Is There An Overlooked Reason for Fed Secrecy on AIG?

Not that I have the time or patience to dig through 250,000 pages of documents, but I have a nagging suspicion that the people who are pouring through various AIG-related disclosures may be missing key points or snookered into interpretations that may be unduly flattering to various banksters.

The focus of the recent investigations into Fed secrecy relative to AIG takes up the theme that the Fed was anxious to hid the fact that it had paid out 100% of the value of toxic CDOs to various AIG counterparties. That is because that concern crops up repeatedly in internal communications. A second reason cited is that the Fed wanted to hide who benefitted most from the rescues (as in seeing the various transactions would allow one to see which CDOs had the deepest discounts).

I have trouble with theory 2. First, we now know who the biggest recipients of AIG-related subsidies were, even by exposure (ie, securities lending versus Maiden Lane III), yet the Fed even as of last week was writing LONG and clearly bogus defenses of why it needed to keep transaction level details a deep dark secret. Second, the differences in dreckiness among these CDOs is not all that large. Despite BlackRock valuing this paper at an average of less than 50 cents on the dollar (which they can do, this is all model based, they no doubt have estimated defaults and loss severities on these bonds that all tie out nicely), given how low the ratings are across the portfolio (most of the stuff is rated CCC or lower), market prices are more in the 20 cents and below range. In Japan, the expression for making fine distinctions among things that are probably not worth parsing that neatly translates roughly as “a height competition among peanuts.” This sounds like that sort of exercise. Hence, I suspect there may be some interesting, but not scandalous, information to be gleaned in divulging “who sold the worst turkeys to AIG.” This paper ALL performed horridly, that’s why it was stuffed into Maiden Lane III.

To switch to a particular example of how information is being read incorrectly, consider this example from Bloomberg this evening, in which I deem the reporter to have been spun successfully:

Goldman Sachs Group Inc. was the most aggressive bank counterparty to American International Group Inc. before its bailout, demanding more collateral while assigning lower values to real estate assets backed by the insurer, documents obtained by lawmakers show.

A month before the September 2008 rescue, Goldman Sachs approached AIG about tearing up contracts protecting the bank against losses on collateralized debt obligations, or holdings backed by mortgages, according to a BlackRock Inc. presentation dated Nov. 5, 2008. Goldman Sachs was the only counterparty willing to cancel the credit-default swaps and bear the risk of further CDO losses, provided that AIG make payments based on the bank’s larger-than-average estimate of market declines.

“Goldman Sachs is the least risk-averse counterparty,” according to the presentation, which was prepared by the asset manager for AIG and later given to the Federal Reserve Bank of New York. The firm is “the only counterparty willing to tear up CDS with AIG at agreed-upon prices and retain CDO exposure.”

Yves here. I wouldn’t call Goldman’s actions “least risk averse” as BlackRock did. I’d call it MOST risk averse. They were marking their deals more aggressively than anyone else, which had the effect of allowing them to suck more collateral out of AIG. What would you rather have? A. Cash. B. A contract for possible future payments with a counterparty whose credit quality is falling like a rock. C. Toxic CDOs that no one will buy at this moment, and current conditions may well prove permanent. Tell me, how a strategy to maximize your current cash is NOT risk averse? Marking down your CDOs aggressively and seeing if you can get AIG to cancel the contract at the value you’ve marked it at is a current cash maximizing approach. (And I’d like to know what sexual favors were exchanged to get BlackRock to issue such a Goldman-favoring report).

Goldman’s willingness to tear up the agreements could just as well reflect its willingness to reduce its exposure to AIG if it could settle on its current marks, ie, show no loss on contract cancelation. One of the anomalies we identified in our effort to drill into Maiden Lane III transaction-level detail was that AIG appeared to be somehow getting away with posting less collateral with counterparties than was contractually stipulated. That would make it even more rational for Goldman to be willing to accept a deal in which AIG settled up:

The collateral calls also appear to be a smaller amount than the marks (after taking into account the thresholds) would indicate. Put another way, based on the marks, the collateral calls should have been larger than they were, in aggregate and by counterparty, than they were described in the AIG memo [of 11/07].

Goldman was not only heavily exposed to AIG (unlike other firms, it got CDS guarantees on CDOs only from AIG, while other firms used monolines as well) but it also had a far better idea of total AIG exposures than any other bank. Our look into transaction-level detail suggests that of the AIG ABS CDO transactions on which we found counterparty detail (nearly 80% of the deals identified in an 11/07 AIG memo; all save the strongest appear to have gone into Maiden Lane III), Goldman was either the dealer manager (it originated a CDO guaranteed by AIG, although in many cases another bank had purchased it and was therefore the counterparty) or the counterparty (via having bought an AIG-guaranteed CDO from another dealer) on over 50% of the deals.

Now consider what that means. When it was the bank that had created the CDOs guaranteed by AIG, Goldman was able to generate marks (it knew what the CDO contained); indeed, many of the counterparties would come to Goldman to get marks (although that does not necessarily mean they used them; these trades could be and were marked to model, so a counterparty had latitude to tweak prices). And on deals in which Goldman was the counterparty on deals created by other bank, AIG would ask it what its marks were. Goldman, being Goldman (and per the Bloomberg story, being consistently aggressive) probably provided its own marks. But either way, Goldman had point of view of the value of over 50% of the multi-sector CDO portfolio. And Goldman may well have known that; AIG in some investor presentation discussed that portfolio separately (the total amount as well as an overview of its ratings profile and other portfolio-wide statistics). So Goldman also probably knew or could make an informed stab at how representative the half of the portfolio it saw compared, in crude terms to the other half.

To put it more crudely, Goldman probably at some point had a much better sense of how quickly AIG was decaying than the other counterparties. And then we get into interesting questions. Did Goldman have any conversations with the officialdom prior to AIG starting its terminal decay? How was Goldman positioning itself? Did Paulson and other ex-Goldman officials handle the conflicts appropriately?

There is an thought-provoking albeit somewhat flawed, related story up at Huffington Post by David Fiderer, which argues that Goldman set out to kill AIG and collect a bounty. The big problem I have with it is that he posits that Goldman orchestrated quite a few events in the AIG unraveling to its advantage. Up to a point, that’s plausible; if you have read Roger Lowenstein’s How Genius Failed, on the LTCM bailout. you get an amazing display of how Goldman got its attorney in a key position in the negotiations, then had him act 100% in the interest of Goldman, not the entire rescue group. They were unabashed pigs and did not care at all about playing fairly.

And I’ve seen this first hand. Goldman is adept at understanding a fluid situation and figuring out how to play it to maximum advantage.

But masterful orchestrated multi-step game plans are another matter. That’s not a GS specialty, for an obvious reason: it’s a bad bet. Anything with a lot of moving parts ultimately has high odds of not working out. If you need 7 things to happen for you to get a payoff, and each of them has 90% odds, your odds of winning are less than 50%.

Thus his argument amounts to assuming unmitigated Goldman genius, when buddies of mine have seek big Goldman cock-ups first hand.

So this HuffPo piece, which I recommend, does a very useful job of digging and exposing some interesting (as in suspicious) connections, but pushes them further than I consider plausible.

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  1. Cullpepper

    Great piece.

    I know you have a devotion to fact-based reporting, but I wonder if you’d hazard a guess as to the eventual end-game here?

    I remember I started reading your blog because you possess an uncanny ability to cut through the words and highlight the deeds. As a citizen, I’m with you that justice has failed, gov’t is corrupt and the Fed is wading in murky legal water. However, markets arn’t about fairness, it’s about *who wins*.

    So, watcha think Yves? In the final report will this all get massaged away? Will it tank the system? Will democracy buck up and force reform? Will the banks & financiers succeed and bring a thousand years of oligarchical rule?

    1. DownSouth


      You ask:

      However, markets arn’t about fairness, it’s about *who wins*.

      So, watcha think Yves? In the final report will this all get massaged away? Will it tank the system? Will democracy buck up and force reform? Will the banks & financiers succeed and bring a thousand years of oligarchical rule?

      What a great comment on the nature of markets, and what great framing of current events as we watch our country struggle to see whether it will descend into chaos like Mexico, or resurrect itself like it did in the 1930s.

      And with that, let me throw out another theory that I believe ranks right up there alongside Steve Keen’s insightful analysis that Yves posted yesterday:

      The conventional theory imagines that the disposition to free-ride in collective action settings is relatively uniform. In contrast, the evidence on which the strong reciprocity theory rests suggests that the disposition to cooperate varies…

      A relatively small fraction of the population (consisting, perhaps, of those who’ve been trained in neoclassical economics) consists of committed free-riders, who shirk no matter what anyone else does, and another small fraction (consisting maybe those who’ve read too much Kantian moral philosophy) of dedicated cooperators, who contribute no matter what. But most individuals are reciprocators who cooperate conditionally on the willingness of others to contribute. Moreover, some reciprocators are relatively intolerant: they bolt as soon as they observe anyone free-riding. Others are relatively tolerant, continuing to contribute even in the face of what they see as a relatively modest degree of defection. And a great many more—call them neutral reciprocators—fall somewhere in between.

      Under these circumstances, individuals are unlikely fully to overcome collective action problems through reciprocity dynamics alone. No matter how cooperative the behavior of others, the committed free-riders will always free-ride if they can get away with it. Indeed, their shirking could easily provoke noncooperative behavior by the less tolerant reciprocators, whose defections in turn risks inducing the neutral reciprocators to abandon ship, thereby prompting even the tolerant reciprocators to throw in the towel, and so forth and so on. If the unfortunate chain reaction takes place, a state of affairs once characterized by a reasonably high degree of cooperation could up decisively toward a noncooperative equilibrium in which only the angelic unconditional cooperators are left contributing (probably futilely) to the relevant public good.

      Maximum cooperation, then, probably requires that reciprocity dynamics be supplemented with appropriately tailored incentives—most likely in the form of penalties aimed specifically at persistent free-riders. Although trust and reciprocity elicit cooperation from most players, some coercive mechanism remains necessary for the small population of dedicated free-riders, who continue to hold out in the face of widespread spontaneous cooperation, thereby depressing the contributions made by relatively intolerant reciprocators. In the face of a credible penalty, however, the committed free-riders fall into line. The existence of such penalties in turn assures the less tolerant reciprocators that their cooperation won’t make them chumps; they thus continue to cooperate, less out of material interest than out of positive reciprocal motivations. And because the less tolerant reciprocators contribute, so do the neutral and tolerance reciprocators, generating an equilibrium of near-universal cooperation.
      –Herbert Gintis et al, Moral Sentiments and Material Interests

      That there should be penalties or regulation, however, flies in the face of the religion of selfishness and greed promoted by the Libertarian-Austrian-Neoliberal constellation, along with their New Atheist allies in the fields of psychology and biology. Unfortunately the paladins of selfishness and greed have run roughshod over US policymaking for the past three or four decades.

      1. DownSouth

        I’d add that TPTB are masters at constructing discrete categories like homo economicus–the selfish P1 maximizer who stands at the core of classical economics–and then using these false constructs as an instrument of social domination and control.

        Here’s another instance of the same phenomenon:

        Males do not represent two populations, heterosexual and homosexual. The world is not to be divided up into sheep and goats. Not all things are black nor all things white. It is a fundamental of taxonomy that nature rarely deals with discrete categories. Only the human mind invents categories and tries to force facts into separated pigeon-holes. The living world is a continuum in each and every one of its aspects. The sooner we learn this concerning human sexual behavior, the sooner we shall reach a sound understanding of the realities of sex.
        –Kinsey, A.C., Pomeroy, W.B. & Martin, C.E., Sexual Behavior in the Human Male

        As Richard Friedman explains:

        On the one hand the continuum model for sexual experience and activity must be regarded as a conceptual advance. Not only did it provide a clear convention for describing sexual history but also it may have served to counter social prejudice against homosexuals. Irrational prejudice, the norm in Kinsey’s time and unfortunately common enough in our own, is characterized by stigmatization and scapegoating. Stigmatization and scapegoating involve labeling some individuals as members of an outcast group; they therefore thrive on discrete categories, not continua.
        –Richard C. Friedman, Male Homosexuality: A Contemporary Psychoanalytic Perspective

      2. Anonymous Jones

        That’s an awesome explication by Gintis (I’m assuming it’s his quote). I don’t know if we can prove what he’s saying, but he has the same instincts about humans that I do (and expresses those thoughts very well). If there is anything I believe about what to do with our communities (large and small), it is trying to develop incentives for cooperation and mutual gain.

        As usual, thanks for the quote!

        1. Dan Duncan

          DownSouth’s quote: “Maximum cooperation, then, probably requires that reciprocity dynamics be supplemented with appropriately tailored incentives….”

          Coupled with Anon Jones’ statement:

          “If there is anything I believe about what to do with our communities (large and small), it is trying to develop incentives for cooperation and mutual gain.”

          All this sounds great. It really does….

          Until one begins to ponder just what the hell it all means.

          Think about how empty it all is: “Maximum cooperation is best achieved by incentives and win/win scenarios”???

          Maximum cooperation about what? Between whom? There’s no contrast in your statements; no moorings. It’s like you’re describing the word “hot” to someone who’s never experienced a temperature change.

          Getting past that…

          It’s as if you’re turning Utilitarianism inside out. In this world: “The greatest good comes from the greatest amount of cooperation.”

          How do we even know “Maximum Cooperation” is a good thing? [Damn, I don’t even know what we’re agreeing about.]

          Also, when you look back on the excesses of this latest credit bubble…wasn’t it all just one MASSIVE Cooperation? Lenders “underwriting” Liar Loans and NINJA
          Loans. The public blindly going along with the charade. Complicit “regulators”. Wall Street, the Fed , Cheap Money and the One-Way Trade, coupled with Greenspan’s Put (“just in case”).

          This is all Empty-Talk. Feel good phrases like Maximum Cooperation, coupled with “reciprocity” and “providing incentives”, etc., etc. Typically, this kind of talk is used to make the speaker feel good. Because, it does sound good. [And smart too!]

          When I read this stuff, I feel like I’m in the presence of one of these nauseating corporate types who are going to regale me with how their company offers “integrated solutions”.

          [WTF is an “integrated solution” anyways? What–a simple “solution” isn’t good enough? It has to be “integrated”?! Good Grief.]

          And now we have “Maximum Cooperation…that’s Enhanced and Integrated!

          1. Dan Duncan


            I’m sorry for writing…”Typically, this kind of talk is used to make the speaker feel good. Because, it does sound good. [And smart too!]”

            It comes across as if I’m criticizing you, and I’m not. I’ve little doubt your thoughts in this are sincere.

          2. LeeAnne

            First, they cooperated in stealth to tear down a legal system based on principles that majorities respected for decades.

          3. LeeAnne



            “Also, when you look back on the excesses of this latest credit bubble…wasn’t it all just one MASSIVE Cooperation? Lenders “underwriting” Liar Loans and NINJA
            Loans. The public blindly going along with the charade. Complicit “regulators”. Wall Street, the Fed , Cheap Money and the One-Way Trade, coupled with Greenspan’s Put (”just in case”).”

            First, they cooperated in stealth to tear down a legal system based on principles that majorities respected for decades.

          4. DownSouth

            Dan Duncan,

            What the authors conclude is that a well-functioning society cannot and will not work without “appropriately tailored incentives–most likely in the form of penalties aimed specifically at persistent free-riders.”

            Notwithstanding your rhetorical wizardry to the contrary, that is not what we have had during the past 30 years in the United States. In fact, what we have had is just the opposite–free-riders have gone completely unpunished and unchecked.

            And according to the authors, that can lead nowhere except to a descent into social chaos.

            From this comment and others you have made, it’s become rather obvious that you don’t believe anyone should be punished for anything, nor do you believe anyone should be coerced to contribute to any public good. I just wish that you would articulate those positions and make arguments for them instead of trying to confuse people with these rhetorical ploys.

          5. Anonymous Jones

            Dan —

            I do appreciate the PS! I’m not sure if the PS was sarcastic or not (and I understand it was probably directed more at DS than me), but when I read your first comment, my initial reaction was, “Wait, I really believe this!”

            Of course, I can’t be a very impartial psychoanalyst of myself, but I don’t think I believe these things because *thinking them* makes me feel good (or smart, for that matter). I think I believe these things because I’ve developed a taste for being parts of cooperative efforts, in much the same way one might develop a taste for duck confit. This may all be delusional, I cede that.

            I totally get your point that the object of the cooperative effort may change others’ view on the desirability of the effort. I’m not sure that it really turns utilitarian thought inside out, but it certainly presents a brain twister. I would have to think on it more.

            I do sense that DS’s point has an underlying empirical validity in that I know people who prefer being part of a successful collective effort and I also know people who enjoy being singled out as special and extraordinary. I have a running debate with friends about whether you want to be Dan Marino v. Doug Williams, or Steve Nash v. Steve Kerr, or Charles Barkley v. Robert Horry. Do you want to win a championship or be a Hall of Famer? While I will not bore with how incredibly complex our analysis is on this issue, there is a small part of some people that just enjoys being part of a winning team and does not care whether a Hall of Fame legacy is in the cards. They want the experience, not the legacy. I may be delusional, but I do count myself among those who would gladly cede the personal honors to experience the joy of winning as a collective unit. This may be brainwashing, this may be poor judgment on my part, I don’t know. But I certainly *feel* like it is my preference.

            To be clear, I am not judging one or the other in the universal sense, that everyone *should* be one or *should* be the other or else they are going to Hell. I am just expressing a preference, or a taste, for being amongst people who enjoy being part of a collective, being part of a community that strives to do something, hopefully “better,” whatever that means. Under no circumstances do I believe that my preference has moral superiority. It is simply my preference.

            And I do not mean to be nauseating. I have the utmost empathy if you are in fact feeling like you are “in the presence of one of these nauseating corporate types who are going to regale me with how their company offers ‘integrated solutions'” because I have been nauseated too many times by the same sorts of people. At the same time, I wonder if your nausea in those situations comes from sensing the false patina of these blowhards rather than the actual meaning of the ideas that they happen to have glommed onto. My comments, and the comments of DS, are probably much more genuine. At the very least, we are not being compensated for them!

            Nevertheless, you made a very good point in your comment, and I wanted to add to it.

  2. joebek

    There is another possibility. What would have happened to NATO if Deutsche Bank and Societe Generale had be forced to accept pennies on the deals with AIG?

    1. Keenan


      NATO was chartered back in the ’40s to check expansion of the Soviet sphere into western Europe. Since the both the USSR and the Warsaw Pact are gone, NATO’s mission has evaporated. Time to declare victory & close up the shop.

      1. John

        What happens when Russia holds up the natural gas flowing to Europe?

        Wouldn’t a NATO threat come in handy?

  3. stevenst

    A contract is a contract. The federal government does not have the power to void private contracts. The point is, it doesn’t matter what value you attribute to the CDS contracts (or to underlying CDO portfolios of the CDS contracts) held between AIG and its counterparties. The Fed and Treasury made the decision to prevent AIG from going bankrupt. At the time, AIG was unable to meet collateral calls for its CDS contracts, so something had to be done.

    One could make a legitimate argument of course for the mistake it was to bail out AIG. However, unless such is your position, criticizing the above is misleading: the only way to keep AIG alive was to cure its liquidity problems, and the only way to do that was to get the CDS contracts off the books. AIG’s CDS counterparties, collateral in hand, were under no obligation to settle for less (hence the collateral).

    Further, consider the case of Goldman Sachs. Their CDS contracts with AIG were pure hedges, not speculative investments. They had CDS contracts sold to their clients that completely offset those they had with AIG. Goldman could not force its clients to settle for less on those CDS contracts, so it would have been unreasonable to force them to do so on the exact same contracts.

    1. DownSouth

      Gosh, stevenst, no more self-serving arguments have been made since Nero insisted that the Christians enjoyed being thrown to the lions because it permitted them to become martyrs.

      All the arguments you put forth have been discussed on this blog–at great lenght I might add–in the past, and thoroughly debunked.

    2. Doug Terpstra

      “A contract is a contract. The federal government does not have the power to void private contracts.”

      Utterly ridiculous, Lord Blankfein! Your contracts and all bonus provisions were dead, null and void—kaput with AIG’s bankruptcy. The gummint has has no business whatsoever fulfilling private contracts with the public purse on your behalf. You now owe your life and your fortune to the people, and we wants it.

      1. Anonymous Jones

        Doug — You are completely correct about the BK issue, but that doesn’t even begin to tell the whole story. Contracts get settled for cents on the dollar every day, with or without a BK threat.

        In practice, everything is a negotiation, whether there’s a contract in place or not…the only people who don’t know this don’t deal with a lot of contracts or a lot of negotiations! Or deal with the government a lot! You know how prosecutors get plea bargains, right? With threats of the unknown.

        (not that I’m “condoning” this…or whatever…it’s just reality)

        As DownSouth said, this and the rest has been thoroughly debunked ad nauseum.

  4. Max

    There is another possibility. What would have happened to NATO if Deutsche Bank and Societe Generale had be forced to accept pennies on the deals with AIG?

    Bingo. Deutsche and SG were (and are) on the brink of collapse since EMU banking rules allowed them to use AIG hedges to exceed leverage ratio requirements. If there was any fraud in the AIG contracts, then the potential failure of several major European banks could have been construed as a criminal act by a US company. Also, AIG (apart from maybe Citi) was uniquely positioned as a vehicle for global contagion. Remember those long lines at AIA branches in Asia, and the moves by sovereigns there to seize AIG assets? (The looting of the UK branch of Lehman just before its collapse the week before was also a factor in Asian reasoning.)

  5. stevenst

    As far as disclosure, I just don’t see what the hullabaloo is all about.

    That being said, I do understand if the hullabaloo is all about. AIG was not legally required to disclose any of these transactions. One could of course make the argument that there should be a law requiring corporations receiving federal support to disclose all transactions it has entered into.

    That being said, I can definitely understand the outrage over how much Goldman Sachs et al benefited from the AIG bailout. When this website first reported on this (six months ahead of the Wall Street Journal, Bloomberg, etc.) I was definitely stunned. However, at the time, I was a bit naive, probably due to the countless journalists who presume they have a legitimate understanding of derivatives, economics and the financial crisis, reducing everything to the simplest of terms. Eventually I snapped out of it, realizing the complexity of the entire mess, including what it would entail to bail out a company in the position AIG was in. I now understand it had to be done to keep AIG alive.

    As for whether the Fed should have let AIG go bankrupt, I am still not certain where I stand on that. No one, including Bernanke and Paulson, ever said it was fair for the recipients of federal aid to receive such benefits, when clearly everyone realized they were to blame for failing in the first place. What was said was that it was necessary to prevent our economy as a whole from tanking even further.

  6. Ina Pickle

    There’s no altruism, so certainly anything that GS did was going to involve a benefit to them and improve their position in the event of a collapse. I agree with you that it was unlikely that they were “doubling down,” in effect.

    There is a real skill to pouring over documents until you find the truth. Unfortunately, it always helps to really understand the business of the people who made the documents. I hope that they have the A-team on reviewing the disclosures, or there will be a whole lot of misinformation circulating. Well, a whole lot more.

  7. fresno dan

    I still do not have a basic understanding of the Fed’s and Treasuries rationale. I assume that they thought if all these CDO’s and what not started collapsing, it would be analogous to a bank run, and the whole system would collapse. So I can understand that some institutions would have to be backstopped. Now bank depositis are 100% backstopped to a certain LIMIT. What in the world was the Fed’s belief that it had to be 100% for everybody??? Lehmann???

    1. Siggy

      In medicine there is this phenomenon of catastrophic events being induced by a cascade of innocuous events. Putting AIG FP into the bankruptcy court while the rational choice would have had the consequence of triggering counterparty defaults and concurrent bankruptcies. In the resulting turmoil it would have been the ‘primary dealer’ banks that would have failed first in the chain of falling dominoes.

      Additionally, it was the Fed that made the bailout loan/equity purchase not the Treasury. There are those who believe that the Fed does not have standing to enter into such a circumstance. If the bailout was to be funded, it should have been by the Treasury.

      Notice that the Treasury is less prominent in the call for secrecy as compared to the Fed. Ask BB about AIG and he stonewalls the inquiry. In one of his pleas for Congressional funding, Paulson sought immunity from prosecution for any and all acts he might perform in the course of the bailouts. Curious request that and the implication seems clear to me.

      My conclusion is that there was this enormous fear of cascading failures that would trigger bank runs and the demise of a large number of dealer banks. The Fed would lose its core clearing banks and the Treasury would be brought to a stand still. Foreign exchange would have cut the dollar by as much as 50% and we would most probably have had the Greatest Depression Ever.

      What is far more troubling is that all of this investigating kabuki is ignoring the apparent fraud that was perpetrated by AIG FP. The questions of who knew what when need to be addressed to the Officers and Board of AIG and all of its subsidiaries.

      It is my understanding that if you wittingly enter into a contract that you cannot honor you are commiting a fraud. When the hell are we going learn that there is a Justice Department inquiry in place.

      1. Doug Terpstra

        To my knowledge, Joe Cassano of AIG FP, perp zero in this, has not even been publicly questioned yet. Why hasn’t this wise guy been subpoenaed by the FCIC? The whitewash coverup grows more incredible every day.

        1. s.tristero

          “Why hasn’t this wise guy been subpoenaed by the FCIC? ”

          maybe because he’s ready to spill the beans as soon he’s given a public forum?

  8. bob

    I don’t even think its that difficult.

    Helicopter Ben- His whole thesis on the GD was that more money out of helicopters would have saved the world from the brink.

    “populist anger” over the bank bailouts and the beginning of the teabaggers ruled out any above board giveaways of money.

    He gave money to the only people who wanted it.

    He found a willing recipient of money that he was trying to give away, and they took it.

    There was also the ability to give dollars to the Euro banks and stem the euro dollar squeeze.

    The simplest answer, they had to give away the money to stem deflation, in BB’s opinion anyway.

  9. i on the ball patriot

    “Is There An Overlooked Reason for Fed Secrecy on AIG?

    Does a cat have an ass?
    Is a pig’s pussy pork?
    Does Obama sling more shit than a cow with diarrhea?

    YES! – There are many unknown reasons for fed secrecy on AIG and its whole inner workings … don’t sell those conspiracy theories so short without first considering a conspiracy of class and the context of class …

    Deception is the strongest political force on the planet.

  10. MichaelC

    I do think something is overlooked.

    I’m troubled by the 100c meme. It’s too convenient as a populist weapon and masks a larger issue, the proliferation of numerous mini-AIGFPs and their role.

    First the 100c thing:

    Since AIG paid cash collateral to its counterparties on the CDS to cover the MTM, then the counterparties had been made whole on the CDS by the time the ratings downgrade hit. For any party holding offsetting CDO/CDS their net exposure to AIG pre MLIII was flat, at least for the ones that participated in MLIII

    Post downgrade, AIG was required to provide additional collateral as counterparty credit enhancement, not to satisfy MTM collateral calls. These were the calls that would guarantee bankruptcy, and I don’t think GS had an incentive to see this happen. They may have been short the mortgage market but an AIG bankruptcy wasn’t necessary for them to win on that trade.

    In the MLIII transactions the counterparties transferred the combined CDO/CDS to MLIII and AIG. They were left flat. MLIII got the CDOs at market and AIGFP forfeited the collateral it had posted to date when the associated CDS was torn up. Technically AIG satisfied its obligation under the CDS.

    So, even though the sum of the MLIII purchases and the AIGFP collateral forfeitures total 100c I have trouble with the ‘ counterparties got paid at par ‘ line, since the counterparties weren’t actually paid 100c, instead AIG was helped to live up to its CDS obligations and the counterparties were able to dispose of their CDO/CDS positions at the zero value they were carried at.

    This may seem like a distinction without a difference, but I don’t think so.

    Taking Goldman at its word (I know, I know..) since they had minimal exposure to AIG on the CDS, we can draw the conclusion that GS was acting as a conduit between AIG and the banks holding the CDOS.

    An AIG bankruptcy would leave GS exposed to further deterioration in their resulting uncovered CDS book.

    But, if GS was ready to tear up the contracts with AIG at market price, as indicated in the Bloomberg article, I conclude they were comfortable with assuming that risk, since they’d already collected and would retain the collateral on the AIG positions in the event of an AIG bankruptcy. If they were willing to keep those positions naked, then they viewed them as underpriced. Further, when the Dec 18 transactions by MLIII were concluded, 2.5B of previously posted collateral was returned to AIGFP, due to the increase in MTM value of the CDOs between Oct and Dec.

    I think GSs role was to remind Treas and the Feds that they had no choice but to honor the CDS or the financial system really would crash immediately. If they had pursued haircuts on the CDS that would have invalidated every outstanding CDS contract immediately.

    The argument that since monolines had taken haircuts, CDS counterparties should too is too simplistic. GS had pioneered the business of insuring credit instruments through its synthetic CDS notes programs. The program was designed to get around the limitations imposed by exposure to the monolines (i.e collateral posting limitations). By the time AIG was at the abyss, the outstanding insurance provided through the synthetics was at least as large as AIGs exposure and completely uncontainable by the Feds. Significant chunks of it had already imploded suddenly and messily ( Canadian CP markets, Asian MiniBonds, etc)

    I think that was the reality that Geithner were facing with when they decided to honor the CDS and relieve the banks of their net exposures.

    If this reasoning is right, then the obsession with “GS got a sweetheart deal” is a distraction from the more important story, that GS and the other IBs created and sold the instruments that resulted in the creation of an untold number of mini-AIGFPs that would implode immediately and messily if AIG messed with their CDS obligations.

    That also leads to the conclusion that the Feds were completely captive once these synthetic CDS notes programs took off. By the time AIG was they knew they were screwed.

    It also leads to the conclusion that any finacial ‘reform’ that doesn’t agressively focus on CDS risks is of very little value.

    1. Yves Smith Post author


      I do think there is a difference here. We are plodding along on the transactions we have identified (nearly all), and the marks on ML III look unrealistic, particularly in light of the cash distributions (which can only be the result of principal paydowns) in 2Q and 3Q 2009 (latest ML III filings). We need to gather more data to firm this up (Intex runs on some transactions) but the overall pattern looks sus.

      Of course, since this crap is all marked to model, and as we both know, there is tremendous latitude in how you mark this stuff, I am sure there is a way someone at BlackRock could defend the marks. But I’d bet some of the assumptions are more than a tad charitable. For CDOs, market prices have turned out to be better predictors of value than model pricing, even with supposedly conservative assumptions. Everyone forgets, for instance, that a worse case on loss severities is over 100% (not sayin’ this will happen, just pointing to cognitive biases). And market prices are 20 cents on the dollar, at best, for severely distressed CDOs (over 3/4 of the portfolio).

      Moreover, Goldman having more “realistic” marks as late as Aug 08 says nothing re how realistic the marks were in December 08, when ML III bought the CDOs. In fact, Goldman had only insured 50% of its AIG exposure, implying it regarded a fall in value of the CDOs to below 50% of par as impossible. Goldman has vociferously defended its “we were covered” position (even though SIGTARP has dismissed it, based on view that counterparties would be unable to pay in event of CDS havoc unleashed by AIG BK). So Goldman had reason not to mark its CDOs below 50 cents on the dollar, it would start reporting losses.

      And as noted here and elsewhere, both expected defaults on subprime and loss severities have increased since then. So no reason to expect value of CDOs to increase, as reported, if you were using model based pricing.

      1. MichaelC

        I’m not commenting on the marks. You’re doing fantastic work and I’m fully on board with you on that front.

        I was responding to your second point :

        “A second reason cited is that the Fed wanted to hide who benefitted most from the rescues (as in seeing the various transactions would allow one to see which CDOs had the deepest discounts).”

        In addition to ‘seeing which CDOs had the deepest discounts’ I think the Fed also didn’t want anyone to realize they had no choice but to fund AIGs CDS payments or face a catastrophe in the CDS market.

        If AIGFP had failed to make its CDS collateral payments, every holder of a synthetic CDS note could demand a comparable haircut. That would be unmanageable.

        1. MichaelC

          Further comment on Why I hate the 100c meme.

          It’s not just about MLIII.

          Pre AIG bailout GS had about 22b in CDS w/AIG

          In MLIII GS settled 13.9 into MLIII

          As of 3/09

          The remaining $6 billion are financial bets Goldman made with AIG. Mr. Viniar said Goldman has received $4.4 billion in collateral from AIG on those trades to reflect the market decline, indicating the underlying assets are valued at roughly 27 cents on the dollar.

          For these trades, “we have derivatives with [AIG] and derivatives on the other side,” Mr. Viniar said. He said many of the trades stemmed from Goldman clients that wanted to make market bets.


          (At least 2.5b of this was paid between 9/08 and 12/08).

          The 100c debate has focused attention only on that portion that ended up in MLIII.

          It’s a distraction from the lesser noticed fact that the bailout guaranteed AIGs continued performance of the remainder of its CDS portfolio.

          Tavakoli has been covering this angle (see (Sorry I don’t know if this violates blogger etiqite) but its probably interesting to your readers.

          GS is just one example, ML and others had positions that didn’t get folded into MLIII.

          Why would the Feds put themselves in this position just to protect GS’s “client bets”?

          At the time they may have feared that non performance by AIG would unleash a contagion that would topple Goldman, ML, MS CITI and every client of those institutions, and every product that had CDS embedded in it?

          But 18 months later there’s not a peep about these trades.

          It’s time to move on from asking why GS etc got paid at 100c. on MLIII, that’s a done deal, and start asking

          “Why the hell does the govt continue to fund payments on these other CDS?”
          They’ve had 18 months to renegotiate. Are they waiting till they go to zero? Where’s the disclosure about this portfolio?

          They’re sticking with the con that MLIII is going to make money, (if Yves would only shut up with her irritating valuation questions)

          And ignoring these other positions which look like they really will end up paying 100c, at the rate the GS swaps are deteriorating.

          I could accept the idea of removing toxic assets from banks at market as was done in MLIII.

          I can’t find any reason to sanction the payments on the remaining portfolio. Since these seem to represent a greater danger than the MLIII CDOs why the deafening silence from Tim,Ben or Paulsen?

          Maybe because no one asked them that question.

  11. Siggy

    Thank you Michael. Nicely done, full marks.

    What if your mini AIGFPs are really a number of dealer banks? What if the GS position was pure agency?

    That is still something that the Fed would like to hide because it says quite clearly that no one supervised the primary dealer banks. This is a mess that needs to be aired and resolved.

    The Fed didn’t do its primary job of bank supervision and then comopounded the malfeasance by arrogating the bailout to itself quite simply because it was covering its own failure to perform.

    Leads me to believe that Mr. Geithner is very vulnerable in this affair and will probably be removed in the not too distant future.

  12. John

    From Huffington piece

    Once the public learned that the CDOs no longer posed a risk to AIG, Paulson announced his his big bait-and-switch: his refusal to use TARP funds to stabilize the mortgage markets. This about face causes the value of all mortgage securities to plummet, imposing an additional loss on Maiden Lane III (and triggering the insolvency of Merrill Lynch).

    Do you think this part is accurate?

    1. Jeremy Johnson

      I recall markets hoping for Government to directly support the value of mortgage securities so the theory could be in the right direction.

      The reason Treasury didn’t ultimately do so was 1) TARP probably wasn’t big enough; 2) it would have been damn hard to make it work without being completely arbitrary in what was bought which would have made some firm’s huge beneficiaries of tax dollars with no accountability after the fact.

      By injecting capital into the banks at least they knew who the beneficiaries were and could go back later and collect what was necessary to make TARP revenue neutral if it was successful.

      1. John

        Thanks. I think the point being that Paulson was telling congress the TARP money would go to buy the bad mortgages which held up the price but really was saying that in order to keep the price from collapsing before the AIG counter parties were paid 100 cents on the dollar.

        Which means that Paulson lied about the TARP money. Not changed his mind about what it was to be used for as he stated many times under oath.

    2. Yves Smith Post author


      That is not correct. TARP had switched gears away from being a toxic asset buy-up program well before ML III was closed (two closings in December 2008). ML III did not exist PRIOR to fall in mortgage paper due to change in TARP focus.

      And the big reason for not using TARP for toxic assets was the one we discussed at length here relative to all the toxic asset programs, back to the famed MLEC: the banks will not sell the toxic paper for less than their current marks, or maybe a teeny haircut. That is well above market prices (if they were marking it at market prices, no need for a toxic asset program, they could just sell the dreck). But Paulson et all promised no losses on these programs. There was no way to solve the “at what price do we buy the dreck from banks” that would fall within the boundary conditions of both parties.

      1. John

        OK. I’m trying to follow.

        Does that mean then that is bit from a Huffington Post article (the one linked to above) is inaccurate?

        Once the public learned that the CDOs no longer posed a risk to AIG, Paulson announced his his big bait-and-switch: his refusal to use TARP funds to stabilize the mortgage markets. This about face causes the value of all mortgage securities to plummet, imposing an additional loss on Maiden Lane III (and triggering the insolvency of Merrill Lynch).

        1. Yves Smith Post author

          The plan to use the TARP to buy equity stakes was in place as of October 8, 2008:

          It was put into effect on October 13:

          Fed did not take over negotiations for AIG and start (not) negotiating CDS until October 31.

          This is the reverse of the sequence you suggest.

          I also (basically) said you needed to take that HuffPo piece with a fistful of salt. Some good stuff in there, but mixed with argument that are at best a BIG stretch.

  13. John

    From curiouscapitalist
    Goldman was the only counterparty not in possession of the bonds it was insuring against. All the other banks that bought protection from AIG seem to have done so to hedge against the risk of bonds they held, or controled, going bad. Not the case for Goldman. They didn’t own the bonds they were insuring against. That means one of two things: A) Goldman had sold bond protection to someone else, and was buying protection from AIG against the risk that the protection it sold would go bad. or B) (and this is the much simpler explanation) Goldman was speculating the US housing bubble was going bust.

    Which of these do you think is true?

    1. Jeremy Johnson

      At the end of the day, they did in fact end up delivering the underlying securities. While it’s possible they could have bought them after the fact, it’s usually not that easy to track down the owner’s of specific deals (I’ve tried!) let alone find a willing seller due to capital rules. I’m not going to argue one way or another, but the fact they delivered the underlying securities to ML III implies the simplest explanation is that they sold protection to someone else.

      1. John


        Would that mean they are off the hook for what the house committee is investigating them for?

        Pushing MBS while betting against them?

        Blankfien keep making the point before the Financial Crisis Inquiry Committee that is what they do.

        1. Jeremy Johnson

          They may have been betting against MBS in some part of the firm. I can’t answer your question specifically. I don’t they had “naked” insurance on the CDOs that ended up in ML III though.

      2. John

        My ignorance will be showing with this question but do we know that they actually delivered them to MLIII or are we going on being told they were delivered?

        1. Jeremy Johnson

          There are checks and balances (ML III is audited) but ultimately I don’t know how you know for sure.

      3. Yves Smith Post author

        They most assuredly did not deliver “underlying securities” to ML III. They delivered the CDO tranches.

    2. Yves Smith Post author

      With all due respect, Jeremy is just wrong here.

      Goldman had CDOs that were synthetics or hybrids. The point is they were not just offsetting their existing long exposure, but establishing a short position. One presumes they used mortgage exposures WORSE than their long position.

      And he is also wrong re the CDOs. You deliver the CDO tranche, which is a bond (except for pure synthetics, but let’s put that aside for now). You most assuredly DO NOT deliver the itty bitty slices of mortgages your bond tranche is exposed to.

      1. Jeremy Johnson

        The CDO is an underlying security of the CDS contract. Goldman delivered the CDO to ML III.

  14. Jeremy Johnson

    My belief is that AIGFP acted effectively as a reinsurer of these contracts for the benefit of SocGen et al. SocGen would have in essense been a distributor. What is unclear is if SocGen could have defaulted on its contracts with its counter parties without impacting itself. Was SocGen backstopping these agreements? Probably, but I’m not sure.

    Or am I wrong and was SocGen in fact the owner of the CDOs? In the case of GS, I would be shocked if they held senior positions in CDOs issued in 2004-05, that doesn’t fit their business model or their ROE target at all, and in fact they have commented on conference calls that the impact of the bailout was of a pass-through nature.

    From my experience a lot of the most senior tranches of CDOs were owned by first-tier Japanese banks or large but not necessarily first-tier Continental European banks and almost always as part of a negative basis trade with a monoline or AIG.

    1. Yves Smith Post author


      With all due respect, are you going to continue to put your foot in your mouth and chew in public? You have made a number of authoritative comments in this thread, nearly all of them 100% wrong or misleading.

      I don’t mind readers speculating or asking questions or arguing with what I wrote. I DO object to readers acting as if they know a subject area and misleading and confusing other readers.

      1. Jeremy Johnson

        If you have something specific for me to respond to, I will as I did above but I don’t know how to respond to this.

  15. yoganmahew

    It makes you wonder. Who would have benefitted from the action (keeping stuff secret)?

    Not the Fed – it makes it look like the bogeyman.
    Not AIG – ditto.
    Not Goldman Sachs – the enhancement to their reputation as savvy operators would be more importantant than the damage of pork allegations.

    Which leaves a couple of possibilities, I suppose.
    1. A player that was bailed out had no other chips. SocGen and Deutsche were mentioned above, but I don’t think they are credible. I don’t think Rabo are either. Are any of the bit players credible suspects?
    2. We are looking at the wrong hand (a favourite theme of mine it seems these days). AIG is more than just AIGFP. Other bits of it are insolvent (ILFC for example) in a big way, or at least not credible without extra capital. It has huge tentacled insurance operations in many countries, both direct and reinsurance. Much of what is written by AIGFP is as insurance for internal AIG companies, i.e. AIG is insuring itself. The collapse of AIGFP would collapse AIG insurance. This would set off a dislocation in the insurance market that would make the investment banking failures look like a high-school bake sale loss.

    Is the second of these credible, though?

    1. i on the ball patriot


      “The party line, expressed in Too Big To Fail and elsewhere, is that an AIG bankruptcy posed a greater systemic risk than a Lehman bankruptcy, because AIG was so much bigger. But that analysis is highly superficial and very misleading. AIG itself was a holding company, which guaranteed the debt of its unregulated financial subsidiary, AIGFP. The lion’s share of AIG’s revenues and profits, and about 80% of its consolidated assets, were concentrated among its different insurance company subsidiaries. Those insurance companies were solvent. They did not pose any systemic risk. In fact, it’s quite likely that they would have continued to operate outside of bankruptcy.”

      More here …

      Deception is the strongest political force on the planet.

  16. Jim in MN

    OK, let’s try to put this into perspective. Before I gave up on Krugman’s blog, there were some good discussions about the big picture there, and here, and elsewhere in the Infernal Aethernet. The gist of it is that the bond market writ large was becoming unstable post Bear and definitely post Lehman–mainly shown by the LIBOR and spread blowouts, the complete freeze on commercial paper, and the whole letters of credit thing (remember that–maybe international trade just stops etc?). So what…well, there are several gargantuan shoes that have and still need to drop no matter what anyone does in macro policy. You have the housing market, consumer retrenchment, state and local insolvancy, commercial real estate, sovereign defaults, and political/security Black Swans a-plenty to sail into the mix. That whole set of Bad Things is why the banks won’t lend to small business or to each other much even now. That’s another story, a sad story about not knowing jack about the 1930s and what we could do about the whole Main Street thing (yes, Virginia, there were policies other than amped up Federal stimulus and sexy men carved into sandstone and marble edifices).

    There are, however, a couple of big shoes that don’t need to drop according to my current version of The Policy. Those are in the bond markets and their good friends the insurance and pension sectors. Imagine if you will the damage to Mom and Pop 6-pack’s only remaining ‘safe’ nest eggs if the pensions and health and life insurance companies got 60-80% whacks on their predominant investment vehicles. Imagine, further, if the health insurance industry said “uh, excuse me a second, I think I have to–urk” and died. As in, could not perform because ALL THE INVESTED PREMIUM MONEY WENT AWAY.

    Starting to follow? OK. Keep up>>>>>

    So, the big policy call was ‘no haircuts on bonds’. This has many implications and the so-called leadership of our nation has completely failed to explain any of it. But that’s the main thing. No mark to market, and by the way, this makes nationalization or widespread bankruptcy also out of the question, in other words no market or public restructuring of the relevant financial sectors. K? K.

    Now, to AIG. I think it is fascinating to watch this unravel as a huge political scandal and criminal case-to-be, and as an ethical Hiroshima for the whole NY-DC financial regulation complex. Yves, I need your read here, but I think, having gone through everything I can find, that of all the banksters and bondholders in all the world, about the only ones that DIDN’T need saving were the speculators in pure derivatives on toxic mortgage paper. I think, having painstakingly put all the pieces together, that this is indeed a simple case of payola. I think this is about as serious as it gets. And, since this is really an economic state of war with my children’s security in the direct line of fire, that the conduct of the principals here is frankly despicable (stronger terms also apply) and any who shelter them, White House included, deserve to be condemned and made into pariahs. I am, by the way, an Obama voter. But this has to get on track fast or the whole effort will just burn down. Think Watergate, Iran-Contra level scandal.

    Am I on the right track? We need to get this right.

    And Yves, keep up the fight. We all need each other now. I would remind readers to donate using the tip jar and to buy Yves’ upcoming book. It is all part of the new normal; we must create it.

    –Jim in MN (yes, shedding a purple tear too…so?)

  17. Jack Parsons

    My nagging suspicion about the Crash Autumn was that if you are the smartest and best-positioned, and you think a crash is coming, it is worth triggering the crash if you think you can come out on top.

    Is this what Goldman did?

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