Really good article in the Times over the weekend, breaking down what happened at AIG in terms the average person can understand. And I'm glad the columnist who wrote it is getting on board with my campaign for more honest language about the meltdown of the markets. He calls a lot of what AIG was up to a scam. I agree wholeheartedly.
Now if we can just get the financial journalists to admit that Paulson, Thain, et al were trying to steal as much taxpayer money as possible on their way the door...
Donn Vickrey, who runs the independent research firm Gradient Analytics, predicts that A.I.G. is going to cost taxpayers at least $100 billion more before it finally stabilizes, by which time the company will almost surely have been broken into pieces, with the government owning large chunks of it. A quarter of a trillion dollars, if it comes to that, is an astounding amount of money to hand over to one company to prevent it from going bust. Yet the government feels it has no choice: because of A.I.G.’s dubious business practices during the housing bubble it pretty much has the world’s financial system by the throat.
If we let A.I.G. fail, said Seamus P. McMahon, a banking expert at Booz & Company, other institutions, including pension funds and American and European banks “will face their own capital and liquidity crisis, and we could have a domino effect.” A bailout of A.I.G. is really a bailout of its trading partners — which essentially constitutes the entire Western banking system.
I don’t doubt this bit of conventional wisdom; after the calamity that followed the fall of Lehman Brothers, which was far less enmeshed in the global financial system than A.I.G., who would dare allow the world’s biggest insurer to fail? Who would want to take that risk? But that doesn’t mean we should feel resigned about what is happening at A.I.G. In fact, we should be furious. More than even Citi or Merrill, A.I.G. is ground zero for the practices that led the financial system to ruin.
“They were the worst of them all,” said Frank Partnoy, a law professor at the University of San Diego and a derivatives expert. Mr. Vickrey of Gradient Analytics said, “It was extreme hubris, fueled by greed.” Other firms used many of the same shady techniques as A.I.G., but none did them on such a broad scale and with such utter recklessness. And yet — and this is the part that should make your blood boil — the company is being kept alive precisely because it behaved so badly.
Seems like the lights are starting to come on for more people with what really happened at AIG. Today, the New York Times has an editorial out, in which they've come to the realization that we were actually bailing out AIG's counter-parties and asking who those folks were. After all, that's the segment of AIG's biz that caused the trouble. Their other insurance units are apparently still profitable and could be sold off. Then we could tell AIG's counter-parties to eat it. I'm sure their biggest counter-party, Goldman, would be cool with that--after all, the head of Goldman said everything was hunky dory with them at those Senate hearings not too long ago, did he not?
Hopefully, somebody gets Geithner on record as to what was going on in the September bailout meetings when he was head of the New York Fed. I'm sure he won't have a problem revealing what Goldman's concerns were at those meetings.
The A.I.G. bailouts fail the basic test of transparency: Who ends up with the money? Major financial institutions are not innocent victims of A.I.G.’s demise. They are sophisticated investors, and they should have known the risks being taken — and who profited mightily from the relationship before it all came crashing down.
Whoever the recipients are, they should be investigated for their roles in the crash and, to the extent possible, be made to pay for the bailouts.
The serial A.I.G. bailouts are especially problematic for their connection to the Wall Street bank Goldman Sachs. At the time of the first A.I.G. rescue last fall, it was reported by Gretchen Morgenson in The Times that Goldman was A.I.G.’s largest trading partner, with some $20 billion of business tied into the insurer. Goldman has said that its exposure to risk from A.I.G. was offset, or hedged, by other investments.
What is certain is that Goldman has lots of friends in high places — yet one more reason why this bailout has to be as transparent as possible. Lloyd Blankfein, Goldman’s chief executive, was the only Wall Street executive at a September meeting at the New York Federal Reserve to discuss the initial A.I.G. bailout. Also involved in the discussion was the then head of the New York Fed, Timothy Geithner, who is now President Obama’s Treasury secretary.
naked capitalism has a post today called, "AIG Restructuring leaving best bits to AIG, not US taxpayer", which references this note from Bronte Capital:
There is only one piece of AIG that is still highly valuable – which is the core American P&C business (including some auto businesses). AIG has for instance merged AIG Direct into its fully owned 21st Century – a California Insurance Company. That business is still a very effective competitor – but their website no longer mentions those three letters (AIG) – I guess to protect the value of that business.
Life companies (ALICO etc) are not anything like as valuable as they were.
In my reading of the first article it implies that one of the reasons we can't let AIG fail is it will lead to the failure of banks in other countries. I ask then, why can't those country's pony up some of the money for the bail out? Or should the US buy up only toxic assets held by US banks and let the rest crash if they aren't willing to put up some cash?
Can I borrow your towel? My car just hit a water buffalo.
I believe the issues with those foreign banks are part of why we've recently started hearing the drumbeat against protectionism around the world. They want us to pick up their tab too, IMO. They probably blame us and want us to pay, but who knows.
I've never met a retarded person who wasn't smiling.
And then there's this from a close observer of the AIG matter ...
Josh, your reporting on the AIG credit default swap/counterparties issue has been spot-on. But to understand what happened there, you have to understand the Fed's "Maiden Lane" vehicles and how it's used them to avoid what Congress intended with TARP, which was the real story that came out of Dodd's hearing on the AIG mess today. And the roots of it go back to the Bear Stearns rescue last year.
By law, the Fed isn't allowed to buy assets -- it can only lend, as lender of last resort. That was a problem for the Bear Stearns bailout, because JP Morgan said it would only buy Bear if someone else assumed responsibility for the crap. Fed came up with this idea to start a shadow company, called a special purpose vehicle (SPVs were how Enron operated, creating "Chewco" and the like named after Chewbacca - the New York Fed called their SPV "Maiden Lane LLC" for name of the street the NY Fed is located on in southern Manhattan). The deal then was JP Morgan put $1 billion into Maiden Lane, the Fed put $29 billion in cash into it. Maiden Lane paid Bear Stearns $30 billion, which went straight back to JP Morgan as this deal happened simultaneously to JP's purchase of Bear. So Morgan got $30 billion in cash ($29 billion net) and the Fed got stuck owning the crap, but was legally only making a loan to Maiden Lane, who was the legal owner (Maiden Lane was incorporated not in NYC, but in Delaware to avoid paying taxes). By the Fed's own accounting - which is very different from a real company's accounting - Maiden Lane has lost $5 billion between its creation and today.
The same problem happened in AIG, but this time there was no buyer. In Sept, the Fed bought AIG (80%) in exchange for an $85 bill loan. By Oct, it was clear AIG was still dying, so the Fed lent it another $40 billion. This $40 billion was restructured in November when the Treasury put in $40 billion of TARP funds, which was needed to bail out the Fed's loan which had by this time gone bad. But essentially AIG had 2 problems: it had lent out safe securities with real values and used that money to buy shit mortgage backed securities -- this was called 'Secured Lending Facility' which was done right under the nose of the state insurance commissioners. It was in the hole $20 billion. The other problem was the crappy insurance that AIG's financial products company had written on other people's shit mortgage backed securities - the credit default swaps (CDS). When the bad mortgages that AIG insured went bad, the insurance had to pay-up -- but because it wasn't called insurance, but rather derivatives, AIG hadn't reserved any money against it. This had lost about $25 billion.
Using the loophole it had learned during Bear Stearns, the Fed set up two new companies: Maiden Lane II and Maiden Lane III. Two dealt with the secured lending and Three the shitty credit default swaps. The Fed lent each Maiden Lane $20 billion and $25 billion and then Maiden Lane paid off the investors that had either lent AIG the money to buy the shitty mortgage backed securities (ML II) and those who had the shitty mortgages and the corresponding insurance (ML III). 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 was all exposed at today's hearing. And despite repeated requests from Senators on both sides - Dodd, Shelby, Corker, Warner - the Fed is still refusing to say who it bailed out through Maiden Lane II and III.
Fuck the Fed, fuck them all.
I've never met a retarded person who wasn't smiling.
