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« AIG Emails Don't Lie, Just Ask Tim Geithner And The New York Fed Officials Who Tried To Keep Them Secret | Main | PHOTO - Ben And Pamela Chillin After FOMC »
Monday
Jul302012

How Goldman Sachs Created 'Shitty' CDOs, Sold Them To AIG, Forced AIG Into Bankruptcy, Got A $20 Billion Bailout, Paid Themselves Billions In Bonuses, And Watched As Tim Geithner Covered It All Up

And Paulson was CEO at the time and knew all about it.  More truth about lack of Fed transparency.  This is not entirely new if you've been following the work we've published from Janet Tavakoli, who is quoted extensively in the article below.  Still, it underscores some of the more arcane points and delves into new territory with discussion of CDO substitutions.  Easy to follow summary piece from Bloomberg's Richard Teitelbaum.

Here's what you need to take from this: Goldman put together crappy CDO's, bought Credit Default Swap protection (insurance) from AIG, pushed AIG into bankruptcy by making claims on the insurance, and then got paid -- not by AIG -- but by the TAXPAYER.

Oh, and the guy who tried to cover all this up? Barack Obama picked him to be your Treasury Secretary. Is this a great country, or what?

--

(Reprinted with persmission from Bloomberg)

By Richard Teitelbaum

(Bloomberg) -- When a congressional panel convened a hearing on the government rescue of American International Group Inc. in January, the public scolding of Treasury Secretary Timothy F. Geithner got the most attention.

Lawmakers said the former head of the New York Federal Reserve Bank had presided over a backdoor bailout of Wall Street firms and a coverup.  Geithner countered that he had acted properly to avert the collapse of the financial system.

A potentially more important development slipped by with less notice, Bloomberg Markets reports in its April issue. Representative Darrell Issa, the ranking Republican on the House Committee on Oversight and Government Reform, placed into the hearing record a five-page document itemizing the mortgage securities on which banks such as Goldman Sachs Group Inc. and Societe Generale SA had bought $62.1 billion in credit-default swaps from AIG.

These were the deals that pushed the insurer to the brink of insolvency -- and were eventually paid in full at taxpayer expense.

  • The New York Fed, which secretly engineered the bailout, prevented the full publication of the document for more than a year, even when AIG wanted it released.

That lack of disclosure shows how the government has obstructed a proper accounting of what went wrong in the financial crisis, author and former investment banker William Cohan says. “This secrecy is one more example of how the whole bailout has been done in such a slithering manner,” says Cohan, who wrote “House of Cards” (Doubleday, 2009), about the unraveling of Bear Stearns Cos. “There’s been no accountability.”

CDOs Identified

The document Issa made public cuts to the heart of the controversy over the September 2008 AIG rescue by identifying specific securities, known as collateralized-debt obligations, that had been insured with the company. The banks holding the credit-default swaps, a type of derivative, collected collateral as the insurer was downgraded and the CDOs tumbled in value.

The public can now see for the first time how poorly the securities performed, with losses exceeding 75 percent of their notional value in some cases. Compounding this, the document and Bloomberg data demonstrate that the banks that bought the swaps from AIG are mostly the same firms that underwrote the CDOs in the first place.

The banks should have to explain how they managed to buy protection from AIG primarily on securities that fell so sharply in value, says Daniel Calacci, a former swaps trader and marketer who’s now a structured-finance consultant in Warren, New Jersey. In some cases, banks also owned mortgage lenders, and they should be challenged to explain whether they gained any insider knowledge about the quality of the loans bundled into the CDOs, he says.

‘Too Uncanny’

“It’s almost too uncanny,” Calacci says. “If these banks had insight into the underlying loans because they had relationships with banks, originators or servicers, that’s at the least unethical.”

The identification of securities in the document, known as Schedule A, and data compiled by Bloomberg show that Goldman Sachs underwrote $17.2 billion of the $62.1 billion in CDOs that AIG insured -- more than any other investment bank. Merrill Lynch & Co., now part of Bank of America Corp., created $13.2 billion of the CDOs, and Deutsche Bank AG underwrote $9.5 billion.

These tallies suggest a possible reason why the New York Fed kept so much under wraps, Professor James Cox of Duke University School of Law says: “They may have been trying to shield Goldman -- for Goldman’s sake or out of macro concerns that another investment bank would be at risk.”

Poor Performers

Goldman Sachs spokesman Michael DuVally declined to comment.

Schedule A also makes possible a more complete examination of why AIG collapsed. Joseph Cassano, the former president of the AIG Financial Products unit that sold the swaps, said on a December 2007 conference call that his firm pulled back from selling swaps on U.S. subprime residential CDOs in late 2005. The list shows that the $21.2 billion in CDOs minted after 2005, mostly based on prime and commercial mortgages, performed as badly as or worse than the earlier subprime vintages.

A lawyer for Cassano declined to comment.

As details of the coverup emerge, so does anger at the perceived conflicts. Philip Angelides, chairman of the Financial Crisis Inquiry Commission, at a hearing held by his panel on Jan. 13, questioned how banks could underwrite poisonous securities and then bet against them. “It sounds to me a little bit like selling a car with faulty brakes and then buying an insurance policy on the buyer of those cars,” he said.

‘Part of the Coverup’

Janet Tavakoli, founder of Tavakoli Structured Finance Inc., a Chicago-based consulting firm, says the New York Fed’s secrecy has helped hide who’s responsible for the worst of the disaster. “The suppression of the details in the list of counterparties was part of the coverup,” she says.

E-mails between Fed and AIG officials that Issa released in January show that the efforts to keep Schedule A under wraps came from the New York Fed. Revelation of the messages contributed to the heated atmosphere at the House hearing.

“What date did you know there was a coverup?” Republican Congressman Brian Bilbray of California demanded of Geithner. Lawmakers used the word coverup more than a dozen times as they peppered Geithner with questions.

Geithner said that he wasn’t involved in matters of disclosure and that his former colleagues did the best they could. In a Jan. 19 statement, the New York Fed said, “AIG at all times remained responsible for complying with its disclosure requirements under the securities laws.”

The government has committed more than $182 billion to AIG and owns almost 80 percent of the company.

Document Withheld

In late November 2008, the insurer was planning to include Schedule A in a regulatory filing -- until a lawyer for the Fed said it wasn’t necessary, according to the e-mails. The document was an attachment to the agreement between AIG and Maiden Lane III, the fund that the Fed established in November 2008 to hold the CDOs after the swap contracts were settled.

AIG paid its counter­parties -- the banks -- the full value of the contracts, after accounting for any collateral that had been posted, and took the devalued CDOs in exchange. As requested by the New York Fed, AIG kept the bank names out of the Dec. 24 filing and edited out a sentence that said they got full payment.

The New York Fed’s January 2010 statement said the sentence was deleted because AIG technically paid slightly less than 100 cents on the dollar.

Paid in Full

Before the New York Fed ordered AIG to pay the banks in full, the company was trying to negotiate to pay off the credit- default swaps at a discount or “haircut.”

By March 2009, responding to a request from Christopher Dodd, chairman of the Senate Committee on Banking, Housing and Urban Affairs, AIG released the names of the counterparty banks. In a filing later that month, AIG included Schedule A, showing bank names while withholding all identification of the underlying CDOs and the amounts of collateral each bank had collected. The document had more than 800 redactions.

In May 2009, AIG again filed Schedule A, this time with about 400 redactions. It revealed that Paris-based Societe Generale got the biggest payout from AIG, or $16.5 billion, followed by Goldman Sachs, which got $14 billion, and then Deutsche Bank and Merrill Lynch. It still kept secret the CDOs’ identification and information that would show performance.

‘Right to Know’

“This is something that belongs in the public domain because it was done with public money,” Issa says. “The public has the right to know what was done with their money and who benefited from it.” Now, thanks to Issa, the list is out, and specific information about AIG’s unraveling can be learned from it.

At the Jan. 27 hearing, the New York Fed was still arguing that the contents of Schedule A shouldn’t be fully disclosed. Thomas Baxter, the New York Fed’s general counsel, testified that divulging the names of the CDOs could erode their value: “We will be hurt because traders in the market will know what we’re holding.”

Tavakoli calls that wrong. With many CDOs, providing more information to the market will give the manager a greater chance of fetching a realistic price, she says.

Jack Gutt, a spokesman for the New York Fed, declined to comment, as did AIG’s Mark Herr.

Bad to Worse

Tavakoli also says that the poor performance of the underlying securities (which are actually specific slices or tranches of CDOs) shows they were toxic in the first place and were probably replenished with bundles of mortgages that were particularly troubled. Managers who oversee CDOs after they are created have discretion in choosing the mortgage bonds used to replenish them.

“The original CDO deals were bad enough,” Tavakoli says. “For some that allow reinvesting or substitution, any reasonable professional would ask why these assets were being traded into the portfolio. The Schedule A shows that we should be investigating these deals.”

Among the CDOs on Schedule A with notional values of more than $1 billion, the worst performer was a tranche identified as Davis Square Funding Ltd.’s DVSQ 2006-6A CP. It was held by Societe Generale, underwritten by Goldman Sachs and managed by TCW Group Inc., a Los Angeles-based unit of SocGen, according to Bloomberg data. It lost 77.7 percent of its value -- though it isn’t in default and continues to pay.

SocGen spokesman James Galvin and TCW spokeswoman Erin Freeman declined to comment.

Documentation Needed

Ed Grebeck, CEO of Tempus Advisors, a global debt market strategy firm in Stamford, Connecticut, agrees that more digging is necessary. “You need all the documentation and more than that, all the e-mails,” he says. “That would allow us to understand what went wrong and how to fix it going forward.”

Neil Barofsky, the special inspector general for the Troubled Asset Relief Program, who delivered a report on the AIG bailout in November, says he’s not finished. He has begun a probe of why his office wasn’t provided all of the 250,000 pages of documents, including e-mails and phone logs, that Issa’s committee received from the New York Fed.

Schedule A provides some answers -- and raises questions that need to be tackled to avoid the next expensive bailout.

To contact the reporter on this story: Richard Teitelbaum in New York at rteitelbaum1@bloomberg.net

 

 

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Reader Comments (22)

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aYb71S4AzqQI

Goldman Sachs Says Greek Swaps Not ‘Inappropriate’
Feb 25, 2010 at 2:08 PM | Registered CommenterDailyBail
Daily Bail Readers:

Here's what you need to take from this: Goldman put together crappy CDO's, bought Credit Default Swap protection (insurance) from AIG, pushed AIG into bankruptcy by making claims on the insurance, and then got paid -- not by AIG -- but by the TAXPAYER.

Oh, and the guy who tried to cover all this up? Barack Obama picked him to be your Treasury Secretary. Is this a great country, or what?
Feb 4, 2011 at 8:12 PM | Registered CommenterDr. Pitchfork
This post is not intended as legal or any other advice. I got a kick out of this and will share it with you.....

Foreclosure Resource Center

http://www.bos.frb.org/commdev/foreclosures/index.htm

[snip]

Foreclosures across New England are a concern of the Federal Reserve Bank of Boston. This web page offers resources for consumers, data and analysis, research and articles from our publications, and information on policy and regulations related to foreclosures.

Comment: Now take a look at a few of these bullet points...

[snip]

Loan Modification Scam Alert

Filing a Bank Related Complaint

Making Home Affordable
Federal refinance and loan modification program

U.S. Treasury Launches "Making Home Affordable" Loan Modification Program (March 4)

National Consumer Law Center
Information about legal resources for homeowners facing foreclosure.
Feb 5, 2011 at 9:48 AM | Unregistered Commenterjohn
SEC enforcement chief cites funding woes

http://www.reuters.com/article/2011/02/04/us-sec-khuzami-idUSTRE7135ZT20110204

[snip] The whole story......

(Reuters) - The head of enforcement at the Securities and Exchange Commission on Friday defended the agency's record for bringing credit crisis cases and raised concerns about the agency's tight budget.

SEC Enforcement Division Director Rob Khuzami told an audience Friday that he knows the agency has faced criticism from those who feel it has not done enough to bring cases against misconduct by firms during the financial crisis. But he dismissed those claims, citing cases the agency has brought against an array of companies, including Goldman Sachs, Citigroup, Countrywide and the Reserve Primary Fund.

"The division's performance in this area has been extraordinary," he said. "Credit crisis cases continue to be a priority in the division."

He added that the budget squeeze is causing strain on the agency. The agency is currently stuck at fiscal year 2010 levels while Congress haggles over how much to appropriate to the agency.

Comments welcome on this (grin)........
Feb 5, 2011 at 10:14 AM | Unregistered Commenterjohn
here's my comment john...khuzami already showed that he's corrupt...

http://dailybail.com/home/busted-robert-khuzami-sec-enforcement-chief.html
Feb 5, 2011 at 11:34 AM | Registered CommenterDailyBail
The story leaves out the smoking gun. Congress repealed the Glass-Steagall Act which made the whole scam possible, putting congresses fingerprints all over the crime, never mind the fact that they did everything they could to help and nothing to stop the fraud. Why did we have to bail out AIG and hence the banks with tax payers money? The banks and government just robbed America blind and not a peep from the media. Hmmm.
Feb 5, 2011 at 11:40 PM | Unregistered CommenterJim
well stated jim...
Feb 6, 2011 at 12:10 AM | Registered CommenterDailyBail
Reposting with update regarding Massachusetts case.

Foreclosure Resource Center

http://www.bos.frb.org/commdev/foreclosures/index.htm

[snip]

Foreclosures across New England are a concern of the Federal Reserve Bank of Boston. This web page offers resources for consumers, data and analysis, research and articles from our publications, and information on policy and regulations related to foreclosures.

Comment: Now take a look at a few of these bullet points...

[snip]

Loan Modification Scam Alert

Filing a Bank Related Complaint

Making Home Affordable
Federal refinance and loan modification program

U.S. Treasury Launches "Making Home Affordable" Loan Modification Program (March 4)

National Consumer Law Center
Information about legal resources for homeowners facing foreclosure.

Now comes this update from massachusetts...........................................

http://stopforeclosurefraud.com/2011/02/06/mass-bk-judge-issues-emergency-preliminary-injunction-pending-loan-modification-request-cruz-v-wells-fargo/

This is where the plaintiff went through HAMP and ended up being foreclosed on. Related to the Ibanez case. A serious must read!
Feb 6, 2011 at 5:34 PM | Unregistered Commenterjohn
As debate begins, here're the facts on Fannie and Freddie

http://www.mcclatchydc.com/2011/02/06/108185/the-great-debate-begins-what-to.html

[snip]


Q: What happens now?

A: Right now, there's still virtually no private-sector secondary market for mortgage lending. Fannie and Freddie securitize about 90 percent of all new mortgages, and home sales remain in the dumps.

One reason mortgage lending is being curtailed, according to the Mortgage Bankers Association, is that Fannie and Freddie are reviewing loans made by banks during the housing boom and giving many of them back to banks when there is evidence of misrepresentation or other errors in underwriting. More than $38 billion of these "put backs" have been identified and more are coming.

Under last year's broad revamp of financial reform, the Obama administration was required to present by Jan. 31 its plan for how to get Fannie and Freddie out of conservatorship. That deadline was missed, but a proposal is expected this month.
Feb 7, 2011 at 7:21 AM | Unregistered Commenterjohn
Pitchfork is exactly correct. I remember it when the story first broke, and how pissed I was back then.

Time to unleash the DOGS OF REALITY !
http://letthemfail.us/archives/8495

(we begin with von Greyerz)
Apr 14, 2011 at 2:53 PM | Unregistered CommenterWil Martindale
Jul 7, 2011 at 3:31 PM | Registered CommenterDailyBail
Jul 7, 2011 at 3:32 PM | Registered CommenterDailyBail
Jul 7, 2011 at 3:32 PM | Registered CommenterDailyBail
No, It's Not The Nat Gas "Fractal" Algo: Nanex Discloses The Very Ominous Implications Of Today's Berserk Crude Algo

http://www.zerohedge.com/article/no-its-not-nat-gas-fractal-also-nanex-discloses-very-ominous-implications-todays-berserk-cru

@ DB what do you think about this?
Jul 7, 2011 at 5:34 PM | Unregistered Commenterjohn
Not sure what to think john...it is definitely strange trading...will bear watching these next few days...
Jul 7, 2011 at 6:43 PM | Registered CommenterDailyBail
The real issue:

those CDO's then were supposedly the subject of Credit Swap Agreements issued by AIG

Those are what is supposedly / thought to have been shorted by GS after they
promulgated the mortgage craziness.

NEITHER Geithner NOR Paulson is Jewish. Bernanke's a patsy or maybe something not great--
you can have him.

Most left sites have flipped on Obama.

If you think the left is the cause of your problems, he'll be pleased.

This appears true:

http://www.google.com/#sclient=psy&hl=en&source=hp&q=open+salon+com+++cia+ford+foundation&aq=0n&aqi=&aql=&oq=open+salon+com+++cia+ford+foundation&pbx=1&bav=on.2,or.r_gc.r_pw.&fp=fce33a84b0764b22&biw=1920&bih=887


http://www.google.com/#sclient=psy&hl=en&source=hp&q=geithner+obama+indonesia+cia+&aq=&aqi=&aql=&oq=&pbx=1&bav=on.2,or.r_gc.r_pw.&fp=fce33a84b0764b22&biw=1920&bih=887


Keep cool.
Jul 7, 2011 at 8:21 PM | Unregistered CommenterJiminy Crickett
Greg Smith, Ex-Goldman Sachs Rogue Executive, Lands Book Deal With $1.5 Million Advance

http://www.imackgroup.com/mathematics/795608-greg-smith-ex-goldman-sachs-rogue-executive-lands-book-deal-with-15-million-advance/

[snip]

The Johannesburg-born Smith worked at Goldman's London office in equity derivatives as an executive director.

His op-ed piece was highly unusual because Goldman employees shy away from publicly criticizing the bank, both because it breaks the Goldman code of silence and because non-disparagement agreements signed by many employees bar them from speaking negatively about the firm.

Goldman responded to the op-ed by saying Smith's views did not reflect the way the business was run.
Mar 31, 2012 at 9:05 PM | Registered CommenterJohn
Goldman nears hedge fund admin unit sale: source

http://articles.chicagotribune.com/2012-06-11/business/sns-rt-us-goldman-statestreet-hedge-fundbre85a0r2-20120611_1_hedge-assets-fund

[snip]

LONDON (Reuters) - Goldman Sachs is close to signing a deal to sell its hedge fund administration business to U.S. bank State Street Corp , a source familiar with the situation said, the latest deal in a sector enjoying growing demand for its back-office services.
Jun 12, 2012 at 6:04 PM | Registered CommenterJohn
Excellent summary Pitchfork remember when the Dems were talking about Pecora style investigations ROFLMAO and what we got was crap like this

Wall Street’s Collapse To Be Mystery Forever: Jonathan Weil

http://www.bloomberg.com/news/2011-01-28/wall-street-s-collapse-to-be-mystery-forever-commentary-by-jonathan-weil.html

And let's not forget the ratings agencies fraud in all of this including warren buffoon's moody's!

Warren Buffet Wrong About Moody’s

http://financegourmet.com/blog/news/warren-buffet-wrong-about-moodys/

and how we bailed him out

Buffett’s Betrayal

http://blogs.reuters.com/rolfe-winkler/2009/08/04/buffetts-betrayal/

or the contributions and the ROFLMAO obama threat about how he was protecting them from pitchforks

"As one of the bankers told Ron Suskind in The Confidence Men: "The sense of everyone after the meeting was relief. The president had us at a moment of real vulnerability. At that point, he could have ordered us to do just about anything and we would have rolled over. But he didn't – he mostly wanted to help us out, to quell the mob. And the guy we figured we had to thank for that was [Treasury secretary] Tim [Geithner]. He was our man in Washington." This is what makes Democratic attacks on the business record of Republican presumptive nominee Mitt Romney so difficult to swallow. While their substance is sound and their target deserving, the source makes them hypocritical and opportunistic. The poor do not have "a man in Washington". Romney deserves to be taken to task. However, it's not a task the Democrats can credibly undertake since they have been complicit in the very practices for which they criticize him."

https://www.commondreams.org/view/2012/07/16-5

Barack’s Wall Street Problem is Now America’s

http://www.noquarterusa.net/blog/4939/baracks-wall-street-problem-is-now-americas/

JPMorgan Employees Join Goldman Sachs Among Top Obama Donors

http://www.bloomberg.com/news/2012-03-20/jpmorgan-employees-join-goldman-sachs-among-top-obama-donors.html
Jul 30, 2012 at 8:05 PM | Unregistered CommenterLiberatedCitizen
And promotions, bonuses, and accolades abound.
Aug 1, 2012 at 1:42 AM | Unregistered CommenterS. Gompers
Justice Department will not prosecute Goldman Sachs, employees for Abacus deal

http://www.reuters.com/article/2012/08/09/us-usa-goldman-no-charges-idUSBRE8781LA20120809

[snip]

Neither Goldman Sachs Group Inc nor its employees will face U.S. criminal charges related to trades they made during the financial crisis that were highlighted in a 2011 U.S. Senate report, the Justice Department said on Thursday.
Aug 10, 2012 at 5:39 AM | Unregistered Commenterjohn
What does a person have to do to get arrested around here?
Aug 10, 2012 at 6:30 AM | Unregistered CommenterSKINFLINT

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