Robbing the Bank

Permit me an indulgence … I offer here an analogy to try to explain our sub-prime mortgage meltdown in late 2008 that cost the United States at least one trillion dollars and likely elected Barack Obama to the Presidency. This analogy will use a simple bank-robbery scenario to try to explain the actors and their roles in this (to me) criminal enterprise. Here is the cast:

- The Master Planners – Barney Frank and Chris Dodd whose drive for universal home ownership was the diabolical felonious scheme behind this travesty (with the template of the Community Development Act of 1974.)

- The Bank Robbers – Countrywide Finance, GMAC, Quicken and the myriad of other bucket-shop mortgage origination companies that sprung up during the last years before the meltdown … along with the complicity of the hundreds of thousands of homeowners who got these no-documentation mortgages using chicanery and mendacity.

- The Money Launderers (legitimizing the pelf acquired in this robbery) – Fannie Mae and Freddie Mac abetted by all those financial institutions (e.g.s: Morgan Stanley, Goldman Sachs, Citigroup, etc.) that packaged up these mortgages (Collateralized Debt Obligations -- CDOs) to sell to these fences … AND all those players in the Credit-Default Swaps casino (AIG, Goldman Sachs, Lehman Brothers, Deutsche Bank, etc.)

- The Get-Away Car Drivers – the Credit Rating Agencies that gave these CDO’s unrealistically high credit ratings

- The Bank’s Security Force – those myriad Federal financial regulatory agencies who spent the period during the actual robbery lounging in the bank’s break room playing pinochle and watching porn on the bank’s security-system screens.

- The Bank’s Depositors (who lost their money in the robbery) –ordinary United States’ citizen-schlubs.

Off Balance

The current sovereign-debt crisis in Greece is apparently caused by unfunded off-balance sheet transactions (reportedly aided and abetted by Goldman Sachs ... so what else is new?) I am over seventy years old and I can't remember a single financial crisis, either private or public, which was not caused in whole or in part by off-balance-sheet shenanigans -- last year's banking crisis, Mexico's near collapse in 1994, the Enron scandal, AIG, Tyco, etc. ... the sliminess goes on and on. How can the accounting community, which has created such a beautiful mechanism for faithfully representing the fiscal health of corporations, charities, and public trusts, continue to allow these entities to subvert this process with off-balance-sheet transactions of any type? It is as though the Swan Lake ballet was being danced in a garbage dump ... or Mozart was being played with kazoos.

Until such time as veracity is returned to the accounting profession, we will continue to enjoy a conga-line of financial crises into the forever future. And this, unfortunately, includes how we, as a nation, keep our own books.

The Face of American Politics

- Friend of Angelo (mortgage rate payola)

- Refusal to release mortgage paper trail
- Wife involved with AIG (on board of IPC)
- Flip-flopper on AIG bonus provision (fessed up) - Waitress "sandwich" maker w/Ted Kennedy

- Irish vacation home shady self-enrichment

- John Huang 1996-97 Chinagate scandal

- Cozy relationship with Fannie Mae

And to think, he might have been the Democrat nominee for President ...

The Camel’s Nose

The House of Representatives this past week overwhelmingly passed a 90% income tax on bonus compensation for executives earning over $250,000 per year and working for companies receiving over $5 billion in TARP or other bailout monies. This includes companies like AIG, Fannie Mae, Freddie Mac, and possibly Citigroup and Merrill Lynch (now part of Bank of America). And, in the process, Congress is ignoring the thousand fold bigger issue of how these TARP and other bailout monies are being distributed. See my blog Golden Goldman).

Although I think this was misguided legislation and may be mollified in the Senate, still executive pay packages have been soaring into the stratosphere in recent years primarily, I believe, because the checks on such largess have all but disappeared. Company shareholders are now mostly mutual funds, hedge funds, and other amalgams of monies whose investment time horizon are very short and whose managers themselves have been caught up in the frenzy of mega-salaries. (When I was an investment analyst on Wall Street in the 1970s, a top pay package for this profession was a few hundred thousand dollars … now, for essentially the same work, it is many millions.)

So, into center stage steps President Obama who is now proposing to limit the pay packages of all corporate America independent of whether any government monies have been given to them. (See Executive Pay Limits). Now while I don’t take issue with the need to reestablish some sanity into the executive pay process, I do question if the Federal Government in the form of Chris Dodd and Barney Frank have the expertise and disposition to be the arbiters of this process. In fact such a development downright frightens me. The AIG executive bonuses uproar has allowed the nose of the government camel into the tent of corporate governance which, if I read the Obama administration’s intentions correctly, will be just the first of a series of baby steps with the ultimate objective of dismantling capitalism.

The road to Socialism is paved with camel’s noses.

Golden Goldman

(Goldman Sachs Tower -- New Jersey)

American International Group (AIG) just released the ordered list of counterparty payments that it had made last fall from the taxpayers’ and the Federal Reserve Bank’s initial $115 billion in bailout money to this company. According to this morning’s NY Times, Goldman Sachs was second on this recipient list at $8.1 billion. However, since then, AIG has received an additional $58 billion from the U.S. Treasury and Goldman now tops the list at $12.9 billion in total bailout largess … presumably to make good on additional Credit Default Swaps or other financial derivatives that Goldman took out with AIG. (Other large benefactors from U.S. taxpayer’s and Fed’s money, via AIG, include Deutsche Bank @ $11.8 billion, Societe Generale @ $11.9 billion, Merrill Lynch @ $6.8 billion, Barclays Bank @$8.5 billion, and UBS @ $5 billion.)

Now, there are many questions surrounding such counterparty payments … such as:

- Did Goldman Sachs or any other counterparty buy these Credit Default Swaps at a discount and then turn around and sell them back to AIG at 100 cents on the dollar? (Question originally posed by Senator Shelby from Alabama in a recent Senate hearing.)

- Did AIG negotiate with any or all these counterparties to pay them something less than full par value for these CDSs as would be expected? (Question originally asked in a recent House hearing on AIG).

- Since Hank Paulson, the then Secretary of the Treasury under G.W. Bush, was a former Goldman Sachs Chairman and CEO … were such pass-through payments to Goldman Sachs from the U.S. Treasury and Federal Reserve Bank a possible conflict of interest? At the time, was Paulson made aware of this seeming breach of faith?

- The new Obama administration, under which an additional $58 billion has been funneled into AIG (and, as a consequence, an additional $4.8 billion into Goldman Sachs) also seems somewhat cozy with Goldman Sachs. Robert Rubin, a transition team economic advisor to Obama is an ex-Goldman co-Chairman and, according to Wikipedia, "Goldman was the second largest donor to the Barack Obama campaign." It is estimated that Goldman Sachs execs gave close to a million dollars to Obama (see Obama Donors) including James Johnson, a Goldman Sachs board member and former chairman and CEO of Fannie Mae, and Bruce Heyman, Managing Director, Private Wealth Mgt at Goldman. Also Larry Summers, Director of the President Obama’s National Economic Council; and Tim Geithner, the new Secretary of the Treasury and last fall’s head of the NY Federal Reserve Bank are both former protégés of Robert Rubin.

As far as I am concerned the current kerfuffle about the $165 million in bonuses paid out to AIG executives is a mere distraction from the much bigger mega-scandal of over $170 billion of make-good payments that AIG is funneling into the world’s financial counterparty community. This is the true AIG, Federal Reserve Bank, and U.S. Treasury misfeasance that Barney Frank and the rest of his masked bandits in Congress need to be investigating with their typical grandstanding vigor … instead of trying to grab headlines with this AIG bonus sidebar.