Sunday, April 3, 2011

The World We Live In, Part Two

The Lie of Our Lives, continued

            In Part One of this post I tried to lay out just one way in which the financial sector of our economy has come to control our national destiny in very unhealthy ways. What I did not get into was how much of this was made possible by the slavish devotion of certain political ideologies to their own warped notion of a "free market." The problem lies not in free markets themselves, which history has shown to be the single greatest means for creating wealth and alleviating poverty that the world has ever known. The problem lies in political ideologies that view a "free market" as one which is as absolutely free of government interference as possible, ignoring the glaringly obvious fact that "free markets" of this kind tend toward monopoly, which is quite as adept at government, if not more so, at stifling innovation, competition, prosperity and the actual freedom of the market itself.
             For the common citizen, this usually manifests itself such; seeing how obtrusive and bureaucratic government can be on their own level, say when they want to build a shed in their own damn back yard, and need a permit, or when the health inspector tells them they need to add a "hand washing" sink to their restaurant kitchen, even though they already have three, but not one specifically devoted to "hand washing," or other such garbage, the citizen applies these principles unequivocally all the way to the top. However, the difference here is obvious. The shed in the yard, or the absence of the sink in the kitchen, are not going to put other people on the other side of the country out of their homes or out of business.
          But when business reaches the stratosphere, and gathers the resources to actually corner and manipulate the markets, this is far, far more destructive to the economy than any government interference could be.
             In the rest of this post, we're going to look, hopefully briefly, at three more stunts that have been pulled by the financial sector in the last few decades. As in the last post, the overwhelming majority of what I have to say has been drawn from Matt Taibbi's excellent book, Griftopia. There is far, far more going on here than I have room to relate, and Tabbi lays it out superbly. He also has room to put names with all of this thievery, because, unsurprisingly, the people in our government who are supposed to be looking out for our interests, actually are not, because they are all past, future or sometimes even present employees of the companies they are supposed to be regulating. And you know how that goes.

 Health Care

            America has the least efficient, least cost-effective health care system in the developed world. Health care consumes 16% of our gross domestic product, compared to France at 11%, Sweden at 9% and England at 8%. "But we get the best care in the world," Americans love to brag. Uh, not exactly. For the $7,200 we spend per capita on health care, versus the $2,900 that is the average in other OECD countries (other market economies), what do we have to show for it? We have, relative to all of those countries, higher infant mortality, higher obesity, shorter life spans, fewer doctors and fewer acute care beds, per capita. Huh. Not really a good bargain. Yes, if you are a petro-shiekh, you fly to Boston for your quadruple-bypass. If you are an American citizen, well, screw you.
            Where does that other $4,300 go? Well, a lot of it goes to paperwork. Because the majority of those other market economies have single-payer care, they have a lot less paperwork. 31% of health care costs in the United States go towards administration, whereas the OECD average is less than half that. The majority of those costs stem from chasing insurance claims. As a personal example, my wife used to work for a small speech pathology practice. Of the six or so employees they had working in the office at any given time, two of them were devoted full time to trying to get insurance companies to pay up on their claims.
           Which of course they rarely do. Which of course is the whole problem here. The reason hospitals and doctors in the US have to charge so much for care is that half the time they don't get paid by the insurance companies. But why don't insurance companies have to pay?
            Because they have local monopolies. Because when the Sherman Anti-Trust Act was written in 1890 to give the federal government the power to break up monopolies that affected interstate commerce, somehow insurance wasn't counted as "commerce."
             This would take a book in itself to get into in detail, but here is one example to demonstrate just how powerful an insurance monopoly can be. Following Hurricane Katrina, insurance companies were hit with thousands of claims. In Louisiana, which has stricter regulations, these claims against hurricane damage were paid out with relatively little fuss. Next door in Mississippi, with laxer regulations, it was a different story. In Mississippi, the insurance companies got together and decide to deny any claim where the homeowner could not prove that their house had been destroyed by wind damage and wind damage only. If there was any evidence of water damage at all, the insurance companies called it "flood damage" and denied the claim, leaving the Federal government, well, us really, to pick up the tab, since the US government would pay these out under the National Flood Insurance Program. Since this was, you know, a hurricane, and it tends to rain during a hurricane, that pretty much means they denied nearly every claim. That year, in what should have been one of the worst years in the history of insurance, the sector posted a record profit of $48.8 billion.
            And that's not even the best part. One of the Mississippi claimants happened to be Trent Lott. Yes, that Trent Lott. Did they even pay out on the claim of the soon to be Senate Majority Leader, third in line for the Presidency of the United States? If you guessed, "nope," you win.
           Take this same fiasco and apply it millions of times over, but spread out over time so that it is less conspicuous, and you pretty much have a picture of the way health insurance in the US operates. Having "insurance" isn't insurance at all. Half of the bankruptcies in this country are due to health care costs, and of those, over 75% actually have health insurance.
              When Obama and Congress got together to draft health care reform, the one thing they heard over and over, from Tea Partiers on the right to pseudo-Marxists on the left was "get rid of the anti-trust exemption for insurance companies." So what did they do? They left it in.
             How could they be so stupid? Well, it isn't really about stupidity. They tried to put it in originally and then, sometime between when the bill passed the House and when it was approved by the Senate, the clause repealing the anti-trust exemption for insurance companies... disappeared. It later turns out that they sold it out to buy the vote of Senator Ben Nelson of Nebraska, a former insurance CEO who has been given $1.29 million in campaign contributions from big insurance over the years. The Democratic leadership also gave Nelson a $100 million and agreed to have the rest of us foot the bill on Nebraska's Medicaid payments for the foreseeable future.
            Obama got his sixty votes. And the Democrats got to pass something they could call "health care reform" and maybe, get their next few election bids paid for. Or maybe not, if big insurance thinks the Republicans will be even kinder, which they probably will be.
             So now you are required to buy health insurance that half the time isn't worth the paper it is printed on. Sure, there were some positive aspects to the bill, regulations about pre-existing conditions and such, but so long as the insurance companies have a monopoly, those regulations won't have any teeth.

            So if you are still under the delusion that the people you shake hands with at town-halls and then send off to Washington full of promises actually run this country at all, then I am not really sure what to say to you. I'm sorry, maybe? Even among the most jaded cynic, I think that the general perception is that our political leaders are in cahoots with big business. But it is sadder than that. They are more like scraggly dogs, begging for scraps, trading millions, sometimes billions of dollars of benefits, loopholes and taxpayer money for a few measly tens of thousands in campaign contributions, and maybe, maybe, if master would be so kind, a job when I retire, if its okay with you, master? (Sorry to mix the metaphors, but our politicians are actually more pathetic than either dog or slave.) 

           And it gets worse.

Commodity Futures

            That sounds innocuous enough right? Well, if you read the last post, you should understand that things with nerdy names like collateralized debt obligations in the hands of a financial sociopath can be as devastating as a machete in the hands of regular 'ole run-of-the-mill sociopath. And commodity futures are worse, because they affect real things that real people need to survive every day, like food and fuel.
            The last time you filled your car, what did it cost you? In a five day work week, I fill mine every four days (I have a 45 minute commute). The last time I filled up, it hit $39.99. I was disappointed. In a truly masochistic way, I wanted to see that 4 roll over, just to laugh in its face. Why is gas so high? Contrary to what the morons on the right would have you think, it isn't because we need to start opening up, right now, drills on national land. And contrary to what the nincompoops on the left would have you believe, it isn't because we all drive our fat asses around in SUVs. (I'm not dismissing energy security, or carbon emissions as a real issue, but it just isn't the cause of what we're paying at the pump right now.)
           So why are we paying so much for gas and heating oil, and subsequently for food? Because of a letter. Well, sixteen letters, to be precise. But let's talk about commodity futures first.

            If you are a wheat farmer and I am a bread company, we need to do business. But if you show up to the market on a day when I am not buying, you have incurred the costs of transportation and are incurring the risk of your crop spoiling before I am ready to buy. Plus, you have a farm that needs tending. Similarly, if I show up on a day when there is no wheat to be had, I stand to lose productivity. So in steps a middle man, the speculator. The speculator agrees to buy wheat from you at $2.80 knowing that he can sell it to me for $3.00. I always have a buyer, you always have a seller, he makes a tidy little profit for very little work. Everyone wins.
           The only danger here, as usual, is a player monopolizing the market, or cornering it, and manipulating the price of an essential commodity. So for the majority of the history of this country, investment firms and other major financial institutions were forbidden from getting into the commodity futures market. And the system worked just fine. Until 1991, and a letter.
             For about ten years prior, Goldman Sachs (surprise, surprise) had been begging the Commodity Futures Trading Commission for an exemption to this rule. In 1991, someone at the CFTC named Laurie Ferber basically decided, "Ah, what the hell. What's the worst that could happen?" So she secretly sent Goldman a letter, secret from Congress, the President, or any of your elected representatives, that made Goldman above the law. The CTFC ultimately issued sixteen of these letters to various Wall St. institutions, and at this point 80% of commodities trading goes through these firms. Basically, if you wanted to buy up a crap-load of commodity futures on your own, it would be highly illegal. But if you pay Goldman or one of these other banks a fee, and go through their letter, then it's all kosher.
         Here's the problem with speculators investing big in commodity futures. To steal Taibbi's example, let's say someone starts going around to car dealers saying he wants to buy $500,000 worth of cars. He doesn't care what kind of car he gets, or how many, because he isn't purchasing it for himself, he is just gambling that value of "cars" is going to go up and he is going to make a profit. Well, eventually, someone is going to sell him one car for $500,000. If enough speculators with enough dough start doing this, eventually anyone who wants a car for the usual stuff, like driving, is going to be shit out of luck. Why would I sell to you for twenty grand what I can sell to this guy for half a mil?
            But the commodities that are traded are things more essential than cars. They are wheat and corn and soybeans, the base of the food pyramid, however you eat. They are oil and natural gas, the things that keep you from freezing to death in the winter, and get you to work, and to the hospital. And the prices we pay for these things, right now, are artificially inflated, pretty much because Laurie Ferber didn't give a crap.
           But wait, it gets better. So who is investing in these things? Well, for one, a lot of it seems to be coming from sovereign wealth funds. Sovereign wealth funds, SWFs, are the enormous amounts of money that some countries, typically Middle Eastern petro-dictatorships, are sitting on, just looking for a place to get a good return. Well, you can imagine how this went. Basically, the sovereign wealth funds of foreign countries, some of whom are extremely antagonistic to, even sworn enemies of, the United States, are being funneled through our banks, to inflate the prices of the very products that they sell us. They are profiting twice over, on the commodities futures, and then on the commodities themselves. And they are able to do this without incurring the wrath that would accompany deliberately cutting the oil supply, because the majority of this money passes through so many bogus companies in so many countries that it is almost impossible to legally trace it back to its source.
               Meanwhile, in poorer parts of the world, there are food riots.

 Selling America, Piece by Piece

             Guess what else these SWFs are buying? Your highways, your turnpikes, your parking garages, even your parking meters. If you think selling parking meters to foreign investors isn't a big deal, lets just take a look at one example. In 2008, Mayor Daley of Chicago leased all of the city's parking meters, for 75 years, to a conglomerate of investors, called Chicago Parking Meters, LLC, assembled by Morgan Stanley. CPM paid $1.2 billion for the lease. Because Daley only gave the city alderman three days to consider a deal he had been putting together for over a year, it wasn't calculated until after the deal had gone through that the projected revenue for the city's 36,000 meters was at least $2 billion over the terms of the lease. Since Chicago will likely still be there in 75 years, it is already losing out.
             Who were the investors in CPM? Well, originally it was Morgan Stanley, a bunch of others, and a 6% share was going to Deeside Investments. After the deal went though, everyone else in CPM except Morgan Stanley bailed and sold their shares to Deeside, who now had a 49.9% share. As it turns out, Tannadice Investments, which owns Deeside, is owned by the Abu Dhabi Investment Authority. Well, at least the alderman knew what they were voting on. Oh wait, no, they didn't.
              Still what's the big deal? This is capitalism right? If you've got the cash, make a bid! The problem is that now the citizens of Chicago don't control parking in their own city. CPM immediately changed the meter schedule from 9am-6pm Monday through Friday to 8am-9pm, seven days a week, 365 days a year. And the rate went from 25 cents an hour to $1.20. If the city wants to close the street for a parade or festival, they have to pay CPM for lost revenue. If you want to close the street for a block party, arts festival or farmer's market, guess what? You owe CPM a few thousand dollars.
              The problem is this; when you sell your sovereignty to people who don't give a crap about anything but making money, you actually hurt the economy. The market suffers. The princes in Abu Dhabi don't give a shit if the meter rates are hurting local business, depressing neighborhoods, or if the absence of fairs and festivals is keeping potential customers away from local business. All they care about is quarters in the meter. But the people of Chicago care about those things. And the city of Chicago used to.

Where We're At

            We're not broke. We're for sale. All of the tremendous wealth that this country is capable of generating is being siphoned off, through a few large financial firms, and turned over to whoever has enough cash up front to play the game. If you are already wealthy, you can become obscenely so, if you know the right people, or hold the right letter. You can do this by manipulating the prices of their homes, their doctor's visits, their food and their heating oil. Then, you can destroy those things that they rely on to get by, and make a profit by betting against them. And finally, you can get them, and their children, to pay you back for the little bit you may have lost by calling your buddies at the Fed and getting them to print you enough greenbacks to cover the difference, which they will have to pay back in taxes.

            The only words to describe this degree of triple-screwing are those in common usage in the porn industry. But since this is a family blog, I'll let you look them up yourself.

The World We Live In, Part One

         The Lie of Our Lives

            I teach mythology to my students- Greek, Chinese, Arabian, etc. as part of their literary and cultural education. Myths are fun; except when they are believed. Then you have priests ripping people's still beating hearts out of their chests to appease the gods to send rain. Then myths are bad. The problem with believing in myths such as these is that they lead people to believe in false solutions to real problems. When the "problem" is that we are mortal, and the "solution" is to pretend that we are not, this is relatively harmless. (Except when it isn't, but I have spent enough time on that one.) But when the problem is a lack of precipitation and the "solution" is human sacrifice, that is more worrisome.
          We live under a similar myth in this country, a myth that offers a false solution to a real problem. The problem is the hijacking of our national interests by a small cabal of financial criminals. The false solution that many continue to believe is that there is a damn thing our elected representatives can do, or want to do, about it.

Financial Magic Tricks
The Pledge 
             This is an extremely complex problem that I can only begin to touch on in a few blog posts. However, if you care at all about your own future security, or that of your children, or of our nation and society at large, you would be remiss if you did not read Matt Taibbi's Griftopia. A large part of what I have to say here is explained at greater length in that book.
             I will, however, try to retain some measure of focus on the above problem and false solution. Thus, we shall begin with the problem. Most people in this country are vaguely aware that over the past decade or so, something not quite right was has been going on over on Wall St., leading up to the financial crisis of 2008. But many of these people wish to persist with the idea that what occurred was merely bad decision making on the part of several large banks, fueled by a perhaps larger than usual dose of greed. Retaining this belief helps these people feel better about themselves, since no one likes to admit that they are a sucker. Others are slightly more cognizant of the situation, having some notion that the stunts that Wall St. pulled were actually fairly deliberate. But even this doesn't begin to touch on the truth of what has occurred in this country over the last several decades, and continues, with no sign of stopping, to this day.
             The reason for our collective ignorance of the the crimes that are being perpetrated against us is simple- the crimes themselves are fairly complex. Learning exactly why credit default swaps, interest rate swaps, collateralized debt obligations and commodity futures are such incredibly destructive financial instruments in the hands of the wrong people is a lot of work. Wall St. counts on this. Even now, while we are being robbed blind on our mortgages and pensions, and at the supermarket and the pump, we still don't bother to learn. Instead, we take it from talking heads on the radio and infotainment news that our current financial situation is the result of too many Mexican lawnmowers and too many black welfare recipients trying to buy quarter-million dollar homes. While there was certainly some of this going on, the real question is; Why?
            Why were real-estate agents pushing McMansion's on illiterate laborers making $9 an hour? In what upside-down world do banks want people to default on their mortgages? Bankers aren't stupid. It used to be that when someone defaulted on their mortgage, that was bad for the bank, because even though they now held the deed and whatever payments you had already made, they still had to get someone into that house paying interest on the loan, which meant lost revenue as long as the house sat empty. A few defaults here and there could be profitable, but obviously, if everyone is defaulting, the price of real estate is going down, and the deeds they are holding are less valuable than when they had loaned out the mortgage in the first place. So how did it come to be that banks were actually rooting for people to default?

The Turn
            The answer lies in credit default swaps and collateralized debt obligations. Credit default swaps are relatively simple. It is basically a twisted form of insurance in which anyone, called the speculator, can take out to gamble on someone else failing to pay back a loan. They were originally designed as a way for smaller banks to take out insurance with larger banks against loans that the smaller banks had lent out. It gave smaller banks and credit unions security in lending out mortgages and small business loans, because they were backed by AAA rated banks. However, this was before the repeal of provisions of Glass-Steagall by the Gramm-Leach-Bliley Act in 1999. Glass-Steagall was the law passed in 1933 which established the FDIC, but more importantly for our purposes, forbid the merger of Wall St. investment banks and depository banks like the one you have a checking account, and possibly a mortgage, with. It was this provision of Glass-Steagall that Gramm-Leach-Bliley repealed.
            It shouldn't be hard to see where this is going. Glass-Steagall was designed to prevent the conflict of interests that arise when investment banks and depository banks merge. As I pointed out earlier, it is not in your mortgage lender's interest, generally, for you to default on your mortgage. So how did it get to be so? If a depository bank sells sub-prime loans, i.e. loans to people with weak credit who are likely to default, and then their parent bank, an investment bank, is able to hide the risk of the loan, pass that mortgage on to another bank, they can then turn around and take out a credit default swap on that mortgage against yet another bank, now as a speculator with inside information, and make free money when the homeowner defaults on the mortgage. To take out a credit default swap, a CDS, as a speculator, you have to pay the bank a periodic fee, and you get paid out if and only if the homeowner defaults on his or her loan. So, to maximize your profit, you want that homeowner to default as fast as possible after you have passed of the mortgage, because this minimizes the fees you pay, and you get your payout sooner. So, if you were wondering exactly what "predatory lending" would look like, there you have it.
             But if bankers are so smart, why on earth would other banks take on these risky mortgages? The answer to that lies in a much more complex financial derivative called collateralized debt obligations. CDO's are a means to spread out the risk on a package of loans. The quick version is this. You take a bunch of loans, say a thousand mortgages and you package them into a CDO. You then look for investors in the CDO, parties who are willing to take on some of the risk for a share of the profit on the interest of these loans. You then break the CDO into three tiers, called "tranches." The first tranche is referred to as "senior" and is a AAA rated investment. (AAA means that investing in this product carries almost no risk.) The rate of return on this investment is low, but it is highly secure because as money comes back into the CDO, the senior tranche is payed out first. The next tranche is the "mezzanine" tier, which gets paid out after the senior, and was generally rated BBB, which means a decent risk, but a better rate of return. This tranche is where all the problems started, so we will return to it in a minute. The bottom tier, which gets paid out last, is called the "junior" tranche, carried a high risk but a huge rate of return. Now, the CDO issuing banks themselves generally held onto the senior tranche, and had little trouble finding buyers for the junior tranche, because other banks were willing to gamble on junior shares, since they didn't cost a whole lot, and so long as too many of those thousand homeowners didn't default on those mortgages, they stood to gain a lot of money.
              The trick was finding buyers for the mezzanine tranche, since it didn't pay out as well as the junior tranche, but cost more, and on the other end, wasn't as secure as the senior tranche. This is where the bankers got really "smart" (if you want to call it that). They took a bunch of mezzanine tranches from a bunch of CDOs and repackaged those into new CDOs. CDOs of CDOs. Now they had a bunch of new "AAA" rated senior tranches to sell, and finding buyers for AAA products is never hard. The problem was, these weren't really AAA at all, because they were actually composed of mountains of BBB-rated investments. So which dumb fools ended up buying this toxic crap? If you have a pension fund, you did. By law, pension funds are only supposed to be invested in AAA-rated products. If you are the manager of the pension funds of tens of thousands of state or private employees, and a big bank comes to you offering a AAA investment which promises a better rate of return than the usual, boring percentages offered on Treasury Bills, you are going to jump on it. You just made all those people whose retirements you are vested with a lot of money, didn't you? Well, unless that investment wasn't actually AAA to being with, in which case you, and everyone else whose future was in your hands, just got seriously screwed.

Things Fall Apart

             Even at this point, things shouldn't have been been that bad, so long as too many people didn't default. But of course, that is exactly what happened. We have already touched on one of the major reasons,  that banks were pushing mortgages on people who they knew couldn't make payments on the loan, simply so they could pass that loan off and then make money against another bank when it defaulted. But this was only a small part of the problem. While some people are uneducated enough or materialistic enough to think they should be living in a $250k house while working as a janitor, this group of borrowers was actually a small percentage of the total. Most of the people who took out these mortgages fell into one of two other camps. Either they were responsible people with decent credit who deserved a prime loan, or they themselves were gamblers who were trying to make money by "flipping" houses in this crazy market.
               As for the first group, these were regular, hard-working Americans who walked into their local bank looking to buy a house and live the American Dream. However, to their agents, they were simply "marks." Because the big investment banks could make a lot more money on sub-prime mortgages, even people whose credit was good enough to warrant a traditional fixed-rate interest rate loan were being sold variable-rate mortgages as sub-prime loans because the agents were paid bigger bonuses for selling sub-prime loans than prime loans. This con was pulled off in various ways. Some mortgages lenders, like Countrywide, seemed to simply lie to their customers who went home thinking that their mortgage payment would be stable for the 30-year life of the loan, only to find out a few months later that it had gone up several percent, or several hundred dollars per month. I know many very intelligent, hard-working people who fell into this trap.
           The other group is more culpable. Many people saw the direction the market was heading and decided to get in on the action. This group bought homes with no intention of occupying them and took out mortgages where they could make monthly interest-deferred payments, so that they were actually paying less per month than was accruing in interest. But since they only intended to ride the wave for a little while before flipping the house for a lot more than they paid, their profit would cover the greater interest that had accrued. 
               Until the market ran out of buyers. And then values started dropping. And then these gamblers were sitting on homes they'd bought for 400k, hoping to sell for 500k, which were now worth 300k. Rather than taking the 100k hit, defaulting was a lot easier. And the well started to dry up.

The Prestige

            The contagion quickly spread. As home owners defaulted, banks started losing money. There are actually several more steps involved here, including some truly boneheaded, or cynical, moves by clowns named Joe Cassano and, ironically, Win Neuger at AIG. The stunts these a-holes pulled are too complex to get into in great detail here, but we can have a quick look. Essentially, these guys were both up to different versions of the same thing. They were both gambling big-time with AIG's assets in an extreme version of fractional-reserve banking. Fractional-reserve banking is standard practice in our economy, and refers to the fact that banks only need to actually hold a fraction of the cash, or it's equivalent, AAA investments (which will become the problem) in order to lend money out. There used to be stricter limits on what fraction a bank needed to hold onto, but like everything else since the '80s onward, this has been deregulated.
           What Cassano did was relatively straight forward. His department at AIG basically sold insurance on bonds. For a tenth of a percentage point of the interest you were making on a bond, you could go to Cassano's department and get credit-default swap insurance, which meant that if the bond failed you were covered and AIG took the hit. Now, if you were holding onto a bond that was paying five-tenths of a percentage point, like the CDOs described above, and you could insure it for one-tenth of a percentage point, what do you have? You have four-tenths of a percentage point of absolutely, completely and totally risk-free income.
              It wasn't long before the other banks figured this out and started buying this insurance, hundreds of millions of dollars of it, against CDOs that they knew are eventually going to fail. Further, it seems that a lot of this was purchased with the personal incomes of the executives of these banks through their firm's proprietary trading desks. Why not? It was the deal of the century, and some other sucker was going to take the hit.
           Except he wasn't. Cassano had no intention of paying out on these credit-default swaps. When everything started imploding, and the other big banks came collecting, it quickly became apparent that AIG didn't have the funds to cover what they had pledged. It looked like the suckers were going to be the big banks after all. Cassano, incidentally retired with $280 million in personal compensation and lives in a three-story villa in London. Of course, the Justice Department has decided not to prosecute him.
                If AIG had defaulted on these credit-default swaps, they would have ended up raiding all of their subsidiary holdings, i.e. smaller, mom-and-pop type insurance companies in order to cover their own asses. This would have led to these subsidiary firms defaulting on life, home and auto-insurance that they issue to people like you and me. The states, Texas in particular, saw this coming and declared that they would seize the assets of these firms before they could be raided, in order to keep their citizens insured.
             This would have been bad enough, except AIG had been playing an equally stupid game out of another department. This was Neuger's department. The game he had been playing was securities lending. A massive insurance company like AIG takes the money you pay in as a premium and turns around and invests it, a lot of it, in the market. So AIG held tons of stocks. If you wanted, you could go to Neuger's department and "borrow" stocks you think are going to decrease in value, put up the equivalent value in cash with Neuger as collateral, then sell the stocks. You now are holding onto the same amount of cash you put up as collateral. You wait a while for the stocks to depreciate, buy back an equivalent amount, but at a lower price, return Neuger his stocks, plus a small percentage as a fee, and you keep the difference. You and Neuger win, someone somewhere else loses.
              Now, this is supposed to be easy money for the securities lender. All he or she does is happen to have a crap-load of stocks, lend them out, make 1-2% on each transaction, take the collateral and invest it somewhere very safe, like a T-bill (Treasury Bill), something AAA-rated (you can probably see where this is going) and keep that percentage as well. That is what should have happened, but it didn't, because Win Neuger is a greedy moron. Instead, he invested the collateral in residential mortgage-backed securities, the same toxic CDOs that started this whole mess.
           Back to the crisis with Cassano's credit-default swap department. Around 2005, AIG's name started taking a hit. Then-New York Attorney General Eliot Spitzer noticed some accounting irregularities at AIG and charged AIG's then-CEO Hank Greenberg, who was forced to step down. This led the major credit-rating agencies to downgrade AIG's rating, for the first time ever, from AAA to AA. This downgrade triggered a bunch of clauses in Cassano's contracts that required AIG to put up collateral to prove they could cover what they had insured.
           There were several more incidents like this leading up to late 2007, with other banks demanding collateral from AIG as it became clearer that things at AIG weren't what they seemed, even though Cassano and AIG both kept insisting publicly that they were. At this point, AIG was posting quarterly losses in the 5-10 billion dollar range. The apocalypse had begun.
               But even at this point it was only truly bad for AIG and the banks that had insured with Cassano all of these toxic so-called AAA crap CDOs that they themselves had created. This was still worrisome enough for the government to step in during September 2008. On the 13th and 14th of that month, the Treasury and the Fed met with AIG and some of their counter parties, people they owed money to, particularly Goldman Sachs.
            As may be recalled, since Cassano was basically giving away the deal of the century, a lot of the executives of the big banks had poured a lot of their own personal fortunes into his scam. When they met with AIG and the government to try and recoup their losses, one bank, one executive in particular, Lloyd Blankfein, CEO of Goldman Sachs, was particularly determined to get his money back, at any cost.
            The trick Lloyd had up his sleeve was this; since his company was playing this game with AIG on both ends, he was holding a mountain of stocks Goldman had borrowed from Neuger's department. The way securities lending works, Goldman had the right to return those stocks at any time for the collateral they had posted in the first place. Since AIG was a beached whale at this point, and didn't even have the money to cover Cassano's stupidity/greed, they certainly didn't have the cash to cover Neuger as well, since he had in the meanwhile, lost billions of dollars of the collateral he had been given, because the housing market was imploding.
             If Goldman returned Neuger's stocks, and demanded its collateral back, and it becomes apparent that AIG no longer has it, this triggers a run on AIG, with all the other banks trying to get their hands on whatever AIG has left, which leads to a crisis on Main Street, as people like you and me learn that the insurance policies we have been paying into our whole lives our worthless. Since all of the big banks are all tied together in this gigantic cluster-f&%$, this is basically the collapse of the financial universe.
              The stocks Goldman was holding were still good stocks, valuable holdings, and there was no reason for Lloyd to be trying to throw them back in AIG's face, except for one reason. He was bull-shit pissed at being ripped off by Joe Cassano and he wanted his "f&%$ing money back." So he basically held a torch to the economy of the entire world and said, "I will burn this f&%$ing thing to the ground if I don't get what's mine."
            And Henry Paulson at the Treasury and Ben Bernanke at the Fed blinked. Then they did what they do best; they printed more money, $200 billion dollars of new money, which they then gave to AIG to cover the greed and stupidity of a couple of buffoons.
              In the end, Lloyd, Goldman Sachs and all of the other banks got their money back. They also got to keep the AAA tranches of the CDOs which were still paying off well. So who lost?

The Mark

              We, the American taxpayer, did, of course, and in more ways than one.
              First of all, when the Fed prints money, pretty much everyone loses, except the people they hand it to, of course. Because when there is more money in circulation, the money you have, in savings, in investments, in your home, in your pension, is worth less due to inflation.
              Second, we lost because we, the tax payers (though our children more than us), who are ultimately on the hook for everything the Fed does, were forced to purchase, without representation or consent, all of those toxic residential mortgage backed securities that AIG and the other banks were holding. They kept the senior tranches, the truly AAA stuff, we got the garbage.
             Third, our homes lost a ton of value. Especially if you bought a house during this period, you are going to be paying these same banks tens of thousands of dollars on a mortgage that costs significantly more that your house is actually worth now. Since for real people their house is the biggest investment they ever make, this is a huge blow. Just to give you an idea of how big an effect this is having on our economy, here are some numbers.

          Every day, 8,500 homeowners default on their mortgage.
          Every day, American homes lose $13 million dollars in total value.
       Every day, Americans make $750 million dollars worth of payments on non-existent value that their homes lost when the market crashed.
           And where does all that money go? Right back to the same people who created this mess in the first place. We are projected to ultimately spend up to $13 trillion (trillion!) on the bailouts, including cash outlaid plus value lost on those toxic securities. Just to give you a hint of what we could have done with 13 trillion dollars, a mere $1.4 trillion, if given to the homeowners instead of directly to the banks, would not only have paid off the mortgages of every single person in this country, it would have bought a house for every single adult who didn't have one. Of course, the banks would get the money eventually, but instead of scrambling every month to avoid being put on the street (by these same banks) every single American in the country would be pouring every penny they now spend on their mortgages back into the economy. That would be an actual stimulus package.
            Would this be socialism? Yeah, it really would be. Would it be stealing from our own children? It would definitely be that as well. But if you have a problem with those things, as I do, then consider that we did exactly the same thing, except the money all went to a few already incredibly wealthy individuals, instead of the American people who have nothing to show for it, except a ton of debt, an over-valued mortgage, and a devalued pension.

               And the picture gets even better, when we start talking about being forced to buy health insurance that won't pay out when you need it, allowing these same banks and their foreign investors to manipulate the prices of the same essential commodities, food and fuel, that they sell to us, making a double profit on both the speculation and the artificially inflated prices, and finally, these same banks selling of bits of our national sovereignty to our sworn enemies. That will be the next post. Oh yeah, it just gets better and better.