Window Dressing: File a Lawsuit — Maybe It will Improve the View

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EDITOR’S COMMENT: YAWN! The government keeps filing lawsuits that COULD be big and COULD cause make corrections in the marketplace to reflect reality. But then they go nowhere, with discovery stymied by the Banks and then a settlement on the table that sells out everyone except the half dozen big banks that we allow to control the market, courtesy of our taxpayer money and our refusal to apply the same rules to them we do to the 7,000 other community banks and credit unions who could do the same or better job at handling the country’s finance sector.

Don’t get fooled. When someone comes out and says that securitization was an illusion, a ruse to defraud as many people in world population as possible, TEN we will have addressed the problem. When that special someone is willing to consider the idea that the banks never actually lost money and never needed a bailout, but that the top management diverted pornographic profits to off-shore havens then we will be on track to recapture the nation’s wealth, which currently is held hostage by Wall Street banks and the great majority of those in government who depend upon the mega banks for their political campaign expenses.

In the meanwhile, the lawsuits should be watched because deep inside each suit are some additional allegations, indicating the results of administrative investigations that you can use. When we get serious, the lawsuits will come fast and furious and aggressively pursued. Until then, all thee actions amount to little more than window dressing.

U.S. Is Set to Sue a Dozen Big Banks Over Mortgages

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The federal agency that oversees the mortgage giants Fannie Mae and Freddie Mac is set to file suits against more than a dozen big banks, accusing them of misrepresenting the quality of mortgage securities they assembled and sold at the height of the housing bubble, and seeking billions of dollars in compensation.

The Federal Housing Finance Agency suits, which are expected to be filed in the coming days in federal court, are aimed at Bank of America, JPMorgan Chase, Goldman Sachs and Deutsche Bank, among others, according to three individuals briefed on the matter.

The suits stem from subpoenas the finance agency issued to banks a year ago. If the case is not filed Friday, they said, it will come Tuesday, shortly before a deadline expires for the housing agency to file claims.

The suits will argue the banks, which assembled the mortgages and marketed them as securities to investors, failed to perform the due diligence required under securities law and missed evidence that borrowers’ incomes were inflated or falsified. When many borrowers were unable to pay their mortgages, the securities backed by the mortgages quickly lost value.

Fannie and Freddie lost more than $30 billion, in part as a result of the deals, losses that were borne mostly by taxpayers.

In July, the agency filed suit against UBS, another major mortgage securitizer, seeking to recover at least $900 million, and the individuals with knowledge of the case said the new litigation would be similar in scope.

Private holders of mortgage securities are already trying to force the big banks to buy back tens of billions in soured mortgage-backed bonds, but this federal effort is a new chapter in a huge legal fight that has alarmed investors in bank shares. In this case, rather than demanding that the banks buy back the original loans, the finance agency is seeking reimbursement for losses on the securities held by Fannie and Freddie.

The impending litigation underscores how almost exactly three years after the collapse of Lehman Brothers and the beginning of a financial crisis caused in large part by subprime lending, the legal fallout is mounting.

Besides the angry investors, 50 state attorneys general are in the final stages of negotiating a settlement to address abuses by the largest mortgage servicers, including Bank of America, JPMorgan and Citigroup. The attorneys general, as well as federal officials, are pressing the banks to pay at least $20 billion in that case, with much of the money earmarked to reduce mortgages of homeowners facing foreclosure.

And last month, the insurance giant American International Group filed a $10 billion suit against Bank of America, accusing the bank and its Countrywide Financial and Merrill Lynch units of misrepresenting the quality of mortgages that backed the securities A.I.G. bought.

Bank of America, Goldman Sachs and JPMorgan all declined to comment. Frank Kelly, a spokesman for Deutsche Bank, said, “We can’t comment on a suit that we haven’t seen and hasn’t been filed yet.”

But privately, financial service industry executives argue that the losses on the mortgage-backed securities were caused by a broader downturn in the economy and the housing market, not by how the mortgages were originated or packaged into securities. In addition, they contend that investors like A.I.G. as well as Fannie and Freddie were sophisticated and knew the securities were not without risk.

Investors fear that if banks are forced to pay out billions of dollars for mortgages that later defaulted, it could sap earnings for years and contribute to further losses across the financial services industry, which has only recently regained its footing.

Bank officials also counter that further legal attacks on them will only delay the recovery in the housing market, which remains moribund, hurting the broader economy. Other experts warned that a series of adverse settlements costing the banks billions raises other risks, even if suits have legal merit.

The housing finance agency was created in 2008 and assigned to oversee the hemorrhaging government-backed mortgage companies, a process known as conservatorship.

“While I believe that F.H.F.A. is acting responsibly in its role as conservator, I am afraid that we risk pushing these guys off of a cliff and we’re going to have to bail out the banks again,” said Tim Rood, who worked at Fannie Mae until 2006 and is now a partner at the Collingwood Group, which advises banks and servicers on housing-related issues.

The suits are being filed now because regulators are concerned that it will be much harder to make claims after a three-year statute of limitations expires on Wednesday, the third anniversary of the federal takeover of Fannie Mae and Freddie Mac.

While the banks put together tens of billions of dollars in mortgage securities backed by risky loans, the Federal Housing Finance Agency is not seeking the total amount in compensation because some of the mortgages are still good and the investments still carry some value. In the UBS suit, the agency said it owned $4.5 billion worth of mortgages, with losses totaling $900 million. Negotiations between the agency and UBS have yielded little progress.

The two mortgage giants acquired the securities in the years before the housing market collapsed as they expanded rapidly and looked for new investments that were seemingly safe. At issue in this case are so-called private-label securities that were backed by subprime and other risky loans but were rated as safe AAA investments by the ratings agencies.

In the years before 2007, “the market was so frothy then it was hard to find good quality loans to securitize and hold in your portfolio,” said David Felt, a lawyer who served as deputy general counsel of the finance agency until January 2010. “Fannie and Freddie thought they were taking AAA tranches, and like so many investors, they were surprised when they didn’t turn out to be such quality investments.”

Fannie and Freddie had other reasons to buy the securities, Mr. Rood added. For starters, they carried higher yields at a time when the two mortgage giants could buy them using money borrowed at rock-bottom rates, thanks to the implicit federal guarantee they enjoyed.

In addition, by law Fannie and Freddie were required to back loans to low-to-moderate income and minority borrowers, and the private-label securities were counted toward those goals.

“Competitive pressures and onerous housing goals compelled them to operate more like hedge funds than government-sponsored guarantors, ” Mr. Rood said.

In fact, Freddie was warned by regulators in 2006 that its purchases of subprime securities had outpaced its risk management abilities, but the company continued to load up on debt that ultimately soured.

As of June 30, Freddie Mac holds more than $80 billion in mortgage securities backed by more shaky home loans like subprime mortgages, Option ARM and Alt-A loans. Freddie estimates its total gross losses stand at roughly $19 billion. Fannie Mae holds $38 billion of securities backed by Alt-A and subprime loans, with losses standing at nearly $14 billion.

WHISTLEBLOWER SUITS IDENTIFIES FRAUD IN AIG BAILOUT: FOLLOW THE MONEY, NOT THE PAPER

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EDITOR’S ANALYSIS: Don’t get intimidated. This is actually very simple. The Federal Reserve window and other “facilities” were made available to the tune of $7 TRILLION dollars (half of the debt ceiling in its current form) in order to ease the liquidity problem. The belief was that by saving these institutions credit would start flowing. Quite the opposite resulted, as Banks consolidated their gains from the biggest economic scam in world history.

As the suit says, Wall Street firms went to the Fed window and gave them  assets in exchange for money. The problem is that the assets were “impaired” (i.e., fraudulent). They were worthless pieces of paper that were never reviewed by anyone until now. The pools were never filled with assets because no paperwork was ever generated on the actual loans. The paperwork that WAS generated was fake describing a transaction that never took place. And then they even failed to transfer the fake paperwork because each time you use fake paperwork in a new transaction it is another crime or civil violation subjecting you to all kinds of liability.

THE POOLS WERE EMPTY. SO ANY BOND ISSUED BY THE POOL WAS WORTHLESS. THAT IS WHAT WAS USED TO CHEAT THE AMERICAN TAXPAYER AND THE SCAM IS CONTINUING WITH FORECLOSURES ON FAKE PAPERWORK OF A FICTITIOUS TRANSACTION. Where people are confused is that a loan DID get funded, but the loan described in the closing papers did NOT occur. FOLLOW THE MONEY TRAIL. NOT THE DOCUMENT TRAIL. If you follow the money, you win, if you follow the paper, they might win.

Claiming Fraud in A.I.G. Bailout, Whistle-Blower Lawsuit Names 3 Companies

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The first known whistle-blower lawsuit to assert that the taxpayers were defrauded when the federal government bailed out the American International Group was unsealed on Friday, joining a number of suits seeking to settle the score on losses related to the financial crisis of 2008.

The lawsuit, filed by a pair of veteran political activists from the La Jolla area of San Diego, asserts that A.I.G. and two large banks engaged in a variety of fraudulent and speculative transactions, running up losses well into the billions of dollars. Then the three institutions persuaded the Federal Reserve Bank of New York to bail them out by giving A.I.G. two rescue loans, which were used to unwind hundreds of failed trades.

The loans were improper, the lawsuit says, because the Fed made them without getting a pledge of high-quality collateral from A.I.G., as required by law.

“To cover losses of those engaged in fraudulent financial transactions is an authority not yet given to the Fed board,” said the plaintiffs, Derek and Nancy Casady, in their complaint, filed in Federal District Court for the Southern District of California.

The lawsuit names A.I.G., Goldman Sachs and Deutsche Bank as defendants, but not the Fed.

Senior Fed officials have stated repeatedly that they had to take unusual steps in 2008 because the global financial system was close to breaking down. The Casadys’ lawyer, Michael J. Aguirre, argued that even so, the Fed was required to comply with its own governing statutes. He said that when the Fed bailed out a nonbank, it was required to secure the loan with the same liquid, high-quality collateral it required when lending to a troubled bank.

A spokesman for A.I.G., Mark Herr, said the Casadys’ lawsuit was “devoid of merit” and said Mr. Aguirre appeared to be recycling old and discredited legal theories.

Separately, A.I.G. is now among the companies turning to the courts in hopes of recovering losses from 2008, and seeking restitution from some banks.

A spokesman for Goldman Sachs said he was not familiar with the Casadys’ lawsuit and could not comment on it. A spokeswoman for Deutsche Bank declined to comment.

The litigation shines a critical light on the Federal Reserve’s on-again-off-again power to bail out nonbanking institutions like Wall Street firms and insurance companies. The Fed first got that authority during the Great Depression, but Congress revoked it in 1958. And then, as the legal walls between banking and other financial services began to fall in the 1990s, Congress once again gave the Fed the power to make emergency loans to nonbanks.

The relevant language is contained in a single, murky sentence inserted in a bill passed the day before Thanksgiving in 1991, as members of Congress were rushing to catch their flights home. Former Senator Christopher Dodd added it at the request of Goldman Sachs and other Wall Street firms, which were still stinging from a major market crash in 1987 and eager to empower the Fed to step in if a similar problem happened again.

The Casadys’ lawsuit says the resulting law needs judicial review because it went flying through Congress with little debate and now appears to be feeding high-risk behavior. Investors in nonbanks now expect that the Fed will open a safety net to catch them, should they falter, the suit contends.

“Congress did not show a legislative intent to convert the Federal Reserve into a bank for bailing out failed speculators,” the complaint asserts.

The suit was filed under the False Claims Act, a federal law that permits private citizens to sue on behalf of government agencies if they believe they have knowledge of a fraud. The law gives people a chance to try to recover money for the government and, by extension, the taxpayers. Plaintiffs who succeed typically get a percentage.

Although the bailout of A.I.G. took place over many months and involved a total commitment of $182 billion, the lawsuit focuses on just part of it — two emergency loans, totaling about $44 billion, made at the end of October 2008. The money was used to settle trades involving two big blocks of complex, mortgage-linked securities, some of which were underwritten by Goldman Sachs and Deutsche Bank, and guaranteed by A.I.G.

When A.I.G. went into a free fall in 2008, the Fed extended the two loans to buy up the troubled securities and put them into two special-purpose vehicles, Maiden Lane II and Maiden Lane III, for holding until the turmoil subsided. Earlier this year, the Fed allowed some of the impaired assets to be sold to undisclosed purchasers.

The Casadys say the Fed erred in making the loans, because it needed a pledge of high-quality collateral from A.I.G. and instead got a big portfolio of impaired assets.

A.I.G. to Pay $725 Million in Ohio Case

July 16, 2010

A.I.G. to Pay $725 Million in Ohio Case

By MICHAEL POWELL and MARY WILLIAMS WALSH

The American International Group, once the nation’s largest insurance group before it nearly collapsed in 2008, has agreed to pay $725 million to three Ohio pension funds to settle six-year-old claims of accounting fraud, stock manipulation and bid-rigging.

Taken together with earlier settlements, A.I.G. will ladle out more than $1 billion to Ohio investors, money that will go to firefighters, teachers, librarians and other pensioners. The state’s attorney general, Richard Cordray, said Friday, that it was the 10th largest securities class-action settlement in United States history.

“No privileged few are entitled to play by different rules than the rest of us,” Mr. Cordray said during a news conference. “Ohio is determined to send a strong message to the marketplace that companies who don’t play by the rules will pay a steep price.”

A.I.G. disclosed the terms of the settlement in a filing with the Securities and Exchange Commission.

How A.I.G. will pay for this settlement is an open question. It has agreed to a two-step payment, in no small part to give it time to figure out how to raise the money.

Executives are well aware that taxpayers and legislators would cry foul if it paid the lawsuit with any portion of the $22 billion in federal rescue money still available from the United States Treasury.

Instead, the company intends to pay $175 million within 10 days of court approval of its settlement. It plans to raise $550 million through a stock offering in the spring of 2011. That prospect struck some market analysts as a long shot.

“There’s still a lot of question marks hanging over A.I.G.,” said Chris Whalen, a co-founder of Institutional Risk Analytics, a research firm. “How would you write a prospectus for it?

“The document,” he said, “would be quite appalling when it described the risks.”

A.I.G.’s former chief executive, Maurice R. Greenberg, and other executives agreed to pay $115 million in an earlier settlement with Ohio, which filed its lawsuit in 2004.

State attorneys general often have proved more aggressive than federal regulators in going after financial houses in the wake of the 2008 crisis. And A.I.G. could face new legal headaches. For instance New York’s attorney general, Andrew M. Cuomo, has stepped up his investigation of the company in the last few weeks, according to a person with direct knowledge of the case.

The Ohio settlement allows “A.I.G. to continue to focus its efforts on paying back taxpayers and restoring the value of our franchise,” Mark Herr, a company spokesman, said in a news release.

The Ohio case was filed on behalf of pension funds in the state that had suffered significant losses in their holdings of A.I.G. when its share price plummeted after it restated results for years before 2004. Those restatements followed an investigation by Eliot L. Spitzer, Mr. Cuomo’s predecessor, into accounting irregularities at the company and the subsequent resignation of Mr. Greenberg.

But the company faces a long and uncertain road, say Wall Street analysts.

Its stock, after adjusting for a reverse split, once traded at $1,446.80 a share; it stands now at $35.64.

A.I.G. has become the definition of turmoil. Its chairman resigned this week after a fierce feud with the chief executive, who has referred dismissively to “all those crazies down in Washington.”

Those crazies presumably include the federal government, which over the last two years gave A.I.G. the largest bailout in United States history, making $182 billion available to the company.

And the company’s proposed stock offering next year is rife with uncertainties. Such an offering would by definition dilute the value of the government’s holdings.

A.I.G. has struggled of late to sell off subsidiaries to repay the Federal Reserve Bank of New York. This year the company failed in its attempts to turn its Asian life insurance subsidiary over to Prudential of Britain. This week the company’s directors voted to proceed with an initial public offering of the same subsidiary, with the proceeds intended for the Federal Reserve.

Should the company fail to raise the $550 million, Ohio has the right to resume its litigation.

The fall of the world’s largest insurance company began in the autumn of 2008, when a sudden downgrade in its credit worthiness set off something like a bank run. It turned out that the company had sold questionable derivatives that were used to prop up the portfolios of other financial institutions.

Federal officials moved quickly to bail out the company, fearing that if A.I.G. toppled, dozens of financial institutions would quickly fall as well. Havoc seemed in the offing.

Federal investigators have since examined many aspects of the company’s behavior, even convening a grand jury in New York. But they have never brought charges against the company or its top officials.

“The states are too often the only ones to watch out for this misconduct,” Mr. Cordray said Friday. “For years, people have been asleep at the switch.”

Louise Story contributed reporting.

This article has been revised to reflect the following correction:

Correction: July 17, 2010

An earlier version of this article misidentified the New York attorney general who began the investigation into A.I.G.’s accounting irregularities. It was Eliot L. Spitzer, not Andrew M. Cuomo.

“uncertain line between hope and despair”

The entities foreclosing don’t have ANYTHING at stake. They have no stake and yet they are still getting homes for nothing

Editor’s Note: The federal plan is good as to its intent but unnecessary if the law was applied. Sure the bailout SHOULD apply to anyone who got stuck with one of these securitized mortgages. it clouded their title and stuck them with loan products that were unworkable while they were told by the experts at the table that everything was fine.
People have the question wrong: If the reality of the situation is not addressed SOMEBODY is going to get a free house — either the homeowner or some corporation set up by Wall Street that never lent a dime. It isn’t about why should a reckless homeowner get a free house, it is about why should a player who gambled with other people’s money get a free house. At least the homeowner has something at stake even if they had no down payment.
The entities foreclosing don’t have ANYTHING at stake. They have no stake and yet they are still getting homes for nothing. People are mad about he federal bailout. Now the same players are getting a foreclosure bailout, or better stated, a gift courtesy of the taxpayer and a reluctant judicial system.
March 22, 2010

Microcosm of Housing Crisis on an Arizona Street

By LOUISE STORY

CAVE CREEK, Ariz. — The uncertain line between hope and despair divides this exurb of Phoenix, where the trim stucco houses used to sell so briskly.

It winds around the swimming pools and the pebbled yards of East Montgomery Road like a slow-burning fuse.

On one side are people like the Setbackens, Gary and Cissie, who moved here from Washington State and, with prudence, have managed to pay their mortgage bill month after month. On the other side are those like Kelley Carter, who never dreamed that home prices would fall so hard, and got in over their heads.

Two in five homeowners in this sprawling development 30 miles northeast of Phoenix are underwater on their mortgages. And that reality is wearing away household budgets and people’s patience.

Arizona is one of five states that, with money from Washington, hopes to help at least some of these people hold on to their homes. Under a new, federally financed pilot program for the hardest-hit housing markets, state officials will decide who will get a homeowner bailout, and who will not.

The idea is as controversial in Washington as it is here. Do the neighbors next door who lived beyond their means — the ones who, say, bought that house they could not afford, or who binged on home equity loans to buy new cars and flat-panel TVs — really deserve to be bailed out with taxpayer dollars? Do they deserve to have some of their debts forgiven? And is that fair to the cautious ones who paid their mortgages?

For the people of Cave Creek, the answers will fall to state officials like Michael Trailor, the director of the Arizona housing department.

A former real estate developer, Mr. Trailor knows firsthand about the perils of the property market.

“I feel for all of them,” Mr. Trailor said of the struggling homeowners. “But we do not have the funds to help all of them. If we can help 6,000 people, which ones should we help?”

The federal government will pay for pilot programs in Arizona, California, Florida, Michigan and Nevada with $1.5 billion from the federal banking rescue. That figure is a small fraction of the funds that would be needed to help all of the people at risk. Arizona, for instance, received $125 million. If it allocates $30,000 of aid for each residence, 4,166 homeowners would benefit. But the Phoenix area is bracing for as many as 50,000 foreclosures this year alone.

Mr. Trailor said he was reluctant to help homeowners with “self-inflicted wounds,” like those who overspent or cashed out the equity in their homes during the bubble years. He wants the banks to match the public money being used for debt forgiveness, and he is focusing on people whose incomes have fallen but who still hold jobs.

He is considering an approach known as “earned forgiveness,” where the state and the banks promise to forgive mortgage debt later on, but only if the homeowners stay in their homes and keep making their payments.

The question of who deserves help rouses neighbors here. Not long ago, home values seemed to reach relentlessly toward the bright blue sky.

Then the boom went bust. Home prices in the Phoenix area have collapsed by 50 percent since mid-2006, leaving many owners with mortgages that are higher than their property values. One in 10 homes in this development in Cave Creek have moved through foreclosure since 2008, according to Netvaluecentral, a real estate tracking company in Glendale, Ariz. Half of the homes here are owned by banks or are being sold for less than the value of their mortgages.

“Underwater homes make it highly likely people will walk away, and if they do, these foreclosures are going to push everyone’s prices down,” said Brett Barry, a real estate agent here. “People need to realize that we’re in this together.”

The new reality is evident on East Montgomery Road, where the bust is playing out in a variety of ways.

There are the Setbackens, at 4355, who arrived in 1993 and paid down their mortgage even as home prices skyrocketed.

Across the street are the Chatburns, Tim and Leslie. They also arrived in the 1990s, before prices exploded, but struggled recently to keep up with the bills after an injury kept Mr. Chatburn out of work.

Mr. Chatburn, an air-conditioning repairman, used to say that bailing out his neighbors would be unfair, but he changed his mind after watching news programs about the rescues of big financial companies like the American International Group.

“I started thinking about all this money we paid as taxpayers to the banks,” he said, “and I thought, ‘Why don’t we take care of our own a little bit?’ ”

Ms. Carter, at 4344, arrived in 2005, as the bubble was inflating. She took out tens of thousands of dollars in home equity for repairs and other items, and by this year, she was underwater on her mortgage by $86,000. A single mother, she moved out this month, days before her home was sold in a short sale, which meant her mortgage lender allowed her to sell for less than the value of her mortgage and the lender took the loss.

And then there is the young couple with a toddler, at 4343. They moved out on the same day as Ms. Carter, before a scheduled foreclosure of their home that was $115,000 underwater. The couple, who asked not to be named, also bought near the peak and took out a home equity loan to pay off their student loans and other debts. Then, a year ago, they stopped paying their mortgage, after both of them lost their jobs for a time. They now have office jobs again.

Mr. Setbacken, a salesman, said he had warned his neighbors not to get in over their heads but they did not listen. He and his wife might have stepped up to a bigger house if they, like so many of their neighbors, had gambled recklessly on the housing market, he said.

“Everybody that I know that got themselves in trouble was because of one word: greed,” said Mr. Setbacken, 63, a former Marine who remains in tip-top physical condition. “I have no sympathy for any of them, on the financial end. When I hear about dropping the amount you actually owe, I could stick my finger down my throat.”

Then the doorbell rang. It was a young girl bearing Girl Scout cookies. “My adopted granddaughter,” Mr. Setbacken announced.

The 8-year-old is Ms. Carter’s daughter, Ava. Across the street, Ms. Carter was packing up the house.

Ms. Carter said she felt guilty about leaving. With her short sale, the price of the home went down to the benefit of the new homeowner. But it dragged down prices in the neighborhood, she said.

Ms. Carter, a mother of two and a real estate agent who poses as an angel with wings on her Web site, has been through hard times before. Years ago, she considered filing for bankruptcy but then changed her mind. She said she was accountable for her actions and was making what amounted to a business decision to leave her home.

“I had to take emotion out of it,” said Ms. Carter, 36. “If I had a business, and every single month I was losing money, would I keep on paying? No, I wouldn’t.”

Sitting at her dining room table, before a large tank of fish, she recalled how she had made this a perfect home. It is one of the few on East Montgomery Road with grass in the yard, an expensive proposition in the desert. A Mercedes sits in the driveway.

She said she did not feel she deserved to have her debts forgiven, but added that if her mortgage had been lowered, she would have tried harder to stay. The worst part, she said, is that her decision will hurt Mr. Setbacken, who has watched out for her over the years. “For Gary, he’s going to have to deal with the ramifications of what I’m doing because I’m bringing his property value down,” she said. “I pray at church. I feel horrible for what I’m doing to my neighbors.”

Later, after Mr. Setbacken talked to Ms. Carter — she “cried and cried and cried,” he said — he had a change of heart. In an e-mail message, he said that perhaps wealthy Americans could donate money to aid homeowners. If he had more money himself, he might help some neighbors pay their mortgage bills.

“I have focused on the financial issues during these times and overlooked what was more important, the emotional stress that my neighbors are feeling,” Mr. Setbacken wrote. He walked down East Montgomery Road and gave a bottle of wine to the young couple facing foreclosure. It was, he said, “to help them pack.”

GRETCHEN MORGENSON Takes the Lead in Media Coverage of Mortgage Meltdown in NY Times

NOW AVAILABLE ON KINDLE/AMAZON
Gretchen Gets It. The entire article is worth reading and even studying. If you get what she is saying, you can understand just how false this Waltz has been.

“The very design of the federal assistance to A.I.G. was that tens of billions of dollars of government money was funneled inexorably and directly to A.I.G.’s counterparties.” The report noted that this was money the banks might not otherwise have received had A.I.G. gone belly-up.

Goldman Sachs, Merrill Lynch, Société Générale and other banks were in the group that got full value for their contracts when many others were accepting fire-sale prices.

Ms. Tavakoli argues that Goldman should refund the money it received in the bailout and take back the toxic C.D.O.’s now residing on the Fed’s books — and to do so before it begins showering bonuses on its taxpayer-protected employees.

According to an e-mail message that Goldman sent to the New York Fed at the time, Mr. Geithner talked about the article with Mr. Viniar, Goldman’s chief financial officer, before calling me. When Mr. Geithner called, he said that Goldman had no exposure to an A.I.G. collapse and that the article had left an incorrect impression about that. When I asked Mr. Geithner if he, as head of the regulatory agency overseeing Goldman, had closely examined the firm’s hedges, he said he had not.

Probing, in-depth analyses of regulatory responses to the financial meltdown are worth their weight in gold. Mr. Barofsky’s certainly is. Yet in its rush to put financial reforms into effect, Congress seems uninterested in investigating or grappling with truths contained in such reports — and until it does, our country’s economic and financial system will continue to be at risk.

November 22, 2009
Fair Game

Revisiting a Fed Waltz With A.I.G.

A RAY of sunlight broke through the Washington fog last week when Neil M. Barofsky, special inspector general for the Troubled Asset Relief Program, published his office’s report on the government bailout last year of the American International Group.

It’s must reading for any taxpayer hoping to understand why the $182 billion “rescue” of what was once the world’s largest insurer still ranks as the most troubling episode of the financial disaster. And it couldn’t have come at a more pivotal moment.

Many in Washington want to give more regulatory power to the Federal Reserve Board, the banking regulator that orchestrated the A.I.G. bailout. Through this prism, the actions taken in the deal by Treasury Secretary Timothy F. Geithner, who was president of the Federal Reserve Bank of New York at the time, grow curiouser and curiouser.

Of special note in the report: the Fed failed to develop a workable rescue plan when A.I.G., swamped by demands that it pay off huge insurance contracts that it couldn’t make good on as the economy tanked, began to sink. The report takes the Fed to task as refusing to use its power and prestige to wrestle concessions from A.I.G.’s big, sophisticated and well-heeled trading partners when the government itself had to pay off the contracts.

The Fed, under Mr. Geithner’s direction, caved in to A.I.G.’s counterparties, giving them 100 cents on the dollar for positions that would have been worth far less if A.I.G. had defaulted. Goldman Sachs, Merrill Lynch, Société Générale and other banks were in the group that got full value for their contracts when many others were accepting fire-sale prices.

On the question of whether this payout was what the report describes as a “backdoor bailout” of A.I.G.’s counterparties, Mr. Barofsky concluded: “The very design of the federal assistance to A.I.G. was that tens of billions of dollars of government money was funneled inexorably and directly to A.I.G.’s counterparties.” The report noted that this was money the banks might not otherwise have received had A.I.G. gone belly-up.

The report zaps Fed claims that identifying banks that benefited from taxpayer largess would have dire consequences. Fed officials had refused to disclose the identities of the counterparties or details of the payments, warning “that disclosure of the names would undermine A.I.G.’s stability, the privacy and business interests of the counterparties, and the stability of the markets,” the report said.

When the parties were named, “the sky did not fall,” the report said.

Finally, Mr. Barofsky pokes holes in arguments made repeatedly over the past 14 months by Goldman Sachs, A.I.G.’s largest trading partner and recipient of $12.9 billion in taxpayer money in the bailout, that it had faced no material risk in an A.I.G. default — that, in effect, had A.I.G. cratered, Goldman wouldn’t have suffered damage.

In short, there’s an awful lot jammed into this 36-page report.

Even before publishing this analysis, Mr. Barofsky had made a name for himself as one of the few truth tellers in Washington. While others estimate how much the taxpayer will make on various bailout programs, Mr. Barofsky has said that returns are extremely unlikely.

His office has also opened 65 cases to investigate potential fraud in various bailout programs. “When I first took office, I can’t tell you how many times I’d be having a sit-down and warning about potential fraud in the program and I would hear a response basically saying, ‘Oh, they’re bankers, and they wouldn’t put their reputations at risk by committing fraud,’ ” Mr. Barofsky told Bloomberg News a little over a week ago, adding: “I think we’ve done a good job of instilling a greater degree of skepticism that what comes from Wall Street isn’t necessarily the holy grail.”

Mr. Barofsky says the Fed failed to strong-arm the banks when it was negotiating payouts on the A.I.G. contracts. Rather than forcing the banks to accept a steep discount, or “haircut,” the Fed gave the banks $27 billion in taxpayer cash and allowed them to keep an additional $35 billion in collateral already posted by A.I.G. That amounted to about $62 billion for the contracts, which the report describes as “far above their market value at the time.”

Mr. Geithner, who oversaw those negotiations, said in an interview on Friday that the terms of the A.I.G. deal were the best he could get for taxpayers. He considered bailing out A.I.G. to be “offensive,’ he said, but deemed it necessary because a collapse would have undermined the financial system.

“We prevented A.I.G. from defaulting because our judgment was that the damage caused by failure would have been much more costly for the economy and the taxpayer,” Mr. Geithner said. “To most Americans, this looked like a deeply unfair outcome and they find it hard to see any direct benefit. But in fact, their savings are more valuable and secure today.”

The report said that while bailing out Goldman and other investment banks might not have been the intent behind the Fed’s A.I.G. rescue, it certainly was its effect. “By providing A.I.G. with the capital to make these payments, Federal Reserve officials provided A.I.G.’s counterparties with tens of billions of dollars they likely would have not otherwise received had A.I.G. gone into bankruptcy,” the report stated.

As Goldman prepares to pay out nearly $17 billion in bonuses to its employees in one of its most profitable years ever, it is important that an authoritative, independent voice like Mr. Barofsky’s reminds us how the taxpayer bailout of A.I.G. benefited Goldman.

A Goldman spokesman, Lucas van Praag, said that Goldman believed “that a collapse of A.I.G. would have had a very disruptive effect on the financial system and that everyone benefited from the rescue of A.I.G.” Regarding his firm’s own dealings with A.I.G., Mr. van Praag said that Goldman believed that its “exposure was close to zero” because it insulated itself from a downturn in A.I.G.’s fortunes through hedges and collateral it had already received. (Goldman’s complete response is here.)

The inspector noted in his report that Goldman made several arguments for why it believed it was not materially at risk in an A.I.G. default, but he is skeptical of the firm’s reasoning.

So is Janet Tavakoli, an expert in derivatives at Tavakoli Structured Finance, a consulting firm. “On Sept. 16, 2008, David Viniar, Goldman’s chief financial officer, said that whatever the outcome at A.I.G., the direct impact of Goldman’s credit exposure would be immaterial,” she said. “That was false. The report states that if the New York Fed had negotiated concessions, Goldman would have suffered a loss.”

The report says that Goldman would have had difficulty collecting on the hedges it used to insulate itself from an A.I.G. default because everyone’s wallets would have been closing in a panic.

“The prices of the collateralized debt obligations against which Goldman bought protection from A.I.G. were in sickening free fall, and the cost of replacing A.I.G.’s protection would have been sky-high,” she said. “Goldman must have known this, because it underwrote some of those value-destroying C.D.O.’s.”

Ms. Tavakoli argues that Goldman should refund the money it received in the bailout and take back the toxic C.D.O.’s now residing on the Fed’s books — and to do so before it begins showering bonuses on its taxpayer-protected employees.

“A.I.G., a sophisticated investor, foolishly took this risk,” she said. “But the U.S. taxpayer never agreed to be a victim of investments that should undergo a rigorous audit.”

Perhaps Mr. Barofsky will do that audit, and closely examine the securities that A.I.G. insured and that Wall Street titans like Goldman underwrote.

Goldman contends that it had a contractual right to the funds it received in the A.I.G. bailout and that the securities it returned to the government in the deal have increased in value.

For his part, Mr. Geithner disputed much of the inspector general’s findings. He also took issue with the conclusion that the Fed failed to develop a contingency plan for an A.I.G. rescue and largely depended on plans proffered by the banks themselves.

He said the report’s view that the Fed didn’t use its might to get better terms in the rescue was unfair. “This idea that we were unwilling to use leverage to get better terms misses the central reality of the situation — the choice we had was to let A.I.G. default or to prevent default,” he said. “We could not enforce haircuts without causing selective defaults and selective defaults would have brought down the company.”

Mr. Geithner also said that the “perception that this decision by the government, not my decision alone, was made to protect any individual investment bank is unfounded.”

Less than two weeks after the A.I.G. bailout, Mr. Geithner took the firm’s side when he criticized a Sept. 28, 2008, article in The New York Times that I wrote about the A.I.G. bailout. That article included Goldman’s statement that it wouldn’t have been affected by an A.I.G. collapse. Among other things, the article, like Mr. Barofsky’s report, questioned Goldman’s assertion.

According to an e-mail message that Goldman sent to the New York Fed at the time, Mr. Geithner talked about the article with Mr. Viniar, Goldman’s chief financial officer, before calling me. When Mr. Geithner called, he said that Goldman had no exposure to an A.I.G. collapse and that the article had left an incorrect impression about that. When I asked Mr. Geithner if he, as head of the regulatory agency overseeing Goldman, had closely examined the firm’s hedges, he said he had not.

Mr. Geithner told me on Friday that he spoke with Mr. Viniar that day to ensure that Goldman’s hedges were adequate. And, notwithstanding the inspector general’s findings, he said he still believes Goldman was hedged.

Probing, in-depth analyses of regulatory responses to the financial meltdown are worth their weight in gold. Mr. Barofsky’s certainly is. Yet in its rush to put financial reforms into effect, Congress seems uninterested in investigating or grappling with truths contained in such reports — and until it does, our country’s economic and financial system will continue to be at risk.

AIG Reports Profits Increase — More Smoke and Mirrors

Editor’s Note: OK if you exclude that small matter of a $182 billion dollar loss, they made a profit. Other than that Mrs. Lincoln, how did you like the play?

It is absurd to allow this kind of reporting. Ever since they started monkeying around with reporting standards in the 1960’s, things like this have been coming at us fast and furious. Won’t somebody besides me and a few others stand up and say the Financial Accounting Standards (FAS) are for truth, reality and accuracy, not for promoting commerce based upon false pretenses. It is this kind of reporting and the fact that it is taken seriously by the media, that leads to total confusion by investors, borrowers, and everyone in between.

By LAVONNE KUYKENDALL and JOAN E. SOLSMAN

American International GroupInc. posted its second consecutive profit in the third quarter, driven largely by asset write-ups, while its core insurance operations continued to struggle with a weak economy and lingering negative perceptions in the marketplace.

Despite beating analyst estimates, AIG shares were down Friday. The stock, which has risen nearly sixfold from an all-time low in March, was up 25% for 2009 through Thursday.

In a news release, AIG Chief Executive Robert H. Benmosche said that AIG’s results “reflect continued stabilization in performance and market trends,” but said the company expects “continued volatility in reported results in the coming quarters, due in part to charges related to ongoing restructuring activities.”

One coming expense will be an approximately $5 billion charge in the fourth quarter as it closes on the special-purpose vehicles connected to its foreign life- insurance businesses AIA and ALICO, to pay off $25 billion of its New York Fed credit line.

The outstanding balance of AIG’s government bailout, including government support of all types, was $120.6 billion at the beginning of September, out of total authorized assistance of $182 billion.

Financial markets have improved significantly in the year since AIG’s bailout and changes in how financial firms can value assets have helped AIG recover from the write-downs and charges that brought it near collapse. But analysts say the company, while healthier, remains weak.

AIG posted a profit of $455 million, or 68 cents a share, compared with a year-earlier loss of $24.47 billion, or $181.02 a share. The latest results included $1.8 billion in capital losses, while the previous year’s results included billions in write-downs from credit-default swaps and $15.06 billion in capital losses.

Excluding capital losses and hedging activities that don’t qualify for hedge-accounting treatment, the profit was $2.85 in the latest quarter. A survey of analysts by Thomson Reuters predicted $1.98.

Operating income at AIG’s general-insurance business before capital gains rose more than sixfold, as net premiums written fell 13%. The portion of premiums paid out on claims and expenses climbed to 105.2% from 104.5%.

Profit at the life-insurance division more than doubled as assets under management rose in an improving market. Premiums, deposits and other considerations dropped 38.6% from last year, to $13.7 billion on lingering negative perceptions of AIG events and lower industry sales generally.

AIG, which has become more patient in selling off units as it attempts to repay federal aid, last month sold investment company Primus Financial Holdings Ltd. for $2.15 billion, its biggest sale globally so far. The company will book a $1.4 billion fourth-quarter loss on the sale.

Write to Lavonne Kuykendall at lavonne.kuykendall@dowjones.com and Joan E. Solsman at joan.solsman@dowjones.com

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