Takeaway #1
Insurance giant AIG posted a $61.7 quarterly loss, the biggest in US history, yet Treasury Secretary Timothy Geithner admitted billions of dollars of more bailout money would be given to AIG.Takeaway #2
AIG spent the last decade evading US and international regulators while making bets in the derivatives market with money it didn't have. AIG's financial products division run by Joseph Cassano relied on the creative use of junk bonds while looking for holes in the regulatory system.Takeaway #3
The economic meltdown is a result of the gradual takeover of the government by a small class of connected insiders, who granted themselves unlimited powers to clean up such a mess.
Takeaway #4
By using CDOs (collateralized-deb oblication) AIG was able to bundle high-risk and low-risk loans together using complicated formulas aimed at convincing ratings agencies to give the package AAA ratings (higher even than Treasury bills). CDOs paved the way for a massive amount of predatory lending.Takeaway #5
Credit default swaps (CDS) were then crafted to help lenders protect themselves against defaults. CDSs were basically instruments for betting on whether a default would happen. Having bought CDSs, the lenders could then lend more money.Takeaway #6
Sellers of CDSs weren't required to actually prove they had the assets to back them up. The CDSs could also be sold to countless other banks in what was essentially a form of gambling on the possibility of defaults happening.
Takeaway #7
In 1999, Senator Phill Gramm co-sponsored a bill that undid regulations set during the Great Depression preventing banks from selling insurance, paving the way for the creation of investment banks. Gramm also wrote the Commodity Futures Modernization Act that made it impossible to classify CDSs as gambling or securities. AIG, an insurance company, wasn't required to hedge on CDSs and bet billions going long on the housing market.Takeaway #8
AIG was regulated by the Office of Thrift supervision which essentially took AIG's word that the CDSs were "benign products."Takeaway #9
When AIG's credit was downgraded, they began to rack up huge losses and Cassano was forced to step down, keeping over $34 million in bonuses. Despite Cassano's AIGFP division having caused the meltdown, AIG decided to pay $450 million in taxpayer bailout money in bonuses to AIGFP employees.
Takeaway #10
When the EU threatened to put tighter regulatory restrictions on US investment banks, they got together with assistance from Hank Paulson to convince the SEC to release them from lending restrictions in return for submitting to rules preventing excessively risky activity, and was enough to satisfy the EU even though no inspections ever took place.Takeaway #11
Paulson became Treasury Secretary and knowing that his former company Goldman Sachs has $20 billion of exposure in Cassano's CDS book he made the case to congress that a bailout of AIG would be needed, which would in turn bailout Goldman Sachs.Takeaway #12
The Fed for years used Repurchase Agreements (Repos) to control interest rates, but now no longer engages in this activity, instead opaquely funneling trillions of dollars into private companies. The Fed has no oversight whatsoever.
Takeaway #13
The Treasury has also maintained an incredible amount of secrecy around the TARP program. Big banks got loans right away but most smaller banks are still waiting for help. Instead of breaking these "too-big-to-fail" firms up, the Fed and the Treasury have boosted their political and financial standing.Takeaway #14
Obama's Treasury secretery Tim Geithner was one of the architects of the Goldman-friendly AIG bailout and picked a former Goldman lobbyist to be his top aide.
