Hullabaloo

Sunday, February 07, 2010

 
Squids And Showdogs Working Together

by digby
 
The NY Times published an interesting article today about Goldman and AIG that doesn't really break any new ground, but puts the narrative together nicely, charts and graphs included. If you haven't been following the saga of the thick and plodding AIG getting squeezed by the Vampire Squid, this is as good a place to catch up as any.

The question of whether or not Goldman did anything illegal or was just doing what any dominant capitalistic predator would do remains unknown. But I was actually more interested in the questions raised at Naked Capitalism about what was missing from the piece rather than what was in it:

Doubts about the monolines were becoming serious in the first acute phase of the credit crisis, September-October 2007. They were a daily focus in the business press in January-February 2008. Bear went under and was rescued because its failure would have rocked the CDS market.

There might have been a defensible case for denial of the seriousness of the problems afflicting the CDS market up through March of 2008. The Bear meltdown, the fact that the ratings agencies were starting systematic, aggressive downgrades of CDOs, and the belief that Lehman and Merrill were next to go meant understanding the risk of mortgage-related CDS exposures was imperative to understanding systemic risks. Even a cursory examination would have led straight to AIG. The “oh were weren’t their regulator” is an implausible excuse. The Fed and the SEC most assuredly WERE regulators of the parties exposed to AIG.

And this inattention raises further issues. Virtually all of the Goldman CDO exposures with AIG were entered into when Paulson was CEO of Goldman. Why has there been no inquiry into his role in overseeing, and ultimately profiting, from these deals?

AIG’s failure to understand the implications of the current market values and downgrades underlying its CDOs sheds light on its CDO underwriting process (or more accurately, lack thereof). How widespread was this problem at other companies? Did anyone that invested in (or insured) these deals really understand them? It suggests that only reason any of these parties were involved in these deals was because they were rated AAA. Yet to date, the SEC, Treasury and Fed have done nothing to address the essentially misleading nature of AAA ratings on such bonds.

Although details are emerging bit by bit on CDOs and credit default swaps, there is still a great deal that is not out in the open. The failure of regulators to push for much larger-scale inquiries suggests at best a troubling complacency, or at worst, the knowledge that a full bore investigation will reflect very poorly on the powers that be.

After watching the interview with Paulson and Greenspan on Meet The Press this morning. I'm guessing the latter.

Among other things, they told us that nobody could have ever predicted that real estate could be a bad investment and that deficits are the biggest threats the world has ever known, but that allowing the Bush tax cuts to expire is the wrong thing to do and we have to cut social security or the terrorists will win.

Henry Paulson is one of the world's ruling oligarchs.  And when asked whether or not he thinks that the Wall Street bonuses are outrageous or if he has any regrets about the bailouts, he repeatedly deflects the question by saying that we need regulatory reform, specifically a risk management provision of some sort.  Maybe I'm wrong, but I assume he's talking about the proposed FDIC authority in the financial reform bill, which flies in the face of the Luntz talking points characterizing this as a "permanent bailout" fund.

I don't trust Paulson in these matters so I'm assuming that there's either something wrong with this FDIC authority --- or Paulson sees another catastrophic failure of the financial sector, knows there will be no more bailouts forthcoming and is trying to foreclose the final slaughtering of the golden goose. Any ideas? Is he begging for someone to stop them before they pillage again?

Anyway, if you want to see the Frick and Frack of financial elite failure (with their performing showdog Dave helpfully keeping the questions light) here's one section of the discussion:

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digby 2/07/2010 01:30:00 PM |