JULY 2018

JULY 2018
One Hundred Years Later, Same Message. 1916 - 2017


Saturday, March 28, 2009


I suppose by now you have read the letter. I am referring to the note of resignation from Jake DeSantis (below), the Executive Vice President and self appointed VP for whining from American International Group, Financial Products unit. If you haven’t read it recently, allow me to remind you:“Dear Mr. Liddy…I am proud of everything I have done…have been betrayed…unfairly persecuted…11 years of dedicated, honorable service… I have personally suffered…. feel betrayed… untrue and unfair accusations… None of us should be cheated of our payments any more than a plumber…I received a payment from A.I.G. amounting to $742,006.40, after taxes… Sincerely, Jake DeSantis".
First, please excuse me but I have to blow off a little steam by mentioning that it seems to me that all these professors of procyclicality, credit default swappers, derivative magicians and Credit Default Option voodoo witch doctors, all insist it was somebody else who farted in the elevator. And yet it stinks.
Someone should explain to Mr. DeSantis that each year there are plenty of plumbers cheated out of their earnings when the financial wizards run out of money and declare bankruptcy or just torch the condos under construction for the insurance. And without a union every Joe the Plumber (to pick a name at random) has no choice but to hire a lawyer and get in line to eventually collect a few pennies on every dollar he or she is due. It is called capitalism, and one of its central tenets is that it is unfair. But for some reason most of the financial wizards think that tenet only applies to other people.Now that I have that out of the way – on to the history: AIG was founded with just 300 yen in 1919 in Shanghai, by Cornelius V. Starr (above). And, good news for all conspiracy freaks, C.V. Starr is the uncle of Ken Starr, Whitewater prosecutor and publisher of legal brief pornography. C.V. was selling insurance to the Chinese. According to Fortune Magazine in 1935, although he “never bothered to become proficient in Chinese…” C.V.’s “knowledge of China is encyclopedic, and he is famed in the foreign community for his uncanny ability to work with and through the natives.” That also probably helped his work (if any) for the American Office of Strategic Services (O.S.S.), forerunner of the C.I.A., for which C.V. openly worked during World War One and – I suspect- beyond. When the communists ran A.I.G. out of China in 1949 Cornelius moved his operations to New York and the tax haven of Bermuda. So, if you are so inclined, you can connect the current financial disaster to the C.I.A. plots to murder Castro and overthrow the government of Chile.Now we jump ahead to September 25, 1987, when a minor item appeared in a column by New York Times business writer Michael Quint; “…the Imperial Savings Association is offering the first issue of notes…through Drexel Burnham Lambert…The notes are collateralized by a pool of junk bonds whose market value is estimated at 175 to 180 percent of the new three-year notes….The financing provides fresh cash for Imperial while allowing it to benefit from the difference between the high interest rates paid by the junk bonds and the much lower interest rate on the new notes.”
In other words they were borrowing money, collateralized with money they were owed by third parties. Those notes were without a name yet, but they would one day be christened Collateralized Debt Obligations. The parents did not survive the birth by much. Drexel Burnham and Lambert filed for Chapter 11 bankruptcy on February 13, 1990 and vanished from Wall Street soon after. And Imperial Savings was taken over by the Resolution Trust Association (and the taxpayer) on June 22nd of the same year.
But their terrible child, the CDO, described by investor Warren Buffet as an “investment of mass destruction”, grew into adulthood without any parental oversight thanks to the era of deregulation.
The market savvy junkies call the CDO a synthetic security (implying there is such a thing as a natural security), and along with “credit swaps” (“I'm going to trade you my dead cow for your dead horse”) came to rule the financial markets. They were not well known in the market until 1998 when the banking firm of JP Morgan asked AIG to insure their credit default swaps against a market collapse. AIG-FP, populated as it was with MIT physics and math grads (the only people who understand derivatives), turned to a professor of business at Yale, who figured out that there was a 98.85% chance that AIG would never have to payoff on the insurance. Ooops. And that is how AIG became the chief enabler for the CDO juggernaut, on the mathematical assurance that the good times were going to go on forever.
But, as any historian could have told Mr. DeSantis to a mathematical certainty (and that Yale professor as well) that the good times never have and never will go on forever. That is another basic tenet of capitalism. These guys really should learn this stuff.
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