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Response to Tansy_Gold (Original post)

Fri Jan 8, 2016, 09:09 AM

20. Wait. So THAT’S what the bailouts were about? October 2014



One of the reasons that no one went to jail for the elite control fraud that caused the financial crisis is because of the pervasiveness of the criminality. You couldn’t send one guy to jail without having that guy very publicly rat out everyone else. To get to a high level on Wall Street you had to be dirty, like in a corrupt police department. No one trusts the one guy who won’t take bribes. Which brings us to Maurice “Hank” Greenberg, the former AIG CEO who is now, for lack of a better word, ratting everyone else out.

AIG, of course, is the massive insurance company which was bailed out by the government, with the Fed taking an 80% ownership stake in 2008. The AIG bailout was a strange deal, and it was renegotiated many times over the years. In a normal clean financial company resolution, AIG shareholders would have gotten wiped out. In the bailouts for Goldman, Morgan Stanley, and most of the big banks, shareholders got to keep their shares. AIG shareholders, by contrast, got to keep a little bit of what they had, a sort of split the baby in half deal. Hank Greenberg, as a shareholder, is extremely angry that he was treated this way. He thinks that he was not given equal treatment to Goldman shareholders, and in that he’s right. Most of us think that he should have been wiped out, and Goldman’s shareholders should have been wiped out too, so there’s little sympathy for this very rich man. But it’s utterly true, and everyone (even the most bank-friendly journalist Andrew Ross Sorkin) is acknowledging that it is true, that the government treated AIG shareholders differently. Greenberg is alleging, with good reason, that the motive here was quite sordid.

To understand the backstory, let’s take a quick look at AIG’s role in the housing bubble. Broadly speaking, AIG sells insurance, and one of its divisions (AIG Financial Products) sold a very specific type of insurance called a credit default swap. If you were a big bank and you owned a mortgage backed security (stuffed into a collateralized debt obligation, or CDO), you could buy a credit default swap against the possibility that the security would default. Then, because you owned this insurance, whatever that security might contain, be it good loans or the most toxic dreck imaginable, it was as good as gold. Default? No problem, AIG had you covered. The problem was that AIG covered everyone in the market (well not everyone, but a lot of the big players especially Goldman) so while the company had a really big balance sheet, it ended up being liable for sums that were larger than the amount of capital the parent company could access. There were other serious problems at AIG, such as its securities lending operation, but those aren’t as relevant to the story. And yes, technically speaking, a credit default swap wasn’t legally considered a type of insurance, it was considered a ‘derivative’. But that was just a legal fiction so that insurance regulators, who would have forced AIG to hold enough money to back its bets, couldn’t touch the company. A credit default swap is insurance.

So anyway, AIG blew up because it guaranteed an entire collapsing market of mortgage-backed securities. The Federal Reserve came in and pumped money into the company, for fear of the whole system collapsing. So why the lawsuit? Seems open and shut. Beyond that, Greenberg wasn’t even the CEO of AIG at the time of the crisis, he had already been dispatched for accounting shenanigans by then-New York Attorney General Eliot Spitzer in an earlier blood feud. The answer is that Greenberg plays hardball, and he’s still a big shareholder in AIG. Beyond that, he was excluded by the government from negotiations during the restructuring of a company he ran for decades, so he has a personal motive in spending his time and money harassing Geithner, Paulson, Bernanke, and company...Bernanke, Geithner, and Paulson have told their sides of the story, through friendly reporters or through books of their own. But no one has had the chance to cross-examine them, to demand they prove that what they were telling the public was true (my read of Geithner’s book was that his recollection of the bailouts was a long and charming set of lies, but you can draw your own conclusions). But now these men are being put on the stand, and an alternative set of facts is coming to light. We’ve always had alternative theories about what happened during the pressure-filled days of the bailouts, but actual evidence has been based on self-serving portraits from CEOs, regulators, and the reporters who love them. And guesses.

No longer. We have already learned a few interesting facts about AIG (courtesy of Yves Smith). First of all, we learned that AIG didn’t necessarily need to be bailed out by the United States government. There were two and a half offers on the table to recapitalize the insurance company. One came from China, which offered to buy parts of the company. Paulson prevented this from happening. We don’t know why, though it could be due to national security concerns (rumors of AIG being heavily involved with the CIA have always floated around). The second offer came from rich Middle Eastern investors, represented by Senator Hillary Clinton (through her friend Mickey Kantor). This didn’t happen either, and again, we don’t know why. Could be national security. But the third offer suggests otherwise. The New York financial regulator offered to let AIG dip into $20 billion of capital it had in an insurance subsidiary, but Geithner said the company didn’t need it. You heard that right — Geithner turned down an internal recapitalization of AIG. $20 billion wasn’t enough to plug the hole, but it wouldn’t have hurt.

There’s more funky stuff that went on. The board of AIG was never even shown the term sheet for the bailout by the government, and the board only approved it because their lawyer — superlawyer Rodge Cohen —made a dramatic reversal of his legal position. Cohen at first told the board that a bankruptcy was a reasonable option, but a few days later he said that if the board chose bankruptcy rather than the government offer, sight unseen, the board members could be personally liable. At the same time, Cohen was also representing AIG counterparties, and was informally advising the government. Whoa there.

In addition to all this, we’ve learned that the Fed, in doing all of this, was probably breaking the law. First, the New York Fed changed the terms of its offer without authorization from the Board of Governors, which was a no-no. More importantly, the Federal Reserve simply could not do what it was doing, which was to buy shares in AIG and take a controlling interest (even if it stuck the shares in a trust, which was the structure it chose). Here’s Scott Alvarez, the Fed’s attorney, saying that. (see link)

This legal jeopardy also explains a lie that Bernanke told about the commercial paper market (which is the mechanism big companies use to borrow money). The week before the bailouts passed Congress, Bernanke explained to Congress that the commercial paper market was freezing up. If they didn’t approve the Troubled Asset Relief Program (TARP), even companies like General Electric would go down. After Congress approved TARP, Bernanke then created a wholly Federal Reserve-concocted facility to back the commercial paper market, thus showing he could protect that market with or without TARP. Why did Bernanke want TARP so badly? Because the Fed needed Treasury to get the authority to buy shares, so Treasury could take the Fed’s illegally held AIG shares off their hands.

In other words, we learned that AIG was bailed out by the Federal Reserve because Paulson, Bernanke and Geithner wanted it bailed out by the Federal Reserve. They exceeded their legal authority to buy AIG for the government, and then lied about it. The $700 billion Troubled Asset Relief Program then bailed them out of this jam.

But why?

Greenberg alleges that their motive was to steal AIG from its shareholders, and then funnel money through AIG to banks like Goldman. There’s compelling evidence this is true; we also learned that banks, even Bank of America and Goldman, were willing to give up some of the money they were owed by AIG as part of their credit default swap payoffs. They would take less than 100 cents on the dollar for counter-party payouts. But Geithner ensured that these banks would get 100 cents on the dollar, as well as legal indemnity. To put it another way, AIG owed these banks a bunch of money, but if it had to pay the banks, it would go bust. But if it didn’t pay the banks, the banks would lose money. The banks were willing to lose a little bit of money, but Geithner said no no, you don’t have to lose any money in the deal at all. The accusation is that Geithner and co. shot AIG in the head, and then let other banks feast on its rotting carcass (liberally spiced with government money). Paulson has actually confirmed this was the goal. Big bank shareholders got bailed out, while AIG shareholders only got partially bailed out, both of course by the public. It was an utterly selective political judgment to choose one set of actors over another set of actors. What’s really interesting is not just this allegation, but how the New York Fed — run at the time by Tim Geithner — tried to hide it. Here are several examples of New York Fed officials explicitly trying to avoid the Freedom of Information Act, as well as SEC disclosure requirements. (See page 72.)

Eventually Republican Darrell Issa, of all people, got information of who was benefitting from the AIG death rattle (Goldman, Soc Gen, etc), and leaked it. Even so, the ‘AIG as backdoor bailout’ theory was vehemently denied for years, until now. Now it’s being understood, even by people like Hank Paulson, as true. Sorkin, says as much in his piece in Dealbook.

The government never sought to couch A.I.G.’s lifeline as a way to push money into the hands of Goldman Sachs, Deutsche Bank, Société Générale and the dozens of other banks around the world that were the beneficiaries. That idea was never going to win a popularity contest. But that was the effect of the assistance to A.I.G. And that was the point.

Dean Baker shows the significance of this statement, and notes that the idea of AIG as a backdoor bailout “was not something generally conceded in policy circles.”

This matters because if everyone understood that the $192 billion injected into AIG was largely about keeping big banks from failing then there might have been more political support for breaking up the big banks and in other ways restricting their conduct. Conceding this point now that the debate over financial reform is largely in the past seems more than a bit dishonest.

In other words, Greenberg’s case is revealing that the bailouts were done selectively, and there was an attempt to cover up what happened. The Federal Reserve and the Treasury ended up treating Goldman/JP Morgan/Citigroup shareholders and employees exceptionally well, AIG shareholders less well, and the public like irrelevant peasants. Greenberg is right to complain about the unequal treatment. Of course he doesn’t deserve any money himself, because AIG really was insolvent, and he was treated better than he should have been. If the judge could dispense justice, the judge would rule in Greenberg’s favor, and then simply take away the money that big bank shareholders got to keep, claw back bank bonuses, and then also confiscate the rest of Greenberg’s assets held in AIG stock. That would be equal treatment for all citizens. Of course the judge can’t do that. The best he can do is let the trial move forward, and show the public what really happened.

There is an attempt to make this whole episode go away, to say that the government’s decisions at the time, though perhaps illegal and perhaps unfairly favoring a set of actors over another, were necessary. And besides, the bailouts made money. And none of this is news, anyway, so what are you whining about? ...This narrative is fundamentally dishonest. Opponents of the bailouts said a lot of things at the time about the motives of the people in charge. It turns out that bailout opponents were largely correct, and the bailout apologists were lying and/or wrong. Increasingly, the public, judges, and politicians will recognize that the way the corrupt manner in which bailouts were done turned property rights into an explicit reflection of arbitrarily exercised political power.

Once it is broadly recognized that property rights in the post-bailout era truly are such an arbitrary exercise of political power, then a lot of things become possible. I believe in property rights; they are an important part of a just society and a mechanism to protect people from tyrannical public power (as long as they are enforced equally and with an understanding that they must also be balanced against other questions of justice, such as the threat of private monopolies to our freedoms). But because of these bailouts, no one can with a straight face claim we live in a culture that enforces property rights as a mechanism to protect individual liberties. And I’m not sure the bailout proponents are going to like where that leads.

Hank Greenberg Wins Trial But No Damages Over AIG Bailout June 2015


Hank Greenberg’s other AIG trial: A fight that just won’t end


Believe it or not, there is yet another trial starring the former AIG CEO waiting in the wings.

Hank Greenberg isn’t just fighting over money.

This week, Starr International, the company run by former AIG CEO Hank Greenberg, filed its appeal in the bitterly contested and highly publicized case over the government’s financial crisis bailout of AIG. Greenberg says that the judge, who found that the government’s conduct was indeed illegal—one lawyer for the Fed even wrote that the government was on “thin ice”—should also award Starr, which was AIG’s biggest investor, damages; he has argued that the bailout improperly enriched the government by at least $18 billion.

But there is another trial starring Greenberg that is waiting in the wings. It is the remnants of a civil case that Eliot Spitzer, who was then New York’s Attorney General, brought against Greenberg, AIG, and AIG’s former CFO, Howard Smith, in May 2005—a decade ago, two attorney generals ago, and in the pre-financial crisis era. The case has been delayed, and delayed and delayed again, by numerous appeals. In pragmatic terms, what’s left of the original blockbuster seems remarkably petty. None of the punishments, particularly the monetary ones, that the AG is seeking seem momentous in the grand scheme of all things Greenberg.

And yet, of all the legal thrillers starring Hank Greenberg, this case might actually be the one that matters most. The official remedies and the legal wrangling are beside the point. For both sides, it is a highly emotional battle to define the legacy of a financial industry titan.

Reading the original complaint, which accused the defendants of “routinely engag[ing] in misleading accounting and financial reporting,” is like going back in time. “American International Group is the world’s largest commercial insurance company,” it begins. “For 2004, it reported net income of more than $11 billion on revenues of nearly $100 billion. It has approximately 93,000 employees in 130 countries. For 38 years, AIG was run by defendant Maurice R Greenberg, also known as ‘Hank.’”

Even before the complaint was brought, the investigation had forced Greenberg out of the insurance giant. In 2006, AIG agreed to pay $1.6 billion to settle the AG’s, as well as the SEC’s, claims against the company. AIG also restated its financial results going back to 2000, reducing its previously reported profits by almost $4 billion, or about 10% of the total, due to what it called “accounting errors” involving the transactions in the AG’s complaint.

The original complaint detailed nine ways in which AIG’s financial results had been manipulated, and charged Greenberg and Smith with violations of New York’s Martin Act and with common law fraud. But by the end of 2006, Spitzer’s office had filed an amended complaint, dropping five of the transactions as well as the common law fraud charges, leaving just the Martin Act. Unlike common law fraud, the Martin Act, which is meant to cover “all deceitful practices contrary to the plain rules of common honesty,” does not require prosecutors to prove that Greenberg and Smith knowingly intended to commit fraud.

Over time, the government dropped two more transactions from its complaint, leaving just two, neither of which were alleged to have affected AIG’s net income or shareholders’ equity. But they did affect AIG’s reserves, which are viewed by investors as a critical measure of an insurer’s strength.

The bulk of the remaining case against Greenberg and Smith involves a transaction that AIG did with General Re, an insurance company owned by Warren Buffett’s Berkshire Hathaway, in late 2000 and early 2001 that allegedly allowed AIG to increase its reserves by $250 million each quarter. At the time Spitzer brought the charges, there was great concern about the use of so-called “finite reinsurance” transactions to manipulate an insurer’s financial statements. It’s perfectly legitimate for one insurer to reinsure another’s risks, but the deal is illegal if no risk is actually transferred. The language in the original complaint was explosive. “The entire AIG Gen Re transaction was a fraud,” it read. “It was explicitly designed by Greenberg from the beginning to create no risk for either party.”

In early 2008—just before AIG was taken over by the government, something which Greenberg and his supporters say never would have happened if he hadn’t been forced out—four former Gen Re executives and one AIG executive were found guilty in a criminal trial based on the activities alleged in the complaint.

In 2009, Greenberg and other AIG executives agreed to pay $115 million to settle a shareholder lawsuit based in part on the AG’s case; at the same time, Greenberg paid another $15 million to settle with the SEC. (Smith paid $1.5 million.) The SEC’s complaint alleges, among other things, that Greenberg and Smith “knew about the effects that certain improper transactions would have on AIG’s reported financial results.”

Neither man admitted nor denied the SEC’s allegations.

Then, in early 2011, the Second Circuit Court of Appeals overturned the convictions of the Gen Re and AIG executives. The decision itself was based on something of a technicality, but the court also noted “compelling inconsistencies” in the testimony of the government’s star witness, a former Gen Re executive named Richard Napier, that “suggest[ed] that Napier may well have testified falsely.” In a letter sent to current New York Attorney General Eric Schneiderman last fall, Greenberg’s defense counsel, the prominent attorney David Boies, wrote, “Mr. Napier is the sole witness proffered for the assertions that Mr. Greenberg, or indeed anyone at AIG, was advised or understood” that there were questionable aspects of the deal. Nor, Boies noted, did Napier ever actually speak to Greenberg. (The government did not retry the case; in turn, the executives agreed that “aspects” of the deal were “fraudulent.”) The extent to which Napier has been discredited is yet another hotly contested issue, with the AG arguing that other evidence backs him up where it matters most.

Everyone agrees that Greenberg did call Ronald Ferguson, the CEO of Gen Re, to initiate the transaction in question. But the strong language in the original complaint—that the deal was “explicitly designed by Greenberg from the beginning to create no risk for either party”—turns out to be less than iron clad.

In the criminal case, Greenberg was identified as an “unindicted co conspirator,” but he wasn’t charged. In a hearing, a prosecutor explained to the judge why that was the case. “There wasn’t a single email that we had—that we are able to produce a [sic] trial involving Mr. Greenberg that I … know of standing here … there were no recorded phone calls to Mr. Greenberg … there was no—not even—a substantial witness who spoke about this to Mr. Greenberg.”

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