Confirmed: US used AIG to bail out banks

posted at 11:38 am on October 28, 2009 by Ed Morrissey

Most people have already concluded that the bailout of insurance giant AIG had a lot more to do with rescuing banks than with AIG itself.  Rumors had already swirled, backed by public testimony, that the government had used AIG as a front in order to make banks healthier without giving the appearance of direct cash infusions to financial institutions.  Today, the Washington Post follows up on a Bloomberg report that the New York Fed forced AIG to use the federal bailout dollars to stop negotiating its losses with banks and pay full dollar value instead, costing taxpayers an extra $13 billion:

The Federal Reserve Bank of New York said Tuesday that it had no choice but to instruct American International Group last November to reimburse the full amount of what it owed to big banks on derivatives contracts, a move that ended months of effort by the insurance giant to negotiate lower payments.

Fed officials offered the explanation in a rare response to a media report after Bloomberg News said that the New York Fed, led at the time by then-President Timothy F. Geithner, directed AIG to make the payments after it received a massive government bailout. The officials said AIG lost its leverage in demanding a better deal once the company had been saved from bankruptcy.

Lawmakers and financial analysts critical of the payouts say it amounted to a back-door bailout for big banks. AIG, the recipient of a $180 billion federal rescue package, ended up paying $14 billion to Goldman Sachs over months and $8.5 billion to Deutsche Bank, among others. Before the New York Fed intervened, AIG had been trying to persuade the firms to take discounts.

The precise cost to taxpayers of these decisions is difficult to determine. Bloomberg, quoting an industry source, reported Tuesday that AIG was aiming to pay just 40 percent of the $32.5 billion it owed to the banks. Using those figures, the report concluded that the government needlessly overpaid $13 billion.

The 40% figure is debatable.  AIG may have wanted to limit their payouts to four dimes on the dollar, but even without the Fed’s interference, that would not have been a likely outcome.  However, AIG would probably have avoided paying off all of the contracts at 100%, especially with everyone facing potential ruin in the event of AIG’s collapse.  The government intervention obliterated any need for the banks to negotiate and forced taxpayers to pay a back-door bailout through the smoldering hulk of AIG.

This isn’t exactly shocking, of course.  It had been clear that the AIG bailout had been used in just this manner almost from the very beginning.  It does, though, put a much different spin on the actions and rhetoric used by the administration and Democrats in Congress this year.  They have used AIG as their poster child for Wall Street run amuck, made national issues of its compensation to executives, and played class warfare on its bailout with very little reservation.  Not only did they use AIG as a political tool for their populist bombast, now it’s clear that they used AIG as a money-laundering service to bolster other financial institutions with as little transparency as possible.


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Well, isnt that special.

becki51758 on October 28, 2009 at 11:42 AM

The best and brightest that the Inbred Ivy Elite can produce.

Flyover Country on October 28, 2009 at 11:43 AM

The Obama Cosa Nostra

darwin on October 28, 2009 at 11:43 AM

I’m still mad that we don’t get to have a little American flag on the AIG soccer team we sponsor in Britain.

BadgerHawk on October 28, 2009 at 11:43 AM

It’s a little shocking to me.

Mord on October 28, 2009 at 11:43 AM

Psycho Killer
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fa fa fa fa fa fa fa fa fa fa better
Run run run run run run run away
OH OH OH
AY AY AY AY AY WOO

darwin on October 28, 2009 at 11:44 AM

And the hits keep coming.

ctmom on October 28, 2009 at 11:44 AM

Money Laundering at it’s finest…only the US can launder money better then other rogue nations.lol

hawkman on October 28, 2009 at 11:45 AM

Most ethical administration evah!!!!11!!1eleventy!!1!!1

gwelf on October 28, 2009 at 11:46 AM

Didn’t see that one coming…

The Calibur on October 28, 2009 at 11:47 AM

Is that legal?

becki51758 on October 28, 2009 at 11:49 AM

The public will not hear about this.

farright on October 28, 2009 at 11:50 AM

Tax cheat Timmy to the rescue.

txag92 on October 28, 2009 at 11:51 AM

It does, though, put a much different spin on the actions and rhetoric used by the administration and Democrats in Congress this year.

Dang Democrats!!! Hypocrites, all of them…

cmsinaz on October 28, 2009 at 11:52 AM

Rush was all over this back in June or July. He was all over the Dems because of the fact that they were all over AIG and Goldman Sachs, yet they were giving them money through the back door.

MobileVideoEngineer on October 28, 2009 at 11:57 AM

Bawney’s Fwank would be proud of the way he destroyed the finance system … And now wants to do the same for free markets and capitalism.

Time to stop talking about whether Obama is a Marxist, no doubt he is, and start fighting for the free market system that made our country what it is.

tarpon on October 28, 2009 at 11:59 AM

the government had used AIG as a front in order to make banks healthier

Sort of like how “healthcare reform” is a front for “commie takeover”.

LibTired on October 28, 2009 at 12:00 PM

It may be even worse. The utter mispricing of risk by AIG in “insuring” these deals has led to speculation that there were “side letters” known only by the recipients, which generally say “you understand, of course, that this instrument you just bought from AIG is just window dressing for your stinky deal, which is all the value we provide. If you come collecting on it we won’t have the money.” If so, then the money dolled out at 100 cents on the dollar through AIG was money the banks were not expected to have ever been paid.

shuzilla on October 28, 2009 at 12:01 PM

I’m sick and tired of this corrupt administration waiting months to fess up to stuff they flat out denied and lied about at the time. Where is the accountability and transparency.

highhopes on October 28, 2009 at 12:02 PM

Well another $13 billion we won’t be getitng back. Add that up with the other stuff we won’t see a dime of return on and pretty soon you are talking real money! Back of the envelope calculations are about $190 billion the taxpayer will not see any returns on from TARP.

Johnnyreb on October 28, 2009 at 12:07 PM

These were apparently credit-rate and interest-rate swaps. The standard swap agreement says that the net of all amounts owed are accelerated and payable in full upon the occurence of an event of default (sometimes with a grace period, and sometimes only so long as the default is continuing, but sometimes not). The problem that AIG had was the net amount of all of its swaps (in the billions) were due and payable to the banks on the other side.

These were the terms in the swap contracts and companies can only unilateraly change them in bankruptcy. So AIG had no choice but to pay (unless they negotiated something) if they couldn’t threaten bankrutpcy. And the banks on the other side had no reason to negotiate if AIG wasn’t threatening bankruptcy.

This wasn’t a front to funnel money to other banks. It was to perform contracts AIG had signed.

Jimbo3 on October 28, 2009 at 12:09 PM

When is someone going to jail?

The question is rhetorical of course. If anyone goes to jail they’ll end up singing and collapsing the entire fraud, so no one goes to jail…

Theworldisnotenough on October 28, 2009 at 12:11 PM

Daley does this stuff all the time, he is now selling off parking revenue, and next selling the water treatment system to a German firm, watch as consumer costs go through the roof.

bbz123 on October 28, 2009 at 12:17 PM

Actually the seeds for all of this mess can be placed in Turbo Tim’s lap from back when he was in charge of the NY Fed. The way I understand it, it worked sort of like this (simplified):

Lender gives a mortgage to Joe Blow and doesn’t verify income or anything. The mortgage is government-backed. The lender buys “default insurance” from AIG. Geithner rules that since the mortgage is “riskless” (backed by the government and insured by AIG), the bank does not need to hold any reserves against the loan. AIG takes the insurance premium from that and lots of other such policies, bundles them up and sells them as derivatives. Someone buys what basically amounts to sort of a mutual fund of insurance premiums of a bundle of mortgage insurance policies. AIG gets cash and the buyer gets a stream of income.

Geithner further rules that AIG doesn’t need to be regulated by the strict bank rules and can be regulated under the rules for credit unions which had basically one regulator (one individual person) overseeing lots of institutions and knows practically nothing about insurance. As the loans AIG is insuring are deemed “riskless” because of federal guarantees, AIG is also allowed to hold no reserves against default.

Now interest rates go up, ARMs begin to default. Banks go to AIG to pay up on the default insurance. AIG has to scramble for cash to pay up. As they didn’t keep any reserves, they are forced to try to find capital to pay off the policies as the trickle of mortgage defaults becomes a flood. There isn’t enough capital in the global market and the US Government steps in to bail them out.

In the meantime, buyers of the derivatives suddenly own a liability rather than an asset. Due to Sarbanes/Oxley “mark to market” requirements, the underlying property values of these mortgages is now less than the amount of the mortgage themselves. Rather than purchasing a $100 bill for $80, they now find themselves with something they paid $80 worth only $60. Now who would insure something worth only $60 for $100? The people holding these derivatives can’t unload them because nobody will buy them and as the mortgages default and no longer collect an insurance premium, the income stream begins to diminish.

Now AIG wants to offer $40 to people holding what was sold as being worth $100. Government steps in, floods AIG with capital to cover new reserve requirements and pay off the people holding the derivatives.

All of this being a result of Geithner’s decision that the banks didn’t need to hold reserves on the loans and to allow AIG to meet less stringent regulation requirements because everything was “riskless” as it was backed by the taxpayer. And in the end, that is what happened. The taxpayer has been fleeced to cover the loans which were guaranteed with their money by Congress.

What else has Congress “guaranteed” with my money?

crosspatch on October 28, 2009 at 12:19 PM

The Obama Cosa Nostra …

darwin on October 28, 2009 at 11:43 AM

Actually it was GW & Paulson who gave the money to AIG

xler8bmw on October 28, 2009 at 12:24 PM

No, you’re all missing the point. These were contracts that units of AIG entered into, just like bonds that require the issuers to pay interest and then principal at maturity. If AIG was in default on the swap agreements, then the banks on the other side (and the other creditors, because there were cross-default provisions) had the immediate right to receive billions in dollars from AIG and to go to court to seize AIG’s assets to collect that amount. AIG would have filed for bankruptcy and the banks on the other side of the equation would not have been paid all the amounts owed. And it’s quite possible that the banks on the other side had also entered into swap agreements with others to try to offload some of the risk. So the whole house of cards might have collapsed, because there are no Federal reserve requirements for swap agreements. So companies can generally enter into swap agreements without having any assets or funds to back up their obligations.

This isn’t money laundering and it’s not a front. It’s a result of the swap agreements that AIG signed. AIG clearly made a bunch of big mistakes in entering into the swap agreements because it mispriced its risk, but the government wasn’t the one to sign the documents.

Jimbo3 on October 28, 2009 at 12:25 PM

AIG has been Drooling Barney’s agent from the get go as he and his co-conspirators schemed to break the banking system through the Community Deadbeats Reinvestment Act.

They succeeded.

notagool on October 28, 2009 at 12:25 PM

Crosspatch, it wasn’t the Fed that made the decision not to require reserves. The derivative areas were not subject to Federal regulation. A bill introduced a few months ago, Authorizing the Regulation of Swaps Act, S. 961, would repeal statutory prohibitions that currently bar government regulation of swap markets, including credit default swaps.(I do know that the SEC in 2003 or 2004 significantly relaxed its rules on what reserves were required for brokerage houses.)

See http://www.lawupdates.com/summary/senate_legislation_seeks_to_regulate_trillion_dollars_worth_of_swap_transac.

Jimbo3 on October 28, 2009 at 12:30 PM

The link doesn’t work. Here’s the summary:

Sen. Susan Collins, R-Maine, and Sen. Carl Levin, D-Mich., have introduced legislation to give federal financial regulators immediate authority to regulate trillions of dollars in swap transactions that continue to be marketed and traded in the United States without adequate government oversight. The Authorizing the Regulation of Swaps Act, S. 961, would repeal statutory prohibitions that currently bar government regulation of swap markets, including credit default swaps.

Swaps are typically an agreement between two parties placing a bet on future cash flows. Some swaps bet on whether a stock price, interest rate, commodity price, or currency value will rise or fall; others bet on whether a company will default on payment of a bond. Stock price bets are referred to as equity swaps; bets on whether companies will pay their debts are referred to as credit default swaps.

The proposed legislation specifically amends the Gramm-Leach-Bliley Act, the Securities Act of 1933, the Securities Exchange Act of 1934, the Commodity Futures Modernization Act of 2000, the Legal Certainty for Bank Products Act of 2000, and the Commodity Exchange Act to repeal prohibitions against regulation of credit default swaps and other swap agreements, whether traded on an exchange or over-the-counter, including commodity, equity, foreign currency, and interest rate swaps.

Jimbo3 on October 28, 2009 at 12:31 PM

highhopes on October 28, 2009 at 12:02 PM

were you looking for This site (open secrets) the other day?

batterup on October 28, 2009 at 12:31 PM

Jimbo3 on October 28, 2009 at 12:25 PM

Which is why AIG should have gone through the bankruptcy process, not the bailout process. Has any one determined how much of our wealth went to prop up foreign banks? I believe a large part of the AIG funds went offshore to foreign banks.

Neo-con Artist on October 28, 2009 at 12:38 PM

AIG may have wanted to limit their payouts to four dimes on the dollar, but even without the Fed’s interference, that would not have been a likely outcome.

Stick with the facts please Ed. It is indeed debatable and at the time all of this was going down they may not have had to pay anything if they could of held out long enough to see a few more of these “banks” fail completely.

nolapol on October 28, 2009 at 12:41 PM

This is just getting traction?

This was known when people were getting upset about 1.5 mil in bonus paid at AIG and not paying attention to the Billions being paid to GS and JPM. Hell we bailed out foreign banks through AIG. The Fed laundered tax money through AIG to banks.

This is criminal and people need to go to jail.

Octavia on October 28, 2009 at 12:42 PM

Jimbo3 on October 28, 2009 at 12:09 PM

In a “Liquid” world, that would be true, Jimbo3. BUT all the banks/lending institutions worldwide were suffering from the extreme credit crunch at that point. They knew everything was based on derivatives made up of mortgages that were becoming worth less and less as the days went by.

It is quite probable that AIG would have been able to make deals on the debts owed simply because other financial institutions needed more liquidity and AIG was going down. Better to get some money than none (or to let a bankruptcy court decide to give 20 cents on the dollar).

Greyledge Gal on October 28, 2009 at 12:47 PM

Neo-con, AIG at one time had almost $3 trillion dollars of swap agreements. The parties on the other side would have only been able to collect cents on the dollar, if anything, and many of them had probably entered into offsetting swap agreements with another financial institution or company to lay off some of the risk (and those financial institutions, in turn, probably had agreements with others.., you get the picture).

If AIG went bankrupt, it could probably have taken out the US financial system, if not the world’s financial system, because of the size of the exposure and because financial institutions weren’t required by law to have reserves.

http://seekingalpha.com/article/129578-unwinding-aigs-derivatives-exposure-loomis-and-buffett.

Jimbo3 on October 28, 2009 at 12:48 PM

Greyledge Gal

–It only takes three unpaid creditors to put you into involuntary bankruptcy proceedings in the US. If AIG was in default, they had 100s if not 1000s of unpaid creditors. It would have been like herding cats.

Jimbo3 on October 28, 2009 at 12:50 PM

This should be a teachable moment. Nothing is too big not to fail and that includes the US Government. Also reading elsewhere that GM is getting ready to ask for more bailout money. Well if that happens this labor union owned company needs to fail for once and for all. As for the AIG, people and politicians need to go to jail. Wake up America and pull your head out of your A$$.

Obama said for those who wish to know who I am just look at who I surround myself with. While the MSM wishes you to think Zero is European royalty, he is surrounded by crooks, liars, theives, idiots, communist and muslim allies. When is enough enough. Thanks to FOX News we have been exposed his crony friends and acquaitnances. So what do you think of him now? Lets get some investigations going on and impeach this bunch of clowns and vote the entire congress out of office..

bluegrass on October 28, 2009 at 12:54 PM

Greyledge Gal on October 28, 2009 at 12:47 PM

Exactly.

Also, these are payments on derivatives. Essentially funny money in the real world of hard assets. While the derivative markets have there place (liquidity, pricing, insurance, etc.), they are not essential to the functioning of the world.

In essence, we the tax payers paid out a bunch of money for worthless paper that was created under the guise of spreading risk. Which we now know really only created more risk aka a bubble.

nolapol on October 28, 2009 at 12:55 PM

So AIG had no choice but to pay (unless they negotiated something) if they couldn’t threaten bankrutpcy. And the banks on the other side had no reason to negotiate if AIG wasn’t threatening bankruptcy.

Jimbo3 on October 28, 2009 at 12:09 PM

While negotiating how much loss large banks would have to take on credit default swaps with the bankrupt insurer AIG, the New York Fed, then under Geithner, rejected a 40 cents-on-the-dollar deal in the works and made taxpayers pay at least $13 billion to ensure the banks suffered no losses:

BadgerHawk on October 28, 2009 at 12:57 PM

I say it would have been worth it if we just got a little American flag on the jerseys of the soccer team we now sponsor in Britain.

BadgerHawk on October 28, 2009 at 12:58 PM

Jimbo3 on October 28, 2009 at 12:48 PM

I don’t disagree with your conclusion about the impact on the US financial system. However, it seems to me that the US taxpayer was always going to be in the unfortunate spot of providing the necessary capital to keep the US financial system afloat. The end result from the AIG bailout is that it appears the US taxpayer kept the world’s financial system afloat.

Neo-con Artist on October 28, 2009 at 12:59 PM

This wasn’t a front to funnel money to other banks. It was to perform contracts AIG had signed.

Jimbo3 on October 28, 2009 at 12:09 PM

Have to say I agree 100%.

Or, as Hulk would say, “AIG no honor contracts, AIG go ‘poof’, those contracts what AIG do.”

DrSteve on October 28, 2009 at 1:00 PM

This isn’t exactly shocking, of course. It had been clear that the AIG bailout had been used in just this manner almost from the very beginning. It does, though, put a much different spin on the actions and rhetoric used by the administration and Democrats in Congress this year.

Helping the rich stay rich without that nasty risk.

Johan Klaus on October 28, 2009 at 1:01 PM

Jimbo3 on October 28, 2009 at 12:50 PM

You can quote the absolutes of law all day long, Jimbo3; however, one must take into consideration the climate at the time. How likely were unpaid creditors to force a bankruptcy? They had not up to that time although it is presumed that AIG had been in default or behind for some time in paying its obligations.

Creditors were mainly other financial institutions who were well aware of the effect AIG collapsing would have on their own stability or chance of survival.

I believe deals would have been made because it is more logical than forcing bankruptcy under those conditions.

Tim Geithner is a problem — a huge problem. He is currently along with Bernanke trying to swing power to be able to give limitless amounts of money out to “save” any institution or corporation Treasury/Fed without Congressional approval deems to be a “systemic risk”.

This insanity has to be stopped so that the true rule of law (not whatever rule of law Obama, Geithner, and crew have imagined up) will prevail.

Greyledge Gal on October 28, 2009 at 1:02 PM

Jimbo3 on October 28, 2009 at 12:09 PM

Don’t you ever get tired of being a stooge and having to make excuses for everything?

Big John on October 28, 2009 at 1:02 PM

Goldman Sachs

The deal contributed to the more than $14 billion that over 18 months was handed to Goldman Sachs, whose former chairman, Stephen Friedman, was chairman of the board of directors of the New York Fed when the decision was made. Friedman, 71, resigned in May, days after it was disclosed by the Wall Street Journal that he had bought more than 50,000 shares of Goldman Sachs stock following the takeover of AIG. He declined to comment for this article.

BadgerHawk on October 28, 2009 at 1:03 PM

BadgerHawk, look at the time frame. The negotiations on the swaps were well after the initial loan by the government.

By Sept. 16, 2008, AIG, once the world’s largest insurer, was running out of cash, and the U.S. government stepped in with a rescue plan. The Federal Reserve Bank of New York, the regional Fed office with special responsibility for Wall Street, opened an $85 billion credit line for New York-based AIG. That bought it 77.9 percent of AIG and effective control of the insurer.

The government’s commitment to AIG through credit facilities and investments would eventually add up to $182.3 billion.

Beginning late in the week of Nov. 3, the New York Fed, led by President Timothy Geithner, took over negotiations with the banks from AIG, together with the Treasury Department and Chairman Ben S. Bernanke’s Federal Reserve. Geithner’s team circulated a draft term sheet outlining how the New York Fed wanted to deal with the swaps — insurance-like contracts that backed soured collateralized-debt obligations.

Jimbo3 on October 28, 2009 at 1:03 PM

Janet Tavakoli, founder of Chicago-based Tavakoli Structured Finance Inc., a financial consulting firm, says the government squandered billions in the AIG deal.

There’s no way they should have paid at par,” she says. “AIG was basically bankrupt.”

Citigroup Inc. agreed last year to accept about 60 cents on the dollar from New York-based bond insurer Ambac Financial Group Inc. to retire protection on a $1.4 billion CDO.

BadgerHawk on October 28, 2009 at 1:05 PM

Jimbo3 on October 28, 2009 at 12:09 PM

Don’t you ever get tired of being a stooge and having to make excuses for everything?

Big John on October 28, 2009 at 1:02 PM

–Look, if you don’t want to hear a fuller story, don’t read my posts. This happened last fall when Bush was President and when there was no regulation of the swap markets. So I’m not sure who you think I’m making excuses for.

Jimbo3 on October 28, 2009 at 1:05 PM

Far more money was wasted in paying the banks for their swaps, says Donn Vickrey of financial research firm Gradient Analytics Inc. “In cases like this, the outcome is always along the lines of 50, 60 or 70 cents on the dollar,” Vickrey says.

Paying par on these types of investments seems to be the exception to the rule, no matter what the contractual obligations at the time were.

So why did the New York Fed roll over so easily? I have no idea, but I bet the answer is pretty interesting.

BadgerHawk on October 28, 2009 at 1:06 PM

You can quote the absolutes of law all day long, Jimbo3; however, one must take into consideration the climate at the time. How likely were unpaid creditors to force a bankruptcy? They had not up to that time although it is presumed that AIG had been in default or behind for some time in paying its obligations.

Creditors were mainly other financial institutions who were well aware of the effect AIG collapsing would have on their own stability or chance of survival.

I believe deals would have been made because it is more logical than forcing bankruptcy under those conditions.

–Banks would have jumped in and done something if they thought anyone else was getting a better deal. There would have been a race to the courthouse, which then triggers a bankruptcy filing by the debtor to preserve its assets and an automatic stay of any collection activities.

Jimbo3 on October 28, 2009 at 1:08 PM

Jimbo3 on October 28, 2009 at 1:05 PM

\
Congress has been controlled by dems for the last three years.

Johan Klaus on October 28, 2009 at 1:09 PM

Well another $13 billion we won’t be getitng back. Add that up with the other stuff we won’t see a dime of return on and pretty soon you are talking real money! Back of the envelope calculations are about $190 billion the taxpayer will not see any returns on from TARP.
Johnnyreb on October 28, 2009 at 12:07 PM

The administration claims the deficit was $1.4 trillion last fiscal year even though the national debt increased by $1.8 trillion. How did they do this? By claiming the money spet on TARP as assets, i.e. they expect it to be repaid.

Now what has happened to the money that some of the banks that has been repaid? It gets used for new bailouts, in effect becoming a government slush fund. Who knows if the money will ever be returned to the taxpayers ofr used to pay off any of the national debt.

agmartin on October 28, 2009 at 1:10 PM

–Look, if you don’t want to hear a fuller story, don’t read my posts. This happened last fall when Bush was President and when there was no regulation of the swap markets. So I’m not sure who you think I’m making excuses for.

Jimbo3 on October 28, 2009 at 1:05 PM

Thats why we need to investigate. If they are both guilty sent them both to jail, take away their perks and pensions and all benefits. Shame me once shame on me, shame me twice and shame on you. Put these shameful clowns in jail and throw away the key.

bluegrass on October 28, 2009 at 1:10 PM

BadgerHawk, look at the time frame. The negotiations on the swaps were well after the initial loan by the government.

Jimbo3 on October 28, 2009 at 1:03 PM

I don’t think I understand the point you’re getting at. Please elaborate.

BadgerHawk on October 28, 2009 at 1:10 PM

Badger Hawk, the answer is probably because the US already had a huge loan on its books to AIG in November.

Jimbo3 on October 28, 2009 at 1:11 PM

“Bloomberg News said that the New York Fed, led at the time by then-President Timothy F. Geithner, directed AIG to make the payments after it received a massive government bailout. The officials said AIG lost its leverage in demanding a better deal once the company had been saved from bankruptcy.”

And there in you have both the administration’s motivation behind the bailouts, and the problem involved in receiving them. The shareholders reliquish control over their asset, and all direction operations and business plan going forward. Thereby reducing it’s status to being that of a mere organ of state policy.

When you are “directed” to take the government bailout, it is nothing more than being offered “a deal you can’t refuse.” It is defacto a forced sale of your property whether you agree to the price and terms or not, or theft plain and simple.

The implementation of such as ongoing governmental policy, is the very definition totalitaririan rule. If the Gov’t can by force take over a car company by fiat, can they not take your car at will? Why not?

If the Gov’t can by executive decree take possession of everyone’motrgage, okay, only 56% of & counting so far, but bank take overs continue apace, what could possibly stop them from taking your house? And, why not?

Sure they may not actually be driving your car, or kicking you out into the street and moving in, but as we can see from the banks and the automotive industry, once they own “the paper” or the rights to that property they dictate how, if and when they are operated. As we can see with AIG and others, if co-operation in accepting said dictats the threat is quite clear. If you don’t, you will be kicked out (Rick Wagoner, with less contractually agreed compensation))into the street, and they will be driving the decision making process anyways after doing so.

How can this be possibly described as anything other than a totalitarian takeover of the nation using Eco-Facist justifications for outright confiscation of personal property?

We have to start calling this for what it is, watered down definitions in the name of polite discourse only masks it’s identity further granting it the cover to continue under. In continuing this charade by our silence we are in effect condoning it and further enabling destructive actions.

By not naming it we repeat the non-sense of saying “man made disasters” instead of terrorism and “overseas contingency operations” as platonically describing the carnage of WAR!

If we have not the courage to even utter the name of the danger before us, we surley lack the fortitude to adequately confront it. It is long past due to, as Obama and his minions say, “call them out” and name what they do hnestly. It has a name, say it with me now boys & girls,
IT’S NAME IS TYRANNY!

Archimedes on October 28, 2009 at 1:11 PM

Badger Hawk, the answer is probably because the US already had a huge loan on its books to AIG in November.

Jimbo3 on October 28, 2009 at 1:11 PM

So they had an interest to get as good a deal on those payments as possible. How does paying par without negotiations make any sense?

BadgerHawk on October 28, 2009 at 1:14 PM

Jimbo3 on October 28, 2009 at 1:11 PM

Side note, and don’t take this the wrong way. But when you just respond to a name and don’t blockquote the specific comment it’s tough to tell which comment you’re replying to or which question you’re answering.

This is a fairly complex subject to begin with, and we’re already not on the same page.

BadgerHawk on October 28, 2009 at 1:16 PM

Because the US had a huge loan and investment on its books of about $170 billion (according to the news story). No one believed the US would throw AIG into bankruptcy for a $13 billion difference when the US already had that much invested. (It looks like the US tried to negotiate for a week, then gave up).

Jimbo3 on October 28, 2009 at 1:17 PM

No problem, BadgerHawk. My last post was in response to your 1:14 p.m. post.

Jimbo3 on October 28, 2009 at 1:18 PM

Say what you will about Bush, but none of this was possible without the strong arming, and bullying done by Pelosi, and Reid.

Recall the fact that when McCain was summoned by Reid, and McCain answered the summons, Reid then told him to go away, he wasn’t needed. Thereby telling the world, the Dems were in charge of this lil dupe!

capejasmine on October 28, 2009 at 1:20 PM

Banks would have jumped in and done something if they thought anyone else was getting a better deal. There would have been a race to the courthouse, which then triggers a bankruptcy filing by the debtor to preserve its assets and an automatic stay of any collection activities.

Jimbo3 on October 28, 2009 at 1:08 PM

Where is there any evidence that any one creditor was going to “get a better deal”, as you put it. That’s a stretch.

Again, it’s easy to argue these things in a vacuum but we do not live in a vacuum. When you factor in the hostile environment in the second half of 2008, and the worry of all of the AIG creditors that they were next in line to fail, the creditors would have cut a deal. In fact, it appears that they were close to agreement when Geithner unilaterally decided that all creditors needed to be “paid in full”.

Any person that has ever had a debt knows that you can always work a deal with a creditor to get that debt reduced. They would rather get some cold hard cash than to have to write off something in its entirety. That’s just good business sense.

Instead, like in all other instances in this bail out tragedy, everyone sat around waiting for the US Gov’t to ride to the rescue. Private investors sat out figuring that the dupes in DC would finally give in. They hedged bets and those bets paid off.

The Dupes in DC are killing or have killed the free market enterprise system. Today we have GMAC back at the trough for another $5+ billion. Do you think it will ever stop?

Greyledge Gal on October 28, 2009 at 1:23 PM

(It looks like the US tried to negotiate for a week, then gave up).

Jimbo3 on October 28, 2009 at 1:17 PM

And this makes the most sense. However, the US could have used its leverage over the other parties in the transactions, and there is still a lot of unanswered questions regarding the purchases of stocks by individuals making the decisions on how much AIG would pay. This entire thing smells a little funky.

To a larger point, it’s almost like the US doesn’t actually give a f*ck about getting the taxpayers money back (shocka!). It’s the same reason they converted their preffered shares in GM (which receive dividends but no voting rights) into common stock (no longer paying a dividend but have voting rights).

It’s about control.

BadgerHawk on October 28, 2009 at 1:24 PM

“Crosspatch, it wasn’t the Fed that made the decision not to require reserves. The derivative areas were not subject to Federal regulation.”

I wasn’t talking so much about the derivatives themselves but on the things underlying the derivatives upon which they are based. There was no requirement for the bank to hold reserves on the mortgages because they had “insurance” and there was no requirement for the insurer (AIG) to hold reserves because it was “riskless”. And so the derivatives based on those insurance policies, regulated or not, were basically naked. There was no protection. Once mortgages began to default the institution issuing the derivatives and the derivatives themselves became worthless. It is sort of like a ponzi scheme. As long as the money was coming it, everyone was collecting. But once mortgages started to default, the entire thing was cut off at the knees and collapsed. There was no cushion in place for defaults. If a mortgage defaulted and the policy had to be paid to the lender, AIG had to pay it off the bottom line instead of out of reserves and since that monthly premium was no longer coming in from the lender, the income stream was diminished to whatever that policy was bundled with.

Holders of the derivatives went from holding a “riskless” cash cow to seeing their income diminish and the investment being of extremely high risk.

It is basically due to an irrational risk assignment. They were high risk derivatives which should have sold at a lower price (due to their risk) being sold at a higher price because they were sold as “riskless”.

As soon as the defaults started, the value of the underlying mortgages went negative (toxic), the insurance then became extremely high risk, AIG didn’t have the money to cover the defaults, the derivatives were worthless on the market and could not be unloaded (nobody would buy them at any price).

But rather than the government buying these “toxic” assets as TARP was originally billed as its purpose, the cash was instead injected into AIG who paid off the owners of the derivatives (thereby retiring them) and also used the capital to pay off the defaulting mortgages.

The end result is that the banks still own a large number of upside down mortgages that haven’t defaulted (yet)and instead of lending, have been building up their reserves to handle the next wave of defaults.

Had government purchased these upside down mortgages, the banks would be free of this huge reserve requirement and could be lending money to business and industry instead of accumulating reserves.

So the end result is that the “system” is still as sick as it ever was with billions so far flushed down the toilet to cover losses to date.

crosspatch on October 28, 2009 at 1:27 PM

Archimedes on October 28, 2009 at 1:11 PM

Amen!

Greyledge Gal on October 28, 2009 at 1:29 PM

The end result is that the banks still own a large number of upside down mortgages that haven’t defaulted (yet)and instead of lending, have been building up their reserves to handle the next wave of defaults.

crosspatch on October 28, 2009 at 1:27 PM

And the banks currently have no incentive to negotiate new terms with home owners or to sell foreclosed properties, because to do so would require them to report the losses (which for some are massive) on their quarterly reports.

BadgerHawk on October 28, 2009 at 1:31 PM

But rather than the government buying these “toxic” assets as TARP was originally billed as its purpose, the cash was instead injected into AIG who paid off the owners of the derivatives (thereby retiring them) and also used the capital to pay off the defaulting mortgages.

Exactly! A year later we sit here with all these toxic assets waiting to implode and more toxic assets being made daily because the government is forcing more people who can’t afford them to buy homes. Not to mention the commercial loans that are on the brink of failure.

Gee, if I didn’t know better, I’d think there was a plan to . . . Oh, wait . . .

Greyledge Gal on October 28, 2009 at 1:32 PM

“It is basically due to an irrational risk assignment.”

And it was Turbo Tim who made the decision that the mortgages were “riskless” when he was at the NY Fed. THAT decision right there was the one thing that caused this whole mess to unravel as it did. Nobody at any point in the chain was required to have any reserves to cover defaults because Geithner assured everyone that the taxpayer was on the hook for it and the government would print the money if it had to in order to cover the mortgages … which is basically what happened.

So my question remains … what ELSE are we on the hook for that we don’t completely know about?

crosspatch on October 28, 2009 at 1:35 PM

It is basically due to an irrational risk assignment.”

And it was Turbo Tim who made the decision that the mortgages were “riskless” when he was at the NY Fed. THAT decision right there was the one thing that caused this whole mess to unravel as it did.

–No, Turbo Tim. The NY Fed had nothing to do with these being “riskless”. The various laws prohibited anyone from regulating credit swaps–i.e., saying that these needed reserves because they had some risk. The fact that there was no regulation is what likely caused this problem.

Jimbo3 on October 28, 2009 at 1:39 PM

Oops, I mean No, crosspatch on the prior post. Sorry.

Jimbo3 on October 28, 2009 at 1:39 PM

And this makes the most sense. However, the US could have used its leverage over the other parties in the transactions, and there is still a lot of unanswered questions regarding the purchases of stocks by individuals making the decisions on how much AIG would pay. This entire thing smells a little funky.

To a larger point, it’s almost like the US doesn’t actually give a f*ck about getting the taxpayers money back (shocka!). It’s the same reason they converted their preffered shares in GM (which receive dividends but no voting rights) into common stock (no longer paying a dividend but have voting rights).

It’s about control.

BadgerHawk on October 28, 2009 at 1:24 PM

–When you’re down $500 in Vegas, you care alot. When you’re down $1 trillion, you figure you’re f**ked anyways.

Jimbo3 on October 28, 2009 at 1:41 PM

“what ELSE are we on the hook for that we don’t completely know about”

Besides a social security trust fund that is stocked with IOUs and has no cash reserves, that is.

crosspatch on October 28, 2009 at 1:42 PM

Archimedes on October 28, 2009 at 1:11 PM
Amen!

Greyledge Gal on October 28, 2009 at 1:29 PM

Thank you sister, sorry for the obscene amount of typos, total abondonment of sentence structure and plethora of missing & duplicate words.

My typing skills are worse than delorable and become yet more pronounced when highly agitated (which Team Obama accomplishes daily) and over-caffeinated.

But I take it, that you got the gist my rant.

Archimedes on October 28, 2009 at 1:44 PM

But rather than the government buying these “toxic” assets as TARP was originally billed as its purpose, the cash was instead injected into AIG who paid off the owners of the derivatives (thereby retiring them) and also used the capital to pay off the defaulting mortgages.
Exactly! A year later we sit here with all these toxic assets waiting to implode and more toxic assets being made daily because the government is forcing more people who can’t afford them to buy homes. Not to mention the commercial loans that are on the brink of failure.

Gee, if I didn’t know better, I’d think there was a plan to . . . Oh, wait . . .

Greyledge Gal on October 28, 2009 at 1:32 PM

Also keep in mind that the TARP IG came out last week and said the issue of the banking industries solvency is now worse, than before the TARP was implented. If Obama’s intent was not to destroy us through fiscal implosion, he could not effectively do any better at it if it was.

Does anyone even know if the myriad financial time-bombs he is planting can be effectively defused, if & when we are able to be rid of him?

Archimedes on October 28, 2009 at 1:51 PM

Jimbo3, again, I am not talking about the derivatives, I am talking about the underlying mortgages and the insurance policies themselves upon which the derivatives were based. You can regulate the derivatives six ways to Sunday but if the underlying security from which they are derived is mis-regulated, all the regulation in the world of the derivative itself is a waste of time.

If you can tolerate strong language, this article gives a pretty good description of what went on.

crosspatch on October 28, 2009 at 1:51 PM

Jimbo3, in other words, a derivative that is derived from AAA+ debt is valued higher than one derived from junk debt. The problem was that the mortgages were junk but were given a credit risk of “riskless” and since the taxpayer was ultimately on the hook, the banks and insurance companies didn’t really care because their butts weren’t hanging in the breeze … OUR collective butts were. So the derivatives were based on debt that was assigned an incorrect level of risk.

Would AIG have been able to sell those derivatives had they been given “junk” status? If they had been, they would have probably been only to get $0.40 on the dollar for them in the first place.

crosspatch on October 28, 2009 at 1:55 PM

Jimbo3, in other words, a derivative that is derived from AAA+ debt is valued higher than one derived from junk debt. The problem was that the mortgages were junk but were given a credit risk of “riskless” and since the taxpayer was ultimately on the hook, the banks and insurance companies didn’t really care because their butts weren’t hanging in the breeze … OUR collective butts were. So the derivatives were based on debt that was assigned an incorrect level of risk.

Would AIG have been able to sell those derivatives had they been given “junk” status? If they had been, they would have probably been only to get $0.40 on the dollar for them in the first place.

crosspatch on October 28, 2009 at 1:55 PM

–What you’re talking about (I think) is the credit rating. Moody’s and S&P, among others, gave AAA credit ratings to the highest levels in collateralized debt obligation pools. They were somehow convinced that the default risk on the highest levels were very low. That was because the highest levels of collateralized debt obligations were the first to receive payment and because the debt obligations were overcollateralized (that is, mortgages for 110% of the value of the highest level were put into the pool, so there would have to be a 10% default rate on all the mortgages in that pool before you even got to the question of which level was the first to receive payment).

Moody’s and S&P, and others, are private rating agencies. They are not government agencies.

Jimbo3 on October 28, 2009 at 2:02 PM

I looked at the article, crosspatch. That is what you’re talking about.

The problem with the collateralized debt obligations (CDOs) is that they took a mispriced underlying obligation and multiplied it by 50 or 100 times. Regulation of derivatives like CDOs might have helped minimize that multiplier effect.

Jimbo3 on October 28, 2009 at 2:05 PM

This wasn’t a front to funnel money to other banks. It was to perform contracts AIG had signed.

Jimbo3 on October 28, 2009 at 12:09 PM

Man, are you getting desperate.

1) AIG was in the process of renegotiating those contracts. That’s what happens in a bankruptcy.
2) Absent govt intervention, the banks would have gottem less than 100% of what was owed to them. AIG was shooting for 40%.
3) Due to govt intervention, the banks got 100% of their money. This happened in no other bankruptcy. The only reason the banks got their money, was because the govt gave AIG a lot of money.

4) Even a liberal should be able to see that the govts money went through AIG, directly to the banks.

MarkTheGreat on October 28, 2009 at 2:10 PM

MarkTheGreat on October 28, 2009 at 2:10 PM

Is your problem with the fact that it happened, or how much money went to them? If the government is bailing out a company so it can meet its obligations to pay x, y, and z, then government money is going to x, y, and z.

DrSteve on October 28, 2009 at 2:25 PM

Man, are you getting desperate.

1) AIG was in the process of renegotiating those contracts. That’s what happens in a bankruptcy.
2) Absent govt intervention, the banks would have gottem less than 100% of what was owed to them. AIG was shooting for 40%.
3) Due to govt intervention, the banks got 100% of their money. This happened in no other bankruptcy. The only reason the banks got their money, was because the govt gave AIG a lot of money.

4) Even a liberal should be able to see that the govts money went through AIG, directly to the banks.

MarkTheGreat on October 28, 2009 at 2:10 PM

–Banks on the other side probably had a hard time believing that the US would allow AIG, with $170 billion of loans and investments from the US, to file for bankruptcy over another $13 billion.

Jimbo3 on October 28, 2009 at 2:28 PM

1) AIG was in the process of renegotiating those contracts. That’s what happens in a bankruptcy.

MarkTheGreat on October 28, 2009 at 2:10 PM

Negotiation wouldn’t have happened in bankruptcy. Creditors would have been prioritized based on security and treated without bias within it’s appropriate classification.

Also, I don’t recall AIG ever filing bankruptcy.

Neo-con Artist on October 28, 2009 at 2:37 PM

AIG never did file bankruptcy. It was the threat of filing that was being used in the negotiations.

Jimbo3 on October 28, 2009 at 2:55 PM

Hmmm….how does this factor in? They sold the private bank to the Arabs: Aabar Investment PJSC (Aabar) is pleased to announce the signing of a binding agreement to acquire AIG Private Bank Ltd. (AIG Private Bank) from its parent company American International Group, Inc. (AIG).Under the new ownership, AIG Private Bank will become an independent financial institution, headquartered in Switzerland along with branches and representative offices in Hong Kong, Shanghai, Singapore and Dubai. AIG Private Bank will conduct its business under a new name and will continue to focus on providing wealth management services to high net worth individuals in Switzerland, Western and Eastern Europe, Asia and the Middle East.

http://www.ameinfo.com/177654.html

And spent 90 million on a Chinese Auto maker
http://www.insideline.com/lifan/us-insurer-aig-buys-135-percent-stake-in-chinas-lifan.html

njpat on October 28, 2009 at 6:46 PM

Oh…and included Goldman Sachs in the transaction…
Goldman Sachs International acted as exclusive financial advisor and Clifford Chance along with Baer & Karrer served as legal counsel to Aabar in relation to this transaction,

http://www.ameinfo.com/177654.html

njpat on October 28, 2009 at 6:49 PM

I haven’t read the comments yet, but wasn’t Tim Geithner the head of the NY Fed at the time?

onlineanalyst on October 28, 2009 at 7:14 PM

This is more flagarant than it appears. Pretty outrageous. Zero Hedge was the first to break this story soon after these bailouts began.

golfballs03 on October 28, 2009 at 10:40 PM

I’m still mad that we don’t get to have a little American flag on the AIG soccer team we sponsor in Britain.

BadgerHawk on October 28, 2009 at 11:43 AM

That would be Manchester United. :) :) :)

Theophile on October 29, 2009 at 1:30 AM