By Pam Martens and Russ Martens: April 12, 2016

Economist Paul Krugman has repeatedly attempted to recast the 2008 Wall Street collapse as triggered by shadow banks rather than the biggest banks on Wall Street. Krugman refuses to let the facts on the ground get in his way. (Later in this article, we’ll produce a document to show just how ridiculously off base Krugman really is.)

On December 14, 2014 Krugman wrote in his column at the New York Times: “In fact, I’d argue that regulating insured banks is something of a sideshow, since the 2008 crisis was brought on mainly by uninsured institutions like Lehman Brothers and A.I.G.” Apparently, Krugman, like his colleague Andrew Ross Sorkin, is ignorant of the fact that both Lehman Brothers and AIG owned FDIC-insured banks at the time of their failure, backstopped by the U.S. taxpayer. (When Wall Street On Parade asked the Public Editor, the Publisher, and the Editor of the New York Times to correct the gross misrepresentations made by Ross Sorkin on this issue in his 2012 article, it ignored each and every one of our requests. That suggested to us that this is an intentional false meme at the New York Times – otherwise known as propaganda.)

Last Friday, Krugman was back at his propaganda desk again, this time attacking Presidential candidate Senator Bernie Sanders in the process. In his column perniciously titled “Sanders Over the Edge,” which the New York Times has generously decided not to put behind its pay wall, Krugman attempts to undercut Sanders’ pledge to break up the big banks by regurgitating the same set of false facts. Krugman writes:

“The easy slogan here is ‘Break up the big banks.’ It’s obvious why this slogan is appealing from a political point of view: Wall Street supplies an excellent cast of villains. But were big banks really at the heart of the financial crisis, and would breaking them up protect us from future crises?

“Many analysts concluded years ago that the answers to both questions were no. Predatory lending was largely carried out by smaller, non-Wall Street institutions like Countrywide Financial; the crisis itself was centered not on big banks but on ‘shadow banks’ like Lehman Brothers that weren’t necessarily that big.”

When Krugman says “the crisis itself was centered not on big banks,” he has placed himself on factually unsupportable ground. The two largest taxpayer bailouts in the crisis were Citigroup, the largest U.S. commercial bank by assets in 2008, and AIG, the big insurance company, which was in fact a bailout of the biggest banks.

Citigroup received a bailout of $45 billion in equity infusions; over $300 billion in asset guarantees; and more than $2 trillion in cumulative, below-market-rate loans from the Federal Reserve. Citigroup was such a basket case in 2008 that those Federal Reserve loans were kept secret until Bloomberg News pried them loose after years of court battle.

Sheila Bair was the head of the Federal Deposit Insurance Corporation (FDIC) that insures the deposits of U.S. commercial banks during the Wall Street collapse of 2008. She published an authoritative book on what was really going on behind the scenes during the crisis. Paul Krugman was never behind the scenes and clearly does not have the vantage point or historical understanding of the crisis that Bair has. In Bair’s book, Bull by the Horns, this is how she described Citigroup’s situation in 2008 at the peak of the crisis:

“By November, the supposedly solvent Citi was back on the ropes, in need of another government handout.  The market didn’t buy the OCC’s and NY Fed’s strategy of making it look as though Citi was as healthy as the other commercial banks.  Citi had not had a profitable quarter since the second quarter of 2007.  Its losses were not attributable to uncontrollable ‘market conditions’; they were attributable to weak management, high levels of leverage, and excessive risk taking.  It had major losses driven by their exposures to a virtual hit list of high-risk lending; subprime mortgages, ‘Alt-A’ mortgages, ‘designer’ credit cards, leveraged loans, and poorly underwritten commercial real estate.  It had loaded up on exotic CDOs and auction-rate securities.  It was taking losses on credit default swaps entered into with weak counterparties, and it had relied on unstable volatile funding – a lot of short-term loans and foreign deposits.  If you wanted to make a definitive list of all the bad practices that had led to the crisis, all you had to do was look at Citi’s financial strategies…What’s more, virtually no meaningful supervisory measures had been taken against the bank by either the OCC or the NY Fed…Instead, the OCC and the NY Fed stood by as that sick bank continued to pay major dividends and pretended that it was healthy.”

The idea that the crisis started with Lehman or AIG (both of which failed in September 2008) is belied by these headlines from earlier that year:

January 10, 2008, Wall Street Journal: “Citigroup, Merrill Seek More Foreign Capital,” noting: “Two of the biggest names on Wall Street are going hat in hand, again, to foreign investors.”

January 17, 2008, Los Angeles Times: “Citigroup Loses Nearly $10 Billion”

March 5, 2008, MarketWatch: “Citigroup CEO Says Firm ‘Financially Sound’ ” with the opening sentence explaining that “The chief executive of Citigroup sought to ally investor fears Wednesday, a day after the stock hit a multiyear low…”

April 20, 2008, New York Times: “Citigroup Records a Loss and Plans 9000 Layoffs,” explaining that the bank reported a $5.1 billion loss and would have to slash jobs.

June 26, 2008, Wall Street Journal: “Citigroup: Worth Less and Less Every Day,” sharing the scary news that the stock was worth one-third of where it had been at its 52-week high.

July 23, 2008, Bloomberg News: “Citigroup Unravels as Reed Regrets Universal Model.”

Now for that document that throws egg all over the Nobel-prize winning ego and blinders of Paul Krugman.

AIG received a taxpayer backstop of $185 billion and had to be taken over by the Federal government. But the bailout of AIG was in reality a backdoor bailout of the biggest Wall Street banks and their foreign big bank kin who had used AIG as a counterparty on their casino-like derivative bets and for securities loans that AIG could not make good on.

It was eventually revealed that major Wall Street banks, foreign banks and hedge funds received more than half of AIG’s bailout money ($93.2 billion). Public pressure eventually forced AIG to release a chart of these payments, but the chart showed just a narrow window of disbursements from September to December 2008.  How vast the full total of payments were to the big banks is yet to see the light of day.

The chart shows that Goldman Sachs received $12.9 billion of the funds; Societe Generale received $11.9 billion; Merrill Lynch and its U.S. banking parent, Bank of America, received a combined $11.5 billion; the British bank, Barclays, received $8.5 billion; Citigroup got another backdoor bailout of $2.3 billion from AIG, to name just a few of the big banks.

Starting in 1988, the New York Times “forcefully advocated” (its words) for the repeal of the Glass-Steagall Act on its editorial page. (See related article below.) After the greatest financial crash since the Great Depression, the Times finally apologized and admitted its error in 2012, writing: “Having seen the results of this sweeping deregulation, we now think we were wrong to have supported it.” But that hasn’t stopped the Times from allowing others to do its dirty work in recasting the financial crash as having nothing to do with the repeal of Glass-Steagall, which allowed the big commercial banks holding insured deposits to merge with their casino cousins.

What’s really behind this revisionist history crusade at the Times? Glass-Steagall was repealed in 1999 under the Bill Clinton administration, a fact that doesn’t encourage voters to trust Hillary Clinton, whom the New York Times has endorsed for President, on issues of financial reform.

Pigs Are Flying on Wall Street — Can Glass-Steagall Be Far Behind