Wednesday, December 9, 2009

AIG-Vampire Squid

"TARP Inspector General Neil Barofsky keeps committing flagrant acts of political transparency, which if nothing else ought to inform the debate going forward over financial reform. In his latest bombshell, the IG discloses that the New York Federal Reserve did not believe that AIG's credit-default swap (CDS) counterparties posed a systemaic financial risk. ... Yet now we learn from Mr. Barofsky that saving the counterparties was not the reason for the bailout. ... The Fed's taxpayer-funded vehicle, Maiden Lane III, bought out the counterparties' mortgage-backed securities at 100 cents on the dollar, effectively cancelling out the CDS contracts. This was miles above that those assets could have fetched in the market at that time, if they could have been sold at all. ... In April we noted in these columns that Goldman Sachs [GSG], a major AIG counterparty, would certainly have suffered from an AIG failure. And in his latest report, Mr. Barofsky comes to the same conclusion. But if Mr. Geithner now says the AIG bailout wasn't driven by a need to rescue CDS counterparties, then what was the point? Why pay [GSG] and even foreign banks like Societe Generale billions of tax dollars to make them whole? ... Regulators say that having taxpayers buy out the counterparties improved AIG's liquidity position, but why was it important to keep IG liquid if not to protect some class of crediutors? ... Yet, if there is one thins that all observers seemed to agree on last year, it was that AIG's money to pay policyholders was segregated and safe inside the regulated insurance subsidiaries. If the real systemic danger was the condition of these highly regulatyed subsidiaries--where there was no CDS trading--then the Beltway narrative implodes. ... For example, if AIG's CDS contracts were not the systemic risk, then what is the argument for resturcturing the derivatives market? After Lehman's failure, CDS contracts were quickly settled according to the industry protocol. Despite fears of systemic risk, none of the large banks, either acting as a counterparty to Lehman or as a buyer of CDS on Lehman itself, turned out to have major exposure", my emphasis, WSJ Editorial, 20 November 2009:

Thomas Adams (TA), an attorney has a 24 November 2009 post at Naked Capitalism, about AIG-Vampire Squid (VS) Conspiracy Theories. TA writes, "I hate to get sucked into the vampire squid line of thinking about Goldman, but the only explanation I can think of for why AIG got rescued and the monolines did not is because Goldman had significant exposure to AIG and did not have exposure to the monolines". I have no problem with VS conspiracy theories, link:
"Insurer [AIG] closed two transactions with the Federal Reserve Bank of New York [NYFed] that will reduce its debt to the government by $25 billion and position the two units for spinoff or sale. AIG said its outstanding debt with the [NYFed] now stands at $127 billion, down from $42 billion, excluding interest and fees. ... The moves will result in an fourth-quarter charge of $5.7 billion, on top of $11.7 billion in write-downs already recognized, AIG said", WSJ, 2 December 2009:

The WSJ has this down. Maiden Lane III is a Fed vehicle on its financials. Did Deloitte & Touche (D&T), which audited the Fed know these things as of 20 April 2009? Did D&T do anything at the Fed aside from some bookeeping? What did PriceWaterhouseCoopers which "audited" AIG and GSG know and when did it know it?

I presume VS realized the monolines could never pay off. Here's a link to my 30 October 2007 post: I keep coming back to the Big 87654. How good are these firms if they did not understand the monolines were Ponzi schemes? Here's a link to my 13 December 2007 post:

Will Zimbabwe Ben record a loss in the Fed's financials from this?


Anonymous said...

The asset side of the Fed's balance sheet has to look like Swiss cheese

Anonymous said...

Lord Blankfein is hiding in the smoke... he is hoping that the opacity of the Fed balance sheet and the complexity of the issue let him wiggle out. (Undoubtably the knives are out at GS... shades of the way Corzine was treated post LTCM).

This scam is bigger than TEAPOT DOME.

President Obama should weigh the cost of defending VS and Geithner and Bernanke. It easily could bring his presidency down.

An esteemed professor from the President's alma mater shoots plenty of holes in Geithner's fantasy of having executed this transaction in a way to protect shareholders.

Geithner gave away the store to save Goldman Sachs.

Timmy is easy to pick on...

But where was Hank Paulson in all this? He was right in the center of the scandal.

Timmy gonna take the whole fall? Uhm.