AIG Bailout Trial Bombshell III: Paulson Lied to Congress About TARP

I’ve gone through only the first day of testimony from the AIG bailout trial, and we are already up to our third bombshell.

The first witness called by the plaintiff, Starr International (an investment vehicle controlled by Hank Greenberg), was Scott Alvarez, general counsel for the Federal Reserve Board of Governors. Part of the testimony covered a discussion that took place late in the evening of September 15, the day Lehman declared bankruptcy in the wee hours of the morning. The topic was AIG. The participants included Alvarez, Timothy Geithner, Fed governors Don Kohn and Kevin Warsh, Ken Wilson, a senior investment banker advising the Treasury, Dan Jester, a recent ex-Goldmanite advising Treasury, and others.

One of the remedies they discussed was legislative solutions, which Alvarez states became the TARP and resolution authority in Dodd Frank.

However, notice the disconnect between what the Fed and Treasury officials were seeking to accomplish and what they told Congress and the public about the TARP.

Alvarez’s testimony makes clear that the plan was always to inject equity into the banks. But that was not what they said to Congress. The plan was called “Troubled Assets Relief Program” and was sold as a way to rescue the banks by getting toxic paper off their balance sheets.

As we said from the very time the scheme was first mooted, on September 19, it couldn’t possibly work as advertised:

Why do we need the government to create a massive and costly effort to buy paper at market prices? Institutions can sell paper at market prices now. This is clearly ether a massive game of smoke and mirrors (f we are lucky) or a plan to buy bad assets at above market prices but somehow pretend that they are indeed correct.

The latter takes us straight down the Japan path. The government is left holding lousy paper it will have to dispose of at a loss, the banking system gets subsidized not based on triage, on who might it make most sense to rescue, but who gets enough of the crappy assets sold at a high enough price. It’s a terrible, inefficient way to recapitalize the banking system. Why should taxpayers underwrite banks without getting some upside and a measure of control?

That Sunday, TARP was announced officially: a three page napkin doodle that put the Treasury secretary above the law and gave him a $700 billion blank check. Congress was still being reassured privately that the program would be used to buy bad mortgage paper, but Treasury was sorta coming clean about the subsidies. From our post, quoting a source:

I worked at [Wall Street firm you’ve heard of], but now I handle financial services for [a Congressman], and I was on the conference call that Paulson, Bernanke and the House Democratic Leadership held for all the members yesterday afternoon. It’s supposed to be members only, but there’s no way to enforce that if it’s a conference call, and you may have already heard from other staff who were listening in.

Anyway, I wanted to let you know that, behind closed doors, Paulson describes the plan differently. He explicitly says that it will buy assets at above market prices (although he still claims that they are undervalued) because the holders won’t sell at market prices.

It turns out this talk of buying toxic assets was all theater for the rubes from the get-go. The Alvarez call notes (embedded at the end of this post) and the related testimony make clear that the Fed and Treasury saw TARP as a way to inject equity into the banks. Yet the Fed and Treasury went to considerable lengths to make their toxic assets charade look plausible, including holding a conference call with analysts to discuss how the asset buying and other features would work.

They abandoned the diversionary asset purchase plan shortly after the sweepingly broad legislation was passed. The focus on toxic mortgage paper, rather than the real intent, equity injections, was presumably to distract Congresscritters and the public from asking: “Whoa, if we are providing equity, what control and upside do we get?” This was a way to avoid inconvenient questions like “Why don’t we cap pay? Fire the top executives? Replace the board?” and other things that are normally done with failing or failed institutions.

Here is the critical part of the testimony (you can read it in context starting on p. 158 of the PDF at the end). Q is David Boies, attorney for Starr, and A. is Alvarez:

Q. Now, there was another call concerning AIG that you participated in on September 15th, correct?
A. I believe so.
Q. And that took place around 10:15 that evening. Is that correct?
A. I think that’s right.
Q. And who participated in that call?
A. So, I believe Don Kohn and others. I don’t recall the entire list.
Q. Let me ask you to turn to Plaintiffs’ Trial Exhibit 65, which I would offer in evidence….And these are your handwritten notes of this conference call on September 15th, 2008, at 10:15 p.m.,correct?
A. That’s right…

Q. On the second page at the top, there’s a line that says, “Powers we would want.” Do you see that?
A. I see that.
Q. What does that refer to?
A. So, this was in — a part of the discussion this evening was about seeking legislative changes. So, these would be in that context.
Q. And the first legislative change listed here is “Treasury and Federal Reserve determine” — what’s that next word?
A. “For.”
Q. — “for systematic reason.”
A. “Systemic reason.”
Q. “Systemic reason.” What does that mean?
A. That if there was a systemic need, there was some threat to the financial system, then the Fed and the Treasury could take certain emergency actions. This would be one of the potential legislative fixes we would seek.
Q. And if Treasury and the Federal Reserve determined that there were systemic reasons to do so, then the two legislative fixes that you identify here are, one, buy any stock, preferred or common, and any debt; and the second is resolution authority by conservatorship or receivership. Is that right?
A. That’s right.
Q. And was any request for these powers, for these legislative powers, actually made in September of 2008?
A. Yes.
Q. When did that happen?
A. So, in September, the — Secretary Paulson led an effort to request both of these powers, and one of them actually became the TARP legislation that allowed the Treasury Department to inject capital into institutions in any form that the Treasury Department deemed appropriate if it was necessary to protect the financial system. The resolution authority was actually enacted as part of the Dodd-Frank Act later on, and that empowers the Treasury, the Federal Reserve, the FDIC to place financial institutions into resolution, and that is separate from bankruptcy.
Q. So that the resolution authority fix that you wanted was enacted in Dodd-Frank. Is that what you’re saying?
A. Yes.
Q. And the buy any stock fix that you wanted was enacted in TARP? Is that correct?
A. That’s right.

So you can see Alvarez stating, under oath, that TARP was designed from the very outset as a way to buy bank equity. Even the reference in testimony to buying debt, in context, clearly means buying debt issued by the bank, as in having Treasury lend money in some form, say by buying newly-issued bonds of the financial institution, as an alternative to an equity infusion.

You’ll notice that the concept revolved entirely around the liability side of the balance sheet. There is nary a mention of buying bank assets, even though that was the misleading label put on the bill. The bait and switch was so egregious that Paulson was offering up explanations in October, barely after the bill had finally passed. From a 2008 post, quoting a New York Times article:

Mr. Paulson and Mr. Bernanke have been criticized for squandering precious time and political capital with their original $700 billion bailout plan, which they presented to Congressional leaders days after the Lehman bankruptcy. The two men sold the plan as a vehicle for purchasing toxic mortgage-backed securities from banks and others…
In the interview, Mr. Paulson said that even before the House acted, he had directed his staff to start drawing up a plan for using some of the $700 billion to recapitalize the banking system — something that Congress was never told and that he had publicly opposed.

Why? Because in the week before the plan passed Congress, conditions deteriorated significantly, Mr. Paulson said.

“Redirected” is now revealed to be a flat-out lie, along with pretty much everything told to the public when the TARP was being pushed through Congress.

This is yet another very big ticket example of the lesson too many people have learned the hard way in dealing with financial services industry salesmen: never, never, never believe what they are telling you. You can at most expect them to deliver on their contractual commitments. And if you read carefully, you will find that they will have described their obligations in the most vague and forgiving terms possible. You can also be assured they will take advantage of every inch of legal rope you give them, and then some.

Congress and the public took Paulson and Bernanke at their word as far as their plans for how to use the $700 billion was concerned. But you could see their real intent from the terms of the TARP itself. They refused to brook anything other than token restrictions on how they used a taxpayer-funded lifeline to reward banks and their executives* for incompetence and looting.
___
* Never forget that Wall Street showed its gratitude to American taxpayers by paying itself record bonuses in 2009 and 2010.

Starr-Exhibit-65
Starr Exhibit 65

2014.09.29-Day-1-Full1
2014.09.29 Day 1 Full

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88 comments

  1. Paul Niemi

    I remember the bait and switch. As I recall, one lonely voice in Barney Frank pointed it out in the press, while most other figures said nothing and looked the other way. The big bonuses paid out to bankers, with taxpayer money, were briefly noted in the papers, then disappeared from view. It is when something big and rotten goes down, that the refrain becomes: “We have to move forward.” Can TARP happen again? Can it happen again now, six years down the road, and when the big banks must be feeling the heat of asset prices plunging? I think we may have a chance to see the Dodd-Frank resolution authority at work, sooner than anyone expected. Finance is taking too large a chunk out of the economy, and it can’t last forever.

    1. susan the other

      deutsche bank is looking bad – and we seem to be immune from the crap that is going to bring it down – one can only hope… DB being the derivative Kong of the universe…

      1. Paul Niemi

        Noted. I’m interested in bad loans swamping the banks in China as the real start of it, even as they roll over loans as fast as they can. Then it will reverberate, but I could be wrong. The big western banks exposed to China, like perhaps Standard Chartered, are most at risk. I can’t be sympathetic if they become insolvent. They sent away our jobs.

      2. Hayek's Heelbiter

        Please don’t lose any sleep over DB. Herr Josef, the matriarch of the derivative toxicity and subsequent coverup from its conception, will skate as he has skated so many times before.

    2. efschumacher

      > think we may have a chance to see the Dodd-Frank resolution authority at work, sooner than
      > anyone expected. Finance is taking too large a chunk out of the economy, and it can’t last forever.

      So that would require an Attorney General to swing into action then. Wonder if the incoming one is as fearless and mean as the outgoing one?

      1. Paul Niemi

        The Attorney General, by having announced his resignation, can now do whatever he feels he has to do. Will whatever he does redound his prospects at the law firm of his choosing? Perhaps, but I think he has more latitude now than before, because his successor will not have her fingerprints on actions he now takes, and thus will not be subject to future reprisals.

  2. cnchal

    This is yet another very big ticket example of the lesson too many people have learned the hard way in dealing with financial services industry salesmen: never, never, never believe what they are telling you.

    A group of people always lie while “working” as a matter of principle. and get to call the shots. Where is justice?

    Will this trial bring some? I hope so.

    1. Ulysses

      I would dearly love to believe that this trial will do some substantial good, and bring real accountability to at least some kleptocrats for their crimes. The likelihood of that is slim to none, however, and I fear the best we can hope for is that some more infuriating details will be added to the long, sorry story of kleptocratic chicanery– already so well told by intrepid reporters like Yves Smith.

      Barring some sort of miracle, then, justice for the kleptocrats will not come– unless accompanied by huge angry mobs, who have access to the requisite ropes and lamp-posts!

      1. MRW

        The likelihood of that is slim to none, however, and I fear the best we can hope for is that some more infuriating details will be added to the long, sorry story of kleptocratic chicanery– already so well told by intrepid reporters like Yves Smith.

        I’d agree with you if lead counsel weren’t David Boies. He’s superb. But, as I suggested to Yves above, I think she should do an iBook about this (best for the 200-300 page court docs). Hell, I’d pay for a video book about this. No regular non-financial services person can get through this stuff or understand it without a veteran cruise director telling you who’s zooming who, and where to look. The PLAINTIFFS’ CORRECTED PROPOSED FINDINGS OF FACT (haven’t finished reading it yet) is a real eye-opener. I think it’s more important that Joe Schmoe understands this because 25 million of them are still un- or under-employed because of this, and countless more hanging on by a thread.

        1. OpenThePodBayDoorsHAL

          Boies can be as effective as he likes but this theft, perjury, and fraud on each and every American citizen and their forebears will go utterly unnoticed and unpunished. Sorry, not entirely unnoticed, 28 people will read about it on blogs like NC, will have smoke coming out of their ears as a result, and will make the breakfast mood very unpleasant for their partners. We’re the United States of Amnesia, as G.Vidal noted, we forget we haven’t won a major military conflict since Normandy just as we forget we sat on our asses while our bank overlords ripped the plumbing of our Republic out of the wall and went back for seconds when nobody stopped them at the door on the way out. Throw out the hand wringing and bring in the guillotines, until we do it’s just a narcissistic charade that because we notice and because we care, that means something.

  3. washunate

    “Congress and the public took Paulson and Bernanke at their word…”

    Given the rather, uh, colorful variations on what TARP stood for, I’m pretty sure the public didn’t actually take Paulson, Bernanke, Pelosi, Reid, Obama, Bush, etc., at their word.

    :)

    Seriously though, that was actually one of the biggest, most glaring gaps between the educated intellectual world and the man on the street. You had all the establishment liberals talking about how we needed to save the system, but everybody outside of DC and NY thought they were crazy. I didn’t realize people thought Paulson hadn’t lied. The House of Representatives actually voted against EESA(!), forcing the Democrats to do the extremely odd maneuver of stripping a bill in the Senate that had already passed the House and replacing its language with EESA.

    1. Barni

      After many decades of corporate money buying politicians (80% of all corporate shares are owned by the wealthiest 5%) and corporate media lying daily to the general public any notion that Congress is run by “liberals” is nonsense. Congress is run by the 5% through corporations (Atilla The Hun was a liberal compared with the corporate – not liberal – controlled Congress). All real liberals are only allowed if they are airhead or weak enough (like Pelosi) to go for the Wall Street con artists! The corporate elitist MSM mocks middle agenda politicians and RW mob elitists destroy liberal politicians and all non RW senior government officials. If there is a real liberal in Washington with the strength to blow his nose the RW mob will be right over to finish her/him off asap. If we continue to assign major crimes and misdemeanors to the mythical liberals we will be blind to the real corporate anti democrats.

      1. Vatch

        Quite true, Barni. One of the points that NC authors and commenters make repeatedly is that there is little difference between Democrats and Republicans on economic issues. Liberals were not responsible for the meltdown, nor were they responsible for the twisted response to it. This was all the work of the giant banks, hedge funds, and their illiberal servants in all 3 branches of the U.S. national government.

        On Nov. 4, vote for third party candidates, even though most of them can’t win. If we vote for Democrats or Republicans, we’re wasting our votes.

        1. MRW

          Liberals were not responsible for the meltdown, nor were they responsible for the twisted response to it.

          The hell they weren’t. ;-) This goes back to Clinton’s failure to regulate. Listen to Bill Black explain it to Harry Shearer in plain clear language: http://harryshearer.com/le-shows/may-1/.

  4. William Hunter Duncan

    I remain 25-30% underwater on my mortgage, on the house I bought in 2006. I knew the market was inflated, but I had no idea about securitizations etc. I even worked @ big bank in 2012, in their home mortgage dept, and saw how they were preparing hundreds of thousands of junk mortgages, to sell to the Fed and Fanny and Freddie. Government is checked out, captured, co-conspiritorial.

    Somehow, I think my government’s response to Ebola looks a lot like the selling out of America to the banks and the Fed,to corporations generally. Based on the fact that there are asset bubbles in the stock market, rental housing, car loans, fracking, college loans, etc, but the language flowing out from gov, bank, corp is all about recovery, I’m inclined to believe not a word coming from them about Ebola. I wonder how it will go for America and it’s leadership if the global economy tanks at the same time Ebola is growing exponentially?

    Gov was supposed to protect me. But I feel like gov, banks and corporations, are predators that work together to feed on people like me. I’m not sure what to do about it, but try to stay out of their way…(otherwise I would put the leadership of all three to washing public bathrooms for the rest of their days, probably ;)

    1. ScrappyLaptop

      Roughly 70% (as of 2013) of all current mortgage cash flow holders cannot provide a valid deed since the ownership chain was broken at the onset by MERS. Get an attorney if you can that can request and verify that your lien-holder can provide a valid, unbroken chain of ownership of your deed. If they cannot it is likely you can own your house outright with a judge’s ruling.

  5. JohnnyGL

    Good stuff, Yves. No one else is covering and there’s lots of interesting content getting revealed in this trial. Your work is appreciated.

    1. MRW

      +1000, as well.

      Yes, thank you for doing this. Important work. I hope you’re turning your trial revelations into a book, and an iBook with court docs so university kids and their parents can read this.

    1. MRW

      Nothing faith-based about it. ;-) Legalistic CYA language that’s a short form for “It is my belief and recollection that….” It gets around declarative answers that could later be used as evidence against him. Half-way to pleading the fifth.

  6. Chauncey Gardiner

    Yves,
    Thank you for this and for all the work you have done in exposing the criminals and their accomplices and enablers.

    We may never see any of them sentenced; but, God willing, I will be telling my grandchildren about what they did to us and our country.

    1. susan the other

      And as you know already, you will have to dig deeper into the Cold War and all the looney extravagance that spun totally out of control.

  7. John

    One thing to remember about this period is the first request for bailout funds failed. Congress rightfully turned down the Treasury over-reach. But then it was restored once Congress loaded the Bill with goodies for back home.

    Paulson made a herculean effort to persuade the Congress and the public that if the funds were not committed in a prompt manner, markets would collapse. Some of us did not buy the argument because after all this was the same Administration that lied about everything (wars, tax cuts, etc) else and it was very clear this was another lie to prop up their Wall Street buddies.

    I sent letters and emails to Congress trying to persuade them not to go for it. Once they were bought off my Congress friends, to the person, came back and said they were reluctant but did it anyways because of funding for pet projects back home would be funded. They got their earmarks and their rich bank friends got their bonuses. Shortly thereafter, Sen Dick Durbin quipped: “And the banks — hard to believe in a time when we’re facing a banking crisis that many of the banks created — are still the most powerful lobby on Capitol Hill. And they frankly own the place.”

    The political structure in Washington is totally corrupt. That same corruption has filtered down to Everywhere, USA. Nothing can be believed, except if you accept the fact they are gatekeepers for the super rich.

    1. Lambert Strether

      Just to sharpen this, pre-midterms, a little: Calls to Congress against TARP were well over 90% against. And it was conservative Republicans who forced the second vote; Democrats, including then President-elect Obama who whipped the Congressional Black Caucus in favor, and Reid, who loaded up the replacement bill with goodies, were the party who passed it.

      1. ArkansasAngie

        I was against it.

        I still am against it.

        I’ve not voted for a person who supported it. And Shan’t in the future.

        I would Dearly love to see these jackass’ in jail.

        But …. but …. people would have been hurt. My response … people (not stats) have been hurt and continue to be hurt. I want somebody else picking the winners and losers.

    2. Carla

      “The political structure in Washington is totally corrupt. That same corruption has filtered down to Everywhere, USA. Nothing can be believed, except if you accept the fact they are gatekeepers for the super rich.”

      Tragically, this is absolutely true. Even in cities where virtually no rich people live (some in the rust belt, for example), the super rich who live in the ‘burbs and actually, anywhere on the globe, control everything. In my inner-ring suburb, the bio of our part-time mayor (who actually does live here) describes him thus:

      … has practiced (law) in the areas of public finance, governmental law, bankruptcy and creditors’ rights, securities, real estate and commercial litigation for over 30 years. In the area of bonds and finance, he has participated as bond, underwriter’s or issuer’s counsel in over $7 billion in financings…(and) has been a member of the National Association of Bond Lawyers since 1979.

      I should add that our mayor sincerely loves our declining little suburb and certainly believes that he acts in the best interests of our city and our citizens.

      Financialization indeed results in the crapification of everything.

    3. Banger

      I want to qualify that “totally” corrupt idea just a bit. The system is totally corrupt but many people in government are fairly honest although their numbers are declining. But this corruption is inevitable and has little to do with malfeasance–our total culture is about self-interest and f-ck the commons and anyone other than me and my tribe. Unless we change our culture it will only get worse.

      Having said that I wonder why progressives object to the right’s desire to limit government. If it is so corrupt why give it stuff to do? Anyway the Ebola crisis puts our public institutions in high relief–we’ll see how they react. I think a crisis tends to burn away a good deal of corruption–maybe this disease is a blessing in disguise.

      1. Carla

        Many on the “left” believe reflexively that “our government IS US,” that in government, we are able to act together as a community.

        I must confess that until Obama, I wanted to believe that that might, possibly, be so. But he disabused me of any such notion VERY QUICKLY in his administration, and I saw the light.

        Now I regret my gullibility. Please cut me some slack. At least I ‘fessed up.

      2. Gaylord

        The reason progressives object to conservatives’ desire to demolish government is the fact that they wanted to replace it with profit-taking private enterprise, typically the very sorts of crooks and cronies that rule the roost today. In fact, starting with Reagan, they have succeeded in that goal (albeit mostly surreptitiously) and the result is the accelerated deprivation of the middle class and worse impoverishment of the poor. So, let’s not try to resurrect that BS about “limiting government.” And please don’t equate Democrats with Progressives.

  8. Crash2Parties

    Can we talk about MERS yet, and how those mortgages (the cash flow of which the bundled securities were ostensibly based upon, at least at the root level) are *all* invalid insofar as proving that any bank or servicing company can prove ownership of anything other than the cash flow? That was the original fraud on which all the subsequent frauds were built upon & it’s getting swept under the rug. If it were to come to light, homeowners would potentially have the opportunity en mass to force the company they send a check to each month to prove it can produce a valid deed after that last payment. A “run” on mortgages, if you will…

    1. alex morfesis

      not quite…MERS is the placeholder/security protection local tax avoidance scam to make sure you can’t sell your home without paying off the funding you received to get the keys to your home…but a mortgage security document always did that…the money…the actual mortgage NOTE as against the mortgage security instrument, is what you owe for the funding provided to get the keys to your home…there are two instruments when you get a home mortgage loan….the loan or note…and the security instrument or Mers mortgage…as to the securitizatized remic based new york common law trust or Delaware Statutory Trust loan pool partnership, there are two trustees and three servicers…there is the corpus holder(physical holder) who has historically been Northern Trust of Chicago and Wilmington Trust of Delaware(now owned by M & T)…the other trustee…the cashier trustee or more properly, the indenture trustee, is the one most people see when being foreclosed upon…and it is correct, the indenture trustee is probably NOT the proper party in interest to bring suit, but none of the named purported party plaintiffs is ever aware of these suits being brought…it is almost all controlled by the robo signer company in jacksonville florida, FIS, Fidelity Information Services, or another company and its product called ISGN/Lenstar…now that is probably a violation of their trademark rights to allow a third party to use their name without having direct permission…and since trademark is the intellectual property right one might find based in BONOland for tax purposes…if anyone ever brings a proper lawsuit against these lending enterprises, lawsuit meaning spending a few hundred bux to challenge at the USPTO, then that person might be doing american taxpayers a big service, forcing a recapture of those offshored profits with the loss of the Intellectual property…not probable, but one can always dream…

  9. Fair Economist

    There were lots of discussions about this on the econ blogs back when this was happening, and basically everybody agreed that Paulson was paying more than market price and that Paulson was smart enough to know that. As it turned out, he was basically correct that the assets were undervalued, but it was government money that was put at risk and of course the government should have gotten the benefit.

    Actually, if Paulson had run the government like he’d have run any large bank, the government would have ended up owning most of the big banks and would probably have made over a trillion dollars for the government. And of course that’s exactly what he was trying to *avoid*; he wanted his banking buddies to have all that money, with the government getting only a pittance. It’s good to see that what we all knew and said is being confirmed in the records.

    1. susan the other

      What I’d like to have explained is Hankster’s little trip to France in February (@) of 2007 when the plan was finalized to bring the whole thing down. That’s almost 2 years before the securities hit the fan.

    2. Yves Smith Post author

      Fair Economist,

      With all due respect, you are missing the point. There was never any plan to buy assets. Never. It was a big lie to divert attention from the real plan, to inject capital into the banks.

      1. Fair Economist

        Injecting capital was the goal, but buying assets was the means. And they *did* indeed buy lots of assets.
        However, injecting capital wasn’t exactly the goal either. They could have injected capital by the FDIC or the Federal Reserve stepping in and taking over the banks, and then backing the banks’ debts. But – that would have left the government owning the banks, and earning and upside from a later recovery (which Paulson) later expected. Preventing *that* was the real goal of TARP – making sure the benefits of halting the crash went to bankers and not the government.

        1. Yves Smith Post author

          No, buying assets was NEVER THE MEANS. Never intended to be the means, You are making it painfully obvious you did not bother to read the post.

          The reason this matters is that discussing the obvious hare-brainedness of the Treasury claims about the red herring of the asset buying scheme (“you said you are buying them at market but that won’t work. How do you make them sell them to you? How will you set the price? How are you sure you won’t lose money?”) diverted attention from the fact that TARP was NEVER intended to be an asset buying scheme. The only place that showed up in the bill was in a very indirect way, in its title. and in all the marketing around the bill. There was never a plan to buy assets, never.

          I don’t see why you find this so hard to grasp and why you fail to understand the political and media significance. For a Cabinet member to lie to Congress about pending legislation is a huge deal. This is on the order of Colin Powell’s “Iraq has WMD” misrepresentation.

          And the reason for proposing an obviously cockamamie scheme (similar to Paulson’s failed MLEC plan of late 2007, which we said from the get-go would not work) was to get everyone fixated on its unworkable mechanics, and divert attention from the fact that if the Administration paid above market for the assets (which they said they weren’t going to do in public but in private said they would), it amounted to an equity injection, and the government should get some control and/or upside for that.

          1. Gaylord

            Yves: “For a Cabinet member to lie to Congress about pending legislation is a huge deal. This is on the order of Colin Powell’s “Iraq has WMD” misrepresentation.”

            I think you have just identified the other of the two MOs that enabled the consummation of the Corporate Coup — 1) War on Terror (military domination); 2) Government Takeover by Investor Class (financial domination).

          2. MRW

            Yves,

            I don’t see why you find this so hard to grasp and why you fail to understand the political and media significance.

            He doesn’t understand double-entry accounting.

          3. Susan the other

            Well. That was amazing. I just went to the NC archive and read up on Paulson’s antics going into the Great Financial Crisis. (Paulson’s SIV Rescue Plan). I remember little stuff, but never understood much of it at the time. This article should be read by all. Just for old times sake. It talks about the events current in October of 2007 and even refers to a year previously, Oct of 2006. What strikes me is the dis-coordination between the banks. Nobody was on first. And the original price tag for this rescue fund, to be private donations by the banks, was only 60 bn. When the dust settled two years later, Hankster was threatening martial law if Congress didn’t give him TARP – 700 bn. The thing that makes me most uneasy is that they knew the whole system was a terrible mess as early as October of 2006 and couldn’t get their act together. But it goes a long way toward explaining why we now have public banking and micro managed interest rates. After pouring all that cash into the banking industry to let it fail once again would really be a circus.

          4. OpenThePodBayDoorsHAL

            There was a point where we approved something like $187 billion in bailout money for Citi, where instead we could have bought every last share of outstanding Citi common stock for $120 billion.

  10. James Cole

    I don’t know what you’re all getting so upset about. TARP was the federal jobs guarantee that the MMTers have been advocating–beta version, for bankers only.

  11. Expat

    So, where are the indictments? There cannot in a constitutional democracy be a statute of limitations on lying to Congress; such would be an unconstitutional derogation of power. So, where are the indictments?

    1. Nate

      Indicted for what? Early on two hedge fund managers at Bear Stearns were criminally prosecuted, and they were acquitted by a Jury of their peers. In my opinion much of the “fraud” for which people want indictments would be exceedingly difficult to prosecute in a criminal case, partly because all parties’ to many of the “fraudulent” transactions were all highly-sophisticated and knew or should have known what they doing.

      If you tried to prosecute officials at Goldman Sachs or other big banks, the Government could not present a single innocent-looking victim who was an actual party to a fraudulent transaction. That was the problem with the prosecution of the Bear Stearns Hedge Fund Managers: because of pre-existing entry barriers, nobody is allowed to “transact” directly with hedge funds unless they are highly sophisticated investors, and highly sophisticated investors are hard to portray as “innocent victims”…

      1. Yves Smith Post author

        That trial of the Bear hedge fund managers was completely off base.

        They were BUYERS of toxic product, not manufactures of it. They were stuffees, victims.

        The SEC only knows how to do insider trading cases, so they looked for what they thought was an insider trading case, the managers selling out of the crap before they sold out their investors out of it.

        Short form was that the managers had a scheduled selling program. The SEC hadn’t done remotely adequate discovery. There was no case.

  12. Jim

    “…Secretary Paulson led an effort to request both of these powers and one of them actually became TARP legislation, the allowed the Treasury Department to inject capital into institutions in any form that the Treasury Department deemed appropriate if it was necessary to protect the financial system.”

    Since, as Yves indicates, the record now clearly shows “that TARP was designed from the very outset as a way to buy bank equity…” some broader questions need to be asked about any potential future reform role of the State ( in particular, the Treasury Department, the Executive Branch, the Federal Reserve and Congress).

    Can the present US State ever truly reform financialization?

    Can the present US State reform our corrupt capitalist system?

    Is the present configuration of the US State the appropriate political structure to build a better future for the average US citizen?

    Can the modern bureaucratic State play any positive role in steering our collective efforts through a time of financial, economic, political and cultural crisis?

    1. Barni

      America is not now and never was a democracy unless Plato, who invented “republic”, was a complete idiot. Plato’s republic was run by and for elites, as is America which is an elite dictatorship (republic). The “will of the majority” will rarely if ever be expressed by American governments. Real democracies reflect the will of the majority while real republics reflect the will of the (now corporate for anonymity) elites. America is a true republic serving the interests of elites while serving up the vast majority while blaming them (in elite owned media – which is to say 95% of the media) for their own financial exploitation. History shows that such governmental arrangements can only be changed through violence and revolution; which is exactly the reason that the US military and state militias are being spent on lavishly by republicans in both parties and idiots in the democratic party! The 95% will be driven to destitution and violence and the American military and police establishment will protect their masters (the 5%) from the fury of the backlash to their political and financial exploitation of the 95%. This anti citizen elitist military/police force is currently being built with taxpayer money with a large slice going directly to the 5% who own the defense contracting corporations. Isn’t fascism great!! Assuming of course you are not in the 95%!

      1. MRW

        A democracy is majority (or mob) rule. Greece only allowed elites to participate in their ‘democracy’.

        A republic is a nation of laws. That was understood at one time in this country, even by the uneducated, which is why we had the term “outlaw.” If you decided to act outside the social compact or contract that was the constitution, then you were not protected by it and could not prevail upon the law to protect you. And if you were an outlaw, and someone shot you, too bad. Rewards for capturing outlaws had to do with restitution. The outlaw could be made to work for the aggrieved until the debt was paid off.

        1. Demeter

          The only difference today is: you can be “outlaw”: not protected by the social compact or the contract that is the constitution; by simple accident of being born non-white and/or female and in the lower 80% economically, or Muslim in faith, or any of a number of accidents. You don’t actually have to do anything to be outside the law, because the law won’t apply to you the way it does to the Obscenely Rich and their hangers-on. You and I are not protected by it and can not prevail upon the law to protect us, no matter how many lawyers we have to defend us. I’m not old enough to say this was always the case. But there used to be exceptions, according to the history books, times when the Rule of Law meant something for the majority of US citizens. Now, it has no meaning whatsoever.

          1. MRW

            Yeah, you’re right. Glenn Greenwald wrote about it as the two-tiered system of justice, but it probably has more layers than that.

  13. GSTalbert

    So… that’s all folks? They screw over the entire country and get to ride out into the sunset happily ever after? Just like Cinderella, how sweet.

  14. Bonkers

    So where are all of these toxic assets now? On the Fed’s balance sheet? In the hands of the Treasury? Sold to hedge funds? If they were bought at above-market prices, did they ever recover their original value? If not, where are the capital losses at? Many questions…

    1. James Cole

      A very big lot are on Fed’s balance sheet, another chunk are in special purpose container vehicles called Maiden Lane I, Maiden Lane II, etc., sponsored and funded by the Fed. A lot are essentially owned by monoline bond insurers who are subrogated to the rights of the owners and litigating or settling with the issuer banks. And a lot were sold to hedge funds at deep discounts.

  15. bh2

    Top government officials boldly lied to benefit their patrons. Wow — who could have seen that coming?

    1. Yves Smith Post author

      Lying to Congress over pending legislation, particularly with a $700 billion price tag on it, is a bigger deal than garden variety Big Lies to the media.

      1. Andrew not the Saint

        It would be a bigger deal if there was any semblance of legal accountability for the PTB. I’m not holding my breadth for any consequences of any of these bombshells – everything will be airbrushed from the official memories.

        Also, consider that Obama and plenty of the previous presidents lied through their teeth to their constituents but still got re-elected. I used to believe that the “people deserve the governments they vote in” credo was cynical, but that is slowly changing.

        1. bh2

          Well of course they lie. It’s their core job description.

          Pols know voters adore being lied to. Swooning tribal crowds will accept even the most obvious fraud if it is crafted to support their collective confirmation bias.

          When the lie is later revealed, of course, voters righteously whine that they were “deceived”. Well of course they were. It’s what they craved, what they got, and what they deserved.

          Next time won’t be different.

  16. economicminor

    So the enemy of your ENEMY is your friend.
    I guess that means we should cheer on AIG Greenberg
    What a world we live in.

  17. bob

    “You can at most expect them to deliver on their contractual commitments”

    In this situation, not even that. One major part of tarp was a pre-pardon for the pusillanimously pugnacious Paulson. ‘Blanket immunity’ was the exact term used, I believe.

      1. bob

        Of course it was. It’s the space-time distortion of law and logic. Infinty lies before thee…

        “we’ll agree that I am not and will not be bound, personally, for anything I say or do”

        How can anyone (either party) agree to this? It’s an anti-agreement. imaginary

        It’s like he stumbled upon the square of negative one. The quants want his secret, right after he forces them to take more money.

  18. Ramakrishna Shanker

    The crux of the matter is this – Can the government do whatever it wants, legal or illegal, in the name of national security? Or to prevent a “collapse”. Or to prevent a “total extinction event”?
    Before we answer – we need to realize that we can never prove them wrong. The actions they take may strip you of your property, your rights, your clothes and leave you on the side of the street eating gruel out of a tin can – and if you dare to complain – they will say you should be grateful to even be alive because things could be a lot worse and you owe them your life. And there is no way for you to argue against that.
    So it boils down further to this: Do we trust that the “folks” in charge are morally upright and genuinely care about the welfare of every American? Because if we do have that trust – we need to believe them when they say we have to sacrifice property, rights, clothes etc in order to survive as a species.
    On the other hand – if the corridors of power are occupied by narrow minded psychopaths who look out for themselves and their gangs, capable of extremely immoral actions if it benefits themselves, and are merely playing everyone else for a fool – we have an entirely different problem.
    That’s why this trial is so important. Because we continue to have this issue. Whether its ebola or a meteor heading towards our planet – we will continually be confronted by this issue – where the guys in charge say – we need everyone to sacrifice everything – because that’s the only way we’ll survive. Do we believe them ? Or do we believe that these are cynical psychopaths that will make sh..t up to steal us blind?

    1. OpenThePodBayDoorsHAL

      Read some more history, America came up with something completely “revolutionary”: the concept that man himself has “certain inalienable rights” that are above the powers that any State can impose, carefully delineated, enshrined and protected in the Constitution. THAT’s what has come apart at the seams, we now have a conception of the State above all, all-powerful, and able to compel Man to do whatever they want him to do for any reason whatsoever. My friends moan when I call that Fascism, but that is precisely what it is: an overarching 3-part State composed of Government, Corporations and the Military, whose authority is fixed well and truly above that of the citizen. Describes our current form to a T.

  19. Ramakrishna Shanker

    If the govt were to require that all inhabitants of NYC immediately vacate their houses, get on buses and move to make-shift tents in Mississippi – because they claim there is a some deadly danger ( virus, foreign threat, financial collapse…. whatever). Then when they are allowed back to NYC , find their houses have been ransacked.
    And then to all the ungrateful “folks” who dare to complain – the govt says – sure we are sorry if any of your personal belongings were missing – we’ll look into it – but it was a necessary sacrifice on your part to “save the nation”.
    You OK with that?
    You look around and notice that the powerful decision makers are living high on the hog and swanking around in even more luxurious houses and cars . You have lost everything. And they say – thanks for your sacrifice, its been tough all around, and it was necessary to “save the planet”. Still OK with that?
    We need to find a way out of this ongoing issue – because I am sure it will re-appear. It seems that at a minimum we need to ensure that there is no way for the “decision makers” and their friends to profit from the experience. That there are no ‘conflicts of interest”. That they sacrifice at least as much as everyone else to ‘save the planet”.
    Perhaps others have more sophisticated ideas.

  20. Fiver

    Without the benefit of having read other comments yet, first, thank you Yves for so clearly and cogently presenting this case and its potential lines of implication/complication to us.

    What this fellow just acknowledged is the policy of the US Treasury and the Banks’ Federal Reserve necessarily entails approval of anything the senior leadership of these co-conspirators deem vital to ensure systemic ‘stability’ – including manipulation of gold markets, oil markets, food and other non-energy commodity markets, FX markets, equity markets, foreign markets, the works.

    Those of us dubbed ‘conspiracy’ nuts over the years when discussing such matters can take some comfort these days that some very important Official Narratives are sloughing off the Obama/Bush Admin like rotting skin. The entire stinking cabal that conspired to extort tens of trillions and counting of public monies are now openly in charge: this is their ‘Market’, their economy, their President, their wars, their disaster.

    There’s a steady stream of these people running around peddling books as if they had not taken part in the wildest flight from the law, from judgment, from reality, from humanity as anything we’ve ever seen over the past 15 years. They all believe even now they are going to get away with just smashing whatever legal, moral, historical, empirical or spiritual principle aside. This was the 9/11 of finance – but as is evident to all, constant manipulation of markets and money and messages inevitably erodes fundamental confidence.

    When markets are managed, and there is no question whatever that they are, it becomes a question of asking ‘why’ from an entirely different perspective, as in, ‘How does this work for TPTB’?

    If I was the lawyer for Geithner or Bernanke or Paulson or some of these other guys, I’d be looking to settle.

    1. Sunny129

      “If I was the lawyer for Geithner or Bernanke or Paulson or some of these other guys, I’d be looking to settle.”

      That’s the notion arrived in rational mind. But would those ever be hired these criminal goons?

      Even if there is a conscious atty, first s/he will be muscled in by her supervisor/head, who is in that position by the same crooks!

      Even before the discovery process and or the trial, key documents will be missing (?) destroyed and the key witnesses will get demised by ‘sudden’ unknown unfortunate events!

      The earlier statement that DC belt (in & out, Dems/Repbs) is totally CORRUPTED and has seeped over decades through all the regulatory apparatus Fed ,State& county wise, is the ugly truth. They have secure hold what is THE truth and power to define that truth according their fancy. SOTS said a Corporation is a citizen and says it ALL and confirms the observation top top 5% corporations control ALL 3 branches. Elections are joke! Democracy has been hijacked by CORPORATOCRACY in front of our own eyes but most citizens (NC readers excluded) fail to THINK critically or discern re: what’s really going on!

      WILLIAM WORTHY(Investigative Journalist 1921-2014):
      One of the most discouraging things about this country is the lack of critical thinking by Americans. The educational system fails Americans miserably in any kind of analysis of what’s going on. And any government line which is echoed daily by the mass media becomes gospel in this country.

      1. Nate

        If I was representing the Government Defendant’s I would not be interested in settling. Even if the Plaintiff’s prove that the bailout violated various statutory or constitutional provisions, they would still have to prove economic loss or other legally cognizable injuries, which may be very difficult to do. The trial and/or appellate courts may conclude that even in the Plaintiff’s “win” on liability, they would only be entitled to damages if they could prove they would have been better off without any bailout.

        The decision of whether, when or under what terms to award a 13(3) bailout is committed to the exclusive discretion of the board of governor’s of the Federal Reserve, not a court, and there is no way for any court to decide whether the Board of Governor’s of the Federal Reserve would have awarded a bailout in the absence of a substantial equity interest/control. If Greenberg actually offers evidence that AIG would have been better off in bankruptcy without a bailout, then they may have a good case. However, it appears the Plaintiff’s will not be presenting any testimony or evidence that AIG would have been better off in bankruptcy so I don’t see how they could ever show economic losses.

        1. Sunny129

          I have no qualms with your comment and in agreement with you.

          Your reply should have been addressed to FIVER directly and NOT me!
          Thanks.

  21. Expat

    Fuggedaboutit!
    We have done nothing to Bush, Cheney, Rumseld, Rice, and Gonzales, and THEY are guilty of murder, torture, treason, kidnapping and any number of crimes against humanity. Do you honestly expect the real rulers of America to get in trouble over a measly trillion dollars in bribes, payoffs, and theft.

    It’s interesting. I was going to write a satirical bit about putting officials on trial and nuking Wall Street, but I decided that the Gestapo would not find it amusing and probably detain me next time I travel to the US. So I self-censored. What does THAT tell you about America?

    1. OpenThePodBayDoorsHAL

      Fuggedabout it, Paulson is a “made man” and the fix is in for all of them, for sure. A measly trillion in theft, you’re right, that doesn’t move the needle away from the Kardashians and the latest Chicken Little that sends American cowards from clucking away in a panic, ebola, the week before it was ISIS, who knows what it will be next week. I’m penning a piece entitled “The Age of Cowardice” which punctures the American myth of being a brave and principled people. Yes we used to be, and what happened? It’s a nation of chickenshit bed-hiders, leaders who won’t tell the truth, won’t lead, corporate heads who won’t take a chance and invest but prefer to game the tax system, play balance sheet games, and use the courts to stifle competitors, we have a State Department managing to “optics” goals instead of national interests, I mean it doesn’t end. I don’t care if we want to be a trembling mass of jelly hiding under our beds but let’s at least be honest about it.

  22. TedWa

    ““Whoa, if we are providing equity, what control and upside do we get?” This was a way to avoid inconvenient questions like “Why don’t we cap pay? Fire the top executives? Replace the board?” and other things that are normally done with failing or failed institutions.”

    Because Obama
    He demanded there be no strings attached

  23. down2long

    Yves, thank you, THANK YOU for all you do, including staying on this trial. I REALLY would be completely without hope without you. I feel that at least this fetid mess being aired is something – a little life ring – to grab on to. The NY Times “reporter” who is covering this trial in an ad hoc manner is totally out of his depth, and the reporting elsewhere seems willful to ignore to the deeply sordid side of this trial for the continual “ungrateful rich guy sues rich government” – including former Saint Elizabeth Warren. (She and Bernie Sanders have both been demoted after their deranged “Israel has a right to bomb a kindergarten if they think it’s a bomb storing facility” crap. Shame on both of them. Warren should be using your commentary to haul these bank asses before the Senate banking committee in a major show trial. But, alas, we know that is not likely to happen. Not something PITHY and relevant.

  24. Sluggeaux

    David Boies is doing a brilliant job — and this reporting is absolutely essential reading to anyone who cares about the restoration of the Rule of Law in America. I apologize for being a bit late to this discussion.

    The harsh reality of TARP is that the Chairman of Goldman Sachs used his connections to have himself appointed Dictator of the American financial system. Appointed by the President, confirmed by the Senate, and authorized by the Congress, “…to take such actions as the Secretary deems necessary to carry out the authorities in this Act, including, without limitation,” he used his unlimited powers to enrich his cronies and to punish his rivals. His response to any criticism is: “I am the law!”

    However, embedded in TARP, 12 USC 5229 sec. 119 provides that:

    SEC. 119. JUDICIAL REVIEW AND RELATED MATTERS.
    (a) JUDICIAL REVIEW.—(1) STANDARD.—Actions by the Secretary pursuant to theauthority of this Act shall be subject to chapter 7 of title 5, United States Code, including that such final actions shall be held unlawful and set aside if found to be arbitrary, capricious, an abuse of discretion, or not in accordance with law.

    This is the crux of where Boies is going with Alvarez.

    1. Nate

      Well this is a certainly a fascinating case, I’m dying to read the transcripts with testimony from AIG officials. I’ve carefully read a number of the relevant filings and I’m really wondering why Greenberg didn’t challenge many of the decisions he complains about in the Delaware Court of Chancery via a Shareholder derivative action?

      IMO many of the actions/omissions Greenberg complains about were directly attributable to AIG’s board of directors, not the US government in it’s “sovereign” capacity. Regardless of whether the US government was effectively “controlling” AIG’s board during the relevant time periods, the actual “decisions” at issue were committed to the discretion of AIG’s board and should have been addressed in a Shareholder Derivative suit in State Court. Indeed, the very issue of whether the board or it’s members acted with sufficient “independence” and in the best interest of the Corporation is most properly addressed in a Shareholder Derivative Action, which Greenberg never pursued.

      Notably, there was a narrowly-focused shareholder action filed by Wilma Walker in the Chancery court in November 2008, which was settled in February 2009. Greenberg alleges that AIG violated a stipulated settlement approved by the Chancery court when AIG refused to hold a Shareholder vote on the reverse stock split; yet neither Greenberg nor Wilma Walker went back to the chancery court with a contempt motion and/or an a request for an order requiring a AIG to hold a proper vote in accordance with the settlement agreement. Instead, Greenberg wants a FEDERAL court to decide whether AIG violated a STATE court order based on state law issues.

  25. ewmayer

    This post prompted me to dig out some of my own linking/musings at the time, in particular I recalled Bernanke saying some interesting things about the need for the government to overpay for illiquid assets. here is the post containing a link to a 23 Sep 2008 Bloomberg piece on the speech in which Bernanke said that.

    Speaking of lying to Congress, I also seem to recall Bernanke saying to Congress around that time that the Fed had been “adding liquidity” in an effort to shore up markets, but the actual data (perhaps the System Open Market Account?) revealing the exact opposite – namely that the Fed had actually drained over $100 Bln in liquidity from the “desperately illiquid credit markets” at the exact time Paulson was trying to ram TARP down congress’ throat. Does anyone else remember that? The cynical (or perhaps in hidnsight, merely realistic) commentary I heard at the time was along the lines of “if I didn’t know better, I’d think they were intentionally trying to crash the markets in order to get TARP passed.”

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