From the New York Times… “Testy Conflict With Goldman Helped Push A.I.G. to Edge”
~~~ “…When A.I.G. asked Goldman to submit the dispute to a panel of independent firms, Goldman resisted, internal e-mail messages show. In a March 7, 2008, phone call, Mr. Cassano discussed surveying other dealers to gauge prices with Michael Sherwood, Goldman’s vice chairman. At that time, Goldman calculated that A.I.G. owed it $4.6 billion, on top of the $2 billion already paid. A.I.G. contended it only owed an additional $1.2 billion.
Mr. Sherwood said he did not want to ask other firms to value the securities because “it would be ‘embarrassing’ if we brought the market into our disagreement,” according to an e-mail message from Mr. Cassano that described the call.
The Goldman spokesman disputed this account, saying instead that Goldman was willing to consult third parties but could not agree with A.I.G. on the methodology…”~~~
Repost from Jesse’s Cafe…
“I have to think this train is probably going to leave the station soon and we need to focus our efforts on explaining the story as best we can. There were too many people involved in the deals — too many counterparties, too many lawyers and advisors, too many people from AIG — to keep a determined Congress from the information.” James P. Bergin, NY Fed, in an email to his Fed colleagues.
‘Though it is hard to divine much understanding from the unredacted filing, it has become clear that Goldman had more involvement than previously believed: In addition to the credit default swaps it bought from AIG, the filing shows that Goldman Sachs also originated many of the underlying assets that AIG and the New York Fed bought back from Société Générale.
The American people have the right to know how their tax dollars were spent and who benefited most from this back-door bailout,” said Kurt Bardella, spokesman for Issa. “Now that it’s public, let’s see if the sky really does fall as the New York Fed said it would to justify its coverup.”
Other lawmakers believed that the New York Fed was trying to hide its ties to Goldman Sachs.’ AIG Reveals the Story – CNN
“Wednesday’s hearing described a secretive group deploying billions of dollars to favored banks, operating with little oversight by the public or elected officials.
We’re talking about the Federal Reserve Bank of New York, whose role as the most influential part of the federal-reserve system — apart from the matter of AIG’s bailout — deserves further congressional scrutiny…
By pursuing this line of inquiry, the hearing revealed some of the inner workings of the New York Fed and the outsized role it plays in banking. This insight is especially valuable given that the New York Fed is a quasi-governmental institution that isn’t subject to citizen intrusions such as freedom of information requests, unlike the Federal Reserve
This impenetrability comes in handy since the bank is the preferred vehicle for many of the Fed’s bailout programs. It’s as though the New York Fed was a black-ops outfit for the nation’s central bank…
From the WSJ…
~~~ “Sen. Jeff Merkley (D., Ore.) last month became the first Democrat to oppose Ben Bernanke’s confirmation for a second term as Federal Reserve chairman. (The leading liberal against Bernanke, Sen. Bernie Sanders of Vermont, is an independent.) He’s been joined now by three other Democrats and a growing list of Republicans. We talked with him about how the Bernanke vote is shaping up among Democrats:
From where you stand, how does this nomination for Chairman Bernanke look right now?
A lot of folks have been coming up to me in the hall, saying that they want more information and that they’re seriously considering voting against him, or that they’re leaning towards voting against him.
Are they asking you for more information?
Some have. … The main points I’ve been making are that there are at least four major issues that happened in the course of the last eight years: expansion of proprietary trading, derivatives, the lifting of leverage and the failure to address the dysfunction in the [regulation of] mortgages — that is, the kickbacks, the yield spread premiums and the prepayment penalties. While not all of these were the responsibility of the Fed, very much in his role as chair of the Council of Economic Advisers, as a member of the Fed, as chair of the Fed, he was at the economic policy table and did not raise concerns about these major issues that had systemic impact.
We’re hearing that about 10 to 15 members are opposed from the Democratic side. Is that right?
I have not tried to tally folks, but there’s nothing in that number that I would react to and say that’s off base. But a bunch of folks have said they’re wrestling with it, or they’re leaning. I don’t know that 10 to 15 have in any public way said that they clearly are opposed.
Are the political ramifications of the Massachusetts election affecting the Bernanke vote substantially?
I don’t really think that’s what’s going on here. I think what’s going on is that folks are very aware that many of the policies we worked on this last year were addressing the potential plunge into a Great Depression — unemployment going up, major institutions on the verge of collapse that could have caused others to collapse. We did a lot to those stabilize financial institutions. We’ve got to pivot to fighting for the financial success of our families. … Here we have an economic policy leader, he did a good job with the fire hose this last year. But he certainly also — in his roles over the last eight years — he helped create the circumstances that set the house on fire. Is he really the person you want now to be the carpenter to rebuild the house?
Do you have any worries about how a Senate vote against Bernanke might influence financial markets here and abroad?
This is always raised in regard to nominations. I think one of the reasons folks have been hesitant despite Bernanke’s involvement in burning down our economic house has been not to upset Wall Street. But what is going to have the biggest impact in the long term: Having a person in economic leadership that has missed every significant systemic risk development, putting them in charge, or putting someone in charge who has the ability to see those risks and respond in an appropriate way, to lean into the wind?
BUENOS AIRES, Jan 8 (Reuters) – An Argentine judge blocked the president’s plan to use Central Bank reserves to pay public debt and ordered the bank chief’s reinstatement on Friday, deepening a dispute that has rattled financial markets.
Moments after a court ruled to reinstate former Central Bank President Martin Redrado, he returned to the bank, waving at television cameras. A day earlier, President Cristina Fernandez fired Redrado for opposing her debt plan.
Despite the court rulings, local media said an interim bank chief was taking steps to move $6.6 billion in foreign currency reserves to the treasury. “It’s like a science fiction movie,” a central bank employee told Reuters.
The conflict has highlighted persistent political instability in Latin America’s No. 3 economy just as Fernandez’s cash-strapped government seeks to charm investors and issue global bonds eight years after a massive default.
Argentine bonds, stocks and the peso closed down due to investor concerns over the strength of Argentina’s institutions ahead of a sovereign debt swap that is expected to launch later this month. [ID:nN08135180]
Fernandez urged opponents to let her govern and defended using part of the Central Bank’s $48 billion in reserves to service the nation’s debts.
“It’s much better to use the reserves than to take out loans with an interest rate of 15 or 14 percent. It’s common sense,” she said in a televised speech.
Opposition leaders have challenged her order for the central bank to transfer billions of dollars in foreign currency reserves to state coffers.
Brilliant analysis from the Economist… this points the way for the new decade…
~~~ “THE air of immediate crisis is over. The monetary and fiscal doctors wheeled out the crash trolley and applied an electric shock to the global economy’s chest. The patient is recovering but is still rather too dependent on the drug of government support. The coming year will be dominated by a debate about how quickly that support can be taken away.
Two shocks have reduced the standard of living of Western economies. One is a terms-of-trade shift. Thanks mainly to China, the prices of the manufactured goods that rich countries sell have fallen; those of the commodities they buy have risen. The other is a “leverage” shock, in which the credit crisis has stopped people from borrowing to finance consumption.
In response to this second shock, governments have deliberately taken on the debts of the private sector. In most cases it has been assumed that governments have almost limitless capacity to assume such burdens. But you can see welfare states as national Ponzi schemes in which governments grant benefits and take on spending responsibilities, confident in the expectation that the next generation of citizens will pick up the bill.
Such promises have worked so far because of continued economic growth and rising populations. But with populations starting to fall in some countries, and the tax base shrinking in others, the strain is starting to show. The financial crisis has piled on further stress. Iceland, a tiny island state, was overwhelmed by the debts of its banks. Dubai has shown that the distinction between government debt and the debt of government-controlled entities can be a fuzzy one. Greece has been downgraded by two rating agencies, Fitch and Standard & Poor’s.
All this may lead to a turbulent year in the currency markets. The idea of the “law of volatility” is that you can control risks in some parts of the system but not in them all. A zero-interest-rate policy has supported risky assets, particularly equities, while quantitative easing, by allowing central banks to buy government bonds, has prevented massive fiscal deficits from pushing up bond yields.
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The New York Times
December 20, 2009
By ELIOT SPITZER, FRANK PARTNOY and WILLIAM BLACK
WE end this extraordinary financial year with news that the Treasury is in discussions with American International Group about selling the taxpayers’ 80 percent ownership stake in that company. The government recently permitted several banks to break free of its potential oversight by repaying loans made during the rescue. But with respect to A.I.G., the Treasury should not move so fast. There is one job left to do.
A.I.G. was at the center of the web of bad business judgments, opaque financial derivatives, failed economics and questionable political relationships that set off the economic cataclysm of the past two years. When A.I.G.’s financial products division collapsed — ultimately requiring a federal bailout of $180 billion — those who had been prospering from A.I.G.’s schemes scurried for taxpayer cover. Yet, more than a year after the rescue began, crucial questions remain unanswered. Who knew what, and when? Who benefited, and by exactly how much? Would A.I.G.’s counterparties have failed without taxpayer support?
The three of us, as experienced investigators and prosecutors of financial fraud, cannot answer these questions now. But we know where the answers are. They are in the trove of e-mail messages still backed up on A.I.G. servers, as well as in the key internal accounting documents and financial models generated by A.I.G. during the past decade. Before releasing its regulatory clutches, the government should insist that the company immediately make these materials public. By putting the evidence online, the government could establish a new form of “open source” investigation.
Once the documents are available for everyone to inspect, a thousand journalistic flowers can bloom, as reporters, victims and angry citizens have a chance to piece together the story. In past cases of financial fraud — from the complex swaps that Bankers Trust sold to Procter & Gamble in the early 1990s to the I.P.O. kickback schemes of the late 1990s to the fall of Enron — e-mail messages and internal documents became the central exhibits in our collective understanding of what happened, and why.