SIGTARP on AIG

SIGTARP as released a new study report on AIG. The report found that the AIG 100% CDS payout was a grave mistake.

Guess whose mistake it was? Then New York Fed President Timothy Geithner.

For some background on this payouts, read The Real Screw Job: AIG used as a Funnel of U.S. Taxpayer money.

Here's the money quote from the SIGTARP report, right in the summary:

  1. The original terms of federal assistance to AIG, including the high interest rate it adopted from the private bank’s initial term sheet, inadequately addressed AIG’s long term liquidity concerns, thus requiring further Government support.
  2. FRBNY’s negotiating strategy to pursue concessions from counterparties offered little opportunity for success, even in light of the willingness of one counterparty to agree to concessions.
  3. The structure and effect of FRBNY’s assistance to AIG, both initially through loans to AIG, and through asset purchases in connection with Maiden Lane III effectively transferred tens of billions of dollars of cash from the Government to AIG’s counterparties, even though senior policy makers contend that assistance to AIG’s counterparties was not a relevant consideration in fashioning the assistance to AIG.
  4. While FRBNY may eventually be made whole on its loan to Maiden Lane III, it is difficult to assess the true costs of the Federal Reserve’s actions until there is more clarity as to AIG’s ability to repay all of its assistance from the Government.

Fellow bloggers, it sure doesn't feel good to be so right. Yes, AIG was used as a funnel of U.S. taxpayer money on glorified gambling bets as noted in the Screw Job post.

Even more amazing, as the crisis unfolded, the New York Fed did not do it's own due diligence on AIG, instead relied on an analysis previously performed by JPMorgan Chase (which Chase decided against due to the overall crisis and capital preservation).

FRBNY did not develop a contingency plan in the event that the private financing did not go through and did not conduct an independent analysis regarding the appropriate terms for Government assistance to AIG; instead it used in substantial part the economic terms of the private sector deal, albeit for $85 billion instead of the $75 billion prepared by JPMorgan Chase for the unsuccessful private sector solution.

SIGTARP went after the ultimate question, why were payouts by AIG made at par, or 100%?

Some interesting notes:

Then-FRBNY President Geithner and the FRBNY General Counsel told SIGTARP that the financial condition of the counterparties was not a relevant factor in the decision to create Maiden Lane III and pay counterparties effectively at par.

This is a shocking statement! With taxpayer money, Tim Giethner did not even consider the reality these counterparties could indeed take a major reduction in payout and not be affected substantially.

One of the biggest reasons they paid out at 100% was the fact counterparties knew the government had already rescued AIG.

It's also fairly clear from the report, if AIG had been allowed to go into bankruptcy, the taxpayer would have been way better off.

A bankruptcy possibility would have left strong room for negotiation with counterparties.

Even more astounding was UBS offered a 2% discount from full value and Geithner ignored this because all counterparties should be treated equally.

I mean some of Geither's reasoning is absurd. Treat foreign banks the same as U.S. banks, oops, it's unethical to use one's regulatory status to pressure counterparties to take a hair cut?

My God! We saw Hank Paulson completely intimidate 9 banks into taking TARP funds. They couldn't use some tactics to not pay out CDSes at 100%, which also were way above market value at that time?

They are the Federal Reserve! Supposedly we have this massive financial Armageddon and they are playing patsy nice and worrying about ethics? How about the ethics of dumping a massive bail out onto the unsuspecting taxpayer?

Even more astounding, AIG still has $34.3 Billion in credit default swap exposure related to CDOs.

Chief Risk Officer and AIGFP’s CEO, AIGFP expects that the majority of its remaining credit default swap contracts will be unwound over the next several years. However, in recent SEC filings, AIG warned that, if credit markets continue to worsen, AIG could be exposed to these risks for a significantly longer period of time and experience additional losses.

One thing SIGTARP notes is how the possibility of a down grade by credit ratings agencies influenced the New York Fed Reserve in their decision making.

When reading this report I could not help but believe they should have let AIG go into bankruptcy. We'll never know if letting AIG go into bankruptcy would truly have caused the catastrophe as claimed.

GM did and obviously the world did not end.

While discussions go on and on about financial collapse and loss of jobs and so forth....what do we have today? Well, Wall Street is happy, banks are fat with taxpayer dough and we have ...loss of jobs and also a massive deficit.

You know what else we still have? Billions in credit default swaps.

I highly recommend reading the entire report. If you have been following this beyond belief debacle called the AIG bail out, the report reads like a Stephen King novel of absurdity, stupidity and horror show.

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Comments

Oh. but Mr. Geithner is given even more power

The protector of the financial oligarchy and a protege of Robert Rubin gets more power. Amazing. Only in America.

RebelCapitalist.com - Financial Information for the Rest of Us.

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Naked Capitalism analysis

Yves Smith has found some gems and blasts SIGTARP for not calling it out harsher.

Gez, I was nice too in my post.

She points out they had no efforts to negotiate lower counterparty payout, and amplifies the outrageous joke of claims that CEOs where threatening the Federal Reserve...

One note, Yves implies a bankruptcy would have been a disaster, but I cannot help but wonder if a pre-packaged, pre-arranged bankruptcy would not have been.

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AIG failure would have hurt Goldman Sachs

HuffPo did a second dig at the SIGTARP report.

story here. Below is the quote from the SIGTARP report which is a dig at GS.
Recall GS was in the meeting with government officials, the only private sector company, on the plan to save AIG.

...in light of the illiquid state of the market in November 2008 (an illiquidity that likely would have been exacerbated by AIG's failure), it is far from certain that the underlying CDOs could have easily been liquidated, even at the discounted price of $4.3 billion. Second, had AIG collapsed, the systemic implications on other market participants might have made it difficult for Goldman Sachs to collect on the credit protection it had purchased against an AIG default, although Goldman Sachs stated that it had received collateral from its counterparties in those transactions. Finally, if AIG had defaulted, Goldman Sachs would have been forced to bear the risk of further declines in the market value of the approximately $4.3 billion in CDOs that it transferred to the Maiden Lane III portfolio as well as approximately $5.5 billion for its credit default swaps that were not part of the Maiden Lane III portfolio; Maiden Lane III removed any risk for the $4.3 billion within that portfolio, and continued Government backing of AIG provided Goldman Sachs with ongoing protection against an AIG default on the remaining $5.5 billion.

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One hundred cents on the dollar

SIG-TARP nailed it. Treasury (think former NY Fed president in tandem with former GS CEO) took the position "We can't negotiate, it's an emergency!" This reminds me of the distressed phone call people sometimes receive from poor relatives: "They're going to evict us if we don't come up with $500 by tomorrow." My reaction to this kind of call would be "And how long have you known you were facing eviction? Don't you read your mail?"
Did Tim Geithner and Hank Paulson just learn of AIG's problem at the last minute? Did Paulson suddenly ask, "Gosh, what's a counter-party?" And "How much did you say you need before the bank takes the farm?" Bear in mind, these are smart guys. The whole thing smacks of either collusion or extortion.
Ben Bernancke's account makes it sound like extortion, but he's a very smart guy who is supposed to pay attention to Wall Street and the banking system (not to mention non-bank funancial institutions).
Let's hope the next crisis does not come as a complete surprise to these people. Certainly we expect a better response than, say, Stalin's when he learned that Germany had invaded.
Frank T.

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Frank T.

article suggested we need an investigation on AIG

Over on HuffPo.

I completely agree with this and if anything stinks to high heaven, it's that "certain players" made the biggest profits ever during bail outs.

There really needs to be an investigation with penalties.

Learsy mentions a PIMCO deal where they made the biggest payout ever when Fannie/Freddie were rescued as well as AIG and how GS was involved in the meeting to bail out AIG.

It stinks to high heaven and it's nice to read someone else demanding an investigation.

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