The “FinCen files” story reveals: getting caught doesn’t stop banks from taking dirty money. It may even encourage them
On December 11, 2012, U.S. Justice Department officials called a press conference in Brooklyn. The key players were once and future bank lawyer Lanny Breuer (disguised at the time as Barack Obama’s Assistant Attorney General in charge of the DOJ’s Criminal Division), and Loretta Lynch, the U.S. Attorney for the Eastern District of New York, and future Attorney General. The duo revealed that HSBC, the largest bank in Europe, had agreed to a $1.9 billion settlement for years of money-laundering offenses.
An alphabet soup of regulatory agencies was represented that day, from the Justice Department, to Immigration and Customs Enforcement (ICE), the U.S. Treasury, the New York County District Attorney, and the Office of the Comptroller of the Currency, among others.
The regulators outlined a slew of admissions, with HSBC’s headline offense being the laundering of $881 million for Central and South American drug outfits, including the infamous Sinaloa cartel.
The laundering was so brazen, regulators said, the bank’s Mexican subsidiary had developed “specially shaped boxes” for cartels to pack with cash and slide through teller windows. The seemingly massive fine reflected serious offenses, including violations of the Bank Secrecy Act (BSA), the International Emergency Economic Powers Act (IEEPA) and the Trading with the Enemy Act (TWEA).
The next years would follow up with a flurry of similar settlements extracting sizable-sounding fees from other transnational banks for laundering money on behalf of terrorists, sanctioned businesses, mobsters, drug dealers, and other malefactors. Firms like JP Morgan Chase ($1.7 billion), Standard Chartered ($300 million), and Deutsche Bank ($258 million) were soon announcing settlements either for laundering, sanctions violations, or both.
Even seasoned financial reporters accustomed to seeing soft-touch settlements scratched their heads at some of the deals. In the case of HSBC, the stiffest penalty doled out to any individual for the biggest drug-money-laundering case in history — during which time HSBC had become the “preferred financial institution” of drug traffickers, according to the Justice Department — involved an agreement to “partially defer bonus compensation for its most senior executives.” If bankers can’t get time for washing money for people who put torture videos on the internet, what can they get time for?
When I did a story on the case in early 2013, I found the HSBC settlement was the latest step in a dizzying, decade-plus cycle of offenses and ignored reprimands, involving multiple regulatory bodies. The number of times HSBC had blown off compliance orders seemed too absurd to be real. In one stretch between 2005 and 2006, the bank received (and, apparently, ignored) 30 formal warnings just from the Office of the Comptroller of the Currency.
Prosecutors insisted the deferred prosecution settlements slapped on companies like HSBC, Standard Chartered, and JP Morgan Chase were tougher than jail terms. The deals would place banks in a permanent state of quasi-arrest, with regulators granted enormous supervisory power and serious charges pre-filed and hanging over the firms going forward.
As one federal investigator put it to me back then, “This way, we have them by the short ones.”
Fast-forward eight years. On September 20th, a combination of Buzzfeed and the International Consortium of Investigative Journalists (ICIJ) published the details of a major document leak highlighting a decade of money-laundering incidents, involving hundreds of billions of dollars and a number of the world’s biggest banks. The leak centered on a cache of over two thousand “suspicious activity reports,” or SARs, filed by those banks to the Financial Crimes Enforcement Network, a regulatory arm of the U.S. Treasury.
Though the ICIJ was also behind the release of the Panama Papers, investigative editor Michael Hudson told me he believes the FinCen leak is “the most important” project they’ve worked on. Instead of being about one group of actors, or one jurisdiction, these revelations span the banking sector as a whole.
“It shows the widest set of problems,” he says.
The story has been covered around the world, but some press accounts particularly here in the States seem to have missed the punchline, i.e. that the banks figuring most prominently in the FinCen leak are exactly the same institutions paraded before the public as subjects of “message-sending” punishments back in 2012-2014.
HSBC, for instance, continued to take in questionable money through 2012 and beyond, including $30 million from Hong Kong accounts related to a Ponzi scheme called World Capital Market. WCM was suspected of bilking “investors” — most of them ordinary people scraping together five or ten thousand dollars and throwing them at false promises of guaranteed returns — of nearly $80 million.
The leaked records show HSBC flagged the account as suspicious as early as 2013, but continued to take the money from this and a wide variety of other dicey accounts. Although regulators saw all of this information, the Department of Justice not only didn’t take action, it announced in 2017 that HSBC had “lived up to all of its commitments” and agreed to file a motion to lift the deferred prosecution deal.
A similar pattern held with JP Morgan Chase, which in 2013 was hit with a cease and desist order over “systemic deficiencies” in its money-laundering controls, yet continued to do business with rogue accounts, including some infamous and obvious ones. To give some sense of the sums involved, JPM made roughly a half-billion dollars just servicing the accounts for con artist Bernie Madoff.
As far back as 2006, JP Morgan Chase knew enough to pull its own money out of investments in hedge funds tied to Madoff, but never told investors, and continued to manage his accounts for years. The bank ultimately settled with the government over the Madoff episode in 2014, after the 2013 “cease and desist” order, while continuing to manage money for other malodorous accounts — including, according to the ICIJ, more than $1 billion for Jho Low, the fugitive financier behind Malaysia’s infamous 1MDB fund.
In a detail that should infuriate the #Resistance crowd, Jamie Dimon’s bank also continued to do business in huge sums for former Trump campaign manager Paul Manafort even after Manafort stepped down in scandal, and even after the bank flagged Manafort’s accounts. From the ICIJ report:
JPMorgan also processed more than $50 million in payments over a decade, the records show, for Paul Manafort, the former campaign manager for President Donald Trump. The bank shuttled at least $6.9 million in Manafort transactions in the 14 months after he resigned from the campaign amid a swirl of money laundering and corruption allegations spawning from his work with a pro-Russian political party in Ukraine.
“If you look at the cases where they tried to punish and deter the big banks, the headline-making efforts just haven’t worked,” says Hudson. “In the aftermath of these supposed crackdowns, the banks continued to move money in staggering amounts, for powerful and dangerous characters.”
“The big takeaway is, the system just doesn’t work,” adds former federal prosecutor Paul Pelletier. “I think these SARs represent about $2 trillion in suspicious transactions, and nearly all of it went through. And this is just a small fraction of the overall amount of money.”
According to Hudson, the FinCen files represent about two-tenths of one percent of the suspicious activity reports filed between 2011 and 2017.
In the aftermath of the HSBC deal in 2012, money laundering cases began to attract a fair amount of press attention. HSBC’s case even became one of the subjects for Oscar-winning documentarian Alex Gibney’s “Dirty Money” series:
At the time, there was an expectation that these stories could be told in the past tense, because firms like HSBC had been busted. The FinCen leaks show the opposite. The settlements may actually have been an accelerant, allowing for the appearance of regulation, while alerting banks to broader weaknesses that encouraged more brazen behavior going forward. We may have to change the way we think about “dirty money,” from being an outside contaminant, to endemic to the system at its core.
Public legend about movement of ill-gotten cash usually centers on crooks sitting under ceiling fans in tropical locales, receiving mysterious wire transfers in places outside the physical reach of American regulators, like Vanuatu, Panama, or the British Virgin Islands. The FinCen leaks make clear the real hub of money laundering is in what Hudson calls the “choke point” of New York, where the world’s largest financial institutions have streamlined the process of moving shady money.
SARs don’t always indicate a crime. They’re the regulatory equivalent of a call to police to check something out that doesn’t add up. Bank monitors who compile them might be spotting something in their account rolls like high numbers of cash transactions, large numbers of wire transfers to a country where the customer doesn’t do business, etc.
The requirement to produce these reports creates a cat-and-mouse game for banks. Every time compliance officers discover derogatory information that leads to an account being closed, it’s a direct hit to a bank’s revenues. On the other hand, to keep regulators off their backs, banks have to be seen to be doing all they can to sniff out illegalities. Therefore there’s an incentive for banks to cycle through creative ways of looking like they’re engaging in compliance, without actually doing so.
A bank might create sizable AML departments, but pad them with inexperienced, entry-level employees incapable of spotting problems (see here for the HSBC example I wrote about years ago). A firm may hire a top-of-the-line department head, but not give him or her real resources. Required hiring boxes may be checked, but the company may non-report or under-report problems. Companies may even generate huge numbers of suspicious activity reports while leaving key data like names or addresses missing.
In a different scenario, reports are filed too late for action to be taken. SARs are supposed to be filed within 30 days, for instance, but the FinCen documents were filed to the government an average of 166 days after the initial detection of a potential problem.
In another stalling method, banks informally agree not to close suspicious accounts until a certain number of SARs have accrued. When the Senate Permanent Subcommittee on Investigations looked at HSBC in 2012, for instance, they found internal emails from bank executives suggesting that HSBC’s Mexico operations had settled on a policy of not closing accounts until four SARs had been filed.
When the company’s chief compliance officer found out about its subsidiary HMEX’s standard, he wrote, in a bemused tone, “4 SARs seems awfully indulgent, even by local standards.” HMEX later cut the standard to two SARs, which seems to be the exception rather than the rule. In the FinCen leaks, companies are seen repeatedly filing reports about the same actor, each time implying they’ve dug just enough to write a report, but never quite enough to actually close the account.
Of course, in banking, size matters. “Maybe the bank looks at a wire transfer and says, ‘This smells.’ Do that in a $12,000 transaction, and they’ll kick you out of the bank,” says Pelletier. “Do it at $12 million, and they’ll let it go.”
What’s unique about this leak it shows bad behavior the banks actually reported. As one former investigator put it this week, “This is the stuff they actually have a suspicious activity report for!” That banks keep taking the money is bad, but the fact that regulators keep receiving the reports and letting shady transactions slide makes the dirty-money problem a bizarre symbiosis of private rapaciousness and (at best) governmental apathy.
While credit card companies are able to detect fraud and banks are able to detect suspicious activity thanks to technological advances, the government lacks the same capability, in part perhaps because the reporting system is not automated. Since it’s a crime to leak a “SAR” — you “literally have to steal one” to make one public, as one former investigator puts it — they’ve rarely been seen by the public. The ICIJ has now put them on display:
The government receives millions of these written reports, which often appear to reflect a fair amount of person-hours of research by the bank. However, the government lacks what one investigator described to me as an “AI-type test” for passive review of this material, and lacks the personnel to go through it all individually.
At best, a federal investigator may go through the SAR database to check an individual or company already targeted in another probe. This particular batch of SARs seems to have been gathered as part of a congressional investigation into Russian interference, for instance. The rest of the reports are fated to be memory-holed by overwhelmed regulators.
What do you get in this seeming worst-case scenario, when banks pretend to monitor, and regulators pretend to collect the monitoring? A short list of some of the messes found in the FinCen docs:
— In one ridiculous case, Deutsche Bank’s New York branch processed $2.6 billion and $700 million, respectively, for a pair of companies called Ergoinvest and Chadborg trade. Both companies declared annual incomes of $35,000, and the statements for both firms bear the signature of the same obscure dentist in Belgium, who claims he doesn’t even own a car. Yet the money kept rolling through! The companies earned British registrations through “formation agencies” located in the Baltics, where investigators have found a rat’s nest of problems in recent years. Deutsche Bank, the originator of 62% of the leaked SARs (perhaps reflecting the focus of the Russia investigation that produced the FinCen docs), moved at least $150 billion just from one small Tallinn-based bank, Danske Estonia, for instance.
— Ukrainian Ihor Kolomoisky was the subject of raids by federal investigators earlier this summer, and has been profiled in colorful news reports that read like movie scripts. In one piece, he allegedly dropped crayfish meat by remote control into a tank to be devoured by sharks in the middle of a meeting, as a Dr. Evil-style intimidation tactic.
The crux of accusations by prosecutors is that Kolomoisky employed gangland tactics at home (including using “armed goons” to take over an oil company), then funneled the money to places like the States, to be invested in legit vehicles like real estate. This is exactly the kind of person the SAR process is designed to identify and disqualify quickly. Nonetheless, the FinCen files show Deutsche Bank, which had entered into a settlement deal in 2015 for moving over $11 billion in suspicious transactions, moved at least $240 million for a Kolomoisky-connected account at exactly that time, between 2015 and 2016.
— Even as Russian aluminum baron Oleg Deripaska garnered enormous media attention in recent years, including during the Russiagate furor, he continued to move money freely through the American banking system. The FinCen files contain a total of 58 SARs related to Deripaska, issued between 1997 and 2017, covering an amazing $12.41 billion in transactions. The Bank of New York Mellon flagged 16 transactions involving a Deripaska subsidiary company called Mallow Capital, but apparently kept doing business. To quote the ICIJ, “Mellon said Mallow Capital appeared to be a shell company operating in a high-risk area with no known legitimate business purpose. In 2012 and 2013, Mallow sent itself nearly $420 million using different British Virgin Islands addresses and different banks…”
The FinCen leaks highlight two major weaknesses of the regulatory system. One is the longstanding absence of a requirement that anyone opening a U.S. account name a “beneficial owner,” i.e. who is really controlling the account. The other is correspondent banking. Banks in the U.S. are required to “know your customer” in addition to monitoring and reporting domestic accounts. Still, any foreign bank with a license may open “correspondent” accounts in those same regulated Western banks. A lot of the worst instances catalogued in the FinCen leaks involve these correspondent accounts, opened in Asia, Eastern Europe, the Middle East, etc.
In the long run, the regulatory system ends up serving as a de facto partner for banks that all but admit they’re taking in money from Ponzi schemers, mobsters, drug lords, and rogue states.
This is a “feature, not a bug” problem. Going back to the years after the crash, regulators spoke often about the need to carefully construct settlements, so that even repeat offenders might remain viable.
In late 2012, for instance, at a press conference announcing a market manipulation settlement for the Swiss Bank UBS, Breuer told reporters, “Our goal here is not to destroy a major financial institution.”
“This is a bank that has broken the law before,” a reporter said that day. “So why not be tougher?”
“I don’t know what tougher means,” Breuer answered.
Some time later, then-Attorney General Eric Holder gave a video message on the theme, “There is no such thing as Too Big to Jail.” While insisting “no one is above the law,” Holder pointed out that some criminal charges carried automatic regulatory penalties that “may even trigger the loss of that institution’s charter.” This, he implied, is not always a good thing.
This issue had come up at the HSBC press conference the previous year, when Breuer said, “had the US authorities decided to press criminal charges, HSBC would almost certainly have lost its banking license in the US.”
For that reason, Holder insisted, regulators often “must go the extra mile to coordinate closely with the regulators who oversee these institutions’ day-to-day operations.”
Translated, this meant the Justice Department was crafting punishments to make sure banks landed on their feet and remained functional as American businesses, even in the face of public reprimand.
A typical settlement involved a fine that sounded large but was really equal to months or weeks of profit, with penalties in some cases also being deductible, so taxpayers could share in the joys of paying a bank’s debt to society. In other words, settlements were designed not to hurt too much, but just the right amount.
Even a “record” harsh settlement doled out to the French bank BNP-Paribas in 2014 for sanctions violations, which included a rare plea to a real criminal charge in addition to a $9 billion penalty, only incurred a one-year exile from U.S. dollar transactions. Even when throwing the proverbial book at firms, regulators made sure to pave clear roads to redemption.
This was not necessarily a bad thing. There’s no reason why anyone should want systemically-important institutions (who are often major employers) to be wiped off the face of the earth, willy-nilly. The problem is that if you completely remove the threat of a lost charter, it signals to everyone that regulators will tolerate even open repeat violations. In this light, even a “tough” public punishment becomes a license to steal.
Hudson, for instance, notes that announcements of many of the biggest money laundering settlements involving the firms in the FinCen files were accompanied by jumps in the company’s share prices. HSBC’s shares rose in London and Hong Kong after the 2012 settlement, and even BNP’s criminal plea deal prompted a 3.6% jump in share price. Markets see the settlements as seals of approval going forward, and “send the signal that the regulators are looking to do a deal,” Hudson says.
The irony of all this is that the Trump era has seen much gnashing of teeth over America’s withdrawal from global bureaucracies like the Paris Agreement, the “Open Skies” arms control treaty, the Iran deal, and other conventions. Meanwhile, in the one place we want an isolationist-style wall, around the Federal Reserve-connected American banking system, barriers are wearing away. Only in crime, it seems, is America becoming more global in outlook.
Mike Lofgren, a congressional staff member for 28 years, joins Bill Moyers to talk about what he calls Washington’s “Deep State,” in which elected and unelected figures collude to protect and serve powerful vested interests. “It is how we had deregulation, financialization of the economy, the Wall Street bust, the erosion or our civil liberties and perpetual war,” Lofgren tells Moyers.
this week on Moyers & Company longtime insider Mike Lofgren what he calls the big story of our times the deep state it is I would save the red thread that runs through the history of the last three decades it’s how we had deregulation financialization of the economy The Wall Street bust the erosion of our civil liberties and perpetual war funding is provided by and gumowitz encouraging the renewal of democracy Carnegie Corporation of New York celebrating 100 years of philanthropy and committed to doing real and permanent good in the world the Ford Foundation working with visionaries on the front lines of social change worldwide the Herb Alpert foundation supporting organizations whose mission is to promote compassion and creativity in our society the John D and Catherine T MacArthur Foundation committed to building a more just verdant and peaceful world more information at macfound.org Park foundation dedicated to heightening public awareness of critical issues the Kohlberg foundation barbra jean– Fleischman and by our sole corporate sponsor mutual of America designing customized individual and group retirement products that’s why we’re your retirement company welcome if you’ve read the Espionage novels of john lecarre a you know that no other writer today has so brilliantly evoked the subterranean workings of government perhaps because he himself was once a British spy liquor a has a name for that invisible labyrinth of power he calls it the deep state and now an American you’re about to meet in this broadcast has seized on that concept to describe the forces he says are controlling our government no matter the party in power but Mike Lofgren ZnO intelligence agent although he had a top-secret security clearance he’s a numbers man a congressional staff member for 28 years with the powerful House and Senate budget committees over the years as he crunched those numbers he realized they didn’t add up in said they led him to America’s own deep state where elected and unelected figures collude to protect and serve powerful vested interests Mike Lofgren was so disgusted he not only left Capitol Hill he left the Republican Party and wrote this book the party is over how Republicans went crazy Democrats became useless and the middle class got shafted now at our request and exclusively for billmoyers.com he is written anatomy of the deep state you’ll want to read it as soon as we finish this conversation Mike Lofgren welcome good to be here again but this is a difficult subject to talk about it would be easier if it were a conspiracy you’re describing but that’s not the case is it no I’m not a conspiracy theorist of this is not some cabal that was hatched in the dark of night this is something that hides in plain sight it’s something we know about but we can’t connect the dots or most people don’t connect the dots it’s kind of a natural evolution when so much money and political control is at stake in the most powerful country in the world this has evolved over time and you call it the real power in the country correct it is a hybrid of corporate America and the national security state everyone knows what the military-industrial complex is since Eisenhower talked about it in his farewell address we must guard against the acquisition of unwarranted influence whether sought or unsought by the military-industrial complex the potential for the disastrous rise of misplaced power exists and will persist we must never let the weight of this combination endanger our liberties or democratic processes everyone knows Wall Street and its depredations everyone knows how corporate America acts they’re both about the same thing they’re both about money sucking as much money out of the country as they can and they’re about control corporate control and political control you said this in your judgment is the big story of our time it is the big story of our time it is I would say the red thread that runs through the history of the last three decades it’s how we had deregulation financialization of the economy the Wall Street bust the erosion of our civil liberties and perpetual war you write that the secret and unaccountable deep state floats freely above the gridlock between both ends of Pennsylvania Avenue is the paradox of American government in the 21st century well that’s just the thing the common narrative in the last five years and on a superficial level it’s right is that government is broken it’s dysfunctional its gridlocked well that’s true and that is the visible government the constitutional government we learn about in civics 101 and it is gridlocked but somehow Obama can go into Libya he can assassinate US citizens he can collect all our phone records without a by-your-leave from anyone um he can even bring down a jet carrying a president of a sovereign country without asking anyone’s permission and no one seems to connect the two the failure of our visible constitutional state and this other government that operates according to no constitutional rules or any constraint by the governed you go on to say though that it’s not just the executive branch that is the heart of this that is just one of the several constituencies that make up what you called the deep state well it’s all the national security functions of the government it’s the Pentagon its homeland security it’s the State Department it’s also Treasury because they have a kind of symbiotic relationship with Wall Street but one thing they control the flow of money absolutely and that’s why there’s such a flow not only of money but of personnel between Wall Street and the Treasury Department there’s other aspects of government there’s a portion of the judiciary a small portion of the judiciary the so called Foreign Intelligence Surveillance courts most of Congress doesn’t even know how they operate talk a little bit more about the Nexus the connection between the national security state and Wall Street because this is a theme that runs through your essay do you know that about 30 blocks north of here there is a restaurant that will sell you a truffle for ninety five thousand dollars also in new york christie’s sold at auction a painting by francis bacon for a hundred and forty two million now a parallel situation with the national security state the NSA spent 1.7 billion dollars to build a facility in Utah that will collect one yottabyte of information that’s as much information as has ever been written in the history of the world it costs four hundred dollars by the time the Pentagon finishes paying contractors to haul one gallon of gasoline into Afghanistan that’s a real extravagant amount of money in both cases of the national security state and the corporate state they are sucking money out of the economy as our infrastructure collapses we have a tinkertoy power grid that goes out every time there’s inclement weather tens of millions of people are on food stamps we incarcerate more people than China an authoritarian state with four times our popular elation does anyone see the disparity between this extravagance for the deep state and the penury that is being forced on the rest of the country that isn’t a natural evolution something made it happen we’re having a situation where the deep state is essentially out of control it’s unconstrained since 9/11 we have built the equivalent of three Pentagon’s around the DC metropolitan area holding defense contractors intelligence contractors and government civilians involved in the military-industrial complex there are over 400,000 contractors private citizens who have top-secret security clearances and they are heart and soul of the of the deep state as you describe it absolutely it being privatized which means the power shifts from accountable officials to unaccountable in contractors about 70% of the intelligence budget goes to contracts how new is this I mean back in 2010 the Washington Post published a stunning investigation of what the editors called top secret America I mean we have known about this have we not yes we know about this but the intelligence functions of the government are too important to outsource in the manner we have it’s something where absolute discretion is needed and absolute trust that they are not violating civil liberties and to put this kind of a burden if you will on private contract employees is I think become a great disservice you say that that you came to question this it took you a while it was a gradual enlightenment that took place you were dealing with big numbers and particular details in the budgets that all of these agencies were sending to you when you on Capitol Hill right you were seeing the number solution you what works what was happening to the numbers at the end of 2001 is we appropriated a lot of money and it didn’t seem to be going to Afghanistan the proximate source of the 911 attacks it seemed to be going to the Persian Gulf region and I said what’s going on here Saddam Hussein didn’t bring down the Twin Towers so the little light went on and I began to sort of disenchant myself from the normal group think that tends to take over in any organization group think at some point in your essay you talk about how group think drives the deep state it absolutely does just as it tends to drive any bureaucratic organization what do you mean by groupthink well the psychologist Irving Janis called it groupthink it’s a kind of assimilation of the views of your superiors and your peers it’s becoming a yes-man and in many respects it’s an unconscious thing I remember what Upton Sinclair once said it’s difficult to get a man to understand something when this salary depends on him not understanding it that is certainly a part of it you described Washington as clearly and obviously the headquarters of a deep state but talk about some of some of the others who are in the game Wall Street is perhaps the ultimate backstop to the whole operation because they generates so much money that they can provide second careers for a lot of the government operatives they’re going to make more money than they ever dreamed they would on Wall Street and I think a good example of that is the most celebrated soldier of the last decade David Petraeus what did he do when he retired he went to Kohlberg Kravis Roberts a Wall Street buyout firm with 90 billion in assets under management you described him as a kind of avatar of the deep state he is in a way because he now represents both ends of it we see now our present-day Cincinnatus did not pick up the plow when he lay down the sword Cincinnatus was the roman who left his farm to become a general in the war when the war was over he went back to be a farmer that doesn’t happen today no it doesn’t the vast majority of generals seem to end up on the boards of defense contractors talk a little bit about what you call this strange relationship between Silicon Valley and the government and how it fits into the deep state well the National Security Agency could not do what it does the CIA could not do what it does without Silicon Valley now Silicon Valley unlike the defense contractors mostly sells to private individuals and to companies it’s not a big government vendor however its services are necessary and de facto they have become a part of the NSA’s operations I’m sure the CEOs of some of these companies try to obscure the fact that this has mostly been voluntary for many years Ameena surveillance the surveillance the gathering of information about unknowing citizens absolute or commercial purposes though precisely they’ve done it themselves and they’ve assisted the NSA through a FISA Court order for an intelligence or an Intelligence Surveillance Act so this has been going on for quite a while yet now like inspector Reno they are shocked shocked to find out but I think their main shock is that they’re now starting to lose market share in foreign countries these these moguls as you call them pass themselves off as libertarians who they make a big pretence about being libertarians and believing in the rugged individualism and so forth but they’ve been every bit as intrusive as the NSA has been in terms of collecting your data for commercial purposes rather than so-called national security purposes but they’re in it just as heavily as the NSA is and they somehow managed to get the intellectual property laws rigged so that you are theoretically subject to a fine up to five hundred thousand dollars for jailbreaking your phone to me which means if you don’t like the carrier on your phone that the manufacturer dictates you shall have and you change it without authorization you don’t have the right to something you bought could this symbiotic and actual relationship between Silicon Valley and the government reflecting the deep state explain the indulgence Washington has shown Silicon Valley Oh matters of intellectual property absolutely people no longer necessarily own their property that they buy if they’re buying it from Silicon Valley they simply have a kind of lease on it if as you write the ideologies of the deep state is not democrat or republican not left or right what is it it’s an ideology I just don’t think we’ve named it it’s a kind of corporatism now the actors in this drama tend to steer clear of social issues they pretend to be merrily neutral servants of the state giving the best advice possible on national security or financial matters but they hold it very deep ideology of the Washington Consensus at home which is deregulation outsourcing deindustrialization and financialization and they believe in American exceptionalism abroad which is boots on the ground everywhere it’s our right to meddle everywhere in the world and the result of that is perpetual war you see it is shadowy and more ill-defined more ill-defined than what it’s more ill-defined than simply saying Wall Street or saying the military-industrial complex or saying Silicon Valley or the corporations it’s a symbiosis of all of the above here’s your summing up quote as long as appropriations bills get passed on time promotion lists get confirmed black or secret budgets get rubber-stamped special tax subsidies for certain corporations are approved without controversy as long as too many awkward questions are not asked the gears of the hybrid state will mesh noiselessly is that the ideology that is a government within a government that operates off the visible government and operates off the taxpayers but it doesn’t seem to be constrained in a constitutional sense by the government is there a solution to the way the system works in I think we’re starting to see some discord in the ideology of the factions that make up the deep state we’re seeing Silicon Valley jumps ship they are starting protests against the NSA we’re seeing the Tea Party bailing out against the deep state they may be wrong on many economic issues but I don’t think they’re necessarily wrong on this one so the public could be doing wise I think they are there’s a much more vivid debate going on in the country about surveillance ever since the revelations by Edward Snowden Mike Lofgren thank you very much for being with me thanks to the journalist Lee Fang we have another revelation into how the deep state enterprise works writing for the Republic report a nonpartisan nonprofit that investigates money in politics he takes up that controversial trade deal called the trans-pacific partnership that President Obama is trying to push through Congress with minimum debate and no amendments controversial because some of its provisions reportedly enable corporate power to trump representative government even go around domestic courts and local laws one is said to prevent governments from enacting safeguards against another bank crisis another to empower corporations to sue governments for compensation if save environmental protections or regulations on tobacco and drugs interfered with future profits because of the secrecy we don’t know everything that’s in the draft agreement senator Elizabeth Warren calls it a chance for these banks to get something done quietly out of sight that they could not accomplish in a public place with the cameras rolling and the lights on which brings us to two officials chosen by President Obama to lead those trade negotiations leafing reports that they received multi-million dollar bonuses as they left giant financial firms to join the government Bank of America gave this man Stephan Selig more than nine million dollars in bonus pay as he was nominated to become the Undersecretary of Commerce for international trade and this man Michael Froman got over four million dollars when he left Citigroup to become the current US Trade Representative now both are no doubt honorable men they are all honorable men but when push comes to shove and the financial interest of huge corporations are on the table we can only hope they will act as independent men not faithful servants of the deep state but given the secrecy we may never know according to Lee Fang many large corporations with a strong incentive to influence public policy give executives bonuses and other incentive pay they take jobs within the government among them Goldman Sachs Morgan Stanley JP Morgan Chase the Blackstone Group Fannie Mae Northern Trust Citigroup even provides an executive contract that Awards additional retirement pay upon leaving to take a full-time high-level position with the US government or regulatory body I’m not making this up you get a bigger incentive if you leave Wall Street to go regulate Wall Street so it is the Fox is groomed for the chicken coop and the deep state grows coming up on Moyers & Company a powerful new book breaks the code of dog-whistle politics dog-whistle politics doesn’t come out of animus at all it doesn’t come out of some desire to hurt minorities it comes out of a desire to win votes and in that sense I want to start using the term strategic racism it’s racism as a strategy it’s cold it’s calculating it’s considered it’s the decision to achieve one’s own ends here winning votes by stirring racial animosity and and here’s a hard difficult truth most racists are good people they’re not sick they’re not ruled by anger or raw emotion or hatred they are complicated people reared in complicated societies they’re fully capable of generosity of empathy of real kindness but because of the idea systems in which they are reared they’re also capable of dehumanizing others and occasionally of brutal violence at our website billmoyers.com remember to read the complete text of my Clough goons essay anatomy of the deep state and then tell us what you think I’ll see you don’t wait a week to get more moyers visit billmoyers.com for exclusive blogs funding is provided by and gumowitz encouraging the renewal of democracy Carnegie Corporation of New York celebrating 100 years of philanthropy and committed to 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April 2 (Bloomberg) — “Flash Boys: A Wall Street Revolt” Author Michael Lewis discusses his book, trading and the stock market on Bloomberg Television’s “Market Makers.” (Source: Bloomberg)
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yeah nobody I mean these are huge18:03numbers to make millions 5 million 1018:06million oh that’s a lifetime’s worth of18:07money you don’t ever need to work again18:10and everybody wanted that you know I18:12could quit working this year I made18:14enough money in one year I’ll never have18:15to work for the rest of my life and that18:17was the goal of everyone it appeared to18:19me huh this is money okay and Aspen’s18:27talking about making money making money18:29making money every year you’re making18:31money and then one year you blow up now18:33the difference between this being your18:35money and being a hedge fund is if this18:38is your money fantastic you’re making18:40money you’re down here you’re bankrupt18:42if it is somebody else’s money if it’s a18:44hedge fund that does this every year18:47they’re taking a percentage they’re18:50taking some of that as profit as their18:52bonus effectively so they make some of18:54that they make some more they make some18:56more all of this money they’re putting18:58into their own bank account and then19:01when they lose money that’s their19:03clients money that’s a lot it’s not19:04their money so you’ve got you can so you19:06can see why it’s very easy for people to19:08abuse this kind of thing I think it’s19:12fantastic the people who take risk19:15should be compensated for taking risk19:19but only if they are actually taking19:22risk themselves taking risk with other19:24people’s money you should not get19:26compensated for I’m sorry I did that the19:29Donald where that fits into economic19:32theory but taking risk with other19:33people’s money does not get rewarded19:34sadly though it does in this business19:38no but now19:46there was a moment when I thought when I19:50questioned why I was ever involved in19:53Wall Street goodbye I need it right now19:56on the double19:57hi that’s something I thought that20:01people would be more judicious and more20:04conservative in their lending and I was20:06involved in it and I thought well wait a20:08second these guys are out of control20:09totally the piece of software per se you20:13know that’s a sort of inanimate object20:15yes people used it but you know if20:18people had used it and put good20:20mortgages into it who never would have20:21caused a problem at all but when you put20:24you know mortgages that you have a20:26fairly high certainty that people cannot20:29repay and then half of all the mortgages20:32issued in a given year that type of20:33mortgages yes the industry has gotten20:36out of control20:39trillions of dollars a year basically20:41went through that model these bonds20:46within two and three years of being20:47issued went from triple-a to20:50unwrite I mean just catastrophic20:51collapse a lot of trading firms that20:55kept these the riskier pieces in their20:58portfolio saw them drop to next to21:00nothing and given the leverages the21:02amount of leverage under the amount that21:03the banks had borrowed they were21:05suddenly in a financial panic21:14Saturday after midnight still studying21:17I know long hours will not stop when I21:20enter a future job as a client21:27because I was primarily a technologist I21:30did not fully understand what was going21:32on I think part of my motivation21:34post-crash for becoming a quant is to21:37gain that understanding having been21:39through the personal experience of21:41seeing the destruction of my firm looked21:45again at my resume that I put out there21:48the same headhunter called again today21:51to see if I would like to take a job in21:53my former field as a financial21:55technologist I declined again of course22:01no invitation for a quanzhou Piett22:13people that are in the business right22:15now probably refuse to talk to the22:17public if they were to talk to the press22:18they would be fired22:19so only limited few people in the22:22business have the option of talking to22:24the press once you’re in the world right22:28I mean your phones are ringing you know22:31from the moment I woke up in the morning22:32and I remembered you know a lot of these22:34guys I do quite well they try to wake me22:37up 6 o’clock oh I thought you were22:39asleep you know can you be up till 1122:41o’clock22:44you have to be wired you have to be22:47alert every second you have to be22:49engaged and and you have to be perfect22:52and you have to be right all the time22:54the software fails people lose millions22:57or billions can’t happen you can’t you23:00can’t be wrong you have to be perfect it23:01says it’s a lot of stress my wife was in23:07the business with me23:08we both would wake up in the morning and23:10describe similar nightmares phones were23:13ringing we couldn’t answer them and then23:15we sort of grew out of that and we both23:18realized that we didn’t know what day of23:21the week was that’s right boy there’s23:24always videos person departures Barclays23:27dangerously Pleasant read the planet23:30record is brought to you by the Deaf23:311.6% it wonder the up 1.2 percent23:35so is the CAC in Paris hey Joel boy23:43stirs23:50banking is completely lost touch with23:53its purpose its original purpose and is23:56now becoming dangerous23:57it used to be that when some of these23:59derivatives were first invented they24:01were to help your farmer for example24:03hedge the value of his crop so he was he24:06wasn’t speculating on the price of wheat24:08he was busy growing it now there are24:12more people trading these these24:14commodity derivatives and then are24:15actually involved in the production of24:17the commodity so which is completely24:20bizarre I know a lot and quite a lot of24:24people in this business who are feeling24:27a bit jaded now people are starting to24:31ask questions my nice friends I started24:35to ask questions about the role in24:36society you may be making lots of money24:38but are you is it something to tell your24:40grandchildren oh yeah I was a banker I24:42was there when I caused the the24:462008-2009 crisis etc what are they24:50actually doing with their lives or their24:52or just moving this money around this24:54isn’t necessary such a business to be24:56proud of I think that’s probably25:03planning 30 35 pounds responsibility is25:07just not a one-way street when it’s25:09successful you’re responsible well you25:10can’t be unresponsible when the same25:12same item is is a failure you have to25:15have some type of responsibility and I25:17could say I wasn’t but I was involved I25:21made a comfortable very comfortable25:23living and and I was proud of what I had25:28done I never I myself never saw this25:32kind of debacle25:38pretty big muscle to see a little Wilder25:43this is a you know they’re yellow on the25:46inside different color a chef and the25:50city loves this wild taste I only do it25:54for one chef because if I did too many25:56there wouldn’t be enough you know the25:59model is Hippocratic oath I will26:02remember that I didn’t make the world26:04and it doesn’t satisfy my equations26:06that’s obviously that’s it that’s about26:09having a a mature appreciation that26:13whatever you do that the models are26:15never going to be perfect26:16I will never sacrifice reality for26:18elegance without explaining why I have26:21done so so it’s again it’s a competition26:24between the real world and the elegant26:27world of mathematics and sometimes the26:28real world is just dirty26:31nor will I give the people who use my26:34model false comfort about its accuracy26:36instead I will make explicit its26:38assumptions and oversights quanta are26:41asked the following by some trader they26:43say well look you’ve just measured the26:45risk in this portfolio it’s too big okay26:48to quant back to the drawing board26:50I want you redoing numbers and come up26:52with a smaller risk it doesn’t mean26:55change the portfolio it means change the26:57maths to make it look less risky people27:00can use the models to hide risk though I27:06will use models boldly to estimate value27:08I will not be overly impressed by27:10mathematics people make finance too27:14mathematical so mathematical that many27:17people who have to implement the models27:19don’t understand what’s going on and27:21once you have too much mathematics it’s27:23difficult to see where the mistakes are27:25I understand that my work may have27:27enormous effects on society and the27:29economy many of them beyond my27:31comprehension so this is a serious27:34business it’s what it’s saying the27:37quantitative finance banking has become27:39so enormous it’s it’s outstripped all27:42other all other businesses and really it27:44should just be a service for these other27:46businesses rather than we are everybody27:49is now working to27:51she service the banks move is what it27:53feels like it’s it’s completely changed27:56the nature of the world always banking27:59again so there’s a nice little picture28:01of the book of me and Emanuel Derman28:06with our with our Karl Marx beards on28:08because obviously it’s it’s basically28:11that the inspiration was a kind of28:12communist manifesto you take the28:15combined the communist manifesto with28:17the Hippocratic oath and this is what28:19you’ve got when I first came to the28:21field I was sort of optimistic about28:23using quantitative methods on the28:24financial markets and I don’t think28:26they’re useless but them but I’m trying28:31to think how to say it I don’t think you28:32can use quantitative methods to explain28:34markets either people like borer28:37Einstein or Schrodinger or Fineman28:39discovered things that um that seem to28:42be God’s true for most you know even if28:44they’re they’re not 100 percent accurate28:45and I’m I don’t think that’s possible in28:48finance I sort of think it’s an illusion28:50it’s the world the financial world and28:53their world of people is changing the28:54whole time history doesn’t repeat itself28:57whereas in physics history repeats28:58itself all the time you can do the same29:00experiment over and over again so I29:02don’t know somewhere somewhere somewhere29:03after five or six years in the field I29:05began to realize that it wasn’t the same29:09thing as doing physics in physics if you29:11wake up in the morning and think of an29:13equation or think of some theory you29:16actually have a small hope in hell that29:18you might actually be right but in29:20finance if you write down some set of29:21assumptions and you look at yourself29:22honestly it may be useful but you know29:25it’s not going to be right in some29:27absolute sense29:30because you’re dealing with people and29:31and people don’t work that way29:43another weekend trying to remember all29:46the parts of the city I haven’t seen29:48since I started the course longing to29:51visit art galleries eat out every night29:53to live the day at the library seem to30:01have more hours than the normal 1230:06studying alone with other people doing30:08the same thing I feel like a monk in a30:11monastery it’s peaceful the library is30:14quite old sometimes we have to cover the30:17air-conditioner with old Soviet30:19mathematical journals from the 60s30:37once I dreamt of doing pure science30:40working on rocket ships working at a30:42small start-up company30:47there has to be a way to be creative as30:49a quant – like designing new financial30:51products and the math to price them30:59do you think it’s always possible for31:02people to express a worry they have31:05about the things they’re building or31:07writing it’s possible people may not31:09listen to them in the end most of these31:11people are employees people don’t always31:14listen to you but yeah it’s possible to31:16do it and I think people should do it31:17and I think people who use the model31:19should should understand that but I31:22don’t honestly believe that the models31:25are responsible for what happened in the31:28world I think what’s just one for what31:29happened in the world is that they’ve31:30been an increasing number of they’ve31:35been an increasing number of crises31:36since 1990 financial crises in the world31:38since 1994 and every time people are31:41used to people are used to constant31:44growth and acceleration and every time31:46it slowed down the government stepped in31:49and tried to stimulate it again by31:51lowering interest rates just like31:52they’re doing now and so you get these31:55sort of a rise and a collapse and then31:56people don’t like the collapse so they31:58lend money cheaply enforcer’ rise again32:00and each time the oscillations get32:02bigger and bigger and they doing exactly32:04the same I have no idea what’s the right32:06thing to do but they’re doing exactly32:07the same thing now which is trying to32:09stimulate the economy every time it32:11looks like it stops growing fast32:17it shocks me that as a person who runs32:20many businesses that we can talk about32:23an economy shrinking by 1% is also32:27growing by 1% is fantastic this32:31difference of 2% how can that difference32:34in 2% have such a big impact on the32:36world around us 1% plus or minus in my32:40businesses I won’t notice the economist32:42sir they think that they’re scientists32:45so they come up with these what they32:47call laws they’re not laws laws of32:51gravity that’s a law anything that Isaac32:54Newton comes up with it is a law but32:56when the Economist comes up it’s just a32:58framework an idea it may work it may not33:01sometimes it’s that’s not a law but they33:03think their laws and so they build up33:05this whole edifice of theory based upon33:09this very shaky foundations and they get33:11all sorts of nonsense coming out of it33:20let’s ease off33:25I think that the natural world is33:29something you learn to appreciate33:32through a struggle in the financial33:36world33:36you know money is a man-made phenomenon33:39right it’s like a game right where you33:41make the rules well money is a game that33:43people make the rules for but out there33:46the day-to-day activity is not about33:48making money the day-to-day activity33:50trying to grow an animal a healthy33:53animal or a group of healthy atoms33:55that’s a big difference34:04that is beautiful34:06believe it or not that is beautiful the34:08beautiful thing about this is it says34:09that in the risk-neutral34:11I’ve got to keep emphasizing this is the34:14risk-neutral version when mu equals R if34:18it was the real world if this was the34:20real version it would have some dim UD34:23T’s in it34:23now let’s do some manipulations now some34:25of these manipulations are34:26straightforward six over zet in which34:29case there are no Zed’s in there at all34:30if you say to me the d by d big t34:33version because we want them we are34:35trying to find the stochastic34:36differential equation not for log said34:39so you’re going to end up with new minus34:401/2 Sigma squared let me backtrack it a34:43wee bit here and we have a stochastic34:47differential equation for Z then we can34:51also write down stochastic differential34:52equation for F there was a very very34:57short period of time when conser in the35:00doghouse so to speak the people were35:01saying but all banking is changed35:03forever a Kwan serveth I’ve finished35:06there’ll be no more these credit35:08instruments and I said you know second35:10guys you really don’t know your history35:11you don’t know human nature this will35:14all blow over you know in a matter of35:16months because we’re back to the big35:17bonus is everything goes back to as it35:21was if people don’t complain now then it35:25serves them right when the next35:26financial crisis happens35:31twelve hours to go before the evening35:33classes start35:35I feel United with my classmates but the35:38enormous workload it’s actually the fees35:42that we’re trying to maximize right of35:44course we have to maximize returns we35:47have to do a good job in managing their35:49money otherwise where we’re going to do35:51pretty poorly at collecting those fees I35:54wanted to feel challenged again and35:56enrolled in a quant program35:58it cost me $60,000 tuition which means36:03more debt that I now have to take on the36:07incentive fee structure basically means36:10that maximizing the twr is like36:13maximizing fees think about that that’s36:16kind of tricky36:18this course is a year and a half36:20full-time one and a half years no salary36:24expenses living in downtown Manhattan36:26plus paying full-time tuition so no36:30alcohol for me not a drop at least till36:33the end of the first semester I can’t36:35afford to lose a day to a hangover36:37hardly any social life for the time36:39being36:43most of the other students are Asian or36:46East Europeans math is their first36:48language and our common language we36:51Americans are the minority maximizing36:55the number of times that we’re going to36:56penetrate the previous high-water mark36:59we’re actually maximizing incentive so37:02you can see that this this type of37:04optimization is very hedge fund like37:07does everybody get it so far37:12used to be the physicists were splitting37:14the atom whose splitting the atom these37:15days building bridges who is people37:18building bridges everybody wants to move37:19into this field scientific creativity is37:23becoming financial creativity which is37:25all of the bogus37:39Kwan’s are essential to modern banking37:41because so much of it is based upon new37:44techniques like the latest thing is the37:46algorithmic trading that high-frequency37:47trading for what you need math skills it37:52used to be you know historically you37:53just have like floor traders and brokers37:55you know screaming and shouting down on37:58the floor of exchanges and trading37:59stocks you know and the order came down38:01and they would run up and they sort of a38:03muscle there he added we’re a different38:05color jackets you know the classic38:06pictures we’ve we’ve all seen Matthew38:09Goldstein almost obscene list for PES38:12below Reuters do same from the ears to38:15the Kefauver format high-frequency38:16trading on cotton the reality is so much38:20of this doesn’t even take place there I38:22mean that’s becoming such a lesser part38:24of trading in what goes on it goes on in38:26the back rooms and it goes on in these38:27these modeling’s where these programs38:29are put together by computer geeks38:31basically so high-frequency trading is38:33just about taking all this data38:35analyzing very very rapidly and then38:37putting on trays that may last38:38milliseconds what worries me the most is38:42I was disturbed to hear that some firms38:45get faster access to the markets than38:50other people I forget what they call it38:52now but people get like a tenth of a38:55second advantage big firms which i think38:57is unfair hedge funds try and get the39:00black boxes as close to an exchange as39:02possible because it takes time for the39:06signal to get from the black box to the39:09exchange to buy or to sell now of course39:11that is dictated by the speed of39:13lightning39:14now we’re talking about trading at the39:16speed of light39:19the classic crash was the 87 the 19th of39:25October 1987 crash that happened within39:27a day all that the big move the 20% fall39:30and S&P 500 was within a day the next39:33crash could be within minutes so what is39:36the black box a black box is just39:39something that has it has inside some39:41kind of formula39:43maybe secret or maybe not that takes in39:45lots of data and the data might be stock39:50prices and might be other information39:51and it tells you what to trade what to39:54buy and sell and my favorite is is40:00Google search terms trading based on40:04what people are searching for it’s not a40:13black box in the sense that um you know40:16if you if you saw the algorithms you40:18could fit what you want you and me might40:20not be able to figure it out but but40:21wiser minds maybe could and computers40:23can certainly read it so it’s a black40:25box in a sense that it’s almost hard for40:26the human mind to get their arms or you40:29know wrap themselves around to really40:30understand what’s going on40:36and you know people have said for years40:38that Goldman itself is a black box we40:41don’t really know how it makes all this40:42money in the billions of dollars and you40:44know the big bonuses we hear about the40:46New York Stock Exchange building is big40:47facility out in New Jersey which is you40:49know right near in New York and and40:51basically it’s being built for40:52high-frequency traders so they can have40:53their equipment very close in a very can40:56you know tightly knit factory40:58essentially to do high-frequency trading41:00well who gets to have their server41:02where’s there going to be a lottery you41:04know you know does someone pay more to41:06get closer I mean it’s sort of a it’s41:08sort of absurd when you think about this41:10is what it’s come down to the41:12battleground is ultimately going to be41:14who has the most resources who can pay41:17the best salaries to hire the best41:19brains in reality we’re talking maybe41:21about a dozen or so really top players41:22you know and not everyone can be a41:24customer of goldman sachs not everyone41:26can be a customer of morgan stanley or41:28no berkeley also it does the the high41:32frequency trading means people more41:33concerned with the price of something41:36and not its value value means what it’s41:39really it’s really worth price is just41:43what people buy and sell for and if you41:45buy something now sell is second or two41:49later all you care about is the price41:51you sold it for is greater than the41:52price you bought it for it’s actual41:54value who cares it sort of flies in the41:57face of what we sort of think about what41:59what the what the markets are really42:01about the companies themselves almost42:03don’t matter what they do doesn’t matter42:05it’s just the fact which way their42:07stocks move is all that matters and42:10what’s sort of great thing about it that42:13I’ve I’ve seen from the standpoint is42:15the systemic risk that might be involved42:16it’s so much of this trading just takes42:19automatically and just takes place so42:21quickly that the the human element gets42:24more and more divorced from it I mean42:25the human beings are obviously42:26responsible for for writing the programs42:29but there’s no human being intercepting42:31between these trades and we saw this a42:33year ago with United Airlines there was42:35a false of bankruptcy rumor some wire42:37service inadvertently and transmitted an42:40old story about a UI42:41bankruptcy filing the problem is all42:45these news reading algorithms saw that42:47and immediately started sell sell sell42:49in a matter of minutes United Airlines42:51stock is cut in half that is clearly a42:53case where the computers have gone wild42:59banking is taking over the entire planet43:01and is having such a major impact on the43:05man in the street and it really should43:07not banking is supposed to be to take43:09money from people with too much to give43:12to people with too little who maybe want43:14to start a business if you’re a business43:16idea but that’s not what banking is43:18about anymore43:19banking is just about gambling on these43:20these numbers not realizing that behind43:24these numbers there are human beings43:26with jobs43:34there’s always been a joke about the New43:37York Stock Exchange becoming a museum at43:38some point and they’ll just have it for43:40like a show there and people running43:42around this is the way we used to trade43:43stocks you know isn’t it so quaint in43:45everything at the same time one can43:58argue though that if there’s this big44:01backlash in high-frequency trading44:02we may see revival to some form of human44:05element inside that people may say you44:07know as flawed as human beings are we44:10don’t want to give everything over to44:11the machines either44:15just walk past a crowded Wall Street44:18full of Chinese tourists asking me if44:20this was the actual stock exchange Wall44:25Street as a location is not any longer44:28what it was many banks moved their front44:31offices uptown and their back offices to44:34newer and cheaper spaces in New Jersey44:37now deutsche bank is the only major firm44:40left on Wall Street proper nearby is44:43Goldman Sachs44:45with no name on the door also about to44:48move there are almost no large firms44:51headquartered in the neighborhood that44:53was the cradle of American Finance only44:56the New York Stock Exchange remains its44:59facade one of the most iconic symbols of45:01global capitalism45:19I’m always trying to encourage young45:21people to do what I’m doing I mean it’s45:23a young person’s you know it’s pretty45:25some pretty physically intensive they45:33really haven’t grown that much I may not45:39make it to Christmas no I like a bigger45:44we sell a much we typically sell a much45:46bigger oyster right what do you find45:48more satisfying45:50well software is much more mental you45:53know the pleasure in the mental exertion45:56is pretty intense I get million lines of45:58software’s a lot – man you have it all45:59memorized right and there’s a pleasure46:01of like ask ruble Scrabble doing that46:04kind of word puzzle kind of thing uh46:07although it’s not that healthy you sit46:09in front of a machine you have the46:10terminal face effect you know it’s not46:13the same as this oh yeah this is pretty46:15uh not good I mean day like today pretty46:19idyllic right you’re just out in the46:20water a nice feeling bringing food and I46:25think we we still about 150,000 oysters46:29which is uh that’s $100,000 you know of46:35course I live off interest you know so I46:39don’t this is nice to have I make some46:42pocket money etc etc and the overhead46:45here is pretty small46:49you have to come to grips with nature46:51like I these these oysters should be46:53bigger every year the ones that I pick46:55in September and October are ready by46:58November why they aren’t I don’t know47:00and there’s nothing you can do about it47:01right we’re in software you can do47:03something about everything47:04you can modify you can get you can creat47:07make you know this virtual world you can47:09make what you want here you know you47:12have to live constrained by the real47:16world
Economist Michael Hudson explains how economics lead to Trump and the need for Revolution.
You can’t rule in favor of the Wall Street donor class and still have a recovery.
Jordan Belfort otherwise known as the “Wolf of Wall Street”, pleaded guilty to fraud and related crimes in connection with stock-market manipulation and running a boiler room as part of a penny-stock scam
Transcript00:00the Joe Rogan experience no well it you00:05get compared to him a lot and one in one00:09way I really saw that comparison was00:11your brilliant coverage of the financial00:13crisis and what was the the mechanisms00:16behind the scene of the financial crisis00:18and that I became a really big fan of00:20your work reading that because the that00:23I I think you covered that as well if00:25not better than anybody00:26oh well thanks yeah I mean so I I knew00:31nothing about any I couldn’t even00:32balance my checkbook when they assign me00:34to that story and and I had to start00:38basically from square one and I was00:41calling people and saying things like00:44can you tell me something about00:45something that I’ll understand you know00:47it’s real cold calling investment banks00:49and literally saying that and I finally00:51got a guy to have lunch with me and he00:56said your problem is that you’re trying00:59to understand this as an economic story01:01once you look at it as a crime story01:04you’ll get it and and from that point01:08forward I I totally I felt like like I01:11started to understand the whole01:13mechanism in the subprime mortgage scam01:16it really was a scam it’s really it’s01:18really just a massive corporatized01:21version of like selling oregano as weed01:26basically they they took stuff that01:30these is incredibly worthless highly01:33risky mortgage loans right you know they01:36would give out loans to everybody with a01:38pulse you know whether you had a job or01:41not whether you were a citizen or not01:43didn’t matter poor thing was to get the01:45loan immediately sell it off chop it up01:48turn it into securities and then they01:50used this highly advanced sort of01:54mathematical trick to turn all that sort01:58of mortgage hamburger into triple-a02:00rated securities so you’d have like a02:02you know a junk rated mortgage like the02:05riskiest loan in existence something02:10that was so toxic that02:12country companies like country or I02:14wouldn’t want to hold on to it for more02:15than a week because they were afraid it02:17would that the stuff would blow up and02:18then they would sell it off to like a02:21pension fund or you know an insurance02:24company in the form of a triple-a rated02:27security which you know is as safe as a02:31US Treasury bond so it was a scam McGann02:35and the the the the metaphor of you know02:39baby power taking baby powder and02:42selling it as coke or whatever that02:44that’s exactly what it was they just02:45took worthless shit and sold it as02:47something that was that was gold and02:49they got they did it for years and years02:52and years and years and they they knew02:54that this gigantic huge bubble of risk02:58and disaster was just accumulating and03:02that someday it was going to all explode03:04and cascade and and and ruin the economy03:07but everybody was trying to time it03:10right and and bet on when that would03:14happen and make their money before that03:16that Judgment Day came and it was it was03:20fascinating what’s it once I started to03:22learn about it it was just such a an03:23amazingly disgusting fascinating story03:27that it was just hard not to not to get03:30into it a crime story yeah think of it03:33as a crime story yeah no absolutely I03:36even got one guy gave me a book it was03:42called famous famous con artists in03:45history right it was like this little03:47tome it’s smaller than like the smallest03:49paperback and it was the biography of03:53this guy Victor Lustig was his name he03:56was famous because he sold the Eiffel03:58Tower twice alright and he he had this04:05this scam that he called I think it was04:09called the the the Hungarian box I’ll04:14have to go back and look but basically04:15what he would do is he would get on a04:18boat in New York and he had this sort of04:24beautiful mahogany box with04:25ranked on it that had two holes in it04:27and he would show all the guests that he04:30would put a blank piece of paper in one04:32and turn a crank and $100 bill would04:35come out the other end and he convinced04:39them all that it was a machine that made04:41money and everybody would offer him an04:45increasing amount of money for this04:47invention and he wouldn’t sell it until04:51the last day when he would sell it for a04:54you know forty or fifty thousand dollars04:55and then he would disappear and jump off04:56the boat and in France and never be seen04:58again people would yeah there it is05:00what’s it called yeah but but that’s05:08exactly what the Mortons picture let me05:10see his face05:13look at that fucking creep05:15[Laughter]05:16Wow let me see that box again Wow that05:22is crazy05:23so there yes so it was obviously fake05:26and and and but that’s what the mortgage05:28scam was they they they were taking05:32basically blank paper these these05:35subprime loans that belong to jander’s05:38who were gonna foreclose within ten05:41minutes all right and they were telling05:45people that oh we have this new05:47mathematical process that allows that05:49actually makes this stuff really safe05:51and you can put it in your in your05:56College endowment you can put in your05:58pension fund and so all these people you06:01know whose retirement monies were based06:04on securities we’re buying all this shit06:08that they thought was was triple-a rated06:11and that’s that’s how they woke up and06:12you know and in 2008-2009 and they found06:14their 401ks or were you know wiped out06:19by 40 percent or whatever it was my06:20neighbor really did I happen to him my06:23neighbor bought this plot of land and06:24had this dream to build his dream house06:27and he would go buy the plot of land and06:30he was always cleaning up and getting06:31ready and I was talking to him and then06:33boom 2008 happened he lost everything06:37and he would still go buy that plot06:40and cleanup and he and I would talk06:42about it and they just told me lost06:44everything06:45yeah so it’s never gonna happen huh yeah06:47no I think he I think he died he06:51eventually got really sick and they took06:53him out of his house and brought him06:55somewhere but I think he’s dead now but06:57yeah his his story was awful awful to07:01hear this guy who was in his 60s who had07:04got this piece of land with a nice view07:06and it’s like this is where I’m gonna07:07build my dream house and he had all this07:10money prepared for it all this money07:11saved away and he was ready to rock and07:14roll and then boom mmm it all went out07:17they just drained out somebody put a07:19hole in the bottom of the boat and07:20everything everything went to the bottom07:23of the ocean yeah and then he’d probably07:25got ripped off twice because his tax07:26dollars went to go bail out the guys who07:28you know you know who because some of07:31the some of the banks got stuck holding07:32some of this shit and rather than eat07:35the losses like your your friend did07:37they got the Federal Reserve to buy it07:40from them ya know and and you know or or07:44the Treasury how the fuck did they get07:47away with giving the CEOs bonuses during07:51that time yeah a giant bonuses during07:53the time where they they had to be07:55bailed out by the taxpayers yeah that07:57was another scam like so they were if08:01you looked at the fine print of all the08:02bailouts it’s basically said that you08:05had to repay the money by us by X time08:08before you could start paying people08:10exorbitant amounts of money again but a08:14lot of those a lot of those conditions08:16were never really followed and you know08:19the the conditions of repayment were08:22kind of glossed over and the the the08:27companies that they were supposed to be08:28able to pass these things called stress08:30tests which demonstrated that they were08:33back on solid footing again before they08:35paid people bonuses but the stress tests08:39were all fledged and you know I mean the08:41there were there was crime and08:44corruption a legality basically in every08:46direction during that whole period and08:48and08:49not just in the government but in in all08:52these companies as well geez yeah but08:55fascinating to follow yeah what was it08:58like covering that I mean how long did09:00you spend working on that seven years09:03probably yeah yeah well because one of09:06the things that I thought no that was09:07really interesting was I did my first09:13story about this and I got this09:16incredible reaction because it turns out09:19that the financial press there is nobody09:21in the financial press who writes for09:23ordinary people like it’s basically what09:26I was doing was a translation job I was09:27trying to basically take what had09:30happened and explain it in a way that a09:33person who knew nothing about finance09:35would be able to understand and it turns09:38out that nobody is doing that so all09:42these people who had questions about it09:44who who wanted to know what had happened09:46to their money or why don’t why didn’t09:49my house get foreclosed on or what it09:50you know what’s what’s a subprime09:52mortgage or anything you know there was09:57nobody else doing that work so I had09:59lots of it to do and it was really10:01interesting and I just kept doing it10:04that had to be depressing yeah oh yeah10:07of course10:07of course I mean most most investigative10:10reporting is depressing particularly10:14that because you mean a lot of it was10:16old people that oh my god old people10:19minorities I mean I did one story about10:22a bank in Maryland well it’s a National10:29Bank it’s it’s a bank that you know I10:31wouldn’t be surprised that a lot of10:34people listening how have their accounts10:35at this Bank they had to pay settlement10:39to the government because they were10:42intentionally targeting elderly black10:45people to sell subprime mortgages to and10:50they called the mud people10:51and there were all these these like10:53toxic emails going back and forth about10:55how stupid they were and how they’ll buy10:57anything etc etc the emails they call11:00them mud pee11:01yeah yeah and so they had to pay a11:03settlement to the government and but you11:06know the racial component of the of that11:08crash was something that I didn’t really11:10clue into until late but that was a big11:12part of it too11:13it was you know a lot of it involved11:18these mortgage lenders going into11:22particularly like lower middle-class11:24black neighborhoods and knocking on11:27doors where there’d be like an elderly11:29person at home and saying hey would you11:31like to refi your mortgage and you’ll11:34have a little bit of extra spending11:35money this month right and the person11:40won’t know anything about finance and11:42they’ll still sign this refinance deal11:44that allows them to save a little bit of11:46money each month not knowing that they11:49had just converted their fixed mortgage11:51into a floating mortgage and that is11:53seeing the interest rates changed you11:56know you’d have people who went from11:58paying $900 a month to paying $7,000 a12:02month right and suddenly they’re out in12:04the street and and you know the the12:08company that sold them the loan is long12:10gone by then they they’re not holding it12:12they as soon as they got her name on the12:15dotted line they sold it off to a bank12:17in New York who in turn again chopped it12:20up into hamburger and sold it probably12:21to you our pension fund or who or12:23whatever so there’s nobody she’d give a12:25complain to and you know yeah that stuff12:27was really depressing what was a feeling12:29like of having very little understanding12:31about finance and then immersing12:33yourself in it and now is vac sizing12:36that this is the underlying structure12:38that our society is Rhon that our money12:41is established through like this is this12:43is how we we sell houses and loans and12:47this is what we’re doing yes yeah no it12:50was it was fascinating I because before12:52that I was mostly covering like12:56elections right and again if you cover12:58elections it’s incredibly boring and you13:01never hear anything of substance and13:03it’s not terribly complicated and you13:05know one one the the Democrat says that13:08you know we want to help the middle13:10class and the Republican says we want to13:11protect America Family Values and that’s13:13pretty much the extent of the end13:15a challenge in terms of covering that13:17stuff and I always thought to myself you13:20know politics in America must be a lot13:22more complicated than this right there13:23must be some other hidden thing where13:28it’s incredibly complex and diabolical13:30and and you know the the real match13:33additions of power must be visible13:35somewhere and I think that you find that13:40when you when you start looking into howWall Street works how money works howcentral banking works how you know howthe concentration of wealth worksI mean basically the subprime scheme wasan effort to pull the remaining savingsout of the population right it justwasn’t you know in the old daysinvestment banks made their money bylending money to companies who wouldbuild factories and they would makestuff and sell it around the world andeverybody would make money and never youknow even even the population wouldwould would benefit from it but thatmanufacturing economy it’s all gone it’sso four C’s so you have thisfinancialized the economy and they haveno normal beneficial way to make moneyand all that all they can really do islook to see where is their money and howcan we get it and most people had moneyin their houses right like the the14:42accumulated savings of most people14:43whatever was left after the internet14:46crash in the 90s was in real estate and14:50that this was the scam by which they14:54took the wealth that was left in the14:58pockets of ordinary people and14:59transferred it to you know nine people15:03in Manhattan basically I mean that’s why15:05you have you know we told them when we15:07talk about wealth inequality now right15:10being a huge factor that you know the15:13top 95 I’m sorry the top 1% of the15:19population owns ninety percent of the15:21wealth in the country whatever it is15:23that’s a consequence of schemes like15:25this where they’re just there15:28they’re finding out where people have a15:30little bit of money and they’re15:32systematically coming up with scams to15:34move it from there to here with no15:37consequence no with no consequence and15:39that was the other part of the story15:40that I ended up having to cover later15:42which was you know the last time they15:45tried something like this like during15:47the SNL crisis which was also sort of a15:51giant fraud scheme also that involved15:53real estate lending and you know but15:56that the government after that actually15:58you know indicted 1800 people they put16:01800 people in jail they put a lot of you16:04know serious influential people on the16:06dock after that nobody nobody went to16:11jail after the stuff and there was and16:13people think that well they didn’t do16:16anything that was technically illegal no16:17bullshit there there was lots of stuff16:19that was that was brazenly criminally16:23illegal I mean they they committed fraud16:25on a broad scale but some of these16:27companies were into the things that wereeven worse than that I mean you takeHSBC HSBC admitted to laundering 850million dollars for a pair of Centraland South American drug cartelsincluding the Sinaloa cartel right whichis suspected in thousands of murderslike and you know they they admitted tothis activity they agreed to a deferredprosecution agreement with thegovernment where nobody did a day injail no individual had to pull out adime out of their own pockets to pay theshareholders pointed up 1.9 milliondollars but some of that was taxdeductible which means we paid some ofthat fine and and the only realpunishment with any teeth is that someof the executives had to partially defertheir bonuses for five years solaundering 850 million dollars for narcoterrorists gets you a total walk youknow that tells you basically everythingyou need to know about do we prosecutewhite-collar crime in this countrybasically no you know I mean that’s theanswerultimately that you find out and therewas paperwork that showed they knew itwas from the cartels oh yeah they if youif you look at the the agreement and youcan watch the thirst there’s there’s avideo of of Loretta Lynch and lanny18:00breuer because this is before laura18:02Loretta Lynch was Attorney General but18:03she was she was basically the head of18:07this deal they talked about the fact18:10that the HSBC branches because most of18:13this was done in Mexico hmx which was18:17the subsidiary company they had special18:20teller windows built to fit cash boxes18:24that the drug cartels were bringing into18:26the bank so basically you’ve seen the18:29scene the scene in Scarface where the18:31guys come in with duffel bags of cash to18:33the bank right and you know that’s like18:35a montage you know there’s that that18:37song I forget what song it is in the18:38background same thing these guys would18:40come into the the bank they would slide18:44in these boxes of cash one after the18:46other and that’s admitted activity the18:49banks signed off on this they’d you know18:50it’s not like they’re contesting it18:52they’re not saying we neither admitted18:53nor denied it’s it’s part of the deal so18:57and in they agreed to the amount18:59everything so yeah it was a one point19:04nine billion dollar settlement but you19:06know it’s not like it came out of the19:07pockets of the people who did it and19:09it’s not like any of the people who did19:11it are in jail it’s just you know a19:13thing that happened and you know that’s19:16five weeks of profit for the bank so19:18what what the fuck they don’t care right19:21did you see the documentary an inside19:24job yeah yep we’ve covered a lot of the19:27same territory yeah yeah that was a19:29sobering documentary where they’re19:31talking to the very people that caused19:33the financial crisis mm-hm and and19:35realizing that these people were19:37economics professors that eventually got19:39these jobs really lucrative jobs with19:42banks and how they finagled this system19:45and made it so it looked like these19:47things were appropriate ya know I talked19:50to the19:50some of the some of the things that they19:53invented that made this the crash19:54possible sounded like good ideas like19:58they they came up with this thing called20:00the credit default swap all right and I20:02won’t bore you with what that is exactly20:05but basically it’s a kind of insurance20:08where it’s it’s basically a bet it’s20:12hard to explain but it’s a way of quasi20:19insuring a product without having to20:22pony up a lot of money and the it’s it’s20:27called the derivative right and these20:31instruments are completely unregulated20:35can I put the secret default swap is20:37like you and I betting on whether or not20:43a third person’s house is going to burn20:48in a fire right like the old-school20:50insurance said that it had to be your20:53house in order for you to get insurance20:55on it this new form of quasi insurance21:00said that two totally disinterested21:01parties could have an interest in a21:03third thing that happens so it’s21:06basically gambling and on the one hand21:11it allowed people to create a whole lot21:15of capital which allowed them to lend21:16more money which theoretically allowed21:18people to buy more houses but in reality21:21it just created the system where all21:23these people had bets that were back and21:25forth on on all these properties that’s21:27one of the reasons why the when the21:30crash happened when when all those21:31mortgages started to fail it wasn’t just21:34the failures of those properties it was21:36all these people who were betting on21:37whether or not these people could could21:39pay their mortgages they started to lose21:42money and then there were people who had21:43bets on that who started to lose money21:45and it’s like this cascading whirlpool21:47of shit that happened and again it just21:51it started out as an idea to just create21:53more money to lend to lend and it turned21:56into this nightmare mechanical scenario22:00that just that created losses22:03you know in this almost apocalyptic22:05fashion and a lot of them had no idea22:08but that that was going to be the22:10eventualities22:14yeah it’s great it’s definitely crazy22:17stuff as a person who didn’t really22:19follow finance before how much does that22:21affected your life now like the way you22:24look at things I definitely pay a lot22:26more attention to the fine print when I22:30enter into any financial contract I22:34think about where I do my banking but22:38the reality is you just don’t have a22:40whole lot of choice in this country22:41anyway I mean it’s like everything else22:43there’s only a few companies left so22:47almost every bank that’s out there where22:51you can have a bank account in a22:52mortgage is is a bank that I’ve written22:55about some massive scandal before so22:58that that’s that’s a problem but yeah I23:03worry about it all the time I mean I23:04have friends in finance who call me and23:07they they tell me that you know that the23:11things that are incredibly unsafe and23:13that this that and the other could could23:14could happen and so I have an anxiety23:17level about things that I never had23:18before but apart from that yeah I mean23:22that’s a natural consequence of having23:26to spend 7 years looking at all these23:29horror stories that’s great it’s crazy23:31you spent their lunch time on it do you23:34see any other bubbles coming up23:36yeah people talk about that all the time23:40there’s a lot of a lot of negative press23:45about subprime auto loans for instance23:48which is it’s not exactly the same but23:52it’s it’s a similar thing I mean the23:53same basic scam of taking loans chopping24:00them up and then repackaging them as24:02something that’s more valuable than the24:04original loan you can do that with24:06anything any kind of credit you can do24:08it with credit cards you can do it with24:09aircraft loans you can do it with with24:11car loans you can do it with with home24:13mortgages24:15and so the the mechanism of taking24:18things that are are toxic and risky and24:22making them look like triple-a is still24:25is still part of the economy and it’s24:30everywhere the plus side of that is that24:33there’s more credit available you know24:36almost anybody can get a credit card or24:38even if you’ve had screwed up credit you24:39can get a car you know I mean there’s24:42this put us on this like endless cycle24:44of build-up bubble collapse build-up24:46bubble collapse rebounding collapse24:49again absolutely I mean I think that’s24:51that’s that’s why I can’t you have to be24:55nervous about the you know the24:57skyrocketing stock exchange because we25:01verified yeah I mean you should be right25:03do you are you heavily invested in and25:05I’ve got some in there I just did when25:07when the whole you know when Trump was25:09saying the economy has never been better25:10look at the stock market stock market’s25:12killing it always do and then it’ll have25:14a bad day and okay well I thought we’re25:16doing great like what’s going on with25:18this bad day can you not control these25:19bad days right like what’s happening25:21here right if you’re if you’re in25:23control the good days you’re also in25:24control the bad days right yeah of25:26course of course it just it seems it25:29seems super suspicious yeah and and in25:32the old days you’d have a lot of25:34confidence that well the stock market25:37always eventually goes up so yeah25:40there’s gonna be bad days but it’ll go25:42back but the problem is the underlying25:43economy in America it just isn’t all25:46that hot you know like we’re like what25:48do we really make in this country what25:50what we’re where’s the floor right like25:53we have we have some industries that25:55sort of perform well but if you know25:58periodically we go through these bubbles26:00that are based on nothing more than26:01enthusiasm you know in the 90s it was26:04the the tech bubble right where people26:08like Alan Greenspan would say things26:10like well we have a new paradigm in26:11economics right so it doesn’t matter26:15whether a company hasn’t shown any26:17ability to make money or26:21you know has no reasonable profit and26:25loss statements it’s just if it’s a good26:27idea that the stock is sound and26:30everybody should invest in it and the26:32stock market is going to continually go26:34go up so don’t worry about it of course26:37that doesn’t happen everybody but it26:39blows up everybody loses their shirt but26:41what what do they do the Fed lowers26:44interest rates basically allows Wall26:46Street to recapitalize drink itself26:49sober and they plunge into the next the26:52next madness which is mortgages and once26:55again you have Alan Greenspan saying hey26:58you know real estate is a great bet it’s27:01you know it’s going to continually27:02ascend people should use their homes as27:05ATM machines you know you should you27:08should consider refinancing your house27:10so that you can get a little bit of27:11extra cash and and this is this was27:14actually the message they sent to27:15America and again it creates as27:17artificial mania27:19where the economy is stoked artificially27:23to gigantic dimensions but it’s not27:27based on anything and so when when it27:30crashes when you finally get like any27:33Ponzi scheme it you know it depends it27:36depends on more new investors coming in27:38than old investors leaving right so27:40there’s always going to be that moment27:42when suddenly we don’t have as many new27:45ones as old ones and the instant that27:47happens it all goes kaboom right and27:50that’s what happened with with the27:53subprime market there was a moment in27:55time where they they just couldn’t keep27:58it going anymore they couldn’t find any28:00more new suckers though to get to sell28:03mortgages to and the mania ended and all28:06went splat and then it was amplified by28:08the fact that we have this system now of28:11people betting on credit that is legal28:16which creates more losses out of thin28:19air so yeah I’m terrified every time I28:22see this the stock market go up what’s28:25it based on is it based on our economy28:27actually doing well I don’t know I don’t28:29think so28:30you know I’m sorry I’m look like I’m28:33scaring you a little bit you’re28:34definitely scaring but I think that’s28:36good I think I need to be scared I tend28:39to take these things and just you know I28:41have financial advisors I let them28:43handle money right when I hear things28:45like this I just got Jesus well I I get28:48terrified when I hear about really smart28:49people getting scammed like yesterday we28:52were talking about theranos do you know28:54that a blood testing company that turned28:57out to be total horseshit no I didn’t28:59hear about this oh it’s great story it’s29:01it’s a story of one of those things29:03where you you find someone who you hope29:06exists and you build them up there was29:08this woman she looked like Steve Jobs29:11she wore a black turtleneck in every29:13photo and she was the richest ever29:18self-made woman she was worth four29:21billion dollars she had built this29:23company called theranos right out of29:25college she was like 19 when she started29:28the company it was a blood-testing29:30company that just required a small prick29:32of your blood to do complicated blood29:34analysis for diseases and things along29:36those lines29:36turns out it didn’t work at all mmm and29:38they faked a bunch of shit I’d spread29:42fraud a lot of people got their blood29:44tested it turned out to be you know they29:46were at risk for all these diseases and29:48warren buffett invested a hundred29:51million dollars I think 125 Betsy DeVos29:54more than 100 million dollars like all29:56these super wealthy people got scammed29:59Wow yeah when you find out that really30:01wealthy people write that do this for a30:04living30:05yeah Buffett does that for a living30:07right that he can get scammed out of a30:09hundred and twenty five million dollars30:12right right yeah and and Warren Buffett30:15his his mantra is supposed to be picking30:20the the absolute long term investment30:25right so it’s not he’s not like a stevie30:28colon type who just looks at the tape30:30and tries to time it just right so you30:32know you can you can make an investment30:35for ten seconds and come out with it30:37with a you know30:38if he if he’s investing in a company and30:40a and even he can be fooled that’s30:43that’s pretty terrible but look at Enron30:45I mean Enron was was another example of30:47the world’s best financial analysts30:49we’re looking at this company for a30:51decade and the the results were30:56completely ridiculous like it should30:58have been obvious to any layperson that31:00that these profit numbers couldn’t31:03possibly be real and it wasn’t until one31:08of those guys I think it was Jim Chanos31:11it was sort of a famous short seller I31:13mean I sort of said hey wait a minute31:15that there’s something up here but31:19people continually invested in these31:21companies and there’s just not a whole31:22lot of oversight that goes on with with31:27Wall Street and I think that’s that’s a31:29major lesson of you know the last 2031:33years is that is that there’s just not a31:36lot of eyes on on crime and in this area31:39another example is I’m sorry the the31:43who’s the guy scammed all the rich31:44people really made up Bernie Madoff yeah31:46I was gonna bring him up yes the most31:47egregious example right yeah yeah I mean31:49there are other there are other people31:51who did similar things but this guy31:54didn’t even make investments right you31:56know what I mean31:57like he he was literally just sort of31:59taking money and you know when someone32:01cashed out he would you know it was like32:04who’s that little girl throwing he had a32:09big you know pile of cash and you know32:11he would who take some man and throw32:13some out but if the SEC it had at any32:16time just looked at his books and said32:19what are you invested in it all would32:23have you know that whole house of cards32:25would have fallen and invest in anything32:27no and he wasn’t he wasn’t making trades32:29he wasn’t doing anything you know and32:32and there are a bunch of stories like32:35this there’s a great book called the32:38octopus which is about as somebody who32:39did a Madoff like scam another hedge32:42fund where same thing they weren’t32:45really making trades they were just sort32:46of creating phony profit and loss32:48statements and32:50and and creating records that look like32:53trades they could they could tell their32:55investors about but they weren’t32:56actually doing anything so if anybody32:58any expert at any time had just poke33:03their nose in into this person’s books33:06they would have seen it in ten seconds33:07that’s the mean that’s the amazing thing33:09about this you know not not to get back33:12to you know my my drug-dealing book but33:15this is one of the things that he says33:16which is that you know you can be in a33:20you know in a poor black neighborhood33:22and a couple of kids will be on a cell33:25phone and talking about selling ten33:27dollars worth of weed and they’ll be33:29picked up by cops you know within 2033:33minutes or something like that33:34meanwhile you know somebody like you33:37know Bernie Madoff can commit 10033:41million dollar frauds year after year33:43after year and not even do any to take33:46any effort to try to cover it up all33:48that well and get away with it well33:50Bernie’s big crime was that he ripped33:52off rich people yeah absolutely33:54if he had done the exact same thing to33:56poor people but he did was just it was33:58just too easy to call what he did a34:00crime versus what you were talking about34:02with these financial institutions right34:05yeah yeah if he if he had long if he34:07laundered it through a slightly more34:09legitimate process he he would have34:11gotten out flattened but the one of the34:13things that a lot of these guys these34:15scam artists get into it thinking that34:18they’re actually gonna be real hedge34:20funds and that they they have some stock34:23picking system that’s actually going to34:25make all their clients money and one of34:27the things they find out is that a they34:29suck they they they’re not outperforming34:31the market and they’re not that smart34:33but be that their clients can’t tell if34:36they just make up the numbers so there34:39there are a number of cases of people34:41who start out trying to be legitimate34:43and trying to be really real investment34:46advisors but they just end up turning it34:49to Bernie Madoff types because it’s just34:52easy there’s no there aren’t that many34:54people watching for it and34:56you know that that’s kind of scary too34:58well it seems like there’s so many35:01people doing it how could there be35:04enough people watching it right about35:06how many investment firms there are and35:08how many different people that are35:09involved in trading how could anybody be35:12watching all of it right yeah no there35:15but even even so even if you take that35:20into consideration then the number of35:22eyes that are that are on this world is35:24is ridiculously low electic take AIG all35:28right AIG was one of the world’s largest35:31companies at before before it crashed it35:35had like a hundred eighty thousand35:36employees it was it took advantage of35:41this weird loophole that allows35:42financial companies to essentially35:45choose their own regulator so because35:48because AIG had a thrift or Savings and35:53Loan that’s basically the same thing35:54they chose to be regulated by the OTS35:59which is the office of Thrift36:01Supervision36:02which is this tiny tiny little you know36:07office in Washington that oversees36:10basically Savings and Loan operations36:12and in in the OTS this is this is36:16actually true the they had exactly one36:19insurance expert on staff so essentially36:22with the world’s largest insurance36:23company was being regulated by a36:27government office that only had one36:29person who really understood insurance36:31and and even and even that person36:33wouldn’t have understood the the part of36:37the company that blew up which was36:39essentially an investment bank within36:42the insurance company that was creating36:44these sort of highly advanced sort of36:46derivative operations that know that36:50they just would not have been able to36:51understand that stuff so there the36:55government just does not place a lot of36:58resources into you know keeping an eye37:01on even the most basic things and when37:04you compare that to law enforcement in37:06other areas you know37:08is how many how many people do we have37:11you know worrying about back bank37:13robberies in this country or drugs right37:16or you know how many people are being37:19watched because their marijuana dealers37:21in other states I mean it dwarfs the37:24number of people who are watching for37:25economic crimes yeah one person yeah I37:30just love the the name of it office of37:33Thrift Supervision yeah sure it exists37:36anymore I think it was it was merged37:39into some other because there used to be37:42the OCC the officer of the Comptroller37:44of the currency and I think they created37:47a new regulator at out of all that after37:49the crash but but yeah and I chose its37:53regulator and its regulator you know was37:56totally overmatched didn’t couldn’t37:58understand shit and that’s one of the38:00reasons why the company blew up the38:02company also blew up because it was run38:04by insurance people who didn’t38:07understand the idea was basically Wall38:11Street’s bookie all these people were38:12betting all these investment banks were38:14betting on whether or not mortgages were38:16gonna fail or not and AIG was selling38:19the product that they could use to make38:23those bets essentially or they were38:24taking on insurance on packets of38:27mortgages so if they exploded you would38:30get a payout right it was it’s like it’s38:33like buying an insurance policy on your38:35neighbor’s house if it goes up in flames38:37you get paid on it you got paid AIG was38:39selling a product that allowed banks38:41essentially to buy insurance on on38:44houses on mortgages and if the if people38:48foreclosed if the mortgage has failed or38:52pools of mortgages failed if you if you38:56bought that kind of insurance you got38:57these huge payouts so people were38:59betting against mortgages basically and39:02AIG was taking all this book and but the39:06the heads of the company were oldschool39:08insurance executives who just didn’t39:10understand this sort of newfangled39:15complicated form of insurance and so39:18they would look at the numbers they were39:20being given and even they didn’t get it39:21didn’t they didn’t understand how how39:24exposed they were and so and all the39:27bets started going the wrong way39:28suddenly they’re being asked to pay out39:30billions of dollars and they’re like39:33wait where is this coming from so even39:36the companies were kind of clueless39:38about the shit that was going on it39:40turns out39:46[Applause]