Friday, October 17, 2008

Your Tax Money Paid to Investment Banks and Hedge Funds via AIG (AIG)

For those not following the AIG (AIG) saga - there is a lot of dirty laundry going on. First we were told its an $85 Billion bailout, but in a couple of steps after it's now increased to $123 Billion (so far!) It has been very difficult to sell AIG assets to pay off this loan thus far.

If you are into this type of thing and want some very interesting reading there is a damning Bloomberg article on how the former CEO of Goldman Sachs (GS) "saved AIG" and the first batch of money went in large part directly to Goldman Sachs (GS) and Morgan Stanley (MS). It will get the blood boiling if this is your type of thing - so essentially your tax dollars went from your pocket to Goldman and Morgan via a quick pit stop at AIG.
  • Sept. 29 (Bloomberg) -- As much as $37 billion from federal bailout loans to American International Group Inc. has gone to investment banks including Goldman Sachs Group Inc., the firm Treasury Secretary Henry Paulson used to run.
  • ``It was the biggest crisis ever -- if you're an investment bank,'' said Joshua Rosner, a managing director at investment research firm Graham Fisher & Co. in New York. ``We didn't just save AIG. We saved the counterparties, the banks. It's true that it would have been a disaster, but it would have been a disaster for them.''
  • Paulson's successor at Goldman, Lloyd Blankfein, was the only chief executive at a meeting Sept. 15 at the New York Federal Reserve Bank at which the troubles at AIG were discussed, although representatives of other firms were present, a Fed spokesman said.
  • The payments show how bailouts engineered by Paulson and Federal Reserve Chairman Ben Bernanke are beginning to shift money to Wall Street firms involved in subprime mortgage trading.
Now, we have the credit default swaps - which are the unregulated instruments that almost everyone in the industry is now agreeing have been gamed beyond belief. Remember, this is like buying life insurance on someone else - obviously if you can cause bodily harm to that person and collect - you will have a huge carrot to try to do it. With financials, which are based on trust and relationships, it has been an easy game - this "insurance" was supposed to be for people who actually held debt of the companies, but anyone can buy it. And now the bill for driving Lehman Brothers (LEH) into the ground is coming due - and certain institutions who bought this insurance are going to get a fat payday. I'd LOVE to see the list of these names - wouldn't it be interesting to see who made the most money betting on the downfall. Cramer has an excellent piece here on "the game" and how our tax money is literally going to be transferred to many of these hedge funds who were playing the CDS game we've described the past few months. Worth a listen.

Again, this insurance was in theory supposed to be for people who actually HOLD debt - BUT Lehman (just one example of many that this game was played against) ONLY had $158B worth of bonds, but there was more than DOUBLE the amount of "insurance" against the debt. Meaning each bond was "insured" (cough) twice. No different than naked short selling really when for each share in existence, there are multiple shares "created" and bet against it so the supply / demand equation is completely out of kilter. That (naked short selling) was ok too, as long as the investment banks and their customers were profiting from it - only when the naked short selling turned on them, did they run to Capital Hill and the White House to get it changed. What a crock.

SEC Chairman Cox's past history? He's a former Congressman. Just what was needed...not.


Hedge funds, which have been selling stock endlessly to meet client redemptions, must be frothing at the mouth for next Tuesday, Oct. 21. That’s payday for everyone who took out insurance against Lehman Brothers' bonds. And bear-raiding hedge funds took out a heck of a lot of insurance against that investment bank.

In fact, while Lehman Brothers [LEHMQ 0.067 -0.013 (-16.25%) ] sold only $158 billion worth of bonds, the SEC allowed hedge funds to take out $365 billion in insurance.

This was all part of the short-sellers grand – and legal – plan to bring down Lehman, Cramer said. Hedge funds bought the insurance knowing they could push the stock down virtually unrestricted, spurring the ratings agencies to downgrade Lehman, further inciting fear, and on and on until the company collapsed. The fact that the U.S. government said it was done saving investment banks only aided the hedge funds’ cause. To them, that insurance was money in the bank.

Guess which company probably did the most underwriting of said insurance. Yep, AIG [AIG 2.27 -0.16 (-6.58%) ]. That means the U.S government, which now owns most of AIG, will most likely spend next Tuesday cutting checks to the hedge funds involved. Cramer thinks this payout will erase whatever value might be left in AIG’s common stock. So the company’s going in the Sell Block.

And this doesn’t even take into account the myriad other issues at AIG. Watch the video for Cramer’s take on last December’s analyst meeting, executive bonuses and company junkets and other legally challenging activities at the insurer.

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