David Copperfield has nothing on these guys.
With the aid of a scantily clad assistant and the artifice of a diverting no, the master illusionist can make a city bus vanish in to thin air. But compared to the magnitude of the magic conjured by big banks like Goldman Sachs and Societé General, the feats of the Las Vegas headliner seem nothing more than clumsily performed card tricks at a children’s birthday party.
These banks have the deft touch of a practiced pickpocket. They’ve fleeced you clean before you’ve had the chance to utter your pardons for having bumped into them on a crowded sidewalk.
This cabal of mystics stole billions from the U.S. taxpayers, and we’re still thanking them for the privilege. In the process, they performed the ultimate feat; they became untouchable.
Banks Were Protected
When it became evident in the fall of 2008 that insurance giant AIG was on the verge of collapse, the Treasury Dept., along with the Federal Reserve Bank of New York, rode to the rescue. Through a series of secret backroom deals, the government, through the facilities of the New York Fed, threw AIG a $182 billion lifeline.
AIG had been brought to its knees by making too many risky outsized bets in the form of unregulated insurance, called swaps. This insurance was provided on suspect real estate deals to the world’s biggest banks, including Goldman, Societé General and Germany’s Deutsche Bank. As their portfolios began to collapse of their own weight, the banks started demanding that AIG make good on their claims.
As part of the deal, the banks got paid 100 cents on the dollar. In the exchange for this lifesaving bailout, AIG had to agree that it would not sue the banks over any irregularities it may find in the future with the mortgage securities it had insured.
Along with Fed Chair Ben Bernanke, this mega compact was orchestrated by then Treasury Secretary Hank Paulson – a former Goldman Sachs CEO – and Timothy Geithner, who later replaced Paulson as the top man at Treasury. With the wave of their magic the grave, and the banks waltzed off to St. Tropez sipping Dom Perignon and nibbling canapés.
Now that the Securities and Exchange Commission (SEC) is suing Goldman Sachs for civil fraud over the propriety of mortgage-backed securities similar to those insured by AIG, the insurer’s shareholders, along with CEO and caretaker-in-chief Robert Bemoshce, are wondering why they can’t do the same.
The Waiver Remained in the Shadows
The answer is simple. To secure the taxpayer money needed to save their bacon, Bemosche’s predecessors at AIG signed a legal waiver by which they agreed not to sue banks.
This legal waiver was largely unknown to anyone other than the legal departments at the big banks. It was buried among 250,000 pages, essentially unknown documents, that were recently released by the House Committee on Oversight and Government Reform.
Along with the waiver, the documents demonstrate that Bernanke, Paulson and Geithner ignored the recommendations of their closest advisers, that they forced the banks to take some amount of loss of their AIG-insured swaps. That decision cost American taxpayers billions of extra dollars in payment to the banks and forced AIG to forego any notion of recouping losses that may have resulted from the type of fraud over which Goldman is now being sued.
The approach to the AIG bailout deal also sharply contrasts with the hard line deal presented to the creditors of General Motors and Chrysler. In those bailouts, everyone from bondholders and shareholders to vendors and subcontractors was forced to take steep losses.
Even though the two car companies eventually stabilized, the deals resulted in countless plant closures, massive layoffs and a tidal wave of commercial and personal bankruptcies. The big Wall Street banks are not only hiring again, salaries and bonuses are starting to return to their pre-recession levels.
As I have previously written, the government’s suit against Goldman Sachs and other big banks for their alleged misdeeds is at best, a dicey proposition. Proving that the banks failed to disclose the actual risks and that they placed bets against deals that they had pre-structured to fail, is going to be difficult to prove. Even so, the threat of multiple lawsuits may have compelled banks like Goldman to settle. This tactic could have yielded a partial recovery for AIG and the U.S. taxpayers to whom the insurer must tender repayment.
According to the figures released by AIG and the government, about $50 billion of taxpayer money was used to pay the banks on their claims. Although the new financial reform legislation will give government entities like the FDIC (Federal Deposit Insurance Corp.) the power to untangle the financial affairs of troubled companies in future crises, it will do little to bring deals like the AIG bailout out of the shadows.
The issue here is one of transparency.
Arguably, regulators at Treasury and the Fed were working feverishly in good faith to avert a larger financial crisis. But the fact that they were free to work outside the reach of public scrutiny and sobriety meant that guys like Paulson were unbound to screw the American taxpayers in favor of their buddies on Wall Street.
This is a travesty.
Not only should AIG, and, derivatively, the U.S. taxpayers be permitted to set aside the legal validity of this waiver, but the architects of this deal — Paulson, Geithner and Bernanke — must be held accountable.
If this means that Paulson is prosecuted along with his two black magic co-conspirators Geithner and Bernanke, so be it. Restoring confidence to our financial system should not require a cauldron of potions and magic spells. Rather, it a simple matter of integrity.
John Cohn is a senior partner in the Globe West Financial Group based in West Los Angeles. He may be contacted at www.globewestfinancial.com
