Tuesday, March 03, 2009

Potential big story?

Here's the full post at But Then What:
AIG: Can We Get Some Transparency Here?

You know that somethings rotten in Denmark when the editorial pages of the Wall Street Journal and the New York Times agree on something. That cats laying down with dogs event occurred today and it was prompted by the latest bailout of AIG.

Both newspapers opined that it was past high time for the government to come clean as to who we were actually bailing out. You see, the government keeps saying that AIG is systemically important and dollars keep flowing out of the company to make good on various credit default swaps contracts that the company entered into but no one will say to whom this money is flowing.

The Fed and the Treasury are stonewalling and, of course, conspiracy stories are starting to swirl. One holds that Goldman has been one of the chief beneficiaries of the bailout. Goldman naturally denies that and says that although they bought a lot of protection, they were able to hedge their exposure. Another and probably more on the mark theory is that the money is flowing to European banks who were big AIG customers.

If it is the European banks then that one is going to be embarrassing to say the least. The taxpayer is pretty fed up with supporting U.S. banks. If they get wind of a scheme to use their dollars to prop up European banks look out. I wouldn’t want to try and explain the intricacies of international finance and inter-dependency to them.

Regardless of to whom the money has been directed, I suspect that the pressure to open up about it is going to get pretty intense. Clearly there’s something here the government doesn’t want to have to deal with otherwise they wouldn’t be so tight lipped. The problem is that you can never keep a lid on this sort of thing. Look for the leaks soon.
Here's my thought: The money is going to the European banks. But to a significant degree, the money the European banks were playing with was from the oil-rich Middle East. If that can be proved, can you imagine the furor over giving money to AIG which flows through to European banks in order to make whole a bunch of wealthy Arab potentates.


This article gives a hint what the Fed is up to through AIG and the Maiden Lane corporations.

"Maiden Lane III already has agreed to buy CDOs with a total principal amount of about $53 billion, AIG says.

Those deals have led to the termination of $46 billion in CDS arrangements and should lead to the termination of $74 billion in CDS arrangements, AIG says."

So Maiden Lane III buys the toxic asset from the counterparties with the deal that the counterparties then cancel the credit default swap they hold against AIG. According to Kohn yesterday:

"The New York Reserve Bank made a secured, non-recourse loan in the amount of $24.3 billion to another special purpose limited liability company (Maiden Lane III). Maiden Lane III then purchased, at market prices, multi-sector collateralized debt obligations with a par value of approximately $62 billion from credit default swap counterparties of Financial Products in return for the agreement of the counterparties to terminate the credit default swaps. AIG provided $5 billion in equity to Maiden Lane III to absorb future losses on the CDOs held by Maiden Lane III."

So these purchases of CDOs were not on par, but AIG is still providing cash to make sure that the two Maiden Lanes set up to deal with its problems lose no money (as is required by law). It was creative accounting like this that led to the $61 billion loss by AIG in its fourth quarter last year.

By Blogger bolo, at 3/06/2009 8:19 AM  

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By Anonymous Anonymous, at 3/06/2009 7:38 PM  

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