This weekend the Wall Street Journal published an excellent article on the AIG bailout, which provided for the first time a small glimpse into the bailout money trail.

WSJ:

“The beneficiaries of the government’s bailout of American International Group Inc. include at least two dozen U.S. and foreign financial institutions that have been paid roughly $50 billion since the Federal Reserve first extended aid to the insurance giant.

Among those institutions are Goldman Sachs Group Inc. and Germany’s Deutsche Bank AG, each of which received roughly $6 billion in payments between mid-September and December 2008, according to a confidential document and people familiar with the matter…” The entire article can be found here and is worth the a read.

After reading the article it is now seems clear why zombie banks are essential to the financial system and why overt nationalization will never happen.

With the collapse of their asset securitization ponzi schemes, major banks have a giant financial hole to fill, especially as it pertains to their obscene compensation programs for employees. Laundering money into zombie banks, in the guise of needed bailouts and naked CDS payouts, is clearly the best method for generating cash to support the status quo at the remaining banks.

If zombie banks are to go bankrupt, it’s unlikely that these types of payoffs would be allowed under the watchful eye of a government-appointed bankruptcy court. And therefore under the bankruptcy scenario, surviving banks would be forced to consider massive layoffs and salary reductions, which would in turn send certain economies, e.g. New York, into certain depressions. So in an effort to prevent a meltdown in certain favored economies, zombie banks are a necessary evil in the view of the Fed and Treasury, both of whom are controlled by the major financial institutions.

So what’s the end game here?

On the one hand, it seems inconceivable that this bailout fraud, which is clearly the largest financial fraud committed in the history of capitalism, can go unnoticed (Note: It took Madoff 20 years to steal some $30 billion, while it took our major banks only a few months to pilfer five times that amount). It seems certain to engender social outrage, further disillusionment with the US financial system, and demands for justice. All of this should keep the markets under pressure for quite some time.

However, at the same time, $150 billion can of course buy you a lot of security, legal defense, and depressed assets. Amazingly, surviving financial behemoths, have another $1 trillion+ coming down the pike via the TALF. With increasing pressure to prove that they can earn money legitimately, and provide some benefit to society other than the occasional bubble, I’m sure that major financial institutions will do everything in their power to reflate asset prices, for at least a short while. With the Fed money-printing machine on their side, the “asset-inflationary” effects of all this cash will be impossible to ignore, at some point (when is the obvious question).