13 Bankers: The Wall Street Takeover and the Next Financial Meltdown (51 page)

91.
For example, Enron borrowed $500 million from Citigroup, used the money to buy Treasury bills, sold the Treasury bills, and repaid Citigroup—and booked the $500 million as operating revenues. Floyd Norris, “Bankrupt Thinking: How the Banks Aided Enron’s Deception,”
The New York Times,
August 1, 2003, available at
http://www.nytimes.com/2003/08/01/business/bankrupt-thinking-how-the-banks-aided-enron-s-deception.html
.

92.
Press Release, Senate Committee on Governmental Affairs, “Report Reveals ‘Systemic and Catastrophic Failure’ of Financial Oversight in Enron Case: Governmental Affairs Committee Recommends Reform for SEC, Wall Street Analysts, Credit Raters,” October 7, 2002, available at
http://hsgac.senate.gov//files/01/20/85/f012085/public/index.cfm?FuseAction=Press.MinorityNews&ContentRecord_id=2efc364b-8472–43b4–9ad1–16b9b1b96f24&Region_id=&Issue_id=2ed9adc5–1c1e-4035–90b5–62bd98bdff7f
.

93.
Reported in Zachary A. Goldfarb, “In Cox Years at the SEC, Policies Undercut Action: Red Tape Halted Cases, Drove Down Penalties,”
The Washington Post,
June 1, 2009, available at
http://www.washingtonpost.com/wp-dyn/content/article/2009/05/31/AR2009053102254.html
.

94.
David Reilly, “Wall Street Fox Beds Down in Taxpayer Henhouse,” Bloomberg, August 25, 2009, available at
http://www.bloomberg.com/apps/news?pid=20601039&sid=aP7ePs7AR.SE
; Paul S. Atkins, “Is Excessive Regulation and Litigation Eroding U.S. Financial Competitiveness?” (lecture, conference co-sponsored by the American Enterprise Institute and the Brookings Institution, Washington, D.C., April 20, 2007), available at
http://www.sec.gov/news/speech/2007/spch042007psa.htm
.

95.
U.S. Securities and Exchange Commission Office of Inspector General,
SEC’s Oversight of Bear Stearns and Related Entities: Broker-Dealer Risk Assessment Program,
September 25, 2008, available at
http://www.sec-oig.gov/Reports/AuditsInspections/2008/446-b.pdf
.

96.
U.S. Securities and Exchange Commission, Office of Investigations,
Investigation of Failure of the SEC to Uncover Bernard Madoff’s Ponzi Scheme—Public Version,
August 31, 2009, available at
http://graphics8.nytimes.com/packages/pdf/business/20090904secmadoff
.pdf
. The total amount missing from client accounts was approximately $65 billion, including fake investment returns; the actual amount invested by and not returned to clients was closer to $20 billion.

97.
James Coffman, “An Inside Perspective on Regulatory Capture,”
The Baseline Scenario,
August 14, 2009, available at
http://baselinescenario.com/2009/08/14/an-inside-perspective-on-regulatory-capture/
.

98.
Andrew G. Haldane, “Why Banks Failed the Stress Test” (lecture at the Marcus Evans Conference on Stress-Testing, February 9–10, 2009), available at
http://www.bankofengland.co.uk/publications/speeches/2009/speech374
.pdf
.

99.
Piergiorgio Alessandri and Andrew G. Haldane, “Banking on the State,”
BIS Review
139/2009, available at
http://www.bis.org/review/r091111e.pdf
.

100.
The original Federal Reserve Act, passed in 1913, is 38 Stat. 251. The “unusual and exigent circumstances” paragraph was added to Section 13 as part of the Emergency Relief and Construction Act of 1932, 47 Stat. 709. The relevant provisions are codified as 12 U.S.C. § 343.

101.
See David Wessel,
In Fed We Trust: Ben Bernanke’s War on the Great Panic
(New York: Crown Business, 2009), 161. The 1991 amendment was Pub. L. 102–242, Title IV, § 473.

CHAPTER 6: TOO BIG TO FAIL

1.
Mervyn King (lecture to Scottish business organizations, Edinburgh, Scotland, October 20, 2009), available at
http://www.bankofengland.co.uk/publications/speeches/2009/speech406
.pdf
.

2.
For accounts of the meeting, see Mark Landler and Eric Dash, “Drama Behind a $250 Billion Banking Deal,”
The New York Times,
October 14, 2008, available at
http://www.nytimes.com/2008/10/15/business/economy/15bailout.html
; and Andrew Ross Sorkin,
Too Big to Fail: The Inside Story of How Wall Street and Washington Fought to Save the Financial System from Crisis—and Themselves
(New York: Viking, 2009), chapter 20.

3.
Quoted in David Wessel,
In Fed We Trust: Ben Bernanke’s War on the Great Panic
(New York: Crown Business, 2009), 239.

4.
Sorkin,
Too Big to Fail, supra
note 2, at chapter 20.

5.
Fact Sheet, U.S. Treasury Department, TARP Capital Purchase Program: Senior Preferred Stock and Warrants: Summary of Senior Preferred Terms, available at
http://www.treas.gov/press/releases/reports/document5hp1207.pdf
. The preferred shares had a perpetual term, meaning they did not have to be paid back until the banks wanted to. The 5 percent interest rate increased to 9 percent after five years.

6.
Phillip Swagel, “The Financial Crisis: An Inside View,” Brookings Papers on Economic Activity, Spring 2009, available at
http://www.brookings.edu/economics/bpea/~/media/Files/Programs/ES
/BPEA/2009_spring_bpea_papers/2009_spring_bpea_swagel.pdf
, 39.

7.
Such as Richard Kovacevich of Wells Fargo. Landler and Dash, “Drama Behind a $250 Billion Banking Deal,”
supra
note 2.

8.
Sorkin,
Too Big to Fail, supra
note 2, at 525.

9.
Dave Kansas,
The Wall Street Journal Guide to the End of Wall Street as We Know It: What You Need to Know About the Greatest Financial Crisis of Our Time—and How to Survive It
(New York: HarperCollins, 2009).

10.
See, e.g., Gillian Tett,
Fool’s Gold: How the Bold Dream of a Small Tribe at J.P. Morgan Was Corrupted by Wall Street Greed and Unleashed a Catastrophe
(New York: Free Press, 2009); Wessel,
In Fed We Trust, supra
note 3; and Sorkin,
Too Big to Fail, supra
note 2.

11.
On the psychological propensity for bubbles, see Virginia Postrel, “Pop Psychology,”
The Atlantic,
December 2008, available at
http://www.theatlantic.com/doc/200812/financial-bubbles
. On the idea that Chinese oversaving (caused by an artificially high currency) caused the crisis, see Sebastian Mallaby, “What OPEC Teaches China,”
The Washington Post,
January 25, 2009, available at
http://www.washingtonpost.com/wp-dyn/content/article/2009/01/23/AR2009012303291.html
.

12.
Sameera Anand, “Citic’s Close Call with Bear Stearns,”
Business Week,
March 19, 2008, available at
http://www.businessweek.com/globalbiz/
content/mar2008/gb20080319_886607.htm
. CITIC is technically a conglomerate owned by the Chinese government, not a sovereign wealth fund. CITIC was able to back out of its deal with Bear Stearns.

13.
For more on the fall of Bear Stearns, see Kate Kelly,
Street Fighters: The Last 72 Hours of Bear Stearns, the Toughest Firm on Wall Street
(New York: Portfolio, 2009); and William D. Cohan,
House of Cards: A Tale of Hubris and Wretched Excess on Wall Street
(New York: Doubleday, 2009).

14.
Heidi N. Moore, “Can What Happened to Bear Happen to Other Banks?” Deal Journal Blog,
The Wall Street Journal,
March 18, 2008, available at
http://blogs.wsj.com/deals/2008/03/18/repos-just-where-do-the-other-banks-stand/
.

15.
Kate Kelly, “Bear Stearns Neared Collapse Twice in Frenzied Last Days,”
The Wall Street Journal,
May 29, 2008, available at
http://online.wsj.com/article/SB121202057232127889.html
.

16.
On the value of the building, see Yalman Onaran, “JPMorgan Chase to Buy Bear Stearns for $240 Million,” Bloomberg, March 17, 2008, available at
http://www.bloomberg.com/apps/news?pid=20601087&sid=aWbXzzlzNAnw
; $240 million was the total price when the deal was at $2 a share.

17.
Press Release, Federal Reserve Bank of New York, “Federal Reserve Announces Establishment of Primary Dealer Credit Facility,” March 16, 2008, available at
http://newyorkfed.org/newsevents/news/markets/2008/rp080316.html
.

18.
“Merrill’s Bitter Pill May Be a Sweet Deal for Lone Star,” DealBook Blog,
The New York Times,
July 29, 2008, available at
http://dealbook.blogs.nytimes.com/2008/07/29/merills-bitter-pill-may-be-a-sweet-deal-for-lone-star/
.

19.
“Factbox—U.S., European Bank Writedowns, Credit Losses,” Reuters, September 24, 2009, available at
http://www.reuters.com/article/fundsFundsNews/idUSLO127608200
90924
.

20.
Quoted in Suddep Reddy, “Paulson’s Bazooka: A Weapon to Be Remembered?”
The Wall Street Journal,
September 24, 2008, available at
http://blogs.wsj.com/economics/2008/09/24/paulsons-bazooka-a-weapon-to-be-remembered/
.

21.
On Paulson’s role, see Sheryl Gay Stolberg, “Paulson’s Influence Displayed in Fannie and Freddie Rescue,”
The New York Times,
September 9, 2008.

22.
Quoted in Wessel,
In Fed We Trust, supra
note 3, at 14, 16.

23.
Quoted in Sorkin,
Too Big to Fail, supra
note 2, at 336.

24.
Quoted in Wessel,
In Fed We Trust, supra
note 3, at 23.

25.
Sorkin,
Too Big to Fail, supra
note 2, at 2.

26.
Troubled Asset Relief Program Office of the Special Inspector General,
Quarterly Report to Congress,
April 21, 2009.

27.
See Carmen M. Reinhart and Kenneth S. Rogoff, “Is the 2007 U.S. Subprime Crisis So Different? An International Historical Comparison,”
American Economic Review
98 (2008): 339–44; and Carmen M. Reinhart and Kenneth S. Rogoff, “The Aftermath of Financial Crises” (paper presented at the meetings of the American Economic Association, January 3, 2009), available at
http://www.aeaweb.org/annual_mtg_papers/2009/retrieve.php?pdfid=140
.

28.
Thomas Hoenig, “Troubled Banks Must Be Allowed a Way to Fail,”
Financial Times,
May 3, 2009, available at
http://www.ft.com/cms/s/0/46e2f784–380b-11de-9211–00144feabdc0.html
. See also Thomas Hoenig, “Too Big Has Failed” (lecture, Omaha, NE, March 6, 2009), available at
http://www.kc.frb.org/speechbio/hoenigPDF/Omaha.03.06.09.pdf
.

29.
See, e.g., Simon Johnson and James Kwak, “The Price of Salvation,” Economists’ Forum,
Financial Times,
September 24, 2008, available at
http://blogs.ft.com/economistsforum/2008/09/the-price-of-salvation/
; John P. Hussman, “You Can’t Rescue the Financial System if You Can’t Read a Balance Sheet,”
Hussman Funds Weekly Market Comment,
September 29, 2008, available at
http://www.hussmanfunds.com/wmc/wmc080929.htm
; Luigi Zingales, “Why Paulson Is Wrong,”
VOX,
September 21, 2008, available at
http://voxeu.org/index.php?q-node/1670
.

30.
TARP Congressional Oversight Panel,
February Oversight Report: Valuing Treasury’s Acquisitions,
February 6, 2009, available at
http://cop.senate.gov/documents/cop-020609-report.pdf
. The Congressional Budget Office separately valued the subsidy at $18 per $100 invested. Congressional Budget Office,
The Troubled Asset Relief Program: Report on Transactions Through December 31, 2008,
January 2009, available at
http://www.cbo.gov/ftpdocs/99xx/doc9961/01–16-TARP.pdf
.