Goldman Sachs' Stolen Umbrellas

As CIT goes bankrupt and Treasury Secretary Geithner warns today that the "damage caused by this crisis" will "take some time" to repair, a key Wall Street player has managed to weather the storm at the expense of an unwary, drenched public.

"All men are equal," E.M. Forster wrote a century ago, "all men, that is to say, who possess umbrellas." An old saying puts it more tartly: "The rain falls equally on the just and the unjust, but more on the just because the unjust have stolen their umbrellas."

According to the McClatchy Newspapers, Goldman Sachs spent years cornering the umbrella market:

In 2006 and 2007, they "peddled more than $40 billion in securities backed by at least 200,000 risky home mortgages, but never told the buyers it was secretly betting that a sharp drop in U.S. housing prices would send the value of those securities plummeting.

"Goldman's sales and its clandestine wagers, completed at the brink of the housing market meltdown, enabled the nation's premier investment bank to pass most of its potential losses to others before a flood of mortgage defaults staggered the U.S. and global economies.

"Only later did investors discover that what Goldman had promoted as triple-A rated investments were closer to junk."

Pension funds, insurance companies, labor unions and financial institutions have been hit with large losses as a five-month McClatchy investigation finds that "Goldman's failure to disclose that it made secret, exotic bets on an imminent housing crash may have violated securities laws."

Meanwhile, after raking in more than $23 billion of taxpayer money (most of it funneled from the AIG bailout), Goldman is repaying the $10 billion it received directly to escape federal limits on $20 billion in bonuses it wants to pay executives from more than $50 billion in expected revenue this year.

In these rainy days for the American economy, there is one place on Wall Street where everybody is staying very dry.

Sobering Up the Banks

Like unreformed drunks, American banks want to settle their rehab bills and go back to the old ways--no government curfews or sobriety pledges for the likes of JP Morgan Chase, Goldman Sachs et al as they rush to repay TARP billions and forget they were ever one step from being trampled by pink elephants.

“These repayments," says Treasury Secretary Tim Geithner in the cautious tones of an alcoholism counselor, "are an encouraging sign of financial repair, but we still have work to do.”

The "work" should involve an attitude adjustment on the part of the risk-addicted money manipulators as well as repair of the financial markets. After being on their knees only months earlier, bankers are now anxious to get back to the princely personal highs they derived from practically wrecking the system with greed and irresponsibility.

Even the Wall Street Journal wants to prevent future binges by members of the too-big-to-fail club.

"Unless we can put the kibosh on that unofficial designation for the biggest banks," it says, "their obligations ultimately remain potential taxpayer liabilities...Let them check out for sure, but make sure that they don't come back, or we'll be left with a financial system full of government-sponsored banks with an implicit guarantee should they run into trouble."

At the very least, before letting them resume their old ways, the Treasury should insist on getting bailed-out banks to subscribe to a counterpart of AA's 12 Steps, which include admitting that "our lives had become unmanageable," believing that "a power greater than ourselves could restore us to sanity" and making "a list of all persons we had harmed" and being "willing to make amends to them all."

There is no guarantee that most won't fall off the wagon again, but unless taxpayers want to continue being their enablers, the government should do everything possible to sober them up before turning them loose.

Update: In the comments section of The Moderate Voice, "Silhouette" has a nifty full 12 Steps for "Absconders Anonymous."

Nobel Economists vs. Geithner

Another winner of the Nobel Prize in economics, and a former Clinton White House adviser, joins Paul Krugman today in turning thumbs down on the Treasury's public-private toxic asset plan and suggests that nationalizing banks would be "preferable."

Joseph Stiglitz concludes: "Some Americans are afraid that the government might temporarily 'nationalize' the banks, but that option would be preferable to the Geithner plan. After all, the F.D.I.C. has taken control of failing banks before, and done it well. It has even nationalized large institutions like Continental Illinois (taken over in 1984, back in private hands a few years later), and Washington Mutual (seized last September, and immediately resold).

"What the Obama administration is doing is far worse than nationalization: it is ersatz capitalism, the privatizing of gains and the socializing of losses. It is a 'partnership' in which one partner robs the other. And such partnerships--with the private sector in control--have perverse incentives, worse even than the ones that got us into the mess."

Stiglitz's denunciation of the Public-Private Asset Plan as "a win-win-lose proposal: the banks win, investors win--and taxpayers lose" follows Krugman's observation last week that "it has become increasingly clear over the past few days that top officials in the Obama administration are still in the grip of the market mystique. They still believe in the magic of the financial marketplace and in the prowess of the wizards who perform that magic."

Not only do we have two Nobel Prize economists trashing the proposal but even the radicals at the Wall Street Journal are unhappy that the trough for investors may be too small:

"So not only is the government going to be anointing a favored few to invest in these assets. It is also giving those favored few the opportunity to collect fees and profit-sharing from anyone else that wants to go in with them. In the wake of the AIG bonfire, Mr. Geithner is tempting another outcry."

Unlike those AIG bonuses, the toxic-asset plan is too complex for "another outcry" by politicians or the public, but in the amounts of taxpayer money involved, it dwarfs that issue.

Even worse, it is a key recovery proposal by a President voters want desperately to succeed. But someone in addition to economists and super-investors like George Soros has to put nationalization of banks in some form on the agenda--and soon.

An AIG Scapegoat Speaks Up

The human price of political and media stereotyping is highlighted today by publication of an angrily cogent resignation letter from an executive who played no part in AIG's problems but has been vilified, harassed and threatened for staying on and trying to fix them.

An executive vice president Jake DeSantis writes: "After 12 months of hard work dismantling the company--during which A.I.G. reassured us many times we would be rewarded in March 2009--we in the financial products unit have been betrayed by A.I.G. and are being unfairly persecuted by elected officials. In response to this, I will now leave the company and donate my entire post-tax retention payment to those suffering from the global economic downturn. My intent is to keep none of the money myself.

"I take this action after 11 years of dedicated, honorable service to A.I.G. I can no longer effectively perform my duties in this dysfunctional environment, nor am I being paid to do so. Like you, I was asked to work for an annual salary of $1, and I agreed out of a sense of duty to the company and to the public officials who have come to its aid. Having now been let down by both, I can no longer justify spending 10, 12, 14 hours a day away from my family for the benefit of those who have let me down."

With a senator suggesting suicide, two state Attorneys General hounding and threatening to name them and busloads of protesters howling in their driveways, AIG employees have become victims of the kind of group discrimination that Americans congratulated themselves for leaving behind with the inauguration of Barack Obama.

Such personalizing of a societal problem is the dark side of celebrity worship--a People magazine approach to the breakdown of government regulation that helped bring on today's economic mess, an updated version of "if the crops fail, find the witches who are responsible and burn them."

Now Treasury Secretary Geithner is proposing new controls. “One of the key lessons of the current crisis is that destabilizing dangers can come from financial institutions besides banks,” he said yesterday, “but our current regulatory system provides few ways to deal with these risks.”

At least one employee of those financial institutions will no longer be trying to undo the effects of those destabilizing dangers.

"I’ll continue over the short term to help make sure no balls are dropped," DeSantis tells his bosses, "but after what’s happened this past week I can’t remain much longer--there is too much bad blood."