This is in response to several good questions and comments regarding the role of the Fed and Goldman Sachs in the AIG debacle that came up in David Farrar's post titled Why Are We Punishing AIG's Employees.
I'm not outraged by Jim Cramer's crappy investment advice on CNBC, or by incompetency bonuses at AIG, Merrill Lynch, et al. No, no, no. I have bigger fish to fry. I am utterly, completely outraged that in the past twelve months since the Bear Stearns bailout, we've devolved from a free Republic to an Ochlocracy while the media has either been in collusion as a propaganda arm of the Corporatists at worst, or ignorantly asleep at the switch at best. With the exception of a C-SPAN interview with Paul Kanjorski in January 2009, there has been absolutely no media coverage of either the massively devastating 9/15/08 run on American mutual funds, or the $1T run on British banks between March and the end of 2008.
I was flipping through channels on the remote during my workout yesterday morning to catch the latest news on our pitchfork-wielding Congress when I ran into a seemingly innocuous interview with Matt Taibbi about an article he'd just written for Rolling Stone titled The Big Takeover - The global economic crisis isn't about money - it's about power. How Wall Street insiders are using the bailout to stage a revolution. It was a fairly brief interview with a loop of professional protestors in the background (those are the ones who carry mass-produced signs, not home-made ones, with professonal slogans, not colloquialisms, and are usually bused in by the local unions or, in the case of AIG executive protests, Communist Front Groups like the Connecticut Working Families Party - not mentioned by name in this article, interestingly, but notice that they were bused in with professional protest signs). But Matt said something that immediately made me perk up my ears: He mentioned The Accounting and Auditing Act of 1950, which prevents the Federal Reserve from being audited by Congress in section 31, USC 714(b).
I will start by giving absolutely mad props to Taibbi for providing the hard-hitting investigative journalism that the Rolling Stone used to be known for back in the gonzo days of Hunter S. Thompson, Tom Wolfe and P.J. O'Rourke. Taibbi stands alone in the media for actually pursuing the story down the rat-holes of international finance and emerges with many nuggets of truth covered in the slime, feces, cronyism, incompetency and corruption of a world-class conspiracy. He exposes a culture of investment elites whose shenanigans and psycopathy rival (and are in some cases were inspired by) the immortal villains of the 1980's: Michael Milken, Ivan Boesky, Charles Keating, et al.
So what exactly do I mean by "world class conspiracy"? If you don't have time to read the thousands of words in Taibbi's article, I'll share a few hundred words of the pertinent details with you, h/t George Washington's Blog excerpt titled We Not Only Have a Shadow Banking System, But also a Shadow Government:
While the rest of America, and most of Congress, have been bugging out about the $700 billion bailout program called TARP, all of these newly created organisms in the Federal Reserve zoo have quietly been pumping not billions but trillions of dollars into the hands of private companies (at least $3 trillion so far in loans, with as much as $5.7 trillion more in guarantees of private investments). Although this technically isn't taxpayer money, it still affects taxpayers directly, because the activities of the Fed impact the economy as a whole. And this new, secretive activity by the Fed completely eclipses the TARP program in terms of its influence on the economy.
No one knows who's getting that money or exactly how much of it is disappearing through these new holes in the hull of America's credit rating. 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.
"They're supposed to be temporary," says Paul-Martin Foss, an aide to Rep. Ron Paul. "But we keep getting notices every six months or so that they're being renewed. They just sort of quietly announce it."
None other than disgraced senator Ted Stevens was the poor sap who made the unpleasant discovery that if Congress didn't like the Fed handing trillions of dollars to banks without any oversight, Congress could apparently go fuck itself — or so said the law. 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 1950. The relevant section, 31 USC 714(b), dictated that congressional audits of the Federal Reserve may not include "deliberations, decisions and actions on monetary policy matters." The exemption, as Foss notes, "basically includes everything." According to the law, in other words, the Fed simply cannot be audited by Congress. Or by anyone else, for that matter.
Stevens isn't the only person in Congress to be given the finger by the Fed. In January, when Rep. Alan Grayson of Florida asked Federal Reserve vice chairman Donald Kohn where all the money went — only $1.2 trillion had vanished by then — Kohn gave Grayson a classic eye roll, saying he would be "very hesitant" to name names because it might discourage banks from taking the money.
"Has that ever happened?" Grayson asked. "Have people ever said, 'We will not take your $100 billion because people will find out about it?'"
"Well, we said we would not publish the names of the borrowers, so we have no test of that," Kohn answered, visibly annoyed with Grayson's meddling.
Grayson pressed on, demanding to know on what terms the Fed was lending the money. Presumably it was buying assets and making loans, but no one knew how it was pricing those assets — in other words, no one knew what kind of deal it was striking on behalf of taxpayers. So when Grayson asked if the purchased assets were "marked to market" — a methodology that assigns a concrete value to assets, based on the market rate on the day they are traded — Kohn answered, mysteriously, "The ones that have market values are marked to market." The implication was that the Fed was purchasing derivatives like credit swaps or other instruments that were basically impossible to value objectively — paying real money for God knows what."Well, how much of them don't have market values?" asked Grayson. "How much of them are worthless?"
"None are worthless," Kohn snapped.
"Then why don't you mark them to market?" Grayson demanded.
"Well," Kohn sighed, "we are marking the ones to market that have market values."In essence, the Fed was telling Congress to lay off and let the experts handle things. "It's like buying a car in a used-car lot without opening the hood, and saying, 'I think it's fine,'" says Dan Fuss, an analyst with the investment firm Loomis Sayles. "The salesman says, 'Don't worry about it. Trust me.' It'll probably get us out of the lot, but how much farther? None of us knows."When one considers the comparatively extensive system of congressional checks and balances that goes into the spending of every dollar in the budget via the normal appropriations process, what's happening in the Fed amounts to something truly revolutionary — a kind of shadow government with a budget many times the size of the normal federal outlay, administered dictatorially by one man, Fed chairman Ben Bernanke. "We spend hours and hours and hours arguing over $10 million amendments on the floor of the Senate, but there has been no discussion about who has been receiving this $3 trillion," says Sen. Bernie Sanders. "It is beyond comprehension."
Count Sanders among those who don't buy the argument that Wall Street firms shouldn't have to face being outed as recipients of public funds, that making this information public might cause investors to panic and dump their holdings in these firms. "I guess if we made that public, they'd go on strike or something," he muses.
And the Fed isn't the only arm of the bailout that has closed ranks. The Treasury, too, has maintained incredible secrecy surrounding its implementation even of the TARP program, which was mandated by Congress. To this date, no one knows exactly what criteria the Treasury Department used to determine which banks received bailout funds and which didn't — particularly the first $350 billion given out under Bush appointee Hank Paulson.
The situation with the first TARP payments grew so absurd that when the Congressional Oversight Panel, charged with monitoring the bailout money, sent a query to Paulson asking how he decided whom to give money to, Treasury responded — and this isn't a joke — by directing the panel to a copy of the TARP application form on its website. Elizabeth Warren, the chair of the Congressional Oversight Panel, was struck nearly speechless by the response.
"Do you believe that?" she says incredulously. "That's not what we had in mind."
Another member of Congress, who asked not to be named, offers his own theory about the TARP process. "I think basically if you knew Hank Paulson, you got the money," he says.
This cozy arrangement created yet another opportunity for big banks to devour market share at the expense of smaller regional lenders. While all the bigwigs at Citi and Goldman and Bank of America who had Paulson on speed-dial got bailed out right away — remember that TARP was originally passed because money had to be lent right now, that day, that minute, to stave off emergency — many small banks are still waiting for help. Five months into the TARP program, some not only haven't received any funds, they haven't even gotten a call back about their applications.
"There's definitely a feeling among community bankers that no one up there cares much if they make it or not," says Tanya Wheeless, president of the Arizona Bankers Association.
Which, of course, is exactly the opposite of what should be happening, since small, regional banks are far less guilty of the kinds of predatory lending that sank the economy. "They're not giving out subprime loans or easy credit," says Wheeless. "At the community level, it's much more bread-and-butter banking."
Nonetheless, the lion's share of the bailout money has gone to the larger, so-called "systemically important" banks. "It's like Treasury is picking winners and losers," says one state banking official who asked not to be identified.
This itself is a hugely important political development. In essence, the bailout accelerated the decline of regional community lenders by boosting the political power of their giant national competitors.
Which, when you think about it, is insane: What had brought us to the brink of collapse in the first place was this relentless instinct for building ever-larger megacompanies, passing deregulatory measures to gradually feed all the little fish in the sea to an ever-shrinking pool of Bigger Fish. To fix this problem, the government should have slowly liquidated these monster, too-big-to-fail firms and broken them down to smaller, more manageable companies. Instead, federal regulators closed ranks and used an almost completely secret bailout process to double down on the same faulty, merger-happy thinking that got us here in the first place, creating a constellation of megafirms under government control that are even bigger, more unwieldy and more crammed to the gills with systemic risk.
In essence, Paulson and his cronies turned the federal government into one gigantic, half-opaque holding company, one whose balance sheet includes the world's most appallingly large and risky hedge fund, a controlling stake in a dying insurance giant, huge investments in a group of teetering megabanks, and shares here and there in various auto-finance companies, student loans, and other failing businesses. Like AIG, this new federal holding company is a firm that has no mechanism for auditing itself and is run by leaders who have very little grasp of the daily operations of its disparate subsidiary operations.
In other words, it's AIG's rip-roaringly shitty business model writ almost inconceivably massive — to echo Geithner, a huge, complex global company attached to a very complicated investment bank/hedge fund that's been allowed to build up without adult supervision. How much of what kinds of crap is actually on our balance sheet, and what did we pay for it? When exactly will the rent come due, when will the money run out? Does anyone know what the hell is going on? And on the linear spectrum of capitalism to socialism, where exactly are we now? Is there a dictionary word that even describes what we are now? It would be funny, if it weren't such a nightmare
Exactly. Now how, you may ask, does Goldman Sachs fit into the AIG puzzle? To quote a conversation on Cavuto today, "AIG is pimping for Goldman Sachs", (playfully referred to as Government Sachs by Michael Hirsh at Newsweek) because they are said to be the most exposed by AIG's potential default on covering the defaults. You can find a tidy list of indictments against Goldman Sachs in A Little Reality's blog post titled Is AIG an International Criminal Conspiracy?
