No empire can survive being rendered a permanent laughingstock, which is what happened as of a few weeks ago, when the buffoons who have been running things in this country finally went one step too far. And all this happened at the end of eight straight years that America devoted to frantically chasing the shadow of a terrorist threat to no avail, eight years spent stopping every citizen at every airport to search every purse, bag, crotch and briefcase for juice boxes and explosive tubes of toothpaste. He conveniently forgot to mention that AIG had spent more than a decade systematically scheming to evade U. Nor did anyone mention that when AIG finally got up from its seat at the Wall Street casino, broke and busted in the afterdawn light, it owed money all over town — and that a huge chunk of your taxpayer dollars in this particular bailout scam will be going to pay off the other high rollers at its table. Or that this was a casino unique among all casinos, one where middle-class taxpayers cover the bets of billionaires.
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No empire can survive being rendered a permanent laughingstock, which is what happened as of a few weeks ago, when the buffoons who have been running things in this country finally went one step too far. And all this happened at the end of eight straight years that America devoted to frantically chasing the shadow of a terrorist threat to no avail, eight years spent stopping every citizen at every airport to search every purse, bag, crotch and briefcase for juice boxes and explosive tubes of toothpaste.
He conveniently forgot to mention that AIG had spent more than a decade systematically scheming to evade U. Nor did anyone mention that when AIG finally got up from its seat at the Wall Street casino, broke and busted in the afterdawn light, it owed money all over town — and that a huge chunk of your taxpayer dollars in this particular bailout scam will be going to pay off the other high rollers at its table.
Or that this was a casino unique among all casinos, one where middle-class taxpayers cover the bets of billionaires. They cemented and formalized a political trend that has been snowballing for decades: the gradual takeover of the government by a small class of connected insiders, who used money to control elections, buy influence and systematically weaken financial regulations. The mistake most people make in looking at the financial crisis is thinking of it in terms of money, a habit that might lead you to look at the unfolding mess as a huge bonus-killing downer for the Wall Street class.
But if you look at it in purely Machiavellian terms, what you see is a colossal power grab that threatens to turn the federal government into a kind of giant Enron — a huge, impenetrable black box filled with self-dealing insiders whose scheme is the securing of individual profits at the expense of an ocean of unwitting involuntary shareholders, previously known as taxpayers. The best way to understand the financial crisis is to understand the meltdown at AIG.
AIG is what happens when short, bald managers of otherwise boring financial bureaucracies start seeing Brad Pitt in the mirror. Cassano, a pudgy, balding Brooklyn College grad with beady eyes and way too much forehead, cut his teeth in the Eighties working for Mike Milken, the granddaddy of modern Wall Street debt alchemists. Milken, who pioneered the creative use of junk bonds, relied on messianic genius and a whole array of insider schemes to evade detection while wreaking financial disaster.
Whatever is unregulated, all the action is going to pile into that. A CDO is like a box full of diced-up assets. They can be anything: mortgages, corporate loans, aircraft loans, credit-card loans, even other CDOs. So as X mortgage holder pays his bill, and Y corporate debtor pays his bill, and Z credit-card debtor pays his bill, money flows into the box.
The key idea behind a CDO is that there will always be at least some money in the box, regardless of how dicey the individual assets inside it are. No matter how you look at a single unemployed ex-con trying to pay the note on a six-bedroom house, he looks like a bad investment. But dump his loan in a box with a smorgasbord of auto loans, credit-card debt, corporate bonds and other crap, and you can be reasonably sure that somebody is going to pay up.
Suddenly, thanks to this financial seal of approval, banks had a way to turn their shittiest mortgages and other financial waste into investment-grade paper and sell them to institutional investors like pensions and insurance companies, which were forced by regulators to keep their portfolios as safe as possible.
Because CDOs offered higher rates of return than truly safe products like Treasury bills, it was a win-win: Banks made a fortune selling CDOs, and big investors made much more holding them. The problem was, none of this was based on reality. To get AAA ratings, the CDOs relied not on their actual underlying assets but on crazy mathematical formulas that the banks cooked up to make the investments look safer than they really were.
In fact, there was such a crush to underwrite CDOs that it became hard to find enough subprime mortgages — read: enough unemployed meth dealers willing to buy million-dollar homes for no money down — to fill them all.
As banks and investors of all kinds took on more and more in CDOs and similar instruments, they needed some way to hedge their massive bets — some kind of insurance policy, in case the housing bubble burst and all that debt went south at the same time. His tool of choice was another new financial instrument known as a credit-default swap, or CDS. The CDS was popularized by J. One of their goals was to find a way to lend more money, while working around regulations that required them to keep a set amount of cash in reserve to back those loans.
What they came up with was an early version of the credit-default swap. In its simplest form, a CDS is just a bet on an outcome. In theory, Bank A is covered if the Pope goes on a meth binge and loses his job. When Morgan presented their plans for credit swaps to regulators in the late Nineties, they argued that if they bought CDS protection for enough of the investments in their portfolio, they had effectively moved the risk off their books.
Therefore, they argued, they should be allowed to lend more, without keeping more cash in reserve. A whole host of regulators — from the Federal Reserve to the Office of the Comptroller of the Currency — accepted the argument, and Morgan was allowed to put more money on the street.
But as Cassano went on a selling spree, the deals he made differed from traditional insurance in several significant ways. So Cassano could sell investment banks billions in guarantees without having any single asset to back it up. It was no different from gambling, the Wall Street version of a bunch of frat brothers betting on Jay Feely to make a field goal.
So long as defaults on the underlying securities remained a highly unlikely proposition, AIG was essentially collecting huge and steadily climbing premiums by selling insurance for the disaster it thought would never come. Everyone made their money — and then it all went to shit. Phil Gramm — a grinning, laissez-faire ideologue from Texas — had finished engineering the most dramatic deregulation of the financial industry since Emperor Hien Tsung invented paper money in A.
Ever since the Great Depression, commercial banks — those that kept money on deposit for individuals and businesses — had not been allowed to double as investment banks, which raise money by issuing and selling securities. The Glass-Steagall Act, passed during the Depression, also prevented banks of any kind from getting into the insurance business. They quickly got what they paid for. In , Gramm co-sponsored a bill that repealed key aspects of the Glass-Steagall Act, smoothing the way for the creation of financial megafirms like Citigroup.
The move did away with the built-in protections afforded by smaller banks. But a giant merged bank might write that loan and then sell it off to some fool in China, and who cared?
The very next year, Gramm compounded the problem by writing a sweeping new law called the Commodity Futures Modernization Act that made it impossible to regulate credit swaps as either gambling or securities. Commercial banks — which, thanks to Gramm, were now competing directly with investment banks for customers — were driven to buy credit swaps to loosen capital in search of higher yields.
The blanket exemption meant that Joe Cassano could now sell as many CDS contracts as he wanted, building up as huge a position as he wanted, without anyone in government saying a word. When investment banks write CDS deals, they hedge them. How a behemoth like AIG came to be regulated by the little-known and relatively small OTS is yet another triumph of the deregulatory instinct. Under another law passed in , certain kinds of holding companies could choose the OTS as their regulator, provided they owned one or more thrifts better known as savings-and-loans.
Because the OTS was viewed as more compliant than the Fed or the Securities and Exchange Commission, companies rushed to reclassify themselves as thrifts. But the OTS managed to convince the Europeans that it had the muscle to regulate these giant companies. What you have to understand is that these regulators have ultimate power. Lee — basically admitted that he had blown it.
Because the company told him so. Lee now works as Midwest region director of the OTS; the agency declined to make him available for an interview. For six months before its meltdown, according to insiders, the company had been searching for a full-time chief financial officer and a chief risk-assessment officer, but never got around to hiring either. That meant that the 18th-largest company in the world had no one checking to make sure its balance sheet was safe and no one keeping track of how much cash and assets the firm had on hand.
The situation was so bad that when outside consultants were called in a few weeks before the bailout, senior executives were unable to answer even the most basic questions about their company — like, for instance, how much exposure the firm had to the residential-mortgage market. When the growing credit crunch prompted senior AIG executives to re-examine its liabilities, a company accountant named Joseph St.
Cassano had. What sank AIG in the end was another credit downgrade. Cassano had written so many CDS deals that when the company was facing another downgrade to its credit rating last September, from AA to A, it needed to post billions in collateral — not only more cash than it had on its balance sheet but more cash than it could raise even if it sold off every single one of its liquid assets.
Even so, management dithered for days, not believing the company was in serious trouble. Treasury Secretary Hank Paulson, who spent most of the weekend preoccupied with the collapse of Lehman Brothers, came in and out. And the bailout was on. Then, in January , the company did it again.
And to whom? The act helped create the too-big-to-fail financial behemoths like Citigroup, AIG and Bank of America — and in turn helped those companies slowly crush their smaller competitors, leaving the major Wall Street firms with even more money and power to lobby for further deregulatory measures. The situation worsened in , in an extraordinary move toward deregulation that never even got to a vote.
The banks generously volunteered to submit to new rules restricting them from engaging in excessively risky activity. In exchange, they asked to be released from any lending restrictions.
The discussion about the new rules lasted just 55 minutes, and there was not a single representative of a major media outlet there to record the fateful decision. The only catch was, neither Donaldson nor his successor, Christopher Cox, actually did any regulating of the banks. Great deal for the banks, which originally complained about being regulated by both Europe and the SEC, and ended up being regulated by no one.
Once the capital requirements were gone, those top five banks went hog-wild, jumping ass-first into the then-raging housing bubble.
One of those was Bear Stearns, which used its freedom to drown itself in bad mortgage loans. Freed from all capital restraints, sitting pretty with its man running the Treasury, Goldman jumped into the housing craze just like everyone else on Wall Street. In truth, Goldman still had a huge exposure come that fateful summer of — to none other than Joe Cassano. Which might explain why Goldman chief Lloyd Blankfein was in the room with ex-Goldmanite Hank Paulson that weekend of September 13th, when the federal government was supposedly bailing out AIG.
When asked why Blankfein was there, one of the government officials who was in the meeting shrugs. Eventually, Paulson went a step further, elevating another ex-Goldmanite named Edward Liddy to run AIG — a company whose bailout money would be coming, in part, from the newly created TARP program, administered by another Goldman banker named Neel Kashkari.
REPO MEN There are plenty of people who have noticed, in recent years, that when they lost their homes to foreclosure or were forced into bankruptcy because of crippling credit-card debt, no one in the government was there to rescue them. That roll of the eyes is a key part of the psychology of Paulsonism. The state is now being asked not just to call off its regulators or give tax breaks or funnel a few contracts to connected companies; it is intervening directly in the economy, for the sole purpose of preserving the influence of the megafirms.
Moreover, this whole process would be done in secret, away from the prying eyes of NASCAR dads, broke-ass liberals who read translations of French novels, subprime mortgage holders and other such financial losers. Some aspects of the bailout were secretive to the point of absurdity. In the pre-crisis days, the Fed used to manage the money supply by periodically buying and selling securities on the open market through so-called Repurchase Agreements, or Repos.
Selling the securities back to the banks reduces the money available for lending, which makes interest rates go up. If you look at the weekly H4 reports going back to the summer of , you start to notice something alarming. The reason the number has dropped to nothing is that the Fed had simply stopped using relatively transparent devices like repurchase agreements to pump its money into the hands of private companies.
And this new, secretive activity by the Fed completely eclipses the TARP program in terms of its influence on the economy. Moreover, no one can really be sure if these new institutions are even temporary at all — or whether they are being set up as permanent, state-aided crutches to Wall Street, designed to systematically suck bad investments off the ledgers of irresponsible lenders. Ron Paul. They just sort of quietly announce it.
When Stevens asked the GAO about what authority Congress has to monitor the Fed, he got back a letter citing an obscure statute that nobody had ever heard of before: the Accounting and Auditing Act of Or by anyone else, for that matter.
The Big Takeover: A Must-Read from Rolling Stone's Matt Taibbi
Links Transcript This is a rush transcript. Copy may not be in its final form. This is Treasury Secretary Geithner. We need to extend those protections and authorities to cover the risks posed by our more diverse and complicated financial system today, and we are proposing legislation to provide those tools and look forward to working with this committee and the Congress to pass such legislation as quickly as possible.
BIG TAKEOVER MATT TAIBBI PDF
So what happened to Cassano? Mike Taibbi works for Raibbi. You compare this whole thing to a casino. We now own controlling stakes in an enormous variety of companies, a dying insurance giant in AIG. The Big Takeover Takeofer 23, takover 2: But did you know we produce our daily news hour at a fraction of the budget of a commercial news operation, all without ads, government funding or corporate underwriting? Are we really looking to Rolling Stone for serious journalism? The only reason that Wall Street rallied yesterday was because this plan that Geithner administered is such an enormous giveaway to Wall Street.
Matt Taibbi: The Big Takeover – Rolling Stone Magazine