Bloomberg News has been pursuing the secretive vale wrapped around the actions of the Federal Reserve Bank of New York, Wall Street corporate executives, Bush and Obama Administration advisers, and other key actors for several months now. The individuals and organizations involved have various motives for opposing transparency, with the common theme being an attempt to avoid accountability for actions taken which clearly and plainly went against the public interest.
The most recent revelation in the saga presents us with an intriguing political question. Once the facts become undeniable, the details beyond dispute, what are we going to do about it? What if those implicated in the affair cross traditional partisan lines? Do we elect more and better Democrats by holding Democrats accountable, or by excusing conduct which would be objectionable were it undertaken by Republicans?
These are pretty thinly disguised rhetorical questions because we've had an overwhelming amount of evidence already about the nature and effects of the corporate bailouts of the past couple years. They have transferred wealth from taxpayers to wealthy managers (and incompetent managers, no less, people so bad at their jobs that they drove their companies into bankruptcy). The purpose of secrecy is to provide just enough cover, sow just enough confusion, so that there is plausible deniability for the key participants.
Well, this most recent piece at Bloomberg should remove those final fig leaves of plausible deniability. We can now say, plainly and directly, that the Fed and Wall Street engaged in a coordinated effort to defraud the American people. These people are criminals of the worst kind: those still loose on the street, committing more crimes. We call this racketeering and conspiracy when the mafia does this.
Is that too harsh? Read for yourself.
Among AIG’s bank counterparties were New York-based Goldman Sachs Group Inc. and Merrill Lynch & Co., Paris-based Societe Generale SA and Frankfurt-based Deutsche Bank AG.
By Sept. 16, 2008, AIG, once the world’s largest insurer, was running out of cash, and the U.S. government stepped in with a rescue plan. The Federal Reserve Bank of New York, the regional Fed office with special responsibility for Wall Street, opened an $85 billion credit line for New York-based AIG. That bought it 77.9 percent of AIG and effective control of the insurer.
The government’s commitment to AIG through credit facilities and investments would eventually add up to $182.3 billion.
Beginning late in the week of Nov. 3, the New York Fed, led by President Timothy Geithner, took over negotiations with the banks from AIG, together with the Treasury Department and Chairman Ben S. Bernanke’s Federal Reserve. Geithner’s team circulated a draft term sheet outlining how the New York Fed wanted to deal with the swaps -- insurance-like contracts that backed soured collateralized-debt obligations.
...snip...
Part of a sentence in the document was crossed out. It contained a blank space that was intended to show the amount of the haircut the banks would take, according to people who saw the term sheet. After less than a week of private negotiations with the banks, the New York Fed instructed AIG to pay them par, or 100 cents on the dollar. The content of its deliberations has never been made public.
...snip...
Citigroup Inc. agreed last year to accept about 60 cents on the dollar from New York-based bond insurer Ambac Financial Group Inc. to retire protection on a $1.4 billion CDO.
Did you read that? I mean, really read it, setting down the coffee for a second, muting the TV volume, thinking through each sentence?
At the highest levels of decision-making, acting completely outside the purview of the elected legislature in Washington, the Fed became a special purpose, off balance sheet vehicle of the US Treasury. We took over the normal process that happens when companies run into trouble, negotiating to repay debts at lower levels. And then, the ordinary course of business itself was abandoned. Rather than seeking haircuts (reductions in value from the original face value to the present market value), Geithner, Bernanke, and Paulson simply issued their royal decree that Goldman Sachs, Merrill Lynch, Societe Generale, Deutsche Bank, and others be paid a completely fictional, made up amount of money that had no relation to the market value of what AIG as a non-governmental entity could have or would have paid. Even the staff of the Federal Reserve Bank of New York didn't contemplate that act: they put into the draft term sheet a spot for the haircut. This doesn't even discuss whether there should have been a bailout at all; this merely touches upon the terms of the bailout.
To use a shorter description, that's called theft.
One of the defining qualities of a society is the treatment of thieves. Societies that are too harsh on thieves, particularly petty thieves, are often unpleasant places to live. But, societies that allow the big thieves to thrive, to be promoted to more powerful positions, to keep jobs they have no business keeping, to retire wealthy, and so forth, are not pleasant places to live either. Societies that do both of these things, inflicting harsh punishments on petty thieves while hiding the secrets of the big thieves, simply don't last long. As the saying goes, unsustainable things have a way of stopping, eventually.
Mr. President, which vision of America do you have? Do you believe in the two-tiered justice system, or equality under the law? Do you believe Geithner, Bernanke, Summers, Gensler, Blankfein, Dimon, et al, should keep their jobs, or do you believe people with different perspectives, experiences, and skills should replace them? Do you believe America is so weak that we have no better minds out there, that we're trapped with those who've brung us thus far, or do you believe we can change, that we can do things differently from here on out? Do you believe in honoring Freedom of Information Act requests, or contesting them?
And to fellow cyberfriends, do you have the cajones to say, still, that it's inappropriate to question Presidential appointments? Do you honestly believe that this is about some purity test of superficial political loyalty to Obama? This isn't (as if it's ever 'pragmatic' or 'strategic' or 'rational' or 'whatever' to dismiss bad behavior simply because 'our guy' appointed somebody who engaged in it rather than some other guy making the appointment). This is about America.
In America, do we use tax dollars to fund the worst of the mega rich, or do we use tax dollars to invest in the common good?
I'd love to know one good reason why names like Paulson, Bernanke, Geithner, Friedman (Stephen, in this particular case), Summers, Blankfein, and Dimon shouldn't instantly be associated with the same reactions elicited by names like Lay and Madoff. And I'd love to know one good reason why keeping these kinds of advisers and executives makes the Obama Administration and corporate America better. For goodness sakes, if the Administration can fire somebody like Rick Wagoner, former CEO of GM, whose crime was merely being a poorly performing executive, why on Earth are the very people most responsible for our present situation still in charge? How does that help the Obama Administration, the Democratic Party, or America? Why don't we make the rich people who crashed the system pay for saving the system?
For some other perspectives, see here and here.
I can't wait to read Taibbi's take. He's either going to blow a gasket or be unnervingly calm. After all, it's not like this is 'completely' shocking. It's more like specific, verifiable* data consistent with an already well documented theory.
*Well, not completely verifiable. There's still those pesky matters of auditing the Fed and how the Fed claims it's not subject to FOIA requests.