Of Crashes, Failures and Bailouts - Round IV

You learn something new every day. Bill Moyers had William Black on his Journal recently. (Click title for link.) William Black, in case you don't know (I didn't), was a regulator during the Keating Five Savings and Loan scandal of the 1980's. That is, when it comes to financial fraud and the law surrounding it, he knows his shtuff.

That's not the new thing I learned, though it is a new thing I learned.

Turns out, AIG alone is bigger than the S&L scandal. Unbelievable. Turns out, AIG was used to funnel money - BAILOUT FUNDS - to supposedly "solvent" banks. Which banks? Well, by now you've heard (at least if you are someone who would be reading this blog) AIG passed bailout funds on to such stalwarts as:

Country		AIG-related payments
			billions of dollars
	US		43.5
	France		19.1
	Germany		16.7
	UK		12.7
	Switzerland		5.4
	Netherlands		2.3
	Canada		1.1
	Spain		0.3
	Denmark		0.2
			101.3

AIG-Related Payments
			Country
Bank		Amount	Total	Country
		billions of dollars
Bank of Montreal		1.1	1.1	Canada
Danske		0.2	0.2	Denmark
Société Générale		11.9		France
BNP Paribas		4.9		France
Calyon		2.3		France
			19.1	France
Deutsche Bank		11.8		Germany
Dresdner Kleinwort		2.2		Germany
Deutsche Zentral-Genossenschaftsbank		1		Germany
DZ Bank		0.7		Germany
KFW		0.5		Germany
Dresdner Bank AG		0.4		Germany
Landesbank Baden-Wuerttemberg		0.1		Germany
			16.7	Germany
ING		1.5		Netherlands
Rabobank		0.8		Netherlands
			2.3	Netherlands
Banco Santander		0.3	0.3	Spain
UBS		5		Switzerland
Credit Suisse		0.4		Switzerland
			5.4	Switzerland
Barclays		8.5		UK
HSBC Bank USA		3.5		UK
Royal Bank of Scotland		0.7		UK
			12.7	UK
Goldman Sachs		12.9		US
States and Cities		12		US
Merrill Lynch		6.8		US
Bank of America		5.2		US
Citigroup		2.3		US
Wachovia		1.5		US
Morgan Stanley		1.2		US
AIG International Inc.		0.6		US
JPMorgan		0.4		US
Citadel		0.2		US
Paloma Securities		0.2		US
Reconstruction Finance Corp		0.2		US
			43.5	US

Aside: You may recall I earlier posted about the bailout money not going to just American banks. Note that over 50% of the money AIG passed out - that you and I are bailed AIG out with - went to foreign entities. (Many thanks to Karl Denninger on that point.)

Black on AIG payments:

...remember, they kept secrets from everyone.

BILL MOYERS: A.I.G. did?

WILLIAM K. BLACK: ...no, Treasury and both administrations. The Bush administration and now the Obama administration kept secret from us what was being done with AIG. AIG was being used secretly to bail out favored banks like UBS and like Goldman Sachs. Secretary Paulson's firm, that he had come from being CEO. It got the largest amount of money. $12.9 billion. And they didn't want us to know that. And it was only Congressional pressure, and not Congressional pressure, by the way, on Geithner, but Congressional pressure on AIG. Where Congress said, "We will not give you a single penny more unless we know who received the money."

Ah! Scandalous! The use of words like "secretly" is nice to see. I love people who tell it like it is because, if you don't, who the hell knows whether they can trust you? And remember, this guy Black has been there and done that.

But that's not the thing I learned. You and I already knew this.

Black talks about FRAUD. Yeah, baby! Now we're gettin' somewhere! You'd swear he shaves with Occam's Razor, he lays it out so simply.

WILLIAM K. BLACK: Fraud is deceit. And the essence of fraud is, "I create trust in you, and then I betray that trust, and get you to give me something of value." And as a result, there's no more effective acid against trust than fraud, especially fraud by top elites, and that's what we have.

Up to now everyone is just calling it bad luck, unforeseeable, a business cycle, a lack of trust, a lack of liquidity. Black calls it fraud.

BILL MOYERS: So you're suggesting, saying that CEOs of some of these banks and mortgage firms in order to increase their own personal income, deliberately set out to make bad loans?

WILLIAM K. BLACK: Yes.

BILL MOYERS: How do they get away with it?...

WILLIAM K. BLACK: All of those checks and balances report to the CEO, so if the CEO goes bad, all of the checks and balances are easily overcome... And the bonus programs are exactly how you do that.

BILL MOYERS: If I wanted to go looking for the parties to this, with a good bird dog, where would you send me?

WILLIAM K. BLACK: Well, that's exactly what hasn't happened. We haven't looked, all right? The Bush Administration essentially got rid of regulation, so if nobody was looking... Where would you look? You'd look at the specialty lenders... liars' loans...

...You tell us what your assets are, and we agree to believe you. We won't check on any of those things...

...We know that they said that to borrowers.

BILL MOYERS: Is it possible that these complex instruments were deliberately created so swindlers could exploit them?

WILLIAM K. BLACK: Oh, absolutely. This stuff, the exotic stuff that you're talking about was created out of things like liars' loans, that were known to be extraordinarily bad. And now it was getting triple-A ratings. Now a triple-A rating is supposed to mean there is zero credit risk. So you take something that not only has significant, it has crushing risk. That's why it's toxic. And you create this fiction that it has zero risk. That itself, of course, is a fraudulent exercise. And again, there was nobody looking, during the Bush years...

BILL MOYERS: So if your assumption is correct, your evidence is sound, the bank, the lending company, created a fraud. And the ratings agency that is supposed to test the value of these assets knowingly entered into the fraud...

WILLIAM K. BLACK: Right, and the investment banker that — we call it pooling — puts together these bad mortgages, these liars' loans, and creates the toxic waste of these derivatives. All of them do that...

Wow.

But that's not the thing I learned, either. Hey, we knew all this, even before anyone said it out loud, right?

WILLIAM K. BLACK: The FBI publicly warned, in September 2004 that there was an epidemic of mortgage fraud, that if it was allowed to continue it would produce a crisis at least as large as the Savings and Loan debacle. And that they were going to make sure that they didn't let that happen.

Ah, but we knew that, too. But did you know after 9/11 Bush pulled 500 white collar crime specialists into the War on Terror? OK. Fine. But he never replaced them.

Oops.

Well, not really oops, more like, "Duh!" The Bush admin did everything in their power to enrich Big Business. Still, I didn't know that.

But that's not the new thing I learned, either.

Did you know Geithner is breaking the law? No, a real, specific law.

WILLIAM K. BLACK: ...they violate the rule of law. This is being done just like Secretary Paulson did it. In violation of the law. We adopted a law after the Savings and Loan crisis, called the Prompt Corrective Action Law. And it requires them to close these institutions. And they're refusing to obey the law.

I, you, we, we all knew there was conflict of interest. We all assumed laws were being broken. We all just... well... just. That's what we did. But these people are breaking the law with impunity while we... just. Now, we kind of expect a little hanky-panky in such a complex situation, pretty much by default. This goes beyond that.

And THIS is the thing I didn't know: There's a law.

This law forces regulators to put these banks into receivership. Receivership would reveal all the toxic assets. That would set the real value of the banks. (Pennies.) And THAT would alter finance forever. Or, at least until we forget the lessons of this meltdown like we did the lessons of the previous one.

But it would also allow recovery. With all assets known, there can be trust that what you buy is what you get. Assets could be sold. Healthy companies with honest management could do something with them. The debt burden would lie on the fools who did this, not on you and I. And our grandchildren.

Oh, and Black says this isn't something Paulson and Geithner could do, it's something they were/are mandated to do by the Prompt Corrective Action Law.

WILLIAM K. BLACK: Well, you do a receivership. No one -- Ronald Reagan did receiverships. Nobody called it nationalization.

BILL MOYERS: And that's a law?

WILLIAM K. BLACK: That's the law.

BILL MOYERS: So, Paulson could have done this? Geithner could do this?

WILLIAM K. BLACK: Not could. Was mandated--

BILL MOYERS: By the law.

WILLIAM K. BLACK: By the law.

BILL MOYERS: This law, you're talking about.

WILLIAM K. BLACK: Yes.

BILL MOYERS: What the reason they give for not doing it?

WILLIAM K. BLACK: They ignore it. And nobody calls them on it.

This is lawbreaking that is slowing economic recovery. It is siphoning the future for the present, but only for a very lucky, manipulative, rich, lying, felonious few. (Have you taken a gander at wealth inequality in the US lately?) Our taxes will be paying for this for generations. Literally. The US is in the process of impoverishing it's citizens for a generation or more.

Will you act?

The interview has more. Watch it or read the transcript. If you dare.

Cheers