[R-G] [BillTottenWeblog] The Big Takeover

[Bill Totten]

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

Rollingstone.com (March 19 2009)


It's over - we're officially, royally fucked. No empire can survive
being rendered a permanent laughingstock, which is what happened as of a
few weeks ago, when the buffoons who have been running things in this
country finally went one step too far. It happened when Treasury
Secretary Timothy Geithner was forced to admit that he was once again
going to have to stuff billions of taxpayer dollars into a dying
insurance giant called AIG, itself a profound symbol of our national
decline - a corporation that got rich insuring the concrete and steel of
American industry in the country's heyday, only to destroy itself
chasing phantom fortunes at the Wall Street card tables, like a
dissolute nobleman gambling away the family estate in the waning days of
the British Empire.
	
_____

The Dirty Dozen: Meet the bankers and brokers responsible for the
financial crisis - and the officials who let them get away with it.
http://www.rollingstone.com/politics/story/26868968/the_dirty_dozen

_____


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 US 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'etat. 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 grace: Given virtually free rein over the
economy, these same insiders first wrecked the financial world, then
cunningly granted themselves nearly unlimited emergency powers to clean
up their own mess. And so the gambling-addict leaders of companies like
AIG end up not penniless and in jail, but with an Alien-style death grip
on the Treasury and the Federal Reserve - "our partners in the
government", as Liddy put it with a shockingly casual matter-of-factness
after the most recent bailout.

The mistake most people make in looking at the financial crisis is
thinking of it in terms of money, a habit that might lead you to look at
the unfolding mess as a huge bonus-killing downer for the Wall Street
class. But if you look at it in purely Machiavellian terms, what you see
is a colossal power grab that threatens to turn the federal government
into a kind of giant Enron - a huge, impenetrable black box filled with
self-dealing insiders whose scheme is the securing of individual profits
at the expense of an ocean of unwitting involuntary shareholders,
previously known as taxpayers.

I. PATIENT ZERO

The best way to understand the financial crisis is to understand the
meltdown at AIG. AIG is what happens when short, bald managers of
otherwise boring financial bureaucracies start seeing Brad Pitt in the
mirror. This is a company that built a giant fortune across more than a
century by betting on safety-conscious policyholders - people who wear
seat belts and build houses on high ground - and then blew it all in a
year or two by turning their entire balance sheet over to a guy who
acted like making huge bets with other people's money would make his
dick bigger.

That guy - the Patient Zero of the global economic meltdown - was one
Joseph Cassano, the head of a tiny, 400-person unit within the company
called AIG Financial Products, or AIGFP. Cassano, a pudgy, balding
Brooklyn College grad with beady eyes and way too much forehead, cut his
teeth in the Eighties working for Mike Milken, the granddaddy of modern
Wall Street debt alchemists. Milken, who pioneered the creative use of
junk bonds, relied on messianic genius and a whole array of insider
schemes to evade detection while wreaking financial disaster. Cassano,
by contrast, was just a greedy little turd with a knack for selective
accounting who ran his scam right out in the open, thanks to
Washington's deregulation of the Wall Street casino. "It's all about the
regulatory environment", says a government source involved with the AIG
bailout. "These guys look for holes in the system, for ways they can do
trades without government interference. Whatever is unregulated, all the
action is going to pile into that."

The mess Cassano created had its roots in an investment boom fueled in
part by a relatively new type of financial instrument called a
collateralized-debt obligation. A CDO is like a box full of diced-up
assets. They can be anything: mortgages, corporate loans, aircraft
loans, credit-card loans, even other CDOs. So as X mortgage holder pays
his bill, and Y corporate debtor pays his bill, and Z credit-card debtor
pays his bill, money flows into the box.

The key idea behind a CDO is that there will always be at least some
money in the box, regardless of how dicey the individual assets inside
it are. No matter how you look at a single unemployed ex-con trying to
pay the note on a six-bedroom house, he looks like a bad investment. But
dump his loan in a box with a smorgasbord of auto loans, credit-card
debt, corporate bonds and other crap, and you can be reasonably sure
that somebody is going to pay up. Say $100 is supposed to come into the
box every month. Even in an apocalypse, when $90 in payments might
default, you'll still get $10. What the inventors of the CDO did is
divide up the box into groups of investors and put that $10 into its own
level, or "tranche". They then convinced ratings agencies like Moody's
and S&P to give that top tranche the highest AAA rating - meaning it has
close to zero credit risk.

Suddenly, thanks to this financial seal of approval, banks had a way to
turn their shittiest mortgages and other financial waste into
investment-grade paper and sell them to institutional investors like
pensions and insurance companies, which were forced by regulators to
keep their portfolios as safe as possible. Because CDOs offered higher
rates of return than truly safe products like Treasury bills, it was a
win-win: Banks made a fortune selling CDOs, and big investors made much
more holding them.

The problem was, none of this was based on reality. "The banks knew they
were selling crap", says a London-based trader from one of the
bailed-out companies. To get AAA ratings, the CDOs relied not on their
actual underlying assets but on crazy mathematical formulas that the
banks cooked up to make the investments look safer than they really
were. "They had some back room somewhere where a bunch of Indian guys
who'd been doing nothing but math for God knows how many years would
come up with some kind of model saying that this or that combination of
debtors would only default once every 10,000 years", says one young
trader who sold CDOs for a major investment bank. "It was nuts".

Now that even the crappiest mortgages could be sold to conservative
investors, the CDOs spurred a massive explosion of irresponsible and
predatory lending. In fact, there was such a crush to underwrite CDOs
that it became hard to find enough subprime mortgages - read: enough
unemployed meth dealers willing to buy million-dollar homes for no money
down - to fill them all. As banks and investors of all kinds took on
more and more in CDOs and similar instruments, they needed some way to
hedge their massive bets - some kind of insurance policy, in case the
housing bubble burst and all that debt went south at the same time. This
was particularly true for investment banks, many of which got stuck
holding or "warehousing" CDOs when they wrote more than they could sell.
And that's were Joe Cassano came in.

Known for his boldness and arrogance, Cassano took over as chief of
AIGFP in 2001. He was the favorite of Maurice "Hank" Greenberg, the head
of AIG, who admired the younger man's hard-driving ways, even if neither
he nor his successors fully understood exactly what it was that Cassano
did. According to a source familiar with AIG's internal operations,
Cassano basically told senior management, "You know insurance, I know
investments, so you do what you do, and I'll do what I do - leave me
alone". Given a free hand within the company, Cassano set out from his
offices in London to sell a lucrative form of "insurance" to all those
investors holding lots of CDOs. His tool of choice was another new
financial instrument known as a credit-default swap, or CDS.

The CDS was popularized by J P Morgan, in particular by a group of
young, creative bankers who would later become known as the "Morgan
Mafia", as many of them would go on to assume influential positions in
the finance world. In 1994, in between booze and games of tennis at a
resort in Boca Raton, Florida, the Morgan gang plotted a way to help
boost the bank's returns. One of their goals was to find a way to lend
more money, while working around regulations that required them to keep
a set amount of cash in reserve to back those loans. What they came up
with was an early version of the credit-default swap.

In its simplest form, a CDS is just a bet on an outcome. Say Bank A
writes a million-dollar mortgage to the Pope for a town house in the
West Village. Bank A wants to hedge its mortgage risk in case the Pope
can't make his monthly payments, so it buys CDS protection from Bank B,
wherein it agrees to pay Bank B a premium of $1,000 a month for five
years. In return, Bank B agrees to pay Bank A the full million-dollar
value of the Pope's mortgage if he defaults. In theory, Bank A is
covered if the Pope goes on a meth binge and loses his job.

When Morgan presented their plans for credit swaps to regulators in the
late Nineties, they argued that if they bought CDS protection for enough
of the investments in their portfolio, they had effectively moved the
risk off their books. Therefore, they argued, they should be allowed to
lend more, without keeping more cash in reserve. A whole host of
regulators - from the Federal Reserve to the Office of the Comptroller
of the Currency - accepted the argument, and Morgan was allowed to put
more money on the street.

What Cassano did was to transform the credit swaps that Morgan
popularized into the world's largest bet on the housing boom. In theory,
at least, there's nothing wrong with buying a CDS to insure your
investments. Investors paid a premium to AIGFP, and in return the
company promised to pick up the tab if the mortgage-backed CDOs went
bust. But as Cassano went on a selling spree, the deals he made differed
from traditional insurance in several significant ways. First, the party
selling CDS protection didn't have to post any money upfront. When a
$100 corporate bond is sold, for example, someone has to show 100 actual
dollars. But when you sell a $100 CDS guarantee, you don't have to show
a dime. So Cassano could sell investment banks billions in guarantees
without having any single asset to back it up.

Secondly, Cassano was selling so-called "naked" CDS deals. In a "naked"
CDS, neither party actually holds the underlying loan. In other words,
Bank B not only sells CDS protection to Bank A for its mortgage on the
Pope - it turns around and sells protection to Bank C for the very same
mortgage. This could go on ad nauseam: You could have Banks D through Z
also betting on Bank A's mortgage. Unlike traditional insurance, Cassano
was offering investors an opportunity to bet that someone else's house
would burn down, or take out a term life policy on the guy with AIDS
down the street. It was no different from gambling, the Wall Street
version of a bunch of frat brothers betting on Jay Feely to make a field
goal. Cassano was taking book for every bank that bet short on the
housing market, but he didn't have the cash to pay off if the kick went
wide.

In a span of only seven years, Cassano sold some $500 billion worth of
CDS protection, with at least $64 billion of that tied to the subprime
mortgage market. AIG didn't have even a fraction of that amount of cash
on hand to cover its bets, but neither did it expect it would ever need
any reserves. So long as defaults on the underlying securities remained
a highly unlikely proposition, AIG was essentially collecting huge and
steadily climbing premiums by selling insurance for the disaster it
thought would never come.

Initially, at least, the revenues were enormous: AIGFP's returns went
from $737 million in 1999 to $3.2 billion in 2005. Over the past seven
years, the subsidiary's 400 employees were paid a total of $3.5 billion;
Cassano himself pocketed at least $280 million in compensation. Everyone
made their money - and then it all went to 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 Senator 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 AD. 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 ten-year period beginning
in 1998, financial companies spent $1.7 billion on federal campaign
contributions and another $3.4 billion on lobbyists. They quickly got
what they paid for. In 1999, Gramm co-sponsored a bill that repealed key
aspects of the Glass-Steagall Act, smoothing the way for the creation of
financial megafirms like Citigroup. The move did away with the built-in
protections afforded by smaller banks. In the old days, a local banker
knew the people whose loans were on his balance sheet: He wasn't going
to give a million-dollar mortgage to a homeless meth addict, since he
would have to keep that loan on his books. But a giant merged bank might
write that loan and then sell it off to some fool in China, and who cared?

The very next year, Gramm compounded the problem by writing a sweeping
new law called the Commodity Futures Modernization Act that made it
impossible to regulate credit swaps as either gambling or securities.
Commercial banks - which, thanks to Gramm, were now competing directly
with investment banks for customers - were driven to buy credit swaps to
loosen capital in search of higher yields. "By ruling that
credit-default swaps were not gaming and not a security, the way was
cleared for the growth of the market", said Eric Dinallo, head of the
New York State Insurance Department.

The blanket exemption meant that Joe Cassano could now sell as many CDS
contracts as he wanted, building up as huge a position as he wanted,
without anyone in government saying a word. "You have to remember,
investment banks aren't in the business of making huge directional
bets", says the government source involved in the AIG bailout. When
investment banks write CDS deals, they hedge them. But insurance
companies don't have to hedge. And that's what AIG did. "They just bet
massively long on the housing market", says the source. "Billions and
billions".

In the biggest joke of all, Cassano's wheeling and dealing was regulated
by the Office of Thrift Supervision, an agency that would prove to be
defiantly uninterested in keeping watch over his operations. How a
behemoth like AIG came to be regulated by the little-known and
relatively small OTS is yet another triumph of the deregulatory
instinct. Under another law passed in 1999, certain kinds of holding
companies could choose the OTS as their regulator, provided they owned
one or more thrifts (better known as savings-and-loans). Because the OTS
was viewed as more compliant than the Fed or the Securities and Exchange
Commission, companies rushed to reclassify themselves as thrifts. In
1999, AIG purchased a thrift in Delaware and managed to get approval for
OTS regulation of its entire operation.

Making matters even more hilarious, AIGFP - a London-based subsidiary of
an American insurance company - ought to have been regulated by one of
Europe's more stringent regulators, like Britain's Financial Services
Authority. But the OTS managed to convince the Europeans that it had the
muscle to regulate these giant companies. By 2007, the EU had conferred
legitimacy to OTS supervision of three mammoth firms - GE, AIG and
Ameriprise.

That same year, as the subprime crisis was exploding, the Government
Accountability Office criticized the OTS, noting a "disparity between
the size of the agency and the diverse firms it oversees". Among other
things, the GAO report noted that the entire OTS had only one insurance
specialist on staff - and this despite the fact that it was the primary
regulator for the world's largest insurer!

"There's this notion that the regulators couldn't do anything to stop
AIG", says a government official who was present during the bailout.
"That's bullshit. What you have to understand is that these regulators
have ultimate power. They can send you a letter and say, 'You don't
exist anymore', and that's basically that. They don't even really need
due process. The OTS could have said, 'We're going to pull your charter;
we're going to pull your license; we're going to sue you'. And getting
sued by your primary regulator is the kiss of death."

When AIG finally blew up, the OTS regulator ostensibly in charge of
overseeing the insurance giant - a guy named C K Lee - basically
admitted that he had blown it. His mistake, Lee said, was that he
believed all those credit swaps in Cassano's portfolio were "fairly
benign products". Why? Because the company told him so. "The judgment
the company was making was that there was no big credit risk", he
explained. (Lee now works as Midwest region director of the OTS; the
agency declined to make him available for an interview.)

In early March, after the latest bailout of AIG, Treasury Secretary
Timothy Geithner took what seemed to be a thinly veiled shot at the OTS,
calling AIG a "huge, complex global insurance company attached to a very
complicated investment bank/hedge fund that was allowed to build up
without any adult supervision". But even without that "adult
supervision", AIG might have been OK had it not been for a complete lack
of internal controls. For six months before its meltdown, according to
insiders, the company had been searching for a full-time chief financial
officer and a chief risk-assessment officer, but never got around to
hiring either. That meant that the eighteenth 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 process".

The following February, when AIG posted $11.5 billion in annual losses,
it announced the resignation of Cassano as head of AIGFP, saying an
auditor had found a "material weakness" in the CDS portfolio. But
amazingly, the company not only allowed Cassano to keep $34 million in
bonuses, it kept him on as a consultant for $1 million a month. In fact,
Cassano remained on the payroll and kept collecting his monthly million
through the end of September 2008, even after taxpayers had been forced
to hand AIG $85 billion to patch up his fuck-ups. When asked in October
why the company still retained Cassano at his $1 million-a-month rate
despite his role in the probable downfall of Western civilization, CEO
Martin Sullivan told Congress with a straight face that AIG wanted to
"retain the twenty-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 orderly fashion.

The bonuses are a nice comic touch highlighting one of the more
outrageous tangents of the bailout age, namely the fact that, even with
the planet in flames, some members of the Wall Street class can't even
get used to the tragedy of having to fly coach. "These people need their
trips to Baja, their spa treatments, their hand jobs", says an official
involved in the AIG bailout, a serious look on his face, apparently not
even half-kidding. "They don't function well without 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 US 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 might suppose".

Market analyst Eric Salzman is more blunt. "If AIG went down", he says,
"there was a good chance Goldman would not be able to collect". The AIG
bailout, in effect, was Goldman bailing out Goldman.

Eventually, Paulson went a step further, elevating another ex-Goldmanite
named Edward Liddy to run AIG - a company whose bailout money would be
coming, in part, from the newly created TARP program, administered by
another Goldman banker named Neel Kashkari.

V. REPO MEN

There are plenty of people who have noticed, in recent years, that when
they lost their homes to foreclosure or were forced into bankruptcy
because of crippling credit-card debt, no one in the government was
there to rescue them. But when Goldman Sachs - a company whose average
employee still made more than $350,000 last year, even in the midst of a
depression - was suddenly faced with the possibility of losing money on
the unregulated insurance deals it bought for its insane housing bets,
the government was there in an instant to patch the hole. That's the
essence of the bailout: rich bankers bailing out rich bankers, using the
taxpayers' credit card.

The people who have spent their lives cloistered in this Wall Street
community aren't much for sharing information with the great unwashed.
Because all of this shit is complicated, because most of us mortals
don't know what the hell LIBOR is or how a REIT works or how to use the
word "zero coupon bond" in a sentence without sounding stupid - well,
then, the people who do speak this idiotic language cannot under any
circumstances be bothered to explain it to us and instead spend a lot of
time rolling their eyes and asking us to trust them.

That roll of the eyes is a key part of the psychology of Paulsonism. The
state is now being asked not just to call off its regulators or give tax
breaks or funnel a few contracts to connected companies; it is
intervening directly in the economy, for the sole purpose of preserving
the influence of the megafirms. In essence, Paulson used the bailout to
transform the government into a giant bureaucracy of entitled
assholedom, one that would socialize "toxic" risks but keep both the
profits and the management of the bailed-out firms in private hands.
Moreover, this whole process would be done in secret, away from the
prying eyes of NASCAR dads, broke-ass liberals who read translations of
French novels, subprime mortgage holders and other such financial losers.

Some aspects of the bailout were secretive to the point of absurdity. In
fact, if you look closely at just a few lines in the Federal Reserve's
weekly public disclosures, you can literally see the moment where a big
chunk of your money disappeared for good. The H4 report (called "Factors
Affecting Reserve Balances") summarizes the activities of the Fed each
week. You can find it online, and it's pretty much the only thing the
Fed ever tells the world about what it does. For the week ending
February 18th, the number under the heading "Repurchase Agreements" on
the table is zero. It's a significant 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, US securities and even mortgage-backed securities from
institutions like Goldman Sachs and J P Morgan, who would then
"repurchase" them in a short period of time, usually one to seven days.
This was the Fed's primary mechanism for controlling interest rates:
Buying up securities gives banks more money to lend, which makes
interest rates go down. Selling the securities back to the banks reduces
the money available for lending, which makes interest rates go up.

If you look at the weekly H4 reports going back to the summer of 2007,
you start to notice something alarming. At the start of the credit
crunch, around August of that year, you see the Fed buying a few more
Repos than usual - $33 billion or so. By November, as private-bank
reserves were dwindling to alarmingly low levels, the Fed started
injecting even more cash than usual into the economy: $48 billion. By
late December, the number was up to $58 billion; by the following March,
around the time of the Bear Stearns rescue, the Repo number had jumped
to $77 billion. In the week of May 1st, 2008, the number was $115
billion - "out of control now", according to one congressional aide. For
the rest of 2008, the numbers remained similarly in the stratosphere,
the Fed pumping as much as $125 billion of these short-term loans into
the economy - until suddenly, at the start of this year, the number
drops to nothing. Zero.

The reason the number has dropped to nothing is that the Fed had simply
stopped using relatively transparent devices like repurchase agreements
to pump its money into the hands of private companies. By early 2009, a
whole series of new government operations had been invented to inject
cash into the economy, most all of them completely secretive and with
names you've never heard of. There is the Term Auction Facility, the
Term Securities Lending Facility, the Primary Dealer Credit Facility,
the Commercial Paper Funding Facility and a monster called the
Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity
Facility (boasting the chat-room horror-show acronym ABCPMMMFLF). For
good measure, there's also something called a Money Market Investor
Funding Facility, plus three facilities called Maiden Lane I, II and III
to aid bailout recipients like Bear Stearns and AIG.

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
Representative 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 Representative 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 worthless?"

"None are worthless", Kohn snapped.

"Then why don't you mark them to market?" Grayson demanded.

"Well", Kohn sighed, "we are marking the ones to market that have 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 Senator Bernie
Sanders. "It is beyond comprehension".

Count Sanders among those who don't buy the argument that Wall Street
firms shouldn't have to face being outed as recipients of public funds,
that making this information public might cause investors to panic and
dump their holdings in these firms. "I guess if we made that public,
they'd go on strike or something", he muses.

And the Fed isn't the only arm of the bailout that has closed ranks. The
Treasury, too, has maintained incredible secrecy surrounding its
implementation even of the TARP program, which was mandated by Congress.
To this date, no one knows exactly what criteria the Treasury Department
used to determine which banks received bailout funds and which didn't -
particularly the first $350 billion given out under Bush appointee Hank
Paulson.

The situation with the first TARP payments grew so absurd that when the
Congressional Oversight Panel, charged with monitoring the bailout
money, sent a query to Paulson asking how he decided whom to give money
to, Treasury responded - and this isn't a joke - by directing the panel
to a copy of the TARP application form on its website. Elizabeth Warren,
the chair of the Congressional Oversight Panel, was struck nearly
speechless by the response.

"Do you believe that?" she says incredulously. "That's not what we had
in mind".

Another member of Congress, who asked not to be named, offers his own
theory about the TARP process. "I think basically if you knew Hank
Paulson, you got the money", he says.

This cozy arrangement created yet another opportunity for big banks to
devour market share at the expense of smaller regional lenders. While
all the bigwigs at Citi and Goldman and Bank of America who had Paulson
on speed-dial got bailed out right away - remember that TARP was
originally passed because money had to be lent right now, that day, that
minute, to stave off emergency - many small banks are still waiting for
help. Five months into the TARP program, some not only haven't received
any funds, they haven't even gotten a call back about their applications.

"There's definitely a feeling among community bankers that no one up
there cares much if they make it or not", says Tanya Wheeless, president
of the Arizona Bankers Association.

Which, of course, is exactly the opposite of what should be happening,
since small, regional banks are far less guilty of the kinds of
predatory lending that sank the economy. "They're not giving out
subprime loans or easy credit", says Wheeless. "At the community level,
it's much more bread-and-butter banking".

Nonetheless, the lion's share of the bailout money has gone to the
larger, so-called "systemically important" banks. "It's like Treasury is
picking winners and losers", says one state banking official who asked
not to be identified.

This itself is a hugely important political development. In essence, the
bailout accelerated the decline of regional community lenders by
boosting the political power of their giant national competitors.

Which, when you think about it, is insane: What had brought us to the
brink of collapse in the first place was this relentless instinct for
building ever-larger megacompanies, passing deregulatory measures to
gradually feed all the little fish in the sea to an ever-shrinking pool
of Bigger Fish. To fix this problem, the government should have slowly
liquidated these monster, too-big-to-fail firms and broken them down to
smaller, more manageable companies. Instead, federal regulators closed
ranks and used an almost completely secret bailout process to double
down on the same faulty, merger-happy thinking that got us here in the
first place, creating a constellation of megafirms under government
control that are even bigger, more unwieldy and more crammed to the
gills with systemic risk.

In essence, Paulson and his cronies turned the federal government into
one gigantic, half-opaque holding company, one whose balance sheet
includes the world's most appallingly large and risky hedge fund, a
controlling stake in a dying insurance giant, huge investments in a
group of teetering megabanks, and shares here and there in various
auto-finance companies, student loans, and other failing businesses.
Like AIG, this new federal holding company is a firm that has no
mechanism for auditing itself and is run by leaders who have very little
grasp of the daily operations of its disparate subsidiary 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
protege 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 ninety-hour weeks, the stress, the failed marriages,
the hemorrhoids and gallstones they all get before they hit forty.

"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 instead?"

But before you even finish saying that, they're rolling their eyes,
because You Don't Get It. These people were never about anything except
turning money into money, in order to get more money; valueswise they're
on par with crack addicts, or obsessive sexual deviants who burgle homes
to steal panties. Yet these are the people in whose hands our entire
political future now rests.

Good luck with that, America. And enjoy tax season.

[From Issue 1075 - April 02 2009]

http://www.rollingstone.com/politics/story/26793903/the_big_takeover/


TO POST A COMMENT, OR TO READ COMMENTS POSTED BY OTHERS, please click
on the word "comment" highlighted at the end of the version of this
essay posted at http://billtotten.blogspot.com/