FedUpUSA

Archive for January, 2010

One of the highlights of my day. 

Meanwhile….

AIG’s mysterious Schedule A finally revealed

The heavily-redacted regulatory filing that spells out the details of the New York Federal Reserve’s controversial bailout of American International Group is a secret no more.

Reuters has obtained a copy of the five-page document the giant insurer and the New York Fed had asked the Securities and Exchange Commission to keep confidential. The effort by the New York Fed to keep the document under wraps has sparked a furor on Capitol Hill and was the subject of a hearing on Wednesday by House Committee on Oversight and Government Reform.

The unredacted version of the “Schedule A – List of Derivative Transactions” fills out some of the missing pieces in the AIG bailout, in which an entity set-up by the New York Fed effectively funneled tens of millions of dollars to 16 big U.S. and Europeans banks that had bought credit default swaps from the insurer.

The unredacted version of the Schedule A enables some to identify all of the 178 mortgage-related securities, or collateralized debt obligations, that AIG wrote insurance-like protection on.

It’s been known for months that Goldman Sachs and Societe Generale were the two banks who recieved the most money in the dea because they had insured the most CDOs with AIG. But the new information enables traders, investors and the general public to see just which deals the banks had purchased insurance on.

The new information also reveals that of the 178 tranches of CDOs that AIG insured, some 14% were on deals issued after 2005. That’s critical because in December 2007, former AIG Financial Products head Joseph Cassano had said AIG largely got out of the CDS business by the end of 2005.

The newly disclosed information also reveals that Goldman not only bought a lot of CDS from AIG to protect itself; the Wall Street firm also originated a good number of the CDOs that were in SocGen’s portfolio. Some of the Goldman deals in SocGen’s portfolio that AIG had insured includes CDOs with names like Adirondack 2005, Putnam Structured Product CDO 2002 and Davis Square Funding IV.

Janet Tavakoli, a derivatives consultant who has called the AIG bailout a gift to the Wall Street banks, said the issue isn’t just what deals AIG insured, but the underlying assets in those deals. She noted that a goodly number of the CDOs held by the banks also held pieces of other CDOs.

Goldman Sachs, Societe Generale, Deutsche Bank, Merrill Lynch and other banks sold their ailing collateralized debt obligations to the New York Fed-sponsored entity, Maiden Lane III. AIG then canceled out the CDS contracts it had sold as default insurance on those 178 CDOs.

“If all of this had come out in the public domain in late 2008, Goldman Sachs and Merrill would have been deeply embarassed and the Federal Reserve woudl have been questioned,” said Tavakoli.

In the process, the banks were made whole and AIG no longer had to pay out billions of dollars in cash collateral to the banks everytime the CDOs dropped in value.

SEE WHAT YOU ARE THE PROUD OWNER OF HERE:   Un-redacted AIG Schedule A  PDF Document

Yes, they paid 100 cents on the dollar for these ‘investments’  with YOUR money, which were not only rated CCC- or less, but had already deteriorated 20, 30, 40 and 50%.

Suspending Money Market Redemptions Is Now Legal; SEC Approves New Money Market Regulation In 4-1 Vote

Submitted by Tyler Durden

Zero Hedge discussed a month ago the disastrous prospects of what would happen if the new proposal contemplated by the SEC, which would allow the suspension of redemptions from Money Market Funds, were to pass. Well, in a nearly unanimous vote, Money Market Funds now have the ability to suspend redemptions, courtesy of the SEC’s just passed 4-1 vote. This explains the negative rate on bills: at this point, should there be another meltdown, money market investors will not, repeat not, be able to withdraw their money purely on the whim of Mary Schapiro. As the SEC noted: “We understand that suspending redemptions may impose hardships on investors who rely on their ability to redeem shares.” Too bad investors’ hardships considerations ended up being completely irrelevant.

As a reminder, here is the gist of the proposal as pertains to redemption suspension:

Proposed rule 22e–3(a) would permit a money market fund to suspend redemptions if: (i) The fund’s current price per share, calculated pursuant to rule 2a–7(c), is less than the fund’s stable net asset value per share; (ii) its board of directors, including a majority of directors who are not interested  persons, approves the liquidation of the fund; and (iii) the fund, prior to suspending redemptions, notifies the Commission of its decision to liquidate and suspend redemptions, by electronic mail directed to the attention of our Director of the Division of Investment Management or the Director’s designee. These proposed conditions are intended to ensure that any suspension of redemptions will be consistent with the underlying policies of section 22(e). We understand that suspending redemptions may impose hardships on investors who rely on their ability to redeem shares. Accordingly, our proposal is limited to permitting suspension of this statutory protection only in extraordinary circumstances. Thus, the proposed conditions, which are similar to those of the temporary rule, are designed to limit the availability of the rule to circumstances that present a significant risk of a run on the fund. Moreover, the exemption would require action of the fund board (including the independent directors), which would be acting in its capacity as a fiduciary. The proposed rule contains an additional provision that would permit us to take steps to protect investors. Specifically, the proposed rule would permit us to rescind or modify the relief provided by the rule (and thus require the fund to resume honoring redemptions) if, for example, a liquidating fund has not devised, or is not properly executing, a plan of liquidation that protects fund shareholders. Under this provision, the Commission may modify the relief ‘‘after appropriate notice and opportunity for hearing,’’ in accordance with section 40 of the Act.

Is Bernanke Hiding A Smoking Gun?

Ryan Grim - Huffington Post

A Republican senator said Tuesday that documents showing Federal Reserve Board Chairman Ben Bernake covered up the fact that his staff recommended he not bailout AIG are being kept from the public. And a House Republican charged that a whistleblower had alerted Congress to specific documents provide “troubling details” of Bernanke’s role in the AIG bailout.

Sen. Jim Bunning (R-Ky.), a Bernanke critic, said on CNBC that he has seen documents showing that Bernanke overruled such a recommendation. If that’s the case, it raises questions about whether bailing out AIG was actually necessary, and what Bernanke’s motives were.

A letter Bunning sent Monday to Banking Committee Chairman Chris Dodd (D-Conn.) also refers to an “[e]mail exchange regarding restructuring of assistance to AIG, initiated by Treasury Secretary Timothy Geithner” in March 2009.

Senators will be voting on Bernanke’s confirmation for a second term in the coming days. But only senators on the Banking Committee have had access to documents that illuminate just what decisions he made and how he made them. And that access only came after Bunning publicly complained that Dodd and Sen. Richard Shelby (R-Ala.) were the only members of the committee could see them.

Meanwhile, Rep. Darrell Issa (R-Calif.), who has been investigating the AIG bailout in his role as ranking Republican on the House Oversight and Government Reform Committee, said that a whistleblower has informed him of “troubling details” of Bernanke’s role in the bailout.

There may be nothing incriminating in the documents, but without access to them, the Senate will be voting to confirm him in the dark.

Senators from both parties who say they will vote to confirm Bernanke credit him with deft actions that averted a second Great Depression. Those actions, they argue, outweigh what blame he deserves for causing the crisis in the first place.

“He’s done a very good job in the last year. And but for his work, we would be in a very different position in this country today,” said Dodd Monday. “Now that’s hard to prove a negative. But the fact of the matter is, our entire financial system might have collapsed but for his leadership.”

On Monday, Bunning sent a letter to Dodd, asking him to subpoena the emails and other documents. Bunning and other committee members have thus far had to view the documents at the Federal Reserve and are bound by confidentiality from revealing their contents. “He thinks that all members of the Senate should have access to the documents he’s seen,” said Bunning spokesman Mike Reynard.

Issa, in a letter to his committee’s chairman, Ed Towns (D-N.Y.), asked for a similar subpoena and even specified exactly which documents he wants: Those tagged electronically as “sb-aig-01000092 to sb-aig-010000125″ and “Draft Memo on AIG.pdf.”

Towns spokeswoman Jenny Rosenberg said that Towns would decide on a subpoena after Wednesday’s hearing on the AIG bailout.

Bunning, in his letter to Dodd, is equally specific, citing nine particular documents that the Senate should review before voting to confirm Bernanke:

1. Agenda and materials for 11/12/2008 meeting of the Board of Directors of AIG (containing minutes of previous board meetings). [AIG_11.12.08_BOD.pdf] 

2. Agenda and materials for 1/14/2009 meeting of the Board of Directors of AIG (containing minutes of previous board meetings). [AIG_01.14.09_BOD.pdf]

3. Memo “Issues Related to Possible IPC Lending to American International Group” presented to the Board of Governors for approval of lending to AIG, dated 9/15/2008. [pages sb-aig-01000092 to sb-aig-01000125]

4. Email from Chairman Bernanke including a draft of the memo to be presented to the Board of Governors for approval of lending to AIG, dated 9/15/2008. [Draft Memo on AIG.pdf]

5. Memo “Proposed Securities Lending Facility for American International Group, Inc. (“AIG”)” presented to the Board of Governors for approval of the securities lending facility for AIG, dated 10/6/2008. [Board Mtg_10-6-2008_8.35.05_AM.pdf]

6. Memo “Proposed Steps to Stabilize American International Group, Inc.” presented to the Board of Governors for approval of restructuring assistance to AIG and creation of Maiden Lane II & III, dated 11/6/2008. [AIG restructuring Board memo Final (Nov. 6, 2008)_11-6-2008_4.55.19_PM.pdf]

7. Spreadsheet describing the assets purchased by Maiden Lane II and Maiden Lane III. [BLK_12.31.08_MLII & III cusip data.xls]

8. Spreadsheet listing derivative transactions and counterparties for Maiden Lane III. [List of Derivative Transactions.pdf]

9. Email exchange regarding restructuring of assistance to AIG, initiated by Treasury Secretary Timothy Geithner, dated 03/01/2009. [AIG Emails, Part3.pdf]

Top Ten Reasons Why Bernanke Should Not be Reappointed

Today, the Alliance for Economic Stability, Inc., on its website located at www.eally.org, released a letter to Congress recommending that Federal Reserve Chairman Ben Bernanke not be reappointed citing the Chairman’s complacency before and after the crisis as the organization’s leading factor in its decision.

1. He violated the first and most important guiding principle of fair markets: he failed to make full disclosures at all points relevant to the development and management of the financial crisis.

2. Outwardly he completely failed to at his first and only responsibility: to protect American Families and Workers from excessive risk in the financial sector.

3. There has been no discovery conducted on what he knew and when, and who he told, before the crisis caused Bear Stearns, Lehman, AIG, Freddie Mac and Fannie Mae, and hundreds of banks to fail.

4. He has failed to provide a complete accounting of the total amount of subprime mortgages underwritten and a fair estimate of their current value by sponsor, including Goldman and JP Morgan.

5. He has failed to provide an accounting of the amount of sub-prime derivatives sold to deposit institutions, pension plans and insurance companies including AIG.

6. He failed to identify the beneficiaries of losses resulting from conflicts-of-interest and unethical standards before he caused the creation of new policies and laws allowing cash payments funded by tax payers to be used in transactions that generated extraordinary gains for the private parties that caused the crisis with no protection for tax payers and no penalty or sanction, or consequences, to the improperly benefited private parties.

7. He continues to engage in a manipulation of markets without any estimate of the cost to tax payers of the program or responsibility to account for the negative impact on the nation’s budget and currency value of his actions.

8. He has not proposed any enforcement action or laws that would correct the laws that allowed the crisis.

9. He denied having any responsibility in the crisis yet at the same time blamed the regulators for allowing unethical sales and trading practices and improper underwriting activities that are at the core of his super visionary duties.

10. He has resisted all efforts to increase transparency of the Fed’s controversial emergency measures, and both before and after the crisis he has been complacent about the laws that are now known to be the direct cause of the crisis and the adverse impact of his policies on conservative savers and benefits to speculators.

AES is an organization devoted to encouraging policies that protect savings and investments and that promote a fair financial marketplace. AES has produced a study of FINRA, titled “Securities Regulatory Reform: Addressing FINRA’s Inherent Conflict and Moral Hazard” and a new regulatory rules filing titled “FINRA Moral Hazard Reforms” that was entered into rulemaking by U.S. Securities and Exchange Commission on January 4, 2010.

Oh, So The Fed *DID* Hide Documents?

Posted by Karl Denninger

Fed E-Mail to Geithner Cites Bank Benefit From AIG

Jan. 25 (Bloomberg) — Timothy F. Geithner, who has denied that the financial condition of American International Group Inc.’s bank counterparties was a consideration in structuring the insurer’s bailout, was told by a senior colleague that the rescue was a way to remove “uncertainty” for the firms.

Buying mortgage-linked assets from banks was better “from a financial-stability perspective” than other plans to shield AIG from losses on contracts guaranteeing the bonds, Margaret McConnell, then a Federal Reserve Bank of New York vice president, wrote in an e-mail to Geithner on Oct. 22, 2008. Geithner, now Treasury secretary, led the New York Fed at the time of AIG’s rescue and McConnell’s e-mail.

The special inspector general of Treasury’s Troubled Asset Relief Program wrote in a 2009 report that Geithner said the New York Fed didn’t weigh the financial status of banks, including Goldman Sachs Group Inc., when deciding to fully reimburse them for $62.1 billion of devalued assets. U.S. Representative Darrell Issa, the ranking member of the House oversight panel that called Geithner to testify this week, has described the rescue of New York-based AIG as a “backdoor bailout” of banks.

The New York Fed weighed two other options for stanching losses tied to AIG’s credit-default swaps in the weeks after the September 2008 rescue, the inspector general, Neil Barofsky, said in the Nov. 17, 2009, report. One included asking counterparties to cancel their swaps and selling the underlying assets for an investment in a vehicle that would assume ownership of the securities. Another was for a Fed-backed vehicle to take over AIG’s responsibility of backing the assets.

‘Considerably More Uncertainty’

The first alternative was deemed too time-consuming and the second made regulators uncomfortable because it would give them “long-term credit relationships with supervised institutions,” Barofsky said in the report.

Paying banks through a Fed-funded facility known as Maiden Lane III made sense, McConnell wrote in the Oct. 22 e-mail to Geithner, “because it seems to remove considerably more uncertainty for the firms and arguably for the system.”

Andrew Williams, a Treasury Department spokesman, said “the creation of Maiden Lane III to help stabilize AIG and the financial markets was prudent, and it is highly likely that the Fed will get back every dollar it committed to Maiden Lane III with interest and, quite likely, a profit.” Jack Gutt, spokesman for the New York Fed, declined to comment on the e- mail.

‘All Too Clear’

The value of securities and cash held in Maiden Lane III climbed 4.5 percent to $23.5 billion in the three months ended Sept. 30, according to a New York Fed report.

Geithner agreed to testify at a House oversight panel hearing scheduled for Jan. 27 after e-mails released by Issa indicated the New York Fed asked AIG to limit what the public knew about the bank payments.

“It has become all too clear that the New York Fed was more interested in protecting the interests of Wall Street instead of Main Street,” said Issa, a California Republican, in a statement.

The McConnell e-mail obtained by Bloomberg News is part of 250,000 pages of documents the New York Fed provided to the House Oversight and Government Reform Committee after the panel issued a subpoena this month asking for e-mails, phone logs and other documents tied to AIG’s rescue, which swelled to $182.3 billion.

“Questions have been raised as to whether the Federal Reserve intentionally structured the AIG counterparty payments to benefit AIG’s counterparties,” Barofsky wrote. “Geithner and the New York Fed’s general counsel deny that this was a relevant consideration for the AIG transactions.”

Barofsky, who agreed to testify this week, wrote in November that the rescue “provided AIG’s counterparties with tens of billions of dollars they likely would have not otherwise received.”

To contact the reporter on this story: Hugh Son in New York at hson1@bloomberg.net