Sunday, November 29, 2009

Vampire Squid Wins Again

"The [Fed] of New York [NYFed] gave up much of its power in high-pressure negotiations with the American International Group's [AIG] trading partners last year, according to a government report made public on Monday. Just two days before the [NYFed] paid AIG's partners 100 cents on the dollar to tear up their contracts with the insurance giant, one bank volunteered to take a modest haircut--but it never got the chance. ... But UBS's good-faith gesture was quickly drowned out by Goldman Sachs [GSG] and the top French bank regulator. They argued, with others, that it would be improper and perhaps even criminal to force AIG's trading partners to bear losses outside of bankruptcy court. The banks and the regulator were confident that the [NYFed] was not willing to push AIG into bankruptcy, because earlier in the fall the [NYFed] had stepped in with $85 billion to prop up the insurer. ... The Fed 'refused to use its considerable leverage,' Neil M. Barofsky, the special inspector general for the [TARP], wrote in a report to be officially released on Tuesday, examining the much-criticized decision to make AIG's trading partners whole when people and businesses were taking painful losses in the financial markets. There have been suggestions that the Fed chose to negotiate weakly, Mr. Barofsky said, to give a 'backdoor bailout' to AIG's banks. He said Mr. Geithner and the Fed's lawyers had denied this, but added that 'irrespective of their stated intent,' there was no doubt about the result: 'Tens of billions of government money was funnelled inexorably and directly to AIG's counterparties.' ... Mr. Barofsky said that Goldman's hedges were unlikely to have held up amid the market turbulence of late last year. ... A spokesman for Goldman ... said any additional exposure to AIG's losses was a moot point, because the Fed's intervention had eliminated the risk", my emphasis, Mary Walsh at the NYT, 17 November 2009, link:

"The [NYFed] caved in to demands by [AIG's] trading partners that they be paid in full for complex securities they had insured with the company, saving soem of the world's biggest banks from billions in losses, according to a government audit. ... The banks that were paid off in full included [GSG]. Merrill Lynch and large French banks Societie Generale and Calyon, the investment bank unit of Credit Agricole Group, which were represented by the French bank regulator in negotiations with the [NYFed] last November, the report said. ... The audit provides a window into a bailout effort that has been shrouded by a lack of disclosure--raised in the report--and questions over why the US government in effect funneled tens of billions of dollars to the US and European banks that were AIG's trading partners", my emphasis, Serena Ng & Carrick Mollenkamp at the WSJ, 17 November 2009, link:

"For more than a year, [GSG] has maintained that it wouldn't have suffered material losses had the government allowed one of its major trading partners, [AIG] to collapse. ... A revamped rescue package in November led to Goldman and 15 other banks being paid in full for $62 billion worth of insurance contracts they had with AIG to protect against losses tied to mortgage assets. ... The government auditor's report broadly fouind that the [NYFed] left itself little room in nogotiating with the banks for a better deal for taxpayers. ... In a separate series of trades, Goldman had sold protection against losses on the same assets to other trading firms. ... Goldman has said it was insulated against a material loss by an AIG default. And the audit pointed our that Goldman in fact was protected against some losses. For example, the firm had collected $8.4 billion worth of collateral--cash or a liquid equivalent--from AIG on a $13.9 billion portion of its bets. Separately, Goldman took steps to try and buy insurance against insurance by purchasing protection against an AIG default. ... The audit said, however, that given the fact that the market for those securities had tanked in November 2008, and then an AIG default would have sparked a rout, Goldman would have had a difficult time obtaining value for those assets. ... The bottom line: The audit said those assets that Goldman held would have been worth a lot less had AIG defaulted. ... The audit also raised questions about the insulation Goldman had purchased against an AIG default", my emphasis, Carrick Mollenkamp and Serena Ng at the WSJ, 18 November 2009, link:

"Finally, Mr. Barofsky pokes holes in arguments made repeatedly over the past 14 months by [GSG], AIG's largest trading partner and recipient of $12.9 billion in taxpayer money in the bailiut, that it had facced no material risk in an AIG default--that, in effect, had AIG cratered, [GSG] wouldn't have suffered damage. ... As Goldman prepares to pay out nearly $17 billion in bonuses to its employees in one of its most profitable years ever, it is important that an authoritative, independent voice like Mr. Barofsky's reminds us how the taxpayer bailout of AIG benefited Goldman. ... Regarding his firm's own dealings with AIG, Mr. [Lucas] van Praag said that Goldman believed that its 'exposure was close to zero; because it insulated itself from a downturn in AIG's fortunes through hedges and collateral it had already received. ... So is Janet Tavakoli, an expert in derivatives at Tavakoli Structured Finance, a consulting firm. 'On Sept. 16, 2008, David Viniar, [GSG's] chief financial officer, said that whatever the outcome at AIG, the direct impact of Goldman's credit exposure would be immaterial,' she said. 'That was false. The report states that if the [NYFed] had negotiated concessions Goldman would have suffered a loss.' ... 'The prices of the collateralized debt obligations against which Goldman bought protection from AIG were in sickening free fall, and the cost of replacing AIG's protection would have been sky-high,' she said. 'Goldman must have known this, because it underwrote some of those value-destroying CDO's.' Ms. Tavakoli argues that [GSG] should refund the money it received in the bailout and take back the toxic CDO's now residing on the Fed's books--and to do so before it begins showering bonuses on its taxpayer-protected employees. 'AIG, a sophisticated investor, foolishly took this risk,' she said. 'But the US taxpayer never agreed to be a victim of investment that should undergo a rigorous audit'," my emphasis, Gretchen Morgenson at the NYT, 22 November 2009, link:

The NYFed didn't play "chicken" with Vampire Squid (VS). The correct response was to have VS's executives "shadowed" by FBI agents 24 hours a day. Like what happened to Joe Jett in 1994. I'm sure even Lloyd Antoinette Blankfein would realize if VS had pressed any claims, he would be indicted for something. As Laverntiy Beria said, "Show me the man, and I'll find you the crime", my 16 October 2009 post: Well Mary Schapiro, read this and compare it to VS's claim it was fully hedged and had no AIG exposure. If true, it's because Timmy Boy put $85 billion into AIG. I think Barofksy is close to the truth here. "Improper and criminal"? Fine, VS, The NYFed should have said, "We will put out a press release 9:00 AM tomorrow with your statement. You have until 8:59 AM tomorrow to retract it. What do you want"? Even VS's attorneys could figure out what that meant. Suggestions? Read my 12 and 13 May 6 September 2009 posts: Hey Preet Bharara(PB), can you indict David Viniar (DV) for securities fraud based on his public pronouncements? Look into it. Boy. Or are you on VS's payroll? Here are some of my prior related posts:

Why? To bail out VS, that's why.

VS had no exposure to an AIG bankruptcy. We know so because VS said it. I doubt VS could have kept the $8.4 billion in collateral it supposedly got. Was AIG then insolvent? Should AIG's "bankruptcy trustee" grab it as a preference payment? PriceWaterhouseCoopers (PWC), was AIG insolvent? You "audited" AIG and VS. Well? In 2008 AIG paid PWC $120 million, VS paid PWC $62 million. For $182 million, what did you do? Hey, VS audit committee, sight unseen, I can do a better audit than PWC. Here's my fee: only $50 million. Well? Of course, I might look DV in the eye and tell him VS will get an adverse opinion based on its supposed "hedge accounting", but I will be thorough. And I will not be intimidated.

VS believed this? It was wrong or lied. PWC, did you find this? What's wrong with VS's internal controls? PWC declared them Kosher for Passover on 22 January 2009. Well, Mary Schapiro, what will you do about this? Beat up some micro cap registrants to show us your brass cojones? Hey PB, Tavakoli (I love her) appears to allege the elements of a securities fraud count. What will you do about this?


Anonymous said...

My prediction is that Lord Blankfein calls President Obama and suggests Geithner be throw under the bus. Then Geithner gets a nice cushy job with JPMC, in Asia, for a few years till things cool down.

Now... who could replace Geithner and stonewall any inquiry into the AIG/Goldman bailout? Busy bright minds are hard at work vetting the short list. Blankfein has some ideas.

Bharara? A nothingburger.

Tavakoli? A babe with brains and a passion for this country that is very refreshing. Palin should plan on having Janet clean up Wall Street... that would get America restarted.

Here's what the President must weigh. Either keeping the corrupt bankers and their practices in place and hopefully they will "earn their way out". Or he must actively address the concentration of banking and the rigged markets and clean up Wall Street. America needs to see that someone is paying for the collapse and the massive taxpayer bailouts. Green shoot talk and "jobs summits" are good for a little splash on the nightly news but the unease is much deeper... and the malaise grows...

Oh... and Vampire Squid was "hedged" what a bluff... and how impossibly lame for Geithner to blame it on the French regulators... Paulson blamed Lehman on the British regulators... they might succeed with these flimsy defenses for a while... but this scandal is much bigger than Teapot Dome... and the facts will come out...

Anonymous said...

The Ponzi scheme rolls on...

Banks have increased purchases 26 percent, borrowing at virtually zero percent and buying higher-yielding Treasuries to recapitalize after global financial companies reported more than $1.7 trillion in losses and writedowns. Banks boosted holdings in Treasuries to $125 billion in the year through June, Fed data show.

“The people who are recommending that he [Geithner] quits are responding to anger among voters toward all politicians,” said Stuart Thomson, a fixed-income fund manager in Glasgow at Ignis Asset Management, which oversees the equivalent of $100 billion.

“They think the money has gone to the privileged and not the people who need it most, and that’s why you’re seeing the anger being directed at Geithner, and indeed Bernanke. It’s difficult to argue they haven’t done a good job.”

Oh sure... the ultrarich love Geithner and Bernanke... giving rich people borrowing at zero to do a "carry trade" makes you very popular...

Pity all the small business people can't get any credit... it's all loaned out at zero percent to Stuart Thomson, a fixed-income fund manager in Glasgow at Ignis Asset Management, which oversees the equivalent of $100 billion and his cronies... oh well...