"End of Wall Street Boom" - Must-read history

[JackRiddler]

.

Bloomberg on the T-bill purchases by the Fed. Note that the purchases are coming after a reduction of T-bills on the Fed balance sheets of $240 billion in a year, so there's supposedly room for them to do this, and they're selling it as a stimulus measure to pump in cash, but in light of T-bill yields currently being so low and a 1.8 trillion dollar deficit planned it's hard not to interpret it as a desperation move to keep the US debt financed. Apparently China after raising its T-bill holdings by 46% last year is now losing money on these and complaining. They're also putting up another $750 billion in cash for trash securities (TALF), which is being treated almost as a sidelight!

Not that I can predict the course of a financial crash unprecedented in scope and scale, but this looks to me like it's quickly turning into the proverbial snake eating its tail, another sign that the biggest drama is imminent. (Actually, I'm one who believes governments should issue currency rather than incur debt, under a different monetary system altogether, but how can they justify this and prevent capital flight in the terms of the system until now? The dollar's fallen again to $1.31 to the euro from $1.24 last week.)

http://www.bloomberg.com/apps/news?pid= ... refer=home

Treasuries Surge as Fed Expands Purchases to Include U.S. Debt


By Dakin Campbell and Susanne Walker

March 18 (Bloomberg) -- Treasury 10-year note yields fell the most since 1962 as the Federal Reserve surprised investors with plans to purchase as much as $300 billion in government debt to drive consumer borrowing costs lower and lift the economy from recession.

The difference between two- and 10-year Treasury note yields narrowed 27 basis points to 1.75 percentage points, the most in at least 25 years, after the central bank said the purchases will be concentrated among those securities. The Fed is expanding the debt purchase portion of its quantitative easing policy, which already includes agency and mortgage debt, to about $1.75 trillion in securities.

“This is shock and awe,” said Steve Rodosky, the head of Treasury and derivatives trading at Newport Beach, California- based Pacific Investment Management Co., which runs the world’s largest bond fund. “The shoot first, assess later approach, with the economy teetering as it is, is the correct method.”

The yield on the benchmark 10-year note tumbled 53 basis points, or 0.53 percentage point, to 2.48 percent, at 4:36 p.m. in New York, according to BGCantor Market Data. It fell 54 basis points in January 1962. The price of the 2.75 percent security due in February 2019 surged 4 19/32, or $5.94 per $1,000 face amount, to 102 12/32.

The 30-year bond’s yield tumbled 32 basis points to 3.50 percent. Yields declined 24 basis points to 0.79 percent on two- year notes.

Treasuries had lost investors 3.4 percent since December, on course for the worst three-month period since the third quarter of 1980, when they fell 5.06 percent, according to a Merrill Lynch & Co. index. Investor concern about rising supplies of debt and gains in equities depressed prices, pushing yields up from record lows in the fourth quarter.

Consumer Rates

Investors have shunned debt backed by consumer loans as unemployment has climbed in the worst financial crisis since the Great Depression. Sales of the bonds plunged 40 percent last year to $106 billion, according to data compiled by Bloomberg, choking off funding to lenders. About $2.3 billion of debt backed by auto loans has been sold this year, compared with more than $9.6 billion in the same period of 2008, according to data from JPMorgan Chase & Co.

Central bankers and Treasury haven’t been able to meet Fed Chairman Ben S. Bernanke’s goal of reducing consumer interest rates along with the borrowing costs paid by banks. The difference between rates on 30-year fixed mortgages and 10-year Treasuries was 2.1 percentage points as of yesterday, Bloomberg data show. That’s up from an average of 1.75 percentage points in the decade before the subprime mortgage market collapsed.

‘Fed’s Willingness’

Bernanke trimmed the target rate for overnight loans between banks to a range of zero to 0.25 percent at the Dec. 16 policy meeting to help unfreeze credit markets.

“This demonstrates the Fed’s willingness to address this financial crisis,” said David Glocke, who manages $65 billion of Treasuries at Vanguard Group Inc. in Valley Forge, Pennsylvania. “It helps to reduce rates all over.”

The extra yield relative to benchmark interest rates that investors demand to own debt backed by consumer loans has soared amid concern that defaults will climb. Top-rated bonds backed by auto loans are trading at about 300 basis points more than the one-month London interbank offered rate compared with 65 basis points in January 2008, JPMorgan data show. One-month Libor, a borrowing benchmark, is currently 0.56 percent.

TALF Expansion

The central bank also said it will consider expanding the Term Asset-Backed Securities Loan Facility to include “other financial assets,” the central bank’s policy statement said. The Fed added that it will “increase its purchases of agency debt this year by up to $100 billion to a total of up to $200 billion.

The Fed will buy $750 billion in mortgage-backed securities on top of the already-announced $500 billion program.

Treasury purchases will take place two to three times a week, and the Fed may also buy other maturity Treasuries and Treasury Inflation-Protected Securities, according to a statement on the Federal Reserve Bank of New York’s Web site.

Thirty-year bond yields fell to a record low of 2.509 percent on Dec. 18, less than three weeks after Bernanke first mentioned the option of buying Treasuries. Yields had climbed to as high as 3.84 percent today.

Strategists at primary dealers UBS AG, Bank of America Corp., Morgan Stanley and Goldman Sachs Group Inc. had forecasted that central bank policy makers wouldn’t provide plans to purchase U.S. debt.

On target as always!

‘Powerful Bullet’

‘‘We thought it was a lower probability event, but we always knew that if the Fed did use this clearly powerful bullet, it would cause a huge drop in yields,” said Suvrat Prakash, an interest-rate strategist in New York at BNP Paribas Securities Corp., another primary dealer.

Yields on 10-year Treasury notes rose 33 basis points in the two days after the last policy meeting Jan. 28, when the Federal Open Market Committee said the central bank might buy longer-term Treasuries to revive lending but gave no further details.

During World War II, the central bank agreed to purchase unlimited amounts of government obligations from banks to keep interest rates low to finance the war, according to the Federal Reserve Bank of Atlanta.

Prior to cutting interest rates near zero, the New York Federal Reserve Bank bought and sold Treasuries almost daily to manage money supply and keep the Fed’s rate for overnight loans between banks near its target. The Fed held $474.6 billion of Treasuries on its balance sheet on March 11, $234.5 billion less than the year-ago period.

Global Central Banks

Expectations for U.S. purchases of Treasuries increased when the Bank of England said March 5 it would buy gilts. Yields on 10-year U.K. government bonds fell to a more than 20-year low of 2.93 percent March 13, from 3.64 percent before the policy was announced.

The Bank of Japan’s decision today to raise monthly purchases of government bonds to 1.8 trillion yen ($18.3 billion) added to the speculation.

“It’s wonderful for Treasuries,” said David Coard, head of fixed-income trading in New York at Williams Capital Group, a brokerage for institutional investors.

Buying Treasuries may help support President Barack Obama’s pledge on March 14 that investors can have “absolute confidence” in Treasuries. Chinese Premier Wen Jiabao said the day before he was “worried” about holdings of Treasuries and wanted assurances that the investment is safe.

China, the biggest foreign holder of U.S. debt, increased Treasury holdings by 46 percent in 2008and now hold about $740 billion, according to Treasury Department data.

To contact the reporters on this story: Susanne Walker in New York at swalker33@bloomberg.net; Dakin Campbell in New York at dcampbell27@bloomberg.net
Last Updated: March 18, 2009 16:38 EDT

Fed's Announcement Today

http://www.businessinsider.com/the-fed- ... lar-2009-3

Release Date: March 18, 2009
For immediate release

Information received since the Federal Open Market Committee met in January indicates that the economy continues to contract. Job losses, declining equity and housing wealth, and tight credit conditions have weighed on consumer sentiment and spending. Weaker sales prospects and difficulties in obtaining credit have led businesses to cut back on inventories and fixed investment. U.S. exports have slumped as a number of major trading partners have also fallen into recession. Although the near-term economic outlook is weak, the Committee anticipates that policy actions to stabilize financial markets and institutions, together with fiscal and monetary stimulus, will contribute to a gradual resumption of sustainable economic growth.

In light of increasing economic slack here and abroad, the Committee expects that inflation will remain subdued. Moreover, the Committee sees some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term.

In these circumstances, the Federal Reserve will employ all available tools to promote economic recovery and to preserve price stability. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and anticipates that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period. To provide greater support to mortgage lending and housing markets, the Committee decided today to increase the size of the Federal Reserve’s balance sheet further by purchasing up to an additional $750 billion of agency mortgage-backed securities, bringing its total purchases of these securities to up to $1.25 trillion this year, and to increase its purchases of agency debt this year by up to $100 billion to a total of up to $200 billion. Moreover, to help improve conditions in private credit markets, the Committee decided to purchase up to $300 billion of longer-term Treasury securities over the next six months. The Federal Reserve has launched the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses and anticipates that the range of eligible collateral for this facility is likely to be expanded to include other financial assets. The Committee will continue to carefully monitor the size and composition of the Federal Reserve's balance sheet in light of evolving financial and economic developments.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Donald L. Kohn; Jeffrey M. Lacker; Dennis P. Lockhart; Daniel K. Tarullo; Kevin M. Warsh; and Janet L. Yellen.

I also watched the video recommended by MWB in another thread:

60 Minutes on Alt-A and ARM Resets

http://www.newmogul.com/item?id=7196

Apparently the automatic "resets" due on these low initial-rate mortgages issued in 2005-2006 at the height of the bubble are still mostly coming, and their volume exceeds that of the subprime loans! They are currently defaulting at the same high 10-percent-plus rate as subprimes and were turned into marketable securities with credit-default swap derivatives sold on them, exactly as with the subprime mortgages, so according to the report, we're only about HALFWAY through the crash of financial instruments following from mortgage foreclosures. And never mind credit cards, car loans, etc. Same story there.

I also watched David Harvey, Marx scholar, present an excellent short lecture on:

The crash as financial Katrina

Oct. 29, 2008

http://davidharvey.org/2008/12/a-financ ... he-crisis/

Download (about 30 mins.) at http://davidharvey.org/media/A_Financial_Katrina.mp3

He employs slides of the foreclosure patterns on subprime mortgages in Cleveland, compared to African-American neighborhoods.



This was happening without intervention from the government, thus his metaphor of a financial Katrina. But of course Paulson and Bernanke stepped in to cover for the banks at 10 times or more the cost of covering the original mortgages. Harvey shows how property asset inflation has always been a favored method of covering for excess liquidity (i.e., when there's growth and nowhere else to put the money, it goes into higher housing prices).

Harvey reviews earlier property crashes with very similar mechanics in the Netherlands, Second-Empire France, and in the 1970s in the United States:



Look at that! The same exact insane ups and downs as you'd see in the years of the present property bubble and crash.

This really puts the lie to the bullshit we're still peddled daily about how the traders and operators of the financial sector simply guessed wrong in their honest assumption that housing prices would keep rising like crazy, forever. I heard a liar doing that today on NPR, she actually said that housing prices had never gone down before, citing data of the national mortgage association (or some such) that, she said, they started collecting in... 1979! Now isn't that convenient?

Harvey also puts it all in the context of neoliberalism as class war. I, like, totally recommend this lecture as an excellent overview.

.

[smiths]

i have said it a few times here, david harvey is a must read,

at the bottom of his wiki page are some links to talks he has given and they are really really good,

he has a long term deep historical perspective that is very compelling

[seemslikeadream]

here Jack

[JackRiddler]

.

AIG Reveals Biggest Counterparties

AIG memo with lists is readable & downloadable here:

http://www.scribd.com/doc/13294757/AIGs ... todown=pdf

A commentator on an NYT blog helpfully aggregated the sums from various categories listed in the memo:

http://dealbook.blogs.nytimes.com/2009/ ... ent-204531

The numbers in parentheses are the amounts received as listed in attachments A (CDS), B (buying securities underlying CDS), and D (securities lending agreements):

$12.9B Goldman Sachs (2.5/5.6/4.
$12.0B Bank of America/Merrill Lynch (7.0/2.3/7.6)
$5.2B Bank of America (0.2/0.5/4.5)
$6.8B Merrill Lynch (6.8/1.8/3.1)
$11.9B Societe Generale (4.1/6.9/0.9)
$11.8B Deutsche Bank (2.6/2.8/6.4)
$8.5B Barclays (0.9/0.6/7.0)
$5.0B UBS (0.8/2.5/1.7)
$4.9B BNP Paribas (0.0/0.0/4.9)
$3.5B HSBC Bank (0.2/0.0/3.3)
$3.3B Calyon (1.1/1.2/0.0)
$2.3B Citigroup (0.0/0.0/2.3)
$2.2B Dresdner Kleinwort (0.0/0.0/2.2)
$1.6B JPMorgan/Morgman Stanley (0.6/0.0/1.0)
$0.4B JPMorgan (0.4/0.0/0.0)
$1.2B Morgan Stanley (0.2/0.0/1.0)
$1.5B Wachovia (0.7/0.8/0.0)
$1.5B ING (0.0/0.0/1.5)
$1.1B Bank of Montreal (0.2/0.9/0.0)
$1.0B Deutsche Zentral-Genossenschaftsbank (0.0/1.0/0.0)
$0.8B Rabobank (0.5/0.3/0.0)
$0.7B Royal Bank of Scotland (0.2/0.5/0.0)
$0.7B DZ Bank (0.7/0.0/0.0)
$0.5B KFW (0.5/0.0/0.)
$0.3B Banco Santander
$0.4B Dresdner Bank AG (0.0/0.4/0.0)
$0.4B Credit Suisse (0.0/0.0/0.4)
$0.2B Citidel (0.0/0.0/0.2)

$38.8B US Banks
$50.2B Foreign Banks
$12.0B Municipal Bonds
$84.0B Unaccounted for

— Posted by Devil's Advocate

Quoth the Times on this matter:

http://dealbook.blogs.nytimes.com/2009/ ... mode=print

March 15, 2009, 5:16 pm
A.I.G. Reveals Biggest Beneficiaries of Its Rescue

Update | 8:49 p.m. The American International Group on Sunday released the names of financial institutions that benefited last fall when the Federal Reserve saved it from collapse with an $85 billion rescue loan and then three subsequent bailouts.

The disclosure included counterparties to both its credit default swap operations and its securities lending businesses, both of which contributed heavily to A.I.G.’s troubles, as well as to muncipalities who participated in certain investment programs. All told, Sunday’s statement detailed payments of more than $94 billion, excluding payments to municipalities. All were made using government loans. (Read the disclosure by A.I.G. after the jump.)

Many critics of the company have demanded the names of A.I.G.’s counterparties as the insurer received government money totaling $170 billion. A.I.G. said in a statement that it made the disclosure in consultation with the Federal Reserve.

“Our decision to disclose these transactions was made following conversations with the counterparties and the recognition of the extraordinary nature of these transactions,” Edward M. Liddy, A.I.G.’s government-appointed chief executive, said in a statement.

Time and again, the rationale given for bailout out A.I.G. was that its credit default swap agreements — essentially insurance contracts on mortgage-backed securities — were so interwoven into the global financial web that to let the insurer fail would create chaos.

As the mortgages underlying the credit default swap agreements decayed, A.I.G. was required to post collateral to its counterparties. By September, the firm warned that it would run out of money, prompting the government to swoop in with its initial $85 billion loan. That money was used to post collateral to counterparties, including France’s Société Générale, Germany’s Deutsche Bank and Goldman Sachs.

All told, the posting of collateral for the swap agreements cost $22.4 billion, A.I.G. said. The money was paid to the counterparties between Sept. 16 and Dec. 31.

A subsequent government bailout provided money for the Federal Reserve to buy the securities underpinning these credit default swap agreements, canceling the contracts. Nearly $30 billion was spent to do so.

Foreign banks, including Deutsche Bank, Société Générale and Calyon and Britain’s Barclays, figured prominently among the firm’s credit default swap counterparties.

Deutsche Bank, Goldman Sachs and others also were owed money under securities lending agreements with the insurer. In this business, A.I.G. lent out shares in companies, primarily to hedge funds that sold short. While the business is normally considered safe, A.I.G. had reinvested proceeds from the business into mortgage-backed securities to earn a higher return. Those investments have since sunken in value.

Nearly $44 billion was paid out to 20 firms, most of which were banks. (One non-bank that appeared on the list was the Citadel Investment Group, the giant hedge fund based in Chicago. It received about $200 million.)

A.I.G. also disclosed $12.1 billion in payments to municipalities, including about $1 billion each to California and and Virginia, under guaranteed investment agreements. These were essentially places for municipalities to hold money raised from the likes of bond issuances until the cash was needed.

The insurer has already taken fire this weekend for its plans to pay out more than $165 million in bonuses to employees in the unit that brought A.I.G. down to its knees. Despite the consternation of the Obama administration and Republicans alike, the company was allowed to make the payments because of contractual obligations.

At a Senate Banking Committee hearing this month, legislators demanded to know who was on the opposite side of the table from A.I.G. on these contracts.

“We need to know who benefited, and we’re going to find out,” said Senator Richard C. Shelby, Republican of Alabama and the ranking member of the committee. “The Fed can be secretive for a while but not forever.”

Update: A commenter Devil’s Advocate helpfully added up how much each listed firm was paid by A.I.G. Goldman comes out on top with $12.9 billion through credit default swap exposure and securities lending contracts, followed by Bank of America Merrill Lynch with $12 billion and then Bank of America itself.

Meanwhile, everyone's going nuts over the

AIG Bonus Scandal

a.k.a. How the Poachers Got Their Tusk

http://www.nytimes.com/2009/03/18/busin ... ments.html

In Online Forums, A.I.G. Bonuses Touch a Nerve

By A.G. SULZBERGER
Published: March 17, 2009

Some people are vengeful, calling for jail, public humiliation or even revolution over the decision by A.I.G. to award $165 million in bonuses to employees who were in part responsible for the insurance giant’s near collapse — though few go as far as Senator Charles Grassley, Republican of Iowa, who has suggested that company executives should “resign or go commit suicide.”
Related
When Bonus Contracts Can Be Broken

How ironclad are the contracts for the bonuses that A.I.G. paid out to its employees?
Join the Discussion »

While politicians and opinion leaders have been making their outrage over the bonus payments loudly known over the last few days, the most passionate voices, not surprisingly, could be found on the Internet — on blogs and discussion threads — in unusually bountiful numbers.

The comments that follow were posted to the Web site of The New York Times in response to articles chronicling the latest episodes in the nation’s economic unraveling.

“This is absolutely disgusting,” wrote Adam, from Los Angeles. “Any such contractual obligations should be broken. The company should be fully nationalized and the people who brought it to its knees, along with the economy as a whole, by manufacturing derivative contracts and obligations that the company lacked the capital to meet, should be put in jail.

“In fact, I would recommend a show trial of sorts in the name of public catharsis. These people should be stripped of their titles and wealth and punished for their reckless behavior. Who cares about contractual obligations? They trampled the spirit of the law.

“When you are too big to fail, as A.I.G. obviously is, then you have to abide by a standard of behavior that is far above the one that was followed by its executives. People are angry, and A.I.G. is making a big mistake by lavishly rewarding its executives.”

From Saturday evening through Tuesday morning, more than 7,000 A.I.G.-related comments were posted on nytimes.com. The remarks take aim at a host of people or institutions believed responsible, from Republicans to Democrats, Wall Street, Main Street, capitalist society in general or all of the above, though few go as far as the suggestion by Senator Grassley.

Others try to tackle the underlying issues with a bit more nuance — or even in verse . Taken together, however, the posts represent a near-consensus among readers that these bonuses should not have been awarded and should not be allowed to stand.

“Outfits like A.I.G. should have been liquidated or nationalized, and their top matadors prosecuted for corporate fraud under every law on the books,” wrote Settembrini, USA. “Is there any spine left in Congress? Or anywhere? I am reluctant to criticize this young administration without giving it a chance to prove itself, but caving in this early does not bode well.”

Since The Times began attaching readers’ comments to specific articles in October 2007, only a few issues have prompted similar levels of reaction, including the selection of Gov. Sarah Palin of Alaska as the Republican nominee for vice president; the divisive Democratic primary battle between Senators Hillary Rodham Clinton and Barack Obama; and the multibillion-dollar bailout of General Motors and Chrysler.

Yet the most striking difference is the degree to which people are united in their outrage.

“We heard before that, "we must pay bonuses, or we won’t be able to retain the recipients ...” What nonsense!!” wrote A.G. Bevin of Chapel Hill, N.C. “Why make any effort to retain people who ran A.I.G. (or many other company failures) into debt, mismanagement, and led to begging the government to bail them out? The most absurd thing I have ever heard. I was raised to feel that if someone does a worthless job, don’t pay them: fire them.”

Jim S., of Cleveland, struck a similar note: “If the government owns 80 percent of A.I.G., simply have the owners order management not to pay these bonuses. Anyone who feels damaged by not receiving a bonus would be free to sue and have the issue decided by a jury selected from the general population.”

Another theme posits that white-collar employees of A.I.G. are being held to a different standard than blue-collar union workers at the struggling American automakers, which are also being propped up with government bailout money.

“Let’s put A.I.G. exactly in the same spot as G.M., wrote Yoandel of Boston, in response to a Dealbook column by Andrew Ross Sorkin. “Let the A.I.G. bonus recipients negotiate with A.I.G. management. The principle will be this: If you do not negotiate the bonuses down, then the U.S. government will call its investments in A.I.G. and will withhold the 30 bln remaining.”

There are some dissenters — though they are easy to overlook amid the flood of bile — warning against rescinding the bonuses out of respect for contractual obligations or out of concern about the precedent that would set in terms of government meddling. But even these writers hedge:

“Sure the bonuses sound suspiciously high and maybe we can get them lowered, but who the heck else is going to take a high level job there now?” asked CVanDoren of Albany, N.Y. “Can you imagine government appointed financial people trying to run the place and understand these contracts? If you think $165 Mil is expensive, try and imagine how much it would cost us taxpayers if the positions were mishandled. Now once things have settled down I am all in favor of sending some of these criminals to jail, but as painful as it is we need them at their desks for now.”

That's the opinion I got to voice as a caller to NPR this morning - not that "we" need any of them at their desks, of course, but that they should lose not just the bonuses but the jobs, and go to prison. The host let me briefly explain that the AIG financial division consisted of 700 pirates in London and that the bonuses, though small compared to the overall losses, are at the center of the scammery because those are the incentives for the dealmakers to do what they do. I even got to describe my metaphor of the poacher killing an elephant just for the tusks. The host naturally treated this as "too conspiratorial" and asked his guest to comment, at which point she went on about how there's something to what I said, but ultimately those poor dumb traders just didn't know that what they were doing would fail, since US housing prices never fell before in all history (um, except for the 1970s and 1930s!), etc. etc.

http://www.foxnews.com/printer_friendly ... 59,00.html

RAW DATA: Cuomo Letter on AIG Bonuses

Tuesday , March 17, 2009

The following is a copy of the March 17 letter New York Attorney General Andrew Cuomo sent to Rep. Barney Frank:

Dear Chairman Frank:

I am writing to provide you and your Committee with information regarding an ongoing investigation my Office has been conducting of executive compensation at American International Group ("AIG"). I hope this information will be useful to the Committee at its hearing on AIG tomorrow.

We learned over the weekend that AIG had, last Friday, distributed more than $160 million in retention payments to members of its Financial Products Subsidiary, the unit of AIG that was principally responsible for the firm's meltdown. Last October, AIG agreed to my Office's demand that no payments be made out of its $600 million Financial Products deferred compensation pool. While this was a positive step, we were dismayed to learn after the fact that AIG had made multi-million dollar payments out of its separate Financial Products retention plan on Friday.

AIG now claims that it had no choice but to pay these sums because of the unalterable terms of the plan. However, had the federal government not bailed out AIG with billions in taxpayer funds, the firm likely would have gone bankrupt, and surely no payments would have been made out of the plan. My Office has reviewed the legal opinion that AIG obtained from its own counsel, and it is not at all clear that these lawyers even considered the argument that it is only by the grace of American taxpayers that members of Financial Products even have jobs, let alone a pool of retention bonus money. I hope the Committee will take up this issue at its hearing tomorrow.

Furthermore, we know that AIG was able to bargain with its Financial Products employees since these employees have agreed to take salaries of $ I for 2009 in exchange for receiving their retention bonus packages. The fact that AIG engaged in this negotiation flies in the face of AIG's assertion that it had no choice but to make these lavish multi-million dollar bonus payments. It appears that AIG had far more leverage than they now claim.

AIG also claims that retention of individuals at Financial Products was vital to unwinding the subsidiary's business. However, to date, AIG has been unwilling to disclose the names of those who received these retention payments making it impossible to test their claim. Moreover, as detailed below, numerous individuals who received large "retention" bonuses are no longer at the firm. Until we obtain the names of these individuals, it is impossible to determine when and why they left the firm and how it is that they received these payments.

If AIG were confident in its claim that those who received these large bonuses were so vital to the orderly unwinding of the unit, one would expect them to freely provide the names and positions of those who got these bonuses. My Office will continue to seek an explanation for why each one of these individuals was so crucial to keep aboard that they were paid handsomely despite the unit's disastrous performance.

As you may know, my Office yesterday subpoenaed AIG for the names of those who received these bonuses, and we plan to do everything necessary to enforce compliance. American taxpayers deserve to know where their money is going, and AIG's intransigence and desire to obscure who received these payments should not be tolerated. Already my Office has determined that some of these bonuses were staggering in size. For example:
The top recipient received more than $6.4 million;
The top seven bonus recipients received more than $4 million each;
The top ten bonus recipients received a combined $42 million;
22 individuals received bonuses of $2 million or more, and combined they received more than $72 million;
73 individuals received bonuses of $1 million or more; and
Eleven of the individuals who received "retention" bonuses of $1 million or more are no longer working at AIG, including one who received $4.6 million;

Again, these payments were all made to individuals in the subsidiary whose performance led to crushing losses and the near failure of AIG. Thus, last week, AIG made more than 73 millionaires in the unit which lost so much money that it brought the firm to its knees, forcing a taxpayer bailout. Something is deeply wrong with this outcome. I hope the Committee will address it head on.

We have also now obtained the contracts under which AIG decided to make these payments. The contracts shockingly contain a provision that required most individuals' bonuses to be 100% of their 2007 bonuses. Thus, in the Spring of last year, AIG chose to lock in bonuses for 2008 at 2007 levels despite obvious signs that 2008 performance would be disastrous in comparison to the year before. My Office has thus begun to closely examine the circumstances under which the plan was created.

I look forward to continuing to cooperate with the Committee in any way possible to ensure that taxpayer funds are not misspent on unjustified bonuses or otherwise misused.

Very truly yours,

Andrew M. Cuomo

Attorney General of the State of New York

http://www.huffingtonpost.com/robert-re ... view=print

Posted March 15, 2009 | 03:33 PM (EST)

The Real Scandal of AIG

The real scandal of AIG isn't just that American taxpayers have so far committed $170 billion to the giant insurer because it is thought to be too big to fail -- the most money ever funneled to a single company by a government since the dawn of capitalism -- nor even that AIG's notoriously failing executives, at the very unit responsible for the catastrophic credit-default swaps at the very center of the debacle -- are planning to give themselves $100 million in bonuses. It's that even at this late date, even in a new administration dedicated to doing it all differently, Americans still have so little say over what is happening with our money.

The administration is said to have been outraged when it heard of the bonus plan last week. Apparently Secretary of the Treasury Tim Geithner told AIG's chairman, Edward Liddy (who was installed at the insistence of the Treasury, in the first place) that the bonuses should not be paid. But most will be paid anyway, because, according to AIG, the firm is legally obligated to do so. The bonuses are part of employee contracts negotiated before the bailouts. And, in any event, Liddy explained, AIG needed to be able to retain talent.

AIG's arguments are absurd on their face. Had AIG gone into chapter 11 bankruptcy or been liquidated, as it would have without government aid, no bonuses would ever be paid; indeed, AIG's executives would have long ago been on the street. And any mention of the word "talent" in the same sentence as "AIG" or "credit default swaps" would be laughable if it weren't already so expensive.

Apart from AIG's sophistry is a much larger point. This sordid story of government helplessness in the face of massive taxpayer commitments illustrates better than anything to date why the government should take over any institution that's "too big to fail" and which has cost taxpayers dearly. Such institutions are no longer within the capitalist system because they are no longer accountable to the market. So to whom should they be accountable? When taxpayers have put up, and essentially own, a large portion of their assets, AIG and other behemoths should be accountable to taxpayers. When our very own Secretary of the Treasury cannot make stick his decision that AIG's bonuses should not be paid, only one conclusion can be drawn: AIG is accountable to no one. Our democracy is seriously broken.

Copyright © 2009 HuffingtonPost.com, Inc.

http://www.counterpunch.org/abourezk03172009.html

March 17, 2009

Show Business on the Hill
AIG and the Posturing Democrats

By JAMES G. ABOUREZK

My friend, Congressman Mo Udall, used to tell the story of the congressman in the 1930s who introduced Franklin Delano Roosevelt’s court packing plan. FDR wanted to do away with opposition to his recovery plans by the Court.

The legislation caught so much heat that the congressman eventually came out against the plan, and even led the floor fight to defeat his own legislation. One of his constituents — a woman — wrote to him with congratulations for his stand on packing the court.

He wrote back, asking “Which one?”

The story came to mind this week when various members of Congress were seen railing on television about the AIG bonuses. After receiving $150 billion from taxpayers, AIG executives decided to pay tens of millions in bonuses to their executives. The result was not surprisingly, a firestorm of criticism, with Congressman Barney Frank and Senator Harry Reid leading the pack. What is surprising is that both Frank and Reid, and others, had fashioned the legislation that gave the series of bailouts to AIG.

Somehow, the issue of non-control of the corporations that are effectively now owned by the government because of bailout money, escapes me. First of all, what was to prevent the Congress from inserting conditions on their bailout of no bonuses? That is, of course, a rhetorical question, because the Congress could have placed any condition it wanted in the bailout bill.

AIG explains that it is bound by contract, contracts made last year, to pay the bonuses. Not that I don’t believe what AIG tells us, but what is to prevent the Congress or the Secretary of the Treasury from examining those contracts?

Secondly, what company would sign a contract paying a bonus to a failed executive? Aren’t bonuses usually paid for successful operation of companies?

Getting back to the vociferous complaints by the same members of Congress who fashioned the bailout legislation, the situation is very much similar to the Mel Brooks movie, “Blazing Saddles.” The pertinent segment of the movie involved a black sheriff having been appointed to enforce the law in a small, racist, western town.

When it appeared that the good townsfolk were about to do injury to the new black sheriff, he pulled his six gun and held it to his own head, saying, “Back away, or the black guy gets it.”

Sympathy for the supposed prisoner then took over, and the villagers backed away, saving the sheriff from lynching.

That segment is what comes forward in the mind when we see the loudly complaining politicians denouncing AIG for its latest act of greed.

What this really tells us is that there is more of a close connection between members of Congress and Wall Street conmen than we realized. Certainly, they should have learned a valuable lesson after the gigantic scam run by George Bush and Henry Paulson last year with the $700 billion TARP funds being handed over without condition.

Similarly, how complicated would it be to have placed conditions on any further taxpayers’ money being handed over to the corporations “too big to fail?”

America’s downfall began in the 1980s when Democrats in Congress started taking money from corporations for their election races. Before that, they took only labor money and money from ordinary citizens who had no ax to grind. Since the 1980s there has been almost no criticism from Democrats of the excesses of the corporate world. That lack of questioning and of criticism has led to more and more deregulation of the financial industry, which has led us to the condition we face today.

Washington needs to divorce itself from Wall Street. Members of Congress need to stop accepting corporate money so they can become, once again, somewhat independent operators. Until then, we are in for more bailouts, more greedy transgressions by Wall Street, and more of the kind of show business nonsense that we’ve been witnessing in recent days.

James G. Abourezk is a lawyer practicing in South Dakota. He is a former United States senator and the author of two books, Advise and Dissent, and a co-author of Through Different Eyes. This article also runs in the current issue of Washington Report For Middle East Affairs. Abourezk can be reached at georgepatton45@gmail.com

http://www.counterpunch.org/morici03172009.html

March 17, 2009
Treasury Gives AIG Big Break, But Not GM
Cuts for Autoworkers, Bonuses for Derivatives Traders

By PETER MORICI

Washington and the nation are enraged that AIG is paying millions in bonuses to retain financial wizards who sold insurance on mortgage-backed securities with few assets to back up their promises.

backed securities with few assets to back up their promises.

AIG is telling us that it must pay those bonuses, because they are required by employment contracts necessary to retain its financial engineers.

Treasury Secretary Timothy Geithner has expressed outrage. Instead, he should be embarrassed.

When the Bush administration agreed to bail out General Motors and Chrysler, it required those companies to renegotiate their labor contracts —- that’s right, contracts —- and they are doing just that to keep their federal largess.

The Obama Treasury, headed by Geithner, is forcing the terms of that deal on the United Autoworkers.

Why did Henry Paulson and Geithner not require the same at AIG? Remember, Geithner was president of the New York Federal Reserve Bank and a key player when financial giants like Citigroup and AIG were being bailed with the taxpayers’ cash.

Those bailouts continue, with easy terms for the bankers and their contracts, on Geithner’s watch.

The threat was the same with AIG and GM. If either shut down, the economy would plummet into chaos and depression, we were told.

So Mr. Geithner, instead of being outraged at AIG’s last revelations, perhaps you can explain to all of us why a UAW worker earning $29 dollars an hour must give back wages and benefits to keep their company alive, while the architects of the biggest financial disaster in history get to keep their gold-plated contracts?

We are waiting for your answer.

Peter Morici is a professor at the Smith School of Business, University of Maryland School, and former Chief Economist at the U.S. International Trade Commission.

http://www.reuters.com/article/topNews/ ... N020090317

Conn. AG doubts AIG bonuses required by state law

Tue Mar 17, 2009 4:39pm EDT

NEW YORK (Reuters) - Connecticut's attorney general said he had "significant doubts" that $165 million of bonuses recently awarded by American International Group Inc are required under state law.

"AIG is shamelessly shielding itself behind the Connecticut Wage Act, a joke of a justification for squandering scarce taxpayer resources," Attorney General Richard Blumenthal said in a statement on Tuesday. "We should use any and every well-founded legal weapon to recapture these baseless bonuses."

Blumenthal said his office will "carefully investigate" the merits of AIG's claims, but added: "Corporate collapse demands accountability -- not windfall payments."

AIG awarded the bonuses even after getting a series of taxpayer bailouts totaling roughly $180 billion, and incurring a $61.7 billion fourth-quarter loss.

A slew of federal and state politicians, including President Barack Obama, and regulators, have demanded steps to ensure the repayment of the bonuses. Some of the bonuses went to employees of the AIG unit responsible for much of the insurer's troubles.

(Reporting by Jonathan Stempel; Editing by Tim Dobbyn)

© Thomson Reuters 2009 All rights reserved

Finally, here's yet another fairly conventional thinker calling for a controlled bankruptcy of AIG, Goldman and Citibank.

http://www.counterpunch.org/baker03172009.html

March 17, 2009
The Wreckage of an Uncontrolled Bankruptcy
Getting Lehman Bros. Wrong ... Again

By DEAN BAKER

There are few economists who would defend the decision to allow Lehman Brothers to go bankrupt last September. Its collapse induced a worldwide panic that sent stock markets plummeting and caused credit to freeze-up. In the subsequent months, the downturn went into over-drive, with the United States losing almost 3 million jobs from October through February.

This set of events has led almost everyone to conclude that the trio who let Lehman go under, Treasury Secretary Henry Paulson, Federal Reserve Board Chairmen Ben Bernanke, and then head of the New York Fed, Timothy Geithner, erred badly in this decision. That seems a reasonable judgment.

However, the conventional wisdom includes a corollary that is much less obvious: because the Lehman bankruptcy was a disaster, U.S. taxpayers must honor in full all the debts of all the banks. This corollary could put U.S. taxpayers on the line for trillions of dollars in commitments that the Wall Street boys apparently made on our behalf. Before we cough up the dough, we might want to consider whether Paulson, Bernanke, and Geithner were not quite as stupid as the current conventional wisdom would imply.

The problems that followed from Lehman did not just stem from the fact the government was not honoring Lehman’s debts. This was an uncontrolled bankruptcy of a huge investment bank in a world where the official line was still that everything was under control. The Washington Post had even run a column the day before Lehman’s collapse ridiculing those who were making negative comments about the state of the economy.

In this context, an uncontrolled bankruptcy of a major investment bank was sort of like a sledge hammer in the face: a rather rude and unexpected blow. The most immediate consequence was that Reserve Primary, one of the largest money market mutual funds in the world, suddenly could not pay its shareholders in full, because it had tens of billions invested in Lehman. In the wake of Lehman’s bankruptcy, Reserve Primary did not know how much, if any, of this investment it could recover. In the post-Lehman world, banks could suddenly no longer trust each other, and the interbank lending rate went through the roof.

But we now have had six months to adjust. The Fed and Treasury are now guaranteeing deposits in money market mutual funds. The FDIC doubled the size of the bank accounts it guarantees and non-interest bearing accounts of any size are guaranteed. In addition, the Fed is now lending hundreds of billions of dollars directly to non-financial corporations, establishing a channel of funding that goes outside the banking system.

These and other measures have restored some measure of stability to the financial system. Now that we have these measures in place, is it still true that we can’t subject Citigroup, Bank of America, or Goldman Sachs to a managed bankruptcy (a.k.a. “nationalization") without the world coming to an end?

With a managed bankruptcy, all the insured deposits would be fully covered. However, the government would only repay bondholders a portion of their investment, depending on how severe the banks’ losses are. By not compensating bondholders in full for their losses, the government could save taxpayers hundreds of billions, perhaps even trillions, of dollars.

In addition, a managed bankruptcy would also help to address the problem of moral hazard created by the bailouts thus far. Investors did not pay adequate attention to the health of banks and other large financial institutions like AIG because they assumed that the government would bail them out if things went badly. If the government makes these investors eat some of their losses, maybe they will put more thought into their investment strategies in the future. This could also let some big investors make some of the “sacrifices” for which fiscal conservatives, which include some big investors, are so eager.

The silence of the fiscal conservatives on the vast sums going to the banks is hard to understand. After all, how can someone get so upset about the prospect of $200 million being spent re-sodding the mall, but be unconcerned when $160 billion, almost 1000 times as much money, goes out the door to AIG?

The sums of money going to bail out the financial industry dwarfs the waste and pork that get John McCain and other budget hawks excited, yet they are strangely calm about the bailout money. In fact, the amount we spent patching the financial system could well be large enough to make the Social Security system fully solvent over its 75-year planning horizon, yet we barely hear a peep from the Peter G. Peterson Foundation and its merry band of anti-Social Security crusaders.

The only answer we ever get in response is that we have no choice. But just six months ago, Henry Paulson, Ben Bernanke, and Timothy Geithner thought we could make a much more extreme choice. They were wrong then, but they are not stupid. We should go back to the bankrupt Lehmans and see if we can do it right this time.

Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of Plunder and Blunder: The Rise and Fall of the Bubble Economy.

This article originally appeared in The Guardian.

What I believe Baker is missing is that Paulson needed something "too big to fail" to actually fail, just once, so as to terrorize the government into giving away the Treasury under the TARP plan. Letting Lehman go under (as it should have, but along with the rest of the parasites) helped Paulson time the crisis to justify TARP. The plunder was directed to his preferred cronies and in the process, he got to eliminate an old enemy from his Goldman days. Looking at the numbers, such as those above, it's still hard to think of a greater beneficiary in all this than Goldman Sachs.

.

[JackRiddler]

here Jack

THANK YOU. Very kind of you to take the time!

[smiths]

The Real AIG Scandal
It's not the bonuses.
It's that AIG's counterparties are getting paid back in full.

By Eliot Spitzer

Everybody is rushing to condemn AIG's bonuses, but this simple scandal is obscuring the real disgrace at the insurance giant:
Why are AIG's counterparties getting paid back in full, to the tune of tens of billions of taxpayer dollars?

For the answer to this question, we need to go back to the very first decision to bail out AIG, made, we are told, by then-Treasury Secretary Henry Paulson, then-New York Fed official Timothy Geithner, Goldman Sachs CEO Lloyd Blankfein, and Fed Chairman Ben Bernanke last fall.
Post-Lehman's collapse, they feared a systemic failure could be triggered by AIG's inability to pay the counterparties to all the sophisticated instruments AIG had sold.
And who were AIG's trading partners?
No shock here: Goldman, Bank of America, Merrill Lynch, UBS, JPMorgan Chase, Morgan Stanley, Deutsche Bank, Barclays, and on it goes. So now we know for sure what we already surmised: The AIG bailout has been a way to hide an enormous second round of cash to the same group that had received TARP money already.

It all appears, once again, to be the same insiders protecting themselves against sharing the pain and risk of their own bad adventure. The payments to AIG's counterparties are justified with an appeal to the sanctity of contract.
If AIG's contracts turned out to be shaky, the theory goes, then the whole edifice of the financial system would collapse.

But wait a moment, aren't we in the midst of reopening contracts all over the place to share the burden of this crisis?
From raising taxes—income taxes to sales taxes—to properly reopening labor contracts, we are all being asked to pitch in and carry our share of the burden. Workers around the country are being asked to take pay cuts and accept shorter work weeks so that colleagues won't be laid off.
Why can't Wall Street royalty shoulder some of the burden?
Why did Goldman have to get back 100 cents on the dollar?
Didn't we already give Goldman a $25 billion capital infusion, and aren't they sitting on more than $100 billion in cash? Haven't we been told recently that they are beginning to come back to fiscal stability?
If that is so, couldn't they have accepted a discount, and couldn't they have agreed to certain conditions before the AIG dollars—that is, our dollars—flowed?

The appearance that this was all an inside job is overwhelming. AIG was nothing more than a conduit for huge capital flows to the same old suspects, with no reason or explanation.

So here are several questions that should be answered, in public, under oath, to clear the air:

What was the precise conversation among Bernanke, Geithner, Paulson, and Blankfein that preceded the initial $80 billion grant?

Was it already known who the counterparties were and what the exposure was for each of the counterparties?

What did Goldman, and all the other counterparties, know about AIG's financial condition at the time they executed the swaps or other contracts? Had they done adequate due diligence to see whether they were buying real protection? And why shouldn't they bear a percentage of the risk of failure of their own counterparty?

What is the deeper relationship between Goldman and AIG? Didn't they almost merge a few years ago but did not because Goldman couldn't get its arms around the black box that is AIG? If that is true, why should Goldman get bailed out? After all, they should have known as well as anybody that a big part of AIG's business model was not to pay on insurance it had issued.

Why weren't the counterparties immediately and fully disclosed?

Failure to answer these questions will feed the populist rage that is metastasizing very quickly. And it will raise basic questions about the competence of those who are supposedly guiding this economic policy.


http://www.slate.com/id/2213942/

[JackRiddler]

.

P.D. Scott in his speech to a Republican group went into something really obvious about the scandal that took down Spitzer. He published that Washington Post piece about how the government forced states to stop investigating derivatives (against the protests of ALL FIFTY state attorney generals) on February 14, 2008. Federal agents first did a live stake-out of Spitzer's visit to whatserface that very same evening.

http://www.radio4all.net:8080/files/ano ... it-22k.mp3

.

[JackRiddler]

.

In the following, leveymg of DU argues that Madoff's fund was not a Ponzi scheme after all, but at least in part a mechanism for many of his clients to wittingly channel cash to offshore hideaways.

http://www.democraticunderground.com/di ... 89x5273942

MYTHS ABOUT MADOFF’S “PONZI SCHEME” – Bernie’s Game Wasn’t What They Tell You

Bernie Madoff’s colossal investment fraud is almost everywhere described as a “Ponzi scheme”. That echoes the very words Madoff, himself, used to describe it to the FBI agents who arrested him on December 11.

I’ve been running “basically, a giant Ponzi scheme,” he told investigators. But, that was quite misleading.

Madoff gives the impression that his scam was a classic, self-contained Ponzi, wherein the first investors see the payouts and later investors are the ones whose capital provides the payouts. In that scheme, Ponzi pockets the proceeds.

But, it didn’t really work that way. Madoff Securities was not designed to rip-off its own customers. Instead, it sustained itself over four decades by an infusion of money from “feeder fund” franchizes, the proceeds of which were methodically diverted into hidden accounts. It was part multi-level marketing, part money-laundering scheme, and part bleed-out fraud designed to provide a cover for conversion of funds that would be used by banks a continent or two away from Madoff’s Manhattan headquarters.



And, it really wasn’t an ethnocentric raid designed to impoverish any particular national or religious group – that would be killing the Golden Goose, but it may have had that effect. Madoff’s biggest clients were powerful banks and politically well-connected, philanthropic men who owned them. Their customers will get some of their money back through deposit guarantee insurance, law suits and other institutional safeguards. Madoff’s own customers get first crack at funds eventually recovered – there is no way that Madoff spent $65 billion on caviar and vintage wine.

An accounting of Madoff’s real estate and personal property, including that placed in the name of his wife, Ruth, amounted to no more than $67 million – not a lot by Wall Street standards. Bernie was smart, emotionally controlled, and personally frugal. His refusal to take the deal reportedly offered by the feds -- trade what he knows for allowing Ruth to keep most of their joint assets -- is telling. No, Bernie didn’t squander it all away. Most of the money his fund piled up over the years is still out there.

The answer to where that money is goes back to where it came from.


The Feeder Funds – Swiss Bankers, Aristocrats and Vultures Wrapped up in TARP


As for the feeder funds, seventeen of the 20 largest investors in Madoff Securities were banks or insurance companies. The others were huge “funds of funds”, unregulated hedge funds and private equity funds. It was the comparative small-fry who got scalded. The bankruptcy courts will have to come to the rescue of many of the 4500 individual investors and those who were attracted through smaller feeder funds.

Most of the biggest losses were sustained by large Swiss, Euro and Asian banks – but, they will survive, and their customers will eventually receive some sort of substantial recovery or part of a government bail-out. Like so many scandals of the era, this too will pass, and public attention will wane.

But, take a good look, anyway.

The third largest institutional investor in Madoff’s scheme — Tremont Group Holdings Inc., a fund of funds owned by Massachusetts Mutual Life Insurance Co. Tremont is attached to an institution so big that its customers are also likely to regain the $3.3 billion in reported losses as the result of investor law suits. A 2007 Hoover’s profile characterized the firm as follows: “Tremont Group Holdings wants to make you a tremendous amount of money -- and to make a tremendous amount for itself, as well....” http://www.hoovers.com/tremont/--ID__10 ... heet.xhtml



Prior to his well-timed resignation as Chairman in July 2008 after the Mass Mutual takeover, Tremont had been run by its founder Robert Schulman. Tremont was one of Madoff’s “early customers.” Schulman now runs a charity with his wife, and invests in real estate. He is named as a co-defendant in an investors’ suit along with Tremont, Mass Mutual and the company’s auditing firm, KPMG, which recently announced its bankruptcy. Déjà vu? http://www.bloomberg.com/apps/news?pid= ... refer=home ; http://newsblaze.com/story/200902041537 ... story.html

There were only three independent funds among the top feeders: Fairfield Greenwich Group, Walter Noel’s hedge-fund, ($7.5 billion in losses); Ascot Partners, headed by former GMAC Chairman Ezra Merkin ($1.8 billion); and Access International Advisors ($1.2 billion), a European investment fund

In 2007, AIA took over management of the Rothschilds family bank portfolio previously managed by UBS. AIA founder, Rene-Thierry Magon de la Villehuchet, committed suicide in his Manhattan office days after the Madoff scandal became public.



Villehuchet had carved a lucrative franchize for himself peddling access to the exclusive Madoff connection among Europe’s richest glitterati, including Bettencourt family heirs to the L’Oreal cosmetics family.

Most of these private hedge funds were not only rich, they had close ties to government officials and political figures, access to public money, and knew how to benefit from bailouts. Ezra Merkin was chair of two large American industrial corporations, GM and Chrysler, which have already received more than ten billion dollars in TARP bail-outs, and are currently seeking more.



J. Ezra Merkin is also owner of a large stake in Bank Leumi, the privatized national bank of Israel, which he acquired with partner Stephen Feinberg, founder of Cerberus Capital Management, which (like so many of the others) grew during the Sharon - Olmert era from a bank holding company into a large global hedge fund.

Accusations abound that Noel and Merkin failed to perform due diligence, and in some cases, allegedly deceived their own customers that they were placing client funds with Madoff. For well over a decade, Madoff had a reputation on The Street not only for phenomenally steady returns but also the whiff of illegitimate methods. The only thing that nobody could quite figure out was how he did it. Suspicions were quietly voiced that he was using insider knowledge gained from his proprietary trading platform that was adopted by NASDAQ brokers that Madoff headed.

But, if the preliminary findings are indeed correct, Madoff hasn’t been trading listed stocks in customer accounts for at least 13 years. But, Bernie nonetheless managed to consistently pay out tens of billions in dividends during that period. At the eight to 17 percent annual returns his investors were reportedly receiving, that would have depleted the fund’s capital in half that time. It is arithmetically not possible that Madoff was simply paying his older investors out of the funds gained from newer, and only from those funds. As one long-term investor who got out a couple years ago remarked, Bernie “never missed a quarter.” If he wasn’t trading, Bernie had to have another source of funds, someone who was. A feeder relationship can operate in both directions, if regulators aren’t looking very closely at both ends. And, in fact, as we are learning, regulatory authorities in several countries in the last decade have been legally blind.

Among the Madoff feeder-funds, closest attention has focused on Ascot Partners. But, J. Ezra Merkin also operates a hedge firm, Gabriel Capital, which partnered with Cerberus in the takeover of the distressed U.S. auto industry and made a big move into the defense sector during the Bush years. The partnership left companies in both sectors worse off for their attentions, but made these hedge funds owners hundreds of millions richer. Money lost in operating failing companies have been made up by lucrative government contracts and bailouts, a not entirely unexpected bonus. The new TARP loans now being sought are in addition to the $13.4 billion the US Treasury lent earlier to Merkin's GM, and Fineberg's Chrysler. In 2006, GM sold 51 percent of Merkin's GMAC to Feinberg's private equity firm Cerberus Capital Management LP (which also owns Chrysler). In May 2004, Feinberg's private equity group, Cerberus Capital Management, LP (Cerebrus is the three-headed dog that guards Hades), became majority owner of IAP Worldwide Services, Inc, one of the US Army’s largest contractors in Iraq. IAP was at the center of the Walter Reed Army medical center privatization scandal. For the sordid details of this fetid corner of pirate capitalism, see, http://www.dailykos.com/story/2007/3/10/21556/5045

Other key parts of the business model pursued by Madoff’s private feeder funds has been political influence-peddling and its financial partner, money-laundering, facilitated by bank secrecy. Merkin and Feinberg are major campaign contributors to GOP candidates and backers of the Likud Party and other right-leaning parties in Israel. Merkin is involved in the same fundraising network for Israeli charities as Morris Talansky, a secretive financier and philanthropist. Talansky’s illegal campaign contributions to Israeli PM Ehud Olmert led to the Israeli Prime Minister’s resignation. Haaretz reports, “Olmert's close associates called Talansky ‘the banker’ or ‘the launderer.’” http://www.haaretz.com/hasen/spages/981755.html

Cerberus-Gabriel has earned a global reputation as a politically-connected “vulture capital” firm. As a hedge fund, it plays the downside, and swoops in on distressed firms considered essential to the national interest. Characteristically, it breaks companies up and sells off their assets when it cannot successfully green-mail governments, extracting huge concessions and cash incentives in several countries. “Crash and burn,” in the parlance.



Walter Noel, like Merkin, is well connected, both financially and politically. According to the WSJ, his fund was part of the fund of funds of the Swiss private bank Union Bancaire Privée (UBP), “one of the world's largest managers of funds of funds. As of June, it managed some $124.5 billion.” http://online.wsj.com/article/SB123058674048040525.html UBP pioneered the use of hedge funds in private equity, and is currently the world’s second largest hedge fund manager. Because of Swiss resistance to international efforts to stem money-laundering, the Madoff scandal has offered the first opportunity to peek inside some of the inner workings of this most secretive of major global financial operators. Noel was also an active contributor to conservative political parties in the United States and Israel. Noel and his wife have contributed to the presidential campaign funds of John McCain, George W. Bush, Dan Quayle and George H.W. Bush.

***

Look Closely, and You'll See a Snake Swallowing Its Own Tail

Recall that Madoff’s Securities was actually a network of banks connected to hedge funds connected by “funds of funds”, drawing from a half-dozen major large feeder funds and about 30 smaller brokers. Many of them escaped official scrutiny, and were virtually self-regulating. The scam went on for at least 14 years, yet no one blew the whistle, and they all kept depositing funds in Bernie's accounts. See TABLE below.

These funds accounts were deposited at a number of U.S. and foreign banks. At that point, a curtain has been drawn down on what happened to the $64.8 billion principal and reported earnings in the fund. The strange secrecy about Madoff's foreign bank accounts has been imposed by the court - in itself, this is a red-flag that this was no conventional Ponzi scheme.

Table 1: “Madoff’s Victims: A List of Reported Victims and Their Exposure” , in Wall Street Journal, December 17, 2008. p. A14.
(Victims For Whom No Exposure Amount Is Available Are Not Shown.)

Fairfield Greenwich Advisors (investment management firm): $7500 million.
Tremont Capital Management (fund of funds run by Tremont Group Holdings): $3300 million.
Banco Santander SA (Spanish bank): $2870 million.
Ascot Partners (hedge fund founded by GMAC chief J. Ezra Merkin): $1800 million.
Access International Advisors (New York investment firm): $1400 million.
Fortis Bank Nederland NV (Dutch bank): $1350 million.
Union Bancaire Privee (Swiss bank): $1000 million.
HSBC Holdings PLC (British-Chinese bank): $1000 million.
Natixis SA (French investment bank): $560 million.
Carl Shapiro (former chairman Kay Windsor Inc.): $550 million.
Royal Bank of Scotland (British Bank): $492.76 million.
BNP Paribas (French Bank): $431.17 million.
BBVA (Spanish bank): $369.57 million.
Man Group PLC (British hedge fund): $360 million.
Reichmuth & Co. (Swiss private bank): $327 million.
Nomura Holdings Ltd. (Japanese brokerage house): $303 million.
Maxam Capital Management Inc. (fund of funds based in Dairen, Conn.): $280 million.
EIM SA (European investment manager with $11 billion in assets): $230 million.
Aozora Bank Ltd. (Japan bank in which Cerebus Capital owns majority stake): $137 million.
AXA (French insurer): $123 million.
UniCredit SA (Italian bank): $92.39 million.
Nordea Bank AB (Swedish bank): $59.13 million.
Hyposwiss (Swiss private bank owned by St. Galler Kantonalbank): $50 million.
Banque Bendict Hoetsch & Cie SA (Swiss private bank): $48.8 million.
City of Fairfield-Connecticut (town pension fund): $42 million.
Bramdean Alternatives (asset manager): $31.2 million.
Haredi Insurance Investments & Financial Services Ltd. (Israeli insurer): $14.2 million.
Societe Generale (French bank): $12.32 million.
Groupama SA (French insurer): $12.32 million.
Credit Agricola SA (French bank): $12.32 million.
Richard Spring (individual investor): $11 million.
RAB Capital (hedge fund): $10 million.
Banco Populare (Italian bank): $9.86 million.
Korea Teachers Pension (Korean pension fund): $9.1 million.
Jewish Community Foundation of Los Angeles: $6.4 million.
Neue Privat Bank (Swiss bank): $5 million.
Clal Insurance Enterprise Holdings Ltd. (Israeli financial services): $3.1 million.
Mediobanca SpA (via its unit Compagnie Monegasque de Banque): $671000.

Now, squint, and it becomes a snake swallowing its own tail.

[JackRiddler]

.

And, finally, what seems to be the biggest story of all - the sudden toppling last week of secrecy policies hundreds of years old at the offshore tax havens that have served as the hidden Archimedean crux of world financial capitalism.

I don't know what to make of this, because forcing this move appears to be in happy contradiction to the behavior until now of US-UK-EU authorities, who in the crisis so far have done whatever was necessary to enrich the banksters and help them consolidate and protect their gains.

http://www.guardian.co.uk/business/2009 ... sion-fight

Beginning of the end for tax havens

Swiss to hand over details of evaders

Comments (161)

Nick Mathiason

guardian.co.uk, Saturday 14 March 2009 00.56 GMT


Gordon Brown last night hailed the beginning of the end for tax havens, as Switzerland opened up its legendary system of bank secrecy and agreed to hand over information on wealthy clients suspected of tax evasion.

The move, described as historic by anti-poverty campaigners, came as ­international pressure, including action from Brown and Barack Obama, forced the world's tax havens to hand over previously undisclosed data on account holders.

In a remarkable week, Europe's secrecy jurisdictions – Liechtenstein, Andorra, Austria, Luxembourg, Jersey and Switzerland – all entered into international information sharing agreements.

Swiss ministers said the government caved in after learning the country was going to be included this month on a blacklist of uncooperative tax havens drawn up by the Organisation for Economic Co-operation and Development (OECD). Having agreed to sign up to the OECD protocol on tax, Switzerland will hand over information on account holders suspected of tax evasion by another country.

Until now tax evasion was not illegal in Switzerland and secrecy has been the bedrock of its economy.

Hans-Rudolf Merz, Swiss president and finance minister, said yesterday: "Co-operation on taxes has become more important given the globalisation of financial markets and in particular against the background of the financial crisis."

Switzerland is the world's biggest tax haven. The world's rich hide at least $1.89 tn (£1.35tn) of the estimated $7trn of private wealth there according to the Swiss Bankers Association, though others put the figure much higher.

Dr Andreas Missbach, joint managing director of Swiss anti-poverty campaign group Berne Declaration, said: "This is a major and historic first step. We have reason to celebrate but we still demand automatic exchange of information to address profound global economic imbalances."

The world's tax havens have been rattled by a series of events that have forced them to come into the open.

The Guardian has run a series of articles in its Tax Gap investigation detailing how some British companies use such havens to pay less tax to the UK treasury.

The global banking collapse revealed that many of the most complex debt instruments were based in offshore centres such as Jersey.

Obama has made cracking down on secretive jurisdictions central to his ­economic justice programme.

The fresh concessions by tax havens will not lead to full disclosure of the true beneficiaries of the complicated maze of sham trusts designed to confuse international tax authorities.

Campaign groups from all over Europe marched through Jersey's capital, St Helier yesterday. In a statement the aid groups demanded "a systemic change … to allow developing countries to get hold of the information they need … so they can stop the tax evasion".

The extent to which companies and individuals are using overseas tax havens to legally dodge tax has been exposed in the Tax Gap series. The investigation found that Royal Bank of Scotland used a series of schemes to avoid paying £500m to British and US revenues.

Many other FTSE-listed companies have also used complex financial structures to cut their tax liabilities to the British Treasury.

---

http://www.guardian.co.uk/business/2009 ... -tax/print

Structured finance

Sand, sea and a double-dip:
all you need to avoid millions in tax offshore

For the first time, bankers are revealing the techniques behind beating the Revenue

Tax gap reporting team
The Guardian, Friday 13 March 2009


If you look up "structured finance" in a business dictionary, you'll be told it is a sector of the banking industry created to help transfer risk by using complex financial instruments. But what structured finance has in fact mostly meant, as authorities around the world are only now beginning to understand fully, is tax avoidance.

Tax "saving" is the phrase preferred by the bankers themselves, and they insist that saving tax is only one of their overall commercial purposes.

These operations by big banking have been so secretive that an OECD taskforce admitted being unable to penetrate them. It said banks had a significant role in developing aggressive tax-planning strategies, with single deals involving billions of pounds and tax profits to the banks of hundreds of millions.

But as major institutions here and in the US quietly dismantle large parts of the structured finance departments that got them into such trouble, insiders have been coming forward to describe to the Guardian just how the arcane world of structured finance really works.

It is a world of jargon unintelligible to outsiders: "de-consolidation", "double-dipping". What one banker calls "a bog-standard structured transaction" turns out to involve a string of offshore companies, a £1bn investment and a "double dip" that manages to claim tax allowances twice for the same £1bn.

Tax deals would start with working out the bank's "tax capacity" - the term for the amount of tax the bank is due to pay on profits, and which it would like to reduce by manufacturing tax losses elsewhere or by buying them in from someone else. "We'd be in constant touch with our bank's back office to see what tax capacity we have available," says the banker. "The back office would release tax capacity of, say, £2bn, and we'd do a deal with that."

For a UK/US "double-dip" tax transaction, the bank would look at setting up a series of "special purpose vehicles" - companies specifically set up to shift huge sums between two or more institutions in an elaborate circle, often moving it offshore before bringing it back with tax benefits attached.

Key to the tax saving will often be a "hybrid entity", a company that can magically be owned by more than one party, so that it comes under the tax rules of the UK at one point, but under the different tax rules of, say, Luxembourg at another convenient point. Further companies may need to be invented to unwind the deal and move the cash back onshore without attracting tax.

The first step for the structured finance team is to go to another large bank or financial institution - a "counterparty" - and offer to pay them to join the deal. Both sides get together with teams of lawyers - seven or eight on each side are said to be common. They advise how to exploit technical loopholes while remaining within the law.

The teams thrash out how the money will move between them, who will own what in what form at what point, how it will be lent back, what kind of collateral the other side will put up against it, whether they need to create an income stream, say from securitised mortgages, that attracts tax in one place in order to pass tax credits on, what interest rates they'll pay each other, and what accounting dates will be used.

Each side's cut of the anticipated tax profits will be negotiated. The leading bank will typically take 70-80%, depending on the complexity of the deal, and the counterparty will take 20-30%, perhaps hidden in a particularly favourable interest rate on a loan between the parties. The banks' risk committees would want a "clean tax opinion from a lawyer" before signing the deal off. US lawyers, according to our sources, tended to be particularly anxious to add some conventional commercial transaction to the operation.

Each deal would then have a "bible" created for it: hundreds of pages recording its details and how to unwind it.

Deals that had started out relatively small, at £300m, got much bigger as the world's liquidity bubble grew. "£1bn seemed a huge deal a few years ago, but then they went up and up and in the heyday, around 2004, £5bn was common," says one banker.

From the authorities' point of view, the complexity of these deals, and their use of secretive jurisdictions offshore, often made them impenetrable. A source close to the US tax authorities compares unpicking such a tax deal with trying to do a 1,000-piece jigsaw, "but you've only been given half the pieces and the bankers have taken away the picture on the box".

The biggest players in structured finance were making about £1bn a year per bank in tax profit at the peak, one expert told us, with about 20 financial institutions active in the market. The loss to exchequers around the world has been huge. A senior source close to the UK Revenue told us that the banks' profits from tax deals were "certainly billions and billions and billions".

Cayman break: Allure of the islands

How many deals?

Thirteen RBS tax avoidance deals over the last five years involved capital of £25bn. Losers in seven of them are countries other than the UK. One deal is still "live" - a £500m trade with Swiss Re. This does not appear to cause tax losses to the UK.

Why are the sums so huge?

Big loans are needed for the banks to make a worthwhile profit, which they share between them. Interest received on a £1bn loan might be £40m a year. UK corporation tax saved on that profit, at 30%, would be £12m a year.

What is the point of the deals?

Some "commercial reason" for the loans is generally claimed. But RBS does not deny that each one makes money by creating a tax loss.

Why the Caymans?

Not because of the Caribbean islands' notorious zero tax rate. The deals are deliberately UK tax resident. The attractions are the secrecy, and the lax rules that allow share deals to be easily "unwound".

guardian.co.uk © Guardian News and Media Limited 2009

.

[smiths]

its not quite that straight forward,

gordon brown who co-runs the biggest tax/secrecy jurisdictions in the world and people like the swiss know that the populist heat is on them, they are making public concessions but will no doubt do everything they have to to make sure no meaningful change occurs

International deals on sharing tax data could take years to complete

There is some doubt about how long the enthusiasm of the newfound converts will last. After an outcry in the Swiss media following the announcement that the country would comply with the OECD standards, the Swiss government issued a statement Saturday saying the decision "does not constitute 'the end of bank secrecy,"' and said the government "has stated on several occasions that Switzerland has no intention of relinquishing bank secrecy."

"The Swiss are trying to gain time," Nicolas Michellod, an analyst with the Zurich office of with Celent, a international financial research firm. "Negotiating new tax treaties with each country will take years."

He said that could give opponents of the measure on the Swiss right, whom he described as feeling aggrieved by the international criticism, a chance to drag out any changes to the banking laws until the issue moved out of the headlines.

http://www.iht.com/articles/2009/03/15/business/tax.php

Liechtenstein eases bank secrecy rules

Liechtenstein said it would negotiate new rules with other countries to encourage wealthy foreigners holding undeclared accounts to come forward voluntarily. The first talks on the initiative, discussed at length with the OECD, are due on Friday with Germany and then the UK next month.
Liechtenstein will go not so far as to abolish bank secrecy. But the principality will co-operate more fully with foreign tax authorities and will end the confusing distinction, also retained by Switzerland, between tax evasion, a civil offence, and tax fraud, a crime.

http://www.ft.com/cms/s/0/b85d298a-0ed9 ... ck_check=1

Swiss warn lifting secrecy ‘will take time’

Switzerland has warned countries against expecting swift results from its decision last week to water down bank secrecy laws, saying it could take years for the necessary legislation to come into action.

Hans-Rudolf Merz, Switzerland’s finance minister, said renegotiating the country’s more than 70 double taxation treaties “won’t be so fast” as each would have to be approved individually by the country’s parliament.

New treaties could be subject to referendums, he told the Financial Times in an interview, while putting in place the rules prescribed by of the Organisation for Economic Co-Operation and Development would also require negotiations and “will take time”.

The comments from Mr Merz, who is head of state under Switzerland’s rotating presidency, came as some of the countries that have pressed hard for greater international tax transparency greeted last week’s move with caution.

http://www.ft.com/cms/s/0/1568c58c-1257 ... fd2ac.html

[smiths]

most of those madoff investments are for millions,
look at these ones in the billions, all going through the caymans

Deal 1


Company Eurus, Caymans
Sum involved £500m
Partner Swiss Re
Features Swiss Re of Zurich sets up two Cayman entities in 2008. One, Zephyrus, is tax resident in Jersey. Three days later, RBS buys both entities from Swiss Re. Swiss Re lends £500m back and pays RBS an "insurance premium" against the highly unlikely event of an earthquake in California before 2010. Swiss Re says: "We fully explained the transaction to HMRC last autumn. HMRC did not express any concerns."
Deal 2

Company Alpino, Caymans
Sum involved £6bn
Partner Morgan Stanley
Features Morgan Stanley invests £5bn in a subsidiary in the low-tax EU state of Luxembourg. RBS sets up two Cayman companies, Deansgate, and Alpino. The £5bn is passed on to RBS as "cash collateral" for a "stock loan agreement". RBS makes payments to the Luxembourg company. A year later, the deal is unwound when Alpino passes into Morgan Stanley's hands. Morgan Stanley says: "No comment."
Deal 3

Company Ironwood FP, Caymans
Sum involved $6bn
Partner Merrill Lynch
Features RBS and Merrill Lynch each have a pair of companies, one in the UK, one in the Caymans. Merrill's UK entity, Breckenridge Investments, holds "asset-backed and mortgage-backed securities". Ironwood is involved in a forward sale agreement over its shares. Merrill Lynch did not respond to invitations to comment.
Deal 4

Company Forres LLC, Delaware
Sum involved $2bn
Partner Goldman Sachs
Features Forres is a US-registered "hybrid", which could be regarded simultaneously as a subsidiary of a Goldman Sachs company and an RBS company. There was a forward sale agreement for its shares. Goldman Sachs says: "No comment."
Deal 5

Company Chaffinch, Caymans
Sum involved $6bn
Partner AIG
Features AIG sets up Chaffinch as a subsidiary of its US entity, Blackbird Investments. Then Chaffinch becomes a subsidiary of RBS and preference shares are transferred. RBS operated through two entities, Lampeter and Stevenson, with forward sale agreements on the shares. On 29 March 2007, "US treasury proposes changes in tax regulations." Trade is unwound. AIG says: "We no longer have any transactions of this type on our books."
Deal 6

Company Islay, Caymans
Sum involved £1bn
Partner Deutsche Bank
Features Islay is an RBS subsidiary (Highland names were frequently used by RBS). It makes deals in yen and Japanese government bonds, with purchase and resale agreements centred on a partnership called Akasaka LLP. Deutsche Bank says: "No comment."
Deal 7

Company Lomond, UK
Sum involved £5bn
Partner Secret "overseas entity"
Features RBS used two subsidiaries, Garten and Etive. Sinking £2.5bn into each to buy a "non-controlling interest" in an unknown foreign entity, it claims UK tax reliefs of more than £140m on grounds that tax had been paid abroad. Both deals are halted on 29 March 2005.

Six other deals involved Scafell ($2bn); Steamboat (£1.5bn); Vallay (£1bn); Winterlake (size unknown); Wainscot ($2bn); and Ringwold (£850m). This last was set up to make loans to the Dutch-Belgian Fortis bank, which did not respond to invitations to comment.

http://www.guardian.co.uk/business/2009 ... xavoidance

[JackRiddler]

.

And, finally for today, Hudson weighs in on the AIG bonuses.

http://counterpunch.org/hudson03182009.html

March 18, 2009

Bait and Switch
The Real AIG Conspiracy

By MICHAEL HUDSON

It may seem odd, but the public outrage against $135 million in AIG bonuses is a godsend to Wall Street, AIG scoundrels included. How can the media be so preoccupied with the discovery that there is self-serving greed to be found in the financial sector? Every TV channel and every newspaper in the country, from right to left, have made these bonuses the lead story over the past two days.

What is wrong with this picture? Is there not something over-inflated about the outrage led most vociferously by Senator Charles Schumer and Rep. Barney Frank, the two leading shills for the bank giveaways over the past year? And does Pres. Obama perhaps find it convenient that finally, at long last, he has been able to criticize something that he believes Wall Street has done wrong? Even the Wall Street Journal has gotten into the act. The government’s takeover of AIG, it pointed out, “uses the firm as a conduit to bail out other institutions.” So much more greed is involved than just that of AIG employees. The firm owed much more to other players – abroad as well as on Wall Street – than the assets it had. That is what drove it to insolvency. And popular opposition has been rising to how Obama and McCain could have banded together to support the bailout that, in retrospect, amounts to trillions and trillions of dollars thrown down the drain. Not really down the drain at all, of course – but given to financial speculators on the winning “smart” side of AIG’s bad financial gambles.

“The Washington crowd wants to focus on bonuses because it aims public anger on private actors,” the Journal accused in a March 17 editorial. But instead of explaining that the shift is away from Wall Street grabbers of a thousand times the amount of bonuses being contested, it blames its usual all-purpose bete noire: Congress. Where the right and left differ is just whom the public should be directing its anger at!

Here’s the problem with all the hoopla over the $135 million in AIG bonuses: This sum is only less than 0.1 per cent – one thousandth – of the $183 BILLION that the U.S. Treasury gave to AIG as a “pass-through” to its counterparties. This sum, over a thousand times the magnitude of the bonuses on which public attention is conveniently being focused by Wall Street promoters, did not stay with AIG. For over six months, the public media and Congressmen have been trying to find out just where this money DID go. Bloomberg brought a lawsuit to find out. Only to be met with a wall of silence.

Until finally, on Sunday night, March 15, the government finally released the details. They were indeed highly embarrassing. The largest recipient turned out to be just what earlier financial reports had rumored: Paulson’s own firm, Goldman Sachs, headed the list. It was owed $13 billion in counterparty claims. Here’s the picture that’s emerging. Last September, Treasury Secretary Paulson, from Goldman Sachs, drew up a terse 3-page memo outlining his bailout proposal. The plan specified that whatever he and other Treasury officials did (thus including his subordinates, also from Goldman Sachs), could not be challenged legally or undone, much less prosecuted. This condition enraged Congress, which rejected the bailout in its first incarnation.

It now looks as if Paulson had good reason to put in a fatal legal clause blocking any clawback of funds given by the Treasury to AIG’s counterparties. This is where public outrage should be focused.

Instead, the leading Congressional shepherds of the bailout legislation – along with Obama, who came out in his final, Friday night presidential debate with McCain strongly in favor of the bailout in Paulson’s awful “short” version – have been highlighting the AIG executives receiving bonuses, not the company’s counterparties.

There are two questions that one always must ask when a political operation is being launched. First, qui bono -- who benefits? And second, why now? In my experience, timing almost always is the key to figuring out the dynamics at work.

Regarding qui bono, what does Sen. Schumer, Rep. Frank, Pres. Obama and other Wall Street sponsors gain from this public outcry? For starters, it depicts them as hard taskmasters of the banking and financial sector, not its lobbyists scurrying to execute one giveaway after another. So the AIG kerfuffle has muddied the water about where their political loyalties really lie. It enables them to strike a misleading pose – and hence to pose as “honest brokers” next time they dishonestly give away the next few trillion dollars to their major sponsors and campaign contributors.

Regarding the timing, I think I have answered that above. The uproar about AIG bonuses has effectively distracted attention from the AIG counterparties who received the $183 billion in Treasury giveaways. The “final” sum to be given to its counterparties has been rumored to be $250 billion, do Sen. Schumer, Rep. Frank and Pres. Obama still have a lot more work to do for Wall Street in the coming year or so.

To succeed in this work – while mitigating the public outrage already rising against the bad bailouts – they need to strike precisely the pose that they’re striking now. It is an exercise in deception.

The moral should be: The larger the crocodile tears shed over giving bonuses to AIG individuals (who seem to be largely on the healthy, bona fide insurance side of AIG’s business, not its hedge-fund Ponzi-scheme racket), the more they will distract public attention from the $180 billion giveaway, and the better they can position themselves to give away yet more government money (Treasury bonds and Federal Reserve deposits) to their favorite financial charities.

Let’s go after the REAL money given to AIG – the $183 billion! I realize that this has already been paid out, and we can’t get it back from the counterparties who knew that Alan Greenspan and George Bush and Hank Paulson were steering the U.S. economy off a real estate cliff, a derivatives cliff and a balance-of-payments cliff all wrapped up into one by betting against collateralized debt obligations (CDOs) and insuring these casino bets with AIG. That money has been siphoned off from the Treasury fair and square, by putting their own proxies in the key government slots, the better to serve them.

So let’s go after them altogether. Sen. Schumer said to the AIG bonus recipients that the I.R.S. can go after them and get the money back one way or another. And it can indeed go after the $183-billion bailout recipients. All it has to do is re-instate the estate tax and raise the marginal income and wealth-tax rates to the (already reduced) Clinton-era levels.

The money can be recovered. And that’s just what Mr. Schumer, Mr. Frank and others don’t want to see the public discussing. That’s why they’ve diverted attention onto this trivia. It’s the time-honored way to get people not to talk about the big picture and what’s really important.

Michael Hudson is a former Wall Street economist. A Distinguished Research Professor at University of Missouri, Kansas City (UMKC), he is the author of many books, including Super Imperialism: The Economic Strategy of American Empire (new ed., Pluto Press, 2002) He can be reached via his website, mh@michael-hudson.com

I think he's mistaken on this point: Obama, Schumer, Frank and Co. aren't jumping at the opportunity to focus on the bonuses. It's all they can do to keep up and deflect blame from themselves. Outrage at the bonuses is as likely to highlight the enormity of the AIG bailout as to hide it. Nor do I see the bonuses as a minor thing; compensation for traders (long as they made trades, no matter how stupid) incentivized the behavior that generated the crisis in the first place. No arguing with his conclusion of course: "Let’s go after the REAL money given to AIG – the $183 billion!" Not to mention the other $700 billion. Let them all fail, establish a national bank instead (on this Harvey and Hudson would presumably agree).

.

[jingofever]

Atrios points to a Newsweek article alleging that AIG is even more screwed than is currently believed. And a funny thing happened - I clicked on the comments and immediately saw two familiar names, "Trifecta" and "Penguin", and wondered if those two had found a new home there. But I suppose those may well be common user names.

Outrageous. It's the preferred adjective used by Barack Obama and Ben Bernanke to describe AIG, the crippled giant that has turned into a national money pit. AIG has swallowed at least $170 billion in taxpayer money so far while funneling $165 million of it onward in bonuses to its incompetent executives, along with tens of billions more to equally privileged "counterparties" like Goldman Sachs.

But I suspect that—with apologies to a famous American patriot—we have not yet begun to get outraged. At least if some of the insurance experts I've been talking to are correct.

Thomas Gober, a former Mississippi state insurance examiner who has tracked fraud in the industry for 23 years and served previously as a consultant to the FBI and the Department of Justice, says he believes AIG's supposedly solvent insurance business may be at least as troubled as its reckless financial-products unit. Far from being "healthy," as state insurance regulators, ratings agencies and other experts have repeatedly described the insurance side, Gober calls it "a house of cards." Citing numerous documents he has obtained from state insurance regulators and obscure data buried in AIG's own 300-page annual reports, Gober argues that AIG's 71 interlocking domestic U.S. insurance subsidiaries are in hock to each other to an astonishing degree.

Most of this as-yet-undiscovered problem, Gober says, lies in the area of reinsurance, whereby one insurance company insures the liabilities of another so that the latter doesn't have to carry all the risk on its books. Most major insurance companies use outside firms to reinsure, but the vast majority of AIG's reinsurance contracts are negotiated internally among its affiliates, Gober says, and these internal balance sheets don't add up. The annual report of one major AIG subsidiary, American Home Assurance, shows that it owes $25 billion to another AIG affiliate, National Union Fire, Gober maintains. But American has only $22 billion of total invested assets on its balance sheet, he says, and it has issued another $22 billion in guarantees to the other companies. "The American Home assets and liquidity raise serious questions about their ability to make good on their promise to National Union Fire," says Gober, who has a consulting business devoted to protecting policyholders. Gober says there are numerous other examples of "cooked books" between AIG subsidiaries. Based on the state insurance regulators' own reports detailing unanswered questions, the tally in losses could be hundreds of billions of dollars more than AIG is now acknowledging.

One early sign of trouble came when Christian Milton, AIG's vice president of reinsurance from 1982 to 2005, was convicted last year in federal district court of conspiracy, securities fraud, mail fraud and making false statements to the Securities and Exchange Commission. (Milton was sentenced in January; his lawyers have indicated plans to appeal.)

AIG spokesman Mark Herr took strong exception: "We strongly disagree with Mr. Gober's analysis, which lacks a fundamental understanding of our commercial insurance operations' inter-company risk sharing agreements or even the basics of statutory accounting. Our primary regulators, including New York and Pennsylvania, regularly review our statutory filings as well as our intra-company risk sharing pool, and have raised no objections to this structure. They have repeatedly stated that we have sufficient financial strength to meet our obligations. In fact, in today's hearing on AIG, Joel Ario, Pennsylvania State Insurance Commissioner, commented that the insurance companies of AIG remain strong and well capitalized."

But if Gober is right, the implications are almost too awful to contemplate. Despite its troubles on Wall Street, AIG is still the largest insurance company in the United States, controlling both the largest life and health insurer and the second-largest property and casualty insurer. It has 30 million U.S. customers. AIG is also a major provider of guaranteed investment contracts and products that protect people in 401(k) plans, as well as being the leading commercial insurer in the U.S. It is one of the largest insurance companies in the world, with insurance and financial operations in more than 130 countries. These insurance businesses were once thought to be so solid that AIG was able to use the triple-A rating it was routinely awarded to start up its vast credit-default-swap business.

Public outrage has been building, along with the outcry about bonuses, over all the taxpayer money that has gone to keep AIG afloat by paying off the credit-default-swap counterparties. While some worries have surfaced about the various insurance companies' risky securities-lending practices, most have escaped scrutiny. But if millions of AIG policyholders are at risk too and no one's saying it yet, the populist backlash could get really ugly.

Gober has brought his allegations to the attention of the House Financial Services Committee, chaired by Rep. Barney Frank. A committee spokesman did not immediately return a call asking for comment. But over at the Senate banking committee, ranking member Sen. Richard Shelby during hearings last week raised questions about whether AIG's insurance side was as sound as the company maintained it to be. In response, Eric Dinallo, New York state's superintendent of insurance, said he thought "the operating companies of AIG, particularly the property companies, are in excellent condition." But Dinallo admitted he had examined only 25 of the domestic AIG companies and added: "There are problems with state insurance regulation. I've been a proponent of us revisiting it."

And therein lies the real problem. More than any other Wall Street rogue, AIG has been able to indulge in "regulatory arbitrage" on a global scale, creating totally unsupervised businesses that act beyond the purview of any government (AIG has repeatedly said that its problems were confined to the London-based financial-products unit). The company's ability to escape an umbrella regulator was one reason the financial-products group was able to sell, indiscriminately and without hedges, credit-default swaps around the world in the belief that they could never all come due at once. They did. Fed chairman Bernanke told lawmakers in early March that AIG "exploited a huge gap in the regulatory system" and was essentially a hedge fund attached to a "large and stable insurance company." But is that really an accurate description? Huge regulatory gaps also exist in insurance. "There is no federal insurance regulator," according to a senior government banking official, only individual state agencies. Are we missing something really big here? If so, there might be another terrible reckoning to come.

[vigilant]

jack riddler

i bow

in respect

to the thread

that you are

your contribution

is vast

should the student care to appear

god bless you, jack riddler
----------------------

and "smiths"..........you too my brother......i'm just too tired

dying is a tired business....after all...and tired i am...really tired..but..say i



now squint....it is a snake swallowing its tail.....it really is

should i say anything worthwhile it is...."cartesian linguistics" as it is the key to what you seek to understand, and what you seek to overstand, as it is the reflection of itself that you see as one, which you seek to see as two, language of science and math, language of debate teams, debating what? debating of winning an argument and no more...

tired now...........

[brainpanhandler]

Main Entry: meg·a·lo·ma·nia
Pronunciation: \ˌme-gə-lō-ˈmā-nē-ə, -nyə\
Function: noun
Etymology: New Latin
Date: 1887
1 : a mania for great or grandiose performance
2 : a delusional mental disorder that is marked by feelings of personal omnipotence and grandeur