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Special Inspector: AIG Counterparty VOLUNTEERED to Take a Haircut, But Geithner Refused
I received an advance copy of the Special Inspector General for
Tarp's Report called "Factors Affecting Efforts to Limit Payments to
AIG Counterparties", which will be released tomorrow. (It will be
posted tomorrow for your review)
The report reveals that at least one counterparty indicated that it was willing to
take a reduced payout on its credit default swaps. In other words,
then-head of the Federal Reserve Bank of New York - Tim Geithner -
wouldn't have had to even play hardball to get a concession from the
counterparty.
But Geithner ended up dictating that all of AIG's counterparties get full payment - with no haircuts for anyone (except the American taxpayer).
The report includes these gems:
- As
a policy matter, FRBNY was unwilling to use its leverage as the
regulator for several of the counterparties to compel concessions, in
part because in the negotiations it was acting as a creditor of AIG and
not as the counterparties' primary regulator
- Also as a policy matter, FRBNY was uncomfortable with violating the principal of sanctity of contract.
Well sure, that makes sense. A creditor doesn't want to negotiate hard and demand concessions from its debtor, now does it?
Apparently,
while Geithner was concerned with the sanctity of the CDS contracts
(which - I would argue - were all based on fraudulent representations
concerning how safe an investment they were), he didn't care very much
about the sanctity of the agreement of a government to do what is best
for its people.
But actually, the New York Fed isn't a government agency. The Fed itself maintains that:
While
the Fed’s Washington-based Board of Governors is a federal agency
subject to the Freedom of Information Act and other government rules, the New York Fed and other regional banks maintain they are separate institutions, owned by their member banks, and not subject to federal restrictions.
So
really Geithner - as head of the private bank-owned and managed New
York Fed - was simply serving his constituency: the giant New York
money center banks. Geithner's constituency never was the American public.
The
giant banks were the creditors of the giant banks. Like two sock
puppets putting on a big show of good cop / bad cop show, the New York
Fed pretended that it was negotiating hard, but ended up making sure
that the boys got their full cut.
- advertisements -
Didn't all this supposedly happen against the backdrop of an insolvent financial system with FED officials going the extra mile to recapitalize the system?
Not that any of that appears to be true still. Or not. Maybe?
I hope a viable third party emerges soon. I'm thinking maybe a Robespierre/Paul ticket. Afterwards, we can set up a row of guillotines on the Mall giving many counterparties the haircuts they deserve. Marla can knit while the blades rise and fall....... ha ha ha. Just kidding.
gethner is a turd like stutterin hank before him. how bout filing your taxes you corrupt sh*thead
No haircut for you!
It was a doublemint bailout.
This whole bail-out travesty was clearly not intended to protect the world from systemic risk. It was enacted to protect the "Club" members from getting salary and bonus haircuts.
And of course, sanctity of contract went out the window about 9 months later in the Chrysler saga. It all depends on what's politically expedient.
i) if any AIG counterparty took a haircut, this would have triggered a CDS on AIG. Somebody had sold a bucket of protection on AIG (to GS at least), so this would have got very nasty.
ii) this would have created a termination event for all other AIG counterparties, WHO WOULD THEN BE CALCULATION AGENT and obviously try to lower the pricing on the CDOs as much as possible, and this would have created pricing observation on a whole slew of other CDOs etc, causing the system to go into a spiral.
iii) the Treasury was planning to buy all of these things anyway, from the banks, so let's say the fair price went from 100 to 70, then AIG would have paid 30 to the banks and the Fed would pay 70. If AIG went bust, the banks would get 30 times recovery rate of AIG, let's say 10%, so then GS would get the remaining 27 (assuming perfect hedge) from the hedge provider.
So the amount paid out by the Fed was essentially to prevent the CDO market collapsing and preventing the CDS counterparties from turning very nasty.
The main lesson from Lehman is a nasty collapse can erode a lot of value (if you are a Europea hedge fund that is) and the way that was handled gave prefential treatment to US counterparts. Obviously, with AIG someone stood to lose big time and the situation was handled differently for this reason.
If we knew who sold CDS on AIG to GS, it would probably make complete sense.
I agree this is why it was done the way it was: to preserve the "sanctity" of CDS contracts. CDS are the duct tape that is holding the whole system together. As long as everyone can poiont at CDS and say "look, we're adequately hedged" they can continue to act as if they're solvent, even though everyone knows they're not, and even though everyone knows there's not a chance in Hell any of the CDS counterparties can actually honor any claims against them without more printing.
China ????
The Good Ole Boy System (GOBS) hard at work. This is how the world works, corruption trumps all else, and it is to the point that we all see it, and they just flaunt it in our faces. We have no power in voting, because the GOBS basically own both the main parties in America. Revolution seems to be the only answer, but things will have to get a whole lot worse for that to be possible.
Irresponsible reporting
Geithner is a scumbag, just like his boss Obama.
Does Geithner have no shame?
dammit we got hosed again
just this once
If the facts presented above are true -- and if we were to assume that the AIG/FRBNY debtor/creditor relationship were the entirety of the relevant facts -- it presets an entirely illogical set of facts. EVERY counterparty facing such an Event of Default/Potential Event of Default would evaluate what defenses it might have, no matter how farfetched. Fradulent inducement might not carry too much credence with a court, but it's not too far down the list of defenses that you'd raise in trying to establish some settlement leverage. It's outrageous that you wouldn't at least try that angle, as well as a number of more implausible arguments.
Unless there were some more compelling reason not to do so, of course.
What an idiot.
Anyone who deals with insurance companies on a regular basis knows the basic playbook maneuver of Deny, delay, don't pay until sued and then offer a discounted payment.
Paying 100% real cash, promptly was insane. Couldn’t the government have "guaranteed" payment if and when real losses were actually taken when the securities matured– I know that is not what the AIG contracts said but how many would have had the ability/will to fight. Such action would have forced the parties to actually deal with the underlying securities or carry on, with their books protected from having to acknowledge the loss. Wouldn't the market have adjusted. And wouldn't there be less problems then actually paying out cash that we are dealing with now?
My lack of finance knowledge may be obvious but I do know a thing or to about how most insurance companies work in the real world. Am I off base?
Your suggested actions would never have been done even though they make sense, as it was not in the interest of bankers...Tim worked for the banks, US taxpayers be damned.
Why do you post this shit? You tell us we can't advocate "bad" things about individuals you write about, but you still continue to post this incendiary stuff. How are we to respond? Geithner as a nyfed bank whore is one thing, but as treas sec he should be bloody eagled.
unrelated:
so cute:
http://www.mantria.com/
must go green, hot hot hot one in a life time opportunity!
http://www.sec.gov/news/press/2009/2009-247.htm
And the ultimate red flag of all red flags is -
" investors were falsely promised enormous returns on their investments ranging from 17 percent to "hundreds of percent" annually. "
We are peasants funding Versailles.
Geithner needs to resign immediately, or Obama needs to can his ass.
that is outrageous, and unsurprising
Keep up the good work Mr. Washington!
Clerks don't do complicated things like negotiating in good faith for best interest of all parties and public good.
Clerks do what their bosses say, they don't think.
You know the counter-party that offered to take a haircut was thinking...man this is a lot of money and we made a some bets against really bad events with a really lame insurer and there will be great public outrage and hell for the Fed and Treasury if they pay off these bets in full when it is obvious that everyone knew AIG could never cover such huge bets...So they think, wow, we better go in and volunteer to take a small haircut, to look reasonable and maybe Geitner will stick his neck out for us and stand up for such a small haircut.
You know this counter party probably had no idea how much power Goldman had...and didn't know that for GSacs to get paid in full, everyone had to be paid in full so as not to raise suspicions of favortism.
The counter party that offered the haircut was probably the french bank, as they culturally expect citizens to demand a fair deal or there will be hell to pay in the streets....but they oh so don't know what sheeple US people are...
Full disclosure: Moneymutt is very resentful about banks as moneymutt lost money shorting banks.
Now this is the GW I'd rather read. Excellent.
Maddening that Geithner can give a FU to tax payers and their tax money paid or payable to the government and then be chosen by Obama to be the caretaker of taxpayer money as Secretary of the Treasury. Hopefully God has a sense of humor and Geithner can receive just payment for his actions before passing into Gods hands.
It will come out that Geithner did this at the behest of the Paulson/Blankfein/Goldman triad. In order to make Goldman whole, Paulson said that ALL the AIG counterparties should be made whole...except Lehman and Bear, of course.
It is sort of akin to having a cake with six kids. In order to make certain that your favourite son has a giant piece, you have to give the others a giant piece, too.
Except two of the kids you give two bucks to and make them walk to the corner store to get milk.
There, now, they all have a giant slice of cake. Don't we feel better?
/:
My bet is also that the counterparty said to be willing to take a haircut was BAC.
You must annoint those CDS's with the faith of payment for long enough for people to beleive they are a real thing that must be respected. What they can get people to do and accept IS the law. Create the acceptance. Create the respectability. Create the law now matter how rediculous.
omg. geithner sucks.
would a pension fund manager go to jail for something like this?
Volunteering to pay more when offered less?
The Ponzi always has complex rules to justify the actor's actions and reasonable doubt on hand to explain why they did this and that. Of course, for good measure, the participants make sure they pray to various God's for guidance and kiss some babies along the way, just for good measure.
Diocletian's Problem, Reaction, Solution.
http://www.propagandamatrix.com/diocletian.html
very interesting. thanks for that info. Diocletian...hmmm... maybe Ron Paul is our Constantine...
here's the PDF of the advance copy
http://cr4re.com/AIGreport.pdf
and here's the link to the SIGTARP site
http://www.sigtarp.gov/