Randy Miller

More AIG Controversy: Maiden Lane III

One more thing. CDS has to be subject to gaming laws. IF somebody makes money on a naked CDS, they should have to pay an exorbitant tax rate. Even if they have the underlying asset, they should be taxed highly if they profit, as opposed to just being made whole.

For example. Company A sells B an asset valued at $1 million, B paying A that amount. The asset happens to be a package of mortgages in Des Moines Iowa.

B purchases Default protection. The mortgages perform, and B over the following 2 years, receives $100,000 in interest, and $100,000 in principal. The remaining balance on that mortgage pool is $900,000. On January 1 of year 3, Des Moines suffers a shock in their housing market, and everyone defaults on their loans. The foreclosure value of the homes is now $500,000, so B has lost $400,000 in market value.

IF the provider of default protection pays B $400,000, he is now whole, no tax liability. IF B purchased default protection from 2 different companies, and is paid $800,000, he has profited from this adverse event, and should be taxed heavily on the $400,000 profit he made from the unfortunate events in Des Moines.

IF C had no stake in the Des Moines market, and purchased default protection, and received $100,000 from counterparties, that should be taxed heavily, because he was purely betting on the failure.

We should also look at put options on securities.

Why all this? Because it is possible for someone to profit from unfortunate events, and in some cases, they can influence those events. IF B had the power to force the mortgage holders into default, and did so, he should not profit by that. It would be no different than if I bought insurance on my neighbors house, and when it started to burn one night, I failed to call the fire deparatment. I should not profit from my action in that case, or lack of action.

I have read through the SIG's report, and we still don't know how much of the CDS was naked. If the Fed really did end up with the underlying CDO's in toto, maybe none of it was naked.

More AIG Controversy: Maiden Lane III

One word: Clawback. GS and the other big financials profits and resulting bonuses are in the billions because of this sweetheart deal. Get the money back, and then see what their bonuses are. Sanctity of contracts? Are these the same guys who voided union contracts and 200 years precedence in paying secured debtors first? What a crock.

Quit whining like wimps and victims. Get the money back.

Financial reform should say:

THe US government will never again guarantee the existence of a private company or guarantee its debts. No implicit guarantees , no explicit guarantees. Companies must be allowed to fail, so better companies can absorb their human and physical resources, and put them to better use.

Rating agencies should be held accountable for their ratings, eliminate conflict of interest inherent in the company holding the rated bonds paying the rating agency. IF the ratings agencies had done their jobs, they would have rated those super senior CDO traunches correctly. Remember, the real panic last fall was that no one knew what anything was worth.

Geithner to Blame for Outrageous Goldman Bonuses

I cannot say it enough times. GS profited greatly from the AIG bailout, in that they did not take a loss on their AIG exposures. And if somebody says to you, "but GS had their AIG exposure hedged", turn to them and say "would GS have gotten 100 cents on the dollar if AIG had defaulted, because if you believe they would have, you are a fool or a liar."

The taxpayer paid GS 100 cents on the dollar on their AIG exposure, an amount they would not have gotten if AIG had gone under. Why do I say that? Because whoever GS's counterparties were with the AIG hedge, those same entities were probably also counterparties to everybody else who was exposed to AIG. There was no combination of counterparties who could come up with the $85 billion the government paid to AIG. Therefore GS, and a lot of other Big Financials, would have gotten pennies on the dollar.

And why is AIG stock in the forties?

Congress' Handling of AIG Bonuses Is Shameful

We have to sort out the propaganda, coming from Wall Street, some in the government. etc

Henry Paulsen used fear to stampede Congress into the original TARP plan, and Barney Frank helped him. Even today, Bernanke keeps saying things would have been much worse if there had been no bailout.

Liddy reads death threats to plant fear that Congressman will be culpable if names were released.

Liddy and others planting the fear that only the guys who made the mess could straighten it out. And that we are cutting our own throats by criticizing the current crowd at AIG.

So, what if, instead of TARP, Congress had passed a law giving FDIC authority of AIG and other large companies, as Geithner proposed today. FDIC could have stepped in on a Friday night in October, split off the genuine insurance side of AIG, the strong viable parts, and said they would be open for business on Monday morning with temporary government ownership until those units could be sold. They could have frozen the Financial Products division, and re-written the contracts to say that the government would use the proceeds from the sale of healthy units to pay the counterparties WHEN THEY ACTUALLY HAD A DERIVATIVE FAIL TO PERFORM.

That is the one pertinent fact that seems to be ignored. I think it was the head of OTS who said last week in Congressional testimony that not one of the the super senior traunches that AIG FP insured has gone into default. Their value may be lower, but they are still performing. IF AIG FP had just re written the CDS contracts to say that we will pay up if the insured derivative actually fails to perform, they would not have needed to send one dime to Goldman Sachs, the French banks, the German banks, etc. In some cases AIG has used taxpayer money to buy some of the CDO's , etc, which will be fine as long as they keep paying. The value of the counterparty CDO had gone down, and because of the way AIG FP wrote those contracts, AIG had to pay up to cover the lowered value. The banks in particular were using the value of the insured CDO's as capital for regulatory purposes, so when the CDO value went down, their capital base shrunk, and they were going to have problems with their regulators. If the governments had just said, even though these CDO's have lost value, they have still not defaulted, so list them in your capital statements at par, in this one special case. You would be telling the actual holders of those CDO's that they would be made whole in the event of a default, which is what insurance is supposed to do.

Of course the speculators holding naked CDS would be hosed. We need to know how much AIG money went to those speculators. A month ago I was concerned we would never know. One value of the populist outrage is that it drew public attention to AIG per se, so the good reporters could say yes, the bonuses are bad, but look what has been going on in the back room. Instead of distracting us from those back room dealings as has been charged, the outrage brought more attention to them.

The way the contracts were originally written would be like writing fire insurance for a house in the woods, and during a forest fire AIG would have to pay money just for the fire approaching the house, even though the fire never gets there or damages the house. This was not a contract written in the best interests of anyone but a small group of people.

But... Cassano still got his fees, and put them in the bank.

Congress' Handling of AIG Bonuses Is Shameful

500 people wrote comments in the Times concerning the Desantis letter, and the overwhelming majority were very critical of Desantis, his sense of entitlement, his sense that only the fools who created the AIG mess could straighten it out. Read the comments. A couple of them may be over the line, but most were pretty well thought out. Desantis threw gas on the fire, despite what the New York related media thinks.

Instead of trashing the hard working Americans who are upset about Wall Street culture, do what the President said the other day, get out to North Dakota, Iowa, Arkansas, spend some time with real people, who are worried about financing their kids' state school tuition, worried about speculators driving the price of oil above $100 again, worried that they will now delay retirement until they are past 70. Sit with them in a small town cafe or at their supper table, and maybe you will get a glimmer of understanding.

We are not a bunch of rubes who can be stirred up by any demagogue. Congress did not stir up this rage. That small town banker Jim Bunning talks about whose entire years profits were wiped out by the new FDIC assessment, an assessment caused by your friends on Wall Street, that banker was mad a long time before Jim Bunning talked to him. Congress is funneling that rage, and you had better listen. Right now there are a lot of people in this country who would vote for Global warming to flood Manhattan, and for all the apologists in the media to be working at a small city TV station covering the latest car wreck.

Todd Sullivan, you guys in the media are a big part of the problem, but you are never going to see that because you have totally lost your objectivity. You are not the laughingstock that CNBC has become, but you need to step back and look at your career. Every financial reporter should have to divulge who they socialize with, because you cannot be objective about people who are your friends.

AIG: Fear and Loathing on Wall Street

Too many people listened to the Liddy testimony instead of the morning panel, which consisted of regulators, representatives of the credit unions, etc. One congressman asked several members (to paraphrase):
Congressman X: " Do you have good people who understand these derivatives?"
Regulator: "Yes"
Cong: "Did you have to give them a $2 million bonus to keep them?"
Regulator: (Laughing) " No, they get around $100,000 per year in salary"

The guys in AIG FP who insist they need to be kept are guilty of extortion. Get real.

Maybe the system is working. 15 out of the top 20 have given the bonuses back. Some of them are doing that because it is the right thing. Some fear exposure. Let's see, fear of being exposed doing wrong..... I think they call that accountability. And as far as the death threats, that's a red herring. Nobody takes them seriously, Liddy read them for the shock value. Most of the bonus money will come back, the foreigners who keep it should be fired, and then we can get onto the real issue, which is the payments to the banks and Goldman Sachs.

The AIG Scandal

Nobody is answering the most important question. How much of AIG's $60 billion loss went to pay naked CDS? John Paulson put $22 million into a CDS betting that Lehman would fail, and received $1 billion in return. Somebody with pretty deep pockets paid that off, and we need to know if it was AIG.

Why is Cassano, the head of AIG financial products not in jail. He made CDS so complicated that nobody could comprehend it, and the big wheels at AIG like Sullivan and Greenberg were not humble enough to admit that. And then Cassano said a little more than a year ago that he could not see any way that AIG would lose one dollar on CDS.

Go after Cassano. Hold all payments to counterparties who bought naked CDS from AIG FP until they can prove they had nothing to do with driving down the value of the underlying asset.

If something seems to good to be true, it probably is, so stay away from it.

If something is to complicated to understand, be humble enough to admit that.....and stay away from it.