FROM WALL ST. TO PENNSYLVANIA AVE . . . AND BACK AGAIN (AKA, THE N.Y.-D.C. SHUTTLE)

As seen in this piece from Bloomberg, Nobel Prize winning economist Joseph Stiglitz joins the growing ranks of mainstream voices criticizing Obama's handling of the economic crisis, along with a sharp attack on his economic team. (H/T Yves). What little I know about Stiglitz doesn't leave me among his supporters (and it's worth noting that he seems to have a personal grudge against Loathsome Larry Summers), but what he says sure has resonance. A highlight or two:

All the ingredients they have so far are weak, and there are several missing ingredients,” Stiglitz said in an interview yesterday. The people who designed the plans are “either in the pocket of the banks or they’re incompetent."

* * *

The Public-Private Investment Program, PPIP, designed to buy bad assets from banks, “is a really bad program,” Stiglitz said. It won’t accomplish the administration’s goal of establishing a price for illiquid assets clogging banks’ balance sheets, and instead will enrich investors while sticking taxpayers with huge losses. “You’re really bailing out the shareholders and the bondholders,” he said. “Some of the people likely to be involved in this, like Pimco, are big bondholders.”

* * *

Stiglitz said taxpayer losses are likely to be much larger than bank profits from the PPIP program even though Federal Deposit Insurance Corp. Chairman Sheila Bair has said the agency expects no losses. “The statement from Sheila Bair that there’s no risk is absurd,” he said, because losses from the PPIP will be borne by the FDIC, which is funded by member banks. “We’re going to be asking all the banks, including presumably some healthy banks, to pay for the losses of the bad banks,” Stiglitz said. “It’s a real redistribution and a tax on all American savers.”

Stiglitz was also concerned about the links between White House advisers and Wall Street. Hedge fund D.E. Shaw & Co. paid National Economic Council Director Lawrence Summers, a managing director of the firm, more than $5 million in salary and other compensation in the 16 months before he joined the administration. Treasury Secretary Timothy Geithner was president of the New York Federal Reserve Bank.

“America has had a revolving door. People go from Wall Street to Treasury and back to Wall Street,” he said. “Even if there is no quid pro quo, that is not the issue. The issue is the mindset.”

Might as well read the rest of the article, though I repeat that I don't agree with at least half of what he says. Nonetheless, I wanted to note that yet another generally-respected voice weighs in against Obama's economic team & its policies, and still nothing changes.

No one likes or supports the current economic policies except the Wall St. Masters and their servants in D.C., yet they continue unabated. With the deeply-conflicted core of individuals making the same rotton decisions over-and-over again. It's exactly the same arrogant combination of “we know best, shut your mouth” and “yeah, well what are you gonna do about it” that we saw from the Bush Administration for 8 years.

The field of “battle” switched from Iraq to Wall St., but the game is the same. A constant reminder of who runs the show . . . and who doesn't. I only hope that with every day that passes, one more person joins the ranks of those who see what's happening. It's our only hope, and even that may not be enough.

COCKTAILS (OF THE TOXIC VARIETY) ON THE HOUSE

Well, well, well. Look who's taking advantage of the "Geithner Plan." Ritholtz has a short piece about Citi and BOA buying toxic assets lately:

As Treasury Secretary Tim Geithner orchestrated a plan to help the nation’s largest banks purge themselves of toxic mortgage assets, Citigroup and Bank of America have been aggressively scooping up those same securities in the secondary market

* * *
both banks have been [aggressive] in their buying, sometimes paying higher prices than competing bidders are willing to pay.

This is the logical outcome of Timmy's "Plan." If you know the government is gonna broker a bunch of deals to buy garbage at above-market prices (through outright purchase, leveraging, guarantees, etc), why the hell wouldn't you buy up as much of that garbage as possible at the current market prices? That's good business, right?

Especially when you consider that the money they'll spend to make these market-rate purchases came directly from the taxpayers in the form of "bailouts."

I believe this is called playing with house money. And we're the house. But unlike Vegas (and Wall St.), in this example the house always loses.

FAUXBAMA'S MONEY MAN UNVEILS HIS "PLAN" TODAY

So at some point today, Timmy "The Bagman" Geithner will roll out the "details" of the latest plan to shift trillions of dollars to the world's wealthiest and most powerful. You and I and our descendants are so generous.

By the end of the day, all the "specifics" will be available to make fun of, and folks who know a lot more than I do will have opined. Most of them -- and likely all of them who aren't beholden to The Insiders -- will rip the plan to shreds. Nevertheless, it won't surprise me if the market goes up. After all, this plan is for the benefit of the largest institutions; I suspect they'll be very pleased.

Anyhow, it looks like the basics of the plan will be a combination of Treasury and FDIC donations, low-interest loans, and guarantees for any private actor reckless/greedy/connected enough to step in and buy the worthless garbage that our government brokers the sale of. The key flaw is that the banks that own the garbage assets stay in business and receive money in exchange for their balance sheet bullshit. The other flaw is that if the garbage assets ever end up being worth anything, they'll be in private hands to a significant degree.

Our money. Our loans. Our guarantees. The bank's benefit: cleaned up balance sheets. The private "purchaser's" benefit: no-risk investments, whereby they at a steep discount for assets that they will own if the value goes up. Our benefit: not sure that's part of the plan.

And, of course, two other things to remember:

One, if no private buyer opts to buy this garbage, the government will end up buying all of it. That's another bailout. Explain to me the difference between giving money to a cancer victim, and buying the cancer and putting it inside of your own body.

Two, the Federal Reserve ultimately backs up the maneuverings of the Treasury and the FDIC, so this is another step in the direction of the complete destruction of the dollar through currency debasement. The end game is becoming clear: unless Fauxbama hears the mob coming with pitchforks and turns into the Obama that the American people and the world want, the Insiders will loot every penny they can get their hands on, and it won't stop until there's nothing left. When either the Treasury is completely insolvent and/or the dollar is so debased, so essentially valueless, that it ceases to be the world's reserve currency.

Whatever specifics Timmy gives us today, remember this: unless his "plan" involves the U.S. government taking complete control of the banks -- kicking their officers, directors, shareholders, and 99% of their creditors to the curb in the process -- it's yet another step in The Looting. So long as the banks remain in private hands, every dollar we give them is just another bailout.

Don't let Timmy's fancy alphabet soup program titles and disembling semantics get in the way of the facts. Ownership is ownership and bailouts are bailouts. Today's plan will be one but not the other.

J'ACCUSE REVISITED

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.

SLEIGHT OF HAND (LEAVING SLIGHTLY LESS IN ALL OUR HANDS)

Today's WSJ reports that in the face of recent populist anger over bonuses paid from governmental bail-out money, Wall St. firms are examining the possibility of increasing base salaries for executives and "top-producing employees." (H/T Yves)

(For the moment let's just behave ourselves and ignore the fact that rewarding Wall St.'s "top level employees" for 2008-09 is tantamount to giving Kevin Smith a raise because he led the 2008 Detroit Lions in rushing.)

A few highlights if I may:

In response to expected bonus restrictions, officials atCitigroup Inc., Morgan Stanley and other financial institutions that got government aid are discussing increasing base salaries for some executives and other top-producing employees, people familiar with the situation said. The crackdown, part of the economic-stimulus package passed by Congress and signed into law by President Obama last month, limits bonus pay for the top five executives of any recipient of taxpayer capital through the Troubled Asset Relief Program, plus the 20 next-highest-compensated employees.

* * *

As banks and securities firms wrestle with growing regulation of compensation practices, substantially increasing the base salaries of top employees could become a popular response, some industry officials say. A larger salary would reduce the relative importance of bonuses but also help financial companies increase those payments, since they usually are calculated as a percentage of total annual compensation.

"The trend is to increase the base pay in light of the reduced bonuses," said Scott Talbott, senior vice president of government affairs at the Financial Services Roundtable. "Without the revenue" that top performers provide, he adds, "these companies can't survive."

Let's again behave ourselves and ignore the fact that they aren't surviving but-for governmental largesse. Back to the sordid tale:

Under the forthcoming rules, bonuses could come to no more than one-third of the total annual compensation paid to employees covered by the restrictions. Some compensation experts view the bonus limits as a mistake that turns the notion of pay for performance on its head, despite Wall Street's culpability for the recession and credit crisis.

"These are not bureaucratic positions where you're paying individuals high salaries," said Michael Karp, chief executive of Options Group. "How can you pay a banker a really high salary without knowing what kind of revenue that person generates?"

Uhhhh, we know they did not generate any revenue. In fact, we know they generated historic, unprecedented, hard-to-fathom losses. Which is why they probably don't deserve anything. Especially since the American taxpayers are paying it! I know I'm but one lone voice in the vast wilderness, but I'm gonna take a wild stab and say I'm a decent proxy for the other citizens. And my decision on their compensation is: Nada. Want a raise? Don't wanna answer to populist demands for a haircut? A got a swell idea: don't accept public money. Otherwise, I'm your boss, I think you suck, and I'll pay you accordingly. Back to the article:

Raising base salaries would play into "a long and dishonorable tradition of responding to any attempt to curb pay excess by just putting it in a different pocket and calling it something else," said Nell Minow, editor of the Corporate Library, a research firm focusing on corporate-governance issues.

Well-put.

Citigroup has received $45 billion in taxpayer-funded capital do far, while Morgan Stanley has received $10 billion. The latest U.S. rescue of Citigroup will leave the federal government holding as much as 36% of the company's common stock.

These firms still stand only because we've propped them up. The money they'll pay to the 25 highest-ranking parasites comes directly from us.

Inside banks and Wall Street firms, some executives are hopeful that the Treasury Department will water down the curbs on bonuses, inserted into the stimulus bill by Sen. Christopher Dodd (D., Conn.), during the department's rule-making process.

With bagman Timmy in charge, who could blame them for their optimism.

The Dodd provision sent shockwaves across Wall Street. Some bankers and compensation experts contend that top revenue-producers could bolt to non-U.S. banks or hedge funds that aren't subject to TARP-related restrictions. "It's possible we will lose some people," J.P. Morgan Chase & Co. Chairman and Chief. "I'll be very sorry if that happens."

He'll be very sorry. I'm sure he will. Anyhow, note the subjunctive tense of those statements. Top-revenue producers could bolt. But franky, at this point, so what if the morons who caused the mess lose their job? Lots of American have lost their job due to nothing more than bad luck. No one bailed them out.

Enough is enough. We have to keep making noise about this.

CONTRACTUALLY BOUND TO ROB YOU BLIND

I'm sure by now you've all heard about AIG doling out $165 million in bonuses to the same useless executives who drove the company into the ditch with their risky investments and failed policies.

I'm sure you've also heard the Oscar-worthy hand-wringing of enablers Summers, Geithner, and Bernanke: If only we could undo those inviolable contracts between AIG and its employees, we would. We're just so outraged by this miscarriage of justice against the American people. I was so mad when I heard about this I tore my hair out and screamed in anger!

Bullshit, I yell. Yeah, they just found out about this over the weekend. Please.

Maybe if these brilliant, powerful, all-knowing leaders of the American economic recovery had done a shred of due-diligence into AIG's contractual obligations they could've chosen not to loan the $170 billion to the failing company. Or, more accurately, since the Three Stooges obviously did their due diligence and knew full-well about the bonus plan, they could have -- gasp! -- attached contingencies to the $170 billion and demanded that AIG award no bonus money after the bail-out. Make no mistake -- they knew about this bonus money and bailed out AIG anyway. It's too big to fail!

If AIG had said, we'd love to tell all our incompetent executives they'll receive no bonus money, but we're contractually obligated, then Timmy, Larry, and Benny could've informed the failing company that they're contractually bound to the American people not to give away money to thieves, bums, fools, and gamblers.

The bullshit storm grows stronger. It's up to Cat 4 and blowing harder. Whatever we're hearing out of The Three Stooges' mouths ain't the truth. Up is down, black is white, war is peace. And billions of dollars of corporate charity with taxpayer money brings "outrage" and "shock" to the very people who gave it away.

We're being bamboozled, and they're not even trying to hide it.

YOUR MONEY IS NONE OF YOUR DAMN BUSINESS

Barry Ritholtz continues his uncharacteristic rage over what's happening right under our collective noses:

[W]hat was misleadingly described as systemic risk turned out to be in large part little more than a counter-party bailout — money for the very same people who helped cause the problem. Only the $25 billion figure I mentioned was off by 100% — the WSJ is reporting this morning it was $50 billion dollars, almost a third of $173 billion total AIG loot.

* * *

Now you know why the Fed was so reluctant to reveal who the counterparties were.

This is a giant FUCK YOU to the American taxpayer. Isn’t there some Congressmen (besides Ron Paul) who are morally offended by the Paulson plan, which is slowly becoming the Geithner plan? Isn’t there anything that can be done?

* * *

This is simply unconscionable . . .

This isn't some sort of marginal tinfoil hat thing. The smartest, best-informed (and honest) Wall St. experts are expressing nothing short of screaming, ranting, sputtering outrage over this.

Those who refuse to acknowledge what's happening in the clear light of day are insane. Truly insane, in that they deny reality in favor of their wishes.

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Update - Yves at Naked Capitalism also posts on this same topic. Good one, as usual. A highlight or two:

Bottom line: covert subsidies were given to bank via AIG. Remember, Henry Paulson, who had perilously few inhibitions about shoveling money at banks, even when the pretexts were often dubious and the checks non-existent, nevertheless was afraid to overpay openly for dud assets, which is why he retreated from his original conception of the TARP as as way to hoover up bad debt.

* * *
Wake up and smell the coffee. The public purse is being looted and we the great unwashed are being fed pablum. Just because the perps work for once esteemed institutions and are typically treated with deference does not change the nature of the undertaking.

THE FED TO THE AMERICAN PEOPLE: YOUR MONEY IS NONE OF YOUR FUCKING BUSINESS

This issue relates somewhat to what I've talked about recently: the seeming paradox of the Federal Reserve, its constituent banks, its board of governors, and the 22 or so-odd institutions first in line for its money. As mentioned, the Fed is private (though it has quasi-governmental features), and the NY Fed, responsible for much of the various bailout money over the last six months, is completely private.

The paradox, of course, comes from the fact that the President appoints the chairman of this private institution. And that the private institution has a monopoly over the right to issue the currency all American citizens are bound to use as legal tender. A monopoly despite the fact that it isn't required to own anything of value backing that legal tender. Which means it can inflate, and thereby devalue, that currency. And has inflated it at a 95% rate in the 96 years of its existence.

So what's the issue I'm talking about today? Well, as you may know, Bloomberg News sued the Federal Reserve last fall under the Federal Freedom of Information Act ("FOIA"), seeking an injunction forcing the Fed to disclose the identity and amounts of TARP money it "lent" to various banks and institutions. And without wading into all the details, one of the Fed's defenses asserts that the NY Fed (which "lent" the money and houses most of the documentation) is not a federal agency, and therefore doesn't fall under the reach of FOIA.

They put forth other defenses, all of them equally nauseating, but that's the one that really gets me boiling. Anyhow, do a search for Bloomberg LP v. Board of Governors of the Federal Reserve System, and prepare to wretch if not rave.

Have a nice weekend . . . until you remember that most Treasury/Federal Reserve shenanigans have gone down over weekends. When you wake up Monday morning, don't be surprised to learn that we've bailed out Citibank to the tune of hundreds of billions of dollars.

And don't be surprised if that private bank that destroys your currency tells you it's none of your goddamn business what it's done with your money in an effort to dole it out to its friends. Nah, don't do any of that Monday morning.

Just Wake Up.

WHEN IT'S TIME TO ASK "WHY?"

Wow. The normally calm, measured, and rational-to-the-point-of-being-unemotional Barry Ritholtz lets loose on the AIG bailout. Damn, check some of this out:

When AIG first faltered, there were two companies jammed under one roof. One was a highly regulated, state supervised, life insurance company. In fact, the biggest such firm in the world. The other firm was an unregulated structured finance firm, specializing in credit default swaps and other derivatives. The first firm was Triple AAA rated. They had a long history of steady growth, profitability, excellent management. They made money (as the commercial goes) the old fashioned way: They earned it. This half of the company held the most important insurance in many families’ financial lives: Their life insurance.

* * *

The other part of the firm was none of the above. It was neither regulated nor transparent. It existed only in the shadow banking world, a nether region of speculation, and of big derivative bets. This part of the company engaged in the most speculative of trading with hedge funds, banks, rank speculators, gamblers from around the world. Huge derivative bets were placed, with billions of dollars riding on the outcome. It served a far more limited societal function than the Life insurance portion, other than a legal pursuit of profit. This part of AIG was nothing more than a giant structured finance hedge fund.

* * *

It was exempt from any form of regulation or supervision, thanks to the Commodities Futures Modernization Act. This ruinous piece of legislation was sponsored by former Senator Phil Gramm (R), supported by Alan Greenspan (R), former Treasury Secretary (and Citibank board member) Robert Rubin (D), and current presidential advisor Larry Summers (D). It was signed into law by President Clinton (D). It was the single most disastrous piece of bipartisan legislation ever signed into law.

* * *

Here is the question that every single taxpayer should be asking themselves: WHY AM I PAYING $1000 TO BAIL OUT THIS GIANT HEDGE FUND? Of all the many horrific decisions that Hank Paulson made, this may be his very worst. That is a very special description, given his track record of incompetence and cluelessness. What should have been done?

Simple: When we nationalized AIG, we should have immediately spun out the good, solvent life insurance company. It is a highly viable standalone entity. The hedge fund should have been wound down in an orderly fashion. Match up the offsetting trades, the rest go to zero. End of story.

* * *

Right now, we are into this clusterfuck for $166 billion — every last penny of which is a needless waste. Taxpayers should not be bailing out hedge fund trades. This insanity must cease immediately.

Again, wow. Not much to add, since Ritholtz says it better than I ever could. At the core of my opinion (since I have different thoughts from him about what "deregulation" is, what it means) is the belief that if you get governmental protection, if you're first in line for cheap loans, if your industry is subject to loopholes and access the rest of us schmucks don't get, then we damn well have the right to make the rules that you play under.

But from what I understand about what Clinton and Gramm and Greenspan and Rubin and Summers did, huge banks and other companies got to have it both ways: all the perks with none of the rules.

And the acolytes of these enablers (Geithner learned his craft at the lap of Rubin, Bernanke served on the Fed Board of Governors under Greenspan), if not the active perpetrators (the utterly loathsome Larry Summers), are continuing to roll out the gravy train.

At our expense.

And as Ritholtz says, "every single taxpayer should be asking themselves: Why am I paying $1000 to bail out this giant hedge fund? ... Taxpayers should not be bailing out hedge fund trades. This insanity must cease immediately."

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Update (Of sorts): This post by Steve Randy Waldman at Interfluidity (H/T Naked Capitalism) is somewhat on-point with the concept I tried (clumsily) to explain at the tail end of this post. I haven't thought enough about what he's actually advocating, and the post is a bit arcane for non-financial types like me. That said, he makes the larger point that:

Private-sector banking has not existed in the United States since first the Fed and then the FDIC undertook to insure bank risks. There is no use getting all ideological about keeping banks private, because they never have been.

* * *

I don't think we should give much deference to traditional banking, on the theory that we know it works. On the contrary, we know that it does not work. Banking crises are not aberrations. They are infrequent but regular occurrences almost everywhere there are banks. I challenge readers to make the case that banking, in its long centuries, has ever been a profitable industry, net of the costs it extracts from governments, counterparties, and investors during its low frequency, high amplitude breakdowns. Banking is lucrative for bankers, and during quiescent periods it has served a useful role in financial intermediation. But in aggregate, has banking has ever been a successful industry for capital providers? A "healthy" banking system is arguably just a bubble, worth investing in only if you're smart enough or lucky enough to get out before the crash, or if you expect to be bailed out after the fall.

Again, I haven't thought about this enough to say I agree with whatever it is that Waldman favors (assuming he has something in mind). I'm just throwing some kindling on the fire I'm trying to stoke: that our collective understanding of "free markets" and "laissez faire" and "deregulation" will forever be skewed unless we come to grips with the fact that, in America, because of the Federal Reserve system and the financial industry's leverage on Capital Hill, the banking system is subsidized, guaranteed, favored, and ultimately rigged.

And if it wants continued largesse, we need to extract some real concessions.

WELCOME TO THE U.S. OF AIG

In the latest report from the "Not Even Remotely Surprising Unless You Haven't Been Paying Attention, Or Haven't Wanted To" Files, we learn that the U.S. government (uhhh, that'd be "You & I") will bailout AIG for the 4th time in less than six months. A few "highlights":

The Treasury Department and the Federal Reserve announced jointly early Monday that they will supply another $30 billion on an "as needed" basis to facilitate "the orderly completion of the company's global divestiture program" and "help stabilize the company and in doing so help stabilize the financial system," in light of the "significant challenges" due to the rapid deterioration in certain financial markets in the last two months of the year.

Where to begin? Before even getting into the substance of what a mistake this is, let's examine the actors, shall we? The Treasury Department and the Federal Reserve.

One a division of the executive branch and the other a quasi-governmental, privately-owned bank headed by an unelected chairman. And, since we're doing this lil' Q&A thing, let's ask who heads that division of the executive branch? Only the former head of the completely private NY facility of that quasi-governmental, privately-owned bank. This isn't Democracy. Now let's ask why these unelected thieves are doing what they're doing:

AIG has been unable to find buyers for pieces of its company that it hoped to sell to repay the government on its existing aid package, which totals some $150 billion.

Read that carefully. AIG is Looking for buyers to raise capital to repay the government that already "lent" it over a hundred billion dollars because it couldn't find any buyers the first time around. Before it added an additional $150 billion to its balance sheet.

And why can't AIG can't "find buyers"? Because it had nothing to sell except a rancid mound of rotting garbage. Who the hell buys rotting garbage? The answer is, of course, "no one." Which is why the enablers in D.C. are fostering this deal, laying the bill onto citizens and taxpayers who have no recourse to remove these gentlemen from their positions because they neither hired nor elected them.

And why would these unelected gents do this? I mean, they must have a good reason to engage in such a shameless expropriation of the nation's wealth, no? For whom would they do such a thing? Who benefits from the survival of AIG as a private institution? Why not nationalize it, wipe out its debt, clean out its worthless "assets" and start over, right?

perhaps the biggest concern about AIG is the dizzying array of complex financial instruments it structured for commercial banks, investment banks and hedge funds around the globe.

"The biggest concern." Yet, the question we need to ask is whose biggest concern? I'm not concerned, are you? Any of your neighbors staying up at night worrying about this? Know anyone who knows anyone that shares this concern that "commercial banks, investment banks and hedge funds around the globe" are gonna lose their shirts due to idiotic investments they made in a "dizzying array of complex financial instruments"?

This article from Bloomberg last fall explains why this is really going on. If AIG went into bankrupcy, it's biggest creditors would get the shaft, receiving (literally) pennies on the dollar for what the insurance company owed them. If they were that lucky; they might get zero. And among those creditors: Goldman Sachs, Morgan Stanley, Merrill Lynch (recently acquired by Bank of America).

As I said at the start of the post, none of this is even remotely surprising unless you haven't been paying attention, or haven't wanted to.

Wake up.

I'LL ADMIT I WAS WRONG

You see, last November 10, after AIG went to Congress for the second time begging for taxpayer money to fund their profligacy and incompetence, I predicted that they'd get it, no problem.

And I was correct. They got it later that same day. But I also predicted that they'd be back to Congress in early 2009 asking for yet even more. But I was wrong in the timing, saying it'd be after April 15. I can't believe how wrong I was.

Because they waited only until yesterday. Seems they wanna "restructure" the deal yet again. And ya know what? Their slaves (that means you & me, though our representatives) will give 'em what they want.

Just remember people: when we finally come around to "nationalize" all these rancid institutions, you'll be sickened to think how much free money we threw at them (read: gave to the Insiders) to no avail as we watched them sink lower & lower. We're paying them to suck as we pretend not to be preparing to do what we're going to have to do in the end: nationalize them.

We're all suckers. How do you feel being bamboozled? I feel like shit.

THE INSIDERS

You'll recall that just a few days ago I referred to Tim Geithner as "The Insider." And I've also used the term to describe the cadre of governmental hacks that do the bidding of Wall St. in the name of the American economy. Of the American people.

Well, lest you think this is nothing more than the mad prattlings of an internet nobody looking for a few rich and famous folks to tee off on, think again. Please read what Simon Johnson, former IMF chief economist and current professor of global economics and management at MIT said on Bill Moyers this week when he discussed his grave concerns about the unchecked power and influence of "America's Oligarchs" (H/T Jesse):

SIMON JOHNSON: I think I'm signaling something a little bit shocking to Americans, and to myself, actually. Which is the situation we find ourselves in at this moment, this week, is very strongly reminiscent of the situations we've seen many times in other places . . . [we] somehow find ourselves in the grip of the same sort of crisis and the same sort of oligarchs . . . it's a small group with a lot of power. A lot of wealth. They don't necessarily - they're not necessarily always the names, the household names that spring to mind, in this kind of context. But they are the people who could pull the strings. Who have the influence. Who call the shots.

BILL MOYERS: Are you saying that the banking industry trumps the president, the Congress and the American government when it comes to this issue so crucial to the survival of American democracy?

SIMON JOHNSON: I don't know. I hope they don't trump it. But the signs that I see this week, the body language, the words, the op-eds, the testimony, the way they're treated by certain Congressional committees, it makes me feel very worried. I have this feeling in my stomach that I felt in other countries, much poorer countries, countries that were headed into really difficult economic situation. When there's a small group of people who got you into a disaster, and who were still powerful. Disaster even made them more powerful. And you know you need to come in and break that power. And you can't. You're stuck.

BILL MOYERS: . . . Rahm Emanuel and David Axelrod [] have pushed for tougher action against the banks. But they didn't prevail. Obama apparently sided with Geithner and the Treasury Department in using a velvet glove.

SIMON JOHNSON: What I read from that is that there is an unnecessary and excessive deference to the experts, or the supposed experts. And I think the view that a lot of people have in Washington -- I live in Washington, I follow this very closely -- the view is that you need to rely on the technocrats. And the technocrats are saying, "This is the way to go, and you mustn't be too tough on because banks, because that will have adverse consequences for credits, and for the economy, and for unemployment," and so on and so forth. Those technocrats, if that's what they're saying, are wrong. That is not the right way to deal with this crisis.

* * *

[B]eing nice to the banks, is a mistake. The powerful people are the insiders. They're the CEOs of these banks. They're the people who run these banks. They're the people who pay themselves the massive bonuses at the end of the last year. Now, those bonuses are not the essence of the problem, but they are a symptom of an arrogance, and a feeling of invincibility, that tells you a lot about the culture of those organizations, and the attitudes of the people who lead them.

BILL MOYERS: Geithner has hired as his chief-of-staff, the lobbyist from Goldman Sachs. The new deputy secretary of state was, until last year, a CEO of Citigroup. Another CFO from Citigroup is now assistant to the president, and deputy national security advisor for International Economic Affairs. And one of his deputies also came from Citigroup. One new member of the president's Economic Recovery Advisory Board comes from UBS, which is being investigated for helping rich clients evade taxes. You're probably too young to remember that old song, "Sounds like the Mack the Knife is back in town." I mean, is that what you're talking about with this web of relationships?

SIMON JOHNSON: . . . it's exactly a web of interest, I think, is what you said. And that's exactly the right way to think about it. That web of interest is not my interest, or your interest, or the interest of the taxpayer. It's the interest, first and foremost, of the financial industry in this country.

* * *

BILL MOYERS: When Tim Geithner said, earlier in the week, that the American people have lost faith in some financial institutions and the government, did it occur to you that this was the same man who was president of the New York Fed through much of this debacle?

SIMON JOHNSON: I have no problem with poachers turning gamekeeper, right? So if you know where the bodies are buried maybe you can help us sort out the problem. And I did think the first three or four minutes of what Mr. Geithner said were very good. As a definition of a problem, and pointing the finger clearly at the bankers, and saying that the government had been slow to react, and, of course, that included himself. I liked that. And then he started to talk about the specifics. And he said, "The compensation caps we've put in place, for the executives of these banks, are strong." And at that point I just fell out of my chair. That is not true. That is factually inaccurate, in my opinion.

BILL MOYERS: That?

SIMON JOHNSON: That this $500,000 limit, and deferred stock, is some kind of restriction on what they do? It's deferred stock, Bill. It's not restricted. You can get as much stock as you want, as soon as you pay back the government, you can cash out of that. That's one. Second, you can, sorry to get technical, but reset the strike price. This is something you and your and your viewers, you need to hear this one out. Just look for these words, okay, follow them through the press. When you get into trouble, when your company goes down, and you have massive amounts of stock options that aren't worth much anymore, because the stock price has gone down, you say, "Oh, well, we're going to reset our option prices."

And, basically, it means that, at the end of the day, these people are going to walk away with tens if not hundreds of millions of dollars paid for by basically, insurance policy that you and I are providing. Think of it like this, our taxpayer money is ensuring their bonuses. We're making sure that companies, that banks survive. And eventually, of course, the economy will turn around. Things will get better. The banks will be worth a lot of money. And they will cash out. And we will be paying higher taxes, we and our children, will be paying higher taxes so those people could have those bonuses. That's not fair. It's not acceptable. It's not even good economics.

BILL MOYERS: Are we chumps?

SIMON JOHNSON: We'll find out. Yes, we may be. Okay. It depends on how we play this politically. It depends on what our political system does. It depends, I think, on the level of reaction. The financial system is playing us for chumps, okay? The bankers think we're chumps. We'll find out. We have leadership that can handle this. We'll find out what they do.

* * *

BILL MOYERS: Geithner says . . . the board of Goldman Sachs, will have to decide [whether to fire Lloyd Blankfein, the CEO of Goldman Sachs]. But aren't we all ipso facto stock holders now?

SIMON JOHNSON: We should certainly have a big say over critical matters like this. Like the CEO. Because, two things. First of all, it's our money that kept these banks in business. Not just the treasury recapitalization money, that's relatively small. It's the financial support provided by the Federal Reserve. Make no mistake about it, if the Federal Reserve hadn't stepped in late September, in dramatic fashion, to prop up organizations like Goldman Sachs, they would be out of business, okay?

It was our money that did that. The Federal Reserve acting on behalf of the American taxpayer. And secondly, Senator Sanders is exactly right. That a CEO, like Lloyd Blankfein, made mistakes, and led his company into deep trouble. Now, other companies are in deeper trouble. His company was in deep trouble and had to be rescued at that moment. It's absolutely the right way to pose the question. And the answer to Senator Sanders' question is, in my opinion, yes. We should change the leadership of these major banks.

BILL MOYERS: And, yet, Secretary Geithner's chief-of-staff is the former lobbyist for Goldman Sachs. How -- serious question -- how do they make a dispassionate judgment about how to deal with Goldman Sachs when they're so intertwined with Goldman Sachs' mindset?

SIMON JOHNSON: I have no idea. Of course, the administration, the new administration, has a lot of rules about lobbying. And they have rules that basically say, I think, as understood the rules, when they were first presented, I was very impressed. They basically said, "We're not going to hire lobbyists into the administration. There has to be some sort of cooling off period."

BILL MOYERS: And the next day Obama exempted a number of people from that very rule that he had just proclaimed.

SIMON JOHNSON: Yes. It's a problem. It's a huge problem.

As always, I urge you to read the entire transcript. And, more importantly, I urge you to come to grips -- intellectually, emotionally, politically -- with the facts that are sitting right in front of you, staring you in the face. Namely, that a small cadre of Washington Insiders is enabling an even smaller Oligarchy of Wall St. Insiders to accomplish one thing, and one thing only: the naked looting of the United States Treasury.

It started last fall with Paulson, Bush, Cheney, Bernanke, and Barney Frank, and it's continuing with Geithner, Bernanke, Larry Sommers, Barney Frank and yes, even Obama.

The Insiders are robbing us blind. And they're laughing at us for letting them do it so brazenly.

Wake up.

PELOSI & FRANK HAVE GOT SOME 'SPLAININ' TO DO

Keeping it short because . . . well, what analysis do you need? Here's the headline:

Congress Kills Plan To Recover Wall Street Bonuses

What explanation can congressional Dems possibly have for why they removed the Wyden-Snowe Amendment -- "without explanation in closed-door talks" -- from the "Stimulus Bill"? That amendment, proposed by Senators Ron Wyden (D-Ore.) & Olympia Snowe (R-Maine), would have:

penalized companies that paid bonuses greater than $100,000 to executives after receiving government rescue funds last year. The companies would have had to repay within four months any portion of the bonus above $100,000 or face an excise tax of 35 percent on the portion of the bonus above $100,000 [and] would have raised as much as $3.2 billion.

But The Insiders, presumably Nancy Pelosi and Barney Frank and Harry Reid and all the other muckety-mucks who care more about their friends on Wall St. than about the American taxpayer stripped the Amendment out.

Behind closed-doors.

And, of course, I think it's legit to ask where Obama was while this backroom dealing was going on. Assuming he wasn't with them behind that closed-door.