Credit Default Swaps, Fannie Mae and Freddie Mac and the Housing Bubble Crash

Matt Taibbi and Byron York Butt Heads Over Whether McCain Deserves Blame for the Wall Street Meltdown

October 14, 2008

New York Magazine - Every day (or close to it) until November 4, a series of writers and thinkers will discuss the election over instant messenger for nymag.com. Today, Rolling Stone's Matt Taibbi and National Review's Byron York argue over the headwinds facing McCain, what Phil Gramm had to do with the financial crisis, and the importance of credit default swaps.

M.T.: So how are you feeling about McCain's chances today?

B.Y.: I've just finished an article for National Review — the actual magazine — about the headwinds McCain faces. I was going to look at three, and then I started to list them. I stopped at ten. New Gallup numbers out today show that George W. Bush's job approval rating remains at 25 percent, while his disapproval rating has ticked up to 71 percent. How hard is it to succeed a two-term president of your own party who is at 25-71? We don't know because it's never been done.

M.T.: Yeah, that's a damned shame, too. I feel really badly for the guy. I suppose you think the media coverage is also a headwind?

B.Y.: Actually, I did not list media coverage among the headwinds. I listed the succeed-a-two-term-president problem, the right-track/wrong-track problem, the Republican-Democrat-enthusiasm gap problem, the Republican-Democrat-I.D.-gap problem, the financial meltdown, Iraq, Republican gloom on Capitol Hill, Obama's fund-raising advantage, and McCain's historical problems with the GOP base.

M.T.: But all of those "headwinds," or almost all of them, are the direct result of McCain having supported policies that are now unpopular. There is absolute justice in his facing a "headwind" from the financial meltdown, from the unpopularity of the Iraq war, and so on. How is that a "headwind"? That's just self-created unpopularity.

I mean, his onetime campaign co-chair and top economic adviser, Phil Gramm, basically created the credit-default-swap market back in 2000. Why shouldn't he get hammered on the financial crisis?

B.Y.: Did I suggest that headwinds are unfair? But on the financial meltdown in particular, if you're suggesting that that is a Republican creation, or even more specifically a McCain creation, I think you're on pretty shaky ground.

M.T.: You don't think the unregulated CDS market was a major factor in the current crisis? Were you watching when AIG almost went under? Were you watching the Lehman collapse?

B.Y.: I think that Fannie Mae and Freddie Mac were also major factors. And I believe that many of the problems in the mortgage area can be attributed to the confluence of Democratic and Republican priorities: the Democrats' desire to give mortgages to people, particularly minorities, who could not afford them, and the Republicans' desire to achieve an "ownership society," in part by giving mortgages to people who could not afford them. Again, I believe that if you are suggesting that the financial crisis is a Republican creation, or even more specifically a McCain creation, I think you're on pretty shaky ground.

M.T.: Oh, come on. Tell me you're not ashamed to put this gigantic international financial Krakatoa at the feet of a bunch of poor black people who missed their mortgage payments. The CDS market, this market for credit default swaps that was created in 2000 by Phil Gramm's Commodities Future Modernization Act, this is now a $62 trillion market, up from $900 billion in 2000. That's like five times the size of the holdings in the NYSE. And it's all speculation by Wall Street traders. It's a classic bubble/Ponzi scheme. The effort of people like you to pin this whole thing on minorities, when in fact this whole thing has been caused by greedy traders dealing in unregulated markets, is despicable.

B.Y.: I was struck by the recent Senate testimony of James Lockhart, who is head of the Federal Housing Finance Agency, about the sheer recklessness of Fannie in recent years. Despite "repeated warnings about credit risk," Lockhart testified, Fannie became more reckless in 2006 and 2007 than they had been in the scandal-ridden tenure of Franklin Raines (who departed in 2004). In 2005, Lockhart said, 14 percent of Fannie's new business was in risky loans. In the first half of 2007, it was 33 percent. So something terribly wrong was going on there, and it became a significant part of the present problem.

M.T.: What a surprise that you mention Franklin Raines. Do you even know how a CDS works? Can you explain your conception of how these derivatives work? Because I get the feeling you don't understand. Or do you actually think that it was a few tiny homeowner defaults that sank gigantic companies like AIG and Lehman and Bear Stearns? Explain to me how these default swaps work, I'm interested to hear.

Because what we're talking about here is the difference between one homeowner defaulting and forty, four hundred, four thousand traders betting back and forth on the viability of his loan. Which do you think has a bigger effect on the economy?

B.Y.: Are you suggesting that critics of Fannie and Freddie are talking about the default of a single homeowner?

M.T.: No. That is what you call a figure of speech. I'm saying that you're talking about individual homeowners defaulting. But these massive companies aren't going under because of individual homeowner defaults. They're going under because of the myriad derivatives trades that go on in connection with each piece of debt, whether it be a homeowner loan or a corporate bond. I'm still waiting to hear what your idea is of how these trades work. I'm guessing you've never even heard of them.

I mean really. You honestly think a company like AIG tanks because a bunch of minorities couldn't pay off their mortgages?

B.Y.: When you refer to "Phil Gramm's Commodities Future Modernization Act," are you referring to S.3283, co-sponsored by Gramm, along with Senators Tom Harkin and Tim Johnson?

M.T.: In point of fact I'm talking about the 262-page amendment Gramm tacked on to that bill that deregulated the trade of credit default swaps.

Tick tick tick. Hilarious sitting here while you frantically search the Internet to learn about the cause of the financial crisis — in the middle of a live chat interview.

B.Y.: Look, you can keep trying to make this a specifically partisan and specifically Gramm-McCain thing, but it simply isn't. We've gone on for fifteen minutes longer than scheduled, and that's enough. Thanks.

M.T.: Thanks. Note, folks, that the esteemed representative of the New Republic has no idea what the hell a credit default swap is. But he sure knows what a minority homeowner looks like.

B.Y.: It's National Review.

Federal Regulators to Ease Rules on Fannie Mae and Freddie Mac

U.S. Treasury is allowing Fannie Mae and Freddie Mac to access as much U.S. aid as they need.

December 28, 2009

New York Times - Federal regulators for Fannie Mae and Freddie Mac, the biggest buyers of American home mortgages, will remove limits on the amount of loans and securities the companies can own, a step that could help bolster the weakening housing market.

The Office of Federal Housing Enterprise Oversight, which oversees the two government-chartered mortgage giants, said Wednesday that it was making the change because the companies have begun filing timely financial reports again, after accounting lapses several years ago. But the regulator declined to ease its requirement that Fannie and Freddie hold 30 percent more capital than they are required to by law, citing the turmoil in the mortgage market.

The announcement came as Fannie Mae, the larger of the two companies, reported a $2.05 billion loss for 2007 and warned that home prices would sink further this year. The loss followed a $4.06 billion profit in 2006 and reflected a rise in mortgage defaults and soured investments.

Despite the weak results, shares of Fannie Mae closed up 1.1 percent, to $27.27. Shares of Freddie Mac fell 0.5 percent, to $25.09, after being up by nearly 17 percent earlier in the day.

The director of the oversight agency, James B. Lockhart, said that the companies had made significant progress and that Fannie’s recent on-schedule publication of audited financial statements for 2007 was “an important milestone.” The investment limits, which cap the companies’ portfolios at $746 billion each, will be lifted on Saturday.

But citing the losses at Fannie Mae, Mr. Lockhart said he was not ready to remove the excess capital requirements, saying they have served the companies well at a time when many banks were struggling with much bigger losses.

He said would discuss easing that rule gradually after the companies finish improving internal controls. A change would depend on the state of the market and the companies’ finances, he said.

“We have to be very careful in this market not to do too much,” Mr. Lockhart said in a telephone interview, noting that he would not begin to consider further changes until April at the earliest. “This capital has served them extremely well over the last nine months,” he said.

Democrats in Congress and some mortgage industry officials have been calling on Mr. Lockhart to loosen controls over Fannie Mae and Freddie Mac so the companies could play a more active role in the housing market by buying bigger and more risky home loans and securities backed by those mortgages.

On Wednesday, Senator Charles E. Schumer, Democrat of New York, welcomed the lifting of the portfolio caps and called on Mr. Lockhart to go even further by removing the excess capital requirement.

While Democrats have advocated lifting restrictions on Fannie Mae and Freddie Mac, the Bush administration and the Federal Reserve have insisted that the companies deserve close scrutiny because of their large role in the mortgage and financial markets.

Since the credit markets seized up, Fannie and Freddie have regained their central role in mortgage finance after losing significant market share to investment banks during the housing boom. They have issued the vast majority of mortgage securities sold in the last six months, because investors have lost confidence in deals put together by big investment banks.

In a conference call with analysts and investors, Fannie Mae executives said they welcomed the removal of the portfolio caps and the prospect of lower capital requirements, but emphasized that the company would be conservative in using its new freedom.

Daniel H. Mudd, Fannie Mae’s chief executive, said the company saw more opportunities in packaging mortgages into securities for sale to investors than in expanding its investment portfolio. He also said the company intends to maintain more capital than it is required to, adding that even now Fannie Mae has more capital than the higher level required by the agency, which is known as Ofheo.

“We will conserve capital,” Mr. Mudd said. And “we will continue those discussion to access the capital that is there above the statutory minimum.”

In a statement, Freddie Mac welcomed the lifting of the portfolio limits and said it looked forward to having the capital requirement eased to give it “more flexibility in providing liquidity to the nation’s housing market at this important time.”

The bond market reacted positively to Ofheo’s decision to remove the portfolio limits. Investors bid up the value of Fannie Mae and Freddie Mac securities, reducing the bonds’ yield premium over safe Treasuries. The spread had widened considerably in recent weeks as investors have become more risk averse, helping to drive up the mortgage interest rates that lenders charge home buyers.

One specialist said the lifting of controls on Fannie Mae and Freddie Mac would help but would not on its own restore the credit market, where investors remain concerned about falling home prices and rising defaults.

“There is a buyers’ strike combined with very little money available, vastly less than two years ago,” said the specialist, Donald Brownstein, chief executive of Structured Portfolio Management, a hedge fund in Stamford, Conn., that specializes in mortgage securities.

Ofheo restricted the companies’ activities in May 2006 after it discovered widespread accounting irregularities there. The two have replaced their top executives as a result of those problems and have spent many months revamping their accounting systems.

Bosses at Bailed-out Fannie, Freddie Were Paid Millions

April 4, 2011

New York Times - Regulators have approved generous executive compensation at Fannie Mae and Freddie Mac, the taxpayer-backed mortgage finance giants, with little scrutiny or analysis, according to a report published Thursday by the inspector general of the Federal Housing Finance Agency.

The companies, whose fates are to be decided by Congress this year, paid a combined $17 million to their chief executives in 2009 and 2010, the two full years when Fannie Mae and Freddie Mac were wards of the state, the report found.

The top six executives at the companies received $35.4 million over the two years. Since Fannie Mae and Freddie Mac were taken over in September 2008, the companies’ mounting mortgage losses have required a $153 billion infusion from taxpayers. Total losses may reach $363 billion through 2013, according to government estimates.

Charles E. Haldeman Jr., a former head of Putnam Investments, the giant fund management concern, joined Freddie Mac as its chief executive in 2009.

He made $7.8 million for 2009 and 2010. Fannie Mae’s chief is Michael J. Williams, who has worked at the company since 1991. He received $9.3 million for the two years. Company officials declined to comment.

With hundreds of billions in government support necessary to keep the companies running, questions are arising about the nature of the pay packages and how performance goals are determined.

Overpayments?

The pay was approved by the housing finance agency, which is charged with conserving the assets of Fannie and Freddie on behalf of taxpayers.

“F.H.F.A. has a responsibility to Congress and taxpayers to efficiently, consistently, and reliably ensure that the compensation paid to Fannie Mae’s and Freddie Mac’s senior executives is reasonable,” said Steve A. Linick, the newly appointed inspector general of the agency, in a statement. “This is especially true when you realize that the U.S. Treasury has invested close to $154 billion to stabilize Fannie Mae and Freddie Mac,” and they “are spending tens of millions of dollars for executive compensation.”

The report cited a “lack of standardized evaluation criteria, documentation of management procedures and internal controls” at the oversight agency, missing steps that may have led to overpayments.

For example, the inspector general said that taxpayer support of the companies may have made performance benchmarks easier to meet for executives. In 2009, Fannie Mae issued 47 percent of new mortgage-backed securities, far exceeding its goal of 37.5 percent. But, as the report noted, this hurdle was almost certainly cleared because the Federal Reserve purchased almost all the mortgage securities issued by Fannie and Freddie in 2009.

In response to the report, the housing agency said that it would “institute a more formal and systematic approach” to its review of the performance benchmarks and the assessment of whether they were reached by the companies’ executives. A spokeswoman for the agency said its officials declined to comment.

Lavish executive pay that does not track a company’s performance has led to anger among shareholders in recent years. When the government stepped in to support some of the nation’s biggest financial institutions in 2008, compensation became an issue of concern to taxpayers. Executive pay at institutions receiving support under the Troubled Asset Relief Program, for example, was subject to approval by an overseer, the special master for TARP. Fannie and Freddie were not required to submit to this process because their assistance did not come from TARP.

As the primary regulator and conservator of both companies, the housing agency has broad powers to direct the companies’ activities; it has replaced board members and senior officers, for example. And it can bar the companies from making golden parachute payments to executives. It consulted with the TARP special master on executive pay at Fannie and Freddie after they were rescued by the government.

Nevertheless, the agency delegates pay decisions to the companies’ boards, accepting their recommendations “unless there is an observed reason to do otherwise,” according to the inspector general’s report.

The F.H.F.A. receives advice from its own compensation consultant as well as the work of those hired by Fannie and Freddie.

The inspector general’s report noted that the executives at Fannie and Freddie received far more than their counterparts at other federal housing agencies. The top executive at Ginnie Mae, for example, received an annual salary of less than $200,000. The inspector general suggested that the agency review the discrepancy and account for it to taxpayers.

Paying for talent

Agency officials say the salaries and deferred compensation awarded to executives at Fannie and Freddie are necessary if they are to attract and keep talent required to run those operations effectively.

They say that current pay at Fannie and Freddie is roughly 40 percent less than it was before the bailout and maintain that the compensation plans are based on the companies’ ability to meet financial and performance targets, like providing liquidity and affordability to the mortgage market.

Edward J. DeMarco, acting director of the Federal Housing Finance Agency, testified before Congress on Thursday about proposals to overhaul Fannie and Freddie.

“I am concerned that legislation to overhaul the compensation levels and programs in place today with the application of a federal pay system to nonfederal employees carries great risk for the conservatorships and hence the taxpayer,” he said.

Last year, Mr. DeMarco testified that the executive compensation plans at Fannie and Freddie were designed to achieve the goals of the conservatorship and “align executive decision-making with the long-term financial prospects of the enterprises, and minimize costs to the taxpayer.”

Because shares of both Fannie and Freddie have little value, the companies’ executive compensation consists solely of cash paid out in base salary, deferred salary and long-term incentive pay.

But Brian Foley, a compensation consultant in White Plains questioned the characterization of the companies’ incentive pay as long term, given that it is paid entirely within two years.

“One hundred percent of the compensation is paid for two-year performance and a fair portion of that is without regard to performance,” he said. “I understand the stock is worthless, but that doesn’t mean you can’t have cash on the table for a long period. If anybody needs to have good long-term performance, isn’t it Fannie Mae and Freddie Mac?”

AIG and the Big Takeover: Matt Taibbi on "How Wall Street Insiders Are Using the Bailout to Stage a Revolution"

March 25, 2009

Democracy Now - In a new article in Rolling Stone Magazine, journalist Matt Tabbi takes an in-depth look at the story behind AIG. "The reality is that the worldwide economic meltdown and the bailout that followed were together a kind of revolution, a coup d’état," writes Taibbi. "They cemented and formalized a political trend that has been snowballing for decades: the gradual takeover of the government by a small class of connected insiders, who used money to control elections, buy influence and systematically weaken financial regulations." [includes rush transcript]

AMY GOODMAN: The Obama administration and the Federal Reserve urged Congress yesterday to give the federal government unprecedented new powers to seize control of troubled financial firms beyond banks deemed too big to fail. Treasury Secretary Timothy Geithner and Federal Reserve Chair Ben Bernanke proposed the idea in testimony before the House Financial Services Committee yesterday. Both men pointed to the troubled insurance giant American International Group, or AIG, as a prime example.

This is Treasury Secretary Geithner.

TIMOTHY GEITHNER: As we’ve seen with AIG, distress at large complex financial institutions can pose risks as dangerous as those that led the United States to establish a full framework of tools for dealing with banks. We need to extend those protections and authorities to cover the risks posed by our more diverse and complicated financial system today, and we are proposing legislation to provide those tools and look forward to working with this committee and the Congress to pass such legislation as quickly as possible.

AMY GOODMAN: The New York Times reports if Congress approves such a measure, it would represent one of the biggest permanent expansions of federal regulatory power in decades.

Federal Reserve Chair Ben Bernanke argued in his testimony, if the government had allowed AIG to fail, it would have jeopardized the entire financial system.

BEN BERNANKE: Conceivably, its failure could have resulted in a 1930s-style global financial and economic meltdown with catastrophic implications for production, income and jobs.

AMY GOODMAN: As Bernanke and Geithner made their pitch for new powers for the federal government, many House committee members grilled them over AIG’s decision to pay out over $165 million in bonuses to executives after receiving a $170 billion taxpayer bailout. Geithner, who has come under fire for not doing enough to block the bonuses, said he shared their anger.

TIMOTHY GEITHNER: Now, I share the anger and frustration of the American people, not just about the compensation practices at AIG and in other parts of our system, but that our financial system permitted a scale of risk taking that has caused grave damage to the lives of so many Americans.

AMY GOODMAN: Many view the massive losses at AIG as the result of corporate greed combined with lax government oversight and regulation. But in a new article in Rolling Stone Magazine that takes an in-depth look at the AIG story, journalist Matt Taibbi writes the financial crisis and the bailout that followed, quote, "cemented and formalized a political trend that has been snowballing for decades: the gradual takeover of the government by a small class of connected insiders, who used money to control elections, buy influence and systematically weaken financial regulations."

Taibbi goes on to write, "The mistake most people make in looking at the financial crisis is thinking of it in terms of money, a habit that might lead you to look at the unfolding mess as a huge bonus-killing downer for the Wall Street class. But if you look at it in purely Machiavellian terms, what you see is a colossal power grab that threatens to turn the federal government into a kind of giant Enron—a huge, impenetrable black box filled with self-dealing insiders whose scheme is the securing of individual profits at the expense of an ocean of unwitting involuntary shareholders, previously known as taxpayers."

Well, Matt Taibbi, contributing editor for Rolling Stone Magazine, joins us right now. His article is called "The Big Takeover." He’s author of a number of books; his most recent, The Great Derangement: A Terrifying True Story of War, Politics, and Religion.

MATT TAIBBI: Thanks for having me, Amy.

AMY GOODMAN: Well, start there. How did this big takeover happen? I think while a lot of people have heard the words and letters AIG, they don’t really know how this unfolded, how it gained its not only money, as you point out, its power.

MATT TAIBBI: Well, it’s an extraordinarily complex story, first of all, but it—you know, this is a process that’s been going on for a generation. And really, the reason we have all of these gigantic firms that are, quote/unquote, “too big to fail” now is because of a series of deregulatory moves that allowed insurance companies to merge with investment banks, investment banks to merge with commercial banks.

The biggest movement in that front was the Gramm-Leach-Bliley Act of 1999, which repealed the Depression-era law called the Glass-Steagall Act, and that allowed all of these companies to merge together and create these enormous mega-companies, like Citi, like Bank of America and like AIG, which was once basically an insurance company but evolved to become, you know, a very complicated hedge fund, an investment bank and a variety of other things.

And under these new regulations, it was also allowed to choose its own regulator, and it chose the weakest and most impotent of the regulators, the Office of Thrift Supervision, which is one of the big reasons that it was allowed to sort of spin out of control.

AMY GOODMAN: What do you mean, AIG chose OTS?

MATT TAIBBI: Under a new law at the end of the ’90s, you could—a bank holding company or, you know, a financial holding company could designate itself a thrift, and a “thrift” is just another word for savings and loan. All they had to do is open up a thrift in one state. And AIG opened up a thrift in Delaware, designated itself a thrift and then chose the Office of Thrift Supervision as its regulator. And the Office of Thrift Supervision is by far the smallest and least aggressive of the regulators. And, in fact, it only had one insurance expert on its entire staff. And this is a company—

AMY GOODMAN: OTS, the Office of Thrift Supervision.

MATT TAIBBI: OTS, yeah. And this is a company—this is an organization that’s supposedly regulating AIG, which was the eighteenth largest company in the world, Ameriprise and a series of other enormous, you know, gigantic insurance companies. So they had really very little expertise to deal with the situation.

AMY GOODMAN: Who is Patient Zero in your story, “The Big Takeover”?

MATT TAIBBI: We called Joseph Cassano “Patient Zero” of the situation. He was the head of a tiny unit within AIG called AIG Financial Products. AIG was a company that had over 150,000 employees. AIGFP is a small London-based bureau that had only 377 employees. And it’s incidentally this very unit that is getting those bonuses now.

And this tiny unit basically made a $500 billion bet with money they didn’t have, and when they lost that bet, when they were suddenly forced to post an enormous amount of money, that’s when the government had to step in and rescue AIG, because they had obligations that they had to meet.

AMY GOODMAN: What do you mean, they made this bet?

MATT TAIBBI: Again, this is very complicated, but they were dealing in these derivative instruments that are called credit default swaps, and—

AMY GOODMAN: CDSs.

MATT TAIBBI: CDSs. And CDSs are—it’s a form of insurance. Actually, if you look at it a different way, it’s really just gambling. But it’s a situation where an outside company like AIG can offer to guarantee the investments of, you know, a bank like Goldman Sachs, for instance. And say a bank like Goldman Sachs invests an enormous amount of money in a housing market, but they want protection in case their investments default, unless some of those mortgages and loans that they’re investing in default, so they go to AIG, and they offer to pay them a premium every month, in exchange for which AIG will pay the entire amount of their mortgages in the case of default. So it’s sort of like an insurance policy against, you know, the investments of these investment banks.

AMY GOODMAN: So you have—Cassano sells $500 billion of CDS protection with at least $64 billion of that tied in the subprime mortgage market.

MATT TAIBBI: Right, and right. And because the CDSs were unregulated—and this is because of a specific law back in the year 2000 called the Commodity Futures Modernization Act, which was sponsored by Phil Gramm. These instruments were unregulated. They were designated outside the regulation of—they couldn’t be regulated as futures commodities or as gaming, so there were no rules about this. So you could sell as much CDS protection as you wanted, but you didn’t have to actually post any capital when you did it. You know, when you sell a bond, somebody actually has to—you know, a $100 bond, somebody actually has to have $100. Well, that’s not the case with CDSs. You could sell as much of the stuff as you wanted, and you didn’t have to have any money at all. And that’s why AIG got in so much trouble.

AMY GOODMAN: I want to ask you, when we come back from break, about Cassano, yes, being—you can’t say “fired,” because he was kept on—

MATT TAIBBI: Right.

AMY GOODMAN: —at the cost of a million dollars a month. And then we are going to talk about these bonuses and who these people are.

MATT TAIBBI: Sure.

AMY GOODMAN: Matt Taibbi is contributing editor for Rolling Stone. His latest article, “The Big Takeover.” Stay with us.

[break]

AMY GOODMAN: Matt Taibbi, our guest, contributing editor to Rolling Stone Magazine, latest article, “The Big Takeover.” I’m Amy Goodman, as we continue on this piece, where Matt Taibbi says, “The global economic crisis isn’t about money—it’s about power. How Wall Street insiders are using the bailout to stage a revolution.” What do you mean?

MATT TAIBBI: Well, you know, one of the things that happened when this whole mess exploded is that the financial community basically said to the government, “Look, we’re the only people who understand this stuff. You have to let us kind of work this out.” And so, the bailout was really just a conversation between Wall Street and a few very connected ex-Wall Street figures, like Hank Paulson and Timothy Geithner, and a lot of this was sort of done in secret, because the bailout facilities in the Federal Reserve are—you can’t audit—Congress is not allowed to audit any of these programs. So it’s really sort of—the bailout is just a giant dictatorially administered program by the Federal Reserve and partially by the Treasury, and it’s all done by ex-Wall Street people and current Wall Street people, and, you know, the ordinary people really don’t have any input into any of this.

And a great example of how Wall Street has actually risen in influence is this new program that Timothy Geithner introduced the other day, which is really just state-subsidized hedge fund profiteering. They’re actually—the government is actually going to be lending a trillion dollars to hedge funds so that they can invest in these securities, and they’re going to basically guarantee that they can’t really lose any money in these investments. It’s sort of a, you know, “heads, I win; tails, the taxpayer loses” situation. And, you know, it’s a really bad situation for ordinary people.

AMY GOODMAN: Socializing the debt and privatizing the profit.

MATT TAIBBI: Exactly, exactly.

AMY GOODMAN: You write in your piece, “In 1997 and 1998”—so like ten years ago—“the years leading up to the passage of Phil Gramm’s fateful act that gutted Glass-Steagall, the banking, brokerage and insurance industries spent $350 million on political contributions and lobbying. Gramm alone—then the chairman of the Senate Banking Committee—collected $2.6 million in [only] five years. The law passed”—not close—“90-8,” you say, “in the Senate, with the support of 38 Democrats, including some names that might surprise you:”—you write—“Joe Biden, John Kerry, Tom Daschle, Dick Durbin, even John Edwards.”

MATT TAIBBI: Right, right. I think one of the things that people don’t understand about this crisis is they—we always have this instinct in America to blame one side or the other for any political problem. You know, people on the left want to say, “Oh, George Bush did it,” and on the right they always want to say, “It was Clinton.” Well, this is as purely a bipartisan problem as we’ve ever had in this country. This was absolute unity on the part of both parties. They both were absolutely complicit in passing these deregulatory moves.

You know, in the instance of the Gramm-Leach-Bliley Act, that was sponsored by Phil Gramm and by the Republicans, but it was very, very enthusiastically supported by Robert Rubin and Larry Summers, and it was signed into law by Bill Clinton and passed with the support of all those very powerful Democratic senators. And this continued to be the case throughout late ’90s and throughout this whole decade, and that’s why we’re in the situation that we are right now, because nobody is really, you know, representing the other side.

AMY GOODMAN: Goldman Sachs, it turns out, was Cassano’s largest customer?

MATT TAIBBI: That’s right.

AMY GOODMAN: What does that mean?

MATT TAIBBI: Well, the insurance policies, the things that Cassano was selling that are like insurance, Goldman Sachs actually had bought $20 billion worth of those guarantees, so that when we bailed out AIG, we were effectively bailing out Goldman Sachs, because AIG owed Goldman Sachs $20 billion.

And that’s significant, because who was the Treasury Secretary who engineered this bailout? It was Hank Paulson, who was the former head of Goldman Sachs. They ultimately ended up installing Ed Liddy as the CEO of AIG, and Liddy, himself, is a former Goldman employee. And now the top aide to Timothy Geithner, Mark Patterson, is a former Goldman executive. I mean, this whole situation is rife with Goldman Sachs employees.

AMY GOODMAN: So what happened to Cassano?

MATT TAIBBI: Cassano made $280 million. He was—when he was forced out of AIG last year, he was given a $34 million severance payment. He was allowed to stay on at a salary of a million dollars a month. And, in fact, he kept earning that salary, even after AIG was bailed out, for at least another month. And he’s now living in London. And as far as I know, that’s the consequence for Joe Cassano. He made almost $300 million, and now he’s living in a big lavish townhouse not far from Harrods in London. And that’s it. That’s the end of the story.

AMY GOODMAN: A friend was asking this question the other day. The House passed the legislation saying tax 90 percent of whatever these bonuses are, if they don’t return them. But, first of all, who are these people in the London office? Are they British? They wouldn’t be subjected to the IRS. And if they’re Americans, how does tax law work for Americans abroad?

MATT TAIBBI: You know, I don’t really know, honestly. I mean, AIGFP has two offices. They have one that’s in Greenwich, Connecticut, and one that’s in London. I’m assuming most of these employees are Americans.

But, you know, the key thing about that whole taxation issue is that it’s not even necessary. This is a situation where Timothy Geithner and Ben Bernanke could have called, you know, AIG’s CEO Ed Liddy on the phone and said, “Hey, look. Take those bonuses back, or you’re going to be floating face down in the Hudson River tomorrow.” We know it’s not necessary to go through a congressional act. The United States now owns 80 percent of AIG. We can basically do whatever we want. The fact that we had to resort to those measures is extraordinary in itself.

AMY GOODMAN: The head—the former CEO of AIG, Hank Greenberg, what did he understand of these credit default swaps? And how did AIG go from insurance to CDSs?

MATT TAIBBI: Well, from what I understand, Greenberg didn’t really understand these instruments at all. And that’s one of the big problems, is that nobody understood them. The only people who understood these CDSs and these derivative instruments was the people who were actually writing these contracts. And this is a tiny, tiny unit. Again, it’s 377 people within a company of over 150,000 employees.

And basically, they were making so much money that AIG senior management said, “Oh, you know, great! As long as you tell us everything’s fine, we’re cool with that.” And they never really did any aggressive accounting of AIGFP, and they never really questioned any of the math that Joe Cassano was sending upstairs.

AMY GOODMAN: You compare this whole thing to a casino. Lay out the analogy for us.

MATT TAIBBI: Well, you know, the biggest situation is, you know, a lot of these contracts, these CDS contracts, are like gambling, in the sense that—normally when you buy an insurance policy, you’re buying a policy on a house that you actually own. With these CDS contracts, you could actually bet on somebody else’s mortgage. AIG, for instance, could have gone to Goldman Sachs and said, you know, “We’d like to bet that the mortgages that were issued by JPMorgan Chase are going to default in the next ten years.” So these two parties that don’t have anything to do with the actual underlying loan could actually gamble on the outcome of that loan. So, this is—it’s really no different at all from gambling. And that’s why they had to seek a specific exemption from gaming laws in the year 2000, when they actually went forward with the deregulation of these instruments.

AMY GOODMAN: What do you mean?

MATT TAIBBI: In the Commodity Futures Modernization Act in the year 2000, they specifically exempted credit default swaps from being treated as gaming under any state laws. And they had to do that, because they were afraid that they were going to be regulated by, you know, state gaming agencies.

AMY GOODMAN: Matt Taibbi, who won? Who lost?

MATT TAIBBI: Well, I think, you know, everybody loses in the financial crisis, and this is obviously an enormous downfall for everybody financially. But I think that the Wall Street crowd really actually won politically in the end, because what we’re seeing now is that they’re now having an influence over budgetary policy, and they’re able to get their hooks not only into our money but into the money of the Federal Reserve and the Treasury. And they’re really rising in influence because of that.

AMY GOODMAN: Is this about restoring Wall Street to the way it was? I mean, you say, “Wall Street insiders are using the bailout to stage a revolution.” Are they succeeding?

MATT TAIBBI: I just think we’re entering into unprecedented territory. Because of the way the bailout was engineered, we’ve essentially created a giant holding company, with the government as senior management. We now own controlling stakes in an enormous variety of companies, a dying insurance giant in AIG. We’ve absorbed all these toxic instruments, so we’re now the world’s largest hedge fund and the world’s riskiest hedge fund. We’ve bought part of auto finance companies and credit card companies.

And so, we’ve created this enormous—an enormously complex holding company, and the only people who really understand how to administer that company are these Wall Street insiders and the ex-Wall Street insiders who are now in the administration. And because the rest of us don’t really understand this stuff, you know, they’ve essentially increased their political power, because they’ve created a political system that’s too complex for ordinary people to understand.

AMY GOODMAN: Should people really feel confident when they say Wall Street has rallied, like when Timothy Geithner yesterday announced his $1 trillion plan?

MATT TAIBBI: No, the only reason—

AMY GOODMAN: Does that help Main Street?

MATT TAIBBI: The only reason that Wall Street rallied yesterday was because this plan that Geithner administered is such an enormous giveaway to Wall Street. It’s essentially, you know—again, it’s state-subsidized hedge fund profiteering. And, of course, every hedge fund in the world was throwing a party at the news that Geithner came out with this plan yesterday.

AMY GOODMAN: Matt Taibbi, I want to thank you for being with us, contributing editor for Rolling Stone Magazine. His latest article, “The Big Takeover.” And he’s written a number of books; his latest, The Great Derangement: A Terrifying True Story of War, Politics, and Religion.