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Timothy Geithner’s Famous Last Words?

February 7, 2010 Leave a comment
(thanks to Big Hollywood for this)

From Bloomberg:

Treasury Secretary Timothy F. Geithner said the U.S. is in no danger of losing its Aaa debt rating even though the Obama administration has predicted a $1.6 trillion budget deficit in 2010.

“Absolutely not,” Geithner said, when asked in an ABC News interview broadcast today whether a downgrade is a concern. “That will never happen to this country.”

The U.S. plans to rein in the deficit once the labor market recovers, Geithner said. In the short run, that means focusing on ways to “make sure that this economy is growing again,” he said. The administration says the deficit will shrink over the next four years as more Americans find jobs and the economy accelerates.

“This is within our capacity to do,” Geithner said.

Where to begin?  First off, I have long believed that Tim Geithner is in fact the fall guy for the economy in the Obama administration.  He has been involved with the bailouts from day one including perhaps a criminal one with AIG, come off as smarmy and weaselly in testimony and been perceived as less competent and well-liked than Bernanke in the court of public opinion.  If I had to guess, when it becomes clear that we are stuck in the economic doldrums (probably closer to the 2010 elections), Barack Obama will fire Geithner and trudge out a man with more panache and credibility, likely Paul Volcker.

On the substance of Geithner’s comments, that anyone in this administration can actually believe that the economy is going to accelerate and the deficit will shrink over the next four years is laughable.  Even if you had breakneck economic growth, and there are absolutely no signs of that on the horizon, the deficit is still growing at an exponential rate, and Congress has shown no signs that it is going to take the steps to deal with the most bloated line items — namely entitlements.  The most expensive parts of our budget are considered sacred, and for a politician to touch them would be considered a sin.

How could Geithner be right that we will never lose our rating?  Well, the ratings agencies are US companies, granted an oligopoly by the state, so it is possible that government could threaten them were they to consider downgrading us.  In this scenario we could have a de facto downgrade however if yields spike up in the bond markets on US debt with Treasuries trading effectively as if we have been downgraded.  Another scenario is that the government builds false demand (or an artificial “bid” in trader lingo) to keep the yields on our debt low by either pressuring the primary dealers to continue to gobble up our bonds (and then at times selling them back to the Fed shortly thereafter), threatening foreign nations to prop us up or creating some kind of incentive to get Americans to invest in Treasuries.  Otherwise, I don’t see how America can be considered fiscally Aaa, but then again the ratings agencies rate a lot of junk Aaa.  They can in fact put lipstick on a pig.

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The Continuing AIG Hellstorm: Jihad Bailout and Money Laundering

February 3, 2010 Leave a comment

Update 1 on the below over at Atlas Shrugs replete with the below presentation:

Pamela over at Atlas Shrugs has been doing an exceptional job exposing the Jihad bailout of AIG.  To go along with being a terrible hedge fund manager in AIGFP, it just so happens that “AIG was (and still is) the world leader in promoting Shariah-compliant insurance products.”  The problem?  As noted in the press release on attorney David Yerushalmi’s site, “By propping up AIG with tax payer funds, the U.S. government is directly and indirectly promoting Islam and, more troubling, Shariah.”  The crux of the court case is below:

David Yerushalmi, who is co-counsel with Robert Muise, laid out the grounds for the motion:  

At the time of the takeover decision, Secretary Geithner was the head of the Federal Reserve Bank of New York and he was the leading advocate of the AIG takeover. Moreover, he designed how the U.S. government would not only bail out AIG with taxpayer dollars, but how the government would illegally take control of 80% of the voting shares through what was patently an illegal and invalid trust arrangement. It is apparent from the discovery we’ve conducted to date that this was done purposefully and with an intent to conceal the illegal takeover with a fraudulent trust. 

Attorneys Yerushalmi and Muise want to ask Secretary Geithner:

·         Why he forced AIG to take on so much debt that AIG’s credit rating, already in peril, was sure to collapse without yet additional government funds, essentially guaranteeing AIG would remain a ward of the state?
·         Why he imposed such Draconian terms on AIG that there was no way it could survive without additional billions from U.S. taxpayers?
·         Why he then used AIG to secretly funnel 100% payoffs to AIG’s counterparties, including his colleagues and friends at Goldman Sachs, Merrill Lynch, and the European giant, Société Générale.  In other words, why did Geithner decide to destroy AIG’s chances of survival as a private entity while surreptitiously saving and preserving private ownership of other domestic and foreign financial companies? And,
·         Why he took control of 80% of AIG’s voting shares without legal authority to do so and used a fraudulent trust arrangement to conceal the illegal takeover?

For more on the matter check out (via Big Government) this transcript from 2008 in which Yerushalmi gives a detailed explanation on the problems regarding taxpayer dollars and Shariah and this interview from yesterday between Frank Gaffney and Yerushalmi on this landmark case of Murray v. Geithner.

On Shariah, Yerushalmi’s moral if not legal argument is well taken:

FrontPage Mag: Why do we care if AIG is offering a Muslim-friendly insurance product as just another way to make money even if the USG is now a shareholder? Doesn’t the USG invest in other companies that might offer religious consumers unique products? For example, what if the USG invests federal employee pension plan funds in a company that publishes books, including a line of religious books?

Yerushalmi: We should care a great deal. First, when the USG invests federal employee pension plans it is acting as an employer, not a government agency per se. In fact, the investment has nothing to do with the government’s tax and spending authority. Second, the investment in such plans is generally through an intermediary investment fund which in turn only invests passively and through minority holdings. In this case, we have the USG acting not as an employer but expressly through its tax and spending authority and taking an absolute controlling position. AIG is in effect nationalized. It is a government company.

But, beyond these strictly legal arguments, there is an overarching concern. Can it really be the case that we want the USG involved in a theologically based legal doctrine that calls for our conversion, subjugation or murder? Have we abdicated even the rudiments of good sense in the name of a PC-driven, non-judgmental multi-culturalism? If we have, we have abdicated our very right to exist as a nation.

The Impending AIG Hellstorm

January 27, 2010 1 comment

Zero Hedge (with help from the Huffington Post) has been all over the biggest fraud perpetrated by the government in economic history.  While trying to avoid some of the minutiae of the transactions that took place, below are some of the highly poignant issues to come out of HuffPo’s (shockingly!) and Zero Hedge’s excellent muckraking.  My commentary is in blue.

On CDOs

AIG did not understand what it was doing; it relied on the rating agencies.
But if Goldman was so smart, how could AIG be so dumb? There’s a short answer and a long answer. The short answer is three little letters: AAA. The long answer gets to the same result; it just takes a longer while to get there.

According to Michael Lewis’s reporting in Vanity Fair, the guys at AIGFP were clueless:

Toward the end of 2005, Cassano [the head of AIGFP] promoted Al Frost, then went looking for someone to replace him as the ambassador to Wall Street’s subprime-mortgage-bond desks. As a smart quant who understood abstruse securities, Gene Park was a likely candidate. That’s when Park decided to examine more closely the loans that A.I.G. F.P. had insured. He suspected Joe Cassano didn’t understand what he had done, but even so Park was shocked by the magnitude of the misunderstanding: these piles of consumer loans were now 95 percent U.S. subprime mortgages. Park then conducted a little survey, asking the people around A.I.G. F.P. most directly involved in insuring them how much subprime was in them. He asked Gary Gorton, a Yale professor who had helped build the model Cassano used to price the credit-default swaps. Gorton guessed that the piles were no more than 10 percent subprime. He asked a risk analyst in London, who guessed 20 percent. He asked Al Frost, who had no clue, but then, his job was to sell, not to trade. “None of them knew,” says one trader. Which sounds, in retrospect, incredible. But an entire financial system was premised on their not knowing–and paying them for their talent! [Emphasis added.]

It seems less shocking if you understand how these CDOs were put together and sold. Take a few minutes and glance over the prospectus for Davis Square Funding VI, one of the dozens of CDOs structured by Goldman before the risk was laid off on AIG. You could spend all day studying the document, but you will never be able to answer the question, “What am I buying?” The document doesn’t tell you. That’s the point. It’s evident in every aspect of this document and the offering circulars for most of the other CDOs. The business purpose, the essence of the deal, can be summarized in one word: obfuscation.

Goldman argued that these CDOs were put together to meet market demand, but demand for what? These subprime CDOs were not financing anything (the underlying mortgages and mortgage securities had already been financed), nor were they promoting liquidity in the marketplace (they couldn’t be traded because nobody knew what was in them).

So just to recap, AIG was trading garbage assets.  As we know, the proliferation of subprime mortgages would have never occurred without artificially low interest rates, the CRA, Fannie and Freddie subsidization and the other political forces like ACORN pushing banks to make loans to uncreditworthy borrowers.  The end result?  A large quantity of mortgages of very low quality, which were clumped together and sold buy banks like Goldman Sachs in CDOs, and of which CDS (basically insurance policies) were sold on to hedge the risk of the CDOs.  Without the garbage mortgages enabled by government intervention, you would have never had the massive increase in the mortage-backed security market and the CDS contracts that were written on the CDOs.
The other element of course of this problem attributable to government is the Washington DC-stamped, cartelized ratings agencies, who created moral hazard in markets by taking the onus off of investors to evaluate the underlying mortgages backing things like the toxic CDOs.  This isn’t to place the blame solely on S&P, Fitch and the like notwithstanding their errors in rating the securities (which of course can be held partially attributable to the inherent conflict of interest between the investment banks and the ratings agencies themselves), as the buyers of CDOs should have invested more responsibly.  But nevertheless, one can see the government role herein.  Incidentally, I would suggest against buying any product whose prospectus looks like this one of a CDO structured by Goldman.

On Moral Hazard

Was AIG really too big to fail? Maybe if you worked for Goldman.
The party line, expressed in Too Big To Fail and elsewhere, is that an AIG bankruptcy posed a greater systemic risk than a Lehman bankruptcy, because AIG was so much bigger. But that analysis is highly superficial and very misleading. AIG itself was a holding company, which guaranteed the debt of its unregulated financial subsidiary, AIGFP. The lion’s share of AIG’s revenues and profits, and about 80% of its consolidated assets, were concentrated among its different insurance company subsidiaries. Those insurance companies were solvent. They did not pose any systemic risk. In fact, it’s quite likely that they would have continued to operate outside of bankruptcy.

The only subsidiary with major problems was AIGFP, whose financial obligations were guaranteed by the parent. But AIGFP was only about one-third the size of Lehman. It’s almost impossible to see how AIGFP ever posed a systemic risk, unless everyone’s intention to provide a backdoor bailout to the banks. Put another way, it seems that the only reason that the government needed to step in for AIG was to provide a backdoor bailout to its banks. 

This pretty much speaks for itself.  The free marketeers among us would argue that there is no such thing as TBTF – that many of these banks would not have grown to the size they did, nor taken on the risks they did without massive government intervention in the banking sector to begin with, but nevertheless that Lehman fell and the financial system didn’t die (even if credit markets froze which is what should have happened in response to the collapse of a major financial institution) is fairly good evidence that AIG’s collapse of solely one of its subsidiaries likely would not have destroyed the financial system.  Granted, AIG had many institutional problems, and AIGFP was merely one of them.  Next, the drama picks up:

Goldman’s scheme to create a liquidity crisis at AIG, in order to manipulate the government into paying CDO counterparties 100 cents on the dollar
Because of laws that emasculated regulatory oversight, Goldman’s trading positions in credit derivatives with AIG had escaped the scrutiny of the Fed until September 11 or 12, 2008, when AIG told the New York Fed that it would soon run out of cash. The CDOs did not trigger a liquidity crisis at AIG, at least, not directly. Rather, it was the imminent cash drain from anticipated downgrades, from AA- to A-, which would trigger $30 billion in new collateral postings on AIGFP’s trading positions. In addition, someone at the company had screwed up. They had invested billions in cash collateral, intended for someone else, in highly rated mortgage securities, for which there was suddenly no liquid market. So AIG needed to come up with the cash right away.

Simultaneously, of course, Lehman Brothers was imploring the government for support, and Paulson’s position, at least on September 12, 2008, was that the Federal government would provide no support of any kind to bail out a private company like Lehman or AIG. Private bankers must come up with a private solution on their own.

On September 15, 2008, the same morning that Lehman’s bankruptcy sent shockwaves, Geithner had convened a meeting with JPMorgan Chase and Goldman to work on an emergency bridge financing for AIG. Why include Goldman? Traditionally, the bank with the largest credit exposure to distressed borrower helps arrange the debt restructuring. Geithner opened the meeting, and left soon thereafter, leaving Paulson’s deputy, Dan Jester, in charge. Jester was a former Goldman banker whom Paulson had plucked in July 2008 to work on matters that concerned Paulson.

September 15, 2008: Paulson’s deputy sabotages efforts to negotiate a private bank deal.
Sorkin describes the opening of the Monday morning meeting:

“Look, we’d like to see if it’s possible to find a private-sector solution,” Geithner said addressing the group. “What do we need to do to make this happen?

This strikes me as incredibly interesting.  That the government initially wanted to look for a private-sector solution is a good thing.  Yet as the title to this section shows, and as we will soon discover, it seems as if Goldman wanted to intentionally cause a crisis so it could be bailed out for its positions with AIG.  In some ways, this seems reminiscent of the Panic of 1907, where some have argued that JP Morgan intentionally tried to sink the market in order to continue building the case for the development of a central bank to cartelize the major Wall Street Banks and provide them with a backstop in the event of a banking crisis.  Granted, now we already have a central bank, but that Goldman might intentionally create a liquidity crisis in order to be bailed out and made whole on its AIG exposure, while further strengthening its position as THE dominant financial institution with an implicit taxpayer backing is certainly within the realm of possibility.

For the next ten minutes the meeting turned into a cacophony of competing voices as the banks tossed out their suggestions: Can we get the rating agencies to hold off on the downgrade? Can we get other state regulators of AIG’s insurance subsidiaries to allow the firm to use those assets as collateral?

Geithner soon got up to leave, saying, “I’ll leave you with Dan,” and pointed to Jester, who was Hank Paulson’s eyes and ears on the ground. “I want a status report as soon as you come up with a plan.”

On the Conflict of Interest and Intimidation

A critical point here is that Pauslon’s deputy, not Geithner, sat at the table to lead government negotiations.

Job 1 was to persuade the rating agencies to forestall their anticipated downgrades, which would have burned up billions because of increased calls to post collateral. This task was assigned to the government’s representative, Dan Jester.

“He was as useless as tits on a bull.” [AIG CEO] Bill Willumstad, normally a calm man, was in an uncharacteristic rage as he railed about Dan Jester of Treasury, while telling Jamie Gamble[a lawyer at Simpson Thatcher] and Michael Wiseman [a lawyer at Sullivan & Cromwell] about his and Jester’s call to Moody’s to try to persuade them to hold off on downgrading AIG.
Willlumstad had hoped that Jester, using the authority of the government and his powers of persuasion as a former banker, would have been able to finesse the task easily.

Willumstad explained that the original plan “was that the Fed was going to try to intimidate these guys to buy us some time.” Instead, when Jester finally got on the phone, “he didn’t want to tell them.” Clearly uncomfortable with playing the heavy, Willumstad told them that Jester could only bring himself to say, “We’re all here, and, you know, we got a big team of people working and we need an extra day or two.”

If Jester spoke to Moody’s the way Willumstad said he did, then there is no doubt in my mind that Jester intended to sabotage the deal. No other explanation is plausible. The importance of the phone call was not unlike that of a death row lawyer seeking a last minute stay of execution. Jester had been the Deputy CFO at Goldman. It would have been his job to deal with the rating agencies regularly. There is no way that he would not have known what to say. All he would need to say is that since AIG’s last meeting with Moody’s, the situation is evolving in a way so Treasury and the Federal Reserve are feeling increasingly confident that the deal being hammered out will significantly ameliorate the company’s liquidity issues. Everyone knows that the rating agencies do not like to abruptly pull the trigger when a situation is still evolving. Everyone also knows that the rating agencies are acutely aware of their chicken/egg role they play in determining a firm’s liquidity situation. (A company has access to the capital markets because of its rating, but its rating reflects its access to the capital markets.) Also, as Janet Tavakoli once mentioned, investment banks train their analysts about how to place pressure on the rating agencies. Finally, it would not have been indelicate to allude to the agencies’ no-so-clean hands in building up the AAA pyramid scheme known as AIGP’s CDO portfolio.

Here we see the evidence that a former Goldmanite, Jester, it seems did little to persuade the ratings agencies to buy AIG time so that a private sector solution could be put in place to deal with the problems between AIG and its counterparties.  There are a few important things to note.  One is the conflict of interest that had to exist between Paulson and Jester dealing with AIG whose biggest counterparty was Goldman, second that the Fed according to AIG CEO Willumstad was trying to INTIMIDATE the ratings agencies (funny I didn’t see that responsibility in the Constitution) and third that Paulson and Geithner were not in the room at this time.  Could this be because they wanted to be able to recuse themselves of any malfeasance in the event of a trial down the road?

September 16, 2008: Paulson installs a CEO at AIG who will favor Goldman.
And a few minutes after Goldman, JPMorgan Chase and the government tried to figure out what was next, at 9:40 a.m., September 16, Goldman CEO Lloyd Blankfein placed a call to Hank Paulson, which Paulson took, even though such communication was illegal. According to Sorkin’s sources, they discussed Lehman and not AIG. Just at the moment when the government was deciding whether to step in and save AIG, Blankfein never mentioned that an AIG collapse could have easily wiped out $15 billion in Goldman’s equity and caused everyone to scrutinize the dodgy CDOs underwritten during Paulson’s tenure. Do you think they just forgot?

As it happened, a few minutes after Paulson got done speaking with Blankfein, Geithner briefed Paulson about a tentative proposal for the government to extend AIG an $85 billion facility. The conversation with Geithner ended at 10:30 a.m.

Sorkin’s sources fabricated a tall tale about what took place afterward:

However resistant Hank Paulson had been to the idea of a bailout, after getting off the phone with Geithner, who had walked him through the latest plan, he could see where the markets were headed and that it scared him. Foreign governments had already been calling Treasury to express their anxiety about AIG’s failing.
Jim Wilkinson [Paulson’s deputy, formerly of the White House Communications office] asked incredulously,” are you really going to rescue an insurance company?”
Paulson just stared at him as if to say only a madman would stand by and do nothing.

Ken Wilson, his special advisor, raised an issue they had yet to consider. “Hank, how the hell can we put $85 billion into this entity without new management?”– a euphemism for how the government could fund this amount of money without firing the current CEO and installing its own. Without a new CEO, it would seem as if the government was backing the same inept management that had created this mess.

“You’re right. You’ve got to find me a CEO. Drop every other thing you are doing,” Paulson told him. “Get me a CEO.”

Their choice: Ed Liddy, the former CEO of Allstate and Goldman board member.

Whoever bore the blame for creating the mess at AIG, it’s extraordinarily reckless, during the middle of a crisis, to immediately install a CEO with no prior experience at the company, which is a huge sprawling conglomerate. That’s especially true when that new CEO has a conflict of interest the size of the Grand Canyon.

Sorkin also makes clear that it was Jester, not Geithner, who took control in structuring AIG’s bailout facility. Before Geithner gets on a conference call with Bernanke:

Jester and [Paulson’s assistant Jeremiah] Norton were poring over all the terms. They had just learned that Ed Liddy had tentatively accepted the job of AIG’s CEO and was planning to fly to New York from Chicago that night. To draft a rescue deal on such short notice, the government needed help, preferably from someone who already understood AIG and its extraordinary circumstances. Jester knew just the man: Marshall Huebner, the co-head of insolvency and restructuring at David Polk & Wardell who was already working on AIG for JP Morgan and who happened to be just downstairs.

Months later, Paulson’s spokesman told The New York Times that, “Federal Reserve officials, not Mr. Paulson, played the lead role in shaping and financing the A.I.G. bailout.”

Again, the conflict of interest here is breathless.  A former GS board member who would obviously act amenably to GS was put in charge, it seems as a puppet leader of AIG.  The fact that the Fed again was maneuvering this whole program shows the significant amount of power they held over the entire financial system, and their panicked actions with massive amounts of taxpayer money are if nothing else incredibly irresponsible if not downright scary.  Below, the WSJ outlines the whole bamboozle:
 

Gaming the System

Further, as Zero Hedge had discovered earlier, none of this intervention at all in AIG may have been necessary as GS was willing to tear up its CDS contracts with AIG:

In tonight’s Heard On The Street section, the WSJ notes:

As everybody knows, AIG got a huge government bailout in September 2008 to help make payments on derivatives contracts with banks, including Goldman. Yet in the previous month, Goldman approached AIG about “tearing up” its contracts, according to a November 2008 analysis by BlackRock, then an adviser to the New York Fed. So was Goldman prepared to offer AIG a haircut in the month before its rescue? A legitimate question, given that Goldman refused to accept such a cut when the New York Fed raised the idea after it bailed out AIG.

The implications of this discovery are huge as they essentially destroy all the arguments presented by the FRBNY about an inability to extract concession out of Goldman (which being the largest AIG CDO counterparty, was the critical negotiating factor). It also casts doubt on the veracity of any arguments presented in Congress by Goldman representatives discussing the potential to take a haircut on their AIG exposure. What this means in plain English is that, in the month before the Fed entered the scene, GOLDMAN SACHS ITSELF OFFERED TO TEAR DOWN THE CDS ON AIG’S CDO PORTFOLIO (we don’t use caps lock lightly). This is basically a smoking gun on the moral hazard issue perpetrated by the FRBNY when it got involved, and indicates that through their involvement, Tim Geithner, Sarah Dahlgren or whoever, not only did not save US taxpayers’ money, but in fact ended up costing money, when they funded the marginal difference between par (the make whole price given to all AIG counterparties after AIG was told to back off in its negotiations) and whatever discount would have been applicable to the contract tear down that had been proposed by Goldman a mere month earlier. This, more so than anything presented up to now, is the true scandal behind the New York Fed’s involvement.

If this November BlackRock report indeed exists, and if Goldman did in fact offer to tear down contracts, this is an act of near criminal implications and heads at the FRBNY must roll immediately.

Today, Zero Hedge released the November BlackRock report.  The report indeed verifies the aforementioned theory:

In layman’s terms, what all this means, is that Goldman would have indeed been willing to accept tear downs due to the excess buffer (positive haircut) arrangement the firm had in place with AIG. Indeed, the firm had downside protection all the way down to at least 12% below fair value as determined by all other AIG counterparties (granted, in such an extremely illiquid market as CDOs nobody knew what price these securities would print at, especially if trades were done in the size discussed). Furthermore, according to BlackRock, Goldman was wise enough to offload the actual CDOs to clients, and was exposed merely through “back-to-back swaps on most of the positions.” This means that Goldman only was exposed purely to counterparty risk on AIG’s behalf – should AIG default, Goldman would become the client-facing entity guaranteeing “pass through” sold CDS.

Yet one wonders just how many billions of dollars Goldman had in margin variation between collateral posted to it via AIG, and how the amount of money it had paid to buyers of CDS sold by Goldman. We are certain that since no Goldman client had the same negotiating power as Goldman did with AIG, Goldman likely had a positive balance in the hundreds of millions if not billions simply on the collateral variance.

As page 10 indicates, whereas all counteparties had requested collateral at a price for the underlying CDOs of 49, Goldman was extremely aggressive, demanding collateral for a price-equivalent of 37. The latter compares to a BlackRock model price for Goldman of 44, meaning that even the Fed’s advisor in good faith could not recommend such a generous treatment of Goldman in the context of all its other counterparties. Were Goldman to receive the same collateral as everyone else, it would be due 8.1 billion: $1 billion less than the 10/24 collateral request.

Now keep in mind, that of the top 5 counterparties, SocGen, GS, Deutsche Bank, Merrill and Calyon, only Goldman had subsequently sold off its entire CDO book: once again implying that unlike the other 4 firms, who at least held the exposure on their own balance sheet, and thus one can say deserved to receive some insurance, Goldman had bought then sold its entire portfolio, in essence making Goldman nothing than an AIG conduit, which was fully hedged  and, as noted above, only had counterparty risk, yet which had the benefit of up to $1 billion in excess cash on its books due to day-to-day marking of its CDS exposure and its advantage collateral arrangement.

Futhermore, as Goldman owned CDS on AIG itself (as a counterparty hedge), Goldman had absolutely no risk in its relationship with AIG whatsoever!!! Of course,  It is critical to remember that Goldman not only received par between the collateral previously posted to it, and actual cash from Maiden Lane III, it also made billions by selling actual AIG CDS (which as we claimed previously was done while in possession of material non-public information). Amusingly, while Goldman bought all of its CDO protection from AIG exclusively, it definitely used a very broad seller base when it loaded up on the actual AIG protection. Therefore, Goldman’s only, ONLY risk, was that of a complete systemic collapse and the repudiation of all contracts, CDS and otherwise. Which is why Goldman’s various agents did everything they could to prevent that from happening, up to and including loading the Federal Reserve with trillions of toxic debt in the upcoming 12 months.

Note that the link in the last stanza detailing how GS may have acted on non-public information to make a significant profit on its AIG CDS is simply breathtaking in its corruptness.  But further, that the system was gamed by the banks, again at the expense of the taxpayer is despicable and heads should roll for it.

The French Connection

FURTHER, as was noted in the Huffington Post piece, as of November 6, 2008:

29% of the remaining CDO exposure belonged to two French banks, whose regulator advised Geithner that it was illegal for them to settle at less than par. Challenging another country’s bank regulator would have opened up a whole can of worms at a point when the risk of global financial panic was very real.

In light of this revelation, Zero Hedge did some digging and the BlackRock document revealed that the French bank Soc Gen “has pledged much of the (CDO) portfolio to the Fed discount window for future liquidity.”  As Zero Hedge puts quite well:

Aside from the fact that in October 2008 France-based Soc Gen was not a Primary Dealer (it only just applied for this position a few weeks ago), one needs to turn to page 5 of the presentation to realize that Soc Gen’s portfolio had a value of 49 cents on the dollar. What this implies is that in October of last year (and ostensibly prior) Soc Gen, a foreign, non Primary Dealer, had access to the Federal Reserve’s Discount Window, where it had pledged securities that had a value of 49 cents on the dollar, and for which the Fed would have taken arguably no haircut, thereby funding the French firm at par for securities that were worth less than half, and which the taxpayer was on the hook for. Indeed, these securities may well have been completely worthless: lower on page 3 we read:

Soc Gen and AIG are currently in dispute over existing events of default and credit events under transaction [ineligible] for 2 deals, totaling $650 million of notional exposure.

We would not be at all surprised if the defaulted securities were part of the crap that had been given to Tim Geithner, at the time head of the New York Federal Reserve.  And what Soc Gen was doing by pledging reference assets to the Fed, we are certain that all the other counterparties (those which unlike Goldman still held on to the securities) were doing as well.

The fact that the Fed was willing to risk taxpayer capital with such reckless abandon, first in the form of accepting literally worthless reference securities from Soc Gen (as documented by BlackRock), and subsequently by bailing out Goldman at well over par (remember the money the firm made on its actual AIG counterparty-risk) protection, would have been sufficient to terminate Geithner’s career in any self-respecting banana republic. Too bad America is no longer even that.


To recap, we have government intervention causing imprudent financial innovation and speculation, moral hazard, major conflicts of interest, Fed intimidation, the banking cartel gaming the system, a variety of potentially illegal actions and the corrupt bailout (of US AND FRENCH(!?) institutions) itself being hoisted on the back of the taxpayer.  This is all truly damning evidence that the actions taken by our government during the financial meltdown were not only incredibly destructive to any semblance of capitalism, potentially illegal but also horribly detrimental to the American people.  Bernanke, Geithner, Paulson and any of the other architects of these corrupt bargains need to face the music.  Let the fireworks begin!

The Emperor Has No Clothes

March 19, 2009 1 comment


What we are seeing right now are the kinds of last ditch efforts that reveal how truly inept and desperate our leaders are. First there is the AIG bonus fiasco, a case study in the bumbling incompetence of the representatives in charge of containing the financial fallout (ironically the very people that preempted it). Then there is the move to quantitative easing — a seemingly sophisticated way of getting around the fact that the state is effectively socializing the government debt market and literally printing a trillion dollars out of thin air (as is the government’s wont). The implications of these two bamboozles are very telling.

In the case of AIG, first let me go on record as saying that AIG was a poorly run company that strayed from its business of insuring, and became a large hedge fund. When times were good, the illusory value created for shareholders in churning out CDS contracts and getting involved with all sorts of other derivatives made it seem as if this company was rock solid. But once the laws of economics came into play as we have seen time and time again, the straw men were revealed; malinvestments were proved to be malinvestments.

As such, the fact that anybody in this company who was responsible for running it into the ground should receive any bonus money is appalling. Adding insult to injury however, once they made the deal with the devil and accepted a government bailout (really a bailout of their counterparties who would have been decimated were AIG to have gone under as they should have), the situation has turned into a political and ethical hellstorm for the American public. Taxpayers paying bonuses for employees that destroyed the company the taxpayers are backstopping; politicians who conveniently forgot that their bailout legislation insured that these bonuses would be paid, only to turn around now and work to pass bills to tax bonuses at 90%.

First, contracts should be honored, and if a company wants to pay inane amounts for failure, then so be it; BUT that company should be allowed to fail for its disastrous business practices. Further, on principle, I am against this knee-jerk reaction to kill the greedy businessmen. On the other hand, the fact that we are all paying for private incompetence is an outrage. Again, we wouldn’t be talking about this if we had allowed the company to go belly up. Be outraged at the government for bailing AIG out, not AIG for being a garbage company.

Just think about the little game the politicians are playing — nationalize a failed company with taxpayer money, then tax bonuses to get taxpayers’ money back. Seems a bit screwy doesn’t it? Our dollars are sloshing around in all different directions. As you can see from this mess, the government isn’t exactly the most competent or honest steward. They are also capitalizing on the populist backlash against “corporate greed” to cover their own blunders for a measly $165 million, chump change compared to all the cash they have thrown around. Even if you hate Wall Street, when it comes to Barney Frank and Chris Dodd versus guys like Martin Sullivan and Angelo Mozilo (call him a derivative of his Wall Street brethren), it seems like a push to me. Then again, Mozilo was gracious enough to help Dodd get a good mortgage. Advantage incompetent/corrupt businessmen.

As I mentioned, the reason we keep dropping truckloads of money into AIG is because of AIG’s counterparties. This is the real game being played. For all of the populist backlash against the banks by politicians, Wall Street has been a part of Washington since the days of Alexander Hamilton. The whole financial system has been socialized since 1913. The Federal Reserve is the government’s bank that controls the fate of all of the other banks on the street. I don’t even know if I would really call its conduits private institutions because their policies are to a large extent determined by their lender, the Fed. But of course, the Fed is a private bank based on its charter too.

All in all through my incoherent rambling, what I am trying to get across is that we are witnessing the crack-up of this system, and the quantitative easing measures to buy a trillion dollars in treasuries and mortgage-backed securities to bring down yields on all sorts of debt (and also to effectively screw my double-inverse short position in long treasuries temporarily, boy that’s a mouthful) reflect the utter panic at the prospect of the socialized financial system going under.

Basically, the government needs to keep yields low to service its own debt and to bail out other debtors, such as for example most Americans. Foreign countries no longer want to purchase more treasuries given the massive supply and the lack of yield (due to the previous flight to the “safety” of our nation’s debt). So after the Treasury creates all this debt to finance the deficits that we’ll never be able to pay back, the Federal Reserve comes in and buys the treasuries, effectively pumping in a trillion bones or clams or whatever you call them to the market. It is the highest stakes shell game ever played. And also the most dangerous.

Since all the government can do at this point besides letting the chips fall and the system collapse (which will happen anyway in this author’s humble opinion) is to inflate (in fact that’s all the Fed does anyway), they are inflating like crazy. They have never lost the battle to falling prices before, and I don’t see them losing the battle this time given the pertinacity of the Depression scholar, the eminent Mr. Bernanke. He will probably get his rising prices sooner or later. Markets certainly think so given the massive run-up in gold, oil and decline in the dollar relative to other currencies. And of course when inflation does hit, the yields on government debt will have to rise anyway. I wonder if Bernanke and Co. thought that through?


But more fundamental than all of this is just the sheer desperation that these actions show: government officials going in ad hoc to side-step contracts by taxing at 90% those receiving TARP money over 250K…or something like that, the minutiae pales in comparison to the principle; government officials going into the debt market and buying treasuries it creates with another one of its entities (flooding the world with dollars) since nobody else wants to hold our junk bonds as we are totally insolvent as a nation to begin with. And then just look at the simply embarrassing, amateur actions of the Obama administration: going after Rush Limbaugh and Jim Cramer (a pretty socialistic guy himself)…giving Gordon Brown a set of DVDs during his visit to the US…attacking the very businessmen who are the only ones that are going to be able to help our economy rebuild…focusing on NCAA picks, Twittering, Facebooking and Lenoing instead of doing his job. What exactly is President Obama thinking?

Americans really need to understand the dire nature of the situation. These guys (and gals) in power on the whole are simply second-rate actors. They are in Washington for self-interested reasons, not with the longterm well-being of their constituents at heart. Companies lobby (basically bribing) politicians to get ahead through patents, monopolies, regulations and other ways to insure that they can win because of a playing field that is not level. The politicians are more than happy to oblige because they will be rewarded upon leaving office with lavish jobs or other support from their business friends. So long as the nation doesn’t implode in their faces, or if it does, so long as they can deflect their failures on others and act sympathetic, they can stay in power forever (see Barney Frank). It is all one big joke. The sooner we accept that these people are not to be taken seriously — that they are a bunch of crooks and frauds who work in the public sector to gain advantages because they couldn’t make it in private life, the sooner we can get the government off our back and out of our lives.

When I imagine the founding father’s thinking about who they wanted to represent the people, I see a group of largely retired folk who had been fairly successful in life and thus had no reason to govern to benefit themselves; they were to serve as competent and honest stewards and largely maintain the status quo (i.e. the Constitution) because they felt it was their duty and valued the sacrifices made to build a country guided by the rule of law and the belief in preserving the life, liberty and property of the people. The government was never intended to be the intrusive, insolvent ignoramous of an institution that it is today. America, wake up and take this country back from these pathetic excuses for representatives!