Bailout Party for the Sharks

Hearings of the House Oversight Committee revealed  that  shortly after the $85 billion taxpayer bailout last month, AIG executives spent more than $ 400.000 on a “conference” in a luxury resort in California. The bill included $200.000 for hotel rooms, almost  $150.000 on catered food banquets and $ 25.000 for salon and spa-treatment…. Not to forget the 10.000 Dollars for booze…. According to recent reports AIG has already used up $61 billion of its $85 billion government loan.

Former CEO Martin Sullivan, who has already pocketed a $ 15 million severance package, was admonished by the committee for behaving as if he had no part in the home-made calamity. Expressions like “financial tsunami” were used to insinuate that we are dealing with a kind of natural disaster which is nobody´s fault.

Sullivan said that “the most respected financial institutions crumbled one after another” (respected by whom and for what, one wonders?) He received special scorn at the hearing because he “went before the board of directors and specifically asked them to ignore the huge losses for the purpose of the compensation plan” .

Do you know what a “Credit Default Swap” is?

No ?  And really don´t care?

Well, neither did I until the “global crisis” unravelled and the panic wave began to spread. We are talking about a global double digit (or more)  trillion dollar business with no oversight and no limiting principle. A simple explanation of the CDS-system can be found in this video:

All I can say is:  there is a method in madness. Whoever dreamed up this insane system where financial institutions can act as seller and buyer of “debt insurance”  at the same time, and bet against each other on the risk of default, these people need psychiatric help. With no transparency or accountability, no containment of any sort, the web got so big that thousands of banks and other financial institutions all over the world are apparently now entangled in it and nobody seems to have a clue about the exact figures or real values of these deals.  Even George Orwell would have been impressed to find that these strange transactions robbed the word “insurance” of its meaning and transformed into another version of “ignorance is strength”.

The idea of a collateral or an “asset backed” loan has been turned on its head because these guys played with debt as if it was some kind of party game: perhaps a mixture between poker and charade….

All these fancy names  and acronyms  like ABS, LBO, CDO, SIV, etc. Most of us did not have a clue what these things are and only now, when the shit has hit the fan, are we learning that these  “innovative instruments” are the “financial weapons of mass destruction” Warren Buffet was talking about years ago…

Le Monde Diplomatique (British Edition) published an article in 2006, warning about the consequences of a deregulated banking system:

” More importantly, deregulation and financial innovation have led to forms of crucial data that cannot be collected and quantified, leaving both bankers and governments in the dark about reality. We may or may not live in a new era of finance, but we certainly are flying blindfolded.”

“On 24 April Stephen Roach, Morgan Stanley’s chief economist, wrote that a major financial crisis seemed imminent and that the global institutions that could forestall it, including the IMF, the World Bank and other mechanisms of the international financial architecture, were utterly inadequate. Hong Kong’s chief secretary deplored the hedge funds’ risks and dangers in June, and at the same time the IMF’s iconoclastic chief economist, Raghuram Rajan, warned that compensation structures encouraged those in charge to take risks, endangering the whole financial system. Soon after Roach was even more pessimistic: “a certain sense of anarchy” dominated academic and political communities “unable to explain the way the new world is working”. In its place, mystery prevailed. By last month the IMF predicted that the risk of a severe slowdown in the global economy was greater than at any time since 2001, mainly because of the sharp decline in housing markets in the US and much of western Europe; it also included the decline in US labour’s real income and insufficient consumer purchasing power. Even if the current level of prosperity endures through next year, and all these people are proved wrong, the transformation of the global financial system will sooner or later lead to dire results.”

Gabriel Kolko rightly concludes that “Financial deregulation has produced a monster, and resolving the many problems that have emerged is scarcely possible for those who deplore controls on making money. The Bank for International Settlement’s (BIS) annual report, released in June, discusses these problems and the triumph of predatory economic behaviour and trends “difficult to rationalise”. The sharks have outflanked more conservative bankers. “

In my view, it is precisely those sharks that have now been “rescued” by the government… The final paragraph of the article (written in 2006) should remind us that the “rescued” are not the victims but the perpetrators here…

“There is now a growing consensus among financial analysts that defaults will increase substantially in the near future. Because there is money to be made in the field, there is now great demand on Wall Street for experts in distressed debt and in restructuring companies in or near bankruptcy.”

Another thought-provoking piece in LMD can be found here: (talk about  foresight….)

“Don’t Turn The World Over To The Bankers” by Kenneth Galbraith

How all legislative mechanisms to prevent such a crisis were eliminated in the US is explained here:

This is anything but a “financial tsunami”: it´s another euphemism for neoliberal policies: Planned Misery

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Filed under Economy, Managing Perceptions, Politics

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