The Bailout, The Banks, And The Single Banker Who Went To Jail

Almost nobody under 40 actually remembers what happened in 2008. The full story – $4.6 trillion in commitments, ten million foreclosed homes, $165 million in bonuses to the executives who blew it up, and exactly one mid-level banker who ever served prison time – is the foundation everything else in this newsletter rests on. If you do not understand 2008, you do not understand why Bitcoin exists.

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I want to walk through what actually happened in 2008, in order, with the numbers, because almost everyone reading this newsletter is too young to remember it the way it deserves to be remembered, and the people who do remember it have largely accepted a sanitized version that obscures the parts that actually matter.

The official story you usually hear goes something like this. There was a housing bubble. The bubble popped. Some banks took losses. The government stepped in to stabilize the financial system. There was a recession. Things eventually recovered. Lessons were learned. Regulations were passed. The system was reformed. Now everything is fine. End of story.

That story is wrong in almost every particular, and the parts that are technically true are framed in a way that obscures the parts that are not. The actual story is one of the most consequential failures in the history of American capitalism, the largest wealth transfer from the public to the financial sector in peacetime, and a structural confirmation that the rules apply differently depending on which side of Wall Street you happen to sit on.

I want to do the version of the story that nobody really writes anymore, because the version that is true is the version that explains everything about why Bitcoin exists, why the gold buying has accelerated, why central banks are diversifying, and why the people who saw all of this clearly in 2009 ended up being the people who built the alternatives to a system that, when pressed, demonstrated exactly whose interests it actually serves.

Start with what the banks were actually doing in the years leading up to the collapse, because the language used to describe it has been deliberately softened over time.

The banks were not making honest mistakes. The banks were knowingly originating mortgages they understood were likely to fail, packaging those mortgages into securities they understood were mispriced, marketing those securities to investors as safer than they actually were, and then in many cases taking positions against those same securities once they had been sold. Internal emails from the period, later released through litigation and congressional investigations, show traders calling the mortgage products “vomit” and “crap” and “Frankenstein” while they were selling them to pension funds and insurance companies and foreign banks. The Senate Permanent Subcommittee on Investigations published these emails. They are not in dispute. The bankers knew what they were selling. The bankers sold it anyway.

The credit rating agencies, who were paid by the banks to evaluate these securities, gave them top investment-grade ratings that allowed them to be sold to institutions legally required to hold only high-quality paper. The Financial Crisis Inquiry Commission, the official congressional investigation that produced the most comprehensive account of what happened, called the rating agencies “essential cogs in the wheel of financial destruction” and concluded that the mortgage-backed securities at the heart of the crisis “could not have been marketed and sold without their seal of approval.” The agencies were paid for those approvals. The conflict of interest was structural and visible to everyone in the industry, and it operated at scale for years.

AIG, the largest insurance company in the world at the time, sold credit default swaps on hundreds of billions of dollars of these securities without setting aside any meaningful reserves to cover potential losses. The bet was that the underlying mortgages would not fail in significant numbers, and the company collected premiums for years while accumulating an exposure that, if the bet turned out to be wrong, was structurally larger than the firm itself could ever cover. When the bet did turn out to be wrong, AIG could not pay, which meant Goldman Sachs and the European banks holding those swaps faced losses that would have wiped out their capital. That cascading failure is what made the collapse systemic. Everyone was tied to everyone else through derivatives that no regulator was tracking and no firm could actually hedge.

When the bubble broke, the speed of the unraveling was breathtaking. Lehman Brothers filed for bankruptcy on September 15, 2008, the largest corporate bankruptcy in American history. Within forty-eight hours, the entire global financial system was experiencing a generalized loss of confidence, with banks refusing to lend to each other because none of them could be sure which of their counterparties was actually solvent. Money market funds, which Americans treated as functionally equivalent to bank deposits, began to “break the buck,” meaning the underlying portfolios were worth less than the dollar value of the shares investors had been told they held. The commercial paper market froze. Companies that were profitable, well-run, and not involved in any of the underlying mortgage chaos suddenly could not roll over their short-term debt and faced existential cash flow crises.

That is the context in which the bailouts happened. The government had a real choice to make. Letting the largest financial firms fail was, by any honest assessment, going to cause a depression. Bailing them out was going to reward exactly the behavior that caused the crisis, and was going to do so in a way that fundamentally changed what Americans could believe about how the financial system worked.

The government chose the bailout. And the size of what followed is the number that most people have forgotten.

The Troubled Asset Relief Program, or TARP, that you have probably heard of was the visible piece. Congress authorized $700 billion in October 2008, later reduced to $475 billion, and ultimately disbursed approximately $431 billion. TARP, in isolation, was the program that bought stakes in major banks and bailed out the auto industry. By the time it wound down, the federal government technically made a small profit on the TARP investments themselves, which is the fact the bailout’s defenders most like to cite.

The problem with citing only TARP is that TARP was a small fraction of what actually happened. The Federal Reserve, separately from TARP and operating largely outside congressional authorization, extended approximately $3.8 trillion in loans to financial institutions during the crisis. The Center for Media and Democracy, after combining all the various programs, estimated total federal commitments during the bailout period at $4.6 trillion. That number represented roughly thirty-two percent of US GDP at the time and one hundred thirty percent of the entire federal budget for fiscal year 2009. A Bloomberg lawsuit eventually forced the Fed to disclose more of what had actually been loaned to whom, and the answer was a level of support to specific firms that nobody outside the Fed and Treasury had known about while it was happening.

AIG alone received approximately $182 billion in federal support across multiple programs. The company used a meaningful portion of that money to make Goldman Sachs whole on the credit default swaps Goldman had purchased — paying out approximately $12.9 billion to Goldman, $11.9 billion to Société Générale, $11.8 billion to Deutsche Bank, and so on, with the total list of foreign and domestic banks receiving AIG payouts coming to over $90 billion of taxpayer money flowing directly through the bailed-out insurance company to the very Wall Street firms whose bets had caused the crisis in the first place. This was not a side effect of the bailout. This was the bailout. AIG was the conduit. The banks were the actual recipients.

Now hold that picture in mind while we look at what happened to the rest of the country.

Between 2006 and 2014, approximately ten million American households lost their homes to foreclosure. Let that number sit. Ten million families. Nearly nine million jobs were lost in the recession that followed. Household wealth in the United States fell by approximately $19 trillion at the trough, with $4.2 trillion of that loss coming from housing alone. The Financial Crisis Inquiry Commission’s official report estimated that four million families had already lost their homes by the time the report was published in 2011, with another four and a half million in the foreclosure process or seriously delinquent. Retirement accounts evaporated. College funds vanished. Small businesses closed permanently. Communities that had been middle-class for generations slipped into permanent decline.

And while that was happening to the population, this was happening at the firms that had caused the crisis.

In March 2009, six months after AIG received its first federal infusion of capital, the company paid out $165 million in bonuses to seventy-three employees of its financial products division — the same division that had originated the catastrophic credit default swap positions in the first place. Subsequent disclosures revealed that AIG paid an additional $454 million in 2008 bonuses to other employees, bringing total bonus payments at the bailed-out insurer to over $600 million in the same period. Within days of receiving its initial bailout funds, AIG had also sent executives on a half-million-dollar resort retreat at the St. Regis in Monarch Beach, California. Citigroup, also bailed out, ordered a $50 million corporate jet. Bank of America, also bailed out, used taxpayer funds to pay year-end bonuses to its trading floor.

President Obama called the AIG bonuses an “outrage.” Larry Summers, his chief economic adviser, called them “the most outrageous” thing about the entire crisis. Senator Charles Grassley publicly suggested that AIG executives should consider Japanese-style ritual suicide. The administration spent weeks promising to recover the bonuses. The bonuses were not recovered. The Treasury Department determined that the federal government did not have legal authority to abrogate the existing employment contracts under which the bonuses had been promised. The same federal government that had just disbursed $182 billion to keep AIG functional was, apparently, powerless to require that the recipient firm decline to use a portion of that money to reward the people who had caused the disaster.

Now we get to the criminal accountability piece, which is the part of the story that should be impossible to read without feeling something.

Following the Savings and Loan crisis of the late 1980s and early 1990s, a smaller and less complex financial scandal involving fraudulent lending and accounting at hundreds of US thrift institutions, the federal government prosecuted over 1,100 individuals and obtained over 800 convictions. Top executives at many of the largest failed thrifts went to prison. The Department of Justice considered prosecuting executive-level financial fraud a core mission of federal law enforcement, and they pursued it with vigor.

Following the 2008 financial crisis, which was vastly larger in scale, vastly more damaging to ordinary Americans, and involved fraudulent conduct documented in tens of thousands of pages of internal bank communications and congressional investigations, exactly one American banker went to prison.

His name was Kareem Serageldin. He was a structured credit trader at Credit Suisse. He had been the global head of his unit, but he was not a member of senior management at the firm. He pleaded guilty in 2013 to conspiracy to falsify books and records, specifically for mismarking the value of mortgage-backed securities at the end of 2007 in a way that hid losses from his supervisors and regulators. He was sentenced to thirty months in federal prison and ordered to pay $25.6 million in restitution. The judge who sentenced him, Alvin Hellerstein, explicitly noted that Serageldin’s conduct represented “a small piece of an overall evil climate within the bank and with many other banks.” The judge also departed downward from the sentencing guidelines, which would have called for fifty-seven months, because he recognized that Serageldin was being punished for behavior that had been pervasive across the industry and that almost everyone else who had engaged in it had walked away free.

That is the entire criminal accountability of the 2008 financial crisis. One mid-level trader at a Swiss bank, serving thirty months at Moshannon Valley Correctional Center in Pennsylvania, for falsifying records that hid losses smaller than the bonuses AIG paid to seventy-three of its own employees in a single quarter while operating on federal life support.

Nobody else went. Lloyd Blankfein, who ran Goldman Sachs through the period, did not go. Dick Fuld, who ran Lehman Brothers into bankruptcy, did not go. Joseph Cassano, who built the AIG financial products book that took down the largest insurance company in the world, did not go. Angelo Mozilo, the founder of Countrywide Financial, did not go. James Cayne, who ran Bear Stearns into the ground, did not go. Stan O’Neal of Merrill Lynch did not go. Charles Prince of Citigroup did not go. None of them went. The Justice Department under both administrations pursued civil settlements that the firms paid out of corporate funds, which is to say with shareholder money rather than executive money, and called the matter closed.

The official explanation for the absence of prosecutions was that the conduct, while clearly damaging, did not meet the standard for criminal fraud, because the executives could plausibly claim they did not understand the products their own firms were selling. That explanation has not aged well. The internal emails make it clear that they understood the products. The congressional testimony made it clear that they understood the products. The civil settlements were structured around the understanding that they had understood the products. The decision not to prosecute was a decision, made by specific people in specific offices, that the executives in question were too important and the prosecutions too difficult to be worth the political and economic risk.

This is the part of 2008 that everyone should sit with, because it is the part that explains everything that came after.

What 2008 actually established, in operational terms, is that the United States operates a financial system in which the rules apply to ordinary people and do not apply, in any meaningful way, to the executives of the largest financial firms. When an ordinary person makes a series of bad decisions and loses everything, they lose everything. When the largest financial firms in the country, staffed by executives earning millions of dollars a year, make a series of bad decisions and lose everything plus an enormous portion of the rest of the economy as collateral damage, they are recapitalized at taxpayer expense, kept in their positions, paid bonuses funded by the same taxpayer recapitalization, and protected from criminal accountability by a Justice Department that has decided to pursue civil settlements instead.

This is the system that produced Satoshi Nakamoto. The Bitcoin white paper was published on October 31, 2008, six weeks after Lehman Brothers collapsed. The genesis block of the Bitcoin blockchain, mined in January 2009, contains an embedded message — a reference to a Times of London headline from that day reading “Chancellor on brink of second bailout for banks.” This is not metaphor. This is not Bitcoin folklore. This is documented evidence that the entire intellectual project of cryptocurrency was conceived as a direct response to what had just happened to the global financial system, by someone who was watching it happen in real time and concluded that an alternative needed to exist.

The alternative was a financial system in which the rules could not be changed by central banks during a crisis. A system in which counterparty risk was eliminated by design rather than managed by trust. A system in which the supply of money could not be expanded by political decision to bail out firms that had earned their own destruction. A system in which a person could hold their own savings without depending on the integrity of any institution that might, when stressed, choose to behave the way every major American financial institution behaved in 2008.

You do not have to be a Bitcoin maximalist to recognize that the project makes more sense in light of 2008 than it does without it. The reason crypto exists is the reason the gold buying is accelerating. The reason the gold buying is accelerating is the reason central banks have lost faith in the dollar-denominated system. The reason central banks have lost faith in the dollar-denominated system is partly Russia’s frozen reserves in 2022 and partly the slow recognition that the institutions managing that system are not, in fact, neutral arbiters of risk and reward. They are participants. They have interests. And when the interests of the institutions diverge from the interests of the people who rely on them, the institutions, every single time, choose themselves.

That is the lesson of 2008. The bailouts were the smaller part of it. The lack of accountability was the larger part. The absence of meaningful reform was the part that confirmed the pattern would repeat. And the steady accumulation of debt and money supply that followed — the quantitative easing that ran for years, the negative real interest rates, the asset price inflation, the silent erosion of stored work — is the trajectory that began in 2008 and has not meaningfully stopped since.

I write a crypto newsletter because I lived through 2008 as an adult, watched what happened, watched what did not happen, and concluded that the people who had been telling me the system was robust and self-correcting and fair had been lying or wrong or both. The alternative that Satoshi proposed in October 2008 was a response to that exact lying. The asset class that has grown around it for the last eighteen years is what the response actually looks like when you let it scale.

Ten million foreclosures. $4.6 trillion in commitments. $165 million in bonuses paid by the firm that took $182 billion to keep its doors open. One banker in prison. And a generation of people who watched it all happen and decided they would never again trust their savings to a system that, when tested, chose itself over them.

That is the foundation. Everything else in this newsletter rests on it. If you understand 2008, you understand why Bitcoin exists. If you do not understand 2008, you do not understand why nothing that has happened since has surprised the people who saw it coming.

The system told you what it was. The only question is whether you were watching.

*THE NEWSLETTER IS SHORTER THIS WEEK!

The views and opinions expressed here are solely my own and should in no way be interpreted as financial advice. Every investment and trading move involves risk. You should conduct your own research when making a decision. I am not a financial advisor. Nothing contained in this e-mail constitutes or shall be construed as an offering of financial instruments or as investment advice or recommendations of an investment strategy or whether or not to "Buy," "Sell," or "Hold" an investment.

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