The global economic crisis isn't about money - it's about power. How Wall
Street insiders are using the bailout to stage a revolution
by MATT TAIBBI
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.
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 portfolio down."
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
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.
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.
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
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.
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.
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.
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.
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.
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
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
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.
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.
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.
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.
II. THE REGULATORS
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.
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.
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.
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!
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
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.
III. THE CRASH
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."
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.)
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.
down with Paulson, Geithner and Dinallo," says a person present at
the negotiations. "I didn't see the OTS even once."
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!
uh, needed to keep these highly expert people in their seats," AIG
spokeswoman Christina Pretto says to me in early February.
didn't these 'highly expert people' basically destroy your company?"
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.
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."
IV. THE POWER
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 Edwards.
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.
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
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 Treasury secretary.
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.
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.
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."
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.
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
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.
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.
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.
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.
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 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.
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 lenders.
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."
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.
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
that ever happened?" Grayson asked. "Have people ever said, 'We
will not take your $100 billion because people will find out about it?'"
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.
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
how much of them don't have market values?" asked Grayson. "How
much of them are worthless?"
are worthless," Kohn snapped.
why don't you mark them to market?" Grayson demanded.
Kohn sighed, "we are marking the ones to market that have market values."
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."
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.
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.
believe that?" she says incredulously. "That's not what we had
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.
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.
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.
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
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.
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.
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.
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
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 profits.
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 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.
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 instead?"
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
with that, America. And enjoy tax season.