The publication of AIG FPâ€™s
counterparty payments since the government took over the firm last fall is
fascinating if not terribly surprising. Perhaps more surprising was the US governmentâ€™s effort to shield this information from the light of day until the firm reported it â€“ I am assuming
without pressure from the government. So all those taxpayer dollars going
out to greedy and grossly irresponsible AIG FP execs who nearly single handedly
sank the free world pales in comparison with all the taxpayer dollars that kept
AIG FP contracts whole â€“ posting of collateral, fees from lending securities
for short sales (presumably borrowed from the warehouse of the real money
accounts at the AIG insurance groups) and payments to states under GIAâ€™s â€“ see http://www.aig.com/aigweb/internet/en/files/Counterparties_tcm385-153017.pdf
But what I am most curious
about is how much customers of AIG FP knew and when they knew it. In
other words know your counterparty applies here to doing billions of dollars in
CDS contracts by AIG FP that clearly did not have the balance sheet to support
the underwriting in adverse conditions. Our all the â€śinsuranceâ€ť bought
without any underlying exposureâ€¦a pure bet like a spec being long euro/dollar.
Are we to believe that one bank buying CDS from AIG FP had no idea others
were into the firm for large amounts? Or more directly how many firms
bought CDS on AIG FP (presumably written by other banks) to hedge counterparty
risk from AIG FP written CDSâ€¦how much, when, etc?
While politicians foam at
the mouth over $165mln â€śearmarkedâ€ť for deconstructed products specialists, and
NY Attorney General Cuomo tries to find a legal way to break contracts with AIG
FP geniuses (getting paid on way up and down), how about a little furry over
the AIG counterparties who have yet to lose a dime on any CDS written by AIG in
a world of ever rising claims and collateral postings. Why are US politicians not looking for legal means to break or
renegotiate the CDS contracts so that taxpayers do not pay for the sins of the
AIG FP rocket surgeons? Why for instance is the US government not negotiating some half-way mark on the
AIG CDS contracts at the very least? Because the banks canâ€™t take any
more stress? What about the current stress tests? This to me is a
giveaway of Himalayan proportions. NECâ€™s and White House economist
Summers said this weekend in a TV interview the US government canâ€™t tear up
contracts struck by a firm it now owns. Well there is a lot between
tearing up a contract and renegotiating with counterparties...again what did
counterparties know about AIG FP CDS business and when did they know it?
Go to the email and check the CDS bought on AIG.
The image of an indignant
Bernanke slamming a phone after learning of AIG FP CDS casino is almost as
incongruous as the 60 Minutes revelation that the Fed Chairman was a poncho
wearing waiter or bus boy at Dillon, SCâ€™s South of the Border Mexican
restaurant as a young man.
I wonder how many phones
Bernanke slammed on NY Fed President Geithner after learning of the shenanigans
the banks the Fed regulates were up to when it came to leverage, RMBS and risk
management. Or maybe it was tequila shots with Compadre Tim at Tio Pepeâ€™s
One lesson the entire mess
of the last 18 months has taught me is that banks that are too big to fail are
going to remain in the hands of bankers and not government receivers (assert as
much anyway) and banks will be given a license to print money when balance
sheets are freed of â€ślegacyâ€ť assets. Late on a credit card payment a few
times and a bank issuing a card can charge you up to 29% AR. If you donâ€™t
run a balance and late on a payment by a day the card issuer can charge you
$35-40 and charge you a full monthâ€™s interest balance. Does this make
Benito hotter than a habanera? I doubt it. As long as banks can get
government out ASAP of owning shares anything goes when it comes to low bank
risk, high cost for consumers banking. Indeed why should the Fed buy
Treasuries when US banks can play yakyuu (baseball) and milk the yield curve
(borrow at near zero cost and lend longâ€¦to the government). At 29% a card
issuer can ride out even Meredith Whitney default assumptions a lot longer than
perhaps many think possible.
I am not suggesting banks
are now emerging from the wreckage intact and ready to rock and roll. But
I am saying that this government is intent on making them whole by offering the
whole enchiladaâ€¦by any means necessary short of wiping out shareholders and
forcing bondholders to take haircuts. So the next time Citi nears $1, buy
it (to sell it near $2.50) and thank a government committed to keeping banks
suffering from Montezumaâ€™s revenge full of rice and beans.
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