An Interview with Charlie Gasparino

It doesn't come as big surprise that Wall Street chronicler Charlie Gasparino's greatest regret in life was not going through with the Golden Gloves boxing competition he dreamed of as a teenager. Born in the Bronx, and growing up in Westchester, where he first slipped on a pair of boxing gloves, Gasparino burnishes a hard-hitting, "I don't give a damn what you think" tough-guy image. Look quickly at him, and you might even see a hint of Rocky Marciano staring back at you. But instead of becoming an "Italian Stallion" inside the ring, Charlie chose investigative journalism. As CNBC's on-air editor, as well as a columnist for The Daily Beast and other publications, the former boxer-turned journalist now prides himself on delivering the inside scoop and throwing haymakers at a hodgepodge of Wall Street miscreants and Washington policymakers.

There's good reason to believe that Gasparino's latest book, The Sellout, will become the definitive book on the current financial crisis and the events that led up to "The Great Recession." Spanning three decades, The Sellout pulls no punches in chronicling the rise and fall of excessive Wall Street leverage and risk taking, as well as the cast of colorful characters that ultimately brought the U.S. financial system to its knees. It hits bookshelves tomorrow.

RealClearMarkets: You sat down recently with Wall Street legend Teddy Forstmann to discuss your new book and the genesis of the mess we now find ourselves in. Forstmann said it all began as a "cold" back in the 1970s and 1980s, and that since no one ever learned much about that cold, or did anything to treat it, it developed into the "cancer" that rocked the market and economy last year. As you pointed out during your conversation, these guys have been bailed out several times before, and that the risk-taking grew-exponentially-each time as a result. So where does that leave us today? Have we at last cured what ails us, or are we going to be reading another Gasparino book about a future Wall Street disaster that we could have prevented?

Charlie Gasparino: I don't know when it's going to happen, but if history is any guide, it has to happen again--the "it" being another financial crash. Of course, it won't happen tomorrow or next week, or maybe not even two years from now. But when the memory of 2008 wears off, and mark my words it will wear off, excessive risk taking will be back in a form that evades all these alleged regulatory controls that have been established. Regulation can never cure the disease of excessive risk.

The only thing that can cure it is tough love--allowing firms to fail. That doesn't mean I wanted the Fed and the Treasury to walk away last year. That would have meant Armageddon. But they should have walked away before that, when the systemic risk was smaller and the damage would have been limited. 1998 would have been a great place to start. Let Long Term Capital Management fail; let Lehman, and as I show in my book, possibly Merrill to fail, because the trades were the most vulnerable to LTCM's bad bond market bets.

Instead, by arranging a bailout, and by using free money to juice up the markets, policy makers emboldened Wall Street to take even more risk. That's what they did then, and that's what I fear is happening all over again.

RCM: As you are well aware, Goldman Sachs now has a serious PR headache on its hands with reports of $16 billion in bonuses in the pipeline. There's widespread anger that Goldman has been milking the system and profiting from a sort of incestuous, government-subsidized, "heads I win, tails you lose" paradigm-that the firm has profited off the taxpayer's dime after being rescued by Uncle Sam. Do you think the public outrage toward Goldman is justified?

Gasparino: Absolutely. Now I'm not in the Goldman is the center of all evil camp. But I know a lot of really smart people who believe that Goldman's bankers and traders virtually control the federal government in order to advance their own notorious agenda.

In fact, as I show in The Sellout, there were far worse players whose risk taking led to last year's meltdown, starting with Merrill Lynch and Citigroup. They were equally powerful from a policy making standpoint.

Remember, after Robert Rubin fought to end Glass-Steagall's separation of investment and commercial banking, he didn't go back to his old firm, Goldman Sachs, he went to work for the firm that benefited the most from the law's demise, Citigroup.

But Goldman in many ways crystallizes all that is wrong with the financial bailout, started by the Bush Administration, but carried on and expanded by Obama's. Goldman has been declared a bank, not much different than the old Bailey Building and Loan, and yet they don't take deposits or offer checking accounts. So what do they do? They trade, and they are trading as a federally protected bank, meaning they get to borrow at cheaper rates and they are Too Big To Fail.

How anyone considering themselves to be a capitalist can support this arrangement is beyond me.

RCM: Hedge-fund manager David Einhorn delivered a heck of a speech at the recent Value Investing Congress. He didn't pull any punches. Of particular note, he said the "failure of Lehman meant that, barring extraordinary measures, Merrill Lynch, Morgan Stanley, and Goldman Sachs would have failed as the credit market realized that if the government were willing to permit failures, then the cost of financing such institutions needed to be re-priced so as to invalidate their business models." Do you agree with Einhorn? But for the bailouts, would those firms have failed?

Gasparino: Yes I do. What's interesting about what Einhorn said is that even though he predicted Lehman's demise, he never thought the feds would let the firm fail. There's a section in the book that discusses this very point.

So think of it this way: if a notorious skeptic like Einhorn thinks the government is going to bailout a firm like Lehman, why wouldn't the irrational exuberants at Morgan, Goldman, and Merrill think that they can take enormous leverage and carry enormous amounts of high-yielding but high risk debt on their books? They all thought when things got tough Uncle Sam would be there with a paycheck ready to bail them out.

RCM: Who's at the top of your list of people who should be held accountable for the unraveling of the global financial system?

Gasparino: The politically correct answer would list a long line of risk-taking CEOs starting with Stan O'Neal at Merrill, Sandy Weill and Chuck Prince at Citi, Jimmy Cayne at Bear, and of course former Lehman CEO Dick Fuld, as well as various senior traders at these firms. They're all in my book with their contributions to the demise of the financial system.

But what you will also find in my book, which I guarantee is absent from most of the others, is the root cause of the risk taking, which I believe begins and ends with the policy makers. The various heads of HUD, like Henry Cisneros, Andrew Cuomo and those in the Bush Administration who believed owning a home was a right, rather than something that should be earned, led to the disaster at Fannie Mae and Freddie Mac, which spread its guarantees to subprime loans, a place it traditionally stayed away from.

You also can't excuse Alan Greenspan for handing out free money to Wall Street every time the big firms screwed up over the past thirty years. It gave them incentive to double down on their risky bets until of course they double-downed so much the system blew up.

RCM: What are your thoughts on President Obama's approach to the economy and his administration's handling of the financial crisis?

Gasparino: What the book says pretty emphatically is that the banking crisis is far from over; that for all the billions handed to Wall Street and the banking system, the crisis has merely abated. The prime reason for this is pretty simple--the Obama administration has done nothing more than maintain the status quo that began under Bush. The banks and Wall Street are being bailed out through subsidies, but Main Street gets no relief, other than stimulus money that does very little to stimulate the part of the economy that creates jobs outside of Wall Street.

RCM: Last question. Terminal curmudgeon Pat Buchanan recently wrote a column titled: "Traditional Americans Are Losing Their Nation." In it he basically argues that the U.S. is going to hell in a hand basket.

Here's an abridged excerpt:

"[Traditional Americans] see Wall Street banks bailed out as they sweat their next paycheck, then read that bank profits are soaring, and the big bonuses for the brilliant bankers are back . . . They see a government in Washington that cannot balance its books . . . The government shovels out trillions to Fortune 500 corporations and banks to rescue the country from a crisis created by the government and Fortune 500 corporations and banks. America was once their country. They sense they are losing it. And they are right."

What's your take?

Gasparino: It's hard to argue with much of his analysis. Unemployment is growing above 10 percent, and yet, bankers are making money based on government subsidy. Now we need a healthy banking system to survive, but Goldman isn't even a real "bank" and yet it gets treated like one from a policy standpoint, but not when it hands out bonuses.

It's about time someone in Washington says the following: "Okay, it's time to sink or swim on your own. Next time you screw up, the taxpayer isn't footing the bill." Goldman for one should become a hedge fund if it likes to trade so much and end this charade.