Tuesday, May 12, 2009

Goldman, AIG and 18 USC 152

"What would have happened to Goldman Sachs Group Inc. [GSG] if American International Group Inc. [AIG] had gone bankrupt last September? From the time of the government's AIG rescue on Sept. 16, [GSG's] position has been consistent: It wouldn't have been hurt. If [GSG] were able to withstand the bankruptcy of a large counterparty like AIG without material hits, it would bolster the view the [GSG] is a savy risk manager, and that its stock deserves to trade at a premium to other banks to reflect that", Peter Eavis at the WSJ, 18 March 2009.

"[GSG] still has $6 billion in trading bets outstanding with [AIG] but had adequately protected itself from problems at the insurer before AIG nearly collapsed last fall, according to a senior executive. ... [GSG] pried billions in cash collateral from AIG and bought large amounts of credit derivatives that would pay out if AIG defaulted on its obligations or filed for bankruptcy, [David Viniar] said. ... Just before the government rescued AIG in September, [GSG] had a $10 billion exposure to the insurer under financial contracts AIG had sold [GSG], insuring the bank on $20 billion of mostly mortgage-related assets. ... [GSG] received another $8.1 billion from AIG and the US between mid-September and year-end 2008 on swaps tied to mortgage assets. The payments helped make [GSG] 'whole' on some of its positions. 'We had no material economic exposure to AIG,' Mr. Viniar said. .... Critics have questioned why [GSG] accepted those payments when its AIG exposure was hedged. Mr. Viniar said [GSG's] transactions with AIG were 'commercial contracts,' and that the bank sought to protect its shareholders. ... In late 2007, when AIG's auditor, PriceWaterhouseCoopers LLP, learned about [GSG's] demands, it reviewed the values of the contracts and ultimately led AIG to reflect its first major write-down on its swap positions. Those write-downs continued through the end of 2008", my emphasis, Serena Ng at the WSJ, 21 March 2009.

"While Mr. Viniar acknowledged that [GSG's] relationship with AIG raised what he called a complex set of issues, he was adamant that, because of the collateral [GSG] held and hedging trades with third parties, it would not have been damaged directly if AIG had been allowed to collapse", my emphasis, Peter Edmonston at the NYT, 21 March 2009: http://www.nytimes.com/2009/03/21/business/21goldman.html.

Junior at Jr. Deputy Accountant, has a related 24 March 2009 post, I am in partial agreement with, link: http://www.jrdeputyaccountant.com/2009/03/bernanke-on-aig-ooops.html.

"The suit is by a receiver of an insolvent corporation to compel its promoters and their confederates to restore illicit gains. At the time of the challenged acts Maxine H. Furlaud was the president and principal shareholder of Furlaud & Company, Inc., a corporation now dissolved", McCandless v. Furlaud, 80 L ed 121, 124 (1935). "Furlaud was known as an investment banking house, and was interested in the issue and sale of corporate securities. Particularly it was interested in a project for the formation of a company that would own and operate gas fields in Western Pennsylvania. Reuter, representing Furlaud, took options from the owners of nine tracts. ... A witness for the complainant stated at the trial that the fair value of all the tracts was about $2,700,000, the cost and little more. ... Investors were informed that the appraisals of the engineers covering the properties of the corporation, including working capital of $365,000, aggregate $7,038,000, the properties examined by Davis being appraised at $1,743,520, and those being examined by his successors at $4,929,787", 125. Are these engineers Moody's or S&P employees? "Checks and credits have now been traced through their bewildering entanglements. None the less when the process of analysis is over, it is legitimate to forget the details, and fix our minds on the results. The situation can be simplified without obscuring its essential features. Indeed only in that way will the realities of what was done be manifest", 127, my emphasis. GSG got $13 billion from AIG. That's the bottom line. "Promoters of a corporation stand in a fiduciary relation to it to this extent at least, that they will be chargeable as trustees if they deal with it unconscionaly or oppressively or in violation of a statute, unless the liability for such misconduct has been effectually released", 128. Does this apply to corporate officers and directors too? "The effect of the promoters' conduct here was to saddle the company with liens beyond the value of its assets, mortgaged and unmortgaged. Through the diversion of proceeds of the subscription to the use of Furlaud and confederates, the company became crippled and indeed insolvent at the outset of its business life", 129. Now operating companies are made insolvent through excessive officer compensation, among other things. "Furlaud and Kingston, having made themselves parties to a scheme whereby Duquesne was to be despoiled and its creditors were to be defrauded, became accountable, we think for everything that came to them as a result of the conspiracy in excess of the consideration furnished on their side", 132. Became accountable "as a result of the conspiracy", hmm. Does this apply to say a ratings agency if ratings are an integral part of a scheme to defraud? Furlaud "was the head and front of the conspiracy. For anything done in fulfillment of the common purpose either by him or by any of the corporations dominated by him, he and his confederates are liable in solido", 133. Is GSG liable for $120 billion at AIG? "Tis a consummation devoutly to be wished".

Who, if anyone will "pay" for GSG's fairy tales?

Interesting. GSG "positioned" itself before September's AIG bailout. What did GSG know and when did if know it? I long ago concluded AIG was told not to file bankruptcy. We must protect GSG at all costs. GSG, its officers and attorneys should be introduced to 18 USC 152, the bankruptcy fraud statute. Well Lev Dassin, how about it? What are you waiting for? Indict these clowns. Of course AIG need go bankrupt for the pre-bankruptcy finagling to be seen as in contemplation of bankruptcy and criminal. I won't hold my breath waiting for the indictments. PWC "audits" AIG. It also "audits" GSG. Does anyone have a problem with that? Bust up the Big 87654 into the not so big 40. I don't believe one word Viniar said. Well Mary Schapiro, will you look into this?

Directly? How about indirectly?

Junior writes, "'The [Fed] and the Treasury agreed that AIG's failure under the conditions [in September 2008] ... would have posed unacceptable risks for the global financial system and for our economy,' says Bernanke. Whose risks are we referring to here? Certainly not the taxpayers". Bravo Junior. As I have written before, when you see a phrase like "risks to the economy", ask: if the "authority" acts, who gets and who pays? Junior writes, "AIG highlights the urgent need for new resolution procedures for systemically important nonbank firms". I've seen various regulatory schemes including the RTC. I assume any regulator will be subverted by the industry it purports to regulate so draw a different conclusion: no "systematially important" bank or nonbank financial institution (FI) should exist! Then when the FI seeks a bailout it can be told, "get lost". How to prevent such firms existence? Establish a maximum asset size for FIs of 1% of industry assets. If total bank assets are $14 trillion, no bank can exist with over $140 billion in assets, period. If such bank is found, its senior executives are guilty of bank fraud, 18 USC 1344. This statute can be amended to cover this. It's so easy a prosecution, even the SDNY US attorney could handle it. Further, require all FIs to have "responsible officers", in effect making them limited partnerships. Imagine how AIG would have been run if Joseph Cassano knew he was personally responsible for AIG's CDS losses and his AIG earnings of any type were subject to say a "four-year" clawback under the fraudulent conveyance statutes.

1 comment:

Anonymous said...

I wonder if we will ever know the timeline of what happened with GS, the Fed and AIG... it's been so murky... and since the taxpayers have put $170+ billion into AIG I think some clarity is in order...

As for the more substantial issues you raise IA... yup... cloudy water... and Friedman resigning sure seemed odd too... everything about the situation is odd...