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Back to The Big Takeover

The Big TakeoverThe global economic crisis isn't about money - it's  
about power. How Wall Street insiders are using the bailout to stage a  
revolution
MATT TAIBBI

Posted Mar 19, 2009 12:49 PM

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

I. PATIENT ZERO

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

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

The mess Cassano created had its roots in an investment boom fueled in  
part by a relatively new type of financial instrument called a  
collateralized-debt obligation. A CDO is like a box full of diced-up  
assets. They can be anything: mortgages, corporate loans, aircraft  
loans, credit-card loans, even other CDOs. So as X mortgage holder  
pays his bill, and Y corporate debtor pays his bill, and Z credit-card  
debtor pays his bill, money flows into the box.
The key idea behind a CDO is that there will always be at least some  
money in the box, regardless of how dicey the individual assets inside  
it are. No matter how you look at a single unemployed ex-con trying to  
pay the note on a six-bedroom house, he looks like a bad investment.  
But dump his loan in a box with a smorgasbord of auto loans, credit- 
card debt, corporate bonds and other crap, and you can be reasonably  
sure that somebody is going to pay up. Say $100 is supposed to come  
into the box every month. Even in an apocalypse, when $90 in payments  
might default, you'll still get $10. What the inventors of the CDO did  
is divide up the box into groups of investors and put that $10 into  
its own level, or "tranche." They then convinced ratings agencies like  
Moody's and S&P to give that top tranche the highest AAA rating —  
meaning it has close to zero credit risk.

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

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

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

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

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

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

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

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

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

In a span of only seven years, Cassano sold some $500 billion worth of  
CDS protection, with at least $64 billion of that tied to the subprime  
mortgage market. AIG didn't have even a fraction of that amount of  
cash on hand to cover its bets, but neither did it expect it would  
ever need any reserves. So long as defaults on the underlying  
securities remained a highly unlikely proposition, AIG was essentially  
collecting huge and steadily climbing premiums by selling insurance  
for the disaster it thought would never come.
Initially, at least, the revenues were enormous: AIGFP's returns went  
from $737 million in 1999 to $3.2 billion in 2005. Over the past seven  
years, the subsidiary's 400 employees were paid a total of $3.5  
billion; Cassano himself pocketed at least $280 million in  
compensation. Everyone made their money — and then it all went to shit.

II. THE REGULATORS

Cassano's outrageous gamble wouldn't have been possible had he not had  
the good fortune to take over AIGFP just as 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.

[From Issue 1075 — April 2, 2009]