Livinglies's Weblog

Look up anything I am saying here.

There is universal agreement that we got the “bailout” wrong in 2008, at least in part. It ended up rewarding the securities brokerage companies for bad behavior with money and prestige because we allowed them to “convert” (like religion) to commercial banks.

Those firms had literally made trillions of dollars, had no exposure to risk and had parked pornogrpahic profits from off-balance sheet transactions around the world in the form of ownership of precious metals distributions centers and other investments.

The “Troubled Asset Relief Program” had to be redefined multiple times because each time the premise was wrong. First it was to set off defaults on mortgages. But the banks held no mortgages. So then it was to set off losses on declining values of mortgage bonds. But the banks were selling bonds not buying them. And there was the problem that they weren’t bonds and they were not mortgage backed.

Then they abandoned any definition and simply kept the name of TARP and gave money to the banks anyway because the Fed wanted to pump money into the economy — a program that was barely effective because it turned out  that the banks were reluctant to actually risk loaning money in a recession.

So before we start “offsetting losses” this time I propose something radical. This time we require evidence of a loss before we pay for it. The fact that this might undermine the entire securitization “marketplace” (which is really a totally controlled trading zone) is not a reason to do it anyway again. It is a reason to bring the “investment banks” back into compliance with our laws, rules and regulations.

The added bonus is that the entire goal of the US Treasury and the Fed would be achieved. It would provide relief to millions of homeowners who have been screwed by the banks who have continued to bet against the loans that they were granting.

The revelation that there are no losses would also be revelation that there is no identified creditor after the current practice of “securitization” is applied. All the players get paid far more than they deserve by any metric employed. That is everyone except investors and borrowers, who are the only two parties with a real interest in “the game.”

The proposition is simple: please show us your losses before we pay them.

EXAMPLE. An easy example of what I am saying is the AIG bailout. AIG was an insurance company that had underwritten an “insurance” policy in favor of Goldman Sachs, a securities brokerage firm that was at the epicenter of “Securitization” of mortgage debt.

But actually it was not an insurance policy which is always defined as a contract to cover a real economic loss.

As Matt Taibbi wrote in Rolling Stone more than 10 years ago, Hank Paulson, then U.S. Treasury Secretary and former CEO of Goldman Sachs, prevailed upon President Bush (literally going down on his knees) to bailout AIG so they could pay the bet that Goldman made that the value of the certificates they were issuing as “mortgage backed bonds” would decline. Since the certificates were essentially worthless it was a good bet.

Tens of billions of dollars went to Goldman Sachs when the government bailed out AIG so it could pay off the Goldman Sachs bet. The bet was based upon a declaration of an “event” in the sole discretion of Goldman Sachs without any review or even subrogation to any remaining rights of collection. that’s because there were no rights to subrogate. And that’s because Goldman neither owned the certificates (“mortgage bonds”) nor the mortgage debts.

So Goldman received the money as pure profit. Nobody ever received compensation for actual loss on the certificates (i.e., the investors who bought the certificates) nor for any actual loss on the mortgage debts (because there were no actual losses on mortgage debts. Goldman kept the money and parked most of it offshore and paid virtually no tax on that. It wasn’t bailout. It was a gift.

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