Sunday, February 14, 2010

...A.I.G. was at the center of the web of bad business judgments, opaque financial derivatives, failed economics and questionable political relationships that set off the economic cataclysm of the past two years. When A.I.G.'s financial products division collapsed -- ultimately requiring a federal bailout of $180 billion -- those who had been prospering from A.I.G.'s schemes scurried for taxpayer cover. Yet, more than a year after the rescue began, crucial questions remain unanswered. Who knew what, and when? Who benefited, and by exactly how much? Would A.I.G.'s counterparties have failed without taxpayer support?
...we know where the answers are. They are in the trove of e-mail messages still backed up on A.I.G. servers, as well as in the key internal accounting documents and financial models generated by A.I.G. during the past decade...
...Once the documents are available for everyone to inspect, a thousand journalistic flowers can bloom, as reporters, victims and angry citizens have a chance to piece together the story.
Perhaps A.I.G.'s employees would also be judged not guilty. But we would like to see the record to find out. As fraud investigators, we would like to examine the trading patterns of A.I.G.'s financial products division, and its communications with Goldman Sachs and other bank counterparties who benefited from the bailout.
Congress wants answers, too. This month, during hearings on Ben Bernanke's nomination to a second term as chairman of the Federal Reserve, several senators fumed about being denied access to his A.I.G.-related documents...

Yves Smith, publisher of Naked Capitalism, was all over this story (before it even hit the newsstands) last Saturday evening, in: "Spitzer, Partnoy, Black Call for AIG Open Source Investigation (and Goldman Implications)."
Putting it simply, the question is: How could our government let the monoline insurance companies--the insurers of most "agency" paper and state and municipal bonds in this country--collapse while choosing to make an exception to this practice as they singled-out AIG for the largest corporate bailout, by far, in our country's history?
Do economist, University of Missouri-Kansas City professor and white collar crime investigator William Black, former NY Governor and Attorney General Eliot Spitzer and University of San Diego professor of law Frank Portnoy have their eyes on the prize: federal indictments of former Treasury Secretary Henry Paulson and Goldman CEO Lloyd Blankfein? Or, saying it more accurately, finding the smoking gun that's the difference between indicting or not indicting former Treasury Secretary Henry Paulson and his successor at Goldman Sachs, current CEO Lloyd Blankfein. What am I referencing you ask? That'd be the "potential" bailout fraud, corruption and malfeasance story about AIG (diarist's note: and Goldman Sachs) that just won't go away. More specifically, you may read all about it in a piece posted at Naked Capitalism, today; but, let's start with an Op Ed piece Spitzer, Black and Partnoy published this past Sunday in the NY Times: "Show Us the E-Mail."
...While the subprime deals and CDOs were obviously going bad, an argument was made by many people at the time that the aggressive mark downs by AIG acelerated the death spiral for the market. It is pretty clear, here and elsewhere, that Goldman was the one that initiated the mark downs of collateral value. It would be interesting to explore this all the way through. Though not discussed in this article, Goldman shorted subprime through the Abacus deals, and perhaps elsewhere. This gave them an incentive to force mark downs. the intermediation deals described in the article, combined with AIG's collateral posting, gave them another incentive to be agressive with mark downs. They were acting like they wanted to grab the money before anyone else could get their hands on it. This would have raised some issues in an AIGFP bankruptcy. (note - Hank Greenberg suggested that this was going on in his october 2008 testimony but there was a chorus of attacks on him for being a crook and unreliable, thanks to his problems with Spitzer.)
So here we have the pattern:
1. Goldman creates or sells $23 billion (or more) of CDOs and stuffs them into AIG.
2. Goldman proclaims to the world they have no exposure to CDOs and warns that banks and insurers with CDO exposure will get downgraded.
3. Goldman initiates the mark downs of CDOs with AIG and others, acelerating the market's downward spiral.
4. Huge mark to market losses lead insurer and bank credit to freeze, short term markets to lock up, ABCP to collapse.
5. AIG posts as much collateral as it has to Goldman, who has more aggressively marked down the exposure.
6. Bond insurers are downgraded, banks begin commutations with them.
7. AIG fails, Fed steps in, Goldman gets bailed out at par.
Yves here. This looks like no accident. I suspect it was no accident...

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