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Politics / Credit Crisis 2008 Jan 07, 2010 - 07:08 AM GMT

By: Trader_Mark

Politics

Best Financial Markets Analysis ArticleI wrote a few times in 2008 and early 2009 that as historic and mind bending the times we were living through then were, that when all the details of what was happening behind the scenes leaked out in the coming years ... that's where the truly fascinating information would be found.  How short are memories are - all the furor over the direct handout to investment (and other) banks the world over, led by our friends at Goldman Sachs (GS) via AIG swap agreements - is but a distant memory. 


Today, Bloomberg reports that Timothy Geithner's Federal Reserve branch - the most powerful as the home to our major financial oligarchs - pressured AIG to delay disclosure to the public on payouts to banks involved.  After all, Tim is a career bureaucrat, and as you quickly learn in Washington - when information is not convient, only release the bare minimum.  Then, with American's incredibly short attention span - you can showcase the full ugly to the light of day months (or if you are really good: years) later when Americans have moved on to a new season of American Idol.
If you are not familiar with the story, a flailing AIG (which should not even exist anymore) owed our financial oligarchs a lot of money.  Most companies on the verge of bankruptcy - in a ploy to try to stay alive - settle with their creditors for perhaps 20, 40, 60 cents on the dollar; depending on how bad their financial situation is.  But since the most important people to our government (the bankers) were involed, the US taxpayer's money came to the rescue to make sure they were paid not at 30 cents on the dollar, not at 60 cents on the dollar, but 100 cents on the dollar.  Because the last thing we want to do is to put the gravy train of political contributions ahead of the citizens of the US. Since these sort of things tend to peeve the American people, it was important for Mr. Geithner to delay the disclosure at the time of the payments... and instead let the details come out many months later when the firestorm had passed.   In return for such good deeds and protecting the bankers, Mr. Geithner was of course promoted.  We were not fooled... Stories like this remind me never to feel any pang of pity for the man as I almost did a few months back [Nov 19, 2009: Tim Geithner Under Fire (Videos)] *********************** On to today's Bloomberg story
  • The Federal Reserve Bank of New York, then led by Timothy Geithner, told American International Group Inc. to withhold details from the public about the bailed-out insurer’s payments to banks during the depths of the financial crisis, e-mails between the company and its regulator show.
  • AIG said in a draft of a regulatory filing that the insurer paid banks, which included Goldman Sachs Group Inc. and Societe Generale SA, 100 cents on the dollar for credit-default swaps they bought from the firm. The New York Fed crossed out the reference, according to the e-mails, and AIG excluded the language when the filing was made public on Dec. 24, 2008.
  • The e-mails were obtained by Representative Darrell Issa, ranking member of the House Oversight and Government Reform Committee.
I don't know Mr. Issa's politics, but I do know he has been one of the few people in Congress who actually has been fighting for disclosure and transparency without relent the past 3 years, so let me applaud him on that front.
  • The New York Fed took over negotiations between AIG and the banks in November 2008 as losses on the swaps, which were contracts tied to subprime home loans, threatened to swamp the insurer weeks after its taxpayer-funded rescue. The regulator decided that Goldman Sachs and more than a dozen banks would be fully repaid for $62.1 billion of the swaps, prompting lawmakers to call the AIG rescue a “backdoor bailout” of financial firms.  
  • It appears that the New York Fed deliberately pressured AIG to restrict and delay the disclosure of important information,” said Issa, a California Republican. Taxpayers “deserve full and complete disclosure under our nation’s securities laws, not the withholding of politically inconvenient information.
  • Issa requested the e-mails from AIG Chief Executive Officer Robert Benmosche in October after Bloomberg News reported that the New York Fed ordered the crippled insurer not to negotiate for discounts in settling the swaps.
Again that last point is so important... when a company you are dealing with as a counterparty is going belly up, you are thankful to get anything back.  In AIG's case the losses were so severe, 20 cents on the dollar most likely would of been a miracle.  But with your grandchildren's help, US and international banks were allowed the gift of 100 cents on the dollar.  Tim Geithner demand no negotiations.
  • The e-mail exchanges between AIG and the New York Fed over the insurer’s disclosure of the transactions show that the regulator pressed the company to keep details out of the public eye.
  • The e-mails span five months starting in November 2008 and include requests from the New York Fed to withhold documents and delay disclosures.
  • AIG’s Dec. 24, 2008, filing was challenged privately by the U.S. Securities and Exchange Commission, which polices the adequacy of disclosures by publicly traded firms. The agency said in a letter to then-CEO Edward Liddy six days later that AIG should provide a Schedule A, which lists collateral postings for the swaps and names the bank counterparties that purchased them from the company. The Schedule A was disclosed about five months later in a filing.
Of course the Fed's legal counsel is washing its hands of the matter ... in perfect legalese talk:
  • “Our position has always been that if AIG’s securities lawyers determine that AIG is legally obligated to make a particular filing or disclosure, then that is what AIG must do,” said Jack Gutt, a spokesman for the New York Fed, in an e- mailed statement. Gutt said it was appropriate for the New York Fed, as party to deals outlined in the filings, “to provide comments on a number of issues, including disclosures, with the understanding that the final decision rested with AIG’s securities counsel.”
This is laughable beyond comment.  As if AIG's legal team was going to do an end around the "counsel" of the New York Fed and do a disclosure that they were being pressed not to do.  AIG’s first rescue was an $85 billion credit line from the New York Fed in September 2008. The bailout was expanded three times and is valued at $182.3 billion. That includes a $60 billion Fed credit line, an investment of as much as $69.8 billion from the Treasury and up to $52.5 billion for Maiden Lane facilities to buy mortgage-linked assets owned or backed by the company.

By Trader Mark

http://www.fundmymutualfund.com

Mark is a self taught private investor who operates the website Fund My Mutual Fund (http://www.fundmymutualfund.com); a daily mix of market, economic, and stock specific commentary.

See our story as told in Barron's Magazine [A New Kind of Fund Manager] (July 28, 2008)

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Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


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