Remember AIG? AIG the big insurer that we bailed out? Bloomberg did a bit of investigating using the Freedom of Information Act. Yes, folks, journalists can still do investigative work.
Let's break it down cause the way people write about this stuff, it sounds like us mortals cannot and would not be able to understand. It's not magic. You can read the original but this is my explanation in real people talk.
AIG insured those magical instruments called "Credit Default Swaps" aka CDS ( no not Clinton Derangement Syndrome). A CDS is an insurance a bank or other large investor buys on an investment. AIG basically promised that if Morgan Stanley bought a bunch of Mortgage Backed Securities and they went bad, AIG would cover their costs.
In 2008, a whole bunch of the stuff AIG insured, started to go bad. Their customers, came to AIG asking to get paid. Well, AIG did not have enough money to pay all the stuff they insured, you see, they did not come under the rules of standard insurance companies, keeping reserves etc.
It seems AIG was making deals at the time to pay those insured below the "par value", meaning, that if someone had one 1 dollar insured, they got below that "par", the dollar, they got .40 cents on the dollar.
So, around November 3, 2008, Geithner, who headed the New York Federal Reserve Bank at the Time, when the Fed put AIG into receivership, AIG was ordered to pay at par, meaning, not to negotiate the deals the way they were doing but to pay a dollar on the dollar.
Who was first in line? Our good friends at Goldman Sachs, Société National of France and Deutsche Bank. One of the mysteries was always the Fed not disclosing who was getting paid out with our bailout money to AIG. The word was at the time that it was proprietary and that they could not disclose the information. This never made sense.
According to Bloomberg, when they looked at the documents, this is what they found:
Part of a sentence in the document was crossed out. It contained a blank space that was intended to show the amount of the haircut the banks would take, according to people who saw the term sheet. After less than a week of private negotiations with the banks, the New York Fed instructed AIG to pay them par, or 100 cents on the dollar. The content of its deliberations has never been made public.The New York Fed’s decision to pay the banks in full cost AIG -- and thus American taxpayers -- at least $13 billion. That’s 40 percent of the $32.5 billion AIG paid to retire the swaps. Under the agreement, the government and its taxpayers became owners of the dubious CDOs, whose face value was $62 billion and for which AIG paid the market price of $29.6 billion. The CDOs were shunted into a Fed-run entity called Maiden Lane III.
The questions remain, why did Geithner choose to pay at par when all AIG was making deals at .40 cents on the dollar? What was special about at three banks that got the 100% of par payment?
I keep coming back to the question of how and why are the guys that created these problems now in the government that was supposed to clean things up and regulate the financial industry ? How much have these guys benefited?
You see, the high priests of finance have two special powers over politicians:
- They buy them with political donations and with jobs when they finish their political tours.
- They confuse the hell out of them, talkign gibberish when it all boils down to ponzi schemes and three card monty.
The priests of finance keep the politicians stupid and fat. Politicians park whatever common sense the gods may have given them and abdicate their values for the financial contributions to their campaigns. Then politicians hire the same guys to clean up the problems.
So, till we stop the cycle of political contributions, we will be owned by the Financiers and the Corporations no matter who is elected. It will all supposedly be done in our name, the people.
Our great moral society makes it illegal for a woman to sell her body, she is a whore and and we have all kinds of laws against it. But, when our politicians sell out their votes , we reward them in our society.
The grand bordello that is the failed system we have is not serving us . We have the right wing defending them just because they defend the status quo , and the left waiting for a few crumbs of the table hoping for a lifeline to preserve whatever living standard and quality of life we think we deserve.
By the way, it took Bloomberg to do this investigative work. Yo, New York Times, ever hear of the Freedom of Information Act?
(Meanwhile the dithering on healthcare reform is in full swing, since the wheel is spun and where it stops no one knows I shall resume posting whe we have a real bill. But, dear President Obama, what do you want? I am tired of the political maneuvering.)
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But I still cannot help but feel like Brando when I type your ScreenName.
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Recent books and CDs of books like those by William Cohan's House of Cards tells all and names names and places. This is why like Akmed Rashid's Descent Into Chaos about Pakistan is not aired on radio and TV. They give too much information on how the public has been hoodwinked.
Information is why a plagerized text for my blogs. I keep my opionion close to my chest, but it always undelies my political choices. We live in critical times, hard to deal with, so we must be ever vigilent as consumers of news and event.
Excellent post.
if america had citizen initiative, politicians would become servants, or convicts. but first america needs citizens, and has only serfs.
The questions is: What are you going to do about it? Can you throw the bums out and reform the system? After all, no one is forcing you to vote for the politician with the biggest campaign chest. Do American voters care enough to make a difference?
@ Motroing, thanks, I am being selfish, I try to write it down so I can see if I understand it. It turns out, it's easier than they think, they just want to make us think it's magic and we are not allowed to look behind the curtain.
@Buffy, our govt is bought and we are lazy and don't want to make political contributions illegal cause we think it's freedom of speech.
@Jeannette, thanks...I try.
@John, they confuse us to make us not pay attention.
@ Steve, I agree, I am with Nicholas Taleb, "you cannot have the guys who made the problem be the guys who fix it"
@mary, thank you, vigilant is right.
@Sheep...thanks.
We will have 20% unemployment into the future, the 10% we have now and the 10% we never bother counting. People will be marginalized into thinking they are the problem and the losers, cause everything in Disneyland is fine. But keep them medicated and entertained and they will not pay attention.
@ Owl, thanks...(small bits at a time) these guys do not hold the keys, they just make up words and way to steal, it's the same stuff that was done from the beginning of time.
http://www.vanityfair.com/online/politics/2009/06/the-man-who-crashed-the-world.html
Finding out about this thwarted 40 cents on the dollar info is even more enlightening.
Bloomberg has been keeping watch over the Fed for at least the last year. When the Fed, separate from TARP, gave away two trillion dollars (nearly three times the amount of the original TARP 750 billion), Bloomberg was all over them with a FOIA request for that, too. I believe, however, that came to nothing. They hid behind the congressional hearings that were then pending.
I believe that far from the media - including the NYT - being liberal or progressive, rather it is owned by the same powers that own our government. Our one party government.
An excellent explanation. Thank you.
@ the Dr. Welcome and thanks for the comment and read.
AIG was like a strapped mortgage borrower who owed the bank more than he could afford to pay. Sure, if the bank felt like it, it could modify the payments and modify the amount owed. But if they couldn't come to a deal, then the bank would be owed the full amount contracted to.
If I were one of the parties that AIG owed money to, you can be damn sure I'd be in there trying to get every single penny I was owed. AIG signed a contract with me. They owed me x dollars and I would be fighting like hell to get x dollars, not x-y dollars. Why should I take a loss of y dollars if AIG screwed up?
What is wrong with trying to get every single penny you're owed by someone?
Did they need to get that or would they have walked away happy with less? I don't know, because I wasn't there.
I do know that AIG was contractually obligated to pay off every single penny it owed. Now, the fact that they were insuring so much debt with so little reserves of their own is very troubling. And yes, that certainly screams for regulation so that a reasonable level of reserves are held by anyone who wants to issue a CDS.
But I don't blame anyone for making them pay up, nor do I blame anyone who collected the money they were contractually owed.
By the way did you see where the former head of AIG is starting a new "mega" insurer? How long until the new one is doing the same thing as the old AIG?
Rated
We should have standards on conflict of interest, standards of how we should behave.
You see Tony this is the cavalier attitude that burns our economy, burns our government and ultimately our democracy. You can hold those values, but I will not approve of them.
Walter, these guys morph themselves, come back and do it again. The recidivism rate is very high, actually the tolerance we as a people have to let those guys come back over and over is remarkable.
AIG sold them, without the money to back up their contracts. And if I have a contract, I expect it to be executed as it's written.
Why should Goldman or Credit Suisse or whoever be any different? Just because there are more commas in the figure doesn't mean that they shouldn't get what they were contractually due.
A contract is a contract, Stellaa. It must be honored.
There was no need to pay them 100%. It was a back door sweetheart deal for Goldman, etc.
But before we get into that, let me ask you this. Credit default swaps are essentially an insurance policy. AIG also sells life insurance, home insurance, aviation insurance, and a host of other insurance policies.
So, if you believe that counterparties like Goldman and Societe Generale should take a haircut of 40 cents on the dollar, let me ask you this.
Should someone who has a homeowner's policy from AIG whose house burns down accept a third less than he's owed? Should the widow of someone who bought life insurance from AIG accept 60 cents on the dollar? And should someone whose airplane crashed take only two thirds of what AIG contractually agreed to pay him?
If the answer to those questions is no, then why should the answer be different for credit default swaps?
That is the question you need to ask yourself.
Now, getting to the Bloomberg article, first of all, it doesn't say that some counterparties agreed to take 40 cents on the dollar. It says that AIG assigned someone to try to get them to take a discount of 40 cents on the dollar. The article does not say whether or not anyone agreed to that. It does point out that Citi agreed to do so for a credit default swap issued by another bankrupt company, but that's neither here nor there.
Furthermore, you didn't give any space to those who were quoted in the Bloomberg article who said they thought what the New York Fed did was right, like the former head of the St. Louis Fed. Nor did you point out what the Bloomberg article said about some of the counterparties being in dire financial straits themselves and needing to be paid at par in order to keep from going under. Or that the New York Fed considered several options, including guaranteeing the CDOs held by AIG's counterparties but decided that the route they took was the best of several bad options.
Nobody is more disgusted by the financial meltdown that occurred last year and the resulting government actions than me. We had a bunch of people who insisted they didn't need regulation because they'd manage the risk themselves, and they blew it. Because they blew it, we had to bail them out because if we didn't, the financial system of not just this country but the world would have frozen.
And now some of the same people are saying, we don't need regulation, we learned our lesson. Yeah, sure, just like you did during the dot com bubble, or the Long Term Capital Management crisis, or the Latin American debt crisis, or a bunch of other financial crises.
So I am steamed by this. But I will not point the finger where it shouldn't be pointed.
First this was specifically to the CDO's the other insurance products, had nothing to do with these deals. AIG actually did not lose money in those and did have adequate reserves and adequate regulations. These are large deals with "sophisticated investors" who should have checked out AIG's capacity. So, I have absolutely no problem with them getting shaved. These guys were all playing a side game, a side game that involved a great deal of risk and was outside of our regulatory system. When the Fed stepped in to "save them" there should have been no obligation to make them whole.
I am not here to re tell the article, I am here to give my opinion. My opinion is that Geithner and Paulsen did make special concessions to Goldman, Deutshe and Societe, a back door bail out for bad deals they made. Deals that they insisted should not be within the regulatory process. So, they had to take the hit.
There were many other counterparties -- some of whom were on the edge themselves -- who were made whole. It wasn't a special deal for just a few companies.
Now, if the New York Fed said, we'll make Goldman, Deutsche Bank, Merrill, and Societe Generale whole and everyone else will get 60 cents on the dollar, that would have been a special deal.
No such thing occurred. Everyone, from the smallest counterparty to the largest, was made whole.