Geithner’s Disgrace

By Eliot Spitzer, courtesy of Clusterstock

See Also:

Jim Rogers: Tim Geithner Has Been Wrong About Everything His Entire Career

How Tim Geithner Screwed Us All

White House Not Yet Actively Considering Throwing Geithner Under The Bus

Abolish the Federal Reserve System – A Huge Impediment to Human Freedom, Dignity and Progress

This blog is full of odes to the dignity and greatness of humanity, and blessings for those who have labored in anonymity and persecution to bring about this potential in all beings for the benefit of mankind. As a result, it has been littered with the refuse of the bigoted and unintellectual comments of those who precisely have struggled to prevent mankind from developing freedom from servitude. True to their technique of dissimulation, that have set about accusing others of the very thing they seek, and, as George Orwell so delicately imaged it, continued to misuse language deliberately and frankly calling white “black” and day “night”, so as to keep the very systems in place which hold back human progress.

But something very important has happened this month in American history, perhaps as important as the Civil War if not more so, in that it involves the potential unraveling of the world slavery system –

The Federal Reserve Transparency Act of 2009 (H.R. 1207), a bill introduced in the U.S. House of Representatives of the 111th United States Congress by Congressman Ron Paul (TX-14). The bill proposes a reformed audit of the Federal Reserve System (the “Fed”) before the end of 2010. I would encourage each and every American to support this bill and restore our free government.

The Federal Reserve Act (ch. 6, 38 Stat. 251, enacted December 23, 1913, 12 U.S.C. ch.3) is the act of Congress that created the Federal Reserve System, the central banking system of the United States of America, which was signed into law by President Woodrow Wilson. Before the 1913 establishment of the Federal Reserve, the banking system had dealt with periodic crises (such as in the Panic of 1907) by suspending the convertibility of deposits into currency. The system nearly collapsed in 1907 and there was an extraordinary intervention by an ad-hoc coalition assembled by J. P. Morgan. The bankers demanded in 1910-1913 a central bank to address this structural weakness. The supposed idea [as illustrated by the critical scene in the Jimmy Stewart Christmas movie It's a Wonderful Life (1946)] is to create a reserve of wealth to prevent bank runs. Let us say that Mr. Smith, a rich man, puts one million dollars into Bank XYZ. Now let us say the same Mr. Smith, now near death, has some sort of religious crisis and suddenly fears going to hell. He decides, therefore, to withdrawal his one million dollars all at once and give it away, so as to guarantee a trip to heaven. The problem is that Bank XYZ has actually loaned Mr. Smith’s money in the meantime to Ms. Hamptom’s flower business, the Gomez family’s mortgage, etc. So the bank doesn’t actually have the money at the bank to cover Mr. Smith’s sudden need for a withdrawal. If enough people does this at once, say because of a sudden fear about the future of the economy or whatever, that’s called a bank run. Similar situations in the past, such as in 1907, have caused severe economic crisis and a critical loss of confidence in the bank industry, currency as a means of trade, etc. In times of economic crisis, individuals often want to withdraw their money to put it into tangibles such as land or gold. This tendency has a way, from the bank industry’s point of view in particular, of magnifying sudden panics or losses of confidence in what is essentially a house of cards. The Federal Reserve was supposedly created to thereby serve as a pool of funds that Bank XYZ could call upon to honor Mr. Smith’s sudden withdrawal. In that way, it was supposed to stabilize the United States against economic crisis. Unfortunately, there were no crises to defend against except for a suspect and immoral usury system being shaken anyway, and all the Federal Reserve System really did was create a system of world-wide slavery and episodic economic crisis. By merely asking the Federal Reserve to have transparency, to show us, the American people what they really are and what they are really doing and for whom, Ron Paul has subtlety and cleverly forced the hand of a most corrupt and evil system of domination by an immoral few at a time when their machinations are most visible in their effect and most susceptible to destruction.

Federal Reserve System is “an independent entity within the government, having both public purposes and private aspects”. In particular, neither the Federal Reserve System nor its component banks are overseen or controlled by the US Federal Government, but bluntly act as loan-sharks to banks across the US.
According to the Federal Reserve acts and amendments over the years, there are presently five different parts of the Federal Reserve System:
1.The presidentially appointed Board of Governors of the Federal Reserve System, a governmental agency in Washington, D.C.
2.The Federal Open Market Committee (FOMC), which oversees Open Market Operations, the principal tool of national monetary policy.
3.Twelve regional privately-owned Federal Reserve Banks located in major cities throughout the nation, which divide the nation into 12 districts, each with its own nine-member board of directors.
4.Numerous other private U.S. member banks, which have required amounts of stock in their regional Federal Reserve Banks, which does pay dividends like any other stock, but cannot be bought or sold publicly on the stocks.
5.Various mysterious advisory councils which provide some sort of sinister coordination or planning to this multi-tentacled and unaudited process.

It is widely believed that Woodrow Wilson rushed the system into law after election largely for the economic benefit of financial entities that contributed heavily to his election campaign. Oddly enough, while he is often portrayed as being pushed into this by lust for power and with remorse, as being our only president with a PhD, he left behind political writings that reveal a distaste for freedom and a desire for a more tyrannical system which abolished the founding father’s system of branches of government with checks and balances long before he ever held office. Under the influence of Walter Bagehot’s The English Constitution, Wilson saw the United States Constitution as pre-modern, cumbersome, and open to corruption. He wrote in the early 1880s:
“I ask you to put this question to yourselves, should we not draw the Executive and Legislature closer together? Should we not, on the one hand, give the individual leaders of opinion in Congress a better chance to have an intimate part in determining who should be president, and the president, on the other hand, a better chance to approve himself a statesman, and his advisers capable men of affairs, in the guidance of Congress?”

The first chairman of the Fed, McAdoo, was an entrepreneur. He was the president of the Hudson & Manhattan Railroad Company, which built the tubes connecting Manhattan and Hoboken and operated by PATH today. He worked on Wilson’s 1912 presidential campaign as noted earlier. Wilson named him Treasury Secretary in 1913. And in March 1914, he became engaged to Wilson’s daughter. So the president was also his soon-to-be father-in-law, quite the incestuous relationship with controlling monetary policy Wilson had hoped to have in the first place. In fact, in the picture beginning this article, McAdoo’s armband is worn to commemorate the death, four days earlier, of his mother-in-law, Ellen Axson Wilson, and some say the death of capitalism and human freedom in general. Interesting other facts about the above picture are that the standing gentleman is Paul Warburg of Hamburg, Germany, of a successful Jewish banking family. He is also of the family banking firm of M.M. Warburg & Company, still a member bank of the Fed, and chairman of Wells Fargo, still receiving Fed handouts to this day. He is also the founder of the Brookings Institute, still one of the aforementioned advisory councils of the Fed to this day!

In addition to controlling the American economy, the Federal Reserve has the authority to act as “lender of last resort” by extending credit to depository institutions or to other entities in unusual circumstances involving a national or regional emergency, such as an economic crisis, where failure to obtain credit would have a severe adverse impact on the economy.

Through its discount and credit operations, Reserve Banks provide liquidity to banks to meet short-term needs stemming from seasonal fluctuations in deposits or unexpected withdrawals. Longer term liquidity may also be provided in exceptional circumstances. The Fed is able to make money through these loans by charging a rate, known as the discount rate (officially the primary credit rate).

By making these loans, the Fed serves as a buffer against unexpected day-to-day fluctuations in reserve demand and supply. This contributes to the effective functioning of the banking system, alleviates pressure in the reserves market and reduces the extent of unexpected movements in the interest rates. For example, on September 16, 2008, the Federal Reserve Board authorized an $85 billion loan to stave off the bankruptcy of international insurance giant American International Group (AIG). The Federal Reserve System’s role as lender of last resort is criticized for shifting risk and responsibility away from lenders and borrowers and placing them on others, namely us middle-class taxpayers, in the form of taxes and/or inflation. This enables the banks and companies that are bailed out to avoid responsible management at our expense, and enables the banks that are doing the rescuing to actually profit from these transactions at our expense, not through any penalty or consequence of the offending institution.

Interestingly, the Fed also has over $11 billion in gold, which is a holdover from the days the government used to back US Notes and Federal Reserve Notes with gold. This means that in times of economic crisis, when tangibles such as gold rise greatly in value, the Fed sees a profit in the rise of the value of its holdings. The Fed has approximately a tenth of the world’s gold, and the member banks are estimated to trade approximately 75% of the world’s foreign exchange trade, or Forex market, while at the same time being able to control the value of the dollar vis a vis other currencies at will. The value of gold held by the Fed at this time of high gold value is around $310 trillion, and represents almost 80% of the world’s gold supply, which can be bought or sold as needed.

So what we are talking about is a group of private banks and companies in the hands of a few families, a surprising number of which are not United States corporations or citizens, many of whom have a similar degree of control over their own countries economic policy and national banking, capable of profiting greatly by economic crisis which they are capable of manufacturing by means of their hold of the reins of economic policy. In fact, the periodic economic cycles we are experiencing over time are in fact a by-product of the policy of those capable of profiting from these crises.
The Federal Reserve’s control of interest rates is an unnecessary and counterproductive interference in the economy. Rates should be naturally low during times of excessive consumer saving (because lendable money is abundant) and naturally high when high net volumes of consumer credit are extended (because lendable money is scarce). These critics argue that setting a baseline lending rate amounts to centralized economic planning, and inflating the currency amounts to a regressive, incremental redistribution of wealth.

Austrian School economists focus on the amplifying, “wave-like” effects of the credit cycle as the primary cause of most business cycles. They assert that inherently damaging and ineffective central bank policies, like those of the Federal Reserve, are the predominant cause of most business cycles, because they tend to set interest rates unnaturally low for too long, resulting in excessive credit creation, speculative “bubbles” and unnaturally low savings. The business cycle unfolds in the following way. Low interest rates tend to stimulate borrowing from the banking system. This expansion of credit causes an expansion of the money supply, through the money creation process in a fractional reserve banking system. This in turn leads to an unsustainable “monetary boom” during which the “artificially stimulated” borrowing seeks out diminishing investment opportunities. This boom results in widespread failed investment, causing capital resources to be misallocated into areas which would not attract investment if the money supply remained stable. The global economic crisis of 2008 represents an example of the Austrian business cycle theory’s dependability.
It is also a widely-accepted criticism of the Fed, first proposed by Milton Friedman and Anna Schwartz, that the Fed exacerbated the 1929 recession, sparking the Great Depression. After the stock market crashed in 1929, the Fed continued to contract the money supply and refused to save struggling banks threatened with runs from failure; this mistake, critics charge, allowed what might have been a relatively mild recession to explode into catastrophe, as discussed in their work A Monetary History of the United States, 1867-1960. The Great Depression was caused by the fall of the money supply. Friedman & Schwartz note that “[f]rom the cyclical peak in August 1929 to a cyclical trough in March 1933, the stock of money fell by over a third.” The result was what Friedman calls the “Great Contraction” — a period of falling income, prices, and employment caused by the choking effects of a restricted money supply. The mechanism suggested by Friedman and Schwartz was that people wanted to hold more money than the Federal Reserve was supplying. People thus hoarded money by consuming less. This, in turn, caused a contraction in employment and production, since prices were not flexible enough to immediately fall.

The current Fed Chairman Ben S. Bernanke, even acknowledged this in a 2002 speech:

Let me end my talk by abusing slightly my status as an official representative of the Federal Reserve. I would like to say to Milton and Anna: Regarding the Great Depression. You’re right, we did it. We’re very sorry. But thanks to you, we won’t do it again.

I think I would prefer to audit their actions in the future rather than take their “good word,” especially as it has occurred repeatedly since then, particularly when the next generation of beneficiaries of these few families needs to yet again harvest the work and ideas of the world for the continuation of their parasitic life-cycle.

In a 2002 interview with Peter Jaworski, Friedman said that ideally he would “prefer to abolish the federal reserve system altogether” rather than try to reform it, because it was a flawed system in the first place. He would prefer to replace the organization with a mechanical system that would increase the money supply at some fixed rate, and thought that “leaving monetary and banking arrangements to the market would have produced a more satisfactory outcome than was actually achieved through government involvement.” I would have to agree. But I must say that Ron Paul’s urgent plea that the American people at least be allowed to be informed as to the workings of the Federal Reserve is certainly logical and virtually unarguable, especially if the workings of the Fed involve the periodic construction of waves of starving families and ruined lives for the benefit of a few families around the world, as they appear to.

You see, there is no witchcraft. The controlling influences are a handful of WASP and Jewish families, about 50/50, who no doubt boringly and dutifully attend their weekly church or synagogue services. After all, what need is there for the drinking of goat’s blood or black masses when you can watch infants starve and grown men bleed tears for their dying wives while you dine on gold-leaf cake? The organization of Adam Weishaupt and it’s members such as Goethe and the founding fathers like Thomas Jefferson in their Joseph Campbellian embrace of humanism have little to do with these fascist machinations. Indeed the forces of the Enlightenment, the lovers of classical culture, and Jesuits and Catholic scholars such as myself and John Kennedy have always stood in stark battle against the forces of totalitarianism and degradors of human freedom. This is why John Kennedy was shot in the first place, for railing against the Fed and endorsing human freedom, potential and the brotherhood of man. Compare this to Woodrow Wilson, author of the Federal Reserve, abolisher of the design of our illuminated founding fathers, and acknowledged Klansman. Listening to the speech below, remember that Kennedy was killed for daring to cry out for change, and let his martyrdom not be in vain. Join Ron Paul and myself and call your representative today and insist on transparency for the Federal Reserve and begin the end of human slavery to a greedy and unintelligent few.

Via Alternet

So this is what our tax dollars cum bailout paid for? Rewarding a company that ran itself into the ground with risky derivative trading who took up a side job fleecing the rural poor.

Middlesboro and Clinton are two tiny, impoverished towns in southern Kentucky with a combined population of 12,000. In 2008, Middlesboro’s per capita income was $13,189 a year, only a few hundred dollars more than the average worker earned in third-world Mexico. That is if they were lucky to even get a job. Real unemployment hovers somewhere around 30%, and the state is so broke that half the people eligible for unemployment benefits can’t receive them. Life may be tough and most people live in poverty, but that doesn’t mean they can’t be made a little poorer. That’s the lesson locals learned after bailed-out insurance villain AIG took over their water utility and instantly raised rates to squeeze an extra $1 million in profits out of its new customers, forcing some to consider choosing between running water and food.

They bought the largest privately held utility in the country. Meaning they were not subject to the same stringent standards as a public utility.

AIG had reason to be pleased with its purchase. Water utilities are one hell of a profitable business, with international corporations easily making a 20 to 30% profit margin, according to a 2007 report by Food and Water Watch. In the US, federal regulations limit profits to 10%, a pesky rule that companies easily subvert by shuffling their income around and “investing” it in side businesses. These kinds of returns would be the envy of the pharmaceutical and oil industries. How do water companies do it? According to Food and Water Watch, they charge 50% more for services than public utilities and pocket the difference, thereby unleashing the potential of the free market.

What is, for all practical purposes, a monopoly can charge 50% more than a public utility.  What were people going to do, dig wells? Wells can cost a lot of money. As can any other practical alternative. So AIG could not lose. And when the credit crunch started and they were desperate for cash, they simply instituted a new “billing system” which was designed, in essence, to create revenues through late fees.

They never once offered to bail out the people of Middlesboro and Clinton.

If I believed in vengeance rather than justice, I would suggest a public caning for all involved in the creation of this disgusting travesty.

Maurice R. “Hank” Greenberg did not start AIG (AIG), but he might as well have. Greenberg took over as head of the insurance company in 1968, the only CEO other than its founder C.V. Starr. Greenberg turned AIG into the largest insurance firm in the world. In 2005 he left during an accounting scandal, then shortly after his departure, problems with toxic assets on the firm’s balance sheet nearly took the company under. A series of government investments totaling $180 billion kept AIG in business. Washington was worried that a collapse of AIG would bankrupt a number of other large companies that had relationships with the firm.

On Nov. 25, AIG and Greenberg agreed to settle all the outstanding legal issues between them. According to an 8-K filed with the SEC, Greenberg and AIG’s former CFO will receive reimbursement of their legal fees of up to $150 million.

Read more…

This Thanksgiving if you happen to be giving thanks for your home and the food on your table,  we hope you take a minute to think about the injured contractors’ lives you’ve stomped all over to get them.

Do your families know the things you do to other families for financial gain?

Reuters:   Saab’s failure to be bought shows that Chinese companies are having trouble moving into Western markets through M&A.

Reuters:   AIG (NYSE:AIG) and former CEO Greenberg settled legal issues between them.

Reuters:   Dubai will put a six month standstill to debt payments.

Reuters:   Fannie Mae (NYSE:FNM) may tighten lending standards.

Reuters:   Improved consumer numbers help increase market optimism.

WSJ:   Toyota (NYSE:TM) will fix pedals on four million cars.

WSJ:   The building of many factories in China as part of its stimulus package could flood the world with goods due to manufacturing overcapacity.

WSJ:   GM will keep all of its plants in Germany.

WSJ:   The White House is considering creating a panel to address the deficit.

NYT:   Many retailers are extending deals beyond Black Friday

FT:   Hershey (NYSE:HSY) is closer to a bid for Cadbury (NYSE:CBY).

Bloomberg:   GE (NYSE:GE) may be closer to selling control of NBCU to Comcast (NASDAQ:CMCSA) as Immelt meets with the head of Vivendi to get it to sell its 20% share in the entertainment company.

Douglas A. McIntyre

How Tim Geithner Screwed Us All

By Gretchen Morgenson, courtesy of Clusterstock

Thomas Adams, a lawyer and former bond insurer executive, wrote a guest post for naked capitalism on the question of why AIG was bailed out and the monoline bond insurers were not (wow, is it really almost two years since the monoline insurer crisis?). He estimates that the monolines together had roughly the same amount of exposure to CDOs that AIG did; in addition, since the monolines also insured trillions of dollars of municipal debt, there were potential spillover effects. (AIG, by contrast, insured tens of trillions of non-financial stuff — people’s lives, houses, cars, commercial liability, etc. — but that was in separately capitalized subsidiaries.)

The difference between the monolines and AIG, Adams posits, was Goldman Sachs.

Apparently while all the other banks were paying monoline insurers to insure their CDOs, Goldman wasn’t, because the monolines refused to agree to collateral posting requirements (clauses saying that if the risk increased and the insurer was downgraded, it would have to give collateral to the party buying the insurance). Instead, Goldman bought its insurance in the form of credit default swaps from AIG, which was willing to agree to collateral posting requirements, as we all now know. This is one way in which Goldman was smarter than its competitors. Another way, which we also all know, is that at some point in 2007 Goldman began shorting the market for mortgage-backed securities — which would given extra incentive to make sure that they were fully insured.

Until, suddenly in September 2008, it turned out that maybe Goldman wasn’t that much smarter than everyone else, when it seemed like AIG might not be able to post the collateral it owed. And so:

“I hate to get sucked into the vampire squid line of thinking about Goldman, but the only explanation i can think of for why AIG got rescued and the monolines did not is because Goldman had significant exposure to AIG and did not have exposure to the monolines.”

There’s more.

Yves Smith points out (in an update) another possible difference between AIG and the monolines — AIG’s business in swaps allowing European banks to reduce their capital requirements, which meant that big European banks had a lot of exposure to AIG.

Another difference might be timing — AIG hit the fan at the same time as Lehman and a week after Fannie and Freddie were taken over. Another difference might be raw size: even if the monolines together were as big as AIG, that’s precisely the point — their problems could be spaced out over time, allowing the markets more time to adjust, while AIG would go bankrupt in one big lump.

By James Kwak

Reuters:   Chinese banks must raise large sums of capital which could test equity markets.

Reuters: AIG’s (NYSE:AIG) CEO had his pay package approved.

Reuters:   The Fed sees growth but substantial policy risks.

Reuters:   The Washington Post (NYSE:WPO) closed all of its US bureaus.

Reuters:   More shoppers plan Black Friday visits.

Reuters:   Starbucks (NASDAQ:SBUX) sees China as its next key market.

Reuters:    The World Bank says that rasing rates quickly could cause a slump.

Reuters:   Calpers may drop Black Rock (NYSE:BLK) as a real estate investor.

Reuters:   The CFO of Microsoft (NASDAQ:MSFT) will leave.

Reuters:   Top performing fund manager Jerry Jordan is selling Google (NASDAQ:GOOG) and Apple (NASDAQ:AAPL)

Reuters:   Cybercriminals regularly breach company systems.

WSJ:   Saab may be closed because GM cannot find a buyer.

WSJ:   Robert Benmosche of AIG (NYSE:AIG) signed a non-compete agreement.

WSJ:   Time Warner Cable (NYSE:TWC) is resisting paying big fees to broadcats channels.

WSJ:   Bank lending is still falling as firms remained concerned about risk.

WSJ:   Clothing retailers think the holidays will be good.

WSJ:   Tivo’s (NASDAQ:TIVO) loss was narrower than expected.

WSJ:   Citigroup (NYSE:C) sold Diner’s Club.

WSJ:   Detroit is releasing incentives, a bad sign.

WSJ:   Royal Dutch Shell’s two huge natural-gas projects in Qatar will increase the company’s cash flow by $4 billion a year

WSJ:   Sprint (NYSE:S) is betting on prepaid customers.

NYT:   The home price recovery may take a dip.

NYT:   The head of the IMF encouraged continuing stimulus spending.

NYT:   The FDIC fell into the red.

NYT:   Market fears are pushing yields on federal securities to all time lows.

Douglas A. McIntyre

Eliot Spitzer took Treasury Secretary Timothy Geithner to task in Slate yesterday, accusing him of incompetence in handling the AIG bailout, particularly the full payment to swap counterparties like Goldman Sachs. Spitzer’s basic position is that since the government had all the money, it should have played hardball and forced everyone to take a haircut, which is standard practice in workout situations.

As Spitzer says, “The entity providing financing to a near-bankrupt institution must always seek contributions from everyone else at risk.” He further notes ““In a workout context, the entity with cash—here, the government—can set the terms, and the other parties can either accept those terms or walk over to bankruptcy court.” Spitzer also references the auto company bailouts, in which the government did play hardball and forced all parties to make concessions.

Regular Thoughtbasket readers will recall my supportive comments (read them here and here) of the government’s aggressive position during the auto bailouts, and so it shouldn’t surprise you to learn that I agree with Spitzer here. Geithner should have been far more forceful in making everybody feel some pain for doing business with AIG. As Spitzer says:

“Pressuring Goldman and the other counterparties to offer concessions would have forced them to absorb the consequences of making suspect deals with an insurance company that was essentially a Ponzi scheme. Forcing them to give concessions would have been one small step toward ending the moral hazard the Fed had allowed to flourish for years.”

This seems like a good opportunity to point out the risk of having career bureaucrats deal with business situations like this. Geithner was out of his league going head to head with Wall Street. Geithner has only worked in governmental positions, except for a couple of years at Kissinger Associates, which is essentially a government position. On the other hand, the guys who ran the auto negotiations, Steve Rattner and Ron Bloom, have significant real-world experience, as investment bankers and, in the case of Bloom, negotiating workouts of failing steel companies. This is why any government agency that deals with business needs to have at least some businesspeople in high-level positions.

With the associated increases of one contractor to one soldier

What a windfall for AIG and CNA

From the Huffington Post

President Barack Obama is expected to announce a “sizable” increase in US troop levels in Afghanistan early next week, tentatively during a prime-time speech on Tuesday, December 1, according to media reports.

Obama met with his war council on Monday evening to decide how many troops to send in addition to the 68,000 already deployed. According to the Associated Press, “Military officials and others said they expect Obama to settle on a middle-ground option that would deploy an eventual 32,000 to 35,000 U.S. forces to the 8-year-old conflict.” McClatchy is reporting that Obama plans to send 34,000. General Stanley McChrystal, the top US commander in the region, had been pressing for 40,000.

After Obama’s announcement next Tuesday, General McChrystal, Defense Secretary Robert Gates and Admiral Mike Mullen, chairman of the joint chiefs of staff, are expected to testify on Capitol Hill.

The president had been reluctant to make a decision without an exit strategy, a theme echoed today by Robert Gibbs. The White House press secretary told reporters that it’s “not just how we get people there, but what’s the strategy for getting them out.”

Below, an official White House photo by Pete Souza of President Obama meeting last night with his national security team to discuss Afghanistan in the Situation Room.

Reuters:   Hewlett-Packard’s (NYSE:HPQ) profit was up 14% and the company will triple its share buyback.

Reuters:   Banks have been asked to give their TARP repayment plans to the government.

Reuters:   Rich people are likely to shop early this year.

Reuters:   The US pitched the F-35 fighter to Israel.

Reuters:   Home sales hit a 2 1/2 year high.

Reuters:   Hedge funds may get $11 billion frozen at Lehman.

Reuters:   Businesses are still cautious on borrowing.

Reuters:   Murdoch’s News Corp (NYSE:NWS) may face trouble if he blocks Google (NASDAQ:GOOG) News.

Reuters:   A falling Chicago Fed index is a bad sign for the economy.

WSJ:   One in four US homeowners is underwater.

WSJ:   HSBC (NYSE:HBC) is telling individual investors to move their gold out of its New York vault to make room for institutional clients.

WSJ:   Some government factions are urging pay czar Ken Feinberg to ease up on AIG (NYSE:AIG) pay restrictions.

WSJ:   Early numbers show electronics sales may be good this holiday but apparel sales will not be.

WSJ:   Fitch cut the rating of Mexico’s debt.

WSJ:   The Organization for Economic Cooperation and Development said rich nations are moving out of a recession but that stimulus spending was still necessary.

WSJ:   The EU will coordinate will coordinate national spending deal with GM’s Opel.

WSJ:   Banks have trillions of dollars in debt due over the next few years.

WSJ:   Google (NASDAQ:GOOG) bought display ad start-up Teracent.

WSJ:   China is slowing bank lending activity.

WSJ:   Hershey’s (NYSE:HSY) bid for Cadbury could hurt the company financially.

WSJ:   Upscale auto companies are doing well in China.

WSJ:   Playboy (NYSE:PLA) will outsource much of its magazine’s  business operation.

WSJ:   Amazon (NASDAQ:AMZN) and Wal-Mart (NYSE:WMT), offering big discounts, are fighting over the future of retailing.

NYT:   Many analysts believe that customers are saving money to spend the day after Thanksgiving.

NYT:   A public database could be used to help monitor drug safety.

FT:   The IMF chief said an early exit from stimulus packages could cripple the recovery.

FT:   The EU dropped its antitrust probe of Qualcomm (NASDAQ:QCOM).

FT:   S&P raised issues over the health of many banks that will have to raise more money.

FT:   China’s rules on derivatives are hurting banks.

Bloomberg:   China’s five largest banks gave regulators plans for them to raise capital.

Bloomberg:   The Fed ask stress tested bank to set schedules for pay back TARP.

Douglas A. McIntyre

• Critics of the health-care reform bills complain that the government will start paying for it years before people actually begin to receive services. And that’s a valid complaint. But if it all started together, wouldn’t they be complaining about that, too, because that would represent a failure to get the money in place first?
• House Appropriations Chairman David Obey warns the president that if the U.S. wants to send more troops to Afghanistan, he won’t approve funding (which could be $40B) without a “war surtax” to pay for it. Obey absolutely opposes sending more troops, so that’s what this is really about for him, but the fact is, we shouldn’t be paying for wars off budget, as we have been doing.
• There’s a huge bloc of voters out there for the grabbing for any politician willing to champion consumers’ rights and fight stuff like this.
• A couple of months old but still noteworthy: Almost 1 in 4 U.S. households has suffered a layoff during the current recession; 44% have either lost a job or had their wages or hours cut; 53% of those polled (including majorities of both Republicans and Democrats) call unemployment the nation’s top problem; 51% said this year’s stimulus bill was the right thing to do and 81% said Obama has not done enough to help the economy.
• How did I miss this — and when did Muammar el-Qaddafi go to work for The Onion? (h/t: Jill)
• Some people just flat shouldn’t be allowed to be cops. Joe Apaio is definitely one of them.
• Yet more on how the Fed, and Tim Geithner in particular, screwed up its handling of AIG. If it seems like I’m harping on this subject, it’s because I think it contains important lessons that I’m terrified we’re not going to learn.
• Sewage? You’re drinking it, and there’s almost a 1-in-10 chance it made you sick last year.
• Congresswoman and raving lunatic Michele Bachmann, R-Minn., says she can’t understand “why the Democratic Party would be opposed to me.” The appropriate question is why any sentient life form would not be opposed to her.
• And, finally, advice for journalists, from Athenae at First Draft: “Mourning the death of hard news? Go do some.”

De Moines Iowa 21 Bloody Deaths

DES MOINES, Iowa — Iowa has officially recorded 21 H1N1 deaths, including seven in Polk County alone. But the county’s medical examiner said he has performed autopsies on some residents who were never diagnosed with H1N1, but actually had it.

“In the autopsy, what we’re seeing is very heavy, wet hemorrhagic lungs, lungs with a lot of blood in them,” said Dr. Gregory Schmunk.He said the official count of seven H1N1 deaths is inaccurate, but patient rights laws prohibit him from giving specific numbers.

He said there are two reasons for the discrepancy.
First, not all sick patients get tests and second, the virus is difficult to detect. Some patients may be too sick to receive the most accurate H1N1 test.”They’re not always done and it can be hazardous to the patient if they’re in a respiratory critical situation,” Schmunk said.

He also said that some tests reveal a false negative.”Because of our limitations on testing, sometimes the tests aren’t positive,” he said. “They do appear to fit clinically the course of a H1N1 viral-type pneumonia.”He said the cases he’s seen in Polk County were all middle-aged adults with a few underlying health conditions.”These may be the patients that are obese,” Schmunk said. “Obesity restricts your ability to breathe and clear the virus from your upper respiratory.”He also said that some of the patients had diabetes.

Schmunk said his urging people to get the vaccine.”The thing that concerns me the most is, you still have people out there they believe that if I get the vaccine, the shot, then I’m going to get the flu,” he said. “You can’t get the flu from the shot.”

He said that in the meantime, remember to wash your hands, sneeze into your sleeve and stay home if you’re sick. The Centers for Disease Control and Prevention said one person who goes to work sick with the virus will infect 10 percent of his or her co-workers.

I would like to know What the Hell is happening and HOW it is happening! I am getting pretty Pissed Off now! WHO, CDC, And the Governments of the World have GOT to come out with the TRUTH! ALSO WHERE THE HELL IS MAIN STREAM MEDIA – MSM? Why the Hell have they NOT said a WORD about this overall! This was a local news organization that reported this. NOW the MSM has GOT to start reporting and investigating WHAT is going on!

UPDATE 11/22/09 6:30PM - Please see the following is under Comments from “Lori” she wrote the following:

I live just NW of Des Moines about 45 miles. There have been low flowing helicopters over my town for the past week. I got woke up about 3 am this morning by a low flying plane, I wasn’t able to see what it was when I looked out.

UPDATE 11/22/09 4:45PM - Fred a reader, passed this information on to me -
VERY ODD – that this mentions IOWA – dated from Sept. – as a Forced Quarantine state! Now they have bleeding lungs – coincidence? Any low flying planes there recently? Sorry, but the conspiracy side of me is coming out. I now say, since Florida is mentioned in this article too – watch for any news coming out of there with bleeding lung cases.

Winston Churchhill

Winston Churchill once said:

“The Americans will always do the right thing… after they’ve exhausted all the alternatives.”

IN THE SCENARIO I’M ABOUT to paint for you, the dialog is fictional, but all the facts and figures are real.

The time: 1 a.m., November 23, 2011, exactly two years from now.
The place: the White House, suddenly and unexpectedly under siege as a new financial crisis erupts.

The economic booms of 2010 have morphed into superbooms … the superbooms into bubbles … and the bubbles into busts.
Large banks are again on the brink. Financial markets are again in turmoil. Wall Street giants like Goldman Sachs, JPMorgan Chase, and Morgan Stanley — the outstanding survivors of an off-again-on-again debt crisis — are now its primary victims. Investments like long-term U.S. Treasury bonds — long sought as safe harbors — are now collapsing in price, turning into torpedoes that can sink even the sturdiest of portfolios. But most important, the government’s too-big-to-fail bailouts, shotgun mergers, and mad money printing — previously hailed as cures that killed the contagion of 2008 — are now widely viewed as far worse than any disease.

President Obama and Treasury Secretary Geithner have huddled in the Oval Office for hours, struggling to find new solutions to old problems: Wall Street meltdowns, renewed threats of a great depression, millions more thrown out of work. After a long and heated debate, the president slumps back into his armchair, signaling it’s time to talk more frankly — to reminisce about past policies and rethink what might have gone wrong.

“With 20-20 hindsight,” he remarks after an introspective pause, “it’s clear we were overly focused on the intended consequences of our efforts — the economic recovery, the bounceback in markets, the jobs saved. Meanwhile, we were blindsided by the unintended consequences, many of which have proven to be bigger, more durable and, ultimately, more impactful than the benefits we did achieve.”

The Treasury Secretary, weary from marathon meetings on precisely the same subject, nods in silent agreement. “So, perhaps one of our tasks,” continues the president, “should be to document two basic issues: What precisely are the unintended consequences? And what exactly did we do to cause them?”

“We don’t have to,” says Geithner sheepishly.
“Why not?”
“Because it’s already been done. Those issues have already been thoroughly documented.”
“Since when?”
“Since the fall of 2009. That’s when SIGTARP — the Special Inspector General for the Troubled Asset Relief Program — revealed the mistakes we made with the giant AIG bailout. And that’s also around the time the public began to react to the enormous contradiction between massive unemployment on Main Street and the monster we helped to create on Wall Street.”

Monster Bonuses
“Monster?” queries Obama. “You mean the giant bonuses?”
“Exactly. We already knew Wall Street execs had been giving themselves megabonuses for most of the decade —
— $29 billion for Citigroup’s Weill in 2003 … $27 billion for Blankfein at Goldman Sachs in 2006 … another $106 billion for Jon Winkelried and Gary Cohn, also at Goldman Sachs, in 2006-2007 … and many more. We already knew how the money from these obscenely large bonuses alone could have been enough to save millions of jobs.”
“Yes.”
“But what we did not know is how soon after the bailouts Wall Street would be at it again — first, dishing out megabonuses to heavy hitters in their trading rooms … then to sluggers in their sales departments … and later, as soon as the public tired of protesting, to themselves.”
“Exactly how soon?”

Geithner answers with questions of his own. “When was Wall Street on the verge of a total meltdown? In September of 2008! When were the record bonuses paid out? In December of 2009! So that’s 14 months. It was just 14 months later that the employee bonuses at the three big Wall Street survivors — Goldman Sachs, JPMorgan Chase, and Morgan Stanley — exceeded all prior records.”
“Even the record bonuses they paid out before the crisis?” the president asks with a mix of disbelief and disdain.
“Yes, even bigger than their record bonuses paid out before the crisis.”
“But why do we blame ourselves for all this?” the president wonders out loud.

The Bungled AIG Bailout
“In public, we don’t … and hopefully never will,” responds Geithner furtively. “But in private, we must admit that we screwed up — particularly with the AIG bailout.”
“Why?”
“For the simple reason that we — the Treasury and FRBNY, the Federal Reserve Bank of New York — didn’t just bail out AIG. Indirectly, we also bailed out all of AIG’s major counterparties, the biggest of which were Société Générale and Goldman Sachs.”
“Said who?”
“Said SIGTARP, the Special Inspector General for the Troubled Asset Relief Program, in its special report of November 2009. I have a copy of the report right here.”
“What precisely did SIGTARP find?” asks the president.
“In essence, they found that AIG’s counterparties — 16 major global banks — should have lost money in their trades with AIG, just like most investors lost money when other companies failed. But instead, AIG’s counterparties did not lose money. We made those creditors whole, practically to the penny.”
“How much did we pay ‘em?”
Before responding, the Treasury secretary flips to page 20 of the SIGTARP report and glances down at Table 2 — Total Payments to AIG Default Swap Counterparties (reproduced below).

Source: SIGTARP, November 17, 2009. “Factors Affecting Efforts to Limit 
Payments to AIG Counterparties”

“Société Générale,” he says, “got $9.6 billion in collateral payments from the money we had loaned earlier to AIG. Plus, we paid Société Générale another $6.9 billion through a special purpose vehicle we created, called Maiden Lane III. In total, the French bank walked off with $16.5 billion.
“Goldman Sachs,” continues Geithner, “got $8.4 billion in collateral payments, plus another $5.6 billion from Maiden Lane, adding up to $14 billion. “Deutsche Bank got a total of $8.5 billion … Merrill Lynch — $6.2 billion … UBS — $3.8 billion … plus …”
“Please cut to the chase,” says the president impatiently. “How much overall?”
“They got $62.1 billion, plus another $2.5 billion we agreed to pay to compensate them for shortfalls in their collateral. Grand total — $64.6 billion.”
“Wait a minute!” interjects the president. “A lot of these big banks, notably Goldman Sachs, have forever insisted that they never wanted a bailout, never needed one, and never got one.”
Geithner picks up the report and waves it for emphasis. “And SIGTARP has forever disagreed.”
“What’s their conclusion?”
“In effect, SIGTARP concluded that, via this back door, the 16 banks not only got big bailouts … they never had to pay back a dime of the money.”

The Sad Saga of How Taxpayers Were Sold Out
“What do you think really happened?” asks the president.
“I don’t think; I know. Remember, I was not only there, I was mostly in charge. So I can tell you flatly: We had our backs to the wall. Sure, we asked 12 of the biggest AIG counterparties to take haircuts, to accept some losses. But 11 out of the 12 refused. So we had no choice but to give them everything they wanted.”
“Why didn’t you press harder?”
“We had no negotiating leverage. Later, with GM and Chrysler, we forced creditors to make concessions by threatening to let the automakers fail. But with AIG, we had already declared, in effect, that we’d never let it fail.”
“When?”
“Several weeks earlier — when we loaned $86 billion to AIG, the biggest bailout in history. The end result was that, when it came time to negotiate with AIG’s creditors, we could no longer function as unbiased regulators. We were already in deep — as the company’s biggest stakeholder. The creditors knew they had us over a barrel. There was no way we could twist their arms.
“If that wasn’t bad enough,” Geithner continues, “I then compounded the problem by adhering too strictly to one of FRBNY’s core values — the concept of treating all counterparties equally. That doomed the negotiations because it gave each party effective veto power over any possible concession from any other party. The way I set things up, either all the banks had to agree to concessions … or none of the banks would agree to concessions. So, needless to say, none agreed to concessions. They got everything.”

Profound Impacts
My fictional scenario ends here. But the impacts of those fateful decisions of late 2008 and early 2009 do not.
The AIG rescue was the biggest taxpayer rip-off of all time. Worse, it was the master seed that sprouted a whole series of similar taxpayer rip-offs on Wall Street. Just connect a few of the dots, and you’ll see what I mean:

1. The U.S. Treasury rushes to bail out AIG. That alone helps protect AIG’s counterparties from the direct losses they’d otherwise suffer in an AIG failure.

2. The Federal Reserve Bank of New York creates a special entity to pay off AIG’s creditors in full. While ordinary U.S. investors lose fortunes even in companies that are financially viable, 16 major banks don’t lose a penny even in a company that would otherwise be bankrupt — all thanks to the Fed’s largesse.

3. Prominent among these government-blessed banks is Goldman Sachs, Wall Street’s most extravagant giver of executive bonuses in 2006 and 2007 … and also Wall Street’s most lavish payer of employee bonuses in 2009.

The money flow is clear:
• From taxpayers to AIG …
• From AIG and the Fed to big Wall Street investment banks like Goldman Sachs, and then …
• From Goldman Sachs to its employees in the form of lavish bonuses.

It is, by far, the greatest taxpayer rip-off off all time!

In this week’s New York, I have a cover story that goes behind-the-scenes in the battle to control Wall Street comp. Nowhere is this conflict more vividly displayed than the current war between AIG and the Government. AIG’s CEO, the brash, outspoken Robert Benmosche, is fending off efforts by Kenneth R. Feinberg, the Pay Czar, who’s seeking to limit what AIG’s traders can make. The standoff came to a head on November 4, when Benmosche told AIG’s board of directors that he is going to quit. They convinced him to stay, but he’s set to give them his final answer at tomorrow’s board meeting.

From the piece:

After viewing the video, Feinberg left the room, and Benmosche turned to face his board members in private. Benmosche saw himself and his traders as being on the same side as the taxpayers—it infuriated him that Geithner and Congress seemed to see them as the enemy. With Feinberg gone, Benmosche let his anger loose. The pointed exchange he just watched only confirmed in his mind that Feinberg didn’t think he, or his executives, were worth much. He was going to quit. “I’m just about ready to hit the road,” Benmosche said. “Feinberg stabbed me in the back.”

“It wasn’t a moment of anger,” an executive familiar with the exchange later recalled. “It was the last straw of things that were agonizing him.”

Read the full piece HERE

… of why Tim Geithner ought not be on my payroll.

Whew! It’s been a long week for the Fed (and for me, hence the Saturday night post on this) but one thing is clear: this SIGTARP audit of the Fed’s questionable-at-best priorities in bailing out AIG counter parties is a sweet read. And the best part is,  anyone can read it – and indeed, almost anyone should – as it is the most accessible and succinct account of the whole affair I’ve read yet. Yes, another gushing account of SIGTARP and Neil Barofsky, but really, I just love what his office is doing for accountability and transparency and hope business media is taking notes (I am.)

At the core of the audit is the question of why the Fed seemingly rushed to pay AIG counter parties – yeah, yeah, Goldman, Merril, Deutsche, and the like – “effectively par value” for busted credit default swaps. According to the report, “effectively par value” looks like this:

Table 2: Total Payments to AIG Credit Default Swap Counter Parties (in billions)

Source: SIGTARP analysis of AIG and FRBNY data
* Amount rounded down to $0.** In addition to the $27.1 billion in payments to the counterparties, AIGFP received a payment of $2.5 billion as an adjustment payment to reflect overcollateralization.

The best thing about blogging on this report a few days out is to see the media response. NYT has taken a fairly aggressive approach with somewhat familiar criticism of the banks, though as the SIGTARP audit points out, Fed officials themselves have acknowledged “the greatest leverage that FRBNY might have had – the threat of default and an associated AIG bankruptcy – was effectively removed by FRBNY’s intervention in September, an intervention that the counterparties understood to mean that the U.S. government would not permit an AIG failure.” There was no (financial) reason to realize a loss, and the banks knew it.

On the other side, there is an interesting approach from Atlantic online pseudonymous blogger “Anal-yst” who slams NYT for “rank speculation and utterly horrific summation” of the SIGTARP audit and wonders aloud why “Government (Treasury, Fed) officials failed to embrace their duty to the American people with hasty, and not particularly well-thought-out decision-making.” For anyone who appreciates a touch of nuance on the oh wicked Wall Street route – even if Goldman’s recent stint in the holy land makes this a particularly easy route to take – it is a well crafted opinion worth checking out.

More to come on this…

AND: You know the Fed’s having a bad week when Ron Paul is (actually) gaining on you …

There’s a pet name I’ve privately assigned to many of the bloggers out there who are so obsessed with covering every story that they barely read actual articles anymore.  It’s “Headline Readers“.  You know who they are and so do they, so we’ll leave it at that.

Now that the government has just released its official report on what actually went on with the allocation of TARP funds, I’m happy to say that one of my fave financial bloggers has taken the time to go through it line by line and come up with an interesting conclusion.

Writing for The Atlantic Monthly, The Anal_yst delivers a gut punch to those who reflexively spout off that “The AIG bailout was really a Goldman Sachs bailout,” without having actually pieced together the real story.

For the record (and for the umpteenth time) I am absolutely revolted by both the spirit in which the bailouts were approved, the haste in which they were created, and the after effects that we’ll probably be feeling for years to come as a result of the bad guys not learning a single damn lesson.  Whether or not the taxpayer is ever made whole is a whole other discussion.

The Anal_yst seems to disagree with the general consensus (and my own opinion) and for interesting reasons:

That’s right folks, I am defending not just Goldman, but the other banks that were paid “effectively par” (which is the report’s language) on their credit default swaps with AIG as well.   From where do I draw this conclusion? From the actual report, which I read, carefully, in its entirety. Now, let me be clear: I fully understand the fear and uncertainty that motivated regulators to act quickly last autumn. But as the adage goes, “haste makes waste,” and unfortunately that’s exactly what happened with AIG.

I recommend you get over to The Atlantic to read the rest for a contrarian take on the whole TARP sitch…

The Media Is Wrong About Goldman Sachs, AIG (Atlantic Monthly)
P.S. – The Anal_yst has some serious chops, I’ve been begging him to take on a more acceptable Nom De Plume so that his work can get more exposure, despite the brand equity he’s built up under his current alias (see 1-2 Knockout).

I Retract My Apology and Call for More Regulation of Goldman Sachs (pdf)

Courtesy of Janet Tavakoli at TSF

(see also Apology)

According to SIGTARP¹, both the Federal Reserve and Treasury agreed that an AIG failure posed unacceptable risk to the global financial system and the U.S. economy.  On March 24, 2009, Fed Chairman Ben Bernanke testified before the House Financial Services Committee [P.9]:

[C]onceivably, its failure could have resulted in a 1930’s-style global financial and economic meltdown, with catastrophic implication[s].

From July 2007, AIG’s financial situation deteriorated while so-called “AAA” collateralized debt obligations (CDOs) dropped in value. AIG sold credit default swaps (CDSs) on these CDOs and had to post more collateral, as the prices plummeted.

Goldman Sachs was AIGFP’s (UK-based AIG Financial Products) largest CDS counterparty with around $22.¹ billion, or about one-third of the problematic trades.  Goldman underwrote some of the CDOs underlying its own CDSs, and also underwrote a large portion of the CDOs against which French banks SocGen, Calyon, Bank of Montreal, and Wachovia bought CDS protection.  Goldman provided pricing on these CDOs to SocGen and Calyon. Goldman was a key contributor to AIG’s liquidity strain and the resulting systemic risk.  (See “Goldman’s Undisclosed Role in AIG’s Distress”)

Apocalypse AIG

By mid September 2008, AIG’s long-term credit rating was downgraded, its stock price plummeted, and AIG couldn’t meet its borrowing needs in the short-term credit markets.  According to SIGTARP, “without outside intervention, the company faced bankruptcy, as it simply did not have the cash that was required to provide to AIGFP’s counterparties as collateral.” [P.9] The Federal Reserve Board with Treasury’s encouragement authorized a bailout. ²

The Federal Reserve Bank of New York (FRBNY) extended an $85 billion revolving credit facility, so AIG could make its collateral payments to Goldman and some of its CDO buyers.  AIG also met other obligations, such as payments under its securities lending programs owed to Goldman and some of its CDO buyers.  (See also: “AIG Discloses Counterparties to CDS, GIA, and Securities Lending Transactions.”)

Goldman “Would Have Realized a Loss”

Fed Chairman Bernanke said AIG’s crisis put the world at risk for a global financial meltdown.  Goldman purchased little credit default protection³ against an AIG collapse.  Even if Goldman escaped a collateral clawback of the billions it held from AIG4, the underlying CDOs posed substantial market value risk (SIGTARP P. 17).  As for systemic risk, Goldman CEO Lloyd Blankfein worried about untold billions in losses. (Too Big to Fail, P. 382.)

On September 16, 2008, as the FRBNY arranged AIG’s $85 billion credit line, Goldman CFO David Viniar said whatever the outcome, he would expect the direct impact of credit exposure to be “immaterial to [Goldman’s] results.” The CDOs’ ($22.1 billion) value was down around $10 billion, and AIG still owed Goldman $2.5 billion in collateral (hedged and partly collateralized by CDSs on AIG).  SIGTARP shows the CDOs’ value fell another $2.5 billion in two months, and AIG’s new credit line provided more collateral.  The CDOs were losing market value.  If AIG had collapsed, the value drop would have been swift and brutal with new protection either unavailable or too expensive, if past CDS market mayhem provided any information.  As the Wall Street Journal put it, SIGTARP “throws cold water on [Goldman’s] claim.”

Before September 16, 2008, AIG tried to negotiate a settlement for forty cents on the dollar.  Other insurers have negotiated even deeper discounts to settle their CDS contracts on CDOs.   The SIGTARP report shows that the FRBNY’s decision to pay 100 cents on the dollar to resolve $13.9 billion (part of Goldman’s $22.1 billion) of credit default swaps by purchasing the underlying CDOs in Maiden Lane III was important to Goldman Sachs.  “Goldman Sachs…did not agree to concessions, because it would have realized a loss if it had.”  [P.16]

Treasury Secretary Timothy Geithner, then President of FRBNY, is revealed in this New York Times article with apparent Stockholm syndrome rivaled only by Patty Hearst.   He seems to echo Goldman’s talking points after discussions with Goldman’s CFO.  In the fall of 2008, Henry (“Hank”) Paulson was Treasury Secretary.  Paulson was formerly CEO of Goldman Sachs and held that role when Goldman executed its trades with AIG.  Stephen Friedman, a former Goldman Sachs co-chairman, was Chairman of FRBNY.  Friedman owned shares of Goldman Sachs, and was a member of Goldman’s board, while he held his influential Fed position.  He resigned the Fed position in May 2009, but not before purchasing 50,000 shares of Goldman Sachs, when the public was still in the dark about the terms of the bailout.

Goldman’s Turn to Apologize

In light of the SIGTARP report, I withdraw my earlier apology to Goldman.  Public commitments to AIG are currently around $182 billion.  If you wonder what Goldman CEO Lloyd Blankfein meant when he said: “[Goldman Sachs] participated in things that were clearly wrong and we have reason to regret and we apologize for them,” think of Goldman’s role in AIG’s crisis, Goldman’s bailout, and Goldman’s ongoing heavy taxpayer subsidies.  That way, one of you will be genuinely sorry about it.

◊◊

1  The November 17, 2009 report of the Office of the Special Inspector General for the Troubled Asset Relief Programs, “Factors Affecting Efforts to Limit Payments to AIG Counterparties.”  The report does not address the risk of collateral clawbacks by authorities on behalf of AIG or the public, and it does not address the relative size of Goldman’s CDS positions and CDO underwriting activity related to AIG’s CDSs mentioned in the above commentary.

2  Fed and Treasury officials thought AIG’s derivatives were “more risky and unbalanced than Lehman’s.”  They were concerned about loss of confidence in AIG’s subsidiaries, AIG’s failure to perform on annuities and wraps, losses to state and local governments, global banks and investment banks, losses to 401k plans, and the credit markets.  The Reserve Primary Fund had fallen below $1.00 per share after it wrote off Lehman’s debt causing a run on the fund, and officials worried about an AIG failure causing further “breaking-of-the-buck.” (P. 10)

3 SIGTARP says Goldman would have trouble collecting on the credit default protection it bought to protect against an AIG collapse—which by deduction seems to only be around $2.5 billion.  It is usual to have mark-to-market collateral, but it is unlikely this position was 100% collateralized.  In November 2008, it seems $1.2 billion of this hedge was allocated for Maiden Lane III assets and $1.1 billion to another $8.2 billion position leaving an apparent slight excess notional amount.  But even if it were 100% collateralized, that seeming advantage could quickly disappear in a volatile market when pricing discounted illiquid assets that lack transparency.  [P. 16, 17]

4 According to SIGTARP, private participants felt AIG’s financial condition was so tenuous that on September 15, they refused to fund AIG making the Fed’s bailout necessary.  Their analysis showed AIG’s liquidity needs exceeded the value of the company’s assets.  [P.8]

Goldman’s status in the event of an AIG collapse would have been that of a credit default swap counterparty during a global crisis with very special circumstances.  Goldman thought it would get to keep the billions in dollars it received from AIG, if AIG collapsed.  That would normally be the case, but these would have been extraordinary circumstances inflamed by value-destroying CDOs over which Goldman had pricing power, and Goldman had underwritten some of the CDOs.  Authorities charged with resolving a collapse of AIG may have clawed back a substantial portion of the collateral.

Janet Tavakoli is the president of Tavakoli Structured Finance, a Chicago-based consulting  firm to financial institutions and institutional investors.  She is the author of a book on the cause global financial meltdown: Dear Mr. Buffett: What an Investor Learns 1,269 Miles from Wall Street (Wiley, 2009), Structured Finance & Collateralized Debt Obligations (Wiley 2003, 2008), and Credit Derivatives & Synthetic Structures (Wiley 1999 and 2001).

Janet Tavakoli

President

Tavakoli Structured Finance, Inc.

web site: www.tavakolistructuredfinance.com

*****

So. Central Rain (I’m Sorry): REM

Gretchen Gets It. The entire article is worth reading and even studying. If you get what she is saying, you can understand just how false this Waltz has been.

“The very design of the federal assistance to A.I.G. was that tens of billions of dollars of government money was funneled inexorably and directly to A.I.G.’s counterparties.” The report noted that this was money the banks might not otherwise have received had A.I.G. gone belly-up.

Goldman Sachs, Merrill Lynch, Société Générale and other banks were in the group that got full value for their contracts when many others were accepting fire-sale prices.

Ms. Tavakoli argues that Goldman should refund the money it received in the bailout and take back the toxic C.D.O.’s now residing on the Fed’s books — and to do so before it begins showering bonuses on its taxpayer-protected employees.

According to an e-mail message that Goldman sent to the New York Fed at the time, Mr. Geithner talked about the article with Mr. Viniar, Goldman’s chief financial officer, before calling me. When Mr. Geithner called, he said that Goldman had no exposure to an A.I.G. collapse and that the article had left an incorrect impression about that. When I asked Mr. Geithner if he, as head of the regulatory agency overseeing Goldman, had closely examined the firm’s hedges, he said he had not.

Probing, in-depth analyses of regulatory responses to the financial meltdown are worth their weight in gold. Mr. Barofsky’s certainly is. Yet in its rush to put financial reforms into effect, Congress seems uninterested in investigating or grappling with truths contained in such reports — and until it does, our country’s economic and financial system will continue to be at risk.

Revisiting a Fed Waltz With A.I.G.

A RAY of sunlight broke through the Washington fog last week when Neil M. Barofsky, special inspector general for the Troubled Asset Relief Program, published his office’s report on the government bailout last year of the American International Group.

It’s must reading for any taxpayer hoping to understand why the $182 billion “rescue” of what was once the world’s largest insurer still ranks as the most troubling episode of the financial disaster. And it couldn’t have come at a more pivotal moment.

Many in Washington want to give more regulatory power to the Federal Reserve Board, the banking regulator that orchestrated the A.I.G. bailout. Through this prism, the actions taken in the deal by Treasury Secretary Timothy F. Geithner, who was president of the Federal Reserve Bank of New York at the time, grow curiouser and curiouser.

Of special note in the report: the Fed failed to develop a workable rescue plan when A.I.G., swamped by demands that it pay off huge insurance contracts that it couldn’t make good on as the economy tanked, began to sink. The report takes the Fed to task as refusing to use its power and prestige to wrestle concessions from A.I.G.’s big, sophisticated and well-heeled trading partners when the government itself had to pay off the contracts.

The Fed, under Mr. Geithner’s direction, caved in to A.I.G.’s counterparties, giving them 100 cents on the dollar for positions that would have been worth far less if A.I.G. had defaulted. Goldman Sachs, Merrill Lynch, Société Générale and other banks were in the group that got full value for their contracts when many others were accepting fire-sale prices.

On the question of whether this payout was what the report describes as a “backdoor bailout” of A.I.G.’s counterparties, Mr. Barofsky concluded: “The very design of the federal assistance to A.I.G. was that tens of billions of dollars of government money was funneled inexorably and directly to A.I.G.’s counterparties.” The report noted that this was money the banks might not otherwise have received had A.I.G. gone belly-up.

The report zaps Fed claims that identifying banks that benefited from taxpayer largess would have dire consequences. Fed officials had refused to disclose the identities of the counterparties or details of the payments, warning “that disclosure of the names would undermine A.I.G.’s stability, the privacy and business interests of the counterparties, and the stability of the markets,” the report said.

When the parties were named, “the sky did not fall,” the report said.

Finally, Mr. Barofsky pokes holes in arguments made repeatedly over the past 14 months by Goldman Sachs, A.I.G.’s largest trading partner and recipient of $12.9 billion in taxpayer money in the bailout, that it had faced no material risk in an A.I.G. default — that, in effect, had A.I.G. cratered, Goldman wouldn’t have suffered damage.

In short, there’s an awful lot jammed into this 36-page report.

Even before publishing this analysis, Mr. Barofsky had made a name for himself as one of the few truth tellers in Washington. While others estimate how much the taxpayer will make on various bailout programs, Mr. Barofsky has said that returns are extremely unlikely.

His office has also opened 65 cases to investigate potential fraud in various bailout programs. “When I first took office, I can’t tell you how many times I’d be having a sit-down and warning about potential fraud in the program and I would hear a response basically saying, ‘Oh, they’re bankers, and they wouldn’t put their reputations at risk by committing fraud,’ ” Mr. Barofsky told Bloomberg News a little over a week ago, adding: “I think we’ve done a good job of instilling a greater degree of skepticism that what comes from Wall Street isn’t necessarily the holy grail.”

Mr. Barofsky says the Fed failed to strong-arm the banks when it was negotiating payouts on the A.I.G. contracts. Rather than forcing the banks to accept a steep discount, or “haircut,” the Fed gave the banks $27 billion in taxpayer cash and allowed them to keep an additional $35 billion in collateral already posted by A.I.G. That amounted to about $62 billion for the contracts, which the report describes as “far above their market value at the time.”

Mr. Geithner, who oversaw those negotiations, said in an interview on Friday that the terms of the A.I.G. deal were the best he could get for taxpayers. He considered bailing out A.I.G. to be “offensive,’ he said, but deemed it necessary because a collapse would have undermined the financial system.

“We prevented A.I.G. from defaulting because our judgment was that the damage caused by failure would have been much more costly for the economy and the taxpayer,” Mr. Geithner said. “To most Americans, this looked like a deeply unfair outcome and they find it hard to see any direct benefit. But in fact, their savings are more valuable and secure today.”

The report said that while bailing out Goldman and other investment banks might not have been the intent behind the Fed’s A.I.G. rescue, it certainly was its effect. “By providing A.I.G. with the capital to make these payments, Federal Reserve officials provided A.I.G.’s counterparties with tens of billions of dollars they likely would have not otherwise received had A.I.G. gone into bankruptcy,” the report stated.

As Goldman prepares to pay out nearly $17 billion in bonuses to its employees in one of its most profitable years ever, it is important that an authoritative, independent voice like Mr. Barofsky’s reminds us how the taxpayer bailout of A.I.G. benefited Goldman.

A Goldman spokesman, Lucas van Praag, said that Goldman believed “that a collapse of A.I.G. would have had a very disruptive effect on the financial system and that everyone benefited from the rescue of A.I.G.” Regarding his firm’s own dealings with A.I.G., Mr. van Praag said that Goldman believed that its “exposure was close to zero” because it insulated itself from a downturn in A.I.G.’s fortunes through hedges and collateral it had already received. (Goldman’s complete response is here.)

The inspector noted in his report that Goldman made several arguments for why it believed it was not materially at risk in an A.I.G. default, but he is skeptical of the firm’s reasoning.

So is Janet Tavakoli, an expert in derivatives at Tavakoli Structured Finance, a consulting firm. “On Sept. 16, 2008, David Viniar, Goldman’s chief financial officer, said that whatever the outcome at A.I.G., the direct impact of Goldman’s credit exposure would be immaterial,” she said. “That was false. The report states that if the New York Fed had negotiated concessions, Goldman would have suffered a loss.”

The report says that Goldman would have had difficulty collecting on the hedges it used to insulate itself from an A.I.G. default because everyone’s wallets would have been closing in a panic.

“The prices of the collateralized debt obligations against which Goldman bought protection from A.I.G. were in sickening free fall, and the cost of replacing A.I.G.’s protection would have been sky-high,” she said. “Goldman must have known this, because it underwrote some of those value-destroying C.D.O.’s.”

Ms. Tavakoli argues that Goldman should refund the money it received in the bailout and take back the toxic C.D.O.’s now residing on the Fed’s books — and to do so before it begins showering bonuses on its taxpayer-protected employees.

“A.I.G., a sophisticated investor, foolishly took this risk,” she said. “But the U.S. taxpayer never agreed to be a victim of investments that should undergo a rigorous audit.”

Perhaps Mr. Barofsky will do that audit, and closely examine the securities that A.I.G. insured and that Wall Street titans like Goldman underwrote.

Goldman contends that it had a contractual right to the funds it received in the A.I.G. bailout and that the securities it returned to the government in the deal have increased in value.

For his part, Mr. Geithner disputed much of the inspector general’s findings. He also took issue with the conclusion that the Fed failed to develop a contingency plan for an A.I.G. rescue and largely depended on plans proffered by the banks themselves.

He said the report’s view that the Fed didn’t use its might to get better terms in the rescue was unfair. “This idea that we were unwilling to use leverage to get better terms misses the central reality of the situation — the choice we had was to let A.I.G. default or to prevent default,” he said. “We could not enforce haircuts without causing selective defaults and selective defaults would have brought down the company.”

Mr. Geithner also said that the “perception that this decision by the government, not my decision alone, was made to protect any individual investment bank is unfounded.”

Less than two weeks after the A.I.G. bailout, Mr. Geithner took the firm’s side when he criticized a Sept. 28, 2008, article in The New York Times that I wrote about the A.I.G. bailout. That article included Goldman’s statement that it wouldn’t have been affected by an A.I.G. collapse. Among other things, the article, like Mr. Barofsky’s report, questioned Goldman’s assertion.

According to an e-mail message that Goldman sent to the New York Fed at the time, Mr. Geithner talked about the article with Mr. Viniar, Goldman’s chief financial officer, before calling me. When Mr. Geithner called, he said that Goldman had no exposure to an A.I.G. collapse and that the article had left an incorrect impression about that. When I asked Mr. Geithner if he, as head of the regulatory agency overseeing Goldman, had closely examined the firm’s hedges, he said he had not.

Mr. Geithner told me on Friday that he spoke with Mr. Viniar that day to ensure that Goldman’s hedges were adequate. And, notwithstanding the inspector general’s findings, he said he still believes Goldman was hedged.

Probing, in-depth analyses of regulatory responses to the financial meltdown are worth their weight in gold. Mr. Barofsky’s certainly is. Yet in its rush to put financial reforms into effect, Congress seems uninterested in investigating or grappling with truths contained in such reports — and until it does, our country’s economic and financial system will continue to be at risk.