Mainstream Media Sweeps Lehman Scam Under the Rug

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Lehman Brothers Collapse Scam-- Geithner Up to His Neck

You gotta see this! If this doesn't convince you that the Timothy Geithner knew about the securities shenanigans that were going on at Lehman, than I don't know what will.

Keep in mind, that Geithner ran Lehman through 3 "stress tests" prior to bankruptcy; all of which Lehman failed, and yet, nothing was done. Anton R. Valukas--the examiner who wrote the 2,200 page investigative-report which was released on Thursday-- has provided plenty of information detailing Lehman's “materially misleading” accounting and “actionable balance sheet manipulation.”

In other words, they cooked the books.

Eves Smith at Naked Capitalism sums up what was going on like this:

"Quite a few observers... have been stunned and frustrated at the refusal to investigate what was almost certain accounting fraud at Lehman. ....The unraveling isn’t merely implicating Fuld (Lehman CEO) and his recent succession of CFOs, or its accounting firm, Ernst & Young, as might be expected. It also emerges that the NY Fed, and thus Timothy Geithner, were at a minimum massively derelict in the performance of their duties, and may well be culpable in aiding and abetting Lehman in accounting fraud and Sarbox violations....

We need to demand an immediate release of the e-mails, phone records, and meeting notes from the NY Fed and key Lehman principals regarding the NY Fed’s review of Lehman’s solvency. If, as things appear now, Lehman was allowed by the Fed’s inaction to remain in business, when the Fed should have insisted on a wind-down ..... at a minimum, the NY Fed helped perpetuate a fraud on investors and counterparties.

This pattern further suggests the Fed, which by its charter is tasked to promote the safety and soundness of the banking system, instead, via its collusion with Lehman management, operated to protect particular actors to the detriment of the public at large.

And most important, it says that the NY Fed, and likely Geithner himself, undermined, perhaps even violated, laws designed to protect investors and markets. If so, he is not fit to be Treasury secretary or hold any office related to financial supervision and should resign immediately. (Naked Capitalism)

Repeat: "Accounting fraud", "collusion", "aiding and abetting." These are serious charges by a usually restrained blogger.

And this is from Zero Hedge:

"Lehman has become merely the latest example of all that is broken with today's crony capitalist system.... The evident conclusion is that the core driver of modern capitalist society is fraud at its very core, and nothing short of a massive revolutionary overhaul of the political system, which is the number one defender .. of very lucrative bribes and kickbacks originating from the same rotten Wall Street that (is) nothing but a sham filled with toxic assets" Zero Hedge

This story isn't going away. Someone has to go to jail. It's clear that Geithner acted as the "chief facilitator" of industrial scale securities flim-flam which led directly to the Great Crash of '08. He needs to be held accountable for his actions.

AIG to Pay $100 Million in Bonuses

The American International Group has agreed to cut employee bonuses by $20 million and will distribute about $100 million on Wednesday, according to people with knowledge of the negotiations.

But the reductions may not be enough to appease the company’s critics, who do not accept the company’s argument that it has to honor contracts established before its government bailout.

“A.I.G. has taxpayers over a barrel,” said Senator Charles E. Grassley, an Iowa Republican, in a statement on Tuesday night. “The Obama administration has been outmaneuvered. And the closed-door negotiations just add to the skepticism that the taxpayers will ever get the upper hand.”

A.I.G. first promised the retention bonuses to keep people working at its financial products unit, which traded in the derivatives that imploded in September 2008, leading to the biggest government bailout in history.

The contracts, which were established in December 2007, were intended to keep people from leaving the company and called for the bonuses to be paid in regular installments to more than 400 employees in the unit. The final payment, which was for about $198 million, was due in mid-March, but was accelerated to Wednesday as part of the agreement to reduce its size.

Fearing a firestorm like the one last spring, A.I.G. had been working with the Treasury’s special master for compensation, Kenneth R. Feinberg, on a compromise that would allow it to keep its promise in part, without offending taxpayers.

The agreement calls for employees who still work for the financial products unit to accept 10 percent cutbacks, while employees who have left the company must take 20 percent cuts. Those employees are still entitled to their bonuses under the contract, which adheres to the scheduled payments even if people have lost their jobs. The financial products unit has shed almost 200 people as it has wound down A.I.G.’s derivatives business.

A.I.G. has told all the affected people that if they do not accept the reduced amounts, they will get no bonus at all, according to a person with knowledge of the agreement.

But some people have not agreed to the cutbacks and are insisting on the entire amounts. People with knowledge of the negotiations said that a vast majority of those still employed at A.I.G. had accepted the cuts, but only about a third of the former employees had done so.

The holdouts seem determined to make A.I.G. pay the full contractual amounts, knowing they can make a reasonably good case under law, because A.I.G.’s own lawyers have previously issued an opinion that the contracts are binding. If they succeed, A.I.G. would have to pay them more money at some point in the future, and might even have to pay penalties for breaking its employment contracts.

Who Got Bailed Out by the AIG Bailout?

A key question at the heart of the controversial bailout of AIG is just how much money the government lost. The Federal Reserve and Treasury Department have worked to keep that number secret and to conceal who was on the winning end.

An unredacted document obtained by the Huffington Post shows the damage in detail.

The list was produced as part of a congressional investigation led by the House Oversight and Government Reform Committee into the federal bailout of AIG.

The Federal Reserve Bank of New York, then led by now-Treasury Secretary Tim Geithner, purchased a slew of souring assets from the world's biggest banks for 100 cents on the dollar in November 2008. A scathing report by a government watchdog held Geithner responsible for the overpayments.

The New York Fed initially pressured AIG to keep the list hidden from investors, regulators and the public. When it was eventually filed with the Securities and Exchange Commission, the SEC allowed the Fed and AIG to keep the details secret. A heavily-redacted version was made public last March.

The document is part of 250,000 pages of internal documents on the AIG deliberations subpoenaed by the oversight committee. It lists the toxic mortgage bonds that banks insured through AIG.

Those insurance contracts, called credit default swaps, are what the New York Fed ultimately took off AIG's books, paying the banks 100 cents on the dollar for toxic mortgage bonds -- home mortgages that were bundled together and securitized. The banks could never have gotten anywhere near such a generous deal on the open market, so the move served essentially as a direct subsidy to those banks from taxpayers.

Up until now, taxpayers had no way to know exactly what they owned. They knew they owned a certain amount of assets, but none of the details: which bundles of mortgages it purchased from AIG; how the banks were valuing those mortgages; how much collateral they had demanded from AIG on those securities; or which bank bundled those mortgages into securities.

Rep. Darrell Issa of California, the top ranking Republican on the oversight committee, told HuffPost that he was not persuaded by government and Fed arguments that the transactions should be kept secret.

"Just because the government happens to own the bonds, which means--by the way, they don't have to be sold at all until they are worth what we want them to be worth--that somehow they have to be kept a secret," Issa said during a break in the today's AIG oversight hearing, where Treasury Secretary Tim Geithner testified about his role in the bailout as then-head of the New York Fed.

Issa said that the public had a right to see the document. "I mean, think about it: What the government owns it can keep as long as it wants. It would be like saying you can't appraise federal land. Why? It is one of those things that's outrageous. We know we paid a hundred percent for them. We know who got the money. This document shows who ultimately were the beneficiaries. And we believe since that they've asked to have it locked up until 2018 - and nobody today defended that--that it's time to release that," Issa said.

"The way the AIG bailout was engineered was to specifically benefit Goldman Sachs and its trading partners," said Janet Tavakoli, a Chicago-based derivatives expert and founder of Tavakoli Structured Finance. "Goldman's past and present officers used crony capitalism to put their own interests ahead of the public.

"The suppression of the details of the [credit default swap] trades protected Goldman Sachs and its trading partners," said Tavakoli, who's examined Goldman's credit default swap arrangements with AIG. "The $182 billion bailout overall kept AIG alive, and its trading partners, including Goldman Sachs, benefited from the funds made available to the securities lending transactions and other subsequent trading transactions."

Goldman's bonds -- now owned by taxpayers -- are presently worth just 75 cents on the dollar, according to the influential financial blog Zero Hedge.

Very Suspicious Behavior from the Fed Regarding AIG Transactions

Bloomberg reports the lengths to which the Fed has gone to try to keep the details of Maiden Lane III, the entity created to buy drecky CDOs from AIG counterparties who received 100% credit default swap payouts.

Get a load of this, the Fed was arguing that info IN THE PUBLIC DOMAIN should be treated as confidential! The Ministry of Truth in action:

After media reports that month named some of AIG’s counterparties, AIG executives wrote a draft of a letter to the SEC saying that it intended to withdraw its January request for confidential treatment. Later that March, the New York Fed sent edited versions of another request for confidentiality and provided arguments to help AIG make the case. The SEC granted confidential treatment in May of 2009.

This whole affair puts the Fed in a bad light indeed. The article details how the AIG, pushed by the Fed, made four efforts with the SEC to get information regarding the AIG payouts and Maiden Lane III purchases redacted. AIG seems reluctant, and the SEC, to its credit, did not roll over (although one can argue it in the end conceded too much ground).

And the arguments made by the Fed are rubbish:

On March 5, 2009, Fed Vice Chairman Donald Kohn testified before Congress that disclosure of the counterparties’ names would harm the insurer’s ability to do business. That month, AIG executives told regulators they had no objection to disclosing counterparty names

Yves here. So let’s be clear, the Fed lied to Congress. If there was the potential for this disclosure to damage AIG, they’d be the first to be keen for any excuse to preserve confidentiality.

Geithner’s Fed Told AIG to Limit Swaps Disclosure

Outrageous:

The Federal Reserve Bank of New York, then led by Timothy Geithner, told American International Group Inc. to withhold details from the public about the bailed-out insurer’s payments to banks during the depths of the financial crisis, e-mails between the company and its regulator show.

AIG said in a draft of a regulatory filing that the insurer paid banks, which included Goldman Sachs Group Inc. and Societe Generale SA, 100 cents on the dollar for credit-default swaps they bought from the firm. The New York Fed crossed out the reference, according to the e-mails, and AIG excluded the language when the filing was made public on Dec. 24, 2008. The e-mails were obtained by Representative Darrell Issa, ranking member of the House Oversight and Government Reform Committee.

The New York Fed took over negotiations between AIG and the banks in November 2008 as losses on the swaps, which were contracts tied to subprime home loans, threatened to swamp the insurer weeks after its taxpayer-funded rescue. The regulator decided that Goldman Sachs and more than a dozen banks would be fully repaid for $62.1 billion of the swaps, prompting lawmakers to call the AIG rescue a “backdoor bailout” of financial firms.

“It appears that the New York Fed deliberately pressured AIG to restrict and delay the disclosure of important information,” said Issa, a California Republican. Taxpayers “deserve full and complete disclosure under our nation’s securities laws, not the withholding of politically inconvenient information.”

AIG executive resigns over pay limits

Good riddance:

NEW YORK, Dec 30 (Reuters) - A top executive at American International Group Inc (AIG.N) has resigned because of pay curbs imposed by the Obama Administration's pay czar, the insurer said on Wednesday.

Anastasia Kelly, AIG's vice chairman for legal, human resources, corporate affairs and corporate communications, resigned effective Dec. 30 for "good reason" and is eligible for severance pay under the terms of the company's executive severance plan, the insurer said.

Kelly stands to be paid about $2.8 million in severance, according to a source familiar with the matter.

Kelly's resignation comes after Kenneth Feinberg, who is charged with monitoring pay levels at companies that received taxpayer funds, imposed pay caps for AIG's top executives.

Earlier this month, Feinberg set the compensation structures for the 26th through 100th highest-paid employees at four firms, including AIG, limiting most cash salaries to $500,000.

Feinberg also granted less than a dozen special exemptions from the cash salary cap, including several AIG executives, after being urged to do so by Federal Reserve and Treasury officials.

AIG Scam New Customers by Using a Fake Name

Just months after dropping the telltale “A.I.G.” from its sales brochures, the company has leapfrogged its competitors and reclaimed a title it held for many years before its bailout — the top seller of fixed annuities to bank customers.

People buying the annuities in bank branches may be surprised to know they are signing up with A.I.G. The contracts are being offered under the names of two subsidiaries, Western National Life and First SunAmerica. Until last June, they carried the name of A.I.G. Annuity.

The booming annuity sales are a bright spot for American International Group, which must raise cash to pay back the federal government.

But some competitors and consumer advocates are questioning A.I.G.’s comeback, saying its ability to keep drawing federal money is giving it an unfair advantage just a year after its government rescue.

Often sold as alternatives to certificates of deposit, fixed annuities are insurance contracts that guarantee a set rate of return, unlike variable annuities, whose returns may track the ups and downs of the markets.

The people who buy them in banks tend to be looking for something safe, but which pays more than a certificate of deposit. Fixed annuity contracts usually run for many years, and even before A.I.G.’s bailout last year, its customers began to have qualms about tying up their money with a company whose future was uncertain.

"Fresh Pay Skirmish Erupts at AIG"

Cry me a river...

Five high-ranking executives at American International Group Inc. said last week they were prepared to quit if their compensation is cut significantly by the insurer's government overseers, according to people familiar with the matter.

The threat is the latest in the running fracas between AIG and the government's compensation czar, Kenneth Feinberg, who is charged with setting pay limits for top executives at companies receiving the most federal bailout money.

The AIG executives who notified the company they were prepared to resign include its general counsel, Anastasia Kelly, and the heads of some of its largest insurance businesses.

AIG Posts Profit of $455 Million

Bailed out insurance giant AIG on Friday announced a profit of 455 million dollars in the third quarter, a massive turnaround from a 24.4 billion dollar loss in the same period last year.

The earnings from group, the largest recipient of US government aid during the financial crisis, were better than expectations.

Excluding special items, the profit was 2.85 dollars per share, compared with a market forecast of 1.98 dollars per share.

It was the second consecutive quarterly profit for American International Group after the prior quarter's earnings of 1.8 billion dollars.

"Our results reflect continued stabilization in performance and market trends," said AIG president and chief executive Robert Benmosche.

"AIG employees are working to preserve the strength of our insurance businesses in a challenging market by working closely with our distribution partners, with third quarter 2009 showing signs of stabilization."

AIG was the largest single recipient of US bailouts with the government pumping more than 170 billion dollars into the firm to keep it afloat and taking a controlling stake in the group in the process.

Once the world's biggest insurer, AIG was on the brink of bankruptcy in September 2008 when the government offered a financial lifeline in exchange for an 80 percent stake in the company.

The company was in trouble after backing trillions of dollars in risky financial products amid a US home mortgage meltdown that triggered a global financial crisis.

The latest quarterly figures showed revenues fell 11.8 percent to 26 billion dollars as AIG sold off some or wound down of its operations.

AIG said it "continues to make progress on its disposition plan," having entered into agreements to sell or completed the sale of operations and assets to generate a total of 5.6 billion dollars.

A government report in September showed AIG still owed nearly 121 billion dollars in taxpayer aid.

The Government Accountability Office, an investigative arm of Congress, said the ultimate success of AIG?s restructuring and repayment efforts remains "uncertain."

Can we get some of our money back now? Though clearly they have a long way to go to pay it all back.

Goldman Sachs: Pure Evil

Somebody fucking needs to go to jail:

WASHINGTON — In 2006 and 2007, Goldman Sachs Group peddled more than $40 billion in securities backed by at least 200,000 risky home mortgages, but never told the buyers it was secretly betting that a sharp drop in U.S. housing prices would send the value of those securities plummeting.

Goldman's sales and its clandestine wagers, completed at the brink of the housing market meltdown, enabled the nation's premier investment bank to pass most of its potential losses to others before a flood of mortgage defaults staggered the U.S. and global economies.

Only later did investors discover that what Goldman had promoted as triple-A rated investments were closer to junk.

Now, pension funds, insurance companies, labor unions and foreign financial institutions that bought those dicey mortgage securities are facing large losses, and a five-month McClatchy investigation has found that Goldman's failure to disclose that it made secret, exotic bets on an imminent housing crash may have violated securities laws.

"The Securities and Exchange Commission should be very interested in any financial company that secretly decides a financial product is a loser and then goes out and actively markets that product or very similar products to unsuspecting customers without disclosing its true opinion," said Laurence Kotlikoff, a Boston University economics professor who's proposed a massive overhaul of the nation's banks. "This is fraud and should be prosecuted."

The House of Representatives Latest Attempt to Reform Banking (Derivatives)

It mostly shows how evil and corrupt they are.

"AIG Shares at it Again. Up 33%"

The retail investors seem hot and bothered over AIG shares today. They’re up more than 33% just after noon. AIG has been on a tear since Aug. 5, when its shares jumped 63%. Volume surged by 1600%, to 134.9 million from the prior day’s 7.9 million. (No typo.) We still don’t know exactly what stoked flood of interest, although the conventional wisdom was that a short-squeeze and retail-led pile on ahead of AIG’s earnings got it going. Since AIG’s Aug. 4 closing low, the government-controlled insurer is up about 150% just before noon today.

There was a little news on the company that might explain some of the renewed attention to the shares. For instance, AIG named a couple executives for its U.S.-based life insurance and retirement services businesses. But that was part of an ongoing leadership reshuffle, and it hardly seems important enough to drive the shares up to where they are.

The only other thing we can find is a Bloomberg interview with AIG’s recently named CEO Robert Benmosche. The money quote: “We believe we will be able to pay back the government and we hope we will be able to do something for our shareholders as well.” Not exactly a hugely reassuring comment for shareholders.

Just one note of contrarian context on the AIG share surge. A 150% move in a couple weeks seems impressive. But don’t forget that the company’s stock underwent a 1-for-20 reverse split in early July. Applying that algebra to AIG’s shares at their recent peak in September 2008 would have made one share worth $455.20. From that perspective, AIG long-term stock chart is still decidedly ski jump-shaped, with shares having lost roughly 93% of their value.

A Very Reasonable Proposal from the NYTimes

Fearing the whole financial system could collapse, the government loaned A.I.G. $85 billion, which it used to pay off more than a dozen big banks that were on the other side of those derivatives trades.

The banks may have needed the money, but they certainly didn’t deserve it. They knew or should have known the risks they were taking when they did business with the highflying A.I.G. But they were paid up anyway because it was believed that widespread failures would be costlier to the economy than the cost of the bailout.

Goldman Sachs got $12.9 billion. Deutsche Bank got $11.8 billion. Bank of America got $5.2 billion, Morgan Stanley $1.2 billion and JPMorgan Chase $400 million, and so on. Since then, the government’s commitment to A.I.G. has swelled to $173 billion.

Now, to try to repay some of the bailout money, A.I.G., which is nearly 80 percent owned by the government, is selling off some units and planning initial public offerings in others. And according to a recent analysis by The Wall Street Journal, several of the banks that were paid off in the first go-round, together with lawyers and accountants, could collect close to $1 billion in advisory and underwriting fees to move those efforts along. (snip)

It seems safe to say that a reasonable person would find that galling. When it comes to A.I.G., the big banks have clearly already got theirs. Now they get more? A.I.G. must be restructured for taxpayers to have a shot at recouping some of the bailout billions.

Jail for AIG executives would be better, and the govt taking over AIG's assets completely-- but, this is better than the status quo.

The Outrageous Never-Ending Goldman-Sachs Scams

High Frequency Trading:

... large brokers and funds can buy and sell a stock for the same price and still make 0.5 cents. Do that a million times a day and the money adds up. Or maybe do it 8 billion times. It requires powerful computers, complicity of the exchanges (because the exchanges get paid a lot), and highly proximate computer connections. Literally, the need for speed is so important that to play this game you have to have your servers physically at the exchange. Across the river in New Jersey is too slow. Forget Texas or California. This is a game played out in microseconds.

More on Goldman-Sachs and HFT here.

Scamming TARP and other outrageousness:

“During the week of the AIG bailout alone, Mr. Paulson and [Goldman Sachs CEO Lloyd] Blankfein spoke two dozen times … far more frequently than Mr. Paulson did with other Wall Street executives,” the Times reports.

The revelation is sure to fuel further claims that the $700-billion Troubled Assets Relief Program, or TARP, passed by Congress last fall with the support of both major presidential candidates, Barack Obama and John McCain, was “gamed” by Paulson in order to help out his colleagues at Goldman — and preserve his own reputation, which he made as the bank’s CEO.

Paulson spoke with Goldman’s CEO in an official capacity a total of 26 times before the treasury secretary was granted an “ethics waiver” that allowed him to be in far closer contact with his former employer than would have otherwise been allowed, Reuters notes.

In the five days after Paulson received his “waiver,” on Sept. 16, 2008, he spoke with Goldman’s Blankfein another 24 times.

But Paulson may have done more than help his former employer get bailed out of bad debts — he may have helped orchestrate the demise of his former employer’s competitors.

“Indeed, Mr. Paulson helped decide the fates of a variety of financial companies, including two longtime Goldman rivals, Bear Stearns and Lehman Brothers, before his ethics waivers were granted,” the Times writes.

Greenberg Fined

The former top executive of embattled insurance giant AIG, Maurice “Hank” Greenberg, agreed to pay 15 million dollars to settle accounting fraud charges, US authorities said Thursday.

The Securities and Exchange Commission said Greenberg, chairman and chief executive at AIG before its spectacular meltdown, will pay disgorgement and penalties to settle a probe into “numerous improper accounting transactions that inflated AIG’s reported financial results between 2000 and 2005.”

The company’s former chief financial officer Howard Smith meanwhile will pay 1.5 million dollars to settle related charges, the SEC said in a statement.

The SEC said it filed the charges and settlement in US District Court for the Southern District of New York.

Greenberg, 84, had led the American International Group for four decades before he was ousted amid an accounting probe in March 2005, ahead of the near collapse of the insurance behemoth during a global financial crisis stemming from a US home mortgage meltdown.

It was taken over by the US government last year in a massive 170-billion-dollar bailout.

The SEC alleged that Greenberg and Smith were responsible for “material misstatements that enabled AIG to create the false impression that the company consistently met or exceeded key earnings and growth targets.”

The SEC had charged AIG in 2006 with securities fraud and improper accounting, and the company had settled the charges by paying disgorgement of 700 million dollars and a penalty of 100 million dollars, among other remedies.

“Without admitting or denying the SEC’s allegations,” Greenberg and Smith had consented to a judgment directing them to pay the penalties, the SEC said.

The Fed: A Never-Ending Rip-Off Conducted in Secrecy

Eliot Spitzer: Federal Reserve is ‘a Ponzi scheme, an inside job’:

The Federal Reserve — the quasi-autonomous body that controls the US’s money supply — is a “Ponzi scheme” that created “bubble after bubble” in the US economy and needs to be held accountable for its actions, says Eliot Spitzer, the former governor and attorney-general of New York.

The war being waged on the TARP watchdog's independence:

Neil Barofsky, the chief watchdog over the $700 billion TARP bank bailout program, is one of those rare creatures in Washington: he takes very seriously his responsibilities of independent oversight and accountability. (snip) But ever since he was appointed to head the oversight office created by Congress when it enacted TARP -- an office designed to ensure transparency and accountability at the Treasury Department and in the banking industry -- he has repeatedly clashed with Obama's Treasury officials over their lack of transparency in how the trillions of dollars in TARP-related funds are being sent to and used by the banking industry. (snip) Last week, he issued a report documenting that the actual amount of taxpayer money theoretically put at risk in the bank bailout -- once Federal Reserve, FDIC and other programs are counted -- is $23.7 trillion, not the widely cited figure of $700 billion, a report that prompted attacks from the White House and Treasury on his credibility. Separately, Barofsky has continuously disputed White House claims that it's impossible to account for what has been done by banks with the TARP funds. (snip)

Most significant of all, and obviously due to Barofsky's truly independent oversight efforts, the Obama administration is now attempting to induce the Justice Department to issue a ruling that Barofsky's office is not independent at all -- but rather, is subject to, and under the supervision of, the authority of Treasury Secretary Tim Geithner. By design, such a ruling would completely gut Barofsky's ability to compel transparency and exercise real oversight over how Treasury is administering TARP, since it would make him subordinate to one of the very officials whose actions Congress wanted him to oversee: the Treasury Secretary's.

The Insider's Vew on AIG-FP: Joseph Cassano as the Bogeyman

Long piece in Vanity Fair by Michael Lewis "The Man Who Crashed the World"-- the title refers to Joseph Cassano.

What’s interesting is their point of view on the event closest to the center of the financial crisis. For while they disagreed on this and that, they all were fairly certain that if it hadn’t been for A.I.G. F.P. the subprime-mortgage machine might never have been built, and the financial crisis might never have happened.

snip

In a financial system that was rapidly generating complicated risks, A.I.G. F.P. became a huge swallower of those risks. In the early days it must have seemed as if it was being paid to insure against events extremely unlikely to occur—how likely was it that all sorts of companies and banks all over the globe would go bust at the same time? Its success bred imitators: Zurich Re F.P., Swiss Re F.P., Credit Suisse F.P., Gen Re F.P. All of these places were central to what happened in the last two decades; without them the new risks being created would have had no place to hide, but would have remained in full view of bank regulators. All of these places have been washed away by the general nausea now felt in the presence of complicated financial risks, but there was a moment when their existence seemed cartographically necessary to the financial world. And A.I.G. F.P. was the model for them all.

snip

...the people who worked at A.I.G. F.P. got rich. Exactly how rich is hard to say, but there are plenty of hints. One is that a company lawyer—a mere lawyer!—took home a $25 million bonus at the end of one year. Another is that in 2005, when Howard Sosin and his wife divorced, she received more than $40 million of an estate valued at $168 million—and Sosin had left A.I.G. in 1993, receiving $182 million from the company! He had been replaced that year as C.E.O. by a gentler soul named Tom Savage, who had allowed Hank Greenberg to take some of the sugar out of F.P., but even then the small band of traders had, arguably, a sweeter deal than any money managers in the world. The typical hedge fund kept 20 percent of profits; the traders at A.I.G. F.P. kept 30 to 35 percent. The typical hedge fund or private-equity fund has to schlep around and raise money all the time, and post collateral with big Wall Street firms for all the trades they do. The traders at A.I.G. F.P. had essentially unlimited capital on tap from the parent company, along with the AAA rating, rent-free. For the people who worked there, A.I.G. F.P. was a financial miracle. They were required to leave 50 percent of their bonuses in the company, but they were happy to do so; many of them, viewing it as the best way to grow their own savings, invested far more than the minimum back in the company. When it collapsed, the employees lost more than $500 million of their own money.

How and why their miracle became a catastrophe, A.I.G. F.P.’s traders say, is a complicated story, but it begins simply: with a change in the way decisions were made, brought about by a change in its leadership. At the end of 2001 its second C.E.O., Tom Savage, retired, and his former deputy, Joe Cassano, was elevated. Savage is a trained mathematician who understood the models used by A.I.G. traders to price the risk they were running—and thus ensure that they were fairly paid for it. He enjoyed debates about both the models and the merits of A.I.G. F.P.’s various trades. Cassano knew a lot less math and had much less interest in debate.

snip

Across A.I.G. F.P. the view of the boss was remarkably consistent: a guy with a crude feel for financial risk but a real talent for bullying people who doubted him. “A.I.G. F.P. became a dictatorship,” says one London trader. “Joe would bully people around. He’d humiliate them and then try to make it up to them by giving them huge amounts of money.”

snip

Even by the standards of Wall Street villains, whose character flaws wind up being exaggerated to fit the crime, Cassano was a cartoon despot.

Oddly, he was as likely to direct his anger at profitable traders as at unprofitable ones—and what caused him to become angry was the faintest whiff of insurrection.

snip

Who put a man like Joe Cassano in charge of such an enterprise as A.I.G. F.P.? The simple answer is Hank Greenberg, the C.E.O. of A.I.G.; the more complicated one is A.I.G. F.P.’s board, consisting of many smart people, including Harvard economist Martin Feldstein. “Tom Savage proposed Joe to replace him,” says Greenberg, “and we had no reason to think he wasn’t able to do the job.”

A.I.G. F.P.’s employees for their part suspect that the only reason Greenberg promoted Cassano was that he saw in him a pale imitation of his own tyrannical self and felt he could control him. “So long as Greenberg was there, it worked,” says one trader, “because he watched everything Joe did.

snip

...the guy who had the most invested in A.I.G. F.P. was Joe Cassano. Cassano had been paid $38 million in 2007, but left $36.75 million of that inside the firm. His financial interest in A.I.G. F.P. struck those who worked for him as secondary to his psychological investment: the firm was, by all accounts, Cassano’s sole source of self-worth, its success his lone status symbol. He wore crappy clothes, drove a crappy car, and spent all of his time at the office. He had made huge piles of money ($280 million!), but so far as anyone could tell he didn’t spend any of it. “Joe wasn’t a trader and now he wasn’t a risktaker, in his personal life,” says one of the traders. “With the money he didn’t have in the company he bought Treasury bonds.” He had no children, no obvious social ambition; his status concerns seemed limited to his place in the global financial order. He entertained a notion of himself as the street-smart guy who had triumphed over his social betters—which of course implied that he wasn’t quite sure that he had. “Joe had Goldman envy,” one trader tells me—which was strange, as Cassano’s brother and sister both worked for Goldman Sachs. “His whole life was F.P.,” another trader says. “Without F.P. he had nothing.” That was another reason, in addition to fear, that the highly educated, highly intelligent people who worked for Joe Cassano were slow to question whatever he was doing: he was the last person, they assumed, who would blow the place up.

snip

...Wall Street firms packaging the loans into bonds had found someone to insure against what turned out to be the rather high risk that they’d go bad: Joe Cassano.

A.I.G. F.P. was already insuring these big, diversified, AAA-rated piles of consumer loans; to get it to insure subprime mortgages was only a matter of pouring more and more of the things into the amorphous, unexamined piles. They went from being 2 percent subprime mortgages to being 95 percent subprime mortgages. And yet no one at A.I.G. said anything about it—not C.E.O. Martin Sullivan, not Joe Cassano, not Al Frost, the guy in A.I.G. F.P.’s Connecticut office in charge of selling his firm’s credit-default-swap services to the big Wall Street firms. The deals, by all accounts, were simply rubber-stamped by Cassano and then again by A.I.G. brass—and, on the theory that this was just more of the same, no one paid them special attention. It’s hard to know what Joe Cassano thought and when he thought it, but the traders inside A.I.G. F.P. are certain that neither Cassano nor the four or five people overseen directly by him, who worked in the unit that made the trades, realized how completely these piles of consumer loans had become, almost exclusively, composed of subprime mortgages.

snip

The A.I.G. F.P. executives present were shocked by how little actual thought or analysis seemed to underpin the subprime-mortgage machine: it was simply a bet that U.S. home prices would never fall.

snip

What no one realized was that it was too late. A.I.G. F.P.’s willingness to assume the vast majority of the risk of all the subprime-mortgage bonds created in 2004 and 2005 had created a machine that depended for its fuel on subprime-mortgage loans. “I’m convinced that our input into the system led to a substantial portion of the increase in housing prices in the U.S. We facilitated a trillion dollars in mortgages,” says one trader. “Just us.” Every firm on Wall Street was making fantastic sums of money from this machine, but for the machine to keep running the Wall Street firms needed someone to take the risk.

snip

What no one realized is that Joe Cassano, in exchange for the privilege of selling credit-default swaps on subprime-mortgage bonds to Goldman Sachs and Merrill Lynch and all the rest, had agreed to change the traditional terms of trade between A.I.G. and Wall Street. In the beginning, A.I.G. F.P. had required its counter-parties simply to accept its AAA credit: it refused to post collateral. But in the case of the subprime-mortgage credit-default swaps, Cassano had agreed to several triggers, including A.I.G.’s losing its AAA credit rating, that would require the firm to post collateral. If the value of the underlying bonds fell, it would fork over cash, so that, for instance, Goldman Sachs would not need to be exposed for more than a day to A.I.G. Worse still, Goldman Sachs assigned the price to the underlying bonds—and thus could effectively demand as much collateral as it wanted. In the summer of 2007, the value of everything fell, but subprime fell fastest of all. The subsequent race by big Wall Street banks to obtain billions in collateral from A.I.G. was an upmarket version of a run on the bank. Goldman Sachs was the first to the door, with shockingly low prices for subprime-mortgage bonds—prices that Cassano wanted to dispute in court, but was prevented by A.I.G. from doing so when he was fired. A.I.G. couldn’t afford to pay Goldman off in March 2008, but that was O.K. The U.S. Treasury, led by the former head of Goldman Sachs, Hank Paulson, agreed to make good on A.I.G.’s gambling debts. One hundred cents on the dollar.

snip

Joe Cassano was the perfect man for these times—as responsible for a series of disastrous trades as a person in a big company can be. He discouraged the dissent of subordinates who understood them better than he did. He acted with the approval of A.I.G., but he also must have known that A.I.G. wasn’t able to evaluate his trades. Once he was persuaded to stop insuring subprime-mortgage bonds, the logical course of action was to reverse the deals he had already done. In 2006 he might have found a way to do this, if he had been willing to accept the costs involved, but he wasn’t. Had he been, the machine he helped to create would have kept running—by then it had a life of its own—and the losses would have simply wound up more concentrated inside the big banks. But he’d have saved his company....

And yet the A.I.G. F.P. traders left behind, much as they despise him personally, refuse to believe Cassano was engaged in any kind of fraud. The problem is that they knew him. And they believe that his crime was not mere legal fraudulence but the deeper kind: a need for subservience in others and an unwillingness to acknowledge his own weaknesses.

For what this is worth-- the insiders claim no fraud, just mismanagement. Surprise. Because if there was fraud, then they would be complicit too.

Obama Admin Has Plans to Make Large Financial Companies Easier to Dis-Assemble

They are the biggest of the big — the Citigroups, the Goldman Sachses, the AIGs and other financial behemoths. The Obama administration doesn't want so many around anymore.

Financial regulations proposed by the president would result in leaner and simpler institutions that don't carry the weight of the system on their marble columns.

Around Washington and Wall Street they have come to be known as TBTF — too big to fail. It's not just size, though. These companies are so far-flung, so intertwined and so precariously leveraged that a single one's collapse can create systemwide tremors that imperil the finances of millions of Americans.

AIG Bailout Details

AIG
Bailout: $69,835,000,000 Returned: $0

10.8%	of all bailout funds committed.
94.1%	of the Insurance Company industry bailout.

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On four separate occasions, the government has offered aid to AIG to keep it from collapsing, rising from an initial $85 billion credit line from the Federal Reserve to what is now a combined $180 billion commitment between the Treasury ($69.84 billion) and Fed ($110 billion). The green number above only reflects Treasury's commitment, since those are taxpayer dollars.

As of June 17, the Treasury and the Fed have lent or invested a total of $122.5 billion in AIG. The Fed has extended $82.5 billion in aid to AIG, according to its June 17, 2009, balance sheet. And though the Treasury has committed up to $69.84 billion, only $40 billion of that has actually been invested.

Via.