Friday, November 21, 2008

Bust-outs and the Paulson Mob

Yves Smith has a 9 November 2008 post at her Naked Capitalism that closely parallels my thinking about AIG'S bailout, i.e., it's a bankruptcy fraud. Here's a link:

I describe a bustout at my 30 July 2008 post, http://skepticaltexascpa.blogspot.com/2008/07/london-banker-on-covered-bonds_30.html.

Bankruptcy fraud is a federal crime, 18 USC 152. Sometimes prosecuted, if small and the "perps" are not politically well connected. "The Beaux Art Dresses Inc., was a domestic corporation organized in December, 1920. ... In August, 1922, the corporation entered into an agreement with a discount company by the terms of which it assigned its accounts receivable to that company for advances of money. ... Within seven weeks before the failure, it purchased merchandise amounting to $47,000 a large part of which purchases were made in the three weeks before the failure. ... At bankruptcy it had liabilities of $67,435.25 and assets of $1,064.14", Beaux Art Dresses v. US, 9 F2d 531, 532 (2nd Cir., 1925). "A decrease of value--more than one-half in two months, after the purchase of new merchandise--under the circumstances disclosed in this record are not to be believed", 534. Ah, for "old time bustouts", when the "mob" did them for profit. They were modest, typically involving $2-$10 million in creditor losses in 2008 $ and easily understood as they used companies which dealt in tangible objects which "disappeared" in the middle of the night. The proof: circumstantial, unexplained asset losses. I estimate $67,000 1922$ is about $2.5 million today, peanuts, 3.7% of Lloyd Blankfein's 2007 bonus, not worth looking at.

Bust outs usually require cooked books to induce the "mullets" to extend credit to the company to be bankrupted and can be charged under 18 USC 1341 and 1343, mail and wire fraud. Insurance companies make ideal bust out candidates because they take in premiums today for a promise to pay claims in the future. Were AIG's books cooked? Was AIG insolvent before Uncle Sam extended it $123 ($150?) billion and if so, who knew? Would anyone have the nerve to conclude AIG was insolvent before its CDS counterparties got more collateral to support their CDSs? What would be the effects? How many billions could it cost Goldman Sachs?

"Appellant, individually and trading as Rand Manufacturing Company, was engaged in business in Philadelphia. On August 22, 1928, an involuntary petition in bankruptcy was filed against Rand, and he was adjudicated a bankrupt on September 12, 1928. To sustain the indictment, Joseph Karp was called as a witness, who testified that he was a certified public accountant living in Brooklyn, N.Y., and that he had considerable experience in examining books of account of garment manufacturers: that he had carefully examined the books of appellant for the purpose of ascertaining the amount of purchases of merchandise, its value and the amount and value of sales of merchandise and finished products, in order to determine if the bankrupt had concealed or disposed of any portion of the merchandise so purchased", Rand v US, 45 F2d 947, 947 (3rd Cir., 1930). "Deducting this amount from the total purchases of 70,574 yards leaves a balance of 22,744 yards of material unaccounted for. ... The witness Karp also testified to a state of facts showing the value of purchases, amount expended for labor, and total sales, which indicated that appellant should have had on hand at the time of bankruptcy, in cash and/or materials, a value amounting to $22,832.94, unaccounted for to the receiver", 948. "Large quantities of merchandise of appellant disappeared, He accounts for the disappearance by claiming a robbery, but the circumstances surrounding the alleged robbery are, to say the least, suspicious. It was proper to submit all of these facts to the jury to determine whether his statement as to the robbery was true or false, whether it led to the conclusion of guilt or innocence as to the charge of concealment", 949, my emphasis. To the jury! Got it yet, Mike Garcia, formerly SDNY US Attorney. Apparently Mary Jo White in her nine years as SDNY US Attorney never did.

What's apparently happening at AIG? First, keep AIG alive to try to "end run" the lookback periods. Next, create massive confusion to conceal what's happening. Which is? AIG's insurance subsidiaries were looted of tens of billions to support AIG's CDSs with the connivance of New York's insurance commissioner, the Fed and the Treasury. The relative positions of insurance policy holders and unsecured creditors were changed during insolvency. If AIG went bankrupt, the bankruptcy judge might let the unsecured creditors "retroject", Hassan v Middlesex, 333 F2d 838 (1st Cir., 1964) AIG's financial condition. If properly done, the scheme could collapse. That's how it looks from here. This secured-unsecured creditor issue sometimes arises in LBOs which later go bust. Neat huh? Bring back "old time" bust-out frauds, they were a relative "public service"; I mean what's a few millions between friends? Or even a few tens of millions?

15 comments:

Anonymous said...

Shivers IA... shivers.

If you're right this is a big one.

Independent Accountant said...

Anonymous:
There are two possbilities here. One, Paulson & Co. don't know what they are doing. Two, they know exactly what they are doing.

Anonymous said...

Kind of like Mexico back in 1982, when outgoing President Jose Lopez-Portillo, as his last act, nationalized the banks in what some say was a successful attempt to conceal his theft of several billion dollars from the national oil company.

Anonymous said...

Well they just copied the Taiwanese game plan, loot and scoot.

Skippy

Independent Accountant said...

Anonymous 1:
The only way I could know if I was right was to see if and when AIG became insolvent and if there were any recent changes in the relative positions of the creditors. However, I've been suspicious even since about 14 September when NYS Insurance Commissioner Eric Dinallo let the AIG insurance subs upstream $20 billion to the parent? Why? Quo bene?

Anonymous 2:
Yes, see my 19 October 2008 post, "Dollar Si, Krona No". Paulson & Co. may be taking us on a trip, not down the yellow brick road, but to "dog hill".

Anonymous 3:
I don't think they're going anywhere. Too brazen.

Anonymous said...

Anonymous1 = Happy/A

Curious about Dinallo in the scenario that you sketch out... who I think is a total tool... I cringe every time I see him rappin some jive to Congress or the media...

Who is he protecting? The citizens of New York state? Ha!

"Saving" the bond insurers was a hand job for Wall Street... that "blew up"...

Happy/A

RKORAS said...

Great article and thoughts! The cases you pose as presidence are not as large as AIG and took place in an economic environment that was closer to 'all other things being equal'. Also AIGs asset value problems triggered credit rating problems that can hurt any insurer, I don't think credit ratings and world wide customers exposure were issues of the cases you listed. Also, unless the plan to bust out was hatched within the last year or so, why would people who wanted to bust out AIG expose themselves to customers and nations all over the world. That exposure would increase the chances of getting caught.


But I think the original plan by Paulson, which was about 3 pages and gave many people protection from many legal actions, does lend itself to the fact that Paulson & Co. may not know exactly what they are doing (its a once and a lifetime event), but they may know what and who is respondsible for this crisis and what and who aided in covering it up until this year.

Independent Accountant said...

RKORAS:
I don't think there is a plan to "bust-out" AIG as such. It seems to have evolved from the desire to protect some creditors at the expense of others. Many bust-outs don't start with the intention of being bust-outs, they evolve into them for various reasons.
For example, a legitimate business may have operated for years. Suddenly for whatever reasons, it faces a downturn. Now the owner can just go bankrupt, or take the company's assets prior to bankruptcy. Even though he never set out to defraud anyone, he rationalizes, "I was trying to make the best of a bad situation". Similarly here. I am sure AIG's counterparties would rather not have called on their CDSs. So? Now they find AIG can't make good. What to do? Take a multi-billion dollar "hickie" or finagle and give the "hickie" to someone else? In this instance, the CDS holders have no fear of: the SEC or the Justice Department.
In the two miniscule cases I cited, credit ratings and worldwide customer exposure weren't issues. So? Even if they were, what of it? I think the plan is: keep AIG afloat as long as possible to ensure the CDS counterparties get paid and let the devil take the hindmost.

Anonymous said...

If the American peasants don't care, nothing will be done. The statistically average American peasant only cares that any "loot" doesn't go to "those welfare queens". Any "loot" going to the American peasant's nobility is - in most case - excused or forgotten about after the next Stupendious Bowl.

tyaresun said...

Could our future Treasury Sec. be implicated in this?

Party like it's 1929 said...

Several themes apply here:
-The fable of the Emperor's new clothes now applies to our culture's former "Masters of the Universe"!Nobody wants to be the first to slay an icon
-Enlightened despotism: a "necessary" way station during national emergencies, or so Paulson and the entire apparatus including magnates and tycoons would like us to believe. At many junctures in our history we've endorsed suspension of freedoms (wars, cold wars, panics, scares, witches)
We want to believe that the powers that be have our best interest at heart, so we suspend our disbelief of the grandeur of their lies. It's like Weapons of Mass Destruction only set in Manhattan

RKORAS said...

Indy Accountant:

I see your point. Great article!

Independent Accountant said...

RKORAS:
I've concluded some of this post was misunderstood. I'll prepare another one to explain in detail what I think is happening at AIG. Consider, to "bust out" AIG would require say, converting $20 billion of AIG's assets to physical currency. Then the "bust-out" artist shows up at AIG's offices with some trucks and drives the currency off. That won't happen. I cited the cases I did to show what type of cases typically get prosecuted under 18 USC 152, i.e., simple, easy to understand ones. What's going on at AIG appears to be subtle.

Anonymous said...

quite interesting post. I would love to follow you on twitter.

Independent Accountant said...

Anonymous:
I don't tweet. If you want a "tweeter" follow Junior Deputy Accountant (JDA). JDA keeps up with my posts.

IA