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Taxpayers, Meet Cleaners


Financial Elites don’t suffer like regular Americans. They wreck the financial system, and your dreams, but it’s you who has to pay, not them. It’s so obvious that even the sycophantic Wall Street Journal can put it in writing:

Banks in the U.S. and abroad are among the biggest winners in the federal government’s revamped $150 billion bailout of American International Group Inc.

Many banks that previously bought protection from the insurer on securities backed by now-troubled mortgage assets stand to recoup the bulk of their investments under a plan by AIG and the Federal Reserve Bank of New York to buy around $70 billion of those securities via a new company. These securities are collateralized debt obligations backed by subprime-mortgage bonds, commercial-mortgage loans and other assets.

The CDS market is a big secret from the public, but it would be irresponsible not to speculate that Goldman Sachs bought protection from AIG. One of the risks Goldman Sachs took when it bought those CDSs is “counterparty risk”, described by Gerald Corrigan, the CEO of Goldman Sachs in written testimony to Congress:

Recall that in a credit event, the buyer of protection (short risk) delivers bonds of the defaulted reference entity, or other eligible assets, and receives par from the seller (long risk). Therefore, an additional risk to the protection buyer is that the protection seller may not be able to pay the full par amount upon default. … While the likelihood of suffering this loss is remote, the magnitude of the loss given default can be material. Counterparties typically mitigate this risk through the posting of collateral (as defined in a credit support annex (CSA) to the ISDA Master Agreement) rather than through the adjustment of the price of protection.

AIG couldn’t put up the collateral its CDS buyers wanted. Wouldn’t you think “free market” principles would dictate the outcome? CDS buyers willingly took the counterparty risk, and they eat the loss, right? Wrong. They run to their buddies Paulson and Bernanke, who run to the weakling congress, everybody’s hair catches fire, and CDS buyers fob the loss off on taxpayers. And we know the taxpayer is going to eat that loss, don’t we? From Josh Marshall at Talking Points Memo:

Will Goldman fail without the few more billion the government gave the bank through AIG? I doubt it. Will the taxpayer be made whole for covering the losses Goldman incurred by dealing with AIG? Of course not.

But why should Goldman Sachs suffer? Its ex-CEO, Henry Paulson, is the Secretary of the Treasury.

All of the financial people, right down to the rank and file, think someone else should suffer. Here’s a Wachovia guy whining about his feelings when he found out he wasn’t getting a bonus this year:

One employee who identified himself as a third-year vice president said the bank’s decision was putting its employees in “financial extremis” and, in some cases, at risk of not making their mortgage payments.

Here’s another company that shouldn’t suffer: Pimco. We’ve been following the GMAC problem around here, including the conversion to a bank holding company, so you’ll remember that part of the deal was that the Fed wanted at least 75% of the noteholders of both GMAC and its mortgage subsidiary, ResCap, LLC, to exchange their debt for equity and new notes. No, said Pimco, the nation’s largest bond fund management fund. It wanted Cerberus, a wealthy private hedge fund, to kick in more equity. Cerberus refused. Pimco refused. Paulson and Bernanke caved. The Treasury kicked in $5bn for GMAC preferred stock, and another $1bn to GM to invest in GMAC, which increased the equity to the required level. As a result, Pimco is now senior to the Treasury, meaning taxpayers will get paid only if Pimco is paid. Cerberus didn’t suffer any additional risk. Felix Salmon explains this outcome clearly:

Since there’s very little chance of GMAC defaulting to the Treasury, or forcing it into a restructuring of its stake, those bondholders’ coupon payments are probably pretty safe for the time being. And, of course, they’re significantly higher than the coupon payments that the people who did tender into the exchange offer are going to receive. Intransigence and unhelpfulness, it seems, is being rewarded. Which is not a good omen for the forthcoming negotiations with GM’s bondholders.

I wondered if maybe Pimco felt safe in refusing because it was protected by CDSs. Now I think it just realized that Hank Paulson and Ben Bernanke are pushovers.

When Congress reconvenes, it could pass laws to deal with these greedheads. For example, it could impose taxes on recalcitrant financial groups. It could nationalize failed companies, file bankruptcy and trash the bondholders. It could raise taxes on the executives of these financial evildoers. It could savage the financial cosa nostra instead of UAW retirees and productive workers.

How likely is any such action? Taxpayers are looking to Harry Reid and Nancy Pelosi, who make Paulson and Bernanke look like brick walls. Our back-up is a congress flush with campaign contributions from the Titans of Wall Street.

Let me repeat. Financial Elites don’t suffer. That’s for the little people.

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