Additional Perspectives On The AIG Fiasco
Courtesy of Tyler Durden at Zero Hedge
While Tim Geithner may hope the AIG situation is now dead and buried, it is likely anything but, with the recently launched investigation into disclosure fraud by the SIGTARP, and the relentless efforts by Darrell Issa to metaphorically crucify the tax-challenged treasury secretary currently ongoing.
As these noble pursuits continue, we ask two simple questions:
1) In Yesterday’s hearings, it became clear that everyone essentially recused themselves of any oversight over the AIG disclosure issue, including Hank Paulson, with most, even Bernanke, claiming they had no control over the counterparty decision-making process. We ask – then who did? Surely someone at the FRBNY had to pull a trigger at some point. Who is that person? And if it is merely Sarah Dahlgren, is there a formal notification that she had obtained proxy power from Tim Geithner, who yesterday disclosed had recused himself only informally to a very select circle of TurboTax-challenged friends.
2) Why did the Fed not guarantee AIG’s assets ahead of the firm’s implosion. Surely, the realization, which as everyone trumpets these days, that AIG’s failure would have destroyed the world should have been known to at least one person in authority? And as all know, the collateral call toxic spiral commenced only once AIG was formally downgraded by the rating agencies. Well, had the AIG had the formal guarantee of the Federal Reserve, which is implicitly a guarantee by the U.S., then AIG would not have been downgraded in the first place, and no collateral calls would be forthcoming. Of course, Goldman would end up owning CDOs that as Janet Tavakoli points out, and contrary to what the Fed claims, are now worth at best pennies on the dollar. Furthermore, Goldman’s AIG CDS would immediately have become worthless, with Goldman unable to sell them in the open market for a profit of billions of dollars, yet the firm would continue extracting collateral as per its prior arrangement with AIG, in essence not impairing Goldman at all. And had AIG not started down the downgrade spiral, then numerous other adverse consequences of the nationalization of the insurance company would not have transpired. While it would not have saved America’s financial system, it would have made the descent more manageable. Yet with Goldman having benefited massively from the elimination of a vast swath of competitors, one wonders if the guarantee track may have been considered and subsequently denied, under the wise tutelage of 85 Broad advisors. We suggest Senator Issa and Neil Barofsky focus very closely on any email released as part of the disclosure process that highlight the Fed’s reasoning as to why AIG should not receive a guarantee, and what the nature of such reasoning may have been.
And speaking of Janet Tavakoli, her latest analysis of AIG’s Schedule A disclosure as posted earlier in the Huffington Post presents yet another reason why Goldman bonuses should be withheld until the billions in illicit profits from AIG are clawed back.
Congress Exposes Potential Profiteering in AIG’s Deals: Delay Enabled Further Cover-Up
Yesterday the House released some missing details of the AIG bailout. (Click here to see the unredacted pages of the March 2008 SEC filing.) The public knew that the Fed paid 100 cents on the dollar to AIG’s trading counterparties to resolve its credit default swaps, but the details of the assets behind the trades were kept secret.
Plenty of Time to Renegotiate AIG’s Contracts
The first bailout of AIG occurred in September 2008 when the FRBNY extended an $85 billion credit line to AIG. By the September 2008 initial bailout, Goldman Sachs had extracted $7.5 billion in collateral from AIG, and other banks that bought Goldman’s CDOs also extracted billions from AIG (click here for details).
Goldman CEO Lloyd Blankfein claims he had no idea AIG had trouble producing collateral. I knew AIG was headed for grave trouble more than a year before the September 2008 bailout and raised the issue with both Warren Buffett and JPMorgan Chase CEO Jamie Dimon. Goldman Sachs claims to be superior risk managers, yet asks the public to believe that it was clueless about AIG’s distress, even though Goldman itself was a key contributor to it.
Then Treasury Secretary Henry Paulson was CEO of Goldman Sachs at the time it put on these trades with AIG. Lloyd Blankfein was (and remains) CEO of Goldman and was the only Wall Street CEO at one of Paulson’s bailout discussions. Stephen Friedman, then Chairman of the NY Fed, also served on Goldman’s board.
Details That Could Anger the Public
An analysis of the previously secret details shows that at the time of the November 2008 buyout, some CDOs had implied prices of around 60 cents on the dollar. Others had implied prices of around 20 cents on the dollar.
Not revealed by the new report is that many of the assets backing some of the CDOs have a high risk of severe or total principal loss (many have actual losses). These CDOs have "cliff risk," as in falling off of one. (There is currently no reliable secondary market, and similar CDOs have traded as low as one penny.) One such CDO is Davis Square IV, a CDO on which French bank Societe Generale bought protection from AIG. The CDO is a poster child for Wall Street’s key contribution to a financial crisis that devastated the U.S. economy.
Goldman Sachs created and closed Davis Square IV in April of 2005. The CDO was managed by Trust Company of the West (TCW). (Click here for a list of assets of Davis Square IV from the time period around January 2008). The original portfolio included mortgage-backed securities from Goldman Sachs Alternative Mortgage Products, Merrill, and problem mortgage lenders Countrywide, New Century, Novastar, First Franklin, and Fremont (among others). Assets include home equity loans, midprime loans, subprime loans, and adjustable rate mortgages. The CDO also includes other CDOs.
AIG’s Joe Cassano said AIG was basically out of the business of guaranteeing mortgage product at the end of 2005, yet the report shows more than 10% of the CDOs on which AIG sold protection appear to be from 2006 and 2007. Furthermore, CDOs from 2006 and 2007 are buried within the portfolios backing the original CDOs. For example, TCW traded mortgages from 2006 and 2007 vintages into the portfolio backing Davis Square IV. These "assets" are among the worst of the lot.
CDO managers may disclose conflicts of interest, but a conflict of interest shouldn’t mean that new assets "managed" into your portfolio are highly likely to do you harm. TCW and Goldman Sachs had a relationship that benefited TCW, which earned fees from deals like Davis Square IV. Davis Square IV included several tranches of Goldman’s Abacus deals, including $53.5 million from 2006. By September 2008, Goldman’s CDO, Abacus 2006-12, was already downgraded from AA2 to Ca, a junk rating–it means you are likely to lose your shirt. Another part of this CDO in Davis Square IV’s portfolio was downgraded from A3 to Ca. Three of Goldman’s slices of Abacus 2006-15 also made their way into Davis Square IV, and they were also all downgraded to Ca, a junk rating, by September 2008.
Among other eyebrow raising assets in Davis Square IV, one finds a CDO called Pinnacle Point Funding 2007-a. This CDO was managed by Blackrock. It closed June 7, 2007, and went into acceleration (not a good sign) on December 13, 2007. Davis Square IV’s "investment" was originally rated triple-A. By the time of AIG’s September 2008 bailout, it was already downgraded to C, a junk rating, by Moody’s. Yet the Fed awarded no-bid contracts to Blackrock to manage the assets it bought from AIG.
Profiteering and Track-Covering: Possible Reasons for Redaction
The financial windfall conferred by AIG’s bailout, the self-serving claim that the crisis prevented negotiation, and the subsequent cover-up of details were very much to the benefit of Goldman Sachs and its current and former officers involved in the bailout discussions.
In the example above, I show the Davis Square IV portfolio as of January 2008. One would need similar snapshots of all the CDOs to figure out who did what to whom. The fact that the Fed and SEC suppressed potentially explosive facts is bad enough, but the delay in making the information public has given interested parties a window of opportunity to cover their tracks by dumping the worst of the assets, thus hiding them forever from public view.
Suppressing the details of AIG’s trades made it easier for AIG’s counterparties to cover-up profiteering and then exploit public funds. If details of these trades had been made public in September 2008, a reasonable negotiator would have demanded that the billions of dollars that had been extracted from AIG (including the $7.5 billion Goldman extracted by then) should be recharacterized as a loan.
Instead, the Fed gifted tens of billions of dollars to banks that supplied the financing for bad loans that damaged the U.S. economy. More than that, these banks engaged in suspect deals that covered up losses and allowed them to continue to report apparent "profits" and pay inflated bonuses. Meanwhile, their securitization activities continued to harm the economy during a period at which the United States was at war.
Goldman is not solely responsible, but it had a large role in AIG’s crisis and a unique position of conflicted interest and influence over the terms of the bailout. Now that the crisis is over, this issue should be reopened, and billions in collateral should be clawed back to pay down public debt, before Goldman Sachs pays more than $16 billion in taxpayer subsidized bonuses to its employees.
