Yes the title is crass, vulgar. Yet the never ending trading of mortgage backed securities, previously titled toxic assets in some game of musical chairs justifies the analogy. Take just this latest revolving door as an example. Did you know a former New York Federal Reserve Official, in charge of overseeing AIG now works for AIG?
The insurance giant has also brought on board Charlie Shamieh as chief actuary; Mark Scully to oversee actuarial functions at its main property and casualty division, Chartis; Sid Sankaran as chief risk officer; and former Federal Reserve official Brian Peters to also help manage risk in an executive position.
Naked Capitalism comments on this little gem in Sleaze Watch:
Now we have another example of unseemly revolving door behavior, this with an even more direct connection between a former official’s old purview and his current role, this time involving AIG and its biggest sugar daddy, the New York Fed.
We were probably remiss in not commenting on the peculiar announcement of AIG’s offer to buy back the bonds in the New York Fed’s Maiden Lane II portfolio for $15.7 billion. The stated reason, that the purchase would “reduce its obligation” to the government is nonsense; it’s astonishing that the press is parroting it. As this Cleveland Fed summary indicates, the latest of a series of restructurings converted the remaining debt payable by AIG to equity; it has paid down all its loan balances. the New York Fed loan to Maiden Lane II is payable by that entity, not by AIG (AIG does have an “equity” position in that portfolio).
AIG can buy plenty of bonds in the marketplace; the only reason for it to offer to buy these bonds in particular is if it believes it can obtain them at a discount, which means that this is yet again another pretty blatant subsidy to the giant insurer. (The only other rationale we could fathom at the time of the announcement of this offer was to justify the government’s continued insistence that all these bailout programs were really great deals. Yes, if you have the Federal Reserve engaging in QE, you can play a three card monte game that makes your older portfolio buys look amazingly astute. But as we discuss below, the evidence has now fallen out conclusively on the side of this move being yet another subsidy to AIG).
Note that if the NY Fed were serious about selling these bonds and maximizing value to the public, the last way you’d do it would be as a single massive portfolio. Big portfolio sales do result in discounts due to the lack of competing bids (think of selling all the artwork in an estate, which included a lot of painting, sculptures, collectable ceramics, and rugs, as a block versus selling the items individually in an auction). The way to fetch a decent price would be to break the portfolio up, in some cases down even to the single bond level, or at least into much smaller homogeneous lots, and work the orders through multiple dealers over time. Admittedly, AIG made its brazen offer back in December and the officialdom failed to respond.
This piece comes on the news the Federal Reserve made record profits and transferred $79 billion to the U.S. Treasury:
Total Reserve Bank assets as of December 31, 2010, were $2.428 trillion, which represents an increase of $193 billion from the previous year. The composition of the balance sheet changed notably. Holdings of U.S. Treasury securities increased $261 billion and holdings of federal agency and government-sponsored enterprise (GSE) mortgage-backed securities (MBS) increased $86 billion. These increases were partly offset by a $96 billion decrease in loans to depository institutions and a $23 billion decrease in loans extended under the Term Asset-Backed Securities Loan Facility, largely due to early repayments by borrowers.
The Reserve Banks' comprehensive income increased $28 billion over the previous year to $82 billion for the year ended December 31, 2010. The increase was primarily attributable to an increase of $24 billion in interest earnings on the federal agency and GSE MBS holdings.
The Reserve Banks transferred $79 billion of their $82 billion in comprehensive income to the U.S. Treasury in 2010, a $32 billion increase from the amount transferred in 2009.
So, the Federal Reserve buys up Treasury bonds, yet magically turns a profit on mortgage backed securities they hold, those infamous worthless securities, and gives back the money...to the U.S. Treasury. Of the $2.428 trillion held at the Fed, $1.275 trillion is in U.S. Treasuries.
Then, the Treasury has announced they will sell $142 billion of Mortgage Backed Securities (MBS), sold in $10 billion allotments. Meanwhile AIG is offering to buy back $15.7 billion in toxic assets held by the New York Fed, which as Naked Capitalism implies, is a way to convert debt into equity, i.e. yet another bail out. Currently there are reports of competitive bids.
Now check this out, AIG, among others just settled a bid rigging lawsuit for only $27 million from a time period of 1998 to 2004. In other words their profits assuredly exceed the cost of the resulting lawsuit from bid rigging on business insurance.
Even more odious, Reuters has a fascinating piece about how the Treasury's annoucement of MBS sales is a technique to not hit the debt ceiling.
The MBS sales will bring in about $10 billion a month to federal coffers over the next year, but the Treasury denied on Monday that the sales were aimed at helping it stay under the $14.294 trillion statutory limit on the government's debt.
It said the sales will not "meaningfully extend" the time before it reaches the debt ceiling -- now projected between April 15 and May 31.
As of March 18, the total public U.S. debt stood at $14.173 trillion, or $121 billion below the limit.
Congress has routinely raised the debt limit every year since 2002, but Republicans want to tie any hike this time to commitments by the Obama administration and Democrats to deeper spending cuts. If the limit were reached, the government could
no longer borrow to fund day-to-day operations, risking a partial shutdown and default on debt payments.
The Treasury has been drawing down a $200 billion Federal Reserve emergency lending account to help avoid hitting the limit, and the account had dwindled to just $25 billion as of Friday.
So, either toxic assets weren't so toxic after all and those arguing against mark-to-market accounting have a point, or do we have the government now in the game of trading worthless assets like baseball cards in a similar rigged game that caused the financial crisis in the first place?
Hard to tell with so many insider trading types of jobs going on here. One thing to note, it's looking bad that eventually the Federal Reserve will be musical chairs odd man out. If inflation increases, which is highly likely, they will take a loss on all of those Treasuries they are holding at minimum.
With record foreclosures, home prices and sales plummeting and the above sales causing mortgage rates to rise, it's hard to comprehend, beyond the assumptions in this title piece, how such toxic assets based on, backed by residential mortgages, could magically become so valuable now.