Thursday, September 18, 2008

BEHIND THE FALLEN WALLS

Progressive Review - We find it interesting that the media is ignoring the fact that the Treasury Secretary controlling the bailout of the American financial interest was formerly the head of one of the major money machines: Goldman Sachs, as was his predecessor, Robert Rubin. In other contexts, this would be considered a major conflict especially since Goldman Sachs has a huge interest in the bailout of Fannie and Freddie and far less interest in the success of Lehman Brothers, which Henry Paulson let fail.

It's a little like the situation with the sainted Alan Greenspan of whom the French economist Patrick Artus said, "He created four major crises: savings and loans, [Long-Term Capital Management], new-technology shares, and subprime mortgages." He then was "congratulated for his role as fireman, but he's the one who started the fire."

Having covered the Savings & Loan scandal - in which the bailout became the successor scandal - we can assure you that the powers that be have absolutely no interest in finding out how we got into this mess, only in how their friends can survive as well as possible. But as a reminder of how this stuff really works, consider this Wikipedia note on Robert Rubin:

"In 1999, affirming his career-long interest in markets, Mr. Rubin joined Citigroup. Of note, the supermerger between Travelers Group and Citicorp was facilitated by the repeal of the Glass Steagall Act. This legislation was passed under the Clinton administration, days before Rubin's resignation. Consolidation of investment, commercial banking, and insurance services as practiced by Citigroup under the direction of Rubin, has been implicated in the subprime mortage crisis. Despite criticism for his role in this debacle, Rubin serves as a Director and Chairman of the Executive Committee. . .

"He sparked controversy in 2001 when he contacted an acquaintance at the Treasury Department and asked if the department could convince bond-rating agencies not to downgrade the corporate debt of Enron, a debtor of Citigroup. Rubin wanted Enron creditors to lend money to the troubled company for a restructuring of its debt; a collapse of the energy giant might have serious consequences for financial markets and energy distribution. The Treasury official refused. A subsequent congressional staff investigation cleared Rubin of any wrongdoing, but he was still harshly criticized by political opponents.

Mother Jones The natural result of the federal government response that emerged over the weekend around the Lehman Brothers catastrophe is to place the venerable Federal Deposit Insurance Corporation, the government institution that insures the bank deposits of hundreds of millions of Americans, in grave jeopardy. While Treasury secretary Henry Paulson and others talk about not sinking taxpayers’ funds into saving Lehman, the real, unstated policy is just the opposite.

It is going to work like this: As it did with Merrill Lynch, the government’s approach to the crisis will force commercial banks to swallow troubled Wall Street investment companies, flooding the commercial banks with the lousy junk bonds and faulty mortgages that the investment companies own, and that started this mess to begin with. More and more commercial banks will find themselves on the edge, and they will turn to the FDIC. But the FDIC can’t possibly shoulder the growing burden. At that point, Congress will have to step in and shore up the FDIC. The deal doubtless will include some version of the S&L bailout, with the creation of a Resolution Trust Company type institution into which the banks can dump the sub-prime mortgages, junk bonds, and the like.

In other words, the public will end up paying for Wall Street’s financial binge. And the leaders of the financial community who got us into this expensive mess? They’ll get the traditional golden parachutes and lavish pension arrangements--huge payoffs for screwing the public.

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