My friend sent me the below read from Rolling Stone Magazine, an article that says it all about what is happening to our economy, without mincing words...

The Big Takeover
The global economic crisis isn't about money - it's about power. How Wall Street insiders are using the
bailout to stage a revolution
MATT TAIBBI

Posted Mar 19, 2009 12:49 PM

It's over — we're officially, royally fucked. no empire can survive being rendered a permanent laughingstock,
which is what happened as of a few weeks ago, when the buffoons who have been running things in this
country finally went one step too far. It happened when Treasury Secretary Timothy Geithner was forced to
admit that he was once again going to have to stuff billions of taxpayer dollars into a dying insurance giant
called AIG, itself a profound symbol of our national decline — a corporation that got rich insuring the concrete
and steel of American industry in the country's heyday, only to destroy itself chasing phantom fortunes at
the Wall Street card tables, like a dissolute nobleman gambling away the family estate in the waning days
of the British Empire.

The latest bailout came as AIG admitted to having just posted the largest quarterly loss in American
corporate history — some $61.7 billion. In the final three months of last year, the company lost more than $27
million every hour. That's $465,000 a minute, a yearly income for a median American household every six
seconds, roughly $7,750 a second. And all this happened at the end of eight straight years that America
devoted to frantically chasing the shadow of a terrorist threat to no avail, eight years spent stopping every
citizen at every airport to search every purse, bag, crotch and briefcase for juice boxes and explosive tubes
of toothpaste. Yet in the end, our government had no mechanism for searching the balance sheets of
companies that held life-or-death power over our society and was unable to spot holes in the national
economy the size of Libya (whose entire GDP last year was smaller than AIG's 2008 losses).

So it's time to admit it: We're fools, protagonists in a kind of gruesome comedy about the marriage of greed
and stupidity. And the worst part about it is that we're still in denial — we still think this is some kind of
unfortunate accident, not something that was created by the group of psychopaths on Wall Street whom we
allowed to gang-rape the American Dream. When Geithner announced the new $30 billion bailout, the party
line was that poor AIG was just a victim of a lot of shitty luck — bad year for business, you know, what with
the financial crisis and all. Edward Liddy, the company's CEO, actually compared it to catching a cold: "The
marketplace is a pretty crummy place to be right now," he said. "When the world catches pneumonia, we get
it too." In a pathetic attempt at name-dropping, he even whined that AIG was being "consumed by the same
issues that are driving house prices down and 401K statements down and Warren Buffet's investment
portfolio down."

Liddy made AIG sound like an orphan begging in a soup line, hungry and sick from being left out in someone
else's financial weather. He conveniently forgot to mention that AIG had spent more than a decade
systematically scheming to evade U.S. and international regulators, or that one of the causes of its
"pneumonia" was making colossal, world-sinking $500 billion bets with money it didn't have, in a toxic and
completely unregulated derivatives market.

Nor did anyone mention that when AIG finally got up from its seat at the Wall Street casino, broke and
busted in the afterdawn light, it owed money all over town — and that a huge chunk of your taxpayer dollars in
this particular bailout scam will be going to pay off the other high rollers at its table. Or that this was a
casino unique among all casinos, one where middle-class taxpayers cover the bets of billionaires.

People are pissed off about this financial crisis, and about this bailout, but they're not pissed off enough.
The reality is that the worldwide economic meltdown and the bailout that followed were together a kind of
revolution, a coup d'état. They cemented and formalized a political trend that has been snowballing for
decades: the gradual takeover of the government by a small class of connected insiders, who used money
to control elections, buy influence and systematically weaken financial regulations.

The crisis was the coup de grâce: Given virtually free rein over the economy, these same insiders first
wrecked the financial world, then cunningly granted themselves nearly unlimited emergency powers to clean
up their own mess. And so the gambling-addict leaders of companies like AIG end up not penniless and in
jail, but with an Alien-style death grip on the Treasury and the Federal Reserve — "our partners in the
government," as Liddy put it with a shockingly casual matter-of-factness after the most recent bailout.

The mistake most people make in looking at the financial crisis is thinking of it in terms of money, a habit
that might lead you to look at the unfolding mess as a huge bonus-killing downer for the Wall Street class.
But if you look at it in purely Machiavellian terms, what you see is a colossal power grab that threatens to
turn the federal government into a kind of giant Enron — a huge, impenetrable black box filled with
self-dealing insiders whose scheme is the securing of individual profits at the expense of an ocean of
unwitting involuntary shareholders, previously known as taxpayers.

I. PATIENT ZERO

The best way to understand the financial crisis is to understand the meltdown at AIG. AIG is what happens
when short, bald managers of otherwise boring financial bureaucracies start seeing Brad Pitt in the mirror.
This is a company that built a giant fortune across more than a century by betting on safety-conscious
policyholders — people who wear seat belts and build houses on high ground — and then blew it all in a year
or two by turning their entire balance sheet over to a guy who acted like making huge bets with other
people's money would make his dick bigger.

That guy — the Patient Zero of the global economic meltdown — was one Joseph Cassano, the head of a tiny,
400-person unit within the company called AIG Financial Products, or AIGFP. Cassano, a pudgy, balding
Brooklyn College grad with beady eyes and way too much forehead, cut his teeth in the Eighties working for
Mike Milken, the granddaddy of modern Wall Street debt alchemists. Milken, who pioneered the creative use
of junk bonds, relied on messianic genius and a whole array of insider schemes to evade detection while
wreaking financial disaster. Cassano, by contrast, was just a greedy little turd with a knack for selective
accounting who ran his scam right out in the open, thanks to Washington's deregulation of the Wall Street
casino. "It's all about the regulatory environment," says a government source involved with the AIG bailout.
"These guys look for holes in the system, for ways they can do trades without government interference.
Whatever is unregulated, all the action is going to pile into that."

The mess Cassano created had its roots in an investment boom fueled in part by a relatively new type of
financial instrument called a collateralized-debt obligation. A CDO is like a box full of diced-up assets. They
can be anything: mortgages, corporate loans, aircraft loans, credit-card loans, even other CDOs. So as X
mortgage holder pays his bill, and Y corporate debtor pays his bill, and Z credit-card debtor pays his bill,
money flows into the box.

The key idea behind a CDO is that there will always be at least some money in the box, regardless of how
dicey the individual assets inside it are. No matter how you look at a single unemployed ex-con trying to
pay the note on a six-bedroom house, he looks like a bad investment. But dump his loan in a box with a
smorgasbord of auto loans, credit-card debt, corporate bonds and other crap, and you can be reasonably
sure that somebody is going to pay up. Say $100 is supposed to come into the box every month. Even in an
apocalypse, when $90 in payments might default, you'll still get $10. What the inventors of the CDO did is
divide up the box into groups of investors and put that $10 into its own level, or "tranche." They then
convinced ratings agencies like Moody's and S&P to give that top tranche the highest AAA rating — meaning it
has close to zero credit risk.

Suddenly, thanks to this financial seal of approval, banks had a way to turn their shittiest mortgages and
other financial waste into investment-grade paper and sell them to institutional investors like pensions and
insurance companies, which were forced by regulators to keep their portfolios as safe as possible. Because
CDOs offered higher rates of return than truly safe products like Treasury bills, it was a win-win: Banks
made a fortune selling CDOs, and big investors made much more holding them.

The problem was, none of this was based on reality. "The banks knew they were selling crap," says a
London-based trader from one of the bailed-out companies. To get AAA ratings, the CDOs relied not on their
actual underlying assets but on crazy mathematical formulas that the banks cooked up to make the
investments look safer than they really were. "They had some back room somewhere where a bunch of
Indian guys who'd been doing nothing but math for God knows how many years would come up with some
kind of model saying that this or that combination of debtors would only default once every 10,000 years,"
says one young trader who sold CDOs for a major investment bank. "It was nuts."

Now that even the crappiest mortgages could be sold to conservative investors, the CDOs spurred a
massive explosion of irresponsible and predatory lending. In fact, there was such a crush to underwrite
CDOs that it became hard to find enough subprime mortgages — read: enough unemployed meth dealers
willing to buy million-dollar homes for no money down — to fill them all. As banks and investors of all kinds
took on more and more in CDOs and similar instruments, they needed some way to hedge their massive
bets — some kind of insurance policy, in case the housing bubble burst and all that debt went south at the
same time. This was particularly true for investment banks, many of which got stuck holding or
"warehousing" CDOs when they wrote more than they could sell. And that's were Joe Cassano came in.

Known for his boldness and arrogance, Cassano took over as chief of AIGFP in 2001. He was the favorite of
Maurice "Hank" Greenberg, the head of AIG, who admired the younger man's hard-driving ways, even if
neither he nor his successors fully understood exactly what it was that Cassano did. According to a source
familiar with AIG's internal operations, Cassano basically told senior management, "You know insurance, I
know investments, so you do what you do, and I'll do what I do — leave me alone." Given a free hand within
the company, Cassano set out from his offices in London to sell a lucrative form of "insurance" to all those
investors holding lots of CDOs. His tool of choice was another new financial instrument known as a
credit-default swap, or CDS.

The CDS was popularized by J.P. Morgan, in particular by a group of young, creative bankers who would
later become known as the "Morgan Mafia," as many of them would go on to assume influential positions in
the finance world. In 1994, in between booze and games of tennis at a resort in Boca Raton, Florida, the
Morgan gang plotted a way to help boost the bank's returns. One of their goals was to find a way to lend
more money, while working around regulations that required them to keep a set amount of cash in reserve to
back those loans. What they came up with was an early version of the credit-default swap.

In its simplest form, a CDS is just a bet on an outcome. Say Bank A writes a million-dollar mortgage to the
Pope for a town house in the West Village. Bank A wants to hedge its mortgage risk in case the Pope can't
make his monthly payments, so it buys CDS protection from Bank B, wherein it agrees to pay Bank B a
premium of $1,000 a month for five years. In return, Bank B agrees to pay Bank A the full million-dollar
value of the Pope's mortgage if he defaults. In theory, Bank A is covered if the Pope goes on a meth binge
and loses his job.

When Morgan presented their plans for credit swaps to regulators in the late Nineties, they argued that if
they bought CDS protection for enough of the investments in their portfolio, they had effectively moved the
risk off their books. Therefore, they argued, they should be allowed to lend more, without keeping more cash
in reserve. A whole host of regulators — from the Federal Reserve to the Office of the Comptroller of the
Currency — accepted the argument, and Morgan was allowed to put more money on the street.

What Cassano did was to transform the credit swaps that Morgan popularized into the world's largest bet on
the housing boom. In theory, at least, there's nothing wrong with buying a CDS to insure your investments.
Investors paid a premium to AIGFP, and in return the company promised to pick up the tab if the
mortgage-backed CDOs went bust. But as Cassano went on a selling spree, the deals he made differed from
traditional insurance in several significant ways. First, the party selling CDS protection didn't have to post
any money upfront. When a $100 corporate bond is sold, for example, someone has to show 100 actual
dollars. But when you sell a $100 CDS guarantee, you don't have to show a dime. So Cassano could sell
investment banks billions in guarantees without having any single asset to back it up.

Secondly, Cassano was selling so-called "naked" CDS deals. In a "naked" CDS, neither party actually holds
the underlying loan. In other words, Bank B not only sells CDS protection to Bank A for its mortgage on the
Pope — it turns around and sells protection to Bank C for the very same mortgage. This could go on ad
nauseam: You could have Banks D through Z also betting on Bank A's mortgage. Unlike traditional
insurance, Cassano was offering investors an opportunity to bet that someone else's house would burn
down, or take out a term life policy on the guy with AIDS down the street. It was no different from gambling,
the Wall Street version of a bunch of frat brothers betting on Jay Feely to make a field goal. Cassano was
taking book for every bank that bet short on the housing market, but he didn't have the cash to pay off if the
kick went wide.

In a span of only seven years, Cassano sold some $500 billion worth of CDS protection, with at least $64
billion of that tied to the subprime mortgage market. AIG didn't have even a fraction of that amount of cash
on hand to cover its bets, but neither did it expect it would ever need any reserves. So long as defaults on
the underlying securities remained a highly unlikely proposition, AIG was essentially collecting huge and
steadily climbing premiums by selling insurance for the disaster it thought would never come.

Initially, at least, the revenues were enormous: AIGFP's returns went from $737 million in 1999 to $3.2
billion in 2005. Over the past seven years, the subsidiary's 400 employees were paid a total of $3.5 billion;
Cassano himself pocketed at least $280 million in compensation. Everyone made their money — and then it
all went to shit.

II. THE REGULATORS

Cassano's outrageous gamble wouldn't have been possible had he not had the good fortune to take over
AIGFP just as Sen. Phil Gramm — a grinning, laissez-faire ideologue from Texas — had finished engineering
the most dramatic deregulation of the financial industry since Emperor Hien Tsung invented paper money in
806 A.D. For years, Washington had kept a watchful eye on the nation's banks. Ever since the Great
Depression, commercial banks — those that kept money on deposit for individuals and businesses — had not
been allowed to double as investment banks, which raise money by issuing and selling securities. The
Glass-Steagall Act, passed during the Depression, also prevented banks of any kind from getting into the
insurance business.

But in the late Nineties, a few years before Cassano took over AIGFP, all that changed. The Democrats, tired
of getting slaughtered in the fundraising arena by Republicans, decided to throw off their old reliance on
unions and interest groups and become more "business-friendly." Wall Street responded by flooding
Washington with money, buying allies in both parties. In the 10-year period beginning in 1998, financial
companies spent $1.7 billion on federal campaign contributions and another $3.4 billion on lobbyists. They
quickly got what they paid for. In 1999, Gramm co-sponsored a bill that repealed key aspects of the
Glass-Steagall Act, smoothing the way for the creation of financial megafirms like Citigroup. The move did
away with the built-in protections afforded by smaller banks. In the old days, a local banker knew the people
whose loans were on his balance sheet: He wasn't going to give a million-dollar mortgage to a homeless
meth addict, since he would have to keep that loan on his books. But a giant merged bank might write that
loan and then sell it off to some fool in China, and who cared?

The very next year, Gramm compounded the problem by writing a sweeping new law called the Commodity
Futures Modernization Act that made it impossible to regulate credit swaps as either gambling or securities.
Commercial banks — which, thanks to Gramm, were now competing directly with investment banks for
customers — were driven to buy credit swaps to loosen capital in search of higher yields. "By ruling that
credit-default swaps were not gaming and not a security, the way was cleared for the growth of the market,"
said Eric Dinallo, head of the New York State Insurance Department.

The blanket exemption meant that Joe Cassano could now sell as many CDS contracts as he wanted,
building up as huge a position as he wanted, without anyone in government saying a word. "You have to
remember, investment banks aren't in the business of making huge directional bets," says the government
source involved in the AIG bailout. When investment banks write CDS deals, they hedge them. But
insurance companies don't have to hedge. And that's what AIG did. "They just bet massively long on the
housing market," says the source. "Billions and billions."

In the biggest joke of all, Cassano's wheeling and dealing was regulated by the Office of Thrift Supervision,
an agency that would prove to be defiantly uninterested in keeping watch over his operations. How a
behemoth like AIG came to be regulated by the little-known and relatively small OTS is yet another triumph
of the deregulatory instinct. Under another law passed in 1999, certain kinds of holding companies could
choose the OTS as their regulator, provided they owned one or more thrifts (better known as
savings-and-loans). Because the OTS was viewed as more compliant than the Fed or the Securities and
Exchange Commission, companies rushed to reclassify themselves as thrifts. In 1999, AIG purchased a
thrift in Delaware and managed to get approval for OTS regulation of its entire operation.

Making matters even more hilarious, AIGFP — a London-based subsidiary of an American insurance company
— ought to have been regulated by one of Europe's more stringent regulators, like Britain's Financial
Services Authority. But the OTS managed to convince the Europeans that it had the muscle to regulate these
giant companies. By 2007, the EU had conferred legitimacy to OTS supervision of three mammoth firms —
GE, AIG and Ameriprise.

That same year, as the subprime crisis was exploding, the Government Accountability Office criticized the
OTS, noting a "disparity between the size of the agency and the diverse firms it oversees." Among other
things, the GAO report noted that the entire OTS had only one insurance specialist on staff — and this despite
the fact that it was the primary regulator for the world's largest insurer!

"There's this notion that the regulators couldn't do anything to stop AIG," says a government official who
was present during the bailout. "That's bullshit. What you have to understand is that these regulators have
ultimate power. They can send you a letter and say, 'You don't exist anymore,' and that's basically that.
They don't even really need due process. The OTS could have said, 'We're going to pull your charter; we're
going to pull your license; we're going to sue you.' And getting sued by your primary regulator is the kiss of
death."

When AIG finally blew up, the OTS regulator ostensibly in charge of overseeing the insurance giant — a guy
named C.K. Lee — basically admitted that he had blown it. His mistake, Lee said, was that he believed all
those credit swaps in Cassano's portfolio were "fairly benign products." Why? Because the company told
him so. "The judgment the company was making was that there was no big credit risk," he explained. (Lee
now works as Midwest region director of the OTS; the agency declined to make him available for an
interview.)

In early March, after the latest bailout of AIG, Treasury Secretary Timothy Geithner took what seemed to be a
thinly veiled shot at the OTS, calling AIG a "huge, complex global insurance company attached to a very
complicated investment bank/hedge fund that was allowed to build up without any adult supervision." But
even without that "adult supervision," AIG might have been OK had it not been for a complete lack of internal
controls. For six months before its meltdown, according to insiders, the company had been searching for a
full-time chief financial officer and a chief risk-assessment officer, but never got around to hiring either. That
meant that the 18th-largest company in the world had no one checking to make sure its balance sheet was
safe and no one keeping track of how much cash and assets the firm had on hand. The situation was so bad
that when outside consultants were called in a few weeks before the bailout, senior executives were unable
to answer even the most basic questions about their company — like, for instance, how much exposure the
firm had to the residential-mortgage market.

III. THE CRASH

Ironically, when reality finally caught up to Cassano, it wasn't because the housing market crapped but
because of AIG itself. Before 2005, the company's debt was rated triple-A, meaning he didn't need to post
much cash to sell CDS protection: The solid creditworthiness of AIG's name was guarantee enough. But the
company's crummy accounting practices eventually caused its credit rating to be downgraded, triggering
clauses in the CDS contracts that forced Cassano to post substantially more collateral to back his deals.

By the fall of 2007, it was evident that AIGFP's portfolio had turned poisonous, but like every good Wall
Street huckster, Cassano schemed to keep his insane, Earth-swallowing gamble hidden from public view.
That August, balls bulging, he announced to investors on a conference call that "it is hard for us, without
being flippant, to even see a scenario within any kind of realm of reason that would see us losing $1 in any
of those transactions." As he spoke, his CDS portfolio was racking up $352 million in losses. When the
growing credit crunch prompted senior AIG executives to re-examine its liabilities, a company accountant
named Joseph St. Denis became "gravely concerned" about the CDS deals and their potential for mass
destruction. Cassano responded by personally forcing the poor sap out of the firm, telling him he was
"deliberately excluded" from the financial review for fear that he might "pollute the process."

The following February, when AIG posted $11.5 billion in annual losses, it announced the resignation of
Cassano as head of AIGFP, saying an auditor had found a "material weakness" in the CDS portfolio. But
amazingly, the company not only allowed Cassano to keep $34 million in bonuses, it kept him on as a
consultant for $1 million a month. In fact, Cassano remained on the payroll and kept collecting his monthly
million through the end of September 2008, even after taxpayers had been forced to hand AIG $85 billion to
patch up his fuck-ups. When asked in October why the company still retained Cassano at his $1
million-a-month rate despite his role in the probable downfall of Western civilization, CEO Martin Sullivan
told Congress with a straight face that AIG wanted to "retain the 20-year knowledge that Mr. Cassano had."
(Cassano, who is apparently hiding out in his lavish town house near Harrods in London, could not be
reached for comment.)

What sank AIG in the end was another credit downgrade. Cassano had written so many CDS deals that when
the company was facing another downgrade to its credit rating last September, from AA to A, it needed to
post billions in collateral — not only more cash than it had on its balance sheet but more cash than it could
raise even if it sold off every single one of its liquid assets. Even so, management dithered for days, not
believing the company was in serious trouble. AIG was a dried-up prune, sapped of any real value, and its
top executives didn't even know it.

On the weekend of September 13th, AIG's senior leaders were summoned to the offices of the New York
Federal Reserve. Regulators from Dinallo's insurance office were there, as was Geithner, then chief of the
New York Fed. Treasury Secretary Hank Paulson, who spent most of the weekend preoccupied with the
collapse of Lehman Brothers, came in and out. Also present, for reasons that would emerge later, was Lloyd
Blankfein, CEO of Goldman Sachs. The only relevant government office that wasn't represented was the
regulator that should have been there all along: the OTS.

"We sat down with Paulson, Geithner and Dinallo," says a person present at the negotiations. "I didn't see
the OTS even once."

On September 14th, according to another person present, Treasury officials presented Blankfein and other
bankers in attendance with an absurd proposal: "They basically asked them to spend a day and check to
see if they could raise the money privately." The laughably short time span to complete the mammoth task
made the answer a foregone conclusion. At the end of the day, the bankers came back and told the
government officials, gee, we checked, but we can't raise that much. And the bailout was on.

A short time later, it came out that AIG was planning to pay some $90 million in deferred compensation to
former executives, and to accelerate the payout of $277 million in bonuses to others — a move the company
insisted was necessary to "retain key employees." When Congress balked, AIG canceled the $90 million in
payments.

Then, in January 2009, the company did it again. After all those years letting Cassano run wild, and after
already getting caught paying out insane bonuses while on the public till, AIG decided to pay out another
$450 million in bonuses. And to whom? To the 400 or so employees in Cassano's old unit, AIGFP, which is
due to go out of business shortly! Yes, that's right, an average of $1.1 million in taxpayer-backed money
apiece, to the very people who spent the past decade or so punching a hole in the fabric of the universe!

"We, uh, needed to keep these highly expert people in their seats," AIG spokeswoman Christina Pretto says
to me in early February.

"But didn't these 'highly expert people' basically destroy your company?" I ask.

Pretto protests, says this isn't fair. The employees at AIGFP have already taken pay cuts, she says. Not
retaining them would dilute the value of the company even further, make it harder to wrap up the unit's
operations in an orderly fashion.

The bonuses are a nice comic touch highlighting one of the more outrageous tangents of the bailout age,
namely the fact that, even with the planet in flames, some members of the Wall Street class can't even get
used to the tragedy of having to fly coach. "These people need their trips to Baja, their spa treatments, their
hand jobs," says an official involved in the AIG bailout, a serious look on his face, apparently not even
half-kidding. "They don't function well without them."

IV. THE POWER GRAB

So that's the first step in wall street's power grab: making up things like credit-default swaps and
collateralized-debt obligations, financial products so complex and inscrutable that ordinary American dumb
people — to say nothing of federal regulators and even the CEOs of major corporations like AIG — are too
intimidated to even try to understand them. That, combined with wise political investments, enabled the
nation's top bankers to effectively scrap any meaningful oversight of the financial industry. In 1997 and
1998, the years leading up to the passage of Phil Gramm's fateful act that gutted Glass-Steagall, the
banking, brokerage and insurance industries spent $350 million on political contributions and lobbying.
Gramm alone — then the chairman of the Senate Banking Committee — collected $2.6 million in only five
years. The law passed 90-8 in the Senate, with the support of 38 Democrats, including some names that
might surprise you: Joe Biden, John Kerry, Tom Daschle, Dick Durbin, even John Edwards.


The act helped create the too-big-to-fail financial behemoths like Citigroup, AIG and Bank of America — and in
turn helped those companies slowly crush their smaller competitors, leaving the major Wall Street firms
with even more money and power to lobby for further deregulatory measures. "We're moving to an
oligopolistic situation," Kenneth Guenther, a top executive with the Independent Community Bankers of
America, lamented after the Gramm measure was passed.

The situation worsened in 2004, in an extraordinary move toward deregulation that never even got to a vote.
At the time, the European Union was threatening to more strictly regulate the foreign operations of America's
big investment banks if the U.S. didn't strengthen its own oversight. So the top five investment banks got
together on April 28th of that year and — with the helpful assistance of then-Goldman Sachs chief and future
Treasury Secretary Hank Paulson — made a pitch to George Bush's SEC chief at the time, William
Donaldson, himself a former investment banker. The banks generously volunteered to submit to new rules
restricting them from engaging in excessively risky activity. In exchange, they asked to be released from
any lending restrictions. The discussion about the new rules lasted just 55 minutes, and there was not a
single representative of a major media outlet there to record the fateful decision.

Donaldson OK'd the proposal, and the new rules were enough to get the EU to drop its threat to regulate the
five firms. The only catch was, neither Donaldson nor his successor, Christopher Cox, actually did any
regulating of the banks. They named a commission of seven people to oversee the five companies, whose
combined assets came to total more than $4 trillion. But in the last year and a half of Cox's tenure, the group
had no director and did not complete a single inspection. Great deal for the banks, which originally
complained about being regulated by both Europe and the SEC, and ended up being regulated by no one.

Once the capital requirements were gone, those top five banks went hog-wild, jumping ass-first into the
then-raging housing bubble. One of those was Bear Stearns, which used its freedom to drown itself in bad
mortgage loans. In the short period between the 2004 change and Bear's collapse, the firm's debt-to-equity
ratio soared from 12-1 to an insane 33-1. Another culprit was Goldman Sachs, which also had the good
fortune, around then, to see its CEO, a bald-headed Frankensteinian goon named Hank Paulson (who
received an estimated $200 million tax deferral by joining the government), ascend to Treasury secretary.

Freed from all capital restraints, sitting pretty with its man running the Treasury, Goldman jumped into the
housing craze just like everyone else on Wall Street. Although it famously scored an $11 billion coup in
2007 when one of its trading units smartly shorted the housing market, the move didn't tell the whole story.
In truth, Goldman still had a huge exposure come that fateful summer of 2008 — to none other than Joe
Cassano.

Goldman Sachs, it turns out, was Cassano's biggest customer, with $20 billion of exposure in Cassano's
CDS book. Which might explain why Goldman chief Lloyd Blankfein was in the room with ex-Goldmanite
Hank Paulson that weekend of September 13th, when the federal government was supposedly bailing out
AIG.

When asked why Blankfein was there, one of the government officials who was in the meeting shrugs. "One
might say that it's because Goldman had so much exposure to AIGFP's portfolio," he says. "You'll never
prove that, but one might suppose."

Market analyst Eric Salzman is more blunt. "If AIG went down," he says, "there was a good chance Goldman
would not be able to collect." The AIG bailout, in effect, was Goldman bailing out Goldman.

Eventually, Paulson went a step further, elevating another ex-Goldmanite named Edward Liddy to run AIG — a
company whose bailout money would be coming, in part, from the newly created TARP program,
administered by another Goldman banker named Neel Kashkari.

V. REPO MEN

There are plenty of people who have noticed, in recent years, that when they lost their homes to foreclosure
or were forced into bankruptcy because of crippling credit-card debt, no one in the government was there to
rescue them. But when Goldman Sachs — a company whose average employee still made more than
$350,000 last year, even in the midst of a depression — was suddenly faced with the possibility of losing
money on the unregulated insurance deals it bought for its insane housing bets, the government was there
in an instant to patch the hole. That's the essence of the bailout: rich bankers bailing out rich bankers, using
the taxpayers' credit card.

The people who have spent their lives cloistered in this Wall Street community aren't much for sharing
information with the great unwashed. Because all of this shit is complicated, because most of us mortals
don't know what the hell LIBOR is or how a REIT works or how to use the word "zero coupon bond" in a
sentence without sounding stupid — well, then, the people who do speak this idiotic language cannot under
any circumstances be bothered to explain it to us and instead spend a lot of time rolling their eyes and
asking us to trust them.

That roll of the eyes is a key part of the psychology of Paulsonism. The state is now being asked not just to
call off its regulators or give tax breaks or funnel a few contracts to connected companies; it is intervening
directly in the economy, for the sole purpose of preserving the influence of the megafirms. In essence,
Paulson used the bailout to transform the government into a giant bureaucracy of entitled assholedom, one
that would socialize "toxic" risks but keep both the profits and the management of the bailed-out firms in
private hands. Moreover, this whole process would be done in secret, away from the prying eyes of NASCAR
dads, broke-ass liberals who read translations of French novels, subprime mortgage holders and other such
financial losers.

Some aspects of the bailout were secretive to the point of absurdity. In fact, if you look closely at just a few
lines in the Federal Reserve's weekly public disclosures, you can literally see the moment where a big
chunk of your money disappeared for good. The H4 report (called "Factors Affecting Reserve Balances")
summarizes the activities of the Fed each week. You can find it online, and it's pretty much the only thing
the Fed ever tells the world about what it does. For the week ending February 18th, the number under the
heading "Repurchase Agreements" on the table is zero. It's a significant number.

Why? 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.

No one knows who's getting that money or exactly how much of it is disappearing through these new holes
in the hull of America's credit rating. Moreover, no one can really be sure if these new institutions are even
temporary at all — or whether they are being set up as permanent, state-aided crutches to Wall Street,
designed to systematically suck bad investments off the ledgers of irresponsible lenders.

"They're supposed to be temporary," says Paul-Martin Foss, an aide to Rep. Ron Paul. "But we keep getting
notices every six months or so that they're being renewed. They just sort of quietly announce it."

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.

VI. WINNERS AND LOSERS

Stevens isn't the only person in Congress to be given the finger by the Fed. In January, when Rep. Alan
Grayson of Florida asked Federal Reserve vice chairman Donald Kohn where all the money went — only $1.2
trillion had vanished by then — Kohn gave Grayson a classic eye roll, saying he would be "very hesitant" to
name names because it might discourage banks from taking the money.

"Has that ever happened?" Grayson asked. "Have people ever said, 'We will not take your $100 billion
because people will find out about it?'"

"Well, we said we would not publish the names of the borrowers, so we have no test of that," Kohn
answered, visibly annoyed with Grayson's meddling.

Grayson pressed on, demanding to know on what terms the Fed was lending the money. Presumably it was
buying assets and making loans, but no one knew how it was pricing those assets — in other words, no one
knew what kind of deal it was striking on behalf of taxpayers. So when Grayson asked if the purchased
assets were "marked to market" — a methodology that assigns a concrete value to assets, based on the
market rate on the day they are traded — Kohn answered, mysteriously, "The ones that have market values
are marked to market." The implication was that the Fed was purchasing derivatives like credit swaps or
other instruments that were basically impossible to value objectively — paying real money for God knows
what.

"Well, how much of them don't have market values?" asked Grayson. "How much of them are worthless?"

"None are worthless," Kohn snapped.

"Then why don't you mark them to market?" Grayson demanded.

"Well," Kohn sighed, "we are marking the ones to market that have market values."

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.
"We spend hours and hours and hours arguing over $10 million amendments on the floor of the Senate, but
there has been no discussion about who has been receiving this $3 trillion," says Sen. Bernie Sanders. "It
is beyond comprehension."

Count Sanders among those who don't buy the argument that Wall Street firms shouldn't have to face being
outed as recipients of public funds, that making this information public might cause investors to panic and
dump their holdings in these firms. "I guess if we made that public, they'd go on strike or something," he
muses.

And the Fed isn't the only arm of the bailout that has closed ranks. The Treasury, too, has maintained
incredible secrecy surrounding its implementation even of the TARP program, which was mandated by
Congress. To this date, no one knows exactly what criteria the Treasury Department used to determine
which banks received bailout funds and which didn't — particularly the first $350 billion given out under Bush
appointee Hank Paulson.

The situation with the first TARP payments grew so absurd that when the Congressional Oversight Panel,
charged with monitoring the bailout money, sent a query to Paulson asking how he decided whom to give
money to, Treasury responded — and this isn't a joke — by directing the panel to a copy of the TARP
application form on its website. Elizabeth Warren, the chair of the Congressional Oversight Panel, was
struck nearly speechless by the response.

"Do you believe that?" she says incredulously. "That's not what we had in mind."

Another member of Congress, who asked not to be named, offers his own theory about the TARP process. "I
think basically if you knew Hank Paulson, you got the money," he says.

This cozy arrangement created yet another opportunity for big banks to devour market share at the expense
of smaller regional lenders. While all the bigwigs at Citi and Goldman and Bank of America who had Paulson
on speed-dial got bailed out right away — remember that TARP was originally passed because money had to
be lent right now, that day, that minute, to stave off emergency — many small banks are still waiting for help.
Five months into the TARP program, some not only haven't received any funds, they haven't even gotten a
call back about their applications.

"There's definitely a feeling among community bankers that no one up there cares much if they make it or
not," says Tanya Wheeless, president of the Arizona Bankers Association.

Which, of course, is exactly the opposite of what should be happening, since small, regional banks are far
less guilty of the kinds of predatory lending that sank the economy. "They're not giving out subprime loans
or easy credit," says Wheeless. "At the community level, it's much more bread-and-butter banking."

Nonetheless, the lion's share of the bailout money has gone to the larger, so-called "systemically
important" banks. "It's like Treasury is picking winners and losers," says one state banking official who
asked not to be identified.

This itself is a hugely important political development. In essence, the bailout accelerated the decline of
regional community lenders by boosting the political power of their giant national competitors.

Which, when you think about it, is insane: What had brought us to the brink of collapse in the first place was
this relentless instinct for building ever-larger megacompanies, passing deregulatory measures to
gradually feed all the little fish in the sea to an ever-shrinking pool of Bigger Fish. To fix this problem, the
government should have slowly liquidated these monster, too-big-to-fail firms and broken them down to
smaller, more manageable companies. Instead, federal regulators closed ranks and used an almost
completely secret bailout process to double down on the same faulty, merger-happy thinking that got us
here in the first place, creating a constellation of megafirms under government control that are even bigger,
more unwieldy and more crammed to the gills with systemic risk.

In essence, Paulson and his cronies turned the federal government into one gigantic, half-opaque holding
company, one whose balance sheet includes the world's most appallingly large and risky hedge fund, a
controlling stake in a dying insurance giant, huge investments in a group of teetering megabanks, and
shares here and there in various auto-finance companies, student loans, and other failing businesses. Like
AIG, this new federal holding company is a firm that has no mechanism for auditing itself and is run by
leaders who have very little grasp of the daily operations of its disparate subsidiary operations.

In other words, it's AIG's rip-roaringly shitty business model writ almost inconceivably massive — to echo
Geithner, a huge, complex global company attached to a very complicated investment bank/hedge fund
that's been allowed to build up without adult supervision. How much of what kinds of crap is actually on our
balance sheet, and what did we pay for it? When exactly will the rent come due, when will the money run
out? Does anyone know what the hell is going on? And on the linear spectrum of capitalism to socialism,
where exactly are we now? Is there a dictionary word that even describes what we are now? It would be
funny, if it weren't such a nightmare.

VII. YOU DON'T GET IT

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.

God knows exactly what this does for the taxpayer, but hedge-fund managers sure love the idea. "This is
exactly what the financial system needs," said Andrew Feldstein, CEO of Blue Mountain Capital and one of
the Morgan Mafia. Strangely, there aren't many people who don't run hedge funds who have expressed
anything like that kind of enthusiasm for Geithner's ideas.

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; valueswise
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.

Good luck with that, America. And enjoy tax season.

[From Issue 1075 — April 2, 2009]
 

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Let's keep our heads, while we continue to watch THE
THEATER OF THE ABSURD!!!