Dubya's Parting Gifts to Big Business - Your Wallet

[Nbadan]

The Bush gang's parting gift: a final, frantic looting of public wealth
The US bail-out amounts to a strings-free, public-funded windfall for big business. Welcome to no-risk capitalism

Naomi Klein
The Guardian, Friday October 31 2008


In the final days of the election many Republicans seem to have given up the fight for power. But don't be fooled: that doesn't mean they are relaxing. If you want to see real Republican elbow grease, check out the energy going into chucking great chunks of the $700bn bail-out out the door. At a recent Senate banking committee hearing, the Republican Bob Corker was fixated on this task, and with a clear deadline in mind: inauguration. "How much of it do you think may be actually spent by January 20 or so?" Corker asked Neel Kashkari, the 35-year-old former banker in charge of the bail-out.

When European colonialists realised that they had no choice but to hand over power to the indigenous citizens, they would often turn their attention to stripping the local treasury of its gold and grabbing valuable livestock. If they were really nasty, like the Portuguese in Mozambique in the mid-1970s, they poured concrete down the elevator shafts.

Nothing so barbaric for the Bush gang. Rather than open plunder, it prefers bureaucratic instruments, such as "distressed asset" auctions and the "equity purchase program". But make no mistake: the goal is the same as it was for the defeated Portuguese - a final, frantic looting of the public wealth before they hand over the keys to the safe.

How else to make sense of the bizarre decisions that have governed the allocation of the bail-out money? When the Bush administration announced it would be injecting $250bn into US banks in exchange for equity, the plan was widely referred to as "partial nationalisation" - a radical measure required to get banks lending again. Henry Paulson, the treasury secretary, had seen the light, we were told, and was following the lead of Gordon Brown. ......


Guardian (http://www.guardian.co.uk/commentisfree/2008/oct/31/useconomy-banking)

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October 30, 2008

A Question for A.I.G.: Where Did the Cash Go?

By MARY WILLIAMS WALSH (http://topics.nytimes.com/top/reference/timestopics/people/w/mary_williams_walsh/index.html?inline=nyt-per)

The American International Group (http://topics.nytimes.com/top/news/business/companies/american_international_group/index.html?inline=nyt-org) is rapidly running through $123 billion in emergency lending provided by the Federal Reserve (http://topics.nytimes.com/top/reference/timestopics/organizations/f/federal_reserve_system/index.html?inline=nyt-org), raising questions about how a company claiming to be solvent in September could have developed such a big hole by October. Some analysts say at least part of the shortfall must have been there all along, hidden by irregular accounting.

“You don’t just suddenly lose $120 billion overnight,” said Donn Vickrey of Gradient Analytics, an independent securities research firm in Scottsdale, Ariz.

Mr. Vickrey says he believes A.I.G. must have already accumulated
tens of billions of dollars worth of losses by mid-September, when it came close to collapse and received an $85 billion emergency line of credit by the Fed. That loan was later supplemented by a $38 billion lending facility.

But losses on that scale do not show up in the company’s financial filings. Instead, A.I.G. replenished its capital by issuing $20 billion in stock and debt in May and reassured investors that it had an ample cushion. It also said that it was making its accounting more precise.
Mr. Vickrey and other analysts are examining the company’s disclosures for clues that the cushion was threadbare and that company officials knew they had major losses months before the bailout.

Tantalizing support for this argument comes from what appears to have been a behind-the-scenes clash at the company over how to value some of its derivatives (http://topics.nytimes.com/top/reference/timestopics/subjects/d/derivatives/index.html?inline=nyt-classifier) contracts. An accountant brought in by the company because of an earlier scandal was pushed to the sidelines on this issue, and the company’s outside auditor, PricewaterhouseCoopers, warned of a material weakness months before the government bailout.

The internal auditor resigned and is now in seclusion, according to a former colleague. His account, from a prepared text, was read by Representative Henry A. Waxman (http://topics.nytimes.com/top/reference/timestopics/people/w/henry_a_waxman/index.html?inline=nyt-per), Democrat of California and chairman of the House Committee on Oversight and Government Reform, in a hearing this month.

These accounting questions are of interest not only because taxpayers are footing the bill at A.I.G. but also because the post-mortems may point to a fundamental flaw in the Fed bailout: the money is buoying an insurer — and its trading partners — whose cash needs could easily exceed the existing government backstop if the housing sector continues to deteriorate.

Edward M. Liddy, the insurance executive brought in by the government to restructure A.I.G., has already said that although he does not want to seek more money from the Fed, he may have to do so.

Continuing Risk

Fear that the losses are bigger and that more surprises are in store is one of the factors beneath the turmoil in the credit markets, market participants say.

“When investors don’t have full and honest information, they tend to sell everything, both the good and bad assets,” said Janet Tavakoli, president of Tavakoli Structured Finance, a consulting firm in Chicago. “It’s really bad for the markets. Things don’t heal until you take care of that.”

A.I.G. has declined to provide a detailed account of how it has used the Fed’s money. The company said it could not provide more information ahead of its quarterly report, expected next week, the first under new management. The Fed releases a weekly figure, most recently showing that $90 billion of the $123 billion available has been drawn down.

A.I.G. has outlined only broad categories: some is being used to shore up its securities-lending program, some to make good on its guaranteed investment contracts, some to pay for day-to-day operations and — of perhaps greatest interest to watchdogs — tens of billions of dollars to post collateral with other financial institutions, as required by A.I.G.’s many derivatives contracts.

No information has been supplied yet about who these counterparties are, how much collateral they have received or what additional tripwires may require even more collateral if the housing market continues to slide.

Ms. Tavakoli said she thought that instead of pouring in more and more money, the Fed should bring A.I.G. together with all its derivatives counterparties and put a moratorium on the collateral calls. “We did that with ACA,” she said, referring to ACA Capital Holdings, a bond insurance company that filed for bankruptcy in 2007.

Of the two big Fed loans, the smaller one, the $38 billion supplementary lending facility, was extended solely to prevent further losses in the securities-lending business. So far, $18 billion has been drawn down for that purpose.

For securities lending, an institution with a long time horizon makes extra money by lending out securities to shorter-term borrowers. The borrowers are often hedge funds setting up short trades, betting a stock’s price will fall. They typically give A.I.G. cash or cashlike instruments in return. Then, while A.I.G. waits for the borrowers to bring back the securities, it invests the money.

In the last few months, borrowers came back for their money, and A.I.G. did not have enough to repay them because of market losses on its investments. Through the secondary lending facility, the insurer is now sending those investments to the Fed, and getting cash in turn to repay customers.

A spokesman for the insurer, Nicholas J. Ashooh, said A.I.G. did not anticipate having to use the entire $38 billion facility. At midyear, A.I.G. had a shortfall of $15.6 billion in that program, which it says has grown to $18 billion. Another spokesman, Joe Norton, said the company was getting out of this business. Of the government’s original $85 billion line of credit, the company has drawn down about $72 billion. It must pay 8.5 percent interest on those funds.
An estimated $13 billion of the money was needed to make good on investment accounts that A.I.G. typically offered to municipalities, called guaranteed investment contracts, or G.I.C.’s.

When a local government issues a construction bond, for example, it places the proceeds in a guaranteed investment contract, from which it can draw the funds to pay contractors.

After the insurer’s credit rating was downgraded in September, its G.I.C. customers had the right to pull out their proceeds immediately. Regulators say that A.I.G. had to come up with $13 billion, more than half of its total G.I.C. business. Rather than liquidate some investments at losses, it used that much of the Fed loan.

For $59 billion of the $72 billion A.I.G. has used, the company has provided no breakdown. A block of it has been used for day-to-day operations, a broad category that raises eyebrows since the company has been tarnished by reports of expensive trips and bonuses for executives.

The biggest portion of the Fed loan is apparently being used as collateral for A.I.G.’s derivatives contracts, including credit-default swaps (http://topics.nytimes.com/top/reference/timestopics/subjects/c/credit_default_swaps/index.html?inline=nyt-classifier).

The swap contracts are of great interest because they are at the heart of the insurer’s near collapse and even A.I.G. does not know how much could be needed to support them. They are essentially a type of insurance that protects investors against default of fixed-income securities. A.I.G. wrote this insurance on hundreds of billions of dollars’ worth of debt, much of it linked to mortgages.

Through last year, senior executives said that there was nothing to fear, that its swaps were rock solid. The portfolio “is well structured” and is subjected to “monitoring, modeling and analysis,” Martin J. Sullivan, A.I.G.’s chief executive at the time, told securities analysts in the summer of 2007.

Gathering Storm

By fall, as the mortgage crisis began roiling financial institutions, internal and external auditors were questioning how A.I.G. was measuring its swaps. They suggested the portfolio was incurring losses. It was as if the company had insured beachfront property in a hurricane zone without charging high enough premiums.

But A.I.G. executives, especially those in the swaps business, argued that any decline was theoretical because the hurricane had not hit. The underlying mortgage-related securities were still paying, they said, and there was no reason to think they would stop doing so.
A.I.G. had come under fire for accounting irregularities some years back and had brought in a former accounting expert from the Securities and Exchange Commission. He began to focus on the company’s accounting for its credit-default swaps and collided with Joseph Cassano, the head of the company’s financial products division, according to a letter read by Mr. Waxman at the recent Congressional hearing.

When the expert tried to revise A.I.G.’s method for measuring its swaps, he said that Mr. Cassano told him, “I have deliberately excluded you from the valuation because I was concerned that you would pollute the process.”

Mr. Cassano did not attend the hearing and was unavailable for comment. The company’s independent auditor,

PricewaterhouseCoopers, was the next to raise an alarm. It briefed Mr. Sullivan late in November, warning that it had found a “material weakness” because the unit that valued the swaps lacked sufficient oversight.

About a week after the auditor’s briefing, Mr. Sullivan and other executives said nothing about the warning in a presentation to securities analysts, according to a transcript. They said that while disruptions in the markets were making it difficult to value its swaps, the company had made a “best estimate” and concluded that its swaps had lost about $1.6 billion in value by the end of November.
Still, PricewaterhouseCoopers appears to have pressed for more. In February, A.I.G. said in a regulatory filing that it needed to “clarify and expand” its disclosures about its credit-default swaps. They had declined not by $1.6 billion, as previously reported, but by $5.9 billion at the end of November, A.I.G. said. PricewaterhouseCoopers subsequently signed off on the company’s accounting while making reference to the material weakness.

Investors shuddered over the revision, driving A.I.G.’s stock down 12 percent. Mr. Vickrey, whose firm grades companies on the credibility of their reported earnings, gave the company an F. Mr. Sullivan, his credibility waning, was forced out months later.

The Losses Grow

Through spring and summer, the company said it was still gathering information about the swaps and tucked references of widening losses into the footnotes of its financial statements: $11.4 billion at the end of 2007, $20.6 billion at the end of March, $26 billion at the end of June. The company stressed that the losses were theoretical: no cash had actually gone out the door.

“If these aren’t cash losses, why are you having to put up collateral to the counterparties?” Mr. Vickrey asked in a recent interview. The fact that the insurer had to post collateral suggests that the counterparties thought A.I.G.’s swaps losses were greater than disclosed, he said. By midyear, the insurer had been forced to post collateral of $16.5
billion on the swaps.

Though the company has not disclosed how much collateral it has posted since then, its $447 billion portfolio of credit-default swaps could require far more if the economy continues to weaken. More federal assistance would then essentially flow through A.I.G. to counterparties.

“We may be better off in the long run letting the losses be realized and letting the people who took the risk bear the loss,” said Bill Bergman, senior equity analyst at the market research company Morningstar (http://topics.nytimes.com/top/news/business/companies/morningstar-inc/index.html?inline=nyt-org).

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October 31, 2008

Fed Adds $21 Billion to Loans for A.I.G.

By MARY WILLIAMS WALSH (http://topics.nytimes.com/top/reference/timestopics/people/w/mary_williams_walsh/index.html?inline=nyt-per)

The American International Group (http://topics.nytimes.com/top/news/business/companies/american_international_group/index.html?inline=nyt-org) said Thursday that it had been given access to the Federal Reserve (http://topics.nytimes.com/top/reference/timestopics/organizations/f/federal_reserve_system/index.html?inline=nyt-org)’s new commercial paper (http://topics.nytimes.com/top/reference/timestopics/subjects/c/commercial_paper/index.html?inline=nyt-classifier) program, allowing it to reduce its reliance on a costlier emergency loan from the Fed.

The company said it would be able to borrow up to $20.9 billion under the new program, raising its maximum available credit from the Fed to $144 billion under three different programs. The credit includes an earlier emergency loan of $85 billion from the Fed that carries a much higher interest rate.

A.I.G.’s big borrowings underscore the company’s bewilderingly rapid decline. When it suddenly faced a cash crisis in mid-September, the original estimate of the amount it needed was just $20 billion. A few days later, the Fed stepped forward with its $85 billion credit line. And now, the stunning size of that original bailout has grown by almost 70 percent.

A.I.G.’s cash needs could grow even further. Much of the cash it needs is being used to meet collateral calls from its derivatives (http://topics.nytimes.com/top/reference/timestopics/subjects/d/derivatives/index.html?inline=nyt-classifier) counterparties, and the precise collateral triggers and amounts are not public information. In general, the derivative contracts cost A.I.G. more as the real estate markets decline. The company’s financial products division did a lot of business in that type of derivative, called credit-default swaps (http://topics.nytimes.com/top/reference/timestopics/subjects/c/credit_default_swaps/index.html?inline=nyt-classifier).

By the same token, if real estate prices rebounded, A.I.G. has said, it could call some of the collateral back.

In addition to the $85 billion credit line and the $20.9 billion commercial paper program, A.I.G. has a $38 billion facility from the Fed that provides liquidity for the company’s securities-lending business. A.I.G. said on Thursday that it was currently using about $18 billion of this facility.

By tapping the newest source of money from the Fed, A.I.G. was able to reduce the amount it had borrowed under the original $85 billion line of credit, said a spokesman, Joe Norton. He said the company had currently drawn down $65.5 billion from that loan, compared with about $72 billion a week ago.

The Fed extended the original $85 billion line of credit at a steep price. On the part of the loan that A.I.G. draws down, it must pay an interest rate of 8.5 percentage points over the three-month Libor, an index rate for inter-bank lending. On the unused portion, A.I.G. must pay a fixed rate of 8.5 percent. In addition, the Fed added a 2 percent commitment fee to the total balance when it started the loan.

Mr. Norton said A.I.G. had incurred interest and fees of about $331 million so far.

The Fed also took a majority stake in A.I.G. in exchange for the bailout, angering shareholders, who were almost completely wiped out.

The commercial paper program is much cheaper. The interest rate changes every day, but in the four days since the Fed started the program, the highest rate was just 3.89 percent.

A.I.G. is not the only participant. The Fed offered the program to all issuers of commercial paper in the nation to restart the stalled credit markets.

Mr. Norton said A.I.G. would use the newest source of funds for working capital, to refinance existing commercial paper, and to make voluntary prepayments on the $85 billion loan. He said that such voluntary prepayments would not reduce the total amount of the credit line available. If, by contrast, A.I.G. sold business assets and used the proceeds to pay down the loan, Mr. Norton said, the $85 billion balance would be reduced accordingly.

==========

Absolutely, inarguablly daylight robbery.

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A Last Push To Deregulate

White House to Ease Many Rules

By R. Jeffrey Smith
Washington Post Staff Writer
Friday, October 31, 2008; A01

The White House (http://www.washingtonpost.com/ac2/related/topic/The+White+House?tid=informline) is working to enact a wide array of federal regulations, many of which would weaken government rules aimed at protecting consumers and the environment, before President Bush (http://www.washingtonpost.com/ac2/related/topic/George+W.+Bush?tid=informline) leaves office in January.

The new rules would be among the most controversial deregulatory steps of the Bush era and could be difficult for his successor to undo. Some would ease or lift constraints on private industry, including power plants, mines and farms.

Those and other regulations would help clear obstacles to some

commercial ocean-fishing activities,

ease controls on emissions of pollutants that contribute to global warming,

relax drinking-water standards and

lift a key restriction on mountaintop coal mining.

Once such rules take effect, they typically can be undone only through a laborious new regulatory proceeding, including lengthy periods of public comment, drafting and mandated reanalysis.

"They want these rules to continue to have an impact long after they leave office," said Matthew Madia, a regulatory expert at OMB Watch, a nonprofit group critical of what it calls the Bush administration's penchant for deregulating in areas where industry wants more freedom. He called the coming deluge "a last-minute assault on the public . . . happening on multiple fronts."

White House spokesman Tony Fratto (http://www.washingtonpost.com/ac2/related/topic/Tony+Fratto?tid=informline) said: "This administration has taken extraordinary measures to avoid rushing regulations at the end of the term. And yes, we'd prefer our regulations stand for a very long time -- they're well reasoned and are being considered with the best interests of the nation in mind."

( Fratto, go fuck to hell your laying self )

As many as 90 new regulations are in the works, and at least nine of them are considered "economically significant" because they impose costs or promote societal benefits that exceed $100 million annually. They include new rules governing employees who take family- and medical-related leaves, new standards for preventing or containing oil spills, and a simplified process for settling real estate transactions.

While it remains unclear how much the administration will be able to accomplish in the coming weeks, the last-minute rush appears to involve fewer regulations than Bush's predecessor, Bill Clinton (http://www.washingtonpost.com/ac2/related/topic/Bill+Clinton?tid=informline), approved at the end of his tenure.

In some cases, Bush's regulations reflect new interpretations of language in federal laws. In other cases, such as several new counterterrorism initiatives, they reflect new executive branch decisions in areas where Congress -- now out of session and focused on the elections -- left the president considerable discretion.

The burst of activity has made this a busy period for lobbyists who fear that industry views will hold less sway after the elections. The doors at the New Executive Office Building have been whirling with corporate officials and advisers pleading for relief or, in many cases, for hastened decision making.

According to the Office of Management and Budget (http://www.washingtonpost.com/ac2/related/topic/U.S.+Office+of+Management+and+Budget?tid=informlin e)'s regulatory calendar,

the commercial scallop-fishing industry came in two weeks ago to urge that proposed catch limits be eased,

nearly bumping into National Mining Association officials making the case for easing rules meant to keep coal slurry waste out of Appalachian streams.

A few days earlier, lawyers for kidney dialysis and biotechnology companies registered their complaints at the OMB about new Medicare (http://www.washingtonpost.com/ac2/related/topic/Medicare?tid=informline) reimbursement rules.

Lobbyists for customs brokers complained about proposed counterterrorism rules that require the advance reporting of shipping data.

Bush's aides are acutely aware of the political risks of completing their regulatory work too late. On the afternoon of Bush's inauguration, Jan. 20, 2001, his chief of staff issued a government-wide memo that blocked the completion or implementation of regulations drafted in the waning days of the Clinton administration that had not yet taken legal effect.

"Through the end of the Clinton administration, we were working like crazy to get as many regulations out as possible," said Donald R. Arbuckle, who retired in 2006 after 25 years as an OMB official. "Then on Sunday, the day after the inauguration, OMB Director Mitch Daniels (http://www.washingtonpost.com/ac2/related/topic/Mitch+Daniels?tid=informline) called me in and said, 'Let's pull back as many of these as we can.' "

Clinton's appointees wound up paying a heavy price for procrastination. Bush's team was able to withdraw 254 regulations that covered such matters as drug and airline safety, immigration and indoor air pollutants. After further review, many of the proposals were modified to reflect Republican policy ideals or scrapped altogether.
Seeking to avoid falling victim to such partisan tactics, White House Chief of Staff Joshua B. Bolten (http://www.washingtonpost.com/ac2/related/topic/Joshua+Bolten?tid=informline) in May imposed a Nov. 1 government-wide deadline to finish major new regulations, "except in extraordinary circumstances."

That gives officials just a few more weeks to meet an effective Nov. 20 deadline for the publication of economically significant rules, which take legal effect only after a 60-day congressional comment period. Less important rules take effect after a 30-day period, creating a second deadline of Dec. 20.

OMB spokeswoman Jane Lee said that Bolten's memo was meant to emphasize the importance of "due diligence" in ensuring that late-term regulations are sound. "We will continue to embrace the thorough and high standards of the regulatory review process," she said.

As the deadlines near, the administration has begun to issue regulations of great interest to industry, including, in recent days, a rule that allows natural gas pipelines to operate at higher pressures and new Homeland Security rules that shift passenger security screening responsibilities from airlines to the federal government. The OMB also approved a new limit on airborne emissions of lead this month, acting under a court-imposed deadline.

Many of the rules that could be issued over the next few weeks would ease environmental regulations, according to sources familiar with administration deliberations.

A rule put forward by the National Marine Fisheries Service (http://www.washingtonpost.com/ac2/related/topic/NOAA+Fisheries+Service?tid=informline) and now under final review by the OMB would lift a requirement that environmental impact statements be prepared for certain fisheries-management decisions and would give review authority to regional councils dominated by commercial and recreational fishing interests.

An Alaska commercial fishing source, granted anonymity so he could speak candidly about private conversations, said that senior administration officials promised to "get the rule done by the end of this month" and that the outcome would be a big improvement.

Lee Crockett of the Pew Charitable Trusts (http://www.washingtonpost.com/ac2/related/topic/The+Pew+Charitable+Trusts?tid=informline)' Environment Group said the administration has received 194,000 public comments on the rule and protests from 80 members of Congress as well as 160 conservation groups. "This thing is fatally flawed" as well as "wildly unpopular," Crockett said.

Two other rules nearing completion would ease limits on pollution from power plants, a major energy industry goal for the past eight years that is strenuously opposed by Democratic lawmakers and environmental groups.

One rule, being pursued over some opposition within the Environmental Protection Agency (http://www.washingtonpost.com/ac2/related/topic/U.S.+Environmental+Protection+Agency?tid=informlin e), would allow current emissions at a power plant to match the highest levels produced by that plant, overturning a rule that more strictly limits such emission increases. According to the EPA's estimate, it would allow millions of tons of additional carbon dioxide into the atmosphere annually, worsening global warming.

A related regulation would ease limits on emissions from coal-fired power plants near national parks.

A third rule would allow increased emissions from oil refineries, chemical factories and other industrial plants with complex manufacturing operations.

These rules "will force Americans to choke on dirtier air for years to come, unless Congress or the new administration reverses these eleventh-hour abuses," said lawyer John Walke of the Natural Resources Defense Council (http://www.washingtonpost.com/ac2/related/topic/Natural+Resources+Defense+Council?tid=informline).

But Scott H. Segal, a Washington lawyer and chief spokesman for the Electric Reliability Coordinating Council, said that "bringing common sense to the Clean Air Act is the best way to enhance energy efficiency and pollution control." He said he is optimistic that the new rule will help keep citizens' lawsuits from obstructing new technologies.

Jonathan Shradar (http://www.washingtonpost.com/ac2/related/topic/Jonathan+Shradar?tid=informline), an EPA spokesman, said that he could not discuss specifics but added that "we strive to protect human health and the environment." Any rule the agency completes, he said, "is more stringent than the previous one."



© 2008 The Washington Post Company



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