Nomi Prins was a Wall St banker, who after 9/11 reassessed her life choices and became somewhat of a traitor to her tribe and an author who is very critical of Wall St banks and the banking industry.
She has written a number of books about how bankers dictate terms to governments and make money via business practices that in other realms would likely be called fraud, and would be crimes.
This post is a summary (not a transcript) of the video below, where she gave a talk about banking, and its abuses, at the Lannan Foundation on the 24th of January 2018.
As the full talk is more entertaining than my terse summary, I do recommend you watch it, but if what you want is a terse summary, here it is.
Table of Contents
Who is Nomi Prins?
I have what I consider to be a bit of a weird admiration for people who, for seemingly moral reasons, turn on their tribe, and in the case of Nomi Prins, her tribe was Wall St investment bankers.
As stated above, after 9/11 (she was in lower Manhatten that day, at work, at Goldman Sachs), she reassessed her life choices, decided that helping morally challenged bankers use banking laws to make money without regard to the harm they caused was not an ethical way to earn a living, and became an author who has written a number of books that are very critical of the banking industry.
While still in college, she started working part-time for Chase Manhattan Bank and joined them full-time after graduation. She subsequently worked at two other banks, Bear Stearns in London for seven years, and Goldman Sachs for two years, before quitting banking after 9/11.
The first 7 1/2 minutes is introductory
It’s interesting, but the presentation of her core ideas starts at around 7 1/2 minutes.
You’ve probably heard these ideas before
Nevertheless, it’s interesting to hear them stated by someone who was an insider in the industry and seems to have deep expertise and credibility.
The economic crisis of the 1990s didn’t “just happen”
The Asian crisis, the Russian and Eastern European crisis, and other problems that manifested throughout the world.
Per Nomi, they were the direct result of things the banks were doing, which in her words “were starting to collapse the world”.
Specifically, the banks were pushing debt and other transactions of securities onto institutions and nations that were incapable of repaying that debt, and the entire effort to make money by selling these loans was unsustainable.
Banks have no political preference
She talks about working with two different people in her writing, identifies one as “on the left” and the other as “on the right” and clarifies that the banks don’t care about political affiliations.
Who we vote for doesn’t influence the policies they want and have put into place to serve their interests.
The US isn’t “borrowing” from China
Nomi Prins doesn’t say that directly, but rather she describes how in the early 1990s when she worked at Lehman Brothers as a junior analyst, she and a salesperson were sent to visit central banks in Asia specifically to sell products they developed.
Lehman Brothers was one of the primary dealers of US treasury securities and they had developed a product specifically to sell US treasury securities, and part of this trip was specifically to sell them to central banks, including the People’s Bank of China, the central bank of the People’s Republic of China.
The point of this being, China owning $1.1T in the US “national debt” is NOT because the US borrowed money from China, but rather because US Treasury securities were sold to (or bought by depending on your perspective) the People’s Bank of China.
From the perspective of Lehman Brothers, the purpose of selling these products to the People’s Bank of China was for Lehman Brothers to make money.
2008 was the result of Wall St banks creating toxic assets from subprime loans
In 2008 the toxic assets were created from the securitization of subprime mortgages, but per Nomi Prins, the underlying asset is not important.
These banks can securitize a variety of assets: corporate loans, debt, toll road payments, or wine receipts. The underlying asset doesn’t matter.
How were the toxic assets created
The idea is that a bunch of stuff is stuck into a larger security and it’s supposed to pay interest.
And based on how much interest the underlying assets pay into the larger security, the security is then cut up into pieces, and those pieces pay interest to the people and institutions that bought those pieces.
There is a hierarchy or waterfall about those pieces, called tranches, which is just a fancy word for “pieces” or “slices” of a larger security.
The idea is that there is an order as regards being paid.
The “purest” pieces that get their interest payments first are the higher-rated AAA pieces.
At the bottom is something called an “equity tranch” which will not be paid out until and unless all the slices above it have been paid.
What makes these assets toxic, is if no interest payments are going into the security, or if there is fraud about the amount of interest payments going into the security, nothing comes out. So nobody gets paid.
And a lot of people didn’t get paid
Ultimately, 60% to 70% of the worst assets that were created during the financial crisis, by the major banks, who then sold them onto different countries, different municipalities, and pension funds, and so forth, weren’t paying anything.
That’s why the financial crisis happened.
Because what happens when banks aren’t able to receive from each other the payments that they bought and sold on some of these securities in the process of selling them elsewhere, they start to close their doors.
They either close their doors for forever by going bankrupt. Bear Sterns almost did but instead was sold to JP Morgan Chase, and Lehman Brothers did.
The surviving institutions stopped trusting each other, and the system collapsed.
So the central banks stepped in
To prevent the global financial system from collapsing, the US central bank (the Federal Reserve) infused the banking system with newly created money.
It would have been possible, and per Nomi Prins, far cheaper, to “fix” some of the toxic assets, by funding the underlying mortgages, by paying for them.
She does not say if it would have been necessary to pay the full mortgage or just part of it, but essentially we could have saved the banking system by bailing out the debtors, rather than the creditors. And doing so would have been far cheaper.
Having said that, the US Federal Reserve led all the other major central banks in the world to infuse their private banking systems with a lot of money as well.
Enter Quantitative Easing
Per Nomi Prins, this is yet another overly complicated term (like tranche). It means to give the banks money and to take something from them in return so it looks like an equal exchange is being made.
In QE1, the Fed bought Treasury securities from the primary dealers, who in turn had previously received them from the US Treasury, and gave the primary dealers cash.
She describes this as a closed triangle. Treasury securities go from the Treasury to the primary dealers to the Fed and the Fed gives money to primary dealers in exchange.
In the next round (presumably QE2) the banks unloaded mortgage bonds nobody wanted, because in her words “they were crap”, in exchange for money from the Fed.
This not only removed the crap bonds from the bank’s balance sheet but allowed them to reprice upwards a bunch of other crap bonds on their balance sheet as well.
Here she uses the analogy of selling junk at a yard sale. If someone pays a lot for one of your chipped mugs, you’re going to ask the next person interested in a chipped mug to pay more. The psychology is that if someone just paid more, they must be worth more. Even if they’re not.
This inflated the value of the crap bonds the banks were carrying on their balance sheets.
At a time when the GDP of the United States was just under $20 trillion, the Fed bought $4.5 trillion of bonds from the banks.
That’s 25% of GDP and an even higher percentage (60% to 65%) of the assets that the top six banks were holding.
It was A LOT of cash to infuse into banks to get crappy bonds or even treasury bonds in exchange.
She then talks about potential alternate uses for the money.
She argues the Fed could have “fortified” (paid – either in whole or in part) the mortgages held by the banks, which she previously said would have been “far cheaper”.
She also talks in more general terms about better highways, high-speed trains, natural disaster response, etc.
Then QE goes global
The economies of the world and the banking systems of the world are interconnected.
So the Fed got other central banks involved: the European Central Bank, the Bank of Japan, Switzerland, etc. And the Fed essentially said this needs to happen collectively.
These banks did not face the same initial crisis the US banks did, because the non US banks had not been manufacturing the toxic assets, at least not nearly in the same amounts, but their central banks were required or pressured into, playing the same game.
The central banks had to buy bonds from their banks and corporate bonds from their larger companies, who were customers of these banks, and in the case of Japan, equity/share products from their institutions, in order to maintain an upward movement of all of the market.
So globally, the total amount of money manufactured for these bailouts, primarily by the G7 central banks, was not $4.5 trillion, but rather $22 trillion.
Which is creating artificial markets
We are now 13 years into an era where central bank money is propping up banks, and this is being done in exchange for the fact that around the world, interest rates have hovered near zero percent since 2008.
This cheap money is also fueling corporate stock buybacks which also artificially inflate values. This is because corporations are borrowing money at very low rates, and using that money to buy their own shares in such volume as to create enough demand to drive up prices.
This is not sustainable
So the central banks of the world are being very careful about how, and when, they will start to taper off this central bank’s “support”.
If they do it too quickly, they can “unravel” (her word) this entire system.
And when they do unravel, they unravel debt markets first.
This would negatively impact companies that borrowed more than they can cover from revenues, countries that borrowed more than they can cover from foreign reserve income.
Ultimately, the inability to meet debt payments becomes the norm, which is where the 2008 global financial crisis started.
Why did these Wall St bailouts not help Main St?
The answer, per Nomi Prins, which she gave to an audience of the Fed, the IMF, and the World Bank, a few years before she gave this talk, is that the central banks are handing out trillions of dollars, with zero strings attached. The Fed requires absolutely nothing in exchange for that cash.
The banks did not help Main St because they saw no need to. The Wall St banks are in the business of doing what they do, which doesn’t include helping Main St.
And, the central banks have no exit strategy
They don’t seem to have ANY strategy to effectively taper banks off central bank money.
They seem to be simply hoping this continues.
That stock market valuations are going up while wages for most people are not, is not something the central banks think needs to be addressed.
The banking system has not been reformed
Nothing fundamentally has changed.
Glass Steagall has still not been reinstated.
Investment banks are now also doing stock buybacks.
And the new toxic assets the banks are creating, made from corporate debts facilitated by low rates and cheap loans, will combust eventually.
So the investment banks are continuing to gamble with federally insured commercial banking depositor money.
We’re also not building stuff
The vast amount of money the central bank manufactured to bail out the banks, and the smaller but still vast sums being used for corporate stock buybacks, could, in theory, help build real tangible stuff that would help grow the economy, rather than just prop up the value of, mostly financial, assets.
The US is not rebuilding roads and bridges, not building high-speed rail, not mitigating effects of climate change we KNOW are coming, etc.
The central bank in China is also manufacturing money out of thin air, but they’re using it for real infrastructure projects in China, and in other countries as part of their Belt and Road initiative.
China is increasing their geopolitical influence through infrastructure projects around the world, financed in a fashion similar to how the US is funding bank bailouts and stock buybacks.
But the central bankers will keep doing what they’re doing
Because they don’t know what else to do without causing a massive financial crash to the entire system.