Secrecy and Capitalism

NEW YORK (Reuters) – U.S. securities regulators originally treated the New York Federal Reserve’s bid to keep secret many of the details of the American International Group bailout like a request to protect matters of national security, according to emails obtained by Reuters.

This is what unregulated, pure, the “Haves and Have Mores” capitalism has come down to. Facts that are so unsupportable, so messy, and quite possibly criminal, that the parties involved, INCLUDING OUR GOVERNMENT, cannot accept the idea that their dirty dealings might see the light of day.

In some courts, there is a concept of “spoliation,” the idea that a wrongdoer has evidence so damaging, that they would actually destroy or hide it, rather than to turn it over and deal with the aftermath of that evidence’s adverse impact. For that reason, many courts treat such missing evidence in the most adverse way possible, allowing the other side to argue that the missing evidence was really, REALLY bad.

That approach should apply to Mr. Geithner, AIG, the SEC and our Fed.

The Fed gave away $70,000,000,000 of our money to US and overseas banks, funneling it through AIG’s lotto cystern. And all of the parties concerned were petrified that we would find out about the details. My, my.

First, a bit of history. Ever since a couple of rich drunks sat in a pub in London, and created the first commercial insurance system called LLoyds, insurance became a way of lowering risk, sharing the cost of damages, and providing a way to allow ship owners, and later home owners, factories, drivers, even high wire acrobats to insure that any loss would be compensated. In many ways, insurance was a huge success. By “rating” and “underwriting” certain risks, people who invested in safer technology or techniques were rewarded (with lower insurance rates), while those who refuse to accept safer practices paid higher premiums, and often, were driven out of business.

Anything can be insured. For a price. A 1950’s centerfold’s legs, a space shuttle flight, even whether someone can hit a small dimpled ball into a hole in the ground with a metal stick.

AIG’s London and US operations found a way to insure something new. Wall Street’s most audacious, ridiculous, and profitable con job in its history. (and that is saying a lot) By selling obscene amounts of incredibly risky mortgages, often to people who had no business getting them, then packaging those as Triple A rated investments (we’ll talk about the amazing intentional fraud committed by Goldman Sachs down the road a bit), financial institutions made obscene amounts of money. Often, these mortgages were sold, bought, resold, repackaged and resold again. After a while, almost every financial institution was licking its chops to be involved in this Ponzi scheme of all Ponzi schemes. And with each paper profit they concocted, the bankers and investors paid themselves obscene bonuses, basically sucking hundreds of billions out of the system for their own, personal benefit.

But in order to make these awful investments appear to be safe (something that they absolutely were not), they needed the veneer of respectability. Security. Safeguards. The appearance of safe havens. IE, Insurance. Let’s call the bastards AIG.

The theory went like this, if you rate and underwrite a risk, say, like and investment package based on subprime mortgages, your money will be safe no matter what happens in the marketplace. After all, you have INSURANCE on the investment. And frankly, had AIG properly rated, underwrote and charge a proper premium, there would have been no problem at all. Because the underlying security (a subprime mortgage) was so risky, the proper premiums would have been sky high, eventually causing the market to shudder and reject any piece of these investment packages.

Makes sense, no?

But here is where greed, avarice, and ineffable stupidity took over. AIG did no rating. It did no underwriting. It did not investigate the underlying security. It did not charge a proper premium. Instead, it agreed that the horseshit subprime investments were Triple A rated . . . . wait for it . . . . BECAUSE THEY WERE INSURED. It gets better.

Most states regulate their insurance companies by making sure that your insurer keeps a “reserve” and either reinsures or spreads its own risk. Let’s say that you have 100 homes. One is guaranteed to burn to the ground over the next year. In a perfect insurance world, every home owner pays a small amount, say 1.5% of the value of their home, to the insurer. Given the 100 insureds, that adds up 150% of the value of one burned out house. That additional 50% goes to the insurance company’s costs, overhead, and profits. (Profits are a good thing, in moderation). So, the insurance company keeps 100% of the value of one house as a reserve, a protected savings account, to be used only when a house burns down. Keeping a proper “reserve” means that an insurance company can pay its losses, and still make a decent profit.

Applying that to subprime mortgage based securities, you would expect that AIG would have kept a proper “reserve” in case the subprime market went down the tubes. That way AIG could pay back those investors who bought “insurance” on their investments.

Instead, not only did AIG NOT properly investigate and rate the risk they were insuring, not only did AIG fail to properly underwrite the risks, THEY DID NOT KEEP ANY RESERVES. They took the premium they charged for this insurance (which was used to market the horribly risky investment as safe, secure, and INSURED) and called it profit. No reserves were kept. None.

The instant that the first claim was made on these securities’ insurance policies, AIG was looking a billions of dollars of exposure, for which they held not one penny in reserve to pay off. Even worse, AIG managed to keep external auditors in the dark by lying and shoveling paper around. Then, to compound their gamble, AIG even managed to hide their lack of reserves, the really risky nature of the coverage they provided from their own internal auditors.

In this way, AIG was no different than the scam artists on Wall Street. Except, the Wall Street bandits simply committed massive fraud by labeling a hugely risky investment as a safe, secure, insured, and very profitable risk. AIG provided that veneer of respectability by providing “insurance” at the same time that they were committing their own fraud by keeping no reserves.

A crime, compounded by a fraud, made worse by deliberate, intentional scheming – this is the state of Wall Street and AIG in a nutshell. Do not forget the driving force behind it all. The more times they sold this crap, with even more insurance, the more often the bankers and insurers were able to suck out a bonus and a paper profit. We are not talking about 6 figure bonuses. We are talking about seven, even eight figures in paper only, fraudulent compensation sucked out by our Wall Street bandits.

No wonder everyone wanted to keep the AIG bailout secret.

So what was Geithner’s crime? I am sure that knowing just how bad the real facts were, each and every of the 16 banks who made a huge claim on AIG’s financial services insurance policies, would have been happy with 50, even 30 cents on the dollar of coverage they sought. Instead, Geithner, AIG, and a few other key players, took taxpayer money, and paid each penny of insurance sold by AIG to those 16 banks and financial institutions. Forget risk and reward, this was little more than raiding the US taxpayer and rewarding AIG and every gambling bank 100% of their loss. With your money.

Remember that last part. WITH YOUR MONEY. What is even worse is that the same co-conspirators, Geithner, Bernanke, and others, who allowed this mess to happen, and then stole your money to fix it, AND then tried to cover it up by labeling it a matter of National Security – all these criminals are still there. And they are advising Barack Obama.

The question is not why they are Obama’s advisors, but why are they not in jail, pending a fair trial.

Ah, one more point. Goldman Sachs. Not only was it a premier seller and repackager of these slimy investments, calling them safe, insured and “Triple A investments,” Goldman had the brilliant idea of placing a bet on these investments they sold. Who did they sell these Triple A, safe investments to? Pension funds, city and town investment funds, school systems, you and me.

And how did Goldman bet? They bet that these incredibly safe Triple A investments would fail. Not only did they profit on the sale, they profited a second time, betting that the suckers who bought from them would lose money.


  1. griff

    Hey it’s the least we generous, big-hearted Americans can do for these unfortunate Wall Strret banksters. I wish I could help more, but I’m tapped out.

    My wife manages a local branch of an international bank. She has been in banking since working as a part-time teller right out of high school, almost twenty years. At 24 she went back to school and earned her MBA while working full-time.

    She used to earn between $10,000 and $15,000 per year in bonuses, not to mention the occasional trip. No bonuses this past year at all. No trips. Not even a Christmas party.

    Furthermore, she gets six weeks of paid vacation every year, but is only allowed to take four. She used to be able to sell her extra weeks back at the end of the year to fund Christmas, but not this year.

    Althgough she is just a worker bee and her bank was unaffected by the subprime blowout due to their conservative lending practices, the aftershocks are rippling through the entire industry. And it’s always the worker bees that feel the crunch.

  2. DejaVuAllOver

    Don’t forget that the mainstream media is part of the syndicate. “Time” named Bernanke “Man of the Year.” Maybe they think that men and snakes look alike.

  3. Warren

    The G.W.Bush administration clearly established that the MIC plus hangers-on (oil,banking) were in charge. A lot of folks voted for Obama in the hope that would change. Oh, my. New boss same as old boss.

    If ‘boss’ at all. That’s the part that’s seriously in question.


  4. Carl Nemo

    Warren, the way this President has been conducting himself to date, I’d say he’s simply the “handpuppet in chief”… / : |

    Carl Nemo **==

  5. griff

    Compared to the Wall Streeters, she’s way down in the pecking order. And after paying nearly 50% in taxes on bonuses, ten grand isn’t that much any more.

    Not only that, but she busts her ass, works long hours under constant pressure from above, and has to deal with all the backlash and anger from customers.

    Branch managers don’t really make that much money. We had come to count on those bonuses to keep us afloat. We always used to think that if we reached the hundred thousand dollars a year mark, we would be content. We finally reached that milestone this past year, and we’re filing chapter 13 next week.

    That’s what you get for working hard and chasing the American Dream these days.

    My point was that while the major players are raking in the huge bonuses, the street-level workers are being screwed over for keeping their stinking branches alive and taking all the heat.

    And like I said, the bank she works at was not involved in this scam at all and remains quite healthy. She’s been desperate to get out of banking for years, but has been unable to find any thing else.

  6. Kent.Shaw

    “My wife manages a local branch of an international bank.
    She used to earn between $10,000 and $15,000 per year in bonuses, not to mention the occasional trip. No bonuses this past year at all.
    Althgough she is just a worker bee…”

    Come on, Griff. The manager of a bank branch is hardly “just a worker bee”. $10K yearly bonuses until just this year? Come on, man. Worker bee? I don’t begrudge her anything, nor you. You should both get every cent you can, no problem. But to call her a worker bee? Please. A teller is a worker bee, just as she was when she started out. Worker bee. Branch manager. Worker bee. Okay.

  7. Kent.Shaw

    Probably your question should have been directed at me, as Griff was only responding to a comment of mine.

  8. logtroll

    My boss is a tightwad loser, spends all the company dough on beer and typewriter ribbon. My only perk is that he lets me throw the empty beer cans at the TV.

  9. issodhos

    First be sure that you have incoroprated your business. Second, hire yourself as an employee. Third, generate a net profit and allocate a portion of those profits to be distributed as tax deductable employee bonuses. Distribute.

    For paid time off, see above and repeat.;-)

  10. woody188

    Single employee company distributing bonuses screams audit. IRS loves to nail small cash businesses. I’m advising against such shenanigans unless lengthy audits and heavy fines are your cup of tea.

    Of course you were joking. No one would ever dare dream of trying to avoid paying taxes.

  11. Rob Kezelis

    Actually, Goldman Sachs profited a third time, when AIG use your money to pay off the insurance policies it sold to Goldman. What an effing deal.

  12. woody188

    And Goldman continues to profit. As part of the plunge protection team, Goldman used it’s special access to read other electronic trades and could make their trade based on the information nanoseconds before the trader. Imagine knowing a large investor is about to dump all their stock in a commodity or company and being able to place your trade just before they did. Our market is anything but free.

  13. griff

    Nice. Goldman Sachs indeed bet against the derivatives quietly while urging every one else that they were safe investments.

    This is also why GS remained afloat while their competitors (Bear Sterns) didn’t quite make the “too big to fail” grade.

    And AIG was duly rewarded as well.

    “Every new regulation concerning commerce or revenue; or in any manner affecting the value of the different species of property, presents a new harvest to those who watch the change and can trace its consequences; a harvest reared not by themselves but by the toils and cares of the great body of their fellow citizens.” – James Madison

  14. almandine

    A pretty good expose’ Rob, but what you have told us has nothing to do with the construct of Capitalism. Your litany is about fraud and corruption, which are anti-capitalist entities.

  15. Rob Kezelis

    I have to disagree. Unregulated capitalism is the problem. Regulations simply provide safeguards for all, while allowing risk takers to win and lose.

    Without even a minimum set of rules, the winners usually cheat, and cause endless destruction along the way.

  16. Carl Nemo

    Thanks Rob for this great piece outlining these crimes in high places with such clarity.

    You are correct in that “unregulated capitalism” is the problem. What this cabal of criminals created didn’t simply occur under a single presidential watch, but started with the Clinton era when Glass Steagall of 1933 was conveniently revoked and replaced with Gramm-Leach-Bliley. There was little oversight during that era, the same under two terms of G.W. Bush. Obama took the handoff a year ago and is still running with this ball of engineered criminality in his hands; ie., business as usual.

    America is suffering under the yoke of “pirate capitalism” where a winner takes all attitude the consequences be damned relative to our nation and its economy is the order of the day.

    We must remember that starting with Ronald Reagan/H.W. Bush our nation was pushed in a direction of deregulation of basic services; ie, utilities, airlines, transportation etc. and many other functions that at one time were allowed a reasonable return on invested capital guaranteed by the ratepayers and users of their services, but then they incrementally moved this nation into the unfettered zone with minimal regulation and effective oversight; ie.,”blue sky” laissez faire capitalism.

    Unless Congress gets motivated to move forward with “serious” hearings followed with recommendations that the Justice Department needs to pursue indictments, then nothing will improve.

    Our criminally disposed leadership is both smug and entrenched and seemingly has no intention of even firing the likes of Geithner, Bernanke et al. associated with this meltdown debacle.

    This President is seemingly one uv’em and if not then he’s either a very gullible man or simply a world class “wimp”. : |

    Carl Nemo **==

  17. griff

    “The very word “secrecy” is repugnant in a free and open society; and we are as a people inherently and historically opposed to secret societies, to secret oaths and to secret proceedings. We decided long ago that the dangers of excessive and unwarranted concealment of pertinent facts far outweighed the dangers which are cited to justify it. Even today, there is little value in opposing the threat of a closed society by imitating its arbitrary restrictions. Even today, there is little value in insuring the survival of our nation if our traditions do not survive with it. And there is very grave danger that an announced need for increased security will be seized upon by those anxious to expand its meaning to the very limits of official censorship and concealment. That I do not intend to permit to the extent that it is in my control. And no official of my Administration, whether his rank is high or low, civilian or military, should interpret my words here tonight as an excuse to censor the news, to stifle dissent, to cover up our mistakes or to withhold from the press and the public the facts they deserve to know.” – John F Kennedy

  18. Carl Nemo

    Yep Griff and we all know what happened to JFK for expressing such sentiments. Ever since, this nation has been on a downhill ride into the depths of hell on earth…!

    Carl Nemo **==

  19. almandine

    You speak of Capitalism as the result of a financial system, but it is much more. It is a social system based on unfettered individual liberty. It embodies the right to act without governmental constraint, especially with regard to private property, but it does not come without consequences for those acts.

    Ethics and morality are the basics of Capitalistic behavior, and what we have seen with regard to the evolving socio-economic fiasco in America is a wide range of fraudulent and illegal actions that should have put the actors – including our politicians – in jail.

    But, alas, we have become too-big-and-important-to-fail, or to jail, both as the world’s primary socio-economic player, as well as being above national [and international] property law, which is supposed to be made and assuredly enforced by our elected reps and “regulators”.

    What have they done instead? Aided and abetted – sometimes committed – the fraud and corruption that should have been prosecuted. They cast aside enforcement of the laws already on the books and replaced it with enhancement of the crooks’ ability to “legitimally” skirt proper action. One way was to replace law with “regulation”, which set the hoards of bad actors loose. The regulations are nothing more than work-arounds for lawyers to exploit. Whether it was by design, or by ineptitude, THAT is the way our govt really works.

    So the question is begged, if our laws aren’t good enough to assure we citizens are protected from those who would steal our future, what makes regulation so swell? The worst that generally happens for failure to obey regulation is a fine of some small amount of money. No one ever goes to jail. There are no meaningful consequences.

    No, the problem is not Capitalism, not even close. The problem is the lying, cheating, stealing, and all the rest… blatantly, as the big banks have done it, or surreptitiously by the FED, the Treasury Secretary(s), GSE management, and/or the Congressman / Senator next door. BUT, it’s not Capitalism.

    A look at is instructive.

  20. woody188

    Debtism? Does that equate to indentured servitude? Have we sold ourselves for fancy cars and big screen televisions like our ancestors did just to get to America?

  21. issodhos

    Regulated capitalism is just another term for providing governemt benefits and protection to established, usually trans-national corporations from competition, and to establish benchmark standards above which a company can safely operate without regard to damage done to other persons or their property.

    And since we have had at least one and a half centures of regulation, we can see that it has not prevented (indeed, it has enabled cheating and made it bothe easier and safer). We are, today, where we are because of regulated ‘capitalism’. An underlying truth of that? A 1913 nickel had more purchasing power than does a 2008 dollar. So, “Ignore the little man behind the curtain” and just keeping demanding more regulation.;-)

  22. griff

    Well I’d say we began that downhill ride some decades previous, but JFK was certainly the last and only President to attempt to stop it.

    Results same.

  23. griff

    I would liken Reagan to Obama. Brilliant campaigning. Forgot every thing once he got in office.

    I would think a bullet in the chest may have had some thing to do with that.

  24. griff

    Lew hit it out of the park, as usual.

    Freedom – a bad word these days, lest ye be a politician in the business of exploiting its distant memory.

  25. bryan mcclellan

    I would say it’s according to and equal to horse thievery which used to be a hanging offense.
    Hang them by the silken nooses of their guilt.
    American style….

  26. issodhos

    I would suggest that there are three types of people who describe the enonomy as a free market — those who are simply ignorant of economics and could educate themselves or be educated; those who absorb whichever is said by power figures (and other mouthpieces of influence); and those who lie for political gain (usually Republicans, Democrats, and other political collectivist types.

    A clue often dropped by such types: they will conflate the descriptive social term “rugged individualism” with “political individualism” intentionally or unintentionally. ‘Progressives’ are often most prone to this deceit, along with other collectivist groups such as corporatists.

  27. Warren

    If it was just the ‘insurance’ that AIG and others were hyping that would be bad enough. But it was much worse. Enter the Credit Default Swap (CDS). Quote from Wikipedia:

    A credit default swap (CDS) is a swap contract in which the buyer of the CDS makes a series of payments to the seller and, in exchange, receives a payoff if a credit instrument (typically a bond or loan) goes into default (fails to pay) [1]. Less commonly, the credit event that triggers the payoff can be a company undergoing restructuring, bankruptcy, or even just having its credit rating downgraded.

    CDS contracts have been compared with insurance, because the buyer pays a premium and, in return, receives a sum of money if one of the events specified in the contract occurs. However, there are a number of differences between CDS and insurance, for example:

    * The buyer of a CDS does not need to own the underlying security or other form of credit exposure; in fact the buyer does not even have to suffer a loss from the default event.[2][3][4][5] In contrast, to purchase insurance, the insured is generally expected to have an insurable interest such as owning a debt obligation;
    * the seller need not be a regulated entity;
    * the seller is not required to maintain any reserves to pay off buyers, although major CDS dealers are subject to bank capital requirements;
    * insurers manage risk primarily by setting loss reserves based on the Law of large numbers, while dealers in CDS manage risk primarily by means of offsetting CDS (hedging) with other dealers and transactions in underlying bond markets;
    * in the United States CDS contracts are generally subject to mark to market accounting, introducing income statement and balance sheet volatility that would not be present in an insurance contract;
    * Hedge accounting may not be available under US Generally Accepted Accounting Principles (GAAP) unless the requirements of FAS 133 are met. In practice this rarely happens.

    However the most important difference between CDS and Insurance is simply that an insurance contract provides an indemnity against the losses actually suffered by the policy holder, the CDS provides an equal payout to all holders, calculated using an agreed, market-wide method.

    There are also important differences in the approaches used to pricing. The cost of insurance is based on actuarial analysis. CDSs are derivatives whose cost is determined using financial models and by arbitrage relationships with other credit market instruments such as loans and bonds from the same ‘Reference Entity’ to which the CDS contract refers.

    Insurance contracts require the disclosure of all risks involved. CDSs have no such requirement, and, as we have seen in the recent past, many of the risks are unknown or unknowable. Most significantly, unlike insurance companies, sellers of CDSs are not required to maintain any capital reserves to guarantee payment of claims. In that respect, a CDS is insurance that insures nothing.

    It is my understanding that there was as much as TEN TIMES the dollars floating on CDS’s based on mortgage-backed securities as on actual mortgages and their insurance. Nothing more than legal high-stakes gambling. Hence the downfall of Citibank, et. al.


  28. Warren

    The really interesting part of this is figuring out who made the money before others lost it. All that money didn’t just vanish into thin air. Granted, paper value is a different thing from greenbacks in the hand.

    AIG’s profit on non-reserve insurance is relatively straightforward. Of more interest is where the money was made on the CDS’s. These ‘securities’ were bought and sold with no backing whatsoever. When they were first sold and every time they changed hands thereafter someone profited. So, lots of profits were made. Who made them? I’m still trying to unravel it all.


  29. almandine

    Look at the players still in business… Goldman, Citi, BoA – those that were the winners.

    Those taken down… WaMu, Lehman, etc – were on the wrong end of the stick. Oh, and don’t forget you and me. We get to absorb it all.