W21st NYC's List: Bailout

• This involvement was remarkable:  Goldman, after all, was one of A.I.G.’s largest trading partners and one of the  biggest beneficiaries of the insurer’s bailout. Goldman received $13 billion  when the New York Fed, under Timothy F. Geithner, paid A.I.G.’s trading partners  in full on credit insurance they had bought from it.

   

  According to Mr. Liddy’s  testimony, Chris Cole, co-chairman of Goldman’s investment banking unit, was the  first to contact him about the A.I.G. job. Mr. Cole was working on a  private-sector rescue of A.I.G. and called Mr. Liddy the morning of Sept. 16,  2008.

• Later that day, testimony shows,  Ken Wilson, Goldman’s former vice chairman and an adviser to Mr. Paulson at the  Treasury, repeated the offer to Mr. Liddy. He accepted it. Mr. Paulson then  telephoned Mr. Liddy around 3 p.m. to discuss the matter.

   

  That evening, the bailout was  completed at the New York Fed.
• Mr. Liddy was appointed A.I.G.’s chief executive on Sept. 18. But he remained a  Goldman director until Sept. 23, and he testified that he attended a Goldman  board meeting by telephone on Sept. 21. At that meeting, the company’s directors  voted to become a bank holding company to receive additional government support.

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• Exchanges between officials got occasionally testy, especially after Mr.  Bernanke's decision to help J.P. Morgan Chase & Co. finance the rescue  buyout of Bear Stearns in March.

• Lehman could have been saved by the federal government rather than filing for  bankruptcy early on the morning of Monday, Sept. 15, 2008.
• This changed with the passage of the Emergency Economic Stabilization Bill on  Oct. 3, 2008, which provided $700 billion in TARP financing to be used to  purchase troubled assets (used in the end mostly to purchase preferred shares in  banks).
• The exchange stabilization fund was used later in the week as the financial  backing behind a Treasury guarantee for money market mutual funds, which faced  panicked withdrawals in the wake of problems at the Reserve Primary Fund.
• But this use followed broader difficulties, as short-term credit markets were  severely strained by the fallout from the money market mutual debacle, as  American corporations that relied on sales of short-term commercial paper to the  funds had to scramble for other sources of cash for their day-to-day needs.   

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• We all know how disastrous that was. So chalk up this plus for Brown-Vitter:  Eliminating risk-weights as part of a capital assessment means less reliance on  unreliable ratings.
• The bill prevents another type of fudging by requiring off-balance-sheet assets  and liabilities and derivatives positions to be included in a bank’s  consolidated assets. In addition, the capital cushion that a bank would hold  under the bill is liquid and can absorb losses easily. This capital measure  would be more transparent than the current system and could not be manipulated.
• In a truly courageous move, Brown-Vitter would require United States financial  regulators to abandon Basel III. An earlier version of Basel did nothing to  prevent the financial crisis and encouraged banks to binge on leverage.
• Brown-Vitter has other attributes as well. It would bar bank regulators from  giving nondepository institutions access to Federal Reserve lending programs.  And it would make it harder for bank holding companies to move assets or  liabilities from nonbanking affiliates, like derivatives bets held at a  brokerage unit, to the protective umbrella of the parent company that might be  rescued by taxpayers in a financial disaster.
• Thomas  M. Hoenig, the vice chairman of the Federal Deposit Insurance Corporation,  supports the bill.

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• Instead of learning from this experience, however, many on the right have chosen  to rewrite history.
• Every piece of this revisionist history has been refuted in detail. No, the  government didn’t force banks to lend to Those People; no, Fannie Mae and  Freddie Mac didn’t cause the housing bubble (they were doing relatively little  lending during the peak bubble years); no, government-sponsored lenders weren’t  responsible for the surge in risky mortgages (private mortgage issuers accounted  for the vast majority of the riskiest loans).

• For here we are, more than five years into the worst  economic slump since the Great Depression, and one of our two great political  parties has seen its economic doctrine crash and burn twice: first in the run-up  to crisis, then again in the aftermath. Yet that party has learned nothing; it  apparently believes that all will be well if it just keeps repeating the old  slogans, but louder.

   

  It’s a disturbing picture, and one that bodes ill for  our nation’s future.

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• More than five years later, the Fed continues to prop up the financial system,  and the  transcripts of the 2007 meetings, released after a standard five-year delay,  provide fresh insight into the decisions made at the outset of its great  intervention.

• They're in deep trouble, but they won't die, because our current president, like  the last one, apparently believes it's better to project a false image of  financial soundness than to allow one of our oligarchic banks to collapse under  the weight of its own corruption. Last year, the Federal Reserve allowed Bank of  America to move a huge portfolio of dangerous bets into a side of the company  that happens to be FDIC-insured, putting all of us on the hook for as much as  $55 trillion in irresponsible gambles. Then, in February, the Justice  Department's so-called foreclosure settlement, which will supposedly provide $26  billion in relief for ripped-off homeowners, actually rewarded the bank with a  legal waiver that will allow it to escape untold billions in lawsuits.
• So McColl and his banking minions set out to break down the interstate banking  laws. First, in 1981, they used a legal loophole in Florida law to buy a bank  branch there – evading the federal ban on out-of-state owners. Then, following a  Supreme Court decision in 1985 that allowed banks to cross state lines within a  designated region, he and Crutchfield went on a conquering spree worthy of a  Mongol horde, buying up a host of banks in other Southern states. McColl, a  silver-haired ex-Marine who would eventually be celebrated for bringing a  "military approach" to his business, went to ridiculous lengths to play up the  manly conquest aspect of his bank's merger frenzy, rewarding key employees with  crystal hand grenades. By 1995, McColl had acquired more than 200 banks and  thrifts across the South, while Crutchfield had snapped up 50.

• A few years later, after Congress repealed most of the barriers to interstate  banking, McColl took over Bank of America, realizing his dream of creating what  one trade publication called "the first ocean-to-ocean bank in the nation's  history." Later, after McColl retired, his successors kept up his acquisitive  legacy, buying notorious mortgage lender Countrywide Financial in 2008, and  using some of the $25 billion in federal bailout funds they received to acquire  dying investment bank Merrill Lynch. Both firms were infamous for their exotic  gambles and their systematic cutting of regulatory corners – meaning that the  shopping spree had burdened Bank of America with a huge portfolio of doomed  trades and criminal conspiracies.

• And why? The rationale for allowing that merger spree in the first place was  based on a phony assumption: that big banks would somehow be more efficient and  more profitable than small ones. "The whole premise of a Citibank or a Chase or  a Bank of America is wrongheaded," says Susan Webber, an analyst who writes one  of the most popular and respected financial blogs under the pseudo­nym Yves  Smith. "Studies consistently show that after a certain size threshold, bank  efficiency taps out. In fact, it turns out that all those cost savings the banks  were supposed to enjoy from being bigger were actually based on cutting corners  and fraud."

• How did they make these loans in the first place? By committing every kind of  lending fraud imaginable – particularly by entering fake data on home loan  applications, magically turning minimum-wage janitors into creditworthy wage  earners. In 2006, according to a report by Credit Suisse, a whopping 49 percent  of the nation's subprime loans were "liar's loans," meaning that lenders could  state the incomes of borrowers without requiring any proof of employment. And no  one lied more than Countrywide and Bank of America. In an internal e-mail  distributed in June 2006, Countrywide's executives worried that 40 percent of  the firm's "reduced documentation loans" potentially had "income overstated by  more than 10 percent... and a significant percent of those loans would have  income overstated by 50 percent or more."

• Many of the nation's largest insurers, in fact, are now suing the pants off  Bank of America, claiming they were fraudulently induced to insure the bank's  "high lending standards." AMBAC, the second-largest bond insurer in America,  went bankrupt in 2010 after paying out some $466 million in claims over 35,000  Countrywide home loans. After analyzing a dozen of the mortgage pools, AMBAC  found that a staggering 97 percent of the loans didn't meet the stated  underwriting standards. That same year, the Association of Financial Guaranty  Insurers, a trade group representing firms like AMBAC, told Bank of America that  it should be repurchasing as much as $20 billion in defective mortgages.

• This is the crossroads where Bank of America now lives – trying to convince  the government to allow it to remain in business, perhaps even asking for  another bailout or two, while it avoids paying back untold billions to all of  the institutional customers it screwed, the list of which has grown so long as  to almost be comical. Last year, the bank settled with a group of pension and  retirement funds, including public employees from Mississippi to Los Angeles,  that charged Bank of America and Merrill with misrepresenting the value of more  than $16 billion in mortgage-backed securities. In the end, the bank paid only  $315 million.
• In the end, says Mehta, Bank of America's fraud resulted in "one of the biggest  reverse transfers of wealth in history – from pensioners to financiers. What the  99 percent should understand is that Wall Street knowingly inflated the bubble  by engaging in rampant mortgage fraud – and then profited from the collapse of  their own exuberance by devising a way to shift the losses to countless pension  funds, endowments and other innocent investors."

• It gets worse. Last fall, some of the bank's biggest creditors and  counterparties started to get nervous about the mountain of toxic bets still  sitting on Merrill Lynch's books – a generation of ill-considered, complex,  exotic derivative trades, bets on bets on bets on shaky subprime mortgages,  sitting there on the company balance sheet, waiting to explode. Nobody felt good  lending Bank of America money with that dangerous shitpile lying there. So they  asked the bank to move a chunk of that mess from Merrill Lynch onto Bank of  America's own balance sheet. Why? Because Bank of America is a federally insured  depository institution. Which means that the FDIC, and by extension you and me,  is now on the hook for as much as $55 trillion in potential losses. Black, the  former regulator, calls the transfer an "obscenity. As a regulator, I would have  never allowed it. Transferring risk to the insured institution crosses the  reddest of red lines."

• Oh, and one more thing, since we're talking about avoiding bills: Bank of  America didn't pay a dime in federal taxes last year. Or the year before. In  fact, they got a $1 billion refund last year. They claimed it was because they  had pretax losses of $5.4 billion in 2010. They paid out $35 billion in bonuses  and compensation that year. You do the math.
• But the only number that really matters is this one: $37 billion. That's the  total bonus and compensation pool this broke-ass, state-dependent,  owing-everybody-in-sight bank paid out to its employees last year.

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• And if we ask why Apple has created so few American jobs, we get an insight into  what is wrong with the ideology dominating much of our politics.
• the advantages of industrial clusters — in which producers, specialized  suppliers, and workers huddle together to their mutual benefit
• And Chinese manufacturing isn’t the only conspicuous example of these advantages  in the modern world. Germany remains a highly successful exporter even with  workers who cost, on average, $44 an hour — much more than the average cost of  American workers. And this success has a lot to do with the support its small  and medium-sized companies — the famed Mittelstand — provide to each other via  shared suppliers and the maintenance of a skilled work force.
• Prosperity depends on the synergy between companies, on the cluster, not the  individual entrepreneur.
• The case for this bailout — which Mr. Daniels has denounced as “crony  capitalism” — rested crucially on the notion that the survival of any one firm  in the industry depended on the survival of the broader industry “ecology”  created by the cluster of producers and suppliers in America’s industrial  heartland. If G.M. and Chrysler had been allowed to go under, they would  probably have taken much of the supply chain with them — and Ford would have  gone the same way.

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• It is dispiriting, of course, that we are still learning about the billions  provided to various financial firms during the crisis. Another sad element to  this mess is that getting the truth requires the legal firepower of an  organization as rich as Bloomberg.
• Those six institutions accounted for 63 percent of the average daily borrowings  from the Fed by all publicly traded United States banks, money management and  investment firms, Bloomberg said.
• Numbers for individual companies were equally astonishing. For example, the Fed  provided Bear Stearns with $30 billion to see it through its 2008 shotgun  marriage with JPMorgan. This was in addition to the $29.5 billion in assets  purchased by the Fed from Bear to assist in the buyout by JPMorgan. Citigroup,  meanwhile, tapped the Fed for almost $100 billion in January 2009 — its peak  during the crisis — and Morgan Stanley received $107 billion in Fed loans in  September 2008.
• But the information is revealing nonetheless. The fact is, investors didn’t know  how dire the situation was at these institutions. At the same time that these  banks were privately thronging the teller windows at the Fed, some of their  executives were publicly espousing their firms’ financial solidity.
• These disclosure lapses are disturbing to Lynn E. Turner, a former chief  accountant at the S.E.C. Since 1989, he said, commission rules have required  public companies to disclose details about material federal assistance they  receive. The rules grew out of the savings  and loan crisis, during which hundreds of banks failed and others received  government help.
• “These banks and the Fed have never believed in transparency,” Mr. Turner said.

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• The suit alleges that by getting a nearly 80% stake in AIG in exchange for  providing tens of billions of dollars in aid, the government took valuable  property from Starr and other AIG shareholders in violation of the Fifth  Amendment, which says that private property can't be taken for "public use,  without just compensation."