AIG – The Gift That Keeps On Giving…

[Junkdrawer]

You probably heard that Tuesday the Federal Government gave $30 billion MORE to AIG. That makes $163 Billion so far.

You may have also heard the AIG is in trouble because of Credit Default Swaps (CDS), essentially lenders insurance on mortgages. And that the payouts are necessary in order to keep banks around the world from going bust.

But what the media is not emphasizing, at least not in the same breath as AIG, is that hedge funds and other large investors that never bought a single mortgage bought large amounts of CDS as a pure speculative bet. Legal with the repeal of the Glass-Steagall Act and, at the time, considered by AIG execs a great source of profit.

In a rare interview, CNBC's David Faber speaks with one of the few savvy investors who bet against the mortgage-backed security fever – Dallas's Kyle Bass - whose hedge fund soared 600% in just eighteen months

http://www.cnbc.com/id/15840232?video=1029066462&play=1

So, the question is “How much of this bailout is going ‘to save the world’s banking system’ and how much is going to reward hedge funds who bet mortgages would fail?”

So far, AIG and The Federal Reserve are telling Congress “None of your business, just fork over the cash”

US Lawmaker Asks Bernanke For Details Of AIG Bailout

WASHINGTON -(Dow Jones)- The head of the Congressional Joint Economic Committee on Wednesday asked Federal Reserve Chairman Ben Bernanke for details about counterparty transactions related to the government's bailout of American International Group Inc. (AIG).

In a letter to Bernanke, Rep. Carolyn Maloney, D-N.Y., wrote that the Fed chairman had agreed during testimony late last year to provide "information about the counterparty transactions in which the Federal Reserve (or entities set up and funded by the Federal Reserve) purchased from certain counterparties multi-sector collateralized debt obligations (CDOs) on which AIG had written credit default swap (CDS) contracts."

"However, to date, your office has not provided that information to me nor, as far as I am aware, to the Financial Services Committee," Maloney wrote.

...

http://money.cnn.com/news/newsfeeds/articles/djf500/200903041321DOWJONESDJONLINE000848_FORTUNE5.htm

Now, as I keep on saying, this is going to become more and more important because the Alt-A mortgage crisis will probably be bigger than the Sub Prime mortgage crisis and is due to blow up bigger later this year:



We want to Rebuild America. We want Universal Healthcare. Hell, we want our Social Security. But if we borrow ourselves into oblivion paying off AIG’s bad debt, none of that will happen.

[Turbineguy]

1. Let's put the blame where it belongs

on the Republicans.

They changed the laws so this was made possible.

Don't blame the thief if the law is changed to allow him to rob your house.

[Make7]

8. Who signed the Gramm-Leach-Bliley Act into law?

And what were the final votes by party affiliation in Congress?
http://en.wikipedia.org/wiki/Gramm-Leach-Bliley_Act

[Fire1]

11. William J. Clinton

[catzies]

13. They spent $5 billion to make it possible. By lobbying for the lawmakers' favors

http://www.cbsnews.com/blogs/2009/03/04/politics/politicalhotsheet/entry4842645.shtml

They spent only $5 billion and look how much they stole.

Quite a return on investment.

[lonestarnot]

16. Here here!

K & R!

[Junkdrawer]

2. For those who want to know more about the Alt-A crisis, Mr. Mortgage...

did a great YouTube summary last year...

http://www.youtube.com/watch?v=pmeBSWI9sF8

[leftstreet]

5. Hey, that's interesting

Thanks for posting it!

:thumbsup:

[Ghost in the Machine]

3. AIG employs 116,000 people worldwide...

Should they all lose their jobs, or should the government help AIG stay afloat? I'd vote for helping them stay afloat... with the conditions that the CEO and others responsible resigned, with no severance package at all... lock those thieves up!

[Junkdrawer]

4. $1.4 million per job...and growing....n/t

[girl gone mad]

7. They should lose their jobs.

We can't afford to subsidize every failing business, but if we're going to try, there are thousands of companies that deserve to be higher on the list than AIG.

[Fire1]

12. How about the stipulation that these ceo's liquidate some of their

assets to 'match' some of this money the unempoyed are coughing up to save their hedge funds?

[slipslidingaway]

6. K&R and...

adding this link which has some additional information.

http://www.scoop.co.nz/stories/HL0902/S00344.htm

Michael Collins: Too Little Too Late?
Friday, 20 February 2009, 10:02 am
Column: Michael Collins


"...The nonprime lone market has 1.2 million loans at risk of entering foreclosure due to substantial arrears in payment. What will change to allow these people to catch up? There's no credit line left, in most cases, and no room for a "second" in a home loan where the current value is less than the loan value.

If anyone tells you that we're finished with the "subprime" crisis, recall these figures above. Over 800,000 subprime loan holders are currently at substantial risk for defaults and foreclosure.

The next wave of loan defaults and eviction risks will come from the Alt-A loans. They are, "typically higher-balance loans made to borrowers who might have past credit problems-but not severe enough to drop them into subprime territory--or who, for some reason (such as a desire not to document income) chose not to obtain a prime mortgage" (NY Federal Reserve) These are often borrowers who took Alan Greenspan's 2004 advice seriously when he pitched borrowing through a "mortgage product alternative," (e.g., ARMs), take some cash out, and spend that money (all to "help" the economy)..."

[slipslidingaway]

9. Cantwell: Where's the AIG Money Going?

http://www.talkingpointsmemo.com/archives/2009/03/cantwell_wheres_the_aig_money_going.php

"Here's an exchange from this afternoon between Sen. Cantwell and Secretary Geithner. Cantwell asks the question we and a lot of others have been asking: where's all the money going? Who are the counter-parties?

We grabbed this exchange because I want to flag that this question appears to be gathering momentum up on the hill. But the exchange itself is interesting for two reasons. First, Geithner simply won't engage. He just ignores the question. But in the course of doing so he provides the administration's rationale for why we have no choice but to keep shoveling money down this hole. But clearly, talk to the hand on the counter-parties ..."

[Junkdrawer]

10. Two good posts. Thanks...

:hi:

[slipslidingaway]

14. And thank you for keeping the topic alive...

the economy forum has a couple of threads up as well.

http://www.democraticunderground.com/discuss/duboard.php?az=show_mesg&forum=114&topic_id=59387&mesg_id=59387

"Using the loophole it had learned during Bear Stearns, the Fed set up two new companies: Maiden Lane II and Maiden Lane III. Two dealt with the secured lending and Three the shitty credit default swaps. The Fed lent each Maiden Lane $20 billion and $25 billion and then Maiden Lane paid off the investors that had either lent AIG the money to buy the shitty mortgage backed securities (ML II) and those who had the shitty mortgages and the corresponding insurance (ML III). To avoid booking a loss on the Fed's balance sheet, because the Fed had some legal problems if either of these Maiden Lanes lost money, and because of a reporting requirement that Dodd had put into TARP which actually required the Fed to report to the Congress and the public about the cost to taxpayers from ML I, the Fed did some creative accounting. They still paid all of the investors off at full value (par), so that they didn't lose anything. But they booked the loss on AIG's balance sheet and kept Maiden Lane clean. This is the hidden story behind how AIG went from losing $38 billion during the first 9 months of 2008 to losing $61 billion in the 4th quarter.

This was all exposed at today's hearing. And despite repeated requests from Senators on both sides - Dodd, Shelby, Corker, Warner - the Fed is still refusing to say who it bailed out through Maiden Lane II and III."


And...


TPM: Who are the AIG counterparties? Here are some...

http://www.democraticunderground.com/discuss/duboard.php?az=show_mesg&forum=114&topic_id=59388&mesg_id=59388


:hi:

[Junkdrawer]

15. Kick

:kick:

[Octafish]

17. The best way to rob a bank is to own one.

These thieves also controlled the Police. State.

AIG's Offshore Strategies Hide a Scam

Meanwhile Corporate McPravda zeroes in on the patsies -- the dumb poor who borrowed too much for houses they couldn't afford.

If we want to rebuild, recover, etc., we need to empty a lot of crooks' Swiss bank accounts.

Thank you for an outstanding post, Junkdrawer.

[Junkdrawer]

18. I think there's a tremendous back story on this one....

If one wanted to force the US into crippling debt while siphoning off huge portions of that debt into slush funds, this would be a great way.

[Octafish]

22. One man appears born for the job...

...should satan spawn that way, Phil Gramm.

Know your BFEE: Phil Gramm, the Meyer Lansky of the War Party, Set-Up the Biggest Bank Heist Ever.

Agree absolutely with your analysis, Junkdrawer. The kkkons hate Progress. A broke Fed means no New Deal or Social Spending, making it easier to fool and control the proles. Without regulation, Wall Street is simply a fancy scam for suckers. Practically the only thing they haven't stolen liquidated is Social Security. And they tried.

[Junkdrawer]

23. Wonder how Armed Service recruitment is going these days...

And Blackwater recruitment for that matter...

As for Social Security, remember the "lock box" or "trust fund" is simply a bunch of T-Bills with fixed interest rates. And all this borrowing will set us up for Weimar style hyperinflation....

[gratuitous]

19. And large investment funds bought those CDS, why?

Because AIG had a triple A rating, the highest, best rating available. Who bestowed that rating? Ratings services run by AIG. A very nice racket. For some. Sucks to be the billions of folks who took it in the shorts.

[Gin]

20. if AIG goes bankrupt wouldn't all those CDS's be voided?

[Junkdrawer]

21. Yes, but until then, they're paying off handsomely.....

Note the hedge fund in the OP that had a 600% payoff...so far....

[slipslidingaway]

24. TPM - How the Rules Were Rigged and more...

http://www.talkingpointsmemo.com/archives/2009/03/im_sure_the_knowledgeable_people.php

"I'm sure the knowledgeable people already know this. But it turns out that one of the features of the 2005 Bankruptcy bill was to put derivative counter parties at the front of the line ahead of other creditors in bankruptcy proceedings. Actually, from what I can tell, they don't just go to the head of the line. They got to skip the line entirely. As the Financial Times noted last fall, "the 2005 changes made clear that certain derivatives and financial transactions were exempt from provisions in the bankruptcy code that freeze a failed company's assets until a court decides how to apportion them among creditors." As the article notes, ironically, this provision which Wall Street pushed for and got to protect investment banks actually ended up hastening the collapse of Lehman and Bear Stearns last year.

Down in the article there are also the mentions of the entertainingly named "International Swaps and Derivatives Association", one of the lobbies that helped get the change in place.

Along these lines, TPM Reader GG sent in this last night ..."



Two follow up posts...


Another View



"TPM Reader SG's take on the derivatives, bankruptcy and AIG issue ...

I beg to differ with GG on two points. First, the subsidiaries of AIG are insurance companies that are by law required to have enough reserves to manage situations like this, thanks to the remnants of Glass Steagall of course. Now, I am not an expert on insurance biz but this claim by GG seems doubtful to me. Second, I have traded derivatives myself and know this much that the market professionals (not the amateurs who think they have info) already have enough info on what AIG owes to whom and they are benefiting immensely by this weired Geithner process. They are getting out calmly and coolly while the rest will be left holding the bag. So, GG's contention that if Geithner releases the names it will have this domino effect doesn't pass the smell test on any count...


...Back to the earlier question of what the argument would be for allowing derivatives to hop to the front of the line in bankruptcy proceedings. A number of very generous readers have written in and try to explain the arguments to me, whether they agree with those arguments or not. I think I understand it. But nearly well enough that I'm going to embarrass myself by trying to explain it to you. Having said that, my takeaway from the discussing is that a lot of this has to do with further gaming the difference between derivatives and insurance. Namely, the folks working with derivatives want them to be insurance when the issue is the 'rights' insurance has in bankruptcy proceedings but not be insurance when it comes to falling under the regulatory regimes that very tightly control actual insurance."



Note to Self

http://www.talkingpointsmemo.com/archives/2009/03/note_to_self.php


"When you invite insurance and derivatives experts to explain their area of specialty and critique each other's understanding of the subject matter, be ready for an afternoon with a lot of squinting and head scratching.

(ed.note: For more on this whole AIG issue, do see this Wednesday post by Barry Ritholtz. I cannot see why the policy solution he proposes at the end wasn't the obvious non-taxpayer-ripoff solution.)"



Solvent Insurer / Insolvent Insurer

http://www.ritholtz.com/blog/2009/03/solvent-insurer-insolvent-insurer/

"Forget the good bank/bad bank, I have an even bigger beef with this INSANE absurdity: Why are the taxpayers making good on hedge fund trades gone bad?

I cannot figure that one out.

When AIG first faltered, there were two companies jammed under one roof. One was a highly regulated, state supervised, life insurance company. In fact, the biggest such firm in the world.

The other firm was an unregulated structured finance firm, specializing in credit default swaps and other derivatives..."

[Junkdrawer]

25. Curiouser and Curiouser....Clearly, as the video in my OP shows...

some people saw this coming and bet accordingly.

Now the 500 trillion dollar questions are:

-> Who else saw this coming?

-> How soon did they see it coming?

-> What all did they do to cause it?

-> What is the endgame?

Is this a Financial MIHOP? Could somebody be consolidating financial power?

[slipslidingaway]

26. Betting on a crash - the gamble of J. Kyle Bass - January 2008

A little more on his story, but it is too late to try and wrap my head around this for the moment.

:)

http://www.nzherald.co.nz/personal-debt/news/article.cfm?c_id=54&objectid=10484879

"J. Kyle Bass, a hedge fund manager from Dallas, strode into a New York conference room in August 2006 to pitch his theory about a looming housing market meltdown to senior executives of a Wall St investment bank. Home prices had been in a five-year boom, rising more than 10 per cent annually. Bass conceived a hedge fund that bet on a crash for residential real estate by trading securities based on sub-prime mortgages to the least creditworthy borrowers. The investment bank, which Bass declines to identify, owned billions of dollars in mortgage-backed securities.

"Interesting presentation," Bass says the firm's chief risk officer said into his ear, his arm draped across Bass' shoulders.

"God, I hope you're wrong."

Within six months, Bass was right. Delinquencies of home loans made to people with poor credit reached record levels, and prices for the securities backed by these sub-prime mortgages plunged. The world's biggest financial institutions would write off more than US$80 billion ($103 billion) in sub-prime losses, while Bass, his allies and a handful of Wall St proprietary trading desks racked up billions in profits.

Bass and investors like him saw opportunity in a range of new investment tools that banks created to sell sub-prime securities worldwide..."