First, the background. Between 2003 and 2007, the largest firms in global finance engaged in a protracted display of recklessness and irresponsibility, of morally hazardous behavior, not seen since the South Sea Bubble and the heyday of John Law, and probably never by institutions with such standing, dignity and presumptive responsibility—and systemic centrality.

Inevitably, when collapse and reversion came, We the Taxpayers were called upon—via our elective and appointed fiscal and monetary authorities—to fix a catastrophe that we had little or no part in causing. And what form has this “fix” taken? Upward of $2 trillion of bailout and stimulus that the Treasury as had to borrow to inject into the banking system and the general economy.

Now we get to the fun part. (I’m italicizing to emphasize the main point.)

It has consisted of the guardians—mainly the Federal Reserve and the Treasury—of the Public Capital—namely, the Full Faith and Credit of the U.S. Taxpayer—lavishing on Wall Street, the villain in the piece, not punishment, not penalty, but a bonanza on a scale probably never seen since the first coinage was struck millennia ago in ancient Phoenicia. In terms of the public interest being fairly served, it is as great a financial scandal as there ever was! And done by the very people we elect and appoint to watch out for us!

Now, let’s turn to the relevant scripture. First, a couple of snippets from The New York Times.

Here’s Edmund L. Andrews reporting on the “stress tests” (May 7): “… regulators gave the banks a break by letting them bolster their capital with unusually strong first-quarter profits …”

Actually, “letting” isn’t really the right word. It implies an option where there is none. Profits are profits and, to the extent not paid out as dividends, increase equity capital, period. Indeed, adding these profits to equity may be about the only honest accounting we’ve seen from the banks recently. And “unusually strong” is the understatement of 10 lifetimes, as we shall see, because it is how and why those “unusually” strong banking profits came to be that is the crux of the scandal.

Next, let’s go to a second Times text, this from my friend Gretchen Morgenson last Saturday, May 9: “Cheap money from government programs translates to delightfully low expenses and the potential for profits where there might otherwise be only losses.”

Gretchen is over the plate in her analysis (with a nice whiff of snark in “delightfully), but it’s a softball she’s serving up when a beanball would be more like it—if the general reader is to be made to grasp how really dreadful, how mind-bendingly inequitable, the Great Geithner Giveaway is. K Street must be wetting its collective bloomers.

For clarity, let’s look to a pair of items from Bloomberg.com. I’ve italicized the especially important points.

First, from Caroline Baum (May 5):

“Dealers can buy, say, a 10-year Treasury note yielding more than 3 percent and finance it (borrow against the securities) [at the Fed] at the overnight repo rate of 0.2 percent.

“No wonder some broker-dealers are applying to the New York Fed to become a primary dealer. At least one dropout is looking for readmission.

“Not only is it a good time to be a primary dealer, it’s a great time to be a bank—assuming you aren’t one already. The Fed is practically giving money away to almost anyone that asks.

“Even if private credit demand is sluggish—it always is in recession—Uncle Sam has a huge appetite. Banks can borrow from the Fed at 0 percent to 25 basis points, turn around and “lend” to Uncle Sam, with the difference going to the bottom line.”

Just in case you don’t grasp the significance of that, let me rephrase: Uncle Sam is handing out virtually free money—via the Fed and the F.D.I.C. guarantee pool—to Goldman Sachs, etc., which those firms are then lending back to Uncle Sam—via Treasury securities issued to finance the bailout, etc.—and pocketing the spread, hence “unusually strong first-quarter profits!”

Private firms borrowing from the Fed/F.D.I.C. to re-lend to the Treasury at a markup? Is that the way the system’s supposed to work? I don’t think so.

But for the facts in the case, let’s turn to Bloomberg.com’s Christine Harper and her May 6 dissection of Goldman Sachs’ footings:

“Trading and principal investments accounted for 61 percent of the bank’s revenue in the first quarter of 2009, up from 59 percent in the first quarter of 2008. Net interest income, the difference between the interest the firm pays and what it charges, doubled from the first quarter of 2008 as the company’s interest expense dropped 76 percent, the filing showed.

“Banks such as Goldman Sachs are benefiting from lower borrowing costs after the Federal Deposit Insurance Corp. in October started guaranteeing bank debt issues that mature within three years. Goldman Sachs has issued about $22 billion of debt that’s guaranteed by the FDIC, according to data compiled by Bloomberg.

“Today’s filing showed the weighted average interest rate paid by Goldman Sachs on its unsecured short-term borrowings dropped to 2.14 percent in March from 3.37 percent in November.”

Nice work if you can get it, and Goldman Sachs apparently can.

Then we need to stir into the pot the fact that the competitive pressures that would normally work to lower the Treasury’s (that is, We the Taxpayers’) borrowing costs have been significantly reduced by the disappearance and decimation of Bear Stearns, Merrill Lynch and Lehman Brothers, and the virtual incapacitation of Citigroup. Finally, the circumstantial evidence is mighty powerful that the Goldmans, etc., are using these “free money” profits to repay the TARP loans they scrambled to take down last fall, and thereby disengage themselves from any meaningful federal oversight.

The questions raised are obvious:

Why doesn’t the Fed lend directly to the Treasury, and save We the Taxpayers the spread cashed by Goldman et al.?

Why just hand the banks these profits without reserving a ratable claim on them—in the form of equity, an excess-profits tax, an interest premium—for We the Taxpayers? Are we not entitled to a piece of the action on terms as good as St. Buffett? It’s our money.

And, with apologies to Pete Seeger, where have all the toxic assets gone?

I hope by now you get my point. This stinks. Stinks!

The callow, squeaky-voiced, miserable sloganeers in charge of effectuating and explaining away this scandal, Messrs. Bernanke and Geithner, like to talk of “transparency.” But in the World According to Goldman Sachs, transparency is a relative term. The philosophy that governed the Clinton administration—namely that if everyone’s lying, no one is—seems merely to have been modified to suit the times. 

Which brings me to the final question.

Does the president understand any of this?

If Mr.Obama doesn’t, that’s bad. If he does, that’s worse.

editorial@observer.com