Thursday, January 28, 2010

Congress Exposes Potential Profiteering in AIG's Deals

Janet Tavakoli emails a link to her latest:

Yesterday the House released some missing details of the AIG bailout. (Click here to see the unredacted pages of the March 2008 SEC filing.) The public knew that the Fed paid 100 cents on the dollar to AIG's trading counterparties to resolve its credit default swaps, but the details of the assets behind the trades were kept secret.

Plenty of Time to Renegotiate AIG's ContractsThe first bailout of AIG occurred in September 2008 when the FRBNY extended an $85 billion credit line to AIG. By the September 2008 initial bailout, Goldman Sachs had extracted $7.5 billion in collateral from AIG, and other banks that bought Goldman's CDOs also extracted billions from AIG (click here for details).

Goldman CEO Lloyd Blankfein claims he had no idea AIG had trouble producing collateral. I knew AIG was headed for grave trouble more than a year before the September 2008 bailout and raised the issue with both Warren Buffett and JPMorgan Chase CEO Jamie Dimon. Goldman Sachs claims to be superior risk managers, yet asks the public to believe that it was clueless about AIG's distress, even though Goldman itself was a key contributor to it.

Then Treasury Secretary Henry Paulson was CEO of Goldman Sachs at the time it put on these trades with AIG. Lloyd Blankfein was (and remains) CEO of Goldman and was the only Wall Street CEO at one of Paulson's bailout discussions. Stephen Friedman, then Chairman of the NY Fed, also served on Goldman's board.

Details That Could Anger the PublicAn analysis of the previously secret details shows that at the time of the November 2008 buyout, some CDOs had implied prices of around 60 cents on the dollar. Others had implied prices of around 20 cents on the dollar.

Not revealed by the new report is that many of the assets backing some of the CDOs have a high risk of severe or total principal loss (many have actual losses). These CDOs have "cliff risk," as in falling off of one. (There is currently no reliable secondary market, and similar CDOs have traded as low as one penny.) One such CDO is Davis Square IV, a CDO on which French bank Societe Generale bought protection from AIG. The CDO is a poster child for Wall Street's key contribution to a financial crisis that devastated the U.S. economy.

Goldman Sachs created and closed Davis Square IV in April of 2005. The CDO was managed by Trust Company of the West (TCW). (Click here for a list of assets of Davis Square IV from the time period around January 2008). The original portfolio included mortgage-backed securities from Goldman Sachs Alternative Mortgage Products, Merrill, and problem mortgage lenders Countrywide, New Century, Novastar, First Franklin, and Fremont (among others). Assets include home equity loans, midprime loans, subprime loans, and adjustable rate mortgages. The CDO also includes other CDOs.

AIG's Joe Cassano said AIG was basically out of the business of guaranteeing mortgage product at the end of 2005, yet the report shows more than 10% of the CDOs on which AIG sold protection appear to be from 2006, 2007, or 2008. (Around 14% of the CDO tranches are 2006, 2007 or 2008 vintage, but they make up more than one-third or more than $21 billion of the $62.13 billion notional amount purchased by the Fed.) Furthermore, CDOs from 2006 and 2007 are buried within the portfolios backing the original CDOs. For example, TCW traded mortgages from 2006 and 2007 vintages into the portfolio backing Davis Square IV. These "assets" are among the worst of the lot.

CDO managers may disclose conflicts of interest, but a conflict of interest shouldn't mean that new assets "managed" into your portfolio are highly likely to do you harm. TCW and Goldman Sachs had a relationship that benefited TCW, which earned fees from deals like Davis Square IV. Davis Square IV included several tranches of Goldman's Abacus deals, including $53.5 million from 2006. By September 2008, Goldman's CDO, Abacus 2006-12, was already downgraded from AA2 to Ca, a junk rating--it means you are likely to lose your shirt. Another part of this CDO in Davis Square IV's portfolio was downgraded from A3 to Ca. Three of Goldman's slices of Abacus 2006-15 also made their way into Davis Square IV, and they were also all downgraded to Ca, a junk rating, by September 2008.

Among other eyebrow raising assets in Davis Square IV, one finds a CDO called Pinnacle Point Funding 2007-a. This CDO was managed by Blackrock. It closed June 7, 2007, and went into acceleration (not a good sign) on December 13, 2007. Davis Square IV's "investment" was originally rated triple-A. By the time of AIG's September 2008 bailout, it was already downgraded to C, a junk rating, by Moody's. Yet the Fed awarded no-bid contracts to Blackrock to manage the assets it bought from AIG.

Read the rest here.


  1. If they think that bail-out is over, don't bank on it - there's more liability hidden in the ARM closet: Of Mortgage Brokers, ARMs, Attrition and Marathons

  2. Why is this woman wasting brain cells chasing down the minutia of these bailouts? Is she really trying to prove that the information was available for the government to have negotiated a better deal when they were GIVING AWAY TAXPAYERS MONEY?!

    As the great musical philosopher Miles Davis once said: So What!