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