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Guest Post: Sham Transactions That Led To AIG's Downfall: The Ugly Truth Was Hiding In Plain Sight

Tyler Durden's picture




 

Submitted by David Fiderer, posted originally at Huffington Post

Sham Transactions That Led To AIG's Downfall: The Ugly Truth Was Hiding In Plain Sight

If you want to understand the deals that wiped out AIG, the best place to start is the website of the New York Fed.
In the financial statement of Maiden Lane III, published last April, we
see the gory details of the three largest CDO investments - Max 2008-1,
Max 2007-1, and TRIAXX 2006-2A - acquired from AIG's banks at par.
Those deals, which totaled $10.7 billion, offer a template for
evaluating the other sham transactions in the portfolio.

Initially, the business deal between AIG and the banks was that AIG
sold credit default swap protection. Banks buy credit default swaps for
two reasons: They want to slice and their dice credit risk, and/or they
want to hide something. Here's a simple, fairly innocuous,
illustration: Suppose you're a banker who tells his client, Procter
& Gamble, "We want to expand the relationship and do more business
with you." P&G then says, "Fine, lend us $100 million." Back at the
office, your senior credit management says, "The maximum risk exposure
we approve for P&G is $80 million." How do you keep in P&G's
good graces? You lend the company $100 million, and simultaneously
offload $20 million in risk exposure by purchasing a credit default
swap from another bank. P&G's understanding is that you've lent
them $100 million.

When Deutsche Bank bought a credit default swap from AIG in 2008,
its primary motivation was not to slice up the credit risk, but to hide
virtually all of it. Max 2008-1,
a CDO that Deutsche arranged and closed on June 25, 2008, was huge. The
total debt issue was $5.8 billion, of which 94%, or the entire $5.4
billion Class A-1 tranche, was covered by one credit default swap
issued by AIG Financial Products. The Class A-1 tranche was considered
"supersenior" because it was ahead of two other tranches, both
originally rated Aaa, which totaled $200 million. (The remaining debt
$200 million worth of debt was rated Aa, a and Baa at closing.)

2010-01-29-Screenshot20100129at12.35.56PM.png

Put another way, Deutsche Bank did not bring Max 2008-1 to "the
marketplace," where investors might consider buying the deal on its own
merits. By normal standards, the "market" for this CDO never really
existed. Nor did Deutsche sell the deal to AIG, which could have
assumed both the risks and rewards of owning a huge CDO. (In all
fairness, we do not know where the remaining 6%, or $400 million, of
less-senior tranches ended up. Deutsche could have kept them in
inventory to be stuffed into a yet another CDO.)

Almost all circumstances surrounding Max 2008-1 seem weird. We do
not know much about the $5.4 billion Class A-1 tranche, except that it
was never downgraded below its initial Aaa rating. Yet, according to
Deutsche Bank, AIG and Maiden Lane III's accountants, the underlying
value of Max 2008-1 collapsed within a matter of months. By the time
that the government agreed to acquire the CDO at par, the Class A-1
tranche purportedly had a negative "mark-to-market" of $2.5 billion. (As noted earlier,
accountants, both for AIG and the Fed, determined that that there was
no market benchmark for valuing any of the CDOs.) So did AIG turn over
$2.5 billion in cash collateral to Deutsche? No. It turned over $4
billion, as revealed in AIG's filing with the SEC, dated May 15, 2009.

Among the hundred plus CDO deals to which AIG extended credit
protection, the only ones which received collateral postings in excess
of the "negative market-to-market" were the two biggest: Max 2008-1 and
Max 2007-1, as revealed in the SEC filing of May 15, 2009.
Together, those two CDO tranches had a par value of $7.5 billion and a
"negative market-to-market" of $3.5 billion at the time Maiden Lane III
closed. But AIG had already turned over $5.6 billion in collateral to
Deutsche Bank, $2 billion more than what anyone thought to be
necessary.

Everything about Max 2008-1 suggests that the parties were not
acting on an arms-length basis, that they had something to hide. A deal
rated Aaa doesn't decline in value by 40% within months after closing
and still retain its Aaa rating. (The more junior tranches received
moderate downgrades on March 19, 2009.) A cash-strapped insurance
conglomerate does not turn over $2 billion in excess cash collateral
for no reason. AIGFP had unsuccessfully struggled for the better part
of a year to establish an agreed-upon method for calculating the
amounts of cash collateral postings on these credit default swaps. It
seems more than a little odd that it would choose to expand this
problem with a credit derivative more than twice the size of its next
largest CDO exposure. And it seems especially odd that it would close
such a deal in June 2008, one month after Moody's and S&P had downgraded AIG, and issued warnings that further downgrades could be coming.

What becomes obvious, after reviewing Max 2008-1, Max 2007-1, and
TRIAXX 2006-2A, is that these deals never could have been done but for
AIG's willingness to assume the lion's share of the credit risk.

TRIAXX 2006-2A
was a $5 billion deal, of which AIGFP assumed $3.2 billion, or 64%, of
the credit risk. AIGFP provided credit protection in three different
tranches, all of which were rated AAA at closing. The sole underwriter
and arranger for the $5 billion CDO, which closed in December 2006, was
an outfit called ICP Securities LLC,
a private firm owned by its employees. In retrospect, it seems
remarkable that AIG would have assumed such a large exposure in a deal
structured by a relatively small private company. Nonetheless, ICP was
able to sell its deal into the marketplace, if that's the correct way
to characterize it. Of the $3.2 billion in credit protection sold by
AIG, $2.5 billion was purchased by Goldman Sachs, another $0.4 billion
was acquired by an affiliate of Dresdner bank, and $.03 billion was
acquired by a company of unknown origin, called CORAL Purchasing
(Ireland) Limited. All of this information was disclosed by AIG to the SEC on May 15, 2009.

The Aaa ratings at TRIAXX 2006-2A remained in effect at the time AIG
collapsed, and at the time the CDOs were sold at par to Maiden Lane
III. Nonetheless, Goldman had demanded, and received about $1 billion
in cash collateral postings prior to the date when the New York Fed
took the exposure off of AIG's books. About a month after Maiden Lane
III closed out its books for the year, on December 31, 2008, TRIAXX
2006-2A suffered a downgrade, to Caa.

Those eight-month-old public disclosures are very incomplete, but
they reveal a lot. They indicate that these CDO deals were not, by any
stretch of the imagination, conducted on an arms-length basis, and that
the these transactions took forms that were designed to conceal the
true economic interests of the parties. I'm always amazed by what
people, especially people not from the financial world, don't know. Big
banks are not like the Pentagon or the Coalition Provisional Authority.
Billion dollar amounts do not just slip through the cracks. There is no
way that the very top people at AIG and Deutsche Bank would not be
thoroughly briefed about every aspect of a $5.4 billion credit default
swap for a CDO called Max 2008-1.

The newly disclosed information,
which reveals the redacted parts of AIG's May 15, 2009 filing, serves
to confirm what we already realized. At AIGFP's CDO business, nothing
was what it seemed.

 

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Fri, 01/29/2010 - 18:09 | 211431 Ned Zeppelin
Ned Zeppelin's picture

Empanel the grand jury. Why are we waiting?

Fri, 01/29/2010 - 18:17 | 211440 bugs_
bugs_'s picture

Keep digging.  Thanks.

Fri, 01/29/2010 - 18:26 | 211450 B9K9
B9K9's picture

Ned, you're not asking the existential question, which is "Why aren't they prosecuting?" And the answer is ... national security - including blanket immunities and pending presidential pardons.

It's all right out there in the open. As if anyone needed additional proof, this week provided it in spades. The government in essence has said, come hell or high-water, it is absolutely committed to the FIRE economy. IOW, national security.

In their minds, little things like paying off some connected, private parties to the tune of a couple hundred $bil is small potatoes when considering what is at stake. But if you read between the lines, they are in effect admitting that other than FIRE, we don't have game.

Those $trillions in mal-investment? Sorry, they can't be re-purposed to effect net production. So we're gonna just have to make do with what we have. Labor arbitrage? Sorry, we cannot reduce wages or repeal regulations to be more competitive. So we're gonna just have to make do with what we have.

They are all in. There is no other way other than we MUST have credit-leveraged asset-inflation in which to resume driving a consumption based economy. If you don't believe we can pull it off (again), as if there were some math proofs or something laying around that dispel such a notion, then you might have some inkling as to what's in store for us.

(Curse you Goodwin.) This is our Stalingrad; Hitler (in the form of our collective representation) has made the decision to stand or die.

 

 

Fri, 01/29/2010 - 18:41 | 211468 Anonymous
Anonymous's picture

Does "national security" mean "security of the global oligarchs who own the Federal Reserve banks"?

Fri, 01/29/2010 - 19:56 | 211558 Ripped Chunk
Ripped Chunk's picture

Bingo!

Fri, 01/29/2010 - 22:00 | 211641 Ned Zeppelin
Ned Zeppelin's picture

Yes, and the phrase "systemic risk" can be used interchangeably, and in fact should be used interchangeably to confuse the sheeple as much as possible.

Fri, 01/29/2010 - 23:12 | 211681 Anonymous
Anonymous's picture

bless you....you have seen the light....

national security is a euphemism for fascist
police state....

people must withdraw their monies from the squids....

Fri, 01/29/2010 - 18:48 | 211485 Anonymous
Anonymous's picture

Maybe its just that they were bailing out their connected friends.

Fri, 01/29/2010 - 18:35 | 211465 Lowest Common D...
Lowest Common Denominator's picture

How I long for the days when ICP stood for Insane Clown Posse, and I was too busy immersed in pop culture and helping rich guys steal money to pay much attention to our econ's soft white underbelly.

(didja know that "Soft White Underbelly" was BOC's (Blue Oyster Cult's) name back in the day?)

Fri, 01/29/2010 - 21:58 | 211636 Ned Zeppelin
Ned Zeppelin's picture

great icon love it

Fri, 01/29/2010 - 18:44 | 211477 pros
pros's picture

 

The GS/AIG transactions were a sham, and fraud ab initio...

a fraudulent conveyance for no consideration

The AIG entity was not capitalized sufficiently.

The government can sue to unwind the transactions and place the losses back on GS' balance sheet...

and get fraud damages as well

But the government is acting for GS, not for US taxpayer..

but the taxpayer is not obligated to support actions of government officials undertaken for the interests of private parties and against the public interest...those are obligations of the private parties...the GS employees planted in the "government" and GS.

 

 

Sat, 01/30/2010 - 11:45 | 211838 boooyaaaah
boooyaaaah's picture

Good one, pros

When public and private become to entangled the common man is in a conundrum

We cant vote out the private crooks

and

There is no way to let the public crooks go bankrupt

Fri, 01/29/2010 - 18:46 | 211481 Waterfallsparkles
Waterfallsparkles's picture

That is my question how many Counter Parties received huge sums of money from Aig prior to the AIG bailout to cover the decrease in value of the CDO investments with the Downgrades by the Rating Agencys.  As you have previously stated the Contract called for Aig to pay to the Counter Party the decrease in value.

So, if these Banks got paid 100% on the Dollar, what about the Money they already received from AIG. 

Did the Banks get 150% or more on the dollar with the AIG Bailout?

I also wonder about the Rating Agencys.  They appear to be bought and paid for by thoes creating the CDO's.  Were they also bought and paid for to Downgrade the CDO's to give the Banks huge payouts?  I think so.

Then you have the FED paying them 100% on the Dollar after they received substancial sums from their Contractural Obligation to Pay the other party the loss of value in the CDO's.

I want to see the Books as to what was previously paid by AIG to the Banks and what they received from the FED.

You have to remember that Goldman was ready to tear up their CDS's because they were Hedged.  I happen to think that the Hedge was that they already recieved most of the money from AIG thru their Contractural Agreement of AIG paying them the loss in value.  Then I believe they got another 100% from the Government or us the People of the United States.

Something is very wrong with this. But, I am sure it will take time to get to the Bottom of it.

I still think this was a scam on the American People.

Fri, 01/29/2010 - 22:03 | 211643 Giovanni Zucchetti
Giovanni Zucchetti's picture

If you look exclusively at ML III assets, I believe Goldman Sachs received 5.9 billion in collateral on 14 billion notional, or a 42% discount from par.

After the bailout, Goldman Sachs received an additional 2.5 billion in collateral from AIG on the 14 billion notional.

Was this a scam on the American people?  By whom? Certainly AIG FG needed their heads examined.  But the Federal Reserve did about the only thing that could have been done.

Fri, 01/29/2010 - 23:14 | 211683 Anonymous
Anonymous's picture

no it didn't....the federal reserve could have
and should have done absolutely nothing....same
for treasury....

gs and aig should have become corpses....

Sat, 01/30/2010 - 00:06 | 211703 Giovanni Zucchetti
Giovanni Zucchetti's picture

You are entitled to your opinion.  You're wrong.

Waterfallsparkles - they paid out 16 billion prior, 18 billion post, and I believe that is the ML IIII CDOs only.

Sat, 01/30/2010 - 10:39 | 211812 Ned Zeppelin
Ned Zeppelin's picture

Actually, you completely miss the point.  Are you paid to infiltrate this site and spread the "official Goldman line" on this stuff? I mean, it would make sense to have someone on staff do that.  Why not?

Thing is, it will be ineffective and runs counter to the central theme here, that of an utter distrust of the banking elites, disgust with their capture of the regulatory authorities, and disagreement with their agenda. Big picture stuff, at the heart of this.  I mean, as you say, you are entitled to your opinion, but it won't fly very far here so it may be an vain effort.

Just sayin'

 

Sat, 01/30/2010 - 14:07 | 211904 Kayman
Kayman's picture

Hey Gio

 

In a "normal" commercial insolvency, AIG's receiver/trustee would have told GS, Deutsche, etc. to GO TAKE A HIKE.

But, this scam was/is so wide-spread, with the patty-cake paper game between the "banks" (now there is a contradiction in terms), the (non-existent) rating agencies, and the so-called insurers, that only insiders, well-connected politically, got out alive.

By comparison, if AIGFP was the AIG commercial insurance division, it would be like me buying insurance on a building, that I had already set on fire, and having AIG pay me out in full. This DOES NOT HAPPEN IN THE REAL WORLD.

It would take 5 to 10 years of real growth in the U.S. economy to make up for the losses foisted onto the American Middle Class by these crooks.

Perhaps you are willing to do your part, by purchasing, at par, the (used only once) toilet paper held by the Federal Reserve.

Sun, 01/31/2010 - 21:12 | 212765 Giovanni Zucchetti
Giovanni Zucchetti's picture

Sorry, but the collateral posted stays with the recipient, so GS would have kept their 5.9 billion, and their position.

 

I believe what Mr. Fiderer is saying was in plain sight has nothing to do with the formerly confidential Schedule A. MAX 2008 - 1 A1 has been publicly listed for months on the Federal Reserve website in the ML III audited financial statements dated December 31, 2008.

Principal amount - 5.4 billion

Fair value - 2.4 billion

Ditch bank was the owner.  BFD. 

Fri, 01/29/2010 - 18:55 | 211491 MarketTruth
MarketTruth's picture

Are you there yet?

 

Are you ready to finally pull out all your funds from banks?

 

Sell off all stocks/trades?

 

Perhaps even go on a labor strike with your co-workers and picket your State government?

.

.

.

.

 

Or are you just sitting there like a good sheeple?

Fri, 01/29/2010 - 20:15 | 211576 dumpster
dumpster's picture

lets see .//labor strike against state government .

 

wave at the camera lol

Fri, 01/29/2010 - 19:06 | 211508 Anonymous
Anonymous's picture

Is it in any way clear that Deutsche were acting on their own behalf for Max 2008-1? Or were they an intermediary for someone else? What if they were an intermediary for AIG itself? (Like the insurance arms). It has been rumoured (more than rumoured?) that AIGFP was writing insurance on assets owned by some of the AIG insurance and reinsurance entities. (The situation being that the insurance companies bought duff assets, had Deutsche roll them into a CDO and insure them (with AIGFP as it happens) magically turning them into insurance grade reserves). If this was the case, then the failure of AIGFP would have brought down significant portions of the pensions and life insurance markets.

Sat, 01/30/2010 - 05:40 | 211771 Anonymous
Anonymous's picture

I'm with you. As a small business man, I obviously do small deals. It looks the same to me as what I've done in the past yet on a small scale, only when it was prudent, and with my own money and not OPM's.

This has all the markeings of back room deals, someone in the chain was on the hook big time, and someone was owed some favors who called them in, who if they did not get them would blow the whole thing up, or threatened to.

IMHO, it's called buying time, and hoping, and that's what you do at the end when you're going under. The only difference here is they did it on a massive scale withe other people's money, and it was illegal.

Sun, 01/31/2010 - 09:50 | 212412 A Man without Q...
A Man without Qualities's picture

I think you, and we, are definitely getting closer to the truth, which is I suspect that a bunch of banks getting 100 cents on the Dollar for selling the assets and canceling the CDS is only a part of a much uglier scandal.

Fri, 01/29/2010 - 19:22 | 211526 GlassHammer
GlassHammer's picture

You know I am so glad we are funding fraud with bailouts. No wonder the government will do anything to keep this hidden because God forbid the public know what happened. 

Fri, 01/29/2010 - 19:58 | 211560 Ripped Chunk
Ripped Chunk's picture

Its becoming obvious isn't it?

Fri, 01/29/2010 - 20:00 | 211562 mikla
mikla's picture

This is *outstanding* work.

To re-emphasize the punchline:

Those eight-month-old public disclosures are very incomplete, but they reveal a lot. They indicate that these CDO deals were not, by any stretch of the imagination, conducted on an arms-length basis, and that the these transactions took forms that were designed to conceal the true economic interests of the parties. I'm always amazed by what people, especially people not from the financial world, don't know. Big banks are not like the Pentagon or the Coalition Provisional Authority. Billion dollar amounts do not just slip through the cracks. There is no way that the very top people at AIG and Deutsche Bank would not be thoroughly briefed about every aspect of a $5.4 billion credit default swap for a CDO called Max 2008-1.

Fri, 01/29/2010 - 20:20 | 211580 dumpster
dumpster's picture

just now many now see fraud ... eyes wide shut for many years .

 

i suspect the fraud of 9-11 has not sunk in ,, or the voting booths for years/

nice to see all the analysis  of the fraud .. its changed what . 

bet most voted for last election .  as a tribute to freedom  // civic duty to vote for those who in the end  force a gun into the mouth one way or another

 

 

Fri, 01/29/2010 - 20:34 | 211594 Anonymous
Anonymous's picture

If these CDOs dropped in value so fast how were they AAA?
The Ratings agencies need to have a spotlight shone right up their jacksies.

The Agencies are probably the biggest source of risk out there.. Why they are still considered relevant is beyond me.

As much as the Banks may have been fraudulent, the agencies have played a major role.

Fri, 01/29/2010 - 23:15 | 211684 Anonymous
Anonymous's picture

they retained aaa rating because 1. they needed
the rating to prevent cascading financial
faults 2. because the holders knew that they
would be made whole...events proved them right...

Fri, 01/29/2010 - 20:36 | 211597 Anonymous
Anonymous's picture

My theory is that back in 2007, the treasury made a deal to "fix" the problem of bad assets by offloading all of the risk to AIG. AIG has been willing to help out the USA when big problems arise (e.g. dubai ports world situation).

This makes political sense because gov't prefers to tackle one big problem instead of dozens of messy smaller problems -- any one bank bailout raises suspicions of favoritism and back-room dealing, whereas bailing out a lynchpin of the economy (as it was presented) is understood by [some of] the public as preventing a nuclear meltdown.

So, transfer the risks to AIG, AIG fails, bail them out, presto! problem solved.
Funny I haven't heard much about CITI's SIVs lately.

Fri, 01/29/2010 - 20:44 | 211600 Anonymous
Anonymous's picture

So banks were stuffing AIG with their risks and AIG (taxpayers) took a fall for it. Was it intentional?
Deutsche Bank bought this CDS in June 2008. Subprime crisis was well known since 2007. Bear Stearn fell in March 2008. It all looks suspect. How many banks got away with free money? Did Paulson, Bernanke arrange it so as to save favored firms?

Fri, 01/29/2010 - 23:17 | 211686 Anonymous
Anonymous's picture

it didn't have to be intentional....the
perpetrators knew they couldn't fail with
tax payer money....

Sat, 01/30/2010 - 11:38 | 211830 boooyaaaah
boooyaaaah's picture

Thanks Ned

Unfortunately Barney and Obama just want a cut of the banksters ill gotten gains --- we have to let them fail

Back in '80 when Chrysler was bailed out  -- they had to get rid of the military tank division -- too important to be run by incompetants at Chrysler

This asset was picked up by Geneal Dynamics and is doing fine today

Let the bank assests be picked up by a new group of banksters

The present group have shown their intellectual fraud -- they must go ---- that is how capitalism rewards the bankrupt ---- the morally bankrupt

Fri, 01/29/2010 - 23:02 | 211653 Jefferson
Jefferson's picture

Not long before derivatives on Blankfein's demise start trading at Intrade:

On the fringes of one of the many showy events that host the real business of Davos, a senior London-based investment banker offered this wager: Lloyd Blankfein, CEO of Goldman Sachs, would be out within two years, he said, and he was prepared to back up his bet with millions of pounds.

Mr. Blankfein isn't the only target of antibanker anger. But he presides over the world's most successful investment bank. Goldman has emerged from the financial crisis stronger than ever. And Mr. Blankfein has been among the most outspoken public defenders of banks and he has paid his bankers well, though the level of bonuses was cut in the last round.

Asked about the wager over Mr. Blankfein, Goldman spokesman Lucas van Praag said: "It is preposterous that The Wall Street Journal would even consider publishing such effluent."

http://online.wsj.com/article/SB1000142405274870434310457503337333575080...

This guy is toast.

Meanwhile the globalists are undertaking a full frontal assault on the bankers in order to deliver the world into the arms of the IMF/BIS/FSB gang while masquerading as champions of the workers, protectors of the environment and saviors of the third world. Bill Clinton as UN Ambassador to Haiti. You gotta be kidding me.

One group enjoying the bankers' pain at the global capitalism fest in Davos is the trade-union movement.

"We were never sure if we were really welcome here. This time, we are speaking on panels, we have a seat at the table," said Philip Jennings, general secretary of the UNI Global Union. Now, bankers are "at the bottom of the totem pole. They've been rumbled."

Of course, what the union membership won't realize until it's too late is that like a turkey at a Thanksgiving meal they are there to be eaten.

Fri, 01/29/2010 - 23:03 | 211676 Anonymous
Anonymous's picture

How long does it take a society to turn its back on the charade? Not measured in billions, trillions or quad-trillions, but the loss of Trust in everything that makes a country. Clearly we are in a state of lawlessnes, and why should a Citizenry follow any legislation passed by a Government so deeply compromised by Plutocracy and Oligarchy. The loss of Trust is the immeasurable value, which we are yet to fully realize. When every pronouncements by the Government, the Media and corporations can only be regarded as lies, the population needs to abandon the game.

This is not the naive population of the Great Depression, but a population tempered by the lies and betrayal of decades.

There may have been a time when shining a light on insidious corruption amounted to some charade of legal response but now the legal public relations is also gone.

It is critical that everyone withdraw all their assets from the game. You must take away their toys.

Fri, 01/29/2010 - 23:21 | 211688 Anonymous
Anonymous's picture

at least someone is suggesting that illogical and senseless actions cannot be explained by official stories....and if not then conspiracy and fraud are the natural causes of so much evil....

and top leaders claiming ignorance are liars...and aig is far more than a bad financial deal...there are huge intelligence implications....

plus the fact that this drama created the basis for the banksters to take official control of the government....

fed and cia, fed and cia, go together like a horse and carriage.....dad was told by mother, you can't have one without the other....

Fri, 01/29/2010 - 23:40 | 211695 Anonymous
Anonymous's picture

Ah, another IFSC http://www.guardian.co.uk/commentisfree/2009/feb/27/liechenstein-liffey-... shell company I expect. Fun fact: Ireland was *very* nearly left holding the Depfa bombshell that obliterated Hypo Real Estate - http://www.independent.ie/business/irish/depfa-demise-could-have-been-ir...

Sat, 01/30/2010 - 00:16 | 211707 Anonymous
Anonymous's picture

I think you have to take it one step farther. ML III paid out the "FMV" plus the counterparties got to keep the collateral. So on these deals:
"Among the hundred plus CDO deals to which AIG extended credit protection, the only ones which received collateral postings in excess of the "negative market-to-market" were the two biggest: Max 2008-1 and Max 2007-1, as revealed in the SEC filing of May 15, 2009. Together, those two CDO tranches had a par value of $7.5 billion and a "negative market-to-market" of $3.5 billion at the time Maiden Lane III closed. But AIG had already turned over $5.6 billion in collateral to Deutsche Bank, $2 billion more than what anyone thought to be necessary."

ML III would have paid $4.0 billion for these two CDOs, plus let DB keep the $5.6 billion in collateral. THEY PAID $9.6 BILLION FOR THESE TWO CDOS THAT HAD A PAR VALUE OF $7.5 BILLION!

Somewhere there is a ton of cash payments related to this deal. If it is a matter of national security we should waterboard these thieves and find out what they know.

Sat, 01/30/2010 - 00:20 | 211711 rapier
rapier's picture

When does the statute of limitations start running out on this stuff?   Well it's too late already.  If the entire CDO universe, and much else in the world where GS et al met the Treasury et al.,  would have been turned over to prosecuters and forensic investigators then the necessary political change could have started. Which is why the dogs were kept off.  Essentially every big swinging dick on Wall Street now owes their lives, their continue rich and comfortable ones, to Obama and I suppose Rahm and Summers.

The final irony of course is that they will see Obama hang for it. He's been played.

Sat, 01/30/2010 - 01:53 | 211744 Jefferson
Jefferson's picture

Congress failed to include either a criminal or civil statute of limitations when it passed the RICO Act. Congress' oversight was easily remedied with regard to the criminal statute of limitations. Title 18, section 3282 of the U.S. Code is the "catch-all" statute of limitation for federal crimes. It states that "no person shall be prosecuted . . . unless the indictment is found or the information is instituted within five years next after such offense shall have been committed." With regard to criminal prosecutions, it is generally held that a prosecution is timely so long as the defendant has committed one predicate act (that forms part of the pattern for which he is being prosecuted) within five years or less of the indictment. See United States v. Darden, 70 F.3d 1507 (8th Cir. 1995).

http://www.ricoact.com/ricoact/nutshell.asp#rico

Sat, 01/30/2010 - 10:49 | 211816 Ned Zeppelin
Ned Zeppelin's picture

Plenty of time:

1.  Issa-Towns Commission report issues, recommends further investigation.

2.  Despite vicious opposition within the Beltway and its Wall Street masters, outside events and a growing public rage result in the appointment of a special prosecutor.

3.  A grand jury is empanelled to investigate, subpoenas are issued to the small fry and subordinates, who quickly understand the meaning of the "Prisoner's Dilemma," and begin singing the high notes. Detailed connection of all of the dots is accomplished by hard work of small group of New Untouchables.

4.  Indictments begin to issue, and trials begin. Glass - Steagall and new laws imosing outright prohibitons on bank size are passed by fearful congressmen. Investment banking reverts to a wholly private endeavor conducted by partnerships.

5.  End result is Geithner, Bernanke, Paulson, Kashkari, and numerous players who sold securities in violation of the antifraud rules, and otherwise engaged in outright bank fraud, are tried and sentenced.  The sweep of the fraud is far worse than even the tin hat crowd initially believed.

Sat, 01/30/2010 - 00:54 | 211729 Anonymous
Anonymous's picture

Ok, let me make sure I've got this straight. Or crooked. That is to say, let me make sure I understand.

AIG was used by a regulator, who now happens to be Treasury Secretary, to directly inject Tier 1 capital into a series of insolvent banks at a time of crisis.

Subsequent to the massive initial bailout schemata, AIG deliberately overstated the recovery value of assets held by major banks in an effort to simulate a solid financial system.

In March of 2009, Liddy testified that AIG had unwound a trillion dollars of risk but still had another 1.6 trillion on the sheets.

As part of that trillion dollars of risk unwinding, AIG paid cash significantly in excess of the notional value of the underlying investments to banks.

Simultaneously, stress tests were run which declared banks solvent.

The government was deciding whom AIG was paying how much at a time when they were also acting as exam proctor. Imagine how well you would do on exams if your instructor were giving you the answers during the test.

Despite the artificially bolstered balance sheets, the banks still needed to raise 75 billion in capital.

AIG is presently 80% owned by the government and can directly influence markets with their many trading divisions.

On TV they keep saying we were at the brink of collapse and what was done was necessary to save us, but it sounds to me like we fell into the chasm and they constructed mirrors around everything that make it look like we aren't still in a pit ... but we are.

Sat, 01/30/2010 - 06:34 | 211775 pros
pros's picture

OBAMA SUCKING EVER MORE BANK LOBBY D**K:

Obama Hypocrisy Watch: Obama Rips Lobbyists, Then Has Treasury Give Them Private Briefings

If anyone had any doubts that Obama rhetoric does not comport with his conduct, consider:

This is what Obama said in the State of the Union address:

We face a deficit of trust – deep and corrosive doubts about how Washington works that have been growing for years. To close that credibility gap we must take action on both ends of Pennsylvania Avenue to end the outsized influence of lobbyists; to do our work openly; and to give our people the government they deserve.

The funny bit is Obama’s use of the phrase “credibility gap”. That was coined by the media to describe the whoopers that Lyndon Baines Johnson told with abandon while President. Does Obama recognize that he is channeling another legislator turned Chief Executive?

He is certainly exhibiting the same sort of behavior. After criticizing lobbyists in his State of the Union address, what does Team Obama (in this case, the Treasury Department) do but invite lobbyists in for a private chat…about the State of the Union address? And no doubt to tell them the tough talk on banks meant less than it appeared to.

The really appalling part is the lobbyists are so deeply embedded in the the operations of government, that the get upset when they are called bad names. Not only are they predictably blind to how corrupting their influence is, but they think their role is legimate, and have lost sight of the fact that the legislators and Executive Branch members that they influence need to have plausible deniabilty, hence need to issue the occasional stern statement about how awful lobbyists are before going back to business as usual. The fact that lobbyists are chafing at this necessary ritual says how disproportionate their role has become.

From The Hill:

A day after bashing lobbyists, President Barack Obama’s administration has invited K Street insiders to join private briefings on a range of topics addressed in Wednesday’s State of the Union.

The Treasury Department on Thursday morning invited selected individuals to “a series of conference calls with senior Obama administration officials to discuss key aspects of the State of the Union address.”…

The invitation stated, “The White House is encouraging you to participate in these calls and will have a question and answer session at the end of each call. As a reminder, these calls are not intended for press purposes.”…

A handful of lobbyists told The Hill on Thursday morning that they received the invitations and were planning to call in.

Some lobbyists say they are extremely frustrated with the White House for criticizing them and then seeking their feedback. Others note that Democrats on Capitol Hill constantly urge them to make political donations.

One lobbyist said, “Bash lobbyists, then reach out to us. Bash lobbyists [while] I have received four Democratic invitations for fundraisers.”…

Lobbyists say the Obama White House has held many off-the-record teleconferences over the past year…Another lobbyist said these types of teleconferences occur “all the time.”

And that is why many on K Street are exasperated with Obama’s use of lobbyists as a punching bag. Some have said they understood why he used strong rhetoric on the campaign trail but are irritated the White House solicits their opinions while Obama’s friends in Congress badger them for political donations.


http://www.nakedcapitalism.com/2010/01/obama-hypocrisy-watch-obama-rips-...

 

 

Sat, 01/30/2010 - 07:32 | 211788 Hephasteus
Hephasteus's picture

Sociopaths are very sensitive. I bet it was super hard for them to take that harsh criticism without crying and feeling guilty.

 

Sat, 01/30/2010 - 09:33 | 211802 Anonymous
Anonymous's picture

And lack of ability to continue to transact sham transactions was the reason why iBanks got paid out at par!

From Bloomberg:

"Goldman Viewed as Favored by Regulators, Fed Says (Update2)"
http://www.bloomberg.com/apps/news?pid=20601087&sid=aLVEy7hav7kc&pos=7

"‘You Just Can’t Explain’

Another reason that Vicente said the New York Fed wanted details of the payments withheld: The banks got 100 cents on the dollar for real-estate linked assets, called collateralized debt obligations, that had declined in value.

“Counterparties received par -- which is politically sensitive -- but necessary given the economics of the deals,” Vicente wrote. “That’s something you just can’t explain in a press release because it involves understanding of why the deals don’t have isolated risks (for example, I believe one counterparty had shorted AIG risk in order to balance their AIG exposure on the CDS deals, so tearing up the trades left them exposed with no hedge, etc.)”"

The key point to the par controversy is, ironically, parenthesized.

Counterparty shorted AIG risk against their AIG exposure so removing the exposure on the CDSs left them unhedged? Really? The Fed bought that hook, line and sinker?!

Now seems to me, that while the Fed was ripping up the contract hedge against the exposure, the counterparty wouldn't need to hedge AIG exposure because the US government was loaning boatloads of money to AIG and implicitly guarantee the company.

So what was the hedge? A Texas hedge?

Further to this point, why would the counterparty be left unhedged? Surely the financial gurus there could dream up some derivative product to create a new hedge? I'm sure they had several designs. But the key element missing from their ability to transact on the deal was that the huge player to take the other side of the hedge was not longer taking on mispriced derivative insurance deals. The counter party could not lay off their new bet on the greater fool, AIG.

Sham on them!

Sat, 01/30/2010 - 14:52 | 211924 Giovanni Zucchetti
Giovanni Zucchetti's picture

First, he's most likely talking about Goldman Sachs..

Don't you think way more than one of them had protected themselves against an AIG failure?  Goldman Sachs has discussed this aspect of the matter several times. They were giving advice to clients.  The Federal Reserve most likely had a very clear understanding of which counter parties were exposed to an AIG bankruptcy, and which were not.  The media talks about the ones that were likely unexposed, and never discusses the ones that were exposed.  Can't sell papers unless you squawk about Goldman Sachs.

Sun, 01/31/2010 - 04:49 | 212355 Anonymous
Anonymous's picture

http://www.commondreams.org/newswire/2010/01/27-10

"Kucinich Questioning Probes Goldman Sachs/AIG Myth:
Congressional investigation finds Government gave Goldman a better deal than it was legally entitled to receive; Goldman was not protected from AIG losses in event of a government bailout"

"WASHINGTON - January 27 - In the testimony of Timothy Geithner and Henry Paulson about the decision to pay AIG counterparties full value on credit derivative contracts, Congressman Dennis Kucinich's (D-OH) questioning disclosed that Goldman Sachs had not expected full payment on those contracts from AIG for over a year, and that Goldman Sachs was in fact exposed to up to $2.5 billion AIG losses once the Government stepped in to rescue the ailing company, contrary to Goldman's public statements. The decision by the New York Fed to pay 100 cents on the dollar gave Goldman Sachs a better deal than it was legally entitled to receive."

Sat, 01/30/2010 - 11:11 | 211823 boooyaaaah
boooyaaaah's picture

The only honorable way out of this mess is to repeal "to Big To Fail"

Let AIG & The Banksters fail

Do not let them siphon some of their ill gotten gains as "Fee" to Obama or a "tax" to the world's cental bankers --

This is only a kickback to maintain their to big to fail status

We need a new crop of bank managers and then after a few years (decades) we can let them fail, also.

just as Thomas Jefferson said the blood of tyrants needs to be shed --- the corporate blood of the banksters need to be shed

Revoke to big to fail

 

Sat, 01/30/2010 - 12:41 | 211857 boooyaaaah
boooyaaaah's picture

http://www.ft.com/cms/s/0/ab5c1fec-0d08-11df-a2dc-00144feabdc0.html

'Some of the world’s most prominent bankers have come out in favour of a global bank wind-down fund, a concession from the industry after weeks of fighting proposals for new taxes in the US and Europe."

And who will control this fund

 

"I think every G20 country would like to have an insurance scheme that would help cover the cost of any future bank failure"

Another, Global, AIG

 

"Bob Diamond, president of Barclays , also supported the idea of a global levy, which could see banks contribute tens or even hundreds of billions of dollars over a period of years."

As long as thing continue as they are --- no price is to high

 

"Support has been growing among regulators and politicians for an insurance levy as the best way to ensure that the burden of big bank collapses would not fall on taxpayers. But until now bankers have resisted the idea."

Regulators Politicians and now Banksters

 

"They say the impetus for considering a global levy came from President Barack Obama’s $90bn balance sheet levy, which will tax banks in the US to recover the cost of an earlier bail-out programme. "

 

A kick back to keep their jobs

 

 

"The House of Representatives approved a bill in December that creates a resolution fund for winding down big companies without the taxpayer expense of the AIG rescue or the damage to markets of the uncontrolled Lehman bankruptcy"

This lock box will be spent over and over again

 

"The Senate is considering whether to approve the House’s version, which levies an up-front fee on big banks, or to follow the Treasury in advocating that banks reimburse the taxpayer after any wind-down"

 

A fee on big banks --- banks that should no longer be alive  ----vampier banks ---- living off the blood sucked from the American Public ----

If they were to big to fail before --- after this fee starts rolling in they will live forver

 

"Regulators will be encouraged by the support of Mr Ackermann and Mr Diamond for a global levy. Jaime Caruana, head of the Bank for International Settlements, the umbrella body for global regulation, told the FT the most realistic way to institute a global levy would be to begin with Europe"

 

A global levy on ill gotten gains

This is just the beginning of levies and of ill gotten gains

 

 

Sat, 01/30/2010 - 11:32 | 211828 Anonymous
Anonymous's picture

You say that there is no way that the upper eschelons of AIG didn't know the details - and risks of these deals. These are insurance people. They understand risks and have even seen a black swan or two. I cannot fathom how anyone with two firing neurons, let alone seasoned professionals bought this crap - unless they were encouraged not to notice. Here is what I believe and will eventually be discovered. Somehow there was money involved. People earned huge fees to do this. Look into the fees. There has to be a pony here. Has to be.

Sat, 01/30/2010 - 14:53 | 211925 rawsienna
rawsienna's picture

Very simply..  These CDO deals were done so DB could get rid of its own subprime risk and to get short.  That is how GS, DB survived the subprime mess. Their risk was transferred to AIG. Lets not also forget that Paulson was shorting the crap out of ABX at the time so that risk also needed to be laid off.  

Sat, 01/30/2010 - 15:11 | 211934 Giovanni Zucchetti
Giovanni Zucchetti's picture

AIG, on a company-wide basis, did not understand what AIGFP was doing.  How is that a sham?

"Hey, Cassano is printing more money.  Some idiot CDO owner just offered to pay us premiums against the possibility (not, haha, hehe, what fools) of a CDO defaulting.  Now, nobody holds back Cassano.  Okay?  Got it?  Nobody!"

"Well gee boss, don't you think letting the CDS buyer dictate the CDO valuation is a little crazy?"

"Shut the F up."

"Well gee boss, don't you think the collateral procedures are a little wacked?"

"Shut the F up.  Stay out of Cassano's way you maggot! He's got a printing press. You don't."

AIG was incompetent.  This does not make the people that did business with them corrupt.

Sat, 01/30/2010 - 23:57 | 212278 Kayman
Kayman's picture

Insurance companies selling insurance on AAA collateral. Yeah, AIG was incompetent and GS were mere innocents.  Where is my barf bag....

Repeating the BIG LIE does not move it closer to the truth.

Sun, 01/31/2010 - 21:00 | 212759 Giovanni Zucchetti
Giovanni Zucchetti's picture

It's been a long time since I've read a prospectus for a bond, but from memory the gist of the disclaimer is that a AAA rating does abrogate the absolute necessity for investors to do their due diligence.

Sun, 01/31/2010 - 21:00 | 212760 Giovanni Zucchetti
Giovanni Zucchetti's picture

It's been a long time since I've read a prospectus for a bond, but from memory the gist of the disclaimer is that a AAA rating does abrogate the absolute necessity for investors to do their due diligence.

Sun, 01/31/2010 - 08:31 | 212398 cognitive asini...
cognitive asininity ad hominem's picture

Yeah!  What Giovanni Zucchetti wrote!  Giovanni, you're my hero!

Sat, 01/30/2010 - 15:42 | 211954 Anonymous
Anonymous's picture

The Russians caused it! That's right, the Russians caused the financial crisis...claims Hank Paulson. No lie.

http://rawstory.com/2010/01/paulson-russia-exacerbate-financial-crisis/

Sat, 01/30/2010 - 18:24 | 212066 Gromit
Gromit's picture

Keeping it simple, hedgers buy CDS when it enhances the value of something else they own by a greater amount than the cost of the premiums. Usually they sell an asset together with the CDS (as in securitization) so they don't care whether the counterparty is solvent as long as the buyer will buy.

This helps to explain the counter intuitive transactions in sovereign CDS. Why does anyone buy sovereign CDS when the country can avoid default simply by printing? Because ownership of this CDS enhances the value of something else the buyer owns.

 

Mon, 02/01/2010 - 09:40 | 213159 Waterfallsparkles
Waterfallsparkles's picture

I have always wondered if the in effect Counterfeited Mortgages.  So, in effect take a $100,000. Mortgage and break it up into 10 $10,000. pieces put thoes pieces in 10 CDO's.  But, if instead of breaking it up into 10 $10,000. pieces they broke it up into 20 $10,000. pieces or even more you are setting up for failure. 

After all who would know as no one held all of the pieces.

With many of the Forclosures no one knows who holds the Original Note, it cannot be found.  Was this done intentionally to cover up the Counterfeiting?

It would make sense as to why they failed so badly.  If one or many Mortgages created double the default it would be a disaster.  As it turned out to be.   It also would make sense why Goldman insured against them.

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guccichanel's picture

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