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Everyone knows what the problem is. Banks and Tim Geithner think toxic waste is worth more than the anyone is currently willing to pay. Hedge funds, vulture funds, even new funds small investors might be able to buy into, all of them think the prices will go lower. This is a standard practice: if someone is headed for bankruptcy, wait until they file to buy their assets. Of course, you might have to bid against other people, but in this case, there are so many assets that you don’t really have to worry about that. How many of these vultures are AIG counterparties who have already been paid off by the Treasury?
Just how greedy are these people? Consider John Paulson. Last year he made huge returns, 36% after fees in one of his hedge funds, mostly from shorting Fannie Mae and Freddie Mac, Lehman Bros. and other financial institutions early in 2008. What is he doing now?
"The government stepped in last year with $150 billion because AIG was too big to fail," said Treasury Secretary Timothy Geithner. "The stock was trading in early September at more than $20 per share.
Today it's worth less than 50 cents a share. If we keep pumping billions of tax dollars into it, I'd say we'll soon reach the point where AIG won't be too big to fail, and then we can stop giving them money."
Mr. Geithner explained that President Obama is using a similar principle in the housing bail out.
"By forcing banks to cut payments for irresponsible homeowners rather than foreclose, the value of all mortgages will continue to decrease until many banks will cease being too big to fail," Mr. Geithner said.
It's beginning to look like American International Group (NYSE: AIG), the largest U.S. insurer, will file for bankruptcy possibly today or tomorrow. What could keep it from filing is a $75 billion raise in capital from the remaining investment banks. But thanks to a $14 billion margin call on its Credit Default Swaps (CDSs) resulting from S&P's downgrade of its credit rating, this capital raise is unlikely to happen.
"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."
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.
The counterparties have never been disclosed publicly. However, banks that sought and received collateral from AIG included Goldman Sachs (GS:Goldman Sachs Group Inc
GS 95.70, +1.80, +1.9%) , Merrill Lynch, UBS AG (UBS:UBS Ag
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UBS 9.85, +0.49, +5.2%) and Deutsche Bank AG (DB:deutsche bank ag namen akt
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DB 35.05, +1.13, +3.3%) , The Wall Street Journal said in November.
Now that the government's bailout of AIG has ballooned to more than $160 billion, some politicians want to know which financial institutions benefited from taxpayer support provided to the insurer.
American International Group Inc (AIG.N) faces heightened probability of a potential bankruptcy filing by the holding company, a Credit Suisse analyst said Tuesday, a day after the insurer's credit ratings were cut, jeopardizing efforts to raise cash necessary for its survival.
You have to wonder what else has to go wrong, how much more wealth will need to be destroyed, before the people on Wall Street get the message that it's no longer business as usual.
Like it or not, we're all in this together now. It's cooperation and compromise, not the usual every-man-for-himself competition, that is going to get us out of this mess. And the sooner people on Wall Street embrace that reality, the better it will be for everyone.
A company led by Hank Greenberg, a former chief executive of American International Group, may try to take over the insurer in a proxy fight or tender offer, according to a regulatory filing.
There is a rumor about Goldman Sachs flying around on the street - allegedly they are about to report their second-best quarter in history, +$12 billion or so.
In addition, there is this from Bloomberg:
A 47 percent gain for the company’s stock price this year and a return to profitability in the first quarter may help Chief Executive Officer Lloyd Blankfein raise new money, analysts said. That might let Goldman Sachs, the sixth-biggest bank, return the cash received in October from the Treasury’s Troubled Asset Relief Program and shake off compensation and hiring restrictions imposed on banks that took the U.S. aid.
Gee, you don't think being paid by the taxpayer through AIG's "conduit" for losses that didn't (yet) happen at 100 cents on the dollar might have anything to do with that, do you?
And further (and potentially much worse) there is the repeated statement by Goldman executives that they were "fully hedged" against a potential counterparty default by AIG.
One wonders - was that "hedge" to be short the equity on AIG itself, perhaps?
Why is this important?
Because if that's how Goldman hedged they got paid twice and the taxpayer literally got robbed.
Someone in Congress needs to look into this now; there are already rumblings of investigation. Those rumblings need to get a lot louder and turn into subpoenas, not "polite inquiries."
If in fact Goldman (or anyone else) was "hedged" against a possible credit loss from their CDS with AIG and they were able to collect on that hedge (no matter what it was) those payments through AIG need to be clawed back immediately as nobody is entitled to be paid twice for the same risk and reap what amounts to a windfall profit by quite literally engineering a multi-billion dollar transfer of funds from the Taxpayer to the firm!
This is not small potatoes either - we're talking $100 billion+ in aggregate with these various banks on a worldwide basis.
We the people deserve answers on this right now and if persons in our government handed these banks $100 billion dollars of our tax money for what was a covered bet, allowing them to collect twice on a risk that had not yet been realized (when at most they were entitled to collect once via their private hedging activity) every single person involved in that scandal must be immediately removed from office, prosecuted if possible, and every nickel of those funds must be clawed back by whatever means are necessary.