[ExI] Was: Re: Economy: "The Big Takeover" Now: WHAT DO WE DO?
possiblepaths2050 at gmail.com
Sun Mar 22 21:42:28 UTC 2009
No thoughts on this, folks? Wow. This story horrified me (yes, the
corporate corruption & takeover of the U.S. govt. is nothing new,
except that it is reaching never before seen heights).
WHAT DO WE DO TO STOP IT??? AND WHAT IF WE CAN'T???
The Big Takeover
The global economic crisis isn't about money - it's about power. How
Wall Street insiders are using the bailout to stage a revolution
Posted Mar 19, 2009 12:49 PM
It's over — we're officially, royally fucked. no empire can survive
being rendered a permanent laughingstock, which is what happened as of
a few weeks ago, when the buffoons who have been running things in
this country finally went one step too far. It happened when Treasury
Secretary Timothy Geithner was forced to admit that he was once again
going to have to stuff billions of taxpayer dollars into a dying
insurance giant called AIG, itself a profound symbol of our national
decline — a corporation that got rich insuring the concrete and steel
of American industry in the country's heyday, only to destroy itself
chasing phantom fortunes at the Wall Street card tables, like a
dissolute nobleman gambling away the family estate in the waning days
of the British Empire.
The latest bailout came as AIG admitted to having just posted the
largest quarterly loss in American corporate history — some $61.7
billion. In the final three months of last year, the company lost more
than $27 million every hour. That's $465,000 a minute, a yearly income
for a median American household every six seconds, roughly $7,750 a
second. And all this happened at the end of eight straight years that
America devoted to frantically chasing the shadow of a terrorist
threat to no avail, eight years spent stopping every citizen at every
airport to search every purse, bag, crotch and briefcase for juice
boxes and explosive tubes of toothpaste. Yet in the end, our
government had no mechanism for searching the balance sheets of
companies that held life-or-death power over our society and was
unable to spot holes in the national economy the size of Libya (whose
entire GDP last year was smaller than AIG's 2008 losses).
So it's time to admit it: We're fools, protagonists in a kind of
gruesome comedy about the marriage of greed and stupidity. And the
worst part about it is that we're still in denial — we still think
this is some kind of unfortunate accident, not something that was
created by the group of psychopaths on Wall Street whom we allowed to
gang-rape the American Dream. When Geithner announced the new $30
billion bailout, the party line was that poor AIG was just a victim of
a lot of shitty luck — bad year for business, you know, what with the
financial crisis and all. Edward Liddy, the company's CEO, actually
compared it to catching a cold: "The marketplace is a pretty crummy
place to be right now," he said. "When the world catches pneumonia, we
get it too." In a pathetic attempt at name-dropping, he even whined
that AIG was being "consumed by the same issues that are driving house
prices down and 401K statements down and Warren Buffet's investment
Liddy made AIG sound like an orphan begging in a soup line, hungry and
sick from being left out in someone else's financial weather. He
conveniently forgot to mention that AIG had spent more than a decade
systematically scheming to evade U.S. and international regulators, or
that one of the causes of its "pneumonia" was making colossal,
world-sinking $500 billion bets with money it didn't have, in a toxic
and completely unregulated derivatives market.
Nor did anyone mention that when AIG finally got up from its seat at
the Wall Street casino, broke and busted in the afterdawn light, it
owed money all over town — and that a huge chunk of your taxpayer
dollars in this particular bailout scam will be going to pay off the
other high rollers at its table. Or that this was a casino unique
among all casinos, one where middle-class taxpayers cover the bets of
People are pissed off about this financial crisis, and about this
bailout, but they're not pissed off enough. The reality is that the
worldwide economic meltdown and the bailout that followed were
together a kind of revolution, a coup d'état. They cemented and
formalized a political trend that has been snowballing for decades:
the gradual takeover of the government by a small class of connected
insiders, who used money to control elections, buy influence and
systematically weaken financial regulations.
The crisis was the coup de grâce: Given virtually free rein over the
economy, these same insiders first wrecked the financial world, then
cunningly granted themselves nearly unlimited emergency powers to
clean up their own mess. And so the gambling-addict leaders of
companies like AIG end up not penniless and in jail, but with an
Alien-style death grip on the Treasury and the Federal Reserve — "our
partners in the government," as Liddy put it with a shockingly casual
matter-of-factness after the most recent bailout.
The mistake most people make in looking at the financial crisis is
thinking of it in terms of money, a habit that might lead you to look
at the unfolding mess as a huge bonus-killing downer for the Wall
Street class. But if you look at it in purely Machiavellian terms,
what you see is a colossal power grab that threatens to turn the
federal government into a kind of giant Enron — a huge, impenetrable
black box filled with self-dealing insiders whose scheme is the
securing of individual profits at the expense of an ocean of unwitting
involuntary shareholders, previously known as taxpayers.
I. PATIENT ZERO
The best way to understand the financial crisis is to understand the
meltdown at AIG. AIG is what happens when short, bald managers of
otherwise boring financial bureaucracies start seeing Brad Pitt in the
mirror. This is a company that built a giant fortune across more than
a century by betting on safety-conscious policyholders — people who
wear seat belts and build houses on high ground — and then blew it all
in a year or two by turning their entire balance sheet over to a guy
who acted like making huge bets with other people's money would make
his dick bigger.
That guy — the Patient Zero of the global economic meltdown — was one
Joseph Cassano, the head of a tiny, 400-person unit within the company
called AIG Financial Products, or AIGFP. Cassano, a pudgy, balding
Brooklyn College grad with beady eyes and way too much forehead, cut
his teeth in the Eighties working for Mike Milken, the granddaddy of
modern Wall Street debt alchemists. Milken, who pioneered the creative
use of junk bonds, relied on messianic genius and a whole array of
insider schemes to evade detection while wreaking financial disaster.
Cassano, by contrast, was just a greedy little turd with a knack for
selective accounting who ran his scam right out in the open, thanks to
Washington's deregulation of the Wall Street casino. "It's all about
the regulatory environment," says a government source involved with
the AIG bailout. "These guys look for holes in the system, for ways
they can do trades without government interference. Whatever is
unregulated, all the action is going to pile into that."
The mess Cassano created had its roots in an investment boom fueled in
part by a relatively new type of financial instrument called a
collateralized-debt obligation. A CDO is like a box full of diced-up
assets. They can be anything: mortgages, corporate loans, aircraft
loans, credit-card loans, even other CDOs. So as X mortgage holder
pays his bill, and Y corporate debtor pays his bill, and Z credit-card
debtor pays his bill, money flows into the box.
The key idea behind a CDO is that there will always be at least some
money in the box, regardless of how dicey the individual assets inside
it are. No matter how you look at a single unemployed ex-con trying to
pay the note on a six-bedroom house, he looks like a bad investment.
But dump his loan in a box with a smorgasbord of auto loans,
credit-card debt, corporate bonds and other crap, and you can be
reasonably sure that somebody is going to pay up. Say $100 is supposed
to come into the box every month. Even in an apocalypse, when $90 in
payments might default, you'll still get $10. What the inventors of
the CDO did is divide up the box into groups of investors and put that
$10 into its own level, or "tranche." They then convinced ratings
agencies like Moody's and S&P to give that top tranche the highest AAA
rating — meaning it has close to zero credit risk.
Suddenly, thanks to this financial seal of approval, banks had a way
to turn their shittiest mortgages and other financial waste into
investment-grade paper and sell them to institutional investors like
pensions and insurance companies, which were forced by regulators to
keep their portfolios as safe as possible. Because CDOs offered higher
rates of return than truly safe products like Treasury bills, it was a
win-win: Banks made a fortune selling CDOs, and big investors made
much more holding them.
The problem was, none of this was based on reality. "The banks knew
they were selling crap," says a London-based trader from one of the
bailed-out companies. To get AAA ratings, the CDOs relied not on their
actual underlying assets but on crazy mathematical formulas that the
banks cooked up to make the investments look safer than they really
were. "They had some back room somewhere where a bunch of Indian guys
who'd been doing nothing but math for God knows how many years would
come up with some kind of model saying that this or that combination
of debtors would only default once every 10,000 years," says one young
trader who sold CDOs for a major investment bank. "It was nuts."
Now that even the crappiest mortgages could be sold to conservative
investors, the CDOs spurred a massive explosion of irresponsible and
predatory lending. In fact, there was such a crush to underwrite CDOs
that it became hard to find enough subprime mortgages — read: enough
unemployed meth dealers willing to buy million-dollar homes for no
money down — to fill them all. As banks and investors of all kinds
took on more and more in CDOs and similar instruments, they needed
some way to hedge their massive bets — some kind of insurance policy,
in case the housing bubble burst and all that debt went south at the
same time. This was particularly true for investment banks, many of
which got stuck holding or "warehousing" CDOs when they wrote more
than they could sell. And that's were Joe Cassano came in.
Known for his boldness and arrogance, Cassano took over as chief of
AIGFP in 2001. He was the favorite of Maurice "Hank" Greenberg, the
head of AIG, who admired the younger man's hard-driving ways, even if
neither he nor his successors fully understood exactly what it was
that Cassano did. According to a source familiar with AIG's internal
operations, Cassano basically told senior management, "You know
insurance, I know investments, so you do what you do, and I'll do what
I do — leave me alone." Given a free hand within the company, Cassano
set out from his offices in London to sell a lucrative form of
"insurance" to all those investors holding lots of CDOs. His tool of
choice was another new financial instrument known as a credit-default
swap, or CDS.
The CDS was popularized by J.P. Morgan, in particular by a group of
young, creative bankers who would later become known as the "Morgan
Mafia," as many of them would go on to assume influential positions in
the finance world. In 1994, in between booze and games of tennis at a
resort in Boca Raton, Florida, the Morgan gang plotted a way to help
boost the bank's returns. One of their goals was to find a way to lend
more money, while working around regulations that required them to
keep a set amount of cash in reserve to back those loans. What they
came up with was an early version of the credit-default swap.
In its simplest form, a CDS is just a bet on an outcome. Say Bank A
writes a million-dollar mortgage to the Pope for a town house in the
West Village. Bank A wants to hedge its mortgage risk in case the Pope
can't make his monthly payments, so it buys CDS protection from Bank
B, wherein it agrees to pay Bank B a premium of $1,000 a month for
five years. In return, Bank B agrees to pay Bank A the full
million-dollar value of the Pope's mortgage if he defaults. In theory,
Bank A is covered if the Pope goes on a meth binge and loses his job.
When Morgan presented their plans for credit swaps to regulators in
the late Nineties, they argued that if they bought CDS protection for
enough of the investments in their portfolio, they had effectively
moved the risk off their books. Therefore, they argued, they should be
allowed to lend more, without keeping more cash in reserve. A whole
host of regulators — from the Federal Reserve to the Office of the
Comptroller of the Currency — accepted the argument, and Morgan was
allowed to put more money on the street.
What Cassano did was to transform the credit swaps that Morgan
popularized into the world's largest bet on the housing boom. In
theory, at least, there's nothing wrong with buying a CDS to insure
your investments. Investors paid a premium to AIGFP, and in return the
company promised to pick up the tab if the mortgage-backed CDOs went
bust. But as Cassano went on a selling spree, the deals he made
differed from traditional insurance in several significant ways.
First, the party selling CDS protection didn't have to post any money
upfront. When a $100 corporate bond is sold, for example, someone has
to show 100 actual dollars. But when you sell a $100 CDS guarantee,
you don't have to show a dime. So Cassano could sell investment banks
billions in guarantees without having any single asset to back it up.
Secondly, Cassano was selling so-called "naked" CDS deals. In a
"naked" CDS, neither party actually holds the underlying loan. In
other words, Bank B not only sells CDS protection to Bank A for its
mortgage on the Pope — it turns around and sells protection to Bank C
for the very same mortgage. This could go on ad nauseam: You could
have Banks D through Z also betting on Bank A's mortgage. Unlike
traditional insurance, Cassano was offering investors an opportunity
to bet that someone else's house would burn down, or take out a term
life policy on the guy with AIDS down the street. It was no different
from gambling, the Wall Street version of a bunch of frat brothers
betting on Jay Feely to make a field goal. Cassano was taking book for
every bank that bet short on the housing market, but he didn't have
the cash to pay off if the kick went wide.
In a span of only seven years, Cassano sold some $500 billion worth of
CDS protection, with at least $64 billion of that tied to the subprime
mortgage market. AIG didn't have even a fraction of that amount of
cash on hand to cover its bets, but neither did it expect it would
ever need any reserves. So long as defaults on the underlying
securities remained a highly unlikely proposition, AIG was essentially
collecting huge and steadily climbing premiums by selling insurance
for the disaster it thought would never come.
Initially, at least, the revenues were enormous: AIGFP's returns went
from $737 million in 1999 to $3.2 billion in 2005. Over the past seven
years, the subsidiary's 400 employees were paid a total of $3.5
billion; Cassano himself pocketed at least $280 million in
compensation. Everyone made their money — and then it all went to
II. THE REGULATORS
Cassano's outrageous gamble wouldn't have been possible had he not had
the good fortune to take over AIGFP just as Sen. Phil Gramm — a
grinning, laissez-faire ideologue from Texas — had finished
engineering the most dramatic deregulation of the financial industry
since Emperor Hien Tsung invented paper money in 806 A.D. For years,
Washington had kept a watchful eye on the nation's banks. Ever since
the Great Depression, commercial banks — those that kept money on
deposit for individuals and businesses — had not been allowed to
double as investment banks, which raise money by issuing and selling
securities. The Glass-Steagall Act, passed during the Depression, also
prevented banks of any kind from getting into the insurance business.
But in the late Nineties, a few years before Cassano took over AIGFP,
all that changed. The Democrats, tired of getting slaughtered in the
fundraising arena by Republicans, decided to throw off their old
reliance on unions and interest groups and become more
"business-friendly." Wall Street responded by flooding Washington with
money, buying allies in both parties. In the 10-year period beginning
in 1998, financial companies spent $1.7 billion on federal campaign
contributions and another $3.4 billion on lobbyists. They quickly got
what they paid for. In 1999, Gramm co-sponsored a bill that repealed
key aspects of the Glass-Steagall Act, smoothing the way for the
creation of financial megafirms like Citigroup. The move did away with
the built-in protections afforded by smaller banks. In the old days, a
local banker knew the people whose loans were on his balance sheet: He
wasn't going to give a million-dollar mortgage to a homeless meth
addict, since he would have to keep that loan on his books. But a
giant merged bank might write that loan and then sell it off to some
fool in China, and who cared?
The very next year, Gramm compounded the problem by writing a sweeping
new law called the Commodity Futures Modernization Act that made it
impossible to regulate credit swaps as either gambling or securities.
Commercial banks — which, thanks to Gramm, were now competing directly
with investment banks for customers — were driven to buy credit swaps
to loosen capital in search of higher yields. "By ruling that
credit-default swaps were not gaming and not a security, the way was
cleared for the growth of the market," said Eric Dinallo, head of the
New York State Insurance Department.
The blanket exemption meant that Joe Cassano could now sell as many
CDS contracts as he wanted, building up as huge a position as he
wanted, without anyone in government saying a word. "You have to
remember, investment banks aren't in the business of making huge
directional bets," says the government source involved in the AIG
bailout. When investment banks write CDS deals, they hedge them. But
insurance companies don't have to hedge. And that's what AIG did.
"They just bet massively long on the housing market," says the source.
"Billions and billions."
In the biggest joke of all, Cassano's wheeling and dealing was
regulated by the Office of Thrift Supervision, an agency that would
prove to be defiantly uninterested in keeping watch over his
operations. How a behemoth like AIG came to be regulated by the
little-known and relatively small OTS is yet another triumph of the
deregulatory instinct. Under another law passed in 1999, certain kinds
of holding companies could choose the OTS as their regulator, provided
they owned one or more thrifts (better known as savings-and-loans).
Because the OTS was viewed as more compliant than the Fed or the
Securities and Exchange Commission, companies rushed to reclassify
themselves as thrifts. In 1999, AIG purchased a thrift in Delaware and
managed to get approval for OTS regulation of its entire operation.
Making matters even more hilarious, AIGFP — a London-based subsidiary
of an American insurance company — ought to have been regulated by one
of Europe's more stringent regulators, like Britain's Financial
Services Authority. But the OTS managed to convince the Europeans that
it had the muscle to regulate these giant companies. By 2007, the EU
had conferred legitimacy to OTS supervision of three mammoth firms —
GE, AIG and Ameriprise.
That same year, as the subprime crisis was exploding, the Government
Accountability Office criticized the OTS, noting a "disparity between
the size of the agency and the diverse firms it oversees." Among other
things, the GAO report noted that the entire OTS had only one
insurance specialist on staff — and this despite the fact that it was
the primary regulator for the world's largest insurer!
"There's this notion that the regulators couldn't do anything to stop
AIG," says a government official who was present during the bailout.
"That's bullshit. What you have to understand is that these regulators
have ultimate power. They can send you a letter and say, 'You don't
exist anymore,' and that's basically that. They don't even really need
due process. The OTS could have said, 'We're going to pull your
charter; we're going to pull your license; we're going to sue you.'
And getting sued by your primary regulator is the kiss of death."
When AIG finally blew up, the OTS regulator ostensibly in charge of
overseeing the insurance giant — a guy named C.K. Lee — basically
admitted that he had blown it. His mistake, Lee said, was that he
believed all those credit swaps in Cassano's portfolio were "fairly
benign products." Why? Because the company told him so. "The judgment
the company was making was that there was no big credit risk," he
explained. (Lee now works as Midwest region director of the OTS; the
agency declined to make him available for an interview.)
In early March, after the latest bailout of AIG, Treasury Secretary
Timothy Geithner took what seemed to be a thinly veiled shot at the
OTS, calling AIG a "huge, complex global insurance company attached to
a very complicated investment bank/hedge fund that was allowed to
build up without any adult supervision." But even without that "adult
supervision," AIG might have been OK had it not been for a complete
lack of internal controls. For six months before its meltdown,
according to insiders, the company had been searching for a full-time
chief financial officer and a chief risk-assessment officer, but never
got around to hiring either. That meant that the 18th-largest company
in the world had no one checking to make sure its balance sheet was
safe and no one keeping track of how much cash and assets the firm had
on hand. The situation was so bad that when outside consultants were
called in a few weeks before the bailout, senior executives were
unable to answer even the most basic questions about their company —
like, for instance, how much exposure the firm had to the
III. THE CRASH
Ironically, when reality finally caught up to Cassano, it wasn't
because the housing market crapped but because of AIG itself. Before
2005, the company's debt was rated triple-A, meaning he didn't need to
post much cash to sell CDS protection: The solid creditworthiness of
AIG's name was guarantee enough. But the company's crummy accounting
practices eventually caused its credit rating to be downgraded,
triggering clauses in the CDS contracts that forced Cassano to post
substantially more collateral to back his deals.
By the fall of 2007, it was evident that AIGFP's portfolio had turned
poisonous, but like every good Wall Street huckster, Cassano schemed
to keep his insane, Earth-swallowing gamble hidden from public view.
That August, balls bulging, he announced to investors on a conference
call that "it is hard for us, without being flippant, to even see a
scenario within any kind of realm of reason that would see us losing
$1 in any of those transactions." As he spoke, his CDS portfolio was
racking up $352 million in losses. When the growing credit crunch
prompted senior AIG executives to re-examine its liabilities, a
company accountant named Joseph St. Denis became "gravely concerned"
about the CDS deals and their potential for mass destruction. Cassano
responded by personally forcing the poor sap out of the firm, telling
him he was "deliberately excluded" from the financial review for fear
that he might "pollute the process."
The following February, when AIG posted $11.5 billion in annual
losses, it announced the resignation of Cassano as head of AIGFP,
saying an auditor had found a "material weakness" in the CDS
portfolio. But amazingly, the company not only allowed Cassano to keep
$34 million in bonuses, it kept him on as a consultant for $1 million
a month. In fact, Cassano remained on the payroll and kept collecting
his monthly million through the end of September 2008, even after
taxpayers had been forced to hand AIG $85 billion to patch up his
fuck-ups. When asked in October why the company still retained Cassano
at his $1 million-a-month rate despite his role in the probable
downfall of Western civilization, CEO Martin Sullivan told Congress
with a straight face that AIG wanted to "retain the 20-year knowledge
that Mr. Cassano had." (Cassano, who is apparently hiding out in his
lavish town house near Harrods in London, could not be reached for
What sank AIG in the end was another credit downgrade. Cassano had
written so many CDS deals that when the company was facing another
downgrade to its credit rating last September, from AA to A, it needed
to post billions in collateral — not only more cash than it had on its
balance sheet but more cash than it could raise even if it sold off
every single one of its liquid assets. Even so, management dithered
for days, not believing the company was in serious trouble. AIG was a
dried-up prune, sapped of any real value, and its top executives
didn't even know it.
On the weekend of September 13th, AIG's senior leaders were summoned
to the offices of the New York Federal Reserve. Regulators from
Dinallo's insurance office were there, as was Geithner, then chief of
the New York Fed. Treasury Secretary Hank Paulson, who spent most of
the weekend preoccupied with the collapse of Lehman Brothers, came in
and out. Also present, for reasons that would emerge later, was Lloyd
Blankfein, CEO of Goldman Sachs. The only relevant government office
that wasn't represented was the regulator that should have been there
all along: the OTS.
"We sat down with Paulson, Geithner and Dinallo," says a person
present at the negotiations. "I didn't see the OTS even once."
On September 14th, according to another person present, Treasury
officials presented Blankfein and other bankers in attendance with an
absurd proposal: "They basically asked them to spend a day and check
to see if they could raise the money privately." The laughably short
time span to complete the mammoth task made the answer a foregone
conclusion. At the end of the day, the bankers came back and told the
government officials, gee, we checked, but we can't raise that much.
And the bailout was on.
A short time later, it came out that AIG was planning to pay some $90
million in deferred compensation to former executives, and to
accelerate the payout of $277 million in bonuses to others — a move
the company insisted was necessary to "retain key employees." When
Congress balked, AIG canceled the $90 million in payments.
Then, in January 2009, the company did it again. After all those years
letting Cassano run wild, and after already getting caught paying out
insane bonuses while on the public till, AIG decided to pay out
another $450 million in bonuses. And to whom? To the 400 or so
employees in Cassano's old unit, AIGFP, which is due to go out of
business shortly! Yes, that's right, an average of $1.1 million in
taxpayer-backed money apiece, to the very people who spent the past
decade or so punching a hole in the fabric of the universe!
"We, uh, needed to keep these highly expert people in their seats,"
AIG spokeswoman Christina Pretto says to me in early February.
"But didn't these 'highly expert people' basically destroy your company?" I ask.
Pretto protests, says this isn't fair. The employees at AIGFP have
already taken pay cuts, she says. Not retaining them would dilute the
value of the company even further, make it harder to wrap up the
unit's operations in an orderly fashion.
The bonuses are a nice comic touch highlighting one of the more
outrageous tangents of the bailout age, namely the fact that, even
with the planet in flames, some members of the Wall Street class can't
even get used to the tragedy of having to fly coach. "These people
need their trips to Baja, their spa treatments, their hand jobs," says
an official involved in the AIG bailout, a serious look on his face,
apparently not even half-kidding. "They don't function well without
IV. THE POWER GRAB
So that's the first step in wall street's power grab: making up things
like credit-default swaps and collateralized-debt obligations,
financial products so complex and inscrutable that ordinary American
dumb people — to say nothing of federal regulators and even the CEOs
of major corporations like AIG — are too intimidated to even try to
understand them. That, combined with wise political investments,
enabled the nation's top bankers to effectively scrap any meaningful
oversight of the financial industry. In 1997 and 1998, the years
leading up to the passage of Phil Gramm's fateful act that gutted
Glass-Steagall, the banking, brokerage and insurance industries spent
$350 million on political contributions and lobbying. Gramm alone —
then the chairman of the Senate Banking Committee — collected $2.6
million in only five years. The law passed 90-8 in the Senate, with
the support of 38 Democrats, including some names that might surprise
you: Joe Biden, John Kerry, Tom Daschle, Dick Durbin, even John
The act helped create the too-big-to-fail financial behemoths like
Citigroup, AIG and Bank of America — and in turn helped those
companies slowly crush their smaller competitors, leaving the major
Wall Street firms with even more money and power to lobby for further
deregulatory measures. "We're moving to an oligopolistic situation,"
Kenneth Guenther, a top executive with the Independent Community
Bankers of America, lamented after the Gramm measure was passed.
The situation worsened in 2004, in an extraordinary move toward
deregulation that never even got to a vote. At the time, the European
Union was threatening to more strictly regulate the foreign operations
of America's big investment banks if the U.S. didn't strengthen its
own oversight. So the top five investment banks got together on April
28th of that year and — with the helpful assistance of then-Goldman
Sachs chief and future Treasury Secretary Hank Paulson — made a pitch
to George Bush's SEC chief at the time, William Donaldson, himself a
former investment banker. The banks generously volunteered to submit
to new rules restricting them from engaging in excessively risky
activity. In exchange, they asked to be released from any lending
restrictions. The discussion about the new rules lasted just 55
minutes, and there was not a single representative of a major media
outlet there to record the fateful decision.
Donaldson OK'd the proposal, and the new rules were enough to get the
EU to drop its threat to regulate the five firms. The only catch was,
neither Donaldson nor his successor, Christopher Cox, actually did any
regulating of the banks. They named a commission of seven people to
oversee the five companies, whose combined assets came to total more
than $4 trillion. But in the last year and a half of Cox's tenure, the
group had no director and did not complete a single inspection. Great
deal for the banks, which originally complained about being regulated
by both Europe and the SEC, and ended up being regulated by no one.
Once the capital requirements were gone, those top five banks went
hog-wild, jumping ass-first into the then-raging housing bubble. One
of those was Bear Stearns, which used its freedom to drown itself in
bad mortgage loans. In the short period between the 2004 change and
Bear's collapse, the firm's debt-to-equity ratio soared from 12-1 to
an insane 33-1. Another culprit was Goldman Sachs, which also had the
good fortune, around then, to see its CEO, a bald-headed
Frankensteinian goon named Hank Paulson (who received an estimated
$200 million tax deferral by joining the government), ascend to
Freed from all capital restraints, sitting pretty with its man running
the Treasury, Goldman jumped into the housing craze just like everyone
else on Wall Street. Although it famously scored an $11 billion coup
in 2007 when one of its trading units smartly shorted the housing
market, the move didn't tell the whole story. In truth, Goldman still
had a huge exposure come that fateful summer of 2008 — to none other
than Joe Cassano.
Goldman Sachs, it turns out, was Cassano's biggest customer, with $20
billion of exposure in Cassano's CDS book. Which might explain why
Goldman chief Lloyd Blankfein was in the room with ex-Goldmanite Hank
Paulson that weekend of September 13th, when the federal government
was supposedly bailing out AIG.
When asked why Blankfein was there, one of the government officials
who was in the meeting shrugs. "One might say that it's because
Goldman had so much exposure to AIGFP's portfolio," he says. "You'll
never prove that, but one might suppose."
Market analyst Eric Salzman is more blunt. "If AIG went down," he
says, "there was a good chance Goldman would not be able to collect."
The AIG bailout, in effect, was Goldman bailing out Goldman.
Eventually, Paulson went a step further, elevating another
ex-Goldmanite named Edward Liddy to run AIG — a company whose bailout
money would be coming, in part, from the newly created TARP program,
administered by another Goldman banker named Neel Kashkari.
V. REPO MEN
There are plenty of people who have noticed, in recent years, that
when they lost their homes to foreclosure or were forced into
bankruptcy because of crippling credit-card debt, no one in the
government was there to rescue them. But when Goldman Sachs — a
company whose average employee still made more than $350,000 last
year, even in the midst of a depression — was suddenly faced with the
possibility of losing money on the unregulated insurance deals it
bought for its insane housing bets, the government was there in an
instant to patch the hole. That's the essence of the bailout: rich
bankers bailing out rich bankers, using the taxpayers' credit card.
The people who have spent their lives cloistered in this Wall Street
community aren't much for sharing information with the great unwashed.
Because all of this shit is complicated, because most of us mortals
don't know what the hell LIBOR is or how a REIT works or how to use
the word "zero coupon bond" in a sentence without sounding stupid —
well, then, the people who do speak this idiotic language cannot under
any circumstances be bothered to explain it to us and instead spend a
lot of time rolling their eyes and asking us to trust them.
That roll of the eyes is a key part of the psychology of Paulsonism.
The state is now being asked not just to call off its regulators or
give tax breaks or funnel a few contracts to connected companies; it
is intervening directly in the economy, for the sole purpose of
preserving the influence of the megafirms. In essence, Paulson used
the bailout to transform the government into a giant bureaucracy of
entitled assholedom, one that would socialize "toxic" risks but keep
both the profits and the management of the bailed-out firms in private
hands. Moreover, this whole process would be done in secret, away from
the prying eyes of NASCAR dads, broke-ass liberals who read
translations of French novels, subprime mortgage holders and other
such financial losers.
Some aspects of the bailout were secretive to the point of absurdity.
In fact, if you look closely at just a few lines in the Federal
Reserve's weekly public disclosures, you can literally see the moment
where a big chunk of your money disappeared for good. The H4 report
(called "Factors Affecting Reserve Balances") summarizes the
activities of the Fed each week. You can find it online, and it's
pretty much the only thing the Fed ever tells the world about what it
does. For the week ending February 18th, the number under the heading
"Repurchase Agreements" on the table is zero. It's a significant
Why? In the pre-crisis days, the Fed used to manage the money supply
by periodically buying and selling securities on the open market
through so-called Repurchase Agreements, or Repos. The Fed would
typically dump $25 billion or so in cash onto the market every week,
buying up Treasury bills, U.S. securities and even mortgage-backed
securities from institutions like Goldman Sachs and J.P. Morgan, who
would then "repurchase" them in a short period of time, usually one to
seven days. This was the Fed's primary mechanism for controlling
interest rates: Buying up securities gives banks more money to lend,
which makes interest rates go down. Selling the securities back to the
banks reduces the money available for lending, which makes interest
rates go up.
If you look at the weekly H4 reports going back to the summer of 2007,
you start to notice something alarming. At the start of the credit
crunch, around August of that year, you see the Fed buying a few more
Repos than usual — $33 billion or so. By November, as private-bank
reserves were dwindling to alarmingly low levels, the Fed started
injecting even more cash than usual into the economy: $48 billion. By
late December, the number was up to $58 billion; by the following
March, around the time of the Bear Stearns rescue, the Repo number had
jumped to $77 billion. In the week of May 1st, 2008, the number was
$115 billion — "out of control now," according to one congressional
aide. For the rest of 2008, the numbers remained similarly in the
stratosphere, the Fed pumping as much as $125 billion of these
short-term loans into the economy — until suddenly, at the start of
this year, the number drops to nothing. Zero.
The reason the number has dropped to nothing is that the Fed had
simply stopped using relatively transparent devices like repurchase
agreements to pump its money into the hands of private companies. By
early 2009, a whole series of new government operations had been
invented to inject cash into the economy, most all of them completely
secretive and with names you've never heard of. There is the Term
Auction Facility, the Term Securities Lending Facility, the Primary
Dealer Credit Facility, the Commercial Paper Funding Facility and a
monster called the Asset-Backed Commercial Paper Money Market Mutual
Fund Liquidity Facility (boasting the chat-room horror-show acronym
ABCPMMMFLF). For good measure, there's also something called a Money
Market Investor Funding Facility, plus three facilities called Maiden
Lane I, II and III to aid bailout recipients like Bear Stearns and
While the rest of America, and most of Congress, have been bugging out
about the $700 billion bailout program called TARP, all of these newly
created organisms in the Federal Reserve zoo have quietly been pumping
not billions but trillions of dollars into the hands of private
companies (at least $3 trillion so far in loans, with as much as $5.7
trillion more in guarantees of private investments). Although this
technically isn't taxpayer money, it still affects taxpayers directly,
because the activities of the Fed impact the economy as a whole. And
this new, secretive activity by the Fed completely eclipses the TARP
program in terms of its influence on the economy.
No one knows who's getting that money or exactly how much of it is
disappearing through these new holes in the hull of America's credit
rating. Moreover, no one can really be sure if these new institutions
are even temporary at all — or whether they are being set up as
permanent, state-aided crutches to Wall Street, designed to
systematically suck bad investments off the ledgers of irresponsible
"They're supposed to be temporary," says Paul-Martin Foss, an aide to
Rep. Ron Paul. "But we keep getting notices every six months or so
that they're being renewed. They just sort of quietly announce it."
None other than disgraced senator Ted Stevens was the poor sap who
made the unpleasant discovery that if Congress didn't like the Fed
handing trillions of dollars to banks without any oversight, Congress
could apparently go fuck itself — or so said the law. When Stevens
asked the GAO about what authority Congress has to monitor the Fed, he
got back a letter citing an obscure statute that nobody had ever heard
of before: the Accounting and Auditing Act of 1950. The relevant
section, 31 USC 714(b), dictated that congressional audits of the
Federal Reserve may not include "deliberations, decisions and actions
on monetary policy matters." The exemption, as Foss notes, "basically
includes everything." According to the law, in other words, the Fed
simply cannot be audited by Congress. Or by anyone else, for that
VI. WINNERS AND LOSERS
Stevens isn't the only person in Congress to be given the finger by
the Fed. In January, when Rep. Alan Grayson of Florida asked Federal
Reserve vice chairman Donald Kohn where all the money went — only $1.2
trillion had vanished by then — Kohn gave Grayson a classic eye roll,
saying he would be "very hesitant" to name names because it might
discourage banks from taking the money.
"Has that ever happened?" Grayson asked. "Have people ever said, 'We
will not take your $100 billion because people will find out about
"Well, we said we would not publish the names of the borrowers, so we
have no test of that," Kohn answered, visibly annoyed with Grayson's
Grayson pressed on, demanding to know on what terms the Fed was
lending the money. Presumably it was buying assets and making loans,
but no one knew how it was pricing those assets — in other words, no
one knew what kind of deal it was striking on behalf of taxpayers. So
when Grayson asked if the purchased assets were "marked to market" — a
methodology that assigns a concrete value to assets, based on the
market rate on the day they are traded — Kohn answered, mysteriously,
"The ones that have market values are marked to market." The
implication was that the Fed was purchasing derivatives like credit
swaps or other instruments that were basically impossible to value
objectively — paying real money for God knows what.
"Well, how much of them don't have market values?" asked Grayson. "How
much of them are worthless?"
"None are worthless," Kohn snapped.
"Then why don't you mark them to market?" Grayson demanded.
"Well," Kohn sighed, "we are marking the ones to market that have
In essence, the Fed was telling Congress to lay off and let the
experts handle things. "It's like buying a car in a used-car lot
without opening the hood, and saying, 'I think it's fine,'" says Dan
Fuss, an analyst with the investment firm Loomis Sayles. "The salesman
says, 'Don't worry about it. Trust me.' It'll probably get us out of
the lot, but how much farther? None of us knows."
When one considers the comparatively extensive system of congressional
checks and balances that goes into the spending of every dollar in the
budget via the normal appropriations process, what's happening in the
Fed amounts to something truly revolutionary — a kind of shadow
government with a budget many times the size of the normal federal
outlay, administered dictatorially by one man, Fed chairman Ben
Bernanke. "We spend hours and hours and hours arguing over $10 million
amendments on the floor of the Senate, but there has been no
discussion about who has been receiving this $3 trillion," says Sen.
Bernie Sanders. "It is beyond comprehension."
Count Sanders among those who don't buy the argument that Wall Street
firms shouldn't have to face being outed as recipients of public
funds, that making this information public might cause investors to
panic and dump their holdings in these firms. "I guess if we made that
public, they'd go on strike or something," he muses.
And the Fed isn't the only arm of the bailout that has closed ranks.
The Treasury, too, has maintained incredible secrecy surrounding its
implementation even of the TARP program, which was mandated by
Congress. To this date, no one knows exactly what criteria the
Treasury Department used to determine which banks received bailout
funds and which didn't — particularly the first $350 billion given out
under Bush appointee Hank Paulson.
The situation with the first TARP payments grew so absurd that when
the Congressional Oversight Panel, charged with monitoring the bailout
money, sent a query to Paulson asking how he decided whom to give
money to, Treasury responded — and this isn't a joke — by directing
the panel to a copy of the TARP application form on its website.
Elizabeth Warren, the chair of the Congressional Oversight Panel, was
struck nearly speechless by the response.
"Do you believe that?" she says incredulously. "That's not what we had in mind."
Another member of Congress, who asked not to be named, offers his own
theory about the TARP process. "I think basically if you knew Hank
Paulson, you got the money," he says.
This cozy arrangement created yet another opportunity for big banks to
devour market share at the expense of smaller regional lenders. While
all the bigwigs at Citi and Goldman and Bank of America who had
Paulson on speed-dial got bailed out right away — remember that TARP
was originally passed because money had to be lent right now, that
day, that minute, to stave off emergency — many small banks are still
waiting for help. Five months into the TARP program, some not only
haven't received any funds, they haven't even gotten a call back about
"There's definitely a feeling among community bankers that no one up
there cares much if they make it or not," says Tanya Wheeless,
president of the Arizona Bankers Association.
Which, of course, is exactly the opposite of what should be happening,
since small, regional banks are far less guilty of the kinds of
predatory lending that sank the economy. "They're not giving out
subprime loans or easy credit," says Wheeless. "At the community
level, it's much more bread-and-butter banking."
Nonetheless, the lion's share of the bailout money has gone to the
larger, so-called "systemically important" banks. "It's like Treasury
is picking winners and losers," says one state banking official who
asked not to be identified.
This itself is a hugely important political development. In essence,
the bailout accelerated the decline of regional community lenders by
boosting the political power of their giant national competitors.
Which, when you think about it, is insane: What had brought us to the
brink of collapse in the first place was this relentless instinct for
building ever-larger megacompanies, passing deregulatory measures to
gradually feed all the little fish in the sea to an ever-shrinking
pool of Bigger Fish. To fix this problem, the government should have
slowly liquidated these monster, too-big-to-fail firms and broken them
down to smaller, more manageable companies. Instead, federal
regulators closed ranks and used an almost completely secret bailout
process to double down on the same faulty, merger-happy thinking that
got us here in the first place, creating a constellation of megafirms
under government control that are even bigger, more unwieldy and more
crammed to the gills with systemic risk.
In essence, Paulson and his cronies turned the federal government into
one gigantic, half-opaque holding company, one whose balance sheet
includes the world's most appallingly large and risky hedge fund, a
controlling stake in a dying insurance giant, huge investments in a
group of teetering megabanks, and shares here and there in various
auto-finance companies, student loans, and other failing businesses.
Like AIG, this new federal holding company is a firm that has no
mechanism for auditing itself and is run by leaders who have very
little grasp of the daily operations of its disparate subsidiary
In other words, it's AIG's rip-roaringly shitty business model writ
almost inconceivably massive — to echo Geithner, a huge, complex
global company attached to a very complicated investment bank/hedge
fund that's been allowed to build up without adult supervision. How
much of what kinds of crap is actually on our balance sheet, and what
did we pay for it? When exactly will the rent come due, when will the
money run out? Does anyone know what the hell is going on? And on the
linear spectrum of capitalism to socialism, where exactly are we now?
Is there a dictionary word that even describes what we are now? It
would be funny, if it weren't such a nightmare.
VII. YOU DON'T GET IT
The real question from here is whether the Obama administration is
going to move to bring the financial system back to a place where
sanity is restored and the general public can have a say in things or
whether the new financial bureaucracy will remain obscure, secretive
and hopelessly complex. It might not bode well that Geithner, Obama's
Treasury secretary, is one of the architects of the Paulson bailouts;
as chief of the New York Fed, he helped orchestrate the
Goldman-friendly AIG bailout and the secretive Maiden Lane facilities
used to funnel funds to the dying company. Neither did it look good
when Geithner — himself a protégé of notorious Goldman alum John
Thain, the Merrill Lynch chief who paid out billions in bonuses after
the state spent billions bailing out his firm — picked a former
Goldman lobbyist named Mark Patterson to be his top aide.
In fact, most of Geithner's early moves reek strongly of Paulsonism.
He has continually talked about partnering with private investors to
create a so-called "bad bank" that would systemically relieve private
lenders of bad assets — the kind of massive, opaque, quasi-private
bureaucratic nightmare that Paulson specialized in. Geithner even
refloated a Paulson proposal to use TALF, one of the Fed's new
facilities, to essentially lend cheap money to hedge funds to invest
in troubled banks while practically guaranteeing them enormous
God knows exactly what this does for the taxpayer, but hedge-fund
managers sure love the idea. "This is exactly what the financial
system needs," said Andrew Feldstein, CEO of Blue Mountain Capital and
one of the Morgan Mafia. Strangely, there aren't many people who don't
run hedge funds who have expressed anything like that kind of
enthusiasm for Geithner's ideas.
As complex as all the finances are, the politics aren't hard to
follow. By creating an urgent crisis that can only be solved by those
fluent in a language too complex for ordinary people to understand,
the Wall Street crowd has turned the vast majority of Americans into
non-participants in their own political future. There is a reason it
used to be a crime in the Confederate states to teach a slave to read:
Literacy is power. In the age of the CDS and CDO, most of us are
financial illiterates. By making an already too-complex economy even
more complex, Wall Street has used the crisis to effect a historic,
revolutionary change in our political system — transforming a
democracy into a two-tiered state, one with plugged-in financial
bureaucrats above and clueless customers below.
The most galling thing about this financial crisis is that so many
Wall Street types think they actually deserve not only their huge
bonuses and lavish lifestyles but the awesome political power their
own mistakes have left them in possession of. When challenged, they
talk about how hard they work, the 90-hour weeks, the stress, the
failed marriages, the hemorrhoids and gallstones they all get before
they hit 40.
"But wait a minute," you say to them. "No one ever asked you to stay
up all night eight days a week trying to get filthy rich shorting
what's left of the American auto industry or selling $600 billion in
toxic, irredeemable mortgages to ex-strippers on work release and Taco
Bell clerks. Actually, come to think of it, why are we even giving
taxpayer money to you people? Why are we not throwing your ass in jail
But before you even finish saying that, they're rolling their eyes,
because You Don't Get It. These people were never about anything
except turning money into money, in order to get more money;
valueswise they're on par with crack addicts, or obsessive sexual
deviants who burgle homes to steal panties. Yet these are the people
in whose hands our entire political future now rests.
Good luck with that, America. And enjoy tax season.
[From Issue 1075 — April 2, 2009]
On Sat, Mar 21, 2009 at 2:28 AM, John Grigg <possiblepaths2050 at gmail.com> wrote:
> "The global economic crisis isn't about money - it's about power. How
> Wall Street insiders are using the bailout to stage a revolution"
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