Thursday, October 22, 2009


This is recommended reading from Nomi Prins who is a former Goldman Sachs MD. The main point to be taken is that Wall Street has availed itself of Trillions of dollars of Federal largess in TARPISTAN. TARP is one component of the overall scheme (see chart). In today's news we see that the Federal pay czar is chopping executive comp at the bailout basket cases that were unable to pay back their TARP injections. But this is a limited subset of the banks that continue to populate the FEDERAL REPUBLIC OF TARPISTAN. Banks that will be doling out billions in December. Banks like Goldman Squid.



Imagine a couple living in a three-bedroom house outside the Twin Cities. Call them Joe and Katie Hazzard. The Hazzards own a small off-track-betting (OTB) business and have some investments and a mortgage on their house. But business is terrible (no one has extra money to make bets); Katie recently lost her job; their investments have hemorrhaged value; and they can't make their mortgage, car or credit card payments. So they ask their local bank for a loan. "No dice," says the bank. "We can't give you money to pay your debts because you're no longer a good credit risk for us." That's more or less what happened to the banks last fall: they couldn't and wouldn't lend to one another.

So the Hazzards go to the Federal Bailout Bank, which says, "Here's some money. Do with it what you want, and someday down the road, if and when you're out of the woods, you'll have to pay us back with a little bit of interest." That's roughly what the $700 billion TARP was: a direct injection of capital to purchase preferred shares, which is really more like extending a loan than making the investment the government said it was, with some very light strings attached.

But then Joe says that the handout isn't enough. It turns out that not only does he own a gambling business; he has a bit of a gambling habit. Joe made big money in previous years betting on the New England Patriots to win the Super Bowl and figured he couldn't go wrong placing the same wager again. But then Tom Brady injured his knee last year, and Joe got creamed. Inveterate gambler that he is, he's doubled down on the Patriots this year, but he won't be paid off (if, that is, the Patriots win) until later in the year. But Joe has a boatload of outstanding gambling debts he needs to pay now.

So the Federal Bailout Bank decides it'll help out. To cover the truly pressing debts (the bookie is about to send over some goons with baseball bats), the bank will just write a check. That's what the Fed did to back the losses of AIG's credit default swaps and other businesses, and what the Fed and Treasury did together by providing protection to Citigroup in the event that more of its toxic assets lost value. The money--$1.4 trillion--was structured as a loan, but it's a bit unclear how it will ever be paid back.

Here is the link:

Her new book, It Takes a Pillage, looks like a must read.

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