The $200 Billion Bail-out for Predator Banks and Spitzer Charges are Intimately Linked

While New York Governor Eliot Spitzer was paying an ‘escort’ $4,300 in a hotel room in Washington, just down the road, George Bush’s new Federal Reserve Board Chairman, Ben Bernanke, was secretly handing over $200 billion in a tryst with mortgage bank industry speculators.

Both acts were wanton, wicked and lewd. But there’s a BIG difference. The Governor was using his own checkbook. Bush’s man Bernanke was using ours.

This week, Bernanke’s Fed, for the first time in its history, loaned a selected coterie of banks one-fifth of a trillion dollars to guarantee these banks’ mortgage-backed junk bonds. The deluge of public loot was an eye-popping windfall to the very banking predators who have brought two million families to the brink of foreclosure.

Up until Wednesday, there was one single, lonely politician who stood in the way of this creepy little assignation at the bankers’ bordello: Eliot Spitzer.

Who are they kidding? Spitzer’s lynching and the bankers’ enriching are intimately tied.

How? Follow the money.

The press has swallowed Wall Street’s line that millions of US families are about to lose their homes because they bought homes they couldn’t afford or took loans too big for their wallets. Ba-LON-ey. That’s blaming the victim.

Here’s what happened. Since the Bush regime came to power, a new species of loan became the norm, the ‘sub-prime’ mortgage and it’s variants including loans with teeny “introductory” interest rates. From out of nowhere, a company called ‘Countrywide’ became America’s top mortgage lender, accounting for one in five home loans, a large chuck of these ‘sub-prime.’

Here’s how it worked: The Grinning Family, with US average household income, gets a $200,000 mortgage at 4% for two years. Their $955 a month payment is 25% of their income. No problem. Their banker promises them a new mortgage, again at the cheap rate, in two years. But in two years, the promise ain’t worth a can of spam and the Grinnings are told to scram – because their house is now worth less than the mortgage. Now, the mortgage hits 9% or $1,609 plus fees to recover the “discount” they had for two years. Suddenly, payments equal 42% to 50% of pre-tax income. Grinnings move into their Toyota.

Now, what kind of American is ‘sub-prime.’ Guess. No peeking. Here’s a hint: 73% of HIGH INCOME Black and Hispanic borrowers were given sub-prime loans versus 17% of similar-income Whites. Dark-skinned borrowers aren’t stupid – they had no choice. They were ‘steered’ as it’s called in the mortgage sharking business.

‘Steering,’ sub-prime loans with usurious kickers, fake inducements to over-borrow, called ‘fraudulent conveyance’ or ‘predatory lending’ under US law, were almost completely forbidden in the olden days (Clinton Administration and earlier) by federal regulators and state laws as nothing more than fancy loan-sharking.

But when the Bush regime took over, Countrywide and its banking brethren were told to party hardy — it was OK now to steer’m, fake’m, charge’m and take’m.

But there was this annoying party-pooper. The Attorney General of New York, Eliot Spitzer, who sued these guys to a fare-thee-well. Or tried to.

Instead of regulating the banks that had run amok, Bush’s regulators went on the warpath against Spitzer and states attempting to stop predatory practices. Making an unprecedented use of the legal power of “federal pre-emption,” Bush-bots ordered the states to NOT enforce their consumer protection laws.

Indeed, the feds actually filed a lawsuit to block Spitzer’s investigation of ugly racial mortgage steering. Bush’s banking buddies were especially steamed that Spitzer hammered bank practices across the nation using New York State laws.

Spitzer not only took on Countrywide, he took on their predatory enablers in the investment banking community. Behind Countrywide was the Mother Shark, its funder and now owner, Bank of America. Others joined the sharkfest: Goldman Sachs, Merrill Lynch and Citigroup’s Citibank made mortgage usury their major profit centers. They did this through a bit of financial legerdemain called “securitization.”

What that means is that they took a bunch of junk mortgages, like the Grinnings, loans about to go down the toilet and re-packaged them into “tranches” of bonds which were stamped “AAA” – top grade – by bond rating agencies. These gold-painted turds were sold as sparkling safe investments to US school district pension funds and town governments in Finland (really).

When the housing bubble burst and the paint flaked off, investors were left with the poop and the bankers were left with bonuses. Countrywide’s top man, Angelo Mozilo, will ‘earn’ a $77 million buy-out bonus this year on top of the $656 million — over half a billion dollars — he pulled in from 1998 through 2007.

But there were rumblings that the party would soon be over. Angry regulators, burned investors and the weight of millions of homes about to be boarded up were causing the sharks to sink. Countrywide’s stock was down 50%, and Citigroup was off 38%, not pleasing to the Gulf sheiks who now control its biggest share blocks.

Then, on Wednesday of this week, the unthinkable happened. Carlyle Capital went bankrupt. Who? That’s Carlyle as in Carlyle Group. James Baker, Senior Counsel. Notable partners, former and past: George Bush, the Bin Laden family and more dictators, potentates, pirates and presidents than you can count.

The Fed had to act. Bernanke opened the vault and dumped $200 billion on the poor little suffering bankers. They got the public treasure – and got to keep the Grinning’s house. There was no ‘quid’ of a foreclosure moratorium for the ‘pro quo’ of public bail-out. Not one family was saved – but not one banker was left behind.

Every mortgage sharking operation shot up in value. Mozilo’s Countrywide stock rose 17% in one day. The Citi sheiks saw their company’s stock rise $10 billion in an afternoon.

And that very same day the bail-out was decided — what a coinkydink! — the man called, ‘The Sheriff of Wall Street’ was cuffed. Spitzer was silenced.

Do I believe the banks called Justice and said, “Take him down today!” Naw, that’s not how the system works. But the big players knew that unless Spitzer was taken out, he would create enough ruckus to spoil the party. Headlines in the financial press — one was “Wall Street Declares War on Spitzer” — made clear to Bush’s enforcers at Justice who their number one target should be. And it wasn’t Bin Laden.

It was the night of February 13 when Spitzer made the bone-headed choice to order take-out in his Washington Hotel room. He had just finished signing these words for the Washington Post about predatory loans:

“Not only did the Bush administration do nothing to protect consumers, it embarked on an aggressive and unprecedented campaign to prevent states from protecting their residents from the very problems to which he federal government was turning a blind eye.”

Bush, said Spitzer right in the headline, was the “Predator Lenders’ Partner in Crime.” The President, said Spitzer, was a fugitive from justice. And Spitzer was in Washington to launch a campaign to take on the Bush regime and the biggest financial powers on the planet.

Spitzer wrote, “When history tells the story of the subprime lending crisis and recounts its devastating effects on the lives of so many innocent homeowners the Bush administration will not be judged favorably.”

But now, the Administration can rest assured that this love story — of Bush and his bankers — will not be told by history at all — now that the Sheriff of Wall Street has fallen on his own gun.

A note on “Prosecutorial Indiscretion.”

Back in the day when I was an investigator of racketeers for government, the federal prosecutor I was assisting was deciding whether to launch a case based on his negotiations for airtime with 60 Minutes. I’m not allowed to tell you the prosecutor’s name, but I want to mention he was recently seen shouting, “Florida is Rudi country! Florida is Rudi country!”

Not all crimes lead to federal bust or even public exposure. It’s up to something called “prosecutorial discretion.”

Funny thing, this ‘discretion.’ For example, Senator David Vitter, Republican of Louisiana, paid Washington DC prostitutes to put him diapers (ewww!), yet the Senator was not exposed by the US prosecutors busting the pimp-ring that pampered him.
Naming and shaming and ruining Spitzer – rarely done in these cases – was made at the ‘discretion’ of Bush’s Justice Department.

Or maybe we should say, ‘indiscretion.’

Greg Palast studied healthcare economics at the Center for Hospital Administration Studies at the University of Chicago. His investigative reports can be seen on BBC Television's Newsnight. Read other articles by Greg, or visit Greg's website.

22 comments on this article so far ...

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  1. Max Shields said on March 15th, 2008 at 8:30am #

    Mr. Palast, thank you.

    I’m still shaking my head. Not because I think Spitzer’s hooker escapade is worthy of note, but that he would do it given the stakes.

    As a NY AG, Spitzer was a model of what’s needed. He went for the top. It appears that he was a major change agent in NY and he had no party preference when it came to reform.

    I don’t know the details of what he has been up to in NY but I really appreciate Mr. Palast’s article. We need to continue to unravel what was behind this whole sting operation. I could care less about Spitzer’s likeability. It was his dogged focus on getting at the concentration of power and wealth that made him a unique politico, Governor and AG.

  2. hp said on March 15th, 2008 at 10:34am #

    Can you spell MOSSAD?

  3. HR said on March 15th, 2008 at 12:37pm #

    Like it or not, Spitzer apparently got carried away with his own ego, and broke the law. He had been in politics long enough to know how the system worked and got involved with prostitution anyway … and got caught, like many before him, and many who will follow him. It’s a damned shame, the demonization and criminalization of prostitution is a damned shame, and the way politics works in this country is a damned shame, too, but nobody seems to care enough to effect any significant change in the way we do business. Ya gets the government you deserve.

  4. Evie said on March 15th, 2008 at 1:06pm #

    As a “dark skinned” homeowner since the ’70 – we do have a choice. Having a good credit rating and understanding what I sign goes a long way.

    In the Reagan/Bush era of the ’80s when interest rates doubled, tripled, the same old subprime was ARMs, adjustable rate mortgages, the “negative amortization” mortgage program. Smart folks re-financed as soon as possible and did not take out second mortgages on the equity.

    Let’s not forget the Reagan bailout for lenders. Remember Madison S&L and Silverado.

    The big boys have been pumping fuel into this ever-more-creative mortgage “crisis” since Reagan/Bush.

    Subprime lending grew big in the ’90s as pols and lenders looked for new ways to create homeowners. Let’s not forget Billy’s role in National Home Ownership Strategy , a “strategy” which devised new ways to get po’ and non-white folks into the Amercian dream. HUD, lenders, banksters, pols and a cast of 1000s found buyers with no downpayment and sometimes no income to make payments, bad credit, no credit, high risk – and turned them into homeowners.

    Countrywide hit the $12 billion mark in home loan servicing in 1989 and became the nations #1 mortgage lender in 1993.

    Not bad for a company founded in the 2 man office of Angelo Mozilo and David Loeb with more business savvy than Meyer Lansky and Lucky Luciano.

    Predatory lending has been around a long time, e.g. pawnshops, Payday loans, credit cards, etc. In fact, I think loan-sharking was legalized around the same time BigDaddy government legalized the numbers racket, calling it cutesy things like Powerball, Lotto, scratch off Money 4 Life tickets.

    As for Spitzer – he sued Countrywide in 2006 until they agreed to “… eradicate racial and ethnic disparities in mortgage lending and are willing to go the extra mile in their efforts to ensure that minorities do not pay higher prices for mortgage loans than similarly-situated non-minorities.” Whoop dee doo.

    Such a silly agreement doesn’t stop the vultures from preying on minorities – they just get more creative about it. We can cease being “victims” and stupid “steers” and the first thing to do is stop listening to anyone who tells us “we don’t have a choice.”

  5. Don Hawkins said on March 15th, 2008 at 1:11pm #

    Hooray could be heard from the floor of the exchange as the news came that Spitzer was in trouble. The fascinating part is I think many on Wall Street thought this would solve all there problems. Right, kind of like corn to solve this little energy problem and who came up with that idea? Many of the same people Greg talked about. It’s for the good of the Nation. Well golly gee it sure seems to me stuck on stupid is America’s greatest resource. Yes ,I said stuck on stupid shocking isn’t it.

  6. rosemarie jackowski said on March 15th, 2008 at 2:14pm #

    Greg, thanks for this great article. I live 40 miles outside of Albany. There has been a lot of news coverage of the Spitzer scandal. All along, I had a gut feeling that the Press was not getting the whole story. Spitzer made a lot of enemies when he wanted to allow immigrants to have drivers licenses. He was right then, but the Press and local talk show hosts really waged a nasty smear campaign against him.

  7. DRL said on March 16th, 2008 at 5:32am #

    Quite right, rosemarie jackowinski. This smear campaign against Spitzer with, in the background, one of the foulest, most criminal administrations of all times, stinks to high heaven.

    I mean, really! All these vociferous busy-bodies condemning Spitzer for his “transgressions”, even amongst the most “progressive” of voices. Oh, please do spare us, for cripe’s sake!

    If anyone were truly concerned about morality, one would do better to investigate dynastic American families, among which the Rockefellers, the Carnegies, the Fords, the Bush family, the Clinton faction, and on to openly supported corporate entities such as Dyncorp and its human trafficking activities, the CIA and its worldwide drug-related fund-raising operations, et ad nauseum.

    The PTB viewed Spitzer’s policies as a direct challenge to their grip, thus he was eliminated.

    Case closed.

  8. Don Hawkins said on March 16th, 2008 at 8:52am #

    DR the only solution is hard choices. Now in order to make those hard choices it means to change the system. Bear Stearns what is it? In simple terms people sitting in front of a computer screen looking at numbers that in many cases are not real looking at charts that are in many cases not real and these people have on those head set’s to talking with other people who are taking those not real numbers and pushing the easy button to make money that is not real except on paper. It’s the not real part that we all see now. It’s time to pay-up. Well pay up with what it’s not real. The money the Fed gave to them where did it come from thin air that’s where it came from. I take that back the air now day’s is thick with CO 2 and a few other gas’s that is another very good reason to change the system.
    Let’s go with this. Oil companies, gas, coal and on and on. Do these people who run these companies know the seriousness of climate change, sure they do. There prime directive is to make money for the share holders again in many way’s not real. The people who run these companies have ego’s the size of there bank accounts and even in the face of making this planet in just a few years real fun because of climate change and for my kids and there kids survival is the name of the game it seems that’s Ok in there book. This administration has done nothing, nothing to slow this down and in many way’s helped to speed it up. It’s the change the system part they have a real hard time with as to do what is needed to go after this problem means they have to put themselves out of business or change. Right now what is the Big plan. To get the economy going again and keep the whole thing going the same as before this is where I hear the laughter of the God’s. They don’t get it or they want to go out in style. 85 million barrels a day oil that’s it. What are the cafe standards for 2020 it’s a joke. 14,000 new cars a day in China and on and on. Hard choices there is no other way to do this. This morning on Fox News they had a man on with his book on how to get rich apparently that ego some have blocks out that laughter of the God’s that seems to be getting louder everyday.

  9. Michael Kenny said on March 16th, 2008 at 9:03am #

    I would guess that more is linked than just this. The Israel Lobby’s strategy is an Isreal propped up by American brute force. That requires US military and economic hegemony in the world. The defeats in Iraq and Afghanistan have discredited US military power and that has undermined the dollar, which, in its turn, has set off the current economic crisis. For the Lobby, therefore, the dollar must at all costs be propped up so as to retain American control of the world economy, and, in particular, oil supplies, and so as to rebuild the American military machine. that, I think, explains the frantic and panicky reaction of the financial sector and why buckets of taxpayers’ money are being thrown at the problem.

  10. rosemarie jackowski said on March 16th, 2008 at 11:24am #

    There should be a massive protest against the busy-body, voyeuristic bureaucrats who disenfranchised all of the voters who voted for Spitzer. This is “democracy” at its worse!

  11. HR said on March 16th, 2008 at 1:02pm #

    No wonder the “left” can do nothing more than paddle in circles. Spitzer “disenfranchised” the voters by his own actions. We waste little sympathy when those on the right are caught in similar situations, so it’s time to grow up and learn to take our knocks. The man did himself in, period.

  12. rosemarie jackowski said on March 16th, 2008 at 3:01pm #

    HR…Are you saying that Spitzer fell on his sword? He did – after the bureaucrats stuck it in his back.
    I don’t care about the sex lives of those on the Right any more than I care about sexual escapades on the Left.
    I care about a Single Payer Health care system and the 18,000 who will die this year because they don’t have it. I care about the 2 million we have slaughtered in Iraq since 1991. I care about the silencing of Ward Churchill, Jeremiah Wright, and many others. I care about too many other things to care about who is playing around where they shouldn’t be.
    Life is short – too short to swallow the trivia fed us by the media. How many times have the photos of the prostitute been shown on TV. How many times have the Fisk War Photos been on TV. They are online. Check them out.

  13. HR said on March 16th, 2008 at 4:08pm #

    Equating Spitzer’s situation to Ward Churchill’s and others who have broken no laws makes no sense whatever. Churchill did NOT violate the law, Spitzer has, based on his resignation speech. How you arrive at the conclusion that I hold the opinion that Spitzer fell on his own sword is beyond me. More like he tripped on his own inflated ego and fell on the sword of the legal system. He broke the law, and irrespective of our opinions on the rightness or wrongness of the particular law, it IS the law.. He got caught, irrespective of whether the investigation was politically motivated (and he’s not claiming the charges are bogus, is he?). He’s paid part of the price for that by resigning. Period. No amount of stating the obvious about our sick media or sick system of morals can change that.

    It’s too damned bad, as I wrote in my original post that Spitzer, a man who knows how politics works, allowed his ego to override his good sense, knowing full well what lay in store, and knowing full well that his political enemies were watching his every move.

  14. Evie said on March 16th, 2008 at 4:34pm #

    Perhaps not caring about the sexual exploits of the rich and powerful gives them faith, that they’re not accountable for other immoral decisions they make. Such as playing around in countries where they shouldn’t be in wars for profit – where instead of the high-priced hire by hour hooker they’re just f*cking Pfc. Schmuck and we the sheeple, and a lot cheaper.

    Seems to me no matter what our “leaders” do – immoral war, adultery, blow jobs in the office – they know half their constituents will walk to the podium and stand by their side, with sad faces, like good little spouses.

  15. synicab12 said on March 16th, 2008 at 4:37pm #

    What baffles me is that how come a sophisticated person like Spitzer
    who was around a long time and know the ropes of how the sytem
    operates do something stupid like that.
    The stakes were very big and the risk was VERY possible that he would be exposed. Many people knew what was going on from the escort agancy and “Kristen” , his inner circle and the hotel personnel ..etc etc.
    Any one of them for the right price or motive would have talke.
    I am really baffled??!!

  16. HR said on March 16th, 2008 at 4:54pm #

    For what it’s worth, I believe that New York will have a much better governor tomorrow than it does today.

  17. TRM said on March 16th, 2008 at 5:02pm #

    Not defending any bank or anything, but don’t you think those 2 million people you mentioned being close to foreclosure are responsible for their circumstance? No one forced them to go into debt… c’mon…

  18. HR said on March 16th, 2008 at 7:23pm #

    Yeah, I agree. I settled for a house I could afford rather than look for a loan I couldn’t.

  19. anonymous said on March 17th, 2008 at 4:15pm #

    that the mud campaign was solely blown up to get him out was quite obvious to see, at least from europe where the only news were what he did before and what he was accused of then.
    in (the non-english part of) europe nobody really cares for someone else seeing prostitutes, that made it easy to see through it.

  20. opeluboy said on March 17th, 2008 at 5:23pm #

    I felt from the beginning that this whole Spitzer thing was just a distraction from more serious issues. Now I’m beginning to think the whole thing smells. We have a really fucked up country, ladies and gentlemen. Really fucked up.

  21. Max Shields said on March 18th, 2008 at 7:10am #

    Predatory lending is incidious, and coupled with wholesale mortage shuffling into the global market for high stakes speculation is the issue at hand, not whether some people are more easily hoodwinked when their desire for a house seems at last in their grasp.

    This does not excuse ignorance but relatively young families are easily enticed and frequently lack the life experience to see past the immediacy of a dreamed for home (not all fall into this category to be sure). The “ballooning” that will occur in the future is like our death, some day…who knows.

    But back here, to the “man” behind the curtain – there’s the culprit. They who perpetrate the possible under the guise of qualified lenders with the “good housekeeping seal of approval”. So, yea, we can blame the victims who are now shoved out on the street while the lenders go scott free and many will be bailed out…sounds like perfect justice to me….no?

    Spitzer never flinched from going after those with the wealth and power – at least I’m not aware of any. I can’t speak for his governorship, but there’s a reason why he was overwhelmingly voted into that position and it wasn’t because he spewed words of “hope” and “oneness”.

  22. societyfriend said on September 28th, 2008 at 3:01pm #

    I find it curious that you left wing doubletalkers can’t see what is going on. Dodd, Pelozzi, Reid et al are knee deep in the conspiracy with Fannie Mae. Obama’s fingers are into ACORN. Your own people did it to you and want to blame Bush.

    You are now celebrating your success. I hope you sink along with the ship. Nobody is confused, just thoroughly disgusted

    Pelozzi, you are the pig!

    Society’s Friend