The Real AIG Scandal
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It's not the bonuses. It's that AIG's counterparties are getting paid back in full.
Posted Tuesday, March 17, 2009 - 10:01am
Everybody is rushing to condemn AIG's bonuses, but this simple scandal is obscuring the real disgrace at the insurance giant: Why are AIG's counterparties getting paid back in full, to the tune of tens of billions of taxpayer dollars?
For the answer to this question, we need to go back to the very first decision to bail out AIG, made, we are told, by then-Treasury Secretary Henry Paulson, then-New York Fed official Timothy Geithner, Goldman Sachs CEO Lloyd Blankfein, and Fed Chairman Ben Bernanke last fall. Post-Lehman's collapse, they feared a systemic failure could be triggered by AIG's inability to pay the counterparties to all the sophisticated instruments AIG had sold. And who were AIG's trading partners? No shock here: Goldman, Bank of America, Merrill Lynch, UBS, JPMorgan Chase, Morgan Stanley, Deutsche Bank, Barclays, and on it goes. So now we know for sure what we already surmised: The AIG bailout has been a way to hide an enormous second round of cash to the same group that had received TARP money already.
It all appears, once again, to be the same insiders protecting themselves against sharing the pain and risk of their own bad adventure. The payments to AIG's counterparties are justified with an appeal to the sanctity of contract. If AIG's contracts turned out to be shaky, the theory goes, then the whole edifice of the financial system would collapse.
But wait a moment, aren't we in the midst of reopening contracts all over the place to share the burden of this crisis? From raising taxes—income taxes to sales taxes—to properly reopening labor contracts, we are all being asked to pitch in and carry our share of the burden. Workers around the country are being asked to take pay cuts and accept shorter work weeks so that colleagues won't be laid off. Why can't Wall Street royalty shoulder some of the burden? Why did Goldman have to get back 100 cents on the dollar? Didn't we already give Goldman a $25 billion capital infusion, and aren't they sitting on more than $100 billion in cash? Haven't we been told recently that they are beginning to come back to fiscal stability? If that is so, couldn't they have accepted a discount, and couldn't they have agreed to certain conditions before the AIG dollars—that is, our dollars—flowed?
The appearance that this was all an inside job is overwhelming. AIG was nothing more than a conduit for huge capital flows to the same old suspects, with no reason or explanation.
So here are several questions that should be answered, in public, under oath, to clear the air:
Comments
Stop doing other people's job
Oh, Mr. Spitzer, you and your sound logic, cutting insight, and knack for seeing thru B.S.... Don't you realize that doing other people's jobs (i.e. the Treasury Department, the Fed, the SEC, ad infinitum) and years of holding the insiders accountable is what got you in trouble in the first place? [Notice the method as well: not via something complex, nuanced, yet critically important; instead something direct, base, and frankly, completely frivolous] The powers that be constantly tell(/lie) the American people that part of the American dream is the "comeback"; rebuilding your life, reputation, and fortune after various disasters. Why not test-out this theory whilst you hold the insider's balls to the fire of accountability? I for one would love to see it because, while this article is interesting and spot-on, blog posts on a semi-obscure website does not have the agency you require to truly help the American taxpayer. Cheers!
AIG payouts
It seems to me AIG had no choice but to pay 100 cents on the dollar in honoring the credit default swaps with the investment banks. The only reason the auto companies were able to re-negotiate contracts with suppliers and unions was because they faced the credible option of bankruptcy. So maybe if AIG were facing bankruptcy they could persuade the investment banks to settle for less than 100%. But the whole point of the feds bailing out AIG was to avoid seeing the company go bankrupt. The investment banks knew this so AIG had no credible way to bargain to be given a break.
Developing Outrage!
Extra Extra!!!
OBAMA TO BECOME FORECLOSER IN CHIEF; ENABLES HEDGE FUNDS TO MAKE BILLIONS
President Obama’s new plan to buy toxic assets will provide a path for a partnership of the government and hedge funds to buy mortgages at pennies on the dollar. If and when the homeowners fall behind in their payments, the government and its partner will foreclose on the loans, and force millions of Americans to lose their home. In the process these hedge funds will earn considerable profits.
The government used to be known for providing a safety net for its citizens with programs such as welfare and unemployment insurance, and social security. Now it will be responsible for foreclosing on millions of Americans while enriching the rich Hedge fund investors!
A better solution: As part of this program, the government should permit the homeowners to buy out the loan for a reasonable premium to what the government paid for the loan. If the government paid 30 cents on the dollar, let the homeowner buy out their loan at 50 cents on the dollar. And if the homeowner can afford it, the government should provide the financing for the homeowner to buy out the loan.
RE: The Real AIG Scandal...
Eliot is right on spot here. All this public outrage about the $160M of bonuses is a nice entertainment, so people can get emotional and angry about something concrete. This is OK to the extent that it will put some extra pressure on the government and politicians to deal with the banks and AIG in a more responsible and aggressive way. However, this is peanuts, and a diversion from the much bigger problem here; which is about the way the $160B is (and additional $30B is to be) spent by the A.I.G under the watch of this and the previous Treasury (think, Paulson).
It is not secret that much of the taxpayer billions was spent on unwinding bunch of CDS contracts that AIG had with Goldman S. and other Wall St players. It is also known that the total CDS "insurance" liability is about $60-80Trillion, which is about 30X times the size of the underlying mortgage market. What this means is that many of these CDS contracts that A.I.G might be unwinding behind the closed door using the taxpayer money could be, for all we know, a speculative contracts in which the CDS counter party is demanding the payment on an asset it insured but *never owned*. This would be illegal in normal insurance business - think of allowing hundreds of people to take a life insurance on a single persons life - but is legal in the unregulated CDS world (such contracts are called "naked CDS").
That is: the taxpayer's billions may be covering contractual gambling wins of the counter parties, such as Goldman S., not the real losses. If so this would be example of the largest transfer of wealth in the history of the world - from the Main St to the Wall St.
The fact that Treasury did not explicitly annul such "naked" CDS contracts even to this day, and certainly not before pouring billions into A.I.G. "bailout", is economic malpractice of a gigantic proportion, and may even be a criminal malpractice. This is an important question that I would urge Eliot to add to the list, and something the media should concentrate on. The $160M of bonuses is peanuts and surely an outrage, but please don't let it be a distraction from the real DIRTY SECRET behind the A.I.G. bailout.
No Insurance for the Default of Trust
The article spells it out as clear as a bell.
PBS Frontline did a piece to which I've embedded the link below.
Unfortunately, for now, the ivory tower answers are locked away.
Pressure will be mounting in the days and weeks to come as to why counterparty risks were paid to companies that participated in a large fiscally irresponsible and highly leveraged ponzi that arguably violated every Fed and Treasury margin rule under the sun. To wit, where are the offsets for price fixing another sensitive and devastating commodities weapon (the high tax from runaway oil prices)? Goldman Sachs, Merrill Lynch and Morgan Stanley all painted the tape on oil and got burned when the bubble popped, or did they? Either way, the manipulation through rumor mongering and war-tails wagging the oil dog were substantive beyond the supply-demand equation. Are we paying two debts here? With respect to GS, $25 billion in TARP bail out money for bad trades and recompensatory money for other bad trades through AIG as the sieve? Ridiculous.
The whole thing makes market timing look like a jaywalking violation.
On that note, exactly where is Attorney General Eric Holder in all of this? If it were me, I'd be issuing subpoenas, spraying and scratching like a cat in heat. Former White House included.
http://www.pbs.org/wgbh/pages/frontline/meltdown/view/
There's no insurance coverage for the default of public trust
The article spells it out as clear as a bell.
PBS Frontline did a piece to which I've embedded the link below.
Unfortunately, for now, the ivory tower answers are locked away.
Pressure will be mounting in the days and weeks to come as to why counterparty risks were paid to companies that participated in a large fiscally irresponsible and highly leveraged ponzi that arguably violated every Fed and Treasury margin rule under the sun. To wit, where are the offsets for price fixing another sensitive and devastating commodities weapon (the high tax from runaway oil prices)? Goldman Sachs, Merrill Lynch and Morgan Stanley all painted the tape on oil and got burned when the bubble popped, or did they? Either way, the manipulation through rumor mongering and war-tails wagging the oil dog were substantive beyond the supply-demand equation. Are we paying two debts here? With respect to GS, $25 billion in TARP bail out money for bad trades and recompensatory money for other bad trades through AIG as the sieve? Ridiculous.
The whole thing makes market timing look like a jaywalking violation.
On that note, exactly where is Attorney General Eric Holder in all of this? If it were me, I'd be issuing subpoenas, spraying and scratching like a cat in heat. Former White House included.
http://www.pbs.org/wgbh/pages/frontline/meltdown/view/
HERE"S TO YOU ELLIOT SPITZER
HERE'S TO YOU ELLIOT SPITZER
(Mrs. Robinson, Simon and Garfunkle)
WilliamBanzai7's Bailout Smart Club Band
Sing along link: http://www.youtube.com/watch?v=Rfkb4qLIQ7k
And here's to you, Elliot Spitzer
We all miss you more than you will know (Wo, wo, wo)
God bless you please, Elliot Spitzer
Wall Street's one big golden playpen for those who prey
(prey, prey, prey...hey, hey, hey)
We'd like to know a little bit about your Slate blog for our files
We'd like to help you learn to help yourself
Look around you, all you see are securitized Wall Street lies
Stroll around downtown and feel at home
And here's to you, Elliot Spitzer
We all need you more than you will know (Wo, wo, wo)
God help us all, Elliot Spitzer
Wall Streets stilla place for those who prey
(Prey, prey prey...hey, hey, hey)
Hide it in a hiding place while the taxpayers get hosed
Put it in an offshore pantry with their bonus cupcakes
It's no little Goldman secret, AIG's the biggest Wall Street affair
By and large, Blankfein's kept it under a bespoke trash lid
Coo, coo, ca-choo, Elliot Spitzer
Wall Street's a bigger con job as you know (Wo, wo, wo)
God help us please, Elliot Spitzer
Sing, Sing holds a place for those who prey
(Prey, prey, prey...hey, hey, hey)
Sitting on a sofa on a Sunday afternoon
Listening to the Washington cretens debate
Cry about it, shout about it
They've got lots of time to schmooze
Ev'ry way you look at it, in the long run we lose
What are you doin, Andrew Cuomo
A nation turns its payback eyes to you (Woo, woo, woo)
What's that you say, Elliot Spitzer
Joltin' Cuomo has got to go a long, long way
(Hey, hey, hey...hey, hey, hey)