Nomi Prins: Into the crash of 1929, there were six big banks. Their leaders controlled most of the market activity, sat on each others' boards and owned large chunks of stock in each others' firms. They inflated the values of stocks through “trusts” (financial mechanisms by which many investors could “pool” together their money, and borrowed money, to purchase or sell various stocks in bulk).
These were further puffed up by a co-opted media and enabling political leaders (as depicted in “Black Tuesday.”) Even as the crash happened, the biggest bankers thought they could contain it and could buoy stocks until the market settled, so they threw in their own (read: customers') money. That didn't work, of course. The financial markets and lending systems collapsed.
Today, we have six banks (mostly incarnations of the 1929 banks) that control the stock market, most mortgage lending, the bulk of deposits and nearly all derivatives activity. They inflated the housing market, in particular subprime loans, so they could stuff those loans into more complicated assets, borrowing hundreds of trillion of dollars against them, increased their risk through derivatives and spread them throughout the globe. When it became apparent these assets didn't have the value that banks said they did, the market, they got federally bailed out, while the Main Street economy sank.
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MK: Why did you choose to write a novel that incorporates Wall Street malfeasance surrounding Black Tuesday instead of a nonfiction book?
NP: I'd always wanted to write both fiction and nonfiction. Ever since my debut story about a fish and a princess at age three, the left and right sides of my brain were engaged in tenuous warfare. Several decades later, after I completed my third nonfiction book, “It Takes a Pillage,” the inevitability of the widespread economic collapse that I'd warned about in excessive detail, bore down on me. I'd worked over a decade in investment banking and been writing about if for nearly a decade. My brain was fried from all the documents and composite statistics. I wanted to write a novel – to develop complex characters – to tell a human story, to access the very heart of a very parallel historical period, through the heart of my protagonist, Leila Kahn.
Then I met a woman who'd live through those times, and she told me about her prudent father during the Depression. Leila's little sister, Rachel, is based on her. Leila herself came to me one night, when I was thinking about how we can often make very different choices depending on whether we listen to our hearts or our minds. The two men in her life, the banker and the laborer, represent those sides of her, in a time where nothing is black and white, but shades of gray.
MK: Does Leila symbolize the seeker of the American Dream running head-on into its dark underside?
NP: Yes, absolutely. There was a wondrous sense when immigrants came to the US, throughout the late 1800s and early 1900s, of an amazing America that held unlimited promise for all, a nation that welcomed all equally, where mere hard work and tenacity would lead to prosperity. Yet, what many found upon arrival was nothing like that.
Leila and her little sister Rachel live in a dilapidated fifth-floor walk-up apartment in a Lower East Side tenement building, sharing a two-room apartment with five people. Their lives are not easy. Her dying Aunt Rosa can't afford the medicine to soothe her pain. Her cousins work at the Fulton Street docks under unbearable conditions, while their bosses, as Nelson, Leila's boyfriend, says before his arrest, make money on their backs.
There was, and is, an upstairs/downstairs world in New York City, a major and visible class divide there, and throughout the country: that 99 vs. 1 percent gap. “Black Tuesday” focuses on the stark lifestyle and wealth difference between families, neighborhoods and ethnicities, the gap in what they sought, with what they found.
MK: The Glass-Steagall Act was passed in 1933 to try and prevent future market collapses. It was repealed in 1999 after Bill Clinton signed it into law. How significant was the repeal in leading to the 2007 near-Wall Street implosion?
NP: In order to avoid the disastrous co-mingling of customer deposits and accounts with the creation of risky securities, trusts and related trading, banks were separated via the Glass-Steagall Act of 1933 into commercial (dealing with the public's loans, deposits and the more productive use of capital) and speculative (securities creation and trading) arms.
The commercial banks received deposit backing from the newly created Federal Deposit Insurance Corporation (FDIC). And the banks that chose to focus on securities creation and trading – well, they were not provided government subsidies like today. Plus, the Securities and Exchange Commission (SEC) was created to ostensibly protect the public from securities fraud (though it has been useless at that recently.)
Due to the 1999 repeal of the Glass-Steagall Act, commercial and investment banking, and insurance companies, intertwined. Commercial banks were able to leverage (or borrow against “safer” positions more massively) because they owned that more “stable” fee-driven deposit and loan business They could thus create big new debt deals for their clients, create assets stuffed with anything from junk bonds to subprime loans, and load up on derivatives. Competition between banks became about who could leverage their simpler businesses, the most and the quickest. Investment banks, like Goldman, Lehman and Merrill that didn't have the depositor cushion, but wanted in on the same game, got the SEC to allow them to leverage the trading positions they did have, more. Repeal stoked the casino element of Wall Street, rendering productive financing less attractive.
MK: In your novel, the nefarious bank in question is led by a powerful mogul uncle who controls his nephew – a family-run financial firm, so to speak. How has the ownership of banks and financial firms changed since the crash of 1929?
NP: Back then, the Morgan Bank (fictionalized in my novel from a story perspective, but real) was a private elitist bank. Partners were handpicked by Jack Morgan (J.P. Morgan Jr.) and customer lists weren't public, nor were many deals. In “Black Tuesday,” Roderick, the nephew, and Jack, the uncle, come to have very different reactions to the bank's secrecy.
Today, JPM Chase, which includes within its hierarchy the original Morgan bank, is similarly one of the most powerful banks in the world, though part-funded by public shares, rather than private ones.
The big banks, epitomized by Morgan Bank in 1929 and JPM Chase today – as well as others – are still run by entitled, privileged titans with disdain for containment by stricter laws. They travel in moneyed circles, have access to – or become – the most senior political leaders and, in general, are completely disconnected from the rest of the public. The only difference is that Morgan came into his position in the family bank through his father, whereas Jamie Dimon rose through the ranks of several banks before attaining his position; otherwise, they could be the same man, same bank, different time.
MK: In 1929, the US financial industry was much more confined to America. Now it is part of an international system that is much more interconnected. Your novel describes a Wall Street that seems quaint and much smaller in scale than what exists today. How has the international financial market in 2011 changed the way in which Wall Street functions?
NP: Today, individuals have more access to invest or “bet” in the market – e-trade or Charles Schwab accounts, and so forth. They never even have to sit down with a broker like they did back in 1929. Additionally, many have 401K or various pension plans that invest in various stocks and securities for them.
In the 1920s, there were things called “trusts” through which people thought they could invest alongside the bigger, smarter financiers. Now, we have MSNBC, Fox Business and Jim Cramer talking about how small investors can become rich.
Then, certain Wall Street bankers and the equivalent of today's hedge and equity fund titans manipulated the market by having more access to information and the ability to maneuver bigger price swings since they controlled more of the trading volume. It's the same thing today, but additionally now with globalized programmed trading, the big volume trades cause tremendous market movements which can hurt the “little people” who don't know they are coming. Then, investors believed trusts (which were created by banks and stuffed with the stock of their preferred clients' companies) were surefire ways to make money because bankers said so. More recently, investors (including pension funds, municipalities and whole countries) believed AAA mortgage-related securities were surefire ways to make money because bankers and rating agencies said so.
MK: One financial tool that didn't exist in 1929 is the derivative. How has that “investment instrument” made Wall Street a much riskier enterprise?
NP: The advent of a whole slew of different derivatives, from interest rate to currency to credit and all sorts of tailored-made combinations in between, mostly over the past three decades, has infused the financial system with exponentially greater risk and less transparency, and much more dangerous interconnectivity amongst the largest financial players. As a result, global bank and political leaders can yell about how the entire system will implode absent certain bailouts, whether for Bank of America or the international speculators who bet against Greece thought the credit derivatives market, if certain things like debt-for-austerity programs aren't enacted.
Derivatives upped the ante of control that the largest financial players have over the entire system, as well as the ability for them to hold whole counties and populations hostage. In essence, there are more derivatives in the world than many multiples of global gross domestic product (GDP). That makes the global financial enterprise exceedingly risky. Put it this way: what happened with the collapse of finance that lead to the Great Depression, absent complex derivatives, is nothing compared to what could happen today.
MK: You and I have talked about Tom and Daisy Buchanan, wealthy characters in F. Scott Fitzgerald's “The Great Gatsby,” who lived reckless lives of privilege and left ruined lives in their wake. How did that novel, published in 1925, influence “Black Tuesday”?
NP: Before contemplating “Black Tuesday,” on a whim, I walked into my local library during Great Gatsby month. I got a copy of the classic, re-read it and decided that I didn't like any of the women in it. Plus, the notion of the “roaring 1920s” was about as fake as the Kardashians. There were some exceedingly wealthy people around, but mostly then, like now, the country was struggling – that's why the allure of the stock market sucked in investors that it shouldn't have, like Leila's uncle's partner.
The characters, Tom and Daisy Buchanan, were the quintessential representations of the 1920s vapid, partying, “good” life. Yet at the time, hosts of young women dreamt of being Daisy. Leila learned about high-society life from reading “The Great Gatsby,” penned the year she came to America, but upon witnessing that life in Roderick's world, she is crushed by the dark criminality of it all. She even tells Roderick, who knows Fitzgerald, that he couldn't possibly understand the real world, her world, foreshadowing the parallel recklessness at the center of “Black Tuesday.”
MK: Unrelated to your novel, but very much related to the subject at hand, is the question of Timothy Geithner. Is there some positive side to his being Secretary of the Treasury, or is he just Wall Street's man in the White House?
NP: Tim Geithner is a tool, literally. When Geithner took the Treasury helm, the amount of Treasury Security debt outstanding was $5.7 trillion (in tradable securities, and $591 billion in nonmarketable ones). In August 2008, just before the most powerful banks sucked the soul out of the country in every manner possible, it was $4.9 trillion. Today, outstanding Treasury debt stands at $9.7 trillion (total debt $10.2 trillion). Most of that increase occurred under Geithner, though it started under Hank Paulson.
Geithner will keep pretending that this seismic debt increase was a requirement to fix our main economy, which continues to get crushed, ignoring mention that the biggest, most powerful banks were propped up by trillions of dollars of federal of subsidies. His being Treasury head is an inherent conflict of interest with his Wall Street alliances, just as then-Treasury Secretary Andrew Mellon, under President Coolidge prior to the 1929 crash, had an allegiance to the bankers, because he was one.
MK: Finally, do you think the Dodd-Frank Wall Street Reform and Consumer Protection Act will actually reform anything on Wall Street?
NP: No. The Dodd-Frank Act does not separate the banks, thereby, no matter what other minor cosmetic items it contains, or yet-to-be-lobbied-to-death practices it evokes, banks can still increase their risk-taking and influence upon the cushion of customers' money.
The Consumer Financial Protection Agency is a great idea, in theory – though it should be noted, there already was a consumer protection department within the Federal Reserve that was 100 percent ineffective as fraudulent mortgages were being stuffed into fraudulent assets and dispersed throughout the world. But, by virtue of its political proximity to the Federal Reserve, any alarm bells it rings will involve a bitter fight against a stronger opponent. Not appointing Elizabeth Warren to run it was a pretty big red flag. I have more confidence in the Occupy movement to bring attention to the myriad of slimy bank practices, like Bank of America's $5 debit fee, which was pushed back, though in order for even public outcry to be effective, it has to translate into real profit loss for the banks, and it has to be hypervigilant and aggressive – forever.