Where Has All The Money Gone?

The Troubled Asset Relief Program, TARP, signed into law in October 2008 at the urging of President Bush and with the help of Democrats who by then controlled the House of Representatives, had hardly any limits on how the money was to be used by banks once they obtained their share. The bailout of AIG had no limits on it either. As we now know, AIG has paid over $160 million in retention bonuses to employees, including the same employees who were responsible for the derivatives debacle that is bringing the company down, along with global banks.

Finally we can see where the TARP money is going. ProPublica.org has posted a list of recipients of TARP funds. As of March 11th, almost $302 billion has been invested in saving the financial institutions of the United States. AIG has gotten the most: $170 billion. Next comes Citibank and Bank of America, including Merrill Lynch, with $45 billion each.

AIG in turn paid out $50 billion of that taxpayer bailout money to US and European banks for their losses under credit default swaps, here, I've got the definition, where without regulation, reserves, or using the word "insurance," AIG secured these institutions against loss of principal and interest when they purchased all of these bundled mortgage securities.

The Wall Street Journal and Fortune's lists were slightly different. Fortune's is available on the web, although the WSJ is only available to subscribers. Notice the names: Bank of America, CitiBank, Wachovia. These are the same names of the banks receiving TARP funds although AIG also paid out taxpayer money to many European banks, too. No wonder CitiBank is claiming it's about to turn a profit again.

Is there double-dipping? And more importantly, since these bonuses paid to AIG employees were allegedly contracted for in 2007 and only paid in 2009, I have some questions to ask. Was this money intended to keep folks quiet about the soon to unravel financial debacle? Or was Edward Liddy, the CEO brought in to run AIG, serious when he said that they agreed to the bonuses because these employees were the only ones "who could understand the exotic financial instruments on AIG's books."

This morning I heard on NPR that some of the employees are no longer working for AIG and many are in the London office, which won't even help the US economy, if they want to use the bonus to buy a new Chevrolet or Cadillac!

Remember what Bethany McLean said: If it's too difficult to understand, it probably isn't making any money. McLean revealed the ENRON scandal. Maybe McLean will investigate and tell us what happened to our financial services industry. there will be no newspapers by then, and anyway, what good were newspapers or the media in informing us about these financial shenanigans.

I wish someone would pay me a bonus for screwing up the entire world.

Greed, Greed, and More Greed

In trying to understand this world financial crisis, I'm paying more attention to financial reporting than ever before. I am reminded of Bethany McLean's statement on The Daily Show a few weeks ago. It went something like this: If you don't understand how it's making money, it probably isn't.

That's the way I feel about money generally.

Although in reading The Ascent of Money by Niall Ferguson, (you can watch the entire two-hour documentary on pbs.org for free) I did learn today that one makes money in the bond markets not by buying bonds at face value and holding onto them, waiting for the corporation to pay the stated amount of interest.

No, one makes money in the bond market by buying bonds at depressed prices, below the face value of the bond, which still pays the stated interest.

That was news to me.

This evening, before chancing upon the Chris Botti Concert on Thirteen, featuring Yo Yo Ma, John Mayer, Sting, and Josh Groban, I read Bethany McLean's piece in this month's Vanity Fair. It's called: Over the Hedge.

Wouldn't you read an article that starts off this way? It used to be that to become a billionaire, rather than a mere millionaire, you had to inherit money, or build an empire that would last for a long, long time. But in the era that has just ended, you could become a billionaire just by managing other people’s money. You didn’t have to do so for very long—and, maybe, you didn’t even have to do so very well.

She was smart enough to unravel Enron. She's unraveling the collapse of Wall Street in very accessible ways. Although the question remains whether we can be rescued from Wall Street's greed.

Just One More Thing About Bernie Madoff

Jon Stewart interviewed Bethany McLean on The Daily Show Thursday night. She is the reporter who broke the Enron story, and her words of wisdom should be abided by us all: if you don't understand how it's making money, it probably isn't.

Today's New York Times reports about a 1992 investigation into the business dealings of Frank Avellino, an accountant who had been funneling clients' money to Madoff since the 1960s. According to the Times: The documents show that Mr. Avellino and Michael Bienes, his business partner, kept almost no records at Avellino & Bienes, a firm that oversaw $440 million. When court-appointed auditors asked Mr. Avellino to prepare a balance sheet, he responded that “my experience has taught me to not commit any figures to scrutiny.”

Imagine saying that to an IRS auditor!

In addition to curtailing the audit quite quickly, the S.E.C. also took at face value Mr. Avellino’s depiction of the deal he offered investors, which guaranteed returns of up to 20 percent a year while requiring him and Mr. Bienes to make up any shortfalls.

I'm curious, aren't you, just why that investigation went nowhere!

The Times also reported this morning about a Thursday night discussion at the YIVO Institute for Jewish Research about the Madoff scandal.

The evening was called "Madoff: A Jewish Reckoning."

Mort Zuckerman, chair of Boston Properties who lost some $30 millions to Madoff, questioned the theme. According to the Times, Zuckerman objected to the name of the panel: Kenneth Lay of the Enron Corporation was not referred to as a “prominent Protestant energy fraudster,” he noted, nor is Gov. Rod Blagojevich of Illinois referred to as a “prominent Serbian-American politician.”

However, I have to disagree. Jews have always been clanish, the reasons why have to do with anti-Semitism and their exclusion from landowning, office holding, and many forms of trade and commerce in Europe after the Diaspora. Yet this clanishness has also been the way Jews have survived. Many ethnic groups admire the recirculation of money within the Jewish community, as Jews tend to be clients and customers of other Jews.

So I believe the Jewish community has to take responsibility for Madoff's preying on fellow members of the clan. It was perceived as a privilege to have enough money to invest with Madoff, and that insecurity, shared by Madoff and his victims, unfortunately is part of the outsider nature of being a Jewish person living in America. However, as I've said before, the returns on Madoff investments were so wildly unrealistic that people should have suspected that something not quite kosher was making these returns possible. That is the complicity that connects the perpetrator to the victim in a ponzi scheme.

There are a lot of questions about how some of the charities that lost endowments through Madoff were run. There are a lot of questions about this scandal, but as Bethany McLean suggested in her Daily Show interview, the real questions aren't about the Madoff scandal, but about how Bank of America, Citibank, and Wall Street are operating. Where is that money going?