The Wall Street Journal explains (subscription required) how hedge funds are the ultimate beneficiaries of a substantial part of AIG bailout money. Hedge fund clients of Deutsche Bank wanted to bet against residential mortgage-backed securities (RMBS). So the Bank sold them protection credit default swaps.
Deutsche Bank wanted to hedge its exposure to its own CDSs, so it set up portfolios of notes, secured by residential mortgages, in off-shore jurisdictions. They called these entities Starts, and designed them to track the value of RMBS. Then it bought protection from the Starts. But that was not enough. So the Starts bought protection credit default swaps aggregating $1bn from AIG. The premiums for this insurance were in the range of $10mn per year. The outcome?
Last fall, after AIG’s credit rating was cut, the insurer paid roughly $800 million to START, according to two people familiar with the matter. Much of the money is being held in escrow and will be used to pay off Deutsche’s swap contracts if mortgage defaults in the portfolio rise above a certain level. Some of that money could go through Deutsche to its hedge-fund clients.
Goldman Sachs (them again) did the same thing, using CDOs named Abacus.
AIG paid $5.4 billion to Deutsche Bank, and $8.1 billion to Goldman Sachs, on their CDSs. This is both money from Maiden Lane II, and direct transfers of cash collateral to these institutions.
Let’s see what the implications of this might be. First, one of the questions FDL gave to the House committee to ask AIG’s CEO Ed Liddy was whether any of the CDSs supported by the AIG bailout went to pay off naked credit default swaps. (Thanks, Hugh). If this story is right, the answer is almost certainly yes. Credit default swaps are used as a substitute for shorting debt instruments, because, in thinly traded markets, it is not often possible to borrow the instrument and sell it, and then buy it back when you want to cash out. That almost certainly means the hedge funds held naked CDSs.
Second, Goldman Sachs creates various investment funds for its clients, and its employees are expected to invest. Employee money makes up as much as 1/3 of the total funds invested. If investment funds of Goldman Sachs bet against housing, that means the employees of Goldman are big winners. But maybe not. The primary point of the NYT article is that Goldman Sachs employees have lost a lot of money in the most recent funds–so much so that Goldman has to lend money to them to meet their capital calls. Why, you ask?
…[S]ome Goldman employees who financed their gilded lifestyles by borrowing in good times are suddenly short on cash needed to meet commitments to their personal investments in the funds. “It’s a problem with the culture of spending,” said Gustavo Dolfino, the president of Whiterock Group, a Wall Street recruitment firm. “No matter how much you have, you spend like you have a lot more.”
Ah, that dratted culture of spending.
Third, I mused in a recent post whether AIG counterparties were planning to cash in on the next bank bailout, under which Treasury will lend money to hedge funds and other private groups to buy up toxic waste on sumptuously favorable terms.
Now we have an answer to that question. Not only do the rich get bailed out, they use those profits to fund a no-lose proposition buying banks out of their problems at non-market prices.
Fourth. Why are the Treasury people such wusses?
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and we’re f*cked up down and sideways.
It’s “over, under, sideways down”. The Yardbirds.
Cars and girls are easy come by in this day and age,
Laughing, joking, drinking, smoking,
Till I’ve spent my wage.
When I was young people spoke of immorality,
All the things they said were wrong,
Are what I want to be.
(Hey)
Over under sideways down,
(Hey)
Backwards forwards square and round.
(Hey)
Over under sideways down,
(Hey)
Backwards forwards square and round.
When will it end, when will it end,
When will it end, when will it end.
see robert rubin and the $115 million he got from citi after retiring from treasury.
Probably, but maybe you can get into the culture of spending.
The only upside of the current situation is that the third tranche of the bailout is going to
look a whole lot different than SummersGeithner was expecting even a few days ago.
if I could just get my hands on some bailout monies, I’d be happy to start spending
Since there is little buying and a whole lot of bailing going on… sounds like the MOU’s know we are far from the bottom of the market.
allan, I’m dubious about that. I don’t doubt that there will be some compensation limits, but the problem is that the hedge funds and other rich people won’t buy in to the Public-Private Investment Fund idea if they can’t see how they are just going to clean up, as in 20-25% per annum. In addition, the prices for the toxic waste will be too high, so taxpayers are doubly screwed.
It will take a lot of rabble-rousing to keep the greedheads and their administration lackeys from going ahead with the Paulson/Geithner plan.
It’s abundantly clear that what is going on is that there is a concerted effort to cover the bad “investments” of the wealthy the so called shareholders or stake holders in these financial “companies”
“partnerships” and other schemes which were supposed to bring in huge returns. The investments were not investments in the sense that they funded creation of factories, or development of research, or ideas, or expansion of business. The investments of the rich were nothing more than bets. That is what was going on in all these “blue chip” top tier, middle tier and even the bottom tier of individuals who wanted to ride the wave of asset bubble created wealth and exit before it imploded.
This is what capitalism has become or perhaps what it is.
Perhaps if all this BS were outlawed, if interests rates were sensible and banks acted as banks and there were labor laws and workers were paid well for their work so they did not have to work two or three jobs to survive and carry a mountain of debt we could carry on with a reigned in type of capitalism.
But that seems unlikely. Just as “capital” and their need for profit doesn’t want to get out of the health industry, it’s going to be hard to take all those profit making schemes from the wealthy, who contribute absolutely NOTHING to society except a few tax deductible contributions to charity.
We really have a rotten system. But the good news is that it will not survive.
American at this point cannot be self sufficient. It has lost it’s manufacturing base. It low paid work force is now addicted to cheap products produced in low wage markets. And they are saddled with debt so they are now refusing to consume. That’ll kill the consumer society fast.
China and Japan see the writing on the wall. Uncle Sam is not buying their junk anymore because the have lost their jobs, and their credit limits are tapped out. The government can’t raise money through taxes because the tax base is shrinking. They can’t raise taxes on the over taxed workers.
We have reached the end game and priming the economy with money printed by the government will only create inflation. We need to get rid of the silly notion of controlling the economy with interest rates and money supply.
We need a sustainable economy where there is decent work and workers are paid enough to live, where they don’t have to work several jobs, borrow up to their eyeballs and end up on the street if they have a health crisis.
People are pretty much freaked out and waiting for their government to make this all go away. Their government is afraid of the S word – socialism where the state – the people – own and control the capital, the means of production and the economy. Private enterprise can continue, but not at the monopolistic ways of the past. That has proven a disaster for all except the monopoly owners.
Who knows if this government will have the balls to do what must be done. But if they don’t, the people will be rather at the end of the rope and a revolution will ensue and the world will be a different place without empires, globalization. Things will get local real fast and terrorism will disappear as if it was ever a threat because the USA will no longer be a threat to anyone or any nation.
The worst is yet to come.
Obama was “stunned” by AIG bonuses. How could he have know? Who could have expected?
http://www.capitalismhitsthefan.com/
KO’s on a tear tonight. Gonna have a special comment ripping corporations.
“most of my money I spent on booze and women- the rest I wasted”
Obama inherited the end game of capitalism. He can embark on a new economy with equity and justice for all or try to put humpty dumpty back together again.
He’s doing the humpty dumpty shuffle. And he will dance right off the cliff and take us with us. He didn’t start it, but he’s going to finish it.
This has been my question all along. I mean this is what hedge funds do.
I’m (naively?) hoping that, as a fallout from Bonusgate, there will be enough publicity about
who has really benefitted from the bailout so far to torpedo the
whole Public-Private Investment Fund concept.
Citi execs are sprucing up their digs for the new economy. How kewl!
Don’t hold your breath.
Won’t matter because the economy is now in a self fulfilling downward spiral. Nothing will save it with the smart moves these boys are making.
Obviously they need bonuses. Problem solved.
That is a quote from George Best
can’t argue with this
“Investments” are shrinking to nothing, the ROIs are hoovering at 0, the losses are mounting. No get rich schemes around to invest in. What is someone with a few tens of millions to do? Cushy jobs are getting a scrutiny for their bloated salaries after the gov took over the companies. Capitalism is no fin anymore.
Let’s try fascism?
masaccio – there was something i wanted to ask you about yesterday’s hearing. grayson asked some questions about aig’s 10K. did you hear this one and do you have any insight on it? this is from marcy’s notes:
i can get a quick transcript fragment if that would help.
My high school’s motto was “The Best Is Yet to Come.” But the school peaked (as did the city) around the time I graduated. It is now a shadow of its former self. So the motto should have been “The Worst …
He’s gonna tear Vikram Pandit a new one … about time, too !
These “financial products” are all hooey and need to be made illegal. It may not be illegal (though it should be) but how can these managers expose their companies (and now the tax payes) to such enormous downside risk? It’s like a hamburger flipper at MacDonalds signing a note to buy a yacht. That’s insane. But these guys are paid millions to do just that.
Ya got something against hamburger flippers owning yachts? Huh? Huh?
Special Comment up.
My theory is that the hedge funds are as bankrupt as the banks. Both are holding a lot of worthless or overvalued paper. That is why I see Geithner’s public private initiative as so dangerous because he wants to take on the debts of both.
Not at all. It would be tres kewl.
I’ll have a Whopper with Gorgonzola and Grey Poupon !
Low hanging fruit.
Very likely they hedged the risk, that sounds like what Liddy answered. There will be exposure, but if AIG hedged, no telling who the loser will be.
Wusses? I think the word is “accomplices.”
Do you think Vikram can be prosecuted for perjury to Congress ?
That’s a pretty frightening thought. I sincerely hope you are wrong.
Gosh, KO sounds just like Amy Goodman tonight.
Amy rarely talks that fast… hahahahahaha
Yup KO is on a tear on the ReichWing and Corporations!! Go KO Go!! Rip e’m a new asshole!!
I wouldn’t be a bit surprised. I know hedge funds aren’t hedged, they’re basically a leveraged bet. And when the markets turn down, all the leveraged players go bust pretty quickly.
Nahant !
How’re you doing ?
Content, definitely not delivery!
Hey PUPS we Need to be DIGGING this thread….
H/T to ES for opening the DIGG!
*Ouch* … is Rachel gonna smackdown Condi ?
OK Petro and your self?
OT: could Al Giordano get any more annoying and full of himself?
Fine, thanks for asking.
That was one of the things that Cassano didn’t do was hedge. But it is all murky. Liddy said that AIG was done with CDSs. Is this stuff the exposure from the $1.6 trillion non-CDS derivative portfolio?
She is doing a GREAT job of smacking down Condi… Caught the BI#ch in lie after lie…
We are enjoying a fine day in the mid 70’s! Spring is great here in the Bay Area!!
These folks are so delusional that they treat video and evidence with such disdain.
I keep getting tempted to move … and then Spring comes to Toronto and all’s well in the World again ! *g*
Duty calls … off to make Popcorn and Nachos … G’nite all !
Yes it does come to the great North EVENTUALLY! I know I lived in Maine in my past… I am sure it still feels like Winter back there! *g*
thanks. liddy waffled on that issue of hedging. but more, i was just wondering in general about the amount of derivatives contracts that had been written on interest rate changes… and if there were alot (i hadn’t even looked that up yet) was it possible that the models were designed with the expectation that interest rates would not go up very much (as apparently housing prices were never expected to go down?).
just some wild speculating about the possibility that there might be other potential fake cdss-type “insurance” land mines waiting to blow up.
We need to know what is in that $1.6 trillion AIGFP derivative portfolio.
Yes, I think so. This is from the 10-K:
Another $234bn is regulatory relief CDS, probably written by Banque AIG, which AIG thinks is not likely to produce a significant loss. I’m not quite clear on the total amount of CDSs because of the way they report but I’m guessing this is all.
If you look at page 263 of the AIG 10-K, there is a chart, showing the $1.6tn figure. It includes $305bn of CDSs, and the rest is interest rate swaps, currency swaps and swaptions, equity and commodity swaps.
can we pretend that when obama said “transparency” he really meant it? i’d like to have every one of those contracts posted on the web.
Oh boy, Obama stepped on it on Leno
Selise, Hugh, the 10-K provides a description of the derivatives portfolio, beginning at page 261. Here’s a link.
Hey at least he didn’t say “no one could have foreseen”
And he also had enough sense to say Timmeh G was doing an “outstanding job” instead of saying “heckuva job Timmy”
And all of this without the teleprompter!. Impressive indeed….
Well, why wouldn’t some, if not a great deal, of the bail out money go to the hedge funds? Wasn’t the idea to prop this system up with a load of cash? Or at least to buy off a lot of the swaps so that there would be no payoff on some default? I get the impression that these CDS’s are like a big pyramid so that if you set off one, it can set off a chain reaction of other defaults and bring the system crashing down. That’s obviously an oversimplification and maybe I’m wrong. If so, maybe there needs to be a better explanation or metaphor for these devices .
Wouldn’t that require naming names? /s
not you too? yesterday wasn’t enough?
I have that t-shirt. Shortly, it will be all I have…
I’m still on the fence on that issue.. just poking fun.
Did you see this
“>ruling news today?
AIG Provides Names of Bonus Recipients to Cuomo
That is like asking a gambler to show his hand, wait a minute that is asking a gambler to show his hand
The problem with 20-25% per annum for “bad assests” is that job creation investment (manufacturing, high tech, whatever), with returns 10-15% gross will be starved of investment.
I made this point to Loretta Sanchez this week that the financial finagling will not creat jobs.
This is just more wealth transfer for the poor to the rich. Thine for a stinging capital gains tax.
let’s not consume all of our outrage over AIG. We need to make sure we have enough left over to confront those other thieves and pillagers over at BOA/Merrill…
The link takes me to a BusinessWeek page and I’m not sure how to get to AIG or its 10-K. And then to I’m on dial-up.
please don’t poke fun with me about that. for me it’s an important matter of principle – about protecting the innocent, about not scapegoating, about the process of justice, and most of all that each person should be judged as an individual based on what they have actually done and not by what group they belong to or what a known liar accuses them of.
hugh… search for the company at http://www.sec.gov for the 10k and other disclosures
Sorry, that link loads more quickly than this one from EDGAR:
http://www.sec.gov/Archives/ed…..0e10vk.htm
Larry Summers worked , reaching across the aisle in good bipartisan fashion , with Phil Gramm to repeal Glass/Stegall in 1999. Bill Clinton signed it into law. FDR put Glass/Stegall into place so we would never have another depression. It kept banks from speculating on Wall Street, real estate etc. So his fixing the problem is about as perverse as Jeff Gannon sitting in the W.H. Press corpse for 2 years.
Deregulation is Washington speak for we do not need laws. We are above all that.Trust us.
http://www.sec.gov/edgar/searchedgar/companysearch.html if you want to look up other publicly listed companies/crime syndicates
lol. thanks for the laugh. you are of course exactly right
your first link looks to me like it’s about 7MB and the second one about 3.6MB. is there a pdf version?
Knowing who worked where and when doesn’t mean they are automatically doomed. If it did I wouldn’t be on the fence. But it does give us insight.. just as you suggested you would like to know in re contracts above.
We need to know a lot about what our trillions are buying and who runs the companies right now, as well as who ran them into the ground.
I just don’t see how we can wait for a formal investigation.. Though of course formal investigation would need be a part of any formal prosecution process.
except that wasn’t what was asked. grayson didn’t say “give me a copy of the org chart with the names of everyone who worked in aigfp during the past n years” – he asked who was responsible for loosing $100 billion dollars and wrecking the company.
instead of taking the thread ot, i’d be happy to discuss this via email or on somewhere else.
That’s alright.. I’ll don’t think we are going to agree on this matter. I’ll find a new joke soon enough. *s*
If we don’t let the Graysons take the gloves off these shock doctors will never quit.
Millions of dead and tortured bodies and looted untold number of trillions ought to have made that clear by now.
We can’t play only nice.
I’d like a CDO with mustard and catsup; an order of naked CDSs on the side; hold the million dollar bonus pickle.
Q: Has there actually been a time when people used these modern financial products to make big money?
yes, of course. let;’s “take the gloves off” (you do remember who said that about the other terrorists?). a discussion of our principles has no place here. that would just be playing nice.
never mind. i think i’ve got it converted to a pdf. from there i’ll just pull out the relevant pages and post the smaller file for downloading.
FYI. Seems I’m linking this article a lot these days.
The Wall Street Journal’s Web site is already (secretly) free
Perhaps there is some sort of problem if masaccio points this out, but in most cases, if I can get the correct title of the WSJ article I want to view, all I need to do is to put that title into Google, and I can get the full article.
The full title to masaccio’s piece is: Hedge Funds May Get AIG Cash, which you can get by following the link he gives. Copy, open Google, paste. There’s a great visual that goes along with the article linked at the sidebar.
It is Thersday upstairs!
BREAKING: President Uses Teleprompter, Wingnuts Wet Selves In Perplexing Fit of Hilarity
I found the AIG 10-K for 2008 here:
http://idea.sec.gov/Archives/e…..4e10vk.htm
On page 263, it shows that AIGFP as of December 31, 2008 had $1.515 trillion in derivatives with $305 billion in CDSs outstanding. 2/3 of them were for 2 or more years. 57% were in the 2-5 year range.
Of the ~$305 billion in CDSs as you point out $234 billion is in the form of regulatory relief CDSs written primarily for European banks. These allowed the banks to make more and riskier investments. They could dip more deeply into their reserves than the regulations normally allowed and AIG guarnateed to make up whatever they needed to bring their reserves to what they needed to be according to the European regulators.
Given all the losses that European banks have experienced I would think that there could be significant losses in these.
About those potential losses it has this to say on page 268:
It says much the same about collateral calls, i.e. it doesn’t know.
As for the rest of it, $883 billion are in interest rate swaps. There are also $194 billion in currency swaps and $132 billion in various options. But the 10-K says that AIG has both sides of all these, so it’s covered.
So very short version. AIG has $305 billion in CDSs. 2/3 of these are for 2 or more years and 3/4 of them at least could experience real losses.
Thanks to everyone for pointing out the 10-K to me and masaccio for going so far as giving me the page numbers. I am flummoxed I guess that Liddy couldn’t get someone at a company the size of AIG to come up with a 2 minute presentation on this. 5 minutes if he described the AIGFP operation and who the counterparties were. Aside from being buried in a big report, this stuff isn’t that hard to grasp.
they paid like 13 billion to goldman sacks not just 8.1 billion. This was an isurance premium that they were obligated to pay. There does need to be regulation on these newer complex financial instruments because even these companies don’t seem to understand the appropriate amount of risk to assign to these products. The government like barnet Frank definately doesn’t so they need someone with proper finacial intelligence to understand and come up with fitting regulation to protect people, companies and taxpayers from and for these investments.
Thanks, Masaccio.
This debacle was engineered long before Bush/Cheney rode off with their loot, leaving Obama with a $2 trillion deficit time bomb and no good choices.
I’ve asked many times: What are the total derivative risk liabilities assumed in the 80% purchase of AIG? CDS insurance contracts on real assets like a CDO or MBS can’t be more than the face value of the asset. However when you take a $100 million portfolio of loans and bet it 20 to 1 in the derivative market, the risk becomes a $2 billion supernova. So, what’s the damage? Only a trillion? A few trillion? Tens of trillions?
Unlike Lehman, AIG was “taken over” to keep it out of bankruptcy court where its assets and liabilities would have been disclosed under penalty of perjury, especially their non-regulated divisions like AIGFP.
Essentially, U.S. taxpayers put up $170 billion to make sure that AIG wouldn’t end up in court like Enron. But that won’t make the liabilities go away. Hence trillions in Fed & treasury injections since at least mid-2007 that have done nothing to expand lending in the Main Street economy.
This is a fight to the death between derivative speculation and the real economy with our government still holding the scale down for the wrong side.
It’s like our next vacation plans:
“We’re making a trip of a lifetime to the sun just as it goes supernova, you don’t want to miss it ….
You can’t do that; you’ll be burned up!
Nope, we’ve got that covered — we’ll go at night.”
I wonder if the hedge funds are planning on stopping at sucking up cheap taxpayer money in the next bailout. What about manipulation to make the CDS pay off, followed by a rapid buy up of distressed assets? Shares in solid(ish) companies with histories and good, real-world products are trading at prices so low that they can be bought up for less than they are worth in parts. We are seeing the start of some really scarey consolidation in pharma and technology, already.
Socialized losses on the back of taxpayers compounded by crashing asset values is a nexus that will make the last eight years, the largest upward transfer of wealth since the Gilded Age, look like whores d’oeuvres before the main course.