The Bailout: Are Massive Scandals About To Unfold?

Are facts concerning details of the current Wall Street bailout--past, present and future--about to unfold in a manner which may very well undermine President Obama's first term unless he acts immediately to staunch the damage created, and the damage about to be created, by the missteps of both (former) Bush Treasury Secretary Henry Paulson, as well as (current) Obama Treasury Secretary Tim Geithner?

This is the indication being gauged by this diarist given deeper dives into press coverage concerning two bailout-related matters of note swirling around the media over the past 72 hours, namely:
          1.) AIG counterparty overpayments during the last 16 weeks of the Bush Administration, which are far more extensive and generous than the already-massive $50 billion being reported over the past 24 hours, and
          2.) an effort--apparently well underway--to absurdly contort the FDIC's mission statement, to the point where the feds are going to provide a stealthy cash bonanza (up to $2 trillion in loans and guarantees/backstops), at taxpayer expense, to the grossly underregulated hedge fund industry--which if you read the Prudent Bear, below, looks at this as something of a free-for-all--as well as to some sovereign funds, under the guise of a federal program that had (up until now) absolutely nothing to do with the hedge fund industry, whatsover.

Reports have been circulating, based upon leaks to the media over the past 24 hours, that:      

1.) AIG ("Bad Bank" #1): $50 billion of the $173 billion forked over to AIG, since September, has been doled out to a handful of Wall Street heavy-hitters--a/k/a the "couterparties" that paid AIG to insure their toxic paper--to support their so-called insurance claims, backed by the good faith of AIG; folks who happened to make a pantload of money writing insurance policies on these Credit Default Swaps and Commercial Debt Obligations over the past few years.

We have Ms. Morgenson in the NY Times telling us the counterparties' sweetheart deals are "likely to increase" in terms of sheer numbers of billions of taxpayer dollars. But, it's the additional documentation ("NEW INFO") below Morgenson's quote which is most's not $50's already $80 billion...and these same firms are receiving 100 cents on the dollar for this toxic paper, too!

Gretchen Morgenson tells us in Sunday's NY Times: "A.I.G., Where Taxpayers' Dollars Go to Die."

A.I.G., Where Taxpayers' Dollars Go to Die
Gretchen Morgenson
March 8, 2009

...Mr. Liddy [AIG's CEO] wouldn't provide details on who the counterparties were or how much they received. But a person briefed on the deals said A.I.G.'s former customers include Goldman Sachs, Merrill Lynch and two large French banks, Société Générale and Calyon.

All the banks declined to comment.

How much money has gone to counterparties since the company's collapse? The person briefed on the deals put the figure at around $50 billion.

Unfortunately, that is likely to rise.

Diarist provides bold emphasis.

NEW INFO: It's already a LOT more than $50 billion, which was reported as "the number" in the past 24 hours; it's at least $80 billion and growing, or almost half of all the funds sent to AIG to date...and growing; perhaps much more if not MOST of the funds dished out to AIG to date all going to the same usual suspects...
The facts are we may just be scratching the surface on the AIG matter. It's going to--and already is--getting much more out-of-hand than originally reported, and virtually all of those funds has gone to the same  20-25 firms (and that's only as of late December '08); and, perhaps even more outrageous, it appears that a trend had developed early on with regard to these toxic debt purchases, whereby the recipients (that same list of 25+/- firms) of the Treasury Department's and the Federal Reserve's largesse were profiting to the tune of 100% on the actual value of the paper being purchased. They're doing this by allowing the counterparties to KEEP the collateral, on top of receiving the payments!!! (See story link and quote, immediately below.) In other words, the Fed was overpaying these firms to the tune of full face value, 100 cents on the dollar, on paper that was only worth from 20 cents to 60 cents on the dollar in the marketplace!

We know this because there've been reports on this dating back more than two months:"AIG Becomes the Fed's Vehicle to Buy Toxic Assets."

AIG Becomes the Fed's Vehicle to Buy Toxic Assets
by:  Michael Steinberg December 28, 2008

The Washington Post (from Bloomberg News) "With Fed's Help, AIG Unloads $16 Billion in Credit Default Swaps" reports that American International Group (AIG) retired another $16B face value of credit default swaps for $6.7B by purchasing the underlying securities and canceling the contracts. The insured (counterparties) were able to keep the more than $9B in collateral that AIG posted. The counterparties were taken out at par. So far, the Fed's Maiden Lane III special purchase fund has purchased $62.1B face value of CDOs from AIG's counterparties. The Fed has committed to purchase up to $70B face value of CDOs from AIG's counterparties at roughly 50% of par.  Each time the Fed is allowing the counterparties to keep all collateral.

Why has the Fed completely removed the risk of AIG as a counterparty in CDS transactions? Perhaps the Fed views moral hazard as a foreword looking constraint and AIG is just trying to unwind past regrettable activities. More likely the Fed is viewing AIG as a conduit to funnel capital into favored financial institutions. By forcing counterparties to sell the underlying CDO securities in order to receive full recovery, the Fed is liquidating toxic assets and preventing pure speculators from participating. But by paying close to par, when posted collateral is included, the benefit of price discovery is missing.

AIG told shareholders that the Fed would negotiate the CDO purchases on AIG's behalf and AIG's participation in any price appreciation would be limited. The implication was that the Fed would use its strength to be an advocate for AIG. Quite the opposite turned out to be true. Instead the Fed used its strength to force a weakened AIG to make whole its stronger counter parties.

Here, we have Fortune Magazine, via InsuranceNewsNet, from January '09, referencing $80 billion--not $50 billion--going to these same usual suspects: "...around 25 financial institutions...."AIG: The Company That Came To Dinner -- A Fortune Profile."

January 19, 2009 U.S. Edition
SECTION: FEATURES; Pg. 70 Vol. 159 No. 1

...Today FP [AIG's London CDS'/CDO issuer] has around $2 trillion of derivatives, not a big book in this world (J.P. Morgan Chase has more than $80 trillion) but one known to be loaded with particularly complex and long-dated contracts. The most infamous among these derivatives are the $80 billion of credit default swaps described above, for which the counterparties were around 25 financial institutions in the U.S. and at least seven other countries. All of the counterparties, of course, were wrung out by the credit crisis and vulnerable to a domino effect if AIG went under. Liddy proves himself a master at understatement in describing the threat to the counterparties: "That would have backed up into their capital adequacy and could have caused a problem."...

2.) FDIC ("Bad Bank" #2): The Treasury Department is currently in the process of providing a $500 billion infusion (along with another $1.5 trillion government guarantee to the hedge fund industry) into the Federal Deposit Insurance Corporation. And, while some naive speculation in the MSM is focused upon a handful of large bank defaults with regard to how this money is going to be spent, the reality is that it's apparently the stealthiest way for the government to actually provision that "Bad Bank" that everyone's been hearing about. (Some have said that the first bad bank was, in effect, AIG. But, based upon the sheer magnitude of Geithner's plans--already on record in a few stories--for this massive FDIC scam, the AIG mess pales in comparison.)  You see, Geithner's stated plans call for "private investment" (i.e.: hedge funds and sovereign funds) to buy up as much as another $2 trillion in toxic debt; but here's the scam: the government is going to insure 100% of all investor's funds via the FDIC, under something they're calling, a "Temporary Liquidity Guarantee Program," basically eliminating all risk in the deall for these hedge fund investors! (NOTE: I blogged a few days ago about part of this FDIC story, "Outrage: FDIC insures bank investors' risk with our money."

NEW INFO: The FDIC plan is already in motion; and, it looks like it's all about a massive loan and guarantee program for hedge funds and sovereign funds; this is NOT about putting a big bank into formal receivership, IMHO; apparently, it's about circumventing the spin on TARP!"FDIC Bill Dodges a New TARP Fight."

FDIC Bill Dodges a New TARP Fight
March 7, 2009

WASHINGTON -- A three-page bill designed to bolster the Federal Deposit Insurance Corp. could let the Obama administration sidestep a huge political problem: securing more financial firepower without opening a debate over the Troubled Asset Relief Program.


"Clearly, it is a backdoor way to avoid the restrictions that could potentially come by means of TARP," said Rep. Scott Garrett, a New Jersey Republican who sits on the House Financial Services Committee.

Democrats might try attaching the measure to a separate bill already moving through Congress that would allow bankruptcy judges to alter the terms of mortgages that are in foreclosure...

On the one hand, the article puts forth the notion that they're merely getting ready to put a large bank into receivership, but this is belied by comments to the contrary elsewhere in the story, such as in the opening paragraph, above, and here:

The Obama administration has suggested it wouldn't allow any of the 19 U.S. banks with more than $100 billion of assets to fail.

And, just in case you were wondering how the industry was looking at this, here's a couple of selections from this past week's editions of the Wall Street Journal, by way of the Prudent Bear stock market website, where I can't help but think of the word "bonanza" applying to the language here:

March 4 - Wall Street Journal (Liz Rappaport and Jon Hilsenrath):  "The U.S. launched a program to finance up to $1 trillion in new lending to consumers and businesses, in an ambitious attempt to jump-start credit for everything from car loans to equipment leases.  The Federal Reserve and the Treasury Department hope to revive the moribund market for so-called securitized lending, which until last year was central to providing consumer and business loans. Starting March 17, large investors -- including hedge funds and private-equity firms -- can obtain cheap credit from the Fed and use the money to buy newly issued securities backed by such loans."

March 3 - Wall Street Journal:  "If you missed the first hedge-fund boom, now may be the time to put up your shingle. Looking at the terms of the Federal Reserve's new Term Asset-Backed Securities Loan Facility, investors using it should be able to generate hefty returns with little risk.  The TALF effectively turns the Fed into a generous prime brokerage. The central bank lends money for up to three years to investment firms to buy bonds backed by assets like auto or credit-card loans.  The Fed needs to lure investors back into the market for these asset-backed securities, or ABS, where new issuance has almost disappeared."

And, just so we're clear folks, the "shadow banking system" (hedge funds, etc.) is comprised of a what could be described as little more than a bunch of sophisticated compulsive gamblers living in a world where, for the most part, they package what they want, sell it as they feel like selling it, and reap massive revenues from the commissions on it. It's comprised of folks like these guys:

John Paulson, Paulson & Co., (not to be confused with former Treasury Secretary Henry Paulson) the person widely considered to have almost single-handedly short sold the British banking sector down the tubes in 2008. In 2009, he's looking for distressed debt...and he knows just where to find it, too! (Oh, yes, having Alan Greenspan on your payroll doesn't hurt when it comes time to spinning things so the market rolls over and begs precisely when you want it to, as well.) Much of what you'd want to know about Mr. Paulson is here: "John Paulson's Funds Shine in the Gloom."

Stanford Kurland, Angelo Mozillo's number two guy at Countrywide, now leading the surge buying up the very foreclosures he helped to create. Read about it here: "Ex-Leaders of Countrywide Profit From Bad Loans."

Yep, meet the new leaders of our banking system...same (or as worse) as the old bankers...but perhaps a lot more ruthless.

So, recapping:

1.) AIG: Almost all of the $173 billion that's passed through AIG may be going to these 20-25 key Wall Street "players." It's not the $50 billion that's been widely reported in the past 24 hours. We know it is at least $80 billion...and growing.  And, these good ole' boys are getting 100 cents on the dollar on assets that are only worth between 20 cents and 60 cents on the dollar now.

2.) FDIC: It appears that the primary reason the FDIC's sole mission is being contorted is to: a.) provide a massive handout to the hedge fund and sovereign fund sectors, b.)  avoid the negative spin that would occur if this was labelled for what it actually is, a bad bank and a massive extension of TARP, c.)  and a situation where much more control of our nation's traditional banking services are being put in the hands of a grossly underregulated hedge fund industry cowboys...the exact opposite of the much more intensive regulation which is, both, so desperately needed and for which so many are clamoring as I write this. (In reality, we're turning over the keys to the car to the very "drivers" that got us into this mess in the first place.)

There are going to be tens of millions more pissed-off Americans once (or if they're ever) they're made aware of the extent of these outrageous actions by our government, in conjunction with a privatized NY Fed and a Federal Reserve Board that doesn't even release the minutes of its Open Market Committee meetings until four or five years after they occur. And, President Obama's window of opportunity to keep the narrative focused on his efforts to clean-up eight years of a country gone wild due to god-awful mismanagement by the Bush administration, will quickly be supplanted with much more negative criticism directed towards him, however unjustified it might be. And, that's due to the reality that Tim Geithner comes from many years at the New York Federal Reserve, working in an environment that was only monitored by the federal government, but totally controlled by (in this instance, the very Wall Street entities that actually are receiving most of the bailout funds now, and with whom Geithner was so close, to the point where, technically, they were paying his salary) the private banks doing business in it.

Yes, it's no wonder that "56% of the Public Favors Bank Nationalization."

Tags: AIG, American International Group, depression, Federal Deposit Insurance Corporation (FDIC), Former President George W. Bush, Former U.S. Secretary of the Treasury Henry Paulson, John Paulson, President Barack Obama, Recession, Stanford Kurland, TARP, Temporary Liquidity Guarantee Program, TLGP (all tags)



Tips: Because it's early Sunday morning! n/t

by bobswern 2009-03-08 04:58AM | 0 recs
Re: The Bailout: Are Massive Scandals

the difficulty in part with understanding the bailout/stimulus spending is a funadamental lack of economic understanding on my part. I am always gratreful when someone takes the time to translate headlines into information I can grasp.

by linfar 2009-03-08 09:42AM | 0 recs
who has power in society?

It sure seems like the financial sector as an entity and as a collection of individual actors behave irresponsibly.

And the gov't sees it's primary function as helping the irresponsible avoid consequences for their actions.

It's like keeping the confidence of the bad actors is more important than keeping the confidence of the tax payers and citizens.

But I guess that reflects the goverment/Obama administration understanding of the power relationship in western society. The citizens/tax payers are marks to be fleeced by the oligarchs.

by Carl Nyberg 2009-03-08 10:48AM | 0 recs

begins - and ends - at home.

Many businesses got fat on coercive profits. Their business models don't allow for the lower margins of honest endeavors.

by architek 2009-03-08 11:18AM | 0 recs
great diary, bob!

as per usual, I must add.


by the national gadfly 2009-03-08 10:57AM | 0 recs
Thanks, gadly! But, you've....

...been posting some incredibly powerful stuff, yourself. Downright great, in fact!

by bobswern 2009-03-08 01:54PM | 0 recs
I think the nasty secret is...

All these billions are going, indirectly, to prop up foreign banks that ate heavily the toxic AIG Credit Default Swap death-burrittos...

And, if the American Public new billions of their tax dollars were going there, the outrage would be insane.

But, what is truly an outrage is, none of these guys is in prison yet...OR may ever go.

We throw poor minority kids in jail for years for selling a bag of weed.

These criminals robbed hundreds of billions, and we are bailing them out.

by WashStateBlue 2009-03-08 11:36AM | 0 recs
While I know this is somewhat...

...hypocritical (because I do take some to task for their actions), the truth is that there's nowhere near enough transparency in terms of what's going on now. It's hard to dive too deep into the analysis when so many pertinent facts are missing!

by bobswern 2009-03-08 01:57PM | 0 recs
Re: The Bailout

President Obama can't be blamed for the problems he was handed (though he did vote for TARP I), but he can certainly be blamed for allowing this corruption to continue and for not putting the criminals behind bars.

by tpeichel 2009-03-08 11:54AM | 0 recs
How many people went to jail

in the Long Term Capital Management cluster-F?

The problem is, these criminals CHANGED THE LAWS, Phil Gramm made everything they did perfectly legal...

I want to see them punished, but the chances are very nil they will be.

And, certainly NEVER the guys at the top?

The Enron guys were just stupid and overt, these guys are smarter and change the laws to make sure they were never punished for their crimes...

by WashStateBlue 2009-03-08 12:04PM | 0 recs
I think that what's happened.... the AIG offices in London over the past few years, where they created all this toxic paper, is (perhaps) one of the biggest stories of this entire nightmare. Much of it was done there, from what I've been told, specifically to skirt the already-too-lenient Gramm-Leach-Bliley efforts. I read somewhere that something in the neighborhood of 4,000 offshore entities have been created by AIG, alone!

Yes, the appeal of Glass Steagall is one of the biggest mistakes our legislative branch has made in the past century.

by bobswern 2009-03-08 02:02PM | 0 recs
Re: I think that what's happened....

I agree that Glass-Steagall was a mistake, but we still had the authority to regulate the banks dealing with AIG. There are two parties in all these toxic transactions.

by tpeichel 2009-03-08 02:10PM | 0 recs
Geithner is Obama's worst appointment

And whoever talked him into that pick should also be fired.

by desmoinesdem 2009-03-08 12:20PM | 0 recs


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