AIG Sanity

Who is on Wait Wait Don’t tell Me — Right Now!!!

This is a very useful and appropriate commentary on AIG and the media mob frenzy. The Dart Arts of Rovian Politics seem to have gone mainstream in the media. Thank you for this commentary. ……………..

http://thefiresidepost.com/2009/03/21/rovian-media-applying-the-dark-arts-to-aig/

Congressional hearings are supposed to illuminate not excoriate. Some committees feeding off public anger have become kangaroo courts. Targeting families at home and school is beyond the pale. Attacking Bernanke and Geithner will serve no practical purpose. We need to look ahead at the 99% of money lent to the system and see how that is monitored. Let Cuomo and the DOJ focus on the 1%. The bill passed by Congress will go down in flames once it is tested in the Courts.

Memo to MSM: I watched 25 minutes of Pres Obama’s exchange with Leno. The unfortunate remark took all of 5 seconds. And the twits seized on that. Congresscritters: please note.

Someone should remind Joe Nocera that you can’t light a bonfire then wag your finger at others when they add gasoline.
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http://www.nytimes.com/2009/02/28/business/28nocera.html?pagewanted=1
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I don’t doubt this bit of conventional wisdom; after the calamity that followed the fall of Lehman Brothers, which was far less enmeshed in the global financial system than A.I.G., who would dare allow the world’s biggest insurer to fail? Who would want to take that risk? But that doesn’t mean we should feel resigned about what is happening at A.I.G. In fact, we should be furious. More than even Citi or Merrill, A.I.G. is ground zero for the practices that led the financial system to ruin.

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http://executivesuite.blogs.nytimes.com/2009/02/27/is-aig-the-worst-of-them-all/
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My column this week is an attempt to unravel, and explain, some of A.I.G.’s seamier practices. It may be easier to get outraged at Merrill’s bonuses, or Lehman’s bankruptcy, or Bank of America’s idiotic deal-making. But you ought to put aside at least a little anger for A.I.G. No company has cost you, the taxpayer, more money. And no company deserves it less.

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Its truly amazing to see how members of the media takes no responsibility for inciting populist outrage. Instead they gin up all this rage and then condemn lawmakers for having to respond to it. When you tell everyone to be “furious” and “angry” at AIG what in the phuck did Nocera would think would happen when word of these bonuses came out? Oh let me guys, he is going to pull a Jim Cramer and say he was just doing his job. Give me a break.

I thought Obama made the case fairly well on Leno. The point of the bailout — the only point of the bailout — is to protect the financial system, and the only real point of protecting the system is to get banks lending again. The bailout needs to be judged against that.
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The real scandal is that AIG is paying its creditors 100 cents on the dollar. The creditors should have been asked to eat some of the cost. Mind you that was the fault of the Fed last year.

Also: Members of Congress grandstanding during a hearing? I’m shocked!

You are missing the invisible glue to everything. Who earned over 18 million dollars as an investment banker in under 2 years while also ushering in a gargantuan sale to ex-Goldman executives? Rahm Emanuael. Who is the gatekeeper between all the executive and the President? Rahm. Who knows how legislating works well enough to cover or orchestrate a mystery between the executive and legislative branches of government that a senator, fed chairman, the president, and the fed wouldn’t know exact details of what has happened? Research Rahm next article you try to explain the financial restructuring problems of AIG, investment banks, hedge funds and treasury. Tried to post on Joe Nocera’s article too.

Rahm is the missing piece in understanding how all this is being pieced together, how it is all coming together in its understanding and presentation within and from the administration.

I don’t think that this is an honest examination, actually.
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It basically serves Joe Nocera very well to seize the high ground of advocating order and “calm”, but it’s dishonest.
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When he says:
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Or how about those efforts to publicize names of individual executives who received bonuses — efforts championed by Attorney General Andrew Cuomo of New York and Barney Frank, chairman of the House Financial Services Committee. To what end?
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, I guess he can’t even imagine that the end would be “public shame”.
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My real guess is that he can and does imagine exactly what public anger and public shame accomplish, but doesn’t think very highly of the American public.
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This is not to take away some of the excellent points Nocera does make with respect to nationalization or regulation, but his final point –Richard Shelby’s advice that we need a commission to study the problem for the next two years– is almost absurd on its face, given that he’s also highlighted that AIG is now effectively a government money laundering operation for Goldman Sachs under the current regulations.
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It seems that Nocera is much more afraid of the potential negative consequences of public action than he is of the real negative consequences of financiers’ actions on us.
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Calm down? Not on your life, Joe Nocera. Not now, when its apparent to everyone just how necessary it is to recreate our financial playing field so that it doesn’t necessarily favor plutocratic reward at plebian risk.

mpk999 are you really Jane Hamsher?

Stuart – Isn’t it just barely possible that people are right even when they are “self-serving?” Would you demand that people are only to be trusted when they are speaking counter to self-interest?
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SGwhite – Oh really? Wouldn’t you wag your finger at someone who poured gasoline on a bonfire?
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I’m feeling particularly prickly because this mess is just so disgusting at every level. I’d like us to follow our own self-interst which is to restore a little sanity to the discussion. I think Nocera’s column does that.
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Last night Larry King started out the program with an examination of Obama’s Special Olympics gaffette (thanks JK). “Tim Shriver strikes back!”
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joyomama – I caught Joe N on “wait wait” too!

kathy
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If I set the bonfire in the first place, hell no.

Everyone should think on something long and hard. Matt Taibbi and others have recently come out with articles explaining in great detail how the AIG debacle happened. Thats great and believe me I feel better informed for it, however why did it take till now to get these facts out into the public domain? AIG went under last September after all . Did it really take 5 or six months to figure out CDOs and CDSs are? Of course not. But instead of doing that kind of substantive reporting, financial journalists like Nocera instead focused on who were the worst offenders and who you should focus your anger on and how much money we were giving the banks and whether we should nationalize or not. Just about every story was intended to spark outrage at the “greed and corruption on Wall Street” without ever clearly defining what those terms meant. There definitely wasn’t much of an effort before now to differentiate between the bad actors and the employees of these countries who were just doing their job. So excuse me if I am not impressed with Nocera, who just a month ago was ginning up rage against AIG, now imploring everyone to calm down. Whether some of the points he raises are true or not is beside my point. He helped create an atmosphere in this country of all this populist rage against Wall Street which in turn put pressure on both the White House and the Congress to act. If he isn’t happy with what is going on then perhaps Nocera should think about that the next time he writes a column directing his readers to be angry and furious at the same people he is now saying shouldn’t be villified.

no, but I tried to comment her @huffington only to end up on her own small blog, which i’d never seen before this week. I think she is thinking right, but missing a goal. A bit too conspirisy obsessed and sounds a little too parinoid (although, sounding paranoid will get you more readers online i suppose).

I am a dem, and actually a giant Rahm fan for years now. But his selection for COS, I thought was brilliant except for my uncomfortableness with his banking history. When I tried to look up his banking history and connections, I didnt find a lot of information in google and have no reason/time to research it. What I did find were bosses, boards, and players between his firm, a large chicago firm, new york firm sold to, politicians, and some general information on some deals he profited from. Then this AIG bonuses and mysteries event started happening and I got this deja-vu nervousness about it. Dodd didn’t know when someone typed in the date “loophole” for bonuses? The administration didn’t know details the day this broke, but Obama and Axelrod clearly thought at first this was a distraction that could blow over. Why would the upper circle of the administration seem to think this could blow over without scrutiny?

I am terrified, as us wussy-liberals tend to be by nature, of dems being in power and doing corrupt, shady, or anything that gives conservatives the perfectly valid criticism of corruption and large government. Why can’t once we are in power, we actually build respect from the people instead of walking into the open arms of a big-machine corruption stereotype? Republicans learned from dems and they get it, they can whine and stick around without backlash if they pull david vitter and airport bathroom scandals while we have murthas and dodds and money-in-freezers setting up the president to look like the leader of corrupt theives instead of horny ones. That pisses me off more than anything. Dems are incredibly organized and well-researched in exploiting republican governing sins but instinctively look for clouds and defensive posturing around our own integrability questionable members. see:Daschele. Not only should dems show a strong honesty, transparency, and integrity, but dems need to show they can prune internally before trimming neighbor’s trees.

I’m always smacked down hard anywhere i try to express support to democrats but call for basic integrity.

The honest thing no one wants to say is that Democrats obviously made a calculated political decision to try not to piss off self-proclaimed capitalists. They tried to avoid an accusation war with conservatives by sacrificing what is right for what was demanded by wall street supporters. There was no “consideration for the contracts” argument, it was clearly done to avoid being called socialists by conservatives and it blew up in their face. I said all along, do whats right. We know whats right. I don’t care about getting the bonuses back or the the money spent – we’d get more money back by pulling back 1 brigade of troops from overseas. Government would find a different way to ‘waste’ the money. We are getting more money back from states refusing parts of the stimulus. Its time to find out who in government is not doing the right thing for the people. The only purpose of government is to protect us, the people. Protect us from other countries and threats, protect us from each other, protect us from business, science, religion. Otherwise, we’re all capitalists and have every right to do whatever to get as much as we want to pursue in our pursuit of happiness. When the government isn’t protecting us, we have an open government in order to find out why. We the people were not protected from whatever was happening in the banking, investment, and insurance world. Who in government is responsible for deliberately weakening a protection of our money being used to fix AIG, to protect us from an industry failure? Dodd says it was treasury. I’m saying, point your attention to Rahm.

And, by the way, this bill was thousands of pages. It was not typed up on a typewriter or written by hand. Doesn’t every single word-composition software program out there have version tracking, check-in and check-out systems, and reversion copies? It should be an hour’s work for any half-competent tech person to look at the electronic document and revert back to see the exact user that actually typed in the february date to Dodd’s amendment. This is clearly a mystery because someone doesn’t want anyone to know.

sgwhite – But I’ve set bonfires on many occasions (I was a summer camp director for a while) and I would have been mighty unhappy if someone crashed the party with gasoline, or ignored my safety instructions. Gasoline and bonfires don’t mix. But that doesn’t mean you can’t have bonfires. just saying. Different point of view, apparently, or different experiences with bonfires.

I meant to say “…’s excessives and oppression.”

*protect us from each other, protect us from business, science, religion = business’s excessives, science’s excessives, religion’s excessives, and business’s oppression, science’s oppression, and religion’s excessives, [in order to be free men]. And yes, the seperation of powers and federalism is the mechanic to protect us from government’s oppression and excessives. Tried to shorten my post and that line read very wrong to me without that clarification.

Are we allowed to get angry now?

How about now?

Please do, SZ. I can’t get rid of the feeling I have that both the DOJ and the FBI should be working hard at finding out whether crimes have been committed. I heard Pres Obama say that the shenanigans were legal. I am not so sure. Cuomo may be on to something. But a couple of grand juries may be in order. Any legal eagles among our commenters with a point of view?

Here’s Tim Geithner’s “plan”:
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Toxic Asset Plan Foresees Big Subsidies for Investors
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…because bonuses weren’t enough to get our financier class feeling confident enough to put down their squash rackets, and get into the office to make some loans.
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Can we say “Rumsfeld” now?

John Cole describes Geithner’s bank bailout plan:
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If this were a medical emergency, it appears it would look something like this:
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The Illness- reckless and irresponsible betting led to huge losses
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The Diagnosis- Insufficient gambling.
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The Cure- a Trillion dollar stack of chips provided by the
house.
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The Prognosis- We are so screwed.
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There also a good exchange between Erin Burnett (Pox and Friends International Super Star) and Mark Haines of CNBC with Rep Brad Sherman at dailybail.com. Pointed.

bitterpill
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I am not legal expert but I think the point you might be missing is that the system was so screwed up that no crimes even had to be committed for all of this to happen. Now I am still sifting through all of the information from various sources about AIG but here is one thing that most agree on, Cassano didn’t lie to anybody or misrepresent anything to anyone except for maybe internally to his own bosses. The problem was that he could be honest and still game the system. What I mean is this, the rules changed which used to govern how much leveraging a bank could engage in. So if a bank made a 30 dollar play and only had 1 dollar in assets to back the play it was perfectly legal. Then the rules changed where these banks and other entities could basically invent vehicles to use to do this leveraging with. In effect that put a stick of dynamite in one hand and a cigarette lighter in the other. I admit that Taibbi’s article went most in depth on this but it seems pretty clear that although the moves Cassano made were crazy and to a certain extent immoral, by the time he made them the system had been greased to the point where it was still fine and legal. And even the declarations about how much money AIG actually had indeed indicated that they were playing with funny money. So you see this is why I am pissed and have no faith in any “financial journalists”. This wasn’t really a mystery, everybody involved knew what was going on even if they didn’t really grasp to what extent. But NOBODY was reporting on it until AFTER the system imploded. And thats what Jon Stewart was talking about when he nailed Jim Cramer.

Thanks SGW: I have no quarrel with the President’s argument that it was legal. But I am thinking about misrepresentation. I am not good at this legal stuff, but I have this nagging feeling that misrepresentation has some legal consequences. Same with the false documentation on the mortgages. Has anyone been charged on the scams in that field? From what you say I am inclined to begin this way: if no laws were broken because AIG was engaged in legal activities then what laws governed those deals. What about contract law? I don’t want to appear to be quibbling, SGW. Nor do I want to sound obtuse ( altho” I won’t complain if I come across as one!). But contract law must have been used in the CDSs. Surrely misrepresentation was involved. Unless of course deceitful practices were ok. If AIG issued a contract which it knew it could not cover what did it do?

bitterpill8:
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That’s a beautiful, incredible defense of why bonuses matter by Representative Brad Sherman.
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I’d ask Joe Nocera to watch that exchange ( http://plus.cnbc.com/rssvideosearch/action/player/id/1067075944/code/cnbcplayershare ), and to tell us whether or not Congress is “out of control”.
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I’d like Joe Nocera to actually refute Congressman Sherman, instead of the emails held out by AIG’s CEO Libby.

bitterpill
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Again I am no legal expert so feel free to disagree with my take but the point I was making is that at least with AIG (but I am sure with many other Wall Street firms) the players all knew what was going on. They didn’t have to lie. Basically the CDOs were away to bundle bad assets with good assets and then sell them off and people were buying them fully knowing this but thinking that the bad assets, in this case bad mortgages, would never go belly up at the same time so they could still profit on the “good” assets. Taibbi says this is what made them attractive to “conservative” investors because it seemed like SOMETHING in the bundle would always make money without a lot of risk. Boy were they wrong. I hope they find something to convict the Cassano guy on but it doesn’t seem like he ever did anything that they could charge him with.
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Now on the actual mortgages I do believe there have been some lawsuits brought over those. I know the NAACP just brought a lawsuit the other day but its more based on the fact that the companies were offering subprime mortgages rather than traditional mortgages to minorities who had the same credit worthiness as white customers who were offered the traditional mortgages. I think there will be some recriminations for that activity eventually but I doubt any jail time will be involved unless its for the worker bees, not the big wigs.
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In the end what needs to happen is that the regulation and the regulators need a huge overhaul. If we could have kept all these big banks smaller we would have never had this systemic problem. And if we had clearer guidlines on who was supposed to be providing oversight on what then maybe the smallish OTC wouldn’t have been the one not looking over AIG’s shoulder.

George Stephanopoulos tweets:
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Early read on Geithner plan from plugged in investment source asset managers he knows just won’t play until sure WH can control Congress
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Hey Joe Nocera: How do you think the WH plans to control Congress (hint: it has something to do with public relations and the papers)?

I will say this, some of the vitriol thrown at the AIG employees is over the top and absolutely wrong. Nobody should be having their life threatened for working for the company or even for getting a bonus. But I will say this, where was this indignation over the death threats aimed at President Obama during the election season much of it due to the media’s coverage of Sarah Palin’s rhetoric? Where is this indignation when you have the Glenn Becks and the Chuck Norris’s basicially encouraging the over throw of the government? Where was the outrage over Bernard Goldberg putting out a list of the “vast liberal conspiracy” when just last year a man shot up a church he said in part because of another list Bernard Goldberg put out about people who are supposedly screwing up the country? Public officials get death threats directed at them all of the time because someone in the media decides to demonize them. So why is Nocera only concerned when its AIG employees? And only after he himself has helped to demonize them? Thats the part that kills me.

SGW: not to push the point but your responses really make me think. If both parties knew they were handling junk, and hoped it will be mixed with good stuff and eventually realised, I see conspiracy. I am not being dramatic. But there appears to be a lot of nudge nudge wink wink stuff. I am selling s*it; you’re buying sh*t. By the time we take our cut and go off to a resort island someone else will be forced to shovel it – Treasury???

SZ: It is refreshing to find a Rep who can take on the Villagers and go toe to toe: knowledge up againt propaganda.

Incredibly, some people are still angry –in spite of Joe Nocera’s fine admonishment for them to “calm down”:

It’s over — we’re officially, royally f*cked. no empire can survive being rendered a permanent laughingstock, which is what happened as of a few weeks ago, when the buffoons who have been running things in this country finally went one step too far. It happened when Treasury Secretary Timothy Geithner was forced to admit that he was once again going to have to stuff billions of taxpayer dollars into a dying insurance giant called AIG, itself a profound symbol of our national decline — a corporation that got rich insuring the concrete and steel of American industry in the country’s heyday, only to destroy itself chasing phantom fortunes at the Wall Street card tables, like a dissolute nobleman gambling away the family estate in the waning days of the British Empire.
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The latest bailout came as AIG admitted to having just posted the largest quarterly loss in American corporate history — some $61.7 billion. In the final three months of last year, the company lost more than $27 million every hour. That’s $465,000 a minute, a yearly income for a median American household every six seconds, roughly $7,750 a second. And all this happened at the end of eight straight years that America devoted to frantically chasing the shadow of a terrorist threat to no avail, eight years spent stopping every citizen at every airport to search every purse, bag, crotch and briefcase for juice boxes and explosive tubes of toothpaste. Yet in the end, our government had no mechanism for searching the balance sheets of companies that held life-or-death power over our society and was unable to spot holes in the national economy the size of Libya (whose entire GDP last year was smaller than AIG’s 2008 losses).
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So it’s time to admit it: We’re fools, protagonists in a kind of gruesome comedy about the marriage of greed and stupidity. And the worst part about it is that we’re still in denial — we still think this is some kind of unfortunate accident, not something that was created by the group of psychopaths on Wall Street whom we allowed to gang-rape the American Dream. When Geithner announced the new $30 billion bailout, the party line was that poor AIG was just a victim of a lot of sh*tty luck — bad year for business, you know, what with the financial crisis and all. Edward Liddy, the company’s CEO, actually compared it to catching a cold: “The marketplace is a pretty crummy place to be right now,” he said. “When the world catches pneumonia, we get it too.” In a pathetic attempt at name-dropping, he even whined that AIG was being “consumed by the same issues that are driving house prices down and 401K statements down and Warren Buffet’s investment portfolio down.”

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If Joe Nocera thinks that people out here should shut up and wait two years for the Senator from Alabama’s proposed “commission” to do what the 9/11 commission did –nothing at all– instead of demanding the change that we were promised, he’s the one that’s “out of control”.
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If he thinks that we’re going to read:
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1) the CBO Report on the President’s Budget which predicts (at least) 9 and a half percent unemployment rates
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2) reports on Secretary Rumsfeld’s –sorry, Secretary Geithner’s “plan” to sell “troubled” assets back to banks (after we buy them all at face value)
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3) reports on how two occupations are going to continue –even escalate– as if nothing is happening, reports on how single-payer health care reform –the cheapest, most efficient option– is “off the table”
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and 4) reports on how nothing –not even semi-treasonous, semi-fraudulent profiteering in a time of war– is grounds for expulsion from luxurious membership in the financier class
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, then Joe Nocera is truly “off the rails”, not “the body politic”.

Sorry, that should read:
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1) the CBO Report on the President’s Budget which predicts (at least) 9 and a half percent unemployment rates
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2) reports on Secretary Rumsfeld’s –sorry, Secretary Geithner’s “plan” to sell “troubled” assets back to banks (after we buy them all at face value)
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3) reports on how two occupations are going to continue –even escalate– as if nothing is happening,

4) reports on how single-payer health care reform –the cheapest, most efficient option– is “off the table”
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and 5) reports on how nothing –not even semi-treasonous, semi-fraudulent profiteering in a time of war– is grounds for expulsion from luxurious membership in the financier class

bitterpill
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It probably was a conspiracy to an extent but the laws made it legal. Put it this way, imagine if the Congress repealed insider trading laws. Then you would have all kinds of conspiracies going on but they would still be legal. I am basically agreeing with everything you say but just saying that it seems like its all legal because of the changing of regulations by the Congress with Phil Gramm and I also should say the SEC had something to do with it because they, I believe, approved of the new debt instruments.

I see your point, SGW. SZ is on a tear. Good luck to you both. Have to take off to cook dinner: my duty Saturday night. Will check in two hours from now, Stay well you two.

Why can I not be outraged? Why should I be calm? You know in China they executed the major players in the tainted milk scandal. Think much milk will be intentionally tainted in the near future?
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I don’t seriously suggest such action, but what some of these people did has also destroyed lives and brought this country to a breaking point.
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If you think punishment is unlikely, crime bbecomes easier. Even if some of this was “technically” legal, it was wrong.
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White collar criminals are criminals. The fact that they get such a free pass is what makes it so encouraging to engage in this behavior.

And BTW, does anybody have a plan to get rid of these “toxic assets” without leaving the taxpayer on the hook?

SZ
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You know, I am no economist and I hold Dr Krugman in high regard but I read the article that purports to reveal Geitner’s plans for the bank and I don’t see it as a plan to buy the troubled assets at face value. At least allegedly thats not what the plan is supposed to do. Dr Krugman is arguing that its not a confidence problem and that we will end up overpaying for toxic assets in an effort to bring in private capital. But here is something from the article itself that stood out to me.
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Risk-taking institutional investors, like hedge funds and private equity funds, have refused to pay more than about 30 cents on the dollar for many bundles of mortgages, even if most of the borrowers are still current. But banks holding those mortgages, not wanting to book huge losses on their holdings, have often refused to sell for less than 60 cents on the dollar.
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The result has been a paralyzing impasse. Banks, unwilling to sell their loans at fire-sale prices, have had less capital available to make new loans. Mortgage investors, unable to leverage their investments with borrowed money, have been unwilling to pay more than fire-sale prices.

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Now I don’t know if this information is correct but it would seem that what Geitner is trying to do is get private investors to jump in at less than face value but more than at 30 cents on the dollar. Now again I don’t claim to be an economist but this part of the article made sense to me.
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To break that impasse, the government’s crucial subsidy is meant to provide investors with the kind of low-cost financing that has been utterly unavailable in today’s credit markets.
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Administration officials refused to comment on the details of the plan, and refused to say what kind of interest rates the government would be charging investors. But government officials have long maintained that they could charge slightly more than the Treasury’s own cost of money and still offer rates far less than the private markets would demand.

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Again I can’t attest to whether this is all accurate or not but if it is it makes sense to me. If we could offer loans that would charge more interest than it costs us to lend it then that would seem like a win for me. And if it works and private investors come off the sideline then it would be a win for the banks even if its at lets say 45 cents on the dollar. Now I would guess the biggest worry would be that the private investors would default on the loans and honestly I have no idea how to mitigate that very real possibility. However in just a common sense way it would seem to me like it would work. The one thing is that Dr Krugman seems to assume that the private investors will simply default on the loans after they buy them. But he never considers the fact that the troubled assets are actually really assets. Meaning that there actually will be homes and their mortgages in these bundles which may end up being decent collateral should the housing market come around in a few years when we could sell those homes again and recoup the taxpayer’s money. I think I will leave a comment on his blog and see if he responds.

The thing that gets me is quotes like this:

They are the ones the company badly needs to keep if it hopes to sell those units at a healthy price. Taking away their bonuses — after they’ve already put the money in their bank accounts — hardly seems like the right way to motivate them. And demonizing them in Congressional hearings doesn’t help either.

I am pretty sure there are millions of people that would stand in line for hours for these employees’ jobs if they are finding motivation a problem. People like myself who have been 6+ months without employment beyond temp work in warehouses and assembly lines despite having college educations. And even if those jobs requires years of specific experience, there is without a doubt thousands of people that used to work on Wall Street that would line up to be paid 1/10th of their salary (what, $400,000/year?) to do the same job.
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Those crocodile tears for AIG employees get no sympathy from any actual people living in the real world – the one in which ~25% of the working population is either unemployed or underemployed.

I think James Galbraith makes a compelling case that the Treasury plan is both wrongheaded and insufficient. Combined with Krugman and others who have gotten a lot right while our masters were getting everything wrong, I’d trust them hands-down over the people who got us in this mess.
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Anger is justified but the people who should be the rightful owners of our civic outrage will do everything in their power to deflect it. BTW, they have a lot of power, and specialize in obfuscation and misdirection. So, any time you hear their minions in the noooze fixate on deficits, what Chris Dodd did or what Republicans think, turn away. You’re being had.

SG, while I agree that the overall problem was a systemic failure to regulate (and the inevitable “success” of thirty years of “conservative” Laissez-faire deregulation), Joseph Cassano’s behavior makes me think that everything wasn’t quite “legal” with AIG’s CDS business.

shepherdwong
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Well like I said I am no legal expert, however what specifically do you think Cassano did that was illegal?

James Galbraith says.
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The other problem was price. The only price at which the assets could be disposed of, protecting the taxpayer, was of course the market price. In the collapse of the market for mortgage-backed securities and their associated credit default swaps, this price was too low to save the banks. But any higher price would have amounted to a gift of public funds, justifiable only if there was a good chance that the assets might recover value when “normal” conditions return.
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That chance can be assessed, of course, only by doing what any reasonable private investor would do: due diligence, meaning a close inspection of the loan tapes. On the face of it, such inspections will reveal a very high proportion of missing documentation, inflated appraisals, and other evidence of fraud. (In late 2007 the ratings agency Fitch conducted this exercise on a small sample of loan files, and found indications of misrepresentation or fraud present in practically every one.) The reasonable inference would be that many more of the loans will default. Geithner’s plan to guarantee these so-called assets, therefore, is almost sure to overstate their value; it is only a way of delaying the ultimate public recognition of loss, while keeping the perpetrators afloat.

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I don’t know but for me I still believe the loan idea is a viable one. Thats not to say that every loan will be paid back and won’t default. But I believe enough of them will pay back the loan and the ones that don’t we still have potential long term to recoup the money by selling the assets at a later date after they have appreciated again. If there is money sitting on the sideline that could help recapitalize the banks I think you have to do something to try to facilitate bringing it in. At this point I am going to just wait for the official announcement of the plan because evidently I am missing something here because I don’t see why these people are so sure it won’t work.

Well, for one thing, if AIG was reporting that CDS portfolios were worth more than they knew they were worth, that’s a rather straightforward fraud that’s still regulated and illegal. I’m not a lawyer or an economist but the lack of interest in the illegality of what went on seems more willful (read: political ass-covering) than what’s possible. They threw Tommy Chong in prison for selling ceramic bongs, after all.

“I don’t know but for me I still believe the loan idea is a viable one. Thats not to say that every loan will be paid back and won’t default. But I believe enough of them will pay back the loan and the ones that don’t we still have potential long term to recoup the money by selling the assets at a later date after they have appreciated again…I am missing something here because I don’t see why these people are so sure it won’t work.”
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As I understand them, they question whether, a) they can get the enough of these toxic assets off bank balance sheets with this program and b) whether the value of the assets will recover quickly enough to start to return for buyers, including the federal government. If not, weak liquidity in the credit market, meaning very tight lending, meaning little job creation and economic growth, resulting in a very long recession or depression with nothing to show for it in the end except a colossal debt that we can’t afford to repay. Also, that we are attempting to continue are monumentally failed strategy of creating wealth through trading paper, rather than restructuring markets for a sustainable future. That’s all if the program can instill enough confidence to keep the whole multi-trillion-dollar house of cards from collapsing in the meantime.

Now I admit I’m neither a legal or financial expert, but if the banks are unwilling to sell their mortgages for less than 60 cents on the dollar and private equity refuses to buy at more than 30 cents on the dollar, why not let the banks hold on to their assets until the foreclosed properties that these securities are based on are resold and represent mortgages with value?
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If we pump the taxpayers funds into the secondary credit markets or create a new one using freddie and fannie to provide mortgages directly to the public until such tim the banks can eventually turn their toxic assets into valuable assets?
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Now maybe this is a dumb idea because I don’t know jack about high finance but if we use taxpayer funds to create a new credit market, wont that be creating more competition and isn’t that good for capitalism?

“Now maybe this is a dumb…but if we use taxpayer funds to create a new credit market, wont that be creating more competition and isn’t that good for capitalism?”
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That’s exactly not the dumb idea, as Treasury/Wall Street critics see it. In addition to breaking apart the insolvent institutions and selling off their viable parts, government would create new institutions and mechanisms to fill the lending gap. The whole problem is that our current masters would have to give up some of their high perches and fat perks (at least temporarily) and have threatened us with financial mayhem and possible economic collapse if we try to fire them or make them try to live on only a quarter-million a year:

Banks, worried that the proposals are distracting employees, are trying to reassure staff and keep them focused on clients. [Bank of America Chief Executive Officer Kenneth] Lewis said the taxes could cause “unintended harm” and delay the recovery of the financial system. Dimon urged workers to call politicians and voice their opinions, a spokesman said.

I’m sure that all the people who lost their jobs, homes, healthcare, savings and are wondering where their next meal is coming from or where they’re going to sleep at night take solace in the contention that no laws were actually broken. They’re probably on their knees right now thanking God that the people that put them in this situation aren’t actually coming to harm or even facing jail. I know if I was unemployed, uninsured, had no place to live and no money to provide for my family that I’d be wondering what all the fuss was about just because the people that destroyed my life were getting million dollar bonuses for doing it and keeping THEIR jobs. When you think that preventing tens of thousands of people who are earning over $250,000 a year won’t be getting bonuses on top of that…you just have to stop and think you’re not being fair to them. Whether what they did was illegal or just unethical wouldn’t matter one single bit to me. I would be thinking that I’m ruined and the people who ruined me and my family were still raking in the bucks, going home every night, having a nice dinner and sleeping in their own beds. Very little solace there.

Oh, and one more reason many economists want these giant zombie banks broken apart (as opposed to Treasury’s plan to keep them whole): under-regulated markets leading to “too big to fail” turns out to be a very costly and dangerous way to organize our financial sector. Who could have predicted?

shepherdwong
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But isn’t the whole point that NOBODY knows how much the CDOs and CDSs were or are really worth? Kinda hard to prove that they over sold the goods if we can never really evaluate how much the goods should have been valued at.

SG,
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We know what we’ve lost in real estate value which, in addition to undercapitalization, is the basis for the whole collapse and no one thinks that market value will recover any time soon. And then there’s this:

About $2 trillion in credit derivatives in 1989 jumped to $8 trillion in 1994 and skyrocketed to $100 trillion in 2002. Last year, the Bank for International Settlements, a consortium of the world’s central banks based in Basel (the Fed chair, Ben Bernanke, sits on its board), reported the gross value of these commitments at $596 trillion. Some are due, and some will mature soon. Typically, they involve contracts of five years or less.
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Credit derivatives are breaking and will continue to break the world’s financial system and cause an unending crisis of liquidity and gummed-up credit. Warren Buffett branded derivatives the “financial weapons of mass destruction.” Felix Rohatyn, the investment banker who organized the bailout of New York a generation ago, called them “financial hydrogen bombs.”
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Both are right. At almost $600 trillion, over-the-counter (OTC) derivatives dwarf the value of publicly traded equities on world exchanges, which totaled $62.5 trillion in the fall of 2007 and fell to $36.6 trillion a year later.

Otherwise, the “value” is what people will buy them for and, right now, it looks to me that the merchants want to guarantee that they are well-paid regardless of outcome and the buyers want to rig the system to protect them from losing money. What does that tell you?

SG:
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You know, I am no economist and I hold Dr Krugman in high regard but I read the article that purports to reveal Geitner’s plans for the bank and I don’t see it as a plan to buy the troubled assets at face value.
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I am also not an economist, and I also hold Dr. Krugman in high regard. It is unfortunate that Jay Ackroyd has not weighed in here.
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You’re right, the plan is not to buy the worthless paper at face value, it is to hold auctions in which investment houses (gamblers) use 97 percent government money loaned at undisclosed rates (which may be slightly above 0 percent) at undisclosed terms (which may be that there is slightly above 0 penalty for default) to buy the worthless paper from the banks at as close to a price as possible that will not show a loss on the banks’ balance sheets –face value.
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what Geitner is trying to do is get private investors to jump in at less than face value but more than at 30 cents on the dollar.
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No, but I’ll let Yves Smith at Naked Capitalism rephrase my explanation:
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Having the banks realize a price at least equal to the value they hold it at on their books is a boundary condition. If the banks sell the assets as a lower level, it will result in a loss, which is a direct hit to equity. The whole point of this exercise is to get rid of the bad paper without further impairing the banks.
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So presumably, the point of a competitive process (assuming enough parties show up to produce that result at any particular auction) is to elicit a high enough price that it might reach the bank’s reserve, which would be the value on the bank’s books now.

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Do you ever sell or buy stuff on eBay, SG?
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You know how the seller can set a secret bottom price (a reserve), so that if no buyer meets that price, the deal is off –but the reserve is secret, so that nobody knows the real value to the seller prior to the auction?
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That’s what the banks’ reserves at these auctions will be. The government is counting on the fact that these effectively collateral-less (the only collateral is the worthless paper itself) hair-above-zero loans that make up 97 percent of the buyers’ moneys will tempt the buyers into paying money (that isn’t theirs and for which there’s no risk of loss) handing over face value, so that the reserves are actually exceeded, and the worthless paper isn’t on the banks’ balance sheets.
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If we could offer loans that would charge more interest than it costs us to lend it then that would seem like a win for me.
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But the loans are to buy worthless paper, so the most likely outcome is default…and if the only collateral for these loans is the paper itself, then the defaulting parties can just give back the worthless paper to the government, and keep the government’s money. Make sense, SG? You’re assuming what Geithner hopes everybody will assume, i.e. that the loans will be repaid, because the securities that the loans purchased will go up in value from their fire-sale price.
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Think about it like this:
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Imagine a bank –one of the biggest in the world– has already bought multiplied-by-ten-thousand overpriced shares –shares sold at the absolute peak of a bubble– in a movie theater’s stock after the movie theater has burned down to the ground. The bank now has something on its books that says that it has enough of something in monetary value to cover what’s called the “fractional reserve”, which is the FDIC’s minimum balance of wealth required for a bank to make loans, but in reality, the only thing keeping the FDIC from taking over the bank is that the bank isn’t writing down in the books that the movie theater was destroyed by fire.
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There’s no chance that the movie theater is coming back, SG. It’s gone. Maybe there will be a theater on some other block some other time, but this one isn’t it. The stock the bank owns is insanely overpriced stock in ashes.
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So now imagine that, instead of the FDIC coming in, taking over the management of the bank, recapitalizing it up to fractional reserve standards, and selling the bank back out into the open market, the Treasury stops this process from happening for whatever reason. .
Some people gossip about the Treasury Secretary not wanting to fire his friends if the FDIC were to take it over (having worked for the people who own the bank with the bad shares), some people say that the bank is involved in even more bad deals than we know about, some people say that it’s because the Secretary feels bad for all of the people who own stock in the bank, and government officials all say that all of the nuclear devices in the world will simultaneously explode if the FDIC steps in.
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For whatever reason it’s not happening, no matter what anybody thinks about it.
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Instead, Treasury is going to acquire a little rental space, hire some stage hands, and put on a play. The play will have three acts, and will be about a bank who has stock in a movie theater to sell at an auction. The extraordinary thing about this little production is that the audience will be composed of a select group of investment capital representatives and high-stakes casino gamblers, and that they will actually be able to participate in the play –if they feel like it, of course.
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“So“, you ask, “How would the audience members participate in a theatrical auction? Would they be bidding with play money?”
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…And of course you would be absolutely right! They are going to bid on the bank’s movie theater stock using big sack-fulls of money that the Treasure has handed to them on the way to their seats. The audience paid a tiny cover charge at the door in their own money, but the government helped them with that expense, too!
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Another amazing thing about the production is that the price of the stock will be bid upon starting at its value in the play –you know, where the script says that the movie theater is still standing there showing movies to paying people– and a big part of the fun is that the audience will be encouraged by the theater ushers to bid even higher than they would if this were a real auction. Of course, the audience members who aren’t feeling sick by the whole thing participate with enthusiasm, since it isn’t their money anyway. The bankers also smile enthusiastically as they stuff the audiences bid money into their pockets. When the bankers shout “Sold!“, the place erupts into raucous laughter at the absurdity of the situation as champagne corks pop!
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Finally, as a parting gift to the audience, they are allowed to keep the stock certificates to the burnt-down movie theater that they got from the play auction as a souvenir. When they ask about owing anything for these fictional movie theater securities, Treasury tells them “Don’t worry about it. Go ask your friends if they’ll buy these things from you, and if nobody does, just give them back to us in a few years.“.
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Treasury now tells the bank to keep on keepin’ on, that it should go make some loans (for heaven’s sake!), and to tell the FDIC that it’s going to write down in its books the amount of cash Treasury gave it for the fake securities during the play, and cross out the movie theater stock as having been sold.
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Imagine now, SG, the realities with which we would be left:
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1) The movie theater is still in ashes, and nobody is paying money to go see movies
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2) The bank is still under no obligation to make any loans to anybody, and will probably just wait to see what happens
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3) The Treasury –that means us– is out the real money that is now sitting in the bank
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4) A bunch of investment capital movers and high-stakes casino gamblers might talk other idiots at another bank into buying prop movie theater stock if they can figure out a way to hide them under a real stack of stock certificates
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That’s my understanding of what the Treasury is proposing to do, SG.
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If they just dispensed with the play auction and the phony movie theater stock, and did what the FDIC is supposed to do with banks who f*ck up this badly, we’d still be out a crap-load of money, but not as much as we’d be if we just recapitalized the banks at what was needed to maintain fractional reserve standards, and not what was needed to maintain the bubble value of the same mortgage-backed securities whose insurance policies’ payouts are bankrupting AIG.
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But they’d have to take over ownership of these “institutional” banks from families that have had their names on the doors, and portraits on the walls for generations, and we can’t have that, can we? How would people look each other in the eye at the club, SG?
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Anyway, feel free to correct my understanding of what I’ve been able to gather from the past few hours of reading analysis of this plan. It’s been make infinitely easier to research Geithner’s “new” plan because it’s the same one that Hank Paulson was flogging back last year.
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I hope that you’ve at least had some entertainment value out of this explanation, SG.

SZ
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Here is my thing, Smith and I think Galbraith admitted that they weren’t sure about whether there would be a reserve price. And even if there is one they can’t be sure of what percentage of face value the reserve price would be. Thats why I said I want to wait to get the concrete plan because whether or not there is a reserve price and or if there is one how it will be set, to me is a pretty big indicator on whether the plan itself is viable or not. The plan is obviously to recapitalize the banks of that I agree and there isn’t a guarantee anyway that even if the reserve price is low and the troubled assets are bought for a little more than the 30 cents on the dollar that they are currently valued at that we will even get the money back at that level if the borrowers ie hedgefunds default on those loans. But here is the problem I keep coming back to. The FDIC recently announced that they were getting low on cash from putting all these banks in recievership. So even if we wanted the FDIC to come in and just put the big banks in a similar recievership I highly doubt we have the money to do so. Its kind of the same argument that was made against letting the Big 3 going into bankruptcy. Because nobody thought or at least not a lot of people thought that they would find financing to reorganize in Chapter 13 they felt like if they went into bankruptcy they would end up in Chapter 11 and there would be a firesale and the domino effect would wipe out close to 3 million jobs. If the FDIC doesn’t actually have the cash on hand to nationalize these big banks how could we ever hope to nationalize them?
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shepherdwong
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The point I was making was about how can we possibly prove fraud on AIG’s part if we can’t evaluate with any certainty what the CDOs and CDSs were worth back when AIG was selling them BEFORE the housing market cratered?

This is my favorite song about Paul Krugman: http://tinyurl.com/deztxs

SG:
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Yves Smith has another excellent point to make in response:
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Regardless, the equity comes from TARP, and Elizabeth Warren of the Congressional Oversight Panel is no slouch. What will happen when she asks for reports of how the actions have gone (for instance, how many failed because the reserve was not met?)

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I can’t wait for Elizabeth Warren to get on Rachel Maddow’s show to tell us all about how they’re not telling her anything…

@stuartzechman:
Let me use your example to ask this question. Are we paying 2 times for these things? Or maybe even 3 times?

So, we give money to the ‘buyers’ at the auction-play. These gamblers buy the prop-movie with that money, to the banks. But didn’t we just pay the full value of the movie theater’s stock to these same gamblers by covering their ‘insurance policies’ @AIG, also just paid to them? (or god forbid, did we just pay 30x the value of these toxic things through AIG to these gamblers?)

So they end up having been paid twice, by our money, once from the auction-play and again through AIG? and they are also left holding the stock to all the abandoned development in arizona? As a reward for acting stupid enough to pull this off?

…and aren’t these same gambler’s going to be paid a third time for the exact same movie theater stock, probably paid for again by banks holding the money we gave to the participants of the auction-play?

and in return, we get 9-79% of various bankrupt companies? Isn’t that screwing the banks AND screwing ourselves BOTH at the expense of the parties that caused this all to happen in the first place?

Anti-Investigative Reporter Joe Nocera and The Newspaper of Non-Record (New York Times)
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September 4th, 2008 by Patrick Byrne
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Joe Nocera has a problem.
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Nocera’s problem is not what Apple CEO Steve Jobs thinks of him (”Steve Jobs Doesn’t Have Cancer, Calls NYT Columnist a ‘Slime Bucket’“).
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No, Joe’s problem is that the naked short selling issue went mainstream this summer. In the last 6 weeks there have been literally hundreds of articles that describe the reality of this crime, its effects on individual companies, the risk it poses to firms at the core of our financial system, the extraordinary steps the SEC has taken to protect them from that risk, the demands of a former SEC Chairman to take draconian steps to rid our markets of the practice, the promises of the current SEC Chairman to do so, and so on and so forth.
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The problem this presents for Joe Nocera is not simply that he is on record as maintaining that “most people who understand the issue or have looked into it think it’s pretty bogus” (New York Times, June 10, 2006). Joe’s problem is that he went so far as to discourage other journalists from digging into the subject.
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Break:
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So Joe’s problem is not that he is on record as ignoring (though he did that too), not just derisively dismissing (though he did that as well), but discouraging journalists from investigating something that has turned into a crisis for our financial system. Joe dismissed it as “pretty bogus”, with no argument, simply asking his audience to rely upon his authority instead. He turned out to be wrong. One might just put it down to honest error, but philosophically Joe keeps close company with various hedge funds whose names turn up wherever naked short selling becomes an issue, and he has had (as you will see) a curious relationship with Gary Weiss (whose involvement in a cover-up on behalf of the DTCC has been amply demonstrated within DeepCapture).
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I believe this constellation of facts is meaningful, that Joe Nocera took part in the cover-up of a financial scandal, and the New York Times was used in that cover-up.
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I’m going to share some email correspondence with Joe Nocera, correspondence which will, I believe, shed light on this bold claim. As you will see, I have given Joe ample opportunity to request that this be off-the-record, or clarify his position one way or another in that regard, and he has failed to do so. Thus freed of any duty to keep them private, I publish them now, organized into flurries of back-and-forths, with minimal editorial explanation in bold italic font.
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More at the link:
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http://www.deepcapture.com/anti-investigative-reporter-joe-nocera-and-the-newspaper-of-non-record/

The virtues of public anger and the need for more
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With lightning speed and lockstep unanimity, opinion-making elites jointly embraced and are now delivering the same message about the public rage triggered this week by the AIG bonus scandal: This scandal is insignificant. It’s just a distraction. And, most important of all, public anger is unhelpful and must be contained or, failing that, ignored.
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This anti-anger consensus among our political elites is exactly wrong. The public rage we’re finally seeing is long, long overdue, and appears to be the only force with both the ability and will to impose meaningful checks on continued kleptocratic pillaging and deep-seated corruption in virtually every branch of our establishment institutions. The worst possible thing that could happen now is for this collective rage to subside and for the public to return to its long-standing state of blissful ignorance over what the establishment is actually doing.
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It makes perfect sense that those who are satisfied with the prevailing order — because it rewards them in numerous ways — are desperate to pacify public fury. Thus we find unanimous decrees that public calm (i.e., quiet) be restored. It’s a universal dynamic that elites want to keep the masses in a state of silent, disengaged submission, all the better if the masses stay convinced that the elites have their best interests at heart and their welfare is therefore advanced by allowing elites — the Experts — to work in peace on our pressing problems, undisrupted and “undistracted” by the need to placate primitive public sentiments.
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While that framework is arguably reasonable where the establishment class is competent, honest, and restrained, what we have had — and have — is exactly the opposite: a political class and financial elite that is rotted to the core and running amok. We’ve had far too little public rage given the magnitude of this rot, not an excess of rage. What has been missing more than anything else is this: fear on the part of the political and financial class of the public which they have been systematically defrauding and destroying.
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http://www.salon.com/opinion/greenwald/?source=rss

Whew! What a read!

“Matt Taibbi and others have recently come out with articles explaining in great detail how the AIG debacle happened. Thats great and believe me I feel better informed for it, however why did it take till now to get these facts out into the public domain? AIG went under last September after all . Did it really take 5 or six months to figure out CDOs and CDSs are?”
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sgwhiteinfla-Matt Taibbi has been talking about and asking questions about CDOs and CDSs for months. Remember this exchange with Byron York happen back in Oct 2008. http://nymag.com/daily/intel/2008/10/matt_taibbi_and_byron_york_but.html
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Of course Matt was taking Bryon on because York who is treated as serious and thoughtful by the MSM is and was pushing that the fault of meltdown is and was because a handful of black people got houses.
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But to your larger point. Why should I have to seek out a political writer-taibbi’s conversation with a known hack-York to hear anything about CDOs and CDSs in teh first friggin place?

gysgt
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This to me is the epitome of villager mentality
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From: Patrick Byrne [mailto:PByrne@overstock.com]
Sent: Thursday, July 17, 2008 4:04 PM
To: Lawrence Ingrassia; Bruce HeadlamCc: nytnews@nytimes.com; public@nytimes.com
Subject: request for comment
Importance: High
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Dear Messieurs Ingrassia and Headlam:
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1) Given the national media’s breakthrough understanding of “naked short selling”being implicating in our current systemic crisis, what are your feelings now about this 50 second statement made by Mr. Nocera at a SABEW conference two years ago?
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2) Some months ago a widely-known and well-respected journalist at the New York Times, “Patrick, I do not want to get into the newsroom politics too much, but I want to tell you that the word we use around here regarding Nocera’s writing on you is ‘surreal’. We say that it is ‘surreal’ that the New York Times has published what Joe Nocera has written about you.” Do you have any comment on this?
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With true respect,
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Patrick M. Byrne
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From: Lawrence Ingrassia [mailto:ingrassia@nytimes.com]
Sent: Thursday, July 17, 2008 2:24 PM
To: Patrick Byrne
Cc: nytnews@nytimes.com; public@nytimes.com; ‘Bruce Headlam’
Subject: RE: request for comment
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Mr. Byrne,
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Regarding your first point, Joe Nocera is a columnist. As a columnist, he is allowed a point of view.
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Regarding your second point, Mr. Nocera is a very widely-known and very well-respected columnist. Moreover, he is an award-winning columnist, having won both a Loeb Award for commentary and a Sabew best columnist award this year, and having been a finalist for a Pulitzer Price for commentary in 2007. The journalistic honors awarded for his work speak volumes.
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Yours sincerely,
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Larry Ingrassia
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Business editor
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The New York Times

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In response to a question about Nocera’s writings about Mr Burns the editor of the NYTimes instead of addressing the question, simply recites Nocera’s resume. That is what happens when you challenge almost any journalist who is a member in good standing of the Village. Instead of addressing the question of what they are currently doing other Villagers and unfortunately this even includes KT fall back on whatever awards they won doing other feats of journalism. Its funny because when Taibbi talks about how the Wall Street crowd just rolls their eyes as if you are beneath them when you ask questions could accurately describe what goes on in the mainstream media when you challenge a Villager. The other Villagers line up to roll their eyes at you as if you have no clue of which you are asking. That this person is above reproach because of some awards they once won. That they can never be wrong because of their strong reputation. And thats what I am call bullsh*t on. Thanks for the link gysgt. Just another nail in the coffin for print media.

SG
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This to me is the epitome of villager mentality
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You couldn’t be more correct.
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Just another nail in the coffin for print media.
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They have no idea just how little credibility they have in this country, let alone the world.
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It’s up to us, the public, to step in while these old zombies search the graveyards for their plots, and recreate news media for them.