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March 29, 2009

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TCO

This is the (pretty obvious and predictable) story of where AIG bailout money went. It went to counterparties. Back when I was warning you that this was all a Goldman bailout and you poo pooed me. Back when deer in the headlights McCain first was against it...then for it...supporting Paulson/Bush...and dragging Palin down into having to mouth support for it. The whole thing is pathetically sad.

This isn't that hard people. Ignore the unsupported "panic" talk and the implicit guarrantee of government backing (why not explicit then, why not beforehand make it so). This is silly to think that pouring money into insollvent entities means it will come back to the agencies pouring it in. It's moronic to talk about "real value" of assets being more than "market value". This whole bailout is pathtically about paying off Democrat financiers who made some bad bets. Well they are hedgies...let them blow themselves up.

http://www.nydailynews.com/opinions/2009/03/29/2009-03-29_follow_the_money_enough_about_the_aig_bo.html

MayBee

I am ashamed, PRS. I am ashamed that earlier tonight I was just enjoying the joy of watching my team make it into the final four, and now I see how awful it truly is for these guys.

This has been really fun. And I'm an asshole to boot.
Good times.

Stephanie

I saw the match today. Awesome!!Eleventy!1!11!

And I'm so bummed... this is the first Sunday in a month that it has been too wet to play. :( (why do I get images of the the Cat in the Hat when I say that :) ) Anyways, don't you just want to go running out of the house with your clubs to see if you can put into practice any of the hints they give while they are showing the golf matches? ARRRGH...

And remember, it's only 10 days til the Masters... and Phil's drubbing. Again. ;)


Fresh Air

TCO--

Without taking a position for the sake of this discussion on whether the AIG bailout was necessary or prudent, why are you surprised the money went mostly to counterparties? If those debts weren't paid, the counterparties would have put AIG into involuntary bankruptcy. Which is exactly why the government bailed it out.

Stephanie

FWIW, my son was recruited to play baseball by some teams that were out of state Div I and some Div II and Div III... why should he consider a partial scholarship at an out of state school where the scholarship offerings don't even make up for the cost of the Out-of-State Tuition difference? Or because the division doesn't even offer scholarships?

Very few sports in college offer full rides and the benefits of playing for some teams may actually cost the student money. He went anyway (costing us about $15k more than GT would have) and after one year was back home... the school merged its program with another and changed coaches and all scholarships were up for renegotiation. Hell yes he felt misled and wished he had just taken the walk on route at another school (which he probably wouldn't have made (Top 10 college baseball school) but would have left him with a little more dignity). So, yes, scholarships can be pulled and leave the athlete disillusioned with college, and no one at the school seems to give a damn about that...

daddy

Geez, I feel now like I'm confessing to a murder, but I am totally happy my team beat the carp out of their team, and I hope we do it again next weekend, and then beat the snot out of the remaining bad guys in the Championship game. Go to hell Duke.

TCO

I'm not surprised. I said so at the time.

Extraneus

Gee, what the hell was *that* all about?

Somebody should have woke Clarice up.

Jane

I'm up early preparing for my new 20 minute on Monday AM radio gig and I hear the following:

Waggoner has been fired by the administration

The union has made no concessions

The government is thinking about taking over the medical costs of the employees - as a way to keep down costs, and begin the socialization of medicine.

I just don't think they have the power to do this.

Jane

Oh yeah and Washington will substitute for the Board of Directors until they are replaced and will also guarantee 110% of the warranties - whatever that means.

Rocco

Good Luck with your new radio show Jane.

Merriam-Webster's online dictionary defines communism as b. a totalitarian system of government in which a single authoritarian party controls state-owned means of production.

Che would be so proud!

Rocco

Perhaps we could change General Motors name to Guevara Motors?

PD

Would it be fair to call the GIVE Act the Child Slavery Act of 2009?

Pofarmer

why are you surprised the money went mostly to counterparties? If those debts weren't paid, the counterparties would have put AIG into involuntary bankruptcy. Which is exactly why the government bailed it out.

That's not surprising. What's well, I guess not surprising also is stuff like this coming out.


During Jan/Feb AIG would call up and just ask for complete unwind prices from the credit desk in the relevant jurisdiction. These were not single deal unwinds as are typically more price transparent - these were whole portfolio unwinds. The size of these unwinds were enormous, the quotes I have heard were "we have never done as big or as profitable trades - ever".

.....

AIG, knowing it would need to ask for much more capital from the Treasury imminently, decided to throw in the towel, and gifted major bank counter-parties with trades which were egregiously profitable to the banks, and even more egregiously money losing to the U.S. taxpayers, who had to dump more and more cash into AIG,

LUN

follow the bread crumbs.

Pofarmer

I just don't think they have the power to do this.

Oh, they have the POWER, they just don't have the right.

clarice

I only have had one experience with athletic scholarships. There was a young black man from the deep South who went to college with me in the early 60's. He'd had a dreadful education in segregated rural schools and came to Wisconsin on an boxing scholarship. Shortly afterward a student died in the ring and the school dropped that sport. (It was the only boxing match I ever went to, coincidentally.)
The school did not drop the athlete's scholarship and it turned out he was some kind of really brilliant in math and physics. He was getting his PhD at a very early age but needed to pass an English test, and given his poor education was having great difficulty with that. In shifts all of the gang of neer -do -wells who lived in the school's dark, beery Rathskellar (like me) took turns tutoring him until he did pass it.
One great advantage of a big state school is you do learn that talent is often hidden and you never know where genius lurks.

Pofarmer

And then there's this aspect of it.

What this all means is that the statements by major banks, i.e. JPM, Citi, and BofA, regarding abnormal profitability in January and February were true, however these profits were a) one-time in nature due to wholesale unwinds of AIG portfolios, b) entirely at the expense of AIG, and thus taxpayers, c) executed with Tim Geithner's (and thus the administration's) full knowledge and intent, d) were basically a transfer of money from taxpayers to banks (in yet another form) using AIG as an intermediary.


clarice

Jane, I'd ridicule the notion of Congress running a car company. I'd note that we baile dout GM once before, and if we followed this precedent we'd have to revive buggy whip factories and keep them going when no one was buying their product..What about Pan Am? I'd go thru all the big companies and industries that mp ;pmger exist and talk about the industrial titans on the Hill like Barney and Ted and Nancy and barbara,,People who couldn't find their hind ends with maps.

Jane

Jane, I'd ridicule the notion of Congress running a car company.

When I got to the station Dick was there - in the ante room. When I started talking about the President's firing of Waggoner, Dick came into the studio, sat next to me, and tried to act intimidating. After we went to break he said: "I will take care of you on that tomorrow on FWSAJ."

It was pretty mind blowing.

Other than that it was a fun segment, which will be live streamed every Monday if anyone is interested. WE also talked about Bill Ayers at BC, Notre Dame's invitation to the WOn and the corruption that took place at Fannie and Freddie under Emmanual's tenure there.

RichatUF

Pofarmer-

Since AIG FP was ordered to liquidate their cds book by the government (by buying the underlying security which they sold protection and then selling it to the Maiden Lane vehicles) and they also had to do it in such a way which wouldn't trigger any default clauses. This quarter, with the screwy currencies market, it might very well be that AIG FP has been liquidating currency positions and every other currency trader in the world knows it and is front running them.

And that is really creepy news with the White House dismissing Waggoner. GM won't be building better cars because of it though.

jean

Clarice We have made great strides in education since the 60s.Now most kids get a really bad education.We have certainly spread the wealth.Jane Please explain once again (for this computer no-nothing)how can I listen to you on the radio

Jane

Jean go to the LUN and you can listen to the podcast. If you want to hear it live-streamed (Tuesdays noon -1, or Mondays at 8:00AM )there is a link on FWDAJ that will take you to the live streaming.

Pofarmer

Rich,

I think the problem is that it certainly LOOKS like AIG is just shoveling money out the door.

I really do think a bankruptcy, in whatever form it would have taken, would have been preferable to this, and ultimately cost the taxpayer less.

narciso

Yes let's bring back Pan Am, which was mortally wounded by the Pan Am 103 attack,
Eastern which was torn down in part by the unions, and some of the management decision of Frank Lorenzo, SouthEast Bank which was consumed by GreatWestern and ultimately by Bank of America. S. Florida hasn't recovered
from those losses in 20 years. We should have learned from the post '01 bailouts of
the Airlines, which didn't resolve the underlying problem, exacerbated by the customer alienation program they seem to have adopted at U.S. Airways, raising fees and cutting back food, they reversed part of that. Financial enterprise specially those involving international transactions
are a different matter, but as long as they are procluded by conducting their business properly they won't thrive either.

jean

Thanks Jane.

DebinNC

BO told some DC kids last week about getting through school primarily on scholarships and family help. If he was talking about college, I wonder if he got a basketball scholarship (see p.1, bottom paragraphs, because the druggie slacker Obama in "Dreams of My Father" was unlikely to get an academic scholarship to Occidental. I can see his ego making this something he'd like to hide, unlike a more secure person who'd gratefully acknowledge help received along the way.

Rick Ballard

"and ultimately cost the taxpayer less."

If it saved the taxpayer $1 in taxes but cost him $1.60 in increased insurance premiums, would that be a "better" solution? That's a hypothetical but part of the AIG problem has to do with the size of the book that they insure. An insurance book has to be backed (per regulation) with adequate reserves and there aren't many insurance companies which can pick up even a decent share of AIG's book at the moment without having to dilute their stock at unfavorable pricing through issuance of new stock.

I'm still working through the difference between posting capital to cover CDS and "losing money". If AIG doesn't default and the covered issues don't default then it would seem that the posted capital returns to AIG upon expiration of the CDS contract.

Rick Ballard

Shoot.

clarice

Because the closing html brackets creates such a fuss here now, why not just put them in [] not<>. That way the reader knows you want to, say, italicize something, but if somehow the closing brackets aren't closed, the problems won't sontinue on thru thew thread.
Like [b]good grief, no more larwyning a thread[/b]

Ignatz Ratzkywatzky

If it saved the taxpayer $1 in taxes but cost him $1.60 in increased insurance premiums, would that be a "better" solution?

Possibly. If it meant not giving Barry a foot in the door to being the new national insurance czar, along with the new bank czar and the new auto czar, etc, it might be a very small price to pay.

PDinDetroit

Reposted for apprpriateness. I am MAD AS HELL ABOUT THIS - KING OBAMA NEEDS TO BE TAKEN DOWN A FEW NOTCHES...

I am going to take the stance of Captain Hate for a minute and give my two cents here (and I respect the hell out of CH):

I have been seriously thinking for several weeks now that the automakers should give the US Public what it wants: BURN THE HOUSE DOWN - FILE CHAPTER 7 IMMEDIATELY.

To Hell with the UAW/UNION, let them pick up the bloated costs of supporting the terribly lazy/stupid workers and their benefits (some truth to this). They can all go learn to do OIL CHANGES for $7 an hour, which is all they are worth anyways.

To Hell with the vast array of Automotive Supplier Companies, let them go swirling down the toilet where they belong as they shouldn't have been supporting failing automakers anyways. They helped pollute the world and we demand a TON OF FLESH, NOW.

To Hell with the IT Suppliers such as IBM, HP, EDS, Cap Gemini/Ernst Young, Accenture, etc. Let them choke on the multi-billion dollar contracts that will be unfulfilled and watch their share prices drop 25% in a day. They can always fire tens of thousands more in the US and remain profitable, even while hiring OFF-SHORE Resources instead.

To Hell with the multitude of companies that support the automakers and their workers, from Office Supply to Power Generation to Clothing Retailers. Just think of all the NATURAL RESOURCES we can save and will probably do more to STOP GLOBAL WARMING that any legislation could ever hope to attain.

To Hell with the DOW. Let it do a death-spiral downwards to 3500 and watch the true depression begin.

C'mon automakers - you are not giving the Public what it wants. Time to pony up and give the people what they really deserve - they are asking for it you know.

RichatUF

Ignatz-

Ok. But the Fed and the NY Insurance Commissioner used authority they already had to put together the original AIG bailout. Barry's foot, leg, and most of his big, dumbo ears were through the door while Team McCain ran a lose with honor campaign while at a 7-1 funding disadvantage.

Curiously the supposed investigation into its collaspe has gone no where but plenty of talk has been generated about the retention payouts.

zim zim alabim

Today's sign- "U.S. Out Of Detroit!"

Ignatz Ratzkywatzky

Tom Sowell and Walter Williams agree with me; the NCAA is a cartel that expoits young black men, IR.

I'm leaving in an hour for five days so I don't mind reopening this slightly unpleasant conversation. :)

I agree the NCAA is a cartel that exploits young black men. However what I recall Sowell and Williams most decrying is sending unqualified young black men into academic settings where they are doomed to fail, not the state compelling the NCAA to pay its unqualified student athletes as professionals. (A related question seldom asked is, if the NCAA is bound to pay athletes involved in profitable sports, are student athletes likewise bound to cover the costs of the university for the privelege of competing in money losing ones?)
And, more importantly, the way to break a cartel is to force it to compete, not use the power of the state to force the cartel to pay some of its students but not others, while leaving the cartel intact.

And, while this subject seems to bring forth fervent passions I'm at a bit of a loss to explain, I think Maybee was treated a little unkindly last night.

Pofarmer

I think Maybee was treated a little unkindly last night.

I agree, I thought Maybee had a pretty good point.

RichatUF

Pofarmer-

I really do think a bankruptcy, in whatever form it would have taken, would have been preferable to this, and ultimately cost the taxpayer less.

How so? If AIG went into bankruptcy, then the banks would have had to raise additional capital because of the AIG event for 2 reasons: fund liquidations and additional debt downgrades.

It would have caused another round of fund liquidations as hedge funds and investment firms would have had to raise cash by selling what they could (much like the pretty sharp drop in everything post-Lehman)-building reserves, redemptions, and fear factor. The debt downgrades would have been across everything that AIG insured requiring banks to hold greater reserves. At that point the only place to turn for additional capital, because all the sovereign wealth funds were burned so badly with the monoline downgrade cycle, was the Treasury. FWIW.

Jane

I'm just posting this so we get to the next page (and no italics) more quickly.

Ignatz Ratzkywatzky

Gotta run Rich, but Po's original proposition was that bankruptcy would have been preferable to a bailout.

Rick responded that perhaps the Fed's plan was preferable.

My response was possibly it wasn't, if it gave the Federal government a foot in the door to running various industries.

So if you now say that the Fed and the NY insurance commissioner had the power to do what they did, you may be right but it is not actually responsive to the propostition that a straight bankruptcy would have been preferable because it would not have opened the floodgates to what is now a tidal wave of bailouts and government control.

They had the power, but I believe we would be better off in the long run had they not used it, even if doing so costs us more in the short run.

PD

re: NCAA. If the addition of money to the situation tends to corrupt the situation, why would adding more money by paying the athletes improve things?

In other words, I tend to see the solution not as paying athletes, but going back to the original influx of money and examining whether that's really such a good thing.

Pofarmer

If AIG doesn't default and the covered issues don't default then it would seem that the posted capital returns to AIG upon expiration of the CDS contract.

Which means that AIG continues on for?????????????????

The really scary/stupid thing is that there is still CDS being written and no apparent move to regulate/control it.

sbw

Clarice, I beg to differ about your characterization of some of our leaders. Barney has other people with maps to help him.

clarice

I think a lot of the university athletic 0problem would be solved if we have minor league basketball and football teams and no longer pretended that these were college sports.

Pofarmer

It would have caused another round of fund liquidations as hedge funds and investment firms would have had to raise cash by selling what they could

I assume that you're talking about CDS redemptions?

We have GOT to get this CDS stuff burnt out of the system. It's too bad that it's still being written.

At that point the only place to turn for additional capital, because all the sovereign wealth funds were burned so badly with the monoline downgrade cycle, was the Treasury.

There's still other capital out there. What would that amount been vs what we've done?

RichatUF

Pofarmer-

A bit more. AIG was in many ways this unfortunate beached whale [content warning]. AIG was so intergrated into the finanical system that the OTS, SPIC, FDIC, and state insurance regulators would have been on the hook for substantial sums-quite probably equal or exceeding what has already been shoveled out the door. One thing that TM has gotten on the soap box is that the state regulated entities were doing similiar things that FP was doing and AIG has been shoveling money to states-$1 billion to CA and VA too.

And this is what GM's happy workers have to look foreward to. Dance, workers, dance.

Pagar

PD, I think you're right on the GIVE act. But
I thought child slavery was outlawed years ago.

richard mcenroe

Obama appoints new GM CEO

richard mcenroe

Sorry. Correct GM link

narciso

In retrospect, getting rid of HankGreenberg on some bogus accounting investigation, replacing him with a factotum like Willemstad, who probably barely knew where the executive men's room was (sarc) so that Spitzer could play the crusader card into the White House, was a bad idea.

When looks over the history of government regulation specially in the financial industry, one isn't encouraged. The Fed was supposed to prevent or weaken downturns in the economic cycle, it has beenspectacularly
bad at timing interest rates from 1926-`28 on, not counting the 1920 downturn. Glass/Steagal was supposedly this great tool that kept the financial system secure. It doesn't work if the stuff you're peddling at either end is substandard trash.
ERISA was supposed to solve some problems in the pension system, it gave rise to the HMO. SarBox was supposed to bring about a more stable financial system, it did nothing
of the sort. So we've already seen the future, and it's not likely to work

RichatUF

Ignatz-

a straight bankruptcy would have been preferable because it would not have opened the floodgates to what is now a tidal wave of bailouts and government control

And the government didn't already exercise significant control?

And which entity would have gone to bankruptcy-a striped down holding company, maybe AIG FP (which would be London), or maybe Banque AIG (that would be France)...my point is that bankruptcy wouldn't have helped and would have probably forced a number of the state regulated insurance business units to bankruptcy too (ie since the NYIC was in the room with the NY Fed, it is a good bet that AIG's NY insurance units had cash flows upstreamed to AIG's holding company).

hit and run

Rick:
Shoot.

I will. But it would certainly help if you would hold still.

heh

Pofarmer

Obama appoints new GM CEO

This is scaring the hell outta me.

AIG was so intergrated into the finanical system that the OTS, SPIC, FDIC, and state insurance regulators would have been on the hook for substantial sums-quite probably equal or exceeding what has already been shoveled out the door.

Yes, but if you're going to cover AIG's possible defaults, and you're not going to negotiate them, the best you are going to do is 1/1 as what a bankruptcy would have looked like, and probably worse. What I foresee happening(and the good Lord knows I could be wrong) is that a bunch of this stuff collapses anyway, and the Govt has already shoveled so much money out the door that they don't have the money to do what they should have done in the first place, which is provide bridging for viable parties in the case of failure of these huge banks. The govt is acting like the bottom is in, and my opinion is that it's not. If the bottom IS in, then the call was probably right. If this is just a bear rally, and the housing bump is a dead cat bounce(which I also beleive) the there is going to be TONS more money shoveled out the door.

The Govt, is not bigger than the market, and we better all hope that it doesn't ever become so.

Porchlight

New GM thread up...

Pofarmer

Keep in mind that Barack Husein is NOT DONE SPENDING.

Enlightened

Morning All - OT and sorry if you already heard this but it looks like Biden has more to worry about than his gaffe-o-matic tendencies....

His daughter has allegedly been caught snorting coke - on video. Sometime earlier this month...hmmmm

Extraneus

I think Maybee was treated a little unkindly last night.

I agree, and she stayed her smart, civil and good-natured self the whole time.

Porchlight

I ♥ MayBee

DebinNC

I agree, and she stayed her smart, civil and good-natured self the whole time.

She surely did. She handled the situation so well, I convinced myself I didn't need to say anthing. I wish now I had, not so much for MayBee who needs no defenders, but for the principle of the thing.

MaryD

I ♥ MayBee too. I'm with Deb. I wish I had said something earlier.

boris

MayBee mixes it up just fine and clearly got the better of the spat.

TCO

The issue is that GS and the other hedge funds (banks here were essentially speculating and hedging) took risks and they knew that the counterparty they bought from did not have the ability to repay everything. They knew that they were not FDIC insured savings accounts. What the Bush/Obama adminstration have done is said, go ahead and make money on trades...and if there is a downside, we will cover it. This is INSANE. It is socialism and crony capitalism. It is literally having hundred million dollar NYC Democrat-financing Goldman Sachs guys LOOT the taxpayers. Loot hard working redstaters. Why you all would go along with that blows my mind. Ronald Reagan, Barry Goldwater, etc. would never do this sort of thing.

TCO

You know there is still more looting going on. We need to STOP it. And we need to recover every possible thing that is still recoverable. And we need to recover our principles.

As it is now, we have economically illiterate types here saying that the government needs to insure wild speculators. Next will be increased regulation (note that almost NONE of the current bailout endorsers had a formal policy of intervention/regulation ahead of this disaster (and they should have if they see that as a role of government) That won't constrain further craziness...and this will repeat in ten years. Maybe then we will just eliminate financial markets...and then lose all the benefit of fluid capital allocation to opportunities.

The whole thing is silly. The solution to this people is to let bad debts get settled. The issue here is not a dysfuncitonal bank run...but that certain portfolios just are under water. The government is not stopping a crisis. It is just bailing out speculators. No wealth is maintained here. We just have a transfer from taxpayers to holders of underwater investments (Goldman Sachs). And we are incentivizing more of the same.

Just let the market function and CLEAR. Everyone is standing on the sidelines waiting to see who gets bailed out. We need to say NO BAILOUTS and let the bankruptcies and liquidations proceed. This is the efficient method for reallocation of capital.

RichatUF

Ronald Reagan, Barry Goldwater, etc. would never do this sort of thing.

No of course not it isn't like that Chrysler got a life line or that there was some sort of invention called Brady Bonds or the RTC.

Just let the market function and CLEAR.

But if it is crony capitalism doesn't that imply that the market, such as it is, isn't going to function without some sort of government intervention (mutual hostages, predatory, or rent seeking).

sbw

Isn't government intervention some sort of crony capitalism?

Rick Ballard

Not only do I ♥ MayBee but I pity the fools awaiting death by a thousand cuts. I also support her position and I don't intend to spend a moment considering whether the uni/college sport machine might be abusing the poor lads and lassies with whom the machine has contracted for service.

After all, they're there for an education, if not a degree.

Pofarmer

No of course not it isn't like that Chrysler got a life line

Gee, how'd that work out?

RichatUF

sbw-

Isn't government intervention some sort of crony capitalism?

AIG wouldn't have been able to pull of the sort of stuff they did without it-government is corrupt, it only depends on form. Crony Capitalism takes 4 forms: laissez faire (individual lawlessness); mutual hostages (where 2 elements of the system reinforce one another: say the trade relationship with the US and China or more to the point the relationship to the US$ and the FM's); rent seeking (exploiting the rules system by having politicians in their pocket); predatory (monopoly or cartel exploitation).

Individual lawlessness doesn't explain AIG's corporate structure or its collapse. Predatory doesn't either because there are other players in the industry, though they were by far the largest player with an unhedged position.

So through a combination of rent seeking and mutual hostages exploitation, AIG was able to weave itself into the financial infrastructure of the world (mutal-hostages)and force the NY Fed and NY Insurance Commissioner (rent-seeking) to press for, and receive, a bailout using authority the Fed already had. AIG was going to get a bailout once the stakes were spelled out to the rest of the Federal Reserve Board.

TCO

Rich: You are either feigning or practicing ignorance. NY State (at the urging of the Fed) waived restrictions so that AIG could tap protected insurance assets. Don't come talking about how you protected those now. That's like killing your parents and pleading with the court for mercy since you are an orphan. A straight up liqwuidation would be the most efficient method of allocation of capital. As it is now, working red staters and spending money to keep Paulson like Goldman Sachsers in the trust fund for family forever business. This is fucking looting and bullets need to start flying.

MayBee

I think its time for a group hug.

RichatUF

TCO, die faster.

Pofarmer

So, AIG was wound into the govt. Great, now the govt is winding itself into AIG.

This isn't going to end well.

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Wilson/Plame