Thursday, March 26, 2009

Dr. John Hope Franklin, 1915-2009: Great Historian, Scholar, Intellectual, and Activist


Dr. John Hope Franklin was a great scholar and a true intellectual pioneer, leader, critic, and activist in the field of U.S. history for over six decades. His many contributions to the national and international discourse on the complex dynamics of race, class, and politics have deeply influenced critical thought and social activism in the United States over the past century. His work has served as a beacon and academic benchmark for the critical examination of the multicultural and multiracial realities of the American historical experience within the broader context of political economy, sociology, and philosophy as well as general scientific inquiry in human/social relations. Among his many books, monographs, essays, and articles his signature text and scholarly magnum opus 'From Slavery to Freedom' first published in 1947 and never out of print since then has educated thousands of college students in this country and abroad and has been translated into many languages. His legacy is profound. A very perceptive and dedicated man of quiet dignity, discipline, gravitas, and a gentle, even sly humor and wit Dr. Franklin will be sorely missed by many people throughout this country and the world, and especially by a large international coterie of former and present day students, scholars, and activists whom he mentored and/or inspired over the course of a very long and distinguished career. I am deeply honored to count myself among them.


John Hope Franklin, Scholar of African-American History, Is Dead at 94


March 25, 2009
New York Times

John Hope Franklin, a prolific scholar of African-American history who profoundly influenced thinking about slavery and Reconstruction while helping to further the civil rights struggle, died Wednesday in Durham, N.C. He was 94.

A spokeswoman for Duke University, where Dr. Franklin taught, said he died of congestive heart failure at the university’s hospital.

During a career of scholarship, teaching and advocacy that spanned more than 70 years, Dr. Franklin was deeply involved in the painful debates that helped reshape America’s racial identity, working with the Rev. Dr. Martin Luther King Jr., W. E. B. Du Bois, Thurgood Marshall and other major civil rights figures of the 20th century.

“I will always think of John Hope as the historian of the South who grasped the complexity of Southern public life as shaped by the horror of personal slavery,” said Nell Irvin Painter, the Princeton University historian. “Franklin was the first great American historian to reckon the price owed in violence, autocracy and militarism.”

It was a theme Dr. Franklin wrestled with into his last years. In an article in The Atlantic Monthly in 2007, he wrote, “If the American idea was to fight every war from the beginning of colonization to the middle of the 20th century with Jim Crow armed forces, in the belief that this would promote the American idea of justice and equality, then the American idea was an unmitigated disaster and a denial of the very principles that this country claimed as its rightful heritage.”

Dr. Franklin combined idealism with rigorous research, producing such classic works as “From Slavery to Freedom: A History of African-Americans,” first published in 1947. Considered one of the definitive historical surveys of the American black experience, it has sold more than three million copies and has been translated into Japanese, German, French, Chinese and other languages.

Robert W. Fogel, a Nobel Prize-winning economist at the University of Chicago, called it “a landmark in the interpretation of American civilization.”

Dr. Franklin also taught at some of the nation’s leading institutions, including Harvard and the University of Chicago in addition to Duke, and as a scholar he personally broke several racial barriers.

He often argued that historians have an important role in shaping policy, a position he put into practice when he worked with Marshall’s team of lawyers in their effort to strike down segregation in the landmark 1954 case Brown v. Board of Education, which outlawed the doctrine of “separate but equal” in the nation’s public schools.

“Using the findings of the historians,” Dr. Franklin recalled in a 1974 lecture, “the lawyers argued that the history of segregation laws reveals that their main purpose was to organize the community upon the basis of a superior white and an inferior Negro caste.”

Dr. Franklin also participated in the 1965 march from Selma to Montgomery, Ala., with Dr. King.

“One might argue that the historian is the conscience of the nation, if honesty and consistency are factors that nurture the conscience,” Dr. Franklin said. Still, he warned, if scholars engage in advocacy as well as scholarship they must “make it clear which activity they are engaging in at any given time.”

President Bill Clinton, in awarding him the Medal of Freedom, the nation’s highest civilian honor, in 1995, said Dr. Franklin had never confused “his role as an advocate with his role as a scholar,” adding that he had held “to the conviction that integration is a national necessity.”

Yet even on so august an occasion, Dr. Franklin could not escape the legacy of discrimination. In a talk he gave in North Carolina 10 years later, he recalled that on the evening before he received the medal at the White House, a woman at a Washington club asked him to fetch her coat, mistaking him for an attendant, and that a man at his hotel had handed him car keys and told him to get his car.

Dr. Franklin’s prestige led Mr. Clinton to select him in 1997 to head the Advisory Board to the President’s Initiative on Race, which was formed to promote dialogue about the country’s race problems.

The panel, however, drew criticism. White supremacists protested at some of its forums, and at others American Indians and other minorities complained that they were being left out of the process. A group of conservative scholars repudiated the panel and formed their own.

And when Dr. Franklin’s group finally issued its report after 15 months, the document was criticized as, in one disillusioned scholar’s words, “a list of platitudes.”

The controversy did little to dim Dr. Franklin’s standing as a groundbreaking historian, however. He was the first African-American president of the American Historical Association; the first black department chairman at a predominantly white institution, Brooklyn College; the first black professor to hold an endowed chair at Duke; the first black chairman of the University of Chicago’s history department; and the first African-American to present a paper at the segregated Southern Historical Association, one of many groups that later elected him its president.

John Hope Franklin was born on Jan. 2, 1915, in Rentiesville, Okla., the son of Buck Colbert Franklin, a lawyer, and Molly Parker Franklin, an elementary school teacher. His parents had moved to Rentiesville, an all-black town, after his father was not allowed to practice law in Louisiana.

In the 1920s, the family moved to Tulsa, and at age 11 he was taken to hear the great civil rights leader W. E. B. Du Bois, with whom Dr. Franklin later became friends.

His youth was marked by frequent brushes with racism. He was forced off an all-white train and made to sit in a segregated section of the Tulsa opera house. He watched black neighborhoods of Tulsa — including the one where his father had his office — being burned during the infamous 1921 race riot, and he was barred from admission to the University of Oklahoma.

Instead, Dr. Franklin attended historically black Fisk University in Nashville, receiving his B.A. in 1935. There he met Aurelia E. Whittington, who would become his wife, and sometime editor, of almost 60 years. They had one son, John Whittington Franklin, who survives him. Mrs. Franklin died in 1999.

In 1997, Dr. Franklin and his son edited an autobiography of his father, Buck Franklin. The book told the tale of free blacks in the Southwestern Indian territories in the late 1800s. Buck Franklin’s father, a former slave owned by Indians, became a cowboy and rancher, while Buck, who taught himself law by mail, was an advocate of black pride and nonviolence.

Before graduating from Fisk, Dr. Franklin considered following his father into law but was persuaded by a white professor, Ted Currier, to make history his field. Professor Currier was said to have borrowed $500 to help Dr. Franklin pursue graduate studies at Harvard. There, Dr. Franklin later recalled, he felt the isolation of being one of only a handful of blacks on campus. He received his master’s degree in 1936 and his Ph.D. in 1941.

Two years later he published his first book, “The Free Negro in North Carolina, 1790-1860,” which explored slaveholders’ hatred and fear of the quarter-million free blacks in the antebellum South. Almost 20 other books followed, either written or edited by Dr. Franklin.

In “The Militant South, 1800-1861” (1956), he described Southern whites’ “martial spirit” and “will to fight,” which he said gave the pre-Civil-War South its reputation for violence. He approvingly quoted Tocqueville’s observation that, because of slavery, “the citizen of the Southern states becomes a sort of domestic dictator from infancy.”

In “Reconstruction After the Civil War” (1961), he wrote that the end of Reconstruction reforms left “the South more than ever attached to the values and outlook that had shaped its history.” He lamented that “in the postwar years, the Union had not made the achievements of the war a foundation for the healthy advancement of the political, social and economic life” of the nation.

“The Emancipation Proclamation” (1963), written a century after the proclamation was issued, examined how it evolved in Lincoln’s mind and its impact on the Civil War and later generations. Dr. Franklin concluded hopefully, “Perhaps in its second century, it would give real meaning and purpose to the Declaration of Independence.”

And in “The Color Line: Legacy for the 21st Century” (1993) he argued that race would remain America’s great problem in the 21st century.

Despite his acute awareness of the South’s troubled racial history, Dr. Franklin was often angrier about Northern racism and frequently defended his adopted home state, North Carolina.

His major biographical project was a 1985 study of George Washington Williams, a self-educated black Civil War veteran and author of a 1,000-page 1882 history of blacks in America from 1619 to 1880. He said he spent nearly 40 years of intermittent research on the project, calling Williams “one of the small heroes of the world.”

Dr. Franklin’s first passion was teaching, and he continued to log classroom time despite his increasing prominence. His teaching career began at Fisk in 1936 and continued over the next 20 years at St. Augustine’s College in Raleigh, N.C., North Carolina College in Durham and Howard University in Washington.

As his first books drew national notice, Dr. Franklin left the world of historically black colleges and went to Brooklyn College, where from 1956 to 1964 he served as chairman of what had been an all-white department.

“Having John Hope Franklin at Brooklyn College in the 1960’s was like having a real star in our midst,” said Senator Barbara Boxer, Democrat of California, who was a student of Dr. Franklin’s. “Students who were lucky enough to get into his class bragged about him from morning until night.”

Dr. Franklin later taught at the University of Chicago before returning to North Carolina in 1982 to teach at Duke and at the Duke Law School.

Dr. Franklin was also a Fulbright professor in Australia and had teaching stints in China and Zimbabwe. He taught at Cambridge University in England; Harvard; Cornell; the University of Wisconsin; the University of Hawaii; the University of California, Berkeley; and other institutions. Since 1992, he had been James B. Duke professor emeritus of history at Duke. A John Hope Franklin Research Center was established in his honor at Duke.

At his home in Durham, Dr. Franklin continued a lifelong hobby of cultivating hundreds of orchids; one species was named for him, the Phalaenopsis John Hope Franklin.

His honors, awards, and professional and civic affiliations were so numerous as to fill several single-spaced pages of a long curriculum vitae. He received more than 100 honorary degrees.

In 2006, he received the John W. Kluge Prize for the Study of Humanities in a ceremony at the Library of Congress. In his prepared remarks he said he had long struggled “to understand how it is that we could seek a land of freedom for the people of Europe and, at the very same time, establish a social and economic system that enslaved people who happen not to be from Europe.”

“I have struggled to understand,” he went on, “how it is that we could fight for independence and, at the very same time, use that newly won independence to enslave many who had joined in the fight for independence.

“As a student of history, I have attempted to explain it historically, but that explanation has not been all that satisfactory. That has left me no alternative but to use my knowledge of history, and whatever other knowledge and skills I have, to present the case for change in keeping with the express purpose of attaining the promised goals of equality for all peoples.”

Pioneering historian John Hope Franklin dies at 94


Associated Press
March 24, 2009

RALEIGH, N.C. (AP) — John Hope Franklin, a towering scholar and pioneer of African-American studies who wrote the seminal text on the black experience in the U.S. and worked on the landmark Supreme Court case that outlawed public school segregation, died Wednesday. He was 94.

David Jarmul, a spokesman at Duke University, where Franklin taught for a decade and was professor emeritus of history, said he died of congestive heart failure at the school's hospital in Durham.

Born and raised in an all-black community in Oklahoma where he was often subjected to humiliating racism, Franklin was later instrumental in bringing down the legal and historical validations of such a world.

As an author, his book "From Slavery to Freedom" was a landmark integration of black history into American history that remains relevant more than 60 years after being published. As a scholar, his research helped Thurgood Marshall and his team at the NAACP win Brown v. Board of Education, the 1954 case that barred the doctrine of "separate but equal" in the nation's public schools.

"It was evident how much the lawyers appreciated what the historians could offer," Franklin later wrote. "For me, and I suspect the same was true for the others, it was exhilarating."

Franklin himself broke numerous color barriers. He was the first black department chair at a predominantly white institution, Brooklyn College; the first black professor to hold an endowed chair at Duke; and the first black president of the American Historical Association.

He often regarded his country like an exasperated relative, frustrated by racism's stubborn power, yet refusing to give up. "I want to be out there on the firing line, helping, directing or doing something to try to make this a better world, a better place to live," Franklin told The Associated Press in 2005.

In November, after Barack Obama broke the ultimate racial barrier in American politics, Franklin called his ascension to the White House "one of the most historic moments, if not the most historic moment, in the history of this country."
"Because of the life John Hope Franklin lived, the public service he rendered, and the scholarship that was the mark of his distinguished career, we all have a richer understanding of who we are as Americans and our journey as a people," Obama said in a statement. "Dr. Franklin will be deeply missed, but his legacy is one that will surely endure."

Obama's achievement fit with Franklin's mission as a historian, to document how blacks lived and served alongside whites from the nation's birth. Black patriots fought at Lexington and Concord, Franklin pointed out in "From Slavery to Freedom," published in 1947. They crossed the Delaware with Washington and explored with Lewis and Clark.
The book sold more than 3.5 million copies and remains required reading in college classrooms. It was based on research Franklin conducted in libraries and archives that didn't allow him to eat lunch or use the bathroom because he was black.

"He was working in a profession that more or less banned him at the outset and ended up its leading practitioner," said Tim Tyson, a history professor at Duke. "And yet, he always managed to keep his grace and his sense of humor."

Late in life, Franklin received more than 130 honorary degrees and the National Association for the Advancement of Colored People's Spingarn Award. In 1993, President Bill Clinton honored Franklin with the Charles Frankel Prize, recognizing scholarly contributions that give "eloquence and meaning ... to our ideas, hopes and dreams as American citizens."

Clinton awarded Franklin the Presidential Medal of Freedom, the nation's highest civilian prize, two years later, and gave him the role for which he was perhaps best known outside academia, as chairman of Clinton's Initiative on Race. It was a job of which Franklin said, "I am not sure this is an honor. It may be a burden."

"John Hope Franklin was one of the most important American historians of the 20th century and one of the people I most admired," Clinton said in a statement. "He graced our country with his life, his scholarship, and his citizenship."

As he aged, Franklin spent more time in the greenhouse behind his home, where he nursed orchids, than in libraries. He fell in love with the flowers because "they're full of challenges, mystery" — the same reasons he fell in love with history.

In June, Franklin had a small role in the movie based on the book "Blood Done Signed My Name," about the public slaying of black man in Oxford in 1970. Tyson, the book's author, said at the time he wanted Franklin in the movie "because of his dignity and his shining intelligence."

Franklin attended historically black Fisk University, where he met Aurelia Whittington, who would be his wife, editor, helpmate and rock for 58 years, until her death in 1999. He planned to follow his father into law, but the lively lectures of a white professor, Ted Currier, convinced him history was his field. Currier borrowed $500 to send Franklin to Harvard University for graduate studies.

Franklin's doctoral thesis was on free blacks in antebellum North Carolina. His wife spent part of their honeymoon in Washington, D.C., at the Census Bureau, helping him finish. The resulting work, "The Free Negro in North Carolina, 1790-1860," earned Franklin his doctorate and, in 1943, became his first published book. Four years later, he took a job at Howard University. It was the same year "From Slavery to Freedom" was published.

Some of his greatest moments of triumph were marred by bigotry.

His joy at being offered the chair of the Brooklyn College history department in 1956 was tempered by his difficulty getting a loan to buy a house in a "white" neighborhood.

When he was to receive the freedom medal, Franklin hosted a party for some friends at Washington's Cosmos Club, of which he had long been a member. A white woman walked up to him, handed him a slip of paper and demanded that he get her coat. He politely told the woman that any of the uniformed attendants, "and they were all in uniform," would be happy to assist her.

Franklin was born Jan. 2, 1915, in the all-black town of Rentiesville, Okla., where his parents moved in the mistaken belief that separation from whites would mean a better life for their young family. But his father's law office was burned in the race riots in Tulsa, Okla., in 1921, along with the rest of the black section of town.

His mother, Mollie, a teacher, began taking him to school with her when he was 3. He could read and write by 5; by 6, he first became aware of the "racial divide separating me from white America."

Franklin, his mother and sister Anne were ejected from a train when his mother refused the conductor's orders to move to the overcrowded "Negro" coach. As they trudged through the woods back to Rentiesville, young John Hope began to cry.

His mother pulled him aside and told him, "There was not a white person on that train or anywhere else who was any better than I was. She admonished me not to waste my energy by fretting but to save it in order to prove that I was as good as any of them."

On the Net:
Duke University's John Hope Franklin Web site:

John Hope Franklin
Updated: March 25, 2009
By Andrew L. Yarrow

John Hope Franklin was a prolific scholar of African-American history who profoundly influenced thinking about slavery and Reconstruction. He died March 25, 2009, in Durham, N.C. He was 94.

During a career of scholarship, teaching and advocacy that spanned more than six decades, Dr. Franklin was deeply involved in the painful debates that helped reshape America's racial identity, working with the Rev. Dr. Martin Luther King Jr., W.E.B. Du Bois, Thurgood Marshall and other giants of the 20th century.

Dr. Franklin combined idealism about the historian's capacity for positively influencing policy with rigorous research and analysis of African-American and American history, producing such classic works as "From Slavery to Freedom: A History of African-Americans," which has sold more than three million copies. He taught at some of the nation's leading institutions, including Duke, Harvard and the University of Chicago, and as a scholar personally broke several racial barriers.

Dr. Franklin often argued that historians had an important role in shaping policy, and no example was more personally salient than his experience with Thurgood Marshall's team of lawyers as they worked to strike down segregation in the landmark 1954 case Brown v. Board of Education. As he recalled in a 1974 lecture, "Using the findings of the historians, the lawyers argued that the history of segregation laws reveals that their main purpose was to organize the community upon the basis of a superior white and an inferior Negro caste."

John Hope Franklin was born on Jan. 2, 1915, in Rentiesville, Okla., the son of Buck Franklin, a lawyer, and Molly Parker Franklin, an elementary school teacher. His parents had moved to Rentiesville, an all-black town, after his father was not allowed to practice law in Louisiana.

In the 1920s, the family moved to Tulsa, where, Dr. Franklin recalled in a 1997 interview with National Public Radio, his parents "always taught us that we were as good as anybody else" and that "race from their point of view meant nothing." At age 11 he was taken to hear the great civil rights leader and intellectual W.E.B. Du Bois, with whom Dr. Franklin later became friends.

Barred from admission to the University of Oklahoma, Dr. Franklin attended historically black Fisk University in Nashville, receiving his B.A. in 1935. He went on to Harvard, later recalling the isolation of being one of just a handful of blacks there. He received his master's degree in 1936 and his Ph.D. in 1941.

He married Aurelia E. Whittington in 1940, and they had one son, John.

John Hope Franklin, Scholar of African-American History, Is Dead at 94

Mr. Franklin was a prolific scholar of African-American history who profoundly influenced thinking about slavery and Reconstruction while helping to further the civil rights struggle.

Two History Scholars Are to Split $1 Million Award

John Hope Franklin and Yu Ying-shih will share this year’s John W. Kluge Prize for the Study of Humanity.

One Man's Memory of What the Nation Wants to Forget

John Hope Franklin's memoir, "Mirror to America," offers a portrait of one black family's struggle to serve with honor in a nation that regarded them as less than fully human.

June 10, 2006

Making History

A memoir by a scholar who fundamentally altered the way Americans view their past.

November 27, 2005

Awash in Inequity

The pioneering African-American scholar talks about the continuing problem of segregation, the legacy of Katrina and writing, cooking and working at age 90.

September 18, 2005

February 20, 2000

2 Works Win History Prize

Lincoln Prize for books or films about Civil War will be shared by Allen C Guelzo for Abraham Lincoln: Redeemer President and John Hope Franklin and Loren Schweninger for Runaway Slaves: Rebels on the Plantation

One More River to Cross

Benjamin Schwarz reviews book Runaway Slaves: Rebels on the Plantation by John Hope Franklin and Loren Schweninger


March 27, 2009
John Hope Franklin

Every death leaves a conversation unfinished. The one I regret not finishing with the historian John Hope Franklin, who died Wednesday at the age of 94, focused on what it was like to be a rising black intellectual in the Jim Crow South. In particular, I wanted to hear more about Dec. 7, 1941, the day he and his wife, Aurelia, drove from Charleston, S.C., to Raleigh, N.C. — covering the better part of two states — before they reached home and learned that the Japanese had bombed Pearl Harbor.

Clearly, the car had no radio. But wouldn’t they have heard the news when they stopped to gas up and get something eat? No, he said; I had misunderstood the period. Black families motoring through the Jim Crow South packed box lunches to avoid the humiliation of being turned away from restaurants. They relieved themselves in roadside ditches because service-station restrooms were often closed to them. They worried incessantly about breakdowns and flat tires that could leave them stranded at the mercy of bigots who demeaned and wished them ill.

“You took your life into your hands every time you went out on the road,” he said. It was, of course, a relief to come upon a black-owned service station. But he said that you could drive from Charleston quite nearly to Baltimore before finding one.

We had that conversation in 2006, in connection with an article I wrote for this page on his powerful autobiography “Mirror to America.” I had known him for more than 30 years by that time. I had long been aware that he had reshaped the scholarship of the South and had given birth to African-American history with books such as “From Slavery to Freedom,” “The Militant South, 1800-1860” and his groundbreaking work on free Negroes in antebellum North Carolina.

I first met him as a student during the 1970s — a time of big hair and loud voices — when young radicals too often dismissed distinguished black elders as Uncle Toms. This was a mistake based on the fashion of the moment. The older I got, the more we talked. And the more we talked, the more I became attuned to the fierce militancy that burned in his voice and in his prose.

He continued to speak out against injustice and never let himself be flattered into the role of the black factotum who would conveniently declare the race problem solved. If anything, the militancy grew fiercer over time. It reached its zenith in “Mirror to America,” which recounts in vivid detail how the decision to segregate the armed forces poisoned American civic culture. He refused to serve during World War II for a country “that had no respect for me [and] little interest in my well-being.”

I had hoped to sit down with him one more time to reconstruct that trip back in 1941. I must now do that without him.


Copyright 2009 The New York Times Company

Political and Economic Democracy vs. the Continued Domination of the Banks, Corporations, and Wall Street


A brilliant and scathingly hilarious piece by Matt Taibbi (talk about gallows humor!) who tells the whole truth and nothing but with respect to Wall Street, the banks, and corporate America's massive hostage taking strangulation of the global economy and the enormous political stakes that we are now ALL faced with--the Obama administration included. What is absolutely clearer than ever is the bottomline fact that the quality and content of our collective grassroots response from the Left will clearly determine whether we, the People or the predatory capitalist monsters who are described so dramatically (and accurately) in this article will ultimately prevail in this epic battle.


The Big Takeover

The global economic crisis isn't about money - it's about power. How Wall Street insiders are using the bailout to stage a revolution

March 19, 2009
Rolling Stone

It's over — we're officially, royally fucked. No empire can survive being rendered a permanent laughingstock, which is what happened as of a few weeks ago, when the buffoons who have been running things in this country finally went one step too far. It happened when Treasury Secretary Timothy Geithner was forced to admit that he was once again going to have to stuff billions of taxpayer dollars into a dying insurance giant called AIG, itself a profound symbol of our national decline — a corporation that got rich insuring the concrete and steel of American industry in the country's heyday, only to destroy itself chasing phantom fortunes at the Wall Street card tables, like a dissolute nobleman gambling away the family estate in the waning days of the British Empire.

The latest bailout came as AIG admitted to having just posted the largest quarterly loss in American corporate history — some $61.7 billion. In the final three months of last year, the company lost more than $27 million every hour. That's $465,000 a minute, a yearly income for a median American household every six seconds, roughly $7,750 a second. And all this happened at the end of eight straight years that America devoted to frantically chasing the shadow of a terrorist threat to no avail, eight years spent stopping every citizen at every airport to search every purse, bag, crotch and briefcase for juice boxes and explosive tubes of toothpaste. Yet in the end, our government had no mechanism for searching the balance sheets of companies that held life-or-death power over our society and was unable to spot holes in the national economy the size of Libya (whose entire GDP last year was smaller than AIG's 2008 losses).

So it's time to admit it: We're fools, protagonists in a kind of gruesome comedy about the marriage of greed and stupidity. And the worst part about it is that we're still in denial — we still think this is some kind of unfortunate accident, not something that was created by the group of psychopaths on Wall Street whom we allowed to gang-rape the American Dream. When Geithner announced the new $30 billion bailout, the party line was that poor AIG was just a victim of a lot of shitty luck — bad year for business, you know, what with the financial crisis and all. Edward Liddy, the company's CEO, actually compared it to catching a cold: "The marketplace is a pretty crummy place to be right now," he said. "When the world catches pneumonia, we get it too." In a pathetic attempt at name-dropping, he even whined that AIG was being "consumed by the same issues that are driving house prices down and 401K statements down and Warren Buffet's investment portfolio down."

Liddy made AIG sound like an orphan begging in a soup line, hungry and sick from being left out in someone else's financial weather. He conveniently forgot to mention that AIG had spent more than a decade systematically scheming to evade U.S. and international regulators, or that one of the causes of its "pneumonia" was making colossal, world-sinking $500 billion bets with money it didn't have, in a toxic and completely unregulated derivatives market.

Nor did anyone mention that when AIG finally got up from its seat at the Wall Street casino, broke and busted in the afterdawn light, it owed money all over town — and that a huge chunk of your taxpayer dollars in this particular bailout scam will be going to pay off the other high rollers at its table. Or that this was a casino unique among all casinos, one where middle-class taxpayers cover the bets of billionaires.

People are pissed off about this financial crisis, and about this bailout, but they're not pissed off enough. The reality is that the worldwide economic meltdown and the bailout that followed were together a kind of revolution, a coup d'état. 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.

The crisis was the coup de grâce: Given virtually free rein over the economy, these same insiders first wrecked the financial world, then cunningly granted themselves nearly unlimited emergency powers to clean up their own mess. And so the gambling-addict leaders of companies like AIG end up not penniless and in jail, but with an Alien-style death grip on the Treasury and the Federal Reserve — "our partners in the government," as Liddy put it with a shockingly casual matter-of-factness after the most recent bailout.

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.


The best way to understand the financial crisis is to understand the meltdown at AIG. AIG is what happens when short, bald managers of otherwise boring financial bureaucracies start seeing Brad Pitt in the mirror. This is a company that built a giant fortune across more than a century by betting on safety-conscious policyholders — people who wear seat belts and build houses on high ground — and then blew it all in a year or two by turning their entire balance sheet over to a guy who acted like making huge bets with other people's money would make his dick bigger.

That guy — the Patient Zero of the global economic meltdown — was one Joseph Cassano, the head of a tiny, 400-person unit within the company called AIG Financial Products, or AIGFP. Cassano, a pudgy, balding Brooklyn College grad with beady eyes and way too much forehead, cut his teeth in the Eighties working for Mike Milken, the granddaddy of modern Wall Street debt alchemists. Milken, who pioneered the creative use of junk bonds, relied on messianic genius and a whole array of insider schemes to evade detection while wreaking financial disaster. Cassano, by contrast, was just a greedy little turd with a knack for selective accounting who ran his scam right out in the open, thanks to Washington's deregulation of the Wall Street casino. "It's all about the regulatory environment," says a government source involved with the AIG bailout. "These guys look for holes in the system, for ways they can do trades without government interference. Whatever is unregulated, all the action is going to pile into that."

The mess Cassano created had its roots in an investment boom fueled in part by a relatively new type of financial instrument called a collateralized-debt obligation. A CDO is like a box full of diced-up assets. They can be anything: mortgages, corporate loans, aircraft loans, credit-card loans, even other CDOs. So as X mortgage holder pays his bill, and Y corporate debtor pays his bill, and Z credit-card debtor pays his bill, money flows into the box.

The key idea behind a CDO is that there will always be at least some money in the box, regardless of how dicey the individual assets inside it are. No matter how you look at a single unemployed ex-con trying to pay the note on a six-bedroom house, he looks like a bad investment. But dump his loan in a box with a smorgasbord of auto loans, credit-card debt, corporate bonds and other crap, and you can be reasonably sure that somebody is going to pay up. Say $100 is supposed to come into the box every month. Even in an apocalypse, when $90 in payments might default, you'll still get $10. What the inventors of the CDO did is divide up the box into groups of investors and put that $10 into its own level, or "tranche." They then convinced ratings agencies like Moody's and S&P to give that top tranche the highest AAA rating — meaning it has close to zero credit risk.

Suddenly, thanks to this financial seal of approval, banks had a way to turn their shittiest mortgages and other financial waste into investment-grade paper and sell them to institutional investors like pensions and insurance companies, which were forced by regulators to keep their portfolios as safe as possible. Because CDOs offered higher rates of return than truly safe products like Treasury bills, it was a win-win: Banks made a fortune selling CDOs, and big investors made much more holding them.

The problem was, none of this was based on reality. "The banks knew they were selling crap," says a London-based trader from one of the bailed-out companies. To get AAA ratings, the CDOs relied not on their actual underlying assets but on crazy mathematical formulas that the banks cooked up to make the investments look safer than they really were. "They had some back room somewhere where a bunch of Indian guys who'd been doing nothing but math for God knows how many years would come up with some kind of model saying that this or that combination of debtors would only default once every 10,000 years," says one young trader who sold CDOs for a major investment bank. "It was nuts."

Now that even the crappiest mortgages could be sold to conservative investors, the CDOs spurred a massive explosion of irresponsible and predatory lending. In fact, there was such a crush to underwrite CDOs that it became hard to find enough subprime mortgages — read: enough unemployed meth dealers willing to buy million-dollar homes for no money down — to fill them all. As banks and investors of all kinds took on more and more in CDOs and similar instruments, they needed some way to hedge their massive bets — some kind of insurance policy, in case the housing bubble burst and all that debt went south at the same time. This was particularly true for investment banks, many of which got stuck holding or "warehousing" CDOs when they wrote more than they could sell. And that's were Joe Cassano came in.

Known for his boldness and arrogance, Cassano took over as chief of AIGFP in 2001. He was the favorite of Maurice "Hank" Greenberg, the head of AIG, who admired the younger man's hard-driving ways, even if neither he nor his successors fully understood exactly what it was that Cassano did. According to a source familiar with AIG's internal operations, Cassano basically told senior management, "You know insurance, I know investments, so you do what you do, and I'll do what I do — leave me alone." Given a free hand within the company, Cassano set out from his offices in London to sell a lucrative form of "insurance" to all those investors holding lots of CDOs. His tool of choice was another new financial instrument known as a credit-default swap, or CDS.

The CDS was popularized by J.P. Morgan, in particular by a group of young, creative bankers who would later become known as the "Morgan Mafia," as many of them would go on to assume influential positions in the finance world. In 1994, in between booze and games of tennis at a resort in Boca Raton, Florida, the Morgan gang plotted a way to help boost the bank's returns. One of their goals was to find a way to lend more money, while working around regulations that required them to keep a set amount of cash in reserve to back those loans. What they came up with was an early version of the credit-default swap.

In its simplest form, a CDS is just a bet on an outcome. Say Bank A writes a million-dollar mortgage to the Pope for a town house in the West Village. Bank A wants to hedge its mortgage risk in case the Pope can't make his monthly payments, so it buys CDS protection from Bank B, wherein it agrees to pay Bank B a premium of $1,000 a month for five years. In return, Bank B agrees to pay Bank A the full million-dollar value of the Pope's mortgage if he defaults. In theory, Bank A is covered if the Pope goes on a meth binge and loses his job.

When Morgan presented their plans for credit swaps to regulators in the late Nineties, they argued that if they bought CDS protection for enough of the investments in their portfolio, they had effectively moved the risk off their books. Therefore, they argued, they should be allowed to lend more, without keeping more cash in reserve. A whole host of regulators — from the Federal Reserve to the Office of the Comptroller of the Currency — accepted the argument, and Morgan was allowed to put more money on the street.

What Cassano did was to transform the credit swaps that Morgan popularized into the world's largest bet on the housing boom. In theory, at least, there's nothing wrong with buying a CDS to insure your investments. Investors paid a premium to AIGFP, and in return the company promised to pick up the tab if the mortgage-backed CDOs went bust. But as Cassano went on a selling spree, the deals he made differed from traditional insurance in several significant ways. First, the party selling CDS protection didn't have to post any money upfront. When a $100 corporate bond is sold, for example, someone has to show 100 actual dollars. But when you sell a $100 CDS guarantee, you don't have to show a dime. So Cassano could sell investment banks billions in guarantees without having any single asset to back it up.

Secondly, Cassano was selling so-called "naked" CDS deals. In a "naked" CDS, neither party actually holds the underlying loan. In other words, Bank B not only sells CDS protection to Bank A for its mortgage on the Pope — it turns around and sells protection to Bank C for the very same mortgage. This could go on ad nauseam: You could have Banks D through Z also betting on Bank A's mortgage. Unlike traditional insurance, Cassano was offering investors an opportunity to bet that someone else's house would burn down, or take out a term life policy on the guy with AIDS down the street. It was no different from gambling, the Wall Street version of a bunch of frat brothers betting on Jay Feely to make a field goal. Cassano was taking book for every bank that bet short on the housing market, but he didn't have the cash to pay off if the kick went wide.

In a span of only seven years, Cassano sold some $500 billion worth of CDS protection, with at least $64 billion of that tied to the subprime mortgage market. AIG didn't have even a fraction of that amount of cash on hand to cover its bets, but neither did it expect it would ever need any reserves. So long as defaults on the underlying securities remained a highly unlikely proposition, AIG was essentially collecting huge and steadily climbing premiums by selling insurance for the disaster it thought would never come.

Initially, at least, the revenues were enormous: AIGFP's returns went from $737 million in 1999 to $3.2 billion in 2005. Over the past seven years, the subsidiary's 400 employees were paid a total of $3.5 billion; Cassano himself pocketed at least $280 million in compensation. Everyone made their money — and then it all went to shit.


Cassano's outrageous gamble wouldn't have been possible had he not had the good fortune to take over AIGFP just as Sen. Phil Gramm — a grinning, laissez-faire ideologue from Texas — had finished engineering the most dramatic deregulation of the financial industry since Emperor Hien Tsung invented paper money in 806 A.D. For years, Washington had kept a watchful eye on the nation's banks. Ever since the Great Depression, commercial banks — those that kept money on deposit for individuals and businesses — had not been allowed to double as investment banks, which raise money by issuing and selling securities. The Glass-Steagall Act, passed during the Depression, also prevented banks of any kind from getting into the insurance business.

But in the late Nineties, a few years before Cassano took over AIGFP, all that changed. The Democrats, tired of getting slaughtered in the fundraising arena by Republicans, decided to throw off their old reliance on unions and interest groups and become more "business-friendly." Wall Street responded by flooding Washington with money, buying allies in both parties. In the 10-year period beginning in 1998, financial companies spent $1.7 billion on federal campaign contributions and another $3.4 billion on lobbyists. They quickly got what they paid for. In 1999, Gramm co-sponsored a bill that repealed key aspects of the Glass-Steagall Act, smoothing the way for the creation of financial megafirms like Citigroup. The move did away with the built-in protections afforded by smaller banks. In the old days, a local banker knew the people whose loans were on his balance sheet: He wasn't going to give a million-dollar mortgage to a homeless meth addict, since he would have to keep that loan on his books. But a giant merged bank might write that loan and then sell it off to some fool in China, and who cared?

The very next year, Gramm compounded the problem by writing a sweeping new law called the Commodity Futures Modernization Act that made it impossible to regulate credit swaps as either gambling or securities. Commercial banks — which, thanks to Gramm, were now competing directly with investment banks for customers — were driven to buy credit swaps to loosen capital in search of higher yields. "By ruling that credit-default swaps were not gaming and not a security, the way was cleared for the growth of the market," said Eric Dinallo, head of the New York State Insurance Department.

The blanket exemption meant that Joe Cassano could now sell as many CDS contracts as he wanted, building up as huge a position as he wanted, without anyone in government saying a word. "You have to remember, investment banks aren't in the business of making huge directional bets," says the government source involved in the AIG bailout. When investment banks write CDS deals, they hedge them. But insurance companies don't have to hedge. And that's what AIG did. "They just bet massively long on the housing market," says the source. "Billions and billions."

In the biggest joke of all, Cassano's wheeling and dealing was regulated by the Office of Thrift Supervision, an agency that would prove to be defiantly uninterested in keeping watch over his operations. How a behemoth like AIG came to be regulated by the little-known and relatively small OTS is yet another triumph of the deregulatory instinct. Under another law passed in 1999, certain kinds of holding companies could choose the OTS as their regulator, provided they owned one or more thrifts (better known as savings-and-loans). Because the OTS was viewed as more compliant than the Fed or the Securities and Exchange Commission, companies rushed to reclassify themselves as thrifts. In 1999, AIG purchased a thrift in Delaware and managed to get approval for OTS regulation of its entire operation.

Making matters even more hilarious, AIGFP — a London-based subsidiary of an American insurance company — ought to have been regulated by one of Europe's more stringent regulators, like Britain's Financial Services Authority. But the OTS managed to convince the Europeans that it had the muscle to regulate these giant companies. By 2007, the EU had conferred legitimacy to OTS supervision of three mammoth firms — GE, AIG and Ameriprise.

That same year, as the subprime crisis was exploding, the Government Accountability Office criticized the OTS, noting a "disparity between the size of the agency and the diverse firms it oversees." Among other things, the GAO report noted that the entire OTS had only one insurance specialist on staff — and this despite the fact that it was the primary regulator for the world's largest insurer!

"There's this notion that the regulators couldn't do anything to stop AIG," says a government official who was present during the bailout. "That's bullshit. What you have to understand is that these regulators have ultimate power. They can send you a letter and say, 'You don't exist anymore,' and that's basically that. They don't even really need due process. The OTS could have said, 'We're going to pull your charter; we're going to pull your license; we're going to sue you.' And getting sued by your primary regulator is the kiss of death."

When AIG finally blew up, the OTS regulator ostensibly in charge of overseeing the insurance giant — a guy named C.K. Lee — basically admitted that he had blown it. His mistake, Lee said, was that he believed all those credit swaps in Cassano's portfolio were "fairly benign products." Why? Because the company told him so. "The judgment the company was making was that there was no big credit risk," he explained. (Lee now works as Midwest region director of the OTS; the agency declined to make him available for an interview.)

In early March, after the latest bailout of AIG, Treasury Secretary Timothy Geithner took what seemed to be a thinly veiled shot at the OTS, calling AIG a "huge, complex global insurance company attached to a very complicated investment bank/hedge fund that was allowed to build up without any adult supervision." But even without that "adult supervision," AIG might have been OK had it not been for a complete lack of internal controls. For six months before its meltdown, according to insiders, the company had been searching for a full-time chief financial officer and a chief risk-assessment officer, but never got around to hiring either. That meant that the 18th-largest company in the world had no one checking to make sure its balance sheet was safe and no one keeping track of how much cash and assets the firm had on hand. The situation was so bad that when outside consultants were called in a few weeks before the bailout, senior executives were unable to answer even the most basic questions about their company — like, for instance, how much exposure the firm had to the residential-mortgage market.


Ironically, when reality finally caught up to Cassano, it wasn't because the housing market crapped but because of AIG itself. Before 2005, the company's debt was rated triple-A, meaning he didn't need to post much cash to sell CDS protection: The solid creditworthiness of AIG's name was guarantee enough. But the company's crummy accounting practices eventually caused its credit rating to be downgraded, triggering clauses in the CDS contracts that forced Cassano to post substantially more collateral to back his deals.

By the fall of 2007, it was evident that AIGFP's portfolio had turned poisonous, but like every good Wall Street huckster, Cassano schemed to keep his insane, Earth-swallowing gamble hidden from public view. That August, balls bulging, he announced to investors on a conference call that "it is hard for us, without being flippant, to even see a scenario within any kind of realm of reason that would see us losing $1 in any of those transactions." As he spoke, his CDS portfolio was racking up $352 million in losses. When the growing credit crunch prompted senior AIG executives to re-examine its liabilities, a company accountant named Joseph St. Denis became "gravely concerned" about the CDS deals and their potential for mass destruction. Cassano responded by personally forcing the poor sap out of the firm, telling him he was "deliberately excluded" from the financial review for fear that he might "pollute the process."

The following February, when AIG posted $11.5 billion in annual losses, it announced the resignation of Cassano as head of AIGFP, saying an auditor had found a "material weakness" in the CDS portfolio. But amazingly, the company not only allowed Cassano to keep $34 million in bonuses, it kept him on as a consultant for $1 million a month. In fact, Cassano remained on the payroll and kept collecting his monthly million through the end of September 2008, even after taxpayers had been forced to hand AIG $85 billion to patch up his fuck-ups. When asked in October why the company still retained Cassano at his $1 million-a-month rate despite his role in the probable downfall of Western civilization, CEO Martin Sullivan told Congress with a straight face that AIG wanted to "retain the 20-year knowledge that Mr. Cassano had." (Cassano, who is apparently hiding out in his lavish town house near Harrods in London, could not be reached for comment.)

What sank AIG in the end was another credit downgrade. Cassano had written so many CDS deals that when the company was facing another downgrade to its credit rating last September, from AA to A, it needed to post billions in collateral — not only more cash than it had on its balance sheet but more cash than it could raise even if it sold off every single one of its liquid assets. Even so, management dithered for days, not believing the company was in serious trouble. AIG was a dried-up prune, sapped of any real value, and its top executives didn't even know it.

On the weekend of September 13th, AIG's senior leaders were summoned to the offices of the New York Federal Reserve. Regulators from Dinallo's insurance office were there, as was Geithner, then chief of the New York Fed. Treasury Secretary Hank Paulson, who spent most of the weekend preoccupied with the collapse of Lehman Brothers, came in and out. Also present, for reasons that would emerge later, was Lloyd Blankfein, CEO of Goldman Sachs. The only relevant government office that wasn't represented was the regulator that should have been there all along: the OTS.

"We sat down with Paulson, Geithner and Dinallo," says a person present at the negotiations. "I didn't see the OTS even once."

On September 14th, according to another person present, Treasury officials presented Blankfein and other bankers in attendance with an absurd proposal: "They basically asked them to spend a day and check to see if they could raise the money privately." The laughably short time span to complete the mammoth task made the answer a foregone conclusion. At the end of the day, the bankers came back and told the government officials, gee, we checked, but we can't raise that much. And the bailout was on.

A short time later, it came out that AIG was planning to pay some $90 million in deferred compensation to former executives, and to accelerate the payout of $277 million in bonuses to others — a move the company insisted was necessary to "retain key employees." When Congress balked, AIG canceled the $90 million in payments.

Then, in January 2009, the company did it again. After all those years letting Cassano run wild, and after already getting caught paying out insane bonuses while on the public till, AIG decided to pay out another $450 million in bonuses. And to whom? To the 400 or so employees in Cassano's old unit, AIGFP, which is due to go out of business shortly! Yes, that's right, an average of $1.1 million in taxpayer-backed money apiece, to the very people who spent the past decade or so punching a hole in the fabric of the universe!

"We, uh, needed to keep these highly expert people in their seats," AIG spokeswoman Christina Pretto says to me in early February.

"But didn't these 'highly expert people' basically destroy your company?" I ask.

Pretto protests, says this isn't fair. The employees at AIGFP have already taken pay cuts, she says. Not retaining them would dilute the value of the company even further, make it harder to wrap up the unit's operations in an orderly fashion.

The bonuses are a nice comic touch highlighting one of the more outrageous tangents of the bailout age, namely the fact that, even with the planet in flames, some members of the Wall Street class can't even get used to the tragedy of having to fly coach. "These people need their trips to Baja, their spa treatments, their hand jobs," says an official involved in the AIG bailout, a serious look on his face, apparently not even half-kidding. "They don't function well without them."


So that's the first step in wall street's power grab: making up things like credit-default swaps and collateralized-debt obligations, financial products so complex and inscrutable that ordinary American dumb people — to say nothing of federal regulators and even the CEOs of major corporations like AIG — are too intimidated to even try to understand them. That, combined with wise political investments, enabled the nation's top bankers to effectively scrap any meaningful oversight of the financial industry. In 1997 and 1998, 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 90-8 in the Senate, with the support of 38 Democrats, including some names that might surprise you: Joe Biden, John Kerry, Tom Daschle, Dick Durbin, even John Edwards.

The act helped create the too-big-to-fail financial behemoths like Citigroup, AIG and Bank of America — and in turn helped those companies slowly crush their smaller competitors, leaving the major Wall Street firms with even more money and power to lobby for further deregulatory measures. "We're moving to an oligopolistic situation," Kenneth Guenther, a top executive with the Independent Community Bankers of America, lamented after the Gramm measure was passed.

The situation worsened in 2004, in an extraordinary move toward deregulation that never even got to a vote. At the time, the European Union was threatening to more strictly regulate the foreign operations of America's big investment banks if the U.S. didn't strengthen its own oversight. So the top five investment banks got together on April 28th of that year and — with the helpful assistance of then-Goldman Sachs chief and future Treasury Secretary Hank Paulson — made a pitch to George Bush's SEC chief at the time, William Donaldson, himself a former investment banker. The banks generously volunteered to submit to new rules restricting them from engaging in excessively risky activity. In exchange, they asked to be released from any lending restrictions. The discussion about the new rules lasted just 55 minutes, and there was not a single representative of a major media outlet there to record the fateful decision.

Donaldson OK'd the proposal, and the new rules were enough to get the EU to drop its threat to regulate the five firms. The only catch was, neither Donaldson nor his successor, Christopher Cox, actually did any regulating of the banks. They named a commission of seven people to oversee the five companies, whose combined assets came to total more than $4 trillion. But in the last year and a half of Cox's tenure, the group had no director and did not complete a single inspection. Great deal for the banks, which originally complained about being regulated by both Europe and the SEC, and ended up being regulated by no one.

Once the capital requirements were gone, those top five banks went hog-wild, jumping ass-first into the then-raging housing bubble. One of those was Bear Stearns, which used its freedom to drown itself in bad mortgage loans. In the short period between the 2004 change and Bear's collapse, the firm's debt-to-equity ratio soared from 12-1 to an insane 33-1. Another culprit was Goldman Sachs, which also had the good fortune, around then, to see its CEO, a bald-headed Frankensteinian goon named Hank Paulson (who received an estimated $200 million tax deferral by joining the government), ascend to Treasury secretary.

Freed from all capital restraints, sitting pretty with its man running the Treasury, Goldman jumped into the housing craze just like everyone else on Wall Street. Although it famously scored an $11 billion coup in 2007 when one of its trading units smartly shorted the housing market, the move didn't tell the whole story. In truth, Goldman still had a huge exposure come that fateful summer of 2008 — to none other than Joe Cassano.

Goldman Sachs, it turns out, was Cassano's biggest customer, with $20 billion of exposure in Cassano's CDS book. Which might explain why Goldman chief Lloyd Blankfein was in the room with ex-Goldmanite Hank Paulson that weekend of September 13th, when the federal government was supposedly bailing out AIG.

When asked why Blankfein was there, one of the government officials who was in the meeting shrugs. "One might say that it's because Goldman had so much exposure to AIGFP's portfolio," he says. "You'll never prove that, but one might suppose."

Market analyst Eric Salzman is more blunt. "If AIG went down," he says, "there was a good chance Goldman would not be able to collect." The AIG bailout, in effect, was Goldman bailing out Goldman.

Eventually, Paulson went a step further, elevating another ex-Goldmanite named Edward Liddy to run AIG — a company whose bailout money would be coming, in part, from the newly created TARP program, administered by another Goldman banker named Neel Kashkari.


There are plenty of people who have noticed, in recent years, that when they lost their homes to foreclosure or were forced into bankruptcy because of crippling credit-card debt, no one in the government was there to rescue them. But when Goldman Sachs — a company whose average employee still made more than $350,000 last year, even in the midst of a depression — was suddenly faced with the possibility of losing money on the unregulated insurance deals it bought for its insane housing bets, the government was there in an instant to patch the hole. That's the essence of the bailout: rich bankers bailing out rich bankers, using the taxpayers' credit card.

The people who have spent their lives cloistered in this Wall Street community aren't much for sharing information with the great unwashed. Because all of this shit is complicated, because most of us mortals don't know what the hell LIBOR is or how a REIT works or how to use the word "zero coupon bond" in a sentence without sounding stupid — well, then, the people who do speak this idiotic language cannot under any circumstances be bothered to explain it to us and instead spend a lot of time rolling their eyes and asking us to trust them.

That roll of the eyes is a key part of the psychology of Paulsonism. The state is now being asked not just to call off its regulators or give tax breaks or funnel a few contracts to connected companies; it is intervening directly in the economy, for the sole purpose of preserving the influence of the megafirms. In essence, Paulson used the bailout to transform the government into a giant bureaucracy of entitled assholedom, one that would socialize "toxic" risks but keep both the profits and the management of the bailed-out firms in private hands. Moreover, this whole process would be done in secret, away from the prying eyes of NASCAR dads, broke-ass liberals who read translations of French novels, subprime mortgage holders and other such financial losers.

Some aspects of the bailout were secretive to the point of absurdity. In fact, if you look closely at just a few lines in the Federal Reserve's weekly public disclosures, you can literally see the moment where a big chunk of your money disappeared for good. The H4 report (called "Factors Affecting Reserve Balances") summarizes the activities of the Fed each week. You can find it online, and it's pretty much the only thing the Fed ever tells the world about what it does. For the week ending February 18th, the number under the heading "Repurchase Agreements" on the table is zero. It's a significant number.

Why? In the pre-crisis days, the Fed used to manage the money supply by periodically buying and selling securities on the open market through so-called Repurchase Agreements, or Repos. The Fed would typically dump $25 billion or so in cash onto the market every week, buying up Treasury bills, U.S. securities and even mortgage-backed securities from institutions like Goldman Sachs and J.P. Morgan, who would then "repurchase" them in a short period of time, usually one to seven days. This was the Fed's primary mechanism for controlling interest rates: Buying up securities gives banks more money to lend, which makes interest rates go down. Selling the securities back to the banks reduces the money available for lending, which makes interest rates go up.

If you look at the weekly H4 reports going back to the summer of 2007, you start to notice something alarming. At the start of the credit crunch, around August of that year, you see the Fed buying a few more Repos than usual — $33 billion or so. By November, as private-bank reserves were dwindling to alarmingly low levels, the Fed started injecting even more cash than usual into the economy: $48 billion. By late December, the number was up to $58 billion; by the following March, around the time of the Bear Stearns rescue, the Repo number had jumped to $77 billion. In the week of May 1st, 2008, the number was $115 billion — "out of control now," according to one congressional aide. For the rest of 2008, the numbers remained similarly in the stratosphere, the Fed pumping as much as $125 billion of these short-term loans into the economy — until suddenly, at the start of this year, the number drops to nothing. Zero.

The reason the number has dropped to nothing is that the Fed had simply stopped using relatively transparent devices like repurchase agreements to pump its money into the hands of private companies. By early 2009, a whole series of new government operations had been invented to inject cash into the economy, most all of them completely secretive and with names you've never heard of. There is the Term Auction Facility, the Term Securities Lending Facility, the Primary Dealer Credit Facility, the Commercial Paper Funding Facility and a monster called the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (boasting the chat-room horror-show acronym ABCPMMMFLF). For good measure, there's also something called a Money Market Investor Funding Facility, plus three facilities called Maiden Lane I, II and III to aid bailout recipients like Bear Stearns and AIG.

While the rest of America, and most of Congress, have been bugging out about the $700 billion bailout program called TARP, all of these newly created organisms in the Federal Reserve zoo have quietly been pumping not billions but trillions of dollars into the hands of private companies (at least $3 trillion so far in loans, with as much as $5.7 trillion more in guarantees of private investments). Although this technically isn't taxpayer money, it still affects taxpayers directly, because the activities of the Fed impact the economy as a whole. And this new, secretive activity by the Fed completely eclipses the TARP program in terms of its influence on the economy.

No one knows who's getting that money or exactly how much of it is disappearing through these new holes in the hull of America's credit rating. Moreover, no one can really be sure if these new institutions are even temporary at all — or whether they are being set up as permanent, state-aided crutches to Wall Street, designed to systematically suck bad investments off the ledgers of irresponsible lenders.

"They're supposed to be temporary," says Paul-Martin Foss, an aide to Rep. Ron Paul. "But we keep getting notices every six months or so that they're being renewed. They just sort of quietly announce it."

None other than disgraced senator Ted Stevens was the poor sap who made the unpleasant discovery that if Congress didn't like the Fed handing trillions of dollars to banks without any oversight, Congress could apparently go fuck itself — or so said the law. When Stevens asked the GAO about what authority Congress has to monitor the Fed, he got back a letter citing an obscure statute that nobody had ever heard of before: the Accounting and Auditing Act of 1950. The relevant section, 31 USC 714(b), dictated that congressional audits of the Federal Reserve may not include "deliberations, decisions and actions on monetary policy matters." The exemption, as Foss notes, "basically includes everything." According to the law, in other words, the Fed simply cannot be audited by Congress. Or by anyone else, for that matter.


Stevens isn't the only person in Congress to be given the finger by the Fed. In January, when Rep. Alan Grayson of Florida asked Federal Reserve vice chairman Donald Kohn where all the money went — only $1.2 trillion had vanished by then — Kohn gave Grayson a classic eye roll, saying he would be "very hesitant" to name names because it might discourage banks from taking the money.

"Has that ever happened?" Grayson asked. "Have people ever said, 'We will not take your $100 billion because people will find out about it?'"

"Well, we said we would not publish the names of the borrowers, so we have no test of that," Kohn answered, visibly annoyed with Grayson's meddling.

Grayson pressed on, demanding to know on what terms the Fed was lending the money. Presumably it was buying assets and making loans, but no one knew how it was pricing those assets — in other words, no one knew what kind of deal it was striking on behalf of taxpayers. So when Grayson asked if the purchased assets were "marked to market" — a methodology that assigns a concrete value to assets, based on the market rate on the day they are traded — Kohn answered, mysteriously, "The ones that have market values are marked to market." The implication was that the Fed was purchasing derivatives like credit swaps or other instruments that were basically impossible to value objectively — paying real money for God knows what.

"Well, how much of them don't have market values?" asked Grayson. "How much of them are worthless?"

"None are worthless," Kohn snapped.

"Then why don't you mark them to market?" Grayson demanded.

"Well," Kohn sighed, "we are marking the ones to market that have market values."

In essence, the Fed was telling Congress to lay off and let the experts handle things. "It's like buying a car in a used-car lot without opening the hood, and saying, 'I think it's fine,'" says Dan Fuss, an analyst with the investment firm Loomis Sayles. "The salesman says, 'Don't worry about it. Trust me.' It'll probably get us out of the lot, but how much farther? None of us knows."

When one considers the comparatively extensive system of congressional checks and balances that goes into the spending of every dollar in the budget via the normal appropriations process, what's happening in the Fed amounts to something truly revolutionary — a kind of shadow government with a budget many times the size of the normal federal outlay, administered dictatorially by one man, Fed chairman Ben Bernanke. "We spend hours and hours and hours arguing over $10 million amendments on the floor of the Senate, but there has been no discussion about who has been receiving this $3 trillion," says Sen. Bernie Sanders. "It is beyond comprehension."

Count Sanders among those who don't buy the argument that Wall Street firms shouldn't have to face being outed as recipients of public funds, that making this information public might cause investors to panic and dump their holdings in these firms. "I guess if we made that public, they'd go on strike or something," he muses.

And the Fed isn't the only arm of the bailout that has closed ranks. The Treasury, too, has maintained incredible secrecy surrounding its implementation even of the TARP program, which was mandated by Congress. To this date, no one knows exactly what criteria the Treasury Department used to determine which banks received bailout funds and which didn't — particularly the first $350 billion given out under Bush appointee Hank Paulson.

The situation with the first TARP payments grew so absurd that when the Congressional Oversight Panel, charged with monitoring the bailout money, sent a query to Paulson asking how he decided whom to give money to, Treasury responded — and this isn't a joke — by directing the panel to a copy of the TARP application form on its website. Elizabeth Warren, the chair of the Congressional Oversight Panel, was struck nearly speechless by the response.

"Do you believe that?" she says incredulously. "That's not what we had in mind."

Another member of Congress, who asked not to be named, offers his own theory about the TARP process. "I think basically if you knew Hank Paulson, you got the money," he says.

This cozy arrangement created yet another opportunity for big banks to devour market share at the expense of smaller regional lenders. While all the bigwigs at Citi and Goldman and Bank of America who had Paulson on speed-dial got bailed out right away — remember that TARP was originally passed because money had to be lent right now, that day, that minute, to stave off emergency — many small banks are still waiting for help. Five months into the TARP program, some not only haven't received any funds, they haven't even gotten a call back about their applications.

"There's definitely a feeling among community bankers that no one up there cares much if they make it or not," says Tanya Wheeless, president of the Arizona Bankers Association.

Which, of course, is exactly the opposite of what should be happening, since small, regional banks are far less guilty of the kinds of predatory lending that sank the economy. "They're not giving out subprime loans or easy credit," says Wheeless. "At the community level, it's much more bread-and-butter banking."

Nonetheless, the lion's share of the bailout money has gone to the larger, so-called "systemically important" banks. "It's like Treasury is picking winners and losers," says one state banking official who asked not to be identified.

This itself is a hugely important political development. In essence, the bailout accelerated the decline of regional community lenders by boosting the political power of their giant national competitors.

Which, when you think about it, is insane: What had brought us to the brink of collapse in the first place was this relentless instinct for building ever-larger megacompanies, passing deregulatory measures to gradually feed all the little fish in the sea to an ever-shrinking pool of Bigger Fish. To fix this problem, the government should have slowly liquidated these monster, too-big-to-fail firms and broken them down to smaller, more manageable companies. Instead, federal regulators closed ranks and used an almost completely secret bailout process to double down on the same faulty, merger-happy thinking that got us here in the first place, creating a constellation of megafirms under government control that are even bigger, more unwieldy and more crammed to the gills with systemic risk.

In essence, Paulson and his cronies turned the federal government into one gigantic, half-opaque holding company, one whose balance sheet includes the world's most appallingly large and risky hedge fund, a controlling stake in a dying insurance giant, huge investments in a group of teetering megabanks, and shares here and there in various auto-finance companies, student loans, and other failing businesses. Like AIG, this new federal holding company is a firm that has no mechanism for auditing itself and is run by leaders who have very little grasp of the daily operations of its disparate subsidiary operations.

In other words, it's AIG's rip-roaringly shitty business model writ almost inconceivably massive — to echo Geithner, a huge, complex global company attached to a very complicated investment bank/hedge fund that's been allowed to build up without adult supervision. How much of what kinds of crap is actually on our balance sheet, and what did we pay for it? When exactly will the rent come due, when will the money run out? Does anyone know what the hell is going on? And on the linear spectrum of capitalism to socialism, where exactly are we now? Is there a dictionary word that even describes what we are now? It would be funny, if it weren't such a nightmare.


The real question from here is whether the Obama administration is going to move to bring the financial system back to a place where sanity is restored and the general public can have a say in things or whether the new financial bureaucracy will remain obscure, secretive and hopelessly complex. It might not bode well that Geithner, Obama's Treasury secretary, is one of the architects of the Paulson bailouts; as chief of the New York Fed, he helped orchestrate the Goldman-friendly AIG bailout and the secretive Maiden Lane facilities used to funnel funds to the dying company. Neither did it look good when Geithner — himself a protégé of notorious Goldman alum John Thain, the Merrill Lynch chief who paid out billions in bonuses after the state spent billions bailing out his firm — picked a former Goldman lobbyist named Mark Patterson to be his top aide.

In fact, most of Geithner's early moves reek strongly of Paulsonism. He has continually talked about partnering with private investors to create a so-called "bad bank" that would systemically relieve private lenders of bad assets — the kind of massive, opaque, quasi-private bureaucratic nightmare that Paulson specialized in. Geithner even refloated a Paulson proposal to use TALF, one of the Fed's new facilities, to essentially lend cheap money to hedge funds to invest in troubled banks while practically guaranteeing them enormous profits.

God knows exactly what this does for the taxpayer, but hedge-fund managers sure love the idea. "This is exactly what the financial system needs," said Andrew Feldstein, CEO of Blue Mountain Capital and one of the Morgan Mafia. Strangely, there aren't many people who don't run hedge funds who have expressed anything like that kind of enthusiasm for Geithner's ideas.

As complex as all the finances are, the politics aren't hard to follow. By creating an urgent crisis that can only be solved by those fluent in a language too complex for ordinary people to understand, the Wall Street crowd has turned the vast majority of Americans into non-participants in their own political future. There is a reason it used to be a crime in the Confederate states to teach a slave to read: Literacy is power. In the age of the CDS and CDO, most of us are financial illiterates. By making an already too-complex economy even more complex, Wall Street has used the crisis to effect a historic, revolutionary change in our political system — transforming a democracy into a two-tiered state, one with plugged-in financial bureaucrats above and clueless customers below.

The most galling thing about this financial crisis is that so many Wall Street types think they actually deserve not only their huge bonuses and lavish lifestyles but the awesome political power their own mistakes have left them in possession of. When challenged, they talk about how hard they work, the 90-hour weeks, the stress, the failed marriages, the hemorrhoids and gallstones they all get before they hit 40.

"But wait a minute," you say to them. "No one ever asked you to stay up all night eight days a week trying to get filthy rich shorting what's left of the American auto industry or selling $600 billion in toxic, irredeemable mortgages to ex-strippers on work release and Taco Bell clerks. Actually, come to think of it, why are we even giving taxpayer money to you people? Why are we not throwing your ass in jail instead?"

But before you even finish saying that, they're rolling their eyes, because You Don't Get It. These people were never about anything except turning money into money, in order to get more money; valueswise they're on par with crack addicts, or obsessive sexual deviants who burgle homes to steal panties. Yet these are the people in whose hands our entire political future now rests.

Good luck with that, America. And enjoy tax season.

[From Issue 1075 — April 2, 2009]

Rolling Stone