The documents released by Sen. Chuck Grassley, R-Iowa, contain a list of the 27 banks, hedge funds and financial companies that received 3). $4.3 billion from Goldman Sachs Group Inc.. The money was to reimburse them for losses on investments called credit default swaps that plunged in value during the financial crisis.
The money trail actually began with AIG, which sold the swaps to Goldman. The big investment bank in turn sold them to its customers, including the international banks and financial companies. When AIG received a bailout worth $182.5 billion, it reimbursed Goldman and other banks, which then repaid their customers.
Credit default swaps are essentially contracts that insure against the default of bonds and corporate debt. Sellers of swaps, such as AIG, are obligated to repay customers if the value of the underlying bonds or debt declines.
Much of the federal rescue money for AIG was used to pay its obligations to its Wall Street trading partners on credit default swaps. 1).The biggest beneficiary of the AIG money was Goldman Sachs, who received $12.9 billion.
According to Grassley, the documents show that the five banks or companies ultimately receiving the largest amount of taxpayer money were DZ Bank AG in Germany, which received $1.18 billion; Banco Santander Central Hispano SA of Spain, which received $484 million; Ireland’s Zulma Finance PLC, which received $416 million; Infinity Finance PLC in Britain, which received $277 million; and Britain’s Sierra Finance PLC, which received $223 million.
Another $173 million went to Hongkong & Shanghai Banking Corp., which has HSBC operations throughout the U.S.
Goldman had previously disclosed that it had made payments to its customers, but did not say who the recipients were. It gave the information to Grassley after he threatened to subpoena the bank. Grassley released the documents showing the payments late Friday.
The payments have been controversial because of concerns that the banks should have absorbed more losses on their investments rather than be reimbursed with taxpayer money. Last month, a watchdog panel raised new doubts over the likelihood taxpayers will be fully repaid for the government’s bailout of AIG.
“The government determined that a collapse of AIG would be systemically disastrous,” Goldman Sachs spokesman Lucas van Praag said. “And of course if a systemic problem had ensued, we along with every company in the world would likely have been affected.”
[Yes, and exactly how would have Goldman been affected? Read on …]
Remember this story:
Goldman Sachs Made BILLIONS Shorting AIG, March 2009
Zero Hedge runs the numbers:
In a nutshell – Goldman had bought billions in AIG CDS in the 2004 to 2006 timeframe. Whether this was predicated by their expectation that subprime would blow up, or their very early understanding just how bad things at AIG were, one will never know, especially not the SEC. However, one look at the CDS chart below shows what prevailing levels for AIG’s CDS was in that time frame. As one can see, AIG 5 yr CDS traded in a range of 4 bps to 52.50 bps between October 1, 2004 (only goes back so far) and December 31, 2006. Indicatively 5 yr CDS closed yesterday at a comparable running spread equivalent of 1,942 bps.
Purchasing $10 billion in CDS (roughly in line with what Viniar claims happened) at a hypothetical average price of 25 bps (and realistically much less than that) and rolling that would imply that at today’s AIG 5 yr CDS price of 1,942 bps, 2). the company made roughly $4.7 billion in profit from shorting AIG alone!
[So let’s review the numbers from above:
Observation 1). AIG makes its largest single payment to Goldman Sachs – $12.9 billion dollars, however,
Observation 2). Goldman has stated that they were fully hedged and would not have lost a penny had AIG failed, in fact, Goldman is reported above, to have made $4.7 billion “shorting” AIG CDS.
Observation 3). Goldman paid out a reported $4.3 billion to European partners who purchased AIG CDS and we, the U.S. Taxpayers, have no idea if Goldman’s partners “shorted” the AIG CDS … making a profit on the CDS investment by following Goldman’s example of “shorting”. It is entirely possible that, like Goldman, these “partners” never lost a dime on their CDS “investments” with AIG, but actually profited from them.
Question 1). Regardless if Goldman’s partners made a dime, where did the remainder of the money go. Goldman received 12.9 billion and then made 4.7 billion shorting the CDS for a “net income” of 17.6 billion. Goldman paid out $4.3 to its “partners” based on the documents obtained by Senator Grassley. 17.6 billion minus 4.3 billion leaves $13.3 billion unaccounted for … $13.3 billion. Was that amount simply a “gift” from U.S. taxpayers? You can dole out some hefty bonuses with $13.3 billion…
and this story
Wall St. Helped to Mask Debt Fueling Europe’s Crisis
Wall Street tactics akin to the ones that fostered subprime mortgages in America have worsened the financial crisis shaking Greece and
undermining the euro by enabling European governments to hide their mounting debts.
As worries over Greece rattle world markets, records and interviews show that with Wall Street’s help, the nation engaged in a decade-long effort to skirt European debt limits. One deal created by Goldman Sachs helped obscure billions in debt from the budget overseers in Brussels.
Even as the crisis was nearing the flashpoint, banks were searching for ways to help Greece forestall the day of reckoning. In early November — three months before Athens became the epicenter of global financial anxiety — a team from Goldman Sachs arrived in the ancient city with a very modern proposition for a government struggling to pay its bills, according to two people who were briefed on the meeting.
The bankers, led by Goldman’s president, Gary D. Cohn, held out a financing instrument that would have pushed debt from Greece’s health care system far into the future, much as when strapped homeowners take out second mortgages to pay off their credit cards.
It had worked before. In 2001, just after Greece was admitted to Europe’s monetary union, Goldman helped the government quietly borrow billions, people familiar with the transaction said. That deal, hidden from public view because it was treated as a currency trade rather than a loan, helped Athens to meet Europe’s deficit rules while continuing to spend beyond its means.
Athens did not pursue the latest Goldman proposal, but with Greece groaning under the weight of its debts and with its richer neighbors vowing to come to its aid, the deals over the last decade are raising questions about Wall Street’s role in the world’s latest financial drama.
As in the American subprime crisis and the implosion of the American International Group, financial derivatives played a role in the run-up of Greek debt. Instruments developed by Goldman Sachs, JPMorgan Chase and a wide range of other banks enabled politicians to mask additional borrowing in Greece, Italy and possibly elsewhere.
In dozens of deals across the Continent, banks provided cash upfront in return for government payments in the future, with those liabilities then left off the books. Greece, for example, traded away the rights to airport fees and lottery proceeds in years to come.
Critics say that such deals, because they are not recorded as loans, mislead investors and regulators about the depth of a country’s liabilities.
Some of the Greek deals were named after figures in Greek mythology. One of them, for instance, was called Aeolos, after the god of the winds.
The crisis in Greece poses the most significant challenge yet to Europe’s common currency, the euro, and the Continent’s goal of economic unity. The country is, in the argot of banking, too big to be allowed to fail. Greece owes the world $300 billion, and major banks are on the hook for much of that debt. A default would reverberate around the globe.
A spokeswoman for the Greek finance ministry said the government had met with many banks in recent months and had not committed to any bank’s offers. All debt financings “are conducted in an effort of transparency,” she said. Goldman and JPMorgan declined to comment.
While Wall Street’s handiwork in Europe has received little attention on this side of the Atlantic, it has been sharply criticized in Greece and in magazines like Der Spiegel in Germany.
“Politicians want to pass the ball forward, and if a banker can show them a way to pass a problem to the future, they will fall for it,” said Gikas A. Hardouvelis, an economist and former government official who helped write a recent report on Greece’s accounting policies.
Wall Street did not create Europe’s debt problem. But bankers enabled Greece and others to borrow beyond their means, in deals that were perfectly legal. Few rules govern how nations can borrow the money they need for expenses like the military and health care. The market for sovereign debt — the Wall Street term for loans to governments — is as unfettered as it is vast.
“If a government wants to cheat, it can cheat,” said Garry Schinasi, a veteran of the International Monetary Fund’s capital markets surveillance unit, which monitors vulnerability in global capital markets.
Banks eagerly exploited what was, for them, a highly lucrative symbiosis with free-spending governments. While Greece did not take advantage of Goldman’s proposal in November 2009, it had paid the bank about $300 million in fees for arranging the 2001 transaction, according to several bankers familiar with the deal.
Such derivatives, which are not openly documented or disclosed, add to the uncertainty over how deep the troubles go in Greece and which other governments might have used similar off-balance sheet accounting.
The tide of fear is now washing over other economically troubled countries on the periphery of Europe, making it more expensive for Italy, Spain and Portugal to borrow.
For all the benefits of uniting Europe with one currency, the birth of the euro came with an original sin: countries like Italy and Greece entered the monetary union with bigger deficits than the ones permitted under the treaty that created the currency. Rather than raise taxes or reduce spending, however, these governments artificially reduced their deficits with derivatives.
Derivatives do not have to be sinister. The 2001 transaction involved a type of derivative known as a swap. One such instrument, called an interest-rate swap, can help companies and countries cope with swings in their borrowing costs by exchanging fixed-rate payments for floating-rate ones, or vice versa. Another kind, a currency swap, can minimize the impact of volatile foreign exchange rates.
But with the help of JPMorgan, Italy was able to do more than that. Despite persistently high deficits, a 1996 derivative helped bring Italy’s budget into line by swapping currency with JPMorgan at a favorable exchange rate, effectively putting more money in the government’s hands. In return, Italy committed to future payments that were not booked as liabilities.
“Derivatives are a very useful instrument,” said Gustavo Piga, an economics professor who wrote a report for the Council on Foreign Relations on the Italian transaction. “They just become bad if they’re used to window-dress accounts.”
In Greece, the financial wizardry went even further. In what amounted to a garage sale on a national scale, Greek officials essentially mortgaged the country’s airports and highways to raise much-needed money.
Aeolos, a legal entity created in 2001, helped Greece reduce the debt on its balance sheet that year. As part of the deal, Greece got cash upfront in return for pledging future landing fees at the country’s airports. A similar deal in 2000 called Ariadne devoured the revenue that the government collected from its national lottery. Greece, however, classified those transactions as sales, not loans, despite doubts by many critics.
These kinds of deals have been controversial within government circles for years. As far back as 2000, European finance ministers
fiercely debated whether derivative deals used for creative accounting should be disclosed.
The answer was no. But in 2002, accounting disclosure was required for many entities like Aeolos and Ariadne that did not appear on nations’ balance sheets, prompting governments to restate such deals as loans rather than sales.
Still, as recently as 2008, Eurostat, the European Union’s statistics agency, reported that “in a number of instances, the observed securitization operations seem to have been purportedly designed to achieve a given accounting result, irrespective of the economic merit of the operation.”
While such accounting gimmicks may be beneficial in the short run, over time they can prove disastrous.
George Alogoskoufis, who became Greece’s finance minister in a political party shift after the Goldman deal, criticized the transaction in the Parliament in 2005. The deal, Mr. Alogoskoufis argued, would saddle the government with big payments to Goldman until 2019.
Mr. Alogoskoufis, who stepped down a year ago, said in an e-mail message last week that Goldman later agreed to reconfigure the deal “to restore its good will with the republic.” He said the new design was better for Greece than the old one.
In 2005, Goldman sold the interest rate swap to the National Bank of Greece, the country’s largest bank, according to two people briefed on the transaction.
In 2008, Goldman helped the bank put the swap into a legal entity called Titlos. But the bank retained the bonds that Titlos issued,
according to Dealogic, a financial research firm, for use as collateral to borrow even more from the European Central Bank.
Edward Manchester, a senior vice president at the Moody’s credit rating agency, said the deal would ultimately be a money-loser for Greece because of its long-term payment obligations.
Referring to the Titlos swap with the government of Greece, he said: “This swap is always going to be unprofitable for the Greek government.”
McAuley’s World Comments:
The fraud that Congress just passed, the aptly named Dodd – Frank Bill, or the Financial Reform Act as it is more commonly called, does nothing to prevent or control these types of activities:
1). Fannie and Freddie are not covered or even addressed in the Dodd-Frank Bill.
2). Sovereign debt is not covered by the Bill either…
So in summary … AIG was bailed out to the tune of $180 billion plus U.S. dollars, all from the American Taxpayer. As the financial crisis unfolded, up until the present day, Obama’s current Treasury Secretary Tim Geithner, Geithner’s predecessor as Treasury Secretary, Henry Paulson (a prior Chairman and CEO of Goldman Sachs) and current Federal Reserve Chairman Ben Bernanke all testified before Congress and the American people that the Financial Bailout was a necessity to prevent a complete collapse of our financial systems… That AIG’s failure would lead to the failure of Goldman Sachs … and Goldman Sach’s failure would lead to… and so on and so on… Only now do we find out that even had AIG failed, Goldman Sachs stood to profit from the failure, that the true beneficiaries of the AIG bailout were European banks and the anonymous purchasers of AIG Credit Default Swaps, purchasers who may have, like Goldman Sachs, completely hedged their investment in the AIG CDS in the first place … American Taxpayers may find out one day that, like TARP, the Troubled Asset Relief Program, a “Program” that never purchased even one “Troubled Asset”, that the true beneficiaries of the “Financial Industry Bailout”, were not the “advertised” beneficiaries at all … and that, at a minimum, there is at least $13.3 billion dollars given to Goldman Sachs that isn’t accounted for…
Tim Geithner: Too Close to Goldman Sachs to Be Treasury Secretary, Critic Says 01/21/2009
Tim Geithner apologized for not paying his taxes and some Republicans criticized his involvement in the TARP program at today’s hearing, but Barack Obama’s nominee for Treasury Secretary appears on track for confirmation.
Congress is “all in a panic” and “really clueless” about this all-important member of Obama’s cabinet, says Christopher Whalen, managing director and co-founder of Institutional Risk Analytics. “I’m just not sure Tim Geithner is the guy we should have driving the bus.”
Beyond his tax gaffe, which will mainly serve to politically weaken Obama’s pick, Whalen says Geithner is the wrong many for the job because of his decision-making as President of the New York Fed.
“I believe Tim Geithner only represents part of Wall Street – Goldman Sachs,” he says, suggesting Goldman was the “primary beneficiary of the AIG bailout” and notes Goldman alum Stephen Friedman serves on the board of the NY Fed. (Hank Paulson and Robert Rubin, with whom Geithner had frequent meetings in the past year, are also Goldman alum.)
Whalen further questions the inconsistency of the Fed’s decision to rescue Bear Stearns – in the end, their debt and shareholders got something – while letting Lehman Brothers “go to hell.”
In the end, Whalen says he’ll fully support Geithner if and when he’s confirmed: “We have to be successful,” he says. “This is not about personality.”
Check out the video embedded in this article.
ALSO SEE: AIG’s Secret Bailout Partners – AIG Bailout Funds Funneled To Secret Partners – Partial List Of Cash Recipients Released : A list obtained by Fortune includes the names of many foreign banks – as well as U.S. giants such as Goldman Sachs. An article that details the “payments” made to foreign banks by AIG directly, payments made in addition to the “indirect payments” made by Goldman Sachs.
Filed under: AIG, Bailout, Banking, Banking Crisis, CDS, Goldman Sachs, Greece, Greece Financial Crisis, Greek Bailout & AIG Credit Default Swaps Tagged: | AIG, Bailout Cash, CDS, Credit Default Swaps, European Banks, Goldman Sachs, Greece, Greek National Debt, Health Care System, Treasury Secretary Tim Geithner