AIG: How It Spent Your Tax Money 17 comments
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For those not following the AIG (AIG) saga - there is a lot of dirty laundry going on. First we were told it's an $85 Billion bailout, but in a couple of steps after it's now increased to $123 Billion (so far!) It has been very difficult to sell AIG assets to pay off this loan thus far.
If you are into this type of thing and want some very interesting reading there is a damning Bloomberg article on how the former CEO of Goldman Sachs (GS) "saved AIG" and the first batch of money went in large part directly to Goldman Sachs (GS) and Morgan Stanley (MS). It will get the blood boiling if this is your type of thing - so essentially your tax dollars went from your pocket to Goldman and Morgan via a quick pit stop at AIG.
- Sept. 29 (Bloomberg) -- As much as $37 billion from federal bailout loans to American International Group Inc. has gone to investment banks including Goldman Sachs Group Inc., the firm Treasury Secretary Henry Paulson used to run.
- ``It was the biggest crisis ever -- if you're an investment bank,'' said Joshua Rosner, a managing director at investment research firm Graham Fisher & Co. in New York. ``We didn't just save AIG. We saved the counterparties, the banks. It's true that it would have been a disaster, but it would have been a disaster for them.''
- Paulson's successor at Goldman, Lloyd Blankfein, was the only chief executive at a meeting Sept. 15 at the New York Federal Reserve Bank at which the troubles at AIG were discussed, although representatives of other firms were present, a Fed spokesman said.
- The payments show how bailouts engineered by Paulson and Federal Reserve Chairman Ben Bernanke are beginning to shift money to Wall Street firms involved in subprime mortgage trading.
Now, we have the credit default swaps - which are the unregulated instruments that almost everyone in the industry is now agreeing have been gamed beyond belief. Remember, this is like buying life insurance on someone else - obviously if you can cause bodily harm to that person and collect - you will have a huge carrot to try to do it. With financials, which are based on trust and relationships, it has been an easy game - this "insurance" was supposed to be for people who actually held debt of the companies, but anyone can buy it. And now the bill for driving Lehman Brothers (LEH) into the ground is coming due - and certain institutions who bought this insurance are going to get a fat payday. I'd LOVE to see the list of these names - wouldn't it be interesting to see who made the most money betting on the downfall.
Cramer has an excellent piece here on "the game" and how our tax money is literally going to be transferred to many of these hedge funds who were playing the CDS game we've described the past few months. Worth a listen.
Again, this insurance was in theory supposed to be for people who actually HOLD debt - BUT Lehman (just one example of many that this game was played against) ONLY had $158B worth of bonds, but there was more than DOUBLE the amount of "insurance" against the debt. Meaning each bond was "insured" (cough) twice. No different than naked short selling really when for each share in existence, there are multiple shares "created" and bet against it so the supply / demand equation is completely out of kilter. That (naked short selling) was ok too, as long as the investment banks and their customers were profiting from it - only when the naked short selling turned on them, did they run to Capital Hill and the White House to get it changed. What a crock.
SEC Chairman Cox's past history? He's a former Congressman. Just what was needed...not.
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Hedge funds, which have been selling stock endlessly to meet client redemptions, must be frothing at the mouth for next Tuesday, Oct. 21. That’s payday for everyone who took out insurance against Lehman Brothers' bonds. And bear-raiding hedge funds took out a heck of a lot of insurance against that investment bank.
This was all part of the short-sellers grand – and legal – plan to bring down Lehman, Cramer said. Hedge funds bought the insurance knowing they could push the stock down virtually unrestricted, spurring the ratings agencies to downgrade Lehman, further inciting fear, and on and on until the company collapsed. The fact that the U.S. government said it was done saving investment banks only aided the hedge funds’ cause. To them, that insurance was money in the bank.
Guess which company probably did the most underwriting of said insurance. Yep, AIG. That means the U.S government, which now owns most of AIG, will most likely spend next Tuesday cutting checks to the hedge funds involved. Cramer thinks this payout will erase whatever value might be left in AIG’s common stock. So the company’s going in the Sell Block.
And this doesn’t even take into account the myriad other issues at AIG.
Watch the video for Cramer’s take on last December’s analyst meeting, executive bonuses and company junkets and other legally challenging activities at the insurer.
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This article has 17 comments:
oh i get it, the big boys who are paying for the political campaigns are the same ones who want to benefit here.
Pay for a political party campaign and get away with destroying the savings and retirement security for countless of retirees.
> jack
Corruption exists. Why do the taxpayers need to pay the piper? I don't blame the greed of the hedge funds. They saw a sure thing and profited off it. So let AIG go bankrupt and liquidate and pay these hegde funds with that money.
"...That is your sin! Should I let you go on, you will ruin fifty thousands families, and that would be my sin! You are a den of vipers and thieves. I intend to rout you out, and by the eternal God, I will rout you out." (President Andrew Jackson 1832)
Suppose Today I sell a naked puts on the 100 stocks in the Naz 100. At the same time I buy puts on the NAZ 100 index. It is an arbitrage on the insurance premiums. Does that cause AMZN to go broke? It is nonsense to suggest that it does.
AIG sod the insurance either too cheaply or did not understand the credit quality of the paper it was guaranteeing. Both are the same effect.
Once AIG had to post the additional collateral because of the downgrade, they were looking at bankruptcy. The effect of the govt. plan on AIG equity holders has been about the same as bankruptcy. However, it was not necessary to destroy the rest of the financial system because AIG screwed up. The govt. money will come back when the different parts of AIG are sold off. Not much different from having a short term loan against land holdings. Banker calls it and you could be introuble. Something has to be sold - better to do it in a few months rather than a few days. I sure don't see this as a nefarious bailout of the "good ol boys network". When the parts are sold, the govt will be whole. AIG Shareholders took the licking.
Warren Buffett famously described derivatives bought speculatively as "financial weapons of mass destruction." In Berkshire Hathaway's annual report to shareholders in 2002, he said, "Unless derivatives contracts are collateralized or guaranteed, their ultimate value also depends on the creditworthiness of the counterparties to them. In the meantime, though, before a contract is settled, the counterparties record profits and losses--often huge in amount--in their current earnings statements without so much as a penny changing hands. The range of derivatives contracts is limited only by the imagination of man (or sometimes, so it seems, madmen)." The same report, however, also states that he uses derivatives to hedge, and that some of Berkshire Hathaway's subsidiaries have sold and currently sell derivatives with notional amounts in the tens of billions of dollars.[21] Berkshire Hathaway, with a market capitalization of $196 billion[22], certainly does have enough equity to collateralize or guarantee these contracts.