Imagine that you rent a room to relative - we'll call him Paul - who stops working and then stops paying rent. You let Paul stay because he means well, and promises to get a job and start paying "next month". Imagine, then, how you would feel if Paul started eating and drinking everything in the house, while jacking up your utilities and pay-for-view cable bills. In the real world you might call Paul a liability (or worse). You might even kick his free-loading butt to the curb.
Unfortunately, these dynamics don't apply to Wall Street ...
You see, if you're a financier on Wall Street who promised to be productive, and then became a free-loading couch potato, you don't get kicked to the curb. In fact, debt-laden deals that fail to pay out - and then threaten to drag the entire household down - are even given fancy or neutral sounding names like "capital arbitrage" or "credit default swaps". In a way, it's kind of like your free-loading relative telling you that his joblessness and couch potato habits are really a "leisure recharge" laced with "horizontal power naps".
This article from Bloomberg.com explains how and why this happened on Wall Street in 2008 and 2009.
In a few words, all the toxic crap that stopped producing money in 2008 and 2009 was re-energized by billions of dollars from the Federal Reserve of New York when Treasury Secretary Tim Geithner was still the boss. More importantly, while Geithner headed the NY Fed in 2008 and 2009, American International Group (AIG) was told by Geithner's Fed "to withhold details from the public about the bailed-out insurer’s payments to banks during the depths of the financial crisis."
The impact of this financial muzzling was that AIG was able to pay its partners (in crime) 100 cents on the dollar for the debt-laden toxic instruments that weren't producing income.
This would be akin to one of your respectable relatives borrowing money from you - we'll call you Peter - and then handing it to your free-loading relative, Paul, so he could pay the rent ... and then telling Paul not to tell anyone where he got the money.
So, how do we know that AIG took money from the Fed and was then asked to stay quiet about what it was doing? Because e-mails between the company and it's regulator tell us the following: The NY Fed (incredibly, the "respectable relative") took money from the hardworking U.S. taxpayer (Peter), handed it to AIG (Paul), and then told them not to say anything about what was happening.
In the real world most of us would have figured what was happening and told our "respectable relative" to take a hike. Then we would have kicked our free loading relative (Paul) to the curb. But Wall Street's bankers don't live in the real world. They live in a world where Congress intercedes and guarantees that ambitous but irresponsible financial couch potatoes on Wall Street can take horizontal power naps all day long.
America's bankers have become wards of the state, plain and simple. This is the Peter Principle in the 20th Century.