Note: this post is by Thomas Adams, at Paykin Krieg and Adams, LLP, and a former managing director at Ambac and FGIC, with some minor additions by yours truly. This is a significant piece of some puzzles he, some other experts who prefer to remain anonymous, and I have been pushing on for several months.
As we have been reading the latest coverage on the AIG bailout from the SIGTARP report and the Treasury Secretary Geithner’s Congressional testimony, a nagging question remains unresolved: why did AIG get bailed out but the monoline bond insurers did not?
The business that caused AIG to blow up was the same that caused the bond insurers to blow up – collateralized debt obligations backed by sub-prime mortgage bonds (ABS CDOs). This was actually one of the few business that AIG Financial Products had in common with the monolines. AIG didn’t participate in municipal insurance, MBS or other ABS deals, which were all important for the monolines.
Certainly, AIG was larger than any of the bond insurers, but in aggregate, the bond insurers had a tremendous amount of ABS CDO exposure, which at the peak was probably over $300 billion. Despite AIG’s claims to have withdrawn from subprime at the end of 2005, we have identified particular 2006 deals with substantial subprime content that AIG most assuredly did guarantee.
In addition, the monolines had exposure to many other assets classes that AIG did not which created chaos for the holders of those bonds when the monolines were downgraded. The chain reaction risk of the bond insurers was arguably greater, when you throw in the damage to the aucton rate securities market, which was rooted in the muni market. In 2007, MBIA had over $650 billion of par insured, Ambac had about $500 billion, FSA had about $380 billion and FGIC had about $300 billion. Throwing in CIFG and XLCA, the total insured par of the monolines was about $2 trillion – this amount certainly would qualify as large enough to be “systemic risk” if the insurers were allowed to fail.
In contrast, while AIG’s aggregate insured par was greater, the only portion that really presented a systemic risk exposure was the CDS and structured finance exposures, which had an aggregate par exposure of about $400-500 billion. a persuasive argument could be made that the monolines were just as intertwined in the financial system as AIG and, thanks to their municipal exposure, presented as great or greater a systemic risk to the financial markets and the economy.
Yet AIG was bailed out and the monolines were not.
So what happened? How did the monolines get dropped and AIG get rescued? The popular reason given has been that AIG was so big that they affected all segments of the economy, whereas the monolines were only midsized and not critical to the economy. i believe that SIGTARP repeated this version of events last week. I understand that Treasury Secretary Geithner last week repeated this notion and added new information – that he was concerned about the cascading risk of AIG’s non CDS exposure.
While this produces a bigger par exposure for AIG, these other areas did not have the huge risks of loss, have largely remained functional, and did not have the issue of collateral posting. The risk were at the parent level, at AIG FP; the bulk of AIG’s business was written by regulated subsidiaries whose claims-paying ability would not be impaired by an AIG FP failure. So, in my view, this is a fairly weak, after the fact argument. A more plausible case might be made that AIG also had a securities lending business that had sprung a $20 billion leak, but that wee problem hasn’t gotten much mention in the official defenses.
I have a different interpretation. I should note that I am a former employee of a bond insurer, so I admit to a bias. However, I my general perspective had been, until recently, that neither AIG or the bond insurers should have been rescued.
When I was at FGIC, Deutsche Bank, Lehman, Bear and UBS were all over my company with sales coverage for CDO deals. But we never heard much from Goldman. I was actually surprised to see that they were so big with John Paulson’s CDO adventures (as recently disclosed in “The Best Trade Ever”), because I never thought they were that big in the CDO market.
One big reason I didn’t know Goldman was so big in CDOs – they didn’t work with the monolines.
Goldman wanted their counterparties to post collateral so they would have protection against corporate downgrades. The monolines refused to have collateral posting requirements in their CDS contracts. The rating agencies supported them in this position on the argument that maintaining their AAA rating was “fundamental to their business”.
AIG, on the other hand, agreed to collateral posting requirements. in fact, they used this as a competitive advantage – they got more business because of it and marketed their flexibility on this issue to the banks. There were two the key distinctions between the monolines and AIG – first, AIG had other businesses, whose losses could threaten AIG’s financial guarantee business while monolines promised to pay claims first, to protect investors. Second, AIG had a history of negotiating before they paid claims (there is an interesting history with a ABS film receivables deal where AIG refused to pay, while the monolines covered similar deals and did not have the same “out” in their policies. this deal did serious damage to AIG’s reputation in the ABS market and shut them out of many deals). So despite their AAA rating, AIG was not as trusted by the structured finance and CDS market – there was a fear that AIG would wiggle out of their obligations in a way that the monolines would not.
All of the other banks got comfortable with the monolines not having to post collateral for CDS trades because of their AAA ratings. Goldman never did.
Of course, Goldman was one of the few banks that clearly set out to profit from shorting CDOs. They obviously realized that if their CDS counterparty was on the hook for a lot of ABS CDOs that were going to blow up, the insurance provider would likely get downgraded. If the downgrade of the insurer was very likely, the only way the short-CDO strategy worked was if the insurer would post collateral.
So Goldman only used AIG, who would provide protection against their downgrade, which Goldman knew would happen because they were stuffing AIG with toxic ABS CDOs.
The banks that used the monolines for their ABS CDOs were making a major error by taking on the monoline downgrade risk without protection, especially if they knew that the ABS CDOs were toxic. So I suspect that most of the banks did not really know that the ABS CDOs would be as toxic as they turned out to be.
This is, of course, what happened. The ABS CDOs blew up, the bond insurers got downgraded, the banks that used them got crushed because their hedges against their CDO risks were now in jeopardy. A death spiral between the monolines and the banks ensued (the ARS meltdown added to the troubles). Goldman didn’t care, because they had collateral posted by AIG once AIG got downgraded..
All of the banks who faced the monolines had to start considering commutation deals with the monolines because it was obvious the monolines did not have enough capital to cover all of the CDO losses. in these commutations, the banks accepted payments as low as 40 cents on the dollar.
Most of the monoline ratings roubles had unfolded earlier in 2008 – many of them had been downgraded, several commutations had already occurred by the time of the AIG bailout. AIG managed to put off the threat of serious downgrade for a long time, despite the junk in their portfolio (as 2008 progressed, it was a mystery to me and many others why the onolines were being downgraded but AIG was not). While AIG had been downgraded to AA some time earlier, this hadn’t caused much of a disruption because the real trigger for collateral posting was if they went below AA. For a variety of reasons, this wasn’t a threat until September of 2008.
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.
When it became clear that AIG could face bankruptcy, Goldman’s plan to profit by shorting ABS CDOs was threatened. While they had the collateral posted, thanks to the downgrades, this collateral could be tied up or lost if AIG went bankrupt. This was a real crisis for Goldman – they thought they had outsmarted the subprime market with their ABS CDOs and outsmarted all of the other banks by getting collateral posting from AIG when they got downgraded. But if AIG went away, this strategy would have blown up and cost Goldman billions.
All of this is essentially factual and based, for the most part, on public information.
As a matter of speculation, i believe that Goldman and their helpers deliberately pumped up the media with the threats that the subprime market posed in order to hasten the collapse of the subprime market. this allowed them to realize their gains sooner from shorting ABS CDOs – they had become impatient waiting for it to blow up.
In addition, I believe that Goldman and their helpers – including their many connections with the White House and the Fed – pumped up concerns about the systemic risk that the market was facing from a Lehman and AIG failure, so that they could force the government to step in and bail out AIG. This would also explain why Lehman was not bailed out. Lehman didn’t really matter to Goldman. But the fear created by Lehman’s failure served as a good excuse for why they should rescue AIG.
I have been wondering why the sub-prime market blow up led to such a massive crisis when subprime and structured finance had experienced big problems before without the issue of systemic risk and financial market collapse.
Certainly, the ABS CDOs were toxic and caused big holes, but not so big that it couldn’t be addressed by an RTC type of clearing system. Various analyst reports of the bad subprime deals (and ABS CDOs) makes it pretty clear that the 2006-2007 vintages were the worst and will probably only create about $500-700 million of aggregate losses. Terrible, but not insurmountable.
This leads me to conclude that the bailout was prompted by fear mongering and deliberate strategies and manipulation on the part of Goldman and a few select others, to make sure that AIG would be bailed out to protect their trades in shorting ABS CDOs.
i believe that John Paulson benefited from this bailout, on his $5 billon or so of ABS CDOs with AIG. But not as much as Goldman benefited themselves, via Abacus and, perhaps, other deals.
AIG, Goldman and ABS CDOs were tied together at the center of the crisis. From Goldman’s perspective, all of the other participants were secondary – they had no exposure to the monolines and they were probably hedged against the other banks. The only loose end was the collateral posted by AIG.
The final question that this raises for me: would it have been cheaper for the government and the taxpayer to have bailed out the bond insurers instead of AIG? The total amount of CDOs and credit default swaps that would have needed to be guaranteed would have been smaller. In the number of investors across the market that would have benefited would probably have been larger. The auction rate securities market, the muni market, the investors that held bond insurer exposure to MBS and ABS would have all benefited. None of these markets were aided by AIG’s bailout.
But a bond insurer bailout would not have helped Goldman much and the AIG bailout did.
Yves here. Note I differ with Tom on how much Goldman could or did pump up subprime fears. A lot of people focused on Jan Hatzius’ bearish calls on financial system losses, but quite a few people in a position to know claim that Hatzius is not the sort to take commercially expedient views. But once the asset-backed commercial paper started imploding in August 2007, the officialdom was very much engaged. So if one can connect the dots between Goldman and the fear and loathing that hit the ABCP market (recall all paper was repudiated as in being possibly tainted by subprime), the story becomes very tidy.
Update 1:50 PM Another possible gap in this line of thinking are the now-infamous AIG regulatory capital swaps, which allowed European banks to carry much less equity (or put it another way, pump up their balance sheets much bigger than they would have otherwise been). But there has been a remarkable lack of coverage of this issue. That would be one reason to save AIG and not the monolines.
There isn’t any evidence that this issue factored into official thinking. That could mean that the officialdom has scrupulously avoided mentioning it (as in why alert the peasants that their tax dollars are supporting profligate Eurobanks), but Sorkin’s Too Big to Fail makes clear that AIG itself was not on top of how badly the ship was leaking, so if AIG didn’t bring this issue up as a need to be rescued, no one would have factored that into their decisions. One way to be certain would be to compel disclosure of the phone logs during the AIG scramble. A absence of calls to European banking regulators would be indirect confirmation that these swaps were not one of the proximate causes of the AIG rescue.
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the nakedconspiracy.com domain is taken already, but baredconspiracy.com is still available. you can move more of your recent posts there.
Just pure coincidence. They are the only smart guys in the room really. Doing god’s work to part the fool with his dough. Seems right, no? Ubermensch Blackfiend. The first. The best. The only. It is not funny. It is deadly f… serious. Billions, just in case you missed it. And shortly trillions in bailouts. No such heist in history. WTF is Maddog or whatever? 60 lousy bill in 10 years time? We are talking trill pal. In a year, remember. No peanuts.
Thank you. More please. Much much more.
Remember 2007 was when the Mason-Rosner paper got pushed out through the Hudson Institute. This was the moment the “big fear” began.
Uncle Billy, that’s a good name. But be careful with spelling Quintus Fabius Maximus Verrucosus’ moniker though.
mltpb: Long time! Now… huh?
exactly right.
conspiracy or no, there’s no reason to be using the public coffers to bail out private risk taking.
Now, you care and a few bloggers, that GS took a few billion with the help of the government. From outside of the US of A we watch in awe of the complacency of the population, even with 50 million people on food stamps and more than 1 out of 5 without jobs (shadowstatistics). Everybody is waiting for the old system to start sputtering again and to forget but I am afraid this is not going to happen. The day of reckoning will come soon when the population has to admit they have been conned, to stand up and say out loud: “Hi, I am a US citizen and a debt addict. This caused me to close my eyes for reality, such as theft, racketeering and fraud”.
“HI, US CITIZEN”
Either this and heal yourself or that: http://is.gd/52thK (video)
I would have thought that the author of this blog was above the populism of conspiracy theories and Goldman bashing. I have already quit reading a few blogs because of their bitter views around this subject. One has to admire the pseudo-reasoning the writer of this post must have gone through to reach the conclusion that there can be no other reason than Goldman that AIG was bailed out and the Monolines not. The author touches on an important point, which is the different stages of the crisis and the understanding on main street prevalent at the time of the Monoline defaults and that of AIG. However, any difference in the public perception of the situation is attributed to rumor feeding by Goldman itself. Forgive me, but it is hard to take this text seriously when misguided and biased speculation permeates it. I am deeply saddened by the fact that one of Americas most respectable institutions falls victim of the public outrage only for the fact that it had the foresight and mindfulness to profit when its presumed equals lost.
“one of Americas most respectable institutions falls victim of the public outrage only for the fact that it had the foresight and mindfulness to profit when its presumed equals lost”
Are you kidding me? You don’t really think we’re all that stupid do you? Goldman (and a few other large banks) would not even EXIST today had the government not intervened to save them last Fall. When the panic hit, these “masters of the universe” peed in their pants and went begging to the government for a rescue.
Macro, can you prove at all that Goldman Sachs is one of America’s most respectable institutions? It is a claim which surprises me.
And do you mean by “respectable” that one could respect it if one chose to do so? Do you mean GS would be respected if only people were in possession of the facts, as you are?
Clearly, until the curtain falls completely, absolute faith in the free market gospel will maintain a powerful grip on the collective mind. In this faith-based universe, one’s mortal soul is imperiled in questioning God’s divine servant doing his will on Earth as it is in heaven. Call the Inquisitor!
“I am deeply saddened by the fact that one of Americas most respectable institutions falls victim of the public outrage only for the fact that it had the foresight and mindfulness to profit when its presumed equals lost.”
whew! you had me going there until that last sentence, Macro. you must be British with that dry wit :-)
Respect, Macro? Any respect that Goldman may have been able to wring out of anyone other than traders and/or management should have evaporated the minute the purchase of Litton Loan Servicing became final. For anyone still harboring feelings that the banks/Wall St. were dealing with ANYone fairly and equitably even up to THAT point in time, the “crack” of the camel’s spine as a result of that single straw should have been enough to grasp everyone’s attention and wake them up. CDO/CDS and/or shorting play is simply ladling extra giblet gravy on this gobbler. Other than that, I really have no strong feelings on the topic either way… But by all means keep spinning the story.
uh oh, looks like Goldman is paying shill cheerleaders now (macro)………..
Macro,
Are not the following facts in evidence and widely accepted? “Of course, Goldman was one of the few banks that clearly set out to profit from shorting CDOs…So Goldman only used AIG, who would provide protection against their downgrade, which Goldman knew would happen because they were stuffing AIG with toxic ABS CDOs.” If true, would not such authorship and insider foreknowledge constitute fraud?
And another curious synchronicity here is “…that [GS was] so big with John Paulson’s CDO adventures (as recently disclosed in “The Best Trade Ever”)…I never thought they were that big in the CDO market.” Question: Is this not the same Paulson & Company (no relation to Hank), which made billions shorting irrational CDSs, that Alan “flawed-worldview” Greenspan joined shortly after he ‘resigned’ as chief bubble-blower (instead of spending more time with the nag and brats)? Would it be too backward-looking to ask why these guys are not wearing orange jumpsuits and hoods?
These “other experts who prefer to remain anonymous” should be haunted to come out of the closet before this great Ponzi finance racket blows up. When that happens, co-conspirators are as likely as prime perps to be put to the proverbial guillotine by breadless peasants.
I think it’s really instructive that GS has operatives reading here, and even commenting. We can ignore their comments entirely, but the fact that they are here at all reveals far more than they probably intended.
cougar
Shorter Macro……Let them eat popcorn!
Faith breathers abound as history repeats itself.
Your right Macro. No one or for that matter no company has ever done anything unethical or illegal in the name of a few dollars. Oh I am sorry I should have said several billions and not to mention the real possibility that they would be reduced to the level of the common bankrupt citizen that they have been stealing from for all these years. Wake up Macro it is called GREED and self preservation.
What amazes me is that even the paid Goldman shills are arrogant tax-loving Keynesian pricks.
And, as usual, I ask myself why I comment on blogs where it impossible to achieve a normal debate. The fact that commentators suggest that I would be on Goldmans payroll is partly amusing, but mostly disturbing. I recognize that no one here is interested in hearing the other side of things, so please, continue to feed your misinformed minds with all the “facts” that support your vampire squid theories. As for some of you questioning Goldmans standing in american society, I don’t know where you come from or from whom you get your opinions, but I cannot help but wonder if you crawled out of a cave 12 months ago. I live in Sweden, a society where socialism and jealousy is deeply rooted in many citizens. I would not have imagined that a financial crisis and a few angry articles would cause the US public to embark on the same path. And do not misunderstand me here, the financial sector deserve criticism, but my point is that Goldman is, and has always been, one of the most prudent firms and does not deserve the squid status just because they survived the crisis. To be fair here, no one really knows whether Goldman would have survived without government help (No, seriously, you don’t), but the same is true for all investment banks today. I don’t know about you, but if I was a taxpaying american citizen, I would be more upset over banks propped up with my hard earned taxes paying bonuses at all than I would be over profits at a bank who paid me back with 23% interest as soon as it had the chance. Your economic system works better than most others in this world, swallow your bitterness and let it continue to do so.
Macro,
I worked briefly at Goldman nearly 30 years ago. The firm now bears no resemblance to the one I knew then (and I would hardly depict it as a paragon of virtue, more an extremely run place that was very sensitive to the long term value of its franchise but would still push the margins wherever possible). I venture to say you have no idea of the predatory behavior it has engaged in. Hint: Abacus.
As for its pay levels being warranted, its former co-chairman, John Whitehead, blasted Lloyd Blankfein in 2006 for the firm’s egregious compensation practices (meaning based on 2005 pay levels, which were less than those seen in 2006, 2007, and expected this year).
And you claim that taxpayers have been fairly compensated for rescuing Goldman is completely spurious. As Roger Ehrenberg pointed out, the TARP warrants were wildly underpriced for the government backstopping a $1 trillion balance sheet. What about the FDIC guaranteed loans? Had Goldman paid those back? What about the value of the super cheap funding, the access to all the fancy facilities, the benefits of the Fed’s “qualitative” easing, the knowledge that the powers will be will never let them go bust (and the effect that has on their funding cost).
The reason that readers have reacted as they do is that your view is so off base f that it sounds as if it comes from someone who has a strong vested interest in Goldman’s image, hence the assumption that you are an employee. And the level of delusion in what you write is so high that being a GS employee (or flack) is the most flattering interpretation.
You have no sense of propriety or proportion. There is a big difference between pay for effort and looting. And every major US capital markets player, would have been toast, including Goldman, if the government had not intervened last November. Any representation to the contrary is simply counterfactual.
Yves,
Given your condescending remarks, which are more embarrassing for you than they are for me, one has to wonder whether you support a debate around these issues or just want your followers to salute you in the comments section. I will let you get back to your agenda, whatever it is, since your reply to my comment is pretty off base itself. Since when is FDIC guarantees, cheap funding and government backstops specific to Goldman Sachs, for example? I am left to wonder when it became unfashionable to make money on Wall Street.
It’s never been “unfashionable to make money on Wall Street.” “Making money on Wall St.” falls quickly out of fashion, though, when it is realized that someone has been rigging the game and STEALING the money outright without regard for those around them or those who may be seriously adversely affected by the actions involved.
“I hate to get sucked into the vampire squid line of thinking about Goldman”
Never attribute to conspiracy what can be explained by idiocy. On the other hand, there was a conspircy by idiots to kill Lincoln.
Actually, I don’t think its a conspiracy. It is far worse. Keynes said “The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist.”
There is a apparently the belief at the FED that everything hinges on saving big finance. It you hang around with, are trained by, financiers, you have a financiers frame of reference. And if every big finance firm had failed, that undoubtedly would have been very bad. But there seems to be the idea that the financial shenanagans that these guys come up must be tolerated, and that these scams are “innovation.” My view is that there is little inovation in loaning money, and to the extent that there is, it is either designed to hide risk, or misprice the asset, or generate fees.
profit is not profit is it requires taxpayers to make it happen
Wish this were true.
Once it is sanitized by passage thru the balance sheet of a large and complex corporation, it’s just profit. And pays those bonuses and campaign contributions just fine.
What we are seeing is ongoing looting of the public treasury. GS and a few others are just the incorporated sieves and shells via which public money are being “converted” to private profits for select individuals in industry and government. There is no effort at all involved in this work, and no services rendered, and nothing of value is produced. Pour public money in one end of the machine, turn the crank, and private profits come out the other end.
There is no limit to how long they can run the machine. BB and TG will cover their back, and probably reap personal profits at a latter date. As the treasury empties and government collapses the risk of being caught is less each day and not more. With the MSM fawning at their sleeves there is no real chance at public exposure.
I’d say the game is over. The oligarchs one this round. Not sure what comes next. Feudalism, I imagine. I already don’t like it.
cougar
Hm… What point is in having collateral you cannot seize when the cpty goes bust? This is what your post seems to imply (collateral lost if AIG went bankrupt). AFAIK, Collateral Security Agreement (CSA) says that on the event on bankruptcy you net your exposure, and seize the relevant collateral (less any treshold/minimum transfer amount). There may be a bit of legal dancing around that, but not much.
Of course, especially in volatile market and on instruments with large gamma collateral will be only an approximation and you can still suffer losses, but no-one explained how exactly would GS suffer, and how much would they lose based on the posted collateral and offsetting transactions.
For me, GS’s collateral is the elephant in the room that people ignore when talking about AIG and GS.
Until it is sufficiently well explained why even collateralised deals would cause large losses (or lower GS’s profit very significantly), it is pointless to try to frame GS one way or another, as there’s no clear motive.
Vlade – I will show you why – its called “jump to default risk”. The collateral posting game when it is rating based (as opposed to say market derived pricing like CDS levels) is a retroactive process….say what?
Additional collateral can only be called for after the rating agencies actually downgrade. Now AIG was rated AA well into 2008 despite CDS prices inferring imminent default – price was 30% upfront plus 500bp running for senior unsecured AIG risk.
In essence – Goldman was facing massive jump to default risk on its collateral calls. That is, it was highly likely that AIG was going to go from being rated AA on one day to being in Ch.11 the next. That is NO rating transition, so no time to readjust the collateral call ratio.
In effect, Goldman DID NOT have a dynamic hedge. They were screwed….believe me.
I know about JTD – in fact, I wrote that this would kill any attempt to put them on exchanges long before people finally accepted it.
But that doesn’t make any difference in this case, as the CDSes weren’t written on the AIG itself (you’d be dumb to buy CDS on AIG from AIG).
So, the CDS was written on X, the fact that AIG goes belly up doesn’t mean that X does (especially if X is a mortgage CDO). If you were saying that X going down could bring AIG down, it would be different story.
My experience with collateral and CSAs is that you either post MTM less treshold, or you don’t post at all. When posting is required because of downgrade move, you get from getting-nothing to getting everything scenario.
MTM of a CDS won’t (necessarily) move because AIG gets downgraded.
What you may mean is that CDS price might move (as opposed to defaulting) when AIG went bust for not exactly rational reasons (i.e. why should mortgage CDO be all of sudden more likely go bust when AIG goes? It’s unlikely it had strong exposure to AIG employees mortgages).
Goldman received about 5.9B from AIG in collateral before the bailout (source: bloomberg) related to this, and the total payout they received on their CDS deals was 8.1B. That means Goldman was set to lose about 2.2B. Not a small change, but not enough to sink them I think.
With King Paulson and Prince Geithner at the helm, was there ever any doubt that Goldman Sachs would be treated to a fabulous orgy at the public trough?
There used to be a rumor when I worked on Wall Street 20 yrs. ago that when a politician entered office he had to put his assets into a blind trust. That’s not the rumor. The rumor was that if he put his assets in trust with Goldman that Goldman would not let him lose money.
This was not true of other firms, in fact, Kit Bond, lost money because Paine Webber invested his money in TCBY.
Just a clarification question, when you speak of “Goldman” who are you really talking about?
A vast shadowy boardroom filled with cigar-smoking old men plotting to rule the world?
A half-dozen young masters-of-the-universe in the trading put who decide to pull a big score in a cocaine-dusted haze of hubris?
A cringingly boring internal memo that instructs accounting to modify all new contracts according to page 12, paragraph 7, subsection R?
I mean, Goldman is a huge company. I like your story, it would explain a lot, but how about some specification. If pumping AIG with toxic CDO’s was deliberate, somebody had to coordinate it.
“If pumping AIG with toxic CDO’s was deliberate, somebody had to coordinate it.”
yes, and the company that employed them, aka Goldman Sachs, would be responsible for their actions.
Yes. But my point is: who, exactly? Under what conditions, and is there a paper trail? Goldman Sachs is just a name on a letterhead. Actual people must have done specific things.
If I remember correctly from my Conspiracy 101, you have to focus on the inner brotherhood, in this case, Inner Goldman Sachs.
Absolutely! I have said similar things for over a year. Why did Vampire Squid (VS) send Henry Paulson to Treasury? To protect its rear end if it got in trouble. Absent the AIG bailout, VS would have gone to sleep with the fish, like Bear Stearns. For my money VS is less “respectable” than the Genovese family.
Yves,
I’m not a man of words I’m more of a man of pictures, moving pictures at that.
Here’s my vid mash-up on evil blood sucking Goldman Sachs where they finally get their comeuppance!
http://www.youtube.com/watch?v=T9yvSmSGjNg
… the shots are taken from the Korean film ‘Old Boy’ and our hero shows them a dark pool they’re not familiar with. Enjoy!
As if Hank Paulson had a passion for serving the public. Its not enough for the investment banking sector to be paying thousands of lobbyists for the purpose of corrupting government officials, or bribery by another name, they have their own employees embedded in government for stealth operations in sensitive areas like printing money and changing the legal process by which we and people all over the world live; using their freedoms to deprive us of ours. They are traitors and unindicted felons.
If any good is to come out of all this it is the demystifying process of blogs like this that informs and empowers the work of reform.
Can you please explain how Goldman wasn’t covered if they held sufficient collateral? It is my understanding that, in the case of AIG bankruptcy, GS would retain the collateral an then have to get in line to claim any difference between the value of that collateral and the original contracted agreement w/AIG. Perhaps the missing detail is the nature of that collateral- if it was MBS then perhaps Goldman was in fact in trouble, but if they were holding Treasuries I don’t see how they were distressed.
In the case of bankruptcy, Goldman’s collateral would have been subject to claw-back. The Goldman grand trading strategy appears to have been to sell and short CDO paper to clients and anyone else. Buy CDS to cover the potential for having to buy back bad paper. What is continuously unsaid in all of this is that which appears to be self evident. AIG commited, at the least, a massive tort if not fraud.
Similary, what should one think of Goldman in that they were selling paper they felt was worthless to parties who were incapable of sustaining a complete loss on said paper? Did they make the sale with the admonishment, “this paper has an expected value near zero, even though you’re paying 80 cents”. Is there a tort in that? I’d also like to know if any of the sales of CDO’s by Goldman were recaptured.
The elephant in the room was, indeed, the collateral. What appears to be in denouement is the fact that what occurred was a conspiracy by default. That is, Treasury and Fed feared the loss of the ‘primary dealer’ banks, which included Goldman. Can it be established that Goldman was witting in its sales of CDO and purchases of CDS; and, critically, did Goldman feel assured in the idea that the Government would arrange bailouts for the ‘primary dealer’ banks?
Despite all representations to the contrary, I do believe that Goldman was in trouble and that the primary threat existed in the form of the potential of a run on the company. At near 40 to 1 leverage, they could have failed within hours. Note that even after receiving the bailout funds via AIG they filed to become a bank in order to have the liquidity necessary to face such a challenge. Also note that they did not delay in seeking capital from Buffett as well the market by way of a stock offering.
Now the question that needs to be considered is: Would the Taxpayers have been better off to have let AIG fail? That’s a question which we can rumminate on for some time. I think the probable answer is that we would have been better served by an apocalyptic collapse rather than the debsaement of the money supply that has been achieved under the auspices of preventing a depression.
Ultimately, we may well have a depression as the Treasury continues to sell debt into the market and as the interest on that debt escalates to more than 50% of GDP. In fact that circumstance has the potential of bringing down the global financial system. The surge in the acquisition of gold is fair testament to the fact that such an occurance has reached the level of being reasonably possible.
This great experiment in a fiat currency coupled with a fractional reserve banking system; and, the presumption that the Fed and/or the Federal Government can manipulate economic activity to achieve perpetual prosperity is over.
The world needs a new financial system and it does not appear that we have the leadership adequate to the task.
AIG was not going to be able to come up with even remotely enough collateral. According to Sorkin’s Too Big to Fail, at the time of the first bailout. AIG was going to come up at least $60 billion short. Each notch of a downgrade meant more collateral posting.
If AIG had missed that collateral call, it would have been downgraded to junk. God only knows how much collateral would have been required in that event (each notch of a downgrade required more collateral, and a default would be a multi-grade downgrade). Goldman clearly partially anticipated this event. It had bought CDS on AIG, that was its defense, that it was not exposed. SIGTARP rejected that argument since if AIG had imploded, the financial system probably would have seized up, and those guarantees would be worthless.
So what happens to GS if there was no collateral posted? It would have to write down the CDOs. it would have no offsetting gains from the AIG guarantees. At a minimum, the losses would probably enough to get GS downgraded, increasing its cost of funding a good deal. And if the losses were big enough, Goldman could be severely impaired.
So who sold the CDS on AIG?
So Goldman was covered in the event of further AIG downgrades and the consequent inability of AIG to post collateral IF you assume that Goldman’s counter-party in the CDS on AIG was able to pay. That means that this all boils down to who the CDS counter-party was and whether the CDS was sufficient in size to cover the hole left in GS balance sheet from any failure to collect sufficient collateral from AIG. To single out GS for getting bailed out when the underlying assumption is that the entire financial system was going to fail (“Financial Armageddon”) and no contracts would be honored is a bit disingenuous. If that is the assumption then every European and US bank and financial institution was in an equal or more precarious situation as GS.
Yossarian – pls see my response to Vlade above.
Gary, thank you and I understand the pickle GS was in w/respect to collateral. The question I have revolves around the CDS they used to hedge their AIG risk, specifically the size and counter-party.
Yossarian – no sure you do understand. Rule no.1 in trading – the only perfect hedge is in the botantical gardens.
So no, the risk was not directly with the AIG CDS counterparty. Any dynamically managed hedge (as a rating based collateral posting is)requires the assumption (or model risk) of an assumed delta between the m2m exposure and underlying CDS.
Goldman quickly realised that whilst they could “theoretically” overhedge the m2m exposure and anticipate rating downgrades – they hedge would fall apart in either a jump to default or govt intervention scenario. They were right.
The only way they could ensure they had a very good hedge was to get greater certainty on the hedges delta ratio – how – ensure government intervention. Thus the best path was not to “overhedge” with the CDS counterparty as this actually cost them billions once the govt stepped in.
The Delta of the trade went inverse once the govt stepped in – no model can handle this. It is purely best guess stuff.
Awful, awful people.
Vampire squid indeed.
the devil you know …
under the condition of a global consciousness, individual investment surplus is free to migrate at will, leaving the infrastructure of artificial top-down, command and control, geocentric governments, which require surplus to fund natural deficits, stranded as sunk costs, with yield curve half lives approaching 0. Artificial geocentric constructs, designed to physically enslave surplus to the benefit of such deficits, is thus being invalidated, resulting in liquidation.
Immobile physical capital is naturally insecure in a mobile economy, but attempting to immobilize labor, instead of adapting, is counter-productive. Discovery is constructive for the purpose of building out the next system, but fighting tyranny necessarily creates an opposing force of tyranny.
Intelligent labor employs capital. The Internet is just the latest tool in that development. Capital that does not wish to be employed will be recycled naturally, of its own dead weight.
if you had an independent energy source to power your home and transportation, how would the economy change?
what would happen to the devil?
Obama can alter some short-term behavior. That’s all.
The bad assumptions begin with humans at the top of the food chain.
The universe is at the top of the food chain. Way, way down the chain resides the solar system. Down that chain is earth, and down that chain is the human race, which the planet has been employing to create diverse surfaces.
Change is possible, but lots of people would have to change their long-term behavior simultaneously. The cookie-cutter mentality has to go.
The universe encourages energy tapping, but recursively dismantles any taps that do not increase diversity.
Because the main body politic is now reducing biological diversity, the planet is driving a recursive de-evolution, looking for a spot for a new tap.
At the same time, it is forging ahead by feeding several small sub-populations to guage their future promise.
It is forming a virtual strait between the two groups that is growing longer and thinner.
The main body politic is imploding of its own dead weight. To the extent it refuses to reorganize for the purpose of crossing that strait, it will be recycled by evolution.
Because the process has been going on for several thousand years, the blink of an eye for the planet, all the humans naturally assume it will continue indefinitely.
The node the planet cares about is human global communication, specifically that portion that promises to increase biological diversity.
That black hole has commercial real estate caught in its outer gravity, and Government never created a real job in its life. Government does not work for labor. Government works for capital, and always has. That’s the constitution. Retained powers is labor. Government is specifically designed to fail when it exceeds its scope of authority, capital allocation, and individual governments are designed to fail when they are no longer competitive with their peers.
Anyone who has ever had an opportunity to observe union deliberations knows that the union is the least democratic institutiion. It was taken over some time ago with induction into the pension ponzi scheme, and is now the stepchild of Government and Corporation.
Institutions chose to liquidate family formation and consume its assets a long time ago (70s), rather than adapt. Now those assets are nearly liquidated, but the behavior is inbred.
GS, the outer shell of the nucleus / center of gravity, is just a symptom. It’s not going to go away until all the food, primarily the pension system, is gone.
I can hear the complaints now.
Either human beings are dumber than all the rest of the critters on the planet, or Government is a convenience.
GS et al knew that AIG’s assets were protected. They could have received shares in the reorged AIG. Another puzzle piece are the AIG CDS.
To save them from certain doom (That was the pitch to Congress) and then earning record bonuses the following year is a non-starter. And no investigation?
We investigate a President’s sexual activities, but somehow avoid auditing the disbursement of HUNDREDS OF BILLIONS!!! Oh yeah, that was club member infighting.
http://anonymousmonetarist.blogspot.com/2009/11/our-top-story-tonight-yippee-ki-yay-mr.html
Thanks for the effort Mr. Adams.
I think GS is to blame but if they did spread fear shouldn’t people have found out if it was true and try to find evidence on the matter before bailing out AIG.
If you want to generate certain outcomes without a lot of discussion or later investigation, you employ fear as a reason for action.
That’s basic Political Psychology 101. Oldest trick in the book. As such, when someone runs into a room shouting “we are all doomed unless you give me money right now!” you are well advised to toss him into the street.
And that is exactly what did not happen here. Someone ran in demanding money… and got it. The question is — why did they not end up in the street instead? There may be an innocent reason, but if there is then in must be that everyone in Washington is bone-headed stupid.
Which they might be. But we’re all holding out for the vampire squid resolution because the alternative is really too dreadful to contemplate.
cougar
A. Because She looks like one
B. Very small rocks
C. Because they are true
Yes viewers, its C
My own theory is that Goldman was working the AIG deal. It would have sunk without it, but Lehman blindsided them and almost took them out anyway. It was only the fancy footwork of giving them bankholder status that saved them. And yes, it is ironic that the idea for this could well have come from Lehman’s Fuld.
The thing that is odd about the regulatory relief CDS is that they were left on AIGFP’s books even as all the MBS and ABS ones were resolved. They are still mostly there as far as I know. The last figure I saw was $200 billion down from $234 billion.
the smoking gun you are looking for is the Goldman created and supported ABX Index CDS market. The AIG Memo that was released thru the freedom of Info Act indicates that they were “providing pricing” services during Nov ’07 when no one else in the street would give a bid. To me this is proof of a fictitious market ie. manipulation, which served the purpose of protecting the Goldman CDS ruse of an orderly marketplace for sub-prime issues. While true the were seling protection, it was the mark-to-market problem they were fighting against(Nov 15th, 2007) when FAS 57 was originally set to kck in. They had to keep AIG afloat past that date, and indeed up until two more quarters had been logged,did they survive.
For better or for worse a call was made by the French Finance Minister to save AIG. I have no idea if this was the primary factor in the AIG bailout but regulatory capital concerns were of importance on the continent. Unwinding the regulatory capital CDS obviously requires big share offerings by European banks. So we definitely saved Credit Agricole if not Unicredit through the AIG bailout.
Many good comments if not always entirely understandable for layperson trying to understand.
The continuing connection/revolving door between GS and the Government over the years should give pause to those who pooh-pooh the “conspiracy” theories. After all, isn’t business a giant conspiracy? The movement of money is a global unstructured conspiracy to make more profit. Period.
Lastly, perception is 99% reality. Which means in all of our minds, that what happened with GS/Government/FED actions appears to have been good for the financial capitalists (GS, BA,WF etc) and bad for the ultimate payers, the taxpayers. But, that is not anything new in retrospect of historical memory.
I do forcefully agree with one blogger above that we need a new system. The old one is dead. Predatory capitalism, wed to extractive capitalism is crushing humanity. I also agree that from this writer’s perspective, apocalyptic failure should have been unleashed. Then all would have understood the failure. But, socially, it may (conditional) have been unacceptable to the whole.
Time for a new paradigm. When the economy (any) becomes too complicated for the common human to understand it’s time for a change.
I enjoyed all the posts.
I’m really working on a book regarding the mess we are in; I’ve predicted this would happen in the early ’90’s and was vilified by some in my own family. The deeper I dig, the more complicated (tho simplified in its entirety) the financial instruments appear to me.
If the ordinary citizen doesn’t understand how his/her economy works, and that person depends on their very survival to understand and work within it’s parameters, then the economy itself is doomed for there is not definite reference point to work from.
Basically, there is enough blame to go around. From simple acquisitiveness the gross population have plumbed the depths of simple greed and now, completely bewildered they have to pay the piper. The big question is, how come the “pay the piper” field is not level?
Very, very interesting. One other point that I like to mention, since it’s my thing, is that both AIG and Goldman Sachs are audited by PwC. Moody’s and MBIA too. It’s no coincidence and should be no surprise that PwC, and the rest of the audit firms, could have, should have, and did know what was going on inside the major financial institutions, the ratings agencies and the monolines. Why? Only these four firms audited all of them and were on all sides of these deals – seeing assets move amongst the financial firms, act as collateral to each other and become a major source of business for the ratings agencies.
http://retheauditors.com/2008/02/21/the-big-4-and-the-ratings-agencies-a-self-fulfilling-prophecy/
And this post officially marks my abandoning this blog. Yves, I tuned into your blog in 2007 when the crisis was just starting off and it was an invaluable resource. Over time, however, you have allowed it – and yourself – to move towards ever-increasing shrillness and conspiracy theory peddling. It is deeply, deeply disappointing that instead of continuing the debate, the blog is now written in with an absolute lack of seriousness. Conspiracy theories are dime a dozen: my advice is stay clear, check your sources and concentrate on known reality.
Good luck, and, ahem, good night.
a major issue not mentioned anywhere in this matter is this’
who now trusts the US markets? China has to buy treasuries, but i moved out of US markets at the begining of this year. until US citizens fix Wall St access to capital from foreigners will be much harder than in previous years.
the US entreprenuer is going to suffer. if small and start up businesses suffer then so goes the economy.
dysfunctional capital markets are not conducive to national wealth. fix em if you want to use our investment capital
Everyone is going to suffer. Big corporations, small businesses and startups. Unfortunately the taxpayer is probably going to suffer the most.
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