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Quelle Surprise! Who Gained From AIG Rescues? Goldman (and Deutsche) Tops the List (and Willer Buiter is REALLY Angry!)

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Even though I often take on the Wall Street Journal’s depiction of new stories, the flip side is that it does break significant news stories. Today is one of those days, although I wonder about an item this juicy hitting the wires on a Friday evening.

Remember that the reason for shoring up AIG was its credit default swaps portfolio, in which it had written lots of unhedged guarantees on the cheery assumption that there was tantamount to no risk. Insurers are state-regulated in the US, and subject to a host country requirements overseas (and AIG has substantial foreign operations). Uncle Sam has no regulatory responsibility for AIG, but was hit up nevertheless as the most logical deep pocket that could prevent a financial train wreck.

Gretchen Morgenson reported in September that Goldman was the only financial firm that had a seat at the table during the AIG rescue talks. We noted at the time:

This is special dealing, pure and simple. Even if AIG needed to be salvaged (there was considerable agreement on this point), having Goldman deeply involved in the process is cronyism. But that’s been a staple of this Administration.

Another reason for the bailout was that AIG’s guarantees allowed European banks to circumvent minimum capital requirements, which means the AIG salvage operation was a backstop to European financial firms.

The Wall Street Journal story, “Top U.S., European Banks Got $50 Billion in AIG Aid” peels back another layer in this sorry affair:

The beneficiaries of the government’s bailout of American International Group Inc. include at least two dozen U.S. and foreign financial institutions that have been paid roughly $50 billion since the Federal Reserve first extended aid to the insurance giant.

Among those institutions are Goldman Sachs Group Inc. and Germany’s Deutsche Bank AG, each of which received roughly $6 billion in payments between mid-September and December 2008….

The names of all of AIG’s derivative counterparties and the money they have received from taxpayers still isn’t known, but The Wall Street Journal has identified some of them and is publishing others here for the first time….

In a Senate Banking Committee hearing in Washington on Thursday, Fed Vice Chairman Donald Kohn declined to identify AIG’s trading partners. He said doing so would make people wary of doing business with AIG.

But Mr. Kohn told lawmakers he would take their requests to his colleagues. The Fed, through a new committee led by Mr. Kohn to discuss transparency concerns, is now weighing whether to disclose more details about the AIG transactions.

Yves here. One would infer that someone who was privy to the details is mighty unhappy with what went down.

The story also includes this text box:

Some banks that were paid by AIG after it was bailed out by the government

Goldman Sachs
Deutsche Bank
Merrill Lynch
Société Générale
Calyon
Barclays
Rabobank
Danske
HSBC
Royal Bank of Scotland
Banco Santander
Morgan Stanley
Wachovia
Bank of America
Lloyds Banking Group
Source: WSJ research

Update 10:50 PM: Readers suffering from bailout fatigue are wondering why this is a biggie. By the time you are talking AIG level numbers, does it matter where the money went, really? Willem Buiter begs to differ (hat tip Ed Harrison). Bottom line: covert subsidies were given to bank via AIG. Remember, Henry Paulson, who had perilously few inhibitions about shoveling money at banks, even when the pretexts were often dubious and the checks non-existent, nevertheless was afraid to overpay openly for dud assets, which is why he retreated from his original conception of the TARP as as way to hoover up bad debt.

But AIG? No problem. CDS are arcane, and these were bi-lateral contracts (while the dud TARP asset were in most cases securities, so in many cases, third parties could formulate a rough view as to where they might trade).

Wake up and smell the coffee. The public purse is being looted and we the great unwashed are being fed pablum. Just because the perps work for once esteemed institutions and are typically treated with deference does not change the nature of the undertaking.

From Buiter:

The reports on the evidence given by the Vice Chairman of the Federal Reserve Board, Don Kohn, to the Senate Banking Committee about the Fed’s role in the government’s rescue of AIG, have left me speechless and weak with rage. AIG wrote CDS, that is, it sold credit default swaps that provided the buyer of the CDS (including some of the world’s largest banks) with insurance against default on bonds and other credit instruments they held. Of course the insurance was only as good as the creditworthiness of the party writing the CDS. When it was uncovered during the late summer of 2008, that AIG had nurtured a little rogue, unregulated investment banking unit in its bosom, and that the level of the credit risk it had insured was well beyond its means, the AIG counterparties, that is, the buyers of the CDS, were caught with their pants down.

Instead of saying, “how sad, too bad” to these counterparties, the Fed decided (in the words of the Wall Street Journal), to unwind “.. some AIG contracts that were weighing down the insurance giant by paying off the trading partners at the full value they expected to realize in the long term, even though short-term values had tumbled.”

An LSE colleague has shown me an earlier report in the Wall Street Journal (in December 2008), citing a confidential document and people familiar with the matter, which estimated that about $19 billion of the payouts went to two dozen counterparties between the government bailout of AIG in mid-September and early November 2008….With the US government (Fed, FDIC and Treasury) now at risk for about $160 bn in AIG, a mere $19 bn may seem like small beer. But it is outrageous. It is unfair, deeply distortionary and unnecessary for the maintenance of financial stability.

Don Kohn ackowledged that the aid contributed to “moral hazard” – incentives for future reckless lending by AIG’s counterparties – it “will reduce their incentive to be careful in the future.” But, here as in all instances were the weak-kneed guardians of the common wealth (or what’s left of it) cave in to the special pleadings of the captains of finance, this bail-out of the undeserving was painted as the unavoidable price of maintaining, defending or restoring financial stability…

I am deeply worried that other people may, as a result of this, be willing to do business with other U.S. financial institutions on the same ludicrous terms that brought us the current crisis,,,,

Unless the counterparties pay the full price for their hubris and recklessness, they will be back for more. It is therefore tragic that central banks and governments everywhere are going out of their way to protect and shelter the unsecured creditors of the banks (holders of junior and senior debt among them), by raiding the tax payer or the credit and reputation of the central bank. Significant mandatory debt-to-equity conversions and large write-downs of (haircuts on) the claims of other unsecured creditors should be an integral part of any financial assistance package.

There’s more good stuff here. Buiter also questions conventional wisdom about the Lehman failure.

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56 comments

  1. Anonymous

    This article raises a much bigger question. In AIG’s Q4 earnings call earlier this week, Ed Liddy said AIG had a 2 trillion financial products operation, with over 1 trillion concentrated with 12 major institutions.

    The big question is this: on a MTM basis, how much does AIG owe the counterparties under its 2 trillion of financial products? That would give a taste of how much money Obama/Geithner/Summers will burn by funding future losses to AIG.

  2. Anonymous

    There’s not much more to say. Either they fix this and give the citizens some relief, or … they don’t, and I don’t know what the consequences are.

    People who didn’t know already should now know that their money is going straight to those banks as a gift. There will be some point where they will go outside the process. I cannot predict when that is but it could be soon.

  3. Anonymous

    The US Treasury asks for and receives Congressional immunity from dispersing bailout monies….does what transpired surprise you?

    Just keep following the blood money because Congress already shot itself in the foot.

  4. esb

    We are nearing the moment when the loving fingers of GECC begin to enter all of your wallets and pockets, perhaps also indirectly.

    “People familiar with the matter” tell me that it will need several billions of public dollars, and soon, and that the new team @ Treasury is attmepting to come up with the proper scam, assisted by the GS team which is still in the process of perfecting its coup.

    (It would not amaze me to learn that the gross Bill Gross is attmepting to interject himself into the “project” in some manner.)

  5. Anonymous

    “The US Treasury asks for and receives Congressional immunity from dispersing bailout monies….does what transpired surprise you?”

    Paulson only got immunity from violating federal law. If he violated state laws like fraud, conspiracy, money laundering, securities laws, embezzlement, a state attorney general can prosecute and imprison Paulson.

  6. Jim in MN

    Sadly, I think it’s been determined on this blog that the bond haircut that would seem just would also be catastrophic, for example collapsing major insurance companies and jerking many corporate and public pension funds far further into the red.

    I am wondering if health insurers might collapse in the US as they parked premium cash in bonds too. Not very fun if you’re having a baby any time soon.

    So, complain all you want. It’s going to be a Lost Decade, but worse: more like a Lost Generation.

    No…..Bond…..Haircuts. Which means no bankruptcies, no nationalization, no relief from the pap drip (‘we will continue to strengthen financial institutions’–Geithner this week on the Hill).

    Drip, drip, drop. Liquidity trap, meet credit crunch. You two are going to be inseparable for a long, long time.

  7. Anonymous

    I can’t help but think of the chaos that would have occured, If LEH went down on Monday, AIG on Wednesday, GS on Friday, and MS the following week. To say nothing of the European Banks.

    That said, i am not sure we are not living through slow motion chaos.

    As more and more of these stories leak out, confidence in any financial institution will continue to move towards zero.

    The current administration is using hope as a strategy as they merely rearrange the chairs on the deck of the Titanic (aka the american financial system)

    Thanks Yves. You do wonderful work.

  8. Anonymous

    “As more and more of these stories leak out, confidence in any financial institution will continue to move towards zero.

    The current administration is using hope as a strategy as they merely rearrange the chairs on the deck of the Titanic (aka the american financial system)”

    No, hope is not the strategy. Rahm Emmanuel is as brilliant and evil as Cheney and Millken. Rahm wants to drip out bad news until there is such a state of crisis that Rahm can ram through left-wing legislation that would curl the hair on Larry Summers head.

    I thought Cheney was good. But Rahm is even better.

  9. Anonymous

    “Rahm wants to drip out bad news until there is such a state of crisis that Rahm can ram through left-wing legislation that would curl the hair on Larry Summers head.”

    We can only hope.

  10. Anonymous

    What does it matter? You can get a bigger crowd more excited about gay marriage or a thug being shot on a train platform than the looting of our retirement money.

    Yes, people understand they are being robbed but unless and until they are willing to fight back it doesn’t matter. Occasionally, a person responds to Yves posts with a call to buy guns and ammo…not to wage war against those who are pauperizing them but against their fellow pauper should he decide to try and take the few cans of food they’ve stashed away.

    I have nowhere to put my meager funds now. NOWHERE. Unless and until large crowds gather in front of the Treasury, the Federal Reserve. Vietnam era sized crowds of a half a million or more, then the doctrine of ‘TBTF’ prevails!

  11. Anonymous

    To me, the huge losses reported by AIG indicate they are closing out these contracts at huge losses. The winners should be posting huge gains shortly. A huge backdoor subsidy to Goldman Sachs et al. Sorbanes Oxley is only enforced for non NY companies. What a joke. Don Kohn is a criminal who has been there the whole time. The puupetmaster telling Alan Greenspan what to say.

  12. Swedish Lex

    Buiter is really angry……..

    The only thing that surprises me in this story, really, is why Paulson & co. were so generous with a bunch of European banks. Had this been a dodgy European bailout involving maximum moral hazard, I am pretty sure that U.S. banks would have been left with (next to) nothing.

    I know that the Finance Minister of France was frantically calling Paulson at the time saying that the country's banks would immediately go under if AIG fell, but that is not a reason for being nice and not asking for a (very) big favour in return.

    This has been q ?-mark on my mind since the AIG bailout. There must be more to be found here.

  13. Swedish Lex

    Another thought. If I put on my constitutional lawyer hat for a moment, this guy’s admission under oath (I presume) before the Senate should be enough to prosecute and to get AIG’s handouts to its friends with public money nullified. (the recipients could however argue that they had received the payouts in good faith, thus preventing re-payment. One could however at least win on the principle).

    At least if this had been the EU……

    Seems to be a good case to argue discrimination and abuse of power.

    Litigation-happy America has probably already thought of this, which could mean that we have interesting proceedings ahead of us.

  14. M.G.

    I do not see the breaking news in the shame the name list of banks. We knew that! I just call for an Euthanasia of the banking system. I still contend that in the insurance business the first thing one should consider is to honor a contract. We can certainly say that AIG and its counterparts either European or Goldman Sachs had really bad assets and liabilities management (for instance by all concentrating their insurance contracts or CDS, at one insurer sic!), but can we say that AIG must not honour the financial commitments it has made through these insurance contracts, no matter the reason why they were taken out?
    It’s like saying that tomorrow the United States of America are simply defaulting on its Treasuries… Can you imagine that? The people who lose biggest out of the collapse of AIG are probably the European banks but from a certain perspective, it is very much in the interests of the U.S. to pay for the rescue of AIG.

  15. Anonymous

    I immigrated to New Zealand a few weeks ago. I really thought I would feel guilty jumping ship… I don’t.

  16. brushes9

    Ernest Becker is the philosopher who wrote, “The Denial of Death,” in which he argues that human institutions and endeavors are our attempt to achieve symbolic immortality, given that we struggle in time within the boundaries of our freedoms and our limitations, between the upward forces of life and the downward, horrible forces of death.

    Peter Schiff is always saying that our currency “is not real.” Becker would agree, but also unreal are all human values and meanings that humans amass and organize symbolically.

    Becker’s opinion on our current, economic crisis is not hard to imagine: the common person is experiencing a significant drop in “self-esteem,” which is the primary force that dulls and dissolves our terror of death. Put another way, our “immortality strategies” are being destroyed, filling us with fear and anger.

    Our anger is both childlike and animal-like in intensity, and rightly so. Reality is a terrible place, filled with Grimm Fairy Tale-like horrors. We must feel that the world is our oyster, not the other way around. Now, other people have severely weakened our defenses and hero strategies. We want them dead.

    I’m not trying to advertise my knowledge of depth psychology (I’m no scholar). But, I am trying to point out that this crisis runs deep into all our psyches.

    Will we have our “Fallujah” moment, with the bodies of contractors dismembered, burnt and hanging from ropes? I suspect that Earnest Becker, along with Alexander Mitscherlich would say:

    “Yes.”

    Links

    “Denial of Death”
    http://en.wikipedia.org/wiki/The_Denial_of_Death

    or, click “brushes9″ above for the same link.

  17. brushes9

    Alice Miller, in “The Drama of the Gifted Child,” suggest that it is “grandiosity” that protects us from depression and the horrors in life. Further, the more desperate my childhood, the more grandiose is my self-reporting, AND the greater is my contempt for others who do not possess my qualities.

    The dark side to this grandiosity and contempt for others is the truth of our early relationships: “if I don’t possess these amazing qualities, I am worthless and should feel horrible, just as I was taught as a child.”

    What would Alice Miller expect from this crisis? People’s grandiose self-reporting is becoming harder, if not impossible to maintain. The depravities of childhood and their concurrent awful feelings are rushing back into our bodies. We are becoming the object of our contempt, a process we mitigate by heaping even more contempt on others. We become depressed,..consumed with anxiety, frightful paralysis and seething rage.

    We will have our Fallujah moment, Miller agrees, but it will be because we cannot admit to our suffering and embark on the path of empathy, compassion and self-healing.

    No, we want to make someone suffer, to victimize. To feel powerful, we act like our parents and that means that we victimize. And we need to feel powerful, again!

    Click “brushes9,” above for Wiki link to Alice Miller.

  18. Anonymous

    Re the article by John Taylor questioning the interpretation that the Lehman bankruptcy precipitated the Autumn financial crisis (everyone should read below the fold on this post): we need to be careful about using an event study in drawing such a conclusion. The Lehman failure was unprecedented and it could be that market participants took 5-10 business days to draw the appropriate conclusions from the bankruptcy. One wouldn’t expeect an event like that to cause an immediate rational and precise reaction in the markets as in more normal events (eg an earnings miss). This is a good debate to have, though.

    jult52

  19. Anonymous

    Get ready for another push to suspend “mark-to-market” accounting rules.

    A bill introduced late Thursday by Rep. Ed Perlmutter (D-Colo.) and Rep. Frank Lucas (R-Okla.) would create a federal board to “review the application” of accounting principles — including controversial mark-to-market rules.
    http://latimesblogs.latimes.com/money_co/2009/03/mark-to-market.html

    A couple of whores out walking the Street. Enron for all, if you still have any money invested in this little banana republic it may be a good time to take it somewhere else.

  20. Been there

    The AIG debacle is outrageous. It was selling unregulated insurance protection (CDS’s) pure and simple. And- since we (society) are under no obligation to protect the fools who purchased the fraudulent CDS protection, why not limit those we bailout to only those who have an “insurable interest”. You get government protection only if you owned the underlying asset for which the CDS protection was purchased. The same requirement applied as for real insurance. CDS buyers who didn’t own the underlying asset (speculators, gamblers, etc.) get left behind to their devices.

    We, as a nation, just can’t afford to protect everyone.

  21. Anonymous

    ” still contend that in the insurance business the first thing one should consider is to honor a contract. We can certainly say that AIG and its counterparts either European or Goldman Sachs had really bad assets and liabilities management (for instance by all concentrating their insurance contracts or CDS, at one insurer sic!), but can we say that AIG must not honour the financial commitments it has made through these insurance contracts, no matter the reason why they were taken out?
    It’s like saying that tomorrow the United States of America are simply defaulting on its Treasuries… Can you imagine that? The people who lose biggest out of the collapse of AIG are probably the European banks but from a certain perspective, it is very much in the interests of the U.S. to pay for the rescue of AIG.”

    This is completely wrong. If a company is insolvent, the most its creditors are entitled to are the assets of the company, or equity or debt issued by the company. They are not entitled to anything else. The counterparties knew that AIG might go insolvent and not be able to pay their claims, and have the claims voided at least in part, in bankruptcy.

    Bankruptcy is part of US law, and was part of US law before AIG entered into these contracts. The US government is playing dirty pool by bailing out the counterparties. They are getting a windfall they did not expect and are not entitled to.

  22. M.G.

    Replying to an anonymous:
    I hope to be completely wrong also when US will default on some Treasuries or they will not be entirely subscribed…It’s a kind of “culture”, not only bankruptcy law, to try honour financial commitments and written contracts, particularly with foreigners…Or U.S. would like to set a precedent? It’s AIG’s fault or counterparts’ one, who took out insurances in good faith (and apparently good bet)? Of course if counterparts “force” AIG to fail, which I would agree, will have to bear the consequences, of bankruptcy law as well…

  23. Anonymous

    People are angry, they are just too simple and too impotent to know what to do. Like drooling imbeciles they have trusted the story our two-headed political leadership has had to sell to them about the essential goodness of our system and have never really questioned it. Yet a system that can so easily produce abuses on this scale has lost its moral right to exist. One gets the sense of the scene in the opening frames of Dr. Zhivago in which a small group of humble protestors together with priests of the Orthodox Church march to object to their treatment by the powers that be and they are slaughtered by Cossacks. Well, we’re being slaughtered by Cossacks and there’s not even a protest. One would have to think that the revolution is over?

  24. Anonymous

    “Of course if counterparts “force” AIG to fail, which I would agree, will have to bear the consequences, of bankruptcy law as well…”

    AIG is insolvent. Since the US government owns msot of the equity, it can have AIG file bankruptcy. And the creditors will have access to AIG’s assets, no more, no less. That is all they are entitled to. They have received more than that due to handouts from the US government.

    This must end. AIG admitted in its Q4 earnings call that its financial products operations had 2 trillion in exposure. The US taxpayer is in no way obligated to pay off AIG’s 2 trillion in liabilities.

    Ths US is not a dictatorship where corporate entities can borrow money and force the taxpayer to pay them. This is a democratic republic, and the voter/taxpayer can refuse to pay corporate debts.

  25. ruetheday

    I think we now have the answer to the riddle of “why was risk vastly underpriced from 2003-2007″. I remember reading a number of academic and popular papers a few years back that marvelled at the incredibly shrinking spread between Treasuries and risky assets. All sorts of contortions were made in an attempt to explain the mystery. The real answer was simple – AIG basically insured away all default risk in almost all markets and no one ever bothered to ask what would happen if AIG tanked (perhaps because no one had a good picture of how much financial insurance AIG had written). Decades from now, when the history books are written on the cause of Great Depression II, I believe that AIG and the failure of financial insurance will be center stage and the subprime stuff will be long forgotten.

  26. Anonymous

    From Buiter’s article the big take away is this (emphasis added): “The logic of collective action teaches us that a small group of interested parties, each with much at stake, will run rings around large numbers of interested parties each one of which has much less at stake individually, even though their aggregate stake may well be larger. The organised lobbying bulldozer of Wall Street sweeps the floor with the US tax payer anytime. The modalities of the bailout by the Fed of the AIG counterparties is a textbook example of the logic of collective action at work. It is scandalous: unfair, inefficient, expensive and unnecessary.”

    Yves,
    In your book you’ll need to deal with this. Taking this to the extreme in political economic terms one might take it to mean that large nations and government currencies need to be abolished.

  27. Dan Duncan

    To Brushes9:

    I appreciate an insightful literature reference as much as the next person, but….

    The multiple posts day-in and day-out of psychoanalysis through literature, coupled with directives to link to YOUR blog, just isn’t getting it done.

    Perhaps you might spend some more time consulting your Pocket Freud. With this Handbook of the Human Condition, you’ll get some penetrating insights about arousal and why Psychology 101, coupled with “Click on the Above to Visit MY Blog” inevitably leads to an erectile dysfunction of the blog reader’s soul.

    And while you’re working your inner Freud, I can’t help but to make a reading suggestion of my own:

    Check out Sir Sigmund’s anticipation of our current economic woes in his essay entitled, “Bankers Love to Create Esoteric Financial Instruments Because They Really Want to F— Their Mothers.”

  28. Anonymous

    To Anon 9:39
    It’s juicy because the counterparties to AIG swaps should have had to write down the value of the contracts, and instead they have received money from the US taxpayer, through AIG, to cover the writedowns.
    At least, that’s how I understand it.
    I think it’s important to have an explanation that someone unfamiliar with the situation can understand, even if it’s oversimplified.
    Harris

  29. S

    On R. Emanuel – he is nothing but Chiacago machine. Unlike Cheney, Emanuel has the collective will, I use that word loosly, of the complacent elitist blue state metro areas behind his agenda – and the dying MSM. That is not america and never will be. Obama won by a slim margin on the popular vote and has no mandate for anything like what he is proposing. Obama like comparisons and Lincoln is looking more the part, if only due to the civil war like conditions. When you see major defense blogs like Wired’s Danger Room openly debating who the military would side with if ordered into the streets we have problems. John Robb is espousing the retun to tribal and resiliant communities. The fact that there is open debate about whether the US military would turn its guns on its own people should be enough to make you shudder. How many people would take up the defense of people like Wasserstein Rham? That bluff will be called.

    Market must have know the story was coming as GS got slammed in the market yesterday on “no” news. The governeemnt is trying to drip feed this stuff to take the edge off. It is why little tim stays on message with the systemically important ministry of truth stuff.

    And Buiter is spot on about LEH. It is about time the bond market is taken to task for taling its book.

    Wait until we have to unwind the FDIC backed debt of these banks. The WSJ carried the article on the fees from these bonds that the banks were taking – all coming at the expense of the taxpayer. Fees plus subsidized interest. The US CDS is spiking and the day of reckoning grows nearer.

    And then there is Madoff? One wonders whehter a high profile trial – just what the doctor ordered – is being orchestrated to not happen. As they say, it is never what they say – rather itn is what they don;t say. The Madoff ordeal is yet another case and point.

    Yves,
    In your book you’ll need to deal with this. Taking this to the extreme in political economic terms one might take it to mean that large nations and government currencies need to be abolished.

  30. m

    Since the notional amount of the CDS coverage was said to be much higher than the face amount of the underlying “insured” toxic bonds, how much of the bailout might have gone to hedge funds and other speculators who were betting against the same bonds as held by the bailed out Goldman and big foreign banks?

    Could the feds bailout one without bailing out the other?

  31. M.G.

    Reply to an anonymous:

    I wonder to what extent the US bankruptcy gives certain derivative counterparties priority claim over depositors in bank bankruptcies. That’s would complicate things if AIG’s failure bring downs some banks and credit default swaps are settled first.

  32. Waldo

    Please excuse my hurried efficiency. My previous blog below has relevance here. [This credit malaise (real estate overhang) was set into motion prior to the tremendous head long rush into real estate finance (CDO's and such). Wall Street lost the business opportunities of IPO and M&A deals thus pushing the real estate deals. All these banks had done real estate business in the past but not in the scale as was orchestrated from 2004-2007. The devalue of the dollar pre-2004 and the tremendous stripping off of disposable and non-disposable income by high gas prices facilitated this economic coma. No true economic theory can withstand stealing. The former oil President pushed us into this current mess and must not go unpunished.]:

    "The machine was not concerned with values and profits; it ground out goods. Hence the businessman would have no function to perform–unless he turned engineer. But as a member of the leisure class he was not interested in engineering; he wanted to accumulate. And this was something the machine was not set up to do at all. So the businessman achieved his end, not by working within the framework of the social machine, but by conspiring against it! His function was not to help make goods, but to cause breakdown in the regular flow of output so that values would flucturate and he could capitaize on the confusion to reap a profit. And so, on top of the machinelike dependability of the actual production apparatus in the world, the businessman built a superstructure of credit, loans, and make believe capitaliztions. Below, society turned over in its mechanical routine; above the strucutre of finance swayed and shifted. And as the financial counterpart to the real world teetered, opportunities for profit constantly appeared, disappeared, and reappeared. But the price of this profit seeking was high; it was the constant disturbing, undoing, even conscious misdirecting of the efforts of society to provision itself."

    Very insightful but we must not confuse profit for stealing. Confusion (fear) is the strongest reagent to facilitate stealing. Much like when a felon points a gun before robbing a 7-11 convenience store. This is not profit he possesses but stolen assets of the business.

    Confusion designed for abetting theft has been elevated to a global scale. The aforementioned theft being perpetrated by the oil thugs. They gained access to our White House and we lived through 9-11, Iraq War, and continuous threats (Cheney, Rumsfeld) orated by the Administration of possibilities of more terrorism on US soil to a panicked American citizenry. Add to this the system of high alert alarms sounded by the Department of Homeland Security. Now Bush, Jr. is being credited with preventing more attacks here in the States (such sh*t).

    I saw through the plan then and I still see through it now. For those (Republican or Democrat) who did not see the crime you are a fool (less free; dumbed down).

    A functioning Justice Department and a character driven President can establish 'rule of law' again. If they do former President(s) will be prosecuted. A long order but necessary. We must punish these crimes and start anew.

    American Poet

    The great genius Emerson wrought this:
    “Where is the American poet?”
    Walt Whitman guided by cowardice
    Responded by composing free verse (don’t covet)!
    Contemporary America’s literature is weaker
    Because of free verse: our literary canker.

    Today I read abundant poetic failure.
    A poetic character of least resistance.
    Reminds me of our past abuse of color,
    Only recently truly feeling repentance.
    We must cease this poetic illusion.
    Begin anew and drive away the confusion.

    The American Poet – literary leader.
    The American Poet – literary rhyme.
    The American Poet – truest dreamer.
    The American Poet – the new global sign.
    We will again create a national literature
    That will respect, inspire, and satiate Nature.

    Free, adventurous, rugged, and beautiful souls.
    The nation of many nations.
    English, German, African, Asian, and Aboriginals
    Our melting pot of relations.
    We fought tyranny to find our truest selves
    And forged a nation where the free man dwells.

    A national republic and a free society.
    A national genius vested in our courage (to again appear).
    A genius that is guided with truth and piety
    Igniting a torch of Liberty for all to see and revere.
    Reach back America to understand and to inspire.
    Surge forward to mend and extinguish our tyrannical fire.

    The great economist Friedman authored this:
    “Free to Choose”
    The power of choice from education to cannabis.
    Free to win and free to loose.
    A man who revered fierce debate and criticism.
    Who expounded the critical value of capitalism.

    This thinker understood the supreme economic value of labor.
    Fought all takers with intellectual breadth and stamina.
    A champion of the free market that always wants more
    That transcended the towering thinkers of Vienna.
    A Jew of anemic physical stature.
    A scholar finished; the rarest creature.

    These Jews who earn great scholarly respect.
    True as the fox has learned to be cunning.
    Grand stewards of America’s national intellect!
    America’s future depends on their creating.
    These little people think for today’s Hollywood
    Because of this we all can learn and be understood.

    The great capitalist Gates gained this:
    “America’s greatest and fairest personal fortune”
    A gift which adds to America’s bliss.
    The entrepreneur of historic opportune.
    This economist with ambitions of much
    Created an empire inaccessible to the human touch.

    America’s past happiness rested with these
    Astor, Stanford, Carnegie, Morgan, and Rockefeller.
    An animal not bent to help or to please.
    Their determination to create their reputations of grandeur.
    These men we needed to think, to lead, and to create stability.
    Our wise Sherman Act completed them and staved the monopoly.

    The great actor Hanks orated this:
    “To contribute today you must help”
    An overture as critical as a lover’s kiss.
    A message for his daughter (us) I deeply felt.
    A platform stationed at a colloquium of scholars (college).
    A place devoted to our past utterances and our homage.

    We now are entering our greatest adult season.
    A time of fear and actions with reason.
    We have seen this before: the civil war of treason.
    Our Creator readied us then with literary cohesion.
    Thoreau, Longfellow, Poe, Field, and Dickinson.
    Today’s cause is a war of greed and of confusion.
    We must come together to again create poetic unison.

  33. Eric L. Prentis

    Yves Smith said, “The problems aren’t going away, … the bad policies, the bad assets, the lack of will to reform, the doublespeak, … the trajectory of policy seems immune to public opinion and reason.” I empathize with Ms. Smith’s statement and completely support her new book project, however, as Willem Buiter makes eminently clear, those in financial power are massively betraying the public trust and they will not be brought low simply by reason or the opinion of naked capitalism progressives. It takes years for the public to indignantly rise up in defiance, but that tipping point is coming, remain steadfast and fully engaged.

  34. Anonymous

    MG: “I wonder to what extent the US bankruptcy gives certain derivative counterparties priority claim over depositors in bank bankruptcies. That’s would complicate things if AIG’s failure bring downs some banks and credit default swaps are settled first.”

    Since AIG has insurance subsidiaries, not bank subsidiaries, I assume you were asking if swap counterparties can trump insurance customers. They cannot. The regulated subs are not parties to or guarantors of the derivatives. The swap counterparties could most the counterparties could get is equity in the insurance subsidiaries, or the proceeds from its sale.

    The same is true of banks. The regulated bank subs I know of didn’t guarantee or participate in writing liquidity puts, CDS, etc. If the bank holding company and the unregulated subsidiaries file bankruptcy, they have no claim against the assets of the regulated bank subs. The most they can get is equity in the regulated subs, or the proceeds from its sale.

    These counterparties aren’t asking for what they’d get in bankruptcy, they are asking for more. Bullocks. You get the contractual protection you pay for, and they didn’t pay for much.

  35. Anonymous

    @ Anon 9:45:

    Thanks for responding to my question about what makes this juicy. I’m still unclear about what makes this new news, though. Haven’t we all known for awhile that a significant chunk of the AIG bailout money went through AIG into the pockets of the CDS counterparties? What is new here?

  36. M.G.

    For anonymus:

    To see an element of subsidy we have to see those contracts. If there was a compelling case and need to unwind them a premium over short term value could be justified if taking them to term or maturity could have had worst consequences on some balance sheets. It is for instance to be noted that Deutsche Bank reduced it’s leverage ratio considerably over the period in question. Have they claimed on some insurance contracts taken out with AIG? In any case one could still assume that unwinding those contracts “was very much in the interests of the U.S. to pay for the rescue of AIG”. If there is in the interest of the nation…you pay a premium as short term perspectives could be better than long term, particularly if you are trying to avoid bankruptcy in the long term.

  37. Eric Hancock

    Were these payments or collateral calls? If AIG wants to remain a going concern, I would expect that the falling creditworthiness would force them to post more collateral.

  38. Anonymous

    EH: “Were these payments or collateral calls? If AIG wants to remain a going concern, I would expect that the falling creditworthiness would force them to post more collateral.”

    Both. AIG made payments terminating some of its losing trades and posted collateral for the benefit of counterparties on other trades. Of course, if the US government exercises its rights as a shareholder to vote for AIG to file bankruptcy, the collateral insures that the counterparties under the derivatives get paid. That is a horrible subsidy. If nothing were posted, and AIG and its unrelated subsidiaries were insolvent, they’d have to take a major haircut. Instead, Geithner is handing them cash and collateral. And if AIG files bankruptcy, they get to take the collateral.

    A real third party would have put AIG on a short leash by lending money at a punitive rate (say borrowing rate plus 7%) payable on 30 days demand, with priority over all unsecured lenders just like a DIP lender. Instead, Geithner is handing out money to banks foreign and domestic as if he works for them and not the public. He should be fired. And prosecuted under RICO.

  39. Anonymous

    What exists beyond the clarity of your most esteemed and respected blog, Yves, lies a world populated by those prone to deception and ignorance (might as well throw in laziness too).
    There is, by all indications, a victim posturing populace participating in a slow motion shuffle, while in front of the march of destiny they are being led by clique of goosestepping politicians and banksters.
    Until the veil that separates this small bloglandia sphere of awareness with the collective consciousness that lies beyond the borders here we are merely muttering mutinous mantras to ourselves.
    Yves, if I may make a fashion makeover suggestion to you. The next time you are in the national spotlight on TV, instead of appearing pretty and polite and fashionably reserved – will you not, for the sake of this country, take on a revolutionary persona of perhaps a Joan of Arc with a nom de guerre (Tania has already been taken) dressed in urban peasant style with a bandolier accouterment as a fashion statement that you mean business (not as usual), teasing your hair into a Angela Davis Afro shouting sound bites of truth.
    The country needs you – we need you now. Forget the book – the urgency of the moment demands revolutionary action. Go girl.

  40. sc

    Paulson should go to jail.

    1. Went to Treasury for tax-free capital gain on Goldman holdings not to serve the country.
    2. Cronyism with GS on the AIG meeting (and much more likely)
    3. Push for AIG bailout which ultimately protects GS

    Wake up!

  41. Anonymous

    “Wake up and smell the coffee. The public purse is being looted and we the great unwashed are being fed pablum. Just because the perps work for once esteemed institutions and are typically treated with deference does not change the nature of the undertaking.”

    I commend you for the use of this language. We must recognize exactly what is going on. Unless we do, things will only get worse, America will be more criminalized than it already is.

    I am wondering if there is any Economist or Criminologist who might write an analysis of this massive FIRE Crime Wave and its magnitude. It certainly has paralyzed the so-called Justice system. My personal conservative estimate is that we have at least 100,000 very wealthy financial criminals running loose in the FIRE system. I am thinking that a book such as The Prosecution of George W. Bush by Vincent Bugliosi is needed. Lay out the evidence, make the case, let the Public judge.

    The absence of analysis by any noted Criminal Authorities is very disheartening, leading one to believe that the Intimidation and Omerta are at very high levels. One must remember what they did to Spitzer.

    Thanks again for your work.

  42. brushes9

    Duncan,

    The clicks in my post above are links to wiki and not to a blog.

    But, thanks for providing a palpable example of ‘contempt for others.’

    Don’t get me wrong, if someone causes you disgust, it may be unhealthy to embrace them anyways. Healthy contempt (prolonged disgust) may be our body’s way of warning us of a danger that we have been ignoring, repeatedly.

    Your disgust is very intense for a person who does not know me..are you sure that you are not mistaking me for you father?

    PS. Your name would appear nicely in blue.

  43. Blurtman

    Yves,

    Thanks for keeping this story in view. But I am a bit mystified as to why no one seems to have noticed a much earlier Bloomberg News story reporting the same that ran in September 2008. (see below).

    I am also a bit troubled by the depth of the reporting (i.e., fleetingly shallow) about what might be going on.

    Consider that it has been reported that the ratio of CDS written on GM bonds to GM bonds themselves is 100:1. That means that 99% of the holders of GM bond CDS are speculators, i.e., are betting that GM goes down, and not hedging risk exposure.

    It had been reported that much of the CDS written by AIG had been to insure mortgage derivative CDOs and the like.

    Many of the benficiaries of the AIG bailouts are the very same firms, e.g. Goldman Sachs, that created and sold "incorrectly" rated CDOs for billions.

    So a very nice money machine has been created where these investment banks get paid billions in both directions, fueled now by taxpayers dollars.

    And who voted to confirm the architect of the AIG bailouts as US Treasury Secretary?

    And who nominated this candidate to be the US Treasury Secretary?

    Bloomberg link:

    http://www.bloomberg.com/apps/news?pid=20601087&sid=aTzTYtlNHSG8&refer=home

  44. Anonymous

    Like many Americans, I’m disgusted with the likes of AIG and every institution that has received our bailout taxpayer dollars, that I’m practically speechless. On the other hand, I applaud those who ignored the temptations of greed and held to their ethics. Unfortunately, the former group will be the ruin of all of us.

    And, please! Do we have to hear again how no one saw any of this financial mess coming? Anyone who can do simple arithmetic can see what happens when you leverage one dollar to borrow thirty. You are just setting yourself up for a cascade failure.

    And no more TV commercials from financial advisors about how we should not let our emotions get in the way of our long term goals because of recent downturns in the stock market. Please!

    The tsunami almost here. The sandbags won’t hold. Head for higher ground. Take care.

  45. eh

    Whatever you want to say about the AIG affair, it appears the Fed could create all the funny money it wants and it would not hurt the dollar:

    The dollar reached the highest since April 2006 against the currencies of six U.S. trading partners as investors sought safety after American International Group Inc. got more government support and Federal Reserve Chairman Ben S. Bernanke said the banking system isn’t yet stabilized…”We saw a bounce in risk appetite late this week, but if the dollar was truly out of favor, you’d see the dollar selling against the euro and also the yen,” said Michael Woolfolk, a senior currency strategist in New York at Bank of New York Mellon Corp. “That hasn’t happened. The safe-haven status of the dollar is unassailable.”

  46. Anonymous

    Who was on the other side of these “insured” contracts that did/cannot/will not perform? Perhaps this might explain why they are so quick to bailout the insured receivable?

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