Former Goldman Sachs Exec Who Worked For Trump Aide Warns Of Another Financial Crisis

As President Trump pushes to sell off public assets to financial firms and eliminate financial regulations, former Goldman Sachs executive Nomi Prins says America is on the verge of another financial crisis. Prins, who is now a journalist and author of “All the President's Bankers,” argues that lawmakers’ refusal to pass legislation breaking up the big banks is putting the global economy at risk. Prins discussed her concerns on a recent podcast with International Business Times reporter David Sirota.

Here is a lightly edited transcript of their discussion.

Sirota: When you worked at Goldman Sachs, you worked for Gary Cohn, who is now President Trump's top economic advisor. He’s been in the news lately for being one of the people who is spearheading the president's plan to try to privatize public assets, at a time when Goldman Sachs says it wants to move into buying up those assets. What should we glean from President Trump appointing Gary Cohn to such a powerful position in the White House?

Prins: Well, first, appointing someone like Gary Cohn or even [Treasury Secretary] Steve Mnuchin who came from Goldman Sachs as well through the hedge fund environment and basically pillaging the banks of individuals, is that the philosophy that these people have, and have held since their time on Wall Street, is such that it's fair game to take over, to securitize, to act in non-transparent ways from a financial perspective at the expense of citizens; that it's okay to make money at the expense of the stability of the economy, at the expense of the stability of the financial health of citizens and so forth.

The consideration, the mechanism for the consideration of policy to them is not about what's good, or what the greater good is for the population, it's what's most expedient for their constituents and their constituents happen to be the banks at which they grew up and from which they came most recently.

So when President Trump campaigned on this idea that he was separate from Wall Street relative to Hillary Clinton who clearly was getting money from Wall Street after she left her position as Secretary of State and through Bill Clinton's speeches, through the foundation and so forth, Trump had tried to distance himself from that. But by appointing individuals that not only don't have a distance, but have a clear alignment in their policy perspectives with the desires of the largest most powerful Wall Street institutions from which they come, and at which their constituents are, then all it says is that he was lying.

Sirota: Gary Cohn was quoted recently on the privatization initiative saying that the adminstration’s offer to corporations is, “The bigger the thing you privatize, the more money we'll give you.” What do you make of his statement?

Prins: Well it's completely open... You're actually taking, you’re confiscating public assets into the private sector, after which there is no accountability in the private sector to how they're run, who gets fired, who is at a disadvantage because of that privatization. The idea of privatization is always the idea that there is money up front in order to generally cheaply take over some form of a public good, or some form of a public utility. And the reason it is done cheaply — even though the argument is that a lot of money will come into the government for the sale of whatever that public good is — is because from a Wall Street perspective, they want to pay as little money up front as possible in order to receive the benefits forever of running and profiting from the privatization of whatever that institution or good is.

Sirota: President Trump has filled his administration with appointees who come from the industries they are now charged with regulating. Some argue that these private sector moguls are the perfect people to “drain the swamp” because they will bring private-sector efficiencies to government. Do you agree?

Prins: The idea that you're draining the swamp when you are specifically filling it with the masters of the swamp, is just tautologically impossible…He's specifically filling it with individuals that are skilled, precisely, at executing financial transactions that get things cheap from the public, and make private profit from them. So it's even worse than simply not draining a swamp, it's filling it with people that are most capable at keeping it full.

Sirota: President Trump and Republicans in Congress are pushing to repeal the Dodd-Frank regulations that passed after the 2008 financial crisis. What do you think the effect of Dodd-Frank was? Did that legislation make matters better or worse?

Prins: What Dodd-Frank did not do was very simply break up the big banks. In fact in the aftermath of Dodd-Frank, the big banks [that] paid multi-billion dollars in fines for crimes they committed leading into the crisis, have become bigger in terms of their percentage of the overall financial assets in the market. Like Bank of America, they were provided the ability to take over the investment bank, Merrill Lynch; in cases of J.P. Morgan Chase they were provided a guarantee to take over the old investment bank Bear Stearns.

So these institutions received government subsidies even with the Dodd-Frank bill that mitigated some of their activities... But at the end of the day their structure, their ability to take deposits and loans and federal reserve window opportunities, FDIC guarantees, a call on the government in the case of a crisis remains not just as it was before the crisis, but in a more precarious position. The reason for that is, we've had almost 10 years of zero percent interest rates to help provide the banking sector with cheap money in order to allow it to maintain the appearance of solvency — without which there would be tremendous problems in the banking system, more than already existed.

So we basically federally propped up these institutions for almost 10 years, and they've become bigger. What Dodd-Frank does is mitigate a small portion of their activity. So overall the problems that they caused can still be caused.

Sirota: What concerns do you have about current economic trends?

Prins: There is a problem building…The reality is, the subprime loans that were at the crux of the financial crisis in 2007, 2008, are now and have been replaced by corporate debt.

So from a Wall Street perspective, what they do is they find the thing in the system that's the easiest target. That used to be subprime loans. Then they mix, and slice, and dice and put them into new securities, sell them across the world and make money. They have been doing that in these last 10 years with cheap money by extending loans to corporations in the U.S. and in the world.

So the amount of corporate debt currently that exists in the world right now, of which a lot has gone through in some capacity to U.S. banks with derivatives and lots of bells and whistles attached to them, is greater than the amount of mortgages that were in the system before the crisis, and far greater than the amount of subprime mortgages that were in the system before the crisis, and they're beginning to default just like subprime loans are beginning to default.

So there's also a matter of the build up of risk as well as the non-restructuring of the system that has happened since the crisis. So what do you do? Well, you break them up before they spillage all over us again.

Sirota: Are we on the verge of another financial crisis?

Prins: The answer is yes, the question is timing. The same signs that happened before a crisis, which is that there's been a large extension generally of debt, in the form of loans or in the form of bonds or whatever, some sort of a bubble, and that is followed by a sort of contraction in the speed of extending that debt, those loans. That is followed by banks trying to get rid of what they have in their association with that debt or those loans, that is followed by a crisis or a crash of some sort if they don't do it fast enough.

So yes, I see those signs happening in the corporate market, and it's globally, it's not just me. I mean S&P which did really bad job of alerting us to what was happening and assets that were created from subprime loans in the last crisis, has had two annual reports in 2015 and 2016: In both of them the increase in defaults of corporate debt has amplified both years by something like 30 to 35 percent each year. So having been pretty stable, there was a large jump in their annual report for 2015 and a larger jump in their annual report for 2016 of the amount of corporates that were defaulted. So right now, as of their 2016 report, the amount is not at the levels of 2009, but it's at levels that are higher than they have been since 2009. So they're approaching 2009 levels — which were not good.

Sirota: You have written a lot about the Glass-Steagall Act — the Depression-era law designed to separate traditional banking from investment banking. The idea was to try to prevent banks from using depositors’ money to make risky bets. That law was repealed during the Clinton administration. You argue that it needs to be reinstated. When you talk to legislators now, are they receptive to what you are telling them?

Prins: Bringing [Glass-Steagall] back was put into the Republican platform. It was put into the Democrat platform…So this is the issue of separating the banks primarily is actually for the first time, since Glass-Steagall was repealed under the Clinton administration in 1999, on the books of both parties…Many [lawmakers] truly don't understand banking, and they'll admit that. It does require sitting down and sort of explaining the connection between a bank having the ability to take deposits and make loans, whether that's to individuals or corporations on one side of their books, and on the other side to create potentially dangerous securities and to trade them with the guarantee of the first side.

So when you break it down, I actually am finding more reception now than ever before, and I think that's because from the Republican side it was actually on the platform.

That said, I'm also finding a lot of lack of clarity from Republicans as to what their platform actually means. Because though Glass-Steagall reinstatement or 21st Century Glass-Steagall was on the Republican platform, different Republicans say different things about what that looks like. A couple weeks ago or so Steve Mnuchin, the Treasury secretary said, that it doesn't mean breaking up banks, to Sen. Elizabeth Warren who was incredulous. Like, "How does the thing that's on your platform, how does the 21st Century Glass-Steagall not represent to you breaking up the big banks?" And he skipped the question, he showed a severe lack of historical knowledge and basically said that he thinks breaking up the banks is a bad idea.

Sirota: We often hear from some folks that even if Glass-Steagall had been around before the financial crisis, it would not have prevented the crisis. What do you say to that?

Prins: It’s really simple, it's like if you take a piece of paper, and I do this right, and you put a line down the middle of the piece of paper. On one side of the piece of paper you just write down commercial banking and under that take deposits, under that provide loans. That's like one side. And you put on top of that, Chase, i.e., half of J.P. Morgan Chase. On the other side you put J.P. Morgan. Under J.P. Morgan is investment banking, under investment banking is create securities, trade securities. That's it. It's very, very simple. What Glass-Steagall did, was it separated the ability for one institution called a bank holding company to be able to use the left side to finance or guarantee the right side. And from the standpoint of a populist measure, it means that a bank cannot create and trade or speculate in newer existing securities of any complex kind.

They've gotten a little bit more complex since the 20s and 30s but honestly not that much more, computing power has increased, the philosophy behind creating securities has developed but it's not like it's a million miles away if you really break it down. But besides that, it just means that you can't guarantee one with the other…

Over the years it's gotten a sort of partisan connotation, even though it was repealed under a Democratic presidency by a Republican Congress, so it was bipartisanly repealed, but it was also bipartisanly pushed and promoted… So now, after we've seen a couple crises since it has been repealed and certainly the largest one, 2007, 2008, going back to your question just in a roundabout way, about whether having it would have prevented this most recent crisis, yes it would. Because if you couldn't as a large institution create securities on one side with a Federal guarantee of some manner on the other side, then you couldn't create as many securities.

Sirota: Is there anything to be optimistic about in the financial system?

Prins: Where I'm optimistic is that for whatever reason it got to the RNC platform…it's there. And obviously it's also on the Democratic platform and has been for a while. And why I'm optimistic is that I'm just personally having a lot more meetings on both sides of the aisle with a lean towards Republicans, particularly in some of the states that kind of swung over, wondering whether this is a real concern and because it's on their platform, just taking it more seriously. I'm having meetings that used to be non-existent become hour-long meetings with some of the Congress people in those states ... And they're asking good questions.

So that's the only reason I can be optimistic. Obviously, the bill itself has been introduced to bring back Glass-Steagall again by Elizabeth Warren and Maria Cantwell, and it's bipartisan in terms of John Mccain and so forth in the Senate. There's a bill H.R.790 which is a reinstatement of Glass-Steagall which has been introduced in a bipartisan manner by Congresswoman Kaptur of Ohio and Congressman Walter Jones, Republican from North Carolina, that has 50 co-sponsors right now, and that's more than a similar bill had the last session around.

There are more people in the Republican Party who are asking good questions and spending more time thinking about the matter of separating the banks, and questioning the leadership, I think in the Republican Party as to what Trump meant, and what the platform meant when the reinstatement of Glass-Steagall was put in, versus what people like Steve Mnuchin say when they say that big banks should not be broken up, that that would be a bad thing. That's not clear, within the party itself. That lack of clarity, I think, is an opportunity.