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Guest Post: AIG's Banks - Market Makers Or Flippers Of CDOs?
Submitted by David Fiderer, courtesy of Huffington Post
Did Societe Generale ever view its $1.2 billion investment in
Adirondack 2005-2 as a buy-and-hold proposition? Or was the bank's
original intention to offload the risk on to AIG? The answer is central
to our understanding of the portfolio of collateralized debt
obligations, or CDOs, that wiped out the insurance behemoth. The
circumstances of SG's, and other banks', holdings, suggest that CDO
market was a Potemkin's Village, a facade constructed to give the
illusion of economic substance to a series of sham transactions.
Adirondack 2005-2 is similar to Max CMBS I Ltd., Series 2008-1, and most of the other billion-dollar-plus exposures that stand out among the transaction details released last week.
Whenever the dollar amount exceeds ten figures, the lion's share of the
entire CDO transaction is usually held by a single bank.
The biggest and most obvious example, disclosed last May, was Max 1.
Deutsche Bank underwrote the $5.8 billion deal, and held on to $5.4
billion, a 94% share. This should have been a big story at the time.
Max I was one of the largest CDOs ever underwritten, and the fact that
Deutsche would have attempted to bring such a deal to market in June
2008, when everyone was feeling skittish about real estate
securitizations, would have been notable in and of itself. Yet Deutsche
was unable to sell off more than a tiny part of the deal. The fact that
the underwriting failed should have been even bigger news. However no
one paid much attention, since no public disclosure was required.
Deutsche quietly offloaded its risk exposure to AIG Financial products.
The same holds true for Altius 2, a $1.5 billion CDO that Goldman
underwrote in 2005. Goldman retained 75%, or a $1 billion share, which
was covered by an AIG credit default swap. And then in the summer of
2006, Goldman underwrote West Coast Funding,
a $2.7 billion deal, of which Goldman retained about $2.2 billion, or
82%. Though once again, Goldman's risk amount got credit protection
from AIG. [Note: The numbers are approximate, since each bank exposure,
as of November 2008, is compared against the total deal size at
closing. See further explanation at the end of this piece.]
By the standards of any normal bond underwriting, Goldman's
inability to sell down either Altius 2 or West Coast Funding would have
been viewed as a conspicuous failure. And such news would have
inhibited other banks and investors, including monoline insurers, from
taking on incremental CDO exposures.
Had the subprime CDO market shut down in 2006, would there have been
any ripple effect on other financial markets or the real economy? It's
doubtful, since the CDOs were not financing anything new. They merely
repackaged versions of mortgage bonds that had already been sold into
the marketplace.
The AIG portfolio also reveals other examples wherein Goldman's
sell-down efforts met with apparent success. But that success was
reliant on a single favored customer, Societe Generale. Goldman sold
75% of Adirondack 2, 68% of Altius I, 73% of G Street, 86% of Sierra Madre 2004, and 70% of Davis Square Funding VI to SG.
These transactions are highly complex, with all sorts of pitfalls
embedded in the documentation, which is one reason why it's highly
unusual for one bank to buy 70% of another bank's structured finance
deal. It's even more unusual when the relevant amount approaches a
billion dollars. Why would SG have taken on a risk concentration of
such magnitude, unless it knew at the onset that the risk would be
neutralized by AIG?
According to an internal AIG memo
from November 2007, SG never took a proactive role in monitoring the
market values of these CDO investments. The bank relegated that job to
Goldman. It's one thing to outsource that role when you hold a small
slice of another bank's deal. It's quite another thing when you hold
the dominant controlling share. You would think SG would have a keen
interest in determining the amount of cash margin it would receive from
AIG to cover the CDOs' purported decline in value. The AIG memo states:
Sogen do not calculate prices themselves and simply ask the
dealer they bought the bond from [i.e. Goldman] for a current estimate
of the current levels [of estimated market values] and they then pass
this level on to us...
At the time, SG asserted that the market value of its holdings in
those six CDOs was between 64% and 87% of par. Of course, the entire
notion of marking to market these CDOs was a bit of a fiction, as noted
in an earlier piece about Goldman's relationship with AIG.
Goldman did the same thing as SG. It bought a couple of billion-plus
slices, representing the dominant ownership shares, of another bank's
CDOs. Goldman's seller of choice was Merrill Lynch. And of course, the
risk for those investments was covered by credit default swaps sold by
AIG.
That's why you have to wonder if these transactions were put
together as package deals - to give the illusion that the banks' CDO
activity was a reflection of legitimate market demand, and not an
elaborate scheme of three-card monte.
Explainer on amounts and percentages: Most of the CDOs, and
the banks' nominal CDO investments, had amortized subsequent their
initial closings. There has been no public disclosure, so far, of the
size of the partially amortized CDOs as of November 2008, when the
banks sold their CDOs to the government at par. Nor has there been any
disclosure of the CDO amounts acquired by the banks before any
amortization. The comparison between a bank's individual slice and the
overall deal size is, admittedly, an apples-and-orange comparison. But
the flaw in this approach does not undercut the thesis, which is about
order of magnitude. This approach understates the extent to which these
individual banks held large and dominant shares of individual CDOs.
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Is this how money passes from hand to hand until it finally disappears?
DUHHHH
If Timmy-Bennie boy, Obama or any congressperson had an inclination to protect the taxpayer and pursue GS/AIG scam they would rescind the fraudulent deals like the monolines that are putting deals back to the banks
these deals need to go back to GS and SOGEN
http://www.marketwatch.com/story/banks-10-billion-problem-loan-repurchas...
hey man! AIG was done in 05... except for the pipeline of course... it was a big pipe apparently.
"In December of '05 we went out to almost all of our counterparts and told them that we were going to stop writing this business," said Cassano, according to a transcript of the December 2007 call. "Now we had a pipeline in place and so through that pipeline, through that first quarter, we did accumulate some early '06s in the period."
Wednesday, February 3, 2010
Rosner: “Has the New York Fed been serving the public trust? Has Geithner?”
By Joshua Rosner, a managing director of an independent financial services research firm who writes for New Deal 2.0
In Geithner’s AIG testimony before the House Oversight Committee, the Secretary again tried to sell the notion that ‘if we didn’t act then, millions more would have lost their jobs and thousands of factories would have closed’. Even if this were true, why did they have to pay these counterparties one hundred cents on the dollar? The answer may be because, as President of the New York Fed, the counterparties you paid out on AIG owned your company.
To simply say “we had to” is an oversimplification and a partial story. Those of us who saw the crisis coming and recognized the fragility of the system before the Fed or Treasury disagree with the “we had to act” line, but the story is actually larger than that, and predates the unfolding of the crisis. The full story puts Tim Geithner and Larry Summers dead center in creating the environment that drove us to crisis.
The New York Fed is not government-owned. Most people fail to recognize this fact. Simply, the Federal Reserve Board (responsible for monetary policy, with a dual mandate of full employment and price stability) is an independent part of the federal government, while the New York Fed is a shareholder-owned or private corporation. In other words, where the Federal Reserve Board is www.frb.gov, the District Bank is www.newyorkfed.org. Historically, the New York Fed has been among the most profitable shareholder-owned corporations in the world. Yet it keeps the details of its shareholders’ ownership information private. What we do know is that its owners include precisely those institutions it is tasked to regulate and supervise and those is has obviously failed to adequately supervise. Unlike the other District Banks of the Federal Reserve system, which have overseen their banks quite well, the New York Fed’s concentration of the largest banks, coupled with its unique role of managing the market operations of the entire Fed system, has built a culture where it sees itself as a market participant and peer to those firms it regulates.
The President of the NY Fed is chosen by, paid by and reports to the private shareholders of that private institution. Only three of the nine Directors of the Board of the New York Fed are chosen by the Federal Reserve Board and, until this year, the NY Fed’s Chair — chosen by the Federal Reserve Board in Washington — was a former Chairman of Goldman Sachs who still sits on Goldman’s Board.
In truth, Geithner’s ineffectiveness in his role at NY Fed President and his current political posturing — without any policy substance to directly address too-big-to-fail or the Fed’s flawed powers to bailout firms — seems to have resulted from design rather than accident. After all, in a previous “public service” role, Geithner was the lead negotiator for the WTO’s General Agreement on Tarrifs and Trade for financial services. In this role, Geithner reported to Larry Summers, who in turn reported to Secretary of Treasury Robert Rubin. In 1998, this team won the banks EVERYTHING they requested from that treaty. From open access to new markets to unrestricted growth in equity and credit derivatives, they opened the door to rapid and deregulated growth of the large multinational banks, allowing them to become “too big to fail”. Moreover, the terms of the agreement has made it almost impossible to put the “too big to fail” genie back in the bottle without running afoul of rules of this international agreement. That was the work of Geithner as “public servant”.
If being a public servant is funneling unreasonable amounts of taxpayer capital, without market discipline, to the largest and most poorly managed banks, then Geithner’s selection as Secretary of Treasury makes sense. The same logic that allows senior officers of Lehman, Pepsi, Pfizer, GE, and Loews to be selected as ‘Class B Directors’ of the New York Fed, chosen as “representatives of the public” makes Geithner the perfect “public servant” to oversee those instutions these largest banks have successfully robbed. To be fair, it is also the same twisted logic that seated the last Treasury Secretary, a man who is being publically whitewashed in the media today — even though, as Chairman of Goldman, he single handedly convinced the SEC to allow Goldman and other investment banks to lever-up so wrecklessley that they would need to be bailed out as AIG counterparties.
http://tinyurl.com/ydxnf4h
Now when are the Toyota related foreclosures coming ? GM/Ford/Chrysler have already decimated Detroit !!
Financial terrorism.
The ramblings of a man who wishes really hard he understood something, anything about structured finance.
AIG's trades might not make sense (particularly with limited info), but neither does this article. Sorry for all you get more outraged by the minute reading it. This is just (like most poorly developed conspiracy theories) meaningless...
Care to explain? What is missing in his understanding of structured finance?
While they're at it, Barney Frank needs probed.
I sure as hell don't know fact from fiction anymore, but I have learned more from this sight in three weeks than I did in the past 5 years.
Christopher Whalen explained to Congress the fraudulent nature of CDO's. He explains elsewhere how AIG and insurance company illegal "side letters" were simply transfered to the derivatives markets. There are open crimes that were and still are being commited. I hereby call for a trial for Treason for Henry Paulson and Tim Geithner.
Lee Stockhamer
If there ever was an argument for bonus clawbacks, this is it. It is becoming increasingly clear that the CDO market began to seize up years ago, but that the players kept writing what they knew were bad deals, taking the fee, then "hedging" by buying CDS' from the five clown circus at AIG FP. Of the folks on the inside, only a fool would have failed to realize that the entire system was being put at risk and that an eventual government bailout would be forthcoming. In the most cynical manner possible, they took advantage of the system. Add to this the rumors that John Paulson was encouraging banks to write bad deals so that---without actually having a position in the underlying paper--- he could buy CDS' on it and profit when the deal most surely exploded, and all that is left to say is that the taxpayers are patsies.
It is also clear why criminals Bernanke and Geithner petitioned the SEC to mask the AIG bailout in a Confidentiality Clause until 2018, as the ugly truth might prove "embarrassing".
What is the boiling point of human blood? It sure is hot here.
†
When you smell a rat
http://biggovernment.com/fgaffney/2010/02/02/geithner-and-bernanke-laund...
A prime example of the rigged nature of the CDS market. The same creeps who gamed the mortgage-AIG CDS market are now ganging up on the sovereigns. Who will be left holding the bag there? Let me guess.....But in the meantime think about it, the CDS for sovereigns is completely unregulated, and the boys can sell them with abandon, no money down, unlimited amounts.
As an aside on AIG, let's look at the big picture. Bankers create synthetic products, don't even bother to sell them, buy insurance from AIG
After they have loaded up on AIG insurance, they then run a massive bet AGAINST AIG
After AIG is broken, and their bets against AIG pay them billions, the banks scream systemic failure, get paid PAR on their AIG insurance
The AIG boys who helped put this together sign lock up deals with "retention bonuses"
Who pays in the end.....let's see.
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