Hostage Situation After Action Report

Longtime readers will remember I started blogging two years ago, just in time to catch the collapse of Fannie, Freddie, Washington Mutual, Lehman Brothers and AIG.

September 15, 2008, the day John McCain lost the election with this infamous statement as the Dow lost over 500 points:



...was the same day AIG's fate was sealed.   Two years later, William Greider reveals the story of how the Wall Street banks held the Fed and the American taxpayer hostage in order to extort trillions out of us, with the collapse of AIG bringing down our financial system as the result if the banks didn't get their ransom.  Early Tuesday morning on September 16, 2008, they delivered their ransom note.

Sometime after midnight, the bankers called to say, sorry, they were not interested. There would be no private-sector rescue. According to Thomas Baxter, general counsel at the New York Fed, notification came on Tuesday morning, not from the principal executives of Goldman and JPMorgan but from a bankruptcy lawyer, Marshall Huebner, advising JPMorgan on AIG’s problems. The New York Fed immediately hired him as its own lawyer and proceeded to do what the bankers had refused to do—bail out AIG.

JPMorgan and Goldman offered no public explanation for rejecting Geithner’s proposal. The public wasn’t ever told the banks were asked to do their part. Nor did Federal Reserve officials argue with the decision or try to apply persuasive pressures. It did not put the squeeze on to convince the bankers they must accept some kind of sacrifice in the interest of sharing the pain. Nor did Geithner threaten to pursue an alternative strategy that could have forced the banks to negotiate the terms. This was considered out of the question, though the central bank has employed all these tools on past occasions.

In a subsequent hearing, Damon Silvers, the AFL-CIO policy director who is a member of Warren’s oversight panel, asked Baxter, “When you’re pulling together the private sector to solve a problem that they’ve created of the type that AIG represented, is it typical to accept no for an answer?” Baxter fudged. “Well, I started out by saying there was nothing typical about the crisis,” he replied. He talked in circles and never answered the question.

If the bankers refused to participate, the Fed had to move fast to stanch the bleeding. AIG faced another downgrade from credit rating agencies (the same agencies that had given triple-A blessings to mortgage securities). The Fed adopted the bankers’ “term sheet” as its operating guide and swiftly created a revolving credit fund of $85 billion.

Late on Tuesday, the central bank lent $12 billion to AIG. The next day, it lent another $12 billion. This was only the beginning. The AIG operation became a gigantic spigot for circuitously distributing public money to private banking interests. As the New York Fed pumped more money into AIG, the insurance giant pumped it right out the door to satisfy the demands from counterparties like Goldman Sachs. Having helped scuttle the private rescue, Goldman collected $13 billion from this backdoor public assistance. The Fed did not stop AIG’s hemorrhage. It began financing it, with no questions asked.

And thus began the downward spiral we're now in today where Wall Street's biggest players are richer than ever before, and the rest of us are facing a long, painful slide into deflation.  JPMorgan and Goldman Sachs told all of us to eat shit and die.  We should be out in the streets right now with pitchforks.

Except we can't afford the pitchforks.