Rolling Stone's Matt Taibbi continues his excellent, infuriating coverage of the Wall Street bailout with analysis of the newly released data on the no-recourse, low-interest loans the Fed made (these are tax-funded loans that don't have to be repaid, offered at an interest rate that's so low you could simply stick the money in the bank and come out ahead). The depth of corruption in these loans is breathtaking — $35 billion to a Bahraini bank whose majority shareholder is Muammar Qaddafi's Central Bank of Libya; $2.2 billion to the Korea Development Bank whose mandate is investment in South Korea and only South Korea; and a pair of $2 trillion loans to Citibank and Morgan Stanley.
But Taibbi really goes to town on the $220 million loan made to the wives of two Morgan Stanley execs, who had no visible investment experience. These millionaires were given another $220 million of tax-payer money, at rock-bottom interest rates, without any requirement to pay it back. They used it to buy up securities that the Fed had bought from Morgan Stanley (the pricing for these transactions remains a secret, as the Fed refuses to disclose it). These securities — mortgages, student loans and so on — have paid out handsomely for their new owners, but they have still not repaid $150 million of the tax money they were given to buy them.
It's hard to imagine a pair of people you would less want to hand a giant welfare check to — yet that's exactly what the Fed did. Just two months before the Macks bought their fancy carriage house in Manhattan, Christy and her pal Susan launched their investment initiative called Waterfall TALF. Neither seems to have any experience whatsoever in finance, beyond Susan's penchant for dabbling in thoroughbred racehorses. But with an upfront investment of $15 million, they quickly received $220 million in cash from the Fed, most of which they used to purchase student loans and commercial mortgages. The loans were set up so that Christy and Susan would keep 100 percent of any gains on the deals, while the Fed and the Treasury (read: the taxpayer) would eat 90 percent of the losses. Given out as part of a bailout program ostensibly designed to help ordinary people by kick-starting consumer lending, the deals were a classic heads-I-win, tails-you-lose investment.
So how did the government come to address a financial crisis caused by the collapse of a residential-mortgage bubble by giving the wives of a couple of Morgan Stanley bigwigs free money to make essentially risk-free investments in student loans and commercial real estate? The answer is: by degrees. The history of the bailout era reads like one of those awful stories about what happens when a long-dormant criminal compulsion goes unchecked. The Peeping Tom next door stares through a few bathroom windows, doesn't get caught, and decides to break in and steal a pair of panties. Next thing you know, he's upgraded to homemade dungeons, tri-state serial rampages and throwing cheerleaders into a panel truck.
It was the same with the bailouts. They started out small, with the government throwing a few hundred billion in public money to prop up genuinely insolvent firms like Bear Stearns and AIG. Then came TARP and a few other programs that were designed to stave off bank failures and dispose of the toxic mortgage-backed securities that were a root cause of the financial crisis. But before long, the Fed began buying up every distressed investment on Wall Street, even those that were in no danger of widespread defaults: commercial real estate loans, credit- card loans, auto loans, student loans, even loans backed by the Small Business Administration. What started off as a targeted effort to stop the bleeding in a few specific trouble spots became a gigantic feeding frenzy. It was "free money for shit," says Barry Ritholtz, author of Bailout Nation. "It turned into 'Give us your crap that you can't get rid of otherwise.' "