The AIG Scandal: Fed Implements New Conflict Standards for Reserve Bank Directors (Update 1)

It is more than a little amusing to see the Fed's Board of Governors ("BOG") in Washington announce  changes to the normative standards for Reserve Bank directors on the eve of the Thanksgiving holiday.  The new rules apparently are a direct result of the scandal involving Steve Friedman,, the former Goldman Sachs banker who chaired the board of the Federal Reserve Bank of New York during the bailout of AIG.

Here's a link to a good Bloomberg story on the new rules and background on Steve Friedman, who was buying more GS stock while he sat as an FRBNY director.  Duh! 

Back in May of this year, we wrote the following about Friedman and the de facto control by GS over the FRBNY board in The Institutional Risk Analyst:

"And speaking of the fall of the elites, FRBNY Chairman Steve Friedman
finally resigned yesterday, ending a scandalous period when the greater
community of present and past employees of Goldman Sachs (NYSE:GS),
JPMorgan Chase (NYSE:JPM) and other dealers was arguably in control of
the most important arm of the US central bank.

The fact that the
Board of Governors appointed former GS ibanker Freidman as a "C" class
director, who are meant to represent the public interest and not be
past officers of regulated banks, was scandal enough. But then, when GS
formally became a bank holding company last year, the Board failed to
remove Friedman when his conflict became acute. The Board also failed
too to appoint another "C" class director, making it almost seem that
the Board wanted to assist in the GS operation to influence the
operations of a Federal Reserve Bank.

Remember that the board of directors of the FRBNY selected Tim Geithner as President, who then bailed out AIG to the benefit of GS and the other OTC derivatives dealers that were facing AIG. That is why a congressional inquiry is needed to understand just why the Fed Board and, in particular, Fed Vice Chairman Don Kohn, tolerated the Freidman conflict and arguably neglected their statutory duty to ensure the proper governance and operation of a Federal Reserve Bank."

Now the BOG has set in place new guidelines for Reserve Bank directors which, in theory, would prevent GS shareholders and former employees such a Friedman from serving.  However, it is far from clear to me that these changes will be effective and, more, that the members of the BOG in Washington will actually police Reserve  Bank director conflicts.  In fact, the bailout of GS by Tim Geithner, an act of scanalous theft that was endorsed by the GS  controlled board of the FRBNY and then ratified by the BOG in Washington, could not have been effected had the directors of the FRBNY been doing their jobs.

Under the normative standards for directors in the COSO framework, which are paralell to the officer and director standards of DE law and have been adopted by all US financial institutions, including the Federal Reserve Banks, risk management and the avoidance of conflicts are active requirments for a director. Failure to perform these duties, which relfect the director's duty of loyalty to the corporation (and not to shareholders, BTW), is cause for removal and even prosecution in extreme cases.  With banks, a director's failure to protect an insured depository from loss can be reason for removal and prosecution via an enforcement action under 12 CFR.

The fact that the directors of the FRBNY led by Friedman would allow Tim Geithner and his political sponsors at GS, including current CEO Lloyd Blankfein, former GS CEO Robert Rubin and former GS CEO Hank Paulson, to loot the central bank to rescue GS and other dealers from their monumental stupidity and creed in dealing with AIG is an outrage.  Tim Geithner should not merely be asked to resign as Treasury Secretary, as several member of Congress have suggested, but he should  be impeached and indicted along with Friedman and the other members of the GS extended political family who engineered the AIG theft.

But this is hardly a new insight.  For those readers of Zero Hedge who've never had the pleasure, read the comments of Rep. Louis T. McFadden of PA from the 1930s.  He sued the Fed and was the chief sponsor of the McFadden Act of 1927 which sought to bring the Reserve Banks under full federal control and end the monopoly of the banksters.  McFadden, who chaired the Banking and Currency Committee, said on the floor of the House in 1932:

"Mr. Chairman, we have in this Country one of the most corrupt institutions the world has ever known. I refer to the Federal Reserve Board and the Federal Reserve Banks, hereinafter called the Fed. The Fed has cheated the Government of these United States and the people of the United States out of enough money to pay the Nation's debt. The depredations and iniquities of the Fed has cost enough money to pay the National debt several times over... This evil institution has impoverished and ruined the people of these United States, has bankrupted itself, and has practically bankrupted our Government. It has done this through the defects of the law under which it operates, through the maladministration of that law by the Fed and through the corrupt practices of the moneyed vultures who control it."

The battle over corruption inside the Fed and the control of our central bank by the big city banks had been going on for a century and more. That is why the scandal and criminality of the AIG bailout demand the attention of every American.

Happy T-Day

Comments

[chindit13]

Ah, but there's more....

Go back to the weekend collapse of Bear Stearns.  How was the sale to JPMorgan engineered?  Answer:  by issuing just enough new BSC stock so that majority ownership could be put in the hands of people who would approve the sale.  The NYFed arranged this deal, without existing shareholder approval (so much for shareholder rights under our system of cronyapitalism).  And who was the Director of the Board of Governors or the NYFed at the time?  Bonus points for knowing what bank he serves as the CEO?

Jamie Dimon.

[Anonymous]

read this on naked capitalism

Goldman/AIG Conspiracy Theories: There’s a Reason They Won’t Go Away

Note: this post is by Thomas Adams, at Paykin Krieg and Adams, LLP,
and a former managing director at Ambac and FGIC, with some minor
additions by yours truly. This is a significant piece of some puzzles
he, some other experts who prefer to remain anonymous, and I have been
pushing on for several months.

As we have been reading the latest coverage on the AIG bailout from
the SIGTARP report and the Treasury Secretary Geithner’s Congressional
testimony, a nagging question remains unresolved: why did AIG get
bailed out but the monoline bond insurers did not?

The business that caused AIG to blow up was the same that caused the
bond insurers to blow up – collateralized debt obligations backed by
sub-prime mortgage bonds (ABS CDOs). This was actually one of the few
business that AIG Financial Products had in common with the monolines.
AIG didn’t participate in municipal insurance, MBS or other ABS deals,
which were all important for the monolines.

Certainly, AIG was larger than any of the bond insurers, but in
aggregate, the bond insurers had a tremendous amount of ABS CDO
exposure, which at the peak was probably over $300 billion. Despite
AIG’s claims to have withdrawn from subprime at the end of 2005, we
have identified particular 2006 deals with substantial subprime content
that AIG most assuredly did guarantee.

In addition, the monolines had exposure to many other assets classes
that AIG did not which created chaos for the holders of those bonds
when the monolines were downgraded. The chain reaction risk of the bond
insurers was arguably greater, when you throw in the damage to the
aucton rate securities market, which was rooted in the muni market. In
2007, MBIA had over $650 billion of par insured, Ambac had about $500
billion, FSA had about $380 billion and FGIC had about $300 billion.
Throwing in CIFG and XLCA, the total insured par of the monolines was
about $2 trillion – this amount certainly would qualify as large enough
to be “systemic risk” if the insurers were allowed to fail.

In contrast, while AIG’s aggregate insured par was greater, the only
portion that really presented a systemic risk exposure was the CDS and
structured finance exposures, which had an aggregate par exposure of
about $400-500 billion. a persuasive argument could be made that the
monolines were just as intertwined in the financial system as AIG and,
thanks to their municipal exposure, presented as great or greater a
systemic risk to the financial markets and the economy.

Yet AIG was bailed out and the monolines were not.

So what happened? How did the monolines get dropped and AIG get
rescued? The popular reason given has been that AIG was so big that
they affected all segments of the economy, whereas the monolines were
only midsized and not critical to the economy. i believe that SIGTARP
repeated this version of events last week. I understand that Treasury
Secretary Geithner last week repeated this notion and added new
information – that he was concerned about the cascading risk of AIG’s
non CDS exposure.

While this produces a bigger par exposure for AIG, these other areas
did not have the huge risks of loss, have largely remained functional,
and did not have the issue of collateral posting. The risk were at the
parent level, at AIG FP; the bulk of AIG’s business was written by
regulated subsidiaries whose claims-paying ability would not be
impaired by an AIG FP failure. So, in my view, this is a fairly weak,
after the fact argument. A more plausible case might be made that AIG
also had a securities lending business that had sprung a $20 billion
leak, but that wee problem hasn’t gotten much mention in the official
defenses.

I have a different interpretation. I should note that I am a former
employee of a bond insurer, so I admit to a bias. However, I my general
perspective had been, until recently, that neither AIG or the bond
insurers should have been rescued.

When I was at FGIC, Deutsche Bank, Lehman, Bear and UBS were all
over my company with sales coverage for CDO deals. But we never heard
much from Goldman. I was actually surprised to see that they were so
big with John Paulson’s CDO adventures (as recently disclosed in “The
Best Trade Ever”), because I never thought they were that big in the
CDO market.

One big reason I didn’t know Goldman was so big in CDOs – they didn’t work with the monolines.

Goldman wanted their counterparties to post collateral so they would
have protection against corporate downgrades. The monolines refused to
have collateral posting requirements in their CDS contracts. The rating
agencies supported them in this position on the argument that
maintaining their AAA rating was “fundamental to their business”.

AIG, on the other hand, agreed to collateral posting requirements.
in fact, they used this as a competitive advantage – they got more
business because of it and marketed their flexibility on this issue to
the banks. There were two the key distinctions between the monolines
and AIG – first, AIG had other businesses, whose losses could threaten
AIG’s financial guarantee business while monolines promised to pay
claims first, to protect investors. Second, AIG had a history of
negotiating before they paid claims (there is an interesting history
with a ABS film receivables deal where AIG refused to pay, while the
monolines covered similar deals and did not have the same “out” in
their policies. this deal did serious damage to AIG’s reputation in the
ABS market and shut them out of many deals). So despite their AAA
rating, AIG was not as trusted by the structured finance and CDS market
– there was a fear that AIG would wiggle out of their obligations in a
way that the monolines would not.

All of the other banks got comfortable with the monolines not having
to post collateral for CDS trades because of their AAA ratings. Goldman
never did.

Of course, Goldman was one of the few banks that clearly set out to
profit from shorting CDOs. They obviously realized that if their CDS
counterparty was on the hook for a lot of ABS CDOs that were going to
blow up, the insurance provider would likely get downgraded. If the
downgrade of the insurer was very likely, the only way the short-CDO
strategy worked was if the insurer would post collateral.

So Goldman only used AIG, who would provide protection against their
downgrade, which Goldman knew would happen because they were stuffing
AIG with toxic ABS CDOs.

The banks that used the monolines for their ABS CDOs were making a
major error by taking on the monoline downgrade risk without
protection, especially if they knew that the ABS CDOs were toxic. So I
suspect that most of the banks did not really know that the ABS CDOs
would be as toxic as they turned out to be.

This is, of course, what happened. The ABS CDOs blew up, the bond
insurers got downgraded, the banks that used them got crushed because
their hedges against their CDO risks were now in jeopardy. A death
spiral between the monolines and the banks ensued (the ARS meltdown
added to the troubles). Goldman didn’t care, because they had
collateral posted by AIG once AIG got downgraded..

All of the banks who faced the monolines had to start considering
commutation deals with the monolines because it was obvious the
monolines did not have enough capital to cover all of the CDO losses.
in these commutations, the banks accepted payments as low as 40 cents
on the dollar.

Most of the monoline ratings roubles had unfolded earlier in 2008 –
many of them had been downgraded, several commutations had already
occurred by the time of the AIG bailout. AIG managed to put off the
threat of serious downgrade for a long time, despite the junk in their
portfolio (as 2008 progressed, it was a mystery to me and many others
why the onolines were being downgraded but AIG was not). While AIG had
been downgraded to AA some time earlier, this hadn’t caused much of a
disruption because the real trigger for collateral posting was if they
went below AA. For a variety of reasons, this wasn’t a threat until
September of 2008.

I hate to get sucked into the vampire squid line of thinking about
Goldman, but the only explanation i can think of for why AIG got
rescued and the monolines did not is because Goldman had significant
exposure to AIG and did not have exposure to the monolines.

When it became clear that AIG could face bankruptcy, Goldman’s plan
to profit by shorting ABS CDOs was threatened. While they had the
collateral posted, thanks to the downgrades, this collateral could be
tied up or lost if AIG went bankrupt. This was a real crisis for
Goldman – they thought they had outsmarted the subprime market with
their ABS CDOs and outsmarted all of the other banks by getting
collateral posting from AIG when they got downgraded. But if AIG went
away, this strategy would have blown up and cost Goldman billions.

All of this is essentially factual and based, for the most part, on public information.

As a matter of speculation, i believe that Goldman and their helpers
deliberately pumped up the media with the threats that the subprime
market posed in order to hasten the collapse of the subprime market.
this allowed them to realize their gains sooner from shorting ABS CDOs
– they had become impatient waiting for it to blow up.

In addition, I believe that Goldman and their helpers – including
their many connections with the White House and the Fed – pumped up
concerns about the systemic risk that the market was facing from a
Lehman and AIG failure, so that they could force the government to step
in and bail out AIG. This would also explain why Lehman was not bailed
out. Lehman didn’t really matter to Goldman. But the fear created by
Lehman’s failure served as a good excuse for why they should rescue AIG.

I have been wondering why the sub-prime market blow up led to such a
massive crisis when subprime and structured finance had experienced big
problems before without the issue of systemic risk and financial market
collapse.

Certainly, the ABS CDOs were toxic and caused big holes, but not so big
that it couldn’t be addressed by an RTC type of clearing system.
Various analyst reports of the bad subprime deals (and ABS CDOs) makes
it pretty clear that the 2006-2007 vintages were the worst and will
probably only create about $500-700 million of aggregate losses.
Terrible, but not insurmountable.

This leads me to conclude that the bailout was prompted by fear
mongering and deliberate strategies and manipulation on the part of
Goldman and a few select others, to make sure that AIG would be bailed
out to protect their trades in shorting ABS CDOs.

i believe that John Paulson benefited from this bailout, on his $5
billon or so of ABS CDOs with AIG. But not as much as Goldman benefited
themselves, via Abacus and, perhaps, other deals.

AIG, Goldman and ABS CDOs were tied together at the center of the
crisis. From Goldman’s perspective, all of the other participants were
secondary – they had no exposure to the monolines and they were
probably hedged against the other banks. The only loose end was the
collateral posted by AIG.

The final question that this raises for me: would it have been
cheaper for the government and the taxpayer to have bailed out the bond
insurers instead of AIG? The total amount of CDOs and credit default
swaps that would have needed to be guaranteed would have been smaller.
In the number of investors across the market that would have benefited
would probably have been larger. The auction rate securities market,
the muni market, the investors that held bond insurer exposure to MBS
and ABS would have all benefited. None of these markets were aided by
AIG’s bailout.

But a bond insurer bailout would not have helped Goldman much and the AIG bailout did

[AN0NYM0US]

the AIG Goldman Connection from Baseline Scenario

http://baselinescenario.com/2009/11/25/aig-goldman-monoline-insurers/

[Anonymous]

What conflict of interest? The FED is run by bankers to benefit bankers thus the bankers self interest is not in conflict with the functioning purpose of the FED. Indeed it should not even be a surprise to the rest of us.

The FED should be stripped of all its regulatory theory since it is meaningless. It is an open question if they should still be in control of the nation's monetary policy.

[Zippyin Annapolis]

Did Timmy get grandfathered--answer--yes--so once again GS wins--face it.

[Anonymous]

There isn't an AG with the stones to charge the white shoe boys.

[tom a taxpayer]

RC Whalen - Thank you for bringing these slimeball federal and Wall Street racketeers to the front burner. Now it is time for Shock-and-Awe prosecution of these RICO criminal enterprises.

1. Although RICO's primary intent was to deal with organized crime, Blakey said that Congress never intended it to merely apply to the Mob. He once told Time, "We don't want one set of rules for people whose collars are blue or whose names end in vowels, and another set for those whose collars are white and have Ivy League diplomas."  The Racketeer Influenced and Corrupt Organizations Act (RICO) provides for extended criminal penalties and a civil cause of action for acts performed as part of an ongoing criminal enterprise. "RICO was enacted by section 901(a) of the Organized Crime Control Act of 1970 (Pub.L. 91-452, 84 Stat. 922, enacted October 15, 1970). RICO is codified as Chapter 96 of Title 18 of the United States Code, 18 U.S.C. § 1961–1968. 

2. Under RICO, a person who is a member of an enterprise that has committed any two of 35 crimes—27 federal crimes and 8 state crimes—within a 10-year period can be charged with racketeering. Those found guilty of racketeering can be fined up to $250,000 and/or sentenced to 20 years in prison per racketeering count. In addition, the racketeer must forfeit all ill-gotten gains and interest in any business gained through a pattern of "racketeering activity." RICO also permits a private individual harmed by the actions of such an enterprise to file a civil suit; if successful, the individual can collect treble damages.

3. When the U.S. Attorney decides to indict someone under RICO, he or she has the option of seeking a pre-trial restraining order or injunction to temporarily seize a defendant's assets and prevent the transfer of potentially forfeitable property, as well as require the defendant to put up a performance bond. This provision was placed in the law because the owners of Mafia-related shell corporations often absconded with the assets. An injunction and/or performance bond ensures that there is something to seize in the event of a guilty verdict.

4. In many cases, the threat of a RICO indictment can force defendants to plead guilty to lesser charges, in part because the seizure of assets would make it difficult to pay a defense attorney. Despite its harsh provisions, a RICO-related charge is considered easy to prove in court, as it focuses on patterns of behavior as opposed to criminal acts.[4]

5. There is also a provision for private parties to sue. A "person damaged in his business or property" can sue one or more "racketeers." The plaintiff must prove the existence of a "criminal enterprise." The defendant(s) are not the enterprise; in other words, the defendant(s) and the enterprise are not one and the same. There must be one of four specified relationships between the defendant(s) and the enterprise. A civil RICO action, like many lawsuits based on federal law, can be filed in state or federal court.[5]

Both the federal and civil components allow for the recovery of treble damages (damages in triple the amount of actual/compensatory damages).

Items 1-6 from: http://en.wikipedia.org/wiki/Racketeer_Influenced_and_Corrupt_Organizati...

[SpartanTnT]

Can't believe this...this is what makes the mobs eventually line up on the streets

[Hephasteus]

Saucepan revolts in south america, then iceland. Next someplace in europe or ukraine maybe USA. China if they don't play it right.

[Aborted Baby Seal]

US Citizen:  Hey, our barn is on fire and our horses are gone!

Federal Reserve:  We've decided to close the barn door for you. 

[Miyagi_san]

If I remember correctly JP Morgan was right in middle of it back then too.

[Anonymous]

Well, another CRISIS could have our politicians voting to put a $10,000 container tax on Chinese junk. And maybe a $700 billion investment in real (manufacturing) jobs in these here United States.

And tell me again what all the slicing and dicing and sidebets (these New York bookees perpetuate)do for the real economy. None of this back door, under-handed, under- the table scamming does anything whatsoever for the fibre of this nation.

The moral base of this nation is fatally undermined.

[Cognitive Dissonance]

Once again the magician is waving his hands and wand in an effort to distract. This time it's all about so called "new" conflict of interest standards.

Please spare me the drama.

This should more properly be called a lame half hearted attempt to minimize inherent and embedded conflicts of interest all "BOG" members have. Considering the revolving door many of these "professionals" follow from academia to governance to corporate to think tanks to non profit to academia etc. there is no such thing as no conflicts of interest, just no blatantly obvious and hard to ignore or rationalize conflicts of interest.

Time to call a spade a dagger in the heart. This of course applies to nearly everyone in any position of power in government/corporate America. 

[Anonymous]

"The Fed has cheated the Government of these United States and the people of the United States ".goverment should be "goverments",and the first United States in the sentence(as opposed to the second one)should not be capitalized,since he is referring to a collection of states,while in the second one he is referring to a country. Opinions are welcomed(I know,just like the verizon .o1 cents=.o1 dollar,it is not subjective).(lol)

[Anonymous]

The rising level of public anger over the Fed and GS makes me wonder if another financial crisis is looming. What better excuse for another cash infusion into the banking sector than another crash?

[Anonymous]

The rising level of public anger over the Fed and GS makes me wonder if another financial crisis is looming. What better excuse for another cash infusion into the banking sector than another crash?

[Psquared]

Rep. Charles August Lindbergh also had some choice comments about the Fed. Reserve when it was founded and later about the involvement of "high finance" in WWI. He also brought criminal charges and wrote a book about the "Moneyed Interests" the plates for which were allegedly confiscated by government agents.

"In 1913, he wrote Banking, Currency, and the Money Trust, and in 1917 he wrote "Why is Your Country at War?," attributing high finance as America's involvement in World War I. According to Eustace Mullins, plates of this book were confiscated and destroyed by Government agents.^[3] Also in 1917 Lindbergh brought articles of impeachment against members of the Federal Reserve Board including Paul Warburg and W.P.G Harding. Lindbergh charged that the Federal Reserve Board members were involved "...in a conspiracy to violate the Constitution and laws of the United States..."^[4]"

"This Act establishes the most gigantic trust on Earth. When the President signs this bill, the invisible government by the Monetary Power will be legalized, the people may not know it immediately but the day of reckoning is only a few years removed.... The worst legislative crime of the ages is perpetrated by this banking bill."

^{http://en.wikipedia.org/wiki/Charles_August_Lindbergh}

^{What I find interesting is all the people whose names are all over this. WPG Harding has to be Warren G. Harding or an ancestor.}

^{Also, Lindbergh's father fled to the US from Sweden where he was implicated in bribery and corruption while working as a bank manager. I guess the son was a little sensitive to banking irregularities.}

[Rainman]

Impeachments, indictments and suing the Fed. Now there's some Holiday cheer.

It's somewhat discomforting to realize that all this swindling has a 1930s precedent. Thanks for the clear and unobstructed stroll down memory lane.

[Fibozachi]

great point but why stop at the 1930's USA why not go through the 1400 other examples.  nothing is new just repackaged like tv and frozen dinners. it ain't different this time, most just don't understand what/ where/ how to look.  Tulips anyone ?

[Anonymous]

Whalen hits the ball out of the park with bases loaded.

[Anonymous]

He killed my auntie!

[Anonymous]

Well now ....here it is....

Let there be no mistake .....there is no accountability....

Simply to enact "if come status" for possible future events

is not satisfactory....

Accountability and the seeking of funds from those who were responsible should start at once....

Do note that money regougement and jail time is light ....as to what would happen to THEM in China....

And let's also be clear about the fraternity of CEOs that think that they are worth 500X their employees....
This ratio should not surpasse 10:1....

Look....JUSTICE must be served....to those who were/are
responsible....and even a child knows who is responsible....

Personally I could write them down on the back of an envelope....

How about all the retired who are paying the hidden tax of government imposition of not being paid on their savings....
Thus also resulting from these very same individuals....

.......................................

Screw this "catch me if you can" Wall Street Mentality"....

ANd no THEY do not get to pass go and collect....

It is "pay it all back time" and then some....
........................................

Thanksgiving ?

No THANKS....I don"t think so....

[Anonymous]

Great post. The anger that is mounting is starting the intellectual revolution. I hope it can be solved by those means. I fear for Wall Street if this anger isn't met with real change.

[Anonymous]

GS was near death those days. If Hank Paulson didn't rescue GS, who will? The only thing was to design a clever scheme to do it. I think almost all American people understand that, just like they understand that Bill Clinton actually DID get a blow job, no matter how he denies it.

[Bruce Krasting]

Nice of you to keep the kid gloves on for this. It's in keeping with that holiday spirit thing....

"he should  be impeached and indicted"

You stuffed Tim's Tom.

[bugs_]

This is supposed to be a happy occasion,
lets not bicker and argue over who killed
who!

[Rollerball]

HAHAHA

http://www.youtube.com/watch?v=GJoM7V54T-c&feature=player_embedded#