Charlie Gasparino’s account of the financial crisis and its roots, The Sellout, officially came out today.
We spoke with the CNBC reporter on his work, subtitled “How Three Decades of Wall Street Greed and Government Mismanagement Destroyed the Global Financial System.”
Here are excerpts of our conversation.
TBI: Why did you write The Sellout?
Charles Gasparino: I got this book deal about a month before Bear Stearns went under, and what’s interesting is that the concept didn’t really change that much. My initial concept at the end of 2007, early 2008, was that Wall Street made this huge massive risk, bet on mortgage-backed securities, embraced this business model that was based on risk, and what I knew about the markets, and what I knew about the last 30 years of Wall Street, was that this thing occurred over a long period of time – this took about 30 years to reach what I thought, at that point, was its height – or its low point I should say, depending on which way you look at it – and it began with the creation of mortgages-backed securities and the business model of embracing risk, you know, which is wall streets business model. And that’s something I’ve been writing about for a long time and reporting on.
So I wanted to write a book that basically said Wall Street’s embrace of this business model, risk, got itself in the position it’s in now, and what the position was, in 2008, was a severely damaged securities industry, and foreign investors basically owning chunks of U.S. security firms, and the U.S. losing our global dominance. And that was the story, and I thought that was a good story. And then Bear Stearns blew up – I had thought that was the last chapter – and as soon as Bear Stearns blew up, I covered the Bear Stearns thing since 2008, I covered it from beginning to end, and then Lehman happened, and you saw it affect the rest of the Street in ways I never thought possible. And what’s interesting is that when I look back, the theme of the book didn’t really change, it’s the magnitude that changed.
So I basically kept with the same theme, which was: how did we get here, what were the influences on Wall Street taking this much risk, and where are we today, and can it happen again.
How was the government involved?
I mean, the mortgage-backed securities market is a market where the notion of government is key because it was the vehicle that the federal government used to basically carry out its housing policy, and it’s a housing policy that started in the Clinton administration, but it was embraced by Bush, so it was bi-partisan, it involved various members of congress, both Republicans and Democrats.
And it was that they believed that everyone, people who traditionally couldn’t afford to take out a mortgage, should have a mortgage. And it’s not like they actually believed that these people should actually own a home, but they believed that people should be able to borrow to get a home. And that was key too, because this was leveraging borrowing up and down the food chain. And in the context of that sweep there are players like Larry Fink, whose career kind of epitomizes the best of that time, which is a guy that blew up early in his career and learned that risk isn’t something to be messed with or else he’s not gonna have a career, and he did a 180. And then there are people who did not do a 180, who basically remained as risk-takers throughout their entire careers – people like Dick Fuld, Jimmy Cayne, Stan O’Neal, who was a guy, at first, who saw the pitfalls of risk, but then embraced it in a major way later on.
So I guess you’re gonna say, “What is the one reason why you wrote the book?” The one reason why is because I thought the story of why Wall Street got in the trouble its gotten into was the story that was in the press, the sort of central story that you see in the New York Times and the Wall Street Journal and other places, was that it’s all about Wall Street greed. Greed got us into this. But I wanted to show that this was much more complex, and that the greed couldn’t have built up to the point it did without the government subsidizing it, and that’s what they did every time. Because this market blew up three times, right? In the 80’s, in ’94, in ’98, and each time Wall Street got bailed out, and each time they got bailed out they came back and doubled-down on their bets.
Is that government role in the financial crisis the most surprising thing that you learned while writing the book?
Well, I knew it was there, but sometimes you don’t understand the magnitude of it until you start doing a deep dive. And that’s what really blew me away: just how much the government played in this market, and how much it subsidized risk, which to me was just amazing. And that’s what this book will show more than anything else. You’ll see the risk takers, you’ll see how stupid and greedy they are, but you’ll also see who was aiding and abetting their stupidity, and it was the government, every step of the way.
What’s your take on the state of financial regulation, and Washington’s push to try and avoid these mistakes again?
You know, I’m dubious.
What they’re doing now is…pay caps and all this “let’s all let loose in front of the sub-committee and scream at them for 20 minutes,” and that sort of stuff. [But] the only way to really cure this, to keep people honest, is to let them fail earlier on.
Now, I’m not advocating that they should have let them fail back in 2008, because that would have been the end of the world, this we know, that would have been bad, because risk had built up to such enormous levels. But I think early on, maybe in 1998, letting LTCM fail, and, if that had happened, allowing Lehman to go under, which it would have.
We would have taken our medicine; risk would not have been rewarded. And it was, in some ways, rewarded. You bailed them out, you lowered interest rates, you really lowered them after 2001, after the stock market bubble burst. And you basically told risk-takers- remember, now, risk-taking is the business model – you told people in this business, who are running these firms, embracing that business model, that there’s no consequence, and it’s interesting how they all embraced this business model in a way that no one ever thought.
Stan O’Neal didn’t like mortgage-backed securities. But you know what? When he got in there, when he became CEO, he embraced it like there’s no tomorrow. Same with John Mack: John Mack was a salesman, he wasn’t some bonds trader, but when he took over Morgan Stanley in 2005… there’s a great scene in the book with him and Stan Druckenmiller, and he’s explaining how he’s gonna be like Goldman and he’s gonna take risk, and Druckenmiller cant believe it. He knows this guy, he knows this isn’t his forte, but Mack did it anyway. You gotta ask why these seemingly self-smart people did something that was so stupid, and part of the reason why I think is because no one thought there was any consequence to it.
Did the business press blow it on warning about these systemic problems?
No, and that’s the whole thing. Listen, I’ve been an investigative reporter my whole life. Generally, when you have a story of magnitude, like a Watergate or something like this, you have someone on the inside that knows something is wrong, that there’s something wrong with the balance sheet. What’s interesting about everything that I’ve uncovered about this is that there was almost nobody on the inside that thought anything was wrong, that anybody was wrong…They all thought AAA was AAA and that’s the scary part.
So, on top of the fact that you really couldn’t read the balance sheets on these things because they were so obtuse, on top of the fact that you had no real whistle-blowers because noone really thought anything was wrong, it was really hard for the business person to figure this out; it was almost impossible.
And there’s a scene in my book where Jamie Dimon, who should be able to figure out a balance sheet better than anybody, is trying to figure out how Citigroup is making so much money, and he can’t. And he’s not turning around and saying, “Listen, I know they re taking enormous risk,” he’s just baffled. It’s just interesting that it never dawned on anybody from the inside that this was a problem, and I think that’s one of the problems here – there was lousy disclosure. And when you put it all together, I think it was almost impossible for the press to figure this out.
People blame the press – I’m not giving anybody a free pass, it would have been nice to call the warning signs early – but it is interesting, as soon as we found out about this… nobody should have been surprised about this in 2007. We were reporting on it everyday in 2007. But the question is, should we have known about this in 2006, 2005? And, I’ll tell you, there’s a reason why no one knew, why the press didn’t make a big thing about this: because it was impossible to see on a balance sheet, and the people internally that were putting it on the balance sheets, they were just so drunk on their own euphoria on making money.