Posted on 10/30/2009 6:59:58 PM PDT by StoneWallJack
Tim Geithner should be given the option to resign immediately, or be fired. He is either incompetent, too conflicted to do his job with the banks properly, or possibly both.
Stephen Friedman should be investigated for $5.4 million in profits made through potential insider trading. His breach of fiduciary responsibility as chairman of the NY Fed is shocking...
(Excerpt) Read more at jessescrossroadscafe.blogspot.com ...
I agree. Goldman Sachs definitely got favorably treatment from the dimoKKKRATS.
Jesse’s site is a great read for those who wish to gain further insight into the financial issues of the day.
Payback for helping set up the timely "financial crisis" last fall that turned the tide for Obama in the election.
The whole premise - that AIG’s assets were worthless and thus any price paid for its securities was theft - is so factually inaccurate that only someone with zero understanding of credit default swaps and the specific instruments that brought down AIG could have written something so incomplete to the point of deception.
Virtually all of AIG’s credit default swaps ended up being insanely profitable. The problem was that, unlike the much wiser Warren Buffett at Berkshire Hathaway, the small group of men and women that sold these products allowed counter parties on all derivatives to demand cash collateral in the event of a downgrade or movement in the asset tied to the derivative.
As the market melted down, this small division of AIG, which was then and remains one of the most profitable businesses in the history of the world, found itself in the position of being forced to come up with first $20 billion and later $60 to $80 billion in cash collateral for what amounted to “escrow” accounts to be kept in the event the underlying companies they had “insured” went bankrupt. Of course, most of these companies didn’t go bust and so nearly all of the CDS didn’t’ have to pay out a dime.
Imagine someone showed up at your house and demanded every penny you ever owed - your mortgage, car payments, student loans, credit cards, etc. - all due and payable within 18 hours. No matter how successful your job, how much real estate you owned, the value of your art collection, or your pedigree, you’re going to go bankrupt.
Goldman Sachs, and the other parties that stepped in to buy the assets, made an insane amount of money on the deal BECAUSE the AIG assets were being given away for free. All of this could have been avoided if the Federal Government had merely issued a single “Letter of Credit” to the counter parties on the derivatives, protecting them from losses. AIG shareholders would have remained almost unscathed, the collateral damage to the economy wouldn’t have happened, and tax payers wouldn’t have actually had to come up with any cash. The mere temporary support would have given the system enough time to work out satisfactorily for everyone involved.
In other words, AIG had a liquidity problem caused by collateral requirements on assets that ultimately ended up profitable.
To state that the people who stepped in to the situation were thieves and there should be an investigation, when in fact they were being pure capitalist taking advantage of a weak competitor, is utterly and completely absurd. Every stockholder of Goldman Sachs should thank God that while the idiots in Detroit drove the automakers into the ground, Wachovia catered on the brink of destruction, and while Freddie Mae and Fannie Mac threatened to blow the country’s economy out of the water, the management team that they had elected to run the daily operations at Goldman were doing their job, doing it well, and making them INSANELY rich.
Anyone who doesn’t understand the mechanics of these securities and the pricing that was ultimately put in place shouldn’t criticize the details of the deal; it would be like a kindergarten teacher passing critical judgment on the technique of a neurosurgeon.
In a world of ineptitude, Goldman has proven to be shrewd, rewarding its owners day after day. Why not stop whining about it and buy shares in the company since you seem to be convinced they can’t lose?
“All of this could have been avoided if the Federal Government had merely issued a single “Letter of Credit” to the counter parties on the derivatives, protecting them from losses. AIG shareholders would have remained almost unscathed, the collateral damage to the economy wouldn’t have happened, and tax payers wouldn’t have actually had to come up with any cash.”
So what would have happened to that office in London? Would they simply have continued, or are they still in business today?
“...the small group of men and women that sold these products allowed counter parties on all derivatives to demand cash collateral in the event of a downgrade or movement in the asset tied to the derivative.”
Why?
The honest answer? They’re educated fools (they test great but have zero common sense). It’s not very polite to say, but most of them believe that everything in life fits in nice, academic models of how humans behave. Yet, if they had bothered to look back to past panics (especially 1907), they would have understood that when crisis enters the system, asset prices don’t reflect reality because you can’t find a willing buyer in that short of a time period and those that do want to buy can’t find a willing financier to lend them the capital.
This is a real problem in economics. The academic literature teaches graduates that everyone behaves rationally. Yet, people are integrated “wholes”. Sam Walton went back, bought a bank that denied him a loan in Arkansas, and fired most of the staff. Was that rational? No. It was based on a psychological need he had. When markets fall apart, these models don’t factor basic, human emotion into their forecast so they consider the possibility that AIG would ever be downgraded simultaneously with a huge drop in the value of AAA rated third party bonds to be a near impossible statistical event.
Buffett, on the other hand, has said that when he wrote the contracts, he figured the last thing he’d want to do was come up with cash at a time when everything was falling apart. Even though that probably would never happen, he made sure the contracts reflected that provision because he thought it was a real risk, no matter how remote. That’s how people should run their businesses but they’re lured into a false sense of confidence. It helps that Buffett is nearly 80 and so has lived through several crashes, whereas the average 40 year old has not because we’ve lived through the greatest economic expansion in world history over the past few decades. The younger managers now running most firms had never experienced a real contraction.
A lot of this comes from high schools not teaching probability theory, which is far more important to the average citizen than geometry or trigonometry. Most people don’t realize that the odds of you hitting the jackpot when you sit down to a slot machine are *exactly identical* the moment after the jackpot has been hit as it was before. You have the same statistical probability of winning the lottery this week with the same numbers that were drawn last week. Unless someone has been trained to rationally address these counter-intuitive realities, they make mistakes.
I imagine the executives at headquarters would have shut them down and kicked them out on the street for one, simple reason: a CEO never likes to be embarrassed.
The CEO really has only four jobs: 1.) Choosing the right people to run each division or business, 2.) Managing risk, 3.) Allocating capital, and 4.) Acting as the public face of a firm.
When Hank G. was in charge, AIG wrote some derivatives, but none of them had the provisions that took the company down because he was, like Buffett, much older and had lived through bad economic times. He also knew risk management (he was forced out of office by Elliott Spitzer for “fraud” that amounted to less than 1.5% of the company’s book value using an accounting method that was not illegal, had no rules against it, and had been used in the past by other companies - it just happened to be in the aftermath of Worldcom and when Spitzer was trying to get a name for himself to run for governor). The folks that came in after Hank didn’t have the same risk management philosophy and they ruined the company that he built over 60 years from a tiny insurance company into a global giant. It was tragic that this man’s life work was taken down by a small group of men and women in London.
Pity their risk management folks didn't read Free Republic back in 2005 when a cabinet shop owner in Portland Oregon Metro area, called the whole thing (CDO's ETC) a con game and/or a suckers bet. :^)
I didn't see the AIG collapse as a black swan event, just the PTB cashing out a CIA propriety company ;^)
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