AIG

In October of last year we wrote an extended piece discussing the conflict between the bankrupt Lehman Brothers estate (i.e., its unsecured creditors) and Barclays, in which JPMorgan played a prominent part, as it was the critical tri-party repo clearing bank on all of Lehman's collateral that would subsequently go to Barclays. As we summarized, extortion attempts back then by Barclays only had the adverse effect of making Jamie Dimon very, very angry: "Barclays' attempt to nickel and dime JPM (and the US taxpayers) so infuriated Jamie Dimon that he penned an angry letter to John Varley,
Barclays Group CEO (which CC:ed Barclays' president Bob Diamond),
threatening with litigation in case Barclays is intent on sticking JPM
with Lehman collateral that it thought was without value and not worth
assuming in a time when every single day stock prices were crashing
further lower." As we expected in October, the resolution would most likely involve litigation, as by dint of its collateral clearing position, JPM had unprecedented knowledge about Lehman's affairs: a special status that would likely be abused in a court of law. Sure enough, here is the lawsuit: the estate of Lehman Brothers, desperate to pick another several bps in recovery on their Lehman General Unsecured Claims, has sued JPMorgan, claiming Jamie Dimon's bank pushed Lehman into bankruptcy by forcing it to turn over $8.6 billion in collateral. As Lehman was completely insolvent long before JPM demanded any incremental collateral comfort, claiming that JPM was the catalyst for Lehman's bankruptcy is absolutely the same as saying that Goldman forced AIG's bankruptcy by increasing its collateral demands. While both arguments are ludicrous, should the JPM case proceed to court, it is tantamount that AIG immediately seek legal action against Goldman Sachs on identical grounds.

One of the central tenants of Farcism as a doctrine is the promotion and use of layers of opacity and complexity to empower regulators via their ability to mitigate red tape and compliance costs and to conceal this power under a cloak of (for example) promoting the "American Dream of Home Ownership."  It will be seen that Farcism has imbued the halls of regulatory power, particularly in financial services, for decades.  Zero Hedge readers are invited to opine on the impact this realization has on prospects for a financial reform bill that puts more power in the hands of these parties.

In this connection, back in November of last year we explored the nuances of the "foreign regulatory capital" credit default swap portfolio of the besieged Financial Products group at AIG.  We pointed out that $172 billion in notional exposure (well, it seemed like a big number for a potential loss before Fannie Mae actually lost $145 billion in eleven consecutive quarterly losses, wiping out its combined profits for the prior 35 years and still leaving about $80 billion in red ink to spare) remained outstanding, that deteriorating credit markets may force AIG to recognize additional losses on the portfolio, but that AIG expected the swaps mostly to be terminated by the first quarter of 2010 (please please please please?).  We also noted that the implicit backing of the Federal Reserve might be one of the key (only?) elements permitting these swaps to perform their desired function: permitting European banks to reduce their regulatory capital requirements (read: boost their leverage).

This is Part III of a multi-part series on global rise of Farcism.  Part I, "The Silver Curtain" can be viewed here. Part II "On the Pensioning of Roman Veterans" can be viewed here.

Long-term subsidies, like the Fed holding who-knows-what to maturity, equals soviet communism, as every hooligan knows. Short-term subsidies transfer credit risk, and they leverage parasitic behavior. Positive valuations assigned by shareholders to equities arise solely from anticipation of value transfer from firm debt-holders or resource transfers from US taxpayers. Debt-holder get a piece of this action too if governments overpay for “toxic” assets backing up their claims. But “everybody” receives more than fair value for their investments.

AIG stock only fin up today on expectations the firm will now have legal precedent to sue Goldman Sachs.

Some time ago, the law office of David Yerushlami, which a week ago filed a lawsuit in the Federal District Court challenging the constitutionality of Obamacare, sued the Fed over its takeover of AIG claiming the entire transaction was illegal and was in essence a money laundering scheme. Below we present the powerpoint presentation prepared by the law firm. Here is how Yerushalmi explains his motive: "The Law Offices of David Yerushalmi, P.C. presents an online PowerPoint presentation fully narrated illustrating rather graphically just how Timothy Geithner, who was then (Sept. 2008) the president of the Federal Reserve Bank of New York, orchestrated the illegal acquisition of 77.9% of AIG's equity and voting rights. As the presentation makes clear, while the FED certainly had authority to loan AIG billions and to take all of the company's assets as collateral, which it did, it had no legal authority to acquire nearly 80% of AIG's shares and voting rights. But this is exactly what it did when it created with great fanfare what is called the AIG Credit Facility Trust." Attached also is a latter by David to SIGTARP Barofsky, discussing the same.

The "Same Manipulation Different Day" continues, as the powers that be run out of tricks to drive the market higher. Today: a well known and much abused trick to prevent market drops in desperate situations: forced covering in fins. This has culminated with a ridiculous move in AIG in the last 30 minutes of trading. From the mailbox:

"Our PB just sent us a recall notice on our entire AIG position. We had to cover before market close. We received the notification at the day lows. "

And there you have it. From the administration to State Street, from there to the Prime Brokers and various Repo Desks, and from there straight to the market which jumps on a forced cover, which is supposed to indicate that the economy is hot, hot, hot.

In the neverending saga of new disclosure of gold price manipulation, here is the most recent pearl, courtesy of Jesse's Cafe Americain:"In front of 3 witnesses, Bank of England Governor Eddie George spoke to Nicholas J. Morrell (CEO of Lonmin Plc) after the Washington Agreement gold price explosion in Sept/Oct 1999. Mr. George said "We looked into the abyss if the gold price rose further. A further rise would have taken down one or several trading houses, which might have taken down all the rest in their wake. Therefore at any price, at any cost, the central banks had to quell the gold price, manage it. It was very difficult to get the gold price under control but we have now succeeded. The US Fed was very active in getting the gold price down. So was the U.K." Makes one wonder just how much the gold price was pushed down today alone to make Gordon Brown's most recent budget reception a little more palatable. It also confirms yet again, that there is no such thing as an unmanipulated gold market. Lastly, it demands the question: on how many other occasions has the UK's massively unpopular prime minister sacrificed his people's interest merely to make criminal organizations such as AIG whole?

It had been a little quiet without Alan Grayson these past few months. Too quiet. The Florida Democrat is now back with a bang after sending a letter to the representatives of the AIG Credit Facility Trust demanding that all AIG emails over the past decade be made public, as well as all company models and internal accounting documents. Yet it is the flourish of the narrative, which reminds one of Dan Loeb in his iconoclastic prime that is the centerpiece of the most recent, and every other letter. Where else can you find pearls like: "It is beyond outrageous that this company, which taxpayers capitalized after Wall Street used it as a slush fund, hides nearly all relevant facts from its owners, the public." We are most enthused by Grayson (and others) finally picking up on a key theme - if you want something analyzed independently and objectively, just open it up to the broader public, and screw all corrupt internal commissions. Crowdsourcing is the only way to get anything done these days. Also, the crowd wonders, is it too late to replace the top two posts in the current administration with Grayson-Kaufman (in alphabetical order)?

It's been eighteen months since AIG collapsed, and Congress has yet to seriously focus on the most important questions: What did they know and when did they know it? "What" refers to the fatal flaws in the collateralized debt obligations, or CDOs, that AIG insured. "They" are the bankers that structured and sold the CDOs, plus the AIG executives who took on the credit risk, plus the rating agencies that handed out AAA ratings. "When" harkens back to 2005 and 2006, when those toxic CDOs were first issued.

The ravenous algo has just sniffed out AIG. Because now that the firm has no relevant core assets to sell, it surely merits a 10% spike in several minutes. Or is there merely a rumor that there is a rumor. Hopefully the government isn't back to its old trick of rolling buy-ins in financial firms. All's fair in love and getting the market higher, higher, higher.

Because everything unraveled so quickly, no one scrutinized Standard & Poor's flip-flop on AIG. On Friday, September 12, 2008, S&P said it would, "continue discussions with the company over the coming weeks regarding liquidity and capital plans. Once we have more clarity on these issues, we could affirm the current ratings on the holding company and operating companies or lower them by one to three notches." Of course, that never happened. S&P did not wait, and issued a downgrade the following Monday. It had at least one conversation with AIG that day, when only two things were clear: Nothing at AIG was settled, and the contagion effect from the Lehman Brothers bankruptcy was huge. The discussions could not have been especially detailed, since AIG's financial staff was preoccupied in its negotiations with Hank Paulson's deputy, Dan Jester, Goldman and JPMorgan Chase, who ostensibly were trying to put together a bank deal that would address S&P's concerns.

Having lost a Motion to Dismiss the plaintiff’s case based on a lack of standing, and also under a failure to state a claim, as well as subsequently losing a motion to obtain a certificate of appealability for an interlocutory appeal, Mr. Geithner now faces the possibility of a deposition as well as discovery in a case that perhaps was seen as a big “nothingburger”, until just a few weeks ago.

As we look forward, we ask, who now determines the variation margin on Greek CDS (and Portugal, and Dubai, and Spain, and, pretty soon, Japan and the US), the associated recovery rate, and how much collateral should be posted by sellers of Greek protection? If Greek banks, as the rumors goes, indeed sold Greek protection, and, as the rumor also goes, Goldman was the bulk buyer, either in prop or flow capacity, it is precisely Goldman, just like in the AIG case, that can now dictate what the collateral margin that Greek counterparties, and by extension the very nation of Greece, have to post on billions of dollars of Greek insurance. Let's say Goldman thinks Greece's debt recovery is 75 cents and the CDS should be trading at 700 bps, instead of the "prevailing" consensus of a 90 recovery and 450 spread, then it will very likely get its way when demanding extra capital to cover potential shortfalls, since Goldman itself has been instrumental in covering up Greece's catastrophic financial state and continues to be a critical factor in any future refinancing efforts on behalf of Greece. Obviously this incremental margin, which only Goldman will ever see, even if the CDS was purchased on a flow basis, will never be downstreamed on behalf of its clients, and instead will be used to [buy futures|buy steepeners|prepay 2011 bonuses|buy more treasuries for the BONY $60 billion Treasury rainy day fund].

In essence, through its conflict of interest, its unshakable negotiating position, and its facility to determine collateral requirements and variation margin, Goldman can expand its previous position of strength from dictating merely AIG and Federal Reserve decision making, to one which determines sovereign policy! This is unmitigated lunacy and a recipe for financial collapse at the global level.

Sooner or later it was bound to happen: the SEC is now looking into whether Goldman's over the top variation margin demands on AIG caused an "improper distress" in the mortgage insurance market (not to mention a couple of competitors' bankruptcies here and there). Not that much will come out of it, you see, since the SEC is woefully underfunded to purchase even one copy of any Janet Tavakoli book... Although the fact that they are finally investigating it should be indicative that if you raise enough stink, even the brain dead Wall Street sycophants at the Syndicate Encouraging Corruption will stop watching pornography for a living and for a few short minutes pretend to push a few papers here and there and actually do their pathetic, anaerobic jobs (and bill taxpayers more than appropriately).

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.