Justice Litle, Editorial Director, Taipan Publishing Group
The AIG fiasco is even bigger and uglier than most realize – and Washington is making the problem worse. Are there any hints of a solution on the horizon? Perhaps at least one...
...let us not kid each other: The $162 billion bailout of AIG is a nontransparent, opaque and shady bailout of the AIG counter-parties: Goldman Sachs, Merrill Lynch and other domestic and foreign financial institutions.
– Nouriel Roubini, “The U.S. Financial System Is Effectively Insolvent”
So where does the buck stop when it comes to the financial crisis? A handful of readers have taken me to task for blaming the new administration. President Obama inherited this mess, they tell me in so many words, and so I should lay off his case.
The trouble with that view is that it gives too much credit to the new broom. It implies a clean break and a fresh start that, at least so far, does not exist.
It is not that team Obama is somehow responsible for the past. The problem is how clearly they have refused to break with the past... at least when it comes to Wall Street. (This is not a partisan observation, but rather a pox on both houses.)
My libertarian friends used to swear up and down that there isn’t “a dime’s worth of difference” between America’s two major parties. I always thought that was an exaggerated statement. But now I’m not so sure.
The AIG folly is a mind-boggling example of this utter sameness. In refusing to disclose the ultimate destination of taxpayer dollars (as you’ll read about in a moment), the new Treasury and the old Fed are engaging in acts of blatant cronyism that would make Dick Cheney proud.
Goldman Sachs Got How Much?
As Nouriel Roubini reports in a recent Forbes column, AIG lost a staggering $99 billion in 2008 – and a staggering $62 billion in the fourth quarter alone. The tally of “public resources” committed to propping up AIG thus far comes to $162 billion.
Roubini wonders aloud, as do I, how in the heck taxpayers can pony up $162 billion and still not own AIG lock, stock and barrel. (As a side note, Roubini calls the bank nationalization debate “surreal” given that $9 trillion worth of taxpayer funds has already been committed – in various forms of guarantee – and $2 trillion has already been spent.)
But anyway, a digression... the question du jour is how the AIG bailout cash got spent. Whispered reports are that at least $25 billion of it went straight into the pocket of Goldman Sachs. Merrill Lynch was reportedly the second largest recipient of AIG cash. Here’s how it worked:
• Government lends (gives) truckload of bailout $$$ to AIG
• AIG uses $$$ to make good on losing bets (the asteroid insurance claims mentioned on Friday)
• Sizable checks go to Goldman, Merrill, and various lesser parties on the other side of AIG’s trades
We can’t be 100% certain that Goldman Sachs got $25 billion precisely. Though we can know, per Roubini again, that “Goldman's Lloyd Blankfein was the only CEO of a Wall Street firm who was present at the New York Fed meeting when the AIG bailout was discussed.”
You just know that room had to be smoke-filled... just to make the picture complete...
So why is it hard to get firmer visibility on the size of taxpayer-funded AIG payouts to Goldman, Merrill et al? Because even though it’s our money, the Fed and Treasury (as of this writing) refuse to tell us who got what.
In other words, it’s not enough that U.S. taxpayers were put on the hook to the tune of hundreds of billions for AIG’s titanic white-collar fraud (collecting premiums against claims it couldn’t pay).
No, to add insult to injury, a big chunk of the taxpayer money dumped into AIG had to be doled out via the back door in a wink-wink, nudge-nudge “stealth” bailout to various other Wall Street houses... and as icing on the cake, the Fed had the nerve to basically say “sorry, can’t tell you” to the Senate Banking Committee when asked just where the heck the dough went.
I tell you what though... the thing that really blows my mind is how Geithner (the current SecTreas), Bernanke (the current Fed Chairman) and friends continue to talk about “restoring confidence in the banking system” even as crap like this continues to go on.
We (as taxpayers) are being implored to “trust” these people, and place fresh “confidence” in the system, even as our pockets are being picked in broad daylight! Do they take us for total idiots? Am I crazy, or does that just make no sense at all?
For the Love of Europe...
Despite the wall of silence, more details are spilling out on the AIG mess, and they ain’t pretty. The firm had a whopping $440 billion worth of credit default swaps on its books prior to collapse, according to The New York Times.
If you’re not quite sure what a credit default swap is, just think of it as a form of blow-up insurance. AIG sells $440 billion worth of this insurance on the assumption that nothing at all will blow up. Then... surprise! In actuality, lots of stuff blows up. The final claims bill (still to be determined) tots up to $100 billion... maybe $200 billion... maybe more. AIG can’t pay, taxpayers eat the loss, and connected players like Goldman and Merrill are quietly made whole.
It’s mildly interesting to note, too, that AIG could have brought down Europe. Remember the talk in recent months of how Europe’s banks managed to lever themselves up even more than their U.S. counterparts? Well, guess who had a hand in that.
AIG had a nice sideline helping the European banks reduce their capital requirements – selling more bogus insurance of a sort that let them take bigger risks on smaller margin.
It was the rough equivalent of one riverboat gambler insuring another... except on a continental scale.
“That’s why we could not allow AIG to fail as we allowed Lehman to fail,” Paul Kanjorski, head of the House Insurance Subcommittee, told Reuters last week. “Because that would have precipitated the failure of the European banking system.”
Eric Dinallo, the superintendent of New York State’s Insurance Department, got in the best line. “It’s like taking insurance on your neighbor’s house and maybe even contributing to blow it up,” he said.
Thanks AIG!
We Tried Cronyism – It Didn’t Work
As Supreme Court Justice Louis Brandeis once said, “sunlight is the best disinfectant.” Apparently the White House isn’t getting the message. Going by the way we have been treated thus far, the Fed and Treasury are still acting like Wall Street has the upper hand and U.S. taxpayers are thickheaded chumps.
The refusal to tackle the nationalization question head on is insulting... by any sane measure we already own these rotten outfits. The refusal to speak clearly and plainly is even more insulting... as if our delicate ears can’t handle hard truths. And refusal to disclose the secret flow of bailout funds is perhaps most insulting of all... like being lied to, patronized and mugged all at the same time.
Plus, as if the hit to the wallet didn’t hurt enough, all this Keystone Cop secrecy and lack of clarity is hurting markets.
We can all see how deeply oversold markets have become in recent days. A good, strong, short-clearing rally has failed to materialize, though by some measures long overdue. The much vaunted bounce in “confidence” that economists keep hoping for is nowhere to be found. Investor bearishness has tipped new record highs.
No doubt this is mostly because the flow of macro news has been so bad. But the unrelenting gloom is also due at least in part, I believe, to how poorly the political end of the crisis has been handled thus far.
Investors have been forced to play a queasy game of “wait and see” with the financials, the wind blowing in a new direction each day, even as political cross-talk grows and matters like the AIG mess infuriate.
We tried secrecy and double-speak and “strategery” with the last administration. It didn’t work. We also got our fill of smoke-filled back room deals on topics of important and legitimate public interest. Those didn’t turn out so well either.
In sum, I’m not imploring Treasury Secretary Geithner to fix the markets here. I’m imploring him to stop killing them...
Wolf, Volcker and Taleb
As one rather irritated reader said to me via e-mail, “Mr. Obama had nothing to do with this and no one seems to clearly understand how to get the world financial system back on track – least of all you.”
I beg to differ, sir. Your first point (re: Mr. Obama) has hopefully already been addressed. The problem is not what happened prior to Mr. Obama’s watch... it is what continues to take place on his watch.
As for your second point, I beg to differ there also. A consensus of informed opinion is beginning to take shape as to how to get the system “back on track.” No one has a complete solution, obviously, but pieces are starting to fall into place.
I don’t include myself in that consensus (although I do try hard to stay informed). What I have noticed in recent weeks is that three notable men whose reputations I respect – Nassim Taleb, Paul Volcker and Martin Wolf – have all endorsed the same idea in various forms.
That idea can be expressed like this. From now on banks need to be “either/or” – as in public utilities or private risk takers – but they can no longer be both.
In a recent commentary on the British banking system, Martin Wolf put it as follows:
The U.K. government has to make a decision. If it believes that costly bail-out must be piled upon ever more costly bail-out, then the banking system can never be treated as a commercial activity again: it is a regulated utility – end of story. If the government does want it to be a commercial activity, then defaults are necessary, as some now argue. Take your pick. But do not believe you can have both. The U.K. cannot afford it. [Emphasis mine]
Neither, I suspect, can any other country afford it.
If we can fix it so that government-guaranteed entities are no longer allowed to take risks any more than nuclear power plant operators are allowed to take risks... while at the same time ensuring that private risk-takers never again become “too big to fail”... then that would be a large step in the right direction. At least getting the conversation going is a start.
http://www.taipanpublishinggroup.com/taipan-daily-031109.html
The AIG fiasco is even bigger and uglier than most realize – and Washington is making the problem worse. Are there any hints of a solution on the horizon? Perhaps at least one...
...let us not kid each other: The $162 billion bailout of AIG is a nontransparent, opaque and shady bailout of the AIG counter-parties: Goldman Sachs, Merrill Lynch and other domestic and foreign financial institutions.
– Nouriel Roubini, “The U.S. Financial System Is Effectively Insolvent”
So where does the buck stop when it comes to the financial crisis? A handful of readers have taken me to task for blaming the new administration. President Obama inherited this mess, they tell me in so many words, and so I should lay off his case.
The trouble with that view is that it gives too much credit to the new broom. It implies a clean break and a fresh start that, at least so far, does not exist.
It is not that team Obama is somehow responsible for the past. The problem is how clearly they have refused to break with the past... at least when it comes to Wall Street. (This is not a partisan observation, but rather a pox on both houses.)
My libertarian friends used to swear up and down that there isn’t “a dime’s worth of difference” between America’s two major parties. I always thought that was an exaggerated statement. But now I’m not so sure.
The AIG folly is a mind-boggling example of this utter sameness. In refusing to disclose the ultimate destination of taxpayer dollars (as you’ll read about in a moment), the new Treasury and the old Fed are engaging in acts of blatant cronyism that would make Dick Cheney proud.
Goldman Sachs Got How Much?
As Nouriel Roubini reports in a recent Forbes column, AIG lost a staggering $99 billion in 2008 – and a staggering $62 billion in the fourth quarter alone. The tally of “public resources” committed to propping up AIG thus far comes to $162 billion.
Roubini wonders aloud, as do I, how in the heck taxpayers can pony up $162 billion and still not own AIG lock, stock and barrel. (As a side note, Roubini calls the bank nationalization debate “surreal” given that $9 trillion worth of taxpayer funds has already been committed – in various forms of guarantee – and $2 trillion has already been spent.)
But anyway, a digression... the question du jour is how the AIG bailout cash got spent. Whispered reports are that at least $25 billion of it went straight into the pocket of Goldman Sachs. Merrill Lynch was reportedly the second largest recipient of AIG cash. Here’s how it worked:
• Government lends (gives) truckload of bailout $$$ to AIG
• AIG uses $$$ to make good on losing bets (the asteroid insurance claims mentioned on Friday)
• Sizable checks go to Goldman, Merrill, and various lesser parties on the other side of AIG’s trades
We can’t be 100% certain that Goldman Sachs got $25 billion precisely. Though we can know, per Roubini again, that “Goldman's Lloyd Blankfein was the only CEO of a Wall Street firm who was present at the New York Fed meeting when the AIG bailout was discussed.”
You just know that room had to be smoke-filled... just to make the picture complete...
So why is it hard to get firmer visibility on the size of taxpayer-funded AIG payouts to Goldman, Merrill et al? Because even though it’s our money, the Fed and Treasury (as of this writing) refuse to tell us who got what.
In other words, it’s not enough that U.S. taxpayers were put on the hook to the tune of hundreds of billions for AIG’s titanic white-collar fraud (collecting premiums against claims it couldn’t pay).
No, to add insult to injury, a big chunk of the taxpayer money dumped into AIG had to be doled out via the back door in a wink-wink, nudge-nudge “stealth” bailout to various other Wall Street houses... and as icing on the cake, the Fed had the nerve to basically say “sorry, can’t tell you” to the Senate Banking Committee when asked just where the heck the dough went.
I tell you what though... the thing that really blows my mind is how Geithner (the current SecTreas), Bernanke (the current Fed Chairman) and friends continue to talk about “restoring confidence in the banking system” even as crap like this continues to go on.
We (as taxpayers) are being implored to “trust” these people, and place fresh “confidence” in the system, even as our pockets are being picked in broad daylight! Do they take us for total idiots? Am I crazy, or does that just make no sense at all?
For the Love of Europe...
Despite the wall of silence, more details are spilling out on the AIG mess, and they ain’t pretty. The firm had a whopping $440 billion worth of credit default swaps on its books prior to collapse, according to The New York Times.
If you’re not quite sure what a credit default swap is, just think of it as a form of blow-up insurance. AIG sells $440 billion worth of this insurance on the assumption that nothing at all will blow up. Then... surprise! In actuality, lots of stuff blows up. The final claims bill (still to be determined) tots up to $100 billion... maybe $200 billion... maybe more. AIG can’t pay, taxpayers eat the loss, and connected players like Goldman and Merrill are quietly made whole.
It’s mildly interesting to note, too, that AIG could have brought down Europe. Remember the talk in recent months of how Europe’s banks managed to lever themselves up even more than their U.S. counterparts? Well, guess who had a hand in that.
AIG had a nice sideline helping the European banks reduce their capital requirements – selling more bogus insurance of a sort that let them take bigger risks on smaller margin.
It was the rough equivalent of one riverboat gambler insuring another... except on a continental scale.
“That’s why we could not allow AIG to fail as we allowed Lehman to fail,” Paul Kanjorski, head of the House Insurance Subcommittee, told Reuters last week. “Because that would have precipitated the failure of the European banking system.”
Eric Dinallo, the superintendent of New York State’s Insurance Department, got in the best line. “It’s like taking insurance on your neighbor’s house and maybe even contributing to blow it up,” he said.
Thanks AIG!
We Tried Cronyism – It Didn’t Work
As Supreme Court Justice Louis Brandeis once said, “sunlight is the best disinfectant.” Apparently the White House isn’t getting the message. Going by the way we have been treated thus far, the Fed and Treasury are still acting like Wall Street has the upper hand and U.S. taxpayers are thickheaded chumps.
The refusal to tackle the nationalization question head on is insulting... by any sane measure we already own these rotten outfits. The refusal to speak clearly and plainly is even more insulting... as if our delicate ears can’t handle hard truths. And refusal to disclose the secret flow of bailout funds is perhaps most insulting of all... like being lied to, patronized and mugged all at the same time.
Plus, as if the hit to the wallet didn’t hurt enough, all this Keystone Cop secrecy and lack of clarity is hurting markets.
We can all see how deeply oversold markets have become in recent days. A good, strong, short-clearing rally has failed to materialize, though by some measures long overdue. The much vaunted bounce in “confidence” that economists keep hoping for is nowhere to be found. Investor bearishness has tipped new record highs.
No doubt this is mostly because the flow of macro news has been so bad. But the unrelenting gloom is also due at least in part, I believe, to how poorly the political end of the crisis has been handled thus far.
Investors have been forced to play a queasy game of “wait and see” with the financials, the wind blowing in a new direction each day, even as political cross-talk grows and matters like the AIG mess infuriate.
We tried secrecy and double-speak and “strategery” with the last administration. It didn’t work. We also got our fill of smoke-filled back room deals on topics of important and legitimate public interest. Those didn’t turn out so well either.
In sum, I’m not imploring Treasury Secretary Geithner to fix the markets here. I’m imploring him to stop killing them...
Wolf, Volcker and Taleb
As one rather irritated reader said to me via e-mail, “Mr. Obama had nothing to do with this and no one seems to clearly understand how to get the world financial system back on track – least of all you.”
I beg to differ, sir. Your first point (re: Mr. Obama) has hopefully already been addressed. The problem is not what happened prior to Mr. Obama’s watch... it is what continues to take place on his watch.
As for your second point, I beg to differ there also. A consensus of informed opinion is beginning to take shape as to how to get the system “back on track.” No one has a complete solution, obviously, but pieces are starting to fall into place.
I don’t include myself in that consensus (although I do try hard to stay informed). What I have noticed in recent weeks is that three notable men whose reputations I respect – Nassim Taleb, Paul Volcker and Martin Wolf – have all endorsed the same idea in various forms.
That idea can be expressed like this. From now on banks need to be “either/or” – as in public utilities or private risk takers – but they can no longer be both.
In a recent commentary on the British banking system, Martin Wolf put it as follows:
The U.K. government has to make a decision. If it believes that costly bail-out must be piled upon ever more costly bail-out, then the banking system can never be treated as a commercial activity again: it is a regulated utility – end of story. If the government does want it to be a commercial activity, then defaults are necessary, as some now argue. Take your pick. But do not believe you can have both. The U.K. cannot afford it. [Emphasis mine]
Neither, I suspect, can any other country afford it.
If we can fix it so that government-guaranteed entities are no longer allowed to take risks any more than nuclear power plant operators are allowed to take risks... while at the same time ensuring that private risk-takers never again become “too big to fail”... then that would be a large step in the right direction. At least getting the conversation going is a start.
http://www.taipanpublishinggroup.com/taipan-daily-031109.html