Big Banks' Recent Profitability Due to AIG Scam?

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Michael Höhne's picture
Michael Höhne
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Big Banks' Recent Profitability Due to AIG Scam?

http://seekingalpha.com/article/128390-exclusive-big-banks-recent-profitability-due-to-aig-scam

AIG, knowing it would need to ask for much more capital from the Treasury imminently, decided to throw in the towel, and gifted major bank counter-parties with trades which were egregiously profitable to the banks, and even more egregiously money losing to the U.S. taxpayers, who had to dump more and more cash into AIG, without having the U.S. Treasury Secretary Tim Geithner disclose the real extent of this - for lack of a better word - fraudulent scam.

In simple terms, think of it as an auto dealer which knows that U.S. taxpayers will provide an infinite amount of money to fund its ongoing sales of horrendous vehicles (think Pontiac Azteks): the company decides to sell all the cars currently in contract, to lessors at far below the amortized market value, thereby generating huge profits for these lessors, as these turn around and sell the cars at a major profit, funded exclusively by U.S. taxpayers (readers should feel free to provide more gripping allegories).

What this all means is that the statements by major banks, i.e. JP Morgan Chase (JPM), Citi (C), and BofA (BAC), regarding abnormal profitability in January and February were true, however these profits were a) one-time in nature due to wholesale unwinds of AIG portfolios, b) entirely at the expense of AIG, and thus taxpayers, c) executed with Tim Geithner's (and thus the administration's) full knowledge and intent, d) were basically a transfer of money from taxpayers to banks (in yet another form) using AIG as an intermediary.

Any comments?

kmarinas86's picture
kmarinas86
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Re: Big Banks' Recent Profitability Due to AIG Scam?
Michael Höhne wrote:

Any comments?

 

Yes. For example, how do you think the banking industry gets its profits anyway?

The banking industry can only get profits if more money is added to the system. The reasoning is very simple. If you take money from your account and pay it to a seller, then that money will be in the seller's bank account. Either way, the money is still in the system, just probably a different bank. In that buyer-seller exchange, the banking system as a whole did not lose or gain any money. Other than that, the volatility between banks increased; voids were created as other ones were filled in.

So what must happen in order for the sum of balance sheets of banks to increase? A bank would simply give out a loan at first. Thus, an asset of cash is exchanged for "notes receivable". What happen to that cash? It gets redeposited into the system. The amount of money that was intially created as a result is equal to "notes receivable". It implies a future net cash flow from banks in general to the original loaning bank. This means as the interest is paid, the loss of assets by those other banks would match the assets gained by the original loaning bank. The same result of net cash flow away from those banks is also true when the principal is paid.

These cash flows must be maintained in order for the system to remain stable. It cannot be stable in a system with constant money supply if we presume that the banks seek a profit. To make the equities higher, one must increase the assets and/or decrease liabilities. The majority of liabilities are paid down by decreasing assets. The rest of the liabilities are defaulted, which in turn reduces the equity of others.

In the end, banks can only make a profit in a system where the money supply grows. Thus, it is no suprise to me that banks and investment companies would support someone who favors a loose monetary policy.

DrKrbyLuv's picture
DrKrbyLuv
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Re: Big Banks' Recent Profitability Due to AIG Scam?

New York Times - A.I.G. Lists Banks It Paid With U.S. Bailout Funds

Financial companies that received multibillion-dollar payments owed by
A.I.G. include Goldman Sachs ($12.9 billion), Merrill Lynch ($6.8
billion), Bank of America ($5.2 billion), Citigroup ($2.3 billion) and
Wachovia ($1.5 billion).

Big foreign banks also received large sums from the
rescue, including Société Générale of France and Deutsche Bank of
Germany, which each received nearly $12 billion; Barclays of Britain
($8.5 billion); and UBS of Switzerland ($5 billion).

When A.I.G. received its first rescue loan of $85 billion
from the Fed, in September, it forwarded about $22 billion to the
companies holding its shakiest derivatives contracts. Those contracts
required large collateral payments if A.I.G.'s credit was downgraded,
as it was that month.

Notice that the reason for the payments was "Those contracts
required large collateral payments if A.I.G.'s credit was downgraded."  My take is that it is possible that many or all of those contracts are still open, but payments are going out. This is fraud, the CDS's should all be frozen or rendered illegal.  Many of the AIG payment benefactors already received taxpayer money - why didn't we stipulate that they not be eligible for payments in the credit downgrade?

Larry

investorzzo's picture
investorzzo
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Re: Big Banks' Recent Profitability Due to AIG Scam?

The banks were helped out bigtime with the toxic assests of a trillion dollars put on the tax payers.  Now that the banks no longer own the toxic assests, they no longer want to play by government rules. So they want to give back the TARP money, saying they are now looking for profitablity soon or already have. The banks dump the bad mortgage loans onto Freddy and Fannie and then let the tax payer pick up the bill.

 I wonder when America will catch on............???????????? 

kmarinas86's picture
kmarinas86
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Joined: Dec 29 2008
Posts: 164
Re: Big Banks' Recent Profitability Due to AIG Scam?
investorzzo wrote:

The banks were helped out bigtime with the toxic assests of a trillion dollars put on the tax payers.  Now that the banks no longer own the toxic assests, they no longer want to play by government rules. So they want to give back the TARP money, saying they are now looking for profitablity soon or already have. The banks dump the bad mortgage loans onto Freddy and Fannie and then let the tax payer pick up the bill.

I wonder when America will catch on............???????????? 

The national debt grows and the government then charges us interest on its borrowing. What that interest barely does is help to prevent the money supply from shrinking, but it is only so much (100's of billion $ per year) compared to the debt (trillions of $). As I speak, the debt is growing at an ever faster pace. The money that exists right now simply cannot provide the cash flow to pay that down. So the government charges the people instead of the banks in a misleading attempt to pay down part of the debt (which they probably won't in all likelihood).

If people did have access to the stimulus money, they could use that money to pay down their debt, and that money used to pay for the bank would still be in the banking system either way (whether that money was simply saved or use to pay down debt). However, doing it that way, according to accounting "rules", that would simply replace the banks' amounts "recievable" with "cash", and would not increase the banks' overall assets. The banks prefer to keep the money to themselves so that way its assets (and equity) will actually grow. Thus, if you want to blame the reason why banks wanted the stimulus money at the expense of individuals, blame the accounting "rules" which are the underlying real reason behind their motivation.

investorzzo's picture
investorzzo
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Posts: 1182
Re: Big Banks' Recent Profitability Due to AIG Scam?

Sounds like another excuse of greed for me.........As far as rules go, let see under Bush they could pick and choose what rules to follow and what rules to skirt......But when you make up the rules you can change them to your benefit........

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