Ivry - The seven sins of Wall Street : big banks, their Washington lackeys, and the next financial crisis

THE SEVEN SINS

OF WALL STREET

Copyright 2014 by Bob Ivry.

Published in the United States by PublicAffairs,

a Member of the Perseus Books Group

All rights reserved.

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Book design by Linda Mark

Library of Congress Cataloging-in-Publication Data

Ivry, Bob.

The seven sins of Wall Street : big banks, their Washington lackeys, and the next financial crisis / Bob Ivry.

pages cm

Includes bibliographical references and index.

ISBN 978-1-61039-366-9 (e-book)

1. FinanceUnited States. 2. Banks and bankingUnited States.

3. Financial crisesUnited States. 4. United StatesEconomic policy.

I. Title.

HG181.I97 2014

332.0973dc23

2013048863

First Edition

10 9 8 7 6 5 4 3 2 1

For Janelle

CONTENTS

Cast of Characters

Ladies and gentlemen, the six largest American banks, listed in alphabetical order:

Bank of America

Home: Charlotte, North Carolina

Scouting report: Hits below its weight. Kryptonite: mortgage servicing

TARP borrowing: $45 billion

Peak Federal Reserve borrowing: $91.4 billion on February 26, 2009

Total assets, 2006: $1.36 trillion

Total assets, 2013: $2.17 trillion

Percentage change: +60

Citigroup

Home: New York

Scouting report: Cant get out of its own way

TARP borrowing: $45 billion

Peak Federal Reserve borrowing: $99.5 billion on January 20, 2009

Total assets, 2006: $1.59 trillion

Total assets, 2013: $1.88 trillion

Percentage change: +18

Goldman Sachs

Home: New York

Scouting report: Biological imperative: money

TARP borrowing: $10 billion

Peak Federal Reserve borrowing: $69 billion on December 31, 2008

Total assets, 2006: $759 billion

Total assets, 2013: $959 billion

Percentage change: +26

JPMorgan Chase

Home: New York

Scouting report: Performance-enhancing drugs suspected

TARP borrowing: $25 billion

Peak Federal Reserve borrowing: $68.6 billion on October 1, 2008

Total assets, 2006: $1.34 trillion

Total assets, 2013: $2.39 trillion

Percentage change: +78

Morgan Stanley

Home: New York

Scouting report: Smallest of the six and getting smaller

TARP borrowing: $10 billion

Peak Federal Reserve borrowing: $107 billion on September 29, 2008

Total assets, 2006: $960 billion

Total assets, 2013: $801 billion

Percentage change: 16

Wells Fargo

Home: San Francisco

Scouting report: Quietly eating its competitors lunch

TARP borrowing: $25 billion

Peak Federal Reserve borrowing: $45 billion on February 26, 2009

Total assets, 2006: $492 billion

Total assets, 2013: $1.44 trillion

Percentage change: +193

My daughter called me from school one day and said, Dad, whats a financial crisis? And without trying to be funny, I said, Its something that happens every five to seven years.

Jamie Dimon, chief executive officer of JPMorgan Chase, January 13, 2010

W HEN REBECCA BLACK BOUGHT THE THREE-BEDROOM house at 698 Hazelwood Road in southwest Memphis in May 2005 and moved in with her two teenage sons, it was a quiet community. Children played in the street, and neighbors tended their yards. She could afford the $57,000 mortgage if she skipped oil changes for the car and served the boys store-brand groceries.

Then trouble came.

Her next-door neighbor died, and his family lost the house. Across the street, there were two foreclosures. One morning, the abandoned house three doors down had gang graffiti spray-painted on the side. A girl in the neighborhood pulled a gun on her son.

In 2010, it was Blacks turn to go. Shed gotten one of those 228 mortgages that slowly strangled so many borrowerstwo years of a low, fixed interest rate followed by twenty-eight years of rising paymentsand shed reached her limit. I was crazy about that house, and so proud of it, said Black, a US Army veteran. I just didnt have enough money. She got a letter from her mortgage company saying it was starting the foreclosure process, and rather than hear a knock on the door one morning from a sheriffs deputy ordering her to get out, Black packed whatever she could fit into her Chevy Astro and left the home she loved so well. By 2011, the property two doors down had sold for $3,000, and Black was in bankruptcy.

If homes are living things, sustaining their inhabitants and contributing to the vitality of their communities, then Hazelwood Road is dying. On nine of the fifteen parcels on Blacks side of the street, houses sit empty or have been bulldozed flat, or the lots have reverted to a tangle of sumac and poison ivy.

I visited Hazelwood Road in the hottest part of 2012, four years after bad mortgages triggered a meltdown in the worlds most resilient economy. The biggest banks were reporting record profits, and government agencies were trumpeting statistics showing that a robust recovery from the worst hard times since Dorothea Langes Migrant Mother was just around the corner. And though Hazelwood Road was never a paradisea place where Black could buy a three-bedroom house for $57,000 couldnt be described as anybodys ideal of location, location, locationconditions there indicated that something essential about America had shifted in the aftermath of the 2008 financial crisis. An economic and political apartheid had emerged. Perhaps fairness had been an illusion and upward mobility just a dream before things went to hell. Still, hope for advancement was that much tougher for most people to sustain after 2008. And just as the crisis was no accident but rather a tragic convergence of stupidity, poor oversight, and, more than anything, a neighbor-versus-neighbor waging of financial warfare, so too were its consequences a result of calculation. Washington, in the form of the federal government and the Federal Reserve, the countrys bank for banks, had sacrificed the common good for the profit of the few. By coddling the biggest banksby rewarding their mischief rather than at least laying down roadblocks of disincentives for them to quit their misconductWashington made certain that the country continued down a path of self-aggrandizement that led to a perversion of American capitalism and the slow demolition of democracy.