Dem Senator Condemns Veil of Secrecy Shrouding AIG Counterparties
The identities of the counterparties who stand to benefit from the government's huge new bailout of AIG are remaining frustratingly secret, as Josh pointed out this morning, even as taxpayers ensure that AIG's partners in deal-making get paid. But at least one member of Congress isn't satisfied with the explanation coming out of the Federal Reserve and Treasury.
Sen. Ron Wyden (D-OR) pressed Fed Chairman Ben Bernanke hard in the Budget Committee this morning on the need to identify AIG's bailed-out counterparties. After Bernanke replied that "under normal conditions, [the counterparties] would have presumption to privacy about their commercial decisions," Wyden sounded extremely displeased:
I've asked you what the endgame is. You've said the situation is evolving. I've asked you why we can't disclose the counterparties; could be anybody as far as I can tell in the world. And you're saying you're studying it.I just hope that in the days ahead, the Fed is going to come clean as to why this is so essential. I think this is setting a precedent. I mean AIG is not an investment company; it's an insurance company. Insurance companies in Oregon don't take these kinds of risks and people want to know how we got into this situation and specifically, what's being done to turn it around.
Another Democrat on the Budget panel, Sen. Mark Warner (VA), echoed Wyden's criticism in a more mild fashion later in the hearing:
And I guess it just irks me a bit that we, the American taxpayers, are still basically asked to continue to total bail out all these counterparties when, at some point, I just believe they're -- and I understand the structural concerns, but there ought to be some haircut taken by these folks at some point in this process.
Whether it's forcing the counterparties to accept a partial loss on their contracts with AIG, or disclosing their identities outright, it looks like some Democrats may drop legislation on this question in the coming days.
Josh
Matt
Eric
This is just bad, bad, bad, bad. Is Bernanke the head of the CIA? This level of secrecy about BUSINESS has absolutely no place in our government--and that includes offshoots of our government which is certainly what Bernanke is in charge of.
My Senators will be hearing from me. I detest this sort of nonsense. Detest it.
March 3, 2009 2:54 PM | Reply | Permalink
Is AIG paying off credit default swap claims from foreign banks and foreign investment houses? That's what I'd like to know.
Imagine the firestorm -- appropriately so -- if US taxpayers are bailing out foreign concerns!
March 3, 2009 3:09 PM | Reply | Permalink
From hints that I've heard (sorry, working, don't have any links), yes. Which is why transparency is needed now and these counterparties come to light. I don't know what the repercussions will be, but if the Fed is effectively propping up entities in other countries, what is our responsibility here? I've heard the other morning on GMA (I think) about AIG being the center of a web that stretches world-wide. Being a multinational company, is it up to one country to prop it up?
(another of my ramblings, but I'm just curious here)
March 3, 2009 4:46 PM | Reply | Permalink
Good god people, its not the 18th Century. There is no separation between our economy and the rest of the world's.
AIG's responsibility is to honor its contracts. Period. Rightly or wrongly, the Feds took the company over to see that that happens because they were afraid of a global cascade failure if it did not.
If you think that the consequences of bailing on a CDS with a bank in France and honoring those with U.S. companies wouldn't be as bad as defaulting on one with a bank in the U.S., you're right. It would be worse. Vastly worse.
Absolute global confidence that the U.S. government to make good on its obligations is the only thing left between civilization and complete collapse. If people in the world get a whiff of the slighest slackening in that resolve, you'd better be stocked up on up on guns, ammo and freeze dried food. (And, of course, since we're all liberals here, most of us aren't.)
We are Democrats. We don't get to indulge ourselves in xenophobic simplistic fantasy solutions to enormously complex problems, nor do we get to act like our country is an island unto itself. That's the other guys. We're the grownups.
March 3, 2009 4:58 PM | Reply | Permalink
Agreed about the point we make good on our obligations, but don't you want to know what those obligations are?
March 3, 2009 5:21 PM | Reply | Permalink
They aren't "our" obligations. AIG isn't even primarily an American insurance company. It has always been primarily based in, and done the majority of its business in, Asia.
Private firms are to be allowed to create binding obligations for the American government merely by being incorporated here? But incorporation is a state matter, not federal. I can't find the state of incorporation in their 2007 Annual Report (probably Delaware or New York). Should that state pick up the tab?
I do find that the AIG Private Client Group "insures more than one-third of the Forbes 400 richest Americans." What proportion of the 400 are - through the hedge funds where they keep their wealth - counterparties in AIG CDS's?
March 4, 2009 7:17 AM | Reply | Permalink
As others have said, AIG has already broken its contractual obligations: It can't pay its debts to swap holders. The ostensible reason we're paying these obligations anyway is to protect our own economy from further collapse. We don't have infinite resources. Therefore, it's only reasonable that we be allowed to direct our bailout money in a way that's likeliest to achieve our intended policy goals and that shields taxpayers from any potential fraud. In order to achieve those ends, we need to know who the counterparties are. It's simple: The contracts have already been broken. They were broken when AIG turned out to be insufficiently capitalized to meet its obligations. The taxpayer money being pumped into the system is a last-ditch, emergency measure only, not a free ride for a company that knowingly skirted regulatory oversight and wants to have it both ways now.
March 4, 2009 10:14 AM | Reply | Permalink
And, upon what legal basis would you suggest they could discriminate among who does and does not get paid depending upon their nationality?
The desire to avoid a jingoistic shitstorm may well be one of the reasons they don't want to disclose which beneficiaries of the CDS's are getting paid, but if they gave in did start discriminating against foreigners, you'd be looking at a losing battle in the WTO, losing lawsuits in U.S. couts and adding greatly to the meltdown in confidence fueling this economic holocaust.
Kinda makes a little grief from a senator look like nothing.
March 3, 2009 4:47 PM | Reply | Permalink
Well, in response to one of your posts a few days ago regarding the shoveling of dollars into, for example aig, I actually found out something interesting this morning on npr. The feds are apparently proping up aig for a time in order to let the credit default swap policies that they wrote expire. When they started proping up aig there were about $600 billion in policies and now there are only $300 billion. Apparently the policies have a time limit, which I did not know and I am sure most people don't know. The thought process was that if aig goes belly up, there goes the financial system, so they are proping it up for a time until the policies expire. My guess is when the policies expire, there goes aig. Also, obviously, they don't want to explain this or everyone holding a policy will try and cash it in. At the end of the day the feds will have to pump about 250 billion into aig and stand to lose about 150 billion, allegedly, according to the reporting that I heard.
March 3, 2009 4:54 PM | Reply | Permalink
Wow, that's fascinating and new info, though, in hindsight, it makes sense. All insurance contracts have an expiration date.
And, frankly, I have no problem with that. If the CDS agreements expire without a claim being made, that means mortgage payments were still rollling in to service the mortgage backed securities they insure. Which is good. And if the CDS contracts expire without being breached by AIG, that may actually put a little heart into the market maniacs that the end of the world isn't nigh (though the good affects may well be overtaken by the effect of not being able to get anyone to issue new CDS's).
And let's keep in mind that its only the evil operating unit that wrote these things that's in trouble. The other evil operating units of AIG are still huge, fantastically profitable and eminently salable.
Its just finding someone with enough money and cojones to buy them that's a problem. If we can, we may get out of AIG without taking too big of a hit, as such things are measured these days.
March 3, 2009 5:11 PM | Reply | Permalink
That's what I thought as well. On the expiration date issue though, generally when the insurance is tied into a mortgage, the expiration date is the expiration date of the mortgage. That's why I was really surprised by this info. Obviously, I am completely clueless about this credit default swap crap, so that's why the expiration date issue surprised me.
I wouldn't be surprised to see the expiration of aig when this credit default swap crap expires as well. On the other units being profitable, they were about a year ago, in light of the current economic meltdown, probably not so profitable anymore. Insurance is not something that people pay for when they are out of work and have no money, so I wouldn't be surprised if the other units are suffering as well.
However, bottom line, now it makes some sense why the feds did what they did with aig. I thought the credit default swap issue was much bigger and long term. The expiration date issue surprised me greatly.
March 3, 2009 5:26 PM | Reply | Permalink
Maybe not 'evil', just stupid enough to believe in Li's risk model completely.;
An aside: Should we even let companies get so large as AIG with so many fingers in so many recesses of the world? I'm weighing it a bit today in my mind. In the Great Depression I think 5000+ banks failed. Right now there's fare less failing in the US, but lots of banks now are much bigger than then. Does it all add up to the same result?
March 3, 2009 5:29 PM | Reply | Permalink
Nope, we should never let companies get so big again in the future. Obviously, the too big to fail bullsh*t is all bullsh*t. When they are so big and they f*ck up majorly, then it is a much, much bigger problem than if they were much smaller and f*cked up. The mergers and consolidations over the last 20-30 years have done nothing for the economy. All they did was shed jobs and destroyed competition. How can you have competition when you only have two banks competiting in a state like california? It's only bofa and wells fargo. The rest of the major banks have ceased to exist. Who suffers? The workers and the consumers. Same thing with media conglomerates. There is no competition and we don't get any legitimate news. It is a total clusterf*ck.
Nope, no more consolidations and mergers. There should be a disinsentive to merge and consolidate by way of the tax code.
March 3, 2009 5:39 PM | Reply | Permalink
A rationale for merging is efficiency. You're proposing changing the tax code to make it less efficient to merge. Seems a little less exciting (so maybe better) than trust busting.....
March 3, 2009 5:52 PM | Reply | Permalink
Everything's already merged. How would you construct tax laws that would require all media conglomerates to break up within two years? We need to, for instance, utterly demolish Clear Channel, Murdoch, and the like? What tax incentive would prompt them to relinquish their power? What they're doing simply has to be made illegal.
March 4, 2009 7:24 AM | Reply | Permalink
Oh, that's true. The huge conglomerates have to be broken up, and not just in the media industry.
My point on taxes is that future mergers should be discouraged through the tax code. Right now with the write-offs, there is almost a tax incentive to merge. Just change it, so that there is no incentive and in fact are some disincentives.
March 4, 2009 7:54 AM | Reply | Permalink
Uh, no, I don't think so.
Mergers may have had some efficiency goals, but that's certainly not why they were being publicly promoted.
I recall some conversations with my father in the late 80's('88?'89?), on the very topic - he was angrily skeptical, and calling it "bullshit".
At the time I was working as a temp, processing paperwork as part of a bank merger/acquisition, copying promissory notes and attaching to original deeds, and copying deeds to attach to original promissory notes - all part of a collateral swap deal. A biggish Boston-based bank was buying up a smaller S&L that also had an investment arm.
The rationale of the era, as advertised on the radio in ads being run by the bigger bank:
"When the best way to beat the competition is to buy them."
Mind you, the big bank was encouraging borrowing, so that the borrowers could buy the competition, but the principle applied to them as well. And I'm sure they were happy to get their hands on the investment branch as well.
Interesting aside - one of the notes we came across was a $325,000.00 loan made in 1929 - that's in 1929 dollars, by the way. The borrower made payments throughout the depression, and the loan was still outstanding 60 years later. That's a LOT of dough for that time period. I was curious why it hadn't been paid off in entirety - who gets a 60-year mortgage?
March 4, 2009 10:59 AM | Reply | Permalink
This is what Stieglitz was suggesting in an interview with Amy Goodman on Democracy Now last week.
http://www.democracynow.org/2009/2/25/stieglitz
March 3, 2009 3:25 PM | Reply | Permalink
I seriously question who the Democratic Party represents. I myself don't trust today's Democratic leadership.
March 3, 2009 3:45 PM | Reply | Permalink
You want to clarify that?
Bernanke ain't a Democrat, or at least as Fed Chairman he isn't/wasn't a Democratic appointment.
March 3, 2009 3:53 PM | Reply | Permalink
Wyden FTW! I loves me my Senators :-D
March 3, 2009 3:58 PM | Reply | Permalink
Good to see this thread. My comment in re a front page article at TPM applies here too. It's not that we need to see the dirty laundry, it's that the Government as de facto owner should know AND should control the cash flow to some extent. Maybe AIG should be put into receivership or some such.
[reposted]
AIG and transparency -- Josh Marshall is warming up on this with Who's Getting the Money?, Can Beggars Be Choosers?, and similar front page articles. Since the front page doesn't support comments I emailed in part:
Parties to a contract, CDS or otherwise, are simply creditors. In order to pursue a claim in court, you have to identify the assets and liabilities, you cannot claim "confidentiality" and just present a bill. AIG and the Government are pretending that AIG is doing business as usual, but clearly even in that case the Government as de facto owner has a material interest in the alleged debts of AIG. So at the very least someone like Elizabeth Warren, or a successor to Neil "Cash and Carry", or an Inspector General should have complete access to details of AIG payouts.
Now that said, sometimes courts will protect privacy, whether it's national security, child welfare, or trade secret issues. So making all the details public is not necessarily good justice. In this case AIG is just bullshitting when it says "trade secrets". The only way THAT works is if AIG is a secret agent of the US Government or has some magic formula to bring itself back to life and pay pack the taxpayer with more than petty interest. Basically it's ludicrous.
March 3, 2009 4:08 PM | Reply | Permalink
If foreign entities bought American mortgage securities relying on our rating system and the CDS insurance, paying off on that insurance is probably the best way for America to retain its reputation as a responsble business partner. If we are bailing out individuals who simply bet that housing was going to fall -- taking out insurance in a situation where they did not have an interest we are simply enabling gambling and such contracts could potentially be held void as against public policy.
If we are buying AIG we are probably bound by their contracts. If we are bailing them out we can probably set whatever conditions we please -- no money to bail out a swap unless the counter party is revealed.
March 3, 2009 4:27 PM | Reply | Permalink
Useful analysis from Ritholtz - that the derivatives-trading side of AIG (including all the CDS stuff) was operating as an unregulated structured hedge fund, not as part of the traditional insurance side of the business (which is still profitable). So why are taxpayers propping up a hedge fund, or the counterparties to bets that all sides knew were risky? The whole point of being part of that world is you know there are great rewards possible precisely because there are great risks. So why are we, as citizens with no part in that, paying for it now?
We need to either separate off the traditional insurer from the hedge fund, and bankrupt the AIG hedge fund, or else Obama's administration will be, despite all the strong reasons we should support it, frankly the most corrupt in history.
March 4, 2009 9:48 AM | Reply | Permalink
Good. We need some transparency here. I mean, we freaking own this company now.
March 3, 2009 4:41 PM | Reply | Permalink
We should have done a prepackaged bankruptcy. It would eliminate the secrecy - you have to declare yourself to be a creditor. It would have given us the leverage to ratably reduce our payouts - the government could have told all counterparties that the US will pay 60 cents on the dollar.
Instead, we pay other banks in full, with the public having no way to evaluate what is going on, with no oversight, costing each family in America $2000? Outrageous. Beyond outrageous.
March 3, 2009 6:01 PM | Reply | Permalink
Whether these are going to foreign institutions is beside the point.
This is more money than the U.S. has give ANYONE, EVER, and we have no idea who it is going to or how it is being spent!
Keep in mind that most credit default swaps are NOT held be people who also hold the insured mortgages or whatever. A lot of them are held by speculators. Are we actually bailing out financial institutions with troubled assets, or giving tens of billions of dollars to speculators who may have bought CDS's last year or last month?
If you want to be really paranoid, could those CDS's be owned unknown investors in the Cayman Islands? What if those hypothetical unknown investors are in a position to cause the defaults that trigger the CDS's (they don't just ensure mortgages!).
What if Tim Geithner or Dick Cheney owns them?
I'm not that paranoid, although my past predictions would have been more accurate if I were. My point is that it is TOTAL LUNACY for us not to know who this cash is going to. I can believe that the Bush administration set this up, because total lunacy was the rule for them. But Obama?
There needs to be a huge public outcry about this!
March 3, 2009 8:11 PM | Reply | Permalink
The secrecy of the counter parties gives credence to one rumor. That is AIG wrote CDS contracts on bonds issued by Eastern European and former Soviet Republics. Maybe as many as ten of these countries face bankruptcy with Austrian banks holding most of the notes. If the CDS contracts are voided, the ratings of the bonds fall which means there values drop also, so this could lead directly to the failure of Austrian banks and open bankruptcies of the effected countries. This would likely be as big a shock to international finance as was Lehman Bros bankruptcy (remember what set off the Sept 2008 panic).
So ironic. The US is maybe propping up bonds that US firms avoided because of their high risk in the first place. (Certainly the idea of buying Bulgarian national bonds sounded like a joke when they first appeared).
If this scenario is correct then Benanke has to maintain secrecy. There is no way the American public would tolerate bailing out bad European loans. At the same time there is no way that any US government official would be willing to make a call that could lead to the bankruptcies of multiple countries and possibly make Austria the new Iceland. What an incredible decision to have to make!
March 3, 2009 9:02 PM | Reply | Permalink
In the thirties Congress mandated disclosure of which banks were getting help from the Reconstruction Finance Corporation (set up to help troubled banks in the early thirties) and the result was runs on the banks that were outed. The depositors and customers of those banks (local businesses) might have wished the news that their bank has received help had been kept secret. Perhaps these same banks would have busted without the push, but that is doubtful. I assume that is one reason Bernanke wants to keep the AIG counter-parties private. That is also why Paulsen gave healthy and sick banks TARP funds initially. Once a sick bank is outed, it's curtains for that bank - loss of confidence = bank run.
March 4, 2009 1:08 AM | Reply | Permalink
At the center of this controversy is the fact that for all intents and purposes the U.S. Taxpayer owns AIG. Due to that condition business as usual can't be conducted in the business as usual way.
We are on the hook for an unknown number of dollars that so far nobody even wants to think of.
And these guys are worried about who owes who how much!!! Paulson, Bernanke and Geithner have handed the U.S. taxpayer the check. That means we get to see who is at the dining table and how much they've spent. As far as I'm concerned all prior bets are null. The U.S. taxpayer, by default, has been awarded the pot. That we don't get to count how much is there and who has to pay up is a load of rubbish.
March 4, 2009 4:28 AM | Reply | Permalink
As the craziness of this whole AIG/bank bailout thing continues to spiral out of control, I find it "interesting" we assume the taxpayers "own" AIG or these banks because taxpayer money is being used.
Not necessarily so.
It's been quite a disinformation campaign going on re: the role of the Federal Reserve in all of this. I'll be honest: It's confusing as heck to try and figure out what role the Fed (PRIVATE cartel of banks including Goldman Sachs, BofA, JPMorgan, etc.) is playing, and what role the US taxpayer is playing. Incredible amounts of "sleight-of-hand" stuff...as the US Treasury floats bonds in order to "lend" $$$ to the Fed so that the Fed can supposedly prop this stuff up (and reap the rewards at virtually no risk to itself because it's "our" money, not "their" money).
Huh? (My sentiments exactly!)
We need to ask: 1. How much does the Fed "own" AIG, and how much does the US Treasury (us)? Latest I've read, "we" really don't own much of anything; reporters seem to assume this, however, because it's predominantly US taxpayer $$ that's being used in this deal. Yet from what I'm picking up, this uber-complicated, parasitic relationship between the Fed and the Treasury leaves them sitting pretty nicely and us not so much. (And we need to remember: Even tho the MSM carries the deceptive meme forward re: the Fed and the Treasury as being one and the same - THEY'RE NOT.)
An even more relevant question at this point: 2. Are any of the US banks that make up the Fed holders of these CDSs? You can see where this is going if indeed that's the case. And yet another reason for the secrecy.
As for the fear of a run on banks: We need to clean house, folks. Completely clean house. Otherwise, we're band-aiding it again. And the rotting-from-the-inside good ol' boys network of financial domination by a few...stays in place.
Personally, I think it's time for a new model.
Wishing everyone well.
March 4, 2009 6:45 AM | Reply | Permalink
The sup-prime was made up back USA and therefore AIG is paying off the Foreign investment company's with the American Tax Payers. Why do you think there keeping this secret?
March 4, 2009 9:42 AM | Reply | Permalink
Did AIG sell CDSs to anyone other than holders of CDOs? Did they sell them to pure speculators who had nothing to protect? I have read elsewhere that indeed some savvy insiders bought CDSs as a synthetic bond "Put" and are collecting on their bets. Is AIG paying off any speculators. (And remember some banks have been known to speculate for themselves or their clients.)
March 4, 2009 10:58 AM | Reply | Permalink