Cockburn Talks About US Sub-Prime Crash
 The Real News Network
go to original
December 13, 2009
Andrew Cockburn co-producer of the documentary "American Casino" talks about the sub-prime crash.
Bio: Andrew Cockburn is an Irish journalist, author and filmmaker who has lived in the United States for many years.
Transcript
PAUL JAY: Welcome to The Real News Network. There's a new documentary out. It's called American Casino. It's made by Andrew Cockburn and his wife Leslie. It's a fascinating exposé of the subprime mortgage scandal and how the system works. There's a piece, an interview in the documentary, that jumped out at me. I'll play it for you now.
MICHAEL GREENBERGER: To understand why this is like a gambling casino, you have to understand what's at stake here. On a December evening, December 15, 2000, around seven o'clock, Phil Gramm, Republican Senator of Texas and the chair of the Senate Finance Committee, walked to the floor of the Senate and introduced a 262-page bill as a rider to the 11,000 page appropriation bill, which excluded from regulation the financial instruments that are probably most at the heart of the present meltdown. He not only excluded them from all federal regulation, but he excluded them from state regulation as well, which is important, because these instruments could be viewed to be gambling instruments, where you're betting on whether people will or will not pay off their loans. And he announced at the time that this measure would be a boon to the American economy and it'd be a boon to Wall Street, because they would be freed of any supervision in this regard. And that lack of supervision freed Wall Street to essentially shoot itself in both feet.
JAY: Now joining us is one of the coproducers, Andrew Cockburn. Andrew's an author, a writer, a filmmaker, a coproducer of the film American Casino. Thanks for joining us, Andrew.
COCKBURN: Hey, you're welcome.
JAY: So this clip we played from the film, it makes it quite clear that this was a very conscious activity, this subprime mortgage fiasco. What I mean by "conscious," not just on the part of Wall Street, but to enable this they needed their political allies in Washington to create the legislative regulatory space for this scheme. Talk about this.
COCKBURN: Sure. I mean, what Michael Greenberger was talking about there was the creation of the legalization of this credit default swap, which is basically a form of gambling. It's basically a way of taking bets, making bets on whether companies and bonds and various other financial instruments would fail or not, and it was actually something that was rendered illegal in 1929. So they legalized it, and that enabled them to make, basically—well, to persuade themselves that they weren't taking any risk in them giving people these very, you know, squishy loans, the subprime loans, and all sorts of other credit, like cars. They'd taken bets so that if they failed, if the loans went bad, they were covered. I mean, it gets a little bit more complicated than that, but that's basically it. This kind of legalized gambling, Wall Street gambling, this is really almost a culminating stage of something that had been going on since at least 1980, or since the Reagan administration, 'cause what Reagan and his merry men hated and what Wall Street always hated was the New Deal, was the reaction to the 1929 crash when, you know, we'd had all sorts of regulation and law enforcement, which had stopped these idiots, you know, for a while at least, you know, [inaudible] bringing the economy down around our ears. But, you know, with all sorts of legislative, you know, lobbying and paying off politicians and corrupting the media and, you know, part of a huge offensive, what we had was the stage set by 2000 for the whole lawless condition on Wall Street that has brought us, you know, the current financial meltdown, which is still going on.
JAY: Now, some of the Reagan supporters, or some of the people that used to work in the Reagan administration, they say that Clinton's more to blame for starting this deregulation. Is that true?
COCKBURN: No, Clinton didn't start it. I mean, as I said, it's been going on since the 1980s at least. Well, no, since the—you could—I like to date it from, actually, 1978, when the Supreme Court basically abolished the usury laws, which, you know, for a while had stopped banks charging, you know, 30 percent for credit cards and things like that. No, Clinton joined in, I have to agree. Clinton was certainly part of it. But that was in the—you know, because Clinton was going along with the Republican Congress. So when the Republican Congress wanted, for example, to repeal the Glass-Steagall Act, which was a very important law from the 1930s from the New Deal that said, basically, that banks that took your money and mine, I mean commercial banks that took our deposits, couldn't use that money for speculating on Wall Street like investment banks do. You know, they couldn't do that. They couldn't be both investment banks and commercial banks. That got repealed in 1999, thanks to the efforts of, well, a lot of people, particularly that Republican senator, Phil Gramm. And Clinton signed it. So Clinton was an enabler, if you like, but, you know, this was business and Wall Street and the Republicans leading the charge on this one.
JAY: Is there any kind of level of accountability for Phil Gramm's role in this? I mean, it's come out, but he was instrumental, at least in terms of the recent facilitation of this.
COCKBURN: No. A lot of people—you know, he had a lot of company, but he was a particularly egregious example. I mean, he was a person whose, you know, public career has had, as far as I can see, no redeeming feature whatsoever. He went on to his reward, which was to be vice chairman of UBS, the giant Swiss bank, which itself, you know, managed to lose a huge amount of money when Wall Street crashed in 2007-2008. And UBS, of course, has also more recently been in the news 'cause it turned out—also it was alleged by authorities here—they were running a very handy tax evasion scheme for American taxpayers. But, no, Phil Gramm, Senator Graham, as we still call him, he's still there. He's still very powerful in Texas politics. He still has not issued one iota of remorse for his role in basically creating this disastrous situation that's ruined millions of people and made millions of people homeless.
JAY: Now, in the film you break down how the subprime process worked, deals being made in parking lots and such. So talk about the whole dropping of the review process. It used to be that if someone wanted a mortgage, you had to prove that you had the income to pay it. That seemed to be a diminishing asset in the eyes of these banks.
COCKBURN: Well, that's right. And what made that possible—I mean, it used to be that you went and got a mortgage, and the bank that you got the mortgage from and the mortgage lender, they owned the loans. So they were very interested in whether you paid it off or not. So they took a good look at, you know, your income and, you know, how likely you were to repay the loan. What changed all that was this magical process called securitization. Well, it's a selling—when the banks discovered what a profitable business it was to take your loan and my loan and someone else's loan and bundle them together and sell it on to investors as a bond, you know, paying a steady rate of interest. So now they didn't really have to care so much whether you've paid off the loan or not, because they'd sold it to someone else. Then it got even more remote when they moved to securitization, when they would take lots of these bonds and pool them together like in a big big cake mixer, and then slice them—. And then you've got all the bonds, you know, in one big pool. Then they would divide up that pool and say, well, this end will pay, you know, into different rates of creditworthiness, if you like, and the more creditworthy a slice was, the more, you know, the people who get paid first got slightly less interest, and on down the line. Well, without sort of boring you with complications, the net effect was the banks didn't care whether you paid your loan off, or they thought they didn't have to care, because, hey, they'd sold on to the investor. As it turned out, that wasn't quite the case. They were still very risky, 'cause they got so greedy they started to keep a lot of these loans for themselves.
JAY: Well, they also insured them. So they were betting both ways: they rode it on the way up, and when it crashed they had insurance money. Of course, it turned out to be public money through AIG that wound up in Goldman Sachs' pockets.
COCKBURN: Well, right. But wait a minute, you know, you have to say—but they never used the word "insurance", because insurance is a very tightly regulated industry, and every state has an insurance regulator, the insurance commissioner that watches the insurance companies and makes sure the insurance companies have enough money, enough capital reserves to pay you or me when we crash the car or, you know, die, or whatever else you get insured for. They invented these fancy things around it called "credit default swaps" so that it was a kind of insurance, but it was a bet. And the big difference was they didn't have the money to pay off the bet when the bond failed. You know, when [inaudible] people, these poor people who'd been maneuvered into getting these ridiculous loans found they couldn't pay.
JAY: Well, one if the bets was that because most of these loans, or a preponderance of these loans, were in California and Florida, they were betting that those real estate markets could simply never fall. So it just didn't matter if anybody defaulted: you could always sell the house. That turned out not to be true.
COCKBURN: Right. Well, they believed, they told everyone that, and to a certain extent they told themselves—well, some of them believed it—was that house prices, particularly—I mean, as you say, California and Florida were the leading bubble states, but actually also Nevada and Arizona. Those are the big four bubble states. But, hey, it was across the country. I mean, a lot of our film, American Casino, was shot in Baltimore, where people had also been preyed on to provide the raw material for these loans. So they told her the mantra was "house prices never go down". So, you know, this is like, you know, a perpetual motion machine. But, of course, if they'd thought about for 10 seconds or 30 seconds—and I think they probably thought about it for 10 seconds and thought was enough. If they'd thought about it for 30 seconds, they'd have known that—you know, looked at a history book or even just a chart for the last 20 years, they'd realize that house prices do go down. You know, they go up and they go down and they go up again.
JAY: The way they'd spread the risk and the way they really in fact had insured against the risk is in the long run they didn't really care anyway. Certainly, Goldman Sachs didn't.
COCKBURN: They didn't care, but the market, you know, that they at a certain point—they didn't regard it as a good thing if house prices went down. But as you say, they had devised this mechanism—it was called the ABX Index—as a way to bet both sides, to bet that the house prices could go down. Well, it made it easier to bet. They were—already found ways to bet, but this made it easier for them to bet and made the—enabled—made it easier for them to bet more.
JAY: And, in fact, there's actually quite a few people that made a lot of money betting on the crash and betting short on this issue.
COCKBURN: Oh, yeah. I mean, there's—well, in our film, in American Casino, we have a chap, Jeff Green, who has made at least—much more now, but when we filmed him, he'd made $500 million from betting that the housing market would go down. I mean, I don't think we should condemn him. He was betting against Wall Street. He got some banks on Wall Street—Morgan Stanley and Merrill Lynch, I think it was—to take his bet that people would default on their mortgages.
JAY: Well, all of this comes back to the fundamental idea, which Greenspan articulated—or in the next segment of our interview we'll show this piece, exchange with Greenspan. But it's essentially that greed is good—Michael Douglas's line in the Wall Street film. Ideologically, at least, they justified all this with the idea that the more speculation, the better for the economy. So in the next segment of our interview, let's delve into that. And has anything changed? Has philosophically, really, that sunk in in the halls of power? Please join us for the next segment of our interview with Andrew Cockburn. |
Vallarta Weddings
Editorials | Issues | December 2009 
Tell a Friend
Site Map
Print this Page
Email Us