Yves here. Richard Alford, a former New York Fed economist, provides his assessment of the AIG bailout in light of some of the revelations in the AIG bailout trial. While many of his arguments have merit, I want to quibble with a couple of them.
The first is the size of the actual amount taken by AIG and the reason for the drawdowns. At the time AIG hit the wall, the amount it needed was first estimated at $50 billion to cover its credit default swaps portfolio and $20 billion for its securities lending. The Maiden Lane III vehicle that the Fed created to take the CDOs has a $62.9 billion face value, so we can use that as a rough and ready value, and the securities lending bailout costs rose to roughly $50 billion. But consider: those two together get you to only a bit over $110 billion versus the peak lending amount reported as just shy of $185 billion. And some of that ~$110 billion includes laundering a bank bailout through AIG, by not obtaining haircuts on the CDS on the Maiden Lane CDOs. So where did that say $80 billion go? It might be commercial paper or medium term notes during the very worst of the crisis, although with the Fed supporting AIG, you’d think investors would be see its paper as fine. We’re conferring with some close AIG watchers and may write up a discussion of what that AIG black hole consisted of.
Second is that at the end, Alford adopts a “what matters is looking forward,” as in preventing future crises. Yes, but we are great believers in post-mortems, particularly in light of the George Santayana saying, “Those who do not remember the past are condemned to repeat it.”
It’s remarkable that this Goldman report, and its writeup on Business Insider, is being treated with a straight face. The short version is current stock price levels are dependent on continued stock buybacks. Key sections of the story:
Yves here. This post describes, in a general way, some outcomes of our current Middle East adventurism, with the Islamic State as its current nemesis. However, at least one of Van Buren’s “worst-case outcomes” strikes me as not bad, which would be a thawing of hostilities with Iran. But I don’t see how Israel tolerates that.
But the looming issue behind all of these scenarios is that the game is being played to justify continued large budget allocations to the military-surveillance complex. The cost of defending the American is more guns in the guns versus butter tradeoff.
Ebola is a very nasty disease, but it is actually fairly easy to understand mathematically, which is why the disease prevention folks are confident in the best ways to manage this epidemic that otherwise seems to be growing exponentially.
Yves here. One might argue that stock market jitters are a sign that investors are finally taking note of crappy fundamentals, since even ZIRP and QE, which central bankers keep insisting won’t go on forever, were starting to lose their effectiveness in already-frothy asset markets.
Yves here. Real News Network features a vivid discussion between Rob Johnson, Director of the Economic Policy Initiative at the Franklin and Eleanor Roosevelt Institute and a member of the UN Commission of Experts on Finance and International Monetary Reform, and Paul Jay on the short-sightedness of the uber-rich.
Although many of the themes of this talk will be familiar to Naked Capitalism readers, Johnson, who is also a long-standing political insider, is blunt.
Yves here. I’m not one to fan Ebola fears. In fact, I’m a bit loath to give it the prominence in Links that I am, given the small number of cases in the US and in the world ex the afflicted parts of Africa. While the mortality rate is high, it’s not all that infectious. You are still more at risk from dying by virtue of driving (if you drive) than you are of dying from Ebola or terrorism.
However, whether or not Ebola morphs into a more virulent version, concern about it is legitimate, if for no other reason than that the US healthcare system is neither willing nor able to cope well with flareups of deadly diseases.
As we said in our companion post today on the AIG bailout trial, former AIG CEO Hank Greenberg may have a case after all. Mind you, we are not fans of Greenberg. But far too much of what happened during the crisis has been swept under the rug, in the interest of preserving the officialdom-flattering story that the way the bailouts were handled was necessary, or at least reasonable, and any errors were good faith mistakes, resulting from the enormity of the deluge.
Needless to say, the picture that emerges from the Greenberg camp, as presented in the “Corrected Plaintiff’s Proposed Findings of Fact,” filed in Federal Court on August 22, is radically different. I strongly urge readers, particularly those with transaction experience, to read the document, attached at the end, in full. It makes a surprisingly credible and detailed case that AIG’s board was muscled into a rescue that was punitive, when that was neither necessary nor warranted. And the tactics used to corner the board were remarkably heavy-handed.
Yves here. Richard Vague has been kind enough to allow us to feature an extract from his recent book, The Next Economic Disaster: Why It’s Coming and How to Avoid It. I first met Richard several years ago at the Atlantic Economy Summit. If my memory serves me correctly, he was then taken with the conventional view that debt was a dampener to growth…meaning government debt. The issue of what caused our economic malaise and what to do about it troubled him enough to lead him to make his own study, and he has come to reject the neoliberal view that government debt is problem and must therefore be contained.
This view implies, as many readers have pointed out, that the great lost opportunity of the crisis was restructuring mortgage debt. That would also have allowed housing prices to reset to levels in line with consumer incomes. Vague also mentions a less-widely-commeneted on debt explosion prior to the crisis, that of business debt. One big contributor was an explosion in takeover debt for private equity transactions. Indeed, a lot of experts were concerned about a blowup due to the difficulty of refinancing these deals in the 2012-2014 time horizon. But ZIRP and QE produced enormous hunger among investors for any type of asset with non-trivial yield, so the Fed enabled the deal barons to refinance on the cheap.
With the recent Global Crisis, the interest in systemic risk and the interconnection between financial institutions has increased. This column investigates the case of European financial firms, where several factors can jeopardise a firm’s financial health. Using data since 2000 to evaluate the firms’ systemic risk, the authors find that for certain countries, the cost to rescue the riskiest domestic banks is too high. They might be considered too big to be saved.
I received a message last week from a savvy reader, a former McKinsey partner who has also done among other things significant pro-bono work with housing not-for-profits (as in he has more interest and experience in social justice issues than most people with his background). His query:
We both know that financialization has, among so many other things, turned large swaths of the capital markets into a casino
Here’s my thought/question: is there a house?
The common wisdom is that the ‘house wins’ in casinos.
Some older readers might recall that during 2010-2013 politicians and the media manifested great anxiety over the unmanageable level of the deficit and a disastrously high public debt. So how has that movie ended?