Good ol’ fashion law breakin’

In their exposé on naughty, Enron-style scandal at The Federal Reserve, Josh Marshall and Zach Roth of Talking Points Memo quote a source who says in order to understand the situation with AIG, we must first review what the Fed did for Bear Stearns last year.

Here’s an excerpt:

 Using the loophole it had learned during Bear Stearns, the Fed set up two new companies: Maiden Lane II and Maiden Lane III… lent each Maiden Lane $20 billion and $25 billion and then… To avoid booking a loss on the Fed’s balance sheet, because the Fed had some legal problems if either of these Maiden Lanes lost money, and because of a reporting requirement that Dodd had put into TARP which actually required the Fed to report to the Congress and the public about the cost to taxpayers from ML I, the Fed did some creative accounting. They still paid all of the investors off at full value (par), so that they didn’t lose anything. But they booked the loss on AIG’s balance sheet and kept Maiden Lane clean. This is the hidden story behind how AIG went from losing $38 billion during the first 9 months of 2008 to losing $61 billion in the 4th quarter.

This is also a chapter in the frightening history of reckless, central bank-style coup. We’re talking about some truly deluded bankers run amock with power and madness. But one thing puzzles me, why start back-peddling after you’ve already over-stepped your bounds? Probably just a confidence thing, or growing pains. They’ll get better with practice.