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Clinton-era Treasury Secretaries Robert Rubin, and Lawrence Summers, now a top economic adviser in the Obama White House, were at the center of this. They, along with then-Fed Chairman Alan Greenspan and Republican congressional leaders Jim Leach and Phil Gramm, blocked any effective regulation of the billions of dollars worth of over-the-counter derivatives that turned into the toxic assets now being paid for with our tax dollars.
Reagan signed legislation making it easier for people to obtain mortgages with lower down payments, but as long as the banks that made those loans expected to have to carry them for 30 years, they did the due diligence needed to qualify creditworthy applicants. The problem occurred only when that mortgage debt could be aggregated and sold as securities to others in an unregulated market.
The growth in that unregulated market alarmed Brooksley Born, the Clinton-appointed head of the Commodity Futures Trading Commission, and she dared propose that her agency regulate that market. The destruction of the government career of the heroic and prescient Born was accomplished when the wrath of the old boys club descended upon her. All five of the above mentioned men sprang into action, condemning Born's proposals as -- get this -- "threatening to the world's financial stability."
They won the day with the passage of the Commodity Futures Modernization Act, which put the over-the-counter derivatives beyond the reach of any government agency or existing law. It was a license to steal, and that is just what occurred. Between 1998 and 2008, the notational value of the OTC derivatives market grew from $72 trillion to a whopping $684 trillion! That is the iceberg that our ship of state has recently hit.
Robert Rubin, who convinced President Clinton to end the New Deal restrictions on the merger of financial entities, went on to help run the too-big-to-fail Citigroup into the ground. Phil Gramm became a top officer at the nefarious UBS bank. Greenspan's epitaph should be his statement to Congress in July 1998 that "regulation of derivatives transactions that are privately negotiated by professionals is unnecessary." That same week Summers assured banking lobbyists that the Clinton administration was committed to preventing government regulation of swaps and other derivatives trading.
Then-Representative Leach, as chairman of the powerful House Banking Committee, codified that concern in legislation to prevent the Commodity Futures Trading Commission or anyone else from regulating the OTC derivatives, and American Banker magazine reported that the legislation "sponsored by Chairman Leach is most popular with the financial services industry because it would provide so-called "legal certainty" for swaps transactions."
Legal certainty for swaps meant that the insurance policies of the sort that AIG sold for collateralized debt obligations could be sold without looking too carefully into exactly what was being insured and, more important, without putting aside reserves to back up the policies in the case of defaults. And this is precisely what caused this once respectable company to eventually be taken over by the U.S. government at a cost of $185 billion to taxpayers.
Jim Leach, an author of the Gramm-Leach-Bliley Act, which allowed banks like Citigroup to become too big to fail, is now a member of the board of directors of ProPublica, which bills itself as "a non-profit newsroom producing journalism in the public interest." Leach serves as the chair of a prize jury that ProPublica has created to honor "outstanding investigative work by governmental groups," and perhaps he will grant one retrospectively to Brooksley Born and the federal commission she ran so brilliantly before Leach and his buddies destroyed her.
http://www.truthdig.com/report/item/20090603_reagan_didnt_do_it/
What did AIG contribute to this catastrophe? What specifically did they do wrong?
They sold guarantees on the purchase of toxic waste, i.e. securitized liar loans. They called it insurance. And for that service, they charged a lot of fees up front. This generated enormous profits, up front, which allowed them to pay enormous bonuses -- bonuses that were, by the way, also facilitated by accounting fraud. And so it was that AIG and all their higher-level employees got very, very rich. Problem was, they had guaranteed hundreds of billions of dollars worth of this toxic waste -- all these packaged and securitized liars' loans.
As has already been described, these toxic-waste liars' loans are going to mean enormous losses, as housing values and wages continue to fall, and foreclosures continue to mount. So the problem for AIG is that they are legally obligated to pay their guarantees on these enormous losses. As a result they were about to go bankrupt -- except that to-big-to-fail corporations in America can't be allowed to do that. Therefore, taxpayers had to come to their rescue.
And so it was that under Secretary Geithner, and under Secretary Paulson before him, our government took $5 billion dollars in U.S. taxpayer money, and sent it to a huge Swiss Bank called UBS, which had purchased a lot of this toxic waste and demanded that AIG pay off on its insurance promise to compensate buyers of these junk securities if they went bad, i.e. lost value. Perversely, we did this at the same time when that bank was defrauding American taxpayers and our government was in the process of bringing a criminal case against them! We eventually got them to pay a $780 million fine, but wait, we just gave them $5 billion. So, the taxpayers of America paid the fine of a Swiss Bank. And why are we bailing out somebody who is defrauding us?
For more on AIG's insurance obligations and payouts (using taxpayer money) to banks like UBS, go to: http://www.dailykos.com/story/2009/3/5/11129/31152/953/704855
So why are the bankers who created this mess still calling the shots?
And why did Obama fire the president of GM but avoid firing the heads of all these banks?
