Guest Post: The Dirty Little Secret About AIG's AAA Pyramid Scheme

Marla Singer's picture

Guest Post by David Fiderer

The insufficiently unexamined issue regarding the timing of AIG’s downfall is the AAA pyramid scheme embedded inside of AIGFP’s CDO portfolio.  The ratings agencies defined reality in the alternate universe of CDOs, where bona fide due diligence was impossible and opportunities for abusive self dealing were rife.

The newly released CUSIPS, which more of less confirm the information yielded from the prior memo obtained by CBS. And again, the noteworthy point is that, on September 15, 2008, almost none of the subject CDO tranches had been seriously downgraded.  They had all been rated Aaa at closing. Their ratings collapsed a few months later.  There’s abundant circumstantial evidence that the ratings agencies delayed and dragged out the downgrade announcements for these black box CDOs. But they had must have done the math, and realized that AIG’s reliance on their ratings proved to be fatal.



That’s why  I believe that the ratings agencies, cognizant of their indirect role in setting up AIG for its demise, would have been receptive to a request by the U.S. government on September 15, 2008 to show some forbearance and delay announcement of a downgrade just at the moment when the Lehman bankruptcy was close to setting off a financial panic.  The downgrades made all the difference in the world, everyone knew it, and the refusal by Dan Jester, Paulson’s special deputy, to forcefully ask Moody’s for a delay in the downgrade is shocking beyond words.

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Anal_yst's picture

Amen, couldn't agree more.

BaronG's picture

So SOI. (Sick Of It)

carbonmutant's picture

The rating agencies "forbearance and delay in the announcement of a downgrade " has been SOP for some time... which I belive has been a major component of THE PROBLEM.

Anonymous's picture

The Rating Agencies are 99.9999% of the problem....

Not 1% of the customers would have bought poorly rated paper.... Not 1%....

Notice any RA heads roll ? Not one....


Anonymous's picture

Is it possible that Warren Buffet (owns 20% of Moodys) put the hit on AIG? Maybe Warren was already being advised by Goldman if not colluding. Who's decision was it inside of Moodys?

Tethys's picture

Hmmm, Warren Buffett, the "Oracle of Obama" owns 20% of Moody's, and Moody's and Goldman pull the rug out from under AIG (after Goldman insures up against AIG losses) just prior to the 2008 elections.  That would be the 2008 elections where Iraq was not going to be the issue - no, it was going to be the economy.  Except John Q. Public was feeling pretty good about the economy.

At least until Goldman (big Dem donor) and Moody's pulled the rug out from under AIG and started the financial clusterf*ck.  Thereby making the economy a huge issue.  Just before the election.

Something stinks.

Assetman's picture

Oh... and we must not forget Buffett's "better than government" $5 billion invetment in GS stock during the height of the crisis.  What was it... $120 bucks a share... were warrants attached?

Talk about a circle jerk of mass collusion...

Anonymous's picture

Right. Or is it possible warren buffet put too much faith in free markets?

Anonymous's picture

Errr. Man. Private industry fails again?

So if 99.999 percent bought and sold it based on that fact. Greenspan and austrians were wrong. Free markets can be dumb?

Ouch :(

plongka10's picture

Deep Capture of ALL aspects of the regulatory process in the US is why we are where we are.

mouser98's picture

David Fiderer is one of a few left of an almost extinct species: journalist

TimmyM's picture

If you check out the largest Goldman position, TRIAX 2006-2A A1B2, you will find Moody's downgraded it all the way from Aaa to junk in Dec 08-curious?

Anonymous's picture

While all of those issues are important,but they all rlate to individual incidents like the BAC/ML or AIG issue. What I like to see is a refutation of the notion that had the FED not saved AIG it would have been the end of the world. The problem with that scenario,is that it is a false premise to begin with,exactly because of the existence of the FED. Whoever studied money and banking in Economic classes knows that the FED has the capability of unlucking credit through its Demand deposit raiio,and the discount windows,effectively saving a bank that has a hardship. Through the thousand of banx available in this country,there would have been absolutly no problem had 1,2 0r more banx failed. I don't recall the end of the world took palce in the eighties(because I am still a live)when litralley hundreds of banx failed,or when the second bank in Mass (bank of New England) failed. Now they could have saved it because they were threatened by the Wall st(back in the eighties the banx closed didn't have the same influence on the goverment as Wall st. Does now). What would that threat be beside crashing the stock market?I can't see anything else that they have a control over(I think the goverment can market its bonds through the same banx that would stay alive). And AIG bailout,the market still plunged to the tune of 50%,untill BB effectivly issued a back stop for the whole economy. So any argument that saving AIG saved the world is false,simply because we had many other "end of the world"moments way after the AIG fiasco.The NOV end of world was stopped only after the goverment guaranteed C(conveniently,nobody mentions that the open interest on the OEX options was the highest at the spx=800 and that is where exactly the spx stopped at on OPEX fiday on NOV). The other "end of the world as we know it" came on JAN with BAC debacle,and it only stopped when again the govie guaranteed and whateveer with BAC. The next "flexing of muscles was the day of congress hearing with TG and the indecision of whther he is going to be confirmed or not. And right now we are witnessing another "end of the world scenario"unless BB is confirmed(so we get the message from all the important people who are telling us that the whole world future is now realy dependent on one man;that must be realy some SUPERMAN).So obviously,AIG bailout has not achieved what they claim they intended to;and that is saving the world,simply because we still have to do other things again and again to "save the world as we know it".....

carbonmutant's picture

It's Not My Fault!

Stand up and Cheer!

Anonymous's picture

Actually Fitch's head rolled, but he still roams free..

shinola's picture

 In 2007 I would have been shocked to know that the rating agencies could be pressured (or bribed) to provide an undeserved AAA or delay a downgrade that they knew was fully deserved.


Thanks to the "-implodes", Mr. Mortgage, Mish, Yves & ZH, I am now better educated.


The rating agencies can hide behind the 1st amendment  & claim it's only an "opinion" & avoid any criminality.  I just hope/wish they could be sued out of existance.


Anonymous's picture

Rating agencies can be sued if can be proven that someone paid for higher rating.

Anonymous's picture

If the high ratings were not given then the next deals would go to the competitor. All the RA's needed business so none were willing to start telling the truth.

Assetman's picture

Even more shocking is that the Fed was instrumental in pressuring the rating agencies to keep those ratings up so they could make the underlying purchases.

They went out of their way to buy AAA-rated collateral that they KNEW it was not-- or was ever going to be-- AAA rated.

But they did save the financial system from collapsing and generating 25% unemployment {/sarcasm}


Miles Kendig's picture

I defer to your astute observations on the matter Assetman.

Anonymous's picture

Obama is a charlatan

Tic tock's picture

This sinister opera, it's a bit like Rigoletto. 

This much-vaunted gun to head of the Wall St. Money too important to be held accountable... technically, it's obsfuctation; since the central bank can hold/collect whatever assets it likes, it isn't terribly important. It still holds the charter to print money and move the base rates. So, will one of these 'Audit the Fed, Kill the Fed' spokespeople, or other interested parties, kindly add a brief aside as to what 'damage' will be done. Thanks,

Then the thing that woke me up this morning., We all know that 'Big' all collude together to get their business interests put forward and center as the first order of business. We all know that 'Small' carry on dying, paying taxes. The two aren't really supposed to meet: the 'Land of Opportunity' is a signboard that reads 'Jobs available'.

This Financial turbulence thing, countries competing yet with shared ideologies, is reminscent of the Catholic Church preaching in high Latin and arguing over the 'real' Christmas day. And just like those Feudals.. these ones really don't have neither the first Care, nor Clue as to what is going on in smallville. man can be born and have the prospects of a janitor. He will have worked hard thru school, he will have been independant, read good books, not subscribed to callous materialsm or 'vicious, exploitative, degrading marketing procedures, shunned a dog-eat-dog world... born two kilometers to the north and he wold have been a Bond-trader, an architect, or even a businessman and probably a freemason. 

..There is a vindictive culture present today, see Crime rates, and it starts with the examples set by those whom we see as 'above' us. Of course it does. The weaker-minded will always follow the behaviour of the alpha class. Geitner, are blatantly using the excuse, the rich would have suffered. I say this to Geitner, 'those who would have suffered are still a long way from being rich.' No, they don't matter. The owners of giant re-insurance agencies do not go bust, not in public.  

So what is this Insanity going on?



SWRichmond's picture

The problem is the "wealth = power" meme.  I don't care how much goddamned money anyone has, as long as they don't believe that having it makes them smarter than me, or that it gives them the right to dictate the terms of my life, or the power to rearrange the world to keep themselves and their idiot offspring on top.  That's when I start to get uppity.

Throughout this crisis it has been really obvious that the wealthy / powerful are willing to use any means to stay on top, even overtly corrupt means.  Say what you want about the Tea Party movement, TARP was the wake up call.  I'm not sure if you meant to, but your post implies that being a bond trader is better than or more preferable to being a janitor.  Believe it or not, not everyone would agree.  Some of us really do value an independent lifestyle and control of our own destinies far more than material wealth.  I realize this is an arcane concept.

As far as the "End the Fed" movement is concerned, I can't speak for them but I can tell you what I think.  The Federal Reserve system is the handmaiden of Leviathan government.  The modern welfare/warfare state is impossible without it providing its covert means of stealing from the public.  I personally believe auditing the Fed is equivalent to ending it, and I'm all for that. The power to manipulate the value of the medium of exchange is life and death itself.  How many lives have been truly destroyed by the bursting of this bubble?  Who are the real terrorists?

This government's response to this crisis has been all about staying in control; the welfare of the people, and their liberty, is the furthest thing from the minds of the dems and repubs.  When this crisis really hits, and I'm confident that it will, the thing that will die a horrible public death is the viability of command economies, central banking, and the regulatory welfare/warfare state.  That is the thing that provides all the wealth and power to the controlling classes, it is the status quo that any real wealth in this country has a vested interest in maintaining and is working hard to preserve. 

DaveyJones's picture

That idiot offsprings gets even uglier once they start inbreeding, amongst themselves and within their government. Seems like the control games get worse as things get worse ... or is that the chicken and egg conundrum? 

Nice post 

Anonymous's picture

Dude we are all exiles on this stage, rehearsing for the big show. Too much cutthroat overacting gets you squat when the lights go on and the parts are assigned. Learn your own script and don't worry about your neighbors' bullshit.

Anonymous's picture

considering the sec has been corrupt for ages I'd guess the ratings agencys weren't far behind. Interesting after all the corruption that has been discovered the sec and ratings agencys are still walking around like nothing happened.

Squid-puppets a-go-go's picture

Hey man, has this ever been tried on?


Lets say I have a $100 billion dollar company of which $80 billion is attributed to 'mark to fantasy' side projects. I also has $50 billion in credit default swaptions.


one day I decide 'hey I'm going to revalue my mark to fantasy at actual market price", suddenly my $100 billion company is only worth, say $30 billion. Which I claim puts my company underwater.


I go into default. I cash in all my credit default swaptions , chi-ching, I've got my $50 billion in the back pocket. Next reporting season I claim to have 'traded my way out of insolvency' , 're-price' my projects back at mark to fantasy prices,


I'm now a $150 billion dollar company


could a company actually feasibly try that on given todays pissweak regulation and F**-up system ??? 

Rick64's picture

Good article and points. These agencies are not held accountable for their outright fraud and thats a huge issue in all this mess. There has been no accountability anywhere.

Dirtt's picture

Yeah it was the ratings agencies?


I mean yes it was.  But really.  If the rating agencies are the fall guy then we'll come to find out how their powers were insufficient to act properly giving the sudden bad news.  Yeah sudden.


Anyone who should have had the power to step in operated in a framework that intentionally was void of any real power.  So when the finger pointing reaches a climax blame will be placed squarely on the system.  A system that was inherently flawed and poorly regulated...point to our elected officials.  By the time this shit hits the fan those elected officials will skate into the private sector.


So the fall guy is not human.  The fall guy is the system.  THAT my friends is exactly what we call "God's Work!"


Some of us may be powerless but at least we aren't stooooopid.

orangedrinkandchips's picture

exactly right. Due D. is the way they could have saved themselves for sure.


Funny, PWT could have sat down without an advanced degree and saw well before anybody that the loans making up these securities are bunk.

the pwt would see that the other pwt are refi'ing like crazy and they are in the same sitch. they cant afford jack.

DaveyJones's picture

The baiting agencies