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<div class=Section1>
<p class=MsoNormal><font size=2 color=navy face=Arial><span style='font-size:
10.0pt;font-family:Arial;color:navy'><o:p> </o:p></span></font></p>
<p class=MsoNormal><font size=2 color=navy face=Arial><span style='font-size:
10.0pt;font-family:Arial;color:navy'><o:p> </o:p></span></font></p>
<p class=MsoNormal><font size=3 face="Times New Roman"><span style='font-size:
12.0pt'><o:p> </o:p></span></font></p>
<div>
<p class=MsoNormal><font size=3 face="Times New Roman"><span style='font-size:
12.0pt'>No one seems to notice that "capitalism" no longer means
investing in plant and equipment and jobs and making stuff to consume and
export. It means speculating in real estate, commodities, and stock
prices; buying companies with debt dumped on the companies, then shrinking
them; trapping people into credit card debt, then raising the rates
retroactively; and conning the poor bewildered into taking out excessive mortgages
and then selling the toxic debt to the rich bewildered.<o:p></o:p></span></font></p>
</div>
<div>
<p class=MsoNormal><font size=3 face="Times New Roman"><span style='font-size:
12.0pt'> <o:p></o:p></span></font></p>
</div>
<div>
<p class=MsoNormal><font size=3 face="Times New Roman"><span style='font-size:
12.0pt'>Milton Friedman is smiling in his grave; Adam Smith is spinning in his.<o:p></o:p></span></font></p>
</div>
<div>
<p class=MsoNormal><font size=3 face="Times New Roman"><span style='font-size:
12.0pt'> <o:p></o:p></span></font></p>
</div>
<div>
<p class=MsoNormal><font size=3 face="Times New Roman"><span style='font-size:
12.0pt'>Fw frm<o:p></o:p></span></font></p>
</div>
<div>
<p class=MsoNormal><font size=3 face="Times New Roman"><span style='font-size:
12.0pt'>Art Hilgart<br>
<a href="mailto:art@hilgart.us">art@hilgart.us</a><o:p></o:p></span></font></p>
</div>
<div>
<p class=MsoNormal><font size=3 face="Times New Roman"><span style='font-size:
12.0pt'> <o:p></o:p></span></font></p>
</div>
<div>
<h1><b><font size=6 face="Times New Roman"><span style='font-size:24.0pt'>The
Big Takeover <o:p></o:p></span></font></b></h1>
<h2><b><font size=5 face="Times New Roman"><span style='font-size:18.0pt'>The
global economic crisis isn't about money - it's about power. How Wall Street
insiders are using the bailout to stage a revolution <o:p></o:p></span></font></b></h2>
<p class=author><strong><b><font size=3 face="Times New Roman"><span
style='font-size:12.0pt'>MATT TAIBBI</span></font></b></strong><o:p></o:p></p>
<p class=dateposted><strong><b><font size=3 face="Times New Roman"><span
style='font-size:12.0pt'>Rolling Stone, </span></font></b></strong><strong><b><font
size=2 color="#666666" face="Times New Roman"><span style='font-size:10.0pt;
color:#666666'>Mar 19, 2009 </span></font></b></strong><o:p></o:p></p>
<p class=dateposted><font size=4 face="Times New Roman"><span style='font-size:
13.5pt'>I</span></font>t'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.<o:p></o:p></p>
<div>
<p><font size=3 face="Times New Roman"><span style='font-size:12.0pt'>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 <em><i><font
face="Times New Roman">every hour</font></i></em>. 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 <st1:country-region
w:st="on"><st1:place w:st="on">America</st1:place></st1:country-region> 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 <st1:country-region w:st="on"><st1:place
w:st="on">Libya</st1:place></st1:country-region> (whose entire GDP last year
was smaller than AIG's 2008 losses).<o:p></o:p></span></font></p>
<p><font size=3 face="Times New Roman"><span style='font-size:12.0pt'>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. <st1:PersonName w:st="on">Ed</st1:PersonName>ward 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
portfolio down."<o:p></o:p></span></font></p>
<div>
<p class=title><font size=3 face="Times New Roman"><span style='font-size:12.0pt'>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 <st1:country-region
w:st="on"><st1:place w:st="on">U.S.</st1:place></st1:country-region> 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.<o:p></o:p></span></font></p>
</div>
<p><font size=3 face="Times New Roman"><span style='font-size:12.0pt'>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 billionaires.<o:p></o:p></span></font></p>
<p><font size=3 face="Times New Roman"><span style='font-size:12.0pt'>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.<o:p></o:p></span></font></p>
<p><font size=3 face="Times New Roman"><span style='font-size:12.0pt'>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 <em><i><font face="Times New Roman">Alien</font></i></em>-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.<o:p></o:p></span></font></p>
<p><font size=3 face="Times New Roman"><span style='font-size:12.0pt'>The
mistake most people make in looking at the financial crisis is thinking of it
in terms of <em><i><font face="Times New Roman">money</font></i></em>, 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.<o:p></o:p></span></font></p>
<p><strong><b><font size=3 face="Times New Roman"><span style='font-size:12.0pt'>I.
PATIENT ZERO</span></font></b></strong><o:p></o:p></p>
<p><font size=4 face="Times New Roman"><span style='font-size:13.5pt'>T</span></font>he
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.<o:p></o:p></p>
<p><font size=3 face="Times New Roman"><span style='font-size:12.0pt'>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 <st1:place w:st="on"><st1:PlaceName
w:st="on">Brooklyn</st1:PlaceName> <st1:PlaceType w:st="on">College</st1:PlaceType></st1:place>
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 <st1:State w:st="on"><st1:place w:st="on">Washington</st1:place></st1:State>'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."<o:p></o:p></span></font></p>
<div>
<p class=MsoNormal><font size=3 face="Times New Roman"><span style='font-size:
12.0pt'>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 <em><i><font
face="Times New Roman">his</font></i></em> bill, money flows into the box.<o:p></o:p></span></font></p>
</div>
<p><font size=3 face="Times New Roman"><span style='font-size:12.0pt'>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 <em><i><font face="Times New Roman">somebody</font></i></em>
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.<o:p></o:p></span></font></p>
<p><font size=3 face="Times New Roman"><span style='font-size:12.0pt'>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.<o:p></o:p></span></font></p>
<p><font size=3 face="Times New Roman"><span style='font-size:12.0pt'>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."<o:p></o:p></span></font></p>
<p><font size=3 face="Times New Roman"><span style='font-size:12.0pt'>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.<o:p></o:p></span></font></p>
<p><font size=3 face="Times New Roman"><span style='font-size:12.0pt'>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 <st1:City w:st="on"><st1:place
w:st="on">London</st1:place></st1:City> 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.<o:p></o:p></span></font></p>
<p><font size=3 face="Times New Roman"><span style='font-size:12.0pt'>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 <st1:place w:st="on"><st1:City
w:st="on">Boca Raton</st1:City>, <st1:State w:st="on">Florida</st1:State></st1:place>,
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.<o:p></o:p></span></font></p>
<p><font size=3 face="Times New Roman"><span style='font-size:12.0pt'>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 <st1:place w:st="on"><st1:PlaceName
w:st="on">West</st1:PlaceName> <st1:PlaceType w:st="on">Village</st1:PlaceType></st1:place>.
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.<o:p></o:p></span></font></p>
<p><font size=3 face="Times New Roman"><span style='font-size:12.0pt'>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.<o:p></o:p></span></font></p>
<p><font size=3 face="Times New Roman"><span style='font-size:12.0pt'>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.<o:p></o:p></span></font></p>
<p><font size=3 face="Times New Roman"><span style='font-size:12.0pt'>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 <em><i><font
face="Times New Roman">someone else's</font></i></em> 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.<o:p></o:p></span></font></p>
<div>
<p class=MsoNormal><font size=3 face="Times New Roman"><span style='font-size:
12.0pt'>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.<o:p></o:p></span></font></p>
</div>
<p><font size=3 face="Times New Roman"><span style='font-size:12.0pt'>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 shit.<o:p></o:p></span></font></p>
<p><strong><b><font size=3 face="Times New Roman"><span style='font-size:12.0pt'>II.
THE REGULATORS</span></font></b></strong><o:p></o:p></p>
<p><font size=4 face="Times New Roman"><span style='font-size:13.5pt'>C</span></font>assano'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 <st1:State w:st="on"><st1:place w:st="on">Texas</st1:place></st1:State>
— had finished engineering the most dramatic deregulation of the financial
industry since Emperor Hien Tsung invented paper money in 806 A.D. For years, <st1:State
w:st="on"><st1:place w:st="on">Washington</st1:place></st1:State> 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.<o:p></o:p></p>
<p><font size=3 face="Times New Roman"><span style='font-size:12.0pt'>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 <st1:State w:st="on"><st1:place w:st="on">Washington</st1:place></st1:State>
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 <st1:country-region
w:st="on"><st1:place w:st="on">China</st1:place></st1:country-region>, and who
cared?<o:p></o:p></span></font></p>
<p><font size=3 face="Times New Roman"><span style='font-size:12.0pt'>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.<o:p></o:p></span></font></p>
<p><font size=3 face="Times New Roman"><span style='font-size:12.0pt'>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."<o:p></o:p></span></font></p>
<p><font size=3 face="Times New Roman"><span style='font-size:12.0pt'>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 <st1:State w:st="on"><st1:place w:st="on">Delaware</st1:place></st1:State>
and managed to get approval for OTS regulation of its entire operation.<o:p></o:p></span></font></p>
<p><font size=3 face="Times New Roman"><span style='font-size:12.0pt'>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 <st1:country-region w:st="on"><st1:place w:st="on">Britain</st1:place></st1:country-region>'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.<o:p></o:p></span></font></p>
<p><font size=3 face="Times New Roman"><span style='font-size:12.0pt'>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!<o:p></o:p></span></font></p>
<p><font size=3 face="Times New Roman"><span style='font-size:12.0pt'>"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."<o:p></o:p></span></font></p>
<p><font size=3 face="Times New Roman"><span style='font-size:12.0pt'>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.)<o:p></o:p></span></font></p>
<p><font size=3 face="Times New Roman"><span style='font-size:12.0pt'>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 residential-mortgage market.<o:p></o:p></span></font></p>
<p><strong><b><font size=3 face="Times New Roman"><span style='font-size:12.0pt'>III.
THE CRASH</span></font></b></strong><o:p></o:p></p>
<p><font size=4 face="Times New Roman"><span style='font-size:13.5pt'>I</span></font>ronically,
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.<o:p></o:p></p>
<div>
<p class=MsoNormal><font size=3 face="Times New Roman"><span style='font-size:
12.0pt'>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."<o:p></o:p></span></font></p>
</div>
<p><font size=3 face="Times New Roman"><span style='font-size:12.0pt'>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 comment.)<o:p></o:p></span></font></p>
<p><font size=3 face="Times New Roman"><span style='font-size:12.0pt'>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.<o:p></o:p></span></font></p>
<p><font size=3 face="Times New Roman"><span style='font-size:12.0pt'>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.<o:p></o:p></span></font></p>
<p><font size=3 face="Times New Roman"><span style='font-size:12.0pt'>"We
sat down with Paulson, Geithner and Dinallo," says a person present at the
negotiations. "I didn't see the OTS even once."<o:p></o:p></span></font></p>
<p><font size=3 face="Times New Roman"><span style='font-size:12.0pt'>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.<o:p></o:p></span></font></p>
<p><font size=3 face="Times New Roman"><span style='font-size:12.0pt'>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.<o:p></o:p></span></font></p>
<p><font size=3 face="Times New Roman"><span style='font-size:12.0pt'>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!<o:p></o:p></span></font></p>
<p><font size=3 face="Times New Roman"><span style='font-size:12.0pt'>"We,
uh, needed to keep these <em><i><font face="Times New Roman">highly expert</font></i></em>
people in their seats," AIG spokeswoman Christina Pretto says to me in
early February.<o:p></o:p></span></font></p>
<p><font size=3 face="Times New Roman"><span style='font-size:12.0pt'>"But
didn't these 'highly expert people' basically destroy your company?" I
ask.<o:p></o:p></span></font></p>
<p><font size=3 face="Times New Roman"><span style='font-size:12.0pt'>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.<o:p></o:p></span></font></p>
<p><font size=3 face="Times New Roman"><span style='font-size:12.0pt'>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 them."<o:p></o:p></span></font></p>
<p><strong><b><font size=3 face="Times New Roman"><span style='font-size:12.0pt'>IV.
THE POWER GRAB</span></font></b></strong><o:p></o:p></p>
<p class=MsoNormal style='margin-bottom:12.0pt'><font size=4
face="Times New Roman"><span style='font-size:13.5pt'>S</span></font>o 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 Edwards.<o:p></o:p></p>
<p><font size=3 face="Times New Roman"><span style='font-size:12.0pt'>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.<o:p></o:p></span></font></p>
<div>
<p class=MsoNormal><font size=3 face="Times New Roman"><span style='font-size:
12.0pt'>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.<o:p></o:p></span></font></p>
</div>
<p><font size=3 face="Times New Roman"><span style='font-size:12.0pt'>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.<o:p></o:p></span></font></p>
<p><font size=3 face="Times New Roman"><span style='font-size:12.0pt'>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 Treasury secretary.<o:p></o:p></span></font></p>
<p><font size=3 face="Times New Roman"><span style='font-size:12.0pt'>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.<o:p></o:p></span></font></p>
<p><font size=3 face="Times New Roman"><span style='font-size:12.0pt'>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.<o:p></o:p></span></font></p>
<p><font size=3 face="Times New Roman"><span style='font-size:12.0pt'>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."<o:p></o:p></span></font></p>
<p><font size=3 face="Times New Roman"><span style='font-size:12.0pt'>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.<o:p></o:p></span></font></p>
<p><font size=3 face="Times New Roman"><span style='font-size:12.0pt'>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.<o:p></o:p></span></font></p>
<p><strong><b><font size=3 face="Times New Roman"><span style='font-size:12.0pt'>V.
REPO MEN</span></font></b></strong><o:p></o:p></p>
<p><font size=4 face="Times New Roman"><span style='font-size:13.5pt'>T</span></font>here
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.<o:p></o:p></p>
<p><font size=3 face="Times New Roman"><span style='font-size:12.0pt'>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.<o:p></o:p></span></font></p>
<p><font size=3 face="Times New Roman"><span style='font-size:12.0pt'>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.<o:p></o:p></span></font></p>
<p><font size=3 face="Times New Roman"><span style='font-size:12.0pt'>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
number.<o:p></o:p></span></font></p>
<p><font size=3 face="Times New Roman"><span style='font-size:12.0pt'>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.<o:p></o:p></span></font></p>
<div>
<p class=MsoNormal><font size=3 face="Times New Roman"><span style='font-size:
12.0pt'>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.<o:p></o:p></span></font></p>
</div>
<p><font size=3 face="Times New Roman"><span style='font-size:12.0pt'>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 AIG.<o:p></o:p></span></font></p>
<p><font size=3 face="Times New Roman"><span style='font-size:12.0pt'>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.<o:p></o:p></span></font></p>
<p><font size=3 face="Times New Roman"><span style='font-size:12.0pt'>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 lenders.<o:p></o:p></span></font></p>
<p><font size=3 face="Times New Roman"><span style='font-size:12.0pt'>"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."<o:p></o:p></span></font></p>
<p><font size=3 face="Times New Roman"><span style='font-size:12.0pt'>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 matter.<o:p></o:p></span></font></p>
<p><strong><b><font size=3 face="Times New Roman"><span style='font-size:12.0pt'>VI.
WINNERS AND LOSERS</span></font></b></strong><o:p></o:p></p>
<p><font size=4 face="Times New Roman"><span style='font-size:13.5pt'>S</span></font>tevens
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.<o:p></o:p></p>
<p><font size=3 face="Times New Roman"><span style='font-size:12.0pt'>"Has
that ever happened?" Grayson asked. "Have people ever said, 'We will
not take your $100 billion because people will find out about it?'"<o:p></o:p></span></font></p>
<p><font size=3 face="Times New Roman"><span style='font-size:12.0pt'>"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 meddling.<o:p></o:p></span></font></p>
<p><font size=3 face="Times New Roman"><span style='font-size:12.0pt'>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.<o:p></o:p></span></font></p>
<p><font size=3 face="Times New Roman"><span style='font-size:12.0pt'>"Well,
how much of them don't have market values?" asked Grayson. "How much
of them are worthless?"<o:p></o:p></span></font></p>
<p><font size=3 face="Times New Roman"><span style='font-size:12.0pt'>"None
are worthless," Kohn snapped.<o:p></o:p></span></font></p>
<p><font size=3 face="Times New Roman"><span style='font-size:12.0pt'>"Then
why don't you mark them to market?" Grayson demanded.<o:p></o:p></span></font></p>
<p><font size=3 face="Times New Roman"><span style='font-size:12.0pt'>"Well,"
Kohn sighed, "we are marking the ones to market that have market
values."<o:p></o:p></span></font></p>
<p><font size=3 face="Times New Roman"><span style='font-size:12.0pt'>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."<o:p></o:p></span></font></p>
<p><font size=3 face="Times New Roman"><span style='font-size:12.0pt'>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."<o:p></o:p></span></font></p>
<p><font size=3 face="Times New Roman"><span style='font-size:12.0pt'>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.<o:p></o:p></span></font></p>
<p><font size=3 face="Times New Roman"><span style='font-size:12.0pt'>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.<o:p></o:p></span></font></p>
<p><font size=3 face="Times New Roman"><span style='font-size:12.0pt'>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.<o:p></o:p></span></font></p>
<p><font size=3 face="Times New Roman"><span style='font-size:12.0pt'>"Do
you believe that?" she says incredulously. "That's not what we had in
mind."<o:p></o:p></span></font></p>
<p><font size=3 face="Times New Roman"><span style='font-size:12.0pt'>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.<o:p></o:p></span></font></p>
<p><font size=3 face="Times New Roman"><span style='font-size:12.0pt'>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
their applications.<o:p></o:p></span></font></p>
<p><font size=3 face="Times New Roman"><span style='font-size:12.0pt'>"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.<o:p></o:p></span></font></p>
<p><font size=3 face="Times New Roman"><span style='font-size:12.0pt'>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."<o:p></o:p></span></font></p>
<p><font size=3 face="Times New Roman"><span style='font-size:12.0pt'>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.<o:p></o:p></span></font></p>
<p><font size=3 face="Times New Roman"><span style='font-size:12.0pt'>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.<o:p></o:p></span></font></p>
<p><font size=3 face="Times New Roman"><span style='font-size:12.0pt'>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.<o:p></o:p></span></font></p>
<div>
<p class=MsoNormal><font size=3 face="Times New Roman"><span style='font-size:
12.0pt'>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 operations.<o:p></o:p></span></font></p>
</div>
<p><font size=3 face="Times New Roman"><span style='font-size:12.0pt'>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.<o:p></o:p></span></font></p>
<p><strong><b><font size=3 face="Times New Roman"><span style='font-size:12.0pt'>VII.
YOU DON'T GET IT</span></font></b></strong><o:p></o:p></p>
<p><font size=4 face="Times New Roman"><span style='font-size:13.5pt'>T</span></font>he
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.<o:p></o:p></p>
<p><font size=3 face="Times New Roman"><span style='font-size:12.0pt'>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 profits.<o:p></o:p></span></font></p>
<p><font size=3 face="Times New Roman"><span style='font-size:12.0pt'>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.<o:p></o:p></span></font></p>
<p><font size=3 face="Times New Roman"><span style='font-size:12.0pt'>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.<o:p></o:p></span></font></p>
<p><font size=3 face="Times New Roman"><span style='font-size:12.0pt'>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.<o:p></o:p></span></font></p>
<p><font size=3 face="Times New Roman"><span style='font-size:12.0pt'>"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 <em><i><font face="Times New Roman">throwing your ass in jail</font></i></em>
instead?"<o:p></o:p></span></font></p>
<p><font size=3 face="Times New Roman"><span style='font-size:12.0pt'>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.<o:p></o:p></span></font></p>
<p><font size=3 face="Times New Roman"><span style='font-size:12.0pt'>Good luck
with that, America. And enjoy tax season.<o:p></o:p></span></font></p>
<p><em><i><font size=3 face="Times New Roman"><span style='font-size:12.0pt'>[From
Issue 1075 </span></font></i></em><o:p></o:p></p>
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