American Conspiracies: Lies, Lies, and More Dirty Lies That the Government Tells Us (23 page)

How insane was it to destroy one of the main protection devices created out of the pain of the Great Depression, and let Wall Street gamble with what had been Main Street's money? But Congress wasn't done yet. In 2000, after getting some heat from a regulator named Brooksley Born about the need to regulate commodities trading, legislation was slipped into an 11,000-page spending bill to exempt derivatives from any oversight, on the very last day of the session. Wonder how many Congresspeople read that one? Probably about as many as read the Patriot Act, I suspect.

Enter George W. Bush with a rousing mandate of “Free-dom! Free-dom!,” as Richie Havens once sang at Woodstock. You'd think something might have been learned from the scandals that sank Enron and WorldCom soon after Bush took office. Instead, “this administration made decisions that allowed the free market to operate as a barroom brawl.”
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Bank regulators took a chainsaw to thousands of pages of troublesome things that Wall Street objected to. States that tried to do something about predatory lending were blocked by the federal comptroller of the currency. Back in 2003, the Office of Federal Housing Enterprise Oversight warned that Fannie Mae and Freddie Mac—the icons that held trillions in mortgages—were in deep doo-doo. But the White House set out to deep-six Armando Falcon's report and replaced him with a Bush buddy from their prep school days together. To W, home ownership was at an all-time peak and that was what America was all about, forgetting that thousands of those people couldn't really afford the loan payments. When the house of cards collapsed, W commented that “Wall Street got drunk.” I guess it takes one to know one.
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The Securities and Exchange Commission was another legacy of the New Deal, a watchdog agency created after Wall Street had pushed our economy over the cliff. Bush sliced its budget, and his first SEC chairman promised a “kinder, gentler agency.” It sure was, when it came to looking the other way. They did six investigations into Bernie Madoff, and knew back in 2005 that he was running a Ponzi scheme—taking bucks from new victims and using it to reimburse some of the old ones. Madoff said in a jailhouse interview that nobody was more surprised than he was, when he didn't get busted long ago. But, like Bernie once said, “In today's regulatory environment, it's virtually impossible to violate rules ... and this is something the public really doesn't know.” So he was able to scam folks out of at least $50 billion. Once he couldn't come up with any more “investors” and people started asking for their money back, they found out that Bernie had none left. It had all gone toward financing his yachts and a number of mansions. Eventually, SEC Chairman Christopher Cox admitted they'd failed to check out “multiple credible and specific allegations regarding Mr. Madoff's financial wrongdoing.” In fact, the agency had been missing numerous “red flags” since at least 1992.
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It took one in-house expert all of 20 minutes to figure out that Madoff's claims were bogus—but somehow, that analysis didn't make it to the SEC's investigative team.
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After Bush's second SEC chairman wanted to regulate high rollers playing fast-and-loose with their hedge funds, he got dumped fast. There was even a hotline for Wall Street companies to ring up SEC brass to “stop an investigation or slow it down.”
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Then again, “For many SEC attorneys, especially those atop the enforcement division, their time at the agency is a stop on their way to seven-figure jobs representing Wall Street elite.”
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Through most of the eight Bush years, insurance giant AIG was having a grand old party at the bottomless money pit. Eliot Spitzer, as attorney General of New York, had begun investigating AIG, especially its shady affiliates like the Coral Re outfit in Barbados. CEO Greenberg was forced to resign during an accounting scandal in 2005. It looked like the jig might be up. But it wasn't too long after that when Spitzer, by then governor of New York, was forced to resign when his involvement with a prostitution ring suddenly became public.
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And now that our own government holds 80 percent of AIG's stock as part of the $85 billion “bridge loan” bailout, don't bet on much scrutiny from outsiders anymore. The day after that deal was made, AIG's top execs took a nose-thumbing retreat at a luxury spa, costing $443,000 of what was now taxpayer money.
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Before he resigned, Greenberg had appointed a guy named Joseph Cassano to run AIG's Financial Products Unit (FPU) and given him all the rein he wanted. Cassano had gotten his start at Drexel Burnham Lambert under “junk bond king” Michael Milliken, who ended up going to prison. A number of Drexel's employees, Cassano included, just moved over to the FPU, where they started dealing in securities called “credit default swaps.” Same scam, same players, simply a different name for leveraging worthless paper to sell to clueless investors. These swaps, like collateralized-debt obligations or CDOs, are so complicated that even a lot of CEOs can't make heads or tails of them. Cassano established dozens of companies, many offshore, to keep all the transactions off AIG's books and out of sight of regulators here and at the “London casino.” Nobody inside the company apparently noticed things on the accounting books like “Lichtenstein Subsidiary Profit, $10 billion.”
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The government's Office of Thrift Supervision was supposed to be keeping an eye on the FPU, but it thought the swaps were “fairly benign products”—because that's what AIG told them. Meantime, the FPU was transforming these into the world's biggest bet on the housing boom, and until the bottom fell out of the sub-prime mortgage scam, they made a ton of money doing it.
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Hank Paulson was still Goldman's CEO in 2004, when he went to the SEC and petitioned to have lending restrictions relaxed for the five leading investment banks.
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Then Goldman went “berserk with lending lust. By the peak of the housing boom in 2006, Goldman was underwriting $76.5 billion worth of mortgage-backed securities—a third of which were subprime—much of it to institutional investors like pensions and insurance companies. And in those massive issues of real estate were vast swamps of crap.”
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Crap that permitted Goldman to pay each employee roughly $350,000 a year. Moving on to become treasury secretary, Paulson declared in 2007 that the American economy was the “strongest in decades.”
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When our gas prices spiked to $4-and-up a gallon in the summer of 2008, resulting in all the outcry about needing to drill for more oil offshore, the reality was that Goldman Sachs—the biggest trader in the energy derivatives market—had led the way by issuing high analyst predictions for the price of oil (a Goldman guy in 2008 talked up $200-a-barrel) and buying up oil futures. They could move the markets by stimulating other investors to jump in, and then selling oil back to them at the higher price. “By 2008, a barrel of oil was traded 27 times, on average, before it was actually delivered and consumed.” Once again, a Depression-era law had been lifted (thanks to Goldman) that previously kept commodities markets in check. “Between 2003 and 2008, the amount of speculative money in commodities grew from $13 billion to $317 billion, an increase of 2,300 percent.”
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There was no oil shortage, except when it was convenient for Goldman and its cronies.

There was only one rub to it all: Early in 2008, Cassano got fired after the huge losses of his arm of AIG became known. Black September wasn't far away. This crisis wasn't about the little guy. It was a bailout of these financial giants unprecedented in our history, because they were “too big to fail.” “For the money spent on subsidizing the industry, the government could have bought out every single outstanding mortgage in the country. Plus, every student loan and everyone's health insurance. And on top of that, still have trillions of dollars left over.”
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That's what a former managing director at Goldman Sachs, Nomi Prins, is laying out in her muckraking book, titled
It Takes a Pillage
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The behind-the-scenes story of the taxpayer-funded bailout is still emerging. I'd like to have been a fly on the wall when Hank Paulson called the “big nine” kleptocrats into his office at the treasury for an emergency chat in September 2008. Remember how Lehman Brothers, the heaviest competitor to Goldman Sachs, was allowed to go broke? Well, that's because Paulson's crew wouldn't let them become a bank holding company and thus qualify for federal bucks. That's exactly the deal Goldman got—remember, it's Paulson's former company—which was worth a quick $10 billion. Goldman had kept right on selling questionable mortgage derivatives to unsuspecting buyers, even while playing smart and divesting its own. This looks to me like a clear case of fraud that ought to land some people in prison.

I can't help but believe there was method to this madness, that it was all designed. I learned in Minnesota that it should not be government's place to pick winners and losers, but to make policy that all have to follow. The disturbing thing is how this was utterly manipulated by the government. Paulson also gave billions to Bank of America so it could pay an inflated price to rescue Merrill Lynch, whose CEO John Thain had once headed Goldman's mortgage desk and then was CEO of the New York Stock Exchange. While Merrill Lynch was going belly-up, Thain was busy buying an $87,000 area rug for his office and a $35,000 toilet bowl. Some might call him a four-flusher, since he'd lost about $15 billion in just three months at Merrill Lynch, and Bank of America then decided to fire Thain when he demanded a $30 million bonus.
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Oh, by the way, Thain was a mentor of Timothy Geithner, who's now treasury secretary under Obama.

Then came the bailout of AIG. We were told that, if AIG collapsed, every large American financial institution and a lot of foreign ones would have gone under with them. Guess who sat in on the closed-door meeting where Paulson and Geithner—who then headed the New York Fed—made the decision to rescue them? Goldman's CEO, Lloyd Blankfein, who'd have been in major trouble if they didn't. That week, Paulson's calendars show he spoke to Blankfein two dozen times, far more than to any other Wall Street exec.
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Birds of a feather and all that. “The government then wrote Goldman a $12.9 billion check to cover its losses to AIG, which were predicated on contractual arrangements that would have been worthless had AIG gone bankrupt.”
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Other AIG trading partners who bought subprime insurance got “saved,” too, like Bank of America, JP Morgan Chase, and Citigroup. Hallelujah! The way Eliot Spitzer sees it, “The appearance that this was all an inside job is overwhelming. AIG was nothing more than a conduit for huge capital flows to the same old suspects, with no reason or explanation.”
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What did AIG do with $181 billion altogether in taxpayer-funded bailouts? Do Americans realize that our money went to pay off foreign debt owed by private enterprise in the U.S.? When rescued, AIG had at least $40 billion in credit default swaps outstanding.
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$11.9 billion went to pay its debt to France's Societe Generale, and $11.8 billion more went to Deutsche Bank of Germany, and $8.5 billion to Barclays Bank in Britain.
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During the last three months of 2008, AIG was losing more than $27 million an hour or $465,000 every minute. With numbers like that, Bernie Madoff comes off as chump change.
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But they were still giving bonuses totaling around $450 million to everybody in the Financial Products Unit—the very same people who'd bankrupted the company!
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Until Congress did an intervention, Joe Cassano continued to pull down a million-dollar-a-month salary.
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This whole bailout business stinks. And we've been left holding the bag. That original $700 billion bailout figure has mushroomed into a commitment that includes about $1.1 trillion in taxpayer money. Total financial support from the Fed, Treasury, and FDIC is actually around $3 trillion, with potential support authorized of $23.7 trillion!
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One economist says government officials “see all this as a Three Card Monte, moving everything around really quickly so the public won't understand that this really is an elaborate way to subsidize the banks” and “won't realize we gave money away to some of the richest people.”
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Wasn't the expectation that, once it got rescued, Wall Street would then be good sports and send money into creating jobs and initiating a major recovery? But the big banks didn't start lending again, instead they hoarded the cash and paid out huge bonuses to their execs. The behemoths got even more beastly. Today JPMorgan Chase holds more than one out of every ten dollars on deposit in America. Bank of America and Wells Fargo are close behind. Those three, plus Citigroup, now issue one half of all mortgages and about two thirds of our credit cards. The big guys can borrow more cheaply because creditors assume they're at no risk for failing.
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“Incredibly, despite the events of last fall, nearly every one of Wall Street's proprietary trading desks can still take huge risks and then, if they get into trouble, head to the Federal Reserve for short-term rescue financing.”
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