The financial crisis gripping the U.S. has the largest banks and
insurance companies begging for massive government bailouts. The
banking, investment, finance and insurance industries, long the foes of
taxation, now need money from working-class taxpayers to stay alive.
Taxpayers should be in the driver's seat now. Instead, decisions that
will cost people for decades are being made behind closed doors, by the
wealthy, by the regulators and by those they have failed to regulate.
Tuesday,
the Federal Reserve and the U.S. Treasury Department agreed to a
massive, $85-billion bailout of AIG, the insurance giant. This follows
the abrupt bankruptcy of Lehman Brothers, the 158-year-old investment
bank; the distressed sale of Merrill Lynch to Bank of America; the
bailout of both Fannie Mae and Freddie Mac; the collapse of retail bank
IndyMac; and the federally guaranteed buyout of Bear Stearns by
JPMorgan Chase. AIG was deemed "too big to fail," with 103,000
employees and more than $1 trillion in assets. According to regulators,
an unruly collapse could cause global financial turmoil. U.S. taxpayers
now own close to 80 percent of AIG, so the orderly sale of AIG will
allow the taxpayers to recoup their money, the theory goes.
It's not so easy.
The
financial crisis will most likely deepen. More banks and giant
financial institutions could collapse. Millions of people bought houses
with shady subprime mortgages and have already lost or will soon lose
their homes. The financiers packaged these mortgages into complex
"mortgage-backed securities" and other derivative investment schemes.
Investors went hog-wild, buying these derivatives with more and more
borrowed money.
Nomi Prins used to run the European analytics
group at Bear Stearns and also worked at Lehman Brothers. "AIG was
acting not simply as an insurance company," she told me. "It was acting
as a speculative investment bank/hedge fund, as was Bear Stearns, as
was Lehman Brothers, as is what will become Bank of America/Merrill
Lynch. So you have a situation where it's [the U.S. government] ...
taking on the risk of items it cannot even begin to understand."
She
went on: "It's about taking on too much leverage and borrowing to take
on the risk and borrowing again and borrowing again, 25 to 30 times the
amount of capital. ... They had to basically back the borrowing that
they were doing. ... There was no transparency to the Fed, to the SEC,
to the Treasury, to anyone who would have even bothered to look as to
how much of a catastrophe was being created, so that when anything
fell, whether it was the subprime mortgage or whether it was a credit
complex security, it was all below a pile of immense interlocked,
incestuous borrowing, and that's what is bringing down the entire
banking system."
FULL STORY  https://www.commondreams.org/view/2008/09/18-5