Naked Capitalism 13 Novembre 2008

Note that the headline above was on a Wall Street Journal story about the new taxpayer-raping improved version of the AIG bailout. The current headline is anodyne: "New AIG Rescue Is Bank Blessing."

Just as one wonders why the government backed down on a deal that was appropriately punitive to AIG (at worst, it was an orderly liquidation, which would be an acceptable outcome, and if management could sell enough businesses at good prices, they might be left with a rump of a company to operate). And now, the Wall Street Journal backs down from a headline that accurately and pointedly describes who does best out of these inexplicably sweetened terms. Both roads appear to lead to Goldman.

As we said in an earlier post on this sorry affair, AIG claimed the interest payments were too high. The only way under the circumstances that they could be "too high" was if the company was having to borrow to fund them. If that was the case, the remedy was simple: require only part to be paid in cash on a current basis, and add the rest to principal. Similarly, AIG said they might not be able to sell subsidiaries in two years (the term of the original loan) to off the debt. Two years is a long way away. I would have waited at least a year and few months before doing anything and then might have extended the loan by a year if I was persuaded AIG really had made bona fide efforts to sell and had not held out for unrealistic prices.

Similarly, Felix Salmon wondered why any changes to the terms were made now, and why this matter was not left to the next Administration. This is all looking, as reader Marshall noted, like the Clinton pardons, except with more dollar signs attached.

But even with the toned-down headline, it looks as if the AIG treatment is, again. all about special dealing on behalf of Goldman. Recall that Goldman CEO Lloyd Blankfein was the only Wall Street executive invited in to work with Paulson on the terms of the original rescue. These guys are completely shameless, and for good reason. There are no repercussions from this sort of cronyism, not even recrimination in the media.

From the Wall Street Journal:

Banks in the U.S. and abroad are among the biggest winners in the federal government's revamped $150 billion bailout of American International Group Inc.

Many banks that previously bought protection from the insurer on securities backed by now-troubled mortgage assets stand to recoup the bulk of their investments under a plan by AIG and the Federal Reserve Bank of New York to buy around $70 billion of those securities via a new company. These securities are collateralized debt obligations backed by subprime-mortgage bonds, commercial-mortgage loans and other assets.



Banks in the U.S., Europe and Canada bought credit-default swaps on these securities from AIG, which in turn promised to compensate them if the securities defaulted. Defaults haven't been a major problem, but the market values of these CDOs fell sharply over the past year or so.

That enabled the banks to pry roughly $35 billion in collateral from AIG as a result of those declines and downgrades in AIG's own credit ratings. The banks that have sought and received collateral from AIG include Goldman Sachs Group Inc., Merrill Lynch & Co., UBS AG, Deutsche Bank AG and others.

Yves here. Note the clearly slanted choice of words, "pry collateral". Huh? These were contractual terms agreed upon by AIG, and other CDS protection writers (ex ones like Ambac who wrote them as insurance contracts rather than swaps) and (not having seen the documents) appear to be standard. A ton of hedge funds and other protection writers also had to cough up a ton of collateral when the credit instruments they guaranteed, such as similarly dodgy CDOs and deteriorating bond issues by Lehman and its ilk, went south. AIG was not treated unfairly nor is it deserving of sympathy, as the turn of phrase implies.

Back to the article:

Throughout its AIG rescue efforts during the past two months, the government has had the banks in its sights; it made its initial bailout of AIG in part to avoid potential bank losses that might have threatened the broader financial system.

Under the plan announced Monday, the banks will get to keep the collateral they received from AIG, much of which came when the government made funds available to AIG in September. The banks also will sell the CDOs to the new facility at market prices averaging 50 cents on the dollar. The banks that participate will be compensated for the securities' full, or par, value in exchange for allowing AIG to unwind the credit-default swaps it wrote.

"It's like a home run for some of the banks," says Carlos Mendez, a senior managing director at ICP Capital, a fixed-income investment firm in New York. "They bought insurance from a company that ran into trouble and still managed to get all, or most, of their money back."...

And why do they deserve a back-door subsidy? These were bad investments, but the banks are being rewarded (as always) for lousy business decisions. The previous capital infusions by the TARP carried a well below market fixed dividend payment on the preferred, But we are past that now, the Treasury is now finding creative ways to hand out taxpayer money with no strings attached, and no upside for the taxpayer (yes, technically the CDO vehicle might show a profit, and if it does, the taxpayer SPLITS it with AIG. But if you believe you will see anything from this chicanery, I have a bridge in Brooklyn I'd like to sell you).

Back to the article:

A person familiar with the government's rescue plan says it wasn't specifically designed to benefit individual banks at the expense of U.S. taxpayers and AIG, which will end up bearing the risk of the CDOs. However, officials wanted to give banks sufficient incentives to sell the securities so that AIG could cancel the swaps.

The contract cancellations will free the insurer from additional collateral calls on those swaps, which also have been responsible for billions of dollars in write-downs that AIG has logged in recent quarters. The plan is analogous to an insurer buying a house it provided fire insurance on, negating the need for an insurance policy on the home....

Yves again. This is utter rubbish. CDS can be cancelled without going through this nonsense. It is called "commuting" the contract. You negotiate and pay a price. See here for an example. And the house illustration serves to demonstrate how roundabout and inefficient this mechanism is.

Back to the article:

In an interview this week, AIG Chief Executive Edward Liddy said the revised rescue plan "ring-fenced" key problems, including the swaps. It also helps keep these problems from affecting AIG's other businesses, while giving the company more breathing room to sell assets to pay back a large loan from the Fed that is central to the bailout....

Yves again. This is artful, to put it politely. This deal only applies to $75 billion in insured value of so-called multi-sector COOs. Lest we forget, AIG also entered into CDS to enable European banks to evade statutory minimum capital requirements. I have not independently verified the figure, but have been told those agreements cover $300 billion of risk, and the Journal later also mentions that AIG has insured over $300 billion of assets excluding these CDOs. There are more shoes still to drop.

Source >  Naked Capitalism | nov 12