McAuleys World Comments Bolded Blue
WASHINGTON – The complex instruments at the heart of the financial meltdown, and the way two giant companies were wrapped around them and entwined with each other, are being examined by the special panel investigating the origins of the economic crisis.
The Financial Crisis Inquiry Commission is turning its focus to derivatives at two days of hearings starting Wednesday. On the hot seat will be former executives of American International Group Inc., the insurance conglomerate saved from collapse by a $182 billion taxpayer bailout, and current officials of Goldman Sachs Group Inc., the finance powerhouse that has been one of Wall Street’s biggest derivatives dealers.
Traded in an opaque global market valued at around $600 trillion, derivatives have caught a big part of the blame for the financial crisis that ignited in late 2008. The value of derivatives hinges on an underlying investment or commodity — such as currency rates, oil futures or interest rates. The derivative is designed to reduce the risk of loss from the underlying asset.
[This is true, but only part of the story. CDS were also bought and sold on a “naked” basis just like the commodities and foreign Governmental debt the CDS “secured”. Individuals who did not own the underlying investment, whether it be “securitized mortgages”, “currency” or “oil”, simply bought CDS, making a “bet” on which way the “investment” would move in price, they made a “bet” by purchasing a CDS without owning the the underlying investment. 100’s of billions of dollars were bet that the U.S. mortgage market would collapse by individuals who never purchased a single “collateralized” “toxic mortgage”, billions of U.S. taxpayer dollars were used to “pay off” these “bets”. http://en.wikipedia.org/wiki/Naked_short_selling ]
After the subprime mortgage bubble burst in 2007, derivatives called credit default swaps, which insured against default of securities tied to the mortgages, collapsed. That brought the downfall of Lehman Brothers and pushed AIG to the brink. New York-based AIG got an initial $85 billion infusion from the government in September 2008.
[AIG eventually received $180 billion in U.S. taxpayer support. There has not been a recent accounting of the total sums paid to AIG.]
Goldman Sachs profited from its bets against the housing market before the crisis, and continued to ring up huge profits after accepting federal bailout money and other government subsidies. The firm’s dealings in another type of derivative, known as collateralized debt obligations, have brought it harsh scrutiny by a Senate panel and in the case of one $2 billion CDO, civil fraud charges from the Securities and Exchange Commission.
A CDO is a pool of securities, tied to mortgages or other types of debt, that Wall Street firms packaged and sold to investors at the height of the housing boom. Buyers of CDOs, mostly banks, pension funds and other big investors, made money off the investments if the underlying debt was paid off. But as U.S. homeowners started falling behind on their mortgages and defaulted in droves in 2007, CDO buyers lost billions.
In early June, the congressionally chartered crisis inquiry panel issued a subpoena for documents from Goldman Sachs, accusing the firm of stonewalling its investigation. Goldman said it had cooperated.
The panel is looking at the relationship between the two financial giants.
“They had very substantial dealings with each other,” commission chairman Phil Angelides said in a conference call with reporters Tuesday.
Much of the federal rescue money for AIG went to meet the company’s obligations to its Wall Street trading partners on credit default swaps. The biggest beneficiary of the AIG money was Goldman, which received $12.9 billion.
Among the executives expected to testify: two former CEOs of AIG, Joseph Cassano and Martin Sullivan; and Gary Cohn, Goldman’s president and chief operating officer.
When AIG posted a loss for the fourth quarter of 2007, it pinned the blame on an $11 billion writedown related to the credit default
swaps held by its Financial Products unit. If AIG couldn’t make good on its promise to pay off the contracts, regulators feared the consequences would pose a threat to the whole U.S. financial system.
Cassano left AIG in 2008, shortly after the $11 billion loss was reported.
He was interviewed by the inquiry panel staff for five hours.
“He was at the center of this,” Angelides said Tuesday.
Please, tell me it isn’t so!
First, in case you missed it, the country of Greece is dead butt broke ….. flat busted. The BBC has announced that Greece will receive an initial bailout of $146 billion US dollars from various parties, http://news.bbc.co.uk/2/hi/business/8656649.stm , while the Euro Zone sets up a $1 trillion US dollar bailout fund. http://www.business-standard.com/india/news/germany-okays-trillion-dollar-euro-zone-bailout-plan/94028/on , http://money.cnn.com/2010/05/10/markets/dollar/?eref=aol .
Reminds me of AIG – really – an intial bailout – with a huge amount of “follow-on” cash a few weeks later.
The initial cost to US Taxpayers is being estimated at something between $56 billion and $170 billion dollars. The estimates are based on the fact that the IMF or International Monetary Fund, will contribute $284 billion to start and may commit up to $1 trillion dollars. http://money.cnn.com/2010/05/10/markets/dollar/?eref=aol
At present the United States Taxpayer provides $54 billion annually in IMF funds. http://www.house.gov/jec/imf/11-18-03.pdf The US pays, at a minimum, 17% of the IMF’s debts. 17% of $1 trillion is $170 billion.
Wait, this isn’t the worst of it.
The American Taxpayer maybe assuming the entire national debt of Greece.
Sounds crazy doesn’t it. I hope to heck it is crazy and not true. America simply can’t afford it!
Enter AIG, the former international insurance giant currently owned by the American Taxpayer, thanks to the US Government and the US Government’s bailout programs.
AIG, American Internation Group, the international insurance giant was ”nationalized” in September 2008 and given an initial infusion of $85 billion in taxpayer cash. http://online.wsj.com/article/SB122156561931242905.html
Additional taxpayer cash was provided to AIG and at present the total amount “fronted to AIG” is at least $135 billion taxpapaer dollars. http://www.propublica.org/ion/bailout/item/how-big-is-aigs-bailout-really707 http://online.wsj.com/article/SB122627437470412029.html
The amount “fronted” to AIG may be in excess of $180 million, it is hard to tell because the US taxpayer has not had a recent accounting of how much additional cash has been funnelled to AIG. http://www.propublica.org/ion/bailout/item/how-big-is-aigs-bailout-really-707
AIG used much of the money to pay off French & German banks who had invested in “toxic mortgage securities” or related securities sold by AIG called “Credit Default Swaps” or CDS. http://www.businessweek.com/the_thread/economicsunbound/archives/2009/03/german_and_fren.html
In the initial payoff, French and German banks received $36 billion in US taxpayer funds, paid through AIG by the Obama Administration. The payout to the French and German banks took place in March 2009 during the first 3 months of the Obama Administration under the direction of Obama Treasury Secretary Geithner. http://www.businessweek.com/the_thread/economicsunbound/archives/2009/03/german_and_fren.html
Almost $60 billion dollars of the initial US Taxpayer payout to AIG went to foreign banks. http://www.businessweek.com/the_thread/economicsunbound/archives/2009/03/german_and_fren.html
You might remember that Neil Barofsky, the Special Inspector General for the $700 billion financial bailout, reported to Congress that the Obama Administration had mismanaged the intial payouts, resulting in billions more than necessary being paid out to foreign and US banks and brokerages. http://www.chinadaily.com.cn/world/2009-11/17/content_8984419.htm
The whole issue of paying out US Taxpayer dollars in satisfaction of AIG’s debt was so “mucked up” that current Treasury Secretary Geithner first refused to disclose who got what and when, in the deals. Inspector General Barofsky faulted Secretary Geitner and the Federal Reserve for refusing at first to reveal which banks had received the billions of American taxpayer dollars
supposedly intended to save AIG. Geithner and the Fed released the banks’ names and the amount of their payoffs only after the American Public demanded greater transparency and the US Congress responded to that demand. http://www.chinadaily.com.cn/world/2009-11/17/content_8984419.htm http://www.marketwatch.com/story/geithner-paulson-defend-182-bln-aig-bailout-2010-01-27
Is AIG at it again?
The international press has reported on how President Obama is pushing for a bailout of Greece’s new Socialist Government. http://www.businessinsider.com/now-obama-is-making-emergency-calls-to-merkel-over-greek-aid-2010-4
For years the Socialists in Greece’s Government have fudged the numbers concerning the Greek National Debt. “To keep within the monetary guidelines of the European Union, the government of Greece has been found to have consistently and deliberately misreported, in other words falsified, the country’s official economic statistics. In the beginning of 2010, it was discovered that Greece had paid Goldman Sachs and other banks hundreds of millions of dollars in fees (CDS fees or “premiums”) arranging transactions that hid the actual level of Greek borrowing. The purpose of these deals …. was to enable them to spend beyond their means, while hiding the actual deficit from the EU overseers.. http://en.wikipedia.org/wiki/2010_European_sovereign_debt_crisis
“Speculation in the CDS market began after 4 October 2009, as the Greek Socialists celebrated their election victory. Two weeks later the newly-elected government informed its Euro-partners that the deficit for 2009 was going to lie at 12.7 percent of economic performance (GDP).” “The new estimate for the budget deficit called onto the stage the first hedge funds, reports a London CDS-dealer working for a large American bank.” http://www.eurosavant.com/2010/02/21/cds-just-another-evanescent-bubble/
Speculation in the CDS market?
Now the Eurpoean Press is reporting that AIG is selling CDS or Credit Default Swaps once again. Only this time, AIG is “insuring” Greece’s debt with the instruments not “toxic mortgage securities”.
“In any case, the CDS-wager has gone up because more and more true-believers in the Greek State have come to feel the need to insure their holdings. This rapidly-rising demand for insurance has been set off by the escalation of the debt crisis. But it is past Greek governments that have to answer in the first place for the exhausted budget situation. The higher demand for insolvency protection that has driven up the CDS price follows from the evidently poorer estimation of Greek credit-worthiness.”
Greek banks as insurers
On the other hand, whoever expected Greece’s rescue by Europartner countries would have had to position himself on the CDS market as an insurer, that is, as a seller of payment protection. The take in premiums from insurance protection sold provides increased revenue. But it’s on the seller-side that the weak points of the CDS market become evident. It’s still unclear who has sold insurance protection for Greece. In one study analysts from the major French bank BNP Paribas referred to market-rumors that Greek banks had insured a large sum by CDS. If this is correct, then the payment protection they have provided is worth nothing. Greek banks hold State debt of over 40 billion euros. This corresponds roughly to the entire amount of equity in the Greek credit market. A bankruptcy of the State would lead to a collapse of the banking system.”
“London investment bankers name AIG as a further CDS-seller. That company had to be nationalized during the financial crisis due to its having written insolvency insurance on American mortgages. This debt-load would have led to the collapse of the world’s biggest insurer. Prior to the financial crisis AIG is said to have widely held State credit-risk. If yet-larger insurance positions on Greece exist, then the American government would have a strong interest in preventing that country’s insolvency.”
Read the full article in Germany’s Frankfurter Allgemeine Zeitung GmbH, the German equivalent of the Wall Street Journal. The original article, in German, can be read here: http://www.faz.net/s/Rub645F7F43865344D198A672E313F3D2C3/Doc~EC22CF3FE26F8487A9B4E8E99B0DA384E~ATpl~Ecommon~Scontent.html
The english translation here: http://www.eurosavant.com/2010/02/21/cds-just-another-evanescent-bubble/
What might this mean to the US taxpayer? Well that will depend on several things.
First, Greece’s total National Debt is a bit of a mystery. The Politicans in Greece have been fudging the numbers for so long, that it is hard to accurately estimate the total debt and without knowing the total debt, it is nearly impossible to estimate how much may have been “insured” by purchasing CDS and how much of the CDS business may have passed through AIG.
Surprisingly similar to the “financial collapse” isn’t it?
A Greek Debt bubble, insured through AIG with CDS.
What is clear is this, if AIG is selling CDS to “insure” the Greek National Debt, the American people have not been told exactly why this is being done, nor have we been told how much we are on the hook for and who is making a buck off the deal. Two of the “usual suspects” are on the sceen, AIG & Goldman Sachs, two large and powerful players in the international financial scene and Democratic to their cores. You can bet on one thing, the average Jack or Jill Taxpayer isn’t going to make a dime on these dealings.
Meanwhile the Greeks Socialists and Anarchists are rioting in the streets over proposed and desperately needed budget cuts and the US is agreeing to bailout Greek workers while US workers run out of unemployment benefits.
Contact Your Congressperson today and insist that they investigate these reports. The US Taxpayer should not be “on the hook” for the Socialist Greek Government’s mismanagement of the Greek economy. Lets put our house in order before we try to prop up foreign Socialists Governments and their failed welfare states.
Lets practice saying “NO” to California by saying “NO” to Greece first!
Read the March 2009 post on AIG’s collapse here: https://mcauleysworld.wordpress.com/2009/03/18/the-story-behind-aigs-collapse-bad-mortgages-credit-default-swaps-accounting-irregularities/
[Is Goldman Sachs betting that Greece will default on its debt? Is AIG taking the bet? Will the U.S. Taxpayer be the one to “payoff” on the bet? Is the Financial Crisis Inquiry Commission even asking these questions? Another “Act” in Washington’s ongoing political theatre. Washington exercising “hindsight”, looking in the rearview mirror and “rehashing” the last crisis over and over, not exercising “oversight” by watching out for and preventing the next crisis before it happens.]
Filed under: AIG, CDS, Economic Crisis, Financial Crisis, Financial Crisis Inquiry Commission, Goldman Sachs, Greece, Greece Financial Crisis, Greek Bailout & AIG Credit Default Swaps Tagged: | AIG, CDS, Derivatives, Financial Crisis Inquiry Commission, Goldman Sachs, Greece