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Monday March 16, 2009 - 21:06:24 GMT
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Forex Blog - AIG's Tangled Web

AIG's Tangled Web

 

The publication of AIG FP’s counterparty payments since the government took over the firm last fall is fascinating if not terribly surprising.  Perhaps more surprising was the US government’s effort to shield this information from the light of day until the firm reported it – 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 – 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 GIA’s – see http://www.aig.com/aigweb/internet/en/files/Counterparties_tcm385-153017.pdf for details. 

 

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 “insurance” bought without any underlying exposure…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 CDS…how much, when, etc? 

 

While politicians foam at the mouth over $165mln “earmarked” 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 can’t take any more stress?  What about the current stress tests?  This to me is a giveaway of Himalayan proportions.  NEC’s and White House economist Summers said this weekend in a TV interview the US government can’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, SC’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 Pepe’s instead. 

 

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 “legacy” 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 don’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 month’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 long…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 enchilada…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 Montezuma’s revenge full of rice and beans.

 

Ole.

 

David Gilmore 



 

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