Gerry Canavan

the smartest kid on earth

Even More AIG Blogging

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I guess I’m doing some AIG blogging today. A few more links for people looking for background and commentary on this.

* Good background on the collapse of Wall Street and the shady and/or illegal practices that have characterized the behavior of these large firms over the last few years can be found in Michael Lewis’s piece for Vanity Fair from December.

That’s when Eisman finally got it. Here he’d been making these side bets with Goldman Sachs and Deutsche Bank on the fate of the BBB tranche without fully understanding why those firms were so eager to make the bets. Now he saw. There weren’t enough Americans with shitty credit taking out loans to satisfy investors’ appetite for the end product. The firms used Eisman’s bet to synthesize more of them. Here, then, was the difference between fantasy finance and fantasy football: When a fantasy player drafts Peyton Manning, he doesn’t create a second Peyton Manning to inflate the league’s stats. But when Eisman bought a credit-default swap, he enabled Deutsche Bank to create another bond identical in every respect but one to the original. The only difference was that there was no actual homebuyer or borrower. The only assets backing the bonds were the side bets Eisman and others made with firms like Goldman Sachs. Eisman, in effect, was paying to Goldman the interest on a subprime mortgage. In fact, there was no mortgage at all. “They weren’t satisfied getting lots of unqualified borrowers to borrow money to buy a house they couldn’t afford,” Eisman says. “They were creating them out of whole cloth. One hundred times over! That’s why the losses are so much greater than the loans. But that’s when I realized they needed us to keep the machine running. I was like, This is allowed?”

Here’s an interview with Lewis.

* Eliot Spitzer, hilarious national joke though he may be, says the real scandal is “that AIG’s counterparties are getting paid back in full.”

But wait a moment, aren’t we in the midst of reopening contracts all over the place to share the burden of this crisis? From raising taxes—income taxes to sales taxes—to properly reopening labor contracts, we are all being asked to pitch in and carry our share of the burden. Workers around the country are being asked to take pay cuts and accept shorter work weeks so that colleagues won’t be laid off. Why can’t Wall Street royalty shoulder some of the burden? Why did Goldman have to get back 100 cents on the dollar? Didn’t we already give Goldman a $25 billion capital infusion, and aren’t they sitting on more than $100 billion in cash? Haven’t we been told recently that they are beginning to come back to fiscal stability? If that is so, couldn’t they have accepted a discount, and couldn’t they have agreed to certain conditions before the AIG dollars—that is, our dollars—flowed?

The appearance that this was all an inside job is overwhelming. AIG was nothing more than a conduit for huge capital flows to the same old suspects, with no reason or explanation.

(Via Vu.) Spitzer also speaks about the (misdirected) “populist rage that is metastasizing very quickly,” which is a topic I just finished writing an email about. My interlocutor had a good line I’ll just go ahead and quote:

Every problem we have is met with demands for a kind of vengeful series of recriminations instead of a focus on what public policy should focus on – the institutional framework that allows/encourages people to behave in a certain way and that leads to disastrous results.

Obama needs to channel this rage into a movement for systemic reform of capitalism, not just pump capital into institutions that have been broken for not years but decades. Otherwise, he and we will find ourselves in this same place soon enough, with all same players crying “Oops!” again.

* Dan Hind has a somewhat similar take, via Lenin’s Tomb, though it must be said that both links are instructive examples of how difficult it can be to divide justice from vengeance in times like these. What I like about Hind in particular is the way he traces the crisis to what I agree is a major point of origin, the explosion of public and consumer debt beginning in the early 1970s, which didn’t “just happen” but which was, again, the result of a system of incentives instituted by those in power. The credit crisis is a symptom of a much larger disease; Obama needs to think much bigger than he seems to be.

* Dr. Bluman has some thoughts about legality and fraudulent conveyance in the comments to a post I keep pushing down the page.

Written by gerrycanavan

March 20, 2009 at 5:27 pm

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