Oh AIG, What Is That Up Your Sleeve?


Oh AIG, What Is That Up Your Sleeve?

Posted by Karl Denninger

Heh, Bloomberg is blowing a whistle!

A potentially more important development slipped by with less notice, Bloomberg Markets reports in its April issue. Representative Darrell Issa, the ranking Republican on the House Committee on Oversight and Government Reform, placed into the hearing record a five-page document itemizing the mortgage securities on which banks such as Goldman Sachs Group Inc. and Societe Generale SA had bought $62.1 billion in credit-default swaps from AIG.

Yeah.  But that 62.1 billion is just part of the problem.  See, we seem to be into these clowns for $180 billion.  How come, if there was “just” $62 billion in bad paper out there?

“It’s almost too uncanny,” Calacci says. “If these banks had insight into the underlying loans because they had relationships with banks, originators or servicers, that’s at the least unethical.”

The identification of securities in the document, known as Schedule A, and data compiled by Bloomberg show that Goldman Sachs underwrote $17.2 billion of the $62.1 billion in CDOs that AIG insured — more than any other investment bank. Merrill Lynch & Co., now part of Bank of America Corp., created $13.2 billion of the CDOs, and Deutsche Bank AG underwrote $9.5 billion.

I don’t think there’s anything uncanny about it.  Look, this wasn’t so simple as “someone placed a bet.”  That goes on every day, and there’s nothing wrong with it.

No, this has more nefarious overtones.

They met with bankers at Bear Stearns, Deutsche Bank, Goldman Sachs, and other firms to ask if they would create securities—packages of mortgages called collateralized debt obligations, or CDOs—that Paulson & Co. could wager against.

The investment banks would sell the CDOs to clients who believed the value of the mortgages would hold up. Mr. Paulson would buy CDS insurance on the CDO mortgage investments—a bet that they would fall in value. This way, Mr. Paulson could wager against $1 billion or so of mortgage debt in one fell swoop.

At Bear Stearns, however, Scott Eichel, a senior trader, and others met with Mr. Paulson and later turned him down. Mr. Eichel said he felt it would look improper for his firm. “On the one hand, we’d be selling the deals” to investors, without telling them that a bearish hedge fund was the impetus for the transaction, Mr. Eichel told a colleague; on the other hand, Bear Stearns would be helping Mr. Paulson wager against the deals.

Some investors later would argue that Mr. Paulson’s actions indirectly led to the creation of additional dangerous CDO investments, resulting in billions of dollars of additional losses for those who owned the CDO slices.

Please go read “The Audacity of Synthetics” again, which I wrote a couple of weeks ago.  The problem with these things is simple – they existed only because someone wanted to make a bet that the person who bought them would lose all their money!

As I have repeatedly said I don’t give a damn what people bet on or what they want to do in the markets.  We have a huge casino here on Wall Street and always have, and trying to make that “go away” is a waste of time.  It won’t.

No, the problem is lack of disclosure and the “I’m just the bookkeeper” defense, which is the essence of the investment (and commercial) bank perspective.

Speaking of the latter, how’s that work out for the bookie’s “accountant” when the FBI comes in and raids a wire room that’s running ponies or whatever?  Not so good, right?

So how come the “bookkeepers” are still operating in this case?

Now there’s something to think about.