AIG Credit Default Swap Geithner Goldman Sachs Max Keiser Nov 2009

Geithner's crimes through AIG : will the truth come out?

Max Keiser and Stacy Herbert and Webster Tarpley talk about AIG being used by Tim Geither to line in the pockets of Goldman Sachs and others
recorded on October 31th 2009


Read The Bloomberg Article

New York Feds Secret Choice to Pay for Swaps Hits Taxpayers

By Richard Teitelbaum and Hugh Son

Oct. 27 (Bloomberg) -- In the months leading up to the September 2008 collapse of giant insurer American International Group Inc., Elias Habayeb and his colleagues worked nights and weekends negotiating with banks that had bought $62 billion of credit-default swaps from AIG, according to a person who has worked with Habayeb.

Habayeb, 37, was chief financial officer for the AIG division that oversaw AIG Financial Products, the unit that had sold the swaps to the banks. One of his goals was to persuade the banks to accept discounts of as much as 40 cents on the dollar, according to people familiar with the matter.

Among AIGs bank counterparties were New York-based Goldman Sachs Group Inc. and Merrill Lynch & Co., Paris-based Societe Generale SA and Frankfurt-based Deutsche Bank AG.

By Sept. 16, 2008, AIG, once the worlds largest insurer, was running out of cash, and the U.S. government stepped in with a rescue plan. The Federal Reserve Bank of New York, the regional Fed office with special responsibility for Wall Street, opened an $85 billion credit line for New York-based AIG. That bought it 77.9 percent of AIG and effective control of the insurer.

The governments commitment to AIG through credit facilities and investments would eventually add up to $182.3 billion.

Beginning late in the week of Nov. 3, the New York Fed, led by President Timothy Geithner, took over negotiations with the banks from AIG, together with the Treasury Department and Chairman Ben S. Bernankes Federal Reserve. Geithners team circulated a draft term sheet outlining how the New York Fed wanted to deal with the swaps -- insurance-like contracts that backed soured collateralized-debt obligations.

Subprime Mortgages

CDOs are bundles of debt including subprime mortgages and corporate loans sold to investors by banks.

Part of a sentence in the document was crossed out. It contained a blank space that was intended to show the amount of the haircut the banks would take, according to people who saw the term sheet. After less than a week of private negotiations with the banks, the New York Fed instructed AIG to pay them par, or 100 cents on the dollar. The content of its deliberations has never been made public.

The New York Feds decision to pay the banks in full cost AIG -- and thus American taxpayers -- at least $13 billion. Thats 40 percent of the $32.5 billion AIG paid to retire the swaps. Under the agreement, the government and its taxpayers became owners of the dubious CDOs, whose face value was $62 billion and for which AIG paid the market price of $29.6 billion. The CDOs were shunted into a Fed-run entity called Maiden Lane III.

Habayeb, who left AIG in May, did not return phone calls and an e-mail.

Goldman Sachs

The deal contributed to the more than $14 billion that over 18 months was handed to Goldman Sachs, whose former chairman, Stephen Friedman, was chairman of the board of directors of the New York Fed when the decision was made. Friedman, 71, resigned in May, days after it was disclosed by the Wall Street Journal that he had bought more than 50,000 shares of Goldman Sachs stock following the takeover of AIG. He declined to comment for this article.

In his resignation letter, Friedman said his continued role as chairman had been mischaracterized as improper. Goldman Sachs spokesman Michael DuVally declined to comment.

AIG paid Societe General $16.5 billion, Deutsche Bank $8.5 billion and Merrill Lynch $6.2 billion.

New York Fed

The New York Fed, one of the 12 regional Reserve Banks that are part of the Federal Reserve System, is unique in that it implements monetary policy through the buying and selling of Treasury securities in the secondary market. It also supervises financial institutions in the New York region.

The New York Fed board, which normally consists of nine directors, in November 2008 included Jamie Dimon, chief executive officer of JPMorgan Chase & Co., and Friedman. The directors have no direct role in bank supervision. Theyre responsible for advising on regional economic conditions and electing the bank president.

Janet Tavakoli, founder of Chicago-based Tavakoli Structured Finance Inc., a financial consulting firm, says the government squandered billions in the AIG deal.

Theres no way they should have paid at par, she says. AIG was basically bankrupt.

Citigroup Inc. agreed last year to accept about 60 cents on the dollar from New York-based bond insurer Ambac Financial Group Inc. to retire protection on a $1.4 billion CDO.

for the rest of the bloomberg article click on the url above

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  1. This is a replay of what Alexander Hamilton went through when he recommended full funding of the States' debts after the revolution. He was excoriated becase he was Wall Street's boy, and full funding helped his guys. Nevertheless, history seems to have concluded that Hamilton was right.

    Hamilton was protecting the brand for future extensions of credit. I think it is important that there be a kind of US private borrowing that foreigners regard as safe. Otherwise, as is now the case, they will insist on buying Treasuries, with all of the distortion to the credit markets that can cause. Until recently, AAA-rated paper was seen as that safe. The corruption of the ratings agencis - one hopes a special place in Hell has been reserved for those whores - is the central issue in the bail-outs. Paulsen, Geithner et al., like Hamilton, believed it was essential to defend the brand, to make good on America's best private paper, whoever also benefited from the bail-out. (Remember, the issuers of this bad paper - AIG, Bear - were decimated. The buyers had to be protected because that's what defending a brand requires.)

    I am leaning to the view that the full funding in this case was ill-advised. Hamilton set a precedent; Paulsen could not. We cannot establish a policy of backing AAA-rated securities unless a Federal Agency is the only one authorized to issue them. Maybe that's where we're heading. But for now, foreign investors who used to rely on AAA ratings are refusing to rely on them, despite what we did last time they proved bogus. Which means that defending the brand may have accomplished nothing.

    Sec. Geithner says that there would have been an intolerable run on too many of our bank if AIG's counterparties had not been bailed out. That is a debatable point, I think, and, as I say, I'm beginning to think that we have had that run, and it is only as bad as it is and not worse. But that's what I see in my rear-view mirror; I don't know how it looked through the windshield.

    What I do know is that purported "analysis" that looks only to "cui bono?" is both mean-spirited and disingenuous. And it is certainly unenlightening.


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