Griftopia: Bubble Machines, Vampire Squids, and the Long Con That Is Breaking America

by Matt Taibbi

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.