How do Wall Street banks make their money?

In the March 4, 2000 episode of Rolling Stone, Matt Taibbi answers a question on many peoples' minds: To exactly does Wall Street make so much money that it could hand out multi-billions of dollars in bonuses last year and this year? The story of Taibbi detailed article is that the Wall Street banks use at least seven major scams to make their money, and most of them involve taking advantage of American taxpayers. The seven scams can be summarized in one principle: "the answer . . . is basically twofold: they raped the taxpayer, and they raped their clients." Taibbi's entire article is available online. If the extremes, the corruption and the opacity of Wall Street have angered you, you'll appreciate Taibbi's facts, as well as his colorful descriptions. The first of the seven major cons described by Taibbi is the "Swoop and Squat," by which Taibbi is referring to the fact that AIG should not have been able to hand over big chunks of cash to a single creditor like Goldman when AIG was about to go belly up. Taibbi correctly refers to this maneuver as a "fraudulent conveyance." That money accounts for $19 billion in cash that Goldman would not have had without the massive intervention by the United States. As Taibbi asks: "To is that $13.4 billion in 2009 profits looking now?" Taibbi cautions that these numbers don't even include the direct bailouts of Goldman Sachs and other big banks. I'll mention one more of the seven major Wall Street cons described by Taibbi: "The Dollar store." Less than a week after the AIG bailout, Goldman and another investment bank, Morgan Stanley applied for and received permission to become bank holding companies, which made them available for increased federal financial support. Why would they do that? You probably won't read this anywhere in your local newspaper, because it's real news.

Institutions that were, in reality, high risk gambling houses were allowed to masquerade as conservative commercial banks. As a result of this new designation, they were given access to a virtually endless stream of "free money" courtesy of unsuspecting taxpayers. The $10 billion that Goldman received under the better-known TARP bailout was chump change in comparison to the smorgasbord of direct and indirect aid it qualified for as a commercial bank.

When Goldman Sachs and Morgan Stanley received those expedited federal bank charters, they were given permission to go to the Fed to borrow huge amounts of money at 0%. Taibbi points out that without this federal gravy, these banks would've totally collapsed, because they had no other way to raise capital at the time. Consider what the banks did with this taxpayer money, however.

Borrowing at 0% interest, banks like Goldman now have virtually infinite ways to make money. In one of the most common maneuvers, they simply took the money they brought from the government at 0% and went it back to the government by buying treasury bills that pay interest of three or 4%. It was basically a license to print money--no different than attaching an ATM to the side of the Federal Reserve.

Taibbi writes that that "The Dollar Store" goes a long way to explaining the enormous profits of Goldman Sachs last year. The entire article is well worth reading. Taibbi has once again done a terrific job of describing the corrupt ways of Washington and Wall Street.

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Matt Taibbi discusses how the media makes and breaks politicians

Yes, the media makes and breaks politicians. They tell us who the "serious" politicians are before the race has even begun, and it always seems to be about who can raise money. At his blog, Matt Taibbi writes thoughtfully about this issue of the way the media caricatures politicians:

The political media has always taken it upon itself to make decisions about who is and who is not qualified to be taken seriously as candidates for higher office. Without even talking about whether they do this more or less to Republicans or Democrats, I can testify that I witnessed this phenomenon over and over again in the primary battles within the Democratic Party. It has always been true that the press corps has drawn upon internalized professional biases, high-school-style groupthink and the urging of insider wonks to separate candidates into “serious” and “unserious” groups before the shots even start to be fired.
Taibbi's post then morphs into some observations about Sarah Palin, who has constantly complained that she is not being treated fairly by "the liberal press."

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Matt Taibbi on economic death by short-selling

In this month's Rolling Stone, Matt Taibbi once again takes on Wall Street with an article entitled "Wall Street's Naked Swindle." This article is not yet available online. Taibbi's focus this time is naked short selling. Taibbi has proven to be an excellent teacher of abstruse financial concepts, including the concept of short selling, and also including the insidious practice of naked short selling. With this technique (and others) Wall Street has turned the economy into "a giant asset-stripping scheme, one whose purpose is to suck up the last bits of meat from the carcass of the middle class." Taibbi's article is an excellent read, which is not at all surprising given Taibbi's track record. The bottom line is that naked short selling is a "flat-out counterfeiting scheme." How bad is the widespread use of this technique?

That this particular scam played such a prominent role in the demise of [Bear and Lehman] was supremely ironic. After all, the boom that had ballooned both companies to fantastic heights was basically a counterfeit economy, a mountain of paste that Wall Street had built to replace the legitimate business it no longer had. By the middle of the Bush years, the great investment banks like Bear and Lehman no longer made their money financing real businesses and creating jobs.

As Taibbi then reminds us, there is more than one way to counterfeit. Consider credit default swaps:

If you squint hard enough, you can see that the derivative-driven economy of the past decade has always, in a way, been about counterfeiting. At their most basic level, innovations like the ones that triggered the global collapse-credit default swaps and the collateralized debt obligations-were employed for the primary purpose of synthesizing out of thin air those revenue flows that are dying industrial economy was no longer pumping into the financial bloodstream. The basic concept in almost every case with the same: replacing hard assets with complex formulas that, once unwound, would prove to be backed by promises and IOUs instead of real stuff.

In this related piece, Taibbi further discusses "naked short selling":

Again, a lot of this stuff is complicated and not only hard for people outside the finance world to follow, but kind of, well, boring as well. But it’s through these tiny regulatory loopholes, these little nooks and crannies, that the economy gets manipulated. The effect of all of these regulatory gaps has been to transform Wall Street from a means of connecting capital to good business ideas into a giant casino, where the object of the game is shaving little slices off the great flows of money as you push them back and forth using a great big toolbox of manipulative techniques. This is one of the tools.

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“Mad Dog Palin” by Matt Taibbi, Rolling Stone

For those of you who haven't experienced Rolling Stone assassin Matt Taibbi's uncompromising, pointy and funny-as-heck style, first cop this excerpt from his Palin pwnage piece on 27 September ... It even crossed my mind that there was an element of weirdly self-destructive pique in McCain's decision to cave in to his party's right-wing…

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Which candidate for president is for sale?

All of the candidates are for sale, according to the August 21, 2008 edition of Rolling Stone. The article, by Matt Taibbi, is entitled:  "Candidates for Sale:  What do Obama and McCain have in common?  The same big donors, who will expect to have their way no matter who wins."…

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