THE NEW YORK TIMES
August 9, 2009
Paulson’s Calls to Goldman Tested Ethics
By GRETCHEN MORGENSON and DON VAN NATTA Jr.
Before he became President George W. Bush’s Treasury secretary in 2006, Henry M. Paulson Jr. agreed to hold himself to a higher ethical standard than his predecessors. He not only sold all his holdings in Goldman Sachs, the investment bank he had run, but also specifically said that he would avoid any substantive interaction with Goldman executives for his entire term unless he first obtained an ethics waiver from the government.
But today, seven months after Mr. Paulson left office, questions are still being asked about his part in decisions last fall to prop up the teetering financial system with tens of billions of taxpayer dollars, including aid that directly benefited his former firm. Testifying on Capitol Hill last month, he was grilled about his relationship with Goldman.
“Is it possible that there’s so much conflict of interest here that all you folks don’t even realize that you’re helping people that you’re associated with?” Representative Cliff Stearns, Republican of Florida, asked Mr. Paulson at the July 16 hearing.
“I operated very consistently within the ethic guidelines I had as secretary of the Treasury,” Mr. Paulson responded, adding that he asked for an ethics waiver for his interactions with his old firm “when it became clear that we had some very significant issues with Goldman Sachs.”
Mr. Paulson did not say when he received a waiver, but copies of two waivers he received — from the White House counsel’s office and the Treasury Department — show they were issued on the afternoon of Sept. 17, 2008.
That date was in the middle of the most perilous week of the financial crisis and a day after the government agreed to lend $85 billion to the American International Group, which used the money to pay off Goldman and other big banks that were financially threatened by A.I.G.’s potential collapse.
It is common, of course, for regulators to be in contact with market participants to gather valuable industry intelligence, and financial regulators had to scramble very quickly last fall to address an unprecedented crisis. In those circumstances it would have been difficult for anyone to follow routine guidelines.
While Mr. Paulson spoke to many Wall Street executives during that period, he was in very frequent contact with Lloyd C. Blankfein, Goldman’s chief executive, according to a copy of Mr. Paulson’s calendars acquired by The New York Times through a Freedom of Information Act request.
During the week of the A.I.G. bailout alone, Mr. Paulson and Mr. Blankfein spoke two dozen times, the calendars show, far more frequently than Mr. Paulson did with other Wall Street executives.
On Sept. 17, the day Mr. Paulson secured his waivers, he and Mr. Blankfein spoke five times. Two of the calls occurred before Mr. Paulson’s waivers were granted.
Michele Davis, a spokeswoman for Mr. Paulson, said that the former Treasury secretary was busy writing his memoirs and that his publisher had barred him from granting interviews until his manuscript was done. She pointed out that the ethics agreement Mr. Paulson agreed to when he joined the Treasury did not prevent him from talking to Goldman executives like Mr. Blankfein in order to keep abreast of market developments.
Ms. Davis also said that Federal Reserve officials, not Mr. Paulson, played the lead role in shaping and financing the A.I.G. bailout.
But Mr. Paulson was closely involved in decisions to rescue A.I.G., according to two senior government officials who requested anonymity because the negotiations were supposed to be confidential.
And government ethics specialists say that the timing of Mr. Paulson’s waivers, and the circumstances surrounding it, are troubling.
“I think that when you have a person in a high government position who has been with one of the major financial institutions, things like this have to happen more publicly and they have to happen more in the normal course of business rather than privately, quietly and on the fly,” said Peter Bienstock, the former executive director of the New York State Commission on Government Integrity and a partner at the law firm of Cohen Hennessey Bienstock & Rabin.
He went on: “If it can happen on a phone call and can happen without public scrutiny, it destroys the standard because then anything can happen in that fashion and any waiver can happen.”
Concerns about potential conflicts of interest were perhaps inevitable during this financial crisis, the worst since the Great Depression. In the weeks before Mr. Paulson obtained the waivers, Treasury lawyers raised questions about whether he had conflicts of interest, a senior government official said.
Indeed, Mr. Paulson helped decide the fates of a variety of financial companies, including two longtime Goldman rivals, Bear Stearns and Lehman Brothers, before his ethics waivers were granted. Ad hoc actions taken by Mr. Paulson and officials at the Federal Reserve, like letting Lehman fail and compensating A.I.G.’s trading partners, continue to confound some market participants and members of Congress.
“I think it’s clear he had a conflict of interest,” Mr. Stearns, the congressman, said in an interview. “He was covering himself with this waiver because he knew he had a conflict of interest with his telephone calls and with his actions. Even though he had no money in Goldman, he had a vested interest in Goldman’s success, in terms of his own reputation and historical perspective.”
Adding to questions about Mr. Paulson’s role, critics say, is the fact that Goldman Sachs was among a group of banks that received substantial government assistance during the turmoil. Goldman not only received $13 billion in taxpayer money as a result of the A.I.G. bailout, but also was given permission at the height of the crisis to convert from an investment firm to a national bank, giving it easier access to federal financing in the event it came under greater financial pressure.
Goldman also won federal debt guarantees and received $10 billion under the Troubled Asset Relief Program. It benefited further when the Securities and Exchange Commission suddenly changed its rules governing stock trading, barring investors from being able to bet against Goldman’s shares by selling them short.
Now that the company’s crisis has passed, Goldman has rebounded more markedly than its rivals. It has paid back the $10 billion in government assistance, with interest, and exited the federal debt guarantee program. It recently reported second-quarter profit of $3.44 billion, putting its employees on track to earn record bonuses this year: about $700,000 each, on average.
Ms. Davis, the spokeswoman for Mr. Paulson, said Goldman never received special treatment from the Treasury. Mr. Paulson’s calendars do not disclose any details about his conversations with Mr. Blankfein, and Ms. Davis said Mr. Paulson always maintained a proper regulatory distance from his old firm.
A spokesman for Goldman, Lucas van Praag, said: “Lloyd Blankfein, like the C.E.O.’s of other major financial institutions, received calls from, and made calls to, Treasury to provide a market perspective on conditions and events as they were unfolding. Given what was happening in the world, it would have been shocking if such conversations hadn’t taken place.”
Although federal officials were concerned that Goldman Sachs might collapse that week, Mr. van Praag said the only topics of discussion between Mr. Blankfein and Mr. Paulson at the time involved Lehman Brothers’ troubled London operations and “disarray in the money markets.” Mr. van Praag said Goldman was fully insulated from financial fallout related to a possible A.I.G. collapse in mid-September of last year.
However, Mr. Paulson believed he needed to request the ethics waivers during that tumultuous week, after regulators had become concerned that the same crisis of confidence that felled Bear Stearns and Lehman might spread to the remaining investment banks, including Goldman Sachs.
At a conference call scheduled for 3 p.m. on Sept. 17, 2008, Fed officials intended to discuss the financial soundness of Goldman Sachs, Merrill Lynch and Morgan Stanley, and they had asked Mr. Paulson to participate, according to Mr. Paulson’s calendars and his spokeswoman.
That was the first time during the crisis that Mr. Paulson’s involvement required a waiver, Ms. Davis said. The waiver was requested that morning and granted orally that afternoon, just before the 3 p.m. conference call.
A few minutes later, in an e-mail message to Mr. Paulson, Bernard J. Knight Jr., assistant general counsel at the Treasury, outlined the agency’s rationale for granting the waiver.
“I have determined that the magnitude of the government’s interest in your participation in matters that might affect or involve Goldman Sachs clearly outweighs the concern that your participation may cause a reasonable person to question the integrity of the government’s programs and operations,” Mr. Knight wrote.
For investors in the United States and around the world, the days after the A.I.G. rescue were perilous and uncertain; the Dow Jones industrial average fell 4 percent on Sept. 17 as credit markets froze and investors absorbed the implications of the insurance giant’s collapse. That day, Mr. Paulson and his colleagues at the Federal Reserve were scrambling to contain the damage and shore up investor confidence.
But Mr. Paulson has disavowed any involvement in the decision to use taxpayer funds to make Goldman and A.I.G.’s trading partners whole. In his July testimony to the House, he said: “I want you to know that I had no role whatsoever in any of the Fed’s decision regarding payments to any of A.I.G.’s creditors or counterparties.”
Ms. Davis reiterated this, saying that Mr. Paulson’s involvement in the A.I.G. bailout was meant to forestall a collapse of the entire financial system and not to rescue any individual firms exposed to A.I.G., like Goldman. However, she said, federal officials were worried that both Goldman and Morgan Stanley were in danger themselves of failing later in the week and it was in that context that Mr. Paulson received a waiver.
“The waiver was in anticipation of a need to rescue Goldman Sachs,” Ms. Davis said, “not to bail out A.I.G.”
Treasury Department lawyers said a waiver for Mr. Paulson regarding A.I.G. was not necessary, Ms. Davis said, because the A.I.G. rescue was conducted by the Federal Reserve. The Treasury had no power to rescue A.I.G., she said. Only the Fed could make such a loan.
But according to two senior government officials involved in the discussions about an A.I.G. bailout and several other people who attended those meetings and requested anonymity because of confidentiality agreements, the government’s decision to rescue A.I.G was made collectively by Mr. Paulson, officials from the Federal Reserve and other financial regulators in meetings at the New York Fed over the weekend of Sept. 13-14, 2008.
These people said Mr. Paulson played a major role in the A.I.G. rescue discussions over that weekend and that it was well known among the participants that a loan to A.I.G. would be used to pay Goldman and the insurer’s other trading partners.
Over that weekend, according to a former senior government official involved in the discussions, Mr. Paulson said that he had been warned by lawyers for the Treasury Department not to contact Goldman executives directly. But he said Mr. Paulson told him he had disregarded the advice because the “crisis” required action.
Ms. Davis said: “Hank doesn’t recall saying that. Staff had advised that he interact one on one with Goldman as little as possible, not because it would be a violation but for appearances, recognizing someone would likely attempt to read too much into it.”
On Sept. 16, 2008, the day that the government agreed to inject billions into A.I.G., Mr. Paulson personally called Robert B. Willumstad, A.I.G.’s chief executive, and dismissed him. Mr. Paulson’s involvement in the decision to rescue A.I.G. is also supported by an e-mail message sent by Scott G. Alvarez, general counsel at the Federal Reserve Board, to Robert Hoyt, a Treasury legal counsel, that same day.
The subject of the message, acquired under the Freedom of Information Act, is “AIG Letter,” and it contains a reference to a document called “AIG.Paulson.Letter.draft2.09.16.2008.doc.” The letter itself was not released.
Ms. Davis said this letter was intended to confirm that the Treasury and Mr. Paulson supported the loan to A.I.G. and that its officials recognized that any Fed losses would be absorbed by taxpayers. She said the existence of the letter did not confirm that Mr. Paulson was extensively involved in discussions about an A.I.G. bailout.
Since last September, the government’s commitment to A.I.G. has swelled to $173 billion. A recent report from the Government Accountability Office questioned whether taxpayers would ever be repaid the money loaned to what was once the world’s largest insurance company.
In the ethics agreement that Mr. Paulson signed in 2006, he wrote: “I believe that these steps will ensure that I avoid even the appearance of a conflict of interest in the performance of my duties as Secretary of the Treasury.”
While that agreement barred him from dealing on specific matters involving Goldman, he spoke with Mr. Blankfein at other pivotal moments in the crisis before receiving waivers.
Mr. Paulson’s schedules from 2007 and 2008 show that he spoke with Mr. Blankfein, who was his successor as Goldman’s chief, 26 times before receiving a waiver.
On the morning of Sept. 16, 2008, the day the A.I.G. rescue was announced, Mr. Paulson’s calendars show that he took a call from Mr. Blankfein at 9:40 a.m. Mr. Paulson received the ethics waiver regarding contacts with Goldman between 2:30 and 3 the next afternoon. According to his calendar, he called Mr. Blankfein five times that day. The first call was placed at 9:10 a.m.; the second at 12:15 p.m.; and there were two more calls later that day. That evening, after taking a call from President Bush, Mr. Paulson called Mr. Blankfein again.
When the Treasury secretary reached his office the next day, on Sept. 18, his first call, at 6:55 a.m., went to Mr. Blankfein. That was followed by a call from Mr. Blankfein. All told, from Sept. 16 to Sept. 21, 2008, Mr. Paulson and Mr. Blankfein spoke 24 times.
At the height of the financial crisis, Mr. Paulson spoke far more often with Mr. Blankfein than any other executive, according to entries in his calendars.
The calls between Mr. Paulson and Mr. Blankfein, especially those surrounding the A.I.G. bailout, are disturbing to Samuel L. Hayes, a professor emeritus at Harvard Business School and a consultant in the past for government agencies, including the Treasury Department.
“We don’t know what they talked about,” Mr. Hayes said. “Obviously there was an enormous amount at stake for Goldman in whether or not the A.I.G. contracts would be made whole. So I think the burden is now on Mr. Paulson to demonstrate that there was no exchange of information one way or the other that influenced the ultimate decision of the government to essentially provide a blank check for A.I.G.’s contracts.”
In a letter accompanying the government’s production of Mr. Paulson’s calendar under the Freedom of Information Act request, Kevin M. Downey, a lawyer for Mr. Paulson, raised questions about how comprehensive the schedules were. He noted, for example, that the calendars did not reflect the Treasury secretary’s attendance at several public events. Mr. Downey did not return phone calls or e-mail messages seeking further comment.
Moreover, because the schedules include only phone calls made through Mr. Paulson’s office at Treasury, they provide only a partial picture of his communications. They do not reflect calls he made on his cellphone or from his home telephone.
According to the schedules, Mr. Paulson’s contacts with Mr. Blankfein began even before the height of the crisis last fall. During August 2007, for example, when the market for asset-backed commercial paper was seizing up, Mr. Paulson spoke with Mr. Blankfein 13 times. Mr. Paulson placed 12 of those calls.
Mon Jul 6, 2009 5:59pm EDT
WASHINGTON (Reuters) – The U.S. Federal Reserve, facing growing pressure as it tries to heal the ailing economy, dodged a bullet on Monday when the U.S. Senate cast aside a new effort to increase scrutiny of the central bank.
On procedural grounds, the Senate blocked a bid to permit the U.S. comptroller general, who heads the investigative arm of Congress known as the Government Accountability Office, to audit the Federal Reserve system and issue a report.
Republican Senator Jim DeMint, who has been pushing for greater transparency at the Fed, failed to get the provision attached to the must-pass annual spending bill that includes funding for the GAO for the upcoming 2010 fiscal year.
The audit would have included details about the Fed’s discount window operations, funding facilities, open market operations and agreements with foreign central banks and governments, DeMint said on the Senate floor.
“The Federal Reserve will create and disburse trillions of dollars in response to our current financial crisis,” DeMint said. “Americans across the nation, regardless of their opinion on the bailout, want to know where the money has gone.
“Allowing the Fed to operate our nation’s monetary system in almost complete secrecy leads to abuse, inflation and a lower quality of life,” he said.
Democrats who control the Senate blocked the South Carolina Republican’s amendment on the grounds that it violated rules prohibiting legislation attached to spending bills.
Fed officials were not immediately available to comment.
The move comes as some lawmakers have increasingly become wary of the Fed’s actions, particularly for its handling of the real estate market and the meltdown of major financial institutions like investment bank Bear Stearns and insurance giant American International Group.
A non-binding provision in the fiscal 2010 budget blueprint Congress approved in April called on the Fed to provide more information about collateral posted against Bear Stearns and AIG loans.
That measure also sought a study evaluating the appropriate number and costs of the regional Fed banks.
The U.S. central bank has a seven-member board in Washington whose members are nominated by the president and confirmed by the Senate. It also has 12 regional banks whose presidents are appointed by banks and other businesses in their local districts, with the consent of the Washington board.
(Reporting by Jeremy Pelofsky and Alister Bull, editing by Dan Grebler)
Jun 17, 7:13 PM (ET)
By JIM KUHNHENN and MARTIN CRUTSINGER
WASHINGTON (AP) – From simple home loans to Wall Street’s most exotic schemes, the government would impose and enforce sweeping new “rules of the road” for the nation’s battered financial system under an overhaul proposed Wednesday by President Barack Obama.
Aimed at preventing a repeat of the worst economic crisis in seven decades, the changes would begin to reverse a determined campaign pressed in the 1980s by President Ronald Reagan to cut back on federal regulations.
Obama’s plan would do little to streamline the alphabet soup of agencies that oversee the financial sector. But it calls for fundamental shifts in authority that would eliminate one regulatory agency, create another and both enhance and undercut the authority of the powerful Federal Reserve.
The new agency, a consumer protection office, would specifically take over oversight of mortgages, requiring that lenders give customers the option of “plain vanilla” plans with straightforward and affordable terms. Lenders who repackage loans and sell them to investors as securities would be required to retain 5 percent of the credit risk – a figure some analysts believe is too low.
In all, the Obama’s broad proposal cheered consumer advocates and dismayed the banking industry with its proposed creation of a regulator to protect consumers in all their banking transactions, from mortgages to credit cards. Large insurers protested the administration’s decision not to impose a standard, federal regulation on the insurance industry, leaving it to the separate states as at present. Mutual funds succeeded in staying under the jurisdiction of the Securities and Exchange Commission instead of the new consumer protection agency.
Obama cast his proposals as an attempt to find a middle ground between the benefits and excesses of capitalism.
“We are called upon to put in place those reforms that allow our best qualities to flourish – while keeping those worst traits in check,” Obama said.
The president’s plan lands in the lap of a Congress already preoccupied by historic health care legislation, consideration of a new Supreme Court justice and other major issues. Still, Obama has set an ambitious schedule, pushing lawmakers to adopt a new regulatory regime by year’s end.
“We’ll have it done this year,” pledged Sen. Chris Dodd, D-Conn., chairman of the Senate Banking Committee.
“Absolutely,” agreed Rep. Barney Frank, D-Mass., chairman of the House Financial Services Committee.
But fissures quickly developed.
Dodd, who had been at Obama’s side in the East Room of the White House for the announcement, raised questions about one of the plan’s key features – giving the Federal Reserve authority to oversee the largest and most interconnected players in the financial world.
“There’s not a lot of confidence in the Fed at this point,” Dodd said.
Obama’s proposal would require the Federal Reserve, which now can independently use emergency powers to bail out failing banks, to first obtain Treasury Department approval before extending credit to institutions in “unusual and exigent circumstances,” a change designed to mollify critics who say the Fed should be more accountable in exercising its powers as a lender of last resort.
But the proposal also would do away with a restriction imposed on the Fed in 1999 when Congress lifted Depression-era restrictions that allowed banks to get into securities and insurance businesses. The Fed, as the regulator for the larger financial holding companies, had been prohibited from examining or imposing restrictions on those firms’ subsidiaries. Obama’s proposal specifically lifts that restriction, giving the Fed the ability to duplicate and even overrule other regulators. At the same time, the new consumer agency would take away some of the Fed’s authority.
Fed defenders argue that none of the major institutional collapses – AIG, Bear Stearns, Lehman Bros., Merrill Lynch or Countrywide – were supervised by the Federal Reserve. Critics argue the Fed failed to crack down on dubious mortgage practices that were at the heart of the crisis.
Administration officials concede their plan responds to the current crisis- in national security terms, it prepares them to fight the last war. But they also insist that a central tenet of their plan is a requirement that from now on financial institutions will have to keep more money in reserve – the best hedge against another meltdown.
That may appear to be a no-brainer: If banks and other large institutions have more money, they won’t be vulnerable if their risky bets go bad.
However, banking regulators have been arguing for years over implementation of an international standard for bank capital. Geithner said Wednesday hoped to move on enhanced capital standards “in parallel with the rest of the world.”
Obama’s overall plan, laid out in an 88-page white paper, was the result of extensive consultations with members of Congress, regulators and industry groups and represented a compromise from bolder ideas the administration ended up abandoning because of heavy opposition.
The plan had its share of winners and losers, both inside and outside government.
Sheila Bair, the chair of the Federal Deposit Insurance Corp., lost her campaign to have a regulatory council, not the Fed, regulate large firms whose failure could undermine the entire system. SEC Chairman Mary Schapiro also had expressed support for Bair’s push for a more powerful risk council.
The regulatory overhaul ended up eliminating only one agency, the Office of Thrift Supervision, generally considered a weak link among current banking regulators. The OTS oversaw the American International Group, whose business insuring exotic securities blew up last fall, prompting a $182 billion federal bailout.
The failure to merge all four current banking agencies into one super regulator could open the door for big banks to continue to exploit weak links in the current system. Sen. Charles Schumer of New York, a leading Democratic voice on Wall Street issues, praised the administration’s plan but said he would consider further consolidation.
“We’re removing one major agency-shopping opportunity, but there’s a real potential for others,” said Patricia McCoy, a law professor at the University of Connecticut who has studied bank failures.
Associated Press writers Marcy Gordon, Anne Flaherty, Jeannine Aversa and Stevenson Jacobs contributed to this report.
This is from Talking Points Memo’s Reader Blogger Joe Wood:
Hitler’s worst mistake is that he did NOT gas the Jews. –James von Braunn, HolyWesternEmpire.org
James W. von Brunn holds a BachSci Journalism degree from a mid-Western university where he was president of SAE and played varsity football.
During WWII he served as PT-Boat captain, Lt. USNR, receiving a Commendation and four battle stars. For twenty years he was an advertising executive and film-producer in New York City. He is a member of Mensa, the high-IQ society.
In 1981 Von Brunn attempted to place the treasonous Federal Reserve Board of Governors under legal, non-violent, citizens arrest. He was tried in a Washington, D.C. Superior Court; convicted by a Negro jury, Jew/Negro attorneys, and sentenced to prison for eleven years by a Jew judge. A Jew/Negro/White Court of Appeals denied his appeal. He served 6.5 years in federal prison. (Read about von Brunn’s “And so, on December 7, 1981, a bright, crisp morning James Wenneker von Brunn visited the Federal Reserve Building on Constitution Ave., across from the Washington Monument, Washington D.C. I had cased the building twice before, and talked at length with one of the guards, a retire U.S. Marine. I posed as a freelance newspaper reporter. I wore a trench-coat with a camera-case slung over my shoulder. . The Marine (“HARRY”)) guided me through the Board Room, and Paul Volcker’s office; there I met his secretary, a smartly dressed middle-aged lady with gray hair. My objective was to arrest Volcker and the FED Brd of Governors.
I intended to bind their hands, and persuade them to appear on Television. There, on camera, I intended to read to the American public my indictment of these treasonous liars. If I survived I expected to be arrested, then stand trial before a jury of my peers. Back then I had faith in our system of justice. The Federal Reserve building fronts on Constitution Avenue, however, the main entrance, the north side, is at the rear. Here broad steps lead to a bank of impressive brass-encased doors, plus one turnstile doorway. Upon entering the building one faces a wide north to south marble corridor. Since my visit they installed security devices. Three (?) elevators stand along the west wall. A uniformed Negro security-guard, to the east (my left), seated behind a desk, required visitors to log-in. Attached to the desk was a closed cabinet containing, I had been informed, riot weapons. Two hall-ways, each running east to west, traverse the length of the building; they intersect the main corridor. Two security guards patrol them. Between the halls two flights of marble stairs along the west wall rise to the second level balcony, overlooking the main corridor. Harry (the ex-Marine) is stationed there – He protects the Board Members’ offices and the Board of Governors conference room. He too has a desk-cabinet with riot arms. On the first floor, opposite the balcony is a waiting room. A guard there directs visitors to their destinations, makes telephone calls to confirm appointments, etc. I waited there with a beautiful young brunette applying for her first job. She wore a luxurious sable coat, which I helped her remove when she complained it was too warm. I didn’t dare unbutton my trench coat, which concealed a sawed-off shot gun, a .38- police-special, a Bowie knife and a carpenters-apron containing cord, etc. Later the visiting-room guard said he thought I looked “suspicious.” The camera-case slung over my shoulder now contained a phony bomb, which, it appeared, could be activated by a phony detonator (range finder). As I didn’t want to kill anyone I carried no ammunition.
The previous day I re-confirmed that the Board would meet and Harry would NOT be on duty. However, upon arrival I saw that Harry was on the balcony, his partner had called in sick. Such are the fickle uncertainties of Fate. The ladies on the balcony decorating the Christmas tree departed, to my great relief, giggling and rosy-cheeked. About an hour had passed since my arrival and visitor traffic was increasing. Still my name had not been called to “photograph” the 2nd floor. I knew I had to make a move. Fortuitously, the waiting-room guard left his station to escort the beautiful lady. Now was the time. I walked down the corridor to the Negro guard at the front entrance, shoved the .38 in his gut, and escorted him out of the building. A woman awaiting an elevator suspected nothing. Outside I told the Negro to walk North and keep walking. He was a tall-lanky dude with red-veined cornea. I returned to the lobby, waited briefly then returned outside. The Negro guard disobeyed and was walking east toward the police station. I warned him that cross-hairs were zeroed in on his spine. One more step and my “comrade’ in the bushes would kill him. Fortunately there were no pedestrians to overhear. The Negro turned and walked north. I never saw him again. At the trial the black attorney praised him for his courage.
Back inside I walked down the corridor and up the marble stairs to the balcony. There, five or six men and women were conversing before the closed board room doors. Harry approached me, testily. I didn’t call you, sir. Go back downstairs and wait. I displayed the .38, keeping the barrel lowered to he couldn’t see the empty cylinders. Sotto voce, escort me to Volcker’s office. Now. I’m going to arrest him. No one will be hurt. Get your ass moving. I ain’t going nowhere, says the ex-Marine. The talking group disappeared down the hall. In that case Harry I’m going to kill you. OK, kill me. Quiet, keep your voice down. Where to you want it Harry, gut or head ? Do it, Harry says. Harry, you dumb bastard. Don’t you know the FED killed your buddies in Nam? I ain’t leaving. Harry, you can help America. Expose the g-d- Jews. Kill me, he says. One last time, I shoved the gun in his gut. NO, says he. Never expect a U.S. Marine to leave his post. I handed my revolver to him (later, in court, he testified that he jumped me and wrestled the weapon from me. Good man, Harry). I removed my trench-coat, went to the ante-room and sat down. A regiment of armed cops arrived. I told them to note that I had no ammo. They handcuffed me. A bomb-detection-team arrived to inspect the camera-case “bomb.” Soon I was hustled into a police van. There were iron benches and nothing to hold on to. It was dark inside. I was given a “joy-ride,” bounced around like dice in a shaker: slammed from wall to wall, as the driver hit every curb and pothole that he could find. Hard on the crotch. My trousers were soaked with blood.
The first night was spent in a two man cell with a white druggie. The floor covered with vomit. The only white man I saw in the DC jail, police and inmates were ALL black. My Parole Officer, appointed by the Court, was a Jew rabbi. I’m tempted to recount my prison experiences — which included fights, suicides, murders, sympathetic nurses, librarians and purloined legal documents, but that is another story probably never to be told. No time.
Suddenly, out of nowhere, a distinguished gentleman, Elgin Groseclose (America’s Money Machine) entered the fray. The 83-year old monetary expert had appeared in that capacity before Congress on numerous occasions. He telephoned me, introduced himself, set a date to meet with him in his D.C. office. He was slim, tall, nattily attired, with white hair and kindly eyes. After an exploratory conversation during which I stated my case, he volunteered to testify in my behalf. He refused to meet with me again. And would not assist in the preparation of my case. He sought impartiality. A few months later he died of cancer
Meanwhile, I was contacted by a U.S. Senator (who must remain nameless), who he offered me a plea bargain (repeated by Harriet Rosen Taylor, JEW judge, in private on the eve of the trial): If I would plead guilty to one count of gun violation (I had no DC permit) they would not prosecute me for Robbery, Burglary, Attempted Kidnapping etc. I refused. I wanted the trial broadcast to the American public. I was confident in the validity of my charges. I could find NO attorney willing to take on my case, including right-wing barristers. ACLU demurred because weapons were involved. I decided to appear pro se, in my own behalf. The government appointed an attorney, who it turned out was half Jew and was a member of NAACP. He was to guide me through courtroom protocol. However, when the prosecutor objected to my every move it became clear they would not allow me to appear pro se. So the half-JEW presented most of the arguments while Groseclose and I presented the FACTS.
I sought to subpoena Zbigniew Brzezinski, Security Advisor to Jimmy Carter; and Paul Volcker, Chairman of the Fed Brd of Governors. Brz, in his book Between Two Worlds, states that Marxism is the wave of the future, the USA must embrace it. Also Brz was appointed by David Rockefeller to organize and head the secretive Trilateral Commission, a One World organization. Paul Volcker was instrumental in floating FED loans to the USSR, to build truck plants, steel mills, etc. which produced war materials shipped to Korea and Nam, killing U.S. military personnel. The judge would not allow the traitors to be subpoenaed. Elgin Groseclose gave testimony extremely damaging to the FED. He supported my charges of FED treason; he testified that Congress was self-serving, ignorant and frightened; therefore, the FED could be removed ONLY BY FORCE. It is a tragedy that Elgin’s testimony never saw the light of day.
The courtroom was filled with Blacks and Jews. When the prosecution made a point they cheered; conversely I was booed. Judge Harriet Rosen Taylor made little effort to quiet them. The prosecution team was led by a JEW, but Nixon, a Negro, tried the case. They decided, early on, that their case was to be based on my racism. The racist charge was predicated on a 1000-word essay that I had intended to read on TV during the FED “action.” My MS, now available at www.holywesternempire.org, stemmed from that essay. There are many notable quotes therein that offend Negroes and Jews — including several by Washington, Jefferson and Lincoln. The jury and all alternates were Negroes, with one exception, a diminutive, gray-haired White lady sitting between two Negro female behemoths. Almost all the Negroes had served jail sentences, and many black ex-felons were rejected at voir dire. One black male slept through most of the trial.
A unanimous verdict was handed down. I was guilty on all counts, and sentenced to 11 years. Elgin Groseclose visited me several days later in the City Jail. He affectionately patted the glass that separated us. There were tears in his eyes. An attractive blonde seated nearby was visiting her Negro husband. It was a most depressing scenario. 6 months later I was sent to Springfield, MO, State Pen for psychiatric examination. I was declared sane “without even a hint” of paranoia, etc. However, I received a low IQ. The tests were taken in pencil, and became part of my prison records. This bothered me. Upon arriving at Ray Brook, FCI, I arranged to take Mensa tests (oral and written). A prison psychologist was sent in to administer them. He had a lisp! Even so, much to my surprise, I was admitted to Mensa. Meanwhile. My preparations for Appeal went badly. The court appointed another attorney who didn’t even have an office! By the time his brief reached me in prison, the Appeal had been adjudicated. Ben Wilson, my Easton, Md, attorney, was hesitant but finally agreed appear in my behalf before the Court of Appeals. Ben had Jew clients. He received Admiral Crommelin’s plea in my behalf; painstakingly written in longhand. The Admiral asked Ben to review it, have it typed in legal format, and then present it before my court appointed attorney made his Appeal. Meanwhile, Adm. Crommelin had personally met with Pres. Ronald Reagan in my behalf (I have a photograph of John and the President). The day of the Appeal, Ben and my sister appeared at court. The three appellate judges were Black, Jew and White. Sadly, Ben had suffered cold feet. For this Crommelin holds Ben Wilson in utter contempt. Ben had not prepared Crommelin’s appeal and he arranged to arrive in court after the decision was handed down, i.e., Guilty on all counts. BELOW IS A LETTER that I wrote while in prison to SecNav James Webb. I hoped to interest him in my case. The letter explains in detail how the Government rigged my trial.
Honorable James Henry Webb. Jr,
U.S. Secretary of the Navy
Washington, D.C. 20500
James W. von Brunn Federal Prisoner #07128-016
FCI Ray Brook, N.Y. 12977
Federal Reserve Caper”
Banks Won Concessions on Tests
Fed Cut Billions Off Some Initial Capital-Shortfall Estimates;
Tempers Flare at Wells
The Federal Reserve significantly scaled back the size of the capital hole facing some of the nation’s biggest banks shortly before concluding its stress tests, following two weeks of intense bargaining.
In addition, according to bank and government officials, the Fed used a different measurement of bank-capital levels than analysts and investors had been expecting, resulting in much smaller capital deficits.
The overall reaction to the stress tests, announced Thursday, has been generally positive. But the haggling between the government and the banks shows the sometimes-tense nature of the negotiations that occurred before the final results were made public.
Government officials defended their handling of the stress tests, saying they were responsive to industry feedback while maintaining the tests’ rigor.
Interactives: Compare Banks Tested
Bank by Bank Findings
When the Fed last month informed banks of its preliminary stress-test findings, executives at corporations including Bank of America Corp., Citigroup Inc. and Wells Fargo & Co. were furious with what they viewed as the Fed’s exaggerated capital holes. A senior executive at one bank fumed that the Fed’s initial estimate was “mind-numbingly” large. Bank of America was “shocked” when it saw its initial figure, which was more than $50 billion, according to a person familiar with the negotiations.
At least half of the banks pushed back, according to people with direct knowledge of the process. Some argued the Fed was underestimating the banks’ ability to cover anticipated losses with revenue growth and aggressive cost-cutting. Others urged regulators to give them more credit for pending transactions that would thicken their capital cushions.
At times, frustrations boiled over. Negotiations with Wells Fargo, where Chairman Richard Kovacevich had publicly derided the stress tests as “asinine,” were particularly heated, according to people familiar with the matter. Government officials worried San Francisco-based Wells might file a lawsuit contesting the Fed’s findings.
The Fed ultimately accepted some of the banks’ pleas, but rejected others. Shortly before the test results were unveiled Thursday, the capital shortfalls at some banks shrank, in some cases dramatically, according to people familiar with the matter.
Bank of America’s final gap was $33.9 billion, down from an earlier estimate of more than $50 billion, according to a person familiar with the negotiations.
A Bank of America spokesman wouldn’t comment on how much the previous gap was reduced, though he said it resulted from an adjustment for first-quarter results and errors made by regulators in their analysis. “It wasn’t lobbying,” he said.
Wells Fargo’s capital hole shrank to $13.7 billion, according to people familiar with the matter. Before adjusting for first-quarter results and other factors, the figure was $17.3 billion, according to a federal document.
“In the end we agreed with the number. We didn’t necessarily like the number,” said Wells Fargo Chief Financial Officer Howard Atkins. He said the company was particularly unhappy with the Fed’s assumptions about Wells Fargo’s revenue outlook.
At Fifth Third Bancorp, the Fed was preparing to tell the Cincinnati-based bank to find $2.6 billion in capital, but the final tally dropped to $1.1 billion. Fifth Third said the decline stemmed in part from regulators giving it credit for selling a part of a business line.
Citigroup’s capital shortfall was initially pegged at roughly $35 billion, according to people familiar with the matter. The ultimate number was $5.5 billion. Executives persuaded the Fed to include the future capital-boosting impacts of pending transactions.
SunTrust Banks Inc. also persuaded the Fed to significantly reduce the size of its estimated capital gap to $2.2 billion, after identifying mathematical errors in the Fed’s earlier calculations, according to a person familiar with the matter.
PNC Financial Services Group Inc., saw a capital hole materialize at the last minute. As recently as Wednesday, PNC executives were under the impression they wouldn’t need to find any new capital, according to people familiar with the matter. Thursday morning, the Fed informed PNC that it had a $600 million shortfall.
Regulators said other banks also were told they needed more capital than initially projected.
The Fed’s findings were less severe than some experts had been bracing for. A weeklong rally in bank stocks continued Friday, with the KBW Bank Stocks index surging 10%. Investors were especially relieved by the relatively small capital holes at regional banks. Shares of Fifth Third soared 59%, while Regions Financial Corp.’s $2.5 billion deficit led to a 25% leap in its stock.
With the stress tests, government officials were walking a fine line. If the regulators were too tough on banks, they risked angering their constituents and spooking markets. But if they were too soft, the tests could have lost credibility, defeating their basic confidence-building purpose.
All the back-and-forth is typical of the way regulators traditionally wrap up their examinations of banks: Regulators often present preliminary findings to lenders and then give them time to respond. The process can result in changes to the regulators’ initial conclusions. Some of the stress-test revisions, for instance, were made to account for the beneficial impact of the industry’s strong first-quarter profits.
On Friday, some analysts questioned the yardstick, known as Tier 1 common capital, that regulators chose to assess capital levels. Many experts had assumed the Fed would use a better-known metric called tangible common equity.
According to Gerard Cassidy, an analyst with RBC Capital Markets, the 19 banks’ cumulative shortfall would have been more than $68 billion deeper if the government had used the latter metric, which accounts for unrealized losses.
Federal officials said their projections reflected the most comprehensive analysis ever conducted of the industry.
The test results showed that the 19 banks faced a total of $599 billion in losses over the next two years under the government’s worst-case, Depression-like scenario. The Fed directed 10 banks to add a total of nearly $75 billion to their capital buffers to insulate themselves from potential losses.
Banks pressed ahead on Friday with plans to fill their capital holes by tapping public markets. Wells Fargo raised $7.5 billion in stock through a public offering. The bank originally planned to raise $6 billion, but expanded the offering, which was valued at $22 a share, due to robust demand. Shares of Wells Fargo rallied $3.42, or 14% to $28.18.
Morgan Stanley, which is facing a $1.8 billion capital hole, raised $4 billion by selling stock. Shares of Morgan rose $1.06, or 4%, to $28.20.
—Robin Sidel and Maurice Tamman contributed to this article.
Bankers Eschewed Subprime Loans, Mortgage Securities; The Result — No Bank Failures
Two more U.S. banks were taken over by the government overnight. And while a number of this country’s biggest banks reported improving conditions this week, some of their accounting methods have been questioned.
One place where none of this banking drama is taking place is Canada, as CBS Evening News weekend anchor Jeff Glor reports.
Ed Clark is a plainspoken, polite and prudent Canadian bank CEO with a few simple rules: “We should never do things for our customers and clients that we don’t actually understand. If you wouldn’t put your mother-in-law in this, don’t put our clients in it.”
You may never have heard of Clark or Toronto Dominion bank (aka TD Bank), but it’s the sixth-largest bank in North America – and, in the middle of a global banking crisis, a profitable one at that.
“We will make more money in this quarter than any bank in North America,” Clark said. “So for a little Canadian bank sitting up here, yeah that feels pretty good.”
How did that come to pass?
“Basically, because we didn’t do the things that blew other banks up,” Clark said.
And neither did TD Banks’s Canadian brethren. In the last quarter of 2008, all of Canada’s major banks were profitable, collectively making $2.5 billion during a period when U.S. banks lost more than $26 billion.
In fact, since the financial crisis began, American taxpayers have provided more than $300 billion dollars to more than 450 companies. During that same period, from their government, Canadian banks have not received one penny.
One reason: Take those infamous subprime mortgages given to risky homebuyers. They crippled banks in the U.S., where at peak, 25 percent of loans were subprime. In Canada? Three percent.
“Our U.S. subsidiaries did not do any subprime lending. Nothing. Zero,” Clark said. “We just said, ‘Stay away from this stuff. We know where this is going.'”
Another villain in the financial crisis were toxic mortgage-backed securities – risky loans that were chopped up and resold in countless different ways. Many banks gobbled up the now virtually worthless investments. Ed Clark got out 4 years ago saying they were just too complex.
Clark: “As soon as you see that complexity, you say, ‘How can I possibly think I actually can guess whether this will work or not?’ And as soon as I hear that, I say, ‘Get out of it.'”
Sherry Cooper spent years at the Fed overseeing Wall Street, before moving to Bay Street, the Canadian equivalent.
“It didn’t take long for me to discover that this is an entirely different culture,” said Cooper, chief economist at the Bank of Montreal. “Canadian banks were up to their ankles in the toxic muck whereas American banks were over there heads.”
“A lot of this is about saying, ‘Here are old banking rules, and we’re prepared to give up short term profit in order to make sure we have a balance sheet that doesn’t blow up on us,'” Clark said.
One reason why Canada is the only industrialized nation in the world without a single bank failure in the current economic downturn.
The global economic crisis isn’t about money – it’s about power. How Wall Street insiders are using the bailout to stage a revolution
The Big Takeover-
It’s over — we’re officially, royally fucked. No empire can survive being rendered a permanent laughingstock, which is what happened as of a few weeks ago, when the buffoons who have been running things in this country finally went one step too far. It happened when Treasury Secretary Timothy Geithner was forced to admit that he was once again going to have to stuff billions of taxpayer dollars into a dying insurance giant called AIG, itself a profound symbol of our national decline — a corporation that got rich insuring the concrete and steel of American industry in the country’s heyday, only to destroy itself chasing phantom fortunes at the Wall Street card tables, like a dissolute nobleman gambling away the family estate in the waning days of the British Empire.
The latest bailout came as AIG admitted to having just posted the largest quarterly loss in American corporate history — some $61.7 billion. In the final three months of last year, the company lost more than $27 million every hour. That’s $465,000 a minute, a yearly income for a median American household every six seconds, roughly $7,750 a second. And all this happened at the end of eight straight years that America devoted to frantically chasing the shadow of a terrorist threat to no avail, eight years spent stopping every citizen at every airport to search every purse, bag, crotch and briefcase for juice boxes and explosive tubes of toothpaste. Yet in the end, our government had no mechanism for searching the balance sheets of companies that held life-or-death power over our society and was unable to spot holes in the national economy the size of Libya (whose entire GDP last year was smaller than AIG’s 2008 losses).
So it’s time to admit it: We’re fools, protagonists in a kind of gruesome comedy about the marriage of greed and stupidity. And the worst part about it is that we’re still in denial — we still think this is some kind of unfortunate accident, not something that was created by the group of psychopaths on Wall Street whom we allowed to gang-rape the American Dream. When Geithner announced the new $30 billion bailout, the party line was that poor AIG was just a victim of a lot of shitty luck — bad year for business, you know, what with the financial crisis and all. Edward Liddy, the company’s CEO, actually compared it to catching a cold: “The marketplace is a pretty crummy place to be right now,” he said. “When the world catches pneumonia, we get it too.” In a pathetic attempt at name-dropping, he even whined that AIG was being “consumed by the same issues that are driving house prices down and 401K statements down and Warren Buffet’s investment 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.
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 Sen. Phil Gramm — a grinning, laissez-faire ideologue from Texas — had finished engineering the most dramatic deregulation of the financial industry since Emperor Hien Tsung invented paper money in 806 A.D. For years, Washington had kept a watchful eye on the nation’s banks. Ever since the Great Depression, commercial banks — those that kept money on deposit for individuals and businesses — had not been allowed to double as investment banks, which raise money by issuing and selling securities. The Glass-Steagall Act, passed during the Depression, also prevented banks of any kind from getting into the insurance business.
But in the late Nineties, a few years before Cassano took over AIGFP, all that changed. The Democrats, tired of getting slaughtered in the fundraising arena by Republicans, decided to throw off their old reliance on unions and interest groups and become more “business-friendly.” Wall Street responded by flooding Washington with money, buying allies in both parties. In the 10-year period beginning in 1998, financial companies spent $1.7 billion on federal campaign contributions and another $3.4 billion on lobbyists. They quickly got what they paid for. In 1999, Gramm co-sponsored a bill that repealed key aspects of the Glass-Steagall Act, smoothing the way for the creation of financial megafirms like Citigroup. The move did away with the built-in protections afforded by smaller banks. In the old days, a local banker knew the people whose loans were on his balance sheet: He wasn’t going to give a million-dollar mortgage to a homeless meth addict, since he would have to keep that loan on his books. But a giant merged bank might write that loan and then sell it off to some fool in China, and who cared?
The very next year, Gramm compounded the problem by writing a sweeping new law called the Commodity Futures Modernization Act that made it impossible to regulate credit swaps as either gambling or securities. Commercial banks — which, thanks to Gramm, were now competing directly with investment banks for customers — were driven to buy credit swaps to loosen capital in search of higher yields. “By ruling that credit-default swaps were not gaming and not a security, the way was cleared for the growth of the market,” said Eric Dinallo, head of the New York State Insurance Department.
The blanket exemption meant that Joe Cassano could now sell as many CDS contracts as he wanted, building up as huge a position as he wanted, without anyone in government saying a word. “You have to remember, investment banks aren’t in the business of making huge directional bets,” says the government source involved in the AIG bailout. When investment banks write CDS deals, they hedge them. But insurance companies don’t have to hedge. And that’s what AIG did. “They just bet massively long on the housing market,” says the source. “Billions and billions.”
In the biggest joke of all, Cassano’s wheeling and dealing was regulated by the Office of Thrift Supervision, an agency that would prove to be defiantly uninterested in keeping watch over his operations. How a behemoth like AIG came to be regulated by the little-known and relatively small OTS is yet another triumph of the deregulatory instinct. Under another law passed in 1999, certain kinds of holding companies could choose the OTS as their regulator, provided they owned one or more thrifts (better known as savings-and-loans). Because the OTS was viewed as more compliant than the Fed or the Securities and Exchange Commission, companies rushed to reclassify themselves as thrifts. In 1999, AIG purchased a thrift in Delaware and managed to get approval for OTS regulation of its entire operation.
Making matters even more hilarious, AIGFP — a London-based subsidiary of an American insurance company — ought to have been regulated by one of Europe’s more stringent regulators, like Britain’s Financial Services Authority. But the OTS managed to convince the Europeans that it had the muscle to regulate these giant companies. By 2007, the EU had conferred legitimacy to OTS supervision of three mammoth firms — GE, AIG and Ameriprise.
That same year, as the subprime crisis was exploding, the Government Accountability Office criticized the OTS, noting a “disparity between the size of the agency and the diverse firms it oversees.” Among other things, the GAO report noted that the entire OTS had only one insurance specialist on staff — and this despite the fact that it was the primary regulator for the world’s largest insurer!
“There’s this notion that the regulators couldn’t do anything to stop AIG,” says a government official who was present during the bailout. “That’s bullshit. What you have to understand is that these regulators have ultimate power. They can send you a letter and say, ‘You don’t exist anymore,’ and that’s basically that. They don’t even really need due process. The OTS could have said, ‘We’re going to pull your charter; we’re going to pull your license; we’re going to sue you.’ And getting sued by your primary regulator is the kiss of death.”
When AIG finally blew up, the OTS regulator ostensibly in charge of overseeing the insurance giant — a guy named C.K. Lee — basically admitted that he had blown it. His mistake, Lee said, was that he believed all those credit swaps in Cassano’s portfolio were “fairly benign products.” Why? Because the company told him so. “The judgment the company was making was that there was no big credit risk,” he explained. (Lee now works as Midwest region director of the OTS; the agency declined to make him available for an interview.)
In early March, after the latest bailout of AIG, Treasury Secretary Timothy Geithner took what seemed to be a thinly veiled shot at the OTS, calling AIG a “huge, complex global insurance company attached to a very complicated investment bank/hedge fund that was allowed to build up without any adult supervision.” But even without that “adult supervision,” AIG might have been OK had it not been for a complete lack of internal controls. For six months before its meltdown, according to insiders, the company had been searching for a full-time chief financial officer and a chief risk-assessment officer, but never got around to hiring either. That meant that the 18th-largest company in the world had no one checking to make sure its balance sheet was safe and no one keeping track of how much cash and assets the firm had on hand. The situation was so bad that when outside consultants were called in a few weeks before the bailout, senior executives were unable to answer even the most basic questions about their company — like, for instance, how much exposure the firm had to the 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 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 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 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 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, U.S. securities and even mortgage-backed securities from institutions like Goldman Sachs and J.P. Morgan, who would then “repurchase” them in a short period of time, usually one to seven days. This was the Fed’s primary mechanism for controlling interest rates: Buying up securities gives banks more money to lend, which makes interest rates go down. Selling the securities back to the banks reduces the money available for lending, which makes interest rates go up.
If you look at the weekly H4 reports going back to the summer of 2007, you start to notice something alarming. At the start of the credit crunch, around August of that year, you see the Fed buying a few more Repos than usual — $33 billion or so. By November, as private-bank reserves were dwindling to alarmingly low levels, the Fed started injecting even more cash than usual into the economy: $48 billion. By late December, the number was up to $58 billion; by the following March, around the time of the Bear Stearns rescue, the Repo number had jumped to $77 billion. In the week of May 1st, 2008, the number was $115 billion — “out of control now,” according to one congressional aide. For the rest of 2008, the numbers remained similarly in the stratosphere, the Fed pumping as much as $125 billion of these short-term loans into the economy — until suddenly, at the start of this year, the number drops to nothing. Zero.
The reason the number has dropped to nothing is that the Fed had simply stopped using relatively transparent devices like repurchase agreements to pump its money into the hands of private companies. By early 2009, a whole series of new government operations had been invented to inject cash into the economy, most all of them completely secretive and with names you’ve never heard of. There is the Term Auction Facility, the Term Securities Lending Facility, the Primary Dealer Credit Facility, the Commercial Paper Funding Facility and a monster called the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (boasting the chat-room horror-show acronym ABCPMMMFLF). For good measure, there’s also something called a Money Market Investor Funding Facility, plus three facilities called Maiden Lane I, II and III to aid bailout recipients like Bear Stearns and 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 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 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 Sen. Bernie Sanders. “It is beyond comprehension.”
Count Sanders among those who don’t buy the argument that Wall Street firms shouldn’t have to face being outed as recipients of public funds, that making this information public might cause investors to panic and dump their holdings in these firms. “I guess if we made that public, they’d go on strike or something,” he muses.
And the Fed isn’t the only arm of the bailout that has closed ranks. The Treasury, too, has maintained incredible secrecy surrounding its implementation even of the TARP program, which was mandated by Congress. To this date, no one knows exactly what criteria the Treasury Department used to determine which banks received bailout funds and which didn’t — particularly the first $350 billion given out under Bush appointee Hank Paulson.
The situation with the first TARP payments grew so absurd that when the Congressional Oversight Panel, charged with monitoring the bailout money, sent a query to Paulson asking how he decided whom to give money to, Treasury responded — and this isn’t a joke — by directing the panel to a copy of the TARP application form on its website. Elizabeth Warren, the chair of the Congressional Oversight Panel, was struck nearly speechless by the response.
“Do you believe that?” she says incredulously. “That’s not what we had in mind.”
Another member of Congress, who asked not to be named, offers his own theory about the TARP process. “I think basically if you knew Hank Paulson, you got the money,” he says.
This cozy arrangement created yet another opportunity for big banks to devour market share at the expense of smaller regional lenders. While all the bigwigs at Citi and Goldman and Bank of America who had Paulson on speed-dial got bailed out right away — remember that TARP was originally passed because money had to be lent right now, that day, that minute, to stave off emergency — many small banks are still waiting for help. Five months into the TARP program, some not only haven’t received any funds, they haven’t even gotten a call back about 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 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 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.