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Economist: US collapse driven by 'fraud'; Geithner covering up bank insolvency

 
 
Reply Mon 6 Apr, 2009 09:22 am
Economist: US collapse driven by 'fraud'; Geithner covering up bank insolvency
by Stephen C. Webster
Published: Saturday April 4, 2009

In an explosive interview on PBS' Bill Moyers Journal, William K. Black, a professor of economics and law with the University of Missouri, alleged that American banks and credit agencies conspired to create a system in which so-called "liars loans" could receive AAA ratings and zero oversight, amounting to a massive "fraud" at the epicenter of US finance.

But worse still, said Black, Timothy Geithner, President Barack Obama's Secretary of the Treasury, is currently engaged in a cover-up to keep the truth of America's financial insolvency from its citizens.

The interview, which aired Friday night, is carried on the Bill Moyers Journal Web site.

Black's most recent published work, "The Best Way to Rob a Bank is to Own One," released in 2005, was hailed by Nobel-winning economist George A. Akerlof as "extraordinary."

"There is no one else in the whole world who understands so well exactly how these lootings occurred in all their details and how the changes in government regulations and in statutes in the early 1980s caused this spate of looting," he wrote. "This book will be a classic."

But that book only covers the fallout from the 1980s Savings & Loan crisis; Black's later first-hand involvement in that scandal being the ensuing liquidation of bad banks.

"A single bank, IndyMac, lost more money than the entire Savings and Loan Crisis," reported PBS. "The difference between now and then, explains Black, is a drastic reduction in regulation and oversight, 'We now know what happens when you destroy regulation. You get the biggest financial calamity of anybody under the age of 80.'"

That financial calamity, he explained, was brought about not by mishap or accident, but only after a concerted effort to undermine and remove all regulations, allowing a creditor free-for-all that hinged on fraudulent risk ratings for bad loans.

"[T]he way that you do it is to make really bad loans, because they pay better," he told Moyers. "Then you grow extremely rapidly, in other words, you're a Ponzi-like scheme. And the third thing you do is we call it leverage. That just means borrowing a lot of money, and the combination creates a situation where you have guaranteed record profits in the early years. That makes you rich, through the bonuses that modern executive compensation has produced. It also makes it inevitable that there's going to be a disaster down the road.

"...This stuff, the exotic stuff that you're talking about was created out of things like liars' loans, that were known to be extraordinarily bad," he continued. "And now it was getting triple-A ratings. Now a triple-A rating is supposed to mean there is zero credit risk. So you take something that not only has significant, it has crushing risk. That's why it's toxic. And you create this fiction that it has zero risk. That itself, of course, is a fraudulent exercise. And again, there was nobody looking, during the Bush years. So finally, only a year ago, we started to have a Congressional investigation of some of these rating agencies, and it's scandalous what came out. What we know now is that the rating agencies never looked at a single loan file. When they finally did look, after the markets had completely collapsed, they found, and I'm quoting Fitch, the smallest of the rating agencies, "the results were disconcerting, in that there was the appearance of fraud in nearly every file we examined."

He equated the entire US financial system to a giant "ponzi scheme" and charged Treasury Secretary Timothy Geithner, like Secretary Henry Paulson before him, of "covering up" the truth.

"Are you saying that Timothy Geithner, the Secretary of the Treasury, and others in the administration, with the banks, are engaged in a cover up to keep us from knowing what went wrong?" asked Moyers.

"Absolutely, because they are scared to death," he said. "All right? They're scared to death of a collapse. They're afraid that if they admit the truth, that many of the large banks are insolvent. They think Americans are a bunch of cowards, and that we'll run screaming to the exits. And we won't rely on deposit insurance. And, by the way, you can rely on deposit insurance. And it's foolishness. All right? Now, it may be worse than that. You can impute more cynical motives. But I think they are sincerely just panicked about, 'We just can't let the big banks fail.' That's wrong."

Ultimately, said Black, the financial downfall of the United States in the wake of the Bush years is due to "the most elite institutions in America engaging in or facilitating fraud."

"When will Americans wake up and hold the real criminals - Banksters - accountable for their actions, and pressure the government to enact systemic changes to prevent future abuses?" asked Huffington Post blogger Mike Garibaldi-Frick.

The full interview can be viewed on-line.
http://www.pbs.org/moyers/journal/04032009/watch.html
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dyslexia
 
  2  
Reply Mon 6 Apr, 2009 11:08 am
Quote:
What a big difference between Democrat Geithner and Republican Paulson.

Geithner presented a rational, well-thought out and comprehensive plan which gives me hope we finally know what to do. Now, if the Republicans help instead of trying to block the plan, we may be on the first step of financial recovery in America and across the world. ---BBB
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hamburger
 
  1  
Reply Mon 6 Apr, 2009 11:32 am
@BumbleBeeBoogie,
Quote:
"Are you saying that Timothy Geithner, the Secretary of the Treasury, and others in the administration, with the banks, are engaged in a cover up to keep us from knowing what went wrong?" asked Moyers.

"Absolutely, because they are scared to death," he said. "All right? They're scared to death of a collapse. They're afraid that if they admit the truth, that many of the large banks are insolvent. They think Americans are a bunch of cowards, and that we'll run screaming to the exits. And we won't rely on deposit insurance. And, by the way, you can rely on deposit insurance. And it's foolishness. All right? Now, it may be worse than that. You can impute more cynical motives. But I think they are sincerely just panicked about, 'We just can't let the big banks fail.' That's wrong."



i wish the good professor would explain how ALL the deposits insured under the deposit insurance plan can be covered AT ONCE if there were a RUN ON THE BANKS .
my guess is that there would be a "bank moratorium" to stop the outflow of cash .
i'm not a banking expert , but doubt that there is sufficient money in the fund to cover all insured depositd in such a case - unless it's done by simply printing (devalued) dollar currency .

i have never read that the deposit insurance fund holds 100 % of CASH RESERVES .
(no insurance ever holds 100 % of reserves in cash) .
i understand that most of the reserves are being held in other financial papers that would have to be sold - but can they all be sold at face value if they are all thrown on to the market - i have great doubts about that .

anyone know a little more about this ?
hbg
BumbleBeeBoogie
 
  1  
Reply Tue 7 Apr, 2009 09:59 am
@hamburger,
Why didn't Fed force big banks to take less of AIG bailout?
By Greg Gordon and Kevin G. Hall | McClatchy Newspapers
4/7/09

WASHINGTON " The Federal Reserve Bank of New York in November chose not to pursue tough negotiations with large foreign and domestic banks and instead allowed them to receive 100 cents on the dollar in government funds to settle tens of billions of dollars of exotic financial bets guaranteed by American International Group.

At the time, Timothy Geithner, now Treasury Secretary, headed the powerful New York Fed. On his watch, the decision was made to forgo a reduced payout " called a "haircut" in industry parlance " to creditors of AIG to prevent financial chaos around the world, the officials told McClatchy.

Had the Fed negotiated a reduction of just 10 cents to 15 cents on the dollar, it could've saved between $2 billion and $3 billion.

The revelation sheds new light on last month's disclosure by AIG that it used loans from the New York Fed to pay more than $17 billion to foreign creditors such as France's Societe Generale and Credit Agricole, and Germany's Deutsche Bank. U.S. investment banks, including Goldman Sachs and Merrill Lynch, also were paid $10 billion in what amounted to a back-door bailout of the troubled institutions that had financed the insurer's risky investments.

The real reasons behind these decisions weren't revealed at the time. And like the Obama administration's decision last month to allow more than $165 million in controversial bonuses to AIG executives, their disclosure is fueling new criticism.

Geithner's office declined requests to comment.

At issue is the Fed's handling of nearly $30 billion that AIG owed on complex insurance-like financial instruments known as credit-default swaps, which are unregulated products that the company issued to guarantee often risky investments.

AIG had at least $440 billion in credit-default swaps outstanding when the New York Fed and the Treasury Department rode to the rescue of its creditors in September with an unprecedented $85 billion cash infusion " a bailout that has since been revamped and grown to some $180 billion.

The rescue, which gave the Fed control of almost 80 percent of AIG, was designed to prevent what Fed Chairman Ben Bernanke has since said could've been a collapse of the global financial system.

The decision to extinguish some of AIG's credit-default swaps, however, was made in mid-November, after the waters had calmed.

Gerald Pasciucco, the new chief executive of AIG's Financial Products division, which sparked the company's meltdown, recently told McClatchy that Fed officials made the decision to pay full value, but he declined to elaborate when pressed. Pasciucco is negotiating the sale of the remaining $1.4 trillion in the division's business.

The decision to pay full contract value is the latest example of the Fed appearing to be "very much out of sync with the attitude of the public and the taxpayers," said John Coffee, a Columbia University law professor who testifies frequently before Congress on matters of corporate finance.

The Fed could have offered 85 cents on the dollar " saving billions of dollars " and claimants would've had little recourse but to sue, he said.

Once the Fed decided against bankruptcy for AIG, it was logical to presume that the company would fully honor its swaps contracts, a senior Fed official said.

By then, AIG had been downgraded by credit-rating agencies. The downgrade meant that AIG had to post $35 billion in collateral with various swapholders _and the company faced catastrophe, another Fed official said. Both officials requested anonymity to speak freely.

After the Fed intervened in September, it made attempts to convince some of AIG's foreign counterparties to accept a reduced payout. They declined. New York Fed officials worried that U.S. defaults on the swaps would lead to "a cascade of other defaults" by firms around the world that had counted on full payouts, one of the officials said.

The idea of a discount was met with "a very hostile reaction" and warnings that such a stance would be viewed as a default, officials said. They pointed to the global financial chaos after the 1991 collapse of the Bank of Credit and Commerce International. Authorities in England and Luxembourg seized Pakistan-based BCCI, and its creditors scrambled for assets across the globe.

Once the decision was made to fully pay AIG's foreign counterparties, including $2.8 billion to Deutsche Bank and $6.9 billion to Societe Generale, the officials concluded that it would be discriminatory to pay less than 100 cents on the dollar to U.S. banks holding the same contracts.

"I was concerned that people would say the Fed used its power to exploit some domestic financial institutions," said Thomas C. Baxter, the general counsel of the New York Fed, in a telephone interview.

At that time, he said, it was easy to explain "why an entity you kept out of bankruptcy was paying its legitimate and lawfully incurred debts. That didn't seem hard."

That, however, was before public anger mounted over Wall Street rescue efforts.

Columbia's Coffee countered that "you could have asked everybody to scale down their expectations at least 10 or 15 percent, and that wouldn't have been discriminatory. And if you asked Congress, I think they would have been much more in favor of being discriminatory towards foreign banks, because this is funded with U.S.-taxpayer-funded dollars."

In bankruptcy, he said, the swaps might've been settled at 20 cents on the dollar. In other words, the government had leverage and chose not to use it.

"So I think that there has been an absence of hard bargaining here, and it is because the Fed puts its highest priority on its loyalty to the banking system and tends to subordinate economizing with taxpayer dollars."

The payouts also have fueled allegations of unnecessary back-channel bailouts on top of the publicly disclosed taxpayer-funded efforts.

New York Insurance Commissioner Eric Dinallo, the most vocal advocate for regulating credit-default swaps, told Congress on Oct. 18 that regulators were working in a vacuum.

"Because the credit default swap market is not regulated, we do not have valid data on the number of swaps outstanding," he said.

ON THE WEB

AIG disclosure on payouts
BumbleBeeBoogie
 
  1  
Reply Tue 7 Apr, 2009 10:12 am
@BumbleBeeBoogie,
ON THE WEB
AIG disclosure on payouts

AIG DISCLOSES COUNTERPARTIES TO CDS, GIA AND SECURITIES LENDING TRANSACTIONS

NEW YORK--Mar. 15, 2009-- American International Group, Inc. (AIG) recognizes the importance of upholding a high degree of transparency with respect to the use of public funds. As a result, after close consultation with the Federal Reserve, AIG is disclosing information identifying certain credit default swap counterparties, municipal counterparties and securities lending counterparties. Before disclosing this information, AIG consulted with the Federal Reserve about the potential public benefit of counterparty disclosure and the potential that such disclosure would cause competitive harm to AIG or its counterparties.

Severe valuation losses on the super senior multi-sector credit default swap portfolio of AIG Financial Products Corp. (AIGFP) triggered collateral provisions in the swap contracts, creating a liquidity crisis for AIG in September 2008. The Federal Reserve Bank of New York (FRBNY) provided an emergency $85 billion loan to AIG to meet short-term cash needs. The aid received by AIG helped avoid severe financial disruptions by providing liquidity to important financial institutions and municipalities.

Using funds from the emergency loan, financial counterparties listed on Attachment A (all attachments are posted online at http://www.aig.com/Related-Resources_385_136430.html) received a total of $22.4 billion in collateral relating to CDS transactions from AIGFP between September 16, 2008 and December 31, 2008. This amount represents funds provided to such counterparties after the date on which AIG began receiving government assistance. The counterparties received additional collateral from AIG prior to September 16, 2008.

On November 10, 2008, AIG and the FRBNY established Maiden Lane III, a financing entity, to purchase the securities underlying certain CDS contracts from the counterparties to such contracts, allowing the cancellation of the contracts. Attachment B lists payments made by Maiden Lane III to such counterparties.

Municipalities in the states listed on Attachment C received a total of $12.1 billion from AIGFP between September 16, 2008 and December 31, 2008 in satisfaction of Guaranteed Investment Agreement (GIA) obligations. GIAs are structured investments with a guaranteed rate of return. Municipalities typically use GIAs to invest the proceeds from bond issuances until the funds are needed.

Public aid was also used to satisfy obligations to financial counterparties related to AIG’s securities lending operations. Securities lending counterparties listed on Attachment D received $43.7 billion from September 18, 2008 to December 31, 2008.

AIG has used the balance of the public aid it received during that time period for other purposes, including the funding of Maiden Lane II and III, debt repayment and capital support for some of its businesses.

AIG Chairman and Chief Executive Officer Edward M. Liddy said that the counterparty and collateral information show that billions in government assistance flowed to dozens of financial counterparties and municipalities during a time of acute stress in the economy.

Mr. Liddy emphasized that AIG’s disclosure of the counterparties does not change AIG’s commitment to maintaining the confidentiality of its business transactions. “Our decision to disclose these transactions was made following conversations with the counterparties and the recognition of the extraordinary nature of these transactions,” Mr. Liddy said.

American International Group, Inc., a world leader in insurance and financial services, is the leading international insurance organization with operations in more than 130 countries and jurisdictions. AIG companies serve commercial, institutional and individual customers through the most extensive worldwide property-casualty and life insurance networks of any insurer. In addition, AIG companies are leading providers of retirement services, financial services and asset management around the world. AIG's common stock is listed on the New York Stock Exchange, as well as the stock exchanges in Ireland and Tokyo.

Source: American International Group, Inc.
American International Group, Inc.
Investment Community:
Teri Watson, 212-770-7074
or
News Media:
Nick Ashooh, 212-770-3523

hamburger
 
  1  
Reply Tue 7 Apr, 2009 02:42 pm
@BumbleBeeBoogie,
from bbb's post :

Quote:
Columbia's Coffee countered that "you could have asked everybody to scale down their expectations at least 10 or 15 percent, and that wouldn't have been discriminatory. And if you asked Congress, I think they would have been much more in favor of being discriminatory towards foreign banks, because this is funded with U.S.-taxpayer-funded dollars."


there was a one hour special re. financial problems in the U.S. last night - but it was past my bedtime .

i just snatched the bit about :
Quote:
"... the U.S. government must ensure the daily inflow of foreign money to finance the operation of the government ... ...
all payouts the U.S. government must meet on a daily basis for pensions , medicare , military operations etc. etc. rely on that inflow " .


i don't think the good professor has given much thought to the reaction of those foreign lenders (essentially foreign governments ) had they been given an unasked for "haircut" .

those foreign banks are not at all like banks in the U.S. or canada ; they are really government operated financial institutions , such as the "people's bank of china" , and the investment funds operated by the saudi royal family .

i think such a "haircut" might have scared off the flow of additional funds from such sources , or at least slowed it down - not something that the U.S. government can afford at this time .

to reapeat the good professor : " ... Columbia's Coffee countered that "you could have asked ... " .
from my limited understanding of high finance , it is not advisable to ask such a question unless one already knows that there will be a favourable answer .

imo the citizens of the U.S. should be happy that the professor was not one to make that decision .

the U.S. - and other countries - would have been better off had they not gotten themselves into this financial mess ... but that was yesterday ...
and today is today .
with much respect to professor coffey !
hbg




0 Replies
 
hamburger
 
  1  
Reply Tue 7 Apr, 2009 04:51 pm
@BumbleBeeBoogie,
a shorter reply would have been :

" don't bite the hand(s) that feeds you ! "

hbg
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