Sunday, November 2, 2008

Extortionists, Thieves & Liars - Will They Go Quietly In the Night?

So, A.I.G. can't account for exactly what it's done with the taxpayer's original $123 billion ("emergency lending") bailout cash (or the already received extra $38 billion), how much more will be needed as the economy continues to weaken, and how a company that was reporting no trouble in September's audit was on the critical list in October (calling into question once again how the decision was made (and by whom) to funnel taxpayer money to A.I.G.). "The internal auditor resigned and is now in seclusion, according to a former colleague."

“You don’t just suddenly lose $120 billion overnight,” said Donn Vickrey of Gradient Analytics, an independent securities research firm in Scottsdale, Ariz. . . . The biggest portion of the Fed loan is apparently being used as collateral for A.I.G.’s derivatives contracts, including credit-default swaps. The swap contracts are of great interest because they are at the heart of the insurer’s near collapse and even A.I.G. does not know how much could be needed to support them. . . . Through last year, senior executives said that there was nothing to fear, that its swaps were rock solid. The portfolio “is well structured” and is subjected to “monitoring, modeling and analysis,” Martin J. Sullivan, A.I.G.’s chief executive at the time, told securities analysts in the summer of 2007.
A Billion Here, A Billion There (Or Is It a Trillion Now?) How many more surprises does A.I.G. have on the backburner for us (and isn't this a very large factor in the thrashing of the credit markets)? Perhaps we may find a few clues here:
A.I.G. had come under fire for accounting irregularities some years back and had brought in a former accounting expert from the Securities and Exchange Commission. He began to focus on the company’s accounting for its credit-default swaps and collided with Joseph Cassano, the head of the company’s financial products division, according to a letter read by Mr. Waxman at the recent Congressional hearing. When the expert tried to revise A.I.G.’s method for measuring its swaps, he said that Mr. Cassano told him, “I have deliberately excluded you from the valuation because I was concerned that you would pollute the process.” Mr. Cassano did not attend the hearing and was unavailable for comment. The company’s independent auditor, PricewaterhouseCoopers, was the next to raise an alarm. It briefed Mr. Sullivan late in November, warning that it had found a “material weakness” because the unit that valued the swaps lacked sufficient oversight. About a week after the auditor’s briefing, Mr. Sullivan and other executives said nothing about the warning in a presentation to securities analysts, according to a transcript. They said that while disruptions in the markets were making it difficult to value its swaps, the company had made a “best estimate” and concluded that its swaps had lost about $1.6 billion in value by the end of November. Still, PricewaterhouseCoopers appears to have pressed for more. In February, A.I.G. said in a regulatory filing that it needed to “clarify and expand” its disclosures about its credit-default swaps. They had declined not by $1.6 billion, as previously reported, but by $5.9 billion at the end of November, A.I.G. said. PricewaterhouseCoopers subsequently signed off on the company’s accounting while making reference to the material weakness. Investors shuddered over the revision, driving A.I.G.’s stock down 12 percent. Mr. Vickrey, whose firm grades companies on the credibility of their reported earnings, gave the company an "F". Mr. Sullivan, his credibility waning, was forced out months later.
Goldman Sachs and Bank of America, which just bought Merrill Lynch, (the clear winners of the "shakeout") evidently had so much extra bailout cash that they felt no need to do anything for the taxpayers (like provide liquidity to the credit markets as advertised) except pay bonuses for its wisest managers and buy weakened competitors at yard sale prices (and you thought all those campaign contributions were gratis). And then, of course, there's also the matter of the "financial fiasco that has ricocheted globally" into every district in the U.S. that sought big returns from investment advisers who talked them into borrowing from overseas to fund a "complex investment that offered big profits" (in effect mimicking hedge funds) to avoid raising taxes to fund pension benefits (and more) and balance budgets.
The Wisconsin schools are on the brink of losing their money, confronting educators with possible budget cuts. Interest rates for New York’s subways are skyrocketing and contributing to budget woes that have transportation officials considering higher fares and delaying long-planned track repairs. And the (Irish) bank at the center of the saga, named Depfa, is now in trouble, threatening the stability of its parent company in Munich and forcing German officials to intervene with a multibillion-dollar bailout to stop a chain reaction that could freeze Germany’s economic system. . . . “What’s the best investment? It’s called a collateralized debt obligation,” or a C.D.O., Mr. Noack said. He described it as a collection of bonds from 105 of the most reputable companies that would pay the school board a small return every quarter. “We’re being very conservative,” Mr. Noack told the board, composed of lawyers, salesmen and a homemaker who lived in the affluent Milwaukee suburb. Soon, Whitefish Bay and the four other districts borrowed $165 million from Depfa and contributed $35 million of their own money to purchase three C.D.O.’s sold by the Royal Bank of Canada, which had a relationship with Mr. Noack’s company. But Mr. Noack’s explanation of a C.D.O. was very wrong. Mr. Noack, who through his lawyer declined to comment, had attended only a two-hour training session on C.D.O.’s, he told a friend.

What's new here (over and above the scams of the last eight bait-and-switch years)?

And what will be different in an Obama administration? Will the taxpayers get (at least) an accounting, if not some show trials? Not likely (although I surely hope I am wrong). So let's review. 1. Couldn't fix the Social Security shortfall. 2. Couldn't guarantee Medicare funding for the poorest citizens. 3. Couldn't allow single-payer healthcare for all.

(All of which could have been done for so many billions less, and benefitted the entire country (and not hurt the rest of the world in the fast-buck shuffle game)!)
4. Has no clue where billions and billions in taxpayers' hard-earned money has disappeared.

Trust (Shifty Paulson and Good-Guy Goldman Sachs).

As if.



The Law said...

I've said it once, and i'll say it again... AIG should have died a free market's death. The bailout should have protected reitrement savings, and nothing more. It is the biggest slap in the face to the American's who begrudginly in support of the bailout as a necessary step. The AIG brass need to be tried and convicted ASAP.


Suzan said...

I'll second that emotion!