You will hear much more about this topic (AIG and Fed secrecy) here on Friday, but Bloomberg reports the lengths to which the Fed has gone to try to keep the details of Maiden Lane III, the entity created to buy drecky CDOs from AIG counterparties who received 100% credit default swap payouts.
Get a load of this, the Fed was arguing that info IN THE PUBLIC DOMAIN should be treated as confidential! The Ministry of Truth in action:
After media reports that month named some of AIG’s counterparties, AIG executives wrote a draft of a letter to the SEC saying that it intended to withdraw its January request for confidential treatment. Later that March, the New York Fed sent edited versions of another request for confidentiality and provided arguments to help AIG make the case. The SEC granted confidential treatment in May of 2009.
This whole affair puts the Fed in a bad light indeed. The article details how the AIG, pushed by the Fed, made four efforts with the SEC to get information regarding the AIG payouts and Maiden Lane III purchases redacted. AIG seems reluctant, and the SEC, to its credit, did not roll over (although one can argue it in the end conceded too much ground).
And the arguments made by the Fed are rubbish:
On March 5, 2009, Fed Vice Chairman Donald Kohn testified before Congress that disclosure of the counterparties’ names would harm the insurer’s ability to do business. That month, AIG executives told regulators they had no objection to disclosing counterparty names
Yves here. So let’s be clear, the Fed lied to Congress. If there was the potential for this disclosure to damage AIG, they’d be the first to be keen for any excuse to preserve confidentiality.
So then this becomes Iraq, new excuses being offered for a dubious course of action:
“If such information were to become available to traders in such securities, traders would be able to use such information to their advantage, and undercut the ability of Maiden Lane III to sell those assets for the maximum total return, to the detriment of taxpayers and AIG,” the New York Fed said in its Jan. 19 statement.
Yves here. This is illiquid, bespoke paper. If Maiden Lane were to try to sell it, any buyer is going to make an assessment of its fundamental value. And the reports I have gotten is that there is no appetite for CDOs, and for reasons that are unlikely to change. They are too costly to evaluate relative to the potential bargains that might be available. You can do rough pricing using proxies for the various types of collateral, but if you are wrong, you can wind up with an instrument that really is worthless. Why bother taking the risk, particularly given how illiquid the paper is?
In the end, the Fed sought over 1000 redactions and got in excess of 400.
So we have the specter of one regulator pushing a public company to operate in a way it clearly is not comfortable with, to get another regulator to bend the rules. If this isn’t further proof the Fed needs to be leashed and collared, I don’t know what is.
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What’s really annoying here is that the Fed is trying to cover up not its cleverness (as a scammer might do) but its incompetence. I’d much prefer the former. The Fed is in full castle defence mode–afraid to admit any mistakes or losses for fear of criticism. This is not a good way for them to operate.
Check a NYC street map around Wall Street and take note that the NY Federal Reserve Building is within a martini run of the NYSE. Maiden Lane is the dark alley directly beneath the windows of the Fed.
In the dark days of the meltdown, someone looked out the window and picked a name off the street sign. Metaphorically, this puts the Maiden Lanes where the Fed can keep a watchful eye and shoe away any vagrants hoping to find out what’s actually going in and out of the backside of the Fed.
Of course we all know what’s coming out the backside of the Fed–we just don’t know what undigested nuggets there may be yet to identify.
Hopefully voters and decision makers are listening to you. As you say, the Fed’s argument for secrecy is a sham, juvenile, or (probably) both.
Nobody seems to know what they are doing.
The French rolled Geithner:
So it goes … http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a__.69Q8BR04
Man that one get funnier and funnier every time I read it. “Misseur Timmeh we French banks would love to work with you on this, but alas our lawyers said French law requires you give us all the money.”
I’d love to give credit to the French for pulling a fast one, but their excuse wasn’t even that clever. And yet Timmy helped himself to another crepe and nodded along, hoping that no one asked him a question.
mark (in comments)
what obama quote are you talking about? let’s give credit where it is due, and blame where it tis deserved. let’s try to be fair!
This post needs some meat on the bones. As I understand matters, AIG insured the top tranche of the toxic CDOs. When Fed largesse allowed AIG to pay up, what did it receive in exchange? If Maiden Lane III represents an asset of the Fed, what is the nature of this asset? Most of the CDOs are synthetic, which means there is no ‘there’ there. How can the Fed expect to resell these phony assets, even if the Go’mint provides 93% financing? Would you pay 7% of any price for donut holes? If the public understood this there would be a revolution tomorrow. morning.
Jack,
No, most of the deals were so-called high-grade CDOs, which means the assets in the CDO would be mainly real securities, not CDS.
The Fed has been operating significantly outside of the law at least since Aug. 2007 it announced a rate cut right before option expirations. It was obvious this information was released to certain parties because the day before the market rallied from falling off the cliff at exactly 2:00 oclock.
If this had not happened the market would have melted down in August of 2007 instead of 2008. The market at that time was done and ready for a major decline. The leaking of the rate cut and the rate cut significantly burned the shorts and allowed the kabuki theater to go on for another year.
There had to be significantly securities laws broken in that move.
I say do not just audit the fed, I say put significant reins on the fed, drastically reduce the size of the fed and significantly reduce the amount of money the fed uses to buy off economists around the country.
“If such information were to become available to traders in such securities, traders would be able to use such information to their advantage…”
Of course traders would be able to use information to their advantage, your moron! That’s the whole point of trading. Why the hell would anyone trade if they didn’t believe they had some sort of advantage from which to profit?
This single quote proves what a complete fool Donald Kohn is. How the vice chairman of the Fed does not understand that the basic premise of, dare I say, “free” markets is that people are actually free to act on transparent information in order to profit for their own benefits.
You’ll have to pardon my French, but, seriously – what a dickhead.
Ishmael, you are absolutely correct. I was watching the action that day in August 2007. It was the the beginning of a lot of dirty business.
Agree with you 100% Yves; this whole thing stinks to high heaven here.
By the way…If remember correctly, it was Fed VP Kohn who spewed this bullshit in response to questioning by Rep. Alan Grayson.
I’m not sure VP Kohn realize in much trouble he put himself to. Does he really think Grayson will let this lie stands without the mother of all grilling?
*very evil grin*
I’ll email your post with the relevant reminders to Grayson today.
Man! That should be fun to watch.
Anyone wants to do likewise? I sure could enjoy another YouTube video of a Fed witness getting mercilessly quartered by an experienced ex-prosecutor.
Isn’t the Fed also doing Gawds work like the squid(GS)?
@Ishmael
Yeah, I remember that day too–I pointed out the huge slug of OTM index calls which were bought that day to some people in the office and we had a good shrug of the shoulders about it.
I didn’t think anyone else remembered. Thanks.
Yves, why did you have to interject a comment about Iraq, “So then this becomes Iraq, new excuses being offered for a dubious course of action?” Please don’t tell me you are another fool who thinks the world with be a better place with Saddam, Uday, and Qusay. Please also don’t tell me that someone with your lucid intelligence was so naive not to recognize the overall objective of the invasion of Iraq was getting rid of Saddam regardless of the intelligence failures about WMD’s by every major western intelligence service.
It’s too bad really that Britain and France didn’t have a President Bush in 1935 when Hitler marched in the Rhineland. WWII wouldn’t have taken place. Getting rid of brutal dictators is a fabulous idea. It is more economical in the long run (forgive the pun) than leaving them in power for generations. See North Korea as an example of what Iraq is not.
Dave
Dave,
With all due respect, I do not know what you are talking about. It seems I write “Iraq” and you start projecting.
First, I am critical of the Fed’s action. So in comparing it to Iraq, which pretty much everyone agrees was an abject disaster, can you possibly construe that I am saying something positive about Iraq?
Second, a salient feature of the Iraq effort was the every growing and changing list of reasons why we had gone in. One journalist found something like 23 and dismissed them all. And the headline is “So Why is the Fed so Desperate…..”
Dave Thomas,
Please don’t tell me you are one of those who think the world be better a better place if that radical Wahhabist sect, the House of Saud, were still in power in Saudi Arabia? After all it was they, through their proxies Al Qaida, who attacked the US on 9/11 and killed 3000 people. Only a surrender monkey, Vichy American fool would still be objecting to Operation Saudi Freedom. Just think if we hadn’t defeated them after they attacked us, the most radical Islamist government in world history would still be pumping out the Jihadis on an industrial scale, would still be spreading radical Wahhabi mardrassas throughout the Islamic world, and they would still be ordering Al Qaida to attack Western countries with impunity. Who knows, if we hadn’t defeated the House of Saud we might still be tied down in Afghanistan? Can you imagine that? That we wouldn’t have been able to withdraw in 2006 and the Taliban would still exist? Thank God George W. Bush had the wisdom and courage to rid the world forever of the House of Saud.
Oh wait a minute, my bad, after the radical Islamist Saudi Arabia attacked us in 2001, we decided to not strike them back but to instead overthrow a socialist tyrant in Iraq and replace him with an Iranian-backed Islamist government headed by members of the “former” terrorist group al-Dawa. And the opportunity cost of Operation Iraqi Freedom is that the House of Saud is both still polluting the world with its medieval Islamist ideology and still indoctrinating Jihadist with impunity. To me then the proper WW2 analogy for Iraq would certainly not be the German occupation of the Rhine; the only possible WW2 analogy is one that thankfully didn’t happen. It would be if in response the Japanese attack on Pearl Harbor FDR had decided not to attack Japan but to instead invade Mongolia and install a militant Nationalist government there. Fair enough the Saudis are Sunnis and the Iraqi Islamists are Shia, but Saudi Arabia is certainly much more pleased to have fellow traveller Islamists in power in Iraq instead of Socialists; just as Japan would have preferred a Nationalist Mongolia over one dominated by the Communists
But no, our junior Van Clausewitz-in-training decided the best way to fight radical Islam was to replace a secular, anit-Islamist government with a radical Islamic one, albeit one called “moderate” compared to their masters in Tehran. Please remind me when during the Cold War we actually sent a huge army to destroy a capitalist regime just so that we could install a “moderate” communist state. Because that is what we have done in Iraq; if you replace capitalist with secular and communist with Islamist.
But you say the invasion of Iraq is justified by the fly paper strategy? That is we use the invasions of Iraq and Afghanistan to lure the Jihadis there and then kill them dead on a retail level while cleverly leaving the wholesale source of these terrorists, Saudi Arabia, untouched. That’s kind of like deciding that I am going to chase individual wasps all over my garden but never ever destroy the source of the problem, the damn wasp’s nest. That strategy is either plain stupidity or there is a larger agenda at work here. I go with the latter choice of course.
So yes I say the world would be a better place if Saddam Hussein and his children were still in power AND we had taken out the House of Saud. In fact there is a chance that a Islamist Sunni strong man will take over in Iraq in the next couple of years anyway, depending how things sort out with Iran. So then we will be not only be right back to square one, only instead of a secular Saddam we would have an Islamist Saddam. But in any case the House of Saud is still going strong, still fully backed and protected by America, still supporting the Taliban, and still enjoying more than ever the spectacle of the US being chained to the rocks of Iraq and Afghanistan while every night the vultures of militant Islam come and peck away at our collective liver.
Awesome. I love the smell of a good slapdown in the morning. Kevin should be our resident foreign policy takedown expert. Another great comment. I tip my hat, sir.
Thanks Anonymous J.
As you might imagine, my comment is the fruit of several years of discussions on a war blogger site where my views were certainly in the minority. I intentionally frame the argument within a right wing world view (might makes right, Islam is the eternal enemy, etc.) in order to show that even from this point of view the invasion of Iraq is somewhat wanting in logic, to say the least.
The House of Saud to America is what the tribal people are to Pakistan, necessary evils.
At first, the State Department proposed the formation of a government-owned oil firm to acquire concessions in Saudi Arabia and extract the kingdom’s reserves. This plan was considered too unwieldy, however, and instead U.S. officials turned this task over to the Arabian American Oil Company (ARAMCO), an alliance of major U.S. oil corporations. But these officials were also worried about the kingdom’s long-term stability, so they concluded that the United States would have to assume responsibility for the defense of Saudi Arabia. In one of the most extraordinary occurrences in modern American history, President Roosevelt met with King Abd al-Aziz Ibn Saud, the founder of the modern Saudi regime, on a U.S. warship in the Suez Canal following the February 1945 conference in Yalta. Although details of the meeting have never been made public, it is widely believed that Roosevelt gave the King a promise of U.S. protection in return for privileged American access to Saudi oil-an arrangement that remains in full effect today and constitutes the essential core of the United States-Saudi relationship.
This relationship has provided enormous benefits to both sides. The United States has enjoyed preferred access to Saudi petroleum reserves, obtaining about one-sixth of its crude-oil imports from the kingdom. ARAMCO and its U.S. partners have reaped immense profits from their operations in Saudi Arabia and from the distribution of Saudi oil worldwide. (Although ARAMCO’s Saudi holdings were nationalized by the Saudi government in 1976, the company continues to manage Saudi oil production and to market its petroleum products abroad.) Saudi Arabia also buys about $6-10 billion worth of goods per year from US companies. The Saudi royal family, for its part, has become immensely wealthy and, because of continued U.S. protection, has remained safe from external and internal attack.
Attribution: Prof Michael Klare
Skippy….King Abd al-Aziz Ibn Saud, now there was a guy who could party all night long!
Dave Thomas wrote, “Please don’t tell me you are another fool who thinks the world with be a better place with Saddam, Uday, and Qusay.”
Please don’t tell me you are another fool who doesn’t understand that the concept “cost/benefit analysis” has two basic components: costs and benefits, not just one component (benefits).
Costs of Iraq invasion/occupation:
* Better part of $1T spent
* Thousands of US troops dead
* Tens of thousands of US troops injured
* Hundreds of thousands of Iraqis dead
* Natural enemy of Iran removed (not that big a deal to me, but to some people it is)
“Please also don’t tell me that someone with your lucid intelligence was so naive not to recognize the overall objective of the invasion of Iraq was getting rid of Saddam regardless of the intelligence failures about WMD’s by every major western intelligence service.”
The point–duh–is that it was sold (at least to the American public) in terms of WMD.
As for major western intelligence services, the rampant conflicts of interest and incompetence there is rivalled only by those in the economics profession.
Fluffy meant to say: “ignoring Bushite troll on this thread..”
Understood. Problem is that I just love pointing out tough-talking right-wingers who don’t understand costs.
“It’s too bad really that Britain and France didn’t have a President Bush in 1935 when Hitler marched in the Rhineland. WWII wouldn’t have taken place.”
(yawn) “The British and the French should have taken care of Germany after Hitler occupied the Rhineland implies that the US and other major powers should invade and occupy any notionally threatening nation” is false, because Iraq in 2003 didn’t equal Germany in 1935.
Besides, a sociopath like Bush is more like Stalin or Hitler than the leaders of Britain or France.
“Getting rid of brutal dictators is a fabulous idea. It is more economical in the long run (forgive the pun) than leaving them in power for generations. See North Korea as an example of what Iraq is not.”
What _is_ North Korea? It certainly poses no threat to the US. We should sign a peace treaty with NK, get the hell out of there, and send the money saved from the concommitant cuts to the military budget back to the taxpayers.
Maiden Lane, um sounds like a race horse, I/II/III sounds like increasing quality’s of shoe polish. The Fed sounds like an owner trying to pull a fast one on the punters aka traders and race fans.
> “That won’t help, suggested Rob Nichols, president of the Financial Services Forum, an industry group representing 18 of the largest financial companies.
“Proposals to preemptively break up large, well-managed and well-capitalized banking companies — or to reimpose Glass-Steagall restrictions — are based on a misdiagnosis of the causes of the financial crisis,” he said.
I> Is this idiot retarded…… or just filled with fraud and other feces-like material that flow from his warped brain? If he was able to point to an example of a well run bank, that would make sense — but to suggest that his lobby-powered mafia banks were well run is nothing sort of retarded!
Yves, thank you so much for the work you do here. I hope you are in communication with members of the Senate who are on the fence on Bernanke (per zerohedge, there are more and more of them).
http://www.zerohedge.com/article/more-democrat-votes-against-bernanke-appear-deck
Perhaps it’s an issue of the viability of CDS as an “insurance product” as opposed to CDS as a credit facility. Per SIGTARP the issue was not the CDOs (no defaults triggering CDS) but rather AIG’s credit rating impairment (a term of the ISDA agreements) making the credit default a “counterparty” event as opposed to the variance in the referred “security” or a collateral impairment.
It’s just a call on a margin account triggered by a credit downgrading; but that in turn exposes CDS for what it is as opposed to what it purports to be.
what do we do now?