning big bucks—Prins knew that Wall Street wasn’t for her. “The job is exhausting, but even more so, it becomes very meaningless,” she says. Now a muckraking journalist and consumer advocate, Prins brings her expertise and years on Wall Street to her new book, It Takes a Pillage: Behind the Bailouts, Bonuses, and Backroom Deals From Washington to Wall Street. She spoke with Bulletin Today about events that led to the worst financial disaster since the Great Depression—and why your tax dollar-funded bailout was, in her words, “shameful.” [Read an excerpt from It Takes a Pillage.]
Q. Why shameful?
A. Because of the huge taxpayer bailout, banks have been able to get back on their feet to pay themselves obscene bonuses. But it’s not as though everyone else is. From every possible measure—less available credit, more fees, higher bankruptcies and unemployment—everyone else is doing worse after this immense transfer of money. Not only is that immoral, unethical—whatever else you can say—it is the most unfair, shameful and worst use of public office.
Q. There’s been a lot of tough talk from Washington directed at Wall Street, but no real action.
A. Exactly, and the recent Financial Crisis Inquiry Commission’s hearing underscored that. The bankers who ripped us off punted every single question on anything that mattered in terms of the link between their practices and the crisis—the entire point of the commission. It’s the bankers’ job to deflect their answers, but the commission should have been slapping those guys left and right. The big bankers didn’t have enough money to back their bets—complex securities stuffed with various mixes of mortgage loans, packages of loans and credit derivatives. This should be the crux of this commission’s investigation.
Q. Your book lays out other bad moves and missteps by federal officials before and during the bailout. Who really dropped the ball?
A. The Federal Reserve certainly did, and chairman Ben Bernanke is now deflecting blame, saying the Fed wasn’t the only regulator. That’s true, but when some of the biggest institutions were creating toxic assets, it would have been useful to note these banks were making some of their most accelerated profits.
Q. Who else fumbled?
A. The Securities and Exchange Commission also seemed to be missing in action in monitoring broker-dealers and regulating the integrity of balance sheets of big investment bankers—Bear Stearns, Lehman Brothers, Goldman Sachs and Merrill Lynch. There should have been questioning about what was going on to throw out some warning signs and to take preventative action. That was not done at all.
Q. Should Washington get more blame for the crisis than Wall Street?
A. Wall Street did what it does, which is find opportunities to make money and take advantage of it. But even if you discount the issue that it made fraudulent loans and other risky deals that may have been immoral, unethical and perhaps not legal—which has yet to be determined—Washington was letting it all happen by not asking for more information about where and how some of these banks were making their money. Regulators were not paying attention to the large balloon of risk occurring when there was a lot of deregulation occurring in the industry, such as mergers that should have come under tighter federal vigilance.
Q. Government officials awarded banks billions in taxpayer money so it could be used, among other things, to renegotiate bad mortgages and make new loans to small business and individuals. Why hasn’t that happened?
A. In sitting on that money, banks can get paid interest on it; in loaning it to borrowers, they take the risk of not getting paid back. So they’re not using it for lending, and were not really required to. What they are doing is using government subsidies and cheap loans—with interest at less than 1 percent—for risky trades and deals. That’s because with the more risk you take, the more money you can make in a shorter period, if you’re right. And if you’re wrong, the government backs you up with taxpayer bailout funds.
Q. And when they’re wrong, as proven, most hard-working Americans lose a big chunk of their retirement savings and some lose their homes.
A. Banks have resisted renegotiating mortgage loans where borrowers are delinquent or about to be in default or foreclosure because they don’t care whether their customers have a home. They can hold a foreclosed property on the books, or sell it. But even when looking at this from a business standpoint, it’s very shortsighted: You’re reducing some of your current customer base. You’re hampering the housing market that is a big part of the rest of your customer base. And you’re not necessarily making money.
Q. So, Wall Street isn’t necessarily full of business superstars deserving of those just-awarded massive bonuses—paid for with our money?
A. They are good in a small arena that defines them as good. In a sports analogy, Wall Street could be compared to the only team playing that sport. So no matter the level of their play, or even if they are amateur athletes, they would still be considered good. The bonuses are really a measure of power and status in an environment when the mindset is all about winning. There’s a lot of competition on Wall Street—between firms and within those organizations—and if you want to rise, you need to get paid more than the next guy. Money is the evaluator of that power and status.
Q. The real power brokers seem to be the banking lobbyists, whose efforts have weakened the original intent and consumer protections of some enacted and proposed legislation.
A. Not only does the banking lobby have power and influence—last year spending about $335 million on lobbying—it also has the time, people and ability to explain the negative side of any proposal as it relates to banks, in a way that can sound very logical. And they know how to interact with politicians.
Unfortunately, banks have many more lobbyists, lawyers and accountants than do consumer advocates. On the consumers’ side, you have groups including Americans for Financial Reform, Public Citizen and Demos—which I’m affiliated with—and they have very intelligent and talented people. But they don’t have deep pockets or the cunning of bank lobbyists … and they’re not as mean.
Q. When the CARD Act was signed into law last May to protect consumers against abusive credit card practices, it gave issuers plenty of time to raise interest rates, impose new fees and otherwise hurt already struggling consumers. What should be done to protect consumers?
A. I see no reason why the government shouldn’t cap interest rates. It’s hideous to allow a 30 percent interest rate on anyone’s credit card. Many people are seeing their interest rates jacked from 9 to 30 percent—nothing in between. And there is nothing to limit that action. Rates could be capped at a certain spread—moving to acknowledge economic changes, but not at hikes that are so obscene, but completely legal.
Q. What about the proposed Consumer Financial Protection Agency?
A. A federal umbrella agency that mandates better disclosure [of terms in financial products] and demands more transparency and accountability by lenders is good, if it can actually be done. But the broader deterrents that caused this problem haven’t really been addressed—the type of securities and risky behavior created from bad consumer loans and products. There’s been ongoing growth in repackaging assets that were so faulty to begin with and caused the credit crisis. A solid protection agency should not only be able to suggest, curtail or prosecute against abusive lending practice, it should also be able to force lenders to renegotiate loans and simply onerous mortgages that people struggle with, and amend past abusive practices.
Q. What do consumers need to do to protect themselves?
A. One thing is to argue every unfair fee and practice with your lender, who has a certain leeway in grandfathering back interest rates. They can do things if you bother them, but it takes more than just you. People also need to write their representatives in Congress, in bulk, so they get a sense of what their constituents feel.
Sid Kirchheimer, author of Scam-Proof Your Life, writes about money and consumer issues.
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