naked capitalism

Independent Accountant says:

I read Hamilton’s comment on deflation. They way I say it is: Bernanke will not repeat the Fed’s 1929-1933 mistakes, but those of the Reichbank from 1918-1923. With the monetary base increasing 35.56% in six weeks, I can’t make a credible case for deflation.

Don says:

““You don’t just suddenly lose $120 billion overnight,””

A post on the NY Times by Mary Williams Walsh about how AIG is spending its money from you know who:

“The American International Group is rapidly running through $123 billion in emergency lending provided by the Federal Reserve, raising questions about how a company claiming to be solvent in September could have developed such a big hole by October. Some analysts say at least part of the shortfall must have been there all along, hidden by irregular accounting.

“You don’t just suddenly lose $120 billion overnight,” said Donn Vickrey of Gradient Analytics, an independent securities research firm in Scottsdale, Ariz.

Mr. Vickrey says he believes A.I.G. must have already accumulated tens of billions of dollars worth of losses by mid-September, when it came close to collapse and received an $85 billion emergency line of credit by the Fed. That loan was later supplemented by a $38 billion lending facility.

I wonder what irregular accounting is.

“These accounting questions are of interest not only because taxpayers are footing the bill at A.I.G. but also because the post-mortems may point to a fundamental flaw in the Fed bailout: the money is buoying an insurer — and its trading partners — whose cash needs could easily exceed the existing government backstop if the housing sector continues to deteriorate.”

See, this is not news. We knew that they didn’t know exactly how much they might lose. Now you know why people are coming up with plans left and right to avoid foreclosures. AIG anyone? Taxpayers anyone?

“No information has been supplied yet about who these counterparties are, how much collateral they have received or what additional tripwires may require even more collateral if the housing market continues to slide.”

See, this is important to know. If we would have known this figure at the beginning, we might have reconsidered whether to give this money or the terms.

“For securities lending, an institution with a long time horizon makes extra money by lending out securities to shorter-term borrowers. The borrowers are often hedge funds setting up short trades, betting a stock’s price will fall. They typically give A.I.G. cash or cashlike instruments in return. Then, while A.I.G. waits for the borrowers to bring back the securities, it invests the money.

In the last few months, borrowers came back for their money, and A.I.G. did not have enough to repay them because of market losses on its investments. Through the secondary lending facility, the insurer is now sending those investments to the Fed, and getting cash in turn to repay customers.”

So:
1) A short term borrower borrows money and gives AIG some collateral
2) AIG invests this collateral
3) Short term borrowers come for collateral
4) Investments lose money, not enough to pay back collateral

This problem is being addressed by the $38 billion. $18 billion of it has been used.

“An estimated $13 billion of the money was needed to make good on investment accounts that A.I.G. typically offered to municipalities, called guaranteed investment contracts, or G.I.C.’s.

When a local government issues a construction bond, for example, it places the proceeds in a guaranteed investment contract, from which it can draw the funds to pay contractors.
After the insurer’s credit rating was downgraded in September, its G.I.C. customers had the right to pull out their proceeds immediately. Regulators say that A.I.G. had to come up with $13 billion, more than half of its total G.I.C. business. Rather than liquidate some investments at losses, it used that much of the Fed loan. “

So:
1) Money put in GIC
2) AIG downgraded
3) GIC’s cashed in

$13 billion spent here

“The biggest portion of the Fed loan is apparently being used as collateral for A.I.G.’s derivatives contracts, including credit-default swaps.

The swap contracts are of great interest because they are at the heart of the insurer’s near collapse and even A.I.G. does not know how much could be needed to support them. They are essentially a type of insurance that protects investors against default of fixed-income securities. A.I.G. wrote this insurance on hundreds of billions of dollars’ worth of debt, much of it linked to mortgages.”

So:
1) AIG offers CDS’s to lenders in case of foreclosure
2) A bunch of foreclosures occur
3) AIG needs to pay insurance on foreclosures

A continuing and indefinite process.

“By fall, as the mortgage crisis began roiling financial institutions, internal and external auditors were questioning how A.I.G. was measuring its swaps. They suggested the portfolio was incurring losses. It was as if the company had insured beachfront property in a hurricane zone without charging high enough premiums.

But A.I.G. executives, especially those in the swaps business, argued that any decline was theoretical because the hurricane had not hit. The underlying mortgage-related securities were still paying, they said, and there was no reason to think they would stop doing so.”

Thank God they’re not with the National Weather service.

“Through spring and summer, the company said it was still gathering information about the swaps and tucked references of widening losses into the footnotes of its financial statements: $11.4 billion at the end of 2007, $20.6 billion at the end of March, $26 billion at the end of June. The company stressed that the losses were theoretical: no cash had actually gone out the door.

“If these aren’t cash losses, why are you having to put up collateral to the counterparties?” Mr. Vickrey asked in a recent interview. The fact that the insurer had to post collateral suggests that the counterparties thought A.I.G.’s swaps losses were greater than disclosed, he said. By midyear, the insurer had been forced to post collateral of $16.5 billion on the swaps.

Though the company has not disclosed how much collateral it has posted since then, its $447 billion portfolio of credit-default swaps could require far more if the economy continues to weaken. More federal assistance would then essentially flow through A.I.G. to counterparties.
“We may be better off in the long run letting the losses be realized and letting the people who took the risk bear the loss,” said Bill Bergman, senior equity analyst at the market research company Morningstar. “

See, this $447 billion dollar figure bothers me. Can you say hurricane?

The problems are:
1) Securities lending ( Category 3 )
2) GIC’s ( Category 3 )
3) CDS’s ( Category 5 )

On the Saffir-Simpson Scale.

“Winds greater than 155 mph (135 kt or 249 km/hr). Storm surge generally greater than 18 ft above normal. Complete roof failure on many residences and industrial buildings. Some complete building failures with small utility buildings blown over or away. All shrubs, trees, and signs blown down. Complete destruction of mobile homes. Severe and extensive window and door damage. Low-lying escape routes are cut by rising water 3-5 hours before arrival of the center of the hurricane. Major damage to lower floors of all structures located less than 15 ft above sea level and within 500 yards of the shoreline. Massive evacuation of residential areas on low ground within 5-10 miles (8-16 km) of the shoreline may be required. Only 3 Category Five Hurricanes have made landfall in the United States since records began”

Add Hurricane AIG to the list. I hope I’ve misunderstood this article.

Don the libertarian Democrat

Mr Curious says:

Seems to me that this massive Fed lending is simply filling in the holes in balance sheets that losses created. But, the money at some point, needs to be re-paid. Thats when inflation kicks in. Right now, Fed is trying to slow deflation which is caused by credit destruction(massive losses).

As no one knows(or says) what AIG’s losses are, we need to know how much the Fed(taxpayer) is on the hook for. Is it $100 billion? 200? Unlimited?

What annoys me, is no one is putting up a timeline showing how commodities have tanked since August, versus when LEH/AIg hit the wall. Could it be that these firms are responsible to some large degree in the commodity runup? And that the selling we have seen is them exiting purely speculative trades?

a says:

For AIG I imagine a lot of that money is going to the IB who cannot be named, who probably stuffed it with the worst toxic sludge imaginable.

doc holiday says:

This metaphor is about being on thin ice. Many people go about daily life without realizing how fragile their infrastructure is, and thus they come to depend on synthetic support and bridges that are suspended by structurally flawed mechanics that are not bound by solid supporting mechanisms. This is an age of defying gravity, where the desire to find meaning in the unseen is seen in the LHC and other attempts to connect invisible shit to incomprehensible illusions, which then become our collective future sources of stability and strength for those that never got it in the first place.

In regard to this boring economic metaphor, everyone knows that this youngster has been kidnapped from its crèche, while the real Mom is out at some casino taking chances on some wild bet to get more shit than she has. The compounding cascade of instability she created for herself with her latest run of bad luck was all about simple greed and taking her eye off the ball, i.e, her kid. This little one may depend on the mutual benefit of exchange, but what honesty is there in a system that thrives on greed and complex transactions.

People end up creating financial messes because they fail to take time to place things into perspective — and instead, everyone looks for short cuts and then they place their trust in the fate of lotto tickets and 401ks which are linked to some glossy marketing bullshit that glosses over the reality of risk and the fact that they just need your cash to sustain the on-going pyramid scams. If yah look around, the thin ice is still melting and IMHO, this is not the time to be looking for an anchor to pull you down!

As we, The Irish know, your born in pain, live in fear and die alone. These are harsh times indeed and the bottom line is that when your on thin ice, you may want to think about what lies beneath and ponder on your ability to sink or swim … and don’t forget that message with being greedy, which was in The Perfect Storm — based on a true story:

The Perfect Storm
http://www.youtube.com/watch?v=jmX3TK7U5K4

This sermon has been approved by Doc Holiday and The Church of The Sacred Thin Ice Swaps.

Anonymous says:

People who buy bonds don’t care if the money is printed or left under pillows by the Fed Fairy. All they care about is the purchasing power of the currency they get back. That is determined by the amount of wealth out there competing to buy the goods and services that a produced during a given time. So many trillions of wealth has been destroyed that there are far fewers dollars out there to buy things. So there is plenty of room for right now for money printing before prices are driven up.

However, once the liquidity crunch is solved, stock prices will recover to normal levels. At that point the Fed will have to sop up the extra cash. I don’t know how they will do that.