The corruption in high places is getting more and more brazen with every passing day. The only thing that separates the US from conventional banana republic status is that no one leaves keys to new luxury cars on the desks of officials to secure their cooperation. It’s just not enough of an inducement to get anyone to take action.
Masaccio at FireDogLake was suitably outraged at this spectacle of a regulator getting a job with the biggest lobbying group in the industry he regulates…..and staying in his current oversight role:
The Washington Post reports that David H. Stevens will be taking over as head of the Mortgage Bankers Association. Stevens currently serves as Assistant Secretary for Housing in the Department of Housing and Urban Development, and as the Commissioner of the Federal Housing Administration. He has a conflict of interest so deep that he should be fired at once…
Allowing Stevens to stay on the job, and saying that it comports with ethics rules, is proof that the term “ethics” has lost all meaning. He is working on a settlement that in some news stories calls for a penalty of $20 billion, which only banksters think bears any relationship to the horrifying damage caused by these sharks, through jacked-up fees, fraudulent court filings, dual-track loan modifications and other sleazy tricks played on suffering homeowners. He comes from the industry, and is heading to the group that put out slimy reports condemning any steps that might aid homeowners, including judicial modification of mortgages in bankruptcy.
Why is he not immediately fired for cause? President Obama can’t even use his standard excuse, that we should look forward, not at the past. I’m looking forward, and I see a totally compromised person negotiating the future of millions of Americans.
Now we have another example of unseemly revolving door behavior, this with an even more direct connection between a former official’s old purview and his current role, this time involving AIG and its biggest sugar daddy, the New York Fed.
We were probably remiss in not commenting on the peculiar announcement of AIG’s offer to buy back the bonds in the New York Fed’s Maiden Lane II portfolio for $15.7 billion. The stated reason, that the purchase would “reduce its obligation” to the government is nonsense; it’s astonishing that the press is parroting it. As this Cleveland Fed summary indicates, the latest of a series of restructurings converted the remaining debt payable by AIG to equity; it has paid down all its loan balances. the New York Fed loan to Maiden Lane II is payable by that entity, not by AIG (AIG does have an “equity” position in that portfolio).
AIG can buy plenty of bonds in the marketplace; the only reason for it to offer to buy these bonds in particular is if it believes it can obtain them at a discount, which means that this is yet again another pretty blatant subsidy to the giant insurer. (The only other rationale we could fathom at the time of the announcement of this offer was to justify the government’s continued insistence that all these bailout programs were really great deals. Yes, if you have the Federal Reserve engaging in QE, you can play a three card monte game that makes your older portfolio buys look amazingly astute. But as we discuss below, the evidence has now fallen out conclusively on the side of this move being yet another subsidy to AIG).
Note that if the NY Fed were serious about selling these bonds and maximizing value to the public, the last way you’d do it would be as a single massive portfolio. Big portfolio sales do result in discounts due to the lack of competing bids (think of selling all the artwork in an estate, which included a lot of painting, sculptures, collectable ceramics, and rugs, as a block versus selling the items individually in an auction). The way to fetch a decent price would be to break the portfolio up, in some cases down even to the single bond level, or at least into much smaller homogeneous lots, and work the orders through multiple dealers over time. Admittedly, AIG made its brazen offer back in December and the officialdom failed to respond.
Providing support for our first theory is the offer by Barclay’s today to bid on the portfolio. From the Financial Times:
Barclays is among a group of investors weighing a rival bid for a portfolio of mortgage-backed securities that has already drawn a $15.7bn offer from AIG, people familiar with the matter said.
The securities are owned by the Federal Reserve Bank of New York and housed within Maiden Lane II, one of the special-purpose vehicles created as part of the insurer’s $180bn rescue during the financial crisis….
People familiar with matter said the Treasury had sought to help broker a deal between the insurer and the New York Fed, reasoning that management’s knowledge of the some 800 securities might help squeeze more profits out of them and maximise taxpayers’ returns on their AIG investment. Fed officials remain concerned how a quick deal with AIG might appear to the public, the people said.
How do you read that statement: “management’s knowledge of the some 800 securities might help squeeze more profits out of them and maximise taxpayers’ returns on their AIG investment” ? That reads as if the Treasury is considering interceding on behalf of AIG to “maximize returns” meaning screw the Fed to allow the garbage barge AIG get a better deal. This is more or less an accounting gimmick among the main actors, but sticking the Fed with a bad deal is not all that visible, while tarting up AIG’s financials will presumably help with the public offering. Thus this, along with every retrade of the AIG deal (I think we are up to five), is yet another covert bailout.
Oh, and more evidence that AIG is trying to get a steal:
“It’s a very different story with or without these securities,” Robert Benmosche, AIG’s chief executive, told the Financial Times. “We can improve yields by 3-4 per cent.”
That, dear readers, means AIG can’t buy this many bonds at a comparable risk/return tradeoff in the market. It can’t be “a different story” unless this portfolio is bought at prices far better than those required for comparable bonds in the market. It’s prima facie evidence that the intent is to get an above market yield, which is tantamount to a discounted price.
Now where is the sleazy part in this? Aside from the hidden bailout, is that the NY Fed official who was responsible for overseeing Fed loans to TARP recipients, including the AIG loan, Brian Peters, joined AIG in late January. See this letter to the Committee on Oversight and Government Reform, based on subpoenaed information from the Fed, p. 8, the e-mail cited in footnote 31, for a sighting of Peters in action. Given the extensive interactions between the Fed and Treasury on the fight with Ken Lewis over his threat to walk from the Merrill purchase (the two were working in tandem here, and pretty much on all the major TARP recipients who got Fed loans), and the continued close cooperation between the Treasury and the NY Fed, it isn’t hard to imagine that Peters has good knowledge of and relationships with the key actors at the Treasury as well as at the NY Fed.
So we have a former NY Fed official, deeply involved in the exchanges among the Fed and AIG and almost certainly the Treasury as well, now joining AIG. It isn’t hard to imagine that the reason he was hired was due to his intimate knowledge of how to move things along at the NY Fed and Treasury, and in particular, what Blackrock had told the NY Fed about Maiden Lane II and what the NY Fed’s return and political considerations were. The Treasury is not trying to protect the NY Fed from any information advantage AIG might have regarding the Maiden Lane II assets; Blackrock is certainly up to that task. It’s entirely about appearances of cutting a deal that favors AIG without that looking too bloody obvious.
So in this warped world of priorities, where giving financial firms great deals to “preserve the system” and cook the books on the TARP are top priorities, having an former insider grease the wheels is probably seen as really helpful. It’s merely another proof of what Simon Johnson pointed out in May 2009: the government is firmly in the hands of financial oligarchs.