Home > Fande = Fact & Evidence, The Economy > America is a Toxic Asset (as long as Wall Street can exploit with impunity)

America is a Toxic Asset (as long as Wall Street can exploit with impunity)

How the Fed Bungled AIG’s Rescue, Enriched Bankers and Screwed Taxpayers

Posted Oct 27, 2009 11:58am EDT by John Carney



It is by now well known that the banks on the other side of credit default swaps sold by AIG got paid out at par when the government bailed out the insurance giant.

But what isn’t as well known is that by deciding to pay AIG’s counter-party in full, the Federal Reserve was reversing months of work AIG executives had done to convince the banks to take a haircut on their positions.

In the months leading up to the bailout of AIG, the chief financial officer for AIG’s financial products unit worked day and night and through the weekends to work out a deal with the banks that had purchased $61 billion of credit default swaps from AIG. AIG was trying to get the banks to accept as little as 40 cents on the dollar to retire the swaps.

Typically, a counter-party to a firm rapidly running out of cash might expect somewhere between 50 to 70 cents on the dollar to close out the obligations. Citigroup agreed last year to accept about 60 cents on the dollar from New York-based bond insurer Ambac Financial Group Inc. to retire protection on a $1.4 billion CDO.

But when the New York Fed stepped in on September 16, 2008,with an $85 billion credit line for the company, those negotiations ground to a halt. Beginning early in November, a team lead by Tim Geithner at the New York Fed took over negotiations with the banks. Geithner’s team offered the banks 100 cents on the dollar….

So why did the Fed pay out so handsomely even though a better deal for taxpayers was already in the works? We’d guess it was financial panic. In the wake of the collapse of Lehman Brothers, the government was worried that the financial system was on the verge of collapse. It fearred making banks take a haircut on the AIG swaps would leave them with insufficient capital. In short, it was a covert bailout of the banks.

The biggest winners here include Goldman Sachs, which got $14 billion, as well as Societe Generale and Deutsche Bank.

* And now, Goldman Sachs is set to pay out record bonuses!



Staff at Goldman Sachs staff can look forward to the biggest bonus payouts in the firm’s 140-year history after a spectacular first half of the year, sparking concern that the big investment banks which survived the credit crunch will derail financial regulation reforms.

A lack of competition and a surge in revenues from trading foreign currency, bonds and fixed-income products has sent profits at Goldman Sachs soaring, according to insiders at the firm.

  1. No comments yet.
  1. No trackbacks yet.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s

%d bloggers like this: