Best of the Week
Most Popular
1. The Trump Stock Market Trap May Be Triggered - Barry_M_Ferguson
2.Why are Central Banks Buying Gold and Dumping Dollars? - Richard_Mills
3.US China War - Thucydides Trap and gold - Richard_Mills
4.Gold Price Trend Forcast to End September 2019 - Nadeem_Walayat
5.Money Saving Kids Gardening Growing Giant Sunflowers Summer Fun - Anika_Walayat
6.US Dollar Breakdown Begins, Gold Price to Bolt Higher - Jim_Willie_CB
7.INTEL (INTC) Stock Investing to Profit From AI Machine Learning Boom - Nadeem_Walayat
8.Will Google AI Kill Us? Man vs Machine Intelligence - N_Walayat
9.US Prepares for Currency War with China - Richard_Mills
10.Gold Price Epochal Breakout Will Not Be Negated by a Correction - Clive Maund
Last 7 days
Has Next UK Financial Crisis Just Started? Bank Accounts Being Frozen - 21st July 19
Silver to Continue Lagging Gold, Will Struggle to Overcome $17 - 21st July 19
What’s With all the Weird Weather?  - 21st July 19
Halifax Stopping Customers Withdrawing Funds Online - UK Brexit Banking Crisis Starting? - 21st July 19
US House Prices Trend Forecast 2019 to 2021 - 20th July 19
MICROSOFT Cortana, Azure AI Platform Machine Intelligence Stock Investing Video - 20th July 19
Africa Rising – Population Explosion, Geopolitical and Economic Consquences - 20th July 19
Gold Mining Stocks Q2’19 Results Analysis - 20th July 19
This Is Your Last Chance to Dump Netflix Stock - 19th July 19
Gold and US Stock Mid Term Election and Decade Cycles - 19th July 19
Precious Metals Big Picture, as Silver Gets on its Horse - 19th July 19
This Technology Everyone Laughed Off Is Quietly Changing the World - 19th July 19
Green Tech Stocks To Watch - 19th July 19
Double Top In Transportation and Metals Breakout Are Key Stock Market Topping Signals - 18th July 19
AI Machine Learning PC Custom Build Specs for £2,500 - Scan Computers 3SX - 18th July 19
The Best “Pick-and-Shovel” Play for the Online Grocery Boom - 18th July 19
Is the Stock Market Rally Floating on Thin Air? - 18th July 19
Biotech Stocks With Near Term Catalysts - 18th July 19
SPX Consolidating, GBP and CAD Could be in Focus - 18th July 19
UK House Building and Population Growth Analysis - 17th July 19
Financial Crisis Stocks Bear Market Is Scary Close - 17th July 19
Want to See What's Next for the US Economy? Try This. - 17th July 19
What to do if You Blow the Trading Account - 17th July 19
Bitcoin Is Far Too Risky for Most Investors - 17th July 19
Core Inflation Rises but Fed Is Going to Cut Rates. Will Gold Gain? - 17th July 19
Boost your Trading Results - FREE eBook - 17th July 19
This Needs To Happen Before Silver Really Takes Off - 17th July 19
NASDAQ Should Reach 8031 Before Topping - 17th July 19
US Housing Market Real Terms BUY / SELL Indicator - 16th July 19
Could Trump Really Win the 2020 US Presidential Election? - 16th July 19
Gold Stocks Forming Bullish Consolidation - 16th July 19
Will Fed Easing Turn Out Like 1995 or 2007? - 16th July 19
Red Rock Entertainment Investments: Around the world in a day with Supreme Jets - 16th July 19
Silver Has Already Gone from Weak to Strong Hands - 15th July 19
Top Equity Mutual Funds That Offer Best Returns - 15th July 19
Gold’s Breakout And The US Dollar - 15th July 19
Financial Markets, Iran, U.S. Global Hegemony - 15th July 19
U.S Bond Yields Point to a 40% Rise in SPX - 15th July 19
Corporate Earnings may Surprise the Stock Market – Watch Out! - 15th July 19
Stock Market Interest Rate Cut Prevails - 15th July 19
Dow Stock Market Trend Forecast Current State July 2019 Video - 15th July 19
Why Summer is the Best Time to be in the Entertainment Industry - 15th July 19
Mid-August Is A Critical Turning Point For US Stocks - 14th July 19
Fed’s Recessionary Indicators and Gold - 14th July 19
The Problem with Keynesian Economics - 14th July 19

Market Oracle FREE Newsletter

Top AI Stocks Investing to Profit from the Machine Intelligence Mega-trend

Banking Sector Bailouts the Biggest Tax Payer Rip-off of All Time

Politics / Credit Crisis Bailouts Nov 24, 2009 - 02:23 PM GMT

By: Martin_D_Weiss

Politics

Best Financial Markets Analysis ArticleIn the scenario I’m about to paint for you, the dialog is fictional, but all the facts and figures are real.

The time: 1 AM, November 23, 2011, exactly two years from now.


The place: the White House, suddenly and unexpectedly under siege as a new financial crisis erupts.

The economic booms of 2010 have morphed into superbooms … the superbooms into bubbles … and the bubbles into busts.

Large banks are again on the brink. Financial markets are again in turmoil.

Wall Street giants like Goldman Sachs, JPMorgan Chase, and Morgan Stanley — the outstanding survivors of an off-again-on-again debt crisis — are now its primary victims.

Investments like long-term U.S. Treasury bonds — long sought as safe harbors — are now collapsing in price, turning into torpedoes that can sink even the sturdiest of portfolios.

But most important, the government’s too-big-to-fail bailouts, shotgun mergers, and mad money printing — previously hailed as cures that killed the contagion of 2008 — are now widely viewed as far worse than any disease.

President Obama and Treasury Secretary Geithner have huddled in the Oval Office for hours, struggling to find new solutions to old problems: Wall Street meltdowns, renewed threats of a great depression, millions more thrown out of work.

After a long and heated debate, the president slumps back into his armchair, signaling it’s time to talk more frankly — to reminisce about past policies and rethink what might have gone wrong.

“With 20-20 hindsight,” he remarks after an introspective pause, “it’s clear we were overly focused on the intended consequences of our efforts — the economic recovery, the bounceback in markets, the jobs saved. Meanwhile, we were blindsided by the unintended consequences, many of which have proven to be bigger, more durable and, ultimately, more impactful than the benefits we did achieve.”

The Treasury Secretary, weary from marathon meetings on precisely the same subject, nods in silent agreement.

“So, perhaps one of our tasks,” continues the president, “should be to document two basic issues: What precisely are the unintended consequences? And what exactly did we do to cause them?”

“We don’t have to,” says Geithner sheepishly.

“Why not?”

“Because it’s already been done. Those issues have already been thoroughly documented.”

“Since when?”

“Since the fall of 2009. That’s when SIGTARP — the Special Inspector General for the Troubled Asset Relief Program — revealed the mistakes we made with the giant AIG bailout. And that’s also around the time the public began to react to the enormous contradiction between massive unemployment on Main Street and the monster we helped to create on Wall Street.”

Monster Bonuses

“Monster?” queries Obama. “You mean the giant bonuses?”

“Exactly. We already knew Wall Street execs had been giving themselves megabonuses for most of the decade — — $29 billion for Citigroup’s Weill in 2003 … $27 billion for Blankfein at Goldman Sachs in 2006 … another $106 billion for Jon Winkelried and Gary Cohn, also at Goldman Sachs, in 2006-2007 … and many more. We already knew how the money from these obscenely large bonuses alone could have been enough to save millions of jobs.”

“Yes.”

“But what we did not know is how soon after the bailouts Wall Street would be at it again — first, dishing out megabonuses to heavy hitters in their trading rooms … then to sluggers in their sales departments … and later, as soon as the public tired of protesting, to themselves.”

“Exactly how soon?”

Geithner answers with questions of his own. “When was Wall Street on the verge of a total meltdown? In September of 2008! When were the record bonuses paid out? In December of 2009! So that’s 14 months. It was just 14 months later that the employee bonuses at the three big Wall Street survivors — Goldman Sachs, JPMorgan Chase, and Morgan Stanley — exceeded all prior records.”

“Even the record bonuses they paid out before the crisis?” the president asks with a mix of disbelief and disdain.

“Yes, even bigger than their record bonuses paid out before the crisis.”

“But why do we blame ourselves for all this?” the president wonders out loud.

The Bungled AIG Bailout

BRIC ETFs vs. The Dow

“In public, we don’t … and hopefully never will,” responds Geithner furtively. “But in private, we must admit that we screwed up — particularly with the AIG bailout.”

“Why?”

“For the simple reason that we — the Treasury and FRBNY, the Federal Reserve Bank of New York — didn’t just bail out AIG. Indirectly, we also bailed out all of AIG’s major counterparties, the biggest of which were Société Générale and Goldman Sachs.”

“Said who?”

“Said SIGTARP, the Special Inspector General for the Troubled Asset Relief Program, in its special report of November 2009. I have a copy of the report right here.”

“What precisely did SIGTARP find?” asks the president.

“In essence, they found that AIG’s counterparties — 16 major global banks — should have lost money in their trades with AIG, just like most investors lost money when other companies failed. But instead, AIG’s counterparties did not lose money. We made those creditors whole, practically to the penny.”

“How much did we pay ‘em?”

Before responding, the Treasury secretary flips to page 20 of the SIGTARP report and glances down at Table 2 — Total Payments to AIG Default Swap Counterparties (reproduced below).

BRIC ETFs vs. The Dow

Source: SIGTARP, November 17, 2009. “Factors Affecting Efforts to Limit Payments to AIG Counterparties,” page 20 (pdf page 24).

“Société Générale,” he says, “got $9.6 billion in collateral payments from the money we had loaned earlier to AIG. Plus, we paid Société Générale another $6.9 billion through a special purpose vehicle we created, called Maiden Lane III. In total, the French bank walked off with $16.5 billion.

“Goldman Sachs,” continues Geithner, “got $8.4 billion in collateral payments, plus another $5.6 billion from Maiden Lane, adding up to $14 billion. “Deutsche Bank got a total of $8.5 billion … Merrill Lynch — $6.2 billion … UBS — $3.8 billion … plus …”

“Please cut to the chase,” says the president impatiently. “How much overall?”

“They got $62.1 billion, plus another $2.5 billion we agreed to pay to compensate them for shortfalls in their collateral. Grand total — $64.6 billion.”

“Wait a minute!” interjects the president. “A lot of these big banks, notably Goldman Sachs, have forever insisted that they never wanted a bailout, never needed one, and never got one.”

Geithner picks up the report and waves it for emphasis. “And SIGTARP has forever disagreed.”

“What’s their conclusion?”

“In effect, SIGTARP concluded that, via this back door, the 16 banks not only got big bailouts … they never had to pay back a dime of the money.”

The Sad Saga of How Taxpayers Were Sold Out

“What do you think really happened?” asks the president.

“I don’t think; I know. Remember, I was not only there, I was mostly in charge. So I can tell you flatly: We had our backs to the wall. Sure, we asked 12 of the biggest AIG counterparties to take haircuts, to accept some losses. But 11 out of the 12 refused. So we had no choice but to give them everything they wanted.”

“Why didn’t you press harder?”

“We had no negotiating leverage. Later, with GM and Chrysler, we forced creditors to make concessions by threatening to let the automakers fail. But with AIG, we had already declared, in effect, that we’d never let it fail.”

“When?”

“Several weeks earlier — when we loaned $86 billion to AIG, the biggest bailout in history. The end result was that, when it came time to negotiate with AIG’s creditors, we could no longer function as unbiased regulators. We were already in deep — as the company’s biggest stakeholder. The creditors knew they had us over a barrel. There was no way we could twist their arms.

“If that wasn’t bad enough,” Geithner continues, “I then compounded the problem by adhering too strictly to one of FRBNY’s core values — the concept of treating all counterparties equally. That doomed the negotiations because it gave each party effective veto power over any possible concession from any other party. The way I set things up, either all the banks had to agree to concessions … or none of the banks would agree to concessions. So, needless to say, none agreed to concessions. They got everything.”

Profound Impacts

My fictional scenario ends here. But the impacts of those fateful decisions of late 2008 and early 2009 do not.

The AIG rescue was the biggest taxpayer rip-off of all time. Worse, it was the master seed that sprouted a whole series of similar taxpayer rip-offs on Wall Street.

Just connect a few of the dots, and you’ll see what I mean:

  1. The U.S. Treasury rushes to bail out AIG. That alone helps protect AIG’s counterparties from the direct losses they’d otherwise suffer in an AIG failure.
  2. The Federal Reserve Bank of New York creates a special entity to pay off AIG’s creditors in full. While ordinary U.S. investors lose fortunes even in companies that are financially viable, 16 major banks don’t lose a penny even in a company that would otherwise be bankrupt — all thanks to the Fed’s largesse.
  3. Prominent among these government-blessed banks is Goldman Sachs, Wall Street’s most extravagant giver of executive bonuses in 2006 and 2007 … and also Wall Street’s most lavish payer of employee bonuses in 2009.

The money flow is clear:

  • From taxpayers to AIG …
  • From AIG and the Fed to big Wall Street investment banks like Goldman Sachs, and then …
  • From Goldman Sachs to its employees in the form of lavish bonuses.

It is, by far, the greatest taxpayer rip-off off all time!

Don’t get sucked up into this madness!

Check your email later this morning for specific instructions on how to avoid it, even profit from it!

Good luck and God bless!

Martin

This investment news is brought to you by Money and Markets . Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com .


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules