Goldman Sachs

A.I.G. Made Easy

 
Copyright Korea Times

Had insurance giant A.I.G. collapsed, losses from its failed insurance coverage would have rippled through banks and investment banks worldwide, destabilizing the world economy.

Yet A.I.G. set aside no reserves to cover the risk of default on those securities it collected premiums to insure. Why should it? Securities rating agencies ranked even the riskiest of those securities akin to U.S.-government bonds with virtually no chance of default.

A.I.G. professed to insure high-risk loans packaged and resold as low-risk securities to unwary pension funds. In a financial markets version of musical chairs, A.I.G. could afford to be the last one standing, confident they were too big to fail. Let’s keep it simple: imagine the casino skim taken to global scale as players extracted fees at each step along the way.

A.I.G.’s lack of financial reserves did not inhibit its financial products unit from charging handsome fees while its insurance unit pocketed vast premiums. A.I.G.’s rare triple-A rating lent the firm an image of strength and stability even as it “insured” the riskiest securities backed by the least secure of subprime mortgages.

A.I.G.’s financial “creativity” induced A.I.G. clients to believe their premiums would cover the risk of default. Heads A.I.G. wins. Tails and we’re told that taxpayers must pay. A precedent was set with the massive savings and loan fraud of the late-1980s when policy changes enabled a similar financial “pump-and-dump.” As real estate prices soared, cash was skimmed at the top of the market to acquire assets cheaply at the fire-sale bottom.

The origins of this fraud can be traced to a “Chicago” mindset that likens unfettered financial freedom to personal freedom. The public interest, we’re assured, is best served by allowing money to freely work its will worldwide. Fed Chairman Alan Greenspan reassured us that “financial creativity” would protect us from the very “irrational exuberance” that he enabled with a combination of easy money and free market ideology.

In a classic exercise in political distraction, the public is now incensed at a reported $165 million in incentive payments to the A.I.G. geniuses behind this financial creativity. In truth, their real bonus figure is closer to $450 million. Albeit outrageous, it totals less than one quarter of one percent of a taxpayer bailout for A.I.G. poised to top $200 billion.

Forced to disclose to which firms the first $85 billion in bailout funds were paid, A.I.G. conceded that 16 of the top 22 institutions were foreign-owned firms. Goldman Sachs, a key node in this transnational network of financial creativity, was paid $13 billon by A.I.G. That’s in addition to the $10 billion that Washington paid directly to Goldman last fall.

Obama adviser Larry Summers succeeded Goldman Sachs chair Robert Rubin as Treasury Secretary when key policies were changed that enabled this fraud. He also handpicked a Harvard advisory team who oversaw a similar fraud that financially pillaged the Russian economy. When Moscow hit the “reset” button in its shift from state to private ownership, a national scale fraud created an oligarchy that dominates the Russian economy.

As soon as Russia’s restructuring was complete, its beneficiaries cited sanctity of contract to protect the spoils of their massive fraud while a deceived Russian public was driven into poverty. There, a massive “loan for shares” fraud enabled financial sophisticates to emerge dominant. Here, a massive “funds for shares” program turned to hedge funds and private equity firms to rescue us from our Greenspan-enabled profligacy.

To facilitate an American-style “reset,” government debts will be secured by our full faith and credit to help financial sophisticates buy trashy debt securities from A.I.G.’s defrauded clients. That cost will reduce fiscal resources required to address the retirement needs of 78 million Baby Boomers whose pension funds were ravaged by this “Chicago” fraud.

As this cash-for-trash program proceeds, who will emerge as dominant owners of the nation’s distressed financial sector? Answer: the senior partners of hedge funds and private equity funds—who already dominate the Forbes 400 list of richest Americans.

As in Russia, debate is being framed around sanctity of contract to insulate from a deceived public a vast transfer of wealth into a few hands. Summers cited that sanctity to insist that A.I.G.’s financial products unit be allowed to keep their half-billion dollars in taxpayer-paid bonuses. Obama initially opposed the bonuses while an incensed House approved legislation imposing a 90% tax. Chicagoan Obama has since backed down. That tax could have set a precedent for a bilked public to recover other stolen wealth.

The real issues remain obscured in the outrage over executive pay while the entire economy is being “reset” in plain sight. The policy changes proposed by Summers & Co. will create a uniquely American-style oligarchy. As taxpayers are stuck with the mortgage, our creative financial sophisticates will get the house. Is this the future that Americans want?

Another intelligence “dot disconnect” may be in the works. While Secretary of Homeland Security Janet Napolitano cites our porous borders as the primary danger, intelligence agencies confirm that our weakened economy poses the top threat to national security.

How was U.S. security improved by enabling A.I.G. to make massive payments to foreign banks? How is our national interest served by taking us deeper into debt in order to bail out complicit bankers while creating a Russian-style oligarchy? If those simple questions were asked, the answers would lead us to those who orchestrated this greatest heist in history. And to those now enacting policies destined to make a bad situation worse.

March 24, 2009

For more background and a better understanding of the situation AT LARGE, please visit my website at http://www.criminalstate.com and have a quick peek at my book “Criminal State“.

Goldman Sachs

Warren Buffet—Wall Street’s Teflon Don?

Lionized as the world’s most astute investor, Warren Buffet’s recent acquisitions drew on networks that this Wall Street legend may prefer remain obscure. Yet the ongoing market meltdown reveals how Berkshire Hathaway tapped the U.S. Treasury to buy Wachovia Bank with the help of tax dodges that left even the experts speechless.

One day after Wachovia agreed to be acquired by Citigroup, Treasury Assistant Secretary Eric Solomon published a notice that transformed Wachovia’s $74 billion in losses into $25 billion in potential tax savings for Wells Fargo, Berkshire’s second largest holding. Based on that notice, Buffet renewed a Wells Fargo bid for Wachovia that he had withdrawn just days earlier.

That acquisition typifies the murky relationships key to Buffet’s top ranking in the Forbes 400 list of richest Americans. He bested Citi not with financial expertise but with well-timed political influence that, in effect, treated the U.S. Treasury as his personal bank.

His latest built on the foundation of an earlier bank stock meltdown when, in 1990, Berkshire acquired 10% of Wells Fargo as its share price plummeted by half in the financial bloodbath that followed a nationwide savings and loan fraud. Today’s Wall Street rout resembles the S&L bust but without the perspective of time required to grasp that this latest collapse is likewise a nationwide fraud—in which Buffet was both perpetrator and beneficiary.

At the core of this latest pump-and-dump are the credit rating agencies: Fitch, S&P and Moody’s. Investors recall the key role played in the dotcom fraud by Citigroup analyst Jack Grubman. His inflated financial projections lured investors to over-priced telecom stocks while Citi lent them money, provided them investment banking, sold them insurance and even managed their pension funds. Rating agencies filled the analyst’s role in this latest fraud by making junk securities appear equivalent in risk to gilt-edged government bonds.

Berkshire Hathaway not only owns a 20% interest in Moody’s, Buffet also controls a bond insurer to which Moody’s gave a triple-A rating. But that’s only the most obvious of the conflicts-of-interest that enriched the Oracle of Omaha and his loyal followers who make an annual pilgrimage to Nebraska to marvel at his homespun wisdom.

Much as Solomon’s ruling transformed Wachovia losses into Wells Fargo assets, Moody’s ratings converted financial straw into gold. Or, as during the dotcom era, into fool’s gold when investors realized that genuine risk analysis had been replaced with what the public could be deceived to believe. In return, Moody’s pocketed record fees for Buffet.

Solomon’s ruling was the first of two expanding the losses that banks could use to reduce future taxes. In effect, he shifted to the Treasury much of the cost of those phony ratings along with the entire cost of Buffet’s $25.4 billion purchase of Wachovia. As taxpayers absorb the fiscal pain—an estimated $140 billion—savvy insiders will pocket the gain while also quickening the pace at which banks are consolidated into ever fewer hands.

That barely scratches the surface of the mega-fraud now underway. Over a 10-day stretch in September—amid taxpayer bailouts for AIG, Fannie Mae and Freddie Mac and a bankruptcy filing by Lehman Brothers—the shares of Goldman Sachs dropped 36%. The firm quickly gained approval to become a bank holding company and completed a $5 billion offering, diluting its shareholders by 20%. Under the leadership of Lloyd Blankfein, Goldman had operated more as a hedge fund than a brokerage firm or an investment bank, generating steady returns that relied on bogus credit ratings.

As those phony ratings became transparent and capital markets tumbled, Berkshire received $8.2 billion in value for its $5 billion cash infusion when Buffet further hammered Goldman’s public shareholders by using Berkshire’s cash hoard to extract massive stock warrants and dividend-assured preferred shares paying $1.3 million per day.

The role played by the Treasury was again obscured, hidden in the $180 billion-plus bailout of AIG. Former CEO Maurice “Hank” Greenberg had used that insurance giant as the counterparty for credit default swaps and financial derivatives originated by Goldman and Lehman. Had Treasury Secretary Henry Paulson not backed the AIG bailout, Goldman would have suffered a $20 billion loss. As a former co-chairman of Goldman with a personal net worth exceeding $850 million, Paulson could not have been unmindful that Goldman’s bonus pool for 2007 was $20 billion.

Former Treasury Secretary Robert Rubin, a senior Citigroup director and previously a co-chairman at Goldman, insisted that Citi invest heavily in securitized loans backed by sham credit ratings. When Buffet prevailed over Citi in his Treasury-funded bid for Wachovia, his triumph cleared the way for Goldman alumni at Treasury to offer Citi a $306 billion bailout.

This scale of fraud only works when the public cannot prove who is stealing from whom.