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

by Matt Taibbi

When you have a system with an electorate divided up into two fiercely warring tribes, each determined to blame the country’s problems on the other, it will often be next to impossible to get anyone to even pay attention to a problem that is not the fault of one or the other group. Moreover it is incredibly easy to shift blame for the problem to one of those groups, or to both of them, if you know how to play things right—which happened over and over again in this case.

Here, in this one document, is laid bare the whole basic stratagem behind the oil bubble. The big investment banks convince the ordinary investor that oil prices are going up because of “fundamentals,” then they get all that money coming in, at which point their predictions about prices going up actually come true. Then they ride in with their own bets and make a fortune, front-running the massive flows of capital pouring into the market. Meanwhile, we all end up paying $4.50 a gallon for gas, just so these assholes can make a few bucks trading on what amounts to inside information.

This story is the ultimate example of America’s biggest political problem. We no longer have the attention span to deal with any twenty-first-century crisis. We live in an economy that is immensely complex and we are completely at the mercy of the small group of people who understand it—who incidentally often happen to be the same people who built these wildly complex economic systems. We have to trust these people to do the right thing, but we can’t, because, well, they’re scum. Which is kind of a big problem, when you think about it. And here’s the punch line: bubbles like the one we saw in 2008 are only one-half of the oil-price scam. Because taking your money through the indirect taxation of high energy and food prices, and reducing you to beggary as you struggle to pay for them, is only half of the job. What these clowns did with all that cash they siphoned from you and what they did to take advantage of your newfound desperation is the other end of the story.

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. Here’s yet another diabolic cycle for ordinary Americans, engineered by the grifter class. A Pennsylvanian like Robert Lukens sees his business decline thanks to soaring oil prices that have been jacked up by a handful of banks that paid off a few politicians to hand them the right to manipulate the market. Lukens has no say in this; he pays what he has to pay. Some of that money of his goes into the pockets of the banks that disenfranchise him politically, and the rest of it goes increasingly into the pockets of Middle Eastern oil companies. And since he’s making less money now, Lukens is paying less in taxes to the state of Pennsylvania, leaving the state in a budget shortfall. Next thing you know, Governor Ed Rendell is traveling to the Middle East, trying to sell the Pennsylvania Turnpike to the same oil states who’ve been pocketing Bob Lukens’s gas dollars. It’s an almost frictionless machine for stripping wealth out of the heart of...

Let’s go back in time, to the early seventies. It’s 1973, and Richard Nixon’s White House makes the fateful decision to resupply the Israelis with military equipment during the 1973 Arab-Israeli War. This pisses off most of the oil-producing Arab states, and as a result, the Organization of the Petroleum Exporting Countries, or OPEC—a cartel that at the time included Saudi Arabia, Kuwait, the UAE, Libya, Iraq, and Iran, among others—decided to make a move. For the second time in six years, they instituted an embargo of oil to the United States, and eventually to any country that supported Israel. The embargo included not only bans of exports to the targeted countries, but an overall cut in oil production. 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).

Oil prices skyrocketed, and without making a judgment about who was right or wrong in the Yom Kippur War, it’s important to point out that it only took about two months from the start of the embargo for Nixon and Kissinger to go from bluster and escalation to almost-total surrender.

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.

The rise of sovereign wealth funds (SWF) as new power brokers in the world economy should not be looked at as a singular phenomenon but rather as part of what can be defined a new economic world order. This new order has been enabled by several mega-trends which operate in a self-reinforcing manner, among them the meteoric rise of developing Asia, accelerated globalization, the rapid flow of information and the sharp increase in the price of oil by a delta of over $100 per barrel in just six years which has enabled Russia and OPEC members to accumulate unprecedented wealth and elevate themselves to the position of supreme economic powers. Oil-rich countries of OPEC and Russia have more than quadrupled their revenues, raking some $1.2 trillion in revenues last year alone. At $125 a barrel oil they are expected to earn close to $2 trillion in 2008. In fact, oil would go up to $149 that summer. Luft went on: SWF are pouring billions into hedge funds, private equity funds, real estate, natural resources and other nodes of the West’s economy. No one knows precisely how much money is held by SWFs but it is estimated that they currently own $3.5 trillion in assets, and within one decade they could balloon to $10–15 trillion, equivalent to America’s gross domestic product.

“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.

The explosion of energy prices—thanks to a bubble that Western banks and perhaps some foreign SWFs had a big hand in creating—led to Americans everywhere feeling increased financial strain. Tax revenue went down in virtually every state in the country. In fact, the correlation between the rising prices from the commodities bubble and declining tax revenues is remarkable.

Around this time, state and municipal executives began putting their infrastructure assets up to lease—essentially for sale, since the proposed leases in some cases were seventy-five years or longer. And in virtually every case that I’ve been able to find, the local legislature was never informed who the true owners of these leases were. Probably the best example of this is the notorious Chicago parking meter deal, a deal that would have been a hideous betrayal even without the foreign ownership angle. It was a blitzkrieg rip-off that would provide the blueprint for increasingly broke-ass America to carry lots of these prized toasters to the proverbial pawnshop.

“When it comes to finding a figure for the citizens of Chicago, they say the meters are worth $1.16 billion,” Waguespack said shortly after the deal. “But when it comes to finding a figure to cover Morgan Stanley, they say they’re worth, what, $5 billion? Who are they looking out for, the residents or Morgan Stanley?” The city inspector at the time, David Hoffman, subsequently did a study of the meter deal and concluded that Daley sold the meters for at least $974 million too little. “The city failed to make a calculation of what the value of the parking meter system was to the city,” Hoffman said. What’s even worse is this—if they really needed the up-front cash, why sell the meters at all? Why not just issue a bond to borrow money against future revenue collection, so that the city can maintain possession of the rights to park on its own streets?

The reason these lease deals happen is the same reason the investment banks made bad investments in mortgage-backed crap that was sure to blow up later, but provided big bonuses today—because the politicians making these deals, the Rendells and Daleys, are going to be long gone into retirement by the time the real bill comes due.

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.

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.

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.

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. Americans spend an average of about $7,200 a year on health care, compared with the roughly $2,900 average for the other market economies that make up the OECD

Moreover, private insurance provides almost nothing in the way of financial protection for those who have it. A full 50 percent of all bankruptcies in America are related to health care costs, and of those, three-fourths involve people who actually have health insurance.

A 2003 New England Journal of Medicine study found that administrative costs make up a full 31 percent of all health care spending

The current American health care system is not regulated at the federal level and instead relies upon a tight network of powerful state-level insurers and plugged-in state regulatory officials, with whom the relevant companies have close relationships. Jack Byrne, who served as the CEO of the insurance giant GEICO for decades, described it to me as a “cartel” system and said that at the state level, the relationship with the state regulator is crucial.

Thus the insurance industry was given a permanent license to steal. There were all sorts of ways in which insurance companies, freed of federal regulatory authority, could collude to manipulate prices. Among other things, they pooled loss information and were allowed legally to set prices through cartel-like organizations such as the Insurance Services Office (ISO).

Way back in 1980, an amendment to the Federal Trade Commission Act had been passed making it basically illegal for the federal government not only to investigate the insurance industry but even to conduct studies in that area. That change had come about when the FTC had begun making noise about investigating the industry’s practice of charging higher property and casualty insurance premiums based on credit scores.

Any industry that basically has government license to (a) fix prices and (b) refuse to uphold legal contracts is going to make money almost without regard to the economic climate.

Here you have a cartel system in which individual customers, hospitals, and doctors alike are at the mercy of an unaccountable industry that can deny coverage or fix prices as it pleases, resulting in the crappy or even openly threatening service and ballooning costs that necessitated the call for health care reform in the first place. And all that is because of one law, and this law is the one that none of the five reigning Democratic committee chairmen thought prudent to touch as they “took on” the problem of health care reform.

The whole style of Obama’s health care “initiative” was to try to smooth the bill’s passage by neutralizing the opposition of the relevant industries by giving way on key issues.

“This was a deal,” says Kucinich. “They promised PhRMA”—the Pharmaceutical Research and Manufacturers of America—“they wouldn’t back reimportation and bulk negotiating for Medicare purchases of drugs. And this is what they gave the health insurance industry. They backed off the antitrust exemption.”

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.

In the age of insta-polling and focus groups it is hard to imagine that the Obama campaign did not know exactly what it was doing when it promised on the one hand to support drug reimportation, televise all negotiations on C-SPAN, and push for bulk pharmaceutical purchases for Medicare, and on the other swore it would never tax health care benefits, push for an individual mandate, or support any health care bill that did not have a public option in it. He would completely reverse himself on all those positions and more. 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 neg...

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. Well, guess what? Billy Tauzin turned out to be one of the very first people Obama invited to the White House, and he became one of his most frequent visitors. Between February 4 and July 22, 2009, Tauzin visited the White House eleven times, an average of once every fifteen days or so, in the process making his notorious deal to pay for a few pro-Obama commercials in exchange for billions in subsidies. Rahm Emanuel’s decision to crawl up the ass of Tauzin’s pharmaceutical lobby in the political back room is almost exactly reminiscent of Dick Cheney’s subpoena-proofed relationship with the energy industry.

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.”

In any case, Emanuel’s open bullying of Obama fan-club groups like MoveOn and Unity ’09 explains in large part why throughout 2009 there was virtually no left flank in the health care debate educating the public about the ramifications of things like the individual mandate.

On both ends of the spectrum, wavering Democratic Caucus members took historically massive pork payouts and other concessions in exchange for their votes for H.R. 3590. The craziest of these involved Nelson and the aforementioned Mary Landrieu, who each agreed to vote for the bill in exchange for, respectively, a $100 million exemption from Medicaid payments and $300 million in extra federal spending. 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.

Thus in the end the health care drama played out almost entirely within the Democratic Party. It was a multistage process. 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 multitrilli...

There will be a lot to say about health care for years to come, but the most important thing about it is that it proved the government’s utter helplessness to police whole sectors of society. Forget about fixing the health care industry; what President Obama proved to America is that his government couldn’t even win back the right to truly regulate this massive industry, even with a historic mandate at his back and after giving away everything he had to trade, conceding even the power to tax.

the passage of the bill presages a revolutionary new vision for America’s industrial economy—one in which companies compete not on price and quality but in political influence, and earn profits not by attracting customers with good service, but by using the power of the state to protect markets and force customers into the fold.

After a few months I also started to notice that every time someone wanted to provide an example of some sordid scam the investment banking community was into, they used Goldman as an example. The bank was also continually held up as a model for how certain firms used their connections with government to buffer business risk—Goldman, I was told, was expert at using campaign contributions as a kind of market insurance to hedge their investments.

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.

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. The famed economist John Kenneth Galbraith wrote up the Blue Ridge/Shenandoah incidents as a classic example of the insanity of leverage-based investment; in today’s dollars, the losses the bank suffered through trusts like Blue Ridge and Shenandoah totaled about $485 billion and were a major cause of the 1929 crash.

It 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.”

“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.

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.”

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). You then promise your best clients the right to buy big chunks of the IPO at the low offering price—let’s say Worthless.com’s starting share price is 15—in exchange for a promise to reenter the bidding later, buying the shares on the open market. Now you’ve got inside knowledge of the IPO’s future, knowledge that wasn’t disclosed to the day-trader schmucks who only had the prospectus to go by: you know that certain of your clients who bought X amount of shares at 15 are also going to buy Y more shares at 20 or 25, virtually guaranteeing that the price is going to go past 25 and beyond. In this way the bank could artificially jack up the new company’s price, which of course was to the bank’s benefit—a 6 percent fee of a $500 million or $750 million IPO was serious money.

a 2002 House Financial Services Committee report showed that in twenty-one different instances, Goldman gave top executives in companies they took public special stock offerings that in most cases were quickly sold at a huge profit.

Beyond that, the House Committee concluded that Goldman’s analysts had kept on issuing “buy” recommendations long after the value of the stocks had fallen, in some cases doing so in exchange for promises of future business.

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

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.