Money power prays upon nations, despotic, insulin, crisis, wall street kills main street

The take over of American Government by wall street

All of the new cabinet and staff are WALL STREET

http://www.youtube.com/watch?v=eAaQNACwaLw

US government works for A I G above the US taxpayers wellness

CAMPAIGN CONTRIBUTIONS = BOUGHT BY LOBBY = BILLIONS = WALLSTREET CONTROLS US GOVERNMENT

INDICTMENTS?

Cuomo Widens His A.I.G. Investigation
March 26, 2009, 6:17 pm

http://www.bloomberg.com/apps/news?pid=20601087&sid=abVP3l30_oQQ&refer=home

Attorney General Andrew M. Cuomo of New York said Thursday afternoon that he was widening his investigation of the American International Group to examine whether its trading counterparties improperly received billions of dollars in government money from the troubled insurer.

Those counterparties include Goldman Sachs, which received $12.9 billion, as well as Société Générale of France and Deutsche Bank of Germany, which each received nearly $12 billion.

"Our investigation into corporate bonuses has led us to an investigation of the credit default swap contracts at A.I.G.," Mr. Cuomo said in a statement. "CDS contracts were at the heart of A.I.G.'s meltdown. The question is whether the contracts are being wound down properly and efficiently or whether they have become a vehicle for funneling billions in taxpayers dollars to capitalize banks all over the world."

Other counterparties that received money from A.I.G. include Barclays of Britain ($8.5 billion), Merrill Lynch ($6.8 billion), Bank of America ($5.2 billion), UBS of Switzerland ($5 billion), Citigroup ($2.3 billion) and Wachovia ($1.5 billion).

WHEN will the INDICTMENTS and Supreme Court hearings begin?

- Joe Cassano, and AIG executives, Citigroup, J P Morgan, Lehman ... ?

Who is Paulson and Bernanke protecting?

- AMERICA wake up, we are being screwed.

The global economic crisis isn't about money - it's about power. How Wall Street insiders are using the bailout to stage a revolution

This summary is not available. Please click here to view the post.

http://www.bloomberg.com/apps/news?pid=20601109&sid=aB1jlqmFOTCA&refer=home

Naked Short Sales Hint Fraud in Bringing Down Lehman

(Update1)

By Gary Matsumoto

March 19 (Bloomberg) -- The biggest bankruptcy in history might have been avoided if Wall Street had been prevented from practicing one of its darkest arts.

As Lehman Brothers Holdings Inc. struggled to survive last year, as many as 32.8 million shares in the company were sold and not delivered to buyers on time as of Sept. 11, according to data compiled by the Securities and Exchange Commission and Bloomberg. That was a more than 57-fold increase over the prior year’s peak of 567,518 failed trades on July 30.

The SEC has linked such so-called fails-to-deliver to naked short selling, a strategy that can be used to manipulate markets. A fail-to-deliver is a trade that doesn’t settle within three days.

“We had another word for this in Brooklyn,” said Harvey Pitt, a former SEC chairman. “The word was ‘fraud.’”

While the commission’s Enforcement Complaint Center received about 5,000 complaints about naked short-selling from January 2007 to June 2008, none led to enforcement actions, according to a report filed yesterday by David Kotz, the agency’s inspector general.

The way the SEC processes complaints hinders its ability to respond, the report said.

Twice last year, hundreds of thousands of failed trades coincided with widespread rumors about Lehman Brothers. Speculation that the company was being acquired at a discount and later that it was losing two trading partners both proved untrue.

After the 158-year-old investment bank collapsed in bankruptcy on Sept. 15, listing $613 billion in debt, former Chief Executive Officer Richard Fuld told a congressional panel on Oct. 6 that naked short sellers had midwifed his firm’s demise.

Gasoline on Fire

Members of the House Committee on Government Oversight and Reform weren’t buying that explanation.

“If you haven’t discovered your role, you’re the villain today,” U.S. Representative John Mica, a Florida Republican, told Fuld.

Yet the trading pattern that emerges from 2008 SEC data shows naked shorts contributed to the fall of both Lehman Brothers and Bear Stearns Cos., which was acquired by JPMorgan Chase & Co. in May.

“Abusive short selling amounts to gasoline on the fire for distressed stocks and distressed markets,” said U.S. Senator Ted Kaufman, a Delaware Democrat and one of the sponsors of a bill that would make the SEC restore the uptick rule. The regulation required traders to wait for a price increase in the stock they wanted to bet against; it prevented so-called bear raids, in which successive short sales forced prices down.

Driving Down Prices

Reinstating the rule would end the pattern of fails-to- deliver revealed in the SEC data, Kaufman said.

“These stories are deeply disturbing and make a compelling case that the SEC must act now to end abusive short selling -- which is exactly what our bill, if

enacted, would do,” the senator said in an e-mailed statement.

Short sellers arrange to borrow shares, then dispose of them in anticipation that they will fall. They later buy shares to replace those they borrowed, profiting if the price has dropped. Naked short sellers don’t borrow before trading -- a practice that becomes evident once the stock isn’t delivered. Such trades can generate unlimited sell orders, overwhelming buyers and driving down prices, said Susanne Trimbath, a trade- settlement expert and president of STP Advisory

Services, an Omaha, Nebraska-based consulting firm.

The SEC last year started a probe into what it called “possible market manipulation” and banned short sales in financial stocks as the number of fails-to-deliver climbed.

‘Unsubstantiated Rumors’

The daily average value of fails-to-deliver surged to $7.4 billion in 2007 from $838.5 million in 1995, according to a study by Trimbath, who examined data from the annual reports of the National Securities Clearing Corp., a subsidiary of the Depository Trust & Clearing Corp.

Trade failures rose for Bear Stearns as well last year. They peaked at 1.2 million shares on March 17, the day after JPMorgan announced it would buy the investment bank for $2 a share. That was more than triple the prior-year peak of 364,171 on Sept. 25.

Fuld said naked short selling -- coupled with “unsubstantiated rumors” -- played a role in the demise of both his bank and Bear Stearns.

“The naked shorts and rumor mongers succeeded in bringing down Bear Stearns,” Fuld said in prepared testimony to Congress in October. “And I believe that unsubstantiated rumors in the marketplace caused significant harm to Lehman Brothers.”

Devaluing Stock

Failed trades correlate with drops in share value -- enough to account for 30 to 70 percent of the declines in Bear Stearns, Lehman and other stocks last year, Trimbath said.

While the correlation doesn’t prove that naked shorting caused the lower prices, it’s “a good first indicator of a statistical relationship between two variables,”

she said.

Failing to deliver is like “issuing new stock in a company without its permission,” Trimbath said. “You increase the number of shares circulating in the market, and that devalues a stock. The same thing happens to a currency when a government prints more of it.”

Trimbath attributes the almost ninefold growth in the value of failed trades from 1995 to 2007 to a rise in naked short sales.

“You can’t have millions of shares fail to deliver and say, ‘Oops, my dog ate my certificates,’” she said.

Explanation Required

On its Web site, the Federal Reserve Bank of New York lists several reasons for fails-to-deliver in securities trading besides naked shorting. They include misunderstandings between traders over details of transactions; computer glitches; and chain reactions, in which one failure to settle prevents delivery in a second trade.

Failed trades in stocks that were easy to borrow, such as Lehman Brothers, constitute a “red flag,” said Richard H. Baker, the president and CEO of the Washington-based Managed Funds Association, the hedge fund industry’s biggest lobbying group.

“Suffice it to say that in a readily available stock that is traded frequently, there has to be an explanation to the appropriate regulator as to the circumstances surrounding the fail-to-deliver,” said Baker, who served in the U.S. House of Representatives as a Republican from Louisiana from 1986 to February 2008.

“If it’s a pattern and a practice, there are laws and regulations to deal with it,” he said.

Fines and Penalties

Lehman Brothers had 687.5 million shares in its float, the amount available for public trading. In float size, the investment bank ranked 131 out of 6,873 public companies -- or in the top 1.9 percent, according to data compiled by Bloomberg.

While naked short sales resulting from errors aren’t illegal, using them to boost profits or manipulate share prices breaks exchange and SEC rules and violators are subject to penalties. If investigators determine that traders engaged in the practice to try to influence markets, the Department of Justice can file criminal charges.

Market makers, who serve as go-betweens for buyers and sellers, are allowed to short stock without borrowing it first to maintain a constant flow of trading.

Since July 2006, the regulatory arm of the New York Stock Exchange has fined at least four exchange members for naked shorting and violating other securities regulations. J.P. Morgan Securities Inc. paid the highest penalty, $400,000, as part of an agreement in which the firm neither admitted nor denied guilt, according to NYSE Regulation Inc.

Enforcement ‘Reluctant’

In July 2007, the former American Stock Exchange, now NYSE Alternext, fined members Scott and Brian Arenstein and their companies $3.6 million and $1.2 million, respectively, for naked short selling. Amex ordered them to disgorge a combined $3.2 million in trading profits and suspended both from the exchange for five years. The brothers agreed to the fines and the suspension without admitting or denying liability, according a release from the exchange.

Of about 5,000 e-mailed tips related to naked short-selling received by the SEC from January 2007 to June 2008, 123 were forwarded for further investigation, according to the report released yesterday by Kotz, the agency’s internal watchdog. None led to enforcement actions, the report said.

Kotz, the commission’s inspector general, said the enforcement division “is reluctant to expend additional resources to investigate” complaints. He recommended in his report yesterday that the division step up analysis of tips, designating an office or person to provide oversight of complaints.

Schapiro’s Plans

“Our audit disclosed that despite the tremendous amount of attention the practice of naked short selling has generated in recent years, Enforcement has brought very few enforcement actions based on conduct involving abusive or manipulative naked short selling,” the report said.

The enforcement division, in a response included in the report, said “a large number of the complaints provide no support for the allegations” and concurred with only one of the inspector general’s 11 recommendations.

SEC Chairman Mary Schapiro, who took office in January, has vowed to reinvigorate the enforcement unit after it drew fire from lawmakers and investors for failing to follow up on tips that New York money manager Bernard Madoff’s business was a Ponzi scheme. She has “initiated a process that will help us more effectively identify valuable leads for potential enforcement action,” John Nester, a commission spokesman, said in response to the Kotz report.

Last September, the agency instituted the temporary ban on short sales of financial stock. It also has announced an investigation into “possible market

manipulation in the securities of certain financial institutions.”

No Effective Action

Christopher Cox, who was SEC chairman last year; Erik Sirri, the commission’s director for market regulation; and James Brigagliano, its deputy director for trading and markets, didn’t respond to requests for interviews. John Heine, a spokesman, said the commission declined to comment for this story.

“It has always puzzled me that the SEC didn’t take effective action to eliminate naked shorting and the fails-to- deliver associated with it,” Pitt, who chaired the commission from August 2001 to February 2003, said in an e-mail. The agency began collecting data on failed trades that exceed 10,000 shares a day in 2004.

“All the SEC need do is state that at the time of the short sale, the short seller must have (and must maintain through settlement) a legally enforceable right to deliver the stock at settlement,” Pitt wrote. He is now the CEO of Kalorama Partners LLC, a Washington-based consulting firm. In August, he and some partners started RegSHO.com, a Web-based service that locates stock to help sellers comply with short-selling rules.

Postponed ‘Indefinitely’

Pitt began his legal career as an SEC staff attorney in 1968, and eventually became the commission’s general counsel. In 1978, he joined Fried Frank Harris Shriver & Jacobson LLP, where as a senior corporate partner he represented such clients as Bear Stearns and the New York Stock Exchange. President George W. Bush appointed him SEC chairman in 2001.

The flip side of an uncompleted transaction resulting from undelivered stock is called a “fail-to-receive.” SEC regulations state that brokers who haven’t received stock 13 days after purchase can execute a so-called buy-in. The broker on the selling side of the transaction must buy an equivalent number of shares and deliver them on behalf of the customer who didn’t.

A 1986 study done by Irving Pollack, the SEC’s first director of enforcement in the 1970s, found the buy-in rules ineffective with regard to Nasdaq securities. The rules permit brokers to postpone deliveries “indefinitely,” the study found.

The effect on the market can be extreme, according to Cox, who left office on Jan. 20. He warned about it in a July article posted on the commission’s Web site.

Turbocharged Distortion

When coupled with the propagation of rumors about the targeted company, selling shares without borrowing “can allow manipulators to force prices down far lower than would be possible in legitimate short-selling conditions,” he said in the article.

“‘Naked’ short selling can turbocharge these ‘distort-and- short’ schemes,” Cox wrote.

“When traders spread false rumors and then take advantage of those rumors by short selling, there’s no question that it’s fraud,” Pollack said in an interview. “It doesn’t matter whether the short sales are legal.”

On at least two occasions in 2008, fails-to-deliver for Lehman Brothers shares spiked just before speculation about the bank began circulating among traders, according to SEC data that Bloomberg analyzed.

On June 30, someone started a rumor that Barclays Plc was ready to buy Lehman for 25 percent less than the day’s share price. The purchase didn’t materialize.

‘Green Cheese’

On the previous trading day, June 27, the number of shares sold without delivery jumped to 705,103 from 30,690 on June 26, a 23-fold increase. The day of the rumor, the amount reached 814,870 -- more than four times the daily average for 2008 to that point. The stock slumped 11 percent and, by the close of trading, was down 70 percent for the calendar year.

“This rumor ranks up there with the moon is made of green cheese in terms of its validity,” Richard Bove, who was then a Ladenburg Thalmann & Co. analyst, said in a July 1 report.

Bove, now vice president and equity research analyst with Rochdale Securities in Lutz, Florida, said in an interview this month that the speculation reflected “an unrealistic view of Lehman’s portfolio value.” The company’s assets had value, he said.

‘Obscene’ Leverage

During the first six days following the Barclays hearsay, the level of failed trades averaged 1.4 million. Then, on July 10, came rumors that SAC Capital Advisors LLC, a Stamford, Connecticut-based hedge fund, and Pacific Investment Management Co. of Newport Beach, California, had stopped trading with Lehman Brothers.

Pimco and SAC denied the speculation. The bank’s share price dropped 27 percent over July 10-11.

Banks and insurers wrote down $969.3 billion last year -- and that gave legitimate traders plenty of reason to short their stocks, said William Fleckenstein, founder and president of Seattle-based Fleckenstein Capital, a short-only hedge fund. He closed the fund in December, saying he would open a new one that would buy equities too.

“Financial stocks imploded because of the drunkenness with which executives buying questionable securities levered-up in obscene fashion,” said Fleckenstein, who said his firm has always borrowed stock before selling it short. “Short sellers didn’t do this. The banks were reckless and they held bad assets. That’s the story.”

‘Market Distress’

On May 21, David Einhorn, a hedge fund manager and chairman of New York-based Greenlight Capital Inc., announced he was shorting stock in Lehman Brothers and said he had “good reason to question the bank’s fair value calculations” for its mortgage securities and other rarely traded assets.

Einhorn declined to comment for this story. Monica Everett, a spokeswoman who works for the Abernathy Macgregor Group, said Greenlight properly borrows shares before shorting them.

Even when they’re legitimate, short sales can depress share values in times of market crisis -- in effect turning the traders’ negative bets into self-fulfilling prophecies, says Pollack, the former SEC enforcement chief who is now a securities litigator with Fulbright & Jaworski in Washington.

The SEC has been concerned about the issue since at least 1963, when Pollack and others at the commission wrote a study for Congress that recommended the “temporary banning of short selling, in all stocks or in a particular stock” during “times of general market distress.”

Airport Runway

On Sept. 17, two days after Lehman Brothers filed for Chapter 11 bankruptcy, the number of failed trades climbed to 49.7 million, 23 percent of overall volume in the stock.

The next day, the SEC announced its ban on shorting financial companies in 2008. The number of protected stocks ultimately grew to about 1,000. On Sept. 19, the commission announced “a sweeping expansion” of its investigation into possible market manipulation.

The ban, which lasted through Oct. 17, didn’t eliminate shorting, according to data from the SEC, the NYSE Arca exchange and Bloomberg. Throughout the period, short sales averaged 24.7 percent of the overall trading in Morgan Stanley, Merrill Lynch & Co. and Goldman Sachs Group Inc. on NYSE Arca. In 2008, short sales averaged 37.5 percent of the overall trading on the exchange in the three companies.

To date, the commission hasn’t announced any findings of its investigation.

Pollack, the former SEC regulator, wonders why.

“This isn’t a trail of breadcrumbs; this audit trail is lit up like an airport runway,” he said. “You can see it a mile off. Subpoena e-mails. Find out who spread false rumors and also shorted the stock and you’ve got your manipulators.”

To contact the reporter on this story: Gary Matsumoto in New York at gmatsumoto@bloomberg.net.

Last Updated: March 19, 2009 03:30 EDT

THE BAIL OUT and Fraudulent CDS and CDO contracts: Larry Summers is directly responsible for the mess: Repeal of Glass-Steagall

http://www.financialsense.com/editorials/engdahl/2009/0318.html

Our Government is playing us for fools

I have been emailing Kerry, Kennedy, Frank and Obama; I see that they are simply playing games with us - when will Volcker's idea of reinstatement of Glass-Steagall be listened to?

It may be time to consider moving out of the country...

"... Larry Summers is the man directly responsible for the mess. As Clinton Treasury Secretary from 1999-January 2001 he shaped and pushed the financial deregulation that unleashed the present crisis. He was Treasury Secretary after July 1999 when his boss, Robert Rubin left to become Vice Chairman of Citigroup, where Rubin went on to advance the colossal agenda of deregulated finance directly.

As Treasury Secretary in 1999 Summers played a decisive role in pushing through the repeal of the Glass Steagall Act of 1933 that was instituted to guard against just the kind of banking abuses taxpayers now are having to bail out. Not only Glass-Steagall repeal. In 2000 Summers backed the Commodity Futures Modernization Act that incredibly mandated that financial derivatives, including in energy, could be traded between financial institutions completely without government oversight, ‘Over-the-Counter’ as in where the taxpayer is now being dragged. Credit default Swaps, at the center of the current storm, would not have been possible without Larry Summers and the Commodity Modernization Act of 2000. He is now the White House Economic Council chairman, mandated to find a solution to the crisis he helped make along with Tim Geithner, his friend who is Treasury chief. Foxes should never be asked to guard the henhouse. "

complete article:

AIG Larry Summers and the Politics of Deflection
by F. William Engdahl
March 18, 2009

Finally US authorities have gotten ‘tough’ with the predator financial institutions. The world has been waiting for such decisive intervention since an unending series of Government bailouts of financial institutions began early in 2008 amounting to now trillions of taxpayer dollars. Now, with the world’s largest insurance giant, AIG, the White House Economic Council chairman, Larry Summers has expressed ‘outrage.’ President Obama himself has entered the fray to promise ‘justice.’ US Senators have threatened a law to change the injustice. The only problem is they are all exercising ‘politics of deflection,’ taking attention away from the real problem, the fraudulent bailout.

The issue is over AIG announcing it was obligated to pay its traders in its high-risk London unit a sales bonus totaling $165 million for the year. Obama Treasury Secretary, Tim Geithner has announced a novel strategy for ‘justice.’ AIG will ‘reimburse’ the taxpayers up to $165 million for bonuses the company is giving employees. AIG will pay the Treasury an amount equal to the bonuses, and the Treasury will deduct that amount from the $30 billion in government (taxpayer) assistance that will soon go to the company. But he said that the Obama administration hasn't given up on efforts to recoup the money from the employees who got the bonuses. Good luck.

Larry Summers is the man directly responsible for the mess. As Clinton Treasury Secretary from 1999-January 2001 he shaped and pushed the financial deregulation that unleashed the present crisis. He was Treasury Secretary after July 1999 when his boss, Robert Rubin left to become Vice Chairman of Citigroup, where Rubin went on to advance the colossal agenda of deregulated finance directly.

As Treasury Secretary in 1999 Summers played a decisive role in pushing through the repeal of the Glass Steagall Act of 1933 that was instituted to guard against just the kind of banking abuses taxpayers now are having to bail out. Not only Glass-Steagall repeal. In 2000 Summers backed the Commodity Futures Modernization Act that incredibly mandated that financial derivatives, including in energy, could be traded between financial institutions completely without government oversight, ‘Over-the-Counter’ as in where the taxpayer is now being dragged. Credit default Swaps, at the center of the current storm, would not have been possible without Larry Summers and the Commodity Modernization Act of 2000. He is now the White House Economic Council chairman, mandated to find a solution to the crisis he helped make along with Tim Geithner, his friend who is Treasury chief. Foxes should never be asked to guard the henhouse.

Theatre of the absurd or deflection?

This all makes great food for tabloid headlines and popular outrage. They can write that elected politicians are finally acting in taxpayer interests. Until we look a bit more closely. Paying $165 million in employee bonuses or any amount for a company that is in the middle of a multi-trillion dollar fraud that is bringing the world economy down with it is ‘outrageous.’

The problem is the tax bailout haemmorrhage will go on. The reason is the Obama Administration like its predecessor refuses to take consequent action with AIG, despite the fact today the US Government owns at least 80% of AIG stock, bought for $180 billion of, yes, taxpayer dollars. To demand AIG ‘pay back the government’ is absurd as the government is in effect demanding it pay itself back with its own money. The latest claim that the Treasury will subtract the $165 million bonus money from the next $30 billion tranche it will give AIG says it all.

Preserving the CDS bubble

The political ‘outrage’ expressed by the Obama Administration is an example of ‘perception management.’ The population is being slylyduped into believing their officials are working in their interest. In reality the officials are channeling growing popular outrage over endless bank bailouts away from the real problem to an entirely tertiary one. The US Government has injected $180 billion since September 2008 to keep the ‘brain dead’ AIG in business and honoring its Credit Default Swap obligations. In effect, they are propping up the casino to continue endless gambling with taxpayer dollars.

The rise of a market in derivatives or ‘swaps’ contracts supposedly to ‘insure’ against a company going into default and not being able to honor its debts, the Credit Default Swaps market, is at the heart of the global financial catastrophe. The market was ‘invented’ by a young economist at JP MorganChase, interestingly enough one of the few big banks recording profit today.

As noted, CDS trading was created free from US Government regulation by President Clinton when he signed the Commodity Futures Modernization Act of 2000 that mandated that financial derivatives not be under government regulation scrutiny. Enron crony and UBS bank adviser, Texas good ‘ol boy Congressman Phil Gramm helped pass the laws at a time his wife, Wendy headed the putative regulator, the Commodity Futures Trading Corporation (CFTC). That gave the green light to a derivatives market nominally worth more than $62 trillion in 2008. No one knows the exact size because this is a ‘phantom banking market’ completely private and between banks, so-called OTC for Over-The-Counter, ‘just between us.’

Michael Greenberger who headed the CFTC Division of Trading and Markets in the late 1990’s at the time of the financial deregulation acts, says that banks and hedge funds"were betting the subprimes would pay off and they would not need the capital to support their bets." The unregulated Credit Default Swaps, he says, have been at "the heart of the subprime meltdown. In 1998 Greenberger proposed regulating the growing derivatives market. At the prospect, he says, "all hell broke loose. The lobbyists for major commercial banks and investment banks and hedge funds went wild. They all wanted to be trading without the government looking over their shoulder."

The confidence between banks, the ‘just between us,’ collapsed after the ill-conceived decision by the US Government on September 15 2008 not to save the world’s fourth largest investment bank, Lehman Brothers. By then, there was no alternative but to nationalize and then sort out the mess. Bankruptcy, as the world now realizes, was not an option. But neither was the Henry Paulson TARP ‘casino rescue plan’ and Geithner’s continuation any option.

At the point the Government let Lehman Bros go down only months after saving the far smaller Bear Stearns and also AIG, not even a bank, there was no clear idea who would be saved and who not. No bank could afford to trust any other bank not to be holding just as risky loans as they. The crisis became a global systemic crisis. Notably, the man who participated in the decision to let Lehman Bros fail ‘to teach a lesson’ was then President of the New York Federal Reserve, US Treasury Secretary Tim Geithner.

The US Government has stated that AIG cannot be allowed to fail, that, to use the jargon, AIG is ‘too big to fail.’ The reason the Government says it can’t let AIG fail is that if the company defaulted, hundreds of billions of dollars’ worth of Credit-Default Swaps (CDS) would ‘blow up,’ and US and European banks whose toxic assets are supposedly insured by AIG would suddenly be sitting on immense losses. Quite the contrary, AIG is ‘too big to save’ under current rules of the game that have been written by Wall Street and the privately-owned Federal Reserve, Treasury Secretary Geithner’s former employer.

The CDS fraud

Credit Default Swaps purported, in theory, to let banks remove loan risk from their balance sheet onto others such as AIG, an insurer. It was based on a colossal fraud using flawed mathematical risk models.

AIG went big into the selling Credit Default Swaps with banks around the world, from its London ‘Financial Practices’ unit. AIG in effect issued pseudo ‘insurance’ for the hundreds of billions of dollars in new Asset Backed Securities (ABS) that Wall Street firms and banks like Citigroup, Goldman Sachs, Deutsche Bank, Barclays were issuing, including Sub-prime Mortgage Backed Securities.

It was a huge Ponzi scheme built by AIG that depended on the fact the world’s largest insurance company held a rare AAA credit rating from Moody’s and S&P rating agencies. That meant AIG could borrow more cheaply than other companies with lower ratings AIG issuing of CDS contracts acted as a form of insurance for the various exotic Asset Backed Securities (ABS) securities being issued by Wall Street and London banks. AIG was saying ‘if, by some remote chance’ those mortgage-backed securities suffered losses, AIG would pay the loss, not the banks.

Then it got really wild. Because credit-default swaps were not regulated, not even classed as a traditional insurance product, AIG didn’t have to set aside loss reserves! And it didn’t. So when housing prices started falling, and losses started piling up, it had no way to pay off.

AIG then issued of hundreds of billions of dollars worth of CDS instruments to allow banks to make their balance sheets look safer than they really were. Banks were able to get their loan risk low not by owning safer assets. They simply bought AIG’s credit-default swaps. The swaps meant that the risk of loss was transferred to AIG, making the bank portfolios look absolutely risk-free. That gave banks the legal illusion of BIS minimum capital requirements, so they could increase their leverage and buy yet more ‘risk-free’ assets.

How could that be allowed? The level of venal corruption in the Clinton and then Bush Administration rivals that of the last days of Rome before its fall from the internal rot of corruption. Banks invested billions in lobbying Washington politicians to get their way.

What can be done?

Fortunately there is a simple way out of the AIG debacle. The US Government can step in and fully nationalize AIG, 100%, kick out responsible management, declare AIG’s CDS contracts null and void and let holders sue the US government to regain value for what were in reality lottery gambles not loans to the real economy. They own 80% so the step is small to 100%. Doing that would end the global market in CDS and open the door for countless legal challenges. But AIG’s counterparties, as we begin to learn, were exactly the big Wall Street players like Goldman Sachs, Citigroup, even Deutsche Bank. They have gotten enough taxpayer bailouts to cover their risk in CDS. Let them recognize risk is the heart of banking, not the opposite.

Myron Scholes, the ‘father’ of financial derivatives, who won a Nobel Prize in economics in 1997 for inventing the stock options model that led to financial derivatives back in the 1970’s, has declared that derivatives and Credit Default Swaps have gotten so dangerously out of hand that authorities must ‘blow up’ the market.

Scholes says derivatives traded over the counter should be shut down completely. Speaking at York University Stern School of Business recently, he said the "solution is really to blow up or burn" the over-the-counter market and start over. He included derivatives on stocks, interest rate swaps and credit default swaps that should be then moved into regulated markets.

The idea is simple and not that radical. A US law banning OTC derivatives and moving them to regulated exchanges would end a colossal ‘shadow banking’ fraud. Banks would not lose much more than already, but the world financial system would get back to ‘normal.’ OTC derivatives are unregulated precisely to hide risk and enable fraud by the banks. It is past time to end that. There is where the US Treasury and other Governments must focus, not on meaningless ‘transparency’ calls or trading bonus ‘justice.’

Copyright © 2009 F. William Engdahl
Editorial Archive

F. William Engdahl is the author of A Century of War: Anglo-American Oil Politics and the New World Order (Pluto Press) and Seeds of Destruction: The Hidden Agenda of Genetic Manipulation, www.globalresearch.ca. The present series is adapted from his new book, now in writing, The Rise and Fall of the American Century: Money and Empire in Our Era. He may be contacted through his website, www.engdahl.oilgeopolitics.net.

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