USA. Heads, they win and the people lose. Tails... they continue winning and the people paying.

9 November 2009 by Daniel Munevar


During recent weeks the press has abounded with comments on the anniversary of the major events of the financial crisis of 2008. Among those significant events that have attracted more press coverage are the fall of Lehman Brothers coupled with the AIG bailout, the approval by the U.S. Congress of the TARP, as well as the forced conversion of the few remaining investment banks into commercial banks, prominently J.P. Morgan and Goldman Sachs, in order to provide these institutions with unlimited access to the discount window of the FED FED
Federal Reserve
Officially, Federal Reserve System, is the United States’ central bank created in 1913 by the ’Federal Reserve Act’, also called the ’Owen-Glass Act’, after a series of banking crises, particularly the ’Bank Panic’ of 1907.

FED – decentralized central bank : http://www.federalreserve.gov/
.

A full year has gone by since these events, yet little has changed on Wall Street. The major financial institutions continue to increase their size through the acquisition of smaller rivals, thereby reinforcing the Too Big to Fail model. Widespread speculation continues unchecked in commodity markets, while Hedge Funds Hedge funds Unlisted investment funds that exist for purposes of speculation and that seek high returns, make liberal use of derivatives, especially options, and frequently make use of leverage. The main hedge funds are independent of banks, although banks frequently have their own hedge funds. Hedge funds come under the category of shadow banking. maximize profits using dubious schemes such as dark pools or flash trading Market activities
trading
Buying and selling of financial instruments such as shares, futures, derivatives, options, and warrants conducted in the hope of making a short-term profit.
, in which prior knowledge of market movements allows them to accumulate significant gains in a matter of milliseconds. And last but not least, the incentives and pay structure that led to a large extent to the excesses and fraud witnessed in financial markets in recent years, remains intact.

Even worse, the sense of urgency to make significant changes in the structure of the financial system has vanished, to the extent that the economic and financial situation has stabilized in the United States. Much of this change in public sentiment is due to the lobbying efforts of major financial institutions with the U.S. government as well as a press corps that is, for practical purposes, at the service of the U.S. financial elite. However, the key factor to understand the change of attitude towards financial reform is the absolute complicity of the economic team of Timothy Geithner, the Secretary of Treasure under the Obama administration, with the interests of the institutions that they ought to supervise and regulate.

In this way, in recent weeks Bloomberg News revealed that several members of Geithner’s economic team received millions in compensation by major Wall Street corporations in recent years. Five of his top advisers received a total of U.S. $ 12.7 million last year in compensations from several Wall Street giants: Gene Sperling and Mark Patterson received U.S. $ 887,727 and U.S. $ 637,492, respectively, from Goldman Sachs; Lee Sachs received more than $ 3 million from a Hedge Fund located in New York; Lewis Alexander received a salary of U.S. $ 2.4 million for its work as chief economist at Citigroup; and finally Matthew Kabaka received U.S. $ 5.8 million from private equity Equity The capital put into an enterprise by the shareholders. Not to be confused with ’hard capital’ or ’unsecured debt’. group, Blackstone [1].

At present this group of advisers command a modest annual salary (compared with their previous income) of U.S. $ 162,900, in exchange for their tasks in the administration of the U.S. $ 700 billion rescue package and the “redesign” of the regulation of the financial system. Yet they have nothing to worry about. In their role of advisors to Geithner none of them had to go through the Senate confirmation process, and therefore have no obligation to testify before the Senate or to explain or defend the policies implemented by the Treasury. Without doubt, once they finish with their current service at the Treasury, they will return to Wall Street, where they will be appropriately rewarded for the favors made during their term in office.

A classic example of the effectiveness of this strategy is the former mentor of Geithner, Robert Rubin. After his tenure as Secretary of Treasury for the Clinton administration, time during which he oversaw the repeal of the Glass Steagall act, Rubin proceeded to join the board of Citigroup with a comfortable annual salary of U.S. $ 20 million.

Moreover it is not necessary to refer to the assistants in order to understand the true nature of Geithner. To the extent that the details of the private negotiations, which led to the collapse of Lehman Brothers and rescue of AIG, have been made public, it is increasingly clear that the Geithner’s loyalty tends to be more on the side of Wall Street institutions than that of the interests of the taxpayer.

In the case of AIG, the history is relatively well known. During the boom years of the subprime bubble, AIG underwrote a massive amount of credit default swaps CDS
Credit Default Swaps
Credit Default Swaps are an insurance that a financial company may purchase to protect itself against non payments.
(CDS) for institutions such as Bank of America or Goldman Sachs. Given that the theoretical probability of default of these financial instruments Financial instruments Financial instruments include financial securities and financial contracts. was extremely low, AIG didn’t set aside enough capital to cope with potential losses. So it was, that when the financial storm came, and AIG’s counterparties began to enforce the terms of contracts, the insurance firm was pushed to the brink of bankruptcy. Aware of the seriousness of the situation, employees of the division of AIG financial products entered into negotiations to withdraw the contracts with their counterparts offering to pay between 40 and 60 cents on the dollar. Otherwise, enforcing the full payment of the obligations would make the insurance firm bankrupt, and as a result, the counterparties would lose most of their money.

This situation changed radically thanks to the proverbial intervention of the New York Fed, under its President, Timothy Geithner. Once the Treasury took control of AIG, with a total cost for the government of U.S. $ 182.3 billion dollars between loans and guarantees Guarantees Acts that provide a creditor with security in complement to the debtor’s commitment. A distinction is made between real guarantees (lien, pledge, mortgage, prior charge) and personal guarantees (surety, aval, letter of intent, independent guarantee). for the insurance giant, the New York Fed was placed in charge of the negotiations between AIG and its counterparties. After a series of private meetings, the New York Fed under Geithner ordered AIG to pay 100 cents on the dollar on existing contracts, overturning previous agreements. According to Bloomberg News, the cost of the decision to make whole to AIG counterparties was at least $ 13 billion, or 40% of the total amount of U.S. $ 32.5 billion that AIG paid to terminate existing swaps [2]. Thanks to the generosity of Geithner and co., Goldman Sachs received payments for $ 14 billion during the last quarter of 2008 and first quarter of 2009 from AIG. During this same period, the U.S. government propped up Goldman with more than $ 31 billion in loans and guarantees to the former investment bank [3].

Bearing in mind the magnitude of these figures is clear that it is due to the collusion between members of firms like Goldman Sachs and government officials that it is possible that despite the worst financial crisis since the Great Depression bonuses for employees of Wall Street firms are set for a new record in 2009, with total payments of U.S. $ 140 billion [4]. And also understand how, despite the massive government support and significant revenues at Goldman, the Treasury of the United States is going to allow the purchase, at reduced prices, of Tax credits currently held by Fannie Mae. The purchase of these instruments would allow Goldman to reduce taxes on their profits [5].

Although this transaction still must be approved by the government, pending an analysis of whether this represents the best interest Interest An amount paid in remuneration of an investment or received by a lender. Interest is calculated on the amount of the capital invested or borrowed, the duration of the operation and the rate that has been set. of taxpayers, it is clear that while those responsible for the crisis continue in charge, the profits and interest from institutions such as Goldman Sachs will always be above the interest of the taxpayers. Thus, despite the crisis they keep winning, and off course, the people paying.




Footnotes

[1“Geithner Aides Reaped Millions Working for Banks, Hedge Funds” by Robert Schmidt, Bloomberg News, available at: http://www.bloomberg.com/apps/news?pid=20601087&sid=abo3Zo0ifzJg

[2“New York FED’s Secret Choice to Pay for Swaps Hits Taxpayers” by Richard Teitelbaum and Hugh Son, Bloomberg News, available at: http://bloomberg.com/apps/news?pid=20601109&sid=a7T5HaOgYHpE

[3“Goldman Sachs,Welfare Queen” by Daniel Gross, available at: http://www.slate.com/id/2214076/pagenum/all/

[4“Wall Street on Track to Award Record Pay” by Aaron Lucchetti and Stephen Grocer, The Wall Street Journal, available at: http://online.wsj.com/article/SB125547830510183749.html

[5“Goldman Looks to Buy Fannie Tax Credits” por Damian Paletta, The Wall Street Journal, disponible en: http://online.wsj.com/article/SB125712159288021753.html

Daniel Munevar

is a post-Keynesian economist from Bogotá, Colombia. From March to July 2015, he worked as an assistant to former Greek Finance Minister Yanis Varoufakis, advising him on fiscal policy and debt sustainability.
Previously, he was an advisor to the Colombian Ministry of Finance. He has also worked at UNCTAD.
He is one of the leading figures in the study of public debt at the international level. He is a researcher at Eurodad.

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