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Wednesday, June 24, 2009

The AIG bailout turns into an apparent Goldman scam

I think the evidence is very clear and brought before a jury Hank Paulson would be in deep trouble with an very obvious conflict of interest to say the least.
The troubling part is for me rather that the whole down move was triggered by two firms who work together on many area's these days. I am talking of JP Morgan and Goldman as JP Morgan collateral call against Bear Stearns brought them down and Goldman triggered not only AIG's collapse but also profited from it in any way. That they were allowed to collect 100 % sponsored by taxpayers money after they brought it on the taxpayer is cynical since counterpart risk is not something they are responsible for. In the light that Goldman is preparing for a record bonus payout completely sponsored by taxpayers is a punch into the mainstream face. It is not clear at all why there is no full fledged investigation into the more than suspect undertakings of Paulson and Goldman and a shame on the Obama administration.
Goldman and JPM are the drivers by this manipulated rally and a very good article of Market skeptics (see link below its a must read) brought up some clear evidence that Goldman and the government were involved in market manipulations all together as they seem to be what I suspected for a long time the broker for the PPT team but they also trade on their own book on behalf of this in formations which would be against any legal rules since sponsored by the government might never be investigated. The Treasury secretary is in charge off the PPT ( Plunge Protection Team) which was Paulson at the operation sits at the trading floor of the FED which was run by an ex Goldman as well.

http://www.marketskeptics.com/2009/06/still-researching-corruption-at.html

Excerpt from Bloomberg

AIG Trading Partners Squeeze Insurer Before Bailout (Update2)


By Hugh Son and Richard Teitelbaum

June 22 (Bloomberg) -- Goldman Sachs Group Inc. and Societe Generale SA extracted about $11.4 billion from American International Group Inc. before the insurer’s collapse as the firms demanded to hold cash against losses on mortgage-linked securities, according to regulatory filings.

Goldman Sachs got $5.9 billion and Societe Generale received $5.5 billion of about $18.5 billion in collateral paid by AIG in the 15 months before the September bailout. The payments helped settle AIG’s obligations on $62.1 billion of credit-default swaps that the Federal Reserve later removed from the New York-based insurer as part of the rescue. Officials at AIG, Goldman Sachs and Societe Generale declined to comment.

“When counterparties see trouble coming, they’ll do everything they can to get their money back, even if it means the death of the other firm,” said William Cohan, a former JPMorgan Chase & Co. investment banker and author of “House of Cards,” about the financial crisis.

President Barack Obama proposed an overhaul in regulations last week to prevent the failure of systemically important institutions such as AIG, which needed a $182.5 billion government rescue to stave off bankruptcy. Banks that bought swaps as protection against losses on mortgage-linked assets demanded cash collateral as the market value of the securities plunged last year, overwhelming AIG’s ability to pay.

“It was precisely that drain of liquidity to Goldman and SocGen that put AIG in a position of illiquidity and ultimately threw them into the government’s arms,” said Charles Calomiris, a finance professor at Columbia Business School in New York.

Collateral Damage

AIG disclosed a complete list last month of payments made to settle the $62.1 billion in derivatives. The figures for the period before the bailout were calculated by subtracting post- rescue payments disclosed in March from the sum of more than 150 transactions outlined in May.

Including collateral from before and after the rescue and payments made by Maiden Lane III, a vehicle created by the Fed to retire the swaps, Goldman Sachs received about $14 billion from AIG, Societe Generale got $16.5 billion, and Deutsche Bank AG received $8.5 billion. More than a dozen more banks got a total of about $23.1 billion.

Michael DuVally, a spokesman for New York-based Goldman Sachs, the most profitable securities firm before converting to a bank last year, declined to comment. Stephanie Carson-Parker of Societe Generale, France’s second-largest bank, also declined to comment, as did AIG’s Christina Pretto and Deutsche Bank’s Ted Meyer.

‘Protecting Itself’

Goldman Sachs was more aggressive than other firms in seeking collateral from AIG because the bank’s models showed a greater decline in the value of securities that had been insured, said two people with knowledge of the matter, who declined to be identified because the contracts were private.

“Goldman is to be congratulated for seeing the problem ahead of others and protecting itself from the impending failure of AIG,” said William Poole, former president of the St. Louis Fed, in an interview last week. “It’s not the responsibility of any private firm to determine what the public interest is -- that’s why we have a government.”

Goldman Sachs bought protection on about $20 billion in assets from AIG, meaning the company was counting on $10 billion from the insurer after the underlying holdings lost about half their value, Goldman Sachs Chief Financial Officer David Viniar said in a March conference call. The firm had “no direct exposure” to AIG because it held about $7.5 billion in collateral and hedged its remaining $2.5 billion risk to the firm’s potential failure, Viniar said. The $7.5 billion tally includes trades unrelated to Maiden Lane.

Seldom Traded

“All we did was call for the collateral that was due to us under the contracts,” Viniar said on March 20.

Arriving at a value for the swaps was “challenging” because of the dearth of pricing information for securities that seldom traded, increasing the possibility of disputes with counterparties about how much collateral was owed, AIG said in a November filing.

Joseph Cassano, who ran the AIG swaps unit until March 2008, told investors at a December 2007 conference that AIG rejected some banks’ demands for collateral. The Department of Justice is probing whether Cassano, 54, misled investors and auditors about the contracts, a person familiar with the inquiry said in April. Joseph Warin, a lawyer for Cassano, didn’t immediately return a call seeking comment.

‘They Go Away’

“We have, from time to time, gotten collateral calls from people,” Cassano said on Dec. 5, 2007. “Then we say to them, ‘Well, we don’t agree with your numbers.’ And they go, ‘Oh.’ And they go away.”

Credit-default swaps allow investors to buy protection against a possible default. The contracts pay the holder face value for the underlying securities or the cash equivalent should a borrower fail to repay debt.

Banks received the full face value to retire the Maiden Lane III holdings by being allowed to keep $35 billion in collateral and getting $27.1 billion in payments to retire the contracts.

“Our government effectively made a cash infusion through AIG and this Maiden Lane vehicle to Goldman and the other banks,” said Haag Sherman, who helps oversee $7.5 billion as chief investment officer of Houston-based Salient Partners.

Goldman Sachs and JPMorgan were involved in a failed effort on the morning of Sept. 15 last year to save AIG with a $75 billion private credit line, AIG said in the November filing. Later that day, the insurer’s credit rating was downgraded, triggering a fresh round of collateral calls and forcing the federal rescue.

Fed Contribution

After then-Treasury Secretary Henry Paulson, a former Goldman Sachs CEO, decided that the government would intervene to rescue AIG, he picked Edward Liddy, a former Allstate Corp. CEO who served on the board of Goldman Sachs for five years, to lead the insurer. Neil Barofsky, special inspector general for the Troubled Asset Relief Program, is probing whether AIG paid more than necessary to banks to settle the swaps.

The insurer said in November that Maiden Lane III would be funded by as much as $30 billion from the New York Fed, with AIG contributing up to $5 billion. A separate facility, with as much as $22.5 billion from the New York Fed, was established to wind down the insurer’s securities-lending program.

In addition to the $52.5 billion for the two vehicles, the government committed to invest as much as $70 billion in the company and provided a $60 billion credit line.

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