Wyden and AIG

Dan Petegorsky

This morning TPM is reporting that Senator Wyden is demanding much greater transparency following the most recent $30 billion installment of the AIG bailout.

Wyden is outraged, as we all should be, by the Fed's refusal to disclose AIG's counterparties, who will benefit from much of the bailout funds. Ironically, while Ben Bernanke defended the Fed's non-disclosure before an exasperated Wyden, just yesterday Bernanke himself blew his top over the AIG fiasco:

“If there is a single episode in this entire 18 months that has made me more angry, I can’t think of one other than AIG,” he said. “There was no oversight of the financial products division. This was a hedge fund basically that was attached to a large and stable insurance company.”

Unless the Fed and the Obama Administration can convince the public that these unimaginably large and seemingly endless bailouts are not just going to reward the crooks who precipitated the disaster, it's hard to imagine this can continue much longer. As Wyden put it, "I've asked you what the endgame is. You've said the situation is evolving. I've asked you why we can't disclose the counterparties; could be anybody as far as I can tell in the world. And you're saying you're studying it. I just hope that in the days ahead, the Fed is going to come clean as to why this is so essential."

Comments

  • Steve (unverified)
    (Show?)

    Maybe Mr Wyden should have thought about that before he voted for the TARP, or better yet come up with a better solution.

  • (Show?)

    Maybe Steve could just check the facts, in which case he would have known that Wyden voted against TARP.

  • Steve (unverified)
    (Show?)

    OK, you're right, I stand corrected in that he voted with mostly Rs against the TARP. However, I ond't know if finding the counterparties is going to get him anywheres.

    AIG wrote insurance on debt instruments. This allowed lenders to make loans at lower rates to poor credit borrowers (this means a lot of low income people) to buy homes. The counterparties are the ones making claims on valid insurance policies. It'd be like if Allstate wrote property insurance and then the west coast of Cali fell in the ocean. Allstate would probably be wiped out without some kind of govt help.

    The option would have been to charge these borrowers "real" rates which means they wouldn't have qualified and then we'd hear screams of prejudice by not allowing the dream of home ownership to everyone - at leat this is what Congress was pushing FNMA to do.

    Hower, I wish him good luck on his search.

  • (Show?)

    AIG wrote insurance on debt instruments. This allowed lenders to make loans at lower rates to poor credit borrowers (this means a lot of low income people) to buy homes.

    That is so not the case. Read the relevant articles. AIG and its ilk got into trouble precisely by creating an unregulated and massive shadow market in credit default swaps. These were in no sense "valid insurance policies" - they were hedging financial instruments designed to offset investments not in actual mortgages but in arcane and enormously leveraged things like synthetic credit default obligations.

  • Admiral Naismith (unverified)
    (Show?)

    In fact, every Oregon Democrat in Congress except Hooley (now retired) voted against TARP, while Smith and Walden supported it. Schraeder and Merkley, of course, had not yet been elected, but Merkley spoke against it during his campaign stops.

  • Missy (unverified)
    (Show?)

    I look a the budget problems Oregon is facing, shortfalls being experienced in almost every state in the country, problems which, as usual, put children, seniors and the poor most at risk. And then I look at the trillions of taxpayer money now going to AIG and others on Wall Street and I cannot believe the choices Congress has made.

    As for Senator Wyden, at least he was consistently against TARP. There have been two votes on the Wall Street bailout. He voted against it first under Bush in October despite the support of many of the Senate Democrats (and almost all Republicans) for the bailout. Then, he voted against the second $350 billion of TARP after the election, despite the near-unanimous Democratic support in the Senate. I think DeFazio joined him in the second no vote, but I'm not sure if any other Democrat did (Walden did, but that was a partisan, anti-Obama vote).

  • Zarathustra (unverified)
    (Show?)

    We need to camp on their doorstep, shut down business as usual until this is resolved.

  • Bill R. (unverified)
    (Show?)

    More grandstanding by Wyden. It's a cheap and easy move on his part. So, we get to find out all the financial institutions at home and abroad that are insolvent. We get to find out how close the international financial system is to total collapse. I'm sure it will make everyone feel better.

  • Bill Bodden (unverified)
    (Show?)

    And then I look at the trillions of taxpayer money now going to AIG and others on Wall Street and I cannot believe the choices Congress has made.

    What else can we expect with Obama's economic team of Rubin, Summers and Geithner, all Wall Street players who played prominent roles in getting deregulation passed to help grease the skids for the current economic disaster? Then there are the 2010 elections with so many politicians in Congress soliciting funds for re-election and Wall Street still a good source of packets containing 30 pieces of silver. And let's not forget the enablers who vote these corrupt politicians back into office.

  • (Show?)

    Bill - you may be right; in fact, an economist colleague of mine on one of the key Congressional committees agrees with your assessment. On the other hand, other real economists (i.e., not people like me!) continue their strong frustration with Bernanke et al. - the ever persistent Paul Krugman, for example, in his post yesterday on Zombie Financial Ideas, in turn citing Tim Duy's Fed Watch.

  • Bill Bodden (unverified)
    (Show?)

    On the other hand, other real economists (i.e., not people like me!) continue their strong frustration with Bernanke et al....

    Bernanke has given sufficient evidence to consider him part of the cabal along with Rubin, Summers and Geithner that is taking care of Wall Street with utter disregard and contempt for Main Street. This last point is understandable when we consider that the people on Main Street have shown they will go along with whatever crap Wall Street and Washington throw at them.

    One piece of evidence was on display in a recent Frontline program when the program claimed Bernanke went along with Paulson on some issue despite Bernanke having reservations. This suggests among the Wall Street Mafia, Paulson outranked Bernanke. In any event, anyone operating at these levels has to be part of the conspiracy.

  • Harry Kershner (unverified)
    (Show?)

    The creation of deregulated, exotic financial instruments may be responsible for the depth of this crash but the crash was bound to occur due to the under-valuing of systemic risk. And the architects of all this are the people who are now designing Obama's economic policies, as Bill B said. (Dean Baker suggested that it's like appointing Osama bin Laden to run the so-called "war on terror".)

    Maybe I was wrong about Obama. I thought he was a smart guy who was ideologically challenged, but maybe he isn't so smart after all. (At least he's anti-war.)

  • rural resident (unverified)
    (Show?)

    The counterparties are the ones making claims on valid insurance policies. It'd be like if Allstate wrote property insurance and then the west coast of Cali fell in the ocean. Allstate would probably be wiped out without some kind of govt help.

    The counterparties weren't necessarily buying insurance. They were gambling. Your analogy would be correct only if many people without an insurance interest in the fate of California property were making bets on California falling into the ocean. The failure to regulate the insurance element of credit default swaps as insurance (with reserves put aside in case of potential claims) or as gambling (with each side putting up the total amount of the bet) was unforgivable. It left massive exposure to loss without any means of satisfying counterparty claims.

    On the same topic, I heard an analyst on one of the financial programs say that much of the money the government has given to AIG actually went to European banks and to others outside the U. S. Does anybody have more info on this?

  • rico (unverified)
    (Show?)

    Let's just let AIG go under and move on.

    Further analysis here: http://www.ricoexplainsitall.com/politcs-economy/2009/3/4/the-irrational-aig-bailout.html

  • (Show?)

    I heard an analyst on one of the financial programs say that much of the money the government has given to AIG actually went to European banks and to others outside the U. S. Does anybody have more info on this?

    It's a natural assumption given who AIG's trading partners are, but here's a piece from Noam Scheiber at TNR on the topic.

  • Bill Bodden (unverified)
    (Show?)

    ...an economist colleague of mine on one of the key Congressional committees agrees...

    It isn't necessary to be an economist to question what Congress is up to. A little "street smarts" or an absence of party blinkers would suffice. Among other examples it was obvious the fix was in when Paulson, Bernanke and Cox presented a three-page proposal for the original 700-billion bailout with absolutely no oversight, and they were the only witnesses allowed to speak before the committees chaired by Chris Dodd and Barney Frank. No dissenting voices allowed from the likes of Joseph Stiglitz, Paul Krugman, Dean Baker, Paul Craig Roberts and others not part of the Wall Street-Congressional duopoly cabal.

  • Steve (unverified)
    (Show?)

    "That is so not the case. Read the relevant articles."

    OK let's use Wikipedia for credit default swaps.

    http://en.wikipedia.org/wiki/Credit_default_swap

    There they compare it to insurance in the sense that portfolio buyers buy the coverage from someone like AIG in case the portfolio defaults. None of what AIG has done is being called illegal. It is very complex, yes, but that is not illegal.

    UNfortunately, most banks did not retain servicing on lonas they originated. Rather they preferred to package them and sell them for value. By purchasing (if you don't want to call it insurance) a device that would guarantee a certain risk level in the portfolio. This allowed them to sell at an effective interest rate less than the real interest rate they yielded.

    THe problems arose when some of the loans in the portfolio defaulted calling into doubt the remaining loans. THe question then became is 1 out of 1000 loans bad or 500 out of a 1000 loans? The AIG swap was intended to cover this until it got swamped.

    All of the above, affected the marketability of these portfolios. Since banks only make money when it changes hands, if you have $100M portfolio with an uncertain value, you can't determine a price to sell it at. THus banks lock up.

    I mean if we name the counterparties, then what? They legally bought this coverage they the tried to enforce.

  • (Show?)

    Steve – I appreciate your questions; a couple of point/notes:

    To cut to the chase, I do think it’s reasonable to ask just who is being made whole through this process, and exactly how this is supposed to solve the crises we’re facing. In buying up the “toxic assets,” who is ultimately benefiting? If it’s the shareholders of the banks who, in your shorthand, bought insurance coverage that went bad, at what price are we all on the hook for covering their losses, and what share of the burden are we asking them to bear?

    There are different options for addressing the problems we’re facing – but I really don’t think the Fed and the Administration have been at all transparent about why they’re choosing the paths they’ve chosen.

    On your second point: I don’t see how at this moment we can say that all of this was legal. First, if it wasn’t much of it should be. I’ve seen the value of the unregulated credit default “insurance” market set at upwards of $45 ,trillion – which dwarfs the combined values of the US stock market plus the US treasuries and mortgage securities markets.

    This wasn’t just a case of insurance on investments going bad. This was a scheme of Enron-like machinations, where at a minimum greed trumped good sense and good practice at every level: from WAMU and the mortgage brokers who originated and resold loans all the way up the food chain – and including the ratings agencies who blessed the various instruments with AAA ratings. I can’t imagine that at a minimum criminal misrepresentations of assets and valuations weren’t part of this edifice; can you?

  • (Show?)

    PS: Over at Tapped Robert Reich puts his finger on why it matters who AIG's trading partners are:

    Top Wall Streeters who raked in tens of millions of dollars a year for more than a decade have now effectively eviscerated the pension fund savings of millions of middle-class American workers and destroyed millions of Main Street jobs. The public is understandably appalled that its tax dollars are being used to pay and prop up the very people and institutions responsible for this debacle. And there seems to be no end in sight: Citigroup and the insurance mammoth AIG, in particular, have become giant ongoing sump-pumps for tens of billions of public dollars. Yet no one seems to know exactly where these dollars are going, or why. Worse: When it turns out that people like Lloyd Blankfein, the CEO of Goldman Sachs, who took home $68 million in 1997, was the only Wall Street financier in a meeting last September at the New York Federal Reserve to discuss the initial AIG bailout with Tim Geithner, then New York Fed chair, and other officials. At the very time, Goldman was AIG's largest trading partner -- a distinct scent of self-dealing begins to emanate. When it turns out that Citigroup got a bailout deal last October far more generous than that given to any other distressed bank and that a top Citi executive was advising the Treasury and Fed, the scent increases. Goldman's past CEO was Treasury Secretary at that time, by the way. Another former Goldman CEO was a top Citi official and also a former Treasury Secretary. I am not suggesting anything so crude as corruption. But could it be, given these tangled webs, that -- innocently, unintentionally, perhaps even subconsciously -- the entire bailout effort was premised on saving these companies rather than protecting the public? Or that the distinction between the two was lost, and still is?
  • gl (unverified)
    (Show?)

    "Top Wall Streeters who raked in tens of millions of dollars a year for more than a decade have now effectively eviscerated the pension fund savings of millions of middle-class American workers and destroyed millions of Main Street jobs"

    I is progressive, what is CDS?

  • Bill Bodden (unverified)
    (Show?)

    Another former Goldman CEO was a top Citi official and also a former Treasury Secretary. I am not suggesting anything so crude as corruption.

    Why not? The whole system has been corrupt for years, with deregulation bought and paid for by Wall Street lobbyists being one of the major factors.

  • Steve (unverified)
    (Show?)

    First, my position on the TARP was it seemed like a good idea originally. However, I’d be the first to admit that in execution it failed. Just writing banks a blank check means like with anyone that they will not spend (or loan) it unless absolutely necessary. You somehow need to get something in exchange for each $ we give.

    Having said that, we are kind of at the point where we are dealing with a known alcoholic who got in an accident while driving drunk. We could sit and argue the morality, but the issue is keeping him alive. We can point the finger at him, the people at the party that let him drive or the hostess that over-served him, but he is still sitting in surgery. Are they all contributory (or in the case of everyone from the borrower getting a house they can’t afford to the Lehman guy selling these things – greedy)? Yes.

    My main point is that no one (D or R) has come up with a solution that reaches the end goal of freeing up money for investment. Since our society is build on borrowed capital, this is key to any economic recovery. In addition, the numbers look huge, but no one knows exactly what the liabilities are which is what is tanking the market now. Is it only 1 out of 1000 loans bad or 500 out of a 1000?

    Anyways, we have this ocean of loan/debt portfolios that no one can put a value on. The idea of the AIG swaps was to set a floor so at least we’d have a minimum value for the paper. The people who bought these swaps (I’ll refrain from using the word insurance) got them assuming they’d be covered. This is the disconnect with the US throwing pots of money at AIG and assuming it goes to the people who bought the swap and in turn makes the debt marketable again which is the primary issue – getting investment cash moving and available to business.

    They are very complex (and yes, unregulated), but does that make them illegal? I’m open if you can make a case, but I don’t see it based on law (I am not a lawyer, so I’ll profess my ignorance.) It’d be nice if they had regulations, but you look at a place like the SEC or Congress and they have never caught a money scheme before it blew up. They are great lawyers, but not very sharp financially.

    In sum, I think we need to keep feeding the system cash, but have some further oversight to make sure it is getting used.

    PS - Thank you for taking the time to follow this. I appreciate when we can talk about the issues without name calling.

  • (Show?)

    I suspect that one of the reasons the treasury is so desperate to keep AIG and Citi going is that they're protecting some big foreign investors. I doubt they care much about union pensions or individual 401Ks. What would happen if big bankruptcies hit China or Saudi Arabia hard? Who would buy Treasuries? Would they stop taking dollars?

  • Stephen Amy (unverified)
    (Show?)

    Wu voted against TARP in the first round (when it failed in the House), but changed his vote in round two.

    Also, I'd like to say that "socialism" is the most over-used and erroneously-used word these days. A government propping up big business is a characteristic of fascism.

    Here's an amazing summation of the situation:

    www.bloomberg.com/apps/news?pid=washingtonstory&sid=aGq2B3XeGKok

    The total commitment from the Treasury, FED & FDIC is $9.7 trillion dollars. Now, the FDIC is designed as an insurance entity, so I don't really quibble with that expenditure (although I don't think the limits had to be changed- $100K is good enough for 99.9% of the depositers).

    Bloomberg points out that $9.7 trillion would cover a payment of $1,430 to EVERY PERSON ON EARTH. Or, about $35,000 to EVERY MAN, WOMAN & CHILD IN THE U.S.! Even subtracting the FDIC portion, the numbers are beyond staggering. Words fail.

    The government ought to really have gone socialist and just created its own banks to lend to businesses and consumers at a low rate. We'd have been a lot better off! I am just beyond rage that the majority of federal pols think the Treasury & Fed are obliged to cover these bad loans and derivatives thereof!

connect with blueoregon