Naked Capitalism: “Time to Investigate Blankfein and Paulson”, Daily Kos, July 1, 2010, by Bob Swern, used with permission, quoted verbatim: Thanks Bob, for allowing Evans Liberal Politics to republish your work on an ongoing basis. Email Bob Swern here.

If you’ve been following the AIG-Goldman Sachs travesty over the past 20+ months, then you know it’s already on the top-10 list of “Greatest Conflicts of Interest of All Time.” Indeed,  IMHO, it’s at the heart of everything that was, and still is, wrong as it relates to the deep capture and regulatory capture — with our legislative branch’s ongoing evisceration, playing out before our very eyes, of most of the financial reforms that are desperately needed right now to put an end to this culture of greed that’s been prevalent in our society since Ronald Reagan’s presidency, and then some — of our government by the status quo. When I think of modern-day examples of “corporate kleptocracy,” I think of this story first.And, when it comes to everything that economist Simon Johnson was discussing in his seminal piece, “The Quiet Coup,” it’s this story that was–and still is–number one on the “greatest societal pillaging hits” of all time, as well.

This week, once again thanks to the Pulitzer-worthy efforts of the NY Times’ Gretchen Morgenson (Ms. Morgenson’s already won a Pulitzer, and is considered by many to be the best business journalist in the U.S.) and her colleague, Louise Story,  we have a pair of pieces that go into even greater detail and substantiation of just how pathetically compromised our government was (and still is) when it opted to put the interests of Wall Street over the interests of Main Street during the financial collapse of our economy, which all came to a head in September 2008, and (if you’ve been reading my posts for the last 2-1/2 years) still persists to this day.Here are the links to the NY Times’ most recent coverage of the “bailout story that just won’t go away:”

“In U.S. Bailout of A.I.G., Forgiveness for Big Banks,” Gretchen Morgenson and Louise Story, NY Times, June 30th, 2010.

“Documents Show Goldman Pressure on A.I.G.,” Gretchen Morgenson and Louise Story, NY Times, July 1st, 2010.

Yes, like all critical transgressions of society through time, this episode and case-in-point concerning the elite’s pillaging of the masses will be posted in historical works for generations to come.  The question now, IMHO, is, “How will it all end?” (The answer, at the moment, is: “Badly, for most of us.”) But, as Yves Smith, who’s been on top of this since day one reminds us, it’s still playing out: “Time to Investigate Blankfein and Paulson (More AIG Shenanigans Edition).”

Sometimes, eventually, even in this day and age, the truth does come out. (Thanks to the persistence of journalists like the NY Times’ Gretchen Morgenson and bloggers like Naked Capitalism’s Yves Smith.)

(Note: Naked Capitalism Publisher Yves Smith has provided written authorization to the diarist to reproduce her blog’s posts in their entirety.)

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Time to Investigate Blankfein and Paulson (More AIG Shenanigans Edition)
Yves Smith
Naked Capitalism
June 30, 2010

The New York Times has unearthed a damning tidbit about the bailout of AIG:

When the government began rescuing it from collapse in the fall of 2008 with what has become a $182 billion lifeline, A.I.G. was required to forfeit its right to sue several banks — including Goldman, Société Générale, Deutsche Bank and Merrill Lynch — over any irregularities with most of the mortgage securities it insured in the precrisis years.

Yves here. How one reacts to this depends in no small measure as to how one views the salvage operation. For all intents and purposes, the rescue of AIG was merely a way to save the banks; the credit default swaps had been too big a source of faux capital (for US firms, via risk-dumping, and for Eurobanks, as part of a regulatory arbitrage) to let the insurer go. So any effort by the officialdom to aid the banks, most notably by paying out 100% on credit default swap exposures (which had already been written down by counterparties to less than par) was simply an effort to funnel more cash to the banks. Since we’ve had massive backdoor bailout mechanisms in addition to the overt ones, this orientation should come as no surprise.

But then we get to the funny business. Why a broad waiver? Why shouldn’t AIG (and by extension, taxpayers) not recover in the event of fraud? And we turn again to the ambiguous standing of AIG. By all rights, it ought to be owned by the government. The reason it isn’t is that we don’t do nationalization in America, and full ownership would require AIG’s debts to be consolidated with government debt. So another way to read this requirement is that the Fed and Treasury were opposed to having fraud at the banks exposed, period.

That is a very troubling stance for bank regulators to take. And experts agreed:

“Even if it turns out that it would be a hard suit to win, just the gesture of requiring A.I.G. to scrap its ability to sue is outrageous,” said David Skeel, a law professor at the University of Pennsylvania. “The defense may be that the banking system was in trouble, and we couldn’t afford to destabilize it anymore, but that just strikes me as really going overboard.”"This really suggests they had myopia and they were looking at it entirely through the perspective of the banks,” Mr. Skeel said.

Yves here. Also note that the banks mentioned by the Times account for a significant proportion of the Maiden Lane III exposures (the $62.9 billion CDO portfolio; note this does not include all CDO guarantees assumed by the Federal Reserve; seven Goldman Abacus trades stayed with AIG and were salvaged via credit extensions to AIG). An analysis by Tom Adams and Andrew Dittmer showed the significance of Merrill, Goldman, and SocGen (percentages based on par amount):

1. Merrill as both packager and counterparty 7.7%
2. Goldman as both packager and counterparty 7.4%
3. Merrill as packager, Goldman as counterparty 9.6%
4. Goldman as packager, SocGen as counterparty 15.9%

We thought these interrelationships were potentially significant; they account for 40.6% of the Maiden Lane III exposures. Then add in:

5. Anyone else with a pulse as packager, SocGen as counterparty 11.0%
6. Anyone else with a pulse as packager, Goldman as counterparty 5.5%

That bring you to 56.5% of the total.

Goldman, either as packager or as swap counterparty, was involved in 38.4% of the Maiden Lane transactions, plus had additional AIG exposure through seven Abacus trades (we only have tranche exposure on three of these transactions):

Abacus 2004-1
Abacus 2004-2
Abacus 2005-2
Abacus 2005-3
Abacus 2005-CB1
Abacus 2006-NS1
Abacus 2007-18

Yves here. The time is long overdue that Lloyd Blankfein’s early and extensive involvement in the AIG rescue be investigated in detail. The legal waiver no doubt was particularly beneficial to Goldman, and given that it is now being sued by the SEC, it is fair to ask if he put the idea of the waiver forward. It is highly unlikely to have occurred to the Fed and Treasury officials unprompted, particularly given the fevered pace at which the AIG rescue was cobbled together.

Moreover, in noting the officialdom’s deference to Wall Street, Blankfein features prominently:

In that regard, the newly released Congressional documents show New York Fed officials deferring to bank executives at a time when the government was pumping hundreds of billions of taxpayer dollars into the financial system to rescue bankers from their own mistakes. While Wall Street deal-making is famously hard-nosed with participants fighting for every penny, during the A.I.G. bailout regulators negotiated with the banks in an almost conciliatory fashion.On Nov. 6, 2008, for instance, after a New York Fed official spoke with Lloyd C. Blankfein, Goldman’s chief executive, about the Fed’s A.I.G. plans, the official noted in an e-mail message to Mr. Blankfein that he appreciated the Wall Street titan’s patience. “Thanks for understanding,” the regulator said.

Yves here. This obsequiousness is noteworthy because the Times also stresses that the Fed’s own advisors (Morgan Stanley, Black Rock, and Ernst & Young) were advocating a tough stand with the banks, including haircuts on their guarantees with AIG. But Treasury appears to have carried the day:

For its part, the Treasury appeared to be opposed to any options that did not involve making the banks whole on their A.I.G. contracts. At Treasury, a former Goldman executive, Dan H. Jester, was the agency’s point man on the A.I.G. bailout. Mr. Jester had worked at Goldman with Henry M. Paulson Jr., the Treasury secretary during the A.I.G. bailout.

Yves here. And in an astonishing lapse, Jester still owned Goldman stock. By any standard, he should not have been involved at all in the process, much less in a crucial role. But because he was a contractor, and not a government employee, this arrangement was kosher. Not surprisingly, Jester opposed measures that would require Goldman and other banks to take any pain.

The Times reminds readers it pays to be a bankster:

All of this was quite different from the tack the government took in the Chrysler bailout. In that matter, the government told banks they could take losses on their loans or simply own a bankrupt company; the banks took the losses.

Yves here. The Audit the Fed investigation will shed even more light on the AIG rescue, but the seamy dealing of Treasury means that investigations need to extend into its role as well. But it will take a public hue and cry for that to come to pass.

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If you’d like to read more about this, checkout some of my past coverage on the matter (in particular the links contained in those posts, of course):

2010–

How Paulson’s People Colluded with Goldman to Destroy AIG… (1/28/10)

Fed-AIG Scandal For Dummies: Corporate Kleptocracy Edition (1/27/10)

Is Geithner Toast? Barofsky Announces 2 New Fed-AIG Probes (1/26/10)

Reuters: SEC Considered AIG Bailout National Security Matter (1/25/10)

Naked Capitalism Guest Post: AIG Bailout Secrets Exposed! (1/23/10)

Breaking (Update): Fed Denies House Subpoena For AIG Docs (1/12/10)

2009–

3 Fraud Probes Target Goldman, AIG: Is It “The” Story of 2010? (12/28/09)

“The AIG-Wall St. Bailout Corruption Story That Won’t Go Away” (12/23/09)

“Breaking WSJ: Massive Goldman-AIG Bailout Conflict Of Interest” (12/12/09)

“New Economic Travesties: GDP Revision, Goldman/AIG, Reform” (11/24/09)

“Goldman’s Eviscerated In NYT; Admits Geithner’s ‘AIGenerosity’ (11/22/09)

Gretchen Morgenson, over at the NY Times: Revisiting a Fed Waltz With A.I.G.” (11/22/09)

“Fed’l Reserve, IG Barofsky: Paulson, Treasury Lied To Public” (10/6/09)

One of Gretchen Morgenson’s (NYT) best pieces of the entire recession: “Member and Overseer of the Finance Club” (4/27/09)

“Is it the largest betrayal of public trust in history?” (3/15/09)

“Doesn’t Geithner’s Middle Finger Look Just Like Paulson’s?” (3/12/09)

“Wall St. Bailout: Is A Massive Scandal About To Unfold?” (3/8/09)

“On Geithner, NYT Leak and TARP II Drama: Kuttner Nails It” (2/13/09)

2008–

“Fed Refuses to Name Recipients of $2 Trillion Bailout” (11/10/08)

“Paulson/Fed Gives O.K. To Banks To Steal Your Money! (For real!)” (9/16/08)

“BREAKING: NY Times, ‘AIG joins Merrill and Lehman in Wall Street Collapse’” (9/15/08)

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