In researching and think about AIG, I have been writing about them as if it were two separate companies: A well regulated Insurer, and a rogue derivatives products firm (FP).

The working assumption has been that the regulated insurer was run fairly conservatively, and the structured financial product side run like a giant hedge fund. The 32% net profit retention on the FP side is actually better than what most hedge funds see.

This dichotomy is mostly true, but with now has an interesting twist to it. In congressional testimony today, Ben Bernanke implied that had the Fed allowed AIG too fall, he detailed what might have happened had AIG been allowed to fail:

The Federal Reserve and the Treasury agreed that AIG’s failure under the conditions then prevailing would have posed unacceptable risks for the global financial system and for our economy. Some of AIG’s insurance subsidiaries, which are among the largest in the United States and the world, would have likely been put into rehabilitation by their regulators, leaving policyholders facing considerable uncertainty about the status of their claims. State and local government entities that had lent more than $10 billion to AIG would have suffered losses. Workers whose 401(k) plans had purchased $40 billion of insurance from AIG against the risk that their stable value funds would decline in value would have seen that insurance disappear. In addition, AIG’s insurance subsidiaries had substantial derivatives exposures to AIG-FP that could have weakened them in the event of the parent company’s failure.

If we are to take Bernanke at face value, he is saying that AIGFP had buried their own firm with junk paper. BB does not define what “substantial derivative exposure” meant — but given the $2.7 trillion dollars in derivatives exposure that FP had, even a tiny percentage might amount to an enormous sum.

That the collapse of AIG Financial Products would have damaged the other Insurance half of the firm is a frightening development.

Even more fascinating is this “lesson learned”

To conclude, I would note that AIG offers two clear lessons for the upcoming discussion in the Congress and elsewhere on regulatory reform. First, AIG highlights the urgent need for new resolution procedures for systemically important nonbank financial firms. If a federal agency had had such tools on September 16, they could have been used to put AIG into conservatorship or receivership, unwind it slowly, protect policyholders, and impose haircuts on creditors and counterparties as appropriate. That outcome would have been far preferable to the situation we find ourselves in now.

In other words, we should have nationalized them from the beginning . . .

Hat Tip: Bob Lenzner of Forbes was the first to spot the issue of AIG’s insurance half having AIG FP derivative exposure.


Chairman Ben S. Bernanke on American International Group
Before the Committee on Financial Services, U.S. House of Representatives, Washington, D.C.
March 24, 2009

Category: Bailouts, Derivatives

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

76 Responses to “Bernanke Bombshell: AIG Insurer Exposed to FP”

  1. franklin411 says:

    Somewhat. The administration is just asking for the authority to selectively take over financial institutions BESIDES just banks. And guess what? The Republicans are calling it the return of Josef Stalin!

    I support giving the Treasury the power it is asking for today to regulate, and if necessary, to seize non-bank institutions. But this is a microcosm of what would have happened at the President sought nationalization–it’s a political impossibility without 60 RELIABLE Democrats in the Senate.

  2. ottovbvs says:

    BR:this comes as a surprise…… it was a given in my mind……Bernanke’s just saying they didn’t have a legal vehicle to seize the company which I do find surprising……As far as the stockholders are concerned the company has effectively been nationalized it’s just the bondholders haven’t been punished enough in your book I think

  3. DeDude says:

    Frightening indeed. It makes you want to ask: “what FP’s are in YOUR insurance companies safe and sound investment portfolio ?”.

  4. call me ahab says:

    BR Says:

    In other words, we should have nationalized them from the beginning . . .

    exactly- why fuck around.

  5. paulbenny says:

    I am certainly short on knowledge compared to many others on these boards. My observation, however, is that the Fed and Treasury know that the net impact of CDS is the most significant and far greatest problem likely greater than all other problems potentially combined and it is too big to address. They are simply trying to drag this out crisis among a variety of parties, spread out the loss to the taxpayers over time, creating record deficits and likely significant inflation.

    If a simple table was presented on the NewsHour or major network showing the math, the general public would be scared, and markets could see the greatest sell off of all time.

    My reading of Chris Whalen, John Mauldin, Barry Ritholtz, Nouriel Roubini and a few others have clearly improved my understanding of the situation.

    My question is this: can we really even trust the government at all any more with the powers they are being given or legislating? Can what they say on a daily basis be trusted at all? They speak too cryptically at times then say it is really bad, why can’t they come clean so we can take our hit and rebase the assets in this country?

  6. franklin411 says:

    I don’t think the general public watches the News Hour! In fact, there’s much wailing and gnashing of teeth because their precious American Idol is going to be bumped tonight by the President’s news conference.

  7. m111ark says:

    I read karl Denninger over at market ticker and BR hoping to gleam some understanding of what happened as well as what IS happening. These are not my only sources, just some. Still, this is mostly too confusing. What I take away so far is that those who should have been watching the store did not. Why is still the question. Was it willful? Are they incompetent? Or is there criminal intent? If so, it doesn’t look like anyone is going to held accountable. If that remains the case, pitchforks and guns may be a reality in the future.

  8. DL says:

    I just don’t see why a bankruptcy of AIG would have been the catastrophic event that Bernanke says that it would have been. The government could have nationalized the company, briefly, for a period of perhaps 90 days before turning the company over to a bankruptcy court. Over the course of those 90 days, administrators of the company could have informed all customers that they would have to find alternative insurance immediately. As long as the customers had found that alternative insurance, what is the big deal? Yes, there would be lawsuits filed for breach of contract, but so what? By the time they could get a court date, the company would be under bankruptcy protection.

    I think the MSM would do us all a great service if they would have interviews with bankruptcy attorneys who would discuss this matter. (Of course, CNBC will never do this, because they’ve never met a financial bailout that they didn’t like).

  9. dead hobo says:

    BR decided:

    In other words, we should have nationalized them from the beginning . . .

    Under what legal authority? I know, it doesn’t matter. What we really need are easy answers to complicated questions. Just by pulling out the magic wand and uttering the magic word “Nationalize” all the problems disappear. This is a job for Harry Potter!

  10. E says:

    “In other words, we should have nationalized them from the beginning .”

    I see it as a diversion or an excuse for how they handled it. Haven’t we been hearing that bankruptcy/receivership would have triggered CDS clauses and/or recent bankruptcy law changes that require full payment to the counterparty?

  11. franklin411 says:

    Agreed, Hobo.

  12. Bruce N Tennessee says:

    Under what legal authority? Are these the same people (at least in congress, who I understand took part in September) who now want a selective 90% tax?

    Perhaps Costa Rica would be nice…I understand the ocean fishing is marvelous…

  13. larster says:

    The Fortune article referred to over the weekend in TBP, quoted the now COO of AIG as saying that the first job of an operating officer was to kick the tires every morning. She further said that she could not even find the tires. It seems that when AIG was acquiring companies they did not have a software system that allowed them to integrate the financials. In my previous life, I found that good mgt had data at their fingertips. Bad (or crooked) mgt could not come up with the relevant data. It appears to me that Hammering Hank Greenberg set this up to purposely muddy the waters and hide the various weaknesse, transgressions, etc. This is also why no one has stepped up to the plate to purchase these supposedly sound insurance entities of AIG.

  14. schoolsout says:

    Jim Sinclair on jsmineset has been a good voice on the OTC Derivative problem

    this shit is everywhere, it seems.

  15. ottovbvs says:

    dead hobo Says:

    March 24th, 2009 at 1:35 pm
    “Under what legal authority? I know, it doesn’t matter. What we really need are easy answers to complicated questions. Just by pulling out the magic wand and uttering the magic word “Nationalize” all the problems disappear. This is a job for Harry Potter!”

    …….this is the Harry Potter network…..all the stereotypes are present…..Voldemart, Uncle Pumblechook oh no that’s great expectations, well whatever his name is, the good guy, and Harry with his magic wand….just wave it…..the whole financial system crashes…..bankers sell apples and clean toilets….we all feel much better for the experience which has little or no impact on ordinary citizens….and we emerge from from it all feeling better and with greatly heightened moral characters…particularly the bankers

  16. FromLori says:

    Unless someone forces them to tell us what our losses would be as citizens you might want to rethink the nationialization. I believe from what I have been able to uncover they are too big to save. Since they no longer pose a risk of systemic failure we should bail out now and let them fail!

    How much does anyone really know? here..

    No longer a systemic risk here…

    It was a giant fraudulant ponzi scheme to begin with let them take their licks they will bankrupt us otherwise!

    Fraud here..

    Public Risk here..{3C374173-407C-4A88-9D76-436ECEE6116E}


  17. Mannwich says:

    @Bruce: For what it’s worth, I went to Costa Rica in ’07. Fabulous place to visit. For such a small country, so much to see/do there. Gorgeous beaches, jungle, volcanoes, natural hot springs, white water rafting, fishing, hiking, and an amazing array of exotic wild life.

    If we had the dough and were a bit older, I’d love to buy this little b&b on the beach down there. On market for $545K. Nothing facny but the location is incredible. We visited their neighbor who is my wife’s family friend from CO. He retired down there and built a house across the street from the beach. Basically there’s never more than 20-30 people at a time up and down the coast on that beach, which has become a haven for international ex-pats and drop outs. Oftentimes, we were solo boogie-boarding at sundown. Amazing.

  18. Gene says:

    “A government big enough to give you everything you want, is strong enough to take everything you have.” – Thomas Jefferson

  19. another scary story, best told around campfires, as an excuse for ever more ‘regulatory’ powers for a private corporation.

    which, I ask you, is a ‘scarier’ story?

    weren’t we just discussing this:

    Source: Rolling Stone – MATT TAIBBI

    It’s over — we’re officially, royally fucked. no empire can survive being rendered a permanent laughingstock, which is what happened as of a few weeks ago, when the buffoons who have been running things in this country finally went one step too far. It happened when Treasury Secretary Timothy Geithner was forced to admit that he was once again going to have to stuff billions of taxpayer dollars into a dying insurance giant called AIG, itself a profound symbol of our national decline — a corporation that got rich insuring the concrete and steel of American industry in the country’s heyday, only to destroy itself chasing phantom fortunes at the Wall Street card tables, like a dissolute nobleman gambling away the family estate in the waning days of the British Empire.

    The latest bailout came as AIG admitted to having just posted the largest quarterly loss in American corporate history — some $61.7 billion. In the final three months of last year, the company lost more than $27 million every hour. That’s $465,000 a minute, a yearly income for a median American household every six seconds, roughly $7,750 a second. And all this happened at the end of eight straight years that America devoted to frantically chasing the shadow of a terrorist threat to no avail, eight years spent stopping every citizen at every airport to search every purse, bag, crotch and briefcase for juice boxes and explosive tubes of toothpaste. Yet in the end, our government had no mechanism for searching the balance sheets of companies that held life-or-death power over our society and was unable to spot holes in the national economy the size of Libya (whose entire GDP last year was smaller than AIG’s 2008 losses).–.html

    and, to larster’s point: did anyone get their ’008 10-K from the FedRes, yet?

  20. How, exactly, is forcibly purchasing an 80% interest in a company not that dreaded bugabear “nationalization”? Nevermind that the government now pretends that it operates as an independent company.

    And what, exactly, is the systemic risk that AIG’s failure would have prompted? The risk that the plutocrats would be tarred and feathered or their heads hoisted on a petard? Or the systemic risk that assets prices artificially inflated by excess money and credit and leverage would find their real value?

    OT: GS is said to be angling to find a way to pay back the TARP money it received. No, not the TARP money that it received that was laundered through AIG. Just the money it received directly from the government. It mentioned something about wanting the freedom to operate without government interference. I can’t see why it would matter to GS. They are the government, or at least the part of it that answers to no one except the Fed and Treasury. And they own the Fed and Treasury, so it’s hard to see where it would matter, except the TARP money did have to originally be approved by representatives of the people. Perhaps that’s the ones they’re afraid of.

  21. ottovbvs says:


    …..Sounds great for two weeks then you’d go stir crazy…..

  22. greg says:

    Mannwich, with reference to your last question on the last thread, here is an article about Canadian Bank CEO compensation you may find interesting. Warning, you may tear up a little when you read it, just remember, it’s a Canadian thing.

  23. Mannwich says:

    @otto: Agreed. That’s why my wife’s family friend travels quite a bit around the world and still keeps his place in CO.

  24. leftback says:


    Time for your meds, Jeff. Take two Costa Rican girls and call me on Monday.

    Soros called for a ban on naked CDS positions today and I think we will see this adopted, even as AIG is unwound.
    The criminal investigations into the Ponzi known as The House That Hank Built will continue for years.

    The technical picture remains quite bullish for the Spring Fling with today’s successful test of SPX 810.

  25. Bruce N Tennessee says:

    Thanks, Manny. I will look that up…

    I spent 6 weeks in Guatemala in the 80′s doing some work with Indians, and I could see us down there…probably doing what I did then.

  26. Marcus Aurelius says:

    Legal authority? We don’t need no stinkin’ legal authority!

    How about these:

    Eminent domain

    The power of the Unitary Executive

    Have them declared “Enemy Combatants” and a threat to Homeland Security

    Actually, I think they could be seized by warrant under the RICO statutes, pending full investigation of the Ponzi scheme in which they are involved. I don’t think it’d be too hard to find a Grand Jury who would approve the warrant.

  27. ottovbvs says:

    “I don’t think it’d be too hard to find a Grand Jury who would approve the warrant.”

    …….So why are Mrs Madoff and dozens of others continuing to live in the lap of luxury?

  28. scvblwxq says:

    I don’t think we have to worry about Joseph Stalin’s philosophy becoming dominant as long as we have elections and everybody in the government only wants to take over very troubled companies for a short time and then to return the companies to private hands as soon as possible. The Republicans seem stuck in the 1950′s not realizing that government owenership of private companies is the furthest thing from Democrats minds.

  29. ottovbvs says:

    Mannwich Says:

    March 24th, 2009 at 2:02 pm
    @otto: Agreed. That’s why my wife’s family friend travels quite a bit around the world and still keeps his place in CO.

    …..I’m surprised at you associating with super rich elitists like this

  30. Marcus Aurelius says:

    …….So why are Mrs Madoff and dozens of others continuing to live in the lap of luxury?

    I don’t believe a grand jury has been impaneled.

  31. ottovbvs says:

    Marcus Aurelius Says:

    March 24th, 2009 at 2:43 pm
    …….So why are Mrs Madoff and dozens of others continuing to live in the lap of luxury?

    I don’t believe a grand jury has been impaneled.


  32. Mannwich says:

    @otto: LOL. Touche. He was actually a director at the local theater in Fort Collins, CO. Pretty average, down to earth guy, but was able to get a great deal on land down in CR (for about $30K, I think) by the beach. Built a pretty modest home by U.S. standards down there for another $200-$300K, I think. The key for him was to get a permit to build there, which I think is now difficult in this area (Matapalo). That’s the toughest part with building/owning RE down there, navigating the laws and permit process. Very bureaucratic and complicated.

  33. ottovbvs says:

    Mannwich Says:

    March 24th, 2009 at 2:47 pm
    “That’s the toughest part with building/owning RE down there, navigating the laws and permit process. Very bureaucratic and complicated.”

    ………yes I can imagine

  34. Marcus Aurelius says:


    Thanks for the links – especially the first. I was looking for that info just yesterday.

  35. jason says:

    Mark E. H.

    Just finished reading that article, nothing new but still had to stop several times to collect my breathe as the anger was overwhelming. I find myself spending more and more time contemplating what the hell I can do and everything I come up with is radical…

  36. FromLori says:

    You are welcome Marcus Aurelius…


    Lawlessness Begets Lawlessness
    Nice 7% rally yesterday eh?

    A few minutes after the close, we got this:

    WASHINGTON (MarketWatch) — The Treasury and the Federal Reserve released a joint statement Monday that spells out the different responsibilities of the two agencies in dealing with the financial crisis. In the most noteworthy part of the agreement, Treasury said it would take over the Fed’s holding of assets of Bear Stearns and American International Group. Treasury did not say how it would pay for these programs and said it would only make the move “in the longer term and as its authorities permit.” The Fed’s investments in the three funds, known as Maiden Lane, totaled $72.21 billion in the latest week, according to Fed statistics.

    Yes, those three “Maiden Lane” equity investments that The Fed is not authorized to make at all, and which Ben Bernanke assured us as recently as January would not lose money.

    The truth?

    - Note: Maiden Lane fund hold Bear Stears and AIG assets. Additionally on 1/20, the WSJ noted that at the end of Sept, Maiden Lane had a value of $27B and the same article noted that analysts expect the value of the Maiden Lane assets to have dropped more in Q4. Furthermore on 3/17, it was disclosed that Maiden Lane III paid $62B to buy CDOs and thus settle derivative transactions for AIG with 16 investment banks in return for securities worth less than $30B.

    Uh, the very same Fed that took an intentional $30 billion loss without appropriating the funds via The House (Congress) as required by The Constitution and now intends to pass that $30 billion loss directly to the Treasury (and the taxpayer), just a couple of months after telling us that they’d take no loss?

    The Fed put this ditty out to go along with it:


    2. The Federal Reserve to avoid credit risk and credit allocation
    The Federal Reserve’s lender-of-last-resort responsibilities involve lending against collateral, secured to the satisfaction of the responsible Federal Reserve Bank. Actions taken by the Federal Reserve should also aim to improve financial or credit conditions broadly, not to allocate credit to narrowly-defined sectors or classes of borrowers. Government decisions to influence the allocation of credit are the province of the fiscal authorities.

    This, of course, is why they entirely ignored that charter and took three separate equity positions including one of them in which they took an intentional loss while Ben Bernanke appears to have lied to Congress and The American People, stating that there had been and would not be, in his best judgment, any loss at all?

    How do you square that with taking an intentional loss by overpaying for CDS on purpose that at the time of acquisition have less than half of the value you spend in dollars?

    Let’s be clear: Ben Bernanke has repeatedly stated that The Fed “only” makes fully-collateralized loans. THIS IS A LIE; the “Maiden Lane” facilities are equity ownership positions created and funded by The Fed! The fact of the matter is that The Fed has no authority under The Federal Reserve Act (or any other existing law) to do anything other than make fully-collateralized loans (even in “unusual and exigent circumstances”), yet they have in fact violated those restrictions with impunity since the failure of Bear Stearns.

    Lying to Congress is already punishable, but we must go much further.

    We need a special prosecutor – now – to investigate this and see if there are criminal sanctions that can be brought against Bernanke and the rest of The Federal Reserve Board, and while we’re at it, Congress needs to revoke The Fed’s charter or rewrite The Federal Reserve Act so as to provide for specific severe criminal penalties for actions that clearly exceed The Fed’s charter.

    Enough is enough.

  37. Transor Z says:

    11 U.S.C. sec. 560 (Bankruptcy Code):

    Sec. 560. Contractual right to liquidate, terminate, or accelerate a swap agreement

    The exercise of any contractual right of any swap participant or financial participant to cause the liquidation, termination, or acceleration of one or more swap agreements because of a condition . . . arising under or in connection with the termination, liquidation, or acceleration of one or more swap agreements shall not be stayed, avoided, or otherwise limited by operation of any provision of this title or by order of a court or administrative agency in any proceeding under this title. [emphasis mine]

    This carve-out/safe harbor provision was strengthened by Congress in 2005 to protect the derivatives markets from systemic risk caused by abusive bankruptcy filings. Kind of ironic, huh?

    For a little light reading, check out

    Edward R. Morrison and Joerg Riegel, Working Paper No. 291: Financial Contracts and the New Bankruptcy Code: Insulating Markets from Bankrupt Debtors and Bankruptcy Judges, Columbia Law School (2006):

    “A principal goal of the Act, then, is to expand dramatically the range of protected financial contracts. Entire derivatives markets are now protected. The Act achieves this goal primarily through definitions that are simply long lists of financial products observed (now or in the future) in financial markets. The
    virtue of this formalistic approach is that it leaves little doubt about the Code’s boundaries: any transaction that bears the formal markings of a swap, repo, forward, commodity contract, or securities contract is protected. It is largely unnecessary for judges to analyze the economics of particular transactions.” (p. 15)

  38. makingmoney says:

    CHRIS WHALEN on AIG: “the staid, boring, heavily regulated insurance businesses managed to run up losses on securities lending requiring $44 billion of government support. ”

    ….Speaking of poor fundamentals, when AIG released information about the amounts and recipients of roughly $100 billion of its government loans from September to December 2008, almost utterly unreported was the fact that the staid, boring, heavily regulated insurance businesses managed to run up losses on securities lending requiring $44 billion of government support.

    By way of contrast, the credit derivatives widely blamed for bringing down the world’s financial system were consuming $27 billion of support; municipal investment agreements (essentially, deposits) made by municipalities with AIG Financial Products took another $12 billion, and maturing debt took $13 billion. We wonder, just which unit of AIG lent the securities? What did AIG purchase with the proceeds of the securities loan? Could it be that the big story at AIG is the unsoundness of the insurer, not the credit default swaps? Why the misdirected coverage?

    Our guess is that we are seeing an unholy alliance of insurance and bank regulators, who would rather point the finger at unregulated credit derivatives and support more regulation as the answer to everything. And don’t forget the public officials who don’t want people to wonder whether other staid, boring insurance companies that don’t do credit derivatives might still have huge problems in their core portfolios. Since securities lending lacks the glamor of M&A or international “Master of the Universe” trading, the media is easily distracted.

    After all, analysts have been sounding the alarm on AIG for many years, but it is difficult for the truth to penetrate Wall Stret’s managed version of reality. As we noted in our statement to the SBC, our friend Tim Freestone identified possible instability in the AIG business as early as 2001. AIG threatened to sue Freestone when he published his findings, which were documented at the time by the Economist magazine.

    The Economist and Freestone stood their ground and Hank Greenberg and his lawyers eventually went away, but the markets took little notice. Notables such as Henry Kissinger questioned the Economist story and said “I just want you to know that Hank Greenberg has more integrity than any person I have ever known in my life.”

    (I never knew that Kissinger had a sense of humor!)

  39. leftback says:

    “I never knew that Kissinger had a sense of humor!”

    Oh sure. Henry used to think he was attractive to women, as well.

  40. Marcus Aurelius says:


    Thanks for that,too. I’ve been harping on the lack of law enforcement for quite some time. We appear to have gone the way of Rome, when it comes to the rights of the Imperial (imperious) class.

  41. ottovbvs says:

    makingmoney Says:
    March 24th, 2009 at 3:23 pm

    …..From what I’ve read and heard about AIG over the years I’d say it has been an iffy organization for 50 years or more going back to the Van der Starr days……off balance sheet entities….blizzards of subs in different and often exotic domiciles….it’s own country clubs…..slush funds in separate companies….rampant conflicts of interest.. etc etc…….All this was manageable until Greenburg took them into CDS in the late eighties…..a lot of the management was home grown and even the top people including Sullivan who literally went from office boy to COO were essentially gophers for Greenburg who had absolute power….the board was stacked with big names who collected fees and went to meetings but had no idea of ops and a few trusties who kept their noses clean……once they got into cds the balance of the business shifted and they got into stuff Greenburg just didn’t understand…after all he was in his late sixties then…..and the gophers didn’t understand either or weren’t about to challenge him……From all I’ve heard it was a very Byzantine organization….None of this matters now…..the corporation is enmeshed in a web of transactions that they can’t legally get out of and even if they could would have serious knock on consequences for other fragile institutions…..We’re way past deciding who was responsible….what are we going to do sentence Greenburg to life……He’ll be dead before the trial ends……No.. Bernanke, Geithner and the other bomb dismantlers are just going to have to navigate a way out of it…….There are even limitations on the extent to which it can be investigated as a criminal enterprise….remember we own it……the only remote hope we have of getting our money back over the next 15 years is to keep it functioning efficiently and profitably and destroying it’s brand isn’t going to assist this process…..

  42. ottovbvs says:

    Oh sure. Henry used to think he was attractive to women, as well.

    ….He was…you’re just too young to remember

  43. leftback says:

    AIG was clearly a criminal enterprise. Cassano is a convicted criminal. Greenberg never got caught.
    Shock disclosure: there is never only one cockroach.

  44. Mannwich says:

    Looks like we’re gonna need more bailout announcements to keep the game going. Which one will be next?

    @leftback: Correction: Most of Wall Street was/is a criminal enterprise. There, fixed it for you.

  45. Rajesh says:

    We did nationalize AIG in September. But as I have pointed out elsewhere, changing ownership does not make the institution any more solvent. As the owners of AIG, the taxpayers had the same tools available to as the previous owners, which is to say either honor the contract or go through bankruptcy. The whole point of legislation is to create a third option where we can honor some contracts but not others. For example, when the FDIC is appointed receiver, stockholders and bondholder are left with nothing but depositors (within certain limits) are protected. So long as the rules are known ahead of time and are applied consistently (fat chance) then investors and counter-parties will be able asses the risks and decide whether they want to invest or trade.

  46. JohnnyVee says:

    We own it now….wind it down. WTF! Gethner(sp) just wants Congressional authority to minimize any polical fallout. I sense AIG’s time is short.

  47. call me ahab says:

    otto Says:

    “the only remote hope we have of getting our money back over the next 15 years is to keep it functioning efficiently and profitably and destroying it’s brand isn’t going to assist this process…..”

    When you say brand I am thinking kitchen appliances- but apart from that- let’s look at this another way. AIG is seized- bondholders wiped out. The government keeps management in place or- maybe they get another management team- I don’t care. Then they continue to operate as usual with government backing (I get so tired at the argument that the USG is not good at managing- who says they are going to manage- they will own- yes, manage- no). This way the investors go down just the way its suppose to play out- the company is relieved of those liabilities which mean they have a stronger balance sheet and the taxpayers take over from there.

    Sound good to you?

  48. FromLori says:

    Boy this is really rolling along here now if only we knew who could and who would do something about it?

    They are basically ALL LYING through their Teeth and they will BANKRUPT us, they have already started the Destruction of the Dollar to such an extent it may be too late! That’s why all the countries are calling for an end to the Dollar as the Worlds Primary, China, Russia, Taiwan, France, Germany,UK to name a few but you have to know that the Convicted Criminal Soros has his hands in this along with Kissinger, Clintons, etc. But what do we see but more misdirection from the FED!


    The Resident Puppet will listen to me (Soros)

    Pink Picks

  49. DL says:

    Finally, some relief for the bears today.

  50. leftback says:

    Geithner is preparing for the failure of other institutions and a few mini-LTCM situations.

    We have not heard much about this of late, because of the “gates” at many hedge funds, but all is not well in Greenwich and Mayfair. The long-short guys have struggled but most of the good ones will survive. However, the shocking fact is that many hedgies were not, in fact, hedged – many of these “unregulated private pools of capital” were actually Leveraged Long Funds. Once the gates go up there will be more forced liquidation and some of these entities will need to be unwound carefully by Tiny Tim due to their involvement with critical counter-parties (i.e. the big banks and broker-dealers – the usual suspects). We can expect to see some of this reflected in more stress in the marketplace. April Showers are in the forecast.

    Meanwhile the Spring rally continues, even with today’s correction we are 60 points above the all-important Leftback/Bruce Burger Wager trigger level at SPX 745 with only five trading days remaining.

  51. Marcus Aurelius says:

    The market is a crack head. Needs another bump.

  52. wunsacon says:

    >> Workers whose 401(k) plans had purchased $40 billion of insurance from AIG against the risk that their stable value funds would decline in value would have seen that insurance disappear.

    Yes. So, when American taxpayers bail out AIG, they actually bail out their 401(k)’s. That’s why our government is spending billions/trillions to AIG counterparties but angry about the bonuses. The bonuses are a small part of the overall money. But, it’s like war profiteering.

  53. schoolsout says:

    Waaaayyyy off topic here, but can anyone verify this?

    Our payroll person at the office just showed me the 2009 revised federal tax withholding guidelines published in March. This just came in the mail yesterday. The revision was on account of the American Recovery and Reinvestment Act of 2009 (AKA the stimulus bill that just passed).

    Sit down before you read this.

    For a married person, earning $1000-1020 per paycheck, paid bimonthly, claiming 1 dependant, the withholding amount has been increased from $52 per paycheck to $97.27. That is roughly an 87% federal tax increase on someone earning $24,000 a year.

    The withholding guideline says the increased withholding’s should begin April 1st, 2009. I’m guessing this won’t hit the news until first or second week of April.

  54. Pat G. says:

    “In addition, AIG’s insurance subsidiaries had substantial derivatives exposures to AIG-FP that could have weakened them in the event of the parent company’s failure.”

    AIG used cash flows from insurance subsidiaries to lever up the FP unit. And you’re suprised by this???

  55. wunsacon says:

    Oh, wait. Strike my last comment. The $40B is a pittance. (I know, I know…I quoted the stat.) I have no idea of the totals in all stable value funds. I *assumed* it’s much higher. But, if it’s only $40 billion, it would have been much, much cheaper to let AIG fail and then bail out the stable value funds directly.

  56. MRegan says:


    Question wrt to issue you noted.

    Authors Morrison and Riegel assert:

    “The new Code, in other words, places form over substance in characterizing
    protected transactions. A combination of contracts merits protection—regardless
    of its underlying economics—if the contracts are commonly recognized in the
    marketplace as swaps, forwards, or another type of contract protected by the
    Code. Indeed, margin loans—loans secured by the debtor’s securities portfolio—
    are now explicitly protected even though they are, in form and in substance,
    simply loans.102 To boot, the Act significantly restricts the equitable powers of
    bankruptcy courts. Section 362(o) now emphasizes that a counterparty’s setoff
    rights “shall not be stayed by any order of a court or administrative agency in
    any proceeding under this title.”103 Similar language was already part of sections
    555, 556, 559 and 560 prior to the Reform Act.104″


    It plainly expands the scope of
    protected transactions—swaps, forwards, commodity contracts, repos, and
    securities contracts—but it does so in a way that renders the concept of
    “protected parties” meaningless in the context of derivative contracts. The new
    definition of “swap” is so broad that a counterparty to almost any derivative
    contract—including any counterparty to a forward or commodity contract—will
    find a safe harbor under the Code.”

    What is the justification for conferring upon these transactions an elevated status vis-a-vis other financial contracts? Have you seen any cases where this fundamental issue has been hashed out?

    And thanks for the headsup (even if you are an unfeeling robot and unresponsive niceties such as gratitude).

  57. leftback says:

    Sooner or later someone is going to cry “Systemic Risk” and we’re just going to let the wolves eat. It’s now pretty clear that AIG was The Nuclear Sized Cockroach, but we’re not going to save all of them. Even Bailout Nation has its limits, and once The System has been restabilized there must be Creative Destruction.

  58. MRegan says:

    Derivatives claimants from Company X under the 2005 modification could easily collude with rogue executives of Company Y to create an unsustainable derivatives exposure which blows up Company Y and then step and take all the juicy parts before other claimants. The law seems to have been modified specifically to aid and abet fraud.

  59. DL says:

    dead hobo @ 4:36

    Hey, c’mon, we bears gotta eat, too!!

  60. jason says:


    I don’t have the tables but Paychex just sent us a notice and will be implementing the REDUCED federal withholding’s beginning on March 5, 2008.

  61. Transor Z says:

    I thought Notterdammerung was when Charlie Weis lost to Syracuse last year.

  62. Transor Z says:

    @MRegan: You’re welcome. :) Sounds like I should change my nick to Dr. Manhattan?

    Systemic risk is/was the justification. Congress was aware — to some extent — of the potential ripple effects caused by high-profile defaults on CDS obligations in the derivatives market.

    I’ll see if I can find you something from federal cases interpreting 11 USC sec 560 and related provisions, but I haven’t seen any cases personally. I don’t litigate at that rarefied level. Six months ago I had never heard of a credit default swap. I suspect that cases in this area are pretty thin on the ground but I’ll see what I can find.

  63. ottovbvs says:

    Transor Z Says:

    March 24th, 2009 at 5:24 pm
    I thought Notterdammerung was when Charlie Weis lost to Syracuse last year.

    ….no that was Wotterdammerung

  64. MRegan says:


    Thanks. I will snoop around as well and share what I find. Good stuff.

  65. ottovbvs says:

    CDS’s, CDO’s, derivatives were not on anyone’s radar outside the financial industry until the spring of 2008…Maybe a few members of congress on key committees like financial services and banking knew what they were but having seen Jim Bunning in action one has to wonder….I’d say most members of congress like the rest of us had no idea what they were….judging by reports you have to wonder if the SEC knew what they were…I jest…but they certainly didn’t appreciate the level of systemic risk that they presented

  66. Manhattan Jewess says:

    Barry: Matt Taibbi revealed this huge loss in his brilliant article in this week’s Rolling Stone. Here’s the link:

    He writes:

    By the fall of 2007, it was evident that AIGFP’s portfolio had turned poisonous, but like every good Wall Street huckster, Cassano schemed to keep his insane, Earth-swallowing gamble hidden from public view. That August, balls bulging, he announced to investors on a conference call that “it is hard for us, without being flippant, to even see a scenario within any kind of realm of reason that would see us losing $1 in any of those transactions.” As he spoke, his CDS portfolio was racking up $352 million in losses. When the growing credit crunch prompted senior AIG executives to re-examine its liabilities, a company accountant named Joseph St. Denis became “gravely concerned” about the CDS deals and their potential for mass destruction. Cassano responded by personally forcing the poor sap out of the firm, telling him he was “deliberately excluded” from the financial review for fear that he might “pollute the process.”

    The following February, when AIG posted $11.5 billion in annual losses, it announced the resignation of Cassano as head of AIGFP, saying an auditor had found a “material weakness” in the CDS portfolio

  67. MRegan says:


    In April of 2002 a wealth management group in Austin, Texas called Sage Advisors contracted me to translate into Spanish a significant number of very complicated documents about CLOs and CMOs and CDOs and CDSs. It was the most god-awful text I ever dealt with. First I had to figure out what I was reading in English. As I generated the translation, I realized/intuited that there was something deeply wrong about the documents. In brief, I chose to forego the pay and told them I wouldn’t be sending them the translations. They were a little peeved, but I ain’t afraid a no Texans, no how no way. Glad I didn’t. They were fixin’ to bushwhack some poor Messicun millionario and I was having no part of it. Funny thing, ole Mr. Slim doesn’t even send a Navidad card. Pinche cabron.

    Quedo de Ud.

    B. Traven

  68. usphoenix says:

    @FromLori – Special prosecutor works for me. But it’s not going to happen. Too many congressmen feeding at the trough.

    Sure they’ll do the pretend inquisitions. Media misdirection play.

  69. Robespierre says:

    Who’s CDSs were paid first? I ventured to say that it was not the ones from the retirement funds Dr. B mentions. You know what cry me a river this tactic of scare and fleece has been used way too many times already.

  70. jason Says: March 24th, 2009 at 3:02 pm

    it’s a rippin’ story, no doubt. sadly, merely one, of hundreds/thousands, that well delineates the *True nature of the Game at hand..

    you were asking: “What to do?”

    remember, not too long ago, it was illegal to teach Slaves to read. Simply, b/c Knowledge is Power.

    with that, I’m sure you, already, see what follows: Spread the word, light the brushfires in others’ minds..

    “A general dissolution of the principles and manners will more surely overthrow the liberties of America than the whole force of the common enemy…. While the people are virtuous they cannot be subdued; but once they lose their virtue, they will be ready to surrender their liberties to the first external or internal invader…. If virtue and knowledge are diffused among the people, they will never be enslaved. This will be their great security.”

  71. FromLori says:


    Volcker: China Chose to Buy Dollars

    EmailPrinter FriendlyPermalink

    By Phil Izzo

    When talk at the Journal’s Future of Finance Initiative turned to inflation, participants turned the resident expert: Paul Volcker. He had a lot to say.

    Paul Morse for The Wall Street Journal
    Paul Volcker at the Wall Street Journal’s Future of Finance Initiative in Washington, D.C.
    The former Federal Reserve chairman touched on a number of subjects ranging from the Fed’s communication strategy to China’s concerns about the U.S. debt load. The latter sparked questions over whether the U.S. could default on its debt — it effectively had done that at least once, Yale professor Robert Shiller noted. When President Roosevelt took the U.S. off the gold standard and unilaterally devalued the dollar, the move wiped out some 75% of dollar-denominated debt. “Maybe I shouldn’t even mention this,” Shiller joked.

    Volcker, who as head of the White House’s Economic Recovery Advisory Board is a key adviser to President Obama, expressed concerns about inflation as a way of dealing with mounting debt. “One historic way of getting yourself out of this situation — or trying to — is to inflate. Either you do it deliberately or you allow it to happen,” he said. “And if we permit that to happen then I think all these dollars will come tumbling down on us.” He said the U.S.’s greatest strength is its history and reputation, and suggested that shouldn’t be put at risk.

    He also critiqued the Fed. “I get a little nervous when I see the Federal Reserve announcements that they want have the amount of inflation that’s conducive to recovery,” Volcker said. “I don’t know what ‘the amount of inflation that’s conducive to recovery’ would be appropriate. I’d much rather they say that they want to maintain stability in the currency, which is conducive to confidence and recovery.”

    As for China’s criticism of the U.S., Volcker was unsympathetic. “I think the Chinese are a little disingenuous to say, ‘Now isn’t it so bad that we hold all these dollars.’ They hold all these dollars because they chose to buy the dollars, and they didn’t want to sell the dollars because they didn’t want to depreciate their currency. It was a very simple calculation on their part, so they shouldn’t come around blaming it all on us.”

    The 81-year-old elder statesman commented on the current state of the U.S. economy: “We’re in a government-dependent financial system; I never thought I would live to see the day… We’ve got to fight to get away from that.”

    China ‘Super Currency’ Call Shows Dollar Concern, G-20 Ambition
    Share | Email | Print | A A A

    By Li Yanping

    March 25 (Bloomberg) — China’s call for the creation of a new international reserve currency may signal its concern at the dollar’s weakness and ambitions for a leadership role at next week’s Group of 20 summit, economists said.

    Central bank Governor Zhou Xiaochuan this week urged the International Monetary Fund to create a “super-sovereign reserve currency.” The dollar weakened after the Federal Reserve said that it would buy Treasuries and the U.S. government outlined plans to buy illiquid bank assets.

    “China is concerned about the potential for a slide in the dollar as the U.S. attempts to stimulate its economy,” said Mark Williams, a London-based economist at Capital Economics Ltd. The “rare” sight of a Chinese official attempting to reframe an international debate may be “a sign of China becoming more engaged,” he said.

  72. mknowles says:

    “In other words, we should have nationalized them from the beginning . . .”
    ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ shoulda, coulda, woulda…
    President Obama said they don’t have a mechanism in place to nationalize an insurance company or an investment bank, or any entity that is not insured by the FDIC. And Bernanke said his attorneys told him not to sue to get the bonuses back because if the gov’t. lost the suit, they’d have to pay 3 x’s the bonuses (or something similar.)

    You can’t nationalize if congress took away the laws that give the gov’t. the option to do so. You can’t claw back bonuses if congress writes the laws that protect these companies from gov’t. lawsuits.

  73. schoolsout says:

    jason Says:

    March 24th, 2009 at 5:17 pm

    I don’t have the tables but Paychex just sent us a notice and will be implementing the REDUCED federal withholding’s beginning on March 5, 2008.


    Used the table in the back supposedly, which was the “combined” table. Payroll person said that usually isn’t like that in the booklet. Should actually be a reduction instead of my first post saying increase.

  74. Lugnut says:

    @FromLori : regarding the announcement of BB dumping Maiden Lane into the Treasury’s lap (i.e. yours and mine). You might note in particular the timing of the announcement, which was 30 days to the day that the Fed had to comply with the ruling laid down by the Judge in the case brought by Fox News (or was it the Reuters case), asking for disclosure of accepted collateral from Bear Stearns et al. They did after close and before 6:00, and of business day. By dumping it off their books, Bernie does two things at once, dick the taxpayer in the eye, who he swore would not lose a single penny on that stuff, and stay in compliance with the ruling, and effectively end the case. A big F-U to everyone, and transparency be damned, he’ll do what he wants. Drinks on the Fed Amex card, this was a win for the pigmen, boys.

  75. Transor Z says:

    @MRegan: If you’re still interested, here are some cites for Bankruptcy cases dealing with 11 USC ss 548, 560 et al (safe harbor for non-bankrupt CDS counter-parties):

    In Re National Gas Distributors, 369 B.R. 884 (Bankr. E.D. N.C. 2007) Judge Small cited to the Morrisson & Riegal article I cited above and also wrote:

    “Congress determined that there are legitimate reasons for creating, in the financial markets, these special exceptions to the overall protections and policies of the Code. The court understands that if contracts traded on a financial market are unraveled, the market itself could become unstable and a domino effect could occur. See H.R.Rep. No. 484, 101st Cong., 2d Sess. (1990). “ [This last cite provided by Judge Small is to the House Report on the 1990 Bankruptcy Code amendments, which first added a limited number of swap-type agreements to the safe harbor protection.]

    The case didn’t hinge on applying the Code to CDSs in a bankruptcy setting, but as I suspected, there aren’t a lot of bankruptcy cases that even mention this issue.

    In Re Marketxt Holdings, 376 B.R. 390 (Bankr. S.D. N.Y. 2007) (stating that qualifying swap agreement payments are immune from creditor challenges under 11 USC s 546(g))

    A helpful pre-2005 case is In Re Thrifty Oil, 249 B.R. 537 (S.D. Cal. 2000) (interpreting the 1990 Amendments protecting swaps):

    “Several provisions in the Bankruptcy Code reflect a strong Congressional policy of protecting interest rate swaps, termination damages and the swap market from the effects of bankruptcy. In 1990, Congress amended the Bankruptcy Code to exempt interest rate swaps from provisions which could otherwise frustrate a creditor-counterparty’s ability to exercise the contractual rights conferred by an interest rate swap agreement. See Act of June 25, 1990, Pub.L. No. 101-311, 104 Stat. 267 (1990) (“Swap Amendments”). The legislative history of the Swap Amendments plainly reveals that Congress recognized the growing importance of interest rate swaps and sought to immunize the swap market from the legal risks of bankruptcy. The Judiciary Committee Report to the Senate version of the bill observed that swap agreements are “a rapidly growing and vital risk management tool in world financial markets,” frequently used by financial institutions and corporations “to minimize exposure to adverse changes in interest . . . rates.” S.Rep. No. 101-285, at 3 (May 14, 1990). Representative Schumer explained that swap agreements “offer borrowers the ability to carefully manage the interest rate or currency risks they undertake, making it easier and safer for companies . . . to raise the capital necessary for economic growth.” 136 Cong. Rec. H2284 (May 15, 1990). The House Judiciary Committee Report confirms that Congress enacted the Swap Amendments to ensure that the swap markets “are not destabilized by uncertainties regarding the treatment of their financial instruments under the Bankruptcy Code.” H.R.Rep. No. 101-484, at 1 (May 14, 1990), reprinted in 1990 U.S.C.C.A.N. 223, 223; accord 136 Cong. Rec. H2281, 2283 (May 15, 1990) (remarks of Rep. Fish) (“The swap market serves essential functions today-including reducing vulnerability to fluctuations in exchange and interest rates. Explicit Bankruptcy Code references to swap agreements will remove ambiguities that undermine the swap market.”); 136 Cong. Rec. S7535 (remarks of Sen. DeConcini) (“The effect of the swap provisions will be to provide certainty for swap transactions and thereby stabilize domestic markets by allowing the terms of the swap agreement to apply notwithstanding the bankruptcy filing.”). [bold mine]

    Congress addressed these concerns by bestowing preferential treatment on the creditor-counterparty who seeks to terminate a swap agreement and collect termination damages from the bankruptcy debtor. Although the Swap Amendments do not directly address the relationship between interest rate swaps and unmatured interest, they provide two policy principles applicable to the interpretation or application of any Bankruptcy Code provision. . . . . At a minimum, federal courts should avoid interpreting [the Code] in a way that would either (1) needlessly discourage the innovation and flexibility that has made interest rate swaps such a valuable risk management and financial tool, or (2) inject unnecessary legal uncertainty into the swap markets. “

    Here’s a juicy little nugget from CSX v. Children’s Inv. Fund Mgmt (UK), 562 F.Supp.2d 511 (S.D. N.Y. 2008) (not a bankruptcy case but very interesting illustration of swap trading involving JPM, GS, ML, and UBS ):

    “Joe O’Flynn, the chief financial officer of TCI Fund told its board . . . that one of the reasons for using swaps is ‘the ability to purchase without disclosure to the market or the company.’”

    I could have days and days of fun digging around but gotta to do some real payin’-client work. :)

  76. Pro Se says:

    The outrage over AIG using less than 0.1% of the $173 billion stolen (so far) to pay employee “bonuses” [sic hush money] is silly. The Department of Justice (“DoJ”) should prosecute and send the guilty parties to jail. Here is a prescription for recovering the $173 billion that AIG has stolen from the federal government thus far.

    (1) The DoJ should file suit in a U.S. District Court for civil conspiracy, fraud and breach of fiduciary duty against AIG and AIG’s directors. The DoJ can prosecute these defendants under the False Claims Act (31 U.S.C. § 3729–3733), the Racketeer Influenced and Corrupt Organizations Act (18 U.S.C. § 1961–1968), and the Foreign Corrupt Practices Act (15 U.S.C. §§ 78dd-1).

    (2) The DoJ should add as co-defendants any counterparties to AIG’s fraudulent derivative contracts (credit default swaps, etc.) who were unjustly enriched by being paid-off using any portion of the $173 billion that AIG extorted and defraud from the federal government.

    (3) DoJ should file a motion in the case seeking the imposition of a constructive trust, in equity, over the federal government’s money, and/or any assets into which the counterparties converted the federal government’s money.

    (4) The DoJ should allow a jury of intellectually honest citizens determine if AIG and AIG’s directors are liable for claims against them; and if they are, the amount of money that each party unjustly enriched by AIG’s extortion and fraud scam should return to the federal government.

    (5) The DoJ should take on all appeals through to the Supreme Court so that the consequences of violating the laws that AIG has violated will set precedent for prosecuting others who choose to follow AIG’s path.

    See http://TexasBarWatch.US for information on how unjust enrichment claims are being used to recover lost damages in fraud and breach of fiduciary duty case. And http://Iran-Conoco-Affair.US for information on the underlying causes of action.