Friday, March 6, 2009

AIG Counterparty Bailout Furor Grows

I am a bit bemused to watch the furor grow of WHOM exactly we are bailing out when we keep funneling money into AIG (AIG). We highlighted this issue last OCTOBER when it first came out and I recommend any new reader read this piece if you read nothing else this weekend [Oct 17: Your Tax Money Paid to Investment Banks and Hedge Funds via AIG] I wrote at the time Hank Paulson was effectively bailing out his buddies at Government Sachs (GS) and Morgan Stanley (MS)... but since this is a relatively quiet part of the blogosphere, it only fell on reader's ears ;) I wrote

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.

And that was just the first phases of the bailout.

Now the furor is growing as the big boys are catching on.... Joe Nocera's piece in the New York Times [Mar 1: NYT - AIG: Propping Up a House of Cards] seemed to wake people up.

Nocera followed up on his (sorta) blog

It is a simple enough question: who bought the credit-default swaps that American International Group sold during the housing bubble? And at this point — after Bailout No. 4, with the government handing A.I.G. another $30 billion to go with the previous $150 billion — you would think that the taxpayers would have the right to know that information. Is it Goldman? Royal Bank of Scotland? The Irish banks that are on the verge of collapse? What happened to all that transparency the new administration keeps talking about?

A fair amount of what A.I.G. was doing was pretty sleazy behavior, using credit-default swaps to help banks evade regulatory capital requirements. And yet when newspapers like this one have requested the information, they have been ignored or turned down.

The answer, as I understand it, is that A.I.G. views these as “confidential transactions,” and the government (as per usual?) is going along with that rationale. One government official told me that if the federal government divulged the names of the counterparties it would amount to a violation of the Trade Secrets Act — unless the counterparties agreed to it, which they never will.

Pretty unsatisfying, isn’t it? Gobs of tax money is going to bail out unnamed companies — and yet we aren’t allowed to know who they are, and are supposed to take it all on faith.

So the Federal Reserve is stonewalling ... your money can be sent to AIG but you are not deserving to know who is getting on the other side of the transaction. So send us your money and shut your mouth citizens!

Senator Jim Bunning, one of the few people who actually calls out the Federal Reserve and Treasury was none too happy

On Thursday, Mr. Bunning did not disappoint, as he lambasted the vice chairman of the Federal Reserve for saying that the names of American International Group’s trading counterparties should not be revealed.

As part of its rescue, the government has stepp ed in with a program to buy securities from A.I.G.’s counterparties at “par,” or full value, even though many of these securities are surely worth far less. And just who are these banks being bought out at par?

“Giving the names could undermine the stability of the company and would have serious knock-on effects” in the broader financial system, Mr. Kohn told lawmakers Thursday. Mr. Bunning pounced on this comment when he took to the microphone. “You are telling us,” he said sternly to Mr. Kohn, “that the counterparties that got par for their bonds or for whatever — the American taxpayer shouldn’t know who they are? And then you may come back to us and ask for more money for more banks and more corporations? You will get the biggest ‘no’ you ever got.”

Now the blogosphere it getting into the act - see Barry Ritholtz

My recent tirade against bailing out the hedge fund half of AIG makes much more sense when you consider who is actually getting all of the taxpayer largesse: Counter-parties of AIG, especially one Goldman Sachs. Some estimates have been in excess of $25 billion to GS.

Other rumored recipients of taxpayer dole include Morgan Stanley, Merrill Lynch, and Deutsche Bank.

Why rumored? Because of the infuriating refusal to turn over any information as to who these counter-parties are by the Fed and Treasury:

Nouriel Roubini chimed in

News and banks analysts’ reports suggested that Goldman Sachs got about $25 billion of the government bailout of AIG and that Merrill Lynch was the second largest benefactor of the government largesse. These are educated guesses, as the government is hiding the counter-party benefactors of the AIG bailout.”

Naked Capitalism talks about yet another conflict between the US government and Government Sachs (GS) [p.s. if you are new to the blog we call Goldman Sachs GOVERNMENT Sachs because it has so many people layered up inside Washington D.C.] This is a Treasury nominee, H. Rodgin Cohen - chairman of Sullivan & Cromwell.... next in line to work "closely with Timmy Geithner!

Sullivan & Cromwell has long been the outside counsel for Goldman, and outside counsel is a vastly more important role for a securities firm than just about any other type of business. In the stone ages, when I worked for a few years at Goldman, certain S&C partners had so much clout at Goldman that they could get a mid-level banker fired. And even then, “Rodg”, head of the banking practice, was a very influential figure at Goldman.

Here is a list of our "friends" we're bailing out - its not AIG; AIG is just a front. And they are not getting 50 pennies on the dollar, 30 pennies, or 70 pennies - they are getting every dollar. Keep in mind these were early amounts from the first round of bailouts. Lots more handed out since then! And more to come in the future.

The Wall Street Journal in December, citing a confidential document and people familiar with the matter, revealed that about $19 billion of the payouts went to two dozen counterparties between the government bailout in mid-September and early November. As previously reported, nearly three-quarters went to a group of banks, including Société Générale SA ($4.8 billion), Goldman Sachs Group ($2.9 billion), Deutsche Bank AG ($2.9 billion), Credit Agricole SA's Calyon investment-banking unit ($1.8 billion), and Merrill Lynch & Co. ($1.3 billion), the Journal reported at the time.

"It's reasonable to ask why holders who would have received only pennies on the dollar for their credit-default swaps absent any government intervention would expect or deserve payments for what essentially is a bankrupt company."

With its latest rescue this week, the government has committed more than $170 billion to prevent AIG's collapse.

Cramerica - for the corporation, by the corporation. But don't argue - it's for the best of us all. Main Street is Wall Street. Just keep repeating that and go watch American Idol... the government will take care of the rest.

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