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Behind Insurerís Crisis, Blind Eye to a Web of Risk [major conflict of interest/rip off]
New York Times ^ | September 27, 2008 | GRETCHEN MORGENSON

Posted on 09/29/2008 12:41:22 AM PDT by Freedom_Is_Not_Free

Two weeks ago, the nation’s most powerful regulators and bankers huddled in the Lower Manhattan fortress that is the Federal Reserve Bank of New York, desperately trying to stave off disaster.

As the group, led by Treasury Secretary Henry M. Paulson Jr., pondered the collapse of one of America’s oldest investment banks, Lehman Brothers, a more dangerous threat emerged: American International Group, the world’s largest insurer, was teetering. A.I.G. needed billions of dollars to right itself and had suddenly begged for help.

The only Wall Street chief executive participating in the meeting was Lloyd C. Blankfein of Goldman Sachs, Mr. Paulson’s former firm. Mr. Blankfein had particular reason for concern.

Although it was not widely known, Goldman, a Wall Street stalwart that had seemed immune to its rivals’ woes, was A.I.G.’s largest trading partner, according to six people close to the insurer who requested anonymity because of confidentiality agreements. A collapse of the insurer threatened to leave a hole of as much as $20 billion in Goldman’s side, several of these people said.

Days later, federal officials, who had let Lehman die and initially balked at tossing a lifeline to A.I.G., ended up bailing out the insurer for $85 billion.

Their message was simple: Lehman was expendable. But if A.I.G. unspooled, so could some of the mightiest enterprises in the world.

A Goldman spokesman said in an interview that the firm was never imperiled by A.I.G.’s troubles and that Mr. Blankfein participated in the Fed discussions to safeguard the entire financial system, not his firm’s own interests.

Yet an exploration of A.I.G.’s demise and its relationships with firms like Goldman offers important insights into the mystifying, virally connected — and astonishingly fragile — financial world that began to implode in recent weeks.

(Excerpt) Read more at nytimes.com ...


TOPICS: Breaking News; Business/Economy; Crime/Corruption; Government
KEYWORDS: aig; bailout; conflict; corruption; crisis; paulson; scandal

1 posted on 09/29/2008 12:41:22 AM PDT by Freedom_Is_Not_Free
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To: Freedom_Is_Not_Free

Yeah I’m especially comforted by how the CEO of Goldman Sachs had taken part of the decision making process in that whole deal with Paulson...

Have the shills whom are advocating for bailout woken up yet?


2 posted on 09/29/2008 12:59:01 AM PDT by Tempest (http://www.youtube.com/watch?v=gNlXgzzdJQA)
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To: Freedom_Is_Not_Free

Gretchen Morgenson is a star reporter. I noticed from the accompanying video that she is also very attractive.


3 posted on 09/29/2008 1:02:43 AM PDT by 1955Ford
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To: 1955Ford

Gretchen has been on top of the banking funniness for a long time, and has even receieved death threats for her reporting. She has been spot on, and is indeed very nice looking!


4 posted on 09/29/2008 1:05:23 AM PDT by Attention Surplus Disorder (Tired from wondering whether we wake up in the newest socialist country tomorrow.)
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To: Freedom_Is_Not_Free

Pretty good article. Yeah, no problem with Goldman’s exposure to AIG-insured assets, hey, just their main trading partner, no problem here, let’s just ask Henry Paulson why he bailed out AIG in such a hurry. Sure. Just a quirky coincidence, I’m sure. Maybe George Noory has the answers or could invite on a guest to blather about it. Ya think?

Nothing to see here, just mosey along.


5 posted on 09/29/2008 1:08:22 AM PDT by Attention Surplus Disorder (Tired from wondering whether we wake up in the newest socialist country tomorrow.)
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To: Attention Surplus Disorder

At this point Coast to Coast seems more credible than the Congress or White House.


6 posted on 09/29/2008 1:45:53 AM PDT by screaminsunshine
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To: Tempest

>> Yeah I’m especially comforted by how the CEO of Goldman Sachs had taken part of the decision making process in that whole deal with Paulson...

This is an insider sweetheart deal from start to finish.


7 posted on 09/29/2008 2:25:35 AM PDT by Nervous Tick (I've left Cynical City... bound for Jaded.)
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To: Freedom_Is_Not_Free

bttt


8 posted on 09/29/2008 6:14:35 AM PDT by Freedom_Is_Not_Free
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To: Freedom_Is_Not_Free

bt again


9 posted on 09/29/2008 12:04:56 PM PDT by Freedom_Is_Not_Free
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To: Freedom_Is_Not_Free

Corruption, conflict of interest, self-dealing bump!


10 posted on 09/29/2008 10:27:33 PM PDT by Jim Robinson
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To: Freedom_Is_Not_Free; Pride in the USA; Stillwaters

Paulson needs to step down! If he doesn’t tender his resignation PDQ, the president should fire him. (I know, that’s not going to happen.)


11 posted on 09/29/2008 10:38:32 PM PDT by lonevoice (John McCain was a Kinoki foot pad in the Reagan Revolution)
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To: Freedom_Is_Not_Free

I think Paulson needs to resign.


12 posted on 09/29/2008 10:46:36 PM PDT by Salvation ( †With God all things are possible.†)
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To: Freedom_Is_Not_Free

I have a simple question to anyone here that understands this business- what happened to PMI (Private Mortgage Insurance)? This insurance was (is?) required by all home buyers of conventional mortgages, and it’s purpose is to indemnify LENDERS against defaults, as I understand it. Where are they? What have all these homeowners been paying for? Why isn’t this mess insured?


13 posted on 09/29/2008 10:47:40 PM PDT by matthew fuller (Palin/McCain 08- So let it be written, So let it be done!)
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To: Freedom_Is_Not_Free

i am not taking any specific spin on this story, but one who thinks goldman is not the most connected firm on the street with Treasury is blind.


14 posted on 09/29/2008 10:47:51 PM PDT by WoofDog123
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To: politicket

Ping.


15 posted on 09/29/2008 10:49:08 PM PDT by 444Flyer (Marriage=1 man+1 woman! Vote "YES" on Prop 8, amend the Calif. State Constitution this November.)
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To: Freedom_Is_Not_Free
Great article. Thanks
16 posted on 09/29/2008 10:49:58 PM PDT by TigerLikesRooster (kim jong-il, chia head, ppogri, In Grim Reaper we trust)
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To: Freedom_Is_Not_Free

This has to be shouted out from the rooftops:

Paulson left GS. His successor, Blankfein, was in the room when it was decided that OUR money would be used to bail out AIG. AIG was on the hook to GS to the tune of $20 billion. Fast forward to LEH, Paulson lets it go bankrupt, “drawing a line in the sand.” Then when GS comes hat in hand last week, all of a sudden there is this overiding, pressing, world-ending crisis, armageddon, god save us all need for a bailout. Paulson is so conflicted it is beyond disgusting. He needs to go. And if Bush is listening to this guy, he deserves all of the opprobrium heaped upon him.

http://online.wsj.com/article/SB122266132599384845.html?mod=rss_markets_main

“Back in New York, the situation at Morgan Stanley and Goldman Sachs was worsening rapidly. In the middle of the trading day, at about 2 p.m., Morgan Stanley CEO John Mack dispatched an email to employees: “What’s happening out here? It’s very clear to me — we’re in the midst of a market controlled by fear and rumors.” By the end of Wednesday, employees at Morgan Stanley and Goldman were shell-shocked. Morgan Stanley’s shares had fallen 24% to $21.75 while Goldman, the largest investment bank by market value, fell 14% to $114.50.

By Thursday, Messrs. Paulson and Bernanke decided that the fallout presented too great a threat to the financial system and the economy. In the biggest government intervention in financial markets since the 1930s, they extended federal insurance to some $3.4 trillion in money-market funds and proposed a $700 billion plan to take bad assets off the balance sheets of banks.

Three days later, Goldman Sachs and Morgan Stanley applied to the Fed to become commercial banks — a historic move that ended the tradition of lightly regulated Wall Street securities firms that take big risks in the pursuit of equally big returns.”


17 posted on 09/29/2008 10:54:41 PM PDT by rumrunner
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To: matthew fuller

I don’t think PMI is required for a conventional mortgage if the downpayment is 20% or more.


18 posted on 09/29/2008 10:55:15 PM PDT by Marak
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To: 444Flyer
Everyone on FR needs to read and understand this article.

When will people realize that the shell of this story is the same for:

Bear Stearns
Fannie Mae
Freddie Mac
Lehman Brothers
AIG
Merrill Lynch
Washington Mutual
Wachovia
National City
Fortis
etc., etc., etc.

Many more to come as the tangled web unweaves.

19 posted on 09/29/2008 11:04:41 PM PDT by politicket (Palin-tology: (n) - The science of kicking Barack Obambi's butt!)
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To: Marak
"I don’t think PMI is required for a conventional mortgage if the downpayment is 20% or more. "

You just mentioned the crux of the problem- none of these "affirmative action" mortgages required ANY down payment, or regular income, or citizenship in this country, or anything resembling a responsible buyer. However, you're missing the point that I'm trying to make- WITHOUT 20% down, PMI is (was) required.... why isn't this PMI insurance now liable for all this worthless paper? That was what it was insuring, if I understand it correctly.

20 posted on 09/29/2008 11:06:26 PM PDT by matthew fuller (Palin/McCain 08- So let it be written, So let it be done!)
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To: matthew fuller

The vast majority of loans originated in the last few years were 80/20 or “piggyback” loans, so the purchase money mortgage was technically only 80% of the FMV, hence no PMI required. In essence, a shady way to avoid having to pay pmi.


21 posted on 09/29/2008 11:20:20 PM PDT by rumrunner
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To: 1955Ford
Claims such as this obviously require proper evidence:

22 posted on 09/29/2008 11:40:17 PM PDT by ThePythonicCow (By their false faith in Man as God, the left would destroy us. They call this faith change.)
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To: matthew fuller

I saw your previous post, and have been trying to remember where I read that relaxing the requirement for PMI was part of the “Re write” during the Clinton assault on the Mortgage Industry later in his misAdministration. I cannot remember the title of the article now, but it was posted here within the past week IIRC.

Specifically the article (I’m Paraphrasing here of course) mentioned that the costs of insurance to the disadvantaged loan applicants was too much and had to be eliminated to allow the applicants to focus on the loan repayment.

I recall an uncontrollable facial contortion upon reading that.


23 posted on 09/29/2008 11:50:25 PM PDT by rockinqsranch (Dems, Libs, Socialists, Call 'em what you will, they ALL have Fairies livin' in their Trees.)
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To: rockinqsranch

My next-door neighbor, who happens to be a brand new rillastate agent, mentioned to me that someone had asked him about this yesterday.


24 posted on 09/29/2008 11:59:17 PM PDT by matthew fuller (Palin/McCain 08- So let it be written, So let it be done!)
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To: rumrunner
opprobrium

Great word.

25 posted on 09/30/2008 4:12:45 AM PDT by murphE (I refuse to choose evil, even if it is the lesser of two)
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To: Freedom_Is_Not_Free
Great article.

We hear the Rats and the RINOs shrieking and moaning about "the crisis we have to address". If the crisis they were talking about was the crisis of embedded corruption and self interest in both the legislative and executive branches, I'd be with them one hundred percent.

26 posted on 09/30/2008 4:26:03 AM PDT by Notary Sojac (I'll back the bailout if Angelo Mozilo lets me borrow his Lamborghini on Saturday nights.)
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To: Freedom_Is_Not_Free

And these people up on the Hill wonder why we’re so suspicious of even a “good” bailout bill, if one could be created? THIS IS WHY.

There may well need to be some sort of government intervention to steady the credit markets, I don’t know. It’s all too complex for me to understand. But when we see things like this, automatically, we think that ANY intervention is being done to support the “inner circle” on Wall Street. This incestuous relationship between Congresscritters, Paulson, regulators, Wall Street execs...that’s why those of us out here in flyover country are willing to risk a partial collapse of the US economy and a painful recession. Because we’re sick of these people.

}:-)4


27 posted on 09/30/2008 4:32:38 AM PDT by Moose4 (http://moosedroppings.wordpress.com -- Because 20 million self-important blogs just aren't enough.)
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To: Freedom_Is_Not_Free
This is what the Pubs should be talking about! The cozy relationship between all these parties.

The more I keep hearing how the world is coming to an end the more I'm surprised that it hasn't.

28 posted on 09/30/2008 5:00:19 AM PDT by wmfights (Believe - THE GOSPEL - and be saved)
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To: matthew fuller
Good discussion on PMI here: Private Mortgage Insurance. The bottom line is that WE are the insurers of last resort and our chickeeeeeens have come home ... to roooooooost.
29 posted on 09/30/2008 5:15:57 AM PDT by NonValueAdded (don't worry, they only want to take water out of the other guy's side of the bucket.)
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To: Freedom_Is_Not_Free; SE Mom; penelopesire; Dog; Miss Didi; jveritas; NormsRevenge; ...
Excerpt:

Goldman is the firm that other Wall Street firms love to hate. It houses some of the world’s biggest private equity and hedge funds.

Its investment bankers are the smartest. Its traders, the best. They make the most money on Wall Street, earning the firm the nickname Goldmine Sachs.

(Its 30,522 employees earned an average of $600,000 last year — an average that considers secretaries as well as traders.)

*snip*

While the credit crisis swamped Wall Street over the last year, causing Merrill, Citigroup and Lehman Brothers to sustain heavy losses on big bets in mortgage-related securities, Goldman sailed through with relatively minor bumps.

In 2007, the same year that Citigroup and Merrill cast out their chief executives, Goldman booked record revenue and earnings and paid its chief, Lloyd C. Blankfein, $68.7 million — the most ever for a Wall Street C.E.O.

*snip*

By the weekend, it was clear that Goldman’s options were to either merge with another company or transform itself into a deposit-taking bank holding company. So Goldman did what it has always done in the face of rapidly changing events: it turned on a dime.

“They change to fit their environment. When it was good to go public, they went public,” said Michael Mayo, banking analyst at Deutsche Bank. “When it was good to get big in fixed income, they got big in fixed income. When it was good to get into emerging markets, they got into emerging markets. Now that it’s good to be a bank, they became a bank.”

The moment it changed its status, Goldman became the fourth-largest bank holding company in the United States, with $20 billion in customer deposits spread between a bank subsidiary it already owned in Utah and its European bank. Goldman said it would quickly move more assets, including its existing loan business, to give the bank $150 billion in deposits.

Even as Goldman was preparing to radically alter its structure, it was also negotiating with Mr. Buffett, a longtime client, on the terms of his $5 billion cash infusion.

Mr. Buffett, as he always does, drove a relentless bargain, securing a guaranteed annual dividend of $500 million and the right to buy $5 billion more in Goldman shares at a below-market price.

While the price tag for his blessing was steep, the impact was priceless.

“Buffett got a very good deal, which means the guy on the other side did not get as good a deal,” said Jonathan Vyorst, a portfolio manager at the Paradigm Value Fund. “But from Goldman’s perspective, it is reputational capital that is unparalleled.”

EVEN if the bailout stabilizes the markets, Wall Street won’t go back to its freewheeling, profit-spinning ways of old. After years of lax regulation, Wall Street firms will face much stronger oversight by regulators who are looking to tighten the reins on many practices that allowed the Street to flourish.

For Goldman and Morgan Stanley, which are converting themselves into bank holding companies, that means their primary regulators become the Federal Reserve and the Office of the Comptroller of the Currency, which oversee banking institutions.

Rather than periodic audits by the Securities and Exchange Commission, Goldman will have regulators on site and looking over their shoulders all the time.

The banking giant JPMorgan Chase, for instance, has 70 regulators from the Federal Reserve and the comptroller’s agency in its offices every day. Those regulators have open access to its books, trading floors and back-office operations. (That’s not to say stronger regulators would prevent losses. Citigroup, which on paper is highly regulated, suffered huge write-downs on risky mortgage securities bets.)

As a bank, Goldman will also face tougher requirements about the size of the financial cushion it maintains. While Goldman and Morgan Stanley both meet current guidelines, many analysts argue that regulators, as part of the fallout from the credit crisis, may increase the amount of capital banks must have on hand.

More important, a stiffer regulatory regime across Wall Street is likely to reduce the use and abuse of its favorite addictive drug: leverage.


30 posted on 09/30/2008 6:39:09 AM PDT by STARWISE (They (Dims) think of this WOT as Bush's war, not America's war-RichardMiniter, respected OBL author)
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To: Freedom_Is_Not_Free
Pullitzer Prize material.

I especially liked this passage:

"Of course, as this intricate skein expanded over the years, it meant that the participants were linked to one another by contracts that existed for the most part inside the financial world’s version of a black box."

To the average guy, this whole financial system is just voodoo and this passage encapsulates that feeling very nicely. It's also one of the main reasons that a bailout is so strongly opposed. There's a widespread feeling that this has all come about because of shady deals made by fast operators who have flown under the radar. This affair will keep journalists and documentary makers busy for years.

31 posted on 09/30/2008 6:44:57 AM PDT by marshmallow
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To: STARWISE

Team Obama is very scared of the ‘tape’ that came out yesterday(the day before online)of Barney Frank et, al....they are in major spin mode! The internals on this must be turning in our favor.

Thanks for the ping to this article. Heard Newt talking about it last night. Goldman Sacs is in the tank for Obama....his biggest contributor!!


32 posted on 09/30/2008 6:48:58 AM PDT by penelopesire ("The only CHANGE you will get with the Democrats is the CHANGE left in your pocket")
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To: NonValueAdded

From the article:

“Croesus was informed Saturday that these complex contracts were hedged until former Chairman Hank Greenberg was ousted from his post in April 2005. Sources close to Greenberg claim AIG held very little subprime paper, if any, before April 2005. But during the last part of 2005 AIG got deeply into subprime mortgages.”

Thanks again, Eliot Spitzer. For nothing!!!


33 posted on 09/30/2008 6:49:31 AM PDT by TenthAmendmentChampion (Lord please bless our nation with John McCain as president and Sarah Palin as Vice President! Amen.)
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To: WoofDog123

Remember the 1990s bailout over Mexican debt? Robert Rubin from Goldman Sachs was treasury secretary under Clinton.


34 posted on 09/30/2008 6:51:17 AM PDT by TenthAmendmentChampion (Lord please bless our nation with John McCain as president and Sarah Palin as Vice President! Amen.)
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To: marshmallow

“This affair will keep journalists and documentary makers busy for years. “

Well maybe not journalists - they prefer fiction rather than fact these days.


35 posted on 09/30/2008 6:52:58 AM PDT by Jenny217 (Competition defines and refines a person. It really is nothing to be afraid of. It’s said the only)
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To: STARWISE

“After years of lax regulation, Wall Street firms will face much stronger oversight by regulators who are looking to tighten the reins on many practices that allowed the Street to flourish.”

Overregulation (Sarbanes Oxley) led to money fleeing the stock market and over investing in property and later commodities (the next bubble to pop, or maybe just deflate).

I don’t know the exact answer but tightening down on ways to make money seems counterproductive.

We should start by repealing Sarbanes Oxley and let money flow back into the stock market. We are strangling ourselves!


36 posted on 09/30/2008 7:01:52 AM PDT by TenthAmendmentChampion (Lord please bless our nation with John McCain as president and Sarah Palin as Vice President! Amen.)
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To: Freedom_Is_Not_Free

This appears to be a good article. Thanks!


37 posted on 09/30/2008 8:02:54 AM PDT by ConservativeMind (What's "Price Gouging"? Should government force us to sell to the 15th highest bidder on eBay?)
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To: ConservativeMind

You are welcome.


38 posted on 09/30/2008 9:35:09 AM PDT by Freedom_Is_Not_Free
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To: matthew fuller
WITHOUT 20% down, PMI is (was) required.... why isn't this PMI insurance now liable for all this worthless paper?

The way this is structured for a low-income person is to give them a second-loan at about 12% for the down payment, and then the first mortgage has a low teaser rate for the rest of the 80% of the cost.

It's basically a bomb with a short fuse.

39 posted on 09/30/2008 7:24:06 PM PDT by slowhandluke (It's hard work to be cynical enough in this age)
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To: Saoirise

Ping.


40 posted on 09/30/2008 9:15:11 PM PDT by 444Flyer (Marriage=1 man+1 woman! Vote "YES" on Prop 8, amend the Calif. State Constitution this November.)
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