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Enlighten Me: WHY Should AIG Have Paid Swaps at < Par?
Washington links to a Bloomberg story quoting Tavakoli, “There’s no way they should have paid at par,” she says.
“AIG was basically bankrupt.”
Washington (through Tavakoli, it seems) claims that Goldman CFO David Viniar lied when he said the boys from 85 Broad would have been more-or-less fine even if they'd received less than par on the AIG swaps in question.
I've yet to check with Janet or Washington, but unless either was (or have since become)
privy to the detailed trading books of both AIG and Goldman (as well as the
other counterparties), term sheets of OTC trades, and collateral
quality/levels at or around the time such payments were made, that claim is unwarranted, at best.
Just because Vikram & Friends received a 40% haircut on a COMPLETELY UNRELATED CDS settlement with AMBAC doesn't mean, by any stretch of the imagination, that the AIG settlement should have been treated the same, or even similarly; To say, or even imply otherwise is a serious non-sequitur considering the terms of the contracts, the situation during which the transactions occurred, and the participants involved were so drastically different.
Now, Janet is far smarter, and no-doubt much more tied-into these things than I, so I'm curious why she's taken such a hard-line stand on the GS-AIG settlement, unless she knows both firms' positions better than they did themselves.
Also, I'm curious - although unsurprised - with all of the outrage towards just Goldman. As the Bloomberg article says, SocGen was paid significantly more than Goldman; AIG paid Societe General $16.5 billion, Deutsche Bank $8.5
billion and Merrill Lynch $6.2 billion.
Look: I don't have all the answers, but it doesn't take much to realize that more often than not, those who claim to, don't.
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What's the appropriate seniority order for pay-out had AIG indeed gone under? I doubt that senior unsecured creditors of LEH would not also accept 100.0 cents on their claims as well. I am mildly shocked if, dare I say it, those CDS contracts were first in line at the receipt window for chapter 11 creditor claims.
Before it's called apples/oranges...bullcrap. An over-levered finance corporation failed, and absent a 25th hour reprieve from uncle Fedster AIG is in the same liquidation boat as good ol' captain dicky fuld and USS Lehman.
Goldman not alone here, obviously. But the commonality of that corporation's supposed skull-duggery has been well noted (JPM likely a distant second in that race, despite my personal lack of anger for mr. dimon).
To anal_yst and the Goldman shills:
AIG was bankrupt. Where in the Fed's charter does it say that the Fed can make good on a private company's mistakes, at taxpayer expense? If you can point that out, perhaps we can have an argument. Where does it give the Fed authority to use US taxpayer money or obligation to bail out foreign banks? What is the precedent for the Fed and Treasury to insist on 100 cents on the dollar in a bankruptcy filing?
If you cannot answer any of these questions, then crawl up my ass and die.
Ah I can see I've brought out the intelligencia with this post, truly impressive!
I can't prove it, nor did I claim to be able to. All I'm asking is how can Janet Tavakoli say that Goldman would have lost more than their claimed $300mil if AIG CDS hadn't paid out at Par? How can she know they weren't fully-, or over-hedged?
Learn to read and put the hateraide down champ. Just like everyone else I find the AIG fiasco questionable, but I'm not so quick to jump to conclusions in the absense of factual (or even quasi-factual) support.
[...]
You know, I love you guys.
love ya'll too!
Fuck this plant. Fuck his article. And Fuck you Zero Hedge for putting it on your website and upsetting me.
Any more mature, informative commentary to add?
Didn't think so.
Hint: If this upsets you so much perhaps you should consider a heavy dose of ganja and/or xanax (or similar), to be taken multiple times daily. That, or educating yourself to the point of being able to contribute anything even remotely meaningful to the conversation.
That article is probably the most rational thing which I have ever read here and goes against the grain of the sophomoric World Wrestling Federation mentality which generally dominates the conversation here.
Kudos to the author.
Perhaps I'm figuratively living on another planet, I'm really having a hard time understanding the gist of the original argument.
We all do not have the answers because we simply cannot get the answers. The level of opacity between counterparties, the Fed, the Treasury-- and the rest of the Administration-- makes it downright impossible to get to the core of the truth. That alone should be of grave concern to all of us.
So in the meantime, we are left with little option but to piece things together. Janet Tavakoli doesn't really need her well heeled network of derivatives contacts to piece together there was no way AIG could have paid near par on these obligations-- quite simply becuase they did not have the financial capacity to come anywhere close to meeting them. If, indeed, they did... we need to have a very serious talk with Timmy Geithner becuase he basically engineered a $165 billion backstop for shits and giggles.
As for the allgations of the Goldman CFO lying about the company's ability to survive without bailout money.. I think the original poster is right to challenge that point. Simply put, there's a lot we don't know to come up with such conclusions. What bothers me, though, is that given all the "questions" that have come up as a conseqeunce of this crisis... we are left with far from complete answers. Those that have them (Goldman, Timmay, Paulson, etc.) have been less than forthcoming... and will likely continue to be.
And on isolating Goldman, PUHLEEZE! Given the extensive "on the record" phone logs between ex-CEO Paulson and current CEO Blankfein, Goldman deserves all its scrutiny and then some. When you have an available bonus pool that exceeds the annual GDP of Costa Rica during a time of widespread strife, its not suprising there's heat in the kitchen. Perhaps shedding more light on SocGen or DB is appropriate, but their political influence here pales in comparison to Goldman. What would be interesting digging, however, would be the foreign banks ties into our own Federal Reserve.
I still didn't understand the post, but it works in bringing up new questions...
This is legitimate. But had AIG gone to bankruptcy (which by all reasonable accounts that's where they were headed), then how do we know a judge would have subordinated the rest of the AIG obligations to the GS CDOs? AIG had more problems than a derivatives mess. They were playing a shell game between state insurance funds.
Goldman et al were not the ultimate other side of the trade. They were simply the broker to the trade. Follow the money and you will find the ultimate other side.
very interesting. perhaps we should putting our detectives' hat on then yes?
this might be of help: according to gloomberg, GS' main counterparties in case of an AIG default were BOA, JPM & SocGen.
question: does et al include the European banks as well?
Finally, a post about GS that's not completely tinfoil-hatter. Quite strange to see it on ZH.
This site works extremely well IMHO. It has a range of opinions, some of which are incendiary enough to ignite calls for censorship and pitchforks. By-and-large, however, the issues get raised and debated in open forum as should be the case.
Thanks Anal_yst for sticking your neck out!
Thanks ZH for a great site!
I learn much here, thanks everyone for your contributions!
You're welcome!
I'm not taking the bait. Anal_ is just bored tonight and posted this to push everyone's buttons.
For any of you that may not be sure; meet the "enemy combatant":
http://www.youtube.com/watch?v=IOWREog3zYM
Where is Sergey? Free Sergey.
Probably a counter-intelligence post. Just to smoke out infiltrated IDs. Gooks in the f*** perimeter.
http://www.youtube.com/watch?v=B4_3FOW0jQs&feature=related
Hell yeah.
They should not have gotten 100 cents on the dollar because when Lehman filed for bankruptcy the CDS' paid out 25 cents on the dollar.
And negociations already had the amount down to 60 cents on the dollar or lower.
That's like saying because Phil Mickelson missed a put (or 5) on Sunday in (whatever major tournament) he only gets $5mil/year from Titelist, so Tiger Woods shouldn't get $40mil/year from Nike.
Please come back when you can construct a plausible and reasonable argument. Thanks.
And that is what happens when companies go bankrupt. Due the injection of capital by our wonderful government AIG did not go bankrupt and because of the injection met obligations to counterparties. Was it the right thing to do? Absolutely not. Did it happen yes. I am pretty sure by the fact that the stock is still listed its listing is another indication it ain't bankrupt.
Wow, I go on vacation and come back only to find ZH running in the opposite mode. A goldman apologist posting here? Wow, TD must be on vacation.
I'm hardly a Goldman apologist, having never worked there and frankly not giving a rat's ass what happens to them (ceteris paribus). I'm merely pointing out that a lack of information doesn't give anyone a right to jump to conclusions with certainty, nor make normative statements without solid fundamental support.
Your point is well taken and I believe that AIG should have paid out as much as it's assets allowed and no more. If that meant that all the dogs went home a little hungry too bad. I object to the dogs being made whole using any government support.
My more general question... what on earth are professional traders doing leaning long and leveraged, holding hedges so illiquid they can't be moved with a mouse click?
Shouldn't we consider that a case of evolution in action?
I think the financial situation at AIG is and was pretty clear. We don't really need to know "precise" details when a government takes such radical, and illegal actions at the speed of light.
The govi can fix this by taxing 60% of the value received.
Settlement in full at a lower price is far from uncommon. The counterparties knew the AAA rating was based on regulated assets and a regulated income stream. Based on Goldman bonuses, it was a giveaway.
Another point about the ABK and SCA settlements: notice that SCA settled for less. Why? Because they were in much worse shape than ABK (unbelievable as it may seem).
What kind of shape was AIGFP in, or the holdco for that matter, who I suppose gave them a support agreement? If the company was about to file BK, what is a reasonable settlement?>
Given that, why was the CFO of the division negotiating for 40 cents on the dollar? That amount seems about right to me given my knowledge of the FG settlements. Why was that number revised to 100cents?
perhaps because monsieur sarkozy & frau merkel threatened to spill the beans?
Doubt liquidation would provide .40 Even as a going concern.
What makes you say the Citi/ABK deals were completely unrelated?
What about the ML/SCA deals that were also commuted?
To my knowledge they were the same types of deals on the same types of collateral. Do you have different info?
Hello....anybody home....????
How about common sense....
No doubt the non GS's need more decent media coverage....
Then people would be white hot angry at them as well....
At this point....if one cannot see the position of GS
within the US govt....then all one can say is....
There is no salt in the bottle....
Excuse me. Is this Zero Hedge? Are you out of your mind asking the question whether Goldman should have taken a haircut on its AIG bets, and why should they if no one else did? Your facts are old news, your questioning of this transaction as if it were perfectly explicable and even mundane complete lunacy. If there is an article of faith here, it is that Goldman (and the rest of the Banksters) stole that AIG money from the US taxpayers with the complicity of Geithner, Paulson and Bernanke.
Listen: AIG was bankrupt. Its debts (essentially insanely risky casino bets) were not guaranteed or backstopped by the US government. Done - game over fellas, sorry about your stupid loss. There was no reason to pay 100% on rotten debts. Period. End of the world's economy? Go fuck yourself - write me the narrative that tells me that story note for note, and I'll shoot holes in it in 15 minutes. Bunch of rich pricks going under is what it boiled down to. And guess what, I'm pissed ANY of those banks got paid. But I am especially irritated about Goldman -you know why? Because - check your facts - Lloyd sat in on the decision of whether they should be paid at all. Thieves and hoodlums, plain and simple.
Analyst, maybe you're a thoughtful guy, but you have alot of balls to suggest this was not malfeasance at the highest levels of our government, if only for the simple reason, as you point out, we don't have all the facts. No shit Sherlock - that's the whole fucking idea. Raising questions about SocGen - do you mean since the whole banking industry sucked up our money it's unfair to single out Goldman? I'll single out any crook I want to in a gang of crooks, thank you. But you do make a point, perhaps I should pick on others as well. But wait: SocGen hasn't inflitrated our government like GS has. Or maybe it has.
This is a bizarre post, and I'm not even sure how it snuck on this site. Is Tyler on vacation? It is rank and odorous Goldman propaganda and apologia. Too early for April Fools, maybe this is some kind of Mischief Night joke, right? I'm probably a sucker for a jokester prank. I apologise for any ad hominem elements - nothing personal - you are entitled to your opinion, no matter how disturbed and divorced from reality it may be.
Brilliant piece. Great language. Great reasoning.
I also wondered hoe few motherfucking crooks have taken the whole mighty US of A for a ride?.
Excellent Rant!
Waldo
Halleluiah glory be, AMEN Ned Zeppelin!!!!!!!
(and it is like the twilight zone to have anyone even suggest that there isn't enough information to draw conclusions about the self dealing that occurred by paulson and bernake on the "let lehman go down, then pass future tax dollars out the back door to the aig counterparties"
AND, the WHOLE incident is SO VERY SUSPECT ON EVERY LEVEL--here is one more tiny little coinkydink: the AIG counterparty list came out on the VERY SAME DAY, AS THE AIG BONUS ISSUE--so the public could understand how 185 MILLION in bonuses is wrong, but 185BILLION IS FREE MONEY OUT THE BACK DOOR TO GS AND OTHER FRIENDS OF THE FED IS JUST A PASSING SHIP IN THE NIGHT BECAUSE THE PUBLIC CANT GET CDS'S AND COUNTERPARTY AND END OF THE WORLD THREATS--IF THAT WASN'NT A SLIMMY TRICK THEN THERE IS NO SUCH THING AS THE SUN.
I'm 100% with you on this. No "toppling of the economy" was going to happen.
As the architect says in The Matrix "there is some minimal level of activity we are willing to accept as survival" (or something to that effect).
Point is, the economy would've taken a sucker punch, for sure. But it wouldn't have collapsed. Not even close. A review of every Depression prior to 1932 shows that they were steep, deep, and over relatively quickly.
Our current "backstops" have only prolonged the damage and pain. These backstops have not eliminated risk (which would eliminate reward), nor have they guaranteed survival. In fact, they may be making things worse. The concept that AIG's full failure would lead to a complete collapse presumes that something worse than what MAY have happened WILL happen because of this meddling.
The crack in the dike may be temporarily plugged with the gum they stuck in it. But they haven't reviewed the engineering specs to see the damage spreading.
take a chill pill son.
1. I never said Tavakoli was necessarily wrong (i went out of my way to say exactly that), all I'm saying is that I don't see how she can have the necessary information to support her viewpoint. Read what I wrote, don't get your panties in a bunch before you understand my very simple point. I'm not apologiezing for Goldman because i don't need to - never worked there - I'm just saying before you accept someone's opinion, you should question the facts upon which it is based, or the lack thereof. That's it.
And the point, without the color commentary, the facts ( you wrote: Enlighten Me: WHY Should AIG Have Paid Swaps at < Par?)
The facts which drive fractional payment on swaps (actually I think it was margin on the swaps):
1. AIG was insolvent.
2. Insolvent entities can't meet their obligations.
3. Business practice and law recognize that insolvent entities pay fractions of outstanding obligations.
4. Contracts and term sheets, although relevant, are unimportant.
Tavakoli has all the facts / information she needs.
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As far as your curiosity why everyone is mad at Goldman: because they manipulated the government to use our tax dollars to cover their shortcomings through undue influence.
SocGen, Merrill and DB deserve our ire for taking our money for their mistakes (mistake: exposing themselves to a bad credit counterparty).
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Of course the real target of our ire s/b treasury and the fed.
I liked Ned's color commentary post better - but if you want just the facts - those are the facts.
Thanks for actually responding and not just shouting, its much appreciated (hence why I'm responding!)
1. AIG WOULD HAVE BEEN insolvent, but they weren't, because the Gov't (rightfully or wrongfully, that's another not unrelated point) stepped-in.
2-4 are thus moot.
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re: Goldman Ire - I think people give them too much credit. Occam's Razor suggests the conspiracy theorists are at the very least a bit off the mark most of the time ("most" being the key word).
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Yes, the proper Ire, if any, should be towards the small small minority of players in the financial system who ruined it for everyone. Most bankers aren't blood-sucking scumbags, even those at goldman, and most regulators/enforcers aren't totally captured by Wall Street ("totally" being the key word). These are very complicated discussions that are 99.999% of the time boiled down to too-few facts, and thus ignore relevent information key to understanding what happened/is happening.
Thanks for your feedback.
re: 'AIG WOULD HAVE BEEN insolvent, but they weren't'...
my thoughts are there were 2 basic potential scenarios:
A) GS had material AIG exposure and failure to pay the swaps at par would have further destabilized the financial system
B) GS did not have material AIG exposure as claimed yet were seeking full payout on this and other unrelated govt concessions as this 'world ending crisis' was occuring.
If A) GS is lying by saying they did not have this exposure. Months later the effects of the combined govt programs are allowing GS to earn windfall profits (much to be paid out in comp, not to equity holders) when GS should have gone down. This is the definition of moral hazard and being deceitful to shareholders.
If B)
B1) GS didn't need the payments, but they bluffed the govt into paying them out in full. At the same time they took advantage of other govt programs designed to bail-out and help failing banks which would destroy the world if they did not have these govt program backstops.
B2) GS didn't need the payments and they acted completely ethically, did not use special connections or political influence and just happened to get a few lucky billion from US taxpayers because some other banks needed the payout.
If B2 first) Allow the audit and testimony. I suppose we will find that the other program funds they took simply to give the appearance of being in the same solvent boat as all the other TARP takers, etc. This sure seems suspicious and in light of this year's massive profits questions the motives for taking advantages of government programs, but the truth shall vindicate the innocent. In the meantime we can go after our stupid and negligent govt officials.
If B1) We will need to determine how the responsibility is distributed between GS and our govt officials. Were our govt officials acting in good faith, not giving favorites and fell for the bluff because of the sheer audacity of it and fabricated evidence? If so then Paulson et all are to be given lenience. In this case it is all GS perpetrating a fraud against the US govt and people. If responsibiltiy is shared and govt was negligent and complicit then get them both.
re: Other players
Yes line them up for audit and investigation too. This is a good example to get started with however because it sure seems obvious that something stinks pretty bad here.
Me again - good point, with the gov't infusion AIG wasn't insolvent. That apparently was the crux of the Fed's response today. But if that was the case, the argument could have been made that the credit rating downgrades were invalidated by the gov't infusion and therefore the collateral payments (required by the event of the downgrades) were not required.
But consider:
The size of the gov't infusion was made due to the size of the collateral calls. If someone had been thinking (I think there was no thinking - there was panic and shoveling of dollars out the door) the infusion could have been tailored to a reduced collateral payment.
WRT to proper ire - it's not a few bankers - it was many more than that - but it was keyed by easy credit and the socialization of risk that had been going on for a long time. And that's the AIG thing in a nutshell - the socialization of risk.
In practice, while everyone honors their commitments, they bargain like hell first to reduce losses and avoid paying out money. The fed and treasury's hands were heavy throughout this period. They could have used their heavy hands here. They didn't. Why not?
WRT to Goldman - it's not about conspiracy, it's about being co-opted. Compromised by a mind-set, a circle of associates and a socialized way of thinking. The end of civilization arguments that drove TARP and everything else here were cunards. But they were accepted because the end of the investment banks and the familiar financial order - that those in power understood as their civilization.
Thanks for actually having the balls to post something that says just because GS and the fed say the sky is blue it doesn't mean they are lying.
Most people disagree with allowing the situation to happen. Thinking that paying 100 cents on the dollar for CDS does not mean you worship at the house of Goldman
You must be joking Ducky--this incident alone was 13BILLION dollars!!! Do you realize how much money that is? And this was pushed out the back door, in the dark, to GS at a time when they were probably just as bankrupt as LEH and this denial of the 6billion loan to LEH combined wtih the stalling of their request for bankholding status, forces their bankruptcy which turns out to be a HUGE WIN FOR THOSE WHO BENEFITED FROM SHORTING LEH AND OWNING CDS'S ON LEH'S DEMISE--DO YOU THINK PAULSON AND BERNAKE HAD NO IDEA ABOUT THE MASSIVE BETS ON LEHMAN AND WHO IT WOULD BENEFIT IN THAT SHORT RUN?
Agro
shhhhhhhhh soto voce
We are not allowed to know about the GS/AIG deal or the Lehman shorts or the half a billion made on those Bear puts or the "rouge" Merril Lynch trader that lost 250 million or...
Because it might bring down the entire financial world if we did know..... OH MY!!!
Bullshit......ALL BULLSHIT
Waldo
Um, no I'm not joking. I doubt either of us knows how much money $13B is other than the fact that it is $13B. GS was in no way in as bad a shape as LEH and if you think otherwise you are living proof of the fact that the person that replies with the most all caps words is always the screaming fool. Therefore, I won't respond to your all caps question.
You respond to me, then you say you wont respond because i am a fool for using all caps--apparently you think insulting me will discredit what i said--
I meant no disrespect to you Ducky...
Don't bother with ducky. He is a Goldman agent. Be very wary of what he puts here.
"Also, I'm curious - although unsurprised - with all of the outrage towards just Goldman"
Hang them all. Instead, they throw Galleon, a second-tier hedge fund, to the circus while the major crooks are out there on the loose.