November 6, 2008 | vol. v. no. 10

QUOTE OF THE YEAR:

“So let us summon a new spirit of patriotism, of responsibility where each of us resolves to pitch in and work harder and look after not only ourselves, but each other.”

President-elect Barack Hussein Obama

Victory Speech

November 4, 2008

SENSE AND NONSENSE -- WORKING THE PROBLEMS

From the editor:  As the exhilaration of President-elect Barack Obama’s victory is replaced by feelings of “coming back to earth” and decompression, all of us -- in our own private ways -- are probably asking “Where do we go from here and how do we get there?”  

I believe Obama provided the most pragmatic answer to this question in his victory speech to thousands of supporters in Chicago’s Grant Park on Tuesday night after he was declared a victor at 11 p.m. Eastern Standard Time. As emphasized in the quote cited at the top of this page, that answer is to look after others as well as ourselves.  

I believe that the future of our nation depends upon replacing our outdated self-image of  “rugged individualism” with an awareness that we are part of a world community -- a community that still looks to the United States to provide humble, but stout, leadership capable of solving difficult problems.

This election was about “the audacity of hope.”  But whereas “hope” is the great motivating factor, “critical thinking” is the engine that will transform hope into solutions.  

I was proud to cast my vote for Obama for many reasons that can be traced back directly to my experiences in Vietnam and as a civil rights worker in the Southwest Georgia Project, but the most important reason surpassed those experiences.  I voted for Obama because I believe he is a problem solver.

His speech on race last spring convinced me that he could rise above the personality of Rev. Wright and the emotional side of the race issue.  That speech convinced me that he was a thinker rather than a “knee-jerk” politician.

After 8 years (or more accurately 28 years beginning with the election of President Reagan in 1980) of a nihilistic “survival of the fittest” political doctrine, it is obvious that there are many problems to be solved.  And president-elect Obama does not have the luxury of addressing these problems one at a time.  Major problems such as the disappearing middle class, the economic crisis, and making health care a “right” instead of a “privilege” are all related.  You cannot solve one of these problems without addressing all of their tentacles such as global warming, a deteriorating infra-structure, and the wars in Iraq and Afghanistan.

I firmly believe that voters have made an important statement in the historic 2008 Presidential election with our choice of Barack Obama.  While it is definitely a statement of hope, it is also a statement that, as a nation, a majority of us want to solve problems rather than create them.

It is perfectly appropriate to repeat the mission statement adopted by The Compass Society in 2004 and repeated at the top of every issue of The Compass newsletter:

“Our purpose is to accurately define problems we face as a nation and promote solutions through smart, non-violent social and political action.”

On November 4, 2008, we took a very important step toward fulfilling that mission.

DOCUMENTING GREED

From the editor: When Treasury Secretary Henry Paulson and Federal Reserve Chief Bernanke presented Congress with a 3-page $700 billion bailout proposal in September, all they shared with the public and Congress was that the piecemeal rescue efforts of Wall Street financial institutions were imploding under the pressure of unidentifiable and unimaginable levels of debt.  The Wall Street terms of “credit default swaps” (CDWs) and “collateralized debt obligations” (CDOs) were just beginning to cross the lips of the analysts trying to deal with the downward spiral of what was presumed to be the world’s safest financial system. 

As part of the early efforts to rescue financial entities considered “too big to fail,” the Federal Reserve loaned the world’s largest insurance firm -- the American International Group (A.I.G.) $85 billion.  That was on Sept. 16, 2008.  By Sept. 28, a few details began to emerge revealing an amazing record of greed, secrecy, deregulation, and unprecedented wealth for a few at the expense of many.

Following are excerpts from a New York Times article written by reporter Gretchen Morgensen and printed September 28, 2008.

“Although America’s housing collapse is often cited as having caused the crisis, the system was vulnerable because of intricate financial contracts known as credit derivatives, which insure debt holders against default.  They are fashioned privately and beyond the ken of regulators -- sometimes even beyond the understanding of executives peddling them.”

“Originally intended to diminish risk and spread prosperity, these inventions instead magnified the impact of bad mortgages like the ones that felled Bear Stearns and Lehman and now the entire economy.”

“In the case of A.I.G., the virus exploded from a freewheeling little 377-person unit in London, and flourished in a climate of opulent pay, lax oversight and blind faith in financial risk models.  It nearly decimated one of the world’s most admired companies, a seemingly sturdy insurer with a trillion-dollar balance sheet, 116,000 employees and operations in 130 countries.”

“’It is beyond shocking that this small operation could blow up the holding company,” said Robert Arvanitis, chief executive of Risk Finance Advisors in Westport, Conn.  ‘They found a quick way to make a fast buck on derivatives based on A.I.G.’s solid credit rating and strong balance sheet.  But it all got out of control.’”

The London Office

“The insurance giant’s London unit was known as A.I.G. Financial Products, or A.I.G.F.P.  It was run with almost complete autonomy, and with an iron hand, by Joseph J. Cassano, according to current and former A.I.G. employees.”

“A onetime executive with Drexel Burnham Lambert -- the investment bank made famous in the 1980s by the junk bond king Michael R. Milken, who later pleaded guilty to six felony charges -- Mr. Cassano helped start the London unit in 1987.”

“The unit became profitable enough that analysts considered Mr. Cassano a dark horse candidate to succeed Maurice R. Greenberg, the longtime chief executive who shaped A.I.G. in his own image until he was ousted amid an accounting scandal three years ago.”

“But last February, Mr. Cassano resigned after the London unit began bleeding money and auditors raised questions about how the unit valued its holdings.  By Sept. 15, the unit’s troubles forced a major downgrade in A.I.G.’s debt rating, requiring the company to post roughly $15 billion in additional collateral -- which then prompted the federal rescue.”

“When Mr. Cassano first waded into the derivatives market, his biggest business was selling so-called plain vanilla products like interest rate swaps.  Such swaps allow participants to bet on the direction of interest rates and, in theory, insulate themselves from unforeseen financial events.”

“Ten years ago, a ‘watershed’ moment changed the profile of the derivatives that Mr. Cassano traded, according to a transcript of comments he made at an industry event last year.  Derivatives specialists from J.P. Morgan, a leading bank that had many dealings with Mr. Cassano’s unit, came calling with a novel idea.”

“Morgan proposed the following:  A.I.G. should try writing insurance on packages of debt known as ‘collaterized debt obligations,’ C.D.O.’s were pools of loans sliced into tranches and sold to investors based on the credit quality of the underlying securities.”

“The proposal meant that the London unit was essentially agreeing to provide insurance to financial institutions holding C.D.O.’s and other debts in case they defaulted -- in much the same way some homeowners are required to buy mortgage insurance to protect lenders in case the borrowers cannot pay back their loans.”

“Because the underlying debt securities -- mostly corporate issues and a smattering of mortgage securities -- carried blue-chip ratings, A.I.G. Financial Products was happy to book income in exchange for providing insurance.  After all, Mr. Cassano and his colleagues apparently assumed, they would never have to pay any claims.”

“Since A.I.G. itself was highly rated company, it did not have to post collateral on the insurance it wrote, analysts said.  That made the contracts all the more profitable.”

“These insurance products were known as ‘credit default swaps,’ or C.D.S.’s in Wall Street argot, and the London unit used them to itself into a cash register.”

“Profit margins on the business were enormous.  In 2002, operating income was 44 percent of revenue; in 2005, it reached 83 percent.”

“Mr. Cassano and his colleagues minted tidy fortunes during these high-cotton years.  Since 2001, compensation at the small unit ranged from $423 million to $616 million each year, according to corporate filings.  That meant that on average each person in the unit made more than $1 million a year.”

“Of course, as this intricate skein expanded over the years, it meant that the participants were linked to one another by contracts that existed for the most part inside the financial world’s version of black box.”

“Goldman Sachs was a member of A.I.G.’s derivative club, according to people familiar with the operation.”

“Few knew of Goldman’s exposure to A.I.G.  When the insurer’s flameout became public, David A. Viniar, Goldman’s chief financial officer, assured anlysts on Sept. 16 that his firm’s exposure was ‘immaterial,’ a view that the company reiterated in an interview.”

“Later that same day, the government announced its two-year, $85 billion loan to A.I.G.”

Copyright © 2008, The Compass Society