How the Big Banks Turned Profitable In January and February

Bob Murphy sends me an email with a link that was sent to him by von Pepe. The link is to a blog post by Zero Hedge which details how the AIG bailout has been used to pump billions into the likes of Citigroup, Goldman Sachs and Bank of America.

That this has been going on doesn't surprise me, but the details of the operation are fascinating. In essence, AIG is unwinding its portfolio of default products at below market prices, thus pumping huge amounts of money into the favored banks, since they liquidate the portfolios after buying them. Thus, Treasury continues to need to pump more money into AIG to prop it up from the additional losses it suffers when the portfolios are sold off at below market prices.

There is still a lot more of AIG that needs to be unwound, so the profits will continue to roll in. We are talking billions upon billions.

Interesting, Goldman is returning the $10 billion in TARP money it received. (I hear mid-April). This money is too hot to hold, since Congress is anxious to limit bonuses and activities of those who have received these funds. Thus, this leads to the interesting possibility that AIG could sell Goldman a portfolio or two to unwind that is sold to Goldman at $10 billion under market. Goldman then "pays back" the $10 billion it received from Treasury. The Treasury then turns around and gives the money to AIG because it is showing more losses, because it just sold portfolios at $10 billion under market price. Final result, net, net Goldman still has $10 billion, but no Congressional oversight--which allows Goldman to pay out to its people huge bonuses for all the, ahem, hard work they have done.

I fully expect that something similar is going to happen when private equity gets involved in the Public-Private-Partnerships. That's why Geithner is so sure more bailout money is going to be needed. The play has already been mapped out. The banks that "fail" the "stress test" will be forced to liquidate mortgage securities at below market rates into the waiting arms of Carlyle Group, etc. Thus, new capital will be needed to prop up these banks. Of course, a bank CEO doesn't have to go along with the program. The Obama Administration today showed there is an option B for those who aren't "doing enough" "quick enough". It's called the Rick Wagoner option. You remember him? He was CEO of GM, once.