The Real Bush Legacy: A Marriage Of Greed And Stupidity

Finally... an excuse to run some photos of Christiano Ronaldo

In the new issue of Rolling Stone Matt Taibbi put together an 8-page look at the crisis 8 years of Bush has left us to face: the marriage of greed and stupidity. The problems our society has to face up to go much deeper than AIG taxpayer-subsidized bonuses in the midst of the "largest quarterly loss in American corporate history-- some $61.7 billion." This morning's NY Times published an editorial by former IMF chief economist Sam Johnson in sync not just with what Taibbi found but what most Americans have also concluded: that "AIG can hardly claim that its generous bonuses attract the best and the brightest. So instead, it defends the payments by arguing they’re needed to retain employees who are crucial for winding down transactions that are 'difficult to understand and manage.' In other words, only the people who stuck the knife into the American International Group can neatly extract it for a decent burial. There is no reason to believe this."

Taibbi, of course, goes much further than Johnson. He sees the AIG mess as part of a culture by, for and of "the group of psychopaths on Wall Street whom we allowed to gang-rape the American Dream." In Yesterday's Times a timeline made it clear that the Bush Regime was still running the show when the AIG bonuses were agreed to. "In November, when the bailout of A.I.G. was restructured, Treasury and Fed officials negotiated the terms under which A.I.G. could make the retention payments." Even after the irresponsible Grand Obstructionist Party's footdragging in the Senate that held up Geithner's ability to get to work at Treasury, the course of action set by the political elite to save the asses of the Wall Street elite doesn't seem to have changed much-- if at all. Taibbi:

When Geithner announced the new $30 billion bailout, the party line was that poor AIG was just a victim of a lot of shitty luck-- bad year for business, you know, what with the financial crisis and all. Edward Liddy, the company's CEO, actually compared it to catching a cold: "The marketplace is a pretty crummy place to be right now," he said. "When the world catches pneumonia, we get it too."

Before you start feeling sorry for poor AIG, keep in mind that Liddy, a slick, predatory corporate career criminal from way back "conveniently forgot to mention that AIG had spent more than a decade systematically scheming to evade U.S. and international regulators, or that one of the causes of its 'pneumonia' was making colossal, world-sinking $500 billion bets with money it didn't have, in a toxic and completely unregulated derivatives market."

Taibbi's main point, though, ventures into territory the Times will never go: the Wall Street meltdown and ensuing bailout amounted to a coup d'état by a dying regime, not just Bush but of the elite that gave legitimacy to the structures that hold up that conservative vision of the new American plutocracy.

The crisis was the coup de grâce: Given virtually free rein over the economy, these same insiders first wrecked the financial world, then cunningly granted themselves nearly unlimited emergency powers to clean up their own mess. And so the gambling-addict leaders of companies like AIG end up not penniless and in jail, but with an Alien-style death grip on the Treasury and the Federal Reserve-- "our partners in the government," as Liddy put it with a shockingly casual matter-of-factness after the most recent bailout.

The mistake most people make in looking at the financial crisis is thinking of it in terms of money, a habit that might lead you to look at the unfolding mess as a huge bonus-killing downer for the Wall Street class. But if you look at it in purely Machiavellian terms, what you see is a colossal power grab that threatens to turn the federal government into a kind of giant Enron-- a huge, impenetrable black box filled with self-dealing insiders whose scheme is the securing of individual profits at the expense of an ocean of unwitting involuntary shareholders, previously known as taxpayers.

I linked to Taibbi's story above because I want to recommend that you read the whole thing. Here, let me do it again. He's eloquent and if you weren't paying attention when the AIG crisis started dominating the headlines you may have missed some crucial moments, moments Taibbi recounts with precision and insight. We all heard Orlando Congressman Alan Grayson grilling Liddy to find out who some of the people responsible for the mess AIG's Financial Products division were. Liddy refused to give up the names of any of the crooks-- claiming angry peasants with pitchforks and piano wire would kill their children (which is how the elites think about the rest of us)-- except for one guy: Joseph Cassano. If you've been following this mess closely, you already know who Cassano is. If you haven't... we have Matt Taibbi analytical and poetic prose to describe him-- and the rest of this unfolding tragedy.

The best way to understand the financial crisis is to understand the meltdown at AIG. AIG is what happens when short, bald managers of otherwise boring financial bureaucracies start seeing Brad Pitt in the mirror. This is a company that built a giant fortune across more than a century by betting on safety-conscious policyholders-- people who wear seat belts and build houses on high ground-- and then blew it all in a year or two by turning their entire balance sheet over to a guy who acted like making huge bets with other people's money would make his dick bigger.

That guy-- the Patient Zero of the global economic meltdown-- was one Joseph Cassano, the head of a tiny, 400-person unit within the company called AIG Financial Products, or AIGFP. Cassano, a pudgy, balding Brooklyn College grad with beady eyes and way too much forehead, cut his teeth in the Eighties working for Mike Milken, the granddaddy of modern Wall Street debt alchemists.

Milken, who pioneered the creative use of junk bonds, relied on messianic genius and a whole array of insider schemes to evade detection while wreaking financial disaster. Cassano, by contrast, was just a greedy little turd with a knack for selective accounting who ran his scam right out in the open, thanks to Washington's deregulation of the Wall Street casino. "It's all about the regulatory environment," says a government source involved with the AIG bailout. "These guys look for holes in the system, for ways they can do trades without government interference. Whatever is unregulated, all the action is going to pile into that."

The mess Cassano created had its roots in an investment boom fueled in part by a relatively new type of financial instrument called a collateralized-debt obligation. A CDO is like a box full of diced-up assets. They can be anything: mortgages, corporate loans, aircraft loans, credit-card loans, even other CDOs. So as X mortgage holder pays his bill, and Y corporate debtor pays his bill, and Z credit-card debtor pays his bill, money flows into the box.

The key idea behind a CDO is that there will always be at least some money in the box, regardless of how dicey the individual assets inside it are. No matter how you look at a single unemployed ex-con trying to pay the note on a six-bedroom house, he looks like a bad investment. But dump his loan in a box with a smorgasbord of auto loans, credit-card debt, corporate bonds and other crap, and you can be reasonably sure that somebody is going to pay up. Say $100 is supposed to come into the box every month. Even in an apocalypse, when $90 in payments might default, you'll still get $10. What the inventors of the CDO did is divide up the box into groups of investors and put that $10 into its own level, or "tranche." They then convinced ratings agencies like Moody's and S&P to give that top tranche the highest AAA rating-- meaning it has close to zero credit risk.

Suddenly, thanks to this financial seal of approval, banks had a way to turn their shittiest mortgages and other financial waste into investment-grade paper and sell them to institutional investors like pensions and insurance companies, which were forced by regulators to keep their portfolios as safe as possible. Because CDOs offered higher rates of return than truly safe products like Treasury bills, it was a win-win: Banks made a fortune selling CDOs, and big investors made much more holding them.

The problem was, none of this was based on reality. "The banks knew they were selling crap," says a London-based trader from one of the bailed-out companies. To get AAA ratings, the CDOs relied not on their actual underlying assets but on crazy mathematical formulas that the banks cooked up to make the investments look safer than they really were. "They had some back room somewhere where a bunch of Indian guys who'd been doing nothing but math for God knows how many years would come up with some kind of model saying that this or that combination of debtors would only default once every 10,000 years," says one young trader who sold CDOs for a major investment bank. "It was nuts."

Now that even the crappiest mortgages could be sold to conservative investors, the CDOs spurred a massive explosion of irresponsible and predatory lending. In fact, there was such a crush to underwrite CDOs that it became hard to find enough subprime mortgages-- read: enough unemployed meth dealers willing to buy million-dollar homes for no money down-- to fill them all. As banks and investors of all kinds took on more and more in CDOs and similar instruments, they needed some way to hedge their massive bets -- some kind of insurance policy, in case the housing bubble burst and all that debt went south at the same time. This was particularly true for investment banks, many of which got stuck holding or "warehousing" CDOs when they wrote more than they could sell. And that's were Joe Cassano came in.

Known for his boldness and arrogance, Cassano took over as chief of AIGFP in 2001. He was the favorite of Maurice "Hank" Greenberg, the head of AIG, who admired the younger man's hard-driving ways, even if neither he nor his successors fully understood exactly what it was that Cassano did. According to a source familiar with AIG's internal operations, Cassano basically told senior management, "You know insurance, I know investments, so you do what you do, and I'll do what I do-- leave me alone." Given a free hand within the company, Cassano set out from his offices in London to sell a lucrative form of "insurance" to all those investors holding lots of CDOs. His tool of choice was another new financial instrument known as a credit-default swap, or CDS.

Sounds complicated, right? It does to me. But that's why we have a government. It's supposed to protect us from predators-- not just the Osama bin-Ladens and Kim Jong-il, but also from the Ken Lays, Edward Liddys and Joseph Cassano (who, by the way retired from AIG this month with $315 million, $34 million of it in a sweet bye-bye bonus). The incompetent and self-serving Bush Regime protected us from none of them. In fact, almost our entire political elite let us down. Wednesday, when President Obama compared AIG and the banksters to suicide bombers, he came closer than he may have realized to assessing the greatest threat to our society--a threat that sums up the Bush legacy in its entirety. And he was getting advice about the dangers of AIG even before the election. Still sounds like a good idea half a year later: "Extradite Cassano. Subpoena Greenberg. Prosecute Willumstaad and Allen." He should discuss that advice his grassroots supporters gave him with that Geithner fella he brought in from Wall Street to save us... from Wall Street.