Financials Watch: AIG Brouhaha Distracts from Other Improprieties

Magicians and pickpockets practice the art of deception. In the first case we gladly pay to be deceived, in the second we would pay even more not to be. In order to perform their acts successfully however, both groups must understand the value of distraction; have quick hands and perfect timing.

It is not known whether Congress hopes to join the first or second group, but whichever book they are reading, it is obvious they are up to the chapter on distraction as the brouhaha they have sparked over the $167MM paid to AIG employees seems trifling when compared to the $170BN they pumped through AIG to settle that company’s seemingly ceaseless desire to continually double down on ever increasingly bad bets. If you stand back far enough it is quite a funny sight.

The rest of Wall St., and most probably Bank of America (BAC), is enjoying the brief respite of having their own compensation plans under the arc lamps and microscopic vision of Congress. I would imagine Ken Lewis is sleeping for the first time in weeks.

To show their appreciation, the constituents of the XLF rallied 6.49% yesterday while the CDS for Citigroup (C), Capital One (COF), Morgan Stanley (MS), BAC, Goldman Sachs (GS) and JP Morgan (JPM) all continued to narrow, with all but C and COF back below the levels seen on February 23rd and seeming to head for the end of February lows.

It has yet to be determined whether “what leads you down leads you up” or “new bull markets require new leaders” will win the battle of the adages but going into 1st quarter earnings season the one thing that can be said is that “hope springs eternal”.

Even further from the fray, Fortress Group (FIG) received a double mention in the papers yesterday. The first was an announcement that its 4th quarter net loss was $140MM or $1.50 a share vs. $29.3MM or $0.43 a share for 4Q07. The stock closed last night at $1.59 after having closed as low as $1.08 on March 6th, so people must feel that the money they have refused to return to investors will produce enough fees to make up for the firm’s bad bets.

The other bit of news surrounding FIG was their interest in the TALF plan. That smart guys on Wall St. think they can beat the magicians, the pickpockets and the government at their own game is not news. What is interesting is how the banks have morphed their TALF oriented offerings for investors such as FIG.

Initially purchasing the TALF securities from a dealer would also give that dealer unfettered access to the customer’s books. This requirement was instituted by the Fed during the TALF creation process. It was not acceptable to FIG and its brethren, so a few banks, JPM and Barclays PLC (BCS) specifically, have created investment vehicles which allow investors to circumvent many of the Fed’s restrictions.

JPM and Barclays have now set up trusts to buy the TALF securities, (to say these vehicles look a lot like CDO’s would be an understatement) with money borrowed from the Fed. The investors then buy the trust certificates earning TALF security type returns without all those messy Fed regs.

This all obviously helps the Treasury spend an additional $1 Trillion of Federal Reserve financed money. Given that the investors only have to pony up between $5 and $14 to buy $100 worth of returns means that it cannot be hurting firms like Fortress either.

While Congress is diligently practicing its distraction exercises it had better keep its timing sharp or someone will ultimately figure out that not only are they trying to get back from AIG’s employees 1/1000 of what they spent on AIG’s IOU’s but that the TALF plan is a thinly veiled bailout of the hedge fund industry.

Hey, if you’re going to increase taxes on the top 2% of wage earners you have to make sure the 2% is worth taxing.

Enjoy the week.

Comments

[athena:]

Of course they have to bail out the hedge funds. Where do you think these guys have their own money invested? Trust me when the general public finds out about these sweetheart deals, and they will,
the AIG bonus outcry will look like the joke that it is.

Mar 18 09:23 AM

[User 360844:]

Excellent article Jim!

Mar 18 09:26 AM

[morph366:]

Good insight into another new scam.
You say that "someone will figure out.... that the TALF plan is a thinly veiled bailout of the hedge fund industry." It sounds like you have already!

Mar 18 12:07 PM

[dcb:]

I urge you to write the white house, congress, etc about this. they actually appear to understand when they fear they won't be elected again. I have been on every board the entire weekend posting much of exactly the same thing. This will never be stopped unless enough people wake up and get the fear of god into congress. Our only protection against lobby money is in numbers. Let your voice be heard.

Mar 18 07:09 PM

[CJJ:]

Who are you all going to vote for when people start listening to you and we're all poor and destitute. Not because of any of the obvious corruption of the day, but because you "Free Market" champions "right the economy" by setting it back about 100 years and lead us to a 40% unemployment rate in the spirit of cleaning things up???

If this occurs it will be a classic case of the retaliator pays the price. Coming to power under such tense and terrible circumstances and then totally blowing what is left will lead to physical harm. Maybe that's why the people touting this crap ARE NOT running for office. They are very good at writing blogs and posts, but most don't have the balls or fortitude to go into office.

You are the same type of people who whine about high gas prices but then say energy reform is too expensive once gas prices go back down.
You are the same type of people who whine about the exponential health care costs of the country but say that its too expensive and complex to fix healthcare.

Mar 18 10:36 PM

[User 331498:]

good points Deep, biggest side show on earth.

while AIG was the guy in the prison "covered wagon" for the street we taxpayers get to bail out the gangbangers. great

Mar 19 09:31 AM

[Al-USA:]

Good article.

So much for the "free" markets. And so much for capitalism...

Mar 19 11:49 PM