The art of Magic is misdirection — to make people look one way while the real action is somewhere else. Such is the nature of the government cover-up regarding AIG currently under way in Washington. This story is complex but be patient and follow along the high points.
Dozens of politicians are running about shocked, shocked that insurance giant AIG is paying bonuses while under government stewardship. At issue is $165 million or 9/100s of 1/100s of what Washington has pumped into AIG.
This outrage erupted at a curious time. After all, AIG’s $1 billion bonus plans for calendar year 2009 disclosed a year ago, were widely publicized again in January and Congress had absolutely nothing to say either time. There was also no objection from the Obama administration. The current detailed bonus payment parameters were made in a March 2 SEC filing. So, why the outrage now?
Lawmakers hope that by throwing a hissy fit about the bonuses, you won’t notice that it was their failure to properly supervise AIG, among other governmental missteps, that tanked AIG. They also hope you don’t notice the other list just released by AIG which details who the financial giant has been making payments to with the bailout money — with government approval. The Wall Street Journal reported that, “Since September 16, AIG has sent $120 billion in cash, collateral and other payouts to banks, municipal governments and other derivative counterparties around the world. This includes at least $20 billion to European banks. The list also includes American charity cases like Goldman Sachs, which received at least $13 billion. This comes after months of claims by Goldman that all of its AIG bets were adequately hedged and that it needed no "bailout." Why take $13 billion then? This needless cover-up is one reason Americans are getting angrier as they wonder if Washington is lying to them about these bailouts.”
Wonder no more. Washington is lying to you and trying to divert your attention by focusing you on bonuses that, incidentally, they actually codified and made legal. Senator Chris “Countrywide” Dodd, who received more than $103,000 in campaign contributions from AIG during the 2008 campaign period plus a sweetheart interest deal from a firm he regulated, included bonus protection in the recently passed economic stimulus bill. Dodd’s amendment grants an, “exception for contractually obligated bonuses agreed on before Feb. 11, 2009,” to firms that received government bailout money. How sweet.
The collapse of AIG is a case study of government induced failure caused by a cascading series of moves by numerous state and federal officials. It has turned into a scandal-plagued rescue effort from the day current treasury secretary Timothy Geithner put the deal together. It now appears to be nothing more than a money-laundering arm of the federal government.
The government orchestrated failure of AIG began in 2003-2004 when New York Attorney General Elliot “love customer number nine” Spitzer was threatening AIG with shakedowns, subpoenas and ultimately a criminal indictment of the company for a host of trumped up charges Spitzer never actually pursued (He was running for governor).
But accusations and threats of criminal indictment are devastating to publicly traded companies. Eventually, long time CEO Hank Greenberg resigned, giving Spitzer the scalp he wanted and all the so-called charges disappeared. AIG’s credit rating plunged, drastically raising their operating costs and causing a sense of unease at the company.
Hank Greenberg, the CEO since 1967, built AIG into what it was and kept it out of trouble as the company swelled to 116,000 employees worldwide. They insured risks, big risks others were too small to handle and literally kept the commercial aviation business in business. His departure saw AIG move into exotic investment vehicles the old-school Greenberg would have never approved of.
Enter Joseph Cassano. Cassano built AIG’s London financial office into one of the world’s largest credit default swap traders of sub-prime housing mortgages, an area AIG had avoided all its life. Cassano’s office boomed and its 377 employees and the parent company were making money hand over fist. But they traded in the dangerous version of swaps, ones that had no reserves backing the deal. It was great if you were right – a 100% profit – but absolutely lethal if you were wrong which Cassano never seemed able to fathom. He once said that his products were so safe that he could never envision they could, “lose one dollar.” Cassano left AIG a year ago as losses began to mount and the London office was wound down.
Interestingly, it was another New York attorney general, current AG Andrew Cuomo, who probably did more to create the sub-prime market than any other individual in the country. He may be singularly the most responsible person for the nation’s current financial mess.
But don’t take my word for it. Here’s a passage from the Village Voice, one of the nation’s most liberal newspapers. In an article dated August 5, 2008 about Cuomo’s stint as HUD secretary under former president Bill Clinton the Voice reported, “There are as many starting points for the mortgage meltdown as there are fears about how far it has yet to go, but one decisive point of departure is the final years of the Clinton administration, when a kid from Queens without any real banking or real-estate experience was the only man in Washington with the power to regulate the giants of home finance, the Federal National Mortgage Association (FNMA) and the Federal Home Loan Mortgage Corporation (FHLMC), better known as Fannie Mae and Freddie Mac.”
“Andrew Cuomo, the youngest Housing and Urban Development secretary in history, made a series of decisions between 1997 and 2001 that gave birth to the country's current crisis. He took actions that—in combination with many other factors—helped plunge Fannie and Freddie into the subprime markets without putting in place the means to monitor their increasingly risky investments. He turned the Federal Housing Administration mortgage program into a sweetheart lender with sky-high loan ceilings and no money down, and he legalized what a federal judge has branded "kickbacks" to brokers that have fueled the sale of overpriced and unsupportable loans. Three to four million families are now facing foreclosure, and Cuomo is one of the reasons why.”
It was Cuomo’s government backed securities that were eventually sliced and diced into the mess we have today. Concluded the Voice, “…the country will be living with his HUD mistakes, ill- or well-intended, for a long time to come.”
AIG, without the long-time steady hand of Greenberg went headlong into this government created, guaranteed and highly regulated bonanza.
The feds, anxious to make you believe that all of this is not their fault are waving their arms and exclaiming this mess was all due to unregulated markets. That is completely untrue. Noted the Wall Street Journal March 17, “The politicians also prefer to talk about AIG's latest bonus payments because they deflect attention from Washington's failure to supervise AIG. The Beltway crowd has been selling the story that AIG failed because it operated in a shadowy unregulated world and cleverly exploited gaps among Washington overseers. Said President Obama yesterday, "This is a corporation that finds itself in financial distress due to recklessness and greed." That's true, but Washington doesn't want you to know that various arms of government approved, enabled and encouraged AIG's disastrous bet on the U.S. housing market.”
“Scott Polakoff, acting director of the Office of Thrift Supervision, told the Senate Banking Committee this month that, contrary to media myth, AIG's infamous Financial Products unit did not slip through the regulatory cracks. Mr. Polakoff said that the whole of AIG, including this unit, was regulated by his agency and by a ‘college’ of global bureaucrats.”
“But what about that supposedly rogue AIG operation in London? Wasn't that outside the reach of federal regulators? Mr. Polakoff called it ‘a false statement’ to say that his agency couldn't regulate the London office.” AIG’s trading activities were also overseen by other federal agencies, including an SEC monitor, that failed in their fiduciary duty.
This, contrary to many media reports, is not a failure of capitalism but one of government spinning out of control. If this were capitalism, you simply let AIG fail. But government couldn't allow that to happen since it was they who were primarily at fault.
When you unravel all that went into the government’s destruction of AIG you find yourself knee-deep in a cluster of government officials trying to get their constituents something for nothing. In the process, they nearly destroyed the American dream, our way of life and our standard of living.