Investigating AIG
Everyone seems to be all abuzz about the Mike Taibbi takedown of AIG in Rolling Stone. Its a fun read — as is any piece that begins “we’re officially, royally fucked” — but there are a few other columns that do an excellent job contextualizing 1) How AIG got so heavily involved in CDOs and CDSs, and 2) What its going to take to clean up the ginormous mess they made.
If you are interested in learning the nitty gritty details about how AIG’s Financial Product division (AIGFP as it came to be known), then the place to start reading is the 3 part series WaPo did in the fall: Investigating AIG (full linkage below).
The clean up half of the story is best described by Carol Loomis in this month’s Fortune. (She makes it pretty clear that Liddy is not the bad guy).
Get crackin’ . . .
Investigating AIG: The Washington Post
Part I: The Beautiful Machine
Part 2: A Crack in the System
Part 3: Downgrades and DownfallsAIG’s rescue has a long way to go
Carol J. Loomis
Fortune DECEMBER 29, 2008: 10:46 AM EThttp://money.cnn.com/2008/12/23/news/companies/AIG_150bailout_Loomis.fortune/index.htm
Behind Insurer’s Crisis, Blind Eye to a Web of Risk
GRETCHEN MORGENSON
The New York Times, September 27, 2008http://www.nytimes.com/2008/09/28/business/28melt.html
The Big Takeover
MATT TAIBBI
Rolling Stone Mar 19, 2009 12:49 PMhttp://www.rollingstone.com/politics/story/26793903/the_big_takeover
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March 22nd, 2009 at 8:43 am
I love this phrase: “Containing the contagion”
March 22nd, 2009 at 9:27 am
I read the Taibbi article yesterday at the urging of some posters who castigate me for my moderation. It’s a great tour d’horizon of how we got here and I’m in almost totally in agreement with his choice of culprits some of whom should be sitting in jail. The problem as Taibbi tacitly concludes and Loomis’ article points out in greater detail is that an enormous time bomb has been created that has to be dismantled with the greatest of care by people who know what they are doing. As Loomis’ Berkshire example demonstrates this is going to take time and patience. And then there’s the other problem she highlights, we have a vast amount of money invested in a insurance company and financial institution that we need keep functioning efficiently and profitably for years ahead. These processes are not assisted by a lot of emotional grandstanding or micro managing of Ed Liddy who has taken on a completely thankless task when he could be puttering around on the golf course. Personally I think the bonus hullabaloo balloon is going to rapidly loose altitude in the next few days but it’s an object lesson in how you can’t allow emotionalism to take over when it comes to managing enormously complex transactions. It may serve one useful purpose though if the administration is skilful in harnessing it to generate sufficient public support for a thoroughgoing overhaul of the regulatory regime and control of remuneration practices on Wall Street and elsewhere for that matter.
March 22nd, 2009 at 9:32 am
And a little background summary courtesy ofThe Guardian in April 2005: http://www.guardian.co.uk/business/2005/apr/03/theobserver.observerbusiness3
Lest we forget that a lot more than just faulty risk management and poorly understood derivatives were in play during the Greenberg era. Disappeared documents/recordings put on a van in Bermuda, Warren Buffett connection?, insurance underwriting kickbacks, shady accounting, Eliot Spitzer back in the day. Good stuff.
Where have you gone, Woodward and Bernstein?
March 22nd, 2009 at 9:37 am
Well, Mr. OT back today…(and Otto, I don’t think we should castrate you for your moderation, I think everyone should have opinions)
Several things this week bothered me about how far in to the downturn we truly are…maybe in the future economists will have better real-time looks, but the Philly Fed numbers I thought said we are still early in the ballgame…
http://www.rttnews.com/CorpInfo/EconomicCalendar.aspx
The prices received and prices paid are BOTH dropping like a rock, and again, I think this shows a global retrenchment that has much further to run….
And the Europeans are having a baby today about the drop in industrial production…
March 22nd, 2009 at 9:39 am
I think he’s right when he says we’re royally fucked.
Everyone is expecting a recovery when, for me anyway, there is one giant issue.
The US is currently focused on propping up its financial system. So basically, not much focus is going into growing the economy efficiently right now. The focus is still on the financial alchemy… ah yes, that famous black matter!
I’m trying to imagine what the growth sectors will be when the US finally takes off… I can’t see very many considering the US is a net importer of energy and resources and money. (Not a healthy combination) And the energy consumption stats do not incldue the Chinese consumption of oil that went into producing the stuff Amercians were consuming. Americans have been consuming way more energy per capita than the stats care to show.
I’m trying to figure out whether or not the world will let you pay for these resources with more of your black matter. Something tells me a few other countries will protest.
March 22nd, 2009 at 9:45 am
After reading Taibbi’s article, I’m glad that I’ve already read the book “Influence” by Robert Cialdini. You immediately recognize the same compliance techniques described by Cialdini being used by the Bailout Pushers and their tools in government and media. These techniques work and they are used against you.
March 22nd, 2009 at 9:57 am
Ritholtz, I am back, and you know why, you rascal.
The AIG and the broader bailout fiasco indicate to me that we are allowing capitalism to fail. When we are so afraid of the bad times of a boom-and-bust cycle that we heap trillions of taxpayer dollars on banks that should have failed, we are not capitalists.
Some people may wonder why this registered Republican is so anti-Republican. The reason is this: The basic tenets of Republicanism include love of country, personal responsibility, and socioeconomic Darwinism. AIG and the established players on Wall Street should be extinct no less than the dodo bird. By using public resources to protect the Wall Street weak, Paulson and Bernanke perverted the system, just as other Republicans have been doing in their privatization and government subsidy scams of the last thirty years. We live in truly tenuous times for our country, because in continuing to mortgage our future for short-term comfort, we further imperil the meritocracy that made this country great.
It is important that you do not lose your outrage.
March 22nd, 2009 at 10:01 am
AIG and the established players on Wall Street should be extinct no less than the dodo bird. By using public resources to protect the Wall Street weak, Paulson and Bernanke perverted the system, just as other Republicans have been doing in their privatization and government subsidy scams of the last thirty years
—————
In the grand scheme of thigs, maybe what we are seeing is Darwinsim at its best… human kind accelerating its own demise.
March 22nd, 2009 at 10:02 am
Those of us that read these articles begin to understand the depth of the problem in derivatives. However, it is amazing the level of ignorance among the so-called pundits. Freidman in The Times today is calling for Obama’s bank plan re toxic assets to be explained to the people. As soon as anyone gets up and makes a firm statement, something is revealed about the toxic crap andd the indidvidual looks foolish. It appears that the only realistic plan is time and this is not saleable. I get the feeling that the game plan is to “rope a dope” and hope we can muddle our way through.
March 22nd, 2009 at 10:12 am
So while I have often updated the “total credit per GDP” metric, which stands at an astonishing 370% and rising, it just dawned on me that I’m an idiot…the true number may be light years worse as these CDS side bets and CDO derivatives are not likely being captured by the Fed. And what are equity players doing now?…are they protecting themselves?…far from it. The 10 day and 21 day MA for total put/call are at multi-year lows…in fact the 10 day may be a decade lows (I only have 3 years data) at an unbelieveable .75.
March 22nd, 2009 at 10:25 am
http://online.wsj.com/article/SB123751980140092361.html
And Barry, what of this fiasco…
“Raters see windfall in bailout program”
Let’s reward these goofs with $1B.
March 22nd, 2009 at 10:26 am
Washington is converting CDS losses directly into public debt…”saving the financial system” may actually be dooming it in the longer run as the debt mountain is still rising and will have to collapse.
March 22nd, 2009 at 10:37 am
@otto
“an enormous time bomb has been created that has to be dismantled with the greatest of care by people who know what they are doing”
What is the probability of success in this endeavor?
March 22nd, 2009 at 10:43 am
Anyone who hates Thomas Friedman as much as Taibbi does cannot be all bad….if you haven’t read Taibbi’s stuff on Mr. Know-It-All, you must do it immediately!
March 22nd, 2009 at 10:43 am
thanks very much for compiling and organizing this. A super resource. As always, great work.
March 22nd, 2009 at 10:46 am
texasradio Says:
March 22nd, 2009 at 10:37 am
@otto
“an enormous time bomb has been created that has to be dismantled with the greatest of care by people who know what they are doing”
What is the probability of success in this endeavor?
…..Better than 90% I’d say….the outcome isn’t going to make some people happy but some people will never be happy….And 95% of the country has no idea what’s going on they just want a return to what they perceive as normality….
March 22nd, 2009 at 10:47 am
OK, Barry, you are finally moderating! Thanks for everything, and please keep up the good work.
I better concentrate on getting to the upper class before the window shuts down.
March 22nd, 2009 at 10:48 am
From the article:
“When Morgan presented their plans for credit swaps to regulators in the late Nineties, they argued that if they bought CDS protection for enough of the investments in their portfolio, they had effectively moved the risk off their books. Therefore, they argued, they should be allowed to lend more, without keeping more cash in reserve. A whole host of regulators — from the Federal Reserve to the Office of the Comptroller of the Currency — accepted the argument, and Morgan was allowed to put more money on the street.”
They moved the risk off their books? Is no one able to think? How is that no one countered saying that “no, rather you have exchanged one kind of risk for another?”
I am going to try and find any documents related to this meeting back in 1994/95 between JPM and OTS et al. If I find anything I will share it here.
MH- regarding Armstrong- I have been reading his It’s Just Time doc which you linked to, nutty and compelling- you know I am not sure if you intended to, but the whole open-ended, indeterminate, polyvalent riff is jarring my nerves. I read an article on Armstrong and his legal problems.
http://www.derivativesstrategy.com/magazine/archive/2000/1000fea2f753.asp?print
When these characters are so kooky I can just taste the void.
March 22nd, 2009 at 10:56 am
CNBC you’ve been reading too many WJS opeds or handouts from Heritage…..
The basic tenets of Republicanism are and always have been the protection of the interests of big business and the wealthiest 10% of the country… and”socioeconomic Darwinism” is the last thing on the mind of big business which loves cartels, and from the defense industries to the healthcare industries has been feeding at the public trough for generations….or should I mention the construction industry lobby that loves those highway bills….or the agribusiness who love those ag subsidies…..I’m not saying any of this is necessarily wrong…just a fact
March 22nd, 2009 at 11:11 am
Trust me you would be amazed at how much of US business functions through off balance sheet entitites of one sort and another..
Since the start of the eighties which is about when this phenomenon went mainstream….I’ve hardly ever come across a company that wasn’t using this device and I’ve seen a lot
March 22nd, 2009 at 11:34 am
Otto-
I have a question. Why do so many companies opt for the off balance sheet entity gambit/scam/grift? Is it impossible to run a legitimate, profitable business without recourse to the Fastow Play?
Bear in mind that I have a letter written by a great grandfather to a group of shareholders proposing a buyers syndicate to create the appearance of volume, dated in 1925. So, I am not quite an ‘ingenue’.
March 22nd, 2009 at 11:46 am
Otto says:
“this will take some time to work out….”
IMHO, as the Real Estate continues its downward glidepath, the CDO’s (and of course their underlying mortgages) are only going DOWN in value.
Even if, by some freak accident, Bernanke is successful in monetizing the debt, thus dropping long rates to 4%, the loss from dropping home price will be more than offset by the losses caused by the refinancing of the quality borrowers.
We’re going to end up with a certain percentage of borrowers who stay currrent at ever dwindling rates of interest, while the rest of the loans go bad. Merril Lynch’s sale of it’s CDO’s at 29 cents on the dollar may have been the deal of the century — for Merril.
March 22nd, 2009 at 11:51 am
MRegan Says:
March 22nd, 2009 at 11:34 am
…..Leverage and it makes the balance sheet look good which is obviously useful if you want to borrow some more money……It’s a very common maneuver in public and private companies to pay for large capital expenditures ……You used to see it sometimes in the late sixties and seventies usually when a company or the guy who owned it was very sophisticated…..My sense is it went mainstream about 25 years ago
March 22nd, 2009 at 11:53 am
MRegan Says:
March 22nd, 2009 at 11:34 am
….Your grandfather’s letter was more of a cartel type maneuver btw….crooks in family…I’m shocked
March 22nd, 2009 at 12:13 pm
FORTUNE did the best write up on AIG in their January 19, 2009 issue. It is the most comprehensive and easily understood (for us non-financial wizard types).
AIG: THE COMPANY THAT CAME TO DINNER by Loomis
http://www.insurancenewsnet.com/article.asp?a=top_news&id=102152
“Buffett’s experience is indeed instructive “Even to me,” the Berkshire CEO cracks. After buying Gen Re in 1998, he tried unsuccessfully to sell the derivatives business and then, in 2001, began to wind it down. Buffett says he told Gen Re’s management to be patient at getting the job done, because he knew its difficulties. Derivatives, he presciently told Berkshire’s stockholders then, are a little like hell: “easy to enter and almost impossible to exit” That’s because if the aim is to terminate all your contracts tear up the tickets, as they say you must conduct negotiations with all your counterparties, most of whom will be interested in exacting a pound of flesh.
Four years later, in early 2005, Buffett gave his shareholders an update: Gen Re Securities had started with 23,218 contracts and had worked those down to 2,890. The aggregate losses on this endeavor, he said, had been $404 million. The settled contract that stood out, he added, was one that had “a term of 100 years!”"
The last I knew, Buffett was still trying to get out from under GenRe derivatives he got when he bought GenRe in 1998. He often talked about this mess in his annual reports and meetings. He said if he had such losses and difficulty in getting rid of these things when times were good, imagine what it will be like when times are tough. The last I read there were some $500 trillion (world’s GDP is only $40 trillion or so) in derivatives floating around the world. Ugh. This (deleveraging) isn’t going to be quick or easy. It has probably only begun.
By the way in the same issue of FORUNE their is another interesting article:
SENDING WALL STREET TO JAIL
“They took your money. They wrecked the economy. Now it’s payback time.”
I highly recommend both of these articles.
March 22nd, 2009 at 12:34 pm
I sure hope some AG is going after Cassano sounds like a clear cut case of fraud.
The whole AIG BOD should be sued out of their gated existence for dereliction of duty.
‘Ace’ might as well try to do something useful since he is looking more and more like a joker.
March 22nd, 2009 at 12:49 pm
JDinCT Says:
March 22nd, 2009 at 11:46 am
……You are I think taking too pessimistic and holistic a view……there are many parts of the country where the ” downward glidepath” shows signs of coming to an end…including in CT …Sorry if this sounds too Lereahesque but it’s a fact….Even in a couple of distressed markets of which I have knowledge the rate of downward has slowed considerably….and outside these distressed markets we seem to be back to 2003/4 valuations which while doing a lot of harm to domestic balance sheets isn’t catastrophic…so recovery isn’t out of sight….I’m a refi quality borrower btw at 4.5%
March 22nd, 2009 at 1:26 pm
Otto-
Thanks for the reply, I would assert that the answer is they want something for nothing.
As for the crooks, yeah, I wasn’t equating the actions but rather the animus which drives some decisions made by those who believe that one’s economic actions have ZERO ethical dimension.
Also, I would note that two of my great grandfathers were teetotallers and now they’re dead.
March 22nd, 2009 at 1:43 pm
MR,
that art. was , really, poorly written. no wonder you’re feeling ‘the jangle’..
though, re: polyvalent syntax, I’m not sure what you meant. you brought up the idea, I, certainly, wasn’t in favor of it..
Past that, all this AIG attention misses the point of what’s going on in London/Euroland this weekend, G-20, et al., and all..
March 22nd, 2009 at 1:46 pm
It seem that rampant fraud is being perpetrated right in front of our eyes on a daily basis. It’s almost as if politicians of all stripes are staging their own version of “The Aristocrats”.
Yet, I feel that most people are still not completely aware of how truly bad it can get. My guess is the bottom won’t hit this year.
March 22nd, 2009 at 1:59 pm
MRegan Says:
March 22nd, 2009 at 1:26 pm
“I would assert that the answer is they want something for nothing.”
…..Wouldn’t that describe most people….if you looked at the books of most companies you’re going to find these entities…..To take one small example, large parts of the Class 8 truck fleets of all the big transport companies or rental companies were acquired under operating leases which is a favored o/bs method…And I was teasing you about the crooks….My father was also TT unusually for someone in the navy…He got absolutely rat assed at one of the Russian black sea ports like Odessa in the late twenties and never touched a drop again.
March 22nd, 2009 at 2:34 pm
MH-
I am not accusing you of imprecise syntax. No. Rather, your referencing people like Armstrong whose work and legal misadventures are difficult to analyze (at least for me…) gives me fits because I experience the unresolvable aspect of the events as something that holds no solution only more challenge. And I can only assimilate so much info at time. Asi que ten piedad que no todos alcanzamos el coco sin trepar el cocotero.
Otto-
Yes. We are flawed. The whole TT comment was my effort at correlation/causation fallacy humor. (the joke went over like a lead ballon on St. Paddy’s Day- I thought I’d give it one more chance.) The whole leasing thing is a good point- I am eager to acquire some pennies on the dollar equipment and get it out the country. Seems to me that converting USD into something tangible and useful is a good option. If one trains their eye on southern Peru one can see that Brasil is psushing through to reach the Pacific.
March 22nd, 2009 at 2:43 pm
«I have a question. Why do so many companies opt for the off balance sheet entity gambit/scam/grift? Is it impossible to run a legitimate, profitable business without recourse to the Fastow Play?»
The Fastow Play, which has recently become the Geithner Play, is a fundamental enabler of massive accounting fraud that makes executives very rich.
The accounting fraud is based on manipulating revenue and cost recognition across multiple years (most corporate activities take place across multiple years).
Companies have some flexibility when they have a N-year project as to when recognize revenue and costs. It is in the interests of executives to recognize revenues as soon as possible and costs as late as possible, because this increases their bonuses, which are only paid in “profitable” years.
To recognize revenues early the tool is choice is some form of securitazion; to recognize costs late the tool of choice is to park them off balance sheet.
Numerical example: suppose you have project that over 4 years costs 400 and makes 440. Your bonus is 10% of profits or 4 over 4 years. It is not a just reward for your being one of the best and brightest!
But suppose that you can shape the term structure so that instead of recognizing 100 per year of costs and 110 of revenue per year you recognize:
year 1 2 3 4
cost 90 90 90 130
rev. 120 120 120 80
Well, in the first 3 years you make an accounting profit of 90, and your bonus is 9, and in the fourth year there is a loss and too bad for that — you have more than doubled your bonus over the 4 years.
March 22nd, 2009 at 3:03 pm
MRegan Says:
March 22nd, 2009 at 2:34 pm
“I am eager to acquire some pennies on the dollar equipment and get it out the country. Seems to me that converting USD into something tangible and useful is a good option.”
……you can make a lot of money in grey markets……but as general observation cash remains if not king, at least prince
March 22nd, 2009 at 3:35 pm
MR,
sweet usage of the Espanol..
though, w/ ‘the Armstrong thing’, I was posting in response to someone’s mention of it–he couldn’t remember ‘what, in specific, it was, but mentioned 3/19/009…’
as far as analyzing Armstrong’s work, much of the ‘baseline’ has been ported to the web, I haven’t seen his, purported to exist, algos..
I’d think that if one was really interested, they’d go pay him a visit–apparently he isn’t hard to find.
As to his ‘legal predicament’, past ‘he pissed off the wrong peeps’, I don’t know anything more about it, so I leave those Nuts in the Tree..
Also, remember, there are hundreds of mountains to climb, though, to climb any, one must climb one, first..
~~
Blissex,
thanks for thinking, you delineate, well, an intro primer as to how the rig is set..
March 22nd, 2009 at 4:22 pm
All good. Thank you Blissex.
MH- if you will indulge me, at some point in the future I will tell you about eating a capulin from the capuli growing in Cesar Vallejo’s family home. (@ about 4,350 meters above sea level).
March 22nd, 2009 at 4:31 pm
I have a question. Why do so many companies opt for the off balance sheet entity gambit/scam/grift? Is it impossible to run a legitimate, profitable business without recourse to the Fastow Play?»
——————
If you can post the most growth, you get a premium in you multiple making it difficult for other companies to buy you. That,s the game of the last couple of decades.
So essentially, yes it has been difficult to stay in business without playing the game.
March 22nd, 2009 at 4:59 pm
MR,
re: http://food.oregonstate.edu/glossary/p/pplant270.html
it’s amazing, most people have no idea that there are, even, Mountains in Mexico, let alone Canyons, that can put the Grand Canyon into perspective..
re: story, sure, let me know..
~~
danm,
you begin to open up the MutFund/M&A ruse..
the shift to ‘earnings growth’ from ‘div. yield’ really took hold when the MutFund Industrial Complex took root (401(kon)’s started in ’78)..
coupled with the ‘Financial Engineers’ ginned-up and cranked-out by the MBA mills–no one wanted to run/own those “Stodgy” “Widows & Orphans” Corpos..
everyone wanted to ‘run w/ the ‘Bulls”, they should have to Spain..
LSS: Wall St. made Fees, Main St. paid to get Fleeced..
March 22nd, 2009 at 5:46 pm
I am at a point where I am believe maybe a “political” reform and overhaul is not only necessary but required if we have ANY hope is reforming and overhauling the financial system.
March 22nd, 2009 at 6:49 pm
Great article about what the meltown has done to NYC.
Here’s a snippet:
And yet, in a sense, as on September 11, 2001, maybe we were just looking the wrong way. After all, you might say that an economic dirty bomb did go off in downtown New York and this city (not to say, the nation and the world) has been experiencing a second 9/11 ever since, even if in slow motion.
In my neighborhood, back in those fateful September days in 2001, you could hear the sirens, see the jets streak overhead, catch the acrid smell of the towers and everything chemical in them burning, and like the rest of America, watch those apocalyptic-looking scenes of the towers collapsing in clouds of ash and smoke again and again. But if the look then was apocalyptic, the damage, however grim, was limited.
This time around there’s no dust, no ash, no acrid smell, no sirens, no jets, and no brave rescuers either. And yet the effect might, sooner or later, be far more apocalyptic and the lives swallowed up far greater. This time, of course, the fanatical extremists were homegrown. Their “caves” were on Wall Street. They hijacked our economy and did their level best to take down our world.
And they may have come closer than most of us imagine. Alpine Sound and Oppenheimer, Tokyo Pop and Planet Kids, Docks and Ruby Foo’s have all gone down (and more are surely headed that way). For the people who owned, or ran, or worked in them, unlike the survivors of the original 9/11, there will be no moving bios in the local papers, no talk of compensation, and no majestic memorials to argue about.
For the perpetrators, who have, at worst, gone home pocketing their millions, there will be no retribution. No invasions will be launched, no missiles shot into homes or hideouts. None of them will be pursued to their lairs, or kidnapped off the streets of New York, or from their palatial mansions, or apartments, or estates. None will be spirited to foreign lands to be imprisoned and tortured. None will be labeled “enemy combatants.”
Quite the opposite, in 9/11, The Sequel, the U.S. government is willing to pay many of them and their institutions in the multi-billions for their time and further efforts.
In the second 9/11, all the pain and torture is in the neighborhood.
© 2009 Tom Engelhardt
Tom Engelhardt, who runs the Nation Institute’s Tomdispatch.com
I don’t know Tom. I think the perps have a giant bullseye painted on them. Their defenders are going increasingly silent. Capitilation is when Bruce in Tn and otto rail against fascistic capitalism (that’ll be the day). But it’s kind of nice to watch hubris of entitlement morph into hurried bag packing for the Argentina flight. We’ll find em’ there too. LOL
March 22nd, 2009 at 7:09 pm
Taibbi’s chronicle of the AIG boondoggle is great, but the rest makes me nervous: He pushes the conspiracy theory that the bailouts are just a Wall Street power grab, but doesn’t come anywhere near proving it.
http://tinyidea.wordpress.com/2009/03/21/here-come-the-conspiracies/
March 22nd, 2009 at 7:37 pm
How unaware do you have to be about the current state of the British banking system to call the FSA a ‘stringent regulator’?
March 22nd, 2009 at 7:51 pm
momoso:
from your link: “…“they screwed up royally, we have to bail them out (or we go down with them), and then we’ll regulate the hell out of them so it doesn’t happen again” explanation.”
simply, whose script is that?
March 22nd, 2009 at 8:20 pm
A little off topic, but in my travels down the Miss River to do some bald eagle watching (saw dozens of them in their migratory path north, incredible, had never seen that before), I just would like to point out there were maybe 50 or more “for lease” or “for sale” signs on enormous swaths of commerical space just outside of St. Paul. I know that things are blowing up in commerical RE everywhere, but it looked eerily apocaplyptic to me. Hate to say it, but this party’s just getting started. We may be in the 7th inning but it’s going extra innings.
March 22nd, 2009 at 9:57 pm
“He pushes the conspiracy theory that the bailouts are just a Wall Street power grab, but doesn’t come anywhere near proving it.”
I hope you are being paid well. On the point of proving “it”, proof of that is nothing I want to see, then its too late. The only other way to “prove” a conspiracy is by turning one of the participants. They are all being paid too well, by us, to turn.
On the WaPo articles. Were the authors on their knees in front of Mr. Greenberg? If I have to read once more how determined he was to keep his AAA rating…..
Spitzer for treasury secretary. He was shamed by one hooker. I can’t imagine what would be reqired to shame some of these people who still think they are worth 10 million a year.
If you are worth 10 million a year to the US taxpayers, we are going to lock you up in a safe and have you guarded 24/7. That is what you do with something worth that much money, you don’t let it walk around manhattan.
March 22nd, 2009 at 9:59 pm
My grandma often admonished ‘it’s what they DO, not what they SAY that matters’. Most excellent advice.
Consider what they are DOING in context. The supply of oil in the world did not increase after mid 2005 even as the price per barrel skyrocketed. The bell curve of oil discoveries peaked 45 years ago and we are now on the far tailing edge of that curve. Reality is reality. Oil production has peaked and is now on a decline curve. This will be reflected by world GDP following a similar curve for the foreseeable future.
What ‘they’ are DOING is draining as much of the countries FUTURE wealth into their coffers as possible before the rubes fully wake up to what’s happening. En masse. That inevitable declining world GDP tells the tale, this economy ain’t gonna bounce back, not in our lifetimes, and those banks have a snowflakes chance in hell of surviving to 2012, but before they go, they are going to take as much of the countries FUTURE wealth with them as they can, even onto the third and fourth generations.
And that’s where Obama is planting his face in the dirt. I believe his heart is in the right place but he somehow let himself get rubed into becoming the elites water carrier for the final raping and pillaging of this country and he is going to pay dearly for that mistake. The real tragedy is he had the power and the opportunity to BUST the bastards and break their power when he took the oath of office and threw that golden opportunity in the gutter. Obama had to go all in and use the bully pulpit to rally the american people behind him. And it WAS a golden opportunity, and one not to be repeated in our lifetime.
This country is now headed to perdition and it’s transition into a police state a near certainty and what’s more the people of this country will welcome it with open arms as the world decends into an energy armegeddon scenario over the next decade. Aftr Bush, I trust few will dispute the pathetic state of the american people when it comes to defending their liberties.
March 22nd, 2009 at 10:05 pm
Jeff,
that’s one of the best things about going ‘off the reservation’, no?
see all kinds of new and interesting things..
apocalypse is, indeed, the correct term.
see:
“”When I started doing research for the book,” he says, “I was really surprised how frequently I came across people telling me about things that clearly worried them, stuff they mull over when they get home after a day’s work. Many people in the business seem to be a little uncertain as to whether what they’re really doing is in the world’s best interest.”
Apocalypse Roulette conveys what Thomson views as the inherent dichotomy of derivatives in no uncertain terms. “Think of a derivative as a loaded gun,” he writes. “You can use it in self defense or for murder. Unfortunately, the temptations to use it for the latter purpose are immense.” ”
http://derivativesstrategy.com/magazine/archive/1998/0498play.asp
note date ~!~
March 22nd, 2009 at 10:35 pm
Directly from the American Conservative there is an article that explains how the banks of the world came to love AIGs credit default swaps. Essentially the regulators (mostly in Europe??) allowed the banks to use a higher amount of leverage if they had insurance on their loans. More leverage, less reserves, more profits. Such a deal on the way up. On the way down, not so good.
Insuring Disaster
http://www.amconmag.com/article/2009/mar/23/00009/
March 22nd, 2009 at 11:03 pm
Just can’t help it :
“Governors actively lead committees that study prevailing economic issues—from affordable housing and consumer banking laws to interstate banking and electronic commerce. The Board also exercises broad supervisory control over certain state-chartered financial institutions, called member banks, as well as the companies that own banks. This control ensures that commercial banks operate responsibly and comply with Federal regulations and that the nation’s payments system functions smoothly. In addition, the Board oversees the activities of Reserve banks, approving the appointments of their presidents and three members of the Reserve banks’ boards of directors. Probably the Board’s most important responsibility is participating on the Federal Open Market Committee (FOMC), the committee that directs the nation’s monetary policy.”
http://www.stls.frb.org/publications/pleng/board.htm
March 22nd, 2009 at 11:52 pm
Oh gosh, it’s the time bomb Analogy, Otto, that’s the second time I heard that one today, The logic was something like we need these people who greedily got us in this mess to fix it for us or that’s it.
Instead of making a controlled safe landing in the Hudson river our economy is gonna crash and burn like a Nascar wreckup.
This reminds me of a funny IT story about the genius geek who wrote code without documentation and lorded his so called genius talent over all… right up to the crunch.
http://itmanagement.earthweb.com/features/print.php/3810466
Don’t buy the time bomb, or the plane landing in the river or whatever they use to justify bonuses for fixing what they broke. If you don’t kick them out of the company they’ll continue to make things worse, call it severance pay if you must, that might *just might* go down a bit better then retention bonuses with the rest of the country.
March 23rd, 2009 at 7:52 am
Nuclear Holocaust if this is correct…
The Size of Derivatives Bubble = $190K Per Person on Planet
By Tom Foremski – October 16, 2008
More must read financial analysis from DK Matai, Chairman of the ACTA Open.
The Invisible One Quadrillion Dollar Equation — Asymmetric Leverage and Systemic Risk
According to various distinguished sources including the Bank for International Settlements (BIS) in Basel, Switzerland — the central bankers’ bank — the amount of outstanding derivatives worldwide as of December 2007 crossed USD 1.144 Quadrillion, ie, USD 1,144 Trillion. The main categories of the USD 1.144 Quadrillion derivatives market were the following:
1. Listed credit derivatives stood at USD 548 trillion;
2. The Over-The-Counter (OTC) derivatives stood in notional or face value at USD 596 trillion and included:
a. Interest Rate Derivatives at about USD 393+ trillion;
b. Credit Default Swaps at about USD 58+ trillion;
c. Foreign Exchange Derivatives at about USD 56+ trillion;
d. Commodity Derivatives at about USD 9 trillion;
e. Equity Linked Derivatives at about USD 8.5 trillion; and
f. Unallocated Derivatives at about USD 71+ trillion.
Quadrillion? That is a number only super computing engineers and astronomers used to use, not economists and bankers! For example, the North star is “just” a couple of quadrillion miles away, ie, a few thousand trillion miles. The new “Roadrunner” supercomputer built by IBM for the US Department of Energy’s Los Alamos National Laboratory has achieved a peak performance of 1.026 Peta Flop per second — becoming the first supercomputer ever to reach this milestone. One Quadrillion Floating Point Operations (Flops) per second is 1 Peta Flop/s, ie, 1,000 Trillion Flops per second. It is estimated that all the data found on all the websites and stored on computers across the world totals more than One Exa byte of memory, ie, 1,000 Quadrillion bytes of data.
Whilst outstanding derivatives are notional amounts until they are crystallised, actual exposure is measured by the net credit equivalent. This is normally a lower figure unless many variables plot a locus in the wrong direction simultaneously. This could be because of catastrophic unpredictable events, ie, “Black Swans”, such as cascades of bankruptcies and nationalisations, when the net exposure can balloon and become considerably larger or indeed because some extremely dislocating geo-political or geo-physical events take place simultaneously. Also, the notional value becomes real value when either counterparty to the OTC derivative goes bankrupt. This means that no large OTC derivative house can be allowed to go broke without falling into the arms of another. Whatever funds within reason are required to rescue failing international investment banks, deposit banks and financial entities ought to be provided on a case by case basis. This is the asymmetric nature of derivatives and here lies the potential for systemic risk to the global economic system and financial markets if nothing is done.
Let us think about the invisible USD 1.144 quadrillion equation with black swan variables — ie, 1,144 trillion dollars in terms of outstanding derivatives, global Gross Domestic Product (GDP), real estate, world stock and bond markets coupled with unknown unknowns or “Black Swans”. What would be the relative positioning of USD 1.144 quadrillion for outstanding derivatives, ie, what is their scale:
1. The entire GDP of the US is about USD 14 trillion.
2. The entire US money supply is also about USD 15 trillion.
3. The GDP of the entire world is USD 50 trillion. USD 1,144 trillion is 22 times the GDP of the whole world.
4. The real estate of the entire world is valued at about USD 75 trillion.
5. The world stock and bond markets are valued at about USD 100 trillion.
6. The big banks alone own about USD 140 trillion in derivatives.
7. Bear Stearns had USD 13+ trillion in derivatives and went bankrupt in March. Freddie Mac, Fannie Mae, Lehman Brothers and AIG have all ‘collapsed’ because of complex securities and derivatives exposures in September.
8. The population of the whole planet is about 6 billion people. So the derivatives market alone represents about USD 190,000 per person on the planet.
The Impact of Derivatives
1. Derivatives are securities whose value depends on the underlying value of other basic securities and associated risks. Derivatives have exploded in use over the past two decades. We cannot even properly define many classes of derivatives because they are highly complex instruments and come in many shapes, sizes, colours and flavours and display different characteristics under different market conditions.
2. Derivatives are unregulated, not traded on any public exchange, without universal standards, dealt with by private agreement, not transparent, have no open bid/ask market, are unguaranteed, have no central clearing house, and are just not really tangible.
3. Derivatives include such well known instruments as futures and options which are actively traded on numerous exchanges as well as numerous over-the-counter instruments such as interest rate swaps, forward contracts in foreign exchange and interest rates, and various commodity and equity instruments.
4. Everyone from the large financial institutions, governments, corporations, mutual and pension funds, to hedge funds, and large and small speculators, uses derivatives. However, they have never existed in history with the overarching, exorbitant scale that they now do.
5. Derivatives are unravelling at a fast rate with the start of the “Great Unwind” of the global credit markets which began in July 2007 and particularly after the collapse of Freddie Mac and Fannie Mae in September this year.
6. When derivatives unravel significantly the entire world economy would be at peril, given the relatively smaller scale of the world economy by comparison.
7. The derivatives market collapse could make the housing and stock market collapses look incidental.
Three Historical Examples
1. The so-called rogue trader Nick Leeson who made a huge derivatives bet on the direction of the Japanese Nikkei index brought on the collapse of Barings Bank in 1995.
2. The collapse of Long Term Capital Management (LTCM), a hedge fund that had a former derivatives and bond dealer from Salomon Brothers and two Nobel Prize winners in Economics as principals, collapsed because of huge leveraged bets in currencies and bonds in 1998.
3. Finally, a lot of the problems of Enron in 2000 were brought on by leveraged derivatives and using derivatives to hide problems on the balance sheet.
The Pitfall
The single conceptual pitfall at the basis of the disorderly growth of the global derivatives market is the postulate of hedging and netting, which lies at the basis of each model and of the whole regulatory environment hyper structure. Perfect hedges and perfect netting require functioning markets. When one or more markets become dysfunctional, the whole deck of cards could collapse swiftly. To hope, as US Treasury Secretary Mr Henry Paulson does, that an accounting ruse such as transferring liabilities, however priced, from a private to a public agent will restore the functionality of markets implies a drastic jump in logic. Markets function only when:
1. There is a price level at which demand meets supply; and more importantly when
2. Both sides believe in each other’s capacity to deliver.
Satisfying criterion 1. without satisfying criterion 2. which is essentially about trust, gets one nowhere in the long term, although in the short term, the markets may demonstrate momentary relief and euphoria.
Conclusion
In the context of the USD 700 billion rescue plan — still being finalised in Washington, DC — the following is worth considering step by step. Decision makers are rightly concerned about alleviating immediate pressure points in the global financial system, such as, the mortgage crisis, decline in consumer spending and the looming loss of confidence in financial institutions. However, whilst these problems are grave, they are acting as a catalyst to another more massive challenge which may have to be tackled across many nation states simultaneously. As money flows slow down sharply, confidence levels would decline across the globe, and trust would be broken asymmetrically, ie, the time taken to repair it would be much longer. Unless there is government action in concert, this could ignite a chain-reaction which would swiftly purge trillions and trillions of dollars in over-leveraged risky bets. Within the context of over-leverage, the biggest problem of all is to do with “Derivatives”, of which CDSs are a minor subset. Warren Buffett has said the derivatives neutron bomb has the potential to destroy the entire world economy, and is a “disaster waiting to happen.” He has also referred to derivatives as Weapons of Mass Destruction (WMD). Counting one dollar per second, it would take 32 million years to count to one Quadrillion. The numbers we are dealing with are absolutely astronomical and from the realms of super computing we have stepped into global economics. There is a sense of no sustainability and lack of longevity in the “Invisible One Quadrillion Dollar Equation” of the derivatives market especially with attendant Black Swan variables causing multiple implosions amongst financial institutions and counterparties! The only way out, albeit painful, is via discretionary case-by-case government intervention on an unprecedented scale. Securing the savings and assets of ordinary citizens ought to be the number one concern in directing such policy.
[ENDS]
To reflect further on this, please respond within Facebook’s ATCA Open discussion board.
We welcome your thoughts, observations and views. Thank you.
Best wishes
DK Mataiv
http://www.siliconvalleywatcher.com/mt/archives/2008/10/the_size_of_der.php
March 24th, 2009 at 12:12 am
@fromLori: Well that’s a lot of policy… What’s the point? Is this the missing documentation? better late than never, but let’s talk about that bonus…
April 25th, 2009 at 4:05 pm
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