The Shameless, Criminal AIG Bonuses

I am sick to my stomach.

I thought I understood what was the cause of the slow death being endured by so many but I merely had a kind of foggy idea. This article makes me begin to feel that the "gut feeling" triggered reaction of the generally ignorant (those who know little or nothing of formal economics) among us is far more "reasonable" a response than all the "intelligent" responses from the intellectual elite.

I understand clearly now why AIG so quickly paid off its foreign partners in crime in France and Germany and why they refuse to reveal exactly where all the money they were given has gone. At this stage I do not give a damn that the AIG bonuses are based on "contractual" agreements. There are times when morality trumps even the best intentioned law let alone law that clearly has no redeeming virtue either in its intent or consequence. Let the bastards take the company to court. They should never be paid one red cent. I recall writing about greed some time ago. The AIG bonus scam is surely greed on steroids. This James Lieber article must be read by all who hope to even begin to understand the fecal matter in which we are sinking and how we got into such deep do-do. It could be that the GOP, now the GOPoN, the "Grand Old Party of No", is on the right track after all. Let the suckers go into bankruptcy! I seriously doubt that any subsequent pain can be worse than that being endured now and likely to be enured in a future that avoids bankruptcy.

These AIG bonuses certainly are causing a furor and for good reason. It is just such a clear demonstration of the indefatigable gall of these people. But the AIG story is very, very bad on many levels and this article from January's Village Voice on the dark arts of the world of derivatives may help explain what really happened.

Great article.

SUMMARY:
The bottom line in this scandal is that fantastically wealthy entities positioned themselves to make unfathomable fortunes by betting that average Americans--Joe Six-Packs and hockey moms--would fail.

What Cooked the World's Economy? It wasn't your overdue mortgage.

By James Lieber
January 28, 2009

James Lieber is a lawyer whose books on business and politics includeFriendly Takeover (Penguin) and Rats in the Grain (Basic Books). This is hisfifth article for the Voice.
It's 2009. You're laid off, furloughed, foreclosed on, or you know someonewho is. You wonder where you'll fit into the grim new semi-socialistic post-post-industrial economy colloquially known as "this mess."

You're astonished and possibly ashamed that mutant financial instrumentsdreamed up in your great country have spawned worldwide misery. You can'tcomprehend, much less trim, the amount of bailout money parachuting into thelaps of incompetents, hoarders, and miscreants. It's been a tough century sofar: 9/11, Iraq, and now this. At least we have a bright new president.He'll give you a job painting a bridge. You may need it to keep body andsoul together.
The basic story line so far is that we are all to blame, includinghomeowners who bit off more than they could chew, lenders who wrote absurdadjustable-rate mortgages, and greedy investment bankers.
Credit derivatives also figure heavily in the plot. Apologists say thatthese became so complicated that even Wall Street couldn't understand themand that they created "an unacceptable level of risk." Then these blowhardstell us that the bailout will pump hundreds of billions of dollars into thecredit arteries and save the patient, which is the world's financial system.It will take time-maybe a year or so--but if everyone hangs in there, we'llbe all right. No structural damage has been done, and all's well that endswell.
Sorry, but that's drivel. In fact, what we are living through is the worstfinancial scandal in history. It dwarfs 1929, Ponzi's scheme, Teapot Dome,the South Sea Bubble, tulip bulbs, you name it. Bernie Madoff? He's peanuts.
Credit derivatives--those securities that few have ever see--are one reasonwhy this crisis is so different from 1929.
Derivatives weren't initially evil. They began as insurance policies onlarge loans. A bank that wished to lend money to a big, but shaky, venture,like what Ford or GM have become, could hedge its bet by buying a creditderivative to cover losses if the debtor defaulted. Derivatives weren'tcheap, but in the era of globalization and declining Americancompetitiveness, they were prudent. Interestingly, the company that put thebasic hardware and software together for pricing and clearing derivativeswas Bloomberg. It was quite expensive for a financial institution-say, abank-to get a Bloomberg machine and receive the specialized trainingrequired to certify analysts who would figure out the terms of theinsurance. These Bloomberg terminals, originally called Market Masters, werefirst installed at Merrill Lynch in the late 1980s.
Subsequently, thousands of units have been placed in trading and financialinstitutions; they became the cornerstone of Michael Bloomberg's wealth,marrying his skills as a securities trader and an electrical engineer.
It's an open question when or if he or his company knew how they would bemisused over time to devastate the world's economy.
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Fast-forward to the early years of the Clinton administration. After aninitial surge of regulatory behavior in favor of fair markets, especially inantitrust, that sort of behavior was abandoned, and free markets triumphed.The result was a morass of white-collar sociopathy at Archer DanielsMidland, Enron, and WorldCom, and in a host of markets ranging from oil tovitamins.
This was the beginning of the heyday of hedge funds. Unregulated investmenthouses were originally based on the questionable but legal practice ofshort-selling-selling a financial instrument you don't own in hopes ofbuying it back later at a lower price. That way, you hedge your bets: Youcover your investment in a company in case a company's stock price falls.
But hedge funds later diversified their practices beyond that easydefinition. These funds acquired a good deal of popular mystique. They madescads of money. Their notoriously high entry fees--up to 5 percent of theinvestment, plus as much as 36 percent of profits--served as barriers to allbut the richest investors, who gave fortunes to the funds to play with. Thefunds boasted of having genius analysts and fabulous proprietary algorithms.Few could discern what they really did, but the returns, for those who couldbuy in, often seemed magical.
But it wasn't magic. It amounted to the return of the age-old scam called"bucket shops." Also sometimes known as "boiler rooms," bucket shops emergedafter the Civil War. Usually, they were storefronts where people came to beton stocks without owning them. Unlike their customers, the shops actuallyowned blocks of stock. If customers were betting that a stock would go up,the shops would sell it and the price would plunge; if bettors were bearish,the shops would buy. In this way, they cleaned out their customers. Freneticbucket-shop activity caused the Panic of 1907. By 1909, New York had bannedbucket shops, and every other state soon followed.
In the mid-'90s, though, the credit-derivatives industry was hitting itsstride and argued vehemently for exclusion from all state and federalanti-bucket-shop regulations. On the side of the industry were FederalReserve Chairman Alan Greenspan, Treasury Secretary Robert Rubin, and hisdeputy, Lawrence Summers. Holding the fort for the regulators was BrooksleyBorn, who headed the Commodity Futures Trading Commission (CFTC). The threefinancial titans ridiculed the virtually unknown and cloutless, butbrilliant and prophetic Born, who warned that unrestricted derivativestrading would "threaten our regulated markets, or indeed, our economy,without any federal agency knowing about it." Warren Buffett also weighed inagainst deregulation.
But Congress loved Greenspan-a/k/a "the Maestro" and "the Oracle"-andClinton loved Rubin. The sleepy hearings received almost no publicattention. The upshot was that Congress removed oversight of derivativesfrom the CFTC and preempted all state anti-bucket-shop laws. Born resignedshortly afterward.
Soon, something odd started to happen. Legitimate big investors, often withmillions of dollars to place, found that they couldn't get into certainhedge funds, despite the fact that they were willing to pay steep fees. Inretrospect, it seems as if these funds did not want fussy outsiders lookinginto what they were doing with derivatives.
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Imagine that a person is terminally ill. He or she would not be able to buya life insurance policy with a huge death benefit. Obviously, third partiescould not purchase policies on the soon-to-be-dead person's life. Yetsomething like that occurred in the financial world.
This was not caused by imprudent mortgage lending, though that was a pieceof the puzzle. Yes, Fannie Mae and Freddie Mac were put on steroids duringthe '90s, and some people got into mortgages who shouldn't have. But thevast majority of homeowners paid their mortgages. Only about 5 to 10 percentof these loans failed--not enough to cause systemic financial failure. (Thedollar amount of defaulted mortgages in the U.S. is about $1.2 trillion,which seems like a princely sum, but it's not nearly enough to drag down theentire civilized world.)
Much more dangerous was the notorious bundling of mortgages. Investmentbanks gathered these loans into batches and turned them into securitiescalled collateralized debt obligations (CDOs). Many included high-riskloans. These securities were then rated by Standard & Poor's, Fitch Ratings,or Moody's Investors Services, who were paid at premium rates and gaveinvestment grades. This was like putting lipstick on pigs with the plague.Banks like Wachovia, National City, Washington Mutual, and Lehman Brothersloaded up on this financial trash, which soon proved to be practicallyworthless. Today, those banks are extinct. But even that was not enough tocause a worldwide financial crisis.
What did cause the crisis was the writing of credit derivatives. In theory,they were insurance policies for investors; in practice, they became aguarantee of global financial collapse.
As insurance, they were poised to pay off fabulously when these weak bundledsecurities failed. And who was waiting to collect? Well, every gambler islooking for a sure bet. Most never find it. But the hedge funds and theirilk did.
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The mantra of entrepreneurial culture is that high risk goes with highreward. But unregulated and opaque derivatives trading was counterculturalin the sense that low or no risk led to quick, astronomically high rewards.By plunking down millions of dollars, a hedge fund could reap billions oncethese fatally constructed securities plunged. Again, the funds did not needto own the securities; they just needed to pay for the derivatives--theinsurance policies for the securities. And they could pay for them again andagain. This was known as replicating. It became an addiction.
About $2 trillion in credit derivatives in 1989 jumped to $8 trillion in1994 and skyrocketed to $100 trillion in 2002. Last year, the Bank forInternational Settlements, a consortium of the world's central banks basedin Basel (the Fed chair, Ben Bernanke, sits on its board), reported thegross value of these commitments at $596 trillion. Some are due, and somewill mature soon. Typically, they involve contracts of five years or less.
Credit derivatives are breaking and will continue to break the world'sfinancial system and cause an unending crisis of liquidity and gummed-upcredit. Warren Buffett branded derivatives the "financial weapons of massdestruction." Felix Rohatyn, the investment banker who organized the bailoutof New York a generation ago, called them "financial hydrogen bombs."
Both are right. At almost $600 trillion, over-the-counter (OTC) derivativesdwarf the value of publicly traded equities on world exchanges, whichtotaled $62.5 trillion in the fall of 2007 and fell to $36.6 trillion a yearlater.
The nice thing about public markets is that they act as canaries that givewarnings as they did in 1929, 1987 (the program trading debacle), and 2001(the dot-com bubble), so we can scramble out with our economic lives. Butcompletely private and unregulated, the OTC derivatives trade is justlyknown as the "dark market."
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The heart of darkness was the AIG Financial Products (AIGFP) office inLondon, where a large proportion of the derivatives were written. AIG hadplaced this unit outside American borders, which meant that it would nothave to abide by American insurance reserve requirements. In other words,the derivatives clerks in London could sell as many products as they couldwrite-even if it would bankrupt the company.
The president of AIGFP, a tyrannical super-salesman named Joseph Cassano,certainly had the experience. In the 1980s, he was an executive at DrexelBurnham Lambert, the now-defunct brokerage that became the pivot of thejunk-bond scandal that led to the jailing of Michael Milken, David Levine,and Ivan Boesky.
During the peak years of derivatives trading, the 400 or so employees of theLondon unit reportedly averaged earnings in excess of a million dollars ayear. They sold "protection"--this Runyonesque term was favored-worth morethan three times the value of parent company AIG. How could they have notknown that they were putting at risk the largest insurer in the world andall the businesses and individuals that it covered?
This scheme that smacks of securities fraud facilitated the dreams of buyerscalled "counterparties" willing to ante up. Hedge fund offices sprouted inKensington and Mayfair like mushrooms after a summer shower. Revenue frompremiums for derivatives at AIGFP rose from $737 million in 1999 to $3.26billion in 2005. Cassano reportedly hectored ever-willing counterparties to"play the power game"--in other words, gobble up all the credit derivativesbacking CDOs that they could grab. As the bundled adjustable-rate mortgagesballooned, stretched home buyers defaulted, and the exciting power gamebecame about as risky as blasting sitting ducks with a Glock.
People still seem surprised to read that hedge principals have raked inbillions of dollars in a single year. They shouldn't be. These subprime-timeplayers knew how to score. The scam bled AIG white. In mid-September, whenit was on the ropes, AIG received an astonishing $85 billion emergency lineof credit from the Fed. Soon, that was supplemented by another $67 billion.Much of that money, to use the government's euphemism, has already been"drawn down." Shamefully, neither Washington nor AIG will explain where thebillions went. But the answer is increasingly clear: It went tocounterparties who bought derivatives from Cassano's shop in London.
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Imagine if a ring of cashiers at a local bank made thousands of bad loans,aware that they could break the bank. They would be prosecuted for fraud andracketeering under the anti-gangster RICO Act. If their counterparties-thedebtors-were in on the scam and understood that they didn't have to pay offthe loans, they could be charged, too. In fact, this scenario played out atsubprime-pushing outlets of a host of banks, including Washington Mutual(acquired last year by JP Morgan Chase, which itself received a $25 billionbailout); IndyMac (which was seized by FDIC regulators); and Lehman Brothers(which went belly-up). About 150 prosecutions of this type of fraud aregoing forward.
The top of the swamp's food chain, where the muck was derivatives ratherthan mortgages, must also be scrutinized. Apparently, that is the case.AIGFP's Cassano has hired top white-collar litigator and former prosecutorF. Joseph Warin (profiled in the 2004 Washingtonian piece, "Who to Call WhenYou're Under Investigation!"). Neither Cassano nor his attorney responded tointerview requests.
AIG's lavishly compensated counterparties were willing participants andlikewise could be considered for prosecution, depending on what they knew.Who were they?
At a 2007 conference, Cassano defined them as a "global swath" that included"banks and investment banks, pension funds, endowments, foundations,insurance companies, hedge funds, money managers, high-net-worthindividuals, municipalities, sovereigns, and supranationals." Abetting thescheme, ratings agencies like Standard & Poor's gave high grades to theshaky mortgage-backed securities bundled by investment banks such as GoldmanSachs and Lehman Brothers.
After the relative worthlessness of these CDOs became clear, the ratersrushed to downgrade them to junk status. This occurred suddenly with morethan 4,000 CDOs in the first quarter of 2008--the financial community nowregards them as "toxic waste." Of course, the sudden massive downgradingraises the question: Why had CDOs been artificially elevated in the firstplace, leading banks to buy them and giving them protective coloring justbecause the derivatives writers "insured" them?
After the raters got real (i.e., got scared), the gig was up. Hedge fundsfled in droves from their luxe digs in London. The industry remains murky,but some observers feel that more than half of all hedges will fold thisyear. Not necessarily a good sign, it seems to show that the funds wereone-trick ponies living mainly off the derivatives play.
We know that AIG was not the only firm that sold derivatives: Lehman andBear Stearns both dealt them and died. About 20 years ago, JP Morgan, thenow-defunct investment bank, had brought the idea to AIGFP in London, whichran with it. Seeing the Cassano group's success, Morgan jumped in with bothfeet. Specializing in credit default swaps--a type of derivative triggered topay off by negative events in the lives of loans, like defaults,foreclosures, and restructurings--Morgan had a distinctive marketing spin.Its "quants" were classy young dealers who could really do the math, whichof course gave them credibility with those who couldn't. They abjured streetslang like "protection." They pitched their sophisticated swaps as"technologies." The market adored them. They, in turn, oversold the product,made huge commissions, and wounded Morgan, which had to sell itself toChase, becoming JP Morgan Chase-now the country's biggest bank.
Today, the real question is whether the Morgan quants knew the swaps didn'twork and actually were grenades with pulled pins. Like Joseph Cassano, suchpeople should consult attorneys.
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Secrecy shrouds the bailout. The 21 banks that each received more than $1billion from the Fed won't disclose how, or even if, they're lending it,which hardly quells fears of hoarding. The Treasury says it can't forcedisclosure because it took only preferred (non-voting) stock in exchange forthe money.
If anything, the Fed had been less candid. It stonewalls requests to revealthe winners (mainly banks and corporations) of $1.5 trillion in loans, aswell as the securities it received as collateral. A Freedom of InformationAct (FOIA) suit to obtain this information by Bloomberg News has beenrebuffed by the Fed, which insists that a loophole in FOIA exempts it.Bloomberg will probably lose the case, but at least it's trying to probe theblack hole of bailout money. Of course, Barack Obama could tell the Fed torelease the information, plus generally open the bailout to public eyes.That would be change that we could believe in.
As for Bloomberg, its business side, Bloomberg L.P., has been less thanforthcoming. Requests to interview someone from the company--and MichaelBloomberg, who retains a controlling interest--about the derivatives tradewent unanswered.
In his economic address at Cooper Union last spring, Obama argued for newregulations, which he called "the rules of the road," and for a $30 billionstimulus package, that now seems quaint. In the OTC swaps trade, theBloomberg L.P.'s computer terminals are the road, bridges, and tunnels for"real-time" transactions. The L.P.'s promotional materials declare: "You'reeither in front of a Bloomberg or behind it." In terms of electronic tradingof certain securities, including credit default swaps: "Access to a dealer'sinventory is based upon client relationships with Bloomberg as the onlyconduit." In short, the L.P. looks like a dominant player--possibly, amonopoly. If it has a true competitor, I can't find it. But then, this is avery dark market.
Did Bloomberg L.P. do anything illegal? Absolutely not. We prosecutehit-and-run drivers, not roads. But there are many questions--about the sizeof the derivatives market, the names of the counterparties, the amount ofreplication of derivatives, the role of securities ratings in Bloombergcalculations (in other words, could puffing up be detected and potentiallystop a swap?), and how the OTC industry should be reported and regulated inorder to prevent future catastrophes. Bloomberg is a privately heldcompany--to the chagrin of would-be investors--and quite private about itsbusiness, so this information probably won't surface without subpoenas.
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So what do we do now? In 2000, the 106th Congress as its final effort passedthe Commodity Futures Modernization Act (CFMA), and, disgracefully,President Clinton signed it. It opened up the bucket-shop loophole thatcapsized the world's economic system. With the stroke of a presidential pen,a century of valuable protection was lost.
Even with that, the dangerous swaps still almost found themselves subjectedto state oversight. In 2000, AIG asked the New York State InsuranceDepartment to decide if it wanted to regulate them, but the department'ssuperintendent, Neil Levin, said no. The question was not posed by AIGFP,but by the company's main office through its general counsel, a reminderthat not long ago, AIG was a blue chip with a triple-A rating that toutedits integrity.
We can't know why Levin rejected the chance to regulate the tricky trade. Hedied in the restaurant at the top of the World Trade Center on the morningof 9/11. A Pataki-appointed former Goldman Sachs vice president, Levin mayhave shared other Wall Streeters' love of derivatives as the last big-moneysure thing as the IPO craze wound down. Or maybe he saw swaps as gamblingrather than insurance, hence beyond his jurisdiction. Regardless, currentInsurance Superintendent Eric Dinallo told me, "I don't agree with hisanswer." Maybe the economic crisis could have been averted if Levin hadanswered otherwise. "How close we came . . ." Dinallo mused.
Deeply occupied with keeping AIG, the parent company, afloat since thebailout, Dinallo saw the carnage that the swaps caused and, with the supportof Governor Paterson, pushed anew for regulatory oversight, a position alsoadopted by the President's Working Group (PWG), which includes the Treasury,Fed, SEC, and CFTC.
But regulation isn't enough to stop a phenomenon called "de-supervision"that occurs when officials can't, or won't, oversee a market. For instance,the Fed under Greenspan had authority to regulate mortgage bankers andbrokers, the industry's cowboys who kicked off this fiasco. BecauseGreenspan's libertarian sensibilities prevented him from invoking the Fed'scontrol, the mortgage market careened corruptly until the wheels came off.Notoriously lax and understaffed, the SEC did nothing to limit investmentbanks that bundled, pitched, and puffed non-prime mortgages as the raterscheered. It's doubtful that any agency can be relied on to control lucrativedefault swaps, which should be made illegal again. The bucket-shop loopholemust be closed. The evil genie should go back in the bottle.
Will Obama re-criminalize these financial weapons by pushing for repeal ofthe CFMA? This should be a no-brainer for Obama, who, before becoming acommunity organizer in Chicago, worked on Wall Street, studied derivatives,and by now undoubtedly knows their destructive power.
What about the $600 trillion in credit derivatives that are still out there,sucking vital liquidity and credit out of the system? It's the tyrannosaurusin the mall, the one that made Henry Paulson, the former Treasury Secretarywho looks like Daddy Warbucks, get down on his knees and beg Nancy Pelosifor a bailout.
Even with the bailout, no one can get their arms around this monster.Obviously, the $600 trillion includes not only many unseemly replicateddeath bets, but also some benign derivatives that creditors bought to hedgerisky loans. Instead of sorting them out, the Bush administration tried toprotect them all, while keeping the counterparties happy and anonymous.
Paulson has taken flack for spending little to bring mortgages in line withfalling home values. Sheila Bair, the FDIC chief who often scrapped withPaulson, said this would cost a measly $25 billion and that without it, 10million Americans could lose their homes over the next five years. Paulsonthought it would take three times as much and balked. Congress is bristlingbecause the Emergency Economic Stabilization Act (EESA) could providemortgage relief-and some derivatives won't detonate if homeowners don'tdefault. Obama's nominee for Treasury Secretary, Timothy Geithner, couldback such relief at his hearings.
The other key appointment is Attorney General. A century ago, when powerfultrusts distorted the market system, we had AGs who relentlessly tracked andbusted them. Today's crisis is missing, so far, an advocate as dynamic andenergetic as the mortgage bankers, brokers, bundlers, raters, and quantswho, in a few short years, littered the world with rotten loans, diseasedCDOs, and lethal derivatives. During the Bush years, white-collar lawenforcement actually dropped as FBI agents were transferred toantiterrorism. Even so, according to William Black, an effective federallitigator and regulator during the 1980s savings-and-loan scandal, by 2004,the FBI perceived an epidemic of fraud. Now a professor of law and financeat the University of Missouri-Kansas City, Black has testified to Congressabout the current crisis and paints it as "control fraud" at every level.Such fraud flows from the top tiers of corporations-typically CEOs and CFOs,who control perverse compensation systems that reward cheating and volumerather than quality, and circumvent standard due diligence such asunderwriting and accounting. For instance, AIGFP's Cassano reportedlyrebuffed AIG's internal auditor.
The environment from the top of the chain--derivatives gang leaders--to thebottom of the chain-subprime, no-doc loan officers-became "criminogenic,"Black says. The only real response? Aggressive prosecution of "elites" atall stages in this twisted mess. Black says sentences should not be thelight, six-month slaps that white-collar criminals usually get, or theMadoff-style penthouse arrest.
As staggering as the Madoff meltdown was, it had a refreshing side--the fundswere frozen. In the bailout, on the other hand, the government often seemsto be completing the scam by quietly passing the proceeds to counterparties.
The advantage of treating these players like racketeers under federal law isthat their ill-gotten gains could be forfeited. The government could recoupthese odious gambling debts instead of simply paying them off. In finance,the bottom line is the bottom line. The bottom line in this scandal is thatfantastically wealthy entities positioned themselves to make unfathomablefortunes by betting that average Americans-Joe Six-Packs and hockeymoms-would fail.
Black suggests that derivatives should be "unwound" and that the payoutscease: "Close out the positions--most of them have no social utility." Andwhere there has been fraud, he adds, "clawback makes perfect sense." Thatwould include taking back the ludicrously large bonuses and other forms ofcompensation given to CEOs at bailed-out companies.
No one knows how much could be clawed back from the soiled derivatives reap.Clearly, it's not $600 trillion. William Bergman, formerly a market analystat the Chicago Fed in "netting"--what's left after financial institutions payeach other off for ongoing deals and debts--makes a "guess" that perhaps only5 percent could be recouped, which he concedes is unfortunately low. Still,that's $30 trillion, a huge number, more than 10 times what the Fed candeploy and over twice the U.S. gross domestic product. Such a sum, ifrecovered through the criminal justice process, could ease the liquiditycrisis and actually get the credit arteries flowing. Not everyone would likeit. What's left of Wall Street and hedge funds want their derivatives gains;so do foreign banks.
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A tangle of secrecy, conflicts of interest, and favoritism plagues theprocess of recovery.
Lehman drowned, but Goldman Sachs, where Paulson was formerly CEO, wassaved. The day before AIG reaped its initial $85 billion bonanza, Paulsonmet with his successor, Lloyd Blankfein, who reportedly argued that Goldmanwould lose $20 billion and fail unless AIG was rescued. AIG got the money.
Had Goldman bought from AIG credit derivatives that it needed to redeem?Like most other huge financial traders, Goldman has a secretive hedge fund,Global Alpha, that refuses to reveal its transactions. Regardless, Paulson'smeeting with Blankfein was a low point. If Dick Cheney had met with hissuccessor at Halliburton and, the very next day, written a check forbillions that guaranteed its survival, the press would have screamed for hishead.
The second most shifty bailout went to Citigroup, a money sewer that wonlast year's layoff super bowl with 73,000. Instead of being parceled toefficient operators, Citi received a $45 billion bailout and $300 billionloan package, at least in part because of Robert Rubin's juice. WhileTreasury Secretary under Clinton, Rubin led us into the derivativesmaelstrom, deported jobs with NAFTA, and championed bank deregulation sothat companies like Citi could mimic Wall Street speculators. After hejoined Citi's leadership in 1999, the bank went long on mortgages and otherrisks du jour, enmeshed itself in Enron's web, tanked in value, and sufferedhaphazard management, while Rubin made more than $100 million.
Rubin remained a director and "senior counselor" at Citi until January 9,2009, and is an economic adviser to Obama. In truth, he probably shouldn'tbe a senior counselor anywhere except possibly at Camp Granada. LikeGreenspan, he should retire before he breaks something again, and we have topay for it. (Incidentally, the British bailout, which is more open than oursand mandates mortgage relief, makes corporate welfare contingent on theremoval of bad management.)
The third strangest rescue involved the Fed's announcement just beforeChristmas that hedge funds for the first time could borrow from it.Apparently, the new $200 billion credit line relates to recently revealedsecuritized debts including bundled credit card bills, student loans, andauto loans. Obviously, it's worrisome that the crisis may be morphing beyondits real estate roots.
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To say the bailout hasn't worked so far is putting it mildly. Since thecrisis broke, Washington's reaction has been chaotic, lenient to favorites,secretive, and staggeringly expensive. An estimated $7.36 trillion, morethan double the total American outlay for World War II (even correcting forinflation), has been thrown at the problem, according to press reports.Along the way, banking, insurance, and car companies have been nationalized,and no one has been brought to justice.
Combined unemployment and underemployment (those who have stopped looking,and part-timers) runs at nearly 20 percent, the highest since 1945. Housingprices continue to hemorrhage--last fall's 18 percent drop could double.Holiday shopping fizzled: 160,000 stores closed last year, and 200,000 moreare expected to shutter in '09. Some forecasts place eventual retaildarkness at 25 percent. In 2008, the Dow dropped further--34 percent--than atany time since 1931. There is no sound sector in the economy; the onlymembers of the 30 Dow Jones Industrials posting gains last year wereWal-Mart and McDonald's.
Does Obama's choice for Attorney General, Eric Holder, have the tenacity andwill to tackle the widest fraud in American history? Parts of his backgrounddon't necessarily augur well: He worked on a pardon for Marc Rich, thefugitive billionaire tax evader once on the FBI's Most Wanted List whomClinton cleared. After leaving the Clinton era's Justice Department, Holderwent to work for Covington & Burling, a D.C. firm that represents corporateheavies including Big Tobacco. He defended Chiquita Brands in a notoriouscase, in which it paid a $25 million fine for using terrorists in Columbiaas security. Holder fits well within the gaggle of elite D.C. lawyers whomove back and forth between government and defending corporate criminals. Hedoesn't exactly have the sort of résumé that startles robber barons.
Can Holder design and orchestrate a muscular legal response, includingprosecution and stern punishment of top executives, plus aggressiveclawbacks of money? There seems little question that he has the skill, sothe decision on how aggressive the Justice Department will be is up toObama.
Holder could ask for and get well-organized FBI white-collar teams. Thepersonnel hole caused by shifts to antiterrorism would have to be more thanfilled to their pre-9/ll staffing if the incoming administration decides tobreak this criminogenic cycle rather than merely address it symbolically.
Black contends that aggressive prosecution would be good for the economybecause it may help prevent cheating and fraud that inevitably cause bubblesand destroy wealth. The Sarbanes-Oxley law passed in Enron's wake, forinstance, is supposed to make corporations now keep the kinds of documentsnecessary to assess criminality. Whether the CEOs, CFOs, and others whocontrolled the current frauds will do so is another matter.
"Don't count on them keeping records for long," Black warns. "It's time toget out the subpoenas."