New York Fed's Secret Choice to Pay for Swaps Hits Taxpayers - Bloomberg.com - The Diigo Meta page

• 06 Nov 09
  

  Eric Hanneken

  The Federal Reserve, after conferring in secret with investment banks, agreed to cover all of their losses with taxpayer money. This is how government works in the real world.

  AIG credit default swap CDO New York Federal Reserve Fed bank Goldman Sachs Timothy Geithner finance crisis government politics

  • Habayeb, 37, was chief financial officer for the AIG
    division that oversaw AIG Financial Products, the unit that had
    sold the swaps to the banks. One of his goals was to persuade
    the banks to accept discounts of as much as 40 cents on the
    dollar, according to people familiar with the matter.

  • After less than a week of private negotiations
    with the banks, the New York Fed instructed AIG to pay them par,
    or 100 cents on the dollar. The content of its deliberations has
    never been made public.

    
    

    The New York Fed’s decision to pay the banks in full cost
    AIG -- and thus American taxpayers -- at least $13 billion.
    That’s 40 percent of the $32.5 billion AIG paid to retire the
    swaps. Under the agreement, the government and its taxpayers
    became owners of the dubious CDOs, whose face value was $62
    billion and for which AIG paid the market price of $29.6
    billion. The CDOs were shunted into a Fed-run entity called
    Maiden Lane III.

  • 1 more annotations...
  • • The deal contributed to the more than $14 billion that over
      18 months was handed to Goldman Sachs, whose former chairman,
      Stephen Friedman, was chairman of the board of directors of the
      New York Fed when the decision was made.
• 29 Oct 09
  

  W21st NYC

  NY Fed corruption Wall Street government cap v cap AIG redux bailout chronology N.B. Maiden Lane 111

  • Among AIG’s bank counterparties were New York-based Goldman
    Sachs Group Inc. and Merrill Lynch & Co., Paris-based Societe
    Generale SA and Frankfurt-based Deutsche Bank AG.

  • By Sept. 16, 2008, AIG, once the world’s largest insurer,
    was running out of cash, and the U.S. government stepped in with
    a rescue plan. The Federal Reserve Bank of New York, the
    regional Fed office with special responsibility for Wall Street,
    opened an $85 billion credit line for New York-based AIG. That
    bought it 77.9 percent of AIG and effective control of the
    insurer.

    
    

    The government’s commitment to AIG through credit
    facilities and investments would eventually add up to $182.3
    billion.

  • 24 more annotations...
  • • Beginning late in the week of Nov. 3, the New York Fed, led
      by President Timothy Geithner, took over negotiations with the
      banks from AIG, together with the Treasury Department and
      Chairman Ben S. Bernanke’s Federal Reserve. Geithner’s team
      circulated a draft term sheet outlining how the New York Fed
      wanted to deal with the swaps -- insurance-like contracts that
      backed soured collateralized-debt obligations.
    • After less than a week of private negotiations
      with the banks, the New York Fed instructed AIG to pay them par,
      or 100 cents on the dollar. The content of its deliberations has
      never been made public.
    • The New York Fed’s decision to pay the banks in full cost
      AIG -- and thus American taxpayers -- at least $13 billion.
      That’s 40 percent of the $32.5 billion AIG paid to retire the
      swaps. Under the agreement, the government and its taxpayers
      became owners of the dubious CDOs, whose face value was $62
      billion and for which AIG paid the market price of $29.6
      billion. The CDOs were shunted into a Fed-run entity called
      Maiden Lane III.
    • The deal contributed to the more than $14 billion that over
      18 months was handed to Goldman Sachs, whose former chairman,
      Stephen Friedman, was chairman of the board of directors of the
      New York Fed when the decision was made.
    • Friedman, 71, resigned
      in May, days after it was disclosed by the Wall Street Journal
      that he had bought more than 50,000 shares of Goldman Sachs
      stock following the takeover of AIG. He declined to comment for
      this article.
    • The New York Fed board, which normally consists of nine
      directors, in November 2008 included Jamie Dimon, chief
      executive officer of JPMorgan Chase & Co., and Friedman. The
      directors have no direct role in bank supervision. They’re
      responsible for advising on regional economic conditions and
      electing the bank president.
    • “There’s no way they should have paid at par,” she says.
      “AIG was basically bankrupt.”
    • Far more money was wasted in paying the banks for their
      swaps, says Donn Vickrey of financial research firm Gradient
      Analytics Inc. “In cases like this, the outcome is always along
      the lines of 50, 60 or 70 cents on the dollar,” Vickrey says.
    • One reason par was paid was because some counterparties
      insisted on being paid in full and the New York Fed did not want
      to negotiate separate deals, says a person close to the
      transaction. “Some of those banks needed 100 cents on the
      dollar or they risked failure,” Vickrey says.
    • People familiar with the transaction say the New York Fed
      considered a range of options, including guaranteeing the banks’
      CDOs. They say that by buying the securities, AIG got the best
      deal it could.
    • According to a quarterly New York Fed report on its
      holdings, the $29.6 billion in securities held by Maiden Lane
      III had declined in value by about $7 billion as of June 30.

    • Edward Grebeck, CEO of Stamford, Connecticut-based debt
      consulting firm Tempus Advisors, says the most serious breach by
      the government was to keep the process of approving the bank
      payments secret.

      
      

      “It’s inexcusable,” says Grebeck, who teaches a course on
      CDSs at New York University. “Everybody should be privy to the
      negotiations that went on. We can’t have bailouts like this
      happening behind closed doors.

    • Bloomberg News has filed a Freedom of Information Act
      request seeking copies of the term sheets related to AIG’s
      counterparty payments, along with e-mails and the logs of phone
      calls and meetings among Geithner, Friedman and other New York
      Fed and AIG officials. The request is pending.
    • The Federal Reserve has been reluctant to publish
      information on its efforts to stabilize the financial system
      since the crisis began. The Fed has loaned more than $2
      trillion, yet it refuses to name the recipients of the loans, or
      cite the amount they borrowed, saying that doing so may set off
      a run by depositors and unsettle shareholders.
    • ruled in
      Bloomberg’s favor, saying the central bank had to provide
      details of the loans.
    • The Fed has appealed to the Second Circuit Court of
      Appeals, and the data remain secret while the appeal proceeds.
    • Information on the borrowers is “central to understanding
      and assessing the government’s response to the most cataclysmic
      financial crisis in America since the Great Depression,”
      attorneys for Bloomberg said in the Nov. 7 suit.
    • Questions about the New York Fed transactions may be
      answered by Neil Barofsky, inspector general for the Troubled
      Asset Relief Program, or TARP. He is working on a report, which
      may be released next month, on whether AIG overpaid the banks.
    • TARP is the vehicle through which the Treasury invested more
      than $200 billion in some 600 U.S. financial institutions.

    • Still, officials at AIG object to the secrecy that
      surrounded the transactions. One top AIG executive who asked not
      to be identified says he was pressured by New York Fed officials
      not to file documents with the U.S. Securities and Exchange
      Commission that would divulge details.

      
      

      “They’d tell us that they don’t think that this or that
      should be disclosed,” the executive says. “They’d say, ‘Don’t
      you think your counterparties will be concerned?’ It was much
      more about protecting the Fed.”

    • Friedman’s role remains controversial. In December 2008,
      weeks after the payments to the banks were authorized in
      November, Friedman bought 37,300 shares of Goldman stock at
      $80.78 a share, according to SEC filings. On Jan. 22, he bought
      15,300 more at $66.61.
    • Both purchases took place before the payments to Goldman
      Sachs were publicly disclosed under pressure from Senator Dodd
      in March. On Oct. 26, Goldman Sachs stock closed at $179.37 a
      share, meaning Friedman had paper profits of $5.4 million.
    • Jerry Jordan, former president of the Federal Reserve Bank
      of Cleveland, says Friedman should have resigned from the New
      York Fed as soon as it became clear that Goldman stood to
      benefit from its actions.
    • Friedman remains a member of Goldman’s board and held a
      total of 98,600 shares of the firm’s stock as of Jan. 22.
• 

  Chasjo Mitch
  • Habayeb, 37, was chief financial officer for the AIG
    division that oversaw AIG Financial Products, the unit that had
    sold the swaps to the banks. One of his goals was to persuade
    the banks to accept discounts of as much as 40 cents on the
    dollar, according to people familiar with the matter.

  • The Federal Reserve Bank of New York, the
    regional Fed office with special responsibility for Wall Street,
    opened an $85 billion credit line for New York-based AIG. That
    bought it 77.9 percent of AIG and effective control of the
    insurer.

    
    

    The government’s commitment to AIG through credit
    facilities and investments would eventually add up to $182.3
    billion.

  • 10 more annotations...
  • • Part of a sentence in the document was crossed out. It
      contained a blank space that was intended to show the amount of
      the haircut the banks would take, according to people who saw
      the term sheet. After less than a week of private negotiations
      with the banks, the New York Fed instructed AIG to pay them par,
      or 100 cents on the dollar. The content of its deliberations has
      never been made public.
    • he New York Fed’s decision to pay the banks in full cost
      AIG -- and thus American taxpayers -- at least $13 billion.
    • The deal contributed to the more than $14 billion that over
      18 months was handed to Goldman Sachs, whose former chairman,
      Stephen Friedman, was chairman of the board of directors of the
      New York Fed when the decision was made.
    • Friedman, 71, resigned
      in May, days after it was disclosed by the Wall Street Journal
      that he had bought more than 50,000 shares of Goldman Sachs
      stock following the takeover of AIG.

    • Janet Tavakoli, founder of Chicago-based Tavakoli
      Structured Finance Inc., a financial consulting firm, says the
      government squandered billions in the AIG deal.

      
      

      “There’s no way they should have paid at par,” she says.
      “AIG was basically bankrupt.”

    • “In cases like this, the outcome is always along
      the lines of 50, 60 or 70 cents on the dollar,” Vickrey says.
    • dward Grebeck, CEO of Stamford, Connecticut-based debt
      consulting firm Tempus Advisors, says the most serious breach by
      the government was to keep the process of approving the bank
      payments secret.
    • In this case, even the identities of the AIG counterparties
      weren’t disclosed until March 2009, when U.S. Senator
      Christopher Dodd, head of the Senate Finance Committee, demanded
      they be made public.
    • The Federal Reserve has been reluctant to publish
      information on its efforts to stabilize the financial system
      since the crisis began. The Fed has loaned more than $2
      trillion, yet it refuses to name the recipients of the loans, or
      cite the amount they borrowed, saying that doing so may set off
      a run by depositors and unsettle shareholders.
    • Both purchases took place before the payments to Goldman
      Sachs were publicly disclosed under pressure from Senator Dodd
      in March. On Oct. 26, Goldman Sachs stock closed at $179.37 a
      share, meaning Friedman had paper profits of $5.4 million.
• 27 Oct 09
  

  Manny C

  banking gfc geithner_tim aig goldman_sachs corporatism cds federal_reserve

  • Friedman had paper profits of $5.4 million.
  • “We limited our overall credit exposure to AIG through a
    combination of collateral and market hedges,” Viniar said.
    “There would have been no credit losses if AIG had failed.”

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