From coverage of Congressional hearings in the New York Times (hat tip reader Tom):
[Former AIG CEO Martin} Sullivan also came under fire for reassuring shareholders about the health of the company last December, just days after its auditor, Pricewaterhouse Cooper, warned of him that AIG was displaying ”material weakness” in its huge exposure to potential losses from insuring mortgage-related securities….
Waxman unveiled documents showing AIG executives hid the full extent of the firm’s risky financial products from auditors, both outside and inside the firm, as losses mounted.
For instance, Federal regulators at the Office of Thrift Supervision warned in March that ”corporate oversight of AIG Financial Products … lack critical elements of independence.”
At the same time, Pricewaterhouse Cooper confidentially warned the company that the ”root cause” of its mounting problems was denying internal overseers in charge of limiting AIG’s exposure access to what was going on in its highly leveraged financial products branch.
[House Oversight Committee Chairman Henry] Waxman also released testimony from former AIG auditor Joseph St. Denis, who resigned after being blocked from giving his input on how the firm estimated its liabilities.
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And I recall Yves’ essential recent post about AIG demonstrating that they played a critical role in helping European banks evade capital requirements.
To quote from the key AIG article she linked to:
“But the AIG case shows the importance of another link across financial markets, namely massive regulatory arbitrage. The K-10 annex of AIG’s last annual report reveals that AIG had written coverage for over US$ 300 billion of credit insurance for European banks. The comment by AIG itself on these positions is: “…. for the purpose of providing them with regulatory capital relief rather than risk mitigation in exchange for a minimum guaranteed fee”. AIG thus helped to organise regulatory arbitrage on a gigantic scale. A formal default of AIG would have had a devastating impact on banks in Europe. This explains why AIG’s problems had sent shock waves through the share prices of European banks. For the time being the US Treasury has saved, inter alia, the European banking system, but given that AIG is to be liquidated European banks now have to scramble to find other ways of obtaining the ‘regulatory capital relief’ they appear to need urgently.”
This link provided by Yves was a word to the wise that continental banking troubles would soon follow.
And indeed they did.
Matt Dubuque
“Ohh, maa-maaa, can this reeeaallyy be the eennd? Tah bee SSTUUCKKKK inside Th’ Disstrictt with those RIIIKERS _BLUUUUUEESS_ aginnn’!”
The only thing that changed in December 07 was the time left to impact; the game remained the same. Nobody but nobody asks any questions so long as the stock goes up and the dividends don’t bounce.
You know those over the counter derivatives are unregulated so who’s fault is that? The inmates are running the asylum.
btw it is Martin Sullivan not Maurice
Can’t help thinking this is why they threw Elliott Spitzer under the bus.
So easy. My country destroyed by its own puritanism.
Impeach a president for -say what?
That was the first bright red flag for what was afoot -ruthless destruction of the government as we have known it.
None of this is recklessness. Here we are a few days from an election with the entire economic future of the country in the hands of the current administration, one person whose name hardly matters, the power to declare martial law in the hands of the boob, the end of posse comitatus, the power to declare and hold anyone, etc. etc., no news for the public other than reaction and propaganda, and the Congress through no fault of its own -bought and paid for.
I weep and thank you for this blog.
Fraud on an unprecedented scale… and not a single perp is in jail yet.
Could recent European events have triggered the credit default swaps (assuming the “credit insurance” is cds) that AIG wrote for the European Banks? Given these products are not homogenous, could nationalisation be a trigger (although nationalisation would not normally be considered a MAC – material adverse change)?
Great news story and link below on Buffett. I think it is wise for people to follow the money in this short-term commercial chaos and to re-visit Buffet and his desire for coupon-based streams of future cash-flows — from future earnings growth, connected to real assets.
I think Warren is the biggest snake out there, but follow the money and then question why he always seems to be connected to sweet deals. Paulson's Bogus Bailout Plan, or smaoke and mirrors with AIG does not provide taxpayers with this kind of deal. All the latest short-term instant casino structures are like drug money laundering which connects banker crooks to hot money flows that are not connected to future cash flows, i.e, Paulson and Congress are essentially betting that taxpayer whores will die off, as they pay for the pimps new cars and jets! Follow the money! {sorry if this is kinda OT here)>>
FYI: `Casino Society'
“He has always wanted a usurious return,'' said David Carr, chairman of Durham, North Carolina-based Oak Value Capital Management Inc., which holds Berkshire shares. “There's nothing more exciting in his mind than being the lender of last resort, being in a situation where they have to have the capital, they don't have anywhere to go, and there aren't a thousand people at an auction.''
Buffett's agreement with Salomon included a provision allowing him to convert the preferred shares to common stock if the price reached $38 — it was at $32 at the time — or return the stock and get his money back. The interest on the preferred shares earned him $63 million a year. It was the biggest bet he had made, and it followed a December 1986 op-ed piece he wrote for the Washington Post criticizing the “casino society'' that was making Wall Street corporate raiders rich.
The Goldman deal is even more favorable, Carr said. In addition to the preferred shares, Berkshire received warrants to buy $5 billion of Goldman common stock for $115 a share at any time in the next five years. Based on the closing price on the day of the deal, Buffett had a paper profit of $437 million on the warrants that day.
Buffett Bets Goldman Will Avoid Salomon's Missteps
http://www.bloomberg.com/apps/news?pid=20601087&sid=a60JzGkrZ8ls&refer=home
Am I banned yet?
Banks Sell `Toxic Waste' CDOs to Calpers, Texas Teachers Fund
http://www.bloomberg.com/apps/news?pid=20601170&refer=special_report&sid=aQWoYszGR6w0
FYI: Bear Stearns offered this hypothetical example at its Las Vegas presentation: A pension fund wants to buy $100 of CDO equity. Instead of buying it directly, the fund buys a zero- coupon government bond for $46 that will be redeemed for $100 in 12 years. That bond is paired with a $54 investment in CDO equity.
Zero-coupon bonds pay no interest; the investor is paid the full face amount — that's $100 in this hypothetical situation – -when the bond matures.
Principal Protection
“Principal protection is guaranteed,'' Fleischhacker says. “It's AAA since you're buying a U.S. Treasury.'' If there are no defaults, this method of investing in CDO equity would return 9.3 percent annually, she says.
The presence of the zero-coupon bond ensures the pension fund will recover its $100 investment even if the equity tranche becomes worthless. While the fund wouldn't lose any money if that happened, there would be no return on the investment for 12 years.
If a fund manager puts all of the same hypothetical $100 into zero-coupon bonds only, it would more than double its money in 12 years, Das says. “I would have thought with pension fund money, they don't really want to lose principal,'' Das says of this equity tranche sales technique. “And clearly here the principal is very much at risk. You've got a highly leveraged bet on no defaults, or very minimal defaults.''
I wanted to add one comment to the above bit on zero coupons.
The main thing I will look at with this is the connection of hedge fund-casinos that will be able to tap into pension, via underwriting derivatives based on that pension collateral. This was a big issue for me last year with The Pension Protection Act, and thus, I know that pensions can buy CDOs and derivatives and that pension funds and underwriters can easily gain exceptions from prohibited activities.
Thus, connecting the very ultra safe zero coupons to the worst of toxic waste may seem like an interesting idea to add 1+1 to = 3, but, I think this concept of substituting risk with reward is the core of the problem in this current financial engineering collapse.
If I were involved in those little private deals, I’d ask the derivatives salespeople to add in a third safety component in the form of something like a highly regulated covered bond that would add to the safety net, because this is a nice sales job in trying to dump this CDO shit, but these pension funds better fully understand the total risks here and not continue to play dead — unless they want to be exposed form alfeasance and violations of federal securities laws and all that other stuff..
That said, we only have 2 examples of covered bonds in America, one “was” with WaMu and the other resides at the parent of Countrywide, aka Bank Of America — these bonds were touted and hyped, then blessed with AAA ratings by rating agencies that had no idea what they were doing — but you can bet your assets that these same people have upgraded their Playstations to help pension funds stay clear of any future risks.
The only thing that may work in this type of CDO/Covered Bond/Zero Coupon Bond packaged pool of trash, would be the interplay of time and long term durations which may allow some CDOs to gain in valuation, while interest is pain on the deal, giving you a Buffett like earnings engine that would take this all forward.
Can I get paid for this shit?
If a fund manager puts all of the same hypothetical $100 into zero-coupon bonds only, it would more than double its money in 12 years, Das says. “I would have thought with pension fund money, they don’t really want to lose principal,” Das says of this equity tranche sales technique. “And clearly here the principal is very much at risk. You’ve got a highly leveraged bet on no defaults, or very minimal defaults.”
Perhaps I am just a bit thick, but I don’t follow this last bit. If one is able to hold the Zero Coupon Bond to maturity, this method seems to guarantee that your principle is safe. In the worst case (assuming that one holds the bond to maturity), the result is that one earns 0% — but the principle is still recovered. The plan seems to be a way to take a chance at higher returns (in the best case), against a risk of lower (or even zero, in the worst case).
Whether such is a good idea will be dependent upon the probabilities of best and worst cases (and those in between), but it would seem that, contrary to Das’s claim, the principle is not at risk.
Look. I was one of the “Blessed few”, one of the ones who raped companies and made a ton of money. You know when it started? It started in the sandbox of pre-school. It started when I began to understand that you were either the “Big Dog” or you got screwed. It continued through academia where if you were a jock and got good grades the world was your oyster. It continued in business where, if you found ways to drive margins, you were a God.
The problem is/was that no one holds people like me accountable. The worst thing is you’re momentarily embarassed. RIGHT! You are sitting in your 10,000 sq. ft. 4th home in Vail and you think I care???? Only when there is total anarchy and the guy who mows your lawn kicks down the door and has you cook his family dinner will it even out. Till then, I’m in the sand box screwing you!
@anon,8:18
Or drop in on you, from the big drop off, right side of China bowl.
Grosse Pointe….LOL death from above:).
P.S. tree wells make good people eskies/coolers, human popsickles, bears coming out of winter sleep love um.