Archive for the ‘CDS’ Category

Smoking Swap Guns Are Beginning to Litter EuroLand, Sovereign Debt Buyer Beware!

Submitted by Reggie Middleton

There are broad indications hinting that Italy and Greece are not the only countries that have used SWAP agreements to manipulate its budget and deficit figures. France and Portugal may be two other European economies which have resorted to similar manipulations in the past in order to qualify as part of single currency member nations (Euro Zone). Below is a small subset of the research that I have been gathering as I construct a global sovereign default model. This model is very comprehensive and thus far has indicated that quite a few (as in more than two or three) nations of significance have an 90% probability of defaulting on their debt in the near to medium term. More on this later, now let’s dig into what we have found that looks like gross manipulation of the numbers in order to hide debt in several European countries. Here’s a quick quiz. What well known (in name only) Italian American has a significant chunk of the European Union Sovereign nations apparently modeled their financial engineering from?

Charles Ponzi (March 3, 1882 – January 18, 1949) was an Italian swindler, who is considered one of the greatest swindlers in American history. His aliases include Charles Ponei, Charles P. Bianchi, Carl and Carlo. The term “Ponzi scheme” is a widely known description of any scam that pays early investors returns from the investments of later investors. He promised clients a 50% profit within 45 days, or 100% profit within 90 days, by buying discounted postal reply coupons in other countries and redeeming them at face value in the United States as a form ofarbitrage.^[1][2] Ponzi was probably inspired by the scheme of William F. Miller, a Brooklyn bookkeeper who in 1899 used the same scheme to take in $1 million.^[3]

I think I’ll call it the Pan-European Ponzi. Conspiracy theorists are going to love this post.

Like Italy (see below), Portugal has also been known for years to take advantage of derivatives contracts to dress up its budget numbers in the late 1990s. In a recent press article (Debt Deals Haunt Europe) Deutsche Bank’s spokesman Roland Weichert commented that the bank has executed currency swaps on behalf of Portugal between 1998 and 2003. He also said that Deutsche Bank’s business with Portugal included “completely normal currency swaps” and other business activity, which he declined to discuss in detail. He also added that the currency swaps on behalf of Portugal were within the “framework of sovereign-debt management,” and the trades weren’t intended to hide Portugal’s national debt position (yeah okay!).

Though the Portuguese finance ministry declined to comment on whether Portugal has used currency swaps such as those used by Greece, it said Portugal only uses financial instruments that comply with European Union rules. Thus, if the use of these instruments complied with European Union rules, then there is nothing wrong with them, right??!! The word “if” is probably one of the most abused words in the English language. As my lawyer use to tell me as I once abused the word, “If Grandma had balls, she’d be Grandpa, wouldn’t she?”

The French 

In 1997, the French government received an upfront payment of £4.7 billion ($7.1 billion) for assuming the pension liabilities for France Telecom workers in return. This quick cash injection helped bring down France’s deficit, helping the country to meet the pre-condition to join the Euro zone. You may reference the Laurent_Paul_and Christophe_Schalck_study for a background on the deal. I don’t necessarily concur with their conclusions, but it does provide some info

For the record and according to the doc referenced above, according to the State balance sheet for 2006, total pension liabilities of civil servants have been estimated at 941 billion €, i.e. 53% of annual GDP in France.  An attempt to reform all special schemes in 1995 collapsed because of severe strikes on the railways. Sounds awfully Hellenic in nature, doesn’t it??? I, for one, believe that Greece is getting a bad rap, and not becaue it is being falsely accused but because it is just a lot sloppier at covering up its shenanigans than its European neighbors.

Now, back to France. A transaction similar to the France Telecomm deal took place in 2006 with La Poste which still employs 200,000 civil servants, but is now facing the same evolution as France Telecom in 1997. But an important difference with France Telecom is the obvious insufficiency of the lump sum paid by the postal company (2 billion €) compared to the amount of pension liabilities transferred (70 billion € at the end of 2006). This low amount is explained by the weak financial position of the company. Thus, the balance of the transaction is guaranteed by 1) additional contributions by the postal company which will be paid until 2010, the scheduled year of the complete liberalization of the
postal services; and 2) the annual contribution by the State Budget the amount of which should progressively increase, from 0.5 billion € in 2006 to 2 billion € in 2020. 

Click to enlarge

As you can see, the French government has accepted 301 billion euros of pension liabilities for 16.2 billion dollars of upfont payments. Who want’s to bet if these liabilities are drastically underfunded? Either cut Greece some slack or jump into France’s ass. We shouldn’t have it both ways!

As public entities replace the public company for the payment of pensions and the collection of contributions, the tax burden can be increased significantly: around 0.1% of GDP each for the EDF-GDF, France Telecom and La Poste transactions. Overall, transfers of pension liabilities
implemented since 1997 have supposedly increased the French tax burden by 0.3% of GDP.

Is France the only one doing this? You know the answer to that question.

The Greeks (again)…

According to people familiar with the matter interviewed by China Securities Journal, Goldman Sachs Group Inc. did as many as 12 swaps for Greece from 1998 to 2001, while Credit Suisse was also involved with Athens, crafting a currency swap for Greece in the same time frame.

Under its “off-market” swap in 2001, Goldman agreed to convert yen and dollars into euros at an artificially favorable rate in the future. This helped Greece to use that “low favorable rate” when it recorded its debt in the European accounts-pushing down the country’s reported debt load.

Moreover, in exchange for the good deal on rates, Greece had to pay Goldman (the amount wasn’t revealed). And since the payment would count against Greece’s deficit, Goldman and Greece came up with another twist: Goldman effectively loaned Greece the money for the payment, and Greece repaid that loan over time. And the two sides structured the loan as another kind of swap. So, the deal didn’t add to Greece’s debt under EU rules. Consequently, Greece’s total debt as a percentage of GDP fell from 105.3% to 103.7%, and its 2001 deficit was reduced by a tenth of a percentage point in GDP terms, according to people close to Goldman.

Another action that smacks of Hellenic manipulation, at least to the staff of BoomBustBlog:  for years it apparently and simply omitted large portions of its military-equipment spending from its deficit calculations. Though, European regulators eventually prevailed on Greece to count everything and as a result, in 2004, there was a massive revision of Greek deficit figures from 2000 (a budget deficit of 2.0% of GDP in 2000 to beyond the 3% deficit limit in 2004), by then Greece had already gained entrance to the euro. As in my trying to prepare for the coming sovereign debt crisis, timing is everything, isn’t it???

The Italians

As discussed in a recent ZeroHedge article, a 1996 Italian currency swap, arranged by J.P. Morgan, allowed Italy to receive large payments upfront that helped keep its deficit in line, with the downside of greater payments later.

In addition, to curbing their current deficits, countries are now using these swap agreements to push off their loan liabilities (related to swap agreements) to a later date through securitization, and Greece is one such example. 

Under the 2001 deal brokered by Goldman, Greece swapped dollar- and yen-denominated debt for Euros at below-market exchange rates. The result was that the country got paid €1 billion ($1.35 billion) upfront on the swap in exchange for an obligation to buy the swaps back later. In 2005, this obligation was in turn securitized as part of a 20-year debt issue, further pushing off the day of reckoning.

Moreover, one of the key reasons why such manipulations continued is the apparent ignorance of the EU’s Eurostat, which knew enough about these deals to tighten the rules governing their accounting-albeit only after they had served their purpose – the Ponzi! When Italy’s then-Prime Minister Romano Prodi miraculously achieved a four-percentage-point improvement in Italy’s budget deficit in time to usher the country into the common currency, Italy’s use of accounting gimmicks was widely discussed, and then promptly ignored. As at that time, everyone was only too eager to look the other way in the drive to get the single currency up and running.

It wasn’t until 2008-a decade after the deals became popular-that Eurostat was able to revise its rules to push countries to include swaps in their debt and deficit calculations. Still, till date too little is known about countries’ continued exposure to the deals that are already out there.

Overall, though there is less evidence to support that there are more such swap deals that happened during the late 90′s till early part of this decade, the data below showing a sharp decline in interest payments as a percentage of GDP particularly for Belgium (apart from Greece and Italy), hints that there are considerably more of these deals to be discovred. The questions is, will they be discovered before or after the respective sovereign issues record debt to the suckers sovereign fxed income investors.

Notice the extremely supercalifragilisticexpealidocious reductions Belgium, Greece and Italy have made in their interest payments from 1993 to 2000 in this graphic made pre-2000. If one didn’t know better, one would have thought theses countries actually used magic to make such reductions. Hell, Italy practicaly cut their debt service (projected, of course) in half. It really makes one wonder. I’m just saying…

According to DERIVATIVES AND PUBLIC DEBT MANAGEMENT by Gustavo Piga, “The political stakes of the 1997 budget package were enormous. Therefore, it was no surprise that many countries were accused of ‘creative window-dressing’ in their budget through the use of accounting tricks to reach the desired goal. One contentious item was interest expenditure, which is the interest expense that governments sustain to finance their deficit and roll over their debt. Interest expenditure represents a high percentage of public spending and GDP in the European Union. It is highly variable over time, especially when compared to other components of the budget. Because of its relevance and because it is subject only to minimal scrutiny during budget law discussions (and many times even after its realization during the fiscal year), interest expenditure is an ideal target for reaching fiscal stabilization goals without incurring excessive political protest or opposition”.

Oh, do you mean like this??? 

1. Can China Control the “Side-Effects” of its Stimulus-Led Growth? Let’s Look at the Facts - Explains the potential fallout of the excessive fiscal stimulus in China. While not European, it is quite likely to kick off the daisy chain effect.
2.  The Coming Pan-European Sovereign Debt Crisis - introduces the crisis and identified it as a pan-European problem, not a localized one.
3. What Country is Next in the Coming Pan-European Sovereign Debt Crisis? - illustrates the potential for the domino effect
4. The Pan-European Sovereign Debt Crisis: If I Were to Short Any Country, What Country Would That Be.. - attempts to illustrate the highly interdependent weaknesses in Europe’s sovereign nations can effect even the perceived “stronger” nations.
5. The Coming Pan-European Soverign Debt Crisis, Pt 4: The Spread to Western European Countries
6. The Depression is Already Here for Some Members of Europe, and It Just Might Be Contagious!
7. The Beginning of the Endgame is Coming???
8. I Think It’s Confirmed, Greece Will Be the First Domino to Fall

Not Again…. (CDS)

Posted by Karl Denninger

Banks Bet Greece Defaults on Debt They Helped Hide

By NELSON D. SCHWARTZ and ERIC DASH

Bets by some of the same banks that helped Greece shroud its mounting debts may actually now be pushing the nation closer to the brink of financial ruin.

Echoing the kind of trades that nearly toppled the American International Group, the increasingly popular insurance against the risk of a Greek default is making it harder for Athens to raise the money it needs to pay its bills, according to traders and money managers.

These contracts, known as credit-default swaps, effectively let banks and hedge funds wager on the financial equivalent of a four-alarm fire: a default by a company or, in the case of Greece, an entire country. If Greece reneges on its debts, traders who own these swaps stand to profit.

“It’s like buying fire insurance on your neighbor’s house — you create an incentive to burn down the house,” said Philip Gisdakis, head of credit strategy at UniCredit in Munich.

As Greece’s financial condition has worsened, undermining the euro, the role of Goldman Sachs and other major banks in masking the true extent of the country’s problems has drawn criticism from European leaders. But even before that issue became apparent, a little-known company backed by Goldman, JP Morgan Chase and about a dozen other banks had created an index that enabled market players to bet on whether Greece and other European nations would go bust.

Last September, the company, the Markit Group of London, introduced the iTraxx SovX Western Europe index, which is based on such swaps and let traders gamble on Greece shortly before the crisis. Such derivatives have assumed an outsize role in Europe’s debt crisis, as traders focus on their daily gyrations.

A result, some traders say, is a vicious circle. As banks and others rush into these swaps, the cost of insuring Greece’s debt rises. Alarmed by that bearish signal, bond investors then shun Greek bonds, making it harder for the country to borrow. That, in turn, adds to the anxiety — and the whole thing starts over again.

On trading desks, there is fierce debate over what exactly is behind Greece’s recent troubles. Some traders say swaps have made the problem worse, while others say Greece’s deteriorating finances are to blame.

“This is a country that is issuing paper into a weakening market,” said Ashish Shah, co-head of credit strategy at Barclays Capital, referring to Greece’s need for continual borrowing.

But while some European leaders have blamed financial speculators in general for worsening the crisis, the French finance minister, Christine Lagarde, last week singled out credit-default swaps. Ms. Lagarde said a few players dominated this arena, which she said needed tighter regulation.

Trading in Markit’s sovereign credit derivative index soared this year, helping to drive up the cost of insuring Greek debt, and, in turn, what Athens must pay to borrow money. The cost of insuring $10 million of Greek bonds, for instance, rose to more than $400,000 in February, up from $282,000 in early January.

On several days in late January and early February, as demand for swaps protection soared, investors in Greek bonds fled the market, raising doubts about whether Greece could find buyers for coming bond offerings.

“It’s the blind leading the blind,” said Sylvain R. Raynes, an expert in structured finance at R&R Consulting in New York. “The iTraxx SovX did not create the situation, but it has exacerbated it.”

The Markit index is made up of the 15 most heavily traded credit-default swaps in Europe and covers other troubled economies like Portugal and Spain. And as worries about those countries’ debts moved markets around the world in February, trading in the index exploded.

In February, demand for such index contracts hit $109.3 billion, up from $52.9 billion in January. Markit collects a flat fee by licensing brokers to trade the index.

European banks including the Swiss giants Credit Suisse and UBS, France’s Société Générale and BNP Paribas and Deutsche Bank of Germany have been among the heaviest buyers of swaps insurance, according to traders and bankers who asked for anonymity because they were not authorized to comment publicly.

That is because those countries are the most exposed. French banks hold $75.4 billion worth of Greek debt, followed by Swiss institutions, at $64 billion, according to the Bank for International Settlements. German banks’ exposure stands at $43.2 billion.

Trading in credit-default swaps linked only to Greek debt has also surged, but is still smaller than the country’s actual debt load of $300 billion. The overall amount of insurance on Greek debt hit $85 billion in February, up from $38 billion a year ago, according to the Depository Trust and Clearing Corporation, which tracks swaps trading.

Markit says its index is a tool for traders, rather than a market driver.

In a statement, Markit said its index was started to satisfy market demand, and had improved the ability of traders to hedge their risks. The index and similar products, it added, actually make it easier for buyers and sellers to gauge prices for instruments that are traded among players over the counter, rather than on exchanges.

“These indices have helped bring transparency to the sovereign C.D.S. market,” Markit said. “Prior to their creation, there was no established benchmark index enabling investors to track the performance of segments of the sovereign C.D.S. market.”

Some money managers say trading in Greek swaps alone, not the broader index, is the problem.

“It’s like the tail wagging the dog,” said Markus Krygier, senior portfolio manager at Amundi Asset Management in London, which has $40 billion in global fixed-income assets. “There is a knock-on effect, as underlying positions begin to seem riskier, triggering risk models and forcing portfolio managers to sell Greek bonds.”

If that sounds familiar, it should. Critics of these instruments contend swaps contributed to the fall of Lehman Brothers. But until recently, there was little demand for insurance on government debt. The possibility that a developed country could default on its obligations seemed remote.

As a result, many foreign banks that held Greek bonds or entered into other financial transactions with the government did not hedge against the risk of a default. Now, they are scrambling for insurance.

“Greece is not a small country,” said Mr. Raynes, at R&R in New York. “Credit-default swaps give the illusion of safety but actually increase systemic risk.”

You Had Better Cage The Monster CONgress (AIG/GS/CDS)

Posted by Karl Denninger

I’ve been writing about this now over a year in regard to the mess that became of AIG, their “financial products” unit, and what I believe is culpability not only of certain financial parties but more importantly our regulators of these firms.

Now The NY Times has published a new article that makes clear that my clarion call for major changes in these areas of the market were not only spot-on, but are even more necessary today than they were back then.

A.I.G. had long insured complex mortgage securities owned by Goldman and other firms against possible defaults. With the housing crisis deepening, A.I.G., once the world’s biggest insurer, had already paid Goldman $2 billion to cover losses the bank said it might suffer.

A.I.G. executives wanted some of its money back, insisting that Goldman — like a homeowner overestimating the damages in a storm to get a bigger insurance payment — had inflated the potential losses. Goldman countered that it was owed even more, while also resisting consulting with third parties to help estimate a value for the securities.

Read that carefully.  The NY Times is making this sound like AIG had insured losses against securities Goldman was holding.  That’s what insurance is, right?

Here’s the problem: Goldman didn’t own the securities.

In addition to offering to cancel its own contracts, Goldman offered to buy all of the insurance A.I.G. had written for several other banks at severely distressed prices, according to three people briefed on the discussions.

Negotiating with Goldman to void the A.I.G. insurance was especially difficult, Federal Reserve Board documents show, because the firm did not own the underlying bonds. As a result, Goldman had little incentive to compromise.

Now do you see the outrage in these so-called “protection devices”?

They aren’t.  They were raw bets.  Very highly-leveraged gambling instruments that had a very low cost at origination – a cost all out of proportion to their eventual potential return.

We do not let “just anyone” buy insurance.  You must have an insurable interest.  That is, I can’t buy fire insurance on your house.  If I could, I might – and so might 20 of my best friends.  We might even target those homes we think might have fires.  We could even bribe the folks doing a controlled burn nearby to be a little less careful than they ordinarily would.  Or, in the extreme case, one of us might just set a fire on purpose!

None of this is allowed in the insurance marketplace because it creates too many incentives for people to set fires and otherwise cause calamities, whether through outright unlawful conduct or helping along “a series of unfortunate events.”

In the regulated options, futures and stock markets we have controls on this sort of thing as well.  To short a stock (legally) you have to be able to borrow it.  That is, someone who owns it must lend it to you first (perhaps in exchange for money.)  As more people short the cache of people willing to lend out that stock for free will evaporate, and you’ll have to start paying up for the privilege of borrowing it.  This is a natural check and balance on placing negative bets via shorting.

Buying PUTs or transacting in the futures market has costs too.  Those regulated markets have defined margin requirements and they are enforced – nightly.  The cost of buying a PUT includes something for the guy who sells it to you, as he is going to hedge his bet by being short the stock.  Thus, as the number of PUT buyers increases the premium demanded rises – precipitously so as the demand for those PUTs goes up.  Finally, buying a PUT doesn’t come with the right to demand anything more from the seller – his margin requirements are enforced by the exchange and you don’t get to hold the money. 

These OTC CDS contracts had another insidious feature: They apparently included a clause that not only would a downgrade of the security trigger margin requirements but so would a downgrade of AIG. 

The terms, described by several A.I.G. trading partners, stated that A.I.G. would post payments under two or three circumstances: if mortgage bonds were downgraded, if they were deemed to have lost value, or if A.I.G.’s own credit rating was downgraded.

The perversity of incentives here is that if you can demand that your counterparty hand over more and more “margin” to you it is possible to actually force a downgrade by your actions and thus cause even more margin to have to be posted!  This, of course, harms the firm’s liquidity and makes a further downgrade more likely. 

Rinse and repeat to destruction – which, incidentally, is exactly what happened.

This is dramatically different than the regulated markets, where valuations are determined by the market, not by one of the parties at interest and the margin requirement is fixed by the deficiency (if any) against the final strike price and the market’s price – the person who happens to be short gets no benefit (or harm) due to his or her credit rating.  If you’re underwater, you post margin.  If not, you don’t, but in neither case does the person on the other side of the trade get to hold the margin funds!  He gets your money only when he closes his position or the option expires (if it’s in the money.)

These “synthetics” (such as the Abacus CDOs) are an outrage on their face.  These are not created from the purchase of actual physical asset (e.g. a mortgage security) but rather by someone writing a credit-default swap against a reference.  These are then bundled up and sold.  When a credit-default swap is then written against a synthetic CDO it is equivalent to writing a gambling contract on a gambling contract as nobody in the chain owns an actual physical asset (such as a loan)!

The simple fact of the matter is that “naked” CDS exposures need to be prohibited right now.  They never should have been allowed and not a damn thing has changed.  Purely synthetic instruments need to be traded on an exchange in each and every case as a means of preventing chicanery, where margin can be enforced transparently on a nightly basis by a neutral third party in the middle of all transactions – the nominal buyer for every seller, and seller for every buyer.  This third party (the exchange), having no skin in the game either way, will not permit the abuses that are too easily committed when you have over-the-counter transactions of this type.

The article referenced makes a decent case that AIG didn’t fall off the cliff, it was pushed.  There are even allegations raised of collusive conduct which, if true, add an even more serious angle to this entire story.

But at the end of the day the problem boils down to the same basic facts I have been harping on since the beginning:

• Writing “insurance” on something the purchaser doesn’t own isn’t insurance, it’s a gambling contract.

• When such gambling contracts stack up to a great degree there are huge incentives for someone to commit financial arson.  Whether they did or did not is a matter for debate, but that the incentives exist to structure deals in a way that are easily detonated so you can profit from them as exposure increases is not open to debate.  Such incentive does absolutely exist – and we must eradicate it.

• To prevent fraud and gaming of the system, such contracts must be on a regulated exchange where each buyer and seller deals with a neutral third party (the exchange itself) that is responsible for nightly margining, trade reporting, open interest and bid/offer maintenance.  These facts must be exposed at all times to the public so that the market operates in a transparent fashion and neither side of the transaction can be “pushed”.

• The exposure of these contracts on said exchange will also prevent disasters like AIG from occurring, as the fact that they are short “X” will become instantly visible to everyone, including their regulators.  The precise exposure they are taking on will thus be known at all times.

• We must bar backstopped entities (such as banks and insurance companies) from trading in or creating synthetic instruments such as this in the first place.  These are not hedges as by definition there are no actual hard assets behind them.  The argument that they are created to fill a demand from the market is true but irrelevant – the fact remains that with no actual hard asset acquisition behind them they serve no fundamental credit intermediation purpose which is the purview of banks and insurance companies – they are, instead, pure speculative instruments.  Let the hedge funds, operating without any sort of financial backstop, create these all they want – and trade them on a regulated exchange – but keep the banks and insurance companies out of it.

We have not neutered this monster in the slightest.  Indeed, the latest rabble in the market with regard to Greece, Spain and Portugal is, not surprisingly, about (once again) credit default swaps blowing out.

And again I ask – who wrote those CDS naked on these nations to people who didn’t actually hold underlying positions in the bonds without them being traded on a central exchange, and why, after 2008 and 2009, do we still let that crap go on?

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%.

NUCLEAR: Did Goldman Offer To Tear Up AIG CDS?

Posted by Karl Denninger

Oh oh.

Remember, Blankfein testified in front of the FCIC at 10:12 AM on 1/13 that he never got a request to take less than 100 cents on the dollar for AIG credit default swap contracts.

Well then what’s this that Zerohedge dug up?

As everybody knows, AIG got a huge government bailout in September 2008 to help make payments on derivatives contracts with banks, including Goldman. Yet in the previous month, Goldman approached AIG about “tearing up” its contracts, according to a November 2008 analysis by BlackRock, then an adviser to the New York Fed.

WHAT?

Oh yeah.  Here’s the link to the Zerohedge article, and the paper in question is right here:

Thanks and noted on the tear up stand down.

We should get back with Goldman.  I will talk with Bill.

Date: 10/31/2008 6:57 PM.

Which followed:

Also, I spoke to Manzari this morning.  He asked me to stand down on tearing up / unwinding CDS trades on the CDO portfolio.

That appears to be a smoking gun in that it documents that there was an active negotiation on “tearing up” – that is, unwinding CDS trades at less than 100 cents on the dollar and that negotiation was intentionally terminated.

Will we next be entertained by a discussion of what the word “is” means, or can we take the above at its obvious face value – that GOLDMAN ITSELF APPEARS TO HAVE OFFERED TO TEAR UP THE CDS ON AIG’S PORTFOLIO!

If there indeed was such an offer – as is all but stated here – and if indeed there was an order given to “stand down” on such negotiations then those persons responsible must be summoned to the dock and compelled to provide testimony, as it appears that one or more individuals who have already stated that no such negotiation was possible may have committed perjury, never mind dispensing more than $10 billion of taxpayer money to Goldman Sachs unnecessarily – at best.