Part 6 – The 2008 US Gentile Housing Crisis (3 of 4)
Three Perpetrator-Victims
Fannie Mae and Freddy Mac
This is a crucial piece of the 2008 puzzle. The institutions of Fannie Mae (Federal National Mortgage Association) and Freddie Mac (Federal Home Loan Mortgage Corporation) were Government-Sponsored Enterprises (GSEs). They were not original lenders but existed to provide liquidity and stability to the US mortgage market. They would buy mortgages from banks and other lenders then pool those mortgages to create Mortgage-Backed Securities (MBS), and sell these MBSs to investors (like pension funds) worldwide.
But there was a crucial difference between them and all other participants in the mortgage market in that they purchased only high-quality mortgages, and they fully guaranteed these investments. Both institutions guaranteed to pay the principal and interest on the underlying mortgages even if the homeowner defaulted. Thus, a 100% guarantee of the value of the investment. It is a matter of record that Fannie Mae and Freddie Mac owned or guaranteed about half of all US mortgages, a figure that rose to over 80% after the crisis began. In reality, it was rather like buying a government bond in that no investor could ever lose money because the US government provided a backstop to these two entities, if they were unable to meet their obligations. Their “securitisation” process served two vital functions. It freed up capital for banks and other lenders, allowing them to issue new mortgages. Also, it standardised mortgage underwriting while providing a massive, steady flow of capital into the US housing system. It is important that these two institutions were privately owned, but with a US government sponsorship and a federal backstop, the eventual guarantee provided by the US government itself.
As things unfolded, the “guarantee” inherent in their securities became a poison pill, and was the cause of their destruction. Fannie Mae and Freddy Mac had purchased – and guaranteed – trillions of dollars of securitised NINJA mortgages and, when the bubble burst, those guarantees were called. They were then contractually obligated to make investors whole, paying out the missing principal and interest from the defaulted mortgages. This turned their massive, steady stream of income into a catastrophic, unending cash outflow. They were actually hit by a double whammy. The first was being obligated to cover the losses on the defaulting mortgages they had guaranteed. The second was that they held many of those low-quality mortgage-related assets in their own investment portfolio and, when the market collapsed, the value of these assets plummeted, forcing them to write down their value and realise massive losses.
They were not just the guarantors of the market; they were also one of its largest, most highly leveraged speculators. They bet on the US housing market with an implicit government guarantee, and they lost. In September 2008, the US government was forced to place both companies into a form of bankruptcy where they were put under federal control and propped up with around $200 billion in taxpayer funds to prevent their total collapse from annihilating the global financial system.
Prior to the bankruptcies, Fannie Mae and Freddie Mac were classified as Government-Sponsored Enterprises (GSEs) but, in reality, they were publicly traded, private businesses. They had a diverse base of institutional shareholders. Capital Research Global Investors was the largest single shareholder of both companies, with other shareholders including Fidelity Investments, American Funds, and many other funds having significant stakes. These two firms were the pillars of the US housing market, owning or guaranteeing over 80% of all US mortgages after the crisis began. Their debt was held by central banks and financial institutions worldwide.
A Look Backward at Fannie Mae and Freddie Mac
A “standard narrative” was being promoted that Fannie and Freddie caused the subprime crisis by buying risky loans, but the reality was different. As the housing bubble inflated in the early 2000s, the private-label (and low-quality) MBS market (led by Wall Street firms like Goldman Sachs and Lehman Brothers) exploded. The official story for the gullible public was that the “prime” sector of the market where these two GSE firms lived, was nearly stagnating while the “subprime” portion was growing exponentially. And because of this, Fannie and Freddie’s market share shrank dramatically. We were told that to maintain relevance and profitability, they felt immense pressure to lower their own underwriting standards and buy these riskier securitised loans to package into their own MBS.
There is something very wrong with the official story which says they felt “pressured” to purchase vast amounts of the toxic securities. It is not possible their purchases resulted from pressure of any kind. These institutions were owned and controlled by firms like Capital Group, who are the largest fund managers in the world, managing more than $3 trillion. Given the sophisticated ownership and management, to suggest that public pressure forced them to purchase enough garbage securities to bankrupt themselves, is an insult to intelligence. These people, of all people, had to fully understand the nature of the CDOs and the risks. They were not children.
The only theory that fits all the known facts is that these firms were active participants along with Goldman, Sachs, Lehman Brothers and the other investment banks in the massive fraud underlying the housing crisis. And that means their purchase and sale of the toxic securities was just another “financialisation project” where they helped firms like Goldman, Sachs privatise the profits and socialise the losses by using Fannie Mae and Freddie Mac as tools. Given their social mandate, there was no valid reason for these two institutions to have knowingly purchased toxic securities when they were full guarantors. They knew they were bound by law to make investors whole, but they also knew the government backstopped them. They didn’t purchase the high-risk mortgages due to pressure, but because they were participants reading from the same script as Goldman, Sachs. These institutions weren’t naive victims but rather active participants in a coordinated worldwide scheme to loot and plunder.
It is not possible to definitively confirm or deny a coordinated script with firms like Goldman Sachs, but an assessment of all the small details of the framework and incentives, creates a compelling argument that this was a massive and deliberate fraud. The argument is that the shareholders of these firms saw such immense and immediate profits in the subprime market that they jumped in with both feet. And they were not sacrificing the companies in the process: they knew they would be unable to fulfill their obligations, but the government would bail them out and they would survive, having looted investors and the US government of hundreds of billions of dollars. And that is precisely what happened. The People’s Bank of China published an assessment of Fannie Mae and Freddy Mac that you might care to read. [1]
The market operated under a long-standing belief in an implicit government guarantee—that the US would not allow the GSEs to fail because of their vital role in the housing market. This created a “heads we win, tails the taxpayer loses” dynamic, encouraging risk-taking with the understanding that the downside would be borne by the public.
Well before the 2008 collapse, there were clear signals that the GSEs were engaging in dangerously aggressive behavior. Warren Buffett was a major investor in Freddie Mac but sold nearly all of his holdings starting in 2000, when the scheme had barely begun. Buffett expressed a fundamental loss of confidence in their management and, crucially, detected signs that Freddie Mac’s management was “cooking the books” and providing misleading financial reports. This action from one of history’s most astute investors is a powerful piece of circumstantial evidence that the problems were known internally. Before the crisis even unfolded, Buffett said the company had “the signs and the smell of death“. [2] [3] Buffett also sensed the increasing danger from the “derivative” securities that were being so aggressively marketed (the CDSs); he said they were “financial weapons of mass destruction”.
Insiders were also keenly aware of the impending doom. Internal documents and subsequent investigations revealed that the GSEs were aware of the risks they were taking. There were many internal warnings: As early as 2004, a Fannie Mae risk manager warned in an internal presentation that the company was so excessively leveraged on subprime mortgages that even a 5% decline in house prices would wipe out their capital and leave them bankrupt. That warning was ignored, but it wasn’t a case of ignorance. There is much evidence of knowing complicity in what was essentially a huge criminal fraud. The executives and shareholders of Fannie Mae and Freddie Mac knew precisely what they were doing, knew the inevitable end result, but were executing a plan to loot trillions from investors and the public and leave the US government holding the bag when the bubble burst.
As the housing bubble inflated in the early 2000s, Goldman Sachs and Lehman Brothers aggressively securitised subprime loans—the very risky, high-yielding mortgages that fell outside Fannie and Freddie’s traditional “conforming” standards. The official narrative about their market share shrinking, was both irrelevant and untrue. Fannie Mae and Freddie Mac had never taken part in this segment of the market, and the borrowers with good credit did not disappear, so their market share could not shrink.
The official story says that if they lost market share, they would no longer the dominant players in the fastest-growing part of the market, and facing a threat to their dominance and profitability. But that entire line of reasoning is irrelevant, a false “official story” that does not explain WHY these two agencies would want to buy toxic mortgages. These were not normal commercial enterprises like Ford and VW fighting for “market share”, and they cannot be compared to normal corporations. Their legislated function was fundamentally social and economic, to provide a stable mortgage market, not to dominate a market or to maximise profits for the next quarter. Their only concern about the explosion of the subprime sector should have been to minimise it, not to participate in it.
There is no rational reason they should have purchased securities they knew were high-risk, which went entirely against their stated purpose. The only logical explanation that fits all the known facts, is that the owners of these two companies were part of the plot, cooperating with Goldman and Lehman to plunder the US Treasury, knowing that they could extract enormous profits today and, when they failed, the government would assume the guarantees on all the toxic mortgages they held. Thus, the owners and shareholders could afford to be reckless. They sucked tens of billions of investor money into their pockets, paid billions in bonuses to their staff to purchase these toxic investments, then left the US government holding the bag for hundreds of billions more. Their actions perfectly mirror those of Goldman, Sachs, Citibank, Lehman Brothers, Bear Sterns, Citibank, and all the others. All players were reading from precisely the same script. When we connect all the pieces, we can’t avoid concluding this was a deliberate fraud, with all available evidence supporting that interpretation.
It is important that Fannie Mae and Freddy Mac were not normal commercial companies. Their congressional charters established them for a public purpose: to provide liquidity, stability, and affordability to the US mortgage market. To suddenly begin chasing market share in the subprime sector was a direct betrayal of that mission. Their hybrid public-private structure proved fatal because that structure created a perfect environment for criminal behavior. They used their government-backed advantage not just for market stability, but for aggressive looting to please their private shareholders. This was in many ways reminiscent of the giant Savings and Loan fraud of the early 1980s.
When the fraud began, executives at Fannie and Freddie were paid like private Wall Street CEOs, with their compensation heavily tied to metrics like earnings per share and market share growth. In the early 2000s, CEO compensation at the GSEs reached tens of millions of dollars. To hit the targets that would generate these massive bonuses, they had dive into the pool of private subprime mortgages. The accurate and damning story is that the Jewish owners, shareholders, and management of Fannie Mae and Freddie Mac hijacked these two institutions with a plan to deceive investors and to loot the US government of hundreds of billions of dollars. The record is clear that they created a perverse incentive and bonus structure to ensure this, bonuses not aligned with their public mission, but with private greed. Taking advantage of their private ownership and government backing, they knowingly abandoned their role as a stabilising force and became a primary accelerator of the crisis, secure in the belief that the American taxpayer would be forced to cover their losses. The tragedy is that the “privatise profits, socialise losses” model I have identified, is not an anomaly in modern finance. But the 2008 crisis was its most spectacular and devastating manifestation.
While proving criminal intent is difficult, the evidence overwhelmingly supports a conclusion of gross, calculated negligence and a breach of fiduciary duty. We have no choice but to conclude that this was a massive betrayal of trust. The leaders of these institutions foresaw the potential for massive losses but proceeded anyway, believing the profits would be theirs and the losses would be borne by the taxpayer. The fact that this was a foreseeable consequence of their actions is the very definition of the moral hazard I described – where foreseeable consequences imply intent.
(2) The Strange Case of Lehman Brothers
From left, Henry Paulson, secretary of the Treasury; Ben Bernanke, Fed chairman; and Timothy Geithner, head of the New York Fed, at a news conference in 2008, as global finances faced ruin. Meeting transcripts from the period were released Friday. CreditHyungwon Kang/Reuters. Source
This is a profound and troubling point that ventures into one of the most controversial aspects of the 2008 crisis. From assembling and connecting the pieces of evidence, it appears that Lehman Brothers was permitted (or, more accurately, chosen and pushed) to go bankrupt, in large part to frighten the US Congress into bailing out the other big banks. It is a bit of a question why Lehman was actively disliked in some powerful segments of the international Jewish banking fraternity.
Lehman had 158 years of history, and was the fourth largest investment bank in the United States. When it filed for bankruptcy protection, it had assets of $635 billion and liabilities of $613 billion. [4] Throughout the summer of 2008, due to the deterioration of the real estate market, the crisis in the financial market became more and more serious, and Lehman’s problems became more and more obvious: Lehman held too many non-performing housing loans which it couldn’t divest. The most important thing is that the scale of these non-performing assets was extraordinary: Lehman lost as much as $7 billion in commercial housing loans alone, and its stock price plummeted by 90%. [5] [6]
The official narrative was that Lehman Brothers was allowed to fail because the government lacked the legal authority to bail it out, and perhaps secondarily wanted to teach the market a lesson about moral hazard. The theory was that if Lehman were rescued, it would encourage financial institutions to engage in high-risk business recklessly, thereby seriously damaging market self-discipline mechanisms. In addition, multiple bailouts of financial companies were bound to cause other industries in trouble to ask the US government to rescue them. But the actual Lehman events that unfolded, suggest a far more calculated and cynical operation. I cannot conclusively verify all the specifics, but we can still analyse the plausibility of this scenario based on known facts, financial mechanics, and historical patterns.
Lehman was definitely an exception to the US government largess of bailout money, and this could only have been a deliberate decision. The suspicion that Lehman Brothers was “chosen” to go bankrupt is supported by the historical record, a stark contrast to the US Treasury’s actions with other similar institutions. Only months earlier, in March of 2008, the FED had facilitated JPMorgan‘s takeover of Bear Stearns by agreeing to back $30 billion of its risky assets. When Lehman found itself in an identical crisis by September, its CEO, Richard Fuld, desperately sought a similar deal. However, the US government’s stance on Lehman was not determined by the US government, but by Henry Paulson who was “totally in charge” and who made a conscious choice not to save Lehman. Paulson called investment bank executives on Wall Street and said he would not use taxpayer funds to rescue Lehman.
After that, the Treasury Department and the FED made it clear that the federal government would not provide any financial support for investors to acquire Lehman. Paulson’s main stated reasons were that the US had no authority to prevent a Lehman failure, and that a bailout would create a “moral hazard” – rewarding risky behavior and setting a dangerous precedent for future crises. But this public rationale deserved only ridicule at best. If the US had no authority to bail out Lehman, and if Lehman didn’t deserve a bailout due to moral hazard, then what was Goldman, Sachs? And what “right” did the FED or the Treasury have, to bail out AIG, Bear Sterns and the others? The suspicion that Lehman Brothers was “chosen” to go bankrupt is supported by the historical record.
The then-President of the NYC FED, Timothy Geithner, (a junior to Paulson) arranged a private sale to Barclays bank in the UK, but the deal collapsed when UK regulators suddenly refused to approve it. Paulson apparently traveled to “Europe” (i.e. the UK) and informed various parties that the US would not use “taxpayer funds” to bail out Lehman Brothers. But the official narrative was nonsense; Paulson’s statements were a warning to others that any attempt to bail out Lehman would not be appreciated. The UK government were not objecting to this bailout, and indeed had bailed out other banks. But, after Paulson’s intervention, the UK government abruptly backed away.
Without a government backstop to absorb Lehman’s worst assets, no other buyer was willing to take on the risk. It was Henry Paulson who definitively killed the rescue of Lehman Brothers. Geithner published a book revealing the inside story of Lehman’s collapse. [7] In that text he wrote, “This was one of the few estrangements between me and Henry during the crisis. There was even some estrangement between me and [then-Fed Chairman] Ben [Bernanke].” Ultimately, Paulson declared that the FED “did not have the right” to save Lehman.
Goldman Sachs and Morgan Stanley had the strength to acquire Lehman, but both had suffered heavy losses in the subprime mortgage crisis, and were taking care of themselves. Private equity funds such as J.C. Flowers, KKR (Kohlberg Kravis Roberts & Co), Carlyle Group and Blackstone Group also had the strength to buy, but those institutions were not interested in acquiring Lehman as a whole, but hoped to acquire some of Lehman’s high-quality assets at a low price after the bank was liquidated.
WASHINGTON – FEBRUARY 11: Executives from the financial institutions who received TARP funds, (L-R) Goldman Sachs Chairman and CEO Lloyd Blankfein, JPMorgan Chase & Co CEO and Chairman Jamie Dimon, The Bank of New York Mellon CEO Robert P. Kelly, Bank of America CEO Ken Lewis (obsucred), and State Street Corporation CEO and Chairman Ronald Logue testify before the House Financial Services Committee February 11, 2009 in Washington, DC. The hearing focused on how financial institutions have spent funds received from the Troubled Asset Relief Program (TARP). (Photo by Chip Somodevilla/Getty Images). Source
The bankruptcy raised many questions and offered much to confound observers. One is whether Lehman was pushed into bankruptcy as a planned “Sacrificial Lamb”. This is the most strategic layer since it tries to explain why Lehman was singled out for destruction while AIG, Bear Stearns, Citigroup, and Bank of America were saved. The most plausible answer is what we term the “Controlled Demolition” theory. Many analysts have argued that the system needed a catastrophic event to shock Congress and the public into accepting unprecedented bailouts (the TARP program) for the bankers. Letting Lehman fail provided the necessary “heart attack” to justify the “open-heart surgery” on the rest of the banking system. In this view, Lehman’s failure was a tactical sacrifice to save the whole – and socialising some of the largest collective losses in history.
The chaotic aftermath of Lehman’s bankruptcy truly did terrify global markets and the US Congress, and was what spurred Congress to approve the $700 billion TARP program, and also to become much more aggressive in bailing out other firms, like the insurance giant AIG. It is of course possible that Lehman was simply the weakest link with the least political clout or the most disagreeable management in the eyes of the Treasury and the FED. The notion that its collapse was “planned” implies a level of coordination that is hard to prove. However, the outcome was the same: its failure served as a justification for a massive, no-strings-attached rescue of its competitors.
When Lehman Brothers Holdings Inc. filed for Chapter 11 bankruptcy in the US, its global operations were frozen and began a long, complex process of liquidation. However, its European operations, based in London, were placed into administration (the UK equivalent of bankruptcy) under different rules. The administrators for Lehman Brothers International (Europe) have so far (to the end of 2025) spent over a decade unwinding its positions and returning assets to creditors. What remains today is not “Lehman Brothers” the active investment bank, but a shell of its former self, managed by teams of lawyers and administrators who are still settling claims.
There is something else here, that was strange. I encountered credible information that “someone” was selling bonds in Lehman Brothers right until the day of the bankruptcy, and were selling them not at a discount but at a high price, claiming that Lehman was in good health. My sources in Hong Kong claimed that at least several billions of US$ of Lehman bonds were sold to investors in Hong Kong right up until the day of the bankruptcy. This raises some interesting questions. If billions of dollars of Lehman bonds were sold, the money would normally have gone into Lehman’s treasury and the firm could not have gone bankrupt. But the money from those bond sales clearly did not go into Lehman Brothers treasury, which means it went into the pockets of the private owners of the company. There is justification for a belief that insiders knowingly sold Lehman bonds at inflated prices right up to the bankruptcy, diverting funds to private pockets rather than the company treasury. I saw documents that claimed, with some good (circumstantial) evidence that, although Lehman was planned and permitted to go bankrupt as a kind of sacrificial lamb, the owners would not necessarily be losers.
I haven’t enough evidence to jump to conclusions, but it appears possible, if not likely, that the Lehman bankruptcy holds yet another financial fraud, and where the bankruptcy was a kind of “controlled demolition” of Lehman, done for greater purposes. Certainly, the historical context gives plausibility to this thesis. In financial crises, there are almost always suspicious trading patterns before collapses. The bond sales in Hong Kong align with known issues of offshore financial opacity, and we can draw comfort from documented patterns from other financial scandals. If we think of the bond sales, the sacrificial lamb theory, and the strange afterlife of Lehman Brothers in London, we can easily tie this back to the broader theme of deliberate wealth transfer.
First, the plausibility is high that “someone” really was selling Lehman bonds until the end. This would be entirely consistent with the “Greater Fool” theory and the incentive structures we’ve examined. When the insiders knew a bankruptcy was imminent, their primary goal would be to raise and extract as much cash as possible through any means before the doors shut. Selling bonds, especially in distant markets like Hong Kong where information asymmetry was high, is a classic tactic the Jews have used repeatedly.
The most damning part of this is that selling a distressed asset at a deep discount is one thing; fraudulently marketing it as a safe investment at par value is another, and would obviously constitute securities fraud. To support this thesis, there were numerous civil cases after the fact alleging that Lehman and others misled investors about the health of their assets right up to the collapse.
The critical distinction is perhaps the destination of the funds obtained from the sales. If Lehman Brothers the corporation issued new bonds, the cash would go to the corporate treasury to fund its operations, even if those operations were doomed. However, if major shareholders or partners (the “private owners”) were selling their personal holdings of existing Lehman bonds to unsuspecting buyers, then the cash would go directly into their pockets, not the company’s. This would be a direct transfer of wealth from the new buyers to the insiders liquidating their positions. Proving this on a large scale is difficult, but it is a known phenomenon in dying companies. As one easy example, insiders often use their superior knowledge to dump their stock before bad news becomes public, and Lehman would be essentially the same thing – but with lies attached.
The scenario outlined above, fits a recognisable pattern of financial predation. There is always insider knowledge prior to such a collapse, where the apex players at the doomed institution know the true state of its balance sheet. When we examine these cases, it seems almost inevitable that the insiders used this knowledge to offload toxic assets onto less-informed investors in offshore and distant markets at inflated prices. And the cash from these final sales extracted from the system went directly into the pockets of insiders selling their personal stakes. The institution is then allowed to fail.
(3) American Insurance Group (AIG)
AIG was the largest insurance company in the world, operating in more than 130 countries. The company’s CEO for nearly 40 years, was Maurice Greenberg, who was part of the Jewish financial elite and well-known to all the players. Greenberg built AIG and, under his leadership, AIG’s market value soared from $3 billion to $1.7 trillion. The man was known for his obsessive control, relentless drive, and sophisticated understanding of risk and financial innovation. Greenberg was also a financial criminal. His reign as CEO ended abruptly in 2005 when a New York investigation uncovered accounting irregularities, forcing his resignation and a $1.6 billion regulatory settlement. AIG did indeed engage in fraudulent accounting. In 2000, AIG engaged in a complex transaction with Warren Bufffet’s General Re that regulators concluded was not true insurance, but a $500 million deal designed to artificially bolster AIG’s financial appearance. [8]
This would suggest that Greenberg was a perfect partner in the massive 2008 mortgage fraud, and he was certainly no stranger to either risk or profit. However it happened, Greenberg and AIG became so deeply involved in the US housing CDO fraud that it bankrupted the company and needed a bailout by the FED and US Treasury.
To recap, the heart of the 2008 crisis was the process of securitising mortgages into complex financial products. Because the bankers conspired to loot the entire known world, this process interconnected the entire global financial system to the US housing market. First, banks issued trillions of dollars of subprime mortgages to totally unqualified borrowers. Then, the investment banks (like Goldman and Lehman) bought these mortgages and bundled them into bonds called Mortgage-Backed Securities (MBS).
Maurice Greenberg, former CEO of American International Group, in better days in 2005. Greenberg believes the 2008 government bailouts left him and other AIG shareholders poorer. Photograph: STEPHEN CHERNIN/AP.
They then took these MBSs and split them into new, even more complex products called Collateralised Debt Obligations (CDOs). These contained tiers, or “tranches,” with different levels of risk and return. The complexity of these (repeatedly sliced and diced securities) was not well known; the prospectus was more than 200 pages and there were probably few who could, or would, read that document. These MBSs and CDOs were sold to investors worldwide (pension funds, foreign banks, etc.).
To make these risky products seem safe, two additional frauds were perpetrated. The rating agencies like S&P and Moody’s falsely gave the subprime rubbish packages a rating of AAA. The second fraud was that AIG sold insurance on securities through instruments called Credit Default Swaps (CDSs). AIG wasn’t a buyer of the toxic securities, but a seller of a kind of insurance on them.
Through a small, 377-person unit in London called AIG Financial Products (AIGFP), the company sold CDS contracts to major banks and investors worldwide. In simple terms, AIG promised investors that if their complex bundles of mortgages (MBSs and CDOs) were to default, AIG would cover the losses. The company appeared to believe that the only risk was in a severe and nationwide crash in US housing prices, a condition considered to be a “once in a million” event for which the possibility was essentially zero.
WASHINGTON – MARCH 18: Code Pink protesters hold signs as Chairman and CEO of the American International Group Edward Liddy prepares to testify before the House Financial Services Committee March 18, 2009 in Washington, DC. Hired after AIG accepted billions of dollars in aid from the federal government, Liddy faced intense scrutiny from members of Congress over $165 million in bonuses paid to employees of the insurance giant. (Photo by Chip Somodevilla/Getty Images). Source
For AIG, this seemed like “free money.” They collected billions in lucrative insurance premiums, believing that they would never have to pay out. AGIFP stated openly that there was essentially zero risk that they would ever have to pay “even $1.00”. For the banks, buying this insurance from a top-rated firm like AIG made their risky assets appear safe, allowing them to meet regulatory requirements. This “insurance” from AIG, added to the fraudulent AAA ratings from the rating agencies, is what convinced investors to participate.
AIGFP’s models were built on the assumption that a crisis affecting all regions and housing market segments was virtually impossible. They grew this business to an enormous scale, at one point providing CDS protection on over $600 billion in bonds, creating a huge, undiversified risk that eventually threatened the entire company. When the “once in a million” housing market collapse occurred and the securities AIG had insured plummeted in value, three things happened simultaneously: (1) The risk of default skyrocketed, meaning AIG’s potential insurance liabilities became enormous. (2) AIG’s own credit rating was downgraded. (3) These two events triggered clauses in the CDS contracts that forced AIG to immediately post billions of dollars in cash collateral. Despite being a massive company, AIG was not a bank and did not have tens of billions in liquid cash on hand. It was this liquidity crisis—the inability to meet its immediate collateral calls—that pushed it to the brink of bankruptcy within days.
The Bailout
The US government decided that AIG was “too interconnected to fail”. Its collapse would have caused catastrophic losses for the countless banks and pension funds that had bought its insurance, potentially triggering a domino effect through the entire global system. In September 2008, the Federal Reserve stepped in with an $85 billion emergency loan to keep AIG afloat. Then, the US government took an 80% ownership stake in AIG, effectively nationalising it. There is an interesting article from Peking University that gives a clear explanation of why AIG was bailed out when Lehman wasn’t. [9]
There were many investigations and much public anger about AIG’s collapse and the subsequent bailout. There were reports of FBI investigations into several financial firms, including AIG, for potential fraud, and there was also widespread public outrage over the use of taxpayer funds for bailouts while the same firms continued to pay million-dollar bonuses to their staff.
The Supreme Court declined to review a challenge to the government’s actions during the crisis-era bailout of insurer American International Group Inc. Source
There were enormous controversies about the bailout of AIG, primarily because that money did not go to AIG. Instead, nearly all the bailout funds were passed through AIG to its counterparties who were the banks that originated the fraud but had exposure to AIG. Of the money supposedly paid to bail out AIG, $12 billion went to Goldman, Sachs, another $12 billion to the Bank of America & Merrill Lynch, $16 billion to Societe Generale in France, and $8.5 billion to Deutsche Bank, among many others. Another $12 billion went to various US states and municipalities. None of it remained with AIG.
The decision to fully repay AIG’s counterparties was contentious for several reasons. One was that the “bailout” of AIG appeared to fraudulently divert funds from their stated purpose to in fact bail out the same banks that caused the crisis (the so-called “counterparties”). And these banks were refunded 100% of AIG’s obligations to them, making them whole on their own risky bets. This was all done with questionable justification. The New York FED defended its actions by stating that it aimed to avoid destabilising the financial system and that the banks needed full payment to avoid failure.
Another contention was the intense lack of transparency. The entire process was initially conducted in secret, with the Federal Reserve refusing to publicly disclose the recipients. This secrecy, combined with the fact that many of these banks had already received direct government bailouts, led to intense criticism from lawmakers and the public, who saw it as a “backdoor bailout” for Wall Street at the expense of the people.
Perhaps the most politically explosive part of the bailout was that the US government, through AIG, effectively bailed out European banks like Societe Generale and Deutsche Bank. The official justification was not about saving them, but about saving the American financial system from them.
Because of the massive volume of “insurance” contracts it had sold, AIG was at the center of a global web of financial contracts. If it had declared bankruptcy and defaulted on its CDS obligations, the massive, sudden losses would have instantly crippled its major counterparties, including Goldman Sachs, Bank of America, and Merrill Lynch. These US banks would have then been unable to meet their own obligations to others, causing a cascade of failures. The European banks, holding billions in claims from these now-failing US banks, would have pulled their capital out of the US. system, freezing credit completely. The theory was that letting AIG fail would have been an uncontrolled, catastrophic explosion. By bailing out AIG and paying its counterparties at 100 cents on the dollar, they were performing a “controlled demolition.” They were stabilising the entire system by ensuring that the failure of one firm (AIG) did not trigger a dozen more. In their view, letting European banks fail from their exposure to AIG would have caused a feedback loop that would have annihilated the American banks intertwined with them.
The Official Story
When the housing market collapsed, the mechanism that destroyed AIG was not a slow bleed, but a sudden financial heart attack.
There are many problems with the official story of AIG. One is that median US house prices had doubled by 2006, and tripled since 1997. If that isn’t a housing bubble, I don’t know what would be, but we are told that no one at AIG or AIGFP believed the bubble would burst. In normal circumstances, house prices might continue a steady upward climb, but these were not normal times. Almost the entire housing frenzy that pushed prices to such high levels, was artificial. It was not a reflection of real demand for housing, but a demand for high-yield and high-risk mortgages. This demand was instigated by “no down payment”, virtually zero interest rates, and an apparent total abandonment of sane lending practices. Most of the mortgages were “subprime” and most borrowers substandard. There was no realistic way this environment could sustain a stable, long-term rise in house prices.
Another is their apparent belief there was no possibility they would have to pay out “even $1”. Yet the underlying mortgages were mostly subprime LIAR and NINJA loans that carried serious risk of default. Even the fact that those mortgages were issued with artificially low initial rates, meant there would be substantial defaults when the interest rates reset in two years.
Another is that AIG broke the fundamental rule of insurance, which is to spread the risk through some form of reinsurance. But AIG kept all the risk to itself instead of reinsuring and spreading that risk. Also, since the credit default swaps (derivatives) did not qualify as insurance products, they were not subject to insurance regulations and thus no requirement to hold reserves. And AGIFP kept no reserves. All its premium income was factually considered as “free money” and was paid out to the owners and shareholders. There was nothing left in the bank when the real estate market crashed and the real liabilities emerged.
When banks issue mortgages, they don’t insure the contracts because their lending practices are restrictive and the risk of default (in normal times) is virtually zero. And in any case, the value of the home is always greater than the mortgage amount, so a default carries no prospect of loss.
The “Quants” (the geniuses at AGIFP) said publicly there was zero chance they would have to pay out even $1 in claims. We must take them at their word. But how could these derivatives be constructed so that could be possible? It seems that the actual “insurance” was only on the top tranche of mortgages or securities that contained only prime mortgages and would have no particular risk of default. Thus, the only apparent risk lay in the prospect of even the highest-quality mortgages defaulting, and that would happen only if house prices collapsed by perhaps 50% or more – which was exactly what happened.
There was a kind of “Too-Safe-to-Fail” arrogance. The quants at AIGFP had such supreme confidence in their mathematical models that they believed the risk was negligible. Their models, which assumed a nationwide housing downturn was a statistical impossibility, told them the probability of having to pay out was so remote that paying reinsurance premiums would be like throwing money away. Also, they seemed to view themselves as “The Ultimate Reinsurer”. AIG was one of the few institutions with a AAA credit rating, strong enough to take on risks others couldn’t. In their view, they were the end of the line. Who could they possibly reinsure with? They believed they were the smartest ones in the room, absorbing risk that others were too timid to touch.
When the housing market collapsed, the mechanism that destroyed AIG was not a slow bleed, but a sudden financial heart attack. The prime result came from collateral calls. The CDS contracts AIG sold had clauses that required them to post billions of dollars in cash collateral if the value of the insured securities fell, or if their own credit rating was downgraded. In 2008, both of these things happened at once. AIG, despite its vast assets, did not have the liquid cash to meet these immediate demands.
AIG’s leadership, operating in a culture of arrogance and short-term greed, made a calculated bet that they could profit from a massive, systemic risk, secure in the belief that their own sophistication would allow them to exit in time, and comforted by the implicit backstop of their own indispensability. This was not a failure of intelligence or risk assessment. It was a catastrophic failure of ethics, systemic design, and ultimately, of hubris.
Rinse and Repeat
May 13, 1985: Depositors line up to withdraw money from a Baltimore bank following the court order that limited depositors’ cash withdrawals until a purchaser was found for the troubled savings and loan. (Photo: Bettmann/Bettmann/Getty Images) Source
If we compare the Savings & Loan US mortgage fraud of the 1980s to the mortgage fraud of 2008, they are essentially the same animal, differing only in the method of looting the US Treasury and taxpayer. Both were massive frauds, both used the US housing stock as the tool; both involved an immense transfer of wealth from the lower classes to the elite class; both depended on prior “deregulation” of laws and policies in order to permit the perpetration. This sounds like the same players doing something twice, but with different methods. The parallels between the 1980s Savings and Loan (S&L) Crisis and the 2008 Financial Crisis are profound, the evidence strongly supporting the view that they represent a repeating pattern of systemic fraud enabled by deregulation, resulting in a massive transfer of wealth. And again, entirely Jewish in origin.
In both cases, financial innovation and deregulation created an opportunity for a massive financial fraud. The 1980s S&L crisis was billed as “the biggest financial fraud in American history.” The “looting” occurred when insiders realised they could make high-risk bets, extract enormous fees and profits upfront, and leave the inevitable losses to the government-backed insurance funds. Privatise the profits and socialise the losses.
I would point out that these events occur so regularly and share such a similar pattern, that it is difficult to consider them as “one-off” events or due to accidental causes. When we examine the repeating patterns, it very much appears all those events were orchestrated (by the same group of persons) to produce precisely the results they produced – a bubble, a crash, and an immense transfer of wealth. These have occurred repeatedly with housing, with the stock markets, with the oil markets, and others.
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Mr. Romanoff’s writing has been translated into 34 languages and his articles posted on more than 150 foreign-language news and politics websites in more than 30 countries, as well as more than 100 English language platforms. Larry Romanoff is a retired management consultant and businessman. He has held senior executive positions in international consulting firms, and owned an international import-export business. He has been a visiting professor at Shanghai’s Fudan University, presenting case studies in international affairs to senior EMBA classes. Mr. Romanoff lives in Shanghai and is currently writing a series of ten books generally related to China and the West. He is one of the contributing authors to Cynthia McKinney’s new anthology ‘When China Sneezes’. (Chap. 2 — Dealing with Demons).
His full archive can be seen at
https://www.bluemoonofshanghai.com/ + https://www.moonofshanghai.com/
He can be contacted at: 2186604556@qq.com
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NOTES: Perpetrator-Victims
[1] Background knowledge questions and answers about the “two rooms” in the United States
http://hangzhou.pbc.gov.cn/hangzhou/125333/125625/2179388/index.html
[2] Buffett: Before the crisis, the company had signs of “death” and smelled that it was about to withdraw……
https://news.futunn.com/post/32803575?level=1&data_ticket=1762525606515068
[3] Buffett’s biggest enlightenment from investing in Freddie Mac: Before the crisis, the company had signs of “death”
https://news.futunn.com/post/32803575?level=2&data_ticket=1762685770146918
[4] Geithner published a book revealing the inside story of Lehman’s collapse
https://www.xinhuanet.com//world/2014-05/13/c_126492367.htm
[5] Let Lehman Brothers go bankrupt
http://big5.news.cn/gate/big5/jjckb.xinhuanet.com/dspd/2011-06/24/content_317297.htm
[6] Lehman Brothers once again tested the wisdom of U.S. financial regulation
http://www.cnfinance.cn/magzi/2008-10/01-1031.html
[7] Geithner published a book revealing the inside story of Lehman’s collapse
https://www.xinhuanet.com//world/2014-05/13/c_126492367.htm
[8] America’s most greedy CEO
http://info.epjob88.com/html/2006-4-13/2006413212559.htm
[9] Xie Shiqing: Save the American insurance giant AIG
https://econ.pku.edu.cn/ccissr/bdbxpl/309017.htm
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