Book Review: The ChickenShit Club by Jesse Eisinger

Editor’s Note: I did a podcast with Jesse Eisinger for the finance website Make Change, in which we discuss his book in further detail. I recommend listening to it here!

Nine years after the Great Recession mortgage bond crisis of 2008, no executives with any seniority on Wall Street faced criminal consequences. Although a few suffered civil penalties like fines, the lack of jail time left many asking, why?

chicken_shit_clubSeptember 2017 marks the ninth anniversary of the most explosive month of the Great Recession. Over one dramatic weekend nine years ago, legendary Wall Street firm Lehman Brothers declared bankruptcy, brokerage giant Merrill Lynch threw itself desperately into the arms of Bank of America, and insurance conglomerate AIG became an 80% ward of the federal government. That very bad weekend in mid-September followed hot on the heels of the previous week’s fireworks, in which mortgage giants Fannie Mae and Freddie Mac entered “conservatorship” status with the Federal Housing Finance Agency.

Like a ghost revived from horrors past, on September 11, 2017, the Justice department brought civil charges against Deutsche Bank mortgage bond trader Paul Mangione for fraudulently structuring sub-prime mortgage bonds back in April 2007, more than ten years ago. Mangione doesn’t face jail time, but rather civil penalties such as fines. So, we’re still reaping the consequences of the subprime mortgage debacle more than 10 years later, and still nobody’s going to jail.

My personal, deeply unpopular, view is that financial executives didn’t go to jail from the sub-prime mortgage crisis because they didn’t commit crimes. Poor money management is not a crime, nor is losing money for your firm or investors. Executives were guilty of believing too deeply in a flawed financial model or failing to respond quickly enough to systemic risks, but that’s a series of human errors, not jailable offences. Many observers of the sub-prime mortgage crisis disagree with me.

Jesse Eisinger, a Pulitzer Prize-winning financial journalist, just published a book this summer, called The Chickenshit Club: The Justice Department and Its Failure to Prosecute White-Collar Criminals, disagreeing with me. I mean, he’s not literally rebutting my argument, but rather he’s explaining the complex history of why nobody went to jail for the mortgage sub-prime crisis and the Great Recession more broadly.

As a general rule, I think it’s a tonic to learn from smarter, better-researched people who disagree completely with me. So I recommend the book whether you agree or disagree with me.

Eisinger’s answer to the question of “why no jail time?” as hinted at by his profane title, is that institutional weaknesses in the US justice system, from the SEC to the Justice Department to especially the Southern District of New York, made them unwilling and unable to catch white collar criminals and put them in jail.

Eisinger contrasts the earlier experience of the Enron prosecutions of criminal behavior by executives following the 2001 collapse of the trading giant with the absence of criminal prosecutions of Wall Street executives involved in the sub-prime mortgage collapse. So what changed between 2001 and 2008? In Eisinger’s telling, many factors combined.

First, a backlash developed against the damage caused by the aggressive prosecution of Enron’s accounting firm Arthur Anderson, a former “Big-5” accountancy, which drove them out of business in 2002.

Government prosecutors worried about the kind of collateral damage – to innocent employees, customers, investors – if they took down Wall Street firms, especially given how weak big firms were in the aftermath of 2008.

Second, prosecutors developed a preference for reaching a new kind of agreement called a “Deferred Prosecution Agreement,” (DPA) in which corporations – but importantly not individuals – agreed to pay fines as a result of bad actions. Typically a DPA meant a hefty corporate fine, ultimately paid by shareholders rather than executives, and an agreement to hire an outside monitor against future ongoing bad behavior.

Not incidentally, these monitoring agreements became extremely lucrative for big private law firms, encouraging a kind of Big Law lobby for more DPAs in place of criminal prosecutions.

Next, he describes a classic kind of regulatory revolving door between government prosecutors and lucrative white-collar defense practices. Eisinger believes many ambitious prosecutors want to eventually make ten times more money in private practice defending white collar criminals. So, they might not want to be overly aggressive prosecuting white collar criminals that could be their future private practice employers.

Finally, Eisinger describes prosecuting white collar crime as a particular skill, requiring a certain institutional culture of risk-taking and a consequences-be-damned attitude. Between the Enron/Arthur Anderson backlash and the rise of DPAs, our regulators lost their taste for putting executives behind bars. Running up the score with DPAs and corporate civil fines became easier than the more difficult task of jailing executives.

Interestingly, legal heavyweights making 2017 headlines such as James Comey, Preet Bharara, Eric Holder, Sally Yates, and Bob Mueller make cameos in Eisinger’s book, often in an unflattering, or at least mixed, context.

jesse_eisingerI spoke to Eisinger about his book recently. As a former mortgage and CDO salesman myself, I tried to explain, the actions of Wall Street folks described in civil complaints about sub-prime mortgage securitizations fell within a normal range of activity of how we did our jobs. Eisinger didn’t buy it.

But even reading the September 2017 civil suit about Paul Mangione at Deutsche Bank, I’m struck by how banal the complaint is. Mangione’s emails and phone records show he is deeply skeptical about the quality of mortgage underwriting standards. He neither created those mortgages nor had any real ability to influence their creation. His job was to take the product he received and try to make bonds he could sell out of them. To refuse to do that would be to refuse his way out of a job, at least a job as a sub-prime mortgage trader at Deutsche Bank.

I remain skeptical. Eisinger’s right to point out the troubling weaknesses in our current system of prosecuting white-collar criminals. I stick to my often unpopular stance that the sub-prime mortgage and CDO traders did not commit crimes for which they deserved jail.


a version of this ran in the San Antonio Express News and Houston Chronicle.


Please see related posts:

All Bankers Anonymous Book Reviews in One Place!

Mortgages Part VIII – The causes of the crisis



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Book Review: Black Swan – The Impact Of The Highly Improbable

The “Black Swan,” of Nicholas Nassim Taleb’s title, describes an event that occurs completely outside expectations, has an enormous impact on future developments, and can be explained only in hindsight as predictable. Further, Taleb argues that despite the fact that we are blind to their imminent arrival ahead of time, Black Swans drive the world more than the visible, predictable patterns around which we typically organize ourselves.

Examples of Black Swans would include the European ‘discovery’ of the American continents, Eduardo Severin’s $20,000 Facebook investment becoming $2 Billion, the rise of modern weaponry for war, the 9/11 attacks, and the Great Credit Crunch of 2008[1]

But instead of looking for Black Swans, we seem to be hardwired to search for predictable patterns to understand our world.  The typical forward-looking models we create to make sense of the world tend to assume inertia and normal distributions.  We expect the future to remain within an expected range of previously observable or predictable outcomes.  Black Swans, however, all too often overwhelm our expectation for continuity, acting like a tsunami that wipes out all our careful planning.

If you find the Black Swan view of the world compelling, how would you then organize your life and organize your investments?

Taleb’s suggested approach to both is dominated by what he calls empirical skepticism, which may be otherwise understood as doubting everything, and trying your darndest to deal with the fact that what you should be worrying most about is the thing you haven’t yet conceived of.

What you should not do, however, is trust too deeply in established patterns, impressive-seeming back-ward looking models, or anything that depends on normally-distributed bell curves.

I founded my investment fund[2] in 2004 with a compelling investment thesis, based on observable phenomenon and solid experience.  From my mortgage bond sales seat at Goldman Sachs I could see clearly that we, and thousands of our colleagues and competitors, were engaged in a headlong rush to underwrite and securitize as much consumer debt as we could possibly create on a daily, weekly, and monthly basis.  A good portion of this debt inevitably would go bad, creating huge opportunities for distressed investors who knew how to find and profit from the distress of financial institutions.

I knew something about the default and recovery rates on this type of debt, and I knew about the profitability of purchasing debt when it became distressed. In sum, I knew that we were headed for a debt reckoning, and I knew I had to set up my fund and achieve scale in time to take advantage of that reckoning.  So far, so good.  My fund grew until 2008.

The Black Swan of 2008 made it clear that instead of focusing on what I knew, I should have profitably focused on what I didn’t know.  Fund of Fund Managers can have their capital wiped out in July 2008 and demand a 100% redemption, for reasons entirely unrelated to my fund.

Let’s just say the Black Swan of 2008 swatted aside all the things I thought I knew about distressed debt investing.  It was all the things I didn’t know that killed the fund.  Taleb would argue that I focused on all the wrong risks, and I have to say, in hindsight, he was right.

Market participants could contemplate a single large broker dealer like Bear Stearns going under in March 2008.  That’s not a Black Swan.  What was harder to contemplate and therefore qualifies for Black Swan status was the simultaneous insolvency in one week in September 2008 of Lehman, AIG, Fannie Mae, and Freddie Mac, followed within weeks by the likely insolvency of money market funds and every other major financial firm.

I know I’ve already written before that I don’t like ‘How To Invest’ books, preferring instead the ‘How Not To Invest,’ book as more profitable in the long run.  Most of Black Swan may be profitably read as a ‘How Not To Invest,’ as Taleb implicitly blows up the status quo investment approaches embraced by the mainstream Financial Infotainment Industrial Complex.

However, I would be remiss if I failed to mention Taleb’s interesting investing career, which practice closely reflects his Black Swan philosophy.  He co-founded and continues to consult with a fund called Universa.  Universa purchases ‘volatility’ and ‘tail risk,’ via a long options strategy.  In plainer English his fund traditionally purchases deep out-of-the-money calls and puts, resulting in a portfolio that loses a little bit of money in most years but makes a killing when the rest of the investment world blows up due to some unforeseen, volatile, Black Swan event.

A word of caution if you’ve never read Taleb:  His personality determines his writing style more than most authors.  In his first, well-known book, Fooled By Randomness, Taleb nearly undermines his key financial and philosophical points with his abrasive style.  He slashes through ideas and people he considers lazy or wrong, never lowering the decibel level on his critique.  He improved the tone in Black Swan to the level of merely an irascible professor, making him more readable than his debut effort.


Please also see my review of Nassim Taleb’s Fooled by Randomness.

Please see related post: All Bankers Anonymous Book Reviews in one place.

[1] Which of course occurred after the publication of Black Swan and did more than anything to cement the value of Taleb’s skeptical empiricism approach.  Black Swan is more readable but probably less profound than his earlier book Fooled by Randomness, which I’ve reviewed here.  His latest book Antifragile, Things That Gain From Disorder is on hold at my local library.

[2] Misleadingly labeled a ‘hedge fund’

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Book Review: The Price of Inequality

I began with so much sympathy for the ideas in The Price of Inequality, by Nobel-Prize winning economist Joseph Stiglitz, so why did I grudge-read the book the whole way through?

I concur about the causes and problems of persistent and rising inequality in the United States, and I suspect Stiglitz and I would vote for similar political candidates.  But my goodness, this is a painful book to read.[1]

First, Stiglitz writes lazily about banking, making errors and relying on simplistic generalizations to match his political points.  As an ex-banker, I’ve got a little problem with Nobel-Prize winning economists getting basic facts wrong about banks in this country.

Second, Stiglitz never surprised me – not with his descriptions, his anecdotes, nor the economic studies he cited. Instead, any consistent reader of the New York Times and Wall Street Journal will know, in advance, the arguments and examples he cites.[2]

Finally and worst of all, Stiglitz is a hammerer, not a sifter, of ideas.  He pounds away at the inequality problem, always from the same left-of-center perspective, until all current events have been beaten into the same shape.

A bit more sifting, or a weighing of alternative perspectives would have won me over to his side.

No, that’s not exactly right.  I started out on his side.  A bit more sifting of competing thoughts would have prevented me from wanting to jump to the opposite side and point out all the ways he simplifies and distorts the left-of-center perspective.  I read a hammer book like The Price of Inequality and I just want to throw the hammer away.

If the last book I reviewed Unintended Consequences has one set of opening assumptions – that growth is the most important goal of economic policy and that financial incentives are a key to growth – then The Price of Inequality takes the opposite view of economic policy based on a very different set of starting assumptions.

While Unintended Consequences built a measure of good will with me, as a reader with banking experience, The Price of Inequality quickly gets my hackles up with a series of incorrect statements about banks.

MF Global did not, as Stiglitz incorrectly states on page 36, falter primarily as a result of derivatives trades – but rather it declared bankruptcy after a series of overly aggressive bets taken by its head Jon Corzine.  Corzine thought European bonds were cheap, so he loaded up his firm’s balance sheet with them, in the hopes that European bond prices would recover.  He was wrong, and the firm went under.  Derivatives were irrelevant.

There are not, as Stiglitz incorrectly states on p. 46, “hundreds of banks,” in the United States.  In fact there are over 7,000 banks in the country.

More troubling than these factual mistakes, however, is Stiglitz’ oversimplification in describing bank misdeeds.  For example, banks did not, as stated on page 47, systematically rig LIBOR ‘enabling them to make still more profits.’  The LIBOR rigging, perpetrated by a small number of cheating traders, had an unknown effect on profitability of the banks overall, and a reasonable argument could be made that systematically lowering LIBOR actually hurt banks’ overall profitability, as their lending portfolios would suffer from the lower interest rates sought by the riggers.  The rigging was wrong, and the cheaters will be and are being punished, but Stiglitz’ simplification doesn’t help his credibility.

Most egregiously, Stiglitz perpetuates the view, mistaken in my opinion, that predatory mortgage lending constituted a predominant bank strategy in the years leading up to the Credit Crunch.  Stiglitz describes the ‘rent seeking’ behavior of mortgage banks exploiting the poor through predatory lending, which he claims brought the banks extraordinary profits.

Ah, where to begin on that one?  Perhaps with those “extraordinary profits?”  Did anyone else notice the extraordinary losses banks took due to lending to poor people?  The write-downs and bailouts of 2008 and 2009 were a direct result of losing money, not making money, on the sub-prime debacle.

And then, if predatory lending was such a winning strategy, why aren’t banks falling all over themselves now to lend to the poor?  There are certainly more poor, and more unemployed now than there were during the boom years.  It should be a real boom time to pile up all those banking profits lending to the poor – right now, no?

What, you say, banks aren’t lending to poor people now?  Why do you think that is Mr. Stiglitz?

The real answer, the logical answer, is that lending to the poor is generally a terrible banking idea, and that banks don’t do it in the ordinary course of business.  The lending that led to the Credit Crunch was a short-lived, devastating experiment.  A near-death-experience-type experiment for banks.[3]

Look, lending to poor people is a damned-if-you-do, damned-if-you-don’t situation for bankers.  For the past thousand years, traditional banks did not do it because it’s not profitable.  To make up for that lack of profitability, federal government policies[4] demand some measure of lending to disadvantaged neighborhoods, while Fannie Mae, Freddie Mac, FHA/VA and USDA (among others) each in their own way incentivize mortgage lending to poor households.

For a brief decade – 1998 to 2007 – banks responded to a combination of government and market incentives, and the sub-prime market boomed. They did it from 1998 to 2007 based on a misunderstanding of market incentives, primarily rising real estate values and history-naïve modeling.

Sub-prime mortgages – before they became a bad word – were praised as an ingenious way of expanding home-ownership, of inviting more Americans into the American Dream.  Stiglitz’ narrative of the banker as profit-making predator and the poor homeowner as naïve victim – while common – is a distorted myth that ignores history and reality.[5]

Why do I get so agitated over Stiglitz’ simplification?  Just this:  If we completely mischaracterize the financial debacle of 2008, we’re likely to learn all the wrong lessons from the Crisis.  I realize its politically appealing to blame the greedy bankers and absolve the plucky poor people exploited by the greedy bankers.  I’m a creature of the same culture as Stiglitz and I love to criticize bankers too.  But please can we agree not to lie to ourselves so much about the mortgage debacle?

Ok, now back to the other problems with Stiglitz’ book.

If I assume I’m a pretty good representative of the intended audience for The Price of Inequality – Non-academic, informed on current events, politically opinionated, concerned with inequality – then why is this book such a chore to read?  I think it has something to do with the fact that Stiglitz’ examples all come from the same headlines and articles I’ve already read in recent years.[6]  I kept waiting for the original idea or surprising, counter-intuitive insight, but I waited in vain.

He offers statistics on the terrible state of wealth disparity in the United States, but in the driest way possible.

In the final analysis, I expected a more thoughtful weighing of evidence and ideas.  Stiglitz’ book wades into an important ‘Battle of Big Ideas,’ but he has no taste for engaging the opposition on its own terms.  He’s a warrior for his own side who does not speak the language of his enemy and cannot conceive of their humanity.

When someone wins the Nobel Prize in Economics, does that confer a monopoly on all the good ideas about a complicated topic like socio-economic inequality?  Are there, possibly, unintended consequences[7] to his policy prescriptions?  Does the opposition deserve a careful and open hearing?

Stiglitz really knows how to put the dismal back into the dismal science.  For a more intuitive, specific, sometimes funny, and interesting read on inequality and its societal costs, can I interest you in an excellent book here?


Please see related post: All Bankers Anonymous Book Reviews in one place.


[1] This is the opposite of my reaction to Ed Conard’s Unintended Consequences, which I reviewed earlier in the month, and which forms a neat book-end as the opposite worldview to Stiglitz’ The Price of Inequality.  Even though I disagree with many of Conard’s proposals, I enjoyed reading the book and would recommend it.  I guess I’m a contrarian that way.

[2] The New York Times’ Thomas Friedman is guiltier of this than anyone.  Never read his books.  I picked up The World is Flat only to discover that he’d retreaded his and his colleague’s columns and observations from the previous 5 years.  If you read newspapers regularly, you don’t need one of his books.  Did you know that hedge funds are allocating capital quickly around the world?  Did you know globalization is having far-reaching effects, visible even in small villages in foreign countries?  Wow.  Give that guy another $45,000 speaking fee.

[4] Primarily via the Community Reinvestment Act, known as the CRA.

[5] An interesting time-capsule on sub-prime lending comes from The Federal Reserve Bank of St. Louis in January 2006, characterizing the risks and rewards of the booming sub-prime mortgage market.  The research article has the advantage of not being tainted by the moral outrage that followed every subsequent discussion of sub-prime lending after 2008.  Accurately enough, the article states “subprime lending is simultaneously viewed as having great promise and great peril.”

[6] One example of rehashing known headlines and anecdotes:  He cites on p. 163 the infamous (and possibly apocryphal) Tea Partier whose protest sign read “Govt hands off my Medicare.”  Nevermind the silliness of citing one foolish protester to make a point, the recycling of Jon Stewart zingers does not win him any originality points.

[7] See what I did there?

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In Praise of SIGTARP, Part I –Truth in Government

As a recovering banker, a main obsessive question of mine remains “How did we get into this mess?”

By “mess,” I mean both the Credit Crunch itself and our collective response to it, at the government and personal levels.

My obsession drives me to read reports by the Special Inspector General for the Troubled Asset Relief Program (SIGTARP).  As a first draft of financial history, the SIGTARP reports have become essential to understanding the bailouts of Citigroup, AIG, other TBTF[1] Banks, and smaller banks as well.

Perhaps it’s a function of my low expectations for a government-produced document on finance.  Perhaps it’s my contrarian nature.  I’m not sure.  But I do know there’s something refreshing and downright exciting about the reports coming from the office of the SIGTARP.

I love SIGTARP so much I want to highlight the key things everyone should know from the reports, on the off chance you aren’t as obsessed with reading government documents as I am.

Two great things, just for starters, to know about SIGTARP’s reports.  First, they’ve got the ring of honesty.  Second, they remind me why I do have faith in our system of government and finance, despite all the reasons to lose faith, and despite all the crazy fringe talk we get bombarded with on a regular basis.

In the April 2012 report, just to cite one happy example, you will find such pleasing curiosities as a Treasury official who tells you her colleagues in another part of Treasury are lying to you, to wit:

“It is a widely held misconception that TARP will make a profit.[2]  The most recent cost estimate for TARP is a loss of $60 Billion.  Taxpayers are still owed $118.5 billion”

Now that’s what I’m talking about!  Some straight talk from the federal government.[3]

Another example of facts cutting through the haze of political speak:

“TARP’s explicit goals of preserving homeownership and promoting jobs were evidence that Congress wanted to help homeowners during the crisis, not just banks.  However…Only 9% of the TARP funds set aside for mortgage modifications have been spent to help a fraction of eligible homeowners after more than three years…after two years, only 3% of the funds obligated [for the Hardest Hit Fund] have been spent to help only approximately 30,000 homeowners.”

In other words, the government’s largest federal programs for mortgage modification and homeowner relief are poorly designed or poorly implemented, or both.

I’m not happy about this.  But I don’t particularly care to blame Congress, or the President, or a bunch of nameless bureaucrats we’ve never heard of.

I am happy, however, to read a technocratic document like SIGTARP’s quarterly report that gives me the hstraight dope about what is working and what is not working in the financial bailout.  The honesty of the reporting gives me hope that people are willing to work on practical data, practical solutions, and do not seek to score points against the other side only for ideological reasons or political gamesmanship.

Too often we fall down the rabbit hole of financial discourse online, where the avatars of pitchfork wielding right-wing trolls do imaginary battle with the avatars of left-wing demagogues who make the Scarecrow’s Occupy Gotham scene seem like a plausible near-future alternative.  I’m pretty sure Dark Knight villains Two-Face, Bain, Joker, and the Scarecrow actually exist, because I feel like I read their stuff in the comments section of respectable online financial outlets.

It’s enough to induce despair, which is always the goal of the Dark Knight’s foes.  That forum has plenty of Gotham-City shouting and fear-mongering but precious little listening, and even less understanding or analysis.

Who can fight against the financial darkness?  SIGTARP can.

I love SIGTARP so much I created my first fictional comic book hero[4] in his honor.  I love SIGTARP so much because he makes me believe in my country’s government again, which is no small feat.

Would you like to feel better about our country and the government’s ability to self-criticize and therefore, possibly, learn from its mistakes?  I suggest you brew some tea and curl up with a nice SIGTARP report sometime.  You’ll feel a lot better.


[1] Too Big To Fail, but you knew that.

[2] Meaning: Please pay no attention to my Treasury colleagues quoted in the Wall Street Journal who wrote the following “Overall, the government is now expected to at least break even on its financial stability programs and may realize a positive return”

[3] Usually it’s the journalists who tell us the government is lying, so it’s nice to see the rare government official willing to make the same claim.

[4] You have to admit SIGTARP does sound like Norse God, no?



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