(
Diarist's Note: A few graphs down, you'll find the latest in a series of crossposts from HuffPo blogger and banker David Fiderer concerning the many questionable, if not extremely suspicious and damning--in this instance with regard to the enabling actions of the credit ratings firms at the time--facts surrounding the taxpayer's [ultimately, $182 billion] bailout of American International Group [AIG] in September of 2008, as it benefitted none other than Bush administration Treasury Secretary Henry Paulson's former employer of 32 years, Goldman Sachs, to the tune of no less than $23 billion. I've been granted ongoing permission, in writing, from the author to provide his posts in their entirety.)
Collectively, I believe David Fiderer's recent posts at HuffPo, along with articles from New York Times Pulitzer Prize-winning journalist Gretchen Morgenson, represent the most comprehensive and downright indictment-worthy works on the Goldman-AIG matter--one which has come to symbolize what has amounted to nothing less than the greatest looting of the underclasses by the status quo in U.S. history (and, perhaps, in the history of mankind). After reading this, and the selected works linked at the bottom of this post, IMHO, it becomes virtually impossible not to ask the question: Where are the indictments?
It should be noted that--between TARP Inspector General Neil Barofsky's Office and the Securities and Exchange Commission--there are no less than six ongoing federal investigations of Goldman and AIG now underway as a result of this and other, related actions of those two firms. (Whether Attorney General Holder and the Department of Justice are also investigating the matter is anyone's guess. In any event, I would assume it would not be publicized if that was the case.)
Will anything become of those (known) investigations? Only time will tell. But, if legal actions to date are any indication of actions to come, it would appear that, aside from just a handful of exceptions such as former Bank of America CEO Ken Lewis, only/mostly lower-level mortgage brokerage executives are bearing the brunt of any significant regulatory/legal enforcement efforts. After all, as Goldman CEO Lloyd Blankfein even told us, just three months ago, he was: "Doing God's Work." Heh.
I wonder how the record-breaking (for a supposed "recession," if not a depression--as if the difference in the definition really means anything to them) tens of millions of unemployed and underemployed, along with the tens of millions of people newly-introduced to poverty and foodstamps over the past 24 months, feel about that?
Then again, they do vote, don't they?
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UPDATE: Hey, I'm NOT an ageist, but this is interesting and worthy of note. From the comments...
Since the SEC's Chief Operating Officer of . . .
Enforcement is one Adam Storch, a 29-year-old from Goldman, I'm sure the SEC will be right on this! Seriously, a 29-year-old former VP of Goldman in a newly created position to "streamline" their work.
Where are the subpoenas? Where is the investigation? Where are the indictments and the convictions? Nowhere!
All politics is class-warfare.
by dhfsfc on Sat Feb 13, 2010 at 09:48:32 AM EST
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First, some related commentary and background from (as I've stated it before) the individual who gets my vote for the most important person on the planet, Nobel Prize-winning economist and Columbia University professor of economics Joseph Stiglitz. From the must-read, January 2009 Vanity Fair article by Stiglitz where he details the five key reasons why our country's in the economic mess it's in, today: "Capitalist Fools."
This guy has been spot-on, perhaps moreso than anyone else in his field. On top of that, he's also one of the leading environmental and social activists in the world. In virtually every country except the U.S., as Newsweek noted, he's treated like a rock star. Another Stiglitz fan, Obama economic advisor Austan Goolsbee, actually forwarded the article, "Chasing Stiglitz" (accessible via the link in the previous sentence), to me a couple of days before he was confirmed for his White House appointment, after reading one of my posts, right here. Too bad Larry Summers doesn't play nice with the guy. (IMHO, that's a positive comment for Stiglitz.)
Capitalist Fools
Joseph Stiglitz
Vanity Fair
January 2009
...The incentive structure of the rating agencies...proved perverse. Agencies such as Moody's and Standard & Poor's are paid by the very people they are supposed to grade. As a result, they've had every reason to give companies high ratings, in a financial version of what college professors know as grade inflation. The rating agencies, like the investment banks that were paying them, believed in financial alchemy--that F-rated toxic mortgages could be converted into products that were safe enough to be held by commercial banks and pension funds. We had seen this same failure of the rating agencies during the East Asia crisis of the 1990s: high ratings facilitated a rush of money into the region, and then a sudden reversal in the ratings brought devastation. But the financial overseers paid no attention.
No. 5: Letting It Bleed
The final turning point came with the passage of a bailout package on October 3, 2008--that is, with the administration's response to the crisis itself. We will be feeling the consequences for years to come. Both the administration and the Fed had long been driven by wishful thinking, hoping that the bad news was just a blip, and that a return to growth was just around the corner. As America's banks faced collapse, the administration veered from one course of action to another. Some institutions (Bear Stearns, A.I.G., Fannie Mae, Freddie Mac) were bailed out. Lehman Brothers was not. Some shareholders got something back. Others did not.
The original proposal by Treasury Secretary Henry Paulson, a three-page document that would have provided $700 billion for the secretary to spend at his sole discretion, without oversight or judicial review, was an act of extraordinary arrogance. He sold the program as necessary to restore confidence. But it didn't address the underlying reasons for the loss of confidence. The banks had made too many bad loans. There were big holes in their balance sheets. No one knew what was truth and what was fiction. The bailout package was like a massive transfusion to a patient suffering from internal bleeding--and nothing was being done about the source of the problem, namely all those foreclosures. Valuable time was wasted as Paulson pushed his own plan, "cash for trash," buying up the bad assets and putting the risk onto American taxpayers. When he finally abandoned it, providing banks with money they needed, he did it in a way that not only cheated America's taxpayers but failed to ensure that the banks would use the money to re-start lending. He even allowed the banks to pour out money to their shareholders as taxpayers were pouring money into the banks.
--SNIP--
The (Bush) administration talked about confidence building, but what it delivered was actually a confidence trick. If the administration had really wanted to restore confidence in the financial system, it would have begun by addressing the underlying problems--the flawed incentive structures and the inadequate regulatory system.
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(Reprinted with the encouragement and full permission of the author.)
Suspicious Timing Surrounding The "De-risking" of AIG's Toxic Obligations
Huffington Post
David Fiderer
1:06PM, Friday, February 12th, 2010
Because everything unraveled so quickly, no one scrutinized Standard & Poor's flip-flop on AIG. On Friday, September 12, 2008, S&P said it would, "continue discussions with the company over the coming weeks regarding liquidity and capital plans. Once we have more clarity on these issues, we could affirm the current ratings on the holding company and operating companies or lower them by one to three notches."
Of course, that never happened. S&P did not wait, and issued a downgrade the following Monday. It had at least one conversation with AIG that day, when only two things were clear: Nothing at AIG was settled, and the contagion effect from the Lehman Brothers bankruptcy was huge. The discussions could not have been especially detailed, since AIG's financial staff was preoccupied in its negotiations with Hank Paulson's deputy, Dan Jester, Goldman and JPMorgan Chase, who ostensibly were trying to put together a bank deal that would address S&P's concerns.
For S&P, the only way to find clarity at AIG was to peer into its own reflection. AIG's liquidity was dependent on its credit ratings, or more specifically, ratings triggers. And AIG's biggest problem - its unsettled disputes over the valuation of $62 billion worth of CDOs - was traceable to the reliance on AAA credit ratings of those CDOs.
For a financial company like AIG, liquidity is like oxygen; it can't live very long without it. To take the analogy a bit further, solvency is more like food; you'll die without it, but your lack of nourishment won't be apparent for a while. Around 6:40 p.m. on September 15, 2008, Fitchannounced its downgrade of AIG, and few hours later S&P and Moody's followed suit. Whether or not the rating agencies acted independently, or in good faith, is an open question. But there is no doubt that they all knew the consequences of their actions. The rating agencies cut off part of AIG's oxygen supply.
More specifically, AIG's unregulated subsidiary, AIG Financial Products, which operated under the financial guaranty of its parent, had hundreds of billions of dollars of trading positions in all sorts of derivatives. AIGFP's obligation to post cash margin on those trading positions was based on its credit ratings. The lower the credit ratings, the more cash margin required. As of September 12, 2008, if AIG were downgraded one notch by one credit agency, its expected liquidity drain would have been about $10.5 billion; if it were downgraded one notch by two agencies, the damage would have been $13.3 billion. During the evening of September 15, 2008, S&P downgraded AIG threenotches, from AA- to A-, and downgraded it's short-term rating from A-1 to A-2. Those downgrades, plus the downgrades at Moody's and Fitch, precipitated a $32 billion liquidity drain by month-end.
On September 16, 2008, when the government hurriedly put together a bailout package for AIG, everyone was focused on AIG's immediate liquidity needs. Certain ratings triggers, with 30-day lead times, were not given top priority. Those triggers had been tripped by downgrades from S&P, and not by those at Moody's. But 18 days later, after AIG had become a ward of the state, Moody's decided that it too would start the 30-day countdown on the ratings triggers of some other CDOs. On October 3, 2008, Moody's downgraded AIG from A2 to A3.
The timing these embedded rating triggers were part of the backdrop of Thomas Baxter's testimony for the House Oversight Committee on February [sic] 27, 2010. Baxter, the general counsel for the New York Fed, was part of the team that oversaw negotiations with banks holding credit default swaps on $62.1 billion worth of CDOs that the government purchased at par. Baxter gave some of the most important testimony of that day's hearings:
First of all, there was a critical deadline, Congressman, of November 10th. And that was the day that AIG was going to announce a $25 billion loss in its 10-Q for the third quarter. So we were looking at that.
And we were being told by the credit rating agencies that unless something happened with respect to the credit default swaps, on or before November 10th, that there was a strong probability of a downgrade.
Now, a downgrade would have been catastrophic. It would have brought us back to where we were in September, on the brink of an AIG bankruptcy.
So from those of us who were working on -- at the New York Fed, we looked at that as a hard deadline. And the execution risk of failing to get the credit default swaps torn up by that date was -- was -- it would put us back on the brink of bankruptcy.
So that was -- that was the risk of deal failure. That was the execution risk. So we had to get the deal done.
AIG had been unable, as Mr. (Elias) Habayeb [AIGFP's CFO when a lot of those toxic assets were booked] has testified, to get that -- those credit default swaps torn up.
On November 6th, Congressman, we got formal authorization from Stasia Kelly, who was then AIG's general counsel, to take over and see whether we could get those credit default swaps terminated by deadline.
So we were operating against the clock to do that.
Our choices were, should we push for concessions and try to use whatever leverage we had to get those concessions, or should we simply go to par, which would apply to every counterparty -- and the way par works is you offset the collateral that these counterparties had been pulling out of AIG against you offset that collateral against the par price of the bonds.
Moody's announcement, contemporaneous with the November 10 deadline, backs up Baxter's testimony. AIG's A3 rating, which had been under review for possible downgrade, was affirmed, following the government-supported restructuring plan, which included "de-risking" the CDO exposures.
The dates are critical. The New York Fed was first authorized to negotiate on behalf of AIG on November 6th, 2008, which was a Thursday. And the New York Fed believed that the absolute deadline for setting everything with 14 different banks was the following Monday, when AIG was required to file its 10-Q with the SEC. That might have been possible if the banks were motivated to cooperate. But, as The New York Times reported, one of the largest CDO counterparties, Goldman Sachs, "did not own the underlying bonds. As a result, Goldman had little incentive to compromise."
If people have little incentive to compromise, they don't make themselves available over a four-day holiday weekend. It's a safe bet that most senior bankers and bank regulators in France took that Monday, November 10, as a vacation day to segue into Armistice Day. The same was true for a lot of bankers in the U.S., where Veterans Day is a bank holiday.
There's another reason why a banker would be disinclined make himself available over the weekend. He would need to assemble a group of very a senior executives in order to say, "I need an emergency approval to agree to something that will force us to write off billions of dollars on a deal that's been the subject of contentious negotiations for the past fifteen months. And the reason why I need an answer right away is because..." If you convene such a meeting, you need to be prepared for tough questions, which may include, "Are we legally required to do this?' or "Are the other banks also taking a comparable haircut?" If you value your career, you'd better have some good answers to show that you are acting on behalf of the bank.
On Friday, November 7, 2008, a [https://www.tcw.com/About_TCW/Our_Firm/Our_History.aspx subsidiary of Societe Generale], another large CDO counterparty, put AIG on notice that it had defaulted on the swaps of several CDOs. And those defaults could not possibly be cured. Those defaults were triggered by the S&P and Moody's downgrades.
Trust Company of the West, an SG subsidiary, was the collateral manager for Davis Square Funding I, Davis Square Funding II, Davis Square Funding III, Davis Square Funding IV, Davis Square Funding V, Davis Square Funding VI, and West Coast Funding I. All of those deals, with the exception of Davis Square Funding II, were originally structured and underwritten by Goldman. Each of those deals is a separate legal entity. Each of those entities had entered into one or more swap agreements with AIG Financial Products. Under the various swap agreements, if AIG were ever downgraded below certain levels, AIG had so many days to find a substitute swap counterparty, with a higher rating, to assume AIG's contractual obligations. Of course, in the fall of 2008, no substitutes were to be found. Nobody was interested in becoming the swap counterparty to a bunch of toxic CDOs.
If 30 days had passed following the downgrade, and AIG had failed to find eligible substitutes, the entities were entitled to terminate the swaps. But Trust Company of the West did not deliver those notices of termination on October 15, or November 3, when those rights first became effective. Only after the New York Fed took over negotiations did TCW deliver that notice on Friday, November 7, the last business day before AIG was required to file its 10-Q, and the day after the New York Fed took over the process. At the Paris headquarters of TCW's parent, the business day is over by noon, New York time.
When testifying before Congress, Neil Barofsky, the Special Inspector General for TARP, said, "I think very much these negotiations could have been conducted in a different way, a more forceful way." Yes, the negotiations might have been very different, if the New York Fed had more than two business days to wrap up a a contentious 14-bank negotiation that had dragged on for 15 months.
The unexamined part of the negotiation was AIG's incentive to acquire majority control over these seven CDOs. The deal with the banks was twofold: terminating the credit default swaps which insure the banks' investments ion these CDOs, and also turning over the underlying CDO investments. By acquiring those investments, the New York Fed, through Maiden Lane III, also acquired majority control over the seven CDOs managed by TCW. On March 6, 2009, TCW went to court, seeking a declaratory judgement to terminate all the relevant swaps. Because the New York Fed controlled the legal entities, it was able to effectuate a withdrawal of the suit 10 weeks later. The Fed's ability to control the process was part of the "de-risking" that Moody's referenced on November 10, 2008. It's an issue that has not been adequately examined by Barofsky, Congress or the press.
GRAPHIC: CDO's WITH SWAP TERMINATION EVENTS
As with everything related to the backdoor bailout of the banks, timing and dates are critical. In the weeks and months following the de-risking of AIG's CDOs, the ratings of those seven deals were slashed severely. The ratings agencies are regulated by the Federal government. There is no way that Congress can understand the AIG bailout without carefully scrutinizing the decision making process behind these specific ratings and subsequent downgrades.
GRAPHIC: MOODY'S RATINGS DOWNGRADES ON SELECTED AIG CDO'S
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Selected/related pieces on this topic by the NY Times' Gretchen Morgenson and HuffPo's David Fiderer--
From blogger and banker David Fiderer, at HuffPo (commenting on Gretchen Morgenson's NY Times piece, linked in the next line, below):
The Times Story On Goldman's Role in AIG's Downfall Is More Damning When Placed In Context (2/8/10)
The latest from Pulitzer Prize-winner Gretchen Morgenson on this, at the NY Times: Testy Conflict With Goldman Helped Push A.I.G. to Edge (2/7/10)
David Fiderer's original post on the AIG-Goldman bailout at HuffPo: How Paulson's People Colluded With Goldman To Destroy AIG And Get A Backdoor Bailout (1/24/10)
Gretchen Morgenson, over at the NY Times, just before this past Thanksgiving: Revisiting a Fed Waltz With A.I.G. (11/22/09)
One of Gretchen Morgenson's (NYT) best pieces of the entire recession: Member and Overseer of the Finance Club (4/27/09)
I've posted quite a few diaries on this topic, dating back to mid-September, 2008.