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WTF?!?!
I want somebody's head on a stick.
New York Fed’s Secret Choice to Pay for AIG Swaps Hits Taxpayers
By Richard Teitelbaum and Hugh Son
Oct. 27 (Bloomberg) -- In the months leading up to the September 2008 collapse of giant insurer American International Group Inc., Elias Habayeb and his colleagues worked nights and weekends negotiating with banks that had bought $62 billion of credit-default swaps from AIG, according to a person who has worked with Habayeb.
Habayeb, 37, was chief financial officer for the AIG division that oversaw AIG Financial Products, the unit that had sold the swaps to the banks. One of his goals was to persuade the banks to accept discounts of as much as 40 cents on the dollar, according to people familiar with the matter.
Among AIG’s bank counterparties were New York-based Goldman Sachs Group Inc. and Merrill Lynch & Co., Paris-based Societe Generale SA and Frankfurt-based Deutsche Bank AG.
By Sept. 16, 2008, AIG, once the world’s largest insurer, was running out of cash, and the U.S. government stepped in with a rescue plan. The Federal Reserve Bank of New York, the regional Fed office with special responsibility for Wall Street, opened an $85 billion credit line for New York-based AIG. That bought it 77.9 percent of AIG and effective control of the insurer.
The government’s commitment to AIG through credit facilities and investments would eventually add up to $182.3 billion.
Beginning late in the week of Nov. 3, the New York Fed, led by President Timothy Geithner, took over negotiations with the banks from AIG, together with the Treasury Department and Chairman Ben S. Bernanke’s Federal Reserve. Geithner’s team circulated a draft term sheet outlining how the New York Fed wanted to deal with the swaps -- insurance-like contracts that backed soured collateralized-debt obligations.
Subprime Mortgages
CDOs are bundles of debt including subprime mortgages and corporate loans sold to investors by banks.
Part of a sentence in the do ent was crossed out. It contained a blank space that was intended to show the amount of the haircut the banks would take, according to people who saw the term sheet. After less than a week of private negotiations with the banks, the New York Fed instructed AIG to pay them par, or 100 cents on the dollar. The content of its deliberations has never been made public.
The New York Fed’s decision to pay the banks in full cost AIG -- and thus American taxpayers -- at least $13 billion. That’s 40 percent of the $32.5 billion AIG paid to retire the swaps. Under the agreement, the government and its taxpayers became owners of the dubious CDOs, whose face value was $62 billion and for which AIG paid the market price of $29.6 billion. The CDOs were shunted into a Fed-run en y called Maiden Lane III.
Habayeb, who left AIG in May, did not return phone calls and an e-mail.
Goldman Sachs
The deal contributed to the more than $14 billion that over 18 months was handed to Goldman Sachs, whose former chairman, Stephen Friedman, was chairman of the board of directors of the New York Fed when the decision was made. Friedman, 71, resigned in May, days after it was disclosed by the Wall Street Journal that he had bought more than 50,000 shares of Goldman Sachs stock following the takeover of AIG. He declined to comment for this article.
In his resignation letter, Friedman said his continued role as chairman had been mischaracterized as improper. Goldman Sachs spokesman Michael DuVally declined to comment.
AIG paid Societe General $16.5 billion, Deutsche Bank $8.5 billion and Merrill Lynch $6.2 billion.
New York Fed
The New York Fed, one of the 12 regional Reserve Banks that are part of the Federal Reserve System, is unique in that it implements monetary policy through the buying and selling of Treasury securities in the secondary market. It also supervises financial ins utions in the New York region.
The New York Fed board, which normally consists of nine directors, in November 2008 included Jamie Dimon, chief executive officer of JPMorgan Chase & Co., and Friedman. The directors have no direct role in bank supervision. They’re responsible for advising on regional economic conditions and electing the bank president.
Janet Tavakoli, founder of Chicago-based Tavakoli Structured Finance Inc., a financial consulting firm, says the government squandered billions in the AIG deal.
“There’s no way they should have paid at par,” she says. “AIG was basically bankrupt.”
Citigroup Inc. agreed last year to accept about 60 cents on the dollar from New York-based bond insurer Ambac Financial Group Inc. to retire protection on a $1.4 billion CDO.
Unwinding Derivatives
In March 2009, congressional hearings and public demonstrations targeted AIG after it was disclosed it had paid $165 million in bonuses that month to the employees of AIGFP, which is unwinding billions of dollars in derivatives under the supervision of Gerry Pasciucco, a former Morgan Stanley managing director who joined AIG after the CDS payments were mandated.
Far more money was wasted in paying the banks for their swaps, says Donn Vickrey of financial research firm Gradient Analytics Inc. “In cases like this, the outcome is always along the lines of 50, 60 or 70 cents on the dollar,” Vickrey says.
A spokeswoman for Geithner, now secretary of the Treasury Department, declined to comment. Jack Gutt, a spokesman for the New York Fed, also had no comment.
One reason par was paid was because some counterparties insisted on being paid in full and the New York Fed did not want to negotiate separate deals, says a person close to the transaction. “Some of those banks needed 100 cents on the dollar or they risked failure,” Vickrey says.
A Range of Options
People familiar with the transaction say the New York Fed considered a range of options, including guaranteeing the banks’ CDOs. They say that by buying the securities, AIG got the best deal it could.
According to a quarterly New York Fed report on its holdings, the $29.6 billion in securities held by Maiden Lane III had declined in value by about $7 billion as of June 30.
Edward Grebeck, CEO of Stamford, Connecticut-based debt consulting firm Tempus Advisors, says the most serious breach by the government was to keep the process of approving the bank payments secret.
“It’s inexcusable,” says Grebeck, who teaches a course on CDSs at New York University. “Everybody should be privy to the negotiations that went on. We can’t have bailouts like this happening behind closed doors.”
Secret Deliberations
The deliberations of the New York Fed are not made public. In this case, even the iden ies of the AIG counterparties weren’t disclosed until March 2009, when U.S. Senator Christopher Dodd, head of the Senate Finance Committee, demanded they be made public.
Bloomberg News has filed a Freedom of Information Act request seeking copies of the term sheets related to AIG’s counterparty payments, along with e-mails and the logs of phone calls and meetings among Geithner, Friedman and other New York Fed and AIG officials. The request is pending.
The Federal Reserve has been reluctant to publish information on its efforts to stabilize the financial system since the crisis began. The Fed has loaned more than $2 trillion, yet it refuses to name the recipients of the loans, or cite the amount they borrowed, saying that doing so may set off a run by depositors and unsettle shareholders.
Bloomberg LP, the parent of Bloomberg News, sued in November 2008 under the Freedom of Information Act for disclosure of details about 11 Fed lending programs. In August, Manhattan Chief U.S. District Judge Loretta Preska ruled in Bloomberg’s favor, saying the central bank had to provide details of the loans.
The Fed has appealed to the Second Circuit Court of Appeals, and the data remain secret while the appeal proceeds.
‘Cataclysmic Financial Crisis’
Information on the borrowers is “central to understanding and assessing the government’s response to the most cataclysmic financial crisis in America since the Great Depression,” attorneys for Bloomberg said in the Nov. 7 suit.
Questions about the New York Fed transactions may be answered by Neil Barofsky, inspector general for the Troubled Asset Relief Program, or TARP. He is working on a report, which may be released next month, on whether AIG overpaid the banks. TARP is the vehicle through which the Treasury invested more than $200 billion in some 600 U.S. financial ins utions.
William Poole, a former president of the Federal Reserve Bank of St. Louis, defends the New York Fed’s action. The financial system had suffered through months of crisis at the time, he says. The investment bank Bear Stearns Cos. had been swallowed by JPMorgan; mortgage packagers Fannie Mae and Freddie Mac had been taken over by the government; and the day before AIG was rescued, Lehman Brothers Holdings Inc. had filed for bankruptcy.
‘Enough Trouble’
“I think the Federal Reserve was trying to stop the spread of fear in the market,” Poole says. “The market was having enough trouble dealing with Lehman. If you add, on top of that, AIG paying off some fraction of its liabilities, a system which is already substantially frozen would freeze rock-solid.”
Still, officials at AIG object to the secrecy that surrounded the transactions. One top AIG executive who asked not to be identified says he was pressured by New York Fed officials not to file do ents with the U.S. Securities and Exchange Commission that would divulge details.
“They’d tell us that they don’t think that this or that should be disclosed,” the executive says. “They’d say, ‘Don’t you think your counterparties will be concerned?’ It was much more about protecting the Fed.”
‘An Outrage’
Friedman’s role remains controversial. In December 2008, weeks after the payments to the banks were authorized in November, Friedman bought 37,300 shares of Goldman stock at $80.78 a share, according to SEC filings. On Jan. 22, he bought 15,300 more at $66.61.
Both purchases took place before the payments to Goldman Sachs were publicly disclosed under pressure from Senator Dodd in March. On Oct. 26, Goldman Sachs stock closed at $179.37 a share, meaning Friedman had paper profits of $5.4 million.
Jerry Jordan, former president of the Federal Reserve Bank of Cleveland, says Friedman should have resigned from the New York Fed as soon as it became clear that Goldman stood to benefit from its actions.
“It’s an outrage,” Jordan says. “He needed to either resign from the Fed board or from Goldman and proceed to sell his stock.”
98,600 Goldman Shares
Friedman remains a member of Goldman’s board and held a total of 98,600 shares of the firm’s stock as of Jan. 22.
Vickrey says that one reason the New York Fed should have insisted on discounted payments for AIG’s CDSs is that the banks likely had hedges against their insured CDOs or had already written down their value. On March 20, Goldman Sachs CFO David Viniar said in a conference call with investors that Goldman was protected.
“We limited our overall credit exposure to AIG through a combination of collateral and market hedges,” Viniar said. “There would have been no credit losses if AIG had failed.”
In any event, former St. Louis Fed President Poole says the entire process should have been public and transparent. “There should be a high bar against not disclosing,” Poole says. “The taxpayer has every right to understand in detail what happened.”
WTF?!?!
I want somebody's head on a stick.
Instead, AIG and it's counterparties we given the US taxpayer to suck on, to tide them over.
There is little doubt now: to whet their appe es for the for the bonanza the very same megacompanies stand to reap from the next financial panic.
At some point, we should make insane financial risk-taking with trillions of dollars a capital (HA!) offense.
CDS should be regulated either by state gaming commissions as bets, or by state insurance departments as insurance.
They are not ing financial instruments created by innovative financiers, they are either gambling or insurance, so let's not bull ourselves that the essence of those transactions is different than what they are.
http://www.bloomberg.com/news/2012-0...odd-frank.htmlMore than half of the derivatives- trading business of Goldman Sachs Group Inc. (GS), Morgan Stanley and three other large banks could fall largely outside the Dodd- Frank Act if they succeed in lobbying regulators to exempt their overseas operations, government records show.
The debate over the reach of Dodd-Frank has been among the most contentious aspects of the regulatory overhaul enacted by President Barack Obama after the 2008 credit crisis. The banks have met with regulators, testified to Congress and filed dozens of letters contending that they will suffer a compe ive disadvantage if the regulations apply to their foreign arms.
bump, questionaire
u guys know how the govt bailed out t he banks that went bankrupt and paying out the ppl who had deposits with them.....
did the govt also paid out the shareholders of those companies also?? cause if they did...FAIL.
Not sure, but that would be surprising to me. The FDIC insures depositors, not investors.
Simple answer: No.
Complex answer: No, but kinda sorta yes to a small extent in certain cases.
Shareholders weren't getting checks from the govt, but if you owned shares in a bank that were on their way to $0 and the govt bailout kept those shares from falling all the way to $0, then there's a case to be made that benefitted shareholders. But that's more side effect than intent of the program. Nothing to get worked up over IMO. In AIG's case it just meant that shareholders "only" lost 99% of their investment instead of 100%.
I thought TDMVPDPOY was talking about banks that defaulted and got reorganized by the FDIC, but I could be wrong...
If he was, then I'm pretty sure all those shareholders got wiped out. I thought he was also asking about the AIG's, BAC's, C's and other banks/financial ins utions that are still with us in some form.
the reference to paying out depositors hooked me
This is the answer to the question exactly.
You know, after the election Geitner was kept on and made Treasury Head in order to assuage the fears of the financial sector.
He has recently been quoted as saying that he "knows that he will not be asked to stay on if the President is reelected".
I have been nervous because I know that Wall Street likes Geitner (why the not, huh?), but now, I think that maybe the Prez has found out just how shady this whole thing has become.
This is what amounts to 'brass on their face' from banks. And I am livid that Republican members of Congress would support their position.
IMO, if Romney starts talking in the general election about over-regulating Wall Street as a bad thing from this administration, it could cause him to lose on just this sort of thing.
I wish I knew if that would be a better thing or a worse thing.
I don't see a good alternative in this election so far.
Obama is reported to have chafed at Geithner's independence and refusal to coordinate with the WH in 2009. Obama knew how dirty this deal was. I think he just dislikes Geithner.
At this point, what possible benefit would be attached to keeping him on?
You think that Obama knew about the deal before he became President?
Remember, most of these things happened before the Inauguration.
The only possible benefit to keeping him on is that I shudder to think who might get appointed.
I fear what would happen to the markets if a flame-thrower got put in. If it were someone like Elizabeth Warren I would be okay, but if it was someone like the equivalent of Holder at Justice I would be upset.
this is the problem i have here with the bailout, where the shareholders benefitted from the bailout that kept their investment and company afloat...
why didnt the shareholders bail out their company?
-how come the bank didnt have a capital raising/sell debentures....
-hence why didnt these ers called up all secured debtors who owes them credit...
-hence why didnt the bank called up all the mortgage holders, im certain its in the policy contracts....
yet the got a bailout and turned around and resold that in other forms of dodgy schemes...
At the time of the deal, no. But I think Obama knew who Tim Geithner was when he appointed him.
Good point. Things can always get worse.
Does my aversion to that possibility overpower my dislike for Tim Geithner? No way.
RE: Eric Holder, please see Tim Geithner, above
Well, what you describe is the way that capitalism is supposed to work. At the very least, the Boards of Directors of these companies should have thrown out management instead of approving mega-bonuses, but they didn't. Then the shareholders should have voted out the Boards and the Senior management, but none of that happened either. Why? It is in their economic interest to keep it going.
That is why the government bailed them out too...it was in the interest of the nation's and the world's economic viability not to let them fail.
Let's face it guys...for the last 45 years or so the entire planet's economic system is virtually nothing more than a socially constructed reality by which we all agree that dollars mean X and Yen mean Y, etc., etc. Ever since the U.S. removed itself from the gold standard, there is no standard, just socially constructed realities.
Agreed. I truly am worried. But I don't have a clue what to do about it.
the funni part is the govt had no say how these morons run their company and redistribute the bailout money....
lol the directors all gettin bonuses from bailout money when they basically did all to earn that bailout when it was all the govt doing....im surprised no charges were laid, let alone the govt and stupid shareholders didnt get rid of the directors of the insolvent companies
To me, this is as great a sign of corruption as anything else. Geithner has to be protecting these guys, or surely a busload of them would be in the clink by now.
Did you read the book or see the do entary Too Big to Fail?
If not, see the HBO do entary. It is faster than the book, well acted and gives you essentially the same information.
i wonder how much did the govt had at stake in these corporations running whatever money they had invested with them, dont forget the sovereign govts that also invested into these dodgy schemes that was run by these banks who didnt get bailed like the depositers...
with billions on the books and computers all in the red, but the actual physical monies are in the safes....so whats the difference of disclosing here when they can just withdraw the money from the banks safes and start depositing them into fake accounts?
Meh. I think you're making too big of a deal over the shareholders. I'd be pissed at who got the money, not at the shareholders who just managed to avoid a total loss because someone else was getting the money.
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