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The Latest AIG Story (must-read)
The Wall Street Journal ^ | Jan 29, 2010

Posted on 01/28/2010 10:53:57 AM PST by TopQuark

Will regulators ever coherently explain why AIG could not be allowed to go bankrupt in September of 2008?

At yesterday's House hearing, Secretary of the Treasury Timothy Geithner and predecessor Hank Paulson said they didn't bail out AIG to save its derivatives counterparties. Instead, said Mr. Geithner, the now-famous 100-cents-on-the-dollar buyouts of credit default swap contracts were necessary to prevent a further downgrade of AIG by credit-ratings agencies.

This topic probably deserves another hearing on its own. Remember, the Federal Reserve Bank of New York, where Mr. Geithner was president, had by that time already seized AIG. We're guessing that a ratings agency is pretty comfortable with the creditworthiness of a firm 79.9%-owned by Uncle Sam. Yet Mr. Geithner is saying that the same credit raters that applied triple-A ratings to tranches of junk mortgages somehow got the yips when the world's most respected borrower was standing behind AIG.

(Excerpt) Read more at online.wsj.com ...


TOPICS: Business/Economy; Front Page News; Government; News/Current Events
KEYWORDS:
This is one of the most important articles of the last couple of years. It is bound to be overlooked, however, as it seems to split hairs about who knew what at the time of the bailout.

What it actually shows in full color is an instance of a well-known yet widely disbelieved fact: the government in general and regulators in particular CANNOT possibly know more than corporate managers. If AIG could not forsee the crisis and properly estimate the systemic risk, neither could government regulators. The article shos that, even in retrospect a year later, the regulators don't even know what the systemic risk was.

Socialists that blame corporate management for the crisis should reflect on this article. When they advocate "tighter regulation," they assume that such regulation exists, that regulators KNOW how to regulate. The simply thrith is, they do not.

"This raises some serious issues for financial reform. The Geithner and Paulson story now is essentially that the system of heavy state insurance regulation was a sham. When push came to shove, policyholders were not protected from a default by the parent company. "

"If yesterday's testimony is true, the real systemic risk was not in unregulated markets where the danger is obvious, but in markets where regulation created the illusion of safety."

1 posted on 01/28/2010 10:53:58 AM PST by TopQuark
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To: TopQuark
"..If AIG could not forsee the crisis and properly estimate the systemic risk, neither could government regulators. The article shos that, even in retrospect a year later, the regulators don't even know what the systemic risk was..."

The Credit Default Swap meltdown had less to do with estimating the systemic risk than it did with the desire of the managers to generate enormous bonuses by backing risk THEY KNEW was crap. The entire operation was a scam.

2 posted on 01/28/2010 10:59:06 AM PST by Anti-Bubba182
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To: Liz; STARWISE; onyx; Bahbah; maggief

FYI


3 posted on 01/28/2010 11:05:02 AM PST by hoosiermama (ONLY DEAD FISH GO WITH THE FLOW.......I am swimming with Sarahcudah! Sarah has read the tealeaves.)
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To: TopQuark

Ginther and Paulson are lying, either back in 2008 or now, because they are telling 2 incompatiable stories. The new story is utter BS spin to make it sound like AIG was saved for the “little guy” not for Wall Street and Euro banks.


4 posted on 01/28/2010 11:07:33 AM PST by C19fan
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To: TopQuark

How many states have their employees’ pension funds invested with AIG?

They had a huge presence in WV.


5 posted on 01/28/2010 11:12:34 AM PST by Jude in WV
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To: Anti-Bubba182

>The entire operation was a scam.

I believe the exact word is fraud.


6 posted on 01/28/2010 11:22:43 AM PST by OneWingedShark (Q: Why am I here? A: To do Justly, to love mercy, and to walk humbly with my God.)
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To: TopQuark

CDS devices are a scam, they were a primary cause of systemic failure; greed being the other component. CDS’s were unregulated insurance with one major difference, those purchasing ‘em (still) don’t have to have any vested interest in the underlying asset being protected. This makes them a big boy toy, purchase and then the asset can be forced into the ground. Fin corps as groups of gang-bangers...

For instance, you can’t take out a real insurance policy on me, my house...etc.


7 posted on 01/28/2010 11:32:17 AM PST by veracious
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To: Anti-Bubba182
The Credit Default Swap meltdown had less to do with estimating the systemic risk than it did with the desire of the managers to generate enormous bonuses by backing risk THEY KNEW was crap. The entire operation was a scam.

"He who works his land will have abundant food, but he who chases fantasies lacks judgment." Proverbs 12:11

"Dishonest money dwindles away, but he who gathers money little by little makes it grow." Proverbs 13:11

"The plans of the diligent lead to profit, as surely as haste leads to poverty. A fortune made by a lying tongue is a fleeting vapor and a deadly snare." Proverbs 21:5-6

"He who works his land will have abundant food, but the one who chases fantasies will have his fill of poverty. A faithful man will be richly blessed, but one eager to get rich will not go unpunished." Proverbs 28:19-20
8 posted on 01/28/2010 11:38:26 AM PST by fallujah-nuker (My vote made a difference. Because of my vote an extra ballot in had to be stuffed in King County.)
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To: TopQuark

in markets where regulation created the illusion of safety.”

^
Hey hey, I think your onto something. Also seems I just seen an article of Bipartisan’s(Democrats + RINO’s) going after Employers to estimate returns on a 401k


9 posted on 01/28/2010 11:41:41 AM PST by Son House (The Learning Curve for Democrats on Macroeconomics is getting Exponential)
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To: TopQuark
Will regulators ever coherently explain why AIG could not be allowed to go bankrupt in September of 2008?

It would have been bad.

Try to imagine all life as you know it stopping instantaneously and every molecule in your body exploding at the speed of light.

10 posted on 01/28/2010 12:04:50 PM PST by Toddsterpatriot (Math is hard. Harder if you're stupid.)
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To: TopQuark

“When buying and selling are controlled by legislation, the first things to be bought and sold are legislators.”-
P. J. O’Rourke


11 posted on 01/28/2010 12:20:06 PM PST by WOBBLY BOB (ACORN:American Corruption for Obama Right Now)
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To: veracious

The bucket-shop laws passed around 1903 made this kind of betting on what happens to securities you don’t own illegal.
Unfortunately, these laws were rescinded (by bipartisan effort) in Clinton’s presidency.


12 posted on 01/28/2010 1:25:39 PM PST by expatpat
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To: All
It's been reported that taxpayers' bailout of AIG directly transferred $14 billion to Goldman Sachs. Course the following is just a coincidence (/sarc)

Goldman Sachs Will Be Sitting Pretty With Emanuel in the Obama White House
By: Timothy P. Carney, Examiner Columnist, Nov 21, 2008

Goldman Sachs always has clout in Washington, as evidenced by the firm’s alumni serving as Treasury secretaries under both Presidents Bush and Clinton. Today, in these tumultuous times of bailouts and meltdowns when the investment banking leviathan needs Washington more than ever before, Goldman can leverage its most valuable asset yet—incoming White House chief of staff Rahm Emanuel. Goldman Sachs is the giant of Wall Street, and more than any other investment bank, Goldman is surviving the current financial storm.

Traditionally a Democratic booster, and one of Barack Obama’s top sources of funds in this past election, Goldman has always had some particularly strong allies within government. Emanuel is one such ally. An interesting early chapter in the Goldman-Emanuel relationship took place in the setting of Bill Clinton’s campaign for the White House in 1992. Clinton hired Emanuel as his chief fundraiser.

At the same time, however, Emanuel was on the payroll of Goldman Sachs, receiving $3,000 per month from the firm to “introduce us to people,” in the words of one Goldman partner at the time. This is certainly a noteworthy relationship, but it’s one that has almost entirely escaped scrutiny. (snip)

In his four terms in Congress, Emanuel has raised $74,750 from Goldman, making the firm his number four source of funds. Goldman has helped Emanuel. How has Emanuel helped Goldman? The most obvious answer, as mentioned in this column two weeks ago, is in Emanuel’s lead role in shepherding the “$700 billion” bailout—first proposed by former a Goldman CEO, Bush Treasury Secretary Henry Paulson—through the skeptical House.

Of course, back in the Clinton days, Goldman benefited from NAFTA and the bailout of the Mexican currency, with Emanuel pushing NAFTA through Congress, and Rubin hammering out the peso bailout. Did Goldman improperly funnel money to the Clinton campaign by subsidizing Emanuel’s salary in 1992? Did Goldman’s help to Clinton spur the Democratic president to push NAFTA and the Mexican bailout?

The answers to these questions are opaque, and with Emanuel burrowed deep within the Obama White House, the continued relationship between Goldman Sachs and Obama’s right hand man won’t be easy to follow.

Watch which regulations of Wall Street Obama fights for. Watch where the bailout money goes. And don’t be surprised Goldman soon sitting pretty once again.

http://www.washingtonexaminer.com/opinion/columns/TimothyCarney/

THINGS WE DO NOT KNOW ABOUT RAHM Did Wall Street Rahm reveal all of his ties to financial institutions involved in Obama's trillion dollar federal bailout of financials.......like Goldman Sachs, for instance?

13 posted on 01/28/2010 1:33:46 PM PST by Liz
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To: expatpat
The bucket-shop laws passed around 1903 made this kind of betting on what happens to securities you don’t own illegal.

I can, on the CBOE, bet on stocks I don't own. I can, on the Chicago Merc, bet on bonds I don't own. I could do both long before Clinton was president.

14 posted on 01/28/2010 1:56:22 PM PST by Toddsterpatriot (Math is hard. Harder if you're stupid.)
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To: expatpat

Thanks, didn’t know about the the bucket-shop laws.

Still I’d rather state the rescission as a function of those many trillions of dollars USA has transfered to foreign nations and entities; ie., why it happened rather than when.

Portions of this ongoing transfer of wealth is coming back to decide what USA does, buying influence/control/politicians/institutions/lobbyists/news-outlets/corporations...


15 posted on 01/28/2010 2:39:07 PM PST by veracious
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To: Anti-Bubba182
"The Credit Default Swap meltdown had less to do with estimating the systemic risk"

That's not what you heard for good one half of the year. They blamed "derivatives" before they moved to bonuses.

"than it did with the desire of the managers to generate enormous bonuses"

Very silly. The first thing you've been told in school was that corporate management is hired to generate profits for owners (which is nowadays the American public in the case of large corporations such as AIG). To generate profit is therefore THE job managers are hired to do. Bonuses help them to exert more effort in that direction, but this is because the OWNERS want them to do so.

"by backing risk THEY KNEW was crap."

Defamation. Pure defamation.

"The entire operation was a scam."

16 posted on 01/31/2010 6:25:17 AM PST by TopQuark
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To: C19fan
"The new story is utter BS spin to make it sound like AIG was saved for the “little guy” not for Wall Street and Euro banks."

You are finally hearing the truth. They could not tell you that the bailout actually was for the Main Street because you would would not be angry at Wall Street.

What is Wall Street? Who owns it? When Goldman Sachs makes profits, it does not keep it as sacks with money somewhere in the basement: one way or another it is the OWNERS that benefit.

Unlike a century ago in robber barrons' America, large American corporations are owned by the American public -- via mutual funds. Most people on this board are probably owners of AIG, Goldman, etc.

The bailout benefited the Main Street both directly and indirectly (that does not mean I actually supported the bailout then or support it now).

17 posted on 01/31/2010 6:32:40 AM PST by TopQuark
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To: Jude in WV
"How many states have their employees’ pension funds invested with AIG?"

Great many. This is because the AIG stock represented a very conservative investment. Not only the states' pension funds but practically every conservative mutual fund had some AIG stock. It is for this reason that Wall Street is actually owned by the American public. Socialists, of course, still portray the Wall Street as being owned by a few "rich." And many people on this forum believe that, too.

18 posted on 01/31/2010 7:01:28 AM PST by TopQuark
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To: OneWingedShark
"I believe the exact word is fraud"

Do you have any evidence for that? Or, as it is customary for socialists, you just habitually defame tens of thousands of honest working people?

19 posted on 01/31/2010 7:02:47 AM PST by TopQuark
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To: veracious
""CDS devices are a scam,"

For the 10,000th time I am asking "conservatives" like you whether they have any evidence for that. Like many other socialists, you simply defame without a shred of evidence.

"they were a primary cause of systemic failure;"

This is so silly, it is not even wrong. The financial sysmem is a large dynamical system. It was push out of equilibrium by the Community Reinvestment Act (an outside force) that MANDATED a certain, and increasing over time, proportion of bad loans that could never be repaid. The simplest macro statistic for that is the level of homeownership, which stood at about 65% for decades and shot up in a few years to 69%. The difference, 4 per cent, is about 12 million Americans that cannot pay back their loans. This situation was mandated by Congress. (The other salient statistic is the divergence between housing price inflation and the overall price inflation that occurred immediately after the Act was passed.)

Now, a complex dynamical system absorbs and distributes the impact of an external influence in a complex fashion. In the case of financial system, this absorption was accommodated by CDOs and various other instruments and practices. That' what the free market does well: it efficiently fullfils the demands but does not tell people what those demands should be. "You, the people of America, demand via your elected representatives that the poor should own their homes, so I the market will provide that to you.

Blaming the market for the government failure is both false and immoral.

"greed being the other component."

You must be one of those jokesters who claims to know what greed and gouging are. And, like most socialists, that nebulous special kind of greed is attributed to the nonexistent "rich."

"CDS’s were unregulated insurance with one major difference, those purchasing ‘em (still) don’t have to have any vested interest in the underlying asset"

You recite textbooks here without any analysis. What is the rational for requiring vested interest in the insured asset? Why SHOULD that be a universal principle, thus applying not only to a motor vehicle but also to a stock?

You indicate very little reflection but a great ease with which you defame people.

20 posted on 01/31/2010 7:20:20 AM PST by TopQuark
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To: TopQuark

Sheesh! Do you work for these animals?


21 posted on 01/31/2010 7:37:38 AM PST by Anti-Bubba182
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To: TopQuark

>>”I believe the exact word is fraud”
>
>Do you have any evidence for that?

Dictionary.com definition for Fraud:
1. deceit, trickery, sharp practice, or breach of confidence, perpetrated for profit or to gain some unfair or dishonest advantage.
2. a particular instance of such deceit or trickery: mail fraud; election frauds.
3. any deception, trickery, or humbug: That diet book is a fraud and a waste of time.
4. a person who makes deceitful pretenses; sham; poseur.

Taking note of definition #1 anyone trying to ‘hustle’ or ‘pressure’ you into signing something with a lot of fine-print IS committing a fraud [though perhaps not in the legal sense, just as lying is different than perjury]... even those who ‘explain’ the fine-print nicely can be committing it by definition 4 [like the ‘housing market is _ONLY_ going to go up!’ people that were pushing interest-only loans].

>Or, as it is customary for socialists, you just habitually defame tens of thousands of honest working people?

I provided the definition and reasoning for my defense above; or do you think that these legal morasses called ‘securities,’ which have been noted by many as an attempt to privatize the profits while [publicly] distributing the risk is, inherently, an honest practice? Do you think it is honest to draw up such tangled (property-ownership-wise) contracts and sell them off letting the courts sort out the mess? {Also consider how much of my [taxpayer] money is going to, as needs be, be used to straighten out the legal mess.}

Do you still think I am “habitually defam[ing] tens of thousands of honest working people?”


22 posted on 01/31/2010 1:59:37 PM PST by OneWingedShark (Q: Why am I here? A: To do Justly, to love mercy, and to walk humbly with my God.)
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