What’s right isn’t always what’s good

Posted: October 28, 2011 | Author: | Filed under: Bailout Blues, Banksters, financial institutions | Tags: | 30 Comments

There’s something that bothers me about the current conversation (diatribe?) about the sins of the bankers.

caricature of very overweight and wealthy man

The tone of a lot of the talk is as if they belong to some other species, as if they commit crimes nobody else does, but also as if they keep their heads when nobody else can.

Holding them to sub- or superhuman standards means it’s hard to understand why they do what they do. And that means it’s hard to make them do the right thing.

Let me explain what I mean.

After the crash, US banks were bailed out. People were outraged, and rightfully so. It’s just wrong for a thief to rob your house and then grab your savings when the jerk can’t make his rent.

But.

The time to worry about the thieving was before the crash. While it was going on. Then it would have been possible to stop it without crashing the economy.

It would have also stopped the wild ride, and — at the time — not many people wanted that. Plenty of people are just like bankers without a bank. There’s a big difference in impact, but the difference is one of degree. They’re no more subhuman than everyone else.

When the crash happens the sad fact is the thief lives in the same house you do. When he (the high-flying financial mavens were almost all “he”) can’t make his share of the rent, you both get evicted.

The thieves are literally in the same house. They’re in the same economy. The 99% and the bankers all depend on it. If the economy is destroyed, everybody is just as homeless. Your pension loses money. Your job is destroyed. The value of your house goes down. That’s been made rather clear by now.

There is no way — during the actual crash — to limit the damage to the people who caused it. There is no choice but to bail out the jerks who caused the problem. It’s not right. It’s maddening. But doing anything else means more damage for you. It’s not about punishing the guilty at that point. It’s about saving the innocent.

That’s why the bailout was the right thing to do. It wasn’t done well, or enough, or with any of the necessary rules attached to it, but it did avert a much bigger disaster. That’s all clear by now, and leads even compassionate economists to point out that economics is not a morality play.

The time for retribution is afterward. That is, now. But now the 1% are going scot-free and raking in more money than ever. That’s criminal laxity. Not the bailout.

However, bankers are just people with banks, so they’re now going through the same process of preferring moral outrage to emergency assistance.

Europe is having a similar problem with inability to repay debts. In their case it’s a country, not mixed salads of mortgages, but the problem is the same.

Unless Greece is convincingly bailed out, everybody with money in the market will be worried about how much they could lose if they don’t get out now. If everybody pulls their money out, economies freeze up, and we all go broke.

So what have the bankers been arguing about? How to create the funds for an adequate bailout? No, it’s about not wanting to bail out those profligate Greeks. It’s the same routine, but with more numbers and graphs: I was frugal. It’s not fair to make me pay some gambler’s debts. They should just suck it up.

These are people whose jobs are dealing with money. They, of all people, should know that economics is not a morality play. They, of all people, should know that when the sheriff is at the door with the eviction notice, it’s not the time to beat up the crackhead brother for squandering the rent. At that point, you just scrape together the rent. Later, you send the brother to rehab.

What’s funny, though, is how far the inability to recognize the common roots of feelings extends. Krugman is smarter than I am in practically every way, but even he is continually mystified by the non-rational adherence to austerity when austerity will cost the earth. (Read his blog. There are dozens of posts asking What were they thinking?.)

There’s nothing mysterious about it. It’s the same reaction everybody has. Don’t make me pay for someone else’s mistakes. It doesn’t matter whether you agree with the bankers’ definitions of mistakes. Nobody wants to pay for what they see as somebody else’s mistakes. And when something turns out to be a mistake, it’s amazing how fast it becomes somebody else’s.

The other unspoken, non-rational motivation is the equally simple one that austerity for thee but not for me is a great way for the rich to get richer. That, too, may be unmentionable, but it is not mysterious.

The point is this. Once the emotional roots of a non-rational stand are recognized, there’s a chance one could deal with it. It’s only a chance, but without that understanding, there’s none at all. Understanding allows us to start fighting the right battles instead of the distractions.

For instance, bankers are professionals, so they hang an economic story around their outrage. They come up with theoretical underpinnings for why austerity is such a good idea. None of those pins stays in place when examined, but they don’t care. And that is the hallmark of acting on feelings, just like an ordinary human being. They’re no more superhuman than everyone else.

I’m not suggesting that every argument one doesn’t like can be written off as “emotional.” All arguments have to be evaluated against the evidence, and evaluated several times to make sure the results are right. But once that’s done, if people keep clutching an anti-rational position, it is not insulting to figure out why they’re doing that. It’s essential.

And then when one argues with them, one needs to argue with their real reasons, not their stories.

So, in the present case, if the roots of the cries for austerity were faced squarely, we could clear the way for useful solutions. We could discount the more-for-me motivation as the bog-standard grabbiness we all have and decide to ignore it. And to the extent that the cries are rooted in a sense of unfairness, maybe we could get past it.

We could acknowledge the unfairness. We could resolve to deal with it after the crisis, instead of letting the rich and powerful off scot-free. And we could acknowledge that fairness is better served by helping millions of small people through the crisis, even if it also carries along some perps. That’s the good thing to do. Punishing the perps may feel right, but it’s stupid to let it cost us everything we have.

[Update Oct 27th: It remains to be seen whether today’s agreement in Europe to help Greece did enough or just did the minimum to keep the markets from panicking this very minute. Still, any prevention of panic is better than none.]

Crossposted to Acid Test

Captains of Contrived Chaos

Posted: July 27, 2011 | Author: | Filed under: Federal Budget, Federal Budget and Budget deficit | Tags: , , | 19 Comments

Professor Chaos and General Disarray

It’s started.  All you have to do is watch the stock market and you’ll  see it.  The unbelievably contrived debt ceiling nonsense is taking hold.  The republican business big guns are out and they don’t seem to be able to stop a group of very determined crazy, freshmen congressmen that don’t have a clue about government or economics.

Here’s some headlines you may want to check out.

First, it’s obvious Boehner, the Chamber of Commerce, and even Wall Street minions don’t have control over the teabots.

Boehner: ‘A Lot’ Of Republicans Want To Force Default, Create ‘Enough Chaos’ To Pass Balanced Budget Amendment

House Speaker John Boehner (R-OH) said today that some members of his own caucus who are refusing to agree to a compromise debt ceiling deal are hoping to unleash “chaos” and thus force the White House and Senate Democrats to make bigger concessions than they’re already offering. As many as 40 House Republicans, especially Tea Party members and freshmen, have demanded nothing short of changing the Constitution to include a balanced budget amendment before they would vote to raise debt ceiling, even though that has zero chance before the U.S. faces potential default on Aug. 2.

A balanced budget amendment is one of the most insane laws a government can pass.  It lets them spend all they want when revenues come in and create depressions during recessions.  Pretty much what they’ve been doing the last 10 years.  Even John McCain says its crazy.

McCain To ‘Foolish’ Republicans Demanding A Balanced Budget Amendment: ‘It’s Bizarro’

In exchange for not sending the nation into economic ruin, a swath of Republicans are demanding to pass a Balanced Budget Amendment (BBA) to the Constitution. By forcing government to actively slash spending in the face of falling revenues, such an amendment “would greatly damage an already-weak recovery,” “mandate perverse actions in the face of recessions,” and is considered one of the worse ideas in Washington. Nonetheless, as House Speaker John Boehner (R-OH) said today, the fringe contingent of the GOP is aiming to create “enough chaos” to force the Senate and the White House to accept a BBA. Freshman Sen. Mike Lee (R-UT), sponsor of the Senate’s BBA bill, actually wants America’s “house to come down” unless he gets his way. But today on the Senate floor, a more seasoned senator schooled the freshman contingent on economic reality. Though an avid supporter of the BBA, Sen. John McCain (R-AZ) stood amazed that some members actually believed a BBA could pass in the Senate. Such a belief, he said, is “worse than foolish. That is deceiving.” Taking heed of numerous economists’ warning about the Aug. 2 deadline, McCain said that Republicans who are holding out on raising the debt ceiling for an impossible amendment is “unfair” and “bizarro”

Here’s a list of the Republicans and which side they’re on: CIVIL WAR: GOP Coalition Splinters Into Open Conflict Over Debt Ceiling.   Boehner’s signed on The Chamber of Commerce, crotchety old Fred Thompson, Nasty young Cantor, Nutcase Allen West, and the presidential candidates that aren’t Michelle Bachmann.  She’s out in front of creating the end times, as usual.

Margaret Carlson–yeah, i know–is even calling Boehner the Gang of One.

The resistance came from the right. At least 60 House Republicans have declared that they won’t vote for a debt-limit increase — for any reason. Although outside experts were brought in to explain the potential consequences of default, including a “death spiral” in the bond market initiated by a loss of confidence, many of the Tea Party intransigents didn’t bother to attend the lecture. In any case, they preferred a potential catastrophe to a deal that would provide political benefits to the president — even if most of the policy benefits accrued to Republicans.

When Obama called for increasing the revenue component from $800 billion to $1.2 trillion, Boehner had his excuse. He pulled out of negotiations, leaving Obama to complain in an impromptu news conference that he had been left, once again, “at the altar.”

It’s hard to know how much of Obama’s lament was genuine and how much of it was designed to give Boehner bragging rights about how he had bested the president. In any case, it wasn’t enough. Boehner merely gave his colleagues dramatic cuts in spending; what they really want is for Obama to fail, painfully and visibly. For that, higher interest rates, a devalued dollar, cratering stock markets and another recession appear to be a price worth paying. They don’t want to govern; they want to stick it to the man.

It’s obvious today that the markets realize that the confidence fairy ran off with the high priests of voodoo economics.  Things are starting to crumble.  That’s the live link to all the red.  Here’s a mid day recap.  Notice that credit default swaps (argghhhh) are on the rise!

Stocks fell for a third day and Treasuries and commodities slid as a stalemate over the debt ceiling pushed the U.S. closer to default and durable-goods orders unexpectedly dropped. The dollar rallied.

The Standard & Poor’s 500 Index lost 1.7 percent to 1,309.87 at 2:31 p.m. in New York. The cost of insuring against a U.S. default climbed to the highest level since February 2010 and 10-year Treasury note yields climbed four basis points to 2.99 percent. Coffee and oil lost more than 1.5 percent and gold erased earlier gains to drag the S&P GSCI Index down 0.9 percent. The Dollar Index rose 0.8 percent.

The dispute over plans to cut the U.S. federal deficit has stolen investor attention away from an earnings season that has produced higher-than-estimated results at about 81 percent of S&P 500 companies that reported so far. Shares of industrial companies helped lead declines today after a Commerce Department report showed durable goods orders fell 2.1 percent.

“It’s a tug of war between the headline risk of the debt ceiling issue and earnings,” Matthew DiFilippo, who helps manage $1 billion as director of research at Stewart Capital Advisors LLC in Indiana, Pennsylvania, said in telephone interview. “The volatility may create buying opportunities because corporate earnings are coming in strong, and the market does appear to be cheap compared to the underlying earnings power.”

 Wall Street really doesn’t care how we pay are bills.  They only care that we do it.  There are plenty of revenue sources out there.  Most of these guys don’t subscribe to voodoo economics at all.  Republicans and most likely the President think that they’re all supply side-oriented.  Most economists and financiers don’t buy that at all and a lot of them have been calling for increased taxes.  They just want a plan that reduces risk,

What Wall Street, and the ratings agencies are worried about is not whether we can pay–we can–but whether we will.  A lot of Republicans seem to think that we can secure our AAA rating by showing the agencies–and the markets–that we’ve made serious cuts.  But if you achieve this end by holding the debt ceiling hostage, what you’re really demonstrating is not a tough-minded commitment to entitlement reform, but a political system so broken that it has trouble taking even simple, obvious steps to keep the fiscal engine running.  Our AAA is not at risk because our current fiscal path is unsustainable, but because ratings agencies know what many GOP freshman and party activists apparently do not: that doing the unpopular things required to get the budget in balance is going to require both parties to hold hands and jump together.  Otherwise, whoever forces through their unpopular plan (huge tax increases/massive spending cuts) is going to get trounced at the next elections by an opposition party promising to undo whatever it is the party in charge has just done.

We are not broke. We can pay our bills. We can meet our obligations.  It’s just a bunch of nutcases in Washington DC aren’t going on reality.  They’re off playing Professor Chaos and General Disarray with our economy because they hate the Washington Insider Kewl Kids.

A Self-Examined Academic Life

Posted: February 6, 2011 | Author: | Filed under: academia, Equity Markets, financial institutions, Global Financial Crisis | Tags: , , , , | 22 Comments

Macroeconomists seemingly have adopted monastic practices of self-flagellation to explain why the tribe completely misjudged the housing bubble .  Their collective crystal balls didn’t predict an ensuing financial crisis either.  A blog entry by Finance Professor Raghu Rajan at University of Chicago has further stimulated the conversation today.  He’s written a book called Fault Lines and made remarks from the book at its official blog site. I found it at Memeorandum along with a few choice links.

I’ve written about  fresh water and salt water economics before.  Some of today’s discussion clearly involves philosophical fault lines.  Rajan is from the panultimate fresh water university and all finance academics eventually drown in the Efficient Markets Hypothesis (EMH) literature. I’ve been pretty outspoken about how much damage I think the EMH has done to economics and especially my field, financial economics.  However, it’s hard to get published in finance journals taking a contrarian view.  This is one explanation he examines, then dismisses which is why I’ve taken a good look at his argument.

I have not read his book, but judging from the video and this blog entry, Rajan spends some time on the role of EMH and EMH true believers in the crisis.   I can provide you with my own anecdotes on this.  I can also tell you I tried to avoid some seminars because I don’t want to read any more Eugene Fama who is Rajan’s colleague.  I frankly think EMH blinders or misunderstanding were a good deal–but not all–of the problem.

I was researching the subprime markets directly after Katrina and was told by my finance professors that I was following an unpublishable and boring line of research. (They used the term ‘unsexy’.)  I saw hints of problems in subprime markets as early as late 2005 in the work I did with the sensitivity of stock prices of finance companies heavily invested in subprime loans to some key macroeconomic variables. I was told that line of research was unlikely to help my marketability and ability to get tenure upon graduation.  They yawned when I presented the paper.  I turned it in for my third econometrics seminar and switched to something else.

Finance journals editors do love them some EMH so anything on market anomalies is likely to get a jaundiced set of editor eyes.   But, Rajan brings up some important points and the resulting discussion is worth viewing here.   Here’s Rajan talking directly to the EMH and why he thinks it may not be a big deal.

Perhaps the reason was ideology: we were too wedded to the idea that markets are efficient, market participants are rational, and high prices are justified by economic fundamentals. But some of this criticism of “market fundamentalism” reflects a misunderstanding. The dominant “efficient markets theory” says only that markets reflect what is publicly known, and that it is hard to make money off markets consistently – something verified by the hit that most investor portfolios took in the crisis. The theory does not say that markets cannot plummet if the news is bad, or if investors become risk-averse.

Critics argue that the fundamentals were deteriorating in plain sight, and that the market (and economists) simply ignored it. But hindsight distorts analysis. We cannot point to a lonely Cassandra like Robert Shiller of Yale University, who regularly argued that house prices were unsustainable, as proof that the truth was ignored. There are always naysayers, and they are often wrong. There were many more economists who believed that house prices, though high, were unlikely to fall across the board.

Rajan points out that this probably isn’t the sole or primary explanation even though it is one that gets a lot of ink these days.  I too think some of the problem is a misunderstanding of the various forms of EMH . So, the major philosophical debate happening in finance circles isn’t central to Rajan’s explanation. There is no conspiracy of EMH apologists to force misunderstanding of market rationality, so alright, I’ll give him that one.

Economist Tyler Cowen at Marginal Revolution likes the alternative succinct explanation Rajan provides.  (You should read the comments to that thread.)

Raghu Rajan nails it:

I would argue that three factors largely explain our collective failure: specialization, the difficulty of forecasting, and the disengagement of much of the profession from the real world.

Rajan also dismisses  another  circle of conspirators by stating this.  It’s also probably why one of those so-called progressives jumped on the dismissal earlier today.  This conspiracy meme crosses circles of folks that are more into political economy than economics itself.  This group argues the hypothesis that the “system” bribed economists to stay quiet.  I’ve gotten into it more than a few people of the Matt Stoller mindset and various Rand hanger-ons about  this improbable case.  One of the biggest memes is that the FED actively influences economists not to publish things against their interests. (Usually, this comes from Austrian School folks who can’t get published any where mainstream because they want to completely operate outside of the scientific method and ignore data.)  Matt Yglesias is one of these people making a living off this canard and he jumped to the bait immediately. His reasoning  speaks more about him than about economists.

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Perspective

Posted: March 5, 2010 | Author: | Filed under: Bailout Blues, Global Financial Crisis, The Bonus Class, The Great Recession, U.S. Economy | Tags: , , , | 1 Comment

The WSJ has an interesting list of folks contributing to “Academics on What Caused the Financial Crisis“. You’ll find a lot of the usual suspects that we’ve talked about around here. There’s some interesting comments on the housing and subprime bubbles, the increased use of exotic financial instruments, and our old friend moral hazard. I’m going to a highlight just a few for you.

Some of the more interesting comments focused on how the housing bubble was enabled by government. Some blame low interest rates by the FED, others see that it wasn’t just a U.S. phenomenon and look for bigger reasons. Many folks see securitization and the pass-the-trash loan model as the big factors.

Dwight Jaffee, Haas School of Business, University of California at Berkeley

On the government’s role in creating the housing bubble: “I find the GSEs [government sponsored enterprises including Freddie Mac and Fannie Mae] to have been a significant factor in expanding the mortgage crisis as a result of their high volume of high-risk mortgage purchases and guarantees. Furthermore, I find that the GSE housing goals for lending to lower-income households and in lower-income regions were secondary to profits as a factor motivating the GSE investments in high-risk mortgages.

…

Christopher Mayer, Columbia Business School

On the housing bubble: “For the housing market, the picture is much more complex than it might first appear. The housing bubble was global in nature and also included commercial real estate, so simple explanations that rely solely on predominantly American institutions like subprime lending or highly structured securitizations cannot be the only factor leading to real estate market excesses. …My own research shows the important role played by declining long‐term, real interest rates in helping drive real estate prices to high levels, at least up to 2005. However, at some point, speculation by both borrowers and lenders took over, leading to excessive appreciation in many parts of the United States and the rest of the world.”

…

Pierre-Olivier Gourinchas, University of California at Berkeley:

How did subprime bust trigger a financial tsunami? “Three factors ensured that the collapse in what was a minor segment of the U.S. financial markets turned into a global financial conflagration. First, profound structural changes in the banking system, with the emergence of the ‘originate-and-distribute’ model, coupled with an increased securitization of credit instruments, led to a decline in lending standards and a general inability to re-price complex financial products when liquidity dried-up.

Randall Kroszner, University of Chicago Booth School of Business and a former Fed governor:

On reducing moral hazard: “Given the extent of interventions world-wide, issues of moral hazard will remain. The Rubicon cannot be uncrossed and financial market behavior will surely anticipate the return of the “temporary” programs and guarantees in the event of another crisis. To maintain the stability of the system and to protect taxpayers, the “too interconnected to fail” problem needs to be addressed in two ways: through improvements in the supervision and regulation framework as well as improvements in the legal and market infrastructure to make markets more robust globally.”

“Ultimately, to mitigate the potential for moral hazard, policy makers must feel that the markets are sufficiently robust that institutions can be allowed to fail with extremely low likelihood of dire consequences for the system.”

These are just a few brief excerpts from a few of the contributors. You should really go check out the full article.

In the same vein, I wanted once again to go behind the unemployment number released to day and the WSJ has a pretty good explanation of the figure that I follow closely. It is called the U-6 unemployment rate. It not only focuses on people without jobs but people that are ‘underemployed’. This rate, unlike the unemployment rate itself which is staying around 9.7%, went up last month.

The U.S. jobless rate was unchanged at 9.7% in February, following a decline the previous month, but the government’s broader measure of unemployment ticked up 0.3 percentage point to 16.8%.

The comprehensive gauge of labor underutilization, known as the “U-6″ for its data classification by the Labor Department, accounts for people who have stopped looking for work or who can’t find full-time jobs. Though the rate is still 0.6 percentage point below its high of 17.4% in October, its continuing divergence from the official number (the “U-3″ unemployment measure) indicates the job market has a long way to go before growth in the economy translates into relief for workers.

You can read more at NYT in a thread called “Is the Recovery Losing Steam?”

Again and despite what AZ Senator John Kyle says–as highlighted in Krugman’s recent op-ed “Bunning’s Universe”–most folks cannot make ends meet on unemployment benefits and must find jobs that are way beneath their job skills, their income requirements, or the lower the number of hours they wish to work. This more realistic rate accounts also for people who simply have given up on finding a job. These folks don’t even collect unemployment benefits. Just to remind you on Kyle’s priorities, here’s a good bit of prose from Krugman.

Consider, in particular, the position that Mr. Kyl has taken on a proposed bill that would extend unemployment benefits and health insurance subsidies for the jobless for the rest of the year. Republicans will block that bill, said Mr. Kyl, unless they get a “path forward fairly soon” on the estate tax.

Now, the House has already passed a bill that, by exempting the assets of couples up to $7 million, would leave 99.75 percent of estates tax-free. But that doesn’t seem to be enough for Mr. Kyl; he’s willing to hold up desperately needed aid to the unemployed on behalf of the remaining 0.25 percent. That’s a very clear statement of priorities.

You can see from various folks quoted on top (some from liberal and some from staunchly conservative b-schools), they do not place the blame for the last financial catastrophe on folks who don’t want to work and simply want to sit around collecting government money. Yet, if you look at today’s unemployment numbers, it’s just plain working folks that are not recovering from the financial global crisis. They are not getting the policy or money to deal with what the crisis did to them. Instead, the people who cause it are the one’s getting giant bonuses, boosts in stock prices, and continued government goodies.

Life isn’t necessarily fair, but does macroeconomic policy have to be so too during a Democratically led Congress and White House?

Market Manipulation 101 or How to Rob Fort Knox in front of a Congressional Panel

Posted: February 3, 2010 | Author: | Filed under: Bailout Blues, Equity Markets, Global Financial Crisis, The Media SUCKS, U.S. Economy, Voter Ignorance | Tags: , , , , , | 1 Comment

Every day, as the AIG saga unfolds, I have to wonder if there is any vestige of a functional regulatory scheme left in this country. I’ve already decided that there is no shred of decency left in any one whose hand came close to unraveling the insurance giant and its deals. I know this is an area where eyes glaze over, but really, it’s like solving a crime that even Miss. Marple couldn’t fathom. Ladies and Gentlemen, we’ve been robbed.

It may be too complex for most journalists to report about, but the financial blog realm, full of individual investors, academics and pissed off Americans is keeping the story alive. The headline today from the Atlantic is there are $100 Million More in AIG bonuses. Don’t forget, we basically OWN this company so this is OUR money. Most voters are wise enough to know that this alone does not pass the threshold of decency. You don’t have to have a PHd with an emphasis on corporate governance to figure out that something is very wrong when people can bankrupt a company one year, and still collect bonuses the very next.

In the ongoing AIG bonus saga, the troubled insurer will distribute around $100 million in bonuses today, that’s likely much to the dismay of taxpayers who now own the firm. Despite the fact that AIG is technically under compensation restrictions, many so-called “guaranteed bonuses” that were in place before AIG’s collapse still must be honored by law. This is a regrettable situation, and speaks loudly to the messy problem that bailouts pose.

This is the headline today in many of the mainstream papers. This includes the NY Times that reports those bonuses may have been lowered by$20 million to lessen the blow. This is a mere trifling compared to what was pilfered from the dying AIG by Goldman Sachs as it was in the throes of death. Those Revenuers let Goldman Sachs pick clean the dead body of AIG before we got the bill for the funeral.

“A.I.G. has taxpayers over a barrel,” said Senator Charles E. Grassley, an Iowa Republican, in a statement on Tuesday night. “The Obama administration has been outmaneuvered. And the closed-door negotiations just add to the skepticism that the taxpayers will ever get the upper hand.”

A.I.G. first promised the retention bonuses to keep people working at its financial products unit, which traded in the derivatives that imploded in September 2008, leading to the biggest government bailout in history.

The contracts, which were established in December 2007, were intended to keep people from leaving the company and called for the bonuses to be paid in regular installments to more than 400 employees in the unit. The final payment, which was for about $198 million, was due in mid-March, but was accelerated to Wednesday as part of the agreement to reduce its size.

Fearing a firestorm like the one last spring, A.I.G. had been working with the Treasury’s special master for compensation, Kenneth R. Feinberg, on a compromise that would allow it to keep its promise in part, without offending taxpayers.

So, the bonuses plays into the theme of the moment–Populist Outrage–which is driving everything from angry teabots to high ratings for media screamers like Glenn Beck. It hides a bigger problem. What is going on behind the schemes in the books and the deals as we attempt to bailout a group of bad gamblers is far worse. Yves Smith of Naked Capitalism lays out some of the issues on HuffPo as well as a series of thread at her own blog. While we rage at the bonuses, the real crime happened behind the curtains, where you’re not supposed to notice Timothy Geithner, pulling the strings and blowing the steam from the giant talking head of Glenn Beck.

Although the focus of press and public attention has been the decision to pay out “100%”, this issue has not been framed as crisply as it should be. Remember, the underlying transactions were crap CDOs that the banks (or bank customers, a subject we will turn to later) owned, and on which the banks had gotten credit default swaps from AIG. The Fed in fact paid out WELL MORE than 100% on the value of the AIG credit default swaps by virtue of also buying the CDOs.

That is one simple paragraph to describe the scheme behind the bailout of AIG. The facts are nearly beyond belief and as Congressman Dennis Kucinich put it, the testimony provided by Timmy-in-the-Well-again Geithner and among others doesn’t “pass the smell test.” I’m not sure how you miss the smells coming from an open, festering mass grave. But, the majority of Americans, and Congressio Critters, seem to think it could be just a few dead birds in the attic. The evil is the ledger accounts at the New York Fed.

Smith says the details show the FED as either captured regulator exhibiting ‘crony behavior’ or the behavior of Geithner was duplicitous and merits legal action. That is even mild. Her Huffpo article lays out the arguments for both scenarios. Either way, Giethner’s NY Fed comes off badly and Paulson and the Bush Treasury come off as co-conspirators to a heist.

Another article which demonstrates palpable anger at both the ineffective Fed and Congress is written in the financial/investment blog Money Morning by Shah Giliani who is a retired Hedge Manager. Again, the lack of knowledgeable staff could be the reason the pieces to the puzzle are being put together outside of the mainstream media. It could be the story is too complex to be glamorous and deemed beyond the reach of the average 5th grade reading level achieved at most major newspapers. It’s even possible no one wants to take on the financial industry. The deal is what happened as outlined in the testimony–had some one on that Congressional Panel actually had a background in something other than professional politics subsidized by the FIRE lobby and a plethora of worthless law degrees and knew finance–should’ve caused outrage around the country and sent subpoenas flying out of the justice department and the SEC. The central players in this are Goldman Sachs and the New York Fed whose people are so entrenched now in the Treasury and the West Wing that you have to wonder if there ever will be enough justice left in this country to counteract what should be the cries of lynch mobs. Following through with the legal obligations to pay out the bonuses–with the smallish $20 million concession–is just the sprinkles on the cake. Perhaps it’s easier to pay them than to have the AIG financiers talk about the details as the FED and Treasury unwound their deals.

The rationale for what is essentially the breaking of so many laws is the rescue of the U.S. and the world from another Great Depression. There are always ignoble deeds, however, done in the name of the most noble causes. This should go down in the press and in history as The Great U.S. Treasury and Financial Market Heist. The last two secretaries of Treasury-Paulson and Geithner–should be hauled before a government tribunal and stuck in Gitmo with the rest of the terrorists and enemies of the state. The dirty details follow the fold.

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