February 19, 2010

“The Grifters”, Taibbi’s Remake


Matt Taibbi’s new Rolling Stone piece, “Wall Street’s Bailout Hustle”, attacks the great crimes of our day with his usual vigor and ferocity.
This piece doesn’t really tell us anything new, but is another piece of the ongoing project in cataloguing these crimes and describing their real nature. We basically have two narrative options. The first is to describe it in terms of classical totalitarianism, corporatism masking itself in the simulacrum of democracy and capitalism (needless to say, what’s happening has literally nothing to do with democracy and textbook “free” markets and everything to do with their complete destruction). Hannah Arendt’s monumental work The Origins of Totalitarianism remains frighteningly relevant today. More topically up to date authorities are Naomi Klein’s Shock Doctrine (which I’ve long considered practically a part four of Arendt’s book) and Chris Hedges’ attempts to popularize Sheldon Wolin’s concept of “inverted totalitarianism” (corporatist tyranny which maintains the trappings of democracy for a while), as in these two excellent pieces.
The second is to describe it in terms of gutter gangsters and con men, swindlers and thugs. Both approaches are correct, and I use both myself. Tyranny is always infused to some extent with flim-flammery and thuggery. Although perhaps this corporatist tyranny is the most brazen and undiluted kleptocracy of all.
Here Taibbi goes all in on the con man lexicography. I don’t know where he picked up these quaint-sounding terms, but they all sound dead on.
So we have the rundown on the basics of this infinite capital crime, described in terms of its true wretched, sniveling, gutter crackhead pickpocket essence.
There’s “the Swoop and Squat”, originally describing an auto insurance scam, here describing how Goldman first bought CDS on mortgage securities from AIG, then bet against those MBS, then made $5.9 billion in collateral calls on the deterioration of its own bubble in order to cash in on as much of this “insurance” as possible before AIG went bankrupt. For the grand finale, Goldman used its government influence to extort another $13 billion in theft from the taxpayers, laundered through the AIG bailout. Grand total swindled: almost $19 billion. That right there wipes out Goldman’s alleged $13.4 billion in 2009 “profits”. That’s quite an insurance claim. But there’s lots, lots more.
We have “the Dollar Store”. For no reality-based reason, Goldman and Morgan Stanley were allowed to become bank holding companies, which gave them access to infinite free money from the Fed. (In spite of the MSM’s lies at the time, this move was heads-I-win, while the tails-you-lose was that the government never for a second intended to exercise the vaunted “greater regulatory oversight” holding company status was supposed to incur.) The FDIC helpfully guaranteed almost $30 billion of borrowing by this “bank”. The Dollar Store is simply a place set up to look like a legitimate outfit but really intended to fleece the mark. Here the banks, the government, the MSM were hustling and bustling about, looking intent, speaking of “getting the banks lending again” while the gullible taxpayer was taken for all he had. (Never explained was why, if it’s all government money, we needed the banks at all. I asked that the very first day Paulson said we need to get the banks lending again, and I’m still waiting for a real answer. I’ve always known there is none.)
Everybody thinks he knows a “Pig in a Poke” when he sees one, but if he’s the average American taxpayer, apparently not. Otherwise it’s hard to explain how the Fed got away with changing its rules to accept worthless toxic crap paper as Grade-A collateral for the free money it’s been shelling out.
The “Rumanian Box” was originally a scam counterfeiting device, but via its MBS buys and QE ideology, the Fed has become the biggest counterfeiter the world has ever seen. If you’re a casino bankster, this box works flawlessly and bounteously. If you’re any kind of saver or pensioner, or anyone who depends upon a paycheck, you’re the rube who bought a box that has stopped working.
“The Big Mitt” refers to a rigged poker game. Here the government and the banksters tip one another off and manipulate the deck so that the banks always draw aces while the taxpayer always gets a worthless hand. A particularly noxious example was how Treasury tipped off the banks on the mechanisms of the PPIP scam so they could load up on toxic paper ahead of time, which would promptly be exchanged with the government for stolen taxpayer money. At what point does corruption pass over into treason?
None of us needed Taibbi to remind us of how Goldman’s high-frequency trading algorithms are simply a legalized form of “the Wire”, the old scam whereby the manipulator of inside information acts upon it before releasing it to other stakeholders, to his profit and their detriment. After months of denial Goldman was finally forced to acknowledge that it sometimes acts against its own clients’ interests, if it can see an advantage in some fast insider trade based in the info a client has given them. It’s simply astounding that Goldman Sachs is allowed to exist at all, let alone that anybody still seeks their business.
Finally, “the Reload” is where the scammer tries to hit the same mark again. In the case of the docile doormat taxpayer I guess it’s hard to resist. So no sooner had the crash occurred and the Bailout was on then all the Wall St and Washington criminals pulled together to try to reflate some bubble, any bubble. The most obvious new bubble is the stock bubble, fueled 100% by public money stolen by the banks (and perhaps even surreptitious direct government buying). But quietly the Fed and Treasury have bought far above $1 trillion in MBS to prop up toxic paper prices and try to get this bubble as well reflated. They’re so desperate for bubbles they’ve even been pretending to take climate change seriously, because via cap and trade they’re on the scent of another bubble.
Of course, they have no choice but to try to reflate the bubble. America’s real economy, any productive basis for an economy, have long since been gutted. Those aren’t coming back under the auspices of this system. The one and only way the power structure can try to preserve its wealth and power is to prop up the zombie system, keep blowing bubbles, use the crashes for disaster capitalism and to consolidate creeping totalitarianism (this to be “inverted” as long as possible). Overt mass state violence will be postponed as long as possible. The final goal is remedievalism. The restoration of the Dark Ages. A handful of warlords, a mass of starving, freezing serfs.
This is the one and only path they can tread. The only alternative is to voluntarily relinquish power, return it to the people. I doubt they’ll do this.
What comes through most clearly from all this:
1. The big banks are permanently insolvent. None has made a legitimate cent in ages, and none ever will again. Especially now, 100% of their “profit” is: (A) simply looted from the taxpayer, (B) accounting fraud, (C) the result of crimes like HFT front-running.
2. America’s apathy and docility in the face of its liquidation, this docility being a form of extremism in itself, is exceeded only by the absolute derangement of the sodomites. The orgy, the “bonuses”, the psychopathic behavior, make it clear that by now they can’t help themselves. They’re like sharks in a feeding frenzy. They’ll rip and tear and gorge and bathe in blood until all the food is destroyed and all that’s left is to rip themselves to shreds.
To harken back to yet another example from medieval history, this is a modern example of the Dance of Death.
3. Taibbi brings in one last term from con lingo – America looks like “the True Believer.” The mark is desperate not to hear what he hears, not to see what he sees, not to know what he knows, and most of all not to do what he must do to redeem what was stolen from him. Too invested in his delusions, in the false comfort of the short-term status quo, in all the lies the con man convinced him to believe to the point that by now they constitute a significant part of his identity, or perhaps all of it, he refuses to hear, to see, to know, to do.
Instead he listens as the criminal himself sidles up again with a new scam. One which convinces the mark he can get everything back if he only believes another lie and forks over what little he has left. As long as for another moment the believer, who believes so intimately in such a bundle of lies that he can’t bear the thought of existence without them, can be warmed with a new reason to believe the lie, he can stave off the coldness of reality.
And so in a sense Lloyd Blankfein is right when he says he provides something in return for his theft. He tells the True Believer the lie he needs to believe in, lest he be forced to face his fleecing. Lest he be forced to face the cold hard choice of fighting back for what’s his, or submitting once and for all, before the world, before history, before himself, to abject slavery, forever.
So the only question is, will the inertia True Believers defeat the real truth and the real call to arms?
Meanwhile, there’s no question at all about the cons themselves. There’s not enough rope in America to hang ’em all. 

December 15, 2009


Filed under: Dance of Death — Tags: — Russ @ 9:44 am


Does it make any sense to buy CDS protection against US default? How would you collect under conditions of anarchy? Tyler Durden at Zero Hedge explores:

There has been much conjecture on whether using CDS is an effective way to hedge against US default risk. Many theoreticians, especially those of the post-March lows variety, have sprung up and are speculating that buying Credit Default Swaps on the US is ultimately a futile and pointless endeavor. The main argument: a US default would likely mean that interconnected dealers won’t recognize contracts on a US default event, as they themselves will be out of business. Even if they continued to exist, like cockroaches in a postapocalyptic world, the collateral which backs derivatives is mostly US Treasurys: the same obligations that would end up being massively impaired.

It reminds me of Homer Simpson: “Joke’s on them. If the core explodes there won’t be any power to light that sign!”
Durden thinks this can be effective for the seller as a kind of currency scam, since the contract of necessity would have to be denominated in something besides dollars. I guess that depends on the sort of sucker Homer was laughing at.
So Durden disagrees with Moody’s pessimistic assessment:

Firstly, an obvious point – major dealers are riskier credits than the U.S. government. The fact that they may put up collateral against their derivative obligations offers little relief because U.S. Treasuries (the very instruments on which the credit event would occur) represent a large portion of such collateral between counterparties.Secondly, given the interconnectedness among the major global dealers, the confidence-sensitive nature of their funding, and the very large exposures they all have to the U.S. market, we think that the “wrong-way” risk of buying protection on the U.S. from any major dealer is very high. In fact, the CDS market sends a similar signal as the correlation of CDS spreads – among the dealers and to the U.S. – is indeed quite high.

I like how they get at the core of the thing:

Still, we think that this is one of the cases where financial engineering is likely to be no match for practical reality.

These kinds of limits in physics or economics, or in energy where the two intersect, always remind me of the physical limit built into E=mc2. The more power, the more resistance it automatically conjures. There’s something cosmically just about it.
Or in this case, the more insanity and hubris….I love the matter-of-fact tone Moody’s has there in describing something they’re really saying is patently insane, even if they can’t bring themselves to see it that way.
[I also like the tepid euphemism “credit event” used to talk about something like this.
In another Simpsons, it turns out Mr. Burns doesn’t like the term “meltdown”. That’s just a “media buzz-word”.
He prefers “unrequested fission surplus”.]

November 28, 2009

“Fool’s Gold” by Gillian Tett

So I recently read Gillian Tett’s Fool’s Gold, her account of the “Morgan Mafia” at JP Morgan who “innovated” the credit default swap and the mass marketization thereof.
The book is well-written and does a good job of explaining all the financial gizmos and machinations which destroyed our economy once and for all.
But in the end Tett does not successfully defend her explicit or implicit theses which are as follows.
Her overt claim is that derivatives and securitization are inherently good and useful, constructive and value-creating, and that it was only their abuse by bad apples which caused everything to go wrong.
This is on display in her very section titles: Innovation, Perversion, Disaster.
More specifically, she claims that the folks at JPMorgan (to whom she had access and who willingly cooperated with her in giving interviews, from Dimon on down to the most obscure cadres; so to a large extent this is JPM’s version of events) did their best to be responsible, accountable, prudent actors, while the bad apples were at most of the other banks.
Her implicit claim is that financialization of the economy and the extreme growth and concentration of the finance sector are also good things. (I take it for granted, after all that has happened, that anything written on the subject which isn’t attacking the sector as such has an obligation to defend its existence.)
But the evidence of the very history she and JPM lay out contradicts all of this.
Tett opens her story with a bunch of drunken frat droogs partying in Boca, reveling in vandalism and mugging one another. This kind of behavior continues throughout the story, unfortunately on more socially destructive levels.
It was at this Boca conference in 1994 that the Morgan Mafia, as the swaps team called themselves, zeroed in on the idea of credit default swaps. This was an extension of existing interest rate swaps, and wasn’t a completely new idea, but the JPM crew really made it work. As will be the pattern throughout the tale, they weren’t doing this in response to any social or even “market” need, but proactively thought it up toward the goals of greater rents and attacking regulation.
They spent the next few years mucking around (by their standards) with the idea, doing a few big deals. But the real goal was to standardize this method of selling risk. They eventually bundled $10 billion worth of JPM risk on existing corporate loans, securitized it, induced Moody’s to give these securities a AAA rating, and in December 1997 marketed it through an SPV shell company (in order to evade taxes). The model was now complete.
When the dotcom bubble crashed, followed by the Enron and Worldcom troubles, nobody took these as evidence that financialization needed to be reined in. On the contrary, CDS were touted as having successfully spread out the risk. Meanwhile, the Fed had embarked upon its easy money policy. So for CDS the lesson and the incentive were clear: They were now to be used to help blow up the mortgage bubble.
Ironically, after having “innovated” the CDS instrument, JPM itself never fully committed to mortgage securities. They could never figure out how correlated mortgage defaults might be, and therefore what the real level of risk was. So they only did two big CDS-MBS deals and then backed off. Similarly, in 2005 Dimon wanted to prioritize mortgage securitization. They spent much of the year setting up an “assembly line” structure to compile, bundle, slice, and sell these securities. But no sooner was the mechanism in place than in early 2006 the mortgage market showed signs of stalling. As defaults started racking up in San Francisco, Las Vegas, Miami and elsewhere, JPM held back once again.
In the end this conservatism served JPM well. When the crash finally came, it was one of the few banks whose balance sheet wasn’t loaded down with toxic paper, and the only one the government could readily turn to as the “private” face of the corporatist bailouts. Tett attributes this to a longstanding corporate culture which allegedly valued teamwork, loyalty, long-term relationships over the Darwinist “eat what you kill” ethos at other banks. Back in 1933 under Congressional grilling JP Morgan Jr. had assured the world that the bank’s mission was to engage in “first class business…in a first class way”. This became a mantra at the bank.
By 2008 this branding, after the neglect of some years, came back to the fore. When Chase Manhattan bought JPM in 2000, although they placed Morgan’s name first in the new combined name “JPMorgan Chase” for this branding purpose, they studiedly dropped the pretentious periods from “J.P. Morgan”, something the JPMers had always taken pride in, just to show who was boss.
Now the periods were back with a vengeance. With the whole system on the verge of collapse, the J.P. Morgan brand name was of great value. But any social value connotation of this was a scam. JPM was in disaster capitalist mode, with Dimon scanning the horizon for M&A opportunities among the wounded. First Bear and later WaMu were the two big feasts JPM enjoyed using public backstops to again mitigate their risk.
As the whole story shows, JPM’s conservatism was never out of any social responsibility or even a real desire to be “first class”, but only out of self-interest. Nothing in the book can elide the fact that even at relatively conservative JPM most of this “innovation” was not in response to any market request but was gratuitously dreamt up and aggressively marketed to buyers who had originally wanted no such thing. Tett quotes Peter Hancock, the early head of the derivatives team: “The idea that we gave the most emphasis to was using derivatives to manage the risk attached to the loan book of banks”.
She goes on:

Players…had different motives for wanting to place bets on future asset prices. Some investors liked derivatives because they wanted to control risk, like the wheat farmers who preferred to lock in a profitable price. Others wanted to use them to make high-risk bets in the hope of making windfall profits. The crucial point about derivatives was that they could do two things: help investors reduce risk or create a good deal more risk. Everything depended on how they were used and on the motives and skills of those who traded in them……

It was only many years later that the team realized the full implications of their ideas, known as credit derivatives. As with all derivatives, these tools were to offer a way of controlling risk, but they could also amplify it. It all depended on how they were used. The first of these results was what attracted Hancock and his team to the pursuit. It would be the second feature which would come to dominate business a decade later, eventually leading to a worldwide financial catastrophe.

But this is belied by every action of this team. On the contrary, from day one team members were focused on politically leveraging risk insurance toward deregulatory lobbying, in order to further amplify risk and rents. The real motives were never anything more than unproductive rent-seeking and regulation-bashing. As for better managing risk, on the evidence of this book no one ever valued any opportunity to build resiliency into the system, to create slack. On the contrary, every space that risk management opened immediately had further risk crammed into it. Nobody seems to have noticed the fallacy here, that is assuming, as Tett seems to, that anyone ever actually cared about “better” risk management, as opposed to generating the fraudulent simulacrum of it to extract further rents and attack regulation.  
Hancock’s real mindset came through more clearly when he decried the “curse of the innovation cycle”, meaning that he lamented that all real financial innovation had long since been completed. He hated what human beings call the proper functioning of an economic sector as it matures, provides its necessary services more efficiently, because then profits go down to their natural mature level. Hancock and his fellow mafioso were out to “innovate” new scams in order to prevent sector maturation and efficiency from prevailing. Similarly Mark Brickell, another Morgan cadre, aptly compared what they were doing to the Manhattan Project. Then there’s the charming Tim Frost, a hard core corporatist ideologue who liked decorating his work space with portraits of “shabby unemployed British miners”. These were a comic centerpiece for his jokes about what happens when returns are bad.
In Brickell’s case the intent to wage total war on society was overt, as his incessant Hayekian market fundamentalist proselytization demonstrates. His real passion was deregulation.

Brickell took the free-market faith to the extreme. His intellectual heroes, in addition to Hayek, were economists Eugene F. Fama and Merton H. Miller, who developed the Efficient Markets Hypothesis at Chicago University in the 1960s and 1970s, which asserted that market prices were always “right”. They were the only true guide to what anything should be worth. “I am a great believer in the self-healing power of markets”, Brickell often said, with an intense, evangelical glint in his blue eyes. “Markets can correct excess far better than any government. Market discipline is the best discipline there is.”

Peter Hancock shared that view, though he rarely expressed it so forcefully in public. So did most other swaps traders.

The International Swaps and derivatives Association (ISDA), the “industry” lobbying group, under Brickell’s personal leadership spread the gospel of voluntary “market discipline”, “the self-healing power of markets”, “rules designed by the industry itself and upheld by voluntary, mutual accord”. “Bankers and their lawyers were better-informed, and they had strong incentives to comply.” The libertarian bullshit was piled high. The quants added the mystique of math, “Value at Risk” (VaR) to the mix.
Between the Chicago ideology, the mathematical assurance that risk had been tamed, and of course the bribes, Brickell and his horde accomplished their goals. They first staved off new regulation in the aftermath of the Orange County bankruptcy in 1994, then launched their real lobbying offensive. The dream was to not only get risk off the books so that it didn’t eat up the reserve requirements, but to convince regulators to lower the requirements themselves. They convinced the Fed and the CFTC in 1996. (They actually had a harder time convincing JPM’s own management to loosen internal restrictions.)
Led by the Morgan cadres, the deregulatory offensive reached its crescendo at the turn of the millennium with the repeal of Glass-Steagal and, with the CFMA in 2000, the explicit declaration that swaps were not securities and beyond CFTC purview. This happened in an atmosphere of absolute fanaticism over technology, “innovation”, and most of all “growth”. The very fact that none of it had any real-world basis played up the religious aspect of it all.
What was the role in all this of derivatives in general and the Morgan mafia in particular? Tett’s own evidence demonstrates that:
1. The JPM cadres themselves took the lead in using these innovations as the pretext for deregulation.
2. Any “innovation” was quickly put to “abusive” uses.
3. That everyone “abused” securities, and that the clear goal of deregulation was to open up space for these abuses, seems to indicate that these uses weren’t really abuses, but rather that the banks entered the deregulated vacuum using CDS and everything else exactly as intended. It seems that, rather than being the only “responsible” player, JPM was unusually conservative.
More to the point, they got lucky. In particular, the mortgage problems arose in early 2006 just when JPM was about to take the plunge. If this had been delayed for another year, or if JPM’s strategy had been implemented one year earlier, they’d have been caught out just like the others.
So the evidence proves that their intentions were always malevolent, and also doesn’t strongly support the proposition that they “knew” what they were doing much better than everyone else.
This is reinforced by JPM’s behavior since the crash. By then the original JPM team was dispersed throughout the sector, but the diaspora rejoined for a collective bout of whining, finger-pointing, CYA and ideological reaffirmation, even cultivating martyr fantasies. The basic line is the same: We’re innocent, derivatives are good, it was just bad apples who abused them. Most still sing the ideological gospel (though Greenspan’s partial recantation has given a few pause).
As for JPM itself, it has used the strength it gained from the bailout to go hunting. It’s now the world’s biggest bank in terms of market capitalization. It has used its prime position to follow Goldman Sachs into a more overt corporatist partnership with government. (If Dimon really is gearing up to become Treasury Secretary as some reports say, this would be the public consummation of that process.)
The real voice of JPM, most truly in synch with JPM’s actions and the actions of the sector as a whole, remains the fascist Mark Brickell. As the crisis descended he never flinched from triumphalism, self-congratulation, and continued ideological assault.
In April 2008, basking in the glow of JPM’s public-enabled fire sale purchase of Bear Stearns, Brickell raved at the ISDA’s annual conference:

As Brickell stood at the podium in the ballroom of the Vienna Hilton, history weighed on him. ISDA had gathered in the same city two decades earlier, and Brickell considered that symbolically appropriate. Vienna was the home of the great free-market economist Freidrich von Hayek, Brickell’s hero. “[Twenty years ago] we set out to design a business guided by market discipline because we believed it should be an even better guide to good behavior than regulatory proscription”, he observed. “The credit crunch gives good evidence that market discipline has guided the derivatives business better than regulation has steered housing finance.”

Brickell remained as opposed as ever to the idea that governments should intervene. “Hayek believed that markets would create a rhythm of their own, that they are self-healing. That is something we should all remember and honor today”, he told the audience. “When governments arrive to help, there is always a price to be paid that often takes the form of greater regulation”.

Every word of this is an Orwellian window into the black larcenous nihilism of gutter evil. The destruction of the real economy, of millions of jobs, is indeed the “discipline” and the “healing”, most of all the “good behavior”, they want to impose upon us all. JPM and the stronger elements of the sector were entering full disaster capitalist mode.
Tett’s book makes clear, in matching words to actions, that not only was there never any good, constructive intention on the part of these operatives, but almost none of them even learned a lesson from or feel remorse over the crisis and all the destruction it has wrought.
On the contrary, most of them are geared up for further battle. They fully intend to keep committing the same crimes. I think this book could provide some useful evidence for a future Nuremburg-style tribunal. It’s an important history of how this gangster network conspired against the wealth and social stability and security of the people.
One of the few cadres who retained some skepticism during the process was Andrew Feldstein.

Back in the days when the JPMorgan team had concocted its derivatives dream, Feldstein had believed deeply in the intellectual arguments behind financial innovation. He was utterly convinced that if tools such as derivatives were implemented in a rational, efficient manner, they would vastly improve the financial system and economy. It was the dream that drove them all.

But after living through the mess of the Chase-JPMorgan merger, Feldstein became cynical. He still believed derivatives had the theoretical potential to make markets function better, but in practice, dysfunctional management and warped incentives for traders and the ratings agencies were badly distorting the CDO market. He understood the ways in which the banks were playing around to garner good ratings and make end runs around the regulatory system, and the situation troubled him. But it also presented a trading opportunity.

So – he was an ideological believer, and he still “believed”, yet in doublethink, as he saw how it didn’t work in the real world. But so what; it was also a “trading opportunity”.
That can sum up every ideologue of all times.

November 17, 2009

Regulation: Fed Up

As Congress debates an alleged attempt* at renewed regulation of the finance sector, one of the main issues is the proper scope of Fed authority.
[*Let’s never forget, short of breaking up the Too Big To Fails it’s all kabuki. All the debate over resolution authority is moonshine at best, disaster capitalism at worst, since none of the on-the-table proposals contemplate anything more than “resolving” TBTF entities when they again start to collapse. None seek to break them all up preemptively.
For that proposal we have to go to Bernie Sanders.]
It’s quite a fracas, with the Fed wanting to preserve and expand its powers; the administration and Frank dithering on distributing power between the Fed, the FDIC, some new “council”, and a newly merged OCC and OTS, but always wanting to maintain broad Fed power; and Dodd actually wanting to strip some Fed power and repose it in the OCC/OTS entity.
But in assessing all this we should always remain crystal clear that the Fed is not a regulator and does not see itself as one. It seeks regulatory authority only to put that range of authority on ice and open up a free fire zone for the banks, with whom it culturally identifies, and with whose personnel its personnel personally identify.
It’s a quasi-public entity only for legal and constitutional arbitrage purposes. Thus it argues its “public” status when convenient to shield it from various kinds of lawsuits and other accountability. But in its own mind it’s a private bank and the orchestrator of anti-public bank feudalism.
For a case study in all this, we have the new SIGTARP report (linked here) on the AIG swap contract resolutions.
This is the notorious incident where the Bush administration, having already bailed out the banks in numerous ways, laundered yet another bailout through AIG via the mechanism of paying off AIG-written CDSs at par.
The gamblers not only had their losses covered but here their losing bets were actually paid off as winners.
We’ve always known this was a corrupt act of theft from the people, organized by Tim Geithner at Goldman Sach’s behest, but thanks to the excellent Neil Barofsky and his investigation we have new details and analysis.
Geithner was supposed to conduct a negotiation with the AIG swapholders on behalf of the taxpayers whose money had bailed out AIG as well as many of those same counterparties. Barofsky found that the Swiss UBS volunteered to accept 98 cents on the dollar. But when Goldman and the French dug in and demanded a full payout, Geithner caved in. GS, acting as ringleader, was confident after the first AIG bailout that the government (it’s taxpayer money so I’m using “Fed” and “government” as synonyms) would bail everybody out across the board, and this was the line they followed.
Barofsky found that the Fed “refused to use its considerable leverage”. (He also correctly gets to the heart of the fact that actions are everything, conscious motive nothing: Geithner and the Fed cadres may deny it, but “irrespective of their  stated intent…tens of billions of government money was funneled inexorably and directly to AIG’s counterparties”. That’s a capital crime by its existential fact, and nothing can mitigate it.)
The report lays out the Fed’s attitudes as being these:
1. It saw itself not as a regulator, but as an AIG creditor. (And a creditor which didn’t care about its “own”, i.e. the taxpayers’, interests.) So it never talked in terms of “we bailed you out, now you need to make concession”, but rather of “AIG owes us all money, and I’m voluntarily not caring about what it owes me, so let’s see if anyone else is willing to make a voluntary concession”.
So even when UBS was willing to concede, when GS refused, the game was over from Geithner’s point of view. All he could do was ask them, and they said No.
2. The Fed decided it couldn’t treat foreign banks differently from domestic ones, so it coordinated with French regulator Commission Bancaire in handling the disposition of two French banks involved in the deal.
The French simply joined Goldman in putting up a solid front vs. anything short of a complete laundry delivery. Altogether 7 of the 8 banks involved refused concessions.
If Geithner had been negotiating on behalf of the people, he would’ve seized the opportunity for divide and conquer. Once UBS went first, they should’ve become the belle of the ball, implicitly first in line, which would’ve put pressure on the others to concede as well. (Needless to say, 98 on the dollar was absurdly high as well and should’ve been just the start of one heckuva massive haircut for these hippies.)
But this wasn’t possible, since:
3. Geithner believed on ideological grounds that his responsibility was to the “sanctity of contracts”. Never mind that (1) CDS as written by AIG were basically a scam, and the government has no responsibility to make whole the rich victims of scams, (2) in this case the “victims” were really co-conspirators, since CDS was a key part of the big bubble they were all blowing as hard as they could, (3) Geithner and the Fed’s first responsibility, their first contract overriding all others, was with the American people.
But as George Washington puts it:

Apparently, while Geithner was concerned with the sanctity of the CDS contracts (which – I would argue – were all based on fraudulent representations concerning how safe an investment they were), he didn’t care very much about the sanctity of the agreement of a government to do what is best for its people.

But actually, the New York Fed isn’t a government agency. The Fed itself maintains that:

While the Fed’s Washington-based Board of Governors is a federal agency subject to the Freedom of Information Act and other government rules, the New York Fed and other regional banks maintain they are separate institutions, owned by their member banks, and not subject to federal restrictions.
So really Geithner – as head of the private bank-owned and managed New York Fed – was simply serving his constituency: the giant New York money center banks. Geithner’s constituency never was the American public.

The giant banks were the creditors of the giant banks. Like two sock puppets putting on a big show of good cop / bad cop show, the New York Fed pretended that it was negotiating hard, but ended up making sure that the boys got their full cut.

After having been bailed out once already, Goldman turned around and said it would be illegal for the government to expect them not to demand a full bailout on their CDS position. It would be illegal for the Fed to say in effect “You should make concessions outside of bankruptcy court, because otherwise we’re not going to do anything, you’ll have to go into court with a bankrupt AIG and end up with little or nothing”.
(Of course, we never should’ve bailed out AIG in the first place. I would’ve let them collapse and blamed any reverberations on Goldman. Legally and politically.)
The Goldman argument was the argument Geithner wanted to hear anyway. As GS correctly assessed, Geithner and the Fed were absolutely committed to the bailout, every cent they could loot.
They really come off like the Keystone Kops:

The report also shed new light on the effect the rating agencies had on the way the Fed handled the A.I.G. emergency. The company’s run-on-the-bank disaster began with a major credit downgrade in September; the Fed quickly responded with an $85 billion loan.

But because the Fed moved so quickly, it recycled a set of lending terms that had previously been devised for A.I.G. by lenders in the private sector. The interest rate was too high, given A.I.G.’s distress, and so the loan that was supposed to rescue the insurer ended up putting it at risk of a second credit downgrade. That, in turn, could have set off a second run-on-the-bank episode.

The Fed got caught in a no-win situation, the report said. While it might have been able to win concessions by threatening to withdraw support from A.I.G., it also ran the risk that the credit agencies would take the threat too seriously and impose another catastrophic downgrade.

So the lesson of this sorry mess of a tale is something we should apply to our current situation. Barosky draws the right conclusion:

Mr. Barofsky said the facts also undermined the Fed’s arguments that banking secrecy was an essential part of bank stability.

“The default position, whenever government funds are deployed in a crisis to support markets or institutions, should be that the public is entitled to know what is being done with government funds,” he said.

The Fed is not a regulator and it never can be. By its very nature it wants to maximize finance sector private profit, and sees America simply as a cash cow. As Barofsky says, the Fed hates democracy, hates transparency, hates accountability. It is simply a rogue organization.
So whenever we assess any reform proposal, in addition to the minimum criterion that it breaks up the Too Big To Fails, we should also measure it according to the measure:
*Does it consider the Fed to be a viable regulator?
*Does it maintain existing Fed “authority”?
*Does it seek to add to that authority?
If the answers to these are Yes (and only Dodd’s proposal even gingerly suggests maybe the answer should be No), then it’s not real reform, but just another lie in the same tired good cop bad cop routine George referred to above.   

October 7, 2009

Cannibal Banks

Filed under: Bailouts Only Propped Up Zombies, Corporatism, Disaster Capitalism — Tags: — Russ @ 7:55 am
As the trillions pile up, our first thought whenever we hear the word “bank” or the word “bailout” should be to remember that the government sold us this bailout on the premise that it was necessary to get the banks lending again, that getting them lending again was necessary to save Main Street, and that these bailouts would in fact get the banks lending again.
By now all three of these have been proven to be lies. This week the TARP inspector general Neil Barofsky exposed the lies of Bush’s Treasury secretary Henry Paulson. If you’ll recall, Paulson/Bush’s first gambit was to demand a veritable Treasury dictatorship because otherwise the economy would completely melt down within days. They presented a three-page ultimatum. Gullible Congessmen staggered out of the room in a daze, some in tears, all completely defeated psychologically. The end was at hand. They’d give Paulson anything he demanded, as fast as he demanded (as always with disaster capitalism, there was a crazed demand for speed at all costs).
The people immediately, intuitively saw this for the power and money grab it was, and in a rare show of accountability Congress rejected the coup attempt. Now Paulson had to a-politicking. Now he assured everybody that the economy wasn’t about to crater after all, that the banks were fundamentally healthy, that there were only some technical reasons lending had dried up, and that they needed a bailout just as a kind of tune-up. Then lending would resume and all would be well.
Today we know, as Barofsky confirms for us, that this was a lie. The banks were insolvent then and they’re insolvent now. The problem then as now is that their balance sheets are dominated by worthless securities that they refuse, seemingly as a matter of ideology, to write off.
(I still always have to laugh at how the banks all claim these things have value, yet refuse to buy them from one another at these alleged values. So each bank is implicitly calling all the others liars, “but I’m telling the truth!” Uh huh.)
The government’s priority then as now is to allow the banks the full payoff they demand from these casino bets by stealing the money from the taxpayers and handing it over to the banks.
That’s it. That’s all Bush policy was, and it’s all Obama policy is.
If you doubt that, consider the failure of Bush’s political promise: bailouts = lending. What is this technical reason the banks “can’t” lend? What is this “paralysis in debt markets”, as today’s NYT puts it?
It’s precisely that by now all conventional bank activity, and especially lending, are dependent upon securitization and the shadow banking system. Banks don’t know how to function other than by making loans, bundling them into securities, and selling the securities. But so long as all the existing securities lie on the balance sheets as worthless dead weight, there’s no way to restart the securities casino. At this point only the government is propping up what little of a securities market exists at all (primarily through the Fed’s purchase of MBSs from the GSEs). That’s the essence of the protection racket they’re trying to run: Until the government makes them whole on all their existing bets, they refuse to make any new bets, and without these bettors orchestrating everything, the whole system, that is all of its real aspects, will remain frozen.
Now, all of this is based on the fundamental delusion that exponential debt and consumerism can ever be revived by any means. The fact is that the American middle class is extinct. It has long been a zombie lurching along on the artificial stimulus of ever-increasing debt which relied upon ever-increasing supplies of cheap oil and the infinite capability of the government to borrow. All the “growth” of the last decade has been spurious, and all the “prosperity” of middle-class America for the last 30 years has been borrowed from the future (even as real wages and the safety net eroded). Today the bill has come due, and the end of borrowing is at hand. Just as there are no lenders and spenders other than the government, so there are no borrowers other than the government. 
The banks know this, which is why they have no intention of lending under any circumstances. But they still want to extract as much loot as they can while the getting’s good, and the government wants to help them do it. Thus the lie that lending can and must resume. The purpose of all of it is to keep the system centered on the profiteering of the big banks, which is allegedly necessary for the health of society.
But this is the second lie. It’s been a year, and the banks are not lending. They continue to post phony profits, all of it extorted from the people. They continue to exist as loathsome high-maintenance high-expense parasites. But they’re not lending. So it’s been proven beyond any doubt that whatever the lack of Wall St lending was going to do to Main St it has done already, while whatever we’re paying to maintain the Big Banks in existence is money thrown down a rathole.
Main St never needed Wall St’s version of securitized “lending”. What it needs is smaller-scale local and regional lending where the loans make good Real Economy sense and are maintained as loans on the balance sheets of the smaller banks who made them. This makes for a responsible economy all around.
But as the NYT piece shows, the congenital mindset and its lies run deep. It quotes LSU “professor of banking” Joseph Mason: “Given the imperative for securitization markets to fuel bank lending, we won’t have meaningful economic growth until securitization markets are re-established.”
Such an “imperative” does not exist other than through the imposition of this gangster ideology. “Meaningful growth” – does he mean the paper growth of the last decade which has now vaporized? He certainly can’t be referring to growth which created any good, permanent jobs. The fact is, there can never be meaningful growth under financialization. By definition it’s a fraud meant to cover up (1) the fact that there’s no longer and real growth, and (2) the looting of the real economy, for example the hollowing out of manufacturing.
Then we have Treasury cadre Lee Sachs: “It’s very important these markets come back to get credit to businesses and families who need it, and also as a sign of confidence”.
“Confidence” – that’s the key word and the code word. (The platitude about “families” is just obligatory boilerplate.) It’s always the Orwellian sign by which the racketeers recognize one another: Everything in our confidence game depends upon our maintaining the simulacrum of societal “confidence”. (The stock market is the terrorist wing of this confidence racket, using its displays of lack of confidence to punish society anytime government shows any sign of acting in the public interest.)
On a different front, we can see the broad expanse of the rent-seeking net, now that the banks have succeeded in freezing the economy. According to Chris Whalen of Institutional Risk Analytics, “The real economy is shrinking because of a lack of credit”. What this really means is, the bank-driven bubbles bloated up a simulated economy, and now that the banks cannot and will not keep securitizing, this bubble must collapse. It’s true that the banks won’t lend, but this is because they are insolvent, and now exist only as feudal looters and profiteers of disaster. So the deluded expectation that Wall Street lending would save Main Street was not only false, but has allowed Wall St to continue to prey on Main St. For there is still “investment” going on. And where is the money flowing now?
You guessed it – to the banks. The banks won’t lend, they’re hoarding cash, the real economy is shrivelling, so speculation money has nowhere else to go but to the stocks of those very banks. To start the week Wells Fargo was up 7%, while JPM, BofA, and Citi also saw significant gains. The finance sector caused the crash, and are now using crash conditions to suck in all investment and further financialize the economy.
A new Goldman Sachs upgrade of finance stocks helped goose the process (and at the same time attack real banking): “The market has failed to recognize the dramatic improvement in earning power at the large banks vs. the regionals”. Indeed.
That means, everyone has still failed to price in the New Order of Too Big To Fail corporatism. People still don’t understand the magnitude of it, of how an entire civilization has been placed at the disposal and at the mercy of a handful of finance thugs.
It’s a great bet if you’ve got a few bucks and you believe all the lies. By now the government guarantees all bets. By now you’re betting only against complete economic collapse, or Revolution. Anything short of that, you know the taxpayers will be mined to bail you out. The country has been ENSLAVED.
[Here’s something extra to chew on: If you want real Smash the Banks reform, here’s a start – ban credit default swaps completely. We already knew of their malevolence, but we’re still told lies about how they’re somehow necessary. But now that we know how useless the Big Banks themselves are, we should consider how only the Big Banks hold CDSs. According to Fitch’s, the usual gangster gallery of Goldman, JPMorgan, Citi, BofA, and Morgan Stanley, just these five, hold 80% of derivatives risk (assets and liabilities) and 96% of exposure to credit derivatives.
This is a microcosm of everything we’re facing here. Only the Big Banks want CDSs to exist, and CDSs benefit only the Big banks, while, as we saw with AIG, they are a clear and present danger to everyone else.
There are only two things CDSs accomplished: to help crash the economy, and to enable the government to launder handouts through AIG, especially the $12 billion gimmie handed over to Goldman to not only cover its bets but pay off its winnings.]
The sun of the debt surge was shining, and there was the shadow. Now the thunderclouds have effaced the sky, and the shadow’s no longer there. But we’re still here, aren’t we?
And they claim that if we can magically bring back the shadow, through some array of gaslights and dirty mirrors, that’ll make the clouds go away?
Why don’t we take the rain as a cleansing, tend to our neglected soil. The real sun will shine again, soon enough.

March 24, 2009

The Bailout War II: Too Big To Fail


(See also the rest of the five-part series)


In the classic Mel Brooks comedy-western Blazing Saddles, the new sheriff arrives in town only to find the townsfolk ready to lynch him. He puts a gun to his own head and, talking about himself in the third person, threatens to shoot himself if they don’t let him as kidnapper/hostage go. They townspeople believe him: “I don’t think he’s bluffing!” He escapes to marvel over how gullible they were.
Today we have a whole industry making the same threat, except they threaten not only to destroy themselves but the whole American economy. The response of America’s public elites has been the same as in the movie. “I don’t think he’s bluffing.” But this is no comedy.
Since this crisis began we’ve been living in fear. The specter which looms over us is called “Too Big To Fail”. This concept is seldom treated as a concept, and almost never questioned. It is accepted on faith and in fear. It was peddled by the same administration whose only idea, ever, was to monger fear. Even though the media and the cognoscenti had been burned so many times by the Bush administration’s lies, and even though this latest threat followed the exact patterns which stampeded us into the Patriot Act and Iraq, and even though the same interests as before stood to profit here, they were still as gullible as ever and have been first the Bush and now Obama administrations’ water carriers right on down the line.
I believe TBTF is a classical Big Lie. Even if it were true, could any of the proposed solutions really solve such a problem? And if it is true, why does there seem to be so little will to solve it in a way which would ensure we are never so vulnerable again? Surely any good-faith plan to temporarily prop up the TBTF banks would include a plan to carefully and with all deliberate speed dismantle these entities such that we would never again be in this position.
Yet it is clear no one in the power structure has such a thought. The very personnel who express such fear and loathing over our helpless predicament are the same who seem content with the TBTF institutional model, and more often they seem intent on further consolidating and aggravating it. For that reason we must consider the possibility that out of ideology and greed they want America in the grip of TBTF. If that’s the case, we must also ask if TBTF is simply an ideologically motivated lie. Beyond this we should ask, what kind of world do we want to live in? What are we trying to preserve, that it’s worth living as a slave, paying protection to boardroom thugs, all for the sake of what? Cheap junk from China?
The basic notion of TBTF is that if the likes of AIG, Citi, BofA and others were allowed to go bankrupt, as they certainly would if they hadn’t been propped up with prodigious sums of taxpayer money, the effects of this would reverberate to other giant institutions, weakening or collapsing them as well, and out through other big corporations, and down through smaller banks, pension funds, consumer lending, etc. to hit every individual, while the failure of savings institutions would bankrupt the FDIC. The government’s only option would be to run the printing presses or default on monumental guarantees, either way destroying the dollar. It would be the end of civilization as we know it. (Of course much of this is happening anyway in spite of the bailouts.)
It’s a harrowing picture. Is it true? If this really is what will happen when this massive inverted pyramid built on bubbles and debt finally comes crashing down, then shouldn’t our priority be to build firewalls against it? Instead of obsessing on the status of all this toxic paper, talking of good banks and bad banks, shouldn’t we instead be bolstering local and regional lenders, providing them with “facilities”, helping them unwind their entanglements with the Wall Street monstrosity? Shouldn’t we be dismantling these radioactive structures as quickly as we can do with any level of reasonable care? Since the government evidently has $trillions available, shouldn’t this be used to start brand new local and regional education networks to train a new workforce of relocalized small farmers, small craftsmen, small factory workers, small distributors? Perhaps even help launch regional and local currencies? Shouldn’t the stimulus be directed toward all these endeavors, which clearly look ahead to a future in a world where exponential debt, suburban sprawl, consumerism and profligate fossil fuel use can no longer serve as the basis for an economy or a civilization? That no one among the powers that be sees things in any way other than the opposite is strong evidence of their bad faith.
To properly judge the motivation of the bailout policy, we must go back to how this came about. We must consider how the same cadres who preach TBTF are those who constructed the system in the first place. The financialization of the economy goes back to the 70s. Since the dollar was detached from gold and set loose as the free-floating reserve currency of globalization and petrodollar recycling, while the manufacturing economy of America was hollowed out and the production offshored to an ever more exploited third world work force, the elite level of the American economy has mostly engaged in rent-seeking. It wove a fantastic web of interconnections, games of chance, tricks and cons, cash flows, inflating bubbles here, preying on the aftermath of burst bubbles or otherwise gutted economies there. All the while it encouraged a massive accumulation of addiction to debt, to the point that all of America’s alleged growth over the past decade has been the result of debt and bubbles. Take those away, and America has been in recession throughout this century. As the final ingredient in this witches’ brew, we had deregulation to the point of anarchy.
While the whole process may not have been planned out step by step, the basic goal was always the same: maximum size, concentration, interdependence, and efficiency. It was the most precariously perched, least robust system imaginable. Even the slightest thing going wrong would crash it. So as delusional as many of the participants became, it’s not credible that they gave no thought to the crash contingency. “TBTF” was a planned campaign.
When the financial crisis reached critical mass with the imminent fall of AIG the TBTF machine went into action. Paulson and Bernanke sounded the cry, “Stampede!” Fear seared it in. They told a Congressional delegation if Paulson wasn’t made a literal financial dictator “by Monday you won’t have an economy”. Although the people were more skeptical, elites everywhere, panicked further by the terrorism of the stock market, leapt on board the bailout train. Since then no one has seen an alternative to shovelling hundreds of $billions, and now $trillions, and soon tens of $trillions, into an ever more hellish, more gaping crematorium, and no one sees an end to it.
Today, even as the “new” Geithner/retreaded Paulson plan is being batted about, we should ask a few questions about the status of TBTF as an economic concept. A major concern is how to unwind AIG’s CDS boondoggle. But here’s something I don’t understand about this. If these bets were never supposed to pay off, as the dogma of the perpetual bubble held, then shouldn’t that have been factored/priced into the system? Weren’t those who bet on failure more like typical casino gamblers, just having fun, betting on long-shots, while other buyers were buying for the rationalistic purpose of evading reserve requirements? My point is, why should it crash the economy if we just declared all CDS contracts held by bailed-out companies, or contracts that were offshored, void? Granted, the banks were absurdly overleveraged thanks in part to the CDS scam, but we have that problem anyway. Why are the CDSs in themselves a problem? It seems like an ideological lie, peddled in tandem with the tantrums of the stock market, to scare the people into allowing public money to be used to pay off these bets in full.
Similarly, as some have commented, this all seemed new last Fall. Perhaps people overreacted to Lehman. But today any reasonable person has been contemplating the destruction of AIG, Citi, BofA and others for over six months. So if the TBTF exposure ever did exist, why should it still exist? Surely most participants could have decoupled by now (while anyone who could have unwound at a reasonable loss but hung on in expectation of a taxpayer bailout should be treated as an asocial element).
And, if banks really were on the verge of failure, they would’ve used the bailout money to forestall this. If they aren’t going to lend it as promised, why haven’t they used it to buy the toxic assets from themselves and in that way cleanse their balance sheets? Instead they’ve used it for bonuses, parties, golfing, airplanes, mergers and acquisitions, or just hoarded it. How do any of these keep you from “failing”? How do they help the economy as a whole?
So TBTF was used to stampede America into submission to a massive redistribution of wealth from the public to the very same criminal elite who profited so obscenely in the buildup to the crisis and then set it off. It was the classical pattern of disaster capitalism: trigger the disaster; confuse, terrorize and stampede the people; apply the shock treatment; carry out the corporatist coup. Although they sold the first TARP as a stimulus to lending, they moved immediately to their real purpose. While no lending materialized, word got out that Treasury was encouraging the big banks to use the money for acquisitions. TBTF was really about helping the big get bigger, the rich get richer, and to wipe out the smaller and not-so-rich. Is the encouragement of further structural concentration the action of anyone who truly believes and fears that things are “too big to fail”?
So we’re embarked upon a program of endless cash injections, sweetheart loans, loan guarantees, every kind of subsidy and direct loot conveyance, as all the while first Paulson/Bush and now Geithner/Obama try to figure out how to fulfill every profit expectation of the banks holding this toxic paper,no matter how much loss has to be socialized. Now Geithner even wants to use the FDIC to leverage a bailout bubble, AIG-style, in his desperate attempt to serve the banks. All of this has been shrouded in as much illegal secrecy as the executive branch can manage. Obama is now continuing with what Naomi Klein called “Bush’s most creative innovation: no risk capitalism”. The goal is a kind of permanent corporatist revolution to complement the permanent imperialist war abroad. The two brand names Too Big To Fail and Global War On Terror are parallel and corollary, and both are intended to be the never-ending Long War.
How can we resist this? The first thing is to ask ourselves, are we willing to pay this price? Even if it were possible to salvage the existing system at the price of paying this protection money and having to live permanently under the thumb of these gangsters, would it be worth it? Would a human being desire to live this way? Are we willing to pay this price? Or just like the War on Terror, is it another form of throwing away our freedom for the mirage of “security”?
To anyone who doubts any of this, who claims to believe in Too Big To Fail in good faith, the question is simple: What is your plan to dismantle the TBTF structures and ensure that Never Again will any such structure exist to threaten us. These things are a clear and present danger to all economic and social stability. No one can in good faith wish for their propagation, or wish to pay the terrible price of their continued existence.
If we can accept the unsustainability of the exponential growth economy and the malevolence of TBTF; if we see how this is a path we cannot take and must not wish to take; we could take another look at the world. We could see ways to rebuild the future and build a new, revitalized America, centered on a relocalized, truly productive, truly fulfilling economy.
The financial crash could yet prove to have served a creative purpose if it alerts us to our predicament. These institutions are not our friends and they do not wish us well. They want to condemn us forever to the road of serfdom. If instead the detonation they’ve triggered can cast a light on a different trail where we retake control of ourselves and our futures, it will not have been in vain. 

The Bailout War I: AIG


(See also the rest of the five-part series)


As the administration releases the details of the latest version of the same old bailout pan, the furor over AIG continues to sound. With this first in a series of posts on the bailouts I want to present a basic depiction of AIG as the most typical of the corporate players in this crisis.
As innovator and as model AIG was the prototypical and core practicioner. It led the deregulatory charge. It was the ultimate buccaneer under Bush. It was the first to totter, the first to suffer a “systemic” meltdown, and was the real occasion for the foisting of Too Big To Fail on the public. It set the whole bailout program in motion. Every step of the way it was both one of the key players and the catalyst for the whole vicious system.
In a phrase which has spontaneously occurred to so many of us, AIG has been “ground zero for the practices which led the financial system to ruin” (this is the formulation of NYT columnist Joe Nocera). Nocera goes on to admit AIG was the starting point for the TBTF ideology: “The company is being kept alive precisely because it behaved so badly.” In a joint statement the Treasury and Fed, if not quite so morally honest, made the same point in defending the bailouts: “additional resources will help stabilize the company, and in doing so help stabilize the financial system”. Ben Bernanke was more menacing: “We have no choice but to stabilize [AIG] or else risk enormous impact, not just in the financial system but on the whole US economy”.
What is this uncanny operation? AIG was one of the world’s prestigious companies, proud bearer of a AAA rating, pillar of a respected industry. What went wrong, such that the name AIG is now mud, and this industry is reviled as the “FIRE trust”, as Michael Hudson put it in a typical formulation?
The basic answer is that AIG sold out its original business to become a deranged casino bettor. In furtherance of greed, ideology, and the apparent will to be reckless just for the thrill of it, AIG was at the core of an industry-wide anti-regulatory, anti-rule of law campaign. From 1990-2008 AIG contributed $9.3 million evenly among both sides of the Washington system, and spent another $70 million lobbying them. This modest amount bought a lot of anarchy, and by 2001 AIG had helped carve out a vast quarry of lawlessness to mine the structural and moral integrity of the system. To properly mix my metaphors, it was in this lawless space that AIG was able to set the charges which now threaten to blow the economy sky-high.
Although its practices weren’t uncommon, no one’s actions were so vast and reckless. Now as we stagger about the ruins of the finance world we keep receiving economic death threats: unless AIG, already one of the ultimate welfare recipients in American history (and perhaps the most contemptuously ungrateful), continues to receive ransom payments, it will destroy the American and global economy completely. (Nor is this just rhetoric, apparently. The NYT’s Andrew Sorkin, among others, has written that he believes AIG cadres, if not paid protection money, will intentionally crash the economy.) People are getting angry. Political and MSM apologists for AIG have had the nerve to criticize the public for its anger. But it’s AIG and its political, regulatory, and media enablers who have destroyed it, and who now threaten to bring down the whole system. It is they who are to blame for any level of public rage and direct action.
AIG was, a Tom Friedman put it, running “an unregulated hedge fund inside a AAA-rated insurance company”. It leveraged the moral authority of a AAA rating to get that rating conferred on the derivative paper chase as well. AIG and the banks conspired using “quant” phantasmagoria and this AAA tranche scam to evade regulation, to the point they could claim (plausibly, to those predisposed to coddle them) they didn’t need regulation at all.
AIG was involved in many unsound speculative activities, both recklessly leveraging itself and enabling the reckless leverage of every other player. But the core of its adventure was its credit default swap business. Banks and others holding mortgage-backed securities and collateralized debt obligations and god knows what else were keen to buy “insurance” on the value of these things. Eventually AIG wrote some $500 billion worth of this pseudo-insurance, providing the template for a $30 trillion build-up and eventual unravelling. In theory a CDS sounds like a good idea – a hedge against an adverse change in a changeably valued security. But under AIG the CDS had more lucrative, and dangerous, uses.
The first ulterior application was to enable banks to evade reserve requirements. This was an innovation of JP Morgan, and it seems CDSs were invented in the first place with this goal in mind. Having bought this insurance on their speculations, banks claimed they were no longer exposed to risk, and regulators acquiesced. Meanwhile, even as the banks said AIG was an insurer, AIG itself told those same regulators it was not, and they also agreed to this. Thus both AIG and the banks were let off the regulatory hook upon mutually exclusive rationales. This was the beginning of the lawless environment where the CDS nightmare was elaborated.
One of the key anti-regulatory goals the industry had was achieved in 2000 with the Commodity Futures Modernization Act, which declared CDSs off limits to regulators. Now the frontier really opened up. Joe Cassano, the head of AIG Financial Products, introduced several innovations. It became possible to place CDS bets with little or no collateral. AIG itself took the lead in betting monumental sums it could never possibly pay off. There was also an explosion of pure gambling, as buyers and sellers placed bets on underlying assets neither of them owned. The seller could take book on the same “naked” bet with any number of bettors. By multiplying “insurance” on the same risk, AIG was betting ever more ponderously vs. systemic risk, even as its very action was increasing that risk. This is the opposite of sound insurance practice. “They just bet massively long on the housing market”, an industry insider told Matt Taibbi of Rolling Stone.
Everyone was in on the CDS/MBS scam. Banks could shift risk and get out from under reserve requirements, while the AAA rating bestowed by AIG’s touch rendered the derivatives more lucrative. AIG collected the premiums. It could charge more by writing “collateral triggers” into its contracts, such that if the rating of AIG or the underlying securities were ever downgraded they’d have to post more collateral.
AIG knew it would quickly become insolvent the moment anything went wrong. The two factors which drove them on were greed and the ideological dogma that the housing market, and therefore the value of MBSs and CDOs, could only go up forever, and therefore the CDSs would never have to pay off. They regarded their own AAA rating as a law of nature, theirs by divine right.
This was the core theology of the whole finance bubble, of every finance bubble, of the bubble economy and society we now have. (That’s why we watch the administration continue to flail about trying to figure out a way to magically restore value to these derivatives, and beyond this to reflate the housing bubble. That’s the only idea they have, the only idea they could possibly have, since the American economy no longer has any basis other than bubbles. There’s no longer a stable foundation, only despair punctuated by gold rushes. Boom and bust.)
Nocera quotes former AIG exec Robert Arvanitis on AIG’s self-perception: “They never thought of it as abuse. They thought of themselves as satisfying their customers.” This is quite right. From the point of view of AIG, of TBTF, and of big capitalism in general, your only responsibilities are to yourself and (maybe) to your customers. The public, the public domain and public property, are just resources to be mined.
The CDS phenomenon was exemplary of the financialization of the global economy as a whole going back to the 70s. These practices, and the overarching economic structure, are not conventional value-adding capitalism at all, but simple atavistic rent-seeking. The deregulation-enabled casino capitalism which reached its frenetic pinnacle over the last decade, and which now through the bailout/loot conveyance seeks new avenues of plunder, has been history’s greatest manifestation of corporatism, not capitalism.
AIG began to unravel even before the housing bubble burst. As a result of its slovenly accounting culture, its rating was downgraded in 2005. In defiance of the eternal bubble dogma, this set off many of the collateral triggers. AIG responded by accelerating the writing of CDSs (in effect trying to “make it up on volume”). But soon its position deteriorated. It was bleeding red ink and in 9/08, facing another downgrade and another round of collateral calls, it couldn’t hang on. Big tough guy AIG cried for Mommy.
It was AIG’s interconnection with so many big financial players, in particular Goldman Sachs, which decided for Goldman cadre Henry Paulson that AIG had to be propped up with taxpayer money.The Bear Stearns failure was ad hoc and small enough to be dealt with summarily. Fannie Mae and Freddie Mac were formally public-private and therefore also considered atypical. Lehman was unloved and at any rate still considered an isolated failure.
But unlike in the case of Lehman, Goldman had a $20 billion exposure to AIG’s swaps. They were the most important of many big counterparties to AIG’s bets. Beyond this loomed the prospect of systemic collapse, given AIG’s myriad positions in the global economy. While Goldman and its gigantic colleagues, including several foreign banks, were paramount in Paulson’s calculations, he was able to whitewash his policy by citing AIG’s legitimate insurance business, all the individual policyholders, pensions, money markets, municipalities and so on who would be affected by an AIG collapse. As Taibbi put it, “the AIG bailout, in effect, was Goldman [Paulson] bailing out Goldman”. Or Nocera again: “the bailout of AIG is really a bailout of its trading partners”.
Paulson now invoked the specter of TBTF, and its counterpart Too Interconnected To Fail. he made no mention of AIG’s fat counterparties. The MSM, befuddled and credulous as always, and panicked by the stock market, was ready and eager to listen and obey. TBTF was now enshrined. Paulson and Bernanke were able to sound their call of “Stampede!”, everyone stampeded, and without even thinking about it we were locked into this “bailout” death march which looks more and more to be permanent.
At the time no mention was made that the main purpose of the AIG bailout was to launder taxpayer money to many of the same banks who were receiving direct conveyances through TARP. This double-dipping was treated as a national secret for six months by AIG and by both administrations until AIG finally had to cave in and release the names in March. This came after four AIG bailouts and counting. There’s no end in sight, nor does anyone in power have any concept of what an “end” might be, unless it is to be a permanent corporate welfare state for the finance industry.
So much for AIG’s historical role. It only remains for me to make a few comments on AIG’s character. AIG has long had a reputation for arrogance, loutishness, and a sense of entitlement. Now during the bailout we have seen these traits taken to psychopathic extremes.
When the lead architect of destruction Cassano was finally forced out early in 2008, he was kept on the books as a “consultant” at $1 million a month, where he would still be today if political pressure hadn’t forced them to drop him completely. There has been no explanation for why they kept paying him, any more than there can be an explanation for why anyone at AIG or any of these banks could ever think he or anyone else deserves a bonus. It can only be described in terms of psychopathy.  
Being installed as the new bailout-era CEO, Edward Liddy declared his first priority would be to renegotiate the terms of the bailout to AIG’s advantage and the public’s disadvantage. He has been successful, with each subsequent bailout delivering more money to AIG at ever better terms for AIG and ever worse terms for the public, while rolling back the taxpayer protections of the previous bailouts. According to competitors, AIG has been leveraging its privileged position as a welfare queen to undercut competitors on premium rates. It can afford to do this since its existence, and lavish pay for its executives, is guaranteed by the federal government.
AIG was the first and the worst in the long line of miscreants among bailout recipients caught partying with taxpayer money at gilded age corporate “retreats”. It has been absolutely incorrigible regarding bonuses. It it now using taxpayer money to sue the taxpayers demanding a tax refund related to its offshore activities (themselves a evasion of American taxes) and the very accounting snafu which triggered its downfall in the first place.
It also recently circulated a veritable terrorist manifesto depicting in garish detail the economic horrors which would allegedly ensue if the bailouts don’t keep rolling in (and, implicitly, if anyone dares to question their executive pay). Thus they again take the lead, in waving the bloody flag of Too Big To Fail. (Getting back to Sorkin’s claim that AIG cadres, unless paid off, will go elsewhere and seek revenge upon the American economy while profiting from its destruction, and the contention that we need to pay protection to “retain” these people: if this is true, why are we giving them a choice at all? If this is a ticking time bomb scenario, and only the bomber can defuse the charge, would you coddle and beg him, and let him leave if he feels like it? Wouldn’t you make him defuse it, one way or another?)  
In all of these cases when criticized AIG’s gut response has been defiance and contempt, and only under extreme duress have they ever changed their behavior. They clearly hate and despise the taxpayer whose largesse keeps them alive, and their favorite act is to laugh at the taxpayer. No doubt the very fact that they’re partying with taxpayer money provides a special titillation for them.
A word about AIG’s other holdings, which they’re now trying to sell off. In themselves these are typical. Ski resorts and soccer sponsorships: luxury items. International Lease Finance – large-scale airlines are another unviable, propped-up industry, now definitely doomed by Peak Oil. AIG owns or manages real estate holdings in 50+ countries. Here too they’re a major player in the FIRE trust. So we see how in their diversifications as well AIG is a top-heavy, unconstructive, counterproductive force wrecking civilization.
AIG’s efforts to sell off these things have been getting harder as they and the administration have seemed to connive at trashing the brand name and everything connected to it. AIG says the government will provide “backstop financing” for buyers in this asset selloff. (The government has been backstopping a lot lately ever since it backstopped the Bear purchase.) So here too it’s bailouts and lemon socialism for everyone. The buyer gets to buy cheap, and on the taxpayer dime, while AIG gets another disguised bailout.
This is above all a morality play. AIG is a simple acronym which stands for the turpitude of an ideology, an industry, a mode of organizing the economy, a way to arrange the priorities and practices of government and society. It stands for the complete failure of all of these, on rational, practical, and moral grounds. AIG and its CDS practice were not features of capitalism, but exemplary of the rentier character of the FIRE trust which has taken control of the world economy. America became entranced by the delusion of an ideology and faith in a business practice. When this ideology proved false and the practice failed, America was then terrorized with the specter of a complete economic collapse.
So now the people live under a double despair. They watch the economy unravel and their dreams for the future vaporize, even as they are terrorized with the threat that things will get far worse if they don’t meekly consent to the complete looting of the country in the form of a Bailout War, a class war from above, a war by the elites on the people. Thus the people come closer to serfdom with every passing day.
That’s why I regard the public outrage over the AIG bonuses as a positive sign. Whether or not the proximate cause warranted the rage, the rage itself is warranted and long overdue. AIG, by providing such a clear example of capital crime, easy to understand, and yet clearly indicative of the deepest, most fundamental truths, has ironically provided the occasion for the public to “leverage” its hitherto inchoate anger and confusion.
That the MSM and the administration have largely responded with disdainful lectures and demands for obedience to power just shows the bad faith of the administration and the craven, corrupted fecklessness of the media.
Let’s hope the public has the will to continue its education, to become more active rather than less, to maintain their anger and convert it to activist passion, toward organizing against this theft of our country, this theft of our future. It’s completely in the people’s hands, to let the crimes continue, or to put an end to them, take back the country, and rebuild the future.
http://www.globalresearch.ca/index.php?context=va&aid=12265 michael hudson

Corporate Anarchy

Filed under: Corporatism, Law, Sovereignty and Constitution — Tags: , , , , — Russ @ 4:13 am

Conventional wisdom would have it there still exists an intact system of law and good faith enforcers of that law, and that what we have here are just atypical abuses of it. I believe the evidence clearly shows the law itself is fundamentally broken, and we do in fact exist in a state of nature where the nominal law is just another weapon.

It is the finance industry (and corporatism in general) which has eradicated any rule of law in America. For decades they have acted in bad faith, against the people, against the country, against the very concept of law. Each and every political action has sought to (1) strip away all purview of law in the first place, (2) render any vestigial law or regulation which does nominally exist toothless, (3) even if there remained any actual law or regulatory enforcement, they sought to evade it, (4) as a social and political matter, if it comes down to it they flat out lie.

Here’s a few examples of what I mean. (These are just finance examples, but I could multiply them with examples from the environmental, detainee, food and drug, and consumer protection realms, to name a few.) 

1. Obliterate rule of law de jure: At the turn of the century Clinton/Bush cadres, at the behest of the industry, repealed the prosthetic Glass-Steagal law (meant to prevent lawless situations which contributed to the Great Depression) and enacted a “law” which formally placed the CDS industry outside the law. The CFMA was not an action of law, but an action of anarchy. These actions were meant to place the finance industry in a Hobbesian state of nature where might (their money and political muscle) would make right.

2. Preventing enforcement: Under Clinton, when Brooksley Born wanted to enforce the law, she was shunned and fired. Many would-be conscientous regulators had the same experience under Bush (not to mention private whistleblowers like Harry Markopolos, who tried to warn the SEC about Madoff for years). Now under the Bush/Obama bailout expedition we have the administration stonewalling on transparency law, refusing on principle to give the public its rightful information on who has received taxpayer money, who did the administration launder money to through AIG, etc.

3. Evading enforcement: How exactly (if we live amid good-faith actors) does a corporation like AIG which has benefitted so tremendously from the very existence of the American system and is asked to contribute so pathetically little in return still decide it has a right to evade even those meager taxes by offshoring operations? (And if we do live amid the rule of law, why does the so-called law allow this? This also goes back to (1).) Yet AIG’s actions here were so egregious even the Bush IRS balked at them. And today, hoping for better treatment under Obama (better than under Bush!), they’re suing to get a refund on prior enforcement of what was an absurdly low tax bill in the first place. That goes back to (2).

4. As if all that weren’t enough, now we learn AIG was lying about the amount of those bonuses. It wasn’t $165 million, it was $218. While this change to what was a relatively minor # isn’t important, that even here they couldn’t help themselves, they had to lie, it’s so engrained in their corporate culture, is important, because it’s typical and indicative.

(It should also be an embarrassment to any apologist who’s been arguing that people shouldn’t make a big deal about this because the number is so small. Evidently AIG itself doesn’t agree with them.)

Another lie which has been hinted at: I don’t have the link handy, but I’ve seen quotes to the effect that the vaunted “stress tests” are not in fact to be reality-based assessments of the solvency of the banks, but rather propaganda exercises which already have the predetermined result that the banks are fine and the public should have confidence in them and in whatever the administration says should be done for them.

This culture of the lie is endemic not only to a particular company. It’s endemic to the industry, to these administrations, to corporatist America as a whole, and to the existing system of law.

So we already have systemic “barbarism”. Even a literal lynch mob could not be anywhere near as lawless or as barbaric as the system itself.

And if anyone were to treat these persons as outlaws in the classical sense, we’d only be treating them as they always sought to be treated, and have in fact been treated, all along.

It would just be in a different sense than what they wanted.     

March 20, 2009


What should we think about this bonus outrage, this “unkindest cut of all”? Throughout this obscene bailout regimen, as the Bush/Obama crew lurches from debacle to debacle, AIG has been in the vanguard of arrogance, with its psychopathic sense of entitlement and gleeful will to spit in the face of the taxpaying public and then walk away laughing. Now we see their funniest prank yet. 

Here’s a few thoughts:
1.What are CDSs? They constitute an insurance scam. It’s claimed that they’re insurance, and through this claim, with the blessing of the (non-)regulators, banks were able to greatly lessen the amount of capital reserves they had to hold.

But at the same time it was claimed they’re not insurance, and therefore shouldn’t be regulated as insurance; indeed that they shouldn’t be regulated at all. “Regulators” again acquiesced.

Worst of all, most of these bets weren’t even pseudo-insurance by the above loose, unregulated standard, but were rather flat out speculative gambling by parties completely unconnected to the underlying.

By no means are CDSs a feature of capitalism. They are rather the tool of parasitic rent-seeking fraud.

2. Summers and Geithner are whining about this? But they presided over the Clinton regulatory gutting. The CFMA is their baby. They personally own this policy which has established America as an anti-regulatory no man’s land. 

3. The cadres at AIG knew this was a criminal enterprise. They knew these contracts were insolvent and yet kept writing them, engaging in conscious fraud for their personal profit. Every step of the way they fully expected that if things went wrong, the losses would be socialized while their private looting operation would be protected, since this government is in the business of facilitating crime. These bonuses are what is called fraudulent conveyance, or looting in a very literal sense.

4. Government has lots of muscle to deploy here, if it cares to flex it. Why not promise to intensively interrogate every bonus recipient, to see what if any indictments are indicated?

5. In particular, I wonder what applications RICO might have here and in the case of the banks. (Would this be an abuse of RICO? I don’t believe so, if these really are the rackets they seem to be. Anyway, they’ve never been shy about “creative” RICO prosecutions before. Why start being shy now, when it might actually be worthwhile?)

6. Getting beyond the legalities: Summers is quoted in the NYT: “this is a country of laws”. No, it’s not. That’s why we’re here. This finance industry has consistently wanted to be placed outside the law. That’s been the entire focus of their anti-regulatory anti-legal lobbying campaign for decades now. And they got what they wanted. They are veritable outlaws, still rampant with the loot, still vandalizing and desecrating. So I’d be happy to treat them as the outlaws they are.

7. What could anyone involved here be thinking? I get that the AIG personnel are pure psychopaths and probably can’t help themselves by now. There’s nothing you can do with them; no rehabilitation is possible. You either let them continue to loot and destroy, or you don’t. But what could Obama be thinking? I don’t normally go in for hyper-Machiavellianism (if only because so few are competent to successfully carry it out), but this case is so extreme, so brazen, and so seemingly gratuitous, that I can’t help wondering if it isn’t actually a trial balloon to test the reaction of the people; to see whether or not the people really will stand for the Big Loot the adminstration clearly wants to facilitate for these corporations, where AIG is just one element among many.

Many commentators have reminded us how quickly insurrection can flare up, and we’re already seeing examples around the world, just as we did a year ago with the food riots. Do the American people have any of the old spark still in them? If they let this AIG affront go by with just the same old griping, if there isn’t a groundswell of elemental outrage DEMANDING that something severe be done to rectify this, then I guess the adminstration will have its answer. It’ll feel emboldened to go ahead.

8. One last point: they say these contracts can’t be broken? That spurned bonus claimants could sue? Let them! I’d love to see that. I’d like to see who has the audacity to go before the country and publicly demand a bonus. I’d like to see who would stand up in court under oath and defend his career in great detail. I’d like to see him go before the reporters and vouch for himself and his company. “Bring ’em on!”

But of course Obama and Geithner won’t force AIG to do that. Why? Because they too agree with the bonuses and want the bonuses paid out. That’s what Geithner’s whole career has stood for, and that’s what Obama’s presidency has so far stood for. Now we’ll see what comes next.