In a typical murder trial, one of the classic, basic requirements for prosecution is to determine motive. This article flat out admits that they have no idea what the motive is. Apparently this strange manipulation was not significantly more profitable than not performing it.
I have no illusions about the morality of the players involved in the financial crisis. But this article is trash. Presumably by publishing a piece in a popular news site, the author is at least claiming to have done some researched and gained at least some understanding of the topic beyond what a typical layman might achieve. If that is the case (and I seriously doubt it is) then the only rational conclusion that I can form from this article is that they might not have been engaging in illegal activities purely for profit. People aiming to earn billion dollar payouts and playing with the volatile fire that is public opinion don't engage in needless games and risks "just to fuck with us".
Again, I don't doubt at all that something seriously wrong was happening, but this article should never have made it past an editor.
Isn't the motive clear form the article? The Fed and US adept of Treasury were completely controlled by ex Goldman execs -- the motive was to find a scapegoat to stick the debt with, while Goldman got off getting paid 100cents on the dollar. Goldman equity was less than what they would have lost on AIG CDS so AIG bankruptcy meant instant Goldman bankruptcy.
Why do people develop loyalty toward the groups they join? Evolution? Reciprocity? Indoctrination?
Either way, not unusual. Happens all the time in the military ("no such thing as an ex-marine"), around football clubs ("once a red, always a red")... pretty much everywhere there are humans, especially men in high-pressure environments.
"During that time, the New York Fed's chairman, Stephen Friedman, sat on Goldman's board and had a large holding in Goldman stock, which because of Goldman's new status as a bank holding company was a violation of Federal Reserve policy."
In the world of regular employment, usually they don't. But in the tight-knit circle of CXO-level personnel of major financial institutions that may not be the case. It strikes me as a club, and to stay in the club one must help other members of the club and practice a bit of "omertà."
> they might not have been engaging in illegal activities purely for profit.
I think the obvious interpretation is that Citigroup was politically connected enough (through lobbyists, personal connections, campaign donations, etc.) to pull strings in government and use taxpayer money to reduce their exposure. This would be mutually beneficial for the actors involved through the typical mechanisms of revolving door politics. It would seem almost delusional to me to think that those typical motives wouldn't have been present in this case. The article even points out using populist anger about bonuses as a negotiating tool against AIG.
While sections of the article, particularly near the end, certainly seem in need of an editor ("just to fuck with us," "the passage of time ... great for the wealthy"), I don't see that discrediting any of the information presented. Most seems to come from Greenberg's lawsuit + known history.
This stuff really makes me wish Lessig had gotten more traction with his Mayday PAC and presidential run.
If you summarize all that, that's pretty much exactly how you'd have expected (and wanted it) to work. The variety of firms in question all in competition for the both attractive offers and largest limitation of their own risk.
Where it seems to have gone off the rails, if it did, was in the speed and exclusivity with which this happened.
If you'd had a couple years to play this out, everyone would have come to a much more equitable solution.
However, because it needed to be done "now" (TM) due to the risks to the economy, the opportunity existed to steamroll deals through that would never have been agreed to by the market otherwise.
The question is whether those deals were a reasonable call in a bad situation, or actually intentionally manipulative.
The huge gapping hole in this article is the fact that AIG share holders probably would have been completely wiped out in bankruptcy. It's very rare for a company to come out of chapter 11 with the shareholders still keeping their equity.
The big problem during the panic was that those mortgage packages had no value because nobody wanted to touch them. That's why they were called toxic assets. And AIG was insuring all those toxic assets. Nobody had any idea how much AIG was on the line for. So nobody would buy it, loan money to it, or invest in it.
So taking 80 percent might have been too low of a percentage. If AIG could get a better deal, why was it begging the Fed for a bailout? The answer is this was the only deal they could have gotten.
The motive for all this was that AIG owed money to everyone. If it goes into bankruptcy, it stops paying out. And then there is a huge liquidity crisis. The banks they owed money to needed that money to stay solvent. If AIG goes insolvent, most of wall street goes insolvent.
And the government had just watched the same exact thing happen when Lehman went into bankruptcy. It shocked wall street.
They honestly (and probably realistically) feared AIG going into bankruptcy would destroy the credit market. That is catastrophic. Companies wouldn't be able to borrow to make payroll. Companies would go insolvent due to liquidity issues. Shelves would stopped being stocked. During this period F500 companies finance departments were freaked the fuck out. They were having trouble financing day to day operations.
One of the big downsides to bailouts is they cause moral hazard. So the solution is make the bailout just barely tolerable. That's why AIG can't just get a big zero interest loan.
AIG stockholders shouldn't have gotten rewarded for running their company into insolvency just because their downfalls carries a systemic risk. The fair thing to do is to wipe the shareholders out 100%. Why should an company that appears to be worthless (since nobody will buy it), who is insolvent, who is a massive risk to the world economy, get a single dime in compensation.
The only reason they got anything was so the company didn't turn down the deal out of spite.
AIG was worthless. I can't believe they are bitching that their bailout wasn't sweet enough. It's ridiculous.
IANAL but pretty sure arguing a motive is not a requirement in any criminal trial even though it might be common. But it's akin to character witnesses and so on. I.e. used to establish plausibility.
Yeah I'm not a lawyer either. I tried to use the descriptor "classic" to indicate that it is well known as a very important part of prosecution, rather than some expert opinion on my part.
The ending was disappointing and a shallow conclusion. To me, it seems clear in hindsight that Geithner, Paulson, and Bernanke, et al, were in uncharted waters trying to manage a banking crisis. Did they overreach and force AIG to take more of the fall than was on them? I think there's a case to be made. So, the motive is the Government was trying to save the financial system. They scapegoated the insurer. Someone had to hold the bag, less they all go down.
The article also glossed over the fact that AIG waited until there was an $85 billion dollar hole in their balance sheet to contact the Treasury/Fed about it. The article describes this as
"In fact, the relative health of its business may have fucked it harder than all those credit-default swaps—as one of the last institutions to run out of cash, it was also one of the last to start seeking a lifeline from foreign wealth funds. "
The size of that hole and the fact that it was needed in a few days time ruled out any merger/acquisition or selling off assets (which could take weeks to price).
Also, Vice should probably not treat Hank Greenbergs lawyer as the source of truth since he has a very clear economic bias to paint AIG in the very best of light. He stands to gain a percentage of a massive settlement if he wins.
Agreed that the article's "case" is weak, though it does contain some interesting information.
Ultimately I think what happened is this:
(1) The financial world made a lot of risky bets that it didn't know were risky because they were based on mathematical models that various Experts(tm) with highfalutin Ivy League degrees told them were solid and reliable. "Mortgages are among the most reliable forms of investment, and when has there ever been a massive default across the board in individual mortgages?" etc., but expressed in mathematical form by people with 4.0 GPAs from Harvard. Nobody ever got fired for listening to such people.
(2) These investments blew up in their faces because these models were wrong. Specifically the problem with those models was the problem with all such closed-form models of open dynamical systems: by taking large positions on the basis of fixed closed-form models, they actually altered the system so as to invalidate those models. That's because dynamical living systems like economies have feedback loops. More specifically for this case: by relying upon models based on the stability of mortgages, positions were taken that made mortgages less stable such as by encouraging more sub-prime lending and by causing a housing bubble.
(3) As the crisis erupted, a massive scramble ensued to do something with huge numbers of people -- some very powerful, wealthy, and connected -- running every which way executing anything they could think of to prevent the next great depression or worse.
(4) In the confusion, those with the most political power, connections, and access to real wealth tended to prevail... as is usually the case, and in that order. In a fire with no marked exit routes those who are first to the exit and/or physically strongest will get out first too.
(5) After the crisis anyone with any kind of political agenda started to pick through the ashes to cherry pick evidence to bolster their pet thesis, implicate their pet enemy, or just sling outrage to get clicks.
Where's the mystery here?
The only "solution" is to reform the financial system so as to put systematic, open, clear safeguards in place so that next time -- and there will be a next time -- this happens, everyone knows what to do. This is why buildings usually have prominently displayed exit paths in case of fire, etc.
I'm too ignorant of high finance to know what that path should be, but here's a layman's suggestion anyway: what if under certain objectively determinable crisis conditions the fed made available a window for anyone to borrow any amount of money at some multiple of the current base rate? This would allow anyone -- from banks down to actual homeowners and businesses -- to temporarily cover themselves until people can figure out what the F is going on and things can unroll in an orderly fashion. This loan would have an escalating interest rate over a period of years, so all would be incentivized to pay it back, but it would give people time to assess the situation. Perhaps that or some version of it could work. The whole problem with these crises is that they can unroll much faster than anyone can think, leading to a lot of stupid decisions that make the crisis worse (analogous to rushing a single exit during a fire) or that result in massively unfair outcome. In some cases these might be corruption and opportunism, but in many cases I think it's just stupidity under stress. The goal of something like the aforementioned would be to "slow down time" a little.
Edit: a possibly better version would be this: in the event of a systematic financial crisis, the fed is empowered to bail out the consumer progressively. This would "trickle up" and prevent the entire financial system from collapsing, but would remove the most obvious forms of moral hazard at the top. Furthermore if the "angry liberal" version of reality is actually true and the financial elite are working tirelessly to keep the poor man down, that means they now have an incentive to do their damn job correctly and prevent a crisis from emerging in the first place.
From a 2010 Bloomberg article on hearings about AIG, http://www.bloomberg.com/news/articles/2010-01-28/secret-ban..., "When unelected and unaccountable agencies pick banking winners while trying to end-run Congress, even as taxpayers are forced to lend, spend and guarantee about $8 trillion to prop up the financial system, our collective blood should boil."
> Reading news coverage of all this five and a half years later is kind of like reading old infatuation-era emails with a much older ex-boyfriend you never think about—but who in hindsight was kind of a pedophile.
Well that's one way to remind me that this is a VICE article.
This completely ignores the perspective of those who bailed-out AIG. Whether their ultimate assessment of the ramifications of AIG's bankruptcy was correct (Which is important to understand for future crises) they feared the collapse of the financial system.
Bair's question: "Were the others really in danger of failing?" seemed obviously true to everyone involved in the crisis at the time. When AIG failed, Lehman had just declared bankruptcy and overnight lending rates between banks had sky-rocketed. Washington Mutual and Wachovia were on the brink of failure. Goldman and Morgan were both sufficiently dependent on the short-term funding markets that they could have been rendered illiquid next.
Looking in from the outside, it's easy to see this as insanity. All they needed to do was trust each other and most of the institutions would have been fine. But they lacked sufficient transparency to know which wouldn't be. While we can all imagine better solutions, making those things happen takes time. Put yourself in Bernanke's, Geithner's and Paulson's shoes. You can do something that will lead to be pilloried in the press or risk watching a repeat of the great depression with some probability you can't estimate.
The other perspective (mine) is that everyone of these 'institutions' should have failed. These were poisonous organizations, criminal parasites. We would all be better off had we simply allowed them to burn to death in the fire of their own making. Then we rebuild our financial system in a way that makes sense, devoid of the influence of the criminals who caused all the trouble.
There are two problems with this course of action:
1. Companies depend completely on an efficient credit infrastructure. They buy on credit even more than consumers. Shutting off the financial system, even for a short time, effectively means shutting off production.
2. To rebuild the financial system one needs domain expertise. The people with the expertise are those who work in financial institutions. Purging the elites has never worked (E.g. Mao and the Cultural Revolution, the US in Iraq, Mugabe, ...)
#2 is a very important principle that spreads across all kinds of areas and domains. The top of the pyramid almost by definition tends to monopolize domain-specific talent, therefore the only revolutions that ever work are those that convince the elite rather than those that purge them.
Luckily elites are just human beings, not shape-shifting reptiles from space, and can be convinced with rational arguments and/or human empathy in the same way and to the same extent anyone else can.
The expertise would still be around, and companies -- possibly new ones -- could still hire them for any positive contributions they believe could still occur. They'd just have lost (arguably with great karmic and ethical justification) a portion of their fortune and power.
Pretty sure in American history there are corporations that have knowingly, literally killed people because they knew the side-effects of their products, if not immediately, over time.
Tobacco industry comes to mind and lying to congress scott-free. There is also the dumping of toxic chemicals into water sources and rivers, etc. which happens to this day.
So while it was the biggest financial and government oversight failure, credit-default swaps unlikely literally, directly killed people.
What's worse is that little to nothing has changed and it could all happen again given enough time.
Chiquita Banana, which changed its name from United Fruit, had the CIA train troops to overthrow a democratically elected government. Literally killed people? Yes.
When the government gets involved just expect the law to be ignored. We saw this with the auto manufacturer bailouts as well. Those in power make their decision and then find means to execute it and redirect the ire. Washington is all about power and manipulation of the public's outrage.
For a minute before I clicked the link I wondered if this was about Enron. I mean, there are a few 'greatest' failures. Pretty good write-up though with its particular perspective.
Enron's bankruptcy was "only" 67billion. The largest bankruptcy to date has been Lehman's, which was shy of 700billion.
AIG's bankruptcy would be over a trillion PLUS would lead to a domino of derivatives-driven bankruptcies across counterparties including Goldman Sachs and Deutsche Bank.
Terrible reporting. Caroms from one innuendo to another, very stingy with verifiable facts. The goal of the author seems to be rage, not sharing information.
I have no illusions about the morality of the players involved in the financial crisis. But this article is trash. Presumably by publishing a piece in a popular news site, the author is at least claiming to have done some researched and gained at least some understanding of the topic beyond what a typical layman might achieve. If that is the case (and I seriously doubt it is) then the only rational conclusion that I can form from this article is that they might not have been engaging in illegal activities purely for profit. People aiming to earn billion dollar payouts and playing with the volatile fire that is public opinion don't engage in needless games and risks "just to fuck with us".
Again, I don't doubt at all that something seriously wrong was happening, but this article should never have made it past an editor.