When Wall Street imploded last year, the Fed and Treasury took "some of the right moves" in order to revive the financial system, says William Cohan, author of House of Cards. But the government blew at least one crucial act of the saga, Cohan says: The backdoor bailout of AIG’s counterparties, notably Goldman Sachs, which received $13 billion of TARP funds via the AIG conduit last fall.

Adding insult to taxpayer injury, Goldman Sachs is primed to benefit should AIG ultimately file for bankruptcy and default on its debt, Cohan reports, having invested about $200 million in related credit default swaps.

Goldman spokesman Michael DuVally confirms the firm spent “over $100 million” on credit default swaps to hedge a $2.5 billion difference between the amount of collateral AIG had posted on certain trades and the amount Goldman thought it was due.

But DuVally says the trades were “wound down because we received the collateral owed,” a reference to the $13 billion the firm received via the AIG conduit last fall.

“They’re gone,” he says. “There will not be a credit event because the government decided to bail AIG out.”To be sure, there's no evidence an AIG default is imminent - or even likely given the government's seemingly endless support.

Still, Cohan disputes DuVally's characterization and AIG's 1-for-20 reverse stock split Wednesday did little to instill confidence in the firm.

Goldman “paid for credit default swaps from third parties to ensure them against a default in AIG debt,” he says in a phone conversation subsequent to the accompanying video. “ If AIG debt does [go into] default they get paid off.”

Furthermore, “it makes no sense to unwind” the trade, Cohan says...

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Updated from 7:00 a.m. EDT

Update: "Big Pay Packages Return to Wall Street," The Wall Street Journal reports. Among the highlights of the story:

• Goldman is on track to pay out as much as $20 billion this year, or about $700,000 per employee. That would be nearly double the firm's $363,000 average last year, and slightly higher than the $661,000 for the average Goldman employee in fiscal 2007.
• Morgan Stanley set aside $2.08 billion for compensation in the first quarter, an unusually high 68% of its revenue. The firm will likely pay out $11 billion to $14 billion in compensation and benefits this year. Credit Suisse analyst Howard Chen projects the company's average pay will approach the $340,000 paid out in fiscal 2007 and up from last year's average of $262,000.

While a weak second-half could diminish those year-end bonuses, "the comeback in compensation so far this year shows how hard it is for Wall Street to break its old habits," The Journal reports.

Earlier: There's been a lot of talk from the Obama administration about reforming Wall Street, but little or no action where it matters most -- compensation, says author and former investment banker William Cohan.

"There's a lot of nice words in the 85-page re-regulation proposal...[about] making sure compensation is tied to behavior and accountability," says the House of Cards author. "But there's not much action going on."

And where there has been action, Cohan notes, its been by Wall Street firms raising salaries to get around new restrictions on bonuses, and paying off TARP so they're less beholden to government oversight.

Cohan believes there must be significant change to the industry's compensation structure in order for any Wall Street reform to be successful. Specifically, the personal fortunes of senior executives must be tied directly to the fate of their firms, he says, echoing the views expressed here by Nouriel Roubini.

Cohan recommends...

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But Madoff's investors are far from satisfied and many are giving a Bronx cheer to Federal regulators for falling to stop the Ponzi scheme in the SEC's case, and the Securities Investor Protection Corp. (SIPC) and IRS for now delaying restitution payments they feel are due.

After first investing with Madoff in 1991, Cynthia Friedman's family put the rest of their life savings in what turned out to be a Ponzi scheme in 2004. "Had the SEC done its job years ago, we would have at least had that money," Friedman says, expressing outrage at the SEC for failing to follow the "road map" provided by would-be Madoff whistleblower Harry Markopolos. "I just don't understand how they could have possibly ignored that," she says.

Jen Meerow, whose parents lost their retirement savings investing with Madoff, discussed her frustrations with SIPC, which she says treats feeder funds like Tremont as one customer, meaning all of Tremont's clients are going to split one $500,000 check (the maximum covered by SIPC) vs. each individual getting up to that amount.

Meerow also expressed frustration with the IRS for not doing more to help investors who'd paid taxes on the (now phony) Madoff gains over the years.

While each has their own particular focus and frustrations, both Meerow and Friedman stressed that the failure of regulators is bigger than them as individuals, or even just the huge Madoff scam.

"It's not just us. If [regulators] don't live up to their responsibility to us - why should they live up to them for you, or anyone else?," Freidman says. "It's in your best interest to help us make systemic changes in the investment industry - make it real this time."

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In sentencing Bernie Madoff to the maximum 150-year prison term Monday, U.S. District Judge Denny Chin cited the "extraordinarily evil" nature of his crimes.

"Here the message must be sent that...this kind of manipulation of the system is not just a bloodless crime that takes place on paper, but one instead that takes a staggering toll," Judge Chin said.

The ruling provided some solace to Madoff's victims who cheered the sentencing. Several Madoff investors spoke at the hearing and "without exception, attacked Madoff as an unfeeling, horrible, relentless pursuer of their money and souls," says Allan Dodds Frank, a veteran journalist and DailyBeast.com correspondent.

In the accompanying video, Frank recounts the "intensity" of the courtroom, how Madoff "pretty impassively" reacted to the sentence, and how quickly he moved when facing his victims...

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From The Business Insider, June 29, 2009:

The book is thrown.

The Ponz-father Bernie Madoff has been sentenced to 150 years in prison.

There was never much chance that Bernie Madoff would get anything other than life. And in fact he got life and then some, since he's only expected to live another 13 years.

His dream of a mere 12-year sentence was always ridiculous.

The judge said in court that the extreme sentence was about sending a message to future financial perps, and that the lack of any cooperation whatsoever would be penalized.

Harvey Pitt is on CNBC arguing that Madoff should've been given a slight glimmer of hope of getting out (25-30, with slight possibility for early release) as an inducement to rat out on his friends.

Madoff victims are said to have cheered in court, but it's unlikely this will satisfy them. Their full force and fury will now turns to his enormous cohort of potential co-conspirators.

For more coverage, see The Business Insider:

• Madoff ordered to forfeit $171 billion
• Busted: Ruth Madoff riding the subway

From The Business Insider, June 29, 2009:

Nine of Bernie Madoff's victimes will speak at his sentencing today. The first victim has just begun.  He is a retired New York City corrections officer, which is exactly the last person you'd ever want to speak at the hearing that decides how long you'll spend under the supervision of corrections officers.

Prosecutors have asked the judge to sentence Madoff to 150 years. The Probation Board has recommended 50 years. His lawyers said he should just get 12. AmLawDaily is liveblogging the whole thing.

More coverage from The Business Insider:

• Madoff ordered to forfeit $171 billion
• Busted: Ruth Madoff riding the subway

Former Ft. Lee, N.J. mayor and current DailyBeast contributor Burt Ross lost $5 million investing with Bernie Madoff, but he considers himself a "survivor" of the massive fraud, rather than a victim.

"We are not a vengeful mob. We are people who anticipate, expect and warrant justice," Ross says of the more-than 1,300 accountholders in Bernard L. Madoff Investment Securities LLC, who lost more than $13 billion as of Dec. 11, The WSJ reports, citing the court-appointed trustee. "Given the heinous nature of crime, the severity, scale, and magnitude [justice means] we never live to see him leave jail. A true life sentence. "

Ross scoffs at Madoff attorney Ira Sorkin's request for a 12-year sentence for his client. The 71-year-old Madoff is facing up to 150 years under federal sentencing guidelines and must forfeit $170 billion, a federal judge ordered Friday evening, after the accompanying video was recorded. The $170 billion represents the "total amount of money that could be connected to the fraud, not the amount stolen or lost," MSNBC reports.

Like most observers, Ross believes it's highly unlikely Madoff acted alone, although he declined to speculate whether Madoff's sons or CFO Frank DiPascali were active participants in the fraud.

But Ross, who in the 1970s refused to take bribes and wore a wire to help the FBI convict mobsters, pulls no punches when it comes to Madoff's wife, Ruth...

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By the time the sun sets Monday, disgraced money manager Bernard Madoff will know how much time he'll face behind bars for perpetrating one of the largest financial scams in history.

U.S. District Judge Denny Chin could give Madoff up to 150 years. Madoff's lawyer says 12 should do it. Sound OK to you?

Since his arrest last December, we’ve heard about the victims in the fraud. Too often, those stories have focused on the rich and powerful, people like Kevin Bacon and Steven Spielberg, as well as major institutions like Fairfield Greenwich and the Royal Bank of Scotland. However, Madoff also destroyed people very much like us -- our neighbors, our friends and our family members. People who had managed to build a nest egg thanks to their hard work.

One of the most gut-wrenching stories was found in this Reuters item, the tale of Ian Thiermann, a 90-year-old in Californian who lost it all and went back to work at a grocery store. Need I say more?

Or Irwin Salbe, who was planning to re-enter the job market at the age of 73 after seeing three-quarters of his portfolio vanish in the Madoff mess.

NPR told us about Ronnie Sue Ambrosino, a Florida retiree who put everything with Madoff. All gone. So much for around 30 years worth of investments and $1.66 million in retirement funds.

Then there’s Bernette Rudolph a Brooklyn, N.Y., artist whose $50,000 investment quadrupled under Madoff’s watch. Now that’s just a memory.

William Foxton, a retired British military officer, couldn’t cope after all his savings disappeared, and in his depression, committed suicide. Here’s Burt Meerow, quoted in an AP report: "We do not have very much of a hope at all of getting anything back. It is the death of your future. When you are 70 years old, you can't just go out and start over."

In a letter to Judge Chin, Allan Goldstein said he and his wife thought they had more than $1 million before they got the bad news. "Now who wants to hire us, a guy with a gimpy leg and a woman who has fought cancer and pneumonia in the past few years," the letter read...

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The grilling Ben Bernanke received on Capitol Hill Thursday was a classic example of politicians playing to the camera. But this wasn't just a regular episode of "American grandstand," says Todd Harrison, CEO of Minyanville.com.

The hearing was an inevitable outcome of what Harrison calls a "misguided ménage a trois" between Bank of America, Merrill Lynch and the U.S. government.

The market's big rally from the March lows seems to have quelled some of the populist outrage, at least in Congress, and "people are now forgetting how dire the situation was at the time and are now looking to point fingers," Harrison says.

Indeed, Bernanke referred to the "extreme stress" in the financial markets last year in seeking to explain the Fed's actions last year, something many on the House Oversight Committee seemed to forget. (They also seem to be deflecting blame from Congress' own failures to oversee the TARP funds, but that's another story.)

But by getting the Fed so involved in the rescue operations of Wall Street firms, Bernanke sacrificed some of the Fed's independence. Yesterday provided a glimpse...

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Bernanke steadfastly defended his actions, and the Fed's action, during that dark chapter in American financial history. "The Federal Reserve acted with the highest integrity throughout the discussions with Bank of America regarding that company's acquisition of Merrill Lynch," Bernanke said in prepared testimony.

The chairman also denied threatening BofA CEO Ken Lewis for trying to get out of the deal in December, amid mounting losses in Merrill's mortgage-backed portfolio.

Bernanke gave a good accounting of himself, judging by the stock market's reaction. Another successful Treasury auction and month- and quarter-end considerations probably didn't hurt, but investors could take solace in Bernanke's testimony, says Syd Finkelstein, a professor of management at Dartmouth's Tuck School.

"Ben was a rock star," Finkelstein says. "He took one shot after another [and] displayed tremendous credibility. It's tough to walk away and not believe everything he said was truthful and accurate."

Still, the co-author of Think Again and Why Smart Executives Fail, admitted "there's still some missing data" on the question of who said what to whom. In an ideal world, Bernanke, Hank Paulson and Ken Lewis would all testify at the same time.

While that's highly unlikely to occur, Oversight Committee Chairman Edolphus Towns (D-NY) did conclude Thursday's hearing by saying the investigation will continue.

Among the still unanswered questions...

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