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There is a glitch in the system. Alan Greenspan famously said after the collapse that he had "found a flaw" in his free market ideology. He added, "Those of us who have looked to the self-interest of lending institutions to protect shareholder's equity (myself especially) are in a state of shocked disbelief."

Well now the shock has worn off. And what have we done about it? Absolutely nothing. The flaw Greenspan is referring to is what I call the Cassano loophole in the system. And apparently Greenspan has learned nothing from it because in his testimony this week, he said he did nothing wrong as the Cassanos of the world robbed us blind.

Jospeh Cassano was the head of AIG's Financial Products Unit. They are the ones that made about a trillion dollars worth of bets in credit default swaps. They lost. Except because of the Cassano loophole, they won.

When they lost the bets, their company was devastated. Completely and utterly bankrput. The failure was so large, it promised to drag down the rest of the global economy with it. This forced the government to step in and cover their losses. So far, the United States taxpayers have put in $182 billion to keep AIG afloat.

So, what happened to Cassano? This was all his idea and his team that brought on this collossal collapse. Well, he was fired! Great, justice served.

Oh, did I forget to mention one thing? He received $35 million in bonuses when he was let go. Can anyone in their right mind explain that? Imagine you bankrupt your company and nearly the entire world economy with it - and they give you a $35 million bonus?

So, how do so-called conservatives explain this? They scream that he had a contract. He had a contract!!! What can we do? We had to honor it, otherwise the whole capitalist system falls apart. You know what happens to your contract if your company goes under? Even if it was through no fault of your own, you lose your contract. The company is bankrupt. There is no more money. Those contracts are null and void. Especially if you're the idiot who caused the bankruptcy in the first place.

But regular rules don't apply to financial industry executives. They get paid no matter what. And that is the whole problem. You see, Joe Cassano never gave a damn about AIG (let alone the American taxpayer). Why would he care about the company? It's not his money. His money comes in bonuses and salary for making money in the short run. If he took too much risk to make that money and it winds up costing the company later, who cares???

He gets to keep his money, no matter what. His self-interest dictates that he should take excessive risk for excessive rewards. And that's exactly what happened. And that is the Cassano loophole. That's the flaw in the system. The people who run the companies don't own the companies. They are sucking them dry. And killing capitalism in the process.

Free markets need rules. If a football game doesn't have refs and rules, it becomes a killing zone. So, do markets. It becomes anarchy disguised as freedom. Every man for himself.

So, let's go back to Cassano. Did he ever get punished for bankrupting the company? This week the Wall Street Journal reported that prosecutors will likely not charge him with fraud. They are not going to try for clawbacks to get some of the money back. In the end, he gets away scott-free. But it's better than free, he gets to keep all the money he never really made in the first place (all of those trades that he got rewarded for eventually wound up losing a tremendous amount of money--and we had to pay for those losses, even though he kept the money).

No, in the end, Cassano got rewarded. I told you about his $35 million thank you note for robbing the place clean. But how about the original robbery? How much did he make for himself from 2000 to 2008 by gambling with the company's money? Only $280 million.

In the end, he walked away with over $315 million for destroying the company and maybe the whole economy. So, why wouldn't he do it again? Well, next time it won't be him. We're on to him, so he's going to have spend his retirement on his yacht. It'll be someone else. It'll be another Cassano. And we'll fall for it then as well. And Alan Greenspan will be in a state of "shocked disbelief" all over again.

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Originally posted to Cenk Uygur on Fri Apr 09, 2010 at 07:39 AM PDT.

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Comment Preferences

    •  Bankrupcy in the answer (9+ / 0-)

      When anyone has an employment contract, an executive or a union, the only way to reject the contract is if the employee breached the contract or through bankruptcy. Because AIG didn't go through a Chapter process all of its employment contracts were enforceable. That is one of the real problems with much of the the bailout process. The bankruptcy laws were not allowed to have the effect that was required including many employment contracts with executives that needed to be rejected.

      "let's talk about that"

      by VClib on Fri Apr 09, 2010 at 07:52:08 AM PDT

      [ Parent ]

    •  Correct, except for one thing. (5+ / 0-)

      Don't make Cassano the fall guy.  

      He couldn't (and didn't) do it alone.  He didn't invent the system.  He didn't even invent CDSs.  He didn't peddle his "insurance" to anyone (read Goldman, among others) who didn't know that AIG could never pay off on the policies (but who nevertheless lied to their own clients that their "investments" were fully hedged).

      In the end Cassano was a (relatively) small player in a much bigger game . . .

      Fake Left, Drive Right . . . not my idea of a Democrat . . .

      by Deward Hastings on Fri Apr 09, 2010 at 08:09:06 AM PDT

      [ Parent ]

      •  Obama should have gone after Cassano (5+ / 0-)

        No excuse for not having done so.

        Weak case or not.

        Let's recall what so many said about Ken Lay, that it was a weak case, and that Bush was wrong to have gone after him.  Same for Skilling.  In fact, it is possible that Skilling may be freed this summer, "victim" of malicious prosecution.

        Let's see what the WSJ said about pursuing Ken Lay the day after his indictment.

        * JULY 9, 2004

        Ken Lay's Bad Day

        The federal government's major law enforcers crowded the lectern yesterday to pat themselves on the back for indicting Ken Lay. But all the self-congratulation over the Enron founder and former CEO's perp walk couldn't conceal the sense of anticlimax.

        The real cause of Enron's collapse, the shunting of debts off the balance sheet and into special-purpose partnerships, came out years ago. The man at the center of that fraud, former CFO Andrew Fastow, is facing a 10-year sentence. So it's telling that Mr. Lay was arraigned yesterday not for directing that fraud, but for misleading investors, bankers and regulators about the true state of his corporation.

        The charges are serious, carrying a maximum penalty of 175 years in prison and $5.7 million in fines. But proving criminal intent here won't be easy. Prosecutors have been known to overreach for a famous scalp, and in this case there is also an imperative to get Mr. Lay in order to prevent him from becoming a political liability for the Bush Administration

        What would have been wrong about tying up Cassono for years in the court, forcing him to spend tens of millions of dollars on his defense team.

        Bush managed to prosecute his fair share of Enron officers

        Many went to jail as a result of the S&L Crisis.

        How many consequential figures has President Obama managed to prosecute?

        Learn about Centrist Economics, learn about Robert Rubin's Hamilton Project.

        by PatriciaVa on Fri Apr 09, 2010 at 08:15:55 AM PDT

        [ Parent ]

      •  True enough - after all a weasel (4+ / 0-)

        will be a weasel

        but where was the fox that was supposed to be guarding the henhouse?

        Personally, I blame that fox.

  •  it's the American way! (6+ / 0-)

    and a perfect illustration of our failed democracy.

    no justice...

    "History is a tragedy, not a melodrama." - I.F.Stone

    by bigchin on Fri Apr 09, 2010 at 07:48:22 AM PDT

  •  The beat goes on. Thinking back from my youth (5+ / 0-)

    in the sixties to the present, it's amazing how much more money is now required to keep the rich happy.  Extrapolating out another 50 years, what are we going to see then?   I've got to develop some kind of mental plan for when I see we have the first trillionaire.  That's gonna hurt.  

    "Peace cannot be achieved by force. It can only be achieved by understanding" Albert Einstein

    by BigAlinWashSt on Fri Apr 09, 2010 at 07:48:46 AM PDT

  •  It's a helluva loophole, made all the bigger (8+ / 0-)

    by deregulation in the 90's. We need to close the loophole via finance reform.  Period.  (Yeah, I know, lots of luck with that....)

    A society grows great when old men plant trees in whose shade they know they shall never sit. -Greek proverb

    by marleycat on Fri Apr 09, 2010 at 07:50:04 AM PDT

  •  Might ask union workers what happens in bkrtcy (8+ / 0-)

    Existing contracts get revised or abrogated all the time then.  That's the whole point of the bankruptcy process.  We operated by clear double standards in this country from 2001-08, and, in some ways, we've been operating by them since the early 80's.  Sadly, we're still operating by them now.

    Not feeling so hopey changey lately.

    Some men see things as they are and ask why. I dream of things that never were and ask why not?

    by RFK Lives on Fri Apr 09, 2010 at 07:52:18 AM PDT

  •  Honoring contracts isnt capitalism (2+ / 0-)
    Recommended by:
    Oh Mary Oh, Wolf10
    It's the rule of law.

    If Cassano committed fraud, put him in jail and confiscate. But don't break contracts... there are a lot of pensioners that are living much longer than expected when they entered it, but I don't favor breaking them even though the pension system is breaking states.

    The failure was allowing risky companies to become massive and then not letting them fail. Period.

    On the wheel of ideology, the cogs of communism and fascism are close. -1, -1.59

    by Liberaltarianish on Fri Apr 09, 2010 at 07:55:28 AM PDT

  •  AIG\Lehman (7+ / 0-)

    I am convinced that Lehman was allowed to fail so that the government would bail out AIG.   Why was AIG so important.   Goldman Sachs.   The AIG bailout benefited Goldman more than anyone else.  My guess is that the Goldman alumni worked the table to make sure that Goldman survived.   It sucks.  We need a real investigation.

  •  If We Had Safe, Proper Progressive Taxation (5+ / 0-)

    AIG would've had to send $31,500,000 of that bonus money down to DC to help slash the deficit, and Cassano would've taken home under $4 million.

    --Well actually he'd have still been there gradually becoming very wealthy for running a successful growing business, because with nobody in any job able to take home more than 10% at the top marginal rates, nobody would have run those casino schemes in the first place.

    We are called to speak for the weak, for the voiceless, for victims of our nation and for those it calls enemy.... --ML King "Beyond Vietnam"

    by Gooserock on Fri Apr 09, 2010 at 08:17:08 AM PDT

  •  the achilles heel and fatal flaw of capitalism (4+ / 0-)

    is that it's unsustainable -- it requires constant growth.

    People are upset Obama hasn't solved all the problems yet. C'mon, he's only been in office one year...the man went to Harvard, not Hogwarts. - Wanda Sykes

    by Cedwyn on Fri Apr 09, 2010 at 08:29:28 AM PDT

  •  As long as people are stupid enough to invest (2+ / 0-)
    Recommended by:
    BigAlinWashSt, Wolf10

    with people who get paid a lot of money even if their products and advice lose the customer's money they have a business model that works. No regulation can stop stupid customers from pissing away their money with incompetent financial services.

    Support good reform not a political party blindly.

    by Eposter on Fri Apr 09, 2010 at 08:35:10 AM PDT

  •  Well, Cenk, I've been hanging (2+ / 0-)
    Recommended by:
    Pris from LA, QuestionAuthority

    out here for awhile waiting for more comments and the action is sparse. I love this topic. We need to replace "Question Authority" with "Question Capitalism".

    As I noted in one of my comments above:

    Believe me, such regulation is possible; (1+ / 0-)

    Recommended by:

    it's just that in America we are so brain washed by the ideology of free-market fundamentalism our beady little brains won't go there.

    Meantime, keep throwing the left hook. Cheers.

    The frog jumped/ into the old pond/ plop! (Basho)

    by Wolf10 on Fri Apr 09, 2010 at 09:22:15 AM PDT

  •  Gaming the System (3+ / 0-)

    Just in case anybody out there has been asleep for the past thirty years...

    If the rules are simple and strict, then everyone knows what they can and cannot do.  Profits are made by those who work hard and provide the best product/service for the best price.

    If the rules are vague and loose, then anything goes.  Profit goes to those who are best able to game the system and deliver products/services which appear to be valuable, but which end up being fantastically overpriced (compared to other comparable offerings).  That is, the con-men win.

    This happened after S&L deregulation.  This happened during the LBO binge.  This happens every time the con-men are able to successfully argue that "the marketplace knows best" and that those burdensome government regulations must be lifted.  

    But those regulations were not put in place by deviants who only lived and breathed to dream up ways of clogging up the free-enterprise machinery.  Those regulations are the result of other con-men's actions, and were intended to prevent anything like this from happening again.

    So, we knock down the wall between insurance and (complex) investment vehicles, and should we be surprised that someone in the insurance industry comes up with an "investment vehicle" which is really insurance, but which doesn't burden the issuer with those unsightly asset requirements?  And should we be surprised that the individuals involved arrange it so that they win even if the entire enterprise collapses?  

    If you are surprised, then please wake up.  We're well into the 21st century.

    Don't be a DON'T-DO... Be a DO-DO!

    by godwhataklutz on Fri Apr 09, 2010 at 10:23:09 AM PDT

  •  Three thoughts on AIG, Cassano Loophole (1+ / 0-)
    Recommended by:

    Governments are formed to protect people from wild actors like Cassano & Co.

    Where is the Tea Party when you need them?

    Capitalism doesn't work without capital.

    --AUTHOR Roger Lowenstein ( "The End of Wall Street") on WNYC Leonard Lopate Show. April 9, 2010

    Media Reform Action Link

    by LNK on Fri Apr 09, 2010 at 10:29:12 AM PDT

  •  One of Cenk's best (0+ / 0-)

    Cenk, this is one of your best blogs I have read.  You elegantly lay out the thoughts on corporate finance you have been formulating on the show.  

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