Ex-Goldmanite Prins Fears Another Great Depression: Interview

The conditions that led to the birth of Occupy Wall Street are very similar to those before the Great Depression, says former Goldman Sachs Group Inc. (GS) managing director Nomi Prins.

Prins is the author of “Black Tuesday,” a novel set in 1929 and ‘30 in which the heroine accidentally discovers dark secrets at the nation’s largest bank. Prins has also written three nonfiction books, including “It Takes a Pillage: Behind the Bailouts, Bonuses and Backroom Deals From Washington to Wall Street” (2009).

In an interview at Bloomberg world headquarters in New York, we discussed the past and future of the financial system and the mistakes policy makers are repeating.

Onaran: Why did you go for fiction this time?

Prins: In nonfiction, you don’t have the ability to dig into the emotional impact on people of financial disasters. You can talk about statistics, but that doesn’t do it justice. I wanted to explore the emotional side of the story.

Onaran: Why did you use the 1930s as the backdrop to the story rather than the current crisis?

Prins: There are so many parallels between the 1930s and now, they’re staggering. Just like the asset bubble that caused the Great Depression, our subprime bubble has led to the 2008 crash from which we’re still suffering. So I wanted to say: “We’ve been here before. Why are we doing this again?”

Source: Nomi Prins via Bloomberg

The cover jacket of "Black Tuesday" by Nomi Prins. Close

The cover jacket of "Black Tuesday" by Nomi Prins.

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Source: Nomi Prins via Bloomberg

The cover jacket of "Black Tuesday" by Nomi Prins.

Rich Versus Poor

Today we have this 1 percent versus 99 percent, the dislocation between the rich and the poor, between the bankers and everybody else. That was very prevalent back then, leading up to the Depression. So the contrast between the poor Lower East Side residents and the Wall Street bankers in the 1930s was very intriguing to me.

Onaran: Are we repeating the same mistakes of the Great Depression?

Prins: The Glass-Steagall Act was created in 1933 to make sure banks couldn’t take advantage of their deposit and loan customers to get involved in the creation of new securities. So the risk of investment banking was separated, and the biggest banks were split up. But this time around, we didn’t do that -- we didn’t break up the banks, we actually consolidated more of their risk. We made them bigger. We lost the opportunity to make the banks less complex and not have the government subsidize zombie banks.

We’ve done so many things wrong, I’m afraid this will be a prolonged depression on the economy.

Roosevelt’s Reforms

Onaran: How could Franklin Delano Roosevelt carry out fundamental reforms -- banks had just as much political clout then, no?

Source: Nomi Prins via Bloomberg

Nomi Prins, author of "Black Tuesday." Close

Nomi Prins, author of "Black Tuesday."

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Source: Nomi Prins via Bloomberg

Nomi Prins, author of "Black Tuesday."

Prins: Banks didn’t see that they were losing their power when they were forced to split. The same people stayed on the boards of the new entities formed, so they thought they continued to wield power in the financial system.

Onaran: Are the banks cooking the books now as they were at the time?

Prins: Yes. By not marking to market the complex securities in their books, they’re hiding losses. Second, if you have loan properties and if you haven’t finished foreclosure, the related assets aren’t marked down. So there’s massive overvaluing going on across the board.

(Yalman Onaran writes for Bloomberg News. The opinions expressed are his own. This interview was condensed from a longer conversation.)

To contact the writer on the story: Yalman Onaran in New York at yonaran@bloomberg.net or @Yalman_BN on Twitter.

To contact the editor responsible for this story: Manuela Hoelterhoff in New York at mhoelterhoff@bloomberg.net.

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