Goldman Sachs Details Where Bailout Cash Went: $4.3 Billion to European Banks

International banks and financial companies were indirect beneficiaries of the government’s 2008 bailout of American International Group Inc., according to newly released documents.

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.

Senator Chuck Grassley

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.

Former Treasury Secretary Henry Paulson - Former Goldman Sachs Chairman & CEO

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

Goldman Sachs (GS) reiterated its claim this morning that it wouldn’t have lost anything had AIG (AIG) been allowed to fail. Indeed, the bank says, it was fully hedged. Actually, it was far more than that. It was not just fully hedged — Goldman Sachs had positioned itself to profit big-time from the fall of AIG.

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

Former New York Reserve - Current Obama Tresury Secretary Tim Geithner

 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.

Federal Reserve Chairman Ben Bernanke

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

Senator Chris Dodd

 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,

Congressman Barney "There is nothing wrong with Fannie or Freddie" Frank

 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.,C,BAC,XLF,MS,JPM,%5EDJI 

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.

Greek Bailout Failing! Is AIG Selling Credit Default Swaps To Greece? Will American Taxpayers Be “On The Hook” Again?

First: The Financial Bailout of Greece is failing.

The bailout is “failing” by this measurement – Greece has been buying Credit Default Swaps or CDS to “insure” its national debt. The cost for Greece to purchase the “insurance” or CDS is skyrocketing ……..


Remember, Credit Default Swaps or CDS, were one of the culprits behind the “toxic mortgage scam” that brought down the US economy.

At the behest of their Democratic political masters Fannie and Freddie “provided” mortgages to millions who could not pay. Then Fannie and Freddie sold the “toxic mortgages” as investment securities with the help of the likes of Goldman Sachs. Finally, AIG “insured” the “securities” by selling Credit Default Swaps to back up the worthless mortgages and put the US taxpayer on the hook for paying off the “toxic debt”. While most of the parties made billions – the US taxpayer got stuck with bill. 

Fannie & Freddie Toxic Mortgages Toxic Mortgage Securities 

Credit Default Swaps  Collapse  Bailout

Fast Forward To Greece

Is AIG creating a Greek Debt Bubble – just like the “housing bubble” AIG helped create?

Greece, which is broke, obtained an international “bailout”. More on that “bailout” below.

Greece is purchasing Credit Default Swaps (CDS) to insure its national debt.

If the ‘Greek Bailout” was working – the cost to buy the “insurance” that the CDS provides should be going down …. it is not …. the cost to insure the Greek debt is skyrocketing …..

“Credit-default swaps pay the buyer face value if a borrower fails to meet its obligations, and prices decline as perceptions of creditworthiness improve. A basis point equals $1,000 annually on a contract protecting $10 million of debt.”

“Soberness is returning quicker than most market participants had expected as investors start to evaluate the long-term consequences of the bailout measures,” Stefan Kolek, a credit strategist at UniCredit SpA in Munich, wrote in a client note.

Credit swaps on Greece dropped 44 basis points to 541, after tumbling 329.5 basis points yesterday, the biggest decline since March 2005, according to CMA.

“Thus markets aren’t quite buying the latest bailout, since they price-in a higher chance of default than just a month ago. Moody’s isn’t buying the bailout either. Which is odd, because theoretically Greece has been just provided a life-line that should at the very least allow it to meet its current outstanding debt obligations. It’s as if markets don’t believe the European bailout fund will actually happen to the full extent as it’s described to.”

A Greek Credit Default: AIG – CDS & US Taxpayer Liability

AIG & The Bailout Of Greece – The Return of Credit Default Swaps (CDS) – Are US Taxpayers “On The Hook” Again?

Posted on May 13, 2010 by mcauleysworld | Edit

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, , while the Euro Zone sets up a $1 trillion US dollar bailout fund. , .

Reminds me of AIG – really – an intial bailout – with a huge amount of “follow-on” cash a few weeks later. 

The initial cost of the Greek bailout 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.

At present the United States Taxpayer provides $54 billion annually in IMF funds.  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!

AIG and the Greek Bailout

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.

Additional taxpayer cash was provided to AIG and at present the total amount “fronted to AIG” is at least $135 billion taxpapaer dollars.                                               

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.

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.

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. 

Almost $60 billion dollars of the initial US Taxpayer payout to AIG went to foreign banks.

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.

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 Geithner 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.        

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.

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.[17][18] 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.[19] The purpose of these deals …. was to enable them to spend beyond their means, while hiding the actual deficit from the EU overseers.[20].

“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.

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:

The english translation here: 

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!

Revisit the March 2009 post on AIG’s collapse:

The Story Behind AIG’s Collapse – Bad Mortgages, Credit Default Swaps & Accounting Irregularities

By David Voreacos and Elliot Blair Smith
Bloomberg News
November 26, 2008
Nov. 26 (Bloomberg) — Prosecutors are examining statements by former American International Group Inc. executive Joseph Cassano to see if he misled auditors and investors on subprime mortgage-related losses, said people familiar with the probe.

Investigators are asking auditors at PricewaterhouseCoopers LLP about memos they wrote last fall on how Cassano and other AIG executives valued contracts protecting $62 billion in mortgage-backed securities, the people said. The government is also looking at AIG’s reliance on valuations that have been questioned by auditors and banks.

PWC told Martin Sullivan, then AIG’s chief executive officer, on Nov. 29, 2007, that auditors had challenged the insurer’s financial controls, according to company records. On Dec. 5, Sullivan and Cassano told investors gathered at New York’s Metropolitan Club not to fear losses on AIG’s portfolio of ‘super senior” credit-default swaps, which insured bond losses tied to the U.S. housing market.

“It is very difficult to see how there can be any losses in these portfolios,” said Cassano, 53, according to a transcript of the investor meeting. Though he said the contracts had dropped in value by $1.1 billion in October and November 2007, Cassano told investors the “losses will come back.”

Cassano, who ran AIG’s London-based financial products unit, made no mention of PWC’s concerns at the meeting, according to the transcript. Cassano also didn’t discuss a running dispute with Goldman Sachs Group Inc., one of its counterparties, about valuing the underlying collateral. The securities firm had made collateral calls by the time of the conference.

‘We Are Confident’

“We are confident in our marks and the reasonableness of our valuation methods,” said Sullivan, 54, at the meeting.

On Feb. 11 of this year, AIG said the contracts declined more than sixfold in November, for an unrealized loss of $5.96 billion. AIG also said PWC found a “material weakness” in how it valued the credit-default swaps.

AIG posted what was then its biggest quarterly loss on Feb. 28, writing down $11.1 billion on the swaps. AIG announced Cassano’s resignation as president and CEO of AIG Financial Products a day later.

Cassano’s lawyer said in a statement that his client is cooperating with investigators and acted lawfully.

“His actions were appropriate, including during the valuation of AIG’s credit-default swaps,” said attorney F. Joseph Warin in an e-mailed statement. “He provided full and complete information to investors, his supervisors and auditors.”

Ousted Sullivan

AIG’s board ousted Sullivan on June 15, pegging paper losses on the contracts at $26.1 billion. While the New York- based insurer said it will probably never realize those losses, it got an $85 billion loan from the Federal Reserve in September. The U.S. this month increased the aid to more than $150 billion.

The Justice Department in Washington and the U.S. Attorney’s Office in Brooklyn, New York, have joined with the Securities and Exchange Commission to determine whether AIG executives committed crimes or merely exercised bad judgment, the people said.

PWC spokesman Steven Silber declined to comment on behalf of the auditing firm and its employees.

One way for prosecutors to build a fraud case is to show executives made public statements “inconsistent with what they knew to be true,” said former U.S. prosecutor Joshua Hochberg, now at McKenna Long & Aldridge in Washington.

“Prosecutors will look for as sharp a contrast as they can find between what an executive said and the information he actually had available,” said Andrew Hruska, a former federal prosecutor now at King & Spalding in New York.

Brooklyn College

Cassano graduated from Brooklyn College in 1977 with a degree in political science. He later worked two years at Drexel Burnham Lambert, the defunct investment bank. In 1987, AIG hired him to help found the financial products unit.

Cassano’s business drew attention from authorities. In 2004, he signed an agreement on behalf of the company to defer prosecution on a charge of aiding and abetting securities fraud. U.S. prosecutors alleged the unit helped Pittsburgh-based PNC Financial Services Group Inc. improperly remove assets from its balance sheet. AIG paid $126.4 million to resolve the case.

Cassano’s unit sold credit-default swaps on securities backed by corporate loans, mortgages, auto loans, credit cards and other assets. Those securities, known as collateralized debt obligations, are sliced into layers carrying different risks. AIG sold credit protection on the top layer, or AAA-rated portion, which is typically the last to suffer in a default.

‘Losing $1’

“It is hard for us, without being flippant, to even see a scenario within any kind of realm or reason that would see us losing $1 in any of those transactions,” Cassano said on an Aug. 9, 2007, investor call, according to a transcript.

AIG sold CDO protection worth about $441 billion as of June 30, 2007, including $64 billion backed by subprime mortgages, according to company documents.

AIG paid Cassano $280 million in the eight years before he resigned, according to U.S. Rep. Henry Waxman, chairman of the House Oversight and Government Reform Committee. After Cassano stepped down, the insurer paid him $1 million a month as a consultant.

AIG stopped paying Cassano the $1 million-a-month consulting fee before Waxman’s committee held a hearing about the insurer on Oct. 7, according to company spokesman Nicholas Ashooh.

At the Dec. 5 conference at New York’s Metropolitan Club, Sullivan said AIG’s risk was “very manageable.” Cassano didn’t disclose that Goldman had already made collateral calls when investors asked about demands from trading partners, according to the transcript. A buyer of the credit protection may demand cash from AIG when the value of the underlying CDOs dropped or if their credit ratings were lowered.

‘Collateral Calls’

“We have, from time to time, gotten collateral calls from people,” Cassano said at the meeting, according to the transcript. “Then we say to them, ‘Well, we don’t agree with your numbers.’ And they go, ‘Oh.’ And they go away.”

Former AIG auditor Joseph St. Denis wrote on Oct. 4 of this year to the Waxman committee that AIG should have disclosed more information on collateral calls because it was of “critical importance” to investors. St. Denis also said Cassano told him to avoid the swaps-valuation process before St. Denis’s resignation Oct. 1, 2007.

“I have deliberately excluded you from the valuation of the super seniors because I was concerned that you would pollute the process,” Cassano told St. Denis, according to the letter.

AIG’s valuation of the swaps, and the underlying CDOs, was based on a mathematical model known as the binomial expansion technique developed by Moody’s Investors Service in 1996 to estimate losses on collateral.

BET Methodology

AIG, after refining its BET methodology in late 2007, discovered “substantially higher” paper losses on the swaps portfolio, according to minutes of a Jan. 15 audit committee meeting released by Waxman. Audit committees regularly keep minutes.

“While it provides useful back-of-the-envelope risk metrics, there are much more accurate techniques,” said John Kiff, a structured-finance analyst at the International Monetary Fund in Washington. Kiff co-wrote an analysis in 2004 that concluded the model’s formula understated potential losses.

Moody’s began to phase out the BET technique in 2005. In a technical paper the credit-rating company published on its Web site in September of that year, the company described the replacement model, the correlated binomial method, as able to “better assess” potential losses in mortgage-dominated CDOs.

AIG’s computer modeling was a subject that PWC raised with management at a meeting, according to audit committee minutes.

Prominent Partners

Some of PWC’s most prominent partners attended audit committee meetings. They included two members of its global board, Tim Ryan and Robert Sullivan, and the U.S. chairman and senior partner, Dennis Nally. AIG paid $384 million in fees to PWC between 2004 and 2007, according to company filings.

On Nov. 29, 2007, six days before AIG’s investor conference at the Metropolitan Club, Ryan met Sullivan and then-Chief Financial Officer Steven Bensinger, according to minutes of the Jan. 15 audit committee meeting. Ryan said he worried about a “material misstatement or omission” in AIG’s second-quarter disclosures on securities lending.

On Jan. 15, Ryan told the audit committee that a “significant deficiency” in financial controls at AIG may amount to a “material weakness,” according to the minutes. Ryan said his concerns extended to the insurer’s securities- lending program and the credit-default swap portfolio.

At that meeting, Elias Habayeb, who then was CFO of AIG’s financial services group, said valuing the swaps “is not going as smoothly as it could,” according to the minutes.

AIG Swaps Portfolio

By then, another accounting firm, KPMG LLP, had also begun valuing the AIG swaps portfolio.

When AIG’s audit committee met again Feb. 26, Ryan said a Goldman collateral call after the second quarter led AIG to increase third-quarter losses to $350 million from $45 million, according to the minutes of the meeting.

In the fourth quarter, Ryan said at the meeting, PWC and AIG managers discussed “the subjectivity of the valuation process and key issues such as the impact of the collateral calls on the valuation judgments,” according to the minutes.

When AIG’s full board met May 8, Bensinger told directors that while the insurer’s models estimated the loss at $1.2 billion to $2.4 billion, an independent valuation by JPMorgan Chase & Co. pegged it at $9 billion to $11 billion. JPMorgan assumed sharper declines in housing values, according to minutes of the board meeting.

Cassano discussed collateral calls in detail with investors and “specifically noted that some counterparties had different valuation estimates,” Warin, his lawyer, said in his statement. “We are disappointed by the rehashing of allegations of wrongdoing that are misleading, incomplete, and in some cases just wrong.”

To date AIG has received $180 Billion Dollars Of Taxpayer Money – There may be $2 Trillion in additional bad debt on the AIG books.

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