Time to Investigate Blankfein and Paulson (More AIG Shenanigans Edition)

The New York Times has unearthed a damning tidbit about the bailout of AIG:

When the government began rescuing it from collapse in the fall of 2008 with what has become a $182 billion lifeline, A.I.G. was required to forfeit its right to sue several banks — including Goldman, Société Générale, Deutsche Bank and Merrill Lynch — over any irregularities with most of the mortgage securities it insured in the precrisis years.

Yves here. How one reacts to this depends in no small measure as to how one views the salvage operation. For all intents and purposes, the rescue of AIG was merely a way to save the banks; the credit default swaps had been too big a source of faux capital (for US firms, via risk-dumping, and for Eurobanks, as part of a regulatory arbitrage) to let the insurer go. So any effort by the officialdom to aid the banks, most notably by paying out 100% on credit default swap exposures (which had already been written down by counterparties to less than par) was simply an effort to funnel more cash to the banks. Since we’ve had massive backdoor bailout mechanisms in addition to the overt ones, this orientation should come as no surprise.

But then we get to the funny business. Why a broad waiver? Why shouldn’t AIG (and by extension, taxpayers) not recover in the event of fraud? And we turn again to the ambiguous standing of AIG. By all rights, it ought to be owned by the government. The reason it isn’t is that we don’t do nationalization in America, and full ownership would require AIG’s debts to be consolidated with government debt. So another way to read this requirement is that the Fed and Treasury were opposed to having fraud at the banks exposed, period.

That is a very troubling stance for bank regulators to take. And experts agreed:

“Even if it turns out that it would be a hard suit to win, just the gesture of requiring A.I.G. to scrap its ability to sue is outrageous,” said David Skeel, a law professor at the University of Pennsylvania. “The defense may be that the banking system was in trouble, and we couldn’t afford to destabilize it anymore, but that just strikes me as really going overboard.”

“This really suggests they had myopia and they were looking at it entirely through the perspective of the banks,” Mr. Skeel said.

Yves here. Also note that the banks mentioned by the Times account for a significant proportion of the Maiden Lane III exposures (the $62.9 billion CDO portfolio; note this does not include all CDO guarantees assumed by the Federal Reserve; seven Goldman Abacus trades stayed with AIG and were salvaged via credit extensions to AIG). An analysis by Tom Adams and Andrew Dittmer showed the significance of Merrill, Goldman, and SocGen (percentages based on par amount):

1. Merrill as both packager and counterparty 7.7%
2. Goldman as both packager and counterparty 7.4%
3. Merrill as packager, Goldman as counterparty 9.6%
4. Goldman as packager, SocGen as counterparty 15.9%

We thought these interrelationships were potentially significant; they account for 40.6% of the Maiden Lane III exposures. Then add in:

5. Anyone else with a pulse as packager, SocGen as counterparty 11.0%
6. Anyone else with a pulse as packager, Goldman as counterparty 5.5%

That bring you to 56.5% of the total.

Goldman, either as packager or as swap counterparty, was involved in 38.4% of the Maiden Lane transactions, plus had additional AIG exposure through seven Abacus trades (we only have tranche exposure on three of these transactions):

Abacus 2004-1
Abacus 2004-2
Abacus 2005-2
Abacus 2005-3
Abacus 2005-CB1
Abacus 2006-NS1
Abacus 2007-18

Yves here. The time is long overdue that Lloyd Blankfein’s early and extensive involvement in the AIG rescue be investigated in detail. The legal waiver no doubt was particularly beneficial to Goldman, and given that it is now being sued by the SEC, it is fair to ask if he put the idea of the waiver forward. It is highly unlikely to have occurred to the Fed and Treasury officials unprompted, particularly given the fevered pace at which the AIG rescue was cobbled together.

Moreover, in noting the officialdom’s deference to Wall Street, Blankfein features prominently:

In that regard, the newly released Congressional documents show New York Fed officials deferring to bank executives at a time when the government was pumping hundreds of billions of taxpayer dollars into the financial system to rescue bankers from their own mistakes. While Wall Street deal-making is famously hard-nosed with participants fighting for every penny, during the A.I.G. bailout regulators negotiated with the banks in an almost conciliatory fashion.

On Nov. 6, 2008, for instance, after a New York Fed official spoke with Lloyd C. Blankfein, Goldman’s chief executive, about the Fed’s A.I.G. plans, the official noted in an e-mail message to Mr. Blankfein that he appreciated the Wall Street titan’s patience. “Thanks for understanding,” the regulator said.

Yves here. This obsequiousness is noteworthy because the Times also stresses that the Fed’s own advisors (Morgan Stanley, Black Rock, and Ernst & Young) were advocating a tough stand with the banks, including haircuts on their guarantees with AIG. But Treasury appears to have carried the day:

For its part, the Treasury appeared to be opposed to any options that did not involve making the banks whole on their A.I.G. contracts. At Treasury, a former Goldman executive, Dan H. Jester, was the agency’s point man on the A.I.G. bailout. Mr. Jester had worked at Goldman with Henry M. Paulson Jr., the Treasury secretary during the A.I.G. bailout.

Yves here. And in an astonishing lapse, Jester still owned Goldman stock. By any standard, he should not have been involved at all in the process, much less in a crucial role. But because he was a contractor, and not a government employee, this arrangement was kosher. Not surprisingly, Jester opposed measures that would require Goldman and other banks to take any pain.

The Times reminds readers it pays to be a bankster:

All of this was quite different from the tack the government took in the Chrysler bailout. In that matter, the government told banks they could take losses on their loans or simply own a bankrupt company; the banks took the losses.

Yves here. The Audit the Fed investigation will shed even more light on the AIG rescue, but the seamy dealing of Treasury means that investigations need to extend into its role as well. But it will take a public hue and cry for that to come to pass.

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  1. Expat

    I know I am horribly cynical at heart, but I don’t understand why you appear to be even the least surprised by this. Is there anyone out there who thinks Congress, the Fed, and the White House are independent or act in the interest of the People?

    I don’t think there is a financial Star Chamber or secret handshakes (well, there might be), but there is a direct connection between our elected officials, the regulators, and Wall Street. People like Geithner and Paulson defend their personal interests as well as their natural affinities. Congress both defends the hands which feed it and listen attentively to the propaganda about how Wall Street is essential to the US economy.

    The leaders of Wall Street compete fiercely against each other when necessary, but prefer collusion. Colluding in limiting government constraints is not illegal, though. The legal standing of Treasury is not clear, however.

    What is clear is that these people, from Geithner to Blankfein to Obama, are a bunch of scum-sucking, treasonous bastards. That, though, is just what America wants.

    1. alex

      “I know I am horribly cynical at heart, but I don’t understand why you appear to be even the least surprised by this.”

      Where did Yves say she was surprised? Obviously I can’t speak for her, but I’d guess that she’s one of the least surprised people.

      It’s easy to act “worldly” and cynical, but to the extent that people say it’s just business as usual, rather than showing the appropriate outrage, it just ensures that nothing ever changes.

      “Is there anyone out there who thinks Congress, the Fed, and the White House are independent or act in the interest of the People?”

      How worldly and cynical! Is there out there who thinks that there’s ever been a perfect government? It’s a matter of degree.

      “What is clear is that these people, from Geithner to Blankfein to Obama, are a bunch of scum-sucking, treasonous bastards. That, though, is just what America wants.”

      And how do you come to the conclusion that this “is just what America wants”? Do you have some poll results or something showing that most Americans want a corrupt plutocratic government?

      1. NOTaREALmerican

        Re: It’s a matter of degree.

        Which implies “things” are kinda ok. Nope, it’s not. We’re a 2nd world political system with a 1st world standard of living. The only question is how quickly the standard of living falls and if TPTB can keep control of the dumbass peasants.

        But, it is a matter of perspective. The believers in an “ism” will always see a hopeful future as their “ism” is surely to take control and right all the wrongs. (The Cubs will eventually win the World Series too. But, ya know what, even if they do it doesn’t matter, because “the game” we’re so enthusiastic about isn’t the one that really matters).

      2. NOTaREALmerican

        Jeezz. I didn’t register this…

        Re: Do you have some poll results or something showing that most Americans want a corrupt plutocratic government?

        Yeah, I do. In fact, I can even make a prediction I’s so sure of the polling figures.

        I predict – and I’m going out on a limb here, but remember, you’ll be shocked when you think about about how accurate I was – I predict that 99% of the population will vote Republicrat this November. Yup, I know, almost sounds crazy… The there you have it, proof the American dumbasses want “a corrupt plutocratic government”.

        1. monday1929

          This IS a Country that re-elected Bush2 and Nixon.
          Ever notice all the applause politicians get when they are guests on a TV show? Even on John Stewart the opposition will get polite applause.
          The Scum shall inherit the Earth.

    2. i on the ball patriot

      Expat … I agree!

      Its a totally corrupt hijacked government … and worse, by giving it — and its sell out media like the New York Slimes — lip service, you only serve to validate it, legitimize it, make it moral and empower it.

      Its like voting in a known rigged electoral process, or sitting down at a known crooked card table, or pissing into a forty knot wind.

      You deserve to be a pissed on loser.

      No balls! No brains! No freedom!

      Deception is the strongest political force on the planet.

      1. alex

        “No balls! No brains! No freedom!”

        Got it. So when does the revolution start? Should we go with a historical theme and meet on the Lexington common? Do we have to bring our muskets or will they be issued from the public armory?

        1. i on the ball patriot

          The revolution starts when you stop banging your head against the wall and realize that change will never come from within the corrupt system, or constantly reflecting off of its also corrupt media, but rather from without.

          No muskets required.

          Simple massive election boycotts as a ‘vote of no confidence’ in this crooked government — with sufficient participation it would fall like an overripe tomato — with a concurrent rewrite of the constitution that includes; a more inclusive democratic electoral process, far greater governmental transparency, and meaningful punishment for violations of the public trust by public officials, all as a new basic framework that would be good for starters, what would you like to see in the newly formed government Alex?

          Deception is the strongest political force on the planet.

          1. alex

            “massive election boycotts”

            We already have that, in the form of some of the lowest voter turnouts of any democracy. Half don’t vote now. If 90% didn’t vote, it would still be called a legitimate election.

            “a concurrent rewrite of the constitution …”

            Re-written by who? How ratified?

          2. i on the ball patriot

            alex said; “We already have that, in the form of some of the lowest voter turnouts of any democracy. Half don’t vote now. If 90% didn’t vote, it would still be called a legitimate election.”

            Current low voter turn out only reflects dissatisfaction and disgust with the over the top crooked system. A proactive massive election boycott would entail all boycotting voters writing to their supervisors of elections and demanding that their ‘non vote’ be counted as a ‘vote of no confidence’ in this crooked government. These letters could be tallied and displayed by the people in what’s left of the public commons all over scamerica, and in other nation states around the globe too. If over fifty percent of the voters did so in an election, it would NOT, and COULD NOT, produce a “legitimate government”!

            Alex says: “Re-written by who? How ratified?”

            By the people, for the people, and ratified by popular democratic vote of the people.

            Deception is the strongest political force on the planet.

          3. NOTaREALmerican

            Re: A proactive massive election boycott

            Sorry dude. Nice fantasy, wrong country. The peasants are still living too well. Even the homeless have cell-phones. Until enough of the peasants are hungry there’s no revolution.

            If, today, the US was 50 separate states you’d be more likely to have massive wars than an agreement to get the states together into unified country.

            Revolutions need a goofy-ass story, one so goofy-ass that a majority of the dumbasses actually believe it and are willing to turn off the TV to act on it. It’s not here yet.

          4. i on the ball patriot

            NotaREALamerican —

            If you think you are defeated you are defeated.

            You either drink the Kool Aid or you sell the Kool Aid.

            Deception is the strongest political force on the planet.

          5. NOTaREALmerican

            Why would ANYBODY – who wasn’t burdened with morals (or an outright dumbass) – not sell the Kool-Aid? That’s where the money is.

          6. i on the ball patriot

            NOTaREALmerican says: “Why would ANYBODY – who wasn’t burdened with morals (or an outright dumbass) – not sell the Kool-Aid? That’s where the money is.”

            Ok — so your not burdened with morals — but that is so obvious in all of your overly cynical, defeatist Kool Aid selling, suck the rich man’s butt posts.

            Where the money is fluctuates. Its distribution is regulated by the morality struggle. The “goofy ass story” that is presently awakening the masses, and, “that a majority of the dumbasses actually believe it and are willing to turn off the TV to act on it”, is that the elite corrupt rich are now fucking the masses overtime in order to eliminate them.

            The masses are really getting it, with the help of; Yves, Rue the day, Richard Kline, etc., people burdened with morals, who refuse the bull shit Kool Aid of all flavors every day.

            Election boycotts will ultimately come about, just as you will see the energy dissipating, spirit robbing collaborators hanging from lamp posts again. It is only a matter of time.

            When the student is ready the master appears.

            Deception is the strongest political force on the planet.

    3. anon

      In times past it was framed as nobility and paupers, royal blood and commoners. Now it’s rich and poor. There is no difference.

      The Pope ascended royal blood via divinity. Today the government ascends the rich via a legal framework. People believed then the Pope to be infallible and today they believe we live in a democracy governed by the rule of law: is there really a difference?

      I look back at the arrangement of nobility and commoners and wonder how the commoners accepted their wretched conditions as providence. I look at the present and wonder how the poor accept their wretched state as democracy governed by the rule of law. It was never providence and it is not democracy governed by the rule of law: It was, and always will be, the golden rule: those with the gold make the rules!

      1. NOTaREALmerican

        Re: People believed then the Pope to be infallible and today they believe we live in a democracy governed by the rule of law: is there really a difference?

        Good point. It’s really just the story delivered to the team-masses of dumbasses that matters. If the story keeps them docile, the “priest class” job is successful.

        We can’t choose if we’re born into nobility, but we can choose if we’re going to be dumbasses our entire lives. Some of the peasants are given the opportunity to be vassals, some given the opportunity to become “priests”. Those peasants lucky enough to be given the opportunity – AND lucky enough to have no morals – grab these opportunities.

        The unlucky ones that believe in “isms” complain.

    4. NOTaREALmerican

      Re: That, though, is just what America wants.

      Vote Republicrat! Because we have nothing to sell but fear itself.

      Different clowns, same circus.

    5. Stelios Theoharidis

      None of the responsible parties are going to be punished for this unless we actually have a serious follow-on to the financial crisis. While it may not be in the interest of the public, a double-dip would probably foment enough rage in the general populace to clear out the politicians that have been bought and paid for to obstruct the political process. But that can’t be certain, given the state of general delusion it may only bring in xenophobic populists bent on scapegoating the crisis upon minorities.

      I can’t be but amazed over the mastery of public sentiment. The options have already been set forth, all the public gets to do is decide amongst them, the game is rigged in that sense. Unfortunately everyone just keeps pulling the slot machine handle. We have this rabid sense of fear over the external terrorism, immigration, crime, drugs, stranger-danger amongst the general populace that has been cultivated for some time now. While the real dangers to the public and the solvency of the USA are all internal obesity, smoking, unchecked business, inadequate public education, lagging competitiveness, government capture, and environmental hazards.

      In framing the fears of the public and crystalizing them into a set of issues that can only be resolved by a larger defense and prison industrial complex citizens were herded into defending a set of cows sacred to specific interests, they were distracted by two wars while the regulatory apparatus was dismantled, their savings were pilfered (social security surpluses during Clinton and Bush), jobs exported overseas, and the political process was captured. When this financial crisis occured they were then duped into socializing risk and bank losses while allowing the gains to be privatized. In short order a set of private and powerful interests has the US on a pathway to cannibalized itself, its become quite tough to exploit third world nations since there a lot more competitors out there these days, so it was the only natural option.

      Maybe the dog will get tired of getting kicked and eventually bite the foot off, I don’t want to be around when the USA hits inequality levels like those in Brazil or South Africa. Unfortunately that seems like the path that we have been heading towards since the 70s. You can’t have money down their without armed guards and 14-foot walls and a constant threat of kidnapping. The reason we feed the poor is so that they don’t feed on us.

      1. NOTaREALmerican

        Re: Unfortunately that seems like the path that we have been heading towards since the 70s.

        Yup. I just hope the society lasts reasonably intact for another 30 years (that’s about how long I’ve got to live and I’ve got no kids). Beyond that tho, you are right – it’s inevitable.

      2. jdmckay

        they were distracted by two wars while the regulatory apparatus was dismantled, their savings were pilfered (social security surpluses during Clinton and Bush), jobs exported overseas, and the political process was captured.

        I’m glad you refreshed my memory on this particular “peace & freedom” head-fake. Thanks dude. :(

        The sequence of events from 9/11 on…
        * one massive corp (eg. K-Street donor) tax break after another
        * tax incentives to offshore, mostly done in stealth, and exploited massively…
        * $b’s freshly minted cash delivered to Baghdad on pallets & disseminated by some guy throwing bundles to (we still don’t know, probably never will)
        * -0- accounting for those wars… ZERO
        * And let’s not forget W’s good will SS privatization initiative, which if it had gone through, would have disappeared that pile of $$ faster then TARP (although things not looking so good on SS front).

        Many many times through (especially) Junior’s first term, I (and many smart people I know when we talked about all that) watched and wondered… are these guys intent upon bankrupting US for some (???) reason?

        That everything BO has done was at tail end of (all of above), with out any effort whatsoever to explain/detail/shine light on what got us here, essentially he has made corrections by doing nothing more then refinancing the system created through those years… eg. ensuring that the stench which created the mess remained intact.

        AFAIC, anyone who’s paid attention can hardly be surprised by the outcome.

  2. RueTheDay

    “the Fed’s own advisors (Morgan Stanley, Black Rock, and Ernst & Young) were advocating a tough stand with the banks”

    Not only tough, but perfectly viable.

    According to the NYT, the advisors first recommended that Treasury simply provide a guarantee on the CDS. This would have been the simplest and least costly option for the government. Treasury rejected it out of hand on the grounds that they didn’t want to use up any more of the dwindling bailout fund. Then the advisors recommended that the Fed buy the AIG-issued CDS from the bank at a discount. A number of approaches for doing this were suggested. No reason was given for why this approach was rejected. It would have required banks give back AIG collateral they previously received, and would have resulted in them receiving less of a payout than expected on the CDS, so it’s obvious why the banks opposed it, but why did the federal government dismiss it? There are A LOT of questions that need to be answered here.

  3. fiscalliberal

    Interesting on how when we combine the financial and oil regulation fiasco’s we must come to the conclusion that our government is incompetent and corrupt.

    Furthermore it is interesting that under George Bush, Enron people went to jail. Under the Obama administration the whole lot are going to not be held accountable for fraud. The regulaters and justice department seem to be unable to see a way to get their job done.

    1. NOTaREALmerican

      Re: Enron people went to jail.

      Enron wasn’t a bank.

      Notice how that if this “scandal” was investigated it would affect the government itself – the Fed, the Treasury, the rich-and-powerful from rich-and-powerful families. Never gonna happen. Just as the Communist Party looks after its own, the Republicrat Party does too. That’s why having a one party state is desired by the rich-and-powerful, you don’t have to worry about being “investigated”.

  4. andrew

    It will take a public hue and cry before something is done about this, yes. Is there a pithy, three-or-four word characterization of this aspect of the scandal that can pass from mouth to mouth and take on a life of its own? “Paulson’s [x]”?

    1. alex

      “Is there a pithy, three-or-four word characterization of this aspect of the scandal that can pass from mouth to mouth and take on a life of its own?”

      No, but there ought to be. I’m terrible at political slogans, so I’ll open the floor for suggestions. I’d suggest something in the style of the NY Daily News.

      I’m a fan of detailed explanations, but there is a truism in politics that if your argument doesn’t fit on a bumper sticker then you’ve already lost. Incendiary slogans are needed – skip the ever so slightly exonerating details. Let the bastards defend themselves. “It wasn’t murder! My critics exaggerate. It was only manslaughter.”

      How about “Paulson got a blow job”? That sort of accusation seems to have gotten more attention than anything else in the last 20 years. Does anyone except political junkies remember Iran-Contra anymore? Are Enron or Worldcom anything more than footnotes? But everybody remembers the blow job heard round the world.

      1. i on the ball patriot

        End Hijacked Gangster Government!

        Death Penalty for Traitors!

        Criminalize Theft and Corruption AT The Top!

        Reclaim Government!

        Boot Obama! Decriminalize Freedom!

        Boot The Federal Reserve!

        Jail Paulson! Jail Blankfein!

        We Want REAL Democracy!



        Interest Free Money For The People!
        NOT FOR The Banks!



        Deception is the strongest political force on the planet.

        1. NOTaREALmerican

          It has to FIT on a bumper sticker too.

          I’ve always liked:

          Jesus votes

          myself. Simple. Two lines. Visible at night. Makes intuitive sense to 40% of the US population.

          I can’t think of a good liberal counter-point sticker tho.

          1. i on the ball patriot

            Duopoly Dodos Are Dumb!

            Two Party Scam Is For Losers!

            Root Out Defeatists!

            Hang Collaborators!

            Sell Outs Suck!

            Piss On Negativity!

            Rich People Suck!

            The Meek Shall Inherit Shit!

            Small Brains Have Small Bumpers!

            Deception is the strongest political force on the planet.

          2. John Q. Public

            Proclamation on the Federal Reserve System of the United States of America

            March 2008

            WHEREAS, Article I, Section 8 of the Constitution of the United States of America authorizes Congress “To coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures”;

            WHEREAS, on December 23rd, 1913 the US Congress enacted the Federal Reserve System;

            WHEREAS, the Federal Reserve System is considered an independent agency within the federal government, with oversight of Congress and containing appointed public officials on its board of directors;

            WHEREAS, the Federal Reserve System Controls the Federal Reserve Note, the official currency of the great nation of the United States of America;

            WHEREAS, there may be controversies regarding the legality and constitutionality of the Federal Reserve System, it is recognized that the said system has operated continuously as the central banking system of the United States since the inception of the Federal Reserve Act of 1913;

            WHEREAS, the Constitution of the United States of America granted Congress the authority to create the current Federal Reserve System, it also does grant Congress the authority to modify or revoke the Federal Reserve System;

            WHEREAS, the actions of the Fedreral Reserve System represent the credit and currency of the United Stated of America to the citizens of this great nation and to the world;

            WHEREAS, the Federal Reserve System, acting independently within the federal government allowed, supported, and even promoted parasitical and non-productive uses of the money and credit of the United States of America;

            WHEREAS, the United States and likely the entire world’s financial system is undergoing massive de-leveraging of the said parasitical and non-productive uses of the credit and money of the United States of America (as well as other nations’ currencies);

            WHEREAS, the US dollar, the “Federal Reserve Note” is declining in value due to these parasitical activites, as well as potentially other causes;

            WHEREAS, it is recognized that the citizens of the United States and other nations did willingly participate at some level in the creation and propogation of said parasitical activities;

            WHEREAS, it is also recognized that the United States of America, a sovereign nation, has the legal, moral, and God given authority to take actions to benefit its citizens and to protect its good name, credit and money in times of difficulty;

            WHEREAS, it is recognized that the current time is such a time of great difficulty;

            WHEREAS, it is recognized the parasitical financial institutions and their activities are at odds with citizens of the United States of America and the good credit and money thereof;

            WHEREAS, the current indications are that the Federal Reserve System is acting to preserve the financial system currently flooded with the parasitical activities;

            WHEREAS, the current indications are that the neither the Federal Reserve System, nor the Congress of the United States, nor the people of the United States have access to the books of the institutions being preserved by the Federal Reserve, and therefor the degree of inter-connectivity and risk associated with the institutions and other entities cannot be determined;

            WHEREAS, the Federal Reserve System is accepting non-performing assets as collateral for credit with ultimate taxpayer responibility to entities not under its legislative mandate;

            IT MUST BE CONCLUDED, that the Federal Reserve System is not acting to the benefit of the people of the United States of America, its credit, money, and good name;

            WHEREAS, it is recognized that the political will and capability of the government of the United States of America may not be up to the task of prosecuting this proclamation ; It is also recognized that this may be the only hope for the continued survival of the United States of America as the great nation as it has historically existed.

            NOW THEREFORE, it is PROCLAIMED by those supporting this Proclamation that the Congress of the United States of America FULLY NATIONALIZE the Federal Reserve System, and take full control of the credit and money of our great nation; The Congress must take whatever action necessary to seperate out, sequester, disown, or otherwise neutralize the effect of the parasitical financial activities which led to the current crisis; The Congress of the United States of America must reorganize, replace, or terminate the Federal Reserve System as appropriate; or otherwise devise a system for creation of the national currency.

            IT IS FURTHER PROCLAIMED, that the Congress of the United States of America in cooperation with the Executive of the United States of America contact allied nations and any other nation willing to participate in the overhaul of the failing and parastical financial sytem currently in operation and create new treaties and alliances as necessary to create a sane and productive system of finance with the express goal of supporting a productive national, and by extension and through voluntary cooperation, world economy;

            FURTHERMORE, it is PROCLAIMED that it should be the goal of such an international effort to maintain fair international trading practices allowing for protection in national interest of labor, resources, and productive capabilities;

            WHEREAS, it is recognized that such a move on the part of the United States of America may result in the necessity of an isolationist policy IF the other developed nations do not follow our lead; If such occurs, so be it.

            SO HELP US GOD!

  5. Francois T

    When it comes to the big banks and all the free passes they got from officialdom, we must always have the following factoids in mind:

    1) Geithner (as an example) has ALWAYS favored the big banks. Be it derivatives exchanges (he insisted on ICE over much more experienced exchanges, since ICE was owned by the psychopaths, a.k.a. big banks) to AIG to Goldman 100% payola.

    2) Geithner was once approached to become Citi CEO. Imagine that! A top regulator (gagging hard here!) would be a great CEO? Whatever…!

    3) Among all the lobbyists working for the psychopaths, 1,400 are former politicians or Hill staffers.

    4) Dick Durbin, was, is and will always be right in his famous declaration: “The banks…quite frankly, they own the place.”

    5) Just yesterday, it was too much for the Reichpubliscums to see the poor big banks having to pay a puny 19 billion over 10 YEARS as a fee for “insurance”. SO, they, once again and with no difficulty, had the spineless DemoRats (not a typo!) bend over and allow another sodomization (without Vaseline, Astroglide or K-Y jelly, of course) of the smaller banks (which didn’t even squealed or moaned mind you…guess they enjoy the treatment!) by forcing the fee on everyone.

    This is all we, the people, need to know about the level of dishonesty, slothfulness and moral depravity that afflicts Congress, as well as the galactic level of sociopathy permeating the rarefied atmosphere of the corner offices in the financial industry.

    It will take quite a trauma ( another shock like 2008, but more intense) to force a change to this incestuous situation.

    1. alex

      Francois T: Dick Durbin, was, is and will always be right in his famous declaration: “The banks…quite frankly, they own the place.”

      That’s the crux of the matter. I sometimes think that discussion of financial shenanigans and fake healthcare and financial “reform” are moot. Until we have publicly financed campaigns (ala The People’s Republic of Arizona), and dispense with the legalized bribery euphemistically called “campaign contributions”, we’ll continue to have the finest government that money can buy.

      Real campaign finance reform is the most important issue there is, but the bribery is such a long standing practice that it gets little attention.

      1. Tom Crowl

        There’s a power in very small money, very large numbers and systems of transparency and feedback that can do this when enabled.

        While it may be a crude demo… its fundamentals are sound as is its business model… (it can support itself as a Commons-owned enterprise if given a chance to viably launch)

        Demo http://www.Chagora.com
        LinkedIn: http://www.linkedin.com/in/culturalengineer

        Personal Democracy: Disruption as an Enlightenment Essential

        From ‘What the Ancient Greeks Can Tell Us About Democracy’

        The original meaning of democracy was ‘the capacity of a
        public… to accomplish things of value in the public
        realm’ – thus ‘the empowered people’ rather than simply ‘the power of the people.’

        1. Tom Crowl

          Extinction requires only inertia.

          We’ve reached that critical point now where…
          Evolution requires tools…

          Carefully thought out tools.

          Tools to deal with inherent conflicts in our natures that become problematic with scale.

          See my very brief post:
          The Problem in Scaling Altruism: Where’s the Intelligent Life?

          The development of the Internet and the democratization of communication technologies provides the foundational structure for the first opportunity to meaningfully address this social scaling problem. I’d like the chance to make this case before ‘lizard-brain’ approaches solidify the landscape… (as largely happened with television).

        1. steelhead23

          Who owns the banks? Yes, that’s an interesting question, but I am far from certain that it was the owners this loophole was intended to protect. Simply put, I believe that many on the street knew this Ponzi finance system would blow. Magnetar and Abacus show that rather than protecting owners, the intentions of the banksters was self-enrichment. Thus, while executives may hold a substantial amount of stock in the big banks from the exercise of options, their behavior is best understood as serving their self-interest, not the interest of the banks they run. If all of the fraudulent activity among the players were to be aired in public, it would become obvious that numerous individuals committed crimes. It is these individuals, not the banks they run, the loophole was intended to protect.

          1. Progressive Ed

            The Progressives (in Europe early in the last century they were known as Fascists)own the banks. In Marxism, the government elites “own” the property and so-called means of production. Progressive government elites don’t “own” these institutions but control them (Didn’t I read somewhere on NC that Fannie, Freddie and the FHA now “own” over 90% of the residential real estate mortgages?). Same difference. BTW, for insight into the political (as compared to the economic) aspects of American Progressivism, check out Glenn Beck on Fox TV.

  6. Siggy

    Net, the bailout of AIG was a bailout of the banks.

    But then, we knew that all along. What is informative of this latest revelation is that there is an apparent linkage between the Fed, GS etal, Treasury and AIG.

    This latest revelation goes to precisely why we need an independent inquiry, one with subpoena power and contempt authority. AIG and Casano and all the decesion making minion at AIGFP are getting a free ride. While there is no law that bans being stupid, for these parties to assert that by inference they were is a fraud in itself.

  7. Transor Z

    Anybody have a link to the precise language in the waiver? Did the waiver expressly include “fraud” or did it use the term “irregularities”?

  8. Jackrabbit

    It could’ve been Paulson. Remember that his initial request for $700b had some crafty legalize (his decisions on spending the money could NEVER be questioned, etc.). But it could’ve been Geithner.

    Everyone at the Fed would’ve been well aware of Paulson’s connection to Goldman, and Paulson was probably too careful about taking overt steps to benefit Goldman. However, no one at the Fed would’ve questioned such a request from Geithner who is/was in close contact with THREE former Goldman CEOs: Paulson, Rubin, and Friedman-who was a Goldman Director and NYFed Chair at the time, each of whom had a long career at Goldman BEFORE becoming CEO.

    The big question now: will Congress and/or the Financial Crisis Inquiry Commission investigate? Clearly this should be nullified for fraud.

    1. Jackrabbit

      Actually it should just be nullified altogether. Consider the CRIMINAL ABSURDITY of Geitner, Paulson, et al. insisting that AIG HAD to pay 100% because the government can’t interfere with private contracts and then forcing AIG to give up any rights to sue.

      I’ve seen a number of calls for RICO investigations related to the financial crisis. That seems most appropriate for these GS-ABACUS-AIG shenanigans.

  9. doc holiday

    “Fed and Treasury were opposed to having fraud at the banks exposed, period”

    Amen Sister, say no more! The Fed and Treasury collusion — in for a penny, in for a metric ton. The “real” capital market will never recover unless there is real justice — this matter, is just a very simple case of trust and confidence. The crooks are still guilty and there have been no investigations, so what is this, the perfect crime? I guess you’d have to ask Bush, Cheney and Paulson…

    1. NOTaREALmerican

      Seem you’d need to ask the Democratic Party too. They’re writing the current Financial “Regulations” Bill.

      It’s a one Party state. Stop obsessing about Cheney.

      (Unless you’re one of those people with the “Bring Steven Home” or “Four More Wars” bumper-stickers still on you car).

    2. readerOfTeaLeaves

      “Fed and Treasury were opposed to having fraud at the banks exposed, period”Indeed.

      I’m not able to watch the entire FCIC hearing today, only getting bits and pieces. Nevertheless, it’s clear that parts of Session 2 raise many grim questions about GS. Which in turn raise grim questions about the Fed and Treasury.

  10. monday1929

    As mentioned above, Paulson I believe, requested blanket immunity, even from overt criminal acts. Theoretically, he could have cashed the TARP(?) check into his own account personal account, is the way it was described at the time.

    Didn’t he reveal in his book that he hid behind the massive Treasury pillars and Threw up? Aren’t murderers known to do that as the realization of what they have done strikes them?

    Does it not occur to the Elites that if they don’t throw those among them who committed treasonous acts to the wolves, that (and I am totally opposed to this)some people highly skilled at killing, such as Military people who feel the US Constitution has been violated, may just start killing off the Elite rather indiscriminately?

    1. NOTaREALmerican

      Re: such as Military people who feel the US Constitution has been violated

      KEY-RYST! You must be joking. History shows “the Military people” are macho dumbasses frat-boys with the same frat-boy loyalty, that is: worship of power and are easily manipulated by sociopaths.

      Our dumbasses would go after “those people” first. You know “those people who ruined this great and glorious nation”.

      The nobility has nothing to fear from the military.

    2. Jackrabbit

      Well this COULD be a military issue given that our enemies use the corruption of crony capitalism against us, saying “democracy, hypocrisy.”

      However, 1) The military won’t rebel and 2) if someone was killed security would be made that much tighter. What is required is that people educate themselves and care enough to force change in peaceful protest and at the ballot box.

      Military people DO have the necessary determination and organizational skills. And they should be particularly galled at a kleptocracy that enriches itself while others are called upon to make the ultimate sacrifice.

      From the Gettysburg Address:
      “…that from these honored dead we take increased devotion to that cause for which they gave the last full measure of devotion — that we here highly resolve that these dead shall not have died in vain — that this nation, under God, shall have a new birth of freedom — and that government of the people, by the people, for the people, shall not perish from the earth.”

    1. Jackrabbit

      There IS law. What you mean to say is, I think, is that there is no justice.

      Perhaps fair representation should be a civil rights issue. There is a slogan that I believe arose from the civil rights movement: “No justice, no peace.”

  11. Blurtman

    BTW, if you think citizens are able to protest against the banks, I am in Toronto now, and the police presence is intimidating. Walking through a local park, police in 2’s and 3’s will not only not share the path, they will aggressively approach you forcing you to step aside as they look you over.

    Returning to my hotel Tuesday night, I was approached by two officers who asked me to prove that I was staying at the hotel. When I objected, they got much closer, and asked for my ID, and of course I caved and showed them my room key. And I am a middle aged businessman.

    The police also had new technology at the ready – some sort of sound cannon monted on a vehicle. Did not learn if they also deployed the microwave cannon (repels folks using heat.)

    Civil rights? Police state? Who seeded the peaceful protesting crowd with masked, back clad hooligans?

    Remember COINTELPRO?

    A lot of the protesters were shouting “Fook the banks!”

    Who wants to quash such protests? Who wants to paint the protesters as platformless vandals?

    Who is running the show and pulling the levers?

    Bizarre stuff and I am no radical.

    1. monday1929

      You witnessed Fascism first-hand. It must have been chilling. Perhaps the “me” generation will redeem itself by sacrificing itself for generation “X”.
      Suicide squads using walkers and canes. And, it will help solve the Social Security problem.
      Of course, I am totally opposed to this.

      1. John

        You really know how to think out of the box.

        A one two jab and they are off kilter and could fall down.

        Back to the box. Baby boomers don’t do canes or suicide missions. They much prefer cruises and tours of Europe and Asia.

  12. Justicia

    OK. We all agree that our politicians have been bought and government is run in the interest of the corporate barons.

    Instead of shrugging cynically and cooly dismissing this all as nothing new, I suggest we get off our collective behinds and DO something about it. Even if it’s nothing more than arguing with your relatives and neighbors who buy the BS they’re being sold.

    This isn’t the way things are supposed to work — under either a capitalist system or in a democracy — and we have to stop accepting the unacceptable.
    Our country is heading over a cliff and if we don’t it pull back now, it will be lost. Demand an end to legalized bribery and work for campaign finance reform — even if it takes a Constitutional amendment to do it.

  13. Hugh

    Facilitate the looting and then immunize the looters is standard operating procedure for our government. Just another example of how our system of crony casino capitalism/corporate kleptocracy works.

  14. Andrew

    I don’t agree there was a blatant impropriety in requiring AIG to give up its rights to sue on these covered assets, since this is a pretty reasonable practice in the face of being saved by the American taxpayer; all one has to do is look to the S&L bailout and the Winstar line of legal cases that resulted.

    I also think a couple people in this article (the Penn law professor, especially) have quickly forgotten the outright panic and fear that pervaded the days when these negotiations took place. Historically, bad decisions are commonly made when the general consensus demands immediate action over careful consideration.

    That said, the disclosure of Dan Jester spearheading this negotiation is extremely disturbing. I love Goldman many, many times over, but their “revolving door” influence on the Treasury needs to come to an end.

    1. monday1929

      We well remember the fear in the eyes of the little chickenshits geithner, paulson, rubin and summers.

    2. Transor Z

      Exactly, Andrew. AIG should have assigned its cause(s) of action to the U.S. taxpayers, not waived them.

      Because that’s what you MEANT to say, right, Andrew?

    3. monday1929

      We well remember the fear in the eyes of the little chickenshits geithner, paulson, rubin and summers.
      Note the dig at the “general consensus”. Bet you don’t like “populism” either. And you think there is “plenty of blame to go around”?
      And we should “not point fingers” but look for “lessons learned” and “focus on the future”.
      FK you

    1. Jackrabbit

      Bob, my 14-year old daughter could’ve won a better deal for US taxpayers.

      And if given a choice of negotiators/representatives, I’d choose my daughter. At least I know which side she’s on.

      He also said today that he remains convinced that the swaps he negotiated were fine and would not have resulted in “economic losses.” He’s sticking to the story that the subprime/financial crisis was an unforeseeable aberration.

  15. Jim

    Naked Capitalism, over the past number of years, has played a pivotal role in explaining and documenting the crimes of our financial/political elites.

    This role, I am sure will continue, but as this political/financial crisis accelerates the question of what are the true emancipatory alternatives to the corrupt status quo becomes more and more paramount.

    Here are a few of the issues and questons that rattle around in my head about these potential emanicpatory alternatives.

    Throughout its existence liberalism has been pulled in two directions towards the market and toward the state.

    A cardinal principal of liberalism is that individuals are the best judges of their own interests which would seem to be an endorsement of, at least, some idealized form of the market.

    Yet liberals also understand that the market tends to universalize itself and as a consequence liberals have also turned to the state for protection. But this remedy has often proved to be worse than the disease because the state also seems to be in its own universalizing business.

    Today, Big Capital and Big Government both seem incapable of repairing the public trust, yet their representatives remain in control.

    Can our present electoral process ever replace this structure of power? (People like Rubin, Summers, Geithner have remained in control at the commanding heights of our economy/Government no matter which political party is in charge.

    How specifically does public funding of elections dislodge this structure of power?

    Do alternative economic frameworks like MMT or libertarianism threatern this structure of power?

    Do we as citizens still maintain a cultural infrastructure, somewhat independent of the market and the state(i.e.informal types of associations like neighborhoods and churches or hangouts like bars, beauty parlors, community centers,cafes, coffee shops, and the internet)resilient enough to initiate and launch some kind of eventual offensive against this structure of power?

    1. NOTaREALmerican

      Re: Can our present electoral process ever replace this structure of power?

      No. Big things never get smaller without collapsing. Big things are unmanageable (doesn’t matter what it is).

      Re: How specifically does public funding of elections dislodge this structure of power?

      It doesn’t. The problem is bigness. The sociopaths will always win. Bigness makes it easier for them to win. Public funding of politics would just be another big pile of loot for the sociopaths to capture. Trick question: Why do liberals insist on making it easier for sociopaths and fascists to win?

      Re: Do alternative economic frameworks like MMT or libertarianism threatern this structure of power?

      It’s not the economic frameworks. Economics is a shame. It’s all psychology. Nothing else. Libertarianism is based on a psychological fantasy – like Communism – that all “the bad people” will somehow disappear (if I just close my eyes and wish real hard). Trick question: What is the ONLY political system that admits sociopaths even exist?

      Re: Do we as citizens still maintain a cultural infrastructure, ….

      No, we don’t. Americans don’t even like dissent (Get a job you hippy, and get a hair cut too!). This is why we all hang out with people that agree with us. When people were forced together – from different classes and backgrounds – perhaps it was different, but now… I personally don’t want to deal with peasants, and I don’t have too. I live in a very nice limousine-liberal college town existing – like a parasite – off the government. Life is grand, and we don’t allow the lower class peasants to live here (housing prices take care of this problem.)

    2. Ghost of Joe

      None of this is new, Jim. Societies make internal adjustments to counter dysfunction. The tragedy is that societies aren’t smart enough to anticipate the damage caused by the dysfunction so it’s almost always ex post. Elites coalesce, wealth aggregates, short-sighted excesses by elites cause damage, members of the elite defect to a modified system, and so it goes.

      The cultural changes you mention are already happening. Bloggers like Yves are getting millions of views. Millions. The media culture that will eventually replace the useless and unrepresentative media currently backed by the elite is already in place. MSM is reaching out to blog culture, trying to emulate it, find a way to absorb it. Bloggers are becoming celebrities.

      Don’t worry. Cultural infrastructure is biological. It’s what people do. It’s a natural by-product of our interactions and needs. Elites can try to disrupt, outlaw, re-educate, substitute the authentic with propaganda, ban the speaking of a language, participating in certain rituals, restrict access to certain forums to party members only. It’s all the same tactics.

      It never lasts. Things look a little brighter when you take the long view and think inter-generationally in terms of entropy. We’re all so narcissistic.

    3. Tom Crowl

      In it’s extremes the Left-Right polarity represents a continuum from Individualism as the central guide to action vs Collectivism as central.

      On one extreme Ayn Rand, on the other Marx.

      Both extremes in practice lead to the same thing. Oligarchy.

      (See an interesting comparison of Rand and Stalinism as expressed through art here: http://www.winkleman.com/exhibition/view/1915 )

      I’d suggest that the eternal problems of Authoritarianism, caste systems, political stagnation, etc. up to and including revolution or collapse are to a significant degree the result of the failure of BOTH State and Private Corporate Structures to properly accommodate our biological roots and social evolution, and especially the limits of altruism.

      Moreover, I’d suggest that at root all social bodies are quite literally the product of countless individual AND group decisions arising from a multitude of impulses both rational and irrational.

      It’s as impossible for Ayn Rand to be an Objectivist as it is for Marx to be a Communist.

      Neither Ayn Rand or Alan Greenspan could escape the natural effects of their desire to please their social networks… (the ‘bounded’ altruistic drive whose effects they ignored)

      Any more than a Lenin or a Stalin could escape the self-interest that resulted in the Soviet oligarchy.

      So a few points for improving the political culture:

      1. Address the political duopoly and media monopoly that artificially constrains what is considered ‘reasonable parameters for discussion’ to the point that democracy may become impossible for lack of an ‘Enlightenment’-oriented political culture.

      (Note: I’m generally a Progressive… but I’d like BOTH a Ralph Nader and a Ron Paul to have a more prominent place on the national stage… and I’m quite pissed-off that the FEC is harassing the “Campaign For Liberty”. Its a Ron Paul organization with which I have much to disagree but the FEC is an organization that works very hard against good governance and to make sure the duopoly stays firmly on top. It has no business squelching ‘outsiders’.)

      2. Address gerrymandering, revolving doors, obscure loopholes stuck in bills late at night, etc as the CRIMES they are. They aren’t ‘quaint’ little funny quirks of our system. They are crimes that work against good citizenship. They are crimes perpetuated by those who claim to be most concerned with governance.

      3. Improve the systems of citizen involvement through technical means. I have very specific suggestions here but there are good reasons to facilitate the Commons-oriented transaction via a Commons-owned structure (not government owned) This also becomes a mechanism for the public funding of elections to the extent desired.

      P.S. Point 3 by itself goes a long ways towards addressing the first 2 points.

      4. Increase the use of sortition in various legislative, executive and corporate governance contexts (a jury system is a sortition system). http://en.wikipedia.org/wiki/Sortition

      5. Re-evaluate several economic fundamentals which incorporate more comprehensive indicators of human well-being. (the ‘Social Energy’ problem: e.g. BOTH hyper-inflation and catastrophic deflation, while each result from their own particulars, can be seen as a society at war with itself. Both are the product of systems of conflicted systems of incentives which conclude with a collapse of the social contract. In that sense, which results is only a question of shaping the collapse. Though that can be quite important to particular individuals and sub-groups.)

      6. Acknowledge uncertainty as a fundamental of social and economic theory just as its been acknowledged by the hard sciences.

      7. Face the fact that there’s a hard road ahead. No guru is going to fix it and it’s up to us. I’m not religious but you wanna know when the “Meek shall Inherit the Earth”?

      When they stand-up and take responsibility for their inheritance.

      Capability ENABLES Responsibility.

      Build the Damn Tools!

  16. Expat

    I don’t see Americans revolting or radically changing the system. Of course, my not seeing it does not make it either impossible nor unlikely. While many people (not millions) read this and similar blogs, most Americans do not.

    Most Americans would call us elite, liberals, commies, hippies, or traitors. Most Americans could not spell, pronounce or define the following words gleaned from the comments above: narcissistic, entropy, libertarianism, emancipatory, collateral, infallible, dissipating, etc.

    When things really start to fall apart, do you think the guys with the John Deere caps and tickets to Wrestlemania will understand that our government and our corporate leadership took us down this road? Will union bosses tell their members to disavow the Democrats?

    No, the traditional enemies and bugbears of the right and the left will brought out as convenient strawmen.

    I bet the average IQ on this blog is north of 120 and that the only conversations most of us have with average IQ’s amounts to “Give me fries with that” or “I’m sorry, Officer, was I speeding?”

    1. Tom Crowl

      I often fear you’re correct and that maybe it really is hopeless. Our planet is at that evolutionary stage where its pretty much ‘poop or get off the pot!’

      Most fish eggs don’t make it to maturity. Maybe most planets with intelligent life don’t make it either.

      But some fish DO grow up.

      The average man will, by definition always be average.

      But that doesn’t necessarily mean politically incapable. The ‘average man’ MUST be brought in to the process because the social contract can’t survive without him. (I mean this literally… a vulnerable technocracy will be increasingly vulnerable to smaller numbers. In behavioral economics its called the “Ultimatum Game”. It operates on a global level just like in the lab.)

      Unfortunately as I think many here may agree, our system actually CULTIVATES political stupidity.

      So fix the system…

      Tell you what. I’ll do it. Call me.

  17. m.jed

    In fairness, I haven’t read through all the comments yet, but in front of FCIC today, Joe Cassano said something to the effect that none of the CDOs underlying AIGs CDSs placed into Maiden Lane have pierced subordination. If this is true, and given he was under oath it’s hard to assume it wasn’t, then all of this “funneling of cash” drama is meaningless.

    1. Yves Smith Post author

      This statement is counterfactual. First, the AIG deals include transactions from ICP (the Triaxx transactions) where the asset manager engaged in fraudulent trades that put assets into the CDO at marks then considerably above market (as evidenced by trades the same day with related parties or preferred clients).

      Second, the Maiden Lane III financials show $22.3 billion of a remaining $22.8 billion marked as Level III assets.

      Third as we discussed in some lengthy posts on Maiden Lane III valuation, it is typical of severely distressed portfolios to throw off principal (ie via refis or sales) but the reminder is in very poor shape. Often owners reach false conclusions about the prospects for the entire pool based on the principal payout. And CDOs are not an area of expertise for BlackRock (I know the people who helped developed BlackRock’s models, they are not complimentary of the firm’s expertise).

      From a January 28 post:

      The fact that some transactions were acknowledged both by AIG and the dealers to be zeros as of the bailout is yet another reason to doubt that these deals would have future upside. That is contrary to both the Fed’s logic in buying the CDOs (see our related post) and its current claim that the deals have traded up despite a massive decay in credit quality. Per a BlackRock memo prepared just prior to the November 2009 decision to buy the CDOs, only 19% were rated junk. Now, according to Moody’s, the more conservative of the two ratings agencies, 93% are rated junk.

      And when we say “junk”, we don’t mean BB or B, we mean in the Cs or Ds. We haven’t updated the ratings, but CDOs are pretty much never upgraded.

      1. m.jed

        Yves, you know that the marks aren’t relevant anymore. Maiden Lane is a hold-to-maturity vehicle, so interim marks, whether to model or to market are meaningless. All that matters is cash flow and principal repayment. Also, doesn’t AIG still retain a first loss position to a cap in the Maiden Lane vehicles?

        Forgetting about the mezz CDOs for a moment, for Maiden Lane/AIG super-seniors, to have cash flows thrown off early is a good thing, it increases the amount of subordination they have because they get paid on the refi, and then what’s remaining, even if it’s dodgy, Maiden Lane gets priority.

        I find it ironic that you invoked Moody’s ratings on Maiden Lane CDOs. Do they have credibility when aligned with the point you’re trying to make but not at origination?

        1. Yves Smith Post author

          With all due respect, your argument is not responsive to my comment. The ratings agencies were guilty of overly generous ratings. If I were to subscribe to your line of implicit criticism, the ratings ought to be lower, which supports my position. And I have yet to hear of a case where a severely distressed CDO meaningfully outdid expectations. And there is no reason to think the refis and principal payments are “early” except perhaps around the margin, due to all the aggressive Fed facilities and Freddie/Fannie credit. The point was a different one, that the level of principal paydowns is often mistakenly used to project out the performance of the pool, when that is not valid for a pool of weak mortgages.

          And it appears likely you misheard what Cassano said. From his prepared statement:

          When AIG-FP exited the business, we wondered whether there was a risk in our existing portfolio for which a hedge might be appropriate. After internal discussion, we believed that the existing vintages were not tainted by any slippage in underwriting standards. We remained confident in our risk analysis for the existing deals. The decision was based on our firm view that the portfolio would not experience realized losses (as opposed to short-term accounting losses). As I look at the performance of some of these same CDOs in Maiden Lane III, I think there would have been few, if any, realized losses on the CDS contracts had they not been unwound in the bailout.

          I have not seen any commentary in the media along the lines of what you suggested he said.

          So – it takes a long time for realized losses to actually be allocated to the super senior class of CDOs. Depending on how Cassano worded the time frame of his statement, he could be right – so far. the point of his statement was to distinguish between accounting MTM losses – which were not real – and actual realized losses – which were not yet incurred.

          But it’s not really being honest if he means, no losses have come in yet, but about $50 billion of losses will be incurred in 3-4 years.

          We’ve did extensive analysis on the Maiden Lane III portfolio, including looking at the deal documents, structures, and asset composition and building detailed spreadsheets. We are not shooting from the hip in our view of the quality of the Maiden Lane III assets.

          1. m.jed

            I understand that you’ve done a lot of work on the Maiden Lanes and certainly know more about the structures than I do. But I did not mis-hear what Cassano said. Watch the following video of his testimony at points 19:35, 41:25; and 58:40, the last point, in which is states:

            “There have been limited losses associated with the piercing of the attachment point. . . I think there was one realization event when they unwound a portfolio that they had.”

            And there is no reason to think the refis and principal payments are “early” except perhaps around the margin, due to all the aggressive Fed facilities and Freddie/Fannie credit.

            We’ve had a boom of refi activity. Calculated Risk described it as a “mini-boom” as recently as 4/5/10, calling for the end, which at the time wasn’t an unreasonable forecast. But since, we’ve had the Euro crisis drive down Treasury yields and refi activity remains understandably strong. In another part of Cassano’s testimony he said (and this I may be remembering incorrectly) that Maiden Lane III has returned $8 bn of cash flow. I’m guessing, but I have a hard time believing that’s entirely from coupon payments.

            When AIG was a real public company, again if memory serves, they were projecting ultimate losses of < $10 bn on their CDS under extremely stressed scenarios. Subordination on their high grade portfolios that contained subprime (ah, it was nice to only worry about subprime) were around 13% and on their mezz portfolios were 40%.

  18. doc holiday

    Why saving the financial system is really important:

    > Society requires structure, like an M&M bag that is filled with tasty little crunchy candies which are consistently dependable and uniform — bag after bag. Without a financial system, M&M’s might just be available in a little store in some little town and hence fewer people would be able to consume them.

  19. Ottawan

    Who’s gonna investigate Blankfein?
    Seriously. Is there someone with juice that’ll seize this agreement and run with it? A congressman, an attorney-general? If this is true, someone could really earn some points crucifying the bastards. Hell, it’d be a smokin gun.

  20. anonymous

    Absolutely astonishing post. Thank you, again, so much, Yves, for producing work that should be on every adult news program. Yes, reading the piece requires us to hold more than one idea in our melons for longer than fifteen seconds, but surely that’s doable for most viewers above the age of fifteen, and many younger.

    Fleecing the taxpayer, the prudent, and those of us who save has become high art for the unscrupulous, the greedy, and the dishonest. I’m not reading anything like this sort of analysis at the Wapo or the NYT for the most part, or any other major news outlet. Yet, there are no really big numbers or complex procedures to work through in this piece.

    Anyway, thanks again. Are there any hard-nosed actuaries, accountants, and financial experts of scruple who can be placed in positions of real authority?

    I suppose that really is asking too much.

  21. Richard Kline

    The entire AIG affair is Teapot Dome to an exponential. The cloud of stink from the zombie’s gut just keeps building and building. We not only don’t do nationalizations in the US [yet, but wait], we don’t do business, don’t do justice, and don’t do reality. What _DO_ we do aside from shave the nickle and lie about it?

  22. Vinny

    Blankfein and Paulson need to be rounded up like common criminals, given a brief televised trial, and then taken out in the backyard and shot like the dogs that they are. Also, add BP’s Tony Haywire to that list as well.

    We need to institute the death penalty for financiers and CEOs whose actions have impacted the country as a whole. These 3 dirtbags have ruined the lives of millions of people, thus their brief trial and swift execution would make for a rally nice modern-day “circuses” for the country.


  23. Jim

    NotaREALmericans insight that bigness is at the origins of our problem resonates with me.

    Is it possible that our present liberal-democratic system will go the way of the former Soviet Union?

    Is it possible that our managerial democracy has succeeded, over the past 130 years in creating a type of bureaucratic-centralist system(with the help and guidance of Big Capital) as rigid as that of the former Soviet Union? (We can’t even deploy skimming equipment to the Gulf without wraping ourselves in red tape.)

    Has our liberal democracy turned into a somewhat more benevolent version of a bureaucratic-centralist system that subverts the conditions for democratic participation?

    Is the continuity between the failed Bolshevik system and our liberal democracy such that the major lesson to be learned from the Soviet disaster is not the we have managed to achieve “the best of all possible worlds,” but that we are embroiled in the same logic which led to the collapse of the Soviet Union?

  24. Justicia

    Thank You, Yves! The stink from Goldman’s merde is starting to hit the fan.

    Back in September of 2008 I noted a little news item on the front page of the FT about a meeting at the Fed, chaired by Paulson, at which Blankfein was the only banker present. (How’s that? The only banker in the room is CEO of the Treasury Secretary’s former firm!!)

    Here’s the take from Bnet:


    At the time of the collapse of Lehman Brothers, Goldman was forced to raise $10 billion of fresh capital by selling a 15 percent stake in itself to Warren Buffett and other investors. (At $123 per share, the sale was completed around 30 percent cheaper than today’s market price of $170 per share.)

    Just days before the share sales — which directly allowed Goldman to stay afloat — the firm received around $12 billion in government aid. What is more, Blankfein was the only U.S. chief executive present at a September 2008 Federal Reserve meeting to discuss AIG’s (AIG) $44.6 billion loan.

    Presumably, if Goldman Sachs had been able to privately raise the initial $12 billion provided to it by the U.S. government, it would have done so. What seems much more likely is that the investors — including Buffett — who later agreed to commit an additional $10 billion only did so on the basis that the firm was reasonably supported by government aid. That way, they could be assured that their money was not merely serving as a stopgap to bankruptcy.

    This point is all the more prescient in light of the recent bankruptcy filing of CIT Group (CIT), a small business lender. The whole reason share sales were not a viable capital raising option for CIT was because the government denied the firm’s application for government aid earlier in the year.

  25. aa

    @ NYT/Yves: Were any lawyers asked as to whether a waiver for fraud was enforceable in court? Some states, by the operation of statutues, declare unenforceable waivers for negligence. Strange that this topic is nowhere discussed.

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