Volatility

April 17, 2010

The SEC Sues Goldman

Filed under: Law, Reformism Can't Work — Tags: , , — Russ @ 2:05 am

 

Yesterday the SEC sued Goldman Sachs for civil fraud. The case centers on Goldman’s 2007 ABACUS CDO, which it manufactured at the behest of hedge fund predator John Paulson. The scam was for Paulson to cobble together a toxic mess of MBS he expected would blow up, find suckers to buy this CDO, and then short it. Goldman’s role was to launder the CDO as having been conscientiously constructed. They used the good name of a vetting firm, ACA. Goldman supposedly told ACA that Paulson was consulting on the MBS selection and would be taking the same side of the bet as the buyers would be.
 
Goldman then cited ACA’s imprimatur in touting this CDO to the suckers – pension funds, other institutional investors, dumber banks, the usual suspects. Meanwhile it helped Paulson really bet against what was really garbage. It collected fat fees every step of the way, including from the investors it defrauded.
 
(Barry Ritholz compares it to The Producers, who try to defraud their investors by putting on a crappy play they expect to quickly close while embezzling much of the loot.)
 
Typical of this feckless government, it’s only a civil and not a criminal indictment. Even if the SEC is serious this time (which I won’t assume until I see it), Goldman would still get off easy for capital fraud.
 
Of course the terrorist stock market struck fast, with the Dow plunging 125.91 points, the most in tow months and ending a week-long surge, to punish this nuisance to the banksters. The MSM rushed to defend the market. The NYT showed great compassion for the victims and fear for the future. “A relatively calm day turned turbulent” as those regulatory barbarians struck out of a beautiful spring sunrise.
 

Expectations are unusually high this quarter: investors are looking for an average of 38 percent growth in profit. Banks have driven much of the strength in the market over the last year, helped by a period of historically low interest rates that have made borrowing cheap.

But analysts worry the golden days for the financial sector may be limited if government investigators intensify their examination of risky trading practices. That may raise new questions about whether the broader momentum in the market can endure.

“What you’re going to go into now is a market that is very skeptical about the outlook,” Mr. Battipaglia said. “Whether this recovery continues or flattens out will be made clear in the weeks ahead.”

 
Even in the first moments of the indictment the first speculation was on how GS probably had a heads up and took positions to capitalize. Zero Hedge was asking how, not if, they must have shorted themselves. Sure enough, a few hours later there were more specific rumors. It’s likely that Goldman has committed every financial crime it was able to conceive every time it could, so it would be extremely out of character for them not to have engaged against insider trading against their own market image. After all, it would only be shareholders who took any hit.
 
If the SEC is serious about this, that’s fine as far as it goes, though we have to assume the least. When everyone parses the technicalities of this or the similar Magnetar trade, or any of an endless list of crimes, we get bogged down in counting how many angels were dancing on the head of a pin. What was technically a violation? What was a “crime” in the legalistic sense.
 
This misses the big picture that the rule of law has already long since been subverted. The law was hijacked to legalize many of the worst crimes. A corrupt Congress led the way, with such abrogations of the rule of law as the CFMA, which unleashed CDS into a lawless free-fire zone. Where it’s technically impossible for “crimes” to be committed, crime can run wild. That’s just one example of how the rule of law has been completely liquidated. Few financial crimes are clearly identifiable as crimes anymore, since the system is set up to allow them to use the very complexity which enables their cons to also legally whitewash them. Meanwhile “regulators” are generally compliant and often accessories.
 
That’s the whole point of rule by administrative decree. You first liquidate the law and replace it by the rule of unaccountable bureaucrats. Then you select the bureaucrats themselves according to their conformity with whatever gangsterism is the regime you really want to impose. Any rogues who actually want to work in the public interest are bullied, marginalized, or purged.
 
So in any particular case like this struggling to figure out the technical extent of the “crimes” is likely to be a fruitless effort. Even if the process goes through the motions of establishing a technical violation, there won’t be any real punishment. It’s political theater. Meanwhile the overall criminal regime continues unabated. It’s misdirection.
 
The reality is always that the finance sector is organized crime, across the board. The government and the MSM want us to think that Goldman may have committed an isolated de jure violation here, an aberration from its general pattern of legality, with technical legality being synonymous with moral legality and with what any human community would treat as legal.
 
But the truth is the opposite. Goldman Sachs and all of Wall Street is a criminal enterprise. All of its major actions are crimes according to any common sense measure of morality and rationality. These crimes have simply been illegitimately legalized by a hijacked system of law. Goldman’s crimes are not the aberrations, but rather the criminal trend itself, while its truly legal actions are there only for money laundering and political cover, just like with similar criminal syndicates like the Mafia.
 
Since we live in a kleptocracy, this government will never actually restore the rule of law and bring justice to these rackets. Even what shreds of legality still remain will only be rarely, meagerly enforced. That this anodyne indictment (not even criminal) has been greeted with such a bustle is a testament to what a vacuum justice has become. We shouldn’t lose sight of the big picture – the entire finance sector is criminal, and this legal system has been hijacked and will never be sufficient to solve the problem. If we sit around and wait for the likes of the SEC to set things right, let them set the pace and dictate the scope of what can be done, we’ll definitely remain serfs and eventually become slaves.
 
In the meantime, what’s the real purpose of this lawsuit? The immediate consensus is probably correct. It’s meant to put on a big political show, to make the Obama administration look good as part of the rollout for his finance “reform” bill. In the end Goldman will at worst get a slap on the wrist. (But maybe not even that -there’s always Obama’s cowardice, his propensity to cave in under the slightest pressure even the rare times he ever tries to do something supposedly in the public interest. It wouldn’t surprise me if he fails to follow through on even this paltry little traffic ticket. Look at what happened to his bogus “Volcker rule”.) Meanwhile they seem to be setting up the standard “bad apple”, in this case one Fabrice Tourre, the Goldman cadre who ran the ABACUS operation. Presumably Blankfein and the rest of the brass have plausible deniability. Ah, there’s that “rule of law” again….
So the administration is inviting Goldman to make the bad apple defense. They can get together to make a deal. They can scapegoat this bad apple, implicitly exonerating the Goldman brass. Goldman gets a slap on the wrist, Obama claims a big phony victory. That looks like the plan. (But like I said, watch for Obama to instead cave in.)  
 
(Meanwhile we can see another example of the government’s bad faith in that phony finance bill. They’re sure in need of propaganda help for it. Its centerpiece is looking to be the “resolution authority” scam. We can see the scam when we look at how this vaunted, robust “authority” would actually require court approval to be exercised. The Federal Bankruptcy Court would have to sign off on any resolution. That’s absurd on its face.
 
Even assuming the government ever actually wanted to “resolve” a collapsing big bank instead of bailing it out, which we should never assume, how are you supposed to do this when you’re melting down so fast that “by Monday we won’t have an economy”? All a bankrupt bank has to do is stall, fight the action in court, and the government will feel it has no choice but to cave in and bail them out.
 
That’s the intended outcome of the “resolution authority” scam. It’s designed to fail even in the unlikely contingency that the government really tried to use it.)
 
These are history’s worst robbers. We need to stop obsessing on the scam “legalities” and develop a fully political consciousness and attack. Sure, when there’s a particular example like this, we can have fun with parsing it – but only and always within the broader context that this is part of a political war. Don’t let the government, the banksters, or myopic commentators frame it as: “Let’s see if they got caught in a technical violation. That’s the extent of culpability here. The burden of proof is on the accuser to prove his case according to the technicalities. If this fails, that signifies innocence.”
 
That would be the equivalent of a Russian in WWII having to prove in any particular case that German invaders were committing a technical crime.
 
The right way to look at this case, or any case like it, is “So for once you’re claiming you’re going to apply your law to one of these crimes? Refreshing. But we’re not going to let you fool us. We’ll believe you’re serious about justice when you restore real laws which criminalize all finance crimes. Until then this is all a scam. We’re not going to wait for a day that will never come. We’ll seek to redeem the law on our own.”
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March 26, 2009

The Bailout War IV: Toxic Bank Assets and the Bailouts

 

(See also the rest of the five-part series)
 
https://attempter.wordpress.com/2009/03/24/the-bailout-war-part-i-aig/
 
https://attempter.wordpress.com/2009/03/24/the-bailout-war-ii-too-big-to-fail/
 
https://attempter.wordpress.com/2009/03/25/the-bailout-war-iii-corporatism-and-finance/ 
 
https://attempter.wordpress.com/2009/03/27/the-bailout-war-v-nationalization-and-relocalization/

 

For a long time I didn’t understand the toxic asset issue. I basically took the conventional frame for granted. This is that America needs for the big banks to get this toxic paper off their balance sheets at some elusive but extant acceptable price; that this is necessary for the good of the economy, of society, for posterity, etc. But it’s become clear that it’s not economically or socially necessary to do anything with this paper. It’s only claimed to be such by those who stand to profit from a massive handout and their agents in the media.
 
The point of all this policy angst is supposed to be to get the big banks lending again. The banks claim to be on board with this project. That’s what the government and the pundit pen have said from the start. That was how they sold the first $700 billion bailout, and that’s how they defend the $3+ trillion in secret loans the Fed has made. So why didn’t all this money do what it was supposed to do? If the idea was that the bad paper stinking up the banks’ balance sheets was crippling their lending abilities, the infusion of government money was supposed to be an end-run around this. There seems to be no reason the banks can’t lend and just let the “assets” sit. But they haven’t used the money to lend. They’ve hoarded some of it, and boasted that they’re hoarding not out of fear, but to be ready to use that money to seize acquisition opportunities. They’ve spent the rest: quite a bit on acquisitions, and more famously on bonuses, parties, golf outings, stadium sponsorships, airplanes…It seems the banks are not particularly nervous about their financial position. So what gives?
 
The truth is that before they are willing to resume lending, these bankers are demanding to be bailed out of these toxic paper positions. This is a stick-up. A ransom demand. The banksters are on strike. They are holding America hostage, and their demand is that America buy them out on their own terms. They’re saying, “You want us to lend? Gives us our profits first.” Until then it’s a work stoppage.
 
The big banks are insolvent. Their assets exceed their liabilities only in fantasy league accounting. If they actually had to obey their vaunted “market” and sell this paper at its real value they’d be bankrupt. They could have used the bailout money to recapitalize as they wrote down this paper, or they could have done the same while selling the paper to the government at marked-down value. This was in fact the original advertised bailout concept. But the irremediable obstacle is that the banks have always privately refused on principle to consider such a thing, while the Bush and Obama administrations were lying when they claimed otherwise. The banks, the administration, and the MSM with few exceptions refuse to accept anything short of a complete public buyout of these assets at fantasy model value. They haven’t yet figured out how to get away with this, although this week Geithner and Obama are trying again.
 
So given this impasse so far administration policy has sought to prop up the big banks with the minimum necessary but still massive welfare, and the implicit promise that one way or another the administration, in an act of top-down civil war, will redistribute from the people to the bankster elite however many $trillions are necessary to satisfy them. That’s why these are called “zombie banks”. Paul Krugman calls it a new kind of voodoo economics, “the belief that by performing elaborate financial rituals we can keep dead banks walking”.
 
This is unjust and an incalculable moral hazard (which in spite of its name is a practical concern, not a moral one; the powers that be seem to have closed ranks on this point, that whatever else they may debate, actual morality should have no place in the discussion; thus we get the supercilious tone even from nationalization advocates where it comes to “populism” and public rage).  
 
Meanwhile the cabal is seeking a new bubble. The fantasy among most in the government is that somehow this will all work out with a new bubble, new debt creation; the banks will be able to pay back the loans, perhaps all that paper can even be reinflated for a taxpayer profit and so on. It’s the exact fix any Ponzi schemer eventually finds himself in, except until now Ponzi schemes didn’t have full government support. But now the government is the top schemer, and who’s going to bail it out? America is running against a greater headwind all the time in selling its debt to China, and China’s looking for a way out.
 
It doesn’t matter right now. This is their policy and they’re sticking with it. Obama agrees which is why from the moment he was elected he tacked 180 degrees from “Change” to “continuity”. That’s why today we have the “new” Geithner plan, which is really just as retreaded from last September as Geithner is.
 
I’ll give a quick synopsis of the Geithner plan. They’re going to have an auction of this toxic paper. The bidders will be ostensibly private members of a “Public-Private Investment Program”. These private bidders will have to put up very little of their own money. The bulk of the money is to come from an FDIC bubble: Treasury will pledge some ridiculous amount, and the already precariously leveraged FDIC will match it 6:1. (They say FDIC isn’t happy about this. Nor should we be. It’s already questionable how readily FDIC, the bedrock of stability for America’s deposit banking system, could actually pay out claims in a commercial bank crisis. And now they’re going to use its balance sheet as a toxic asset shooting gallery. Sociopathic.) The rest of it will come from the $75-100 billion of TARP money still left. The private bidders can default on the loan portion of this at will. So they stand to profit if this paper ever goes up in value in some mythical future, while they have almost no risk. Meanwhile the Taxpayer’s exposure is overwhelming and completely negative. (OK, they too can profit if they turn out to have bought low. The chances of winning the lottery are better. Indeed, this is as if you gave somebody a million dollars to buy lottery tickets, only making him chip in a hundred bucks or so, and then gave him 20% of the tickets, and said he only had to pay you anything back if one of his tickets won.)
In addition to this bailout, the plan calls for the Term Asset Lending Facility, already dispenser of gargantuan sums, to lend the banks another $1 trillion or so, at generous terms and with no real collateral.
 
Of course the real and intended winners here are the banks. The auction is supposed to be the vehicle by which they can trump up an inflated price for these assets. The private bidders, bidding with taxpayer money, are intended to bid the price up to whatever figure the banks choose. Then the adminstration happily shovels out that much money in a monumental loot conveyance, while claiming “the market” discovered that price, and that this is what we need to do to put the financial system on solid ground. As Yves Smith wrote, they must really think we’re idiots.
 
We must be clear that these “securities” have little if any real value. They never had more than a fantasy value. Now that the fantasy has been dispelled, the market has correctly priced them at or near zero. But the administration’s top priority is to bail out the banks, so they want to hand out as much public money as is politically possible. Beyond that, they’re like hippies trying to levitate the Pentagon. They want to levitate a new debt bubble. They believe we can resume exponential growth. Even the best of them is intellectually bankrupt. This is all they have. Reinflate, levitate. Indeed, the fantastical alleged taxpayer upside is completely dependent upon reflating the “growth” bubble, meaning the debt bubble. (America has not in fact legitimately grown in this century, it has only bubbled up debt.)
 
The bankers concur with the administration that their profitable bailout be the #1 priority. Only then will they too join in seeking the next bubble, and embarking upon new disaster capitalist expeditions.
 
The real public-private relationship can be seen in comparing these two quotes:
 
Geithner from February: “We have a financial system that is run by private shareholders, managed by private institutions, and we’d like to do our best to preserve that system.”
 
At around the same time, Citi’s Vikram Pandit: “We completely remain in day-to-day charge of the company. We are going to run Citi for shareholders.”
 
Citi has to date received over $350 billion in handouts and loan guarantees (another kind of handout). It seems Pandit and Geithner are simpatico. Geithner only needed to add that where it comes to financial policy, the administration as well is run and managed by private shareholders, and they want to do their best to preserve that system.
 
Here we have explicit public-private confirmation of a corporatist coup. 
 
The stock market stands ready as enforcer. How did the Lehman failure cause a market crash? Or the failure of the first bailout vote in the House last September? It was market terrorism, a corrective blow, the infliction of punishment upon society for misbehaving. The market insists that every policy step have private investor profit with socialization of all losses as its overriding goal. It demands that unlimited public resources be used up for this purpose. When the government misbehaved and allowed one of the fraternity to fail, the market launched a retaliatory strike against America. You could view it as a terrorist attack. And you should consider that when you see how the market rewarded the announcement of the new PPIP. As Naomi Klein wrote back in November, “The markets can be relied on to vote in precisely the opposite way that Americans have just voted….Any and all moves to change course will be met with short term market shocks.” When the media knuckles under and parrots the dogma, Bailouts Uber Alles, we have Too Big To Fail joining with appeasement.
 
So that’s the bottleneck we face: an extortion racket, bankers demanding that their private profit be the #1 concern of public policy; and an administration which is ideologically sympathetic but which is under political constraint such that it can’t directly convey the loot. It needs to find ways to redirect and launder it. This is the  source of the “public-private” concept, with these Potemkin “private ” investors who are really in effect extremely well paid agents earning a guaranteed salary for playing the role of capitalists. The result is an administration which is malevolent in principle, bumbling and ad hoc in practice. Willem Buiter gets it just right: the bailouts are “without redeeming social value”. (I add, this thereby places them in the legal category of obscenity.)
 
Fundamentally, the concept that these assets have to come off the books at a profit level dictated by the banks is a theological tenet. The zombie banks and the financial/insurance/real estate (FIRE) trust as a whole are existential and psychological obstructions to any kind of real solution. All their actions are devoted to further consolidation and more intensive rent-seeking – the consolidation and intensification of a new feudalism.
 
As for our general problem, it’s that everyone in positions of power or influence have one and only one pseudo-idea: always, always more lending, more debt, more bubbles.
 
The numbers no longer have meaning: $100 billion more from TARP, plus a lot more from new Treasury borrowing, and that amount to be sextupled by even more borrowing in the name of the FDIC, oh and don’t forget another $1 trillion in sweetheart loans. This is clinical insanity by now.
 
I’m convinced the “leadership” has actually given up all reality-based hope of saving the situation. Where not bolstered by ideology, their nerves have caved in completely. They can only see, only think, only scream “More debt!” It’s a depraved latter-day degeneration from the call Marx imagined them hearing in the capitalist heyday, “Go on! Go on!” toward more production, more profit. Today they can only go on under the hypnosis and artificial stimulant of debt.
 
Anyone not psychologically sealed in the insanity must look at this Tower of Babel of debt, being built ever higher and ever more top-heavy by the day, and know that it can never reach whatever heaven the bingers are seeking.
 
If we are to try to constructively unwind the exponential debt civilization, the first thing to do is detach in our minds from the lies and craziness, as well as the seductions and promises, of this delusion. The seductions are only a mirage; no amount of propping up dead banks, no matter how profitable for the bankers themselves, is going to bring back the greed circle of debt which for a few years swept everyone along. People’s material conditions are now being forcibly simplified, but this can all be for the better if not the good if we use this pivot to simplify our aspirations as well.
 
The world can be a beautiful place, and no one needs the debt civilization to live there. But first we must free ourselves, and a good place to start is to stop fearing the threats of bankers.
 
[Next up: Nationalization]
 
 

March 24, 2009

The Bailout War II: Too Big To Fail

 

(See also the rest of the five-part series)
 
https://attempter.wordpress.com/2009/03/24/the-bailout-war-part-i-aig/ 
 
https://attempter.wordpress.com/2009/03/25/the-bailout-war-iii-corporatism-and-finance/
 
https://attempter.wordpress.com/2009/03/26/the-bailout-war-part-iv-toxic-bank-assets-and-the-bailouts/
 
https://attempter.wordpress.com/2009/03/27/the-bailout-war-v-nationalization-and-relocalization/

 

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)
 
 
https://attempter.wordpress.com/2009/03/24/the-bailout-war-ii-too-big-to-fail/
 
https://attempter.wordpress.com/2009/03/25/the-bailout-war-iii-corporatism-and-finance/
 
https://attempter.wordpress.com/2009/03/26/the-bailout-war-part-iv-toxic-bank-assets-and-the-bailouts/
 
https://attempter.wordpress.com/2009/03/27/the-bailout-war-v-nationalization-and-relocalization/

 

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.nytimes.com/2009/02/28/business/28nocera.html
 
http://www.globalresearch.ca/index.php?context=va&aid=12265 michael hudson
 
http://www.rollingstone.com/politics/story/26793903/the_big_takeover/print
 
http://www.nytimes.com/2009/03/17/business/17sorkin.html

March 20, 2009

AIG 2

NYT admission: AIG is racketeering.

The NYT’s Andrew Sorkin has written a piece unusual for the MSM.

http://www.nytimes.com/2009/03/17/business/17sorkin.html?hp=&pagewanted=print  

What’s unusual is not the standard MSM corporatist ideology and theological adherence to “Too Big To Fail”, the angry volcano everyone dances around, looking more and more tribalistic all the time. Nor is the slimy sanctity-of-contracts argument unusual. On the contrary, it’s the same old heads-I-win, tails-you-lose.   

What’s unusual is how Sorkin openly states, as a matter of fact and not rhetoric, that AIG and the banks are literally extortionists, only metaphorically holding society at gunpoint, but just as surely demanding protection money or else.   Sorkin actually says the AIG gangsters need to be paid or they’ll get revenge through intentional subversion and treason.

Let’s go through it:  

The Case for Paying Out Bonuses at A.I.G. By ANDREW ROSS SORKIN 

Do we really have to foot the bill for those bonuses at the American International Group?

It sure does sting. A staggering $165 million – for employees of a company that nearly took down the financial system. And heck, we, the taxpayers, own nearly 80 percent of A.I.G.

It doesn’t seem fair.

So here is a sobering thought: Maybe we have to swallow hard and pay up, partly for our own good. I can hear the howls already, so let me explain.

Everyone from President Obama down seems outraged by this. The president suggested on Monday that we just tear up those bonus contracts. He told the Treasury secretary, Timothy F. Geithner, to use every legal means to recoup taxpayers’ money. Hard to argue there.

“This isn’t just a matter of dollars and cents,” he said. “It’s about our fundamental values.”

On that last issue, lawyers, Wall Street types and compensation consultants agree with the president. But from their point of view, the “fundamental value” in question here is the sanctity of contracts.

That may strike many people as a bit of convenient legalese, but maybe there is something to it. If you think this economy is a mess now, imagine what it would look like if the business community started to worry that the government would start abrogating contracts left and right.

 

This is disingenuous. As others have pointed out, there are many perfectly legal ways that contracts can be modified after the fact: if material conditions change, non-performance, non-disclosure of important information (e.g. if a trader was taking reckless positions), functional insolvency (like when the government has to take you over), acts of god, force majeure, unconscionable outcomes, and most of all in this case, fraud and crime.

The facts are that AIG has been running a massive pyramid scheme, selling fake insurance policies to banks to enable them to evade capital reserve requirements. Meanwhile, enabled all the way by corrupt regulators, it was allowed to turn around and claim it wasn’t selling insurance after all, and therefore wasn’t subject to regulation as an insurer, or to maintain the requisite capital reserves of an insurer. It could instead invest the revenues from this scam in other derivative scams, enabling other pyramid schemes, and so on. All of this was certainly in violation of the spirit of god knows how many laws, and I have no doubt an intrepid prosecutor could prove them guilty in the letter-of-the-law sense.

In particular, these bonuses are clearly “fraudulent conveyance”, which is stripping assets from a company in the form of “compensation” when you realize the company is in financial trouble. It’s looting plain and simple, stealing from the company on your way out the door. (AIG is, of course, insolvent in reality; only redistribution of wealth from the taxpayers is propping it up.)

We saw another particularly brazen example of this at Merrill late last year.

So let’s be clear: there are ample reasons to void these “contracts”, or at least delay their execution, which shouldn’t for a moment unnerve any legitimate businessman.  

As much as we might want to void those A.I.G. pay contracts, Pearl Meyer, a compensation consultant at Steven Hall & Partners, says it would put American business on a worse slippery slope than it already is. Business agreements of other companies that have taken taxpayer money might fall into question. Even companies that have not turned to Washington might seize the opportunity to break inconvenient contracts. 

If government officials were to break the contracts, they would be “breaking a bond,” Ms. Meyer says. “They are raising a whole new question about the trust and commitment organizations have to their employees.” (The auto industry unions are facing a similar issue – but the big difference is that there is a negotiation; no one is unilaterally tearing up contracts.)

 

Beyond the facts of AIG con artistry, let me emphasize the broad fact that the finance “industry” from its inception has sought to exist outside the law. Its entire lobbying agenda has been to empower it above the law, beyond regulation. They have in fact wanted to be outlaws, and succeeded in becoming so.

Of course, as always with feudalists, they only wanted the upside profit from this, and wanted only the people to bear the risks, the costs, the losses, the pain.

And now through flunkies like this they dare to cite the “sanctity of contracts” and accuse anyone who is skeptical of wanting to “break a bond”?

What contracts? AIG wrote all these contracts they could never pay off. Right there they have forfeited forever any right to have any contract which would benefit them, like these loot-seeking “bonus” contracts, honored. They no longer exist in the world of contracts.

What bond? AIG and its confederates long ago renounced any “bond” they could possibly have had with anyone, with any society. For all intents and purposes, they renounced any American or even human citizenship when they embarked upon their monumental con job and looting expedition, when they sought the eradication of all regulation, all social restraint, all rule of law, except where such things could be twisted to their benefit. They are anti-social to the level of a capital crime. They no longer exist in the world of bonds.

So I would happily deal with them as the outlaws they always wanted to be.

And now for the terrorist threat:  

But what about the commitment to taxpayers? Here is the second, perhaps more sobering thought: A.I.G. built this bomb, and it may be the only outfit that really knows how to defuse it.

 

A.I.G. employees concocted complex derivatives that then wormed their way through the global financial system. If they leave – the buzz on Wall Street is that some have, and more are ready to – they might simply turn around and trade against A.I.G.’s book. Why not? They know how bad it is. They built it.

So as unpalatable as it seems, taxpayers need to keep some of these brainiacs in their seats, if only to prevent them from turning against the company. In the end, we may actually be better off if they can figure out how to unwind these tricky investments.

 

So here MSM Sorkin goes further than anyone else I’ve seen in saying (1) these cadres have intentionally set financial charges all over the economy, (2) they are now demanding protection money, (3) if they’re denied, the bombs will go off, (4) indeed these agents will personally detonate these charges, (5) in order to destroy the American and global economies.

This reads like James Bond villainy. And it seems correct. It seems to be exactly what’s happening here.

So why aren’t these extortionists in prison? This is their “rule of law”? Last time I checked extortion was a crime as well.

Here’s the rest: 

Not that any of this takes the bite out of paying these bonuses. For better or worse – in this case, worse – someone at A.I.G. decided this company needed to sign bonus agreements last year to keep people before the full extent of its problems became clear. Now we can debate why A.I.G. felt it necessary to guarantee seven executives at least $3 million apiece when the economy was clearly on shaky ground. Perhaps we will find out these contracts were a bit of sleight of hand to enrich executives who knew this financial Titanic had hit the iceberg. But another possible explanation is that A.I.G. knew it needed to keep its people.
That is the explanation offered by Edward M. Liddy, who was installed as A.I.G.’s chief executive when the government effectively nationalized the company last fall. (He is being paid $1 a year.)

“We cannot attract and retain the best and brightest talent to lead and staff” the company “if employees believe that their compensation is subject to continued and arbitrary adjustment by the U.S. Treasury,” he said.

There’s some truth to what Mr. Liddy is saying. Would you want to work at A.I.G.? Sure, maybe for $3 million. But not if you could go somewhere else for even more – or even much less.

“The jobs are terrible,” said Robert M. Sedgwick, an executive compensation lawyer at Morrison Cohen who represents a number of employees of banks that have taken government money. “You have to read about yourself in the paper every day. These people are leaving as soon as they can.”

Let them leave, you say. Where would they go, given the troubles in the financial industry? But the fact is, the real moneymakers in finance always have a place to go. You can bet that someone would scoop up the talent from A.I.G. and, quite possibly, put it to work – against taxpayers’ interests.

“The word on the street is that A.I.G. employees are being heavily recruited,” Ms. Meyer says.

Of course, if taxpayers had not bailed out A.I.G., these contracts would not be worth anything. Andrew M. Cuomo, the attorney general of New York, made the point on Monday, when he subpoenaed A.I.G. for the names of the people who received the bonuses. If A.I.G. had spiraled into bankruptcy, its employees would have had to get in line with other unsecured creditors.

Mr. Cuomo wants to know who A.I.G.’s lucky employees are, and how they have been doing at their jobs. So here is a suggestion for him. Get the list, and give those big earners at A.I.G. a not-so-subtle nudge: Perhaps they will “volunteer” to give some of their bonuses back or watch their names hit the newspapers. But in the meantime, despite how offensive and painful it might be, let’s honor the contracts.

 

So it’s no longer just rabble-rousers in the blogosphere accusing AIG and the banks of racketeering and extortion, and making comparisons to terrorism. We now have the NYT’s corporatist business section conceding the truth of this and ordering us to knuckle under and submit.

I’ve long had my doubts about the Too Big To Fail religion. I believe it’s a classical Big Lie, meant to terrorize the people into standing by like sheep as the country is further looted.

But even beyond the “truth” of what would happen if we rejected the bailout ideology and let these insolvent entities go down, I don’t see how any human being would want to live under the thumb of this protection racket, paying up every month or else the system goes down and you wouldn’t be able to buy cheap crap from China anymore.

The exponential debt model is not sustainable. One way or another this financial edifice must come down anyway. Many material things will have to be foregone. Wouldn’t it be better to take what real wealth still remains to us and use it toward a rational, human transformation and devolution? What’s more, wouldn’t it be better to come through it with our human dignity intact?

One thing’s for sure. We keep obeying the dictates of government and media, and keep “bailing out” these criminals, and we’ll soon have nothing left of wealth or dignity.     

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