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.