Eliot Spitzner is now a columnist for Slate and his post yesteday poses five important questions for Geithner and Bernanke to answer in public and under oath:
What was the precise conversation among Bernanke, Geithner, Paulson, and Blankfein that preceded the initial $80 billion grant?
Was it already known who the counterparties were and what the exposure was for each of the counterparties?
What did Goldman, and all the other counterparties, know about AIG's financial condition at the time they executed the swaps or other contracts? Had they done adequate due diligence to see whether they were buying real protection? And why shouldn't they bear a percentage of the risk of failure of their own counterparty?
What is the deeper relationship between Goldman and AIG? Didn't they almost merge a few years ago but did not because Goldman couldn't get its arms around the black box that is AIG? If that is true, why should Goldman get bailed out? After all, they should have known as well as anybody that a big part of AIG's business model was not to pay on insurance it had issued.
Why weren't the counterparties immediately and fully disclosed?
He opens by saying what has been emphasized here at Corrente and elsewhere, that the scandal is the weallth transfer, not these piddling bonuses. Brief and to the point article.
Everybody is rushing to condemn AIG's bonuses, but this simple scandal is obscuring the real disgrace at the insurance giant: Why are AIG's counterparties getting paid back in full, to the tune of tens of billions of taxpayer dollars?
For the answer to this question, we need to go back to the very first decision to bail out AIG, made, we are told, by then-Treasury Secretary Henry Paulson, then-New York Fed official Timothy Geithner, Goldman Sachs CEO Lloyd Blankfein, and Fed Chairman Ben Bernanke last fall. Post-Lehman's collapse, they feared a systemic failure could be triggered by AIG's inability to pay the counterparties to all the sophisticated instruments AIG had sold. And who were AIG's trading partners? No shock here: Goldman, Bank of America, Merrill Lynch, UBS, JPMorgan Chase, Morgan Stanley, Deutsche Bank, Barclays, and on it goes. So now we know for sure what we already surmised: The AIG bailout has been a way to hide an enormous second round of cash to the same group that had received TARP money already.
It all appears, once again, to be the same insiders protecting themselves against sharing the pain and risk of their own bad adventure. The payments to AIG's counterparties are justified with an appeal to the sanctity of contract. If AIG's contracts turned out to be shaky, the theory goes, then the whole edifice of the financial system would collapse.
Spitzer appeared on The Brian Lehrer Show on WNYC this morning to discuss these issues. Audio available later today.
Toward the end of the WNYC interview, the host mentioned that the WSJ had an opinion piece yesterday which blamed Sptizer for the entire collapse of the global financial system! Due to his investigation of AIG irregularities back when he was Attorney General of NY, AIG lost its AAA credit rating and -- whoosh!-- the system goes down the drain. Well, other government regulators and their laxness or misunderstanding were also to blame as well... Oh, and don't forget housing.
But what about that supposedly rogue AIG operation in London? Wasn't that outside the reach of federal regulators? Mr. Polakoff [acting director of the Office of Thrift Supervision] called it "a false statement" to say that his agency couldn't regulate the London office. [That is very interesting; hope Congress asks him about that.]
And his agency wasn't the only federal regulator. AIG's Financial Products unit has been overseen for years by an SEC-approved monitor. And AIG didn't just make disastrous bets on housing using those infamous credit default swaps. AIG made the same stupid bets on housing using money in its securities lending program, which was heavily regulated at the state level. State, foreign and various U.S. federal regulators were all looking over AIG's shoulder and approving the bad housing bets. Americans always pay their mortgages, right? Mr. Polakoff said his agency "should have taken an entirely different approach" in regulating the contracts written by AIG's Financial Products unit.
That's for sure, especially after March of 2005. The housing trouble began -- as most of AIG's troubles did -- when the company's board buckled under pressure from then New York Attorney General Eliot Spitzer when it fired longtime CEO Hank Greenberg. Almost immediately, Fitch took away the company's triple-A credit rating, which allowed it to borrow at cheaper rates. AIG subsequently announced an earnings restatement. The restatement addressed alleged accounting sins that Mr. Spitzer trumpeted initially but later dropped from his civil complaint.
Other elements of the restatement were later reversed by AIG itself. But the damage had been done. The restatement triggered more credit ratings downgrades. Mr. Greenberg's successors seemed to understand that the game had changed, warning in a 2005 SEC filing that a lower credit rating meant the firm would likely have to post more collateral to trading counterparties. But rather than managing risks even more carefully, they went in the opposite direction. Tragically, they did what Mr. Greenberg's AIG never did -- bet big on housing.
So, according to the WSJ editorial board, it's the government and regulators at fault. Not poor benighted businesses.... But the bonuses are seen as a diversion, a way to avoid the real problems.
The Washington crowd wants to focus on bonuses because it aims public anger on private actors, not the political class. But our politicians and regulators should direct some of their anger back on themselves -- for kicking off AIG's demise by ousting Mr. Greenberg, for failing to supervise its bets, and then for blowing a mountain of taxpayer cash on their AIG nationalization.
In closing, Brian Lehrer asked Spitzer about his fall from grace, noting that several commenters had said WNYC was wrong to have a sexual sinner (OK, he didn't use those exact words) on air as an expert on AIG. So Spitzer was asked how he felt about his disgrace and it was noted that he resigned a year ago. OK. Mandatory Scarlet Letter applied. Spitzer said he was sorry and deeply regretted his actions.
I missed most of the interview, but, again, audio will be available at the link above. Comments are interesting as well: the sex police are out early, followed by the pragmatists, and also some who note that Spitzer was a force some on Wall Street wanted out of their hair and, voila, a sex scandal accomplishes that.
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As others have said, indeed: Texas Nate's' diary at Agonist has
more and comments add others.
In his post he quotes Earl Devaney, Obama's "chairman of the Recovery Act Transparency and Accountability Board estimates that up to $55 billion in stimulus money could be lost to fraud and waste."
$55B might be on the low side....
Gretchen Morgenson and others on Charlie Rose last night also
talk about the need to follow the money-- the Big Money. Video and transcript (tab to right of comments, scroll down) now available.
The panel consists of Hank Greenberg, former chairman and CEO of AIG; Carol Loomis, Senior editor-at-large of "Fortune"; Gretchen Morgenson of "The New York Times"; and Meredith Whitney, a bank analyst who saw the Big Meltdown coming early on, especially concerning Citi. Meredith Whitney made some good points about the need for time to dig out the counterparties:
Good read -- or listen.
Calculated Risks's take away quote from the Charlie Rose panel:
From Meredith Whitney.
Dave Johnson at Seeing the Forest is outraged--
Outraged that no one is being held accountable.
It IS the Bonuses
Not in the way Spitzer means (he's right the real robbery is elsewhere). But the bonuses are why the average person might start paying attention to the larger robbery. Ordinary people don't know who to believe on the bank bailouts. They have some economists and commentators telling them it's an enormous waste, but they also have Obama Administration officials and other commentators telling them it's a great idea. They viscerally hate them, but they don't know enough to be able to determine whether they're necessary to keep things from getting worse.
The bonuses, however, are easy to understand. It's robbery, plain and simple. No amount of spin can change that. That the Obama Administration tried to spin it, kills them on everything else. Because with that one act, they showed that they were willing to go along with the robbery. All the "nothing they could do" bullshit sounded like every other politician. Telling Americans there's nothing Obama can do while they get robbed by corporations isn't change and Americans know it.
And that then opens up the larger AIG issue and gives it traction. I think that without the bonuses, people were willing to give the Obama Administration the benefit of the doubt on the AIG bailout. I don't think most people liked it, but they wanted to believe and it was all very complicated to understand (and not covered well by most MSM). The bonuses kills that willingness for a lot of people, IMO.
They fucked this one up big time. Because the bonuses are easy to understand and easy to focus on and serve as a rallying point. Up until now, with the exception of the bailout bill, they've been bleeding us in ways that were hard for most people to get their heads around. Now, they've given the public something to rail against.
My guess (hope?) is that having roused the public and given it a rallying cry, it's going to be a lot harder to stem the tide of anger. Because what the bonuses really did was break whatever trust a lot of people had in this new Administration. And it was that trust that's allowed them to continue to rob us. We'll see if they can get it back, but I tend to think the damage is done.
"Do what you feel in your heart to be right -- for you'll be criticized anyway. You'll be damned if you do, and damned if you don't. " - Eleanor Roosevelt
Precisely
The bonuses actually push the Versailles
narrative to the public consciousness, and that's way more important that anything else. Mismanagement of money is an ancient story; mismanagement on the take is what gets the public-anger juices flowing.