How Big Firms Were Allowed to Leverage Debt to Assets at 33:1
A must read article from the New York Times explains how a little-known ruling in 2004 eliminated the requirement that large investment banks retain a reasonable amount of cash to cover losses.
Here’s an excerpt:
Many events in Washington, on Wall Street and elsewhere around the country have led to what has been called the most serious financial crisis since the 1930s. But decisions made at a brief meeting on April 28, 2004, explain why the problems could spin out of control. The agency’s failure to follow through on those decisions also explains why Washington regulators did not see what was coming.
On that bright spring afternoon, the five members of the Securities and Exchange Commission met in a basement hearing room to consider an urgent plea by the big investment banks.
They wanted an exemption for their brokerage units from an old regulation that limited the amount of debt they could take on. The exemption would unshackle billions of dollars held in reserve as a cushion against losses on their investments. Those funds could then flow up to the parent company, enabling it to invest in the fast-growing but opaque world of mortgage-backed securities; credit derivatives, a form of insurance for bond holders; and other exotic instruments.
The five investment banks led the charge, including Goldman Sachs, which was headed by Henry M. Paulson Jr. Two years later, he left to become Treasury secretary. [The fox guarding the hen house possibly?]
Still, nothing illegal happened. There’s no one to prosecute since they got permission. How scary is that???
On the topic of a dissenting view of the bailout, check out this awesome clip from Representative Kaptur from Ohio (Thanks The Soccer Mom Vote!) While I have argued that it was probably necessary to bail out the ultra-wealthy, I liked that Kaptur called out the Paulsen crew for the fear-mongering and obfuscation. Considering Paulsen was somewhat instrumental in CAUSING the meltdown. (see above!)
A Crisis Without Criminals
My husband has a friend who worked on Wall Street packaging crummy mortgages into bundled securities and selling them to unsuspecting buyers. We’ll call him Boris. Boris is a real person. He was probably making $500K a year, and really needed that income to pay for the house in the Hamptons, private school for the kids, and a 6,000-square-foot penthouse apartment in NY. Boris had, and still has, a lifestyle to maintain. So he did what everyone he knew in the business was doing: he sold worthless, bundled junk to any buyer because it was rated well, and he wasn’t the one who rated it. In the downturn, his company (which will remain unnamed) let many of their brokers go. Boris did not end up on the streets. He found an equally high-paying job helping a new institution to recognize risky investments. After all, he knew exactly what they looked like.
Did I mention that Boris thought the whole thing was pretty funny at the time? That he was getting away with such a blatant ripoff and making tons of money doing it? The many brokers and executives running Wall Street knew EXACTLY what they were doing. But they didn’t stop because it was all highly profitable. And NOT ILLEGAL.
Even those massive bonuses that the execs paid themselves, $5 MILLION for Martin Sullivan, the departing CEO of AIG, were not illegal.
So Congress is giving them a verbal lashing. “Ow! Stop it! That hurts!” Our country and the world’s financial systems are tanking horribly and they get a verbal lashing. Sullivan keeps the $5 million and my husband’s friend Boris keeps the house in the Hamptons.
And now we get Neel Kashkari, our 35 year old boy genius to manage the Office of Financial 
Stability worth $700 billion of taxpayer dollars. A little youth obsession anyone? Wasn’t there a more senior, seasoned, wise choice for this position? Not that I’m nervous or anything, but Kashkari is the same age as Boris. And it may be me, but he’s got the look of mad ambition. Gawd I’m tired of mad ambition. It’s so 2007. And so McCain.
To Bail, Or Not To Bail… That Is the Question
The short version: Paulsen and Pelosi thought they had a done deal. A faction of house Republicans (and some Democrats)were unhappy with the bill. McCain showed up at the talks, told Boehner that the Republicans could not support the plan without core changes. Obama pressed McCain on alternatives. McCain refused to answer and left the meeting. Nancy made a speech. The house voted. The measure failed.
The big question is whether or not it was a good thing that the bailout failed. They’re nationalizing banks in Britain, Belgium, and Iceland. Still, it’s unclear whether the bailout is actually necessary. Here’s my observation: Our country’s economic system is predicated on the success of the ultra-wealthy. Nobody talks about this any more since Ayn Rand, but it’s a fact. If the captains of industry don’t succeed, we all fail. We are the wide-end of the pyramid supporting the top. Conversely, if there’s no top, there are no jobs, no grocery stores, no corporations to employ millions. Our system is capitalistic. It’s the nature of the beast. So, what the president and congresspeople cannot say, is that we need to bail out a lot of ultra-wealthy people or we’re all screwed.
Here’s a quote from a 2005 Businessweek article discussing who owns AIG:
AIG has a highly unusual arrangement with three private entities, governed and controlled by Greenberg and other AIG executives. Each serves a different purpose and raises unique concerns. SICO is a holding company that owns about 12% of AIG stock — making it the company’s largest shareholder — and pays out some of that stock to an elite group of AIG managers as deferred compensation. Greenberg and other AIG directors sit on the board, have large personal stakes, and decide who gets paid what. Regulators believe SICO hides executive pay and takes away powers that should rightly lie with the compensation committee of the board.
C.V. Starr & Co., on the other hand, is a group of agencies that develops business and issues specialized policies for AIG. It’s owned and operated by AIG executives — many of whom perform functions similar to what they do at AIG — and controls 1.8% of AIG shares… The arrangement creates endless possibilities for conflicts of interest. Says North Carolina State Treasurer Richard H. Moore, who oversees a stake in AIG worth more than $300 million: “I don’t think you can have a publicly traded company that allows board members to own a private entity that does business with the publicly traded company. [It's] impossible to know if shareholders are being taken advantage of.”
Yikes. Thank goodness the government bailed those guys out.
Is it fair? No. Is it right? I don’t know. But it is a fact of our country, the great secret the Republicans, who have become the great guards of the wealthy, don’t talk about. It’s the secret most Americans don’t want to think about. We spend all our time imagining that someday, we or our children will make it to that top income bracket. The American Dream. Republicans know this. They know it so well, that they’re planning a big distraction to get their guy elected.
According to the Times Online:
Inside John McCain’s campaign the expectation is growing that there will be a popularity boosting pre-election wedding in Alaska between Bristol Palin, 17, and Levi Johnston, 18, her schoolmate and father of her baby. “It would be fantastic,” said a McCain insider. “You would have every TV camera there. The entire country would be watching. It would shut down the race for a week.”
Don’t think about the bailout. The press will keep you titillated with BUZZ about Bristol’s choice of wedding dress to cover “the bump.” Aaaaack!
$700 Billion: What it Could Pay For
So, I was trying to get a vision for how much money $700 billion dollars really is, especially since “billion” sounds so much like “million” that I’m failing to grasp the geometry of the difference. I did some minor research and came up with these estimates. Each of these is a separate estimate for the $700,000,000,000:
- $3,000 per person in the US. Family of four worth $12,000. Family of ten worth $30,000. (current US pop: 305 million)
- $104 per person across the planet. EVERYONE ON THE PLANET!!! (current population: 6.7 billion)
- $10,000 per single-family-detached house in US. (Estimated number of houses is 70 million.)
- $8,860 per adult currently estimated to be struggling with health care debt (current estimate 79 million).
- $19,178 per person currently living below the poverty line. $76,712 per family of four. (36.5 million for 2006 estimate.)
- $800 million to 875 research facilities to pay for R&D on developing new antibiotics.
- $2,187,500 per person currently employed as a securities, commodities, or financial services sales agent in the US (320,000 as of 2006).
oh my.
“It’s not based on any particular data point,” a Treasury spokeswoman told Forbes.com Tuesday. “We just wanted to choose a really large number.”
Oh. My.
Or it could pay for roughly 16 months of US military spending.
I think I might be ill.
The Invisible Hand Just Slapped Us All. Are We Awake Yet?
Oh yeah. It’s cool. My government owns a great big company, an unimaginably huge company called AIG. All over the world the socialist governments that we have scorned (France, Venezuela, heck – Cuba!) are laughing. Hard. Because this is the kind of socialism the US offers: socialism for investors. We don’t bother using our grand wealth to pay for things like six weeks of vacation. That would be such a waste!! We’d rather work ourselves to the bone and give the money away to people who made bad investments: on houses, on hedge funds, on way-swapped out bad credit not worth the paper. We’d rather sweat and toil in factories for rotten “minimum-wage” jobs and then die slow deaths from diseases that are not covered by insurance. We know how to live the life! The great Puritan ethic of hard-work will never die!
Unless, of course, you are an investment banker still collecting your massive bonus from last year. The one you get even though your company went down in flames. Because everyone knows, ever American at least, people with money deserve more money, much more than people who’ve never had any. Yay!
Is it unpatriotic of me to question these actions? We could’ve paid for so many productive helpful programs and improved the quality of life for so many with $700 billion.
This country has been divided for too long between intransigent, ideology-driven parties that 
don’t ever even look at our country’s fundamental flaws. Isn’t anyone ready to have a real conversation about better models? Or are we still going to perpetuate the lie that pure capitalism trumps all.
There’s no name for a party I’d love, but it would enjoy all the freedoms of Libertarians and all the peace-inducing, care-taking of Socialists.
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