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Paulson led bailout of AIG; saved $20 billion for Goldman Sachs
Sunday, September 28, 2008, 10:47 PM
This is another astounding article by the very respectable Gretchen Morgenson of the NY Times.
It is astounding because of all that is revealed in the opening paragraphs.
Two weeks ago, the nation’s most powerful regulators and bankers huddled in the Lower Manhattan fortress that is the Federal Reserve Bank of New York, desperately trying to stave off disaster.
As the group, led by Treasury Secretary Henry M. Paulson Jr., pondered the collapse of one of America’s oldest investment banks, Lehman Brothers, a more dangerous threat emerged: American International Group, the world’s largest insurer, was teetering. A.I.G. needed billions of dollars to right itself and had suddenly begged for help.
The only Wall Street chief executive participating in the meeting was Lloyd C. Blankfein of Goldman Sachs, Mr. Paulson’s former firm. Mr. Blankfein had particular reason for concern.
Although it was not widely known, Goldman, a Wall Street stalwart that had seemed immune to its rivals’ woes, was A.I.G.’s largest trading partner, according to six people close to the insurer who requested anonymity because of confidentiality agreements. A collapse of the insurer threatened to leave a hole of as much as $20 billion in Goldman’s side, several of these people said.
Days later, federal officials, who had let Lehman die and initially balked at tossing a lifeline to A.I.G., ended up bailing out the insurer for $85 billion.
To recap:
- Only one Wall Street executive was in the war room, and he was from Goldman Sachs (GS), the firm Paulson headed up before becoming Treasury Secretary.
- Lehman, with whom GS did not have an overly large trading position, was allowed to go under.
- AIG, with whom GS did have a large position, was handed an $85 billion handout.
Even if you don't ascribe to all of this as a looting operation (which I do), hopefully you can allow that perhaps this doesn't look too good from an appearances standpoint.
At this point I think we're going to have to admit that, at times like these, the revolving door between Wall Street and the Treasury Department is too laden with conflicts of interest to be considered a good idea.
9 Comments
Mon, Sep 29, 2008 - 1:07am
#1
Wow.
Let's play Grand Theft America.
Mon, Sep 29, 2008 - 6:13am
#2
An exemplary "government-business partnership"
And it was bipartisan, Chris.
What could possibly be wrong with that? 
Mon, Sep 29, 2008 - 7:37am
#3
Bailout Plan Conference Call
Beyond UFB! On a crony conference call last night, Paulson explained that the "tranches" of $350 billion are just a smokescreen -- he can draw down the whole $700 bil tomorrow morning -- this is just a fig leaf for the suckers, errrr, "voters."
Moreover, he admitted that the system isn't going to fall apart this week and cause that overnight loss of "3 million jobs" that Bonesman Kerry was fantasizing about. In fact, his real intention was to wait "a few weeks" (meaning, till after the KongressKlown election) to start greasing the palms of his cronies ... when no adults are even in town to stop his homies from raiding the liquor cabinet, then taking dad's Thunderbird for a drunken joyride.
This is so cynically corrupt that it turns the stomach. However, Ms. Market seems to be saying, "I see your $700 billion, and raise you to $7 trillion."
OOPS! Take my word for it -- there ain't that much cash on the whole planet. And there isn't time to print it before the NYSE opens.
Needless to say, I am loony-tunes, "psychotic break" bearish. The End of Money is nigh!
SCHOOL'S OUT FOREVER!!!!
ah hahahahahahaha mwa hahahahaa ah ha ha ha hhhhaaaaaaa hhhaaaaaaaaaaaaaaaa ..............
Mon, Sep 29, 2008 - 7:59am
#4
re: Bailout Plan Conference Call
Where did you hear this? Any links?
I am not surprised in the least. One does not become the head of GS without being ruthlessly dedicated to greed and cronyism. I imagine it is hard to shuck those long-developed attributes after briefly stepping into a public role.
And, since he knows as well as we do that the writing is on the wall, why not have it be your friends who can grab the last remaining loot from the system?
Somebody is going to and it might as well be your folks, right?
Mon, Sep 29, 2008 - 8:02am
#5
Appearances are everything
Chris,
You mentioned "Even if you don't ascribe to all of this as a looting operation (which I do), hopefully you can allow that perhaps this doesn't look too good from an appearances standpoint."
I work in the 'police business', and EVERYTHING in the world is about appearances! Perspective IS reality! What you and I see is what we believe, and if we are provided with the right viewpoint from the right people, we see what they want us to see, and thus - believe. I suspect that it was never the intention of this particular insider group that you ever 'see' what happened here, never mind share it with the world! This site, and others like it are the keys to seeing the world for what it is. Until we all start to see things from an educated point of view, instead of buying into the tripe being fed to us by the electorate, the looting will continue. Unfortunately, these thefts are becoming more grandiose and blatant in scope and the sales methods are very effective. The sheeple need to return to a sense of community and take back control of their lives. Germany suffered many of the same political pressures in the not-so-distant past, and the results scarred a world. I suspect that those folks never banked on what came of that little run for power any more than the US population wants what's coming now - but then:
"But, after all, it is the leaders of the country who determine the policy and it is always a simple matter to drag the people along, whether it is a democracy or a fascist dictatorship or a Parliament or a Communist dictatorship." - Hermann Goering
Mon, Sep 29, 2008 - 8:12am
#6
Securities Housing Investment Trust
The name for the biggest transfer of wealth in 100 generations. Keep the sheeple asleep.
Notice the words TRUST and Pelosis "INVEST"
As big a smokescreen as the name FEDERAL RESERVE
Dollar screaming up 1.5%. A last hurrah for the mighty buck? The delayed reaction should be a show to remember. I'm not looking forward to it as things will quickly disintegrate once the first central banker abandons ship.
Mon, Sep 29, 2008 - 10:56am
#7
more at this link
9/29/08 Mussolini-Style Corporatism in Action:Treasury Conference Call on Bailout Bill to Analysts
http://www.tickerforum.org/cgi-ticker/akcs-www?post=63843
Mon, Sep 29, 2008 - 2:29pm
#8
NYTimes is the new Oliver Stone...
Hi Chris,I apologize for the length of this post!!! I'm a first time reader on your blog...looks interesting and I will take a look around. I am a "reformed Democrat"...I think their policies have gone too far left/socialist since the Clinton administration. I've been taking a view of our economy, foreign policy, role of government etc with a critical eye and applying the principals our country was based on: the opportunity to pursue (and not the GUARANTEE OF) "happiness"; free markets work in the sense that supply and demand produces a price equilibrium and the basic fact that human greed is a part of human nature and you can't legislate/regulate it out of people. Though simplistic, these are the basic economic principals that form our capitalist system. For those who don't agree we should have a capitalist system in the first place where competition is the driving force, but rather one where our government is the driving force, telling us what programs we should pay for with our tax dollars because these programs are "good for us, good for our neighbors, good for the world"...those people don't have to read on; it would be like getting people of a different religion to agree and I can't change their mind. I believe in capitalism being the best for this country (most innovative and most growth, though admittedly "cruel") and others believe in veiled socialism being best for this country (inefficiency, waste and stagnation, though we'd all have a piece of the pie. Oh, and did I mention the pie shrinks every year because socialist economies do not innovate as well). And no - I don't eat babies, want to destroy the planet, spit on poor people, believe in God, want to drill in pristine natural habitats, want to bomb Iran or the host of other negative labels the liberals continue to name-call those who have ideas outside their big government spending, ideal-driven handbook. I believe our government is faced with hard choices and each dilemma is a weighing of those choices - their risks and rewards. It is not a childish cry for "an ideal world" that I hear so often from the left.
So...just needed to get that out there. Regarding your post about the "Paulson-GS Conspiracy" - I used to be a NY Times reader but now I think they have gone off the deep end in their reporting and are trying so hard to push their liberal agenda it is laughably transparent. I can't read their articles anymore because it's like propoganda...only presents one side, ignores history and refuses to establish the root cause of events, and relies on hysteria and hearsay. This latest one, with a conspiratorial tone that somehow Paulson was "in" on the AIG bailout to save his buddies at GS is ridiculous. It reads like an Oliver Stone script...and I've noticed this is a very common stance in the mainstream media. So my only point is - reader beware with any of these MSM rags...particularly the NYT, Washington Post, MSNBC etc.
My opinion on AIG is that it was a political move, but not one done to benefit an ex-CEO and his buddies. AIG was heavily exposed (due to its risk taking and also due to, I believe, the Clinton Administration's mucking up the housing market with their "everyone must own a home agenda". But that is another topic) to the US housing market. There is an article in Reuters in June '08 that sums up the level of AIG's exposure: http://reuters.socialpicks.com/ideas/show/178658. The exposure was in hundreds of billions. They originated first and second lien mortgages through their subsidiary, AGF. They provided what's called "first-loss insurance" so that sub-prime market loans could be originated without a down-payment cushion and loans with a very high loan-to-value could be originated (AIG didn't care...because these were eventually sold to Freddie and Fannie...an agency that by the way, received way too much market influence under the Clinton Administration and the Democratic Congress). This "first-loss insurance" was developed such that people unable to afford the down payment, or who would not qualify to securitize them through Fannie & Freddie due to the loan's high loan-to-value could continue to get mortgages. It was a house of card that depended on one thing working out - home prices continuing to rise. However, pricing could not continue to rise because the supply of housing increased...home builders saw there was a rising demand for homes, fueled by the credit availability, and built and built. A classic response to growing demand - prices came down...house of cards falls. AIG also guaranteed lots of securitized mortgage products (e.g. insurance wrapping for CDOs, so they could get a better rating...something I have been so adamant against b/c the risk cannot be appropriately priced. There's a reason why Lloyd's of London no longer does default or financial insurance).
So - if AIG were allowed to flail around and declare bankruptcy, all of this massive exposure to the housing markets would completely blow up. The first to go would be the "first loss insurance" - since these mortgages are typically a second lien piece, supporting a first lien being serviced by the mortgagee...all of these mortgages would be called (demanded to be repaid) since the "insurance protection" that allowed them to be originated in the first place would just go away. We would have a situation where people who are already struggling with mortgage payments (because they could never afford them/should have gotten them in the first place) would be instantly foreclosed upon. This was not something any politician or person wants – hordes of people being turned out of their houses, living in the streets, particularly in the poor areas where these mortgages were peddled in the first place. So there is the human issue. There would also be the financial issue – because financial insurance has become such an integral part of the securitization market…it would be a massive freeze in that market, triggering another cascade of failed firms and people not knowing what their assets were worth now without that insurance wrapping.
Faced with that reality, the Administration had its hands tied. The failure of AIG would have very visible, negative repercussions and they weighed the choice and decided it was indeed “too big, too entrenched” to fail. Adults often have to clean up the mess children left behind. And years of government intervention, propping up institutions like Fannie and Freddie whose way of doing business distorted the markets and the relationship between risk/reward, was in my belief what led us to this mess.
I’d be interested to hear your thoughts.
LB
So...just needed to get that out there. Regarding your post about the "Paulson-GS Conspiracy" - I used to be a NY Times reader but now I think they have gone off the deep end in their reporting and are trying so hard to push their liberal agenda it is laughably transparent. I can't read their articles anymore because it's like propoganda...only presents one side, ignores history and refuses to establish the root cause of events, and relies on hysteria and hearsay. This latest one, with a conspiratorial tone that somehow Paulson was "in" on the AIG bailout to save his buddies at GS is ridiculous. It reads like an Oliver Stone script...and I've noticed this is a very common stance in the mainstream media. So my only point is - reader beware with any of these MSM rags...particularly the NYT, Washington Post, MSNBC etc.
My opinion on AIG is that it was a political move, but not one done to benefit an ex-CEO and his buddies. AIG was heavily exposed (due to its risk taking and also due to, I believe, the Clinton Administration's mucking up the housing market with their "everyone must own a home agenda". But that is another topic) to the US housing market. There is an article in Reuters in June '08 that sums up the level of AIG's exposure: http://reuters.socialpicks.com/ideas/show/178658. The exposure was in hundreds of billions. They originated first and second lien mortgages through their subsidiary, AGF. They provided what's called "first-loss insurance" so that sub-prime market loans could be originated without a down-payment cushion and loans with a very high loan-to-value could be originated (AIG didn't care...because these were eventually sold to Freddie and Fannie...an agency that by the way, received way too much market influence under the Clinton Administration and the Democratic Congress). This "first-loss insurance" was developed such that people unable to afford the down payment, or who would not qualify to securitize them through Fannie & Freddie due to the loan's high loan-to-value could continue to get mortgages. It was a house of card that depended on one thing working out - home prices continuing to rise. However, pricing could not continue to rise because the supply of housing increased...home builders saw there was a rising demand for homes, fueled by the credit availability, and built and built. A classic response to growing demand - prices came down...house of cards falls. AIG also guaranteed lots of securitized mortgage products (e.g. insurance wrapping for CDOs, so they could get a better rating...something I have been so adamant against b/c the risk cannot be appropriately priced. There's a reason why Lloyd's of London no longer does default or financial insurance).
So - if AIG were allowed to flail around and declare bankruptcy, all of this massive exposure to the housing markets would completely blow up. The first to go would be the "first loss insurance" - since these mortgages are typically a second lien piece, supporting a first lien being serviced by the mortgagee...all of these mortgages would be called (demanded to be repaid) since the "insurance protection" that allowed them to be originated in the first place would just go away. We would have a situation where people who are already struggling with mortgage payments (because they could never afford them/should have gotten them in the first place) would be instantly foreclosed upon. This was not something any politician or person wants – hordes of people being turned out of their houses, living in the streets, particularly in the poor areas where these mortgages were peddled in the first place. So there is the human issue. There would also be the financial issue – because financial insurance has become such an integral part of the securitization market…it would be a massive freeze in that market, triggering another cascade of failed firms and people not knowing what their assets were worth now without that insurance wrapping.
Faced with that reality, the Administration had its hands tied. The failure of AIG would have very visible, negative repercussions and they weighed the choice and decided it was indeed “too big, too entrenched” to fail. Adults often have to clean up the mess children left behind. And years of government intervention, propping up institutions like Fannie and Freddie whose way of doing business distorted the markets and the relationship between risk/reward, was in my belief what led us to this mess.
I’d be interested to hear your thoughts.
LB
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