Audit Faults New York Fed in A.I.G. Bailout

Editor’s Note: In this article you have the nub of the problem for the investors, for the foreclosers, for the pretender lenders. What did the taxpayer actually pay for and what did they get for it? And if the money all went to pay off credit default swaps at 100 cents on the dollar then are those obligations to be considered paid or still outstanding, due and owing. And if they are still due and owing, to whom?

Remember that in addition to the windfall hidden yield spread premium between the aggregating pool and the SPV pool that amounted to as much as multiples of the loan amounts, these investment banks placed bets (credit default swaps) on the failure of those pools. These were pools they created (or that they had inside information on) and they “traded” with other investment houses (creating plausible deniability that they had done anything wrong). Based on the certainty that the pools would fail they purchased as many as 30 bets that the loan would fail and under the rules, they were allowed to collect 30 times the loss amount.

So that is why I have repeatedly said that the only incentive amongst the pretender lenders and all the other sharks posing as conduits or intermediaries, was to make certain that the loans went into default. Unless a solid percentage went into default, the credit default swaps didn’t pay off. Loan modifications don’t pay off, short-sales don’t pay off, settlements don’t pay off. Only defaults brings the ridiculous profits to the doorstep of these companies who are the only ones making money off this debacle. And the NY Fed either didn’t understand it or did understand it. Either way the NY Fed needs to be brought to task about this and the question of Geitner’s continued tenure as Treasury secretary needs to be addressed.

But this is not going to be settled in the court of public opinion. It is only going to be settled in the courts of competent jurisdiction. Somehow we have to get the message across that these people are making king’s ransoms off the defaulting loans and that they are taking the houses too as the cherry on top of their self-created gluttonous cake.
November 17, 2009

Audit Faults New York Fed in A.I.G. Bailout

The Federal Reserve Bank of New York gave up much of its power in high-pressure negotiations with the American International Group’s trading partners last year, according to a government report made public on Monday.

Just two days before the New York Fed paid A.I.G.’s partners 100 cents on the dollar to tear up their contracts with the insurance giant, one bank volunteered to take a modest haircut — but it never got the chance.

UBS, of Switzerland, alone offered to give a break to the New York Fed in the negotiations last November over how to keep A.I.G. from toppling and taking other banks down with it. It would have accepted 98 cents on the dollar.

But UBS’s good-faith gesture was quickly drowned out by Goldman Sachs and the top French bank regulator. They argued, with others, that it would be improper and perhaps even criminal to force A.I.G.’s trading partners to bear losses outside of bankruptcy court.

The banks and the regulator were confident that the New York Fed was not willing to push A.I.G. into bankruptcy, because earlier in the fall the New York Fed had stepped in with $85 billion to prop up the insurer.

The New York Fed, led then by Timothy F. Geithner, who is now the Treasury secretary, therefore had little leverage in the negotiations, according to a post-mortem of what has emerged as the most inflammatory episode in the rescue of A.I.G.

The Fed “refused to use its considerable leverage,” Neil M. Barofsky, the special inspector general for the Troubled Asset Relief Program, wrote in a report to be officially released on Tuesday, examining the much-criticized decision to make A.I.G.’s trading partners whole when people and businesses were taking painful losses in the financial markets.

There have been suggestions that the Fed chose to negotiate weakly, Mr. Barofsky said, to give a “backdoor bailout” to A.I.G.’s banks. He said Mr. Geithner and the Fed’s lawyers had denied this, but added that “irrespective of their stated intent,” there was no doubt about the result: “Tens of billions of dollars of government money was funneled inexorably and directly to A.I.G.’s counterparties.”

Among its notable findings, the report challenged Goldman’s position that it should not have been forced to bear losses on its dealings with A.I.G. because it had successfully hedged away any exposure. Mr. Barofsky said that Goldman’s hedges were unlikely to have held up amid the market turbulence of late last year.

A spokesman for Goldman took issue with that finding, saying that the bank believed it had, in fact, successfully hedged its exposure to A.I.G. up until the point in November when the Fed was seeking a way to terminate all the trading partners’ contracts with A.I.G.

He said any additional exposure to A.I.G.’s losses was a moot point, because the Fed’s intervention had eliminated the risk.

The report concluded that the Fed’s efforts to negotiate concessions from A.I.G.’s trading partners had no chance of success because of several crucial positions taken by the Fed.

First, the Fed considered itself a creditor of A.I.G., rather than a regulator that could impose its will on banks. It approached A.I.G.’s trading partners with a request for “voluntary” concessions. Mr. Barofsky said this differed from the government’s role in the auto industry, where it lent the car makers money but also negotiated aggressively and won substantial concessions from other creditors.

The Fed also decided it could not treat foreign banks differently from American banks, for fear of setting off foreign retaliation.

While seeking concessions from the various banks, the Fed contacted the Commission Bancaire, a French regulator, to request support in its negotiations with two French institutions, Société Générale and Calyon.

The Commission Bancaire responded “forcibly” that unless A.I.G. were in bankruptcy, the French banks were “precluded by law from making concessions and could face potential criminal liability” if they helped.

By that time, seven of the eight banks had also refused to grant concessions. Officials at the Fed then met with Mr. Geithner. The officials recommended that the Fed stop seeking concessions.

The report said Mr. Geithner did not recall being told one bank was willing to take a haircut, but did not challenge the account of those on his staff.

The report also shed new light on the effect the rating agencies had on the way the Fed handled the A.I.G. emergency. The company’s run-on-the-bank disaster began with a major credit downgrade in September; the Fed quickly responded with an $85 billion loan.

But because the Fed moved so quickly, it recycled a set of lending terms that had previously been devised for A.I.G. by lenders in the private sector. The interest rate was too high, given A.I.G.’s distress, and so the loan that was supposed to rescue the insurer ended up putting it at risk of a second credit downgrade. That, in turn, could have set off a second run-on-the-bank episode.

The Fed got caught in a no-win situation, the report said. While it might have been able to win concessions by threatening to withdraw support from A.I.G., it also ran the risk that the credit agencies would take the threat too seriously and impose another catastrophic downgrade.

Mr. Barofsky said the facts also undermined the Fed’s arguments that banking secrecy was an essential part of bank stability.

“The default position, whenever government funds are deployed in a crisis to support markets or institutions, should be that the public is entitled to know what is being done with government funds,” he said.

13 Responses

  1. […] Neil Garfied has a great commentary on this piece. […]

  2. Investors ask Goldman to be less greedy: report

    ZURICH (Reuters) – Big shareholders at Goldman Sachs have asked the U.S. bank, on track to deliver $20 billion in bonuses, to pass more profit to investors after it quadrupled quarterly net profit, the Wall Street Journal reported.

    Although investors are not pushing for a huge cut, they feel Goldman, which received $10 billion of taxpayer help during the credit crisis, should better reward them for this year’s rebound, the paper said, quoting people familiar with the situation.

    A year after the implosion of former U.S. bank giant Lehman Brothers, there is concern among regulators and politicians that bankers’ bonuses are climbing back to pre-crisis level and shareholder rights’ lobbies have called for closer scrutiny of pay.

    “This is particularly of psychological importance because it is self-imposed and not government-imposed. We have to try to all move toward the same approach to maintain the talent pool,” Lutz Raettig, Morgan Stanley’s chairman in Germany, said when asked about investor action at Goldman.

    Reacting to public outrage to bankers’ greed and fat-cat pay checks in the run-up to the crisis, the Group of 20 nations agreed on guidelines for bankers’ pay that would put the focus more on long-term performance rather than short-term gains.

    The U.S. bank has repaid the government cash it received, but its robust performance this year is pushing investors to ask for higher returns. Goldman generated net income in excess of $3 billion in the third quarter.

    The shareholders are also concerned about a change in the company’s financial statements that increased the firm’s total headcount by adding temporary employees and consultants, the Wall Street Journal said.

    Due to the change, it looked like Goldman employees are on pace to earn $717,000 per person in 2009, the Journal said.

    The United States in June appointed “pay czar” Kenneth Feinberg to review pay at some of America’s biggest companies.

    Regulators in European countries such as Britain, France and Switzerland are already taking steps to introduce new rules on bankers’ compensation. Some banks, like Swiss lender Credit Suisse, moved fast to adapt their pay structure to fit with the new international guidelines.

    But Swiss-based investment fund Ethos, which has a keen interest in corporate governance practice, says the key to changing compensation schemes is empowering shareholders.

    Ethos and eight Swiss pension funds are planning to repeat this year initiatives they undertook in the aftermath of the crisis to force large companies to accept a “say on pay” by shareholders.

    The Wall Street Journal quoted a Goldman spokesman saying shareholders “have historically been more focused on the absolute return on equity and on book value per share growth” than per-share earnings.

    Goldman could not be immediately reached for comment outside regular U.S. business hours.

  3. Should We Believe the GDP? Source:

    GDP does not, and cannot, reflect the waste of enormous effort, and precious natural resources, that went into building something that suddenly no one wants.” Yes, all of the malinvestment made GDP soar, but ultimately just wasted capital.

  4. usedkarguy,
    you are so funny, it looks like you always have a story to tell. very humorous stories. this is a warning for everyone who has a jp morgan chase account. this loan servicer ask the Bk court to instruct the debtors ( which is Me) to pay a direct payment regarding the account number it stated on their letter. yesterday , i tried to contact the number -800-520-6447 and a representative from manila, phil. answered and told her about the account number, my name and my social security, unfortunately, no active loans can be found under my name and i don’t know if it was a secured loans. this is another attempt for a fraudulent claims by this criminal enterprise who doesn’t care if they will be caught or not. the problem with the BK court it easy for the attorneys and other criminal elements to infiltrate the system because the judges believes that all documents filed are all legitimate. the judges can give away your homes without scrutinizing the paper works. this is a big problem our court system facing with. the BK law were created for creditors right not for the consumers right. the attorneys who successfully foreclose a property thru a court proceeding with a sham and fraudulent claim are laughing all the way because the lawyers knew how easy to steal a house with a court approval. our court system suck, it needs changes, until we can’t get one, we as the homeowners are at the mercy of losing what we have. anyway, i sent a letter to the court denouncing the fraudulent claim this jp morgan is claiming against me. another one is ROUNDUP FUNDING, LLC filed a transfer of claim in the court and i filed a motion this morning to OBJECT about the transfer. no documentation, it just said chase bank usa, na will transfer to ROUNDUP Funding, LLC all the accounts within 20 days, if no objection receive by the court , the RoundUP FUnding. LLC will be substituted as the original claimant without further order of the court. see thats how incompetent a court is. they just assumed every documents were all legit . as for my situation i am proud i have not paid any cent toward my mortgages because i refuse to pay the wrong parties.

  5. I was halfway through the application for a similar position at CHASE. I’m gonna tell ya something, Dan, I could not do that job for any length of time. It is essentially a collections/skip-trace position. That is, until you get the homeowner on the line. Then, you start lying. I’m a CAR SALESMAN, FOR GOD’S SAKE, and I think I have too much of a conscience to do what these people are doing to homeowners. But you might be right. It would be worth the experience to see how the other side works.

  6. Pissed off… They don’t bow in China. It’s the JAPANESE Emperor that he gave a deep bow to. And, irt’s not his first… he gave a deep bow to the Saudi Arabian King, Abdullah during the G-20 summit. It’s NOT typical of American Presidents to bow to any other foreign leaders.

  7. usedkarguy,
    We need somebody on the inside just like what happened with Acorn and the two investigators. Somebody needs to apply for this job and get the SCOOP. This might be better and apply to 1000x more people.

    Who is up for the challange?

    Would it be fraudulent to modify your own loan? 🙂

    Dan Edstrom

  8. While companies like FISERV are dumbing down & vandalizing the title and appraisal industry. This company is owned by BofA, JP, et al and processes tens of thousands of files per day. Pumping a bunch of crap through the system without a care in the world as to what is correct, legal and proper.

    On the title side they have eliminated the job of “title examiner” and replaced it with “title proofer” & “title reviewer”. The back chain is sent to INDIA for typing and then comes back to the US where a proofer or reviewer only sees the last deed of record. HMMMMM – their fancy automated system crawls public record in all counties of all 50 states but is sent halfway across the globe for typing.

    YES! So people who know what proper chain of title looks like don’t start asking questions about funky securitized deeds and MERS and such. I was fired from my job for asking too many questions.

    On the appraisal side they have pimped out the industry, taking half of the appraisal fee, blackballing honest appraisers and replacing them with compliant “yes men” who hit any number they want without question. See “The Fraud of Appraisal Regulation” by Larry Levy.

    I’d like to know how many of our politicians are in the pockets of companies like this? E-AppraiseIT/Wamu lawsuit is a perfect example of how these AMC’s/Title Mills do the dirty work at the speed of light by the tens of thousands. Wonder if they’ll ever have to answer for their fraud & wrongdoings?

  9. Bankruptcy Ruling May Breach CMBS Trust Structure: Moody’s
    November 16, 2009 3:40 PM CST

    A US Bankruptcy Court judge ruled late last week to grant the debtor access to names of certificate-holders of a $4.1bn commercial mortgage-backed security (CMBS) trust, according to weekly market commentary by Moody’s Investors Service.

    The Extended Stay Hotel (ESH) chain, which filed for bankruptcy in June, requested the securitization trust holding legal title to the $4.1bn of mortgages on 680 hotels provide the names to help ESH in developing its reorganization plan.

    The bankruptcy judge said the procedural ruling aimed to let ESH determine which certificate holders are “in the driver’s seat in the bus and who are the passengers,” according to Moody’s. The ruling to grant a “routine” discovery motion and allow ESH access to the list of names means individual certificateholders might appear in court to plead their cases.

    Moody’s noted it cautioned in June this scenario might lead to “free-for-all financing” as certificate-holders plead their own cases, bypassing the natural filtering process of the trustee and servicers. Because of the implications, Moody’s said at the time any judge would be unlikely to pursue that option.

    “However, times change, and so do views,” said Daniel Rubock, a senior vice president at Moody’s and author of the commentary.

    Discovery rights remain broad, the judge noted in his ruling, and a procedural ruling does not necessitate a similar ruling on a more substantive motion regarding who may appear in court to argue individual economic interests.

    “Judge [James] Peck may return to his initial skepticism and rule on later substantive motions the way all market participants, even the certificateholders now attempting opportunistically to bypass the trust structure, thought the rules would work when the ESH transaction went out the door,” Rubock said. “Or me may not, and we may need to rethink how robust many structures are — from trusts to participants — under the extreme tests to come.”

    Write to Diana Golobay.

  10. usedkarguy, on November 17th, 2009 at 12:31 pm Said: “I’m gonna go apply….”

    I saw an ad for a “foreclosure specialist”. Job description is as follows:

    – Negotiating short sales (and other options) for homes going into foreclosure
    – Will work directly with realtors and homeowners
    – Must be able to explain every step of the process in detail, follow up regularly and document calls
    – Primarily making outbound calls or return calls to customers

    – You will be the decision maker on each file, you are assessing property values, risk to investors, etc
    – Must be able to find a deal that works for the client and the realtor/homeowner

    – Must possess very strong skills in communication, sales/negotiation, analytical thinking, organization, attention to detail
    – Ability to speak with people from all backgrounds and knowledge levels
    – Experience in an industry that is accustomed to closing deals and working towards goals with incentives is helpful: realtors, title companies, insurance, mortgage underwriter/originator etc.
    – Cannot be afraid to negotiate
    – Analytical thinking
    – Organized and detail orientated
    – Must be flexible, rules and processes can/do change regularly.
    – Willing to do work again as some deals can fall through

    **If you are an active realtor, you must be able and willing to suspend your real estate license.

    Now, I wonder….. why would you have to give up your license? Could it be that you would be violating the ethical standards of a licensed professional? This is a banking job? The ad is placed through a headhunter. Client confidential. If you have to include the title companies in the negotiation, is that your evidence of tainted title via the fraudulent conveyance of the note and deed of trust? Isn’t that like an anti-trust thing, too? How F__________g blatant. I won’t swear. I just did two hours ago. How do you convey rage and anger on computer without swearing?????? It also sounds like everyone is there to make money on the deal— except the homeowner!! He’s the guy getting his home stolen out from under him while they conduct a sham real estate “transaction”. Isn’t this where the violation of the REMIC tax laws come into play? The investors and banks aren’t making money on the interest streams, they’re pocketing the insurance proceeds AND the HOUSE! Gotta make you feel good at the end of the day, knowing you just torched some family’s credit and made them homeless! Now that’s what I call “job satisfaction”.

  11. Hey Pissed Off! you forgot to mention that Goldman Sachs, Merrill Lynch, and Wachovia are the ones that cashed in on the payouts. We all stood around scratching our heads wondering “why Wells Fargo would buy a big smoking turd like Wachovia?”—Now you know why!!!!

    That’s it!! I’m changing my name!


    Keep watching FOX NEWS!

    Pall vs Countrywide home loans and or it’s Successors
    Bank of America N.A.
    David vs Goliath
    How I missed the whole thing at the very end of raising 3 adult children only to be facing divorce by summer of 2006.

    JUST FRUSTRATED BY THE BANKS. Are you old enoubh to remember going to the bank as kids and all transactions were entered by hand and you were handed a statement from the friendly “TELLER” 1960s?

  13. Funny you should mention it. Talk about timing! Justice Department just announced ANOTHER TASK FORCE to investigate and “prevent another meltdown from happening”. You gotta be packin’ my ass!!!!! How much evidence do they need? Where are they looking? Geithner’s basement? Bernanke’s junk drawer in the kitchen? This is the height of hypocrosy!! The Obama Administration, again, has no intention of holding anyone accountable. This is more government job creation at the expense of the taxpayer and…. hmmmm, hold that thought….

    I’ll be right back. I’m gonna go apply to the Justice Department for a job.

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