Or, maybe your new passport will read “United Baronies of Wall Street,” but the message is the same. The political coup d’etat is almost complete, our transition to feudal corporate capitalism has been smoothly accomplished thanks to the latest extreme crisis that is the trademark of what Naomi Klein called “disaster capitalism” in her recent book Shock Doctrine. You think I am exaggerating? Hear how Edward Liddy, CEO of AIG referred to the US Treasury and Federal Reserve: “our partners in the government;” or the warning issued by Mr. Guenther, a top executive with the Independent Community Bankers of America, after Phil Gramm persuaded Congress to gut the Glass-Steagall Act, “We’re moving to an oligopolistic situation,” quoted by Matt Taibbi, writing in “The Big Takeover” in Rolling Stone. (http://www.rollingstone.com/politics/story/26793903/the_big_takeover). We are now in the end game of a political revolution which started with minor de-regulation of the financial industry under Clinton and became a roaring tidal wave under Bush II, turning Wall Street into a casino, enabling a small class of enormously wealthy insiders to “control elections, buy influence, and systematically weaken financial regulations,” thus creating a mess so complicated only the perpetrators could understand it and, supposedly, resolve it. Taibbi puts it bluntly:
The crisis was the coup de grace: Given virtually free rein over the economy, these same insiders first wrecked the financial world, then cunningly granted themselves nearly unlimited emergency powers to clean up their own mess. And so the gambling-addict leaders of companies like AIG end up not penniless and in jail, but with (a).... death grip on the Treasury and the Federal Reserve
Populist outrage notwithstanding, the system does not appear to be in danger of serious reform. The fox is in charge of the henhouse, and, despite the concentration of attention on AIG, the fingerprints of Goldman Sachs are all over every phase of the crisis, a crisis which in fact is not really about money---- it is about power. Just how did this come about, is there anything we can do about it (and is Obama willing)?
THE STRAIGHT SKINNY. In the late 1990's cash-strapped Democrats under Clinton decided to become more “pro-business” and compete with Republicans for campaign donations, says Taibbi. Wall Street over the past 10 years has gleefully spent $2.7 Billion on political influence: $1.7 B for both parties and $1 B for lobbyists. It was money well-spent. After freeing the financiers from the fire-wall restrictions of Glass-Steagall in 1999, Senator Gramm delivered The Commodity Modernization Act in 2000 which prevented regulation of new financial instruments like the credit swaps, and a few years later when various State Attorneys General, including Elliott Spitzer, tried to protect their residents from burgeoning predatory lending, the Bush regime high-handedly overrode state consumer protection laws, citing the obscure National Bank Act of 1863. (http://www.alternet.org/bloggers/http://brilliantatbreakfast.blogspot.co...).
Once the big financial institutions of Wall Street (investment banks like Lehman Brothers and Goldman Sachs and insurance companies like AIG) were de-regulated, they devised innovative new financial instruments called collateralized debt obligations (CDOs) which Taibbi describes as black boxes full of diced-up assets (mortgages, corporate loans, credit-card loans, even other CDOs) that receive debtors’ payments. If some loans in the box went bad, others continued to pay, so the CDO could be given an over-all AAA credit rating, and anyway it was possible to buy insurance on the CDO, just in case. Clever quants (computer geniuses who devised complicated formulae and quantitative analyses of these new instruments) created the credit default swap (CDS) to cover their CDOs and spread the risk around; Taibbi calls the CDS “just a bet on an outcome,” like Las Vegas. Thanks to the security of insurance, no one felt it necessary to hold much cash in reserve to cover any bad loans, and the bankers went wild, selling CDOs and CDSs around the world as well as to each other, making obscene profits.
The wildest banker was Joseph Cassano of AIG Financial Products, a man of surpassing arrogance who told his corporate bosses to leave him alone, what he did was too complicated to explain except that it made money by the boatload, and they did. Cassano even sold “naked CDOs” which is to say neither buyer nor seller actually held the underlying loan: in other words, Bank B not only sells CDS protection to Bank A for its mortgage on a particular property, but turns around and sells protection to Bank C for the very same mortgage and maybe to Banks D through Z as well— gambling Wall Street style.
Cassano was taking book for every bank that bet short on the housing market, but he didn’t have the cash to pay off...
Taibbi calls Cassano Patient Zero in the contagion of gambling that suffused Wall Street; in seven years the man sold some $500 Billion of CDS protection, helping to raise AIG’s profits from $737 Million in 1999 to $3.2 Billion in 2005. (In case you’re wondering, Cassano himself earned $280 Million minimum over the time period, and his 400 AIGFP employees were paid a total of $3.5 Billion).
WHAT REGULATION? When the European Union threatened to regulate these goings on, AIG, GE, and Ameriprise in 2007 persuaded the EU that they were already well-regulated by the Office of Thrift Supervision. Thanks to another law passed in 1999, holding companies, if they owned at least one savings and loan, could choose to be regulated by the OTS, a tiny, understaffed body which had neither interest in supervising mega-corporations nor personnel to do so, and which showed even less diligence after Bush became President. Companies hastened to a buy a thrift institution and place themselves under the compliant OTS. During the years the EU was nosing around, the top five investment banks made a preemptive strike, sending Hank Paulson of Goldman Sachs (future Secretary of the Treasury) to persuade Bush’s Chair of the SEC, William Donaldson (himself a former investment banker) that they wanted to be restricted from “engaging in excessively risky activity” in exchange for being released from any lending restrictions. Neither Donaldson nor his successor, Christopher Cox, followed up with the slightest regulation, with the result that the investment banks were actually regulated by no one. Once the capital requirements were gone, they all allowed their debt-to-equity ratios to soar to a stunningly imprudent 33 to 1 or higher.
By mid-2008 Goldman Sachs had enormous exposure to AIG; they had in fact been Cassano’s biggest customer with $20 Billion exposure. Cassano was forced to retire in February 2008 when AIG posted $11.5 Billion in annual losses; by September 2008, AIG had suffered another downgrade in its credit rating, and on the 13th its top management was summoned to the New York Federal Reserve under Tim Geithner to meet with him, Dinallo the Fed’s insurance expert, Paulson who was by then Secretary of the Treasury but was preoccupied by the collapse of Lehman Brothers, and Lloyd Blankfein who had replaced him as chief of Goldman Sachs, present no doubt because of their horrendous exposure to AIG. The only one missing was the supposed regulator, C.K. Lee of the OTS. Paulson told AIG to borrow however much money needed to cover their losses, but that was of course impossible, so by the 14th of September the bailout by Paulson’s Treasury was underway. As market analyst Eric Saltzman says, “If AIG went down, there was a good chance Goldman would not be able to collect.” It was, in effect, a case of Goldman Sachs bailing out Goldman Sachs.... with public money.
SECRET SEIZURE OF POWER. When Paulson demanded his $700 Billion bailout money (TARP) immediately from Congress with no strings attached, Congress attempted to impose some requirements. Paulson still did not explain what he was doing, or where the money really went and, indeed, secretiveness is the hallmark of Paulson and his fellow Wall Street financiers, every one of whom appears to regard the rest of us as peasants too stupid to understand high finance, so they categorically will not explain anything. According to Taibbi, the essence of “Paulsonism” is secrecy while Paulson was turning the government into a giant bureaucracy which socialized the toxic waste of Wall Street while keeping profits and the management of the bailed out firms in private hands “for the sole purpose of preserving the influence of the megafirms.” Deregulating the Big Banks has enabled them to grow “too big to fail,” to crush and gobble up smaller institutions---- regional banks are being allowed to fail, you will notice, thus enhancing still more the power of the few big ones. These monsters have used the bailout money for purchasing other banks as well as for paying their top employees handsome bonuses (AIG is only the most prominent example)---- no wonder they refuse to discuss it.
The Fed has always been secretive, but you used to be able to read its H4 reports (“Factors Affecting Reserve Balances”) and see how they were managing the money supply and controlling interest rates. If the Fed bought Treasury bills and securities from, say, Goldman Sachs, the bank had more money to lend so interest rates would go down; if the Fed sold securities to the banks, the supply of money would decrease and interest rates rise, and the figures were right there in H4. Beginning in 2007 the Fed began buying more and more securities in an effort to inject cash to relieve the credit crunch, going from the usual $25 Billion purchase to $58 Billion to $77 Billion to $125 Billion---- to zero in 2009. Now we have no way of knowing what is going on. Why? A whole zoo of new operations has been invented to inject cash into the economy: Term Auction Facility, Term Securities Lending Facility, Primary Dealer Credit Facility, Money Market Investor Funding Facility, Maiden Lane I, II, and III, among others, and there is no transparency on how these are used. So far, it appears that $3 Trillion has been put out in loans and $1 Trillion in guarantees of private investments. While this is not taxpayer money, it affects us directly because it has a huge effect on the economy.
Who gets that money? How much is simply disappearing into black holes in the economy? No one knows, or no one is saying. Is this a “permanent, state-aided crutch” to Wall Street, “designed to systematically suck bad investments off the ledgers of irresponsible” big bankers? We do not know; every six months this is quietly renewed with no explanations. Even worse, no one is allowed to audit the Federal Reserve, by law. Section 31 USC 714(b) of The Accounting and Auditing Act of 1950 actually says that congressional audits of the Fed may not include “deliberations, decisions, and actions on monetary policy matters.” What else is there? That's everything.
What we have is “something truly revolutionary,” a shadow government with a budget many times the federal budget, administered dictatorially by one man, Fed Chairman Ben Bernanke. Plus, there is the Treasury, which has likewise concealed what it is doing, especially with the original $350 Billion given out by Bush appointee Paulson, who refused to explain his criteria for giving out the money. One anonymous member of Congress said of the TARP process, “basically if you knew Hank Paulson, you got the money.” Is Geithner, who was mentored by a Goldman Sachs alum, going to be any different?
Paulson and his cronies have “turned the federal government into one gigantic, half-opaque holding company” very much like AIG, with no mechanism for auditing itself, a “two-tiered state” with a much too complex economy, run by a wealthy financial elite on top supported by a mass of clueless peasants below. As Taibbi asks,
And on the linear spectrum of capitalism to socialism, where exactly are we now?
To be followed by “The Mess We’re In, Part II: Taking Back Control” and a look at why Spitzer maybe was taken out