Sunday, March 22, 2009


I'm sure many of you have heard the buzz about Matt Tiabbi's article in Rolling Stone about the AIG bailout & the roots of the financial mess. Well, it's a damn strong article, and it really sums up some of the things we've spoken about here. The Insiderism, the Oligarchy, the complicity of Paulson, Geithner, Bernanke. It's absolutely required reading. Read the whole thing -- some of it is frankly devastating -- but I especially like his takedown of the Federal Reserve on pp. 6-7:
In the pre-crisis days, the Fed used to manage the money supply by periodically buying and selling securities on the open market through so-called Repurchase Agreements, or Repos. The Fed would typically dump $25 billion or so in cash onto the market every week, buying up Treasury bills, U.S. securities and even mortgage-backed securities from institutions like Goldman Sachs and J.P. Morgan, who would then "repurchase" them in a short period of time, usually one to seven days. This was the Fed's primary mechanism for controlling interest rates: Buying up securities gives banks more money to lend, which makes interest rates go down. Selling the securities back to the banks reduces the money available for lending, which makes interest rates go up.

If you look at the weekly H4 reports going back to the summer of 2007, you start to notice something alarming. At the start of the credit crunch, around August of that year, you see the Fed buying a few more Repos than usual — $33 billion or so. By November, as private-bank reserves were dwindling to alarmingly low levels, the Fed started injecting even more cash than usual into the economy: $48 billion. By late December, the number was up to $58 billion; by the following March, around the time of the Bear Stearns rescue, the Repo number had jumped to $77 billion. In the week of May 1st, 2008, the number was $115 billion — "out of control now," according to one congressional aide. For the rest of 2008, the numbers remained similarly in the stratosphere, the Fed pumping as much as $125 billion of these short-term loans into the economy — until suddenly, at the start of this year, the number drops to nothing. Zero.

The reason the number has dropped to nothing is that the Fed had simply stopped using relatively transparent devices like repurchase agreements to pump its money into the hands of private companies. By early 2009, a whole series of new government operations had been invented to inject cash into the economy, most all of them completely secretive and with names you've never heard of. There is the Term Auction Facility, the Term Securities Lending Facility, the Primary Dealer Credit Facility, the Commercial Paper Funding Facility and a monster called the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (boasting the chat-room horror-show acronym ABCPMMMFLF). For good measure, there's also something called a Money Market Investor Funding Facility, plus three facilities called Maiden Lane I, II and III to aid bailout recipients like Bear Stearns and AIG.

While the rest of America, and most of Congress, have been bugging out about the $700 billion bailout program called TARP, all of these newly created organisms in the Federal Reserve zoo have quietly been pumping not billions but trillions of dollars into the hands of private companies (at least $3 trillion so far in loans, with as much as $5.7 trillion more in guarantees of private investments). Although this technically isn't taxpayer money, it still affects taxpayers directly, because the activities of the Fed impact the economy as a whole. And this new, secretive activity by the Fed completely eclipses the TARP program in terms of its influence on the economy.

* * *

None other than disgraced senator Ted Stevens was the poor sap who made the unpleasant discovery that if Congress didn't like the Fed handing trillions of dollars to banks without any oversight, Congress could apparently go fuck itself — or so said the law. When Stevens asked the GAO about what authority Congress has to monitor the Fed, he got back a letter citing an obscure statute that nobody had ever heard of before: the Accounting and Auditing Act of 1950. The relevant section, 31 USC 714(b), dictated that congressional audits of the Federal Reserve may not include "deliberations, decisions and actions on monetary policy matters." The exemption, as Foss notes, "basically includes everything." According to the law, in other words, the Fed simply cannot be audited by Congress. Or by anyone else, for that matter.

* * *

In essence, the Fed was telling Congress to lay off and let the experts handle things. "It's like buying a car in a used-car lot without opening the hood, and saying, 'I think it's fine,'" says Dan Fuss, an analyst with the investment firm Loomis Sayles. "The salesman says, 'Don't worry about it. Trust me.' It'll probably get us out of the lot, but how much farther? None of us knows."

When one considers the comparatively extensive system of congressional checks and balances that goes into the spending of every dollar in the budget via the normal appropriations process, what's happening in the Fed amounts to something truly revolutionary — a kind of shadow government with a budget many times the size of the normal federal outlay, administered dictatorially by one man, Fed chairman Ben Bernanke.
Finally, as he closes the piece he gets to an essential understanding of how all this outrageous shit went down:
The real question from here is whether the Obama administration is going to move to bring the financial system back to a place where sanity is restored and the general public can have a say in things or whether the new financial bureaucracy will remain obscure, secretive and hopelessly complex. It might not bode well that Geithner, Obama's Treasury secretary, is one of the architects of the Paulson bailouts; as chief of the New York Fed, he helped orchestrate the Goldman-friendly AIG bailout and the secretive Maiden Lane facilities used to funnel funds to the dying company. Neither did it look good when Geithner — himself a protégé of notorious Goldman alum John Thain, the Merrill Lynch chief who paid out billions in bonuses after the state spent billions bailing out his firm — picked a former Goldman lobbyist named Mark Patterson to be his top aide.

In fact, most of Geithner's early moves reek strongly of Paulsonism. He has continually talked about partnering with private investors to create a so-called "bad bank" that would systemically relieve private lenders of bad assets — the kind of massive, opaque, quasi-private bureaucratic nightmare that Paulson specialized in. Geithner even refloated a Paulson proposal to use TALF, one of the Fed's new facilities, to essentially lend cheap money to hedge funds to invest in troubled banks while practically guaranteeing them enormous profits.

* * *

As complex as all the finances are, the politics aren't hard to follow. By creating an urgent crisis that can only be solved by those fluent in a language too complex for ordinary people to understand, the Wall Street crowd has turned the vast majority of Americans into non-participants in their own political future. There is a reason it used to be a crime in the Confederate states to teach a slave to read: Literacy is power. In the age of the CDS and CDO, most of us are financial illiterates. By making an already too-complex economy even more complex, Wall Street has used the crisis to effect a historic, revolutionary change in our political system — transforming a democracy into a two-tiered state, one with plugged-in financial bureaucrats above and clueless customers below.

The most galling thing about this financial crisis is that so many Wall Street types think they actually deserve not only their huge bonuses and lavish lifestyles but the awesome political power their own mistakes have left them in possession of. When challenged, they talk about how hard they work, the 90-hour weeks, the stress, the failed marriages, the hemorrhoids and gallstones they all get before they hit 40.

"But wait a minute," you say to them. "No one ever asked you to stay up all night eight days a week trying to get filthy rich shorting what's left of the American auto industry or selling $600 billion in toxic, irredeemable mortgages to ex-strippers on work release and Taco Bell clerks. Actually, come to think of it, why are we even giving taxpayer money to you people? Why are we not throwing your ass in jail instead?"

But before you even finish saying that, they're rolling their eyes, because You Don't Get It. These people were never about anything except turning money into money, in order to get more money; values-wise they're on par with crack addicts, or obsessive sexual deviants who burgle homes to steal panties. Yet these are the people in whose hands our entire political future now rests.

Analyses of the roots of this disaster have bounced around the blogosphere for months now. Over the last month or so it's begun to hit the mainstream press. Anyone who sits quietly watching the business-as-usual "solutions" that Bernanke & Geithner (and yes, Obama too) are proposing without instantly seething in outrage is either an Insider himself, or a complete idiot. This shit has got to stop and the only way that'll happen is if we all make an effort to understand it, and then make so much noise they fear not only election day doom but the mob with torches and pitchforks.

This has to stop.

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Anonymous Applesaucer said...

Once again, well done, Mike.

One of my fears has been that Obama would get away with wagging his finger or making some such other feckless gesture and the press would just go away while the looting continued apace.

But, I am pleasantly surprised to see that even Obama's would-be allies are sinking their teeth into this with pit bull-like determination.

Frank Rich's Op-Ed piece in yesterday's NY Times exemplifies and explains this.

The press; intelligent, informed and honest bloggers (outside of the burping, farting -- can one tell the difference? -- pygmy boars of Boobus Blogosaurus); and everyone else MUST do their best to force Obama's hand on this issue.

It starts with his firing Tim Geithner. Then come Summers and Bernanke. That's at a minimum and just to start.

But nothing Obama does or says will matter one whit until this happens.

Keep on keepin' on, Mike.


11:03 AM  
Blogger Mike said...

It starts with his firing Tim Geithner. Then come Summers and Bernanke. That's at a minimum and just to start.

But nothing Obama does or says will matter one whit until this happens.


11:05 AM  
Blogger steves said...

I still think Taibbi is an untalented hack, but I will reluctantly admit that he is spot on with this article. Like Applesaucer, I am surprised that some of Obama's pals have been critical, though I still don't see the level of outrage that this situation deserves.

5:07 PM  
Blogger Mike said...

Taibbi is an untalented hack

I can understand not liking him (hell, I can see folks hating him). But he's no hack, and he's got talent coming out of his ass.

Anyhow, we're all (you, me, Taibbi) sharing the same levels of outrage.

6:31 PM  
Blogger steves said...

Taibbi's talented ass, notwithstanding, this was a good and well researched article. I haven't found all of his stuff to be this good. Some of his articles aren't very well researched and biased to the point where he comes across as a mean prick.

I try not to judge articles by what an author has said in the past, but that doesn't always work. That being said, I'll save my Taibbi hate for another post and just say good job for this rant.

7:27 PM  
Anonymous Anonymous said...

Is referring to Steven's as 'disgraced' really fair in light of all the shenanigans during his trial?

9:46 PM  
Blogger Mr Furious said...

Anyone who sits quietly watching the ... without instantly seething in outrage is either an Insider himself, or a complete idiot.

Well, that's a bit of an extreme choice...This shit takes a pretty significant amount of time and effort to not only understand, but even to discern between to two completely dishonest camps on all of this—the Republicans are full of shit, and so is the Obama team.

In the face of that, I'm not ready to toss everyone into the Complete Idiot bin.

12:19 AM  
Blogger Mike said...

This shit takes a pretty significant amount of time and effort to not only understand


In the face of that, I'm not ready to toss everyone into the Complete Idiot bin.

With all due respect, 6+ months into this crisis, anyone who hasn't "taken the time and effort to [] understand" this problem is an idiot.

Some people are idiots because they're incapable. That's unfortunate. Others are willful idiots. And they deserve every ounce of our scorn and derision.

5:56 AM  
Blogger Mr Furious said...

With all due respect, 6+ months into this crisis, anyone who hasn't "taken the time and effort to [] understand" this problem is an idiot.

You're being unreasonable. The fact that I have a job that allows me the fuck-off time to read up on this stuff is the only reason I have a handle on it.

I feel like I have a much better understanding of it than most people, and I feel like I'm a kid peering through a hole in the fence.

You can't quote shit like "creating an urgent crisis that can only be solved by those fluent in a language too complex for ordinary people to understand" to make your case, and then declare everyone an idiot for not suddenly earning a MBA.

Just last week I read compelling stuff from Brad DeLong that had me vacillating for a moment on a couple points until Taibbi had me spitting nails.

You've been leading the Financial Illuminati Charge for weeks now—and while much of what you railed about is becoming more clear—if not more true—this is still a topic that is practically impossible to feel 100% about anything except my anger—and even that firehose of fury has been difficult to keep on target.

10:03 AM  
Blogger Mike said...

Lots of people aren't that busy with work. And even if they are, why do they have enough time to conduct research for 3 fantasy teams in two sports as well as keep up with 7 regular TV shows and a couple movies?

I'm as busy as anyone, trust me. If people want to rise from ignorance, they'll make the effort to learn. You have, I have, lots of the others here have. Those who haven't are making a choice.

And -- in my opinion -- that makes them idiots.

6:14 AM  

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