In response to recent news that homeowners were coolly walking away from their 'underwater' homes, a wall street economist said recently that borrowers were not victims - they “signed contracts, and as adults should also be held accountable”. My response is simple: Give us a single instance where an 'adult' was punished for the reckless financial practices promoted on Wall Street... Keep walking away - may your ilk increase!!! ... Other ironies of the day include the news that AIG will distribute about $100 million in bonuses today to "adults" working at its financial products unit, which traded in the derivatives that imploded in September 2008, leading to the biggest government bailout ($182 BILLION) in history. The gravy train on the casino never amazes me – there is also news that the CEO of Goldman Sachs will receive $100 million in bonuses.

AIG - a cover play? - II

Eliot Spitzer, former john and former governor of New York State makes a compelling case for the AIG bailout serving as a front for saving firms with deeper connections (like Goldman Sachs)...

But wait a moment, aren't we in the midst of reopening contracts all over the place to share the burden of this crisis? From raising taxes—income taxes to sales taxes—to properly reopening labor contracts, we are all being asked to pitch in and carry our share of the burden. Workers around the country are being asked to take pay cuts and accept shorter work weeks so that colleagues won't be laid off. Why can't Wall Street royalty shoulder some of the burden? Why did Goldman have to get back 100 cents on the dollar? Didn't we already give Goldman a $25 billion capital infusion, and aren't they sitting on more than $100 billion in cash? Haven't we been told recently that they are beginning to come back to fiscal stability? If that is so, couldn't they have accepted a discount, and couldn't they have agreed to certain conditions before the AIG dollars—that is, our dollars—flowed? The appearance that this was all an inside job is overwhelming. AIG was nothing more than a conduit for huge capital flows to the same old suspects, with no reason or explanation.

AIG - a cover play?

Is it AIG that's playing us for fools or is it really Goldman Sachs?

From here: The roots of the linkage between Goldman Sachs and AIG go back to the closing months of the Bush administration, as the financial meltdown reached crisis proportions and key decisions were made that are now reaping the whirlwind. Remember who played a key role in deciding to bail out AIG? Henry Paulson, the Goldman CEO-turned George W. Bush Treasury Secretary. Paulson, according to a September 27, 2008 New York Times piece by Gretchen Morgenson, led a team of regulators and bankers in early September to determine what to do with the most severely wounded financial institutions. One of the participants in those meetings was Lloyd C. Blankfein, Paulson's successor at Goldman Sachs. Out of those meetings came the controversial and heavily criticized decision to allow Lehman Brothers, a Goldman competitor, to go belly up, and to bail out AIG. Starting with $85 billion from the Fed, taxpayers have pumped a total of $170 billion into the giant insurance company. The bailout was crucial to Goldman in that it permitted AIG to pay off its $12.6 billion debt to the firm, $8.1 billion of which was to cover AIG-backed credit derivatives. At a hearing of the House Financial Services Committee on February 11, 2009, Goldman Sachs CEO Lloyd Blankfein denied that his firm had a major stake in bailing out AIG. Blankfein told the panel that "with respect to our dealings with AIG, we were always fully collateralized and had de minimis or no credit risk at any given moment because we exchanged collateral....We had transactions with them. And if they had gone the wrong way, they would have owed us money. We assumed they'd pay it, but if they defaulted, they wouldn't pay us. We insured against that default. We didn't win money from it. We wouldn't have made money. But it would have protected our down side."

Throughout the past six months of economic crisis, Goldman has taken full advantage of what the government has to offer. On October 28, 2008, Goldman and eight other banks were the first to receive federal bailout money under the Treasury Department's Troubled Assets Relief Program (TARP). which was initiated by Paulson. On November 25, 2008, Goldman became the first bank in the nation to benefit from the Federal Deposit Insurance Corp.'s Temporary Liquidity Guarantee Program (TLGP), issuing $5 billion in government-secured debt at 3.367%, substantially less than the market rate facing banks which issued unsecured debt. All told, Goldman has issued a total of $20 billion in government-guaranteed debt under TLGP. In their dealings with banks, both Treasury and the Fed have been subject to relatively minimal disclosure, in order to protect the proprietary interests of financial institutions, especially to prevent rumors of illiquidity or excessive debt from threatening a bank's viability.

While Rome burns...

One has got to love this bit of news...

A white paper prepared by the company says that AIG is contractually obligated to pay a total of about $165 million of previously awarded "retention pay" to employees in this unit by Sunday, March 15. The document says that another $55 million in retention pay has already been distributed to about 400 AIG Financial Products employees.

AIG has already recieved a taxpayer bailout of more than $170 billion dollars.

The A. I. G. Sinkhole

Joe Nocera of the Times on AIG - the company which got a further $30 billion yesterday in addition to the $150 billion already committed by the United States taxpayer so far.

Here’s what is most infuriating: Here we are now, fully aware of how these scams worked. Yet for all practical purposes, the government has to keep them going. Indeed, that may be the single most important reason it can’t let A.I.G. fail. If the company defaulted, hundreds of billions of dollars’ worth of credit-default swaps would “blow up,” and all those European banks whose toxic assets are supposedly insured by A.I.G. would suddenly be sitting on immense losses. Their already shaky capital structures would be destroyed. A.I.G. helped create the illusion of regulatory capital with its swaps, and now the government has to actually back up those contracts with taxpayer money to keep the banks from collapsing. It would be funny if it weren’t so awful. I asked Mr. Arvanitis, the former A.I.G. executive, if the company viewed what it had done during the bubble as a form of gaming the system. “Oh no,” he said, “they never thought of it as abuse. They thought of themselves as satisfying their customers.”

That’s either a remarkable example of the power of rationalization, or they were lying to themselves, figuring that when the house of cards finally fell, somebody else would have to clean it up.

That would be us, the taxpayers.

Pervasive Ponzi(ness)

The more I start to understand the methods employed by Wall Street firms to achieve profits, the more I am convinced that grandfather Madoff might not be the only one running a Ponzi scheme…

From here: After all, Madoff’s scheme -- at least in spirit, if not in its nefarious intent -- wasn’t much different than the business models at some of the nation’s largest failed financial institutions. Back in May, four months before it collapsed, American International Group Inc. increased its dividend at the same time it unveiled plans to raise $12.5 billion in capital. Later, when its cash ran out, AIG got a government bailout, the size of which has expanded to about $150 billion.

Whether you call that a Ponzi scheme or something less sinister, AIG was paying old investors with money raised from new investors. The same could be said of many banks that blew through billions of dollars in freshly raised capital the past couple of years, continuing to pay large dividends even as their balance sheets quietly imploded.

Geoffrey Raymond's caricature of Mr. Madoff (ripped from Dealbreaker)

On what we could learn from the Chinese regarding bailouts

Today was yet another great day for bailouts. Firstly, there was yet another bailout of the beleaguered insurance giant AIG, then there was news that the Treasury Department on the sly decided to give American banks a tax windfall of $140 billion and thirdly, there was news of a half a trillion dollar Chinese bailout. OK, now why am I mixing the Chinese bailout with similar measures taking place here? Well, it is indeed interesting to see how these monies are being put to use. To get a quick idea on the differences between the plans hatched by the Treasury as opposed to the Chinese in bailing out, it is instructive to see the details. Or, maybe it is even time to learn from the Chinese.

On what the Chinese would do with their bailout:

At a time when major infrastructure projects are being put off around the world, China said it would spend an estimated $586 billion over the next two years — roughly 7 percent of its gross domestic product each year — to construct new railways, subways and airports and to rebuild communities devastated by an earthquake in the southwest in May.

On the sly tax windfall to US banks:

Late September, the Treasury Department issued a five-sentence notice that attracted almost no public attention. Administration officials had just given American banks a windfall of as much as $140 billion. The change to Section 382 of the tax code came after a two-decade effort by the Republican administration to eliminate or overhaul the law. Section 382 of the tax code was created by Congress in 1986 to end what it considered an abuse of the tax system: companies sheltering their profits from taxation by acquiring shell companies whose only real value was the losses on their books. The firms would then use the acquired company's losses to offset their gains and avoid paying taxes.

On bailing out AIG again and yet again:

The government created an $85 billion emergency credit line in September to keep A.I.G. from toppling and added $38 billion more in early October when it became clear that the original amount was not enough. As part of the new revision announced today, the Federal Reserve said it would reduce that credit line to $60 billion. When the reorganized deal is complete, taxpayers will have invested and lent a total of $150 billion to A.I.G., the most the government has ever directed to a single private enterprise.

So just to get this clear:

• China spends its bailout money on actual projects like infrastructure additions that benefit its citizens and in turn keep the economy humming and productive.
• In the United States, the Treasury decides to award tax write-offs to banks that shelter their profits from taxation by acquiring shell companies whose real value indicates losses on their books, but then manage to offset imaginary losses with actual capital gains to avoid any payment of taxes.

Tip of the iceberg slowly thaws...

Finally, signs that something might be happening in the secretive, tony world of executive compensation...

American International Group Inc. agreed Wednesday to freeze some $19 million in payments to its former chief executive, Martin Sullivan, while New York Attorney General Andrew Cuomo reviews executive compensation and other expenditures aid out as the company neared collapse earlier this year.

About time... Of course, one can't be too sure if Cuomo is trying another Spitzer...

Details of an orgy

Maureen Dowd on why heads must roll in the orgy of executive excesses that is being played out even as the mortage meltdown unfolds...

Just when we thought executives of A.I.G., the insurance giant bailed out by taxpayers for $123 billion, had been shamed into stopping their post-bailout Marie Antoinette spa treatments, luxury sports suites, Vegas and California posh resort retreats, we were dumbfounded to learn that some A.I.G. execs were cavorting at a lavish shooting party at a British country manor. London’s News of the World sent undercover reporters to hunt down the feckless financiers on their $86,000 partridge hunt as they tromped through the countryside in tweed knickers, and then later as they “slurped fine wine” and feasted on pigeon breast and halibut.
The paper reported that the A.I.G. revelers stayed at Plumber Manor — not the ancestral home of Joe the Plumber, a 17th-century country house in Dorset — and spent $17,500 for food and rooms. The private jet to get there cost another $17,500, and the limos added up to $8,000 more. In an astonishing let-them-eat-cake moment, the A.I.G. big shot Sebastian Preil held court at the bar and told an undercover reporter, “The recession will go on until about 2011, but the shooting was great today and we are relaxing fine.”

On flipping flopped companies

Looks like the Fed is flipping and flopping a lot like the McCain campaign in its policy pronouncements. “Being for something before being against the same”.

When the financial markets were melting down on Monday with Lehman going under and jobs lost all around, McCain coolly comes up and tells us that the economy is strong. Later he backtracks and says that he was talking about the American people and not the health of the economy actually. Likewise, the Fed initially said that they will not bail out AIG before actually deciding to bail them out late evening yesterday. Yes, it called for an injection of $85 billion of taxpayer money this time. Of course, this is on top of the bail out of Bear, Fannie and Freddie.

The latest bailout might be labeled as the ‘mother of all bailouts’ since it was not just the company (AIG) that was bailed out, but all those toxic assets from companies that AIG had insured. In essence, AIG's clients still got to chew on their toxic mortgage meatballs while the taxpayers stepped in to foot the bill. Of course, many will advance the argument that AIG was 'too big to fail'. Even if one agrees with this theory (yes, this too big to fail thing is fast becoming a theory as more and more banks are signing on the bailout bucket list), the bailout should have come with regulatory conditions that will prevent this mess from happening again. Of course, none of that happened. Taxpayer money was pledged to straighten a large Wall Street firm with minimal guarantees ensuring the survival of the firm, ensuring the people at the top get their regular bonuses and also ensuring that nary a legislation or regulation is passed that would have prevented a meltdown like this from happening in the future. Well, this is free market at its best.

Two things were clear after the latest bailout: The first being that the Fed is absolutely clueless and has just about zero control over the rapidly deteriorating situation in the financial markets. The other being that we have just further slowed down what was essentially an already very slow moving financial train wreck. What is that expression of Chinese torture – death by a thousand cuts – is what we will be subject to….

Executive paycheck watch - II

As the investors keeps getting hammered with more bad news (AIG falling under after ratings cut last night, Goldman announced a couple of minutes back that their profits were down 70%, the first time since the company went public, Merrill to see large layoffs, thousands of Lehman workers out on the street), here is a bit of news that looks to the bright side of things...

From here: Merrill Lynch & Co. Chief Executive Officer John Thain and trading-division head Thomas Montag may reap payouts totaling more than $47 million if they leave or are given lesser roles after Bank of America Corp. buys the firm.

The ultimate irony with the whole payout was that John Thain was hired into Merrill nine months back explicitly to turn the ailing company around. Instead, he turns tables and sells the company lock stock to Bank of America (of course, he had no other option after the debacle at Lehman). Yes, greed is good.

The executive paychecks for CEOs who were responsible for sending Fannie Mae and Freddie Mac into the ground covered here previously.

Using more of our money… Bail Baby, Bail!

On April Fools day of this year, I wrote about a money spigot opened up by the Fed that allowed investment banks on Wall Street to drive by and borrow any amount that they wished from the Feds sans rigorous oversight or regulation. The rate of drawing from the spigot was about $33 billion a day then – I do not have the numbers for now. The ostensible reason for this largesse was to preserve 'financial liquidity' and make sure that the major players on the Street have enough money to perform their complex dalliances and ensuring year end bonuses.

This weekend, we witnessed multiple events that almost looks like an automatic structural re-adjustment of the financial industry. The spectacularly predictable failure of Lehman. Merrill rushing into the waiting hands of its suitor, Bank of America and AIG (the biggest insurance company in the world) gasping for air as it asks the Fed for $40 billion in restructuring costs.

Well, the common sense would dictate the following: Hey, these companies played poker with the money entrusted to them and during the process of carving up mortgages into complex financial instruments that no-one understood, they were setting themselves for failure. Let the structural adjustment happen, let the financially unsound institutions fail, as soon as the bad apples amongst the lot is weeded out and we should see the bottom of this thing - Or so, one might think.

Well, the Fed thinks otherwise. In a sign of continuing largesse and misfired blanks from Paulson’s bazooka, the Fed has opened up newer spigots of money to Wall Street banks.

From here:

In an obscure but highly important announcement late Sunday evening, the Fed said it would let Wall Street firms post as collateral much riskier assets — including equities, junk bonds, subprime mortgage-backed securities and even whole mortgages — in exchange for emergency loans through the Primary Dealer Credit Facility.

But with the new announcement, the Fed will accept stocks and some debt that has junk-bond status and some securities that may have few real buyers.

Well, now they are ready to accept junk bonds from distressed companies on Wall Street. Wonder what is next.

What amazes me is that we have just peeled some preliminary skin off the mortgage mess. We are only witnessing the fallout from a type of mortgage called 'sub-prime'. Mortgages of lesser toxicity sit waiting for their turn to wreck havoc – an example of such a mortgage is called 'Alt-A'.

From here:
Homeowners lured by low introductory rates to Alt-A mortgages, which typically require little or no proof of a borrower's income, may fuel the next wave of foreclosures and further delay a recovery from the worst housing decline since the 1930s. Almost 16 percent of securitized Alt-A loans issued since January 2006 are at least 60 days late, data compiled by Bloomberg show. Defaults will accelerate next year and continue through 2011 as these loans hit their three- and five-year reset periods

About 3 million U.S. borrowers have Alt-A mortgages totaling $1 trillion, compared with $855 billion of subprime loans outstanding, according to Inside Mortgage Finance, a trade publication in Bethesda, Maryland. Of the Alt-A borrowers, 70 percent may have exaggerated their income, said David Olson, president of mortgage research firm Wholesale Access in Columbia, Maryland.

Wonder what the Fed will do when the bottom on the Alt-A mortgage market fall out. I guess we all have a simple enough answer: Use more of our money… Bail Baby, Bail!