This morning, Frank Rich asks us in his weekly NY Times column: "
Has a 'Katrina Moment' Arrived?" There's a diary on the Daily Kos Rec List about this article as I write this. But, this diary is about a bit of new information relating to compensation received to date, and going forward, by entities such as AIG.
For the record, however, I would answer, "Yes," to Frank Rich's question.
But, I say that knowing that there may be an even bigger outrage behind the AIG story than just executive compensation issues. It may be somewhat of a scoop, too. Then again, maybe not. Here's the crux of the issue (see below). You tell me?
Given the current administration's upcoming plans for "Wall Street Bailout II," it certainly looks like at least some--if not all--AIG counterparties (and, perhaps, other buyers of Wall Street's "toxic trash," as well) may stand to reap hugely
excessive federal compensation for their derivatives and underlying securities, via perfectly legitimate, federally-sponsored bailout programs.
We're not talking about 100 cents on the dollar; try 150 cents on the dollar...for toxic paper that's only worth pennies on the dollar.
Essentially, the stage has been set to allow these entities to legally double-dip into federal coffers in coming days.
Yes, in some instances, given how our government is now structuring the Wall Street bailout--while putting any further Main Street stimulus plains on hold--many Wall Street firms may actually be legally empowered to receive upwards of a total of 150%+/- of the value of their toxic trash, primarily due to poorly-managed efforts at the outset of the first leg of the TARP bailout, in the last quarter of 2008, when then-Treasury Secretary Henry Paulson was running the show, and when initial AIG (and other) counterparty payments were distributed.
But, first, more on Frank Rich's observation from the Sunday NY Times.
Has a "Katrina Moment" Arrived?
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By FRANK RICH
Published: March 21, 2009
A CHARMING visit with Jay Leno won't fix it. A 90 percent tax on bankers' bonuses won't fix it. Firing Timothy Geithner won't fix it. Unless and until Barack Obama addresses the full depth of Americans' anger with his full arsenal of policy smarts and political gifts, his presidency and, worse, our economy will be paralyzed. It would be foolish to dismiss as hyperbole the stark warning delivered by Paulette Altmaier of Cupertino, Calif., in a letter to the editor published by The Times last week: "President Obama may not realize it yet, but his Katrina moment has arrived."
Six weeks ago I wrote in this space that the country's surge of populist rage could devour the president's best-laid plans, including the essential Act II of the bank rescue, if he didn't get in front of it ... Yet last week's events suggest that the administration learned nothing from that brush with disaster.
Otherwise it never would have used Lawrence Summers, the chief economic adviser, as a messenger just as the A.I.G. rage was reaching a full boil last weekend. Summers is so tone-deaf that he makes Geithner seem like Bobby Kennedy.
Rich reminds us of the the reality that it took "...six months for us to learn (some of) what A.I.G. did with our money. "
Rich touches upon a point I'd like to expand upon now. It may very well turn out to be a tempest in a teapot--an outrage exponentially greater than anything we've learned with regard to Wall Street executive compensation levels. Here is Rich's comment:
...We need to understand why some of that money was used to bail out foreign banks. And why Goldman, which declared that its potential losses with A.I.G. were "immaterial," nonetheless got the largest-known A.I.G. handout of taxpayers' cash ($12.9 billion) while also receiving a TARP bailout...We must be told why taxpayers have so little control of the bailed-out financial institutions that we now own some or most of. And where are the M.R.I.'s from those "stress tests" the Treasury Department is giving those banks?"
On December 28th, 2008, the stock market website, Seeking Alpha, in a post entitled, "AIG Becomes the Fed's Vehicle to Buy Toxic Assets," enlightened us to the reality that AIG's counterparties were being compensated for their losses but, simultaneously, they were also enabled by the government (via AIG) to actually hold onto their toxic trash while pocketing taxpayer-backed bailout money for it.
AIG Becomes the Fed's Vehicle to Buy Toxic Assets
by: Michael Steinberg December 28, 2008
The Washington Post (from Bloomberg News) "With Fed's Help, AIG Unloads $16 Billion in Credit Default Swaps" reports that American International Group (AIG) retired another $16B face value of credit default swaps for $6.7B by purchasing the underlying securities and canceling the contracts. The insured (counterparties) were able to keep the more than $9B in collateral that AIG posted. The counterparties were taken out at par. So far, the Fed's Maiden Lane III special purchase fund has purchased $62.1B face value of CDOs from AIG's counterparties. The Fed has committed to purchase up to $70B face value of CDOs from AIG's counterparties at roughly 50% of par. Each time the Fed is allowing the counterparties to keep all collateral.
Why has the Fed completely removed the risk of AIG as a counterparty in CDS transactions? Perhaps the Fed views moral hazard as a foreword looking constraint and AIG is just trying to unwind past regrettable activities. More likely the Fed is viewing AIG as a conduit to funnel capital into favored financial institutions. By forcing counterparties to sell the underlying CDO securities in order to receive full recovery, the Fed is liquidating toxic assets and preventing pure speculators from participating. But by paying close to par, when posted collateral is included, the benefit of price discovery is missing.
AIG told shareholders that the Fed would negotiate the CDO purchases on AIG's behalf and AIG's participation in any price appreciation would be limited. The implication was that the Fed would use its strength to be an advocate for AIG. Quite the opposite turned out to be true. Instead the Fed used its strength to force a weakened AIG to make whole its stronger counter parties.
Diarist emphasis is in bold.
What we're being told in this article is that all this toxic paper is still in the hands of the folks that have already been compensated for it by our government! How could that be? Apparently, we've knowingly let these AIG counterparties (and, perhaps other recipients of other bailout funds) keep it.
Next week, per [news articles throughout Saturday's MSM], Treasury Secretary Geithner will [formally announce a series of federal programs to subsidize the private sector's purchase of all of this toxic paper]--and more--from these very same entities.
Now, with the advent of new Financial Accounting Standards Board regulations that redefine the meaning of "Net Income," along with the Treasury Department's and the Fed's new TALF, TLGP and related programs, it would appear that these same counterparties may be enabled to:
a.) place those same derivatives and underlying securities--derivatives and securities for which they've already been compensated once by U.S. taxpayers--on their books as assets at mark-to-model valuations (i.e.: 100 cents on the dollar or more, for garbage that's only worth pennies on the dollar); and/or
b.) repackage them and offer them through to the shadow banking sector via TALF and a few other programs, collecting more government-sponsored subsidies--equivalent to possibly much more than the derivative's original value--in the process of doing so, thus...
c.) earning upwards of 150% in taxpayer-subsidized returns on paper that's actually worth only cents on the dollar.
Recapping, according to previously announced plans, our government is about to provide up to 85%, or more, of the funds (apart from a 10% to 15% insured buy-in from the shadow banking sector) to the private sector to (again, for a second time,) buy these very same securities--and much more--from the AIG (and other entities') counterparties that were enabled to hold onto after they were first paid off/for by the taxpayers in the fourth quarter of 2008!
While Frank Rich refers to a potential "Kartrina Moment" in today's NY Times, I believe I may have just identified it. Because an event such as paying up to 50% more than the (most outrageous) mark-to-model valuations for this junk really would bring out the pitchforks and the kerosene torches.
Please! Tell me I'm wrong.