Voters who throw their emotional weight into elections they know deep down inside won’t produce real change in their lives are also indulging in a kind of fantasy. That’s why voters still dream of politicians whose primary goal is to effectively govern and maintain a thriving first world society with great international ambitions. What voters don’t realize, or don’t want to realize, is that that dream was abandoned long ago by this country’s leaders, who know the more prosaic reality and are looking beyond the fantasy, into the future, at an America plummeted into third world status.

These leaders are like the drug lords who ruled America’s ghettos in the crack age, men (and some women) interested in just two things: staying in power, and hoovering up enough of what’s left of the cash on their blocks to drive around in an Escalade or a 633i for however long they have left. Our leaders know we’re turning into a giant ghetto and they are taking every last hubcap they can get their hands on before the rest of us wake up and realize what’s happened.

The engine for looting the old ghetto neighborhoods was the drug trade, which served two purposes with brutal efficiency. Narco-business was the mechanism for concentrating all the money on the block into that Escalade-hungry dealer’s hands, while narco-chemistry was the mechanism for keeping the people on his block too weak and hopeless to do anything about it. The more dope you push into the neighborhood, the more weak, strung-out, and dominated the people who live there will be.

In the new American ghetto, the nightmare engine is bubble economics, a kind of high-tech casino scam that kills neighborhoods just like dope does, only the product is credit, not crack or heroin. It concentrates the money of the population in just a few hands with brutal efficiency, just like narco-business, and just as in narco-business the product itself, debt, steadily demoralizes the customer to the point where he’s unable to prevent himself from being continually dominated.

In the ghetto, nobody gets real dreams. What they get are short-term rip-off versions of real dreams. You don’t get real wealth, with a home, credit, a yard, money for your kids’ college—you get a fake symbol of wealth, a gold chain, a Fendi bag, a tricked-out car you bought with cash. Nobody gets to be really rich for long, but you do get to be pretend rich, for a few days, weeks, maybe even a few months. It makes you feel better to wear that gold, but when real criminals drive by on the overpass, they laugh.

It’s the same in our new ghetto. We don’t get real political movements and real change; what we get, instead, are crass show-business manipulations whose followers’ aspirations are every bit as laughable and desperate as the wealth dreams of the street hustler with his gold rope. What we get, in other words, are moderates who don’t question the corporate consensus dressed up as revolutionary leaders, like Barack Obama, and wonderfully captive opposition diversions like the Tea Party—the latter a fake movement for real peasants that was born that night in St. Paul, when Sarah Palin addressed her We.

If American politics made any sense at all, we wouldn’t have two giant political parties of roughly equal size perpetually fighting over the same 5–10 percent swatch of undecided voters, blues versus reds. Instead, the parties should be broken down into haves and have-nots—a couple of obnoxious bankers on the Upper East Side running for office against 280 million pissed-off credit card and mortgage customers. That’s the more accurate demographic divide in a country in which the top 1 percent has seen its share of the nation’s overall wealth jump from 34.6 percent before the crisis, in 2007, to over 37.1 percent in 2009. Moreover, the wealth of the average American plummeted during the crisis—the median American household net worth was $102,500 in 2007, and went down to $65,400 in 2009—while the top 1 percent saw its net worth hold relatively steady, dropping from $19.5 million to $16.5 million.

The other reason is obvious: the bubble economy is hard as hell to understand. To even have a chance at grasping how it works, you need to commit large chunks of time to learning about things like securitization, credit default swaps, collateralized debt obligations, etc., stuff that’s fiendishly complicated and that if ingested too quickly can feature a truly toxic boredom factor.

So long as this stuff is not widely understood by the public, the Grifter class is going to skate on almost anything it does—because the tendency of most voters, in particular conservative voters, is to assume that Wall Street makes its money engaging in normal capitalist business and that any attempt to restrain that sector of the economy is thinly disguised socialism.

Our world isn’t about ideology anymore. It’s about complexity. We live in a complex bureaucratic state with complex laws and complex business practices, and the few organizations with the corporate willpower to master these complexities will inevitably own the political power. On the other hand, movements like the Tea Party more than anything else reflect a widespread longing for simpler times and simple solutions—just throw the U.S. Constitution at the whole mess and everything will be jake. For immigration, build a big fence. Abolish the Federal Reserve, the Department of Commerce, the Department of Education. At times the overt longing for simple answers that you get from Tea Party leaders is so earnest and touching, it almost makes you forget how insane most of them are.

My whole purpose in going to Nevada was to try to find someone in any of the races who had any interest at all in talking about the financial crisis. Everyone wanted to talk about health care and immigration, but the instant I even mentioned Wall Street I got blank stares at best (at one voter rally in suburban Vegas I had a guy literally spit on the ground in anger, apparently thinking I was trying to trick him, when I asked him his opinion on what caused AIG’s collapse). Parson, meanwhile, seemed obsessed with a whole host of intramural conservative issues that make absolutely no sense to me whatsoever—at one point he spent nearly an hour trying to explain to me the difference between people who call themselves conservative and people who are conservative. “You have people who say, ‘Well, I really think we ought to help people, but I’m a conservative,’ ” he says. “So it’s like, you can’t find anything in their statement that shows they’re a conservative. Do you see the distinction?”

Bachmann spelled this out explicitly in an amazing series of comments arguing against global integration, which showed that she believed the American economy can somehow be walled off from impure outsiders, the way parts of California are walled off from Mexico by a big fence. “I don’t want the United States to be in a global economy,” she said, “where our economic future is bound to that of Zimbabwe.”

The fact that a goofball like Michele Bachmann has a few dumb ideas doesn’t mean much, in the scheme of things. What is meaningful is the fact that this belief in total deregulation and pure capitalism is still the political mainstream not just in the Tea Party, not even just among Republicans, but pretty much everywhere on the American political spectrum to the right of Bernie Sanders. Getting ordinary Americans to emotionally identify in this way with the political wishes of their bankers and credit card lenders and mortgagers is no small feat, but it happens—with a little help.

What they are, and they don’t realize it, is an anachronism. They’re fighting a 1960s battle in a world run by twenty-first-century crooks. They’ve been encouraged to launch costly new offensives in already-lost cultural wars, and against a big-government hegemony of a kind that in reality hasn’t existed—or perhaps better to say, hasn’t really mattered—for decades. In the meantime an advanced new symbiosis of government and private bubble-economy interests goes undetected as it grows to exponential size and robs them blind.

The Tea Party is not a single homogenous entity. It’s really many things at once. When I went out to Nevada, I found a broad spectrum of people under the same banner—from dyed-in-the-wool Ron Paul libertarians who believe in repealing drug laws and oppose the Iraq and Afghan wars, to disaffected George Bush/mainstream Republicans reinventing themselves as anti-spending fanatics, to fundamentalist Christians buzzed by the movement’s reactionary anger and looking to latch on to the “values” portion of the Tea Party message, to black-helicopter types and gun crazies volunteering to organize the bunkers and whip up the canned food collection in advance of the inevitable Tea Party revolution.

So in one sense it’s a mistake to cast the Tea Party as anything like a unified, cohesive movement. On the other hand, virtually all the Tea Partiers (with the possible exception of the Ron Paul types, who tend to be genuine dissidents who’ve been living on the political margins for ages) have one thing in common: they’ve been encouraged to militancy by the very people they should be aiming their pitchforks at. A loose definition of the Tea Party might be fifteen million pissed-off white people sent chasing after Mexicans on Medicaid by the small handful of banks and investment companies who advertise on Fox and CNBC.

The Tea Partiers deny it today, but they were mostly quiet during all of those other bailout efforts. Certainly no movement formed to oppose them. The same largely right-wing forces that would stir up the Tea Party movement were quiet when the Fed gave billions to JPMorgan to buy Bear Stearns. Despite their natural loathing for all things French/European, they were even quiet when foreign companies like the French bank Société Générale were given billions of their dollars through the AIG bailout. Their heroine Sarah Palin enthusiastically supported the TARP and, electorally, didn’t suffer for it in the slightest.

SANTELLI: You could go down to minus two percent. They can’t afford the house.

KERNEN: … and still have forty percent, and still have forty percent not be able to do it. So why are they in the house? Why are we trying to keep them in the house?

SANTELLI: I know Mr. Summers is a great economist, but boy, I’d love the answer to that one.

REBECCA QUICK: Wow. Wilbur, you get people fired up.

SANTELLI: We’re thinking of having a Chicago Tea Party in July. All you capitalists that want to show up to Lake Michigan, I’m gonna start organizing.

From there the crowd exploded in cheers. That clip became an instant Internet sensation, and the Tea Party was born. The dominant meme of the resulting Tea Parties was the anger of the “water carriers” over having to pay for the “water drinkers,” which morphed naturally into hysteria about the new Democratic administration’s “socialism” and “Marxism.”

Again, you have to think about the context of the Santelli rant. Bush and Obama together, in a policy effort that was virtually identical under both administrations, had approved a bailout program of historic, monstrous proportions—an outlay of upwards of $13 to $14 trillion at this writing. That money was doled out according to the trickle-down concept of rescuing the bad investments of bank speculators who had gambled on the housing bubble.

The banks that had been bailed out by Bush and Obama had engaged in behavior that was beyond insane. In 2004 the five biggest investment banks in the country (at the time, Merrill Lynch, Goldman, Morgan Stanley, Lehman Brothers, and Bear Stearns) had gone to then–SEC chairman William Donaldson and personally lobbied to remove restrictions on borrowing so that they could bet even more of whatever other people’s money they happened to be holding on bullshit investments like mortgage-backed securities.

They were making so much straight cash betting on the burgeoning housing bubble that it was no longer enough to be able to bet twelve dollars for every dollar they actually had, the maximum that was then allowed under a thing called the net capital rule.

So people like Hank Paulson (at the time, head of Goldman Sachs) got Donaldson to nix the rule, which allowed every single one of those banks to jack up their debt-to-equity ratio above 20:1. In the case of Merrill Lynch, it got as high as 40:1.

This was gambling, pure and simple, and it got rewarded with the most gargantuan bailout in history. It was irresponsibility on a scale far beyond anything any individual homeowner could even conceive of. The only problem was, it was invisible. When the economy tanked, the public knew it should be upset about something, that somebody had been irresponsible. But who?

What the Santelli rant did was provide those already pissed-off viewers a place to focus their anger away from the financial services industry, and away from the genuinely bipartisan effort to subsidize Wall Street. Santelli’s rant fostered the illusion that the crisis was caused by poor people, which in this county usually conjures a vision of minorities, no matter how many poor white people there are, borrowing for too much house. It was classic race politics—the plantation owner keeping the seemingly inevitable pitchfork out of his abdomen by pitting poor whites against poor blacks. And it worked, big-time.

There have been a great many critiques of the Tea Party movement, which is often described as a thinly disguised white power uprising, but to me these critiques miss the mark. To me the most notable characteristic of the Tea Party movement is its bizarre psychological profile. It’s like a mass exercise in narcissistic personality disorder, so intensely focused on itself and its own hurt feelings that it can’t even recognize the lunacy of a bunch of middle-class white people nodding in agreement at the idea that Black History Month doesn’t do enough to celebrate nice white people.

They are, if you listen to them, the only people in America who love their country, obey the law, and do any work at all. They’re lonely martyrs to the lost national ethos of industriousness and self-reliance, whose only reward for their Herculean labors is the bleeding of their tax money for welfare programs—programs that of course will be consumed by ungrateful minorities who hate America and white people and love Islamic terrorists.

There’s a definite emphasis on race and dog-whistle politics in their rhetoric, but the racism burns a lot less brightly than these almost unfathomable levels of self-pity and self-congratulation. It would be a lot easier to listen to what these people have to say if they would just stop whining about how underappreciated they are and insisting that they’re the only people left in America who’ve read the Constitution. In fact, if you listen to them long enough, you almost want to strap them into chairs and make them watch as you redistribute their tax money directly into the arms of illegal immigrant dope addicts.

They are, if you listen to them, the only people in America who love their country, obey the law, and do any work at all. They’re lonely martyrs to the lost national ethos of industriousness and self-reliance, whose only reward for their Herculean labors is the bleeding of their tax money for welfare programs—programs that of course will be consumed by ungrateful minorities who hate America and white people and love Islamic terrorists.

There’s a definite emphasis on race and dog-whistle politics in their rhetoric, but the racism burns a lot less brightly than these almost unfathomable levels of self-pity and self-congratulation. It would be a lot easier to listen to what these people have to say if they would just stop whining about how underappreciated they are and insisting that they’re the only people left in America who’ve read the Constitution. In fact, if you listen to them long enough, you almost want to strap them into chairs and make them watch as you redistribute their tax money directly into the arms of illegal immigrant dope addicts.

So far, so good. But then things went off the rails. The resulting settlement was a classic example of nutty racial politics. It was white lawyers suing white lawyers (the lead counsel for the Anti-Discrimination Center, Craig Gurian, is a bald, bearded New Yorker who looks like a model for a Nation house ad) so that low-income blacks and Hispanics living close to New York City in places like Mount Vernon and Yonkers, none of whom were ever involved in the suit in any way, could now be moved to subsidized housing in faraway white bedroom suburbs like Mount Kisco and Croton-on-Hudson.

Meanwhile, for so heroically pushing for all this aid to very poor minorities, all the white lawyers involved got paid huge money. The Anti-Discrimination Center got $7.5 million, outside counsel from a DC firm called Relman, Dane & Colfax got $2.5 million, and EpsteinBeckerGreen, the firm that defended Westchester County, got paid $3 million for its services. “There wasn’t a single minority involved with the case,” says one lawyer who worked on the suit.

I ask him if experiences like that would color his opinion on, say, the deregulation of the financial services industry in the late nineties. “Absolutely,” he says. When I bring up the repeal of the Glass-Steagall Act (which prevented the mergers of insurance, investment banking, and commercial banking companies) and the 2000 law that deregulated the derivatives industry, Bock demurs. I’m not sure he knows what I’m talking about, but then he plunges forward anyway. In his opinion, he says, the deregulation of Wall Street was the right move, but it was just implemented too quickly.

“I think it needed to be done more gradually,” he says.

This is how you get middle-class Americans pushing deregulation for rich bankers. Your average working American looks around and sees evidence of government power over his life everywhere. He pays high taxes and can’t sell a house or buy a car without paying all sorts of fees. If he owns a business, inspectors come to his workplace once a year to gouge him for something whether he’s in compliance or not. If he wants to build a shed in his backyard, he needs a permit from some local thief in the city clerk’s office.

And, who knows, he might live in a sleepy suburb like Greenburgh where the federal government has decided to install a halfway house and a bus route leading to it, so that newly released prisoners can have all their old accomplices come visit them from the city, leave condom wrappers on lawns and sidewalks, maybe commit the odd B and E or rape/murder.

This stuff happens. It’s not paranoia. There are a lot of well-meaning laws that can be manipulated, or go wrong over time, or become captive to corrupt lawyers and bureaucrats who fight not to fix the targeted social problems, but to retain their budgetary turf. Tea Party grievances against these issues are entirely legitimate and shouldn’t be dismissed. The problem is that they think the same dynamic they see locally or in their own lives—an overbearing, interventionist government that seeks to control, tax, and regulate everything it can get its hands on—operates the same everywhere.

There are really two Americas, one for the grifter class, and one for everybody else. In everybody-else land, the world of small businesses and wage-earning employees, the government is something to be avoided, an overwhelming, all-powerful entity whose attentions usually presage some kind of financial setback, if not complete ruin. In the grifter world, however, government is a slavish lapdog that the financial companies that will be the major players in this book use as a tool for making money.

The grifter class depends on these two positions getting confused in the minds of everybody else. They want the average American to believe that what government is to him, it is also to JPMorgan Chase and Goldman Sachs. To sustain this confusion, predatory banks launch expensive lobbying campaigns against even the mildest laws reining in their behavior and rely on carefully cultivated allies in that effort, like the Rick Santellis on networks like CNBC. In the narrative pushed by the Santellis, bankers are decent businessmen-citizens just trying to make an honest buck who are being chiseled by an overweening state, just like the small-town hardware-store owner forced to pay a fine for a crack in the sidewalk outside his shop.

The insurmountable hurdle for so-called populist movements is having the nerve to attack the rich instead of the poor. Even after the rich almost destroyed the entire global economy through their sheer unrestrained greed and stupidity, we can’t shake the peasant mentality that says we should go easy on them, because the best hope for our collective prosperity is in them creating wealth for us all. That’s the idea at the core of trickle-down economics and the basis for American economic policy for a generation. The entire premise—that the way society works is for the productive rich to feed the needy poor and that any attempt by the latter to punish the former for their excesses might inspire Atlas to shrug his way out of town and leave the rest of us on our own to starve—should be insulting to people so proud to call themselves the “water carriers.” But in a country where every Joe the Plumber has been hoodwinked into thinking he’s one clogged toilet away from being rich himself, we’re all invested in rigging the system for the rich.

What’s accelerated over the last few decades, however, is just how thoroughly the members of the grifter class have mastered their art. They’ve placed themselves at a nexus of political and economic connections that make them nearly impossible to police. And even if they could be policed, there are not and were not even laws on the books to deal with the kinds of things that went on at Goldman Sachs and other investment banks in the run-up to the financial crisis. What has taken place over the last generation is a highly complicated merger of crime and policy, of stealing and government. Far from taking care of the rest of us, the financial leaders of America and their political servants have seemingly reached the cynical conclusion that our society is not worth saving and have taken on a new mission that involves not creating wealth for all, but simply absconding with whatever wealth remains in our hollowed-out economy. They don’t feed us, we feed them.

The same giant military-industrial complex that once dotted the horizon of the American states with smokestacks and telephone poles as far as the eye could see has now been expertly and painstakingly refitted for a monstrous new mission: sucking up whatever savings remains in the pockets of the actual people still living between the coasts, the little hidden nest eggs of the men and women who built the country and fought its wars, plus whatever pennies and nickels their aimless and doomed Gen-X offspring might have managed to accumulate in preparation for the gleaming future implicitly promised them, but already abandoned and rejected as unfeasible in reality by the people who run this country.

The reality is that neither of these narratives makes sense anymore. The new America, instead, is fast becoming a vast ghetto in which all of us, conservatives and progressives, are being bled dry by a relatively tiny oligarchy of extremely clever financial criminals and their castrato henchmen in government, whose main job is to be good actors on TV and put on a good show. This invisible hive of high-class thieves stays in business because when we’re not completely distracted and exhausted by our work and entertainments, we prefer not to ponder the dilemma of why gasoline went over four dollars a gallon, why our pension funds just lost 20 percent of their value, or why when we do the right thing by saving money, we keep being punished by interest rates that hover near zero, while banks that have been the opposite of prudent get rewarded with free billions. In reality political power is simply taken from most of us by a grubby kind of fiat, in little fractions of a percent here and there each and every day, through a thousand separate transactions that take place in fine print and in the margins of a vast social mechanism that most of us are simply not conscious of.

America’s dirty little secret is that for this small group of plugged-in bubble lords, the political system works fine not just without elections, but without any political input from any people at all outside Manhattan. In bubble economics, actual human beings have only a few legitimate roles: they’re either customers of the financial services industry (borrowers, investors, or depositors) or else they’re wage earners whose taxes are used to provide both implicit and explicit investment insurance for the big casino-banks pushing the bubble scam. People aren’t really needed for anything else in the Griftopia, but since Americans require the illusion of self-government, we have elections.

To make sure those elections are effectively meaningless as far as Wall Street is concerned, two things end up being true. One is that voters on both sides of the aisle are gradually weaned off that habit of having real expectations for their politicians, consuming the voting process entirely as culture-war entertainment. The other is that millions of tenuously middle-class voters are conned into pushing Wall Street’s own twisted greed ethos as though it were their own. The Tea Party, with its weirdly binary view of society as being split up cleanly into competing groups of producers and parasites—that’s just a cultural echo of the insane greed-is-good belief system on Wall Street that’s provided the foundation/excuse for a generation of brilliantly complex thievery. Those beliefs have trickled down to the ex-middle-class suckers struggling to stay on top of their mortgages and their credit card bills, and the real joke is that these voters listen to CNBC and Fox and they genuinely believe they’re the producers in this binary narrative. They don’t get that somewhere way up above, there’s a group of people who’ve been living the Atlas dream for real—and building a self-dealing financial bureaucracy in their own insane image.

Greenspan’s rise to the top is one of the great scams of our time. His career is the perfect prism through which one can see the twofold basic deception of American politics: a system that preaches sink-or-swim laissez-faire capitalism to most but acts as a highly interventionist, bureaucratic welfare state for a select few. Greenspan pompously preached ruthless free-market orthodoxy every chance he got while simultaneously using all the powers of the state to protect his wealthy patrons from those same market forces. A perfectly two-faced man, serving a perfectly two-faced state. If you can see through him, the rest of it is easy.

In his writings Greenspan unapologetically recalls being overwhelmed as a young man by the impression left by his first glimpses of the upper classes and the physical trappings of their wealth. In his junior year of college he had a summer internship at an investment bank called Brown Brothers Harriman:*

Prescott Bush, father of George H. W. Bush and grandfather of George W. Bush, served there as a partner before and after his tenure in the U.S. Senate. The firm was literally on Wall Street near the stock exchange and the morning I went to see Mr. Banks was the first time I’d ever set foot in such a place. Walking into these offices, with their gilded ceilings and rolltop desks and thick carpets, was like entering a sanctum of venerable wealth—it was an awesome feeling for a kid from Washington Heights.

Greenspan left NYU to pursue a doctorate in economics at Columbia University, where one of his professors was economist Arthur Burns, a fixture in Republican administrations after World War II who in 1970 became chief of the Federal Reserve. Burns would be Greenspan’s entrée into several professional arenas, most notably among the Beltway elite.

Rand’s book Atlas Shrugged, for instance, remains a towering monument to humanity’s capacity for unrestrained self-pity—it’s a bizarre and incredibly long-winded piece of aristocratic paranoia in which a group of Randian supermen decide to break off from the rest of society and form a pure free-market utopia, and naturally the parasitic lower classes immediately drown in their own laziness and ineptitude.

The book fairly gushes with the resentment these poor “Atlases” (they are shouldering the burdens of the whole world!) feel toward those who try to use “moral guilt” to make them share their wealth. In the climactic scene the Randian hero John Galt sounds off in defense of self-interest and attacks the notion of self-sacrifice as a worthy human ideal in a speech that lasts seventy-five pages.

It goes without saying that only a person possessing a mathematically inexpressible level of humorless self-importance would subject anyone to a seventy-five-page speech about anything. Hell, even Jesus Christ barely cracked two pages with the Sermon on the Mount. Rand/Galt manages it, however, and this speech lays the foundation of objectivism, a term that was probably chosen because “greedism” isn’t catchy enough.

Rationality is the recognition of the fact that existence exists, that nothing can alter the truth and nothing can take precedence over that act of perceiving it, which is thinking—that the mind is one’s only judge of values and one’s only guide of action—that reason is an absolute that permits no compromise—that a concession to the irrational invalidates one’s consciousness and turns it from the task of perceiving to the task of faking reality—that the alleged short-cut to knowledge, which is faith, is only a short-circuit destroying the mind—that the acceptance of a mystical invention is a wish for the annihilation of existence and, properly, annihilates one’s consciousness.

A real page-turner. Anyway, Alan Greenspan would later regularly employ a strikingly similar strategy of voluminous obliqueness in his public appearances and testimony before Congress. And rhetorical strategy aside, he would forever more cling on some level to the basic substance of objectivism, expressed here in one of the few relatively clear passages in Atlas Shrugged:

A living entity that regarded its means of survival as evil, would not survive. A plant that struggled to mangle its roots, a bird that fought to break its wings would not remain for long in the existence they affronted. But the history of man has been a struggle to deny and to destroy his mind …

Since life requires a specific course of action, any other course will destroy it. A being who does not hold his own life as the motive and goal of his actions, is acting on the motive and standard of death. Such a being is a metaphysical monstrosity, struggling to oppose, negate and contradict the fact of his own existence, running blindly amuck on a trail of destruction, capable of nothing but pain.

This is pure social Darwinism: self-interest is moral, interference (particularly governmental interference) with self-interest is evil, a fancy version of the Gordon Gekko pabulum that “greed is good.” When you dig deeper into Rand’s philosophy, you keep coming up with more of the same.

Rand’s belief system is typically broken down into four parts: metaphysics (objective reality), epistemology (reason), ethics (self-interest), and politics (capitalism). The first two parts are basically pure bullshit and fluff. According to objectivists, the belief in “objective reality” means that “facts are facts” and “wishing” won’t make facts change. What it actually means is “When I’m right, I’m right” and “My facts are facts and your facts are not facts.”

This belief in “objective reality” is what gives objectivists their characteristic dickish attitude: since they don’t really believe that facts look different from different points of view, they don’t feel the need to question themselves or look at things through the eyes of others. Since being in tune with how things look to other people is a big part of that magical unspoken connection many people share called a sense of humor, the “metaphysics” of objectivism go a long way toward explaining why there has never in history been a funny objectivist.

The real meat of Randian thought (and why all this comes back to Greenspan) comes in their belief in self-interest as an ethical ideal and pure capitalism as the model for society’s political structure. Regarding the latter, Randians believe government has absolutely no role in economic affairs; in particular, government should never use “force” except against such people as criminals and foreign invaders. This means no taxes and no regulation.

To sum it all up, the Rand belief system looks like this:

Facts are facts: things can be absolutely right or absolutely wrong, as determined by reason.

According to my reasoning, I am absolutely right.

Charity is immoral.

Pay for your own fucking schools.

Rand, like all great con artists, was exceedingly clever in the way she treated the question of how her ideas would be employed. She used a strategic vagueness that allowed her to paper over certain uncomfortable contradictions. For instance, she denounced tax collection as a use of “force” but also quietly admitted the need for armies and law enforcement, which of course had to be paid for somehow. She denounced the very idea of government interference in economic affairs but also here and there conceded that fraud and breach of contract were crimes of “force” that required government intervention.

She admitted all of this, but her trick was one of emphasis. Even as she might quietly admit to the need for some economic regulation, for the most part when she talked about “crime” and “force” she either meant (a) armed robbers or pickpockets or (b) governments demanding taxes to pay for social services:

Be it a highwayman who confronts a traveler with the ultimatum: “Your money or your life,” or a politician who confronts a country with the ultimatum: “Your children’s education or your life,” the meaning of that ultimatum is: “Your mind or your life.”

A conspicuous feature of Rand’s politics is that they make absolutely perfect sense to someone whose needs are limited to keeping burglars and foreign communists from trespassing on their Newport manses, but none at all to people who might want different returns for their tax dollar. Obviously it’s true that a Randian self-made millionaire can spend money on private guards to protect his mansion from B-and-E artists. But exactly where do the rest of us look in the Yellow Pages to hire private protection against insider trading? Against price-fixing in the corn and gasoline markets? Is each individual family supposed to hire Pinkertons to keep the local factory from dumping dioxin in the county reservoir?

Rand’s answer to all of these questions was to ignore them. There were no two-headed thalidomide flipper-babies in Rand’s novels, no Madoff scandals, no oil bubbles. There were, however, a lot of lazy-ass poor people demanding welfare checks and school taxes. It was belief in this simplistic black-and-white world of pure commerce and bloodsucking parasites that allowed Rand’s adherents to present themselves as absolutists, against all taxes, all regulation, and all government interference in private affairs—despite the fact that all of these ideological absolutes quietly collapsed whenever pragmatic necessity required it. In other words, it was incoherent and entirely subjective. Its rhetoric flattered its followers as Atlases with bottomless integrity, but the fine print allowed them to do whatever they wanted.

Rand’s objectivists were very strongly opposed to the very concept of the Federal Reserve, a quasi-public institution created in 1913 that allowed a federally appointed banking official—the Federal Reserve chairman—to control the amount of money in the economy.

When he was at Rand’s apartment, Greenspan himself was a staunch opponent of the Federal Reserve. One of Rand’s closest disciples, Nathaniel Branden, recalled Greenspan’s feelings about the Fed. “A number of our talks centered on the Federal Reserve Board’s role in influencing the economy by manipulating the money supply,” Branden recalled. “Greenspan spoke with vigor and intensity about a totally free banking system.”

Throughout the fifties and sixties Greenspan adhered strictly to Rand’s beliefs. His feelings about the Federal Reserve during this time are well documented. In 1966 he wrote an essay called “Gold and Economic Freedom” that blamed the Fed in part for the Great Depression:

The excess credit which the Fed pumped into the economy spilled over into the stock market—triggering a fantastic speculative boom.

Foreshadowing alert! In any case, during this same period Greenspan drew closer to Rand, who as self-appointed pope of the protocapitalist religion had become increasingly unhinged, prone to Galtian rants and banishments. One of her rages centered around Branden, a handsome and significantly younger psychotherapist Rand met when she was forty-four and Branden was nineteen. The two had an affair despite the fact that both were married; in a cultist echo of David Koresh/Branch Davidian sexual ethics, both spouses reportedly consented to the arrangement to keep the movement leader happy.

But in 1968, eighteen years into their relationship, Rand discovered that Branden had used his pure reason to deduce that a young actress named Patrecia Scott was, objectively speaking, about ten thousand times hotter than the by-then-elderly and never-all-that-pretty-to-begin-with Rand, and was having an affair with her without Rand’s knowledge.

Rand then used her pure reason and decided to formally banish both Branden and his wife, Barbara, from the movement for “violation of objectivist principles.” This wouldn’t be worth mentioning but for the hilarious fact that Greenspan signed the excommunication decree, which read:

Because Nathaniel Branden and Barbara Branden, in a series of actions, have betrayed fundamental principles of Objectivism, we condemn and repudiate these two persons irrevocably.

The irony of a refugee from Soviet tyranny issuing such a classically Leninist excommunication appears to have been completely lost on Rand. But now here comes the really funny part. Almost exactly simultaneous to his decision to sign this preposterous decree, Greenspan did something that was anathema to any good Randian’s beliefs: he went to work for a politician.

In 1968 he joined the campaign of Richard Nixon, going to work as an adviser on domestic policy questions. He then worked for Nixon’s Bureau of the Budget during the transition, after Nixon’s victory over Humphrey. This was a precursor to an appointment to serve on Gerald Ford’s Council of Economic Advisers in 1974; he later ingratiated himself into the campaign of Ronald Reagan in 1980, served on a committee to reform Social Security, and ultimately went on to become Federal Reserve chief in 1987. There is a whole story about Greenspan’s career as a private economist that took place in the intervening years, but for now the salient fact about Greenspan is that this is a person who grew up in an intellectual atmosphere where collaboration with the government in any way was considered a traitorous offense, but who nonetheless spent most of his adult life involved in government in one way or another. He told the New York Times Magazine in 1976 that he rationalized his decision to join the government thusly: “I could have a real effect.”

Toward the end of her life, even Rand began to wonder about Greenspan’s commitment to the faith, leading to one of the few genuinely salient observations she ever made in her whole silly life: “I think that Alan basically is a social climber,” she said.

This ability to work both sides of the aisle at the same time would ultimately amaze even Barbara Walters, whom Greenspan somehow managed to make his girlfriend in the seventies. “How Alan Greenspan, a man who believed in the philosophy of little government interference and few rules of regulation, could end up becoming chairman of the greatest regulatory agency in the country is beyond me,” Walters said in 2008.

How did it happen? Among other things, Alan Greenspan was one of the first Americans to really understand the nature of celebrity in the mass-media age. Thirty years before Paris Hilton, Greenspan managed to become famous for being famous—and levered that skill into one of the most powerful jobs on earth.

Alan Greenspan’s political career was built on a legend—the legend of the ultimate Wall Street genius, the Man with All the Answers. But the legend wasn’t built on his actual performance as an economist. It was a reputation built on a reputation. In fact, if you go back and look at his rise now, his career path has a lot less in common with economist icons like Keynes or Friedman than it does with celebrity con artists like L. Ron Hubbard, Tony Robbins, or Beatles guru Maharishi Mahesh Yogi.

Like the Maharishi, Greenspan got his foot in the big door by dazzling deluded celebrities with voluble pseudo-mystical nonsense. One of his big breaks came when a lawyer named Leonard Garment introduced him to Dick Nixon in 1968.

Greenspan was exceptionally skilled at pushing his image of economic genius, particularly since his performance as an economic prognosticator was awful at best. “He was supposedly the smartest man in the world,” laughs economist Brian Wesbury today. “He was the greatest, the Maestro. Only if you look at his record, he was wrong about almost everything he ever predicted.”

Fed watchers and Greenspan critics all seem to share a passion for picking out which of Greenspan’s erroneous predictions was most ridiculous. One of his most famous was his pronouncement in the New York Times in January 1973: “It’s very rare that you can be as unqualifiedly bullish as you can now,” he said. The market proceeded to lose 46 percent of its value over the next two years, plunging from above 1,000 the day of Greenspan’s prediction to 571 by December 1974.

Greenspan was even bad at predicting events that had already happened. In April 1975, Greenspan told a New York audience that the recession wasn’t over, that the “worst was yet to come.” The economy swiftly improved, and the National Bureau of Economic Research later placed the end of the recession at March 1975, a month before Greenspan’s speech.

The economy has a lot in common with the weather, and even very good economists charged with the job of predicting market swings can become victims of unexpected turns, just like meteorologists. But Greenspan’s errors were often historic, idiotic blunders, evidence of a fundamental misunderstanding of problems that led to huge disasters. In fact, if you dig under almost every one of the major financial crashes of our time, you can find some kind of Greenspan quote cheerfully telling people not to worry about where the new trends in the economy were leading.

Before the S&L crisis exploded Greenspan could be seen giving a breezy thumbs-up to now-notorious swindler Charles Keating, whose balance sheet Greenspan had examined—he said that Keating’s Lincoln Savings and Loan “has developed a series of carefully planned, highly promising and widely diversified projects” and added that the firm “presents no foreseeable risk to the Federal Savings and Loan Corporation.”

The mistake he made in 1994 was even worse. After a few (relatively) small-scale disasters involving derivatives of the sort that would eventually nearly destroy the universe in 2008, Greenspan told Congress that the risks involved with derivatives were “negligible,” testimony that was a key reason the government left the derivatives market unregulated. His misreading of the tech bubble of the late nineties is legendary (more on that later); he also fell completely for the Y2K scare and at one point early in the George W. Bush presidency actually worried aloud that the national debt might be repaid too quickly.

Greenspan’s solution was to recommend hikes in the Social Security tax, which of course is not considered a real “tax” (Reagan would hilariously later describe such hikes as “revenue enhancements”) because the taxpayer theoretically gets that money back later on in benefits. The thinking here was that in the early eighties, with so many baby boomers now in their prime earning years, the Reagan administration would hike payments to build up a surplus that could in twenty or thirty years be used to pay out benefits when those same baby boomers reached retirement age. The administration accepted those proposals, and the Social Security tax rate went from 9.35 percent in 1981 to 15.3 percent by 1990.

Two things about this. One, Social Security taxes are very regressive, among other things because they only apply to wage income (if you’re a hedge fund manager or a Wall Street investor and you make all your money in carried interest or capital gains, you don’t pay) and they are also capped, at this writing at around $106,000, meaning that wages above a certain level are not taxed at all. That means that a married couple earning $100,000 total will pay roughly the same amount of Social Security taxes that Lloyd Blankfein or Bill Gates will (if not more, depending on how the latter two structure their compensation). So if you ignore the notion that Social Security taxes come back as benefits later on, and just think of them as a revenue source for the government, it’s a way for the state to take money from working- and middle-class taxpayers at a highly disproportional rate.

Second, Greenspan’s plan to build up a sort of Social Security war chest for use in paying out benefits to retirees twenty years down the road was based on a fallacy. When you pay money into Social Security, it doesn’t go into a locked box that is separate from the rest of the budget and can’t be used for other government spending. After the Greenspan reforms, the Social Security Administration bought T-bills with that money, essentially lending the cash back to the government for use in other appropriations. So if, let’s say, your president wanted an extra few billion dollars or so of short-term spending money, he could just reach into the budget and take all that Social Security money, leaving whoever would be president two decades later holding not cash to pay out Social Security benefits, but government notes or bonds, i.e., IOUs.

And that’s exactly what happened. The recommendations ushered in after Greenspan’s commission effectively resulted in $1.69 trillion in new, regressive taxes over the next twenty years or so.

But instead of keeping their hands off that money and preserving it for Social Security payments, Reagan, Bush I, Clinton, and Bush II spent it—all of it—inspiring the so-called Social Security crisis of George W. Bush’s presidency, in which it was announced suddenly that Social Security, far from having a surplus, was actually steaming toward bankruptcy. The bad news was released to the public by then–Treasury secretary Paul O’Neill, who let it slip that the Social Security fund had no assets at all, and instead just had pieces of paper in its account.

To recap: Greenspan hikes Social Security taxes by a trillion and a half dollars or so, four presidents spend all that money on other shit (including, in George W. Bush’s case, a massive tax cut for the wealthy), and then, when it comes time to start paying out those promised benefits, Greenspan announces that it can’t be afforded, the money isn’t there, benefits can’t be paid out.

It was a shell game—money comes in the front door as payroll taxes and goes right out the back door as deficit spending, with only new payroll taxes over the years keeping the bubble from popping, continuing the illusion that the money had never left. Senator Daniel Patrick Moynihan, way back in 1983, had called this “thievery,” but as the scam played out over the decades it earned a more specific title. “A classic Ponzi scheme” is how one reporter who covered Greenspan put it.

Coming up with a scheme like this is the sort of service that endears one to presidents, and by the mid-eighties Greenspan got his chance at the big job. Reagan had grown disenchanted with Volcker. The administration apparently wanted a Fed chief who would “collaborate more intimately with the White House,” as one Fed historian put it, and they got him in Greenspan, whom Reagan put in the top job in 1987. Greenspan “struggled inwardly to contain his glee,” his biographer Tuccille wrote, and came into the job with great fanfare, including a Time magazine cover story that anointed him “The New Mr. Dollar.”

Proxmire kept at Greenspan, but it didn’t take. On August 11, 1987, Alan Greenspan was sworn in as Federal Reserve chairman, effectively marking the beginning of the Bubble Generation.

The shorthand version of how the bubble economy works goes something like this:

Imagine the whole economy has turned into a casino. Investors are betting on oil futures, subprime mortgages, and Internet stocks, hoping for a quick score. In this scenario the major brokerages and investment banks play the role of the house. Just like real casinos, they always win in the end—regardless of which investments succeed or fail, they always take their cut in the form of fees and interest. Also just like real casinos, they only make more money as the number of gamblers increases: the more you play, the more they make. And even if the speculative bubbles themselves have all the inherent value of a royal flush, the money the house takes out is real.

Maybe those oil futures you bought were never close to being worth $149 a barrel in reality, but the fees you paid to Goldman Sachs or Morgan Stanley to buy those futures get turned into real beach houses, real Maseratis, real Park Avenue town houses. Bettors chase imaginary riches, while the house turns those dreams into real mansions.

Now imagine that every time the bubble bursts and the gamblers all go belly-up, the house is allowed to borrow giant piles of money from the state for next to nothing. The casino then in turn lends out all that money at the door to its recently busted customers, who flock back to the tables to lose their shirts all over again. The cycle quickly repeats itself, only this time the gambler is in even worse shape than before; now he’s not only lost his own money, he’s lost his money and he owes the house for what he’s borrowed.

The basic idea behind the Fed’s regulation of the money supply is to keep the economy as healthy as possible by limiting inflation on the one hand and preventing recession on the other. It achieves this by continually expanding and contracting the amount of money in the economy, theoretically tightening when there is too much buying and inflation and loosening when credit goes slack and the lack of lending and business stimulation threatens recession.

The Fed gets its pseudo-religious aura from its magical ability to create money out of nothing, or to contract the money supply as it sees fit. As a former Boston Fed chief named Richard Syron has pointed out, the bank has even fashioned its personnel structure to resemble that of the Catholic Church, with a pope (the chairman), cardinals (the regional governors), and a curia (the senior staff).

The bank can also inject money into the system directly, mainly through two avenues. One is by lending money directly to banks at a thing called the discount window, which allows commercial banks to borrow from the Fed at relatively low rates to cover short-term financing problems.

The other avenue is for the Fed to buy Treasury bills or bonds from banks or brokers. It works like this: The government, i.e., the Treasury, decides to borrow money. One of a small group of private banks called primary dealers is contracted to raise that money for the Treasury by selling T-bills or bonds or notes on the open market. Those primary dealers (as of this writing there are eighteen of them, all major institutions, including Goldman Sachs, Morgan Stanley, and Deutsche Bank) on occasion sell those T-bills to the Fed, which simply credits that dealer’s account when it buys the securities. Through this circular process the government prints money to lend to itself, adding to the overall money supply in the process.

In recent times, thanks to an utterly insane program spearheaded by Greenspan’s successor, Ben Bernanke, called quantitative easing, the Fed has gotten into the habit of buying more than just T-bills and is printing billions of dollars every week to buy private assets like mortgages. In practice, however, the Fed’s main tool for regulating the money supply during the Greenspan years wasn’t its purchase of securities or control over margin requirements, but its manipulation of interest rates.

Here’s how this works: When a bank falls short of the cash it needs to meet its reserve requirement, it can borrow cash either from the Fed or from the reserve accounts of other banks. The interest rate that bank has to pay to borrow that money is called the federal funds rate, and the Fed can manipulate it. When rates go up, borrowers are discouraged from taking out loans, and banks end up rolling back their lending. But when the Fed cuts the funds rate, banks are suddenly easily able to borrow the cash they need to meet their reserve requirements, which in turn dramatically impacts the amount of new loans they can issue, vastly increasing the money in the system.

The upshot of all of this is that the Fed has enormous power to create money both by injecting it directly into the system and by allowing private banks to create their own new loans. If you have a productive economy and an efficient financial services industry that rapidly marries money to solid, job-creating business opportunities, that stimulative power of a central bank can be a great thing. But if the national economy is a casino and the financial services industry is turning one market after another into a Ponzi scheme, then frantically pumping new money into such a destructive system is madness, no different from lending money to wild-eyed gambling addicts on the Vegas strip—and that’s exactly what Alan Greenspan did, over and over again.

Alan Greenspan met with major challenges almost immediately after taking office in August 1987. The first was the stock market correction of October of that year, and the next was the recession of the early 1990s, brought about by the collapse of the S&L industry.

Both disasters were caused by phenomena Greenspan had a long track record of misunderstanding. The 1987 crash was among other things caused by portfolio insurance derivatives (Greenspan was still fighting against regulation of these instruments five or six derivative-based disasters later, in 1998, after Long-Term Capital Management imploded and nearly dragged down the entire world economy), while Greenspan’s gaffes with regard to S&Ls like Charles Keating’s Lincoln Savings have already been described. His response to both disasters was characteristic: he slashed the federal funds rate and flooded the economy with money.

Greenspan’s response to the 1990s recession was particularly dramatic. When he started cutting rates in May 1989, the federal funds rate was 9 percent. By July 1991 he had cut rates 36 percent, to 5.75 percent. From there he cut rates another 44 percent, reaching a low of 3 percent in September 1992—and then he held rates at that historically low rate for fifteen more months. He showered Wall Street with money year after year. When he raised rates again in February 1994, it was the first time he had done so in five years.

Here we have to pause briefly to explain something about these rate cuts. When the Fed cuts the funds rate, it affects interest rates across the board. So when Greenspan cut rates for five consecutive years, it caused rates for bank savings, CDs, commercial bonds, and T-bills to drop as well.

So Greenspan was aware that his policies were luring ordinary people into the riskier investments of the stock market, which by 1994 was already becoming overvalued, exhibiting some characteristics of a bubble. But he was reluctant to slow the bubble by raising rates or increasing margin requirements, because … why? If you actually listen to his explanations at the time, Greenspan seems to say he didn’t raise rates because he didn’t want to be a bummer. In that same Senate testimony, he admits to seeing that investors were chasing a false dream:

Because we at the Federal Reserve were concerned about sharp reactions in the markets that had grown accustomed to an unsustainable combination of high returns and low volatility [emphasis mine], we chose a cautious approach … We recognized … that our shift could impart uncertainty to markets, and many of us were concerned that a large immediate move in rates could create too big a dose of uncertainty, which could destabilize the financial system.

Translation: everybody was used to making unrealistic returns, and we didn’t want to spoil the party by instituting a big rate hike. (Cue Claude Rains in Casablanca after the Nazis shut down Rick’s roulette game: “But everybody’s having such a good time!”) Instead, Greenspan’s response to the growing bubble in the summer of 1994 was a very modest hike of one-half of one percentage point.

But Greenspan’s biggest contribution to the bubble economy was psychological. As Fed chief he had enormous influence over the direction of the economy and could have dramatically altered history simply by stating out loud that the stock market was overvalued.

And in fact, Greenspan in somewhat hesitating fashion tried this—with his famous December 1996 warning that perhaps “irrational exuberance” had overinflated asset values. This was spoken in the full heat of the tech bubble and is a rare example of Greenspan speaking, out loud, the impolitic truth.

It’s worth noting, however, that even as he warned that the stock market was overheated, he was promising to not do a thing about it. On the same day that he spoke about “irrational exuberance,” Greenspan said that the Fed would only act if “a collapsing financial asset bubble does not threaten to impair the real economy.” Since popping a bubble always impairs the real economy, Greenspan was promising never to do anything about anything.

In fact, far from expressing concern about “irrational” stock values, Greenspan subsequently twisted himself into knots finding new ways to make sense of the insane share prices of the wave of Worthless.com stocks that were flooding the market at the end of that decade. The same man who as early as 1994 was warning the FOMC about “a lot of bubble around” took to arguing that there was no bubble.

Greenspan’s eventual explanation for the growing gap between stock prices and actual productivity was that, fortuitously, the laws of nature had changed—humanity had reached a happy stage of history where bullshit could be used as rocket fuel. In January 2000 Greenspan unveiled a theory, which he would repeat over and over again, that the economy had entered a new era, one in which all the rules were being rewritten:

When we look back at the 1990s, from the perspective of say 2010, the nature of the forces currently in train will have presumably become clearer. We may conceivably conclude from that vantage point that, at the turn of the millennium, the American economy was experiencing a once-in-a-century acceleration of innovation, which propelled forward productivity … at a pace not seen in generations, if ever.

In a horrifyingly literal sense, Greenspan put his money where his mouth was, voting for the mania with the Fed’s money. An example: On November 13, 1998, a company called theglobe.com went public, opening at $9 and quickly jumping to $63.50 at the close of the first day’s trading. At one point during that day, the stock market briefly valued the shares in theglobe.com at over $5 billion—this despite the fact that the company’s total earnings for the first three quarters of that year were less than $2.7 million.

Four days after that record-shattering IPO, which clearly demonstrated the rabid insanity of the tech-stock tulipomania, Alan Greenspan again doused the market with lighter fluid, chopping rates once more, to 4.75 percent. This was characteristic of his behavior throughout the boom. In fact, from February 1996 through October 1999, Greenspan expanded the money supply by about $1.6 trillion, or roughly 20 percent of GDP.

Even now, with the memory of the housing bubble so fresh, it’s hard to put in perspective the craziness of the late-nineties stock market. Fleckenstein points out that tech stocks were routinely leaping by 100 percent of their value or more on the first day of their IPOs, and cites Cobalt Networks (482 percent), Foundry Networks (525 percent), and Akamai Technologies (458 percent) as examples. All three of those companies traded at one hundred times sales—meaning that if you bought the entire business and the sales generated incurred no expenses, it would have taken you one hundred years to get your money back.

Greenspan’s endorsement of the “new era” paradigm encouraged all the economic craziness of the tech bubble. This was a pattern he fell into repeatedly. When a snooty hedge fund full of self-proclaimed geniuses called Long-Term Capital Management exploded in 1998, thanks to its managers’ wildly irresponsible decision to leverage themselves one hundred or two hundred times over or more to gamble on risky derivative bets, Greenspan responded by orchestrating a bailout, citing “systemic risk” if the fund was allowed to fail. The notion that the Fed would intervene to save a high-risk gambling scheme like LTCM was revolutionary. “Here, you’re basically bailing out a hedge fund,” says Dr. John Makin, a former Treasury and Congressional Budget Office official. “This was a bad message to send. It basically said to people, take more risk. Nobody is going to stop you.”

When the Russian ruble collapsed around the same time, causing massive losses in emerging markets where investors had foolishly committed giant sums to fledgling economies that were years from real productivity, Greenspan was spooked enough that he announced a surprise rate cut, again bailing out dumb investors by letting them borrow their way out of their mistakes. “That’s what capitalism is supposed to be about—creative destruction,” says Fleckenstein. “People who take too much risk are supposed to fail sometimes.” But instead of letting nature take its course, Greenspan came to the rescue every time some juiced-up band of Wall Street greedheads drove their portfolios into a tree.

Greenspan was even dumb enough to take the Y2K scare seriously, flooding the markets with money in anticipation of a systemwide computer malfunction that, of course, never materialized. We can calculate how much money Greenspan dumped into the economy in advance of Y2K; between September 20 and November 10, 1999, the Fed printed about $147 billion extra and pumped it into the economy. “The crucial issue … is to recognize that we have a Y2K problem,” he said at the century’s final FOMC meeting. “It is a problem about which we don’t want to become complacent.”

Aside: a “put” is a financial contract between two parties that gives the buyer the option to sell a stock at a certain share price. Let’s say IBM is trading at 100 today, and you buy 100 puts from Madonna at 95. Now imagine the share price falls to 90 over the course of the next two weeks. You can now go out and buy 100 shares at 90 for $9,000, and then exercise your puts, obligating Madonna to buy them back at 95, for $9,500. You’ve then earned $500 betting against IBM.

The “Greenspan put” referred to Wall Street’s view of cheap money from the Fed playing the same hedging role as a put option; it’s a kind of insurance policy against a declining market you keep in your back pocket. Instead of saying, “Well, if IBM drops below ninety-five, I can always sell my put options,” Wall Street was saying, “Well, if the market drops too low, Greenspan will step in and lend us shitloads of money.” A Cleveland Fed official named Jerry Jordan even expressed the idea with somewhat seditious clarity in 1998:

I have seen—probably everybody has now seen—newsletters, advisory letters, talking heads at CNBC, and so on saying there is no risk that the stock market is going to go down because even if it started down, the Fed would ease policy to prop it back up.

“It’s a two-pronged problem,” says Fleckenstein. “Number one, he’s putting in this rocket fuel to propel the speculation. And number two, he’s giving you the confidence that he’s going to come in and save the day … that the Fed will come in and clean up the mess.”

The idea that Greenspan not even covertly but overtly encouraged irresponsible speculation to a monstrous degree is no longer terribly controversial in the financial world. But what isn’t discussed all that often is how Greenspan’s constant interventions on behalf of Wall Street speculators dovetailed with his behavior as a politician and as a regulator during the same period.

As chief overseer of all banking activity the Fed was ostensibly the top cop on the financial block, but during his years as Fed chief Greenspan continually chipped away—actually it was more like hacking away, with an ax—at his own regulatory authority, diluting the Fed’s power to enforce margin requirements, restrict derivative trades, or prevent unlawful mergers. What he was after was a sort of cynical perversion of the already perverse Randian ideal. He wanted a government that was utterly powerless to interfere in the workings of private business, leaving just one tool in its toolbox—the ability to funnel giant sums of money to the banks. He turned the Fed into a Santa Claus who was legally barred from distributing lumps of coal to naughty kids.

Greenspan’s reigning achievement in this area was his shrewd undermining of the Glass-Steagall Act, a Depression-era law that barred insurance companies, investment banks, and commercial banks from merging. In 1998, the law was put to the test when then–Citibank chairman Sandy Weill orchestrated the merger of his bank with Travelers Insurance and the investment banking giant Salomon Smith Barney.

The merger was frankly and openly illegal, precisely the sort of thing that Glass-Steagall had been designed to prevent—the dangerous concentration of capital in the hands of a single megacompany, creating potential conflicts of interest in which insurers and investment banks might be pressed to promote stocks or policies that benefit banks, not customers. Moreover, Glass-Steagall had helped prevent exactly the sort of situation we found ourselves subject to in 2008, when a handful of companies that were “too big to fail” went belly up thanks to their own arrogance and stupidity, and the government was left with no choice but to bail them out.

When a draft of Born’s concept release began circulating on the Hill in March and April of that year, Bill Clinton’s inner circle on economic matters—including former Goldman chief and then–Treasury secretary Bob Rubin, his deputy Gary Gensler, Greenspan at the Fed, and then–SEC chief Arthur Levitt—all freaked out. This was despite the fact that Born hadn’t even concretely proposed any sort of regulation yet—she was just trying to initiate a discussion about the possibility of regulation. Nonetheless, a furor ensued, and at a critical April 21, 1998, meeting of the President’s Working Group on Financial Markets—a group that includes primarily the heads of the Treasury (at the time, Rubin), the SEC (Levitt), the CFTC (Born), and the Fed (Greenspan)—the other members openly pressured Born to retrench.

“It was a great big conference table in this ornate room that the secretary of the Treasury had,” says Michael Greenberger, who at the time worked under Born as the head of the CFTC’s Division of Trading and Markets. “Not only were the four principals there, but everybody in the government who has any regulatory responsibility for financial affairs was there—the comptroller of the currency, the chairman of the FDIC, the Office of Thrift Supervision, the White House adviser, the OMB, the room was packed with people.

Born had complete legal authority to issue her concept release without interference from the Working Group, the president, or anyone else—in fact, the seemingly overt effort to interfere with her jurisdiction was “a violation, maybe even rising to the level of a criminal violation,” according to Greenberger. Despite these legally questionable efforts of Rubin and Greenspan, Born did eventually release her paper on May 7 of that year, but to no avail; Greenspan et al. eventually succeeded not only in unseating Born from the CFTC the next year, but in passing a monstrosity called the Commodity Futures Modernization Act of 2000, which affirmatively deregulated the derivatives market.

The new law, which Greenspan pushed aggressively, not only prevented the federal government from regulating instruments like collateralized debt obligations and credit default swaps, it even prevented the states from regulating them using gaming laws—which otherwise might easily have applied, since so many of these new financial wagers were indistinguishable from racetrack bets.

None of this fazed Greenspan, who apparently never understood what derivatives are or how they work. He saw derivatives like credit default swaps—insurance-like contracts that allow a lender to buy “protection” from a third party in the event his debtor defaults—as brilliant innovations that not only weren’t risky, but reduced risk.

“Greenspan saw credit derivatives as a device that enhanced a risk-free economic environment,” says Greenberger. “And the theory was as follows: he’s looking at credit derivatives, and he’s saying everyone is going to have insurance against breakdowns … But what he didn’t understand was that the insurance wasn’t going to be capitalized.”

In other words, credit default swaps and the like allowed companies to sell something like insurance protection without actually having the money to pay that insurance—a situation that allowed lenders to feel that they were covered and free to take more risks, when in fact they were not. These instruments were most often risk enhancers, not risk eliminators.

“It wasn’t like buying insurance, car insurance, life insurance, something else, where it’s regulated and the companies have to be capitalized,” Greenberger goes on. “These guys were selling insurance without being capitalized.” AIG, which imploded in 2008 after selling nearly a half billion dollars’ worth of insurance despite having practically no money to pay off those bets, would end up being the poster child for that sort of risk.

But this problem should have been obvious way before AIG, particularly to someone in Greenspan’s position. In fact, even by 1998, by the time LTCM was over, the country had already experienced numerous derivatives-based calamities: the 1987 crash, the Orange County bankruptcy of 1994, the Bankers Trust scandal of 1995, and LTCM. Nonetheless, Greenspan refused to see the danger. In March 1999, just months after he himself had orchestrated a bailout for LTCM, he said that “derivatives are an increasingly important vehicle for unbundling risk.” He then said he was troubled that the “periodic emergence of financial panics” had inspired some to consider giving regulators more power to monitor derivative risk, instead of leaving the banks to monitor risk on their own.

The same person who intervened to counteract the market’s reaction to the implosion of Long-Term Capital Management and the Russian ruble even had the balls to tell Congress that he, Alan Greenspan, did not have the right to question the wisdom of the market, when for instance the market chose to say that a two-slackers-in-a-cubicle operation like theglobe.com was worth $500 billion.

“To spot a bubble in advance,” he told Congress in 1999, “requires a judgment that hundreds of thousands of informed investors have it all wrong.” He added, with a completely straight face, “Betting against markets is usually precarious at best.”

Some said he was just naïve, or merely incompetent, but in the end, Greenspan was most likely just lying. He castrated the government as a regulatory authority, then transformed himself into the Pablo Escobar of high finance, unleashing a steady river of cheap weight into the crack house that Wall Street was rapidly becoming.

“He made that argument [about adjustable-rate mortgages] right before he started raising interest rates. Are you kidding me?” said one hedge fund manager. “All he was doing was screwing the American consumer to help the banks … If you had had people on thirty-year fixed mortgages, you wouldn’t have had half these houses blowing up, because mortgages would have remained steady. Instead … it was the most disingenuous comment I’ve ever heard from a government official.”

Greenspan’s frantic deregulation of the financial markets in the late nineties had led directly to the housing bubble; in particular, the deregulation of the derivatives market had allowed Wall Street to create a vast infrastructure for chopping up mortgage debt, disguising bad loans as AAA-rated investments, and selling the whole mess off on a secondary market as securities. Once Wall Street perfected this mechanism, it was suddenly able to create hundreds of billions of dollars in crap mortgages and sell them off to unsuspecting pension funds, insurance companies, unions, and other suckers as grade-A investments, as I’ll detail in the next chapter.

The amount of new lending was mind-boggling: between 2003 and 2005, outstanding mortgage debt in America grew by $3.7 trillion, which was roughly equal to the entire value of all American real estate in the year 1990 ($3.8 trillion). In other words, Americans in just two years had borrowed the equivalent of two hundred years’ worth of savings.

Any sane person would have looked at these numbers and concluded that something was terribly wrong (and some, like Greenspan’s predecessor Paul Volcker, did exactly that, sounding dire warnings about all that debt), but Greenspan refused to admit there was a problem. Instead, incredibly, he dusted off the same old “new era” excuse, claiming that advances in technology and financial innovation had allowed Wall Street to rewrite the laws of nature again:

Technological advances have resulted in increased efficiency and scale within the financial services industry … With these advances in technology, lenders have taken advantage of credit-scoring models and other techniques for efficiently extending credit to a broader spectrum of consumers.

The kinds of technological advances Greenspan was talking about were actually fraud schemes. In one sense he was right: prior to the 2000s, the technology did not exist to make a jobless immigrant with no documentation and no savings into an AAA-rated mortgage risk. But now, thanks to “technological advances,” it was suddenly possible to lend trillions of dollars to millions of previously unsuitable borrowers! This was Greenspan’s explanation for the seemingly inexplicable surge in new home buying.

The results of all these policies would be catastrophic, of course, as the collapse of the real estate market in 2007–8 would wipe out roughly 40 percent of the world’s wealth, while Greenspan’s frantic printing of trillions of new dollars after the collapse of the tech boom would critically devalue the dollar. In fact, from 2001 to 2006, the dollar would lose 24 percent of its value versus the foreign currencies in the dollar index and 28 percent of its value versus the Canadian dollar. Even tin-pot third world currencies like the ruble and the peso gained against the dollar during this time. And yet Greenspan insisted at the end of this period that the devaluation of the dollar was not really a problem—so long as you didn’t travel abroad!

The results of all these policies would be catastrophic, of course, as the collapse of the real estate market in 2007–8 would wipe out roughly 40 percent of the world’s wealth, while Greenspan’s frantic printing of trillions of new dollars after the collapse of the tech boom would critically devalue the dollar. In fact, from 2001 to 2006, the dollar would lose 24 percent of its value versus the foreign currencies in the dollar index and 28 percent of its value versus the Canadian dollar. Even tin-pot third world currencies like the ruble and the peso gained against the dollar during this time. And yet Greenspan insisted at the end of this period that the devaluation of the dollar was not really a problem—so long as you didn’t travel abroad!

So long as the dollar weakness does not create inflation … then I think it’s a market phenomenon, which aside from those who travel the world, has no real fundamental consequences.

No real fundamental consequences? For Greenspan to say such a thing proved he was either utterly insane or completely dishonest, since even the world’s most stoned college student understands that a weak dollar radically affects real wealth across the board: we buy foreign oil in dollars, and since energy costs affect the price of just about everything, being able to buy less and less oil with a dollar as time goes on makes the whole country that much poorer. It’s hard to overstate how utterly mad it is for a Fed chairman in the age of the global economy to claim that a weak currency only affects tourists. It’s a little bit like saying a forest fire only really sucks if you’re a woodpecker.

It sounds facile to pin this all on one guy, but Greenspan was the crucial enabler of the bad ideas and greed of others. He blew up one bubble and then, when the first one burst, he printed money to inflate the next one. That was the difference between the tech and the housing disasters. In the tech bubble, America lost its own savings. In the housing bubble, we borrowed the shirts we ended up losing, leaving us in a hole twice as deep.

It’s important to note that throughout this entire time, while Greenspan was printing trillions of dollars and manipulating the economy to an elaborate degree, he was almost completely unaccountable to voters. Except for the right of an elected president to nominate the Fed chief, voters have no real say over what the Fed does. Citizens do not even get to see transcripts of FOMC meetings in real time; we’re only now finding out what Greenspan was saying during the nineties. And despite repeated attempts to pry open the Fed’s books, Congress as of this writing has been unsuccessful in doing so and still has no idea how much money the Fed has lent out at the discount window and to whom.

Would running the restaurant like a legit business make more money in the long run? Sure. But that’s only if you give a fuck. If you don’t give a fuck, the whole equation becomes a lot simpler. Then every restaurant is just a big pile of cash, sitting there waiting to be seized and blown on booze, cars, and coke. And the marks in this game are not the restaurant’s customers but the clueless, bottomless-pocketed societal institutions: the credit companies, the insurance companies, the commercial suppliers extending tabs to the mobster’s restaurant.

In the housing game the scam was just the same, only here the victims were a little different. It was an ingenious, almost impossibly complex sort of confidence game. At the bottom end of the predator chain were the brokers and mortgage lenders, raking in the homeowners, who to the brokers were just unwitting lists of credit scores attached to a little bit of dumb fat and muscle. To the brokers and lenders, every buyer was like a restaurant to a mobster—just a big pile of cash waiting to be seized and liquidated.

The homeowner scam was all about fees and depended upon complex relationships that involved the whole financial services industry. At the very lowest level, at the mortgage-broker level, the game was about getting the target homeowner to buy as much house as he could at the highest possible interest rates. The higher the rates, the bigger the fees for the broker. They greased the homeowners by offering nearly unlimited sums of cash.

The falsification mania went in all directions, as Eljon and Clara found out. On one hand, their broker Edwards doctored the loan application to give Clara credit for $7,000 in monthly income, far beyond her actual income; on the other hand, Edwards falsified the couple’s credit scores downward, putting them in line for a subprime loan when they actually qualified for a real, stable, fixed bank loan. Eljon and his wife actually got a worse loan than they deserved: they were prime borrowers pushed down into the subprime hell because subprime made the bigger commission.

It was all about the commissions, and the commissions were biggest when the mortgage was adjustable, with the so-called option ARM being particularly profitable. Buyers with option-ARM mortgages would purchase their houses with low or market loan rates, then wake up a few months later to find an adjustment upward—and then perhaps a few years after that find another adjustment. The jump might be a few hundred dollars a month, as in the case of the Williams family, or it might be a few thousand, or the payment might even quadruple. The premium for the brokers was in locking in a large volume of buyers as quickly as possible.

Both the lender and the broker were in the business of generating commissions. The houses being bought and sold and the human borrowers moving in and out of them were completely incidental, a tool for harvesting the financial crop. But how is it possible to actually make money by turning on a fire hose and blasting cash by the millions of dollars into a street full of people with low credit scores?

This is where the investment banks came in. The banks and the mortgage lenders had a tight symbiotic relationship. The mortgage guys had a job in this relationship, which was to create a vast volume of loans. In the past those great masses of loans would have been a problem, because nobody would have wanted to sit on millions’ worth of loans lent out to immigrant glass cutters making nine dollars an hour.

Enter the banks, which devised a way out for everybody. A lot of this by now is ancient history to anyone who follows the financial story, but it’s important to quickly recap in light of what would happen later on, in the summer of 2008. The banks perfected a technique called securitization, which had been invented back in the 1970s. Instead of banks making home loans and sitting on them until maturity, securitization allowed banks to put mortgages into giant pools, where they would then be diced up into bits and sold off to secondary investors as securities.

The securitization innovation allowed lenders to trade their long-term income streams for short-term cash. Say you make a hundred thirty-year loans to a hundred different homeowners, for $50 million worth of houses. Prior to securitization, you couldn’t turn those hundred mortgages into instant money; your only access to the funds was to collect one hundred different meager payments every month for thirty years. But now the banks could take all one hundred of those loans, toss them into a pool, and sell the future revenue streams to another party for a big lump sum—instead of making $3 million over thirty years, maybe you make $1.8 million up front, today. And just like that, a traditionally long-term business is turned into a hunt for short-term cash.

But even with securitization, lenders had a limiting factor, which was that even in securitized pools, no one wanted to buy mortgages unless, you know, they were actually good loans, made to people unlikely to default.

To fix that problem banks came up with the next innovation—derivatives. The big breakthrough here was the CDO, or collateralized debt obligation (or instruments like it, like the collateralized mortgage obligation). With these collateralized instruments, banks took these big batches of mortgages, threw them into securitized pools, and then created a multitiered payment structure.

Imagine a box with one hundred home loans in it. Every month, those one hundred homeowners make payments into that box. Let’s say the total amount of money that’s supposed to come in every month is $320,000. What banks did is split the box up into three levels and sell shares in those levels, or “tranches,” to outside investors.

All those investors were doing was buying access to the payments the homeowners would make every month. The top level is always called senior, or AAA rated, and investors who bought the AAA-level piece of the box were always first in line to get paid. The bank might say, for instance, that the first $200,000 that flowed into the box every month would go to the AAA investors.

If more than $200,000 came in every month, in other words if most of the homeowners did not default and made their payments, then you could send the next payments to the B or “mezzanine”-level investors—say, all the money between $200,000 and $260,000 that comes into the box. These investors made a higher rate of return than the AAA investors, but they also had more risk of not getting paid at all.

Most shameful of all was the liberal allotment of investment-grade ratings given to combinations of subprime mortgages. In a notorious example, Goldman Sachs put together a package of 8,274 mortgages in 2006 called GSAMP Trust 2006-S3. The average loan-to-value in the mortgages in this package was an astonishing 99.21 percent. That meant that these homeowners were putting less than 1 percent in cash for a down payment—there was virtually no equity in these houses at all. Worse, a full 58 percent of the loans were “no-doc” or “low-doc” loans, meaning there was little or no documentation, no proof that the owners were occupying the homes, were employed, or had access to any money at all.

The ratings agencies were shameless in their explanations for the seemingly inexplicable decision to call time-bomb mortgages risk free for years on end. Moody’s, one of the two agencies that control the vast majority of the market, went public with one of the all-time “the dog ate my homework” moments in financial history on May 21, 2008, when it announced, with a straight face, that a “computer error” had led to a misclassification of untold billions (not millions, billions) of junk instruments. “We are conducting a thorough review of the matter,” the agency said.

Why didn’t it fix the grade on the misrated instruments? “It would be inconsistent with Moody’s analytical standards and company policies to change methodologies in an effort to mask errors,” the company said. Which translates as: “We were going to keep this hidden forever, except that we got outed by the Financial Times.”

In this world, everybody kept up the con practically until they were in cuffs. It made financial sense to do so: the money was so big that it was cost-efficient (from a personal standpoint) for executives to chase massive short-term gains, no matter how ill-gotten, even knowing that the game would eventually be up. Because you got to keep the money either way, why not?

There is an old Slavic saying: one thief sits on top of another thief and uses a third thief for a whip. The mortgage world was a lot like that. At every level of this business there was some sort of pseudo-criminal scam, a transaction that either bordered on fraud or actually was fraud. To sort through all of it is an almost insanely dull exercise to anyone who does not come from this world, but the very dullness and complexity of that journey is part of what made this cannibalistic scam so confoundingly dependable.

The process starts out with a small-time operator like Solomon Edwards, who snares you, the schmuck homeowner, and slaps your name on a loan that gets sent up the line. In league with Edwards is the mortgage lender, the originator of the loan, who like Edwards is just in it for the fees. He lends you the money and immediately looks for a way to sell that little stake in you off to a big national or international investment bank—whose job it is to take that loan of yours and toss it into a big securitized pool, where it can then be chopped up and sold as securities to the next player in the sequence.

This was a crucial stage in the process. It was here that the great financial powers of this country paused and placed their bets on the various classes of new homeowner they’d created with this orgy of new lending. Amazingly, these bigger players, who ostensibly belonged to the ruling classes and were fighting over millions, were even more dishonest and underhanded and petty than the low-rent, just-above-street-level grifters who bought cheap birthday presents for the kids of the Eljon Williamses of the world in pursuit of a few thousand bucks here and there.

“Option ARMs used to be a wealthy person’s product,” he explains now. “It was for people who had chunky cash flows. For instance, on Wall Street you get paid a bonus at the end of the year,” he said, describing one of the option ARM’s traditional customer profiles, “so I’ll pay a little now, but at the end of the year I’ll pay down the principal, true everything up—a wealthy person’s product. Then it became the ultimate affordability product.”

The option ARM evolved into an arrangement where the homebuyer could put virtually nothing down and then have a monthly payment that wasn’t just interest only, but, in some cases, less than interest only. Say the market interest rate was 5 percent; you could buy a house with no money down and just make a 1 percent payment every month, for years on end. In the meantime, those four points per month you’re not paying just get added to the total amount of debt. “The difference between that 5 percent and the 1 percent just gets tacked on later on in the form of a negative amortization,” Andy explains.

Here’s how that scenario looks: You buy a $500,000 house, with no money down, which means you take out a mortgage for the full $500,000. Then instead of paying the 5 percent monthly interest payment, which would be $2,500 a month, you pay just $500 a month, and that $2,000 a month you’re not paying just gets added to your mortgage debt. Within a couple of years, you don’t owe $500,000 anymore; now you owe $548,000 plus deferred interest. “If you’re making the minimum payment, you could let your mortgage go up to 110 percent, 125 percent of the loan value,” says Andy. “Sometimes it went as high as 135 percent or 140 percent. It was crazy.”

The reason this hedge fund wanted to buy the crap at the bottom was that they’d figured that even a somewhat lousy credit risk could make a 1 percent monthly payment for a little while. Their strategy was simple: buy the waste, cash in on the large returns for a while (remember, the riskier the tranche, the higher rate of return it pays), and hope the homeowners in your part of the deal can keep making their pathetic 1 percent payments just long enough that the hedge fund can eventually unload their loans on someone else before they start defaulting. “It was a timing game,” Andy explains. “They figured that these guys at the bottom would be able to make their payments even later than some of the guys higher up in the deal.”

Meanwhile a lot of the homeowners taking out these loans were buying purely as a way of speculating on housing prices: their scheme was to keep up those 1 percent payments for a period of time, then flip the house for a profit before the ARM kicked in and the payments adjusted and grew real teeth. At the height of the boom this process in some places was pushed to the level of absurdity. A New Yorker article cited a broker in Fort Myers, Florida, who described the short resale history of a house that was built in 2005 and first sold on December 29, 2005, for $399,600. It sold the next day for $589,900. A month later it was in foreclosure and the real estate broker bought it all over again for $325,000. This clearly was a fraudulent transaction of some kind—the buyers on those back-to-back transactions were probably dummy buyers, with the application and appraisal process rigged somehow (probably with the aid of a Solomon Edwards type) to bilk the lenders, which in any case probably didn’t mind at all and simply sold off the loans immediately, pocketing the fees—but this is the kind of thing that went on. The whole industry was infested with scam artists.

For example, part of the reason Andy’s hedge fund clients had such faith in these homeowners in the toxic-waste tranche is that their credit scores weren’t so bad. As most people know, the scores used in the mortgage industry are called FICO scores and are based on a formula invented back in the late fifties by an engineer named Bill Fair and a mathematician named Earl Isaac. The Fair Isaac Corporation, as their company was eventually called, created an algorithm that was intended to predict a home loan applicant’s likelihood of default. The scores range from 300 to 850, with the median score being 723 at this writing. Scores between 620 and 660 are considered subprime, and above 720 is prime; anything in between is considered “Alt-A,” a category that used to be a catchall term for solid borrowers with nontraditional jobs, but which morphed into something more ominous during the boom.

Wall Street believed in FICO scores and over the years had put a lot of faith in them. And if you just looked at the FICO scores, the homeowners in Andy’s deal didn’t look so bad.

“Let’s say the average FICO in the whole deal, in the billion dollars of mortgages, was 710,” Andy says. “The hedge fund guys were getting the worst of the worst in the deal, and they were getting, on average, 675, 685 FICO. That’s not terrible.”

Or so they thought. Andy’s bank assembled the whole billion-dollar deal in February 2007; Andy ended up selling the bottom end of the pool to these hedge fund clients for $30 million in May. That turned out to be just in the nick of time, because almost immediately afterward, the loans started blowing up. This was doubly bad for Andy’s clients, because they’d borrowed half of the money to buy this crap … from Andy’s bank.

It turns out that the FICO scores themselves were a scam. A lot of the borrowers were gaming the system. Companies like TradeLine Solutions, Inc., were offering, for a $1,399 fee, an unusual service: they would attach your name to a credit account belonging to some stranger with a perfect credit history, just as the account was about to close. Once this account with its perfect payment history was closed, it could add up to 45 points to your score. TradeLine CEO Ted Stearns bragged on the company’s website: “There is one secret the credit scoring granddaddy and the credit bureaus do not want you to know: Good credit scores can be bought!”

In an alternative method, an applicant would take out five new credit cards with $5,000 limits and only run a $100 balance. “So FICO goes, oh, this guy’s got $25,000 of available credit, and he’s only drawing down $500,” Andy explains. “He’s very liquid.”

This sounds complicated, but all you have to do is remember the ultimate result here. This technique allowed Andy’s bank to take all the unsalable BBB-rated extras from these giant mortgage deals, jiggle them around a little using some mathematical formulae, and—presto! All of a sudden 70 percent of your unsalable BBB-rated pseudo-crap (“which in reality is more like B-minus-rated stuff, since the FICO scores aren’t accurate,” reminds Andy) is now very salable AAA-rated prime paper, suitable for selling to would-be risk-avoidant pension funds and insurance companies. It’s the same homeowners and the same loans, but the wrapping on the box is different.

At around the same time Andy was doing his billion-dollar deal, another trader at a relatively small European bank—let’s call him Miklos—stumbled on to what he thought, at first, was the find of a lifetime.

“So I’m buying bonds,” he says. “They’re triple-A, supersenior tranche bonds. And they’re paying, like, LIBOR plus fifty.”

Jargon break:

LIBOR, or the London Interbank Offered Rate, is a common reference tool used by bankers to determine the price of borrowing. LIBOR refers to the interest rate banks in London charge one another to borrow unsecured debt. The “plus” in the expression “LIBOR plus,” meanwhile, refers to the amount over and above LIBOR that bankers charge one another for transactions, with the number after “plus” referring to hundredths of a percentage point. These hundredths of a point are called basis points.

Why? Because what few regulations there are remaining are based upon calculations involving AAA-rated paper. Both banks and insurance companies are required by regulators to keep a certain amount of real capital on hand, to protect their depositors. Of course, these institutions do not simply hold their reserves in cash; instead, they hold interest-bearing investments, so that they can make money at the same time they are fulfilling their reserve obligations.

Knowing this, the banking industry regulators—in particular a set of bylaws called the Basel Accords, which all major banking nations adhere to—created rules to make sure that those holdings these institutions kept were solid. These rules charged institutions for keeping their holdings in investments that were not at least AAA rated. In order to avoid these capital charges, institutions needed to have lots of “safe” AAA-rated paper. And if you could find AAA-rated paper that earns LIBOR plus fifty, instead of buying the absolutely safe U.S. Treasury notes that might earn LIBOR plus twenty, well, then, you jumped on that chance—because that was 0.30 more percentage points you were making. In banks and insurance companies with holdings in the billions, that subtle discrepancy meant massive increases in revenue.

It was this math that drove all the reckless mortgage lending. Thanks to the invention of these tiered, mortgage-backed, CDO-like derivative deals, banks could now replace all the defiantly unsexy T-bills and municipal bonds they were holding to fulfill their capital requirements with much higher earning mortgage-backed securities. And what happens when most of the world’s major financial institutions suddenly start replacing big chunks of their “safe” reserve holdings with mortgage-backed securities?

To simplify this even more: The rules say that banks have to have a certain amount of cash on hand. And if not cash, something as valuable as cash. But the system allowed banks to use home loans as their reserve capital, instead of cash, Banks were therefore meeting their savings requirements by … lending. Instead of the banking system being buttressed by real reserve capital, it was buttressed by the promised mortgage payments of a generation of questionable homebuyers.

Everyone and his brother starts getting offered mortgages. At its heart, the housing/credit bubble was the rational outcome of a nutty loophole in the regulatory game. The reason Vegas cocktail waitresses and meth addicts in Ventura were suddenly getting offered million-dollar homes had everything to do with Citigroup and Bank of America and AIG jettisoning their once-safe AAA reserves, their T-bills and municipal bonds, and exchanging them for these mortgage-backed “AAA”-rated securities—which, as we’ve already seen, were sometimes really BBB-rated securities turned into AAA-rated paper through the magic of the CDO squared. And which in turn perhaps should originally have been B-minus-rated securities, because the underlying FICO scores of the homeowners in deals like Andy’s might have been fakes.

Getting back to the story: So Miklos is buying AAA bonds. These bonds are paying his bank LIBOR plus fifty, which isn’t bad. But it becomes spectacular when he finds a now-infamous third party, AIG, to make the deal absolutely bulletproof.

“So I’m getting LIBOR plus fifty for these bonds,” he says. “Then I turn around and I call up AIG and I’m like, ‘Hey, where would you credit default swap this bond?’ And they’re like, ‘Oh, we’ll do that for LIBOR plus ten.’ ”

Miklos pauses and laughs, recalling the pregnant pause on his end of the phone line as he heard this offer from AIG. He couldn’t believe what he’d just heard: it was either a mistake, or they had just handed him a mountain of money, free of charge.

“I hear this,” he says, “and I’m like, ‘Uh … okay. Sure, guys.’ ”

Here we need another digression. The credit default swap was a kind of insurance policy originally designed to get around those same regulatory capital charges. Ironically, Miklos had once been part of a famed team at JPMorgan that helped design the modern credit default swap, although the bank envisioned a much different use for them back then.

A credit default swap is just a bet on an outcome. It works like this: Two bankers get together and decide to bet on whether or not a homeowner is going to default on his $300,000 home loan. Banker A, betting against the homeowner, offers to pay Banker B $1,000 a month for five years, on one condition: if the homeowner defaults, Banker B has to pay Banker A the full value of the home loan, in this case $300,000.

So Banker B has basically taken 5–1 odds that the homeowner will not default. If he does not default, Banker B gets $60,000 over five years from Banker A. If he does default, Banker B owes Banker A $300,000.

This is gambling, pure and simple, but it wasn’t invented with this purpose. Originally it was invented so that banks could get around lending restrictions. It used to be that, in line with the Basel Accords, banks had to have at least one dollar in reserve for every eight they lent; the CDS was a way around that.

Say Bank A is holding $10 million in A-minus-rated IBM bonds. It goes to Bank B and makes a deal: we’ll pay you $50,000 a year for five years and in exchange, you agree to pay us $10 million if IBM defaults sometime in the next five years—which of course it won’t, since IBM never defaults.

If Bank B agrees, Bank A can then go to the Basel regulators and say, “Hey, we’re insured if something goes wrong with our IBM holdings. So don’t count that as money we have at risk. Let us lend a higher percentage of our capital, now that we’re insured.” It’s a win-win. Bank B makes, basically, a free $250,000. Bank A, meanwhile, gets to lend out another few million more dollars, since its $10 million in IBM bonds is no longer counted as at-risk capital.

One is that no regulations were created to make sure that at least one of the two parties in the CDS had some kind of stake in the underlying bond. The so-called naked default swap allowed Bank A to take out insurance with Bank B not only on its own IBM holdings, but on, say, the soon-to-be-worthless America Online stock Bank X has in its portfolio. This is sort of like allowing people to buy life insurance on total strangers with late-stage lung cancer—total insanity.

The other factor was that there were no regulations that dictated that Bank B had to have any money at all before it offered to sell this CDS insurance. In other words, Bank A could take out insurance on its IBM holdings with Bank B and get an exemption from lending restrictions from regulators, even if Bank B never actually posted any money or proved that it could cover that bet. Wall Street is frequently compared by detractors to a casino, but in the case of the CDS, it was far worse than a casino—a casino, at least, does not allow people to place bets they can’t cover.

These two loopholes would play a major role in the madness Miklos was now part of. Remember, Miklos was buying the AAA-rated slices of tiered bonds like the ones Andy was selling, and those bonds were paying LIBOR plus fifty. And then he was turning around and buying default swap insurance on those same bonds for LIBOR plus ten.

To translate that into human terms, Miklos was paying one-tenth of a percentage point to fully insure a bond that was paying five-tenths of a percentage point. Now, the only reason a bond earns interest at all is because the person buying it faces the risk that it might default, but the bonds Miklos was buying were now 100 percent risk free. The four-tenths of a percentage point he was now earning on the difference between the bond and the default swap was pure, risk-free profit. This was the goose that laid the golden egg, the deal of the decade. Once he bought the AIG default swap protection on his bonds, Miklos couldn’t lose. The only thing to compare it to would be a racetrack whose oddsmakers got stoned and did their math wrong—imagine if you could put a dollar on all twenty horses in the Kentucky Derby and be guaranteed to make at least $25 no matter who wins the race. That’s what it’s like to buy bonds at LIBOR plus fifty that you can credit-default-swap at LIBOR plus ten.

Making matters even more absurd, the bonds Miklos was buying were already insured; they had, built in to the bonds themselves, something called monoline insurance. Monoline insurance refers to the insurance provided by companies like Ambac and MBIA. These companies, for a fee, will guarantee that the buyer of the bond will receive all his interest and principal on time. Miklos’s bonds contained MBIA/Ambac insurance; in the event of a default, they were supposed to cover the bond.

So Miklos’s bond deal was, in a sense, almost triple insured. It was AAA rated to begin with. Then it had the monoline insurance built in to the bond itself. Then it had credit default swap insurance from AIG. And yet there was that four-basis-point spread, just sitting there. It was bizarre, almost like Wall Street had reached into Miklos’s office and started handing him money, almost without his even asking. Perhaps not coincidentally, it was very much like the situation for ordinary homeowners, who around the same time found themselves suddenly and inexplicably offered lots of seemingly free money. It sounded too good to be true—was it?

That didn’t mean, however, that they didn’t want him to do more of those trades. But no sooner had Miklos tried to buy more of the bonds than he found that another, much bigger party had discovered his little secret. “Suddenly someone is buying like five hundred million dollars of this stuff and getting the same swap deal from AIG,” he says. “I’m getting blown out of the water.”

Miklos starts hearing that the other party is one of the top five investment banks on Wall Street. And the rumor is that the money behind the deals is “partner money”—that the higher-ups in the Wall Street colossus had caught on to this amazing deal and were buying it all up for themselves, with their personal money, via the firm’s proprietary trading desk. “They started tagging AIG with all of this stuff,” he recalls. “And we got squeezed out.”

One school was the part we’ve already seen, the credit default scam that Miklos tapped into. This was the monster created by a pinhead American financier named Joe Cassano, who was running a tiny unit within AIG called AIG Financial Products, or AIGFP (FP for short). Cassano, a beetle-browed, balding type in glasses, worked for years under Mike Milken at the notorious Drexel Burnham Lambert investment bank, the poster child for the 1980s era of insider manipulations. He moved to AIG in 1987 and helped set up AIGFP.

The unit originally dealt in the little-known world of interest rate swaps (which would later become notorious for their role in the collapse of countries like Greece and localities like Jefferson County, Alabama). But in the early part of this decade it moved into the credit default swap world, selling protection to the Mikloses and Goldman Sachses of the world, mainly for supersenior AAA-rated tranches of the tiered, structured deals of the type Andy put together.

How you view Cassano’s business plan largely depends on whether you think he was hugely amoral or just really stupid. Again, thanks largely to the fact that credit default swaps existed in a totally unregulated area of the financial universe—this was the result of that 2000 law, the Commodity Futures Modernization Act, sponsored by then-senator Phil Gramm and supported by then–Treasury chief Larry Summers and his predecessor Bob Rubin—Cassano could sell as much credit protection as he wanted without having to post any real money at all. So he sold hundreds of billions of dollars’ worth of protection to all the big players on Wall Street, despite the fact that he didn’t have any money to cover those bets.

Cassano’s business was rooted in the way these structured deals were set up. When investment banks assembled their pools of mortgages, they would almost always sell the high-yield toxic waste portions at the bottom of the deals as quickly as possible—few banks wanted to hold on to that stuff (although some did, to disastrous effect). But they would often keep the AAA-rated portions of the pools because they were useful in satisfying capital requirements. Instead of keeping low-yield Treasuries or municipal bonds to satisfy regulators that they had enough reserves on hand, banks could keep the AAA tranches of these mortgage deals and get a much higher rate of return.

Another thing that happened is that sometime around the end of 2005 and 2006, the banks started finding it harder to dump their excess AAA tranches on the institutional clients. So the banks ended up holding on to this stuff temporarily, in a practice known as warehousing. Theoretically, investment banks didn’t mind warehousing, because they earned money on these investments as they held them. But since they represented a somewhat larger risk of default than normal AAA investments (although, of course, this was not publicly conceded), the banks often went out and bought credit protection from the likes of Cassano to hedge their risk.

Banks like Goldman Sachs and Deutsche Bank were holding literally billions of dollars’ worth of these AAA-rated mortgage deals, and they all went to Cassano for insurance, offering to pay him premiums in exchange for a promise of compensation in the event of a default. The money poured in. In 1999, AIGFP only had $737 million in revenue. By 2005, that number jumped to $3.26 billion. Compensation at the tiny unit (which had fewer than five hundred employees total) was more than $1 million per person.

Cassano was thinking one of two things. Either he thought that these instruments would never default, or else he just didn’t care and never really planned to pay out in the event that they did. It’s probably the latter, for things worked out just fine for Cassano; he made $280 million in personal compensation over eight years and is still living in high style in a three-floor town house in Knightsbridge in London, while beyond his drawing room windows, out in the world, the flames keep kicking higher. Moreover, reports have also surfaced indicating that the Justice Department will not prosecute him.

That’s what Andy means when he asks if, in offering guys like Miklos their crazy insurance deals, AIG was being stupid, or whether they were just collecting premiums without ever intending to pay. It would fit perfectly with the narrative of the grifter era if it turned out to be the latter.

That was one scam AIG had running, and it was a big one. But even as Cassano was laying nearly $500 billion in bets with the biggest behemoths on Wall Street, there was another big hole opening on the other side of the AIG hull. This was in AIG’s Asset Management department, headed by yet another egomaniacal buffoon, this one by the name of Win Neuger.

Here’s how shorting works. Say you’re a hedge fund and you think the stock of a certain company—let’s call it International Pimple—is going to decline in value. How do you make money off that knowledge?

First, you call up a securities lender, someone like, say, Win Neuger, and ask if he has any stock in International Pimple. He says he does, as much as you want. You then borrow a thousand shares of International Pimple from Neuger, which let’s say is trading at 10 that day. So that’s $10,000 worth of stock.

Now, in order to “borrow” those shares from Neuger, you have to give him collateral for those shares in the form of cash. For his trouble, you have to pay him a slight markup, usually 1–2 percent of the real value. So perhaps instead of sending $10,000 to Neuger, you send him $10,200.

Now you take those thousand shares of International Pimple, you go out onto the market, and you sell them. Now you’ve got $10,000 in cash again. Then, you wait for the stock to decline in value. So let’s say a month later, International Pimple is now trading not at 10 but at 7½. You then go out and buy a thousand shares in the company for $7,500. Then you go back to Win Neuger and return his borrowed shares to him; he returns your $10,000 and takes the stock back. You’ve now made $2,500 on the decline in value of International Pimple, less the $200 fee that Neuger keeps. That’s how short selling works, although there are endless nuances. It’s a pretty simple business model from the short seller’s end. You identify securities you think will fall in value, you borrow big chunks of those securities and sell them, then you buy the same stock back after the value has plummeted.

But a funny thing began happening in late 2007 and early 2008. Suddenly Neuger’s customers started returning their securities to him en masse. Banks like Goldman Sachs started returning huge chunks of securities and demanding their collateral back. In what quickly struck some regulators as a somewhat too convenient coincidence, many of these banks that started returning Neuger’s sec-lending cash were also counterparties to Cassano’s Financial Products division.

“Many of the counterparties who were involved with the securities-lending business, they were knowledgeable as to what was going on with [Cassano’s] Financial Products division,” says Eric Dinallo, at the time the head of the New York State Insurance Department. “You had people who were counterparties to the credit default swap side who were also able to pull cash out of [Neuger’s] sec-lending business.”

Early in that summer of 2008, Dinallo would chair a multistate task force charged with helping AIG “wind down” its crippled securities-lending business in such a way that AIG’s subsidiary insurance companies (and by extension the holders of policies issued by those companies) would not be harmed by any potential bankruptcy. The threat that a run on Neuger’s sec-lending business would result in these insurance companies getting bankrupted or seized by state insurance commissioners was like a guillotine that hung over the entire American economy in the summer of 2008—and, in ways that to this day remain unknown to most Americans, that guillotine would become a crucial factor in the decision to bail out AIG and AIG’s counterparties amid the implosion of September 2008.

Neuger had been borrowing from AIG subsidiary companies like American General, SunAmerica, and United States Life, companies that insured tens of thousands, if not hundreds of thousands, of ordinary policyholders and retirees. If enough of Neuger’s securities-lending clients demanded their money back at once, suddenly there was a real threat that the parent company AIG would have to reach down and liquidate the assets of these mom-and-pop insurance companies, leaving those tens of thousands of people out in the wilderness. All in order to cover Neuger’s colossally stupid and unnecessary bets on the mortgage market.

But then something surprising happened. The counterparties did start closing out their accounts with Neuger. One in particular was extremely aggressive in returning securities to AIG: Goldman Sachs. Goldman had been leading the charge throughout the year in closing out its accounts with Neuger; now, in the summer of 2008, it stepped up the pace, hurling billions of dollars’ worth of Neuger’s securities back in his car-salesman face and demanding its money back.

Dinallo here interjects with what he calls a “powerful” piece of information—that during this period when Goldman and all the other counterparties suddenly started pulling cash out of AIG’s securities-lending business, no other sec-lending firm on Wall Street was having anything like the same problems. If Neuger’s counterparties were pulling their cash out en masse, it didn’t seem to be because they were worried about the value of the securities they were holding. Something else was going on.

Had Texas gone ahead and seized those subsidiaries, all the other states that had AIG subsidiaries headquartered within their borders would almost certainly have followed suit. A full-blown run on AIG’s subsidiary holdings would likely have gone into effect, creating a real-world financial catastrophe. “It would have been ugly,” says Dinallo. Thousands if not tens or hundreds of thousands of people would have seen their retirement and insurance nest eggs depleted to a fraction of their value, overnight.

The Texas letter was prepared and ready to go on the weekend of September 13–14. That was when an extraordinary collection of state officials and megapowerful Wall Street bankers had gathered in several locations in New York to try to figure out how best to handle the financial storm that had gathered around a number of huge companies—not only AIG, but Lehman Brothers, Merrill Lynch, and others.

That fact was made clear the next morning, on Sunday, when all the main parties met in the grand old conference room on the first floor of the Fed building. “It’s like this weird, medieval lobby,” says Kolchak. “No one ever goes in there, ever. That made it even weirder.” The sight of this seldom-used hall, packed with fifty or sixty of the most powerful financiers in the world, was surreal—as was the angry announcement made by Goldman CEO Lloyd Blankfein at the outset of the meeting. Kolchak reports that Blankfein was the dominant presence at the meeting; he stood up and threw down the gauntlet, demanding that AIG cough up the disputed collateral in the CDS/Cassano mess.

“Blankfein was basically like, ‘They [AIG] can start by giving us our money,’ ” Kolchak says. “He was really pissed. He just kept coming back to that, that he wanted his fucking money.”

After that meeting Kolchak suddenly grasped, he thought, the dynamic of the whole weekend. Goldman was really holding a gun not only to the head of AIG but to the thousands of policyholders who, somewhere outside the room and all across America, had no idea what was going on. Basically what was happening was that Blankfein and the other Goldman partners wanted the money AIGFP and Cassano owed them so badly that they were willing to blow up the other end of AIG, if needed, to make that happen. Even though they weren’t really in danger of losing any money by holding on to Neuger’s securities, they were returning them anyway, just to force AIG into a crisis.

Less well known is that the counterparties to Neuger’s securities-lending operations would receive a staggering $43.7 billion in public money via the AIG bailout, with Goldman getting the second-biggest slice, at $4.8 billion (Deutsche Bank, with $7 billion, was number one).

How they accomplished that feat was somewhat complicated. First, the Fed put up the money to cover the collateral calls against Neuger from Goldman and other banks. Then the Fed set up a special bailout facility called Maiden Lane II (named after the tiny street in downtown Manhattan next to the New York Federal Reserve Bank), which it then used to systematically buy up all the horseshit RMBS assets Neuger and his moronic “ten cubed”–chasing employees had bought up with all their billions in collateral over the years.

The mechanism involved in these operations—whose real mission was to filter out the unredeemable crap from the merely temporarily distressed crap and stick the taxpayer with the former and Geithner’s buddies with the latter—would be enormously complex, a kind of labyrinthine financial sewage system designed to stick us all with the raw waste and pump clean water back to Wall Street.

The AIG bailout marked the end of a chain of mortgage-based scams that began, in a way, years before, when Solomon Edwards set up a long con to rip off an unsuspecting sheriff’s deputy named Eljon Williams. It was a game of hot potato in which money was invented out of thin air in the form of a transparently bogus credit scheme, converted through the magic of modern financial innovation into highly combustible, soon-to-explode securities, and then quickly passed up the chain with lightning speed—from the lender to the securitizer to the major investment banks to AIG, with each party passing it off as quickly as possible, knowing it was too hot to hold. In the end that potato would come to rest, sizzling away, in the hands of the Federal Reserve Bank.

And, amazingly, it was the same thing at the very top. When the CEO of Goldman Sachs stood up in the conference room of the New York Federal Reserve Bank and demanded his money, he did so knowing that it was more profitable to put AIG to the torch than it was to try to work things out. In the end, Blankfein and Goldman literally did a mob job on AIG, burning it to the ground for the “insurance” of a government bailout they knew they would get, if that army of five hundred bankers could not find the money to arrange a private solution. In their utter pessimism and complete disregard for the long term, they were absolutely no different from Solomon Edwards or the New Century lenders who trolled the ghettos and the middle-class suburbs for home-buying suckers to throw into the meat grinder, where they could be ground into fees and turned into Ford Explorers and flat-screen TVs or weekends in Reno or whatever else helps a back-bench mortgage scammer get his rocks off. The only difference with Goldman was one of scale.

We paid for this instead of a generation of health insurance, or an alternative energy grid, or a brand-new system of roads and highways. With the $13-plus trillion we are estimated to ultimately spend on the bailouts, we could not only have bought and paid off every single subprime mortgage in the country (that would only have cost $1.4 trillion), we could have paid off every remaining mortgage of any kind in this country—and still have had enough money left over to buy a new house for every American who does not already have one.

Both candidates presented the solution as just sitting there waiting to be unleashed, if only one or the other would get the political go-ahead. McCain said the lower gas prices were sitting somewhere under the Gulf of Mexico. Obama said they were sitting in the bank accounts of companies like Exxon in the form of windfall profits to be taxed.

The formula was the same formula we see in every election: Republicans demonize government, sixties-style activism, and foreigners. Democrats demonize corporations, greed, and the right-wing rabble.

Both candidates were selling the public a storyline that had nothing to do with the truth. Gas prices were going up for reasons completely unconnected to the causes these candidates were talking about. What really happened was that Wall Street had opened a new table in its casino. The new gaming table was called commodity index investing. And when it became the hottest new game in town, America suddenly got a very painful lesson in the glorious possibilities of taxation without representation. Wall Street turned gas prices into a gaming table, and when they hit a hot streak we ended up making exorbitant involuntary payments for a commodity that one simply cannot live without. Wall Street gambled, you paid the big number, and what they ended up doing with some of that money you lost is the most amazing thing of all. They got America—you, me, Priscilla Carillo, Robert Lukens—to pawn itself to pay for the gas they forced us to buy in the first place. Pawn its bridges, highways, and airports. Literally sell our sovereign territory. It was a scam of almost breathtaking beauty, if you’re inclined to appreciate that sort of thing.

This was never supposed to happen. All the way back in 1936, after gamblers disguised as Wall Street brokers destroyed the American economy, the government of Franklin D. Roosevelt passed a law called the Commodity Exchange Act that was specifically designed to prevent speculators from screwing around with the prices of day-to-day life necessities like wheat and corn and soybeans and oil and gas. The markets for these necessary, day-to-day consumer items—called commodities—had suffered serious manipulations in the twenties and thirties, mostly downward.

The most famous of these cases involved a major Wall Street power broker named Arthur Cutten, who was known as the “Wheat King.” The government accused Cutten of concealing his positions in the wheat market to manipulate prices. His case eventually went to the Supreme Court as Wallace v. Cutten and provided the backdrop for passage of the new 1936 commodity markets law, which gave the government strict watchdog powers to oversee the functioning of this unique kind of trading.

Again, imagine you’re that corn grower but you bring your crop to market at a moment when the cereal company isn’t buying. That’s where the speculator comes in. He buys up your corn and hangs on to it. Maybe a little later, that cereal company comes to the market looking for corn—but there are no corn growers selling anything at that moment. Without the speculator there, both grower and cereal company would be fucked in the instance of a temporary disruption.

With the speculator, however, everything runs smoothly. The corn grower goes to the market with his corn, maybe there are no cereal companies buying, but the speculator takes his crop at $2.80 a bushel. Ten weeks later, the cereal guy needs corn, but no growers are there—so he buys from the speculator, at $3.00 a bushel. The speculator makes money, the grower unloads his crop, the cereal company gets its commodities at a decent price, everyone’s happy.

This system functioned more or less perfectly for about fifty years. It was tightly regulated by the government, which recognized that the influence of speculators had to be watched carefully. If speculators were allowed to buy up the whole corn crop, or even a big percentage of it, for instance, they could easily manipulate the price. So the government set up position limits, which guaranteed that at any given moment, the trading on the commodities markets would be dominated by the physical hedgers, with the speculators playing a purely functional role in the margins to keep things running smoothly.

Corn, wheat, soybean, and oil producers could simply look at the futures prices at centralized commodities markets like the NYMEX (the New York Mercantile Exchange) to get a sense of what to charge for their products. If supply and demand were the ruling factors in determining those futures prices, the system worked fairly and sensibly. If something other than supply and demand was at work, though, then the whole system got fucked—which is exactly what happened in the summer of 2008.

The bubble that hit us that summer was a long time in coming. It began in the early eighties when a bunch of Wall Street financial companies started buying up stakes in trading firms that held seats on the various commodities exchanges. One of the first examples came in 1981, when Goldman Sachs bought up a commodities trading company called J. Aron.

Not long after that, in the early nineties, these companies quietly began to ask the government to lighten the hell up about this whole position limits business. Specifically, in 1991, J. Aron—the Goldman subsidiary—wrote to the Commodity Futures Trading Commission (the government agency overseeing this market) and asked for one measly exception to the rules.

But what about people on Wall Street? Were not they, too, like farmers, in the sense that they were taking a risk, exposing themselves to the whims of economic nature? After all, a speculator who bought up corn also had risk—investment risk. So, Goldman’s subsidiary argued, why not allow the poor speculator to escape those cruel position limits and be allowed to make transactions in unlimited amounts? Why even call him a speculator at all? Couldn’t J. Aron call itself a physical hedger too? After all, it was taking real risk—just like a farmer!

On October 18, 1991, the CFTC—in the person of Laurie Ferber, an appointee of the first President Bush—agreed with J. Aron’s letter. Ferber wrote that she understood that Aron was asking that its speculative activity be recognized as “bona fide hedging”—and, after a lot of jargon and legalese, she accepted that argument. This was the beginning of the end for position limits and for the proper balance between physical hedgers and speculators in the energy markets.

In the years that followed, the CFTC would quietly issue sixteen similar letters to other companies. Now speculators were free to take over the commodities market. By 2008, fully 80 percent of the activity on the commodity exchanges was speculative, according to one congressional staffer who studied the numbers—“and that’s being conservative,” he said.

What you’re doing when you invest in the S&P GSCI is buying monthly futures contracts for each of these commodities. If you decide to simply put a thousand dollars into the S&P GSCI and leave it there, the same way you might with a mutual fund, this is a little more complicated—what you’re really doing is buying twenty-four different monthly futures contracts, and then at the end of each month you’re selling the expiring contracts and buying a new set of twenty-four contracts. After all, if you didn’t sell those futures contracts, someone would actually be delivering barrels of oil to your doorstep. Since you don’t really need oil, and you’re just investing to make money, you have to continually sell your futures contracts and buy new ones in what amounts to a ridiculously overcomplex way of betting on the prices of oil and gas and cocoa and coffee.

This process of selling this month’s futures and buying the next month’s futures is called rolling. Unlike shares of stock, which you can simply buy and hold, investing in commodities involves gazillions of these little transactions made over time. So you can’t really do it by yourself: you usually have to outsource all of this activity, typically to an investment bank, which makes fees handling this process every month. This is usually achieved through yet another kind of diabolical derivative transaction called a rate swap. Roughly speaking, this infuriatingly complex scheme works like this:

You the customer take a concrete amount of money—let’s say a thousand dollars—and “invest” it in your commodity index. That thousand dollars does not go directly to the index, however. Instead, you’re buying, say, a thousand dollars’ worth of U.S. Treasury notes. The money you make from those T-bills goes, every month, to your investment bank, along with a management fee.

Your friendly investment bank, which might very well be Goldman Sachs, then takes that money and buys an equivalent amount of futures on the S&P GSCI, following the price changes.

When you cash out, the bank pays you back whatever you invested, plus whatever increases there have been in commodity prices over that period of time.

If you really want to get into the weeds of how all this works, there’s plenty of complexity there to delve into, if you’re bored as hell. The monthly roll of the S&P GSCI has achieved an almost mythical status—it is called the Goldman roll, and there are lots of folks who believe that knowing when and how it works gives investors an unfair advantage (particularly Goldman)—but in the interest of not having the reader’s head explode, we’ll skip that topic for now.

The only way for you to get to the gaming table was, in essence, to rent the speculator-hedger exemption that the government had quietly given to companies like Goldman Sachs via those sixteen letters.

If you wanted to speculate on commodity prices, you had to do so through a government-licensed speculator like Goldman Sachs. It was the ultimate scam: not only did Goldman and the other banks undermine the 1936 law and upset the delicate balance that had prevented bubbles for decades, unleashing a flood of speculative money into a market that was not designed to handle it, these banks managed to secure themselves exclusive middleman status for the oncoming flood.

Now, once upon a time, this kind of “investing” was barred to institutional investors like trusts and pension funds, which by law and custom are supposed to be extremely conservative in outlook. If you’re the manager of a pension fund for Ford autoworkers, it kind of makes sense that when you invest the retirement money of a bunch of guys who spent their whole lives slaving away at hellish back-breaking factory work, that money should actually be buying something. It should go into blue-chip stocks, or Treasury bills, or some other safe-as-hell thing you can actually hold. You shouldn’t be able to put that money on red on the roulette wheel.

n fact, for most of the history of the modern American economy, there had been laws specifically barring trusts and pension funds and other such entities from investing in risky/speculative ventures. For trusts, the standard began to be set with an influential Massachusetts Supreme Court case way back in 1830 called Harvard College v. Amory, which later became the basis for something called the prudent man rule.

What the Harvard case and the ensuing prudent man rule established was that if you’re managing a trust, if you’re managing someone else’s money, you had to follow a general industry standard of prudence. You couldn’t decide, say, that your particular client had a higher appetite for risk than the norm and go off and invest your whole trust portfolio in a Mexican gold mine. There were numerous types of investments that one simply could not go near under the prudent man rule, commodity oil futures being a good example of one.

the whole concept of taking money from pension funds and dumping it long-term into the commodities market went completely against the spirit of the delicate physical hedger/speculator balance as envisioned by the 1936 law. The speculator was there, remember, to serve traders on both sides. He was supposed to buy corn from the grower when the cereal company wasn’t buying that day and sell corn to the cereal company when the farmer lost his crop to bugs or drought or whatever. In market language, he was supposed to “provide liquidity.”

The one thing he was not supposed to do was buy buttloads of corn and sit on it for twenty years at a time. This is not “providing liquidity.” This is actually the opposite of that. It’s hoarding.

When an investment banker coaxes a pension fund into the commodities markets, he’s usually not bringing it in for the short term. “Pension funds and other institutional investors have extremely long time horizons,” says Mike Masters of Masters Capital Management, who has been agitating against commodity speculation for years. He notes, for example, that the average duration of a pension fund’s portfolio is designed to match the average employee’s years until retirement. “Which could be twenty years, or more,” says Masters.

To use an example frequently offered by Masters, imagine if someone continually showed up at car dealerships and asked to buy $500,000 worth of cars. This mystery person doesn’t care how many cars, mind you, he just wants a half million bucks’ worth. Eventually, someone is going to sell that guy one car for $500,000. Put enough of those people out there visiting car dealerships, your car market is going to get very weird very quickly. Soon enough, the people who are coming into the dealership looking to buy cars they actually plan on driving are going to find that they’ve been priced out of the market.

In and around Wall Street, there was no doubt what was going on. Everyone knew that the reason the price of commodities was rising had to do with all the new investor flows into the market. Citigroup in April 2008 called it a “Tidal Wave of Fund Flow.” Greenwich Associates a month later wrote: “The entry of new financial or speculative investors into global commodities markets is fueling the dramatic run-up in prices.”

And the top oil analyst at Goldman Sachs quietly conceded, in May 2008, that “without question the increased fund flow into commodities has boosted prices.”

One thing we know for sure is that the price increases had nothing to do with supply or demand. In fact, oil supply was at an all-time high, and demand was actually falling. In April 2008 the secretary-general of OPEC, a Libyan named Abdalla El-Badri, said flatly that “oil supply to the market is enough and high oil prices are not due to a shortage of crude.” The U.S. Energy Information Administration (EIA) agreed: its data showed that worldwide oil supply rose from 85.3 million barrels a day to 85.6 million from the first quarter to the second that year, and that world oil demand dropped from 86.4 million barrels a day to 85.2 million.

Sovereign wealth funds, or SWFs, are huge in the Middle East. Most of the bigger oil-producing states have massive SWFs that act as cash repositories (with holdings often kept in dollars) for the revenues generated by, for instance, state-owned oil companies. Unlike the central banks of most Western countries, whose main function is to accumulate reserves in an attempt to stabilize the domestic currency, most SWFs have a mission to invest aggressively and generate huge long-term returns. Imagine the biggest and most aggressive hedge fund on Wall Street, then imagine that that same fund is fifty or sixty times bigger and outside the reach of the SEC or any other major regulatory authority, and you’ve got a pretty good idea of what an SWF is.

I dropped my fork. “The Pennsylvania Turnpike is for sale?”

He nodded. “Yeah,” he said. “We didn’t do the deal, though. But, you know, there are some other deals that have gotten done. Or didn’t you know about this?”

As it turns out, the Pennsylvania Turnpike deal almost went through, only to be killed by the state legislature, but there were others just like it that did go through, most notably the sale of all the parking meters in Chicago to a consortium that included the Abu Dhabi Investment Authority, from the United Arab Emirates.

There were others: A toll highway in Indiana. The Chicago Skyway. A stretch of highway in Florida. Parking meters in Nashville, Pittsburgh, Los Angeles, and other cities. A port in Virginia. And a whole bevy of Californian public infrastructure projects, all either already leased or set to be leased for fifty or seventy-five years or more in exchange for one-off lump sum payments of a few billion bucks at best, usually just to help patch a hole or two in a single budget year.

America is quite literally for sale, at rock-bottom prices, and the buyers increasingly are the very people who scored big in the oil bubble. Thanks to Goldman Sachs and Morgan Stanley and the other investment banks that artificially jacked up the price of gasoline over the course of the last decade, Americans delivered a lot of their excess cash into the coffers of sovereign wealth funds like the Qatar Investment Authority, the Libyan Investment Authority, Saudi Arabia’s SAMA Foreign Holdings, and the UAE’s Abu Dhabi Investment Authority.

When you’re trying to sell a highway that was once considered one of your nation’s great engineering marvels—532 miles of hard-built road that required tons of dynamite, wood, and steel and the labor of thousands to bore seven mighty tunnels through the Allegheny Mountains—when you’re offering that up to petro-despots just so you can fight off a single-year budget shortfall, just so you can keep the lights on in the state house into the next fiscal year, you’ve entered a new stage in your societal development.

The effect of the 1973 oil embargo was dramatic. OPEC effectively quadrupled prices in a very short period of time, from around three dollars a barrel in October 1973 (the beginning of the boycott) to more than twelve dollars by early 1974. The United States was in the middle of its own stock market disaster at the time, caused in part by the dissolution of the Bretton Woods agreement (the core of which was Nixon’s decision to abandon the gold standard, an interesting story in its own right). In retrospect we ought to have known we were in trouble earlier that year because on January 7, 1973, then–private economist Alan Greenspan told the New York Times, “It is very rare that you can be as unqualifiedly bullish as you can be now.” Four days later, on January 11, the stock market crash of 1973–74 began. Over the course of the next two years or so, the NYSE would lose about 45 percent of its value.

Hilariously, the OPEC states didn’t drop the prices back to old levels after the American surrender in the Yom Kippur episode, but just kept them flat at a now escalated price. Prices skyrocketed again during the Carter administration and the turmoil of the deposition of the shah of Iran, leading to the infamous “energy crisis” with its long gas lines that some of us are old enough to remember very well.

Then, after that period, the United States and the Arab world negotiated an uneasy détente that left oil prices at a relatively steady rate for most of the next twenty-five years or so.

So now it’s 2004. The United States and George W. Bush have just done an interesting thing, going off the map to launch a lunatic invasion of Iraq in a move that destabilizes the entire region, again pissing off pretty much all the oil-rich Arab nationalist regimes in the Middle East, including the Saudi despots—although, on the other hand, fuck them.

The CFTC’s own analysis in 2008 put the amount of SWF money in commodity index investing at 9 percent overall, but was careful to note that none of them appeared to be Arab-based funds. The oddly specific insistence in the report that all the SWF money is “Western” and not Arab is particularly amusing because it wasn’t like the question of Arab ownership was even mentioned in the report—this was just the Bush administration enthusiastically volunteering that info on its own.

“I am doubting that result because I think it would be easy for an SWF to set up another company, say in Switzerland, or work through a broker or fund of funds and therefore not have a swap on directly with a bank but through an intermediary,” he says. “I think that the banks in complying with the CFTC request followed the letter of the law and not the spirit of the law.”

He goes on: “So if a sovereign wealth fund has an investment in a hedge fund—which they have a bunch—and that hedge fund was then invested in commodities, I expect that a bank would report that as a hedge fund to the CFTC and not a sovereign wealth fund. And their argument would be, ‘How can we know who the hedge fund’s investors are?’—even if they know darn well.

“I think that this is very much a national security issue because the Arab states might be pumping up oil prices and siphoning off huge amounts of money from our economy,” he adds. “A rogue state like Iran or Venezuela could use their petrodollars to keep us weak economically.”

We know some things about what happened between the start of the Iraq war and 2008 in the commodities market. We know the amount of speculative money in commodities exploded, that between 2003 and 2008 the amount of money in commodities overall went from $13 billion to $317 billion, and that because virtually all investment in commodities is long investment, that nearly twenty-five-fold increase necessarily drove oil prices up around the world, putting great gobs of money into the coffers of the SWFs.

There is absolutely nothing wrong with oil-producing Arab states accumulating money, particularly money from the production of oil, a resource that naturally belongs to those countries and ought rightly to contribute to those states’ prosperity. But for a variety of reasons the United States’s relationship to many Arab countries is complicated and at times hostile, and the phenomenon of the wealth funds of these states buying up American infrastructure is something that should probably not happen in secret.

But more to the point, the origin of these SWFs is not even relevant, necessarily. What is relevant is that these funds are foreign and that thanks to a remarkable series of events in the middle part of the last decade, they rapidly became owners of big chunks of American infrastructure. This is a process of a country systematically divesting itself of bits and pieces of its own sovereignty, and it’s taking place without really anyone noticing it happening—often not even the people asked to vote formally on the issue.

Here’s how they pulled off the paperwork in this deal. It’s really brilliant.

At the time the deal was voted on in December 2008, an “Abu Dhabi entity,” according to the mayor’s office, had just a 6 percent stake in the deal. Spokesman Peter Scales of the Chicago mayor’s office has declined to date to identify which entity that was, but by sifting through the disclosure documents, we can find a few possibilities, including a group called Cavendish Limited that is headquartered in Abu Dhabi.

Apart from that, most of the investors in the parking meter deal at the time it was voted on look like they were either American or from nations with relatively uncomplicated relationships with America. The Teacher Retirement System of Texas had a significant stake in one of the Morgan Stanley funds at the time of the sale, as did the Victorian Funds Management Corporation of Australia and Morgan Stanley itself. A Mitsubishi fund called Mitsubishi UFJ Financial Group also had a stake. There were a variety of other German and Australian investors.

All of these companies together put up the $1.2 billion or so to win the bid, and once they secured the deal, they created Chicago Parking Meters LLC, a new entity, which in turn hired an existing parking management company called LAZ to run the meter system in place of city-run parking police. The press stories about the deal invariably reported only that the city of Chicago had leased its parking meters to some combination of Morgan Stanley, Chicago Parking Meters LLC, and LAZ. A Chicago Sun-Times piece at the time read:

But two months after the deal, in February 2009, the ownership structure completely changed. According to Scales in the mayor’s press office:

In this case, after the Morgan Stanley investor group’s $1.15 billion bid was accepted and approved by the City in December 2008, Morgan Stanley sought new investors to provide additional capital and reduce their investment exposure—again, not an unusual move.

So, while a group of several Morgan Stanley infrastructure funds owned 100% of Chicago Parking Meters, LLC in December 2008, by February 2009, they had located a minority investor—Deeside Investments, Inc.—to accept 49.9% ownership. Tannadice Investments, a subsidiary of the government-owned Abu Dhabi Investment Authority, owns a 49.9% interest in Deeside.

So basically Morgan Stanley found a bunch of investors, including themselves, to put up over a billion dollars in December 2008; a big chunk of those investors then bailed out to make way in February 2009 for this Deeside Investments, which was 49.9 percent owned by Abu Dhabi and 50.1 percent owned by a company called Redoma SARL, about which nothing was known except that it had an address in Luxembourg.

But the most obnoxious part of the deal is that the city is now forced to cede control of their streets to a virtually unaccountable private and at least partially foreign-owned company. Written into the original deal were drastic price increases. In Hairston’s and Colon’s neighborhoods, meter rates went from 25¢ an hour to $1.00 an hour the first year, and to $1.20 an hour the year after that. And again, the city has no power to close streets, remove or move meters, or really do anything without asking the permission of Chicago Parking Meters LLC.

Obamacare had been designed as a coldly cynical political deal: massive giveaways to Big Pharma in the form of monster subsidies, and an equally lucrative handout to big insurance in the form of an individual mandate granting a few already-wealthy companies 25–30 million new customers who would be forced to buy their products at artificially inflated, federally protected prices.

Really Obamacare was designed as a straight money trade. The administration meant to deal away those billions in subsidies and the premiums from millions of involuntary customers in exchange for the relevant industries’ campaign contributions for a few election cycles going forward. It was almost the perfect example of politics in the Bubble Era, where the time horizon for anyone with any real power is always close to zero, long-term thinking is an alien concept, and even the most massive and ambitious undertakings are motivated entirely by short-term rewards. A radical reshaping of the entire economy, for two election cycles’ worth of campaign cash—that was what this bill meant. It sounds absurdly reductive to say so, but there’s no other explanation that makes any sense.

The epic struggle to pass health care reform was at once a shameless betrayal of the public trust of historic proportions and proof that a nation that perceives itself as being divided into red and blue should start paying attention to a third color that rules the day in Washington—a sort of puke-colored politics that puts together deals like this one and succeeds largely through its mastery of the capital city’s bureaucracy. The defining characteristic of puke politics is that if it must have government at all, the government should be purposefully ineffectual almost across the board in terms of the functions we usually ascribe to the state and really only competent in one area, and that’s giving away taxpayer money in return for campaign contributions.

Popola estimates that she spends roughly half her time chasing claims from just this one insurer, the dominant insurer in New Jersey; her hospital estimates that fully half of its administrative staff is employed solely to try to collect payment from insurers.

This backs up the one thing we know for sure about health care in America: a great deal of the costs come from the one part of this whole equation that absolutely nobody gives a fuck about, that has no natural support in the Congress or anywhere else—the paperwork.

Because we have no single-payer system, because we have 1,300 different insurance companies that all require different forms to be filled out and have different methods for judging claims, the great bulk of nonmedical personnel at hospitals and clinics are assigned to chasing claims. The half of the Bayonne administrative staff devoted to claims is not at all unusual.

American health care, to employ a seriously overused term, is a Kafkaesque parody of corporate inefficiency, with urgently necessary procedures approved at split-second speed by doctors standing over living patients at one end, balanced out on the other end by a huge Space Mountain of corporate denials that must later on be negotiated in the dark by helpless underpaid clerks in order to extract payment for those same procedures.

Studies have backed up the notion that paperwork is where most of the excess cost in the U.S. health care system comes from. By now almost everyone knows that American health care costs more than health care anywhere else in the world: the most recent studies show that American health care costs more than 16 percent of GDP, compared with notoriously socialistic states like France (its next-closest competitor) at around 11 percent, Sweden at 9.1 percent, and England at 8.4 percent.

The Bayonne doctor (who also didn’t give his name, depending heavily as he does on Horizon customers) who told me about watching his atrial fibrillation patient walk out the front door recounted the story like a man describing a fantastic dream—“I literally couldn’t believe my eyes.”

One patient, who also declined to give her name, had checked herself into the hospital with pneumonia and within three days was getting phone calls from Horizon and being told to pull out her IV drips, get up, and leave. “Horizon told me I was well enough to move, to get dressed and walk out of the hospital,” she says. “I panicked. I was having trouble breathing. So I did what they said.”

One would think that hospitals would have some sort of recourse against these kinds of tactics, but in point of fact the behavior of Horizon Blue Cross is exactly in line with the way the American health care system was drawn up. The system is designed to give regional insurers the power to coerce and intimidate customers in exactly this manner, and also to force them to pay inflated rates.

This is thanks to one of the worst pieces of legislation in American history, a monster called the McCarran-Ferguson Act that just might be a more shameful chapter in our legal history than the Jim Crow laws—and you won’t understand exactly how bad a deal Obamacare is until you can grasp the subtext of the whole so-called health care reform effort, which was to pass a “health care reform bill” without touching McCarran-Ferguson.

Almost everyone in America is familiar with the Sherman Antitrust Act, and most people have a fairly good idea of why it was enacted. The law was passed in 1890 (sponsored, ironically, by a predecessor of Max Baucus, a Senate Finance Committee chairman named John Sherman) and was designed to curtail the power of the monopolistic supercompanies that were beginning to dominate American business.

The original law grew out of an investigation into the practices of the insurance, coal, railroad, and oil industries in Ohio, where state officials had begun to see evidence of collusion and price-fixing among those firms, one of which was John D. Rockefeller’s Standard Oil. The truly amusing thing about the Sherman Antitrust Act (and the related state vanguard legislation, Ohio’s Valentine Antitrust Act of 1898) is that most modern Americans look back at the period when powerful companies routinely got together and colluded to constrict supply and jack up prices as something out of the Stone Age, impossible to conceive of in the modern United States.

George Pullman, the millionaire owner of the Pullman Palace Car Company, had decided to execute numerous wage cuts. The thing is, most of his employees lived in Pullman, Illinois, a town he virtually owned, meaning his employees were forced to buy from his stores, rent his houses, and so on. When he cut wages repeatedly without cutting other prices in Pullman, the workers flipped and, led by Eugene Debs, went on strike.

So Pullman did a brilliant thing and decided to attach U.S. Mail cars to his Pullman trains. Without workers servicing the mail cars, the mail stopped operating and the strikers were suddenly criminals guilty of interfering with the delivery of the U.S. Mail. Grover Cleveland sent twenty thousand troops to break up the strike and get the trains running, and Debs got six months in jail.

On the flip side, however, the Sherman Act was shortly thereafter used to break up Pullman’s authority. This was the sort of thing Congress used to have to do to make sure revered businessmen didn’t act like antebellum plantation owners, and the fact that both Congress and a few presidents (most notably Teddy Roosevelt) fought hard to give these laws teeth and break up these companies provides a sharp contrast between what government used to be like and what government is like, well, now.

“If a bunch of construction contractors got together and decided to set the prices of bricks and mortar, they’d all go to prison,” says Robert Hunter of the Consumer Federation of America, who served as a federal insurance administrator under President Ford. “But in insurance, it’s all legal.”

Why pass the buck from wind to flood? That’s easy—there was a federal, taxpayer-backed program to cover flood damage! In this case the National Flood Insurance Program issued many ruined homeowners checks from Uncle Sam to repair their flooded houses. And in a supreme bit of irony, the federal government contracted out to private companies to issue those rewards, even as some of those same companies were denying their own wind coverage.

“So here’s State Farm,” explains Martin, “running around, saying, here’s your $250,000 from the government for your flood damage, but oh, by the way, we don’t see any wind damage.”

Taylor’s home was one of the ones State Farm decided not to cover, which was bad enough—messing with a U.S. congressman. But the insurers were so brazen they denied coverage to Trent fucking Lott, who at the time was not very far removed from being the Senate majority leader, undoubtedly one of the most powerful men in America (to say nothing of Mississippi).

DeFazio says he spoke with Obama personally at a Democratic Caucus meeting in early 2010, around the time of Brown’s victory in Massachusetts, and asked him about his position on the antitrust exemption.

“What he told me,” DeFazio says, “is that he always thought it was ‘weird’ that the insurance industry had this exemption. But what he also said is, he needed his sixty votes.”

The reason the Democrats pursued the strategy they did was based almost entirely on their perception of the political playing field. This was a party leadership that was not really interested in actually fixing the health care problem; what they were much more concerned with was passing something they could call “health care reform” while at the same time doing it in a way that kept campaign contributions from the insurance and pharmaceutical industries away from the Republicans.

This was Rahm Emanuel’s political unified field theory: score a monster political win with the electorate and a massive takeaway of campaign funds at the same time, a great interconnected loop of deals that would keep them in office for two terms at the least. And to achieve this, all they had to do was sell out just enough to buy the acquiescence of the relevant businesses.

That would be a straight business deal, a backroom calculation of the sort the modern Democrats are quite good at. But the other half of the deal, managing the internal dynamics of their own party, that was less predictable, and from the outset it was clearly the problem that troubled the party leadership the most.

Toward the end of Obama’s first year in office, when certain pundits and journalists (myself included) began going after him for breaking an alarming number of campaign promises, a small public relations campaign gurgled up in the nation’s editorial pages in response. It was suggested that it’s unreasonable to criticize a politician for breaking campaign promises, apparently because expecting a candidate to avoid lying during an election campaign is unrealistic.

A White House spokesman even expressed that idea in graphic terms to a New York Times reporter, in response to a question about activists harping on Obama’s broken promises. These critics, he said, “need to take off their pajamas, get dressed, and realize that governing a closely divided country is complicated.”

But in the case of Barack Obama, complaints about broken promises—particularly with regard to those he made on health care—were, for two key reasons, not just a matter of weepy pajama-wearing teenage idealists failing to grasp how the hard, hard adult world works.

Obama made a lot of these policy promises sound like they weren’t particularly tough decisions for him, either. My personal favorite was his take on the individual mandate, offered in February 2008 in an interview on CNN. Obama is laughing when he’s asked about mandates. “If a mandate was the solution,” he chuckles, “we could try that to solve homelessness by mandating everybody buy a house.” Roughly a year later, Obama would be ramming a sweeping mandate to buy insurance down the throats of the entire U.S. population.

Candidate Obama similarly laughed at the notion that reimporting cheap drugs from Canada was unsafe, but when he became president his administration ultimately rejected reimportation over safety issues. His campaign take on taxing “Cadillac” health plans (a major McCain campaign idea) was just as eloquent; candidate Obama was one of the few politicians to grasp that a lot of these so-called Cadillac plans were union benefits that had been negotiated up in exchange for concessions on salary in collective bargaining.

“John McCain calls these plans ‘Cadillac plans,’ ” Obama said in October 2008. “Now in some cases, it may be that a corporate CEO is getting too good a deal. But what if you’re a line worker making a good American car like the Cadillac? What if you’re one of the steelworkers … and you’ve given up wage increases in exchange for better health care?”

It wasn’t just the promise, it was the candidate’s nuanced understanding of issues like this, added to a seemingly rare willingness to educate the public about these matters, that impressed voters like me before the election. Obama clearly understood that taxing Cadillac plans would disproportionately punish union members, but then as president he turned around and pushed for exactly that tax as health care moved toward the finish line, eschewing a genuinely progressive millionaire’s tax as an alternative.

Probably the most cynical reversal of all was Obama’s extremely sudden change of heart when it came to Billy Tauzin, the former Louisiana congressman who was the principal author of the Bush-era prescription drug benefit bill of 2003—a massive giveaway to the pharmaceutical industry that barred the government from negotiating bulk rates for Medicare purchases of drugs. Here is the text of an Obama campaign ad called “Billy” that showed Obama talking to a small group of seniors:

The pharmaceutical industry wrote into the prescription drug plan that Medicare could not negotiate with drug companies. And you know what, the chairman of the committee who pushed the law through went to work for the pharmaceutical industry making two million dollars a year. Imagine that. That’s an example of the same old game playing in Washington. I don’t want to learn how to play the game better. I want to put an end to the game playing.

n a similar aping of Bush-era corruption, the Obama administration served up an almost exact answer to the Armstrong Williams scandal (in which a conservative pundit was paid $240,000 via a Department of Education grant in exchange for his public promotion of George Bush’s No Child Left Behind Act) by repeatedly citing the work of an MIT economist named Jonathan Gruber in its propagandizing of health care reform. The administration failed to disclose that Gruber, who was extremely enthusiastic about Obamacare all year, had received some $780,000 in taxpayer money via a consulting contract with the Department of Health and Human Services.

“If this had been George Bush, liberals would have been screaming bloody murder,” says author and activist David Sirota. “But they were silent.”

Why were they silent? Well, among other things, because the White House carefully disciplined virtually the entire universe of liberal activist groups through regular contact, instruction, and intimidation. One of the chief forums here was the little-publicized meetings of a group called Common Purpose, run by former Dick-Gephardt-aide-turned-lobbyist Erik Smith and held once a week at the Capitol Hilton.

At these weekly meetings, liberal activist groups like Change to Win, Rock the Vote, and MoveOn would show up and receive guidance—some would say marching orders—from a White House representative, typically former Max Baucus aide and legendary Washington hardass Jim Messina.

Deals like this increased the obligation of the average taxpayer under Obamacare to a triple ultimatum: many of us would now have to (1) buy our own private health insurance, (2) pay taxes to subsidize the insurance of low-income citizens across the country, and (3) pay still more taxes to subsidize the ordinary Medicaid payments for the citizens of the state of Nebraska, which thanks to Nelson and the White House would not have to pay its own share. That was the original deal, anyway.

Stage one involved the election campaign of a magnetic, personable intellectual named Barack Obama who corralled millions of voters into his camp by promising health care reform with a public option that would reduce costs without being an open giveaway to the drug and insurance industries.

Stage two: after getting elected, Obama invited said industries to the White House early on in the process and cut a private deal to reverse virtually all of his campaign promises in exchange for their support of the bill.

Stage three then involved pretending the deal hadn’t been made (the White House to this day denies that the PhRMA deal that Tauzin admitted to took place) and insisting instead that the bill Obama supported was not an industry giveaway but simply good policy—and to prove it, they moved to stage four, which was repeatedly citing the research of an MIT economist who received nearly a million dollars from the federal government.

Stage five involved bullying their own ranks to lay off conservative Democrats and get in line behind a public relations campaign against a totally idiotic and irrelevant Republican-led protest movement.

Stages six through eight were blaming the Senate for taking all the good stuff out of the bill, buying off the remaining recalcitrant members for $100 million apiece, and then sauntering off into the sunset atop a multitrillion-dollar corporate welfare program that might further wreck an already wrecked system for a generation, but will keep Rahm Emanuel rolling in campaign contributions for, well, the next two electoral cycles.

And then of course there was stage nine—losing Ted Kennedy’s seat and having to use the reconciliation process after all, but not taking advantage of that process to improve the bill in any significant way.

But perhaps as interesting as the actual material in the original piece was what happened after we ran it, as the magazine and I got sucked into a public relations firestorm that was both bizarre and educational. My initial reaction to being blasted in the media by commentators from CNBC (“Stop Blaming Goldman Sachs!” read Charlie Gasparino’s rant; another on-air talent called me a “lunatic”), the Atlantic, and other outlets was that this was just typical media turf-war stuff: a bunch of insiders angrily piling on someone who didn’t have any background in their area of expertise (which I did not) and yet was not-so-subtly indicting them for falling asleep on the job.

That was part of the story. If Goldman Sachs really was, as we’d described, little more than an upscale version of a boiler-room pump-and-dump operation, then that definitely was an indictment of the financial press, which almost universally praised the bank as a pillar of economic genius. If financial journalists like the Charlie Gasparinos and Megan McArdles out there took it that way, good—I meant it that way.

But when the uproar continued for more than a month—an eternity in news cycle time—it was clear that there was something else at work. Looking back now, what I experienced in the wake of the Goldman piece was a lesson in a subtle truth about class politics in this country.

Which is this: you can pick on the rich in an ironic, Arrested Development sort of way, you can muss Donald Trump’s hair, you can even talk abstractly about class economics using clinical terms like “income disparity.” But in our media you’re not allowed to just kick the rich in the balls and use class-warfare language. The taboo isn’t so much the subject matter, the taboo is the tone. You’re allowed to grimace and shake your head at their shenanigans, but you can’t call them crooks and imply that they haven’t earned their money by being better or smarter than everyone else, at least not until they’ve been indicted or gone bankrupt.

Goldman was the ultimate embodiment of this media privilege. The most valuable item in all the bank’s holdings was its undeserved reputation for brilliance and efficiency. The narrative that Goldman had always enjoyed was a sort of ongoing validation of the Ayn Rand/Alan Greenspan fairy tale, in which their riches and power sufficed as testimony to their social value. They made lots of money, they were good at whatever it is they did, therefore they were “producers” and should be given the benefit of the doubt. This fairy tale was deeply ingrained in the financial press, to the point where any suggestion to the contrary had to be attacked, regardless of the substance of that suggestion.

The abuse I was taking after my Goldman story came out wasn’t so much a media turf war as a defense of The Narrative. I believe now that there’s real fear of what happens once The Narrative blows up—because once we’ve ripped the rich to shreds, what we’re left with is a whole bunch of broke people wondering where the hell their money went, without even a soothing fairy tale to help them get to sleep at night.

People in the financial community who actually worked in that world, the traders and the bankers themselves who joked with me about “those motherfuckers,” did not have these illusions. You’re not going to be good at making money if you need there to be a halo around the moneymaking process. The only people who really clung to those illusions were the financial commentators, right up to the point where those illusions became completely unsustainable. Within six months after this article came out, it was de rigueur even for wire services to reference Goldman’s “vampire squid” reputation. But by then the executives at Goldman weren’t worrying all that much about their plummeting reputation—and that, in the end, turned out to be the most interesting part of this story. But more on that at the end of this updated version of the original piece,* which I’ve saved for last in this book because the history of Goldman—a company that has developed a reputation as the smartest and nimblest of corporate enterprises—is the story of the great lie at the center of our political and economic life. Goldman is not a company of geniuses, it’s a company of criminals. And far from being the best fruit of a democratic, capitalist society, it’s the apotheosis of the Grifter Era, a parasitic enterprise that has attached itself to the American government and taxpayer and shamelessly engorged itself on us all.

It achieves this using the same playbook over and over again. What it does is position itself in the middle of horrific bubble manias that function like giant lottery schemes, hoovering vast sums from the middle and lower floors of society with the aid of a government that lets it rewrite the rules, in exchange for the relative pennies the bank throws at political patronage. This dynamic allows the bank to suck wealth out of the economy and vitality out of the democracy at the same time, resulting in a snowballingly regressive phenomenon that pushes us closer to penury and oligarchy at the same time.

Goldman wasn’t always a too-big-to-fail Wall Street behemoth and the ruthless, bluntly unapologetic face of kill-or-be-killed capitalism on steroids—just almost always. The bank was actually founded in 1882 by a German Jewish immigrant named Marcus Goldman, who built it up with his son-in-law, Samuel Sachs. They were pioneers in the use of commercial paper, which is just a fancy way of saying they made money lending out short-term IOUs to small-time vendors in downtown Manhattan.

You can probably guess the basic plotline of Goldman’s first one hundred years in business: plucky immigrant-led investment bank beats the odds, pulls itself up by its bootstraps, makes shitloads of money. In that ancient history there’s only one episode that bears real scrutiny now, in light of more recent events: Goldman’s disastrous foray into the speculative mania of precrash Wall Street in the late 1920s and the launch of now-infamous “investment trusts” like the Goldman Sachs Trading Corporation, the Shenandoah Corporation, and the Blue Ridge Corporation.

Beginning a pattern that would repeat itself over and over again, Goldman got into the investment trust game slightly late, then jumped in with both feet and went absolutely hog wild. The first effort was the Goldman Sachs Trading Corporation; the bank issued a million shares at $100 apiece, bought all those shares with its own money, and then sold 90 percent of the fund to the hungry public at $104.

GSTC then relentlessly bought shares in itself, bidding the price up further and further. Eventually it dumped part of its holdings and sponsored a new trust, Shenandoah, and issued millions more in shares in that fund—which in turn later sponsored yet another trust called Blue Ridge. The last trust was really just another front for an endless investment pyramid, Goldman hiding behind Goldman hiding behind Goldman. Of the 7,250,000 initial shares of Blue Ridge, 6,250,000 were actually owned by Shenandoah, which of course was in large part owned by Goldman Trading.

The end result (ask yourself if this sounds familiar) was a daisy chain of borrowed money exquisitely vulnerable to any decline in performance anywhere along the line. It sounds complicated, but the basic idea isn’t hard to follow. You take a dollar and borrow nine against it; then you take that ten-dollar fund and borrow ninety; then you take your hundred-dollar fund and, so long as the public is still lending, borrow and invest nine hundred. If the last fund in the line starts to lose value, you no longer have the money to pay everyone back, and everyone gets massacred.

also, oddly enough, had a reputation for relatively solid ethics and long-term thinking, as its executives were trained to adopt the firm’s mantra, “Long-term greedy.” One former Goldman banker who left the firm in the early nineties recalls seeing his superiors give up a very profitable deal on the grounds that it was a long-term loser. “We gave back money to ‘grown-up’ corporate clients who had made [for them] bad deals with us,” he says. “Everything we did was legal and fair … but ‘long-term greedy’ said we didn’t want to make such a profit at the clients’ collective expense that we spoiled the marketplace.”

But then something happened. It’s hard to say what it was exactly; it might have been the fact that its CEO in the early nineties, Robert Rubin, followed Bill Clinton to the White House, where he was the director of Clinton’s new National Economic Council and eventually became Treasury secretary. While the American media fell in love with the storyline of a pair of baby-boomer, sixties-child, Fleetwood Mac–fan yuppies nesting in the White House, it also nursed an undisguised crush on the obnoxious Rubin, who was hyped as the smartest person ever to walk the face of the earth.

Rubin was the prototypical Goldman banker. He was probably born in a four-thousand-dollar suit, he had a face that seemed permanently frozen just short of an apology for being so much smarter than you, and he maintained a Spocklike, emotion-neutral exterior; the only human feeling you could imagine him experiencing was a nightmare about being forced to fly coach. The press went batshit over him and it became almost a national cliché that whatever Rubin thought was probably the correct economic policy, a phenomenon that reached its nadir in 1999, when Rubin appeared on that famous Time magazine cover with Alan Greenspan and then–Treasury chief Larry Summers under the headline “The Committee to Save the World.”

It sounds obvious now, but what the average investor didn’t know at the time was that the banks had changed the rules of the game, making the deals look better than they were, setting up what was in reality a two-tiered investment system—one for bankers and insiders who knew the real numbers, and another for the lay investor, who was invited to chase soaring prices the banks themselves knew were irrational. While Goldman’s later pattern would be to capitalize on changes in the regulatory environment, its key innovation in the Internet years was its executives’ abandonment of their own industry’s quality control standards.

“What people don’t realize is that the banks had adopted strict underwriting standards after the Depression,” says one prominent hedge fund manager. “For decades, no bank would take a company public unless it met certain conditions. It had to have existed for at least five years. It had to have been profitable for at least three years in a row. It had to be making money at the time of the IPO.

“Goldman took these rules and just threw them out the window. They’d sign up Worthless.com and take it public five minutes into its existence. The public mostly had no idea. They assumed these companies met the banks’ standards.”

Jay Ritter, a professor at the University of Florida, says the decline in underwriting standards began in the eighties. “In the early eighties the major underwriters insisted on three years of profitability. Then it was one year, then it was a quarter. By the time of the Internet bubble things had declined to the point where not only was profitability not required next year, they were not requiring profitability in the foreseeable future.”

Goldman has repeatedly denied that it changed its underwriting standards during the Internet years, but the statistics belie the bank’s claims. Just like it did with the investment trust phenomenon, Goldman in the Internet years started slow and finished crazy.

Of those 1999 IPOs, a full four-fifths were Internet companies (including stillborns like Webvan and eToys), making Goldman the leading underwriter of Internet IPOs during the boom. The company’s IPOs were consistently more volatile than those of their competitors: the average Goldman IPO in 1999 leapt 281 percent above its offering price that year, compared to the Wall Street average of 183 percent.

How did they manage such extraordinary results? One answer was that they used a practice called laddering, which is just a fancy way of saying they manipulated the share price of new offerings. Here’s how it works: Say you’re Goldman Sachs and Worthless.com comes to you and asks you to take their company public. You agree on the usual terms: you’ll price the stock, determine how many shares should be released, and take the Worthless.com CEO on a “road tour” to meet and schmooze investors, in exchange for a substantial fee (typically 6–7 percent of the amount raised, which added up to enormous sums in the tens if not hundreds of millions).

All of these factors conspired to turn the Internet bubble into one of the greatest financial disasters in world history. More than $5 trillion of wealth was wiped out on the NASDAQ alone—an amount that doesn’t seem like an incomprehensible disaster only in light of recent developments. But despite the enormous evaporation of public wealth and similarly large job losses that without a shadow of a doubt were due in significant part to the bank’s indifferent IPO ethics, Goldman’s employees—in what again would be a pattern with the bank—managed to do just fine throughout the crash.

The bank paid out $6.4 billion in compensation and benefits to 15,361 employees in 1999 (an average of close to $420K per employee), paid $7.7 billion to 22,627 employees in 2000 (an average of $340K), and stayed at $7.7 billion, paid out to 22,677 employees ($339K), in 2001. Even in 2002, the year the bank was most affected by the crash, employee compensation barely moved: the total payout was $6.7 billion to 19,739 employees, an average of $341K per person—virtually the same as in the precrash years.

Now, if you laddered and spun fifty Internet IPOs and forty-five of them went bust within a year, and besides that you got caught by the SEC and your firm was forced to pay a $40 million fine, well, so what? By the time the SEC got around to fining your firm, the yacht you bought with your IPO bonuses was already five or six years old. Besides, you were probably out of Goldman by then, running the Treasury or maybe the state of New Jersey. (One of the truly comic moments in the history of America’s recent financial collapse came when Jersey governor Jon Corzine, who ran Goldman from 1997 to 1999 and left with $320 million in IPO-fattened Goldman stock, said in 2002 that “I’ve never even heard of ‘laddering.’ ”)

Goldman’s role in the sweeping global disaster that was the housing bubble is not hard to trace. By the peak of the housing boom, 2006, Goldman was issuing $44.5 billion worth of mortgage-based investment vehicles annually (mainly CDOs), a lot of it to institutional investors like pensions and insurance companies. Of course, as we’ve seen, within this massive issue was loads of pure crap, loans underwritten according to a pyramid of lies and fraudulent information. How does a bank make money selling gigantic packages of grade-D horseshit? Easy: it bets against the stuff as it’s selling it! What was truly amazing about Goldman was the sheer balls it showed during its handling of the housing business. First it had the gall to take all this hideous, completely irresponsible mortgage lending from beneath-gangster-status firms like Countrywide and sell it to pensioners and municipalities, old people for God’s sake, and pretend the whole time that it wasn’t toxic waste. But at the same time, it took short positions in the same market, in essence betting against the same crap it was selling. And worse than that, it bragged about it in public.

When Viniar bragged about being short on mortgages, he was probably referring to credit default swaps the bank held with firms like AIG. This is part of the reason that the AIG bailout is so troubling: when at least $13 billion worth of taxpayer money given to AIG in the bailout ultimately went to Goldman, some of that money was doubtless going to cover the bets Goldman had made against the stuff the bank itself was selling to old people and cities and states. In other words, Goldman made out on the housing bubble twice: it fucked the investors who bought their horseshit CDOs by betting against its own crappy product, then it turned around and fucked the taxpayer by making him pay off those same bets.

Fall 2008. After the bursting of the commodities bubble, which, as we’ve seen, was another largely Goldman-engineered scam, there was no new bubble to keep things humming—this time the money seems really to be gone, like worldwide depression gone. Then–Treasury secretary and former Goldman chief Paulson makes a momentous series of decisions. Although he has already engineered a rescue of Bear Stearns that same spring, and helped bail out quasi-private lenders Fannie Mae and Freddie Mac, Paulson elects to let Lehman Brothers—one of Goldman’s last real competitors—collapse without intervention.

That same weekend, he green-lights a massive $80 billion bailout of AIG, a crippled insurance giant that just happens to owe Goldman Sachs about $20 billion. Paulson’s decision to intervene selectively in the market would radically reshape the competitive dynamic on Wall Street. Goldman’s main competitor, Lehman Brothers, was wiped out, as was Merrill Lynch, which was bought by Bank of America in a Treasury-brokered shotgun wedding. Bear Stearns had died six months earlier. So when the dust settles after the AIG wreck, only two of the top five investment banks on Wall Street are left standing: Goldman and Morgan Stanley.

Meanwhile, after the AIG bailout, Paulson announces his federal bailout for the financial industry, a $700 billion plan called the Troubled Asset Relief Program (or TARP), and immediately puts a heretofore unknown thirty-five-year-old Goldman banker named Neel Kashkari in charge of administering the funds. In order to qualify for bailout monies, Goldman announces that it will be converting from an investment bank to a bank holding company—a move that allows it access not only to $10 billion in TARP funds but to a whole galaxy of less conspicuous publicly backed funding sources, most notably lending from the discount window of the Federal Reserve Bank. Its chief remaining competitor, Morgan Stanley, announces the same move on the same day.

No one knows how much either bank borrows from the Fed, but by the end of the year upwards of $3 trillion will have been lent out by the Fed under a series of new bailout programs—and thanks to an obscure law allowing the Fed to block most congressional audits, both the amounts and the recipients of these monies remain almost entirely secret.

Moreover, serendipitously from Goldman’s point of view, its conversion to a bank holding company means that its primary regulator is now the New York Federal Reserve Bank, whose chairman at the time is one Stephen Friedman, a former managing director of, well, you know.

Friedman, in addition, is supposed to divest himself of his Goldman stock after Goldman becomes a bank holding company, but he not only doesn’t dump his holdings, he goes out and buys 37,000 additional shares in December 2008, leaving him with almost 100,000 shares in his old bank, worth upwards of $13 million at the time.

Throughout that crisis period Goldman can’t move an inch without getting a hand job from a government agency. In that same period, in late September 2008, both Goldman CEO Lloyd Blankfein and Morgan Stanley CEO John Mack lobby the government to impose restrictions on short sellers who were attacking their companies—and they get them, thanks to a decision by the SEC on September 21 to ban bets against some eight hundred financial stocks. Goldman’s share price rises some 30 percent in the first week of the ban.

Here’s the real punch line. After playing an intimate role in three historic bubble catastrophes, after helping $5 trillion in wealth disappear from the NASDAQ in the early part of the 2000s, after pawning off thousands of toxic mortgages on pensioners and cities, after helping drive the price of gas up above $4.60 a gallon for half a year, and helping 100 million new people around the world join the ranks of the hungry, and securing tens of billions of taxpayer dollars through a series of bailouts, what did Goldman Sachs give back to the people of the United States in the year 2008?

Fourteen million dollars.

That is what the firm paid in taxes in 2008: an effective tax rate of exactly 1, read it, one, percent. The bank paid out $10 billion in compensation and bonuses that year and made a profit above $2 billion, and yet it paid the government less than a third of what it paid Lloyd Blankfein, who made $42.9 million in 2008.

How is this possible? According to its annual report, the low taxes are due in large part to changes in the bank’s “geographic earnings mix.” In other words, the bank moved its money around so that all of its earnings took place in foreign countries with low tax rates. Thanks to our completely fucked corporate tax system, companies like Goldman can ship their revenues offshore and defer taxes on those revenues indefinitely, even while they claim deductions up front on that same untaxed income. This is why any corporation with an at least occasionally sober accountant can usually find a way to pay no taxes at all. A Government Accountability Office report, in fact, found that between 1998 and 2005, two-thirds of all corporations operating in the United States paid no taxes at all.

At the same time it was orphaning more than a billion dollars in losses, the bank announced a highly suspicious $1.8 billion profit for the first quarter of 2009, with a large chunk of that money seemingly coming from money funneled to it by taxpayers via the AIG bailout (although the bank cryptically claims in its first-quarter report that the “total AIG impact on earnings, in round numbers, was zero”). “They cooked those first-quarter results six ways from Sunday,” says the hedge fund manager. “They hid the losses in the orphan month and called the bailout money profit.”

Two more numbers stood out from that stunning first-quarter turnaround: one, the bank paid out an astonishing $4.7 billion in bonuses and compensation in that quarter, an 18 percent increase over the first quarter of 2008. The other number was $5 billion—the amount of money it raised in a new share issue almost immediately after releasing its first-quarter result. Taken altogether, what these numbers meant was this: Goldman essentially borrowed a $5 billion salary bump for its executives in the middle of a crisis, using half-baked accounting to reel in investors, just months after receiving billions in a taxpayer bailout.

The bank didn’t really bother with me at all—why would it need to?—but other financial reporters surely did. Overwhelmingly the theme of the criticism was not that my reporting was factually wrong, but that I’d missed the larger, meta-Randian truth, which is that while Goldman might be corrupt and might have used government influence to bail itself out, this was necessary for the country, because our best and our brightest must be saved at all costs. Otherwise, who would put bread on our tables? Gasparino, the CNBC tool, put it best:

And thank God Paulson and Bernanke turned to Blankfein and not the editors at Rolling Stone for help. I hate to break it to everyone out there in a class-warfare mood, but if AIG is imploding and you’re the government and you need help restructuring the company or figuring out ways the government can fix the problem, Goldman is a good place to start.

Yes, Goldman might be guilty of many things, they may even have stolen billions of your hard-earned tax dollars to buy themselves yachts and blowjobs, but we can’t throw out the baby with the bathwater!

But things did shift a bit. The Narrative was wounded. The mainstream media act just like in the classic studies of herd animals: at the exact instant more than half of the herd makes a move to bolt, they all move. That’s what happened in the summer of 2009: for a variety of reasons, including the Friedman and Aleynikov scandals, the tide of public opinion turned against Goldman. The same on-their-knees/at-your-throat media reversal that George Bush felt at the end of his term was now being experienced by the bank. And from there, the next year or so was like one long chorus of exposés about Goldman’s behavior. Among the stories that came out:

Goldman survived the initial uproar over the scandal; in fact, although its share price dipped 12.8 percent on the day the SEC filed its suit, the share price jumped back up on the next trading day. A few days after that, Goldman announced a first-quarter profit of $3.46 billion. The bank was still cruising, although its reputation had clearly taken a hit. Over the next months investors gradually began to flee the company, which had been outed not for screwing the taxpayer or mom-and-pop investors, but its own clients. Goldman ended up losing nearly $8 billion in share value between the date the suit was announced and the date that it ultimately settled with the SEC later in the summer of 2010 for $550 million—a record fine, but one that nonetheless represented just a fraction even of Goldman’s first-quarter profits that year. In fact, news that the SEC fine wasn’t larger (many analysts expected it to be over a billion dollars) sent Goldman’s stock price soaring back up 9 percent in one day; the bank recovered over $550 million in share value the day the fine was announced.

Even before the Senate hearing, there was plenty of evidence of that. Goldman Sachs international adviser Brian Griffiths reached a new low in late 2009 when he told an audience at St. Paul’s Cathedral in London that “the injunction of Jesus to love others as ourselves is an endorsement of self-interest” and “We have to tolerate the inequality as a way to achieving greater prosperity and opportunity for all.”

Griffiths was followed in very short order by Lloyd Blankfein himself, who in a remarkable interview with the Times (London) doled out perhaps the quote of the year. From that piece:

Is it possible to make too much money? “Is it possible to have too much ambition? Is it possible to be too successful?” Blankfein shoots back. “I don’t want people in this firm to think that they have accomplished as much for themselves as they can and go on vacation. As the guardian of the interests of the shareholders and, by the way, for the purposes of society, I’d like them to continue to do what they are doing. I don’t want to put a cap on their ambition. It’s hard for me to argue for a cap on their compensation.”

By the time this book hits the shelves, the 2010 midterm elections will be upon us, at which time this dumbing-down process with regard to the public perception of the financial catastrophe should be more or less complete. The Tea Party and its ilk will have found a way to push the national conversation in the desired idiotic direction. Instead of talking about what to do about the fact that, after all the mergers in the crisis, just four banks now account for half of the country’s mortgages and two-thirds of its credit card accounts, we’ll be debating whether or not we should still automatically grant citizenship to the American-born children of illegal immigrants, or should let Arizona institute a pass-law regime, or some such thing.

Meanwhile, half a world away, in little-advertised meetings of international bankers in Basel, Switzerland, the financial services industry will be settling on new capital standards for the world’s banks. And here at home, bodies like the CFTC and the Treasury will be slowly, agonizingly making supertechnical decisions on regulatory questions like “Who exactly will be subject to the new Consumer Financial Protection Bureau?” and “What kinds of activities will be covered by the partial ban on proprietary trading?”

On these real meat-and-potatoes questions about how to set the rules for modern business, most ordinary people won’t have a voice at all; they won’t even be aware that these decisions are being made. But industry lobbyists are already positioning themselves to have a behind-the-scenes impact on the new rules. While the rest of us argue about Mexican babies before the midterms, hotshot DC law firms like Skadden, Arps, Slate, Meagher & Flom may have as many as a hundred lawyers working on the unresolved questions in the Dodd-Frank bill. And that’s just one firm. Thousands of lobbyists will be employed; millions of lobbying dollars will be spent.